INCOME TAX

Rev. Rul. 2001–35, page 59.LIFO; price indexes; department stores. The May 2001Bureau of Labor Statistics price indexes are accepted foruse by department stores employing the retail inventory andlast-in, first-out inventory methods for valuing inventories fortax years ended on, or with reference to, May 31, 2001.

T.D. 8951, page 63.Final regulations under section 6323 of the Code set forthlimited circumstances under which the Service may withdrawa notice of federal tax lien. The regulations provide proce-dures for requesting the withdrawal of a notice and the noti-fication of credit agencies, financial institutions, and credi-tors.

T.D. 8953, page 44.Final regulations under section 32 of the Code provide guid-ance to taxpayers who have been denied the earned incomecredit (EIC) as a result of the deficiency procedures and whowish to claim the EIC in a subsequent year.

REG–100548–01, page 67.This document withdraws proposed regulations (LR–107–84, 1984–2 C.B. 902) under section 341 of the Codethat relate to collapsible corporations and proposed regula-tions (LR–97–79, 1984–2 C.B. 821) under section 1502 ofthe Code that relate to corporations filing consolidatedincome tax returns.

EMPLOYEE PLANS

Rev. Rul. 2001–30, page 46.Nondiscrimination; cross-testing. This ruling describesspecific conditions that a defined contribution plan allocationmust meet to be treated as a defined benefit replacementallocation under section 1.401(a)(4)–8(b) of the regulations.

T.D. 8954, page 47.Final regulations under section 401(a)(4) of the Code prescribeconditions under which certain defined contribution retirementplans (sometimes referred to as “new comparability” plans) cancomply with applicable nondiscrimination requirements basedon plan benefits rather than plan contributions.

EXEMPT ORGANIZATIONS

Announcement 2001–76, page 67.A list is provided of organizations now classified as privatefoundations.

ADMINISTRATIVE

T.D. 8952, page 60.Final regulations under section 6302 of the Code perma-nently remove as authorized depositaries the twelve FederalReserve banks and their approximately two dozen branches.

Internal Revenue

bbuulllleettiinnBulletin No. 2001–29

July 16, 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 16, 2001 2001–29 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.

Section 32.—Earned Income

26 CFR 1.32–3: Eligibility requirements afterdenial of the earned income credit.

T.D. 8953

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 602

Eligibility Requirements AfterDenial of the Earned IncomeCredit

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document containsfinal regulations that provide guidance totaxpayers who have been denied theearned income credit (EIC) as a result ofthe deficiency procedures and wish toclaim the EIC in a subsequent year. Thetemporary regulations apply to taxpayersclaiming the EIC for taxable years begin-ning after December 31, 1997, where thetaxpayer’s EIC claim was denied for ataxable year beginning after December31, 1996.

DATES: Effective date: These regula-tions are effective June 25, 2001.

Applicability dates: For dates of ap-plicability, see §1.32–3(f) of these regula-tions.

FOR FURTHER INFORMATION CON-TACT: Karin Loverud at 202-622-6080(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number1545–1575. Responses to this collectionof information are mandatory.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-

lection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

The burden is reflected in the burden ofForm 8862.

Comments and suggestions for reduc-ing the burden imposed by this regulationshould be sent to the Internal RevenueService, Attn: IRS Reports Clearance Of-ficer, W:CAR:MP:FP, Washington, DC20224, and to theOffice of Managementand Budget, Attn: Desk Officer for theDepartment of the Treasury, Office of In-formation and Regulatory Affairs, Wash-ington, DC 20503.

Books or records relating to this collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

Section 32(k) was added by the Tax-payer Relief Act of 1997. Section32(k)(2) provides that, in the case of ataxpayer who is denied the EIC as a resultof the deficiency procedures, no EIC is al-lowed for any subsequent taxable year un-less the taxpayer provides such informa-tion as the Secretary may require todemonstrate eligibility for the credit. OnJune 25, 1998, temporary regulations(T.D. 8773, 1998–2 C.B. 70) relating toearned income credit eligibility require-ments under section 32(k)(2) were pub-lished in the Federal Register(63 FR34594). A notice of proposed rulemaking(REG–116608–97, 1998–2 C.B. 78)cross-referencing the temporary regula-tions was published in the Federal Regis-ter for the same day (63 FR 34615).

No written comments responding to thenotice of proposed rulemaking were re-ceived. No public hearing was requestedor held.

As part of an audit pertaining to theIRS’s management of the EIC eligibilityprogram, the Treasury Inspector Generalfor Tax Administration recommended thatthe Treasury and the IRS reconsider (1)the time at which the taxpayer should berequired to establish eligibility to claimthe EIC, and (2) whether the eligibility re-

quirement should pertain to the reason theEIC was denied. For example, under thetemporary regulations, a taxpayer who isdenied the credit on the basis of a childwho is determined not to be a qualifyingchild must establish eligibility the nexttime the taxpayer claims the EIC, regard-less of whether the taxpayer is claimingthe credit on the basis of one or morequalifying children or on the basis of noqualifying children. Treasury and the IRSbelieve that the purpose of the eligibilityrequirement (to prevent erroneous claims)is better effectuated if the taxpayer estab-lishes eligibility the next time the tax-payer claims the credit with one or morequalifying children, rather than the nexttime the taxpayer claims the credit.

The IRS is currently exploring whether,and to what extent, its system is capableof undertaking such a change. If a changeis made, it would not affect the method ofestablishing eligibility, that is, the tax-payer would continue to be required to at-tach a completed Form 8862 to his or hertax return. The Treasury and the IRS donot expect any change will affect returnsfor tax year 2001.

If a change is made, the IRS expects toinform taxpayers of the change in two spe-cific ways. First, the IRS would reviseLetter 3094, which informs the taxpayer ofthe eligibility requirements. Second, theIRS would revise the instructions for Form8862 to clarify the return to which it mustbe attached. In addition, the IRS would in-clude information regarding the change inall IRS taxpayer publications that deal withthe EIC eligibility requirements.

The proposed regulations under section32(k)(2) are adopted as revised by thisTreasury decision. The revisions are dis-cussed below.

Explanation of Revisions

To permit the IRS to make changes tothe EIC eligibility program as indicatedabove, §1.32–3(c) is revised to state thatthe Form 8862 instructions will instructthe taxpayer when to file Form 8862. Anew sentence is added to §1.32–3(c) tothe effect that, if the taxpayer attachesForm 8862 to an incorrect return, the tax-payer will nevertheless be required to at-tach Form 8862 to the correct return.

July 16, 2001 44 2001–29 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

The IRS and Treasury will considerwritten comments pertaining to these re-visions. Submissions should be sent to:CC:ITA:RU (T.D. 8953), room 5226, In-ternal Revenue Service, POB 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered Mon-day through Friday between the hours of8 a.m. and 5 p.m. to: CC:ITA:RU (T.D.8953), Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW.,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.gov/tax_regs/regslist.html.

Special Analyses

It has been determined that these finalregulations are not a significant regulatoryaction as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) does notapply to these regulations.

It is hereby certified that these regulationswill not have a significant economic impacton a substantial number of small entities.This certification is based upon the fact thatthe underlying statute applies only to indi-viduals. Therefore, a regulatory flexibilityanalysis under the Regulatory Flexibility Act(5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of theCode, the notice of proposed rulemakingpreceding these regulations was submit-ted to the Chief Counsel for Advocacy ofthe Small Business Administration forcomment on its impact on small business.

Drafting Information

The principal author of these regula-tions is Karin Loverud, Office of DivisionCounsel/Associate Chief Counsel (TaxExempt and Government Entities). How-ever, other personnel from the IRS andthe Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Par. 2. Section 1.32–3 is added to read

as follows:

§1.32–3 Eligibility requirements afterdenial of the earned income credit.

(a) In general. A taxpayer who hasbeen denied the earned income credit(EIC), in whole or in part, as a result ofthe deficiency procedures under sub-chapter B of chapter 63 (deficiency pro-cedures) is ineligible to file a returnclaiming the EIC subsequent to the de-nial until the taxpayer demonstrates eli-gibility for the EIC in accordance withparagraph (c) of this section. If a tax-payer demonstrates eligibility for a tax-able year in accordance with paragraph(c) of this section, the taxpayer need notcomply with those requirements for anysubsequent taxable year unless the Ser-vice again denies the EIC as a result ofthe deficiency procedures.

(b) Denial of the EIC as a result of thedeficiency procedures.For purposes ofthis section, denial of the EIC as a resultof the deficiency procedures occurs whena tax on account of the EIC is assessed asa deficiency (other than as a mathematicalor clerical error under section6213(b)(1)).

(c) Demonstration of eligibility. Inthe case of a taxpayer to whom para-graph (a) of this section applies, and ex-cept as otherwise provided by the Com-missioner in the instructions for Form8862, “Information To Claim Earned In-come Credit After Disallowance,” noclaim for the EIC filed subsequent to thedenial is allowed unless the taxpayerproperly completes Form 8862, demon-strating eligibility for the EIC, and oth-erwise is eligible for the EIC. If anyitem of information on Form 8862 is in-correct or inconsistent with any item onthe return, the taxpayer will be treated asnot demonstrating eligibility for theEIC. The taxpayer must follow the in-structions for Form 8862 to determinethe income tax return to which Form8862 must be attached. If the taxpayerattaches Form 8862 to an incorrect taxreturn, the taxpayer will not be relievedof the requirement that the taxpayer at-

tach Form 8862 to the correct tax returnand will, therefore, not be treated asmeeting the taxpayer’s obligation underparagraph (a) of this section.

(d) Failure to demonstrate eligibility.If a taxpayer to whom paragraph (a) ofthis section applies fails to satisfy the re-quirements of paragraph (c) of this sec-tion with respect to a particular taxableyear, the IRS can deny the EIC as amathematical or clerical error under sec-tion 6213(g)(2)(K).

(e) Special rule where one spouse de-nied EIC. The eligibility requirementsset forth in this section apply to taxpay-ers filing a joint return where one spousewas denied the EIC for a taxable yearprior to marriage and has not establishedeligibility as either an unmarried or mar-ried taxpayer for a subsequent taxableyear.

(f) Effective date. This section ap-plies to returns claiming the EIC for tax-able years beginning after December 31,1997, where the EIC was denied for ataxable year beginning after December31, 1996.

§1.32–3T [Removed]

Par. 3. Section 1.32–3T is removed.

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 4. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 5. In §602.101, paragraph (b) is

amended by:1. Removing the entry for 1.32–3T

from the table.2. Adding an entry for 1.32–3 to read

as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section Current OMBwhere identified and control No.described

* * * * *1.32–3 . . . . . . . . . . . . . . . . . 1545–1575

* * * * *

2001–29 I.R.B. 45 July 16, 2001

July 16, 2001 46 2001–29 I.R.B.

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved June 20, 2001.

Mark Weinberger,Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June22, 2001, 8:45 a.m., and published in the issue of theFederal Register for June 25, 2001, 66 F.R. 33636)

Section 401.—QualifiedPension, Profit Sharing andStock Bonus Plans

26 CFR 1.401(a)(4)–8: Cross-testing.

This revenue ruling describes specific con-ditions in order for defined benefit replace-ment allocations under a defined contribu-tion plan to meet section 1.401(a)(4)–8(b)of the Income Tax Regulations.

Rev. Rul. 2001–30

I. PURPOSE

This revenue ruling provides guidancewith respect to the application of§ 1.401(a)(4)–8(b) of the Income TaxRegulations relating to compliance of cer-tain new comparability and similar de-fined contribution plans with the nondis-crimination requirements of § 401(a)(4)of the Internal Revenue Code.

Under those regulations, a qualified de-fined contribution plan that has broadlyavailable allocation rates can be tested fornondiscrimination based on plan benefits(rather than contributions) whether or notit meets the minimum allocation gateway.In determining whether a plan has broadlyavailable allocation rates, the regulationspermit an allocation to be disregarded tothe extent that it is a defined benefit re-placement allocation or other transitionallocation. Allocations are defined bene-fit replacement allocations if they satisfythe basic conditions in the regulations andthe specific conditions prescribed in thisrevenue ruling.

II. BACKGROUND

Under final regulations (T.D. 8954,2001–29 I.R.B. 47) amending §1.401(a)(4)–8(b), published in the Federal Regis-

ter on June 29, 2001, a defined contribu-tion plan must satisfy a minimum alloca-tion gateway in order to be eligible tomeet the nondiscrimination requirementsof § 401(a)(4) on the basis of plan bene-fits rather than contributions, unless, forthe plan year, the plan has broadly avail-able allocation rates (as defined in theregulations) or certain age-based alloca-tions.

Section 1.401(a)(4)–8(b)(1)(iii)(A)provides that a plan has broadly availableallocation rates for a plan year if each al-location rate under the plan is currentlyavailable during the plan year (within themeaning of § 1.401(a)(4)–4(b)(2)) to agroup of employees that satisfies § 410(b)(without regard to the average benefit per-centage test of § 1.410(b)–5). In deter-mining whether a plan has broadly avail-able allocation rates for the plan year, anemployee’s allocation may be disregardedto the extent that it is a transition alloca-tion. In order to be treated as a transitionallocation, the allocation must be either adefined benefit replacement allocation(DBRA) described in § 1.401(a)(4)–8(b)(1)(iii)(D), or a pre-existing replace-ment allocation or pre-existing mergerand acquisition allocation described in§ 1.401(a)(4)–8(b)(1)(iii)(E). Plan provi-sions relating to transition allocationsmust meet the requirements of § 1.401(a)(4)–8(b)(1)(iii)(C).

Under § 1.401(a)(4)–8(b)(1)(iii)(D), inorder for an allocation to be a DBRA itmust be provided in accordance withguidance prescribed by the Commissionerin the Internal Revenue Bulletin (see “III.Specific Conditions” below) and the basicconditions set forth in § 1.401(a)(4)–8(b)(1)(iii)(D)(1)–(4).

III. SPECIFIC CONDITIONS

(1) This revenue ruling sets forth thespecific conditions that an allocation mustsatisfy to be treated as a DBRA under§ 1.401(a)(4)–8(b)(1)(iii)(D). These spe-cific conditions are designed to permitemployers to provide, in a nondiscrimina-tory manner, allocations replacing the re-tirement benefits that would have beenprovided under a defined benefit plan,without having to satisfy the minimum al-location gateway. At the same time, thespecific conditions are designed to pre-vent the inappropriate avoidance of thegateway in the case of plans that provide

special allocations for employees whoformerly benefited under a defined bene-fit plan.

(2) Pursuant to this revenue ruling, tobe treated as a DBRA, an allocation mustmeet the following conditions for a planyear:

(a) To satisfy the basic condition in§ 1.401(a)(4)–8(b)(1)(iii)(D)(1) thatthe allocations are provided to a groupof employees who formerly benefittedunder an established nondiscriminatorydefined benefit plan of the employer orof a prior employer that provided age-based equivalent allocation rates, theallocations must be based on a definedbenefit plan that satisfies the followingspecific conditions:

(i) The defined benefit plan’s benefitformula applicable to the group ofemployees generated equivalent nor-mal allocation rates (determinedwithout regard to changes in accrualrates attributable to changes in anemployee’s years of service) that in-creased from year to year as employ-ees attained higher ages.

(ii) The defined benefit plan satisfied§§ 410(b) and 401(a)(4), without re-gard to § 410(b)(6)(C) and withoutaggregating with any other plan, forthe plan year immediately precedingthe first plan year for which the allo-cation is provided to the employees.If the defined benefit plan was spon-sored by a prior employer, but not bythe employer, this condition does notapply.

(iii) The defined benefit plan was ineffect for at least the 5-year periodending on the date benefit accrualsfor the employees under the definedbenefit plan cease (with one yearsubstituted for 5 years in the case ofa defined benefit plan of a formeremployer), and neither the plan for-mula nor the coverage of the planhas been substantially changed dur-ing such period.

(b) To satisfy the basic condition in§ 1.401(a)(4)–8(b)(1)(iii)(D)(2) thatthe allocations for each employee in thegroup were reasonably calculated, in aconsistent manner, to replace the retire-ment benefits that the employee wouldhave been provided under a definedbenefit plan of the employer or of the

prior employer, the allocation must bereasonably calculated to replace theemployee’s retirement benefits underthe defined benefit plan based on theterms of the defined benefit plan (in-cluding the § 415(b)(1)(A) limit) as ineffect immediately prior to the datebenefit accruals under the defined ben-efit plan ceased.

(c) To satisfy the basic condition in§ 1.401(a)(4)–8(b)(1)(iii)(D)(4) thatthe composition of the group of em-ployees who receive the allocations forthe plan year is nondiscriminatory, thegroup of employees who receive the al-locations must satisfy § 410(b) (deter-mined without regard to the averagebenefit percentage test of § 1.410(b)–5)for the plan year.

DRAFTING INFORMATION

The principal authors of this revenue rul-ing are Kenneth R. Conn of the EmployeePlans, Tax Exempt and Government Enti-ties Division and John T. Ricotta and LindaS. F. Marshall of the Office of DivisionCounsel/Associate Chief Counsel (Tax Ex-empt and Government Entities). For fur-ther information regarding this revenue rul-ing, please contact the Employee Plans’taxpayer assistance telephone service be-tween the hours of 1:30 and 3:30 p.m. East-ern time, Monday through Thursday, bycalling (202) 283-9516. Mr. Conn’s num-ber is (202) 283-9526. Mr. Ricotta’s num-ber is (202) 622-6060. Ms. Marshall’snumber is (202) 622-6090. (These tele-phone numbers are not toll-free.)

26 CFR 1.401(a)(4)–8: Cross-testing.

T.D. 8954

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1

Nondiscrimination Requirementsfor Certain Defined ContributionRetirement Plans

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations that permit certain de-

fined contribution retirement plans todemonstrate compliance with the nondis-crimination requirements based on planbenefits rather than contributions. Underthe final regulations, a defined contribu-tion plan can test on a benefits basis if itprovides broadly available allocationrates, age-based allocations, or passes agateway requiring allocation rates fornonhighly compensated employees to beat least 5% of pay or at least 1/3 of thehighest allocation rate for highly compen-sated employees. The regulations alsopermit qualified defined contribution anddefined benefit plans that are tested to-gether as a single, aggregated plan (andthat are not primarily defined benefit orbroadly available separate plans) to teston a benefits basis after passing a similargateway, under which the allocation ratefor nonhighly compensated employeesneed not exceed 7 1/2 % of pay. Thesefinal regulations affect employers thatmaintain qualified retirement plans andqualified retirement plan participants.

DATES: Effective Date: These regula-tions are effective June 29, 2001.

Applicability Date: These regulationsapply for plan years beginning on or afterJanuary 1, 2002.

FOR FURTHER INFORMATION CON-TACT: John T. Ricotta, 202-622-6060, orLinda S. F. Marshall, 202-622-6090 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 1 under section 401(a)(4) ofthe Internal Revenue Code of 1986(Code).

Section 401(a)(4) provides that a planor trust forming part of a stock bonus,pension, or profit-sharing plan of an em-ployer shall not constitute a qualified planunder section 401(a) of the Code unlessthe contributions or benefits providedunder the plan do not discriminate infavor of highly compensated employees(HCEs) (within the meaning of section414(q)). Whether a plan satisfies this re-quirement depends on the form of theplan and its effect in operation.

Section 415(b)(6)(A) provides that thecomputation of benefits under a definedcontribution plan, for purposes of section

401(a)(4), shall not be made on a basis in-consistent with regulations prescribed bythe Secretary. The legislative history ofthis provision explains that, in the case oftarget benefit and other defined contribu-tion plans, “regulations may establish rea-sonable earnings assumptions and otherfactors for these plans to prevent discrimi-nation.” Conf. Rep. No. 1280, 93d Cong.,2d Sess. 277 (1974).

Under the section 401(a)(4) regula-tions, a plan can demonstrate that eitherthe contributions or the benefits providedunder the plan are nondiscriminatory inamount. Defined contribution plans gen-erally satisfy the regulations by demon-strating that contributions are nondiscrim-inatory in amount, through certain safeharbors provided for under the regulationsor through general testing.

A defined contribution plan (other thanan ESOP) may, however, satisfy the regu-lations on the basis of benefits by usingcross-testing pursuant to rules provided in§1.401(a)(4)–8 of the regulations. Underthis cross-testing method, contributionsare converted, using actuarial assump-tions, to equivalent benefits payable atnormal retirement age, and these equiva-lent benefits are tested in a manner similarto the testing of employer-provided bene-fits under a defined benefit plan.

In Notice 2000–14 (2000–10 I.R.B.737), released February 24, 2000, the IRSand the Treasury Department initiated areview of issues related to use of thecross-testing method by so-called newcomparability plans and requested publiccomments on this plan design from plansponsors, participants and other interestedparties. In general, new comparabilityplans are defined contribution plans thathave built-in disparities between the allo-cation rates for classifications of partici-pants consisting entirely or predominantlyof HCEs and the allocation rates for otheremployees.

In a typical new comparability plan,HCEs receive high allocation rates, whilenonhighly compensated employees(NHCEs), regardless of their age or yearsof service, receive comparatively low al-location rates. For example, HCEs insuch a plan might receive allocations of18 or 20% of compensation, whileNHCEs might receive allocations of 3%of compensation. A similar plan design,sometimes known as a super-integrated

2001–29 I.R.B. 47 July 16, 2001

plan, provides for an additional allocationrate that applies only to compensation inexcess of a specified threshold, but thespecified threshold (e.g., $100,000) or theadditional allocation rate (e.g., 10%) ishigher than the maximum threshold andrate allowed under the permitted disparityrules of section 401(l).

These new comparability and similarplans rely on the cross-testing method todemonstrate compliance with the nondis-crimination rules by comparing the actu-arially projected value of the employercontributions for the younger NHCEswith the actuarial projections of the largercontributions (as a percentage of compen-sation) for the older HCEs. As a result,these plans are able generally to providehigher rates of employer contributions toHCEs, while NHCEs are not allowed toearn the higher allocation rates as theywork additional years for the employer orgrow older. Notwithstanding the analyti-cal underpinnings of cross-testing, theIRS and Treasury Department becameconcerned that new comparability andsimilar plans were not consistent with thebasic purpose of the nondiscriminationrules under section 401(a)(4).

After consideration of the commentsreceived in response to Notice 2000–14,the IRS and Treasury issued pro-posed regulations on this subject(REG–114697–00, 2000–43 I.R.B. 421),which were published in the FederalRegister on October 6, 2000 (65 FR59774). The proposed regulations pre-served the cross-testing rules of the sec-tion 401(a)(4) regulations, but prescribeda gateway condition for new comparabil-ity and similar plans to meet in order tobe eligible to use cross-testing to satisfythe nondiscrimination rules on the basisof benefits. However, defined contribu-tion plans that provide broadly availableallocation rates, as defined in the pro-posed regulations, did not have to satisfythe gateway. The definition of broadlyavailable allocation rates under the pro-posed regulations covered plans that pro-vide different allocation rates to differ-ent, nondiscriminatory groups ofemployees. Under the proposed regula-tions, the definition also covered plansthat base allocations or allocation rateson age or years of service, that, in con-trast to new comparability plans, providean opportunity for participants to “grow

into” higher allocation rates as they ageor accumulate additional service.

The proposed regulations also ad-dressed a new comparability-type plandesign that aggregates a defined benefitplan that benefits primarily HCEs with adefined contribution plan that benefitsprimarily NHCEs. This design wouldpermit an employer to circumvent theminimum allocation gateway by aggre-gating (for purposes of the nondiscrimina-tion rules) a new comparability or similardefined contribution plan with a definedbenefit plan that provides only minimalbenefits to NHCEs or covers only a rela-tively small number of NHCEs. In addi-tion, a defined benefit plan that benefitsprimarily HCEs, and that is aggregatedwith a defined contribution plan fornondiscrimination testing, could produceresults similar to a new comparabilityplan but with a potential for substantiallymore valuable benefits for HCEs. Theproposed regulations provided a gatewayfor testing the aggregated plans on thebasis of benefits that must be satisfied un-less the aggregated defined contributionand defined benefit plan (the DB/DCplan) is primarily defined benefit in char-acter (as defined in the proposed regula-tions), or unless each of the defined con-tribution and defined benefit portions ofthe DB/DC plan is a broadly availableseparate plan (as defined in the proposedregulations).

Written comments responding to thenotice of proposed rulemaking were re-ceived, and a public hearing was held onJanuary 25, 2001, at the request of onecommentator. After consideration of thecomments, the proposed regulations areadopted as revised by this Treasury deci-sion.

Explanation of Provisions

A. Overview

Like the proposed regulations, thesefinal regulations permit defined contribu-tion plans with either broadly available al-location rates or certain age-based alloca-tion rates to test on a benefits basis(cross-test) in the same manner as undercurrent law, and permit other defined con-tribution plans to cross-test once they passa gateway that prescribes minimum allo-cation rates for NHCEs. Similarly, thesefinal regulations retain the rule in the pro-

posed regulations that permits a DB/DCplan to test on a benefits basis in the samemanner as under current law if theDB/DC plan either is primarily definedbenefit in character or consists of broadlyavailable separate plans. Other DB/DCplans are permitted to test on a benefitsbasis once they pass a correspondinggateway prescribing minimum aggregatenormal allocation rates for NHCEs.

B. Gateway for Cross-Testing of NewComparability and Similar Plans

These final regulations retain the rulein the proposed regulations that requires adefined contribution plan that does notprovide broadly available allocation ratesor certain age-based allocation rates (asthese terms are defined in these final reg-ulations) to satisfy a gateway in order tobe eligible to use the cross-testing rules tomeet the nondiscrimination requirementsof section 401(a)(4). Under these finalregulations, as under the proposed regula-tions, a plan satisfies this minimum allo-cation gateway if each NHCE in the planhas an allocation rate that is at least onethird of the allocation rate of the HCEwith the highest allocation rate, but a planis deemed to satisfy the gateway if eachNHCE receives an allocation of at least5% of the NHCE’s compensation (withinthe meaning of section 415(c)(3)).

Several commentators raised questionsabout the interaction of the requirementsunder the proposed regulations and otherregulatory rules relating to testing fornondiscrimination. For example, somecommentators asked what was intendedby the gateway requirement that allNHCEs receive the minimum required al-location. Except as specifically provided,the regulatory definitions and rules thatapply for purposes of section 401(a)(4)also apply for purposes of these regula-tions. For example, the term employee,as used in these regulations, is defined in§1.401(a)(4)–12 as an employee (withinthe meaning of §1.410(b)–9) who benefitsas an employee under the plan for the planyear, and an NHCE is defined in§1.401(a)(4)–12 as an employee who isnot an HCE. Thus, an individual whodoes not otherwise benefit under the planfor the plan year is not an employee underthese regulations, hence not an NHCE,and need not be given the minimum re-quired allocation under the gateway.

July 16, 2001 48 2001–29 I.R.B.

Similarly, the allocation rate referred to inthe gateway is determined under§1.401(a)(4)–2(c) as the allocations to anemployee’s account for a plan year, ex-pressed either as a percentage of plan yearcompensation (which must be calculatedusing a definition of compensation thatsatisfies the requirements of section414(s)) or as a dollar amount.

The general rules and regulatory defini-tions applicable under section 410(b)apply also for purposes of these regula-tions. For example, these regulations donot change the general rule prohibitingaggregation of a 401(k) plan or 401(m)plan with a plan providing nonelectivecontributions. Accordingly, matchingcontributions are not taken into accountfor purposes of the gateway. Similarly,pursuant to §1.410(b)–6(b)(3), if a planbenefits employees who have not met theminimum age and service requirements ofsection 410(a)(1), the plan may be treatedas two separate plans, one for those other-wise excludable employees and one forthe other employees benefitting under theplan. Thus, if the plan is treated as twoseparate plans in this manner, cross-test-ing the portion of the plan benefitting thenonexcludable employees will not resultin minimum required allocations underthe gateway for the employees who havenot met the section 410(a)(1) minimumage and service requirements.

One commentator suggested that theregulatory provision that permits a plan tosatisfy the gateway requirement by pro-viding an allocation of at least 5% ofcompensation within the meaning of sec-tion 415(c)(3) not require that the alloca-tion be based on a full year’s compensa-tion in the case of an employee whoparticipates in the plan for only a portionof the plan year. The final regulationsmodify this requirement as suggested.The final regulations allow a plan to sat-isfy the gateway by providing an alloca-tion of at least 5% of compensation withinthe meaning of section 415(c)(3), limitedto a period otherwise permissible underthe timing rules applicable under the defi-nition of plan year compensation, in thesame manner as the general rules underthe section 401(a)(4) regulations. The de-finition of plan year compensation per-mits use of amounts paid only during theperiod of participation within the planyear.

Some commentators questionedwhether it was necessary to require theuse of compensation within the meaningof section 415(c)(3) for purposes of the5% of compensation component of theminimum allocation gateway. One ofthese commentators argued that usingcompensation within the meaning of sec-tion 414(s) would be more appropriate.Two other commentators argued that, forthis purpose, plans should be able to use adefinition of compensation that would bea reasonable definition of compensationfor purposes of section 414(s) without re-gard to whether the definition of compen-sation meets the nondiscrimination stan-dard under the section 414(s) regulations.

After consideration of these comments,the requirement that section 415(c)(3)compensation be used for purposes of the5% of compensation component of theminimum allocation gateway has been re-tained. For purposes of the “one third”component of the gateway, a definition ofcompensation that satisfies section 414(s)is an appropriate measure because thiscomponent is based on the ratio of HCEallocation rates to NHCE allocation rates.By contrast, the 5% of compensationcomponent of the gateway does not re-flect a comparison of NHCE allocationsto HCE allocations, but is based on a par-ticular level of NHCE allocations. With-out the comparison between HCE andNHCE allocations, a rule permitting theuse of a definition of compensation thatsatisfies section 414(s), but is less inclu-sive than total compensation, could leadto NHCE allocations that are significantlysmaller than the minimum that is contem-plated by the regulations. Therefore, it isappropriate to require the use of totalcompensation, as defined in section415(c)(3), for the 5% allocation compo-nent of the gateway. Furthermore, per-mitting the use of a potentially discrimi-natory definition of compensation wouldbe inconsistent with the nondiscrimina-tion requirements in general, includingthe minimum allocation gateway.

C. Plans with Broadly AvailableAllocation Rates

Like the proposed regulations, thesefinal regulations provide that a plan thathas broadly available allocation ratesneed not satisfy the minimum allocationgateway. In order to be broadly available,

each allocation rate under the plan mustbe currently available to a group of em-ployees that satisfies section 410(b)(without regard to the average benefit per-centage test). Thus, if, within one plan,an employer provides different allocationrates for nondiscriminatory groups of em-ployees at different locations or differentprofit centers, the plan would not need tosatisfy the minimum allocation gatewayin order to use cross-testing.

For purposes of determining whether anallocation rate that was available only toemployees who satisfied an age or servicecondition was currently available to a sec-tion 410(b) group, the proposed regula-tions allowed such a condition to be disre-garded if certain standards were met. Thefinal regulations retain this exception fromthe application of the minimum allocationgateway. However, this exception hasbeen relocated and is now part of an ex-panded provision for plans with age-basedallocations (see Plans with Age-Based Al-locations portion of this preamble).

In response to comments, the final regu-lations also liberalize the determination ofwhether a plan has broadly available allo-cation rates. First, the final regulationspermit two allocation rates to be aggre-gated in a manner similar to the rule thatpermits aggregation of certain benefits,rights or features. This rule permits ex-cess NHCEs with a higher allocation rateto be used to support a lower allocationrate. For example, under this rule, if undera plan there are two groups of participants,one group that receives an allocation rateof 10% and another that receives an allo-cation rate of 3%, and if the group of em-ployees who receive the 10% allocationrate satisfies section 410(b) (without re-gard to the average benefit percentagetest), then the 10% rate and the 3% ratecan be aggregated and treated as a singleallocation rate for purposes of determiningwhether the plan has broadly available al-location rates. In addition, the final regu-lations provide that, in determiningwhether a plan provides broadly availableallocation rates, differences in allocationrates resulting from any method of permit-ted disparity provided for under the sec-tion 401(l) regulations are disregarded.

D. Transition Allocations

Several commentators raised the con-cern that a defined contribution plan may

2001–29 I.R.B. 49 July 16, 2001

fail the broadly available test because ofgrandfathered allocation rates provided toemployees who formerly participated in adefined benefit plan or provided to agroup of employees in connection with amerger, acquisition, or other similar trans-action. In response to these comments,the final regulations permit an employee’sallocation to be disregarded, to the extentthe employee’s allocation is a transitionallocation (as defined in the regulations)for the plan year. Transition allocationswhich can be disregarded can be definedbenefit replacement allocations, pre-exist-ing replacement allocations, or pre-exist-ing merger and acquisition allocations (asdefined in the regulations).

In each case, the transition allocationsmust be provided to a closed group of em-ployees and must be established underplan provisions. Once the allocations areestablished under the plan, they cannot bemodified, except to reduce allocations forHCEs, or because of de minimischanges(such as a change in the definition ofcompensation to include section 132(f)elective reductions). A plan also does notviolate this requirement because of anamendment that either adds or removes aprovision applicable to all employees inthe group eligible for the allocationsunder which each employee who is eligi-ble for a transition allocation receives thegreater of the transition allocation or an-other allocation for which the employeewould otherwise be eligible. If the planprovides that all employees who are eligi-ble for the transition allocation receive thegreater of the transition allocation or anotherwise available allocation, the other-wise available allocation is consideredcurrently available to all such employees,including employees for whom the transi-tion allocation is greater.

These final regulations set forth basicconditions for defined benefit replace-ment allocations. These conditions pro-vide a framework that is designed to en-sure that these allocations are provided ina manner consistent with the general prin-ciples underlying the provisions forbroadly available allocation rates underthese regulations. The regulations thendelegate authority to the Commissioner toprescribe rules for defined benefit re-placement allocations in revenue rulings,notices, and other guidance published inthe Internal Revenue Bulletin. Rev. Rul.

2001–30 (2001–29 I.R.B. 46), dated July16, 2001, published in conjunction withthese final regulations, prescribes specificconditions for defined benefit replace-ment allocations that relate to the basicconditions set forth in the regulations.This division of the medium of guidanceis designed to provide ongoing flexibilityto the IRS and Treasury to respond tochanging circumstances, or additional in-formation relating to defined benefit re-placement allocations.

The basic conditions that allocationsmust satisfy in order to be defined benefitreplacement allocations are as follows:(1) The allocations are provided to agroup of employees who formerly bene-fitted under an established nondiscrimina-tory defined benefit plan of the employeror of a prior employer that provided age-based equivalent allocation rates; (2) theallocations for each employee were rea-sonably calculated, in a consistent man-ner, to replace the retirement benefits thatthe employee would have been providedunder the defined benefit plan if the em-ployee had continued to benefit under thedefined benefit plan; (3) no employeewho receives the allocation receives anyother allocations under the plan for theplan year (except as provided in these reg-ulations); and (4) the composition of thegroup of employees who receive the allo-cations is nondiscriminatory.

Rev. Rul. 2001–30 fleshes out thesebasic conditions for determining whetheran allocation is a defined benefit replace-ment allocation. Under the revenue rul-ing, the defined benefit plan’s benefit for-mula applicable to the group ofemployees must be one that generatedequivalent normal allocation rates (deter-mined without regard to changes in ac-crual rates attributable to changes in anemployee’s years of service) that in-creased from year to year as employeesattained higher ages. Further, if the de-fined benefit plan was sponsored by theemployer, the defined benefit plan satis-fied sections 410(b) and 401(a)(4), with-out regard to section 410(b)(6)(C) andwithout aggregating with any other plan,for the plan year which immediately pre-cedes the first plan year for which the al-locations are provided. Finally, the de-fined benefit plan must be one that hasbeen established and maintained withoutsubstantial change for at least the 5 years

ending on the date benefit accruals underthe defined benefit plan cease (with oneyear substituted for 5 years in the case ofa defined benefit plan of a former em-ployer).

In order to be defined benefit replace-ment allocations for the plan year, the al-locations for each employee in the groupmust be reasonably calculated, in a con-sistent manner, to replace the employee’sretirement benefits under the defined ben-efit plan based on the terms of the definedbenefit plan (including the section415(b)(1)(A) limit) as in effect immedi-ately prior to the date accruals under thedefined benefit plan cease. In addition,the group of employees who receive theallocations in a plan year must satisfy sec-tion 410(b) (determined without regard tothe average benefit percentage test of§1.410(b)–5).

Although the regulations and Rev. Rul.2001–30 prescribe conditions for the de-fined benefit replacement allocations,they still leave employers with flexibilityin structuring these benefits. For exam-ple, there is more than one way in whichthe allocations may reasonably be calcu-lated, such as a level percentage of payfor each year or an amount that increasesas the employee ages.

The final regulations provide specialrules applicable to allocations that are ei-ther pre-existing replacement allocationsor pre-existing merger and acquisition al-locations. Allocations are pre-existing re-placement allocations if the allocationsare provided pursuant to a plan provisionadopted before June 29, 2001, are pro-vided to employees who formerly benefit-ted under a defined benefit plan and arereasonably calculated, in a consistentmanner, to replace some or all of the re-tirement benefits that the employee wouldhave received under the defined benefitplan and any other plan or arrangement ofthe employer if the employee had contin-ued to benefit under such defined benefitplan and such other plan or arrangement.Allocations are pre-existing merger andacquisition allocations if the allocationswere established in connection with astock or asset acquisition, merger, or othersimilar transaction occurring prior to Au-gust 28, 2001, for a group of employeeswho were employed by the acquired tradeor business prior to a specified date, pro-vided that the class of employees eligible

July 16, 2001 50 2001–29 I.R.B.

for the allocations is closed no later thantwo years after the transaction (or January1, 2002, if earlier), the allocations are pro-vided pursuant to a plan amendmentadopted by the date the class was closed,and the allocations for each employee inthe group are reasonably calculated, in aconsistent manner, to replace some or allof the retirement benefits that the em-ployee would have received under anyplan of the employer if the new employerhad continued to provide the retirementbenefits that the prior employer was pro-viding for employees of the trade or busi-ness.

E. Plans with Age-Based Allocations

These final regulations provide a sepa-rate exception from the application of theminimum allocation gateway for certainplans with age-based allocation rates.This provision incorporates the exceptionunder the proposed regulations for planswith gradual age or service schedules, andexpands the exception to include plansthat provide for allocation rates based ona uniform target benefit allocation.

A plan has a gradual age or serviceschedule if the schedule of allocationrates under the plan’s formula is availableto all employees in the plan and providesfor allocation rates that increase smoothlyat regular intervals. The rules applicableto the schedule of allocation rates are de-signed to be sufficiently flexible to ac-commodate a wide variety of age- or ser-vice-based plans (including age-weightedprofit-sharing plans that provide for allo-cations resulting in the same equivalentaccrual rate for all employees). The finalregulations clarify that a plan projectingfuture age or service may not use imputeddisparity in determining whether the allo-cation rates under the schedule increasesmoothly at regular intervals. In responseto comments, the final regulations alsoaccommodate smoothly increasing sched-ules of allocation rates that are based onthe sum of age and years of service. Inaddition, to conform with the rules forcomputation of service under§1.401(a)(4)–12, references to servicehave been changed to years of service.

The requirement that the allocationrates under a schedule increase smoothlyat regular intervals provides importantprotection for employees, because this re-quirement limits the exception from the

minimum allocation gateway to plans inwhich NHCEs actually receive the benefitof higher rates as they attain higher agesor complete additional years of service.Some commentators expressed concernthat employers could be forced to reduceallocations to younger or shorter-serviceNHCEs in order to satisfy the conditionsfor allocation rates that increase smoothlyat regular intervals. In response to thesecomments, the final regulations providethat a plan’s schedule of allocation ratesdoes not fail to increase smoothly at regu-lar intervals merely because a specifiedminimum uniform allocation rate is pro-vided for all employees or because theminimum benefit described in section416(c)(2) is provided for all non-key em-ployees (either because the plan is topheavy or without regard to whether theplan is top heavy) if one of two alternativeconditions is satisfied. These two alterna-tive conditions are intended to limit thepotential use of a minimum allocation toprovide a schedule of rates that deliversallocations similar to those under a newcomparability plan (i.e., a flat allocationrate applicable for all employees below acertain age, followed by a sharply in-creasing schedule of rates that effectivelybenefits only HCEs) without satisfyingthe minimum allocation gateway.

A plan satisfies the first alternative con-dition if the allocation rates under the planthat exceed the specified minimum ratecould form part of a schedule of alloca-tion rates that increase smoothly at regu-lar intervals (as defined in these regula-tions) in which the lowest allocation rateis at least 1% of plan year compensation.The second alternative condition, avail-able for a plan using an age-based sched-ule, allows the use of a minimum alloca-tion rate if, for each age band above theminimum allocation rate, the allocationrate applicable for that band is less than orequal to the allocation rate that wouldyield an equivalent accrual rate at thehighest age in the band that is the same asthe equivalent accrual rate determined forthe oldest hypothetical employee whowould receive just the minimum alloca-tion rate. Thus, under this condition, theallocation rates above the minimum allo-cation rate do not rise more steeply thanexpected under an age-weighted profit-sharing plan generally intended to providethe same accrual rate at all ages.

The exception to the minimum alloca-tion gateway for plans with age-based al-location rates also applies to certain uni-form target benefit plans that do notcomply with the safe-harbor testingmethod provided in §1.401(a)(4)–8(b)(3).1 A plan has allocation ratesbased on a uniform target benefit alloca-tion if it would comply with the require-ments for a safe harbor target benefit planin §1.401(a)(4)–8(b)(3) except that the in-terest rate for determining the actuarialpresent value of the stated plan benefitand the theoretical reserve is lower than astandard interest rate, the stated benefit iscalculated assuming compensation in-creases, or the plan computes the currentyear contribution using the actual accountbalance instead of the theoretical reserve.

F. Application to Defined ContributionPlans That Are Combined with DefinedBenefit Plans (DB/DC Plans)

These regulations prescribe rules fortesting defined contribution plans that areaggregated with defined benefit plans forpurposes of sections 401(a)(4) and 410(b).These rules apply in situations in which theemployer aggregates the plans because oneof the plans does not satisfy sections401(a)(4) and 410(b) standing alone. Theserules do not apply to safe harbor floor-off-set arrangements described in§1.401(a)(4)–8(d), or to the situation inwhich plans are aggregated solely for pur-poses of satisfying the average benefit per-centage test of §1.410(b)–5.

These regulations retain the rule of theproposed regulations that the combinationof a defined contribution plan and a de-fined benefit plan may demonstratenondiscrimination on the basis of benefitsif the combined plan (the DB/DC plan) isprimarily defined benefit in character,consists of broadly available separateplans (as these terms are defined in theregulations), or satisfies a minimum ag-gregate allocation gateway requirementthat is generally similar to the minimumallocation gateway for defined contribu-tion plans that are not combined with adefined benefit plan.

2001–29 I.R.B. 51 July 16, 2001

1 No exception to the minimum allocation gateway isneeded for target benefit plans that comply with thesafe-harbor testing provisions of §1.401(a)(4)-8(b)(3),because they are deemed to satisfy section 401(a)(4)with respect to an equivalent amount of benefits.

1. Gateway for benefits testing ofcombined plans

In order to apply this minimum aggre-gate allocation gateway, the employee’saggregate normal allocation rate is deter-mined by adding the employee’s alloca-tion rate under the defined contributionplan to the employee’s equivalent alloca-tion rate under the defined benefit plan.This aggregation allows an employer thatprovides NHCEs with both a defined con-tribution and a defined benefit plan totake both plans into account in determin-ing whether the minimum aggregate allo-cation gateway is met.

Under the gateway, if the aggregatenormal allocation rate of the HCE withthe highest aggregate normal allocationrate under the plan (HCE rate) is less than15%, the aggregate normal allocation ratefor all NHCEs must be at least 1/3 of theHCE rate. If the HCE rate is between15% and 25%, the aggregate normal allo-cation rate for all NHCEs must be at least5%. If the HCE rate exceeds 25%, thenthe aggregate normal allocation rate foreach NHCE must be at least 5% plus onepercentage point for each 5-percentage-point increment (or portion thereof) bywhich the HCE rate exceeds 25% (e.g.,the NHCE minimum is 6% for an HCErate that exceeds 25% but not 30%, and7% for an HCE rate that exceeds 30% butnot 35%).

Several commentators expressed a con-cern that the minimum aggregate alloca-tion gateway in the proposed regulationscould require contributions for NHCEsthat would make DB/DC plans too expen-sive for employers in certain circum-stances. This could occur in cases whereone HCE had a very high equivalent allo-cation rate on account of age or someother factor, and could prompt such anemployer to redesign its plans in waysthat could disadvantage NHCEs. In re-sponse to these comments, these final reg-ulations provide that a plan is deemed tosatisfy this minimum aggregate allocationgateway if the aggregate normal alloca-tion rate for each NHCE is at least 7 1/2%of compensation within the meaning ofsection 415(c)(3), determined over a pe-riod otherwise permissible under the tim-ing rules applicable under the definitionof plan year compensation.

These regulations retain the rule that, indetermining the equivalent allocation rate

for an NHCE under a defined benefitplan, a plan is permitted to treat eachNHCE who benefits under the definedbenefit plan as having an equivalent allo-cation rate equal to the average of theequivalent allocation rates under the de-fined benefit plan for all NHCEs benefit-ting under that plan. This averaging rulerecognizes the grow-in feature inherent intraditional defined benefit plans (i.e., thedefined benefit plan provides higherequivalent allocation rates at higher ages).

2. Primarily defined benefit in character

Like the proposed regulations, thesefinal regulations provide that a DB/DCplan that is primarily defined benefit incharacter is not subject to the gateway re-quirement and may continue to be testedfor nondiscrimination on the basis of ben-efits as under former law. A DB/DC planis primarily defined benefit in characterif, for more than 50% of the NHCEs ben-efitting under the plan, the normal accrualrate attributable to benefits providedunder defined benefit plans for the NHCEexceeds the equivalent accrual rate attrib-utable to contributions under defined con-tribution plans for the NHCE. For exam-ple, a DB/DC plan is primarily definedbenefit in character where the definedcontribution plan covers only salaried em-ployees, the defined benefit plan coversonly hourly employees, and more thanhalf of the NHCEs participating in theDB/DC plan are hourly employees partic-ipating only in the defined benefit plan.

Some comments suggested a looseningof the standard as to when a DB/DC plan isprimarily defined benefit in character, butno changes have been made. The Treasuryand IRS believe that the determination ofwhether a DB/DC plan is primarily definedbenefit in character should be based on therelative size of the defined benefit accrualsand the defined contribution allocations forindividual employees, as reflected in theactual benefits testing that is being doneunder section 401(a)(4). In particular, theactuarial assumptions used to determinewhether a DB/DC plan is primarily definedbenefit in character must be the same as-sumptions that are used to apply the cross-testing rules.

3. Broadly available separate plans

Like the proposed regulations, thesefinal regulations provide that a DB/DC

plan that consists of broadly availableseparate plans may continue to be testedfor nondiscrimination on the basis of ben-efits as under current law, even if it doesnot satisfy the gateway requirement. ADB/DC plan consists of broadly availableseparate plans if the defined contributionplan and the defined benefit plan, testedseparately, would each satisfy the require-ments of section 410(b) and the nondis-crimination in amount requirement of§1.401(a)(4)–1(b)(2), assuming satisfac-tion of the average benefit percentage testof §1.410(b)–5. Thus, the defined contri-bution plan must separately satisfy thenondiscrimination requirements (takinginto account these regulations as applica-ble), but for this purpose assuming satis-faction of the average benefit percentagetest. Similarly, the defined benefit planmust separately satisfy the nondiscrimina-tion requirements, assuming for this pur-pose satisfaction of the average benefitpercentage test. In conducting the re-quired separate testing, all plans of a sin-gle type (defined contribution or definedbenefit) within the DB/DC plan are aggre-gated, but those plans are tested withoutregard to plans of the other type.

This alternative is useful, for example,where an employer maintains a definedcontribution plan that provides a uniformallocation rate for all covered employeesat one business unit and a safe harbor de-fined benefit plan for all covered employ-ees at another unit, and where the groupof employees covered by each of thoseplans is a group that satisfies the nondis-criminatory classification requirement ofsection 410(b). Because the employerprovides broadly available separate plans,it may continue to aggregate the plans andtest for nondiscrimination on the basis ofbenefits, as an alternative to using thequalified separate line of business rules ordemonstrating satisfaction of the averagebenefit percentage test.

G. Use of Component Plans

As under the proposed regulations, therules set forth in these final regulations can-not be satisfied using component plansunder the restructuring rules. Althoughsome commentators requested that restruc-turing be permitted for this purpose, the IRSand Treasury have determined that such useof component plans would be inconsistentwith the purpose of these regulations.

July 16, 2001 52 2001–29 I.R.B.

Effective Date

These regulations apply for plan yearsbeginning on or after January 1, 2002.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because the regulation does notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking pre-ceding these regulations was submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Drafting Information

The principal authors of these regula-tions are John T. Ricotta and Linda S. F.Marshall of the Office of the DivisionCounsel/Associate Chief Counsel (TaxExempt and Government Entities). How-ever, other personnel from the IRS andTreasury participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1 — INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. In §1.401(a)(4)–0, the entry for

§1.401(a)(4)–8(b)(1) is revised to read asfollows:

§1.401(a)(4)–0 Table of contents.

* * * * *

§1.401(a)(4)–8 Cross-testing.

* * * * *(b) * * *(1) General rule and gateway.* * * * *

Par. 3. In §1.401(a)(4)–8, paragraph(b)(1) is revised to read as follows:

§1.401(a)(4)–8 Cross-testing.

* * * * *(b) Nondiscrimination in amount of

benefits provided under a defined contri-bution plan—(1) General rule and gate-way—(i) General rule. Equivalent bene-fits under a defined contribution plan(other than an ESOP) are nondiscrimina-tory in amount for a plan year if—

(A) The plan would satisfy§1.401(a)(4)–2(c)(1) for the plan year ifan equivalent accrual rate, as determinedunder paragraph (b)(2) of this section,were substituted for each employee’s allo-cation rate in the determination of rategroups; and

(B) For plan years beginning on or afterJanuary 1, 2002, the plan satisfies one ofthe following conditions—

(1) The plan has broadly available allo-cation rates (within the meaning of para-graph (b)(1)(iii) of this section) for theplan year;

(2) The plan has age-based allocationrates that are based on either a gradual ageor service schedule (within the meaningof paragraph (b)(1)(iv) of this section) ora uniform target benefit allocation (withinthe meaning of paragraph (b)(1)(v) of thissection) for the plan year; or

(3) The plan satisfies the minimum al-location gateway of paragraph (b)(1)(vi)of this section for the plan year.

(ii) Allocations after testing age. Aplan does not fail to satisfy paragraph(b)(1)(i)(A) of this section merely be-cause allocations are made at the samerate for employees who are older thantheir testing age (determined without re-gard to the current-age rule in paragraph(4) of the definition of testing agein§1.401(a)(4)–12) as they are made foremployees who are at that age.

(ii i) Broadly available allocationrates—(A) In general. A plan hasbroadly available allocation rates for theplan year if each allocation rate under theplan is currently available during the planyear (within the meaning of§1.401(a)(4)–4(b)(2)), to a group of em-ployees that satisfies section 410(b)(without regard to the average benefit per-centage test of §1.410(b)–5). For thispurpose, if two allocation rates could bepermissively aggregated under

§1.401(a)(4)–4(d)(4), assuming the allo-cation rates were treated as benefits,rights or features, they may be aggregatedand treated as a single allocation rate. Inaddition, the disregard of age and serviceconditions described in §1.401(a)(4)–4(b)(2)(ii)(A) does not apply for purposesof this paragraph (b)(1)(iii)(A).

(B) Certain transition allocations. Indetermining whether a plan has broadlyavailable allocation rates for the plan yearwithin the meaning of paragraph(b)(1)(iii)(A) of this section, an em-ployee’s allocation may be disregarded tothe extent that the allocation is a transitionallocation for the plan year. In order foran allocation to be a transition allocation,the allocation must comply with the re-quirements of paragraph (b)(1)(iii)(C) ofthis section and must be either—

(1) A defined benefit replacement allo-cation within the meaning of paragraph(b)(1)(iii)(D) of this section; or

(2) A pre-existing replacement alloca-tion or pre-existing merger and acquisi-tion allocation, within the meaning ofparagraph (b)(1)(iii)(E) of this section.

(C) Plan provisions relating to transi-tion allocations—(1) In general. Planprovisions providing for transition alloca-tions for the plan year must specify boththe group of employees who are eligiblefor the transition allocations and theamount of the transition allocations.

(2) Limited plan amendments. Alloca-tions are not transition allocations withinthe meaning of paragraph (b)(1)(iii)(B) ofthis section for the plan year if the planprovisions relating to the allocations areamended after the date those plan provi-sions are both adopted and effective. Thepreceding sentence in this paragraph(b)(1)(iii)(C)(2) does not apply to a planamendment that reduces transition alloca-tions to HCEs, makes de minimischangesin the calculation of the transition alloca-tions (such as a change in the definition ofcompensation to include section 132(f)elective reductions), or adds or removes aprovision permitted under paragraph(b)(1)(iii)(C)(3) of this section.

(3) Certain permitted plan provisions.An allocation does not fail to be a transi-tion allocation within the meaning ofparagraph (b)(1)(iii)(B) of this sectionmerely because the plan provides thateach employee who is eligible for a tran-sition allocation receives the greater of

2001–29 I.R.B. 53 July 16, 2001

such allocation and the allocation forwhich the employee would otherwise beeligible under the plan. In a plan that con-tains such a provision, for purposes of de-termining whether the plan has broadlyavailable allocation rates within themeaning of paragraph (b)(1)(iii)(A) ofthis section, the allocation for which anemployee would otherwise be eligible isconsidered currently available to the em-ployee, even if the employee’s transitionallocation is greater.

(D) Defined benefit replacement allo-cation. An allocation is a defined benefitreplacement allocation for the plan year ifit is provided in accordance with guidanceprescribed by the Commissioner pub-lished in the Internal Revenue Bulletin(see § 601.601(d)(2)(ii)(b) of this chapter)and satisfies the following conditions—

(1) The allocations are provided to agroup of employees who formerly bene-fitted under an established nondiscrimina-tory defined benefit plan of the employeror of a prior employer that provided age-based equivalent allocation rates;

(2) The allocations for each employeein the group were reasonably calculated,in a consistent manner, to replace the re-tirement benefits that the employee wouldhave been provided under the definedbenefit plan if the employee had contin-ued to benefit under the defined benefitplan;

(3) Except as provided in paragraph(b)(1)(iii)(C) of this section, no employeewho receives the allocation receives anyother allocations under the plan for theplan year; and

(4) The composition of the group ofemployees who receive the allocations isnondiscriminatory.

(E) Pre-existing transition alloca-tions—(1) Pre-existing replacement allo-cations. An allocation is a pre-existingreplacement allocation for the plan year ifthe allocation satisfies the following con-ditions—

(i) The allocations are provided pur-suant to a plan provision adopted beforeJune 29, 2001;

(ii ) The allocations are provided to em-ployees who formerly benefitted under adefined benefit plan of the employer; and

(iii ) The allocations for each employeein the group are reasonably calculated, ina consistent manner, to replace some orall of the retirement benefits that the em-

ployee would have received under the de-fined benefit plan and any other plan orarrangement of the employer if the em-ployee had continued to benefit undersuch defined benefit plan and such otherplan or arrangement.

(2) Pre-existing merger and acquisitionallocations. An allocation is a pre-exist-ing merger and acquisition allocation forthe plan year if the allocation satisfies thefollowing conditions—

(i) The allocations are provided solelyto employees of a trade or business thathas been acquired by the employer in astock or asset acquisition, merger, or othersimilar transaction occurring prior to Au-gust 28, 2001, involving a change in theemployer of the employees of the trade orbusiness;

(ii ) The allocations are provided only toemployees who were employed by the ac-quired trade or business before a specifieddate that is no later than two years after thetransaction (or January 1, 2002, if earlier);

(iii ) The allocations are provided pur-suant to a plan provision adopted no laterthan the specified date; and

(iv) The allocations for each employeein the group are reasonably calculated, ina consistent manner, to replace some orall of the retirement benefits that the em-ployee would have received under anyplan of the employer if the new employerhad continued to provide the retirementbenefits that the prior employer was pro-viding for employees of the trade or busi-ness.

(F) Successor employers. An employerthat accepts a transfer of assets (within themeaning of section 414(l)) from the planof a prior employer may continue to treatany transition allocations provided underthat plan as transition allocations underparagraph (b)(1)(iii)(B) of this section,provided that the successor employer con-tinues to satisfy the applicable require-ments set forth in paragraphs(b)(1)(iii)(C) through (E) of this sectionfor the plan year.

(iv) Gradual age or service schedule—(A) In general. A plan has a gradual ageor service schedule for the plan year if theallocation formula for all employeesunder the plan provides for a singleschedule of allocation rates underwhich—

(1) The schedule defines a series ofbands based solely on age, years of ser-

vice, or the number of points representingthe sum of age and years of service (ageand service points), under which the sameallocation rate applies to all employeeswhose age, years of service, or age andservice points are within each band; and

(2) The allocation rates under theschedule increase smoothly at regular in-tervals, within the meaning of paragraphs(b)(1)(iv)(B) and (C) of this section.

(B) Smoothly increasing schedule of al-location rates. A schedule of allocationrates increases smoothly if the allocationrate for each band within the schedule isgreater than the allocation rate for the im-mediately preceding band (i.e., the bandwith the next lower number of years ofage, years of service, or age and servicepoints) but by no more than 5 percentagepoints. However, a schedule of allocationrates will not be treated as increasingsmoothly if the ratio of the allocation ratefor any band to the rate for the immedi-ately preceding band is more than 2.0 or ifit exceeds the ratio of allocation rates be-tween the two immediately precedingbands.

(C) Regular intervals. A schedule ofallocation rates has regular intervals ofage, years of service or age and servicepoints, if each band, other than the bandassociated with the highest age, years ofservice, or age and service points, is thesame length. For this purpose, if theschedule is based on age, the first band isdeemed to be of the same length as theother bands if it ends at or before age 25.If the first age band ends after age 25,then, in determining whether the length ofthe first band is the same as the length ofother bands, the starting age for the firstage band is permitted to be treated as age25 or any age earlier than 25. For aschedule of allocation rates based on ageand service points, the rules of the preced-ing two sentences are applied by substi-tuting 25 age and service points for age25. For a schedule of allocation ratesbased on service, the starting service forthe first service band is permitted to betreated as one year of service or any lesseramount of service.

(D) Minimum allocation rates permit-ted. A schedule of allocation rates under aplan does not fail to increase smoothly atregular intervals, within the meaning ofparagraphs (b)(1)(iv)(B) and (C) of thissection, merely because a minimum uni-

July 16, 2001 54 2001–29 I.R.B.

form allocation rate is provided for allemployees or the minimum benefit de-scribed in section 416(c)(2) is providedfor all non-key employees (either becausethe plan is top heavy or without regard towhether the plan is top heavy) if theschedule satisfies one of the followingconditions—

(1) The allocation rates under the plan thatare greater than the minimum allocation ratecan be included in a hypothetical schedule ofallocation rates that increases smoothly atregular intervals, within the meaning ofparagraphs (b)(1)(iv)(B) and (C) of this sec-tion, where the hypothetical schedule has alowest allocation rate no lower than 1% ofplan year compensation; or

(2) For a plan using a schedule of allo-cation rates based on age, for each ageband in the schedule that provides an allo-cation rate greater than the minimum allo-cation rate, there could be an employee inthat age band with an equivalent accrualrate that is less than or equal to the equiv-alent accrual rate that would apply to anemployee whose age is the highest age forwhich the allocation rate equals the mini-mum allocation rate.

(v) Uniform target benefit allocations.A plan has allocation rates that are based

on a uniform target benefit allocation forthe plan year if the plan fails to satisfy therequirements for the safe harbor testingmethod in paragraph (b)(3) of this sectionmerely because the determination of theallocations under the plan differs from theallocations determined under that safeharbor testing method for any of the fol-lowing reasons—

(A) The interest rate used for determin-ing the actuarial present value of thestated plan benefit and the theoretical re-serve is lower than a standard interestrate;

(B) The stated benefit is calculated as-suming compensation increases at a spec-ified rate; or

(C) The plan computes the current yearcontribution using the actual account bal-ance instead of the theoretical reserve.

(vi) Minimum allocation gateway—(A)General rule. A plan satisfies the mini-mum allocation gateway of this paragraph(b)(1)(vi) if each NHCE has an allocationrate that is at least one third of the alloca-tion rate of the HCE with the highest allo-cation rate.

(B) Deemed satisfaction. A plan isdeemed to satisfy the minimum allocationgateway of this paragraph (b)(1)(vi) if

each NHCE receives an allocation of atleast 5% of the NHCE’s compensationwithin the meaning of section 415(c)(3),measured over a period of time permittedunder the definition of plan year compen-sation.

(vii) Determination of allocation rate.For purposes of paragraph (b)(1)(i)(B) ofthis section, allocations and allocationrates are determined under §1.401(a)(4)–2(c)(2), but without taking into ac-count the imputation of permitted dispar-ity under §1.401(a)(4)–7. However, indetermining whether the plan has broadlyavailable allocation rates as provided inparagraph (b)(1)(iii) of this section, dif-ferences in allocation rates attributablesolely to the use of permitted disparity de-scribed in §1.401(l)–2 are disregarded.

(viii) Examples. The following exam-ples illustrate the rules in this paragraph(b)(1):

Example 1. (i) Plan M, a defined contributionplan without a minimum service requirement, pro-vides an allocation formula under which allocationsare provided to all employees according to the fol-lowing schedule:

2001–29 I.R.B. 55 July 16, 2001

Completed Years of Service Allocation Rate Ratio of Allocation Rate for Bandto Allocation Rate for ImmediatelyPreceding Band

0-5 3.0% not applicable

6-10 4.5% 1.50

11-15 6.5% 1.44

16-20 8.5% 1.31

21-25 10.0% 1.18

26 or more 11.5% 1.15

(ii) Plan M provides that allocation rates for allemployees are determined using a single schedulebased solely on service, as described in paragraph(b)(1)(iv)(A)(1) of this section. Therefore, if the al-location rates under the schedule increase smoothlyat regular intervals as described in paragraph(b)(1)(iv)(A)(2) of this section, then the plan has agradual age or service schedule described in para-graph (b)(1)(iv) of this section.

(iii) The schedule of allocation rates under PlanM does not increase by more than 5 percentagepoints between adjacent bands and the ratio of theallocation rate for any band to the allocation ratefor the immediately preceding band is never morethan 2.0 and does not increase. Therefore, the al-location rates increase smoothly as described inparagraph (b)(1)(iv)(B) of this section. In addi-tion, the bands (other than the highest band) are all

5 years long, so the increases occur at regular in-tervals as described in paragraph (b)(1)(iv)(C) ofthis section. Thus, the allocation rates under theplan’s schedule increase smoothly at regular inter-vals as described in paragraph (b)(1)(iv)(A)(2) ofthis section. Accordingly, the plan has a gradualage or service schedule described in paragraph(b)(1)(iv) of this section.

(iv) Under paragraph (b)(1)(i) of this section,Plan M satisfies the nondiscrimination in amount re-quirement of §1.401(a)(4)-1(b)(2) on the basis ofbenefits if it satisfies paragraph (b)(1)(i)(A) of thissection, regardless of whether it satisfies the mini-mum allocation gateway of paragraph (b)(1)(vi) ofthis section.

Example 2. (i) The facts are the same as in Ex-ample 1, except that the 4.5% allocation rate appliesfor all employees with 10 years of service or less.

(ii) Plan M provides that allocation rates for allemployees are determined using a single schedulebased solely on service, as described in paragraph(b)(1)(iv)(A)(1) of this section. Therefore, if the al-location rates under the schedule increase smoothlyat regular intervals as described in paragraph(b)(1)(iv)(A)(2) of this section, then the plan has agradual age or service schedule described in para-graph (b)(1)(iv) of this section.

(iii) The bands (other than the highest band) inthe schedule are not all the same length, since thefirst band is 10 years long while other bands are 5years long. Thus, the schedule does not have regularintervals as described in paragraph (b)(1)(iv)(C) ofthis section. However, under paragraph(b)(1)(iv)(D) of this section, the schedule of alloca-tion rates does not fail to increase smoothly at regu-lar intervals merely because the minimum allocation

rate of 4.5% results in a first band that is longer thanthe other bands, if either of the conditions of para-graph (b)(1)(iv)(D)(1) or (2) of this section is satis-fied.

(iv) In this case, the schedule of allocation ratessatisfies the condition in paragraph (b)(1)(iv)(D)(1)of this section because the allocation rates under theplan that are greater than the 4.5% minimum alloca-

tion rate can be included in the following hypotheti-cal schedule of allocation rates that increasessmoothly at regular intervals and has a lowest allo-cation rate of at least 1% of plan year compensation:

July 16, 2001 56 2001–29 I.R.B.

Completed Years of Service Allocation Rate Ratio of Allocation Rate for Bandto Allocation Rate for ImmediatelyPreceding Band

0-5 2.5% not applicable

6-10 4.5% 1.80

11-15 6.5% 1.44

16-20 8.5% 1.31

21-25 10.0% 1.18

26 or more 11.5% 1.15

(v) Accordingly, the plan has a gradual age orservice schedule descr ibed in paragraph(b)(1)(iv) of this section. Under paragraph(b)(1)(i) of this section, Plan M satisfies thenondiscrimination in amount requirement of

§1.401(a)(4)–1(b)(2) on the basis of benefits if itsatisfies paragraph (b)(1)(i)(A) of this section, re-gardless of whether it satisfies the minimum allo-cation gateway of paragraph (b)(1)(vi) of thissection.

Example 3. (i) Plan N, a defined contributionplan, provides an allocation formula under which al-locations are provided to all employees according tothe following schedule:

Age Allocation rate Ratio of Allocation Rate for Bandto Allocation Rate for ImmediatelyPreceding Band

under 25 3.0% not applicable

25-34 6.0% 2.00

35-44 9.0% 1.50

45-54 12.0% 1.33

55-64 16.0% 1.33

65 or older 21.0% 1.31

(ii) Plan N provides that allocation rates for allemployees are determined using a single schedulebased solely on age, as described in paragraph(b)(1)(iv)(A)(1) of this section. Therefore, if the al-location rates under the schedule increase smoothlyat regular intervals as described in paragraph(b)(1)(iv)(A)(2) of this section, then the plan has agradual age or service schedule described in para-graph (b)(1)(iv) of this section.

(iii) The schedule of allocation rates under PlanN does not increase by more than 5 percentagepoints between adjacent bands and the ratio of theallocation rate for any band to the allocation rate for

the immediately preceding band is never more than2.0 and does not increase. Therefore, the allocationrates increase smoothly as described in paragraph(b)(1)(iv)(B) of this section. In addition, the bands(other than the highest band and the first band,which is deemed to be the same length as the otherbands because it ends prior to age 25) are all 5 yearslong, so the increases occur at regular intervals asdescribed in paragraph (b)(1)(iv)(C) of this section.Thus, the allocation rates under the plan’s scheduleincrease smoothly at regular intervals as describedin paragraph (b)(1)(iv)(A)(2) of this section. Ac-cordingly, the plan has a gradual age or service

schedule described in paragraph (b)(1)(iv) of thissection.

(iv) Under paragraph (b)(1)(i) of this section,Plan N satisfies the nondiscrimination in amount re-quirement of §1.401(a)(4)–1(b)(2) on the basis ofbenefits if it satisfies paragraph (b)(1)(i)(A) of thissection, regardless of whether it satisfies the mini-mum allocation gateway of paragraph (b)(1)(vi) ofthis section.

Example 4. (i) Plan O, a defined contributionplan, provides an allocation formula under which al-locations are provided to all employees according tothe following schedule:

Age Allocation rate Ratio of Allocation Rate for Bandto Allocation Rate for ImmediatelyPreceding Band

under 40 3% not applicable

40-44 6% 2.00

45-49 9% 1.50

50-54 12% 1.33

55-59 16% 1.33

60-64 20% 1.25

65 or older 25% 1.25

(ii) Plan O provides that allocation rates for allemployees are determined using a single schedulebased solely on age, as described in paragraph(b)(1)(iv)(A)(1) of this section. Therefore, if the al-location rates under the schedule increase smoothlyat regular intervals as described in paragraph(b)(1)(iv)(A)(2) of this section, then the plan has agradual age or service schedule described in para-graph (b)(1)(iv) of this section.

(iii) The bands (other than the highest band) inthe schedule are not all the same length, since thefirst band is treated as 15 years long while otherbands are 5 years long. Thus, the schedule does nothave regular intervals as described in paragraph(b)(1)(iv)(C) of this section. However, under para-graph (b)(1)(iv)(D) of this section, the schedule ofallocation rates does not fail to increase smoothly atregular intervals merely because the minimum allo-cation rate of 3% results in a first band that is longerthan the other bands, if either of the conditions ofparagraph (b)(1)(iv)(D)(1) or (2) of this section issatisfied.

(iv) In this case, in order to define a hypotheticalschedule that could include the allocation rates inthe actual schedule of allocation rates, each of thebands below age 40 would have to be 5 years long(or be treated as 5 years long). Accordingly, the hy-pothetical schedule would have to provide for aband for employees under age 30, a band for em-ployees in the range 30-34 and a band for employeesage 35-39.

(v) The ratio of the allocation rate for the age 40-44 band to the next lower band is 2.0. Accordingly,in order for the applicable allocations rates underthis hypothetical schedule to increase smoothly, theratio of the allocation rate for each band in the hypo-thetical schedule below age 40 to the allocation ratefor the immediately preceding band would have tobe 2.0. Thus, the allocation rate for the hypotheticalband applicable for employees under age 30 wouldbe .75%, the allocation rate for the hypotheticalband for employees in the range 30-34 would be1.5% and the allocation rate for employees in therange 35-39 would be 3%.

(vi) Because the lowest allocation rate under anypossible hypothetical schedule is less than 1% ofplan year compensation, Plan O will be treated assatisfying the requirements of paragraphs(b)(1)(iv)(B) and (C) of this section only if theschedule of allocation rates satisfies the steepnesscondition described in paragraph (b)(1)(iv)(D)(2) ofthis section. In this case, the steepness condition isnot satisfied because the equivalent accrual rate foran employee age 39 is 2.81%, but there is no hypo-thetical employee in the band for ages 40-44 with anequal or lower equivalent accrual rate (since thelowest equivalent accrual rate for hypothetical em-ployees within this band is 3.74% at age 44).

(vii) Since the schedule of allocation rates underthe plan does not increase smoothly at regular inter-vals, Plan O’s schedule of allocation rates is not agradual age or service schedule. Further, Plan Odoes not provide uniform target benefit allocations.Therefore, under paragraph (b)(1)(i) of this section,Plan O cannot satisfy the nondiscrimination inamount requirement of §1.401(a)(4)–1(b)(2) for theplan year on the basis of benefits unless either PlanO provides for broadly available allocation rates forthe plan year as described in paragraph (b)(1)(iii) ofthis section (i.e., the allocation rate at each age is

provided to a group of employees that satisfies sec-tion 410(b) without regard to the average benefitpercentage test), or Plan O satisfies the minimum al-location gateway of paragraph (b)(1)(vi) of this sec-tion for the plan year.

Example 5. (i) Plan P is a profit-sharing planmaintained by Employer A that covers all of Em-ployer A’s employees, consisting of two HCEs, Xand Y, and 7 NHCEs. Employee X’s compensationis $170,000 and Employee Y’s compensation is$150,000. The allocation for Employees X and Y is$30,000 each, resulting in an allocation rate of17.65% for Employee X and 20% for Employee Y.Under Plan P, each NHCE receives an allocation of5% of compensation within the meaning of section415(c)(3), measured over a period of time permittedunder the definition of plan year compensation.

(ii) Because the allocation rate for X is not cur-rently available to any NHCE, Plan P does not havebroadly available allocation rates within the mean-ing of paragraph (b)(1)(iii) of this section. Further-more, Plan P does not provide for age based-alloca-tion rates within the meaning of paragraph (b)(1)(iv)or (v) of this section. Thus, under paragraph(b)(1)(i) of this section, Plan P can satisfy thenondiscrimination in amount requirement of§1.401(a)(4)–1(b)(2) for the plan year on the basisof benefits only if Plan P satisfies the minimum allo-cation gateway of paragraph (b)(1)(vi) of this sec-tion for the plan year.

(iii) The highest allocation rate for any HCEunder Plan P is 20%. Accordingly, Plan P would sat-isfy the minimum allocation gateway of paragraph(b)(1)(vi) of this section if all NHCEs have an allo-cation rate of at least 6.67%, or if all NHCEs receivean allocation of at least 5% of compensation withinthe meaning of section 415(c)(3) (measured over aperiod of time permitted under the definition of planyear compensation).

(iv) Under Plan P, each NHCE receives an alloca-tion of 5% of compensation within the meaning ofsection 415(c)(3) (measured over a period of timepermitted under the definition of plan year compen-sation). Accordingly, Plan P satisfies the minimumallocation gateway of paragraph (b)(1)(vi) of thissection.

(v) Under paragraph (b)(1)(i) of this section, PlanP satisfies the nondiscrimination in amount require-ment of §1.401(a)(4)–1(b)(2) on the basis of benefitsif it satisfies paragraph (b)(1)(i)(A) of this section.* * * * *

Par. 4. Section 1.401(a)(4)–9 isamended by adding paragraph (b)(2)(v)and revising paragraph (c)(3)(ii) to readas follows:

§1.401(a)(4)–9 Plan aggregation andrestructuring.

* * * * *(b) * * *(2) * * *(v) Eligibility for testing on a benefits

basis—(A) General rule. For plan yearsbeginning on or after January 1, 2002, un-less, for the plan year, a DB/DC plan isprimarily defined benefit in character

(within the meaning of paragraph(b)(2)(v)(B) of this section) or consists ofbroadly available separate plans (withinthe meaning of paragraph (b)(2)(v)(C) ofthis section), the DB/DC plan must satisfythe minimum aggregate allocation gate-way of paragraph (b)(2)(v)(D) of this sec-tion for the plan year in order to be per-mitted to demonstrate satisfaction of thenondiscrimination in amount requirementof §1.401(a)(4)–1(b)(2) on the basis ofbenefits.

(B) Primarily defined benefit in char-acter. A DB/DC plan is primarily definedbenefit in character if, for more than 50%of the NHCEs benefitting under the plan,the normal accrual rate for the NHCE at-tributable to benefits provided under de-fined benefit plans that are part of theDB/DC plan exceeds the equivalent ac-crual rate for the NHCE attributable tocontributions under defined contributionplans that are part of the DB/DC plan.

(C) Broadly available separate plans.A DB/DC plan consists of broadly avail-able separate plans if the defined contri-bution plan and the defined benefit planthat are part of the DB/DC plan eachwould satisfy the requirements of section410(b) and the nondiscrimination inamount requirement of §1.401(a)(4)–1(b)(2) if each plan were tested separatelyand assuming that the average benefit per-centage test of §1.410(b)–5 were satis-fied. For this purpose, all defined contri-bution plans that are part of the DB/DCplan are treated as a single defined contri-bution plan and all defined benefit plansthat are part of the DB/DC plan aretreated as a single defined benefit plan. Inaddition, if permitted disparity is used foran employee for purposes of satisfyingthe separate testing requirement of thisparagraph (b)(2)(v)(C) for plans of onetype, it may not be used in satisfying theseparate testing requirement for plans ofthe other type for the employee.

(D) Minimum aggregate allocationgateway—(1) General rule. A DB/DCplan satisfies the minimum aggregate al-location gateway if each NHCE has anaggregate normal allocation rate that is atleast one third of the aggregate normal al-location rate of the HCE with the highestsuch rate (HCE rate), or, if less, 5% of theNHCE’s compensation, provided that theHCE rate does not exceed 25% of com-pensation. If the HCE rate exceeds 25%

2001–29 I.R.B. 57 July 16, 2001

of compensation, then the aggregate nor-mal allocation rate for each NHCE mustbe at least 5% increased by one percent-age point for each 5-percentage-point in-crement (or portion thereof) by which theHCE rate exceeds 25% (e.g., the NHCEminimum is 6% for an HCE rate that ex-ceeds 25% but not 30%, and 7% for anHCE rate that exceeds 30% but not 35%).

(2) Deemed satisfaction. A plan isdeemed to satisfy the minimum aggregateallocation gateway of this paragraph(b)(2)(v)(D) if the aggregate normal alloca-tion rate for each NHCE is at least 7 1/2%of the NHCE’s compensation within themeaning of section 415(c)(3), measuredover a period of time permitted under thedefinition of plan year compensation.

(3) Averaging of equivalent allocationrates for NHCEs. For purposes of thisparagraph (b)(2)(v)(D), a plan is permit-ted to treat each NHCE who benefitsunder the defined benefit plan as havingan equivalent normal allocation rate equalto the average of the equivalent normal al-

location rates under the defined benefitplan for all NHCEs benefitting under thatplan.

(E) Determination of rates. For pur-poses of this paragraph (b)(2)(v), the nor-mal accrual rate and the equivalent nor-mal allocation rate attributable to definedbenefit plans, the equivalent accrual rateattributable to defined contribution plans,and the aggregate normal allocation rateare determined under paragraph (b)(2)(ii)of this section, but without taking into ac-count the imputation of permitted dispar-ity under §1.401(a)(4)–7, except as other-wise permitted under paragraph(b)(2)(v)(C) of this section.

(F) Examples. The following examplesillustrate the application of this paragraph(b)(2)(v):

Example 1. (i) Employer A maintains Plan M, adefined benefit plan, and Plan N, a defined contribu-tion plan. All HCEs of Employer A are covered byPlan M (at a 1% accrual rate), but are not covered byPlan N. All NHCEs of Employer A are covered byPlan N (at a 3% allocation rate), but are not coveredby Plan M. Because Plan M does not satisfy section

410(b) standing alone, Plans M and N are aggre-gated for purposes of satisfying sections 410(b) and401(a)(4).

(ii) Because none of the NHCEs participate in thedefined benefit plan, the aggregated DB/DC plan isnot primarily defined benefit in character within themeaning of paragraph (b)(2)(v)(B) of this sectionnor does it consist of broadly available separateplans within the meaning of paragraph (b)(2)(v)(C)of this section. Accordingly, the aggregated Plan Mand Plan N must satisfy the minimum aggregate al-location gateway of paragraph (b)(2)(v)(D) of thissection in order to be permitted to demonstrate satis-faction of the nondiscrimination in amount require-ment of §1.401(a)(4)–1(b)(2) on the basis of bene-fits.

Example 2. (i) Employer B maintains Plan O, adefined benefit plan, and Plan P, a defined contribu-tion plan. All of the six employees of Employer Bare covered under both Plan O and Plan P. UnderPlan O, all employees have a uniform normal ac-crual rate of 1% of compensation. Under Plan P,Employees A and B, who are HCEs, receive an allo-cation rate of 15%, and participants C, D, E and F,who are NHCEs, receive an allocation rate of 3%.Employer B aggregates Plans O and P for purposesof satisfying sections 410(b) and 401(a)(4). Theequivalent normal allocation and normal accrualrates under Plans O and P are as follows:

July 16, 2001 58 2001–29 I.R.B.

Employee Equivalent Normal Allocation Rates Equivalent Normal Accrual Rates for thefor the 1% Accrual under Plan O 15%/3% Allocations under Plan P(defined benefit plan) (defined contribution plan)

HCE A (age 55) 3.93% 3.82%

HCE B (age 50) 2.61% 5.74%

C (age 60) 5.91% .51%

D (age 45) 1.74% 1.73%

E (age 35) .77% 3.90%

F (age 25) .34% 8.82%

(ii) Although all of the NHCEs benefit under PlanO (the defined benefit plan), the aggregated DB/DCplan is not primarily defined benefit in character be-cause the normal accrual rate attributable to definedbenefit plans (which is 1% for each of the NHCEs)is greater than the equivalent accrual rate under de-fined contribution plans only for Employee C. Inaddition, because the 15% allocation rate is avail-able only to HCEs, the defined contribution plancannot satisfy the requirements of §1.401(a)(4)–2and does not have broadly available allocation rateswithin the meaning of §1.401(a)(4)–8(b)(1)(iii).Further, the defined contribution plan does not sat-isfy the minimum allocation gateway of§1.401(a)(4)–8(b)(1)(vi) (3% is less than 1/3 of the15% HCE rate). Therefore, the defined contributionplan within the DB/DC plan cannot separately sat-isfy §1.401(a)(4)–1(b)(2) and does not constitute abroadly available separate plan within the meaningof paragraph (b)(2)(v)(C) of this section. Accord-ingly, the aggregated plans are permitted to demon-strate satisfaction of the nondiscrimination inamounts requirement of §1.401(a)(4)–1(b)(2) on the

basis of benefits only if the aggregated plans satisfythe minimum aggregate allocation gateway of para-graph (b)(2)(v)(D) of this section.

(iii) Employee A has an aggregate normal alloca-tion rate of 18.93% under the aggregated plans(3.93% from Plan O plus 15% from Plan P), whichis the highest aggregate normal allocation rate forany HCE under the plans. Employee F has an aggre-gate normal allocation rate of 3.34% under the ag-gregated plans (.34% from Plan O plus 3% fromPlan P) which is less than the 5% aggregate normalallocation rate that Employee F would be required tohave to satisfy the minimum aggregate allocationgateway of paragraph (b)(2)(v)(D) of this section.

(iv) However, for purposes of satisfying the min-imum aggregate allocation gateway of paragraph(b)(2)(v)(D) of this section, Employer B is permittedto treat each NHCE who benefits under Plan O (thedefined benefit plan) as having an equivalent alloca-tion rate equal to the average of the equivalent allo-cation rates under Plan O for all NHCEs benefittingunder that plan. The average of the equivalent allo-cation rates for all of the NHCEs under Plan O is

2.19% (the sum of 5.91%, 1.74%, .77%, and .34%,divided by 4). Accordingly, Employer B is permit-ted to treat all of the NHCEs as having an equivalentallocation rate attributable to Plan O equal to 2.19%.Thus, all of the NHCEs can be treated as having anaggregate normal allocation rate of 5.19% for thispurpose (3% from the defined contribution plan and2.19% from the defined benefit plan) and the aggre-gated DB/DC plan satisfies the minimum aggregateallocation gateway of paragraph (b)(2)(v)(D) of thissection.

* * * * *(c) * * *(3) * * *(ii) Restructuring not available for cer-

tain testing purposes. The safe harbor in§1.401(a)(4)–2(b)(3) for plans with uni-form points allocation formulas is notavailable in testing (and thus cannot besatisfied by) contributions under a com-ponent plan. Similarly, component plans

cannot be used for purposes of determin-ing whether a plan provides broadly avail-able allocation rates (as defined in§1.401(a)(4)–8(b)(1)(iii)), determiningwhether a plan has a gradual age or ser-vice schedule (as defined in §1.401(a)(4)–8(b)(1)(iv)), determining whethera plan has allocation rates that are basedon a uniform target benefit allocation (asdefined in §1.401(a)(4)–8(b)(1)(v)), ordetermining whether a plan is primarilydefined benefit in character or consists ofbroadly available separate plans (as de-fined in paragraphs (b)(2)(v)(B) and (C)of this section). In addition, the minimumallocation gateway of §1.401(a)(4)–8(b)(1)(vi) and the minimum aggre-gate allocation gateway of paragraph(b)(2)(v)(D) of this section cannot be sat-isfied on the basis of component plans.See §§1.401(k)–1(b)(3)(ii i) and1.401(m)–1(b)(3)(iii) for rules regardingthe inapplicability of restructuring to sec-tion 401(k) plans and section 401(m)plans.* * * * *

Par. 5. Section 1.401(a)(4)–12 isamended by adding a sentence to the endof the definition of Standard mortalitytableto read as follows:

§1.401(a)(4)–12 Definitions.

* * * * *Standard mortality table.* * * The ap-

plicable mortality table under section417(e)(3)(A)(ii)(I) is also a standard mor-tality table.* * * * *

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved June 21, 2001.

Mark Weinberger,Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June28, 2001, 8:45 a.m., and published in the issue of theFederal Register for June 29, 2001, 66 F.R. 34545)

Section 472.—Last-in, First-outInventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; departmentstores. The May 2001 Bureau of LaborStatistics price indexes are accepted foruse by department stores employing the

retail inventory and last-in, first-outinventory methods for valuing inventoriesfor tax years ended on, or with referenceto, May 31, 2001.

Rev. Rul. 2001–35

The following Department Store Inven-tory Price Indexes for May 2001 were is-sued by the Bureau of Labor Statistics.The indexes are accepted by the InternalRevenue Service, under § 1.472–1(k) ofthe Income Tax Regulations and Rev.Proc. 86–46, 1986–2 C.B. 739, for appro-priate application to inventories of depart-ment stores employing the retail inven-tory and last-in, first-out inventorymethods for tax years ended on, or withreference to, May 31, 2001.

The Department Store Inventory PriceIndexes are prepared on a national basisand include (a) 23 major groups of depart-ments, (b) three special combinations ofthe major groups - soft goods, durablegoods, and miscellaneous goods, and (c) astore total, which covers all departments,including some not listed separately, ex-cept for the following: candy, food,liquor, tobacco, and contract departments.

2001–29 I.R.B. 59 July 16, 2001

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Percent ChangeGroups May May from May 2000

2000 2001 to May 20011

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501.7 491.2 -2.12. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . 620.4 598.8 -3.53. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . 642.2 653.9 1.84. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923.1 889.7 -3.65. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641.0 625.4 -2.46. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573.4 570.4 -0.57. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335.1 352.0 5.08. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . 543.4 553.1 1.89. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . 401.5 394.6 -1.7

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623.7 595.5 -4.511. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636.3 619.2 -2.712. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . 502.5 497.1 -1.113. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 943.4 934.7 -0.914. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775.9 776.3 0.115. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . 971.1 947.8 -2.416. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . 672.5 641.8 -4.617. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608.6 623.7 2.518. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779.4 767.1 -1.619. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233.7 224.3 -4.0

DRAFTING INFORMATION

The principal author of this revenueruling is Alan J. Tomsic of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further information re-garding this revenue ruling, contact Mr.Tomsic at (202) 622-4970 (not a toll-freecall).

Section 6302.—Mode or Time ofCollection

26 CFR 31.6302–1: Federal tax deposit rules forwithheld income taxes and taxes under the FederalInsurance Contributions Act (FICA) attributable topayments made after December 31, 1992.

T.D. 8952

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1, 31, 35, 36, 40,301, and 601

Removal of Federal ReserveBanks as Federal Depositaries

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document containsfinal regulations which remove the Fed-eral Reserve Banks as authorized deposi-

taries for Federal tax deposits. The regu-lations affect taxpayers who make Federaltax deposits using paper Federal Tax De-posit (FTD) coupons (Form 8109) at Fed-eral Reserve Banks.

DATES: Effective Date: These regula-tions are effective June 26, 2001.

Applicability Date:These regulationsapply to deposits made after December31, 2000.

FOR FURTHER INFORMATION CON-TACT: Brinton T. Warren (202) 622-4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION

Background

This document contains amendments to26 CFR parts 1, 31, 35, 36, 40, 301, and601 relating to Federal tax deposits undersection 6302(c) of the Internal RevenueCode (Code). On December 26, 2000,temporary regulations (T.D. 8918, 2001–4I.R.B. 372) relating to the removal ofFederal Reserve Banks as federal deposi-taries were published in the Federal Reg-ister (65 FR 81356). A notice of pro-posed rulemaking (REG–107176–00,2001–4 I.R.B. 428) that proposed the re-moval of Federal Reserve Banks as fed-eral depositaries was published in theFederal Registerfor the same day (65FR 81453). No comments were receivedfrom the public in response to the noticeof proposed rulemaking.

Explanation of Provisions

These final regulations, which perma-nently remove Federal Reserve Banks asauthorized depositaries for Federal tax de-posits, adopt the rules of the proposedregulations and remove the correspondingtemporary regulations. The term FederalReserve Bank includes twelve banks andtheir approximately two dozen branchesthat constitute the nation’s central bank-ing system. The term does not include thethousands of federally and state charteredbanks that are recognized as members ofthe Federal Reserve System. Accord-ingly, these final regulations do not affectFederal Tax Deposits (FTDs) made withpaper coupons at any of the more than10,000 financial institutions nationwidethat serve as Treasury Tax and Loan(TT&L) depositaries. Deposits madethrough the Electronic Federal Tax Pay-ment System (EFTPS) are also not af-fected.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because the regulations do notimpose a collection of information on

July 16, 2001 60 2001–29 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS, Continued

(January 1941 = 100, unless otherwise noted)

Percent ChangeGroups May May from May 2000

2000 2001 to May 20011

20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.1 54.7 -9.021. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . 93.9 90.2 -3.9 22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 128.5 125.7 -2.223. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.5 108.9 2.3

Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . 604.5 594.0 -1.7

Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . 438.3 423.0 -3.5

Groups 21 - 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . 100.9 98.6 -2.3

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.5 530.8 -2.2

1 Absence of a minus sign before the percentage change in this column signifies a price increase.2 Indexes on a January 1986 =100 base.3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,tobacco, and contract departments.

small entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking preceding these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Brinton T. Warren of the Office ofAssociate Chief Counsel, Procedure andAdministration (Administrative Provi-sions and Judicial Practice Division).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, and under the authority of26 U.S.C. 7805 and 5 U.S.C. 301, 26 CFRparts 1, 31, 35, 36, 40, 301 and 601 areamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citationfor part 1 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *

§1.6302–1 [Amended]

Par. 2. Section 1.6302–1 is amended byremoving the fifth sentence in paragraph(b)(1).

§1.6302–2 [Amended]

Par. 3. Section 1.6302–2 is amended byremoving the third sentence in paragraph(b)(1).

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE

Par. 4. The authority citation for part 31continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§31.6302–1 [Amended]

Par. 5. Section 31.6302–1 is amendedby removing the fourth sentence inparagraph (i)(3).

§31.6302(c)–3 [Amended]

Par. 6. Section 31.6302(c)–3 isamended by removing the third sentencein paragraph (b)(2).

PART 301—PROCEDURE ANDADMINISTRATION

Par. 7. The authority for part 301 con-tinues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§301.6302–1T [Removed]

Par. 8. Section 301.6302–1T is re-moved.

PARTS 1, 31, 35, 36, 40, 301, 601[AMENDED]

Par. 9. In the list below, for each sec-tion indicated in the left column, removethe language in the middle column andadd, if any, the language in the right col-umn:

2001–29 I.R.B. 61 July 16, 2001

Section Remove Add

1.1461–1(a)(1), a Federal reserve bank or anfirst sentence

1.1502–5(a)(1), commercial dispositary or Federal Reserve Bank financial institutionfourth sentence

1.6151–1(d)(1) Federal Reserve Banks or

1.6302–1(b)(1) 214 or, at the election of the corporation, 203fourth sentence to a Federal Reserve bank

1.6302–1(b)(1), the Federal Reserve bank orfifth sentence

1.6302–2(a)(1)(i), a Federal Reserve bank or anfirst sentence

1.6302–2(a)(1)(ii), a Federal Reserve bank or anfirst sentence

1.6302–2(a)(1)(iv), a Federal Reserve bank or anfirst sentence

1.6302–2(b)(1), 214 or, at the election of the withholding agent, 203second sentence to a Federal Reserve bank

1.6302–2(b)(1), the Federal Reserve bank orthird sentence

1.6302–3(a) or with a Federal Reserve Bank

31.6071(a)–1(a)(1), or by a Federal Reserve banklast sentence

July 16, 2001 62 2001–29 I.R.B.

Section Remove Add

31.6071(a)–1(c), a Federal Reserve bank or bylast sentence

31.6151–1(b), Federal Reserve banks andfirst sentence

31.6302–1(c)(1), a Federal Reserve bank or anfirst sentence

31.6302–1(c)(2)(i) a Federal Reserve bank or anintroductory text

31.6302–1(c)(3) a Federal Reserve bank or an

31.6302–1(i)(3) 214 or, at the election of the employer, 203introductory text, to a Federal Reserve bankfirst sentence

31.6302–1(i)(5) the Federal Reserve bank or

31.6302(c)–2A(b)(1)(i) with a Federal Reserve bank or

31.6302(c)–2A(b)(3) with a Federal Reserve bank or

31.6302(c)–3(a)(1)(i) with a Federal Reserve bank or

31.6302(c)–3(a)(1)(ii) with a Federal Reserve bank or

31.6302(c)–3(a)(3) with a Federal Reserve bank or

31.6302(c)–3(b)(2) 214 or, at the election of the employer, 203second sentence to a Federal Reserve bank

31.6302(c)–3(b)(2), the Federal Reserve bank orthird sentence

35.3405–1T e–10A., a Federal Reserve Bank orfirst sentence

36.3121(l)(10)–4 a Federal Reserve bank or an

40.6302(c)–1(d)(1) 214) or to a Federal Reserve bank 203)

301.6302–1(a) Federal Reserve banks and authorized authorized financial institutionscommercial banks

301.6302–1(b)(1) Federal Reserve banks or authorized authorized financial institutionscommercial banks

301.6302–1(b)(2) Federal Reserve banks or authorized authorized financial institutionscommercial banks

301.9100–5T(c) Federal Reserve banks andconcluding text

601.401(a)(5) Federal Reserve banks andheading

601.401(a)(5)(iii) a Federal Reserve bank or anfirst sentence

601.401(a)(5)(iii) a Federal Reserve bank or ansecond sentence

601.401(a)(5)(iv), a Federal Reserve bank or a financial an authorized financialfirst sentence institution authorized in accordance with institution

Treasury Department Circular No. 1079, revised,to accept remittances of these taxes for transmissionto a Federal Reserve bank

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved June 15, 2001.

Mark A. Weinberger,Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on June25, 2001, 8:45 a.m., and published in the issue of theFederal Register for June 26, 2001, 66 F.R. 33830)

Section 6323.—Validity andPriority Against Certain Persons

26 CFR 301.6323(j)–1: Withdrawal of notice offederal tax lien in certain circumstances.

T.D. 8951

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 301

Withdrawal of Notice of FederalTax Lien in CertainCircumstances

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document containsfinal regulations relating to the with-drawal of notices of federal tax liens incertain circumstances. The final regula-tions reflect changes made to section6323 of the Internal Revenue Code of1986 by the Taxpayer Bill of Rights 2.The final regulations affect all taxpayersseeking withdrawals of notices of federaltax liens.

EFFECTIVE DATE: These regulationsapply on or after June 22, 2001.

FOR FURTHER INFORMATION CON-TACT: Kevin B. Connelly, (202) 622-3630 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments tothe Procedure and Administration Regula-tions (26 CFR part 301) relating to thewithdrawal of notices of federal tax liens

under section 6323 of the Internal Rev-enue Code (Code). Section 501(a) of theTaxpayer Bill of Rights 2 (TBOR2), Pub-lic Law 104–168, 110 Stat. 1452 (1996),amended section 6323 to authorize theSecretary to withdraw a notice of federaltax lien in certain limited circumstances.Section 501(a) also requires the Secretaryto notify credit reporting agencies, finan-cial institutions, and creditors of the with-drawal upon the written request of thetaxpayer. On June 30, 1999, a notice ofproposed rulemaking (REG–101519–97,1999–2 C.B. 114) reflecting thesechanges was published in theFederalRegister (64 FR 35102). Several partiescommented on the notice of proposedrulemaking and a hearing was held onNovember 30, 1999. The final regula-tions are adopted with minor changes.

Explanation of Provisions

Section 501(a) of TBOR2 amendedsection 6323 of the Code by authorizingthe Secretary to withdraw a notice of fed-eral tax lien under certain conditions andproviding that upon written request of thetaxpayer the Secretary will notify anycredit reporting agency and any financialinstitution or creditor identified by thetaxpayer. These regulations implementsection 501(a).

The proposed regulations provided thatthe district director had the authority towithdraw a notice of federal tax lien if thedistrict director determined that one of thefour conditions enumerated in paragraph(b) of the regulations existed. Because ofthe reorganization of the Internal RevenueService (IRS), which eliminated the dis-trict director position, the final regula-tions provide that the Commissioner orhis delegate (Commissioner) may with-draw a notice of federal tax lien under theproper conditions.

The notice of federal tax lien is with-drawn by filing a notice of withdrawal inthe office in which the notice of federaltax lien is filed and providing the taxpayerwith a copy of the notice. Following thewithdrawal of a notice of federal tax lien,chapter 64 of subtitle F, relating to collec-tion, is applied as if the IRS had neverfiled a notice of federal tax lien. Thewithdrawal of a notice of federal tax liendoes not affect the underlying tax lien.The withdrawal simply relinquishes anylien priority the IRS had obtained under

section 6323 of the Code when the IRSfiled the notice being withdrawn.

Paragraph (b) of the regulations pro-vides that the Commissioner has the au-thority to withdraw a notice of federal taxlien if one of the following conditions ex-ists: (1) the filing of the notice of federaltax lien was premature or otherwise not inaccordance with the administrative proce-dures of the Secretary; (2) the taxpayerhas entered into an agreement under sec-tion 6159 to satisfy the liability for whichthe lien was imposed by means of install-ment payments, unless the agreement byits terms provides that the notice will notbe withdrawn; (3) the withdrawal of no-tice will facilitate collection of the tax lia-bility for which the lien was imposed; or(4) the withdrawal of notice is in the bestinterests of the taxpayer and the UnitedStates.

A new example has been added (Exam-ple 1) that illustrates when the Commis-sioner may withdraw a notice of federaltax lien under paragraph (b)(1) becausethe IRS failed to follow administrativeprocedures when filing notice. Each ex-ample now refers to just one of the fourwithdrawal criteria under paragraph(b)(1). In addition, the examples havebeen renumbered to correspond to thenumbers of the criteria in paragraph (b)that the examples illustrate.

One of the commenting parties recom-mended that the final regulations definethe terms “facilitate collection” and“best interests of the taxpayer and theUnited States,” found in paragraphs(b)(3) and (b)(4). The final regulationspurposely do not define these terms.Congress intended “to give the IRS dis-cretion to withdraw a notice of lien” inthese circumstances. H.R. Rep. No. 506,104th Cong., 2d Sess. 32 (Mar. 28,1996). The circumstances under which alien may be withdrawn are inherentlyfactual. Further refinement of the statu-tory terms may unnecessarily limit theIRS’s ability to withdraw a notice whereappropriate.

A commenting party asked the IRS toadd a paragraph providing that, if the Na-tional Taxpayer Advocate (or his dele-gate) determines that a taxpayer is suffer-ing or about to suffer a significanthardship, the National Taxpayer Advocate(or his delegate) may, in appropriatecases, issue a taxpayer assistance order

2001–29 I.R.B. 63 July 16, 2001

(TAO) requiring the Commissioner towithdraw a notice of federal tax lien.This issue, concerning whether the Na-tional Taxpayer Advocate (or his dele-gate) may issue a TAO ordering the with-drawal of a notice, involves aninterpretation of section 7811, and the au-thority granted to the National TaxpayerAdvocate, which are not pertinent to thisregulation.

The final regulations provide that a per-son may request the withdrawal of a no-tice of federal tax lien by writing to theCommissioner. A written request for with-drawal must include: (1) the name, currentaddress, and taxpayer identification num-ber of the person requesting withdrawal ofthe notice of federal tax lien; (2) a copy ofthe notice of federal tax lien affecting theproperty, if available; (3) the groundsupon which the withdrawal of notice offederal tax lien is being requested; (4) alist of the names and addresses of anycredit reporting agency and any financialinstitution or creditor that the taxpayerwishes the Commissioner to notify of thewithdrawal of notice of federal tax lien;and (5) a request to disclose informationrelating to the withdrawal to the persons orentities listed.

The Commissioner must consider eachtaxpayer’s request for withdrawal of no-tice of federal tax lien and determinewhether any of the conditions authorizingwithdrawal exist and whether to issue awithdrawal. The Commissioner also mayissue a notice of withdrawal based on in-formation received from a source otherthan the taxpayer.

If the Commissioner grants a requestfor the withdrawal of notice of federal taxlien, the taxpayer may supplement the listof credit reporting agencies and financialinstitutions or creditors provided with therequest for withdrawal. If no list was sub-mitted with the request for withdrawal, alist may be submitted after the notice iswithdrawn. A request to supplement thelist must be sent in writing to the Com-missioner. The request must contain: (1)the name, current address, and taxpayeridentification number of the person re-questing the notification; (2) a copy of thenotice of withdrawal; (3) the names andaddresses of the persons or entities thetaxpayer wishes the IRS to contact; and(4) a request to disclose the withdrawal tothe persons or entities listed.

A commenting party suggested that theIRS send notification to credit agenciesand financial institutions by certifiedmail. Certified mail generally is requiredwhere there is a statute of limitations de-pendent on service. This is not the casewith respect to notification under section6323(j)(2).

A commenting party also requested thatlanguage be added to the regulations stat-ing that, upon receipt of notification thatthe IRS has withdrawn a notice of federaltax lien, a credit agency will be immunefrom any damage claim a taxpayer mayhave against it for its handling of the no-tice if the credit agency acts within rea-sonable time after receiving notice. Thestatute simply instructs the IRS to notifycredit agencies of a notice of withdrawalupon request of the taxpayer. The IRSdoes not have the statutory authority toshield a credit agency from a taxpayer’sclaim for damages due to how the creditagency handled the notice.

The regulations will be applicable onor after June 22, 2001, with respect towithdrawals of any notice of federal taxlien occurring after such date regardlessof when the notice was filed.

Special Analyses

It has been determined that this finalregulation is not a significant regulatoryaction as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because the collection of infor-mation in the regulations is exempt pur-suant to 5 U.S.C. 601(7)(B), theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Internal RevenueCode, this regulation will be submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small businesses.

Drafting Information

The principal author of these regula-tions is Kevin B. Connelly, Office of As-sociate Chief Counsel (Procedure and Ad-ministration), Collection Bankruptcy &Summons Division, CC:PA:CBS, IRS.However, other personnel from the IRS

and Treasury Department participated intheir development.

* * * * *

Final Amendments to the Regulations

Accordingly, the IRS amends 26 CFRpart 301 as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6323(j)–1 is added

to read as follows:

§301.6323(j)–1 Withdrawal of notice offederal tax lien in certain circumstances.

(a) In general. The Commissioner orhis delegate (Commissioner) may with-draw a notice of federal tax lien filedunder this section, if the Commissionerdetermines that any of the conditions inparagraph (b) of this section exist. A no-tice of federal tax lien is withdrawn by thefiling by the Commissioner of a notice ofwithdrawal in the office in which the no-tice of federal tax lien is filed. If a noticeof withdrawal is filed, chapter 64 of subti-tle F, relating to collection, will be appliedas if the withdrawn notice had never beenfiled. A copy of the notice of withdrawalwill be provided to the taxpayer. Uponwritten request by a taxpayer with respectto whom a notice of federal tax lien hasbeen or will be withdrawn, the Commis-sioner will promptly make reasonable ef-forts to notify any credit reporting agencyand any financial institution or creditoridentified by the taxpayer of the with-drawal of such notice. The withdrawal ofa notice of federal tax lien will not affectthe underlying federal tax lien.

(b) Conditions authorizing withdrawal.The Commissioner may authorize thewithdrawal of a notice of federal tax lienupon determining that one of the follow-ing conditions exists:

(1) Premature or not in accordance withadministrative procedures. The filing ofthe notice of federal tax lien was prematureor otherwise not in accordance with the ad-ministrative procedures of the Secretary.

(2) Installment agreement. The tax-payer has entered into an agreement undersection 6159 to satisfy the liability for

July 16, 2001 64 2001–29 I.R.B.

which the lien was imposed by means ofinstallment payments. Entry into an in-stallment agreement may not, however,be the basis for withdrawal of a notice oflien if the installment agreement specifi-cally provides that a notice of federal taxlien will not be withdrawn.

(3) Facilitate collection. The with-drawal of the notice of federal tax lienwill facilitate the collection of the tax lia-bility for which the lien was imposed.

(4) Best interests of the United Statesand the taxpayer—(i) In general. Thetaxpayer or the National Taxpayer Advo-cate (or his delegate) has consented to thewithdrawal of the notice of federal taxlien, and withdrawal of the notice wouldbe in the best interest of the taxpayer, asdetermined by the taxpayer or the Na-tional Taxpayer Advocate (or his dele-gate), and in the best interest of theUnited States, as determined by the Com-missioner.

(ii) Best interest of the taxpayer. Whena taxpayer requests the withdrawal of no-tice of federal tax lien based on the bestinterests of the United States and the tax-payer, the National Taxpayer Advocate(or his delegate) generally will determinewhether the withdrawal of the notice offederal tax lien is in the best interest of thetaxpayer. If, however, a taxpayer requeststhe Commissioner to withdraw a noticeand has not specifically requested the Na-tional Taxpayer Advocate (or his dele-gate) to determine the taxpayer’s best in-terest, a finding by the Commissioner thatthe withdrawal of notice is in the best in-terest of the taxpayer will be sufficient tosupport withdrawal. If the Commissionerdecides independently of a request by thetaxpayer to withdraw a notice of federaltax lien, the taxpayer or the National Tax-payer Advocate (or his delegate) mustconsent to the withdrawal.

(5) Examples. The following examplesillustrate the provisions of this paragraph(b):

Example 1. A owes $1,000 in Federal incometaxes. The IRS files a notice of federal tax lien to se-cure A’s tax liability. However, the IRS failed to fol-low procedure provided by the Internal RevenueManual (but not required by statute) with regard tomanagerial approval prior to the filing of a notice offederal tax lien. The Commissioner may withdrawthe notice of federal tax lien because the filing of thenotice was not in accordance with the Secretary’sadministrative procedures.

Example 2. A owes $1,000 in federal incometaxes. A enters into an agreement to pay the out-

standing federal income tax liability in installments.The agreement provides that a notice of federal taxlien may be filed if the taxpayer defaults. A timelypays the installments each month and has not de-faulted in any way. Eleven months after enteringinto the installment agreement, the Internal RevenueService files a notice of federal tax lien. Noting thatthere has been no default, the taxpayer asks the In-ternal Revenue Service to withdraw the notice offederal tax lien. In this situation, the Commissionermay withdraw the notice of federal tax lien becausethe taxpayer has entered into an installment agree-ment.

Example 3. A is an employee of X Corporation.A notice of federal tax lien has been filed to securean outstanding tax liability against A. A, who has noassets and no other secured creditors, has agreed topay the balance of tax due through payroll deduc-tions at a rate higher than the Internal Revenue Ser-vice could obtain through a wage levy in order to getthe notice of federal tax lien withdrawn. X Corpora-tion has agreed to allow A to enter into a payroll de-duction agreement. In this situation, the Commis-sioner may withdraw the notice of federal tax lien tofacilitate collection.

Example 4. A is owner of a farm machinerydealership against whom a notice of federal tax lienhas been filed to secure an outstanding tax liability.A currently is paying the tax liability by an install-ment agreement. X Corporation has agreed to pro-vide A with 100 tractors to increase A’s inventory ifthe notice of federal tax lien is withdrawn. A asksthe Internal Revenue Service to withdraw the noticeof federal tax lien. The Commissioner determinesthat the larger inventory would enable A to generateadditional tractor sales. Increased sales would en-able A to increase the amount of installment pay-ments and, consequently, reduce the amount of timeneeded to satisfy the liability. A, who has no otherassets or secured creditors, has agreed to modify theinstallment agreement. The Commissioner maywithdraw the notice of federal tax lien because thewithdrawal is in the best interest of the taxpayer andthe United States.

(c) Determinations by the Commis-sioner. The Commissioner must deter-mine whether any of the conditions autho-rizing the withdrawal of a notice offederal tax lien exist if a taxpayer submitsa request for withdrawal in accordancewith paragraph (d) of this section. TheCommissioner may also make this deter-mination independent of a request fromthe taxpayer based on information re-ceived from a source other than the tax-payer. If the Commissioner determinesthat conditions authorizing the with-drawal are not present, the Commissionermay not authorize the withdrawal. If theCommissioner determines conditions forwithdrawal are present, the Commis-sioner may (but is not required to) autho-rize the withdrawal.

(d) Procedures for request for with-drawal—(1) Manner. A request for the

withdrawal of a notice of federal tax lienmust be made in writing in accordancewith procedures prescribed by the Com-missioner.

(2) Form. The written request will in-clude the following information and doc-uments—

(i) Name, current address, and taxpayeridentification number of the person re-questing the withdrawal of notice of fed-eral tax lien;

(ii) A copy of the notice of federal taxlien affecting the taxpayer’s property, ifavailable;

(iii) The grounds upon which the with-drawal of notice of federal tax lien isbeing requested;

(iv) A list of the names and addresses ofany credit reporting agency and any fi-nancial institution or creditor that the tax-payer wishes the Commissioner to notifyof the withdrawal of notice of federal taxlien; and

(v) A request to disclose the withdrawalof notice of federal tax lien to the personslisted in paragraph (d)(2)(iv) of this sec-tion.

(e) Supplemental list of credit agen-cies, f inancial inst i tut ions, andcreditors—(1) In general. If the Com-missioner grants a withdrawal of noticeof federal tax lien, the taxpayer maysupplement the l ist in paragraph(d)(2)(iv) of this section. If no list wasprovided in the request to withdraw thenotice of federal tax lien, the list in para-graph (d)(2)(iv) of this section and therequest for notification in paragraph(d)(2)(v) of this section may be submit-ted after the notice is withdrawn.

(2) Manner. A request to supplementthe list of any credit agencies and any fi-nancial institutions or creditors that thetaxpayer wishes the Commissioner to no-tify of the withdrawal of notice of federaltax lien must be made in writing in accor-dance with procedures prescribed by theCommissioner.

(3) Form. The request must include thefollowing information and documents—

(i) Name, current address, and taxpayeridentification number of the taxpayer re-questing the notification of any creditagency or any financial institution orcreditor of the withdrawal of notice offederal tax lien;

(ii) A copy of the notice of withdrawal,if available;

2001–29 I.R.B. 65 July 16, 2001

(iii) A supplemental list, identified assuch, of the names and addresses of anycredit reporting agency and any financialinstitution or creditor that the taxpayerwishes the Commissioner to notify of thewithdrawal of notice of federal tax lien;and

(iv) A request to disclose the with-drawal of notice of federal tax lien to thepersons listed in paragraph (e)(3)(iii) ofthis section.

(f) Effective date. This section applieson or after June 22, 2001, with respect toa withdrawal of any notice of federal taxlien.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved June 13, 2001.

Mark A. Weinberger,Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June21, 2001, 8:45 a.m., and published in the issue of theFederal Register for June 22, 2001, 66 F.R. 33464)

July 16, 2001 66 2001–29 I.R.B.

Withdrawal of Notices ofProposed Rulemaking

Withdrawal of ProposedRegulations Relating toCorporations Filing ConsolidatedReturns and ProposedRegulations Relating toCollapsible Corporations

REG–100548–01

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Withdrawal of notices of pro-posed rulemaking.

SUMMARY: This document withdrawstwo notices of proposed rulemaking, onerelating to corporations filing consoli-dated income tax returns and the other re-lating to collapsible corporations. Theproposed regulations were published be-fore the enactment of the Internal Rev-enue Code of 1986, do not reflectchanges to the tax law made after theirpublication, and will not be finalized un-less reproposed.

DATES: These proposed regulations arewithdrawn June 27, 2001.

FOR FURTHER INFORMATION CON-TACT: Charles M. Whedbee (202) 622-7550 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

On July 31, 1984, the IRS issued pro-posed regulations (LR–97–79, 1984–2C.B. 821) relating to corporations filingconsolidated returns (49 FR 30528). Por-tions of these proposed consolidated re-turn regulations were withdrawn by sub-sequent notices of proposed rulemaking(CO–78–90, 1991–1 C.B. 757 andREG–103805–99, 2000–42 I.R.B. 376)published in the Federal RegisteronFebruary 4, 1991 (56 FR 4228) and Sep-tember 26, 2000 (65 FR 57755).

On August 31, 1984, the IRS issuedproposed regulations (LR–107–84,1984–2 C.B. 902) relating to collapsiblecorporations (49 FR 34523).

The IRS is withdrawing these pro-posed regulations because of intervening

amendments to the Internal RevenueCode and because these regulations pro-jects will not be undertaken in the fore-seeable future (or if undertaken, the regu-lations will be reproposed).

Drafting Information

The principal author of this withdrawalnotice is Charles M. Whedbee of the Officeof the Associate Chief Counsel (Corporate).However, other personnel from the IRS andTreasury participated in its development.

* * * * *

Withdrawal of Notices of ProposedRulemaking

Accordingly, under the authority of 26U.S.C. 7805, the notices of proposedrulemaking published in the FederalRegisteron July 31, 1984 (49 FR 30528)and August 31, 1984 (49 FR 34523) arewithdrawn.

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on June26, 2001, 8:45 a.m., and published in the issue of theFederal Register for June 27, 2001, 66 F.R. 34136)

Foundations Status of CertainOrganizations

Announcement 2001–76The 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:

ACFE Foundation, Inc., Springfield, MOAkaryd Trust, Inc., Leawood, KSAmerican Institute of Jewish Studies,

Overland Park, KSAmerican Neuropsychiatric Association,

Detroit, MIAnother Way the Fund for Progress,

Wichita, KSAssociation for a Free Burma,

Fairbanks, AKAvonda Land, Inc., St. Louis, MOBethany Free Methodist Church-District

40 School Historical PreservationSociety, Inc., Bennington, KS

Beyond Bounds, Inc., Kansas City, MOBiblical Archeology Educational

Services, Inc., Lincoln, NEBismarck-Mandan Interfaith Hospitality

Network, Bismarck, NDBoomerang Kids, Inc., Kirksville, MOBoonslick Area Citizens Advisory Board,

Columbia, MOBox Butte County Family Focus

Coalition, Inc., Alliance, NEBoys and Girls Club of Standing Rock,

Fort Yates, NDBrown Hotel, Inc., Neodesha, KSBrown Institute Association of Topeka,

Topeka, KSBSDC Foundation, Inc., Beatrice, NECall to Commitment, Branson, MOCapital City Men of Integrity,

Jefferson City, MOCare of Poor People, Inc., Kansas City,

MOCity Sprouts, Inc., Omaha, NECivil War Round Table of Wilmington

Delaware, Inc., Wilmington, DEConcerned Citizens for Topeka, Inc.,

Topeka, KSCrawford County Domestic Violence

Coalition, Steelville, MOCrete Athletic Booster Club, Inc.,

Crete, NECrown, Inc., Fulton, MODakota Flyers, Inc., Fargo, NDDerby Historical Society, Derby, KSDivine Resurrection Ministries, Inc.,

Oakland, CADolan Residential Care Centers, Inc.,

Chesterfield, MODouglas County Fire-Rescue

Departments, Inc., Boys Town, NEEagle Feather Indian Center, Inc.,

Minot, NDEmerald Door, Inc., Fargo, ND

2001–29 I.R.B. 67 July 16, 2001

Part IV. Items of General Interest

July 16, 2001 68 2001–29 I.R.B.

En Gedi Ministries, Inc., Branson, MOEye Laser Center, Springfield, MOFargo-Moorehead Express, Inc.,

Saint Paul, MNFarm & Ranch Educational Exchange,

Morrill, NEFirst Place Racing Ministries Foundation,

Lawrence, KSFlying Circus Air and Sea Museum,

Gravois Mills, MOFowler Hospital District, Inc.,

Fowler, KSFreedom Prison Ministries, Inc.,

Minot, NDFriends of Kagawad, St. Louis, MOGateway Moo Do Kwan Association,

Inc., St. Louis, MOGentle Giants Equestrian Therapy,

Incorporation, Russell, KSGladd, Inc., Jefferson City, MOGreater Missouri Area C.A.,

University City, MOGreater St. Louis Community Prevention

Partnership, St. Louis, MOGreater St. Louis Regional, Inc.,

St. Louis, MOGreenway Manor Resident Management

Association, Inc., Wichita, KSGrundy County R-VI Instructional Fund,

Inc., Trenton, MOHarvey Sports Boosters, Harvey, NDHeartland Dance Company, Bellevue, NEHenderson Health Care Foundation,

Henderson, NEHome Charitable Foundation,

Kensington, KSIdhal, Inc., Poplar Bluff, MOIgbo Union of St. Louis, Inc.,

Florissant, MOImprove the Educational Process, Inc.,

Topeka, KSInnovation Institute, Inc.,

Lawrence, KSJohn H. Hinrichs PDCA Scholarship

Fund, St. Louis, MOJohnson County Volleyball Club, Inc.,

Kansas City, KSJuda, Inc., Buffalo Gap, SDKanarts, Incorporated, Lawrence, KSKansas Business Education Coalition,

Inc., Overland Park, KSKansas City Irish Festival Organization,

Olathe, KSKansas International Museum, Inc.,

Topeka, KSKansas Search & Rescue Dog

Association, Topeka, KSKanza Development, Inc., Wilson, KS

Kids Can Foundation, Inc., Blair, NEKids First, Inc., Independence, MOKidspace Childrens Museum, Inc.,

Springfield, MOKinder Town, Inc., Waverly, KSLa Roca Boxing Club of Leavenworth,

Leavenworth, KSLawson Cardinal Soccer Club,

Lawson, MOLexington Senior Center, Inc.,

Lexington, MOLiberty Area Chamber Community

Foundation, Inc., Liberty, MOLong Time Coming, Inc.,

Kansas City, MOMaize Youth Baseball & Softball

Association, Maize, KSMasonic Charity Fund of Wichita

AF&AM, Inc., Wichita, KSMay Morley Elementary School Parent

Teacher Organization, Lincoln, NEMerry Go Round Day Care Center, Inc.,

Boonville, MOMidwest Ecological Resources

Foundation, Inc., Lawrence, KSMidwest Railroad Workers Scholarship

Foundation, St. Louis, MOMission Out-Reach to Siberia,

Frohna, MOMissouri Kids with Neimann-Pick C,

Imperial, MOMolly M. Rickel Research Library, Inc.,

Manhattan, KSMyria Lee Youth House, St. Louis, MONative American Foundation of

Nebraska, Lincoln, NENebraska Operation Lifesaver,

Lincoln, NENew Wineskins, Inc., Omaha, NENoel Community Development Council,

Inc., Noel, MONorth American Fiddlers Association -

NAFA, Warrenburg, MONorth Dakota Olympic Dreamers, Inc.,

Williston, NDNorth Kansas City Kiwanis Foundation,

Gladstone, MOOld Engine Company 8, Inc., Ottawa, KSOmicron XI Foundation,

Kansas City, MOOptimist Club of Deep River - Northview

North Carolina, Sanford, NCOver the Road Gang, Inc., Ottawa, KSPakistan American Society of Greater

Kansas City, Olathe, KSParshall 2000, Inc., Parshall, NDParsons Community Service Fund, Inc.,

Parsons, KS

Partners in Progress, Portland, NDPet Adoption & Welfare Society, Inc.,

Branson, MOPeter Erickson Ministries, Inc.,

Fargo, NDPi Bear Childrens Charities, Inc.,

Hays, KSPolk County Foundation, Inc.,

Osceola, NEPosi-Rx, Wichita, KSQuakes Softball, Inc., Omaha, NERay Menefee Amateur Boxing Club, Inc.,

Lincoln, NEReno County Planning Council for

Children and Families, Inc.,Hutchinson, KS

Saddle Champ Therapeutic RidingCenter, Inc., Kansas City, MO

Safe Harbor, Inc., Scottsbluff, NESaline County Fair Association,

Marshall, MOSarcoidosis Resource Center of

Delaware, Inc., Wilmington, DESeeds for Leadership, Talmage, NESenior Center of Carroll County,

Carrollton, MOS.E.T. Community Youth Center of the

Kansas Business Womens Assn., Inc.,Kansas City, KS

Shawnee Mission East Friends of theArts, Inc., Prairie Village, KS

Shelton Township Library Foundation,Shelton, NE

Sioux Empire Housing Partnership, Inc.,Sioux Falls, SD

Smart Motorcyclists Attend RiderTraining, Inc., (S.M.A.R.T., Inc.),Topeka, KS

Soft Steps, Inc., Mandan, NDSpirit Four Indian Center of Topeka, Inc.,

Topeka, KSSplitrock Rail Station, Garretson, SDSt. Louis Advisory Board of Caring

Communities, St. Louis, MOSt. Peters Beautification Task Force, Inc.,

St. Louis, MOStepping-Stone Ranch, Inc., Spearfish,

SDSumner Youth Services, Inc.,

Wellington, KSTeton Lakota Museum Board,

Hill City, SDTopeka Model Railroaders, Incorporated,

Topeka, KSTuttle Area Development Corporation,

Tuttle, NDVeterans Foundation of America,

Columbia, MO

2001–29 I.R.B. 69 July 16, 2001

Vietnam Veterans Support Foundation,Inc., Kansas City, MO

Voices of the Children Auxiliary Fund,Wichita, KS

Watertown Banquet, Watertown, SDWatertown Inline Skating Association,

Watertown, SDWilco Interagency Corporation,

Fredonia, KS

Wilmington Youth Organization, Inc.,Wilmington, DE

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 16, 2001 i 2001–29 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

2001–29 I.R.B. ii July 16, 2001

Numerical Finding List1

Bulletins 2001–27 and 2001–28

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. 42

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. 4

Railroad Retirement Quarterly Rates:

2001–27, I.R.B. 1

Revenue Procedures:

2001–39, 2001–28 I.R.B. 38

Revenue Rulings:

2001–34, 2001–28 I.R.B. 31

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. 34

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 16, 2001 iii 2001–29 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2001–27 and 2001–28

Proposed Regulations:

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

65–316Obsoleted byREG–106917–99, 2001–27 I.R.B. 4

68–125Obsoleted byREG–106917–99, 2001–27 I.R.B. 4

69–563Obsoleted byREG–106917–99, 2001–27 I.R.B. 4

74–326Obsoleted byREG–106917–99, 2001–27 I.R.B. 4

78–179Obsoleted 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

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by theSuperintendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold

on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

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