Internal Revenue Bulletin 2000-8 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
Rev. Rul. 2000–10, page 643.
LIFO; price indexes; department stores.The December
1999 Bureau of Labor Statistics price indexes are accepted for
use by department stores employing the retail inventory and
last-in, first-out inventory methods for valuing inventories for tax
years ended on, or with reference to, December 31, 1999.
T.D. 8870, page 647.
Final regulations under section 1295 of the Code relate to mak-
ing and maintaining qualified electing fund (QEF) elections. No-
tices 88–125 and 98–22 obsoleted.
T.D. 8872, page 639.
REG–209135–88, page 681.
Temporary and proposed regulations under section 337(d) of
the Code provide guidance with respect to the built-in gain of C
corporation assets that become assets of a Regulated Invest-
ment Company (RIC) or a Real Estate Investment Trust (REIT) by
(1) the qualification of the corporation as RIC or REIT or (2) the
transfer of assets to a RIC or REIT in a carryover basis transac-
tion. A public hearing on the proposed regulations is scheduled
for May 10, 2000.
EMPLOYEE PLANS
T.D. 8871, page 641.
Final regulations under section 401(b) of the Code relate to
the remedial amendment period during which an employer
that maintains, or a sponsor of, a qualified retirement plan
can make retroactive amendments to the plan to eliminate
certain qualification defects for the entire period.
EXEMPT ORGANIZATIONS
T.D. 8874, page 644.
Final regulations under section 513 of the Code relate to
travel and tour activities of tax-exempt organizations.
ADMINISTRATIVE
REG–208280–86, page 654.
Proposed regulations under section 883 of the Code pro-
vide guidance for excluding from a foreign corporation’s
Internal Revenue
bbuulllleettiinn
Bulletin No. 2000–8
February 22, 2000
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page ii.
(Continued on the next page)

ADMINISTRATIVE—continued
gross income the income from international operations of
ships or aircraft if the corporation is a qualified foreign
corporation and the income is qualified income. A public
hearing is scheduled for April 27, 2000.
REG–100276–97, page 682.
Proposed regulations under sections 860H-860L of the
Code provide guidance concerning financial asset securiti-
zation investment trusts (FASITs). A public hearing is
scheduled for May 15, 2000.
REG–103882–99, page 706.
Proposed regulations under section 263A of the Code pro-
vide guidance for the payor of a delay rental in deducting
the delay rental as an expense or charging it to depletable
capital account under section 266. A public hearing is
scheduled for May 26, 2000.
REG–105279–99, page 707.
Proposed regulations under section 6071(b) of the Code extend
the due date to March 31 for those electronically filed informa-
tion returns having a due date of February 28. They also provide
that under section 6651(h) failure to pay penalties will be re-
duced from 0.5% to 0.25% per month for certain individuals
who enter into an installment agreement under section 6159.
February 22, 20002000–8 I.R.B.

2000–8 I.R.B.February 22, 2000
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2000–8 I.R.B.639February 22, 2000
Section 337.—Nonrecognition
for Property Distributed to
Parent in Complete Liquidation
of Subsidiary
26 CFR 1.337(d)–5T: Tax on C assets becoming
RIC or REIT assets (temporary).
T.D. 8872
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Certain Asset Transfers to
Regulated Investment Companies
(RICs) and Real Estate Investment
Trusts (REITs)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations that apply with re-
spect to the net built-in gain of C corpora-
tion assets that become assets of a Regu-
lated Investment Company [RIC] or Real
Estate Investment Trust [REIT] by the
qualification of a C corporation as a RIC
or REIT or by the transfer of assets of a C
corporation to a RIC or REIT in a carry-
over basis transaction. The regulations
generally require the corporation to rec-
ognize gain as if it had sold the assets
transferred or converted to RIC or REIT
assets at fair market value and immedi-
ately liquidated. The regulations permit
the transferee RIC or REIT to elect, in
lieu of liquidation treatment, to be subject
to the rules of section 1374 of the Internal
Revenue Code and the regulations there-
under. The text of the temporary regula-
tions also serves as the text of the pro-
posed regulations set forth in the notice of
proposed rulemaking REG–209135–88
on page 681.
DATES: Effective Date: These regula-
tions are effective February 4, 2000.
Applicability Dates: For dates of ap-
plicability, see the Effective Dates portion
of the preamble under SUPPLEMEN-
TARY INFORMATION.
FOR FURTHER INFORMATION CON-
TACT: Christopher W. Schoen, (202)
622-7750 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public procedure
pursuant to the Administrative Procedure
Act (5 U.S.C. section 553). For this rea-
son, the collection of information con-
tained in these regulations has been re-
viewed and, pending receipt and
evaluation of public comments, approved
by the Office of Management and Budget
under control number 1545-1672. Re-
sponses to this collection of information
are required to obtain a benefit, i.e., to
elect to be subject to section 1374 of the
Internal Revenue Code (Code) and the
regulations thereunder.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
For further information concerning
this collection of information, and
where to submit comments on the col-
lection of information and the accuracy
of the estimated burden, and suggestions
as to reducing this burden, please refer
to the preamble to the cross-referencing
notice of proposed rulemaking,
REG–209135–88, on page 681.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. section 6103.
Background
Sections 631 and 633 of the Tax Re-
form Act of 1986 (the 1986 Act) (Public
Law 99-514), as amended by sections
1006(e) and (g) of the Technical and
Miscellaneous Revenue Act of 1988 (the
1988 Act) (Public Law 100-647),
amended the Code to repeal the General
Utilities doctrine. The 1986 Act
amended sections 336 and 337 of the
Code, generally requiring corporations
to recognize gain when appreciated
property is distributed in connection
with a complete liquidation. Section
337(d) directs the Secretary to prescribe
regulations as may be necessary to carry
out the purposes of General Utilitiesre-
peal, including rules to “ensure that such
purposes shall not be circumvented ...
through the use of a regulated invest-
ment company [RIC], a real estate in-
vestment trust [REIT], or a tax exempt
entity....” The transfer of the assets of a
C corporation to a RIC or REIT could
result in permanently removing the
built-in gain inherent in those assets
from the reach of the corporate income
tax because RIC and REIT income is not
subject to a corporate-level income tax
if such income is distributed to the RIC
or REIT shareholders.
Accordingly, on February 4, 1988, the
IRS issued Notice 88–19 (1988–1 C.B.
486). Notice 88–19 announced that the
IRS intended to promulgate regulations
under the authority of section 337(d) with
respect to transactions or events that result
in the ownership of C corporation assets
by a RIC or REIT with a basis determined
by reference to the corporation’s basis (a
carryover basis). Notice 88–19 served as
an “administrative pronouncement,” and
could be relied upon to the same extent as
a revenue ruling or revenue procedure.
Notice 88–19 also indicated that the regu-
lations would be applicable retroactively
to June 10, 1987. See also Notice 88–96
(1988–2 C.B. 420).
As a result of the issuance of Notice
88–19, many taxpayers have become un-
certain about the current law applicable to
their transactions, as well as the proper
method of making a valid election to be
subject to the rules of section 1374 and
the regulations thereunder. In order to re-
solve this uncertainty and to provide tax-
payers with guidance, the IRS and Trea-
sury are issuing these temporary
regulations.
Explanation of Provisions
These regulations implement Notice
88–19 by providing that when a C corpo-
ration (1) qualifies to be taxed as a RIC or
REIT, or (2) transfers assets to a RIC or
REIT in a carryover basis transaction, the
C corporation is treated as if it sold all of
its assets at their respective fair market
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

February 22, 20006402000–8 I.R.B.
values and immediately liquidated, unless
the RIC or REIT elects to be subject to tax
under section 1374. Any resulting net
built-in gain is recognized by the C corpo-
ration and the bases of the assets in the
hands of the RIC or REIT are generally
adjusted to their fair market values to re-
flect the recognized net built-in gain. The
regulations do not permit a C corporation
to recognize a net built-in loss, and, in this
case, the carryover bases of the assets in
the hands of the RIC or REIT are pre-
served.
If the RIC or REIT elects to be subject
to treatment under section 1374, its built-
in gain, and the corporate-level tax im-
posed on that gain, is subject to rules sim-
ilar to the rules applying to the net income
of foreclosure property of REITs.
Effective Dates
In the case of carryover basis transac-
tions involving the transfer of property of
a C corporation to a RIC or REIT, the reg-
ulations apply to transactions occurring
on or after June 10, 1987. In the case of a
C corporation that qualifies to be taxed as
a RIC or REIT, the regulations apply to
such qualifications that are effective for
taxable years beginning on or after June
10, 1987.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, these temporary
regulations will be submitted to the Chief
Counsel of Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Christopher W. Schoen of the Of-
fice of Assistant Chief Counsel (Corpo-
rate). Other personnel from the IRS and
Treasury participated in their develop-
ment.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART I–INCOME TAXES
Paragraph 1. The authority citation for
26 CFR part 1 is amended by adding an
entry in numerical order to read as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 1.337(d)–5T also issued under
26 U.S.C. 337. * * *
Par. 2. Section 1.337(d)–5T is added to
read as follows:
§1.337(d)–5T Tax on C assets becoming
RIC or REIT assets (temporary).
(a) Treatment of C corporations--(1)
Scope. This section applies to the net
built-in gain of C corporation assets that
become assets of a RIC or REIT by—
(i) The qualification of a C corporation
as a RIC or REIT; or
(ii) The transfer of assets of a C corpo-
ration to a RIC or REIT in a transaction in
which the basis of such assets are deter-
mined by reference to the C corporation’s
basis (a carryover basis).
(2) Net built-in gain. Net built-in gain
is the excess of aggregate gains (including
items of income) over aggregate losses.
(3) General rule. Unless an election is
made pursuant to paragraph (b) of this
section, the C corporation will be treated,
for all purposes including recognition of
net built-in gain, as if it had sold all of its
assets at their respective fair market val-
ues on the deemed liquidation date de-
scribed in paragraph (a)(7) of this section
and immediately liquidated.
(4) Loss. Paragraph(a)(3) of this sec-
tion shall not apply if its application
would result in the recognition of net
built-in loss.
(5) Basis adjustment. If a corporation
is subject to corporate-level tax under
paragraph (a)(3) of this section, the bases
of the assets in the hands of the RIC or
REIT will be adjusted to reflect the recog-
nized net built-in gain. This adjustment is
made by taking the C corporation’s basis
in each asset, and, as appropriate, increas-
ing it by the amount of any built-in gain
attributable to that asset, or decreasing it
by the amount of any built-in loss attribut-
able to that asset.
(6) Exception—(i) In general. Para-
graph (a)(3) of this section does not apply
to any C corporation that—
(A) Immediately prior to qualifying to
be taxed as a RIC was subject to tax as a
C corporation for a period not exceeding
one taxable year; and
(B) Immediately prior to being subject
to tax as a C corporation was subject to
the RIC tax provisions for a period of at
least one taxable year.
(ii) Additional requirement. The ex-
ception described in paragraph (a)(6)(i)
of this section applies only to assets ac-
quired by the corporation during the year
when it was subject to tax as a C corpora-
tion in a transaction that does not result in
its basis in the asset being determined by
reference to a corporate transferor’s basis.
(7) Deemed liquidation date—(i) Con-
versions. In the case of a C corporation
that qualifies to be taxed as a RIC or
REIT, the deemed liquidation date is the
last day of its last taxable year before the
taxable year in which it qualifies to be
taxed as a RIC or REIT.
(ii) Carryover basis transfers. In the
case of a C corporation that transfers prop-
erty to a RIC or REIT in a carryover basis
transaction, the deemed liquidation date is
the day before the date of the transfer.
(b) Section 1374 treatment—(1) In
general. Paragraph (a) of this section will
not apply if the transferee RIC or REIT
elects (as described in paragraph (b)(3) of
this section) to be subject to the rules of
section 1374, and the regulations thereun-
der. The electing RIC or REIT will be
subject to corporate-level taxation on the
built-in gain recognized during the 10-
year period on assets formerly held by the
transferor C corporation. The built-in
gains of electing RICs and REITs, and the
corporate-level tax imposed on such
gains, are subject to rules similar to the
rules relating to net income from foreclo-
sure property of REITs. See sections
857(a)(1)(A)(ii), and 857(b)(2)(B), (D),
and (E). An election made under this
paragraph (b) shall be irrevocable.
(2) Ten-year recognition period. In the
case of a C corporation that qualifies to be
taxed as a RIC or REIT, the 10-year recog-
nition period described in section
1374(d)(7) begins on the first day of the

2000–8 I.R.B.641February 22, 2000
RIC’s or REIT’s taxable year for which the
corporation qualifies to be taxed as a RIC
or REIT. In the case of a C corporation
that transfers property to a RIC or REIT in
a carryover basis transaction, the 10-year
recognition period begins on the day the
assets are acquired by the RIC or REIT.
(3) Making the election. A RIC or REIT
validly makes a section 1374 election with
the following statement: “[Insert name and
employer identification number of electing
RIC or REIT] elects under
§1.337(d)–5T(b) to be subject to the rules
of section 1374 and the regulations there-
under with respect to its assets which for-
merly were held by a C corporation, [insert
name and employer identification number
of the C corporation, if different from
name and employer identification number
of RIC or REIT].” This statement must be
signed by an official authorized to sign the
income tax return of the RIC or REIT and
attached to the RIC’s or REIT’s Federal in-
come tax return for the first taxable year in
which the assets of the C corporation be-
come assets of the RIC or REIT.
(c) Special rule. In cases where the first
taxable year in which the assets of the C
corporation become assets of the RIC or
REIT ends after June 10, 1987 but before
March 8, 2000, the section 1374 election
may be filed with the first Federal income
tax return filed by the RIC or REIT after
March 8, 2000.
(d) Effective date. In the case of carry-
over basis transactions involving the
transfer of property of a C corporation to
a RIC or REIT, the regulations apply to
transactions occurring on or after June 10,
1987. In the case of a C corporation that
qualifies to be taxed as a RIC or REIT, the
regulations apply to such qualifications
that are effective for taxable years begin-
ning on or after June 10, 1987.
Par. 3. In §1.852–12, paragraph (d) is
added to read as follows:
§1.852–12 Non-RIC earnings and profits.
* * * * *
(d) For treatment of net built-in gain as-
sets of a C corporation that become assets
of a RIC, see §1.337(d)–5T.
Par. 4. In §1.857–11, paragraph (e) is
added to read as follows:
§1.857–11 Non-REIT earnings and prof-
its.
* * * * *
(e) For treatment of net built-in gain as-
sets of a C corporation that become assets
of a REIT, see §1.337(d)–5T.
PART 602–OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101––OMB Control numbers.
* * * * *
(b) ***
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved January 21, 2000.
Jonathan Talisman,
Acting Assistant Secretary
for Tax Policy.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 7, 2000, 65 F.R.
5775)
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.337(d)–5T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1672
* * * * *
Section 401.—Qualified
Pensions, Profit-sharing, and
Stock Bonus Plans
26 CFR 1.401(b)–1: Certain retroactive changes in
plan.
T.D. 8871
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Remedial Amendment Period
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations relating to the remedial
amendment period, during which a spon-
sor of a qualified retirement plan or an
employer that maintains a qualified retire-
ment plan can make retroactive amend-
ments to the plan to eliminate certain
qualification defects for the entire period.
These final regulations clarify the scope
of the Commissioner’s authority to pro-
vide relief from plan disqualification
under the regulations. These clarifica-
tions confirm the Commissioner’s author-
ity to provide appropriate relief for plan
amendments relating to changes to the
plan qualification rules made in recent
legislation. These final regulations affect
sponsors of qualified retirement plans,
employers that maintain qualified retire-
ment plans, and qualified retirement plan
participants.
EFFECTIVE DATES: These regulations
are effective February 4, 2000.
FOR FURTHER INFORMATION CON-
TACT: Linda S.F. Marshall at (202)622-
6030 or Lisa A. Tavares at (202) 622-
6090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 401(b). These regu-
lations provide guidance to clarify the

February 22, 20006422000–8 I.R.B.
scope of the Commissioner’s authority to
provide relief from plan disqualification
under section 401(b) and the regulations.
On August 1, 1997, temporary regulations
(T.D. 8727, 1997–2 C.B. 47) under sec-
tion 401(b) were published in the Federal
Register(62 F.R. 41272). A notice of
proposed rulemaking (REG–106043–97,
1997–2 C.B. 654) cross-referencing the
temporary regulations, was published in
the Federal Register(62 F.R. 41322) on
the same day. The temporary regulations
enabled the Commissioner to provide ap-
propriate relief concerning the timing of
plan amendments relating to changes to
the plan qualification rules made in recent
legislation, as well as for other plan
amendments that may be needed as a re-
sult of future changes to the Internal Rev-
enue Code (Code).
No written comments responding to the
notice of proposed rulemaking were re-
ceived. No public hearing was requested
or held. The proposed regulations under
section 401(b) are adopted by this Trea-
sury decision, and the corresponding tem-
porary regulations are removed.
Explanation of Provisions
Section 401(b) provides that a plan is
considered to satisfy the qualification re-
quirements of section 401(a) for the pe-
riod beginning with the date on which it
was put into effect, or for the period be-
ginning with the earlier of the date on
which any amendment that caused the
plan to fail to satisfy those requirements
was adopted or put into effect, and ending
with the time prescribed by law for filing
the employer’s return for the taxable year
in which that plan or amendment was
adopted (including extensions) or such
later time as the Secretary may designate,
if all provisions of the plan needed to sat-
isfy the qualification requirements are in
effect by the end of the specified period
and have been made effective for all pur-
poses for the entire period.
Section 1.401(b)–1(b) lists the plan pro-
visions that may be amended retroactively
pursuant to the rules of section 401(b).
These plan provisions, termed disqualify-
ing provisions,include the plan provisions
described in section 401(b), as well as
plan provisions that result in failure of a
plan to satisfy the qualification require-
ments of the Code by reason of a change
in those requirements effected by the leg-
islation listed in §1.401(b)–1(b)(2)(i) and
(ii). Under §1.401(b)–1(b)(2)(ii), a dis-
qualifying provision also includes a plan
provision that is integral to a qualification
requirement changed by specified legisla-
tion. As in effect prior to the previously
issued final and temporary regulations,
§1.401(b)–1(b)(2)(iii) provided that a dis-
qualifying provision includes a plan provi-
sion that results in failure of the plan to
satisfy the Code’s qualification require-
ments by reason of a change in those re-
quirements effected by amendments to the
Code, that is designated by the Commis-
sioner, at the Commissioner’s discretion,
as a disqualifying provision.
Section 1.401(b)–1(d) provides rules
for determining the period for which the
relief provided under section 401(b) ap-
plies (the “remedial amendment pe-
riod”). Section 1.401(b)–1(d)(1) defines
the beginning of the remedial amend-
ment period for the disqualifying provi-
sions listed in §§1.401(b)–(1)(b)(1) and
1.401(b)–1(b)(2)(i) and (ii).
The final regulations retain the rules set
forth in the temporary regulations to clar-
ify the scope of the Commissioner’s au-
thority to provide relief from plan dis-
qualification under section 401(b). These
changes are needed to clarify the rules re-
lating to the plan provisions that may be
designated by the Commissioner as dis-
qualifying provisions based on amend-
ments to the plan qualification require-
ments of the Internal Revenue Code.
Section 1.401(b)–1(b)(3) retains the rule
set forth in the temporary regulations to
provide that a disqualifying provision in-
cludes a plan provision designated by the
Commissioner, at the Commissioner’s
discretion, as a disqualifying provision
that either (1) results in the failure of the
plan to satisfy the qualification require-
ments of the Code by reason of a change
in those requirements; or (2) is integral to
a qualification requirement of the Code
that has been changed. Section
1.401(b)–1(c)(2) retains the rule set forth
in the temporary regulations to provide
the Commissioner with explicit authority
to impose limits and provide additional
rules regarding the amendments that may
be made with respect to disqualifying pro-
visions during the remedial amendment
period. Section 1.401(b)–1(d)(1)(iv) and
(v) provide conforming rules, as previ-
ously provided in the temporary regula-
tions, regarding the beginning of the re-
medial amendment period for disqualify-
ing provisions described in
§1.401(b)–1(b)(3).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulation does not
impose a collection of information 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, the notice of proposed
rulemaking preceding these regulations
was submitted to the Small Business Ad-
ministration for comment on its impact on
small businesses.
Drafting Information
The principal authors of these regula-
tions are Linda S. F. Marshall and Lisa A.
Tavares, Office of the Associate Chief
Counsel (Employee Benefits and Exempt
Organizations). However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(b)–1 is amended
by:
1. Revising paragraphs (b)(3), (c), and
(d)(1)(iv).
2. Adding paragraph (d)(1)(v).
The addition and revisions read as fol-
lows:
§1.401(b)–1 Certain retroactive changes
in plan.
* * * * *
(b) * * *

2000–8 I.R.B.643February 22, 2000
(3) A plan provision designated by the
Commissioner, at the Commissioner’s
discretion, as a disqualifying provision
that either—
(i) Results in the failure of the plan to
satisfy the qualification requirements of
the Internal Revenue Code by reason of a
change in those requirements; or
(ii) Is integral to a qualification require-
ment of the Internal Revenue Code that
has been changed.
(c) Special rules applicable to disquali-
fying provisions– – (1) Absence of plan
provision. For purposes of paragraphs
(b)(2) and (3) of this section, a disqualify-
ing provision includes the absence from a
plan of a provision required by, or, if ap-
plicable, integral to the applicable change
to the qualification requirements of the
Internal Revenue Code, if the plan was in
effect on the date the change became ef-
fective with respect to the plan.
(2) Method of designating disqualifying
provisions. The Commissioner may des-
ignate a plan provision as a disqualifying
provision pursuant to paragraph (b)(3) of
this section only in revenue rulings, no-
tices, and other guidance published in the
Internal Revenue Bulletin. See
§601.601(d)(2) of this chapter.
(3) Authority to impose limitations. In
the case of a provision that has been des-
ignated as a disqualifying provision by
the Commissioner pursuant to paragraph
(b)(3) of this section, the Commissioner
may impose limits and provide additional
rules regarding the amendments that may
be made with respect to that disqualifying
provision during the remedial amendment
period. The Commissioner may provide
guidance in revenue rulings, notices, and
other guidance published in the Internal
Revenue Bulletin. See §601.601(d)(2) of
this chapter.
(d) ***
(1) ***
(iv) In the case of a disqualifying provi-
sion described in paragraph (b)(3)(i) of
this section, the date on which the change
effected by an amendment to the Internal
Revenue Code became effective with re-
spect to the plan; or
(v) In the case of a disqualifying provi-
sion described in paragraph (b)(3)(ii) of
this section, the first day on which the
plan was operated in accordance with
such provision, as amended, unless an-
other time is specified by the Commis-
sioner in revenue rulings, notices, and
other guidance published in the Internal
Revenue Bulletin. See §601.601(d)(2) of
this chapter.
* * * * *
§1.401(b)–1T [Removed]
Par. 3. Section 1.401(b)–1T is removed.
John M. Dalrymple,
Acting Deputy Commissioner
of Internal Revenue.
Approved January 19, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 3, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 4, 2000, 65 F.R.
5432)
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The December 1999 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, December 31, 1999.
Rev. Rul. 2000–10
The following Department Store Inven-
tory Price Indexes for December 1999
were issued by the Bureau of Labor Sta-
tistics. The indexes are accepted by the
Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inven-
tories of department stores employing the
retail inventory and last-in, first-out in-
ventory methods for tax years ended on,
or with reference to, December 31, 1999.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsDec.Dec.from Dec. 1998
19981999to Dec. 1999
1
1. Piece Goods - - - - - - - - - - - - - - - - - - - - - - - - -546.8512.9-6.2
2. Domestics and Draperies - - - - - - - - - - - - - - - - -631.2619.5-1.9
3. Women’s and Children’s Shoes - - - - - - - - - - - - -660.9631.0-4.5
4. Men’s Shoes - - - - - - - - - - - - - - - - - - - - - - - - -905.3887.4-2.0
5. Infants’ Wear - - - - - - - - - - - - - - - - - - - - - - - - -628.7650.03.4
6. Women’s Underwear - - - - - - - - - - - - - - - - - - - -559.6561.60.4
7. Women’s Hosiery - - - - - - - - - - - - - - - - - - - - - -304.1325.0 6.9
8. Women’s and Girls’ Accessories - - - - - - - - - - - -536.4526.2-1.9
9. Women’s Outerwear and Girls’ Wear - - - - - - - - -401.0393.5-1.9
10. Men’s Clothing - - - - - - - - - - - - - - - - - - - - - - -603.3610.11.1

DRAFTING INFORMATION
The principal author of this revenue ruling
is Alan J. Tomsic of the Office of Assistant
Chief Counsel (Income Tax and Account-
ing). For further information regarding this
revenue ruling, contact Mr. Tomsic on (202)
622-4970 (not a toll-free call).
Section 513.—Unrelated Trade
or Business
26 CFR 1.513–7: Travel and tour activities of tax
exempt organizations.
T.D. 8874
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Travel and Tour Activities of
Tax-Exempt Organizations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations clarifying when the
travel and tour activities of tax-exempt or-
ganizations are substantially related to the
purposes for which exemption was
granted. This action provides needed
guidance for tax-exempt organizations
concerning when travel tour activities
may be subject to tax as an unrelated trade
or business. This action affects tax-ex-
empt organizations that engage in travel
tour activities.
DATES: Effective Date: These regula-
tions are effective on February 7, 2000.
Applicability Date: These regulations
are applicable for taxable years beginning
after February 7, 2000.
FOR FURTHER INFORMATION CON-
TACT: Robin Ehrenberg, (202) 622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On April 23, 1998, the IRS published in
the Federal Register(63 F.R. 20156) a
notice of proposed rulemaking
(REG–121268–97, 1998–20 I.R.B. 12)
under section 513 to clarify when the
travel and tour activities of tax-exempt or-
ganizations are substantially related to the
purposes for which exemption was
granted. The notice of proposed rulemak-
ing added Treas. Reg. §1.513–7, which
provides that whether travel tour activities
are substantially related to an organiza-
tion’s exempt purposes is determined by
examining all the relevant facts and cir-
cumstances. The proposed regulations
also contain examples applying the facts
and circumstances test.
The notice of proposed rulemaking so-
licited comments from the public. Nine-
teen commentators submitted written com-
ments. A public hearing was held on
February 10, 1999, at which eight speakers
presented testimony. After consideration
of all the comments, the proposed regula-
tions under section 513 are adopted as re-
vised by this Treasury Decision. The com-
ments and revisions are discussed below.
Explanation of Provisions and
Summary of Comments
Many of the commentators welcomed
the proposed regulationsas workable guid-
ance that will promote tax compliance.
Commentators differed on the approach
that the IRS should adopt in final regula-
tions. Some commentators suggested that
the final regulations should adopt specific,
weighted standards to be used in evaluat-
ing relatedness to exempt purpose. Other
commentators recommended against
adopting specific standards, arguing that
no single set of standards would be appro-
priate given the broad range of tax-exempt
organizations. One commentator sug-
gested that the final regulations adopt a set
of specific standards that would apply to
test relatedness of tours in the educational
context and a more general consistency
standard that would evaluate whether the
marketing, location, and execution of a
tour are consistent with the organization’s
core exempt activities.
February 22, 20006442000–8 I.R.B.
11. Men’s Furnishings - - - - - - - - - - - - - - - - - - - - -591.9626.05.8
12. Boys’ Clothing and Furnishings - - - - - - - - - - - - -493.7506.4 2.6
13. Jewelry - - - - - - - - - - - - - - - - - - - - - - - - - - - - -953.0924.8-3.0
14. Notions - - - - - - - - - - - - - - - - - - - - - - - - - - - - -771.9768.3-0.5
15. Toilet Articles and Drugs - - - - - - - - - - - - - - - - -939.4981.74.5
16. Furniture and Bedding - - - - - - - - - - - - - - - - - - -691.1688.5-0.4
17. Floor Coverings - - - - - - - - - - - - - - - - - - - - - - -602.5602.70.0
18. Housewares - - - - - - - - - - - - - - - - - - - - - - - - - -806.5786.9-2.4
19. Major Appliances - - - - - - - - - - - - - - - - - - - - - -236.0234.9-0.5
20. Radio and Television - - - - - - - - - - - - - - - - - - - -69.663.2-9.2
21. Recreation and Education
2
- - - - - - - - - - - - - - - -101.695.3-6.2
22. Home Improvements
2
- - - - - - - - - - - - - - - - - - -130.6129.3-1.0
23. Auto Accessories
2
- - - - - - - - - - - - - - - - - - - - - -107.7107.3-0.4
Groups 1 - 15: Soft Goods - - - - - - - - - - - - - - - - - -595.0596.70.3
Groups 16 - 20: Durable Goods - - - - - - - - - - - - - - - -458.0445.6-2.7
Groups 21 - 23: Misc. Goods
2
- - - - - - - - - - - - - - - - -106.6102.1-4.2
Store Total
3
- - - - - - - - - - - - - - - - - - - - - - - - -544.8540.2-0.8
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract depart-
ments.

2000–8 I.R.B.645February 22, 2000
Section 513(a) generally defines an un-
related trade or business as any trade or
business the conduct of which is not sub-
stantially related to the exercise or perfor-
mance by the organization of its charita-
ble, educational, or other purpose or
function constituting the basis for its ex-
emption under section 501(a). See also
United States v. American Bar Endow-
ment, 477 U.S. 105, 109-110 (1986).
Treas Reg. § 1.513–1(d)(2) provides that,
for the conduct of a trade or business to be
substantially related to the purposes for
which exemption was granted, the pro-
duction or distribution of the goods or the
performance of services must contribute
importantly to the accomplishment of
those purposes. Whether activities gener-
ating gross income contribute importantly
to accomplishing any purpose for which
an organization was granted exemption
depends in each case upon the particular
facts and circumstances. Id. This rule ap-
plies to travel tours.
Organizations exempt from tax under
section 501(a) have diverse exempt pur-
poses (for example: charities; social wel-
fare organizations; labor, agricultural and
horticultural organizations; business
leagues; fraternal beneficiary societies).
Accordingly, no one set of factors could
be sufficiently comprehensive as to define
relatedness for the variety of exempt or-
ganizations to which these travel tour reg-
ulations apply. Even among exempt or-
ganizations that share a common exempt
purpose, such as education, the methods
of accomplishing that purpose vary con-
siderably. For this reason, the final regu-
lations do not enumerate any specific fac-
tors that determine relatedness of travel
tour activities to exempt purposes. The
final regulations adopt the general facts
and circumstances approach of the pro-
posed regulations. See e.g, Hi-Plains
Hospital v. United States, 670 F.2d 528
(5
th
Cir. 1982) (need for case-by-case
analysis identifying exempt purpose and
analysis of how activity in each case con-
tributes to exempt purpose); Louisiana
Credit Union League v. United States, 693
F.2d 525, 534 (5
th
Cir. 1982) (resolution
of the substantial relationship test requires
“an examination of the relationship be-
tween the business activities that generate
the income in question ... and the accom-
plishment of the organization’s exempt
purposes”). However, as discussed
below, the final regulations include new
examples that provide additional guid-
ance regarding the application of this
facts and circumstances approach in both
educational and noneducational contexts.
Another commentator suggested that
the final regulations should clarify that
the manner in which an organization de-
velops and promotes a tour is relevant to
determining whether the tour activity is
substantially related to exempt purposes.
The development, promotion and opera-
tion of a tour are all indicators of whether
an organization’s offering of a tour is re-
lated or unrelated to its exempt purpose.
See International Postgraduate Medical
Found. v. Commissioner, 1989-36 T.C.
Memo., 56 T.C.M. (CCH) 1140 (1989)
(brochures promoting the trips empha-
sized recreational sightseeing activity and
omitted educational course descriptions).
Language has been added to the final reg-
ulations stating that relevant facts and cir-
cumstances include (but are not limited
to) how a travel tour is developed, pro-
moted and operated. Examples in the
final regulations also illustrate the rele-
vance of these factors.
Many commentators requested more ex-
amples addressing specific areas. As noted
above, examples have been added that fur-
ther illustrate the application of the facts
and circumstances rule. Some commenta-
tors raised concerns regarding the number
of hours of related activities a travel tour
must offer. Examples in the final regula-
tion clarify that the number of hours spent
on any related travel tour activity is only
one factor in determining relatedness of
the tour as a whole to exempt purposes and
is not by itself determinative. Examples in
the final regulation clarify that the nature
of the related activities, and the practicali-
ties of engaging in such activities (for ex-
ample, the hours during which the activity
normally would be conducted), must also
be taken into account.
One commentator suggested adding an
example addressing whether income from
travel tour activity is a royalty under sec-
tion 512(b)(2) where the exempt organiza-
tion does not operate the tour, but provides
member names to a for-profit tour opera-
tor. Section 512(b)(2) excludes royalties
from the computation of unrelated busi-
ness taxable income. The question of
what constitutes a royalty is beyond the
scope of these regulations. For guidance
as to whether income received by a tax-
exempt organization from travel tour ac-
tivities is excludable from unrelated busi-
ness taxable income as a royalty, see
generallyTreas. Reg. §1.512(b)–1(b) and
Sierra Club v. Commissioner, 86 F.3d
1526 (9
th
Cir. 1996).
Some commentators suggested that the
final regulations should contain provisions
that prevent tax-exempt organizations
from competing unfairly with taxable travel
businesses. However, the test under section
513 is substantial relatedness to exempt
purposes, not the presence or absence of
unfair competition. Section 513 was en-
acted to prevent unfair competition be-
tween exempt organizations and taxable
businesses. H.R. Rep. No. 2319, 81
st
Cong., 2d Sess. (1950), reprinted in1950-2
C.B. 380, 409; S. Rep. No. 2375, 81
st
Cong., 2d Sess. (1950), reprinted in1950-2
C.B. 483, 504; Portland Golf Club v. Com-
missioner, 497 U.S. 154, 161-162, fn. 12
(1990); Treas. Reg. §1.513–1(b). Never-
theless, “Congress did not force exempt or-
ganizations to abandon all commercial ven-
tures”, but rather imposed a tax on ventures
that are not substantially related to an orga-
nization’s exempt purposes. United States
v. American College of Physicians, 475
U.S. 834, 838 (1986). See also Louisiana
Credit Union League v. United States, 693
F.2d 525, 541 (5
th
Cir. 1982). Following
this approach, the section 513(a) regula-
tions, published in 1967, state that “any ac-
tivity of a section 511 organization which is
carried on for the production of income and
which otherwise possesses the characteris-
tics required to constitute ‘trade or busi-
ness’ within the meaning of section 162–
and which, in addition, is not substantially
related to the performance of exempt func-
tions— presents sufficient likelihood of un-
fair competition to be within the policy of
the tax [imposed by section 511(a)].”
Treas. Reg. §1.513–1(b). In expanding the
categories of organizations subject to unre-
lated business income tax in 1969, Con-
gress revisited the unfair competition issue.
“[A] business competing with taxpaying
organizations should not be granted an un-
fair competitive advantage by operating tax
free unlessthe business contributes impor-
tantly to the exempt function.” H.R. Rep.
No. 413 (Part 1), 91
st
Cong., 1
st
Sess., 44,
50 (1969), reprinted in1969 U.S.C.C.A.N.
1645, 1689, 1695 (emphasis added). If an
organization’s trade or business is substan-

February 22, 20006462000–8 I.R.B.
tially related to its exempt purposes, the tax
under section 511 is not imposed, regard-
less of the existence of competition with
taxable entities. Accordingly, the final reg-
ulations continue to focus on relatedness to
exempt purposes, as required by section
513.
The preamble to the proposed regula-
tions requested comments on whether the
final regulations should include documen-
tation and recordkeeping requirements spe-
cific to travel tours. Commentators split on
the preferred approach. Some commenta-
tors requested general guidance as to the
types of records that an organization should
keep to establish a tour’s purpose, but did
not want the IRS to mandate specific
recordkeeping requirements. Other com-
mentators asked that the IRS specify what
documentation is required. Section 6001
authorizes the Secretary to prescribe regu-
lations that require taxpayers to keep
records sufficient to establish whether a
taxpayer is liable for any tax imposed under
the Code. Currently, any person subject to
tax under subtitle A of the Code, including
the tax imposed under section 511, or re-
quired to file a return of information with
respect to income, must keep permanent
books or records sufficient to establish the
amount of gross income, deductions, cred-
its or other matters required to be shown by
such person in any return of tax or informa-
tion. SeeTreas. Reg. §1.6001–1(a). In ad-
dition, every organization exempt from tax
under section 501(a) must keep permanent
books of account or records sufficient to
show specifically items of gross income,
receipts and disbursements, and to substan-
tiate the information required by section
6033. SeeTreas. Reg. §1.6001– 1(c).
The IRS and Treasury Department be-
lieve that, with respect to travel tours, it is
unnecessary to supplement the existing
recordkeeping requirements under sec-
tions 6001 and 6033. Therefore, the final
regulations do not impose additional
recordkeeping requirements. However,
in response to commentators’ sugges-
tions, examples in the final regulations il-
lustrate that contemporaneous documen-
tation showing how an organization
develops, promotes and operates the
travel tour is relevant to the facts and cir-
cumstances analysis.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regu-
latory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Robin Ehrenberg, Office of Asso-
ciate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and the
Treasury Department participated in their
development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.513–7 is added to
read as follows:
§1.513–7 Travel and tour activities of tax
exempt organizations.
(a) Travel tour activities that constitute a
trade or business, as defined in
§1.513–1(b), and that are not substantially
related to the purposes for which exemp-
tion has been granted to the organization
constitute an unrelated trade or business
with respect to that organization. Whether
travel tour activities conducted by an orga-
nization are substantially related to the or-
ganization’s exempt purpose is determined
by looking at all relevant facts and circum-
stances, including, but not limited to, how
a travel tour is developed, promoted and
operated. Section 513(c) and §1.513–1(b)
also apply to travel tour activity. Applica-
tion of the rules of section 513(c) and
§1.513–1(b) may result in different treat-
ment for individual tours within an organi-
zation’s travel tour program.
(b) Examples. The provisions of this
section are illustrated by the following ex-
amples. In all of these examples, the
travel tours are priced to produce a profit
for the exempt organization. The exam-
ples are as follows:
Example 1. O, a university alumni association, is
exempt from federal income tax under section
501(a) as an educational organization described in
section 501(c)(3). As part of its activities, O oper-
ates a travel tour program. The program is open to
all current members of O and their guests. O works
with travel agencies to schedule approximately 10
tours annually to various destinations around the
world. Members of O pay $x to the organizing
travel agency to participate in a tour. The travel
agency pays O a per person fee for each participant.
Although the literature advertising the tours encour-
ages O’s members to continue their lifelong learning
by joining the tours, and a faculty member of O’s re-
lated university frequently joins the tour as a guest
of the alumni association, none of the tours includes
any scheduled instruction or curriculum related to
the destinations being visited. The travel tours made
available to O’s members do not contribute impor-
tantly to the accomplishment of O’s educational pur-
pose. Rather, O’s program is designed to generate
revenues for O by regularly offering its members
travel services. Accordingly, O’s tour program is an
unrelated trade or business within the meaning of
section 513(a).
Example 2. N is an organization formed for the
purpose of educating individuals about the geogra-
phy and culture of the United States. It is exempt
from federal income tax under section 501(a) as an
educational and cultural organization described in
section 501(c)(3). N engages in a number of activi-
ties to accomplish its purposes, including offering
courses and publishing periodicals and books. As
one of its activities, N conducts study tours to na-
tional parks and other locations within the United
States. The study tours are conducted by teachers
and other personnel certified by the Board of Educa-
tion of the State of P. The tours are directed toward
students enrolled in degree programs at educational
institutions in P, as reflected in the promotional ma-
terials, but are open to all who agree to participate in
the required study program. Each tour’s study pro-
gram consists of instruction on subjects related to
the location being visited on the tour. During the
tour, five or six hours per day are devoted to orga-
nized study, preparation of reports, lectures, instruc-
tion and recitation by the students. Each tour group
brings along a library of material related to the sub-
ject being studied on the tour. Examinations are
given at the end of each tour and the P State Board
of Education awards academic credit for tour partic-
ipation. Because the tours offered by N include a
substantial amount of required study, lectures, report
preparation, examinations and qualify for academic
credit, the tours are substantially related to N’s edu-
cational purpose. Accordingly, N’s tour program is
not an unrelated trade or business within the mean-
ing of section 513(a).
Example 3. R is a section 501(c)(4) social wel-
fare organization devoted to advocacy on a particu-

lar issue. On a regular basis throughout the year, R
organizes travel tours for its members to Washing-
ton, DC. While in Washington, the members follow
a schedule according to which they spend substan-
tially all of their time during normal business hours
over several days attending meetings with legisla-
tors and government officials and receiving brief-
ings on policy developments related to the issue that
is R’s focus. Members do have some time on their
own in the evenings to engage in recreational or so-
cial activities of their own choosing. Bringing
members to Washington to participate in advocacy
on behalf of the organization and learn about devel-
opments relating to the organization’s principal
focus is substantially related to R’s social welfare
purpose. Therefore, R’s operation of the travel tours
does not constitute an unrelated trade or business
within the meaning of section 513(a).
Example 4. S is a membership organization
formed to foster cultural unity and to educate X
Americans about X, their country of origin. It is ex-
empt from federal income tax under section 501(a)
and is described in section 501(c)(3) as an educa-
tional and cultural organization. Membership in S is
open to all Americans interested in the X heritage.
As part of its activities, S sponsors a program of
travel tours to X. The tours are divided into two cat-
egories. Category A tours are trips to X that are de-
signed to immerse participants in the X history, cul-
ture and language. Substantially all of the daily
itinerary includes scheduled instruction on the X
language, history and cultural heritage, and visits to
destinations selected because of their historical or
cultural significance or because of instructional re-
sources they offer. Category B tours are also trips to
X, but rather than offering scheduled instruction,
participants are given the option of taking guided
tours of various X locations included in their itiner-
ary. Other than the optional guided tours, Category
B tours offer no instruction or curriculum. Destina-
tions of principally recreational interest, rather than
historical or cultural interest, are regularly included
on Category B tour itineraries. Based on the facts
and circumstances, sponsoring Category A tours is
an activity substantially related to S’s exempt pur-
poses, and does not constitute an unrelated trade or
business within the meaning of section 513(a).
However, sponsoring Category B tours does not
contribute importantly to S’s accomplishment of its
exempt purposes and, thus, constitutes an unrelated
trade or business within the meaning of section
513(a).
Example 5. T is a scientific organization engaged
in environmental research. T is exempt from federal
income tax under section 501(a) as an organization
described in section 501(c)(3). T is engaged in a
long-term study of how agricultural pesticide and
fertilizer use affects the populations of various bird
species. T collects data at several bases located in
an important agricultural region of country U. The
minutes of a meeting of T’s Board of Directors state
that, after study, the Board has determined that non-
scientists can reliably perform needed data collec-
tion in the field, under supervision of T’s biologists.
The Board minutes reflect that the Board approved
offering one-week trips to T’s bases in U, where par-
ticipants will assist T’s biologists in collecting data
for the study. Tour participants collect data during
the same hours as T’s biologists. Normally, data col-
lection occurs during the early morning and evening
hours, although the work schedule varies by season.
Each base has rustic accommodations and few
amenities, but country U is renowned for its beauti-
ful scenery and abundant wildlife. T promotes the
trips in its newsletter and on its Internet site and
through various conservation organizations. The
promotional materials describe the work schedule
and emphasize the valuable contribution made by
trip participants to T’s research activities. Based on
the facts and circumstances, sponsoring trips to T’s
bases in country U is an activity substantially related
to T’s exempt purpose, and, thus, does not constitute
an unrelated trade or business within the meaning of
section 513(a).
Example 6. V is an educational organization de-
voted to the study of ancient history and cultures and
is exempt from federal income tax under section
501(a) as an organization described in section
501(c)(3). In connection with its educational activi-
ties, V conducts archaeological expeditions around
the world, including in the Y region of country Z. In
cooperation with the National Museum of Z, V re-
cently presented an exhibit on ancient civilizations
of the Y region of Z, including artifacts from the col-
lection of the Z National Museum. V instituted a
program of travel tours to V’s archaeological sites
located in the Y region. The tours were initially pro-
posed by V staff members as a means of educating
the public about ongoing field research conducted
by V. V engaged a travel agency to handle logistics
such as accommodations and transportation arrange-
ments. In preparation for the tours, V developed ed-
ucational materials relating to each archaeological
site to be visited on the tour, describing in detail the
layout of the site, the methods used by V’s re-
searchers in exploring the site, the discoveries made
at the site, and their historical significance. V also
arranged special guided tours of its exhibit on the Y
region for individuals registered for the travel tours.
Two archaeologists from V (both of whom had par-
ticipated in prior archaeological expeditions in the Y
region) accompanied the tours. These experts led
guided tours of each site and explained the signifi-
cance of the sites to tour participants. At several of
the sites, tour participants also met with a working
team of archaeologists from V and the National Mu-
seum of Z, who shared their experiences. V pre-
pared promotional materials describing the educa-
tional nature of the tours, including the daily trips to
V’s archaeological sites and the educational back-
ground of the tour leaders, and providing a recom-
mended reading list. The promotional materials do
not refer to any particular recreational or sightseeing
activities. Based on the facts and circumstances,
sponsoring trips to the Y region is an activity sub-
stantially related to V’s exempt purposes. The
scheduled activities, which include tours of archaeo-
logical sites led by experts, are part of a coordinated
educational program designed to educate tour partic-
ipants about the ancient history of the Y region of Z
and V’s ongoing field research. Therefore, V’s tour
program does not constitute an unrelated trade or
business within the meaning of section 513(a).
Example 7. W is an educational organization de-
voted to the study of the performing arts and is ex-
empt from federal income tax under section 501(a)
as an organization described in section 501(c)(3). In
connection with its educational activities, W pre-
sents public performances of musical and theatrical
works. Individuals become members of W by mak-
ing an annual contribution to W of $q. Each year, W
offers members an opportunity to travel as a group
to one or more major cities in the United States or
abroad. In each city, tour participants are provided
tickets to attend a public performance of a play, con-
cert or dance program each evening. W also
arranges a sightseeing tour of each city and provides
evening receptions for tour participants. W views its
tour program as an important means to develop and
strengthen bonds between W and its members, and
to increase their financial and volunteer support of
W. W engaged a travel agency to handle logistics
such as accommodations and transportation arrange-
ments. No educational materials are prepared by W
or provided to tour participants in connection with
the tours. Apart from attendance at the evening cul-
tural events, the tours offer no scheduled instruction,
organized study or group discussion. Although sev-
eral members of W’s administrative staff accompany
each tour group, their role is to facilitate member in-
teraction. The staff members have no special exper-
tise in the performing arts and play no educational
role in the tours. W prepared promotional materials
describing the sightseeing opportunities on the tours
and emphasizing the opportunity for members to so-
cialize informally and interact with one another and
with W staff members, while pursuing shared inter-
ests. Although W’s tour program may foster good-
will among W members, it does not contribute im-
portantly to W’s educational purposes. W’s tour
program is primarily social and recreational in na-
ture. The scheduled activities, which include sight-
seeing and attendance at various cultural events, are
not part of a coordinated educational program.
Therefore, W’s tour program is an unrelated trade or
business within the meaning of section 513(a).
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved January 21, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 7, 2000, 65 F.R.
5772)
Section 1295.—Qualified
Electing Fund
26 CFR 1.1295–1: Qualified electing funds.
T.D. 8870
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
2000–8 I.R.B.647February 22, 2000

General Rules for Making and
Maintaining Qualified Electing
Fund Elections
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that provide guidance to
a passive foreign investment company
(PFIC) shareholder that makes the elec-
tion under section 1295 (section 1295
election) to treat the PFIC as a qualified
electing fund (QEF), and for PFIC share-
holders that wish to make a section 1295
election that will apply on a retroactive
basis (retroactive election). In addition,
this document contains a final regulation
that provides guidance under section 1291
to a PFIC shareholder that is a tax-exempt
organization. Lastly, this document con-
tains final regulations under section 1293
for calculating and reporting net capital
gain by a QEF, and also clarifies the ap-
plication of the current income inclusion
rules of section 1293 to interest in a QEF
held through a domestic pass through en-
tity.
DATES: Effective Date. These regula-
tions are effective February 7, 2000.
Applicability Date. In general, these
regulations are applicable as of January 2,
1998. For special dates of applicability
see §1.1295–1(k).
FOR FURTHER INFORMATION CON-
TACT: Margaret A. Fung, (202) 622-
3840 (not a toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these
final regulations have been reviewed and
approved by the Office of Management
and Budget in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507) under control number 1545 - 1555.
Responses to these collections of infor-
mation are mandatory for PFIC share-
holders that wish to make the section
1295 election to treat the PFIC as a QEF.
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224.
The estimated average annual burden
per respondent and/or recordkeeper varies
from fifteen minutes to three hours, de-
pending on individual circumstances,
with an estimated average of twenty-nine
minutes.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On January 2, 1998, the Treasury and
the IRS published temporary regulations
regarding the section 1295 election and
rules applicable to a PFIC shareholder
under sections 1291, 1293, 1295 and 1297
(redesignated as section 1298 by the Tax-
payer Relief Act of 1997, and hereafter
referred to as section 1298) (T.D. 8750,
1998–8 I.R.B. 4 [63 F.R. 6]). On that
same date, the Treasury and the IRS pub-
lished a proposed rulemaking
(REG–115795–97, 1998–8 I.R.B. 33) in
the Federal Register(63 F.R. 35). The
text of the temporary regulations served
as the text of the proposed regulations.
Sections 1291, 1293, 1295 and 1298
were added by the Tax Reform Act of
1986, effective for taxable years of foreign
corporations beginning after December 31,
1986. As originally enacted, the section
1295 election was an election made by the
PFIC. The Technical and Miscellaneous
Revenue Act of 1988 (TAMRA) amended
section 1295, effective for taxable years of
foreign corporations beginning after De-
cember 31, 1986, to change the section
1295 election to a shareholder-by-share-
holder election. Sections 1291, 1293 and
1298 were also amended by TAMRA, and
sections 1293 and 1298 were further
amended by the Omnibus Budget Recon-
ciliation Act of 1993. Section 1298 also
was amended by the Revenue Reconcilia-
tion Act of 1989 and the Small Business
Job Protection Act of 1996. In addition,
the Taxpayer Relief Act of 1997 (1997
TRA) amended section 1 to provide cate-
gories of long-term capital gain and the
maximum rates of tax to which the cate-
gories are subject. In certain cases, this
amendment affects the calculation of net
capital gain for purposes of section 1293.
No written comments were received on
the proposed regulations, and no public
hearing was requested or held. The pro-
posed regulations are adopted as final reg-
ulations as revised by this Treasury Deci-
sion. The revisions are summarized in the
explanations below.
Explanation of Revisions
A foreign corporation is a PFIC for a
taxable year if the foreign corporation sat-
isfies either the income or asset test of
section 1297(a) for that year. A foreign
corporation is a PFIC under the income
test if 75 percent or more of its gross in-
come for its taxable year is passive, or in-
vestment-type, income. Alternatively,
under the asset test, a foreign corporation
is a PFIC if 50 percent or more of the av-
erage fair market value of its assets during
its taxable year are assets that produce or
are held for the production of passive in-
come. A shareholder of a foreign corpo-
ration that qualifies as a PFIC is subject to
the interest charge regime of section 1291
with respect to certain distributions by the
PFIC and certain dispositions of its stock.
Generally, a shareholder of a PFIC may
avoid the interest charge regime by mak-
ing a timely election under section 1295
to treat a PFIC as a QEF, in which case
the shareholder will be taxed annually
pursuant to section 1293 on its pro rata
share of the ordinary earnings and net
capital gain of the PFIC. Under section
1295(a), a section 1295 election will
apply with respect to the PFIC if the PFIC
complies with requirements prescribed by
the Secretary for purposes of determining
the ordinary earnings and net capital gain
of the PFIC and otherwise carrying out
the purposes of the PFIC provisions.
Section 1295(b)(1), as enacted by
TAMRA, provides that a shareholder may
make a section 1295 election with respect
to a PFIC for any taxable year of the
shareholder (shareholder election year).
Once made, the election will apply to that
year and to all subsequent years of the
shareholder unless revoked by the share-
February 22, 20006482000–8 I.R.B.

2000–8 I.R.B.649February 22, 2000
holder with the consent of the Secretary.
Section 1295(b)(2) prescribes the time for
making the election. In general, for the
section 1295 election to be applicable to a
taxable year, the shareholder must make
the election by the due date, as extended
under section 6081, for the shareholder’s
return for that taxable year. However, to
the extent provided in the regulations, a
section 1295 election may be made for a
taxable year after the prescribed due date
if the shareholder failed to make a timely
election because the shareholder reason-
ably believed that the foreign corporation
was not a PFIC.
Under temporary regulations
§1.1295–1T(d)(1) and (f)(1), the share-
holder, as defined in §1.1291–9(j)(3), of a
PFIC makes the section 1295 election by
filing a Form 8621 with the shareholder’s
Federal income tax return by the election
due date for the shareholder election year,
and by filing a copy of that form with the
Philadelphia Service Center. In addition,
under temporary regulation
§1.1295–1T(f)(2), the shareholder must
file an annual Form 8621 with its Federal
income tax return to report the share-
holder’s pro rata share of the ordinary
earnings and net capital gain of the QEF.
Temporary regulation §1.1295–1T(f)(2)
also required that a copy of the annual
Form 8621 be filed with the Philadelphia
Service Center. To reduce taxpayer bur-
den, this final regulation eliminates the
requirement for filing a copy of Form
8621 with the Philadelphia Service Center
when the shareholder makes the section
1295 election or reports the shareholder’s
annual pro rata share of the ordinary earn-
ings and net capital gain of the QEF.
In addition, this final regulation clari-
fies the rule in temporary regulation
§1.1295–1T(c)(2)(ii) for income inclu-
sion by the shareholder of a QEF under
section 1293 for any taxable year that the
foreign corporation is not a PFIC under
section 1297(a) and is not treated as a
PFIC under section 1298(b)(1). This final
regulation clarifies that in such case, the
shareholder is not required to include pur-
suant to section 1293 the shareholder’s
pro rata share of ordinary earnings and net
capital gain for such year, and the share-
holder shall not be required to satisfy the
section 1295 annual reporting require-
ment for such year. Cessation of a foreign
corporation’s status as a PFIC will not,
however, terminate a section 1295 elec-
tion. Thus, if the foreign corporation is a
PFIC in any taxable year after a year in
which it is not treated as a PFIC, the
shareholder’s original election under sec-
tion 1295 continues to apply and the
shareholder must take into account its pro
rata share of ordinary earnings and net
capital gain for such year and comply
with the section 1295 annual reporting re-
quirement.
The Taxpayer Relief Act of 1997 added
section 1296 to provide PFIC sharehold-
ers with an alternative method for current
income inclusion by making a mark-to-
market election with respect to their PFIC
stock that qualifies as marketable stock.
The election is available to shareholders
whose taxable years begin after Decem-
ber 31, 1997 for stock in a foreign corpo-
ration whose taxable year ends with or
within the shareholder’s taxable year.
The effect of a mark-to-market election
on a section 1295 election will be ad-
dressed in subsequent regulations under
section 1296. In addition, temporary reg-
ulation §1.1297–3T(c) governing the
deemed dividend election by a United
States person that is a shareholder of a
PFIC will be finalized in a future regula-
tion project.
Notice 98–22 (1998–17 I.R.B. 5) pro-
vides that taxpayers will be permitted to
apply the rules of the temporary regula-
tions under §1.1295–1T(b)(4) (section
1295 election by shareholders who file a
joint return) and §1.1295–1T(f) and (g)
(procedures for making a section 1295
election and annual information require-
ments by the PFIC or intermediary) to
taxable years beginning before January 1,
1998, for which the statute of limitations
on the assessment of tax has not expired
and, with respect to § 1.1295–1T(b)(4), if
certain consistency requirements are met.
The rule of Notice 98–22 has been incor-
porated into §1.1295–1(k) of this regula-
tion. Final regulation §1.1295–1(k) is
changed to reflect the special effective
dates for §1.1295–1(b)(4), (f) and (g) as
provided by Notice 98–22. Accordingly,
Notice 98–22 is obsoleted since the effec-
tive date provisions are contained in this
final regulation.
Notice 88–125 described the require-
ments a shareholder must satisfy to make
and maintain a section 1295 election for
taxable years beginning before January 1,
1998. As a result of the procedures and
requirements set forth first in the tempo-
rary regulations published on January 2,
1998, and now in these final regulations,
Notice 88–125 is obsoleted effective Feb-
ruary 7, 2000.
Effect On Other Documents
Notice 88–125 and Notice 98–22 are
obsoleted as of February 7, 2000.
Special Analyses
It has been determined that the final reg-
ulations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not
apply to these regulations. Further, it is
hereby certified, pursuant to sections
603(a) and 605(b) of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), that the col-
lection of information contained in these
regulations will not have a significant eco-
nomic impact on substantial number of
small entities. The cost of collection of in-
formation to small entities is insignificant
because the primary reporting burden is on
individual PFIC shareholders who make
the section 1295 election. Therefore, the
collection of information will not have a
substantial economic impact. Therefore, a
regulatory flexibility analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rule-
making preceding these regulations was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of the final regula-
tions is Margaret A. Fung, Office of Asso-
ciate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

February 22, 20006502000–8 I.R.B.
PART 1–INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.1291–1 also issued under 26
U.S.C. 1291. * * *
Sec. 1.1293–1 also issued under 26
U.S.C. 1293. * * *
Sec. 1.1295–3 also issued under 26
U.S.C. 1295. * * *
§1.1291–1T [Redesignated as
§1.1291–1]
Par. 2. Section 1.1291–1T is redesig-
nated as §1.1291–1 and the section head-
ing is revised to read as follows:
§1.1291–1 Taxation of U.S. persons that
are shareholders of PFICs that are not
pedigreed QEFs.
* * * * *
Par. 3. Section 1.1293–1T is redesig-
nated as §1.1293–1 and the newly desig-
nated section is amended by revising the
section heading and the first sentence of
paragraph (c)(1) to read as follows:
§1.1293–1 Current taxation of income
from qualified electing funds.
* * * * *
(c) Application of rules of inclusion
with respect to stock held by a pass
through entity — (1) In general. If a do-
mestic pass through entity makes a sec-
tion 1295 election, as provided in para-
graph (d)(2) of this section, with respect
to the PFIC shares that it owns, directly or
indirectly, the domestic pass through en-
tity takes into account its pro rata share of
the ordinary earnings and net capital gain
attributable to the QEF shares held by the
pass through entity. * * *
* * * * *
Par. 4. Section 1.1295–0 is amended
by:
1. Revising the introductory text of the
section.
2. Removing the entry for the heading
of §1.1295–1T and adding an entry for
the heading of §1.1295–1 in its place.
3. Revising the entries for
§1.1295–1(d)(3) through (d)(5).
4. Adding entries for §1.1295–1(d)(6)
and (e)(1) and (e)(2).
5. Removing the entry for the heading
of §1.1295–3T and adding an entry for
the heading of §1.1295–3 in its place.
The revisions and additions read as fol-
lows:
§1.1295–0 Table of contents.
This section contains a listing of the
headings for §§1.1295–1 and 1.1295–3.
§1.1295–1 Qualified electing funds.
* * * * *
(d) * * *
(3) Indirect ownership of a PFIC
through other PFICs.
(4) Member of consolidated return
group as shareholder.
(5) Option holder.
(6) Exempt organization.
(e) * * *
(1) General rule.
(2) Examples.
* * * * *
§1.1295–3 Retroactive elections.
* * * * *
§1.1295–1T [Redesignated as
§1.1295–1]
Par. 5. Section §1.1295–1T is redesig-
nated as §1.1295–1 and the newly desig-
nated section is amended by:
1. Revising the section heading.
2. Revising paragraph (b)(3)(iv)(B).
3. Adding paragraph (b)(3)(v).
4. Adding a sentence to the end of para-
graph (b)(4).
5.Revising paragraphs (c)(2)(ii)
and (iii).
6.Revising the third sentence in
paragraph (c)(2)(v) Example 3.
7. Redesignating paragraphs (d)(3),
(d)(4) and (d)(5) as paragraphs (d)(4),
(d)(5) and (d)(6), respectively.
8. Adding a new paragraph (d)(3).
9. Revising paragraph (e).
10. In the last sentence of paragraph
(f)(1)(iii), the language “capital gain;
and” is removed and the language “capital
gain.” is added in its place.
11. Adding the word “and” at the end of
paragraph (f)(1)(ii).
12. Removing paragraph (f)(1)(iv).
13. Adding the word “and” at the end
of paragraph (f)(2)(i)(B).
14. In the last sentence of paragraph
(f)(2)(i)(C), the language “capital gain;
and” is removed and the language “capital
gain.” is added in its place.
15. Removing paragraph (f)(2)(i)(D).
16. Adding a new paragraph (f)(3).
17. Revising the introductory language
of paragraph (g)(3).
18. Adding paragraph (g)(5).
19. Revising the first sentence of para-
graph (h).
20. Revising paragraph (k).
The revisions and additions read as fol-
lows:
§1.1295–1 Qualified electing funds.
* * * * *
(b) * * *
(3) * * *
(iv) * * *
(B) In the case of PFIC stock trans-
ferred by an interest holder or beneficiary
to a pass through entity in a transaction in
which gain is not fully recognized (in-
cluding pursuant to regulations under sec-
tion 1291(f)), the pass through entity
makes the section 1295 election with re-
spect to the PFIC stock transferred for the
taxable year in which the transfer was
made. The PFIC stock transferred will be
treated as stock of a pedigreed QEF by the
pass through entity, however, only if that
stock was treated as stock of a pedigreed
QEF with respect to the interest holder or
beneficiary at the time of the transfer, and
the PFIC has been a QEF with respect to
the pass through entity for all taxable
years of the PFIC that are included wholly
or partly in the pass through entity’s hold-
ing period of the PFIC stock during which
the foreign corporation was a PFIC within
the meaning of §1.1291–9(j).
(v) Characterization of stock distrib-
uted by a partnership. In the case of
PFIC stock distributed by a partnership to
a partner in a transaction in which gain is
not fully recognized, the PFIC stock will
be treated as stock of a pedigreed QEF by
the partners only if that stock was treated
as stock of a pedigreed QEF with respect
to the partnership for all taxable years of
the PFIC that are included wholly or
partly in the partnership’s holding period
of the PFIC stock during which the for-
eign corporation was a PFIC within the
meaning of §1.1291–9(j), and the partner
has a section 1295 election in effect with
respect to the distributed PFIC stock for
the partner’s taxable year in which the
distribution was made. If the partner does
not have a section 1295 election in effect,
the stock shall be treated as stock in a sec-
tion 1291 fund. See paragraph (k) of this
section for special applicability date of
paragraph (b)(3)(v) of this section.
(4) * * * See paragraph (k) of this sec-
tion for special applicability date of para-
graph (b)(4) of this section.
(c) * * *

(2) * * *
(ii) Effect of PFIC status on election.
A foreign corporation will not be treated
as a QEF for any taxable year of the for-
eign corporation that the foreign corpora-
tion is not a PFIC under section 1297(a)
and is not treated as a PFIC under section
1298(b)(1). Therefore, a shareholder
shall not be required to include pursuant
to section 1293 the shareholder’s pro rata
share of ordinary earnings and net capital
gain for such year and shall not be re-
quired to satisfy the section 1295 annual
reporting requirement of paragraph (f)(2)
of this section for such year. Cessation of
a foreign corporation’s status as a PFIC
will not, however, terminate a section
1295 election. Thus, if the foreign corpo-
ration is a PFIC in any taxable year after a
year in which it is not treated as a PFIC,
the shareholder’s original election under
section 1295 continues to apply and the
shareholder must take into account its pro
rata share of ordinary earnings and net
capital gain for such year and comply
with the section 1295 annual reporting re-
quirement.
(iii) Effect on election of complete ter-
mination of a shareholder’s interest in the
PFIC. Complete termination of a share-
holder’s direct and indirect interest in
stock of a foreign corporation will not ter-
minate a shareholder’s section 1295 elec-
tion with respect to the foreign corpora-
tion. Therefore, if a shareholder
reacquires a direct or indirect interest in
any stock of the foreign corporation, that
stock is considered to be stock for which
an election under section 1295 has been
made and the shareholder is subject to the
income inclusion and reporting rules re-
quired of a shareholder of a QEF.
* * * * *
(v) * * *
Example 3. * * * If P does not make the section
1295 election with respect to the FC stock, C will
continue to be subject, in C’s capacity as an indirect
shareholder of FC, to the income inclusion and re-
porting rules required of shareholders of QEFs in
1999 and subsequent years for that portion of the FC
stock C is treated as owning indirectly through the
partnership. * * *
(d) * * *
(3) Indirect ownership of a PFIC
through other PFICs — (i) In general.
An election under section 1295 shall
apply only to the foreign corporation for
which an election is made. Therefore, if a
shareholder makes an election under sec-
tion 1295 to treat a PFIC as a QEF, that
election applies only to stock in that for-
eign corporation and not to the stock in
any other corporation which the share-
holder is treated as owning by virtue of its
ownership of stock in the QEF.
(ii) Example. The following example
illustrates the rules of paragraph (d)(3)(i)
of this section:
Example. In 1988, T, a U.S. person, purchased
stock of FC, a foreign corporation that is a PFIC.
FC also owns the stock of SC, a foreign corporation
that is a PFIC. T makes an election under section
1295 to treat FC as a QEF. T’s section 1295 election
applies only to the stock T owns in FC, and does not
apply to the stock T indirectly owns in SC.
* * * * *
(e) Time for making a section 1295
election— (1) In general. Except as pro-
vided in §1.1295–3, a shareholder making
the section 1295 election must make the
election on or before the due date, as ex-
tended under section 6081 (election due
date), for filing the shareholder’s income
tax return for the first taxable year to
which the election will apply. The section
1295 election must be made in the origi-
nal return for that year, or in an amended
return, provided the amended return is
filed on or before the election due date.
(2) Examples. The following exam-
ples illustrate the rules of paragraph (e)(1)
of this section:
Example 1. In 1998, C, a domestic corporation,
purchased stock of FC, a foreign corporation that is
a PFIC. Both C and FC are calendar year taxpayers.
C wishes to make the section 1295 election for its
taxable year ended December 31, 1998. The section
1295 election must be made on or before March 15,
1999, the due date of C’s 1998 income tax return as
provided by section 6072(b). On March 14, 1999, C
files a request for a three-month extension of time to
file its 1998 income tax return under section
6081(b). C’s time to file its 1998 income tax return
and to make the section 1295 election is thereby ex-
tended to June 15, 1999.
Example 2. The facts are the same as in Example
1except that on May 1, 1999, C filed its 1998 in-
come tax return and failed to include the section
1295 election. C may file an amended income tax
return for 1998 to make the section 1295 election
provided the amended return is filed on or before the
extended due date of June 15, 1999.
* * * * *
(f) * * *
(3) Effective date. See paragraph (k)
of this section for special applicability
date of paragraph (f) of this section.
(g) * * *
(3) Annual Intermediary Statement. In
the case of a U.S. person that is an indi-
rect shareholder of a PFIC that is owned
through an intermediary, as defined in
paragraph (j) of this section, an Annual
Intermediary Statement issued by an in-
termediary containing the information de-
scribed in paragraph (g)(1) of this section
and reporting the indirect shareholder’s
pro rata share of the ordinary earnings and
net capital gain of the QEF as described in
paragraph (g)(1)(ii)(A) of this section,
may be provided to the indirect share-
holder in lieu of the PFIC Annual Infor-
mation Statement if the following condi-
tions are satisfied —
* * * * *
(5) Effective date. See paragraph (k)
of this section for special applicability
date of paragraph (g) of this section.
(h) Transition rules. Taxpayers may
rely on Notice 88–125 (1988–2 C.B. 535)
(see §601.601(d)(2) of this chapter), for
rules on making and maintaining elec-
tions for shareholder election years (as
defined in paragraph (j) of this section)
beginning after December 31, 1986, and
before January 1, 1998. * * *
* * * * *
(k) Effective dates. Paragraphs
(b)(2)(iii), (b)(3), (b)(4) and (c) through
(j) of this section are applicable to taxable
years of shareholders beginning after De-
cember 31, 1997. However, taxpayers
may apply the rules under paragraphs
(b)(4), (f) and (g) of this section to a tax-
able year beginning before January 1,
1998, provided the statute of limitations
on the assessment of tax has not expired
as of April 27, 1998 and, in the case of
paragraph (b)(4) of this section, the tax-
payers who filed the joint return have
consistently applied the rules of that sec-
tion to all taxable years following the year
the election was made. Paragraph
(b)(3)(v) of this section is applicable as of
February 7, 2000, however a taxpayer
may apply the rules to a taxable year prior
to the applicable date provided the statute
of limitations on the assessment of tax for
that taxable year has not expired.
§1.1295–3T [Redesignated as
§1.1295–3]
Par. 6. Section §1.1295–3T is redesig-
nated as §1.1295–3 and the newly desig-
nated section is amended by revising the
section heading and paragraphs (b)(1) and
(c)(5)(i) to read as follows:
§1.1295–3 Retroactive elections.
* * * * *
(b) * * *
(1) Reasonably believed, within the
2000–8 I.R.B.651February 22, 2000

meaning of paragraph (d) of this section,
that as of the election due date, as defined
in § 1.1295–1(e), the foreign corporation
was not a PFIC for its taxable year that
ended during the retroactive election year;
* * * * *
(c) * * *
(5) Time of and manner for filing a
Protective Statement—(i) In general.
Except as provided in paragraph (c)(5)(ii)
of this section, a Protective Statement
must be attached to the shareholder’s fed-
eral income tax return for the share-
holder’s first taxable year to which the
Protective Statement will apply. The
shareholder must file its return and the
copy of the Protective Statement by the
due date, as extended under section 6081,
for the return.
* * * * *
Par. 7. In the list below, for each section
indicated in the left column, remove the
language in the middle column and add
the language in the right column.
February 22, 20006522000–8 I.R.B.
Affected SectionRemoveAdd
1.1293–1(c)(1), last sentence§1.1295–1T(j).§1.1295–1(j).
1.1293–1(c)(2)(i), first sentence§1.1295–1T(D)(2),§1.1295–1(d)(2),
1.1295–1(b)(3)(iv)(A)stock), andstock) and
1.1295–1(c)(2)(ii), first sentence1296(a)1297(a)
1.1295–1(c)(2)(ii), first sentence1297(b)(1).1298(b)(1).
1.1295–1(c)(2)(iv), last sentence§1.1293–1T(c).§1.1293–1(c).
1.1295–1(d)(1), last sentence(d)(5)(d)(6)
1.1295–1(d)(2)(i)(A), last sentence§1.1293–1T(c)(1),§1.1293–1(c)(1),
1.1295–1(d)(2)(ii), last sentence§1.1293–1T(c)(1),§1.1293–1(c)(1),
1.1295–1(d)(2)(iii), last sentence§1.1293–1T(c)(1),§1.1293–1(c)(1),
1.1295–1(d)(6), first sentence§1.1291–1T(e),§1.1291–1(e),
1.1295–1(f)(1)(iii), last sentenceQEF calculated the QEF’s PFIC calculated the PFIC’s
1.1295–1(g)(1) introductory text, representation —representations —
second sentence, last word
1.1295–1(g)(1)(ii)(A) §1.1293–1T(a)(2)§1.1293–1(a)(2)
1.1295–1(h), second sentence§1.1295–1T§1.1295–1
1.1295–1(i)(1)(iii), last sentencenever was made.was never made.
1.1295–1(i)(3)(iii)through 1297through 1298
1.1295–3(a), first sentence§1.1295–1T(j),§1.1295–1(j),
1.1295–3(a), first sentence§1.1295–1T(e)§1.1295–1(e)
1.1295–3(b)(2)and 1297and 1298
1.1295–3(c)(3)§1.1295–1T(d).§1.1295–1(d).
1.1295–3(c)(4)(i)(A), third sentenceassessment of taxesassessment of all PFIC related taxes
1.1295–3(c)(6)(i), last sentencesee §1.1295–1T(c)(2)(iii).see §1.1295–1(c)(2)(iii).
1.1295–3(d)(1), first sentencesection 1296(a)section 1297(a)
1.1295–3(d)(1), second sentencesection 1296(a)section 1297(a)
1.1295–3(f)(2)(i) introductory text, PFIC and the availabilityPFIC and of the availability
second sentence
1.1295–3(f)(4)(vi), first sentence§1.1295–1T(d).§1.1295–1(d).
1.1295–3(g)(3), first sentence§1.1295–1T(d).§1.1295–1(d).

PART 602- - OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 9. In § 602.101, paragraph (b) is
amended by removing the entries for
§§1.1295–1T and 1.1295–3T and adding
entries in numerical order to the table to
read as follows:
§ 602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved January 14, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 7, 2000, 65 F.R.
5777)
2000–8 I.R.B.653February 22, 2000
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.1295–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1555
1.1295–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1555
* * * * *

February 22, 20006542000–8 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Exclusions From Gross Income
of Foreign Corporations
REG–208280–86
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed rules implementing the portions
of section 883(a) and (c) of the Internal
Revenue Code (Code) that relate to in-
come derived by foreign corporations
from the international operation of a ship
or ships or aircraft. The proposed rules
reflect changes made by the Tax Reform
Act of 1986 and subsequent legislative
amendments. The proposed rules pro-
vide, in general, that a foreign corporation
organized in a qualified foreign country
and engaged in the international operation
of ships or aircraft shall exclude qualified
income from gross income for purposes
of United States Federal income taxation,
provided that the corporation can satisfy
certain ownership and related documenta-
tion requirements. The proposed rules ex-
plain when a foreign country is a qualified
foreign country and what income is con-
sidered to be qualified income. The pro-
posed rules specify how a foreign corpo-
ration may satisfy the ownership and
related documentation requirements. In
addition, the proposed rules describe the
information that the foreign corporation
must include on its United States income
tax return in order to claim an exemption.
This document provides notice of a public
hearing on these proposed rules.
DATES: Written comments must be re-
ceived by May 8, 2000. Requests to
speak and outlines of topics to be dis-
cussed at the public hearing scheduled for
Thursday, April 27, 2000, at 10 a.m. must
be received by Wednesday, April 5, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–208280–86),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–208280–86),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW.,
Washington, DC. 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.us-
treas.gov/tax_regs/regslist.html. The
public hearing will be held in room 2615,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed rules,
Patricia A. Bray, (202) 622-3880; con-
cerning submissions, the hearing, and/or
to be placed on the building access list to
attend the hearing, Guy Traynor, (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the IRS, Attn: IRS Reports Clearance Of-
ficer, OP:FS:FP, Washington, DC 20224.
Comments on the collection of informa-
tion should be received by April 10, 2000.
Comments are specifically requested con-
cerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in §§1.883–1,
1.883–2, 1.883–3, 1.883–4, and 1.883–5.
The information required in these sections
will enable a foreign corporation to deter-
mine if it is eligible to exclude its income
from the international operation of a ship
or ships or aircraft from gross income on
its U.S. Federal income tax return. The
information required in these sections will
also enable the IRS to monitor compli-
ance with the provisions of the proposed
regulations with respect to the stock own-
ership requirements of §1.883–1(c)(2),
and to make a preliminary determination
of whether the foreign corporation is eli-
gible to claim such an exemption and is
accurately reporting income as required
under section 6012.
The collection of information and re-
sponses to these collections of informa-
tion are mandatory. The likely respon-
dents are foreign corporations engaged in
the international operation of a ship or
ships or aircraft that wish to claim an ex-
emption from U.S. tax under section 883,
and certain of their shareholders owning
(directly or indirectly) a majority of the
value of the shares of such corporations.
Estimated total annual reporting/record-
keeping burden on corporations:1,400
hours.
The estimated annual burden per respon-
dent varies from 30 minutes to eight
hours, depending on the circumstances of
the foreign corporation, with an estimated
average of one hour.
Estimated number of respondents:
1,400.
Estimated annual frequency of re-
sponses: Once.
Estimated total annual reporting bur-
den on shareholders:22,500 hours.
The estimated annual burden per respon-
dent varies from 15 minutes to eight
hours, depending on the circumstances of
Part IV. Items of General Interest

the shareholder or intermediary, with an
estimated average of 90 minutes.
Estimated number of respondents:
15,000.
Estimated annual frequency of re-
sponses: Once.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Section 883 provides an exemption
from gross income for earnings of a for-
eign corporation derived from the interna-
tional operation of a ship or ships or air-
craft (hereinafter ships or aircraft) if an
equivalent exemption from tax is granted
by the applicable foreign country to cor-
porations organized in the United States.
Section 883 has generally been referred to
as the reciprocal exemption provision.
Before 1986, section 883 eliminated U.S.
tax on earnings from the operation of
ships or aircraft derived by foreign per-
sons, including U.S.-controlled foreign
corporations, based on whether the coun-
try of documentation of the ship or reg-
istry of the aircraft provided an exemption
to U.S. persons. Section 883 did not re-
quire a foreign transportation company to
be organized or resident in the country of
registration or documentation. Many
countries offered various incentives, in-
cluding no taxation, to non-resident ship-
ping companies that registered ships in
that jurisdiction (referred to as flagging-
out or documenting ships under flags of
convenience). Thus, foreign corporations
that documented their ships in such flag of
convenience countries could claim a reci-
procal exemption from U.S. income tax.
Congress concluded in 1986 that the
reciprocal exemption provisions were not
meeting their original goal of reserving
the right to tax transportation income to
the country of residence of the taxpayer
(and therefore to eliminate double taxa-
tion). In cases where residents of a coun-
try with which the United States might
desire a reciprocal exemption used ves-
sels or aircraft documented or registered
under another flag, the unilateral U.S.
concession provided under prior law left
the country of residence little incentive to
exempt U.S. shippers. Congress was con-
cerned that U.S.-based transportation
companies were at a competitive disad-
vantage because U.S. companies re-
mained potentially subject to tax by the
countries in which their foreign competi-
tors were organized and resident.
Congress amended the reciprocal ex-
emption provisions of section 883 to rec-
tify this situation. Tax Reform Act of
1986, section 1212, Public Law 99-514,
((1986–3 C.B. 1) (the 1986 Act)), as
amended by the Technical and Miscella-
neous Revenue Act of 1988 (TAMRA),
Public Law 100–647 (1988–3 C.B. 1), and
by the Omnibus Budget Reconciliation Act
of 1989, Public Law 101–239 (1990–1
C.B. 210), (the 1986 Act, as amended). It
is now irrelevant under section 883 where
a ship is documented or an aircraft is regis-
tered. Instead, section 883 provides that a
foreign corporation may qualify for the
reciprocal exemption only if it is organized
in a foreign country that grants corpora-
tions organized in the United States an
equivalent exemption with respect to in-
come derived from the international opera-
tion of ships or aircraft. In addition, more
than 50 percent of the value of the stock of
the foreign corporation must be owned by
individuals who are residents of a foreign
country that grants corporations organized
in the United States an equivalent exemp-
tion. The 50 percent ownership require-
ment generally does not apply if the corpo-
ration is either a qualifying controlled
foreign corporation (CFC) or if its stock is
primarily and regularly traded on an estab-
lished securities market in a qualified for-
eign country or the United States.
Since 1986, the United States and more
than 30 foreign countries have entered
into reciprocal exemption agreements in-
corporating the statutory amendments of
section 883. In addition, more than 60
countries now provide an equivalent ex-
emption through domestic law or an in-
come tax convention. The current regula-
tions under §1.883–1, however, have not
been amended to reflect the statutory
changes enacted since 1986. This docu-
ment proposes updated rules reflecting
the statutory changes.
Explanation of Provisions
General Rule
Section 1.883–1(a) provides the gen-
eral rule. A foreign corporation engaged
in the international operation of a ship or
aircraft shall exclude from its gross in-
come for U.S. Federal income tax pur-
poses any income it derives from the in-
ternational operation of ships or aircraft if
such income is qualified income under
paragraph (b) and if the corporation is a
qualified foreign corporation under para-
graph (c).
Section 1.883–1(b) provides that quali-
fied income is income that is properly in-
cludible in an income category described
in paragraph (h)(2) of this section and that
is the subject of an equivalent exemption
granted by the foreign country in which
the foreign corporation seeking qualified
foreign corporation status is organized.
Section 1.883–1(c)(1) describes the
general requirements that a foreign corpo-
ration must satisfy to be considered a
qualified foreign corporation. A qualified
foreign corporation is a corporation, as
defined in §§301.7701–2(b) and
301.7701–3, that is engaged in the inter-
national operation of ships or aircraft and
that is organized in a qualified foreign
country. A qualified foreign corporation
must also satisfy one of the three stock
ownership tests described in paragraph
(c)(2) of this section as well as the sub-
stantiation and reporting requirements de-
scribed in paragraph (c)(3) of this section.
Paragraph (c)(2) describes the three
stock ownership tests. Generally, a for-
eign corporation must be able to demon-
strate and document that more than fifty
percent of the value of its stock is owned
by qualified shareholders, as determined
under §1.883–4 (qualified shareholder
stock ownership test). However, a for-
eign corporation will not be required to
demonstrate that it satisfies the qualified
shareholder stock ownership test if it can
demonstrate either that its stock is primar-
ily and regularly traded on an established
securities market in a qualified foreign
country or in the United States, as deter-
mined under §1.883–2 (publicly-traded
test), or that it is a qualifying controlled
foreign corporation as determined under
§1.883–3 (CFC test).
2000–8 I.R.B.655February 22, 2000

February 22, 20006562000–8 I.R.B.
To satisfy the substantiation and report-
ing requirements described in paragraph
(c)(3) of this section, a foreign corpora-
tion must include the information set out
in that paragraph in its Form 1120F, “U.S.
Income Tax Return of a Foreign Corpora-
tion,” in such form and manner as the
Form 1120F and its accompanying in-
structions prescribe. The information to
be submitted with the return includes in-
formation set out in §§1.883–2(f),
1.883–3(d) and 1.883–4(e), as applicable,
relating to information demonstrating that
the foreign corporation satisfies one of the
three stock ownership tests. Section
1.883–5(c) provides a transition rule that
will require such information to be in-
cluded in a statement attached to the re-
turn until the Form 1120F and its instruc-
tions are amended to conform to final
regulations under this section.
Paragraph (c)(3)(ii) provides that if the
Commissioner requests in writing that the
foreign corporation substantiate represen-
tations made under paragraph (c)(3)(i) of
this section, or under §1.883–2(f),
1.882–3(d) or 1.883–4(e), the foreign cor-
poration must provide the supporting doc-
umentation or substantiation within 60
days following the written request. If the
foreign corporation does not provide all
of the information requested within the 60
day period but demonstrates that the fail-
ure was due to reasonable cause and not
willful neglect, the Commissioner may
grant the foreign corporation a 30-day ex-
tension to provide the supporting docu-
mentation or substantiation. Whether a
failure to obtain the documentation or
substantiation in a timely manner was due
to reasonable cause shall be determined
by the Commissioner after considering all
the facts and circumstances.
Paragraph (c)(4) contains a rule that al-
lows the Commissioner to retain the right
to cure any defects in the documentation
where the Commissioner is satisfied that
the foreign corporation would otherwise
be a qualified foreign corporation.
Paragraph (d) defines a qualified for-
eign countryas a foreign country that
grants an equivalent exemption to corpo-
rations organized in the United States for
the relevant category of qualified income
earned by the foreign corporation seeking
qualified foreign corporation status. A
foreign country may be a qualified for-
eign country with respect to one category
of income but not with respect to other
categories of income.
Operation of Ships or Aircraft
Section 1.883–1(e) explains what it
means to be engaged in the operation of
ships or aircraft for purposes of these pro-
posed rules and provides examples of ac-
tivities that are not treated as the opera-
tion of ships or aircraft. Under the
general rule, only a corporation that is an
owner, lessor, or lessee of an entire ship
or aircraft used to carry cargo or persons
for hire can be considered engaged in the
operation of ships or aircraft.
The term operation of ships or aircraft,
which includes the operation of a single
ship or aircraft, means: the carrying of
cargo or passengers for hire; the time or
voyage charter of a ship or the wet lease
of an aircraft, as those terms are defined
in the regulations; and the bareboat char-
ter of a ship or the dry lease of an aircraft,
as those terms are defined in the regula-
tions. The term also includes active par-
ticipation by a corporation that is other-
wise engaged in the operation of ships or
aircraft in a pool, partnership, strategic al-
liance, joint operating agreement or code
sharing arrangement, or other joint ven-
ture that is itself engaged in the operation
of ships or aircraft.
Paragraph (e)(2) provides as examples
that activities of the following will not be
considered operation of ships or aircraft:
a non-vessel operating common carrier
(an NVOCC); a space or slot charterer; a
ship management company; a company
that obtains ships crews; a ship’s agent; a
ship or aircraft broker; a freight for-
warder; a travel agent; a tour operator; a
pure container leasing company; a passive
investor in a shipping or aircraft business;
or a concessionaire. The proposed rule
also provides the definitions of a number
of relevant terms.
International Operation of Ships or
Aircraft
Section 1.883–1(f) distinguishes interna-
tional from domestic operation of ships or
aircraft. In TAMRA, Congress directed
that transportation income derived solely
from sources within the United States
under section 863(c)(1) should not be
granted exemption from U.S. income taxa-
tion under section 883. Congress also spec-
ified, however, that the reciprocal exemp-
tion generally should be available for
income from international transport activity
that is treated as 50 percent U.S. source in-
come under section 863(c)(2). This is the
same type of income on which the gross
basis tax of section 887 generally would be
imposed. See, S. Rep. No. 100-445, 100th
Cong., 2d Sess. 241-242 (1988). However,
the reciprocal exemption may not necessar-
ily be available to all types of persons earn-
ing that type of income.
To carry out Congress’s intent,
§1.883–1(f)(1) defines the term interna-
tional operationto mean the operation of
ships or aircraft on voyages or flights that
begin or end in the United States and cor-
respondingly end or begin in a foreign
country, determined on a passenger-by-
passenger or cargo-by-cargo basis, as dis-
cussed below. The term specifically ex-
cludes a “cruise to nowhere” that begins
in a U.S. port, travels out into open waters
beyond the territorial limits of the United
States, and then returns to the U.S. port of
origin without touching a foreign port
during the voyage. The fact that a ship
travels beyond United States territorial
limits does not, in itself, constitute inter-
national operation of ships or aircraft if
there is no stop in a foreign country, as
determined under paragraph (f)(2). The
same rules apply for aircraft.
Paragraph (f)(2) provides rules for de-
termining the beginning and ending
points of a voyage for purposes of the de-
finition of the term international opera-
tion. Except in the case of a round trip
cruise, the carriage of a passenger will be
treated as ending at the passenger’s final
destination even if, en route to the passen-
ger’s final destination, a stop is made at a
U.S. intermediate point for refueling,
maintenance, or other business reasons,
provided the passenger does not change
aircraft or ships at the U.S. intermediate
point. Similarly, carriage of a passenger
will be treated as beginning at the passen-
ger’s point of origin even if en route to the
passenger’s final destination, a stop is
made at a U.S. intermediate point pro-
vided the passenger does not change air-
craft or ships at the U.S. intermediate
point. Carriage of a passenger will be
treated as beginning or ending at a U.S.
intermediate point if the passenger
changes aircraft or ships at that location.
See, H.R. Rep No. 432, 98
th
Cong., 2d
Sess. 1340 (1984); H.R. Rep. No. 861,
98
th
Cong., 2d Sess. 934 (1984).

2000–8 I.R.B.657February 22, 2000
The carriage of a passenger on a round
trip cruise that begins in the United States
and stops at one or more foreign ports for
day excursions, maintenance or other
business reasons, and returns to the same
or another U.S. port will be treated as the
international operation of a ship. Pur-
suant to paragraph (f)(2)(i)(A) such a
round trip cruise may also include one or
more intermediate stops at a U.S. port or
ports for similar purposes.
Carriage of cargo will be treated as
ending at the final destination of the cargo
even if, en route to that final destination, a
stop is made at a U.S. intermediate point,
provided that the cargo is transported to
its ultimate destination on the same ship
or aircraft, or provided the same taxpayer
transports the cargo to and from the U.S.
intermediate point and the cargo does not
pass through customs at the U.S. interme-
diate point. Similarly, carriage of cargo
will be treated as beginning at the cargo’s
point of origin even if, en route to its final
destination, a stop is made at a U.S. inter-
mediate point, provided that the cargo is
transported to its ultimate destination on
the same ship or aircraft or provided both
that the same taxpayer transports the
cargo on both legs of the trip and that the
cargo does not pass through customs at
the U.S. intermediate point. Repackag-
ing, recontainerization, or any other activ-
ity involving the unloading of the cargo at
the U.S. intermediate point will not
change these results. See, H.R. Rep No.
432, 98
th
Cong., 2d Sess. 1340 (1984);
H.R. Rep. No. 861, 98
th
Cong., 2d Sess.
934 (1984), reprinted in 1984–3 C.B.
Vol.2., 1, 188.
Whether income is from international
operation is generally to be determined on
a passenger-by-passenger and item of
cargo-by-item of cargo basis. In the case
of income from the bareboat charter of a
ship or the dry lease of an aircraft,
whether the charter income is derived
from international operation is deter-
mined by reference to the use of the ship
or aircraft by the lowest-tier lessee-opera-
tor in the chain of lessees.
A person that is the lessor of a ship
under a bareboat charter or of an aircraft
under a dry lease will be treated as en-
gaged in the international operation of
such ship or aircraft to the extent that the
lowest-tier lessee-operator in the chain of
ownership uses such ship or aircraft for
the international carriage of passengers or
cargo for hire during the shorter of the pe-
riod of the charter or the taxable year.
Paragraph (f)(2)(iii) adopts the guidance
in section 5.02 of Rev. Proc. 91–12
(1991–1 C.B. 473), for determining the
amount of income from the bareboat char-
ter of a ship or the dry lease of an aircraft
that is treated as derived from the interna-
tional operation of the ship or aircraft.
The rule provides that a foreign corpora-
tion must use a reasonable method for de-
termining the proportion of the charter in-
come that is attributable to such
international operation.
One reasonable method, described in
§1.883–1(f)(2)(iii)(A), is based on the
proportion of the days in the term of the
charter or the taxable year, whichever is
shorter, that the ship or aircraft is used in
international operation by the lowest tier
lessee-operator in its chain of lessees. For
this purpose, the number of days during
which the ship or aircraft is not generating
transportation income, within the mean-
ing of section 863(c)(2) (for example,
days during which the ship or aircraft is
out of service while being repaired or
maintained) should not be included in the
numerator of the ratio. Another reason-
able method described in paragraph
(f)(2)(iii)(B) is based on the proportion of
the gross income of the lowest tier lessee-
operator of the ship or aircraft derived
from the international operation of the
ship or aircraft during the taxable year.
An allocation based on the net income of
such lessee-operator will not be consid-
ered reasonable for this purpose due to the
administrative difficulties involved in de-
termining and verifying the proper alloca-
tion of the operator’s expenses.
Activities Incidental to International
Operations
Some corporations engaged in the op-
eration of ships or aircraft earn income
from activities that are so closely related
to the primary activity of operation of
ships or aircraft that it is appropriate to
exclude income from these activities from
taxation under section 883 of the Code.
By contrast, in cases where the operator’s
activities are not so closely related to the
primary activity of operation of ships or
aircraft, it is not appropriate to exclude
the income from such activities from tax-
ation.
The purpose of §1.883–1(g) is to pro-
vide rules for determining when a closely
related activity is incidental to the busi-
ness of the international operation of
ships or aircraft. Paragraph (g)(1) pro-
vides examples of activities that will be
considered incidental to the international
operation of ships or aircraft. For exam-
ple, where a ship operator contracts for
the international carriage of cargo or pas-
sengers on a second operator’s ship, the
activity may be incidental to the interna-
tional operation of a ship by the first oper-
ator. Other examples are: the temporary
investment of working capital funds; the
sale of tickets for international travel by a
ship operator for another ship operator, or
by an air carrier for another air carrier; the
rental by the operator of a ship or aircraft
of containers and related equipment used
in connection with the international oper-
ation of its ship or aircraft; and bareboat
charter of ships or aircraft normally oper-
ated on international voyages or flights
but currently not needed by the operator,
and that are used for international voy-
ages or flights by the lessee/charterer.
If an operator enters into a contract that
requires a concessionaire to provide ser-
vices onboard during the international op-
eration of the operator’s ship or aircraft
and if the operator receives income from
such services, then the income of the op-
erator is appropriately treated as inciden-
tal to the operation of the ship or aircraft
by the operator.
Paragraph (g)(2) provides examples of
activities that are not considered inciden-
tal to the international operation of ships
or aircraft. These examples include: the
sale of or arranging for train travel, bus
transfers, land tour packages, or port city
hotel accommodations within the United
States or a foreign country; and the sale of
airline tickets by a cruise ship operator or
cruise tickets by an air carrier. Further
examples include the sale or rental of U.S.
real property; treasury activities involving
the investment of excess funds or funds
awaiting repatriation generated by the op-
eration of ships or aircraft; rental of con-
tainers for a domestic leg of transporta-
tion in connection with international
carriage of cargo; mere passive invest-
ment in an enterprise engaged in the inter-
national operation of ships or aircraft; ser-
vices performed by the operator for
parties other than passengers, consignors
or consignees; or the carriage of passen-

February 22, 20006582000–8 I.R.B.
gers or cargo on ships or aircraft on do-
mestic legs, not treated as international
operation, either by the foreign operator
or by a U.S. member of a joint operating
agreement, such as a code sharing
arrangement, pooling or alliance.
Determining Whether a Foreign Country
Grants an Equivalent Exemption
Section 1.883–1(h)(1) addresses the
conditions under which a foreign coun-
try’s exemption of certain categories of
income from income tax may constitute
an “equivalent exemption” within the
meaning of section 883 of the Code. A
foreign country will be considered to
grant an equivalent exemption if: the for-
eign country generally imposes no tax on
income, including income from the inter-
national operation of ships or aircraft; the
foreign country specifically provides a
domestic law exemption from a tax on in-
come from the international operation of
ships or aircraft either by statute, decree,
or otherwise; or the foreign country pro-
vides for a reciprocal exemption by
means of an exchange of diplomatic notes
or other agreement with the United States.
In addition, solely with respect to deter-
mining whether a shareholder is a resident
of a qualified foreign country in §1.883–4
(for purposes of the qualified shareholder
stock ownership test), the foreign country
may provide a reciprocal exemption with
respect to income from the international
operation of ships or aircraft by means of
an income tax convention with the United
States. Paragraph (h)(3) of this section
discusses under what circumstances an in-
come tax convention will be considered to
provide an equivalent exemption.
Whether a foreign country provides an
equivalent exemption is determined sepa-
rately with respect to each of the follow-
ing categories of income—
(A) Income from the carriage of cargo
and passengers;
(B) Time or voyage (full) charter in-
come;
(C) Bareboat charter income;
(D) Incidental bareboat charter income;
(E) Incidental container-related in-
come;
(F) Any other income that is incidental
to the business of operating ships or air-
craft; or
(G) Gains of the operator from the sale,
exchange or other disposition of a ship,
aircraft, container or related equipment or
other moveable property used by that op-
erator in international operation.
If an equivalent exemption is not
granted by the foreign country for a cate-
gory of income, income in that category
cannot be exempted from U.S. tax regard-
less of whether the foreign country grants
an equivalent exemption for other cate-
gories of income. Furthermore, an equiv-
alent exemption may be available for in-
come derived from the international
operation of ships even though income
derived from the international operation
of aircraft may not be exempt, and vice
versa.
Section 1.883–1(h)(3) contains a spe-
cial rule regarding income tax conven-
tions. If a foreign corporation is orga-
nized in a foreign country that provides an
equivalent exemption only through an in-
come tax convention with the United
States, the foreign corporation may claim
benefits under section 894 and the income
tax convention, but not under section 883.
See, H.R. Rep. No. 841, 99
th
Cong., 2d
Sess., (1986); Staff of joint Comm. on
Taxation, 100
th
Cong., 1
st
Sess., General
Explanation of the Tax Reform Act of
1986, 931 (1987). If, however, the for-
eign corporation is organized in a country
that offers an equivalent exemption under
an income tax convention and also by
some other means, such as by a diplo-
matic note, the foreign corporation may
choose annually whether it will claim an
exemption under section 894 and the in-
come tax convention or under section 883
by means of the diplomatic note. Such an
election must be made with respect to all
income of the foreign corporation from
the international operation of ships or air-
craft and cannot be made separately with
respect to each category of such income.
If a foreign corporation elects to be cov-
ered under section 883 rather than under
the income tax convention, the foreign
corporation must satisfy the requirements
of this proposed rule, including demon-
strating that it satisfies the stock owner-
ship test of paragraph (c)(2) of this sec-
tion.
Section 1.883–1(h)(4) describes certain
foreign residence-based taxation systems
that may not satisfy the equivalent ex-
emption requirements of this section. For
example, the exemption granted by a for-
eign country’s law or income tax conven-
tion must be a complete exemption and
not merely a reduction to a non-zero rate
of tax levied against corporations orga-
nized in the United States engaged in the
international operation of ships or air-
craft, except in the case of a reduction to a
zero rate for an unlimited period of time.
An exemption granted by a foreign coun-
try’s law that reduces the rate of tax to a
zero rate for only a limited period of time,
such as in the case of a tax holiday, would
not be considered a complete exemption
for purposes of this rule.
Similarly, many foreign countries im-
pose tax only on the income of ships or
aircraft derived from transporting cargoes
into, but not out of, the country or vice
versa. Such a foreign country will not be
treated as granting an equivalent exemp-
tion on the non-taxed income. For exam-
ple, a foreign country that imposes tax
only on the transportation of cargo carried
out of the country (outbound freight) will
not be treated as granting an equivalent
exemption for income from the transport-
ing of cargo into that country (inbound
freight). Thus, if a corporation organized
in such a country derives U.S. source in-
come from voyages that end in the United
States, it cannot claim an exemption on
the basis of an equivalent exemption
granted by the foreign country for in-
bound freight income. With respect to the
carriage of cargo, the foreign country
must provide an exemption from tax for
income from transporting cargo both in-
bound and outbound before it will be con-
sidered to grant an equivalent exemption.
An equivalent exemption also does not
arise where a foreign country only ex-
empts tax on specific types of cargo. Un-
less a country exempts income from
transporting all types of cargo, it will not
be considered to grant an equivalent ex-
emption for purposes of this section.
A foreign country that has a territorial
tax system will be considered to grant an
equivalent exemption only if the tax sys-
tem treats income from the international
operation of ships or aircraft as 100 per-
cent foreign source, and thereby not sub-
ject to tax, even if the income is derived
from a voyage or flight that begins or
ends in that foreign country.
Pursuant to authority provided in sec-
tion 883(a)(5) of the Code, these rules
provide that if a foreign country generally
grants an equivalent exemption to corpo-
rations organized in the United States, but

2000–8 I.R.B.659February 22, 2000
also imposes a residence-based tax on
certain corporations organized in the
United States, the foreign country may
nevertheless be considered to grant an
equivalent exemption and to be a quali-
fied foreign country if the residence-
based tax is imposed only on a corpora-
tion organized in the United States that is
treated as a resident of the other country
because its place of management or con-
trol, or other comparable standard, is in
that foreign country. See, H.R. Rep. No.
247, 101
st
Cong., 1
st
Sess. 1415 (1989).
If instead the residence-based tax is im-
posed on a corporation organized in the
United States that is not managed and
controlled in that foreign country, the for-
eign country would not be treated as a
qualified foreign country and would not
grant an equivalent exemption for pur-
poses of this section.
Finally, a foreign country must provide
an exemption from tax for all income in a
category of income, as defined in para-
graph (h)(2) of this section. For example,
a country that exempts income from the
bareboat charter of passenger aircraft but
not the bareboat charter of cargo aircraft
does not provide an equivalent exemption
for income from bareboat charter of air-
craft.
Pursuant to section 872(b)(7), the pro-
posed rule explains in §1.883–1(i) that a
possession of the United States is consid-
ered to be a foreign country for purposes
of this proposed rule. Thus, a possession
on a mirror system is a qualified foreign
country and is considered to grant an
equivalent exemption to corporations or-
ganized in the United States. The term
mirror systemrefers to the general applic-
ability of the Code in the possession with
the name of the possession substituted for
United Statesin the Code where appropri-
ate. Therefore, a qualified foreign corpo-
ration that is organized in a possession on
a mirror system, and that operates a trans-
portation business between the possession
and the United States, could exclude its
income from the international operation
of ships or aircraft from its gross income
for purposes of U.S. Federal income tax
and such income could be exempt from
U.S. income tax. In cases where a posses-
sion is not on a mirror system, the posses-
sion may nevertheless be a qualified for-
eign country if, for example, it provides
for an equivalent exemption through its
internal law.
Section 1.883–1(j) confirms the rule of
section 265(a)(1). If a qualified foreign
corporation derives income from a non-
exempt activity as well as qualified in-
come, and both are effectively connected
with the conduct of a U.S. trade or busi-
ness, the foreign corporation may not
deduct from any income derived from the
non-exempt activity any amount other-
wise allowable as a deduction from quali-
fied income that is excluded from gross
income and exempt under this proposed
rule.
Stock Ownership Tests
As provided in §1.883–1(c)(2), a for-
eign corporation must satisfy one of three
stock ownership tests to be considered a
qualified foreign corporation. It must
demonstrate that more than fifty percent
of the value of its stock is owned by qual-
ified shareholders, as determined under
§1.883–4 (qualified shareholder test) or
that its stock is primarily and regularly
traded on an established securities market
in a qualified foreign country or in the
United States, as determined under
§1.883–2 (publicly-traded test), or that it
is a controlled foreign corporation as de-
termined under §1.883–3 (CFC test).
Separate reporting and documentation re-
quirements apply to each test. A foreign
corporation that satisfies the publicly-
traded test or the CFC test and its relevant
reporting and documentation require-
ments does not have to comply with the
reporting and documentation require-
ments of the qualified shareholder test.
The Publicly-Traded Stock Ownership
Test
The branch profits tax rules under
§1.884–5(d) provide the framework for
the publicly traded test due to the strong
similarities between the statutory lan-
guage in sections 883(c) and 884(d)(4)(B)
and the fact that both statutes were first
enacted as part of the Tax Reform Act of
1986. Section 1.883–2(a) provides that a
corporation is a publicly-traded corpora-
tion if its stock is primarily and regularly
traded on one or more established securi-
ties markets in any qualified foreign
country or in the United States. The pro-
posed rule generally follows
§1.884–5(d)(2) of the branch profits tax
regulations in defining the term estab-
lished securities market, except that the
proposed rule does not require the foreign
securities exchange to be the principal ex-
change in a country. In addition, the pro-
posed rule follows §1.884–5(d)(3) in
defining the term primarily traded, except
that in the proposed rule the corporation’s
stock may be traded in any qualified for-
eign country or the United States and is
not limited to trading only in the country
where the corporation is organized or the
United States.
Similarly, the proposed rule follows
§1.884–5(d)(4)(i) in defining the general
rule for the term regularly traded. Sec-
tion 1.883–2(d) provides that stock of a
foreign corporation is regularly traded if
one or more classes of stock of the corpo-
ration that, in the aggregate, represent 80
percent or more of the total combined vot-
ing power of all classes of stock of such
corporation entitled to vote and 80 per-
cent or more of the total value of all
classes of stock of such corporation are
listed on an established securities market
or markets during the taxable year; and,
with respect to each class relied on to
meet the 80 percent requirement, trades in
each such class are effected, other than in
de minimis quantities, on such market or
markets on at least 60 days during the tax-
able year (or 1/6 of the number of days in
a short taxable year). In addition, the ag-
gregate number of shares in each such
class that are traded on such market or
markets during the taxable year must be at
least 10 percent of the average number of
shares outstanding in that class during the
taxable year (or, in the case of a short tax-
able year, a percentage that equals at least
10 percent of the average number of
shares outstanding in that class during the
short taxable year multiplied by the num-
ber of days in the short taxable year, di-
vided by 365).
In addition, if a class of stock of the
foreign corporation is traded on an estab-
lished securities market in the United
States, and it is regularly quoted by bro-
kers or dealers making a market in the
stock, it can also be treated as meeting the
trading requirements, provided that the
closely-held exception, described below,
does not apply. A broker or dealer makes
a market in a stock only if the broker or
dealer holds himself out to buy or sell the
stock at the quoted price.
A closely-held class of stock, as set out
in §1.883– 2(d)(3)(i), cannot be treated as

February 22, 20006602000–8 I.R.B.
meeting the trading requirements of the
publicly-traded stock ownership test.
See, §1.884–5(d)(4)(iii)(A). Section
1.883–2(d)(3)(i) provides that a class of
stock is closely held if at any time during
the taxable year, one or more 5 percent
shareholders own, in the aggregate, 50
percent or more of the value of the out-
standing shares of the class of stock at any
time during the taxable year. A five per-
cent shareholder is any person who owns
at least five percent of the value of the
outstanding shares of the class of stock,
taking into account stock owned by re-
lated persons. See §1.883– 2(d)(3)(iii).
See also §1.884–5(d)(4)(iii)(B).
For this purpose, persons will be
treated as related if they are related within
the meaning of section 267(b). In deter-
mining whether two or more corporations
are members of the same controlled group
under section 267(b)(3), a person is con-
sidered to own stock owned directly by
such person, stock owned with the appli-
cation of section 1563(e)(1), and stock
owned with the application of section
267(c). Further, in determining whether a
corporation is related to a partnership
under section 267(b)(10), a person is con-
sidered to own the partnership interest
owned directly by such person and the
partnership interest owned with the appli-
cation of section 267(e)(3).
The closely-held test in this proposed
rule differs in one significant respect from
the rule in the branch profits tax regula-
tions. The proposed rule allows the for-
eign corporation to look through the five
percent shareholders of the closely-held
class to the ultimate owners and to
demonstrate that such owners are quali-
fied shareholders, provided no shares of
stock in the chain of ownership are issued
in bearer form. In the proposed rule, a
class of stock of a foreign corporation that
is otherwise regularly traded but is also
closely-held will be treated as regularly
traded if the foreign corporation demon-
strates that more than 50 percent of the
value of that class of stock is owned, or is
treated as owned by applying the rules of
attribution contained in §1.883–4(c), by
qualified shareholders for more than half
of the days of the taxable year. The re-
quirements for being treated as a qualified
shareholder are described in §1.883–4(b).
Under this rule, an individual cannot be
treated as a qualified shareholder if any
corporation in the relevant chain of own-
ership issues stock in bearer form.
Thus, a foreign corporation with a class
of stock that is closely-held may neverthe-
less count that class as regularly traded pro-
vided that the foreign corporation is able to
establish that more than 50 percent of the
value of the entire class of stock is owned
(for example, through a partnership, trust or
holding company) by persons who would
themselves be qualified shareholders. The
branch profits tax regulations do not treat a
closely-held class of stock as regularly
traded if 50 percent or more of the value of
the closely-held block is owned by one or
more 5 percent shareholders who are not
qualifying shareholders, as defined in
§1.884–5(b)(1) and those regulations do
not permit the foreign corporation to look
beyond the 5 percent shareholders to the
owners. The IRS is considering whether to
make conforming changes to
§1.884–5(d)(4)(iii).
Paragraph (d)(4) is similar to
§1.884–5(d)(4)(iv) and provides that
trades between related persons described
in section 267(b), as modified by
§1.883–2(d)(3)(iii), and trades conducted
in order to meet the regularly traded re-
quirements are disregarded. A class of
stock shall not be treated as meeting the
trading requirements if there is a pattern
of trades conducted to meet such require-
ments. For example, trades between two
persons that occur several times during
the taxable year may be treated as an
arrangement or a pattern of trades con-
ducted to meet the trading requirements
of paragraph (d) of this section.
Section 1.883–2(d)(5) provides an ex-
ample to illustrate the application of the
rules regarding regularly traded stock and
the closely-held exception.
Section 1.883–2(e) provides that a for-
eign corporation relying on the publicly-
traded stock ownership test to establish
that it satisfies the stock ownership test of
§1.883–1(c)(2) must substantiate that it
meets such requirements. The proposed
rule requires, for example, that if a class of
stock of a foreign corporation is closely-
held within the meaning of paragraph
(d)(3)(i), then the foreign corporation
must obtain an ownership statement from
each qualified shareholder upon whom it
relies to meet the exception to the closely-
held test. The ownership statements are
described in §1.883–4(d). In addition, the
foreign corporation must maintain and
provide to the Commissioner upon request
a list of its shareholders of record and any
other relevant information.
Section 1.883–2(f) describes the infor-
mation that the foreign corporation must
include in its Form 1120F in order to rely
on the publicly-traded stock ownership
test to satisfy the stock ownership test of
§1.883–1(c)(2).
Controlled Foreign Corporation Stock
Ownership Test
Section 1.883–3 provides rules that a
foreign corporation must follow if the for-
eign corporation relies on this section to
satisfy the stock ownership test of
§1.883–1(c)(2). A controlled foreign cor-
poration (CFC) satisfies the stock owner-
ship test of §1.883–1(c)(2) if it is orga-
nized in a qualified foreign country,
satisfies the income inclusion test of para-
graph (b) of this section, and satisfies the
documentation and reporting require-
ments of paragraphs (c) and (d) of this
section, respectively (the CFC test). For
purposes of these proposed rules, a CFC
that fails the income inclusion test may
only satisfy the stock ownership test of
§1.883–1(c)(2) if the CFC demonstrates
that it meets either the publicly traded test
of §1.883–2 or the qualified shareholder
test of §1.883–4.
To satisfy the income inclusion test of
paragraph (b), the foreign corporation
must be a CFC as defined in section
957(a) if such section were applied with-
out regard to section 318(a)(4). In addi-
tion, more than 50 percent of the CFC’s
subpart F income (as defined in section
952) derived from the international opera-
tion of ships or aircraft must be included,
pursuant to section 951, in the gross in-
come of one or more U.S. citizens, indi-
vidual residents of the United States or
domestic corporations for the taxable
years of such persons in which the taxable
year of the CFC ends. This additional re-
quirement was included in order to pre-
vent inappropriate extension of benefits
under section 883. The rule is illustrated
by two examples.
Paragraph (c) provides that a CFC rely-
ing on this section to satisfy the stock
ownership test of §1.883–1(c)(2) must es-
tablish all the facts necessary to satisfy
the Commissioner that it qualifies under
the CFC stock ownership test. To meet
this requirement with respect to the in-

2000–8 I.R.B.661February 22, 2000
come inclusion test, the CFC must obtain
the documentation described in paragraph
(c)(2). This documentation includes a
copy for the taxable year of the Form
5471, Information Return of U.S. Persons
With Respect to Certain Foreign Corpora-
tions (if otherwise required to be filed)
prepared by or on behalf of any U.S.
shareholder that is a partnership, estate or
trust. In addition, the documentation
must include a written statement from
each such U.S. shareholder that is a part-
nership, estate or trust providing the
name, address, taxpayer identification
number and percentage of interest in the
U.S. shareholder held by each partner,
beneficiary or other interest owner that is
a U.S. citizen, individual resident of the
United States or domestic corporation.
Finally, paragraph (d) explains that if a
CFC is relying on this section to satisfy
the stock ownership test of
§1.883–1(c)(2), it must include certain
additional information in its Form 1120F
for the taxable year, along with the infor-
mation required to be included in its re-
turn by §1.883–1(c)(3). This additional
information is set out in paragraph (d) and
should be current as of the end of the cor-
poration’s taxable year.
Qualified Shareholder Stock Ownership
Test
Section 1.883–4(a) provides that a for-
eign corporation shall satisfy the stock
ownership test of §1.883–1(c)(2) if more
than 50 percent of its stock (by value) is
owned, or treated as owned by applying
the attribution rules of paragraph (c) of
this section, for at least half of the number
of days in the foreign corporation’s tax-
able year by one or more qualified share-
holders. In addition, a foreign corpora-
tion must meet the substantiation and
reporting requirements of paragraphs (d)
and (e) of this section (qualified share-
holder stock ownership test).
Paragraph (b)(1) of this section ex-
plains that a shareholder is a qualified
shareholder only if the shareholder meets
certain criteria. First, the shareholder
must be a resident in a country that offers
an equivalent exemption for the same
type of income as that earned by the for-
eign corporation. Second, the shareholder
must not own its interest in the foreign
corporation through bearer shares either
directly or by applying the attribution
rules of paragraph (c) of this section.
Third, the shareholder must provide to the
foreign corporation the documentation re-
quired in paragraph (d) of this section and
the foreign corporation must meet the re-
porting requirements of paragraph (e) of
this section with respect to such share-
holder. Finally, the shareholder must be
described in one of the following cate-
gories of qualified shareholders—
(A) An individual who is not a benefi-
ciary of a pension fund, as described in
paragraph (E), and who is a resident of a
qualified foreign country, as determined
under paragraph (b)(2);
(B) The government of a qualified for-
eign country (or a political subdivision or
local authority of such country);
(C) A foreign corporation that is orga-
nized in a qualified foreign country and
meets the publicly traded rules of
§1.883–2;
(D) A not-for-profit organization de-
scribed in paragraph (b)(4) of this section
that is not a pension fund as defined in
paragraph (b)(5) of this section and that is
organized in a qualified foreign country;
or
(E) A beneficiary of a pension fund (as
defined in paragraph (b)(5)(iv) of this sec-
tion) administered in or by a qualified for-
eign country (whose residency is deter-
mined under paragraph (d)(3)).
Paragraph (b)(2) of this section ex-
plains when an individual is a resident of
a qualified foreign country for purposes
of this proposed rule. An individual is a
resident of a qualified foreign country
only if the individual is fully liable to tax
as a resident in such country (for exam-
ple, an individual who is liable to tax only
on a remittance basis in a foreign country
may not be treated as a resident of that
country), and in addition, either: (1) the
individual’s tax home, within the meaning
of paragraph (b)(2)(ii) of this section, is
within that qualified foreign country 183
days or more of the taxable year; or (2)
the individual is treated as a resident of a
qualified foreign country based on special
rules pursuant to paragraphs (d)(3) of this
section.
Paragraph (b)(2)(ii) explains that for
purposes of this section an individual’s
tax home is considered to be located at the
individual’s regular or principal (if more
than one regular) place of business. If the
individual has no regular or principal
place of business because of the nature of
his business (or lack of a business), then
the individual’s tax home is located at his
regular place of abode in a real and sub-
stantial sense. If an individual has no reg-
ular or principal place of business and no
regular place of abode in a real and sub-
stantial sense in a qualified foreign coun-
try for 183 days or more of the taxable
year, that individual does not have a tax
home for purposes of this section and,
therefore, is not a qualified shareholder
unless either a special rule in paragraphs
(d)(3)(ii) through (v) of this section ap-
plies or the individual demonstrates that
he is fully liable to tax as a resident in
such country. If further guidance is
needed to determine the tax home of an
individual for the purpose of determining
whether the individual is a qualified
shareholder under this paragraph, the pro-
posed rule anticipates that the foreign cor-
poration would look to published guid-
ance under section 911(d)(3), with the
exception of guidance relating to the
treatment of itinerants.
Paragraph (b)(3) provides that a share-
holder otherwise described in paragraph
(b)(1) of this section may be a resident of
a foreign country that provides an equiva-
lent exemption for the category of income
at issue through an income tax convention
with the United States. If the shareholder
relies on the convention to demonstrate
that the country of residence provides an
equivalent exemption and the convention
has a requirement in the shipping and air
transport article other than residence,
such as place of registration or documen-
tation of the ship or aircraft, or in the lim-
itation on benefits article, such as a per-
centage of resident ownership, the
shareholder is not a qualified shareholder
unless the corporation seeking qualified
foreign corporation status would satisfy
any such additional requirement if it were
organized in such foreign country. The
proposed rule offers two examples to il-
lustrate this rule.
Paragraph (b)(4) explains the require-
ments for a not-for- profit organization to
be a qualified shareholder. This rule gen-
erally follows the rules in the first para-
graph of §1.884–5(b)(1)(iv) of the branch
profits tax regulations. Similarly, para-
graph (b)(5) explains the requirements
that a pension fund must satisfy in order
for its beneficiaries to be qualified share-
holders. The proposed rule addresses

February 22, 20006622000–8 I.R.B.
both government and non-government
pension funds and defines the term bene-
ficiary of a pension fund. This paragraph
generally follows §1.884–5(b)(8)(i)
through (iii) of the branch profits tax reg-
ulations.
Paragraph (c) of this section contains
the rules for determining constructive
ownership for purposes of applying the
stock ownership test of §1.883–1(c)(2)
and the qualified shareholder stock own-
ership test of paragraph (a) of this section.
Paragraph (c)(1) provides that stock
owned by or for a corporation, partner-
ship, trust, estate, or mutual insurance
company or similar entity shall be treated
as owned proportionately by its share-
holders, partners, beneficiaries, grantors,
or other interest holders as provided in
paragraphs (c)(2)through (6) of this sec-
tion. The proportionate interest rules of
this paragraph apply successively upward
through a chain of ownership, and a per-
son’s proportionate interest shall be com-
puted for the relevant days or period that
is taken into account in determining
whether a foreign corporation satisfies the
requirements of paragraph (a) of this sec-
tion. Stock treated as owned by a person
by reason of this paragraph shall be
treated as actually owned by such person
for purposes of this section. An owner of
an interest in an association taxable as a
corporation shall be treated as a share-
holder of such association for purposes of
this paragraph (c).
Paragraph (c)(2) explains that a partner
shall be treated as having an interest in
stock of a foreign corporation owned by a
partnership in proportion to the least of
three distributive shares: the partner’s
percentage distributive share of the part-
nership’s dividend income from the stock;
the partner’s percentage distributive share
of gain from disposition of the stock by
the partnership; or the partner’s percent-
age distributive share of the stock (or pro-
ceeds from the disposition of the stock)
upon liquidation of the partnership. This
rule generally follows the constructive
ownership rules in §1.884–5(b)(2)(ii) of
the branch profits tax regulations. It dif-
fers, however, because all qualified share-
holders that are partners in a partnership
and that are residents of, or organized in,
the same qualified foreign country shall
be treated as one partner. Thus, the per-
centage distributive shares of dividend in-
come, gain and liquidation rights of all
qualified shareholders that are partners in
a partnership and that are residents of, or
organized in, the same qualified foreign
country are aggregated prior to determin-
ing the least of the three percentages set
out in paragraph (c)(2)(i) of this section.
This divergence was necessary because
one country may be a qualified foreign
country while another may not and it is
necessary for the foreign corporation to
identify the value of the stock owned by
residents of each country. Several exam-
ples illustrate the rules of this paragraph.
Paragraph (c)(3) of this section pro-
vides rules for determining the owners of
stock owned by or for a trust or estate.
These rules generally adopt the rules of
§1.884–5(b)(2)(iii) of the branch profits
tax regulations. Similarly, paragraphs
(c)(4) and (5) provide rules for determin-
ing the owners of stock owned by corpo-
rations that issue stock and by mutual in-
surance companies and similar entities,
respectively. These rules adopt the rules
of §1.884–5(b)(2)(iv) and (v) of the
branch profits tax regulations, respec-
tively.
Paragraph (c)(6) explains how to com-
pute the beneficial interests of individuals
in non-government pension funds. This
rule differs from the rule in
§1.884–5(b)(8)(iv) of the branch profits
tax regulations in that the proposed rule
provides that stock held by a non-govern-
ment pension fund shall be considered
owned by the beneficiaries of the fund
equally on a pro-rata basis if certain condi-
tions are met. For example, the trustees,
directors or other administrators of the
pension fund must have no knowledge,
and no reason to know, that a pro-rata allo-
cation of interests of the fund to all benefi-
ciaries would differ significantly from an
actuarial allocation of interests in the fund
(or, if the beneficiaries’ actuarial interest
in the stock held directly or indirectly by
the pension fund differs from the benefi-
ciaries’s actuarial interest in the pension
fund, that a pro-rata allocation of interests
of the fund to all beneficiaries would dif-
fer significantly from the actuarial inter-
ests computed by reference to the benefi-
ciaries’ actuarial interest in the stock).
The branch profits tax regulations de-
termine such beneficial interests on an ac-
tuarial basis. The other conditions that
must be satisfied generally follow those
set out in §1.884–5(b)(8)(iv).
Paragraph (d)(1) provides that a foreign
corporation that relies on this section to
satisfy the ownership requirements of
§1.883–1(c)(2), must establish all the
facts necessary to satisfy the Commis-
sioner that more than 50 percent of the
value of its shares is owned, or treated as
owned by applying paragraph (c) of this
section, by qualified shareholders. A for-
eign corporation cannot meet this require-
ment with respect to any stock issued in
bearer form. A shareholder that holds
shares in the foreign corporation either di-
rectly or indirectly in bearer form cannot
be a qualified shareholder.
Paragraph (d)(2)(i) provides that, ex-
cept as provided in paragraph (d)(3), a
person may only be a qualified share-
holder if for the relevant period, the per-
son completes an ownership statement,
which is described in paragraph (d)(4) of
this section. In the case of a person own-
ing stock in the foreign corporation indi-
rectly through one or more intermediaries
(including mere legal owners or record-
holders acting as nominees), each inter-
mediary in the chain of ownership be-
tween that person and the foreign
corporation seeking qualified foreign cor-
poration status must also complete an in-
termediary ownership statement, which is
described in paragraph (d)(4)(v). In addi-
tion, the foreign corporation must receive
such ownership statements and retain
them with the corporate books and
records until the close of statute of limita-
tions for the taxable year to which the
statements relate.
The ownership statements required in
paragraph (d)(2)(i) remain valid until the
earlier of the last day of the third calendar
year following the year in which the own-
ership statement is signed or the day that a
change of circumstance occurs that makes
any information on the ownership state-
ment incorrect. For example, an owner-
ship statement signed on September 30,
2000, remains valid through December
31, 2003, unless circumstances change
that make the information of the state-
ment no longer correct.
Paragraph (d)(3) contains special rules
for determining the residence of certain
shareholders. These rules are intended to
simplify and reduce the effort needed by
the foreign corporation and its intermedi-
ary shareholders to obtain the documenta-

2000–8 I.R.B.663February 22, 2000
tion required to substantiate whether the
foreign corporation satisfies the qualified
shareholder stock ownership test. If one
of these special rules applies, the foreign
corporation is not required to obtain an
ownership statement from the individual
owners covered by that rule.
Paragraph (d)(3)(ii) provides a special
rule for registered shareholders owning
less than one percent of widely-held cor-
porations. This rule is adopted from
§1.884–5(b)(3)(iii) of the branch profits
tax regulations. A foreign corporation
with at least 250 registered individual
shareholders, that is not a publicly-traded
corporation, as described in §1.883–2, (a
widely-held corporation), may not be re-
quired to obtain an ownership statement
from an individual shareholder owning
less than one percent of the widely-held
corporation at all times during the taxable
year. If such widely-held foreign corpora-
tion is the foreign corporation seeking
qualified foreign corporation status, or an
intermediary that meets the documenta-
tion requirements of paragraphs
(d)(4)(v)(A) and (B) of this section, relat-
ing to ownership statements from widely-
held intermediaries with registered share-
holders owning less that one percent of
such intermediary, the widely-held foreign
corporation may treat the address of
record in its ownership records as the resi-
dence of any less than one percent individ-
ual shareholder if the individual’s address
of record is not a non-residential address,
such as a post office box or in care of a fi-
nancial intermediary or stock transfer
agent and the officers and directors of the
widely-held corporation neither know nor
have reason to know that the individual
does not reside at that address.
Paragraph (d)(3)(iii) provides special
rules for pension funds. An individual
who is a beneficiary of a government pen-
sion fund shall be treated as a resident of
the country in which the pension fund is
administered if the pension fund satisfies
the documentation requirements of para-
graphs (d)(4)(v)(A) and (C)(1) of this sec-
tion, relating to ownership statements
from pension funds. An individual who is
a beneficiary of a non-government pen-
sion fund having more than 100 benefi-
ciaries shall be treated as a resident of the
country of the beneficiary’s address as it
appears on the records of the fund, pro-
vided it is not a nonresidential address,
such as a post office box or an address in
care of a financial intermediary, and pro-
vided none of the trustees, directors or
other administrators of the pension fund
know, or have reason to know, that the
beneficiary is not an individual resident of
such foreign country. This rule applies
only if the non-government pension fund
satisfies the documentation requirements
of paragraphs (d)(4)(v)(A) and (C)(2) of
this section.
Paragraph (d)(3)(iv) provides a special
rule for publicly- traded corporations
owning a direct or indirect interest in the
foreign corporation seeking qualified for-
eign corporation status. Any stock in a
foreign corporation seeking qualified for-
eign corporation status that is owned by a
publicly traded corporation will be treated
as owned by a person resident in the
country where the publicly traded corpo-
ration is organized if the foreign corpora-
tion receives the statement described in
paragraph (d)(4)(iii) of this section from
the publicly-traded shareholder along
with copies of any relevant ownership
statements that the publicly traded share-
holder relies on to satisfy the exception to
the closely-held class of stock rule of
§1.883–2(d)(3)(ii).
Finally, paragraph (d)(3)(v) provides a
special rule for not-for-profit organiza-
tions. For purposes of meeting the own-
ership requirements of paragraph (a) of
this section, a not-for-profit organization
may rely on the addresses of record of its
individual beneficiaries and supporters to
determine where such persons are resi-
dent, provided that: the addresses of
record are not nonresidential addresses
such as a post office box or in care of a fi-
nancial intermediary; the officers, direc-
tors or administrators or the organization
do not know or have reason to know that
the individual beneficiaries or supporters
do not reside at that address; and the for-
eign corporation seeking qualified foreign
corporation status receives the statement
required in paragraph (d)(4)(iv) of this
section from the not-for profit organiza-
tion.
Paragraph (d)(4) describes the informa-
tion that must be obtained by a corpora-
tion seeking qualified foreign corporation
status for each taxable year if the foreign
corporation relies on §1.883–4 to meet
the stock ownership requirements of
§1.883–1(c)(2), or to demonstrate that it
is not a closely-held corporation. Trea-
sury and the IRS solicit comments with
respect to the appropriateness of these in-
formation requirements.
Paragraph (d)(4)(i) provides that an
ownership statement from an individual
shareholder is a written statement signed
under penalties of perjury stating certain
general information about a shareholder’s
ownership interest and country of resi-
dence. Paragraph (d)(4)(ii) provides ad-
ditional information that must be included
if the shareholder is a foreign govern-
ment. Paragraph (d)(4)(iii) provides addi-
tional information that must be included if
the shareholder is a publicly traded corpo-
ration. Paragraph (d)(4)(iv) provides ad-
ditional information that must be included
if the shareholder is a not-for-profit orga-
nization.
The foreign corporation seeking quali-
fied foreign corporation status must ob-
tain an intermediary ownership statement
from each intermediary standing in the
chain of ownership between it and the
qualified shareholders upon whom it re-
lies to meet the qualified shareholder
stock ownership test. Paragraph (d)(4)(v)
provides that an intermediary ownership
statement is a written statement signed
under penalties of perjury by the interme-
diary (if the intermediary is an individual)
or a person who would be authorized to
sign a tax return on behalf of the interme-
diary (if the intermediary is not an indi-
vidual) stating certain general information
about the intermediary’s ownership inter-
est and residence. Paragraph (d)(4)(v)(B)
provides additional information that must
be included if the shareholder is a widely-
held intermediary with registered share-
holders owning less than one percent of
the widely-held intermediary. Paragraph
(d)(4)(v)(C) provides additional informa-
tion that must be included if the share-
holder is a pension fund. This paragraph
describes the information to be included
in the intermediary ownership statement
by both government and non-government
pension funds and provides that the deter-
minations required to be made under this
paragraph (d)(4)(v)(C) shall be made
using information shown on the records
of the pension fund for a date during the
foreign corporation’s taxable year to
which the determination is relevant.
Paragraph (d)(5) requires the foreign
corporation seeking qualified foreign cor-

February 22, 20006642000–8 I.R.B.
poration status to retain the documenta-
tion described in paragraphs (d)(3) and
(4) of this section until the expiration of
the statute of limitations for the taxable
year of the foreign corporation to which
the documentation relates. Such docu-
mentation must be made available for in-
spection by the Commissioner at such
place as the Commissioner may request.
A foreign corporation relying on the
ownership requirements of this section to
demonstrate that it is a qualified foreign
corporation for purposes of
§1.883–1(c)(2) must provide the infor-
mation described in paragraph (e) in addi-
tion to the information required in
§1.883–1(c)(3) to be included in its Form
1120F for each taxable year. The infor-
mation should be current as of the end of
the corporation’s taxable year. This infor-
mation is to be based on an analysis of the
ownership records of the foreign corpora-
tion, as well as on the ownership state-
ments and other documentation that are
obtained from its shareholders.
Proposed Effective Dates
The effective date provisions for the
proposed rule are contained in §1.883–5.
The proposed rule applies to taxable years
of the foreign corporation ending 30 days
or more after the date the proposed rule is
published as a final regulation in the Fed-
eral Register. When the regulation is
final, taxpayers may rely on all the provi-
sions of this section for guidance and may
elect to apply all such substantive provi-
sions for any open taxable year beginning
after December 31, 1986, and ending be-
fore the date the final regulation is effec-
tive. Such election will be applicable for
the year of the election and for all subse-
quent taxable years. However, in no
event will §1.883–1(c)(3) (relating to the
substantiation and reporting required to
be treated as a qualified foreign corpora-
tion) or §§1.883–2(f), 1.883–3(d) and
1.883–4(e) (relating to additional infor-
mation to be included in the return to
demonstrate whether the foreign corpora-
tion satisfies one of three stock ownership
tests) apply to any taxable years ending
prior to the effective date of this regula-
tion.
Section 1.883–1(c)(3) (relating to the
substantiation and reporting required to be
treated as a qualified foreign corporation)
requires that certain information be in-
cluded in the foreign corporation’s Form
1120F, “U.S. tax Return of Foreign Corpo-
ration.” Sections 1.883–2(f), 1.883–3(d)
and 1.883–4(e) (relating to information to
be included to demonstrate whether the
foreign corporation satisfies one of three
stock ownership tests) require that addi-
tional information also be included in such
return. When this regulation becomes
generally applicable, and until the taxable
year for which the Form 1120F and its in-
structions are revised to conform to this
regulation and the foreign corporation
seeking qualified foreign corporation sta-
tus is otherwise directed by such instruc-
tions, the information required in
§1.883–1(c)(3) and §1.883–2(f),
1.883–3(d) or 1.883–4(e), as applicable,
must be included in a written statement
signed under penalties of perjury by a per-
son authorized to sign the return, attached
to the Form 1120F, and filed with the re-
turn.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. Pursuant
to section 7805(f) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business. An
initial regulatory flexibility analysis has
been prepared as required for the collec-
tion of information in this notice of pro-
posed rulemaking under 5 U.S.C. 603.
The analysis is set forth in this preamble
under the heading “Initial Regulatory
Flexibility Analysis.”
Initial Regulatory Flexibility Analysis
This initial analysis is prepared pur-
suant to the Regulatory Flexibility Act (5
U.S.C. chapter 6). The objective of the
proposed regulations is to provide guid-
ance to foreign corporations engaged in
the international operation of a ship or
ships or aircraft. This guidance will en-
able the foreign corporation to determine
if it is eligible to exclude its income from
these activities from gross income for
purposes of its United States Federal in-
come tax. The legal basis for these re-
quirements is section 883. The IRS and
Treasury are not aware of any Federal
rules that duplicate, overlap, or conflict
with the proposed regulations.
The documentation and reporting re-
quirements of the proposed regulations
enable the IRS to identify those taxpayers
that may or may not be eligible to claim a
reciprocal exemption. In addition, analy-
sis of the required shareholder documen-
tation will enable the foreign corporation
to correctly file its U.S. Federal income
tax return.
There are approximately 1,400 foreign
corporations that operate a ship or ships
or aircraft on voyages or flights to or from
the United States annually. These foreign
corporations all have an obligation to file
a U.S. Federal income tax return, regard-
less of whether they are entitled to a reci-
procal exemption. However, many of
those corporations are organized in quali-
fied foreign countries and may be eligible
to exempt their income from the interna-
tional operation of a ship or ships or air-
craft from U.S. tax. Because it is impos-
sible to determine at this time which of
these foreign corporations satisfies the
ownership requirements of the proposed
rule, an estimate of the number of small
entities that would be affected by these
regulations is unavailable. A foreign cor-
poration that complies with the documen-
tation requirements of these proposed
rules should have the information neces-
sary to determine with certainty whether
it is eligible for an equivalent exemption.
This, in turn, is expected to create the ad-
ditional benefits of increasing compliance
with the filing requirements of the Inter-
nal Revenue Code and enabling the IRS
to confirm whether the foreign corpora-
tion is entitled to an exemption.
None of the significant alternatives
considered in drafting these regulations
would have significantly altered the eco-
nomic impact of the collections of infor-
mation on small entities. In considering
the significant alternatives that would be
permissible under the Code and would en-
able the IRS to ensure compliance with
the Code, the IRS and Treasury concluded
that the alternatives generally would im-
pose equal or greater burdens.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)

2000–8 I.R.B.665February 22, 2000
copies) that are submitted timely to the
IRS. The IRS and Treasury request com-
ments on the clarity of the proposed rule
and how it may be made easier to under-
stand. All comments will be made avail-
able for public inspection and copying.
A public hearing has been scheduled
for April 27, 2000, at 10 a.m., in room
2615, Internal Revenue Building, 1111
Constitution Ave., NW., Washington, DC.
Due to building security procedures, visi-
tors must enter at the 10
th
Street entrance,
located between Constitution and Penn-
sylvania Avenues, NW. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 15 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to this hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by April 5, 2000.
A period of 10 minutes will be allotted to
each person for making comments. An
agenda showing the scheduling of the
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Patricia A. Bray of the Of-
fice of the Associate Chief Counsel (In-
ternational). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.883–1 is also issued under 26
U.S.C. 883.
Section 1.883–2 is also issued under 26
U.S.C. 883.
Section 1.883–3 is also issued under 26
U.S.C. 883.
Section 1.883–4 is also issued under 26
U.S.C. 883.
Section 1.883–5 is also issued under 26
U.S.C. 883. * * *
Par. 2. Section 1.883–0 is added to
read as follows:
§1.883–0 Outline of major topics.
This section lists the major paragraphs
contained in §§1.883–1 through 1.883–5.
§1.883–0 Outline of major topics.
§1.883–1 Exclusion of income from the
international operation of ships or
aircraft.
(a) General rule.
(b) Qualified income.
(c) Qualified foreign corporation.
(1) General rule.
(2) Stock ownership tests.
(3) Substantiation and reporting require-
ments.
(i) General rule.
(ii) Further documentation.
(4) Commissioner’s discretion to cure de-
fects in documentation.
(d) Qualified foreign country.
(e) Operation of ships or aircraft.
(1) General rule.
(2) Activities not considered operation of
ships or aircraft.
(3) Definitions.
(i) Full charter.
(ii) Time charter.
(iii) Voyage charter.
(iv) Wet lease.
(v) Bareboat charter.
(vi) Dry lease.
(vii) Space or slot charter.
(viii) Nonvessel operating common car-
rier (NVOCC).
(ix) Code sharing arrangements.
(f) International operation.
(1) General rule.
(2) Determining whether income is from
international operation.
(i) International carriage of passengers.
(A) In general.
(B) Round trip travel on cruise ships.
(ii) International carriage of cargo.
(iii) Bareboat charter of ships or aircraft
used in international operations.
(A) Ratio based on use.
(B) Ratio based on gross income.
(g) Activities incidental to the interna-
tional operation of ships or aircraft.
(1) General rule.
(2) Activities not considered incidental to
the international operation of ships or air-
craft.
(h) Equivalent exemption.
(1) General rule.
(2) Determining equivalent exemptions
for each category of income.
(3) Special rule with respect to income tax
conventions.
(4) Exemptions not qualifying as equiva-
lent exemptions. (i) General rule.
(ii) Reduced tax rate or time limited ex-
emption.
(iii) Inbound or outbound freight tax.
(iv) Exemptions for limited types of
cargo.
(v) Territorial tax systems.
(vi) Countries that tax on a residence
basis.
(vii) Exemptions within categories of in-
come.
(i) Treatment of possessions.
(j) Expenses related to exempt income not
deductible from non-exempt income.
§1.883–2 Treatment of publicly-traded
corporations.
(a) General rule.
(b) Established securities market.
(1) General rule.
(2) Exchanges with multiple tiers.
(3) Computation of dollar value of stock
traded.
(4) Over-the-counter market.
(5) Discretion to determine that an ex-
change does not qualify as an established
securities market.
(c) Primarily traded.
(d) Regularly traded.
(1) General rule.
(2) Classes of stock traded on a domestic
established securities market treated as
meeting trading requirements.
(3) Closely-held classes of stock not
treated as meeting trading requirements.
(i) General rule.
(ii) Exception.
(iii) Treatment of related persons.
(4) Anti-abuse rule.
(5) Example.
(e) Substantiation that a foreign corpora-
tion is publicly-traded.
(i) In general.

February 22, 20006662000–8 I.R.B.
(ii) Availability and retention of docu-
ments for inspection.
(f) Reporting requirements.
§1.883–3 Treatment of controlled foreign
corporations.
(a) General rule.
(b) Special rule for CFC’s with certain en-
tity shareholders.
(1) Income inclusion test.
(2) Examples.
(c) Substantiating CFC stock ownership.
(1) In general.
(2) Documentation from certain U.S.
shareholders.
(3) Availability and retention of docu-
ments for inspection.
(d) Reporting requirements.
§1.883–4 Qualified shareholder stock
ownership test.
(a) General rule.
(b) Qualified shareholder.
(1) General rule.
(2) Residence of individual shareholders.
(i) General rule.
(ii) Tax home.
(3) Certain income tax convention restric-
tions applied to shareholders.
(i) Application of restrictions.
(ii) Examples.
(4) Not-for-profit organizations.
(5) Pension funds.
(i) Pension fund defined.
(ii) Government pension funds.
(iii) Non-government pension funds.
(iv) Beneficiary of a pension fund.
(c) Rules for determining constructive
ownership.
(1) General rules for attribution.
(2) Partnerships.
(i)General rule.
(ii) Partners resident in same country.
(iii) Examples.
(3) Trusts and estates.
(i) Beneficiaries.
(ii) Grantor trusts.
(4) Corporations that issue stock.
(5) Mutual insurance companies and simi-
lar entities.
(6) Computation of beneficial interests in
non-government pension funds.
(d) Substantiation of stock ownership.
(1) General rule.
(2) Application of general rule.
(i) Ownership statements.
(ii) Three-year period of validity.
(3) Special rules.
(i) Determining residence of certain
shareholders.
(ii) Special rule for registered sharehold-
ers owning less than one percent of
widely-held corporations.
(iii) Special rules for beneficiaries of pen-
sion funds.
(A) Government pension fund.
(B) Non-government pension fund.
(iv) Special rule for stock owned by pub-
licly-traded corporations.
(v) Special rule for not-for-profit organi-
zations.
(4) Ownership statements from share-
holders.
(i) Ownership statements from individu-
als.
(ii) Ownership statements from foreign
governments.
(iii) Ownership statements from publicly-
traded corporate shareholders.
(iv) Ownership statements from not-for-
profit organizations.
(v) Ownership statements from intermedi-
aries.
(A) General rule.
(B) Ownership statements from widely-
held intermediaries with registered share-
holders owning less than one percent of
such widely-held intermediary.
(C) Ownership statements from pension
funds.
(1) Ownership statements from govern-
ment pension funds.
(2) Ownership statements from non-gov-
ernment pension funds.
(3) Time for making determinations.
(5) Availability and retention of docu-
ments for inspection.
(e) Reporting requirements.
§1.883–5 Effective date.
(a) General rule.
(b) Election for retroactive application.
(c) Transition rule.
Par. 3. Section 1.883–1 is revised to
read as follows:
§1.883–1 Exclusion of income from the
international operation of ships or air-
craft.
(a) General rule. A foreign corporation
shall exclude from its gross income for
U.S. tax purposes any income it derives
from the international operation of ships
or aircraft if such income is qualified in-
come under paragraph (b) of this section
and if the corporation is a qualified for-
eign corporation under paragraph (c) of
this section. See paragraph (e) of this sec-
tion for the definition of the term opera-
tion of ships or aircraftand see paragraph
(f) of this section for the definition of the
term international operation.
(b) Qualified income. Qualified in-
come is income from the international op-
eration of ships or aircraft that—
(1) Is properly includible in any of the
income categories described in paragraph
(h)(2) of this section; and
(2) Is the subject of an equivalent ex-
emption, as described in paragraph (h) of
this section, granted by the qualified for-
eign country in which the foreign corpo-
ration seeking qualified foreign corpora-
tion status is organized. See paragraph
(d) of this section for the definition of the
term qualified foreign country.
(c) Qualified foreign corporation—(1)
General rule. A qualified foreign corpo-
ration is a corporation, as defined in
§§301.7701–2(b) and 301.7701–3 of this
chapter, that is engaged in the interna-
tional operation of ships or aircraft and
that is organized in a qualified foreign
country. To be a qualified foreign corpo-
ration the corporation must also satisfy
one of the three stock ownership tests de-
scribed in paragraph (c)(2) of this section
and satisfy the substantiation and report-
ing requirements described in paragraph
(c)(3) of this section. A corporation may
be a qualified foreign corporation with re-
spect to one category of qualified income
but may not be with respect to another
category of income. See paragraph (h)(2)
of this section for a discussion of cate-
gories of qualified income.
(2) Stock ownership tests. To be a qual-
ified foreign corporation the foreign cor-
poration generally must demonstrate and
document that more than fifty percent of
the value of its stock is owned by quali-
fied shareholders, as determined in
§1.883–4 (qualified shareholder stock
ownership test). However, a foreign cor-
poration will not be required to demon-
strate that it satisfies the qualified share-
holder stock ownership test if it can
demonstrate either that its stock is primar-
ily and regularly traded on an established
securities market in a qualified foreign
country or in the United States, as deter-
mined under §1.883–2 (publicly-traded
test), or that it is a controlled foreign cor-
poration as determined under §1.883–3
(CFC test).
(3) Substantiation and reporting re-
quirements—(i) General rule. To be a

qualified foreign corporation, a foreign
corporation must include the following
information in its Form ll20F, “U.S. In-
come Tax Return of a Foreign Corpora-
tion,” in the manner that the Form 1120F
and its accompanying instructions pre-
scribes—
(A) The corporation’s name and ad-
dress (including mailing code);
(B) The corporation’s U.S. taxpayer
identification number;
(C) The foreign country in which the
corporation is organized;
(D) The applicable authority for an
equivalent exemption, (e.g., a citation to
either a statute in the country where the
corporation is organized or a diplomatic
note between the foreign country where
the corporation was organized and the
United States that provides an equivalent
exemption, or to Rev. Rul. 97–31 (1997–1
C.B. 703) (see §601.601(d)(2) of this
chapter), if the foreign country is included
in Part II or III of the Table of countries
that currently provide an equivalent ex-
emption);
(E) The category or categories of quali-
fied income for which an exemption is
being claimed;
(F) A reasonable estimate of the
amount of each category of U.S. source
qualified income for which the exemption
is claimed;
(G) Any other information required
under §1.883–2(f), 1.883–3(d), or
1.883–4(e); and
(H) Any other specified information.
(ii) Further documentation. If the
Commissioner requests in writing that the
foreign corporation substantiate represen-
tations made under paragraph (c)(3)(i) of
this section, or under §1.883–2(f),
1.882–3(d) or 1.883–4(e), the foreign cor-
poration must provide the supporting doc-
umentation or substantiation within 60
days following the written request. If the
foreign corporation does not provide all
of the information requested within the 60
day period but demonstrates that the fail-
ure was due to reasonable cause and not
willful neglect, the Commissioner may
grant the foreign corporation a 30-day ex-
tension to provide the supporting docu-
mentation or substantiation. Whether a
failure to obtain the documentation or
substantiation in a timely manner was due
to reasonable cause shall be determined
by the Commissioner after considering
all the facts and circumstances.
(4) Commissioner’s discretion to cure
defects in documentation. The Commis-
sioner retains the discretion to cure any
defects in the documentation where the
Commissioner is satisfied that the foreign
corporation would otherwise be a quali-
fied foreign corporation.
(d) Qualified foreign country. A quali-
fied foreign country is a foreign country
that grants to corporations organized in
the United States an equivalent exemp-
tion, as described in paragraph (h) of this
section, for the category of qualified in-
come earned by the foreign corporation
seeking qualified foreign corporation sta-
tus. A foreign country may be a qualified
foreign country with respect to one cate-
gory of income but not with respect to an-
other category of income, as described in
paragraph (h)(2) of this section.
(e) Operation of ships or aircraft—(1)
General rule. Only a corporation that is
an owner, lessor or lessee of an entire ship
or aircraft used to carry cargo or passen-
gers for hire can be considered engaged in
the operation of ships or aircraft. The
term operation of ships or aircraft, which
includes the operation of a single ship or
aircraft, means—
(i) Carriage of passengers or cargo for
hire;
(ii) Time or voyage charter of a ship, or
wet lease of an aircraft (full charter), as
defined in paragraph (e)(3) of this section;
(iii) Bareboat charter of a ship, or dry
lease of an aircraft, as defined in para-
graph (e)(3) of this section; or
(iv) Active participation by a foreign
corporation that is otherwise engaged in
the operation of ships or aircraft in a pool,
partnership, strategic alliance, joint oper-
ating agreement, code sharing or other
joint venture, that is itself engaged in the
operation of ships or aircraft.
(2) Activities not considered operation
of ships or aircraft. A corporation that is
not engaged in any of the activities de-
scribed in paragraph (e)(1) of this section
shall not be considered engaged in the op-
eration of ships or aircraft. Examples of
activities that do not constitute activities
described in (e)(1) include—
(i) The activities of a nonvessel-operat-
ing common carrier (NVOCC), as defined
in paragraph (e)(3)(viii) of this section;
(ii) Space or slot charter, as defined in
paragraph (e)(3)(vii) of this section;
(iii) Ship management;
(iv) Obtaining crews for ships or air-
craft not operated by the corporation;
(v) The activities of a ship’s agent;
(vi) Ship or aircraft brokering;
(vii) Freight forwarding;
(viii) The activities of travel agents and
tour operators;
(ix) Rental by a container leasing com-
pany of containers and related equipment
for inland transportation;
(x) Passive investment in an enterprise,
including a pool, partnership, strategic al-
liance, joint operating agreement, or other
joint venture, engaged in the international
operation of ships or aircraft; or
(xi) The activities of a concessionaire.
(3) Definitions—(i)Full charter. Full
charter (or full rental) means a time char-
ter or a voyage charter of a ship or a wet
lease of an aircraft.
(ii) Time charter. A time charter is a
contract for the use of a ship or aircraft for
a specific period of time during which the
owner/lessor of the ship or aircraft retains
control of the navigation and management
of the ship or aircraft (e.g., the
owner/lessor continues to be responsible
for the crew, supplies, repairs and mainte-
nance, fees and insurance, charges, com-
missions and other expenses connected
with the use of the ship or aircraft).
(iii) Voyage charter. A voyage charter
is a contract similar to a time charter ex-
cept that the ship or aircraft is chartered
for a specific voyage or flight rather than
for a specific period of time.
(iv) Wet lease. When a time charter or
voyage charter involves an aircraft, it is
referred to, in both cases, as a wet lease.
(v) Bareboat charter. A bareboat
charter is a contract for the use of air-
craft whereby the charterer/lessee is in
complete possession, control, and com-
mand of the ship or aircraft and per-
forms functions normally performed by
the owner/lessor of the ship or aircraft.
For example, the charterer/lessee is re-
sponsible for the navigation and man-
agement of the ship or aircraft, the crew,
supplies, repairs and maintenance, fees,
insurance, charges, commissions and
other expenses connected with the use
of the ship or aircraft. The owner/lessor
of the ship bears none of the expense or
responsibility of operation of the ship or
aircraft.
(vi) Dry lease. When a bareboat char-
2000–8 I.R.B.667February 22, 2000

ter involves an aircraft, it is referred to as
a dry lease.
(vii) Space or slot charter. A space or
slot charter is a contract for use of a cer-
tain amount of space (but less than all of
the space) on a ship or aircraft, and may
be on a time or voyage basis. When used
in connection with passenger aircraft this
may be referred to as the sale of block
seats.
(viii) Nonvessel operating common
carrier (NVOCC). A nonvessel operating
common carrier is an entity that holds it-
self out to the public as providing trans-
portation for hire, assumes responsibility
or has liability by law for safe transporta-
tion of shipments and arranges in its own
name with underlying carriers for the per-
formance of such transportation. An
NVOCC is distinguishable from a char-
terer/lessee in that a charterer/lessee hires
and has control of all or part of a vessel.
An NVOCC is merely a customer of the
ocean common carrier. Where an
NVOCC consolidates shipments and
holds itself out to the public as providing
transportation for hire, its services and li-
abilities are comparable to that of a
freight forwarder.
(ix) Code-sharing arrangements. Code
sharing is an arrangement in which one
air carrier puts its identification code on
the flight of another carrier. This allows
the first carrier to hold itself out as pro-
viding service in markets where it does
not operate or where it operates infre-
quently. Code sharing can range from a
very limited agreement involving only
one market, to alliances between interna-
tional carriers involving agreements on
joint marketing, baggage handling, one-
stop check-in service and sharing of fre-
quent flyer awards.
(f) International operation—(1) Gen-
eral rule. The term international opera-
tionmeans operation of ships or aircraft,
as defined in paragraph (e) of this section,
on voyages or flights that begin or end in
the United States, as determined in para-
graph (f)(2) of this section, and corre-
spondingly end or begin in a foreign
country. The term does not include a voy-
age or flight that begins and ends in the
United States even if the voyage or flight
contains a segment extending beyond the
territorial limits of the United States with
no stop in a foreign country. Operation of
ships or aircraft beyond the territorial lim-
its of the United States does not, in itself,
constitute international operation of ships
or aircraft.
(2) Determining whether income is
from international operation. Whether
income is derived from the international
operation of ships or aircraft is deter-
mined on a passenger-by-passenger basis
(as provided in paragraph (f)(2)(i) of this
section) and item of cargo-by-item of
cargo basis (as provided in paragraph
(f)(2)(ii) of this section). In the case of
the bareboat charter of a ship or the dry
lease of an aircraft, whether the charter
income is derived from international op-
eration is determined by reference to the
use of the ship or aircraft by the lowest-
tier operator in the chain of lessees (as
provided in paragraph (f)(2)(iii) of this
section).
(i) International carriage of passen-
gers—(A) In general. Except in the case
of a round trip cruise, income from the
carriage of a passenger will be income
from the international operation of ships
or aircraft if the passenger is carried be-
tween a beginning point in the United
States and an ending point in a foreign
country and vice versa. Carriage of a pas-
senger will be treated as ending at the pas-
senger’s final destination even if, en route
to the passenger’s final destination, a stop
is made at an intermediate point for refu-
eling, maintenance, or other business rea-
sons, provided the passenger does not
change aircraft or ships at the intermedi-
ate point. Similarly, carriage of a passen-
ger will be treated as beginning at the pas-
senger’s point of origin even if, en route
to the passenger’s final destination, a stop
is made at an intermediate point and the
passenger does not change aircraft or
ships at the intermediate point. Carriage
of a passenger will be treated as begin-
ning or ending at a U.S. or foreign inter-
mediate point if the passenger changes
aircraft or ships at that intermediate point.
(B) Round trip travel on cruise ships.
In the case of the carriage of a passenger
on a round trip cruise that begins in the
United States, stops at a foreign interme-
diate port for shore excursions, refueling,
maintenance, or other business reasons,
and returns to the same or another U.S.
port, the carriage of such passenger on the
round trip cruise will be treated as inter-
national operation of a ship under para-
graph (f)(2)(i)(A) of this section. Such a
round trip cruise may also include one or
more intermediate stops at a U.S. port or
ports for similar purposes.
(ii) International carriage of cargo. In-
come from the carriage of cargo will be
income from the international operation
of ships or aircraft if the cargo is carried
between a beginning point in the United
States and an ending point in a foreign
country or vice versa. Carriage of cargo
will be treated as ending at the final desti-
nation of the cargo even if, en route to
that final destination, a stop is made at a
U.S. intermediate point, provided that the
cargo is transported to its ultimate desti-
nation on the same ship or aircraft. If the
cargo is transferred to another ship or air-
craft, the carriage of the cargo may never-
theless be treated as ending at its final
destination if the same taxpayer transports
the cargo to and from the U.S. intermedi-
ate point and the cargo does not pass
through customs at the U.S. intermediate
point. Similarly, carriage of cargo will be
treated as beginning at the cargo’s point
of origin, even if en route to its final desti-
nation, a stop is made at a U.S. intermedi-
ate point, provided that the cargo is trans-
ported to its ultimate destination on the
same ship or aircraft. If the cargo is trans-
ferred to another ship or aircraft, the car-
riage of the cargo may nevertheless be
treated as beginning at the point of origin
if the same taxpayer transports the cargo
to and from the U.S. intermediate point
and the cargo does not pass through cus-
toms at the U.S. intermediate point.
Repackaging, recontainerization, or any
other activity involving the unloading of
the cargo at the U.S. intermediate point
will not change these results if the same
taxpayer transports the cargo to and from
the U.S. intermediate point and the cargo
does not pass through customs at the U.S.
intermediate point.
(iii) Bareboat charter of ships or air-
craft used in international operations. If
a qualified foreign corporation bareboat
charters a ship or dry leases an aircraft to
a lessee and the lowest tier lessee-opera-
tor in the chain of ownership uses such
ship or aircraft for the international car-
riage of passengers or cargo for hire, as
described in paragraphs (f)(2)(i) and (ii)
of this section, the qualified foreign cor-
poration may exclude the proportion of
the bareboat charter income attributable
to such international operation of the ship
February 22, 20006682000–8 I.R.B.

or aircraft. The foreign corporation must
use a reasonable method for determining
the proportion of the charter income that
is attributable to such international opera-
tion. Two reasonable methods for deter-
mining the amount of charter income at-
tributable to the international operation of
the ship or aircraft are the following:
(A) Ratio based on use. Multiply the
annual charter amount attributable to use
of the ship or aircraft by a lessee by a
ratio, the numerator of which is the total
number of days of uninterrupted travel on
voyages or flights of such ship or aircraft
between the United States and the farthest
point or points where cargo or passengers
are loaded en route to, or discharged en
route from, the United States, and the de-
nominator of which is the total number of
days in the smaller of the taxable year or
the particular charter period. For this pur-
pose, the number of days during which
the ship or aircraft is not generating trans-
portation income, within the meaning of
section 863(c)(2), for example while the
ship or aircraft is out of service while
being repaired or maintained, should not
be included in the numerator of the ratio.
(B) Ratio based on gross income. Mul-
tiply the annual charter amount attribut-
able to the use of the ship or aircraft by
the lessee by a ratio, the numerator of
which is the U.S. source gross transporta-
tion income (USSGTI as that term is de-
fined in section 887(b)) earned from the
operation of the vessel or aircraft by the
lowest tier lessee-operator, and the de-
nominator of which is the total gross in-
come of such lessee-operator from the op-
eration of the ship or aircraft during the
smaller of the taxable year or the term of
the charter, if such information is avail-
able. An allocation based on the net in-
come of such lessee-operator will not be
considered reasonable for this purpose.
(g) Activities incidental to the interna-
tional operation of ships or aircraft—(1)
General rule. Certain activities of an op-
erator of ships or aircraft are so closely re-
lated to the primary activity of operation
of ships or aircraft that they are consid-
ered incidental to such operations. In-
come from these incidental activities is el-
igible for the reciprocal exemption under
this section. Examples of activities of a
foreign corporation engaged in the inter-
national operation of ships or aircraft that
may be considered incidental to such op-
eration include—
(i) Contracting for the international car-
riage of cargo or passengers, as defined in
paragraph (f) of this section, using a space
or slot charter, alliance, code sharing or
similar arrangement, on ships or aircraft
operated by another carrier;
(ii) Temporary investment of working
capital funds;
(iii) Sale of tickets for an international
voyage by a ship operator for another ship
operator;
(iv) Sale of tickets for an international
flight by an air carrier for another air car-
rier;
(v) Rental of containers in connection
with the international carriage of goods
by sea by the operator of a ship or by air
by the operator of an aircraft;
(vi) Contracting with concessionaires
for performance of services onboard dur-
ing the international operation of the op-
erator’s ship or aircraft as the case may
be; or
(vii) Bareboat charter of ships or air-
craft normally used by the operator in in-
ternational operation but currently not
needed, if the ship or aircraft is used by
the lessee for international voyages or
flights.
(2) Activities not considered incidental
to the international operation of ships or
aircraft. Examples of activities that are
not considered to be incidental to the in-
ternational operation of ships or aircraft
by an operator include—
(i) The sale of or arranging for train
travel, bus transfers, land tour packages,
or port city hotel accommodations within
the United States or a foreign country, or
the sale of airline tickets by a cruise ship
operator or cruise tickets by an air carrier;
(ii) The sale or rental of real property;
(iii) Treasury activities involving the
investment of excess funds or funds
awaiting repatriation generated by the op-
eration of ships or aircraft;
(iv) Rental of containers for a domestic
leg of transportation in connection with
international carriage of cargo;
(v) Passive investment in an enterprise
engaged in the international operation of
ships or aircraft;
(vi) Services performed for parties
other than passengers, consignors or con-
signees, such as ground services at ports
or airports or ship or aircraft maintenance;
or
(vii) The carriage of passengers or
cargo on ships or aircraft on domestic
legs, not treated as international operation
under paragraph (f) of this section, either
by the foreign operator or by a U.S. oper-
ator that is a member with the foreign op-
erator in a pool, partnership, strategic al-
liance, joint operating agreement, code
sharing or other joint venture, that is itself
engaged in the operation of ships or air-
craft.
(h) Equivalent exemption—(1) General
rule. A foreign country grants an equiva-
lent exemption when it exempts from tax-
ation income from the international oper-
ation of ships or aircraft derived by
corporations organized in the United
States. Whether a foreign country pro-
vides an equivalent exemption must be
determined separately with respect to
each category of income, as provided in
paragraph (h)(2) of this section. How-
ever, an equivalent exemption may be
available for income derived from the in-
ternational operation of ships even though
income derived from the international op-
eration of aircraft may not be exempt, and
vice versa. For rules regarding sharehold-
ers resident in a foreign country that of-
fers an exemption under an income tax
convention, see §1.883–4(b)(3). An
equivalent exemption may exist where the
foreign country—
(i) Generally imposes no tax on in-
come, including income from the interna-
tional operation of ships or aircraft;
(ii) Specifically provides a domestic
law tax exemption for income derived
from the international operation of ships
or aircraft, either by statute, decree, or
otherwise; or
(iii) Exchanges diplomatic notes with
the United States, or enters into an agree-
ment with the United States, that provides
for a reciprocal exemption under section
883.
(2) Determining equivalent exemptions
for each category of income. Whether a
foreign country grants an equivalent ex-
emption is determined separately with re-
spect to each category of income listed in
paragraphs (h)(2)(i) through (vii) of this
section and is determined separately with
respect to income from the operation of
ships and income from the operation of
aircraft. Where an exemption is unavail-
able in the foreign country for a particular
category of income, a foreign corporation
2000–8 I.R.B.669February 22, 2000

organized in that country shall not be per-
mitted to exempt that category of income
from U.S. tax under this section, even
though the foreign country may grant an
equivalent exemption for other categories
of income. An equivalent exemption may
be available for income derived from the
international operation of ships even
though income derived from the interna-
tional operation of aircraft may not be ex-
empt, and vice versa. A separate determi-
nation of whether a foreign country grants
an equivalent exemption must be made
for each of the following categories of in-
come—
(i) Income from the carriage of cargo
and passengers (operating income);
(ii) Time or voyage (full) charter in-
come (or full rental);
(iii) Bareboat charter income (or bare-
boat rental);
(iv) Incidental bareboat charter income
(or incidental bareboat rental);
(v) Incidental container-related in-
come;
(vi) Income incidental to the operation
of ships or aircraft other than incidental
income described in paragraphs (h)(2)(iv)
and (v) of this section; and
(vii) Capital gains of the operator from
the sale, exchange or other disposition of
a ship, aircraft, container or related equip-
ment or other moveable property used by
that operator in the international operation
of ships or aircraft.
(3) Special rule with respect to income
tax conventions. If a corporation is orga-
nized in a foreign country that provides an
equivalent exemption only through an in-
come tax convention with the United
States, the foreign corporation must sat-
isfy the terms of that convention before it
can receive a benefit under the convention
and the foreign corporation may not claim
an exemption under section 883. If, how-
ever, the corporation is organized in a for-
eign country that offers an equivalent ex-
emption under an income tax convention
and also by some other means, such as by
diplomatic note or domestic law, the for-
eign corporation may choose annually
whether it will claim benefits under sec-
tion 894 and the income tax convention or
an exemption under section 883. This
choice will apply with respect to all in-
come of the corporation from the interna-
tional operation of ships or aircraft and
the choice cannot be made separately with
respect to different categories of such in-
come. If a foreign corporation bases its
claim for an exemption on section 883
rather than the income tax convention, the
foreign corporation must satisfy all of the
requirements under this regulation to
qualify for an exemption from U.S. in-
come tax. See §1.883–4(b)(3) for rules
regarding shareholders resident in a for-
eign country that offers an equivalent ex-
emption under a treaty.
(4) Exemptions not qualifying as equiv-
alent exemptions—(i) General rule. Ex-
emptions provided to corporations orga-
nized in the United States by certain
foreign countries may not satisfy the
equivalent exemption requirements of this
section.
(ii) Reduced tax rate or time limited ex-
emption. The exemption granted by the
foreign country’s law or income tax con-
vention must be a complete exemption.
The exemption may not constitute merely
a reduction to a non-zero rate of tax levied
against corporations organized in the
United States engaged in the international
operation of ships or aircraft or a tempo-
rary reduction to a zero rate of tax for
only a limited period of time, such as in
the case of a tax holiday.
(iii) Inbound or outbound freight tax.
With respect to the carriage of cargo, the
foreign country must provide an exemp-
tion from tax for income from transport-
ing freight both inbound and outbound
before it will be considered to grant an
equivalent exemption. A foreign country
that imposes tax only on outbound freight
will not be treated as granting an equiva-
lent exemption for income from transport-
ing freight inbound into that country.
(iv) Exemptions for limited types of
cargo. A foreign country must provide an
exemption from tax for income from
transporting all categories of cargo before
it will be considered to grant an equiva-
lent exemption. For example, if a foreign
country were generally to impose tax on
income from the international carriage of
cargo but to provide a statutory exemp-
tion for income from transporting agricul-
tural products, the foreign country would
not be considered to grant an equivalent
exemption with respect to income from
the international carriage of cargo and
passengers and would not be a qualified
foreign country with respect to that type
of income.
(v) Territorial tax systems. A foreign
country with a territorial tax system will
be treated as granting an equivalent ex-
emption if it treats income from the inter-
national operation of ships or aircraft de-
rived by a U.S. corporation as 100 percent
foreign source and thereby not subject to
tax, even if the income is derived from a
voyage or flight that begins or ends in that
foreign country.
(vi) Countries that tax on a residence
basis. A foreign country that generally
provides an equivalent exemption to cor-
porations organized in the United States
but also imposes a residence-based tax on
certain corporations organized in the
United States, may nevertheless be con-
sidered to grant an equivalent exemption
if the residence-based tax is imposed only
on a corporation organized in the United
States that maintains its center of manage-
ment and control or other comparable at-
tributes in that foreign country. If the res-
idence-based tax is imposed on
corporations organized in the United
States and engaged in the international
operation of ships or aircraft that are not
managed and controlled in that foreign
country, the foreign country shall not be
treated as a qualified foreign country and
shall not be considered to grant an equiva-
lent exemption for purposes of this sec-
tion.
(vii) Exemptions within categories of
income. A foreign country must provide
an exemption from tax for all income in a
category of income, as defined in para-
graph (h)(2) of this section. For example,
a country that exempts income from the
bareboat charter of passenger aircraft but
not the bareboat charter of cargo aircraft
does not provide an equivalent exemp-
tion. However, an equivalent exemption
may be available for income derived from
the international operation of ships even
though income derived from the interna-
tional operation of aircraft may not be ex-
empt, and vice versa.
(i) Treatment of possessions. A posses-
sion of the United States will be consid-
ered to grant an equivalent exemption and
will be treated as a qualified foreign coun-
try if it is on a mirror system. The term
mirror systemrefers to the general applic-
ability in the possession of the Internal
Revenue Code of 1986, as amended, with
the name of the possession substituted for
“United States” where appropriate. If a
February 22, 20006702000–8 I.R.B.

possession does not use a mirror system,
the possession may nevertheless be a
qualified foreign country if, for example,
it provides for an equivalent exemption
through its internal law.
(j) Expenses related to exempt income
not deductible from non-exempt income.
If a qualified foreign corporation derives
income from the international operation
of ships or aircraft as well as from a non-
exempt activity, and that income is effec-
tively connected with the conduct of a
trade or business within the United States,
the foreign corporation may not deduct
from income derived from a non-exempt
activity, any amount otherwise allowable
as a deduction from qualified shipping or
aircraft income if that income is excluded
under this proposed rule. See section
265(a)(1).
Par. 4. Sections 1.883–2 through
1.883–5 are added to read as follows:
§1.883–2 Treatment of publicly-traded
corporations.
(a) General rule. A foreign corporation
shall satisfy the stock ownership test of
§1.883–1(c)(2) if it is considered a pub-
licly-traded corporation and satisfies the
substantiation and reporting requirements
of paragraphs (e) and (f) of this section.
To be considered a publicly-traded corpo-
ration, the stock of the foreign corpora-
tion must be primarily traded and regu-
larly traded on one or more established
securities markets, as those terms are de-
fined in paragraphs (b), (c), and (d) of this
section, in the United States or any quali-
fied foreign country.
(b) Established securities market—(1)
General rule. For purposes of this sec-
tion, the term established securities mar-
ketmeans, for any taxable year—
(i) A foreign securities exchange that is
officially recognized, sanctioned, or su-
pervised by a governmental authority of
the country in which the market is lo-
cated, and has an annual value of shares
traded on the exchange exceeding $1 bil-
lion during each of the three calendar
years immediately preceding the begin-
ning of the taxable year;
(ii) A national securities exchange that
is registered under section 6 of the Securi-
ties Act of 1934 (15 U.S.C. 78f);
(iii) A United States over-the-counter
market, as defined in paragraph (b)(4) of
this section;
(iv) Any exchange designated under a
Limitation On Benefits article in a United
States income tax convention; and
(v) Any other exchange that the Secre-
tary may designate by regulation or other-
wise.
(2) Exchanges with multiple tiers. If an
exchange in a foreign country has more
than one tier or market level on which
stock may be separately listed or traded,
each such tier shall be treated as a sepa-
rate exchange.
(3) Computation of dollar value of
stock traded. For purposes of paragraph
(b)(1)(i) of this section, the value in U.S.
dollars of shares traded during a calendar
year shall be determined on the basis of
the dollar value of such shares traded as
reported by the International Federation
of Stock Exchanges located in Paris, or, if
not so reported, then by converting into
U.S. dollars the aggregate value in local
currency of the shares traded using an ex-
change rate equal to the average of the
spot rates on the last day of each month of
the calendar year.
(4) Over-the-counter market. An over-
the-counter market is any market re-
flected by the existence of an interdealer
quotation system. An interdealer quota-
tion system is any system of general cir-
culation to brokers and dealers that regu-
larly disseminates quotations of stocks
and securities by identified brokers or
dealers, other than by quotation sheets
that are prepared and distributed by a bro-
ker or dealer in the regular course of busi-
ness and that contain only quotations of
such broker or dealer.
(5) Discretion to determine that an ex-
change does not qualify as an established
securities market. The Commissioner
may determine that a securities exchange
that otherwise meets the requirements of
this paragraph (b) of this section does not
qualify as an established securities mar-
ket, if—
(i) The exchange does not have ade-
quate listing, financial disclosure, or trad-
ing requirements (or does not adequately
enforce such requirements); or
(ii) There is not clear and convincing
evidence that the exchange ensures the
active trading of listed stocks.
(c) Primarily traded. For purposes of
this section, stock of a corporation is pri-
marily traded on one or more established
securities markets, as defined in para-
graph (b) of this section, if, with respect
to each class of stock described in para-
graph (d)(1)(i) of this section (relating to
classes of stock relied on to meet the reg-
ularly traded test)—
(1) The number of shares in each such
class that are traded during the taxable
year on all established securities markets
in that country exceeds
(2) The number of shares in each such
class that are traded during that year on
established securities markets in any other
single foreign country.
(d) Regularly traded—(1) General
rule. For purposes of this section, stock
of a corporation is regularly traded on one
or more established securities markets, as
defined in paragraph (b) of this section,
if—
(i) One or more classes of stock of the
corporation that, in the aggregate, repre-
sent 80 percent or more of the total com-
bined voting power of all classes of stock
of such corporation entitled to vote and of
the total value of the stock of such corpo-
ration are listed on such market or mar-
kets during the taxable year; and
(ii) With respect to each class relied on
to meet the 80 percent requirement of
paragraph (d)(1)(i) of this section—
(A) Trades in each such class are ef-
fected, other than in de minimis quanti-
ties, on such market or markets on at least
60 days during the taxable year (or 1/6 of
the number of days in a short taxable
year); and
(B) The aggregate number of shares in
each such class that are traded on such
market or markets during the taxable year
are at least 10 percent of the average num-
ber of shares outstanding in that class dur-
ing the taxable year (or, in the case of a
short taxable year, a percentage that
equals at least 10 percent of the average
number of shares outstanding in that class
during the taxable year multiplied by the
number of days in the short taxable year,
divided by 365).
(2) Classes of stock traded on a domes-
tic established securities market treated
as meeting trading requirements. A class
of stock that is traded during the taxable
year on an established securities market
located in the United States shall be con-
sidered to meet the trading requirements
of paragraph (d)(1)(ii) of this section if
the stock is regularly quoted by dealers
making a market in the stock. A dealer
makes a market in a stock only if the
2000–8 I.R.B.671February 22, 2000

dealer regularly and actively offers to, and
in fact does, purchase the stock from, and
sell the stock to, customers who are not
related persons (as defined in section
954(d)(3)) with respect to the dealer in the
ordinary course of a trade or business.
(3) Closely-held classes of stock not
treated as meeting trading requirement—
(i) General rule. Except as provided in
paragraph (d)(3)(ii) of this section, a class
of stock of a foreign corporation listed on
an established securities market or mar-
kets and otherwise meeting the trading re-
quirements of paragraph (d)(1)(ii) of this
section shall not be treated as meeting the
trading requirements of paragraph
(d)(1)(ii) of this section (or the require-
ments of paragraph (d)(2) of this section)
for a taxable year if, at any time during
the taxable year, one or more persons who
own at least 5 percent of the value of the
outstanding shares of the class of stock (5
percent shareholders as determined under
paragraph (d)(3)(iii) of this section) own,
in the aggregate, 50 percent or more of
the value of the shares.
(ii) Exception. Notwithstanding the
general rule of paragraph (d)(3)(i) of this
section, a closely-held class of stock that
otherwise satisfies the trading require-
ments of paragraph (d)(1)(ii) of this sec-
tion may be treated as meeting such trad-
ing requirements if the foreign
corporation can establish that more than
50 percent of the value of the outstanding
shares of the class of stock is owned, or
treated as owned under §1.883–4(c), by
persons who are qualified shareholders,
within the meaning of §1.883–4(b), for
more than half the number of days during
the taxable year. In addition, such per-
sons may not own their interests in the
foreign corporation either directly or by
applying the attribution rules of
§1.883–4(c) through bearer shares. Fur-
ther, the foreign corporation must obtain
from such persons the relevant documen-
tation described in §1.883–4(d).
(iii) Treatment of related persons. Solely
for purposes of determining whether a per-
son is a 5 percent shareholder, persons re-
lated within the meaning of section 267(b)
shall be treated as one person. In determin-
ing whether two or more corporations are
members of the same controlled group
under section 267(b)(3), a person is consid-
ered to own stock owned directly by such
person, stock owned with the application of
section 1563(e)(1), and stock owned with
the application of section 267(c). Further,
in determining whether a corporation is re-
lated to a partnership under section
267(b)(10), a person is considered to own
the partnership interest owned directly by
such person and the partnership interest
owned with the application of section
267(e)(3).
(4) Anti-abuse rule. Trades between
related persons described in section
267(b), as modified by paragraph
(d)(3)(iii) of this section, and trades con-
ducted in order to meet the requirements
of paragraph (d)(1) of this section (the
trading rule) shall be disregarded. A class
of stock shall not be treated as meeting
the trading requirements of paragraph
(d)(1) of this section if there is a pattern of
trades conducted to meet the requirements
of paragraph (d)(1) of this section. For
example, trades between two persons that
occur several times during the taxable
year may be treated as an arrangement or
a pattern of trades conducted to meet the
trading requirements of paragraph
(d)(1)(ii) of this section.
(5) Example. The closely-held class of
stock rule in paragraph (d)(3) is illustrated
by the following example:
Example. Closely-held exception—(i) Facts. X
is a corporation organized in a qualified foreign
country. X has one class of stock that is listed and
primarily traded on an established securities market
in the qualified foreign country. The class of stock
of X also meets the trading requirements of para-
graph (d)(1)(ii) of this section. However, the found-
ing family owns 60 percent of that class of stock
through Hold Co. The remaining 40 percent is not
owned by any 5 percent shareholder. Some of the
family members are U.S. residents, while the re-
maining family members are residents of the quali-
fied foreign country. Individuals A and B are mem-
bers of the founding family and each owns 10
percent of the stock of Hold Co.
(ii) Analysis. Because Hold Co owns 60 percent
of the class of stock, Hold Co is a 5 percent share-
holder and the class of stock will not be regularly
traded unless X can prove, applying the attribution
rules of §1.883–4(c), that more than 50 percent of
the stock of X is owned, or treated as owned under
§1.883–4(c), by residents of a qualified foreign
country. If X can demonstrate that more than 50
percent of the stock held by Hold Co is owned by
qualified shareholders, X can meet this burden and
the stock of X will be regularly traded because the
exception in paragraph (d)(3)(ii) of this section
would apply.
(e) Substantiation that a foreign corpo-
ration is publicly traded—(1) In general.
A foreign corporation that relies on the
publicly traded test of this section to es-
tablish that it is a qualified foreign corpo-
ration for purposes of §1.883–1(c)(2)
must substantiate that the stock of the for-
eign corporation is primarily and regu-
larly traded on an established securities
market. If one of the classes of stock on
which the foreign corporation relies to
meet this test is closely-held within the
meaning of paragraph (d)(3)(i) of this sec-
tion, the foreign corporation must obtain
an ownership statement described in
§1.883–4(d) from each qualified share-
holder and intermediary that it relies upon
to satisfy the exception to the closely-held
class of stock rule, but only to the extent
such statement would be required if the
foreign corporation were relying on the
qualified shareholder test of §1.883–4
with respect to those shares of stock. The
foreign corporation must also maintain
and provide to the Commissioner upon re-
quest a list of its shareholders of record
and any other relevant information known
to the foreign corporation.
(2) Availability and retention of docu-
ments for inspection. The documentation
described in paragraph (e)(1) of this sec-
tion must be retained by the corporation
seeking qualified foreign corporation sta-
tus (the foreign corporation) until the ex-
piration of the statute of limitations for
the taxable year of the foreign corporation
to which the documentation relates. Such
documentation must be made available
for inspection by the Commissioner at
such time and such place as the Commis-
sioner may request in writing.
(f) Reporting requirements. A foreign
corporation relying on this section to sat-
isfy the stock ownership requirements of
§1.883–1(c)(2) must provide the follow-
ing information that is current as of the
end of the corporation’s taxable year, in
addition to the information required in
§1.883–1(c)(3) to be included in its Form
1120F for the taxable year—
(1) The name of the country in which
the stock is primarily traded;
(2) The name of the established securi-
ties market or markets on which that the
stock is listed;
(3) A description of each class of stock
relied upon to meet the requirements of
paragraph (d) of this section, including
the number of shares issued and outstand-
ing as of the close of the taxable year;
(4) For each class of stock relied upon
to meet the requirements of paragraph (d)
of this section, if one or more 5 percent
February 22, 20006722000–8 I.R.B.

shareholders, as defined in paragraph
(d)(3)(i) of this section, own in the aggre-
gate 50 percent or more of the value of the
outstanding shares of that class of stock at
any time during the taxable year, state—
(i) The name and address of each 5 per-
cent shareholder of that class of stock and
each related person whose stock is treated
as owned by the 5 percent shareholder;
(ii) For each qualified shareholder of
the closely-held class of stock upon
whom the corporation intends to rely to
satisfy the exception to the closely-held
class of stock rule of paragraph (d)(3)(ii)
of this section—
(A) The name of each such share-
holder;
(B) The percentage of the total value of
the stock held by each such shareholder;
(C) The address of record of each such
shareholder;
(D) The country of residence of each
such shareholder, determined under
§1.883–4(b)(2)(residence of individual
shareholders) or §1.883–4(d)(3)(special
rules for residence of certain sharehold-
ers);
(E) The portion of the taxable year of
the foreign corporation during which the
requisite ownership in the closely-held
block of stock by qualified shareholders
was satisfied;
(5) The percentage of the value of the
class of stock represented by the widely-
held block of stock; and
(6) Any other specified information.
§1.883–3 Treatment of controlled foreign
corporations—(a) General rule. A for-
eign corporation that is a controlled for-
eign corporation (CFC), as defined in sec-
tion 954(a), satisfies the stock ownership
test of §1.883–1(c)(2) if it meets the in-
come inclusion test in paragraph (b)(1) of
this section and satisfies the substantia-
tion and reporting requirements of para-
graphs (c) and (d) of this section, respec-
tively (the CFC test). A CFC that fails the
income inclusion test of paragraph (b)(1)
of this section may not satisfy the stock
ownership test of §1.883–1(c)(2) unless
the CFC demonstrates that it meets either
the publicly traded test of §1.883–2 or the
qualified shareholder test of §1.883–4.
(b) Special rule for CFCs with certain
entity shareholders— (1) Income inclu-
sion test. For purposes of these proposed
rules, a CFC will not be considered to sat-
isfy the requirements of paragraph (a) of
this section unless—
(i) Such corporation would be a CFC as
defined in section 957(a) if such section
were applied without regard to section
318(a)(4); and
(ii) More than 50 percent of the CFC’s
subpart F income (as defined in section
952) derived from the international opera-
tion of ships or aircraft is includible, pur-
suant to section 951, in the gross income
of one or more U.S. citizens, individual
residents of the United States or domestic
corporations for the taxable years of such
persons in which the taxable year of the
CFC ends.
(2) Examples. The income inclusion
test of this paragraph (b) is illustrated in
the following examples:
Example 1. CFC earns U.S. source income from
the international operation of aircraft that is not ef-
fectively connected with the conduct of a U.S. trade
or business. CFC is organized in a qualified foreign
country. CFC is not a publicly traded corporation
and all of its U.S. shareholders, as defined in section
951(b), are domestic partnerships. All of the part-
ners in those domestic partnerships are citizens and
residents of foreign countries. Thus, the CFC fails
the income inclusion test of paragraph (b)(1) of this
section because no amount of the CFC’s relevant
subpart F income is includible in the gross income
of one or more U.S. citizens, individual residents of
the United States or domestic corporations. There-
fore the CFC must satisfy the rules of §1.883–4, re-
garding the qualified shareholder stock ownership
test, in order to satisfy the stock ownership test of
§1.883–1(c)(2) and be considered a qualified foreign
corporation.
Example 2. Ship Co is a CFC organized in a
qualified foreign country and is not a publicly traded
corporation. Corp A, a domestic corporation, owns
50 percent of the value of the stock of Ship Co. X, a
domestic partnership, owns the remaining 50 per-
cent of the value of the stock of Ship Co. A U.S. cit-
izen is a partner owning a 20 percent interest in X.
Individual partners owning 80 percent of X are citi-
zens and residents of foreign countries. There are no
special allocations of partnership income. Ship Co
satisfies the income inclusion test of paragraph
(b)(1) of this section because 60 percent (50% +
(20% x 50%))of the subpart F income would be in-
cludible in the gross income of U.S. citizens or indi-
vidual residents of the United States or domestic
corporations. If Ship Co satisfies the substantiation
and reporting requirements of paragraphs (c) and (d)
of this section, respectively and the reporting re-
quirements of §1.883–1(c)(3), it will be a qualified
foreign corporation.
(c) Substantiating CFC stock owner-
ship—(1) In general. A CFC relying on
this section to satisfy the stock ownership
test of §1.883–1(c)(2) must establish all
the facts necessary to satisfy the Commis-
sioner that it qualifies under the CFC test.
For purposes of the income inclusion test
of paragraph (b)(1) of this section, if the
CFC has one or more U.S. shareholders
that are domestic partnerships, estates, or
trusts, the proportionate interest of the
subpart F income of the CFC will not be
treated as includible in the gross income
of any partner, beneficiary or other inter-
est owner of such U.S. shareholder that is
a U.S. citizen, resident of the United
States or a domestic corporation unless
the CFC obtains the documentation de-
scribed in paragraph (c)(2) of this section.
(2) Documentation from certain U.S.
shareholders—(i) In general. A CFC can
only meet the documentation requirements
of paragraph (c)(1) of this section if the
CFC obtains the following documentation
from each U.S. shareholder that is a part-
nership, estate or trust, with respect to the
taxable year of the entity which ends with
or within the taxable year of the CFC—
(A) A copy of the Form 5471, “Infor-
mation Return of U.S. Persons With Re-
spect to Certain Foreign Corporations,” if
required to be filed with the U.S. share-
holder’s return and with the Internal Rev-
enue Service Center, Philadelphia PA
19255;
(B) A written statement, signed under
penalties of perjury by a person autho-
rized to sign the U.S. Federal tax return of
the U.S. shareholder, providing the fol-
lowing information with respect to each
U.S. citizen, individual resident of the
United States or domestic corporation that
is a partner, beneficiary or other interest
owner of each such U.S. shareholder and
upon whom the CFC intends to rely to
satisfy the income inclusion test of para-
graph (b)(1) of this section—
(1) The name, address (if not a non-res-
idential address, such as a post office box
or in care of a financial intermediary or
stock transfer agent), and taxpayer identi-
fication number;
(2) The interest owner’s proportionate
interest in the U.S. shareholder that re-
flects that owner’s share of subpart F in-
come required to be included in income
on such interest owner’s U.S. Federal in-
come tax return;
(3) The percentage of the vote and the
percentage of the value of shares of the
CFC owned by each such interest owner;
and
(C) Any other specified information.
(ii) Availability and retention of docu-
ments for inspection. The documentation
described in paragraph (c)(2)(i) of this
2000–8 I.R.B.673February 22, 2000

section must be retained by the corpora-
tion seeking qualified foreign corporation
status (the CFC) until the expiration of the
statute of limitations for the taxable year
of the CFC to which the documentation
relates. Such documentation must be
made available for inspection by the
Commissioner at such place as the Com-
missioner may request in writing.
(d) Reporting requirements. A foreign
corporation that relies on the CFC test of
this section to satisfy the stock ownership
test of §1.883–1(c)(2), must provide the
following information in addition to the
information required in §1.883–1(c)(3) to
be included in its Form 1120F for the tax-
able year. The information must be cur-
rent as of the end of the corporation’s tax-
able year and must include the
following—
(1) The name, address in the corporate
records (if that address is not a non-resi-
dential address such as a post office box
or in care of a financial intermediary or
stock transfer agent) and taxpayer identi-
fication number of each U.S. shareholder
of the CFC;
(2) The percentage of the value of the
shares of the CFC that is owned by each
U.S. shareholder, as defined in section
957(a) if such section were applied with-
out regard to section 318(a)(4);
(3) If one or more of the U.S. sharehold-
ers is a domestic partnership, estate or
trust, the name, address, taxpayer identifi-
cation number and percentage of the vote
and the percentage of the value of shares of
the CFC owned by each interest owner of
each such U.S. shareholder that is a U.S.
citizen, individual resident of the United
States or a domestic corporation; and
(4) Any other specified information.
§1.883–4 Qualified shareholder stock
ownership test
.
(a) General rule. A foreign corporation
shall satisfy the stock ownership test of
§1.883–1(c)(2) if more than 50 percent of
its stock (by value) is owned, or treated as
owned by applying the attribution rules of
paragraph (c) of this section, for at least
half of the number of days in the foreign
corporation’s taxable year by one or more
qualified shareholders. In addition, a for-
eign corporation must meet the substanti-
ation and reporting requirements of para-
graphs (d) and (e) of this section.
(b) Qualified shareholder—(1) Gen-
eral rule. A shareholder is a qualified
shareholder only if the shareholder—
(i) Is a resident of a country that offers
an equivalent exemption for the same
type of income (as described in §1.883–
1(h)(2)), as that earned by the foreign cor-
poration and for which the foreign corpo-
ration is seeking an exemption;
(ii) Does not own its interest in the for-
eign corporation through bearer shares ei-
ther directly or by applying the attribution
rules of paragraph (c) of this section;
(iii) Provides to the foreign corporation
the documentation required in paragraph
(d) of this section and the foreign corpora-
tion meets the reporting requirements of
paragraph (e) of this section with respect
to such shareholder; and
(iv) Is described in one of the following
categories of qualified shareholders—
(A) An individual not described in
paragraph (b)(1)(iv)(E) of this section
(whose residency is determined under
paragraph (b)(2) of this section);
(B) The government of a qualified for-
eign country (or a political subdivision or
local authority of such country);
(C) A foreign corporation that is orga-
nized in a qualified foreign country and
meets the publicly traded rules of
§1.883–2;
(D) A not-for-profit organization de-
scribed in paragraph (b)(4) of this section
that is not a pension fund as defined in
paragraph (b)(5) of this section and that is
organized in a qualified foreign country;
or
(E) A beneficiary of a pension fund (as
defined in paragraph (b)(5)(iv) of this sec-
tion) administered in or by a qualified for-
eign country (whose residency is deter-
mined under paragraph (d)(3)(iii) of this
section).
(2) Residence of individual sharehold-
ers—(i) General rule. An individual not
described in paragraph (b)(1)(iv)(E) of
this section is a resident of a qualified for-
eign country only if the individual is fully
liable to tax as a resident in such country
(e.g., an individual who is liable to tax on
a remittance basis in a foreign country
will not be treated as a resident of that
country) and, in addition—
(A) The individual’s tax home, within
the meaning of paragraph (b)(2)(ii) of this
section, is within that qualified foreign
country for 183 days or more of the tax-
able year; or
(B) The individual is treated as a resi-
dent of a qualified foreign country based
on special rules pursuant to paragraph
(d)(3) of this section.
(ii) Tax home. For purposes of this sec-
tion, an individual’s tax home is considered
to be located at the individual’s regular or
principal (if more than one regular) place of
business. If the individual has no regular or
principal place of business because of the
nature of his business (or lack of a busi-
ness), then the individual’s tax home is lo-
cated at his regular place of abode in a real
and substantial sense. If an individual has
no regular or principal place of business
and no regular place of abode in a real and
substantial sense in a qualified foreign
country for 183 days or more of the taxable
year, that individual does not have a tax
home for purposes of this section.
(3) Certain income tax convention re-
strictions applied to shareholders—(i)
Application of restrictions. A shareholder
otherwise described in paragraph (b)(1) of
this section may be a resident of a foreign
country that provides an equivalent ex-
emption for the category of income at
issue through an income tax convention
with the United States. If the shareholder
relies on the convention to demonstrate
that the country of residence provides an
equivalent exemption and the convention
has a requirement in the shipping and air
transport article other than residence,
such as place of registration or documen-
tation of the ship or aircraft, or in the lim-
itation on benefits (LOB) article, such as
a percentage of resident ownership, the
shareholder is not a qualified shareholder
unless the corporation seeking qualified
foreign corporation status would satisfy
any such additional requirement if it were
organized in such foreign country.
(ii) Examples. The rules of this para-
graph (b)(3) are illustrated by the follow-
ing examples:
Example 1. LOB article requiring additional
Country B ownership. Ship Co is organized in
Country A. Country A provides an equivalent ex-
emption through a diplomatic note. Eighty percent
of the value of the shares of Ship Co is owned by a
resident of Country B. Country B provides an
equivalent exemption only through an income tax
convention with the United States. The limitation
on benefits article in the income tax convention be-
tween the United States and Country B requires that
more than 75 percent of the value of the shares of a
Country B corporation must be owned by residents
of Country B before such corporation could receive
benefits under the income tax convention. In accor-
dance with paragraph (b)(3) of this section, in order
for the Country B resident to be a qualified share-
February 22, 20006742000–8 I.R.B.

holder, Ship Co must meet the LOB requirements of
the United States/Country B income tax convention
applied as if Ship Co were a Country B corporation.
Because 80 percent of the value of the shares of Ship
Co is owned by a resident of Country B, this require-
ment is satisfied and the Country B shareholder may
be a qualified shareholder.
Example 2. Income tax convention requiring reg-
istration of ship. Ship Co is organized in Country X
and owned entirely by residents of Country Y.
Country X’s domestic law grants an equivalent ex-
emption to shipping corporations organized in the
United States. Country Y grants an equivalent ex-
emption for shipping income through an income tax
convention between the United States and Country
Y. Article 8 of the income tax convention provides
that the exemption will apply only if the ships are
registered in the contracting state of the taxpayer’s
country of residence. Ship Co owns a ship regis-
tered in Country Y and a ship registered in Country
Z. In accordance with paragraph (b)(3) of this sec-
tion, in order for the Country Y resident to be a qual-
ified shareholder, Ship Co must meet the flagging
requirements of the United States/Country Y income
tax convention applied as if Ship Co were a Country
Y corporation. Thus, the Country Y shareholders
may be qualified shareholders with respect to in-
come earned by the ship registered in Country Y but
not with respect to the income earned by the ship
registered in Country Z. Thus, if Ship Co otherwise
satisfies the requirements of this proposed rule, Ship
Co may exclude its income derived from the interna-
tional operation of the ship registered in Country Y
from gross income for purposes of its United States
income tax, but may not exclude its income from the
international operation of the ship registered in
Country Z.
(4) Not-for-profit organizations. A not-
for-profit organization is a qualified
shareholder if it meets the following re-
quirements—
(i) It is a corporation, association tax-
able as a corporation, trust, fund, founda-
tion, league or other entity operated ex-
clusively for religious, charitable,
educational, or recreational purposes, and
not organized for profit;
(ii) It is generally exempt from tax in
its country of organization by virtue of its
not-for-profit status; and
(iii) Either—
(A) More than 50 percent of its annual
support is expended on behalf of persons
described in paragraph (b)(1)(i) of this
section (see paragraph (d)(3)(v) of this
section for rules regarding the residence
of individual beneficiaries); or
(B) More than 50 percent of its annual
support is derived from persons described
in paragraph (b)(1)(i) of this section (see
paragraph (d)(3)(v) of this section for
rules regarding the residence of individual
supporters).
(5) Pension funds—(i) Pension fund
defined. The term pension fundshall
mean a government pension fund or a
non- government pension fund, as those
terms are defined, respectively, in para-
graph (b)(5)(ii) and paragraph (b)(5)(iii)
of this section, that is a trust, fund, foun-
dation, or other entity that is established
exclusively for the benefit of employees
or former employees of one or more em-
ployers, the principal purpose of which is
to provide retirement, disability, and
death benefits to beneficiaries of such en-
tity and persons designated by such bene-
ficiaries in consideration for prior ser-
vices rendered.
(ii) Government pension funds. A gov-
ernment pension fund is a pension fund
that is a controlled entity of a foreign sov-
ereign within the principles of
§1.892–2T(c)(1) (relating to pension
funds established for the benefit of em-
ployees or former employees of a foreign
government).
(iii) Non-government pension funds. A
non-government pension fund is a pen-
sion fund that—
(A) Is administered in a foreign country
and is subject to supervision or regulation
by a governmental authority (or other au-
thority delegated to perform such supervi-
sion or regulation by a governmental au-
thority) in such country;
(B) Is generally exempt from income
taxation in its country of administration;
(C) Has 100 or more beneficiaries; and
(D) The trustees, directors or other ad-
ministrators of which pension fund pro-
vide the documentation required in para-
graph (d) of this section.
(iv) Beneficiary of a pension fund. The
term beneficiary of a pension fundshall
mean any person who has made contribu-
tions to a pension fund, as that term is de-
fined in paragraph (b)(5)(i) of this sec-
tion, or on whose behalf contributions
have been made, and who is currently re-
ceiving retirement, disability, or death
benefits from the pension fund or can rea-
sonably be expected to receive such ben-
efits in the future, whether or not the per-
son’s right to receive benefits from the
fund has vested. See paragraph (c)(6) of
this section for rules regarding the com-
putation of stock ownership through non-
government pension funds.
(c) Rules for determining constructive
ownership—(1) General rules for attribu-
tion. For purposes of applying the excep-
tion to the closely-held test of
§1.883–2(d)(3)(ii) and paragraph (a) of this
section, stock owned by or for a corpora-
tion, partnership, trust, estate, or mutual in-
surance company or similar entity shall be
treated as owned proportionately by its
shareholders, partners, beneficiaries,
grantors, or other interest holders as pro-
vided in paragraphs (c)(2)through (6) of this
section. The proportionate interest rules of
this paragraph (c) shall apply successively
upward through a chain of ownership, and a
person’s proportionate interest shall be com-
puted for the relevant days or period that is
taken into account in determining whether a
foreign corporation satisfies the require-
ments of paragraph (a) of this section.
Stock treated as owned by a person by rea-
son of this paragraph (c) shall be treated as
actually owned by such person for purposes
of this section. An owner of an interest in an
association taxable as a corporation shall be
treated as a shareholder of such association
for purposes of this paragraph (c).
(2) Partnerships—(i) General rule. A
partner shall be treated as having an inter-
est in stock of a foreign corporation
owned by a partnership in proportion to
the least of—
(A) The partner’s percentage distribu-
tive share of the partnership’s dividend in-
come from the stock;
(B) The partner’s percentage distribu-
tive share of gain from disposition of the
stock by the partnership; or
(C) The partner’s percentage distribu-
tive share of the stock (or proceeds from
the disposition of the stock) upon liquida-
tion of the partnership.
(ii) Partners resident in the same coun-
try. For purposes of this paragraph, all
qualified shareholders that are partners in a
partnership and that are residents of, or or-
ganized in, the same qualified foreign
country shall be treated as one partner.
Thus, the percentage distributive shares of
dividend income, gain and liquidation
rights of all qualified shareholders that are
partners in a partnership and that are resi-
dents of, or organized in, the same quali-
fied foreign country are aggregated prior to
determining the least of the three percent-
ages set out in paragraph (c)(2)(i) of this
section. For the meaning of the term resi-
dent, see paragraph (b)(2) of this section.
(iii) Examples. The rules of paragraph
(c)(2)(ii) of this section are illustrated by
the following examples:
2000–8 I.R.B.675February 22, 2000

Example 1. Stock held solely by qualified share-
holders through a partnership. Country X grants an
equivalent exemption. A and B are individual resi-
dents of Country X and are qualified shareholders
within the meaning of paragraph (b)(1) of this sec-
tion. A and B are the sole partners of Partnership P.
P’s only asset is the stock of Corporation Z, a Coun-
try X corporation seeking a reciprocal exemption
under this section. A’s distributive share of P’s in-
come and gain on the disposition of P’s assets is 80
percent, but A’s distributive share of P’s assets (or
the proceeds therefrom) on P’s liquidation is 20 per-
cent. B’s distributive share of P’s income and gain is
20 percent and B is entitled to 80 percent of the as-
sets (or proceeds therefrom) on P’s liquidation.
Under the attribution rules of paragraph (c)(2)(ii) of
this section, A and B will be treated as a single part-
ner owning in the aggregate 100 percent of the stock
of Z owned by P.
Example 2. Stock held by both qualified and
non-qualified shareholders through a partnership.
Assume the same facts as in Example 1except that
C, an individual who is not a resident of a qualified
foreign country, is also a partner in P and that C’s
distributive share of P’s income is 60 percent. The
distributive shares of A and B are the same as in Ex-
ample 1except that A’s distributive share of income
is 20 percent. Under the attribution rules of para-
graph (c)(2)(ii) of this section, qualified sharehold-
ers A and B will be treated as a single partner own-
ing in the aggregate 40 percent of the stock of Z
owned by P (i.e., the lowest aggregate percentage of
A and B’s distributive shares of dividend income (40
percent), gain (100 percent), and liquidation rights
(100 percent) with respect to the Z stock). Thus, Z
fails to satisfy the ownership requirements of para-
graph (a) of this section.
Example 3. Stock held through tiered partner-
ships. Country X grants an equivalent exemption. A
and B are individual residents of Country X and are
qualified shareholders within the meaning of para-
graph (b)(1) of this section. A and B are the sole
partners of Partnership P. P is a partner in Partner-
ship P1, which owns the stock of Corporation Z, a
Country X corporation seeking a reciprocal exemp-
tion under this section. Assume that P’s distributive
share of the dividend income, gain and liquidation
rights with respect to the Z stock held by P1 is 40
percent. Assume that of the remaining partners of
P1 only D is a qualified shareholder. D’s distribu-
tive share of P1’s dividend income and gain is 15
percent; D’s distributive share of P1’s assets on liq-
uidation is 25 percent. Under the attribution rules of
paragraph (c)(2)(ii) of this section, A and B, treated
as a single partner, will own 40 percent of the Z
stock owned by P1 (100 percent X 40 percent) and
D will be treated as owning 15 percent of the Z stock
owned by P1 (the least of D’s dividend income (15
percent), gain (15 percent), and liquidation rights
(25 percent) with respect to the Z stock). Thus, 55
percent of the Z stock owned by P1 is treated as
owned by qualified shareholders.
(3) Trusts and estates—(i) Beneficia-
ries. In general, an individual shall be
treated as having an interest in stock of a
foreign corporation owned by a trust or
estate in proportion to the individual’s ac-
tuarial interest in the trust or estate, as
provided in section 318(a)(2)(B)(i), ex-
cept that an income beneficiary’s actuarial
interest in the trust will be determined as
if the trust’s only asset were the stock.
The interest of a remainder beneficiary in
stock will be equal to 100 percent minus
the sum of the percentages of any interest
in the stock held by income beneficiaries.
The ownership of an interest in stock
owned by a trust shall not be attributed to
any beneficiary whose interest cannot be
determined under the preceding sentence,
and any such interest, to the extent not at-
tributed by reason of this paragraph
(c)(3)(i), shall not be considered owned
by a beneficiary unless all potential bene-
ficiaries with respect to the stock are qual-
ified shareholders. In addition, a benefi-
ciary’s actuarial interest will be treated as
zero to the extent that someone other than
the beneficiaries is treated as owning the
stock under paragraph (c)(3)(ii) of this
section. A substantially separate and in-
dependent share of a trust, within the
meaning of section 663(c), shall be
treated as a separate trust for purposes of
this paragraph (c)(3)(i), provided that
payment of income, accumulated income
or corpus of a share of one beneficiary (or
group of beneficiaries) cannot affect the
proportionate share of income, accumu-
lated income or corpus of another benefi-
ciary (or group of beneficiaries).
(ii) Grantor trusts. A person is treated
as the owner of stock of a foreign corpo-
ration owned by a trust to the extent that
the stock is included in the portion of the
trust that is treated as owned by the per-
son under sections 671 through 679 (relat-
ing to grantors and others treated as sub-
stantial owners).
(4) Corporations that issue stock. A
shareholder of a corporation that issues
stock shall be treated as owning stock of a
foreign corporation that is owned by such
corporation on any day in a proportion
that equals the value of the stock owned
by such shareholder to the value of all
stock of such corporation. If, however,
there is an agreement, express or implied,
that a shareholder of a corporation will
not receive distributions from the earn-
ings of stock owned by the corporation,
the shareholder will not be treated as
owning that stock owned by the corpora-
tion.
(5) Mutual insurance companies and
similar entities. Stock held by a mutual
insurance company, mutual savings bank,
or similar entity (including an association
taxable as a corporation that does not
issue stock interests) shall be considered
owned proportionately by the policy hold-
ers, depositors, or other owners in the
same proportion that such persons share
in the surplus of such entity upon liquida-
tion or dissolution.
(6) Computation of beneficial interests
in non-government pension funds. Stock
held by a pension fund shall be consid-
ered owned by the beneficiaries of the
fund equally on a pro-rata basis if—
(i) The pension fund meets the require-
ments of paragraph (b)(5)(iii) of this sec-
tion;
(ii) The trustees, directors or other ad-
ministrators of the pension fund have no
knowledge, and no reason to know, that a
pro-rata allocation of interests of the fund
to all beneficiaries would differ signifi-
cantly from an actuarial allocation of in-
terests in the fund (or, if the beneficiaries’
actuarial interest in the stock held directly
or indirectly by the pension fund differs
from the beneficiaries’s actuarial interest
in the pension fund, the actuarial interests
computed by reference to the beneficia-
ries’ actuarial interest in the stock);
(iii) Either—
(A) Any overfunding of the pension
fund would be payable, pursuant to the
governing instrument or the laws of the
foreign country in which the pension fund
is administered, only to, or for the benefit
of, one or more corporations that are orga-
nized in the country in which the pension
fund is administered, individual benefi-
ciaries of the pension fund or their desig-
nated beneficiaries, or social or charitable
causes (the reduction of the obligation of
the sponsoring company or companies to
make future contributions to the pension
fund by reason of overfunding shall not it-
self result in such overfunding being
deemed to be payable to or for the benefit
of such company or companies); or
(B) The foreign country in which the
pension fund is administered has laws that
are designed to prevent overfunding of a
pension fund and the funding of the pen-
sion fund is within the guidelines of such
laws; or
(C) The pension fund is maintained to
provide benefits to employees in a partic-
ular industry, profession, or group of in-
dustries or professions and employees of
at least 10 companies (other than compa-
February 22, 20006762000–8 I.R.B.

nies that are owned or controlled, directly
or indirectly, by the same interests) con-
tribute to the pension fund or receive ben-
efits from the pension fund; and
(iv) The trustees, directors or other ad-
ministrators provide the relevant docu-
mentation as required in paragraph (d) of
this section.
(d) Substantiation of stock
ownership—(1) General rule. A foreign
corporation that relies on this section to
satisfy the ownership requirements of
§1.883–1(c)(2), must establish all the
facts necessary to satisfy the Commis-
sioner that more than 50 percent of the
value of its shares is owned, or treated as
owned applying paragraph (c) of this sec-
tion, by qualified shareholders. A foreign
corporation cannot meet this requirement
with respect to any stock that is issued in
bearer form. A shareholder that holds
shares in the foreign corporation either di-
rectly or indirectly in bearer form cannot
be a qualified shareholder.
(2) Application of general rule—(i)
Ownership statements. Except as pro-
vided in paragraph (d)(3) of this section, a
person shall only be treated as a qualified
shareholder of a foreign corporation if—
(A) For the relevant period, the person
completes an ownership statement de-
scribed in paragraph (d)(4) of this section
or has a valid ownership statement in ef-
fect under paragraph (d)(2)(ii) of this sec-
tion;
(B) In the case of a person owning
stock in the foreign corporation indirectly
through one or more intermediaries (in-
cluding mere legal owners or recordhold-
ers acting as nominees), each intermedi-
ary in the chain of ownership between
that person and the foreign corporation
seeking qualified foreign corporation sta-
tus completes an intermediary ownership
statement described in paragraph
(d)(4)(v) of this section or has a valid in-
termediary ownership statement in effect
under paragraph (d)(2)(ii) of this section;
and
(C) The foreign corporation seeking
qualified foreign corporation status ob-
tains the statements described in para-
graphs (d)(2)(i)(A) and (B) of this sec-
tion.
(ii) Three-year period of validity. The
ownership statements required in para-
graph (d)(2)(i) of this section shall remain
valid until the earlier of the last day of the
third calendar year following the year in
which the ownership statement is signed,
or the day that a change of circumstance
occurs that makes any information on the
ownership statement incorrect. For ex-
ample, an ownership statement signed on
September 30, 2000, remains valid
through December 31, 2003, unless cir-
cumstances change that make the infor-
mation of the statement no longer correct.
(3) Special rules—(i) Determining res-
idence of certain shareholders. A foreign
corporation seeking qualified foreign cor-
poration status or an intermediary that is a
direct or indirect shareholder of such for-
eign corporation may determine the resi-
dence of certain shareholders, for pur-
poses of paragraph (b)(2)(i)(B) of this
section, under one of the following spe-
cial rules, in lieu of obtaining the owner-
ship statements required in paragraph
(d)(2)(i) of this section from such share-
holders.
(ii) Special rule for registered share-
holders owning less than one percent of
widely-held corporations. A foreign cor-
poration with at least 250 registered indi-
vidual shareholders, that is not a publicly-
traded corporation, as described in
§1.883–2, (a widely-held corporation),
may not be required to obtain an owner-
ship statement from an individual share-
holder owning less than one percent of the
widely-held corporation at all times dur-
ing the taxable year. If such widely-held
foreign corporation is the foreign corpora-
tion seeking qualified foreign corporation
status, or an intermediary that meets the
documentation requirements of para-
graphs (d)(4)(v)(A) and (B) of this sec-
tion, the widely-held foreign corporation
may treat the address of record in its own-
ership records as the residence of any less
than one percent individual shareholder
if—
(A) The individual’s address of record
is not a non-residential address, such as a
post office box or in care of a financial in-
termediary or stock transfer agent; and
(B) The officers and directors of the
widely-held corporation neither know nor
have reason to know that the individual
does not reside at that address.
(iii) Special rule for beneficiaries of
pension funds—(A) Government pension
fund. An individual who is a beneficiary
of a government pension fund, as defined
in paragraph (b)(5)(ii) of this section,
shall be treated as a resident of the coun-
try in which the pension fund is adminis-
tered if the pension fund satisfies the doc-
umentation requirements of paragraphs
(d)(4)(v)(A) and (C)(1) of this section.
(B) Non-government pension fund. An
individual who is a beneficiary of a non-
government pension fund, as described in
paragraph (b)(5)(iii) of this section, shall
be treated as a resident of the country of
the beneficiary’s address as it appears on
the records of the fund, provided it is not
a nonresidential address, such as a post
office box or an address in care of a finan-
cial intermediary, and provided none of
the trustees, directors or other administra-
tors of the pension fund know, or have
reason to know, that the beneficiary is not
an individual resident of such foreign
country. The rules of this paragraph
(d)(3)(iii)(B) shall apply only if the non-
government pension fund satisfies the
documentation requirements of para-
graphs (d)(4)(v)(A) and (C)(2
) of this sec-
tion.
(iv) Special rule for stock owned by
publicly-traded corporations. Any stock
in a foreign corporation seeking qualified
foreign corporation status that is owned
by a publicly- traded corporation will be
treated as owned by an individual resident
in the country where the publicly-traded
corporation is organized if the foreign
corporation receives the statement de-
scribed in paragraph (d)(4)(iii) of this sec-
tion from the publicly-traded intermedi-
ary and copies of any relevant ownership
statements from shareholders of the pub-
licly traded corporation relied on to sat-
isfy the exception to the closely-held class
of stock rule of §1.883–2(d)(3)(ii) as re-
quired in paragraph (d)(2)(i) of this sec-
tion.
(v) Special rule for not-for-profit orga-
nizations. For purposes of meeting the
ownership requirements of paragraph (a)
of this section, a not-for-profit organiza-
tion may rely on the addresses of record
of its individual beneficiaries and sup-
porters to determine the residence of an
individual beneficiary or supporter,
within the meaning of paragraph
(b)(2)(i)(B) of this section, to the extent
required under paragraph (b)(4) of this
section, provided that—
(A) The addresses of record are not
nonresidential addresses such as a post of-
fice box or in care of a financial interme-
2000–8 I.R.B.677February 22, 2000

diary;
(B) The officers, directors or adminis-
trators or the organization do not know or
have reason to know that the individual
beneficiaries or supporters do not reside
at that address; and
(C) The foreign corporation seeking
qualified foreign corporation status re-
ceives the statement required in paragraph
(d)(4)(iv) of this section from the not-for-
profit organization.
(4) Ownership statements from share-
holders—(i) Ownership statements from
individuals. An ownership statement
from an individual is a written statement
signed by the individual under penalties
of perjury stating—
(A) The individual’s name, permanent
address, and country where the individual
is fully liable to tax as a resident, if any;
(B) If the individual was not a resident
of the country for the entire taxable year
of the foreign corporation seeking quali-
fied foreign corporation status, state each
of the foreign countries in which the indi-
vidual resided and the dates of such resi-
dence during the taxable year of such for-
eign corporation;
(C) If the individual directly owns
stock in the corporation seeking qualified
foreign corporation status, the name of
the corporation, the number of shares in
each class of stock of the corporation that
are so owned, and the period of time dur-
ing the taxable year of the foreign corpo-
ration during which the individual owned
the stock;
(D) If the individual directly owns an
interest in a corporation, partnership,
trust, estate or other intermediary that di-
rectly or indirectly owns stock in the cor-
poration seeking qualified foreign corpo-
ration status, the name of the
intermediary, the number and class of
shares or amount and nature of the inter-
est of the individual in such intermediary,
and the period of time during the taxable
year of the corporation seeking qualified
foreign corporation status during which
the individual held such interest;
(E) To the extent known by the individ-
ual, a description of the chain of owner-
ship through which the individual owns
stock in the corporation seeking qualified
foreign corporation status, including the
name and address of each intermediary
standing between the intermediary de-
scribed in paragraph (d)(4)(i)(D) of this
section and the foreign corporation and
whether this interest is owned either di-
rectly or indirectly through bearer shares;
and
(F) Any other specified information.
(ii) Ownership statements from foreign
governments. An ownership statement
from a government that is a qualified
shareholder is a written statement—
(A) Signed by either—
(1) An official of the governmental au-
thority, agency or office who has supervi-
sory authority with respect to the govern-
ment’s ownership interest and who is
authorized to sign such a statement on be-
half of the authority, agency or office; or
(2) The competent authority of the for-
eign country (as defined in the income tax
convention between the United States and
the foreign country);
(B) That provides—
(1) The title of the official signing the
statement;
(2) The name and address of the gov-
ernment authority, agency or office that
has supervisory authority;
(3) The information described in para-
graphs (d)(4)(i)(C) through (F) of this
section (substituting “government” for
“individual”) with respect to the govern-
ment’s direct or indirect ownership of
stock in the corporation seeking qualified
resident status; and
(C) Any other specified information.
(iii) Ownership statements from pub-
licly-traded corporate shareholders. An
ownership statement from a publicly-
traded corporation that is a direct or indi-
rect owner of the corporation seeking
qualified foreign corporation status is a
written statement, signed under penalties
of perjury by a person that would be au-
thorized to sign a tax return on behalf of
the shareholder corporation containing
the following information—
(A) The name of the country in which
the stock is primarily traded;
(B) The name of the established securi-
ties market or markets on which that the
stock is listed;
(C) A description of each class of stock
relied upon to meet the requirements of
§1.883–2(d)(1), including the number of
shares issued and outstanding as of the
close of the taxable year;
(D) For each class of stock relied upon
to meet the requirements of
§1.883–2(d)(1), if one or more 5 percent
shareholders, as defined in
§1.883–2(d)(3)(i), own in the aggregate
50 percent or more of the value of the out-
standing shares of that class of stock at
any time during the taxable year, state—
(1) The name and address of each 5
percent shareholder and of each related
person whose stock is treated as owned by
the 5 percent shareholder;
(2) For each qualified shareholder upon
whom the corporation intends to rely to
satisfy the exception to the closely-held
class of stock rule of §1.883–2(d)(3)(ii)—
(i) The name of each such shareholder;
(ii) The percentage of the total out-
standing shares of that class owned by
such shareholder;
(iii) The address of record of such
shareholder;
(iv) The country of residence of such
shareholder, determined under paragraph
(b)(2) or (d)(3) of this section; and
(E) The information described in para-
graphs (d)(4)(i)(C) through (F) of this
section (substituting “publicly-traded cor-
poration” for “individual”) with respect to
the publicly-traded corporation’s direct or
indirect ownership of stock in the corpo-
ration seeking qualified resident status;
and
(F) Any other specified information.
(iv) Ownership statements from not-
for-profit organizations. An ownership
statement from a not-for-profit organiza-
tion (other than a pension fund as defined
in paragraph (b)(5) of this section) is a
written statement signed by a person au-
thorized to sign a tax return on behalf of
the organization under penalties of per-
jury stating—
(A) The name, permanent address, and
principal location of the activities of the
organization (if different from its perma-
nent address);
(B) The information described in para-
graphs (d)(4)(i)(C) through (F) of this
section (substituting “not-for-profit orga-
nization” for “individual”);
(C) A representation that the not-for-
profit organization satisfies the require-
ments of paragraph (b)(4) of this section;
and
(D) Any other specified information.
(v) Ownership statements from inter-
mediaries—(A) General rule. The for-
eign corporation seeking qualified foreign
corporation status under the shareholder
stock ownership test must obtain an inter-
February 22, 20006782000–8 I.R.B.

mediary ownership statement from each
intermediary standing in the chain of
ownership between it and the qualified
shareholders on whom it relies to meet
this test. An intermediary ownership
statement is a written statement signed
under penalties of perjury by the interme-
diary (if the intermediary is an individual)
or a person who would be authorized to
sign a tax return on behalf of the interme-
diary (if the intermediary is not an indi-
vidual) containing the following informa-
tion—
(1) The name, address, country of resi-
dence, and principal place of business (in
the case of a corporation or partnership)
of the intermediary and, if the intermedi-
ary is a trust or estate, the name and per-
manent address of all trustees or execu-
tors (or equivalent under foreign law), or
the name and permanent address of place
of administration of the intermediary (if a
pension fund);
(2) The information described in para-
graphs (d)(4)(i)(C) through (F) (substitut-
ing “intermediary” for “individual”);
(3) If the intermediary is a nominee for
a shareholder or another intermediary, the
name and permanent address of the share-
holder, or the name and principal place of
business of such other intermediary;
(4) If the intermediary is not a nominee
for a shareholder or another intermediary,
the name and country of residence (within
the meaning of paragraph (b)(2) of this
section) and the proportionate interest in
the intermediary of each direct share-
holder, partner, beneficiary, grantor, or
other interest holder (or if the direct
holder is a nominee, of its beneficial
shareholder, partner, beneficiary, grantor,
or other interest holder) which the foreign
corporation seeking qualified foreign cor-
poration status intends to rely on to satisfy
the requirements of paragraph (a) of this
section, as well as an ownership statement
from such person and the period of time
during the taxable year for which the in-
terest in the intermediary was owned by
the shareholder, partner, beneficiary,
grantor or other interest holder. For pur-
poses of this paragraph (d)(4)(v)(A), the
proportionate interest of a person in an in-
termediary is the percentage interest (by
value) held by such person, determined
using the principles for attributing owner-
ship in paragraph (c) of this section;
(5) If the intermediary is a widely-held
corporation with registered shareholders
owning less than one percent of the stock
of such widely-held corporation, the
statement set out in paragraph
(d)(4)(v)(B) of this section, relating to
ownership statements from widely-held
intermediaries with registered sharehold-
ers owning less than one percent of such
widely-held intermediaries;
(6) If the intermediary is a pension
fund, within the meaning of paragraph
(b)(5) of this section, the statement set out
in paragraph (d)(4)(v)(C) of this section,
relating to ownership statements from
pension funds; and
(7) Any other specified information.
(B) Ownership statements from widely-
held intermediaries with registered share-
holders owning less than one percent of
such widely-held intermediary. An own-
ership statement from an intermediary
that is a corporation with at least 250 indi-
vidual shareholders, but that is not a pub-
licly-traded corporation within the mean-
ing of §1.883–2, and that relies on
paragraph (d)(3)(ii) of this section, relat-
ing to the special rule for registered share-
holders owning less than one percent of
widely-held corporations, must provide
the following information in addition to
the information required in paragraph
(d)(4)(v)(A) of this section—
(1) The aggregate proportionate inter-
est by country of residence in the widely-
held corporation of such registered share-
holders or other interest holders whose
address of record is not a non-residential
address, such as a post office box or in
care of a financial intermediary or stock
transfer agent; and
(2) A representation that the officers
and directors of the widely-held interme-
diary neither know nor have reason to
know that the individual shareholder does
not reside at his or her address of record
in the corporate records; and
(3) Any other specified information.
(C) Ownership statements from pen-
sion funds—(1) Ownership statements
from government pension funds. A gov-
ernment pension fund (as defined in para-
graph (b)(5)(ii) of this section) that relies
on paragraph (d)(3)(iii) of this section, re-
lating to the special rules for pension
funds, generally must provide the docu-
mentation required in paragraph
(d)(4)(v)(A) of this section and, in addi-
tion, the government pension fund must
also provide the following information—
(i) The name of the country in which
the plan is administered;
(ii) A representation that the fund is es-
tablished exclusively for the benefit of
employees or former employees of a for-
eign government, or employees or former
employees of a foreign government and
non-governmental employees or former
employees that perform or performed
governmental or social services;
(iii) A representation that the funds that
comprise the trust are managed by
trustees who are employees of, or persons
appointed by, the foreign government;
(iv) A representation that the trust form-
ing part of the pension plan provides for
retirement, disability, or death benefits in
consideration for prior services rendered;
(v) A representation that the income of
the trust satisfies the obligations of the
foreign government to the participants
under the plan, rather than inuring to the
benefit of a private person; and
(vi) Any other specified information.
(2) Ownership statement from non-gov-
ernment pension funds. The trustees, di-
rectors, or other administrators of the
non-government pension fund, as defined
in paragraph (b)(5)(iii) of this section,
that rely on paragraph (d)(3)(iii) of this
section, relating to the special rules for
pension funds, generally must provide the
pension fund’s intermediary ownership
statement described in paragraphs
(d)(4)(v)(A) of this section, and, in addi-
tion, the non-government pension fund
must also provide the following informa-
tion—
(i) The name of the country in which
the pension fund is administered;
(ii) A representation that the pension
fund is subject to supervision or regula-
tion by a governmental authority (or other
authority delegated to perform such su-
pervision or regulation by a governmental
authority) in such country, and, if so, the
name of the governmental authority (or
other authority delegated to perform such
supervision or regulation);
(iii) A representation that the pension
fund is generally exempt from income
taxation in its country of administration;
(iv) The number of beneficiaries in the
pension plan;
(v) The aggregate percentage interest of
beneficiaries by country of residence
based on addresses shown on the books
2000–8 I.R.B.679February 22, 2000

and records of the fund, provided the ad-
dresses are not nonresidential addresses,
such as a post office box or an address in
care of a financial intermediary, and pro-
vided none of the trustees, directors or
other administrators of the pension fund
know, or have reason to know, that the
beneficiary is not a resident of such for-
eign country;
(vi); A representation that the pension
fund meets the requirements of paragraph
(b)(5)(iii) of this section;
(vii) A representation that the trustees,
directors or other administrators of the
pension fund have no knowledge, and no
reason to know, that a pro-rata allocation
of interests of the fund to all beneficiaries
would differ significantly from an actuar-
ial allocation of interests in the fund (or, if
the beneficiaries’ actuarial interest in the
stock held directly or indirectly by the
pension fund differs from the beneficia-
ries’s actuarial interest in the pension
fund, the actuarial interests computed by
reference to the beneficiaries’ actuarial in-
terest in the stock);
(viii) Either—
(A) Any overfunding of the pension
fund would be payable, pursuant to the
governing instrument or the laws of the
foreign country in which the pension fund
is administered, only to, or for the benefit
of, one or more corporations that are orga-
nized in the country in which the pension
fund is administered, individual benefi-
ciaries of the pension fund or their desig-
nated beneficiaries, or social or charitable
causes (the reduction of the obligation of
the sponsoring company or companies to
make future contributions to the pension
fund by reason of overfunding shall not it-
self result in such overfunding being
deemed to be payable to or for the benefit
of such company or companies); or
(B) The foreign country in which the
pension fund is administered has laws that
are designed to prevent overfunding of a
pension fund and the funding of the pen-
sion fund is within the guidelines of such
laws; or
(C) The pension fund is maintained to
provide benefits to employees in a partic-
ular industry, profession, or group of in-
dustries or professions and employees of
at least 10 companies (other than compa-
nies that are owned or controlled, directly
or indirectly, by the same interests) con-
tribute to the pension fund or receive ben-
efits from the pension fund; and
(ix) Any other specified information.
(3) Time for making determinations.
The determinations required to be made
under this paragraph (d)(4)(v)(C) shall be
made using information shown on the
records of the pension fund for a date dur-
ing the foreign corporation’s taxable year
to which the determination is relevant.
(5) Availability and retention of docu-
ments for inspection. The documenta-
tion described in paragraphs (d)(3) and
(4) of this section must be retained by
the corporation seeking qualified for-
eign corporation status (the foreign cor-
poration) until the expiration of the
statute of limitations for the taxable year
of the foreign corporation to which the
documentation relates. Such documen-
tation must be made available for in-
spection by the Commissioner at such
time and place as the Commissioner
may request in writing.
(e) Reporting requirements. A foreign
corporation relying on the qualified share-
holder test of this section to demonstrate
that it is a qualified foreign corporation
for purposes of §1.883–1(c)(2) must pro-
vide the following information in addition
to the information required in
§1.883–1(c)(3) to be included in its Form
1120F for each taxable year. The infor-
mation should be current as of the end of
the corporation’s taxable year. The infor-
mation must include the following—
(1) A representation that more than 50
percent of the value of the outstanding
shares of the corporation is owned (or
treated as owned by reason of paragraph
(c) of this section) by qualified sharehold-
ers for the category of income for which
the exemption is claimed;
(2) With respect to each individual
qualified shareholder owning 5 percent or
more of the foreign corporation, applying
the attribution rules of paragraph (c) of
this section, and relied upon to meet the
50 percent ownership test of paragraph (a)
of this section, the name and address, as
represented on each such individual’s
ownership statement;
(3) With respect to all qualified share-
holders relied upon to satisfy the 50 per-
cent ownership test of paragraph (a) of
this section, the total percentage of the
value of the outstanding shares owned,
applying the attribution rules of paragraph
(c) of this section, by all qualified share-
holders resident in a qualified foreign
country, by country; and
(4) Any other required documentation.
§1.883–5 Effective date.
(a) General rule. Sections 1.883–1
through 1.883–4 apply to taxable years of
the foreign corporation ending 30 days or
more after the date these regulations are
published as final regulations in the Fed-
eral Register.
(b) Election for retroactive
application. When §§1.883–1 through
1.883–4 become generally applicable,
taxpayers may rely on all the provisions
of §§1.883–1 through 1.883–4 for guid-
ance and may elect to apply all such sub-
stantive provisions for any open taxable
year of the foreign corporation beginning
after December 31, 1986, and ending less
than 30 days after the date these regula-
tions are published as final regulations in
the Federal Register. However, such
election is not required to be applied with
respect to §1.883–1(c)(3) (relating to the
substantiation and reporting required to
be treated as a qualified foreign corpora-
tion) or §§1.883–2(f), 1.883–3(d) and
1.883–4(e) (relating to additional infor-
mation to be included in the return to
demonstrate whether the foreign corpora-
tion satisfies one of three stock ownership
tests). Such election will be applicable
for the year of the election and for all sub-
sequent taxable years.
(c) Transition rule. For taxable years
of the foreign corporation ending 30 days
or more after the date these regulations
are published as final regulations in the
Federal Register, and until such time as
the Form 1120F and its instructions are
revised to conform to §§1.883–1 through
1.883–4, the information required in
§1.883–1(c)(3) and §1.883–2(f),
1.883–3(d) or 1.883–4(e), as applicable,
must be included on a written statement
signed under penalties of perjury by a per-
son authorized to sign the return, attached
to the Form 1120F, and filed with the re-
turn.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 7, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 8, 2000, 65 F.R.
6065)
February 22, 20006802000–8 I.R.B.

Notice of Proposed Rulemaking
and Notice of Public Hearing
Certain Asset Transfers to
Regulated Investment
Companies (RICs) and Real
Estate Investment Trusts (REITs)
REG–209135–88
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: In T.D. 8872 on page 639,
the IRS is issuing temporary regulations
which apply with respect to the net built-
in gain of C corporation assets that be-
come assets of a Regulated Investment
Company (RIC) or Real Estate Invest-
ment Trust (REIT) by the qualification of
a C corporation as a RIC or REIT or by
the transfer of assets of a C corporation to
a RIC or REIT in a carryover basis trans-
action. This document also provides no-
tice of a public hearing on these proposed
regulations.
DATES: Written comments and outlines
of topics to be discussed at the public
hearing scheduled for May 10, 2000, at 10
a.m. in the IRS Auditorium, must be re-
ceived by April 19, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209135–88),
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–209135–88), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the Home Page
or by submitting comments directly to the
IRS Internet site at: http://www.irs.us-
treas.gov/tax_regs/regslist.html. The pub-
lic hearing has been scheduled for May
10, 2000, at 10 a.m., in the IRS Audito-
rium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Christopher W. Schoen, (202) 622-
7750, concerning submissions and the
hearing, LaNita Van Dyke (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. section 3507(d)).
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Com-
ments on the collection of information
should be received by April 7, 2000.
Comments are specifically requested con-
cerning:
Whether the proposed collection of infor-
mation is necessary for the proper perfor-
mance of the functions of the IRS, includ-
ing whether the collection will have
practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of
information (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
The collection of information in this
proposed regulation is in §1.337(d)–5.
This information is necessary for the Ser-
vice to determine whether liquidation
treatment or section 1374 treatment is ap-
propriate for the entity for which the regu-
lation applies. The collection of informa-
tion is required to obtain a benefit, i.e., to
elect to be subject to section 1374 in lieu
of liquidation treatment. The likely re-
spondents are Regulated Investment
Companies (RICs) and Real Estate In-
vestment Trusts (REITs).
The regulation provides that a section
1374 election is made by filing a state-
ment, signed by an official authorized to
sign the income tax return of the RIC or
REIT and attached to the RIC’s or REIT’s
Federal income tax return. The burden
for the collection of information in
§1.337(d)–5T(b)(3) is as follows:
Estimated total annual reporting burden:
50 hours
Estimated average annual burden per re-
spondent: 30 minutes
Estimated number of respondents: 100
Estimated annual frequency of responses:
Once
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. section 6103.
Background
Temporary regulations in T.D. 8872,
page 639, amend the Income Tax Regu-
lations (26 CFR part 1) relating to sec-
tion 337(d). The temporary regulations
provide rules that when a C corporation
(1) qualifies to be taxed as a RIC or
REIT, or (2) transfers assets to a RIC or
REIT in a carryover basis transaction,
the C corporation is treated as if it sold
all of its assets at their respective fair
market values and immediately liqui-
dated, unless the RIC or REIT elects to
be subject to tax under section 1374 of
the Code. The text of those temporary
regulations also serves as the text of
these proposed regulations. The pream-
ble to the temporary regulations explains
the temporary regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
2000–8 I.R.B.681February 22, 2000

ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, these temporary
regulations will be submitted to the Chief
Counsel of Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted to the
IRS. The IRS and Treasury request com-
ments on the clarity of the proposed rule
and how it may be made easier to under-
stand. All comments will be made avail-
able for public inspection and copying.
A public hearing has been scheduled
for May 10, 2000, at 10 a.m., in the IRS
Auditorium. Because of access restric-
tions, 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 at the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments and an outline of the topics to
be discussed (signed original and eight (8)
copies) by [Insert date].
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Christopher W. Schoen of the Of-
fice of Assistant Chief Counsel (Corpo-
rate). Other personnel from the IRS and
Treasury participated in their develop-
ment.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1–INCOME TAXES
Paragraph 1. The authority citation for
26 CFR part 1 is amended by adding an
entry in numerical order to read as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 1.337(d)–5 also issued under
26 U.S.C. 337. * * *
Par. 2. Section 1.337(d)–5 is added to
read as follows:
§1.337(d)–5 Tax on C assets becoming
RIC or REIT assets.
[The text of proposed §1.337(d)–5 of
this section is the same as the text of
§1.337(d)–5T published in T.D. 8872.]
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 7, 2000, 65
F.R. 5805)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Financial Asset Securitization
Investment Trusts; Real Estate
Mortgage Investment Conduits
REG–100276–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to financial
asset securitization investment trusts (FA-
SITs). This action is necessary because of
changes to the applicable tax law made by
the Small Business Job Protection Act of
1996. The proposed regulations affect
FASITs and their investors. This docu-
ment also contains proposed regulations
relating to real estate mortgage invest-
ment conduits (REMICs). This document
provides notice of a public hearing on the
proposed regulations.
DATES: Written comments must be re-
ceived by May 8, 2000. Outlines of top-
ics to be discussed at the public hearing
scheduled for May 15, 2000 at 10 a.m.,
must be received by April 24, 2000.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–100276–97
and REG–122450–98), room 5226, Inter-
nal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–100276–97), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
via the Internet by selecting the “Tax
Regs” option of the IRS Home Page or by
submitting them directly to the IRS Inter-
net site at
http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held in Room
2615, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions other than issues relating specifi-
cally to cross border transactions, David
L. Meyer at (202) 622-3960 (not a toll-
free number) and for issues relating
specifically to cross border transactions,
Rebecca Rosenberg or Milton Cahn at
(202) 622-3870 (not a toll-free number);
concerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, Guy
Traynor at (202) 622-7180 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking
has been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of informa-
tion should be sent to the Office of Man-
agement and Budget, Attn: Desk Offi-
cer for the Department of the Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224.
Comments on the collection of informa-
February 22, 20006822000–8 I.R.B.

tion should be received by April 7, 2000.
Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
collection will have a practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or startup costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
The collection of information is in
§1.860H–1(b)(2) and §1.860H–6(e). This
information is required to permit qualified
entities to elect to become a Financial
Asset Securitization Investment Trust and
to ensure the holder of the ownership in-
terest in a FASIT properly reports the
FASIT’s items of income, gain, deduc-
tion, loss, and credit. This information
will be used to properly administer the
provisions of part V of subchapter M of
the Code. The collection of information
is mandatory. The likely respondents are
business or other for-profit institutions.
Estimated total annual reporting and/or
record keeping burden: 750 hours.
Estimated average annual burden hours
per respondent and/or record-keeper: 5
hours.
Estimated number of respondents
and/or record-keepers: 150.
Estimated annual frequency of re-
sponses: one annually.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
Section 1621(a) of the Small Business
Job Protection Act of 1996, Public Law
104-188, 110 Stat. 1755 (August 20,
1996) (the Act) amended the Internal
Revenue Code (Code) by adding part V
(sections 860H through 860L) (the FASIT
provisions) to subchapter M of chapter 1.
Part V, which is effective September 1,
1997, authorizes a securitization vehicle
called a Financial Asset Securitization In-
vestment Trust (FASIT). FASITs are
meant to facilitate the securitization of
debt instruments, including non-mortgage
and mortgage debt instruments.
Asolicitation for comments
(SPR–247516–96) was published in the
Federal Registerfor November 4, 1996
(61 FR 56647). The comments received
both raised and helped resolve significant
issues. The IRS and Treasury request
comments on these proposed regulations
generally, and specifically request sugges-
tions on how they may be revised to be
more easily understood.
Explanation of Provisions
In General
A FASIT is a qualified arrangement
that elects FASIT treatment and meets
certain requirements concerning the com-
position of its assets and the interests it is-
sues to investors. A qualified arrange-
ment can be a corporation (other than a
regulated investment company (RIC) as
defined in section 851(a)), partnership,
trust, or segregated pool of assets.
A FASIT may issue one or more classes
of regular interests, which are treated as
debt for all purposes of the Code. In addi-
tion, each FASIT must have a single own-
ership interest, which must be held en-
tirely by a non-exempt domestic C
corporation (other than a RIC, real estate
investment trust (REIT), real estate mort-
gage investment conduit (REMIC), or
subchapter T cooperative).
A FASIT is not subject to income tax.
Instead, the tax items of the FASIT are in-
cluded in the taxable income of the holder
of the ownership interest (the Owner).
The Owner, (and in some circumstances a
person related to the Owner) must recog-
nize gain (if any) when property is either
transferred to the FASIT or supports the
regular interests.
Congress enacted the FASIT provisions
to facilitate the securitization of revolv-
ing, non-mortgage debt obligations. An
anti-abuse rule incorporated in these pro-
posed regulations is designed to ensure
that FASITs are used in a manner that is
consistent with this intent and not to cre-
ate opportunities for tax planning that
would not exist but for the enactment of
the FASIT provisions and these proposed
regulations.
RULES APPLICABLE TO THE FASIT
Administrative Provisions
1. Background
The administrative provisions have
three objectives: (1) ensuring accurate
and timely reporting of the FASIT’s tax
items, (2) ensuring compliance by the
FASIT with the operating and qualifica-
tion rules, and (3) reducing administrative
burdens on FASIT interest holders and the
IRS.
2. FASIT Election
The proposed regulations provide that a
FASIT election is made by attaching a
statement to the Owner’s Federal income
tax return for the taxable year that in-
cludes the startup day. No particular form
is presently required, but the statement
must be specified as a FASIT election,
and must identify the arrangement for
which the election is made. The IRS and
Treasury want to ensure that the persons
most affected by a FASIT election have
agreed to make the election. Therefore, if
the electing arrangement is an entity, the
election statement must be signed by the
person who would sign the entity’s return
in the absence of the FASIT election. If
the electing arrangement is a segregated
pool of assets, the election statement must
be signed by each person that owns the
assets in the pool for Federal income tax
purposes immediately before the startup
day.
3. Treatment of FASIT Under Subtitle F
None of the FASIT provisions ad-
dresses how a FASIT is treated under sub-
title F (Procedure and Administration),
which governs matters such as returns,
penalties, tax payments, and assessments.
One rule considered was to make a
FASIT’s subtitle F treatment depend on
the classification of the electing arrange-
ment. Thus, for example, if a partnership
makes a FASIT election, the FASIT is a
partnership for purposes of subtitle F.
Rather than adopt this approach, which
2000–8 I.R.B.683February 22, 2000

leads to several different administrative
regimes for FASITs, the proposed regula-
tions treat each FASIT as a branch or divi-
sion of its Owner for purposes of subtitle
F. Because an Owner must always be a
domestic C corporation, this solution re-
sults in uniform treatment.
The proposed regulations also make the
Owner responsible for reporting interest
income with respect to the regular inter-
ests which are treated for reporting pur-
poses as collateralized debt obligations
(CDOs).
Relationship of a FASIT to the Owner
The FASIT provisions do not provide a
general rule defining the relationship be-
tween a FASIT and its Owner for non-
FASIT Federal income tax purposes. The
nature of this relationship may be relevant
in determining the Federal income tax
consequences of a number of transactions
entered into with a FASIT. For example,
it is necessary to know the extent to which
transactions with a FASIT are treated as
transactions with the Owner in determin-
ing how the portfolio interest exception
applies and whether a change in the
Owner of the FASIT results in a realiza-
tion event for holders of the FASIT regu-
lar interests.
The IRS and Treasury considered
proposing a general rule to characterize
the FASIT’s relationship to its Owner for
all non-FASIT Federal income tax pur-
poses. Among the alternatives evaluated
were (1) treating the FASIT as an entity
separate from the Owner; (2) treating the
FASIT as a branch of the Owner; and (3)
treating the FASIT as an entity for some
purposes and as a branch for others.
Each alternative has some underpin-
ning in the statutory scheme. For exam-
ple, in determining the Owner’s taxable
income, the FASIT provisions treat a
FASIT’s assets, liabilities, and tax items
as the assets, liabilities, and tax items of
the Owner. This supports treating a
FASIT as a branch of the Owner. How-
ever, the restrictions on what kind of as-
sets may be held and what type of in-
vestor interests may be issued apply to the
FASIT alone and favor treating a FASIT
as a separate entity.
The IRS and Treasury have decided it
is better to resolve the nature of the
FASIT’s relationship with the Owner on
an issue-by-issue basis rather than by
adopting a single general rule. A few situ-
ations (for example, the treatment of a
FASIT under subtitle F and the treatment
of a FASIT under the portfolio interest
rules) are addressed in these proposed
regulations. The IRS and Treasury wel-
come additional comments on whether
and how additional rules should detail the
FASIT’s relationship with the Owner for
non-FASIT Federal income tax purposes.
Assets That May be Held by a FASIT
(Permitted Assets)
1. Background
Except during a brief formation period,
substantially all of a FASIT’s assets must
consist of permitted assets. Permitted as-
sets include cash and cash equivalents,
debt instruments (and rights to acquire
debt instruments), foreclosure property,
interest and currency hedges (and rights
to acquire interest and currency hedges),
guarantees (and rights to acquire guaran-
tees), regular interests in other FASITs,
and regular interests in REMICs. The
FASIT provisions generally do not allow
a FASIT to hold debt instruments issued
by the Owner (or a related person).
Several commentators requested guid-
ance on whether certain assets qualified
as permitted assets. Other comments fo-
cused on the prohibition on Owner debt.
In particular, the commentators requested
guidance on the extent to which an Owner
may guarantee assets or enter into a per-
mitted hedge with the FASIT without vio-
lating the prohibition on Owner debt.
2. “Substantially All”
The FASIT provisions require substan-
tially allof a FASIT’s assets to be permit-
ted assets. Under the proposed regula-
tions, a FASIT meets this test if the
aggregate adjusted basis of its assets other
than permitted assets is less than one per-
cent of the aggregate adjusted basis of all
its assets.
The proposed rule is patterned after a
safe harbor rule applicable to REMICs.
The proposed regulations do not incorpo-
rate a provision in the REMIC safe harbor
that allows a qualified entity that fails the
REMIC safe harbor to otherwise demon-
strate that it does not own more than a de
minimis amount of non-qualified assets.
This provision does not appear necessary
because a FASIT, unlike a REMIC, can
acquire additional permitted assets if it is
in danger of failing the substantially all
test.
3. Cash and Cash Equivalents
The FASIT provisions treat cash and
cash equivalentsas permitted assets. The
proposed regulations generally define the
phrase cash and cash equivalentsto mean
functional currency. Investment quality
debt instruments that are close to maturity
are also cash and cash equivalents be-
cause of their perceived liquidity.
In response to some commentators, the
proposed regulations provide that cash
and cash equivalents include shares in
U.S.-dollar-denominated money market
mutual funds. Although such shares are
technically stock, money market mutual
funds are practical investments for cash
balances pending either distribution to
regular interest holders or reinvestment in
new debt instruments. The IRS and Trea-
sury, therefore, believe it is appropriate to
allow FASITs to hold these investments.
4. Debt Instruments in General
Under the FASIT provisions, a debt in-
strument must satisfy two criteria to be a
permitted asset. First, it has to be a debt
instrumentas defined in section
1275(a)(1) of the Code, which means it
has to be a bond, debenture, note or cer-
tificate, or other evidence of indebted-
ness. Second, interest payments (if any)
must be made in the manner prescribed
for REMIC regular interests. Interest
payments on REMIC regular interests
must be based on a fixed or variable rate
(as allowed in regulations), or must con-
sist of a specified portion of the interest
payments on the underlying mortgages
held by the REMIC. This means that
under the FASIT provisions, interest pay-
ments on a debt instrument held by a
FASIT must also be payable at a fixed or
variable rate, or consist of a specified por-
tion of the interest payments on some un-
derlying debt instrument.
The proposed regulations enumerate
the types of debt instruments that meet
this standard and therefore qualify as per-
mitted assets. In general, a FASIT may
hold fixed-rate debt instruments, speci-
fied floating-rate debt instruments, infla-
tion-indexed debt instruments, and credit
card receivables. In response to com-
ments received, the proposed regulations
also clarify that a FASIT may generally
hold beneficial interests in, or coupon and
principal strips created from, these instru-
ments.
One commentator requested that the
proposed regulations specifically allow
February 22, 20006842000–8 I.R.B.

FASITs to hold debt instruments that pro-
vide for prepayment penalties. The com-
mentator’s concern was that prepayment
penalties might be viewed as contingent
payments that are not fixed or variable in-
terest payments within the meaning of the
FASIT provisions. The proposed regula-
tions accommodate this concern by in-
cluding in the list of permitted debt instru-
ments, debt instruments to which
§1.1272–1(c) (relating to debt instru-
ments that provide for alternate payment
schedules) applies. These rules generally
accommodate prepayment penalties.
To prevent a FASIT from indirectly
holding equity-like or other non-debt in-
terests, the proposed regulations disqual-
ify any debt instrument that can be con-
verted into, or the value of which is based
on, anything other than a permitted debt
instrument. Impermissible debt instru-
ments include, for example, a debt instru-
ment convertible into stock and a debt in-
strument the interest payments on which
vary based on the spot price of oil. The
proposed regulations also do not permit a
FASIT to hold debt instruments that,
when acquired by the FASIT, are in de-
fault due to any payment delinquency un-
less the Owner reasonably expects the
obligor to cure the default (including the
payment of any interest and penalties)
within 90 days of the date the instrument
is acquired by the FASIT. The concern is
that a distressed debt instrument may take
on the characteristics of equity because
the FASIT (and in turn the regular interest
holders): (1) may have to look to the
obligor’s general assets for payment of
the instrument, (2) may not receive full
payment of the instrument, and (3) may
not receive any payment until the satisfac-
tion of claims held by the obligor’s other
creditors.
5. Participation Interests
One commentator requested guidance
on whether a participation interest in a
pool of revolving loans would be consid-
ered a permitted asset. The commentator
pointed out that a participation interest
can be based either on a fixed percentage
of assets in the pool or on a fixed dollar
amount of assets in the pool.
The proposed regulations do not specif-
ically address participation interests. It
does not appear that guidance is needed
concerning participation interests that are
based on a fixed percentage of assets. If a
FASIT owns a fixed-percentage participa-
tion interest, as the outstanding principal
balance of the pool rises and falls, the
FASIT may be required to pay additional
amounts or entitled to receive distribu-
tions to maintain its fixed percentage
ownership in the pool. As long as the dis-
tributions are paid in cash (or in the form
of an otherwise permitted asset), the
FASIT’s fixed-percentage interest should
be considered a fixed-percentage interest
in each of the debt instruments in the
pool. Thus, the FASIT’s fixed-percentage
participation interest should qualify as a
permitted debt instrument to the extent
the underlying debt instruments are them-
selves permitted assets.
The result under the FASIT provisions
is less clear in cases where the participa-
tion interest is based on a fixed dollar
amount of assets in a pool. In this case,
each change in the outstanding balance of
the pool would trigger a corresponding
change in the FASIT’s percentage owner-
ship of the pool. When the size of the
pool increases, the FASIT could be
viewed as exchanging an interest in each
asset in the old pool for a lower percent-
age interest in each asset in the new pool.
This exchange might constitute an imper-
missible asset disposition. In some cases,
this disposition could result in the imposi-
tion of the prohibited transaction tax.
While the problem with fixed-dollar
participation interests might be resolved
by treating a pool as a single asset, a rule
specifically allowing a FASIT to hold par-
ticipation interests may be used as a
means of inappropriately avoiding other
rules. The IRS and Treasury welcome ad-
ditional comments on whether and how
the need for a FASIT to hold fixed-dollar
amount participation interests can be ac-
commodated.
6. Debt Instruments Issued by the Owner
To ensure that the holders of the regular
interests are looking primarily to the
FASIT, and not the Owner, for payment,
the FASIT provisions generally prohibit a
FASIT from holding debt instruments is-
sued either by the Owner or a person re-
lated to the Owner (collectively, Owner
debt). An exception is made for cash
equivalents and other instruments speci-
fied by regulation.
Under the proposed regulations, Owner
debt means more than just debt instru-
ments issued by the Owner. It includes an
obligation of the Owner embedded in an-
other instrument, a third party debt instru-
ment the performance of which is contin-
gent on the performance of Owner debt,
and any partial interest in Owner debt
such as a principal or coupon strip. Simi-
larly, a debt instrument guaranteed by an
Owner is treated as Owner debt, if at the
time the FASIT acquires the debt instru-
ment, the Owner is in substance the pri-
mary obligor of the debt instrument. See
Rev. Rul. 97–3 (1997–1 C.B. 9).
Cash equivalents of the Owner, which
are permitted under the FASIT provisions,
are limited by the proposed regulations to
short-term investment quality debt instru-
ments that are acquired to temporarily in-
vest cash pending either distribution to
the FASIT interest holders or re-invest-
ment in other permitted assets.
One commentator noted that under the
FASIT provisions, it is unclear whether
the Owner of two or more FASITs may
use regular interests from one FASIT to
fund another of its FASITs. If regular in-
terests are considered debt of the Owner,
then, technically, the regular interests held
by the second FASIT would be impermis-
sible Owner debt. The commentator
noted that this form of tiering arrange-
ment is commonly used in REMICs and
should be available for use with FASITs.
In response to this comment, the proposed
regulations allow this type of tiering
arrangement. As discussed below, how-
ever, tiered FASITs may not be used to
achieve benefits that could not be ob-
tained without the FASIT provisions.
7. Foreclosure Property
The FASIT provisions allow a FASIT
to hold an asset (foreclosure property) ac-
quired upon the default or imminent de-
fault of a permitted debt instrument. The
FASIT provisions generally allow a
FASIT to retain foreclosure property for a
designated grace period of approximately
three to four years. After the grace pe-
riod, a 100-percent tax is imposed on any
net income derived from the foreclosure
property, including income from its oper-
ation or disposition.
In some cases, the property acquired
upon foreclosure may independently
qualify as another type of permitted asset.
Under the proposed regulations, the
FASIT may retain this type of foreclosure
property beyond the grace period. If the
FASIT retains the property beyond the
2000–8 I.R.B.685February 22, 2000

grace period, the property loses its status
as foreclosure property at the end of the
grace period. At this point, the proposed
regulations require the Owner to recog-
nize gain, if any, on the property as if it
had been contributed to the FASIT at the
close of the grace period. In addition,
after the grace period, the property can no
longer qualify for the foreclosure excep-
tion to the prohibited transaction rules.
8. Contracts or Agreements in the Nature
of a Line of Credit
A FASIT may generally hold as a per-
mitted asset a contract or agreement in the
nature of a line of credit as long as the
FASIT does not originate the contract or
agreement.
9. Guarantees and Hedges
Under the FASIT provisions, a contract
may qualify as a permitted asset if it is a
permitted hedge or guarantee. The FASIT
provisions impose two requirements on
permitted hedges and guarantees. First,
the contract must be an interest rate or
foreign currency notional principal con-
tract, letter of credit, insurance, guarantee
against defaults, or other similar instru-
ment. Second, the contract must be rea-
sonably required to guarantee or hedge
against the FASIT’s risks associated with
being the obligor on the interests that the
FASIT has issued. Several commentators
asked for guidance on the scope of this
rule.
The proposed regulations provide guid-
ance as to what constitutes a permitted
hedge or guarantee. Rather than focus on
the type of contract, the proposed regula-
tions focus on its intended function.
Under the proposed regulations, a con-
tract is a permitted hedge or guarantee if
the contract is reasonably required to off-
set differences that specified risk factors
may cause between the amount or timing
of the cash flows on a FASIT’s assets and
the amount or timing of the cash flows on
the FASIT’s regular interests. The speci-
fied risk factors are (1) fluctuations in
market interest rates, (2) fluctuations in
currency exchange rates, (3) the credit
quality of the FASIT’s assets and regular
interests, and (4) the receipt of payments
on the FASIT’s assets earlier or later than
originally anticipated.
Several commentators requested that
the proposed regulations list specific
types of hedges and guarantees that qual-
ify as permitted assets. Because the pro-
posed regulations define permitted assets
and guarantees in terms of their function,
the proposed regulations do not include
this type of list. Out of a concern that
hedges could be used to effect the eco-
nomic equivalent of a transfer of non-per-
mitted assets to the FASIT, the proposed
regulations prohibit a hedge or guarantee
from referencing certain assets and in-
dices. In particular, a hedge is not a per-
mitted hedge if it references an asset other
than a permitted asset or if it references an
index, economic indicator or financial av-
erage that is not widely disseminated and
designed to correlate closely with changes
in one or more of the four specified risk
factors.
One commentator requested that the
proposed regulations permit the incidental
hedging of assets allocable to ownership
interests. The commentator suggested
that, as a practical matter, an Owner may
desire to hedge all of the FASIT’s assets
inside the FASIT even though the FASIT
securitizes less than all of the assets. The
proposed regulations accommodate this
concern by allowing the FASIT to hedge
assets held (or to be held) and liabilities
issued (or to be issued). Thus, under the
proposed regulations, an Owner can
hedge assets inside a FASIT that currently
relate to the ownership interest if the as-
sets are being held inside the FASIT be-
cause the Owner intends for them to sup-
port FASIT regular interests in the future.
The proposed regulations provide spe-
cial rules for hedges and guarantees en-
tered into with the Owner or a related
party. These rules generally allow a
FASIT to enter into a hedge (other than a
credit hedge) with the Owner (or a related
party) if two conditions are met. First, the
Owner (or related party) must be a dealer
with respect to that type of hedging con-
tract. Second, the Owner must maintain
records establishing that the hedge con-
tract was entered into at arm’s length. In
addition, the special rules provide that an
Owner (or a related party) may issue a
guarantee to a FASIT if the Owner can
demonstrate that, immediately after the
guarantee is issued, less than three per-
cent of the value of the FASIT’s assets are
attributable to Owner guarantees.
Finally, the usefulness of a hedge is di-
minished if the tax character of the hedge
(as an ordinary or capital asset) does not
match the tax character of the hedged
item. Absent a special rule, disposing of a
FASIT hedge could generate capital loss
even though the associated assets and lia-
bilities of the FASIT generate ordinary in-
come and deductions. To alleviate this
character mismatch, the proposed regula-
tions treat a permitted hedge as an ordi-
nary asset.
Prohibited Transactions
1. Background
The FASIT provisions restrict the types
of transactions in which a FASIT may en-
gage through the imposition of a prohib-
ited transactions tax. The tax is equal to
100 percent of the income a FASIT real-
izes from a prohibited transaction. The
four categories of prohibited transactions
set out in the FASIT provisions include
the receipt of any income from a loan
originated by the FASIT and the receipt
of gains from the FASIT’s disposition of
its assets.
2. Loan Origination
Commentators expressed considerable
concern over the lack of statutory guid-
ance on determining whether a debt in-
strument held by a FASIT has been origi-
nated by the FASIT. Commentators noted
that debt instruments originated through
the Owner’s business activities might be
deemed to be originated by the FASIT
thereby exposing the FASIT to liability
for the prohibited transactions tax on any
income realized on the instrument.
The proposed regulations contain five
safe harbors to limit the scope of the pro-
hibited transaction rules as they relate to
loan origination. Under the first safe har-
bor, a FASIT is not considered to have
originated a loan if the FASIT acquires
the loan from an established securities
market.
Under the second safe harbor, a FASIT
is not considered to have originated a loan
if the FASIT acquires the loan more than
a year after the loan was created.
Under the third safe harbor, a FASIT is
not considered to have originated a loan if
the FASIT acquires the loan from a person
that regularly originates similar loans in
the ordinary course of its trade or business.
Importantly, this third safe harbor extends
to transactions entered into with the Owner
(or a related party). As a result, a FASIT
that acquires credit card receivables from
its Owner (or a related party), or creates
new receivables from issuances made on
accounts held by the FASIT will not be
February 22, 20006862000–8 I.R.B.

considered to have originated the receiv-
ables to the extent the Owner (or related
party) originates similar loans in the ordi-
nary course of its business.
The fourth safe harbor provides that the
FASIT will not be treated as originating
any new loan it may receive from the same
obligor in exchange for the obligor’s origi-
nal loan in the context of a workout.
Finally, a FASIT will not be treated as
having originated a debt instrument when
it makes a loan pursuant to a contract or
agreement in the nature of a line of credit
the FASIT is permitted to hold.
3. Substitution or Distribution of Debt In-
struments.
The FASIT provisions generally im-
pose a prohibited transaction tax on the
distribution of debt instruments to the
Owner. An exception to this rule exists
for distributions to the Owner so long as
the principal purpose of the distribution is
not the recognition of gain that is due to
changes in market conditions while the
FASIT held the debt instrument. This rule
effectively allows an Owner to reduce
over-collateralization so long as the re-
duction is not designed to obtain a charac-
ter advantage. Absent this rule, in times
of falling market interest rates, an Owner
could inappropriately generate capital
gain and economically offsetting ordinary
loss by disposing of distributed appreci-
ated debt instruments while having the
FASIT dispose of related hedges. To clar-
ify the application of the distribution rule,
the proposed regulations deem a distribu-
tion of a debt instrument to be carried out
principally to recognize gain if the Owner
(or a related person) sells the substituted
or distributed debt instrument at a gain
within 180 days of the substitution or dis-
tribution. In this case, the distribution
will be a prohibited transaction subject to
the 100-percent tax.
Consequences of FASIT Cessation
Under the FASIT provisions, the Com-
missioner may consent to the intended ces-
sation of a FASIT and may grant condi-
tional relief in the case of an inadvertent
cessation. There are, however, no compre-
hensive rules describing the consequences
of a cessation. The proposed regulations,
therefore, detail how a cessation affects the
FASIT, the underlying arrangement that
made the FASIT election, the Owner, and
the regular interest holders. These rules
apply unless a cessation is carried out with
the Commissioner’s consent, in which case
the consent document controls.
Under the proposed regulations the
Owner is treated as disposing of the
FASIT’s assets for their fair market value
in a prohibited transaction. Gain, if any,
on this deemed distribution is subject to
the prohibited transactions tax. Any loss
is disallowed. The Owner is also treated
as satisfying the regular interests for an
amount equal to the lesser of the adjusted
issue price or fair market value of the reg-
ular interests. This deemed satisfaction
will result in cancellation of indebtedness
income in cases where the aggregate fair
market value of the assets is less than the
aggregate adjusted issue price of the regu-
lar interests. The underlying arrangement
is no longer treated as a FASIT and gener-
ally is prohibited from making a new
FASIT election. In addition, the underly-
ing arrangement is treated as holding the
assets of the terminated FASIT and is
classified (for example, as a corporation
or partnership) under general tax princi-
ples. Finally, the regular interest holders
are treated as exchanging their FASIT
regular interests for new interests in the
underlying arrangement. These new in-
terests are classified under general tax
principles, and the deemed exchange of
the regular interests for the new interests
may require the regular interest holders to
recognize gain or loss.
RULES APPLICABLE TO OWNER
Under the FASIT provisions, an Owner
generally determines its taxable income
by including the gains, losses, income and
deductions of the FASIT and by treating
the assets and liabilities of the FASIT as
its own. In addition, the Owner must also
follow special rules concerning the
FASIT’s tax-exempt income, prohibited
transactions and method of accounting for
debt instruments. Few comments were
received concerning these provisions.
Under the special rule concerning the
method of accounting for debt instru-
ments, a FASIT must use the constant
yield method in determining all interest,
acquisition discount, original issue dis-
count (OID), market discount, and pre-
mium deductions or adjustments. To en-
sure that the Owner uses a constant yield
method for all interest and interest-like
items, the proposed regulations require
the Owner to compute the amount of in-
terest income and premium offset accru-
ing on debt instruments held in a FASIT
under the methodology described in
§1.1272–3(c).
One commentator noted that the FASIT
provisions speak in terms of determining
the Owner’s taxable income, and that tax-
able income, which the Code defines as
gross income minus deductions, makes no
reference to credits. The proposed regula-
tions, therefore, clarify the extent to
which an Owner, in determining its tax,
may claim the FASIT’s credits. In gen-
eral, the Owner may claim a credit for
taxes paid or deemed paid by the FASIT
in the same manner and to the same extent
as if the FASIT were an unincorporated
branch of the Owner. As discussed below,
the allowance of a foreign tax credit is
subject to the anti-abuse provisions of this
regulation, and other relevant authorities
including case law and the potential appli-
cation of IRS Notice 98–5 (1998–3 I.R.B.
49).
Because the Owner includes the
FASIT’s tax items in determining its cred-
its and taxable income, the proposed reg-
ulations make the Owner (rather than the
FASIT) responsible for reporting those
items on its Federal income tax return.
The Owner is required to attach a separate
statement to its income tax return detail-
ing these items. No specific form is re-
quired.
Gain Recognition on Property
Transferred to a FASIT
1. Background
The FASIT provisions require Owners
(or, in some cases, related persons) to in-
clude in income gain (but not loss) real-
ized on the transfer of assets to a FASIT.
In general, the amount of gain (if any)
that must be included is equal to the value
of the transferred asset over its adjusted
basis in the transferor’s hands. In addi-
tion, the FASIT provisions require gain (if
any) to be recognized on assets the Owner
holds outside of the FASIT but which
nonetheless support FASIT regular inter-
ests. Significant comments were received
regarding the gain recognition rule. In
particular, comments were received on
the method of valuing property, the scope
of the support rule, and the need for a gain
deferral rule.
2. Related-person Gain Recognition Rule
The IRS and Treasury have determined
that the gain recognition rule of the
2000–8 I.R.B.687February 22, 2000

FASIT provisions could be circumvented
when a related person transfers property
to a FASIT. Because the FASIT provi-
sions do not require that the related per-
son be a taxable C corporation (or even
that the related person be subject to U.S.
tax), the intended corporate-level tax on
gain could be avoided by having non-cor-
porate or foreign related persons make
asset transfers. In this case, the FASIT
provisions could be interpreted as allocat-
ing gain to the related person and the eco-
nomically offsetting losses (usually in the
form of premium offset) to the Owner.
This misallocation of gain, if allowed,
would frustrate the purpose of the gain
recognition rule.
The IRS and Treasury considered two
ways to address this issue in developing
these proposed regulations. One approach
would have required any contribution from
a related party to the FASIT to be taxed as
if it were a deemed sale to the Owner fol-
lowed by a contribution to the FASIT. This
rule would conform the treatment of related
person contributions with the treatment of
contributions from unrelated persons under
section 860I(a)(2). This rule would also
ensure that gain upon contribution would
be allocated to the taxpayer entitled to the
subsequently occurring offsetting eco-
nomic loss, namely, the Owner. A second
approach was to develop regulations that
would limit related person treatment to tax-
able, domestic C corporations and ensure
that the misallocation of gain (in the related
person) and associated loss (in the Owner)
would not produce unwarranted tax bene-
fits.
The proposed regulations adopt the
first approach. Under the proposed regu-
lations, transactions between a related
person and the FASIT are treated as trans-
actions between the related person and the
Owner followed by transactions between
the Owner and the FASIT. This rule,
however, does not apply in all cases.
Transfers of publicly traded property by
related persons are unlikely to be abusive.
The rule in the proposed regulations,
therefore, only applies if the related per-
son transfers property not traded on an es-
tablished securities market. Thus, for ex-
ample, the rule applies to a transfer of
consumer receivables, but not to a trans-
fer of Treasury bills.
3. Determination of Value for Gain
Recognition Purposes
a. In general
To determine value for purposes of ap-
plying the gain recognition rules, the
FASIT provisions divide property into
two categories: (1) debt instruments not
traded on an established securities mar-
ket, and (2) all other property. The value
of debt instruments not traded on an es-
tablished securities market is determined
by a special statutory rule. The value of
all other property (which includes debt in-
struments that are traded on an estab-
lished securities market) is fair market
value.
Under the special rule, the value of a
debt instrument not traded on an estab-
lished securities market is the sum of the
reasonably expected cash flows on the in-
strument, discounted using semiannual
compounding at a rate equal to 120 per-
cent of the applicable federal rate (AFR).
The intent behind the special valuation
rule is uncertain. The legislative history
of the FASIT provisions indicates the rule
was meant to be a simple and mechanical
formula that, by its nature, would not pro-
duce accurate results in every case.
Specifically, the legislative history states
that the value of an asset is determined by
the special valuation rule even if a differ-
ent value would be determined by apply-
ing a willing buyer/willing seller stan-
dard. See H.R. Rept.104-737, 104th
Cong. 2d Sess., 327 (1996). At the same
time, by applying a fair market value
standard to all other assets (including
market-traded debt), Congress showed a
clear preference for using actual fair mar-
ket value whenever it can be determined
with reasonable accuracy.
Several commentators made sugges-
tions on how to interpret the legislative
intent behind the special valuation rule.
In general, the commentators were con-
cerned that implementing the rule without
modification would in many cases gener-
ate tax gains far in excess of economic
gains. Because the commentators viewed
this overvaluation as a substantial impedi-
ment to the use of FASITs, they asked that
the proposed regulations narrow as much
as possible the debt instruments subject to
the special valuation rule.
The proposed regulations attempt to
reconcile the legislative intent and the
commentators’ concerns in a consistent
and principled manner. The policy justifi-
cation for the special valuation rule is
strongest where it is difficult, if not im-
possible, to separate the value of a debt
instrument from the value of the Owner’s
business relationship with the debtor. For
example, the value of credit card receiv-
ables may be inferred if the receivables
are placed in trust and used to create new
debt instruments that are sold to the pub-
lic at a disclosed price. In this case, how-
ever, the implied price necessarily in-
cludes both the value of the receivables
and the value of the transferor’s implicit
or explicit promise to replace the receiv-
ables as they mature. Because there is no
objective, easily administrable method for
allocating the portion of the price alloca-
ble to the receivable (as opposed to the
portion allocable to the transferor’s ongo-
ing business), the special valuation rule
seems appropriate in this context.
By contrast, the policy justification for
the special valuation rule is weakest in
cases where the fair market value of the
debt instrument can be easily established.
For example, if a FASIT purchases a pool
of non-market-traded securities for cash
in a transaction where the FASIT main-
tains no continuing relationship with the
seller, there appears to be no reason to
distrust the value as determined by an ac-
tual arm’s length bargaining.
Consistent with this understanding of
the purpose behind the special valuation
rule, the proposed regulations take a
broad view of what constitutes an estab-
lished securities market. In addition, the
regulations clearly delineate whether
property is subject to the special rule and
provide a number of exceptions from the
special rule.
b. Traded on an established securities
market
The proposed regulations define the
term traded on an established securities
marketby reference to §1.1273–2(f)(2)
through (4) of the OID regulations. The
proposed regulations also give the Com-
missioner the power to determine that
debt instruments not meeting the stan-
dards of the OID regulations are neverthe-
less traded on an established securities
market. Under the cross- reference to the
OID regulations, debt is considered
traded on an established securities market
if (1) it is listed on certain specified secu-
rities exchanges or on certain interdealer
quotation systems, (2) it is traded on a
board of trade or interbank market, or (3)
February 22, 20006882000–8 I.R.B.

it appears on a quotation medium that
provides a reasonable basis to determine
fair market value by disseminating either
recent price quotations or actual prices of
recent sales transactions.
The proposed regulations do not cross-
reference §1.1273–2(f)(5) of the OID reg-
ulations. Consequently, debt is not con-
sidered traded on an established
securities marketif it is merely readily
quotable within the meaning of
§1.1273–2(f)(5). The IRS and Treasury
do not expect this omission to have a sig-
nificant impact because, under a special
exception (the spot purchase rule, dis-
cussed below) the proposed regulations
value non-publicly traded debt instru-
ments at their cost if a FASIT acquires
them in (or soon after) an arm’s length
cash purchase.
According to one commentator, bank
loans and private placement loans, which
are typically made to small and medium
sized businesses, are readily quotable
within the meaning of §1.1273–5(f)(5)
but would not otherwise be considered as
traded on an established securities mar-
ket. The commentator stated there would
be commercial interest in securitizing
these loans through FASITs but for appli-
cation of the special valuation rule. Al-
though the proposed regulations do not
adopt the readily quotable standard, the
IRS and Treasury believe bank and pri-
vate placement loans will be securitized
in transactions qualifying for the spot pur-
chase exception. Nevertheless, comments
are requested on whether the readily
quotable standard is still necessary.
c. Exceptions for debt not traded on an
established securities market
The proposed regulations except from
the special valuation rule certain benefi-
cial and stripped interests. Under this ex-
ception, a certificate representing benefi-
cial ownership of debt instruments
constitutes beneficial ownership of debt
instruments traded on an established secu-
rities market if either the certificate or all
of the underlying debt instruments are
traded on an established securities mar-
ket. Similarly, a stripped bond or stripped
coupon represents debt traded on an es-
tablished securities market, if either the
strip or the underlying debt instrument is
traded on an established securities mar-
ket. Because fair market value is easily
determined in these circumstances, there
appears to be little reason to apply the
special valuation rule.
Finally, the proposed regulations pro-
vide an exception for certain debt instru-
ments that are contemporaneously pur-
chased and transferred to the FASIT (the
spot purchase rule). Under this provision,
the value of a debt instrument is its cost to
the Owner if four conditions are met: (1)
the debt instrument is purchased from an
unrelated person in an arm’s length trans-
action, (2) the debt instrument is acquired
for cash, (3) the price of the debt instru-
ment is fixed no more than 15 days before
the date of the purchase, and (4) the debt
instrument is transferred to the FASIT no
more than 15 days after the date of the
purchase.
d. Debt instruments not traded on an es-
tablished securities market
As discussed above, the special valua-
tion rule values a debt instrument by dis-
counting the reasonably expected cash
flows on the instrument. The proposed
regulations require that the determination
of reasonably expected cash flows be
commercially reasonable. The proposed
regulations also permit reasonable as-
sumptions concerning credit risk, early
repayments, and loan servicing costs to be
taken into account. Additional rules dis-
courage the use of assumptions known to
be inaccurate.
One safeguard is a consistency test.
Even though a debt instrument may not be
traded on an established securities mar-
ket, a person securitizing the debt instru-
ment may make certain public representa-
tions about the debt instrument, such as in
a prospectus or an offering memorandum.
The consistency test prevents the use of
one set of assumptions for tax purposes
and the use of another set for different
purposes. Specifically, all assumptions
used in determining reasonably expected
cash flows (for purposes of the FASIT
valuation rule) must be no less favorable
than the assumptions underlying the rep-
resentations made to any of the following
groups in the prescribed order: investors,
rating agencies, or governmental agen-
cies. For example, if one default rate is
assumed to value debt instruments in a
prospectus, a higher default rate cannot be
assumed to value the debt instruments for
purposes of the gain recognition provi-
sions. Even if no representations con-
cerning value are made to investors, rat-
ing agencies, or governmental agencies,
the assumptions made for purposes of the
gain recognition provisions must still be
consistent with any applicable industry
customs and standards. To encourage ad-
herence to the consistency test, the Com-
missioner may determine reasonably ex-
pected cash flows without making any
adjustment if the assumption made with
respect to that adjustment (for example,
assumed credit risks) fails the consistency
test or is otherwise unreasonable.
In addition to the consistency test, the
proposed regulations place a ceiling on
projected loan servicing costs. Specifi-
cally, the amount of loan servicing costs
projected may not exceed the lesser of (1)
the amount the FASIT agrees to pay the
Owner (or a related person) for servicing
all, or a portion, of the loans held by the
FASIT, or (2) the amount a third party
would reasonably pay for the servicing of
identical loans.
e. Special valuation rule for guarantees
Because a guarantee usually is not a
debt instrument, any gain recognized on
transferring a guarantee to a FASIT would
be determined using the guarantee’s fair
market value absent a special rule. Nev-
ertheless, if a guarantee relates solely to
non-traded debt instruments, the proposed
regulations allow taxpayers to value the
guarantee and the debt instruments to-
gether. Under this rule, the reasonably
expected payments on the guarantee are
treated as part of the reasonably expected
payments on the debt instruments to
which the guarantee relates.
4. Property Held Outside a FASIT Sup-
porting FASIT Regular Interests
An Owner (or a person related to the
Owner) must recognize gain on any prop-
erty the Owner or related person holds
outside the FASIT that supports the regu-
lar interests. In addition, property held by
the Owner or related person that supports
regular interests is treated as held by the
FASIT for all purposes of the FASIT pro-
visions. By treating support property as
transferred to and held by a FASIT, the
support rules discourage taxpayers from
trying to avoid the gain-on-transfer rules
and ensure that FASIT income includes
the income from all FASIT property.
Commentators asked for a clear and
narrow definition of support property.
They suggested limiting the support rule
to situations in which the arrangement
2000–8 I.R.B.689February 22, 2000

with the regular interest holders indicates
that assets held outside the FASIT would
have been transferred to the FASIT but
for the gain recognition rules. Under this
view, support property includes: (1) sub-
ordinated interests in debt instruments
contributed to the FASIT, (2) property se-
curing an Owner’s guarantee, and (3) con-
tribution agreements that allow the FASIT
to purchase a debt instrument for an
amount significantly below its fair market
value. Several commentators argued that
unless a narrow view of support is
adopted, the support rule threatens to sub-
ject to the gain recognition rule all prop-
erty held by an Owner whenever the
Owner guarantees a regular interest or has
any kind of continuing relationship with
the FASIT.
Consistent with the comments re-
ceived, the proposed regulations narrowly
define support property. Under the pro-
posed regulations, property generally is
support propertyif the Owner (or a re-
lated person): (1) identifies the property
as providing security for a regular inter-
est, (2) sets aside the property for transfer
to the FASIT under a contribution agree-
ment, or (3) holds an interest in the prop-
erty that is subordinate to the FASIT’s in-
terest in the property. This last situation
can arise, for example, if the Owner holds
the junior interests in a pool of debt in-
struments while the FASIT holds the se-
nior interests.
5. Deferral of Gain Recognition
Although gain must ordinarily be rec-
ognized as soon as property is transferred,
the FASIT provisions authorize regula-
tions under which gain on transferred
property is deferred until the transferred
property supports regular interests. Sev-
eral commentators specifically requested
a gain deferral system and one explained
in detail how a gain deferral system could
be applied to a constantly revolving pool
of assets.
The proposed regulations do not pro-
vide a general gain deferral system. After
carefully considering the issues involved,
the IRS and Treasury have determined
that gain deferral rules must build on rules
for accounting for pooled debt instru-
ments. The IRS and Treasury anticipate
providing rules for pooled debt instru-
ment in future guidance, and at that time
expect to revisit the FASIT gain deferral
rules.
Although the proposed regulations do
not provide rules for gain deferral gener-
ally, rules permitting gain deferral for pre-
effective date FASITs have been devel-
oped consistent with the requirements of
the Act. The IRS and the Treasury re-
quest comments on whether and how the
gain deferral system for pre-effective date
FASITs may be modified to accommodate
a general gain deferral system.
Ownership Interests and Consolidated
Groups
By statute, to qualify as a FASIT, an
arrangement must have one (and only
one) ownership interest, and that owner-
ship interest must be held by one (and
only one) eligible corporation. Congress,
however, anticipated that Treasury would
“issue guidance on how the ownership
rule would apply to cases in which the en-
tity that owns the FASIT joins in the filing
of a consolidated return with other mem-
bers of the group that wish to hold an
ownership interest in the FASIT.” See
H.R. Conf. Rep. No. 737, 104th Cong., 2d
Sess. 329 (1996).
Commentators urged the IRS and Trea-
sury to issue guidance that would change
the statutory rule and permit members of
a consolidated group to jointly hold a
FASIT ownership interest. In studying
the issue, however, the IRS and Treasury
became concerned about how such guid-
ance would continue to satisfy those gen-
eral principles of the consolidated return
regulations that preclude the shifting of
stock basis, income, or loss. The IRS and
Treasury considered different models that
would permit members of a consolidated
group to jointly hold (or enjoy the bene-
fits of jointly holding) a FASIT ownership
interest, but none of these were found to
adequately address the government’s con-
cerns without adding administrative com-
plexity for both the IRS and taxpayers.
Moreover, the IRS and Treasury are not
convinced the level of potential attribute
shifting should be disregarded or ad-
dressed through an anti-abuse rule or
would be so minor that disregarding it
would be appropriate. Therefore, the pro-
posed regulations do not provide rules
permitting members of a consolidated
group to jointly hold ownership interests
in a FASIT. The IRS and Treasury invite
the submission of additional comments
that would address these concerns.
Transfers of Ownership Interests
The proposed regulations ignore the
transfer of an ownership interest if the
transfer is accomplished to impede the as-
sessment or collection of tax. A transfer
is accomplished to impede the assessment
or collection of tax if the transferor
knows, or should know, that the transferee
would be unwilling or unable to pay some
or all of the tax arising from holding the
ownership interest. A safe harbor, incor-
porated through a cross-reference to com-
parable rules regarding transfers of
REMIC residual interests, is available to
Owner-transferors who conduct a reason-
able investigation of the transferee’s fi-
nancial condition. As explained under the
caption PROPOSED AMENDMENT TO
REMIC REGULATIONS in this pream-
ble, the REMIC safe harbor incorporated
by the FASIT rules has been modified.
RULES APPLICABLE TO REGULAR
INTEREST HOLDERS
The FASIT provisions treat a regular
interest as a debt instrument for all pur-
poses of the Code and require the holder
to account for gross income with respect
to the regular interest under an accrual
method.
Few comments were made with respect
to FASIT regular interests. One commen-
tator suggested a rule that would prevent
the holder of a debt instrument from rec-
ognizing a loss on, or changing the tax
consequences of, the debt instrument by
transferring it to a FASIT in exchange for
an identical or similar FASIT regular in-
terest. No such rule is adopted by the pro-
posed regulations because the IRS and
Treasury believe this type of transaction
is adequately addressed by the wash sales
rules of the Code and the FASIT anti-
abuse rule described later. Similarly, the
proposed regulations have adopted no
special rules concerning the consequences
of modifying regular interests, because
the IRS and Treasury believe these issues
are adequately addressed under existing
principles of Federal tax law.
SPECIAL RULES
Anti-Abuse Rule
The proposed regulations contain an
anti-abuse rule patterned after the anti-
abuse rule in the partnership regulations
issued under subchapter K. The FASIT
February 22, 20006902000–8 I.R.B.

anti-abuse rule evaluates transactions
against the underlying purpose of the
FASIT provisions, which is to promote
the spreading of credit risk on debt instru-
ments by facilitating the securitization of
debt instruments. If a FASIT is formed or
used to achieve a tax result inconsistent
with this purpose, the Commissioner may
take remedial action, including disregard-
ing the FASIT election, reallocating items
of income, deductions and credits, rechar-
acterizing regular interests, and redesig-
nating the holder of the ownership inter-
est. Whether a FASIT is formed or used
to achieve a tax result that is inconsistent
with the FASIT provisions is a question of
fact. In addition to applying the specific
anti-abuse rule included in these proposed
regulations, the IRS and Treasury will
also continue to apply other statutory, ad-
ministrative, and judicial anti-abuse pro-
visions, such as the judicial doctrines of
economic substance and substance over
form, to transactions and structures in-
volving FASITs. For example, see the
principles of Notice 98–5 (1998–3 I.R.B.
49), regarding foreign tax credits.
Although regular interests in a FASIT
may be held in a tiered FASIT structure
and treated by each FASIT as permitted
assets, the tiering of FASITs may not be
used for double or multiple counting of
the FASIT gross income or gross assets
for other purposes of the Code in a man-
ner that would be inconsistent with the in-
tent of the FASIT provisions. In this re-
gard, the IRS and Treasury consider the
recognition of interest expense paid and
the corresponding interest income re-
ceived by the same Owner to be inconsis-
tent with the intent of the provisions. Ac-
cordingly, such Owner-created attributes
must be disregarded because a taxpayer
may not enter into a transaction with it-
self. For example, the gross income and
gross assets from the tiering of FASITs
may not be taken into account more than
once for purposes of testing whether an
Owner is an 80/20 company under section
861, or for purposes of determining the
relative domestic and foreign source gross
assets of the Owner or the Owner’s affili-
ated group in applying the interest ex-
pense allocation rules proposed here
under section 864(e).
INTERNATIONAL PROVISIONS
Prohibition of Foreign FASITS and
Segregated Pools Subject to Foreign Tax
It appears that taxpayers may attempt
to exploit differences in the characteriza-
tion of a FASIT or the interests in a
FASIT under U.S. law and relevant for-
eign law to produce inappropriate tax
avoidance (including by producing a non-
economic allocation of foreign taxes to
the holder of the FASIT ownership inter-
est). To minimize this possibility, the pro-
posed regulations provide that a foreign
entity (including but not limited to a for-
eign corporation or a foreign partnership)
may not be a qualified arrangement. In
addition, a qualified arrangement may not
be a domestic entity or a segregated pool
of identified assets any of the income of
which is subject to tax on a net basis by a
foreign country. The IRS and Treasury
intend that the imposition of foreign tax
on a net basis with respect to the assets
and liabilities of a FASIT will disqualify a
FASIT election without regard to whether
the segregated pool of assets is actually
held through a U.S. or foreign office or
fixed place of business. In addition, a
preexisting qualified FASIT may cease to
be a FASIT prospectively by being sub-
jected to foreign net taxation for the first
time in a later year as a result of newly
conducted foreign activities. It is not nec-
essary that actual foreign tax be imposed
for an arrangement to be considered sub-
ject to foreign net taxation.
The IRS and Treasury request com-
ments regarding whether there may be
circumstances in which legitimate (non-
tax) business reasons justify allowing a
FASIT election to be made by a foreign
entity, or an entity the income of which is
subject to net foreign taxation, or on be-
half of a segregated pool which may be
subject to net foreign taxation.
Prohibition on Foreign FASITs and
Segregated Pools Subject to Foreign Tax
The IRS and Treasury are also con-
cerned that taxpayers may attempt to use
FASITs to produce non-economic alloca-
tions of foreign withholding taxes to the
holder of the FASIT ownership interest.
The IRS and Treasury believe that such
transactions may be facilitated by the ease
with which an Owner can acquire pub-
licly-traded debt that is subject to foreign
withholding tax. In addition, prohibiting
a FASIT from holding publicly-traded
debt subject to a foreign withholding tax
should not unduly interfere with legiti-
mate securitizations of debt held by an
Owner. Accordingly, the proposed regu-
lations provide that the definition of per-
mitted debt instruments does not include
debt instruments traded on an established
securities market if such debt instruments
are subject to foreign withholding tax.
The IRS and Treasury request comments
concerning whether the scope of this rule
is adequate to address potentially abusive
transactions and whether legitimate (non-
tax) business reasons may justify the use
of a FASIT to hold foreign debt that is
traded on an established securities market
and is subject to a foreign withholding
tax.
Avoidance of U.S. Withholding Tax
The IRS and Treasury are also con-
cerned that FASITs may be used by for-
eign resident taxpayers to avoid U.S.
withholding taxes that would otherwise
be imposed on direct cross-border financ-
ing to a foreign person’s U.S. subsidiary.
In particular, the IRS and Treasury are
aware that foreign taxpayers may attempt
to use FASITs to convert interest that
would be disqualified from the portfolio
interest exemption under sections
871(h)(3), 881(c)(3)(B), and 881(c)(3)(C)
(concerning interest paid to a 10 percent
shareholder and interest paid to a con-
trolled foreign corporation from a related
person) into interest that qualifies as port-
folio interest. To prevent such avoidance,
the proposed regulations provide that in-
terest paid or accrued to a foreign holder
of a FASIT regular interest will not qual-
ify as portfolio interest under sections
871(h)(3) and 881(c)(3) to the extent that
the FASIT receives or accrues interest
from an obligor who is a U.S. resident
taxpayer (the related obligor) if (1) the
foreign holder is a 10 percent shareholder
(within the meaning of Section 871(h)(3))
of the related obligor or (2) the foreign
holder is a controlled foreign corporation
and the related obligor is a related person
(within the meaning of section 864(d)(4))
with respect to the foreign holder. For
these purposes, the related obligor is de-
fined as a conduit debtorwho is treated as
paying interest directly to the 10 percent
shareholder or the controlled foreign cor-
poration for purposes of sections 871,
881, 1441 and 1442. This rule character-
izes all interest of the foreign regular in-
terest holder as non-portfolio interest if
2000–8 I.R.B.691February 22, 2000

the FASIT receives or accrues an equal or
greater amount of interest from the related
obligor.
Further, the IRS and Treasury request
comments concerning whether FASIT
regular interests, REMIC regular inter-
ests, and pass through certificates should
be treated in a consistent manner for pur-
poses of applying U.S. withholding tax
rules.
The IRS and Treasury intend to issue
regulations that will provide that the
FASIT and its Owner are withholding
agents in respect of payments made to
foreign regular interest holders. The IRS
and Treasury solicit comments with re-
spect to circumstances in which the
FASIT and its Owner may be unaware of
a possible relationship between foreign
regular interest holders and the related
obligors of the debt instruments held by
the FASIT or other circumstances under
which it would be inappropriate to treat
payments to a regular interest holder as
payments directly from a conduit debtor.
It is anticipated that these regulations will
provide that the FASIT and its Owner will
not be responsible for withholding
amounts paid to the foreign regular inter-
est holders in the above circumstances un-
less the FASIT or its Owner knows, or has
reason to know, that the foreign regular
interest holder is a 10 percent shareholder
of the related obligor or is a controlled
foreign corporation considered to be re-
ceiving interest from a related person. It
is expected that these regulations will fur-
ther provide that the FASIT and its Owner
shall be presumed to know that these cir-
cumstances exist if the foreign regular in-
terest holder owns 10 percent or more of
the total value of the FASIT’s regular in-
terests and the debt of the related obligor
accounts for 10 percent or more of the
total value of the FASIT’s assets.
Earnings Stripping and Original Issue
Discount
The IRS and Treasury are also aware
that regular interests in FASITs may be
used by foreign residents to avoid other
consequences that might apply to cross-
border related-party payments. The IRS
and Treasury are concerned that taxpayers
may attempt to use FASITs to avoid the
deferrals on deductibility imposed by sec-
tions 163(e)(3) on OID owing to related
foreign persons and 163(j) on net interest
expense that is otherwise treated as dis-
qualified under the earnings stripping
rules.
Similar to the rules adopted for portfo-
lio indebtedness purposes, the proposed
regulations treat a U.S. resident taxpayer
who is an obligor to a FASIT as a conduit
debtor to the extent a related person
(within the meaning of section 267(b) or
707(b)(1)) who would not be subject to
tax on a direct payment by the U.S.
obligor receives interest with respect to a
regular interest in the FASIT. In such cir-
cumstances, the earnings stripping provi-
sions will apply to treat interest paid by a
U.S. corporation or a U.S. trade or busi-
ness of a foreign corporation on an oblig-
ation held by a FASIT as disqualified in-
terest for purposes of section 163(j).
Similarly, the conduit debtor rule also op-
erates to treat OID accrued to a FASIT by
a domestic party as deferred to the extent
a related foreign person (as defined in
section 163(e)(3)(B)) receives interest
with respect to a regular interest of the
FASIT. These rules apply to payments
and accruals made during the same period
the regular interest in the FASIT is held
by the 10 percent shareholder or foreign
related party.
No Correlative Adjustments to FASIT
The FASIT and its Owner are not enti-
tled to any correlative adjustments for
amounts that are treated as directly paid
by a conduit debtor and treated as directly
received by or accrued to a related party.
Accordingly, all interest paid or accrued
by the conduit debtor to the FASIT must
be taken into account by the Owner in de-
termining its own taxable income. This
treatment is consistent with Treasury’s
general approach, already adopted in con-
duit financing regulations, to preventing
withholding tax avoidance. TD 8611,
1995–2 C.B. 286, 293.
Interest Expense Allocation
For purposes of applying the interest
expense allocation rules to the Owner
under section 864(e) and the regulations
thereunder, new proposed regulations
provide that all interest expense from all
FASITs that is treated as incurred by any
Owner or by any other Owner that is a
member of the same affiliated group of
which the Owner is a member is directly
allocated solely to all income from all FA-
SITs of such Owners. The directly allo-
cated interest expense is treated as di-
rectly related to all activities and assets of
all the Owner’s FASITs and is appor-
tioned between domestic and foreign
source FASIT gross income by applying
the general asset method to the FASIT’s
assets. The proposed interest allocation
rules also extend the existing asset adjust-
ment rules under the asset method in
§1.861–9T(g), which reduce assets to re-
flect the principal amount of indebted-
ness outstanding relating to the interest
which is directly allocated. The rules of
§1.861–10T(d)(2) are also made applica-
ble. In addition, the new proposed inter-
est allocation rules are the exclusive
method for the direct allocation of FASIT
interest expense. The IRS and Treasury
are not aware of any situations in which
the direct allocation rules of the existing
temporary regulations would apply to any
items of FASIT income and interest ex-
pense. Comments are solicited in this re-
gard.
The rules apply to interest expense with
respect to any FASIT as of that FASIT’s
startup day and throughout the entire pe-
riod that the arrangement continues to
qualify as a FASIT. The rules provide the
Commissioner with discretion to continue
to directly allocate interest expense with
respect to a ceased FASIT to FASIT in-
come if the Commissioner determines
that a principle purpose for terminating
the FASIT was to affect the interest allo-
cation.
The IRS and Treasury believe that di-
rectly allocating FASIT interest expense
solely to FASIT gross income is an ad-
ministrable and appropriate way to limit
distortions (favorable or unfavorable as
the case may be) to a taxpayer’s overall
allocation of interest expense for foreign
tax credit purposes. It is recognized,
however, that the new proposed direct al-
location rules may enable certain interest
expense allocation planning that may cre-
ate distortions that would not occur under
existing interest allocation rules. To ad-
dress these concerns, the IRS and Trea-
sury are considering whether to adopt
rules in final regulations that limit the ex-
tent to which the direct allocation rules
may apply, including rules regarding the
amount of variance between the direct al-
location and combined asset allocation
rules that is appropriate. Comments are
solicited on this issue.
PRE-EFFECTIVE DATE FASITs
February 22, 20006922000–8 I.R.B.

Section 1691(e) of the Small Business
Job Protection Act of 1996 (the Act) pro-
vides special transition rules for securiti-
zation entities in existence on August 31,
1997. Under these rules, the Owner of a
pre-effective date FASIT may defer the
recognition of FASIT gain on assets at-
tributable to pre-FASIT interests. For
purposes of this rule, a pre-effective date
FASITis a FASIT the underlying arrange-
ment of which was in existence on August
31, 1997. Apre-FASIT interestis an inter-
est in the underlying arrangement that
was outstanding on the FASIT startup
date and that is considered debt under
general tax principles.
The proposed regulations provide a
safe-harbor method of accounting that al-
lows the separation of FASIT gain attrib-
utable to pre-FASIT interests, and other
FASIT gain. Basically, the safe-harbor
method has three steps. Under the first
step, the Owner groups the assets of the
FASIT into pools. To ensure that each
pool can be marked to market using a val-
uation methodology appropriate for its
constituent assets, the proposed regula-
tions provide that no pool may contain as-
sets of more than one of the following
three types: (1) assets that are valued
under the special valuation rule and that
have FASIT gain on the first day they are
held by the FASIT, (2) assets that are val-
ued under general fair market value prin-
ciples and that have FASIT gain on the
first day they are held by the FASIT, and
(3) assets that do not have FASIT gain on
the first day they are held by the FASIT.
Under the second step, the Owner peri-
odically computes for each pool the dif-
ference between the income determined
under a mark-to-market system (using the
appropriate FASIT valuation methodol-
ogy) and the income determined under an
accrual system. This difference is re-
ferred to as FASIT gain (or loss) and is es-
sentially a measure of the gain (or loss)
from the pool that is attributable to the op-
eration of the FASIT gain recognition
rules. These rules require gain to be de-
termined at the pool level when assets are
contributed to a FASIT, and implicitly
allow this gain to be reversed out (as de-
ductions in the nature of premium offset)
as the assets in the pool mature. In peri-
ods in which net contributions are made
to the pool, the calculation generally will
produce FASIT gain. In periods in which
the pool decreases in size or duration, the
calculation generally will produce FASIT
loss. This FASIT loss is, in effect, a re-
capture of previously determined FASIT
gain. Over the entire life of a pool, the
aggregate FASIT gain (or loss) will be
zero; the FASIT valuation rules do not
create lifetime net income.
Under the third step, the Owner deter-
mines the proper amount of FASIT gain
(or loss) to recognize during the current
period. To determine this amount, the
Owner first calculates the total amount of
FASIT gain as of the last day of the cur-
rent period. The Owner then reduces this
amount to exclude the percentage of the
FASIT gain that is attributable to pre-
FASIT interests outstanding on the last
day of the period. This reduced amount
represents the cumulative amount of
FASIT gain the Owner should recognize
by the end of the current period. Finally,
to adjust for amounts recognized in previ-
ous periods, the Owner subtracts from
this amount the cumulative amount of
FASIT gain that the Owner had recog-
nized at the end of the previous period.
The difference is the amount of FASIT
gain (or loss) to be recognized in the cur-
rent period.
Owners of pre-effective date FASITs
that presently use a gain deferral method-
ology that differs from the safe harbor
method described above may adopt the
safe-harbor method. The IRS and Trea-
sury request comments on whether guid-
ance is needed on how this change of
method may be accomplished.
PROPOSED AMENDMENT TO REMIC
REGULATIONS
Final regulations governing REMICs,
issued in 1992, contain rules governing
the transfer of noneconomic REMIC
residual interests. In general, a transfer of
a noneconomic residual interest is disre-
garded for all tax purposes if a significant
purpose of the transfer is to enable the
transferor to impede the assessment or
collection of tax. A purpose to impede the
assessment or collection of tax (a wrong-
ful purpose) exists if the transferor, at the
time of the transfer, either knew or should
have known that the transferee would be
unwilling or unable to pay taxes due on its
share of the REMIC’s taxable income.
Under a safe harbor, the transferor of a
REMIC residual interest is presumed not
to have a wrongful purpose if two require-
ments are satisfied. First, the transferor
must conduct a reasonable investigation
of the transferee’s financial condition.
Second, the transferor must secure a rep-
resentation from the transferee to the ef-
fect that the transferee understands the tax
obligations associated with holding a
residual interest and intends to pay those
taxes.
The IRS and Treasury are concerned
that some transferors of residual interests
claim they satisfy the safe harbor even in
situations where the economics of the
transfer clearly indicate the transferee is
unwilling or unable to pay the tax associ-
ated with holding the interest. The pro-
posed regulations, therefore, would clar-
ify the safe harbor. The proposal explains
that the safe harbor is unavailable unless
the present value of the anticipated tax li-
abilities associated with holding the resid-
ual interest does not exceed the sum of:
(1) the present value of any consideration
given to the transferee to acquire the in-
terest; (2) the present value of the ex-
pected future distributions on the interest;
and (3) the present value of the antici-
pated tax savings associated with holding
the interest as the REMIC generates
losses. No inference is intended regard-
ing whether any existing transactions sat-
isfy the substantive requirements of this
safe harbor before the clarification made
by this amendment.
Proposed Effective Date
In general, the proposed regulations in-
cluding the proposed amendments to the
interest expense allocation regulations are
proposed to apply on the date final regula-
tions are filed with the Federal Register.
The portion of the proposed regulations
containing the anti-abuse rule and the por-
tion of the proposed regulations allowing
the deferral of gain on assets held by a
pre-effective date FASIT are proposed to
apply on February 4, 2000. The proposed
amendment to the REMIC regulations is
proposed to apply to all transfers occur-
ring after the date final regulations con-
cerning the amendment are published in
the Federal Register.
Special Analyses
It is hereby certified that these pro-
posed regulations will not have a signifi-
cant economic impact on a substantial
2000–8 I.R.B.693February 22, 2000

number of small entities. This certifica-
tion is based on the fact that it is unlikely
that a substantial number of small entities
will hold FASIT ownership interests.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, these pro-
posed regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for May 15, 2000, beginning at 10 a.m. in
Room 2615 of the Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
10
th
Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the “FOR FURTHER INFORMA-
TION CONTACT” section of this pream-
ble. 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 written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by April 24,
2000. A period of 10 minutes will be al-
lotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is David L. Meyer, Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products), IRS. However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for 1.861–10(e) and adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.860H–1 also issued under 26
U.S.C. 860L(h).
Section 1.860H–2 also issued under 26
U.S.C. 860L(h).
Section 1.860H–3 also issued under 26
U.S.C. 860L(h) and 860L(f).
Section 1.860H–4 also issued under 26
U.S.C. 860L(h).
Section 1.860H–5 also issued under 26
U.S.C. 860L(h) and 7701(l).
Section 1.860I–1 also issued under 26
U.S.C. 860L(h) and 860I(c).
Section 1.860I–2 also issued under 26
U.S.C. 860L(h).
Section 1.860J–1 also issued under 26
U.S.C. 860L(h).
Section 1.860K–1 also issued under 26
U.S.C. 860L(h).
Section 1.860L–1 also issued under 26
U.S.C. 860L(h).
Section 1.860L–2 also issued under 26
U.S.C. 860L(h).
Section 1.860L–3 also issued under 26
U.S.C. 860L(h).
Section 1.860L–4 also issued under 26
U.S.C. 860L(h). * * *
Section 1.861–9 also issued under 26
U.S.C. 864(e)(7).
Section 1.861–10 also issued under 26
U.S.C 863(a), 26 U.S.C. 864(e)(7), 26
U.S.C. 865(i), and 26 U.S.C. 7701(f). * * *
Par. 2. Section 1.860E–1 is amended by:
1. Revising paragraph (c)(4).
2. Adding paragraphs (c)(5) and (c)(6).
The addition and revision read as follows:
§1.860E–1 Treatment of taxable income
of a residual interest holder in excess of
daily accruals.
* * * * *
(c) * * *
(4) Safe harbor for establishing lack of
improper knowledge. A transferor is pre-
sumed not to have improper knowledge
if—
(i) The transferor conducted, at the time
of the transfer, a reasonable investigation
of the financial condition of the transferee
and, as a result of the investigation, the
transferor found that the transferee had
historically paid its debts as they came
due and found no significant evidence to
indicate that the transferee will not con-
tinue to pay its debts as they come due in
the future;
(ii) The transferee represents to the
transferor that it understands that, as the
holder of the noneconomic residual inter-
est, the transferee may incur tax liabilities
in excess of any cash flows generated by
the interest and that the transferee intends
to pay taxes associated with holding
residual interest as they become due; and
(iii) The present value of the antici-
pated tax liabilities associated with hold-
ing the residual interest does not exceed
the sum of—
(A) The present value of any considera-
tion given to the transferee to acquire the
interest;
(B) The present value of the expected
future distributions on the interest; and
(C) The present value of the anticipated
tax savings associated with holding the
interest as the REMIC generates losses.
(5) Computational assumptions. The
following rules apply for purposes of
paragraph (c)(4)(iii) of this section:
(i) The transferee is assumed to pay tax
at a rate equal to the highest rate of tax
specified in section 11(b)(1); and
(ii) Present values are computed using
a discount rate equal to the applicable
Federal rate prescribed by section 1274(d)
compounded semiannually (a lower dis-
count rate may be used if the transferee
can demonstrate that it regularly borrows,
in the course of its trade or business, sub-
stantial funds at such lower rate from un-
February 22, 20006942000–8 I.R.B.

related third parties).
(6) Effective date. Paragraphs (c)(4)
and (5) of this section are applicable on
February 4, 2000.
Par. 3. Sections 1.860H–0 through
1.860L–4 are added to read as follows:
§1.860H–0 Table of contents.
This section lists captions that appear
in §§1.860H–1 through 1.860L–4.
§1.860H–1 FASIT defined, FASIT
election, other definitions.
(a) FASIT defined.
(b) FASIT election.
(1) Person that makes the election.
(2) Form of election.
(3) Time for filing election.
(4) Contents of election.
(5) Required signatures.
(6) Special rules regarding startup day.
(c) General definitions.
(1) Owner.
(2) Transfer.
§1.860H–2 Assets permitted to be held by
a FASIT.
(a) Substantially all.
(b) Permitted debt instrument.
(1) In general.
(2) Special rules for short-term debt in-
struments issued by the Owner or related
person.
(3) Exceptions.
(c) Cash and cash equivalents.
(d) Hedges and guarantees.
(1) In general.
(2) Referencing other than permitted as-
sets.
(3) Association with particular assets or
regular interests.
(4) Creating an investment prohibited.
(e) Hedges and guarantees issued by
Owner (or related person).
(1) Hedges.
(2) Guarantees.
(f) Foreclosure property.
(g) Special rule for contracts or agree-
ments in the nature of a line of credit.
(h) Contracts to acquire hedges or debt
instruments.
§1.860H–3 Cessation of a FASIT.
(a) In general.
(b) Time of cessation.
(c) Consequences of cessation.
(d) Disregarding inadvertent failures to
remain qualified.
§1.860H–4 Regular interests in general.
(a) Issue price of regular interests.
(1) Regular interests not issued for prop-
erty.
(2) Regular interests issued for property.
(b) Special rules for high-yield regular
interests.
(1) High-yield interests held by a securi-
ties dealer.
(2) High-yield interests held by a pass-
thru.
§1.860H–5 Foreign resident holders of
regular interests.
(a) Look-through to underlying FASIT
debt.
(b) Conduit debtor.
(c) Limitation.
(d) Cross-references.
§1.860H–6 Taxation of Owner, Owner’s
reporting requirements, transfers of
ownership interest.
(a) In general.
(b) Constant yield method to apply.
(c) Method of accounting for, and charac-
ter of, hedges.
(d) Coordination with mark to market
provisions.
(1) No mark to market accounting.
(2) Transfer of a mark to market asset to a
FASIT.
(e) Owner’s annual reporting require-
ments.
(f) Treatment of FASIT under subtitle F
of Title 26 U.S.C.
(g) Transfer of ownership interest.
(1) In general.
(2) Safe harbor for establishing lack of
improper knowledge.
§1.860I–1 Gain recognition on property
transferred to FASIT or supporting FASIT
regular interests.
(a) In general.
(b) Support property defined.
(c) Time of gain determination and
recognition.
(d) Gain deferral election. [Reserved]
(e) Amount of gain.
(f) Record keeping requirements.
(g) Special rule applicable to property of
related persons.
§1.860I–2 Value of property.
(a) Special valuation rule.
(b) Traded on an established securities
market.
(c) Reasonably expected payments.
(1) In general.
(2) Consistency requirements.
(3) Servicing costs.
(4) Nonconforming or unreasonable as-
sumptions.
(d) Special rules.
(1) Beneficial ownership interests.
(2) Stripped interests.
(3) Contemporaneous purchase and
transfer of debt instruments.
(4) Guarantees.
(e) Definitions.
§1.860J–1 Non-FASIT losses not to offset
certain FASIT inclusions.
(a) In general.
(b) Special rule for holders of multiple
ownership interests.
(c) Related persons.
(1) Taxable income.
(2) Effect on net operating loss.
(3) Coordination with minimum tax.
§1.860L–1 Prohibited transactions.
(a) Loan origination.
(1) In general.
(2) Acquisitions presumed not to be loan
origination.
(3) Activities presumed to be loan origi-
nation.
(4) Loan workouts.
(b) Origination of a contract or agree-
ment in the nature of a line of credit.
(1) In general.
(2) Activities presumed to be origination.
(3) Debt instruments issued under con-
tracts or agreements in the nature of a line
of credit.
(c) Disposition of debt instruments.
(d) Exclusion of prohibited transactions
tax to dispositions of hedges.
§1.860L–2 Anti-abuse rule.
(a) Intent of FASIT provisions.
(b) Application of FASIT provisions.
(c) Facts and circumstances analysis.
§1.860L–3 Transition rule for pre-
effective date FASITs.
(a) Scope.
(1) Pre-effective date FASIT defined.
(2) Pre-FASIT interest defined.
(3) FASIT gain defined.
(b) Election to defer gain.
(c) Safe harbor method.
(d) Example
(e) Election to apply gain deferral
retroactively
(f) Effective date.
2000–8 I.R.B.695February 22, 2000

§1.860L–4 Effective date.
§1.860H–1 FASIT defined, FASIT
election, other definitions.
(a) FASIT defined.(1) AFASITis a
qualified arrangement (as defined in para-
graph (a)(2) of this section) that meets the
requirements of section 860L(a)(1) and
the FASIT regulations (as defined in para-
graph (c) of this section). A qualified
arrangement fails to meet the require-
ments of section 860L(a)(1) unless it has
one and only one ownership interest and
that ownership interest is held by one and
only one eligible corporation (as defined
in section 860L(a)(2)).
(2) Except as provided in paragraph
(a)(3) of this section, a qualified arrange-
ment is an arrangement that is either—
(i) An entity (other than a regulated in-
vestment company as defined in section
851(a)); or
(ii) A segregated pool of assets if—
(A) The initial assets of the pool are
clearly identified, such as through an in-
denture; and
(B) Changes in the assets of the pool
are clearly identified, such as through in-
struments of conveyance or release.
(3) Notwithstanding paragraph (a)(2)
of this section, a qualified arrangement
does not include—
(i) An entity created or organized under
the law of a foreign country or a posses-
sion of the United States;
(ii) An entity any of the income of
which is or ever has been subject to net
tax by a foreign country or a possession of
the United States; or
(iii) A segregated pool of assets any of
the income of which at any time is subject
to net tax by a foreign country or a pos-
session of the United States.
(b) FASIT election—(1) Person that
makes the election. For a qualified
arrangement to be a FASIT an eligible
corporation (as defined in section
860L(a)(2)) must make the election re-
quired under section 860L(a)(1)(A).
(i) If the qualified arrangement is an
entity described in paragraph (a)(2)(i) of
this section, the eligible corporation mak-
ing the election must hold one or more in-
terests in the entity, and one of those in-
terests must be the interest designated as
the FASIT’s ownership interest.
(ii) If the qualified arrangement is a
segregated pool of assets described in
paragraph (a)(2)(ii) of this section, the eli-
gible corporation making the election
must be the first taxpayer to be treated as
the Owner of the resulting FASIT.
(2) Form of election. Unless the
Commissioner prescribes otherwise, a
FASIT election is made by means of a
statement attached to the Federal income
tax return of the eligible corporation mak-
ing the election.
(3) Time for filing election. The state-
ment referred to in paragraph (b)(2) of
this section must be attached to a timely
filed (including extensions) original Fed-
eral income tax return for the eligible cor-
poration’s taxable year in which the
FASIT’s startup day occurs. An election
may not be made on an amended return.
(4) Contents of election. The state-
ment referred to in paragraph (b)(2) of
this section must include—
(i) For other than a segregated pool of
assets, the name, address, and taxpayer
identification number of the arrangement
(if one was issued prior to the making of
the election);
(ii) For a segregated pool of assets, the
following information—
(A) The name, address, and taxpayer
identification number of the person or
persons holding legal title to the pool of
assets;
(B) The name, address, and taxpayer
identification number of the person or
persons that, immediately before the
startup day, are considered to own the
pool for Federal income tax purposes; and
(C) Information describing the origin
of the pool (including the caption and date
of execution of any instruments of inden-
ture or similar documents that govern the
pool);
(iii) The startup day; and
(iv) The name and title of all persons
signing the statement.
(5) Required signatures.The state-
ment referred to in paragraph (b)(2) of
this section must be signed by the autho-
rized person, described in this paragraph
(b)(5).
(i) For other than a segregated pool of
assets, the authorized person is any per-
son authorized to sign the qualified
arrangement’s Federal income tax return
in the absence of a FASIT election. For
example, if a qualified arrangement is a
corporation or trust under applicable state
law, an authorized person is a corporate
officer or trustee, respectively.
(ii) For a segregated pool of assets, the
authorized person is each person who, for
Federal income tax purposes, owns the
assets of the pool immediately before the
earlier of the date on which—
(A) An outstanding interest in the pool
is designated as a regular or ownership in-
terest in a FASIT; or
(B) The pool issues an interest desig-
nated at the time of issuance as a regular
or ownership interest in a FASIT.
(6) Special rule regarding startup day.
The startup day must be a day on which
the eligible corporation making the elec-
tion is described in paragraph (b)(1)(i) or
(ii) of this section.
(c) General definitions. For purposes
of the regulations issued under part V of
subchapter M of chapter 1 of subtitle A of
the Internal Revenue Code (the FASIT
regulations)—
(1) Owner means the eligible corpora-
tion that holds the interest described in
section 860L(b)(2);
(2) Transferincludes a sale, contribu-
tion, endorsement, or other conveyance of
a legal or beneficial interest in property.
§1.860H–2 Assets permitted to be held by
a FASIT.
(a) Substantially all. For purposes of
section 860L(a)(1)(D), substantially all of
the assets held by a FASIT consist of per-
mitted assets if the total adjusted bases of
the permitted assets is more than 99 per-
cent of the total adjusted bases of all the
assets held by the FASIT, including those
assets deemed to be held under section
860I(b)(2).
(b) Permitted debt instrument—(1) In
general. Except as otherwise provided, a
debt instrument is described in section
860L(c)(1)(B) only if it is a permitted
debt instrument. For purposes of the
FASIT regulations, a permitted debt in-
strument is—
(i) A fixed rate debt instrument, includ-
ing a debt instrument having more than
one payment schedule for which a single
yield can be determined under
§1.1272–1(c) or (d);
(ii) A variable rate debt instrument
within the meaning of §1.1275–5 if the
debt instrument provides for interest at a
qualified floating rate within the meaning
of §1.1275–5(b);
(iii) A REMIC regular interest;
(iv) A FASIT regular interest (includ-
February 22, 20006962000–8 I.R.B.

ing a FASIT regular interest issued by an-
other FASIT in which the Owner (or a re-
lated person) holds an ownership inter-
est);
(v) An inflation-indexed debt instru-
ment as defined in §1.1275–7;
(vi) Any receivable generated through
an extension of credit under a revolving
credit agreement (such as a credit card ac-
count);
(vii) A stripped bond or stripped
coupon (as defined in section 1286(e)(2)
and (3)), if the debt instrument from
which the stripped bond or stripped
coupon is created is described in para-
graphs (b)(1)(i) through (vi) of this sec-
tion; and
(viii) A certificate of trust representing
a beneficial ownership interest in a debt
instrument described in paragraphs
(b)(1)(i) through (vii) of this section.
(2) Special rules for short-term debt
instruments issued by the Owner or re-
lated person.Notwithstanding section
860L(c)(2) and paragraph (b)(3)(iii) of
this section, a debt instrument issued by
the Owner (or a related person) is a per-
mitted debt instrument if it—
(i) Is described in paragraph (b)(1)(i) or
(ii) of this section;
(ii) Has an original stated maturity of
270 days or less;
(iii) Is rated at least investment quality
by a nationally recognized statistical rat-
ing organization that is not a related per-
son of the issuer; and
(iv) Is acquired to temporarily invest
cash awaiting either reinvestment in per-
mitted assets not described in this para-
graph (b)(2), or distribution to the Owner
or holders of one or more FASIT regular
interests.
(3) Exceptions. Notwithstanding para-
graph (b)(1) of this section, the following
debt instruments are not permitted assets.
(i) Equity-linked debt instrument. A
debt instrument is not a permitted asset if
the debt instrument contains a provision
that permits the instrument to be con-
verted into, or exchanged for, any legal or
beneficial ownership interest in any asset
other than a permitted debt instrument
(such as a debt instrument that is ex-
changeable for an interest in a partner-
ship). Similarly, a debt instrument is not a
permitted asset if the debt instrument con-
tains a provision under which one or more
payments on the instrument are deter-
mined by reference to, or are contingent
upon, the value of any asset other than a
permitted debt instrument (such as a debt
instrument containing a provision under
which one or more payments on the in-
strument are determined by reference to,
or are contingent upon, the value of
stock).
(ii) Defaulted debt instrument. A debt
instrument is not a permitted asset if, on
the date the debt instrument is acquired by
the FASIT, the debt instrument is in de-
fault due to the debtor’s failure to have
timely made one or more of the payments
owed on the debt instrument and the
Owner has no reasonable expectation that
all delinquent payments on the debt in-
strument, including any interest and
penalties thereon, will be fully paid on or
before the date that is 90 days after the
date the instrument is first held by the
FASIT.
(iii) Owner debt. A debt instrument is
not a permitted asset if the debt instru-
ment is issued by the Owner (or a related
person) and the debt instrument does not
qualify as a permitted debt instrument
under paragraphs (b)(1)(iv) or (2) of this
section.
(iv) Certain Owner-guaranteed debt.
A debt instrument is not a permitted asset
if the debt instrument is guaranteed by the
Owner (or a related person) and, based on
all of the facts and circumstances existing
at the time the guarantee is given, or at the
time the FASIT acquires the guaranteed
debt instrument the Owner (or a related
person) is, in substance, the primary
obligor on the debt instrument. For this
purpose, a guarantee includes any
promise to pay in the case of the default
or imminent default of any debt instru-
ment.
(v) Debt instrument linked to the
Owner’s credit. A debt instrument that is
issued by a person other than the Owner
(or a related person) is not a permitted
asset if the timing or amount of payments
on the instrument are determined by refer-
ence to, or are contingent on, the timing
or amount of payments made on a debt in-
strument issued by the Owner (or a re-
lated person).
(vi) Partial interests in non-permitted
debt instruments. A debt instrument is not
a permitted asset if the debt instrument is
a partial interest such a stripped bond or
stripped coupon (as defined in section
1286(e)) in a debt instrument described in
paragraphs (b)(3)(i) through (v) of this
section.
(vii) Certain Foreign Debt Subject to
Withholding Tax. A debt instrument is not
a permitted asset if the debt instrument is
traded on an established securities market
(within the meaning of §1.860I–2) and in-
terest on the debt instrument is subject to
any tax determined on a gross basis (such
as a withholding tax) other than a tax
which is in the nature of a prepayment of
a tax imposed on a net basis.
(c) Cash and cash equivalents.For
purposes of section 860L(c)(1)(A) and the
FASIT regulations, the term cash and
cash equivalentsmeans—
(1) The United States dollar;
(2) A currency other than the United
States dollar if the currency is received as
payment on a permitted asset described in
§1.860H–2, or the currency is required by
the FASIT to make a payment on a regu-
lar interest issued by the FASIT according
to the terms of the regular interest;
(3) A debt instrument if it—
(i) Is described—
(A) In paragraphs (b)(1)(i), (ii), or (v)
of this section, or
(B) In paragraph (b)(vii) of this section
if it is created from an instrument de-
scribed in paragraphs (b)(1)(i), (ii), or (v)
of this section;
(ii) Has a remaining maturity of 270
days or less; and
(iii) Is rated at least investment quality
by a nationally recognized statistical rat-
ing organization that is not a related per-
son to the issuer; and
(4) Shares in a U.S.-dollar-denomi-
nated money market fund (as defined in
17 CFR 270.2a-7).
(d) Hedges and guarantees—(1) In
general. Subject to the rules in para-
graphs (d)(2) through (4) of this section, a
hedge or guarantee contract is described
in section 860L(c)(1)(D) (a permitted
hedge) only if the hedge or guarantee con-
tract is reasonably required to offset any
differences that any risk factor may cause
between the amount or timing of the re-
ceipts on assets the FASIT holds (or ex-
pects to hold) and the amount or timing of
the payments on the regular interests the
FASIT has issued (or expects to issue).
For purposes of this paragraph (d), the
risk factors are—
(i) Fluctuations in market interest rates;
2000–8 I.R.B.697February 22, 2000

(ii) Fluctuations in currency exchange
rates;
(iii) The credit quality of, or default on,
the FASIT’s assets or debt instruments
underlying the FASIT’s assets; and
(iv) The receipt of payments on the
FASIT’s assets earlier or later than origi-
nally anticipated.
(2) Referencing other than permitted
assets. A hedge or guarantee contract is
not a permitted hedge if it references an
asset other than a permitted asset or if it
references an index, economic indicator,
or financial average, that is not both
widely disseminated and designed to cor-
relate closely with changes in one or more
of the risk factors described in paragraphs
(d)(1)(i) through (iv) of this section.
(3) Association with particular assets
or regular interests. A hedge or guarantee
contract need not be associated with any
of the FASIT’s assets or regular interests,
or any group of its assets or regular inter-
ests, if the hedge or guarantee contract
offsets the differences described in para-
graph (d)(1) of this section.
(4) Creating an investment prohibited.
A hedge or guarantee contract is not a per-
mitted hedge if at the time the hedge or
guarantee is entered into, it in substance
creates an investment in the FASIT.
(e) Hedges and guarantees issued by
Owner (or related person)—(1) Hedges.
A hedge contract issued by the Owner (or
a related person) is a permitted asset only
if—
(i) The contract is a permitted hedge
other than a guarantee contract;
(ii) The Owner (or the related person)
regularly provides, offers, or sells sub-
stantially similar contracts in the ordinary
course of its trade or business;
(iii) On the date the contract is acquired
by the FASIT (and on any later date that it
is substantially modified) its terms are
consistent with the terms that would apply
in the case of an arm’s length transaction
between unrelated parties; and
(iv) The Owner maintains records
that—
(A) Show the terms of the contract are
consistent with the terms that would apply
in the case of an arm’s length transaction
between unrelated parties; and
(B) Explain how the Owner (or related
person) determined the consideration for
the contract.
(2) Guarantees. A guarantee contract
issued by the Owner (or a related person)
is a permitted asset only if—
(i) The contract is a permitted hedge
and satisfies paragraphs (e)(1)(iii) and
(iv) of this section;
(ii) The contract is a credit enhance-
ment contract under §1.860G–2(c); and
(iii) Immediately after the contract is
acquired by the FASIT (and on any later
date that it is substantially modified), the
value (determined under section 860I and
§1.860I–2) of all the FASIT’s guarantee
contracts issued by the Owner (and re-
lated persons) is less than 3 percent of the
value (determined under section 860I and
§1.860I–2) of all the FASIT’s assets.
(f) Foreclosure property. Property ac-
quired in connection with the default or
imminent default of a debt instrument
held by a FASIT may qualify both as fore-
closure property under section
860L(c)(1)(C) and as another type of per-
mitted asset under section 860L(c)(1). If
foreclosure property qualifies as another
type of permitted asset, the FASIT may
hold the property beyond the grace period
prescribed for foreclosure property under
section 860L(c)(3). In this case, immedi-
ately after the grace period ends, the tax-
payer must recognize gain, if any, as if the
property had been contributed by the
Owner to the FASIT on that date. See
§1.860I–1(a)(1)(iii). In addition, after the
close of the grace period, disposition of
the property is subject to the prohibited
transactions tax imposed under section
860L(e) without the benefit of the excep-
tion for foreclosure property.
(g) Special rule for contracts or agree-
ments in the nature of a line of credit. For
purposes of section 860L(c)(1), the term
permitted assetincludes a lender’s posi-
tion in a contract or agreement in the na-
ture of a line of credit (other than a con-
tract or agreement that is originated by the
FASIT). Such a contract or agreement is
not subject to the rules of section 860I(a)
at the time the contract or agreement is
transferred to the FASIT. Extensions of
credit under the contract or agreement are
subject to the rules of section 860I(a) at
the time the extension is made. See sec-
tion 860I(d)(2). To determine whether a
contract or agreement is originated by a
FASIT, see §1.860L–1.
(h) Contracts to acquire hedges or debt
instruments.A contract is not described
in section 860L(c)(1)(E) if it is an agree-
ment under which the Owner (or a related
person) agrees to transfer permitted
hedges or permitted debt instruments to a
FASIT for less than —
(1) Fair market value, in the case of
hedges or debt instruments traded on an
established securities market (as defined
in §1.860I–2); or
(2) Ninety percent of their value, as de-
termined under section 860I(d)(1)(A) and
the FASIT regulations, in the case of debt
instruments not traded on an established
securities market.
§1.860H–3 Cessation of a FASIT.
(a) In general. An arrangement ceases
to be a FASIT if it revokes its election
with the consent of the Commissioner or
if it fails to qualify as a FASIT and the
Commissioner does not determine the
failure to be inadvertent.
(b) Time of cessation. An arrangement
ceases to be a FASIT at the close of the
day designated by the Commissioner in
the consent to revoke, or if there is no
consent to revoke or determination of in-
advertence, at the close of the day on
which the arrangement initially fails to
qualify as a FASIT.
(c) Consequences of cessation. Except
as otherwise determined by the Commis-
sioner, the consequences of cessation are
as follows:
(1) The FASIT and the underlying
arrangement. The arrangement that made
the FASIT election (the underlying
arrangement) is no longer a FASIT and
cannot re-elect FASIT treatment without
the Commissioner’s approval. Immedi-
ately after the cessation, the arrange-
ment’s classification (for example, as a
partnership or corporation) is determined
under general principles of Federal in-
come tax law. Immediately after the ces-
sation, the arrangement holds the FASIT’s
assets with a fair market value basis. Any
election the Owner made (other than the
FASIT election), and any method of ac-
counting the Owner adopted with respect
to those assets, binds the underlying
arrangement as if the underlying arrange-
ment itself had made the election or
adopted the method of accounting. If the
underlying arrangement is a segregated
pool of assets, the person holding legal
title to the pool is responsible for comply-
ing with any tax filing or reporting re-
quirements arising from the pool’s opera-
tion.
February 22, 20006982000–8 I.R.B.

(2) The Owner. (i) The Owner is
treated as exchanging the assets of the
FASIT for an amount equal to their value
(as determined under §1.860I–2). Gain
realized on the exchange is treated as gain
from a prohibited transaction and the
Owner is subject to the tax imposed by
860L without exception. Loss, if any, is
disallowed. The determination of gain or
loss on assets for purposes of this para-
graph is made on an asset-by-asset basis.
(ii) The Owner must recognize cancel-
lation of indebtedness income in an
amount equal to the adjusted issue price
of the regular interests outstanding imme-
diately before the cessation over the fair
market value of those interests immedi-
ately before the cessation. This determi-
nation is made on a regular interest by
regular interest basis. The Owner cannot
take any deduction for acquisition pre-
mium.
(iii) If, after the cessation, the Owner
has a continuing economic interest in the
assets, the characterization of this eco-
nomic interest (for example, as stock or a
partnership interest) is determined under
general principles of Federal income tax
law. If the Owner has a continuing eco-
nomic interest in the assets immediately
after cessation, the Owner holds the inter-
est with a fair market value basis.
(3) The regular interest holders. Hold-
ers of the regular interests are treated as
exchanging their regular interests for in-
terests in the underlying arrangement. In-
terests in the underlying arrangement are
classified (for example, as debt or equity)
under general principles of Federal in-
come tax law. Gain must be recognized if
a regular interest is exchanged either for
an interest not classified as debt or for an
interest classified as debt that differs ma-
terially either in kind or extent. No loss
may be recognized on the exchange. The
basis of an interest in the underlying
arrangement equals the basis in the regu-
lar interest exchanged for it, increased by
any gain recognized on the exchange
under this paragraph (c)(3).
(d) Disregarding inadvertent failures to
remain qualified—(1) If a qualified
arrangement that ceases to be a FASIT
meets the requirements of paragraph
(d)(2) of this section, then the Commis-
sioner may either—
(i) Deem the qualified arrangement as
continuing to be a FASIT notwithstanding
the cessation; or
(ii) Allow the qualified arrangement to
re-elect FASIT status after cessation
notwithstanding the prohibition in section
860L(a)(4) .
(2) The requirements of this paragraph
are satisfied if —
(i) The Commissioner determines that
the cessation was inadvertent;
(ii) No later than a reasonable time
after the discovery of the event resulting
in the cessation, steps are taken so that all
of the requirements for a FASIT are satis-
fied; and
(iii) The qualified arrangement and
each person holding an interest in the
qualified arrangement at any time during
the period the qualified arrangement
failed to qualify as a FASIT agree to make
such adjustments (consistent with the
treatment of the qualified arrangement as
a FASIT or the treatment of the Owner as
a C corporation) as the Commissioner
may require with respect to such period.
§1.860H–4 Regular interests in general.
(a) Issue price of regular interests—(1)
Regular interests not issued for property.
The issue price of a FASIT regular inter-
est not issued for property is determined
under section 1273(b).
(2) Regular interests issued for prop-
erty.Notwithstanding sections 1273 and
1274 and the regulations thereunder, the
issue price of a FASIT regular interest is-
sued for property is the fair market value
of the regular interest determined as of the
issue date.
(b) Special rules for high-yield regular
interests—(1) High-yield interests held by
a securities dealer—(i) Due date of tax
imposed on securities dealer under sec-
tion 860K(d). The excise tax imposed
under section 860K(d) (treatment of high-
yield interest held by a securities dealer
that is not an eligible corporation) must be
paid on or before the due date of the secu-
rities dealer’s Federal income tax return
for the earlier of the taxable year in which
the securities dealer—
(A) Ceases to be a dealer in securities;
or
(B) Commences holding the high-yield
interest for investment.
(ii) [Reserved]
(2) High-yield interests held by a pass-
thru—(i) Nature and due date of tax im-
posed under section 860K(e). The tax im-
posed under section 860K(e) (treatment
of high-yield interest held by a pass-thru
entity) is an excise tax which must be paid
on or before the due date of the pass-thru
entity’s Federal income tax return for the
taxable year in which the pass-thru entity
issues the debt or equity interest described
in section 860K(e).
(ii) Pass-thru entity includes REMIC.
For purposes of section 860K(e), a pass-
thru entity includes a real estate mortgage
investment conduit (REMIC) as defined
in section 860D.
§1.860H–5 Foreign resident holders of
regular interests.
(a) Look-through to underlying FASIT
debt. If, during the same period, a foreign
resident holds (either directly or through a
vehicle which itself is not subject to the
Federal income tax such as a partnership
or trust) a regular interest in a FASIT and
a conduit debtor (as defined in paragraph
(b) of this section) pays or accrues interest
on a debt instrument held by the FASIT,
then any interest received or accrued by
the foreign resident with respect to the
regular interest during that period is
treated as received or accrued from the
conduit debtor. This rule applies to both
the foreign resident holder of the FASIT
regular interest and the conduit debtor for
all purposes of subtitle A and the regula-
tions thereunder.
(b) Conduit debtor.A debtor is a con-
duit debtor if the debtor is a U.S. resident
taxpayer or a foreign resident taxpayer to
which interest expense paid or accrued
with respect to the debt held by the FASIT
is treated as paid or accrued by a U.S.
trade or business of the foreign taxpayer
under section 884(f)(1)(A), and the for-
eign resident holder described in para-
graph (a) of this section—
(1) Is a 10-percent shareholder of the
debtor (within the meaning of section
871(h)(3)(B));
(2) Is a controlled foreign corporation,
but only if the debtor is a related person
(within the meaning of section 864(d)(4))
with respect to the controlled foreign cor-
poration; or
(3) Is related to the debtor (within the
meaning of section 267(b) or 707(b)(1)).
(c) Limitation. The amount of income
treated under paragraph (a) of this section
as received from a conduit debtor is the
lesser of—
(1) The income received or accrued by
the foreign resident holder with respect to
2000–8 I.R.B.699February 22, 2000

the FASIT regular interest; or
(2) The amount paid or accrued by the
conduit debtor with respect to the debt in-
strument held by the FASIT.
(d) Cross references. For the treatment
of related-party interest accrued to foreign
related persons, see sections 163(e)(3),
163(j), 871(h)(3), 881(c)(3)(B), and
881(c)(3)(C).
§1.860H–6 Taxation of Owner, Owner’s
reporting requirements, transfers of
ownership interest.
(a) In general. For purposes of deter-
mining an Owner’s credits and taxable in-
come, all assets, liabilities, and items of
income, gain, deduction, loss, and credit
of the FASIT are treated as assets, liabili-
ties, and such items of the Owner.
(b) Constant yield method to apply.
The income from each debt instrument a
FASIT holds is determined by applying
the constant yield method (including the
rules of section 1272(a)(6)) described in
§1.1272–3(c).
(c) Method of accounting for, and char-
acter of, hedges. The method of account-
ing used for a permitted hedge (as de-
scribed in §1.860H–2(e)) must clearly
reflect income and otherwise comply with
the rules of §1.446–4 (whether or not the
permitted hedge instrument is part of a
hedging transaction as defined in
§1.1221–2(b)). The character of any gain
or loss realized on a permitted hedge (as
described in §1.860H–2(e)) is ordinary.
(d) Coordination with mark-to market
provisions—(1) No mark to market ac-
counting. Mark to market accounting
does not apply to any asset (other than a
non-permitted asset) while it is held, or
deemed held, by a FASIT.
(2) Transfer of a mark to market asset
to a FASIT. If an Owner transfers a per-
mitted asset to a FASIT and the asset
would have been marked to market if the
taxable year had ended immediately be-
fore the transfer (for example, an asset ac-
counted for under section 475(a)), then
immediately before the transfer, the
Owner must mark the asset to market and
take gain or loss into account as if the tax-
able year had ended at that point. See
§1.475(b)–1(b)(4). If the asset is a debt
instrument that is valued under the special
valuation rule of §1.860I–2(a), then im-
mediately after the asset is marked to
market under this paragraph (d)(2), the
asset is also valued under §1.860I–2(a),
and any additional gain is taken into ac-
count under section 860I. The latter gain,
but not any mark to market gain, is sub-
ject to section 860J.
(e) Owner’s annual reporting require-
ments. Unless the Commissioner other-
wise prescribes, specified information re-
garding the FASIT must be reported by
means of a separate statement, attached
by the Owner to its income tax return for
the taxable year that includes the report-
ing period. The reporting period is the
period in the Owner’s taxable year during
which the Owner holds the ownership in-
terest in the FASIT. Unless the Commis-
sioner otherwise requires, the statement
must set forth—
(1) The name, address, and taxpayer
identification number (if any) of the
FASIT and any other information neces-
sary to establish the identity of the FASIT
for which the statement is being filed;
(2) If the ownership interest was ac-
quired from another person during the
Owner’s taxable year, the date on which it
was acquired, and the name and address
of the person from which it was acquired;
(3) If the ownership interest was trans-
ferred by the Owner during the Owner’s
taxable year, the date on which it was
transferred, the name and address of the
person to which it was transferred, and
whether such person is described in sec-
tion 860L(a)(2);
(4) If any regular interests are issued
during the reporting period, a description
of the prepayment and reinvestment as-
sumptions that are made pursuant to sec-
tion 1272(a)(6) and any regulations there-
under, including a statement supporting
the selection of the prepayment assump-
tion;
(5) The FASIT’s items (taken into ac-
count during the reporting period) of in-
come, gain, loss, deduction and credit
from permitted transactions, and sepa-
rately stated, the FASIT’s items (taken
into account during the reporting period)
of income, gain, loss, deduction and
credit from prohibited transactions;
(6) Information detailing the extent to
which the items described in paragraph
(f)(5) of this section consist of interest ac-
crued that, but for section 860H(b)(4), is
exempt from the taxes imposed under
subtitle A of 26 U.S.C.; and
(7) If a qualified arrangement ceases to
be a FASIT during a reporting period (in-
cluding at the close of a reporting period),
information disclosing—
(i) The effective date of the cessation;
(ii) A description of how the cessation
occurred; and
(iii) A statement regarding whether the
arrangement will continue after cessation
and, if so, the continuing arrangement’s
name, address, and taxpayer identification
number.
(f) Treatment of FASIT under subtitle F
of Title 26 U.S.C.For purposes of subti-
tle F (Procedure and Administration)—
(1) A FASIT is treated as a branch or
division of the Owner;
(2) The Owner is treated as the issuer
of the regular interests; and
(3) The regular interests are treated as
collateralized debt obligations as defined
in §1.6049–7(d)(2).
(g) Transfer of ownership interest—(1)
In general. If, at the time of any transfer
of the ownership interest, the Owner
knew or should have known that the
transferee would be unwilling or unable
to pay some or all of the tax arising from
the application of section 860H(b), then
the transfer is disregarded for all Federal
tax purposes.
(2) Safe harbor for establishing lack of
improper knowledge. A transfer will not
be disregarded under paragraph (g)(1) of
this section if the rules of
§1.860E–1(c)(4) (safe harbor for estab-
lishing lack of improper knowledge on
the transfer of a non-economic REMIC
residual interest) are satisfied with respect
to the FASIT ownership interest.
§1.860I–1 Gain recognition on property
transferred to FASIT or supporting FASIT
regular interests.
(a) In general—(1) Except as provided
in paragraphs (a)(2) and (d) of this sec-
tion, the Owner of a FASIT (or a related
person ) must recognize gain (if any)
on—
(i) Property the Owner (or the related
person) transfers either to the FASIT or its
regular interest holders;
(ii) Support property; and
(iii) Property acquired by the FASIT as
foreclosure property and held beyond the
grace period allowed for foreclosure
property.
(2) An Owner (or a related person) does
not have to recognize gain under section
860I or paragraph (a)(1) of this section on
a transfer or pledge of property to a regu-
February 22, 20007002000–8 I.R.B.

lar interest holder, if the Owner (or the re-
lated person) makes the transfer or pledge
in a capacity other than as Owner (or re-
lated person), and the regular interest
holder receives the transfer or pledge in a
capacity other than regular interest holder.
(b) Support property defined. Property
is support property if the Owner (or a re-
lated person)—
(1) Pledges the property, directly or in-
directly, to pay a FASIT regular interest,
or otherwise identifies the property as
providing security for the payment of a
FASIT regular interest;
(2) Sets aside the property for transfer
to a FASIT under any agreement or un-
derstanding; or
(3) Holds an interest in the property
that is subordinate to the FASIT=s interest
in the property (for example, the Owner
holds subordinate interests in a pool of
mortgages and the FASIT holds senior in-
terests in the same pool).
(c) Timing of gain determination and
recognition. Gain is determined and rec-
ognized under paragraph (a)(1) of this
section immediately before the property is
transferred to the FASIT or becomes sup-
port property, or in the case of foreclosure
property, on the day immediately follow-
ing the termination of the grace period al-
lowed for foreclosure property.
(d) Gain deferral election. [Reserved]
(e) Amount of gain. Except as provided
in paragraph (f) of this section, the
amount of gain recognized under para-
graph (a)(1) of this section is the same as
if the Owner (or the related person) had
sold the property for its value as deter-
mined under §1.860I–2.
(f) Record keeping requirements. The
Owner is required to maintain such books
and records as may be necessary or appro-
priate to demonstrate that the require-
ments of this section are satisfied.
(g) Special rule applicable to property
of related persons. Except in the case of
property traded on an established securi-
ties market (as defined in §1.860I–2(b)),
if a related person holds property that be-
comes support property, or if a related
person transfers property to a FASIT or its
regular interest holders, then for purposes
of applying the gain recognition provi-
sions of this section—
(1) The related person is treated as
transferring the property to the Owner for
the property’s fair market value as deter-
mined under general tax principles; and
(2) The Owner is treated as transferring
the property to the FASIT for the property’s
value as determined under §1.860I–2.
§1.860I–2 Value of property.
(a) Special valuation rule. For purposes
of section 860I(d)(1)(A), except as pro-
vided in paragraph (c) of this section, the
value of a debt instrument not traded on
an established securities market is the
present value of the reasonably expected
payments on the instrument deter-
mined—
(1) As of the date the instrument is to
be valued (as described in §1.860I–1(c));
and
(2) By using a discount rate equal to
120 percent of the applicable federal rate,
compounded semi-annually, for instru-
ments having the same term as the
weighted average maturity of the reason-
ably expected payments on the instru-
ment. For this purpose, the applicable
federal rate is the rate prescribed under
section 1274(d) for the period that in-
cludes the date the instrument is valued
(as described in §1.860I–1(c)).
(b) Traded on an established securities
market. For purposes of section
860I(d)(1)(A), a debt instrument is traded
on an established securities market if it is
traded on a market described in
§1.1273–2(f)(2), (3), or (4).
(c) Reasonably expected payments—
(1) In general. Reasonably expected pay-
ments on an instrument must be deter-
mined in a commercially reasonable man-
ner and, except as otherwise provided in
this section (c), may take into account
reasonable assumptions concerning early
repayments, late payments, non-pay-
ments, and loan servicing costs. No other
assumptions may be considered.
(2) Consistency requirements. Except
as provided in paragraph (c)(3) of this
section, any assumption used in determin-
ing the reasonably expected payments on
an instrument must be consistent with
(and no less favorable than) the first of the
following categories that applies—
(i) Representations made in connection
with the offering of a regular interest in
the FASIT;
(ii) Representations made to any na-
tionally recognized statistical rating orga-
nizations;
(iii) Representations made in any fil-
ings or registrations with any governmen-
tal agency with respect to the FASIT; and
(iv) Industry customs or standards (as
defined in paragraph (e) of this section).
(3) Servicing costs. Notwithstanding
paragraph (c)(2) of this section, the
amount of loan servicing costs assumed
may not exceed the lesser of—
(i) The amount the FASIT agrees to pay
the Owner for servicing the loans held by
the FASIT if the Owner is providing the
servicing; or
(ii) The amount a third party would rea-
sonably pay for servicing identical loans.
(4) Nonconforming or unreasonable
assumptions. If a taxpayer, in determin-
ing the expected payments on an instru-
ment, takes into account an assumption
that either fails to meet the requirements
of paragraph (c)(2) or (3) of this section
or is unreasonable, the Commissioner
may determine the reasonably expected
payments on the instrument without the
assumption. Thus, for example, if a tax-
payer makes an unreasonable assumption
concerning non-payments, the Commis-
sioner may compute expected payments
without any adjustment for non-pay-
ments.
(d) Special rules—(1) Beneficial own-
ership interests. A certificate representing
beneficial ownership of a debt instrument,
is deemed to represent beneficial owner-
ship of a debt instrument traded on an es-
tablished securities market, if either —
(i) The certificate is traded on an es-
tablished securities market; or
(ii) The certificate represents owner-
ship in a pool of assets composed solely
of debt instruments all of which are traded
on established securities markets.
(2) Stripped interests. A stripped bond
or stripped coupon (as defined in section
1286(e)) not otherwise traded on an estab-
lished securities market is considered as
being traded on an established securities
market, if—
(i) The underlying bond (the bond from
which the stripped bond or stripped
coupon is created) is traded on an estab-
lished securities market; and
(ii) The stripped bond or stripped
coupon is valued using a commercially
reasonable method based on the market
value of the underlying bond.
(3) Contemporaneous purchase and
transfer of debt instruments—(i) Notwith-
standing paragraph (a) of this section, the
value of a debt instrument not traded on
2000–8 I.R.B.701February 22, 2000

an established securities market is its cost
to the Owner (or a related person) if—
(A) The debt instrument is purchased
from an unrelated person in an arm’s
length transaction in which no other prop-
erty is transferred or services provided;
(B) The debt instrument is acquired
solely for cash;
(C) The price of the debt instrument is
fixed no more than 15 days before the
date of purchase; and
(D) The debt instrument is transferred
to the FASIT no more than 15 days after
the date of purchase.
(ii) For purposes of paragraph (d)(3)(i)
of this section, the date of purchase is the
earliest date on which the burdens and
benefits of ownership of the debt instru-
ment irrevocably pass to the Owner (or a
related person).
(4) Guarantees. Notwithstanding para-
graph (c)(1) of this section, if a guarantee
qualifying as a permitted hedge under this
paragraph (d) relates solely to a debt in-
strument not traded on an established se-
curities market and the taxpayer deter-
mines the reasonably expected payments
on the debt instrument by including the
reasonably expected payments on the
guarantee, then the guarantee and the
property need not be valued separately.
(e) Definitions. For purposes of
§1.860I–2—
(1) An industry customis any long-
standing practice in use by entities that
engage in asset securitization as part of
their ordinary business activities; and
(2) An industry standardis any stan-
dard that is both—
(i) Commonly used in evaluating the
expected payments on securitized debt in-
struments (or debt instruments pending
securitization) in similar transactions; and
(ii) Disseminated through written or
electronic means by any independent, na-
tionally recognized trade association or
other authority that is recognized as com-
petent to issue the standard.
§1.860J–1 Non-FASIT losses not to offset
certain FASIT inclusions.
(a) In general. For purposes of apply-
ing section 860J(a)(1), an Owner’s tax-
able income from a FASIT includes any
gains recognized by the Owner under
§1.860I–1(a).
(b) Special rule for holders of multiple
ownership interests. For purposes of ap-
plying section 860J and the rules of
§1.860J–1, a person may aggregate the
net income (or loss) from all FASITs in
which the person holds the ownership in-
terest.
(c) Related persons—(1) Taxable in-
come. The taxable income of a related
person for any taxable year is no less than
the sum of—
(i) The amounts specified in section
860J(a); plus
(ii) Any gains recognized under
§1.860I–1(a).
(2) Effect on net operating loss. Any
increase in a related person’s taxable in-
come attributable to paragraph (c)(1) of
this section is disregarded—
(i) In determining under section 172 the
amount of the related person’s net operat-
ing loss for the taxable year; and
(ii) In determining the related person’s
taxable income for such taxable year for
purposes of the second sentence of sec-
tion 172(b)(2).
(3) Coordination with minimum tax.
For purposes of part VI of subchapter A of
chapter 1 of subtitle A of Title 26 U.S.C.,
the alternative minimum taxable income
of any related person is in no event less
than the related person’s taxable income
as computed under paragraph (c)(1) of
this section.
§1.860L–1 Prohibited transactions.
(a) Loan origination—(1) In general.
Section 860L(e) imposes a prohibited
transactions tax on the receipt of any in-
come derived from any loan originated by
a FASIT. Except as provided in para-
graphs (a)(2) and (3) of this section,
whether a FASIT originates a loan for
purposes of section 860L(e) depends on
all the facts and circumstances.
(2) Acquisitions presumed not to be
loan origination. Except as provided in
paragraph (a)(3) of this section, a FASIT
is considered not to have originated a loan
if the FASIT acquires the loan—
(i) From an established securities mar-
ket described in §1.1273–2(f)(2), (3), or
(4);
(ii) On a date more than 12 months
after the loan was issued; or
(iii) From a person (including the
Owner or a related person) that regularly
originates similar loans (such as through a
standardized contract) in the ordinary
course of its business.
(3) Activities presumed to be loan orig-
ination. (i) Notwithstanding paragraph
(a)(2) of this section, a FASIT is consid-
ered to originate a loan if the FASIT ei-
ther engages in or facilitates (other than
through a person from whom the FASIT
acquires the loan and who is described in
paragraph (a)(2)(iii) of this section)—
(A) Soliciting the loan, including ad-
vertising to solicit borrowers, accepting
the loan application, or generally making
any offer to lend funds to any person;
(B) Evaluating an applicant’s financial
condition;
(C) Negotiating or establishing any
terms of the loan;
(D) Preparing or processing any docu-
ment related to negotiating or entering
into the loan; or
(E) Closing the loan transaction.
(ii) For purposes of paragraph (a)(3)(i)
of this section, if a FASIT enters into a
contract to engage in purchases described
in paragraph (a)(2)(iii) of this section, the
FASIT is not treated as originating the
loans it acquires solely because it was a
party to the contract.
(4) Loan workouts. If a FASIT holds a
loan, the FASIT is not treated as originat-
ing a new loan that it receives from the
same obligor in exchange for the old loan
in the context of a workout.
(b) Origination of a contract or agree-
ment in the nature of a line of credit–(1)
In general. A FASIT is presumed not to
have originated a contract or agreement in
the nature of a line of credit if the FASIT
acquires the contract or agreement from a
person (including the Owner or a related
person) that regularly originates similar
contracts or agreements in the ordinary
course of its business.
(2) Activities presumed to be origina-
tion. If a FASIT assumes the role of a
lender under a contract or agreement in
the nature of a line of credit from a person
that does not regularly originate similar
contracts or agreements in the ordinary
course of its business, the FASIT is con-
sidered to originate the contract or agree-
ment if, with respect to the contract or
agreement, the FASIT engages in any of
the activities described in paragraphs (A)
through (E) of §1.860L–1(a)(3)(i) of this
section.
(3) Debt instruments issued under con-
tracts or agreements in the nature of a
line of credit. If a FASIT acquires a debt
instrument as a result of the FASIT’s posi-
tion as a lender under a contract or agree-
February 22, 20007022000–8 I.R.B.

ment in the nature of a line of credit, the
FASIT is presumed to have originated the
debt instrument if and only if the FASIT
originated the related contract or agree-
ment.
(c) Disposition of debt instruments.
Notwithstanding sections
860L(e)(3)(B)(i) and (ii) (certain excep-
tions from the prohibited transactions
tax), the distribution to the Owner of a
debt instrument contributed by the
Owner, and the transfer to the Owner of
one debt instrument in exchange for an-
other, are prohibited transactions, if
within 180 days of receiving the debt in-
strument the Owner realizes a gain on the
disposition of the instrument to any per-
son, regardless of whether the realized
gain is recognized.
(d) Exclusion of prohibited transac-
tions tax to dispositions of hedges. The
rules of section 860L(e) and paragraph (b)
of this section do not apply to the disposi-
tion of any asset described in section
860L(c)(1)(D).
§1.860L–2 Anti-abuse rule.
(a) Intent of FASIT provisions.Part V
of subchapter M of the Internal Revenue
Code (the FASIT provisions) is intended
to promote the spreading of credit risk on
debt instruments by facilitating the securi-
tization of those debt instruments. Im-
plicit in the intent of the FASIT provi-
sions are the following requirements—
(1) Assets to be securitized through a
FASIT consist primarily of permitted debt
instruments;
(2) The source of principal and interest
payments on a FASIT’s regular interests
is primarily the principal and interest pay-
ments on permitted debt instruments held
by the FASIT (as opposed to receipts on
other assets or deposits of cash); and
(3) No FASIT provision may be used to
achieve a Federal tax result that cannot be
achieved without the provision unless the
provision clearly contemplates that result.
(b) Application of FASIT provisions.
The FASIT provisions and the FASIT reg-
ulations must be applied in a manner con-
sistent with the intent of the FASIT provi-
sions as set forth in paragraph (a) of this
section. Therefore, if a principal purpose
of forming or using a FASIT is to achieve
results inconsistent with the intent of the
FASIT provisions and the FASIT regula-
tions, the Commissioner may make any
appropriate adjustments with regard to the
FASIT and any arrangement or transac-
tion (or series of transactions) involving
the FASIT. The Commissioner’s author-
ity includes—
(1) Disregarding a FASIT election;
(2) Treating one or more assets of a
FASIT as held by a person or persons
other than the Owner;
(3) Allocating FASIT income, loss, de-
ductions and credits to a person or per-
sons other than the Owner;
(4) Disallowing any item of FASIT in-
come, loss, deduction, or credit;
(5) Treating the ownership interest in a
FASIT as held by a person other than the
nominal holder;
(6) Treating a FASIT regular interest as
other than a debt instrument; and
(7) Treating a regular interest held by
any person as having the same tax charac-
teristics as one or more of the assets held
by the FASIT.
(c) Facts and circumstances analysis.
Whether a FASIT is created or used for a
principal purpose of achieving a result in-
consistent with the intent of the FASIT
provisions is determined based on all of
the facts and circumstances, including a
comparison of the purported business pur-
pose for a transaction and the claimed tax
benefits resulting from the transaction.
(d) Effective date. This section is ap-
plicable on February 4, 2000.
§1.860L–3 Transition rule for pre-
effective date FASITs.
(a) Scope. This section applies if a pre-
effective date FASIT has one or more pre-
FASIT interests outstanding on the startup
day of the FASIT.
(1) Pre-effective date FASIT defined. A
pre-effective date FASITis a FASIT
whose underlying qualifying arrangement
was in existence on August 31, 1997.
(2) Pre-FASIT interest defined. Apre-
FASIT interestis an interest in a pre-effec-
tive date FASIT that—
(i) Was issued before February 4, 2000;
(ii) Was outstanding on the date the
FASIT election for the underlying quali-
fying arrangement goes into effect; and
(iii) Is considered debt of the Owner
under general principles of Federal in-
come tax law.
(3) FASIT gain defined. For purposes
of this section, the term FASIT gain
means any gain that the Owner of a pre-
effective date FASIT must recognize
under the rules of this section.
(b) Election to defer gain. The Owner
of a pre-effective date FASIT may elect to
defer the recognition of FASIT gain on
assets that are held by the FASIT but that
are allocable to pre-FASIT interests. An
Owner that elects under this section must
establish a method of accounting for its
FASIT gain. To clearly reflect income,
this method must periodically determine
the aggregate amount of FASIT gain on
all of the assets in the FASIT and exclude
the portion of the FASIT gain attributable
to the pre-FASIT interests.
(c) Safe-harbor method. This para-
graph (c) provides a safe-harbor method
for determining the amount of FASIT
gain that can be deferred under this sec-
tion. The method has the following steps:
(1) Step one: Establish pools—(i)
Group assets into pools. The Owner must
group the assets of the FASIT into one or
more pools. No pool may contain assets
of more than one of the following three
types—
(A) Assets that are valued under the
special valuation rule of §1.860I–2(a) and
that have FASIT gain on the first day held
by the FASIT;
(B) Assets that are valued for FASIT
gain purposes under a standard other than
the special valuation rule of §1.860I–2(a)
and that have FASIT gain on the first day
held by the FASIT; and
(C) Assets that do not have FASIT gain
on the first day held by the FASIT.
(ii) Treatment of pools. If a pool con-
tains assets described in paragraph
(c)(1)(i)(A) or (B) of this section, the
Owner must apply paragraphs (c)(2)
through (5) of this section to the pool. If a
pool contains assets described in para-
graph (c)(1)(i)(C) of this section, the pool
is ignored for FASIT gain purposes.
(2) Step two: Determine the FASIT
gain (or loss) at the pool level–(i) In gen-
eral.For each taxable year, the FASIT
gain (or loss) at the pool level is equal to
the net increase (or decrease) in the value
of the pool minus the income that is in-
cluded with respect to the pool under gen-
eral income tax principles (without regard
to the FASIT rules). For purposes of the
preceding sentence, the net increase (or
decrease) in the value of the pool is equal
to—
(A) The sum of the value of the pool
(as determined under §1.860I–2) at the
end of the taxable year and the amount of
2000–8 I.R.B.703February 22, 2000

any cash distributed (even if reinvested)
from the pool during the taxable year;
minus
(B) The sum of the value of the pool (as
determined under §1.860I–2) at the end
of the previous taxable year and the
Owner’s adjusted basis in the assets con-
tributed to the pool during the taxable
year.
(ii) Limitation. This paragraph applies
if the calculation in paragraph (c)(2)(i) of
this section produces a loss for the taxable
year and the amount of the loss exceeds
the net amount of the FASIT gain from
the pool in all prior years. In this case, the
amount of the loss for the current year is
limited to the amount of net FASIT gain
for all previous years.
(3) Step three: Determine the percent-
age of total FASIT gain that must be rec-
ognized by the end of the current taxable
year. The percentage of FASIT gain that
must be recognized by the end of the cur-
rent taxable year is equal to 100 percent
minus the percentage of FASIT gain that
may be deferred at the end of the current
taxable year. The percentage of FASIT
gain that may be deferred at the end of the
taxable year is equal to the lesser of 100
percent and the ratio of—
(i) The product of 107 percent and ag-
gregate adjusted issue prices of all pre-
FASIT interests outstanding on the last
day of the taxable year; over
(ii) The total value of all assets held by
the FASIT on the last day of the taxable
year.
(4) Step four: Determine the total
amount of FASIT gain that is not attrib-
uted to pre- effective date FASIT interests.
The total amount of FASIT gain that is
not attributed to pre- effective date FASIT
interests is equal to the product of—
(i) The sum of the amount of FASIT
gain (as determined under paragraph
(c)(2) of this section) for the current tax-
able year and all previous taxable years;
and
(ii) The percentage of FASIT gain that
must be recognized in the current taxable
year (as determined under paragraph
(c)(3) of this section).
(5) Step five: Determine the amount of
FASIT gain (or loss) to be recognized in
the taxable year. For the taxable year that
includes the startup date, the amount of
FASIT gain to be recognized is equal to
the total amount of FASIT gain not attrib-
utable to pre-effective date FASIT inter-
ests (as determined under paragraph
(c)(4) of this section). Thereafter, the
amount of FASIT gain (or loss) to be rec-
ognized in a given taxable year is equal to
the total amount of FASIT gain not attrib-
utable to pre-effective date FASIT inter-
ests for that taxable year (as determined
under paragraph (c)(4) of this section)
less the amount of FASIT gain not attrib-
utable to pre-effective date FASIT inter-
ests for the immediately preceding tax-
able year (as determined under paragraph
(c)(4) of this section).
(d) Example. The rules of this section
are illustrated by the following example:
Example. (i) Facts. Ois an eligible corporation
within the meaning of section 860(a)(2) that uses the
calendar year as its taxable year. On July 1, 1996, O
forms TR, a trust. Shortly thereafter, Ocontributes
credit card receivables to TRand TRissues certifi-
cates that, for Federal income tax purposes, are char-
acterized as debt of O. Effective March 31, 1999, O
elects FASIT status for TR. On March 31, 1999, TR
holds credit card receivables that have an outstand-
ing principal balance of $20,000,000 and TRhas
outstanding certificates (that are characterized for
Federal income tax purposes as debt of O) that have
an aggregate adjusted issue price of $10,000,000.
(ii) Status as a pre-effective date FASIT. TRis a
pre-effective date FASIT because TRwas a trust that
was in existence on August 31, 1997. The certifi-
cates outstanding on March 1, 1999, are pre-FASIT
interests because they were outstanding on March
31, 1999, and they were considered debt of Ounder
general principles of Federal income tax law.
(iii) Facts: 1999. From April 1, 1999, through
December 31, 1999, the credit card receivables held
by TRgenerated $800,000 of taxable income and
$4,000,000 of total cash flow. TRdistributed
$2,500,000 of the cash flow to Oin exchange for
new receivables having an outstanding principal bal-
ance of $2,500,000. TRused the remaining
$1,500,000 of cash flow to make payments on its
outstanding debt instruments. On December 31,
1999, TRcontributed additional credit card receiv-
ables with an outstanding principal balance of
$10,700,000 and an aggregate adjusted basis of
$10,700,000. On December 31, 1999, TRheld
credit card receivables that had an outstanding prin-
cipal balance of $30,000,000, an aggregate adjusted
basis of $30,000,000, and a value (as determined
under §1.860I–2(a)) of $30,300,000. In addition, on
December 31, 1999, the outstanding adjusted issue
price of the pre-FASIT interests was $9,000,000.
(iv) FASIT gain recognition for 1999—(A) Es-
tablish pools. TRelects to defer gain recognition
under the safe harbor method. Consistent with para-
graph (c)(1) of this section, TRgroups the assets of
the FASIT into a single pool because all of the assets
of the FASIT are credit card receivables subject to
the special valuation rule of §1.860I–1(a) and the as-
sets have FASIT gain on the date they are acquired
by the FASIT.
(B) Determination of FASIT gain for 1999. The
sum of the value of the pool at the end of 1999
($30,300,000) and the cash distributed during 1999
($4,000,000) is $34,300,000. There are three contri-
butions of assets by Oduring 1999: one of
$20,000,000 on March 31, 1999; one of $2,500,000
over the course of 1999; and an additional contribu-
tion of $10,700,000 on December 31, 1999. Thus,
O’s basis in assets contributed to the pool during
1999 is $33,200,000. The net increase in the value
of the pool is $1,100,000 ($34,300,000 minus
$33,200,000). Under paragraph (c)(2) of this sec-
tion, the FASIT gain for 1999 is $300,000
($1,100,000 net increase in value minus $800,000
taxable income).
(C) Determination of percentage of total FASIT
gain that must be recognized by the end of 1999.
Under paragraph (c)(3) of this section, the percent-
age of FASIT gain that may be deferred for the tax-
able year is 31.78 percent (107 percent x
$9,000,000 adjusted issue price of pre-FASIT inter-
ests divided by $30,300,000 value of the assets).
The percentage of the FASIT gain that must be rec-
ognized is for the taxable year, therefore, 68.22 per-
cent (1 - 31.78 percent).
(D) Determination of total amount of FASIT gain
not attributed to pre-effective date FASIT interests in
1999. Under paragraph (c)(4) of this section, the
total amount of FASIT gain not attributed to pre-ef-
fective date FASIT interests in 1999 is $204,660
($300,000 FASIT gain x 68.22 percent).
(E) Determine the amount of FASIT gain to be
recognized in 1999. Under paragraph (c)(5) of this
section, because 1999 includes the startup date, TR
must include in income the entire $204,660 of
FASIT gain not attributed to pre-effective date
FASIT interests.
(v) Facts: 2000. In 2000, the credit card receiv-
ables held by TRgenerated $1,500,000 of taxable in-
come and $5,000,000 of cash flow. TRdistributed
$4,000,000 of the cash flow to Oin exchange for
new receivables having an outstanding principal bal-
ance of $4,000,000. TRused the remaining
$1,000,000 of cash flow to make payments on its
outstanding debt instruments. On December 31,
2000, TRcontributed additional credit card receiv-
ables with an outstanding principal balance of
$9,500,000 and an aggregate adjusted basis of
$9,500,000. On December 31, 2000, TRheld credit
card receivables that had an outstanding principal
balance of $40,000,000, an aggregate adjusted basis
of $40,000,000, and a value (as determined under
§1.860I–2(a)) of $40,800,000. In addition, on De-
cember 31, 2000, the outstanding adjusted issue
price of the pre-FASIT interests was $8,500,000.
(vi) FASIT gain recognition for 2000—(A) De-
termination of FASIT gain for 2000. The sum of the
value of the pool on December 31, 2000
($40,800,000) and the cash distributed during 2000
($5,000,000) is $45,800,000. The value of the pool
on December 31, 1999, was $30,300,000. During
2000, O
contributed receivables in which O had a
basis of $13,500,000 ($4,000,000 over the course of
the year and $9,500,000 on December 31, 2000).
The net increase in the value of the pool during 2000
is $2,000,000 ($45,800,000 minus $43,800,000).
Under paragraph (c)(2), the FASIT gain for 2000 is
$500,000 ($2,000,000 net increase in value minus
$1,500,000 taxable income).
(B) Determination of percentage of total FASIT
gain that must be recognized by the end of 2000.
Under paragraph (c)(3), the percentage of FASIT
gain that may be deferred for the taxable year is
February 22, 20007042000–8 I.R.B.

22.29 percent (107 percent times $8,500,000 ad-
justed issue price of pre-FASIT interests divided by
$40,800,000 value of the assets). The percentage of
the FASIT gain that must be recognized is, therefore,
77.71 percent (1 – 22.29 percent).
(C) Determination of total amount of FASIT gain
not attributed to pre-effective date FASIT interests in
2000. Under paragraph (c)(4) of this section, the
total amount of FASIT gain not attributed to pre-ef-
fective date FASIT interests in 2000 is $388,500
($500,000 FASIT gain multiplied by 77.71 percent).
(D) Determine the amount of FASIT gain to be
recognized in 2000. Under paragraph (c)(5) of this
section, the FASIT gain to be recognized for 2000 is
equal to the FASIT gain that not attributable to pre-
effective date FASIT interests in 2000 ($388,500)
minus the FASIT gain not attributable to pre-effec-
tive date FASIT interests in 1999 ($204,660). Thus,
in 2000, TRmust include $183,840.
(e) Election to apply gain deferral
retroactively.The Owner of a pre-effec-
tive date FASIT, including a pre-effective
date FASIT having a startup date before
February 4, 2000, may apply the rules of
paragraph (a) of this section for the period
beginning on the startup date by making
an election in the manner prescribed by
the Commissioner.
(f) Effective date.This section is ap-
plicable on February 4, 2000.
§1.860L–4 Effective date.
Except as otherwise provided in
§1.860L–2(e) (relating to the rules on
anti-abuse) and §1.860L–3(f) (relating to
the rules governing transition entities) this
section is applicable on the date final reg-
ulations are filed with the Federal Regis-
ter.
Par. 4. Section 1.861–9T is amended
by redesignating the text of paragraph
(g)(2)(iii) as paragraph (g)(2)(iii)(A) and
adding a heading to new paragraph
(g)(2)(iii)(A), and adding paragraph
(g)(2)(iii)(B):
§1.861–9T Allocation and
apportionment of interest expense
(temporary regulation).
* * * * *
(g) * * *
(2) * * *
(iii) Adjustment for directly allocated
interest— (A)
Nonrecourse indebtedness
and integrated financial transactions.* *
*
(B) FASIT Interest Expense. The rules
of paragraph (g)(2)(iii)(A) of this section
shall also apply to all assets to which
FASIT interest expense is directly allo-
cated during the current taxable year
under the rules of §1.861–10T(f). This
paragraph (g)(2)(iii)(B) applies on the
date final regulations are filed with the
Federal Register.
Par. 5. Section 1.861–10T is amended
by—
1. Revising paragraph (a); and
2. Adding paragraph (f).
§1.861–10T Special allocations of
interest expense (temporary regulation).
(a) In general. This section applies to
all taxpayers and provides four exceptions
to the rules of §1.861–9T that require the
allocation and apportionment of interest
expense on the basis of all assets of all
members of the affiliated group. Para-
graph (b) of this section describes the di-
rect allocation of interest expense to the
income generated by certain assets that
are subject to qualified nonrecourse in-
debtedness. Paragraph (c) of this section
describes the direct allocation of interest
expense to income generated by certain
assets that are acquired in integrated fi-
nancial transactions. Paragraph (d) of this
section provides special rules that are ap-
plicable to all transactions described in
paragraphs (b) and (c) of this section.
Paragraph (e) of this section requires the
direct allocation of third party interest of
an affiliated group to such group’s invest-
ment in related controlled foreign corpo-
rations in cases involving excess related
person indebtedness (as defined therein).
Paragraph (f) of this section provides
rules for the direct allocation and appor-
tionment of all FASIT interest expense to
all FASIT gross income, on the basis of
all FASITassets. See also
§1.861–9T(b)(5), which requires direct
allocation of amortizable bond premium.
* * * * *
(f) FASIT Interest Expense—(1) In
general. All FASIT interest expense of the
taxpayer’s affiliated group (or the tax-
payer, if the taxpayer is not a member of
an affiliated group) shall be directly allo-
cated solely to the FASIT gross income of
the affiliated group (or the taxpayer, if the
taxpayer is not a member of an affiliated
group).
(2) Asset method. Interest expense that
is directly allocated under this paragraph
(f) shall be treated as directly related to all
the activities and assets of all FASITs in
which the taxpayer or any member of the
taxpayer’s affiliated group holds the own-
ership interest. The directly allocated in-
terest expense shall be apportioned
among all of the FASIT gross income of
the affiliated group (or the taxpayer, if the
taxpayer is not a member of an affiliated
group) under the asset method described
in §1.861–9T(g).
(3) FASIT period. After a FASIT’s
startup day (as defined in section
860L(d)(1)), the taxpayer must allocate
the interest expense of the FASIT accord-
ing to the rules of this paragraph (f) dur-
ing the entire period that the arrangement
continues to be a FASIT. If an arrange-
ment ceases to be a FASIT, interest ex-
pense with respect to the ceased FASIT
arrangement shall no longer be allocated
and apportioned under the rules of this
paragraph (f) as of the time the arrange-
ment is treated as having ceased in accor-
dance with §1.860H–3(b). The Commis-
sioner may continue to allocate interest
expense with respect to a ceased FASIT
arrangement under this paragraph (f) if
the Commissioner determines that the
principal purpose of ending the arrange-
ment’s qualification as a FASIT was to af-
fect the taxpayer’s interest expense allo-
cation.
(4) Application of special rules. In ap-
plying this paragraph (f), the rules of
paragraph (d)(2)of this section shall
apply.
(5) Definitions. For purposes of this
paragraph (f):
(i) FASIT defined. FASIT has the
meaning given such term in
§1.860H–1(a).
(ii) FASIT interest expense defined. (A)
In general. FASIT interest expense means
any amount paid or accrued by or on be-
half of a FASIT to a holder of a regular in-
terest in such FASIT, if such amount is—
(1) Treated as incurred by the taxpayer
or any member of the taxpayer’s affiliated
group by reason of §1.860H–6(a), be-
cause the taxpayer or such member holds
the ownership interest in a FASIT; and
(2) Treated as interest by reason of sec-
tion 860H(c).
(B) Interest equivalents. FASIT inter-
est expense includes any expense or loss
from a hedge that is a permitted asset (as
described in §1.860H–2(d) and (e)), but
only to the extent such expense or loss is
an interest equivalent as described in
§1.861–9T(b).
(iii) FASIT gross income defined.
FASIT gross income means gross income
2000–8 I.R.B.705February 22, 2000

of the taxpayer’s affiliated group (or the
taxpayer, if the taxpayer is not a member
of an affiliated group) treated as received
or accrued by the taxpayer, or any mem-
ber of the taxpayer’s affiliated group, by
reason of §1.860H–6(a).
(iv) Affiliated group defined.Affiliated
group has the meaning given such term by
§1.861– 11T(d).
(6) Coordination with other provisions.
If any FASIT interest expense is directly al-
locable under both this paragraph (f) and
paragraph (b) or (c) (determined without
regard to this paragraph (f)(6)), only the
rules of this paragraph (f) shall apply.
(7) Effective date. The rules of this
section apply for taxable years beginning
after December 31, 1986. However, para-
graphs (a) and (f) apply as of the date
final regulations are filed with the Fed-
eral Register, and paragraph (e) applies
to all taxable years beginning after De-
cember 31, 1991.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 7, 2000, 65 F.R.
5807)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Depletion; Treatment of Delay
Rental
REG–103882–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed amendments conforming regu-
lations relating to delay rental to the re-
quirements of section 263A relating to
capitalization and inclusion in inventory
of costs of certain expenses. Changes to
the applicable law were made by the Tax
Reform Act of 1986 and the Technical
and Miscellaneous Revenue Act of 1988.
The proposed regulations provide the
public with guidance concerning the ap-
plication of section 263A to delay rental.
DATES: Written comments must be re-
ceived by May 8, 2000. Outlines of top-
ics to be discussed at the public hearing
scheduled for May 26, 2000, at 10 a.m.
must be received by May 5, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–103882–99),
room 5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand deliv-
ered between the hours of 8 a.m. and 5 p.m.
to: CC:DOM:CORP:R (REG–103882–99),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit 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/reg
slist.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulation,
Brenda M. Stewart, (202) 622-3120; con-
cerning submissions and the hearing,
LaNita Van Dyke, (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 612 to
conform them to the requirements of sec-
tion 263A. Section 263A was enacted by
the Tax Reform Act of 1986, Public Law
99–514 (100 Stat. 2085), and amended by
the Technical and Miscellaneous Revenue
Act of 1988, Public Law 100–647 (102
Stat. 3342).
Explanation of Provisions
Under the terms of a lease of mineral
property, the lessee acquires, for a stated
term, the right and obligation to obtain
production of minerals from the property.
A lease may provide that for each year
that the lessee fails to make efforts to ob-
tain production, the lessee must pay a
“delay rental” to the lessor.
Section 1.612–3(c)(1) of the final regu-
lations defines a delay rental as an amount
paid for the privilege of deferring devel-
opment of the property and which could
have been avoided by abandonment of the
lease, or by commencement of develop-
ment operations, or by obtaining produc-
tion. Section 1.612–3(c)(2) of the final
regulations provides that since a delay
rental is in the nature of rent, it is ordinary
income to the payee and not subject to de-
pletion. The payor may at his election
deduct the delay rental as an expense, or
charge it to depletable capital account
under section 266.
Section 263A was enacted subsequent
to the issuance of §1.612–3(c) of the final
regulations. The uniform capitalization
rules of section 263A generally require
the capitalization of all direct costs and
certain indirect costs properly allocable to
property produced by the taxpayer. Capi-
talization may be required even though
production (development) has not yet
begun. §1.263A–2(a)(3)(ii). In some situ-
ations, a delay rental may be required to
be capitalized under section 263A. Ac-
cordingly, the proposed regulation clari-
fies that subsequent to the enactment of
section 263A, the payor of a delay rental
may elect to expense currently the delay
rental or charge it to depletable capital ac-
count under section 266 to the extent that
the delay rental is not required to be capi-
talized under section 263A and the regula-
tions thereunder.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It 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 information
on small entities, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
February 22, 20007062000–8 I.R.B.

tion will be given to any written com-
ments that are submitted timely (a signed
original and eight copies) to the IRS. The
IRS and Treasury request comments on
the clarity of the proposed regulations and
they may be made easier to understand.
All comments will be made available for
public inspection and copying.
A public hearing has been scheduled
for May 26, 2000, at 10 a.m. in room
2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC. Because of access restrictions, visi-
tors will not be admitted beyond the Inter-
nal 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 that wish to present oral com-
ments at the hearing must submit written
comments (a signed original and eight (8)
copies) by May 8, 2000. The outline of
topics to be discussed at the hearing must
be received by May 5, 2000.
A period of 10 minutes will be allotted
for each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of this proposed
regulation is Brenda M. Stewart of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries), In-
ternal Revenue Service. However, other
personnel from the IRS and Treasury De-
partment participated in its development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.612–3, the second sen-
tence of paragraph (c)(2) is removed and
two sentences are added in its place to
read as follows:
§1.612–3 Depletion; treatment of bonus
and advanced royalty.
* * * * *
(c) * * *
(2) * * * To the extent the delay rental
is not required to be capitalized under sec-
tion 263A and the regulations thereunder,
the payor may at his election deduct such
amount or under section 266 and the regu-
lations thereunder, charge it to depletable
capital account. The second sentence of
this paragraph (c)(2) applies to delay
rentals paid with respect to leasing trans-
actions entered into on or after the date
these regulations are published as final
regulations in the Federal Register.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 7, 2000, 8:45 a.m., and published in the issue
of the Federal Register for February 8, 2000, 65 F.R.
6090)
Notice of Proposed Rulemaking
Extension of Due Date for
Electronically Filed Information
Returns; Limitation of Failure to
Pay Penalty for Individuals
During Period of Installment
Agreement
REG–105279–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations implementing sec-
tion 6071(b) relating to the extension of
the due date for certain electronically
filed information returns. The regulations
also provide rules under section 6651(h)
relating to a penalty reduction for certain
individuals who have agreed with the IRS
to make installment payments in satisfac-
tion of their tax liability. The regulations
relating to extension of filing dates affect
payors required to file information returns
after December 31, 1999. The regulations
relating to penalty reduction affect indi-
vidual taxpayers with installment agree-
ments in effect during months beginning
after December 31, 1999.
DATES: Written or electronic comments
and requests for a public hearing must be
received by April 26, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–105279–99),
room 5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–105279–99),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/reglist.
html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations relat-
ing to the extension of due dates, Marilyn
E. Brookens, (202) 622-4920; concerning
the regulations relating to penalty reduc-
tions, Robert B. Taylor, (202) 622-4940;
concerning submissions of comments,
Guy Traynor, (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions, Employment Tax Regulations, and
Procedure and Administration Regula-
tions (26 CFR Parts 1, 31, and 301), and
implements sections 6071(b) and
6651(h), which were added to the Inter-
nal Revenue Code (Code) by the Internal
Revenue Service Restructuring and Re-
form Act of 1998, Public Law 105-206
(112 Stat. 685, 724 (1998 Act)). Section
6071(b) was added to the Code by sec-
tion 2002 of the 1998 Act and extends
the due date for information returns re-
quired by chapter 61, subchapter A, part
III, subparts B and C (sections 6041
through 6053) that are filed electroni-
cally. Under section 6071(b) such infor-
mation returns are due on or before
March 31 of the year following the cal-
endar year to which the returns relate.
Section 6071(b) applies to information
returns required to be filed with the IRS
or the Social Security Administration
after December 31, 1999.
2000–8 I.R.B.707February 22, 2000

Section 6651(h) was added to the Code
by section 3303 of the 1998 Act and pro-
vides that, for individuals, the failure to
pay penalty is reduced from 0.5 percent
per month to 0.25 percent per month dur-
ing the period an installment agreement
under section 6159 is in effect with regard
to a timely filed return. Section 6651(h)
applies to any Federal tax liability of an
individual (including a liability under
subtitle C) and is effective for determin-
ing the addition to tax for months begin-
ning after December 31, 1999.
1. Proposed Regulations Implementing
Section 6071(b)
Sections 6041 through 6053 of the Code
require the filing of information returns
that report income, payments, or gross pro-
ceeds resulting from certain transactions.
Under current law, these returns are gener-
ally due to the IRS or the Social Security
Administration by (1) February 28 of the
year following the calendar year to which
the returns relate or (2) the last day of Feb-
ruary following the calendar year to which
the returns relate. Certain returns, how-
ever, such as those required by section
6050I (relating to cash receipts of more
than $10,000) are due on a date other than
February 28 or the last day of February.
The due date for filing information returns
is the same whether the returns are filed on
paper, electronically, or by other forms of
magnetic media (such as magnetic tape,
cartridges, and diskettes).
As an incentive to filers of information
returns to use electronic filing, section
6071(b) extends by 1 month the due date
for certain information returns required
by sections 6041 through 6053 if the re-
turn is filed electronically. H.R. Conf.
Rep. No. 599, 105th Cong., 2nd Sess.
235. Accordingly, beginning on January
1, 2000, information returns currently re-
quired by sections 6041 through 6053 to
be filed by February 28, or the last day of
February, of the year following the calen-
dar year to which the returns relate may
be filed electronically as late as March 31
of the year following the calendar year to
which the returns relate. The information
returns affected by the proposed regula-
tions include the Form W-2 series, Form
W-2G, the Form 1098 series, the Form
1099 series, and Form 8027. Section
6071(b) does not affect information re-
turns required to be filed on or before a
date other than February 28 or the last day
of February. Section 6071(b) also does
not affect information returns filed on
paper or by means of magnetic media
(such as magnetic tape, cartridges or
diskettes) other than electronic filing.
The proposed regulations affect only in-
formation returns for which a due date is
currently prescribed by regulation. Section
6071(b) also applies to other information
returns required under sections 6041
through 6053 and extends the due date for
electronic filing of those returns in cases in
which a due date of February 28 or the last
day of February is prescribed by form or
other nonregulatory guidance.
The proposed regulations also remove
references to two obsolete forms (Form
1099F and Form 1099L) and make minis-
terial changes to the phrasing and forms
of citation used in various provisions.
2. Proposed Regulations Implementing
Section 6651(h)
Section 6651(a)(2) imposes a penalty for
failure to pay the amount shown as tax on a
return on or before the due date prescribed
for payment of such tax (with regard to ex-
tensions), unless it is shown that such fail-
ure is due to reasonable cause and not due
to willful neglect. The amount of the
penalty is 0.5 percent of the amount of such
tax if the failure is for not more than 1
month, with an additional 0.5 percent for
each additional month or fraction thereof
during which such failure continues, not
exceeding 25 percent in the aggregate.
Section 6651(a)(3) imposes a penalty for
failure to pay any amount in respect of any
tax required to be shown on a return, which
is not so shown, within 21 calendar days
from the date of notice and demand there-
for (10 business days if the amount for
which such notice and demand is made
equals or exceeds $100,000), unless it is
shown that such failure is due to reasonable
cause and not due to willful neglect. The
amount of the penalty is 0.5 percent of the
amount of tax stated in the notice and de-
mand if the failure is for not more than 1
month, with an additional 0.5 percent for
each additional month or fraction thereof
during which such failure continues, not
exceeding 25 percent in the aggregate.
Section 6651(h), added to the Code by
section 3303 of the 1998 Act, provides
that for an individual who enters into an
installment agreement under section 6159
with regard to a timely filed return, the
failure to pay penalties will be reduced
from 0.5 percent to 0.25 percent during
the period of the installment agreement.
This provision was added to the Code be-
cause Congress believed that it was “inap-
propriate to apply the full penalty for fail-
ure to pay taxes to taxpayers who are in
fact paying their taxes through an install-
ment agreement.” H.R. Rep. No. 364,
105th Cong., 1st Sess. 81; S. Rep. No.
174, 105th Cong., 2nd Sess. 63. This pro-
vision is effective for purposes of deter-
mining additions to tax for months begin-
ning after December 31, 1999.
Accordingly, for an individual who en-
ters into an installment agreement under
section 6159 with regard to a timely filed
return, the proposed regulations provide
that the failure to pay penalties under sec-
tion 6651(a)(2) and (3) will be reduced
from 0.5 percent per month to 0.25 per-
cent per month during the period of the
installment agreement.
Proposed Effective Date
The provisions of these regulations
under section 6071(b) are proposed to be
applicable for returns required to be filed
after December 31, 1999. The provisions
of these regulations under section 6651(h)
are proposed to be applicable for deter-
mining the addition to tax for months be-
ginning after December 31, 1999.
Special Analyses
It has been determined that this notice of
proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not impose
a collection of information on small enti-
ties, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. Chapter 6) is not required. Pursuant
to section 7805(f) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
February 22, 20007082000–8 I.R.B.

tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be made
easier to understand. All comments will
be available for public inspection and
copying. A public hearing may be sched-
uled if requested by any person that
timely submits comments. If a public
hearing is scheduled, notice of the date,
time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal author of the regulations
relating to the extension of due dates under
section 6071(b) is Marilyn E. Brookens,
Office of Assistant Chief Counsel (Income
Tax & Accounting). The principal author
of the regulations relating to the reduction
in the penalty under section 6651(h) is
Robert B. Taylor, Office of Assistant Chief
Counsel (Income Tax & Accounting).
However, other personnel from the IRS and
Treasury Department participated in their
development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 31, and
301 are proposed to be amended as fol-
lows:
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. In §1.6041–2, paragraph
(a)(3)(ii) is revised to read as follows:
§1.6041–2 Return of information as to
payments to employees.
(a) * * *
(3) * * *
(ii) Exception. In a case where an em-
ployer is not required to file Forms W-3 and
W-2 under §31.6011(a)–4 or 31.6011(a)–5
of this chapter, returns on Forms W-3 and
W-2 required under this paragraph for any
calendar year shall be filed on or before
February 28 (March 31 if filed electroni-
cally) of the following year.
* * * * *
Par. 3. In §1.6041–6, the first sentence
is revised to read as follows:
§1.6041–6 Returns made on Forms 1096
and 1099 under section 6041; contents
and time and place for filing.
Returns made under section 6041 on
Forms 1096 and 1099 for
any calendar year shall be filed on or
before February 28 (March 31 if filed
electronically) of the following year with
any of the Internal Revenue Service Cen-
ters, the addresses of which are listed in
the instructions for such forms. * * *
Par. 4. In §1.6042–2, the first sentence of
paragraph (c) is revised to read as follows:
§1.6042–2 Returns of information as to
dividends paid in calendar years after
1962.
* * * * *
(c) Time and place for filing. The re-
turns required under this section for any
calendar year shall be filed after Septem-
ber 30 of such year, but not before the
payer’s final payment for the year, and on
or before February 28 (March 31 if filed
electronically) of the following year with
any of the Internal Revenue Service Cen-
ters, the addresses of which are listed in
the instructions for Form 1096. * * *
* * * * *
Par. 5. In §1.6043–2, paragraph (a) is
revised to read as follows:
§1.6043–2 Return of information respect-
ing distributions in liquidation.
(a) Unless the distribution is one in re-
spect of which information is required to
be filed pursuant to §1.332–6(b),
1.368–3(a), or 1.1081–11, every corpora-
tion making any distribution of $600 or
more during a calendar year to any share-
holder in liquidation of the whole or any
part of its capital stock shall file a return
of information on Forms 1096 and 1099,
giving all the information required by
such form and by the regulations in this
part. A separate Form 1099 must be pre-
pared for each shareholder to whom such
distribution was made, showing the name
and address of such shareholder, the num-
ber and class of shares owned by him in
liquidation of which such distribution was
made, and the total amount distributed to
him on each class of stock. If the amount
distributed to such shareholder on any
class of stock consisted in whole or in part
of property other than money, the return
on such form shall in addition show the
amount of money distributed, if any, and
shall list separately each class of property
other than money distributed, giving a de-
scription of the property in each such
class and a statement of its fair market
value at the time of the distribution. Such
forms, accompanied by transmittal Form
1096 showing the number of Forms 1099
filed therewith, shall be filed on or before
February 28 (March 31 if filed electroni-
cally) of the year following the calendar
year in which such distribution was made
with any of the Internal Revenue Service
Centers, the addresses of which are listed
in the instructions for Form 1096.
* * * * *
Par. 6. In §1.6044–2, the first sentence
of paragraph (d) is revised to read as fol-
lows:
§1.6044–2 Returns of information as to
payments of patronage dividends with re-
spect to patronage occurring in taxable
years beginning after 1962.
* * * * *
(d) Time and place for filing. The re-
turn required under this section on Forms
1096 and 1099 for any calendar year shall
be filed after September 30 of such year,
but not before the payer’s final payment
for the year, and on or before February 28
(March 31 if filed electronically) of the
following year, with any of the Internal
Revenue Service Centers, the addresses
of which are listed in the instructions for
such forms. * * *
* * * * *
Par. 7. Section §1.6045–1 is amended
by adding paragraph (r) to read as fol-
lows:
§1.6045–1 Returns of information of bro-
kers and barter exchanges.
* * * * *
(r) Electronic filing.Notwithstanding
the time prescribed for filing in paragraph
(j) of this section, Forms 1096 and 1099
required under this section for reporting
periods ending during a calendar year
shall, if filed electronically, be filed after
the last calendar day of the reporting pe-
riod elected by the broker or barter ex-
change and on or before March 31 of the
following calendar year.
Par. 8. In §1.6045–2, paragraph (g)(3)
is revised to read as follows:
§1.6045–2 Furnishing statement required
with respect to certain substitute pay-
ments.
* * * * *
(g) * * *
(3) Time and place of filing. The re-
turns required under this paragraph (g) for
2000–8 I.R.B.709February 22, 2000

any calendar year shall be filed after Sep-
tember 30 of such year, but not before the
final substitute payment for the year is re-
ceived by the broker, and on or before
February 28 (March 31 if filed electroni-
cally) of the following year with any of
the Internal Revenue Service Centers, the
addresses of which are listed in the in-
structions for Form 1096.
* * * * *
Par. 9. In §1.6045–4, the first sentence
of paragraph (j) is revised to read as fol-
lows:
§1.6045–4 Information reporting on real
estate transactions with dates of closing
on or after January 1, 1991.
* * * * *
(j) Time and place for filing. A report-
ing person shall file the information re-
turns required by this section with respect
to a real estate transaction after December
31 of the calendar year that includes the
date of closing (as determined under para-
graph (h)(2)(ii) of this section) and on or
before February 28 (March 31 if filed
electronically) of the following calendar
year. * * *
* * * * *
Par. 10. In §1.6047–1, the first sen-
tence of paragraph (a)(6) is revised to
read as follows:
§1.6047–1 Information to be furnished
with regard to employee retirement plan
covering an owner-employee.
(a) * * *
(6) Time and place for filing.The re-
turn required under this section for any
calendar year shall be filed after the close
of that year and on or before February 28
(March 31 if filed electronically) of the
following year with any of the Internal
Revenue Service Centers, the addresses
of which are listed in the instructions for
Form 1096. * * *
* * * * *
Par. 11. Section 1.6049–4 is amended
by:
1. Revising the first sentence of para-
graph (g)(1).
2. Revising the first sentence of para-
graph (g)(2).
The revisions read as follows:
§1.6049–4 Return of information as to in-
terest paid and original issue discount in-
cludible in gross income after December
31, 1982.
* * * * *
(g) * * * (1) Annual return. Except as
provided in paragraph (g)(2) of this section,
the returns required under this section for
any calendar year for the payment of inter-
est shall be filed after September 30 of such
year, but not before the payor’s final pay-
ment to the payee for the year, and on or be-
fore February 28 (March 31 if filed elec-
tronically) of the following year. * * *
(2) Transactional return. In the case of
a return under paragraph (e) of this sec-
tion, relating to returns on a transactional
basis, such return shall be filed at any
time but in no event later than February
28 (March 31 if filed electronically) of the
year following the calendar year in which
the interest was paid. * * *
* * * * *
Par. 12. In §1.6049–7, the first sen-
tence of paragraph (b)(2)(iv) is revised to
read as follows:
§1.6049–7 Returns of information with
respect to REMIC regular interests and
collateralized debt obligations.
* * * * *
(b) * * *
(2) * * *
(iv) Time and place for filing a return
with respect to amounts includible as in-
terest. The returns required under para-
graph (b)(2) of this section for any calen-
dar year must be filed after September 30
of that year, but not before the payor’s
final payment to the payee for the year,
and on or before February 28 (March 31 if
filed electronically) of the following year.
* * *
* * * * *
Par. 13. In §1.6050A–1, paragraph (b)
is revised to read as follows:
§1.6050A–1 Reporting requirements of
certain fishing boat operators.
* * * * *
(b) Time and place for filing. Returns
required to be made under this section on
Form 1099-MISC shall be filed with the
Internal Revenue Service Center, desig-
nated in the instructions for Form 1099-
MISC, on or before February 28 (March
31 if filed electronically) of the year fol-
lowing the calendar year in which the rel-
evant services were performed.
* * * * *
Par. 14. In §1.6050D–1, paragraph (b)
is revised to read as follows:
§1.6050D–1 Information returns relating
to energy grants and financing.
* * * * *
(b) Time and place for filing. Returns re-
quired to be made under this section shall
be filed with the Internal Revenue Service
Center designated in the instructions for
Form 6497 or 1099-G on or before the last
day of February (March 31 if filed electron-
ically) of the year following the calendar
year for which the return is made.
Par. 15. In §1.6050E–1, the first sen-
tence of paragraph (h) is revised to read as
follows:
§1.6050E–1 Reporting of State and local
income tax refunds.
* * * * *
(h) Time and place for filing. The re-
turns required under this section for any
calendar year shall be filed after Septem-
ber 30 of that calendar year, but not be-
fore the refund officer’s final payment (or
allowance of credit or offset) for the year,
and on or before February 28 (March 31 if
filed electronically) of the following year.
* * *
* * * * *
Par. 16. In §1.6050H–2, the first and
second sentences of paragraph (a)(4) are
revised to read as follows:
§1.6050H–2 Time, form, and manner of
reporting interest received on qualified
mortgage.
(a) * * *
(4) Time and place for filing return. An
interest recipient must file a return re-
quired by paragraph (a) of this section on
or before February 28 (March 31 if filed
electronically) of the year following the
calendar year for which it receives the
mortgage interest. If no interest is re-
quired to be reported for the calendar
year, but a reimbursement of interest on a
qualified mortgage is required to be re-
ported for the calendar year, then a return
required by paragraph (a) of this section
must be filed on or before February 28
(March 31 if filed electronically) of the
year following the calendar year in which
the reimbursement was made. * * *
* * * * *
Par. 17. In §1.6050J–1T, A–33 is re-
vised to read as follows:
§1.6050J–1T Questions and answers con-
cerning information returns relating to
foreclosures and abandonments of secu-
rity (temporary).
* * * * *
A-33: The return or returns must be
filed on or before February 28 (March 31
if filed electronically) of the year follow-
ing the calendar year in which the acquisi-
February 22, 20007102000–8 I.R.B.

tion of an interest in the property occurs
or in which the lender knows or has rea-
son to know of the abandonment of the
property.
* * * * *
Par. 18. In §1.6050P–1, paragraph
(a)(4)(i) is revised to read as follows:
§1.6050P–1 Information reporting for
discharges of indebtedness by certain fi-
nancial entities.
(a) * * *
(4) * * * (i) In general. Except as
provided in paragraph (a)(4)(ii) of this
section, returns required by this section
must be filed with the Internal Revenue
Service office designated in the instruc-
tions for Form 1099-C on or before Feb-
ruary 28 (March 31 if filed electronically)
of the year following the calendar year in
which the identifiable event occurs.
* * * * *
Par. 19. In §1.6052–1, paragraph
(b)(1)(ii) is revised to read as follows:
§1.6052–1 Information returns regarding
payment of wages in the form of group-
term life insurance.
* * * * *
(b) * * * (1) * * *
(ii) Exception. In a case where an em-
ployer is not required to file Forms W-3
and W-2 under §31.6011(a)–4 or
§31.6011(a)–5 of this chapter, returns on
Forms W-3 and W-2 required under para-
graph (a) of this section for any calendar
year shall be filed on or before February
28 (March 31 if filed electronically) of the
following year.
* * * * *
PART 31-EMPLOYMENT TAXES
Par. 20. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 21. In §31.3402(q)–1, the first
sentence of paragraph (f)(1) is revised to
read as follows:
§31.3402(q)–1 Extension of withholding
to certain gambling winnings.
* * * * *
(f) * * * (1) In general. Every per-
son making payment of winnings for
which a statement is required under para-
graph (e) of this section shall file a return
on Form W-2G with the Internal Revenue
Service Center serving the district in
which is located the principal place of
business of the person making the return
on or before February 28 (March 31 if
filed electronically) of the calendar year
following the calendar year in which the
payment of winnings is made. * * *
* * * * *
Par. 22. In §31.6053–3, the first sen-
tence of paragraph (a)(4) is revised to
read as follows:
§31.6053–3 Reporting by certain large
food or beverage establishments with re-
spect to tips.
(a) * * *
(4) Time and place for filing. The in-
formation return required by this para-
graph shall be filed on or before the last
day of February (March 31 if filed elec-
tronically) of the year following the cal-
endar year for which the return is made
with the Internal Revenue Service Center
specified by the Form 8027 or its instruc-
tions. * * *
* * * * *
Par. 23. In §31.6071(a)–1, paragraph
(a)(3)(i) is revised to read as follows:
§31.6071(a)–1 Time for filing returns and
other documents.
(a) * * *
(3) * * * (i) General rule. Each infor-
mation return in respect of wages as de-
fined in the Federal Insurance Contribu-
tions Act or of income tax withheld from
wages which is required to be made under
§31.6051–2 shall be filed on or before the
last day of February (March 31 if filed
electronically) of the year following the
calendar year for which it is made, except
that, if a tax return under
§31.6011(a)–5(a) is filed as a final return
for a period ending prior to December 31,
the information statement shall be filed on
or before the last day of the second calen-
dar month following the period for which
the tax return is filed.
* * * * *
PART 301-PROCEDURE AND
ADMINISTRATION
Par. 24. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 25. Section 301.6651–1 is
amended by:
1. Revising the last sentence in para-
graph (a)(2).
2. Revising the second sentence in
paragraph (a)(3).
3. Adding paragraph (a)(4).
The revisions and additions read as fol-
lows:
§301.6651–1 Failure to file tax return or
to pay tax.
(a) * * *
(2) * * * Except as provided in para-
graph (a)(4) of this section, the amount to
be added to the tax is 0.5 percent of the
amount of tax shown on the return if the
failure is for not more than 1 month, with
an additional 0.5 percent for each addi-
tional month or fraction thereof during
which the failure continues, but not to ex-
ceed 25 percent in the aggregate.
(3) * * * Except as provided in para-
graph (a)(4) of this section, the amount to
be added to the tax is 0.5 percent of the
amount stated in the notice and demand if
the failure is for not more than 1 month,
with an additional 0.5 percent for each ad-
ditional month or fraction thereof during
which the failure continues, but not to ex-
ceed 25 percent in the aggregate. * * *
(4) Reduction of failure to pay penalty
during the period an installment agree-
ment is in effect—(i) In general. In the
case of a return filed by an individual on
or before the due date for the return (in-
cluding extensions)—
(A) The amount added to tax for a
month or fraction thereof is determined
by substituting 0.25 percent for 0.5 per-
cent under paragraph (a)(2) of this section
if at any time during the month an install-
ment agreement under section 6159 is in
effect for the payment of such tax; and
(B) The amount added to tax for a
month or fraction thereof is determined
by substituting 0.25 percent for 0.5 per-
cent under paragraph (a)(3) of this section
if at any time during the month an install-
ment agreement under section 6159 is in
effect for the payment of such tax.
(ii) Effective date. This paragraph
(a)(4) applies for purposes of determining
additions to tax for months beginning
after December 31, 1999.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 26, 2000, 8:45 a.m., and published in the issue of
the Federal Register for January 27, 2000, 65 F.R.
4396)
2000–8 I.R.B.711February 22, 2000

February 22, 2000i2000–8 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

2000–8 I.R.B.iiFebruary 22, 2000
Numerical Finding List
1
Bulletins 2000–1 through 2000–7
Announcements:
2000–1, 2000–2 I.R.B. 294
2000–2, 2000–2 I.R.B. 295
2000–3, 2000–2 I.R.B. 296
2000–4, 2000–3 I.R.B. 317
2000–5, 2000–4 I.R.B. 427
2000–6, 2000–4 I.R.B. 428
2000–7, 2000–6 I.R.B. 586
2000–8, 2000–6 I.R.B. 586
Notices:
2000–1, 2000–2 I.R.B. 288
2000–3, 2000–4 I.R.B. 413
2000–4, 2000–3 I.R.B. 313
2000–5, 2000–3 I.R.B. 314
2000–6, 2000–3 I.R.B. 315
2000–7, 2000–4 I.R.B. 419
2000–8, 2000–4 I.R.B. 420
2000–9, 2000–5 I.R.B. 449
2000–10, 2000–5 I.R.B. 451
2000–11, 2000–6 I.R.B. 572
Proposed Regulations:
REG–208254–90, 2000–6 I.R.B. 577
REG–101492–98, 2000–3 I.R.B. 326
REG–106012–98, 2000–2 I.R.B. 290
REG–103831–99, 2000–5 I.R.B. 452
REG–105089–99, 2000–6 I.R.B. 580
REG–105606–99, 2000–4 I.R.B. 421
REG–111119–99, 2000–5 I.R.B. 455
REG–113572–99, 2000–7 I.R.B. 624
REG–116048–99, 2000–6 I.R.B. 584
REG–116567–99, 2000–5 I.R.B. 463
REG–116704–99, 2000–3 I.R.B. 325
REG–100163–00, 2000–7 I.R.B. 633
Revenue Procedures:
2000–1, 2000–1 I.R.B. 4
2000–2, 2000–1 I.R.B. 73
2000–3, 2000–1 I.R.B. 103
2000–4, 2000–1 I.R.B. 115
2000–5, 2000–1 I.R.B. 158
2000–6, 2000–1 I.R.B. 187
2000–7, 2000–1 I.R.B. 227
2000–8, 2000–1 I.R.B. 230
2000–9, 2000–2 I.R.B. 280
2000–10, 2000–2 I.R.B. 287
2000–11, 2000–3 I.R.B. 309
2000–12, 2000–4 I.R.B. 387
2000–13, 2000–6 I.R.B. 515
2000–15, 2000–5 I.R.B. 447
2000–16, 2000–6 I.R.B. 518
2000–20, 2000–6 I.R.B. 553
Revenue Rulings:
2000–1, 2000–2 I.R.B. 250
2000–2, 2000–3 I.R.B. 305
2000–3, 2000–3 I.R.B. 297
2000–4, 2000–4 I.R.B. 331
2000–5, 2000–5 I.R.B. 436
2000–6, 2000–6 I.R.B. 512
2000–8, 2000–7 I.R.B. 617
2000–9, 2000–6 I.R.B. 497
Treasury Decisions:
8849, 2000–2 I.R.B. 245
8850, 2000–2 I.R.B. 265
8851, 2000–2 I.R.B. 275
8852, 2000–2 I.R.B.253
8853, 2000–4 I.R.B.377
8854, 2000–3 I.R.B.306
8855, 2000–4 I.R.B.374
8856, 2000–3 I.R.B.298
8857, 2000–4 I.R.B.365
8858, 2000–4 I.R.B.332
8859, 2000–5 I.R.B.429
8860, 2000–5 I.R.B.437
8861, 2000–5 I.R.B.441
8862, 2000–6 I.R.B.466
8863, 2000–6 I.R.B.488
8864, 2000–7 I.R.B.614
8865, 2000–7 I.R.B.589
8866, 2000–6 I.R.B.495
8867, 2000–7 I.R.B.620
8868, 2000–6 I.R.B.491
8869, 2000–6 I.R.B.498
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–27 through
1999–52 is in Internal Revenue Bulletin 2000–1,
dated January 3, 2000.

February 22, 2000iii2000–8 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 2000–1 through 2000–7
Announcements:
99–50
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
Notices:
92–48
Obsoleted by
Notice 2000–11, 2000–6 I.R.B. 572
97–19
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–52
Modified by
Notice 2000–3, 2000–4 I.R.B. 413
98–61
Modified and superseded by
Rev. Proc. 2000–15, 2000–5 I.R.B. 447
99–8
Obsoleted by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
Revenue Procedures:
80–18
Modified by
Rev. Proc. 2000–13, 2000–6 I.R.B. 515
89–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
89–13
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
90–21
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
91–66
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
92–13
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–13A
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–41
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–10
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
94–12
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
Revenue Procedures—Continued:
94–42
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
96–13
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–22
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
98–27
Superseded by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
98–64
Superseded by
Rev. Proc. 2000–9, 2000–2 I.R.B. 280
99–1
Superseded by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
99–2
Superseded by
Rev. Proc. 2000–2, 2000–1 I.R.B. 73
99–3
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
99–4
Superseded by
Rev. Proc. 2000–4, 2000–1 I.R.B. 115
99–5
Superseded by
Rev. Proc. 2000–5, 2000–1 I.R.B. 158
99–6
Superseded by
Rev. Proc. 2000–6, 2000–1 I.R.B. 187
99–7
Superseded by
Rev. Proc. 2000–7, 2000–1 I.R.B. 227
99–8
Superseded by
Rev. Proc. 2000–8, 2000–1 I.R.B. 230
99–13
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–31
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–49
Modified and amplified by both
Rev. Rul. 2000–4, 2000–4 I.R.B. 331 and
Notice 2000–4, 2000–3 I.R.B. 313
99–51
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
2000–6
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–8
Modified by both
Rev. Proc. 2000–16, 2000–6 I.R.B. 518 and
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
Revenue Rulings:
88–36
Modified by
Rev. Proc. 2000–6, 2000–6 I.R.B. 512
98–30
Amplified and superseded by
Rev. Rul. 2000–8, 2000–7, I.R.B. 617
Treasury Decisions:
8734
Modified by
T.D. 8856, 2000–3, I.R.B. 298
8804
Modified by
T.D. 8856, 2000–3, I.R.B. 298
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
1999–27 through 1999–52 is in Internal Revenue
Bulletin 2000–1, dated January 3, 2000.

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