bulletin no. 2002–14 highlights of this issue · bulletin no. 2002–14 april 8, 2002. excise tax...

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.

SPECIAL ANNOUNCEMENTS

Announcement 2002–41, page 739.The Director of Practice has extended all enrollment cards ofenrolled agents until April 30, 2002.

Announcement 2002–42, page 739.The Director of Practice has extended all existing continuingprofessional education sponsor agreements through August31, 2002.

INCOME TAX

Rev. Rul. 2002–17, page 716.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 1274, 1288, and other sections of theCode, tables set forth the rates for April 2002.

T.D. 8985, page 707.Final regulations under section 1221 of the Code relate to thedetermination of the character of gain or loss from hedgingtransactions.

Notice 2002–21, page 730.This notice addresses a transaction generating tax lossesbased on an inflated basis in assets acquired from anotherparty. The inflated basis is claimed as a result of a transfer ofassets in which a taxpayer becomes jointly and severally liableon indebtedness of the transferor, with the indebtedness hav-ing a stated principal amount substantially in excess of the fairmarket value of the assets transferred. The notice states thatthe taxpayer’s basis in the assets transferred is equal to the fairmarket value of such assets upon their acquisition by the tax-payer rather than the stated principal amount of the indebted-ness.

Rev. Proc. 2002–20, page 732.Guidance is provided to individuals who fail to meet the eligibil-ity requirements of section 911(d)(1) of the Code becauseadverse conditions in a foreign country preclude the individualfrom meeting those requirements. A current list of countriesand the dates those countries are subject to the section911(d)(4) waiver is provided. Rev. Proc. 2001–27 supple-mented.

EXEMPT ORGANIZATIONS

Announcement 2002–39, page 738.Section 911(d)(4) waiver. This document contains correc-tions to final regulations (T.D. 8978, 2002–7 I.R.B. 500) relat-ing to the excise taxes on excess benefit transactions.

(Continued on the next page)

Finding Lists begin on page ii.

Bulletin No. 2002–14April 8, 2002

EXCISE TAX

Ct. D. 2073, page 718.The Supreme Court has concluded, that under sections4401(a), 1441, 3402(q), 6041, and 6050I of the Code, tribesare not exempt from paying the gambling-related taxes thatChapter 35 of the Code imposes. Chickasaw Nation v.United States.

Announcement 2002–39, page 738.This document contains corrections to final regulations (T.D.8978, 2002–7 I.R.B. 500) relating to the excise taxes onexcess benefit transactions.

TAX CONVENTIONS

Page 725.The bilateral agreement between the United States and theRepublic of Ghana, providing for the reciprocal tax exemptionof income from the international operation of ships and/or air-craft, is set forth.

ADMINISTRATIVE

Notice 2002–22, page 731.Guidance priority list. Public comments are requested aboutitems that should be included in the Guidance Priority List for2002–2003. All comments should be submitted by April 30,2002.

Rev. Proc. 2002–22, page 733.Undivided fractional interests in real estate. This proce-dure specifies the conditions under which the Service will con-sider a request for a ruling that an undivided fractional interestin rental real property (other than a mineral property as definedin section 614) is not an interest in a business entity within themeaning of section 301.7701–3 of the regulations. Rev. Proc.2000–46 superseded. Rev. Proc. 2002–3 modified.

Announcement 2002–38, page 738.This document contains corrections to proposed regulations(REG–112991–01, 2002–4 I.R.B. 404) relating to the compu-tation of the research credit.

April 8, 2002 2002–14 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.

2002–14 I.R.B. April 8, 2002

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

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof April 2002. See Rev. Rul. 2002–17, page 716.

Section 267.—Losses,Expenses, and Interest WithRespect to TransactionsBetween Related Taxpayers

26 CFR 1.267(a)–1: Deductions disallowed.

Under what conditions will the Internal RevenueService consider a request for a ruling that an undi-vided interest in rental real property (other than amineral property as defined in § 614) is not an inter-est in a business entity within the meaning of§ 301.7701–3 of the Procedure and AdministrationRegulations? See Rev. Proc. 2002–22, page 733.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of April 2002. SeeRev. Rul. 2002–17, page 716.

Section 382.—Limitation onNet Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of April 2002. See Rev. Rul.2002–17, page 716.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—Special Rulesfor Mining and Solid WasteReclamation and ClosingCosts


Section 482.—Allocation ofIncome and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 511.—Imposition ofTax on Unrelated BusinessIncome of Charitable, etc.,Organizations

26 CFR 1.511–1: Imposition and rates of tax.


Section 512.—UnrelatedBusiness Taxable Income

26 CFR 1.512(a)–1: Definition.


Section 642.—Special Rulesfor Credits and Deductions


Section 707.—TransactionsBetween Partner andPartnership

26 CFR 1.707–1: Transactions between partner andpartnership.


Section 761.—Terms Defined

26 CFR 1.761–1: Terms defined.


Section 807.—Rules forCertain Reserves


2002–14 I.R.B. 706 April 8, 2002

Section 846.—DiscountedUnpaid Losses Defined


Section 856.—Definition ofReal Estate Investment Trust

26 CFR 1.856–1: Definition of real estate invest-ment trust.


Section 1031.—Exchange ofProperty Held For ProductiveUse or Investment

26 CFR 1.1031(a)–1: Property held for productiveuse in trade or business or for investment.


Section 1221.—Capital AssetDefined

26 CFR 1.1221–2: Hedging transactions.

T.D. 8985

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 602

Hedging Transactions

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to the characterof gain or loss from hedging transactions.

The regulations reflect changes to the lawmade by the Ticket to Work and WorkIncentives Improvement Act of 1999. Theregulations affect businesses entering intohedging transactions.

DATES: Effective Date: These regula-tions are effective March 20, 2002.

Applicability Dates: For dates of appli-cability of these regulations, see the dis-cussion in the Dates of Applicability para-graph in the Supplementary Informationportion of the preamble.

FOR FURTHER INFORMATION CON-TACT: Elizabeth Handler, (202) 622–3930 or Viva Hammer at (202) 622–0869(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations have beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545–1480. Some responses tothese collections of information are man-datory, and others are required to obtainthe benefit of the separate-entity election.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.

The estimated annual burden perrespondent or recordkeeper varies from .1to 40 hours, depending on individual cir-cumstances, with an estimated average of5.9 hours.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service, Attn: IRSReports Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224, and tothe Office of Management and Budget,Attn: Desk Officer for the Department ofthe Treasury, Office of Information andRegulatory Affairs, Washington, DC20503.

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.

Background

This document contains amendmentsto 26 CFR Part 1 under section 1221 ofthe Internal Revenue Code (Code). Priorto amendment in 1999, section 1221 gen-erally defined a capital asset as propertyheld by the taxpayer other than: (1) Stockin trade or other types of assets includiblein inventory; (2) property used in a tradeor business that is real property or prop-erty subject to depreciation; (3) certaincopyrights (or similar property); (4)accounts or notes receivable acquired inthe ordinary course of a trade or business;and (5) U.S. government publications.

In 1994, the IRS published in the Fed-eral Register (T.D. 8555, 1994–2 C.B.180 [59 FR 36360]) final Treasury regu-lations under section 1221 providing forordinary character treatment for certainbusiness hedges. The regulations gener-ally apply to transactions that reduce riskwith respect to ordinary property, ordi-nary obligations, and borrowings of thetaxpayer and that meet certain identifica-tion requirements. (§ 1.1221–2). In 1996,the IRS published in the Federal Regis-ter (T.D. 8653, 1996–1 C.B. 67 [61 FR517]) final regulations on the characterand timing of gain or loss from hedgingtransactions entered into by members of aconsolidated group. In this preamble, thefinal regulations published in 1994 and1996 are referred to collectively as theTreasury regulations.

On December 17, 1999, section 1221was amended by section 532 of the Ticketto Work and Work Incentives Improve-ment Act of 1999 (113 Stat 1860) to pro-vide ordinary gain or loss treatment forhedging transactions and consumablesupplies. Section 1221(a)(7) providesordinary treatment for hedging transac-tions that are clearly identified as suchbefore the close of the day on which theywere acquired, originated, or entered into.

The statute defines a hedging transac-tion as a transaction entered into by thetaxpayer in the normal course of businessprimarily to manage risk of interest rate,price changes, or currency fluctuationswith respect to ordinary property, ordi-nary obligations, or borrowings of the

April 8, 2002 707 2002–14 I.R.B.

taxpayer. Sections 1221(b)(2)(A)(i) and(ii). The statutory definition of hedgingtransaction also includes transactions tomanage such other risks as the Secretarymay prescribe in regulations. Section1221(b)(2)(A)(iii). Further, the statutegrants the Secretary the authority to pro-vide regulations to address the treatmentof nonidentified or improperly identifiedhedging transactions, and hedging trans-actions involving related parties (sections1221(b)(2)(B) and (b)(3), respectively).The statutory hedging provisions areeffective for transactions entered into onor after December 17, 1999. Congressintended that the hedging rules be theexclusive means through which the gainsand losses from hedging transactions aretreated as ordinary. S. Rep. No. 201,106th Cong., 1st Sess. 25 (1999).

Section 1221(a)(8) provides that sup-plies of a type regularly consumed by thetaxpayer in the ordinary course of a tax-payer’s trade or business are not capitalassets. That provision is effective for sup-plies held or acquired on or after Decem-ber 17, 1999.

A notice of proposed rulemaking(REG–107047–00, 2001–14 I.R.B. 1002)was published in the Federal Register(66 FR 4738) on January 18, 2001. OnMay 16, 2001, the IRS held a public hear-ing on the proposed regulations. Writtencomments responding to the notice ofproposed rulemaking were also received.In response to these comments, the pro-posed regulations were modified and asso modified are adopted as final regula-tions. The principal changes to the pro-posed regulations are discussed below.

Explanation of Provisions

Coordination with InternationalProvisions of the Code

The provisions of these regulationsgenerally apply to determine the characterof gain or loss from transactions that arealso subject to various international pro-visions of the Code. Paragraph (a)(4) ofthe regulations, however, provides thatthe character of gain or loss on section988 transactions is not determined underthese regulations because gain or loss onthose transactions is ordinary under sec-tion 988(a)(1). In addition, no implicationis intended as to what constitutes “riskmanagement” or “managing risk” for pur-

poses of proposed or final regulationsunder section 482.

Paragraph (a)(4) of the proposed regu-lations provided that the definition of ahedging transaction under § 1.1221–2(b)of the proposed regulations would applyfor purposes of certain other internationalprovisions of the Code only to the extentprovided in regulations issued underthose provisions. Technical changes havebeen made in the final regulations toeliminate references to proposed regula-tions as well as Code sections for whichthe relevant regulations have not beenissued in final form. Subsequent regula-tions will specify the extent to which therules relating to hedging transactions thatare contained in § 1.1221–2 will be appli-cable for purposes of those other regula-tions and related Code sections.

Risk Management Standard

Several commentators noted that theproposed regulations used risk reductionas the operating standard to implementthe risk management definition of hedg-ing introduced by section 1221(b)(2)(A).These commentators found that riskreduction is too narrow a standard toencompass the intent of Congress whichdefined hedges to include transactionsthat manage risk of interest rate, pricechanges or currency fluctuations. Theyurged the IRS and Treasury to adopt abroader definition of hedging to reflectCongress’ intent. With one exception, thecommentators did not suggest a definitionof risk management.

In response to these comments, thefinal regulations have been restructured toimplement the risk management standard.No definition of risk management is pro-vided, but instead, the rules characterize avariety of classes of transactions as hedg-ing transactions because they managerisk. Risk reducing transactions stillqualify as one class of hedging transac-tions, but there are also others. In addi-tion, specific provision is made for therecognition of additional types of qualify-ing risk management transactions throughpublished guidance or private letter rul-ings. Under the final regulations, as underthe proposed regulations, transactionsentered into for speculative purposes willnot qualify as hedging transactions. SeeS. Rep. No. 201, 106th Cong., 1st Sess.24 (1999).

Application on the Basis of SeparateBusiness Units

The proposed regulations providedthat a taxpayer has risk of a particulartype only if it is at risk when all of itsoperations are considered. That is, riskmust exist on a “macro” basis. For thispurpose, under the proposed regulations,a taxpayer has to show that hedges of par-ticular assets or liabilities, or groups ofassets or liabilities, are reasonablyexpected to reduce the overall risk of thetaxpayer’s operations.

Commentators pointed out that thisentity-based approach to hedging is nolonger uniform business practice. Instead,businesses often conduct risk manage-ment on a business unit by business unitbasis. In response to these comments, thefinal regulations permit the determinationof whether a transaction manages risk tobe made on a business unit basis providedthat the business unit is within a singleentity or consolidated return group thatadopts the single-entity approach. Anexample was added to the final regula-tions in which for one taxpayer, the deter-mination of whether hedging activitiesreduce risk is made at the business unitlevel. In the example, the conduct of riskmanagement activities within separatebusiness units is undertaken as part of aprogram to reduce the overall risk of thetaxpayer’s operations.

Fixed-to-floating Interest Rate Hedges

Paragraph (c)(1) of the proposed regu-lations recognized that a transaction thateconomically converts an interest rate orprice from a fixed rate or price to a float-ing rate or price may manage risk. Com-mentators suggested that the rule in theproposed regulations provides insufficientguidance in that it states only that fixed-to-floating interest rate or price hedgesmay be hedging transactions. In responseto these comments, the regulations havebeen restructured to separately addressinterest rate hedges and price hedges.

Commentators suggested that in thecase of interest rate conversions, a tax-payer may choose to convert from a float-ing to a fixed rate to fix the amount pay-able on the obligation. However, ataxpayer could also elect to convert froma fixed to a floating rate to insure that thevalue of the liability remained relatively

2002–14 I.R.B. 708 April 8, 2002

constant. In response to these comments,the final regulations provide that a trans-action that converts an interest rate froma fixed rate to a floating rate or from afloating rate to a fixed rate manages risk.With respect to fixed-to-floating pricehedges, the final regulations adopt theproposed rules without change.

Transactions Not Entered into Primarilyto Manage Risk

Paragraph (c)(3) of the proposed regu-lations provided that the purchase or saleof certain assets will not qualify as ahedging transaction if the assets are notacquired primarily to manage risk. Thisrule was illustrated by the example of ataxpayer that has an interest rate risk froma floating rate borrowing and thatacquires debt instruments bearing a com-parable floating interest rate. Althoughthe taxpayer’s interest rate risk from thefloating rate borrowing may be reducedby the purchase of the floating rate debtinstruments, the proposed regulations pro-vided that the acquisition of the debtinstruments is not made primarily toreduce risk and, therefore, is not a hedg-ing transaction.

The IRS and Treasury understand thatsome employers may invest in assets(such as shares of a mutual fund) that areused as a reference investment for pur-poses of computing their liability toemployees under a nonqualified deferredcompensation plan. A question may arisewhether such an investment may consti-tute a hedging transaction and, if so,whether income from the investment maybe deferred by the employer until pay-ments of deferred compensation are madeto employees. See § 1.446–4(b); but com-pare Albertson’s, Inc. v. Commissioner, 42F.3d 537 (9th Cir. 1994).

The rule in the proposed regulations isbased on § 1.1221–2(c)(1)(vii). The rulehas been restated in the final regulationsto refer specifically to investments in debtinstruments, equity securities, and annuitycontracts so as to provide greater cer-tainty in its application. For this purposecertain transactions in instruments thatare not themselves debt instruments mayinclude a debt investment. See, e.g.,§ 1.446–3(g)(4). Further, the final regula-tions provide that the IRS may identify byfuture published guidance specified trans-actions that are determined not to be

entered into primarily to manage risk. Anexample has been added to the final regu-lations to illustrate that an investment inmutual fund shares in the case describedin the preceding paragraph does notqualify as a hedging transaction. A similarexample is added with respect to aninvestment in an annuity contract.

Hedging Risks Other Than Interest Rateor Price Changes, or CurrencyFluctuations

Paragraph (c)(8) of the proposed regu-lations provided that the Commissionermay, by published guidance, provide thathedging transactions include transactionsentered into to manage risks other thaninterest rate or price changes, or currencyfluctuations.

The notice of proposed rulemakingsolicited comments regarding the expan-sion of the definition of hedging transac-tions to include transactions that managerisks other than interest rate or pricechanges, or currency fluctuations withrespect to ordinary property, ordinaryobligations or borrowings of the taxpayer.Some comments were received inresponse to that request. Because thecomments described hedging transactionsthat related to the general operatingresults of a business (such as gross sales)rather than specific ordinary property,ordinary obligations or borrowings of thetaxpayer, the implementation of rulesrespecting such hedges would present anumber of issues not easily dealt with bythe rules contained in the final regula-tions. Thus, the expansion of the scope ofoperation of the hedging rules is notbeing proposed at this time, so as not todelay the publication of guidance on thematters that are covered by the final regu-lations. However, the IRS is continuing toconsider whether to expand the definitionof hedging transactions to cover hedgesof such other risks. The IRS and Treasuryinvite comments on the types of risks thatshould be covered, including specificexamples of derivative transactions thatmay be incorporated into future guidance,as well as the appropriate timing of inclu-sion of gains and losses with respect tosuch transactions. Send submissions to:CC:ITA:RU (REG–107047–00), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044.

“Gap” Hedges

The status of so-called gap hedges wasnot separately addressed in the proposedregulations and is not covered in the finalregulations. Insurance companies, forexample, sometimes hedge the gapbetween their liabilities and the assets thatfund them. Under the final regulations, ahedge of those assets would not qualify asa hedging transaction if the assets arecapital assets. Whether a gap hedge quali-fies as a liability hedge is a question offact and depends on whether it is moreclosely associated with the liabilities thanwith the assets.

Identification Requirement

A rule has been added specifying addi-tional information that must be providedfor a transaction that counteracts a hedg-ing transaction.

Dates of Applicability

The regulations generally apply to alltransactions entered into on or afterMarch 20, 2002. However, the IRS willnot challenge any transaction entered intoon or after December 17, 1999, andbefore March 20, 2002, that satisfies theprovisions of either § 1.1221–2 of REG–107047–00 (2001–14 I.R.B. 1002), pub-lished in the Federal Register (66 FR4738) on January 18, 2001, or the provi-sions of this final regulation.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It is hereby certifiedthat the collection of information in theseregulations will not have a significanteconomic impact on a substantial numberof small entities. This certification isbased upon the fact that very few smallbusinesses enter into hedging transactionsdue to their cost and complexity. Further,those small businesses that hedge enterinto very few hedging transactionsbecause hedging transactions are costly,complex, and require constant monitoringand a sophisticated understanding of thecapital markets. Therefore, a RegulatoryFlexibility Analysis under the Regulatory

April 8, 2002 709 2002–14 I.R.B.

Flexibility Act (5 U.S.C. chapter 6) is notrequired. Pursuant to section 7805(f) ofthe Code, the notice of proposed rulemak-ing preceding these regulations was sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.

Drafting Information

The principal author of these regula-tions is Elizabeth Handler, Office of theAssociate Chief Counsel (Financial Insti-

tutions and Products). However, otherpersonnel from the IRS and TreasuryDepartment participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the entryfor §1.1221–2 to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.1221–2 also issued under 26

U.S.C. 1221(b)(2)(A)(iii), (b)(2)(B), and(b)(3); 1502 and 6001. * * *

Par. 2. In the list below, for each loca-tion indicated in the left column, removethe language in the middle column fromthat section, and add the language in theright column.

Affected section Remove Add

1.446–4(d)(2), first sentence 1.1221–2(e) 1.1221–2(f)

1.446–4(d)(2), last sentence 1.1221–2(e)(2) 1.1221–2(f)(2)

1.446–4(d)(3), first sentence 1.1221–2(e) 1.1221–2(f)

1.446–4(d)(3), last sentence 1.1221–2(a)(4)(i) 1.1221–2(a)(4)

1.446–4(e)(7), first sentence 1.1221–2(c)(2) 1.1221–2(d)(4)

1.446–4(e)(9)(ii), first sentence 1.1221–2(d)(2) 1.1221–2(e)(2)

1.446–4(e)(9)(ii), last sentence 1.1221–2(d)(2)(ii) 1.1221–2(e)(2)(ii)

1.475(b)–1(d)(2) 1.1221–2(e) 1.1221–2(f)

1.954–2(a)(4)(ii)(A), first sentence 1.1221–2(a) through (c) 1.1221–2(a) through (d)

1.954–2(a)(4)(ii)(B), first sentence 1.1221–2(e) 1.1221–2(f)

1.954–2(g)(2)(ii)(B)(2), last sentence 1.1221–2(c)(7) 1.1221–2(c)(3)

1.954–2(g)(3)(i)(B), last sentence 1.1221–2(c)(7) 1.1221–2(c)(3)

1.1256(e)–1(b), first and last sentences 1.1221–2(e)(1) 1.1221–2(f)(1)

1.1256(e)–1(c), first sentence 1.1221–2(e)(1) 1.1221–2(f)(1)

1.1256(e)–1(c), last sentence paragraph (f)(1)(ii) of § 1.1221–2 1.1221–2(g)(1)(ii)

Par. 3. Section 1.1221–2 is revised toread as follows:

§ 1.1221–2 Hedging transactions.

(a) Treatment of hedging transact-ions—(1) In general. This section gov-erns the treatment of hedging transactionsunder section 1221(a)(7). Except as pro-vided in paragraph (g)(2) of this section,the term capital asset does not includeproperty that is part of a hedging transac-tion (as defined in paragraph (b) of thissection).

(2) Short sales and options. This sec-tion also governs the character of gain orloss from a short sale or option that ispart of a hedging transaction. Except asprovided in paragraph (g)(2) of this sec-tion, gain or loss on a short sale or optionthat is part of a hedging transaction (as

defined in paragraph (b) of this section) isordinary income or loss.

(3) Exclusivity. If a transaction is not ahedging transaction as defined in para-graph (b) of this section, gain or loss fromthe transaction is not made ordinary onthe grounds that property involved in thetransaction is a surrogate for a noncapitalasset, that the transaction serves as insur-ance against a business risk, that thetransaction serves a hedging function, orthat the transaction serves a similar func-tion or purpose.

(4) Coordination with section 988.This section does not apply to determinethe character of gain or loss realized on asection 988 transaction as defined in sec-tion 988(c)(1) or realized with respect toany qualified fund as defined in section988(c)(1)(E)(iii).

(b) Hedging transaction defined. Sec-tion 1221(b)(2)(A) provides that a hedg-

ing transaction is any transaction that ataxpayer enters into in the normal courseof the taxpayer’s trade or businessprimarily—

(1) To manage risk of price changes orcurrency fluctuations with respect to ordi-nary property (as defined in paragraph(c)(2) of this section) that is held or to beheld by the taxpayer;

(2) To manage risk of interest rate orprice changes or currency fluctuationswith respect to borrowings made or to bemade, or ordinary obligations incurred orto be incurred, by the taxpayer; or

(3) To manage such other risks as theSecretary may prescribe in regulations(see paragraph (d)(6) of this section).

(c) General rules—(1) Normal course.Solely for purposes of paragraph (b) ofthis section, if a transaction is enteredinto in furtherance of a taxpayer’s tradeor business, the transaction is entered into

2002–14 I.R.B. 710 April 8, 2002

in the normal course of the taxpayer’strade or business. This rule includes man-aging risks relating to the expansion of anexisting business or the acquisition of anew trade or business.

(2) Ordinary property and obligations.Property is ordinary property to a tax-payer only if a sale or exchange of theproperty by the taxpayer could not pro-duce capital gain or loss under any cir-cumstances. Thus, for example, propertyused in a trade or business within themeaning of section 1231(b) (determinedwithout regard to the holding periodspecified in that section) is not ordinaryproperty. An obligation is an ordinaryobligation if performance or terminationof the obligation by the taxpayer couldnot produce capital gain or loss. For pur-poses of this paragraph (c)(2), the termtermination has the same meaning as itdoes in section 1234A.

(3) Hedging an aggregate risk. Theterm hedging transaction includes a trans-action that manages an aggregate risk ofinterest rate changes, price changes,and/or currency fluctuations only if all ofthe risk, or all but a de minimis amount ofthe risk, is with respect to ordinary prop-erty, ordinary obligations, or borrowings.

(4) Managing risk—(i) In general.Whether a transaction manages a taxpay-er’s risk is determined based on all of thefacts and circumstances surrounding thetaxpayer’s business and the transaction.Whether a transaction manages a taxpay-er’s risk may be determined on a businessunit by business unit basis (for exampleby treating particular groups of activities,including the assets and liabilities attrib-utable to those activities, as separate busi-ness units), provided that the businessunit is within a single entity or consoli-dated return group that adopts the single-entity approach. A taxpayer’s hedgingstrategies and policies as reflected in thetaxpayer’s minutes or other records areevidence of whether particular transac-tions were entered into primarily to man-age the taxpayer’s risk.

(ii) Limitation of risk managementtransactions to those specificallydescribed. Except as otherwise deter-mined by published guidance or by pri-vate letter ruling, a transaction that is nottreated as a hedging transaction underparagraph (d) does not manage risk.Moreover, a transaction undertaken for

speculative purposes will not be treated asa hedging transaction.

(d) Transactions that manage risk—(1) Risk reduction transactions—(i) Ingeneral. A transaction that is entered intoto reduce a taxpayer’s risk, manages ataxpayer’s risk.

(ii) Micro and macro hedges—(A) Ingeneral. A taxpayer generally has risk ofa particular type only if it is at risk whenall of its operations are considered. None-theless, a hedge of a particular asset orliability generally will be respected asreducing risk if it reduces the risk attrib-utable to the asset or liability and if it isreasonably expected to reduce the overallrisk of the taxpayer’s operations. If a tax-payer hedges particular assets or liabili-ties, or groups of assets or liabilities, andthe hedges are undertaken as part of aprogram that, as a whole, is reasonablyexpected to reduce the overall risk of thetaxpayer’s operations, the taxpayer gener-ally does not have to demonstrate thateach hedge that was entered into pursuantto the program reduces its overall risk.

(B) Example. The following exampleillustrates the rules stated in paragraph(d)(1)(ii)(A) of this section:

Example. Corporation X manages its businessoperations by treating particular groups of activities,including the assets and liabilities attributable tothose assets, as separate business units. A separateset of books and records is maintained with respectto the activities, assets and liabilities of separatebusiness unit y. As part of a risk management pro-gram that Corporation X reasonably expects toreduce the overall risks of its business operations,Corporation X enters into hedges to reduce the risksof separate business unit y. Corporation X may dem-onstrate that the hedges reduce risk by taking intoaccount only the activities, assets and liabilities ofbusiness unit y.

(iii) Written options. A written optionmay reduce risk. For example, in appro-priate circumstances, a written call optionwith respect to assets held by a taxpayeror a written put option with respect toassets to be acquired by a taxpayer maybe a hedging transaction. See also para-graph (d)(3) of this section.

(iv) Fixed-to-floating price hedges.Under the principles of paragraph(d)(1)(ii)(A) of this section, a transactionthat economically converts a price from afixed price to a floating price may reducerisk. For example, a taxpayer with a fixedcost for its inventory may be at risk if theprice at which the inventory can be soldvaries with a particular factor. Thus, forsuch a taxpayer a transaction that con-

verts its fixed price to a floating pricemay be a hedging transaction.

(2) Interest rate conversions. A trans-action that economically converts aninterest rate from a fixed rate to a floatingrate or that converts an interest rate froma floating rate to a fixed rate managesrisk.

(3) Transactions that counteract hedg-ing transactions. If a transaction isentered into primarily to offset all or anypart of the risk management effected byone or more hedging transactions, thetransaction is a hedging transaction. Forexample, if a written option is used toreduce or eliminate the risk reductionobtained from another position such as apurchased option, then it may be a hedg-ing transaction.

(4) Recycling. A taxpayer may enterinto a hedging transaction by using aposition that was a hedge of one asset orliability as a hedge of another asset orliability (recycling).

(5) Transactions not entered into pri-marily to manage risk—(i) Rule. Exceptas otherwise determined in publishedguidance or private letter ruling, the pur-chase or sale of a debt instrument, anequity security, or an annuity contract isnot a hedging transaction even if thetransaction limits or reduces the taxpay-er’s risk with respect to ordinary property,borrowings, or ordinary obligations. Inaddition, the Commissioner may deter-mine in published guidance that othertransactions are not hedging transactions.

(ii) Examples. The following examplesillustrate the rule stated in paragraph(d)(5)(i) of this section:

Example 1. Taxpayer borrows money and agreesto pay a floating rate of interest. Taxpayer purchasesdebt instruments that bear a comparable floatingrate. Although taxpayer’s interest rate risk from thefloating rate borrowing may be reduced by the pur-chase of the debt instruments, the acquisition of thedebt instruments is not a hedging transaction,because the transaction is not entered into primarilyto manage the taxpayer’s risk.

Example 2. Taxpayer undertakes obligations topay compensation in the future. The amount of thefuture compensation payments is adjusted as ifamounts were invested in a specified mutual fundand were increased or decreased by the earnings,gains and losses that would result from such aninvestment. Taxpayer invests funds in the shares ofthe mutual fund. Although the investment in sharesof the mutual fund reduces the taxpayer’s risk offluctuation in the amount of its obligation toemployees, the investment was not made primarilyto manage the taxpayer’s risk. Accordingly, thetransaction is not a hedging transaction.

April 8, 2002 711 2002–14 I.R.B.

Example 3. Taxpayer provides a nonqualifiedretirement plan for employees that is structured likea defined contribution plan. Based on a schedulethat takes into account an employee’s monthly sal-ary and years of service with the taxpayer, the tax-payer makes monthly credits to an account for eachemployee. Each employee may designate that theaccount will be treated as if it were used to pay pre-miums on a variable annuity contract issued by theM insurance company with a value that reflects aspecified investment option. M offers a number ofinvestment options for its variable annuity contracts.Taxpayer invests funds in M company variableannuity contracts that parallel the investmentoptions selected by the employees. The investmentis not made primarily to manage the taxpayer’s riskand is not a hedging transaction.

(6) Hedges of other risks. The Com-missioner may, by published guidance,determine that hedging transactionsinclude transactions entered into to man-age risks other than interest rate or pricechanges, or currency fluctuations.

(7) Miscellaneous provision—(i) Ex-tent of risk management. A taxpayer mayhedge all or any portion of its risk for allor any part of the period during which itis exposed to the risk.

(ii) Number of transactions. The factthat a taxpayer frequently enters into andterminates positions (even if done on adaily or more frequent basis) is not rel-evant to whether these transactions arehedging transactions. Thus, for example,a taxpayer hedging the risk associatedwith an asset or liability may frequentlyestablish and terminate positions thathedge that risk, depending on the extentthe taxpayer wishes to be hedged. Simi-larly, if a taxpayer maintains its level ofrisk exposure by entering into and termi-nating a large number of transactions in asingle day, its transactions may nonethe-less qualify as hedging transactions.

(e) Hedging by members of a consoli-dated group—(1) General rule: single-entity approach. For purposes of this sec-tion, the risk of one member of aconsolidated group is treated as the riskof the other members as if all of themembers of the group were divisions of asingle corporation. For example, if anymember of a consolidated group hedgesthe risk of another member of the groupby entering into a transaction with a thirdparty, that transaction may potentiallyqualify as a hedging transaction. Con-versely, intercompany transactions are nothedging transactions because, when con-

sidered as transactions between divisionsof a single corporation, they do not man-age the risk of that single corporation.

(2) Separate-entity election. In lieu ofthe single-entity approach specified inparagraph (e)(1) of this section, a consoli-dated group may elect separate-entitytreatment of its hedging transactions. If agroup makes this separate-entity election,the following rules apply:

(i) Risk of one member not risk ofother members. Notwithstanding para-graph (e)(1) of this section, the risk ofone member is not treated as the risk ofother members.

(ii) Intercompany transactions. Anintercompany transaction is a hedgingtransaction (an intercompany hedgingtransaction) with respect to a member ofa consolidated group if and only if itmeets the following requirements—

(A) The position of the member in theintercompany transaction would qualifyas a hedging transaction with respect tothe member (taking into account para-graph (e)(2)(i) of this section) if the mem-ber had entered into the transaction withan unrelated party; and

(B) The position of the other member(the marking member) in the transactionis marked to market under the markingmember’s method of accounting.

(iii) Treatment of intercompany hedg-ing transactions. An intercompany hedg-ing transaction (that is, a transaction thatmeets the requirements of paragraphs(e)(2)(ii)(A) and (B) of this section) issubject to the following rules—

(A) The character and timing rules of§ 1.1502–13 do not apply to the income,deduction, gain, or loss from the inter-company hedging transaction; and

(B) Except as provided in paragraph(g)(3) of this section, the character of themarking member’s gain or loss from thetransaction is ordinary.

(iv) Making and revoking the election.Unless the Commissioner otherwise pre-scribes, the election described in thisparagraph (e)(2) must be made in a sepa-rate statement saying “[Insert Name andEmployer Identification Number of Com-mon Parent] HEREBY ELECTS THEAPPLICATION OF SECTION 1.1221–2(e)(2) (THE SEPARATE-ENTITYAPPROACH).” The statement must alsoindicate the date as of which the election

is to be effective. The election must besigned by the common parent and filedwith the group’s Federal income taxreturn for the taxable year that includesthe first date for which the election is toapply. The election applies to all transac-tions entered into on or after the date soindicated. The election may be revokedonly with the consent of the Commis-sioner.

(3) Definitions. For definitions of con-solidated group, divisions of a single cor-poration, group, intercompany transac-tions, and member, see section 1502 andthe regulations thereunder.

(4) Examples. General Facts. In these examples,O and H are members of the same consolidatedgroup. O’s business operations give rise to interestrate risk “A,” which O wishes to hedge. O entersinto an intercompany transaction with H that trans-fers the risk to H. O’s position in the intercompanytransaction is “B,” and H’s position in the transac-tion is “C.” H enters into position “D” with a thirdparty to reduce the interest rate risk it has withrespect to its position C. D would be a hedgingtransaction with respect to risk A if O’s risk A wereH’s risk. The following examples illustrate this para-graph (e):

Example 1. Single-entity treatment—(i) Generalrule. Under paragraph (e)(1) of this section, O’s riskA is treated as H’s risk, and therefore D is a hedgingtransaction with respect to risk A. Thus, the charac-ter of D is determined under the rules of this section,and the income, deduction, gain, or loss from Dmust be accounted for under a method of account-ing that satisfies § 1.446–4. The intercompany trans-action B-C is not a hedging transaction and is takeninto account under § 1.1502–13.

(ii) Identification. D must be identified as ahedging transaction under paragraph (f)(1) of thissection, and A must be identified as the hedged itemunder paragraph (f)(2) of this section. Under para-graph (f)(5) of this section, the identification of A asthe hedged item can be accomplished by identifyingthe positions in the intercompany transaction ashedges or hedged items, as appropriate. Thus, sub-stantially contemporaneous with entering into D, Hmay identify C as the hedged item and O may iden-tify B as a hedge and A as the hedged item.

Example 2. Separate-entity election; counter-party that does not mark to market. In addition tothe General Facts stated above, assume that thegroup makes a separate-entity election under para-graph (e)(2) of this section. If H does not mark C tomarket under its method of accounting, then B is nota hedging transaction, and the B-C intercompanytransaction is taken into account under the rules ofsection 1502. D is not a hedging transaction withrespect to A, but D may be a hedging transactionwith respect to C if C is ordinary property or anordinary obligation and if the other requirements ofparagraph (b) of this section are met. If D is not partof a hedging transaction, then D may be part of astraddle for purposes of section 1092.

2002–14 I.R.B. 712 April 8, 2002

Example 3. Separate-entity election; counter-party that marks to market. The facts are the sameas in Example 2 above, except that H marks C tomarket under its method of accounting. Also assumethat B would be a hedging transaction with respectto risk A if O had entered into that transaction withan unrelated party. Thus, for O, the B-C transactionis an intercompany hedging transaction with respectto O’s risk A, the character and timing rules of§ 1.1502–13 do not apply to the B-C transaction,and H’s income, deduction, gain, or loss from C isordinary. However, other attributes of the itemsfrom the B-C transaction are determined under§ 1.1502–13. D is a hedging transaction with respectto C if it meets the requirements of paragraph (b) ofthis section.

(f) Identification and recordkeeping—(1) Same-day identification of hedgingtransactions. Under section 1221(a)(7), ataxpayer that enters into a hedging trans-action (including recycling an existinghedging transaction) must clearly identifyit as a hedging transaction before theclose of the day on which the taxpayeracquired, originated, or entered into thetransaction (or recycled the existing hedg-ing transaction).

(2) Substantially contemporaneousidentification of hedged item—(i) Contentof the identification. A taxpayer thatenters into a hedging transaction mustidentify the item, items, or aggregate riskbeing hedged. Identification of an itembeing hedged generally involves identify-ing a transaction that creates risk, and thetype of risk that the transaction creates.For example, if a taxpayer is hedging theprice risk with respect to its June pur-chases of corn inventory, the transactionbeing hedged is the June purchase of cornand the risk is price movements in themarket where the taxpayer buys its corn.For additional rules concerning the con-tent of this identification, see paragraph(f)(3) of this section.

(ii) Timing of the identification. Theidentification required by this paragraph(f)(2) must be made substantially contem-

poraneously with entering into the hedg-ing transaction. An identification is notsubstantially contemporaneous if it ismade more than 35 days after enteringinto the hedging transaction.

(3) Identification requirements for cer-tain hedging transactions. In the case ofthe hedging transactions described in thisparagraph (f)(3), the identification underparagraph (f)(2) of this section mustinclude the information specified.

(i) Anticipatory asset hedges. If thehedging transaction relates to the antici-pated acquisition of assets by the tax-payer, the identification must include theexpected date or dates of acquisition andthe amounts expected to be acquired.

(ii) Inventory hedges. If the hedgingtransaction relates to the purchase or saleof inventory by the taxpayer, the identifi-cation is made by specifying the type orclass of inventory to which the transac-tion relates. If the hedging transactionrelates to specific purchases or sales, theidentification must also include theexpected dates of the purchases or salesand the amounts to be purchased or sold.

(iii) Hedges of debt of the taxpayer—(A) Existing debt. If the hedging transac-tion relates to accruals or payments underan issue of existing debt of the taxpayer,the identification must specify the issueand, if the hedge is for less than the fullissue price or the full term of the debt, theamount of the issue price and the termcovered by the hedge.

(B) Debt to be issued. If the hedgingtransaction relates to the expected issu-ance of debt by the taxpayer or to accru-als or payments under debt that isexpected to be issued by the taxpayer, theidentification must specify the followinginformation: the expected date of issu-ance of the debt; the expected maturity ormaturities; the total expected issue price;

and the expected interest provisions. Ifthe hedge is for less than the entireexpected issue price of the debt or the fullexpected term of the debt, the identifica-tion must also include the amount or theterm being hedged. The identificationmay indicate a range of dates, terms, andamounts, rather than specific dates, terms,or amounts. For example, a taxpayermight identify a transaction as hedgingthe yield on an anticipated issuance offixed rate debt during the second half ofits fiscal year, with the anticipatedamount of the debt between $75 millionand $125 million, and an anticipated termof approximately 20 to 30 years.

(iv) Hedges of aggregate risk—(A)Required identification. If a transactionhedges aggregate risk as described inparagraph (c)(3) of this section, the iden-tification under paragraph (f)(2) of thissection must include a description of therisk being hedged and of the hedging pro-gram under which the hedging transactionwas entered. This requirement may bemet by placing in the taxpayer’s records adescription of the hedging program andby establishing a system under whichindividual transactions can be identifiedas being entered into pursuant to the pro-gram.

(B) Description of hedging program. Adescription of a hedging program mustinclude an identification of the type ofrisk being hedged, a description of thetype of items giving rise to the risk beingaggregated, and sufficient additionalinformation to demonstrate that the pro-gram is designed to reduce aggregate riskof the type identified. If the program con-tains controls on speculation (forexample, position limits), the descriptionof the hedging program must also explainhow the controls are established, commu-nicated, and implemented.

April 8, 2002 713 2002–14 I.R.B.

(v) Transactions that counteract hedg-ing transactions. If the hedging transac-tion is described in paragraph (d)(3) ofthis section, the description of the hedg-ing transaction must include an identifica-tion of the risk management transactionthat is being offset and the original under-lying hedged item.

(4) Manner of identification andrecords to be retained—(i) Inclusion ofidentification in tax records. The identifi-cation required by this paragraph (f) mustbe made on, and retained as part of, thetaxpayer’s books and records.

(ii) Presence of identification must beunambiguous. The presence of an identi-fication for purposes of this paragraph (f)must be unambiguous. The identificationof a hedging transaction for financialaccounting or regulatory purposes doesnot satisfy this requirement unless thetaxpayer’s books and records indicate thatthe identification is also being made fortax purposes. The taxpayer may indicatethat individual hedging transactions, or aclass or classes of hedging transactions,that are identified for financial accountingor regulatory purposes are also beingidentified as hedging transactions for pur-poses of this section.

(iii) Manner of identification. The tax-payer may separately and explicitly makeeach identification, or, so long as para-graph (f)(4)(ii) of this section is satisfied,the taxpayer may establish a system pur-suant to which the identification is indi-cated by the type of transaction or by themanner in which the transaction is con-summated or recorded. An identificationunder this system is made at the later ofthe time that the system is established orthe time that the transaction satisfies theterms of the system by being entered, orby being consummated or recorded, in thedesignated fashion.

(iv) Principles of paragraph (f)(4)(iii)of this section illustrated. Paragraphs(f)(4)(iv)(A) through (C) of this sectionillustrate the principles of paragraph(f)(4)(iii) of this section and assume thatthe other requirements of this paragraph(f) are satisfied.

(A) A taxpayer can make an identifica-tion by designating a hedging transactionfor (or placing it in) an account that hasbeen identified as containing only hedgesof a specified item (or of specified itemsor specified aggregate risk).

(B) A taxpayer can make an identifica-tion by including and retaining in itsbooks and records a statement that desig-nates all future transactions in a specifiedderivative product as hedges of a speci-fied item, items, or aggregate risk.

(C) A taxpayer can make an identifica-tion by designating a certain mark, a cer-tain form, or a certain legend as meaningthat a transaction is a hedge of a specifieditem (or of specified items or a specifiedaggregate risk). Identification can bemade by placing the designated mark ona record of the transaction (for example,trading ticket, purchase order, or tradeconfirmation) or by using the designatedform or a record that contains the desig-nated legend.

(5) Identification of hedges involvingmembers of the same consolidatedgroup—(i) General rule: single-entityapproach. A member of a consolidatedgroup must satisfy the requirements ofthis paragraph (f) as if all of the membersof the group were divisions of a singlecorporation. Thus, the member enteringinto the hedging transaction with a thirdparty must identify the hedging transac-tion under paragraph (f)(1) of this section.Under paragraph (f)(2) of this section,that member must also identify the item,items, or aggregate risk that is beinghedged, even if the item, items, or aggre-gate risk relates primarily or entirely toother members of the group. If the mem-bers of a group use intercompany transac-tions to transfer risk within the group, therequirements of paragraph (f)(2) of thissection may be met by identifying theintercompany transactions, and the riskshedged by the intercompany transactions,as hedges or hedged items, as appropriate.Because identification of the intercom-pany transaction as a hedge serves solelyto identify the hedged item, the identifica-tion is timely if made within the periodrequired by paragraph (f)(2) of this sec-tion. For example, if a member transfersrisk in an intercompany transaction, itmay identify under the rules of this para-graph (f) both its position in that transac-tion and the item, items, or aggregate riskbeing hedged. The member that hedgesthe risk outside the group may identifyunder the rules of this paragraph (f) bothits position with the third party and itsposition in the intercompany transaction.

Paragraph (e)(4) Example 1 of this sec-tion illustrates this identification.

(ii) Rule for consolidated groups mak-ing the separate-entity election. If a con-solidated group makes the separate-entityelection under paragraph (e)(2) of thissection, each member of the group mustsatisfy the requirements of this paragraph(f) as though it were not a member of aconsolidated group.

(6) Consistency with section1256(e)(2). Any identification for pur-poses of section 1256(e)(2) is also anidentification for purposes of paragraph(f)(1) of this section.

(g) Effect of identification and non-identification—(1) Transactions identi-fied—(i) In general. If a taxpayer identi-fies a transaction as a hedging transactionfor purposes of paragraph (f)(1) of thissection, the identification is binding withrespect to gain, whether or not all of therequirements of paragraph (f) of this sec-tion are satisfied. Thus, gain from thattransaction is ordinary income. If thetransaction is not in fact a hedging trans-action described in paragraph (b) of thissection, however, paragraphs (a)(1) and(2) of this section do not apply and thecharacter of loss is determined withoutreference to whether the transaction is asurrogate for a noncapital asset, serves asinsurance against a business risk, serves ahedging function, or serves a similarfunction or purpose. Thus, the taxpayer’sidentification of the transaction as a hedg-ing transaction does not itself make lossfrom the transaction ordinary.

(ii) Inadvertent identification. Not-withstanding paragraph (g)(1)(i) of thissection, if the taxpayer identifies a trans-action as a hedging transaction for pur-poses of paragraph (f) of this section, thecharacter of the gain is determined as ifthe transaction had not been identified asa hedging transaction if—

(A) The transaction is not a hedgingtransaction (as defined in paragraph (b) ofthis section);

(B) The identification of the transac-tion as a hedging transaction was due toinadvertent error; and

(C) All of the taxpayer’s transactionsin all open years are being treated oneither original or, if necessary, amendedreturns in a manner consistent with theprinciples of this section.

2002–14 I.R.B. 714 April 8, 2002

(2) Transactions not identified—(i) Ingeneral. Except as provided in paragraphs(g)(2)(ii) and (iii) of this section, theabsence of an identification that satisfiesthe requirements of paragraph (f)(1) ofthis section is binding and establishes thata transaction is not a hedging transaction.Thus, subject to the exceptions, the rulesof paragraphs (a)(1) and (2) of this sec-tion do not apply, and the character ofgain or loss is determined without refer-ence to whether the transaction is a surro-gate for a noncapital asset, serves asinsurance against a business risk, serves ahedging function, or serves a similarfunction or purpose.

(ii) Inadvertent error. If a taxpayerdoes not make an identification that satis-fies the requirements of paragraph (f) ofthis section, the taxpayer may treat gainor loss from the transaction as ordinaryincome or loss under paragraph (a)(1) or(2) of this section if—

(A) The transaction is a hedging trans-action (as defined in paragraph (b) of thissection);

(B) The failure to identify the transac-tion was due to inadvertent error; and

(C) All of the taxpayer’s hedgingtransactions in all open years are beingtreated on either original or, if necessary,amended returns as provided in para-graphs (a)(1) and (2) of this section.

(iii) Anti-abuse rule. If a taxpayer doesnot make an identification that satisfiesall the requirements of paragraph (f) ofthis section but the taxpayer has no rea-sonable grounds for treating the transac-tion as other than a hedging transaction,then gain from the transaction is ordinary.The reasonableness of the taxpayer’s fail-ure to identify a transaction is determinedby taking into consideration not only therequirements of paragraph (b) of this sec-tion but also the taxpayer’s treatment ofthe transaction for financial accounting or

other purposes and the taxpayer’s identi-fication of similar transactions as hedgingtransactions.

(3) Transactions by members of a con-solidated group—(i) Single-entity app-roach. If a consolidated group is underthe general rule of paragraph (e)(1) of thissection (the single-entity approach), therules of this paragraph (g) apply only totransactions that are not intercompanytransactions.

(ii) Separate-entity election. If a con-solidated group has made the electionunder paragraph (e)(2) of this section,then, in addition to the rules of para-graphs (g)(1) and (2) of this section, thefollowing rules apply:

(A) If an intercompany transaction isidentified as a hedging transaction butdoes not meet the requirements of para-graphs (e)(2)(ii)(A) and (B) of this sec-tion, then, notwithstanding any contraryprovision in § 1.1502–13, each party tothe transaction is subject to the rules ofparagraph (g)(1) of this section withrespect to the transaction as though it hadincorrectly identified its position in thetransaction as a hedging transaction.

(B) If a transaction meets the require-ments of paragraphs (e)(2)(ii)(A) and (B)of this section but the transaction is notidentified as a hedging transaction, eachparty to the transaction is subject to therules of paragraph (g)(2) of this section.(Because the transaction is an intercom-pany hedging transaction, the characterand timing rules of § 1.1502–13 do notapply. See paragraph (e)(2)(iii)(A) of thissection.)

(h) Effective date. The rules of thissection apply to transactions entered intoon or after March 20, 2002.

Par. 4. Section 1.1256(e)–1 is revisedto read as follows:

§ 1.1256(e)–1 Identification of hedgingtransactions.

(a) Identification and recordkeepingrequirements. Under section 1256(e)(2), ataxpayer that enters into a hedging trans-action must identify the transaction as ahedging transaction before the close ofthe day on which the taxpayer enters intothe transaction.

(b) Requirements for identification.The identification of a hedging transac-tion for purposes of section 1256(e)(2)must satisfy the requirements of§ 1.1221–2(f)(1). Solely for purposes ofsection 1256(f)(1), however, an identifi-cation that does not satisfy all of therequirements of § 1.1221–2(f)(1) is nev-ertheless treated as an identification undersection 1256(e)(2).

(c) Consistency with § 1.1221–2. Anyidentification for purposes of § 1.1221–2(f)(1) is also an identification for pur-poses of this section. If a taxpayer satis-fies the requirements of § 1.1221–2(f)(1)(ii), the transaction is treated as ifit were not identified as a hedging trans-action for purposes of section 1256(e)(2).

(d) Effective date. The rules of thissection apply to transactions entered intoon or after March 20, 2002.

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORKREDUCTION ACT

Par. 5. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 6. In § 602.101, paragraph (b) is

amended by removing the entries for“1.1221–2,” “1.1221–2(d)(2)(iv),”“1.1221–2(e)(5),” “1.1221–2(g)(5)(ii),”“1.1221–2(g) (6) ( i i ) ,” “1.1221–2(g)(6)(iii),” and “1.1221–2T(c)” andadding an entry in numerical order to thetable to read as follows:

§ 602.101 OMB Control numbers.* * * * *

(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *

1.1221–2................................................................................................................................................................... 1545–1480

* * * * *

April 8, 2002 715 2002–14 I.R.B.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved March 14, 2002.

Mark Weinberger,Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register onMarch 15, 2002, 8:54 a.m., and published in theissue of the Federal Register for March 20, 2002, 67F.R. 12863)

Section 1274.—Determin-ation of Issue Price in theCase of Certain DebtInstruments Issued forProperty

(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federalrates; adjusted federal long-term rateand the long-term exempt rate. For pur-poses of sections 382, 1274, 1288, andother sections of the Code, tables set forththe rates for April 2002.

Rev. Rul. 2002–17

This revenue ruling provides variousprescribed rates for federal income taxpurposes for April 2002 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposes

of section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains theappropriate percentages for determiningthe low-income housing credit describedin section 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520.

REV. RUL. 2002–17 TABLE 1

Applicable Federal Rates (AFR) for April 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 2.88% 2.86% 2.85% 2.84%

110% AFR 3.17% 3.15% 3.14% 3.13%

120% AFR 3.46% 3.43% 3.42% 3.41%

130% AFR 3.75% 3.72% 3.70% 3.69%

Mid-Term

AFR 4.65% 4.60% 4.57% 4.56%

110% AFR 5.12% 5.06% 5.03% 5.01%

120% AFR 5.60% 5.52% 5.48% 5.46%

130% AFR 6.07% 5.98% 5.94% 5.91%

150% AFR 7.02% 6.90% 6.84% 6.80%

175% AFR 8.21% 8.05% 7.97% 7.92%

Long-Term

AFR 5.62% 5.54% 5.50% 5.48%

110% AFR 6.18% 6.09% 6.04% 6.01%

120% AFR 6.76% 6.65% 6.60% 6.56%

130% AFR 7.33% 7.20% 7.14% 7.09%

2002–14 I.R.B. 716 April 8, 2002


Adjusted AFR for April 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 2.08% 2.07% 2.06% 2.06%

Mid-termadjusted AFR 3.52% 3.49% 3.47% 3.46%

Long-termadjusted AFR 4.87% 4.81% 4.78% 4.76%


Rates Under Section 382 for April 2002

Adjusted federal long-term rate for the current month 4.87%

Long-term tax-exempt rate for ownership changes during the current month (thehighest of the adjusted federal long-term rates for the current month and the priortwo months.) 5.01%


Appropriate Percentages Under Section 42(b)(2) for April 2002

Appropriate percentage for the 70% present value low-income housing credit 8.20%

Appropriate percentage for the 30% present value low-income housing credit 3.51%

April 8, 2002 717 2002–14 I.R.B.


Rate Under Section 7520 for April 2002

Applicable federal rate for determining the present value of an annuity, aninterest for life or a term of years, or a remainder or reversionary interest 5.6%

Section 1288.—Treatment ofOriginal Issue Discounts onTax-Exempt Obligations


Section 1361.—S CorporationDefined

26 CFR 1.1361–1: S Corporation defined.


Section 4401.—Imposition ofTax

Ct. D. 2073

SUPREME COURT OF THEUNITED STATES

No. 00–507

CHICKASAW NATION v. UNITED

STATES

CERTIORARI TO THE UNITEDSTATES COURT

OF APPEALS FOR THE TENTHCIRCUIT

November 27, 2001*

Syllabus

The Indian Gaming Regulatory Act

(Gaming Act) provides, as relevant here,that Internal Revenue Code (Code) provi-sions “(including [Secs.] 1441, 3402(q),6041, and 6050I, and chapter 35 . . . )concerning the reporting and withholdingof taxes” with respect to gambling opera-tions shall apply to Indian tribes in thesame way as they apply to States. 25U.S.C. Sec. 2719(d)(i). Chapter 35imposes taxes from which it exempts cer-tain state-controlled gambling activities,but says nothing about tax reporting orwithholding. Petitioners, the Choctaw andChickasaw Nations, claim that the Gam-ing Act subsection’s explicit parentheticalreference exempts them from payingthose chapter 35 taxes from which theStates are exempt. Rejecting that claim,the Tenth Circuit held that the subsectionapplies only to Code provisions concern-ing tax withholding and reporting.

Held: Section 2719(d)(i) does notexempt tribes from paying the gambling-related taxes that chapter 35 imposes. Pp.3–11.

(a) The subsection’s language outsidethe parenthetical says that the subsectionapplies to Code provisions concerningreporting and withholding, and the otherfour parenthetical references arguablyconcern reporting and withholding. TheTribes nonetheless claim that the subsec-tion’s explicit parenthetical reference tochapter 35 expands the Gaming Act’sscope beyond reporting and withholdingprovisions — to the tax-imposing provi-sions that chapter 35 contains — and atthe very least gives the subsection an

ambiguity that can be resolved by apply-ing the canon that statutes are to be con-strued liberally in favor of Indians withambiguous provisions interpreted to theirbenefit. Rejecting their argument reducesthe chapter 35 phrase to surplusage, butthere is no other reasonable reading of thestatute. Pp. 3–4.

(b) The statute’s language is too strongto give the chapter 35 reference indepen-dent operative effect. The unambiguouslanguage outside the parenthetical sayswithout qualification that the subsectionapplies to “provisions . . . concerning thereporting and withholding of taxes”; andthe language inside the parenthetical,prefaced with the word “including,” liter-ally says the same, since to “include”means to “contain.” The use of parenthe-ses emphasizes the fact that that which iswithin is meant simply to be illustrative.To give the chapter 35 reference indepen-dent operative effect would require seri-ously rewriting the rest of the statute. Onewould have to read “including” to meanwhat it does not mean, namely, “includ-ing. . . and.” To read the language outsidethe parenthetical as if it referred to (1)Code provisions concerning tax reportingand withholding and (2) those “concern-ing . . . wagering operations” would befar too convoluted to believe Congressintended it. There is no reason to thinkCongress intended to sweep within thesubsection’s scope every Code provisionconcerning wagering. The subject matterat issue — tax exemption — also coun-sels against accepting the Tribes’ inter-pretation. This Court can find no com-parable instance in which Congress

*Together with Choctaw Nation of Oklahoma v. United States (see this Court’s Rule 12.4), also on certiorari to the same court.

2002–14 I.R.B. 718 April 8, 2002

legislated an exemption through a paren-thetical numerical cross-reference. Sincethe more plausible role for the parentheti-cal to play in this subsection is that ofproviding an illustrative list of examples,common sense suggests that “chapter 35”is simply a bad example that Congressincluded inadvertently, a drafting mistake.Pp. 4–6.

(c) The Gaming Act’s legislative his-tory on balance supports this Court’s con-clusion. And the canons of interpretationto which the Tribes point — that everyclause and word of a statute should begiven effect and that statutes are to beconstrued liberally in favor of the Indianswith ambiguous provisions interpreted totheir benefit — do not determine how toread this statute. First, the canons areguides that need not be conclusive. Cir-cuit City Stores, Inc. v. Adams, 532 U.S.105, 115. To accept these canons as con-clusive here would produce an interpreta-tion that the Court firmly believes wouldconflict with congressional intent. Sec-ond, specific canons are often counteredby some maxim pointing in a differentdirection. Ibid. The canon requiring acourt to give effect to each word “if pos-sible” is sometimes offset by the canonpermitting a court to reject words as meresurplusage if inadvertently inserted or ifrepugnant to the rest of the statute. More-over, the pro-Indian canon is offset by thecanon warning against interpreting fed-eral statutes as providing tax exemptionsunless the exemptions are clearlyexpressed. Given the individualizednature of this Court’s previous cases, onecannot say that the pro-Indian canon isinevitably stronger, particularly where theinterpretation of a congressional statuterather than an Indian treaty is at issue. Pp.6–11.

208 F.3d 871 (first judgment); 210F.3d 389 (second judgment), affirmed.

BREYER, J., delivered the opinion ofthe Court, in which REHNQUIST, C. J.,and STEVENS, KENNEDY, and GINS-BURG, JJ., joined, and in all but Part II-Bof which SCALIA and THOMAS, JJ.,joined. O’CONNOR, J., filed a dissentingopinion, in which SOUTER, J., joined.


No. 00–507

CHICKASAW NATION,

PETITIONER v. UNITED STATESCHOCTAW NATION OF

OKLAHOMA, PETITIONER v.UNITED STATES

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURTOF APPEALS FOR THE TENTH

CIRCUIT

November 27, 2001

JUSTICE BREYER delivered theopinion of the Court.*

In these cases, we must decide whethera particular subsection in the Indian Gam-ing Regulatory Act, 102 Stat. 2467–2486,25 U.S.C. Secs. 2701–2721 (1994 ed.),exempts tribes from paying the gambling-related taxes that chapter 35 of the Inter-nal Revenue Code imposes — taxes thatStates need not pay. We hold that it doesnot create such an exemption.

IThe relevant Indian Gaming Regula-

tory Act (Gaming Act) subsection, ascodified in 25 U.S.C. Sec. 2719(d)(i),reads as follows:

“The provisions of [the InternalRevenue Code of 1986] (includingsections 1441, 3402(q), 6041, and6050I, and chapter 35 of such Code)concerning the reporting and with-holding of taxes with respect to thewinnings from gaming or wageringoperations shall apply to Indiangaming operations conducted pursu-ant to this chapter, or under a Tribal-State compact entered into undersection 2710(d)(3) of this title that isin effect, in the same manner assuch provisions apply to State gam-ing and wagering operations.”

The subsection says that Internal RevenueCode provisions that “concer[n] thereporting and withholding of taxes” withrespect to gambling operations shallapply to Indian tribes in the same way as

they apply to States. The subsection alsosays in its parenthetical that those provi-sions “includ[e]” Internal Revenue Code“chapter 35.” Chapter 35, however, saysnothing about the reporting or the with-holding of taxes. Rather, that chapter sim-ply imposes taxes — excise taxes andoccupational taxes related to gambling —from which it exempts certain state-controlled gambling activities. See, e.g.,26 U.S.C. Sec. 4401(a) (1994 ed.)(imposing 0.25% excise tax on eachwager); Sec. 4411 (imposing $50 occupa-tional tax on each individual engaged inwagering business); Sec. 4402(3)(exempting state-operated gamblingoperations, such as lotteries).

In this lawsuit two Native AmericanIndian Tribes, the Choctaw and Chick-asaw Nations, claim that the Gaming Actsubsection exempts them from payingthose chapter 35 taxes from which Statesare exempt. Brief for Petitioners 34–36.They rest their claim upon the subsec-tion’s explicit parenthetical reference tochapter 35. The Tenth Circuit rejectedtheir claim on the ground that the subsec-tion, despite its parenthetical reference,applies only to Code provisions that con-cern the “reporting and withholding oftaxes.” 208 F.3d 871, 883–884 (2000);see also 210 F.3d 389 (2000). The Courtof Appeals for the Federal Circuit, how-ever, reached the opposite conclusion.Little Six, Inc. v. United States, 210 F.3d1361, 1366 (2000). We granted certiorariin order to resolve the conflict. We agreewith the Tenth Circuit.

IIThe Tribes’ basic argument rests upon

the subsection’s explicit reference to“chapter 35” — contained in a parentheti-cal that refers to four other Internal Rev-enue Code provisions as well. The sub-sect ion’s language outside theparenthetical says that the subsectionapplies to those Internal Revenue Codeprovisions that concern “reporting andwithholding.” The other four parentheti-cal references are to provisions that con-cern, or at least arguably concern, report-ing and withholding. See 26 U.S.C. Sec.1441 (withholding of taxes for nonresi-dent alien); Sec. 3402(q) (withholding of

*JUSTICE SCALIA and JUSTICE THOMAS join all but Part II-B of this opinion.

April 8, 2002 719 2002–14 I.R.B.

taxes from certain gambling winnings);26 U.S.C. Sec. 6041 (reporting by busi-nesses of payments, including paymentsof gambling winnings, to others); Sec.6050I (reporting by businesses of largecash receipts, arguably applicable to cer-tain gambling winnings or receipts).

But what about chapter 35? The Tribescorrectly point out that chapter 35 hasnothing to do with “reporting and with-holding.” Brief for Petitioners 28–29.They add that the reference must servesome purpose, and the only purpose thatthe Tribes can find is that of expandingthe scope of the Gaming Act’s subsectionbeyond reporting and withholding provi-sions — to the tax-imposing provisionsthat chapter 35 does contain. The GamingAct therefore must exempt them (likeStates) from those tax payment require-ments. The Tribes add that at least thereference to chapter 35 makes the subsec-tion ambiguous. And they ask us toresolve the ambiguity by applying a spe-cial Indian-related interpretative canon,namely, “‘statutes are to be construed lib-erally in favor of the Indians’ withambiguous provisions interpreted to theirbenefit.” Brief for Petitioners 13 (quotingMontana v. Blackfeet Tribe, 471 U.S. 759,766 (1985)).

We cannot accept the Tribes’ claim.We agree with the Tribes that rejectingtheir argument reduces the phrase“(including . . . chapter 35) . . .” to sur-plusage. Nonetheless we can find noother reasonable reading of the statute.

A

The language of the statute is toostrong to bend as the Tribes would wish— i.e., so that it gives the chapter 35 ref-erence independent operative effect. Forone thing, the language outside the paren-thetical is unambiguous. It says withoutqualification that the subsection applies to“provisions . . . concerning the reportingand withholding of taxes.” And the lan-guage inside the parenthetical, prefacedwith the word “including,” literally saysthe same. To “include” is to “contain” or“comprise as part of a whole.” Webster’sNinth New Collegiate Dictionary 609(1985). In this instance, that which “con-tains” the parenthetical references — the“whole” of which the references are“parts” — is the phrase “provisions . . .concerning the reporting and withholding

of taxes. . . .” The use of parenthesesemphasizes the fact that that which iswithin is meant simply to be illustrative,hence redundant — a circumstance under-scored by the lack of any suggestion thatCongress intended the illustrative list tobe complete. Cf. 26 U.S.C. Sec. 3406(backup withholding provision not men-tioned in parenthetical).

Nor can one give the chapter 35 refer-ence independent operative effect withoutseriously rewriting the language of therest of the statute. One would have toread the word “including” to mean what itdoes not mean, namely, “including . . .and.” One would have to read the statuteas if, for example, it placed “chapter 35”outside the parenthetical and said “provi-sions of the . . . Code including chapter35 and also provisions . . . concerning thereporting and withholding of taxes. . . .”Or, one would have to read the languageas if it said “provisions of the . . . Code. . . concerning the taxation and thereporting and withholding of taxes. . . .”We mention this latter possibility becausethe congressional bill that became the lawbefore us once did read that way. Butwhen the bill left committee, it containednot the emphasized words (“the taxationand”) but the cross-reference to chapter35.

We recognize the Tribes’ claim (madehere for the first time) that one couldavoid rewriting the statute by reading thelanguage outside the parenthetical as if itreferred to two kinds of “provisions of the. . . Code”: first those “concerning thereporting and withholding of taxes withrespect to the winnings from gaming,”and, second, those “concerning . . .wagering operations.” See Reply Brief forPetitioners 8–10. The subsection’s gram-mar literally permits this reading. But thatreading, even if ultimately comprehen-sible, is far too convoluted to believeCongress intended it. Nor is there anyreason to think Congress intended tosweep within the subsection’s scopeevery Internal Revenue Code provisionconcerning wagering — a result that thisunnatural reading would accomplish.

The subject matter at issue also coun-sels against accepting the Tribes’ inter-pretation. That subject matter is taxexemption. When Congress enacts a taxexemption, it ordinarily does so explic-itly. We can find no comparable instance

in which Congress legislated an exemp-tion through an inexplicit numericalcross-reference — especially a cross-reference that might easily escape notice.

As we have said, the more plausiblerole for the parenthetical to play in thissubsection is that of providing an illustra-tive list of examples. So considered,“chapter 35” is simply a bad example —an example that Congress included inad-vertently. The presence of a bad examplein a statute does not warrant rewriting theremainder of the statute’s language. Nordoes it necessarily mean that the statute isambiguous, i.e., “capable of being under-stood in two or more possible senses orways.” Webster’s Ninth New CollegiateDictionary 77 (1985). Indeed, in ordinarylife, we would understand an analogousinstruction — say, “Test drive some cars,including Plymouth, Nissan, Chevrolet,Ford, and Kitchenaid” — not as creatingambiguity, but as reflecting a mistake.Here too, in context, common sense sug-gests that the cross-reference is simply adrafting mistake, a failure to delete aninappropriate cross-reference in the billthat Congress later enacted into law. Cf.Little Six, Inc. v. United States, 229 F.3d1383, 1385 (CA Fed. 2000) (Dyk, J., dis-senting from denial of rehearing en banc)(“The language of the provision has allthe earmarks of a simple mistake in legis-lative drafting”).

B

The Gaming Act’s legislative historyon balance supports our conclusion. Thesubsection as it appeared in the originalSenate bill applied both to taxation and toreporting and withholding. It read as fol-lows:

“Provisions of the Internal RevenueCode . . . concerning the taxationand the reporting and withholdingof taxes with respect to gambling orwagering operations shall apply toIndian gaming operations . . . thesame as they apply to State opera-tions,” S. 555, 100th Cong., 1stSess., 37 (1987).

With the “taxation” language present, itwould have made sense to include chap-ter 35, which concerns taxation, in a par-enthetical that included other provisionsthat concern reporting and withholding.But the Senate committee deleted thetaxation language. Why did it permit the

2002–14 I.R.B. 720 April 8, 2002

cross-reference to chapter 35 to remain?Committee documents do not say.

The Tribes argue that the committeeintentionally left it in the statute in orderto serve as a substitute for the word“taxation.” An amicus tries to support thisview by pointing to a tribal representa-tive’s testimony that certain Tribes were“opposed to any indication where InternalRevenue would be collecting taxes fromthe tribal bingo operations.” Hearings onS. 555 and S. 1303 before the SenateSelect Committee on Indian Affairs,100th Cong., 1st Sess., 109 (1987) (state-ment of Lionel John, Executive Directorof United South and Eastern Tribes).Other Tribes thought the “taxation” lan-guage too “vague,” preferring a clearstatement “that the Internal Revenue Ser-vice is not being granted authority to taxtribes.” Id., at 433, 435 (statement ofCharles W. Blackwell, Representative ofthe American Indian Tribal Governmentand Policy Consultants, Inc.).

Substitution of “chapter 35” for theword “taxation,” however, could not haveserved the tribal witnesses purposes, fordoing so took from the bill the verywords that made clear the tribes wouldnot be taxed and substituted language thatmade it more likely they would be taxed.Nor can we believe that anyone seekingto grant a tax exemption would intention-ally substitute a confusion-generatingnumerical cross-reference, see Part A,supra, for pre-existing language thatunambiguously carried out that objective.It is far easier to believe that the drafters,having included the entire parentheticalwhile the word “taxation” was still part ofthe bill, unintentionally failed to removewhat had become a superfluous numericalcross-reference—particularly since thetax-knowledgeable Senate Finance Com-mittee never received the opportunity toexamine the bill. Cf. S. Doc. No. 100–1,Senate Manual, 30 (1987) (proposed leg-islation concerning revenue measuresshall be referred to the Committee onFinance).

Finally, the Tribes point to a letterwritten by one of the Gaming Act’sauthors, stating that “by including refer-ence to Chapter 35,” Congress intended“that the tax treatment of wagers con-ducted by tribal governments be the sameas that for wagers conducted by state gov-ernments under Chapter 35.” App. to Pet.

for Cert. 113a. This letter, however, waswritten after the event. It expresses theviews of only one member of the commit-tee. And it makes no effort to explain thecritical legislative circumstance, namely,the elimination of the word “taxation”from the bill. The letter may express theSenator’s interpretive preference, but thatpreference cannot overcome the languageof the statute and the related consider-ations we have discussed. See Heintz v.Jenkins, 514 U.S. 291, 298 (1995) (A“statement [made] not during the legisla-tive process, but after the statute becamelaw . . . is not a statement upon whichother legislators might have relied in vot-ing for or against the Act, but it simplyrepresents the views of one informed per-son on an issue about which others may(or may not) have thought differently”).Cf. New York Telephone Co. v. New YorkState Dept. of Labor, 440 U.S. 519, 564,n. 18 (1979) (Powell, J., dissenting) (“Thecomments . . . of a single Congressman,delivered long after the original passageof the [act at issue], are of no aid in deter-mining congressional intent . . .”).

In sum, to adopt the Tribes’ interpreta-tion would read back into the Act the veryword “taxation” that the Senate commit-tee deleted. We ordinarily will not assumethat Congress intended “‘to enact statu-tory language that it has earlier discardedin favor of other language.’” INS v.Cardoza-Fonseca, 480 U.S. 421, 443(1987) (quoting Nachman Corp. v. Pen-sion Benefit Guaranty Corporation, 446U.S. 359, 392–393 (1980)); Gulf OilCorp. v. Copp Paving Co., 419 U.S. 186,200 (1974) (same); Mescalero ApacheTribe v. Jones, 411 U.S. 145, 157 (1973)(same). There is no special reason fordoing so here.

C

The Tribes point to canons of interpre-tation that favor their position. The Courthas often said that “‘every clause andword of a statute’” should, “‘if possible,’”be given “‘effect.’” United States v.Menasche, 348 U.S. 528, 538–539 (1955)(quoting Montclair v. Ramsdell, 107 U.S.147, 152 (1883)). The Tribes point outthat our interpretation deprives the words“chapter 35” of any effect. The Court hasalso said that “statutes are to be construedliberally in favor of the Indians withambiguous provisions interpreted to their

benefit.” Montana v. Blackfeet Tribe, 471U.S. at 766; South Carolina v. CatawbaTribe, Inc., 476 U.S. 498, 520 (1986)(Blackmun, J., dissenting). The Tribespoint out that our interpretation is not tothe Indians’ benefit.

Nonetheless, these canons do notdetermine how to read this statute. Forone thing, canons are not mandatoryrules. They are guides that “need not beconclusive.” Circuit City Stores, Inc. v.Adams, 532 U.S. 105, 115 (2001). Theyare designed to help judges determine theLegislature’s intent as embodied in par-ticular statutory language. And other cir-cumstances evidencing congressionalintent can overcome their force. In thisinstance, to accept as conclusive the can-ons on which the Tribes rely would pro-duce an interpretation that we concludewould conflict with the intent embodiedin the statute Congress wrote. Cf. Cho-teau v. Burnet, 283 U.S. 691 (1931)(upholding taxation where congressionalintent reasonably clear); Superintendentof Five Civilized Tribes v. Commissioner,295 U.S. 418 (1935) (same); MescaleroApache Tribe v. Jones, supra (same). Inlight of the considerations discussed ear-lier, we cannot say that the statute is“fairly capable” of two interpretations, cf.Montana v. Blackfeet Tribe, supra, at 766,nor that the Tribes’ interpretation is fairly“possible.”

Specific canons “are often countered. . . by some maxim pointing in a differ-ent direction.” Circuit City Stores, Inc. v.Adams, supra, at 115. The canon requir-ing a court to give effect to each word “ifpossible” is sometimes offset by thecanon that permits a court to reject words“as surplusage” if “inadvertently insertedor if repugnant to the rest of the statute. . . .” K. Llewellyn, The Common LawTradition 525 (1960). And the lattercanon has particular force here where thesurplus words consist simply of a numeri-cal cross-reference in a parenthetical. Cf.Cabell Huntington Hospital, Inc. v.Shalala, 101 F.3d 984, 990 (CA4 1996)(“A parenthetical is, after all, a parentheti-cal, and it cannot be used to overcome theoperative terms of the statute”).

Moreover, the canon that assumesCongress intends its statutes to benefit thetribes is offset by the canon that warns usagainst interpreting federal statutes as

April 8, 2002 721 2002–14 I.R.B.

providing tax exemptions unless thoseexemptions are clearly expressed. SeeUnited States v. Wells Fargo Bank, 485U.S. 351, 354 (1988) (“[E]xemptionsfrom taxation . . . must be unambiguouslyproved”); Squire v. Capoeman, 351 U.S.1, 6 (1956) (“[T]o be valid, exemptions totax laws should be clearly expressed”);United States Trust Co. v. Helvering, 307U.S. 57, 60 (1939) (“Exemptions fromtaxation do not rest upon implication”).Nor can one say that the pro-Indian canonis inevitably stronger — particularlywhere the interpretation of a congres-sional statute, rather than an Indian treaty,is at issue. Cf. post, at 7. This Court’searlier cases are too individualized,involving too many different kinds oflegal circumstances, to warrant any suchassessment about the two canons’ relativestrength. Compare, e.g., Choate v. Trapp,224 U.S. 665, 675–676 (1912) (interpret-ing statement in treaty-related Indian landpatents that land is “nontaxable” as creat-ing property right invalidating later con-gressional effort to tax); Squire, supra, at3 (Indian canon offsetting tax canon whenrelated statutory provision and historymake clear that language freeing Indianland “‘of all charge or incumbrance what-soever’” includes tax); McClanahan v.Arizona Tax Comm’n, 411 U.S. 164, 174(1973) (state tax violates principle ofIndian sovereignty embodied in treaty),with Mescalero, supra (relying on taxcanon to find Indians taxable); Choteau,supra language makes clear no exemp-tion); Five Tribes, supra (same).

Consequently, the canons here cannotmake the difference for which the Tribesargue. We conclude that the judgments ofthe Tenth Circuit must be affirmed.

It is so ordered.


No. 00–507

CHICKASAW NATION,

PETITIONER v. UNITED STATES

CHOCTAW NATION OFOKLAHOMA, PETITIONER v.

UNITED STATES

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURTOF APPEALS FOR THE TENTH

CIRCUIT

November 27, 2001

JUSTICE O’CONNOR, with whomJUSTICE SOUTER joins, dissenting.

The Court today holds that 25 U.S.C.Sec. 2719(d) (1994 ed.) clearly andunambiguously fails to give IndianNations (Nations) the exemption fromfederal wagering excise and related occu-pational taxes enjoyed by the States.Because I believe Sec. 2719(d) is subjectto more than one interpretation, andbecause “statutes are to be construed lib-erally in favor of the Indians, withambiguous provisions interpreted to theirbenefit,” Montana v. Blackfeet Tribe, 471U.S. 759, 766 (1985), I respectfully dis-sent.

I

I agree with the Court that Sec.2719(d) incorporates an error in drafting.I disagree, however, that the section’s ref-erence to chapter 35 is necessarily thaterror.

As originally proposed in the Senate,the bill that became the Indian GamingRegulatory Act (IGRA) would haveapplied all gambling and wagering-related sections of the Internal RevenueCode to the Nations in the same manneras the States:

“Provisions of the Internal RevenueCode of 1986, concerning the taxa-tion and the reporting and withhold-ing of taxes with respect to gam-bling or wagering operations shallapply to Indian gaming operationsconducted pursuant to this Act thesame as they apply to State opera-tions.” S. 555, 100th Cong., 1stSess., 37 (1987).

The Senate Indian Affairs Committeealtered the language of this bill in twocontradictory ways. It restricted the appli-cable Code sections to those relating tothe “reporting and withholding of taxeswith respect to the winnings” from gam-ing operations. 25 U.S.C. Sec. 2719(d). Italso added a parenthetical listing specificCode sections to be applied to the Nationsin the same manner as the States, includ-

ing chapter 35, a Code provision thatrelates to gambling operations generally,but not to the reporting and withholdingof gambling winnings. Ibid.

One of these two changes must havebeen made in error. There is no reason toassume, however, that it must have beenthe latter. It is equally likely that Con-gress intended Sec. 2719(d) to applychapter 35 to the Nations, but adopted toorestrictive a general characterization ofthe applicable sections.

The Court can do no more than specu-late that the bill’s drafters included theparenthetical while the original restrictionwas in place and failed to remove it whenthat restriction was altered. See ante, at 7.Both the inclusion of the parentheticaland the alteration of the restrictionoccurred in the Senate committee, S. Rep.No. 100–446 (1988), and there is no wayto determine the order in which they wereadopted. If the parenthetical was addedafter the restriction, one could just as eas-ily characterize the restriction as an unin-tentional holdover from a previous ver-sion of the bill.

True, reading the statute to grant theNations the exemption requires the sec-tion’s reference to the “reporting andwithholding of taxes with respect to thewinnings” from gaming operations to sus-tain a meaning the words themselves can-not bear. But the Court’s reading of thestatute fares no better: It requires excisingfrom Sec. 2719(d) Congress’ explicit ref-erence to chapter 35. This goes beyondtreating statutory language as mere sur-plusage. See Potter v. United States, 155U.S. 438, 446 (1894) (the presence ofstatutory language “cannot be regarded asmere surplusage; it means something”);cf. ante, at 3. Surplusage is redundantstatutory language, Babbitt v. Sweet HomeChapter, Communities for Great Ore.,515 U.S. 687, 697–698 (1995); W. Pop-kin, Materials on Legislation: PoliticalLanguage and the Political Process 214(3d ed. 2001) — the Court’s readingnegates language that undeniably bearsseparate meaning. This is not a step to beundertaken lightly.

Both approaches, therefore, requirerewriting the statute, see ante, at 4. Nei-ther of these rewritings is necessarilymore “serious” than the other: At most,each involves doing no more than revers-ing a change made in committee. Cf.ante, at 4–5.

2002–14 I.R.B. 722 April 8, 2002

The Court argues that because the ref-erence to chapter 35 occurs in a paren-thetical, negating this language does lessdamage to the statute than concluding thatthe restrictive language outside the paren-thetical is too narrowly drawn. I amaware of no generally accepted canon ofstatutory construction favoring languageoutside of parentheses to language withinthem, see, e.g., W. Eskridge, P. Frickey, &E. Garrett, Legislation and StatutoryInterpretation, App. C (2000) (listing can-ons), nor do I think it wise for the Courtto adopt one today. The importance ofstatutory language depends not on itspunctuation, but on its meaning. SeeUnited States Nat. Bank of Ore. v. Inde-pendent Ins. Agents of America, Inc., 508U.S. 439, 454 (1993) (“[A] purportedplain-meaning analysis based only onpunctuation is necessarily incomplete andruns the risk of distorting a statute’s truemeaning”).

The fact that the parenthetical is illus-trative does not change the analysis: IfCongress’ illustration does not match itsgeneral description, there is as much rea-son to question the description as theillustration. Where another generaldescription is possible — and was in factpart of the bill at an earlier stage — Con-gress’ choice of an example that matchesthe earlier description is at least ambigu-ous. Moreover, as Sec. 2719(d)’s paren-thetical specifically lists statutory sectionsto be applied to the Nations, one might infact conclude that the doctrine that thespecific governs the general, CrawfordFitting Co. v. J. T. Gibbons, Inc., 482U.S. 437, 445 (1987), makes this specificparenthetical even more significant thanthe general restriction that follows.

Nor is negating Congress’ clear refer-ence to chapter 35 required by the policybehind the statute. If anything, congres-sional policy weighs in favor of theNations. Congress’ central purpose inenacting IGRA was “to provide a statu-tory basis for the operation of gaming byIndian tribes as a means of promotingtribal economic development, self-sufficiency, and strong tribal govern-ments.” Sec. 2702(1). Exempting Nationsfrom federal gaming taxation in the samemanner as States preserves the Nations’sovereignty and avoids giving state gam-ing a competitive advantage that would

interfere with the Nations’ ability to raiserevenue in this manner.

IIBecause nothing in the text, legislative

history, or underlying policies of Sec.2719(d) clearly resolves the contradictioninherent in the section, it is appropriate toturn to canons of statutory construction.The Nations urge the Court to rely uponthe Indian canon, that “statutes are to beconstrued liberally in favor of the Indians,with ambiguous provisions interpreted totheir benefit,” Montana v. Blackfeet Tribe,471 U.S., at 766, as a basis for decidingthat the error in Sec. 2719(d) lies in therestriction of the subclass, not in the spe-cific listing of chapter 35. “[R]ooted inthe unique trust relationship between theUnited States and the Indians,” County ofOneida v. Oneida Indian Nation of N.Y.,470 U.S. 226, 247 (1985), the Indiancanon presumes congressional intent toassist its wards to overcome the disadvan-tages our country has placed upon them.Consistent with this purpose, the Indiancanon applies to statutes as well as trea-ties: The form of the enactment does notchange the presumption that Congressgenerally intends to benefit the Nations.Montana v. Blackfeet Tribe, supra;County of Yakima v. Confederated Tribesand Bands of Yakima Nation, 502 U.S.251 (1992). In this case, because Con-gress has chosen gaming as a means ofenabling the Nations to achieve self-sufficiency, the Indian canon rightly dic-tates that Congress should be presumed tohave intended the Nations to receivemore, rather than less, revenue from thisenterprise.

Of course, the Indian canon is not theonly canon with potential applicability inthis case. Also relevant is the taxationprinciple, that exemptions from taxationmust be clearly expressed. United StatesTrust Co. v. Helvering, 307 U.S. 57, 60(1939); see also ante, at 10. These canonspull in opposite directions, the formerfavoring the Nations’ preferred reading,and the latter favoring the Government’s.

This Court has repeatedly held that,when these two canons conflict, theIndian canon predominates. In Choate v.Trapp, 224 U.S. 665 (1912), a Stateattempted to rely on the taxation principleto argue that a treaty provision makingland granted to Indians nontaxable wasmerely a bounty, capable of being with-

drawn at any time. The Court acknowl-edged the taxation principle, responding:

“But in the Government’s dealingswith the Indians, the rule is exactlythe contrary. The construction,instead of being strict, is liberal;doubtful expressions, instead ofbeing resolved in favor of theUnited States, are to be resolved infavor of [Indian nations.] Id., at674–675.

In Squire v. Capoeman, 351 U.S. 1, 3(1956), the Federal Government had con-veyed land to the Nations “‘free of allcharge or encumbrance whatsoever.’”Although this phrase did not expresslymention nontaxability, the Court held thatthe language “might well be sufficient toinclude taxation,” id., at 7. Invoking theIndian canon, id., at 6–7, we found theNations exempt.

Likewise, in McClanahan v. ArizonaTax Comm’n, 411 U.S. 164 (1973), thisCourt inferred an exemption from statetaxation of property inside reservationsfrom a treaty reserving lands for theexclusive use and occupancy of theNations. In doing so, the Court noted that:“It is true, of course, that exemptionsfrom tax laws should, as a general rule,be clearly expressed. But we have in thepast construed language far more ambigu-ous than this as providing a tax exemp-tion for Indians.” Id., at 176 (citingSquire, supra, at 6).

As the purpose behind the Indiancanon is the same regardless of the formof enactment, supra, at 5, there is no rea-son to alter the Indian canon’s relativestrength where a statute rather than atreaty is involved. Cf. ante, at 10. Theprimacy of the Indian canon over thetaxation principle should not be surpris-ing, as this Court has also held that thegeneral presumption supporting the legal-ity of executive action must yield to theIndian canon, a “counterpresumption spe-cific” to Indians. Minnesota v. Mille LacsBand of Chippewa Indians, 526 U.S. 172,194, n. 5 (1999).

This Court has failed to apply theIndian canon to extend tax exemptions tothe Nations only when nothing in the lan-guage of the underlying statute or treatysuggests the Nations should be exempted.The Cherokee Tobacco, 11 Wall. 616,618–620 (1871) (finding no exemptionfor the Nations from language imposing

April 8, 2002 723 2002–14 I.R.B.

taxes on certain “‘articles produced any-where within the exterior boundaries ofthe United States’”); Choteau v. Burnet,283 U.S. 691, 693–694 (1931) (findingno exemption in provisions “subject[ing]the income of ‘every individual’ to tax,”including “income ‘from any sourcewhatever’”); Superintendent of Five Civi-lized Tribes v. Commissioner, 295 U.S.418 (1935) (same); Mescalero ApacheTribe v. Jones, 411 U.S. 145, 155 (1973)(refusing to exempt the Nations fromtaxes on land use income based on lan-guage that “[o]n its face . . . exempts landand rights in land, not income derivedfrom its use”). Mescalero also went fur-ther, suggesting that because of the taxa-tion principle, the Court would refuse tofind such an exemption absent “clearstatutory guidance.” Id., at 156. Mescale-ro’s formulation is admittedly in tensionwith the Court’s precedents giving theIndian canon primacy over the taxationprinciple where statutory language isambiguous. As Mescalero was decided onthe same day as one of those very prece-

dents, the unanimous decision inMcClanahan v. Arizona Tax Comm’n,supra, however, it cannot have intendedto alter the Court’s established practice.

Section 2719(d) provides an evenmore persuasive case for application ofthe Indian canon than any of our prece-dents. Here, the Court is not being askedto create out of vague language a taxexemption not specifically provided for inthe statute. Instead, the Nations simplyask the Court to use the Indian canon as atiebreaker between two equally plausible(or, in this case, equally implausible) con-structions of a troubled statute, one whichspecifically makes chapter 35’s taxexemption applicable to the Nations, andone which specifically does not. Breakinginterpretive ties is one of the least contro-versial uses of any canon of statutoryconstruction. See Eskridge, Frickey, &Garrett, Legislation and Statutory Inter-pretation, at 341 (“The weakest kind ofsubstantive canon operates merely as atiebreaker at the end of the interpretiveanalysis”).

Faced with the unhappy choice ofdetermining which part of a flawed statu-tory section is in error, I would thus relyupon the long-established Indian canon ofconstruction and adopt the reading mostfavorable to the Nations.

Section 7520.—ValuationTables


Section 7872.—Treatment ofLoans With Below-MarketInterest Rates

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof April 2002. See Rev. Rul. 2002–17, page716.

2002–14 I.R.B. 724 April 8, 2002

Part II. Treaties and Tax LegislationSubpart A.—Tax Conventions and Other Related Items

April 8, 2002 725 2002–14 I.R.B.

2002–14 I.R.B. 726 April 8, 2002

April 8, 2002 727 2002–14 I.R.B.

2002–14 I.R.B. 728 April 8, 2002

April 8, 2002 729 2002–14 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Tax Avoidance Using InflatedBasis

Notice 2002–21

The Internal Revenue Service and theTreasury Department have become awareof a type of transaction, described below,that is used by taxpayers to generate taxlosses. This Notice alerts taxpayers andtheir representatives that the tax benefitspurportedly generated by these transac-tions are not allowable for federal incometax purposes. This Notice also alerts tax-payers, their representatives, and promot-ers of these transactions of certain respon-sibilities that may arise from participatingin these transactions.

FACTS

In general, the transaction involves theuse of a loan assumption agreement toclaim an inflated basis in assets acquiredfrom another party. This inflated basis isclaimed as a result of a transfer of assetsin which a U.S. taxpayer (Taxpayer)becomes jointly and severally liable onindebtedness of the transferor of theassets (Transferor), with the indebtednesshaving a stated principal amount substan-tially in excess of the fair market value ofthe assets transferred. Transferor may notbe subject to U.S. tax or otherwise maybe indifferent to the federal income taxconsequences of the transaction.

In one variation of the transaction,Transferor borrows money from a lender(Lender) on a long term basis such as 30years (the “Loan”). The amount borrowedmay be in a foreign currency. Interest ispayable at regular intervals, and principalis due at maturity. The Loan may permitprepayment. The Loan is made with fullrecourse to Transferor.

Transferor uses the proceeds to pur-chase assets (the “Assets”), such as short-term deposits, government bonds, orhigh-grade corporate debt, which may bedenominated in a foreign currency. TheAssets serve as collateral for the Loanpursuant to a loan agreement. As eachinterest payment becomes due, the collat-eral is used to satisfy such payments.Upon maturity or earlier payment, theLoan is satisfied, by its terms, first from

the collateral, and only then againstTransferor (or Transferor and any partythat has assumed the liability as a jointand several obligor) to satisfy any short-fall.

Pursuant to a separate agreementbetween Transferor and Taxpayer, Transf-eror transfers a portion of the Assets toTaxpayer in consideration for Taxpayer’sagreement to pay a portion of the Loanand become jointly and severally liable toLender as a co-obligor on the Loan. Thefair market value of the Assets transferredto Taxpayer (the “Conveyed Assets”)equals the present value of the Loan’sprincipal payment at maturity, determinedby using a market rate of interest. Thus,the fair market value of the ConveyedAssets is substantially less than theLoan’s stated principal amount. Taxpayerprovides substitute collateral for theLoan, equal in value to the ConveyedAssets. The remainder of the Assetsowned by Transferor continue to serve ascollateral for the Loan.

Also pursuant to the agreementbetween Transferor and Taxpayer, Transf-eror agrees to make all interest paymentson the Loan, and Taxpayer agrees to paythe principal due at maturity. Theco-obligors and Lender anticipate that thecollateral will be substantially (if notentirely) sufficient to repay the Loan.

Taxpayer subsequently disposes of theConveyed Assets for their fair marketvalue. Taxpayer claims that, as a result ofits assumption of joint and several liabil-ity on the Loan, the entire principalamount of the Loan is included in Tax-payer’s basis in the Conveyed Assets. Asa result, Taxpayer claims a loss for fed-eral income tax purposes in an amountequal to the excess of the stated principalamount of the Loan over the fair marketvalue of the Conveyed Assets. If the Con-veyed Assets are nonfunctional currency,Taxpayer claims an ordinary loss.

ANALYSIS

Section 1012 of the Internal RevenueCode provides that the basis of propertyis equal to the cost of the property. Sec-tion 1.1012–1(a) of the Income Tax Regu-lations defines “cost” to mean the“amount paid” for the property in cash or

other property. Under general tax lawprinciples, the amount paid for propertygenerally includes the amount of the sell-er’s liabilities assumed by the buyer.Commissioner v. Oxford Paper Co., 194F.2d 190 (2d. Cir. 1952). The inclusion ofliabilities in basis by a buyer, however, ispredicated on the assumption that theliabilities will be paid in full by the buyer.See Commissioner v. Tufts, 461 U.S. 300,308 (1983), 1983–1 C.B. 120, 123.

In appropriate cases, the courts haverejected attempts to assign an inflatedbasis to property and have limited thebasis of property to its fair market value.For example, the basis of propertyacquired with the issuance or assumptionof recourse indebtedness has been limitedto the acquired property’s fair marketvalue where “a transaction is not con-ducted at arm’s-length by two economi-cally self-interested parties or where atransaction is based upon ‘peculiar cir-cumstances’ which influence the pur-chaser to agree to a price in excess of theproperty’s fair market value.” Lemmen v.Commissioner, 77 T.C. 1326, 1348 (1981)(citing Bixby v. Commissioner, 58 T.C.757, 776 (1972)); Webber v. Commis-sioner, T.C. Memo. 1983–633, aff’d, 790F.2d 1463 (9th Cir. 1986). See alsoMajestic Securities Corp. v. Commis-sioner, 42 B.T.A. 698, 701 (1940), aff’d,120 F.2d 12 (8th Cir. 1941) (“The generalrule that the price paid is the basis fordetermining gain or loss on future dispo-sition presupposes a normal businesstransaction.”)

Other cases have limited the portion ofan assumed indebtedness that may betaken into account for federal income taxpurposes. For example, where two ormore persons are liable on the sameindebtedness, or hold separate propertiessubject to the same indebtedness, theamount taken into account for federalincome tax purposes by each person gen-erally is based on all the facts and cir-cumstances, including the economic reali-ties of the situation and the parties’expectations as to how the liabilities willbe paid. See Maher v. United States, No.16253–1 (W.D. Mo. 1969) (property wasnot in substance “subject to” liabilitywhere lender was not actually relying on

2002–14 I.R.B. 730 April 8, 2002

property as collateral); Maher v. Commis-sioner, 469 F.2d 225 (8th Cir. 1972) (cor-poration’s assumption of primary liabilityon shareholder’s indebtedness becomestaxable dividend only as corporationmakes payments as promised); Snowa v.Commissioner, T.C. Memo 1995–336,rev’d on other grounds, 123 F.3d 190 (4thCir. 1997) (co-obligor’s cost of a newresidence included only her ratable shareof the liability due to state law’s right ofcontribution).

Under the facts and circumstances ofthe transaction described in this Notice,as a matter of economic reality, the par-ties will bear responsibility for repaymentof the Loan in accordance with their rela-tive ownership of the Assets immediatelyafter the transfer from Transferor to Tax-payer. Accordingly, the Service and theTreasury believe that Taxpayer’s basis inthe Conveyed Assets is equal to the fairmarket value of such assets upon theiracquisition by Taxpayer. The losses pur-portedly resulting from the transactiondescribed in this Notice (or substantiallysimilar to the transaction described in thisNotice) are not allowable to the extentTaxpayer derives a tax benefit that isattributable to a basis in excess of the fairmarket value of the Conveyed Assets.The purported tax benefits from thesetransactions also may be subject to chal-lenge under other provisions of the Codeand regulations, including but not limitedto § 988 and, in the case of individuals,§§ 165(c)(2) and 465.

In addition, the Service may imposepenalties on participants in these transac-tions or, as applicable, on persons whoparticipate in the promotion or reportingof these transactions, including theaccuracy-related penalty under § 6662,the return preparer penalty under § 6694,the promoter penalty under § 6700, andthe aiding and abetting penalty under§ 6701.

Transactions that are the same as, orsubstantially similar to, the transactiondescribed in this Notice 2002–21 areidentified as “listed transactions” for thepurposes of §§ 1.6011–4T(b)(2) of theTemporary Income Tax Regulations and301.6111–2T(b)(2) of the Temporary Pro-cedure and Administrative Regulations.See also § 301.6112–1T, A–4. It shouldbe noted that, independent of their classi-

fication as “listed transactions” for pur-poses of §§ 1.6011–4T(b)(2) and301.6111–2T(b)(2), such transactionsmay already be subject to the tax shelterregistration and list maintenance require-ments of §§ 6111 and 6112 under theregulations issued in February 2000(§§ 301.6111–2T and 301.6112–1T, A–4),as well as the regulations issued in 1984and amended in 1986 (§§ 301.6111–1Tand 301.6112–1T, A–3). Persons requiredto register these tax shelters who havefailed to register the shelters may be sub-ject to the penalty under § 6707(a), and tothe penalty under § 6708(a) if the require-ments of § 6112 are not satisfied.

The Service and the Treasury recog-nize that some taxpayers may have filedtax returns taking the position that theywere entitled to the purported tax benefitsof the type of transaction described in thisNotice. These taxpayers are advised totake prompt action to file amendedreturns.

The principal author of this Notice isChristina A. Morrison of the Office ofAssociate Chief Counsel (Financial Insti-tutions and Products). For further infor-mation regarding this Notice, contact Ms.Morrison at (202) 622–3950 (not a toll-free call).

Request for Comments onItems for 2002–2003Published Guidance PriorityList

Notice 2002–22

The Department of Treasury and Inter-nal Revenue Service request public com-ment about items that should be includedin the Guidance Priority List for 2002–2003.

IRS and Treasury’s Office of TaxPolicy use the Guidance Priority List(“Priority List”) each year to identify andprioritize the tax issues that should beaddressed through regulations, rulings,and other published administrative guid-ance. The Priority List will set forth guid-ance Treasury and the IRS intend to issuefrom July 1, 2002, through June 30, 2003.Public input is invited as part of the pro-cess of formulating the Priority List to

ensure that the agencies’ resources focuson the guidance items that are mostimportant to taxpayers and tax adminis-tration.

As Treasury and the IRS draft guid-ance and consider suggestions for guid-ance, we will focus on providing neededguidance on a timely basis and considerthe following questions:1. Whether the guidance is consistentwith the letter and the intent of the statu-tory language.2. Whether the guidance is easily under-stood and applied by taxpayers.3. Whether the guidance is enforceable ona uniform basis by the IRS.4. Whether the guidance provides bright-line rules and resolves issues rather thanraises issues.5. Whether the guidance reduces contro-versy and lessens the burden on taxpayerand IRS resources.

No particular format is required forcomments submitted in response to thisNotice. However, it will be helpful forcomments both to briefly describe theitem that is recommended for inclusionon the Priority List and to explain whythere is a need for guidance. In addition,comments may present an analysis ofhow the issue should be resolved.

Please submit all comments by April30, 2002. Written comments should besent to:

Internal Revenue ServiceAttn: CC:ITA:RU (Notice 2002–22)Room 5226P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

or hand delivered between the hours of 8a.m. and 5 p.m. to:

Courier’s DeskInternal Revenue ServiceAttn: CC:ITA:RU (Notice 2002–22)1111 Constitution Avenue, N.W.Washington, D.C. 20224

Alternatively, comments may be sub-mitted electronically via e-mail to the fol-lowing address: [email protected]. Please include “Notice2002–22” in the subject line. All com-ments will be available for public inspec-tion and copying in their entirety.

April 8, 2002 731 2002–14 I.R.B.

For further information regarding thisnotice, contact Brenda Wilson of theOffice of Associate Chief Counsel(Income Tax and Accounting) at (202)622–4800 (not a toll-free call).

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, § 911, 1.911–1)

Rev. Proc. 2002–20

SECTION 1. PURPOSE

01. This revenue procedure providesinformation to any individual who failedto meet the eligibility requirements of§ 911(d)(1) of the Internal Revenue Codebecause adverse conditions in a foreigncountry precluded the individual frommeeting those requirements for taxableyear 2001.

02. The Internal Revenue Service haspreviously listed countries for which theeligibility requirements of § 911(d)(1) ofthe Code are waived under § 911(d)(4)because of adverse conditions in thosecountries on and after the date stated. See

Rev. Proc. 2001–27 (2001–19 I.R.B.1155), Rev. Proc. 2000–14 (2000–1 C.B.960), and Rev. Proc. 99–20 (1999–1 C.B.872) . This revenue procedure lists thecountry added to the list in 2001, forwhich the eligibility requirements of§ 911(d)(1) are waived. Rev. Proc. 2001–27, Rev. Proc. 2000–14, and Rev. Proc.99–20 remain in full force and effect.

SECTION 2. BACKGROUND

01. Section 911(a) of the Code allowsa “qualified individual,” as defined in§ 911(d)(1), to exclude foreign earnedincome and housing cost amounts fromgross income. Section 911(c)(3) of theCode allows a qualified individual todeduct housing cost amounts from grossincome.

02. Section 911(d)(1) of the Codedefines the term “qualified individual” asan individual whose tax home is in a for-eign country and who is (A) a citizen ofthe United States and establishes to thesatisfaction of the Secretary of the Trea-sury that the individual has been a bonafide resident of a foreign country or coun-tries for an uninterrupted period thatincludes an entire taxable year, or (B) a

citizen or resident of the United Stateswho, during any period of 12 consecutivemonths, is present in a foreign country orcountries during at least 330 full days.

03. Section 911(d)(4) of the Code pro-vides an exception to the eligibilityrequirements of § 911(d)(1). An indi-vidual will be treated as a qualified indi-vidual with respect to a period in whichthe individual was a bona fide resident of,or was present in, a foreign country if theindividual left the country during a periodfor which the Secretary of the Treasury,after consultation with the Secretary ofState, determines that individuals wererequired to leave because of war, civilunrest, or similar adverse conditions thatprecluded the normal conduct of business.An individual must establish that but forthose conditions the individual could rea-sonably have been expected to meet theeligibility requirements.

04. For 2001, the Secretary of theTreasury in consultation with the Secre-tary of State, has determined that war,civil unrest, or similar adverse conditionsthat precluded the normal conduct ofbusiness existed in the following countrybeginning on the specified date:

Date of Departure

Country On or After

Macedonia July 27, 2001

05. Accordingly, for purposes of § 911of the Code, an individual who left Mace-donia on or after July 27, 2001, shall betreated for 2001 as a qualified individualwith respect to the period during whichthat individual was present in, or was abona fide resident of Macedonia, if theindividual establishes a reasonable expec-tation of meeting the requirements of§ 911(d) but for those conditions.

06. To qualify for relief under§ 911(d)(4) of the Code, an individualmust have established residency on orprior to July 27, 2001, or have beenphysically present in Macedonia on July27, 2001, the date that the Secretary ofthe Treasury determined that individualswere required to leave the foreign coun-try. Individuals who establish residencyor are first physically present in Mace-donia after July 27, 2001, shall not betreated as qualified individuals under§ 911(d)(4) of the Code for taxable year2001.

07. In order to assist those individualswho are filing prior year or amended taxreturns, the Internal Revenue Service isrepublishing the countries listed for taxyears 1998, 1999, and 2000, for whichthe eligibility requirements of § 911(d)(1)of the Code are waived under § 911(d)(4):

2002–14 I.R.B. 732 April 8, 2002

Tax Year 1998 —

Date of Departure

Country On or After

Albania August 14, 1998

Democratic Republic of the Congo August 5, 1998

Eritrea June 5, 1998

Guinea-Bissau June 10, 1998

Indonesia May 15, 1998

Pakistan August 16, 1998

Sierra Leone December 23, 1998

Serbia-Montenegro October 11, 1998

Tax Year 1999 —

Date of Departure

Country On or After

Eritrea February 12, 1999

Ethiopia February 12, 1999

Serbia-Montenegro March 20, 1999

Tax Year 2000 —

Date of Departure

Country On or After

Eritrea May 19, 2000

SECTION 3. INQUIRIES

A taxpayer who needs assistance onhow to claim this exclusion, or on how tofile an amended return, should contact alocal IRS Office or, for a taxpayer resid-ing or traveling outside the United States,the nearest overseas IRS office.

SECTION 4. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2001–27 (2001–19 I.R.B.1155) is supplemented.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Kate Y. Hwa of the Office ofAssociate Chief Counsel (International).For further information regarding thisrevenue procedure contact Ms. Hwa at(202) 622–3840 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters.(Also Part I, §§ 267, 511, 512, 707, 761, 856, 1031,1361; 1.761–1, 1.761–2; 301.7701–1, 301.7701–2,301.7701–3, 301.7701–4.)

Rev. Proc. 2002–22

SECTION 1. PURPOSE

This revenue procedure specifies theconditions under which the Internal Rev-enue Service will consider a request for aruling that an undivided fractional interestin rental real property (other than a min-eral property as defined in section 614) isnot an interest in a business entity, withinthe meaning of § 301.7701–2(a) of theProcedure and Administration Regula-tions.

This revenue procedure supersedesRev. Proc. 2000–46 (2000–2 C.B. 438),which provides that the Service will notissue advance rulings or determinationletters on the questions of whether anundivided fractional interest in real prop-erty is an interest in an entity that is noteligible for tax-free exchange under

§ 1031(a)(1) of the Internal RevenueCode and whether arrangements wheretaxpayers acquire undivided fractionalinterests in real property constitute sepa-rate entities for federal tax purposes under§ 7701. This revenue procedure alsomodifies Rev. Proc. 2002–3 (2002–1I.R.B. 117) by removing these issuesfrom the list of subjects on which the Ser-vice will not rule. Requests for advancerulings described in Rev. Proc. 2000–46that are not covered by this revenue pro-cedure, such as rulings concerning min-eral property, will be considered underprocedures set forth in Rev. Proc. 2002–1(2002–1 I.R.B. 1) (or its successor).

SECTION 2. BACKGROUND

Section 301.7701–1(a)(1) provides thatwhether an organization is an entity sepa-rate from its owners for federal tax pur-poses is a matter of federal law and doesnot depend on whether the entity is recog-nized as an entity under local law. Section301.7701–1(a)(2) provides that a jointventure or other contractual arrangement

April 8, 2002 733 2002–14 I.R.B.

may create a separate entity for federaltax purposes if the participants carry on atrade, business, financial operation, orventure and divide the profits therefrom,but the mere co-ownership of propertythat is maintained, kept in repair, andrented or leased does not constitute aseparate entity for federal tax purposes.

Section 301.7701–2(a) provides that abusiness entity is any entity recognizedfor federal tax purposes (including anentity with a single owner that may bedisregarded as an entity separate from itsowner under § 301.7701–3) that is notproperly classified as a trust under§ 301.7701–4 or otherwise subject to spe-cial treatment under the Internal RevenueCode. A business entity with two or moremembers is classified for federal tax pur-poses as either a corporation or a partner-ship.

Section 761(a) provides that the term“partnership” includes a syndicate, group,pool, joint venture, or other unincorpo-rated organization through or by means ofwhich any business, financial operation,or venture is carried on, and that is not acorporation or a trust or estate.

Section 1.761–1(a) of the Income TaxRegulations provides that the term “part-nership” means a partnership as deter-mined under §§ 301.7701–1, 301.7701–2,and 301.7701–3.

The central characteristic of a tenancyin common, one of the traditional concur-rent estates in land, is that each owner isdeemed to own individually a physicallyundivided part of the entire parcel ofproperty. Each tenant in common isentitled to share with the other tenants thepossession of the whole parcel and hasthe associated rights to a proportionateshare of rents or profits from the property,to transfer the interest, and to demand apartition of the property. These rightsgenerally provide a tenant in common thebenefits of ownership of the propertywithin the constraint that no rights maybe exercised to the detriment of the othertenants in common. 7 Richard R. Powell,Powell on Real Property §§ 50.01–50.07(Michael Allan Wolf ed., 2000).

Rev. Rul. 75–374 (1975–2 C.B. 261)concludes that a two-person co-ownershipof an apartment building that was rentedto tenants did not constitute a partnershipfor federal tax purposes. In the revenueruling, the co-owners employed an agent

to manage the apartments on their behalf;the agent collected rents, paid propertytaxes, insurance premiums, repair andmaintenance expenses, and provided thetenants with customary services, such asheat, air conditioning, trash removal,unattended parking, and maintenance ofpublic areas. The ruling concludes thatthe agent’s activities in providing custom-ary services to the tenants, althoughimputed to the co-owners, were not suffi-ciently extensive to cause theco-ownership to be characterized as apartnership. See also Rev. Rul. 79–77(1979–1 C.B. 448), which did not find abusiness entity where three individualstransferred ownership of a commercialbuilding subject to a net lease to a trustwith the three individuals as beneficiaries.

Where a sponsor packagesco-ownership interests for sale by acquir-ing property, negotiating a master leaseon the property, and arranging for financ-ing, the courts have looked at the rela-tionships not only among the co-owners,but also between the sponsor (or personsrelated to the sponsor) and the co-ownersin determining whether the co-ownershipgives rise to a partnership. For example,in Bergford v. Commissioner, 12 F.3d 166(9th Cir. 1993), seventy-eight investorspurchased “co-ownership” interests incomputer equipment that was subject to a7-year net lease. As part of the purchase,the co-owners authorized the manager toarrange financing and refinancing, pur-chase and lease the equipment, collectrents and apply those rents to the notesused to finance the equipment, preparestatements, and advance funds to partici-pants on an interest-free basis to meetcash flow. The agreement allowed theco-owners to decide by majority votewhether to sell or lease the equipment atthe end of the lease. Absent a majorityvote, the manager could make that deci-sion. In addition, the manager wasentitled to a remarketing fee of 10 percentof the equipment’s selling price or leaserental whether or not a co-owner termi-nated the agreement or the manager per-formed any remarketing. A co-ownercould assign an interest in theco-ownership only after fulfilling numer-ous conditions and obtaining the manag-er’s consent.

The court held that the co-ownershiparrangement constituted a partnership for

federal tax purposes. Among the factorsthat influenced the court’s decision werethe limitations on the co-owners’ abilityto sell, lease, or encumber either theco-ownership interest or the underlyingproperty, and the manager’s effective par-ticipation in both profits (through theremarketing fee) and losses (through theadvances). Bergford, 12 F.3d at 169–170.Accord Bussing v. Commissioner, 88 T.C.449 (1987), aff’d on reh’g, 89 T.C. 1050(1987); Alhouse v. Commissioner, T.C.Memo. 1991–652.

Under § 1.761–1(a) and §§ 301.7701–1 through 301.7701–3, a federal taxpartnership does not include mereco-ownership of property where the own-ers’ activities are limited to keeping theproperty maintained, in repair, rented orleased. However, as the above authoritiesdemonstrate, a partnership for federal taxpurposes is broader in scope than thecommon law meaning of partnership andmay include groups not classified by statelaw as partnerships. Bergford, 12 F.3d at169. Where the parties to a venture jointogether capital or services with the intentof conducting a business or enterprise andof sharing the profits and losses from theventure, a partnership (or other businessentity) is created. Bussing, 88 T.C. at 460.Furthermore, where the economic ben-efits to the individual participants are notderivative of their co-ownership, butrather come from their joint relationshiptoward a common goal, the co-ownershiparrangement will be characterized as apartnership (or other business entity) forfederal tax purposes. Bergford, 12 F.3d at169.

SECTION 3. SCOPE

This revenue procedure applies toco-ownership of rental real property(other than mineral interests) (the Prop-erty) in an arrangement classified underlocal law as a tenancy-in-common.

This revenue procedure providesguidelines for requesting advance rulingssolely to assist taxpayers in preparing rul-ing requests and the Service in issuingadvance ruling letters as promptly aspracticable. The guidelines set forth inthis revenue procedure are not intended tobe substantive rules and are not to beused for audit purposes.

2002–14 I.R.B. 734 April 8, 2002

SECTION 4. GUIDELINES FORSUBMITTING RULING REQUESTS

The Service ordinarily will not con-sider a request for a ruling under this rev-enue procedure unless the informationdescribed in section 5 of this revenue pro-cedure is included in the ruling requestand the conditions described in section 6of this revenue procedure are satisfied.Even if sections 5 and 6 of this revenueprocedure are satisfied, however, the Ser-vice may decline to issue a ruling underthis revenue procedure whenever war-ranted by the facts and circumstances of aparticular case and whenever appropriatein the interest of sound tax administra-tion.

Where multiple parcels of propertyowned by the co-owners are leased to asingle tenant pursuant to a single leaseagreement and any debt of one or moreco-owners is secured by all of the parcels,the Service will generally treat all of theparcels as a single “Property.” In such acase, the Service will generally not con-sider a ruling request under this revenueprocedure unless: (1) each co-owner’spercentage interest in each parcel is iden-tical to that co-owner’s percentage inter-est in every other parcel, (2) eachco-owner’s percentage interests in theparcels cannot be separated and tradedindependently, and (3) the parcels ofproperty are properly viewed as a singlebusiness unit. The Service will generallytreat contiguous parcels as comprising asingle business unit. Even if the parcelsare not contiguous, however, the Servicemay treat multiple parcels as comprisinga single business unit where there is aclose connection between the businessuse of one parcel and the business use ofanother parcel. For example, an officebuilding and a garage that services thetenants of the office building may betreated as a single business unit even ifthe office building and the garage are notcontiguous.

For purposes of this revenue proce-dure, the following definitions apply. Theterm “co-owner” means any person thatowns an interest in the Property as a ten-ant in common. The term “sponsor”means any person who divides a singleinterest in the Property into multipleco-ownership interests for the purpose ofoffering those interests for sale. The term

“related person” means a person bearing arelationship described in § 267(b) or707(b)(1), except that in applying§ 267(b) or 707(b)(1), the co-ownershipwill be treated as a partnership and eachco-owner will be treated as a partner. Theterm “disregarded entity” means an entitythat is disregarded as an entity separatefrom its owner for federal tax purposes.Examples of disregarded entities includequalified REIT subsidiaries (within themeaning of § 856(i)(2)), qualified sub-chapter S subsidiaries (within the mean-ing of § 1361(b)(3)(B)), and businessentities that have only one owner and donot elect to be classified as corporations.The term “blanket lien” means any mort-gage or trust deed that is recorded againstthe Property as a whole.

SECTION 5. INFORMATION TO BESUBMITTED

.01 Section 8 of Rev. Proc. 2002–1outlines general requirements concerningthe information to be submitted as part ofa ruling request, including advance rul-ings under this revenue procedure. Forexample, any ruling request must containa complete statement of all facts relatingto the co-ownership, including thoserelating to promoting, financing, andmanaging the Property. Among the infor-mation to be included are the items ofinformation specified in this revenue pro-cedure; therefore, the ruling request mustprovide all items of information and con-ditions specified below and in section 6of this revenue procedure, or at leastaccount for all of the items. For example,if a co-ownership arrangement has nobrokerage agreement permitted in section6.12 of this revenue procedure, the rulingrequest should so state. Furthermore,merely submitting documents and supple-mentary materials required by section5.02 of this revenue procedure does notsatisfy all of the information requirementscontained in section 5.02 of this revenueprocedure or in section 8 of Rev. Proc.2002–1; all material facts in the docu-ments submitted must be explained in theruling request and may not be merelyincorporated by reference. All submitteddocuments and supplementary materialsmust contain applicable exhibits, attach-ments, and amendments. The rulingrequest must identify and explain anyinformation or documents required in sec-

tion 5 of this revenue procedure that arenot included and any conditions in section6 of this revenue procedure that are or arenot satisfied.

.02 Required General Information andCopies of Documents and SupplementaryMaterials. Generally the following infor-mation and copies of documents andmaterials must be submitted with the rul-ing request:

(1) The name, taxpayer identificationnumber, and percentage fractional interestin Property of each co-owner;

(2) The name, taxpayer identificationnumber, ownership of, and any relation-ship among, all persons involved in theacquisition, sale, lease and other use ofProperty, including the sponsor, lessee,manager, and lender;

(3) A full description of the Property;(4) A representation that each of the

co-owners holds title to the Property(including each of multiple parcels ofproperty treated as a single Propertyunder this revenue procedure) as a tenantin common under local law;

(5) All promotional documents relat-ing to the sale of fractional interests in theProperty;

(6) All lending agreements relating tothe Property;

(7) All agreements among theco-owners relating to the Property;

(8) Any lease agreement relating tothe Property;

(9) Any purchase and sale agreementrelating to the Property;

(10) Any property management orbrokerage agreement relating to the Prop-erty; and

(11) Any other agreement relating tothe Property not specified in this section,including agreements relating to any debtsecured by the Property (such as guaran-tees or indemnity agreements) and anycall and put options relating to the Prop-erty.

SECTION 6. CONDITIONS FOROBTAINING RULINGS

The Service ordinarily will not con-sider a request for a ruling under this rev-enue procedure unless the conditionsdescribed below are satisfied. Neverthe-less, where the conditions describedbelow are not satisfied, the Service mayconsider a request for a ruling under thisrevenue procedure where the facts and

April 8, 2002 735 2002–14 I.R.B.

circumstances clearly establish that sucha ruling is appropriate.

.01 Tenancy in Common Ownership.Each of the co-owners must hold title tothe Property (either directly or through adisregarded entity) as a tenant in commonunder local law. Thus, title to the Propertyas a whole may not be held by an entityrecognized under local law.

.02 Number of Co-Owners. The num-ber of co-owners must be limited to nomore than 35 persons. For this purpose,“person” is defined as in § 7701(a)(1),except that a husband and wife are treatedas a single person and all persons whoacquire interests from a co-owner byinheritance are treated as a single person.

.03 No Treatment of Co-Ownership asan Entity. The co-ownership may not filea partnership or corporate tax return, con-duct business under a common name,execute an agreement identifying any orall of the co-owners as partners, share-holders, or members of a business entity,or otherwise hold itself out as a partner-ship or other form of business entity (normay the co-owners hold themselves outas partners, shareholders, or members of abusiness entity). The Service generallywill not issue a ruling under this revenueprocedure if the co-owners held interestsin the Property through a partnership orcorporation immediately prior to the for-mation of the co-ownership.

.04 Co-Ownership Agreement. Theco-owners may enter into a limitedco-ownership agreement that may runwith the land. For example, aco-ownership agreement may provide thata co-owner must offer the co-ownershipinterest for sale to the other co-owners,the sponsor, or the lessee at fair marketvalue (determined as of the time the par-tition right is exercised) before exercisingany right to partition (see section 6.06 ofthis revenue procedure for conditionsrelating to restrictions on alienation); orthat certain actions on behalf of theco-ownership require the vote ofco-owners holding more than 50 percentof the undivided interests in the Property(see section 6.05 of this revenue proce-dure for conditions relating to voting).

.05 Voting. The co-owners must retainthe right to approve the hiring of anymanager, the sale or other disposition ofthe Property, any leases of a portion or allof the Property, or the creation or modifi-

cation of a blanket lien. Any sale, lease,or re-lease of a portion or all of the Prop-erty, any negotiation or renegotiation ofindebtedness secured by a blanket lien,the hiring of any manager, or the negotia-tion of any management contract (or anyextension or renewal of such contract)must be by unanimous approval of theco-owners. For all other actions on behalfof the co-ownership, the co-owners mayagree to be bound by the vote of thoseholding more than 50 percent of the undi-vided interests in the Property. Aco-owner who has consented to an actionin conformance with this section 6.05may provide the manager or other persona power of attorney to execute a specificdocument with respect to that action, butmay not provide the manager or otherperson with a global power of attorney.

.06 Restrictions on Alienation. In gen-eral, each co-owner must have the rightsto transfer, partition, and encumber theco-owner’s undivided interest in the Prop-erty without the agreement or approval ofany person. However, restrictions on theright to transfer, partition, or encumberinterests in the Property that are requiredby a lender and that are consistent withcustomary commercial lending practicesare not prohibited. See section 6.14 ofthis revenue procedure for restrictions onwho may be a lender. Moreover, theco-owners, the sponsor, or the lessee mayhave a right of first offer (the right tohave the first opportunity to offer to pur-chase the co-ownership interest) withrespect to any co-owner’s exercise of theright to transfer the co-ownership interestin the Property. In addition, a co-ownermay agree to offer the co-ownershipinterest for sale to the other co-owners,the sponsor, or the lessee at fair marketvalue (determined as of the time the par-tition right is exercised) before exercisingany right to partition.

.07 Sharing Proceeds and Liabilitiesupon Sale of Property. If the Property issold, any debt secured by a blanket lienmust be satisfied and the remaining salesproceeds must be distributed to theco-owners.

.08 Proportionate Sharing of Profitsand Losses. Each co-owner must share inall revenues generated by the Propertyand all costs associated with the Propertyin proportion to the co-owner’s undividedinterest in the Property. Neither the other

co-owners, nor the sponsor, nor the man-ager may advance funds to a co-owner tomeet expenses associated with theco-ownership interest, unless the advanceis recourse to the co-owner (and, wherethe co-owner is a disregarded entity, theowner of the co-owner) and is not for aperiod exceeding 31 days.

.09 Proportionate Sharing of Debt.The co-owners must share in any indebt-edness secured by a blanket lien in pro-portion to their undivided interests.

.10 Options. A co-owner may issue anoption to purchase the co-owner’s undi-vided interest (call option), provided thatthe exercise price for the call optionreflects the fair market value of the Prop-erty determined as of the time the optionis exercised. For this purpose, the fairmarket value of an undivided interest inthe Property is equal to the co-owner’spercentage interest in the Property multi-plied by the fair market value of the Prop-erty as a whole. A co-owner may notacquire an option to sell the co-owner’sundivided interest (put option) to thesponsor, the lessee, another co-owner, orthe lender, or any person related to thesponsor, the lessee, another co-owner, orthe lender.

.11 No Business Activities . Theco-owners’ activities must be limited tothose customarily performed in connec-tion with the maintenance and repair ofrental real property (customary activities).See Rev. Rul. 75–374 (1975–2 C.B. 261).Activities will be treated as customaryactivities for this purpose if the activitieswould not prevent an amount received byan organization described in § 511(a)(2)from qualifying as rent under§ 512(b)(3)(A) and the regulations there-under. In determining the co-owners’activities, all activities of the co-owners,their agents, and any persons related tothe co-owners with respect to the Prop-erty will be taken into account, whetheror not those activities are performed bythe co-owners in their capacities asco-owners. For example, if the sponsor ora lessee is a co-owner, then all of theactivities of the sponsor or lessee (or anyperson related to the sponsor or lessee)with respect to the Property will be takeninto account in determining whether theco-owners’ activities are customaryactivities. However, activities of aco-owner or a related person with respect

2002–14 I.R.B. 736 April 8, 2002

to the Property (other than in theco-owner’s capacity as a co-owner) willnot be taken into account if the co-ownerowns an undivided interest in the Prop-erty for less than 6 months.

.12 Management and BrokerageAgreements. The co-owners may enterinto management or brokerage agree-ments, which must be renewable no lessfrequently than annually, with an agent,who may be the sponsor or a co-owner(or any person related to the sponsor or aco-owner), but who may not be a lessee.The management agreement may autho-rize the manager to maintain a commonbank account for the collection anddeposit of rents and to offset expensesassociated with the Property against anyrevenues before disbursing eachco-owner’s share of net revenues. In allevents, however, the manager must dis-burse to the co-owners their shares of netrevenues within 3 months from the dateof receipt of those revenues. The manage-ment agreement may also authorize themanager to prepare statements for theco-owners showing their shares of rev-enue and costs from the Property. In addi-tion, the management agreement mayauthorize the manager to obtain or modifyinsurance on the Property, and to negoti-ate modifications of the terms of anylease or any indebtedness encumberingthe Property, subject to the approval of

the co-owners. (See section 6.05 of thisrevenue procedure for conditions relatingto the approval of lease and debt modifi-cations.) The determination of any feespaid by the co-ownership to the managermust not depend in whole or in part onthe income or profits derived by any per-son from the Property and may notexceed the fair market value of the man-ager’s services. Any fee paid by theco-ownership to a broker must be compa-rable to fees paid by unrelated parties tobrokers for similar services.

.13 Leasing Agreements. All leasingarrangements must be bona fide leases forfederal tax purposes. Rents paid by a les-see must reflect the fair market value forthe use of the Property. The determinationof the amount of the rent must notdepend, in whole or in part, on theincome or profits derived by any personfrom the Property leased (other than anamount based on a fixed percentage orpercentages of receipts or sales). See sec-tion 856(d)(2)(A) and the regulationsthereunder. Thus, for example, theamount of rent paid by a lessee may notbe based on a percentage of net incomefrom the Property, cash flow, increases inequity, or similar arrangements.

.14 Loan Agreements. The lender withrespect to any debt that encumbers theProperty or with respect to any debtincurred to acquire an undivided interest

in the Property may not be a related per-son to any co-owner, the sponsor, themanager, or any lessee of the Property.

.15 Payments to Sponsor. Except asotherwise provided in this revenue proce-dure, the amount of any payment to thesponsor for the acquisition of theco-ownership interest (and the amount ofany fees paid to the sponsor for services)must reflect the fair market value of theacquired co-ownership interest (or theservices rendered) and may not depend,in whole or in part, on the income orprofits derived by any person from theProperty.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2000–46 is superseded.Rev. Proc. 2002–3 is modified by remov-ing sections 5.03 and 5.06.

SECTION 7. DRAFTINGINFORMATION

The principal authors of this revenueprocedure are Jeanne Sullivan and DeaneBurke of the Office of Associate ChiefCounsel (Passthroughs and Special Indus-tries). For further information regardingthis revenue procedure, contact Ms. Sulli-van or Mr. Burke at (202) 622–3070 (nota toll-free call).

April 8, 2002 737 2002–14 I.R.B.

Part IV. Items of General Interest

Credit for IncreasingResearch Activities;Correction

Announcement 2002–38


ACTION: Correction to notice of pro-posed rulemaking and notice of publichearing.

SUMMARY: This document containscorrections to a notice of proposed rule-making (REG–112991–01, 2002–4 I.R.B.404) and notice of public hearing relatingto the computation of the research credit.

This document was published in the Fed-eral Register on December 26, 2001 (66FR 66362).

FOR FURTHER INFORMATIONCONTACT: Lisa J. Shuman (202) 622–3120 (not a toll-free number).


Background

The proposed regulations that are thesubject of these corrections are under sec-tions 41(c) and and 41(d) of the InternalRevenue Code.

Need for Correction

As published, the proposed regulationsREG–112991–01, contains errors thatmay prove to be misleading and are inneed of clarification.

Correction of Publication

Accordingly, the publication of theproposed regulations REG–112991–01,which is the subject of FR. Doc.01–31007, is corrected as follows:

§ 1.41–3 [Corrected]

1. On page 66368, column 1, § 1.41–3,paragraph (e), line 3, the language “end-ing on or after the date December 21” iscorrected to read “ending on or afterDecember 26”.


2. On page 66369, column 1, § 1.41–4,paragraph (a)(8), paragraph (i) ofExample 2., line 3 from the bottom ofparagraph, the language “tests the nozzlesto ensure that to ensure that” is correctedto read “tests the nozzles to ensure that”.

3. On page 66369, column 1, § 1.41–4,paragraph (a)(8), paragraph (ii) ofExample 2., line 2 the language “paintingprocess is a separate business” is cor-rected to read “painting process relate toa separate business”.

4. On page 66369, column 3, § 1.41–4,paragraph (a)(8), paragraph (i) ofExample 6., lines 5 through 8 from thebottom of the paragraph, the language “Xconducts extensive and complex scientificor laboratory testing to determine if thecurrent model vehicle meets X’s require-ments.” is removed.

5. On page 66370, column 3, § 1.41–4,paragraph (c)(6), line 2 of the paragraphheading, the language “years beginningon or after the” is corrected to read “yearsbeginning on or after”.

6. On page 66371, column 2, § 1.41–4,paragraph (c)(6)(iv)(C), line 1 of the col-umn, the language “leased, licensed orotherwise marketed” is corrected to read“leased, licensed, or otherwise marketed”.

7. On page 66371, column 2, § 1.41–4,paragraph (c)(6)(vi)(C), line 2 from thebottom of the paragraph, the language“paragraphs (c)(6)(v)(A) and (B) of this”is corrected to read “paragraphs(c)(6)(vi)(A) and (B) of this”.

8. On page 66371, column 3, § 1.41–4,paragraph (c)(6)(viii), paragraph (i) ofExample 2., line 3, the language “order tocreate an improved reserve valuation” iscorrected to read “order to create theimproved reserve valuation”.

9. On page 66372, column 3, § 1.41–4,paragraph (c)(6), paragraph (ii) ofExample 7., line 1, the language “(ii)Conclusion. X’s software is software” iscorrected to read “(ii) Conclusion. X’ssoftware is”.

10. On page 66375, column 1,§ 1.41–4, paragraph (c)(10), paragraph (i)of Example 6., line 1, the language“Example 6. (i) Facts. X manufacturerand” is corrected to read “Example 6. (i)Facts. X manufacturers and”.

11. On page 66375, column 2,§ 1.41–4, paragraph (c)(10), paragraph(1) of Example 7. is correctly designated§ 1.41–4, paragraph (c)(10), paragraph (i)of Example 7.

12. On page 66375, column 2,§ 1.41–4, paragraph (c)(10), paragraph (i)of Example 7., line 9, the language “pur-chases the existing robotic equipmentfor” is corrected to read “purchases exist-ing robotic equipment for”.

13. On page 66375, column 3,§ 1.41–4, paragraph (e), line 4, the lan-guage “December 26, 2002.” is correctedto read “December 26, 2001.”.


14. On page 66375, column 3,§ 1.41–8, paragraph (b)(4), line 4, the lan-guage “December 26, 2002.” is correctedto read “December 26, 2001.”.

Cynthia E. Grigsby,Chief, Regulations Unit,Associate Chief Counsel

(Income Tax and Accounting).


Excise Taxes on ExcessBenefit Transactions;Correction



ACTION: Correction to final regulations.

SUMMARY: This document containscorrections to final regulations (T.D.8978, 2002–7 I.R.B. 500) that were pub-lished in the Federal Register onWednesday, January 23, 2002 (67 FR3076) relating to the excise taxes onexcess benefit transactions.

DATES: This correction is effective Janu-ary 23, 2002.

FOR FURTHER INFORMATION CON-TACT: Phyllis D. Haney, (202) 622–4290(not a toll-free number).

2002–14 I.R.B. 738 April 8, 2002


Background

The final regulations that are the sub-ject of these corrections are under section4958 of the Internal Revenue Code.

Need for Correction

As published, the final regulationscontain errors that may prove to be mis-leading and are in need of clarification.

Correction of Publication

Accordingly, the publication of thefinal regulations (T.D. 8978), that werethe subject of FR Doc. 02–985, is cor-rected as follows:

1. On page 3078, column 1, in the pre-amble under the paragraph heading “Defi-nition of Applicable Tax-Exempt Organi-zation”, line 6 from the top of thecolumn, the language “to the efficientadministration of the” is corrected to read“for the efficient administration of the”.

2. On page 3082, column 3, in the pre-amble under the paragraph heading“Final Regulatory Flexibility Analysis”,first paragraph, line 13, the language“REP. 104–506 at 56–7, March 28,1996)” is corrected to read “REP. 506,104th Congress, 2d SESS. (1996), 53,56–7)”.

3. On page 3083, column 1, in the pre-amble under the paragraph heading“Final Regulatory Flexibility Analysis”,first full paragraph, line 1, the language

“The objective for the rebuttable” is cor-rected to read “The objective of the rebut-table”.

§ 53.4958–4 [Corrected]

4. On page 3091, column 3,§ 53.4958–4(a)(3)(vii), Example 1, line12, the language “T (see § 53.4958–3(a)).Under the initial” is corrected to read “T(see § 53.4958–3(c)(3)). Under the ini-tial”.

5. On page 3095, column 2,§ 53.4958–4(c)(4), Example 2, line 10,the language “D fails to report the bonuson his individual” is corrected to read “Dfails to report the bonus on D’s indi-vidual”.

§ 301.7611–1 [Corrected]

6. On page 3099, column 2, in A–19,line 1, the language “A–19: See§ 53.4958–7(b) of this” is corrected toread “A–19: See § 53.4958–8(b) of this”.

Cynthia E. Grigsby,Chief, Regulations Unit,Associate Chief Counsel

(Income Tax and Accounting).


Renewal of Enrolled AgentStatus


Enrolled agent cards will expire onMarch 31, 2002. However, all cards forthe upcoming three year cycle will not bemailed out by that date. Therefore, theDirector of Practice has extended all cur-rent enrollment cards until April 30, 2002.Anyone not receiving their enrollmentcard by that date should call (313) 234–1280 or e-mail the Enrolled PractitionerUnit at [email protected]. Enrolled agents maycontinue to use their existing enrollmentcard until April 30, 2002.

Renewal of SponsorAgreements for EnrolledAgent Continuing ProfessionalEducation


Sponsor agreements for sponsors ofqualifying continuing professional educa-tion expire on March 31, 2002. TheDirector of Practice will not mail out theirapproval or disapproval of sponsor agree-ments for the upcoming three year cycleby that date. Therefore, the Director ofPractice has extended all existing sponsoragreements through August 31, 2002.Sponsors will be notified by August 31,2002, of their renewal status. Sponsorsseeking renewal will continue to beapproved until that date.

April 8, 2002 739 2002–14 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 Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—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.

2002–14 I.R.B. i April 8, 2002

Numerical Finding List1

Bulletins 2002–1 through 2002–13

Announcements:

2002–1, 2002–2 I.R.B. 3042002–2, 2002–2 I.R.B. 3042002–3, 2002–2 I.R.B. 3052002–4, 2002–2 I.R.B. 3062002–5, 2002–4 I.R.B. 4202002–6, 2002–5 I.R.B. 4582002–7, 2002–5 I.R.B. 4592002–8, 2002–6 I.R.B. 4942002–9, 2002–7 I.R.B. 5362002–10, 2002–7 I.R.B. 5392002–11, 2002–6 I.R.B. 4942002–12, 2002–8 I.R.B. 5532002–13, 2002–7 I.R.B. 5402002–14, 2002–7 I.R.B. 5402002–15, 2002–7 I.R.B. 5402002–16, 2002–7 I.R.B. 5412002–17, 2002–8 I.R.B. 5612002–18, 2002–10 I.R.B. 6212002–19, 2002–8 I.R.B. 5612002–20, 2002–8 I.R.B. 5612002–21, 2002–8 I.R.B. 5622002–22, 2002–8 I.R.B. 5622002–23, 2002–8 I.R.B. 5632002–24, 2002–9 I.R.B. 6062002–25, 2002–10 I.R.B. 6212002–26, 2002–11 I.R.B. 6292002–27, 2002–11 I.R.B. 6292002–28, 2002–11 I.R.B. 6302002–29, 2002–11 I.R.B. 6312002–30, 2002–11 I.R.B. 6322002–32, 2002–12 I.R.B. 6642002–33, 2002–12 I.R.B. 6662002–34, 2002–13 I.R.B. 7022002–35, 2002–12 I.R.B. 6672002–36, 2002–13 I.R.B. 7032002–37, 2002–13 I.R.B. 703

Notices:

2002–1, 2002–2 I.R.B. 2832002–2, 2002–2 I.R.B. 2852002–3, 2002–2 I.R.B. 2892002–4, 2002–2 I.R.B. 2982002–5, 2002–3 I.R.B. 3202002–6, 2002–3 I.R.B. 3262002–7, 2002–6 I.R.B. 4892002–8, 2002–4 I.R.B. 3982002–9, 2002–5 I.R.B. 4502002–10, 2002–6 I.R.B. 4902002–11, 2002–7 I.R.B. 5262002–12, 2002–7 I.R.B. 5262002–13, 2002–8 I.R.B. 5472002–14, 2002–8 I.R.B. 5482002–15, 2002–8 I.R.B. 5482002–16, 2002–9 I.R.B. 5672002–17, 2002–9 I.R.B. 5672002–18, 2002–12 I.R.B. 6442002–19, 2002–10 I.R.B. 619

Proposed Regulations:

REG–209135–88, 2002–4 I.R.B. 418REG–209114–90, 2002–9 I.R.B. 576REG–107100–00, 2002–7 I.R.B. 529REG–107366–00, 2002–12 I.R.B. 645REG–118861–00, 2002–12 I.R.B. 651REG–105344–01, 2002–2 I.R.B. 302REG–112991–01, 2002–4 I.R.B. 404REG–115054–01, 2002–7 I.R.B. 530REG–119436–01, 2002–3 I.R.B. 376REG–120135–01, 2002–8 I.R.B. 552REG–125450–01, 2002–5 I.R.B. 457REG–125626–01, 2002–9 I.R.B. 604REG–142299–01, 2002–4 I.R.B. 418REG–159079–01, 2002–6 I.R.B. 493REG–102740–02, 2002–13 I.R.B. 701

Revenue Procedures:

2002–1, 2002–1 I.R.B. 12002–2, 2002–1 I.R.B. 822002–3, 2002–1 I.R.B. 1172002–4, 2002–1 I.R.B. 1272002–5, 2002–1 I.R.B. 1732002–6, 2002–1 I.R.B. 2032002–7, 2002–1 I.R.B. 2492002–8, 2002–1 I.R.B. 2522002–9, 2002–3 I.R.B. 3272002–10, 2002–4 I.R.B. 4002002–11, 2002–7 I.R.B. 5262002–12, 2002–3 I.R.B. 3742002–13, 2002–8 I.R.B. 5492002–14, 2002–5 I.R.B. 4502002–15, 2002–6 I.R.B. 4902002–16, 2002–9 I.R.B. 5722002–17, 2002–13 I.R.B. 6762002–18, 2002–13 I.R.B. 6782002–19, 2002–13 I.R.B. 696

Revenue Rulings:

2002–1, 2002–2 I.R.B. 2682002–2, 2002–2 I.R.B. 2712002–3, 2002–3 I.R.B. 3162002–4, 2002–4 I.R.B. 3892002–5, 2002–6 I.R.B. 4612002–6, 2002–6 I.R.B. 4602002–7, 2002–8 I.R.B. 5432002–8, 2002–9 I.R.B. 5642002–9, 2002–10 I.R.B. 6142002–10, 2002–10 I.R.B. 6162002–11, 2002–10 I.R.B. 6082002–12, 2002–11 I.R.B. 6242002–13, 2002–12 I.R.B. 6372002–14, 2002–12 I.R.B. 6362002–15, 2002–13 I.R.B. 668

Treasury Decisions:

8968, 2002–2 I.R.B. 2748969, 2002–2 I.R.B. 2768970, 2002–2 I.R.B. 2818971, 2002–3 I.R.B. 3088972, 2002–5 I.R.B. 4438973, 2002–4 I.R.B. 3918974, 2002–3 I.R.B. 3188975, 2002–4 I.R.B. 3798976, 2002–5 I.R.B. 4218977, 2002–6 I.R.B. 4638978, 2002–7 I.R.B. 5008979, 2002–6 I.R.B. 4668980, 2002–6 I.R.B. 4778981, 2002–7 I.R.B. 4968982, 2002–8 I.R.B. 5448983, 2002–9 I.R.B. 5658984, 2002–13 I.R.B. 668

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

April 8, 2002 ii 2002–14 I.R.B.

Finding List of Current Actionson Previously Published Items2

Bulletins 2002–1 through 2002–13

Announcements:

2001–83Modified byAnn. 2002–36, 2002–13 I.R.B. 703

2002–9Corrected byAnn. 2002–30, 2002–11 I.R.B. 632Ann. 2002–35, 2002–12 I.R.B. 667

Notices:

98–31Supplemented byAnn. 2002–37, 2002–13 I.R.B. 703

98–43Modified and superseded byNotice 2002–5, 2002–3 I.R.B. 320

2000–11Obsoleted byNotice 2002–3, 2002–2 I.R.B. 289

2001–10Revoked byNotice 2002–8, 2002–4 I.R.B. 398

2001–61Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

2001–68Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

Proposed Regulations:

REG–209135–88Corrected byAnn. 2002–15, 2002–7 I.R.B. 540Ann. 2002–30, 2002–11 I.R.B. 632

REG–251502–96Withdrawn byAnn. 2002–33, 2002–12 I.R.B. 666

REG–107100–00Corrected byAnn. 2002–30, 2002–11 I.R.B. 632



Proposed Regulations:—Continued








REG–142299–01Corrected byAnn. 2002–15, 2002–7 I.R.B. 540Ann. 2002–30, 2002–11 I.R.B. 632



Revenue Procedures:

84–37Modified byRev. Proc. 2002–1, 2002–1 I.R.B. 1

84–57Obsoleted byT.D. 8976, 2002–5 I.R.B. 421



97–27Modified and amplified byRev. Proc. 2002–19, 2002–13 I.R.B. 696


Revenue Procedures:—Continued

99–49Modified and superseded byRev. Proc. 2002–9, 2002–3 I.R.B. 327


2001–1Superseded byRev. Proc. 2002–1, 2002–1 I.R.B. 1








2001–13Corrected byAnn. 2002–5, 2002–4 I.R.B. 420

2001–16Modified byAnn. 2002–26, 2002–11 I.R.B. 629




2 A cumulative list of current actions on previously published

items in Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

2002–14 I.R.B. iii April 8, 2002

Revenue Procedures:—Continued

2002–6Modified byNotice 2002–1, 2002–2 I.R.B. 283


2002–9Modified and clarified byAnn. 2002–17, 2002–8 I.R.B. 561

Modified and amplified byRev. Rul. 2002–9, 2002–10 I.R.B. 614Rev. Proc. 2002–17, 2002–13 I.R.B. 676Rev. Proc. 2002–19, 2002–13 I.R.B. 696

Revenue Rulings:

55–747Revoked byNotice 2002–8, 2002–4 I.R.B. 398

61–146Distinguished byRev. Rul. 2002–3, 2002–3 I.R.B. 316




92–19Supplemented in part byRev. Rul. 2002–12, 2002–11 I.R.B. 624

2002–7Corrected byAnn. 2002–13, 2002–7 I.R.B. 540

Treasury Decisions:

8971Corrected byAnn. 2002–20, 2002–8 I.R.B. 561





April 8, 2002 iv 2002–14 I.R.B.