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.

INCOME TAX

Rev. Rul. 2001–59, page 585.Bank bad debts; clarification of the conformity method.This ruling provides guidance to banks using the conformityelection as to what steps are necessary to assign a loan as aloss asset. Also, the conclusive presumption of worthlessnesswill apply to loans erroneously charged off if the charge-offs arenot substantially in excess of those warranted by reasonablebusiness judgment.

Rev. Rul. 2001–60, page 587.Golf course greens land preparation costs. The costs ofland preparation undertaken by a taxpayer in the original con-struction or reconstruction of push-up or natural soil golfcourse greens are not depreciable. However, the costs of landpreparation undertaken by a taxpayer in the original construc-tion or reconstruction of modern golf course greens that is soclosely associated with depreciable assets, such as a networkof underground drainage tiles or pipes, that the land prepara-tion will be retired, abandoned, or replaced contemporaneouslywith those depreciable assets are depreciable. Rev. Rul.55–290 modified and superseded. Rev. Proc. 99–49 modifiedand amplified.

Rev. Proc. 2001–56, page 590.This procedure provides optional methods for determining thevalue of the use of demonstration automobiles provided toemployees by automobile dealerships. The optional methodsinclude (1) a simplified method for the full exclusion of qualifiedautomobile demonstration use, (2) a simplified method for thepartial exclusion of nonqualified demonstration automobile use,and (3) a simplified method for the full inclusion of nonqualifieddemonstration automobile use.

EMPLOYEE PLANS

Announcement 2001–122, page 604.Extension of time for filing forms described inAnnouncement 2001–77. This announcement extendsthrough March 31, 2002, the cut-off date for the use of theprior revision of certain forms used to apply for determinationletters on the tax-qualified status of employee benefit plansdescribed in section I.G. of Announcement 2001–77 (2001–30I.R.B. 83).

EMPLOYMENT TAX

Rev. Proc. 2001–56, page 590.This procedure provides optional methods for determining thevalue of the use of demonstration automobiles provided toemployees by automobile dealerships. The optional methodsinclude (1) a simplified method for the full exclusion of qualifiedautomobile demonstration use, (2) a simplified method for thepartial exclusion of nonqualified demonstration automobile use,and (3) a simplified method for the full inclusion of nonqualifieddemonstration automobile use.

Page 603.2002 social security contribution and benefit base;domestic employee coverage threshold. The Commis-sioner of the Social Security Administration has announced (1)the OASDI contribution and benefit base for remuneration paidin 2002 and self-employment income earned in taxable yearsbeginning in 2002, and (2) the domestic employee coveragethreshold amount for 2002.

(Continued on the next page)

Actions Relating to Court Decisions is on the page following the Introduction.Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 604.Finding Lists begin on page ii.

Bulletin No. 2001–51December 17, 2001

ADMINISTRATIVE

Notice 2001–75, page 590.Equity investment prior to new markets tax credit alloca-tion. An equity investment in an entity will be eligible to be des-ignated as a qualified equity investment under section45D(b)(1) of the Code if (1) the equity investment is made on orafter April 20, 2001, (2) the entity in which the equity invest-ment is made is certified by Treasury’s Community Develop-

ment Financial Institutions Fund (CDFI Fund) as a qualified com-munity development entity under section 45D(c)(1) beforeJanuary 1, 2003, (3) the entity in which the equity investmentis made receives notification of a credit allocation (with theactual receipt of such credit allocation contingent upon subse-quently entering into an allocation agreement) from the CDFIFund before January 1, 2003, and (4) the equity investmentotherwise satisfies the requirements of section 45D.

December 17, 2001 2001–51 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are consolidated semiannually into Cumulative Bulle-tins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in the Bul-letin. All published rulings apply retroactively unless otherwiseindicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in the rev-enue ruling. In those based on positions taken in rulings to tax-payers or technical advice to Service field offices, identifyingdetails and information of a confidential nature are deleted toprevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

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

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, andMiscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

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

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannualperiod, respectively.

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

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

2001–51 I.R.B. December 17, 2001

Actions Relating to Decisions of the Tax CourtIt is the policy of the Internal Revenue

Service to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only onunappealed issues decided adverse to thegovernment. Generally, an Action onDecision is issued where its guidancewould be helpful to Service personnelworking with the same or similar issues.Unlike a Treasury Regulation or a Rev-enue Ruling, an Action on Decision is notan affirmative statement of Service posi-tion. It is not intended to serve as publicguidance and may not be cited as prece-dent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions.

Prior to 1991, the Service publishedacquiescence or nonacquiescence only incertain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now mayacquiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as acqui-escence, acquiescence in result only, ornonacquiescence. Both “acquiescence”and “acquiescence in result only” meanthat the Service accepts the holding of thecourt in a case and that the Service willfollow it in disposing of cases with thesame controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or allof those reasons. “Nonacquiescence” sig-

nifies that, although no further reviewwas sought, the Service does not agreewith the holding of the court and, gener-ally, will not follow the decision in dis-posing of cases involving other taxpay-ers. In reference to an opinion of a circuitcourt of appeals, a “nonacquiescence”indicates that the Service will not followthe holding on a nationwide basis. How-ever, the Service will recognize the prece-dential impact of the opinion on casesarising within the venue of the decidingcircuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear inthe first Bulletin for July and the Cumu-lative Bulletin for the first half of theyear. A semiannual consolidation alsoappears in the first Bulletin for the fol-lowing January and in the CumulativeBulletin for the last half of the year.

The Commissioner ACQUIESCES inthe following decision:

Robert L. Beck v. Commissioner,1

T.C. Memo. 2001–198 (filed July 30,2001)Dkt. Nos. 14577–98 and 14578–98

1 Acquiescence relating to whether the Tax Court has jurisdiction to review the Service’s determination that a spouse is not entitled to equitable relief underI.R.C. section 66(c).

December 17, 2001 2001–51 I.R.B.

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

Section 166.—Bad Debts

26 CFR 1.166–2: Evidence of worthlessness.

Bank bad debts; clarification of theconformity method. A bank has classi-fied loans as loss assets under the confor-mity election if the loans are charged offpursuant to a board of director’s resolu-tion authorizing the charge-offs only ifrequired under regulatory standards. Also,the conclusive presumption of worthless-ness under the conformity electionapplies to loans erroneously charged offfor regulatory purposes, if the bank’scharge-offs are not substantially in excessof those warranted by reasonable businessjudgment.

Rev. Rul. 2001–59

ISSUES

1. What steps are necessary to recordor memorialize the assignment of a loan(or loan portion) as a “loss asset” for pur-poses of the conformity method ofaccounting for worthless bad debts?

2. Does the conclusive presumption ofworthlessness under the conformitymethod apply to loans erroneously classi-fied as loss assets?

FACTS

ABC corporation is a “bank” (asdefined in § 1.166–2(d)(4)(i) of theIncome Tax Regulations) and is subject tosupervision by Federal authorities. ABChas elected under § 1.166–2(d)(3) to usethe conformity method of accounting todetermine when debts owed to ABCbecome worthless bad debts.

Under a resolution adopted by ABC’sboard of directors, ABC’s officers andemployees are authorized to charge offloans (or portions of loans) only when thecharge-off is required under the loan lossclassification standards issued by thebank’s supervisory authority. Thus, whenABC’s officers and employees charge offa loan for regulatory purposes, they donot take any additional steps to record ormemorialize whether, in their judgment,the charge-off is required by the loan loss

standards that have been issued by ABC’ssupervisory authority.

The loan loss standards require ABC tocharge off “loss assets.” Loss assets areloans (or portions of loans) determined tobe uncollectible and of such little valuethat their continuance as bankable assetsis not warranted. In the case of a con-sumer loan or credit card debt, regardlesswhether there is specific adverse informa-tion about the borrower, ABC is requiredto charge off the asset when its delin-quency exceeds certain establishedthresholds. Thus, ABC must charge offinstallment loans that are 120 days, orfive payments, past due and credit carddebts that are 180 days past due afterseven zero billings. In addition, if ABCreceives specific adverse borrower infor-mation (for example, the borrower’sdeath or bankruptcy) confirming a lossbefore the applicable 120 day or 180 daythreshold date has passed, then an imme-diate charge-off is required. See Comp-troller of the Currency, “Allowance forLoan and Lease Losses,” Comptroller’sHandbook 10, 19 (June 1996); “UniformAgreement on the Classification of Assetsand Appraisal of Securities Held byBanks,” Attachment to Comptroller of theCurrency Banking Circular No. 127, Rev.4–26–91.

ABC’s supervisory authority, in con-nection with its most recent examinationof the bank’s loan review process, madean express determination that ABC main-tains and applies loan loss standards thatare consistent with the regulatory stan-dards issued by the Comptroller of theCurrency.

During the taxable year ending onDecember 31, 2000, ABC charged off forregulatory purposes certain credit carddebts that were not required to be chargedoff under applicable regulatory loan lossstandards. Except for the erroneouslycharged off credit card debts, ABCcharged off only loans required to becharged off under the loan loss standards.

On its Federal income tax return for2000, ABC deducted as wholly worthlessdebts all assets that it had charged off forregulatory purposes, including the debtsthat had been erroneously charged offdespite the absence of an applicable regu-latory requirement. Even so, the total

amount of worthless bad debts claimed onthe return was not substantially in excessof the amount that would be warranted bythe exercise of reasonable business judg-ment in applying the loan loss standardsof ABC’s supervisory authority.

LAW AND ANALYSIS

Section 166(a)(1) of the Internal Rev-enue Code allows a deduction for a debtthat becomes worthless during the taxableyear. In addition, § 166(a)(2) permits adeduction for “partially worthless debts”if the taxpayer charges off an appropriateamount on the taxpayer’s books andrecords and the Internal Revenue Serviceis satisfied that the debt is recoverableonly in part.

No precise test exists for determiningwhether a debt is worthless. In many situ-ations, no single factor or identifiableevent clearly demonstrates whether a debthas become worthless. Instead, a series offactors or events in the aggregate estab-lishes whether the debt is worthless.Among the factors indicating worthless-ness are: a debtor’s serious financialreverses, insolvency, lack of assets, con-tinued refusal to respond to demands forpayment, ill health, death, disappearance,abandonment of business, and bank-ruptcy. Additionally, a debt’s unsecured orsubordinated status and expiration of thestatute of limitations can provide an indi-cation that the debt is worthless. Con-versely, availability of collateral or thirdparty guarantees, a debtor’s earningcapacity, payment of interest, a credi-tor’s failure to press for payment, and acreditor’s willingness to make furtheradvances are factors suggesting thatthe debt is not worthless. Accordingly,§ 1.166–2 of the regulations requires con-sideration of all pertinent evidence andprovides that a deduction is warranted ifthe surrounding circumstances indicatethat the debt is uncollectible and thatlegal action to enforce payment would inall probability not result in the satisfac-tion of execution on a judgment.

In the case of a “bank” (as defined in§ 1.166–2(d)(4)(i) of the regulations) orother corporation subject to supervisionby Federal authorities, or by Stateauthorities maintaining substantially

2001-51 I.R.B 585 December 17, 2001

equivalent standards, § 1.166–2(d)(1)provides administrative simplicity by cre-ating a conclusive presumption of worth-lessness for loans charged off in whole orin part in obedience to specific orders orin accordance with the established poli-cies of those authorities.

Additional simplification is providedby § 1.166–2(d)(3) of the regulations fortax years ending on or after December 31,1991. Under the regulation, a bank sub-ject to supervision by Federal authorities,or by State authorities maintaining sub-stantially equivalent standards, may electto use the conformity method of account-ing to determine when a debt becomesworthless. Under the conformity method,a conclusive presumption of worthless-ness applies to loans charged off, inwhole or in part, for regulatory purposesif the charge-offs correspond to thebank’s classification of the loans, inwhole or in part, as loss assets underapplicable regulatory standards. Section1.166–2(d)(3)(ii)(A)(2) provides that abad debt deduction is allowed for the tax-able year in which a debt is conclusivelypresumed to have become worthless.

For the conclusive presumption ofworthlessness to arise, a bank must sat-isfy the express determination require-ment of § 1.166–2(d)(3)(iii)(D) of theregulations and must classify the loan, inwhole or in part, as a loss asset asdescribed in § 1.166–2(d)(3)(ii)(C). Theexpress determination requirement is sat-isfied if the bank’s supervisory authority,in connection with its most recent exami-nation of the bank’s loan review process,has made an express determination thatthe bank maintains and applies loan lossclassification standards that are consistentwith the authority’s regulatory standards.See Rev. Proc. 92–84 (1992–2 C.B. 489)(providing the form for the determinationletter). Section 1.166–2(d)(3)(ii)(C)defines the term “loss asset” as a debt thatthe bank has assigned to a class that cor-responds to a loss asset classificationunder the standards set forth in the “Uni-form Agreement on the Classification ofAssets and Appraisal of Securities Heldby Banks” or similar guidance issued bythe bank’s supervisory authority.

Various procedures can be used by abank to classify loans (or loan portions)as loss assets. For example, an officer oremployee may record or memorialize ona form the determination that a loan (orloan portion) is a loss asset. Loan orcredit committee reports or internal creditrating reports also can demonstrate that aloan has been classified as a loss asset.Additionally, if officers and employeesare authorized to charge off loans (or loanportions) only if the loans (or loan por-tions) are loss assets, then the charge-offsof the loans (or loan portions) demon-strate that the loans (or loan portions)have been classified as loss assets.

ABC has made the conformity electionunder § 1.166–2(d)(3) of the regulationsand has satisfied the express determina-tion requirement described in § 1.166–2(d)(3)(iii)(D). Additionally, under theresolution adopted by ABC’s board ofdirectors, ABC’s officers and employeesare authorized to charge off loans (or por-tions of thereof) only if the charge-offsare required under applicable loan lossstandards issued by ABC’s supervisoryauthority. Under these circumstances,ABC’s charge-offs of certain loans (orloan portions) are sufficient to demon-strate classification of those loans (or loanportions) as loss assets under standardsissued by ABC’s supervisory authority.

Under § 1.166–2(d)(3)(ii) of the regu-lations, the conclusive presumption ofworthlessness applies to loans chargedoff, in whole or in part, for regulatorypurposes if the charge-off corresponds tothe bank’s classification of the loans, inwhole or in part, as loss assets underapplicable regulatory standards. Althoughthe applicable loan loss regulatory stan-dards did not require ABC to charge offcertain credit card debts, the conclusivepresumption of worthlessness attached tothose debts when ABC erroneouslycharged off the debts for regulatory pur-poses.

Under § 1.166–2(d)(3)(iv)(D) of theregulations, if an electing bank fails tofollow the conformity method of account-ing to determine when debts becomeworthless, or if the bank’s charge-offs aresubstantially in excess of those warranted

by reasonable business judgment inapplying the regulatory standards of thebank’s supervisory authority, then theCommissioner may revoke the bank’selection to use the conformity method.Under the facts described above, how-ever, except for the erroneously chargedoff credit card debts, ABC properly usedregulatory loan loss standards to deter-mine its worthless bad debts and did notclaim a deduction on its return for baddebts substantially in excess of theamount warranted by reasonable businessjudgment under the applicable regulatorystandards. If the deduction claimed hadbeen substantially in excess of thatamount, the Commissioner could haverevoked the conformity election.

HOLDINGS

1. ABC’s charge-offs of certain loans(or portions thereof), pursuant to a boardof directors’ resolution authorizing thecharge-off of a loan (or portion thereof)only if the charge-off is required underapplicable regulatory standards issued bythe bank’s supervisory authority, are suf-ficient to demonstrate classification of theloans (or loan portions) as loss assets forpurposes of § 1.166–2(d)(3) of the regu-lations.

2. The conclusive presumption ofworthlessness applies to the credit carddebts that ABC erroneously charged offfor regulatory purposes during the taxableyear ending on December 31, 2000. ABC,on its 2000 income tax return, properlydeducted the credit card debts as worth-less bad debts.

DRAFTING INFORMATION

The principal author of this revenueruling is Craig Wojay of the Office of theAssociate Chief Counsel (Financial Insti-tutions and Products). For further infor-mation regarding this revenue ruling, con-tact Mr. Wojay at (202) 622–3920 (not atoll-free call).

December 17, 2001 586 2001-51 I.R.B.

Section 167.—Depreciation

26 CFR 1.167(a)–2: Tangible property.(Also § 168.)

Golf course greens land preparationcosts. The costs of land preparationundertaken by a taxpayer in the originalconstruction or reconstruction of push-upor natural soil golf course greens are notdepreciable, but the costs of land prepara-tion undertaken by a taxpayer in the origi-nal construction or reconstruction ofmodern golf course greens that is soclosely associated with depreciable assets,such as a network of underground drain-age tiles or pipes, that the land prepara-tion will be retired, abandoned, orreplaced contemporaneously with thosedepreciable assets are depreciable.

Rev. Rul. 2001–60

ISSUE

Are land preparation costs incurred bya taxpayer in the original construction orreconstruction of golf course greens sub-ject to an allowance for depreciationunder § 167 of the Internal RevenueCode?

FACTS

Two types of golf course greens thatare currently in use are “push-up” ornatural soil greens and “modern” greens.Push-up or natural soil greens are essen-tially landscaping that involves somereshaping or regrading of the land. Thesoil is pushed up or reshaped to form thegreen. While push-up or natural soilgreens may have limited irrigation sys-tems (such as hoses and sprinklers adja-cent to the greens), a subsurface drainagesystem is not utilized.

Modern greens make use of techno-logical changes in green design and con-struction and contain sophisticated inte-grated drainage systems. The constructionof the modern green occurs after the gen-eral earthmoving, grading, and initialshaping of the area surrounding andunderneath the green. These greens areconstructed with a network of subsurfacedrainage tiles or interconnected pipes, oneor more layers of gravel and/or sand par-ticles, a rootzone layer, and a variety of

turfgrass. Over time, the modern greenloses its effectiveness as a drainage sys-tem due to tile or pipe deterioration, orsediment blockage. Replacement of thesubsurface drainage tiles or pipes requiresexcavation and replacement of the gravellayer, rootzone layer, and turfgrass abovethe tiles or pipes. The subsurface drainagetiles or pipes typically are replaced within20 years.

LAW AND ANALYSIS

Section 167(a) provides that there shallbe allowed as a depreciation deduction areasonable allowance for the exhaustionand wear and tear of property used in atrade or business or held for the produc-tion of income.

Section 1.167(a)–2 of the Income TaxRegulations provides that in the case oftangible property, the depreciation allow-ance applies only to that part of the prop-erty that is subject to wear and tear, todecay or decline from natural causes, toexhaustion, and to obsolescence. Theallowance does not apply to land apartfrom the improvements or physical devel-opment added to it.

The depreciation deduction providedby § 167(a) for tangible property placedin service after 1986 generally is deter-mined under § 168. This section pre-scribes two methods of accountingfor determining depreciation allow-ances: (1) the general depreciation sys-tem in § 168(a); and (2) the alternativedepreciation system in § 168(g). Undereither depreciation system, the deprecia-tion deduction is computed by using aprescribed depreciation method, recoveryperiod, and convention.

The applicable recovery period forpurposes of § 168(a) or § 168(g) is deter-mined by reference to class life. Section168(i)(1) provides that the term “classlife” means the class life (if any) thatwould be applicable with respect to anyproperty as of January 1, 1986, underformer § 167(m) as if it were in effect andthe taxpayer had elected under that sec-tion. Prior to its revocation, § 167(m) pro-vided that in the case of a taxpayer whoelected the asset depreciation range sys-tem of depreciation, the depreciationdeduction would be computed based onthe class life prescribed by the Secretarythat reasonably reflects the anticipated

useful life of that class of property to theindustry or other group.

Rev. Proc. 87–56 (1987–2 C.B. 674)sets forth the class lives of property thatare necessary to compute the depreciationallowance under § 168. This revenue pro-cedure establishes two broad categoriesof depreciable assets: (1) asset classes00.11 through 00.4 that consist of specificassets used in all business activities; and(2) asset classes 01.1 through 80.0 thatconsist of assets used in specific businessactivities.

Asset class 00.3, Land Improvements,of Rev. Proc. 87–56 includes improve-ments directly to or added to land,whether the improvements are § 1245 or§ 1250 property, provided the improve-ments are depreciable. Examples of theseassets might include sidewalks, roads,canals, waterways, drainage facilities,sewers, wharves and docks, bridges,fences, landscaping, shrubbery, orradio and television transmitting towers.Assets included in asset class 00.3 havea recovery period of 15 years for pur-

poses of § 168(a) and 20 years for pur-poses of § 168(g).

Rev. Rul. 55–290 (1955–1 C.B. 320)concludes that expenditures incurred by ataxpayer in the original construction ofgolf course greens are capital expendi-tures that are added to the original cost ofthe land and are not subject to an allow-ance for depreciation. The revenue rulingalso concludes that subsequent operatingexpenses for sod, seed, soil, and othersundry maintenance are ordinary and nec-essary business expenses that are deduct-ible from gross income for federal incometax purposes.

In Edinboro Company v. United States,224 F. Supp. 301 (W.D.Pa. 1963), thecourt held that golf course improvements,such as greens, tees, fairways, and traps,were not depreciable under § 167(a)because they are not distinguishable fromthe land, which is molded and reshaped toform them, and, like the land, they havean unlimited useful life. The court con-cluded that “[a] golf course is primarily alandscaping proposition[, although][o]ccasionally a green or a trap or bunkeris altered or rebuilt.” The taxpayer inEdinboro failed to demonstrate a deter-minable useful life of the golf courseimprovements, or that the improvementswere subject to wear and tear, exhaustion,

2001-51 I.R.B 587 December 17, 2001

or obsolescence that could not be fullyreversed by annual maintenance.

Although the depreciation allowancegenerally does not apply to land becauseland has no determinable useful life, landpreparation may be depreciable if it isclosely associated with depreciable assetsso that it is possible to establish a deter-minable period over which the landpreparation will be useful in a particulartrade or business. A useful life for landpreparation is established if it will bereplaced contemporaneously with arelated depreciable asset. Whether landpreparation will be replaced contempora-neously with a related depreciable asset isa question of fact, but if the replacementof the asset will require the physicaldestruction of the land preparation, thistest will be considered satisfied. Rev. Rul.68–193 (1968–1 C.B. 79) clarifying Rev.Rul. 65–265 (1965–2 C.B. 52) (costs fora roadway grading that would be retiredcontemporaneously with a building aredepreciable); Rev. Rul. 72–96 (1972–1C.B. 66) (land preparation costs for a res-ervoir that would be retired contempora-neously with an electric generating plantare depreciable); Rev. Rul. 74–265(1974–1 C.B. 56) (the cost of shrubberyimmediately adjacent to apartment build-ings is depreciable because the shrubberywould be retired contemporaneously withthe buildings); Rev. Rul. 80–93 (1980–1C.B. 50) (costs for excavation and back-filling that would be retired contempora-neously with laundry facilities and astorm sewer system are depreciable).

While § 168 determines the amountof the depreciation allowance providedby § 167(a) for tangible property placedin service generally after 1986, § 167determines whether the tangible propertyis depreciable property. Under § 167 andthe regulations thereunder, land is notdepreciable. Similarly, the costs of gen-eral grading or shaping of land are notdepreciable because the land preparationis inextricably associated with the land.However, if the land preparation is soclosely associated with depreciable assetsthat it will be retired, abandoned, orreplaced contemporaneously with thoseassets, a useful life for land preparation isestablished and, therefore, the cost of theland preparation is depreciable.

Push-up or natural soil greens are rep-resentative of the type of green com-

monly in use when Rev. Rul. 55–290 wasissued and Edinboro was decided.Push-up or natural soil greens are essen-tially landscaping that involves somereshaping or regrading of the land.Accordingly, the Service will continue tofollow the holdings in Rev. Rul. 55–290and Edinboro with respect to push-up ornatural soil greens.

Unlike push-up or natural soil greens,the modern green is a sophisticatedimprovement to the land carefullydesigned to facilitate drainage. Essentialcomponents of the modern green are theunderground drainage tiles or intercon-nected pipes. Because these tiles or pipesdeteriorate over time, they have a deter-minable useful life and, therefore, aredepreciable. Asset class 00.3, LandImprovements, of Rev. Proc. 87–56,includes drainage facilities. The gravellayer, rootzone layer, and turfgrass abovethe network of underground drainage tilesor interconnected pipes are so closelyassociated with these tiles or pipes thatreplacement of the tiles or pipes willrequire the contemporaneous physicaldestruction of that land preparation. Thus,it is possible to establish a determinableuseful life for the land preparation abovethe underground tiles and pipes.

HOLDINGS

Land preparation undertaken by a tax-payer in the original construction orreconstruction of push-up or natural soilgreens is inextricably associated with theland and, therefore, the costs attributableto this land preparation are added to thetaxpayer’s cost basis in the land and arenot depreciable.

The costs of land preparation under-taken by a taxpayer in the original con-struction or reconstruction of moderngreens that is so closely associated withdepreciable assets, such as a network ofunderground drainage tiles or pipes, thatthe land preparation will be retired, aban-doned, or replaced contemporaneouslywith those depreciable assets are to becapitalized and depreciated over therecovery period of the depreciable assetswith which the land preparation is associ-ated. For purposes of § 168, the moderngreen described above is includible inasset class 00.3, Land Improvements, ofRev. Proc. 87–56. However, the generalearthmoving, grading, and initial shaping

of the area surrounding and underneaththe modern green that occur before theconstruction are inextricably associatedwith the land and, therefore, the costsattributable to this land preparation areadded to the taxpayer’s cost basis in theland and are not depreciable.

Subsequent operating expenses forsod, seed, soil, and other sundry mainte-nance are ordinary and necessary busi-ness expenses that are deductible fromgross income for federal income tax pur-poses.

CHANGE IN METHOD OFACCOUNTING

Any change in a taxpayer’s treatmentof the cost of modern greens to conformwith this revenue ruling is a change inmethod of accounting to which the provi-sions of §§ 446 and 481 and the regula-tions thereunder apply. A taxpayer want-ing to change the method of accountingfor the cost of modern greens owned bythe taxpayer at the beginning of the yearof change to conform with this revenueruling must follow the automatic changein method of accounting provisions inRev. Proc. 99–49 (1999–2 C.B. 725) (orits successor), unless the scope limitationsin section 4.02 of Rev. Proc. 99–49 apply.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 55–290 is modified andsuperseded. Rev. Proc. 99–49 is modifiedand amplified to include this accountingmethod change in the APPENDIX.

PROSPECTIVE APPLICATION

A taxpayer may continue to use itspresent method of treating the cost ofmodern greens placed in service duringany taxable year beginning beforeNovember 29, 2001, as a nondepreciablecapital expenditure.

DRAFTING INFORMATION

The principal author of this revenueruling is Mark Pitzer of the Office ofAssociate Chief Counsel (Passthroughsand Special Industries). For further infor-mation regarding this revenue ruling, con-tact Mark Pitzer at (202) 622–3110 (not atoll-free call).

December 17, 2001 588 2001-51 I.R.B.

Section 168.—AcceleratedCost Recovery System

If the costs of land preparation under-taken by a taxpayer in the original con-struction or reconstruction of moderngolf course greens are depreciable, whatis the classification of these costs under§ 168(e)(1) of the Internal RevenueCode? See Rev. Rul. 2001–60, page 587.

2001-51 I.R.B 589 December 17, 2001

Part III. Administrative, Procedural, and Miscellaneous

Section 45D.—New MarketsTax Credit

Notice 2001–75

PURPOSE

This notice clarifies that certain equityinvestments may be eligible for the newmarkets tax credit under § 45D of theInternal Revenue Code, notwithstandingthat they are made before the receipt of acredit allocation from the Secretary of theTreasury under § 45D(f)(2).

BACKGROUND

Section 45D(a)(1) provides a new mar-kets tax credit on certain credit allowancedates described in § 45D(a)(3) withrespect to a qualified equity investment ina qualified community developmententity (CDE).

Section 45D(b)(1) provides that aninvestment in a CDE is a qualified equityinvestment only if, among other things,the CDE designates the investment as aqualified equity investment.

Section 45D(c)(1) provides that anentity is a CDE only if, among otherthings, the entity is certified by the Secre-tary as a CDE.

Section 45D(b)(2) provides that themaximum amount of equity investmentsissued by a CDE that may be designatedby the CDE as qualified equity invest-ments may not exceed the portion of thenew markets tax credit limitation set forthin § 45D(f) that is allocated to the CDEby the Secretary under § 45D(f)(2).

The Secretary has delegated certainadministrative functions relating to thenew markets tax credit program to theUnder Secretary (Domestic Finance), whoin turn has delegated those functions tothe Community Development FinancialInstitutions Fund (CDFI Fund). In accor-dance with procedures to be issued by theCDFI Fund in the future, the CDFI Fundwill request and evaluate applications forCDE certification and for new marketstax credit allocations. Under those proce-dures, if a CDE is selected to receive a

credit allocation, the CDFI Fund will pro-vide to the CDE a notification ofcredit allocation. However, the CDE’sactual receipt of a credit allocationunder § 45D(f)(2) will be contingentupon the CDE subsequently entering intoan allocation agreement with the CDFIFund.

DISCUSSION

Questions have arisen as to whether anequity investment in an entity may be eli-gible to be designated as a qualifiedequity investment if it is made before theentity is certified by the CDFI Fund as aCDE under § 45D(c)(1) and before theentity enters into an allocation agreementwith the CDFI Fund. In such a situation,an equity investment in an entity will beeligible to be designated as a qualifiedequity investment under § 45D(b)(1) if:

1. The equity investment is made on orafter April 20, 2001;

2. The entity in which the equityinvestment is made is certified by theCDFI Fund as a CDE under § 45D(c)(1)before January 1, 2003;

3. The entity in which the equityinvestment is made receives notificationof a credit allocation (with the actualreceipt of such credit allocation contin-gent upon subsequently entering into anallocation agreement) from the CDFIFund before January 1, 2003; and

4. The equity investment otherwisesatisfies the requirements of § 45D.

In the case of an equity investmentthat is designated as a qualified equityinvestment in accordance with thisnotice, the first credit allowance dateunder § 45D(a)(3)(A) will be the effectivedate of the allocation agreement betweenthe CDE and the CDFI Fund.

Regulations to be issued in the nearfuture will incorporate the guidance setforth in this notice. Taxpayers may relyon this notice until those regulations areissued.

DRAFTING INFORMATION

The principal author of this notice isPaul Handleman of the Office of Associ-

ate Chief Counsel (Passthroughs and Spe-cial Industries). For further informationregarding this notice, contact Mr. Handle-man at (202) 622–3040 (not a toll-freecall).

Rev. Proc. 2001–56

TABLE OF CONTENTS

SECTION 1. PURPOSE AND SCOPE

Q–1. What is the purpose of this rev-enue procedure?

Q–2. Who may use the simplifiedmethods in this revenue procedure?

Q–3. What vehicles are demonstrationautomobiles that qualify for the simplifiedmethods?

Q–4. For which employees can thesimplified methods be used?

Q–5. Does this revenue proceduredescribe all of the methods for determin-ing and substantiating the value of theuse of demonstration vehicles provided toemployees by automobile dealerships?

SECTION 2. BACKGROUND

Q–6. What provisions of the tax lawmay apply to a vehicle provided to anemployee by an employer?

Q–7. When is the use of an employer-provided automobile a working conditionfringe?

SECTION 3. FULL EXCLUSION FORQUALIFIED AUTOMOBILEDEMONSTRATION USE

Q–8. What is the full exclusion forqualified automobile demonstration use?

Q–9. What are the requirements forthe full exclusion of automobile demon-stration use by a full-time salesperson?

Q–10. What is the treatment if therequirements for the full exclusion are notmet?

December 17, 2001 590 2001-51 I.R.B.

SECTION 4. SIMPLIFIED METHODFOR THE FULL EXCLUSION OFQUALIFIED AUTOMOBILEDEMONSTRATION USE

Q–11. What are the requirementsunder this revenue procedure for the Sim-plified Method for Full Exclusion ofQualified Automobile Demonstrationuse?

Q–12. What is a qualified writtenpolicy for purposes of the full exclusion?

Q–13. When may the employer reason-ably believe that the full-time automobilesalesperson complies with the writtenpolicy?

Q–14. What is the sales area of anautomobile dealer?

Q–15. When is the personal use of thedemonstration automobile limited forpurposes of the full exclusion?

Q–16. How does an employer deter-mine the total mileage that a demonstra-tion automobile is used outside of normalworking hours?

Q–17. What is a reasonable system forrecording out and in mileage?

Q–18. What is the applicable periodfor determining whether the average 10miles per day is exceeded?

Q–19. What is commuting mileage?Q–20. How does an employer deter-

mine the commuting mileage for a full-time salesperson?

Q–21. Is commuting mileage limited tothe most direct route between the employ-ee’s home and the sales office?

Q–22. How does an employer usingthe full exclusion method calculate per-sonal use?

Q–23. What records must an employermaintain to satisfy the requirements forthe full exclusion?

Q–24. What records must an employeemaintain to satisfy the requirements forthe full exclusion?

Q–25. What are the tax consequencesif one or more employees fail to satisfythe limited personal use requirement?

SECTION 5. SIMPLIFIEDMETHOD FOR PARTIAL EXCLUSIONOF DEMONSTRATIONAUTOMOBILE USE BY FULL-TIMESALESPEOPLE

Q–26. What is the partial exclusion ofdemonstration automobile use?

Q–27. When can an employer use thepartial exclusion method?

Q–28. What are the requirements forthe partial exclusion of demonstrationautomobile use by a full-time salesper-son?

Q–29. What is the treatment if therequirements for the partial exclusion arenot met?

Q–30. What is a qualified writtenpolicy for purposes of the partial exclu-sion?

Q–31. May a qualified written policyunder the full exclusion method be usedfor the partial exclusion method?

Q–32. When may the employer reason-ably believe that the full-time automobilesalesperson complies with the writtenpolicy?

Q–33. What method does an employeruse to determine the value of the demon-stration automobile used by a full-timesalesperson?

Q–34. How does an employer deter-mine the annual average sales price ifmore than one franchise is operated at orfrom a single location?

Q–35. What is the amount included inthe full-time salesperson’s income andwages for use of the demonstration auto-mobile under the partial exclusionmethod?

Q–36. How does an employer deter-mine the number of days that a salesper-son has the use of a demonstration auto-mobile?

Q–37. May an employer elect undersection 3402(s) of the Code not to with-hold income taxes from the portion of thevehicle fringe benefit required to beincluded under the partial exclusionmethod provided under this revenue pro-cedure?

Q–38. What records must an employermaintain to satisfy the requirements forthe partial exclusion?

Q–39. What records must an employeemaintain to satisfy the requirements forthe partial exclusion?

SECTION 6. SIMPLIFIED METHODFOR INCLUSION OF THE VALUE OFDEMONSTRATION AUTOMOBILE IFNEITHER THE FULL NOR PARTIALEXCLUSION APPLIES

Q–40. What method does an employeruse to account for the use of demonstra-tion automobiles provided to employeeswho are not full-time salespeople?

Q–41. What method is used to accountfor the use of a demonstration automobileby a full-time salesperson who does notqualify for the full exclusion or partialexclusion?

Q–42. What are the requirements forusing the full inclusion method for dem-onstration automobiles used by employ-ees who are not full-time salespeople orwho are full-time salespeople?

Q–43. Under the full inclusion method,how does the employer determine thevalue of the demonstration automobilesprovided to employees?

Q–44. How is the pro rata portion ofthe annual lease value amount includedin income calculated?

Q–45. Under the full inclusion method,how does an employer determine thenumber of days that an employee has theuse of a demonstration automobile?

Q–46. What records must an employermaintain to satisfy the requirements forthe full inclusion method?

Q–47. What records must an employeemaintain to satisfy the requirements forthe full inclusion method?

SECTION 7. APPLICATION OFGENERAL RULE WHEN METHODSIN REVENUE PROCEDURE ARENOT USED

Q–48. What is the interaction of themethod under Treas. Reg. § 1.274–6T foran employer implementing a policy of nopersonal use except commuting through awritten policy with the full exclusion orpartial exclusion methods?

Q–49. What amount of personal usemileage in addition to commuting wouldsatisfy the de minimis personal use inaddition to commuting under Treas. Reg.§ 1.274–6T ?

2001-51 I.R.B 591 December 17, 2001

Q–50. What evidence would satisfythe requirement under Treas. Reg.§ 1.274–6T that the employer must main-tain evidence that would enable a deter-mination whether the use of the vehiclemet the requirements?

Q–51. What amount is included in theincome of an employee if the use was nottaken into account and included inincome for the month in which the use ofa demonstration automobile was pro-vided?

SECTION 8. INTENT TO REVISEREGULATIONS TO EXTENTNECESSARY

SECTION 9. EFFECTIVE DATE

SECTION 10. REQUEST FORCOMMENTS

SECTION 11. DRAFTINGINFORMATION

SECTION 12. PAPERWORKREDUCTION ACT

APPENDIX A. MODEL QUALIFIEDWRITTEN POLICY FOR FULLEXCLUSION

APPENDIX B. MODEL QUALIFIEDWRITTEN POLICY FOR PARTIALEXCLUSION

SECTION 1. PURPOSE AND SCOPE

Q–1. What is the purpose of this rev-enue procedure?

A–1. This revenue procedure providesoptional simplified methods for determin-ing the value of the use of demonstrationautomobiles provided to employees byautomobile dealerships. The methods inthis revenue procedure include —• Simplified Method for the Full Exclu-

sion of Qualified Automobile Demon-stration Use. (Simplified Out/InMethod) This is a simplified methodfor keeping records to support the fullexclusion of the use of a demonstrationautomobile from the income of a full-time automobile salesperson. Thismethod is discussed in section 4, Ques-tions and Answers 11 through 25.

• Partial Exclusion of DemonstrationAutomobile Use by Full-Time Sales-people. This is a simplified method for

determining the excludible business useof a demonstration automobile pro-vided to a full-time salesperson and theamount included in income if the fullexclusion is not applicable. Thismethod is discussed in section 5, Ques-tions and Answers 26 through 39.

• Inclusion of the Value of Demonstra-tion Automobile Use When No Exclu-sion Applies. This is a simplifiedmethod for determining the amount tobe included in income of any employeeprovided the use of a demonstrationautomobile if neither the full nor partialexclusion for full-time salespeople isavailable. This method is discussed insection 6, Questions and Answers 40through 47.

• Application of General Rule WhenMethods in Revenue Procedure are NotUsed. Question 51 in section 7 pro-vides that if the requirements of thesimplified methods provided under thisrevenue procedure are not satisfied,generally the amount required to beincluded in an employee’s income isthe fair market value of the use of thedemonstration automobile. Question 51also provides that if errors are identi-fied and corrected during the calendaryear in which the vehicle is provided,an employer may continue to use thesimplified methods under this revenueprocedure.This revenue procedure is designed to

provide a comprehensive framework foraddressing the tax treatment of demon-stration automobiles provided by automo-bile dealers to employees. The simplifiedmethods have been structured sequen-tially so that if the use by an employeedoes not qualify for treatment under onemethod, the use can nonetheless be takeninto account under a subsequent methodwith no additional recordkeeping orchange in determination period. Forexample, if the use of a demonstrationautomobile by a full-time salespersonfails to qualify for full exclusion underthe simplified full exclusion method, theuse may still be accounted for under thepartial exclusion method based on recordsotherwise available or already maintainedunder the full exclusion method. At thesame time, employers can choose to usethe partial exclusion method immediatelyfor all full-time salespeople without firstattempting to satisfy the requirements of

the full exclusion method. Moreover, anemployer can choose to apply the differ-ent optional methods on an employee byemployee basis. Thus, if some employeesare unwilling to maintain the records nec-essary to satisfy the full exclusionmethod, the employer can account fortheir use under the partial or full inclusionmethods while still retaining the ability touse the full exclusion method for theother employees.

Q–2. Who may use the simplifiedmethods in this revenue procedure?

A–2. The simplified methods providedin this revenue procedure are available toany automobile dealer engaged in thebusiness of retail sales of new or usedvehicles described in Question andAnswer 3.

Q–3. What vehicles are demonstra-tion automobiles that qualify for the sim-plified methods?

A–3. The application of the simplifiedmethods provided in this revenue proce-dure for determining the tax-treatment ofemployer-provided vehicles is limited todemonstration automobiles as defined inTreas. Reg. § 1.132–5(o)(3). That regula-tion requires that the vehicle be currentlyin the inventory of the automobile dealer-ship and be available for test drives bycustomers during the normal businesshours of the employee provided its use.For purposes of this revenue procedure,demonstration automobiles can includepassenger vans, sport utility vehicles, andlight-duty trucks. Light-duty trucks aretrucks with a gross vehicle weight of14,000 pounds or less, which are alsoreferred to as class 1, 2, or 3 trucks.

Q–4. For which employees can thesimplified methods be used?

A–4. The application of the simplifiedmethods provided in this revenue proce-dure for the full or partial exclusion ofdemonstration automobile use is limitedto use by full-time salespeople as definedin Treas. Reg. § 1.132–5(o)(2). That regu-lation requires that the individual beemployed by an automobile dealer, cus-tomarily spend at least half of a normalbusiness day performing the functions ofa floor salesperson or sales manager,directly engage in substantial promotionand negotiation of sales to customers,customarily work a number of hours con-sidered full-time in the industry (but at arate not less than 1,000 hours per year),

December 17, 2001 592 2001-51 I.R.B.

and derive at least 25 percent of grossincome from sales activities.

The simplified method for full inclu-sion may be applied with respect to theuse of a demonstration automobile by anyemployee of an automobile dealer.

Q–5. Does this revenue proceduredescribe all of the methods for determin-ing and substantiating the value of theuse of demonstration vehicles providedto employees by automobile dealerships?

A–5. No. An automobile dealer is notrequired to use the optional simplifiedmethods described in this revenue proce-dure. An automobile dealer may use anyother applicable method that complieswith the Internal Revenue Code and Trea-sury regulations to account for the use ofdemonstration automobiles by employees.

SECTION 2. BACKGROUND

Q–6. What provisions of the tax lawmay apply to a vehicle provided to anemployee by an employer?

A–6. In general, section 61(a)(1) of theInternal Revenue Code (the Code) pro-vides that gross income means allincome, including compensation for ser-vices. Fringe benefits are specificallylisted as an example of compensation forservices. The examples of fringe benefitsunder Treas. Reg. § 1.61–2T(a)(1) includean employer-provided automobile.

However, section 132(a) of the Codepermits certain fringe benefits, includingworking condition fringes, to be excludedfrom gross income. In certain circum-stances, all or part of the value of the useof an employer-provided automobile maybe a working condition fringe.

Q–7. When is the use of an employer-provided automobile a working condi-tion fringe?

A–7. Section 132(d) of the Code gen-erally defines a working condition fringeas any property or services provided to anemployee by an employer to the extentthat, if the employee paid for such prop-erty or services, the payment would beallowable as a business expense deduc-tion. Thus, generally any business use ofan employer-provided vehicle, includinga demonstration automobile, by anyemployee is a working condition fringe.

In addition, section 132(j)(3) of theCode specifically provides that “qualifiedautomobile demonstration use” by a full-

time automobile salesperson is treated asa working condition fringe.

However, regulations related to work-ing condition fringe benefits at section1.132–5(c)(1) generally provide thatworking condition fringe benefits maynot be excluded unless the substantiationrequirements of either section 274(d) orsection 162 and corresponding regula-tions are satisfied. Thus, even if businessuse of an employer-provided vehicle is aworking condition fringe, it may not beexcluded from the employee’s grossincome unless that business use is prop-erly substantiated.

SECTION 3. FULL EXCLUSION FORQUALIFIED AUTOMOBILEDEMONSTRATION USE

Q–8. What is the full exclusion forqualified automobile demonstration use?

A–8. As noted above, section 132(j)(3)specifically provides that “qualified auto-mobile demonstration use” is treated as aworking condition fringe. Generally,“qualified automobile demonstration use”is the use of a demonstration automobileby a full-time salesperson if the specificrestrictions described in Question andAnswer 9 are observed. If there is “quali-fied automobile demonstration use,” thevalue of the use of the demonstrationautomobile is excluded from the full-timesalesperson’s wages. As a result, thesalesperson will not owe income or FICAtaxes on the value of use and theemployer will not be required to withholdincome taxes or pay FICA taxes withrespect to the value of the use.

Q–9. What are the requirements forthe full exclusion of automobile demon-stration use by a full-time salesperson?

A–9. The requirements for the fullexclusion of automobile demonstrationuse by a full-time salesperson containedin section 132(j)(3) of the Code are asfollows:

a. The use must be in the sales area inwhich the automobile dealer’s sales officeis located.

b. The use must be provided primarilyto facilitate the salesperson’s performanceof services for the employer.

c. There must be substantial restric-tions on the personal use of the automo-bile by the salesperson.

Under Treas. Reg. § 1.132–5(o)(4),substantial restrictions on the personaluse of a demonstration automobile existwhen all of the following conditions aresatisfied:

a. Use by individuals other than thefull-time salesperson (e.g., the salesper-son’s family) is prohibited;

b. Use for personal vacation trips isprohibited;

c. The storage of personal possessionsin the automobile is prohibited; and

d. The total use by mileage of theautomobile by the salesperson outside thesalesperson’s normal working hours(“personal use”) is limited.

To use the simplified full and partialexclusion methods contained in this rev-enue procedure, the employer must alsohave a written policy limiting the use ofthe demonstration automobile. To use thefull exclusion method, the employer mustalso determine that the personal use of thevehicle is limited to establish that therestrictions provided by the Code andregulations are satisfied.

Q–10. What is the treatment if therequirements for the full exclusion arenot met?

A–10. If the use of the demonstrationautomobile by one or more employeesdoes not satisfy the requirements for fullexclusion, the employer must includesome or all of the value of the use of thevehicle in the gross income of thoseemployees using the methods for partialexclusion or full inclusion described insection 5 and 6, respectively, below.

SECTION 4. SIMPLIFIED METHODFOR THE FULL EXCLUSION OFQUALIFIED AUTOMOBILEDEMONSTRATION USE

Q–11. What are the requirementsunder this revenue procedure for theSimplified Method for Full Exclusion ofQualified Automobile Demonstrationuse?

A–11. The requirements are as fol-lows:

a. The employer must have a qualifiedwritten policy limiting the use of thedemonstration automobile;

b. The employer must reasonablybelieve that the full-time automobilesalesperson complies with the writtenpolicy; and

2001-51 I.R.B 593 December 17, 2001

c. The employer must determine, noless often than monthly, that the personaluse of the vehicle by the full-time sales-person was limited and maintain therecords described in Answer 23 support-ing the determination. (But see Questionand Answer 51 regarding correctingerrors identified during the calendar year.)

Q–12. What is a qualified writtenpolicy for purposes of the full exclusion?

A–12. A qualified written policy is inplace if the employer establishes andcommunicates to each full-time automo-bile salesperson allowed the use of ademonstration automobile a writtenpolicy which —

(1) Prohibits use of the vehicle outsideof normal business hours by individualsother than full-time salespeople.

(2) Prohibits use of the vehicle for per-sonal vacation trips.

(3) Prohibits use outside of the salesarea in which the employer’s sales officeis located.

(4) Prohibits storage of personal pos-sessions in the vehicle.

(5) Limits the total use by mileage ofthe vehicle by the salesperson outsidenormal working hours to commutingbetween the salesperson’s home and thedealer’s sales office and to an additionalaverage number of miles per day of 10miles or less.

A model qualified written policy forpurposes of the full exclusion is providedin Appendix A.

Q–13. When may the employer rea-sonably believe that the full-time auto-mobile salesperson complies with thewritten policy?

A–13. Under the full exclusionmethod, the employer may reasonablybelieve that a salesperson complies withthe written policy where the calculationsof total mileage outside of normal work-ing hours indicate that the limit on per-sonal use was not exceeded and theemployer has no actual knowledge thatthe other requirements of the policy arenot satisfied. For example, if theemployer had actual knowledge that asalesperson’s family members used thedemonstration automobile in violation ofthe policy, the use during the period doesnot qualify for the full exclusion even ifthe mileage records indicate that the lim-

its on mileage outside of normal workinghours have not been exceeded during theperiod.

Q–14. What is the sales area of anautomobile dealer?

A–14. Under Treas. Reg. § 1.132–5(o)(5)(i), sales area is generally definedas the geographic area surrounding theautomobile dealer’s sales office fromwhich the office regularly derives cus-tomers. Paragraph (ii) under that regula-tion provides a safe harbor rule that, as aminimum, allows that an automobiledealer’s sales area may be treated as thearea within a radius of 75 miles of thesales office.

Q–15. When is the personal use of thedemonstration automobile limited forpurposes of the full exclusion?

A–15. For a full-time salesperson, per-sonal use is considered limited asrequired under section 132(j)(3) if thetotal mileage a demonstration automobileis used outside normal working hours,less commuting mileage, does not exceedan average of 10 miles per day. For thispurpose, the mileage on each demonstra-tion automobile a salesperson uses foreither commuting or personal purposesmust be taken into account.

Q–16. How does an employer deter-mine the total mileage that a demonstra-tion automobile is used outside of nor-mal working hours?

A–16. For purposes of this revenueprocedure, an employer can determine thetotal mileage that a demonstration auto-mobile is used outside of normal workinghours under the Simplified Out/InMethod. Under this method, the totalmiles that a demonstration automobile isused during normal working hours is nottaken into account and only mileage out-side of normal working hours is consid-ered. To satisfy this method, the mileageon the automobile must be recorded undera reasonable system (1) at the end of theworking hours of the salesperson usingthe automobile (out mileage) and (2) atthe beginning of that salesperson’s work-ing hours on the next working day (inmileage).

Q–17. What is a reasonable systemfor recording out and in mileage?

A–17. Any reasonable system may beused for recording out and in mileage.

For example, an employee other than thesalesperson could record the mileage onthe demonstration automobiles at thearrival and departure of the vehicle at thesales office on each workday. A reason-able system would also include mileageentries for the vehicles by the full-timesalespeople using the vehicle if there wasrandom verification of the accuracy of theentries by an employee other than thesalespeople at least once in every deter-mination period, as described in Questionand Answer 18.

Q–18. What is the applicable periodfor determining whether the average 10miles per day is exceeded?

A–18. Under the simplified full exclu-sion method provided by this revenueprocedure, the employer must determinewhether the average 10 miles per day ofpersonal use has been exceeded no lessoften than once each calendar month. Ifan employer chooses to make the deter-mination every two weeks, the applicableperiod is two weeks, and the amount ofpersonal use in addition to commutingallowed for the two weeks is 140 miles(14 days multiplied times 10 miles perday). If the employer chooses to make thedetermination monthly, the amount variesfrom month to month, depending on thenumber of days in the calendar month.

Q–19. What is commuting mileage?A–19. Commuting mileage is the total

number of miles a demonstration automo-bile is driven by a salesperson when com-muting to and from the dealer’s salesoffice during the period at issue. For thispurpose, commuting mileage includesonly one round trip to and from the salesoffice per workday. The employer shouldassume that the commuting distance is thesame for every day the employee drivesthe automobile to work unless theemployer has reason to believe that theemployee has moved.

Q–20. How does an employer deter-mine the commuting mileage for a full-time salesperson?

A–20. A full-time salesperson’s com-muting mileage can be determined by anyreasonable method. Reasonable methodsinclude employee mileage records of asingle commute, computer research pro-grams identifying distance between the

December 17, 2001 594 2001-51 I.R.B.

employee’s home address and the deal-er’s sales office, or employee self-reporting that reasonably corresponds tothe driving distance between the employ-ee’s home address and the dealer’s salesoffice.

Q–21. Is commuting mileage limitedto the most direct route between theemployee’s home and the sales office?

A–21. No. An employee can use anycommuting route that is reasonable intime or mileage. However, an employeemay not increase his or her reported com-muting mileage to allow for additionalpersonal use; the average 10 miles perday allowance is intended to provide lim-ited personal use in addition to commut-ing.

Example 1. A salesperson employee lives in asubdivision on the opposite side of a significanturban area from the sales office. Although a directroute through the urban area is shorter, using a high-way around the urban area generally takes less time,although the actual mileage is greater. In this case,the employer can use the longer commuting mileagereflecting the use of the highway for purposes ofdetermining the employee’s personal use mileage inexcess of commuting.

Example 2. A salesperson belongs to a fitnessclub located eight miles outside of any reasonablecommuting route between the sales office and thesalesperson’s home. Even if the salesperson regu-larly stops at the fitness club on the trip home, theemployer cannot include the additional eight milesin the commuting mileage for purposes of determin-ing the employee’s personal use mileage in excessof commuting.

Q–22. How does an employer usingthe full exclusion method calculate per-sonal use?

A–22. The following examples illus-trate calculations of personal use anddeterminations of whether the require-ment that personal use outside of workinghours was limited in accordance with thequalified policy.

Example 1. The employer adopts the simplifiedout/in method and implements a written policy thatsatisfies the requirements of this revenue procedure.The employer chooses to determine personal usemonthly. For a 30 day month, the total mileage forthe automobiles used by full-time salesperson Y dur-ing the month is 1,450 miles. Based on the mileagerecorded at arrival and departure during the month,800 miles relate to use during normal working hoursand is not taken into account. Salesperson Y’s roundtrip commute is 15 miles and Y works 20 days dur-ing the month, for a total commuting mileage of 300miles during the month. The total use outside ofnormal working hours is calculated by taking the

1,450 total miles and subtracting the use duringworking hours, resulting in 650 miles. Total use out-side of normal working hours for the month, 650miles, less commuting miles for the month, 300miles, results in 350 miles. This is greater than 10miles per day for 30 days (300 miles). Thus, use bysalesperson Y is not considered to be limited duringthe month and salesperson Y does not qualify for theexclusion for the month. Nonetheless, salesperson Ymay qualify for the partial exclusion under this rev-enue procedure if the requirements for that methodare satisfied.

Example 2. The same facts as in Example 1,except that for a 31 day month, the total mileage forthe automobiles used by full-time salesperson X forthe month is 1,600 miles. Based on the mileagerecorded at arrival and departure during the month,720 miles relate to use during working hours. Sales-person X’s round trip commute is 30 miles and Xworks 22 days during the month, for total commut-ing mileage of 660 miles during the month. Thetotal use outside of normal working hours is calcu-lated by taking the 1,600 total miles and subtracting720 miles, the use during working hours, resultingin 880 miles. Total use outside of working hours forthe month, 880 miles, less commuting miles for themonth, 660 miles, results in 220 miles. This is lessthan 10 miles per day for 31 days (310 miles). Thus,use by X is considered to be limited during themonth.

Q–23. What records must anemployer maintain to satisfy the require-ments for the full exclusion?

A–23. An employer must maintain thefollowing records to satisfy the require-ments for the full exclusion for anymonth —

a. A copy of the written policy on useand evidence that it was communicated toemployees, such as a copy of a posternotifying employees of the policy, a copyof a letter or an electronic communicationnotifying the employee of the policy, orsigned statements by the employeesacknowledging receipt of the writtenpolicy.

b. Records establishing that the sales-person’s personal use by mileage was cal-culated no less often than once each cal-endar month. This may include:

(i) Records identifying each demon-stration automobile assigned to eachsalesperson during the period.

(ii) Records identifying the total mile-age for each demonstration automobileassigned to a salesperson during theperiod.

(iii) Records supporting the total useoutside of normal working hours underthe Simplified Out/In Method described

in Question and Answer 16 and any veri-fication of those records. In particular, theemployer would maintain records of outand in mileage of the demonstration auto-mobiles provided to full-time salespeoplefor each day the automobile is used.

(iv) Records identifying the round tripcommuting mileage of each salespersonassigned a demonstration automobilefrom salesperson’s home to the dealer’ssales office during the period. See Ques-tions and Answers 19, 20 and 21 regard-ing the determination of commuting mile-age.

Q–24. What records must anemployee maintain to satisfy the require-ments for the full exclusion?

A–24. The employee is required tomaintain no records except to the extentthe employee is required to provide infor-mation to the employer to allow theemployer to maintain the records as notedabove.

Q–25. What are the tax consequencesif one or more employees fail to satisfythe limited personal use requirement?

A–25. For each full-time salespersonwhose personal use mileage exceeds the10 miles per day average for the appli-cable determination period, the employermust include all or a portion of the valueof the use of the demonstration automo-bile for the period in the income of thatfull-time salesperson. The employer maycontinue to use the full exclusion for allother full-time salespeople whose per-sonal use mileage is limited.

The employer may implement the par-tial exclusion method by includingamounts in income either in the currentperiod or in the period immediately fol-lowing the current period. Whichevermethod is chosen, the employer mustimplement the exclusion in a consistentmanner. Thus, after determining that anemployee does not qualify for the fullexclusion for the month, the employercan include an amount in the employee’sincome for the current month. Alterna-tively, the employer can include anamount in the employee’s income duringthe next month. In that case, the amountincluded in the next month under the par-tial or full inclusion method is determinedby the number of days in the next month.

2001-51 I.R.B 595 December 17, 2001

SECTION 5. SIMPLIFIED METHODFOR PARTIAL EXCLUSION OFDEMONSTRATION AUTOMOBILEUSE BY FULL-TIME SALESPEOPLE

Q–26. What is the partial exclusion ofdemonstration automobile use?

A–26. Under the partial exclusionmethod, an amount is included in the full-time automobile salesperson’s incomeand wages no less often than monthly.The amount reflects personal use of thedemonstration automobile and is based onthe value of the use of that vehicle asdetermined in Question and Answer 33below. The remaining portion is deemedto represent business use that is exclud-able from income and wages as a workingcondition fringe.

Q–27. When can an employer use thepartial exclusion method?

A–27. An employer choosing not touse the full exclusion method can use thepartial exclusion method to account forthe use of any demonstration automobileby a full-time salesperson if the require-ments of this revenue procedure are satis-fied. Moreover, the partial exclusionmethod is also available if a full-timesalesperson employed by a dealer other-wise satisfying the requirements for thefull exclusion exceeds the average 10miles per day of personal use or does notprovide records with respect to businessuse of a demonstration automobile. Insuch cases, the employer will generallybe able to account for the use of the dem-onstration automobile by using the partialexclusion method rather than includingthe full value of the use of demonstrationautomobile in the income of the full-timesalesperson.

Q–28. What are the requirements forthe partial exclusion of demonstrationautomobile use by a full-time salesper-son?

A–28. The requirements are as fol-lows:

a. The employer must have a qualifiedwritten policy limiting the use of thedemonstration automobile;

b. The employer must reasonablybelieve that the full-time automobilesalesperson complies with the writtenpolicy; and

c. The employer must account for thenondeductible personal use by any full-time automobile salesperson by including

in gross income and wages the amountspecified in the table in Answer 35 noless often than monthly and maintainrecords specified in Answer 38, which arenecessary to support that accounting.

Q–29. What is the treatment if therequirements for the partial exclusionare not met?

A–29. If the use of the demonstrationautomobile by a full-time salespersondoes not satisfy the requirements for par-tial exclusion, the employer must includeall of the value of the use of the vehiclein gross income of that employee usingthe method for full inclusion described inAnswers 40–47 below. But see specialrule regarding self-correction below inQuestion and Answer 51.

Q–30. What is a qualified writtenpolicy for purposes of the partial exclu-sion?

A–30. A qualified written policy is inplace if the employer establishes andcommunicates to each full-time automo-bile salesperson allowed the use of ademonstration automobile a writtenpolicy which—

(1) Prohibits use of the vehicle outsideof normal business hours by individualsother than full-time salespeople.

(2) Prohibits use of the vehicle for per-sonal vacation trips.

(3) Prohibits storage of personal pos-sessions in the vehicle.

A model written policy for purposes ofthe partial exclusion is provided inAppendix B.

Q–31. May a qualified written policyunder the full exclusion method be usedfor the partial exclusion method?

A–31. Yes.Q–32. When may the employer rea-

sonably believe that the full-time auto-mobile salesperson complies with thewritten policy?

A–32. Under the partial exclusionmethod, the employer may reasonablybelieve that a salesperson complies withthe written policy if the employer has noactual knowledge that the other require-ments of the policy are not satisfied. Forexample, if the employer had actualknowledge that a salesperson’s familymembers used the demonstration automo-bile, the use does not qualify for the par-tial exclusion.

Q–33. What method does theemployer use to determine the value of

the demonstration automobile used by afull-time salesperson?

A–33. An employer may use any rea-sonable method to determine the value ofthe demonstration automobile used by afull-time salesperson. That value is usedin applying the table in Answer 35. Thefollowing method is considered a reason-able method.

Annual Average Look Back Method.Under the annual average look backmethod, the value of the use of any newdemonstration automobile is based on theaverage sales price of all vehicles sold inthe prior year. The average sales price iscalculated by taking the sum of the salesprices of all new car and truck sales in theprior calendar year and dividing that sumby the number of new vehicles sold in theprior year. The average sales price is usedto determine the value of the demonstra-tion automobile and the correspondingdaily inclusion amount under the table inAnswer 35. This amount is included inthe employee’s income and wages foreach day the employee used a demonstra-tion automobile. The amount must beincluded in income at least monthly. Theaverage sales price must be determined inJanuary of each year and must be appliedno later than February of that year.

For used vehicles, the average salesprice is calculated by taking the sum ofthe sales prices of all used vehicles forthe prior year and dividing by the numberof vehicles sold in the prior year. Thevalue of a demonstration automobile mayonly be based on used cars for sales-people using only used cars as demonstra-tion automobiles; the average sales priceof used cars cannot be combined with theaverage sales price of new cars for pur-poses of determining the value of demon-stration automobiles that are new. If adealership sells both new and usedvehicles, the employer may use the valuebased on new vehicles as the value of thedemonstration automobiles used by allsalespeople. Alternatively, the employermay calculate the value of the demonstra-tion automobiles separately for sales-people using used vehicles and sales-people using new vehicles.

An employer using the annual averagelook back method must maintain evi-dence supporting the calculation of theannual average sales price.

Example 1. In 2001, an employer sold 948 newvehicles for total gross sales of $23, 226,000 (as

December 17, 2001 596 2001-51 I.R.B.

shown on the year-end standard financial statementthat the dealer provided to the manufacturer). InJanuary 2002, the employer calculates the averagesales price by dividing $23,226,000 by 948 vehicles,resulting in $24,500. For each month ending on orafter February 1, 2002, to January 31, 2003, of thenext year, for each full-time salesperson providedthe use of a demonstration automobile, the employerincludes in the salesperson’s gross income $6, theamount from the table in Answer 35 based on thatvalue, for each day in the month. This treatment isproper even if one full-time salesperson was pro-vided only used demonstration automobiles. In addi-tion, the employer keeps a copy of the factory state-ment that provided the amount of the 2001 sales andthe number of vehicles sold as a record of his calcu-lation.

Example 2. The same facts as in Example 1,except in addition to the new cars, the employersold 233 used vehicles in 2001 for a total sales priceof $2,903,248. Thus, the average sales price for theused vehicles is $12,456. While all the full-timesalespeople sell used vehicles, only two full-timesalespeople are provided used vehicles as demon-stration automobiles. In this example, the value ofthe demonstration automobiles for the salespeopleprovided new cars as demonstration automobilesmay not be based on the used cars sold in 2001.However, the employer may use $12,456 to deter-mine the amount included in the income of the twofull-time salespeople provided used cars as demon-stration automobiles.

Q–34. How does an employer deter-mine the annual average sales price ifmore than one franchise is operated ator from a single location?

A–34. The employer must use a con-sistent method for calculating the value ofthe demonstration automobiles. If morethan one franchise is operated at a singlephysical location (“store”), the annualaverage sales price for all salespeoplemay be based on the combined sales of

all franchises operating at the store. Thevalue of a demonstration automobile mayonly be based on used cars for sales-people provided used cars as demonstra-tion automobiles; the average sales priceof used cars cannot be combined with theaverage sales price of new cars for pur-poses of determining the value of the useof demonstration automobiles that arenew.

However, if a salesperson is only pro-vided demonstration automobiles from asingle franchise operating out of the store,the employer may base the annual calcu-lation of value for that salesperson on thesales of the specific franchise. In thatcase, the value for all salespeople in thestore must also be based on specific fran-chises.

Similarly, if some salespeople receivedemonstration automobiles exclusivelyfrom the store’s used car inventory andother salespeople received demonstrationautomobiles exclusively from the store’snew car inventory, the value must gener-ally be calculated separately for eachgroup of salespeople. However, as notedin Question and Answer 33, if the storesells both new and used vehicles, theemployer may also use the value based onsales of new vehicles as the value of thedemonstration automobiles for all sales-people.

A special consistency rule is availableif some salespeople sell automobiles andprovide demonstration automobiles frommore than one franchise operating out ofthe store; in that case, the value must be

calculated consistently within groups ofsalespeople. For example, all salespeopleassigned demonstration automobiles froma single franchise may have the valuebased on the specific franchise, and allsalespeople assigned demonstration auto-mobiles from more than one franchisemay have the value based on the com-bined inventories of the franchises.

However, if two franchises operate outof a store, the employer could not basethe value for salespeople of the lessexpensive franchise on the less expensivefranchise while basing the value for sales-people of the more expensive franchiseon the combined inventory. In that case,either the value for all salespeople mustbe based on the combined sales or thevalue for the two groups of salespeoplemust be based on the respective franchisesales.

Q–35. What is the amount included inthe full-time salesperson’s income andwages for use of the demonstration auto-mobile under the partial exclusionmethod?

A–35. For each day (including non-workdays) a full-time salesperson is pro-vided the use of a demonstration automo-bile, the appropriate amount from thetable below, based on the value of thedemonstration automobile as determinedunder a reasonable method as describedin Question and Answer 33, must beincluded in the full-time salesperson’sincome and wages no less often thanmonthly.

Value of the Demonstration Automobile Daily Inclusion Amount0 — $14,999 $3

$15,000 — $29,999 $6$30,000 — $44,999 $9$45,000 — $59,999 $13$60,000 — $74,999 $17$75,000 and above $21

Q–36. How does an employer deter-mine the number of days that a salesper-son has the use of a demonstration auto-mobile?

A–36. Absent evidence to the contrary,full-time salespeople are assumed to have

the use of a demonstration automobile forevery day of the period under consider-ation. Salespeople hired during the periodare assumed to have use for every dayfrom the date of hire to the end of theperiod. Salespeople that separate from

service are assumed to have the use of anautomobile from the first day of theperiod to the date of separation.

2001-51 I.R.B 597 December 17, 2001

Q–37. May an employer elect undersection 3402(s) of the Code not to with-hold income taxes from the portion ofthe vehicle fringe benefit required to beincluded under the partial exclusionmethod provided under this revenue pro-cedure?

A–37. No. Under this revenue proce-dure, the periodic inclusion inherent inthe requirement to include amounts inincome not less often than monthly isintended to substitute for more specificrecordkeeping requirements for substanti-ating the use of the demonstration auto-mobile. Annual inclusion and withholdingof other employment taxes with respect tononcash fringe benefits allowed underAnnouncement 85–113 (1985–31 I.R.B.31) is unavailable under the methods pro-vided by this revenue procedure.

Q–38. What records must anemployer maintain to satisfy the require-ments for the partial exclusion?

A–38. An employer must maintain thefollowing records to satisfy the require-ments for the partial exclusion—

a. Records supporting the determina-tion of the value of the use of demonstra-tion automobiles. For these purposes,records identified above in the descriptionof annual average look back method fordetermining value in Question andAnswer 33 will be considered adequate.

b. Evidence that the amount wastimely included in the employee’s incomeand wages. For example, copies of wagestatements showing inclusion of theamounts no less often than monthly.

c. A copy of the written policy on useand evidence that it was communicated toemployees, such as a copy of a posternotifying employees of the policy, a copyof a letter or an electronic communicationnotifying the employee of the policy, orsigned statements by the employeesacknowledging receipt of the writtenpolicy.

Q–39. What records must anemployee maintain to satisfy the require-ments for the partial exclusion?

A–39. The employee is required tomaintain no records.

SECTION 6. SIMPLIFIED METHODFOR INCLUSION OF THE VALUE OFDEMONSTRATION AUTOMOBILE IFNEITHER FULL NOR PARTIALEXCLUSION APPLIES

Q–40. What method does an employeruse to account for the use of demonstra-tion automobiles provided to employeeswho are not full-time salespeople?

A–40. If the employee provided theuse of a demonstration automobile is nota full-time salesperson, the full exclusionand the partial exclusion in this revenueprocedure do not apply. To reduce recordkeeping with respect to use of a demon-stration automobile by an employee whois not a full-time salesperson, theemployer may include in the employee’sincome and wages each month the fullvalue of the demonstration automobiledetermined with no reduction to take intoaccount business use (the “full inclusionmethod”). See Questions and Answers 43through 45 below which discuss the useof the annual lease value table to deter-mine the amount included under thismethod.

Of course, other methods for exclud-ing from an employee’s income a portionof the value of the use of an employer-provided automobile remain available forthose employees that are not full-timesalespeople. Specifically, see Questionsand Answers 48 through 50 belowregarding the application of Treas. Reg.§ 1.274–6T. Section 1.274–6T generallyallows an employer implementing certainwritten policies restricting personal use toaccount for commuting and de minimispersonal use by any employee by includ-ing the $1.50 per one-way commute pro-vided under Treas. Reg. § 1.61–21(f)(3)in the employee’s income and providingother evidence allowing a determinationthat use was actually limited.

Q–41. What method is used toaccount for the use of a demonstrationautomobile by a full-time salespersonwho does not qualify for the full exclu-sion or partial exclusion?

A–41. If use of a demonstration auto-mobile by a full-time salesperson doesnot qualify for the full exclusion or thepartial exclusion, an amount is includedin the full-time salesperson’s income andwages no less often than monthly thatreflects the full value of the demonstra-tion automobile, with no reduction to takeinto account business use. See Questionsand Answers 42 through 44 below whichdiscuss the use of the annual lease valuetable to determine the amount includedunder this method.

Q–42. What are the requirements forusing the full inclusion method for dem-onstration automobiles used by employ-ees who are not full-time salespeople orwho are full-time salespeople?

A–42. The employer must account forthe use by an employee who is not a full-time salesperson by including in grossincome and wages for each day in eachperiod (no less often than monthly) thegreater of $3 per day or the pro rata por-tion of the amount specified in the annuallease value table at Treas. Reg. § 1.61–21(d)(2)(iii) using the value of the dem-onstration automobile.

Q–43. Under the full inclusionmethod, how does an employer deter-mine the value of the demonstrationautomobiles provided to employees?

A–43. An employer may use any rea-sonable method to determine the value ofthe demonstration automobile provided tothe employee. For this purpose, a reason-able method includes the annual averagelook back method listed as a reasonablemethod for determining the value of ademonstration automobile under the par-tial exclusion method in Answer 33above.

Q–44. How is the pro rata portion ofthe annual lease value amount includedin income calculated?

A–44. The pro rata portion of theannual lease value amount is the amountspecified in annual lease value table atTreas. Reg. § 1.61–21(d)(2)(iii) using thefull value of the demonstration automo-bile, divided by 365, rounding to nearestdollar amounts.

December 17, 2001 598 2001-51 I.R.B.

For ease of reference, the following table provides the daily inclusion amount under the annual lease value table.

Value of Demonstration Automobile Daily Inclusion Amount$0–2,999 $3

3,000–4,999 45,000–5,999 56,000–7,999 68,000–8,999 79,000–10,999 8

10,000–11,999 912,000–12,999 1013,000–14,999 1115,000–15,999 1216,000–17,999 1318,000–18,999 1419,000–20,999 1521,000–21,999 1622,000–23,999 1724,000–24,999 1825,000–25,999 1926,000–27,999 2028,000–29,999 2130,000–31,999 2332,000–33,999 2434,000–35,999 2536,000–37,999 2738,000–39,999 2840,000–41,999 2942,000–43,999 3144,000–45,999 3246,000–47,999 3448,000–49,999 3550,000–51,999 3652,000–53,999 3854,000–55,999 3956,000–57,999 4058,000–59,999 42

For vehicles with value in excess of $59,999, the dollar inclusion amount is (.25 x value) + $500, divided by 365, roundedto nearest dollar amount.

Q–45. Under the full inclusionmethod, how does an employer deter-mine the number of days that anemployee has the use of a demonstrationautomobile?

A–45. Absent evidence to the contrary,employees provided the use of a demon-stration automobile are assumed to havethe use of the automobile for every day(including non-workdays) of the periodunder consideration.

Q–46. What records must anemployer maintain to satisfy the require-ments for the full inclusion method?

A–46. An employer must maintain thefollowing records to satisfy the require-ments for the full inclusion method—

a. Adequate records supporting thedetermination of the value of the demon-stration automobile provided to theemployee. For these purposes, recordsidentified above in the description of thedeemed reasonable method for determin-ing value will be considered adequate.

b. Evidence that the amount wastimely included in the employee’s incomeand wages. For example, copies of wagestatements showing inclusion of theamounts no less often than monthly.

Q–47. What records must anemployee maintain to satisfy the require-ments for the full inclusion method?

A–47. No records must be maintainedby an employee under the full inclusionmethod.

2001-51 I.R.B 599 December 17, 2001

SECTION 7. APPLICATION OFGENERAL RULE WHEN METHODSIN REVENUE PROCEDURE ARENOT USED

Q–48. What is the interactionof the method under Treas. Reg.§ 1.274–6T for an employer implement-ing a policy of no personal use exceptcommuting through a written policy withthe full exclusion or partial exclusionmethods?

A–48. Under Treas. Reg. § 1.274–6T,certain types of written policy statementscan be used to implement a policy of nopersonal use, or no personal use exceptcommuting, of a vehicle provided by anemployer. Under the regulation, theemployee is not required to keep a sepa-rate set of records for purposes of theemployer’s substantiation requirementsunder section 274(d) of the Code withrespect to the use of a vehicle satisfy-ing the written policy statement rules.Among the requirements under Treas.Reg. § 1.274–6T for a policy of no per-sonal use except commuting is that theemployer reasonably believe there is nopersonal use except for de minimis per-sonal use in addition to commuting andthat the employee does not use thevehicle for any personal use except for deminimis personal use in addition to com-muting. Also among the requirements isthat there be evidence that would enablethe Commissioner to determine whetherthe use of the vehicle met the require-ments.

Generally, in the case of a full-timesalesperson, satisfying the requirementsof Treas. Reg. § 1.274–6T would satisfythe requirements for the full exclusionunder this revenue procedure. Moreover,in the case of a full-time salesperson, theemployer would not be required toinclude an amount in the income of thesalesperson representing the value ofcommuting.

Q–49. What amount of personal usemileage in addition to commuting wouldsatisfy the de minimis personal use inaddition to commuting under Treas.Reg. § 1.274–6T ?

A–49. For purposes of Treas. Reg.§ 1.274–6T and this revenue procedure,de minimis personal use means personaluse during the employee’s commute andin conjunction with business use. In con-

trast, the limited personal use permittedunder section 132(j)(3) and the full exclu-sion in this revenue procedure allow theemployee to use the vehicle for personalpurposes, even if that use involves adeparture from the commuting route.Thus, if the employee stops on the com-muting route for a personal purpose, thatuse constitutes de minimis personal use.However, if the employee travels to alocation that is five miles away from thecommuting route for a personal purpose,that use exceeds de minimis personal useeven though it may be permitted underthe full exclusion method described inthis revenue procedure.

Q–50. What evidence would satisfythe requirement under Treas. Reg.§ 1.274–6T that the employer mustmaintain evidence that would enable adetermination whether the use of thevehicle met the requirements?

A–50. Evidence establishing that eachsalesperson’s personal use by mileagewas calculated no less often than monthlywould support an employer’s reasonablebelief that the vehicle was not used forany personal purpose other than de mini-mis personal use in addition to commut-ing. For that purpose, the out and inrecords under the simplified full exclu-sion method described in section 4 wouldconstitute evidence that would enable adetermination that the use of the vehiclemet the requirements. Of course, as notedin Question and Answer 49, the additionalaverage 10 miles per day would not bepermitted as de minimis use.

Q–51. What amount is included in theincome of an employee if the use wasnot taken into account and included inincome for the month in which the useof a demonstration automobile was pro-vided?

A–51. If the error is identified and cor-rected during the calendar year the dem-onstration automobile was provided, theamount included may be determinedunder this revenue procedure. If the erroris not corrected during the calendar yearin which the demonstration automobile isprovided, the amount included is deter-mined under general valuation and sub-stantiation rules.

Example 1. In August, the employer determinesthat three employees provided the use of demonstra-tion automobiles without limitations on personalmileage (and for whom amounts were included inincome and wages under the partial exclusion

method) did not qualify as full-time salespeoplesince June of that year. Beginning in August, theemployer accounts for the use of demonstrationautomobiles by these three employees using the fullinclusion method. In addition, no later than Decem-ber 31, the employer includes an amount in the threeemployees’ income that is the difference betweenthe amount that should have been included in theirincomes under the full inclusion method for Juneand July and the amount actually included under thepartial exclusion method. With respect to theseemployees, the employer satisfies the requirementsof Question and Answer 51 of this revenue proce-dure.

Example 2. Two years after a demonstrationautomobile was provided to an employee, it is deter-mined that the employee was not a full-time sales-person qualifying for the full exclusion or the partialexclusion. The employer did not include any amountin the employee’s income with respect to the dem-onstration automobile. The amount required to beincluded in income and wages for the year thevehicle was provided is the full fair market value ofthe demonstration automobile. If there are notrecords substantiating the business use of the dem-onstration automobile, the full fair market value isincluded without reduction.

SECTION 8. INTENT TO REVISEREGULATIONS TO EXTENTNECESSARY

The Service intends to issue regula-tions modifying existing regulations tothe extent required to authorize the proce-dures set out in this revenue procedure.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effective fortaxable years beginning on or after Janu-ary 1, 2002.

SECTION 10. REQUEST FORCOMMENTS

We welcome comments regarding thisrevenue procedure. We specificallyrequest comments concerning two issues:

Question and Answer 32 of this rev-enue procedure describes one reasonablemethod for determining the value of dem-onstration automobiles, an annual lookback at the average sales price of allvehicles sold in the prior calendar year,for purposes of applying the daily inclu-sion value table under the partial exclu-sion method. Comments are specificallyrequested regarding the usefulness ofspecifying additional reasonable methods,including:

December 17, 2001 600 2001-51 I.R.B.

• A method basing the daily inclusionamount on an annual look back at theaverage sales price of only thosevehicles used as demonstration auto-mobiles in the prior year. For example,an employer has a full-time sales staffof six employees. During January, theemployer reviews the permanentrecords of all vehicles sold during theprior year. This review identifies 38vehicles that were sold as new vehicleswith over 1,000 miles on the odometerat the time of sale. Totaling the pricefor which the 38 vehicles sold anddividing by 38 results in an averagevalue of $26,980. For each month fromFebruary 1 of the present year to Janu-ary 31 of the next year, the employerincludes in each of the 38 full-timesalesperson’s gross income the amountfrom the table based on that value foreach day in the month.

• A method basing the daily inclusionamount for each employee on the valueof the specific demonstration automo-biles provided to the employees for themonth; in particular where recordsidentifying which salesperson is pro-vided which vehicle are already main-tained pursuant to the simplified out/inmethod under the full exclusion.Question and Answer 51 allows

employers to correct errors identified inthe calendar year during the calendaryear. Comments are also specificallyrequested regarding the need for moredetailed correction procedures whereerrors are identified preventing theemployer from satisfying the require-ments for the simplified methods underthis revenue procedure.

Comments regarding this revenue pro-cedure should be sent by March 1, 2002,in writing, and should reference Rev.Proc. 2001–56. Comments can beaddressed to:

CC:ITA:RU (Rev. Proc. 2001–56),room 5226

Internal Revenue ServicePOB 7604, Ben Franklin StationWashington, DC 20044

Comments also may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to:

CC:ITA:RU (Rev. Proc. 2001–56)Courier’s Desk

Internal Revenue Service1111 Constitution Avenue, NWWashington, DC.

Alternatively, taxpayers may transmitcomments electronically via the followingemail address:

Notice.Comments@m1.irscounsel.treas.gov

SECTION 11. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Neil D. Shepherd of theOffice of the Division Counsel/AssociateChief Counsel (Tax Exempt and Govern-ment Entities), IRS. However, other per-sonnel from the IRS and Treasury Depart-ment participated in its development. Forfurther information regarding this revenueprocedure, call (202) 622–6040 (not atoll-free number.)

SECTION 12. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by theOffice of Management and Budget inaccordance with the Paperwork Reduc-tion Act (44 U.S.C. 3507) under controlnumber 1545–1756.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.

The collections of information in thisrevenue procedure are in sections 4, 5,and 6. This information is required tocomply with the optional simplifiedmethods for determining the value of theuse of demonstration automobiles pro-vided to employees by automobile dealer-ships. This information will be used tosatisfy the substantiation requirements ofsection 274(d) and the regulations there-under and is required to obtain a benefitunder the optional simplified methods.The likely respondents are business orother for-profit institutions.

The estimated total annual recordkeep-ing burden is 100,000 hours.

The estimated annual burden perrecordkeeper varies from 2.5 hours to 7.5hours, depending on individual circum-

stances, with an estimated average of 5hours. The estimated number of record-keepers is 20,000.

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

APPENDIX A

MODEL QUALIFIED WRITTENPOLICY FOR FULL EXCLUSION

[INSERT NAME OF DEALERSHIP]

DEMONSTRATOR VEHICLE POLICY

This policy statement is designed foruse by dealers that wish to adopt theout/in or partial exclusion methods ofaccounting for use of demonstratorvehicles provided to full-time automobilesalespeople. It may also be used toexplain the full inclusion method forvehicles provided to employees other thanfull-time automobile salespeople.

Material in italics explains how to usethe policy and should be deleted from thepolicy provided to employees and main-tained by the dealership. Material in boldis optional and should be included only ifit reflects the choices made by the dealer-ship. Material IN CAPITALS is informa-tion that is specific to the dealership—the dealership should insert the appropri-ate information.

Because the optional language in thismodel provides for specifying the amountincluded in employee income, any dealeradopting that language should review themodel annually to determine if inclusionamounts have changed; if the inclusionamounts have changed, the dealer shouldmodify the policy to reflect the changeand reissue it to employees provided dem-onstration automobiles.

Full-time automobile salespeople at[INSERT NAME OF DEALERSHIP]and certain other employees may beprovided with the use of a demonstrationvehicle. We want you to understand therestrictions on use of demonstrationvehicles and how employees who usedemonstration vehicles will be taxed onthat use.

2001-51 I.R.B 601 December 17, 2001

Restrictions on Use of DemonstrationVehicles

• The demonstration vehicle must beavailable for test drives by customersduring the normal working hours of theemployee to whom the vehicle isassigned. Personal possessions may notbe stored in the vehicle. Any personalpossessions must be removed by thebeginning of normal working hours.

• The demonstrator vehicle is providedso that employees can become familiarwith the features of the vehicles wesell. Only the employee to whom thevehicle is assigned may use the vehicleoutside of normal working hours. Itmay not be used by family, friends, orneighbors.

• The demonstrator vehicle is part of ourinventory and must be available forsale to customers. It may not be usedoutside the dealership’s sales area orfor vacation travel.

• Insert any other restrictions the dealer-ship has concerning use or mainte-nance of the vehicle.

Insert the following two paragraphsonly if the “out/in” method will be usedfor full-time automobile salespeople.• The demonstration vehicle may be

used only for tests drives by custom-ers or other dealer business, for adaily commute between the employ-ee’s home and the dealership, andfor other limited personal use. Per-sonal use is limited to [INSERTNUMBER NO GREATER THAN 10MULTIPLIED BY THE NUMBEROF DAYS IN THE DETERMINA-TION PERIOD] miles during each[INSERT LENGTH OF A DETER-MINATION PERIOD WHICH ISNOT MORE THAN ONE MONTH].In order to minimize recordkeeping,all use during the employee’s normalworking hours will be treated asbusiness use, and all use outside theemployee’s normal working hourswill be treated as commuting or per-sonal use.

• The employee must ensure that mile-age on the vehicle at the end of eachworking day, and at the beginning ofthe next working day, is properly[recorded] OR [verif ied] by[INSERT NAME, TITLE, OR JOBDESCRIPTION OF THE PERSON

OR PEOPLE RESPONSIBLE FORRECORDING OR VERIFYINGMILEAGE].

Tax Treatment of Use of DemonstratorVehicles

Insert the next paragraph only if the“out/in” method is being used.• Any full-time automobile salesperson

who meets all of the above require-ments, including limiting personaluse to [INSERT NUMBER NOGREATER THAN 10 MULTIPLIEDBY THE NUMBER OF DAYS INTHE DETERMINATION PERIOD]miles during each [INSERTLENGTH OF A DETERMINATIONPERIOD WHICH IS NOT MORETHAN ONE MONTH] will not oweany federal [INSERT STATE ORLOCAL, IF APPROPRIATE]income tax or any Social Security orMedicare tax on the use of the dem-onstrator vehicle.

• Any full-time automobile salespersonwho meets all of the above require-ments [insert this material only if the“out/in” method is used except forlimiting personal use or ensuringthat mileage is recorded and veri-fied] will have [INSERT APPROPRI-ATE NUMBER FROM TABLE INANSWER 35] dollars per dayincluded in wages for each day onwhich the salesperson was assigned ademonstrator vehicle. Income tax,Social Security tax, and Medicare taxon this amount will be withheld fromother wages owed to the salesperson.

• Any full-time salesperson who is pro-vided with the use of a demonstrationvehicle but does not comply with therestrictions on storage of personal pos-sessions, use by people other than theemployee, use outside the sales area,and vacation travel during a pay periodwill have the full value of the use ofthe demonstrator automobile includedin wages for the pay period, resultingin [INSERT APPROPRIATE NUM-BER FROM ANNUAL LEASEVALUE TABLE UNDER ANSWER44] dollars per day included in wagesfor each day on which the salespersonwas assigned a demonstrator vehicle.Income tax, Social Security tax, and

Medicare tax on this amount will bewithheld from other wages owed to thesalesperson.Insert the following bullet only if dem-

onstration vehicles are provided toemployees other than full-time sales-people.• Any other employee who is provided

with use of a demonstration vehicleand meets all of the above require-ments [insert this material only if the“out/in” method is used except forlimiting personal use or ensuringthat mileage is recorded and veri-fied] will have:[INSERT APPROPRIATE NUM-BER FROM ANNUAL LEASEVALUE TABLE AT QUESTIONAND ANSWER 44] dollars per dayincluded in wages for each day onwhich the salesperson was assigneda demonstrator vehicle. Income tax,Social Security tax, and Medicaretax on this amount will be withheldfrom other wages owed to the sales-person.

APPENDIX B

MODEL QUALIFIED WRITTENPOLICY FOR PARTIAL EXCLUSION

[INSERT NAME OF DEALERSHIP]

DEMONSTRATOR VEHICLE POLICY

This policy statement is designed foruse by dealers that wish to adopt the par-tial exclusion methods of accounting foruse of demonstrator vehicles provided tofull-time automobile salespeople.

Material in italics explains how to usethe policy and should be deleted from thepolicy provided to employees and main-tained by the dealership. Material in boldis optional and should be included only ifit reflects the choices made by the dealer-ship. Material IN CAPITALS is informa-tion that is specific to the dealership—the dealership should insert the appropri-ate information.

Because the language in this modelprovides for specifying the amountincluded in employee income, any dealeradopting that language should review themodel annually to determine if inclusionamounts have changed; if the inclusionamounts have changed, the dealer shouldmodify the policy to reflect the change

December 17, 2001 602 2001-51 I.R.B.

and reissue it to employees provided dem-onstration automobiles.

Full-time automobile salespeople at[INSERT NAME OF DEALERSHIP]may be provided with the use of a dem-onstration vehicle. We want you to under-stand the restrictions on use of demon-stration vehicles and how full-timesalespeople who use demonstrationvehicles will be taxed on that use.

Restrictions on Use of DemonstrationVehicles

• The demonstration vehicle must beavailable for test drives by customersduring the normal working hours of theemployee to whom the vehicle isassigned. Personal possessions may notbe stored in the vehicle. Any personalpossessions must be removed by thebeginning of normal working hours.

• The demonstrator vehicle is providedso that employees can become familiarwith the features of the vehicles wesell. Only the employee to whom thevehicle is assigned may use the vehicleoutside of normal working hours. Itmay not be used by family, friends, orneighbors.

• The demonstrator vehicle is part of ourinventory and must be available forsale to customers. It may not be usedfor vacation travel.

• Insert any other restrictions the dealer-ship has concerning use or mainte-nance of the vehicle.

Tax Treatment of Use of DemonstratorVehicles

• Any full-time automobile salespersonwho meets all of the above require-ments will have [INSERT APPROPRI-ATE NUMBER FROM TABLE INANSWER 35] dollars per day includedin wages for each day on which thesalesperson was assigned a demonstra-tor vehicle. Income tax, Social Securitytax, and Medicare tax on this amountwill be withheld from other wagesowed to the salesperson.

• Any full-time salesperson who is pro-vided with the use of a demonstrationvehicle but does not comply with the

restrictions on storage of personal pos-sessions, use by people other than theemployee, and vacation travel during apay period will have the full value ofthe use of the demonstrator automobileincluded in wages for the pay period,resulting in [INSERT APPROPRIATENUMBER FROM ANNUAL LEASEVALUE TABLE UNDER ANSWER44] dollars per day included in wagesfor each day on which the salespersonwas assigned a demonstrator vehicle.Income tax, Social Security tax, andMedicare tax on this amount will bewithheld from other wages owed to thesalesperson.

Social Security Contributionand Benefit Base for 2002

Under authority contained in theSocial Security Act (“the Act”), the Com-missioner, Social Security Administra-tion, has determined and announced (66F.R. 54047, dated October 25, 2001) thatthe contribution and benefit base forremuneration paid in 2002, and self-employment income earned in taxableyears beginning in 2002 is $84,900.

“Old-Law” Contribution and BenefitBase

General

The “old-law” contribution and benefitbase for 2002 is $63,000. This is the basethat would have been effective under theAct without the enactment of the 1977amendments. The base is computed undersection 230(b) of the Act as it read priorto the 1977 amendments.

The “old-law” contribution and benefitbase is used by:

(a) The Railroad Retirement programto determine certain tax liabilities and tierII benefits payable under that program tosupplement the tier I payments which cor-respond to basic Social Security benefits,

(b) The Pension Benefit Guaranty Cor-poration to determine the maximumamount of pension guaranteed under theEmployee Retirement Income Security

Act (as stated in section 230(d) of theSocial Security Act),

(c) Social Security to determine a yearof coverage in computing the specialminimum benefit, as described earlier,and

(d) Social Security to determine a yearof coverage (acquired whenever earningsequal or exceed 25 percent of the “old-law” base for this purpose only) in com-puting benefits for persons who are alsoeligible to receive pensions based onemployment not covered under section210 of the Act.

Domestic Employee CoverageThreshold

General

The minimum amount a domesticworker must earn so that such earningsare covered under Social Security orMedicare is the domestic employee cov-erage threshold. For 2002, this thresholdis $1,300. Section 3121(x) of the InternalRevenue Code provides the formula forincreasing the threshold.

Computation

Under the formula, the domesticemployee coverage threshold amount for2002 shall be equal to the 1995 amount of$1,000 multiplied by the ratio of thenational average wage index for 2000 tothat for 1993. If the resulting amount isnot a multiple of $100, it shall be roundedto the next lower multiple of $100.

Domestic Employee Coverage ThresholdAmount

Multiplying the 1995 domesticemployee coverage threshold amount($1,000) by the ratio of the national aver-age wage index for 2000 ($32,154.82) tothat for 1993 ($23,132.67) produces theamount of $1,390.02. We then round thisamount to $1,300. Accordingly, thedomestic employee coverage thresholdamount is $1,300 for 2002.

(Filed by the Office of the Federal Register on Octo-ber 24, 2001, 8:45 a.m., and published in the issueof the Federal Register for October 25, 2001, 66F.R. 54047)

2001-51 I.R.B 603 December 17, 2001

Part IV. Items of General Interest

Extension of Cut-Off Date forUse of Prior Revision ofDetermination LetterApplication Forms

Announcement 2001–122

The Service is extending the cut-offdate for use of the prior revision of cer-tain forms used to apply for determinationletters on the tax-qualified status ofemployee benefit plans. This extensionwill allow determination letter applicantsto use the prior revision of the forms inaccordance with the transition rulesdescribed in section I.G. of Announce-ment 2001–77 (2001–30 I.R.B. 83)through March 31, 2002.

Announcement 2001–77 describedchanges that the Service has made to sim-plify its application procedures for deter-mination letters on the qualification ofpension, profit-sharing, stock bonus andannuity plans under §§ 401(a) and 403(a)of the Internal Revenue Code. Announce-ment 2001–77 noted that the Service wasrevising the determination letter applica-tion forms. Section I.G. of Announcement2001–77 required determination letterapplications filed after December 31,2001, to be submitted on the revisedapplication forms. For determination let-ter applications filed on or before Decem-ber 31, 2001, section I.G. provided transi-

tion rules that allowed the prior revisionof the application forms to be used.

Announcement 2001–109 (2001–45I.R.B. 485) announced the availability ofseveral of the revised application forms.Rev. Proc. 2001–55 (2001–49 I.R.B. 552)extended the remedial amendment periodfor amending plans for GUST1 until Feb-ruary 28, 2002.

The availability of the transition rulesin section I.G. of Announcement 2001–77is extended through March 31, 2002.Thus, the Service will accept applicationsthat are filed on the July, 1998 revision ofthe following forms in accordance withthe procedures in section I.G. throughMarch 31, 2002: Form 5300, Schedule Q(Form 5300), Form 5307, and Form 6406.Of course, applicants may instead use the2001 revision of these forms. In addition,Form 5303 (Rev. 7/98), which is beingdiscontinued, and the September, 1999revision of Form 5309 may be usedthrough March 31, 2002. Applications fordetermination letters on plan terminationshould be filed on the June, 1997 revisionof Form 5310 and, if applicable, Form6088 (Rev. 6/97) until further notice.Also, notices of plan merger, etc., andqualified separate lines of business,should be filed on the June, 1997 revisionof Form 5310–A until further notice.

DRAFTING INFORMATION

The principal author of this announce-ment is James Flannery of the EmployeePlans, Tax Exempt and Government Enti-ties Division. For further informationregarding this announcement, please con-tact the Employee Plans’ taxpayer assis-tance telephone service at 1–877–829–5500 (a toll-free number), between thehours of 8:00 a.m. and 9:30 p.m. EasternTime, Monday through Friday. Mr. Flan-nery may be reached at (202) 283–9888(not a toll-free number).

Notice of Disposition ofDeclaratory JudgmentProceedings Under Section7428

This announcement serves notice todonors that on July 26, 1999, the Court ofAppeals for the Eleventh Circuit affirmedthe decision of the United States TaxCourt which was entered on August 28,1998. The Courts agreed with the Servicethat the organization listed below is notan organization recognized as tax exemptunder section 501(a) of the Internal Rev-enue Code and is not described in section501(c)(3) effective October 1, 1982.

Anclote Psychiatric Center, Inc.Tarpon Springs, FL

1 “GUST” refers to the following:• the Uruguay Round Agreements Act, Pub. L. 103–465;• the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103–353;• the Small Business Job Protection Act of 1996, Pub. L. 104–188;• the Taxpayer Relief Act of 1997, Pub. L. 105–34;• the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105–206; and• the Community Renewal Tax Relief Act of 2000, Pub. L. 106–554.

December 17, 2001 604 2001-51 I.R.B.

Definition of TermsRevenue 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, ifan 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.

Distinguished describes 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

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly 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 aperiod 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 case,the 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 and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings 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 currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income SecurityAct.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.—Intemal 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.

2001-51 I.R.B i December 17, 2001

Numerical Finding List1

Bulletins 2001–27 through 2001–50

Announcements:

2001–69, 2001–27 I.R.B. 232001–70, 2001–27 I.R.B. 232001–71, 2001–27 I.R.B. 262001–72, 2001–28 I.R.B. 392001–73, 2001–28 I.R.B. 402001–74, 2001–28 I.R.B. 402001–75, 2001–28 I.R.B. 422001–76, 2001–29 I.R.B. 672001–77, 2001–30 I.R.B. 832001–78, 2001–30 I.R.B. 872001–79, 2001–31 I.R.B. 972001–80, 2001–31 I.R.B. 982001–81, 2001–33 I.R.B. 1752001–82, 2001–32 I.R.B. 1232001–83, 2001–35 I.R.B. 2052001–84, 2001–35 I.R.B. 2062001–85, 2001–36 I.R.B. 2192001–86, 2001–35 I.R.B. 2072001–87, 2001–35 I.R.B. 2082001–88, 2001–36 I.R.B. 2202001–89, 2001–38 I.R.B. 2912001–90, 2001–35 I.R.B. 2082001–91, 2001–36 I.R.B. 2212001–92, 2001–39 I.R.B. 3012001–93, 2001–44 I.R.B. 4162001–94, 2001–39 I.R.B. 3032001–95, 2001–39 I.R.B. 3032001–96, 2001–41 I.R.B. 3172001–97, 2001–40 I.R.B. 3102001–98 2001–41 I.R.B. 3172001–99 2001–42 I.R.B. 3402001–100, 2001–41 I.R.B. 3172001–101, 2001–43 I.R.B. 3742001–102, 2001–42 I.R.B. 3402001–103, 2001–43 I.R.B. 3752001–104, 2001–43 I.R.B. 3762001–105, 2001–43 I.R.B. 3762001–106, 2001–44 I.R.B. 4162001–107, 2001–44 I.R.B. 4192001–108, 2001–44 I.R.B. 4192001–109, 2001–45 I.R.B. 4852001–110, 2001–45 I.R.B. 4862001–111, 2001–45 I.R.B. 4862001–112, 2001–46 I.R.B. 4942001–113, 2001–46 I.R.B. 4942001–114, 2001–47 I.R.B. 5282001–115, 2001–48 I.R.B. 5392001–116, 2001–48 I.R.B. 5392001–117, 2001–49 I.R.B. 5672001–118, 2001–48 I.R.B. 5402001–119, 2001–50 I.R.B. 5752001–120, 2001–50 I.R.B. 5832001–121, 2001–50 I.R.B. 584

Court Decisions:

2070, 2001–31 I.R.B. 90

Court Decisions—Continued

2071, 2001–44 I.R.B. 3852072, 2001–44 I.R.B. 379

Notices:

2001–39, 2001–27 I.R.B. 32001–41, 2001–27 I.R.B. 22001–42, 2001–30 I.R.B. 702001–43, 2001–30 I.R.B. 722001–44, 2001–30 I.R.B. 772001–45, 2001–33 I.R.B. 1292001–46, 2001–32 I.R.B. 1222001–47, 2001–36 I.R.B. 2122001–48, 2001–33 I.R.B. 1302001–49, 2001–34 I.R.B. 1882001–50, 2001–34 I.R.B. 1892001–51, 2001–34 I.R.B. 1902001–52, 2001–35 I.R.B. 2032001–53, 2001–37 I.R.B. 2252001–54, 2001–37 I.R.B. 2252001–55, 2001–39 I.R.B. 2992001–56, 2001–38 I.R.B. 2772001–57, 2001–38 I.R.B. 2792001–58, 2001–39 I.R.B. 2992001–59, 2001–41 I.R.B. 3152001–60, 2001–40 I.R.B. 3042001–61, 2001–40 I.R.B. 3052001–62, 2001–40 I.R.B. 3072001–63, 2001–40 I.R.B. 3082001–64, 2001–41 I.R.B. 3162001–65, 2001–43 I.R.B. 3692001–66, 2001–44 I.R.B. 3962001–67, 2001–49 I.R.B. 5442001–68, 2001–47 I.R.B. 5042001–69, 2001–46 I.R.B. 4912001–70, 2001–45 I.R.B. 4372001–71, 2001–48 I.R.B. 5302001–72, 2001–49 I.R.B. 5482001–73, 2001–49 I.R.B. 5492001–74, 2001–49 I.R.B. 5512001–77, 2001–50 I.R.B. 5762001–78, 2001–50 I.R.B. 5762001–79, 2001–50 I.R.B. 576

Proposed Regulations:

REG–110311–98, 2001–35 I.R.B. 204REG–106917–99, 2001–27 I.R.B. 4REG–103735–00, 2001–35 I.R.B. 204REG–103736–00, 2001–35 I.R.B. 204REG–107151–00, 2001–43 I.R.B. 370REG–100548–01, 2001–29 I.R.B. 67REG–106431–01, 2001–37 I.R.B. 272REG–125161–01, 2001–48 I.R.B. 538REG–126485–01, 2001–49 I.R.B. 555REG–137519–01, 2001–49 I.R.B. 559REG–142686–01, 2001–49 I.R.B. 561REG–142499–01, 2001–45 I.R.B. 476

Railroad Retirement Quarterly Rates:

2001–27, I.R.B. 12001–41, I.R.B. 314

Revenue Procedures:

2001–39, 2001–28 I.R.B. 382001–40, 2001–33 I.R.B. 1302001–41, 2001–33 I.R.B. 1732001–42, 2001–36 I.R.B. 2122001–43, 2001–34 I.R.B. 1912001–44, 2001–35 I.R.B. 2032001–45, 2001–37 I.R.B. 2272001–46, 2001–37 I.R.B. 2632001–47, 2001–42 I.R.B. 3322001–48, 2001–40 I.R.B. 3082001–49, 2001–39 I.R.B. 3002001–50, 2001–45 I.R.B. 4372001–51, 2001–43 I.R.B. 3692001–52, 2001–46 I.R.B. 4912001–53, 2001–47 I.R.B. 5062001–54, 2001–48 I.R.B. 5302001–55, 2001–49 I.R.B. 5522001–57, 2001–50 I.R.B. 5772001–58, 2001–50 I.R.B. 579

Revenue Rulings:

2001–30, 2001–29 I.R.B. 462001–33, 2001–32 I.R.B. 1182001–34, 2001–28 I.R.B. 312001–35, 2001–29 I.R.B. 592001–36, 2001–32 I.R.B. 1192001–37, 2001–32 I.R.B. 1002001–38, 2001–33 I.R.B. 1242001–39, 2001–33 I.R.B. 1252001–40, 2001–38 I.R.B. 2762001–41, 2001–35 I.R.B. 1932001–42, 2001–37 I.R.B. 2232001–43, 2001–36 I.R.B. 2092001–44, 2001–37 I.R.B. 2232001–45, 2001–42 I.R.B. 3232001–46, 2001–42 I.R.B. 3212001–47, 2001–39 I.R.B. 2932001–48, 2001–42 I.R.B. 3242001–49, 2001–41 I.R.B. 3122001–50, 2001–43 I.R.B. 3432001–51, 2001–45 I.R.B. 4272001–52, 2001–45 I.R.B. 4342001–53, 2001–46 I.R.B. 4892001–54, 2001–46 I.R.B. 4902001–55, 2001–47 I.R.B. 4972001–56, 2001–47 I.R.B. 5002001–57, 2001–46 I.R.B. 4882001–58, 2001–50 I.R.B. 5702001–61, 2001–50 I.R.B. 573

Treasury Decisions:

8947, 2001–28 I.R.B. 368948, 2001–28 I.R.B. 278949, 2001–28 I.R.B. 338950, 2001–28 I.R.B. 348951, 2001–29 I.R.B. 638952, 2001–29 I.R.B. 608953, 2001–29 I.R.B. 448954, 2001–29 I.R.B. 478955, 2001–32 I.R.B. 1018956, 2001–32 I.R.B. 112

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2001–1 through 2001–26 is

in Internal Revenue Bulletin 2001–27, dated July 2, 2001.

December 17, 2001 ii 2001-51 I.R.B.

Treasury Decisions—Continued

8957, 2001–33 I.R.B. 1258958, 2001–34 I.R.B. 1838959, 2001–34 I.R.B. 1858960, 2001–34 I.R.B. 1768961, 2001–35 I.R.B. 1948962, 2001–35 I.R.B. 2018963, 2001–35 I.R.B. 1978964, 2001–42 I.R.B. 3208965, 2001–43 I.R.B. 3448966, 2001–45 I.R.B. 4228967, 2001–50 I.R.B. 568

2001-51 I.R.B iii December 17, 2001

Finding List of Current Actionson Previously Published Items1

Bulletins 2001–27 through 2001–50

Announcements:

2000–48Modified byNotice 2001–43, 2001–30 I.R.B. 72

Notices:

98–52Modified byNotice 2001–56, 2001–38 I.R.B. 277

99–41Modified and superseded byNotice 2001–62, 2001–38 I.R.B. 307

2001–4Modified byNotice 2001–43, 2001–30 I.R.B. 72

2001–9Modified byNotice 2001–46, 2001–32 I.R.B. 122

2001–15Supplemented byNotice 2001–51, 2001–34 I.R.B. 190

2001–42Modified byNotice 2001–57, 2001–38 I.R.B. 279

2001–70Clarified and supplemented byNotice 2001–74, 2001–49 I.R.B. 551

Proposed Regulations:

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

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

REG–110311–98Supplemented byT.D. 8961, 2001–35 I.R.B. 194

REG–106917–99Corrected byAnn. 2001–86, 2001–35 I.R.B. 207

REG–103735–00Supplemented byT.D. 8961, 2001–35 I.R.B. 194

REG–103736–00Supplemented byT.D. 8961, 2001–35 I.R.B. 194

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

Proposed Regulations—Continued

REG–130477–00Supplemented byAnn. 2001–82, 2001–32 I.R.B. 123

REG–130481–00Supplemented byAnn. 2001–82, 2001–32 I.R.B. 123

Revenue Procedures:

83–74Revoked byRev. Proc. 2001–49, 2001–39 I.R.B. 300

84–84Revoked byRev. Proc. 2001–49, 2001–39 I.R.B. 300

93–27Clarified byRev. Proc. 2001–43, 2001–34 I.R.B. 191

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

97–19Modified byNotice 2001–62, 2001–40 I.R.B. 307

98–44Superseded byRev. Proc. 2001–40, 2001–33 I.R.B. 130

99–27Superseded byRev. Proc. 2001–42, 2001–36 I.R.B. 212

99–49Modified and amplified byRev. Proc. 2001–46, 2001–37 I.R.B. 263

2000–20Modified byNotice 2001–42, 2001–30 I.R.B. 70Rev. Proc. 2001–55, 2001–49 I.R.B. 552

2000–27Modified byRev. Proc. 2001–55, 2001–49 I.R.B. 552

2000–28Superseded byRev. Proc. 2001–50, 2001–45 I.R.B. 437

2000–39Corrected byAnn. 2001–73, 2001–28 I.R.B. 40Superseded byRev. Proc. 2001–47, 2001–42 I.R.B. 332

2000–48Superseded byRev. Proc. 2001–54, 2001-48 I.R.B. 530

2001–2Modified byRev. Proc. 2001–41, 2001–33 I.R.B. 173

Revenue Procedures—Continued

2001–3Modified byRev. Proc. 2001–51, 2001–43 I.R.B. 369

2001–6Modified byNotice 2001–42, 2001–30 I.R.B. 70Rev. Proc. 2001–55, 2001–49 I.R.B. 552

Revenue Rulings:

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

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

67–274Amplified byRev. Rul. 2001–46, 2001–42 I.R.B. 321

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

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

70–379Obsoleted byRev. Rul. 2001–39, 2001–33 I.R.B. 125

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

78–127Modified byRev. Rul. 2001–40, 2001–38 I.R.B. 276

78–179Obsoleted byREG–106917–99, 2001–27 I.R.B. 4

89–42Modified and superseded byRev. Rul. 2001–48, 2001–42 I.R.B. 324

90–95Distinguished byRev. Rul. 2001–42, 2001–42 I.R.B. 321

92–19Supplemented byRev. Rul. 2001–38, 2001–33 I.R.B. 124

97–31Modified and superseded byRev. Rul. 2001–48, 2001–42 I.R.B. 324

Treasury Decisions:

8948Corrected byAnn. 2001–90, 2001–35 I.R.B. 208

1 A cumulative list of current actions on previously published

items in Internal Revenue Bulletins 2001–1 through 2001–26 is

in Internal Revenue Bulletin 2001–27, dated July 2, 2001.

December 17, 2001 iv 2001-51 I.R.B.