Internal Revenue Bulletin No. 2001–30 bulletin

EMPLOYEE PLANS

Notice 2001–42, page 70.Qualified plans; remedial amendment period. Thisnotice provides a remedial amendment period under section401(b) of the Code with respect to the Economic Growth andTax Relief Reconciliation Act of 2001 (EGTRRA). This reme-dial amendment period is conditioned on the timely adoptionof “good faith” EGTRRA plan amendments. The GUST reme-dial amendment period for individually designed plans is notbeing extended. Rev. Procs. 2000–20 and 2001–6 modi-fied.

Announcement 2001–77, page 83.Qualified plans; determination letters. This announce-ment describes steps the Service is taking to simplify the appli-cation procedures for determination letters on the qualificationof pension, profit-sharing, stock bonus, and annuity plansunder sections 401(a) and 403(a) of the Code.

EXEMPT ORGANIZATIONS

Announcement 2001–78, page 87.A list is provided of organizations now classified as privatefoundations.

ADMINISTRATIVE

Notice 2001–43, page 72.This notice provides transitional relief and guidance to cer-tain U.S. withholding agents making payments to nonquali-fied intermediaries (NQIs) and foreign trusts for implement-ing the new withholding regulations under section 1441 ofthe Code. These regulations, which were published as T.D.8734 (1997–2 C.B. 109) and T.D. 8881 (2000–23 I.R.B.1158), apply to payments made after December 31, 2000.Announcement 2000–48 modified. Notice 2001–4 modified.

Notice 2001–44, page 77.Notional principal contract (NPC). The IRS and theTreasury Department are soliciting comments on the appro-priate method for including in income or deducting contin-gent nonperiodic payments made pursuant to a notional prin-cipal contract and the treatment of such inclusions ordeductions.

Internal Revenue

bbuulllleettiinnBulletin No. 2001–30

July 23, 2001

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page ii.Finding Lists begin on page ii.

July 23, 2001 2001–30 I.R.B.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative 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 applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel 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 circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof 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 RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese 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 Rulingsare issued by the Department of the Treasury’s Office of theAssistant 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 indexfor 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 toall.

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.

Amendment of Qualified Plansfor the Economic Growth andTax Relief Reconciliation Act of2001

Notice 2001–42

I. Purpose

This notice provides guidance concern-ing amendments to plans qualified under§§ 401(a) and 403(a) of the InternalRevenue Code related to the EconomicGrowth and Tax Relief Reconciliation Actof 2001, Pub. L. 107–16 (“EGTRRA”).Changes made by EGTRRA to the Codeprovisions related to qualified plansinclude changes that require plan amend-ment to preserve qualification andchanges that require plan amendment onlyif the plan sponsor chooses to change theplan.

The effects of this notice are to:

• avoid further delays in amending plansfor GUST1;

• prevent disruption of the GUST deter-mination letter process that has alreadybeen undertaken by thousands of plansponsors;

• facilitate timely adoption of EGTRRAplan amendments;

• ensure that plan terms reflect the actualoperation of the plan;

• allow plan sponsors to minimize thecost and burden of adopting EGTRRAplan amendments;

• provide plan sponsors with the oppor-tunity to retroactively amend their“good faith” EGTRRA plan amend-ments, if necessary; and

• facilitate the timely amendment ofmaster and prototype (“M&P”) and

volume submitter plans (“pre-approvedplans”) for GUST and EGTRRA.

Specifically, this notice provides thefollowing:

• The GUST remedial amendment periodfor individually designed plans, whichends on the last day of the 2001 planyear, is not being extended. However,a separate, later remedial amendmentperiod is being provided for EGTRRA.

• The GUST remedial amendment periodprovided to prior adopters of pre-approved plans and employers thattimely certify their intent to adopt apre-approved plan that has been restat-ed for GUST will be treated as notexpiring earlier than December 31,2002. This change will simplify thedetermination of the GUST amendmentdeadline for these plans and facilitatetimely amendment of the plans forGUST and EGTRRA.

• A plan is required to have a “goodfaith” EGTRRA plan amendment ineffect for a year if:(1) the plan is required to implement a

provision of EGTRRA for the year,or the plan sponsor chooses to im-plement an optional provision ofEGTRRA for the year, and

(2) the plan language, prior to theamendment, is not consistent eitherwith the provision of EGTRRA orwith the operation of the plan in amanner consistent with EGTRRA,as applicable.

• Before the end of August 2001, theService will publish sample EGTRRAplan amendments that plan sponsors andsponsors of pre-approved plans canadopt or use in drafting individualizedplan amendments. A sample EGTRRAplan amendment, or a plan amendmentthat is materially similar to a sampleEGTRRA plan amendment, will be a“good faith” EGTRRA plan amendment.

• Plan provisions that are amended by atimely “good faith” EGTRRA planamendment or that automaticallyreflect a statutory EGTRRA change(for example, as a result of permittedincorporation by reference) have aremedial amendment period ending noearlier than the end of the 2005 planyear in which any needed retroactive

remedial EGTRRA plan amendmentsmay be adopted.

• “Good faith” EGTRRA plan amend-ments must be adopted no later than thelater of (1) the end of the plan year inwhich the amendments are required tobe, or are optionally, put into effect or(2) the end of the GUST remedialamendment period. In limited situa-tions, earlier amendment may berequired to avoid a decrease or elimina-tion of benefits prohibited by § 411(d)(6).

• Individually designed plans submittedfor GUST determination letters mayreflect the changes made by EGTRRA.Also, pre-approved plans submitted forGUST determination letters mayinclude EGTRRA amendments in theform of a separate, clearly identifiedaddendum to the plan (or basic plandocument) and/or adoption agreementthat is limited to the provisions ofEGTRRA. However, until furthernotice, determination, opinion, andadvisory letters will not consider theEGTRRA changes.

II. Background

Section 401(b). Section 401(b) andthe regulations thereunder provide a re-medial amendment period during whichan amendment to a disqualifying provi-sion may be made retroactively effec-tive, under certain circumstances, tocomply with the requirements of § 401(a). Section 1.401(b)–1(b)(3) au-thorizes the Commissioner to designateas a disqualifying provision under § 401(b) a plan provision that either (1)results in the failure of the plan to satisfythe qualification requirements of theCode by reason of a change in those re-quirements, or (2) is integral to a qualifi-cation requirement that has beenchanged. Section 1.401(b)–1(c)(3) au-thorizes the Commissioner to imposelimits and provide additional rules re-garding the amendments that may bemade within the remedial amendmentperiod with respect to a plan provisiondesignated as a disqualifying provision.Section 1.401(b)–1(f) grants the Com-missioner the discretion to extend the re-medial amendment period.

July 23, 2001 70 2001–30 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

1 The term “GUST” refers to the following:• the Uruguay Round Agreements Act, Pub. L.

103-465;• the Uniformed Services Employment and

Reemployment Rights Act of 1994, Pub. L. 103-353;

• the Small Business Job Protection Act of 1996,Pub. L. 104-188;

• the Taxpayer Relief Act of 1997, Pub. L. 105-34(“TRA ’97”);

• the Internal Revenue Service Restructuring andReform Act of 1998, Pub. L. 105-206; and

• the Community Renewal Tax Relief Act of 2000,Pub. L. 106-554 (“CRA”).

The GUST Remedial Amendment Periodand Determination Letter Program.Theremedial amendment period for GUST dis-qualifying provisions for individually de-signed plans generally ends on the last dayof the first plan year beginning on or afterJanuary 1, 2001 (“the 2001 plan year”).Many sponsors of individually designedplans have already amended or are in theprocess of amending plans for GUST.

Sponsors of pre-approved plans were re-quired to submit these plans to the Serviceby December 31, 2000. The Service is cur-rently reviewing and issuing opinion andadvisory letters for pre-approved plans thathave been amended for GUST. Section 19of Rev. Proc. 2000–20, 2000–6 I.R.B. 553,as modified by Rev. Proc. 2000–27,2000–26 I.R.B. 1272, provides an exten-sion of the GUST remedial amendment pe-riod for employers that have adopted a pre-approved plan, or certified their intent toadopt a pre-approved plan that has been re-stated for GUST, by the end of the 2001plan year. If the requirements for the exten-sion are satisfied, the GUST remedialamendment period for the employer’s planwill not end before the end of the 12thmonth beginning after the date on whichthe Service issues a GUST opinion or advi-sory letter for the pre-approved plan.

EGTRRA. EGTRRA, which was en-acted on June 7, 2001, includes numerouschanges to the qualified plan rules. Al-most all of these changes are effective inyears beginning after December 31, 2001.While many of the changes are notmandatory, a plan sponsor that chooses toimplement an optional provision ofEGTRRA will have to amend its plan toconform plan provisions to plan operation.

White Paper on Future DeterminationLetter Process. The Service is consider-ing the design of the Employee Plans de-termination letter process and will publishin the near future a white paper that ex-plores some options for long-termchanges and alternatives to the currentprocess. Some of the options in the whitepaper will deal with the timing of planamendments to comply with law changesand the application of the remedialamendment provisions of § 401(b).

III. Remedial Amendment Period forEGTRRA

Designation as Disqualifying Provi-sions. A plan provision is hereby desig-

nated as a disqualifying provision under § 1.401(b)–1(b) if:

(1) the plan provision either (i) causesthe plan to fail to satisfy the qualifi-cation requirements of the Code be-cause of a change in those require-ments made by EGTRRA or (ii) isintegral to a qualification require-ment that has been changed byEGTRRA; and

(2) if a “good faith” EGTRRA planamendment is required to be in ef-fect with respect to the provision,the plan provision was added orchanged by a “good faith”EGTRRA plan amendment adoptedno later than the later of (i) the endof the plan year in which theEGTRRA change in the qualifica-tion requirements is required to be,or is optionally, put into effectunder the plan or (ii) the end of theGUST remedial amendment periodfor the plan.

Extension of the EGTRRA RemedialAmendment Period. The remedialamendment period under § 401(b) for adisqualifying provision described in thepreceding paragraph shall not end prior tothe last day of the first plan year begin-ning on or after January 1, 2005 (“the2005 plan year”).

Good Faith EGTRRA Plan Amend-ments. A plan is required to have a “goodfaith” EGTRRA plan amendment in effectfor a year if:

(1) the plan is required to implement aprovision of EGTRRA for the year,or the plan sponsor chooses toimplement an optional provision ofEGTRRA for the year, and

(2) the plan language, prior to theamendment, is not consistent eitherwith the provision of EGTRRA orwith the operation of the plan in amanner consistent with EGTRRA,as applicable.

For purposes of this notice, a plan amend-ment is a “good faith” EGTRRA planamendment if the amendment represents areasonable effort to take into account allof the requirements of the applicableEGTRRA provision and does not reflectan unreasonable or inconsistent interpre-tation of the provision. A plan amend-ment that merely incorporates by refer-ence an EGTRRA change in aqualification requirement that would not

otherwise be permitted to be incorporatedby reference is not a “good faith”EGTRRA plan amendment.

Section 411(d)(6).Section 411(d)(6)generally prohibits plan amendments thatdecrease accrued benefits or have the ef-fect of eliminating or reducing an earlyretirement benefit or retirement-type sub-sidy, or eliminating an optional form ofbenefit, for benefits attributable to servicebefore the amendment.

EGTRRA does not provide relief fromthe requirements of § 411(d)(6) for planamendments adopted as a result ofEGTRRA changes in the plan qualifica-tion requirements. Therefore, in order tohave a provision effective for a plan year,a plan may have to be amended for provi-sions of EGTRRA before the time when“good faith” EGTRRA plan amendmentswould otherwise be required under thisnotice. However, a plan amendment thateliminates or decreases benefits that havenot yet accrued does not violate § 411(d)(6).

For example, in a top-heavy definedcontribution plan, only those non-key em-ployees who are participants and have notseparated from service by the end of theplan year must receive the top-heavy min-imum benefit. (See § 1.416–1, Q&AM–10.) A benefit that is conditioned onemployment at the end of the plan yeardoes not accrue until the participant satis-fies the end-of-the-plan-year employmentrequirement. Thus, the top-heavy mini-mum benefit in a defined contributionplan that provides minimum contributionsonly to non-key employees who have notseparated from service by the end of theplan year does not accrue until the end ofthe plan year. A “good faith” amendmentof such a plan that modifies the plan’stop-heavy rules in accordance with § 613of EGTRRA will not result in an imper-missible decrease of accrued minimumbenefits provided the amendment isadopted before the end of the 2002 planyear.

In a top-heavy defined benefit plan,under §1.416–1, Q&A M–4, only thosenon-key employees who are participantsand have at least one thousand hours ofservice for an accrual computation periodmust accrue the top-heavy minimum ben-efit for that accrual computation period.(In a top-heavy defined benefit plan thatcredits benefit accrual service using the

2001–30 I.R.B. 71 July 23, 2001

July 23, 2001 72 2001–30 I.R.B.

elapsed time method described in § 1.410(a)–7, minimum benefits must becredited for all periods of service requiredto be credited for benefit accrual.) A ben-efit that is conditioned on completion ofone thousand hours of service does notaccrue until the participant satisfies theservice requirement. Thus, the top-heavyminimum benefit in a defined benefit planthat provides minimum benefits only tonon-key employees who have at least onethousand hours of service in an accrualcomputation period does not accrue untilthe participant has one thousand hours ofservice in the period. A “good faith”amendment of a defined benefit plan thatmodifies the plan’s top-heavy rules in ac-cordance with § 613 of EGTRRA will notbe treated as impermissibly decreasingaccrued minimum benefits provided theamendment is adopted on or before May31, 2002, or, in the case of a plan thatcredits service using elapsed time, March31, 2002.

Effect of This Section. A plan amend-ment to a disqualifying provision de-scribed in this section III can be maderetroactively effective within theEGTRRA remedial amendment period tothe extent necessary either to satisfy thequalification requirements as amended byEGTRRA, as interpreted in publishedguidance, or to make the plan provisionsconsistent with plan operation. To the ex-tent necessary, such a remedial amend-ment may be made retroactively effectiveas of the effective date of the “good faith”EGTRRA plan amendment or, where theplan provision automatically reflects theEGTRRA change, as of the effective dateof the change.

No Extension of GUST RemedialAmendment Period. The EGTRRA reme-dial amendment period applies only todisqualifying provisions described in thissection. It does not extend the GUST re-medial amendment period.

IV. Sample EGTRRA Plan Amendments

Publication of Sample “Good Faith”EGTRRA Plan Amendments. Before theend of August 2001, the Service will pub-lish sample EGTRRA plan amendmentsthat can be adopted verbatim or used indrafting individualized plan amendmentsfor individually designed and pre-ap-proved plans. The sample EGTRRA planamendments will be for both the required

and optional changes under EGTRRA.Additional guidance on amending pre-ap-proved plans will be included with thesample EGTRRA amendments. A sampleEGTRRA plan amendment, or a planamendment that is materially similar to asample EGTRRA plan amendment, willbe a “good faith” EGTRRA plan amend-ment for purposes of this notice. How-ever, plan amendments will not fail to be“good faith” plan amendments merely be-cause they differ materially from the sam-ple EGTRRA plan amendments.

Possible Subsequent Required Amend-ments. Plans amended by adoption of thesample EGTRRA amendments may haveto be amended again within the EGTRRAremedial amendment period to continueto satisfy the plan qualification require-ments as amended by EGTRRA.

V. Effect on Determination LetterPrograms and Reliance

In General. Until further notice, deter-mination, opinion and advisory letterswill not consider and may not be relied onwith respect to the EGTRRA changes.However, an employer’s ability to rely ona favorable determination, opinion, or ad-visory letter will not be adversely affectedby the timely adoption of “good faith”EGTRRA plan amendments.

Individually Designed Plans. Individu-ally designed plans submitted for GUSTdetermination letters may incorporate thechanges made by EGTRRA; however theGUST determination letter will not ex-tend to amendments incorporatingEGTRRA provisions.

Pre-Approved Plans. M&P sponsorsand volume submitter practitioners mayamend pre-approved plans for EGTRRAthrough the adoption of a separate, clearlyidentified addendum to the plan (or basicplan document) and/or adoption agree-ment that is limited to the provisions ofEGTRRA. The sample EGTRRA planamendments will provide additional guid-ance on the amendment of pre-approvedplans. Until further notice, EGTRRAamendments of pre-approved plansshould not be submitted to the Service.

Determination Letter Applications forPre-Approved Plans. Until further notice,determination letter applications for pre-approved plans that include EGTRRAamendments in a form other than a sepa-rate, clearly identified addendum to the

plan (or basic plan document) and/oradoption agreement that is limited to theprovisions of EGTRRA will be treated asindividually designed plans.

VI. Extension of 12-Month Period UnderRev. Proc. 2000–20

The extended GUST remedial amend-ment period available to certain adoptersof pre-approved plans is determined byreference to the date on which the Serviceissues a favorable GUST opinion or advi-sory letter for the pre-approved plan. Pur-suant to this notice, if the requirements ofsection 19 of Rev. Proc. 2000–20, asmodified, and Announcement 2001–77,page 83, this bulletin, are satisfied, the ex-tension of the GUST remedial amend-ment period thereunder will be treated asnot expiring earlier than December 31,2002. This change will simplify the de-termination of the GUST remedialamendment deadline for pre-approvedplans and facilitate timely amendment ofthe plans for GUST and EGTRRA.

VII. Effect on Other Documents

Rev. Proc. 2000–20 and Rev. Proc.2001–6, 2001–1 I.R.B. 194, are modified.

DRAFTING INFORMATION

The principal drafter of this notice isJames Flannery of Employee Plans. Forfurther information regarding this notice,please contact Employee Plans’ taxpayerassistance telephone service at (202) 283-9516 or (202) 283-9517, between thehours of 1:30 p.m. and 3:30 p.m. EasternTime, Monday through Thursday. Mr.Flannery may be reached at (202) 283-9613. These telephone numbers are nottoll-free.

Guidance on Implementation ofWithholding and ReportingRegulations

Notice 2001–43

This notice provides guidance on theimplementation of the withholding andreporting regulations (T.D. 8734, 1997–2C.B. 109, and T.D. 8881, 2000–23 I.R.B.1158). Specifically, this notice:

(1) provides a temporary alternative pro-cedure for withholding and reporting on

payments made to certain nonqualified in-termediaries (NQIs) and foreign trusts,which is available only for paymentsmade to NQIs or foreign trusts on or afterJanuary 1, 2001, and before January 1,2002;

(2) clarifies and corrects sections1.1441–6(b)(1) and 301.6114–1 of theregulations, which require disclosure ofcertain treaty based return positions;

(3) adds a new alternative convention forconverting payments in foreign currencyinto U.S. dollars to those listed in section1.1441–3(e)(2);

(4) modifies section III. A. 1. of Notice2001–4, 2001–2 I.R.B. 267, to permit anapplicant for a qualified intermediaryagreement that has been issued a QI-EINto represent that it is a qualified interme-diary (QI) until the IRS revokes its QI-EIN and to permit an applicant that hasbeen issued a QI-EIN before January 1,2002, to apply all of the provisions of theQI agreement beginning January 1, 2001;

(5) clarifies section III. C. of Notice2001–4, which provides documentationand reporting relief for simple and grantortrusts; and

(6) modifies Announcement 2000–48,2000–23 I.R.B. 1243, to permit a branchof a QI to act as a qualified intermediaryunder the QI’s home country know-your-customer (KYC) rules if the branch is lo-cated in a country for which KYC ruleshave been submitted to IRS for approval.

1. Transitional relief for certain nonquali-fied intermediaries and foreign trusts.

In October 1997, Treasury and theIRS issued T.D. 8734, 1997–2 C.B. 109(modified by T.D. 8881, 2000–23 I.R.B.1158), which provided comprehensiveregulations under chapter 3 (sections1441–1445) and subpart G of subchapterA of chapter 61 (sections 6041–6050S)of the Internal Revenue Code. Theseregulations, which became effective onJanuary 1, 2001, were developed afteryears of discussion with the U.S. andforeign financial services industry re-garding how to improve compliancewith the U.S. withholding rules withoutunduly impeding foreign investments inthe United States or burdening financialinstitutions.

A key component of the new rules isthe introduction of the qualified interme-diary (QI) concept. In basic terms, a QI isa foreign financial institution that entersinto an agreement with the IRS to verifythe beneficial ownership of payments ofU.S. source income for purposes of deter-mining whether any reductions in thestatutory 30 percent U.S. withholding taxrate under sections 871 and 881 are ap-propriate. To make this determination, aQI generally may rely on the documenta-tion that it collects under the bank regula-tory rules requiring it to establish theidentity and residency of its account hold-ers (“know your customer” (KYC) rules).The QI is required to transmit “pooled”information (but generally not the identityof its non-U.S. customers) to the U.S.withholding agent to enable the withhold-ing agent to determine the correct amountof tax to withhold on payments made tothe QI’s customers. The QI is also re-quired to report certain pooled informa-tion to the IRS, as specified in the regula-tions. By allowing QIs to transmitinformation on a pooled basis, the regula-tions reduce the QI’s compliance burden(by minimizing the amount of informa-tion that is required to be reported to theIRS) and protect the QI’s customer base(by minimizing the amount of informa-tion that must be reported to the U.S.withholding agent, who will often be acompetitor of the QI).

Sections 1.1441–1(e)(3)(iii) and (iv) ofthe regulations require a nonqualified in-termediary (NQI) to supply the U.S. with-holding agent or a QI with customer-spe-cific documentation, rather than pooledinformation, to establish that its cus-tomers qualify for a reduction in the statu-tory 30 percent withholding rate.

The NQI does this by attaching appro-priate documentation and a withholdingstatement identifying customers and allo-cating payments among them to an inter-mediary certificate that it forwards to theU.S. withholding agent or QI. To ensurethe proper withholding and reporting of apayment, the U.S. withholding agent orQI must receive this intermediary certifi-cate before it makes a payment of a re-portable amount (as defined in section1.1441–1(e)(3)(vi)) to the NQI. Finally,unless its withholding agent has done so,the NQI must report payment informationto the IRS on Forms 1042 and 1042–S

and must send the foreign income recipi-ent a corresponding Form 1042–S. In thesame way, foreign simple trusts and for-eign grantor trusts are required to forwardto the U.S. withholding agent or QI aflow-through withholding certificate withattached documentation and a withhold-ing statement identifying beneficiariesand grantors and to report payment infor-mation to the IRS.

Treasury and the IRS understand that,despite significant efforts by U.S. with-holding agents and QIs to establish auto-mated systems to process information re-ceived from NQIs and foreign trusts forwithholding and reporting purposes, insome cases these systems are not yet fullyoperational. Treasury and the IRS havebeen advised, however, that the auto-mated systems in those cases will be fullyoperational before the end of 2001. Ac-cordingly, Treasury and the IRS believethat limited relief is warranted to ensure asmooth transition into the new withhold-ing procedures. Treasury and the IRS em-phasize, however, that the NQI and for-eign trust documentation and reportingrules in the regulations are central to theappropriate administration of the U.S.withholding regulations, and U.S. with-holding agents and QIs are expected tocomplete the development of automatedsystems that will ensure compliance withthese rules.

To achieve a smoother transition periodfor withholding agents that make pay-ments to NQIs and foreign trusts, the IRSwill permit a withholding agent and NQIor foreign trust to apply the alternativeprocedures of section 1.1441–1(e)(3)(iv)(D) of the regulations as modifiedbelow for calendar year 2001, providedthe withholding agent and NQI or foreigntrust comply with all the conditions setforth below. This modified alternativeprocedure may not be used by flow-through entities or U.S. branches de-scribed in section 1.1441–1(e)(3)(iv)(D)(8) of the regulations. (See sec-tions III. C. and IV. of Notice 2001–4,2001–2 I.R.B. 267 for certain other reliefprovisions relating to trusts and partner-ships.) A withholding agent may use thismodified alternative procedure only forpayments made to NQIs and to foreignsimple or grantor trusts. This modifiedalternative procedure may not be used bya withholding agent if the withholding

2001–30 I.R.B. 73 July 23, 2001

agent would be responsible for filingfewer than 250 Forms 1042–S for calen-dar year 2001 without using this modifiedalternative procedure. This modified al-ternative procedure may not be used forpayments to U.S. nonexempt recipients.

An NQI or foreign trust and its with-holding agent that comply with the condi-tions set forth below may rely on this no-tice for payments made on or afterJanuary 1, 2001, and before January 1,2002: (1) to permit pooled basis reportingon Form 1042–S instead of the payee spe-cific reporting otherwise required underthe alternative procedure of section1.1441–1(e)(3)(iv)(D); and (2) to permitthe NQI or foreign trust to provide thewithholding agent with a withholdingstatement containing the beneficial ownerinformation required under sections1.1441–1(e)(3)(iv)(C)(1) and (D)(2) aftera payment is made but no later than Janu-ary 31, 2002.

In order to qualify for this transitional re-lief, the following conditions must be met:

(1) The withholding agent submits anotification no later than January 31,2002, that it is using the temporary alter-native procedure under this notice. Noti-fications should be sent to:

Internal Revenue ServicePre-Filing Services LM:PFT:PFNew Mint Building, 3rd Floor1111 Constitution Avenue, NWWashington, DC 20224

(2) The withholding agent includes thefollowing in its notification under penal-ties of perjury:

(a) a statement listing the NQIs andforeign trusts that are participating with thewithholding agent in using the temporaryalternative procedure under this notice;

(b) a statement (i) that during 2001the withholding agent was engaged in thebuilding and implementation of comput-erized information systems for transferand processing of withholding statementinformation between the withholdingagent and the NQI or foreign trust and forForm 1042–S reporting to the IRS, and(ii) that they were relying on completionof those systems for purposes of comply-ing with section 1.1441–1(e)(3)(iii) and(iv) of the regulations;

(c) a representation that the with-holding agent has exercised its best ef-forts to complete those systems;

(d) a statement that those systems arenot capable of complying with the re-quirements of section 1.1441–1(e)(3)(iii)and (iv) regarding timely provision ofwithholding statement information by theNQI or foreign trust and Form 1042–S re-porting by the withholding agent for cal-endar year 2001;

(e) a statement of the number ofForms 1042–S that the withholding agentwould be responsible for filing for calen-dar year 2001 if it were not using thismodified alternative procedure; and

(f) a representation that the systemswill be capable of complying with thosewithholding statement and Form 1042–Sreporting requirements for calendar year2002.

(3) The withholding agent and NQI orforeign trust comply with all applicablerequirements of section 1.1441–1(e)(3)(iv)(D) of regulations, except as modifiedby conditions (4), (5) and (6).

(4) The NQI or foreign trust providesthe withholding agent with withholdingrate pool information prior to the paymentof a reportable amount in accordance withsection 1.1441–1(e)(3)(iv)(D)(2) of theregulations. The NQI or foreign trustmust also provide appropriate documenta-tion with respect to its customers to thewithholding agent prior to the paymentbeing made. The NQI or foreign trustneed not, however, provide the withhold-ing statement information identifying andclassifying foreign persons as required bysections 1.1441–1(e)(3)(iv)(C)(1) and(D)(2) and assigning each listed foreignperson to a withholding rate pool as re-quired by section 1.1441–1(e)(3)(iv)(D)(2) prior to payment. The NQI orforeign trust is required to provide thatwithholding statement information to thewithholding agent no later than January31, 2002. The NQI or foreign trust mustprovide the withholding agent with with-holding statement information allocatingthe income in each withholding rate poolto each payee within the pool no later thanJanuary 31, 2002, as required under sec-tions 1.1441–1(e)(3)(iv)(C)(2) and (D)(3)of the regulations.

(5) The withholding agent withholdsand timely files Forms 1042–S based onthe withholding rate pool informationprovided by the NQI or foreign trust.

(6) The withholding agent submits acopy of the withholding statement that it

receives from the NQI or foreign trust(which must identify each beneficialowner of payments to the NQI or foreigntrust and allocate payments among thesebeneficial owners) for calendar year 2001to the IRS at the address stated in condi-tion (1) on or before the due date for filingForms 1042–S for calendar year 2001.

If the NQI or foreign trust fails to pro-vide the withholding statement informa-tion required under condition (4) by Janu-ary 31, 2002, for any withholding ratepool, then the withholding agent mayapply the provisions of sections1.1441–1(e)(3)(iv)(D)(4), (5), (6), and(7). The NQI or foreign trust will be re-sponsible for withholding, filing Form1042 and filing Forms1042–S for eachbeneficial owner for which it has receivedpayments.

The IRS will accept the pooled basisreporting and withholding statementsfiled under this temporary procedure inlieu of the payee specific reporting other-wise required of an NQI or foreign trustand its withholding agent only if the NQIor foreign trust and its withholding agentsatisfy all of the conditions set forthabove. The withholding agent and NQIor foreign trust must retain all records,documentation and other evidence rele-vant to the above conditions for the sameretention period as would be required forinformation relevant to an audit of Form1042–S for calendar year 2001. In deter-mining on audit whether a withholdingagent has exercised its best efforts tocomplete building and implementing theirinformation systems, the IRS will takeinto account all the facts and circum-stances including the efforts and perfor-mance of similarly situated withholdingagents.

2. Disclosing treaty based return posi-tions.

Section 1.1441–6(b)(1) of the regula-tions provides that withholding undersections 1441, 1442 and 1443 on a pay-ment to a foreign person is eligible for re-duction under the terms of an income taxtreaty only to the extent that the paymentis treated as derived by a resident of anapplicable treaty jurisdiction, such resi-dent is a beneficial owner, and all otherrequirements for benefits under the treatyare satisfied. It provides further that if thebeneficial owner is a person related to the

July 23, 2001 74 2001–30 I.R.B.

withholding agent within the meaning ofsection 482, the beneficial owner’s with-holding certificate must contain a repre-sentation that the beneficial owner willfile the statement required under section301.6114–1(d) if applicable. This re-quirement applies only to amounts of in-come subject to withholding received dur-ing the calendar year that exceed$500,000 in the aggregate.

Section 301.6114–1(a) of the regula-tions provides that if a taxpayer takes a re-turn position that a tax treaty overrules ormodifies any provision of the InternalRevenue Code and thereby effects a re-duction of any tax at any time, the tax-payer shall disclose such return positionon a statement attached to the return. If atax return would not otherwise be re-quired to be filed, a return must neverthe-less be filed to make this disclosure. Forthis purpose, the taxpayer’s taxable yearis deemed to be the calendar year, unlessthe taxpayer has established or timelychooses to establish a different taxableyear. The taxpayer must make the disclo-sure statement on a fully completed Form8833 (Treaty-Based Return Position Dis-closure Under Section 6114 or 7701(b))attached to the return.

Section 301.6114–1(b) provides thatreporting is required unless it is expresslywaived, and it further provides a nonex-clusive list of particular positions forwhich reporting is required. Among thepositions listed are those described in sec-tion 301.6114–1(b)(4)(ii)(C) or (D).

Paragraph (b)(4)(ii)(C) requires a tax-payer to report a position taken under atreaty that contains a limitation on bene-fits provision if: (1) the treaty exemptsfrom tax or reduces the rate of tax on in-come subject to withholding; (2) the in-come is received by a foreign personother than an individual or State that is thebeneficial owner of the income and theforeign person is related to the person ob-ligated to pay the income within themeaning of sections 267(b) and707(b)(5); (3) the income exceeds$500,000; and (4) the foreign personmeets the requirements of the limitationon benefits provision. Paragraph(b)(4)(ii)(D) requires reporting a positiontaken under a treaty that imposes anyother conditions for the entitlement totreaty benefits if the position is that suchconditions are met.

Section 301.6114–1(c) lists positionsfor which reporting is expressly waived.Paragraph (c)(1)(i) waives reporting forthe position that a treaty has reduced therate of withholding tax otherwise applica-ble to a particular type of income subjectto withholding to the extent that the in-come is beneficially owned by an individ-ual or a State. Paragraph (c)(2) waives re-porting by an individual who receivespayments or income items during the tax-able year that do not exceed $10,000 inthe aggregate.

Taxpayers have requested guidance onthe scope of the reporting required undersection 301.6114–1(b) in the case oftreaty claims for exemption or reducedrates of tax on income subject to with-holding made by foreign persons that arenot individuals or States. Taxpayers haveexpressed concerns that:

(1) Because paragraph (c)(1)(i) of thatsection waives reporting only for individ-uals and States, it is unclear whether tax-payers that are not individuals or Statesand that are not required to report underparagraph (b)(4)(ii)(C) are required nev-ertheless to disclose treaty based returnpositions described in paragraph (b)(4)(ii)under the general rule of paragraph (b).

(2) Because paragraph (c)(2) waives re-porting only for individuals who receiveless than the threshold amount, taxpayersthat are not individuals must report underparagraph (b)(4)(ii)(D) even when theyhave received de minimisamounts of in-come subject to withholding.

(3) Because the representation under sec-tion 1.1441–6(b)(1) is required when thebeneficial owner is related to the with-holding agent within the meaning of sec-tion 482 and the filing under section301.6114–1(b)(4)(ii)(C) is required whenthe beneficial owner is related to the per-son obligated to pay the income withinthe meaning of sections 267(b) and707(b), it is unclear how the representa-tion requirement coordinates with the fil-ing requirement.

(4) Because section 1.1441–6(b)(1) statesthat the filing requirement applies only toamounts received during the calendaryear that exceed $500,000 in the aggre-gate and section 301.6114–1(b)(1) per-mits a taxpayer to adopt a taxable year forfiling different from the calendar year, it

is unclear how a fiscal year taxpayer is toreport those amounts.

To address these concerns, Treasuryand the IRS intend to amend sections1.1441–6(b)(1) and 301.6114–1 of theregulations, as described below, effectiveJanuary 1, 2001.

(1) Treasury and the IRS intend to amendsection 301.6114–1(c) to provide that re-porting is waived for taxpayers that aretaking a treaty based return position de-scribed in section 301.6114–1(b)(4)(ii),unless those taxpayers are described inparagraph (b)(4)(ii)(A) and (B), or (C) or(D).

(2) Treasury and the IRS intend to amendsection 301.6114–1(c) to waive reportingunder section 301.6114–(b)(4)(ii)(D) fortaxpayers that are not individuals orStates and that receive amounts of incomesubject to withholding that do not exceed$10,000 in the aggregate.

(3) Treasury and the IRS intend to amendsection 1.1441–6(b)(1) to conform therepresentation requirement to the filingrequirement of section 301.6114–1(b)(4)(ii)(C). Thus, section 1.1441–6(b)(1)will require a representation if the tax-payer takes the position under a treaty thatcontains a limitation on benefits provisionthat the treaty exempts from tax or re-duces the rate of tax on income subject towithholding, the income is received by aforeign person other than an individual orState that is the beneficial owner of the in-come, the foreign person is related to theperson obligated to pay the income withinthe meaning of sections 267(b) and707(b), the income exceeds $500,000 inthe aggregate, and the foreign personmeets the requirements of the limitationon benefits provision.

(4) Treasury and the IRS intend to amendsection 1.1441–6(b)(1) to conform to sec-tion 301.6114–1(b)(1) by changing therule that the filing requirement appliesonly to amounts received during the cal-endar year that exceed $500,000 in theaggregate. The conformed rule will pro-vide that the filing requirement appliesonly to income received during the tax-payer ’s taxable year that exceeds$500,000 in the aggregate.

A taxpayer that is required to make thedisclosure statement on Form 8833 under

2001–30 I.R.B. 75 July 23, 2001

sections 301.6114–1 (b)(4)(ii)(A) and (B)or (C) or (D) taking into account the mod-ifications described in the notice will beconsidered to have timely filed Form8833 if, in the case of a calendar year tax-payer, the taxpayer files the Form 8833with its return for its taxable year endingon December 31, 2001, or in the case of afiscal year taxpayer, the taxpayer filesForm 8833 with its return for its first tax-able year ending after December 31,2001.

Taxpayers may rely on the authority ofthis notice until the regulations areamended.

3. Converting payments in foreign cur-rency to U.S. dollars.

Section 1.1441–3(e)(2) provides that ifan amount subject to tax is paid in a cur-rency other than the U.S. dollar, theamount of withholding under section1441 shall be determined by applying theapplicable rate of withholding to the for-eign currency amount and converting theamount withheld into U.S. dollars at thespot rate on the date of payment. A with-holding agent that makes regular or fre-quent payments in foreign currency ispermitted to use a month end spot rate ora monthly average spot rate.

Certain withholding agents that makeregular and frequent payments in foreigncurrency have expressed concern that thepermitted conversion conventions can ex-pose them to currency risks that would re-quire management by means of hedgingtransactions. Also, they have expressedconcern that permitted conventions canrequire multiple accounting adjustmentswhen payment amounts in the base cur-rency are adjusted or corrected in thecourse of processing and settlement.They have suggested that using the spotrate on the day of deposit of the amount oftax withheld would eliminate the currencyrisks and the need for those accountingadjustments.

In response to those concerns, Treasuryand the IRS intend to amend section1.1441–3(e)(2) to add the suggested alter-native conversion convention to the con-ventions already permitted. Section1.1441–3(e)(2) will permit a withholdingagent that makes regular or frequent pay-ments in foreign currency to convert theamount withheld into U.S. dollars at the

spot rate on the day the tax is depositedprovided that the deposit is made withinseven days of the date of payment. As isthe case with the conversion conventionscurrently in the regulations, taxpayersusing this alternative convention must doso consistently for all nondollar amountswithheld and from year to year. Suchconvention cannot be changed without theconsent of the Commissioner. Taxpayersmay rely on the authority of this noticeuntil the regulations are amended.

4. Representing QI status and applyingQI agreement beginning January 1, 2001.

Section III. A. 1. of Notice 2001–4 pro-vides that an applicant that has submitteda QI application before January 1, 2001,may represent on Form W-8IMY that it isa QI without being in possession of a fullyexecuted QI agreement until June 30,2001. It further provides that an applicantthat has submitted a QI application afterDecember 31, 2000, may represent onForm W-8IMY that it is a QI until the endof the sixth full month after the month inwhich it submits its QI application. Ap-plicants have been issued QI-EINs uponapplication to permit them to completeForms W-8IMY. Finally, it provides thata potential QI may apply all of the provi-sions of the QI agreement beginning Jan-uary 1, 2001, provided that it submits itsapplication before July 1, 2001.

Taxpayers have requested extension ofthe time during which an applicant mayrepresent that it is a QI without being inpossession of a fully executed QI agree-ment and extension of the July 1, 2001,application deadline for application of theQI agreement beginning January 1, 2001,in order to allow adequate time for theprocess of review and execution by boththe applicants and the IRS.

In response, this notice modifies thoseprovisions of Notice 2001–4. An appli-cant to which IRS has issued a QI-EINmay represent on Form W–8IMY that it isa QI without being in possession of a fullyexecuted QI agreement until the IRS re-vokes its QI-EIN. The IRS will revoke anapplicant’s QI-EIN if the applicant doesnot execute and return its QI agreement tothe IRS within a reasonable time after theIRS has sent the QI agreement to the ap-plicant for signature. An applicant towhich the IRS has issued a QI-EIN beforeJanuary 1, 2002, may apply all of the pro-

visions of the QI agreement beginningJanuary 1, 2001.

5. Documentation and reporting relief forsimple and grantor trusts.

The QI agreement generally requires aQI to obtain a Form W-8IMY from a for-eign simple or grantor trust together withappropriate documentation from benefi-ciaries and grantors and requires the QI tofile separate Forms 1042–S for each bene-ficiary or grantor.

Section III. C. of Notice 2001–4,2001–2 I.R.B. 267, provides documenta-tion and reporting relief for simple andgrantor trusts. It permits a QI to treat thebeneficiaries or grantors as direct accountholders, and thus permits them to be in-corporated into the pooled basis reportingpermitted for direct account holders ratherthan requiring separate Forms 1042–S foreach of them, provided three criteria aremet. (1) The QI must be required, pur-suant to the applicable KYC rules, to de-termine the identity of the beneficiaries orowners of foreign simple or grantor trusts.(2) The QI must obtain the type of docu-mentation set forth in the appropriateKYC attachment to the agreement. (3)The QI must obtain a valid FormW–8BEN from the beneficiary or ownerof the trust.

Some QIs have suggested that thescope of criterion (1) may be unclear, be-cause local KYC rules in certain jurisdic-tions require the QI to determine the iden-tity of the beneficiaries or owners offoreign simple or grantor trusts, but donot require the QI to obtain documenta-tion confirming their identities. TheseQIs have expressed the concern that thereporting relief for trusts may be unavail-able in such jurisdictions.

This notice clarifies that criterion (1) issatisfied if the local KYC rules require theQI to determine the identity of trust bene-ficiaries and grantors, even if those rulesdo not require the QI to obtain documen-tation confirming their identities. The QImust nevertheless obtain any documenta-tion necessary to satisfy criterion (2),which is based on the applicable KYCdocumentation.

6. Branches permitted to apply QI’shome country KYC.

Announcement 2000–48, 2000–23I.R.B. 1243, provides that the IRS gener-

July 23, 2001 76 2001–30 I.R.B.

ally will not extend the QI system to anycountry that does not have KYC rules orthat has unacceptable KYC rules. The IRSwill, however, permit a branch of a finan-cial institution (but not a separate juridicalentity affiliated with the financial institu-tion) located in such a country to act as aQI if the branch is part of an entity orga-nized in a country that has acceptable KYCrules and the entity agrees to apply itshome country KYC rules to the branch.

Taxpayers have requested that this rulebe extended to include branches of QIs incountries for which KYC rules have beensubmitted to IRS for approval during thetime those rules are pending approval.

In response, this notice modifies An-nouncement 2000–48. IRS will permit abranch of a financial institution (but not aseparate juridical entity affiliated with thefinancial institution) to act as a QI if thebranch is located in a country identifiedby the IRS as a jurisdiction awaiting ap-proval of KYC rules on the IRS website atwww.irs.ustreas.gov, if the branch is partof an entity organized in a country thathas acceptable KYC rules and if the entityagrees to apply its home country KYCrules to the branch. The branch will bepermitted to act as a QI under this ruleonly for the period of time during whichthe jurisdiction in which it is located isidentified as awaiting approval. If theIRS approves the KYC rules of the juris-diction, then the branch must apply theKYC rules of the jurisdiction beginningon the date that an attachment to the QIagreement for the jurisdiction is posted onthe IRS website at www.irs.ustreas.gov.

Contact Information

For further information regarding this no-tice, contact Carl Cooper or Laurie Hatten-Boyd of the Office of the Associate ChiefCounsel (International), Internal RevenueService, 1111 Constitution Avenue, N.W.,Washington, D.C. 20224. Mr. Cooper andMs. Hatten-Boyd may be contacted by tele-phone at 202-622-3840 (not a toll-free call).

Notional Principal Contracts

Notice 2001–44

I. PURPOSE

The IRS and the Treasury Departmentare soliciting comments on the appropri-

ate method for the inclusion into incomeor deduction of contingent nonperiodicpayments made pursuant to a notionalprincipal contract and the treatment ofsuch inclusions or deductions.

II. BACKGROUND

A. In GeneralSection 1.446–3 of the Income Tax

Regulations provides rules on the timingof inclusion of income and deductions foramounts paid or received pursuant to no-tional principal contracts. T.D. 8491,1993–2 C.B. 215. The regulations definea notional principal contract (“a NPC”) asa “financial instrument that provides forthe payment of amounts by one party toanother at specified intervals calculatedby reference to a specified index upon anotional principal amount, in exchangefor specified consideration or a promise topay similar amounts.” Section 1.446–3(c)(1)(i). Payments made pursuant toNPCs are divided into three categories(periodic, nonperiodic, and terminationpayments), and the regulations provideseparate timing regimes for each. How-ever, no guidance is provided in the regu-lations for the timing of inclusion or de-duction of contingent nonperiodicpayments made under NPCs. In addition,neither § 1.446–3 nor any other sectionprovides specific rules governing thecharacter of the various types of paymentsthat could be made pursuant to a NPC.

The lack of comprehensive guidance inthis area of the law has created significantuncertainty for taxpayers. For some, thisuncertainty adds a considerable burden tothe tax compliance process, and may dis-courage certain taxpayers from enteringinto NPCs. Other taxpayers welcome theability to pick and choose among varioustax law theories as to the character andtiming of NPC payments, but this canlead to a whipsaw of the government.Both result in lack of confidence in thetax system, and inefficiencies in the capi-tal markets.

The IRS and Treasury have reviewedseveral methods for including into incomeor deducting contingent nonperiodic pay-ments made pursuant to NPCs. In evalu-ating each method, the IRS and Treasuryhave considered the extent to which it re-flects certain fundamental tax policy prin-ciples. These policy principles include:whether the method provides sufficient

certainty as to the amount and timing ofinclusions or deductions (certainty/clar-ity); whether the method is complex, andthe compliance and administrability bur-den created by that complexity (adminis-trability); whether the method creates orincreases inconsistencies in the tax treat-ment of financial instruments with similareconomic characteristics (neutrality);whether the method creates or increasesinconsistencies in the tax treatment of dif-ferent taxpayers entering into the same in-struments (symmetry); whether themethod accurately reflects the accretionor reduction in economic wealth in the pe-riod in which the taxpayer is measuringthe tax consequence of being a party tothe NPC (economic accuracy); andwhether the method is flexible enough toreadily accommodate new financialarrangements (flexibility). It is clear thatthese principles are frequently in conflict,and there is no method of accounting thatwould satisfy all the criteria. However,the examination of an accounting methodin the light of these principles can high-light the strengths and weaknesses of themethod and inform the rulemakingprocess.

The methods the IRS and Treasury areconsidering for the inclusion into incomeor deduction of contingent nonperiodicpayments made pursuant to NPCs are de-scribed below under the following head-ings: the Noncontingent Swap Method;the Full Allocation Method; the ModifiedFull Allocation Method; and the Mark-to-Market Method. The IRS and Treasuryare seeking comments on the relativemerits of each of these methods, as wellas suggestions as to other methods thatmay be superior to these methods with re-spect to the fundamental tax policy princi-ples listed above. The IRS and Treasuryare interested in what authority taxpayersbelieve exists for mandating any and eachof these methods.

Although this notice is addressing thetiming issues regarding NPCs with a con-tingent component, the IRS and Treasuryare aware that there must be some coordi-nation between the existing NPC rulesand any new applicable rules. The IRSand Treasury are interested in commentson the need to revise the current rules forNPCs and related instruments if new rulesfor contingent NPCs are introduced. TheIRS and Treasury are also interested in

2001–30 I.R.B. 77 July 23, 2001

whether taxpayers believe it is necessaryto develop rules on a much wider range ofinstruments before any kind of rule is is-sued with respect to contingent NPCs,which are only one specific type of instru-ment, i.e., whether the proliferation of in-dividualized rules is more harmful thanhelpful in this area.

The IRS and Treasury are interested incomments from taxpayers as to the appro-priateness of special, simplified rules forshort-term or standardized contracts, andwhat form the simplified rules shouldtake. If taxpayers suggest that a simpli-fied rule should be provided for certaincontracts, the IRS and Treasury are inter-ested in what kind of test should be usedto determine whether the simplified ruleapplies.

In addition to reviewing methods forthe timing of income and expense with re-spect to contingent nonperiodic pay-ments, the IRS and Treasury are consider-ing what the character should be for alltypes of payments made pursuant toNPCs. In the current tax law, the distinc-tion between capital gain and ordinary in-come is significant in two ways. First,taxpayers cannot offset capital lossesagainst ordinary income (with a small ex-ception for individuals). One policy rea-son for the rule against offsetting of capi-tal losses against ordinary income is thattaxpayers are able to choose the timing oftheir sales or exchanges of capital assetsmuch more easily than the timing of theirordinary income or loss (“cherry pick-ing”). They could, therefore, sell theirloss assets at a time when they are expect-ing large amounts of ordinary incomewhile deferring recognition on their gainassets. Second, for individuals, long-termcapital gains are taxed at lower rates thanordinary income.

In determining whether particular pay-ments made pursuant to a NPC shouldmost appropriately be characterized ascapital or as ordinary, attention should begiven to the goals of minimizing cherrypicking of character results and consistentapplication of the policy rationale for thecurrent capital gains preference. In addi-tion, in the financial products area, it isparticularly important to pay attention tothe neutrality principle, i.e., consistenttreatment of different instruments withsimilar economic characteristics. There isalmost limitless flexibility in the design of

derivatives, and tax rules that provide fordifferences in tax treatment that do not re-flect economic differences may produceinappropriate tax consequences. For ex-ample, some taxpayers are permitted totreat certain payments received pursuantto forward and option contracts as capital.If these taxpayers entered into NPCs withthe same economic characteristics as theoptions or forwards contracts, but did notreceive the same tax character treatment,tax-advantaged products might develop toarbitrage the tax differences between thevarious instruments. The particular prob-lem the IRS and Treasury face with regardto neutrality is that the existing rules forvarious financial instruments are so in-consistent with each other, that it is diffi-cult to decide, when developing rules fornew instruments that can mimic manytypes of instruments, which set of existingrules should be followed. The IRS andTreasury are interested in comments onhow the neutrality principle can best begiven consistent effect for complex finan-cial instruments.

The IRS and Treasury invite commentson the appropriate policy considerationsfor making character designations forNPC payments, as well as the applicationof those principles illustrated by the ex-amples in the notice. The IRS and Trea-sury also seek comments on: the author-ity governing the character of NPCpayments and whether and what legisla-tive change may be necessary to rational-ize the rules.

The IRS and Treasury are aware thatthe definition of NPC as provided in§ 1.446–3 covers only one class of thepossible notional principal contracts thatare transacted in the marketplace. For ex-ample, a contract that provides for a sin-gle payment at maturity based on somenotional amount and specified index maynot be covered by the definition becausethere are no “payments” made at “speci-fied intervals.” Such a contract is some-times called a “bullet swap.” There maybe little difference in economics betweena NPC as defined in § 1.446–3 and a se-ries of bullet swaps, yet the paymentsmade under one are covered by the regu-lation, whereas the payments under theother may not. The IRS and Treasuryseek comments on how the tax accountingmethods described in this notice, or othermethods, could be made applicable to a

broader group of contracts that serve sim-ilar purposes as NPCs. The IRS and Trea-sury also seek comments on the appropri-ate character of payments made pursuantto contracts similar to NPCs.

A. Methods for Determining theTiming of Payments under NPCs

1. The Noncontingent Swap Method

a. Timing. The noncontingent swap(“NCS”) method provides an approach toaccruing contingent payments made pur-suant to a NPC. The method provides tech-niques for taxpayers to convert the contin-gent nonperiodic payment provided for inthe NPC into a noncontingent periodicamount. The method would provide rulesfor creating a payment schedule thatspreads the recognition of income or deduc-tion of this noncontingent amount over thelife of the NPC on a constant yield basis.

b. Illustration. This method is illus-trated using the following example of asimple equity swap contract, on a notionalamount of 100 shares of XYZ stock, en-tered into on January 1, 2001, between Aand B with the following terms:

A pays B:Every six months until expiration – any dividend

payments to the holder of one share of XYZ times100.

At expiration, December 31, 2002 – any appreci-ation in a share of XYZ since contract inceptiontimes 100.

B pays A:Every six months until expiration – 7.00% (an-

nual rate) of notional amount at inception.At expiration, December 31, 2002 – any depreci-

ation in a share of XYZ since contract inceptiontimes 100.

The contingent payment is equal to theappreciation or depreciation in the valueof a share during the period between theinception and expiration of the contract,multiplied by 100 shares. The paymentsare netted, and only the net amounts aretransferred. The net payments can flowfrom either A to B or from B to A.

Under the NCS method, the cost ofhedging the exposure to the contingentNPC payment is used as a proxy for thecontingent payment itself. The cost ofhedging the contingent payment under theNPC is the current price of a portfolio offinancial assets that, if liquidated on De-cember 31, 2002, will exactly cover thecost of the contingent payment. This ap-proach has been chosen because if a party

July 23, 2001 78 2001–30 I.R.B.

to a contingent NPC assumed the hedgingcost, both counterparties would be in thesame position as if the contingent futureobligation were actually paid. This hedg-ing cost is therefore deemed to be paid, forexample, by A to B, in satisfaction of thecontingent obligation (for purposes ofmaking calculations under the NCSmethod). The NCS method then providesa mechanism for amortizing this deemedpayment by A to B into B’s incomethroughout the life of the swap. It shouldbe noted that the hedge transaction neednot be entered into by either A or B. Thedeemed hedge merely provides a compu-tational mechanism for converting thecontingent payment into a fixed payment.Further details regarding this illustration,with computations of the hedging cost andthe amounts of deductions and income in-clusions, are provided in the Appendix.

c. Policy Considerations. The NCSmethod has the policy advantage of beingcertain and clear in many cases. It de-pends, however, on the ability to establishthe cost of hedging the contingent pay-ment exposures using forward pricinganalysis. The methodology may be diffi-cult to administer and apply in other casesbecause of the subjectivity in pricing for-ward contracts where there is no activemarket. This problem may be partiallyovercome by requiring appropriate recordkeeping and information reporting. TheNCS method provides relative neutralityof tax treatment compared to contingentdebt, but does not provide neutrality oftax treatment as compared to forwardsand options, or as compared to ownershipof the underlying equity (in the exampleof an equity NPC). Given that for manyNPCs, at least one counterparty is on amark-to-market method of accountingwith respect to the NPC under § 475 ofthe Internal Revenue Code, in many casesthere would be asymmetry of tax treat-ment between counterparties. The NCSmethod does not accurately reflect thechange in economic position over time ofeither counterparty as a result of being aparty to the NPC, because the schedulethat determines inclusions and deductionsis fixed at the outset and, in the simplestdescription of the method, does notchange with market conditions. Finally, itis unclear how flexible the method is inaccommodating variations in NPCs andrelated instruments.

d. Request for Comments. (i) The IRS and Treasury request

comments on a number of aspects of thismethod. The amount of inclusions anddeductions under this method could sig-nificantly diverge from market prices asthe swap runs its course. The ability ofthis method to meet the policy principlesoutlined above may be reduced unless thecounterparties to the swap are required torevise their payment schedules withchanges in market conditions. The IRSand Treasury invite comments on if andwhen it would be appropriate to requiretaxpayers to make such revisions to thepayment schedule (e.g., every threeyears), or if the underlying index changesa certain percentage from its level at theinception of the contract, or both. Com-ments are also solicited on the treatmentof adjustments resulting from updatedprojections. For example, should adjust-ments from updated projections be takeninto account in the year of the updatedprojections or should they be spread overthe remaining term of the NPC?

The IRS and Treasury are aware that themore frequently payment schedules are re-quired to be updated, the more the methodbegins to resemble a mark-to-marketmethod. We are seeking comments on therelative effectiveness of the NCS method,given the inaccuracies that are possiblewhen only one market observation is re-quired at the inception of the contract, andthe fact that as the number of adjustmentsto that initial observation is increased, thebenefits of using this technique (e.g., cer-tainty of tax result) decline.

(ii) The IRS and Treasury also re-quest comments on the treatment of con-tingent payments that are made prior totheir expected payment date, and how thisshould be coordinated with the treatmentof revised payment schedules.

(iii) The character of paymentsgenerated by the NCS method is unclearunder current law. The IRS and Treasuryare seeking comments on what the char-acter of payments under the NCS methodwould be under current law, both origi-nally projected payments and any peri-odic revisions (see (i), above). In addi-tion, comments are solicited on whether itwould be appropriate to change or clarifythe character rules, either statutorily orthrough regulations, so that the variouspolicy goals can be achieved

(iv) One commentator suggestedan interpretation of § 1234A that wouldconform the character treatment of NPCswith the character of the underlying posi-tion or positions. Comments would bewelcome on the desirability of this ap-proach, including the authority for itsadoption under current law, and the feasi-bility of administration.

(v) More generally, comments areinvited on the problem of mismatching ofthe character of payments and receiptsand on methods of avoiding or minimiz-ing such mismatches.

2. The Full Allocation Method

a. Timing. Under the full allocationmethod, taxpayers would not include ordeduct any payment that is required to bemade under the NPC (periodic, nonperi-odic, contingent, and noncontingent) untilthe taxable year in which all contingen-cies are resolved. When the final contin-gency is resolved, the parties would treatall payments as made or received in theyear of the resolution of the contingency.

b. Policy Considerations. Thismethod has the policy advantages of beingcertain, clear, and administrable. Themethod provides partial neutrality of taxtreatment compared to options and for-wards, and compared to ownership of theunderlying equity, but does not provideneutrality of tax treatment compared tocontingent debt. There would be asymme-try of tax treatment between the counter-parties if only one party to the contingentNPC were on a mark-to-market method ofaccounting with respect to the NPC. Thefull allocation method does not reflect thechange in economic position over time ofeither counterparty as a result of being aparty to the NPC, because all tax conse-quences are postponed until the contractmatures, is terminated, etc. This result isparticularly open for manipulation to theextent taxpayers have the ability to termi-nate a contract if it has decreased in valuebut can retain the contract if it has in-creased in value. Finally, it would appearthat the method is flexible enough to ac-commodate many financial instruments,although it is unclear whether the methodwould be appropriate for all forms ofNPCs and related contracts.

c. Request for Comments. The IRSand Treasury request comments on anumber of aspects of this method:

2001–30 I.R.B. 79 July 23, 2001

(i) The IRS and Treasury are awarethat this method permits complete deferralfor taxpayers entering into NPCs with con-tingent elements, in contrast to the accrualmethod required for NPCs without suchcontingent elements. However, eventhough the full allocation method wouldcreate discontinuities between differenttypes of NPCs, it is somewhat consistentwith the treatment of both straight equityand certain other derivatives, such as op-tions and forward contracts, as notedabove. The IRS and Treasury are solicitingcomments on whether the inconsistency be-tween contingent and noncontingent NPCscould be mitigated through the use of ananti-abuse rule (and on what the nature andscope of such an anti-abuse rule might be),or whether a more global change in thetreatment of derivatives would be neces-sary to overcome this problem.

(ii) It is unclear how current lawwould characterize the various paymentsmade pursuant to a contingent NPC underthe full allocation method. Based on oneinterpretation of § 1234A, it is possiblethat taxpayers could elect the character oftheir NPC payments by terminating theirNPC early or holding it until maturity.Comments are solicited on how taxpayerscould be prevented from manipulating thecharacter of payments made pursuant to aNPC under current law if the full alloca-tion method is required. Comments arealso solicited on whether and how a mod-ification of current law could improve thecharacter treatment of payments madepursuant to a contingent NPC under thefull allocation method.

(iii) The IRS and Treasury seekcomments on how the full allocationmethod should apply when contingenciesunder a NPC are resolved at a time otherthan at the maturity of the contract.

3. Modified Full Allocation Method

a. Timing. Under this method, eachparty to a NPC would offset any noncon-tingent payments made by that party in ataxable year against any payments re-ceived in that year with respect to theNPC, but would not be able to claim a de-duction if the amount received were lessthan the amount paid out. Any net deduc-tions with respect to the NPC would bedeferred until all contingencies are re-solved. In effect, this method accordswith those tax principles that provide for

income to be recognized when receivedand deductions to be deferred until allcontingencies with respect to that deduc-tion are resolved. However, this methodmodifies the effects of these principles byfirst determining income on an annual netbasis.

b. Policy Considerations. Thismethod has the advantages of being cer-tain and clear, and being relatively easy toadminister. However, the method doesnot provide for neutrality of tax treatmentwith respect to any financial instrument orcombination of instruments that have eco-nomic characteristics similar to a contin-gent NPC. The method does not accu-rately reflect the change in economicposition over time of a counterparty sub-ject to the method because of the differingtreatment of net receipts and paymentsunder the NPC. In addition, there wouldbe asymmetry of tax treatment of thecounterparties to the NPC if one of theparties were subject to the mark-to-mar-ket method of accounting with respect tothe NPC. Finally, it is unclear how flexi-ble the method would be in accommodat-ing variations in NPCs and related instru-ments.


(i) The IRS and Treasury areaware that the modified full allocationmethod may result in mismatching of in-come and deductions. This is because in-come from the NPC would be recognizedwhen received while deductions would bedeferred until all contingencies are re-solved. The IRS and Treasury are seekingassistance in developing rules to ensurethat the asymmetrical treatment of the in-come and deductions under this methoddoes not lead to undesirable consequencesfor either taxpayers or the government.

(ii) It is unclear how the paymentsmade pursuant to a NPC would be charac-terized under the modified full allocationmethod. It is possible that application ofcurrent law to the modified full allocationmethod could result in differences in char-acter for current inclusions and for gains orlosses on final settlement of the NPC. Forexample, a taxpayer may be taxable cur-rently on net receipts as ordinary incomebut have an offsetting capital loss subjectto loss limitations on the final settlement ofthe NPC. Mismatches of timing and char-

acter could be reduced if deductions werepermitted in years before the resolution ofall contingencies, in a manner similar tothe treatment of unreversed inclusionsunder § 1296(a)(2). The IRS and Treasuryrequest comments on ways to avoid thismismatching of character, and whether aregime similar to that used under § 1296(a)(2) would be administrativelyburdensome to implement.

(iii) The IRS and Treasury seekcomments on how the modified full alloca-tion method should apply when contingen-cies under a NPC are resolved at a timeother than at the maturity of the contract.

4. Mark-to-Market Method

a. Timing. Under this method, tax-payers would mark their NPCs to marketand recognize gain or loss at year end, orwhen the contract is terminated, assigned,etc.

b. Policy Considerations. Themark-to-market method has the advan-tages of being certain and clear with re-spect to timing and character. It wouldlikely, however, be difficult to administerfor non-exchange traded instruments tothe extent that there is no consensus onthe fair market value of the NPC. Thisproblem may be partially overcome by re-quiring appropriate record keeping andinformation reporting. The mark-to-mar-ket method does not provide neutrality oftax treatment compared to almost any fi-nancial instrument or combination of in-struments or compared to the underlyingproperty. It would, however, provide eq-uitable tax treatment between counterpar-ties. The mark-to-market method accu-rately reflects the change in economicposition over time of both counterpartiesas a result of being a party to the NPC, tothe extent that the mark is accurate. Fi-nally, the mark-to-market method is themost flexible of the methods, as it is con-strained only by the ability to provide aconsistent system for measuring the mar-ket value of instruments.


(i) The IRS and Treasury are in-terested in comments generally on thebenefits and burdens of imposing a mark-to-market regime.

(ii) The IRS and Treasury are in-terested in what the character of a gain or

July 23, 2001 80 2001–30 I.R.B.

loss on a mark would be under currentlaw, and how the law may be modified toensure appropriate characterization of themark, based on policy principles.

(iii) The IRS and Treasury are in-terested in comments on what authoritytaxpayers believe exists to mandate amark-to-market regime for NPCs. We arealso requesting comments on whether thisregime should be made elective if anotherregime is used as the primary regime.

(iv) The IRS and Treasury seekcomments on how to ensure that the valuestaxpayers use as market values are truly re-lated to the market, and are not subject toconsistently biased manipulation by tax-payers. It appears that substantial invest-ment has been made by the financial com-munity into technology that enables aregular mark-to-market of many types ofderivatives.1 The IRS and Treasury are re-questing comments on how a valuationregime could be developed to ensure someconsistency by a single taxpayer with dif-ferent NPCs, and between taxpayers.

C. Recordkeeping and InformationReporting

The IRS and Treasury are seeking com-ments on what kinds of record keepingand information reporting would be nec-essary for each and any of the methods ofaccounting for contingent NPCs thatwould enable the IRS to verify the inclu-sions and deductions of counterparties tocontingent NPCs and minimize the com-pliance burdens for taxpayers. In particu-lar, the IRS and Treasury are interested inthe following:

1. Are there any special kinds of infor-mation necessary for the IRS to obtain

from taxpayers in order to verify their taxreturn positions with respect to contingentNPCs?

2. If there are special kinds of informa-tion relating to tax return positions forcontingent NPCs, how should that infor-mation be made available to the IRS? Is itsufficient for taxpayers to keep detailedbooks and records which an agent can re-quest if necessary? Or should specific in-formation be required to be reported withthe tax return? If the information is re-ported with a tax return, what form shouldthe reporting take?

3. Is there sufficient justification to re-quire third party reporting with respect toany of the methods of accounting forNPCs, particularly for the NCS methodand the mark-to-market method? Shouldcounterparties who are dealers be re-quired to report their marks to nondealercounterparties under the mark-to-marketmethod?

4. If certain types of record keeping orinformation reporting are recommendedin comments to the IRS and Treasury,what would be the appropriate penaltiesfor failure to keep the required records orprovide the information?

III. REQUEST FOR COMMENTS

Written comments are requested to besubmitted no later than November 20,2001, to CC:FIP (Notice 2001–44), room4300, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Comments may be hand de-livered between the hours of 8 a.m. and 5p.m. to CC:FIP (Notice 2001–44),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by submitting comments di-rectly to the IRS Internet site athttp://www.irs.gov/tax_regs/regslist.html.All comments will be available for publicinspection and copying.


The principal authors of this notice are:Elizabeth Handler and Dale S. Collinson,Office of Associate Chief Counsel (Finan-cial Institutions and Products), InternalRevenue Service; Viva Hammer, Officeof the Tax Legislative Counsel, Office ofTax Policy, United States Department ofthe Treasury; and Matthew J. Eichner, Of-

fice of Tax Analysis, Office of Tax Policy,United States Department of the Treasury.However, other personnel from the IRSand Treasury Department participated inits development. For further informationregarding this notice contact Viva Ham-mer at (202) 622-0869 or Dale Collinsonat (202) 622-3900 (not toll-free calls).

APPENDIX

The method described in SectionII.B.1.b. is illustrated using the followingexample of a simple equity swap contracton a notional amount of 100 shares ofXYZ stock, entered into on January 1,2001, between A and B with the followingterms:

A pays B:Every six months until expiration – any dividend

payments to the holder of one share of XYZ times100.

At expiration, December 31, 2002 – any appreci-ation in a share of XYZ since contract inceptiontimes 100.

B pays A:Every six months until expiration – 7.00% (an-

nual rate) of notional amount at inception.At expiration, December 31, 2002 – any depreci-

ation in a share of XYZ since contract inceptiontimes 100.

Assume that the market price of a shareof XYZ was $975 at the inception of thecontract, and the forward price for futuredelivery of a share of XYZ was $1,062.For computational purposes only, A isdeemed under the NCS method to havehedged itself by entering into a forwardcontract at the inception of the NPC forthe purchase of 100 shares of XYZ, in ex-change for $106,200, on December 31,2002. In order to make the $106,200payment, A would need to set aside at theinception of the contract an amount thatequals the present value of $106,200, i.e.,$92,547 (based on a 7% annual interestrate compounded semiannually).

With this forward contract in place, Awould be able to make the required pay-ment to party B.2 However, the arrange-ment described thus far would involve Acommitting more funds to building thehedge than is absolutely necessary. A isrequired to pay B only the difference be-

2001–30 I.R.B. 81 July 23, 2001

1 Much of the impetus for this has come from theStatement of Financial Accounting Standards No.133, Accounting for Derivative Instruments andHedging Activities, as amended by Statement ofFinancial Accounting Standards No. 138, whichrequires that an entity recognize all derivatives aseither assets or liabilities in the statement offinancial position and measure those instruments atfair value. However, this is not the only source ofinterest in technology to enable a regular marking ofderivatives. Treasury departments of many corp-orations require a tool to assess the impact offinancial stress on their portfolios, and this requiresa mechanism for marking their securities in variousscenarios. In addition, in a different context entirely,mutual funds must have some mechanism forregularly assessing the value of their portfolios(including derivatives) as they have to report a dailynet asset value.

2 The terms of the contract require B to make apayment to A if the XYZ stock decreases in value.Because forward pricing for investment property suchas corporate stock always assumes an increase inprice, the method would also assume at the outset thatthe contingent payment would be made by A to B.

tween the price of the shares on December31, 2002, and the price of the shares onJanuary 1, 2001, and not the entire valueof the shares on December 31, 2002. Forexample, suppose that the price of the 100XYZ shares has risen to $110,000 by expi-ration of the NPC. If this happens, Awould be obligated to pay B $12,500. Awould purchase the shares pursuant to theforward contract for $106,200, sell themfor $110,000, and pay party B the $12,500required under the terms of the swap. Theremaining $97,500 in proceeds would be-long to A. This $97,500 (the market priceof the shares on January 1, 2001) wouldalways remain in A’s possession at matu-rity no matter how the value of XYZ stockchanges through the life of the NPC.Therefore, simply entering into a forwardcontract for the purchase of the XYZ stockis not an exact hedge for A’s commitment

under the swap contract. To further refinethe hedge, A could borrow the presentvalue of $97,500, i.e., $84,966 on January1, 2001. Borrowing this amount wouldmean that the cost of assembling thehedge would be ($92,547 - $84,966), or$7,582.

The net cash flow from these two trans-actions - purchasing the forward contractand borrowing the present value of thecurrent price of the 100 shares - would al-ways enable A to exactly make the pay-ment due to B under the NPC on Decem-ber 31, 2002, no less and no more. If theshare price rises to $1,000 by December31, 2002, A would sell the stock deliveredin satisfaction of the forward contract for$100,000, pay $2,500 to B and repay theloan with the remaining $97,500. If, in-stead, the price were to fall to $935 byDecember 31, 2002, A would actually re-

ceive $4,000 from B which, in combina-tion with the proceeds from selling thestock delivered under the forward con-tract for $93,500, would allow A to repaythe loan balance of $97,500.

Once the present value of A’s deemedhedge for the contingent payment is deter-mined, this amount must be amortizedinto B’s income. This can be done bydeeming A to provide to B a zero couponbond with a present value of $7,582.Such a bond has a face value, payable atmaturity, of $8,700 (assuming again anannual rate of 7.00% and compoundedsemiannually).

The original issue discount (OID) isfound by multiplying the present value ofthe bond at the beginning of each sixmonth period by the periodic rate,7.00%/2 or 3.50%:

July 23, 2001 82 2001–30 I.R.B.

Period Ending OID Present Value of Bond(at end of period)

6/30/01 $265 [= $7,582 * 3.50%] $7,847 [= $7,582 + $265]

12/31/01 $275 [= $7,847 * 3.50%] $8,122 [= $7,847 + $275]

6/30/02 $284 $8,406

12/31/02 $294 $8,700

Note that the total OID sums to $1,118, precisely the difference between the present value of the bond ($7,582) and the face value ofthe bond ($8,700).

This OID is the first component of income for each period; amortization of the principal of $7,582 is the other piece. The follow-ing table summarizes the annuity calculation:

Period Ending Payment Interest Principal Balance (end of period)

6/30/01 $2,064 $265 [= $7,582 x 3.5%] $1,799 [= $2,064 - $265 $5,783 [= $7,582 - $1,799]

12/31/01 $2,064 $202 $1,862 $3,921

6/30/02 $2,064 $137 $1,927 $1,994

12/31/02 $2,064 $120 $1,994 $0

The principal allocated to each period is then added to the OID to reach a total income allocation for the period. This wouldbecome the “payment schedule” which determines the tax inclusions required for B through the life of the contingent NPC.

Period Ending OID Principal Income

6/30/01 $265 $1,799 $2,064

12/31/01 $275 $1,862 $2,137

6/30/02 $284 $1,927 $2,211

12/31/02 $294 $1,994 $2,288

Total $8,700

2001–30 I.R.B. 83 July 23, 2001

Simplification of Employee PlansDetermination Letter ApplicationProcedures

Announcement 2001–77

The Service is simplifying its applicationprocedures for determination letters on thequalification of pension, profit-sharing,stock bonus, and annuity plans under §§ 401(a) and 403(a) of the Internal Rev-enue Code. These changes will give plansponsors the flexibility to request a determi-nation letter that considers either the form ofthe plan only or both the form of the planand compliance with the requirements of §§ 401(a)(4), 401(a)(26), and 410(b). TheService is also modifying its procedures tofacilitate plan compliance with new finalregulations on the use of cross-testing in theapplication of the nondiscrimination re-quirements of § 401(a)(4).

Specifically, the Service is:

• Modifying its procedures and revisingthe determination letter applicationforms to give plan sponsors the optionto request determination letters withoutfurnishing information on how planssatisfy the nondiscrimination require-ments of § 401(a)(4), the additionalparticipation requirements of § 401(a)(26) or the minimum coveragerequirements of § 410(b).

• Modifying its procedures to allowadopting employers of nonstandardizedmaster and prototype (M&P) plans orcertain volume submitter plans to relyon a favorable opinion or advisory let-ter with respect to most qualificationrequirements without requesting a de-termination letter.

• Modifying its procedures to allow anemployer maintaining a multiple em-ployer plan to rely on a favorable deter-mination letter for the plan with respectto most qualification requirements with-out submitting a separate Form 5300.

• Encouraging practitioners to highlightthe changes to plans that have previouslyreceived favorable determination letters.

• Making available, during the secondhalf of 2001, and updating periodically,a list of the M&P plans and volumesubmitter specimen plans that weresubmitted to the Service for GUST1 ad-

visory and opinion letters by December31, 2000, indicating the dates on whichopinion and advisory letters were is-sued or the applications were with-drawn.

• Allowing practitioners to amend vol-ume submitter specimen plans to re-flect the recently published final regu-lations on cross-testing.

• Allowing plan sponsors to request de-termination letters that take into ac-count the final regulations on cross-testing, beginning August 22, 2001.

The Service is also taking a number ofother steps to improve the efficiency of itscase processing. The changes describedin this announcement are separate fromany long-term changes to the determina-tion letter program that may result fromthe Service’s ongoing study of the futureof the Employee Plans determination let-ter program. The Service expects to pub-lish a white paper as part of this study inthe near future.

SECTION I. CHANGES TODETERMINATION LETTERAPPLICATION PROCEDURES ANDFORMS

A. Current Procedures

Under current procedures, plans aregenerally reviewed for compliance withform and operational coverage andnondiscrimination requirements, includ-ing, for example, the ratio-percentage testof § 410(b)(1). In addition, at the electionof the plan sponsor, a plan may also be re-viewed for compliance with the averagebenefit test of § 410(b)(2) and the nondis-criminatory availability of benefits, rightsand features requirement and the generaltest for nondiscrimination in amount ofcontributions or benefits of § 401(a)(4).

Applicants must file Schedule Q (Form5300),Nondiscrimination Requirements,providing demographic data for coverageand nondiscrimination requirements to beconsidered by the Service in reviewingthe plan.

B. New Procedures

Under the new procedures, plan spon-sors can elect to have a plan reviewed forcompliance with the form requirementsonly or with both the form requirementsand the coverage and nondiscriminationrequirements of §§ 401(a)(4), 401(a)(26)and 410(b) that the plan sponsor elects tohave considered. For example, a plansponsor no longer must provide demo-graphic data for the ratio-percentage test,but may choose to do so to have compli-ance with § 410(b) considered in the de-termination letter. Thus, the filing ofSchedule Q is now optional.

C. Revised Application Forms

The following forms are being revised: Form 5300, Application for Determina-tion for Employee Benefit PlanSchedule Q (Form 5300), Nondiscrimina-tion RequirementsForm 5307, Application for Determina-tion for Adopters of Master or Prototype,Regional Prototype or Volume SubmitterPlansForm 5309, Application for Determina-tion of Employee Stock Ownership PlanForm 5310, Application for Determina-tion for Terminating PlanForm 5310–A, Notice of Plan Merger orConsolidation, Spinoff, or Transfer ofPlan Assets or Liabilities; Notice ofQualified Separate Lines of BusinessForm 6088, Distributable Benefits FromEmployee Benefit Pension PlansForm 6406, Short Form Application forDetermination for Minor Amendment ofEmployee Benefit PlanForm 8717, User Fee for Employee PlanDetermination Letter Request.

Form 5303, Application for Determina-tion for Collectively Bargained Plan, cur-rently used to apply for a determinationletter for a collectively bargained plan, iseliminated. Applications previously sub-mitted using Form 5303 will now be sub-mitted using Form 5300.

Part IV. Items of General Interest

1 The term “GUST” refers to:• the Uruguay Round Agreements Act, Pub. L.

103-465;• the Uniformed Services Employment and

Reemployment Rights Act of 1994, Pub. L.103-353;

• the Small Business Job Protection Act of 1996,Pub. L. 104-188;

• the Taxpayer Relief Act of 1997, Pub. L. 105-34; • the Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105-206; and • the Community Renewal Tax Relief Act of 2000,

Pub. L. 106-554 (“CRA”).

July 23, 2001 84 2001–30 I.R.B.

D. Draft Forms Will Be Available on theInternet

To assist entities developing softwareused in preparing determination letter ap-plications, as well as plan sponsors andpractitioners, the Service will soon postdraft Forms 5300, 5307, 5310, 6406, andSchedule Q to: http://www.irs.gov/ep. Al-though the Service does not anticipatemaking changes to the content of thesedraft forms, users are cautioned that theseforms are subject to substantive and for-matting changes before final versions areavailable. It is anticipated that finalforms will be available in August.

E. Changes to Forms 5300, 5307, 5310,and Schedule Q

The following are the principal changesregarding Forms 5300, 5307, 5310, andSchedule Q:

1. Schedule Q, an optional form, must beattached to Form 5300 or Form 5307 ifthe applicant wishes to request a deter-mination letter that covers one or moreof certain coverage and nondiscrimina-tion requirements.

2. Certain questions are being eliminatedfrom the Schedule Q, including those re-lated to § 401(a)(26). A determinationletter application for a defined benefitplan will be reviewed for compliancewith § 401(a)(26) if the application re-quests consideration of § 410(b), or if acover letter requests consideration of § 401(a)(26) and the applicant providesdata supporting the request.

3. Questions related to the ratio-percent-age test under § 410(b) and the nondis-criminatory amount design-based safeharbors under § 401(a)(4) are includedin Forms 5300 and 5307 as optionalquestions.

4. Questions related to the minimum cov-erage requirements, including the aver-age benefit test, and the nondiscrimina-tory amounts requirement, includingthe general test and the design-basedsafe harbors, are being added to Form5310. Form 5310 applicants will con-tinue to be required to demonstratecompliance with the minimum cover-age and nondiscriminatory amounts re-quirements, including the average ben-efit and general tests, unless theconditions described in section 12.04

of Rev. Proc. 2001–6, 2001–1 I.R.B.194, have been satisfied. Applicantsmay file Schedule Q with Form 5310 torequest a determination that covers anyof the other nondiscrimination require-ments addressed by the Schedule Q,such as the requirement that a plan notdiscriminate in the availability of bene-fits, rights and features under the plan.

F. Changes Regarding Favorable Deter-mination Letters

Under current procedures, determina-tion letters may include separate caveatsindicating that the applicant has demon-strated that the plan satisfies specific cov-erage and nondiscrimination require-ments, such as the average benefit testand the general test. However, the actualscope of reliance on a favorable determi-nation letter is based on the informationand demonstrations submitted with theapplication and the failure of an applicantto retain this information might limit thescope of reliance. (See section 21.01 ofRev. Proc. 2001–6.) The use of multiplecaveats has sometimes resulted in confu-sion and administrative complications.

To improve the quality of the letters andprocessing efficiency, the Service will gen-erally discontinue the use of separatecaveats for the coverage and nondiscrimi-nation requirements. The extent of re-liance on a favorable letter will not change.Thus, a letter may be relied on with regardto specific determination requests madewith the application, provided the relevantinformation and demonstrations are re-tained by the applicant.

G. Effective Dates and Transition Rules

1. Determination letter applications filedbefore July 23, 2001, must comply withthe procedures in Rev. Proc. 2001–6and the current determination letter ap-plication forms.

2. Between July 23, 2001, and December31, 2001, applicants requesting deter-mination letters on Form 5300 or 5307may choose to: • submit the revised Form 5300 or

5307 either including or omitting therevised Schedule Q, once the formsare finalized;

• submit the current Form 5300 or5307 with the current Schedule Q,following the procedures in Rev.Proc. 2001–6;

• submit the current Form 5300 or5307 omitting Schedule Q; or

• submit the current Form 5300 or5307 with the current Schedule Q,completing only Part I of the Sched-ule Q and those line items relating tothe specific coverage and nondis-crimination requirements for whichthe applicant requests a determina-tion.

In the latter two cases, the applicantmust include a cover letter indicatingthat the determination requested is onlyon the form of the plan or on both theform of the plan and those issues se-lected on Schedule Q. If this informa-tion is not included in the cover letter,the Service will not contact the appli-cant but will assume the omission orpartial completion of the Schedule Qcorrectly reflects the scope of the deter-mination requested by the applicant.

3. Determination letter applications filed onForm 5310 before January 1, 2002, mustcomply with the procedures in Rev.Proc. 2001–6 and the current forms.

4. Determination letter applications filedafter December 31, 2001, must be sub-mitted on the revised forms.

H. User Fees

The user fee for an application will con-tinue to be based on the form on which theapplication is submitted and whether theapplication involves a determination of theaverage benefit or general test.

SECTION II. CHANGES TORELIANCE PROCEDURES FORADOPTING EMPLOYERS OF M&PAND VOLUME SUBMITTER PLANS

A. Current Reliance Procedures

Under current procedures, an employerthat adopts a nonstandardized M&P planor a volume submitter plan must request adetermination letter to have reliance. Anemployer that adopts a standardized M&Pplan (including paired plans) generallymust request a determination letter tohave reliance if the employer maintainsanother plan.

B. New Reliance Procedures

Adopting employers of M&P and vol-ume submitter plans can rely on a favor-

2001–30 I.R.B. 85 July 23, 2001

able opinion or advisory letter issued tothe M&P sponsor or volume submitterpractitioner as described below if the em-ployer adopts a plan that is identical to anapproved M&P or specimen plan andchooses only options permitted under theterms of the approved plan. These em-ployers can forego filing Form 5307 andrely on a favorable opinion or advisory let-ter issued to the M&P sponsor or volumesubmitter practitioner with respect to thequalification requirements, except as pro-vided in 1 through 5 of this paragraph Band in paragraph C of this section, below. 1. Except as provided herein, adopting

employers of nonstandardized M&Pplans and volume submitter plans can-not rely on a favorable opinion or advi-sory letter with respect to the require-ments of:(a) § 401(a)(4), 401(a)(26), 401(l),410(b) or 414(s); or (b) if the employer maintains or hasever maintained another plan coveringsome of the same participants2, § 415or 416.

2. Adopting employers of nonstandard-ized M&P plans and volume submitterplans can rely on the opinion or advi-sory letter with respect to the require-ments of §§410(b) and 401(a)(26)(other than the § 401(a)(26) require-ments that apply to a prior benefitstructure) if 100 percent of all nonex-cludable employees benefit under theplan.

3. Nonstandardized M&P plans must giveadopting employers the option to electa safe harbor allocation or benefit for-mula and a safe harbor compensationdefinition. Adopting employers ofnonstandardized M&P plans that electa safe harbor allocation or benefit for-mula and a safe harbor compensationdefinition can rely on an opinion letterwith respect to the nondiscriminatoryamounts requirement under § 401(a)(4)and the requirements of §§ 401(k) and401(m) (except where the M&P plan isa safe harbor § 401(k) plan that pro-vides for the safe harbor contribution tobe made under another plan).

4. Adopting employers of nonstandard-ized safe harbor M&P plans (which re-

quire adopting employers to elect a safeharbor allocation or benefit formula) areentitled to the same reliance as adoptingemployers of nonstandardized plans ex-cept that they have automatic reliancewith respect to the nondiscriminatoryamounts requirement if they elect a safeharbor definition of compensation.

5. Adopting employers of standardizedM&P plans (including paired plans)that maintain or have ever maintainedanother plan can rely on a favorableopinion letter except with respect to therequirements of §§ 415 and 416 and therequirements of § 401(a)(26) that applyto prior benefit structures.

C. Other Limitations and Conditions onReliance

1. An adopting employer of an M&P orvolume submitter plan can rely on a fa-vorable opinion or advisory letter only ifthe letter has taken into account the re-quirements of GUST and the plan hasbeen amended to the extent necessary tocomply with the requirements of § 314(e) of CRA, relating to changes tothe definition of compensation under §§ 414(s) and 415(c)(3). In addition, ifthe opinion or advisory letter is a“GUST I” letter (as defined in Rev.Proc. 2000–27, 2000–26 I.R.B. 1272),the plan must have been amended to theextent necessary to comply with the re-quirements of GUST that are effectiveafter 1998.

2. An adopting employer can rely on a fa-vorable opinion or advisory letter for aplan that amends or restates a plan ofthe employer only if the plan that isbeing amended or restated satisfies thequalification requirements as in effectprior to GUST and the operationalcompliance requirements of GUST, andthe GUST amendments are retroac-tively effective to the extent required.

3. An adopting employer cannot rely on anopinion or advisory letter for a plan if therepealed family aggregation rules contin-ued to apply under the plan after 1996 orif the repealed § 415(e) limits continuedto apply under the plan after 1999. Thecontinued application of these rules andlimits in years following their repealcould cause a plan to fail to satisfy one ormore requirements of § 401(a).

4. An adopting employer cannot rely onan advisory letter issued after the date

the employer adopts the GUST-amended plan.

5. An adopting employer can rely on anopinion or advisory letter only if theemployer has not added any terms tothe approved M&P or volume submit-ter plan document and has not modifiedor deleted any terms of the documentother than choosing options permittedunder the document or, in the case of anM&P plan, amending the document aspermitted under sections 5.07 and 5.11of Rev. Proc. 2000–20. Thus, for ex-ample, in the case of a volume submit-ter plan, the employer’s plan must beidentical to the approved specimen planexcept as the result of the employer’sselection among options that are per-mitted under the terms of the approvedspecimen plan.

6. An adopting employer cannot rely onan opinion or advisory letter if theadopting employer has modified theterms of the plan’s approved trust in amanner that would cause the plan tofail to be qualified.

D. Reliance Equivalent to DeterminationLetter

To the extent an employer can rely on afavorable opinion or advisory letter pur-suant to this announcement or Rev. Proc.2000–20 and Rev. Proc. 2001–6, the opin-ion or advisory letter shall be equivalentto a favorable determination letter. Forexample, the favorable opinion or advi-sory letter shall be treated as a favorabledetermination letter for purposes of sec-tion 21 of Rev. Proc. 2000–6, regardingthe effect of a determination letter, andsection 5.01(4) of Rev. Proc. 2001–17,2001–7 I.R.B. 589, regarding the defini-tion of “favorable letter” for purposes ofthe Employee Plans Compliance Resolu-tion System.

E. Change to Conditions for ExtendedRemedial Amendment Period

The GUST remedial amendment periodgenerally ends on the last day of the firstplan year beginning on or after January 1,2001. However, certain plans may be eli-gible for an extended remedial amend-ment period under the provisions of sec-tion 19 of Rev. Proc. 2000–20. Section19.04 of Rev. Proc. 2000–20 requiresplans eligible for the extension to requesta determination letter by the end of the

2 For this purpose, whether an employer maintainsor has ever maintained another plan will bedetermined using principles consistent with section6.02 of Rev. Proc. 2000-20, 2000-6 I.R.B. 553.

July 23, 2001 86 2001–30 I.R.B.

extended period if a determination letteris required for reliance. Thus, currentprocedures would require adopting em-ployers of nonstandardized M&P plansand volume submitter plans to request de-termination letters within the extendedperiod.

An employer eligible for reliance with-out a determination letter, as described inthis section, is not required to request adetermination letter to be entitled to theextension of the remedial amendment pe-riod under section 19 of Rev. Proc.2000–20, provided that the employeradopts the GUST-approved M&P or spec-imen plan within the extended remedialamendment period.

SECTION III. CHANGES TOAPPLICATION PROCEDURES FOREMPLOYERS THAT MAINTAINMULTIPLE EMPLOYER PLANS

A. Current Application Procedures

Under current procedures, an applica-tion for a determination letter for a multi-ple employer plan must include separateForm 5300 applications for each employermaintaining the plan. In addition, demon-strations to be included with Schedule Qmust separately demonstrate compliancewith the relevant coverage or nondiscrimi-nation requirement by each employer.

B. New Application Procedures

A determination letter applicant can re-quest either (1) a letter for the plan or (2) aletter for the plan and a letter for each em-ployer maintaining the plan with respect towhom a separate Form 5300 is filed.1. An applicant requesting a letter for the

plan submits one Form 5300 applicationfor the plan, filed on behalf of one em-ployer, omitting the optional minimumcoverage questions and Schedule Q andeither including or omitting the design-based safe harbor questions. The userfee for a single employer plan willapply. An employer maintaining a mul-tiple employer plan can rely on a favor-able determination letter issued for theplan except with respect to the require-ments of §§ 401(a)(4), 401(a)(26),401(l), 410(b) and 414(s), and, if theemployer maintains or has ever main-tained another plan, §§ 415 and 416.

2. An applicant requesting a letter for theplan and an employer must submit the

filing required in (1) above and a sepa-rate Form 5300 application, completedthrough line 8, for each employer re-questing a separate letter. Each em-ployer may elect to respond to theForm 5300 questions regarding mini-mum coverage and design-based safeharbors and to file Schedule Q to re-quest a determination on the averagebenefit test, the general test, or anyother nondiscrimination requirementaddressed by the Schedule Q. The userfee for the application will be deter-mined under the user fee schedules formultiple employer plans in section 6.06of Rev. Proc. 2001–8, 2001–1 I.R.B.239, substituting the number of Forms5300 filed for the number of employersmaintaining the plan and treating theentire application as a general test oraverage benefit test application if anyemployer requests a determination oneither of these tests.

C. Other Limitations and Conditions

Rules similar to the rules in SectionII.C and D above also apply in the case ofan employer maintaining a multiple em-ployer plan.

SECTION IV. HIGHLIGHTINGDOCUMENT CHANGES

The Service encourages practitioners tohighlight changes to plan documents thathave previously received determination let-ters in such a way as makes the nature andpurpose of the changes apparent and assistsService personnel in reviewing the plan.This practice may speed the review of plandocuments; however, the Service retains thediscretion to review the entire document.

SECTION V. LISTS OF M&P ANDVOLUME SUBMITTER PLANS

The period of extension of the GUSTremedial amendment period under section19 of Rev. Proc. 2000–20 is 12 months.The 12-month period begins on the dateof approval of the last M&P or specimenplan of the employer’s M&P sponsor orvolume submitter practitioner to receive afavorable GUST opinion or advisory let-ter. In Notice 2001–42, page 70, this bul-letin, the Service has provided that the 12-month period shall be treated as notending before December 31, 2002.

The Service has been asked to makeavailable lists of M&P and volume sub-

mitter plans to assist employers in deter-mining the expiration of their GUST re-medial amendment period. Therefore, theService plans to make available on the In-ternet a list of all the M&P and volumesubmitter plans that were submitted to theService for GUST opinion or advisory let-ters by December 31, 2000, the deadlinefor filing under Rev. Proc. 2000–20. Thislist will include the name of the M&Psponsor or volume submitter practitioner,the name of each plan submitted by thesponsor or practitioner, and the file folderor other number assigned to each plan.This list will be posted as early as possi-ble in the second half of 2001.

As soon as practical after publication ofthe list, and periodically thereafter, theService will amend the list to include thedate on which each plan is approved orthe application is otherwise closed.

SECTION VI. FINAL CROSS-TESTING REGULATIONS

A. Publication of Final Regulations

Final regulations under § 401(a)(4), pub-lished in the Federal Register on June 29,2001 (the “final cross-testing regulations”)amend §§ 1.401(a)(4)–8, 1.401(a)(4)–9 and1.401(a)(4)–12 of the Income Tax Regula-tions. The final cross-testing regulationsdescribe the conditions under which de-fined contribution plans, and defined con-tribution and defined benefit plans that aretested together, are permitted to demon-strate compliance with nondiscriminationrequirements on a benefits basis. The regu-lations are effective for plan years begin-ning on or after January 1, 2002.

B. Permitted Amendment of PendingSpecimen Plans in Conjunction withGUST

Practitioners that sponsor volumesubmitter plans with “cross-testing for-mulas” or provisions may wish toamend their specimen plans for the reg-ulations to help adopting employers en-sure that their plans will be eligible tocross-test. In order to facilitate theamendment of specimen plans for thefinal cross-testing regulations duringthe GUST plan restatement process, theService will allow practitioners to sub-mit final regulation amendments to theirspecimen defined contribution plans tobe reviewed in conjunction with the re-

2001–30 I.R.B. 87 July 23, 2001

view of the plan for compliance withGUST, provided the amendments aresubmitted by October 22, 2001. Whensubmitting such amendments, practi-tioners should include a cover letter thatidentifies the specimen plan to whichthe amendments relate and the status ofthe application (if known) and that de-scribes the nature of the amendments.The Service will not issue an advisoryletter for a defined contribution speci-men plan before October 22, 2001,without first obtaining the concurrenceof the practitioner.

C. Permitted Amendment of PreviouslyApproved Specimen Plans

Practitioners that have already re-ceived a GUST advisory letter for a de-fined contribution specimen plan mayresubmit the plan by October 22, 2001,to include final regulation amendments.The submission should include the planand any amendments, a copy of theGUST advisory letter, and a cover letterwhich describes the nature of thechanges to the specimen plan and indi-cates that the application is being sub-mit ted pursuant to Announcement2001–77. In this case, a favorable advi-sory letter issued with respect to theamendments will be treated as the ini-tial GUST advisory letter for the speci-men plan for purposes of determiningthe 12-month period under Rev. Proc.2000–20.

D. Determination Letter Applications

For determination letter applicationsfiled on or after August 22, 2001, em-ployers may request a determination thattakes the final cross-testing regulationsinto account. If a demonstration involv-ing cross-testing relates to the 2002 orlater plan year, the demonstration mustaddress the requirements of the regula-tions. Estimated data for the 2002 planyear may be used for purposes of thisdemonstration.

SECTION VII. RELIANCE PRIOR TOPUBLICATION OF MODIFIEDREVENUE PROCEDURES

The changes described in this an-nouncement will be published as modifi-cations to Rev. Procs. 2000–20, 2001–6and 2001–8. Until the modifications tothe revenue procedures are published,

plan sponsors may rely on this announce-ment regarding the changes.


The principal drafter of this announce-ment is James Flannery of EmployeePlans. For further information regardingthis announcement, please contact Em-ployee Plans’ taxpayer assistance tele-phone service at (202) 283-9516 or (202)283-9517, between the hours of 1:30 p.m.and 3:30 p.m. Eastern Time, Mondaythrough Thursday. Mr. Flannery may bereached at (202) 283-9613. These tele-phone numbers are not toll-free.

Foundations Status of CertainOrganizations

Announcement 2001–78The following organizations have

failed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing of noticesunder section 508(b) of the Code. Thislisting does not indicate that the organiza-tions have lost their status as organiza-tions described in section 501(c)(3), eligi-ble to receive deductible contributions.

Former Public Charities.The follow-ing organizations (which have beentreated as organizations that are not pri-vate foundations described in section509(a) of the Code) are now classified asprivate foundations:

African American Cultural Center, Inc.,Lumberton, NC

Algerian Relief Foundation, Inc., Cary, NC

Alliance Educational Fund, Alexandria, VA

American Friends of English NationalOpera, New York, NY

Andrews Youth Football Association,Andrews, NC

Apollon Art Research Foundation, Inc.,Claverack, NY

Arc of Mecklenburg CountyCondominiums, Inc., Charlotte, NC

Asian-American Cultural Society,Philadelphia, PA

Assistance in Dialysis Expenses, Inc.,Charlotte, NC

Assisted Living Legal Defense &Education Fund, Inc., Herndon, VA

Association of Virginia Artisans, Inc.,Waynesboro, VA

Badin-Harristown in Home Enrichmentin Reading Program, Badin, NC

Belyi Foundation, Brevard, NCBenco, Corvallis, ORBethany Bible Institute, Inc.,

Plainfield, NJBone and Muscle Cancer Research and

Awareness Foundation, Bala Cynwyd, PA

Brownlee Non-Profit HousingCorporation, Durham, NC

Build, Inc., Sanford, NCCape Fear Community Development

Corporation, Fayetteville, NCCarolina Stage Company, Fayettville, NCCary First Planned Partners Ministry,

Inc., Cary, NCCenter for Academic Excellence,

Naples, NCCenter for Children of Separation and

Divorce, Charlotte, NCChaparral Rails to Trails, Inc.,

Roxton, TXCharlotte Wine & Food Weekend, Inc.,

Charlotte, NCChatham Citizens for Responsible

Development, Siler City, NCCherubs the Assoc. of Congenital

Diaphragmatic Hernia Research,Creedmor, NC

Childcare Advocates for Response &Empowerment, Inc., Smithfield, NC

Christian Relief Ministries, Incorporated,Advance, NC

Community Networking Association,Virginia Beach, VA

Concerned Citizens Coalition for EqualOpportunity and Equality, Naperville, IL

Constitutional Tradition and EducationCorporation, Durham NC

Craven Community Chorus, New Bern, NC

Cross Ministries, Garner, NCCub Scout Pack 52 Endowment Fund,

Inc., Morgantown, WVDanny McLean Memorial Scholarship,

St. Paul, NCDisability Express, Raleigh, NCEagles Wings Ministries International,

Burke, VAEase, Inc., Durham, NC

July 23, 2001 88 2001–30 I.R.B.

East Coast State CommunityDevelopment Corporation, Virginia Beach, VA

East Mecklenburg Exceptional ChildrensBooster Club, Charlotte, NC

Ebenezer Baptist Church Child CareCenter, Rocky Mount, NC

Ebony-Ivory International, Inc.,Baltimore, MD

Egregor, Inc., Faith, NCElizabeth City Neighborhood

Corporation, Elizabeth City, NCFat Guy Charities, Inc., Charlotte, NCFilipino-American Senior Citizens of Los

Angeles, Los Angeles, CAFirst Baptist Housing Development, Inc.

II, Lumberton, NCFirst in Families, Inc., Charlotte, NCFoundation for Sustainable Development,

Carrboro, NCFoundation for the Historical and

Cultural Preservation of Inigenou,Elkins, WV

Friends for Animals of Green County,Snow Hill, NC

Friends of the Belle Haven Marina,Alexandria, VA

Fund for Investigative Reporting, Inc.,Asheville, NC

Garlyn, Inc., Shelby, NCG.E.M. Community Services, Inc.,

Edison, NJGilbert Theater, Fayetteville, NCGlobal Institute of Environmental

Scientists, Alexandria, VAGlobal Response Service Corporation,

Herndon, VAGolf Shop-Headquarters for Jr. Golf, Inc.,

Norfolk, VAGreater Manassas Tournament Softball

Foundation, Manassas, VAGuardians of Wildlife, Dale City, VaGuilford County Association of Scuba

Personnel, Oak Ridge, NCHampton Roads Early Music Society,

Norfolk, VAHand to Eye Workshop & Studio,

Incorporated, Durham, NCHarold C. Enloe Lodge No. 1 of the

Fraternal Order of Police Foundation,Inc., Asheville, NC

Heritage Square Apartments, Inc., Siloam Springs, AR

High Point Youth Sports Council, Inc.,High Point, NC

Highlands-Cashiers National PublicRadio Assoc., Inc., Cashiers, NC

HR Housing, Inc., Milwaukee, WI

Hyline Rescue Team, Inc., Harrisonburg, VA

In Step Ministries, Inc., Greensboro, NCInstitute for Training and Development,

Herndon, VaInternational Coalition for Aids Research

and Education, Sterling, VAInternational Federation of Conservation

& Wildlife, Cleveland, OHIsle of Wight Educational Foundation,

Smithfield, VAJ.D. Grant Ministries, Inc., Sylva, NCJoint Committee for Persons with

Disabilities, Elizabeth City, NCJoyland Foundation, Durham, NCJustice for Children Corporation,

Durham, NCKehilah Kashrus, Inc., Brooklyn, NYKelly M. Alexander Sr. Leadership

Institute, Charlotte, NCKennesaw Non-Profit Housing

Corporation, Santa Monica, CAKnights of Windmaster, Inc.,

Lillington, NCLaurel Springs Educational Foundation,

Ojai, CALimits, Washington, DCLiving Free Program, Inc., Roanoke, VALiving in the Word International,

Midlothian, VALove Foundation, Winston Salem, NCLumbee Tribe of Cheraw Indians Dept.

of Programs & Administration, Inc.,Pembroke, NC

Lyric Theatre, Inc., Poquoson, VAMackall Foundation for the Arts, Inc.,

Arlington, VAMary’s Learning Center, Inc.,

Thomasville, NCMecklenburg Youth Council, Inc.,

Charlotte, NCMetropolitan Washington Council for

Homeless Veteran, Inc., Washington, DC

Montgomery County Young MensChristian Association, Troy, NC

Music Mothers of Meagher County,Incorporated, White Sulphur Springs, MT

Neighborhood Community Builders, Inc.,Greensboro, NC

New Bern Volunteer Firefighters Ladies’Auxiliary, New Bern, NC

New Covenant Christian Center,Philadelphia, PA

New Tomorrow World Ministries, Inc.,Kearneysville, WV

New Vinland Foundation, Rockport, ME

NFL Alumni Charities of Arizona,Tucson, AZ

Noble Quest, Ltd., Hillsborough, NCNorthern Wizards Wrestling Club,

Cambridge, MNNutrition for Children, Inc.,

Demopolis, ALOhio Valley Multiple Sclerosis Society,

Inc., Weirton, WVPanhandle Humane Society, Inc.,

Kearneysville, WVPark II Non-Profit Housing Corporation,

Santa Monica, CAPastoral Biblical Counseling Center, Inc.,

Scotts, MIPeacehaven, Inc., Warrensville, NCPeter Gammons Ministries International,

Altamonte, VAPets are Worth Saving, Inc., Sanford, NCPitt County Historical Reenactors,

Greenville, NCPlaza II Non-Profit Housing Corporation,

Redono Beach, CAProject Motivation Education, Inc.,

Charlotte, NCRacers Reward, Inc., Concord, NCRadical Changes Ministry, Raleigh, NCReach Teach and Touch Ministries,

Bryson City, NCReal Theatre Company, Boone, NCRebecca Gray Davis Memorial Fund for

Children, Inc., Morgantown, NCReclaiming Our Youth, Inc.,

Centerville, VARegional Family Service Enterprise, Inc.,

High Point, NCRough River Area Enhancement, Inc.,

Leitchfield, KYRowan County Youth Soccer Association,

Inc., Salisbury, NCSevert-Holston League of Residents,

Marion, VASisters in the Name of Love of the

Roanoke Valley, Inc., Roanoke, VASMP Retreat Center, Twin Lake, MISoar Corp. International,

Virginia Beach, VASoaring In Education, Dresden, MESoldiers Memorial A.M.E. Zion Church

Foundation, Inc., Salisbury, NCSoutheastern Case Management

Network, Greensboro, NCSouthwest Area Network, Inc.,

Birmingham, ALSpruce Pine Housing Authority, Inc.,

Spruce Pine, NCSt. Paul’s Family Resources,

St. Paul, MN

2001–30 I.R.B. 89 July 23, 2001

Statesmen, Inc., Charlotte, NCSunset Ministries, Ft. Worth, TXThird World Outreach (TWO), Inc.,

Bronx, NYTimberlake Restoration Fund, Inc.,

Lynchburg, VATithe Luv, Inc., Norfolk, VATriad Community Artspace, Inc.,

Greensboro, NCTriad Radio Project, Greensboro, NCTularcitos Parent Club,

Carmel Valley, CATwin Rivers Quilters, New Bern, NCUjamma, Incorporated, Charlotte, NCUnited Burial Fund, Inc.,

Chesapeake, VAUnited Ralph Bell Crusade for Christ

Ministry of Billy Graham, Clarksburg, WV

Voter Education and EqualRepresentation, Inc., Charlotte, NC

VQHA Ray Melton Youth ScholarshipFund, Montpelier, VA

Wake Electric Care, Inc., Wake Forest, NCWalking by Faith Prophetic Ministry,

Inc., North Chicago, ILWestview Bible College, Inc.,

Rocky Point, NCWestview Summer Baseball Softball

Association Norton, CTWillow Care, Raleigh, NCWoodbridge Foundation, Inc.,

Woodbridge, VAWorld Engineering Partnership for

Sustainable Development, Inc.,Alexandria, VA

York Non-Profit Housing Corporation,Santa Monica, CA

Youth Taking Charge, Arlington, VA

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or as aprivate operating foundation, the InternalRevenue Service will issue a ruling or de-termination letter with the revised classi-fication as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

July 23, 2001 i 2001–30 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, 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 usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling 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 thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security

Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contributions Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

2001–30 I.R.B. ii July 23, 2001

Numerical Finding List1

Bulletins 2001–27 through 2001–29

Announcements:

2001–69, 2001–27 I.R.B. 232001–70, 2001–27 I.R.B. 232001–71, 2001–27 I.R.B. 262001–72, 2001–28 I.R.B. 392001–73, 2001–28 I.R.B. 402001–74, 2001–28 I.R.B. 402001–75, 2001–28 I.R.B. 422001–76, 2001–29 I.R.B. 67

Notices:

2001–39, 2001–27 I.R.B. 32001–41, 2001–27 I.R.B. 2

Proposed Regulations:

REG–106917–99, 2001–27 I.R.B. 4REG–100548–01, 2001–29 I.R.B. 67

Railroad Retirement Quarterly Rates:

2001–27, I.R.B. 1

Revenue Procedures:

2001–30, 2001–29 I.R.B. 462001–39, 2001–28 I.R.B. 38

Revenue Rulings:

2001–34, 2001–28 I.R.B. 312001–35, 2001–29 I.R.B. 59

Treasury Decisions:

8947, 2001–28, I.R.B. 368948, 2001–28, I.R.B. 278949, 2001–28, I.R.B. 338950, 2001–28, I.R.B. 348951, 2001–29, I.R.B. 638952, 2001–29, I.R.B. 608953, 2001–29, I.R.B. 448954, 2001–29, I.R.B. 47

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2001–1 through 2001–26is in Internal Revenue Bulletin 2001–27, dated July2, 2001.

July 23, 2001 iii 2001–30 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2001–27 through 2001–29

Proposed Regulations:

LR–97–79Withdrawn byREG–100548–01, 2001–29 I.R.B. 67

LR–107–84Withdrawn byREG–100548–01, 2001–29 I.R.B. 67

REG–107186–00Corrected byAnn. 2001–71, 2001–27 I.R.B. 26

Revenue Procedures:

97–13Modified byRev. Proc. 2001–39, 2001–28 I.R.B. 38

2000–39Corrected byAnn. 2001–73, 2001–28 I.R.B. 40

Revenue Rulings:

57–589Obsoleted byREG–106917–99, 2001–27 I.R.B. 4






1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2001–1 through 2001–26 is in Internal RevenueBulletin 2001–27, dated July 2, 2001.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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Internal Revenue Bulletin No. 2001–30 bulletin

Documents

Transcript of Internal Revenue Bulletin No. 2001–30 bulletin