Internal Revenue Bulletin No. 2001–42 bulletin October 15 ... · cases where the facts are...

INCOME TAXRev. Rul. 2001–45, page 323.LIFO; price indexes; department stores. The August2001 Bureau of Labor Statistics price indexes are acceptedfor use by department stores employing the retail inventoryand last-in, first-out inventory methods for valuing inventoriesfor tax years ended on, or with reference to, August 31,2001.

Rev. Rul. 2001–46, page 321.Step transaction. Under the facts presented, if, pursuantto an integrated plan, a newly formed wholly owned sub-sidiary of an acquiring corporation merges into a target cor-poration, followed by the merger of the target corporationinto the acquiring corporation, the transaction is treated asa single statutory merger of the target corporation into theacquiring corporation that qualifies as a reorganization undersection 368(a)(1)(A) of the Code. Rev. Rul. 67-274 amplified.Rev. Rul. 90–95 distinguished.

Rev. Rul. 2001–48, page 324.This ruling updates the list of countries that grant a recipro-cal exemption for income from the international operation ofships or aircraft to U.S. persons for purposes of sections872(b) and 883 of the Code. Rev. Ruls. 89–42 and 97–31modified and superseded.

T.D. 8964, page 320.Final regulations under section 301 of the Code relate to lia-bilities assumed in connection with corporate distributions.

Announcement 2001–99, page 340.For purposes of the Archer MSA pilot program under section220(j)(2) of the Code, 2001 is not a cut-off year.

EXEMPT ORGANIZATIONSAnnouncement 2001–102, page 340.A list is provided of organizations now classified as privatefoundations.

ADMINISTRATIVERev. Proc. 2001–47, page 332.Per diem allowances. This procedure provides rules fordeeming substantiated the amount of certain reimbursedtraveling expenses of an employee as well as optional rulesfor determining the amount of deductible meals and inciden-tal expenses while traveling away from home. Rev. Proc.2000–39 superseded.

Internal Revenue

bbuulllleettiinnBulletin No. 2001–42

October 15, 2001

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

Department of the TreasuryInternal Revenue Service

Actions Relating to Court Decisions is on the page following the Introduction.Finding Lists begin on page ii.

October 15, 2001 2001–42 I.R.B.

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

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

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

The IRS Mission

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

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

Introduction

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

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

2001–42 I.R.B. October 15, 2001

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

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

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

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquies-cence” and “acquiescence in result only”mean that the Service accepts the holdingof the court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or all

of those reasons. “Nonacquiescence” sig-nifies that, although no further reviewwas sought, the Service does not agreewith the holding of the court and, gener-ally, will not follow the decision in dis-posing of cases involving other taxpay-ers. In reference to an opinion of a circuitcourt of appeals, a “nonacquiescence” in-dicates that the Service will not followthe holding on a nationwide basis. How-ever, the Service will recognize theprecedential impact of the opinion oncases arising within the venue of the de-ciding circuit.

The Actions on Decisions published inthe weekly Internal Revenue Bulletin areconsolidated semiannually and appear inthe first Bulletin for July and the Cumu-lative Bulletin for the first half of theyear. A semiannual consolidation also ap-pears in the first Bulletin for the follow-ing January and in the Cumulative Bul-letin for the last half of the year.

The Commissioner ACQUIESCES inthe following decision:

Therese Hahn v. Commissioner,1

110 T.C. 140 (1998)T.C. Dkt. No. 17210–96

Actions Relating to Decisions of the Tax Court

1 Acquiescence relating to whether I.R.C. section 2040(b)(1) applies to joint interest created before January 1, 1977, where the deceased joint tenant died afterDecember 31, 1981.

October 15, 2001 320 2001–42 I.R.B.

Section 62.—Adjusted GrossIncome Defined

26 CFR 1.62–2: Reimbursements and other expenseallowance arrangements.

Rules are set forth under which reimbursement orother expense allowance arrangement for the cost oflodging, meal, and incidental expenses or meal andincidental expenses incurred by an employee whiletraveling away from home will satisfy the require-ment of § 62(c) of the Code as to substantiation ofthe amount of the expense. See Rev. Proc. 2001–47,page 332.

Section 162.—Trade or BusinessExpenses

26 CFR 1.162–17: Reporting and substantiation ofcertain business expenses of employees.

Rules are set forth for substantiating the amountof a deduction or an expense for lodging, meal, andincidental expenses or meal and incidental expensesincurred while traveling away from home. See Rev.Proc. 2001–47, page 332.

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

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

When a payor provides a per diem allowance toan employee who is a related party, the rules setforth for the deemed substantiation to the payor ofthe amount of the employee’s ordinary and neces-sary business expenses for lodging, meal, and inci-dental expenses incurred while traveling away fromhome do not apply. See Rev. Proc. 2001–47, page332.

Section 274.—Disallowance ofCertain Entertainment, etc.,Expenses

26 CFR 1.274–5: Substantiation requirements.

Rules are set forth for an optional method forsubstantiating the amount of ordinary and necessarybusiness expenses of an employee for lodging, meal,and incidental expenses or meal and incidental ex-penses incurred while traveling away from homewhen a payor provides a per diem allowance under areimbursement or other expense allowance arrange-ment to pay for such expenses. Rules are also setforth for an optional method for employees and self-employed individuals to use in computing the de-ductible costs of business meal and incidental ex-

penses paid or incurred while traveling away fromhome. See Rev. Proc. 2001–47, page 332.

Section 301.—Distributions ofProperty

26 CFR 1.301-1: Rules applicable with respect todistributions of money and other property.

T.D. 8964

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1

Liabilities Assumed in CertainCorporate Transactions

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document containsfinal regulations relating to the assump-tion of liabilities in certain corporatetransactions under section 301 of the In-ternal Revenue Code. These final regula-tions affect corporations and their share-holders. Changes to the applicable lawwere made by the Miscellaneous Tradeand Technical Corrections Act of 1999.

DATES: Effective Date: These regula-tions are effective September 27, 2001.

Applicability Date: For dates of applic-ability, see the Effective Date portion ofthe preamble under SUPPLEMENTARYINFORMATION.

FOR FURTHER INFORMATION CON-TACT: Douglas Bates (202) 622-7550(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

Changes to the applicable law weremade by the Miscellaneous Trade andTechnical Corrections Act of 1999, PublicLaw 106-36 (113 Stat. 127). On January4, 2001, temporary regulations (T.D.8924, 2001–6 I.R.B. 489) were publishedin the Federal Register (66 FR 723)under section 301 of the Internal RevenueCode, relating to liabilities assumed in

connection with a distribution of propertymade by a corporation with respect to itsstock. A notice of proposed rulemakingcross-referencing the temporary regula-tions (REG–106791–00, 2001–6 I.R.B.521) was published in the Federal Regis-ter for the same day (66 FR 748). Nopublic hearing was requested or held.

No written comments responding to thenotice were received. This documentadopts, without substantive change, finalregulations with respect to the notice ofproposed rulemaking.

Effective Date

The regulations apply generally to dis-tributions occurring after January 4, 2001.The regulations also apply to distributionsoccurring on or prior to January 4, 2001,if the distribution is made as part of atransaction described in, or substantiallysimilar to, the transaction in Notice 99–59(1999–2 C.B. 761), including transactionsdesigned to reduce gain. Under section7805(b)(3), the Secretary may providethat any regulation may take effect orapply retroactively to prevent abuse.These regulations are being appliedretroactively to prevent the abuse de-scribed in Notice 99–59. No inferenceshould be drawn regarding the tax treat-ment of distributions not covered by theseregulations.

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 certified that these final regu-lations do not have a significant economicimpact on a substantial number of small en-tities. These final regulations under section301 address distributions by corporations inwhich liabilities are assumed by the share-holders or in which the distributed propertyis subject to liabilities. These final regula-tions provide that the amount of a distribu-tion under section 301 will be reduced bythe amount of any liability that is treated asassumed by the distributee within themeaning of section 357(d).

These regulations apply to persons re-ceiving distributions of property in

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

2001–42 I.R.B. 321 October 15, 2001

which the property is subject to a liabil-ity, or in which liabilities are assumed bythe distributee. These regulations, how-ever, will affect only those persons de-scribed in the preceding sentence thatwould have, but for the regulations, con-sidered liabilities to have been assumedin circumstances other that those de-scribed in section 357(d). Therefore,most businesses will not be affected bythe final regulations in any given year.Therefore, a Regulatory FlexibilityAnalysis under the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) is not re-quired. Pursuant to section 7805(f) ofthe Code, the notice of proposed rule-making accompanying these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall businesses.

Drafting Information

The principal author of these regula-tions is Michael N. Kaibni of the Officeof the Associate Chief Counsel (Corpo-rate). However, other personnel from theIRS and Treasury Department partici-pated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citationfor part 1 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Section 1.301–1 also issued under 26

U.S.C. 357(d)(3). * * *Par. 2. Section 1.301–1 is amended by

revising paragraph (g) to read as follows:

§1.301–1 Rules applicable with respectto distributions of money and otherproperty.

* * * * *(g) Reduction for liabilities - - (1) Gen-

eral rule. For the purpose of section 301,no reduction shall be made for the amountof any liability, unless the liability is as-sumed by the shareholder within themeaning of section 357(d).

(2) No reduction below zero. Any re-duction pursuant to paragraph (g)(1) of

this section shall not cause the amount ofthe distribution to be reduced below zero.

(3) Effective dates — (i) In general.This paragraph (g) applies to distributionsoccurring after January 4, 2001.

(ii) Retroactive application. This para-graph (g) also applies to distributionsmade on or before January 4, 2001, if thedistribution is made as part of a transac-tion described in, or substantially similarto, the transaction in Notice 99–59(1999–2 C.B. 761), including transactionsdesigned to reduce gain (see § 601.601(d)(2) of this chapter). For rulesfor distributions on or before January 4,2001 (other than distributions on or beforethat date to which this paragraph (g)applies), see rules in effect on January 4,2001 (see §1.301–1(g) as contained in 26CFR Part 1 revised April 1, 2001).* * * * *

§ 1.301–1T [Removed]

Par. 3. Section 1.301–1T is removed.

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

Approved September 17, 2001.

Mark Weinberger,Assistant Secretary

of the Treasury for Tax Policy.

(Filed by the Office of the Federal Register on Sep-tember 26, 2001, 8:45 a.m., and published in theissue of the Federal Register for September 27,2001, 66 F.R. 49278)

Section 368(a)(1)(A).—DefinitionsRelating to CorporateReorganizations

26 CFR 1.368–1: Purpose and scope of exceptionof reorganization exchanges.

Step transaction. Under the factspresented, if, pursuant to an integratedplan, a newly formed wholly owned sub-sidiary of an acquiring corporationmerges into a target corporation, fol-lowed by the merger of the target corpo-ration into the acquiring corporation, thetransaction is treated as a single statuto-ry merger of the target corporation intothe acquiring corporation that qualifiesas a reorganization under section368(a)(1)(A).

Rev. Rul. 2001–46

ISSUE

Under the facts described below, whatis the proper tax treatment if, pursuant toan integrated plan, a newly formed whol-ly owned subsidiary of an acquiring cor-poration merges into a target corporation,followed by the merger of the target cor-poration into the acquiring corporation?

FACTS

Situation (1). Corporation X owns allthe stock of Corporation Y, a newlyformed wholly owned subsidiary. Pur-suant to an integrated plan, X acquires allof the stock of Corporation T, an unre-lated corporation, in a statutory merger ofY into T (the “Acquisition Merger”), withT surviving. In the Acquisition Merger,the T shareholders exchange their T stockfor consideration, 70 percent of which isX voting stock and 30 percent of which iscash. Following the Acquisition Mergerand as part of the plan, T merges into X ina statutory merger (the “UpstreamMerger”). Assume that, absent some pro-hibition against the application of the steptransaction doctrine, the step transactiondoctrine would apply to treat the Acquisi-tion Merger and the Upstream Merger asa single integrated acquisition by X of allthe assets of T. Also assume that the sin-gle integrated transaction would satisfythe nonstatutory requirements of a reorga-nization under § 368(a) of the InternalRevenue Code.

Situation (2). The facts are the same asin Situation (1) except that in theAcquisition Merger the T shareholdersreceive solely X voting stock in exchangefor their T stock, so that the AcquisitionMerger, if viewed independently of theUpstream Merger, would qualify as areorganization under § 368(a)(1)(A) byreason of § 368(a)(2)(E).

LAW

Section 338(a) provides that if a corpo-ration makes a qualified stock purchaseand makes an election under that section,then the target corporation (i) shall betreated as having sold all of its assets atthe close of the acquisition date at fairmarket value and (ii) shall be treated as anew corporation which purchased all of

October 15, 2001 322 2001–42 I.R.B.

its assets as of the beginning of the dayafter the acquisition date. Section338(d)(3) defines a qualified stock pur-chase as any transaction or series of trans-actions in which stock (meeting therequirements of § 1504(a)(2)) of one cor-poration is acquired by another corpora-tion by purchase during a 12-monthacquisition period. Section 338(h)(3)defines a purchase generally as any acqui-sition of stock, but excludes acquisitionsof stock in exchanges to which § 351, § 354, § 355, or § 356 applies.

Rev. Rul. 90–95 (1990–2 C.B. 67)(Situation 2), holds that the merger of anewly formed wholly owned domesticsubsidiary into a target corporation withthe target corporation shareholders receiv-ing solely cash in exchange for theirstock, immediately followed by the merg-er of the target corporation into thedomestic parent of the merged subsidiary,will be treated as a qualified stock pur-chase of the target corporation followedby a § 332 liquidation of the target corpo-ration. As a result, the parent’s basis inthe target corporation’s assets will be thesame as the basis of the assets in the targetcorporation’s hands. The ruling explainsthat even though “the step-transactiondoctrine is properly applied to disregardthe existence of the [merged subsidiary],”so that the first step is treated as a stockpurchase, the acquisition of the target cor-poration’s stock is accorded independentsignificance from the subsequent liquida-tion of the target corporation and, there-fore, is treated as a qualified stock pur-chase regardless of whether a § 338election is made.

Section 1.338–3(d) of the Income TaxRegulations incorporates the approach ofRev. Rul. 90–95 into the regulations byrequiring the purchasing corporation (or amember of its affiliated group) to treatcertain asset transfers following a quali-fied stock purchase (where no § 338 elec-tion is made) independently of the quali-fied stock purchase. In the example in § 1.338–3(d)(5), the purchase for cash of85 percent of the stock of a target corpo-ration, followed by the merger of the tar-get corporation into a wholly owned sub-sidiary of the purchasing corporation, istreated (other than by certain minorityshareholders) as a qualified stock pur-chase of the stock of the target corporationfollowed by a § 368 reorganization of the

target corporation into the subsidiary. Asa result, the subsidiary’s basis in the targetcorporation’s assets is the same as thebasis of the assets in the target corpora-tion’s hands.

Section 368(a)(1)(A) defines the term“reorganization” as a statutory merger orconsolidation. Section 368(a)(2)(E) pro-vides that a transaction otherwise qualify-ing under § 368(a)(1)(A) shall not be dis-qualified by reason of the fact that stockof a corporation (controlling corporation),which before the merger was in control ofthe merged corporation, is used in thetransaction if (i) after the transaction, thecorporation surviving the merger holdssubstantially all of its properties and theproperties of the merged corporation, and(ii) in the transaction, former shareholdersof the surviving corporation exchange, foran amount of voting stock of the control-ling corporation, an amount of stock in thesurviving corporation which constitutescontrol of such corporation.

In Rev. Rul. 67–274 (1967–2 C.B. 141),Corporation Y acquires all of the stock ofCorporation X in exchange for some of thevoting stock of Y and, thereafter, X com-pletely liquidates into Y. The ruling holdsthat because the two steps are parts of a planof reorganization, they cannot be consid-ered independently of each other. Thus, thesteps do not qualify as a reorganizationunder § 368(a)(1)(B) followed by a liquida-tion under § 332, but instead qualify as anacquisition of X’s assets in a reorganizationunder § 368(a)(1)(C).

ANALYSIS

Situation (1)Because of the amount of cash consid-

eration paid to the T shareholders, theAcquisition Merger could not qualify as areorganization under § 368(a)(1)(A) and § 368(a)(2)(E). If the Acquisition Mergerand the Upstream Merger in Situation (1)were treated as separate from each other,as were the steps in Situation (2) of Rev.Rul. 90–95, the Acquisition Merger wouldbe treated as a stock acquisition that is aqualified stock purchase, because thestock is not acquired in a § 354 or § 356exchange. The Upstream Merger wouldqualify as a liquidation under § 332.

However, if the approach reflected inRev. Rul. 67–274 were applied toSituation (1), the transaction would betreated as an integrated acquisition of T’s

assets by X in a single statutory merger(without a preliminary stock acquisition).Accordingly, unless the policies underly-ing § 338 dictate otherwise, the integratedasset acquisition in Situation (1) is prop-erly treated as a statutory merger of T intoX that qualifies as a reorganization under§ 368(a)(1)(A). See King Enterprises,Inc. v. United States, 418 F.2d 511 (Ct. Cl.1969) (in a case that predated § 338, thecourt applied the step transaction doctrineto treat the acquisition of the stock of atarget corporation followed by the mergerof the target corporation into the acquiringcorporation as a reorganization under § 368(a)(1)(A)); J.E. Seagram Corp. v.Commissioner, 104 T.C. 75 (1995)(same). Therefore, it is necessary todetermine whether the approach reflectedin Rev. Rul. 90–95 applies where the steptransaction doctrine would otherwiseapply to treat the transaction as an assetacquisition that qualifies as a reorganiza-tion under § 368(a).

Rev. Rul. 90–95 and § 1.338–3(d) re-ject the approach reflected in Rev. Rul.67–274 where the application of that ap-proach would treat the purchase of a tar-get corporation’s stock without a § 338election followed by the liquidation ormerger of the target corporation as thepurchase of the target corporation’s assetsresulting in a cost basis in the assets under§ 1012. The rejection of step integrationin Rev. Rul. 90–95 and § 1.338–3(d) isbased on Congressional intent that § 338“replace any nonstatutory treatment of astock purchase as an asset purchase underthe Kimbell-Diamond doctrine.” H.R.Rep. No. 760, 97th Cong., 2d Sess. 536(1982), 1982–2 C.B. 600, 632. (In Kim-bell-Diamond Milling Co. v. Commis-sioner, 14 T.C. 74, aff’d per curiam, 187F.2d 718 (1951), cert. denied, 342 U.S.827 (1951), the court held that the pur-chase of the stock of a target corporationfor the purpose of obtaining its assetsthrough a prompt liquidation should betreated by the purchaser as a purchase ofthe target corporation’s assets with thepurchaser receiving a cost basis in the as-sets.) Rev. Rul. 90–95 and § 1.338–3(d)treat the acquisition of the stock of the tar-get corporation as a qualified stock pur-chase followed by a separate carryoverbasis transaction in order to preclude anynonstatutory treatment of the steps as anintegrated asset purchase.

2001–42 I.R.B. 323 October 15, 2001

The policy underlying § 338 is not vio-lated by treating Situation (1) as a singlestatutory merger of T into X because suchtreatment results in a transaction that qual-ifies as a reorganization under § 368(a)(1)(A) in which X acquires the assets of Twith a carryover basis under § 362, anddoes not result in a cost basis for thoseassets under § 1012. Thus, in Situation(1), the step transaction doctrine applies totreat the Acquisition Merger and theUpstream Merger not as a stock acquisi-tion that is a qualified stock purchase fol-lowed by a § 332 liquidation, but insteadas an acquisition of T’s assets through a single statutory merger of T into X that qualifies as a reorganization under § 368(a)(1)(A). Accordingly, a § 338 elec-tion may not be made in such a situation.

Situation (2)Situation (2) differs from Situation (1)

only in that the Acquisition Merger, ifviewed independently of the UpstreamMerger, would qualify as a reorganizationunder § 368(a)(1)(A) by reason of § 368(a)(2)(E). This difference does not change theresult from that in Situation (1). The trans-action is treated as a single statutory merg-er of T into X that qualifies as a reorganiza-tion under § 368(a)(1)(A) without regard to§ 368(a)(2)(E).

HOLDING

Under the facts presented, if, pursuant toan integrated plan, a newly formed whollyowned subsidiary of an acquiring corpora-tion merges into a target corporation, fol-lowed by the merger of the target corpora-tion into the acquiring corporation, thetransaction is treated as a single statutorymerger of the target corporation into theacquiring corporation that qualifies as areorganization under § 368(a)(1)(A).

APPLICATION

Pursuant to § 7805(b)(8), the Servicewill not apply the principles of this rev-enue ruling to challenge a taxpayer’s posi-tion with respect to the treatment of amulti-step transaction, one step of which,

viewed independently, is a qualified stockpurchase if:

(1) a timely (including extensions) andvalid (without regard to whether there wasa qualified stock purchase under the prin-ciples of this revenue ruling) electionunder § 338(h)(10) or § 338(g) (Election)is or was filed with respect to the acquisi-tion of the stock of the target corporation;and

(2) either (a) the acquisition date for the target

corporation is on or before September 24,2001; or

(b) the acquisition of stock of the tar-get corporation meeting the requirementsof § 1504(a)(2) by the purchasing corpo-ration is pursuant to a written agreementthat (subject to customary conditions) isbinding on September 24, 2001, and at alltimes thereafter until the acquisition date;and

(3) such taxpayer does not take a posi-tion for U.S. tax purposes that is inconsis-tent with the treatment of the acquisitionas a qualified stock purchase with respectto which the Election was made.

Further, the Service and the Treasuryare considering whether to issue regula-tions that would reflect the general princi-ples of this revenue ruling, but wouldallow taxpayers to make a valid electionunder § 338(h)(10) with respect to a stepof a multi-step transaction that, viewedindependently, is a qualified stock pur-chase if such step is pursuant to a writtenagreement that requires, or permits thepurchasing corporation to cause, a § 338(h)(10) election in respect of suchstep to be made. The Service and theTreasury request comments regarding theadoption of such an approach.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 67–274 is amplified and Rev.Rul. 90–95 is distinguished.

DRAFTING INFORMATION

The principal authors of this revenueruling are Reginald Mombrun and Joseph

M. Calianno of the Office of the AssociateChief Counsel (Corporate). For furtherinformation regarding this revenue ruling,contact Mr. Mombrun at (202) 622-7750(not a toll-free call) or Mr. Calianno at(202) 622-7930 (not a toll-free call).

Section 472.—Last-in, First-outInventories

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

LIFO; price indexes; departmentstores. The August 2001 Bureau of LaborStatistics price indexes are accepted foruse by department stores employing theretail inventory and last-in, first-out in-ventory methods for valuing inventoriesfor tax years ended on, or with referenceto, August 31, 2001.

Rev. Rul. 2001–45

The following Department Store Inven-tory Price Indexes for August 2001 were is-sued by the Bureau of Labor Statistics. Theindexes are accepted by the Internal Rev-enue Service, under § 1.472–1(k) of the In-come Tax Regulations and Rev. Proc.86–46 (1986–2 C.B. 739), for appropriateapplication to inventories of departmentstores employing the retail inventory andlast-in, first-out inventory methods for taxyears ended on, or with reference to, Au-gust 31, 2001.

The Department Store Inventory PriceIndexes are prepared on a national basisand include (a) 23 major groups ofdepartments, (b) three special combina-tions of the major groups - soft goods,durable goods, and miscellaneous goods,and (c) a store total, which covers alldepartments, including some not listedseparately, except for the following:candy, food, liquor, tobacco, and contractdepartments.

October 15, 2001 324 2001–42 I.R.B.

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

(January 1941 = 100, unless otherwise noted)

Percent ChangeGroups Aug. Aug. from Aug. 2000

2000 2001 to Aug. 20011

1. Piece Goods - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 509.2 485.7 –4.62. Domestics and Draperies - - - - - - - - - - - - - - - - - - - - - - - - 617.9 591.8 –4.23. Women’s and Children’s Shoes- - - - - - - - - - - - - - - - - - - - 618.3 655.4 6.04. Men’s Shoe - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 913.2 856.4 –6.25. Infants’ Wear - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 619.8 609.5 –1.76. Women’s Underwear - - - - - - - - - - - - - - - - - - - - - - - - - - 570.2 567.5 –0.57. Women’s Hosiery- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 334.7 354.8 6.08. Women’s and Girls’ Accessories - - - - - - - - - - - - - - - - - - - 532.0 547.2 2.99. Women’s Outerwear and Girls’ Wear - - - - - - - - - - - - - - - - 370.5 361.6 –2.4

10. Men’s Clothing - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 605.4 579.2 –4.311. Men’s Furnishings - - - - - - - - - - - - - - - - - - - - - - - - - - - - 612.9 583.9 –4.712. Boys’ Clothing and Furnishings - - - - - - - - - - - - - - - - - - - 473.0 469.2 –0.813. Jewelry - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 936.5 936.3 0.014. Notions - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 785.9 793.0 0.915. Toilet Articles and Drugs- - - - - - - - - - - - - - - - - - - - - - - - 971.0 969.9 –0.116. Furniture and Bedding - - - - - - - - - - - - - - - - - - - - - - - - - 687.9 633.9 –7.817. Floor Coverings- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 603.2 623.8 3.418. Housewares - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 778.5 767.6 –1.419. Major Appliances- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 230.9 226.9 –1.720. Radio and Television - - - - - - - - - - - - - - - - - - - - - - - - - - 58.8 53.4 –9.221. Recreation and Education2- - - - - - - - - - - - - - - - - - - - - - - 92.2 89.3 –3.1 22. Home Improvements2 - - - - - - - - - - - - - - - - - - - - - - - - - - 129.2 125.8 –2.623. Auto Accessories2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 106.2 109.4 3.0

Groups 1 – 15: Soft Goods - - - - - - - - - - - - - - - - - - - - - - - - 585.3 575.5 –1.7

Groups 16 – 20: Durable Goods- - - - - - - - - - - - - - - - - - - - - - 437.2 421.8 –3.5

Groups 21 – 23: Misc. Goods2- - - - - - - - - - - - - - - - - - - - - - - 99.8 98.2 –1.6

Store Total3- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 529.7 518.8 –2.1

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


The principal author of this revenueruling is Michael Burkom of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further informationregarding this revenue ruling, contact Mr.Burkom at (202) 622-4930 (not a toll-freecall).

Section 872. — Gross Income

(Also sections 883, 894.)26 CFR 1.872–2: Exclusions from gross income ofnonresident alien individuals.(Also 26 CFR 1.883–1.)

This revenue ruling updates the list ofcountries that grant a reciprocal exemp-

tion for income from the international op-eration of ships or aircraft to U.S. personsfor purposes of sections 872(b) and 883 ofthe Code.

Rev. Rul. 2001–48

PURPOSE

The purpose of this revenue ruling is toassist foreign persons who derive incomefrom the international operation of shipsor aircraft in determining whether suchincome is exempt from U.S. taxationunder section 872(b) or 883(a) of theInternal Revenue Code of 1986, by pro-viding a current list of countries that grantUnited States persons equivalent exemp-tions from tax for various categories of

income from the international operationof ships and aircraft. This revenue rulingmodifies and supersedes Rev. Rul. 89–42(1989–1 C.B. 234), as supplemented byRev. Rul. 97–31 (1997–2 C.B. 77).

Section 872(b) of the Code providesthat gross income shall not includeincome from the international operationof a ship or ships or aircraft, and suchincome shall be exempt from U.S. Federalincome taxation, if the income is derivedby an individual resident of a foreigncountry, and such foreign country grantsan equivalent exemption to individual res-idents of the United States. Section883(a) provides a similar exemption forsuch income derived by corporationsorganized in a foreign country that grants

2001–42 I.R.B. 325 October 15, 2001

an equivalent exemption to corporationsorganized in the United States. For pur-poses of sections 872(b) and 883(a), a for-eign country may grant an equivalentexemption from tax through an exchangeof diplomatic notes or other agreement, bynot imposing a tax on income from theinternational operation of ships or aircraft,or by a decree or specific statutoryexemption.

Part A of Table I provides a list of thecountries that grant exemptions throughdiplomatic notes exchanged with theUnited States.

Part B of Table I provides a list of thecountries for which the Service has deter-mined, upon examination of their domes-tic law, that an equivalent exemption isgranted by statute or decree, or by notimposing a tax on income from the inter-national operation of ships or aircraft.This determination is made on a country-by-country basis and relies upon informa-tion submitted to the Internal RevenueService by the foreign country regardingthe foreign law in effect at the time of thesubmission. The date of the Service’sreview is reflected in the first column ofPart B of Table I. Since its initial review,the Service has not attempted to deter-mine whether any of the foreign laws ofthe countries listed in Part B of Table Ihave been amended or repealed.Therefore, taxpayers should independent-ly verify the accuracy of the informationin Part B of Table I at such time that adetermination is relevant.

Part B of Table I does not represent anexclusive list of countries the domesticlaw of which provides an equivalentexemption. Other countries that have notsubmitted the information necessary forthe Service to make a determination alsomay grant an equivalent exemption. Inthose cases, an individual resident of, or acorporation organized in, such a foreigncountry may be treated as a resident of, ora corporation organized in, a foreigncountry that grants an equivalent exemp-tion, even though the foreign country isnot included in Part B of Table I.Consistent with past practice, the Servicewill entertain a request from a foreigngovernment to determine whether thedomestic law of the country provides anequivalent exemption. Accordingly, tax-payers may seek to have the relevant for-eign government request a determination

that the particular country qualifies as anequivalent-exemption jurisdiction.

Table II provides a list of countries thatgrant an exemption under the shippingand aircraft article or capital gains articleof an income tax convention to which theUnited States is a party. Table II is pro-vided to assist a foreign corporation orga-nized in one of the countries listed inTable I in demonstrating that it also meetsthe ownership requirements of section883(c). In general, a foreign corporationcan demonstrate that it meets the owner-ship requirements of section 883(c) if thecorporation can show that more than 50percent of the value of the stock of thecorporation is owned by individuals whoare residents of countries that grant anequivalent exemption to corporationsorganized in the United States. For thesole purpose of determining if an individ-ual shareholder’s country of residencegrants an equivalent exemption for pur-poses of section 883(c), a foreign countrywill also be considered to grant an equiv-alent exemption if it grants such anexemption through an income tax conven-tion with the United States.

Accordingly, Table II is relevant only indetermining whether a shareholder of aforeign corporation seeking an exemptionfrom tax under section 883 is a sharehold-er that qualifies under section 883(c)(1)because the shareholder’s country of resi-dence grants an equivalent exemptionunder an income tax convention with theUnited States. Table II is not relevant indetermining whether a nonresident alienindividual or a foreign corporation itself iseligible to claim an exemption under sec-tion 872(b) or 883(a), respectively.

Table II includes a summary of therequirements for the exemption, such aswhether the exemption is based solely onresidence, or, as in the case of certainolder income tax conventions, the exemp-tion has an additional requirement of doc-umentation or registration. Table II doesnot set forth other benefits relating to ashipping or an air transport business thatmay be provided under articles coveringbusiness profits, rentals and royalties, andother income because such benefits arenot relevant for purposes of section883(c).

These Tables are intended only as asummary. The full text of any relevantdiplomatic note, foreign law, or income

tax convention should be consulted. Itmay be necessary to consult the technicalexplanation of an income tax convention,including any protocol thereto, any agree-ment, or any diplomatic note accompany-ing a convention, to determine the itemsof income exempted. Income tax conven-tions and diplomatic notes are publishedin the Cumulative Bulletin and InternalRevenue Bulletins. These Tables willcontinue to be updated periodically.

CHANGES TO REV. RUL. 97–31

The changes to the table published inRev. Rul. 89–42, as supplemented by Rev.Rul. 97–31, are summarized below.

The table in the prior rulings has beenreorganized to clarify the limited rele-vance of Part I of that table, relating totreaties, as discussed above. Accordingly,in this revenue ruling Part II of the priortable (diplomatic notes) has become PartA of Table I; Part III (domestic law) of theprior table has become Part B of Table I;and Part I of the prior table (treaties) hasbecome Table II.

In Part A of Table I, Bahrain, Ethiopia,Saudi Arabia, and the United ArabEmirates have been added to the list ofcountries that have exchanged diplomaticnotes with the United States. Although adiplomatic note was signed with Boliviain November 1987, that note required rat-ification by the Bolivian Government toenter into force. The diplomatic note wasratified on March 24, 1999, and officiallybecame effective upon publication in theofficial Gazette on March 31, 1999, forincome earned after that date. Therefore,Bolivia also has been added to the list.

In Part B of Table I, Aruba, Peru (withrespect to aircraft), and the Republic ofSurinam have been added to the list ofcountries whose domestic law has beendetermined to provide an equivalentexemption.

In Table II, the following countrieshave been added to the list of countriesthat provide an exemption under anincome tax convention: Estonia, Latvia,Lithuania, Slovenia, South Africa,Thailand, Turkey, the Ukraine, andVenezuela. The following countries haveentered into new income tax conventionswith the United States that supersede priorincome tax conventions reported in Rev.Rul. 97–31: Austria, Denmark, Ireland,Luxembourg, and Switzerland.

October 15, 2001 326 2001–42 I.R.B.

TO CLAIM AN EXEMPTION

Taxpayers claiming an exemption fromU.S. Federal income tax under section872(b) of the Code must file a return onForm 1040NR (U.S. Income Tax Returnof a Nonresident Alien). Taxpayersclaiming an exemption from U.S. Federalincome tax under section 883 must file areturn on Form 1120F (U.S. Income Tax

Return of a Foreign Corporation). Bothmust comply with the relevant provisionsof section 8 of Rev. Proc. 91–12 (1991–1C.B. 473).

EFFECT ON OTHER REVENUERULINGS

Rev. Rul. 97–31 and Rev. Rul. 89–42are modified and superseded.


The principal author of this revenueruling is Patricia A. Bray of the Office ofAssociate Chief Counsel (International).For information regarding this revenueruling, contact Ms. Bray at (202) 622-3880 (not a toll-free call).

TABLE I

Countries Currently Granting Equivalent Exemptions ForIncome From The International Operation of

Ships and Aircraft

PART A - EXCHANGE OF NOTES1

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Opera- Full Bare- Con- Capitalting Rental Boat tainer Gains3

Countries Cumulative Bulletin Income (Time Rental Rental3

and Or Internal Revenue or voy-Territories Bulletin Citation age char-

ter)

Argentina 1988-1 C.B. 456 X X X X X

Bahamas 1988-1 C.B. 458 X X X X -

Bahrain 2000-46 I.R.B. 475 X X X X X

Belgium 1988-1 C.B. 459 X X - X -

Bolivia4 1988-1 C.B. 460 X X X X -

Chile5 1991-1 C.B. 304 X X X3 X -

Colombia 1988-1 C.B. 461 X X X X -

Cyprus 1989-2 C.B. 332 X X X X -

Denmark 1988-1 C.B. 462 X X X X -

El Salvador5 1988-1 C.B. 463 X X X X X

Ethiopia 1999-1 C.B. 1134 X X X X X

Fiji 1996-2 C.B. 202 X X X X X

Finland 1989-2 C.B. 334 X X X X -

Greece 1988-2 C.B. 366 X X X X -

Hong Kong6/7 1995-1 C.B. 228 X X X X X

India 1990-2 C.B. 316 X X X3 X X

Isle of Man6 1990-2 C.B. 317 X X X X X

Japan 1990-2 C.B. 318 X X X X -

Jordan 1996-2 C.B. 202 X X X X -

Liberia 1988-1 C.B. 463 X X X X X

Luxembourg 1996-2 C.B. 203 X X X X -

Malaysia 1990-2 C.B. 319 X X X3 X X

2001–42 I.R.B. 327 October 15, 2001

TABLE I—Continued


Ships and Aircraft

PART A - EXCHANGE OF NOTES1

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Opera- Full Bare- Con- Capitalting Rental Boat tainer Gains3

Countries Cumulative Bulletin Income (Time Rental Rental3

and Or Internal Revenue or voy-Territories Bulletin Citation age char-

ter)

Malta 1997-1 C.B. 314 X X X X X

Marshall Islands 1990-2 C.B. 321 X X X X X

Norway 1991-1 C.B. 304 X X X X X

Pakistan6 1991-1 C.B. 305 X8 - - - -

Panama 1988-2 C.B. 366 X X X X -

Peru6 1989-2 C.B. 335 X X X3 X -

Saudi Arabia9 2000-22 I.R.B. 1126 X X X X X

St. Vincent & Grenadines 1989-2 C.B. 336 X X X X -

Singapore 1990-2 C.B. 323 X X X X -

Sweden 1988-1 C.B. 466 X X X3 X -

Taiwan 1989-2 C.B. 337 X X X X -

United Arab Emirates 1998-2 C.B. 528 X X X X X

Venezuela 1988-1 C.B. 467 X X X3 X X

PART B - DOMESTIC LAWTYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Opera- Full Bare- Con- CapitalDate ting Rental Boat tainer Gains3

Countries Foreign Income (Time Rental Rental3

and Law or voy-Territories Reviewed age char-

ter)

Antigua & Barbuda6 NOV 1991 X X X X X

Aruba JUNE 1999 X X X X -

Barbados OCT 1989 X X X X X

Bermuda NOV 1988 X X X X X

Brazil10 DEC 1988 X X X3 X -

Bulgaria FEB 1989 X X X X X

Cayman Islands11 JAN 1987 X X X X X

Chile6 OCT 1988 X X X X X

Ecuador6/12 DEC 1989 X X X3 X X

Israel FEB 1991 X X X X X

October 15, 2001 328 2001–42 I.R.B.

TABLE I—Continued


Ships and Aircraft

PART B - DOMESTIC LAW—ContinuedTYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Opera- Full Bare- Con- CapitalDate ting Rental Boat tainer Gains3

Countries Foreign Income (Time Rental Rental3

and Law or voy-Territories Reviewed age char-

ter)

Netherlands OCT 1988 X X X3 X -

Netherlands Antilles MAY 1988 X X X X X

Peru5 SEPT 1995 X X X X X

Portugal10 Ships JUNE 1989 X X X - -Aircraft FEB 1989 X X X - -

Qatar5 AUG 1994 X8 - - - -

Spain13 DEC 1988 X X - X -

Surinam NOV 1999 X X X X X

Turkey14 JAN 1987 X - - X -

Turks & Caicos11 FEB 1990 X X X X X

U.S. Virgin Islands OCT 1988 X X X X X

Vanuatu MAY 1987 X X X X X

TABLE II

Countries Currently Granting by Income Tax ConventionEquivalent Exemptions For Purposes of Qualifying a

Shareholder Under Section 883(c)(1)15

BASIS FOR EXEMPTION TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Resi- Resi- Resi- Opera- Full Bare- Con- Capitaldence dence dence ting Rental Boat tainer Gains

Countries Based & Flag & Flag Income (Time Rental Rentaland No Reci- Uni- or voy-Territories Flag procal lateral age char-

ter)

Australia X X X16 X17 X17 X3/18

Austria19 X X X20 X20 X X

Barbados X X X20 X20 X X

Belgium X21 X X3 X3 X3 X3

Canada X X X X X X

China22

(PeoplesRepublic) X X X20 X20 X X

Cyprus X X X20 X20 X X

2001–42 I.R.B. 329 October 15, 2001

TABLE II—Continued






ter)

Czech Republic X X X X3 X X

Denmark19 X X X X20 X X

Egypt X X X3 X3 X3 -

Estonia19 X X X X3 X X

Finland X X X3 X3 X23 X

France X X X X20 X3 X3

Germany24 X X X - X X

Greece X X8 - - - -

Hungary X X X3 X3 X X

Iceland X25 X X3 X3 X3 X

India X X X3 X3 X X3/26

Indonesia X X X X27 X3 X

Ireland19 X X X X20 X X

Israel X X X3 X3 X3 X3

Italy28/29 X25 X X30 X3 X X3

Jamaica X X X20 X20 X X3

Japan28 X31 X X3 X3 X3 X3

Kazakhstan X X X X20 X X

Korea X X X32 - X3 -

Latvia19 X X X X17 X X

Lithuania19 X X X X17 X3 X

Luxembourg19 X X X X20 X X

Mexico X X X X23 X X

Morocco X21 X8 - - - X3

Netherlands X X X3 X3 - X

New Zealand X X X X3 X3 X18

Norway28 X X X32 X3 X3 X

Pakistan5 X X8 - - - -

Philippines6 X - - - - X3

October 15, 2001 330 2001–42 I.R.B.

TABLE II—Continued






ter)

Poland X25 X X3 X3 X3 X

Portugal X X X X3 - X

Romania X X X3 X3 X3 X

RussianFederation X X X X20 X X

SlovakRepublic X X X X3 X X

Slovenia19 X X X X20 X X

SouthAfrica19 X X X X20 X X

Spain X X X X3 X X

Sweden X X X X3 X X

Switzerland19 X X X33 X3 - X

Thailand19 X5 X X X3 X3 XX6 - - - - X

Trinidad &Tobago X25 X X3 X3 - X

Tunisia X X X20 X20 X3 X

Turkey19 X X X X3 X X

Ukraine19 X X X X20 X X3

USSR/NIS34 X X8 - - - X3

U.K.29 X25 X X X3 X X3

Venezuela19 X X X X20 X X

1 Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988 will be interpreted in accordance with Technical Corrections enacted by that Act.2 Unless otherwise footnoted, an “X” indicates full exemption whether or not there is a permanent establishment.3 The tax exemption is available only if the income is incidental to operating income.4 The note was ratified by the Bolivian Congress and signed by the Bolivian President. The note and exemption officially became effective upon publication in the

official Gazette on March 31, 1999, for income earned after that date.5 This exemption applies to aircraft only.6 This exemption applies to shipping only. 7 This diplomatic note applies to Hong Kong before July 1, 1997, and pursuant to Notice 97-40 (1997-2 C.B. 287), to the Hong Kong Special Administrative Region

of the People’s Republic of China on or after July 1, 1997. The note does not apply with respect to the People’s Republic of China, which will continue to be treat-ed as a separate country for purposes of the Internal Revenue Code.

8 Operating income is not defined.9 The note is effective for all taxable years beginning on or after January 1, 1999, and for all prior open taxable years.

2001–42 I.R.B. 331 October 15, 2001

10 Brazilian and Portuguese statutes exempt only companies.11 The country generally imposes no income tax.12 This exemption is generally effective for all open years beginning on or after January 1, 1987.13 The Spanish statute exempts only corporations.14 See generally Rev. Rul. 87-18 (1987-1 C.B. 178) (explaining the application of Turkey’s domestic-law exemption).15 Table II is relevant only in determining whether a shareholder of a foreign corporation seeking an exemption from tax under section 883 is a shareholder that qual-

ifies under section 883(c)(1) because the shareholder’s country of residence grants an equivalent exemption under an income tax convention with the United States.Table II is not relevant in determining whether a nonresident alien individual or foreign corporation itself is eligible to claim an exemption under section 872(b)or 883(a), respectively.

16 Lessor must either regularly lease ships or aircraft on a full basis or operate them in international traffic.17 This exemption applies if the ships or aircraft are operated in international traffic by the lessee, and the rental income is incidental to the operation of ships or air-

craft in international traffic by the lessor.18 Except to the extent depreciation has been allowed in the other country.19 The following income tax treaties were ratified after the publication of Rev. Rul. 97-31 and are generally effective on the following dates:

Austria . . . . . . . . . . . . . . . . . . . . . . January 1, 1999Denmark . . . . . . . . . . . . . . . . . . . . . January 1, 2001Estonia . . . . . . . . . . . . . . . . . . . . . . January 1, 2000Ireland . . . . . . . . . . . . . . . . . . . . . . January 1, 1998Latvia . . . . . . . . . . . . . . . . . . . . . . . January 1, 2000Lithuania . . . . . . . . . . . . . . . . . . . . January 1, 2000Luxembourg . . . . . . . . . . . . . . . . . . January 1, 2001Slovenia . . . . . . . . . . . . . . . . . . . . . January 1, 2002South Africa . . . . . . . . . . . . . . . . . . January 1, 1998Switzerland . . . . . . . . . . . . . . . . . . . January 1, 1998Thailand . . . . . . . . . . . . . . . . . . . . . January 1, 1998Turkey . . . . . . . . . . . . . . . . . . . . . . January 1, 1998Ukraine . . . . . . . . . . . . . . . . . . . . . . January 1, 2001Venezuela . . . . . . . . . . . . . . . . . . . . January 1, 2000The U.S.-Slovenia tax treaty entered into force on June 22, 2001. The treaty applies, with respect to taxes withheld at source, in respect of amounts paid or cred-ited on or after September 1, 2001, and, with regard to other taxes, in respect of taxable years beginning on or after January 1, 2002.

20 This exemption applies if the ships or aircraft are operated in international traffic by the lessee, or the rental income is incidental to the operation of ships or air-craft in international traffic by the lessor.

21 In the case of aircraft only, the registration may be in the country of residence or in any country with a treaty providing a reciprocal exemption between such coun-try and the country of residence.

22 Pursuant to Notice 97-40 (1997-2 C.B. 287), the treaty between the United States and the People’s Republic of China (China) will continue to apply only to Chinaand will not apply to the Hong Kong Special Administrative Region of the People’s Republic of China.

23 The exemption applies except where the containers are used solely between places within the other Contracting State.24 This treaty is effective for the eastern States of Germany (the former East Germany) from January 1, 1991.25 Documentation or registration required for ships or aircraft of United States residents only.26 This treaty exempts gains derived by an enterprise of a Contracting State if the ships, aircraft or containers are owned and operated by the enterprise and the income

from them is taxable only in that State.27 Income from the bareboat rental of aircraft used in international traffic is exempt. Income from the bareboat rental of ships also is exempt if the ship is operated

in international traffic and if the lessee is not a resident of, or does not have a permanent establishment in, the other Contracting State.28 See also the diplomatic notes or protocol accompanying this treaty.29 The United States has entered into new treaties with Italy and the United Kingdom, but neither treaty has entered into force as of the date of publication of this

ruling.30 This exemption applies if the ship or aircraft is operated in international traffic or if the rental income is incidental to income from such international operation.31 With regard to residents of Japan, the ships or aircraft need not be registered in Japan if the ships or aircraft are leased by such a resident. 32 As a result of correspondence, it was clarified that income from the international operation of ships or aircraft includes this category of income.33 This exemption applies if the ships or aircraft are used by the lessee in international traffic.34 The U.S. - U.S.S.R. income tax treaty signed June 20, 1973, continues to apply to the New Independent States (NIS) of Armenia, Azerbaijan, Belarus, Georgia,

Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.

Section 883.—Exclusions FromGross Income

This revenue ruling updates the Table of coun-tries that grant a reciprocal exemption for incomefrom the international operation of ships or aircraftto U.S. persons for purposes of sections 872(b) and883 of the Code. See Rev. Rul. 2001–48, page 324.

Section 894.—Income AffectedBy Treaty

This revenue ruling updates the Table of coun-tries that grant a reciprocal exemption for incomefrom the international operation of ships or aircraftto U.S. persons for purposes of sections 872(b) and883 of the Code. See Rev. Rul. 2001–48, page 324.

October 15, 2001 332 2001–42 I.R.B.

26 CFR 601.105: Examination of returns andclaims for refund, credit, or abatement;determination of correct tax liability. (Also Part I, §§ 62, 162, 267, 274; 1.62–2,1.162–17, 1.267(a)–1, 1.274–5.)

Rev. Proc. 2001–47

SECTION 1. PURPOSE

This revenue procedure updates Rev.Proc. 2000–39 (2000–41 I.R.B. 340), byproviding rules under which the amountof ordinary and necessary business ex-penses of an employee for lodging, meal,and incidental expenses or for meal andincidental expenses incurred while travel-ing away from home will be deemed sub-stantiated under § 1.274–5 of the IncomeTax Regulations when a payor (the em-ployer, its agent, or a third party) providesa per diem allowance under a reimburse-ment or other expense allowance arrange-ment to pay for such expenses. This rev-enue procedure also provides an optionalmethod for employees and self-employedindividuals to use in computing the de-ductible costs of business meal and inci-dental expenses paid or incurred whiletraveling away from home. Use of amethod described in this revenue proce-dure is not mandatory, and a taxpayermay use actual allowable expenses if thetaxpayer maintains adequate records orother sufficient evidence for proper sub-stantiation. This revenue procedure doesnot provide rules under which the amountof an employee’s lodging expenses willbe deemed substantiated when a payorprovides an allowance to pay for those ex-penses but not meal and incidental ex-penses.

SECTION 2. BACKGROUND ANDCHANGES

.01 Section 162(a) of the Internal Rev-enue Code allows a deduction for all theordinary and necessary expenses paid orincurred during the taxable year in carry-ing on any trade or business. Under thatprovision, an employee or self-employedindividual may deduct expenses paid orincurred while traveling away from homein pursuit of a trade or business. How-ever, under § 262, no portion of suchtravel expenses that is attributable to per-sonal, living, or family expenses is de-ductible.

.02 Section 274(n) generally limits theamount allowable as a deduction under § 162 for any expense for food, bever-ages, or entertainment to 50 percent of theamount of the expense that otherwisewould be allowable as a deduction. In thecase of any expenses for food or bever-ages consumed while away from home(within the meaning of § 162(a)(2)) by anindividual during, or incident to, the pe-riod of duty subject to the hours of servicelimitations of the Department of Trans-portation, § 274(n)(3) gradually increasesthe deductible percentage to 80 percentfor taxable years beginning in 2008. Fortaxable years beginning in 2001, the de-ductible percentage for these expenses is60 percent. For taxable years beginningin 2002, the deductible percentage forthese expenses is 65 percent.

.03 Section 274(d) provides, in part,that no deduction shall be allowed under § 162 for any traveling expense (includ-ing meals and lodging while away fromhome) unless the taxpayer complies withcertain substantiation requirements. Thesection further provides that regulationsmay prescribe that some or all of the sub-stantiation requirements do not apply toan expense that does not exceed anamount prescribed by such regulations.

.04 Section 1.274–5(g) of the regula-tions, in part, grants the Commissionerthe authority to prescribe rules relating toreimbursement arrangements or per diemallowances for ordinary and necessary ex-penses paid or incurred while travelingaway from home. Pursuant to this grantof authority, the Commissioner may pre-scribe rules under which such arrange-ments or allowances, if in accordancewith reasonable business practice, will beregarded (1) as equivalent to substantia-tion, by adequate records or other suffi-cient evidence, of the amount of suchtravel expenses for purposes of § 1.274–5(c), and (2) as satisfying the require-ments of an adequate accounting to theemployer of the amount of such travel ex-penses for purposes of § 1.274–5(f).

.05 For purposes of determining ad-justed gross income, § 62(a)(2)(A) allowsan employee a deduction for expenses al-lowed by Part VI (§ 161 and following),subchapter B, chapter 1 of the Code, paidor incurred by the employee in connection

with the performance of services as an em-ployee under a reimbursement or other ex-pense allowance arrangement with a payor.

.06 Section 62(c) provides that anarrangement will not be treated as a reim-bursement or other expense allowancearrangement for purposes of § 62(a)(2)(A) if it—

(1) does not require the employee tosubstantiate the expenses covered by thearrangement to the payor, or

(2) provides the employee with theright to retain any amount in excess of thesubstantiated expenses covered under thearrangement.

Section 62(c) further provides that thesubstantiation requirements describedtherein shall not apply to any expense tothe extent that, under the grant of regula-tory authority prescribed in § 274(d), theCommissioner has provided that substan-tiation is not required for such expense.

.07 Under § 1.62–2(c)(1) a reimburse-ment or other expense allowance arrange-ment satisfies the requirements of § 62(c)if it meets the requirements of businessconnection, substantiation, and returningamounts in excess of expenses as speci-fied in the regulations. Section1.62–2(e)(2) specifically provides thatsubstantiation of certain business ex-penses in accordance with rules pre-scribed under the authority of § 1.274–5(g) or 1.274–5(j)(1) will be treated assubstantiation of the amount of such ex-penses for purposes of § 1.62–2. Under § 1.62–2(f)(2), the Commissioner mayprescribe rules under which an arrange-ment providing per diem allowances willbe treated as satisfying the requirement ofreturning amounts in excess of expenses,even though the arrangement does not re-quire the employee to return the portionof such an allowance that relates to daysof travel substantiated and that exceedsthe amount of the employee’s expensesdeemed substantiated pursuant to rulesprescribed under § 274(d), provided theallowance is reasonably calculated not toexceed the amount of the employee’s ex-penses or anticipated expenses and theemployee is required to return any portionof such an allowance that relates to daysof travel not substantiated.

.08 Section 1.62–2(h)(2)(i)(B) providesthat if a payor pays a per diem allowance

Part III. Administrative, Procedural, and Miscellaneous

2001–42 I.R.B. 333 October 15, 2001

that meets the requirements of § 1.62–2(c)(1), the portion, if any, of the al-lowance that relates to days of travel sub-stantiated in accordance with § 1.62–2(e),that exceeds the amount of the em-ployee’s expenses deemed substantiatedfor such travel pursuant to rules pre-scribed under § 274(d) and § 1.274–5(g)or § 1.274–5(j)(1), and that the employeeis not required to return, is subject towithholding and payment of employmenttaxes. See §§ 31.3121(a)–3, 31.3231(e)–1(a)(5), 31.3306(b)–2, and 31.3401(a)–4of the Employment Tax Regulations. Be-cause the employee is not required to re-turn this excess portion, the reasonableperiod of time provisions of § 1.62–2(g)(relating to the return of excess amounts)do not apply to this portion.

.09 Under § 1.62–2(h)(2)(i)(B)(4), theCommissioner may, in his or her discre-tion, prescribe special rules regarding thetiming of withholding and payment ofemployment taxes on per diem al-lowances.

.10 Section 1.274–5(j)(1) grants theCommissioner the authority to establish amethod under which a taxpayer may electto use a specified amount for meals paidor incurred while traveling away fromhome in lieu of substantiating the actualcost of meals.

.11 Section 5.04 of this revenue proce-dure contains revisions to the list of high-cost localities and to the high-low ratesfor purposes of section 5.

.12 Sections 3.02, 4.04(5), and 5.06provide transition rules for the last 3months of calendar year 2001 due tochanges in the effective date of theCONUS rates published by GSA.

SECTION 3. DEFINITIONS

.01 Per diem allowance. The term “perdiem allowance” means a payment undera reimbursement or other expense al-lowance arrangement that meets the re-quirements specified in § 1.62–2(c)(1)and that is

(1) paid with respect to ordinary andnecessary business expenses incurred, orwhich the payor reasonably anticipateswill be incurred, by an employee for lodg-ing, meal, and incidental expenses or formeal and incidental expenses for travelaway from home in connection with theperformance of services as an employeeof the employer,

(2) reasonably calculated not to ex-ceed the amount of the expenses or theanticipated expenses, and

(3) paid at or below the applicablefederal per diem rate, a flat rate or statedschedule, or in accordance with any otherService-specified rate or schedule.

.02 Federal per diem rate and federalM&IE rate.

(1) General rule. The federal perdiem rate is equal to the sum of the applic-able federal lodging expense rate and theapplicable federal meal and incidental ex-pense (M&IE) rate for the day and local-ity of travel.

(a) CONUS rates. The rates for lo-calities in the continental United States(“CONUS”) are set forth in Appendix Ato 41 C.F.R. ch. 301. However, in apply-ing section 4.01, 4.02, or 4.03 of this rev-enue procedure, taxpayers may continueto use the CONUS rates in effect for thefirst 9 months of 2001 for expenses of allCONUS travel while away from homethat are paid or incurred during calendaryear 2001 in lieu of the updated GSArates. A taxpayer must consistently useeither these rates or the updated rates forthe period of October 1, 2001, throughDecember 31, 2001.

(b) OCONUS rates. The rates for lo-calities outside the continental UnitedStates (“OCONUS”) are established bythe Secretary of Defense (rates for non-foreign localities, including Alaska,Hawaii, Puerto Rico, the Northern Mari-ana Islands, and the possessions of theUnited States) and by the Secretary ofState (rates for foreign localities), and arepublished in the Per Diem Supplement tothe Standardized Regulations (Govern-ment Civilians, Foreign Areas) (updatedon a monthly basis).

(c) Internet access to the rates. TheCONUS and OCONUS rates may befound on the Internet at www.policy-works.gov/perdiem.

(2) Locality of travel. The term “lo-cality of travel” means the locality wherean employee traveling away from home inconnection with the performance of ser-vices as an employee of the employerstops for sleep or rest.

(3) Incidental expenses. The term“incidental expenses” includes, but is notlimited to, expenses for laundry, cleaningand pressing of clothing, and fees and tipsfor services, such as for porters and bag-

gage carriers. The term “incidental ex-penses” does not include taxicab fares,lodging taxes, or the costs of telegrams ortelephone calls.

.03 Flat rate or stated schedule. (1) In general. Except as provided in

section 3.03(2) of this revenue procedure,an allowance is paid at a flat rate or statedschedule if it is provided on a uniform andobjective basis with respect to the expens-es described in section 3.01 of this rev-enue procedure. Such allowance may bepaid with respect to the number of daysaway from home in connection with theperformance of services as an employeeor on any other basis that is consistentlyapplied and in accordance with reasonablebusiness practice. Thus, for example, anhourly payment to cover meal and inci-dental expenses paid to a pilot or flightattendant who is traveling away fromhome in connection with the performanceof services as an employee is anallowance paid at a flat rate or statedschedule. Likewise, a payment based onthe number of miles traveled (e.g., centsper mile) to cover meal and incidentalexpenses paid to an over-the-road truckdriver who is traveling away from homein connection with the performance ofservices as an employee is an allowancepaid at a flat rate or stated schedule.

(2) Limitation. For purposes of thisrevenue procedure, an allowance that iscomputed on a basis similar to that used incomputing the employee’s wages or othercompensation (e.g., the number of hoursworked, miles traveled, or pieces pro-duced) does not meet the business con-nection requirement of § 1.62–2(d), is nota per diem allowance, and is not paid at aflat rate or stated schedule, unless, as ofDecember 12, 1989, (a) the allowancewas identified by the payor either by mak-ing a separate payment or by specificallyidentifying the amount of the allowance,or (b) an allowance computed on thatbasis was commonly used in the industryin which the employee is employed. See§ 1.62–2(d)(3)(ii).

SECTION 4. PER DIEMSUBSTANTIATION METHOD

.01 Per diem allowance. If a payorpays a per diem allowance in lieu of reim-bursing actual expenses for lodging, meal,and incidental expenses incurred or to beincurred by an employee for travel away

October 15, 2001 334 2001–42 I.R.B.

from home, the amount of the expensesthat is deemed substantiated for each cal-endar day is equal to the lesser of the perdiem allowance for such day or theamount computed at the federal per diemrate (see section 3.02 of this revenue pro-cedure) for the locality of travel for suchday (or partial day, see section 6.04 of thisrevenue procedure).

.02 Meals only per diem allowance. Ifa payor pays a per diem allowance onlyfor meal and incidental expenses in lieu ofreimbursing actual expenses for meal andincidental expenses incurred or to be in-curred by an employee for travel awayfrom home, the amount of the expensesthat is deemed substantiated for each cal-endar day is equal to the lesser of the perdiem allowance for such day or theamount computed at the federal M&IErate (see section 3.02 of this revenue pro-cedure) for the locality of travel for suchday (or partial day, see section 6.04 of thisrevenue procedure). A per diem al-lowance is treated as paid only for mealand incidental expenses if (1) the payorpays the employee for actual expenses forlodging based on receipts submitted to thepayor, (2) the payor provides the lodgingin kind, (3) the payor pays the actual ex-penses for lodging directly to the providerof the lodging, (4) the payor does nothave a reasonable belief that lodging ex-penses were or will be incurred by theemployee, or (5) the allowance is com-puted on a basis similar to that used incomputing the employee’s wages or othercompensation (e.g., the number of hoursworked, miles traveled, or pieces pro-duced).

.03 Optional method for meals only de-duction. In lieu of using actual expenses,employees and self-employed individu-als, in computing the amount allowable asa deduction for ordinary and necessarymeal and incidental expenses paid or in-curred for travel away from home, mayuse an amount computed at the federalM&IE rate (see section 3.02 of this rev-enue procedure) for the locality of travelfor each calendar day (or partial day, seesection 6.04 of this revenue procedure)the employee or self-employed individualis away from home. Such amount will bedeemed substantiated for purposes ofparagraphs (b)(2) (travel away fromhome) and (c) of § 1.274–5, provided theemployee or self-employed individual

substantiates the elements of time, place,and business purpose of the travel ex-penses in accordance with those regula-tions.

.04 Special rules for transportation in-dustry.

(1) In general. This section 4.04applies to (a) a payor that pays a per diemallowance only for meal and incidentalexpenses for travel away from home asdescribed in section 4.02 of this revenueprocedure to an employee in the trans-portation industry, or (b) an employee orself-employed individual in the trans-portation industry who computes theamount allowable as a deduction for mealand incidental expenses for travel awayfrom home in accordance with section4.03 of this revenue procedure.

(2) Rates. A taxpayer described insection 4.04(1) of this revenue proceduremay treat $38 as the federal M&IE ratefor any locality of travel in CONUS,and/or $42 as the federal M&IE rate forany locality of travel OCONUS. A payorthat uses either (or both) of these specialrates with respect to an employee mustuse the special rate(s) for all amounts sub-ject to section 4.02 of this revenue proce-dure paid to that employee for travel awayfrom home within CONUS and/orOCONUS, as the case may be, during thecalendar year. Similarly, an employee orself-employed individual that uses either(or both) of these special rates must usethe special rate(s) for all amounts comput-ed pursuant to section 4.03 of this revenueprocedure for travel away from homewithin CONUS and/or OCONUS, as thecase may be, during the calendar year.See section 4.04(5) of this revenue proce-dure for transition rules.

(3) Periodic rule. A payor describedin section 4.04(1) of this revenue proce-dure may compute the amount of theemployee’s expenses that is deemed sub-stantiated under section 4.02 of this rev-enue procedure periodically (not less fre-quently than monthly), rather than daily,by comparing the total per diemallowance paid for the period to the sumof the amounts computed at the federalM&IE rate(s) for the localities of travelfor the days (or partial days, see section6.04 of this revenue procedure) theemployee is away from home during theperiod. For example, assume an employ-ee in the transportation industry travels

away from home within CONUS on 17days (including partial days, see section6.04 of this revenue procedure) during acalendar month and receives a per diemallowance only for meal and incidentalexpenses from a payor that uses the spe-cial rule under section 4.04(2) of this rev-enue procedure. The amount deemed sub-stantiated under section 4.02 of thisrevenue procedure is equal to the lesser ofthe total per diem allowance paid for themonth or $646 (17 days at $38 per day).

(4) Transportation industry defined.For purposes of this section 4.04 of thisrevenue procedure, an employee or self-employed individual is “in the transporta-tion industry” only if the employee’s orindividual’s work (a) is of the type thatdirectly involves moving people or goodsby airplane, barge, bus, ship, train, ortruck, and (b) regularly requires travelaway from home which, during any singletrip away from home, usually involvestravel to localities with differing federalM&IE rates. For purposes of the preced-ing sentence, a payor must determine thatan employee or a group of employees is“in the transportation industry” by using amethod that is consistently applied and inaccordance with reasonable businesspractice.

(5) Transition rules. Under the cal-endar-year convention provided in section4.04(2), a taxpayer who used the federalM&IE rates during the first 9 months ofcalendar year 2001 to substantiate theamount of an individual’s travel expensesunder sections 4.02 or 4.03 of Rev. Proc.2000–39 may not use, for that individual,the special transportation industry ratesprovided in this section 4.04 until January1, 2002. Similarly, a taxpayer who usedthe special transportation industry ratesduring the first 9 months of calendar year2001 to substantiate the amount of anindividual’s travel expenses may not use,for that individual, the federal M&IE ratesuntil January 1, 2002.

SECTION 5. HIGH-LOWSUBSTANTIATION METHOD

.01 General rule. If a payor pays a perdiem allowance in lieu of reimbursing ac-tual expenses for lodging, meal, and inci-dental expenses incurred or to be incurredby an employee for travel away fromhome and the payor uses the high-lowsubstantiation method described in this

2001–42 I.R.B. 335 October 15, 2001

section 5 for travel within CONUS, theamount of the expenses that is deemedsubstantiated for each calendar day isequal to the lesser of the per diem al-lowance for such day or the amount com-puted at the rate set forth in section 5.02of this revenue procedure for the localityof travel for such day (or partial day, seesection 6.04 of this revenue procedure).Except as provided in section 5.06 of thisrevenue procedure, this high-low substan-tiation method may be used in lieu of theper diem substantiation method providedin section 4.01 of this revenue procedure,but may not be used in lieu of the meals

only substantiation method provided insection 4.02 or 4.03 of this revenue proce-dure.

.02 Specific high-low rates. Except asprovided in section 5.06 of this revenueprocedure, the per diem rate set forth inthis section 5.02 is $204 for travel to any“high-cost locality” specified in section5.03 of this revenue procedure, or $125for travel to any other locality withinCONUS. Whichever per diem rate ap-plies, it is applied as if it were the federalper diem rate for the locality of travel.For purposes of applying the high-lowsubstantiation method and the § 274(n)

limitation on meal expenses (see section6.05 of this revenue procedure), the fed-eral M&IE rate shall be treated as $42 fora high-cost locality and $34 for any otherlocality within CONUS.

.03 High-cost localities. The followinglocalities have a federal per diem rate of$165 or more, and are high-cost localitiesfor all of the calendar year or the portionof the calendar year specified in parenthe-sis under the key city name, except asprovided in section 5.06 of this revenueprocedure:

Key city County or other defined location

CaliforniaNapa Napa

(April 1-November 15)Palm Springs Riverside

(January 1-May 31)San Francisco San FranciscoSan Mateo/Redwood City San MateoSunnyvale/Palo Alto/San Jose Santa ClaraTahoe City Placer

ColoradoAspen Pitkin

(January 1-April 30)Silverthorne/Keystone SummitTelluride San Miguel

(December 20-September 30)Vail Eagle

(December 1-March 31)

District of ColumbiaWashington, D.C. Washington, D.C.; the cities of Alexandria, Fairfax, and Falls Church, and

the counties of Arlington, Fairfax, and Loudoun, in Virginia; and the coun-ties of Montgomery and Prince George’s in Maryland

FloridaKey West Monroe

(January 1-April 30)Palm Beach Cities of Boca Raton, Delray Beach, Jupiter, Palm Beach Gardens, Palm (January 1-April 30) Beach Shores, Singer Island, and West Palm Beach

IdahoSun Valley City limits of Sun Valley

IllinoisChicago Cook and Lake

LouisianaNew Orleans/St. Bernard Orleans, St. Bernard, Plaquemine, and Jefferson Parishes

(January 1-May 31)

MaineKennebunk/Kittery/Sanford York

(June 15-October 31)

October 15, 2001 336 2001–42 I.R.B.

Key city County or other defined location

Maryland(For the counties of Montgomery and Prince George’s, see District of Columbia)Ocean City Worcester


MassachusettsBoston SuffolkCambridge Middlesex County (except Lowell) Martha’s Vineyard Dukes

(June 1-October 15)Nantucket Nantucket


MichiganMackinac Island MackinacTraverse City Grand Traverse

MontanaBig Sky Gallatin (except West Yellowstone Park)

NevadaStateline Douglas

New JerseyAtlantic City Atlantic

(June 1-November 30)Cape May Cape May (except Ocean City)

(June 1-November 30)Edison Middlesex (except Piscataway)Newark Essex, Bergen, Hudson and PassaicOcean City City limits of Ocean City

(June 15-September 15)Piscataway/Belle Mead Somerset; and City limits of PiscatawayPrinceton/Trenton Mercer County

New YorkThe Bronx/Brooklyn/Queens The boroughs of The Bronx, Brooklyn, and QueensManhattan ManhattanNassau County/Great Neck Nassau CountySuffolk County Suffolk CountyWhite Plains City limits of White Plains

PennsylvaniaHershey City limits of Hershey

(June 1-September 15)

Utah Ogden/Layton/Davis County Weber and Davis

(January 1-February 28)Park City Summit

(December 15-March 31)Provo Utah

(January 15-February 28)Salt Lake City Salt Lake, Dugway Proving Ground, and Tooele Army Depot

(January 15-February 28)

Virginia(For the cities of Alexandria, Fairfax, and Falls Church, and the counties of Arlington, Fairfax, and Loudoun, see District ofColumbia)

Wintergreen Nelson

2001–42 I.R.B. 337 October 15, 2001

.04 Changes in high-cost localities.The list of high-cost localities in section5.03 of this revenue procedure differsfrom the list of high-cost localities in sec-tion 5.03 of Rev. Proc. 2000–39.

(1) The following localities (listed bykey cities) have been added to the list ofhigh-cost localities: Napa, California; SanMateo/Redwood City, California; PalmBeach, Florida; Kennebunk/Kittery/San-ford, Maine; Nantucket, Massachusetts;Stateline, Nevada; Atlantic City, New Jer-sey; Edison, New Jersey; Newark, NewJersey; Ogden/Layton/Davis County, Utah;Provo, Utah; and Salt Lake City, Utah.

(2) The portion of the year for whichthe following are high-cost localities (list-ed by key cities) has been changed:Telluride, Colorado; Vail, Colorado; BigSky, Montana; and Park City, Utah.

(3) The following locality has beenremoved from the list of high-cost locali-ties: Philadelphia, Pennsylvania.

.05 Specific limitation. (1) Except as provided in section

5.05(2) of this revenue procedure, a payorthat uses the high-low substantiationmethod with respect to an employee mustuse that method for all amounts paid tothat employee for travel away from homewithin CONUS during the calendar year.See section 5.06 of this revenue procedurefor transition rules.

(2) With respect to an employeedescribed in section 5.05(1) of this rev-enue procedure, the payor may reimburseactual expenses or use the meals only perdiem method described in section 4.02 ofthis revenue procedure for any travelaway from home, and may use the perdiem substantiation method described insection 4.01 of this revenue procedure forany OCONUS travel away from home.

.06 Transition rules. A payor who usedthe substantiation method of section 4.01of Rev. Proc. 2000–39 for an employeeduring the first 9 months of calendar year2001 may not use the High-Low Substan-tiation Method in section 5 of this revenueprocedure for that employee until January1, 2002. A payor who used the High-LowSubstantiation Method of section 5 ofRev. Proc. 2000–39 for an employee dur-ing the first 9 months of calendar year2001 must continue to use the High-LowSubstantiation Method for the remainderof calendar year 2001 for that employee.A payor described in the previous sen-

tence may use the rates and high-cost lo-calities published in section 5 of Rev.Proc. 2000–39, in lieu of the updated ratesand high-cost localities provided in sec-tion 5 of this revenue procedure, for travelon or after October 1, 2001, and beforeJanuary 1, 2002, if those rates and locali-ties are used consistently during this pe-riod for all employees reimbursed underthis method.

SECTION 6. LIMITATIONS ANDSPECIAL RULES

.01 In general. The federal per diemrate and the federal M&IE rate describedin section 3.02 of this revenue procedurefor the locality of travel will be applied inthe same manner as applied under theFederal Travel Regulations, 41 C.F.R.Part 301–11 (2000), except as provided insections 6.02 through 6.04 of this revenueprocedure.

.02 Federal per diem rate. A receiptfor lodging expenses is not required in de-termining the amount of expenses deemedsubstantiated under section 4.01 or 5.01of this revenue procedure. See section7.01 of this revenue procedure for the re-quirement that the employee substantiatethe time, place, and business purpose ofthe expense.

.03 Federal per diem or M&IE rate. Apayor is not required to reduce the federalper diem rate or the federal M&IE rate forthe locality of travel for meals provided inkind, provided the payor has a reasonablebelief that meal and incidental expenseswere or will be incurred by the employee.

.04 Proration of the federal per diem orM&IE rate. Pursuant to the FederalTravel Regulations, in determining thefederal per diem rate or the federal M&IErate for the locality of travel, the full ap-plicable federal M&IE rate is availablefor a full day of travel from 12:01 a.m. to12:00 midnight. For purposes of deter-mining the amount deemed substantiatedunder section 4 or 5 of this revenue proce-dure with respect to partial days of travelaway from home, either of the followingmethods may be used to prorate the fed-eral M&IE rate to determine the federalper diem rate or the federal M&IE rate forthe partial days of travel:

(1) Such rate may be prorated usingthe method prescribed by the FederalTravel Regulations. Currently the FederalTravel Regulations allow three-fourths of

the applicable federal M&IE rate for eachpartial day during which the employee orself-employed individual is travelingaway from home in connection with theperformance of services as an employeeor self-employed individual; or

(2) Such rate may be prorated usingany method that is consistently appliedand in accordance with reasonable busi-ness practice. For example, if an employ-ee travels away from home from 9 a.m.one day to 5 p.m. the next day, a methodof proration that results in an amountequal to 2 times the federal M&IE ratewill be treated as being in accordancewith reasonable business practice (eventhough only 1 1/2 times the federal M&IErate would be allowed under the FederalTravel Regulations).

.05 Application of the appropriate § 274(n) limitation on meal expenses. Allor part of the amount of an expensedeemed substantiated under this revenueprocedure is subject to the appropriatelimitation under § 274(n) (see section2.02 of this revenue procedure) on the de-ductibility of food and beverage ex-penses.

(1) When an amount for meal andincidental expenses is computed pursuantto section 4.03 of this revenue procedure,the taxpayer must treat such amount as anexpense for food and beverages.

(2) When a per diem allowance ispaid only for meal and incidental expens-es, the payor must treat an amount equalto the lesser of the allowance or the feder-al M&IE rate for the locality of travel forsuch day (or partial day, see section 6.04of this revenue procedure) as an expensefor food and beverages.

(3) When a per diem allowance ispaid for lodging, meal, and incidentalexpenses, the payor must treat an amountequal to the federal M&IE rate for thelocality of travel for each calendar day (orpartial day, see section 6.04 of this rev-enue procedure) the employee is awayfrom home as an expense for food andbeverages. For purposes of the precedingsentence, when a per diem allowance forlodging, meal, and incidental expenses ispaid at a rate that is less than the federalper diem rate for the locality of travel forsuch day (or partial day, see section 6.04of this revenue procedure), the payor maytreat an amount equal to 40 percent ofsuch allowance as the federal M&IE rate

October 15, 2001 338 2001–42 I.R.B.

for the locality of travel for such day (orpartial day, see section 6.04 of this rev-enue procedure).

.06 No double reimbursement or de-duction. If a payor pays a per diem al-lowance in lieu of reimbursing actual ex-penses for lodging, meal, and incidentalexpenses or for meal and incidental ex-penses in accordance with section 4 or 5of this revenue procedure, any additionalpayment with respect to such expenses istreated as paid under a nonaccountableplan, is included in the employee’s grossincome, is reported as wages or othercompensation on the employee’s FormW-2, and is subject to withholding andpayment of employment taxes. Similarly,if an employee or self-employed individ-ual computes the amount allowable as adeduction for meal and incidental ex-penses for travel away from home in ac-cordance with section 4.03 or 4.04 of thisrevenue procedure, no other deduction isallowed to the employee or self-employedindividual with respect to such expenses.For example, assume an employee re-ceives a per diem allowance from a payorfor lodging, meal, and incidental expensesor for meal and incidental expenses in-curred while traveling away from home.During that trip, the employee pays fordinner for the employee and two businessassociates. The payor reimburses as abusiness entertainment meal expense themeal expense for the employee and thetwo business associates. Because thepayor also pays a per diem allowance tocover the cost of the employee’s meals,the amount paid by the payor for the em-ployee’s portion of the business entertain-ment meal expense is treated as paidunder a nonaccountable plan, is reportedas wages or other compensation on theemployee’s Form W-2, and is subject towithholding and payment of employmenttaxes.

.07 Related parties. Sections 4.01 and5 of this revenue procedure will not applyin any case in which a payor and an em-ployee are related within the meaning of § 267(b), but for this purpose the percent-age of ownership interest referred to in § 267(b)(2) shall be 10 percent.

SECTION 7. APPLICATION

.01 If the amount of travel expenses isdeemed substantiated under the rules pro-vided in section 4 or 5 of this revenue pro-

cedure, and the employee actually sub-stantiates to the payor the elements oftime, place, and business purpose of thetravel expenses in accordance with para-graphs (b)(2) (travel away from home)and (c) (other than subparagraph(2)(iii)(A) thereof) of § 1.274–5, the em-ployee is deemed to satisfy the adequateaccounting requirements of § 1.274–5(f)as well as the requirement to substantiateby adequate records or other sufficient ev-idence for purposes of § 1.274–5(c). See§ 1.62–2(e)(1) for the rule that anarrangement must require business ex-penses to be substantiated to the payorwithin a reasonable period of time.

.02 An arrangement providing per diemallowances will be treated as satisfyingthe requirement of § 1.62–2(f)(2) with re-spect to returning amounts in excess ofexpenses if the employee is required to re-turn within a reasonable period of time (asdefined in § 1.62–2(g)) any portion ofsuch an allowance that relates to days oftravel not substantiated, even though thearrangement does not require the em-ployee to return the portion of such an al-lowance that relates to days of travel sub-stantiated and that exceeds the amount ofthe employee’s expenses deemed substan-tiated. For example, assume a payor pro-vides an employee an advance per diemallowance for meal and incidental ex-penses of $200, based on an anticipated 5days of business travel at $40 per day to alocality for which the federal M&IE rateis $34, and the employee substantiates 3full days of business travel. The require-ment to return excess amounts will betreated as satisfied if the employee is re-quired to return within a reasonable pe-riod of time (as defined in § 1.62–2(g))the portion of the allowance that is attrib-utable to the 2 unsubstantiated days oftravel ($80), even though the employee isnot required to return the portion of the al-lowance ($18) that exceeds the amount ofthe employee’s expenses deemed substan-tiated under section 4.02 of this revenueprocedure ($102) for the 3 substantiateddays of travel. However, the $18 excessportion of the allowance is treated as paidunder a nonaccountable plan as discussedin section 7.04 of this revenue procedure.

.03 An employee is not required to in-clude in gross income the portion of a perdiem allowance received from a payorthat is less than or equal to the amount

deemed substantiated under the rules pro-vided in section 4 or 5 of this revenue pro-cedure if the employee substantiates thebusiness travel expenses covered by theper diem allowance in accordance withsection 7.01 of this revenue procedure.See § 1.274–5(f)(2)(i). In addition, suchportion of the allowance is treated as paidunder an accountable plan, is not reportedas wages or other compensation on theemployee’s Form W-2, and is exemptfrom the withholding and payment of em-ployment taxes. See § 1.62–2(c)(2) and(c)(4).

.04 An employee is required to includein gross income only the portion of theper diem allowance received from a payorthat exceeds the amount deemed substan-tiated under the rules provided in section4 or 5 of this revenue procedure if the em-ployee substantiates the business travelexpenses covered by the per diem al-lowance in accordance with section 7.01of this revenue procedure. See § 1.274–5(f)(2)(ii). In addition, the excess por-tion of the allowance is treated as paidunder a nonaccountable plan, is reportedas wages or other compensation on theemployee’s Form W-2, and is subject towithholding and payment of employmenttaxes. See § 1.62–2(c)(3)(ii), (c)(5), and(h)(2)(i)(B).

.05 If the amount of the expenses that isdeemed substantiated under the rules pro-vided in section 4.01, 4.02, or 5 of thisrevenue procedure is less than the amountof the employee’s business expenses fortravel away from home, the employeemay claim an itemized deduction for theamount by which the business travel ex-penses exceed the amount that is deemedsubstantiated, provided the employee sub-stantiates all the business travel expenses,includes on Form 2106, Employee Busi-ness Expenses, the deemed substantiatedportion of the per diem allowance re-ceived from the payor, and includes ingross income the portion (if any) of theper diem allowance received from thepayor that exceeds the amount deemedsubstantiated. See § 1.274–5(f)(2)(iii).However, for purposes of claiming thisitemized deduction with respect to mealand incidental expenses, substantiation ofthe amount of the expenses is not requiredif the employee is claiming a deductionthat is equal to or less than the amountcomputed under section 4.03 of this rev-

2001–42 I.R.B. 339 October 15, 2001

enue procedure minus the amount deemedsubstantiated under sections 4.02 and 7.01of this revenue procedure. The itemizeddeduction is subject to the appropriatelimitation (see section 2.02 of this rev-enue procedure) on meal and entertain-ment expenses provided in § 274(n) andthe 2-percent floor on miscellaneousitemized deductions provided in § 67.

.06 An employee who does not receivea per diem allowance for meal and inci-dental expenses may deduct an amountcomputed pursuant to section 4.03 of thisrevenue procedure only as an itemized de-duction. This itemized deduction is sub-ject to the appropriate limitation (see sec-tion 2.02 of this revenue procedure) onmeal and entertainment expenses pro-vided in § 274(n) and the 2-percent flooron miscellaneous itemized deductionsprovided in § 67.

.07 A self-employed individual maydeduct an amount computed pursuant tosection 4.03 of this revenue procedure indetermining adjusted gross income under§ 62(a)(1). This deduction is subject tothe appropriate limitation (see section2.02 of this revenue procedure) on mealand entertainment expenses provided in § 274(n).

.08 If a payor’s reimbursement or otherexpense allowance arrangement evi-dences a pattern of abuse of the rules of § 62(c) and the regulations thereunder, allpayments under the arrangement will betreated as made under a nonaccountableplan. Thus, such payments are includedin the employee’s gross income, are re-ported as wages or other compensation onthe employee’s Form W-2, and are subjectto withholding and payment of employ-ment taxes. See § 1.62–2(c)(3), (c)(5),and (h)(2).

SECTION 8. WITHHOLDING ANDPAYMENT OF EMPLOYMENTTAXES.

.01 The portion of a per diem al-lowance, if any, that relates to the days ofbusiness travel substantiated and that ex-ceeds the amount deemed substantiatedfor those days under section 4.01, 4.02, or5 of this revenue procedure is subject towithholding and payment of employmenttaxes. See § 1.62–2(h)(2)(i)(B).

.02 In the case of a per diem allowancepaid as a reimbursement, the excess de-scribed in section 8.01 of this revenueprocedure is subject to withholding andpayment of employment taxes in the pay-roll period in which the payor reimbursesthe expenses for the days of travel sub-stantiated. See § 1.62–2(h)(2)(i)(B)(2).

.03 In the case of a per diem allowancepaid as an advance, the excess describedin section 8.01 of this revenue procedureis subject to withholding and payment ofemployment taxes no later than the firstpayroll period following the payroll pe-riod in which the days of travel with re-spect to which the advance was paid aresubstantiated. See § 1.62–2(h)(2)(i)(B)(3). If some or all of the days of travelwith respect to which the advance waspaid are not substantiated within a reason-able period of time and the employee doesnot return the portion of the allowancethat relates to those days within a reason-able period of time, the portion of the al-lowance that relates to those days is sub-ject to withholding and payment ofemployment taxes no later than the firstpayroll period following the end of thereasonable period. See § 1.62–2(h)(2)(i)(A).

.04 In the case of a per diem allowanceonly for meal and incidental expenses fortravel away from home paid to an em-ployee in the transportation industry by apayor that uses the rule in section 4.04(3)of this revenue procedure, the excess ofthe per diem allowance paid for the periodover the amount deemed substantiated forthe period under section 4.02 of this rev-enue procedure (after applying section4.04(3) of this revenue procedure), is sub-ject to withholding and payment of em-ployment taxes no later than the first pay-roll period following the payroll period inwhich the excess is computed. See § 1.62–2(h)(2)(i)(B)(4).

.05 For example, assume that an em-ployer pays an employee a per diem al-lowance to cover business expenses formeals and lodging for travel away fromhome at a rate of 120 percent of the fed-eral per diem rate for the localities towhich the employee travels. The em-ployer does not require the employee toreturn the 20 percent by which the reim-

bursement for those expenses exceeds thefederal per diem rate. The employee sub-stantiates 6 days of travel away fromhome: 2 days in a locality in which thefederal per diem rate is $100 and 4 days ina locality in which the federal per diemrate is $125. The employer reimbursesthe employee $840 for the 6 days of travelaway from home (2 x (120% x $100) + 4x (120% x $125)), and does not requirethe employee to return the excess pay-ment of $140 (2 days x $20 ($120-$100)+ 4 days x $25 ($150-$125)). For thepayroll period in which the employer re-imburses the expenses, the employer mustwithhold and pay employment taxes on$140. See section 8.02 of this revenueprocedure.

SECTION 9. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2000–39 is hereby super-seded (except to the extent specified insections 4.04(5) and 5.06 of this revenueprocedure) for per diem allowances thatare paid both (1) to an employee on orafter October 1, 2001, and (2) with re-spect to lodging, meal, and incidental ex-penses or with respect to meal and inci-dental expenses paid or incurred for travelwhile away from home on or after Octo-ber 1, 2001. Rev. Proc. 2000–39 is alsohereby superseded (except to the extentspecified in section 4.04(5) of this rev-enue procedure) for purposes of comput-ing the amount allowable as a deductionfor meal and incidental expenses paid orincurred by an employee or self-em-ployed individual for travel while awayfrom home on or after October 1, 2001.


The principal author of this revenueprocedure is John L. Trevey, Jr., of the Of-fice of Associate Chief Counsel (IncomeTax and Accounting). For further infor-mation regarding this revenue procedure,contact Mr. Trevey at (202) 622-4970 (nota toll-free call).

October 15, 2001 340 2001–42 I.R.B.

Archer MSAs

Announcement 2001–99

PURPOSE

Sections 220(i) and (j) of the InternalRevenue Code provide that if the numberof Medical Savings Account (MSA)returns filed for 2000 or a statutorily spec-ified projection of the number of MSAreturns that will be filed for 2001 exceeds750,000, then October 1, 2001, is a “cut-off” date for the Archer MSA pilot pro-ject. The Internal Revenue Service (IRS)has determined that the applicable numberof MSA returns filed for 2000 is 36,250and that the applicable number of MSAreturns projected to be filed for 2001 is76,035 (after reduction in each case forstatutorily specified exclusions, such asthe exclusion for previously uninsuredtaxpayers). Consequently, October 1,2001, is not a “cut-off” date and 2001 isnot a “cut-off” year for the Archer MSApilot project.

BACKGROUND

The Health Insurance Portability andAccountability Act of 1996 added section220 to the Code to permit eligible individ-uals to establish Archer MSAs under apilot project effective January 1, 1997.The pilot project, as amended by TheCommunity Renewal Tax Relief Act of2000, has a scheduled “cut-off” year of2002, but may have an earlier “cut-off”year if the number of individuals whohave established Archer MSAs exceedscertain numerical limitations. See sec-tions 220(i) and (j).

If a year is a “cut-off” year, section220(i)(1) generally provides that no indi-vidual will be eligible for a deduction or ex-clusion for Archer MSA contributions forany taxable year beginning after the “cut-off” year unless the individual (A) was anactive MSA participant for any taxable yearending on or before the close of the “cut-off ” year, or (B) first became an activeMSA participant for a taxable year endingafter the “cut-off ” year by reason of cover-age under a high deductible health plan ofan MSA-participating employer.

Section 220(j)(2)(A) provides that thenumerical limitation for 2001 is exceeded

if the number of MSA returns filed on orbefore April 15, 2001, for taxable yearsending with or within the 2000 calendaryear, plus the Secretary’s estimate of thenumber of MSA returns for those taxableyears which will be filed after April 15,2001, exceeds 750,000. For this purpose,section 220(j)(2)(A) provides that a taxreturn is an MSA return for a taxable yearif any exclusion is claimed under section106(b) or any deduction is claimed undersection 220 for that taxable year. Section220(j)(2)(B) provides, as an alternativetest, that the numerical limitation for2001 is also exceeded if the sum of 90percent of the MSA returns for 2000 plusthe product of 2.5 and the number ofArcher MSAs for taxable years beginningin 2001 that are established during theportion of 2001 preceding July 1 (basedon reports by Archer MSA trustees andcustodians), exceeds 750,000.

Under section 220(j)(3), in determiningwhether any calendar year is a “cut-off”year, the Archer MSA of any previouslyuninsured individual is not taken intoaccount. In addition, section 220(j)(4)(D)specifies that, to the extent practical, allArcher MSAs established by an individ-ual are aggregated and two married indi-viduals opening separate Archer MSAsare to be treated as having a single ArcherMSA for purposes of determining thenumber of Archer MSAs.

A total of 54,979 tax returns reportingan excludable or deductible contributionto an Archer MSA for the 2000 taxableyear were filed by April 15, 2001. Of thistotal, 22,968 taxpayers were reported asbeing previously uninsured. It has beenestimated that an additional 7,253 taxreturns reporting Archer MSA contribu-tions for the 2000 taxable year have beenor will be filed after April 15, 2001,including 3,014 taxpayers who were pre-viously uninsured. Accordingly, it hasbeen determined that there were 62,232(54,979 plus 7,253) MSA returns for2000. Of this total, 25,982 (22,968 plus3,014) were for taxpayers reported asbeing previously uninsured. As a result,36,250 (62,232 minus 25,982) MSAreturns count toward the applicable statu-tory limitation for 2001 MSA returns of750,000.

Based on the Forms 8851 filed on orbefore August 1, 2001, by Archer MSAtrustees and custodians, it has been deter-mined that 22,640 taxpayers who did nothave Archer MSA contributions for 2000established Archer MSAs for 2001 duringthe portion of 2001 preceding July 1. Ofthis total, 4,967 taxpayers were reportedby trustees and custodians as previouslyuninsured, and therefore are not taken intoaccount in determining whether 2001 is a“cut-off” year. In addition, 272 taxpayerswere reported by trustees and custodiansas excludable from the count because theirspouse also established an Archer MSA,and 37 taxpayers had more than oneaccount. Accordingly, the applicable num-ber of Archer MSAs established fromJanuary 1, 2001, through June 30, 2001, is17,364 (22,640 minus (4,967 plus 272 plus37)). The alternative limitation for 2001(90 percent of the applicable number ofMSA returns for 2000 plus the product of2.5 and the number of applicable ArcherMSAs established from January 1, 2001,through June 30, 2001) is 76,035 (90 per-cent of 36,250 plus 2.5 times 17,364),which is less than the statutory limit of750,000. Thus, 2001 is not a “cut-off”year for the Archer MSA pilot project byreason of either the 2000 MSA returns testof section 220(j)(2)(A) or the alternativetest of section 220(j)(2)(B) of the Code.

Questions regarding this announcementmay be directed to Felix Zech in the Of-fice of Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities) at (202) 622-6080 (not a toll-freenumber).

Foundations Status of CertainOrganizations

Announcement 2001–102The following organizations have

failed to establish or have been unable tomaintain their status as public charitiesor as operating foundations. Accord-ingly, grantors and contributors may not,after this date, rely on previous rulingsor designations in the Cumulative Listof Organizations (Publication 78), or onthe presumption arising from the filingof notices under section 508(b) of the

Part IV. Items of General Interest

2001–42 I.R.B. 341 October 15, 2001

Code. This listing does not indicate thatthe organizations have lost their statusas organizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities. The follow-ing organizations (which have beentreated as organizations that are not pri-vate foundations described in section509(a) of the Code) are now classified asprivate foundations:

A.C. Milan Futbol Club, Plano, TXAids Prevention Education and Advocacy

Resource, Austin, TXAlumni Association of Martin Luther

King, Jr. High School, New York, NYAnew a Renewal Center for Men and

Women, Los Angeles, CAAnointed Voices, Corpus Christi, TXAustin Revitalization Authority,

Austin, TXAustin Sign Language Theatre Academy,

Austin, TXBaptist Ministries of South Texas, Inc.,

San Antonio, TXBeta Education Foundation, Austin, TXBible Memory Challenge Ministries,

San Antonio, TXBishop College Historical Society, Inc.,

Dallas, TXBridge the Gap, Inc., Fort Worth, TXBuckingham Terrace, Inc., Atlanta, GABurleson County Reserve Law

Enforcement Officers Association,Caldwell, TX

Cadillac Power Hitters Association,Kaufman, TX

Calvary Center, Inc., Laredo, TXCentro De Inmigracion, Dallas, TXCFIDS Walk-A-Thon Committee,

Hicksville, NYCherokees of North Texas, Dallas, TXChildrens Life Link, Inc., Waco, TXChinese Broadcasting Network, Inc.,

Richardson, TXColorado Museum of Contemporary Arts,

Inc., Denver, COColorado Volunteer Victim Advocate

Program, Arvada, COCourt Appointed Special Advocates of

Upshur County, Inc., Gilmer, TXDenton Public School Foundation, Inc.,

Denton, TXDivine Health Care Systems, Inc.,

San Antonio, TXEast Texas Critical Incident Stress

Management Team, Inc., Tyler, TXEcotema, Davis, CA

El Paso Charities Community Chest, El Paso, TX

El Paso Million Man March Initiative,Inc., El Paso, TX

El Paso Minority Supplier DevelopmentCouncil, Inc., El Paso, TX

Elite Credit Services, Inc., Dallas, TXEmergency Assistance Alliance, Inc.,

Fort Worth, TXEnvironmental Mobility, Inc.,

Corpus Christi, TXEveryman Project, Austin, TXFillmore Civic Arts Council, Inc.,

Fillmore, UTFirst Motion, Inc., Mokena, ILForth Worth Rugby Football Corporation,

Ft. Worth, TXFoundation for Aquatic Safety and

Training, Dallas, TXFoundation of Behavior Education

Modification FBEM, Fort Worth, TXFriends Who Care Foundation,

Georgetown, TXGambian Association of Massachusetts,

Somerville, MAGamma Education Foundation,

Austin, TXGay and Lesbian Leaders Outreach

Project Gallop, Dallas, TXGood News Music Ministry, Bryan, TXGrace Vocational Academy, Post, TXGriggs Foundation, Inc., Dallas, TXHatzolah Jerusalem, Inc., Brooklyn, NYHelping Hands for Life, Inc., Austin, TXHFJ Community Services, Tacoma, WAHispanic Women for Progress,

Big Spring, TXHouston Musicians Benefit Foundation,

Houston, TXHuman Potential Development Corp.,

Texarkana, TXImagination Young Peoples Center for

Science Music and Movement in EastAustin, Austin, TX

Institute for Learning andCommunication Strategies, Inc.,Austin, TX

Institute of New Physics, Inc., Los Angeles, CA

Internet Archive, San Francisco, CAJaguar Museum for British Car History a

NJ Non-Profit Corp., Mahwah, NJJohnson County Business Development

Corporation, Tecumseh, NEJoshua Community Development, Inc.,

Joshua, TXKathleen Akin Scholarship Fund,

Rockport, TX

Kids Voting California, San Jose, CAKilleen Amateur Boxing Association,

Kileen, TXKing Preservation Corporation,

Chicago, ILKnights of Malta Sovereign Order of

Hospitallers of St. John of Jerusalem,Gallatin, TN

Kosher Kesher, Inc., Brooklyn, NYKPCH, Inc., Winston-Salem, NCLa Habra High School Volleyball

Boosters, La Habra, CALa Junta Housing Development

Corporation, La Junta, COLake State Community Housing, Inc.,

St. Joseph, MILake Villa Township Youth Football,

Lake Villa, ILLazarus Alliance, Draper, UTLearning Safari, Great Falls, VALets Help Sunray, Inc., Dumas, TXLife Match, Waco, TXLiga Pan Americana Aguilas, Inc.,

San Antonio, TXLilies of the Field, Walnut, CALillian J. Robinson Community

Development Corporation, Bryan, TXLiving Word Outreach, Inc.,

Fairburn, GALove of Life Pregnancy Center, Inc.,

El Paso, TXLove on 4 Paws, Ennis, TXLove the Animals Charitable Trust,

El Cerrito, CAMaggies Playhouse, Dallas, TXManos Extendidas, Kent, WAMary Starke Harper Foundation, Inc.,

Tuscaloosa, ALMassachusetts Vietnam Veterans

Foundation, Inc., W. Springfield, MAMercy Wings International, Inc.,

Caddo Mills, TXMica League, Inc., Philadelphia, PAMigala Foundation, Duncanville, TXMingeikan USA Tour, Fort Worth, TXMinnesota Housing Initiative,

Brooklyn Park, MNMohawk Area Development Corporation,

Cincinnati, OHMontgomery Times Foundation, Inc.,

Rockville, MDMorgantown Lacrosse Club, Inc.,

Morgantown, WVMorning Mist Ranch, Lubbock, TXNational Sexual Trauma Center, Inc.,

Pass Christian, MSNCOA Student Civic Action Program,

Inc., Mcghee Tyson, TN

October 15, 2001 342 2001–42 I.R.B.

Neighborhood in Action, Austin, TXNeighborhoods Acting Together,

San Antonio, TXNew Directions Network, Inc.,

Galveston, TXNew Life Ministries of the Rio Grande

Valley, Inc., Harlingen, TXNew Millennium Educational Institute,

Redwood City, CANicaraguan - American Childrens

Foundation, Inc., Miami, FLNorth Bay Volunteer Medical Clinic, Inc.,

Ingleside, TXNorth Texas Junior Golf & Education

Foundation, Dallas, TXNortheast Alamo Community

Development Corporation, San Antonio, TX

Old East Dallas NeighborhoodAssociation, Dallas, TX

Omega Education Foundation,Georgetown, TX

Organization for the Enrichment ofHuman Resource, Fairfield, CA

Pacific Actors Company, Sonoma, CAParker County Child Protective Services

Board, Weatherford, TXPedastal Gardens Residents Association,

Baltimore, MDPeoples First Intermediate Care, Phoenix, ILPioneer Mountain Foundation, Inc.,

Ketchum, IDPlano Lacrosse Association, Plano, TXPlayer Service Foundation, Newport, RIPlayground For All, Inc., Azle, TXPPBA Scholarship Foundation, Inc.,

Toledo, OHPro-Action, El Paso, TXProfessional Outreach Ministries, Inc.,

San Antonio, TXProject Hope Tenants Assoc., Inc.,

Bronx, NYProject Wheelbarrow, Inc., Canton, OHQuitman Foundation of Perpetual

Scholastic Funds, Quitman, TXRaymine, Dallas, TXReaching & Identifying Special Kids-

R.I.S.K., Picayune, MSReal Solution Living Program,

San Antonio, TXReconciled Ministries, Inc.,

San Antonio, TXRecovery Haven Drug Recovery Center,

Medaryville, INRediscover Opportunity, Inc.,

Louisville, CORhythm of Life Foundation,

Los Angeles, CA

Rifled Arms Historical Association,Wallkill, NY

Robbie Cave Ministries, Austin, TXRoger Brown Benefit Fund, Inc.,

Greensboro, NCRomanian Childrens Connection, Inc.,

Alexandria, VARunning Creek Animal Refuge, Inc.,

San Antonio, TXRyan Dietzman Memorial Scholarship

Fund, Justin, TXSan Antonio Public Theatre,

San Antonio, TXSandy Ford Junior Shooters, Inc.,

Streator, ILSave Our Kids Boxing Association,

Cleburne, TXSave the World Ministries, Berkeley, CAScurry Youth Center, Snyder, TXSeagraves-Loop Youth Association,

Seagraves, TXSenior Care Careers, Inc.,

Schaumburg, ILShades of the African-American Woman,

Austin, TXShare the Wealth Ministries,

Mt. Airy, GAShenango Presbyterian Senior Housing,

Inc., Oakmount, PASierra Community Healthcare

Foundation, Las Vegas, NVSilver City Jazz Society, Silver City, NMSisters of Safety, Buena Vista, COSoutheastern Connecticut Mental Health

Authority, Inc., Norwich, CTSouthern Oregon Family Consortium,

Medford, ORSouthside Virginia Wildlife

Rehabilitation Center, Inc., South Hill, VA

Special Events for Aids, Inc., Sterling Hgts., MI

Springbrook Farm Corporation, Stow, MA

SSG Richard A. Fitts Veterans TransitionalCenter, Inc., Braintree, MA

St. Louis Bombers Rugby Football Club,Inc., St. Louis, MO

Step-Save the Earth and Its People, Inc.,Jasper, GA

Street Light Productions, Inc., San Antonio, TX

Surgery Education Fund, Ann Arbor, MISynergy Local Development

Corporation, Philadelphia, PATaskmates, Providence, RITaylors Charities Program, Dallas, TXTelees Kids, Inc., Dallas, TX

Texas Hunter Education InstructorsAssociation, Inc., Georgetown, TX

Texas Pride Baseball, Fort Worth, TXTexas Society for Medical Staff Services,

Austin, TXTexas Socratic Foundation, Austin, TXTheatre on Elm Street Toes, Dallas, TXThomas G. Daugherty Memorial

Scholarship Fund, Sacramento, CAThree Rivers Housing Development

Corporation, Rome, GATransitional Services and Housing, Inc.,

Beavercreek, OHTwla Gibson Transplant Fund,

Victoria, TXTyler County, Woodville, TXU.I.S.D. Campus Crime Stoppers, Inc.,

Laredo, TXUmoja, Inc., Fort Worth, TXUnified Resident Council of Chandler,

Chandler, AZUnity Foundation, San Antonio, TXUnlimited Access Educational Services,

Ann Arbor, MIUPCOD, Inc., Freer, TXVaad Ahavas Chinum, Inc., Baltimore, MDVenture Outreach International,

Fort Worth, TXVirology Institute, San Antonio, TXVisions of North Carolina, Greensboro, NCWashington Times Foundation, Inc.,

Washington, DCWeiss & Weiss Aquatics, Austin, TXWetstone Integrated Community

Services, San Diego, CAWhere Hearts Can Mend, San Antonio, TXWomen & Youth Supporting Each Other,

Los Angeles, CAYucca Corridor Coalition of Property Owners

& Managers, Inc., Hollywood, CAZion Arts Institute, Inc., San Antonio, TXZions Treatment Center, Inc., Miami, FL

If an organization listed above sub-mits information that warrants the re-newal of its classification as a publiccharity or as a private operating founda-tion, the Internal Revenue Service willissue a ruling or determination letterwith the revised classification as tofoundation status. Grantors and contrib-utors may thereafter rely upon such rul-ing or determination letter as providedin section 1.509(a)–7 of the Income TaxRegulations. It is not the practice of theService to announce such revised classi-fication of foundation status in the Inter-nal Revenue Bulletin.

2001–42 I.R.B. i October 15, 2001

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

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

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

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 ap-

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

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

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

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

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

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

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

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

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security

Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contributions Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

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

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

October 15, 2001 ii 2001–42 I.R.B.

Numerical Finding List1

Bulletins 2001–27 through 2001–41

Announcements:

2001–69, 2001–27 I.R.B. 232001–70, 2001–27 I.R.B. 232001–71, 2001–27 I.R.B. 262001–72, 2001–28 I.R.B. 392001–73, 2001–28 I.R.B. 402001–74, 2001–28 I.R.B. 402001–75, 2001–28 I.R.B. 422001–76, 2001–29 I.R.B. 672001–77, 2001–30 I.R.B. 832001–78, 2001–30 I.R.B. 872001–79, 2001–31 I.R.B. 972001–80, 2001–31 I.R.B. 982001–81, 2001–33 I.R.B. 1752001–82, 2001–32 I.R.B. 1232001–83, 2001–35 I.R.B. 2052001–84, 2001–35 I.R.B. 2062001–85, 2001–36 I.R.B. 2192001–86, 2001–35 I.R.B. 2072001–87, 2001–35 I.R.B. 2082001–88, 2001–36 I.R.B. 2202001–89, 2001–38 I.R.B. 2912001–90, 2001–35 I.R.B. 2082001–91, 2001–36 I.R.B. 2212001–92, 2001–39 I.R.B. 3012001–94, 2001–39 I.R.B. 3032001–95, 2001–39 I.R.B. 3032001–96, 2001–41 I.R.B. 3172001–97, 2001–40 I.R.B. 3102001–98, 2001–41 I.R.B. 3172001–100, 2001–41 I.R.B. 317

Court Decisions:

2070, 2001–31 I.R.B. 90

Notices:

2001–39, 2001–27 I.R.B. 32001–41, 2001–27 I.R.B. 22001–42, 2001–30 I.R.B. 702001–43, 2001–30 I.R.B. 722001–44, 2001–30 I.R.B. 772001–45, 2001–33 I.R.B. 1292001–46, 2001–32 I.R.B. 1222001–47, 2001–36 I.R.B. 2122001–48, 2001–33 I.R.B. 1302001–49, 2001–34 I.R.B. 1882001–50, 2001–34 I.R.B. 1892001–51, 2001–34 I.R.B. 1902001–52, 2001–35 I.R.B. 2032001–53, 2001–37 I.R.B. 2252001–54, 2001–37 I.R.B. 2252001–55, 2001–39 I.R.B. 2992001–56, 2001–38 I.R.B. 2772001–57, 2001–38 I.R.B. 2792001–58, 2001–39 I.R.B. 2992001–59, 2001–41 I.R.B. 3152001–60, 2001–40 I.R.B. 3042001–61, 2001–40 I.R.B. 3052001–62, 2001–40 I.R.B. 3072001–63, 2001–40 I.R.B. 3082001–64, 2001–41 I.R.B. 316

Proposed Regulations:

REG–110311–98, 2001–35 I.R.B. 204REG–106917–99, 2001–27 I.R.B. 4REG–103735–00, 2001–35 I.R.B. 204REG–103736–00, 2001–35 I.R.B. 204REG–100548–01, 2001–29 I.R.B. 67REG–106431–01, 2001–37 I.R.B. 272

Railroad Retirement Quarterly Rates:

2001–27, I.R.B. 12001–41, I.R.B. 314

Revenue Procedures:

2001–39, 2001–28 I.R.B. 382001–40, 2001–33 I.R.B. 1302001–41, 2001–33 I.R.B. 1732001–42, 2001–36 I.R.B. 2122001–43, 2001–34 I.R.B. 1912001–44, 2001–35 I.R.B. 2032001–45, 2001–37 I.R.B. 2272001–46, 2001–37 I.R.B. 2632001–48, 2001–40 I.R.B. 3082001–49, 2001–39 I.R.B. 300

Revenue Rulings:

2001–30, 2001–29 I.R.B. 462001–33, 2001–32 I.R.B. 1182001–34, 2001–28 I.R.B. 312001–35, 2001–29 I.R.B. 592001–36, 2001–32 I.R.B. 1192001–37, 2001–32 I.R.B. 1002001–38, 2001–33 I.R.B. 1242001–39, 2001–33 I.R.B. 1252001–40, 2001–38 I.R.B. 2762001–41, 2001–35 I.R.B. 1932001–42, 2001–37 I.R.B. 2232001–43, 2001–36 I.R.B. 2092001–44, 2001–37 I.R.B. 2232001–47, 2001–39 I.R.B. 2932001–49, 2001–41 I.R.B. 312

Treasury Decisions:

8947, 2001–28 I.R.B. 368948, 2001–28 I.R.B. 278949, 2001–28 I.R.B. 338950, 2001–28 I.R.B. 348951, 2001–29 I.R.B. 638952, 2001–29 I.R.B. 608953, 2001–29 I.R.B. 448954, 2001–29 I.R.B. 478955, 2001–32 I.R.B. 1018956, 2001–32 I.R.B. 1128957, 2001–33 I.R.B. 1258958, 2001–34 I.R.B. 1838959, 2001–34 I.R.B. 1858960, 2001–34 I.R.B. 1768961, 2001–35 I.R.B. 1948962, 2001–35 I.R.B. 2018963, 2001–35 I.R.B. 197

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2001–1 through 2001–26is in Internal Revenue Bulletin 2001–27, dated July2, 2001.

2001–42 I.R.B. iii October 15, 2001

Finding List of Current Actions onPreviously Published Items1

Bulletins 2001–27 through 2001–41

Announcements:

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

Notices:


99–41Modified and superseded by Notice 2001–62, 2001–40 I.R.B. 307



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


Proposed Regulations:

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

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

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

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



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

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

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

Revenue Procedures:

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

Revenue Procedures—Continued:

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

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

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

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

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

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

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


2000–39Corrected byAnn. 2001–73, 2001–28 I.R.B. 40

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


Revenue Rulings:

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




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


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


Revenue Rulings—Continued:

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

Treasury Decisions:

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

1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2001–1 through 2001–26 is in Internal RevenueBulletin 2001–27, dated July 2, 2001.

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