INCOME TAX

Notice 2000–56, page 393.This notice provides guidance under section 1032 of the Codeon which entity is treated as the grantor and owner of a grantortrust when a parent corporation contributes its stock to a rabbitrust for the benefit of the employees of a subsidiary.

Rev. Proc. 2000–42, page 394.This procedure informs taxpayers of the information they mustsubmit to request a closing agreement under section1.1503–2(g)(2)(iv)(B) of the regulations to prevent the recap-ture of dual consolidated losses (DCLs) upon the occurrence ofcertain triggering events.

Rev. Proc. 2000–44, page 409.Insurance companies; loss reserves; discounting unpaidlosses. The loss payment patterns and discount factors areset forth for the 2000 accident year. These factors will be usedfor computing discounted unpaid losses under section 846 ofthe Code.

Rev. Proc. 2000–45, page 417.Insurance companies; discounted estimated salvagerecoverable. The salvage discount factors are set forth forthe 2000 accident year. These factors will be used for com-puting estimated salvage recoverable under section 832 of theCode.

Announcement 2000–78, page 428.The Service is requesting comments on the proposed regula-tions regarding the monthly limit for transit passes and trans-portation, in a commuter highway vehicle, provided by anemployer to employees under section 132(f) of the Code.

EMPLOYEE PLANS

REG–114697–00, page 421.Nondiscrimination requirements for certain definedcontribution retirement plans. Proposed regulations wouldprescribe conditions under which certain defined contributionretirement plans (sometimes referred to as “new comparabili-ty” plans) are permitted to demonstrate compliance withapplicable nondiscrimination requirements based on plan ben-efits rather than plan contributions. A public hearing is sched-uled for January 25, 2001.

Notice 2000–55, page 393.Weighted average interest rate update. The weightedaverage interest rate for October 2000 and the resulting per-missible range of interest rates used to calculate current liabil-ity for purposes of the full funding limitation of section412(c)(7) of the Code are set forth.

TAX CONVENTIONS

Notice 2000–57, page 389.The agreement between the United States and Netherlandsidentifying U.S. and Dutch pension plans for tax treaty benefitsis set forth.

ADMINISTRATIVE

Rev. Proc. 2000–43, page 404.Ex parte communication prohibition. Guidance is providedto taxpayers and IRS employees about ex parte communica-tions during the appeals process.

Internal Revenue

bbuulllleettiinnBulletin No. 2000–43

October 23, 2000

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

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page ii.

(Continued on the next page)

October 23, 2000 2000–43 I.R.B.

ADMINISTRATIVE—continued

Announcement 2000–85, page 429.This document contains corrections to a notice of proposed rule-making (REG–108522–00, 2000–34 I.R.B 187) relating to therecognition of gain on certain transfers to certain foreign trustsand estates.

2000–43 I.R.B. October 23, 2000

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

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

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basis,and are published in the first Bulletin of the succeeding semi-annual period, respectively.

The IRS Mission

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

October 23, 2000 388 2000–43 I.R.B.

Section 832.—InsuranceCompany Taxable Income

26 CFR 1.832–4: Gross income.

The salvage discount factors are set forth for the2000 accident year. These factors will be used forcomputing estimated salvage recoverable for pur-poses of section 832 of the Code. See Rev. Proc.2000–45, page 417.

Section 846.—DiscountedUnpaid Losses Defined

26 CFR 1.846–1: Application of discount factors.

The loss payment patterns and discount factorsare set forth for the 2000 accident year. These fac-tors will be used for computing discounted unpaidlosses under section 846 of the Code. See Rev. Proc.2000–44, page 409.

26 CFR 1.846–1: Application of discount factors.

The salvage discount factors are set forth for the2000 accident year. These factors will be used forcomputing estimated salvage recoverable for pur-poses of section 832 of the Code. See Rev. Proc.2000–45, page 417.

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

2000–43 I.R.B. 389 October 23, 2000

Subpart A.—Tax Conventions

Following is a Copy of the NewsRelease Issued by International(U.S. Competent Authority) onApril 20, 2000 (IR–INT–2000–9)

Notice 2000–57

AGREEMENT IDENTIFIES U.S.AND DUTCH PENSION PLANSFOR TAX TREATY BENEFITS

Washington – The Competent Authori-ties of the The Netherlands and the UnitedStates reached a mutual agreement on thequalification of certain Dutch and U.S.pensions for treaty benefits under Article35 of the US-Netherlands Income TaxTreaty. The agreement specifies the proce-dures for claiming treaty benefits in eachcountry and the methods each country willuse to grant treaty benefits.

The agreement constitutes a MutualAgreement in accordance with the Con-vention between the Kingdom of theNetherlands and the United States ofAmerica for the avoidance of double taxa-tion and the prevention of fiscal evasionwith respect to taxes on income, signed onDecember 18, 1992, and amended by Pro-tocol signed on October 13, 1993.

The agreement is as follows:

Chapter I

Qualification for treaty benefits underarticle 35 of the 1992 Netherlands-US

income tax treaty

Questions have been raised regardingthe types of US and Netherlands residenttax exempt trusts, companies or other or-ganisations providing pension or retire-ment benefits that qualify for treaty bene-fits under article 35 of the Conventionbetween the Kingdom of the Netherlandsand the United States of America for theavoidance of double taxation and the pre-vention of fiscal evasion with respect totaxes on income, signed on 18 December1992, and amended by Protocol signed on13 October 1993 (in the following: theTreaty). In practise there are many differ-ent types of funds or plans established toprovide pension or retirement benefits andit is not always clear which of these funds

or plans fulfill the requirements of article35 of the Treaty. This issue is being dis-cussed between the Netherlands and theUS competent authorities under the mutualagreement procedure of article 29 of theTreaty, with the following initial conclu-sions.

In view of the present uncertainty it hasbeen decided to identify all the differenttypes of US and Netherlands resident taxexempt trusts, companies or other organi-sations providing pension or retirementbenefits that are considered to fall withinthe scope of article 35 of the Treaty andalso to indicate the appropriate proceduresfor filing a request for an application oftreaty benefits under said treaty provision.

In the course of the mutual agreementdiscussions it became apparent that,whereas with respect to certain types of USand Netherlands resident tax exempt trusts,companies or other organisations providingpension or retirement benefits it is beyonddoubt that they fall within the scope of arti-cle 35 of the Treaty, with respect to othertypes of US and Netherlands resident taxexempt trusts, companies or other organi-sations providing pension or retirementbenefits this is less clear. The Netherlandsand US authorities concluded that all thedifferent types of Netherlands and US resi-dent tax exempt trusts, companies or otherorganisations providing pension or retire-ment benefits mentioned in chapter II andIV of this agreement would be consideredto fall within the scope of article 35 of theTreaty.

However, in order to ensure that treatyprotection is restricted to qualifying USresident tax exempt trusts providing pen-sion or retirement benefits, the Netherlandscompetent authority would -at least for thetime being- prefer a closer monitoring ofall requests filed for an application of treatybenefits under article 35 of the Treaty.

It is understood that for the purpose ofthis publication the term “Code section”refers to sections of the US Internal Rev-enue Code and that the term “trust” in-cludes a custodial account treated as a trustfor US federal income tax purposes.

Chapter II

US resident tax exempt trusts providingpension or retirement benefits

Subject to the conditions of article 26,article 35, paragraph 2, and article 34,paragraph 4, of the Treaty:

1. a US resident tax exempt trust pro-viding pension or retirement benefitsunder a Code section 401 (a) qualifiedpension plan, profit sharing plan or stockbonus plan (including Code section 401(k) arrangements); or

2. a US resident tax exempt trust pro-viding pension or retirement benefitsunder a Code section 457(b) pension planor under a Code section 403(b) plan; or

3. a US resident tax exempt trustwhich is an Individual retirement account(Code section 408), a Roth Individual re-tirement account (Code section 408A), ora Simple retirement account, or a US resi-dent tax exempt trust which is providingpension or retirement benefits under aSimplified employee pension plan; or

4. a US resident common trust fund orgroup trust which is tax exempt underCode section 501 (a) with respect to fundsthat equitably belong to its participatingtrusts, all of which are entities mentionedunder point 1) above; or

5. a US resident common trust fund orgroup trust which is tax exempt under theInternal Revenue Code with respect tofunds that equitably belong to its partici-pating trusts, some of which are trustsother than those mentioned under point 1)above, but all of which are trusts men-tioned under point 1), 2), or 3) above, isconsidered to qualify for treaty benefitsunder article 35 of the Treaty and mayclaim application of treaty benefits withrespect to income derived from theNetherlands referred to in article 10 (divi-dends) of the Treaty. The Netherlandsdoes not apply a withholding tax on out-going interest payments as meant in arti-cle 12 of the Treaty.

However, a US resident tax exempttrust mentioned under point 2) or 3) abovewill not be considered to qualify for treatybenefits under article 35 of the Treaty inany taxable year if less than 70% of thetotal amount of the withdrawals fromsuch US trust during that year is used toprovide pension, retirement or other em-ployee benefits as meant in article 35 ofthe Treaty.

Any type of US resident tax exempttrust not mentioned above, which consid-

Part II. Treaties and Tax Legislation

October 23, 2000 390 2000–43 I.R.B.

ers itself to qualify for treaty benefitsunder article 35 of the Treaty, may presentits case to the Netherlands tax unit BPObuitenland, Heerlen (address: P.O. Box2865, 6401 DJ HEERLEN, The Nether-lands), or to the US competent authoritiesrequesting for a competent authority con-sideration under article 29 of the Treaty.

Chapter III

Appropriate procedures for filing arequest for an application of treaty

benefits in the Netherlands

The Netherlands has two methods forgranting treaty benefits for income re-ferred to in article 10 (dividends) of theTreaty, these methods being: the so-calledexemption method (in which case thetreaty rate is applied at source) and the so-called refund method.

As a general rule, the Netherlands ap-plies the exemption method when grant-ing treaty benefits in the case of Dutchsource dividend income received by a res-ident of the US, which means that treatybenefits will be granted by means of anexemption from Netherlands withholdingtax at source. In view of the Netherlandscompetent authority’s preference for acloser monitoring of all requests filed foran application of treaty benefits under ar-ticle 35 of the Treaty, a US resident taxexempt trust (including a US commontrust fund or group trust) mentioned inpoint 1) through 5) of chapter II of thispublication shall - as a general rule - berequired to use the refund method whenfiling its request for an application oftreaty benefits under article 35 of theTreaty. Only if certain conditions are ful-filled, such US resident tax exempt trustmay use the exemption method when fil-ing its request for an application of treatybenefits under article 35 of the Treaty.

The Netherlands regulations for the im-plementation of the Treaty, published inthe “Staatscourant” 5 January 1994, nr. 3and lastly amended on December 1996(“Staatscourant” 30 December 1996, nr.250), give a detailed description of theprocedures to be applied in the case of re-spectively the exemption method and therefund method.

The exemption method may be used ifthe US resident tax exempt trust request-ing treaty benefits under article 35 of theTreaty:

* has been issued a certification letter(Form 6166) by the US Internal RevenueService for the taxable year(s) in ques-tion, stating that the trust in question is atrust forming part of a pension, profitsharing, or stock bonus plan qualifiedunder Code section 401 (a) of the InternalRevenue Code (an example of a certifica-tion letter (Form 6166) is attached); or

* has been issued a so-called “qualifi-cation” certification by the competentNetherlands tax authorities, stating thatthe trust in question is a US resident taxexempt trust as described in article 35,paragraph 1, of the Treaty. Requests for a “qualification” certifica-tion may be filed with the tax unit BPObuitenland, Heerlen (address: P.O. Box2865, 6401 DJ HEERLEN, The Nether-lands).

A “qualification” certification, issuedby the competent Netherlands authorities,is in principle valid indefinitely. How-ever, a “qualification” certification willno longer be valid in the event:

*there is a material change in facts orcircumstances; or

*It is determined that the “qualifica-tion” certification was issued erroneously;or

*the US resident tax exempt trust inquestion has not claimed an application oftreaty benefits under article 35 of theTreaty for five consecutive calendaryears. Since a certification letter (Form6166) issued by the US Internal RevenueService is not valid indefinitely, a US res-ident tax exempt trust which has been is-sued a certification letter (Form 6166) bythe US Internal Revenue Service may alsofile a request for a “qualification” certifi-cate with the competent Netherlands taxauthorities.

Irrespective of the above, use of the re-fund method is mandatory in any taxableyear for a US resident tax exempt trustmentioned under point 2) or 3) of chapterII, if less than 70% of the total amount ofthe withdrawals from such US trust dur-ing that year is used to provide pension orretirement benefits.

Where assets of the pension fund(s) orpension plan(s) are held in custodial ac-counts, the amended form IB 92 USA willrequire a certification that the claim for arefund of Dutch dividend tax is filed forthe benefit of the custodial accounts inquestion.

The status of all US resident tax exempttrusts providing pension or retirement ben-efits and claiming treaty benefits under ar-ticle 35 of the Treaty may at any time besubject to verification by the competentNetherlands tax authority. If considerednecessary, use will be made of the ex-change of information procedure (article30 of the Treaty).

The Netherlands regulations for the im-plementation of the Treaty (including the“special arrangements” issued by theNetherlands competent authority in the re-lation to the US) and Form IB 92 USA will- where necessary - be amended in accor-dance with the above. A model of the“special arrangements” is published in theInfobulletin of 12 January 1999.

The new procedures will become ap-plicable beginning with dividends madepayable after 30 June 2000. The presentlyexisting procedures will remain applicablefor dividends made payable before or on30 June 2000.

Chapter IV

Netherlands resident tax exemptcompanies providing pension or

retirement benefits

Subject to the conditions of article 26,article 35, paragraph 2, and article 34,paragraph 4, of the Treaty, a Netherlandsresident tax exempt company constitutedand operated exclusively to administer orprovide benefits as meant in article 5, para-graph b), of the Netherlands corporationtax act (including a Netherlands residenttax exempt company constituted and oper-ated exclusively to administer or providebenefits under a pension plan as meant inarticle 8, paragraph 1, under f), of theNetherlands income tax act) is consideredto qualify for treaty benefits under article35 of the Treaty and may claim applicationof treaty benefits with respect to incomederived from the United States of Americareferred to in article 10 (dividends) and inarticle 12 (interest) of the Treaty.

Any type of Netherlands resident tax ex-empt company not mentioned above,which considers itself to qualify for treatybenefits under article 35 of the Treaty, maypresent its case to the United States com-petent authority, or to the Netherlandscompetent authority requesting for a com-petent authority consideration under article29 of the Treaty.

2000–43 I.R.B. 391 October 23, 2000

Chapter V

Appropriate procedures for filing arequest for an application of treaty

benefits in the United States of America

Under US tax law a Netherlands resi-dent taxpayer (including a Netherlandsresident tax exempt company referred toin article 35 of the Treaty) may file for anapplication of treaty benefits at source, ormay claim a refund of US income taxwithheld according to regulations setforth under the Internal Revenue Code.The following procedures apply to aNetherlands resident tax exempt com-pany.

A Netherlands resident tax exemptcompany described in this agreementshould claim exemption from US incometax withholding under Article 35 of the1992 Netherlands-US income tax treatyon dividends or interest income referredto in articles 10 and 12, respectively, ofthat treaty by providing a properly com-pleted IRS Form W-8BEN to the with-holding agent or payer of such income be-fore the income is paid or credited to thecompany. A company filing Form W-8BEN should cite Article 35 of the treatyon line 10 thereof, and state that it is aNetherlands resident tax exempt companydescribed in this agreement.

Notwithstanding the foregoing, untilDecember 31, 2000, and to the extent pro-vided in transition rules set forth in regu-lations under Internal Revenue Code sec-tion 1441 and Notice 99–25, 1999–20I.R.B. 75, a Netherlands resident tax ex-empt company may provide, and a with-holding agent may rely upon, other appro-priate documentation of the company’sexempt status, including, for example, aForm 1001, supplemented by a statement,or a valid Netherlands Form IB 93 USA

(certified by the tax inspector competentin the case of the Netherlands tax exemptcompany in question) stating that thecompany is a Netherlands resident tax ex-empt company described in this agree-ment.

Alternatively, the company may seek arefund of taxes withheld on such dividendor interest income by timely filing aUnited States income tax return andclaiming a refund of such taxes.

The status of all Netherlands residenttax exempt companies providing pensionor retirement benefits and claiming treatybenefits under article 35 of the Treatymay be subject to verification by the In-ternal Revenue Service. If considerednecessary, use will be made of the ex-change of information procedure (article30 of the Treaty).

A Netherlands resident tax exemptcompany as meant in article 5, paragraphb), of the Netherlands corporation tax act(including a Netherlands resident tax ex-empt company providing pension or re-tirement benefits as meant in article 8,paragraph 1, under f), of the Netherlandsincome tax act) may have the Netherlandstax authority concur in its claim of tax ex-empt status by means of a so-called article26 declaration (Form IB 93 USA), certi-fied by the tax inspector competent in thecase of the Netherlands tax exempt com-pany in question. This will not, however,preclude an audit and determination of thecompany’s substantive liability.

As noted in Article 6 of the Protocol,Article 35(2) of the Treaty provides thatdividends from a Real Estate InvestmentTrust are not eligible for Article 35 bene-fits. Article 35(2) also provides that in-come of an exempt pension trust is not ex-empt under Article 35 if it is receivedfrom a related person that is not itself anexempt pension trust. Paragraph VIII of

the Agreed Minutes to the Protocol pro-vides the understanding of the negotiatorsthat for purposes of Article 35(2), a per-son will be considered to be a “relatedperson” if more than 80 percent of thevote or value of any class of shares isowned by the person deriving the income.

Chapter VI

Tax exempt trusts, companies or otherorganisations providing other employee

benefits

In order to determine whether a clarifi-cation of the qualification under article 35of the Treaty for the various types of taxexempt trusts, companies or other organi-sations providing other employee benefitsis also considered necessary, comments orquestions regarding this issue are invitedand may be sent to to one of the followingaddresses:

Ministry of Finance of the NetherlandsDirectorate for International Tax Policyand LegislationP.O. Box 202012500 EE Den HaagThe Netherlands

Assistant Commissioner(International)attn. Tax Treaty DivisionInternal Revenue ServiceP.O. Box 23598Washington, D.C. 20024United States of America

Attachment:Form 6166 (Rev. 6–96)

October 23, 2000 392 2000–43 I.R.B.

2000–43 I.R.B. 393 October 23, 2000

Weighted Average Interest RateUpdate

Notice 2000–55

Notice 88–73 provides guidelines fordetermining the weighted average inter-est rate and the resulting permissible

range of interest rates used to calculatecurrent liability for the purpose of the fullfunding limitation of § 412(c)(7) of theInternal Revenue Code as amended bythe Omnibus Budget Reconciliation Actof 1987 and as further amended by theUruguay Round Agreements Act, Pub. L.103–465 (GATT).

The average yield on the 30-yearTreasury Constant Maturities for Oc-tober 2000 is 5.83 percent.

The following rates were deter-mined for the plan years beginning inthe month shown below.

Part III. Administrative, Procedural, and Miscellanous

90% to 105% 90% to 110%Weighted Permissible Permissible

Month Year Average Range Range

October 2000 5.95 5.35 to 6.24 5.35 to 6.54

Drafting Information

The principal author of this notice isTodd Newman of the Employee Plans,Tax Exempt and Government Entities Di-vision. For further information regardingthis notice, call the Employee Plans Actu-arial hotline, (202) 622-6076 between2:30 and 3:30 p.m. Eastern time (not atoll-free number). Mr. Newman’s numberis (202) 622-8458 (also not a toll-freenumber).

Rabbi Trusts

Notice 2000–56

I. PURPOSE

This notice provides guidance onwhich entity is treated as the grantor andowner of a grantor trust when a parentcorporation contributes its stock to a rabbitrust for the benefit of the employees of asubsidiary.

II. BACKGROUND

(i) Rabbi Trust Model Rev. Proc. 92–64, 1992–2 C.B. 422,

contains a model grantor trust for use innonqualified executive compensationarrangements that are popularly referredto as “rabbi trust” arrangements. Underthat revenue procedure, the Service willnot rule on unfunded deferred compensa-tion arrangements that use a trust otherthan the model trust, except in rare andunusual circumstances. Section 1(d) ofthe model trust document states that “Anyassets held by the Trust will be subject tothe claims of the Company’s general cred-

itors under federal and state law in theevent of Insolvency, as defined in Section3(a) herein.” In the case of a trust thatprovides benefits to employees of a sub-sidiary, it is the Service’s position thatSection 1(d) will not be satisfied unlessthe assets held by the trust are subject tothe claims of the subsidiary’s creditors(whether or not those assets are also sub-ject to the claims of the parent’s credi-tors). In this case, it has been the Ser-vice’s position that the subsidiary istreated as the grantor and owner of therabbi trust.

(ii) Final Regulations under Section1032 of the Internal Revenue Code

Section 1032 states that no gain or lossis recognized to a corporation on the re-ceipt of money or other property in ex-change for stock of the corporation. Regu-lations were recently issued under section1032 of the Internal Revenue Code (see65F.R. 31073 (May 16, 2000)). Section1.1032–3(b)(1) of these regulations pro-vides that no gain or loss is recognized onthe disposition of the issuing corporation’sstock by an acquiring entity if the require-ments set forth in Reg. § 1.1032–3(c) aremet. Section 1.1032–3(c)(2) requires,among other things, that the acquiring en-tity transfer the stock of the issuing corpo-ration to another person immediately afteracquiring the stock from the issuing corpo-ration (the “immediacy requirement”).Under the regulations, if the requirementsof Reg. § 1.1032–3(c), including the im-mediacy requirement, are met, the transac-tion is treated as if, immediately before theacquiring entity transfers the stock of theissuing corporation, the acquiring entity

purchased the issuing corporation’s stockfrom the issuing corporation for fair mar-ket value with cash contributed to the ac-quiring entity by the issuing corporation(or, if necessary, through intermediate cor-porations or partnerships). This series oftransactions is commonly referred to as the“cash purchase model.”

Rabbi trust arrangements typically donot involve an immediate transfer of stockto employees. In the case of a rabbi trustarrangement in which Parent Stock istreated for federal tax purposes as ownedby a subsidiary for a period of time beforethe Parent Stock is transferred to the em-ployees of the subsidiary, the immediacyrequirement of Reg. §1.1032–3(c)(2) willnot be satisfied when the Parent Stock istransferred from the rabbi trust to employ-ees of the subsidiary. Because the cashpurchase model of those Regulations willas a result not apply, the nonrecognitiontreatment of section 1032 will be inapplic-able in such a case, and, thus, the sub-sidiary typically will recognize gain on thetransfer of the Parent Stock from the rabbitrust to employees of the subsidiary.

III. TREATMENT OF PARENTCORPORATION AS GRANTOR OF ARABBI TRUST

The Service and Treasury have deter-mined that when a parent corporationcontributes Parent Stock to a rabbi trust toassist a subsidiary in meeting the sub-sidiary’s deferred compensation obliga-tions to its employees or serviceproviders, and the Parent Stock is bothsubject to the claims of the creditors ofthe parent corporation and subject to therequirement that any Parent Stock not

October 23, 2000 394 2000–43 I.R.B.

transferred to the subsidiary’s employeeswill revert to the parent on termination ofthe trust, then the parent corporation willbe considered the grantor and the ownerof the Parent Stock held in the trust, eventhough the Parent Stock is also subject tothe claims of the creditors of the sub-sidiary. If these conditions are satisfied,the Parent Stock (or other assets) will notbe considered transferred to the sub-sidiary until such time as they are used tosatisfy the subsidiary’s deferred compen-sation obligation to its employees or ser-vice providers, or when a claim is madeagainst the trust by a creditor of the sub-sidiary in the case of the subsidiary’s in-solvency. Thus, the immediacy require-ment of Reg. § 1.1032–3(c)(2) would besatisfied with respect to the Parent Stock.

This concept is illustrated in Example10 of Reg. § 1.1032–3(e). In the example,in Year 1, the issuing corporation, X,forms a trust which it will use to satisfydeferred compensation obligations owedby Y, X’s wholly owned subsidiary, to Y’semployees. X funds the trust with Xstock which would revert to X upon ter-mination of the trust, subject to the em-ployees’ rights to be paid the deferredcompensation. The creditors of X canreach all trust assets upon the insolvencyof X. Similarly, the creditors of Y canreach all trust assets upon the insolvencyof Y. In Year 5, the trust transfers X stockto the employees of Y in satisfaction ofthe deferred compensation obligation.The example states that X is considered tobe the grantor of the trust, and, under sec-tion 677 of the Code, X is also the ownerof the trust. Y is not considered a grantoror owner of the trust corpus at the time Xtransfers X stock to the trust. Any incomeearned by the trust would be reflected onX’s income tax return. In Year 5, whenemployees of Y receive X stock in satis-faction of the deferred compensationobligation, no gain or loss is recognizedby X or Y on the deemed disposition ofthe X stock by Y. Immediately before Y’sdeemed disposition of the X stock, Y istreated as purchasing the X stock from Xfor fair market value using cash con-tributed to Y by X. Under section 358,X’s basis in its Y stock increases by theamount of cash deemed contributed. Ac-cordingly, when employees or serviceproviders of Y receive X stock in satisfac-tion of the deferred compensation obliga-

tion, the requirements of § 1.1032–3(c)are satisfied, and no gain or loss is recog-nized by X or Y on the deemed disposi-tion of the X stock by Y.

Similarly, the parent corporation willbe treated as the grantor and owner of as-sets other than Parent Stock that are con-tributed by the parent corporation to arabbi trust if the assets are both subject tothe claims of the creditors of the parentcorporation and subject to the require-ment that any such assets not transferredto the subsidiary’s employees or serviceproviders will revert to the parent on ter-mination of the trust, even though suchassets are also subject to the claims of thecreditors of the subsidiary. The cash pur-chase model applies only to transfers ofstock by the parent corporation to thetrust. Therefore, when assets other thanParent Stock are transferred from the trustto the employees of the subsidiary, thesubsidiary is treated as receiving the otherassets from the parent corporation withthe parent’s carryover basis and the sub-sidiary will recognize gain or loss (if any)on the transfer of the assets to the sub-sidiary’s employees or service providers.

IV. MODIFICATION TO MODELTRUST UNDER REV. PROC. 92–64

The Service will rule on a request sub-mitted under Rev. Proc. 92–64 where themodel language has been modified to pro-vide that Parent Stock (or other assets)contributed by a parent corporation to arabbi trust for the benefit of employees orservice providers of a subsidiary is sub-ject to the claims of the creditors of boththe parent corporation and the subsidiary,and the remaining Parent Stock (or otherassets) contributed by the parent corpora-tion reverts to the parent corporation upontermination of the trust.

V. TRANSITION PROVISIONS FOREXISTING TRUSTS

The Service will not challenge a tax-payer’s position that no gain or loss is rec-ognized by a subsidiary upon the rabbitrust’s disposition of Parent Stock con-tributed to the rabbi trust by the parentcorporation on or before May 16, 2001,with respect to trusts in existence on orbefore June 15, 2000.

If the terms of the rabbi trust areamended to provide that assets (includingParent Stock) contributed by the parent

corporation to the rabbi trust are subjectto claims of the parent corporation’s cred-itors (in addition to being subject to theclaims of the subsidiary’s creditors) andthose assets not transferred to the sub-sidiary’s employees or service providerswill revert to the parent corporation upontermination of the rabbi trust, the Servicewill not treat such amendment as a con-structive dividend to the parent corpora-tion, provided the amendment is adoptedby May 16, 2001.

VI. EFFECT ON OTHER GUIDANCE

Rev. Proc. 92–64 will not fail to be sat-isfied if Parent Stock (or other assets)contributed by a parent corporation to arabbi trust for the benefit of employees orservice providers of a subsidiary is sub-ject to the claims of the creditors of theparent corporation and the subsidiary, andthe remaining Parent Stock (or other as-sets) contributed by the parent corpora-tion reverts to the parent corporation upontermination of the trust.

DRAFTING INFORMATION

The principal author of this notice isSusan Lennon of the Office of the Associ-ate Chief Counsel (Tax Exempt and Gov-ernment Entities). However, other per-sonnel from the Service and the TreasuryDepartment participated in its develop-ment. For further information regardingthis notice, contact Ms. Lennon at (202)622-6030 (not a toll-free telephone num-ber).

26 CFR 1.1503–2 Dual consolidated loss.26 CFR 301.7121–1 Closing agreements.

Rev. Proc. 2000–42

SECTION 1. PURPOSE

This revenue procedure informs tax-payers of the information they must sub-mit to request a closing agreement under§1.1503–2(g)(2)(iv)(B)(2)(i) to preventthe recapture of dual consolidated losses(DCLs) upon the occurrence of certaintriggering events.

Before this revenue procedure, the In-ternal Revenue Service and the Depart-ment of the Treasury had not specified indetail how taxpayers should request these

2000–43 I.R.B. 395 October 23, 2000

closing agreements. The Service andTreasury are issuing this revenue proce-dure to provide taxpayers with guidanceon the information and representationsthey should include in a §1503(d) closingagreement request and to facilitate theprocess and reduce the time necessary forthe Service to process requests.

Appendix A to this revenue procedureis a model closing agreement. The Ser-vice intends the model closing agreementto serve as an example of the format andcontents of a §1.1503–2(g)(2)(iv)(B)(2)(i)closing agreement and to aid taxpayers inunderstanding how the information re-quired by this revenue procedure will beused in the closing agreement. Taxpayersshould note, however, that the modelagreement is only an example. A tax-payer’s actual agreement could differfrom the model. Finally, Appendix B is aflow chart of the entities included in themodel closing agreement, along withnotes explaining the model agreement.

SECTION 2. BACKGROUND

The United States taxes the worldwideincome of domestic corporations. TheUnited States allows certain domestic cor-porations to file consolidated returns withother affiliated domestic corporations.When two or more domestic corporationsfile a consolidated return, losses that onecorporation incurs generally may reduceor eliminate tax on income that anothercorporation earns.

Because other countries may apply dif-ferent standards for determining the resi-dence and taxability of a corporation (e.g.,based on the management and control ofthe corporation), some domestic corpora-tions are dual resident corporations and, assuch, are also subject to the income tax ofa foreign country on their income on a res-idence basis (and not on a source basis).Foreign countries often have provisionsthat permit commonly owned entities tocombine their income and losses throughconsolidation or some other form of com-bined reporting for income tax purposes.

Prior to the Tax Reform Act of 1986, ifa dual resident corporation were a residentof a foreign country with tax laws that per-mitted the losses of the corporation to beused to offset the income of another per-son (e.g., under a consolidated return pro-vision), then the dual resident corporationcould use any losses it generated twice:

once to offset the income of affiliates resi-dent in the United States (but not abroad),and again to offset the income of its affili-ates resident only in the other country.Thus, such a dual resident corporationcould use a single economic loss to offsettwo separate items of income in two juris-dictions. Congress expressed concernsthat this dual use of a loss could result inan undue tax advantage to certain foreigninvestors that made investments in domes-tic corporations, and could create anundue incentive for certain foreign corpo-rations to acquire domestic corporationsand for domestic corporations to acquireforeign rather than domestic assets. Staffof Joint Committee on Taxation, 99th

Cong., 2nd Sess., General Explanation ofthe Tax Reform Act of 1986, at 1064 –1065 (1987). As part of the Tax ReformAct of 1986, Congress responded by en-acting §1503(d) to prevent the use ofDCLs that resulted from consolidation inmultiple jurisdictions.

The Treasury and Service issued tempo-rary regulations under §1503(d) in 1989(T.D. 8261, 1989–2 C.B. 220), and finalregulations in 1992 (T.D. 8434, 1992–2C.B. 240). The final regulations in§1.1503–2 are generally effective for tax-able years beginning on or after October 1,1992; the temporary regulations in§1.1503–2A are effective for taxable yearsbeginning after December 31, 1986, andbefore October 1, 1992. The temporaryregulations were initially designated as§1.1503–2T, but were redesignated as§1.1503–2A by the final regulations.

Section 1503(d) provides that a DCL ofa dual resident corporation shall not be al-lowed to reduce the taxable income of anyother member of the corporation’s affili-ated group for any taxable year. The termdual resident corporation includes a do-mestic corporation that is subject to the in-come tax of a foreign country on itsworldwide income or on a residence basisand a separate unit of a domestic corpora-tion (e.g., a foreign branch, an interest in apartnership, an interest in a trust, or a dis-regarded entity that a foreign countrytaxes at the entity level). SeeTreas. Reg.§1.1503–2(c)(2) – (4). This revenue pro-cedure will collectively refer to dual resi-dent corporations and separate units as“DRCs.”

The final §1503(d) regulations permit ataxpayer to elect to use a DCL of a DRC

by entering into an agreement under§1.1503–2(g)(2)(i) in which the taxpayercertifies that the DCL has not been, andwill not be, used to offset the income ofanother person under the laws of a foreigncountry. Certain subsequent events,known as “triggering events” require thetaxpayer to recapture the losses as income,including an interest charge. Treas. Reg.§§1.1503–2(g)(2)(iii) and (vii). If a tax-payer fails to comply with the §1503(d)recapture provisions upon the occurrenceof a triggering event, then the DRC (or asuccessor-in-interest) that incurred theDCL generally will not be eligible for re-lief to use any DCLs incurred in the five(5) taxable years beginning with the yearin which recapture is required. Treas.Reg. §1.1503–2(g)(2)(vii)(F)(1).

Triggering events occur when: (1) anyportion of the loss taken into account incomputing the DCL is used by any meansto offset the income of any other personfor foreign tax purposes within fifteen(15) years; (2) a DRC or domestic ownerof a separate unit ceases to be a memberof the consolidated group that filed theagreement at a time when there is a con-tinuing ability to use the DCL to offset in-come of another person for foreign taxpurposes; (3) an unaffiliated DRC or un-affiliated domestic owner of a separateunit becomes a member of a consolidatedgroup, unless there is no continuing abil-ity to use the DCL to offset income of an-other person for foreign tax purposes; (4)a DRC transfers its assets to a transfereein a transaction that results, under thelaws of a foreign country, in a carryoverof the losses, expenses, or deductions thatmake up the DCL; (5) a domestic ownerof a separate unit disposes of fifty (50)percent or more of the assets of, or its in-terest in, the separate unit at a time whenthere is a continuing ability to use theDCL to offset income of another personfor foreign tax purposes; (6) an unaffili-ated DRC or unaffiliated domestic ownerof a separate unit becomes a foreign cor-poration in a transaction that, for foreigntax purposes, is not treated as involving atransfer of assets to a new entity, unlessthere is no continuing ability to use theDCL to offset income of another personfor foreign tax purposes; or (7) the tax-payer fails to file an annual certificationrequired under §1.1503–2(g)(2)(vi)(B).Treas. Reg. §1.1503–2(g)(2)(iii)(A).

October 23, 2000 396 2000–43 I.R.B.

The final regulations provide two ex-ceptions to events described as triggeringevents, making the events not triggeringevents requiring recapture of losses andan interest charge. The first exception,under §1.1503–2(g)(2)(iv)(A), applieswhen a DRC, or its assets, is acquired byanother member of the DRC’s consoli-dated group. The second exception,under §1.1503–2(g)(2)(iv)(B), applies,provided the taxpayer enters into a clos-ing agreement, when a DRC or a domes-tic owner of a separate unit becomes dis-affiliated from its consolidated group, orwhen an unaffiliated domestic corpora-tion or new consolidated group acquiresthe DRC or its assets.

The Service is aware that as a result oftaxpayers’ ability to elect entity classifica-tion under the §7701 elective Federal taxclassification regulations that became ef-fective as of January 1, 1997 (i.e., thecheck-the-box regulations), the number ofDRCs may increase, and taxpayers maybecome subject to the §1503(d) DCL pro-visions, including the recapture provi-sions. For instance, the conversion of aforeign branch to a foreign corporationmay be treated as a triggering event underthe final §1503(d) regulations. SeeTreas.Reg. §§1.1503–2(g)(2)(iii)(A)(4) – (7)and Treas. Reg. §301.7701–3(g)(1).Therefore, this procedure is also intendedto publicize the Service’s procedures andrequirements that will prevent certain re-organization and disposition transactionsinvolving DRCs from resulting in§1503(d) recapture consequences.

SECTION 3. SCOPE

.01 General.

This section provides the conditionsthat must be satisfied for the Service toconsider requests from taxpayers for a§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement.

.02 Taxpayers Must Be InCompliance And Must FirstRequest Any Treas. Reg.§301.9100 Relief Needed.

Before requesting a closing agreementunder §1.1503–2(g)(2)(iv)(B)(2)(i), thetaxpayer should ensure that it has com-plied with the regulations issued under§1503(d), including having filed the req-

uisite agreements, elections, and certifica-tions under §1.1503–2(g)(2) (or§1.1503–2A(c)(3) or (d)(3) if the tax-payer is asking for relief under§1.1503–2A). See infra, section 3.07(which provides when the Service willconsider including in a §1.1503–2(g)(2)(iv)(B)(2)(i) closing agreement, DCLscovered by the temporary §1503(d) regu-lations). In practical terms, this meansthat the taxpayer should first request andsecure (or at least simultaneously request)any necessary relief under §301.9100 foran extension of time to make any requiredelection or application under the §1503(d)regulations. For example, a taxpayer thathas not filed the requisite agreements andelections under §1.1503–2(g)(2)(i) mustfirst request (or simultaneously request)§301.9100 relief to file the elections andagreements.

Under §§1.1503–2(g)(2)(iii)(A) and(iv)(B), a taxpayer must enter into a clos-ing agreement with the Service before thetaxpayer files its tax return for the taxableyear of a triggering event to prevent therecapture of losses and the accompanyinginterest charge. Under this revenue pro-cedure, however, a taxpayer can preventthe recapture of losses and the interestcharge if the taxpayer submits its requestfor a closing agreement by the due date ofits tax return (including extensions) forthe triggering event year and specifies onits tax return that it is requesting a§1503(d) closing agreement.

.03 Statutes Of Limitations.

The Service may request a taxpayer toexecute a consent to extend the period oflimitations for assessment of tax for thetaxable periods related to the DCLs forwhich the taxpayer has requested a clos-ing agreement.

.04 When And By Whom A ClosingAgreements May Be Executed.

Treas. Reg. §1.1503–2(g)(2)(iv)(B)(1)provides that if the requirements of§1.1503–2(g)(2)(iv)(B)(2) are met, thefollowing events will not constitute trig-gering events requiring the recapture ofDCLs: (1) an affiliated DRC or an affili-ated domestic owner becomes an unaffili-ated domestic corporation or a member ofa new consolidated group; (2) an unaffili-ated DRC or an unaffiliated domestic

owner becomes a member of a consoli-dated group; (3) assets of a DRC are ac-quired by an unaffiliated domestic corpo-ration or a member of a new consolidatedgroup; or (4) a domestic owner of a sepa-rate unit transfers its interest in the sepa-rate unit to an unaffiliated domestic cor-poration or to a member of a newconsolidated group. Treas. Reg.§1.1503–2(g)(2)(iv)(B)(2) requires(among other requirements) that the tax-payers enter into a closing agreement withthe Service which provides that the tax-payers will be jointly and severally liablefor the total amount of the recapture of theDCLs and an interest charge upon anysubsequent triggering event.

The Service may execute a closingagreement under §1.1503–2(g)(2)(iv)(B)(2)(i) and §7121 with the followingtaxpayers: (1) the consolidated group(i.e., the parent on behalf of the consoli-dated group), the unaffiliated DRC, or theunaffiliated domestic owner that filed the§1.1503–2(g)(2)(i) agreement for the rel-evant DCLs, and (2) the unaffiliated do-mestic corporation or the new consoli-dated group, provided the requirements of§1.1503–2(g)(2)(iv)(B) are satisfied.This revenue procedure will refer to thesetaxpayers as the “Taxpayer Parties.” Au-thorized officers of the Taxpayer Partiesmust sign the closing agreement (gener-ally two originals per party to the agree-ment).

.05 Taxpayers That Cannot Execute AClosing Agreement.

The Service will not execute a§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement with foreign entities/transfer-ees, individuals, or partnerships. Section1.1503–2 does not provide for closingagreements with such taxpayers.

.06 Losses Must Be DCLs.

The Service will not execute a closingagreement with taxpayers for net operat-ing losses (NOLs) that are not DCLs.Therefore, taxpayers must represent thatthe losses at issue are DCLs.

.07 Closing Agreements For LossesUnder The TemporaryRegulations.

The final regulations provide for tax-payers to enter into a §1.1503–2(g)(2)-

2000–43 I.R.B. 397 October 23, 2000

(iv)(B)(2)(i) closing agreement with theService to prevent certain events from re-sulting in recapture and an interestcharge; the temporary regulations do notcontain such a provision. In appropriatecircumstances, taxpayers may elect toapply the final regulations to DCLs whichare otherwise subject to §1.1503–2A.Treas. Reg. §1.1503–2(h). If a taxpayerfiles a request to enter into a closingagreement for losses covered by the finalregulations, under this revenue procedure,the Service will consider a request to in-clude in the closing agreement DCLs oth-erwise covered by §1.1503–2A for whichthe taxpayer has not made a §1.1503–2(h)election to apply the final regulations.This revenue procedure’s reference to“representations and citations as appropri-ate under §1.1503–2A,” means represen-tations and citations related to a DCL cov-ered by §1.1503–2A.

SECTION 4. PROCEDURE TO ENTERINTO A CLOSING AGREEMENT

.01 General.

The first revenue procedure publishedeach year (the Annual Revenue Proce-dure) outlines the general procedures ofthe Service for the issuance of letter rul-ings and determination letters, includingclosing agreements entered into under theauthority of §7121, by the National Of-fice. See, e.g., Rev. Proc. 2000–1,2000–1 I.R.B. 4. Taxpayers should notethat the Service also publishes an annualrevenue procedure, generally in the firstInternal Revenue Bulletin of the year,which provides a list of those areas of theCode under the jurisdiction of the Associ-ate Chief Counsel (International), forwhich the Service will not issue advanceletter rulings, (e.g., certain §1503(d) de-terminations, such as whether the condi-tions for excepting losses of a DRC fromthe definition of a DCL are satisfied).See, e.g., Rev. Proc. 2000–7, 2000–1I.R.B. 227.

The consolidated group (i.e., the parenton behalf of the consolidated group), theunaffiliated DRC, or the unaffiliated do-mestic owner that filed the agreementsunder §1.1503–2(g)(2)(i) for the DCLsfor which the closing agreement wouldrelate may file a request to enter into a§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement by following the procedures

of the most recent Annual Revenue Pro-cedure and this revenue procedure. Tax-payers must include the user fee requiredby the most recent Annual Revenue Pro-cedure.

.02 Additional Information.

Because the information, representa-tions, and documentation necessary toenter into a closing agreement depend onall the facts and circumstances, the Ser-vice may require information, representa-tions, and documentation in addition tothat set forth in this revenue procedureand the most recent Annual Revenue Pro-cedure. Taxpayers should submit suchadditional information in accordance withthe Annual Revenue Procedure and withinthe time allowed by the Annual RevenueProcedure. If a taxpayer does not submitthe information requested within the timeprovided, the request will be closed andthe taxpayer will be notified in writing.See, e.g., section 10.06(3), Rev. Proc.2000–1. If while processing a taxpayer’srequest for a §1503(d) closing agreement,the Service determines that the taxpayer isnot in compliance with the §1503(d) regu-lations and needs relief under §301.9100to obtain an extension of time to make arequired election or application under the§1503(d) regulations, then the taxpayerhas thirty (30) days from the date the Ser-vice notifies the taxpayer to file a requestfor relief under §301.9100. If a taxpayerdoes not submit the §301.9100 requestwithin the thirty-day period, the§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement request will be closed and thetaxpayer will be notified in writing.

Taxpayers are responsible for keepingthe Service informed of all materialchanges to the information, representa-tions, and documentation submitted aspart of the closing agreement request.

SECTION 5. INFORMATIONTAXPAYERS MUST INCLUDE INREQUEST

.01 General.

This section describes the information,representations, and documentation thattaxpayers are expected to provide with a§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement request. Taxpayers should or-ganize information and representations

following the format of this procedureand should use appropriate descriptiveheadings. To facilitate the processing ofthe closing agreement request, taxpayersmust also provide a full statement of allrelevant facts related to the taxpayers andthe DCLs.

Taxpayers must address each item inthis section, providing all relevant facts.If an item is not applicable, taxpayersshould so state and briefly explain why.

.02 Information Related To TaxpayerParties, Relevant Members OfThe Consolidated Group, AndDRCs.

Taxpayers must provide a full state-ment of the facts, including the followinggeneral information, as appropriate, abouteach Taxpayer Party, relevant member ofthe consolidated group, and DRC withlosses that will be covered by the closingagreement.

1. Name, address, and employer iden-tification number.

2. Type of entity, and date and place ofincorporation or other formation.

3. Information about the formation andtreatment of disregarded entities di-rectly or indirectly owned by a Tax-payer Party (including the date theentity became or elected to becomea disregarded entity under§301.7701–3).

4. Classifications of the entity under§1.1503–2(c)(2) – (4) (e.g., dualresident corporation, foreign branchseparate unit, hybrid entity separateunit) before and after any triggeringevent. If the taxpayer is requestingthat the closing agreement includelosses covered by the temporaryregulations, the taxpayer shouldclassify the entity under§1.1503–2A(b) (e.g., dual residentcorporation, foreign branch separateunit, partnership interest separateunit).

5. Detailed explanation of the chain ofownership between the parent of theconsolidated group (or in the casewhere there is no U.S. consolidatedgroup, the unaffiliated domesticowner of the DRC) and the DRC be-fore and after any triggering event(as described in §1.1503–2(g)(2)(iii)or §1.1503–2A(c)(3)(iii), as appro-priate).

October 23, 2000 398 2000–43 I.R.B.

6. The taxable year of a TaxpayerParty to the closing agreement (bothbefore and after any triggeringevent). If as a result of a triggeringevent there is a requirement for fil-ing a short-period return under§1.1502–76(b) or other relevantprovision, taxpayer should providerelated information and an explana-tion.

7. The office that has jurisdiction overthe Federal income tax returns of aTaxpayer Party to the closing agree-ment.

.03 Additional Information RelatedTo DRCs.

Taxpayers must provide the followingadditional information for each DRC withlosses that will be covered by the closingagreement:

1. The country or countries that tax theDRC on its worldwide income or ona residence basis. If the DRC is aseparate unit, identify the separateunit and name under which it con-ducts business, and the country inwhich its principal place of businessis located.

2. Description of the principal busi-ness activity.

3. Amounts and taxable years ofDRC’s NOLs.

4. Date the period of limitations on as-sessment of tax expires related toeach DCL.

.04 List And Description Of AllTriggering Events.

For all losses to be included in the§1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement, taxpayers must provide a listand description of all triggering eventsdescribed in §1.1503–2(g)(2)(iii) and§1.1503–2A(c)(3)(iii) as appropriate (in-cluding specific citations). In particular,taxpayers should explain how the trigger-ing events are treated under the Code, in-cluding information about any taxabletransfers or any nonrecognition provi-sions that apply, and should provide infor-mation about all parties, stock, and assetsinvolved. Taxpayers should indicatewhether any triggering event listed in-cludes a transaction within the meaning of§1.1502–75(d)(2) or (3) whereby thecommon parent of the consolidated groupthat filed the §1.1503–2(g)(2)(i) agree-

ments is no longer in existence orwhereby the common parent was a partyto a reverse acquisition, through whichthe consolidated group continues.

Taxpayers should state whether an ex-ception to a triggering event applies andshould explain the exception in detail andinclude a citation to the relevant provision(e.g., §1.1503–2(g)(2)(iv)(A), §1.1503–2(g)(2)(iv)(B), or §1.1503–2A(c)(3)(vi)).If a taxpayer has exercised rebuttal rightsprovided in §§1.1503–2(g)(2)(iii)(A)(2) –(7), taxpayer must provide informationrelated to those rebuttals.

.05 Specific Representations AndAgreements Required For ClosingAgreement.

Taxpayers must provide the followingrepresentations and agreements, when ap-plicable, to secure a §1.1503–2(g)(2)(iv)(B)(2)(i) closing agreement:

1. That a corporation is a DRC as de-scribed in §1.1503–2(c)(2). Taxpay-ers must provide a representation foreach relevant entity, and provide a§1.1503–2A representation as appro-priate.

2. That a foreign branch, interest in apartnership, or interest in a trust is aseparate unit as described in the ap-propriate subsection of §1.1503–2(c)(3) and a DRC as described in§1.1503–2(c)(2). Taxpayers mustprovide a representation for each rel-evant entity, and provide a§1.1503–2A representation as appro-priate.

3. That a hybrid entity separate unit is ahybrid entity separate unit as de-scribed in §1.1503–2(c)(4) and aDRC as described in §1.1503–2(c)(2). Taxpayers must provide arepresentation for each relevant en-tity, and provide a §1.1503–2A repre-sentation as appropriate.

4. That the NOLs described are DCLsunder §1.1503–2(c)(5) (or under§1.1503–2A(b)(2) as appropriate).

5. That the requisite elections, agree-ments, and certifications were timelymade under §1.1503–2(g)(2)(i) (or§1.1503–2A(c)(3) or (d)(3) as appro-priate).

6. That the DCLs were computed as re-quired under §1.1503–2(d)(1) (or§1.1503–2A(f)(1) as appropriate).

7. That the necessary reporting and cer-

tifications were made under§1.1503–2(g)(2)(vi) (or §1.1503–2A(c)(3)(v) as appropriate).

8. That the consolidated group, unaffili-ated DRC, or unaffiliated domesticowner will or has filed an electionand agreement described in§1.1503–2(g)(2)(i) with its timelyfiled Federal income tax return forthe year(s) of the triggering event(s)described in §1.1503–2(g)(2)(iii).Taxpayers should provide a§1.1503–2A representation as appro-priate.

9. That apart from the triggering eventslisted, no triggering event describedin §1.1503–2(g)(2)(iii) (or§1.1503–2A(c)(3)(iii) as appropriate)has occurred applicable to the DCLs.

10. That upon any subsequent trigger-ing event described in §1.1503–2(g)(2)(iii), the Taxpayer Parties will bejointly and severally liable for thetotal amount of the recapture of theDCLs to which the closing agree-ment relates and the related interestcharge under §1.1503–2 (g)(2)(vii),to the extent the triggering eventdoes not fall under one of the excep-tions provided in §1.1503–2(g)(2)(iv)(A) or (B).

11. That the new consolidated group orunaffiliated domestic corporationwill treat any potential recapture ofthe DCLs under §1.1503–2(g)(2)(vii) as unrealized built–in gainfor purposes of §384(a), subject toany applicable exceptions thereun-der, and will treat the total recaptureamount of the described DCLs asrecognized built-in gain for pur-poses of §384(a), subject to any ap-plicable exceptions thereunder.

12. That the new consolidated groupor unaffiliated domestic corpora-tion will comply with the reportingrequirements described in§1.1503–2(g)(2)(vi) for each DCLfor the taxable years covered bythe closing agreement.

13. That an election was made (or wasnot made) under §1.1503–2(h)(2)or (3) for any DCLs incurred intaxable years beginning before Oc-tober 1, 1992. Taxpayers shouldprovide an explanation for theelection provision used.

14. That an event described in

2000–43 I.R.B. 399 October 23, 2000

§§1.1503–2(g)(2)(iii)(A)(2) – (7) isnot a triggering event under suchprovision because the transfer didnot result in a carryover under for-eign law of such losses, or becausesuch losses cannot be used to offsetthe income of another person underforeign law. Taxpayers should rep-resent the specific requirementsunder the provision cited. See, e.g.,section 3.01(4) and section4.01(22), Rev. Proc. 2000–7 (theNational Office of the Service gen-erally will not make a determinationrelated to the rebuttals).

.06 Documents Required.

As part of the initial submission request-ing a §1.1503–2(g)(2)(iv)(B)(2)(i) closingagreement, taxpayers must provide the fol-lowing documents when applicable:

1. Copies of all elections, agreementsand certifications required by§1.1503–2(g)(2) (or §1.1503–2A(c)(3) or (d)(3)).

2. Copies of all ruling letters issued bythe Service under §301.9100 provid-ing for an extension of time to makea required election or applicationunder the §1503(d) regulations.

3. Copy of all consents to an extensionof the statute of limitations on assess-ment and collection.

4. Documents supporting the rebuttal ofa presumption of a triggering eventdescribed in §§1.1503–2(g)(2)(iii)(A)(2) – (7).

5. Other documents as requested by theService.

SECTION 6. PAPERWORKREDUCTION ACT

The collection of information containedin this revenue procedure has been re-viewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number 1545-1706.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validOMB control number.

The collection of information is con-tained in sections 4 and 5 of this revenueprocedure. This information will enablethe Service to determine whether to exe-

cute a closing agreement under §§1503(d)and 7121 of the Code. The likely respon-dents are domestic corporations.

The estimated average annual reportingand/or recordkeeping burden is two-thou-sand (2,000) hours.

The estimated average annual burdenper applicant is one-hundred (100) hours.The estimated number of applicants istwenty (20). The estimated frequency ofresponses is on occasion.

Books and records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns and taxreturn information are confidential, as re-quired by 26 U.S.C. 6103.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenue pro-cedure is Camille B. Evans of the Office ofthe Associate Chief Counsel (Interna-tional). For further information regardingthis revenue procedure contact Camille B.Evans or Kenneth D. Allison of the Officeof the Associate Chief Counsel (Interna-tional) at (202) 622-3860 (not a toll freecall).

Appendix A

DEPARTMENT OF THE TREASURYINTERNAL REVNUE SERVICE

MODEL CLOSING AGREEMENT ONFINAL DETERMINATION

COVERING SPECIFIC MATTERS

Under section 7121 of the Internal Rev-enue Code of 1986, as amended (theCode), Corporation A, 123 Main Street,Wilmington, DE 20000, EIN 11-1234567,a domestic corporation, as common parenton behalf of all the members of a consoli-dated group (the Corporation A Group);Corporation B, 124 Main Street, Wilming-ton, DE 20000, EIN 22-1234567, a do-mestic corporation, as common parent onbehalf of all the members of a consolidatedgroup as of January 1, Year 3 (the Corpora-tion B Group); and the Commissioner ofInternal Revenue hereby make the follow-ing closing agreement (Closing Agree-ment) based on the representations madeby Corporation A and Corporation B, in

paragraphs one (1) through fourteen (14)below:

WHEREAS:

(1) Corporation A, a Delaware corpora-tion and party to this Closing Agreement,owned through December 31, Year 2, all ofthe stock of Corporation B, a Delawarecorporation and party to this ClosingAgreement. Until December 31, Year 2,Corporation A had outstanding Class Xcommon stock and Class Y common stock.Corporation A is the common parent of anaffiliated group of corporations that files aconsolidated federal income tax return on acalendar year basis (the Corporation AGroup). Corporation B was a member ofthe Corporation A Group through Decem-ber 31, Year 2. On January 1, Year 3, Cor-poration B became the common parent ofan affiliated group of corporations thatfiles a consolidated federal income tax re-turn on a calendar year basis (the Corpora-tion B Group).

(2) Corporation B owns all of the stockof Corporation D, a Delaware corporation(EIN 33-1234567) and a member of theCorporation A Group through December31, Year 2, and of Corporation E, aDelaware corporation (EIN 44-1234567)and a member of the Corporation A Groupthrough December 31, Year 2. Corpora-tion D and Corporation E became mem-bers of the Corporation B Group on Janu-ary 1, Year 3.

(3) Since 1970, Corporation D hasmaintained assets and operated a widgetsbusiness in Country 1 through a branch inCountry 1 (Branch 1). Branch 1 is a sepa-rate unit as described in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a dual residentcorporation (DRC) as defined in Treas.Reg. §1.1503–2(c)(2).

(4) Since 1970, Corporation E hasmaintained assets and operated a widgetsbusiness in Country 2 through a branch inCountry 2 (Branch 2). Branch 2 is a sepa-rate unit as described in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a DRC as de-fined in Treas. Reg. §1.1503–2(c)(2).

(5) Since 1975, Corporation E hasmaintained assets and operated a widgetsbusiness in Country 3 through a branch in

October 23, 2000 400 2000–43 I.R.B.

The Corporation B Branches’ NOLs forthe Year 1 taxable year and the Year 2taxable year will hereinafter collectivelybe referred to as the Corporation BBranches NOLs.

(12) The Corporation A Group usedall of the Corporation B Branches NOLswithin the meaning of Treas. Reg.§1.1503–2(c)(15).

(13) Corporation A, as common par-ent of the Corporation A Group, filed theelections and agreements described inTreas. Reg. §1.1503–2(g)(2)(i) for theCorporation B Branches NOLs incurred

for the Year 1 taxable year and the Year2 taxable year.

(14) Excluding the distribution ofCorporation B stock to the CorporationA Class X common stockholders in aCode §355 split-off transaction, on De-cember 31, Year 2, (as described in para-graph 9 above), causing Corporation Band its affiliates to cease being membersof the Corporation A Group, no trigger-ing event described in Treas. Reg.§1.1503–2 (g)(2)(iii) has occurred thatis appl icable to the Corporation BBranches NOLs.

THEREFORE, based on the above infor-mation and material submitted by Corpo-ration A and Corporation B in connectionwith this Closing Agreement, and in theabsence of other material factual or legalcircumstances concerning the events de-scribed above, it is determined for federalincome tax purposes that with respect tothe Corporation B Branches NOLs:

(1) This Closing Agreement is a clos-ing agreement described in Treas. Reg.§1.1503–2(g)(2)(iv)(B)(2)(i).

(2) The Corporation B Branches areseparate units as described in Treas. Reg.

Country 3 (Branch 3). Branch 3 is a sepa-rate unit as described in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a DRC as de-fined in Treas. Reg. §1.1503–2(c)(2).

(6) Since 1972, Corporation E hasmaintained assets and operated a widgetsbusiness in Country 4 through a branch inCountry 4 (Branch 4). Branch 4 is a sepa-rate unit as described in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a DRC as de-fined in Treas. Reg. §1.1503–2(c)(2).

Branch 1, Branch 2, Branch 3, andBranch 4 will hereinafter collectively bereferred to as the “Corporation BBranches.”

(7) The income and losses of Branch 4were included in the Corporation A Groupthrough Date A, Year 2. The income andlosses of Branch 1, Branch 2, and Branch3 were included in the Corporation AGroup through December 31, Year 2.

(8) On Date A, Year 2, Corporation E,sold all of the assets of Branch 4 to an un-related Country 4 company, Corporation4. Corporation E’s sale of Branch 4’s as-sets is not a triggering event under Treas.Reg. §1.1503–2(g)(2)(iii)(A)(5) becausethe sale did not result in a carryover under

Country 4 law of Branch 4’s losses, ex-penses, or deductions to Corporation 4.As a result of this Date A, Year 2 sale,Branch 4 ceased to be a separate unit asdescribed in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a DRC as de-fined in Treas. Reg. §1.1503–2(c)(2). SeeAppendix B, Note 1.

(9) On December 31, Year 2, Corpora-tion A distributed all of the stock of Cor-poration B to its Corporation A Class Xcommon stockholders in exchange for allof the Corporation A Class X commonstock in a split-off transaction describedin Code §355. As a result of this split-offtransaction: (a) Corporation B, Corpora-tion D, and Corporation E, and the in-come and losses of Branch 1, Branch 2,and Branch 3 ceased to be included in theCorporation A Group; (b) Corporation Bbecame the common parent of the Corpo-ration B Group; and (c) the income andlosses of Branch 1, Branch 2, and Branch3 became included with the CorporationB Group. See Appendix B, Note 2.

(10) On Date C, Year 3, Corporation Esold the Branch 3 assets to an unrelatedCountry 3 company, Corporation 3. Cor-poration E’s sale of Branch 3’s assets isnot a triggering event under Treas. Reg.

§1.1503–2(g)(2)(iii)(A)(5) because thesale did not result in a carryover under thelaws of Country 3 of Branch 3’s losses,expenses, or deductions to Corporation 3.As a result of this Date C, Year 3 sale,Branch 3 ceased to be a separate unit asdescribed in Treas. Reg.§1.1503–2(c)(3)(i)(A) and a DRC as de-fined in Treas. Reg. §1.1503–2(c)(2). SeeAppendix B, Note 3.

(11) The Corporation B Branches in-curred net operating losses (NOLs) for theYear 1 taxable year and the Year 2 taxableyear. Such losses were computed in ac-cordance with Treas. Reg. §1.1503–2(d)(1) and are as follows:

BRANCH Year 1 Tax Year Year 2 Tax YearBranch 1 $ $Branch 2 $ $Branch 3 $ $Branch 4 $ $ N.A. * TOTAL $ $

*See Appendix B, Note 4.

2000–43 I.R.B. 401 October 23, 2000

§1.1503–2(c)(3)(i)(A) and are dual resi-dent corporations as defined in Treas.Reg. §1.1503–2(c)(2).

(3) The Corporation B Branch NOLs aredual consolidated losses under Treas. Reg.§1.1503–2(c)(5).

(4) But for Treas. Reg. §1.1503–2(g)(2)(iv)(B)(2), the distribution of Corpo-ration B stock to the Corporation A Class Xcommon stockholders in a Code §355 split-off transaction, causing Corporation B,Corporation D, and Corporation E to ceasebeing members of the Corporation A Groupand the income and losses of the Corpora-tion B Branches to cease being included inthe Corporation A Group, was a triggeringevent under Treas. Reg.§1.1503–2(g)(2)(iii)(A)(2) requiring the re-capture of Corporation B Branch NOLs asrequired by Treas. Reg.§1.1503–2(g)(2)(vii).

(5) Under Treas. Reg. §1.1503–2(g)(2)(iv)(B)(2), the distribution of Corpo-ration B stock to Corporation A Class Xcommon stockholders in a Code §355 split-off transaction, whereby Corporation B,Corporation D, and Corporation E ceasedto be members of the Corporation A Groupand the income and losses of the Corpora-tion B Branches ceased to be included inthe Corporation A Group, is not consideredto be a triggering event requiring the recap-

ture of the Corporation B Branch NOLsand an interest charge.

(6) Upon any subsequent triggeringevent described in Treas. Reg.§1.1503–2(g)(2)(iii), the Corporation AGroup and the Corporation B Group will bejointly and severally liable for the totalamount of recapture of the dual consoli-dated losses of the Corporation B Branchesand the related interest charge under Treas.Reg. §1.1503–2(g)(2)(vii), to the extent thetriggering event does not fall under one ofthe exceptions provided in Treas. Reg.§1.1503–2(g)(2)(iv)(A) or (B). The charac-ter and source of the recapture amount shallbe determined pursuant to Treas. Reg.§1.1503-2(g)(2)(vii)(D). An event other-wise constituting a triggering event applica-ble to the Corporation B Branch NOLsunder Treas. Reg. §1.1503–2(g)(2)(iii)(A)shall not constitute a triggering event if itoccurs in any taxable year after the fifteenth(15th) taxable year following the year inwhich the Corporation B Branch NOLswere incurred.

(7) The Corporation B Group will treatany potential recapture amount underTreas. Reg. §1.1503–2(g)(2)(vii) as unreal-ized built-in gain for purposes of Code§384(a), subject to any applicable excep-tions thereunder, and such total recaptureamount shall constitute recognized built-ingain of the Corporation B Group for pur-

poses of Code §384(a), subject to any ap-plicable exceptions thereunder.

(8) The Corporation B Group will com-ply with the reporting requirements de-scribed in Treas. Reg. §1.1503–2 (g)(2)(vi)with respect to each Corporation B BranchNOL for the Year 1 taxable year and theYear 2 taxable year.

(9) If the amount of the Corporation BBranch NOLs is adjusted by the InternalRevenue Service, judicial authority, or oth-erwise in a final determination of taxes fortaxable years ending December 31, Year 1,and December 31, Year 2, the provisions ofthis Closing Agreement will apply mutatismutandisto such final adjusted lossamounts.

NOW THIS CLOSING AGREEMENTWITNESSETH, that Corporation A, Cor-poration B, and the Commissioner of Inter-nal Revenue hereby mutually agree to thedeterminations set forth above and furthermutually agree that those determinationsshall be final and conclusive, subject, how-ever, to reopening in the event of fraud,malfeasance, or misrepresentation of mate-rial fact, and provided that any change ormodification of applicable statutes or taxconventions shall render this ClosingAgreement ineffective to the extent that it isdependent upon such statutes or tax con-ventions.

IN WITNESS WHEREOF, by signing the foregoing, the above parties signify that they have read and agreed to the terms of thisdocument.

CORPORATION A

By: Date:

Title:

CORPORATION B

By: Date:

Title:

COMMISSIONER OF INTERNAL REVENUE

By: Date:

Title: Associate Chief Counsel (International)

By: Date:

Title: Director, International

October 23, 2000 402 2000–43 I.R.B.

2000–43 I.R.B. 403 October 23, 2000

October 23, 2000 404 2000–43 I.R.B.

Prohibition of Ex ParteCommunications BetweenAppeals Officers And OtherInternal Revenue ServiceEmployees

Rev. Proc. 2000–43

TABLE OF CONTENTS

SECTION 1. PURPOSE AND SCOPE

SECTION 2. BACKGROUND

SECTION 3. GUIDANCECONCERNING THE EX PARTECOMMUNICATIONS

PROHIBITION DESCRIBED INSECTION 1001(a)(4) OF THEINTERNAL REVENUE SERVICERESTRUCTURING AND REFORMACT OF 1998

SECTION 4. EFFECTIVE DATE

SECTION 1. PURPOSE AND SCOPE

Section 1001(a) of the Internal RevenueService Restructuring and Reform Act of1998, Pub. L. 105–206, 112 Stat. 685(RRA 98), states that “The Commissionerof Internal Revenue shall develop and im-plement a plan to reorganize the InternalRevenue Service. The plan shall ...

(4) ensure an independent appealsfunction within the Internal Rev-enue Service, including the prohibi-tion in the plan of ex parte commu-nications between appeals officersand other Internal Revenue Serviceemployees to the extent that suchcommunications appear to compro-mise the independence of the ap-peals officers.”

Notice 99–50, 1999–40 I.R.B. 444 (Octo-ber 4, 1999), set forth a proposed revenueprocedure concerning the ex parte com-munication prohibition. The proposedrevenue procedure provided guidance inthe form of a series of questions and an-swers that address situations frequentlyencountered by the Service during thecourse of an administrative appeal and in-vited public comment. The Departmentof the Treasury and the Internal Revenue

Service have considered all comments re-ceived, and the proposed revenue proce-dure has been modified to take into ac-count the concerns raised. Specifically,the scope of permissible communicationshas been clarified, limitations have beenplaced on communications between Ap-peals and certain employees in the Officeof Chief Counsel, concerns about com-munications that take place in the contextof multi-functional meetings have beenaddressed, and other questions and an-swers have been modified. In addition,new questions and answers have been in-cluded to define key terms and clarify re-sponsibilities of the parties, permit tax-payers/representatives to waive theprohibition, and to address certain man-agement issues.

SECTION 2. BACKGROUND

In 1927, the Internal Revenue Serviceestablished an administrative appealprocess to resolve tax disputes without lit-igation. The Appeals mission is to re-solve tax controversies, without litigation,on a basis that is fair and impartial to boththe Government and the taxpayer. LocalAppeals Officers have traditionally re-ported to different managers than the Ser-vice officials who proposed the adjust-ment. Appeals has historically been ableto settle the vast majority of the cases thatcome within its jurisdiction.

The inventory of cases handled by Ap-peals falls into two major categories —nondocketed and docketed B determinedby whether the case is pending in theUnited States Tax Court. Nondocketedcases typically involve an administrativeprotest by the taxpayer of the findings andconclusions of the Examination, Collec-tion, or other IRS function that initiallyconsiders a taxpayer’s case. The tax-payer’s protest is typically followed by aconference, or series of conferences, withthe taxpayer or the taxpayer’s representa-tive, during which Appeals and the tax-payer attempt to reach resolution of the is-sues in dispute. Docketed cases involvedisputes where the taxpayer has filed apetition in the U.S. Tax Court, contestinga determination made by the Service in astatutory notice of deficiency. Followingthe filing of the petition, taxpayers whohave not previously availed themselves ofthe opportunity for an Appeals conferencegenerally are afforded an opportunity to

resolve their case with Appeals before thecase proceeds further in the litigationprocess. See generallyRev. Proc. 87–24,1987–1 C.B. 720. In both types of dis-putes, Appeals has broad authority to ne-gotiate settlements by applying a “hazardsof litigation” standard.

Proceedings before Appeals have tradi-tionally followed a much less formalcourse than court proceedings. Whileproceedings before Appeals are designedto be fair and impartial, they are not sub-ject to judicial rules of evidence or proce-dure. Some early legislative proposalsduring 1998 would have required Appealsto adopt more formal and less flexibleprocesses. S. Rep. No. 1669, 105th Cong.,2nd Sess., § 304(a) (Feb. 24, 1998), wouldhave established an independent Office ofAppeals in the Internal Revenue Service,the head of which was to be appointed byand report directly to the OversightBoard. Further, this proposal would havebarred Appeals from considering issuesnot “raised” by the originating functionand prohibited “any communication” withthe originating function unless the tax-payer or taxpayer’s representative had anopportunity to be present.

As ultimately enacted, § 1001(a)(4) ofRRA 98 did not impose a comprehensiveoverhaul of Appeals’ processes. Instead,that section requires the IRS, as part of itsreorganization plan, to establish an inde-pendent Office of Appeals “within the In-ternal Revenue Service.” The plan mustprohibit ex parte communications “to theextent such communications appear tocompromise the independence” of Ap-peals. When the evolution of § 1001(a)(4)of RRA 98 during the1998 legislativeprocess is considered in light of Appealslongstanding methods of operation, it canbe fairly concluded that Appeals must beaccorded a significant degree of indepen-dence from other IRS components, andshould be mindful to avoid ex parte com-munications with other IRS functions thatmight appear to compromise that indepen-dence. The statutory provision cannot,however, be interpreted as mandating amajor redesign of the fundamentalprocesses Appeals has traditionally fol-lowed to carry out its dispute resolutionmission.

The procedures set forth in this Rev-enue Procedure are designed to accom-modate the overall interests of tax admin-

2000–43 I.R.B. 405 October 23, 2000

istration, while preserving operationalfeatures that are vital to Appeals’ case res-olution processes within the structure ofthe IRS and ensuring more open lines ofcommunication between Appeals and thetaxpayer/representative. Thus, in order topreserve the informal give-and-take andflexibilities that have been conducive toachieving settlements in Appeals, theguidance provided in this revenue proce-dure does not adopt the formal ex parteprocedures that would apply in a judicialproceeding. The guidance is designed toensure the independence of the Appealsorganization, while preserving the role ofAppeals as a flexible administrative set-tlement authority, operating within the In-ternal Revenue Service’s overall frame-work of tax administrationresponsibilities. For example, as morefully explained in Section 3 below:

■ Appeals will retain procedures for (a)returning cases that are not ready forAppeals consideration, (b) raisingcertain new issues, and (c) seekingreview and comments from the origi-nating IRS function with respect tonew information or evidence fur-nished by the taxpayer or representa-tive.

■ Appeals will continue to be able toobtain legal advice from the Office ofChief Counsel, subject to limitationsdesigned to ensure that the advice toAppeals is not provided by the samefield attorneys who previously gaveadvice on the same issue to the IRSofficials who made the determinationAppeals is reviewing. These limita-tions adopt some of the suggestionsreceived in response to Notice 99–50and reflect a balance between meet-ing Appeals’ needs for legal assis-tance and avoiding ex parte commu-nications that might appear tocompromise Appeals’ independence.

■ Finally, the Revenue Proceduremakes clear that the Commissionerand others responsible for overallIRS operations (including Appeals)may continue to communicate exparte with Appeals in order to fulfilltheir responsibilities.

SECTION 3. GUIDANCECONCERNING THE EX PARTECOMMUNICATIONSPROHIBITION DESCRIBED INSECTION 1001(a)(4) OF THE

INTERNAL REVENUE SERVICERESTRUCTURING AND REFORMACT OF 1998

Q-1 What is “ex parte communication”and when is it prohibited?

A-1 For the purposes of this revenue pro-cedure, ex parte communications are com-munications that take place between Ap-peals and another Service functionwithout the participation of the taxpayer orthe taxpayer ’s representative(taxpayer/representative). While the legis-lation refers to “appeals officers,” theoverall intent of the ex parte provision isto ensure the independence of the entireAppeals organization. Ex parte communi-cations between any Appeals employee,e.g., Appeals Officers, Appeals Team CaseLeaders, Appeals Tax Computation Spe-cialists, and employees of other InternalRevenue Service offices are prohibited tothe extent that such communications ap-pear to compromise the independence ofAppeals.

Q-2 Is the prohibition on ex partecommunications limited to oralcommunications?

A-2 No. The prohibition is not limited tooral communications. It applies to anyform of communication, oral or written(manually or computer generated).

Q-3 Are communications betweenAppeals Officers and other Appealsemployees subject to the prohibition onex parte communications?

A-3 No. As indicated in A-1 above, theex parte communication prohibition wasintended to preserve the independence ofthe Appeals organization as a whole.Intra-Appeals communications during thedeliberation process do not compromise orappear to compromise that independence.Appeals employees may communicatefreely with other Appeals employees with-out inviting the taxpayer/representative toparticipate.

Q-4 Is the administrative file transmittedto Appeals by the office that made thedetermination which is subject to theAppeals process (the originatingfunction) considered to be an ex partecommunication within the context of thisrevenue procedure?

A-4 No. The administrative file is notconsidered to be an ex parte communica-tion within the context of this revenue pro-cedure. The administrative file, contain-ing the proposed determination and thetaxpayer’s protest or other approvedmeans of communicating disagreementwith the proposed determination, setsforth the boundaries of the dispute be-tween the taxpayer and the Service andforms the basis for Appeals to assume ju-risdiction.

Q-5 Does the prohibition on ex partecommunications extend to discussionsbetween Appeals employees and theoriginating function during the courseof preliminary review of a newlyassigned case?

A-5 It depends on the nature of the com-munication. During the preliminary re-view of a newly assigned case, officials inAppeals may ask questions that involveministerial, administrative, or proceduralmatters and do not address the substanceof the issues or positions taken in thecase. For example, Appeals employeesmay make the following types of inquirieswithout involving the taxpayer/represen-tative:

■ Questions about whether certain in-formation was requested andwhether it was received.

■ Questions about whether a documentreferred to in the workpapers that theAppeals Officer cannot locate in thefile is available.

■ Questions to clarify the content of il-legible documents or writings.

■ Questions about case controls on theIRS’s management information sys-tems.

■ Questions relating to tax calculationsthat are solely mathematical in na-ture. Communications with the orig-inating function which extend be-yond matters of the type describedabove and address the substance ofthe issues in the case are prohibitedunless the taxpayer is given the op-portunity to participate. Examplesof prohibited communications in-clude:

■ Discussions about the accuracy ofthe facts presented by the taxpayerand the relative importance of thefacts to the determination.

■ Discussions of the relative merits or

October 23, 2000 406 2000–43 I.R.B.

alternative legal interpretations of au-thorities cited in a protest or in a re-port prepared by the originating func-tion.

■ Discussions of the originating func-tion’s perception of the demeanor orcredibility of the taxpayer or tax-payer’s representative.

Q-6 Does the ex parte communicationsprohibition apply to Appealsconsideration of cases which originatedin the Collection function, e.g.,collection due process (CDP) appeals,collection appeals program (CAP) cases,offers in compromise, trust fundrecovery penalty cases, etc.?

A-6 Yes. The principles applicable to dis-cussions between Appeals employees andofficials in other originating functions alsoapply to discussions between Appeals andCollection employees. Appeals may notengage in discussions of the strengths andweaknesses of the issues and positions inthe case, which would appear to compro-mise Appeals’ independence. The tax-payer/representative should be given anopportunity to participate in any discus-sion that involves matters other than min-isterial, administrative or procedural mat-ters.

Section 3401 of RRA 98 (§§ 6320 and6330 of the Internal Revenue Code), re-garding due process in IRS collection ac-tions, states that at a hearing, the AppealsOfficer must obtain verification that therequirements of any applicable law or ad-ministrative procedure have been met.Communications seeking to verify com-pliance with legal and administrative re-quirements are similar to the ministerial,administrative or procedural inquiries dis-cussed in A-5 above. Therefore, suchcommunications are not subject to the pro-hibition on ex parte communications.

Q-7 Does the prohibition on ex partecommunications change the criteria forpremature referrals?

A-7 As a general rule, there is no changeto current criteria or procedures. Inessence, RRA 98 reinforces the instruc-tions in Section 8.2.1.2 of the InternalRevenue Manual (IRM) and reaffirms Ap-peals’ role as the settlement arm of theService. If a case is not ready for Appealsconsideration, Appeals may return it forfurther development or for other reasons

described in IRM 8.2.1.2. Appeals maycommunicate with the originating func-tion regarding the anticipated return of thecase, but may not engage in a discussionof matters beyond the types of ministerial,administrative or procedural matters setforth in A-5 as part of a discussion ofwhether the premature referral guidelinesrequire further activity by the originatingfunction.

Q-8 Is there any change to the Appealsnew issue policy?

A-8 No. The prohibition against ex partecommunications does not affect Appeals’existing policy about raising new issues inAppeals. However, any new issue mustfirst satisfy Appeals’ new issue policy.New issues must continue to meet the“material” and “substantial” tests of IRM8.6.1.4 and succeeding sections. If discus-sions with the originating function areneeded in order to evaluate the strengthsand weaknesses of the possible new issue,the taxpayer/representative must be givenan opportunity to participate in such dis-cussions. Appeals will continue to followthe principles of Policy Statement P-8-49and the “General Guidelines” outlined inIRM 8.6.1.4.2 in deciding whether or notto raise a new issue.

Q-9 May Appeals continue to haveongoing communication with theoriginating function during the course ofan appeal?

A-9 Yes. However, the prohibition on exparte communications will affect the man-ner in which Appeals has traditionally op-erated during the course of the appeal.Appeals must give the taxpayer/represen-tative the opportunity to participate in anydiscussions with the originating functionwhich concern matters beyond the minis-terial, administrative or procedural mattersdescribed in A-5 above.

Q-10 What should Appeals do if newinformation or evidence is submitted?Can Appeals still return the new materialto the originating function for reviewand comment?

A-10 There is no change to existing pro-cedures. The principles in IRM 8.2.1.2.2remain in effect. The originating functionshould be given the opportunity to timelyreview and comment on significant new

information presented by the taxpayer.“Significant new information” is informa-tion of a non-routine nature which, in thejudgment of Appeals, may have had animpact on the originating function’s find-ings or which may impact on the Appeals’independent evaluation of the litigatinghazards. Generally, the review can be ac-complished by sending the material to theoriginating function while Appeals retainsjurisdiction of the case and proceeds withresolution of other issues. However, if itappears that important new information orevidence was purposely withheld from theoriginating function, the entire case shouldbe returned to the originating function andjurisdiction relinquished pursuant to IRM8.2.1.2.2(3). The taxpayer/representativemust be notified when a case is returned tothe originating function or new materialnot available during initial considerationhas been sent to the originating function.The results of the originating function’sreview of the new information will becommunicated to the taxpayer/representa-tive.

Q-11 Does the prohibition on ex partecommunications have any impact on therelationship between Appeals andCounsel?

A-11 Chief Counsel is the legal adviserto the Commissioner of Internal Revenueand his or her officers and employees (in-cluding employees of Appeals) on allmatters pertaining to the interpretation,administration and enforcement of the in-ternal revenue laws and related statutes.Attorneys in the Office of Chief Counselare expected to provide legal advice basedon a determination of “. . . the reasonablemeaning of various Code provisions inlight of the Congressional purpose in en-acting them,” without bias in favor of ei-ther the Government or the taxpayer.Rev. Proc. 64–22, 1964–1 C.B. 689. Tobalance Appeals employees’ need to ob-tain legal advice with the requirement thatthey avoid ex parte communications thatwould appear to compromise Appeals’ in-dependence, the following limitationswill apply to communications betweenAppeals employees and attorneys in theOffice of Chief Counsel in cases notdocketed in the United States Tax Court:

Appeals employees should not commu-nicate ex parte regarding an issue in acase pending before them with Counsel

2000–43 I.R.B. 407 October 23, 2000

field attorneys who have previously pro-vided advice on that issue in the case tothe IRS employees who made the deter-mination Appeals is reviewing. Counselwill assign a different attorney to provideassistance to Appeals. If an Appeals em-ployee believes it is necessary to seek ad-vice from any Counsel field attorney whopreviously provided advice to the origi-nating function regarding that issue in thecase, the taxpayer/representative will beprovided an opportunity to participate inany such communications.

Appeals’ requests for legal advice thatraise questions that cannot be answeredwith a high degree of certainty by appli-cation of established principles of law toparticular facts will be referred to theChief Counsel National Office and willbe handled as requests for field serviceadvice or technical advice, as appropri-ate, in accordance with applicable proce-dures. The response of the National Of-fice to Appeals will be disclosed to thetaxpayer in accordance with § 6110.

Appeals employees are cautioned that,while they may obtain legal advice fromthe Office of Chief Counsel, they remainresponsible for independently evaluatingthe strengths and weaknesses of the spe-cific issues presented by the cases as-signed to them, and for making indepen-dent judgments concerning the overallstrengths and weaknesses of the casesand the hazards of litigation. Consistentwith this assignment of responsibility,Counsel attorneys will not provide advicethat includes recommendations of settle-ment ranges for an issue in a case pend-ing before Appeals or for the case as awhole.

The foregoing limitations on ex partecommunications do not apply to casesdocketed in the United States Tax Court.Docketed cases will be handled in accor-dance with Rev. Proc. 87–24, 1987–1C.B. 720, and the Tax Court Rules ofPractice and Procedure.

Q-12 Appeals is required to submitcertain cases to the Joint Committee onTaxation for review. On occasion, theJoint Committee (or its staff) willquestion a settlement or raise a newissue. Are communications with theJoint Committee (or its staff) covered bythe ex parte communicationsprohibition?

A-12 No. The prohibition applies onlyto communications between Appeals andother Internal Revenue Service employ-ees.

Q-13 Does the prohibition on ex partecommunications have any impact on therequirement that IndustrySpecialization Program (ISP) issues incases in Appeals jurisdiction be reviewedand approved by the Appeals ISPCoordinator?

A-13 No. Existing procedures for reviewand approval remain in place. The Ap-peals ISP Coordinator serves as a re-source person for the Appeals organiza-tion. The purpose of the review is toensure consistency of settlements and ad-herence to approved settlement guide-lines. Communications between Appealsemployees and the Appeals ISP Coordina-tor are entirely internal within Appeals,and consequently, the ex parte communi-cations prohibition does not apply.

Q-14 Delegation Order 247, 1996-1C.B. 356, gives Examination casemanagers limited settlement authority toresolve ISP coordinated issues whichhave Appeals Settlement Guidelines,provided that they secure the review andapproval of both the Examination andAppeals ISP Coordinators. Would suchcommunications constitute a violation ofthe ex-parte communicationsprohibition?

A-14 No. The purpose of the review is toensure that the resolution by Examinationfits within the guidelines developed byAppeals and that the application of theguidelines is consistent. The role of theAppeals ISP coordinator is directive innature and has no impact on the indepen-dence of Appeals.

Q-15 Does the prohibition on ex partecommunications apply in the context ofmeetings which include representativesfrom Appeals, Counsel, Collection andExamination (ACCE meetings), industrywide ISP coordination meetings, ormeetings of Compliance Councils or theLarge Case Policy Board?

A-15 Generally, no. Meetings of thistype usually involve general discussionsof how to handle technical issues or pro-cedural matters. As long as the discus-

sions do not identify specific taxpayers,the prohibition on ex parte communica-tions would not apply. Participants incross-functional meetings need to remaincognizant of the prohibition on ex partecommunications and ensure that discus-sions do not appear to compromise the in-dependence of Appeals.

Q-16 Does the prohibition on ex partecommunications apply tocommunications between Appeals andthe Commissioner or other Serviceofficials who have overall supervisoryresponsibility for IRS operations?

A-16 No. In accordance with § 7803, theCommissioner is responsible for manag-ing and directing the administration of theinternal revenue laws and tax conventionsto which the United States is a party. Inthe course of exercising that statutory re-sponsibility, the Commissioner and thoseofficials, such as the Deputy Commis-sioner Operations, who have overall su-pervisory responsibility for IRS opera-tions may communicate with Appealsabout specific cases or issues and may di-rect that other IRS officials participate inmeetings or discussions about such casesor issues without providing the taxpayeror representative an opportunity to partic-ipate.

Q-17 Does the prohibition on ex partecommunications apply to discussionsAppeals employees have with personnelin the IRS competent authority officeregarding a taxpayer’s request for reliefunder a tax treaty?

A-17 No. Communications between Ap-peals employees and IRS officials consid-ering relief under competent authorityprocedures are not subject to the ex parteprohibitions because the Appeals Officermay assume that the competent authorityis acting at the request, and with the con-sent, of the taxpayer.

Q-18 Does the prohibition on ex partecommunications have any impact onAppeals communications with theTaxpayer Advocate Service (TAS) on anopen case?

A-18 No. Communications by Appealswith the TAS that are initiated by the TASare not subject to the prohibition becausethe Appeals Officer may assume that the

October 23, 2000 408 2000–43 I.R.B.

TAS is acting at the request, and with theconsent, of the taxpayer.

Q-19 Are communications betweenAppeals and outside consultants orexperts under contract to the IRSsubject to the ex parte communicationprohibition?

A-19 Yes. Under the ex parte rulesadopted here, outside consultants or ex-perts under contract to the IRS (other thanthose employed directly by Appeals) willbe treated as “other IRS employees.”Therefore, the principles set forth in A-5will apply. Appeals must give the tax-payer/representative the opportunity toparticipate in case-specific discussionsthat concern matters beyond the non-sub-stantive ministerial, administrative or pro-cedural matters described in A-5 above.

Q-20 A number of questions andanswers have referred tocommunications with the “originatingfunction.” How is that term defined?

A-20 An “originating function” is an or-ganization within the IRS that makes de-terminations which are subject to the Ap-peals process. For purposes of thisrevenue procedure, the term includes theExamination, Collection, Service Center,International, and Tax Exempt/Govern-ment Entities functions, or their successororganizations.

Q-21 Several responses in thisdocument refer to thetaxpayer/representative being given an“opportunity to participate.” What doesthis phrase mean?

A-21 It means that the taxpayer/represen-tative will be given a reasonable opportu-nity to attend a meeting or be a participantin a conference call between Appeals andthe originating function when thestrengths and weaknesses of issues or po-sitions in the taxpayer’s case are dis-cussed. The taxpayer/representative willbe notified of a scheduled meeting or con-ference call and invited to participate. Ifthe taxpayer/representative is unable toparticipate at the scheduled time, reason-able accommodations will be made toreschedule. This does not mean that theService will delay scheduling a meetingfor a protracted period of time to accom-modate the taxpayer/representative. Facts

and circumstances will govern what con-stitutes a reasonable delay.

Q-22 May the taxpayer/representativewaive the prohibition on ex partecommunications?

A-22 Yes. If the taxpayer/representativeis given an opportunity to participate in adiscussion, but decides that such partici-pation is unnecessary, the prohibition canbe waived. Generally, a waiver will begranted on a communication-by-commu-nication basis. However, if thetaxpayer/representative so desires, thewaiver could encompass all communica-tions that might occur during the courseof Appeals’ consideration of a specifiedcase. The Appeals Officer should docu-ment the waiver in the Case ActivityRecord.

Q-23 What if thetaxpayer/representative declines toparticipate or seeks to delay themeeting/conference call beyond areasonable time?

A-23 Appeals should proceed with themeeting or discussion and document thetaxpayer/representative’s declination orthe reason for proceeding in the absenceof the taxpayer/representative. This couldbe accomplished by an entry in the CaseActivity Record and a letter to the tax-payer/representative documenting the rea-son for proceeding.

Q-24 The IRM provides forcomputational review within 120 days ofa team case being assigned. If thisreview reveals computational errorsaffecting the proposed tax liability, canAppeals discuss these errors with theoriginating function without violatingthe prohibition on ex partecommunications?

A-24 It depends on the nature of theerror. If the discrepancy is purely mathe-matical, any discussion would likely beinformational only, and no violation ofthe prohibition is likely. Both the tax-payer/representative and the originatingfunction would be advised before a math-ematical correction is made.

However, if the error involves the inter-pretation of a legal principle or applica-tion of the law to a particular set of facts,the taxpayer/representative should be af-

forded the opportunity to participate inany scheduled meetings with the originat-ing function to discuss the discrepancy.In such cases, there may be instanceswhere the best approach is for Appeals toreturn the case for further developmentand correction.

Q-25 Does the prohibition on ex partecommunications apply to pre-conference meetings between Appealsand Examination?

A-25 Yes. This is clearly a situationwhere the intended communicationscould appear to compromise the indepen-dence of Appeals. Pre-conference meet-ings should not be held unless the tax-payer/representative is given theopportunity to participate.

Q-26 Does the prohibition on ex partecommunications apply to post-settlementconferences between Appeals andExamination?

A-26 No. The post-settlement confer-ence with Examination is intended to in-form Examination about the settlement ofissues and to supply information that maybe helpful in the examination of subse-quent cycles. Appeals’ objective is to en-sure that Examination fully understandsthe settlement and the rationale for theresolution. In addition, the conferenceprovides an opportunity for Appeals todiscuss with Examination the applicationof Delegation Orders 236 and 247 (i.e.,settlement by Examination consistentwith prior Appeals settlement or ISP set-tlement guidelines) to issues settled byAppeals.

The tax periods that are the subject ofthe post-settlement conference have beenfinalized, and the participants are cau-tioned to limit discussion to the results inthe closed cycle. Discussion of the reso-lution of issues present in the closed peri-ods does not jeopardize the independenceof Appeals. Any discussion that ad-dresses open cycles of the same taxpayershould be postponed, and the guidanceprovided in this revenue procedure relat-ing to ongoing disputes should be fol-lowed.

Q-27 Does the prohibition on ex partecommunications alter existingprocedures for handling claims filed latein the Appeals process?

2000–43 I.R.B. 409 October 23, 2000

A-27 No. There is no change to existingprocedure. The claim should be referredto the originating function with a requestfor expedited examination. Because sucha referral is in the nature of a ministerialact and involves no discussion about thestrengths and weaknesses of the issue, thereferral is not subject to the prohibition.

Q-28 How will the Service monitorcompliance with the prohibition on exparte communications?

A-28 Employees will receive training onthe contents of this revenue procedureand will be encouraged to seek manager-ial guidance whenever they have ques-tions about the propriety of an ex partecommunication. Managers will considerfeedback from other functions and willbe responsible for monitoring compli-ance during their day-to-day interactionwith employees, as well as during work-load reviews and closed case reviews.Violations will be addressed in accor-dance with existing administrative andpersonnel processes.

Q-29 Are IRS employees assigned tofunctions other than Appealsresponsible for complying with theprohibition on ex partecommunication?

A-29 Yes. It is recognized that Appealscannot always fully control communica-tions from other IRS personnel. Appealswill make every effort to promptly termi-nate any discussion that verges into mat-ters not permitted by these rules. How-ever, all IRS and Counsel employeesshare the responsibility to ensure thatcommunications do not appear to com-promise the independence of Appeals.Violations will be addressed in accor-dance with existing administrative andpersonnel processes.

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective forcommunications between Appeals Offi-cers and other Internal Revenue Serviceemployees which take place after Octo-ber 23, 2000, the date this revenue proce-dure is published in the Internal RevenueBulletin.

DRAFTING INFORMATION

The principal author of this revenue proce-dure is David M. Geber, Appeals LMSBOperations, Headquarters Appeals. Forfurther information regarding this revenueprocedure, contact Mr. Geber at (202)694-1827 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters(Also Part I, Sections 846; 1.846–1.)

Rev. Proc. 2000–44

SECTION 1. PURPOSE

This revenue procedure prescribes theloss payment patterns and discount factorsfor the 2000 accident year. These factorswill be used for computing discounted un-paid losses under § 846 of the InternalRevenue Code. SeeRev. Proc. 98–11,1998–1 C.B. 358, for background con-cerning the loss payment patterns and ap-plication of the discount factors.

SEC. 2. SCOPE

This revenue procedure applies to anytaxpayer that is required to discount its un-paid losses under § 846 for a line of busi-ness using discount factors published bythe Secretary.

SEC. 3. TABLES OF DISCOUNTFACTORS

.01 The following tables present sepa-rately for each line of business the dis-

count factors under § 846 for accidentyear 2000. All the discount factors pre-sented in this section were determinedusing the applicable interest rate under § 846(c) for 2000, which is 6.09 percent,and by assuming all loss payments occurin the middle of the calendar year.

.02 If the groupings of individual linesof business on the annual statementchange, taxpayers must discount the un-paid losses on the affected lines of busi-ness in accordance with the discountingpatterns that would have applied to thoseunpaid losses based on their classificationon the 1995 annual statement. SeeRev.Proc. 98–11, 1998–1 C. B. 358, section 2,for additional background on discountingunder section 846 and the use of the Sec-retary’s tables.

.03 Section V of Notice 88–100,1988–2 C.B. 439, provides a compositediscount factor to be used in determiningthe discounted unpaid losses for accidentyears that are not separately reported onthe annual statement. Taxpayers that donot use the methodology set forth in sec-tion V of Notice 88–100 should insteaduse the discount factor for the appropriateyear in the Secretary’s table for that line ofbusiness. If such taxpayers have unpaidlosses relating to an accident year that isolder than the last accident year for whicha discount factor is presented in the Secre-tary’s table, those unpaid losses should bediscounted using the discount factor forthe last accident year in the Secretary’stable. Seesection 2.03(3) of Rev. Proc.98–11.

.04 Tables

Accident and Health(Other Than Disability Income or

Credit Disability Insurance)

Discount factor for all years equals97.0874 percent.

Auto Physical Damage

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 89.9430 89.9430 10.0570 9.7134 96.5830AY+ 1 99.3814 9.4384 0.6186 0.5834 94.3008AY+ 2 N/A 0.3093 0.3093 0.3003 97.0874

October 23, 2000 410 2000–43 I.R.B.

Commercial Auto/Truck Liability/Medical

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 25.8075 25.8075 74.1925 65.1995 87.8788AY+ 1 49.8793 24.0718 50.1207 44.3762 88.5386AY+ 2 67.6592 17.7799 32.3408 28.7654 88.9446AY+ 3 79.7711 12.1119 20.2289 18.0419 89.1890AY+ 4 88.2132 8.4421 11.7868 10.4453 88.6190AY+ 5 93.1778 4.9646 6.8222 5.9679 87.4779AY+ 6 95.9623 2.7845 4.0377 3.4633 85.7748AY+ 7 97.0091 1.0468 2.9909 2.5960 86.7980AY+ 8 97.5719 0.5628 2.4281 2.1744 89.5538AY+ 9 98.2191 0.6471 1.7809 1.6403 92.1035AY+10 N/A 0.6471 1.1338 1.0737 94.6950AY+11 N/A 0.6471 0.4867 0.4725 97.0874

.Composite Discount Factors

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 35.4611 35.4611 64.5389 55.4546 85.9243AY+ 1 59.1449 23.6838 40.8551 34.4374 84.2916AY+ 2 70.8220 11.6771 29.1780 24.5073 83.9923AY+ 3 81.9019 11.0799 18.0981 14.5875 80.6022AY+ 4 86.3688 4.4669 13.6312 10.8749 79.7797AY+ 5 90.0497 3.6809 9.9503 7.7459 77.8458AY+ 6 92.7488 2.6991 7.2512 5.4375 74.9880AY+ 7 93.8259 1.0771 6.1741 4.6593 75.4648AY+ 8 94.2415 0.4156 5.7585 4.5150 78.4051AY+ 9 94.8568 0.6153 5.1432 4.1561 80.8087AY+10 N/A 0.6153 4.5279 3.7755 83.3830AY+11 N/A 0.6153 3.9125 3.3716 86.1744AY+12 N/A 0.6153 3.2972 2.9431 89.2617AY+13 N/A 0.6153 2.6819 2.4886 92.7929AY+14 N/A 0.6153 2.0665 2.0063 97.0874

Fidelity/Surety

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 24.1540 24.1540 75.8460 70.2828 92.6652AY+ 1 59.0961 34.9421 40.9039 38.5727 94.3008AY+ 2 N/A 20.4520 20.4520 19.8563 97.0874

2000–43 I.R.B. 411 October 23, 2000

Financial Guaranty/Mortgage Guaranty

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 9.2513 9.2513 90.7487 84.0520 92.6206AY+ 1 50.5659 41.3146 49.4341 46.6168 94.3008AY+ 2 N/A 24.7171 24.7171 23.9971 97.0874

International(Composite)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 35.4611 35.4611 64.5389 55.4546 85.9243AY+ 1 59.1449 23.6838 40.8551 34.4374 84.2916AY+ 2 70.8220 11.6771 29.1780 24.5073 83.9923AY+ 3 81.9019 11.0799 18.0981 14.5875 80.6022AY+ 4 86.3688 4.4669 13.6312 10.8749 79.7797AY+ 5 90.0497 3.6809 9.9503 7.7459 77.8458AY+ 6 92.7488 2.6991 7.2512 5.4375 74.9880AY+ 7 93.8259 1.0771 6.1741 4.6593 75.4648AY+ 8 94.2415 0.4156 5.7585 4.5150 78.4051AY+ 9 94.8568 0.6153 5.1432 4.1561 80.8087AY+10 N/A 0.6153 4.5279 3.7755 83.3830AY+11 N/A 0.6153 3.9125 3.3716 86.1744AY+12 N/A 0.6153 3.2972 2.9431 89.2617AY+13 N/A 0.6153 2.6819 2.4886 92.7929AY+14 N/A 0.6153 2.0665 2.0063 97.0874

Medical Malpractice — Claims-Made

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 6.3899 6.3899 93.6101 77.2316 82.5035AY+ 1 24.0011 17.6112 75.9989 63.7954 83.9426AY+ 2 42.6970 18.6959 57.3030 48.4238 84.5048AY+ 3 58.0610 15.3640 41.9390 35.5479 84.7609AY+ 4 69.6653 11.6043 30.3347 25.7603 84.9203AY+ 5 75.6033 5.9380 24.3967 21.2130 86.9502AY+ 6 81.8786 6.2753 18.1214 16.0413 88.5212AY+ 7 87.8539 5.9753 12.1461 10.8637 89.4415AY+ 8 89.5207 1.6668 10.4793 9.8084 93.5982AY+ 9 94.3025 4.7818 5.6975 5.4805 96.1916AY+10 N/A 4.7818 0.9157 0.8890 97.0874

October 23, 2000 412 2000–43 I.R.B.

Medical Malpractice — Occurrence

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 2.1239 2.1239 97.8761 72.1344 73.6997AY+ 1 6.4831 4.3592 93.5169 72.0374 77.0314AY+ 2 15.5987 9.1156 84.4013 67.0354 79.4246AY+ 3 31.9062 16.3075 68.0938 54.3211 79.7739AY+ 4 45.0931 13.1868 54.9069 44.0468 80.2208AY+ 5 50.0751 4.9821 49.9249 41.5977 83.3206AY+ 6 60.9728 10.8976 39.0272 32.9064 84.3166AY+ 7 69.2138 8.2411 30.7862 26.4221 85.8247AY+ 8 72.8658 3.6519 27.1342 24.2698 89.4433AY+ 9 80.0005 7.1347 19.9995 18.3990 91.9973AY+10 N/A 7.1347 12.8648 12.1707 94.6050AY+11 N/A 7.1347 5.7300 5.5631 97.0874

Miscellaneous Casualty

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 77.6669 77.6669 22.3331 21.1962 94.9091AY+ 1 94.0673 16.4004 5.9327 5.5946 94.3008AY+ 2 N/A 2.9664 2.9664 2.8800 97.0874

Other Liability — Claims-Made

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 10.2440 10.2440 89.7560 74.2142 82.6844AY+ 1 29.3763 19.1323 70.6237 59.0277 83.5805AY+ 2 44.4111 15.0349 55.5889 47.1365 84.7949AY+ 3 67.8197 23.4086 32.1803 25.8963 80.4726AY+ 4 73.4753 5.6555 26.5247 21.6482 81.6150AY+ 5 78.8604 5.3852 21.1396 17.4198 82.4039AY+ 6 83.5027 4.6422 16.4973 13.6992 83.0388AY+ 7 84.0676 0.5649 15.9324 13.9516 87.5674AY+ 8 85.2129 1.1453 14.7871 13.6216 92.1180AY+ 9 90.5992 5.3863 9.4008 8.9033 94.7074AY+10 N/A 5.3863 4.0145 3.8976 97.0874

2000–43 I.R.B. 413 October 23, 2000

Other Liability — Occurrence

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 13.5751 13.5751 86.4249 68.2254 78.9418AY+ 1 26.3964 12.8213 73.6036 59.1744 80.3960AY+ 2 40.2725 13.8761 59.7275 48.4857 81.1782AY+ 3 55.4566 15.1841 44.5434 35.7988 80.3685AY+ 4 65.3309 9.8742 34.6691 27.8085 80.2112AY+ 5 74.0647 8.7339 25.9353 20.5062 79.0668AY+ 6 80.9090 6.8442 19.0910 14.7055 77.0281AY+ 7 84.3622 3.4532 15.6378 12.0442 77.0197AY+ 8 84.6163 0.2542 15.3837 12.5159 81.3585AY+ 9 86.7311 2.1147 13.2689 11.1000 83.6538AY+10 N/A 2.1147 11.1542 9.5978 86.0463AY+11 N/A 2.1147 9.0395 8.0041 88.5462AY+12 N/A 2.1147 6.9247 6.3134 91.1715AY+13 N/A 2.1147 4.8100 4.5197 93.9645AY+14 N/A 2.1147 2.6953 2.6168 97.0874

Multiple Peril Lines(Homeowners/Farmowners Multiple Peril, Commercial Multiple Peril, and Special Liability

(Ocean Marine, Aircraft (All Perils), Boiler and Machinery))

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 55.9587 55.9587 44.0413 39.1921 88.9894AY+ 1 77.8939 21.9352 22.1061 18.9856 85.8842AY+ 2 84.0083 6.1144 15.9917 13.8440 86.5701AY+ 3 91.3188 7.3105 8.6812 7.1573 82.4462AY+ 4 92.1670 0.8482 7.8330 6.7195 85.7851AY+ 5 94.3838 2.2168 5.6162 4.8455 86.2767AY+ 6 96.4959 2.1121 3.5041 2.9651 84.6181AY+ 7 97.3670 0.8712 2.6330 2.2484 85.3944AY+ 8 98.0034 0.6364 1.9966 1.7299 86.6410AY+ 9 98.4059 0.4025 1.5941 1.4207 89.1194AY+10 N/A 0.4025 1.1916 1.0926 91.6918AY+11 N/A 0.4025 0.7892 0.7446 94.3565AY+12 N/A 0.4025 0.3867 0.3754 97.0874

Other(Including Credit)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 66.7418 66.7418 33.2582 31.4101 94.4432AY+ 1 89.2755 22.5337 10.7245 10.1133 94.3008AY+ 2 N/A 5.3622 5.3622 5.2061 97.0874

October 23, 2000 414 2000–43 I.R.B.

Private Passenger Auto Liability/Medical

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 37.9339 37.9339 62.0661 56.4356 90.9282AY+ 1 67.7044 29.7705 32.2956 29.2089 90.4424AY+ 2 81.5316 13.8272 18.4684 16.7457 90.6722AY+ 3 89.8898 8.3583 10.1102 9.1565 90.5677AY+ 4 94.6531 4.7633 5.3469 4.8080 89.9215AY+ 5 97.1265 2.4734 2.8735 2.5532 88.8539AY+ 6 98.4587 1.3322 1.5413 1.3366 86.7155AY+ 7 98.9811 0.5224 1.0189 0.8799 86.3544AY+ 8 99.2330 0.2519 0.7670 0.6740 87.8739AY+ 9 99.4067 0.1737 0.5933 0.5362 90.3643AY+10 N/A 0.1737 0.4196 0.3899 92.9156AY+11 N/A 0.1737 0.2460 0.2348 95.4492AY+12 N/A 0.1737 0.0723 0.0702 97.0874

Products Liability — Claims-Made

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 4.9750 4.9750 95.0250 75.9026 79.8765AY+ 1 15.1072 10.1322 84.8928 70.0889 82.5617AY+ 2 30.9560 15.8488 69.0440 58.0331 84.0523AY+ 3 38.2420 7.2860 61.7580 54.0627 87.5396AY+ 4 68.6101 30.3681 31.3899 26.0760 83.0712AY+ 5 78.5966 9.9865 21.4034 17.3779 81.1923AY+ 6 88.3971 9.8005 11.6029 8.3417 71.8934AY+ 7 93.2957 4.8986 6.7043 3.8042 56.7423AY+ 8 88.3815 -4.9142 11.6185 9.0975 78.3015AY+ 9 89.6105 1.2290 10.3895 8.3856 80.7125AY+10 N/A 1.2290 9.1604 7.6304 83.2971AY+11 N/A 1.2290 7.9314 6.8291 86.1028AY+12 N/A 1.2290 6.7024 5.9791 89.2095AY+13 N/A 1.2290 5.4733 5.0774 92.7656AY+14 N/A 1.2290 4.2443 4.1207 97.0874

2000–43 I.R.B. 415 October 23, 2000

Products Liability – Occurrence

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 9.0653 9.0653 90.9347 69.1525 76.0464AY+ 1 14.9035 5.8382 85.0965 67.3506 79.1462AY+ 2 29.2591 14.3555 70.7409 56.6660 80.1036AY+ 3 45.6462 16.3871 54.3538 43.2383 79.5496AY+ 4 57.5945 11.9483 42.4055 33.5647 79.1518AY+ 5 63.8634 6.2689 36.1366 29.1518 80.6712AY+ 6 75.2266 11.3632 24.7734 19.2231 77.5957AY+ 7 78.2679 3.0413 21.7321 17.2613 79.4274AY+ 8 78.1898 -0.0781 21.8102 18.3929 84.3316AY+ 9 81.8722 3.6825 18.1278 15.7201 86.7184AY+10 N/A 3.6825 14.4453 12.8845 89.1953AY+11 N/A 3.6825 10.7628 9.8762 91.7625AY+12 N/A 3.6825 7.0803 6.6847 94.4128AY+13 N/A 3.6825 3.3979 3.2989 97.0874

Reinsurance A(Nonproportional Property)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 27.1668 27.1668 72.8332 64.8422 89.0284AY+ 1 68.7008 41.5340 31.2992 26.0111 83.1046AY+ 2 70.0362 1.3354 29.9638 26.2197 87.5046AY+ 3 87.5338 17.4976 12.4662 9.7940 78.5641AY+ 4 90.2132 2.6794 9.7868 7.6307 77.9687AY+ 5 91.3751 1.1619 8.6249 6.8986 79.9846AY+ 6 94.3845 3.0095 5.6155 4.2190 75.1316AY+ 7 93.3293 -1.0552 6.6707 5.5628 83.3917AY+ 8 N/A 1.0387 5.6320 4.8317 85.7905AY+ 9 N/A 1.0387 4.5932 4.0560 88.3049AY+10 N/A 1.0387 3.5545 3.2332 90.9598AY+11 N/A 1.0387 2.5158 2.3602 93.8153AY+12 N/A 1.0387 1.4771 1.4340 97.0874

October 23, 2000 416 2000–43 I.R.B.

Reinsurance B(Nonproportional Liability)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 6.6962 6.6962 93.3038 69.1335 74.0951AY+ 1 22.3944 15.6982 77.6056 57.1746 73.6733AY+ 2 32.6486 10.2542 67.3514 50.0947 74.3781AY+ 3 50.2234 17.5748 49.7766 35.0434 70.4014AY+ 4 53.5839 3.3605 46.4161 33.7162 72.6391AY+ 5 55.6838 2.0999 44.3162 33.6066 75.8338AY+ 6 63.6144 7.9306 36.3856 27.4848 75.5376AY+ 7 66.4211 2.8066 33.5789 26.2678 78.2269AY+ 8 N/A 2.8066 30.7723 24.9766 81.1660AY+ 9 N/A 2.8066 27.9656 23.6069 84.4138AY+10 N/A 2.8066 25.1590 22.1537 88.0547AY+11 N/A 2.8066 22.3524 20.6120 92.2140AY+12 N/A 2.8066 19.5457 18.9764 97.0874

Reinsurance C(Financial Lines)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 11.4622 11.4622 88.5378 77.2190 87.2158AY+ 1 44.5791 33.1169 55.4209 47.8112 86.2692AY+ 2 63.9134 19.3343 36.0866 30.8085 85.3739AY+ 3 65.6185 1.7051 34.3815 30.9285 89.9569AY+ 4 79.9778 14.3593 20.0222 18.0220 90.0101AY+ 5 88.9152 8.9374 11.0848 9.9140 89.4380AY+ 6 91.2490 2.3338 8.7510 8.1140 92.7206AY+ 7 94.7645 3.5155 5.2355 4.9872 95.2564AY+ 8 N/A 3.5155 1.7200 1.6699 97.0874

Special Property(Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 57.4895 57.4895 42.5105 40.4949 95.2586AY+ 1 90.5193 33.0297 9.4807 8.9404 94.3008AY+ 2 N/A 4.7404 4.7404 4.6023 97.0874

2000–43 I.R.B. 417 October 23, 2000

Workers’ Compensation

DiscountedCumulative Estimated Unpaid UnpaidLosses Losses Paid Losses at Losses at Discount

Tax Year Paid Each Year Year End Year End Factors(%) (%) (%) (%) (%)

AY+ 0 23.6461 23.6461 76.3539 62.5642 81.9398AY+ 1 44.8166 21.1705 55.1834 44.5688 80.7648AY+ 2 57.9652 13.1486 42.0348 33.7399 80.2667AY+ 3 72.0542 14.0889 27.9458 21.2831 76.1583AY+ 4 80.5542 8.5000 19.4458 13.8242 71.0909AY+ 5 84.8876 4.3334 15.1124 10.2026 67.5118AY+ 6 87.1173 2.2297 12.8827 8.5274 66.1927AY+ 7 88.2647 1.1473 11.7353 7.8649 67.0194AY+ 8 88.5404 0.2757 11.4596 8.0599 70.3333AY+ 9 88.8062 0.2658 11.1938 8.2770 73.9426AY+10 N/A 0.2658 10.9279 8.5072 77.8484AY+11 N/A 0.2658 10.6621 8.7515 82.0804AY+12 N/A 0.2658 10.3963 9.0107 86.6720AY+13 N/A 0.2658 10.1304 9.2856 91.6604AY+14 N/A 0.2658 9.8646 9.5773 97.0874

DRAFTING INFORMATION

The principal author of this revenueprocedure is Katherine A. Hossofsky ofthe Office of the Associate Chief Counsel(Financial Institutions and Products). Forfurther information regarding this revenueprocedure, contact Ms. Hossofsky at(202) 622-3477 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters(Also Part I, Sections 832, 846; 1.832–4, 1.846–1.)

Rev. Proc. 2000–45

SECTION 1. PURPOSE

This revenue procedure prescribes thesalvage discount factors for the 2000 acci-dent year. These factors will be used forcomputing discounted estimated salvagerecoverable under § 832 of the InternalRevenue Code.

SEC. 2. BACKGROUND

Section 832(b)(5)(A) requires that allestimated salvage recoverable (includingthat which cannot be treated as an assetfor state accounting purposes) be takeninto account in computing the deduction

for losses incurred. Under § 832(b)(5)(A), paid losses are to be reduced bysalvage and reinsurance recovered duringthe taxable year. This amount is adjustedto reflect changes in discounted unpaidlosses on nonlife insurance contracts andin unpaid losses on life insurance con-tracts. An adjustment is then made to re-flect any changes in discounted estimatedsalvage recoverable and in reinsurance re-coverable.

Pursuant to § 832(b), the amount of es-timated salvage is determined on a dis-counted basis in accordance with proce-dures established by the Secretary.

SEC. 3. SCOPE

This revenue procedure applies to anytaxpayer that is required to discount esti-mated salvage recoverable under § 832.

SEC. 4. APPLICATION

.01 The following tables present sepa-rately for each line of business the dis-count factors under § 832 for the 2000 ac-cident year. All the discount factorspresented in this section were determinedusing the applicable interest rate under § 846(c) for 2000, which is 6.09 percent,

and by assuming all estimated salvage isrecovered in the middle of each calendaryear. SeeRev. Proc. 98–12, 1998–1 C.B.367, for background regarding the tables.

.02 These tables must be used by tax-payers irrespective of whether theyelected to discount unpaid losses usingtheir own historical experience under § 846.

.03 Section V of Notice 88–100,1988–2 C. B. 439, provides guidance con-cerning the determination of discount fac-tors for unpaid losses for accident yearsnot separately reported on the annualstatement. Taxpayers that do not use themethodology set forth in section V of No-tice 88–100 should instead use the dis-count factors for the appropriate year inthe Secretary’s table for that line of busi-ness. If such taxpayers have unpaidlosses relating to an accident year that isolder than the last accident year for whicha discount factor is presented in the Secre-tary’s table, those unpaid losses should bediscounted using the discount factor forthe last accident year in the Secretary’stable. Seesection 2.03(3) of Rev. Proc.98–11, 1998–1 C.B. 358.

.04 Tables.

October 23, 2000 418 2000–43 I.R.B.

Accident and Health(Other Than Disability Income orCredit Disability Insurance)

Discount factor for all years equals97.0874 percent.

Auto Physical Damage

DiscountTax Year Factors

(%)

AY+ 0 95.7079AY+ 1 94.3008AY+ 2 97.0874

Commercial Auto/TruckLiability/Medical

DiscountTax Year Factors

(%)

AY+ 0 88.4462AY+ 1 87.6196AY+ 2 89.3091AY+ 3 88.6027AY+ 4 88.4348AY+ 5 90.7689AY+ 6 86.1529AY+ 7 91.6750AY+ 8 90.1421AY+ 9 92.6871AY+10 95.2242AY+11 97.0874

Composite Discount Factors

DiscountTax Year Factors

(%)

AY+ 0 86.0068AY+ 1 84.4299AY+ 2 84.0175AY+ 3 83.9135AY+ 4 84.6433AY+ 5 85.2133AY+ 6 85.2701AY+ 7 85.3660AY+ 8 88.1610AY+ 9 90.6657AY+10 93.2331AY+11 95.7807AY+12 97.0874

Fidelity/Surety

DiscountTax Year Factors

(%)

AY+ 0 93.0043AY+ 1 94.3008AY+ 2 97.0874

Financial Guaranty/MortgageGuaranty

DiscountTax Year Factors

(%)

AY+ 0 94.8017AY+ 1 94.3008AY+ 2 97.0874

International(Composite)

DiscountTax Year Factors

(%)

AY+ 0 86.0068AY+ 1 84.4299AY+ 2 84.0175AY+ 3 83.9135AY+ 4 84.6433AY+ 5 85.2133AY+ 6 85.2701AY+ 7 85.3660AY+ 8 88.1610AY+ 9 90.6657AY+10 93.2331AY+11 95.7807AY+12 97.0874

Medical Malpractice — Claims-Made

DiscountTax Year Factors

(%)

AY+ 0 70.6135AY+ 1 73.2471AY+ 2 71.8267AY+ 3 71.2085AY+ 4 74.7120AY+ 5 73.1233AY+ 6 82.6622AY+ 7 91.6505AY+ 8 96.4072AY+ 9 97.0874

Medical Malpractice — Occurrence

DiscountTax Year Factors

(%)

AY+ 0 64.5191AY+ 1 67.8389AY+ 2 72.3139AY+ 3 76.0455AY+ 4 72.9166AY+ 5 78.8620AY+ 6 83.7311AY+ 7 86.8009AY+ 8 91.1931AY+ 9 93.8108AY+10 96.4471AY+11 97.0874

Miscellaneous Casualty

DiscountTax Year Factors

(%)

AY+ 0 95.1290AY+ 1 94.3008AY+ 2 97.0874

Multiple Peril Lines(Homeowners/Farmowners MultiplePeril, Commercial Multiple Peril, andSpecial Liability (Ocean Marine,Aircraft (All Perils), Boiler andMachinery))

DiscountTax Year Factors

(%)

AY+ 0 88.5313AY+ 1 87.5052AY+ 2 88.2611AY+ 3 87.9246AY+ 4 89.0327AY+ 5 90.4578AY+ 6 90.4533AY+ 7 89.4276AY+ 8 91.7961AY+ 9 94.4397AY+10 97.0874

Other(Including Credit)

DiscountTax Year Factors

(%)

AY+ 0 96.1583AY+ 1 94.3008AY+ 2 97.0874

2000–43 I.R.B. 419 October 23, 2000

Other Liability — Claims-Made

DiscountTax Year Factors

(%)

AY+ 0 77.8928AY+ 1 83.2885AY+ 2 82.3182AY+ 3 80.0331AY+ 4 82.9792AY+ 5 87.5716AY+ 6 86.1171AY+ 7 91.6842AY+ 8 93.7737AY+ 9 96.4015AY+10 97.0874

Other Liability — Occurrence

DiscountTax Year Factors

(%)

AY+ 0 78.8476AY+ 1 79.5688AY+ 2 81.9224AY+ 3 83.8683AY+ 4 85.1067AY+ 5 82.7221AY+ 6 86.7561AY+ 7 88.6932AY+ 8 92.7419AY+ 9 95.2771AY+10 97.0874

Private Passenger AutoLiability/Medical

DiscountTax Year Factors

(%)

AY+ 0 91.7145AY+ 1 91.1741AY+ 2 90.2569AY+ 3 89.8777AY+ 4 89.4206AY+ 5 89.8689AY+ 6 88.6823AY+ 7 89.3993AY+ 8 90.0819AY+ 9 92.6259AY+10 95.1657AY+11 97.0874

Products Liability — Claims-Made

DiscountTax Year Factors

(%)

AY+ 0 79.2866AY+ 1 81.3032AY+ 2 85.7298AY+ 3 85.6427AY+ 4 81.3092AY+ 5 88.2121AY+ 6 81.0185AY+ 7 88.3819AY+ 8 96.8185AY+ 9 97.0874

Products Liability — Occurrence

DiscountTax Year Factors

(%)

AY+ 0 75.8372AY+ 1 78.4119AY+ 2 76.8096AY+ 3 78.0983AY+ 4 79.8362AY+ 5 79.1928AY+ 6 80.5510AY+ 7 72.7819AY+ 8 78.1849AY+ 9 80.6043AY+10 83.2009AY+11 86.0229AY+12 89.1515AY+13 92.7357AY+14 97.0874

Reinsurance A(Nonproportional Property)

DiscountTax Year Factors

(%)

AY+ 0 86.7196AY+ 1 89.8651AY+ 2 92.5548AY+ 3 91.9205AY+ 4 79.2342AY+ 5 94.8666AY+ 6 93.5010AY+ 7 96.0788AY+ 8 97.0874

Reinsurance B(Nonproportional Liability)

DiscountTax Year Factors

(%)

AY+ 0 74.9392AY+ 1 77.1865AY+ 2 77.9061AY+ 3 77.3172AY+ 4 79.7911AY+ 5 74.9223AY+ 6 76.6707AY+ 7 84.0847AY+ 8 86.4718AY+ 9 88.9546AY+10 91.5395AY+11 94.2379AY+12 97.0874

Reinsurance C(Financial Lines)

DiscountTax Year Factors

(%)

AY+ 0 81.2986AY+ 1 83.6608AY+ 2 86.8994AY+ 3 92.7099AY+ 4 91.3004AY+ 5 93.1619AY+ 6 89.7226AY+ 7 96.9751AY+ 8 97.0874

Special Property (Fire, Allied Lines, Inland Marine,Earthquake, Glass, Burglary andTheft)

DiscountTax Year Factors

(%)

AY+ 0 92.3377AY+ 1 94.3008AY+ 2 97.0874

Workers’ Compensation

DiscountTax Year Factors

(%)

AY+ 0 78.6954AY+ 1 81.0988AY+ 2 82.9848AY+ 3 84.5349AY+ 4 84.6485AY+ 5 84.8143AY+ 6 85.9824AY+ 7 86.7267AY+ 8 89.1111AY+ 9 91.6840AY+10 94.3504AY+11 97.0874

DRAFTING INFORMATION

The principal author of this revenueprocedure is Katherine A. Hossofsky ofthe Office of the Associate Chief Counsel(Financial Institutions and Products). Forfurther information regarding this revenueprocedure, contact Ms. Hossofsky at(202) 622-3477 (not a toll-free number).

October 23, 2000 420 2000–43 I.R.B.

2000–43 I.R.B. 421 October 23, 2000

Notice of Proposed Rulemakingand Notice of Public Hearing

Nondiscrimination Requirementsfor Certain Defined ContributionRetirement Plans

REG–114697–00

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations that would prescribeconditions under which certain definedcontribution retirement plans (sometimesreferred to as “new comparability” plans)are permitted to demonstrate compliancewith applicable nondiscrimination re-quirements based on plan benefits ratherthan plan contributions. This documentalso provides notice of a public hearingon these proposed regulations.

DATES: Written comments, requests tospeak and outlines of oral comments to bediscussed at the public hearing scheduledfor January 25, 2001, at 10 a.m., must bereceived by January 5, 2001.

ADDRESSES: Send submissions to:CC:M&SP:RU (REG–114697–00) room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be handdelivered Monday through Friday be-tween the hours of 8 a.m. and 5 p.m. to:CC:M&SP:RU (REG–114697–00),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue NW.,Washington, DC. Alternatively, taxpay-ers may submit comments electronicallyvia the Internet by selecting the “TaxRegs” option of the IRS Home Page, orby submitting comments directly to theIRS Internet site at:http://www.irs.gov/tax_regs/reglist.html.The public hearing will be held in the IRSAuditorium (7th Floor), Internal RevenueBuilding, 1111 Constitution Avenue NW.,Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, JohnT. Ricotta, 202-622-6060 or Linda S. F.Marshall, 202-622-6090; concerning sub-

missions and the hearing, and/or to beplaced on the building access list to attendthe hearing, LaNita VanDyke, 202-622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 1 under sec-tion 401(a)(4) of the Internal RevenueCode of 1986 (Code).

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

Section 415(b)(6)(A) provides that thecomputation of benefits under a definedcontribution plan, for purposes of section401(a)(4), shall not be made on a basis in-consistent with regulations prescribed bythe Secretary. The legislative history ofthis provision explains that, in the case oftarget benefit and other defined contribu-tion plans, “regulations may establish rea-sonable earnings assumptions and otherfactors for these plans to prevent discrim-ination.” Conf. Rep. No. 1280, 93dCong., 2d Sess. 277 (1974).

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

A defined contribution plan (other thanan ESOP) may, however, satisfy the regu-lations on the basis of benefits by using“cross-testing” pursuant to rules providedin §1.401(a)(4)–8 of the regulations.Under this cross-testing method, contri-butions are converted to equivalent bene-fits payable at normal retirement age andtested on the basis of these equivalent

benefits. The conversion is done by mak-ing an actuarial projection of the benefitspayable at normal retirement age that areattributable to the contributions. Thus,this cross-testing method effectively per-mits nonelective employer contributionsunder a defined contribution plan to betested on the basis of the benefits attribut-able to those contributions, in a mannersimilar to the testing of employer-pro-vided benefits under a defined benefitplan.

In Notice 2000–14 (2000–10 I.R.B.737), released February 24, 2000, the IRSand the Treasury Department initiated areview of issues related to use of thecross-testing method by so-called “newcomparability plans” and requested pub-lic comments on this plan design fromplan sponsors, plan participants and otherinterested parties. In general, new com-parability plans are defined contributionplans that have built-in disparities be-tween the allocation rates for classifica-tions of participants consisting entirely orpredominately of HCEs and the allocationrates for other employees.

In a typical new comparability plan,HCEs receive high allocation rates, whilenonhighly compensated employees(NHCEs), regardless of their age or yearsof service, receive comparatively low al-location rates. For example, HCEs insuch a plan might receive allocations of18 or 20% of compensation, whileNHCEs might receive allocations of 3%of compensation. A similar plan design,sometimes known as a “super-integrated”plan, provides for an additional alloca-tion rate that applies only to compensa-tion in excess of a specified threshold, butthe specified threshold (e.g., $100,000) orthe additional allocation rate (e.g., 10%)is higher than the maximum threshold andrate allowed under the permitted disparityrules of section 401(l).

These new comparability and similarplans rely on the cross-testing method todemonstrate compliance with the nondis-crimination rules by comparing the actu-arially projected value of the employercontributions for the younger NHCEswith the actuarial projections of the largercontributions (as a percentage of compen-sation) for the older HCEs. As a result,these plans are able generally to provide

Part IV. Items of General Interest

October 23, 2000 422 2000–43 I.R.B.

higher rates of employer contributions toHCEs, while NHCEs are not allowed toearn the higher allocation rates as theywork additional years for the employer orgrow older. Notwithstanding the analyti-cal underpinnings of cross-testing, theIRS and the Treasury Department are con-cerned whether new comparability andsimilar plans are consistent with the basicpurpose of the nondiscrimination rulesunder section 401(a)(4).

A variety of public comments weresubmitted in response to Notice2000–14. Some comments expressedthe view that changes in the applicationof the nondiscrimination rules to newcomparability plans are unnecessary.These comments noted that in somecases such plans are adopted by employ-ers that previously had no retirementplan for their employees. At the sametime, many of these comments advancedsuggestions as to the types of conditionsthat might be imposed on new compara-bility plans if changes in the rules are infact proposed.

Other comments expressed the viewthat the rules need to be changed to in-crease the contr ibutions made forNHCEs in new comparability plans andsimilar tax-qualified plan designs. Thesecomments suggested various methodsfor ensuring that NHCEs receive largerallocations of employer contributionsunder new comparability plans, includ-ing imposing a maximum ratio of the al-location rates for HCEs to those forNHCEs or requiring a minimum alloca-tion rate for the NHCEs.

Still other comments questioned thepolicy justification for permitting newcomparability plans under the nondis-crimination rules governing tax-quali-fied plans because new comparabilityplan designs often provide such an over-whelming percentage of total plan allo-cations to HCEs, with only a modestpercentage of the plan allocations goingto the NHCEs. Some of these commentsexpressed concern that new comparabil-ity plans in some instances have beenmarketed as a technique for limitingmost employees to lower allocationrates than they would receive underother defined contribution plan designs(such as salary ratio or age-weighted)and allocating the difference to one ormore HCEs. They noted that, in some

cases, the percentage of total plan allo-cations provided to the HCEs can ex-ceed 90%.

After consideration of the commentsreceived, the IRS and Treasury are issu-ing these proposed regulations, whichwould prescribe conditions that newcomparability and similar plans mustsatisfy if they are to use the cross-testingmethod. The proposed regulations pre-serve the existing cross-testing rules ofthe section 401(a)(4) regulations, andwould not affect cross-tested definedcontribution plans that provide broadlyavailable allocation rates, as defined inthe proposed regulations. The definitionof broadly available allocation rates in-cludes plans that base allocations or al-location rates on age or service. In con-trast to new comparability plans, theseplans provide an opportunity for partici-pants to “grow into” higher allocationrates as they age or accumulate addi-tional service.

These proposed regulations would con-tinue to permit new comparability plans.As suggested in various comments, theproposed regulations would set forth aminimum allocation “gateway” thatwould constrain the plan designs with thegreatest disparity in favor of HCEs, whileleaving many new comparability plan de-signs unchanged. A new comparabilityplan that satisfies the minimum allocationgateway could continue to use the exist-ing cross-testing rules of the section401(a)(4) regulations.

The proposed regulations also wouldprevent circumvention of the minimumallocation gateway by aggregating (forpurposes of satisfying the nondiscrimina-tion rules) a new comparability definedcontribution plan with a defined benefitplan that provides only minimal benefitsor covers only a relatively small numberof the employees, or by aggregating a de-fined contribution plan with a definedbenefit plan that benefits primarily HCEs.However, an aggregated defined contribu-tion and defined benefit plan that is pri-marily defined benefit in character (as de-fined in the proposed regulations) couldtest for nondiscrimination on the basis ofbenefits in the same manner as under cur-rent law. Similarly, the ability to test fornondiscrimination on a benefits basis asunder current law would be unrestricted ifeach of the defined contribution and de-

fined benefit portions of the aggregatedplan is a broadly available separate plan(as defined in the proposed regulations).

The proposed regulations would not af-fect defined benefit plans except where adefined contribution plan is aggregatedwith a defined benefit plan for nondis-crimination purposes and thus is a part ofa DB/DC plan (as defined in§1.401(a)(4)–9). The proposed regula-tions would not apply merely because aplan sponsor maintains both a definedcontribution plan and a defined benefitplan. The proposed regulations would notrequire aggregation of a defined contribu-tion plan with a defined benefit plan orotherwise modify the existing rules re-garding when plans are required or per-mitted to be aggregated.

Explanation of Provisions

A. Overview

The basic structure of the proposed reg-ulations permits defined contributionplans with broadly available allocationrates to test on a benefits basis (“cross-test”) in the same manner as under currentlaw, and permits other defined contribu-tion plans to cross-test once they pass agateway that prescribes minimum alloca-tion rates for NHCEs. Similarly, the pro-posed regulations permit a DB/DC plan totest on a benefits basis in the same man-ner as under current law if the DB/DCplan either is primarily defined benefit incharacter or consists of broadly availableseparate plans. Other DB/DC plans arepermitted to test on a benefits basis oncethey pass a corresponding gateway pre-scribing minimum aggregate normal allo-cation rates for NHCEs.

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

The proposed regulations would re-quire that a defined contribution plan thatdoes not provide broadly available alloca-tion rates (as defined in these proposedregulations) satisfy a gateway in order tobe eligible to use the cross-testing rules tomeet the nondiscrimination requirementsof section 401(a)(4). A plan would satisfythis minimum allocation gateway if eachNHCE in the plan has an allocation ratethat is at least one third of the allocationrate of the HCE with the highest alloca-

2000–43 I.R.B. 423 October 23, 2000

tion rate1; however, a plan would bedeemed to satisfy this minimum alloca-tion gateway if each NHCE received anallocation of at least 5% of the NHCE’scompensation (within the meaning of sec-tion 415(c)(3)).

The proposed regulations would notchange the general rule prohibiting aggre-gation of a 401(k) plan or 401(m) planwith a plan providing nonelective contri-butions. Accordingly, elective contribu-tions and matching contributions wouldnot be taken into account for purposes ofthe gateway. If an employer also providesa 401(k) plan, however, then to the extentthe HCEs are electing contributions underthat plan, the highest HCE allocation ratemay be lower than it otherwise would be,which, in turn would lower the minimumrequired allocation for the NHCEs underthe gateway. Further, if the employersponsors a safe harbor 401(k) plan thatprovides for 3% nonelective contribu-tions, then, as noted in Notice 98–52(1998–2 C.B. 632), those nonelectivecontributions may be taken into accountin determining the allocation rates for theNHCEs under section 401(a)(4), includ-ing the minimum allocation gateway.

C. Plans with Broadly AvailableAllocation Rates

As suggested in Notice 2000–14, a planthat has broadly available allocation rateswould not need to satisfy the minimum al-location gateway and may continue to betested for nondiscrimination on the basisof benefits as under current law. In orderto be broadly available, each allocationrate under the plan must be currentlyavailable to a group of employees that sat-isfies section 410(b) (without regard tothe average benefit percentage test). Thus,for example, if within one plan an em-ployer provides different allocation ratesfor nondiscriminatory groups of employ-ees at different locations or differentprofit centers, the plan would not need tosatisfy the minimum allocation gatewayin order to use cross testing.

In addition, a plan that provides alloca-tion rates that increase as an employeeages or accumulates additional service

would be treated as having broadly avail-able allocation rates, if the schedule of al-location rates satisfies certain conditionsthat permit participants to “grow into”higher allocation rates. The conditionsare that the same schedule of allocationrates is available to all employees in theplan and that the schedule provides forsmoothly increasing allocation rates atregular intervals of age or service.

The proposed regulation would providethat in order for a schedule of allocationrates to increase smoothly, the allocationrate for each age or service band cannotbe more than 5 percentage points higherthan the allocation rate for the immedi-ately preceding band and cannot be morethan twice that allocation rate. For exam-ple, if the allocation rate for an age or ser-vice band were 6%, the allocation rate forthe next higher age or service band couldnot exceed 11% (i.e., the lesser of 11%(6% plus 5%) and 12% (2 times 6%)).

Further, in order for a schedule of allo-cation rates to be considered to be in-creasing smoothly, the ratio of the alloca-tion rate for any age or service band to theallocation rate for the immediately pre-ceding band cannot exceed the ratio of theallocation rates between the two immedi-ately preceding bands. The proposed reg-ulations would provide that the intervalsfor the age or service bands are regular ifthey are all of the same length (althoughthis requirement generally would notapply to the first and last bands).

The definition of broadly available al-location rates is designed to be suffi-ciently flexible to accommodate a widevariety of age- and service-based plans(including age-weighted profit-sharingplans that provide for allocations that re-sult in the same equivalent accrual rate forall employees).

The conditions described above relat-ing to a plan’s schedule of age-based orservice-based allocation rates are in-tended to exempt from the minimum allo-cation gateway those plans in whichNHCEs actually receive the benefit ofhigher rates as they attain higher ages orcomplete additional years of service.Without conditions such as these, planscan be designed to backload allocationrates excessively, providing for lengthyplateau periods in which rates increase lit-tle if at all, followed by sharp increases.

Comments are invited on whether there

are plans using schedules of allocationrates (such as schedules of rates based onpoints or otherwise combining age andservice) that would fall outside the defini-tion of broadly available allocation ratesbut that do afford sufficient opportunityfor NHCEs to “grow into” higher alloca-tion rates.

D. Application to Defined ContributionPlans That Are Combined with DefinedBenefit Plans

The proposed regulations would pre-scribe rules for testing defined contribu-tion plans that are aggregated with de-fined benefit plans for purposes ofsections 401(a)(4) and 410(b). Theserules would apply in situations in whichthe employer aggregates the plans be-cause one of the plans does not satisfysections 401(a)(4) and 410(b) standingalone.

1. Gateway for benefits testing ofcombined plans

Under the proposed regulations, thecombination of a defined contributionplan and a defined benefit plan maydemonstrate nondiscrimination on thebasis of benefits if the combined plan isprimarily defined benefit in character,consists of broadly available separateplans (as these terms are defined in theproposed regulations), or satisfies a gate-way requirement. This minimum aggre-gate allocation gateway is generally simi-lar to the minimum allocation gateway fordefined contribution plans that are notcombined with a defined benefit plan. Toapply this minimum aggregate allocationgateway, the employee’s aggregate nor-mal allocation rate is determined byadding the employee’s allocation underthe defined contribution plan to the em-ployee’s equivalent allocation under thedefined benefit plan. The use of aggrega-tion would allow an employer that pro-vides both a defined contribution and adefined benefit plan to the NHCEs to takeboth plans into account in determiningwhether the minimum aggregate alloca-tion gateway is met.

Under the gateway, if the aggregatenormal allocation rate of the HCE withthe highest aggregate normal allocationrate under the plan (HCE rate) is less than15%, the aggregate normal allocation ratefor all NHCEs must be at least 1/3 of the

1For example, if any HCE had an allocation of 12%of compensation, all NHCEs in the plan would berequired to have an allocation of at least 4% of com-pensation.

October 23, 2000 424 2000–43 I.R.B.

HCE rate. If the HCE rate is between15% and 25%, the aggregate normal allo-cation rate for all NHCEs must be at least5%. If the HCE rate exceeds 25%, thenthe aggregate normal allocation rate foreach NHCE must be at least 5% plus onepercentage point for each 5-percentage-point increment (or portion thereof) bywhich the HCE rate exceeds 25% (e.g.,the NHCE minimum is 6% for an HCErate that exceeds 25% but not 30%, and7% for an HCE rate that exceeds 30% butnot 35%, etc.).

In addition, in determining the equiv-alent allocation rate for an NHCE undera defined benefit plan, a plan is permit-ted to treat each NHCE who benefitsunder the defined benefit plan as havingan equivalent allocation rate equal to theaverage of the equivalent allocation ratesunder the defined benefit plan for allNHCEs benefitting under that plan. Thisaveraging rule recognizes the “grow-in”feature inherent in traditional definedbenefit plans (i.e., the defined benefitplan provides higher equivalent alloca-tion rates at higher ages).

Comments are invited on possible spe-cial situations involving DB/DC plans,such as situations arising as a result of amerger or acquisition or a situation inwhich some HCEs in a DB/DC plan haveunusually high equivalent normal alloca-tion rates for reasons other than the de-sign of the plan. Comments are invitedas to whether the regulations should ad-dress such special circumstances and, ifso, how (e.g., through a maximum re-quired rate for NHCEs under a DB/DCplan or other approaches).

2. Primarily defined benefit in character

A combined plan that is primarily de-fined benefit in character would not besubject to the gateway requirement andmay continue to be tested for nondis-crimination on the basis of benefits asunder current law. A combined planwould be primarily defined benefit incharacter if, for more than 50% of theNHCEs benefitting under the plan, thenormal accrual rate attributable to bene-fits provided under defined benefit plansfor the NHCE exceeds the equivalent ac-crual rate attributable to contributionsunder defined contribution plans for theNHCE. For example, a DB/DC planwould be primarily defined benefit in

character where the defined contributionplan covers only salaried employees, thedefined benefit plan covers only hourlyemployees, and more than half of theNHCEs participating in the DB/DC planare hourly employees participating onlyin the defined benefit plan.

3. Broadly available separate plans

A combined plan that consists ofbroadly available separate plans wouldnot be subject to the gateway require-ment and may continue to be tested fornondiscrimination on the basis of bene-fits as under current law. A DB/DC planconsists of broadly available separateplans if the defined contribution planand the defined benefit plan each wouldsatisfy the requirements of section410(b) and the nondiscrimination inamount requirement of§1.401(a)(4)–1(b)(2) if each plan weretested separately, assuming satisfactionof the average benefit percentage test of§1.410(b)–5. Thus, the defined contri-bution plan must separately satisfy thenondiscrimination requirements (takinginto account these proposed regulationsas applicable), but for this purpose as-suming satisfaction of the average bene-fit percentage test. Similarly, the de-fined benefit plan must separately satisfythe nondiscrimination requirements, as-suming for this purpose satisfaction ofthe average benefit percentage test. Inconducting the required separate testing,all plans of a single type (defined contri-bution or defined benefit) within theDB/DC plan are aggregated, but thoseplans are tested without regard to plansof the other type.

This alternative would be useful, forexample, where an employer maintains adefined contribution plan that provides auniform allocation rate for all coveredemployees at one business unit and asafe harbor defined benefit plan for allcovered employees at another unit,where the group of employees coveredby each plan is a group that satisfies thenondiscriminatory classification require-ment of section 410(b). Because the em-ployer provides broadly available sepa-rate plans, it may continue to aggregatethe plans and test for nondiscriminationon the basis of benefits, as an alternativeto using the qualified separate line ofbusiness rules or demonstrating satisfac-

tion of the average benefit percentagetest.

E. Use of Component Plans andPermitted Disparity

Component plans under the restructur-ing rules cannot be used for the determi-nation of whether a defined contributionplan provides broadly available allocationrates or satisfies the minimum allocationgateway, or the determination of whethera DB/DC plan satisfies the minimum ag-gregate allocation gateway, is primarilydefined benefit in character, or consists ofbroadly available separate plans. For pur-poses of the two gateways and determin-ing whether a DB/DC plan is primarilydefined benefit in character, allocationrates and equivalent allocation rates aredetermined without the use of permitteddisparity. For purposes of determiningwhether a DB/DC plan consists ofbroadly available separate plans, permit-ted disparity may be used in the definedcontribution plan or the defined benefitplan but not in both plans with respect toeach employee who participates in both.

Proposed Effective Date

The regulations are proposed to be ap-plicable for plan years beginning on orafter January 1, 2002.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It alsohas been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and because the regulationdoes not impose a collection of informa-tion on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply. Pursuant to section 7805(f) ofthe Code, these proposed regulations willbe submitted to the Chief Counsel for Ad-vocacy of the Small Business Administra-tion for comment on their impact on smallbusiness.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any electronic or

2000–43 I.R.B. 425 October 23, 2000

written comments (preferably a signedoriginal and eight (8) copies) that are sub-mitted timely to the IRS. In addition tothe other requests for comments set forthin this document, the IRS and Treasuryalso request comments on the clarity ofthe proposed rule and how it may be madeeasier to understand. All comments willbe available for public inspection andcopying.

A public hearing has been scheduledfor January 25, 2001, at 10 a.m. in the IRSAuditorium (7th Floor), Internal RevenueBuilding, 1111 Constitution Avenue NW.,Washington, DC. Due to building secu-rity procedures, visitors must enter at the10th street entrance, located between Con-stitution and Pennsylvania Avenues, NW.In addition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 15 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATIONCONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons who wish to present oral com-ments at the hearing must submit writtencomments and an outline of the topics tobe discussed and the time to be devoted toeach topic (signed original and eight (8)copies) by January 5, 2001.

A period of 10 minutes will be allottedto each person for making comments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.

Drafting Information

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

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:

PART 1 — INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. In §1.401(a)(4)–8, paragraph

(b)(1) is revised to read as follows:

§1.401(a)(4)–8 Cross-testing.

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

efits provided under a defined contributionplan—(1) General rule and gateway—(i)General rule. Equivalent benefits under adefined contribution plan (other than anESOP) are nondiscriminatory in amount fora plan year if—

(A) The plan would satisfy §1.401-(a)(4)–2(c)(1) for the plan year if an equiv-alent accrual rate, as determined underparagraph (b)(2) of this section, were sub-stituted for each employee’s allocation ratein the determination of rate groups; and

(B) For plan years beginning on or afterJanuary 1, 2002, if the plan does not havebroadly available allocation rates (withinthe meaning of paragraph (b)(1)(iii) of thissection) for the plan year, the plan satisfiesthe minimum allocation gateway of para-graph (b)(1)(iv) of this section for the planyear.

(ii) Allocations after testing age. A plandoes not fail to satisfy paragraph(b)(1)(i)(A) of this section merely becauseallocations are made at the same rate foremployees who are older than their testingage (determined without regard to the cur-rent-age rule in paragraph (4) of the defini-tion of testing agein §1.401(a)(4)–12), asthey are made for employees who are atthat age.

(iii) Broadly available allocation rates—(A) In general. A plan has broadly avail-able allocation rates for the plan year ifeach allocation rate under the plan is cur-rently available during the plan year (withinthe meaning of §1.401(a)(4)–4(b)(2)), to agroup of employees that satisfies section410(b) (without regard to the average bene-fit percentage test of §1.410(b)–5). For thispurpose, the disregard of age and serviceconditions described in §1.401(a)(4)–4(b)(2)(ii)(A) applies only if the plan pro-vides an allocation formula under whichthe allocation rates for all employees bene-

fitting under the plan are determined usinga single schedule of rates that are basedsolely on either age or service, and only ifthe allocation rates under the schedule in-crease smoothly at regular intervals, withinthe meaning of paragraphs (b)(1)(iii)(B)and (C) of this section. A plan does not failto provide broadly available allocation ratesmerely because it provides the minimumbenefit described in section 416(c)(2).

(B) Smoothly increasing schedule of al-location rates. A plan uses a single sched-ule of allocation rates that are based solelyon age or service if it uses a single scheduleof allocation rates that consists of a seriesof either age or service bands under whichthe same allocation rate applies to all em-ployees whose age is within each age bandor whose years of service are within eachservice band. A schedule of allocation ratesincreases smoothly if the allocation rate foreach age or service band within the sched-ule is greater than the allocation rate for theimmediately preceding band (i.e., the ageor service band with the next lower numberof years of age or service) but by no morethan 5 percentage points. However, aschedule of allocation rates will not betreated as increasing smoothly if the ratio ofthe allocation rate for any age or serviceband to the rate for the immediately preced-ing band is more than 2.0 or if it exceedsthe ratio of allocation rates between the twoimmediately preceding bands.

(C) Regular intervals. A schedule of al-location rates has regular intervals of age orservice if each age or service band, otherthan the band associated with the highestage or years of service, is the same length.For this purpose, if the schedule is based onage, the first age band will be deemed to beof the same length as the other bands if itends at or before age 25. If the first ageband ends after age 25, then, in determiningwhether the length of the first band is thesame as the length of other bands, the start-ing age for the first age band is permitted tobe treated as age 25 or any age earlier than25.

(iv) Minimum allocation gateway. Aplan satisfies the minimum allocation gate-way of this paragraph (b)(1)(iv) if eachNHCE has an allocation rate that is at leastone third of the allocation rate of the HCEwith the highest allocation rate. How-ever, a plan is deemed to satisfy this mini-mum allocation gateway if each NHCEreceives an allocation of at least 5% of the

October 23, 2000 426 2000–43 I.R.B.

NHCE’s compensation within the mean-ing of section 415(c)(3).

(v) Determination of allocation rates.For purposes of this paragraph (b)(1), allo-cations and allocation rates are determined

under §1.401(a)(4)–2(c)(2), but withouttaking into account the imputation of per-mitted disparity under §1.401(a)(4)–7 inapplying the minimum allocation gatewayof paragraph (b)(1)(iv) of this section.

(vi) Examples. The following examplesillustrate the rules in this paragraph (b)(1):

Example 1. (i) Plan M is a defined contributionplan that provides an allocation formula under whichallocations are provided to all employees according tothe following schedule:

Ratio of Allocation Rate forYears of Service Allocation Rate Band to Allocation Rate for

Immediately Preceding Band

0- 5 3.0% not applicable

6-10 4.5% 1.50

11-15 6.5% 1.44

16-20 8.5% 1.31

21-25 10.0% 1.18

26 or more 11.5% 1.15

(ii) Because Plan M provides that allocation ratesfor all employees are determined using a singleschedule based solely on service, the plan is permit-ted to disregard the service requirement in determin-ing whether the allocation rates are broadly avail-able (within the meaning of paragraph (b)(1)(iii) ofthis section), if the allocation rates under the sched-ule increase smoothly at regular intervals.

(iii) The schedule of allocation rates under PlanM does not increase by more than 5 percentagepoints between adjacent bands and the ratio of the

allocation rate for any band to the allocation rate forthe immediately preceding band is never more than2.0 and does not increase. Therefore, the allocationrates increase smoothly. In addition, the bands(other than the highest band) are all 5 years long, sothe increases occur at regular intervals. Accord-ingly, the service requirement is disregarded andeach allocation rate is broadly available within themeaning of paragraph (b)(1)(iii) of this section, aseach allocation rate is currently available to all em-ployees in the Plan.

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

Example 2. (i) Plan N is a defined contributionplan that provides an allocation formula underwhich allocations are provided to all employees ac-cording to the following schedule:

Ratio of Allocation Rate forBand to Allocation Rate for

Age Allocation rate Immediately PrecedingBand

under 25 3.0 % not applicable

25-34 6.0 % 2.00

35-44 9.0 % 1.50

45-54 12.0% 1.33

55-64 16.0% 1.33

65 or older 21.0% 1.31

(ii) Because Plan N provides that allocation ratesfor all employees are determined using a singleschedule based solely on age, the plan is permittedto disregard the age requirement in determiningwhether the allocation rates are broadly available(within the meaning of paragraph (b)(1)(iii) of thissection), if the allocation rates under the schedule in-crease smoothly at regular intervals.

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

allocation rate for any band to the allocation rate forthe immediately preceding band is never more than2.0 and does not increase. Therefore, the allocationrates increase smoothly. In addition, the bands areall 10 years long (other than the highest band and thefirst band, which is deemed to be the same length asthe other bands because it ends prior to age 25), sothe increases occur at regular intervals. Accord-ingly, the age requirement is disregarded and eachallocation rate is broadly available within the mean-ing of paragraph (b)(1)(iii) of this section, as each

allocation rate is currently available to all employeesin the Plan.

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

Example 3. (i) Plan O is a profit-sharing planmaintained by Employer A that covers all of Em-

2000–43 I.R.B. 427 October 23, 2000

ployer A’s employees, consisting of two HCEs, Xand Y, and 7 NHCEs. Employee X’s compensation is$170,000 and Employee Y’s compensation is$150,000. The allocation for Employees X and Y is$30,000 each, resulting in an allocation rate of17.6% for Employee X and 20% for Employee Y.Under Plan O, each NHCE receives an allocation of5% of compensation within the meaning of section415(c)(3).

(ii) Because the allocation rate for X is not cur-rently available to any NHCE, Plan O does not havebroadly available allocation rates and must satisfy theminimum allocation gateway of paragraph (b)(1)(iv)of this section.

(iii) The highest allocation rate for any HCEunder Plan O is 20%. Accordingly, Plan O wouldsatisfy the minimum allocation gateway of paragraph(b)(1)(iv) of this section if all NHCEs have an alloca-tion rate of at least 6.67%, or if all NHCEs receive anallocation of at least 5% of compensation within themeaning of section 415(c)(3).

(iv) Under Plan O, each NHCE receives an alloca-tion of 5% of compensation within the meaning ofsection 415(c)(3). Accordingly, Plan O satisfies theminimum allocation gateway of paragraph (b)(1)(iv)of this section.

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

* * * * *Par. 3. Section 1.401(a)(4)–9 is

amended by adding paragraph (b)(2)(v)and revising paragraph (c)(3)(ii) to read asfollows:

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

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

basis—(A) General rule. For plan yearsbeginning on or after January 1, 2002, un-less, for the plan year, a DB/DC plan isprimarily defined benefit in character(within the meaning of paragraph(b)(2)(v)(B) of this section) or consists ofbroadly available separate plans (withinthe meaning of paragraph (b)(2)(v)(C) ofthis section), the DB/DC plan must satisfythe minimum aggregate allocation gate-way of paragraph (b)(2)(v)(D) of this sec-tion for the plan year in order to be permit-ted to demonstrate satisfaction of thenondiscrimination in amount requirementof §1.401(a)(4)–1(b)(2) on the basis ofbenefits.

(B) Primarily defined benefit in charac-ter. A DB/DC plan is primarily definedbenefit in character if, for more than 50%

of the NHCEs benefitting under the plan,the normal accrual rate for the NHCE at-tributable to benefits provided under de-fined benefit plans that are part of theDB/DC plan exceeds the equivalent ac-crual rate for the NHCE attributable tocontributions under defined contributionplans that are part of the DB/DC plan.

(C) Broadly available separate plans.A DB/DC plan consists of broadly avail-able separate plans if the defined contribu-tion plan and the defined benefit plan thatare part of the DB/DC plan each wouldsatisfy the requirements of section 410(b)and the nondiscrimination in amount re-quirement of §1.401(a)(4)–1(b)(2) if eachplan were tested separately and assumingthat the average benefit percentage test of§1.410(b)–5 were satisfied. For this pur-pose, all defined contribution plans thatare part of the DB/DC plan are treated as asingle defined contribution plan and alldefined benefit plans that are part of theDB/DC plan are treated as a single definedbenefit plan. In addition, if permitted dis-parity is used for an employee for pur-poses of satisfying the separate testing re-quirement of this paragraph (b)(2)(v)(C)for plans of one type, it may not be used insatisfying the separate testing requirementfor plans of the other type for the em-ployee.

(D) Minimum aggregate allocationgateway. A DB/DC plan satisfies the min-imum aggregate allocation gateway of thisparagraph (b)(2)(v)(D) if each NHCE hasan aggregate normal allocation rate that isat least one third of the aggregate normalallocation rate of the HCE with the highestsuch rate (HCE rate), or, if less, 5% of theNHCE’s compensation, provided that theHCE rate does not exceed 25% of com-pensation. If the HCE rate exceeds 25%of compensation, then the aggregate nor-mal allocation rate for each NHCE mustbe 5% increased by one percentage pointfor each 5-percentage-point increment (orportion thereof) by which the HCE rateexceeds 25% (e.g., the NHCE minimum is6% for an HCE rate that exceeds 25% butnot 30%, and 7% for an HCE rate that ex-ceeds 30% but not 35%). For purposes ofthis paragraph (b)(2)(v)(D), a plan is per-mitted to treat each NHCE who benefitsunder the defined benefit plan as havingan equivalent normal allocation rate equal

to the average of the equivalent normal al-location rates under the defined benefitplan for all NHCEs benefitting under thatplan.

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

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

Example 1. (i) Employer A maintains Plan M, adefined benefit plan, and Plan N, a defined contribu-tion plan. All HCEs of Employer A are covered byPlan M (at a 1% accrual rate), but not covered byPlan N. All NHCEs of Employer A are covered byPlan N (at a 3% allocation rate), but not covered byPlan M. Because Plan M does not satisfy section410(b) standing alone, Plans M and N are aggregatedfor purposes of satisfying sections 410(b) and401(a)(4).

(ii) Because none of the NHCEs participate in thedefined benefit plan, the aggregated DB/DC plan isnot primarily defined benefit in character within themeaning of paragraph (b)(2)(v)(B) of this section nordoes it consist of broadly available separate planswithin the meaning of paragraph (b)(2)(v)(C) of thissection. Accordingly, the aggregated Plan M and PlanN must satisfy the minimum aggregate allocationgateway of paragraph (b)(2)(v)(D) of this section inorder to satisfy the nondiscrimination in amount re-quirement of §1.401(a)(4)–1(b)(2) on the basis ofbenefits.

Example 2. (i) Employer B maintains Plan O, adefined benefit plan, and Plan P, a defined contribu-tion plan. All of the six employees of Employer Bare covered under both Plan O and Plan P. UnderPlan O, all employees have a uniform normal accrualrate of 1% of compensation. Under Plan P, Employ-ees A and B, who are HCEs, receive an allocationrate of 15%, and participants C, D, E and F, who areNHCEs, receive an allocation rate of 3%. EmployerB aggregates Plans O and P for purposes of satisfyingsections 410(b) and 401(a)(4). The equivalent nor-mal allocation and normal accrual rates under PlansO and P are as follows:

October 23, 2000 428 2000–43 I.R.B.

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

HCE A (age 55) 3.93% 3.82%

HCE B (age 50) 2.61% 5.74%

C (age 60) 5.91% .51%

D (age 45) 1.73% 1.73%

E (age 35) .77% 3.90%

F (age 25) .34% 8.82%

(ii) Although all of the NHCEs benefit under thePlan O (the defined benefit plan), the aggregatedDB/DC plan is not primarily defined benefit in char-acter because the normal accrual rate attributable todefined benefit plans (which is 1% for all theNHCEs) is greater than the equivalent accrual rateunder defined contribution plans only for EmployeeC. In addition, because the 15% allocation rate isonly available to HCEs, the defined contributionplan cannot satisfy the requirements of§1.401(a)(4)–2 and does not have broadly availableallocation rates within the meaning of§1.401(a)(4)–8(b)(1)(iii). Further, the defined con-tribution plan does not satisfy the minimum alloca-tion gateway of §1.401(a)(4)–8(b)(1)(iv) (3% is lessthan 1/3 of the 15% HCE rate). Therefore, the de-fined contribution plan within the DB/DC plan can-not separately satisfy §1.401(a)(4)–1(b)(2) and doesnot constitute a broadly available separate planwithin the meaning of paragraph (b)(2)(v)(C) of thissection. Accordingly, the aggregated plans can sat-isfy the nondiscrimination in amounts requirementof §1.401(a)(4)–1(b)(2) on the basis of benefits onlyif the aggregated plans satisfy the minimum aggre-gate allocation gateway of paragraph (b)(2)(v)(D) ofthis section.

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

(iv) However, for purposes of satisfying the min-imum aggregate allocation gateway of paragraph(b)(2)(v)(D) of this section, Employer B is permittedto treat each NHCE who benefits under the Plan O(the defined benefit plan) as having an equivalent al-location rate equal to the average of the equivalentallocation rates under Plan O for all NHCEs benefit-ting under that plan. The average of the equivalentallocation rates for all the NHCEs under Plan O is2.19% (the sum of 5.91%, 1.73%, .77%, and .34%,divided by 4). Accordingly, Employer B is permit-ted to treat all the NHCEs as having an equivalentallocation rate attributable to Plan O equal to 2.19%.Thus, all NHCEs can be treated as having an aggre-gate normal allocation rate of 5.19% for this purpose(3% from the defined contribution plan and 2.19%

from the defined benefit plan) and the aggregatedDB/DC plan satisfies the minimum aggregate allo-cation gateway of paragraph (b)(2)(v)(D) of this sec-tion.

* * * * *(c) * * *

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

tain testing purposes. The safe harbor in§1.401(a)(4)–2(b)(3) for plans with uni-form points allocation formulas is notavailable in testing (and thus cannot besatisfied by) contributions under a com-ponent plan. Similarly, component planscannot be used for purposes of determin-ing whether a plan provides broadly avail-able allocation rates (as defined in§1.401(a)(4)–8(b)(1)(iii)), or determiningwhether a plan is primarily defined bene-fit in character or consists of broadlyavailable separate plans (as defined inparagraphs (b)(2)(v)(B) and (C) of thissection). In addition, the minimum allo-cation gateway of§1.401(a)(4)–8(b)(1)(iv) and the mini-mum aggregate allocation gateway ofparagraph (b)(2)(v)(D) of this sectioncannot be satisfied on the basis of compo-nent plans. See §§1.401(k)–1(b)(3)(iii)and 1.401(m)–1(b)(3)(iii) for rules re-garding the inapplicability of restructur-ing to section 401(k) plans and section401(m) plans.

* * * * *

David A. Mader,Acting Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on Octo-ber 5, 2000, 8:45 a.m., and published in the issue ofthe Federal Register for October 6, 2000, 65 F.R.59774)

Monthly Limit for Transit Passesand Transportation in aCommuter Highway VehicleProvided by an Employer toEmployees Under Section 132(f)of the Internal Revenue Code

Announcement 2000–78

This announcement sets forth a clarifi-cation to the proposed Treasury Regula-tions dealing with qualified transporta-tion fringes (Prop. Treas. Reg. § 1.132–9,65 F.R. 4388). Specifically, when final-ized, the regulations will clarify that tran-sit passes may be distributed in advancefor more than one month (such as for acalendar quarter). The applicable statu-tory monthly l imit under section132(f)(2) on the combined amount oftransit passes and transportation in acommuter highway vehicle may be cal-culated by taking into account themonthly limits for all months for whichthe transit passes are distributed. Thus,for example, the employer may distributeadvance transit passes for a subsequentcalendar quarter with a value equal to thestatutory monthly l imit t imes threemonths (for 2000, $65 times three equals$195). However, if transit passes are pro-vided in advance and the employee’s em-ployment terminates before the begin-ning of the last month of the period forwhich the transit passes are provided, thevalue of transit passes covering themonth(s) that begin after the employee’semployment terminates is included in theemployee’s wages for income tax pur-poses and for employment tax purposes(income tax withholding, FICA andFUTA) to the extent the employer doesnot recover those transit passes or thevalue of those passes.

2000–43 I.R.B. 429 October 23, 2000

Pending issuance of the final regula-tions, taxpayers may rely on this an-nouncement. An employer will not beconsidered to have failed to satisfy em-ployment tax requirements under this an-nouncement for advance transit pass distri-butions occurring before January 1, 2001.

Prior to issuing final regulations, theService is requesting comments concern-ing this announcement. Written commentsshould be sent to the following address:

Internal Revenue ServiceCC:DOM:CORP (ANN 2000–78;CC:TEGE:EOEG:ET2)P.O. Box 7604, Ben Franklin StationWashington, DC 20044

In the alternative, comments may behand delivered between the hours of 8:00a.m. and 5:00 p.m. to the courier’s deskat 1111 Constitution Avenue, NW.,Washington, DC, or submitted electroni-cally via the IRS Internet site athttp://www.irs.utreas.gov/tax_regs/regslist.html.

Because the Service and Treasury wouldlike to receive comments with sufficienttime to consider them in developing thefinal regulations, comments should be sub-mitted by November 15, 2000. However,to the extent possible, consideration will begiven to comments received after that date.

The principal author of this announce-ment is John Richards of the Office of As-sociate Chief Counsel (Tax Exempt and

Government Entities). For further infor-mation regarding this announcement con-tact John Richards at (202) 622-6040 (nota toll-free call).

Recognition of Gain on CertainTransfers to Certain ForeignTrusts and Estates; Correction

Announcement 2000–85

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correction to notice of pro-posed rulemaking.

SUMMARY: This document contains acorrection to a notice of proposed rule-making that was published in the Fed-eral Register on Monday, August 7,2000 (65 F.R. 48198) relating to therecognition of gain on certain transfersto certain foreign trusts and estates.

FOR FURTHER INFORMATION CON-TACT: Karen A. Rennie Quarrie at(202) 622-3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemakingthat is the subject of this correction isunder section 684 of the Internal Rev-enue Code.

Need for Correction

As published, the notice of proposedrulemaking contains errors that mayprove to be misleading and are in need ofclarification.

Correction of Publication

Accordingly, the publication of the no-tice of proposed rulemaking(REG–108522–00, 2000–34 I.R.B. 187),that was the subject of FR Doc.00–19896, is corrected as follows:

§1.684–3 [Corrected]

On page 48202, column 1, §1.684–3(f),the first line in Example 1, the language“Example 1. Transfer to owner trust. In”is corrected to read “Example 1. Transferto grantor trust. In”

Cynthia E. Grigsby,Chief, Regulations Unit,

Office of Special Counsel(Modernization and Strategic Planning).

(Filed by the Office of the Federal Register on Octo-ber 2, 2000, 8:45 a.m., and published in the issue ofthe Federal Register for October 3, 2000, 65 F.R.58973)

October 23, 2000 i 2000–43 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

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

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

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

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

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

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

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

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

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

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

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contributions Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

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

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

2000–43 I.R.B. ii October 23, 2000

Numerical Finding List1

Bulletins 2000–27 through 2000–42

Announcements:

2000–57, 2000–28 I.R.B. 1152000–58, 2000–30 I.R.B. 1352000–59, 2000–29 I.R.B. 1202000–60, 2000–31 I.R.B. 1492000–61, 2000–30 I.R.B. 1362000–62, 2000–30 I.R.B. 1372000–63, 2000–31 I.R.B. 1492000–64, 2000–31 I.R.B. 1492000–65, 2000–31 I.R.B. 1502000–66, 2000–32 I.R.B. 1602000–67, 2000–32 I.R.B. 1602000–68, 2000–32 I.R.B. 1612000–69, 2000–33 I.R.B. 1832000–70, 2000–34 I.R.B. 2042000–72, 2000–35 I.R.B. 2262000–73, 2000–35 I.R.B. 2302000–74, 2000–35 I.R.B. 2302000–75, 2000–37 I.R.B. 2682000–76, 2000–36 I.R.B. 2602000–77, 2000–36 I.R.B. 2602000–79, 2000–39 I.R.B. 3032000–80, 2000–40 I.R.B. 3202000–81, 2000–41 I.R.B. 3482000–82, 2000–42 I.R.B. 3852000–83, 2000–41 I.R.B. 3482000–84, 2000–42 I.R.B. 385

Court Decisions:

2068, 2000–28 I.R.B. 109

Notices:

2000–33, 2000–27 I.R.B. 972000–34, 2000–33 I.R.B. 1722000–35, 2000–29 I.R.B. 1182000–36, 2000–33 I.R.B. 1732000–37, 2000–29 I.R.B. 1182000–38, 2000–33 I.R.B. 1742000–39, 2000–30 I.R.B. 1322000–40, 2000–30 I.R.B. 1342000–41, 2000–33 I.R.B. 1772000–42, 2000–39 I.R.B. 3022000–43, 2000–35 I.R.B. 2092000–44, 2000–36 I.R.B. 2552000–45, 2000–36 I.R.B. 2562000–46, 2000–37 I.R.B. 2652000–48, 2000–37 I.R.B. 2652000–49, 2000–37 I.R.B. 2662000–50, 2000–38 I.R.B. 2912000–51, 2000–38 I.R.B. 2912000–52, 2000–38 I.R.B. 2922000–53, 2000–38 I.R.B. 2932000–54, 2000–42 I.R.B. 356

Proposed Regulations:

REG–209038–89, 2000–34 I.R.B. 191REG–105316–98, 2000–27 I.R.B. 98REG–110311–98, 2000–36 I.R.B. 258REG–103805–99, 2000–42 I.R.B. 376REG–116495–99, 2000–33 I.R.B. 179REG–103735–00, 2000–36 I.R.B. 258REG–103736–00, 2000–36 I.R.B. 258REG–108522–00, 2000–34 I.R.B. 187REG–112502–00, 2000–40 I.R.B. 316

Railroad Retirement Quarterly Rate:

2000–28, I.R.B. 1122000–29, I.R.B. 1172000–42, I.R.B. 354

Revenue Procedures:

2000–28, 2000–27 I.R.B. 602000–29, 2000–28 I.R.B. 1132000–30, 2000–28 I.R.B. 1132000–31, 2000–31 I.R.B. 1462000–32, 2000–33 I.R.B. 1722000–33, 2000–36 I.R.B. 2572000–34, 2000–34 I.R.B. 1862000–35, 2000–35 I.R.B. 2112000–36, 2000–37 I.R.B. 2672000–37, 2000–40 I.R.B. 3082000–38, 2000–40 I.R.B. 3102000–39, 2000–41 I.R.B. 3402000–40, 2000–42 I.R.B. 3572000–41, 2000–42 I.R.B. 371

Revenue Rulings:

2000–32, 2000–27 I.R.B. 12000–33, 2000–31 I.R.B. 1422000–34, 2000–29 I.R.B. 1162000–35, 2000–31 I.R.B. 1382000–36, 2000–31 I.R.B. 1402000–37, 2000–32 I.R.B. 1562000–38, 2000–32 I.R.B. 1572000–39, 2000–34 I.R.B. 1842000–40, 2000–35 I.R.B. 2082000–41, 2000–36 I.R.B. 2482000–42, 2000–39 I.R.B. 2972000–43, 2000–41 I.R.B. 3332000–44, 2000–41 I.R.B. 3362000–45, 2000–41 I.R.B. 3372000–46, 2000–41 I.R.B. 3342000–47, 2000–37 I.R.B. 2642000–48, 2000–42 I.R.B. 349

Treasury Decisions:

8886, 2000–27 I.R.B. 38888, 2000–27 I.R.B. 38889, 2000–30 I.R.B. 1248890, 2000–30 I.R.B. 1228891, 2000–32 I.R.B. 1528892, 2000–32 I.R.B. 1588893, 2000–31 I.R.B. 1438894, 2000–33 I.R.B. 1628895, 2000–40 I.R.B. 3048896, 2000–36 I.R.B. 2498897, 2000–36 I.R.B. 2348898, 2000–38 I.R.B. 2768899, 2000–38 I.R.B. 2888900, 2000–38 I.R.B. 2798901, 2000–38 I.R.B. 2728902, 2000–41 I.R.B. 3238903, 2000–42 I.R.B. 3528904, 2000–42 I.R.B. 350

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2000–1 through 2000–26is in Internal Revenue Bulletin 2000–27, dated July3, 2000.

October 23, 2000 iii 2000–43 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2000–27 through 2000–42

Notices:

87–76Obsoleted byT.D. 8897, 2000–36 I.R.B. 234

88–24Obsoleted byT.D. 8897, 2000–36 I.R.B. 234

88–86Obsoleted byT.D. 8897 (section V), 2000–36 I.R.B. 234

2000–48Superseded by Rev. Proc. 2000–39, 2000–41 I.R.B. 340

Proposed Regulations:

LR–97–79Partial withdrawal byREG–103805–99, 2000–42 I.R.B. 376

FI–42–90Withdrawn byAnnouncement 2000–63, 2000–31 I.R.B. 149

IA–38–93Withdrawn byAnnouncement 2000–68, 2000–32 I.R.B. 161

REG–107644–98Corrected byAnnouncement 2000–66, 2000–32 I.R.B. 160

Revenue Procedures:

88–23Superseded byRev. Proc. 2000–35, 2000–35 I.R.B. 211

98–50Modified and superseded byRev. Proc. 2000–31, 2000–31 I.R.B. 146

98–51Modified and superseded byRev. Proc. 2000–31, 2000–31 I.R.B. 146

99–18Modified by Rev. Proc. 2000–29, 2000–28 I.R.B. 113

99–34Superseded by Rev. Proc. 2000–28, 2000–27 I.R.B. 60

99–49Modified and amplified byRev. Proc. 2000–38, 2000–40 I.R.B. 310

2000–9Superseded byRev. Proc. 2000–39, 2000–41 I.R.B. 340

Treasury Decisions:

8873Corrected by Announcement 2000–74, 2000–35 I.R.B. 230

8883Corrected by Announcement 2000–57, 2000–28 I.R.B. 115

Treasury Decisions—continued:

8884Corrected by Announcement 2000–73, 2000–35 I.R.B. 230

8892Corrected by Announcement 2000–81, 2000–41 I.R.B. 348

1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2000–1 through 2000–26 is in Internal RevenueBulletin 2000–27, dated July 3, 2000.

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

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