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					Internal Revenue                                                                           Bulletin No. 2001–43
                                                                                              October 22, 2001

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HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.


INCOME TAX                                                       EMPLOYEE PLANS
Rev. Rul. 2001–50, page 343.                                     Notice 2001–65, page 369.
Built-in gains tax. The built-in gains tax under section 1374    Weighted average interest rate update. The weighted
of the Code will not apply to the timber, coal, and domestic     average interest rate for October 2001 and the resulting
iron ore transactions described in the four situations in the    permissible range of interest rates used to calculate current
ruling.                                                          liability for purposes of the full funding limitation of section
                                                                 412(c)(7) of the Code are set forth.
T.D. 8965, page 344.
Final regulations under sections 6221 through 6233 of the        Announcement 2001–103, page 375.
Code implement the unified partnership audit procedures.         Filing of certain schedules of Form 5500 due October
                                                                 15, 2001. As a result of the disruption in financial markets
REG–107151–00, page 370.                                         caused by the events of September 11, 2001, this
Proposed regulations under section 1041 of the Code relate       announcement provides limited relief from the penalties for
to the tax treatment of certain redemptions, during marriage     failure to file a complete and accurate Schedule B and
or incident to divorce, of stock owned by a spouse or former     Schedule R of a Form 5500 that is due on or before October
spouse. A public hearing is scheduled for December 14,           15, 2001.
2001.
                                                                 Announcement 2001–104, page 376.
Announcement 2001–101, page 374.                                 GUST approved opinion letters and advisory letters.
This document informs issuers of tax-exempt bonds that,          This announcement describes the issuance of GUST
effective immediately, the Service will put into effect proce-   approved opinion letters and advisory letters in the instance
dures to provide relief to issuers affected by the September     of master & prototype and volume submitter specimen plans
11, 2001, terrorist attack. Affected issuers are provided        and reminds employers of the need to timely adopt their
additional time to file forms required under section 149(e) of   GUST approved plans.
the Code and to make payments required under section
148(f) of the Code.




                                                                                              (Continued on the next page)




Finding Lists begin on page ii.


         Department of the Treasury
         Internal Revenue Service
EXEMPT ORGANIZATIONS
Announcement 2001–105, page 376.
A list is provided of organizations now classified as private
foundations.


ADMINISTRATIVE
Rev. Proc. 2001–51, page 369.
Section 1374 rulings. This procedure modifies Rev. Proc.
2001–3 (2001–1 I.R.B. 111) by removing section 5.06 from
the No-Rule list. This concerns the application of section
1374 of the Code to certain timber, coal, and domestic iron
ore transactions. Rev. Proc. 2001–3 modified.




October 22, 2001                                                2001–43 I.R.B.
The IRS Mission

Provide America’s taxpayers top quality service by help-                                                and by applying the tax law with integrity and fairness to
ing them understand and meet their tax responsibilities                                                 all.




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




2001–43 I.R.B.                                                                                                                                                      October 22, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 1374.—Tax Imposed on                            Situation 4: An S corporation holds coal      timber is treated as a sale or exchange of
Certain Built-In Gains                               or domestic iron ore property with built-in      the timber in the year it is cut. Section
                                                     gain on the date its election to convert from    631(b) provides that, under certain circum-
26 CFR 1.1374–4: Recognized built-in gain or loss.   a C corporation to an S corporation is ef-       stances, a taxpayer’s disposition of timber
                                                     fective (or acquires coal or domestic iron       shall be treated as giving rise to gain or
   Built-in gains tax. The built-in gains            ore property with built-in gain from a C         loss on a sale of such timber. Section
tax under § 1374 will not apply to the tim-          corporation in a transaction to which            631(c) provides that, under certain circum-
ber, coal and domestic iron ore transac-             § 1374(d)(8) applies). During the recogni-       stances, a taxpayer’s disposition to unre-
tions described in the four situations in            tion period, the S corporation recognizes        lated parties of coal or domestic iron ore
the ruling.                                          that built-in gain on the disposal of the coal   shall be treated as giving rise to gain or
                                                     or domestic iron ore under a contract to         loss on a sale of such coal or iron ore. In
Rev. Rul. 2001–50                                    which § 631(c) applies.                          general, § 631 permits a taxpayer to benefit
ISSUE                                                                                                 from capital gain treatment in circum-
                                                     LAW AND ANALYSIS
                                                                                                      stances that would otherwise give rise to
   Is the S corporation’s gain recognized               Section 1374 imposes a corporate-level        ordinary income.
in each of the situations described below            tax on an S corporation’s net recognized            If an S corporation holds timber prop-
recognized built-in gain for purposes of             built-in gain during the recognition period      erty on the date its election to convert from
§ 1374 of the Internal Revenue Code?                 in the case of a C corporation’s conversion      a C corporation to an S corporation is ef-
                                                     to S corporation status (§ 1374(a)) or an S      fective and, during the recognition period,
FACTS
                                                     corporation’s acquisition of assets in a         cuts the timber and sells the resulting wood
   Situation 1: An S corporation holds tim-          transaction in which the S corporation’s         products in a transaction to which § 631
ber property with built-in gain on the date          basis in the acquired assets is determined       does not apply, the tax consequences to the
its election to convert from a C corporation         by reference to the basis of such assets         S corporation under § 1374 are determined
to an S corporation is effective (or acquires        in the hands of a C corporation                  using the same analysis contained in Ex-
timber property with built-in gain from a C          (§ 1374(d)(8)). Recognized built-in gain         ample 1 of § 1.1374–4(a)(3). The wood
corporation in a transaction to which                includes any gain recognized on the dispo-       products sold as inventory during the
§ 1374(d)(8) applies). During the 10-year            sition of an asset during the recognition pe-    recognition period did not constitute sepa-
period beginning with the first day of the           riod, except to the extent the S corporation     rate assets held by the S corporation on the
first taxable year for which the corporation         establishes that it did not hold the asset on    conversion date and thus their production
was an S corporation (or beginning on the            the conversion date or § 1374(d)(8) transac-     and sale do not constitute a partial disposi-
day of the § 1374(d)(8) transaction) (the            tion date, or that the gain recognized was       tion of the timber property. See Rev. Rul.
recognition period), the S corporation cuts          greater than the excess of the asset’s fair      72–515 (1972–2 C.B. 466) (treating grow-
the timber and sells the resulting wood              market value over its adjusted basis on the      ing timber as part of the underlying real
products and recognizes that built-in gain           conversion date or § 1374(d)(8) transaction      property for purposes of § 1031). Accord-
in a transaction to which § 631 does not             date (§ 1374(d)(3)). Section 1374(d)(3) ap-      ingly, the S corporation’s income on the
apply.                                               plies to any gain recognized during the          sale of the resulting wood products during
   Situation 2: An S corporation holds tim-          recognition period in a transaction treated      the recognition period is not recognized
ber property with built-in gain on the date          as a sale or exchange for Federal income         built-in gain within the meaning of
its election to convert from a C corporation         tax purposes (§ 1.1374–4(a) of the Income        § 1374(d)(3) and is not taxed under § 1374.
to an S corporation is effective (or acquires        Tax Regulations). In Example 1 of                   Notwithstanding the treatment accorded
timber property with built-in gain from a C          § 1.1374–4(a)(3), X is a C corporation that      income under § 631, the income received
corporation in a transaction to which                elects to become an S corporation effective      from the sale of the resulting wood prod-
§ 1374(d)(8) applies). During the recogni-           January 1, 1996. On that date, X owns a          uct, produced coal, or produced iron ore
tion period, the S corporation recognizes            working interest in an oil and gas property      involves the receipt of normal operating
that built-in gain on cutting the timber pur-        with a fair market value of $250,000 and an      business income in the nature of rent or
suant to an election under § 631(a).                 adjusted basis of $500,000. During the           royalties. See Rev. Rul. 77–109 (1977–1
   Situation 3: An S corporation holds tim-          recognition period, X produces and sells oil     C.B. 87) (holding that payments received
ber property with built-in gain on the date its      extracted from the oil and gas property for      from a disposal of coal to which § 631(c)
election to convert from a C corporation to          $75,000. The example concludes that the          does not apply is ordinary income). The
an S corporation is effective (or acquires tim-      $75,000 is not recognized built-in gain          receipt of normal operating business in-
ber property with built-in gain from a C cor-        under § 1374 because, as of the beginning        come in the nature of rents and royalties is
poration in a transaction to which                   of the recognition period, X held only a         not subject to tax under § 1374. There is
§ 1374(d)(8) applies). During the recogni-           working interest in the oil and gas property,    no indication that Congress intended the
tion period, the S corporation recognizes that       and not the oil itself.                          capital gain tax rate benefits provided by
built-in gain on the disposal of the timber             Section 631(a) provides that, under cer-      section § 631 to cause normal operating
under a contract to which § 631(b) applies.          tain circumstances, a taxpayer’s cutting of      business income from the cutting of tim-

2001–43 I.R.B.                                                           343                                               October 22, 2001
ber or the extraction of minerals to be sub-     SUMMARY: This document contains final                Books or records relating to this collec-
ject to tax under § 1374. Moreover,              regulations relating to the unified partnership   tion of information must be retained as
§ 631(c) is designed to favor domestic           audit procedures added to the Internal            long as their contents may become mater-
production of iron ore and sales of coal         Revenue Code by the Tax Equity and Fiscal         ial in the administration of any internal
and iron ore to unrelated parties. Applying      Responsibility Act of 1982 (TEFRA), and           revenue law. Generally, tax returns and
§ 1374 to income taxed under § 631(c)            amended by the Taxpayer Relief Act of 1997        tax return information are confidential, as
could have the anomalous effect of taxing        (1997 Act) and the Internal Revenue Service       required by 26 U.S.C. 6103.
sales of domestic iron ore more heavily          Restructuring and Reform Act of 1998 (1998
than sales of foreign production and tax-        Act). The unified partnership audit proce-        Background
ing sales of coal and iron to unrelated par-     dures provide administrative rules for the           These regulations finalize the regulations
ties more heavily than sales to related par-     auditing of a partnership and its partners.       proposed December 13, 1984 (L.R. 242–84,
ties. Accordingly, an S corporation’s gain                                                         1984–2 C.B. 917 [49 FR 48573]), April 18,
recognized pursuant to § 631(a), § 631(b),       EFFECTIVE DATES: These regulations
                                                 are effective October 4, 2001.                    1986 (L.R. 205–82, 1986–1 C.B. 782 [51
or § 631(c) during the recognition period                                                          FR 13231]), and January 26, 1999
is not recognized built-in gain within the       FOR FURTHER INFORMATION CON-                      (REG–106564–98, 1999–1 C.B. 714 [64 FR
meaning of § 1374(d)(3).                         TACT: William Heard at (202) 622-7950             3886]) and issued as temporary regulations
                                                 (not a toll-free number).                         on December 13, 1984 (T.D. 7996, 1985–1
HOLDINGS
                                                 SUPPLEMENTARY INFORMATION:                        C.B. 357 [49 FR 48536]), March 5, 1987
   The S corporation’s gain recognized in                                                          (T.D. 8128, 1987–1 C.B. 325 [52 FR 6779]),
the transactions described in Situation 1,       Paperwork Reduction Act                           and January 26, 1999 (T.D. 8808, 1999–1
2, 3, and 4 is not recognized built-in gain                                                        C.B. 682 [64 FR 3837]). On January 26,
for purposes of § 1374.                             The collections of information contained       1999, proposed regulations (REG–106564–
   See also Rev. Proc. 2001–51 (2001–43          in these final regulations have been reviewed     98, 1999–1 C.B. 714) were published in the
I.R.B. 369), which modifies Rev. Proc.           and, pending receipt and evaluation of public     Federal Register (64 FR 3886). These reg-
2001–3 (2001–1 I.R.B. 111), by deleting          comments, approved by the Office of Man-          ulations implemented the amendments to the
therefrom section 5.06 (the no-rule under        agement and Budget (OMB) under 44                 unified partnership audit rules made by the
§ 1374, regarding the tax imposed on cer-        U.S.C. 3507 and assigned control number           1997 and 1998 Acts. In addition, the pream-
tain built-in gains).                            1545-0790. Responses to these collections         ble to those proposed regulations stated that
                                                 of information are both mandatory and vol-        the IRS planned on finalizing all of the uni-
DRAFTING INFORMATION                             untary and are required to receive a benefit.     fied partnership audit procedure regulations
                                                    An agency may not conduct or sponsor,          as part of this project (i.e., those regulations
   The principal author of this revenue          and a person is not required to respond to, a     proposed on December 13, 1984, and April
ruling is Cristian P. Silva of the Office of     collection of information unless the collec-      18, 1986). No written comments were re-
Associate Chief Counsel (Corporate). For         tion of information displays a valid control      ceived in response to the January 26, 1999,
further information regarding this revenue       number assigned by the Office of Manage-          notice of proposed rulemaking. Contempo-
ruling, contact Mr. Silva at (202) 622-          ment and Budget.                                  raneous with the issuance of proposed regu-
7750 (not a toll-free call).                        The collections of information required        lations, Treasury and the IRS issued tempo-
                                                 by §§ 301.6222(b)–1, 301.6227(c)–1, and           rary regulations containing substantially
                                                 301.6227(d)–1 are reflected on Form 8082,         similar rules. Taxpayers and the IRS have
Section 6221.—Tax Treatment                      “Notice of Inconsistent Treatment or Admin-       been operating under these rules since they
Determined at Partnership Level                  istrative Adjustment Request (AAR).” The          were promulgated as temporary regulations.
                                                 burden associated with them is reflected on          The proposed regulations under
26 CFR 301.6221–1: Tax treatment determined at   that form.
partnership level.                                                                                 §§ 301.6221 thru 301.6233 are adopted,
                                                    The remaining collections of information:      as revised by this Treasury decision.
T.D. 8965                                        §§ 301.6222(a)–2,           301.6222(b)–2,
                                                 301.6222(b)–3(a)(2), 301.6223(b)–1(b),            Explanation of Provisions
                                                 301.6223(c)–1(a), 301.6223(e)–2(a),
DEPARTMENT OF THE TREASURY                                                                            These final regulations contain regula-
                                                 301.6223(g)–1, 301.6223(h)–1, 301.6224
Internal Revenue Service                                                                           tions substantially similar to the previ-
                                                 (b)–1(b), 301.6224(c)–1(c), 301.6224(c)
                                                                                                   ously proposed and currently effective
26 CFR Parts 301 and 602                         –3(c), 301.6229(b)–2(b), 301.6230(b)–1,
                                                                                                   temporary regulations under sections
                                                 301.6230(e)–1, 301.6231(a)(1)–1(b),
Unified Partnership Audit                                                                          6221 through 6231, inclusive. The sub-
                                                 301.6231(a)(7)–1, 301.6231(c)–1(d),
Procedures                                                                                         stantive changes from the provisions in
                                                 301.6231(c)–2(d), are not reflected on the
                                                                                                   the proposed and temporary regulations
                                                 Form 8082. The estimated annual burden
AGENCY: Internal Revenue Service                                                                   are as follows:
                                                 per respondent varies from .25 hours to .75
(IRS), Treasury.
                                                 hours, depending on individual circum-            1. Clarification of § 301.6223(a)–2T
ACTION: Final regulations and removal            stances, with an estimated average of .5             Section 6223 requires the IRS to pro-
of temporary regulations.                        hours.                                            vide partners with notice of partnership

October 22, 2001                                                     344                                                   2001–43 I.R.B.
proceedings. Under section 6223, the IRS        787 (1990), the issuance of an NBAP            469, the passive loss rules. Because the
must notify each partner of the beginning       fewer than 120 days before the issuance        application of the passive loss rules to a
of an administrative proceeding by send-        of the FPAA does not invalidate the            partner is similar to the existing list of af-
ing out a notice of the beginning of an ad-     FPAA. Instead, a taxpayer will have 45         fected items, the final regulations provide
ministrative proceeding (NBAP). Under           days from the mailing of the FPAA to           that the application of the passive loss
§ 301.6223(a)–2T, if the IRS has issued an      make the elections provided in section         rules under section 469 to a partner with
NBAP but decides not to propose any ad-         6223(e).                                       respect to a loss flowing from a partner-
justments to the partnership return as filed,                                                  ship is an affected item to the extent it is
the IRS has 45 days to withdraw the             3. Effect of a Nonresident Alien Partner       not a partnership item.
NBAP. If the IRS does not withdraw the          on the Small Partnership Exception of
                                                Section 6231(a)(1)(B)(i)                       5. Husbands and Wives Owning Partner-
NBAP, however, it is not required to issue
                                                    For purposes of the unified partnership    ship Interests Separately or Jointly
a notice of final partnership administrative
                                                audit rules, section 6231(a)(1)(B)(i) con-        The temporary regulations under sec-
adjustment (FPAA). This has led to some
                                                tains an exception from the definition of a    tion 6231 describe the treatment of
confusion among partnerships who post-
                                                partnership for certain small partnerships.    spouses under the unified partnership
pone raising adjustments that may result
                                                Under this rule, a partnership does not in-    audit rules where: (1) a married couple
in refunds or offsets while they await the
                                                clude any partnership having 10 or fewer       owns an interest in a partnership as joint
outcome of the partnership-level audit.
                                                partners, each of whom is an individual        property; and (2) a married individual
The issue of whether the IRS is required to
                                                (other than a nonresident alien), a C cor-     owns an interest in a partnership as sepa-
issue an FPAA after issuance of an NBAP
                                                poration, or an estate of a deceased part-     rate property. Section 301.6231(a)
was litigated in Atlantic Richfield Co. v.
                                                ner. The proposed regulations stated that      (12)–1T applies when a married couple
Dept. of Treasury, 1996 U.S. Dist. LEXIS
                                                “the 10 or fewer limitation . . . is applied   owns a partnership interest as joint prop-
19891, (D.D.C. Dec. 31, 1996). In that
                                                to the number of natural persons (other        erty. It provides that, with limited excep-
case, the court held that the IRS is not re-
                                                than nonresident aliens) . . .” Some prac-     tions, spouses holding a joint interest in a
quired to issue an FPAA even if it does not
                                                titioners have read this provision to mean     partnership are both treated as partners for
withdraw the NBAP. If the IRS does not
                                                that a nonresident alien can be a partner in   purposes of subchapter C of chapter 63 of
issue an FPAA the partners will be unable
                                                a small partnership that is not subject to     the Internal Revenue Code. This regula-
to request favorable adjustments unless
                                                the unified partnership audit rules, but       tion interprets section 6231(a)(12), which
they have filed a timely administrative ad-
                                                that such partners are not counted toward      provides that a husband and wife who
justment request (AAR) seeking a change
                                                the 10 partner limitation. To clarify that a   have a joint interest in a partnership shall
in the treatment of partnership items. Ac-
                                                partnership that has a nonresident alien       be treated as one person, except as other-
cordingly, a sentence has been added to
                                                partner cannot qualify for the small part-     wise provided in regulations.
§ 301.6223(a)–2 to explicitly inform tax-
                                                nership exception of section 6231(a)              Section 301.6231(a)(2)–1T applies
payers that the IRS does not have to issue
                                                (1)(B)(i), this parenthetical has been re-     when one spouse owns a partnership in-
an FPAA notwithstanding the issuance of
                                                moved in § 301.6231(a)(1)–1(a)(1) of the       terest as separate property. It provides
(and failure to withdraw) an NBAP.
                                                final regulations.                             that, with limited exceptions, a spouse
2. Elections Made Under § 301.6223(e)–2T                                                       who files a joint return with an individual
   As stated above, section 6223 requires       4. Definition of Affected Item                 holding a separate interest in a partnership
the IRS to provide partners with an NBAP           Under the unified partnership audit         is treated as a partner for purposes of sub-
and an FPAA. If the IRS fails to provide a      rules, special procedures apply with re-       chapter C of chapter 63. This regulation
partner with timely notice, the partner         spect to affected items, that is, items that   interprets section 6231(a)(2), which pro-
may, under § 301.6223(e)–2T(c)(2), elect        are affected by partnership items. Section     vides that the term partner includes any
to have either the FPAA, a court decision,      301.6231(a)(5)–1T defines the term af-         person whose income tax liability is de-
a consistent settlement agreement, or con-      fected item as including, among other          termined in whole or in part by taking into
version to nonpartnership items apply to        things, a partner’s basis in the partner’s     account directly or indirectly partnership
that partner’s partnership items. That          partnership interest, the application of the   items.
election must be mailed within 45 days          section 465 at-risk rules to a partner, and       In Callaway v. Commissioner, 231 F.3d
after “that notice was mailed.” Section         any addition to tax or additional amount       106 (2d Cir. 2000), the U.S. Court of Ap-
301.6223(e)–2T(c)(2). To remove any             to the extent that they are not partnership    peals for the Second Circuit considered
ambiguity regarding which notice triggers       items. Generally, affected items are di-       § 301.6231(a)(2)–1T in holding that a
the right to make an election under sec-        rectly assessed following partnership pro-     wife was not bound by the outcome of a
tion 6223(e), the final regulations amend       ceedings. If the item requires partner-        unified partnership proceeding where her
the temporary regulations to make it clear      level determinations, however, the IRS         husband’s partnership items converted to
that the 45-day period for making the           must assert changes to affected items in a     nonpartnership items during the proceed-
election under section 6223(e) relates to       partner-level deficiency proceeding fol-       ing. The partnership interest at issue in
the mailing of the FPAA, not the NBAP.          lowing the completion of the partnership-      Callaway was the husband’s separate
The final regulations also clarify that, in     level proceeding.                              property. The court reasoned that the wife
accordance with Wind Energy Technology             The IRS promulgated § 301.6231(a)           was treated as a partner under the regula-
Associates III v. Commissioner, 94 T.C.         (5)–1T before the enactment of section         tion only because she filed a joint return

2001–43 I.R.B.                                                     345                                              October 22, 2001
with a person who owned a partnership          that the partnership’s penalty defenses are    cause the 1997 Act amends section
interest; therefore, her tax liability was     to be resolved during the partnership pro-     6226(f), but not section 6226(e), it ap-
determined in part by taking into account      ceeding; individual defenses can only be       pears that Congress did not intend to re-
partnership items. Once the husband’s          brought by the partner in a subsequent re-     quire a deposit of penalties attributable to
partnership items converted to nonpart-        fund action. In addition, the 1999 Regu-       partnership-level determinations as a con-
nership items, the wife’s tax liability was    lations modify the computational adjust-       dition of bringing such an action. This
no longer affected by any partnership          ment rules to allow the IRS to assess          rule is applicable to civil actions begin-
items and there was no longer any reason       penalties under those procedures. Finally,     ning on or after October 4, 2001.
for her to participate in or be bound by the   the 1999 Regulations specify that partner-        Treasury and the IRS also amended
partnership proceedings.                       ship-level determinations of a penalty         § 301.6226(e)–1T to clarify that, in the case
   In so holding, the Callaway court dis-      may be the subject of a settlement agree-      of a petition filed by a 5-percent group or
tinguished Dubin v. Commissioner, 99           ment between the IRS and a partner in a        pass-thru partner, the members of the group
T.C. 325 (1992). In Dubin, the Tax Court       partnership. If they are, then the IRS         or the indirect partners holding an interest
held that a wife was bound by the out-         must offer consistent settlement terms         in the partnership through the pass-thru
come of a unified partnership audit pro-       with respect to those partnership-level de-    partner must deposit the aggregate amount
ceeding even though her husband’s part-        terminations of the penalty (and other set-    by which their tax liabilities would be in-
nership items converted to nonpartnership      tled partnership items) to other partners in   creased if the treatment of partnership items
items prior to the conclusion of the pro-      the partnership, subject to the limitations    on the partners’ returns were made consis-
ceeding. In Dubin, unlike Callaway, the        of section 6224(c)(2) and the regulations      tent with the treatment of partnership items
husband and wife owned the interest as         thereunder.                                    on the partnership return. This clarification
joint property. Therefore, each was               The final regulations make additional       is applicable to civil actions beginning on
treated as having a share of partnership       changes to the regulations under subchap-      or after March 30, 2002.
items that could be affected by the part-      ter C of chapter 63 to conform those regu-     7. Applicability Dates
nership proceeding independently of the        lations to the new statutory treatment of         This document contains final regula-
other’s share.                                 penalties. Specifically, the final regula-     tions relating to the unified partnership
   To resolve questions concerning the         tions amend § 301.6224(c)–1T to clarify        audit procedures added to the Internal
treatment of partnership items when a          that a settlement agreement between the        Revenue Code by TEFRA, and amended
conversion event occurs with respect to a      tax matters partner and the IRS with re-       by the 1997 Act and the 1998 Act. Pro-
spouse, §§ 301.6231(a)(2)–1T and               spect to penalties, like a settlement agree-   posed regulations were published on De-
301.6231(a)(12)–1T have been amended           ment with respect to partnership items,        cember 13, 1984, April 18, 1986, and Jan-
to be consistent with the Callaway opin-       binds partners other than notice partners      uary 26, 1999. Temporary regulations
ion.                                           and members of a notice group. Simi-           were published on December 13, 1984
                                               larly, the final regulations amend             (effective December 10, 1984), March 5,
6. Partnership-Level Determinations of         § 301.6224(c)–2T to clarify that a settle-     1987 (effective September 3, 1982), and
Penalties                                      ment agreement between a pass-thru part-       January 26, 1999 (effective January 26,
   Before the 1997 Act, the IRS could im-      ner and the IRS with respect to penalties      1999). The final regulations published in
pose penalties on a partner only through       binds indirect partners, as would a settle-    this document apply to unified partner-
the application of the deficiency proce-       ment agreement with respect to partner-        ship proceedings with respect to partner-
dures after the completion of a partner-       ship items. In addition, the final regula-     ship taxable years beginning on or after
ship-level proceeding. Forcing the IRS to      tions amend § 301.6229(f)–1T to clarify        October 4, 2001. For unified partnership
open deficiency proceedings against the        that the rules applicable to partial settle-   proceedings with respect to partnership
individual partners was inconsistent with      ments of partnership items also apply to       taxable years beginning before October 4,
the efficiency goal of the partnership audit   partnership-level determinations of penal-     2001, taxpayers and practitioners are di-
rules. The 1997 Act cured this problem         ties.                                          rected to the temporary regulations that
by providing that, for partnership taxable        The final regulations also amend            were in effect for the period in question.
years ending after August 5, 1997, part-       § 301.6226(f)–1T to reflect the 1997 Act
nership-level proceedings include the de-      changes to section 6226(f). The 1997 Act       Effective Date
termination of applicable penalties at the     grants courts jurisdiction to determine
partnership level. Partners may now raise      penalties, additions to tax, or additional       These regulations are effective as of
any partner-level defenses to the imposi-      amounts relating to an adjustment to part-     October 4, 2001.
tion of penalties only in a subsequent re-     nership items. The final regulations do        Special Analyses
fund action.                                   not, however, amend § 301.6226(e)–1T to
   The temporary regulations issued on         require that a partnership contesting an          It has been determined that this Trea-
January 26, 1999 (the 1999 Regulations),       FPAA, in a United States district court or     sury decision is not a significant regula-
revised §§ 301.6221–1T, 301.6224(c)            the United States Court of Federal             tory action as defined in Executive Order
–3T(b)(1), and 301.6231(a)(6)–1T to con-       Claims, deposit tax attributable to partner-   12866. Therefore, a regulatory assess-
form those regulations to the statutory        ship-level determinations of penalties as a    ment is not required. It is hereby certified
change. The revised regulations mandate        condition of bringing the proceeding. Be-      that the collection of information in

October 22, 2001                                                  346                                                2001–43 I.R.B.
§ 301.6229(b)–2(b) does not have a sig-         Adoption of Amendments to the                 justment to a partnership item shall be
nificant impact on a substantial number of      Regulations                                   made based on partnership-level determi-
small entities. This certification is based                                                   nations. Partnership-level determinations
on the fact that the notification is only re-     Accordingly, 26 CFR parts 301 and
                                                                                              include all the legal and factual determi-
quired for the few partnerships whose Tax       602 are amended as follows:
                                                                                              nations that underlie the determination of
Matters Partners are debtors in a bank-         PART 301 - - PROCEDURE AND                    any penalty, addition to tax, or additional
ruptcy proceeding under Title 11 of the         ADMINISTRATION                                amount, other than partner-level defenses
United States Code. Moreover, the time                                                        specified in paragraph (d) of this section.
required to prepare and file the notifica-         Paragraph 1. The authority citation for       (d) Partner-level defenses. Partner-
tion is minimal and will not have a signif-     part 1 is amended by adding entries in nu-    level defenses to any penalty, addition to
icant impact on those few small entities        merical order to read as follows:             tax, or additional amount that relates to an
that file the notification. Therefore, a           Authority: 26 U.S.C. 7805 * * *            adjustment to a partnership item may not
Regulatory Flexibility Analysis under the          Section 301.6231(c)–1 also issued          be asserted in the partnership-level pro-
Regulatory Flexibility Act (5 U.S.C.            under 26 U.S.C. 6231(c)(1) and (3).           ceeding, but may be asserted through sep-
chapter 6) is not required for                     Section 301.6231(c)–2 also issued          arate refund actions following assessment
§ 301.6229(b)–2(b).                             under 26 U.S.C. 6231(c)(1) and (3). * * *     and payment. See section 6230(c)(4).
   The other information collections im-           Par. 2. Section 301.6221–1 is added to     Partner-level defenses are limited to those
posed by this Treasury decision are not         read as follows:                              that are personal to the partner or are de-
subject to the Regulatory Flexibility Act                                                     pendent upon the partner’s separate return
                                                § 301.6221–1 Tax treatment determined
because the notice of proposed rulemak-                                                       and cannot be determined at the partner-
                                                at partnership level.
ing with respect to these requirements                                                        ship level. Examples of these determina-
was published prior to March 29, 1996.             (a) In general. A partner’s treatment of   tions are whether any applicable threshold
Nevertheless, we believe that these infor-      partnership items on the partner’s return     underpayment of tax has been met with
mation collections will not have a signifi-     may not be changed except as provided in      respect to the partner or whether the part-
cant impact on a substantial number of          sections 6222 through 6231 and the regu-      ner has met the criteria of section 6664(b)
small entities. This is based on the fact       lations thereunder. Thus, for example, if a   (penalties applicable only where return is
that most of the information collections        partner treats an item on the partner’s re-   filed), or section 6664(c)(1) (reasonable
only apply to entities under audit, and the     turn consistently with the treatment of the   cause exception) subject to partnership-
remaining information collections apply         item on the partnership return, the IRS       level determinations as to the applicabil-
only to a small number of small busi-           generally cannot adjust the treatment of      ity of section 6664(c)(2).
nesses, namely small partnerships who           that item on the partner’s return except         (e) Cross-references. See §§ 301.
elect to have the provisions of subchapter      through a partnership-level proceeding.       6231(c)–1 and 301.6231(c)–2 for special
C of chapter 63 apply, and small business       Similarly, the taxpayer may not put part-     rules relating to certain applications and
partners that report partnership items in-      nership items in issue in a proceeding re-    claims for refund based on losses, deduc-
consistently with the reporting of that         lating to nonpartnership items. For exam-     tions, or credits from abusive tax shelter
item on the partnership return. Moreover,       ple, the taxpayer may not offset a            partnerships.
the time required to prepare and file the       potential increase in taxable income based       (f) Effective date. This section is ap-
required statements is minimal on those         on changes to nonpartnership items by a       plicable to partnership taxable years be-
few small entities that file the statements.    potential decrease based on partnership       ginning on or after October 4, 2001. For
   It also has been determined that section     items.                                        years beginning prior to October 4, 2001,
553(b) of the Administrative Procedure             (b) Restrictions inapplicable after        see § 301.6221–1T contained in 26 CFR
Act (5 U.S.C. chapter 5) does not apply to      items become nonpartnership items. Sec-       part 1, revised April 1, 2001.
these regulations. Pursuant to section          tion 6221 and paragraph (a) of this section
                                                                                              § 301.6221–1T [Removed]
7805(f) of the Internal Revenue Code, the       cease to apply to items arising from a
notice of proposed rulemaking was sub-          partnership with respect to a partner when       Par. 2a. Section 301.6221–1T is re-
mitted to the Chief Counsel for Advocacy        those items cease to be partnership items     moved.
of the Small Business Administration for        with respect to that partner under section       Par. 3. Section 301.6222(a)–1 is added
comment on its impact on small business.        6231(b).                                      to read as follows:
                                                   (c) Penalties determined at partnership
Drafting Information                                                                          § 301.6222(a)–1 Consistent treatment of
                                                level. Any penalty, addition to tax, or ad-
                                                                                              partnership items.
   The principal author of these regula-        ditional amount that relates to an adjust-
tions is Horace Howells, Office of Associ-      ment to a partnership item shall be deter-       (a) In general. The treatment of a part-
ate Chief Counsel (Passthroughs and Spe-        mined at the partnership level.               nership item on the partner’s return must
cial Industries), IRS. However, other           Partner-level defenses to such items can      be consistent with the treatment of that
personnel from the IRS and Treasury De-         only be asserted through refund actions       item by the partnership on the partnership
partment participated in their develop-         following assessment and payment. As-         return in all respects including the
ment.                                           sessment of any penalty, addition to tax,     amount, timing, and characterization of
              * * * * *                         or additional amount that relates to an ad-   the item.

2001–43 I.R.B.                                                    347                                             October 22, 2001
   (b) Treatment must be consistent with                 ally applied with respect to the source         from a source partnership in a manner
partnership return. The treatment of a                   partnership. For purposes of this section,      consistent with the treatment of that item
partnership item on the partner’s return                 the term source partnership means the           by a pass-thru partner through which the
must be consistent with the treatment of                 partnership (within the meaning of sec-         indirect partner holds the interest in the
that item on the partnership return. Thus,               tion 6231(a)(1)) from which the partner-        source partnership and that pass-thru part-
a partner who treats an item consistently                ship item originates.                           ner—
with a schedule or other information fur-                   (b) Indirect partner files consistently         (i) Treats that item in a manner incon-
nished to the partner by the partnership                 with source partnership. An indirect part-      sistent with the treatment of that item on
has not satisfied the requirement of para-               ner who treats an item from a source part-      the source partnership’s return; and
graph (a) of this section if the treatment of            nership in a manner consistent with the            (ii) Files a statement identifying the in-
that item is inconsistent with the treat-                treatment of that item on the source part-      consistency with the source partnership in
ment of the item on the partnership return               nership’s return satisfies the consistency      accordance with § 301.6222(b)–1, the in-
actually filed. For rules relating to the                requirement of section 6222(a) regardless       direct partner is not subject to a computa-
election to be treated as having reported                of whether the indirect partner treats that     tional adjustment to conform to the treat-
the inconsistency where the partner treats               item in a manner consistent with the treat-     ment of that item on the return of the
an item consistently with an incorrect                   ment of that item by the pass-thru partner      source partnership.
schedule, see § 301.6222(b)–3.                           through which the indirect partner holds           (d) Examples. The following examples
   (c) Examples. The following examples                  the interest in the source partnership.         illustrate the principles of this section:
illustrate the principles of this section:               Under these circumstances, therefore, the           Example 1. One of the partners in Partnership A
   Example 1. B is a partner of Partnership P. Both                                                      is Partnership B, which has four equal partners C, D,
                                                         Internal Revenue Service shall not send to
B and P use the calendar year as the taxable year. In                                                    E, and F. Both A and B are partnerships within the
                                                         the indirect partner the notice described in    meaning of section 6231(a)(1). On its return, A
December 2001, P receives an advance payment for
services to be performed in 2002 and reports this        section 6231(b)(1)(A).                          reports $100,000 as B’s distributive share of A’s ordi-
amount as income for calendar year 2001. However,           (c) Indirect partner files inconsistently    nary income. B, however, reports only $80,000 as its
B reports B’s distributive share of this amount on B’s   with source partnership—(1) Indirect            distributive share of the income and does not notify
income tax return for 2002 and not on B’s return for                                                     the Internal Revenue Service of this inconsistent
                                                         partner notifies the Internal Revenue Ser-      treatment with respect to A. C reports $20,000 as its
2001. B’s treatment of this partnership item is
inconsistent with the treatment of the item by P.
                                                         vice of inconsistency. An indirect partner      distributive share of the item. Although C reports the
   Example 2. Partnership P incurred certain start-      who—                                            item consistently with B, C is subject to a computa-
up costs before P was actively engaged in its busi-         (i) Treats an item from a source part-       tional adjustment to conform the treatment of that
ness. P capitalized these costs. C, a partner in P,                                                      item on C’s return to the treatment of that item on A’s
                                                         nership in a manner inconsistent with the
deducted C’s proportionate share of these start-up                                                       return.
                                                         treatment of that item on the source part-          Example 2. Assume the same facts as in Example
costs. C’s treatment of the partnership expenditure is
inconsistent with the treatment of that item by P.       nership’s return; and                           1, except that B notified the Internal Revenue
   Example 3. D is a partner in partnership P. P            (ii) Files a statement identifying the in-   Service of its inconsistent treatment with respect to
reports a loss of $100,000 on its return, $5,000 of      consistency with the source partnership in      source partnership A. C is not subject to a computa-
which it reports on the Schedule K-1 attached to its                                                     tional adjustment.
                                                         accordance with § 301.6222(b)–1, shall
return as D’s distributive share. However, P reports                                                         Example 3. Assume the same facts as in Example
$15,000 as D’s distributive share of P’s loss on the
                                                         not be subject to a computational adjust-       1. D reports only $15,000 as D’s distributive share
Schedule K-1 furnished to D. D reports the $15,000       ment to conform the treatment of that           of the income and does not report the inconsistency.
loss on D’s income tax return. D has not satisfied the   item to the treatment of that item on the       F reports only $9,000 as its distributive share of the
consistent reporting requirement. See, however,          return of the source partnership.               item but reports this inconsistency with respect to
§ 301.6222(b)–3 for an election to be treated as hav-                                                    source partnership A. D is subject to a computation-
                                                            (2) Indirect partner does not notify the     al adjustment to conform the treatment of that item
ing reported the inconsistency.
                                                         Internal Revenue Service of inconsis-           on D’s return to the treatment of that item on A’s
   (d) Effective date. This section is ap-
                                                         tency. Except as provided in paragraph          return. F is not subject to a computational adjust-
plicable to partnership taxable years be-                                                                ment.
                                                         (c)(3) of this section, an indirect partner
ginning on or after October 4, 2001. For                                                                     Example 4. Assume the same facts as in Example
                                                         who—
years beginning prior to October 4, 2001,                                                                3, except that F reported the inconsistency with
                                                            (i) Treats an item from a source part-       respect to B and did not report the inconsistency
see § 301.6222(a)–1T contained in 26
                                                         nership in a manner inconsistent with the       with respect to source partnership A. F is subject to
CFR part 1, revised April 1, 2001.
                                                         treatment of that item on the source part-      a computational adjustment to conform the treatment
§ 301.6222(a)–1T [Removed]                               nership’s return; and                           of that item on F’s return to the treatment of that item
                                                                                                         on A’s return.
                                                            (ii) Fails to file a statement identifying       Example 5. Assume the same facts as in Example
   Par. 3a. Section 301.6222(a)–1T is re-                the inconsistency with the source partner-      1. E reports $25,000 as its distributive share of the
moved.                                                   ship in accordance with § 301.6222(b)–1,        item. Regardless of whether E reports the inconsis-
   Par. 4. Section 301.6222(a)–2 is added                is subject to a computational adjustment        tency between its treatment of the item and that by
to read as follows:                                      to conform the treatment of that item to        B, E is neither subject to a computational adjustment
                                                                                                         to conform E’s treatment of that item to that of B nor
§ 301.6222(a)–2 Application of                           the treatment of that item on the return of     subject to the notice described in section
consistent reporting and notification                    the source partnership.                         6231(b)(1)(A) with respect to any such notification
rules to indirect partners.                                 (3) Indirect partner files consistently      of inconsistent treatment.
                                                         with a pass-thru partner that notifies the         (e) Effective date. This section is ap-
  (a) In general. The consistent reporting               Internal Revenue Service of the inconsis-       plicable to partnership taxable years be-
requirement of § 301.6222(a)–1 is gener-                 tency. If an indirect partner treats an item    ginning on or after October 4, 2001. For

October 22, 2001                                                            348                                                       2001–43 I.R.B.
years beginning prior to October 4, 2001,         (1) Conducts a partnership-level pro-                  § 301.6222(b)–2T [Removed]
see § 301.6222(a)–2T contained in 26           ceeding; or
CFR part 1, revised April 1, 2001.                (2) Notifies the partner under section                    Par. 6a. Section 301.6222(b)–2T is re-
                                               6231(b)(1)(A) that all partnership items                  moved.
§ 301.6222(a)–2T [Removed]                     arising from that partnership will be                        Par. 7. Section 301.6222(b)–3 is added
                                               treated as nonpartnership items. See,                     to read as follows:
   Par. 4a. Section 301.6222(a)–2T is re-
moved.                                         however, §§ 301.6231(c)–1 and
                                                                                                         § 301.6222(b)–3 Partner receiving
   Par. 5. Section 301.6222(b)–1 is added      301.6231(c)–2 for special rules relating to
                                                                                                         incorrect schedule.
to read as follows:                            certain applications and claims for refund
                                               based on losses, deductions, or credits                      (a) In general. A partner shall be
§ 301.6222(b)–1 Notification to the            from abusive tax shelter partnerships.                    treated as having complied with section
Internal Revenue Service when partnership         (b) Partner protected only to extent of                6222(b)(1)(B) and § 301.6222(b)–1 with
items are treated inconsistently.              notification. (1) A partner who reports the               respect to a partnership item if the part-
                                               inconsistent treatment of partnership items               ner—
   (a) In general. The statement identify-     on the partner’s return is protected from
ing an inconsistency described in section                                                                   (1) Demonstrates that the treatment of
                                               computational adjustments under section                   the partnership item on the partner’s re-
6222(b)(1)(B) shall be filed by filing the     6222(c) only with respect to those partner-
form prescribed for that purpose in accor-                                                               turn is consistent with the treatment of
                                               ship items the inconsistent treatment of                  that item on the schedule prescribed by
dance with the instructions accompanying       which is reported. Thus, if a partner notify-
that form.                                                                                               the Internal Revenue Service and fur-
                                               ing the Internal Revenue Service with re-                 nished to the partner by the partnership
   (b) Effective date. This section is ap-     spect to one item fails to report the incon-
plicable to partnership taxable years be-                                                                showing the partner’s share of income,
                                               sistent treatment of another item, the                    credits, deductions, etc.; and
ginning on or after October 4, 2001. For       partner is subject to a computational adjust-
years beginning prior to October 4, 2001,                                                                   (2) Elects in accordance with the rules
                                               ment with respect to that other item.                     prescribed in paragraph (b) of this section
see § 301.6222(b)–1T contained in 26              (2) The following example illustrates
CFR part 1, revised April 1, 2001.                                                                       to have this section apply with respect to
                                               the principles of this paragraph (b):                     that item.
                                                  Example. Partner A of Partnership P treats a
§ 301.6222(b)–1T [Removed]                     deduction and a capital gain arising from P on A’s
                                                                                                            (b) Election provisions—(1) Time and
                                               return in a manner that is inconsistent with the treat-   manner of making election. The election
   Par. 5a. Section 301.6222(b)–1T is re-      ment of those items by P. A reports the inconsistent      described in paragraph (a) of this section
moved.                                         treatment of the deduction but not of the gain. A is      shall be made by filing a statement with
   Par. 6. Section 301.6222(b)–2 is added      subject to a computational adjustment under section       the Internal Revenue Service office issu-
to read as follows:                            6222(c) with respect to the gain.
                                                                                                         ing the notice of computational adjust-
                                                  (c) Adjustments in a separate proceed-
§ 301.6222(b)–2 Effect of notification of                                                                ment within 30 days after the notice is
                                               ing not limited to conforming adjust-
inconsistent treatment.                                                                                  mailed to the partner.
                                               ments. (1) If the Internal Revenue Service
                                                                                                            (2) Contents of statement. The state-
                                               conducts a separate proceeding with a
   (a) In general. Generally, if a partner                                                               ment described in paragraph (b)(1) of this
                                               partner whose partnership items are
treats a partnership item on the partner’s                                                               section shall be—
                                               treated as nonpartnership items under sec-
return in a manner inconsistent with the                                                                    (i) Clearly identified as an election
                                               tion 6231(b), the Internal Revenue Ser-
treatment of that item on the partnership                                                                under section 6222(b)(2);
                                               vice is not limited to making adjustments
return, the Internal Revenue Service may                                                                    (ii) Signed by the partner making the
                                               that merely conform the partner’s return
make a computational adjustment to con-                                                                  election; and
                                               to the partnership return.
form the treatment of the item by the part-                                                                 (iii) Accompanied by copies of the
                                                  (2) Example. The following example
ner with the treatment of that item on the                                                               schedule furnished to the partner by the
                                               illustrates the principles of this paragraph
partnership return. Any additional tax re-                                                               partnership and of the notice of computa-
                                               (c):
sulting from that computational adjust-           Example. Partnership P allocates to E, one of its
                                                                                                         tional adjustment. The partner need not
ment may be assessed without either the        partners, a loss of $8,000. E, however, claims a loss     enclose a copy of the notice of computa-
commencement of a partnership proceed-         of $9,000 and reports the inconsistent treatment.         tional adjustment, however, if the partner
ing or notification to the partner that all    The Internal Revenue Service notifies E that it will      clearly identifies the notice of computa-
                                               treat all of E’s partnership items arising from P as      tional adjustment. Generally, the require-
partnership items arising from that part-
                                               nonpartnership items. As a result of a separate pro-
nership will be treated as nonpartnership      ceeding with E, the Internal Revenue Service may
                                                                                                         ment described in paragraph (a)(1) of this
items. However, if a partner notifies the      issue a deficiency notice which could include reduc-      section will be satisfied by attaching to
Internal Revenue Service of the inconsis-      ing the loss to $3,000.                                   the statement a copy of the schedule fur-
tent treatment of a partnership item in the       (d) Effective date. This section is ap-                nished to the partner by the partnership.
manner prescribed in § 301.6222(b)–1,          plicable to partnership taxable years be-                 However, if it is not clear from the infor-
the Internal Revenue Service generally         ginning on or after October 4, 2001. For                  mation contained on the schedule that the
may not make an adjustment with respect        years beginning prior to October 4, 2001,                 treatment of the partnership item on the
to that partnership item unless the Internal   see § 301.6222(b)–2T contained in 26                      schedule is consistent with the partner’s
Revenue Service—                               CFR part 1, revised April 1, 2001.                        treatment of such item on the partner’s re-

2001–43 I.R.B.                                                         349                                                   October 22, 2001
turn, the statement shall also include an                   Par. 8a. Section 301.6223(a)–1T is re-        (3) Other circumstances exist which in-
explanation of how the treatment of such                 moved.                                        dicate that failure to reissue the notice
item on the schedule is consistent with the                 Par. 9. Section 301.6223(a)–2 is added     would be a serious administrative omis-
treatment on the partner’s return with re-               to read as follows:                           sion.
spect to the characterization, timing, and                                                                (c) Effective date. This section is ap-
amount of such item.                                     § 301.6223(a)–2 Withdrawal of notice of       plicable to partnership taxable years be-
   (c) Effective date. This section is ap-               the beginning of an administrative            ginning on or after October 4, 2001. For
plicable to partnership taxable years be-                proceeding.                                   years beginning prior to October 4, 2001,
ginning on or after October 4, 2001. For                    (a) In general. If the Internal Revenue    see § 301.6223(a)–2T contained in 26
years beginning prior to October 4, 2001,                Service, within 45 days after the day on      CFR part 1, revised April 1, 2001.
see § 301.6222(b)–3T contained in 26                     which the notice specified in section
CFR part 1, revised April 1, 2001.                                                                     § 301.6223(a)–2T [Removed]
                                                         6223(a)(1) is mailed to the tax matters
                                                         partner, decides not to propose any ad-         Par. 9a. Section 301.6223(a)–2T is re-
§ 301.6222(b)–3T [Removed]
                                                         justments to the partnership return as        moved.
   Par. 7a. Section 301.6222(b)–3T is re-                filed, the Internal Revenue Service may         Par. 10. Section 301.6223(b)–1 is
moved.                                                   withdraw the notice specified in section      added to read as follows:
   Par. 8. Section 301.6223(a)–1 is added                6223(a)(1) by mailing a letter to that ef-
                                                                                                       § 301.6223(b)–1 Notice group.
to read as follows:                                      fect to the tax matters partner within that
                                                         45-day period. Even if the Internal Rev-         (a) In general. If a group of partners
§ 301.6223(a)–1 Notice sent to tax                       enue Service does not withdraw the no-        having in the aggregate a 5 percent or
matters partner.                                         tice specified in section 6223(a)(1), the     more interest in the profits of a partner-
                                                         Internal Revenue Service is not required      ship requests and designates one of their
   (a) In general. For purposes of sub-
                                                         to issue a notice of final partnership ad-    members to receive the notices described
chapter C of chapter 63 of the Internal
                                                         ministrative adjustment. If the Internal      in sections 6223(a)(1) and (2), the mem-
Revenue Code, a notice is treated as
                                                         Revenue Service withdraws the notice          ber so designated shall be treated as a
mailed to the tax matters partner on the
                                                         specified in section 6223(a)(1), neither      partner to whom section 6223(a) applies.
earlier of—
                                                         the Internal Revenue Service nor the tax      Thus, the designated representative is
   (1) The date on which the notice is
                                                         matters partner is required to furnish any    entitled to receive any notice described
mailed to “THE TAX MATTERS PART-
                                                         notice with respect to that proceeding to     in section 6223(a) that is mailed to the
NER” at the address of the partnership (as
                                                         any other partner. Except as provided in      tax matters partner 30 days or more after
provided on the partnership return, except
                                                         paragraph (b) of this section, a notice       the day on which the Internal Revenue
as updated under § 301.6223(c)–1); or
                                                         specified in section 6223(a)(1) which has     Service receives the request from the
   (2) The date on which the notice is
                                                         been withdrawn shall be treated for pur-      group.
mailed to the person who is the tax mat-
                                                         poses of subchapter C of chapter 63 of           (b) Request for notice—(1) In general.
ters partner at the address of that person
                                                         the Internal Revenue Code as if that no-      The Internal Revenue Service shall mail
(as provided on the partner’s return, ex-
                                                         tice had never been mailed to the tax mat-    to the member of the notice group desig-
cept as updated under § 301.6223(c)–1)
                                                         ters partner.                                 nated to receive such notice any notice
or the partnership. See § 301.6223(c)–1
                                                            (b) Internal Revenue Service may not       described in section 6223(a) that is
for rules relating to the information used
                                                         reissue notice except under certain cir-      mailed to the tax matters partner 30 days
by the Internal Revenue Service in pro-
                                                         cumstances. If the notice specified in sec-   or more after the day on which the Inter-
viding notices, etc.
                                                         tion 6223(a)(1) was mailed to the tax mat-    nal Revenue Service receives the request
   (b) Example. The provisions of this
                                                         ters partner with respect to a partnership    for notice from the group if such request
section may be illustrated by the follow-
                                                         taxable year and that notice was later        for notice is made in accordance with the
ing example:
   Example. Partnership P designates B as its tax        withdrawn as provided in paragraph (a) of     rules prescribed in this paragraph (b).
matters partner in accordance with § 301.6231(a)         this section, the Internal Revenue Service       (2) Content of request. The request for
(7)–1(b). On December 1, a notice of the beginning       shall not mail a second notice specified in   notice from a notice group shall—
of an administrative proceeding is mailed to “THE        section 6223(a)(1) with respect to that          (i) Identify the partnership by name,
TAX MATTERS PARTNER” at the address of P. On
                                                         taxable year unless—                          address, and taxpayer identification num-
January 10, a copy of the notice is mailed to B at B’s
address. December 1 is treated as the date that the         (1) There is evidence of fraud, malfea-    ber;
notice was mailed to the tax matters partner.            sance, collusion, concealment, or misrep-        (ii) Specify the taxable year or years for
   (c) Effective date. This section is ap-               resentation of a material fact;               which the notice group is formed;
plicable to partnership taxable years be-                   (2) The prior proceeding involved the         (iii) Designate the member of the group
ginning on or after October 4, 2001. For                 misapplication or erroneous interpretation    to receive the notices;
years beginning prior to October 4, 2001,                of an established Internal Revenue Ser-          (iv) Set out the name, address, taxpayer
see § 301.6223(a)–1T contained in 26                     vice position existing at the time of the     identification number, and profits interest
CFR part 1, revised April 1, 2001.                       previous examination, or the failure to       of each member of the group; and
                                                         make an adjustment based on such a posi-         (v) Be signed by all partners compris-
§ 301.6223(a)–1T [Removed]                               tion; or                                      ing the notice group.

October 22, 2001                                                           350                                                2001–43 I.R.B.
   (3) Place for filing. The request for no-    filed its request, a statement that it is join-   through one or more pass-thru partners) at
tice from a notice group generally must be      ing the notice group. The statement shall         some time during that taxable year; and
filed with the service center where the         identify the partner joining the notice              (B) The indirect partner was identified
partnership return is filed. However, if        group, the partnership, and the members           as provided in section 6223(c)(3) and
the notice group representative knows that      of the notice group by name, address, and         § 301.6223(c)–1 on or before the date on
the notice described in section 6223(a)(1)      taxpayer identification number and shall          which the pass-thru partner became a
(beginning of an administrative proceed-        be signed by the joining partner. A copy          member of a notice group.
ing) has already been mailed to the tax         of the statement shall be provided by the            (d) Termination of notice group. Un-
matters partner, the statement should be        joining partner to both the tax matters           less the original request for notice from
filed with the Internal Revenue Service         partner and the notice group representa-          the notice group or a subsequent state-
office that mailed that notice.                 tive within 30 days after the request is          ment filed by the representative (in accor-
   (4) Copy to be sent to the tax matters       filed with the Internal Revenue Service.          dance with paragraphs (b)(3) and (4) of
partner. A copy of the request for notice       The partner shall become a member of the          this section) designates a successor to the
from a notice group shall be provided to        notice group for each partnership taxable         designated group representative, the
the tax matters partner by the notice group     year for which the group was formed and           group terminates if the representative dies
representative within 30 days after the re-     for which the partner was a partner at any        (or, in the case of an entity, if the entity is
quest is filed with the Internal Revenue        time during such partnership taxable year.        dissolved), resigns, or is adjudicated in-
Service.                                           (4) Date on which a partner becomes a          competent.
   (5) Years covered by request. A request      member of notice group. A partner shall              (e) Notice group is not a 5-percent
for notice by a notice group may relate         become a member of a notice group on              group. The forming of a notice group
only to partnership taxable years that have     the 30th day after the day on which the In-       under this section does not constitute the
ended before the request is filed. A re-        ternal Revenue Service receives—                  forming of a 5-percent group for purposes
quest, however, may relate to more than            (i) A request for notice from a notice         of litigation. A notice group is formed
one partnership taxable year if the 5 per-      group that identifies that partner as a           solely for the purpose of receiving no-
cent or more profits interest requirement       member of that notice group; or                   tices. A 5-percent group is formed solely
of section 6223(b)(2) is satisfied for each        (ii) A statement filed in accordance           for the purpose of filing a petition for ju-
year to which the request relates.              with paragraph (c)(3) of this section that        dicial review or appealing a judicial deter-
   (c) Composition of notice group—(1)          states that the partner is joining the notice     mination. See § 301.6226(b)–1. Thus, a
In general. A notice group shall be com-        group.                                            member of a notice group may choose not
prised only of persons who were partners           (5) No withdrawal from notice group. A         to join a 5-percent group formed by other
at some time during the partnership tax-        partner who has signed a notice group re-         members of the notice group.
able year for which the group is formed.        quest filed with the Internal Revenue Ser-           (f) Effective date. This section is ap-
If a notice group is formed for more than       vice remains a member of that notice group        plicable to partnership taxable years be-
one taxable year, each member of the            until the group terminates. A partner can-        ginning on or after October 4, 2001. For
group must have been a partner at some          not withdraw from the notice group.               years beginning prior to October 4, 2001,
time during at least one of the taxable            (6) Indirect and pass-thru partners—(i)        see § 301.6223(b)–1T contained in 26
years for which the group is formed. A          Pass-thru partners and unidentified indi-         CFR part 1, revised April 1, 2001.
notice group may include a partner enti-        rect partners. A pass-thru partner may
tled to separate notice. See section            become a member of a notice group as              § 301.6223(b)–1T [Removed]
6231(d) and § 301. 6231(d)–1 for rules          provided in this section. For purposes of
                                                                                                    Par. 10a. Section 301.6223(b)–1T is
relating to determining the interest of a       applying the aggregate interest require-
                                                                                                  removed.
partner in the profits of a partnership for a   ment specified in paragraph (a) of this
                                                                                                    Par. 11. Section 301.6223(c)–1 is
partnership taxable year for purposes of        section to a pass-thru partner, the partner-
                                                                                                  added to read as follows:
section 6223(b). See paragraph (c)(6) of        ship interest held by the pass-thru partner
this section for rules relating to indirect     shall not include any interest held through       § 301.6223(c)–1 Additional information
and pass-thru partners.                         the pass-thru partner by an indirect part-        regarding partners furnished to the
   (2) Partner may be a member of only          ner that has been identified as provided in       Internal Revenue Service .
one group. A partner cannot be a member         section 6223(c)(3) and § 301.6223(c)–1
of more than one notice group with re-          before the date on which the pass-thru               (a) In general. In addition to the
spect to the same partnership for the same      partner becomes a member of the notice            names, addresses, and profits interests as
partnership taxable year. See paragraph         group.                                            shown on the partnership return, the Inter-
(c)(6) of this section for rules relating to       (ii) Indirect partners identified before       nal Revenue Service will use additional
indirect and pass-thru partners.                the pass-thru partner joins a notice              information as provided in this section for
   (3) Partner may join group after forma-      group. An indirect partner may become a           purposes of administering subchapter C
tion. A partner may join a notice group         member of a notice group with respect to          of chapter 63 of the Internal Revenue
at any time after the formation of that         a partnership taxable year only if—               Code.
group by filing, with the Internal Revenue         (A) The indirect partner held an interest         (b) Procedure for furnishing additional
Service office where the notice group           in the partnership (either directly or            information—(1) In general. Any person

2001–43 I.R.B.                                                      351                                                October 22, 2001
may furnish additional information at any      is attached to the statement. Furthermore,     able years beginning on or after October
time by filing a written statement with the    reference to a prior general notification to   4, 2001. For years beginning prior to Oc-
Internal Revenue Service. However, the         the Internal Revenue Service that a part-      tober 4, 2001, see § 301.6223(c)–1T con-
information contained in the statement         ner who would otherwise be the tax mat-        tained in 26 CFR part 1, revised April 1,
will be considered for purposes of deter-      ters partner is a debtor in a bankruptcy       2001.
mining whether a partner is entitled to a      proceeding or has had a receiver ap-
notice described in section 6223(a) only if    pointed for the partner in a receivership      § 301.6223(c)–1T [Removed]
the Internal Revenue Service receives the      proceeding is not sufficient unless a copy       Par. 11a. Section 301.6223(c)–1T is
statement at least 30 days before the date     of the notification document referred to is    removed.
on which the Internal Revenue Service          attached to the statement.                       Par. 12. Section 301.6223(e)–1 is
mails the notice to the tax matters partner.      (d) Information supplied by a person        added to read as follows:
Similarly, information contained in the        other than the tax matters partner. The
statement generally will not be taken into     Internal Revenue Service may require ap-       § 301.6223(e)–1 Effect of Internal
account for other purposes by the Internal     propriate verification in the case of infor-   Revenue Service’s failure to provide
Revenue Service until 30 days after the        mation furnished by a person other than        notice.
statement is received.                         the tax matters partner. The 30-day pe-
   (2) Where statement must be filed. A        riod referred to in paragraph (b)(1) of this      (a) Notice group. Section 6223(e)
statement furnished under this section         section shall not begin until that verifica-   (1)(B)(ii) applies with respect to a notice
generally must be filed with the service       tion is supplied.                              group only if the request for notice de-
center where the partnership return is            (e) Power of attorney—(1) In general.       scribed in § 301.6223(b)–1 is received by
filed. However, if the person filing the       This paragraph (e) applies to powers of        the Internal Revenue Service at least 30
statement knows that the notice described      attorney with respect to proceedings           days before the notice is mailed to the tax
in section 6223(a)(1) (beginning of an ad-     under subchapter C of chapter 63 of the        matters partner.
ministrative proceeding) has already been      Internal Revenue Code (chapter 63C) that          (b) Indirect partners—(1) In general.
mailed to the tax matters partner, the         begin on or after January 2, 2002.             For purposes of section 6223(e), the Inter-
statement should be filed with the Internal       (2) Specifically for purposes of sub-       nal Revenue Service’s failure to provide
Revenue Service office that mailed such        chapter C of chapter 63 of the Internal        notice to a pass-thru partner entitled to
notice.                                        Revenue Code. A power of attorney              notice under section 6223(b) is deemed a
   (3) Contents of statement. The state-       specifically for purposes of subchapter C      failure to provide notice to indirect part-
ment shall—                                    of chapter 63 of the Internal Revenue          ners holding an interest in the partnership
   (i) Identify the partnership, each part-    Code shall be furnished in accordance          through the pass-thru partner. However,
ner for whom information is supplied, and      with paragraph (b)(2) of this section.         this rule does not apply if the indirect
the person supplying the information by           (3) Existing power of attorney. A           partner—
name, address, and taxpayer identification     power of attorney granted to another per-         (i) Receives notice from the Internal
number;                                        son by a partner for other tax purposes        Revenue Service;
   (ii) Explain that the statement is fur-     shall not be given effect for purposes of         (ii) Is identified as provided in section
nished to correct or supplement earlier in-    subchapter C of chapter 63 unless the          6223(c)(3) and § 301.6223(c)–1 at least
formation with respect to the partners in      partner specifically requests that the         30 days before the notice is mailed to the
the partnership;                               power be given such effect in a statement      tax matters partner; or
   (iii) Specify the taxable year to which     furnished to the Internal Revenue Service         (iii) Is a member of a notice group enti-
the information relates;                       in accordance with paragraph (b) of this       tled to notice under paragraph (a) of this
   (iv) Set out the corrected or additional    section.                                       section.
information; and                                  (f) Internal Revenue Service may use           (2) Examples. The provisions of para-
   (v) Be signed by the person supplying       other information. In addition to the in-      graph (b)(1) of this section may be illus-
the information.                               formation on the partnership return and        trated by the following examples:
                                                                                                  Example 1. Partnership ABC has as one of its
   (c) No incorporation by reference to        that supplied on statements filed under        partners, A, a partnership with three partners, X, Y,
previously furnished documents. Incorpo-       this section, the Internal Revenue Service     and Z. ABC does not have more than 100 partners,
ration by reference of information con-        may use other information in its posses-       and partnership A is entitled to notice under section
tained in another document previously          sion (for example, a change in address re-     6223(a). In addition, Z was identified as provided in
                                                                                              section 6223(c)(3) and § 301.6223(c)–1 on May 1,
furnished to the Internal Revenue Service      flected on a partner’s return) in adminis-
                                                                                              2002. The Internal Revenue Service mailed a notice
will not be given effect for purposes of       tering subchapter C of chapter 63 of the       to the tax matters partner of ABC on July 1, 2002,
section 6223(c) or 6229(e). For example,       Internal Revenue Code. However, the In-        but failed to provide notice to partnership A.
reference to a return filed by a pass-thru     ternal Revenue Service is not obligated to     Notwithstanding the Internal Revenue Service’s
partner which contains identifying infor-      search its records for information not ex-     notice to the tax matters partner, the Internal
                                                                                              Revenue Service is deemed to have failed to provide
mation with respect to the indirect part-      pressly furnished under this section.
                                                                                              notice to X and Y. The Internal Revenue Service’s
ners of that pass-thru partner is not suffi-      (g) Effective date. Except as provided      failure to provide notice to A, however, has no effect
cient to identify the indirect partners        in paragraph (e)(1) of this section, this      on Z; whether notice was provided to Z is deter-
unless a copy of the document referred to      section is applicable to partnership tax-      mined independently.


October 22, 2001                                                  352                                                     2001–43 I.R.B.
    Example 2. Assume the same facts as in Example           (1) The period within which a petition        (ii) Specify the election being made
1, except that the Internal Revenue Service provided     for review of the FPAA under section           (that is, application of final partnership
notice to partnership A but did not provide separate
notice to Z. Notwithstanding the Internal Revenue
                                                         6226 may be filed has expired and no pe-       administrative adjustment, court decision,
Service’s notice to partnership A, the Internal          tition has been filed; or                      consistent settlement agreement, or non-
Revenue Service is deemed to have failed to provide          (2) The decision of a court in an ac-      partnership item treatment);
notice to Z.                                             tion begun by such a petition has be-             (iii) Identify the partner making the
    Example 3. Assume the same facts as in Example       come final, the partner may elect in ac-       election and the partnership by name, ad-
1, except that partnership ABC has more than 100
partners and partnership A is entitled to notice under
                                                         cordance with paragraph (d) of this            dress, and taxpayer identification number;
section 6223(b) because it had at least a 1 percent      section to have that adjustment, that de-         (iv) Specify the partnership taxable
profits interest in partnership ABC. In addition, X      cision, or a settlement agreement de-          year to which the election relates; and
became a member of a notice group on June 1, 2002,       scribed in section 6224(c)(2) with re-            (v) Be signed by the partner making the
and the Internal Revenue Service mailed a notice to      spect to the partnership taxable year to       election.
the designated member of that notice group. The
Internal Revenue Service also mailed a separate
                                                         which the adjustment relates apply to             (e) Effective date. This section is ap-
notice to Z. The Internal Revenue Service’s failure      that partner. If the partner does not          plicable to partnership taxable years be-
to provide notice to partnership A only affects Y,       make an election in accordance with            ginning on or after October 4, 2001. For
who is deemed not to have been provided notice by        paragraph (d) of this section, the part-       years beginning prior to October 4, 2001,
the Internal Revenue Service.                            nership items of the partner for the part-     see § 301.6223(e)–2T contained in 26
   (c) Effective date. This section is ap-               nership taxable year to which the pro-         CFR part 1, revised April 1, 2001.
plicable to partnership taxable years be-                ceeding relates shall be treated as having
ginning on or after October 4, 2001. For                 become nonpartnership items as of the          § 301.6223(e)–2T [Removed]
years beginning prior to October 4, 2001,                day on which the Internal Revenue Ser-
see § 301.6223(e)–1T contained in 26                                                                      Par. 13a. Section 301.6223(e)–2T is
                                                         vice mails the partner the FPAA.               removed.
CFR part 1, revised April 1, 2001.                           (c) Proceeding still going on. If at the     Par. 14. Section 301.6223(f)–1 is
§ 301.6223(e)–1T [Removed]                               time the Internal Revenue Service mails        added to read as follows:
                                                         the partner an FPAA, paragraphs (b)(1)
  Par. 12a. Section 301.6223(e)–1T is                    and (2) of this section do not apply, the      § 301.6223(f)–1 Duplicate copy of final
removed.                                                 partner shall be a party to the proceeding     partnership administrative adjustment.
  Par. 13. Section 301.6223(e)–2 is                      unless the partner elects, in accordance
added to read as follows:                                with paragraph (d) of this section, to            (a) In general. Section 6223(f) does
                                                         have—                                          not prohibit the Internal Revenue Service
§ 301.6223(e)–2 Elections if Internal Rev-                   (1) A settlement agreement described       from issuing a duplicate copy of the no-
enue Service fails to provide timely notice.             in section 6224(c)(2) with respect to the      tice of final partnership administrative ad-
                                                         partnership taxable year to which the pro-     justment (for example, in the event the
   (a) In general. This section applies in                                                              original notice is lost).
any case in which the Internal Revenue                   ceeding relates apply to the partner; or
                                                             (2) The partnership items of the partner      (b) Effective date. This section is ap-
Service fails to timely mail any notice de-                                                             plicable to partnership taxable years be-
scribed in section 6223(a) of the Internal               for the partnership taxable year to which
                                                         the proceeding relates treated as having       ginning on or after October 4, 2001. For
Revenue Code to a partner entitled to                                                                   years beginning prior to October 4, 2001,
such notice within the period specified in               become nonpartnership items as of the
                                                         day on which the Internal Revenue Ser-         see § 301.6223(f)–1T contained in 26
section 6223(d). The failure to issue any                                                               CFR part 1, revised April 1, 2001.
notice within the period specified in sec-               vice mails the partner the FPAA.
tion 6223(d) does not invalidate the notice                  (d) Election—(1) In general. The elec-     § 301.6223(f)–1T [Removed]
of the beginning of an administrative pro-               tion described in paragraph (b) or (c) of
ceeding or final partnership administra-                 this section shall be made in the manner         Par. 14a. Section 301.6223(f)–1T is re-
tive adjustment (FPAA). An untimely                      prescribed in this paragraph (d). The          moved.
FPAA enables the recipient of the un-                    election shall apply to all partnership          Par. 15. Section 301.6223(g)–1 is
timely notice to make the elections de-                  items for the partnership taxable year to      added to read as follows:
scribed in paragraphs (b), (c), and (d) of               which the election relates.
                                                             (2) Time and manner of making elec-        § 301.6223(g)–1 Responsibilities of the
this section. The period within which to                                                                tax matters partner.
make the elections described in para-                    tion. The election shall be made by filing
graphs (b), (c), and (d) of this section                 a statement with the Internal Revenue             (a) Notices described in section
commences with the mailing of an FPAA                    Service office mailing the FPAA within         6223(a)—(1) Notice of beginning of pro-
to the partner. In the absence of an elec-               45 days after the date on which the FPAA       ceeding. Except as otherwise provided in
tion, paragraphs (b) and (c) of this section             was mailed to the partner making the           § 301.6223(a)–2, the tax matters partner
provide for the treatment of a partner’s                 election.                                      shall, within 75 days after the Internal
partnership items.                                           (3) Contents of statement. The state-      Revenue Service mails the notice speci-
   (b) Proceeding finished. If at the time               ment shall—                                    fied in section 6223(a)(1), forward a copy
the Internal Revenue Service mails the                       (i) Be clearly identified as an election   of that notice to each partner not entitled
partner an FPAA—                                         under section 6223(e)(2) or (3);               to notice from the Internal Revenue

2001–43 I.R.B.                                                              353                                             October 22, 2001
Service under section 6223. See                    (vii) Filing by the tax matters partner or      (a) In general. The pass-thru partner
§ 301.6230(e)–1 for information to be           any other partner of any petition for judi-     shall, within 30 days of receiving notice
furnished to the Internal Revenue Service.      cial review under sections 6226 or              or any other information regarding a part-
   (2) Notice of final partnership adminis-     6228(a);                                        nership proceeding from the Internal Rev-
trative adjustment. The tax matters part-          (viii) Filing of any appeal with respect     enue Service, the tax matters partner, or
ner shall, within 60 days after the Internal    to any judicial determination provided for      another pass-thru partner, forward a copy
Revenue Service mails the notice speci-         in sections 6226 or 6228(a); and                of that notice or information to the person
fied in section 6223(a)(2), forward a copy         (ix) Final judicial redetermination.         or persons holding an interest through the
of that notice to each partner not entitled        (2) Partners to be notified. The tax         pass-thru partner in the profits or losses of
to notice from the Internal Revenue Ser-        matters partner shall provide information       the partnership for the partnership taxable
vice under section 6223.                        with respect to any action or other matter      year to which the notice or information
   (3) Requirement inapplicable in certain      specified in paragraph (b)(1) of this sec-      relates. In the case of a pass-thru partner
cases. The tax matters partner is not re-       tion to all notice group representatives        that is a partnership within the meaning of
quired to send notice to a partner if—          and all other partners except partners—         section 6231(a)(1), the tax matters partner
   (i) Before the expiration of the applica-       (i) Whose partnership items become           of such partnership shall forward copies
ble 75-day or 60-day period, the partner-       nonpartnership items before the expira-         of the notice or information to the part-
ship items of that partner have become          tion of the period specified in paragraph       ners of such partnership.
nonpartnership items (for example, by           (b)(3) of this section for furnishing that         (b) Effective date. This section is ap-
settlement);                                    information;                                    plicable to partnership taxable years be-
   (ii) That partner is an indirect partner        (ii) Who are indirect partners and who       ginning on or after October 4, 2001. For
and has not been identified to the tax mat-     are not identified to the tax matters part-     years beginning prior to October 4, 2001,
ters partner at least 30 days before the tax    ner at least 30 days before the tax matters     see § 301.6223(h)–1T contained in 26
matters partner is required to send such        partner is required to provide the informa-     CFR part 1, revised April 1, 2001.
notice;                                         tion;
   (iii) That partner is treated as a partner      (iii) Who are treated as partners solely     § 301.6223(h)–1T [Removed]
solely by virtue of § 301.6231(a)(2)–1;         by virtue of § 301.6231(a)(2)–1;
                                                                                                  Par. 16a. Section 301.6223(h)–1T is
   (iv) That partner was a member of a no-         (iv) Who are members of a notice
                                                                                                removed.
tice group as of the date on which the no-      group as of the date on which the tax mat-
                                                                                                  Par. 17. Section 301.6224(a)–1 is
tice was mailed to the tax matters partner      ters partner takes that action or receives
                                                                                                added to read as follows:
(see § 301.6223(b)–1(c)(4) for the date on      information with respect to that matter
which a partner becomes a member of a           (see § 301.6223(b)–1(c)(4) for the date on      § 301.6224(a)–1 Participation in
notice group);                                  which a partner becomes a member of a           administrative proceedings.
   (v) The notice has already been pro-         notice group); or
vided to that partner by another person; or        (v) Who have already received infor-            (a) In general. Every partner in the
   (vi) The notice is withdrawn by the Inter-   mation with respect to the action or matter     partnership, including an indirect partner,
nal Revenue Service under § 301.6223(a)–2.      from any other person.                          has the right to participate in any phase of
   (b) Other notices or information—(1)            (3) Time for furnishing information.         administrative proceedings. However, ex-
In general. The tax matters partner shall       The tax matters partner shall furnish in-       cept as provided in section 6223 and the
furnish to the partners specified in para-      formation with respect to an action or          regulations thereunder, neither the Inter-
graph (b)(2) of this section information        other matter described in paragraph (b)(1)      nal Revenue Service nor the tax matters
with respect to the following—                  of this section within 30 days of taking        partner is required to provide notice of
   (i) Closing conference with the exam-        the action or receiving information with        any proceeding to the partners. Conse-
ining agent;                                    respect to that matter.                         quently, a partner who wishes, for exam-
   (ii) Proposed adjustments, rights of ap-        (c) Effective date. This section is ap-      ple, to be present during a preliminary
peal, and requirements for filing of a          plicable to partnership taxable years be-       discussion between an examining agent
protest;                                        ginning on or after October 4, 2001. For        and the tax matters partner should make
   (iii) Time and place of any Appeals          years beginning prior to October 4, 2001,       special arrangements with the tax matters
conference;                                     see § 301.6223(g)–1T contained in 26            partner to obtain information as to the
   (iv) Acceptance by the Internal Rev-         CFR part 1, revised April 1, 2001.              time and place of the discussion. The In-
enue Service of any settlement offer;                                                           ternal Revenue Service and the tax mat-
   (v) Consent to the extension of the pe-      § 301.6223(g)–1T [Removed]                      ters partner will determine the time and
riod of limitations with respect to all part-     Par. 15a. Section 301.6223(g)–1T is           place for all administrative proceedings.
ners;                                           removed.                                        Arrangements will generally not be
   (vi) Filing of a request for administra-       Par. 16. Section 301.6223(h)–1 is             changed merely for the convenience of
tive adjustment (including a request for        added to read as follows:                       another partner.
substituted return treatment under                                                                 (b) Effective date. This section is ap-
§ 301.6227(c)–1) on behalf of the partner-      § 301.6223(h)–1 Responsibilities of pass-       plicable to partnership taxable years be-
ship;                                           thru partner.                                   ginning on or after October 4, 2001. For

October 22, 2001                                                   354                                                 2001–43 I.R.B.
years beginning prior to October 4, 2001,         Par. 19. Section 301.6224(c)–1 is                      Revenue Service and states that the agreement is
see § 301.6224(a)–1T contained in 26            added to read as follows:                                binding on other partners as provided in section
                                                                                                         6224(c)(3). Because partnership J is bound by the
CFR part 1, revised April 1, 2001.                                                                       settlement agreement, paragraph (a) of this section is
                                                § 301.6224(c)–1 Tax matters partner may
                                                                                                         applied separately to each of the indirect partners to
§ 301.6224(a)–1T [Removed]                      bind nonnotice partners.                                 determine whether they are bound. A is not bound
                                                                                                         by the agreement because A was a member of a
  Par. 17a. Section 301.6224(a)–1T is              (a) In general. In the absence of a                   notice group on the day the agreement was entered
removed.                                        showing of fraud, malfeasance, or misrep-                into and B is not bound because B filed the statement
  Par. 18. Section 301.6224(b)–1 is             resentation of fact, if the tax matters part-            not to be bound at least 30 days before the agreement
added to read as follows:                       ner enters into a settlement agreement                   was entered into. C is bound by the settlement
                                                                                                         agreement.
                                                with the Internal Revenue Service with
§ 301.6224(b)–1 Partner may waive                                                                           (c) Statement not to be bound—(1)
                                                respect to partnership items, including
rights.                                                                                                  Contents of statement. The statement re-
                                                partnership-level determinations relating
                                                to any penalty, addition to tax, or addi-                ferred to in paragraph (a)(2) of this sec-
   (a) In general. A partner may at any
                                                tional amounts that relate to adjustments                tion shall—
time waive any right that the partner has
or any restriction on action by the Internal    to partnership items, and expressly states                  (i) Be clearly identified as a statement
Revenue Service under subchapter C of           that the agreement shall be binding on the               to deny settlement authority to the tax
chapter 63 of the Internal Revenue Code.        other partners, then that agreement shall                matters partner under section 6224(c)
   (b) Form and manner of making                be binding on all partners except those                  (3)(B);
waiver. The waiver described in para-           who—                                                        (ii) Identify the partner and partnership
graph (a) of this section shall be made by         (1) Are, as of the day on which the                   by name, address, and taxpayer identifica-
a written statement. If the Internal Rev-       agreement is entered into, either notice                 tion number;
enue Service furnishes a form to be used        partners or members of a notice group                       (iii) Specify the taxable year or years to
for this purpose, the partner may make the      (see § 301.6223(b)–1(c)(4) for the date on               which the statement applies; and
waiver by completing the form in accor-         which a partner becomes a member of a                       (iv) Be signed by the partner filing the
dance with the form’s instructions. If          notice group); or                                        statement.
such a form is not furnished, the state-           (2) Have, at least 30 days before the                    (2) Place where statement is to be filed.
ment shall—                                     day on which the agreement is entered                    The statement described in paragraph
   (1) Be clearly identified as a waiver        into, filed with the Internal Revenue Ser-               (c)(1) of this section generally shall be
under section 6224(b);                          vice the statement described in paragraph                filed with the Internal Revenue Service
   (2) Identify the partner and the partner-    (c) of this section.                                     service center where the partnership re-
ship by name, address, and taxpayer iden-          (b) Indirect partners—(1) In general.                 turn is filed. However, if the partner
tification number;                              If, under paragraph (a) of this section, a               knows that the notice described in section
   (3) Specify the right or restriction being   pass-thru partner is not bound by an                     6223(a)(1) (beginning of an administra-
waived and the taxable year(s) to which         agreement entered into by the tax matters                tive proceeding) has already been mailed
the waiver applies;                             partner, all indirect partners holding an in-            to the tax matters partner, the statement
   (4) Be signed by the partner making the      terest in the partnership through that pass-             shall be filed with the Internal Revenue
waiver; and                                     thru partner shall not be bound by that                  Service office that mailed that notice.
   (5) Be filed with the service center         agreement. If, however, the pass-thru                       (3) Consolidated statements. The state-
where the partnership return is filed.          partner is bound by an agreement entered                 ment described in paragraph (c)(1) of this
However, if the person filing the state-        into by the tax matters partner, paragraph               section may be filed with respect to more
ment knows that the notice described in         (a) of this section shall be applied sepa-               than one partner if the requirements of
section 6223(a)(1) (beginning of an ad-         rately to each indirect partner holding an               that paragraph (c)(1) (including signa-
ministrative proceeding) has already been       interest in the partnership through the                  tures) are satisfied with respect to each
mailed to the tax matters partner, the          pass-thru partner to determine whether                   partner.
statement shall be filed with the Internal      the indirect partner is also bound by the
                                                                                                            (d) Effective date. This section is ap-
Revenue Service office that mailed such         agreement.
                                                                                                         plicable to partnership taxable years be-
notice.                                            (2) Example. The following example
                                                                                                         ginning on or after October 4, 2001. For
   (c) Effective date. This section is ap-      illustrates the principles of this section:
                                                                                                         years beginning prior to October 4, 2001,
plicable to partnership taxable years be-          Example. Partnership P has over 100 partners.
                                                Partnership J is a partner in partnership P with a       see § 301.6224(c)–1T contained in 26
ginning on or after October 4, 2001. For
                                                profits interest of less than 1 percent. Partnership J   CFR part 1, revised April 1, 2001.
years beginning prior to October 4, 2001,
                                                has three partners, A, B, and C. A is a member of a
see § 301.6224(b)–1T contained in 26            notice group with respect to partnership P, but B and    § 301.6224(c)–1T [Removed]
CFR part 1, revised April 1, 2001.              C are not. On July 1, 2002, B filed the statement
                                                described in paragraph (c) of this section not to be       Par. 19a. Section 301.6224(c)–1T is
§ 301.6224(b)–1T [Removed]                      bound by any settlement agreement entered into by        removed.
                                                the tax matters partner of partnership P. On August
  Par. 18a. Section 301.6224(b)–1T is           1, 2002, the tax matters partner of partnership P          Par. 20. Section 301.6224(c)–2 is
removed.                                        enters into a settlement agreement with the Internal     added to read as follows:

2001–43 I.R.B.                                                         355                                                        October 22, 2001
§ 301.6224(c)–2 Pass-thru partner binds                 of that trust, estate, or nominee, may enter   mination of any penalty, addition to tax,
indirect partners.                                      into a settlement agreement with the In-       or additional amount that relates to an ad-
                                                        ternal Revenue Service on behalf of its re-    justment to a partnership item, that part-
   (a) Pass-thru partner binds unidentified             spective entity that would bind the            ner may not subsequently request settle-
indirect partners—(1) In general. If a                  unidentified indirect partners that hold a     ment terms consistent with a settlement
pass-thru partner enters into a settlement              partnership interest through the pass-thru     that contains the previously settled item.
agreement with the Internal Revenue Ser-                partner.                                       The requirement for consistent settlement
vice with respect to partnership items,                    (c) Effective date. This section is ap-     terms applies only if—
that agreement binds all indirect partners              plicable to partnership taxable years be-         (i) The items were partnership items (or
holding an interest in that partnership                 ginning on or after October 4, 2001. For       a partnership-level determination of any
through the pass-thru partner except those              years beginning prior to October 4, 2001,      related penalty, addition to tax, or addi-
indirect partners who have been identified              see § 301.6224(c)–2T contained in 26           tional amount) for the partner entering
as provided in section 6223(c)(3) and                   CFR part 1, revised April 1, 2001.             into the original settlement immediately
§ 301.6223(c)–1 at least 30 days before                                                                before the original settlement; and
the date on which the agreement is en-                  § 301.6224(c)–2T [Removed]
                                                                                                          (ii) The items are partnership items (or
tered into. A settlement with respect to                  Par. 20a. Section 301.6224(c)–2T is          a partnership-level determination of any
partnership items includes partnership-                 removed.                                       related penalty, addition to tax, or addi-
level determinations relating to any                      Par. 21. Section 301.6224(c)–3 is            tional amount) for the partner requesting
penalty, addition to tax, and additional                added to read as follows:                      the consistent settlement at the time the
amounts that relate to adjustments to part-                                                            partner files the request.
nership items. However, if, in addition to              § 301.6224(c)–3 Consistent settlements.
                                                                                                          (2) Effect of consistent agreement.
the interest in the partnership held                                                                   Consistent settlement terms are reflected
                                                           (a) In general. If the Internal Revenue
through the pass-thru partner entering into                                                            in a consistent agreement. A consistent
                                                        Service enters into a settlement agreement
a settlement agreement, an indirect part-                                                              agreement is not a settlement agreement
                                                        with any partner with respect to partner-
ner holds a separate interest in that part-                                                            that gives rise to further consistent settle-
                                                        ship items, whether comprehensive or
nership, either directly or indirectly                                                                 ment rights because it is required to be
                                                        partial, the Internal Revenue Service shall
through a different pass-thru partner, then                                                            given without volitional agreement of the
                                                        offer to any other partner who so requests
the indirect partner shall not be bound by                                                             Secretary. Therefore, a consistent agree-
                                                        in accordance with paragraph (c) of this
that settlement agreement with respect to                                                              ment required to be offered to a requesting
                                                        section, settlement terms consistent with
the interests held directly or indirectly                                                              taxpayer is not a settlement agreement
                                                        those contained in the settlement agree-
through a pass-thru partner other than the                                                             under section 6224(c)(2) or paragraph
                                                        ment entered into.
pass-thru partner entering into the settle-                                                            (c)(3) of this section which starts a new
                                                           (b) Requirements for consistent settle-
ment agreement.                                                                                        period for requesting consistent settlement
                                                        ment terms—(1) In general. Consistent
   (2) Example. The provisions of para-                                                                terms. For all other purposes of the Inter-
                                                        settlement terms are those based on the
graph (a)(1) of this section may be illus-                                                             nal Revenue Code, however, (e.g., binding
                                                        same determinations with respect to part-
trated by the following example:                                                                       effect under section 6224(c)(1) and con-
   Example. Partnership J is a partner in partnership   nership items. However, consistent settle-
P. C is a partner in J but has not been identified as   ment terms also may include partnership-       version to nonpartnership items under sec-
provided in section 6223(c)(3) and § 301.6223(c)–1.     level determinations of any penalty,           tion 6231(b)(1)(C)), a consistent agree-
The only interest that C holds in P is through J. The   addition to tax, or additional amount that     ment is treated as a settlement agreement.
tax matters partner of J enters into a settlement                                                         (c) Time and manner of requesting con-
                                                        relates to partnership items. Settlements
agreement with the Internal Revenue Service with
                                                        with respect to partnership items shall be     sistent settlements—(1) In general. A
respect to partnership items arising from P. C is
bound by the settlement agreement entered into by       self-contained; thus, a concession by one      partner desiring settlement terms consis-
the tax matters partner of J.                           party with respect to a partnership item       tent with the terms of any settlement
   (b) Person in pass-thru partner autho-               may not be based upon a concession by          agreement entered into between any other
rized to enter into settlement agreement                another party with respect to any item that    partner and the Internal Revenue Service
that binds indirect partners. In the case of            is not a partnership item other than a part-   shall submit a written statement to the In-
a pass-thru partner that is—                            nership-level determination of any             ternal Revenue Service office that entered
   (1) A partnership within the meaning of              penalty, addition to tax, or additional        into the settlement.
section 6231(a)(1), the tax matters partner             amount that relates to an adjustment to a         (2) Contents of statement. Except as
of that partnership;                                    partnership item. Consistent agreements        otherwise provided in instructions to the
   (2) A partnership other than a partner-              must be identical to the original settle-      taxpayer from the Internal Revenue Ser-
ship described in paragraph (b)(1) of this              ment (that is, the settlement upon which       vice, the written statement described in
section, any general partner of that part-              the offered settlement terms are based). A     paragraph (c)(1) of this section shall—
nership;                                                consistent agreement must mirror the              (i) Identify the statement as a request
   (3) An S corporation, any officer of that            original settlement and may not be limited     for consistent settlement terms under sec-
S corporation; or                                       to selected items from the original settle-    tion 6224(c)(2);
   (4) A trust, estate, or nominee, any per-            ment. Once a partner has settled a part-          (ii) Contain the name, address, and tax-
son authorized in writing to act on behalf              nership item, or a partnership-level deter-    payer identification number of the part-

October 22, 2001                                                           356                                                2001–43 I.R.B.
nership and of the partner requesting the                 the settlement, the items arising from P are no longer   ginning on or after October 4, 2001. For
settlement offer (and, in the case of an in-              partnership items with respect to G.                     years beginning prior to October 4, 2001,
direct partner, of the pass-thru partner                     (e) Effective date. This section is ap-               see § 301.6226(b)–1T contained in 26
through which the indirect partner holds                  plicable to partnership taxable years be-                CFR part 1, revised April 1, 2001.
an interest);                                             ginning on or after October 4, 2001. For
   (iii) Identify the earlier agreement to                years beginning prior to October 4, 2001,                § 301.6226(b)–1T [Removed]
which the request refers; and                             see § 301.6224(c)–3T contained in 26
                                                          CFR part 1, revised April 1, 2001.                         Par. 23a. Section 301.6226(b)–1T is
   (iv) Be signed by the partner making
                                                                                                                   removed.
the request.                                              § 301.6224(c)–3T [Removed]                                 Par. 24. Section 301.6226(e)–1 is
   (3) Time for filing request. The state-
                                                                                                                   added to read as follows:
ment shall be filed not later than the later                Par. 21a. Section 301.6224(c)–3T is
of—                                                       removed.                                                 § 301.6226(e)–1 Jurisdictional
   (i) The 150th day after the day on                       Par. 22. Section 301.6226(a)–1 is                      requirement for bringing an action in
which the notice of final partnership ad-                 added to read as follows:                                District Court or United States Court of
ministrative adjustment is mailed to the                                                                           Federal Claims.
tax matters partner; or                                   § 301.6226(a)–1 Principal place of
   (ii) The 60th day after the day on which               business of partnership.                                    (a) Amount to be deposited—(1) In
the settlement agreement was entered                         (a) In general. The principal place of a              general. The jurisdictional amount that
into.                                                     partnership’s business for purposes of de-               the filing partner (or, in the case of a peti-
   (d) Examples. The following examples                   termining the appropriate district court in              tion filed by a 5-percent group, each
illustrate the principles of this section:                which a petition for a readjustment of                   member of the group, or, for civil actions
    Example 1. The Internal Revenue Service seeks                                                                  beginning on or after March 30, 2002, in
to disallow a $100,000 loss reported by Partnership       partnership items may be filed is its prin-
                                                          cipal place of business as of the date the               the case of a petition filed by a pass-thru
P $20,000 of which was allocated to partner X, and
$10,000 of which was allocated to partner Y. The          petition is filed.                                       partner, each indirect partner holding an
Internal Revenue Service agrees to a settlement with         (b) Example. The provisions of para-                  interest through the pass-thru partner)
X in which the Internal Revenue Service allows
                                                          graph (a) of this section may be illustrated             shall deposit is the amount by which the
$12,000 of the loss, accepts the treatment of all other                                                            tax liability of the partner would be in-
partnership items on the partnership return, and          by the following example:
                                                             Example. The principal place of Partnership A’s       creased if the treatment of the partnership
imposes a penalty for negligence related to the
$8,000 loss disallowance. Partner Y requests settle-      business on the day that the notice of the final part-   items on the partner’s return were made
ment terms consistent with the settlement made            nership administrative adjustment was mailed to A’s      consistent with the treatment of partner-
between X and the Internal Revenue Service. The           tax matters partner was Cincinnati, Ohio. However,       ship items on the partnership return, as
items are partnership items (or a related penalty) for    by the day on which a petition seeking judicial
                                                          review of that adjustment was filed, A had moved its
                                                                                                                   adjusted by the notice of final partnership
X immediately before X enters into the settlement                                                                  administrative adjustment. The partner is
agreement and are partnership items (or a related         principal place of business to Louisville, Kentucky.
penalty) for Y at the time of the request. The Internal   For purposes of section 6226(a)(2), A’s principal        not required to pay other outstanding lia-
Revenue Service must offer Y settlement terms             place of business is Louisville.                         bilities in order to deposit a jurisdictional
allowing a $6,000 loss, a negligence penalty on the          (c) Effective date. This section is ap-               amount.
$4,000 disallowance, and otherwise reflecting the         plicable to partnership taxable years be-                   (2) Example. The provisions of para-
treatment of partnership items on the partnership         ginning on or after October 4, 2001. For                 graph (a)(1) of this section may be illus-
return.
                                                          years beginning prior to October 4, 2001,                trated by the following example:
    Example 2. F files inconsistently with Partner-
ship P and reports the inconsistency. The Internal        see § 301.6226(a)–1T contained in 26                        Example. A files a petition for readjustment of
                                                          CFR part 1, revised April 1, 2001.                       partnership items in the United States Court of
Revenue Service notifies F that it will treat all part-
                                                                                                                   Federal Claims. A’s tax liability would be increased
nership items arising from P as nonpartnership items
                                                          § 301.6226(a)–1T [Removed]                               by $4,000 if partnership items on A’s return were
with respect to F. Later, the Internal Revenue
                                                                                                                   conformed to the partnership return, as adjusted by
Service enters into a settlement with F on these
                                                            Par. 22a. Section 301.6226(a)–1T is                    the notice of final partnership administrative adjust-
items. The Internal Revenue Service is not required
                                                                                                                   ment. A has an unpaid liability of $10,000 attribut-
to offer the other partners of P settlement terms con-    removed.
                                                                                                                   able to nonpartnership items. A is required to
sistent with the settlement reached between F and           Par. 23. Section 301.6226(b)–1 is                      deposit $4,000 in order to satisfy the jurisdictional
the Internal Revenue Service because the items aris-
                                                          added to read as follows:                                requirement.
ing from P are not partnership items with respect
to F.                                                                                                                 (b) Deposit taken into account in com-
                                                          § 301.6226(b)–1 5-percent group.
    Example 3. G, a partner in Partnership P, filed                                                                puting interest. The amount deposited is
suit under section 6228(b) after the Internal Revenue                                                              treated as a payment of tax for purposes
                                                             (a) In general. All members of a 5-per-
Service failed to allow an administrative adjustment
                                                          cent group shall join in filing any petition             of chapter 67 of the Internal Revenue
request with respect to a partnership item arising
from P for a taxable year.             Under section      for judicial review. The designation of a                Code (relating to interest).
6231(b)(1)(B), the partnership items of G for the         partner as a representative of a notice                     (c) Deposit generally not treated as
partnership taxable year became nonpartnership            group does not authorize that partner to file            payment of tax. Except as provided in
items as of the date G filed suit. After G filed suit,                                                             paragraph (b) of this section, an amount
                                                          a petition for a readjustment of partnership
another partner and the Internal Revenue Service
                                                          items on behalf of the notice group.                     deposited under section 6226(e) shall not
entered into a settlement agreement with respect to
items arising from P in that year. G is not entitled to      (b) Effective date. This section is ap-               be treated as a payment of tax. Thus, the
consistent settlement terms because, at the time of       plicable to partnership taxable years be-                Internal Revenue Service may proceed

2001–43 I.R.B.                                                                   357                                                        October 22, 2001
against the depositor for a deficiency                   review of that notice is filed. During the judicial       for example, the tax matters partner may
based on nonpartnership items without re-                proceeding, a partner of ABC, in accordance with          file suit under section 6228(a) if the Inter-
                                                         the applicable court rules, raises an issue relating to
gard to this deposit.                                    the treatment of intangible drilling costs. The court
                                                                                                                   nal Revenue Service fails to take timely
   (d) Amount deposited may be applied                   reviewing the notice has jurisdiction to determine        action on the request.
against assessment. If the restriction on                the intangible drilling cost issue in addition to the        (c) Effective date. This section is ap-
assessment provided under section                        depreciation issue.                                       plicable to partnership taxable years be-
6225(a) lapses with respect to a defi-                      (c) Effective date. This section is ap-                ginning on or after October 4, 2001. For
ciency attributable to partnership items                 plicable to partnership taxable years be-                 years beginning prior to October 4, 2001,
for a partnership taxable year while an                  ginning on or after October 4, 2001. For                  see § 301.6227(b)–1T contained in 26
amount is on deposit under section                       years beginning prior to October 4, 2001,                 CFR part 1, revised April 1, 2001.
6226(e) in connection with a petition re-                see § 301.6226(f)–1T contained in 26
lating to those items, the Internal Revenue              CFR part 1, revised April 1, 2001.                        § 301.6227(c)–1T [Removed]
Service may apply the amount deposited
                                                         § 301.6226(f)–1T [Removed]                                  Par. 27. Section 301.6227(c)–1T is re-
against any such deficiency that is as-
                                                                                                                   moved.
sessed.                                                   Par. 25a. Section 301.6226(f)–1T is re-                    Par. 27a. Section 301.6227(d)–1 is
   (e) Effective date. Except as otherwise               moved.                                                    added to read as follows:
provided in paragraph (a)(1) of this sec-
tion, this section is applicable to civil ac-            § 301.6227(b)–1T [Removed]                                § 301.6227(d)–1 Administrative
tions beginning on or after October 4,                                                                             adjustment request filed on behalf of a
                                                           Par. 26. Section 301.6227(b)–1T is re-
2001. For civil actions beginning prior to                                                                         partner.
                                                         moved.
October 4, 2001, see § 301.6226(e)–1T
                                                           Par. 26a. Section 301.6227(c)–1 is
contained in 26 CFR part 1, revised April                                                                             (a) In general. A request for an adminis-
                                                         added to read as follows:
1, 2001.                                                                                                           trative adjustment on behalf of a partner
                                                         § 301.6227(c)–1 Administrative                            shall be filed on the form prescribed by the
§ 301.6226(e)–1T [Removed]                                                                                         Internal Revenue Service for that purpose
                                                         adjustment request by the tax matters
  Par. 24a. Section 301.6226(e)–1T is re-                partner on behalf of the partnership.                     in accordance with that form’s instructions.
moved.                                                                                                             Except as otherwise provided in that form’s
                                                            (a) In general. A request for an admin-                instructions, the request shall—
  Par. 25. Section 301.6226(f)–1 is
                                                         istrative adjustment filed by the tax mat-                   (1) Be filed in duplicate, the original
added to read as follows:
                                                         ters partner on behalf of the partnership                 copy filed with the partner’s amended in-
§ 301.6226(f)–1 Scope of judicial review.                shall be filed on the form prescribed by                  come tax return (on which the partner
                                                         the Internal Revenue Service for that pur-                computes the amount by which the part-
   (a) In general. A court reviewing a no-               pose in accordance with that form’s in-                   ner’s tax liability should be adjusted if the
tice of final partnership administrative ad-             structions. Except as otherwise provided                  request is granted) and the other copy
justment has jurisdiction to determine all               in that form’s instructions, the request                  filed with the service center where the
partnership items for the taxable year to                shall be—                                                 partnership return is filed (but, if the no-
which the notice relates and the proper al-                 (1) Filed with the service center where                tice described in section 6223(a)(1) (be-
location of such items among the part-                   the original partnership return was filed                 ginning of an administrative proceeding)
ners. Thus, the review is not limited to                 (but, if the notice described in section                  has already been mailed to the tax matters
the items adjusted in the notice. In addi-               6223(a)(1) (beginning of an administra-                   partner, the statement should be filed with
tion, the court has jurisdiction in the part-            tive proceeding) has already been mailed                  the Internal Revenue Service office that
nership-level proceeding to determine any                to the tax matters partner, the statement                 mailed such notice);
penalty, addition to tax, or additional                  should be filed with the Internal Revenue                    (2) Identify the partner and the partner-
amount that relates to an adjustment to a                Service office that mailed such notice);                  ship by name, address, and taxpayer iden-
partnership item. However, the court                        (2) Signed by the tax matters partner;                 tification number;
does not have jurisdiction in the partner-               and                                                          (3) Specify the partnership taxable year
ship-level proceeding to consider any                       (3) Accompanied by revised schedules                   to which the administrative adjustment re-
partner-level defenses to any penalty, ad-               showing the effects of the proposed                       quest applies;
dition to tax, or additional amount that re-             changes on each partner and an explana-                      (4) Relate only to partnership items;
lates to an adjustment to a partnership                  tion of the changes.                                      and
item. See section 6230(c)(4) and                            (b) Denied request for treatment as a                     (5) Relate only to one partnership and
§ 301.6221–1(c) and (d).                                 substituted return remains administrative                 one partnership taxable year.
   (b) Example. The provisions of para-                  adjustment request. An administrative                        (b) Effective date. This section is ap-
graph (a) of this section may be illustrated             adjustment request filed by the tax mat-                  plicable to partnership taxable years be-
by the following example:                                ters partner on behalf of the partnership                 ginning on or after October 4, 2001. For
   Example. The Internal Revenue Service issues a
                                                         for which substituted return treatment is                 years beginning prior to October 4, 2001,
notice of final partnership administrative adjustment
with respect to Partnership ABC in which the only        requested but not granted remains an ad-                  see § 301.6227(c)–1T contained in 26
item adjusted is depreciation. A petition for judicial   ministrative adjustment request. Thus,                    CFR part 1, revised April 1, 2001.

October 22, 2001                                                                 358                                                      2001–43 I.R.B.
  Par. 28. Section 301.6229(b)–1 is             States Code, such agreement shall be             Par. 31. Section 301.6229(f)–1 is
added to read as follows:                       binding on all partners in the partnership     added to read as follows:
                                                unless the Internal Revenue Service has
§ 301.6229(b)–1 Extension by agreement.         been notified of the bankruptcy proceed-       § 301.6229(f)–1 Special rule for partial
                                                ing in accordance with paragraph (b) of        settlement agreements.
   (a) In general. Any partnership may
authorize any person to extend the period       this section.                                     (a) In general. If a partner enters into
described in section 6229(a) with respect          (b) Procedures for notifying the Inter-     a settlement agreement with the Internal
to all partners by filing a statement to that   nal Revenue Service of a partner’s bank-       Revenue Service with respect to the
effect with the service center where the        ruptcy proceeding. (1) The Internal Rev-       treatment of some of the partnership
partnership return is filed (but, if the no-    enue Service shall be notified of the          items or partnership-level determina-
tice described in section 6223(a)(1) (be-       bankruptcy proceeding of the tax matters       tions of any penalty, addition to tax, or
ginning of an administrative proceeding)        partner in accordance with the procedures      additional amount in dispute for a part-
has already been mailed to the tax matters      set forth in § 301.6223(c)–1.                  nership taxable year, but one or more
partner, the statement should be filed with        (2) In addition to the information speci-   other partnership items or determina-
the Internal Revenue Service office that        fied in § 301.6223(c)–1, notification that     tions remain in dispute, the period of
mailed such notice). The statement              a person is (or was) a debtor in a bank-       limitations for assessing any tax attribut-
shall—                                          ruptcy proceeding shall include the date       able to the settled items shall be deter-
   (1) Provide that it is an authorization      the bankruptcy proceeding was filed, the       mined as if such agreement had not been
for a person other than the tax matters         name and address of the court in which         entered into.
partner to extend the assessment period         the bankruptcy proceeding exists (or took         (b) Other items remaining in dispute.
with respect to all partners;                   place), the caption of the bankruptcy pro-     Pursuant to section 6226(c), a partner is a
   (2) Identify the partnership and the per-    ceeding (including the docket number or        party to a partnership-level judicial pro-
son being authorized by name, address,          other identification number used by the        ceeding with respect to partnership items
and taxpayer identification number;             court), and the status of the proceeding as    and partnership-level determinations of
   (3) Specify the partnership taxable year     of the date of notification.                   penalties, additions to tax or additional
or years for which the authorization is ef-        (c) Effective date. This section is ap-     amounts. When a partner settles partner-
fective; and                                    plicable to partnership taxable years be-      ship items, the settled partnership items
   (4) Be signed by all persons who were        ginning on or after October 4, 2001. For       convert to nonpartnership items under
general partners (or, in the case of an         years beginning prior to October 4, 2001,      section 6231(b)(1)(C) and will not be sub-
LLC, member-managers, as those terms            see § 301.6229(b)–2T contained in 26           ject to any future or pending partnership-
are defined in § 301.6231(a)(7)–2(b)) at        CFR part 1, revised April 1, 2001.             level proceeding pursuant to section
any time during the year or years for           § 301.6229(b)–2T [Removed]                     6226(d)(1). The remaining unsettled part-
which the authorization is effective.                                                          nership items, as well as any unsettled
   (b) Effective date. This section is ap-        Par. 29a. Section 301.6229(b)–2T is          penalty, addition to tax, or additional
plicable to partnership taxable years be-       removed.                                       amount that relates to an adjustment to a
ginning on or after October 4, 2001. For          Par. 30. Section 301.6229(e)–1 is            partnership item (regardless of whether
years beginning prior to October 4, 2001,       added to read as follows:                      the partnership item to which it relates has
see § 301.6229(b)–1T contained in 26                                                           been settled), however, will remain sub-
CFR part 1, revised April 1, 2001.              § 301.6229(e)–1 Information with respect       ject to determination under partnership-
                                                to unidentified partner.                       level administrative and judicial proce-
§ 301.6229(b)–1T [Removed]                                                                     dures. Consequently, any remaining
                                                   (a) In general. A partner who is not
  Par. 28a. Section 301.6229(b)–1T is           properly identified on the partnership re-     unsettled items, including any unsettled
removed.                                        turn (including an indirect partner) re-       penalty, addition to tax, or additional
  Par. 29. Section 301.6229(b)–2 is             mains an unidentified partner for pur-         amount that relates to an adjustment to a
added to read as follows:                       poses of section 6229(e) until identifying     partnership item, will be deemed to re-
                                                information is furnished as provided in        main in dispute. Thus, the period for as-
§ 301.6229(b)–2 Special rule with respect       § 301.6223(c)–1.                               sessing any tax attributable to the settled
to debtors in Title 11 cases.                      (b) Effective date. This section is ap-     items will be governed by the period for
                                                plicable to partnership taxable years be-      assessing any tax attributable to the re-
   (a) In general. Notwithstanding any                                                         maining unsettled items.
other law or rule of law, if an agreement       ginning on or after October 4, 2001. For
                                                years beginning prior to October 4, 2001,         (c) Effective date. This section is ap-
is entered into under section                                                                  plicable to partnership taxable years be-
6229(b)(1)(B), and the agreement is             see § 301.6229(e)–1T contained in 26
                                                CFR part 1, revised April 1, 2001.             ginning on or after October 4, 2001. For
signed by a person who would be the tax                                                        years beginning prior to October 4, 2001,
matters partner but for the fact that, at       § 301.6229(e)–1T [Removed]                     see § 301.6229(f)–1T contained in 26
the time that the agreement is executed,                                                       CFR part 1, revised April 1, 2001.
the person is a debtor in a bankruptcy            Par. 30a. Section 301.6229(e)–1T is
proceeding under Title 11 of the United         removed.                                       § 301.6229(f)–1T [Removed]

2001–43 I.R.B.                                                     359                                             October 22, 2001
  Par. 31a. Section 301.6229(f)–1T is re-          (a) In general. If a notice of the begin-   year had more than 10 partners may be
moved.                                          ning of an administrative proceeding is        treated as a small partnership even if, be-
  Par. 32. Section 301.6230(b)–1 is             mailed to the tax matters partner with re-     cause of transfers of interests in the part-
added to read as follows:                       spect to any partnership taxable year, the     nership, 11 or more natural persons, C
                                                tax matters partner shall furnish to the In-   corporations, or estates of deceased part-
§ 301.6230(b)–1 Request that correction         ternal Revenue Service office that issued      ners owned interests in the partnership for
not be made.                                    the notice the name, address, profits inter-   some portion of the taxable year. See sec-
   (a) In general. The request that a cor-      est, and taxpayer identification number of     tion 1361(a)(2) for the definition of a C
rection not be made under section               each person who was a partner in the part-     corporation. For purposes of section
6230(b)(2) shall be in writing and shall—       nership at any time during that taxable        6231(a)(1)(B) and this section, a husband
   (1) State that it is a request that a cor-   year if that information was not provided      and wife (and their estates) are treated as
rection not be made under section               on the partnership return filed for that       one person.
6230(b);                                        year.                                             (2) Pass-thru partner. The exception
   (2) Identify the partnership and the            (b) Revised or additional information.      provided in section 6231(a)(1)(B) does
partner filing the request by name, ad-         If the tax matters partner discovers that      not apply to a partnership for a taxable
dress, and taxpayer identification number;      any information furnished to the Internal      year if any partner in the partnership dur-
   (3) Be signed by the partner filing the      Revenue Service on the partnership return      ing that taxable year is a pass-thru partner
request; and                                    or under paragraph (a) of this section was     as defined in section 6231(a)(9). For pur-
   (4) Be filed with the Internal Revenue       incorrect or incomplete, the tax matters       poses of this paragraph (a)(2), an estate
Service office that provided the notice of      partner shall furnish revised or additional    shall not be treated as a pass-thru partner.
the correction of the error.                    information to the Internal Revenue Ser-          (3) Determination made annually. The
   (b) Effective date. This section is ap-      vice within 15 days of discovering that        determination of whether a partnership
plicable to partnership taxable years be-       the information furnished to the Internal      meets the requirements for the exception
ginning on or after October 4, 2001. For        Revenue Service was incorrect or incom-        for small partnerships under section
years beginning prior to October 4, 2001,       plete.                                         6231(a)(1)(B) and this paragraph (a) shall
see § 301.6230(b)–1T contained in 26               (c) Information required with respect to    be made with respect to each partnership
CFR part 1, revised April 1, 2001.              indirect partners. The requirements of         taxable year. Thus, a partnership that
                                                this section for identifying information       does not qualify as a small partnership in
§ 301.6230(b)–1T [Removed]                      apply with respect to indirect partners to     one taxable year may qualify as a small
                                                the extent that the tax matters partner has    partnership in another taxable year if the
  Par. 32a. Section 301.6230(b)–1T is           such information.                              requirements for the exception under sec-
removed.                                           (d) Effective date. This section is ap-     tion 6231(a)(1)(B) and this paragraph (a)
  Par. 33. Section 301.6230(c)–1 is             plicable to partnership taxable years be-      are met with respect to that other taxable
added to read as follows:                       ginning on or after October 4, 2001. For       year.
§ 301.6230(c)–1 Claim arising out of            years beginning prior to October 4, 2001,         (b) Election to have subchapter C of
erroneous computation, etc.                     see § 301.6230(e)–1T contained in 26           chapter 63 apply—(1) In general. Any
                                                CFR part 1, revised April 1, 2001.             partnership that meets the requirements
   (a) In general. A claim for refund                                                          set forth in section 6231(a)(1)(B) and
under section 6230(c) shall state the           § 301.6230(e)–1T [Removed]
                                                                                               paragraph (a) of this section (relating to
grounds for the claim and shall be filed          Par. 34a. Section 301.6230(e)–1T is          the exception for small partnerships) may
with the service center where the partner’s     removed.                                       elect under paragraph (b)(2) of this sec-
return is filed.                                  Par. 35. Section 301.6231(a)(1)–1 is         tion to have the provisions of subchapter
   (b) Effective date. This section is          added to read as follows:                      C of chapter 63 of the Internal Revenue
applicable to partnership taxable years                                                        Code apply with respect to that partner-
beginning on or after October 4, 2001.          § 301.6231(a)(1)–1 Exception for small         ship.
For years beginning prior to October 4,         partnerships.                                     (2) Method of election. A partnership
2001, see § 301.6230(c)–1T contained               (a) In general. For purposes of the ex-     shall make the election described in para-
in 26 CFR part 1, revised April 1,              ception for small partnerships under sec-      graph (b)(1) of this section by attaching a
2001.                                           tion 6231(a)(1)(B), the rules contained in     statement to the partnership return for the
                                                this section shall apply.                      first taxable year for which the election is
§ 301.6230(c)–1T [Removed]                                                                     to be effective. The statement shall be
                                                   (1) 10 or fewer. The 10 or fewer limi-
  Par. 33a. Section 301.6230(c)–1T is           tation described in section 6231(a)            identified as an election under section
removed.                                        (1)(B)(i) is applied to the number of nat-     6231(a)(1)(B)(ii), shall be signed by all
  Par. 34. Section 301.6230(e)–1 is             ural persons, C corporations, and estates      persons who were partners of that partner-
added to read as follows:                       of deceased partners that were partners at     ship at any time during the partnership
                                                any one time during the partnership tax-       taxable year to which the return relates,
§ 301.6230(e)–1 Tax matters partner             able year. Thus, for example, a partner-       and shall be filed at the time (determined
required to furnish names.                      ship that at no time during the taxable        with regard to any extension of time for

October 22, 2001                                                   360                                               2001–43 I.R.B.
filing) and place prescribed for filing the    this section, for purposes of subchapter C               Husband files for bankruptcy. Because the filing of
partnership return. However, for any part-     of chapter 63 of the Internal Revenue                    the bankruptcy petition by Husband is an event that
                                                                                                        would convert Husband’s partnership items to non-
nership taxable year for which the due         Code, a spouse who files a joint return                  partnership items if Husband were the owner of a
date of the return (determined without re-     with an individual holding a separate in-                separate interest, Husband shall no longer be treated
gard to extensions) is before January 2,       terest in the partnership shall be treated as            as a partner as of the filing of the bankruptcy peti-
2002, the partnership may file the state-      receiving any notice received by the indi-               tion. Pursuant to paragraph (a)(4)(ii) of this section,
ment described in the preceding sentence       vidual holding the separate interest.                    the partnership items of Wife are not affected by
                                                                                                        Husband’s bankruptcy.
on or before the date which is one year           (ii) Spouse identified on partnership re-
                                                                                                           (5) Cross–reference. See § 301.6231(a)
before the date specified in section           turn or by statement. Paragraph (a)(3)(i)
                                                                                                        (12)–1 for special rules relating to spouses
6229(a) for the expiration of the period of    of this section shall not apply to a spouse
                                                                                                        holding a joint interest in a partnership.
limitations with respect to that partnership   who files a joint return with an individual
                                                                                                           (b) Shareholder of C corporation. A
(determined with regard to extensions of       holding a separate interest in the partner-
                                                                                                        shareholder of a C corporation (as defined
that period under section 6229(b)).            ship if that spouse—
                                                                                                        in section 1361(a)(2)) is not a partner in a
   (3) Years covered by election. The             (A) Is identified on the partnership re-
                                                                                                        partnership merely because the C corpo-
election shall be effective for the partner-   turn; or
                                                                                                        ration is a partner in that partnership.
ship taxable year to which the return re-         (B) Is identified as a partner entitled to
                                                                                                           (c) Effective date. This section is ap-
lates and all subsequent partnership tax-      notice as provided in § 301.6223(c)–1(b).
                                                                                                        plicable to partnership taxable years be-
able years unless revoked with the                (4) Conversion of partnership items—
                                                                                                        ginning on or after October 4, 2001. For
consent of the Commissioner.                   (i) Individual holding a separate interest.
                                                                                                        years beginning prior to October 4, 2001,
   (c) Effective date. This section is ap-     A spouse who files a joint return with an
                                                                                                        see § 301.6231(a)(2)–1T contained in 26
plicable to partnership taxable years be-      individual holding a separate interest in
                                                                                                        CFR part 1, revised April 1, 2001.
ginning on or after October 4, 2001. For       the partnership shall cease to be treated as
years beginning prior to October 4, 2001,      a partner in the partnership under para-                 § 301.6231(a)(2)–1T [Removed]
see § 301.6231(a)(1)–1T contained in 26        graph (a)(1) of this section upon the con-
CFR part 1, revised April 1, 2001.             version of the partnership items of the in-                Par. 36a. Section 301.6231(a)(2)–1T is
                                               dividual holding the separate interest in                removed.
§ 301.6231(a)(1)–1T [Removed]                  the partnership to nonpartnership items                    Par. 37. Section 301.6231(a)(5)–1 is
  Par. 35a. Section 301.6231(a)(1)–1T is       pursuant to section 6231(b). If each                     added to read as follows:
removed.                                       spouse holds a separate interest in the
                                               partnership, the previous sentence shall be              § 301.6231(a)(5)–1 Definition of affected
  Par. 36. Section 301.6231(a)(2)–1 is
                                               applied separately with respect to each                  item.
added to read as follows:
                                               partnership interest.
                                                                                                           (a) In general. The term affected item
§ 301.6231(a)(2)–1 Persons whose tax              (ii) Spouse who files a joint return with
                                                                                                        means any item to the extent such item is
liability is determined indirectly by          an individual holding a separate interest
                                                                                                        affected by a partnership item. It includes
partnership items.                             in the partnership. A spouse who files a
                                                                                                        items unrelated to the items reflected on
                                               joint return with an individual holding a
   (a) Spouse filing joint return with indi-                                                            the partnership return (for example, an
                                               separate interest in the partnership shall
vidual holding a separate interest—(1) In                                                               item, such as the threshold for the medical
                                               cease to be treated as a partner in the part-
general. Except as otherwise provided in                                                                expense deduction under section 213, that
                                               nership under paragraph (a)(1) of this sec-
this paragraph (a), a spouse who files a                                                                varies if there is a change in an individual
                                               tion upon the occurrence of an event that
joint return with an individual holding a                                                               partner’s adjusted gross income).
                                               would convert the partnership items of the
separate interest in the partnership shall                                                                 (b) Basis in a partner’s partnership in-
                                               spouse to nonpartnership items if the
be treated as a partner for purposes of                                                                 terest. The basis of a partner’s partner-
                                               spouse were the owner of a separate inter-
subchapter C of chapter 63 of the Internal                                                              ship interest is an affected item to the ex-
                                               est.
Revenue Code. Thus, the spouse who                                                                      tent it is not a partnership item.
                                                  (iii) Examples. The following exam-
files a joint return with a partner will be                                                                (c) At-risk limitation. The application
                                               ples illustrate the application of paragraph
permitted to participate in administrative                                                              of the at-risk limitation under section 465
                                               (a)(4) of this section:
and judicial proceedings.                         Example 1. Husband owns a separate interest           to a partner with respect to a loss incurred
   (2) Counting rules. A spouse who files      in ABC partnership and files a joint return with Wife.   by a partnership is an affected item to the
a joint return with an individual holding a    Husband files for bankruptcy.            Pursuant to     extent it is not a partnership item.
                                               § 301.6231(c)–7, upon filing for bankruptcy, the            (d) Passive losses. The application of
separate interest in the partnership shall
                                               partnership items of the debtor convert to nonpart-
not be counted as a partner for purposes                                                                the passive loss rules under section 469 to
                                               nership items. Thus, Husband’s partnership items
of applying section 6223(b) (relating to       converted to nonpartnership items upon the filing of     a partner with respect to a loss incurred by
special rules for partnerships with more       Husband’s bankruptcy petition. Pursuant to para-         a partnership is an affected item to the ex-
than 100 partners) and section                 graph (a)(4)(i) of this section, Wife is no longer       tent it is not a partnership item.
                                               treated as a partner of ABC partnership as of the date      (e) Penalty, addition to tax, or addi-
6231(a)(1)(B) (relating to the exception
                                               the partnership items of Husband converted to non-
for small partnerships).                                                                                tional amount—(1) In general. The term
                                               partnership items.
   (3) Notice rules—(i) In general. Ex-           Example 2. Wife owns a separate interest in XYZ       affected item includes any penalty, addi-
cept as provided in paragraph (a)(3)(ii) of    partnership and files a joint return with Husband.       tion to tax, or additional amount provided

2001–43 I.R.B.                                                        361                                                        October 22, 2001
by subchapter A of chapter 68 of the In-                items by $6,000. An adjustment to a partnership         63 of the Internal Revenue Code), except
ternal Revenue Code of 1986 to the extent               item resulting from a partnership proceeding            for any penalty, addition to tax, or addi-
                                                        increased B’s income tax by an additional $2,000.
provided in this paragraph (e).                         Prior to the adjustment, B would have been subject
                                                                                                                tional amount that relates to an adjust-
   (2) Penalty, addition to tax, or addi-               to the accuracy-related penalty under section 6662      ment to a partnership item.
tional amount without floor. If a penalty,              for a substantial understatement of income tax with        (2) Affected items that do not require
addition to tax, or additional amount that              respect to the $6,000 understatement attributable to    partner-level determinations. Changes in
does not contain a floor (that is, a thresh-            nonpartnership items. The portion of the accuracy-      a partner’s tax liability with respect to af-
                                                        related penalty under section 6662 computed with
old amount of underpayment or under-                    reference to the $2,000 understatement attributable
                                                                                                                fected items that do not require partner-
statement necessary before the imposition               to partnership items to which the accuracy-related      level determinations (such as the thresh-
of the penalty, addition to tax, or addi-               penalty applies is an affected item. The portion of     old amount of medical deductions under
tional amount) is imposed on a partner as               the accuracy-related penalty under section 6662         section 213 that changes as the result of
the result of an adjustment to a partner-               computed with reference to the $6,000 pre-existing      determinations made at the partnership
                                                        understatement is not an affected item.
ship item, the term affected item shall in-                 Example 3. C, a partner in partnership P, under-
                                                                                                                level) are computational adjustments that
clude the penalty, addition to tax, or addi-            stated C’s income tax liability attributable to non-    are directly assessed. When making
tional amount computed with reference to                partnership items by $4,000. As a result of an          computational adjustments, the Internal
the portion of the underpayment that is at-             adjustment to partnership items, that understatement    Revenue Service may assume that
tributable to the partnership item adjust-              is increased to $10,000. Prior to the adjustment, C     amounts the partner reported on the part-
                                                        would not have been subject to the accuracy-related
ment(s) to which the penalty, addition to               penalty under section 6662 for a substantial under-
                                                                                                                ner’s individual return include all
tax, or additional amount applies.                      statement of income tax. The accuracy-related           amounts reported to the partner by the
   (3) Penalty, addition to tax, or addi-               penalty under section 6662 computed with reference      partnership (on the Schedule K-1s at-
tional amount containing floor—(i) Floor                to the entire $10,000 understatement to which the       tached to the partnership’s original re-
exceeded prior to adjustment. If a partner              accuracy-related penalty applies is an affected item.   turn), absent contrary notice to the Inter-
would have been subject to a penalty, ad-                  (f) Effective date. This section is ap-              nal Revenue Service (for example, a
dition to tax, or additional amount that                plicable to partnership taxable years be-               “Notice of Inconsistent Treatment” pur-
contains a floor in the absence of an ad-               ginning on or after October 4, 2001. For                suant to § 301.6222(a)–2(c)). Such an
justment to a partnership item (that is, the            years beginning prior to October 4, 2001,               assumption by the Internal Revenue Ser-
partner’s understatement or underpay-                   see § 301.6231(a)(5)–1T contained in 26                 vice does not constitute a partner-level
ment exceeded the floor even without an                 CFR part 1, revised April 1, 2001.                      determination. Moreover, substituting
adjustment to a partnership item) the term              § 301.6231(a)(5)–1T [Removed]                           redetermined partnership items for the
affected item shall include only the por-                                                                       partner’s previously reported partnership
tion of the penalty, addition to tax, or ad-              Par. 37a. Section 301.6231(a)(5)–1T is                items (including partnership items in-
ditional amount computed with reference                 removed.                                                cluded in carryover amounts) does not
to the partnership item (or affected item)                Par. 38. Section 301.6231(a)(6)–1 is                  constitute a partner-level determination
adjustments.                                            added to read as follows:                               where the Internal Revenue Service oth-
   (ii) Floor not exceeded prior to adjust-                                                                     erwise accepts, for the sole purpose of
ment. In the case of a penalty, addition to             § 301.6231(a)(6)–1 Computational                        determining the computational adjust-
tax, or additional amount that contains a               adjustments.                                            ment, all nonpartnership items (includ-
floor, if the taxpayer’s understatement or                 (a) Changes in a partner’s tax                       ing, for example, nonpartnership item
underpayment does not exceed the floor                  liability—(1) In general. A change in the               components of carryover amounts) as re-
prior to an adjustment to a partnership                 tax liability of a partner to properly reflect          ported.
item but does so after such adjustment,                 the treatment of a partnership item under                  (3) Affected items that require partner-
the term affected item shall include the                subchapter C of chapter 63 of the Internal              level determinations. Changes in a part-
penalty, addition to tax, or additional                 Revenue Code is made through a compu-                   ner’s tax liability with respect to affected
amount computed with reference to the                   tational adjustment. A computational ad-                items that require partner-level determina-
entire underpayment or understatement to                justment includes a change in tax liability             tions (such as a partner’s at-risk amount to
which the penalty, addition to tax, or addi-            that reflects a change in an affected item              the extent it depends upon the source
tional amount applies.                                  where that change is necessary to prop-                 from which the partner obtained the funds
   (4) Examples. The provisions of this                 erly reflect the treatment of a partnership             that the partner contributed to the partner-
paragraph (e) may be illustrated by the                 item, or any penalty, addition to tax, or               ship) are computational adjustments that
following examples:                                     additional amount that relates to an ad-                are subject to the deficiency procedures.
   Example 1. A, a partner of P, had an aggregate                                                               Notwithstanding the preceding sentence,
underpayment of $1,000 of which $100 is attribut-       justment to a partnership item. However,
                                                        if a change in a partner’s tax liability can-           any penalty, addition to tax, or additional
able to an adjustment to partnership items. A is neg-
ligent in reporting the partnership items. The accu-    not be made without making one or more                  amount that relates to an adjustment to a
racy-related penalty under section 6662 for             partner-level determinations, that portion              partnership item is not subject to the defi-
negligence computed with reference to the $100
                                                        of the change in tax liability attributable             ciency procedures, but rather may be di-
underpayment attributable to the partnership item                                                               rectly assessed as part of the computa-
adjustments is an affected item.                        to the partner-level determinations shall
                                                        be made under the deficiency procedures                 tional adjustment that is made following
   Example 2. B, a partner of P, understated B’s
income tax liability attributable to nonpartnership     (as described in subchapter B of chapter                the partnership proceeding, based on de-

October 22, 2001                                                               362                                                     2001–43 I.R.B.
terminations in that proceeding, regard-        nations of a tax matters partner occurring                  in paragraph (b)(2) of this section, the In-
less of whether any partner-level determi-      on or after December 23, 1996, except for                   ternal Revenue Service or the tax matters
nations may be required.                        paragraphs (p)(2) and (r)(1), that are ap-                  partner may send any required notice to
   (b) Interest. A computational adjust-        plicable on or after October 4, 2001.                       either spouse.
ment includes any interest due with re-                                                                        (2) Identified spouse entitled to notice.
spect to any underpayment or overpay-           § 301.6231(a)(7)–1T [Removed]                               For purposes of applying section 6223
ment of tax attributable to adjustments to                                                                  (relating to notice to partners of proceed-
                                                  Par. 39a. Section 301.6231(a)(7)–1T is
reflect properly the treatment of partner-                                                                  ing) for a partnership taxable year, an in-
                                                removed.
ship items.                                                                                                 dividual who holds a joint interest in a
                                                  Par. 40. Section 301.6231(a)(12)–1 is
   (c) Effective date. This section is ap-                                                                  partnership with a spouse who is entitled
                                                added to read as follows:
plicable to partnership taxable years be-                                                                   to notice under section 6223 shall be enti-
ginning on or after October 4, 2001. For        § 301.6231(a)(12)–1 Special rules                           tled to receive separate notice under sec-
years beginning prior to October 4, 2001,       relating to spouses.                                        tion 6223 if such individual—
see § 301.6231(a)(6)–1T contained in 26                                                                        (i) Is identified as a partner on the part-
CFR part 1, revised April 1, 2001.                 (a) Spouses holding a joint interest—                    nership return for that taxable year; or
                                                (1) In general. Except as otherwise pro-                       (ii) Is identified as a partner entitled to
§ 301.6231(a)(6)–1T [Removed]                   vided in this section, spouses holding a                    notice as provided in § 301.6223(c)–1(b).
   Par. 38a. Section 301.6231(a)(6)–1T is       joint interest in a partnership shall be                       (c) Conversion of partnership items—
removed.                                        treated as separate partners for purposes                   (1) In general. If spouses holding a joint
   Par. 39. Section 301.6231(a)(7)–1 is         of subchapter C of chapter 63 of the Inter-                 interest in a partnership are treated as sep-
amended by revising paragraphs (p)(2),          nal Revenue Code. Thus, both spouses                        arate partners under this section, then sec-
(r)(1), and (s) to read as follows:             may participate in administrative and ju-                   tion 6231(b) (relating to the conversion of
                                                dicial proceedings. The term joint inter-                   partnership items) shall be applied sepa-
§ 301.6231(a)(7)–1 Designation or               est includes tenancies in common, joint                     rately to each spouse.
selection of tax matters partner.               tenancies, tenancies by the entirety, and                      (2) Example. The following example
                                                community property.                                         illustrates the application of paragraph (c)
*****                                              (2) Identification of joint interest. For                of this section:
   (p) * * *                                    purposes of this section, an interest shall                     Example. Husband and Wife own a joint interest
   (2) When each general partner is             be treated as a joint interest in a partner-                in XYZ Partnership. The partnership return identi-
deemed to have no profits interest in the                                                                   fies both spouses on the Schedule K-1. Under this
                                                ship only if both spouses are identified on                 section, each spouse is treated as a separate partner.
partnership. If it is impracticable under       the partnership return or are identified as                 If Wife enters into a settlement agreement, Wife’s
paragraph (o)(2) of this section to apply       partners entitled to notice as provided in                  partnership items convert to nonpartnership items
the largest-profits-interest rule of para-      § 301.6223(c)–1(b).                                         pursuant to section 6231(b)(1)(C). Accordingly,
graph (m)(2) of this section, the Commis-          (3) Failure to identify both spouses as                  Wife no longer has the right to participate in the part-
sioner will select a partner (including a                                                                   nership proceeding subsequent to entering into the
                                                partners. If both spouses are not identi-                   settlement agreement. Pursuant to paragraph (c) of
general or limited partner) as the tax mat-     fied as set forth in paragraph (a)(2) of this               this section, however, the partnership items of
ters partner in accordance with the criteria    section, then the partnership interest shall                Husband are not affected by the conversion of the
set forth in paragraph (q) of this section.     be treated as separately owned by the                       partnership items of Wife, and Husband continues to
The Commissioner will notify, within 30         identified spouse.                                          have the right to participate in the partnership pro-
days of the selection, the partner selected,                                                                ceeding. This result is the same regardless of
                                                   (4) Example. The following example                       whether the partnership items are reported on a joint
the partnership, and all partners required      illustrates the application of paragraph                    return or on separate returns.
to receive notice under section 6223(a) of      (a)(3) of this section:                                        (d) Cross-reference. See § 301.6231(a)
the selection of the tax matters partner, ef-      Example. Wife owns an interest in ABC                    (2)–1(a) for special rules relating to
fective as of the date specified in the no-     Partnership and is identified on the Schedule K-1 of
                                                the partnership return. Wife and Husband live in a          spouses who file joint returns with indi-
tice.
                                                community property state. The partnership return of         viduals holding a separate interest in a
*****
                                                ABC partnership does not identify Husband, and              partnership.
   (r) * * * (1) In general. If the Commis-     Husband is not identified as a partner entitled to notice      (e) Effective date. This section is ap-
sioner selects a tax matters partner under      as provided in § 301.6223(c)–1(b). Pursuant to para-        plicable to partnership taxable years be-
the provisions of paragraph (p)(1) or           graph (a)(3) of this section, the partnership interest of
                                                Wife shall be treated as separately owned by Wife.          ginning on or after October 4, 2001. For
(p)(3)(i) of this section, the Commis-
                                                   (b) Notice and counting rules—(1) In                     years beginning prior to October 4, 2001,
sioner will notify, within 30 days of the
                                                general. Except as provided in paragraph                    see § 301.6231(a)(12)–1T contained in 26
selection, the partner selected, the part-
                                                (b)(2) of this section, for purposes of ap-                 CFR part 1, revised April 1, 2001.
nership, and all partners required to re-
ceive notice under section 6223(a) of the       plying section 6223 (relating to notice to                  § 301.6231(a)(12)–1T [Removed]
selection of the tax matters partner, effec-    partners of proceedings) and section
tive as of the date specified in the notice.    6231(a)(1)(B) (relating to the exception                       Par. 40a. Section 301.6231(a)(12)–1T
*****                                           for small partnerships), spouses holding a                  is removed.
   (s) Effective date. This section applies     joint interest in a partnership shall be                       Par. 41. Section 301.6231(c)–1 is
to all designations, selections, and termi-     treated as one partner. Except as provided                  added to read as follows:

2001–43 I.R.B.                                                           363                                                          October 22, 2001
§ 301.6231(c)–1 Special rules for certain       any amount applied, credited, or refunded            (iv) Specify the partnership taxable
applications for tentative carryback and        as a result of an application described in        year to which the election applies; and
refund adjustments based on partnership         paragraph (a) of this section may be made            (v) Be signed by the partner making the
losses, deductions, or credits.                 before there is a final partnership-level         election.
                                                determination with respect to the losses,            (e) Effective date. This section is ap-
   (a) Application subject to this section.     deductions, or credits on which the appli-        plicable to partnership taxable years be-
This section applies in the case of an ap-      cation is based. As provided in section           ginning on or after October 4, 2001. For
plication under section 6411 (relating to       6213(b)(1), the Internal Revenue Service          years beginning prior to October 4, 2001,
tentative carryback and refund adjust-          shall mail notice of any such assessment          see § 301.6231(c)–1T contained in 26
ments) based on losses, deductions, or          to the partner filing the application. The        CFR part 1, revised April 1, 2001.
credits of a partnership if the Commis-         notice shall also inform the partner of the
sioner, or the Commissioner’s delegate,         partner’s limited right to elect to treat         § 301.6231(c)–1T [Removed]
determines, after review of the available       items as nonpartnership items as provided
relevant information, that it is highly                                                             Par. 41a. Section 301.6231(c)–1T is
                                                in paragraph (d) of this section.                 removed.
likely that a person described in section          (d) Limited right to elect to treat items as
6700(a)(1) made, with respect to the part-                                                          Par. 42. Section 301.6231(c)–2 is
                                                nonpartnership items—(1) In general. A            added to read as follows:
nership—                                        partner to whom the Internal Revenue Ser-
   (1) A gross valuation overstatement; or      vice mails a notice of suspension of action       § 301.6231(c)–2 Special rules for certain
   (2) A false or fraudulent statement with     on a refund claim under paragraph (c) of          refund claims based on losses,
respect to the tax benefits to be secured by    this section may elect in accordance with         deductions, or credits from abusive tax
reason of holding an interest in the part-      this paragraph (d) to have all partnership        shelter partnerships.
nership that would be subject to a penalty      items for the partnership taxable year in
under section 6700 (relating to penalty for     which the losses, deductions, or credits at          (a) Claims subject to this section. This
promoting abusive tax shelters, etc.). This     issue arose treated as nonpartnership items.      section applies in the case of a claim for
section applies only with respect to an ap-                                                       credit or refund based on losses, deduc-
                                                   (2) Time and place of making election.
plication based upon the original report-                                                         tions or credits of a partnership if the
                                                The election shall be made by filing a
ing on the partner’s income tax return of                                                         Commissioner, or the Commissioner’s
                                                statement with the Internal Revenue Ser-
partnership losses, deductions, or credits.                                                       delegate, determines, after review of
                                                vice office that mailed the notice of sus-
Thus, this section does not apply to a re-                                                        available relevant information, that it is
                                                pension. The statement may be filed at
quest for administrative adjustment under                                                         highly likely that a person described in
                                                any time—
section 6227 through which a partner                                                              section 6700(a)(1) made, with respect to
                                                   (i) After the date which is one year after
seeks to change the partner’s reporting of                                                        the partnership—
                                                the date on which the partnership return
partnership items on the partner’s income                                                            (1) A gross valuation overstatement; or
                                                was filed for the partnership taxable year
tax return (or on an earlier request for ad-                                                         (2) A false or fraudulent statement with
                                                in which the items at issue arose; and
ministrative adjustment).                                                                         respect to the tax benefits to be secured by
   (b) Determination of special enforce-           (ii) Before the date on which the Inter-       reason of holding an interest in the part-
ment area. In the case of an application        nal Revenue Service mails to the tax mat-         nership that would be subject to a penalty
under section 6411 described in para-           ters partner the notice of final partnership      under section 6700 (relating to penalty for
graph (a) of this section, precluding an as-    administrative adjustment for the partner-        promoting abusive tax shelters, etc.). This
sessment under section 6225 that would          ship taxable year in which the items at           section applies only with respect to a
be permitted under section 6213(b)(3) (re-      issue arose. For purposes of this para-           claim that is based upon the partner’s
lating to assessments arising out of tenta-     graph (d)(2), a partnership return filed be-      original reporting on the partner’s income
tive carryback or refund adjustments)           fore the last day prescribed by law for its       tax return of partnership losses, deduc-
with respect to any amount applied, cred-       filing (determined without regard to ex-          tions, or credits. Thus, this section does
ited, or refunded as a result of the applica-   tensions) shall be treated as filed on the        not apply to a request for administrative
tion may encourage the proliferation of         last day.                                         adjustment under section 6227 through
abusive tax shelter partnerships and make          (3) Contents of the statement. The             which a partner seeks to change the part-
the eventual collection of taxes due more       statement shall—                                  ner’s reporting of partnership items on the
difficult. Consequently, the Secretary             (i) Be clearly identified as an election       partner’s income tax return (or on an ear-
hereby determines that such applications        to have partnership items treated as non-         lier request for administrative adjust-
present special enforcement considera-          partnership items because of notification         ment). For purposes of this section, any
tions within the meaning of section             of an assessment under section                    income tax return requesting a credit or
6231(c)(1)(E).                                  6213(b)(3);                                       refund shall be treated as a claim for a
   (c) Assessment permitted under section          (ii) Identify the partnership by name,         credit or refund.
6213(b)(3). Notwithstanding section             address, and taxpayer identification num-            (b) Determination of special enforce-
6225 (relating to restrictions on assess-       ber;                                              ment area. Granting a claim for credit or
ment with respect to partnership items),           (iii) Identify the partner making the          refund described in paragraph (a) of this
an assessment that would be permitted           election by name, address, and taxpayer           section may encourage the proliferation
under section 6213(b)(3) with respect to        identification number;                            of abusive tax shelter partnerships and
October 22, 2001                                                    364                                                 2001–43 I.R.B.
make the eventual collection of taxes              (iii) Identify the partner making the      § 301.6231(c)–4 Termination and
more difficult. Consequently, the Secre-        election by name, address, and taxpayer       jeopardy assessment.
tary hereby determines that such claims         identification number;
present special enforcement considera-             (iv) Specify the partnership taxable          (a) In general. The treatment of items
tions within the meaning of section             year to which the election applies; and       as partnership items with respect to a part-
6231(c)(1)(E).                                     (v) Be signed by the partner making the    ner against whom an assessment of in-
   (c) Action on refund claims suspended.       election.                                     come tax under section 6851 (termination
In the case of a claim described in para-          (e) Effective date. This section applies   assessment) or section 6861 (jeopardy as-
graph (a) of this section, the Internal Rev-    with respect to any claim described in        sessment) is made will interfere with the
enue Service may mail to the partner fil-       paragraph (a) of this section that is filed   effective and efficient enforcement of the
ing the claim a notice stating that no          on or after October 4, 2001. For claims       internal revenue laws. Accordingly, part-
action will be taken on the partner’s claim     filed prior to October 4, 2001, see           nership items of such a partner arising in
until the completion of the partnership-        § 301.6231(c)–2T contained in 26 CFR          any partnership taxable year ending with
level proceedings. The notice shall also        part 1, revised April 1, 2001.                or within the partner’s taxable year for
inform the partner of the partner’s limited                                                   which an assessment of income tax under
right to elect to treat items as nonpartner-    § 301.6231(c)–2T [Removed]                    section 6851 or 6861 is made shall be
ship items as provided in paragraph (d) of                                                    treated as nonpartnership items as of the
                                                  Par. 42a. Section 301.6231(c)–2T is         moment before such assessment is made.
this section.                                   removed.
   (d) Limited right to elect to treat items                                                     (b) Effective date. This section is ap-
                                                  Par. 43. Section 301.6231(c)–3 is           plicable to partnership taxable years be-
as nonpartnership items—(1) In general.         added to read as follows:
A partner to whom the Internal Revenue                                                        ginning on or after October 4, 2001. For
Service mails a notice of suspension            § 301.6231(c)–3 Limitation on                 years beginning prior to October 4, 2001,
under paragraph (c) of this section may         applicability of §§ 301.6231(c)–4             see § 301.6231(c)–4T contained in 26
elect in accordance with this paragraph         through 301.6231(c)–8.                        CFR part 1, revised April 1, 2001.
(d) to have all partnership items for the                                                     § 301.6231(c)–4T [Removed]
partnership taxable year in which the              (a) In general. A provision of
losses, deductions, or credits at issue         §§ 301.6231(c)–4 through 301.6231(c)–8          Par. 44a. Section 301.6231(c)–4T is
arose treated as nonpartnership items.          shall not apply with respect to partnership   removed.
   (2) Time and place of making election.       items arising in a partnership taxable year     Par. 45. Section 301.6231(c)–5 is
The election shall be made by filing a          if, as of the date on which those items       added to read as follows:
statement with the Internal Revenue Ser-        would otherwise begin to be treated as non-
                                                partnership items under that provision—       § 301.6231(c)–5 Criminal investigations.
vice office that mailed the notice of sus-
pension. The statement may be filed at             (1) A notice of final partnership admin-      (a) In general. The treatment of items
any time—                                       istrative adjustment with respect to those    as partnership items with respect to a part-
   (i) After the date which is one year after   items has been mailed to the tax matters      ner under criminal investigation for viola-
the date on which the partnership return        partner; and                                  tion of the internal revenue laws relating
was filed for the partnership taxable year         (2) Either—                                to income tax will interfere with the effec-
in which the items at issue arose; and             (i) The period during which an action      tive and efficient enforcement of the inter-
   (ii) Before the date on which the Inter-     with respect to that final partnership ad-    nal revenue laws. Accordingly, partner-
nal Revenue Service mails to the tax mat-       ministrative adjustment may be brought        ship items of such a partner arising in any
ters partner the notice of final partnership    under section 6226 has expired and no         partnership taxable year ending on or be-
administrative adjustment for the partner-      such action has been brought; or              fore the last day of the latest taxable year
ship taxable year in which the items at            (ii) The decision of the court in an ac-   of the partner to which the criminal inves-
issue arose. For purposes of this para-         tion brought under section 6226 with re-      tigation relates shall be treated as nonpart-
graph (d)(2), a partnership return filed be-    spect to that final partnership administra-   nership items as of the date on which the
fore the last day prescribed by law for its     tive adjustment has become final.             partner is notified that the partner is the
filing (determined without regard to ex-           (b) Effective date. This section is ap-    subject of a criminal investigation and
tensions) shall be treated as filed on the      plicable to partnership taxable years be-     written notification is sent by the Internal
last day.                                       ginning on or after October 4, 2001. For      Revenue Service that the partner’s part-
   (3) Contents of the statement. The           years beginning prior to October 4, 2001,     nership items shall be treated as nonpart-
statement shall—                                see § 301.6231(c)–3T contained in 26          nership items. The partnership items of a
   (i) Be clearly identified as an election     CFR part 1, revised April 1, 2001.            partner who is notified that the partner is
to have partnership items treated as non-       § 301.6231(c)–3T [Removed]                    the subject of a criminal investigation
partnership items because of notification                                                     shall not be treated as nonpartnership
of suspension of action on a refund claim;        Par. 43a. Section 301.6231(c)–3T is         items under this section unless and until
   (ii) Identify the partnership by name,       removed.                                      such partner is sent written notification
address, and taxpayer identification num-         Par. 44. Section 301.6231(c)–4 is           from the Internal Revenue Service of such
ber;                                            added to read as follows:                     treatment.

2001–43 I.R.B.                                                    365                                              October 22, 2001
   (b) Effective date. This section is ap-       due in the bankruptcy proceeding shall be      § 301.6231(c)–8T [Removed]
plicable to partnership taxable years be-        treated as nonpartnership items as of the
ginning on or after October 4, 2001. For         date the petition naming the partner as          Par. 48a. Section 301.6231(c)–8T is
years beginning prior to October 4, 2001,        debtor is filed in bankruptcy.                 removed.
see § 301.6231(c)–5T contained in 26                (b) Receivership. The treatment of            Par. 49. Section 301.6231(d)–1 is
CFR part 1, revised April 1, 2001.               items as partnership items with respect to     added to read as follows:
                                                 a partner for whom a receiver has been
§ 301.6231(c)–5T [Removed]                       appointed in any receivership proceeding       § 301.6231(d)–1 Time for determining
                                                 before any court of the United States or of    profits interest of partners for purposes of
  Par. 45a. Section 301.6231(c)–5T is                                                           sections 6223(b) and 6231(a)(11).
removed.                                         any State or the District of Columbia will
  Par. 46. Section 301.6231(c)–6 is              interfere with the effective and efficient
                                                                                                   (a) Partner owns interest at close of
added to read as follows:                        enforcement of the internal revenue laws.
                                                                                                year. For purposes of section 6223(b)
                                                 Accordingly, partnership items of such a
                                                                                                (relating to special rules for partnerships
§ 301.6231(c)–6 Indirect method of proof         partner arising in any partnership taxable
                                                                                                with more than 100 partners) and section
of income.                                       year ending on or before the last day of
                                                                                                6231(a)(11) (relating to 5-percent
                                                 the latest taxable year of the partner with
   (a) In general. The treatment of items                                                       groups), except as otherwise provided in
                                                 respect to which the United States could
as partnership items with respect to a part-                                                    this section, the profits interest held by a
                                                 file a claim for income tax due in the re-
ner whose taxable income is determined                                                          partner, directly or indirectly through one
                                                 ceivership proceeding shall be treated as
by use of an indirect method of proof of                                                        or more pass-thru partners, in a partner-
                                                 nonpartnership items as of the date a re-
income will interfere with the effective                                                        ship (the source partnership) to which
                                                 ceiver is appointed in any receivership
and efficient enforcement of the internal                                                       subchapter C of chapter 63 of the Internal
                                                 proceeding before any court of the United
revenue laws. Accordingly, partnership                                                          Revenue Code applies shall be deter-
                                                 States or of any State or the District of
items of such a partner arising in any part-                                                    mined at the close of the source partner-
                                                 Columbia.
nership taxable year ending on or before                                                        ship’s taxable year.
                                                    (c) Effective date. This section is ap-
the last day of the taxable year of the part-                                                      (b) Partner does not own interest at
                                                 plicable to partnership taxable years be-
ner for which a deficiency notice based                                                         close of year. If the entire direct and indi-
                                                 ginning on or after October 4, 2001. For
upon an indirect method of proof of in-                                                         rect interest of a partner in a source part-
                                                 years beginning prior to October 4, 2001,
come is mailed to the partner shall be                                                          nership is terminated by virtue of a dispo-
                                                 see § 301.6231(c)–7T contained in 26
treated as nonpartnership items as of the                                                       sition by such partner of such interest (or
                                                 CFR part 1, revised April 1, 2001.
date on which that deficiency notice is                                                         by virtue of the disposition of an interest
mailed to the partner.                           § 301.6231(c)–7T [Removed]                     held by one or more pass-thru partners
   (b) Effective date. This section is ap-                                                      through which the partner holds an inter-
plicable to partnership taxable years be-          Par. 47a. Section 301.6231(c)–7T is          est), then the profits interest of such part-
ginning on or after October 4, 2001. For         removed.                                       ner in the source partnership shall be mea-
years beginning prior to October 4, 2001,          Par. 48. Section 301.6231(c)–8 is            sured as of the moment before the
see § 301.6231(c)–6T contained in 26             added to read as follows:                      disposition causing such termination. The
CFR part 1, revised April 1, 2001.                                                              preceding sentence shall not apply with
                                                 § 301.6231(c)–8 Prompt assessment.
                                                                                                respect to a termination if subsequent to
§ 301.6231(c)–6T [Removed]                          (a) In general. The treatment of items      such termination and before the close of
                                                 as partnership items with respect to a part-   the source partnership’s taxable year the
  Par. 46a. Section 301.6231(c)–6T is
                                                 ner on whose behalf a request for a            partner acquires a direct or indirect inter-
removed.
                                                 prompt assessment of tax under section         est in the source partnership.
  Par. 47. Section 301.6231(c)–7 is
                                                 6501(d) is filed will interfere with the ef-      (c) Disposition of last remaining por-
added to read as follows:
                                                 fective and efficient enforcement of the       tion of interest is disposition of entire in-
§ 301.6231(c)–7 Bankruptcy and                   internal revenue laws. Accordingly, part-      terest. If a partner (or a pass-thru partner
receivership                                     nership items of such a partner arising in     through which a partner holds an interest)
                                                 any partnership taxable year ending with       makes several partial dispositions of an
   (a) Bankruptcy. The treatment of items        or within any taxable year of the partner      interest in a source partnership during a
as partnership items with respect to a part-     with respect to which a request for a          taxable year of the source partnership,
ner named as a debtor in a bankruptcy pro-       prompt assessment of tax is filed shall be     paragraph (b) of this section will apply
ceeding will interfere with the effective        treated as nonpartnership items as of the      with respect to the disposition which
and efficient enforcement of the internal        date that the request is filed.                causes a termination of the partner’s en-
revenue laws. Accordingly, partnership              (b) Effective date. This section is ap-     tire direct and indirect interest in the
items of such a partner arising in any part-     plicable to partnership taxable years be-      source partnership.
nership taxable year ending on or before         ginning on or after October 4, 2001. For          (d) No profits interest in certain cases.
the last day of the latest taxable year of the   years beginning prior to October 4, 2001,      If—
partner with respect to which the United         see § 301.6231(c)–8T contained in 26              (1) The interest of a partner in a part-
States could file a claim for income tax         CFR part 1, revised April 1, 2001.             nership is entirely disposed of before the

October 22, 2001                                                    366                                                2001–43 I.R.B.
close of the taxable year of the partner-                  § 301.6231(d)–1T [Removed]                     see § 301.6231(e)–2T contained in 26
ship; and                                                                                                 CFR part 1, revised April 1, 2001.
   (2) No items of the partnership for that                  Par. 49a. Section 301.6231(d)–1T is
taxable year are required to be taken into                 removed.                                       § 301.6231(e)–2T [Removed]
account by the partner, then that partner                    Par. 50. Section 301.6231(e)–1 is
                                                           added to read as follows:                        Par. 51a. Section 301.6231(e)–2T is
has no profits interest in the partnership                                                                removed.
for that taxable year.                                     § 301.6231(e)–1 Effect of a                      Par. 52. Section 301.6231(f)–1 is
   (e) Examples. The provisions of this                    determination with respect to a                added to read as follows:
section may be illustrated by the follow-                  nonpartnership item on the determination
ing examples. Assume in all examples                       of a partnership item.                         § 301.6231(f)–1 Disallowance of losses
that there have been no reacquisitions                                                                    and credits in certain cases.
prior to the close of the source partner-                     (a) In general. The determination of
ship’s taxable year. The examples are as                   an item after it has become a nonpartner-         (a) Application of section. This section
follows:                                                   ship item with respect to a partner is not     applies if—
    Example 1. B holds an interest in partnership P        controlling in the determination of that          (1) A partnership, whether domestic or
through T, a pass-thru partner. P uses a fiscal year
                                                           item with respect to other partners. Thus,     foreign, that is required to file a return
ending June 30 as P’s taxable year; B and T use the                                                       under section 6031 for a taxable year fails
calendar year as the taxable year. As of the close of      for example, the determination by a court
                                                           in a separate proceeding relating to a         to file the return within the time pre-
P’s taxable year ending June 30, 2002, T holds an
interest in P and B holds an interest in P through T.      partner that a certain partnership expen-      scribed; and
The profits interest held by B in P through T for that     diture was deductible does not bind either        (2) At any time after the close of that
year is determined as of June 30, 2002.
                                                           the Internal Revenue Service or the other      taxable year, either—
    Example 2. Assume the same facts as in Example                                                           (i) The tax matters partner of that part-
1, except that B sold the entire interest that B held in   partners in a later partnership or other
                                                           proceeding.                                    nership resides outside the United States;
P through T on November 5, 2001. The profits inter-
est held by B in P through T for P’s taxable year end-        (b) Effective date. This section is ap-     or
ing June 30, 2002, is determined as of the moment          plicable to partnership taxable years be-         (ii) The books and records of that part-
before the sale on November 5, 2001.
                                                           ginning on or after October 4, 2001. For       nership are maintained outside the United
    Example 3. C holds an interest in partnership P                                                       States.
through T, a pass-thru partner. C, P, and T all use the    years beginning prior to October 4, 2001,
                                                           see § 301.6231(e)–1T contained in 26              (b) Computational adjustment permit-
calendar year as the taxable year. T disposes of T’s
interest in P on June 5, 2002. The profits interest        CFR part 1, revised April 1, 2001.             ted if return is not filed after mailing of
held by C in P through T for 2002 is determined as                                                        notice. Except as otherwise provided in
of the moment before the disposition on June 5,            § 301.6231(e)–1T [Removed]                     paragraph (c) of this section, if—
2002.                                                                                                        (1) This section applies with respect to
    Example 4. Assume the same facts as in Example           Par. 50a. Section 301.6231(e)–1T is          a partnership for a partnership taxable
3, except that C sold C’s entire interest in T (and,       removed.
therefore, C’s entire interest that C held in P through                                                   year;
                                                             Par. 51. Section 301.6231(e)–2 is               (2) The Internal Revenue Service mails
T) on March 15, 2002. The profits interest held by
C in P through T for 2002 is determined as of the          added to read as follows:                      notice to a partner that the losses and
moment before the sale on March 15, 2002.                                                                 credits arising from that partnership for
    Example 5. On January 1, 2002, D held a 2 per-         § 301.6231(e)–2 Judicial decision not a
                                                           bar to certain adjustments.                    that year will be disallowed to that partner
cent profits interest in partnership P. Both D and P
use the calendar year as the taxable year. On August                                                      unless the partnership files a return for
1, 2002, D transfers three-fourths of D’s profits             (a) In general. A court decision with       that year within 60 days after the date on
interest in P to E. On September 1, 2002, D sells D’s      respect to a partner’s income tax liability    which the notice is mailed; and
remaining .5 percent profits interest in P to F. For       attributable to nonpartnership items shall        (3) The partnership fails to file a return
purposes of sections 6223(b) and 6231(a)(11), D had
                                                           not be a bar to further proceedings with       for that year within that 60-day period,
a .5 percent profits interest in P for 2002.
    Example 6. Assume the same facts as in Example         respect to that partner’s income tax liabil-   the Internal Revenue Service may, with-
5, except that on January 1, 2002, D also held a 1         ity if that partner’s partnership items be-    out conducting a partnership-level pro-
percent profits interest in partnership P through T, a     come nonpartnership items after the            ceeding, mail a notice of computational
pass-thru partner which also uses the calendar year        appropriate time to include such nonpart-      adjustment to that partner to reflect the
as the taxable year. In addition to the sale to E on
                                                           nership items in the earlier court proceed-    disallowance of any loss (including a cap-
August 1, 2002, D sold a portion of D’s interest in T
on December 1, 2002, such that after the sale, D held      ing has passed. Thus, the Internal Rev-        ital loss) or credit arising from that part-
a .2 percent profits interest in P through T. D made       enue Service could issue a later               nership for that year.
no other transfers of interests in either P or T. For      deficiency notice for the same taxable            (c) Restriction on notices under para-
purposes of sections 6223(b) and 6231(a)(11), D had        year with respect to that partner or that      graph (b) of this section. Neither the no-
a .7 percent profits interest in P for 2002.
                                                           partner could bring a refund suit with re-     tice referred to in paragraph (b)(2) of this
   (f) Effective date. This section is ap-                 spect to those items that have become          section nor the notice of computational
plicable to partnership taxable years be-                  nonpartnership items.                          adjustment referred to in paragraph (b) of
ginning on or after October 4, 2001. For                      (b) Effective date. This section is ap-     this section may be mailed on a day on
years beginning prior to October 4, 2001,                  plicable to partnership taxable years be-      which—
see § 301.6231(d)–1T contained in 26                       ginning on or after October 4, 2001. For          (1) The tax matters partner of the partner-
CFR part 1, revised April 1, 2001.                         years beginning prior to October 4, 2001,      ship resides within the United States; and

2001–43 I.R.B.                                                                367                                              October 22, 2001
   (2) The books and records of the partner-       spect to all items of the entity that would         Par. 54. The authority for Part 602 con-
ship are maintained within the United              be partnership items, as defined in section      tinues to read as follows:
States. Thus, if this section applies with re-     6231(a)(3) and the regulations thereunder,          Authority: 26 U.S.C.7805.
spect to a partnership for a taxable year          if such entity had been a partnership in            Par. 55. Section 602.101, paragraph (b)
solely because the tax matters partner of that     such taxable year (including, for example,       is amended by removing the entries for
partnership resided outside the United             any amounts taxable to an entity deter-          “301.6222(a)–2T”, “301.6222(b)–1T”,
States for a period after the close of that tax-   mined to be an association taxable as a          “301.6222(b)–2T”, “301.6222(b)–3T”,
able year and the tax matters partner later        corporation). For example, a final deter-        “301.6227(b)–1T”, and adding the fol-
takes up residence within the United States,       mination under subchapter C that an en-          lowing entries to the table in numerical
no notice may be mailed under paragraph            tity that filed a partnership return is an as-   order:
(b) of this section while the tax matters part-    sociation taxable as a corporation will
ner resides within the United States.              serve as a basis for a computational ad-         § 602.101 OMB Control numbers.
   (d) No disallowance in certain circum-          justment reflecting the disallowance of          *****
stances. If the person to whom the notice          any loss or credit claimed by a purported         (b) * * *
referred to in paragraph (b)(2) of this sec-       partner with respect to that entity.
tion is mailed establishes to the satisfac-           (b) Partnership return filed but no en-       CFR part or section
tion of the Internal Revenue Service—              tity found to exist— Paragraph (a) of this       where identified                  Current OMB
   (1) That the losses and credits arising         section shall apply where a partnership re-      and described                     control No.
from the partnership for the year are              turn is filed for a taxable year but it is de-
proper; and                                        termined that there is no entity for such        * * * * *
   (2) That the partner has made a good            taxable year. For purposes of applying           301.6222(a)–2 . . . . . . . . . . . 1545–0790
faith effort to have the partnership file the      paragraph (a) of this section, the partner-      301.6222(b)–1 . . . . . . . . . . . 1545–0790
required return; the Internal Revenue Ser-         ship return shall be treated as if it were       301.6222(b)–2 . . . . . . . . . . . 1545–0790
vice may allow the losses and credits in           filed by an entity. However, any final           301.6222(b)–3 . . . . . . . . . . . 1545–0790
whole or in part.                                  partnership administrative adjustment or         301.6223(b)–1 . . . . . . . . . . . 1545–0790
   (e) Effective date. This section is ap-         judicial determination resulting from a          301.6223(c)–1 . . . . . . . . . . . 1545–0790
plicable to partnership taxable years be-          proceeding under subchapter C with re-           301.6223(e)–2 . . . . . . . . . . . 1545–0790
ginning on or after October 4, 2001. For           spect to such taxable year may also in-          301.6223(g)–1 . . . . . . . . . . . 1545–0790
years beginning prior to October 4, 2001,          clude a determination that there is no en-       301.6223(h)–1 . . . . . . . . . . . 1545–0790
see § 301.6231(f)–1T contained in 26               tity for such taxable year.                      301.6224(b)–1 . . . . . . . . . . . 1545–0790
CFR part 1, revised April 1, 2001.                    (c) Exceptions. Paragraph (a) of this         301.6224(c)–1 . . . . . . . . . . . 1545–0790
                                                   section shall not apply to—                      301.6224(c)–3 . . . . . . . . . . . 1545–0790
§ 301.6231(f)–1T [Removed]                            (1) Entities for any taxable year in          301.6227(c)–1 . . . . . . . . . . . 1545–0790
                                                   which such entity would be excepted              301.6227(d)–1 . . . . . . . . . . . 1545–0790
   Par. 52a. Section 301.6231(f)–1T is re-
                                                   from the provisions of subchapter C of the       301.6229(b)–2 . . . . . . . . . . . 1545–0790
moved.
                                                   Internal Revenue Code under section              301.6230(b)–1 . . . . . . . . . . . 1545–0790
   Par. 53. Section 301.6233–1 is added
                                                   6231(a)(1)(B) and the regulations there-         301.6230(e)–1 . . . . . . . . . . . 1545–0790
to read as follows:
                                                   under (relating to the exception for small       301.6231(a)(1)–1 . . . . . . . . . 1545–0790
§ 301.6233–1 Extension to entities filing          partnerships) if such entity were a part-        * * * * *
partnership returns.                               nership for such taxable year; and
                                                      (2) Entities for any taxable year for         301.6231(c)–1 . . . . . . . . . . . 1545–0790
   (a) Entities filing a partnership return.       which a partnership return was filed for         301.6231(c)–2 . . . . . . . . . . . 1545–0790
Except as provided in paragraph (c)(1) of          the sole purpose of making the election
this section, the provisions of subchapter                                                          * * * * *
                                                   described in section 761(a).
C of chapter 63 of the Internal Revenue               (d) Effective dates. This section is ap-
Code (subchapter C) and the regulations                                                                                        Robert E. Wenzel,
                                                   plicable to partnership taxable years be-                                Deputy Commissioner
thereunder shall apply with respect to any         ginning on or after October 4, 2001. For
taxable year of an entity for which such                                                                             of Internal Revenue Service.
                                                   years beginning prior to October 4, 2001,
entity files a partnership return as well as       see § 301.6233–1T contained in 26 CFR            Approved September 20, 2001.
to such entity’s items for that taxable year       part 1, revised April 1, 2001.
and to any person holding an interest in                                                                                     Mark Weinberger,
such entity at any time during that taxable        § 301.6233–1T [Removed]                                  Assistant Secretary of the Treasury.
year. Any final partnership administrative
                                                                                                    (Filed by the Office of the Federal Register on Octo-
adjustment or judicial determination re-            Par. 53a. Section 301.6233–1T is re-
                                                                                                    ber 3, 2001, 8:45 a.m., and published in the issue of
sulting from a proceeding under subchap-           moved.                                           the Federal Register for October 4, 2001, 66 F.R.
ter C with respect to such taxable year                                                             50541)
may include a determination that the en-           PART 602 — OMB CONTROL
tity is not a partnership for such taxable         NUMBERS UNDER THE
year as well as determinations with re-            PAPERWORK REDUCTION ACT

October 22, 2001                                                       368                                                     2001–43 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest Rate                interest rates used to calculate current lia-      The average yield on the 30-year
Update                                        bility for the purpose of the full funding      Treasury Constant Maturities for
                                              limitation of § 412(c)(7) of the Internal       September 2001 is 5.48 percent.
Notice 2001–65                                Revenue Code as amended by the                     The following rates were determined
                                              Omnibus Budget Reconciliation Act of            for the plan years beginning in the month
   Notice 88–73 provides guidelines for       1987 and as further amended by the              shown below.
determining the weighted average interest     Uruguay Round Agreements Act, Pub. L.
rate and the resulting permissible range of   103–465 (GATT).

                                                                                         90% to 105%             90% to 110%
                                                            Weighted                      Permissible             Permissible
Month                        Year                           Average                         Range                   Range

October                     2001                               5.76                       5.18 to 6.05            5.18 to 6.34


Drafting Information                          Special Industries), the Associate Chief        § 631(b) applies, and (2) an S corporation
                                              Counsel (Procedure and Administration),         holds coal or domestic iron ore property
  The principal author of this notice is      and the Division Counsel/Associate Chief        on the date it converts from a C corpora-
Todd Newman of the Employee Plans,            Counsel (Tax Exempt and Government              tion to an S corporation (or acquires coal
Tax Exempt and Government Entities            Entities) relating to issues on which the       or domestic iron ore property from a C
Division. For further information regard-     Internal Revenue Service will not issue         corporation in a transaction to which
ing this notice, please call Mr. Newman at    letter rulings or determination letters.        § 1374(d)(8) applies) and during the
(202) 283-9702 (not a toll-free number).         .02 Section 5 of Rev. Proc. 2001–3 sets      recognition period recognizes gain or loss
                                              forth those areas under extensive study in      on the disposal of the coal or iron ore
                                              which letter rulings or determination let-      under a contract to which § 631(c) applies.
26 CFR 601.201: Rulings and determination
letters.                                      ters will not be issued until the Service
                                              resolves the issue through publication of a     SECTION 3. PROCEDURE
Rev. Proc. 2001–51                            revenue ruling, revenue procedure, or oth-        Rev. Proc. 2001–3 is modified by delet-
                                              erwise.                                         ing section 5.06.
SECTION 1. PURPOSE AND NATURE                    Section 5.06 of Rev. Proc. 2001–3 pro-
OF CHANGE                                     vides as follows:                               SECTION 4. EFFECT ON OTHER
                                                 Section 1374.—Tax Imposed on Certain         DOCUMENTS
   .01 The purpose of this revenue proce-     Built-in Gains — The tax consequences
dure is to modify Rev. Proc. 2001–3           under § 1374 in the following situations:         Rev. Proc. 2001–3 is modified.
(2001–1 I.R.B. 111) by removing section       (1) an S corporation holds timber property      SECTION 5. EFFECTIVE DATE
5.06 from the No-Rule list. Section 5.06      on the date it converts from a C corpora-
concerns the application of § 1374 of the     tion to an S corporation (or acquires tim-         This revenue procedure is effective
Internal Revenue Code to timber, coal and     ber property from a C corporation in a          October 9, 2001, the date of its release to
domestic iron ore transactions.               transaction to which § 1374(d)(8) applies)      the public.
                                              and during the recognition period (a) cuts
SECTION 2. BACKGROUND                         the timber and sells resulting wood prod-       DRAFTING INFORMATION
   .01 Rev. Proc. 2001–3 sets forth those     ucts (including any unfinished or finished        The principal author of this revenue
provisions of the Internal Revenue Code       products derived, manufactured, or pro-         procedure is Cristian P. Silva of the Office
under the jurisdiction of the Associate       duced from such wood products) in a             of Associate Chief Counsel (Corporate).
Chief Counsel (Corporate), the Associate      transaction to which § 631 does not apply,      For further information about this revenue
Chief Counsel (Financial Institutions &       (b) recognizes gain or loss on cutting the      procedure, please contact Mr. Silva at
Products), the Associate Chief Counsel        timber pursuant to a § 631(a) election, or      (202) 622-7750 (not a toll-free call).
(Income Tax & Accounting), the                (c) recognizes gain or loss on the disposal
Associate Chief Counsel (Passthroughs &       of timber under a contract to which




2001–43 I.R.B.                                                   369                                              October 22, 2001
Part IV. Items of General Interest
Notice of Proposed Rulemaking                SUPPLEMENTARY INFORMATION:                     so in a written agreement or if a divorce or
and Notice of Public Hearing                                                                separation agreement requires such treat-
                                             Paperwork Reduction Act                        ment. This information must be retained
Constructive Transfers and                      The collection of information contained     and is required for the spouses or former
Transfers of Property to a Third             in this notice of proposed rulemaking has      spouses to report properly the tax conse-
Party on Behalf of a Spouse                  been submitted to the Office of                quences of the redemption. The likely
                                             Management and Budget for review in            respondents are individuals.
REG–107151–00                                accordance with the Paperwork Reduction           Estimated total annual reporting and/or
                                             Act of 1995 (44 U.S.C. 3507(d)).               recordkeeping burden: 500 hours.
AGENCY: Internal Revenue Service
                                             Comments on the collection of informa-            Estimated average annual burden hours
(IRS), Treasury.
                                             tion should be sent to the Office of           per respondent and/or recordkeeper: 30
ACTION: Notice of proposed rulemaking        Management and Budget, Attn: Desk              minutes.
and notice of public hearing.                Officer for the Department of the                 Estimated number of respondents
                                             Treasury, Office of Information and            and/or recordkeepers: 1,000
SUMMARY: This document contains                                                                Estimated annual frequency of respons-
proposed regulations under section 1041      Regulatory Affairs, Washington, DC
                                             20503, with copies to the Internal             es: On occasion
of the Internal Revenue Code relating to                                                       An agency may not conduct or sponsor,
the tax treatment of certain redemptions,    Revenue Service, Attn: IRS Reports
                                             Clearance Officer, W:CAR:MP:FP:S,              and a person is not required to respond to,
during marriage or incident to divorce, of                                                  a collection of information unless it dis-
stock owned by a spouse or former            Washington, DC 20224. Comments on
                                             the collection of information should be        plays a valid control number assigned by
spouse. This document also provides                                                         the Office of Management and Budget.
notice of a public hearing on the proposed   received by October 2, 2001. Comments
                                             are specifically requested concerning:            Books or records relating to a collec-
regulations.                                                                                tion of information must be retained as
                                                Whether the proposed collection of
DATES: Written comments must be              information is necessary for the proper        long as their contents may become mater-
received by November 1, 2001. Requests       performance of the functions of the            ial in the administration of any internal
to speak and outlines of topics to be dis-   Internal Revenue Service, including            revenue law. Generally, tax returns and
cussed at the public hearing scheduled for   whether the information will have practi-      tax return information are confidential, as
Friday, December 14, 2001, must be           cal utility;                                   required by 26 U.S.C. 6103.
received by November 23, 2001.                  The accuracy of the estimated burden        Background
ADDRESSES: Send submissions to:              associated with the proposed collection of
CC:ITA:RU (REG–107151–00), room              information (see below);                          Section 1041 was added to the Internal
5226, Internal Revenue Service, POB 7604,       How the quality, utility, and clarity of    Revenue Code by section 421 of the Tax
Ben Franklin Station, Washington, DC         the information to be collected may be         Reform Act of 1984 (1984 Act), Public
20044. Submissions may be hand delivered     enhanced;                                      Law 98–369. Section 1041(a) provides
between the hours of 8 a.m. and 5 p.m. to       How the burden of complying with the        that no gain or loss will be recognized on
CC:ITA:RU (REG–107151–00), Courier’s         proposed collection of information may         a transfer of property from an individual
Desk, Internal Revenue Service, 1111         be minimized, including through the            to (or in trust for the benefit of) a spouse
Constitution Avenue NW, Washington, DC.      application of automated collection tech-      or former spouse if the transfer is incident
Alternatively, taxpayers may submit com-     niques or other forms of information tech-     to a divorce. Under section 1041(b), for
                                             nology; and                                    purposes of subtitle A, the transferee is
ments electronically via the Internet by
                                                Estimates of capital or start-up costs      treated as having acquired the property by
selecting the “Tax Regs” option on the IRS
                                             and costs of operation, maintenance, and       gift from the transferor with a carryover
Home Page, or by submitting comments
                                             purchase of services to provide informa-       basis from the transferor.
directly to the IRS Internet site at
                                             tion.                                             The House Report accompanying the
http://www.irs.gov/tax_regs/regslist.html.
                                                The collection of information in this       1984 Act states:
The public hearing will be held in the
                                             proposed regulation is in § 1.1041–2(c) of             The current rules governing trans-
Auditorium, Internal Revenue Build-
                                             these regulations. Section 1.1041–2(c)            fers of property between spouses or
ing, 1111 Constitution Avenue NW,
                                             permits spouses or former spouses to treat        former spouses incident to divorce have
Washington, DC.
                                             a redemption of stock of one spouse (the          not worked well and have led to much
FOR FURTHER INFORMATION CON-                 first spouse) as a transfer of that stock to      controversy and litigation. Often the
TACT: Concerning the proposed regula-        the other spouse (the second spouse) in           rules have proved a trap for the unwary
tions, Edward C. Schwartz (202) 622-         exchange for the redemption proceeds and          ....
4960; concerning submissions and the         a redemption of the stock from the second              Furthermore, in divorce cases, the
hearing, Guy Traynor (202) 622-7180          spouse in exchange for the redemption             government often gets whipsawed.
(not toll-free numbers).                     proceeds if they reflect their intent to do       The transferor will not report any gain

October 22, 2001                                                370                                               2001–43 I.R.B.
   on the transfer, while the recipient         spouse to a third party that is on behalf of     the redemption was on behalf of the hus-
   spouse, when he or she sells, is entitled    the other spouse or former spouse (non-          band and, therefore, was not taxable to the
   under [United States v. Davis, 370 U.S.      transferor spouse) if: (i) the transfer to the   wife, because it found that the husband
   65 (1962)] to compute his or her gain        third party is required by the divorce or        had an obligation under the property set-
   or loss by reference to a basis equal to     separation instrument; (ii) the transfer to      tlement to purchase the wife’s stock and
   the fair market value of the property at     the third party is pursuant to the written       the husband was benefitted by the
   the time received.                           request of the nontransferor spouse; or          redemption. The Ninth Circuit did not
         The committee believes that to         (iii) the transferor spouse receives from        address the tax treatment of the husband,
   correct these problems and make the          the nontransferor spouse a written consent       although it implied that the husband might
   tax laws as unintrusive as possible with     or ratification of the transfer to the third     be taxable on the redemption.
   respect to relations between spouses,        party. If Q&A-9 applies, a direct transfer          The Tax Court in Arnes addressed
   the tax laws governing transfers be-         of property to a third party is treated first    whether the husband was taxable on the
   tween spouses and between former             as a transfer to the nontransferor spouse in     redemption. The Tax Court stated that the
   spouses should be changed. . . .             a transaction governed by section 1041           question was whether the husband had a
         The bill provides that the transfer    and then as an immediate transfer by the         constructive dividend; that is, whether he
   of property to a spouse incident to a di-    nontransferor spouse to the third party in       had a “primary and unconditional obliga-
   vorce will be treated, for income tax        a transaction not governed by section            tion” to purchase the stock. The court
   purposes, in the same manner as a gift.      1041.                                            concluded that the husband did not have a
   Gain (including recapture income) or             Q&A-9 has provided spouses and for-          primary and unconditional obligation to
   loss will not be recognized to the trans-    mer spouses with the ability to shift            purchase the wife’s stock and, therefore,
   feror, and the transferee will receive the   between themselves the tax consequences          the redemption of the wife’s stock did not
   property at the transferor’s basis . . . .   of a sale of property outside the marital        result in a constructive dividend to the
   Thus, uniform Federal income tax con-        unit. However, the questions of what             husband. This conclusion, the court stat-
   sequences will apply to these transfers      standard should be applied for purposes of       ed, was supported by the IRS’s position in
   notwithstanding that the property may        determining whether a transfer of proper-        Rev. Rul. 69–608 (1969–2 C.B. 43). Rev.
   be subject to differing state property       ty is, or is not, “on behalf of” the non-        Rul. 69–608 holds that a corporation’s
   laws.                                        transferor spouse for purposes of section        redemption of its stock from a sharehold-
H. R. Rep. No. 432, 98th Cong., 2d Sess.,       1041, and whether the same standard              er (the first shareholder) results in a con-
Part 2, at 1491–92 (1984) (House Report).       should be applied for purposes of deter-         structive distribution to another share-
   By enacting the carryover basis rules in     mining the tax treatment of the transferor       holder (the second shareholder) if the
section 1041(b), Congress has, in essence,      spouse and the nontransferor spouse              redemption is in satisfaction of the second
provided spouses with a mechanism for           under provisions of the Internal Revenue         shareholder’s primary and unconditional
determining between themselves which            Code other than section 1041, have               obligation to purchase the first sharehold-
one will pay tax upon the disposition of        become the source of much confusion and          er’s stock. The majority opinion of the
property outside the marital unit. For          litigation in the context of certain stock       Tax Court in Arnes expressly declined to
example, assume Spouse A owns appreci-          redemptions. For instance, the United            opine as to whether the “on behalf of”
ated property that he or she wishes to sell     States Court of Appeals for the Ninth            standard of Q&A-9 is the same as the
to a third party. The spouses may agree         Circuit in Arnes v. United States, 981 F.2d      “primary and unconditional obligation”
that Spouse A will sell the property to the     456 (9th Cir. 1992) (regarding the tax           standard applicable to constructive distri-
third party and recognize the gain. Any         treatment of the transferor spouse), and         butions.
subsequent transfer from Spouse A to            the Tax Court in Arnes v. Commissioner,             The uncertainty has persisted in subse-
Spouse B of the sales proceeds will be          102 T.C. 522 (1994) (regarding the tax           quent cases. In Read v. Commissioner,
nontaxable under section 1041. In the           treatment of the nontransferor spouse),          114 T.C. 14 (2000), the Tax Court reject-
alternative, the spouses may agree that         applied different standards to determine         ed equating the “primary and uncondi-
Spouse A will first transfer the property to    the tax treatment of the transferor spouse       tional obligation” standard with the “on
Spouse B. This transfer is nontaxable           and the nontransferor spouse, respective-        behalf of” standard in Q&A-9 for purpos-
under section 1041, with Spouse B taking        ly, in the context of a redemption of stock      es of determining the tax consequences of
a carryover basis in the transferred prop-      owned by the transferor spouse.                  a stock redemption to the transferor
erty. Spouse B will then recognize the          Consequently, neither spouse was taxed           spouse. The Tax Court concluded that the
gain or loss on the sale of the property to     on the redemption proceeds, a result that        appropriate standard for determining
the third party because a sale to a third       Congress clearly sought to avoid in enact-       whether a transfer of property to a third
party is not covered by section 1041. In        ing section 1041. See House Report at            party by a transferor spouse was on behalf
this latter scenario, the tax consequences      1491.                                            of the nontransferor spouse under Q&A-9
of the sale are shifted to Spouse B.                In the Arnes cases, a husband and wife       was whether the transferor spouse was
   Under § 1.1041–1T(c), Q&A-9, of the          owned all the stock of a corporation. The        acting “as the representative of” or “in the
Temporary Income Tax Regulations                divorce instrument required the wife to          interest of” the nontransferor spouse or
(Q&A-9), section 1041 will apply to a           tender her stock to the corporation for          whether the transfer satisfied a liability or
transfer of property by the transferor          redemption. The Ninth Circuit held that          an obligation of the nontransferor spouse.

2001–43 I.R.B.                                                      371                                               October 22, 2001
See also Blatt v. Commissioner, 102 T.C.        redeeming corporation in exchange for          exchange for the stock and then to be
77 (1994).                                      the redemption proceeds from the               transferred by the nontransferor spouse to
   Because of these inconsistent stan-          redeeming corporation are determined           the transferor spouse. The special rule
dards, the regulations must be amended to       under applicable provisions of the Internal    will apply if a divorce or separation
provide greater certainty in determining        Revenue Code (other than section 1041)         instrument, or a written agreement
which spouse will be taxed on certain           as if such transfers had actually occurred.    between the transferor spouse and the
stock redemptions occurring during mar-            Where applicable law does not treat a       nontransferor spouse, requires the trans-
riage or incident to divorce.                   transferor spouse’s receipt of property in     feror spouse and the nontransferor spouse
                                                respect of stock redeemed as resulting in a    to file their Federal income tax returns in
Explanation of Provisions                       constructive distribution to the nontrans-     a manner that reflects that the transferor
   The proposed regulations apply where,        feror spouse, the form of the stock            spouse transferred the redeemed stock to
under current law, the “primary and             redemption is respected. In other words,       the nontransferor spouse in exchange for
unconditional obligation” standard applic-      the transferor spouse and the redeeming        the redemption proceeds and the corpora-
able to constructive distributions governs      corporation are respected as parties to the    tion redeemed the stock from the non-
the tax consequences to one spouse or for-      redemption transaction, and thus the           transferor spouse in exchange for the
mer spouse of a redemption of stock             transferor spouse, not the nontransferor       redemption proceeds. Such divorce or
owned by the other spouse or former             spouse, is treated as a party to the redemp-   separation instrument must be effective,
spouse. Accordingly, the proposed regu-         tion.                                          or the written agreement must be execut-
lations provide that they apply only where         The approach of the proposed regula-        ed by both spouses or former spouses,
the nontransferor spouse owns stock of          tions recognizes that applicable tax law       prior to the date on which the nontransfer-
the redeeming corporation either immedi-        currently imposes the primary and uncon-       or spouse files such spouse’s first timely
ately before or immediately after the stock     ditional obligation standard, which has its    filed Federal income tax return for the
redemption.                                     origins in well-established case law           year that includes the date of the redemp-
   The proposed regulations provide that,       including Wall v. United States, 164 F.2d      tion, but no later than the date such return
if a corporation redeems stock owned by a       462 (4th Cir. 1947), and Sullivan v. United    is due (including extensions). The special
transferor spouse, and the transferor           States, 363 F.2d 724 (8th Cir. 1966), for      rule is provided to give spouses and for-
spouse’s receipt of property in respect of      determining whether a shareholder has          mer spouses a means of ensuring the
such stock is treated, under applicable tax     received a constructive distribution. The      application of those Federal income tax
law, as resulting in a constructive distribu-   proposed regulations are designed to           consequences that would have resulted
tion to the nontransferor spouse, then the      remove inconsistencies caused by the           had applicable tax law treated the trans-
stock redeemed is deemed first to be            simultaneous potential application of the      feror spouse’s stock redemption as result-
transferred by the transferor spouse to the     on behalf of standard of Q&A-9 for one         ing in a constructive distribution to the
nontransferor spouse and then to be trans-      spouse and the primary and unconditional       nontransferor spouse.
ferred by the nontransferor spouse to the       obligation standard of the case law for the
                                                other spouse. Thus, for example, if the        Proposed Effective Date
redeeming corporation. Section 1041
applies to the deemed transfer of the stock     rules of the proposed regulations had             The proposed regulations are applica-
by the transferor spouse to the nontrans-       applied in the Arnes case, because the         ble to redemptions of stock on or after the
feror spouse, provided the requirements of      husband did not have a primary and             date the regulations in this section are
section 1041 are otherwise satisfied with       unconditional obligation to purchase the       published as final regulations, except for
respect to such deemed transfer. Section        wife’s stock, the redemption would have        redemptions of stock that are pursuant to
1041 does not apply to the deemed trans-        been taxed in accordance with its form         instruments in effect before the date the
fer of stock from the nontransferor spouse      with the result that the wife would have       regulations in this section are published as
to the redeeming corporation. Any prop-         incurred the tax consequences of the           final regulations. For redemptions of
erty actually received by the transferor        redemption.                                    stock before the date the regulations in
spouse from the redeeming corporation in           The proposed regulations provide a          this section are published as final regula-
respect of the redeemed stock is deemed         special rule that permits spouses and for-     tions and redemptions of stock that are
first to be transferred by the redeeming        mer spouses to treat a redemption of the       pursuant to instruments in effect before
corporation to the nontransferor spouse in      transferor spouse’s stock as a deemed          the date the regulations in this section are
exchange for the stock in a transaction to      transfer of the redeemed stock by the          published as final regulations, see
which section 1041 does not apply, and          transferor spouse to the nontransferor         § 1.1041–1T(c), A-9. However, these reg-
then to be transferred by the nontransferor     spouse and then a deemed transfer of the       ulations will be applicable to redemptions
spouse to the transferor spouse in a trans-     redeemed stock by the nontransferor            described in the preceding sentence if the
action to which section 1041 applies, pro-      spouse to the redeeming corporation, and       spouses or former spouses execute a writ-
vided the requirements of section 1041          to treat any property actually received by     ten agreement on or after August 3, 2001,
are otherwise satisfied with respect to         the transferor spouse from the redeeming       that satisfies the requirements of para-
such deemed transfer. The tax conse-            corporation in respect of the redeemed         graph (c) of these regulations with respect
quences of the deemed transfer of stock         stock as first transferred by the redeeming    to such redemption.
from the nontransferor spouse to the            corporation to the nontransferor spouse in

October 22, 2001                                                   372                                               2001–43 I.R.B.
Special Analysis                                   The rules of 26 CFR 601.601(a)(3)           (transferor spouse), and the transferor
                                                apply to the hearing.                          spouse’s receipt of property in respect of
   It has been determined that this notice         Persons that wish to present oral com-      such redeemed stock is treated, under
of proposed rulemaking is not a signifi-        ments at the hearing must submit timely        applicable tax law, as resulting in a con-
cant regulatory action as defined in            written or electronic comments and must        structive distribution to the other spouse or
Executive Order 12866. Therefore, a reg-        submit an outline of the topics to be dis-     former spouse (nontransferor spouse),
ulatory assessment is not required. It has      cussed and the time to be devoted to each      then the stock redeemed shall be deemed
also been determined that section 553(b)        topic (preferably a signed original and        first to be transferred by the transferor
of the Administrative Procedure Act (5          eight (8) copies) by November 23, 2001.        spouse to the nontransferor spouse and
U.S.C. chapter 5) does not apply to these          A period of 10 minutes will be allotted     then to be transferred by the nontransferor
regulations, and because the regulations        to each person for making comments.            spouse to the redeeming corporation. Any
do not impose a collection of information          An agenda showing the scheduling of         property actually received by the transfer-
on small entities, a Regulatory Flexibility     the speakers will be prepared after the        or spouse from the redeeming corporation
Analysis is not required. Pursuant to sec-      deadline for receiving outlines has passed.    in respect of the redeemed stock shall be
tion 7805(f) of the Internal Revenue            Copies of the agenda will be available free    deemed first to be transferred by the
Code, this notice of proposed rulemaking        of charge at the hearing.                      redeeming corporation to the nontransfer-
will be submitted to the Chief Counsel                                                         or spouse in exchange for the redeemed
for Advocacy of the Small Business              Drafting Information                           stock and then to be transferred by the
Administration for comment on its impact                                                       nontransferor spouse to the transferor
on small business.                                 The principal author of these regula-
                                                tions is Edward C. Schwartz of the Office      spouse.
Comments and Public Hearing                     of the Associate Chief Counsel (Income            (2) Redemptions of stock not resulting
                                                Tax and Accounting). However, other            in constructive distributions. Notwith-
   Before these proposed regulations are        personnel from the IRS and Treasury            standing Q&A-9 of § 1.1041–1T(c), if a
adopted as final regulations, consideration     Department participated in their develop-      corporation redeems stock owned by the
will be given to any written comments (a        ment.                                          transferor spouse, and the transferor
signed original and eight (8) copies) and                     * * * * *                        spouse’s receipt of property in respect of
electronic comments that are submitted                                                         such redeemed stock is not treated, under
timely to the IRS. The IRS is also inter-       Proposed Amendments to the                     applicable tax law, as resulting in a con-
ested in receiving comments regarding the       Regulations                                    structive distribution to the nontransferor
proper treatment of transfers of property                                                      spouse, then the form of the stock re-
to third parties by a spouse or former             Accordingly, 26 CFR part 1 is proposed      demption shall be respected for Federal
spouse other than transfers under these         to be amended as follows:                      income tax purposes. Therefore, the
proposed regulations that solely govern         PART 1—INCOME TAXES                            transferor spouse and the redeeming cor-
certain redemptions of stock owned by a                                                        poration will be respected as engaging in
spouse or former spouse. Further, com-             Paragraph 1. The authority citation for     a redemption transaction to which the
ments are specifically requested concern-       part 1 continues to read in part as follows:   nontransferor spouse is not a party.
ing the effective date provisions in the           Authority: 26 U.S.C. 7805 * * *                (b) Tax consequences — (1) Transfers
proposed regulations. All comments will            Par. 2. In § 1.1041–1T, paragraph (c) is    described in paragraph (a)(1). The tax
be available for public inspection and          amended by adding a sentence at the end        consequences of each deemed transfer
copying.                                        of A-9 to read as follows:                     described in paragraph (a)(1) of this sec-
   A public hearing has been scheduled for                                                     tion are determined under applicable pro-
December 14, 2001, at 10:00 a.m. in the         § 1.1041–1T Treatment of transfers of          visions of the Internal Revenue Code as if
Auditorium, Internal Revenue Building,          property between spouses or incident to        the parties had actually made such trans-
1111 Constitution Avenue, NW, Washing-          divorce (temporary).                           fers. Accordingly, section 1041 applies to
ton, DC. Due to building security proce-        *****                                          any deemed transfer of the stock and
dures, visitors must enter at the 10th Street      (c) * * *                                   redemption proceeds between the trans-
entrance, located between Constitution             A-9: * * * This A-9 shall not apply to      feror spouse and the nontransferor spouse,
and Pennsylvania Avenues, NW. In addi-          transfers to which § 1.1041–2 applies.         provided the requirements of section 1041
tion, all visitors must present photo identi-   *****                                          are otherwise satisfied with respect to
fication to enter the building. Because of         Par. 3. Section 1.1041–2 is added to        such deemed transfer. Section 1041, how-
access restrictions, visitors will not be ad-   read as follows:                               ever, will not apply to any deemed trans-
mitted beyond the immediate entrance                                                           fer of stock by the nontransferor spouse to
area more than 15 minutes before the            § 1.1041–2 Certain redemptions of stock.       the redeeming corporation in exchange
hearing starts. For information about hav-                                                     for the redemption proceeds. See section
ing your name placed on the building ac-           (a) In general — (1) Redemptions of         302 for rules relating to the tax conse-
cess list to attend the hearing, see the        stock resulting in constructive distribu-      quences of certain corporate redemptions.
“FOR FURTHER INFORMATION CON-                   tions.    Notwithstanding Q&A-9 of                (2) Transfers described in paragraph
TACT” section of this preamble.                 § 1.1041–1T(c), if a corporation redeems       (a)(2). Section 1041 will not apply to any
                                                stock owned by a spouse or former spouse

2001–43 I.R.B.                                                     373                                              October 22, 2001
of the transfers described in paragraph                      Example 2. Assume the same facts as Example 1,          that satisfies the requirements of para-
(a)(2) of this section. See section 302 for              except that the divorce instrument requires A to sell       graph (c) of this section with respect to
                                                         A’s shares to Corporation X in exchange for a note.
rules relating to the tax consequences of                B guarantees Corporation X’s payment of the note.
                                                                                                                     such redemption.
certain stock redemptions.                               Assume that, under applicable tax law, B does not
   (c) Special rule. Notwithstanding                     have a primary and unconditional obligation to pur-
                                                                                                                                                 Robert E. Wenzel,
applicable tax law, a transferor spouse’s                chase A’s stock. Also assume that the special rule of                                Deputy Commissioner
receipt of property in respect of redeemed               paragraph (c) of this section does not apply to the                                   of Internal Revenue.
                                                         transfer of stock and redemption proceeds in con-
stock will be treated as resulting in a con-             nection with the redemption transaction. Under              (Filed by the Office of the Federal Register on Au-
structive distribution to the nontransferor              applicable tax law, the stock redemption does not           gust 2, 2001, 8:45 a.m., and published in the issue of
spouse for purposes of paragraph (a)(1) of               result in a constructive distribution to B, because B       the Federal Register for August 3, 2001, 66 F.R.
this section if a divorce or separation                  does not have a primary and unconditional obliga-           40659)
instrument, or a written agreement                       tion to purchase A’s stock. Paragraph (a)(1) of this
                                                         section does not apply to the transfers of stock and
between the transferor spouse and the                    redemption proceeds in connection with the redemp-
nontransferor spouse, requires the trans-                tion transaction. Accordingly, under paragraphs             Disaster Relief for Issuers of
feror spouse and the nontransferor spouse                (a)(2) and (b)(2) of this section, the tax conse-           Tax-Exempt Bonds Affected by
to file their Federal income tax returns in              quences of the redemption will be determined in             the September 11, 2001,
a manner that reflects that the transferor               accordance with its form as a redemption of A’s
                                                         shares by Corporation X. See section 302.
                                                                                                                     Terrorist Attack
spouse transferred the redeemed stock to                     Example 3. Assume the same facts as Example 2,
the nontransferor spouse in exchange for                 except that the divorce instrument provides as fol-         Announcement 2001–101
the redemption proceeds and the corpora-                 lows: “A and B agree that A’s Federal income tax
tion redeemed the stock from the non-                    return for the year that includes the date of the           PURPOSE
transferor spouse in exchange for the                    redemption will reflect that A transferred A’s shares
                                                         of Corporation X to B in exchange for the redemp-              The purpose of this announcement is to
redemption proceeds. Such divorce or                     tion proceeds of $100x and B’s Federal income tax           inform issuers of tax-exempt bonds that,
separation instrument must be effective,                 return for such year will reflect that Corporation X        effective immediately, the Internal
or written agreement must be executed by                 redeemed such shares from B in exchange for such            Revenue Service will put into effect pro-
both spouses or former spouses, prior to                 proceeds.” By virtue of the special rule of paragraph
                                                                                                                     cedures to provide relief to issuers affect-
the date on which the nontransferor                      (c) of this section, the redemption is treated as result-
                                                         ing in a constructive distribution to B. Accordingly,       ed by the September 11, 2001, Terrorist
spouse files such spouse’s first timely                  A will be treated as transferring A’s stock of              Attack.
filed Federal income tax return for the                  Corporation X to B in a transfer to which section
year that includes the date of the stock                 1041 applies (assuming the requirements of section          BACKGROUND
redemption, but no later than the date such              1041 are otherwise satisfied). B will be treated as
                                                         transferring the Corporation X stock B is deemed to            In connection with the September 11,
return is due (including extensions).
                                                         have received from A to Corporation X in exchange           2001, Terrorist Attack, the President
   (d) Limited scope. Paragraphs (a) and                 for $100x in an exchange to which section 1041 does         issued federal disaster declarations with
(c) of this section shall apply only to stock            not apply and sections 302(d) and 301 apply, and B
                                                                                                                     respect to certain counties and may issue
redemptions where, either immediately                    will be treated as transferring the $100x to A in a
                                                         transfer to which section 1041 applies.                     additional declarations with respect to
before or immediately after the stock
                                                            (f) Effective date. Except as otherwise                  other counties (such counties are collec-
redemption, the nontransferor spouse
                                                         provided in this paragraph, this section is                 tively referred to herein as, the “covered
owns directly stock of the redeeming cor-
                                                         applicable to redemptions of stock on or                    counties”).
poration.
                                                         after the date these regulations are pub-                      As a consequence of the September 11,
   (e) Examples. The provisions of this
                                                         lished as final regulations in the Federal                  2001, Terrorist Attack, an affected issuer
section may be illustrated by the follow-
                                                         Register, except for redemptions of stock                   (as defined below), may not be able to
ing examples:
   Example 1. Corporation X has 100 shares out-          that are pursuant to instruments in effect                  comply with certain requirements of sec-
standing. A and B each own 50 shares. A and B            before the date these regulations are pub-                  tion 103 and related provisions of the
divorce. The divorce instrument requires B to pur-
                                                         lished as final regulations in the Federal                  Internal Revenue Code, including, but not
chase A’s shares, and A to sell A’s shares to B, in                                                                  limited to, the requirements set forth in
exchange for $100x. Corporation X redeems A’s            Register.      For redemptions of stock
                                                         before the date these regulations are pub-                  sections 148(f) and 149(e) of the Code,
shares for $100x. Assume that, under applicable tax
law, the stock redemption results in a constructive      lished as final regulations in the Federal                  with respect to certain of its bond issues.
distribution to B. Paragraph (a)(1) of this section      Register and redemptions of stock that
applies to the transfers of stock and redemption pro-                                                                PROCEDURES FOR REQUESTING
                                                         are pursuant to instruments in effect                       RELIEF
ceeds in connection with the redemption transaction.
Accordingly, A will be treated as transferring A’s       before the date these regulations are pub-
stock of Corporation X to B in a transfer to which       lished as final regulations in the Federal                    (a) An affected issuer is an issuer that
section 1041 applies (assuming the requirements of       Register, see § 1.1041–1T(c), A-9.                          meets one or more of the following:
section 1041 are otherwise satisfied). B will be         However, these regulations will be applic-                       (i) It is located in one of the cov-
treated as transferring the Corporation X stock B is
                                                         able to redemptions described in the pre-                             ered counties;
deemed to have received from A to Corporation X in
exchange for $100x in an exchange to which section       ceding sentence of this paragraph (f) if the                     (ii) It is not located in any of the
1041 does not apply and sections 302(d) and 301          spouses or former spouses execute a writ-                              covered counties, but its
apply, and B will be treated as transferring the $100x   ten agreement on or after August 3, 2001,                              records necessary to meet a fil-
to A in a transfer to which section 1041 applies.

October 22, 2001                                                                  374                                                            2001–43 I.R.B.
             ing or paying deadline for the     also be granted under appropriate cir-       tributions for a plan year made by an
             issue are maintained in one of     cumstances for affected issuers (for         employer by the end of the 8 1/2 month
             the covered counties;              example, affected issuers unable to          period following the end of such plan
      (iii) The facilities financed with the    redeem their current refunded issue          year are deemed to have been made on
            proceeds of the issue are lo-       within 90 days of issuance of the current    the last day of the plan year.
            cated in one of the covered         refunding issue). An affected issuer may        Section 6058 of the Code and § 104 of
            counties;                           request relief by contacting the Tax         ERISA require plan administrators to
      (iv) The conduit borrower for the         Exempt Bonds, Outreach, Planning and         file an annual return/report of employee
            issue is located in one of the      Review (“TEB OPR”) function of Tax           benefit plan within a specified period of
            covered counties;                   Exempt/Government Entities at (202)          time after the end of the plan year. The
      (v) The counsel to the issuer or the      283-9798, contact person: Cliff Gannett.     annual return/report of employee benefit
            conduit borrower, or bond                                                        plan is Form 5500 and Form 5500–EZ
            counsel for the issue, is located   DRAFTING INFORMATION                         (hereinafter Form 5500). For defined
            in one of the covered counties;        The principal author of this announce-    benefit pension plans subject to the min-
      (vi) The professional on whom the         ment is Sunita Lough of Tax Exempt           imum funding standard, § 6059 of the
            issuer relies for compliance        Bonds Outreach, Planning and Review of       Code requires that a periodic report of
            with the relevant provision of      the Office of the Director, Tax Exempt       the actuary be filed with the annual
            the Code is located in one of the   Bonds, Tax Exempt/Government Entities.       return. Under § 301.6059–1 of the
            covered counties. For example,      For further information regarding this an-   Procedure and Administration Regula-
            the issuer may need to rely on      nouncement or comments as to how addi-       tions, the periodic report is the Schedule
            one or more of the following        tional relief may be provided to affected    B, which must be signed by an enrolled
            persons in order to comply with     issuers, contact Sunita Lough at (202)       actuary. In order to properly complete
            the rebate requirement of sec-      283-9774 (not a toll-free call).             the Schedule B, the enrolled actuary
            tion 148(f): the bond trustee, a                                                 must know whether a contribution for a
            financial advisor or a rebate                                                    plan year was made within the period
            consultant.                                                                      specified by § 412(c)(10) of the Code
                                                Filing of Certain Forms 5500
   (b) With respect to the requirements                                                      and § 302(c)(10) of ERISA.
under sections 149(e) and 148(f), an            Announcement 2001–103                           Under section 502(c)(2) of ERISA, a
affected issuer has an additional 6 months                                                   penalty of up to $1,100 a day may be
plus 120 days to file Form 8038, Form              The Internal Revenue Service (IRS),       assessed for each day a plan administra-
8038-G, Form 8038-GC, or Form 8038-T            the Department of Labor’s Pension and        tor fails or refuses to file a complete and
for an issue for which such form is other-      Welfare      Benefits     Administration     accurate annual report and accompany-
wise required to be filed in accordance         (PWBA), and the Pension Benefit              ing schedules. Similarly, § 6652(e) of
with an original due date that occurs on or     Guaranty Corporation (PBGC) provide          the Code imposes a penalty of $25 a day
after September 11, 2001, and on or             relief from certain penalties relating to    (up to $15,000) for not filing returns for
before November 30, 2001. In the case of        Forms 5500 for defined benefit and           certain deferred compensation plans.
a Form 8038-T, the Service will not             money purchase pension plans that are        Section 6692 of the Code imposes a
impose a penalty, including any interest        required to be filed on or before October    penalty of $1,000 for not filing an actu-
portion thereof, under section 148 of the       15, 2001. This announcement also             arial report described in § 6059. Under
Code, on rebate payments, yield reduction       includes PBGC’s statement of relief          § 301.6692–1(a) of the regulations, a
payments and penalties in lieu of rebate        from penalties relating to premiums,         failure to provide a material item of
that are originally due on or after             reporting and disclosure, and certifica-     information is considered as a failure to
September 11, 2001, and on or before            tions.                                       file an actuarial report.
November 30, 2001, provided such pay-                                                           Because of the disruption of the finan-
                                                Background
ments are made within 6 months and 120                                                       cial markets caused by the events of
days of the original due date of the pay-          Section 412(a) of the Internal            September 11, 2001, many employers
ment. For computation purposes, such            Revenue Code (Code) and § 302(a) of          have stated they were not able to make
payments will be treated as paid on the         the Employee Retirement Income               required contributions to their pension
last day of the computation or spending         Security Act of 1974 (ERISA) provide         plans on or before September 15, 2001,
period to which they relate.                    that a plan meets the minimum funding        to satisfy the minimum funding stan-
   (c) When filing a form described in          standards of the Code and ERISA for a        dards.
subsection (b) above, the affected issuer       plan year if the plan does not have an
                                                                                             Grant of Relief
should add the following designation in         accumulated funding deficiency as of
red ink at the top of the form,                 the end of the plan year. Section              The IRS, the PWBA, and the PBGC
“September 11, 2001 – Terrorist Attack,         412(c)(10) of the Code and § 302(c)(10)      provide the following relief. In the case
See Announcement 2001–101.”                     of ERISA provide that, for purposes of       of a defined benefit or money purchase
   (d) In addition to the relief granted in     satisfying the minimum funding require-      pension plan with a plan year ending on
subsection (b) above, other relief may          ments of the Code and ERISA, any con-        or after December 27, 2000, and on or

2001–43 I.R.B.                                                    375                                            October 22, 2001
before January 8, 2001, for which a Form       GUST1 opinion letters by December 31,               Foundations Status of Certain
5500 is required to be filed on or before      2000. Recently, the Service completed               Organizations
October 15, 2001, plan administrators          revisions to pertinent sections of the List-
and plan sponsors will not be treated as       ing of Required Modifications and Infor-            Announcement 2001–105
failing to file a complete and accurate        mation Package (LRM) for both defined                  The following organizations have
return/report under § 6058 of the Code or      contribution and defined benefit plans.             failed to establish or have been unable to
§ 104 of ERISA, nor will enrolled actu-        The revisions to the LRMs are posted to             maintain their status as public charities
aries be treated as failing to file an actu-   the Employee Plans Internet address at              or as operating foundations. Accord-
arial report that satisfies the requirements   www.irs.gov/ep.                                     ingly, grantors and contributors may not,
of § 6059(b) of the Code, solely because          Generally, an employer who, by the end           after this date, rely on previous rulings
contributions made on or before                of the 2001 plan year (December 31, 2001,           or designations in the Cumulative List of
September 24, 2001, are included on line       for calendar-year plans), either adopts or          Organizations (Publication 78), or on
3 of Schedule B of Form 5500 (showing          certifies its intent to adopt a timely submit-      the presumption arising from the filing
the actual date of payment of the contri-      ted M&P plan or volume submitter speci-             of notices under section 508(b) of the
bution) and line 6(b) of Schedule R of         men plan will have until the later of De-           Code. This listing does not indicate that
Form 5500.                                     cember 31, 2002, or 12 months after the             the organizations have lost their status
   In addition, the PBGC provides the          date of the last opinion or advisory letter is-     as organizations described in section
following relief with respect to any plan      sued to the M&P plan sponsor or volume              501(c)(3), eligible to receive deductible
with a plan year ending on or after            submitter practitioner to adopt the GUST-           contributions.
December 27, 2000, and on or before            approved plan. An M&P plan or volume                   Former Public Charities. The follow-
January 8, 2001. The PBGC will not             submitter specimen plan is timely submit-           ing organizations (which have been
assess any penalties for a failure to pay      ted if an application for a GUST opinion or         treated as organizations that are not pri-
PBGC premiums in a timely manner or a          advisory letter for the plan was filed by De-       vate foundations described in section
failure to meet a PBGC reporting or dis-       cember 31, 2000. An employer who does               509(a) of the Code) are now classified as
closure requirement, nor will it treat a       not so adopt or certify its intent to adopt a       private foundations:
certification as failing to be a valid and     timely submitted M&P plan or volume sub-
correct certification, solely because con-     mitter specimen plan must amend its plan            4T Ministry, Inc., San Jose, CA
tributions made on or before September         for GUST by the end of the 2001 plan year.          75 Lyerly Residents Council,
24, 2001, are included in the plan’s assets       As provided in Announcement 2001–77                Incorporated, Houston, TX
for purposes of PBGC premiums or are           (2001–30 I.R.B. 83), the Service will soon          Abundant Rain, Inc., Amarillo, TX
counted for purposes of determining            publish on the IRS Web-page a list of the           African Business Group ABG,
whether any PBGC reporting or disclo-          M&P plans and volume submitter speci-                 Dallas, TX
sure requirement applies.                      men plans that were timely submitted for            A.H.S. Enterprises, Inc., Houston, TX
                                               GUST opinion and advisory letters. This             Akido of Santa Barbara, Santa Barbara, CA
Drafting Information                                                                               All Star Kids Day Care, Houston, TX
                                               list will be updated periodically to indicate
   The principal author of this announce-      the dates on which letters were issued or the       Alumni Association of Brooks Institute,
ment is James E. Holland, Jr. of the           applications were withdrawn. The Service              Santa Barbara, CA
Employee Plans, Tax Exempt and Gov-            expects to complete the issuance of GUST            American Indian Cultural & Business
ernment Entities Division. For further         opinion and advisory letters in the first             Council-AICBC, Dallas, TX
information regarding this announcement,       quarter of calendar year 2002.                      Ancient Eyes Foundation, Oxnard, CA
please contact the Employee Plans’ tax-           More information about GUST dead-                Antelope Valley Youth Football
payer assistance telephone service at          lines and filing procedures can be found in           Association, Bakersfield, CA
1-877-829-5500, between the hours of           the following IRS procedures: Rev. Proc.            Apostolate for Catholic Truth and
8:00 a.m. and 9:30 p.m. Eastern Time,          2000–20 (2000–6 I.R.B. 553), Rev. Proc.               Service, Fresno, CA
Monday through Friday (toll-free num-          2000–27 (2000–26 I.R.B. 1272), Rev.                 Applied Geography Conferences, Inc.,
ber). Mr. Holland may be reached at            Proc. 2001–6 (2001–1 I.R.B. 194), and                 Denton, TX
(202) 283-9699 (not a toll-free number).       Notice 2001–42 (2001–30 I.R.B. 70).                 Asian-American Association Clothing the
                                                                                                     Needy, Stockton, CA
                                               1 The  term “GUST” refers to:                       Asthma Watch Advocates Reinforcing
Issuance of GUST Opinion                       • The Uruguay Round Agreements Act, Pub. L. 103-      and Educating Aware, Lancaster, TX
                                                 465;                                              Athens-Henderson County
Letters for Master and                         • The Uniformed Service Employment and Reem-          Crimestoppers, Malakoff, TX
Prototype Plans                                  ployment Rights Act of 1994, Pub. L. 103-353;
                                                                                                   Beaumont Federation of Neighborhood
                                               • The Small Business Job Protection Act of 1996,
Announcement 2001–104                            Pub. L.104-188;                                     Associations, Beaumont, TX
                                               • The Taxpayer Relief Act of 1997, Pub. L.105-34;   Believers Bible Fellowship, Inc.,
   The Service has begun to issue opinion      • The Internal Revenue Service Restructuring and      Missoula, MT
letters to sponsors of master and proto-         Reform Act of 1998, Pub. L.105-206; and           Bellerive Residents Council,
type (M&P) plans who applied for               • The Community Renewal Tax Relief Act of 2000,
                                                                                                     Incorporated, Houston, TX
                                                 Pub. L.106-554 (“CRA”).

October 22, 2001                                                    376                                                 2001–43 I.R.B.
Benbrook Firefighters Association, Inc.,      Court Appointed Special Advocates of         Hazel-Lisa-McMurran Foundation,
  Benbrook, TX                                   Angelina County, Inc., Lufkin, TX            Lake Arrowhead, CA
Bi Stone Economic Strategy Team, Inc.,        Cup of Water International Ministries,       Health and Environment International,
  Teague, TX                                     Inc., Bay City, TX                           Los Altos, CA
Big Horn River Guide Company, Inc.,           Dallas Hispanic Criminal Justice             Health Education Alliance Foundation,
  Billings, MT                                   Association, Dallas, TX                      Great Falls, MT
Big Sky Gymnastic Booster Club,               Dan McPherson Memorial Foundation,           Henderson County Arts Council,
  Great Falls, MT                                Lubbock, TX                                  Athens, TX
Brain Games USA, Duncanville, TX              DARE Montana, Helena, MT                     Hispanic Festival, Inc., Florissant, MO
Brothers of West Liberty Foundation,          Deaf Educational Access Foundation,          Hope Restoration, Inc., Dallas, TX
  Inc., Liberty, TX                              Palo Alto, CA                             Houston Council on Sexual Dependency
Brownwood Area Habitat for Humanity,          Down Syndrome Partnership of Tarrant            Recovery, Houston, TX
  Inc., Brownwood, TX                            County, Inc., Fort Worth, TX              Humble Beginnings Emergency
Buenaventura Theatre Group,                   Dr. Thomas S. Mackey Educational Trust,         Assistance Center, Humble, TX
  Ventura, CA                                    Galveston, TX                             Idaho Trauma System Development
California Broadcasters Foundation,           Drum Not Guns, Inc., Dallas, TX                 Coalition, Boise, ID
  Sacramento, CA                              Eagle Fest, Emory, TX                        In Depth Ministries, Inc., Houston, TX
California Industrial Safety Council, Inc.,   Elks Park Scholarship and Charity Fund,      Indian Culture Center-Spring, Spring, TX
  Bakersfield, CA                                Merced, CA                                Indico Foundation, Fort Worth, TX
Canyon Community Center, Inc.,                Emmaus House, Hollister, CA                  Instititute for Comprehensive
  Hungry Horse, MT                            Encouragement Ministries, Inc.,                 Understanding, Sunnyvale, CA
Carmel Literacy Arts Society,                    Morgan Hills, CA                          Irving Together, Inc., Irving, TX
  Carmel, CA                                  Envirohome, Santa Cruz, CA                   Jerusalem Ministries, Inc., Houston, TX
Carmel Valley Trail & Saddle Club             Equadorables, San Jose, CA                   Jim Caruthers Ministries, Inc., Justin, TX
  Community Foundation, Inc.,                 Extended Hope Youth Program,                 J.R. Richard Foundation for the
  Salinas, CA                                    Lancaster, TX                                Homeless, Dallas, TX
Carpinteria Creek Foundation,                 Fillmore FFA Booster Club,                   Jungle Gym Daycare, Inc., Culbertson, MT
  Carpinteria, CA                                Fillmore, CA                              Kalispell Dramatic Arts Company, Inc.,
Cedar Gardens Tenant Association,             Firstplus Employees Foundation,                 Kalispell, MT
  Fresno, CA                                     Dallas, TX                                Kerman Bible Studies, Fresno, CA
Center for Attitudinal Healing Dallas,        Fish Camp Fire Volunteers Auxiliary,         Kerman Unified Education Foundation,
  Inc., Dallas, TX                               Fish Camp, CA                                Kerman, CA
Center for Hope, Inc., Tacoma, WA             Fort Worth Beat the Heat Racing,             Kern County Royals Baseball Club,
Center for Internet Mail Education and           Fort Worth, TX                               Bakersfield, CA
  Research, Santa Cruz, CA                    Foundation for the Development of            Kern Musicians Association,
Chances, Inc., Terrell, TX                       Critical Thought, Inc., Arlington, TX        Bakersfield, CA
Charles Tolbert Ministries, Inc.,             Foundation for the Missions of               Kindness Foundation, Dallas, TX
  Midland, TX                                    Coromoto, Salinas, CA                     Kingdom Stewardship Ministries, Inc.,
Chestnut Corporation, Bellaire, TX            Four Corners Community Outreach, Inc.,          Lewisville, TX
Child Support Investigations, Inc.,              Richmond, TX                              Kings Highway Ministries, Incorporated,
  Santa Ana, CA                               Friends of the Rink, Inc., Butte, MT            Fresno, CA
Childrens Advocacy Network,                   Friends of the Shelter Tobacco Valley        Knights of Care, Dallas, TX
  Mammoth Lakes, CA                              Animal Shelter, Inc., Eureka, MT          Lancelot Bell Foundation, Los Gatos, CA
Childrens Special Moments, Inc.,              Geriatric Assessment Plans, Inc.,            Laurell Akers Ministries, Inc.,
  Conroe, TX                                     Irving, TX                                   Tomball, TX
Chinese Physical Culture Plus, Inc.,          Glacier Affordable Housing Foundation,       Lighthouse Redemption Center,
  Houston, TX                                    Kalispell, MT                                Camarillo, CA
Coastline Organization of People with         Golden State Human Service Continuum,        Lisa L. Netsch Foundation,
  Aids-HIV, La Marque, TX                        Inc., New Haven, CT                          Highland Vill, TX
Connie M. Pate Memorial Scholarship           Golden State Track Club, San Jose, CA        Livingston Area Cultural Arts and
  Fund, Beaumont, TX                          Great Race Automotive Hall of Fame,             Activities Center, Inc., Livingston, MT
Core Performance Manufactory,                    Inc., Granbury, TX                        Love Foundation, Houston, TX
  Dallas, TX                                  Greater Fairfield Restoration Association,   McCampbell Institute, Monterey, CA
Corner Boxing Club, Inc., Arlington, TX          Inc., Fairfield, TX                       Midlothian Amateur Baseball
Corpus Christi Club Estates Swim Team         Hagerman Quick Response Unit, Inc.,             Association, Inc., Midlothian, TX
  Parents Club, Corpus Christi, TX               Hagerman, ID                              Ministerio Vida Y Luz, Odessa, TX
Corvallis Quick Response Unit,                Hall of Fame of Golf, Inc.,                  Miracle Healing Ministry,
  Corvallis, MT                                  The Woodlands, TX                            Stevensville, MT

2001–43 I.R.B.                                                  377                                           October 22, 2001
Montana County Fire Wardens              Philippians 413 Ministries,                 S.Y. Larrick Memorial Library
  Association, Stanford, MT                Missoulas, MT                               Foundation, Whitefish, MT
Montana Mens Foundation,                 Phoenix Data Center of Santa Clara          TCC Alumni Association, Conroe, TX
  Bozeman, MT                              County, Inc., Los Gatos, CA               Team Aztecas Sports, Dallas, TX
Montana River Action Network Fund,       Proclaim Ministries, Plano, TX              Teen Court of Hopkins County,
  Inc., Bozeman, MT                      Professional Football Referees                Sulphur Springs, TX
Montana Tribal Business Information        Association Charities, Plano, TX          Tegloma Texas Chapter, Incorporated,
  Network, Incorporated, Billings, MT    Progressive Economic Opportunity              Houston, TX
Monterey County Appointed Special          Programs for Local Efforts, Inc.,         Total Care Living Center, Houston, TX
  Advocate Association, Monterey, CA       Wichita Falls, TX                         Transplants Are Us, Missoula, MT
Monterey Peninsula-Nanao Friendship      Prop Foundation, Inc., Missoula, MT         Ulysses-Cora Cephas House of San
  Association, Marina, CA                PTA California Congress of Parents            Marcos Texas, Dallas, TX
Montessori Phoenix Projects, Inc.,         Teachers and Students, Inc.,              Unified Charities of Texas, Inc.,
  Gaviota, CA                              Morgan Hill, CA                             Austin, TX
Nash Country School, Inc.,               Red River Emmaus Community,                 United Kids Charity Group, Inc.,
  Toluca Lake, CA                          Incorporated, Wichita Falls, TX             Incline Village, NV
National Association of Presidential     Rotarun Ski Club, Inc., Hailey, ID          Vessels for Jesus Prison Missions, Inc.,
  Assistants in Higher, Washington, DC   Rural Community Health Centers,               Midlothian, TX
National Disaster Search Dog               Lemoore, CA                               Vietnam Helicopter Pilots Association,
  Foundation, Inc., Ojai, CA             San Angelo Business-Education                 Mineral Wells, TX
Network Ministries Fellowship, Inc.,       Coalition, Inc., San Angelo, TX           Vineyard Press, Kalispell, MT
  Arlington, TX                          San Benito County Athletic Foundation,      West Houston Community Center, Inc.,
New Creation Ministry, Inc.,               Hollister, CA                               Houston, TX
  Nacogdoches, TX                        Sandon Bailey Foundation, Coppell, TX       Westside Food Pantry, Patterson, CA
New Creations Recovery, Inc.,            Santa Barbara Air Fair, Inc., Goleta, CA    Wildwood Center for Walking, Inc.,
  Porterville, CA                        Santa Barbara Sister Cities Association-      Saint Paul, MN
North Grassland Wildlife Foundation,       Yalta, Santa Barbara, CA                  Wishing on the Lone Star, Inc.,
  Newman, CA                             Say No To Drugs, Dallas, TX                   Mesquite, TX
North Richland Hill Citizens Police      Seawind, Inc., Seaside, CA                  Wit Foundation for Artists, Dallas, TX
  Academy Alumni Association,            Segeh Gospel Mission, Inc.,                 Women Against Sexual Harassment,
  N. Richland Hills, TX                    San Jose, CA                                Irving, TX
North Texas Housing & Management         Sensible Solutions the Institute, Inc.,     Womens Resource Video Library,
  Corp., Plano, TX                         Missoula, MT                                Somers, MT
North Texas Select Softball,             Services for the Medically                  Youth Education Systems, Inc.,
  Southlake, TX                            Disadvantaged, Fort Worth, TX               Sand City, CA
Northern Santa Barbara County Athletic   Sexual Abuse Intervention Network of        Youth Net Ministries, Inc.,
  Roundtable, Inc., Santa Maria, CA        Dallas, Inc., Dallas, TX                    Lake Jackson, TX
Northwest Pharmacist Recovery            Shields Valley Foundation, Inc.,
  Network, Fircrest, WA                    Clyde Park, MT                               If an organization listed above sub-
Oleander & Sunset Park Association,      Sierra Scholarship Foundation, Inc.,        mits information that warrants the re-
  Bakersfield, CA                          Bishop, CA                                newal of its classification as a public
One Church One Child of North-North      Somers Volunteer Firefighters               charity or as a private operating founda-
  Central Texas and Surrounding,           Association, Inc., Somers, NY             tion, the Internal Revenue Service will
  Arlington, TX                          South Texas Prison Outreach, Inc.,          issue a ruling or determination letter
One Foundation Ministries, Inc.,           Bay City, TX                              with the revised classification as to
  Dallas, TX                             Special Family Ministries, Irving, TX       foundation status. Grantors and contrib-
Opera San Joaquin, Fresno, CA            Special Pets Incorporated, Dallas, TX       utors may thereafter rely upon such rul-
Others, Inc., Waxahachie, TX             Spruce Island Foundation,                   ing or determination letter as provided
Out of the Madness Charity, Inc.,          Sunnyvale, CA                             in section 1.509(a)–7 of the Income Tax
  Dallas, TX                             Storm Shelter Counseling for the Fissures   Regulations. It is not the practice of the
Pacific Grove Feast of Lanterns, Inc.,     of Men of Ventura County,                 Service to announce such revised classi-
  Pacific Grove, CA                        Ventura, CA                               fication of foundation status in the Inter-
Palo Pinto County A&M Club,              Structural Engineers World Congress,        nal Revenue Bulletin.
  Mineral Wells, TX                        Los Altos, CA
Paso Robles Police Activities League,    Stump Enrichment Ministry for Church
  Paso Robles, CA                          & Family, Dallas, TX
Pearl Longbines Cottage for Children,    Summitt Place, Inc., Butte, MT
  Inc., Amarillo, TX                     Sun & Star 1996, Dallas, TX

October 22, 2001                                           378                                             2001–43 I.R.B.
Definition of Terms
Revenue rulings and revenue procedures                plies to both A and B, the prior ruling is    new ruling does more than restate the
(hereinafter referred to as “rulings”)                modified because it corrects a published      substance of a prior ruling, a combination
that have an effect on previous rulings               position. (Compare with amplified and         of terms is used. For example, modified
use the following defined terms to de-                clarified, above).                            and superseded describes a situation
scribe the effect:                                       Obsoleted describes a previously pub-      where the substance of a previously pub-
   Amplified describes a situation where              lished ruling that is not considered deter-   lished ruling is being changed in part and
no change is being made in a prior pub-               minative with respect to future transac-      is continued without change in part and it
lished position, but the prior position is            tions. This term is most commonly used        is desired to restate the valid portion of
being extended to apply to a variation of             in a ruling that lists previously published   the previously published ruling in a new
the fact situation set forth therein. Thus,           rulings that are obsoleted because of         ruling that is self contained. In this case
if an earlier ruling held that a principle            changes in law or regulations. A ruling       the previously published ruling is first
applied to A, and the new ruling holds                may also be obsoleted because the sub-        modified and then, as modified, is super-
that the same principle also applies to B,            stance has been included in regulations       seded.
the earlier ruling is amplified. (Compare             subsequently adopted.                            Supplemented is used in situations in
with modified, below).                                   Revoked describes situations where the     which a list, such as a list of the names of
   Clarified is used in those instances               position in the previously published rul-     countries, is published in a ruling and
where the language in a prior ruling is               ing is not correct and the correct position   that list is expanded by adding further
being made clear because the language                 is being stated in the new ruling.            names in subsequent rulings. After the
has caused, or may cause, some confu-                    Superseded describes a situation where     original ruling has been supplemented
sion. It is not used where a position in a            the new ruling does nothing more than         several times, a new ruling may be pub-
prior ruling is being changed.                        restate the substance and situation of a      lished that includes the list in the original
   Distinguished describes a situation                previously published ruling (or rulings).     ruling and the additions, and supersedes
where a ruling mentions a previously                  Thus, the term is used to republish under     all prior rulings in the series.
published ruling and points out an essen-             the 1986 Code and regulations the same           Suspended is used in rare situations to
tial difference between them.                         position published under the 1939 Code        show that the previous published rulings
   Modified is used where the substance               and regulations. The term is also used        will not be applied pending some future
of a previously published position is                 when it is desired to republish in a single   action such as the issuance of new or
being changed. Thus, if a prior ruling                ruling a series of situations, names, etc.,   amended regulations, the outcome of
held that a principle applied to A but not            that were previously published over a pe-     cases in litigation, or the outcome of a
to B, and the new ruling holds that it ap-            riod of time in separate rulings. If the      Service study.

Abbreviations                                         E.O.—Executive Order.
                                                      ER—Employer.
                                                                                                    PHC—Personal Holding Company.
                                                                                                    PO—Possession of the U.S.
The following abbreviations in current use and for-   ERISA—Employee Retirement Income Security     PR—Partner.
merly used will appear in material published in the
                                                      Act.                                          PRS—Partnership.
Bulletin.
                                                      EX—Executor.                                  PTE—Prohibited Transaction Exemption.
A—Individual.                                         F—Fiduciary.                                  Pub. L.—Public Law.
Acq.—Acquiescence.                                    FC—Foreign Country.                           REIT—Real Estate Investment Trust.
B—Individual.                                         FICA—Federal Insurance Contributions Act.     Rev. Proc.—Revenue Procedure.
BE—Beneficiary.                                       FISC—Foreign International Sales Company.
                                                                                                    Rev. Rul.—Revenue Ruling.
BK—Bank.                                              FPH—Foreign Personal Holding Company.
                                                                                                    S—Subsidiary.
B.T.A.—Board of Tax Appeals.                          F.R.—Federal Register.
                                                                                                    S.P.R.—Statements of Procedural Rules.
C—Individual.                                         FUTA—Federal Unemployment Tax Act.
                                                                                                    Stat.—Statutes at Large.
C.B.—Cumulative Bulletin.                             FX—Foreign Corporation.
                                                                                                    T—Target Corporation.
CFR—Code of Federal Regulations.                      G.C.M.—Chief Counsel’s Memorandum.
                                                                                                    T.C.—Tax Court.
CI—City.                                              GE—Grantee.
COOP—Cooperative.                                                                                   T.D.—Treasury Decision.
                                                      GP—General Partner.
Ct.D.—Court Decision.                                                                               TFE—Transferee.
                                                      GR—Grantor.
CY—County.                                                                                          TFR—Transferor.
                                                      IC—Insurance Company.
D—Decedent.                                           I.R.B.—Internal Revenue Bulletin.             T.I.R.—Technical Information Release.
DC—Dummy Corporation.                                 LE—Lessee.                                    TP—Taxpayer.
DE—Donee.                                             LP—Limited Partner.                           TR—Trust.
Del. Order—Delegation Order.                          LR—Lessor.                                    TT—Trustee.
DISC—Domestic International Sales Corporation.        M—Minor.                                      U.S.C.—United States Code.
DR—Donor.                                             Nonacq.—Nonacquiescence.                      X—Corporation.
E—Estate.                                             O—Organization.                               Y—Corporation.
EE—Employee.                                          P—Parent Corporation.                         Z—Corporation.

2001–43 I.R.B.                                                                 i                                               October 22, 2001
Numerical Finding List1                               Proposed Regulations:
                                                      REG–110311–98, 2001–35 I.R.B. 204
Bulletins 2001–27 through 2001–42                     REG–106917–99, 2001–27 I.R.B. 4
                                                      REG–103735–00, 2001–35 I.R.B. 204
Announcements:                                        REG–103736–00, 2001–35 I.R.B. 204
2001–69, 2001–27 I.R.B. 23                            REG–100548–01, 2001–29 I.R.B. 67
2001–70, 2001–27 I.R.B. 23                            REG–106431–01, 2001–37 I.R.B. 272
2001–71, 2001–27 I.R.B. 26
                                                      Railroad Retirement Quarterly Rates:
2001–72, 2001–28 I.R.B. 39
2001–73, 2001–28 I.R.B. 40                            2001–27, I.R.B. 1
2001–74, 2001–28 I.R.B. 40                            2001–41, I.R.B. 314
2001–75, 2001–28 I.R.B. 42
2001–76, 2001–29 I.R.B. 67                            Revenue Procedures:
2001–77, 2001–30 I.R.B. 83                            2001–39, 2001–28 I.R.B. 38
2001–78, 2001–30 I.R.B. 87                            2001–40, 2001–33 I.R.B. 130
2001–79, 2001–31 I.R.B. 97                            2001–41, 2001–33 I.R.B. 173
2001–80, 2001–31 I.R.B. 98                            2001–42, 2001–36 I.R.B. 212
2001–81, 2001–33 I.R.B. 175                           2001–43, 2001–34 I.R.B. 191
2001–82, 2001–32 I.R.B. 123                           2001–44, 2001–35 I.R.B. 203
2001–83, 2001–35 I.R.B. 205                           2001–45, 2001–37 I.R.B. 227
2001–84, 2001–35 I.R.B. 206                           2001–46, 2001–37 I.R.B. 263
2001–85, 2001–36 I.R.B. 219                           2001–47, 2001–42 I.R.B. 332
2001–86, 2001–35 I.R.B. 207                           2001–48, 2001–40 I.R.B. 308
2001–87, 2001–35 I.R.B. 208                           2001–49, 2001–39 I.R.B. 300
2001–88, 2001–36 I.R.B. 220
2001–89, 2001–38 I.R.B. 291                           Revenue Rulings:
2001–90, 2001–35 I.R.B. 208                           2001–30, 2001–29 I.R.B. 46
2001–91, 2001–36 I.R.B. 221                           2001–33, 2001–32 I.R.B. 118
2001–92, 2001–39 I.R.B. 301                           2001–34, 2001–28 I.R.B. 31
2001–94, 2001–39 I.R.B. 303                           2001–35, 2001–29 I.R.B. 59
2001–95, 2001–39 I.R.B. 303                           2001–36, 2001–32 I.R.B. 119
2001–96, 2001–41 I.R.B. 317                           2001–37, 2001–32 I.R.B. 100
2001–97, 2001–40 I.R.B. 310                           2001–38, 2001–33 I.R.B. 124
2001–98, 2001–41 I.R.B. 317                           2001–39, 2001–33 I.R.B. 125
2001–99, 2001–42 I.R.B. 340                           2001–40, 2001–38 I.R.B. 276
2001–100, 2001–41 I.R.B. 317                          2001–41, 2001–35 I.R.B. 193
2001–102, 2001–42 I.R.B. 340                          2001–42, 2001–37 I.R.B. 223
                                                      2001–43, 2001–36 I.R.B. 209
Court Decisions:                                      2001–44, 2001–37 I.R.B. 223
2070, 2001–31 I.R.B. 90                               2001–45, 2001–42 I.R.B. 323
                                                      2001–46, 2001–42 I.R.B. 321
Notices:                                              2001–47, 2001–39 I.R.B. 293
2001–39, 2001–27 I.R.B. 3                             2001–48, 2001–42 I.R.B. 324
2001–41, 2001–27 I.R.B. 2                             2001–49, 2001–41 I.R.B. 312
2001–42, 2001–30 I.R.B. 70
2001–43, 2001–30 I.R.B. 72                            Treasury Decisions:
2001–44, 2001–30 I.R.B. 77                            8947, 2001–28 I.R.B. 36
2001–45, 2001–33 I.R.B. 129                           8948, 2001–28 I.R.B. 27
2001–46, 2001–32 I.R.B. 122                           8949, 2001–28 I.R.B. 33
2001–47, 2001–36 I.R.B. 212                           8950, 2001–28 I.R.B. 34
2001–48, 2001–33 I.R.B. 130                           8951, 2001–29 I.R.B. 63
2001–49, 2001–34 I.R.B. 188                           8952, 2001–29 I.R.B. 60
2001–50, 2001–34 I.R.B. 189                           8953, 2001–29 I.R.B. 44
2001–51, 2001–34 I.R.B. 190                           8954, 2001–29 I.R.B. 47
2001–52, 2001–35 I.R.B. 203                           8955, 2001–32 I.R.B. 101
2001–53, 2001–37 I.R.B. 225                           8956, 2001–32 I.R.B. 112
2001–54, 2001–37 I.R.B. 225                           8957, 2001–33 I.R.B. 125
2001–55, 2001–39 I.R.B. 299                           8958, 2001–34 I.R.B. 183
2001–56, 2001–38 I.R.B. 277                           8959, 2001–34 I.R.B. 185
2001–57, 2001–38 I.R.B. 279                           8960, 2001–34 I.R.B. 176
2001–58, 2001–39 I.R.B. 299                           8961, 2001–35 I.R.B. 194
2001–59, 2001–41 I.R.B. 315                           8962, 2001–35 I.R.B. 201
2001–60, 2001–40 I.R.B. 304                           8963, 2001–35 I.R.B. 197
2001–61, 2001–40 I.R.B. 305                           8964, 2001–42 I.R.B. 320
2001–62, 2001–40 I.R.B. 307
2001–63, 2001–40 I.R.B. 308
2001–64, 2001–41 I.R.B. 316




1 A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–1 through 2001–26
is in Internal Revenue Bulletin 2001–27, dated July
2, 2001.

October 22, 2001                                                             ii              2001–43 I.R.B.
Finding List of Current Actions on                     Revenue Procedures—Continued:            Revenue Rulings—Continued:
Previously Published Items1                            84–84                                    78–127
                                                       Revoked by                               Modified by
Bulletins 2001–27 through 2001–42                      Rev. Proc. 2001–49, 2001–39 I.R.B. 300   Rev. Rul. 2001–40, 2001–38 I.R.B. 276
Announcements:                                         93–27                                    78–179
2000–48                                                Clarified by                             Obsoleted by
Modified by                                            Rev. Proc. 2001–43, 2001–34 I.R.B. 191   REG–106917–99, 2001–27 I.R.B. 4
Notice 2001–43, 2001–30 I.R.B. 72                      97–13                                    89–42
                                                       Modified by                              Modified and superseded by
Notices:                                               Rev. Proc. 2001–39, 2001–28 I.R.B. 38    Rev. Rul. 2001–48, 2001–42 I.R.B. 324
98–52                                                  97–19                                    90–95
Modified by                                            Modified by                              Distinguished by
Notice 2001–56, 2001–38 I.R.B. 277                     Notice 2001–62, 2001–40 I.R.B. 307       Rev. Rul. 2001–42, 2001–42 I.R.B. 321
99–41                                                  98–44                                    92–19
Modified and superseded by                             Superseded by                            Supplemented by
Notice 2001–62, 2001–40 I.R.B. 307                     Rev. Proc. 2001–40, 2001–33 I.R.B. 130   Rev. Rul. 2001–38, 2001–33 I.R.B. 124
2001–4                                                 99–27                                    97–31
Modified by                                            Superseded by                            Modified and superseded by
Notice 2001–43, 2001–30 I.R.B. 72                      Rev. Proc. 2001–42, 2001–36 I.R.B. 212   Rev. Rul. 2001–48, 2001–42 I.R.B. 324
2001–9                                                 99–49
Modified by                                                                                     Treasury Decisions:
                                                       Modified and amplified by
Notice 2001–46, 2001–32 I.R.B. 122                     Rev. Proc. 2001–46, 2001–37 I.R.B. 263   8948
2001–15                                                2000–20                                  Corrected by
Supplemented by                                        Modified by                              Ann. 2001–90, 2001–35 I.R.B. 208
Notice 2001–51, 2001–34 I.R.B. 190                     Notice 2001–42, 2001–30 I.R.B. 70
2001–42                                                2000–39
Modified by                                            Corrected by
Notice 2001–57, 2001–38 I.R.B. 279                     Ann. 2001–73, 2001–28 I.R.B. 40
                                                       Superseded by
Proposed Regulations:
                                                       Rev. Proc. 2001–47, 2001–42 I.R.B. 332
LR–97–79
                                                       2001–2
Withdrawn by
                                                       Modified by
REG–100548–01, 2001–29 I.R.B. 67
                                                       Rev. Proc. 2001–41, 2001–33 I.R.B. 173
LR–107–84
                                                       2001–6
Withdrawn by
                                                       Modified by
REG–100548–01, 2001–29 I.R.B. 67
                                                       Notice 2001–42, 2001–30 I.R.B. 70
REG–110311–98
Supplemented by                                        Revenue Rulings:
T.D. 8961, 2001–35 I.R.B. 194
                                                       57–589
REG–106917–99                                          Obsoleted by
Corrected by                                           REG–106917–99, 2001–27 I.R.B. 4
Ann. 2001–86, 2001–35 I.R.B. 207
                                                       65–316
REG–103735–00                                          Obsoleted by
Supplemented by                                        REG–106917–99, 2001–27 I.R.B. 4
T.D. 8961, 2001–35 I.R.B. 194
                                                       67–274
REG–103736–00                                          Amplified by
Supplemented by                                        Rev. Rul. 2001–46, 2001–42 I.R.B. 321
T.D. 8961, 2001–35 I.R.B. 194
                                                       68–125
REG–107186–00                                          Obsoleted by
Corrected by                                           REG–106917–99, 2001–27 I.R.B. 4
Ann. 2001–71, 2001–27 I.R.B. 26
                                                       69–563
REG–130477–00                                          Obsoleted by
Supplemented by                                        REG–106917–99, 2001–27 I.R.B. 4
Ann. 2001–82, 2001–32 I.R.B. 123
                                                       70–379
REG–130481–00                                          Obsoleted by
Supplemented by                                        Rev. Rul. 2001–39, 2001–33 I.R.B. 125
Ann. 2001–82, 2001–32 I.R.B. 123
                                                       74–326
Revenue Procedures:                                    Obsoleted by
                                                       REG–106917–99, 2001–27 I.R.B. 4
83–74
Revoked by
Rev. Proc. 2001–49, 2001–39 I.R.B. 300




1 A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2001–1 through 2001–26 is in Internal Revenue
Bulletin 2001–27, dated July 2, 2001.

2001–43 I.R.B.                                                               iii                                      October 22, 2001
                                  INTERNAL REVENUE BULLETIN
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Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.


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                            INTERNAL REVENUE BULLETIN
  If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, W:CAR:MP:FP, Washington, DC 20224.



  Internal Revenue Service
  Washington, DC 20224
  Official Business
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posted:7/22/2011
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