[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



                    26


          Part 1 (Sec. 1.1551-1 to End)

                         Revised as of April 1, 2003

Internal Revenue





          Containing a codification of documents of general 
          applicability and future effect
          As of April 1, 2003
          With Ancillaries
          Published by
          Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register



[[Page ii]]

                                      




                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003



  For sale by the Superintendent of Documents, U.S. Government Printing 
                                  Office
  Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area 
                              (202) 512-1800
      Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001



[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     631
      Alphabetical List of Agencies Appearing in the CFR......     649
      Table of OMB Control Numbers............................     659
      List of CFR Sections Affected...........................     677



[[Page iv]]


      


                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  26 CFR 1.1551-1 
                       refers to title 26, part 
                       1, section 1551-1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2003), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
info@fedreg.nara.gov.

SALES

    The Government Printing Office (GPO) processes all sales and 
distribution of the CFR. For payment by credit card, call toll free, 
866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or 
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371954, Pittsburgh, PA 15250-7954. For GPO Customer Service call 202-
512-1803.

ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers, Weekly Compilation of Presidential 
Documents and the Privacy Act Compilation are available in electronic 
format at www.access.gpo.gov/nara (``GPO Access''). For more 
information, contact Electronic Information Dissemination Services, U.S. 
Government Printing Office. Phone 202-512-1530, or 888-293-6498 (toll-
free). E-mail, gpoaccess@gpo.gov.

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.archives.gov/federal--
register. The NARA site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 2003.



[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2003. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60; 
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850; 
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400; 
Secs. 1.1401-1.1503-2A; and Sec. 1.1551-1 to end. The fourteenth volume 
containing parts 2-29, includes the remainder of subchapter A and all of 
Subchapter B--Estate and Gift Taxes. The last six volumes contain parts 
30-39 (Subchapter C--Employment Taxes and Collection of Income Tax at 
Source); parts 40-49; parts 50-299 (Subchapter D--Miscellaneous Excise 
Taxes); parts 300-499 (Subchapter F--Procedure and Administration); 
parts 500-599 (Subchapter G--Regulations under Tax Conventions); and 
part 600 to end (Subchapter H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec. 602.101 of this 
chapter. For the convenience of the user, Sec. 602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

[[Page x]]





[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




            (This book contains part 1, Sec. 1.1551-1 to End)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, January 25, 
1980, deleting statutory sections from their regulations. In Chapter I 
cross references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, March 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes................................           5

Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                  SUBCHAPTER A--INCOME TAX (CONTINUED)





PART 1--INCOME TAXES--Table of Contents




                              RELATED RULES

Sec.
1.1551-1  Disallowance of surtax exemption and accumulated earnings 
          credit.
1.1552-1  Earnings and profits.

                     Certain Controlled Corporations

1.1561-0  Effective date.
1.1561-1  Limitations on certain multiple tax benefits in the case of 
          certain controlled corporations.
1.1561-2  Determination of amount of tax benefits.
1.1561-3  Apportionment of surtax exemption.
1.1562-0  Effective date.
1.1562-1  Privilege of controlled group to elect multiple surtax 
          exemptions.
1.1562-2  Termination of election.
1.1562-3  Consents to election and termination.
1.1562-4  Election after termination.
1.1562-5  Continuing and successor controlled groups.
1.1562-6  Election for short taxable years.
1.1562-7  Extension of statutory periods of limitation.
1.1563-1  Definition of controlled group of corporations and component 
          members.
1.1563-2  Excluded stock.
1.1563-3  Rules for determining stock ownership.
1.1563-4  Franchised corporations.
1.1564-1  Limitations on additional benefits for members of controlled 
          groups.

                      Procedure and Administration

                         INFORMATION AND RETURNS

                           returns and records

                Records, Statements, and Special Returns

1.6001-1  Records.
1.6001-2  Returns.

                        Tax Returns or Statements

1.6011-1  General requirement of return, statement, or list.
1.6011-2  Returns, etc., of DISC's and former DISC's.
1.6011-3  Requirement of statement from payees of certain gambling 
          winnings.
1.6011-4  Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
1.6012-1  Individuals required to make returns of income.
1.6012-2  Corporations required to make returns of income.
1.6012-3  Returns by fiduciaries.
1.6012-4  Miscellaneous returns.
1.6012-5  Composite return in lieu of specified form.
1.6012-6  Returns by political organizations.
1.6013-1  Joint returns.
1.6013-2  Joint return after filing separate return.
1.6013-3  Treatment of joint return after death of either spouse.
1.6013-4  Applicable rules.
1.6013-6  Election to treat nonresident alien individual as resident of 
          the United States.
1.6013-7  Joint return for year in which nonresident alien becomes 
          resident of the United States.
1.6014-1  Tax not computed by taxpayer for taxable years beginning 
          before January 1, 1970.
1.6014-2  Tax not computed by taxpayer for taxable years beginning after 
          December 31, 1969.
1.6015-0  Table of contents.
1.6015-1  Relief from joint and several liability on a joint return.
1.6015-2  Relief from liability applicable to all qualifying joint 
          filers.
1.6015-3  Allocation of deficiency for individuals who are no longer 
          married, are legally separated, or are not members of the same 
          household.
1.6015-4  Equitable relief.
1.6015-5  Time and manner for requesting relief.
1.6015-6  Nonrequesting spouse's notice and opportunity to participate 
          in administrative proceedings.
1.6015-7  Tax Court review.
1.6015-8  Applicable liabilities.
1.6015-9  Effective date.
1.6015(a)-1  Declaration of estimated income tax by individuals.
1.6015(b)-1  Joint declaration by husband and wife.
1.6015(c)-1  Definition of estimated tax.
1.6015(d)-1  Contents of declaration of estimated tax.
1.6015(e)-1  Amendment of declaration.
1.6015(f)-1  Return as declaration or amendment.
1.6015(g)-1  Short taxable years of individuals.
1.6015(h)-1  Estates and trusts.
1.6015(i)-1  Nonresident alien individuals.
1.6015(j)-1  Applicability.
1.6016-1  Declarations of estimated income tax by corporations.
1.6016-2  Contents of declaration of estimated tax.
1.6016-3  Amendment of declaration.

[[Page 6]]

1.6016-4  Short taxable year.
1.6017-1  Self-employment tax returns.

                           Information Returns

1.6031(a)-1  Return of partnership income.
1.6031(b)-1T  Statements to partners (temporary).
1.6031(b)-2T  REMIC reporting requirements (temporary). [Reserved]
1.6031(c)-1T  Nominee reporting of partnership information (temporary).
1.6031(c)-2T  Nominee reporting of REMIC information (temporary). 
          [Reserved]
1.6032-1  Returns of banks with respect to common trust funds.
1.6033-1  Returns by exempt organizations; taxable years beginning 
          before January 1, 1970.
1.6033-2  Returns by exempt organizations (taxable years beginning after 
          December 31, 1969) and returns by certain nonexempt 
          organizations (taxable years beginning after December 31, 
          1980).
1.6033-3  Additional provisions relating to private foundations.
1.6034-1  Information returns required of trusts described in section 
          4947(a)(2) or claiming charitable or other deductions under 
          section 642(c).
1.6035-1  Returns of U.S. officers, directors and 10-percent 
          shareholders of foreign personal holding companies for taxable 
          years beginning after September 3, 1982.
1.6035-2  Returns of U.S. officers and directors of foreign personal 
          holding companies for taxable years beginning before September 
          4, 1982.
1.6035-3  Returns of 50-percent U.S. shareholders of foreign personal 
          holding companies for taxable years beginning before September 
          4, 1982.
1.6036-1  Notice of qualification as executor or receiver.
1.6037-1  Return of electing small business corporation.
1.6038-1  Information returns required of domestic corporations with 
          respect to annual accounting periods of certain foreign 
          corporations beginning before January 1, 1963.
1.6038-2  Information returns required of United States persons with 
          respect to annual accounting periods of certain foreign 
          corporations beginning after December 31, 1962.
1.6038-3  Information returns required of certain United States persons 
          with respect to controlled foreign partnerships (CFPs).
1.6038-3T  Information returns required of certain United States persons 
          with respect to controlled foreign partnership (CFPs) 
          (temporary).
1.6038A-0  Table of contents.
1.6038A-1  General requirements and definitions.
1.6038A-2  Requirement of return.
1.6038A-3  Record maintenance.
1.6038A-4  Monetary penalty.
1.6038A-5  Authorization of agent.
1.6038A-6  Failure to furnish information.
1.6038A-7  Noncompliance.
1.6038B-1  Reporting of certain transfers to foreign corporations.
1.6038B-1T  Reporting of certain transactions to foreign corporations 
          (temporary).
1.6038B-2  Reporting of certain transfers to foreign partnerships.
1.6039-1  Information returns required of corporations with respect to 
          certain stock option transactions occurring on or after 
          January 1, 1964.
1.6039-2  Statements to persons with respect to whom information is 
          furnished.
1.6041-1  Return of information as to payments of $600 or more.
1.6041-2  Return of information as to payments to employees.
1.6041-2T  Return of information as to payments to employees 
          (temporary).
1.6041-3  Payments for which no return of information is required under 
          section 6041.
1.6041-4  Foreign-related items and other exceptions.
1.6041-5  Information as to actual owner.
1.6041-6  Returns made on Forms 1096 and 1099 under section 6041; 
          contents and time and place for filing.
1.6041-7  Magnetic media requirement.
1.6041-8  Cross-reference to penalties.
1.6041A-1  Returns regarding payments of remuneration for services and 
          certain direct sales.
1.6042-1  Return of information as to dividends paid in calendar years 
          before 1963.
1.6042-2  Returns of information as to dividends paid.
1.6042-3  Dividends subject to reporting.
1.6042-4  Statements to recipients of dividend payments.
1.6043-1  Return regarding corporate dissolution or liquidation.
1.6043-2  Return of information respecting distributions in liquidation.
1.6043-3  Return regarding liquidation, dissolution, termination, or 
          substantial contraction of organizations exempt from taxation 
          under section 501(a).
1.6043-4T  Information returns relating to certain acquisitions of 
          control and changes in capital structure (temporary).
1.6044-1  Returns of information as to patronage dividends with respect 
          to patronage occurring in taxable years beginning before 1963.
1.6044-2  Returns of information as to payments of patronage dividends.
1.6044-3  Amounts subject to reporting.
1.6044-4  Exemption for certain consumer cooperatives.
1.6044-5  Statements to recipients of patronage dividends.

[[Page 7]]

1.6045-1  Returns of information of brokers and barter exchanges.
1.6045-1T  Returns of information of brokers and barter exchanges 
          (temporary).
1.6045-2  Furnishing statement required with respect to certain 
          substitute payments.
1.6045-2T  Furnishing statement required with respect to certain 
          substitute payments (temporary).
1.6045-3T  Information reporting for an acquisition of control or a 
          substantial change in capital structure (temporary).
1.6045-4  Information reporting on real estate transactions with dates 
          of closing on or after January 1, 1991.
1.6046-1  Returns as to organization or reorganization of foreign 
          corporations and as to acquisitions of their stock, on or 
          after January 1, 1963.
1.6046A-1  Return requirement for United States persons who acquire or 
          dispose of an interest in a foreign partnership, or whose 
          proportional interest in a foreign partnership changes 
          substantially.
1.6046-2  Returns as to foreign corporations which are created or 
          organized, or reorganized, on or after September 15, 1960, and 
          before January 1, 1963.
1.6046-3  Returns as to formation or reorganization of foreign 
          corporations prior to September 15, 1960.
1.6047-1  Information to be furnished with regard to employee retirement 
          plan covering an owner-employee.
1.6049-1  Returns of information as to interest paid in calendar years 
          before 1983 and original issue discount includible in gross 
          income for calendar years before 1983.
1.6049-2  Interest and original issue discount subject to reporting in 
          calendar years before 1983.
1.6049-3  Statements to recipients of interest payments and holders of 
          obligations to which there is attributed original issue 
          discount in calendar years before 1983.
1.6049-4  Return of information as to interest paid and original issue 
          discount includible in gross income after December 31, 1982.
1.6049-5  Interest and original issue discount subject to reporting 
          after December 31, 1982.
1.6049-5T  Reporting by brokers of interest and original issue discount 
          on and after January 1, 1986 (temporary).
1.6049-6  Statements to recipients of interest payments and holders of 
          obligations for attributed original issue discount.
1.6049-7  Returns of information with respect to REMIC regular interests 
          and collateralized debt obligations.
1.6049-7T  Market discount fraction reported with other financial 
          information with respect to REMICs and collateralized debt 
          obligations (temporary).
1.6049-8  Interest and original issue discount paid to residents of 
          Canada.
1.6050A-1  Reporting requirements of certain fishing boat operators.
1.6050B-1  Information returns by person making unemployment 
          compensation payments.
1.6050D-1  Information returns relating to energy grants and financing.
1.6050E-1  Reporting of State and local income tax refunds.
1.6050H-0  Table of contents.
1.6050H-1  Information reporting of mortgage interest received in a 
          trade or business from an individual.
1.6050H-1T  Information reporting of mortgage interest received in a 
          trade or business from individuals after 1985 and before 1988 
          (temporary).
1.6050H-2  Time, form, and manner of reporting interest received on 
          qualified mortgage.
1.6050I-0  Table of contents.
1.6050I-1  Returns relating to cash in excess of $10,000 received in a 
          trade or business.
1.6050I-2  Returns relating to cash in excess of $10,000 received as 
          bail by court clerks.
1.6050J-1T  Questions and answers concerning information returns 
          relating to foreclosures and abandonments of security 
          (temporary).
1.6050K-1  Returns relating to sales or exchanges of certain partnership 
          interests.
1.6050L-1  Information return by donees relating to certain dispositions 
          of donated property.
1.6050M-1  Information returns relating to persons receiving contracts 
          from certain Federal executive agencies.
1.6050N-1  Statements to recipients of royalties paid after December 31, 
          1986.
1.6050P-0  Table of contents.
1.6050P-1  Information reporting for discharges of indebtedness by 
          certain financial entities.
1.6050S-0  Table of contents.
1.6050S-1  Information reporting for qualified tuition and related 
          expenses.
1.6050S-2T  Electronic furnishing of information statements for 
          qualified tuition and related expenses (temporary).
1.6050S-3  Information reporting for payments of interest on qualified 
          education loans.
1.6050S-4T  Electronic furnishing of information statements for payments 
          of interest on qualified education loans (temporary).
1.6052-1  Information returns regarding payment of wages in the form of 
          group-term life insurance.
1.6052-2  Statements to be furnished employees with respect to wages 
          paid in the form of group-term life insurance.
1.6060-1  Reporting requirements for income tax return preparers.

[[Page 8]]

          Signing and Verifying of Returns and Other Documents

1.6061-1  Signing of returns and other documents by individuals.
1.6062-1  Signing of returns, statements, and other documents made by 
          corporations.
1.6063-1  Signing of returns, statements, and other documents made by 
          partnerships.
1.6065-1  Verification of returns.

               Time for Filing Returns and Other Documents

1.6071-1  Time for filing returns and other documents.
1.6072-1  Time for filing returns of individuals, estates, and trusts.
1.6072-2  Time for filing returns of corporations.
1.6072-3  Income tax due dates postponed in case of China Trade Act 
          corporations.
1.6072-4  Time for filing other returns of income.
1.6073-1  Time and place for filing declarations of estimated income tax 
          by individuals.
1.6073-2  Fiscal years.
1.6073-3  Short taxable years.
1.6073-4  Extension of time for filing declarations by individuals.
1.6074-1  Time and place for filing declarations of estimated income tax 
          by corporations.
1.6074-2  Time for filing declarations by corporations in case of a 
          short taxable year.
1.6074-3  Extension of time for filing declarations by corporations.

                  Extension of Time for Filing Returns

1.6081-1  Extension of time for filing returns.
1.6081-1T  Extension of time to file return in case of taxpayers with 
          mixed straddles (temporary).
1.6081-2  Automatic extension of time to file partnership return of 
          income.
1.6081-3  Automatic extension of time for filing corporation income tax 
          returns.
1.6081-4  Automatic extension of time for filing individual income tax 
          returns.
1.6081-5  Extensions of time in the case of certain partnerships, 
          corporations and U.S. citizens and residents.
1.6081-6  Automatic extension of time to file trust income tax return.
1.6081-7  Automatic extension of time to file Real Estate Mortgage 
          Investment Conduit (REMIC) income tax return.

               Place for Filing Returns or Other Documents

1.6091-1  Place for filing returns or other documents.
1.6091-2  Place for filing income tax returns.
1.6091-3  Income tax returns required to be filed with Director of 
          International Operations.
1.6091-4  Exceptional cases.

                        Miscellaneous Provisions

1.6102-1  Computations on returns or other documents.
1.6107-1  Income tax return preparer must furnish copy of return to 
          taxpayer and must retain a copy or record.
1.6109-1  Identifying numbers.
1.6109-2  Income tax return preparers furnishing identifying numbers for 
          returns or claims for refund filed after December 31, 1999.
1.6115-1  Disclosure requirements for quid pro quo contributions.

 Regulations Applicable to Returns or Claims for Refund Filed Prior to 
                             January 1, 2000

1.6109-2A  Furnishing identifying number of income tax return preparer.

                      TIME AND PLACE FOR PAYING TAX

                  Place and Due Date for Payment of Tax

1.6151-1  Time and place for paying tax shown on returns.
1.6152-1  Installment payments.
1.6153-1  Payment of estimated tax by individuals.
1.6153-2  Fiscal years.
1.6153-3  Short taxable years.
1.6153-4  Extension of time for paying the estimated tax.
1.6154-1  Payment of estimated tax by corporations.
1.6154-2  Short taxable years.
1.6154-3  Extension of time for paying estimated tax.
1.6154-4  Use of Government depositaries.
1.6154-5  Definition of estimated tax.

                     Extensions of Time for Payment

1.6161-1  Extension of time for paying tax or deficiency.
1.6162-1  Extension of time for payment of tax on gain attributable to 
          liquidation of personal holding companies.
1.6164-1  Extensions of time for payment of taxes by corporations 
          expecting carrybacks.
1.6164-2  Amount of tax the time for payment of which may be extended.
1.6164-3  Computation of the amount of reduction of the tax previously 
          determined.
1.6164-4  Payment of remainder of tax where extension relates to only 
          part of the tax.
1.6164-5  Period of extension.
1.6164-6  Revised statements.
1.6164-7  Termination by district director.
1.6164-8  Payments on termination.
1.6164-9  Cross references.
1.6165-1  Bonds where time to pay the tax or deficiency has been 
          extended.

[[Page 9]]

                               COLLECTION

                           General Provisions

1.6302-1  Use of Government depositaries in connection with corporation 
          income and estimated income taxes and certain taxes of tax-
          exempt organizations.
1.6302-2  Use of Government depositaries for payment of tax withheld on 
          nonresident aliens and foreign corporations.
1.6302-3  Use of Government depositaries in connection with estimated 
          taxes of certain trusts.
1.6302-4  Use of financial institutions in connection with income taxes; 
          voluntary payments by electronic funds transfer.
1.6361-1  Collection and administration of qualified State individual 
          income taxes.

                    ABATEMENTS, CREDITS, AND REFUNDS

1.6411-1  Tentative carryback adjustments.
1.6411-2  Computation of tentative carryback adjustment.
1.6411-3  Allowance of adjustments.
1.6411-4  Consolidated groups.
1.6414-1  Credit or refund of tax withheld on nonresident aliens and 
          foreign corporations.
1.6425-1  Adjustment of overpayment of estimated income tax by 
          corporation.
1.6425-2  Computation of adjustment of overpayment of estimated tax.
1.6425-3  Allowance of adjustments.

   ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES

1.6654-1  Addition to the tax in the case of an individual.
1.6654-2  Exceptions to imposition of the addition to the tax in the 
          case of individuals.
1.6654-3  Short taxable years of individuals.
1.6654-4  Waiver of penalty for underpayment of 1971 estimated tax by an 
          individual.
1.6654-5  Applicability.
1.6655-1  Addition to the tax in the case of a corporation.
1.6655-2  Exceptions to imposition of the addition to the tax in the 
          case of corporations.
1.6655-2T  Safe harbor for certain installments of tax due before July 
          1, 1987 (temporary).
1.6655-3  Short taxable years in the case of corporations.
1.6655-5  Addition to tax on account of excessive adjustment under 
          section 6425.
1.6655-7  Special rules for estimating the corporate alternative minimum 
          tax book income adjustment under the annualization exception.
1.6655(e)-1  Time and manner for making election under the Omnibus 
          Budget Reconciliation Act of 1993.
1.6661-1  Addition to tax in the case of a substantial understatement of 
          tax liability.
1.6661-2  Computation of penalty; meaning of terms.
1.6661-3  Substantial authority.
1.6661-4  Disclosure of certain information.
1.6661-5  Items relating to tax shelters.
1.6661-6  Waiver of penalty.
1.6662-0  Table of contents.
1.6662-1  Overview of the accuracy-related penalty.
1.6662-2  Accuracy-related penalty.
1.6662-3  Negligence or disregard of rules or regulations.
1.6662-4  Substantial understatement of income tax.
1.6662-5  Substantial and gross valuation misstatements under chapter 1.
1.6662-5T  Substantial and gross valuation misstatements under chapter 1 
          (temporary).
1.6662-6  Transactions between persons described in section 482 and net 
          section 482 transfer price adjustments.
1.6662-7  Omnibus Budget Reconciliation Act of 1993 changes to the 
          accuracy-related penalty.
1.6664-0  Table of contents.
1.6664-1  Accuracy-related and fraud penalties; definitions and special 
          rules.
1.6664-2  Underpayment.
1.6664-3  Ordering rules for determining the total amount of penalties 
          imposed.
1.6664-4  Reasonable cause and good faith exception to section 6662 
          penalties.
1.6664-4T  Reasonable cause and good faith exception to section 6662 
          penalties.
1.6694-0  Table of contents.
1.6694-1  Section 6694 penalties applicable to income tax return 
          preparer.
1.6694-2  Penalty for understatement due to an unrealistic position.
1.6694-3  Penalty for understatement due to willful, reckless, or 
          intentional conduct.
1.6694-4  Extension of period of collection where preparer pays 15 
          percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
1.6695-1  Other assessable penalties with respect to the preparation of 
          income tax returns for other persons.
1.6695-2  Preparer due diligence requirements for determining earned 
          income credit eligibility.
1.6696-1  Claims for credit or refund by income tax return preparers.
1.6709-1T  Penalties with respect to mortgage credit certificates 
          (temporary).

                 JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS

1.6851-1  Termination assessments of income tax.
1.6851-2  Certificates of compliance with income tax laws by departing 
          aliens.

[[Page 10]]

1.6851-3  Furnishing of bond to insure payment; cross reference.

                              THE TAX COURT

 Declaratory Judgements Relating to Qualification of Certain Retirement 
                                  Plans

1.7476-1  Interested parties.
1.7476-2  Notice to interested parties.
1.7476-3  Notice of determination.
1.7519-0T  Table of contents (temporary).
1.7519-1T  Required payments for entities electing not to have required 
          year (temporary).
1.7519-2T  Required payments--procedures and administration (temporary).
1.7519-3T  Effective date (temporary).

                      General Actuarial Valuations

1.7520-1  Valuation of annuities, unitrust interests, interests for life 
          or terms of years, and remainder or reversionary interests.
1.7520-2  Valuation of charitable interests.
1.7520-3  Limitation on the application of section 7520.
1.7520-4  Transitional rules.
1.7701(l)-0  Table of contents.
1.7701(l)-1  Conduit financing arrangements.
1.7701(l)-3  Recharacterizing financing arrangements involving fast-pay 
          stock.
1.7702B-1  Consumer protection provisions.
1.7702B-2  Special rules for pre-1997 long-term care insurance 
          contracts.
1.7703-1  Determination of marital status.
1.7704-1  Publicly traded partnerships.
1.7704-2  Transition provisions.
1.7704-3  Qualifying income.
1.7872-1--1.7872-4  [Reserved]
1.7872-5T  Exempted loans (temporary).

                      PUBLIC LAW 74, 84TH CONGRESS

1.9000-1  Statutory provisions.
1.9000-2  Effect of repeal in general.
1.9000-3  Requirement of statement showing increase in tax liability.
1.9000-4  Form and content of statement.
1.9000-5  Effect of filing statement.
1.9000-6  Provisions for the waiver of interest.
1.9000-7  Provisions for estimated tax.
1.9000-8  Extension of time for making certain payments.

             RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958

1.9001  Statutory provisions; Retirement-Straight Line Adjustment Act of 
          1958.
1.9001-1  Change from retirement to straight-line method of computing 
          depreciation.
1.9001-2  Basis adjustments for taxable years beginning on or after 1956 
          adjustment date.
1.9001-3  Basis adjustments for taxable years between changeover date 
          and 1956 adjustment date.
1.9001-4  Adjustments required in computing excess-profits credit.

              DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960

1.9002  Statutory provisions; Dealer Reserve Income Adjustment Act of 
          1960 (74 Stat. 124).
1.9002-1  Purpose, applicability, and definitions.
1.9002-2  Election to have the provisions of section 481 of the Internal 
          Revenue Code of 1954 apply.
1.9002-3  Election to have the provisions of section 481 of the Internal 
          Revenue Code of 1954 not apply.
1.9002-4  Election to pay net increase in tax in installments.
1.9002-5  Special rules relating to interest.
1.9002-6  Acquiring corporation.
1.9002-7  Statute of limitations.
1.9002-8  Manner of exercising elections.

             PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960

1.9003  Statutory provisions; section 4 of the Act of September 14, 1960 
          (Pub. L. 86-781, 74 Stat. 1017).
1.9003-1  Election to have the provisions of section 613(c)(2) and (4) 
          of the 1954 Code, as amended, apply for past years.
1.9003-2  Effect of election.
1.9003-3  Statutes of limitation.
1.9003-4  Manner of exercising election.
1.9003-5  Terms; applicability of other laws.

CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE 
                        ACT OF SEPTEMBER 26, 1961

1.9004  Statutory provisions; the Act of September 26, 1961 (Pub. L. 87-
          312, 75 Stat. 674).
1.9004-1  Election relating to the determination of gross income from 
          the property for taxable years beginning prior to 1961 in the 
          case of certain clays and shale.
1.9004-2  Effect of election.
1.9004-3  Statutes of limitation.
1.9004-4  Manner of exercising election.
1.9004-5  Terms; applicability of other laws.

 QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION 
                         FOR PRIOR TAXABLE YEARS

1.9005  Statutory provisions; section 2 of the Act of September 26, 1961 
          (Pub. L. 87-321, 75 Stat. 683).
1.9005-1  Election relating to the determination of gross income from 
          the property for taxable years beginning prior to 1961 in the 
          case of clay and quartzite used in making refractory products.
1.9005-2  Effect of election.

[[Page 11]]

1.9005-3  Statutes of limitation.
1.9005-4  Manner of exercising election.
1.9005-5  Terms; applicability of other laws.

                         Tax Reform Act of 1969

1.9006  Statutory provisions; Tax Reform Act of 1969.
1.9006-1  Interest and penalties in case of certain taxable years.

                        MISCELLANEOUS PROVISIONS

1.9101-1  Permission to submit information required by certain returns 
          and statements on magnetic tape.
1.9200-1  Deduction for motor carrier operating authority.
1.9200-2  Manner of taking deduction.

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.6011-4T also issued under 26 U.S.C. 6001 and 6011(a).
    Section 1.6013-6 also issued under 26 U.S.C. 7701(b)(11).
    Section 1.6015-1 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-2 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-3 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-4 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-5 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-6 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-7 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-8 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-9 also issued under 26 U.S.C. 6015(h).
    Section 1.6031(a)-1 also issued under 26 U.S.C. 6031.
    Sections 1.6035-1 through 1.6035-3 also issued under 26 U.S.C. 6035 
(a), (d), and (e).
    Section 1.6038-2 also issued under 26 U.S.C. 6038.
    Section 1.6038-3 also issued under 26 U.S.C. 6038.
    Section 1.6038A-1 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-2 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-3 also issued under 26 U.S.C. 6038A and 7701(l).
    Section 1.6038A-4 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-5 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-6 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-7 also issued under 26 U.S.C. 6038A.
    Section 1.6038B-1 also issued under 26 U.S.C. 6038B.
    Section 1.6038B-1T also issued under 26 U.S.C 6038B.
    Section 1.6038B-2 also issued under 26 U.S.C. 6038B.
    Section 1.6041-1 also issued under 26 U.S.C. 6041(a).
    Section 1.6041-2T also issued under 26 U.S.C. 6041(d).
    Section 1.6041-3 also issued under 26 U.S.C. 62 and 6041(a).
    Section 1.6042-3 also issued under 26 U.S.C. 6045.
    Section 1.6045-1 also issued under 26 U.S.C. 6045.
    Section 1.6045-2 also issued under 26 U.S.C. 6045.
    Section 1.6045-4 also issued under 26 U.S.C. 6045.
    Section 1.6046A-1 also issued under 26 U.S.C. 6046A.
    Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and (d).
    Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), and (d).
    Section 1.6049-5T also issued under 26 U.S.C. 6049.
    Section 1.6049-6 also issued under 6049(a), (b), and (d).
    Section 1.6049-7 also issued under 26 U.S.C. 860G(e), 1275(c) and 26 
U.S.C. 6049(d)(7)(D).
    Section 1.6050E-1 also issued under 26 U.S.C. 6050E.
    Section 1.6050H-1 also issued under 26 U.S.C. 6050H.
    Section 1.6050H-1T also issued under 26 U.S.C. 6050H.
    Section 1.6050H-2 also issued under 26 U.S.C. 6050H.
    Section 1.6050I-1 also issued under 26 U.S.C. 6050I.
    Section 1.6050I-2 also issued under 26 U.S.C. 6050I.
    Section 1.6050K-1 also issued under 26 U.S.C. 6050K.
    Section 1.6050M-1 also issued under 26 U.S.C. 6050M.
    Section 1.6050P-1 also issued under 26 U.S.C. 6050P.
    Section 1.6050S-1 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-2T also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-3 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-4T also issued under 26 U.S.C. 6050S(g).
    Section 1.6061-2T also issued under 26 U.S.C. 6061.
    Section 1.6065-2T also issued under 26 U.S.C. 6065.
    Section 1.6081-2 also issued under 26 U.S.C. 6081(a).
    Section 1.6081-4 also issued under 26 U.S.C. 6081(a).
    Section 1.6081-6 also issued under 26 U.S.C. 6081(a).

[[Page 12]]

    Section 1.6081-7 also issued under 26 U.S.C. 6081(a).
    Section 1.6302-1 also issued under 26 U.S.C. 6302(c) and (h).
    Section 1.6302-2 also issued under 26 U.S.C. 6302(h).
    Section 1.6302-3 also issued under 26 U.S.C. 6302(h).
    Section 1.6302-4 also issued under 26 U.S.C. 6302(a), (c), and (h).
    Section 1.6411-4 also issued under 26 U.S.C. 6402(i) and 6411(c).
    Section 1.6662-6 also issued under 26 U.S.C. 6662.
    Section 1.6695-1 also issued under 26 U.S.C. 6060(b) and 6695(b).
    Section 1.6695-2 also issued under 26 U.S.C. 6695(g).
    Section 1.6851-2 also issued under 26 U.S.C 6851(d).
    Section 1.7520-1 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-2 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-3 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-4 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7701(l)-1 also issued under 26 U.S.C. 7701(l).
    Section 1.7701(l)-3 also issued under 26 U.S.C. 7701(l).
    Section 1.7872-5T also issued under 26 U.S.C. 7872.

    Source: Sections 1.1401-1 to 1.1403-1 contained in T.D. 6691, 28 FR 
12796, Dec. 3, 1963, unless otherwise noted.



RELATED RULES--Table of Contents






Sec. 1.1551-1  Disallowance of surtax exemption and accumulated earnings credit.

    (a) In general. If:
    (1) Any corporation transfers, on or after January 1, 1951, and 
before June 13, 1963, all or part of its property (other than money) to 
a transferee corporation,
    (2) Any corporation transfers, directly or indirectly, after June 
12, 1963, all or part of its property (other than money) to a transferee 
corporation, or
    (3) Five or fewer individuals are in control of a corporation and 
one or more of them transfer, directly or indirectly, after June 12, 
1963, property (other than money) to a transferee corporation, and the 
transferee was created for the purpose of acquiring such property or was 
not actively engaged in business at the time of such acquisition, and if 
after such transfer the transferor or transferors are in control of the 
transferee during any part of the taxable year of the transferee, then 
for such taxable year of the transferee the Secretary or his delegate 
may disallow the surtax exemption defined in section 11(d) or the 
accumulated earnings credit of $150,000 ($100,000 in the case of taxable 
years beginning before January 1, 1975) provided in paragraph (2) or (3) 
of section 535(c), unless the transferee establishes by the clear 
preponderance of the evidence that the securing of such exemption or 
credit was not a major purpose of the transfer.
    (b) Purpose of section 1551. The purpose of section 1551 is to 
prevent avoidance or evasion of the surtax imposed by section 11(c) or 
of the accumulated earnings tax imposed by section 531. It is not 
intended, however, that section 1551 be interpreted as delimiting or 
abrogating any principle of law established by judicial decision, or any 
existing provisions of the Code, such as sections 269 and 482, which 
have the effect of preventing the avoidance or evasion of income taxes. 
Such principles of law and such provisions of the Code, including 
section 1551, are not mutually exclusive, and in appropriate cases they 
may operate together or they may operate separately.
    (c) Application of section 269(b) to cases covered by section 1551. 
The provisions of section 269(b) and the authority of the district 
director thereunder, to the extent not inconsistent with the provisions 
of section 1551, are applicable to cases covered by section 1551. 
Pursuant to the authority provided in section 269(b) the district 
director may allow to the transferee any part of a surtax exemption or 
accumulated earnings credit for a taxable year for which such exemption 
or credit would otherwise be disallowed under section 1551(a); or he may 
apportion such exemption or credit among the corporations involved. For 
example, corporation A transfers on January 1, 1955, all of its property 
to corporations B and C in exchange for all of the stock of such 
corporations. Immediately thereafter, corporation A is dissolved and its 
stockholders become the sole stockholders of corporations B and C. 
Assuming that corporations B and C are unable to establish

[[Page 13]]

by the clear preponderance of the evidence that the securing of the 
surtax exemption defined in section 11(d) or the accumulated earnings 
credit provided in section 535, or both, was not a major purpose of the 
transfer, the district director is authorized under sections 1551(c) and 
269(b) to allow one such exemption and credit and to apportion such 
exemption and credit between corporations B and C.
    (d) Actively engaged in business. For purposes of this section, a 
corporation maintaining an office for the purpose of preserving its 
corporate existence is not considered to be ``actively engaged in 
business'' even though such corporation may be deemed to be ``doing 
business'' for other purposes. Similarly, for purposes of this section, 
a corporation engaged in winding up its affairs, prior to an acquisition 
to which section 1551 is applicable, is not considered to be ``actively 
engaged in business.''
    (e) Meaning and application of the term ``control''--(1) In general. 
For purposes of this section, the term ``control'' means:
    (i) With respect to a transferee corporation described in paragraph 
(a) (1) or (2) of this section, the ownership by the transferor 
corporation, its shareholders, or both, of stock possessing either (a) 
at least 80 percent of the total combined voting power of all classes of 
stock entitled to vote, or (b) at least 80 percent of the total value of 
shares of all classes of stock.
    (ii) With respect to each corporation described in paragraph (a)(3) 
of this section, the ownership by five or fewer individuals of stock 
possessing (a) at least 80 percent of the total combined voting power of 
all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of the stock of each corporation, 
and (b) more than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such individual only to the extent 
such stock ownership is identical with respect to each such corporation.
    (2) Special rules. In determining for purposes of this section 
whether stock possessing at least 80 percent (or more than 50 percent in 
the case of subparagraph (1)(ii)(b) of this paragraph) of the total 
combined voting power of all classes of stock entitled to vote is owned, 
all classes of such stock shall be considered together; it is not 
necessary that at least 80 percent (or more than 50 percent) of each 
class of voting stock be owned. Likewise, in determining for purposes of 
this section whether stock possessing at least 80 percent (or more than 
50 percent) of the total value of shares of all classes of stock is 
owned, all classes of stock of the corporation shall be considered 
together; it is not necessary that at least 80 percent (or more than 50 
percent) of the value of shares of each class be owned. The fair market 
value of a share shall be considered as the value to be used for 
purposes of this computation. With respect to transfers described in 
paragraph (a) (2) or (3) of this section, the ownership of stock shall 
be determined in accordance with the provisions of section 1563(e) and 
the regulations thereunder. With respect to transfers described in 
paragraph (a)(1) of this section, the ownership of stock shall be 
determined in accordance with the provisions of section 544 and the 
regulations thereunder, except that constructive ownership under section 
544(a)(2) shall be determined only with respect to the individual's 
spouse and minor children. In determining control, no stock shall be 
excluded because such stock was acquired before January 1, 1951 (the 
effective date of section 1551(a)(1)), or June 13, 1963 (the effective 
date of section 1551(a) (2) and (3)).
    (3) Example. This paragraph may be illustrated by the following 
example:

    Example. On January 1, 1964, individual A, who owns 50 percent of 
the voting stock of corporation X, and individual B, who owns 30 percent 
of such voting stock, transfer property (other than money) to 
corporation Y (newly created for the purpose of acquiring such property) 
in exchange for all of Y's voting stock. After the transfer, A and B own 
the voting stock of corporations X and Y in the following proportions:

------------------------------------------------------------------------
                                                               Identical
             Individual                 Corp. X     Corp. Y    ownership
------------------------------------------------------------------------
A...................................          50          30          30
B...................................          30          50          30
                                     -----------------------------------

[[Page 14]]

 
  Total.............................          80          80          60
------------------------------------------------------------------------


The transfer of property by A and B to corporation Y is a transfer 
described in paragraph (a)(3) of this section since (i) A and B own at 
least 80 percent of the voting stock of corporations X and Y, and (ii) 
taking into account each such individual's stock ownership only to the 
extent such ownership is identical with respect to each such 
corporation, A and B own more than 50 percent of the voting stock of 
corporations X and Y.

    (f) Taxable year of allowance or disallowance--(1) In general. The 
district director's authority with respect to cases covered by section 
1551 is not limited to the taxable year of the transferee corporation in 
which the transfer of property occurs. Such authority extends to the 
taxable year in which the transfer occurs or any subsequent taxable year 
of the transferee corporation if, during any part of such year, the 
transferor or transferors are in control of the transferee.
    (2) Examples. This paragraph may be illustrated by the following 
examples:

    Example (1). On January 1, 1955, corporation D transfers property 
(other than money) to corporation E, a corporation not actively engaged 
in business at the time of the acquisition of such property, in exchange 
for 60 percent of the voting stock of E. During a later taxable year of 
E, corporation D acquires an additional 20 percent of such voting stock. 
As a result of such additional acquisition, D owns 80 percent of the 
voting stock of E. Accordingly, section 1551(a)(1) is applicable for the 
taxable year in which the later acquisition of stock occurred and for 
each taxable year thereafter in which the requisite control continues.
    Example (2). On June 20, 1963, individual A, who owns all of the 
stock of corporation X, transfers property (other than money) to 
corporation Y, a corporation not actively engaged in business at the 
time of the acquision of such property, in exchange for 60 percent of 
the voting stock of Y. During a later taxable year of Y, A acquires an 
additional 20 percent of such voting stock. After such acquisition A 
owns at least 80 percent of the voting stock of corporations X and Y. 
Accordingly, section 1551(a)(3) is applicable for the taxable year in 
which the later acquisition of stock occurred and for each taxable year 
thereafter in which the requisite control continues.
    Example (3). Individuals A and B each owns 50 percent of the stock 
of corporation X. On January 15, 1964, A transfers property (other than 
money) to corporation Y (newly created by A for the purpose of acquiring 
such property) in exchange for all the stock of Y. In a subsequent 
taxable year of Y, individual B buys 50 percent of the stock which A 
owns in Y (or he transfers money to Y in exchange for its stock, as a 
result of which he owns 50 percent of Y's stock). Immediately thereafter 
the stock ownership of A and B in corporation Y is identical to their 
stock ownership in corporation X. Accordingly, section 1551(a)(3) is 
applicable for the taxable year in which B acquires stock in corporation 
Y (see paragraph (g)(3) of this section) and for each taxable year 
thereafter in which the requisite control continues. Moreover, if B's 
acquisition of stock in Y is pursuant to a preexisting agreement with A, 
A's transfer to Y and B's acquisition of Y's stock are considered a 
single transaction and section 1551(a)(3) also would be applicable for 
the taxable year in which A's transfer to Y took place and for each 
taxable year thereafter in which the requisite control continues.

    (g) Nature of transfer--(1) Corporate transfers before June 13, 
1963. A transfer made before June 13, 1963, by any corporation of all or 
part of its assets, whether or not such transfer qualifies as a 
reorganization under section 368, is within the scope of section 
1551(a)(1), except that section 1551(a)(1) does not apply to a transfer 
of money only. For example, the transfer of cash for the purpose of 
expanding the business of the transferor corporation through the 
formation of a new corporation is not a transfer within the scope of 
section 1551(a)(1), irrespective of whether the new corporation uses the 
cash to purchase from the transferor corporation stock in trade or 
similar property.
    (2) Corporate transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by any corporation of all or part of 
its assets to a transferee corporation, whether or not such transfer 
qualifies as a reorganization under section 368, is within the scope of 
section 1551(a)(2) except that section 1551(a)(2) does not apply to a 
transfer of money only. For example, if a transferor corporation 
transfers property to its shareholders or to a subsidiary, the transfer 
of that property by the shareholders or the subsidiary to a transferee 
corporation as part of the same transaction is a transfer of property by 
the transferor corporation to which section 1551(a)(2) applies. A 
transfer of property pursuant to a purchase by a

[[Page 15]]

transferee corporation from a transferor corporation controlling the 
transferee is within the scope of section 1551(a)(2), whether or not the 
purchase follows a transfer of cash from the controlling corporation.
    (3) Other transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by five or fewer individuals to a 
transferee corporation, whether or not such transfer qualifies under one 
or more other provisions of the Code (for example, section 351), is 
within the scope of section 1551(a)(3) except that section 1551(a)(3) 
does not apply to a transfer of money only. Thus, if one of five or 
fewer individuals who are in control of a corporation transfers property 
(other than money) to a controlled transferee corporation, the transfer 
is within the scope of section 1551(a)(3) notwithstanding that the other 
individuals transfer nothing or transfer only money.
    (4) Examples. This paragraph may be illustrated by the following 
examples:

    Example (1). Individuals A and B each owns 50 percent of the voting 
stock of corporation X. On January 15, 1964, A and B each acquires 
property (other than money) from X and, as part of the same transaction, 
each transfers such property to his wholly owned corporation (newly 
created for the purpose of acquiring such property). A and B retain 
substantial continuing interests in corporation X. The transfers to the 
two newly created corporations are within the scope of section 
1551(a)(2).
    Example (2). Corporation W organizes corporation X, a wholly owned 
subsidiary, for the purpose of acquiring the properties of corporation 
Y. Pursuant to a reorganization qualifying under section 368(a)(1)(C), 
substantially all of the properties of corporation Y are transferred on 
June 15, 1963, to corporation X solely in exchange for voting stock of 
corporation W. There is a transfer of property from W to X within the 
meaning of section 1551(a)(2).
    Example (3). Individuals A and B, each owning 50 percent of the 
voting stock of corporation X, organize corporation Y to which each 
transfers money only in exchange for 50 percent of the stock of Y. 
Subsequently, Y uses such money to acquire other property from A and B 
after June 12, 1963. Such acquisition is within the scope of section 
1551(a)(3).
    Example (4). Individual A owns 55 percent of the stock of 
corporation X. Another 25 percent of corporation X's stock is owned in 
the aggregate by individuals B, C, D, and E. On June 15, 1963, 
individual A transfers property to corporation Y (newly created for the 
purpose of acquiring such property) in exchange for 60 percent of the 
stock of Y, and B, C, and D acquire all of the remaining stock of Y. The 
transfer is within the scope of section 1551(a)(3).

    (h) Purpose of transfer. In determining, for purposes of this 
section, whether the securing of the surtax exemption or accumulated 
earnings credit constituted ``a major purpose'' of the transfer, all 
circumstances relevant to the transfer shall be considered. ``A major 
purpose'' will not be inferred from the mere purchase of inventory by a 
subsidiary from a centralized warehouse maintained by its parent 
corporation or by another subsidiary of the parent corporation. For 
disallowance of the surtax exemption and accumulated earnings credit 
under section 1551, it is not necessary that the obtaining of either 
such credit or exemption, or both, have been the sole or principal 
purpose of the transfer of the property. It is sufficient if it appears, 
in the light of all the facts and circumstances, that the obtaining of 
such exemption or credit, or both, was one of the major considerations 
that prompted the transfer. Thus, the securing of the surtax exemption 
or the accumulated earnings credit may constitute ``a major purpose'' of 
the transfer, notwithstanding that such transfer was effected for a 
valid business purpose and qualified as a reorganization within the 
meaning of section 368. The taxpayer's burden of establishing by the 
clear preponderance of the evidence that the securing of either such 
exemption or credit or both was not ``a major purpose'' of the transfer 
may be met, for example, by showing that the obtaining of such 
exemption, or credit, or both, was not a major factor in relationship to 
the other consideration or considerations which prompted the transfer.

[T.D. 6911, 32 FR 3214, Feb. 24, 1967, as amended by T.D. 7376, 40 FR 
42745, Sept. 16, 1975]



Sec. 1.1552-1  Earnings and profits.

    (a) General rule. For the purpose of determining the earnings and 
profits of each member of an affiliated group which is required to be 
included in a consolidated return for such group filed

[[Page 16]]

for a taxable year beginning after December 31, 1953, and ending after 
August 16, 1954, the tax liability of the group shall be allocated among 
the members of the group in accordance with one of the following 
methods, pursuant to an election under paragraph (c) of this section:
    (1)(i) The tax liability of the group shall be apportioned among the 
members of the group in accordance with the ratio which that portion of 
the consolidated taxable income attributable to each member of the group 
having taxable income bears to the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph is 
an amount equal to the tax liability of the group multiplied by a 
fraction, the numerator of which is the taxable income of such member, 
and the denominator of which is the sum of the taxable incomes of all 
the members. For purposes of this subdivision the taxable income of a 
member shall be the separate taxable income determined under 
Sec. 1.1502-12, adjusted for the following items taken into account in 
the computation of consolidated taxable income:
    (a) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, the consolidated 
dividends received deduction, the consolidated section 247 deduction, 
the consolidated section 582(c) net loss, and the consolidated section 
922 deduction, attributable to such member;
    (b) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryover attributable to such member);
    (c) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member; and
    (d) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.

If the computation of the taxable income of a member under this 
subdivision results in an excess of deductions over gross income, then 
for purposes of this subdivision such member's taxable income shall be 
zero.
    (2)(i) The tax liability of the group shall be allocated to the 
several members of the group on the basis of the percentage of the total 
tax which the tax of such member if computed on a separate return would 
bear to the total amount of the taxes for all members of the group so 
computed.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph is 
an amount equal to the tax liability of the group multiplied by a 
fraction, the numerator of which is the separate return tax liability of 
such member, and the denominator of which is the sum of the separate 
return tax liabilities of all the members. For purposes of this 
subdivision the separate return tax liability of a member is its tax 
liability computed as if it has filed a separate return for the year 
except that:
    (a) Gains and losses on intercompany transactions shall be taken 
into account as provided in Sec. 1.1502-13 as if a consolidated return 
had been filed for the year;
    (b) Gains and losses relating to inventory adjustments shall be 
taken into account as provided in Sec. 1.1502-18 as if a consolidated 
return had been filed for the year;
    (c) Transactions with respect to stock, bonds, or other obligations 
of members shall be reflected as provided in Sec. 1.1502-13 (f) and (g) 
as if a consolidated return had been filed for the year;
    (d) Excess losses shall be included in income as provided in 
Sec. 1.1502-19 as if a consolidated return had been filed for the year;
    (e) In the computation of the deduction under section 167, property 
shall not lose its character as new property as a result of a transfer 
from one member to another member during the year;
    (f) A dividend distributed by one member to another member during 
the

[[Page 17]]

year shall not be taken into account in computing the deductions under 
section 243(a)(1), 244(a), 245, or 247 (relating to deductions with 
respect to dividends received and dividends paid);
    (g) Basis shall be determined under Secs. 1.1502-31 and 1.1502-32, 
and earnings and profits shall be determined under Sec. 1.1502-33, as if 
a consolidated return had been filed for the year;
    (h) Subparagraph (2) of Sec. 1.1502-3(f) shall apply as if a 
consolidated return had been filed for the year; and
    (i) For purposes of Subtitle A of the Code, the surtax exemption of 
the member shall be an amount equal to $25,000 ($50,000 in the case of a 
taxable year ending in 1975), divided by the number of members (or such 
portion of $25,000 or $50,000 which is apportioned to the member 
pursuant to a schedule attached to the consolidated return for the 
taxable year). (However, if for the taxable year some or all of the 
members are component members of a controlled group of corporations 
(within the meaning of section 1563) and if there are other such 
component members which do not join in filing the consolidated return 
for such year, the amount to be divided among the members filing the 
consolidated return shall be (in lieu of $25,000 or $50,000) the sum of 
the amounts apportioned to the component members which join in filing 
the consolidated return (as determined for taxable years beginning after 
December 31, 1974 under Sec. 1.1561-2(a)(2) or Sec. 1.1561-3, whichever 
is applicable, and for taxable years beginning before January 1, 1975, 
under Sec. 1.561-2A(a)(2) or Sec. 1.1561-3A whichever is applicable).)

If the computation of the separate return tax liability of a member 
under this subdivision does not result in a positive tax liability, then 
for purposes of this subdivision such member's separate return tax 
liability shall be zero.
    (3)(i) The tax liability of the group (excluding the tax increases 
arising from the consolidation) shall be allocated on the basis of the 
contribution of each member of the group to the consolidated taxable 
income of the group. Any tax increases arising from the consolidation 
shall be distributed to the several members in direct proportion to the 
reduction in tax liability resulting to such members from the filing of 
the consolidated return as measured by the difference between their tax 
liabilities determined on a separate return basis and their tax 
liabilities (determined without regard to the 2-percent increase 
provided by section 1503(a) and paragraph (a) of Sec. 1.1502-30A (as 
contained in the 26 CFR edition revised as of April 1, 1996) for taxable 
years beginning before January 1, 1964) based on their contributions to 
the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph 
shall be determined by:
    (a) Allocating the tax liability of the group in accordance with 
subparagraph (1)(ii) of this paragraph, but
    (b) The amount of tax liability allocated to any member shall not 
exceed the separate return tax liability of such member, determined in 
accordance with subparagraph (2)(ii) of this paragraph, and
    (c) The sum of the amounts which would be allocated to the members 
but for (b) of this subdivision (ii) shall be apportioned among the 
other members in direct proportion to, but limited to, the reduction in 
tax liability resulting to such other members. Such reduction for any 
member shall be the excess, if any, of (1) its separate this paragraph.
    (4) The tax liability of the group shall be allocated in accordance 
with any other method selected by the group with the approval of the 
Commissioner. No method of allocation may be approved under this 
subparagraph which may result in the allocation of a positive tax 
liability for a taxable year, among the members who are allocated a 
positive tax liability for such year, in a total amount which is more or 
less than the tax liability of the group for such year. (However, see 
paragraph (d) of Sec. 1.1502-33.)
    (b) Application of rules--(1) Tax liability of the group. For 
purposes of section 1552 and this section, the tax liability of the 
group for a taxable year shall consist of the Federal income tax 
liability of the group for such year determined in accordance with 
Sec. 1.1502-2 or Sec. 1.1502-30A (as contained in the 26 CFR edition 
revised as of April 1, 1996),

[[Page 18]]

which-ever is applicable. Thus, in the case of a carryback of a loss or 
credit to such year, although the earnings and profits of the members of 
the group may not be adjusted until the subsequent taxable year from 
which the loss or credit was carried back, the effect of the carryback, 
for purposes of this section, shall be determined by allocating the 
amount of the adjustment as a part of the tax liability of the group for 
the taxable year to which the loss or credit is carried. For example, if 
a consolidated net operating loss is carried back from 1969 to 1967, the 
allocation of the tax liability of the group for 1967 shall be 
recomputed in accordance with the method of allocation used for 1967, 
and the changes resulting from such recomputation shall, for accrual 
method taxpayers, be reflected in the earnings and profits of the 
appropriate members in 1969.
    (2) Effect of allocation. The amount of tax liability allocated to a 
corporation as its share of the tax liability of the group, pursuant to 
this section, shall (i) result in a decrease in the earnings and profits 
of such corporation in such amount, and (ii) be treated as a liability 
of such corporation for such amount. If the full amount of such 
liability is not paid by such corporation, pursuant to an agreement 
among the members of the group or otherwise, the amount which is not 
paid will generally be treated as a distribution with respect to stock, 
a contribution to capital, or a combination thereof, as the case may be.
    (c) Method of election. (1) The election under paragraph (a) (1), 
(2), or (3) of this section shall be made not later than the time 
prescribed by law for filing the first consolidated return of the group 
for a taxable year beginning after December 31, 1953, and ending after 
August 16, 1954 (including extensions thereof). If the group elects to 
allocate its tax liability in accordance with the method prescribed in 
paragraph (a) (1), (2), or (3) of this section, a statement shall be 
attached to the return stating which method is elected. Such statement 
shall be made by the common parent corporation and shall be binding upon 
all members of the group. In the event that the group desires to 
allocate its tax liability in accordance with any other method pursuant 
to paragraph (a)(4) of this section, approval of such method by the 
Commissioner must be obtained within the time prescribed above. If such 
approval is not obtained in such time, the group shall allocate in 
accordance with the method prescribed in paragraph (a)(1) of this 
section. The request shall state fully the method which the group wishes 
to apply in apportioning the tax liability. Except as provided in 
subparagraph (2) of this paragraph, an election once made shall be 
irrevocable and shall be binding upon the group with respect to the year 
for which made and for all future years for which a consolidated return 
is filed or required to be filed unless the Commissioner authorizes a 
change to another method prior to the time prescribed by law for filing 
the return for the year in which such change is to be effective.
    (2) Each group may make a new election to use any one of the methods 
prescribed in paragraph (a) (1), (2), or (3) of this section for its 
first consolidated return year beginning after December 31, 1965, or in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, or 
may request the Commissioner's approval of a method under paragraph 
(a)(4) of this section for its first consolidated return year beginning 
after December 31, 1965, irrespective of its previous method of 
allocation under this section. If such new election is not made in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, it 
shall be effective for the first consolidated return year beginning 
after December 31, 1965, and all succeeding years. (See Sec. 1.1502-33 
for the method of making such new election in conjunction with an 
election under paragraph (d) of Sec. 1.1502-33.) Any other such new 
election (or request for the Commissioner's approval of a method under 
paragraph (a)(4) of this section) shall be made within the time 
prescribed by law for filing the consolidated return for the first 
taxable year beginning after December 31, 1965 (including extensions 
thereof), or within 60 days after July 3, 1968, whichever is later. Such 
new election shall be made by attaching a statement to the consolidated 
return for the first taxable year beginning after December 31, 1965, or 
if

[[Page 19]]

such election is made within the time prescribed above but after such 
return is filed, by filing a statement with the internal revenue officer 
with whom such return was filed.
    (d) Failure to elect. If a group fails to make an election in its 
first consolidated return, or any other election, in accordance with 
paragraph (c) of this section, the method prescribed under paragraph 
(a)(1) of this section shall be applicable and shall be binding upon the 
group in the same manner as if an election had been made to so allocate.
    (e) Definitions. Except as otherwise provided in this section, the 
terms used in this section shall have the same meaning as provided in 
the regulations under section 1502.
    (f) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation P is the common parent owning all of the stock 
of corporations S1 and S2, members of an affiliated group. A 
consolidated return is filed for the taxable year ending December 31, 
1966, by P, S1, and S2. For 1966 such corporations had the following 
taxable incomes or losses computed in accordance with paragraph 
(a)(1)(ii) of this section:

P......................................................................0
S1................................................................$2,000
S2...............................................................(1,000)


The group has not made an election under paragraph (c) of this section 
or paragraph (d) of Sec. 1.1502-33. Accordingly, the method of 
allocation provided by paragraph (a)(1) of this section is in effect for 
the group. Assuming that the consolidated taxable income is equal to the 
sum of the members taxable income and losses, or $1,000, the tax 
liability of the group for the year (assuming a 22-percent rate) is 
$220, all of which is allocated to S1. S1 accordingly reduces its 
earnings and profits in the amount of $220, irrespective of who actually 
pays the tax liability. If S1 pays the $220 tax liability there will be 
no further effect upon the income, earnings and profits, or the basis of 
stock of any member. If, however, P pays the $220 tax liability (and 
such payment is not in fact a loan from P to S1), then P shall be 
treated as having made a contribution to the capital of S1 in the amount 
of $220. On the other hand, if S2 pays the $220 tax liability (and such 
payment is not in fact a loan from S2), then S2 shall be treated as 
having made a distribution with respect to its stock to P in the amount 
of $220, and P shall be treated as having made a contribution to the 
capital of S1 in the amount of $220.

[T.D. 6962, 33 FR 9655, July 3, 1968, as amended by T.D. 7825, 42 FR 
64694, Dec. 28, 1977; T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 8560, 
59 FR 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36680, July 18, 1995; T.D. 
8677, 61 FR 33325, June 27, 1996]

                     Certain Controlled Corporations



Sec. 1.1561-0  Effective date.

    (a) Taxable years beginning after December 31, 1974. The provisions 
of Secs. 1.1561-1 through 1.1561-3 apply only to taxable years beginning 
after December 31, 1974.
    (b) Taxable years beginning before January 1, 1975. The provisions 
of Secs. 1.1561-1A through 1.1561-3A apply only to taxable years 
beginning before January 1, 1975.

[T.D. 7528, 42 FR 64694, Dec. 28, 1977]



Sec. 1.1561-1  Limitations on certain multiple tax benefits in the case of certain controlled corporations.

    (a) In general. Part II (section 1561 and following), subchapter B, 
chapter 6 of the Code, provides rules relating to certain controlled 
corporations. In general, section 1561 provides that the component 
members of a controled group of corporations on a December 31, for their 
taxable years which include such December 31, shall be limited for 
purposes of subtitle A to:
    (1) One surtax exemption under section 11(d),
    (2) One $150,000 amount for purposes of computing the accumlated 
earnings credit under section 535(c) (2) and (3), and
    (3) One $25,000 amount for purposes of computing the limitation on 
the small business deduction of life insurance companies under sections 
804(a)(4) and 809 (d)(10).

For certain definitions (including the definition of a ``controlled 
group of corporations'' and a ``component member'') and special rules 
for purposes of part II of subchapter B, see section 1563 and the 
regulations thereunder.
    (b) Tax avoidance. The provisions of part II, subchapter B, chapter 
6 do not delimit or abrogate any principle of law established by 
judicial decision, or any existing provisions of the code,

[[Page 20]]

such as sections 269, 482, and 1551, which have the effect of preventing 
the avoidance or evasion of income taxes.
    (c) Special rules. (1) For purposes of sections 1561 and 1563 and 
the regulations thereunder, the term ``corporation'' includes an 
electing small business corporation (as defined in section 1371 (b)). 
However, for the treatment of an electing small business corporation as 
an excluded member of a controlled group of corporations, see paragraph 
(b)(2)(ii) of Sec. 1.1563-1.
    (2) In the case of corporations electing a 52-53-week taxable year 
under section 441(f)(1), the provisions of sections 1561 and 1563 and 
the regulations thereunder shall be applied in accordance with the 
special rule section 441(f)(2)(A). See Sec. 1.441-2.

[T.D. 7528, 42 FR 64694, Dec. 28, 1977, as amended by T.D. 8996, 67 FR 
35012, May 17, 2002]



Sec. 1.1561-2  Determination of amount of tax benefits.

    (a) Surtax exemption. (1) If a corporation is a component member of 
a controlled group of corporations on December 31, the surtax exemption 
under section 11(d) of such corporation for the taxable year which 
includes such December 31 shall be an amount equal to:
    (i) $50,000 divided by the number of corporations which are 
component members of such group on such December 31, or
    (ii) If an apportionment plan is adopted under Sec. 1.1561-3 which 
is effective with respect to such taxable year such portion of $50,000 
as is apportioned to such member in accordance with such plan.
    (2) In the case of a controlled group of corporations which includes 
component members which join in the filing of a consolidated return and 
other component members which do not join in the filing of such a 
return, and where there is no apportionment plan effective under 
Sec. 1.1561-3 apportioning the $50,000 amount among the component 
members filing the consolidated return and the other component members 
of the controlled group, each component member of the controlled group, 
(including each component member which joins in filing the consolidated 
return) shall be treated as a separate corporation for purposes of 
equally apportioning the $50,000 amount under subparagraph (1)(i) of 
this paragraph. In such case, the surtax exemption of the corporations 
filing the consolidated return shall be the sum of the amounts 
apportioned to each component member which joins in filing the 
consolidated return.
    (3) The provisions of section 1561 may reduce the surtax exemption 
of any corporation which is a component member of a controlled group or 
corporations and which is subject to the tax imposed by section 11, or 
by any other provision of subtitle A of the Code if the tax under such 
other provisions is computed by reference to the amount of the surtax 
exemption provided by section 11. Such other provisions include, for 
example, sections 511(a)(1), 594, 802, 831, 852, 857, 882, 1201, and 
1378.
    (4) This paragraph (a) shall not apply with respect to any component 
member of a controlled group of corporations on a December 31 if one or 
more component members of such controlled group has a taxable year 
including such December 31 which ends after December 31, 1978. Rules 
pertaining to the apportionment of the surtax exemption with respect to 
component members of controlled groups of corporations to which this 
paragraph does not apply are reserved.
    (5) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). Corporations W, X, Y, and Z are component members of a 
controlled group of corporations on December 31, 1975, and each 
corporation files its income tax return on the basis of a calendar year. 
For their taxable years ending on December 31, 1975, W and X each incurs 
a net operating loss; Y has $5,250 of taxable income; and Z has $30,000 
of taxable income. If an apportionment plan is not effective for such 
taxable years, the surtax exemption under section 11(d) of each 
corporation determined under subparagraph (1)(i) of this paragraph is 
$12,500 ($50,000/4). However, the four corporations may avoid a pro rata 
division of the $50,000 amount by filing an apportionment plan in 
accordance with the provisions of Sec. 1.1561-3 allocating the $50,000 
amount in any manner they deem proper.
    Example (2). Corporation A files its income tax return on the basis 
of a calendar year;

[[Page 21]]

corporation B files its income tax return on the basis of a fiscal year 
ending March 31. On December 31, 1975, A and B are the only component 
members of a controlled group of corporations. Under subparagraph (1)(i) 
of this paragraph, the surtax exemption of A for 1975, and the surtax 
exemption of B for its fiscal year ending March 31, 1976, is $25,000 
($50,000/2). However, if an apportionment plan is filed in accordance 
with the provisions of Sec. 1.1561-3, the surtax exemption of each such 
corporation will be the amount apportioned to the corporation pursuant 
to the plan.
    Example (3). Corporations R, P, and S are component members of a 
controlled group of corporations on December 31, 1975. P and S file a 
consolidated return for their fiscal years ending June 30, 1976. R files 
a separate return for its taxable year ending on December 31, 1975. No 
apportionment plan is effective with respect to R's, P's, and S's 
taxable years which include December 31, 1975. Therefore R, P, and S are 
each apportioned $16,666.67 ($50,000/3) as their surtax exemption under 
section 11(d) for their taxable years including such date. The surtax 
exemption of the affiliated group filing a consolidated return (P and S) 
for the year ending June 30, 1976, is $33,333.34 (i.e., the sum of the 
$16,666.67 amounts apportioned to P and S). However, if an apportionment 
plan is filed in accordance with the provisions of Sec. 1.1561-3, the 
surtax exemption of the corporations which are members of the affiliated 
group filing a consolidated return and of each other corporation which 
is a component member of the controlled group of corporations will be 
the amount apportioned to such affiliated group and to each such other 
corporations pursuant to the plan.

    (b) Allocation of amounts of taxable income subject to normal tax. 
(1) In the case of a taxable year of a corporation, if:
    (i) The amount of normal tax under section 11(b) is equal to the sum 
of 20 percent of so much of the taxable income as does not exceed 
$25,000, plus 22 percent of so much of the taxable income as exceeds 
$25,000 for a taxable year, and
    (ii) The amount of surtax exemption of the corporation is less than 
$50,000 under paragraph (a)(1) (i) or (ii) of this section,

then for purposes of applying section 11(b), the taxable income subject 
to taxation at the rate of 20 percent shall be (in lieu of the first 
$25,000 of taxable income) one-half of the amount of the surtax 
exemption allocated to such corporation under paragraph (a)(1) (i) or 
(ii) of this section. In addition, the amount of taxable income subject 
to taxation at the rate of 22 percent shall be (in lieu of the amount of 
taxable income in excess of $25,000) the taxable income that exceeds 
one-half of the amount of the surtax exemption allocated to such 
corporation under paragraph (a)(1) (i) or (ii) of this section for such 
year. In the case of an affiliated group of corporations filing a 
consolidated return for a taxable year, the preceding sentence shall be 
applied by substituting the term ``affiliated group'' for the term 
``corporation'' each time it appears.
    (2) The provisions of this paragraph may be illustrated by the 
following example:

    Example. Corporations P and S are component members of a controlled 
group of corporations on December 31, 1975, and each corporation files a 
separate income tax return on the basis of a calendar year. For the 
taxable year ending on December 31, 1975, P incurs a net operating loss 
and S has $25,000 of taxable income. If an apportionment plan is not 
effective for that taxable year, the surtax exemption under section 
11(d) of each corporation (determined under paragraph (a)(1)(i) of this 
section) is $25,000 ($50,000/2). For purposes of applying section 11(b) 
to determine S's liability for tax for 1975, the amount of taxable 
income subject to taxation at the rate of 20 percent is limited to 
$12,500 (i.e., one-half of the amount of the surtax exemption allocated 
to S under paragraph (a)(1)(i) of this section), and the amount of 
taxable income subject to taxation at the rate of 22 percent is $12,500 
(i.e., the amount of taxable income in excess of one-half of the amount 
of the surtax exemption). If, on the other hand, an apportionment plan 
is adopted by P and S effective for such taxable years apportioning the 
entire $50,000 surtax exemption to S, then, for purposes of applying 
section 11(b) to determine S's liability for tax for 1975, the amount of 
taxable income subject to taxation at the rate of 20 percent is $25,000.

    (3) If an apportionment plan is adopted under Sec. 1.1561-3 for a 
December 31, and if paragraph (b)(1) of this section applies to any 
component member whose taxable year includes such December 31, then the 
plan shall specify:
    (i) The amount subject to taxation at the rate of 20 percent, and
    (ii) The amount subject to taxation at the rate of 22 percent,

[[Page 22]]


as determined under paragraph (b)(1) of this section for each component 
member. The information required to be included in a plan by this 
subparagraph is in addition to the information required under 
Sec. 1.1561-3(a). Where an existing apportionment plan is effective 
under Sec. 1.1561-3(a)(3) for such December 31, the additional 
information required under this subparagraph may be provided in an 
amendment of the existing plan as provided in Sec. 1.1561-3(c).
    (c) Accumulated earnings credit. (1) Except as provided in 
subparagraph (2) of this paragraph, if a corporation is a component 
member of a controlled group on a December 31, the amount for purposes 
of computing the accumlated earnings credit under section 535(c) (2) and 
(3) of such corporation shall be an amount equal to $150,000 divided by 
the number of corporations which are component members of such group on 
such December 31. In the case of a controlled group of corporations 
which includes component members which join in the filing of a 
consolidated return and other component members which do not join in the 
filing of such a return, each component member of the controlled group 
(including each component member which joins in filing the consolidated 
return) shall be treated as a separate corporation for purposes of 
equally apportioning the $150,000 amount under this subparagraph. In 
such case, the amount for purposes of computing the accumulated earnings 
credit for the component members filing the consolidated return shall be 
the sum of the amounts apportioned to each component member which joins 
in filing the consolidated return.
    (2) If, with respect to any component member of the controlled 
group, the amount determined under subparagraph (1) of this paragraph 
exceeds the sum of (i) such member's accumlated earnings and profits as 
of the close of the preceding taxable year, plus (ii) such member's 
earnings and profits for the taxable year which are retained (within the 
meaning of section 535(c)(1)), then any such excess shall be subtracted 
from the amount determined under subparagraph (1) of this paragraph with 
respect to such member and shall be divided equally among those 
remaining component members of the controlled group that do not have 
such an excess (until no such excess remains to be divided among those 
remaining members that have not had such an excess). The excess so 
divided among such remaining members shall be added to the amount 
determined under subparagraph (1) with respect to such members. If a 
controlled group of corporations includes component members which join 
in the filing of a consolidated return and other component members which 
do not join in filing such return, the component members filing the 
consolidated return shall be treated as a single corporation for 
purposes of this subparagraph.
    (3) A controlled group may not adopt an apportionment plan, as 
provided in Sec. 1.1561-3, with respect to the amounts computed under 
the provisions of this paragraph.
    (4) The provisions of this paragraph may be illustrated by the 
following example:

    Example. A controlled group is composed of four component member 
corporations, W, X, Y, and Z. Each corporation files a separate income 
tax return on the basis of a calendar year. The sum of the earnings and 
profits for the taxable year ending December 31, 1975, which are 
retained plus the sum of the accumulated earnings and profits (as of the 
close of the preceding taxable year) is $15,000, $75,000, $37,500, and 
$300,000 for W, X, Y, and Z, respectively. The amounts determined under 
this paragraph for W, X, Y, and Z for 1975 are $15,000, $48,750, 
$37,500, and $48,750, respectively, computed as follows:

----------------------------------------------------------------------------------------------------------------
                                                                         Component members
                                                 ---------------------------------------------------------------
                                                         W               X               Y               Z
----------------------------------------------------------------------------------------------------------------
Earnings and profits............................         $15,000         $75,000         $37,500        $300,000
Amount computed under subparagraph (1)..........          37,500          37,500          37,500          37,500
Excess..........................................          22,500               0               0               0
Allocation of excess............................  ..............           7,500           7,500           7,500
New excess......................................  ..............  ..............           7,500  ..............
Reallocation of new excess......................  ..............           3,750  ..............           3,750
                                                 ---------------------------------------------------------------

[[Page 23]]

 
    Amount to be used for purposes of section             15,000          48,750          37,500          48,750
     535(c) (2) and (3).........................
----------------------------------------------------------------------------------------------------------------

    (d) Small business deduction of life insurance companies. (1) Except 
as provided in subparagraph (2) of this paragraph, if two or more life 
insurance companies which are taxable under section 802 are component 
members of a controlled group of corporations on a December 31, the 
amount for purposes of computing the limitation on the small business 
deduction under sections 804(a)(4) and 809(d)(10) of such corporations 
for their taxable years which include such December 31 shall be an 
amount equal to $25,000 divided by the number of life insurance 
companies taxable under section 802 which are component members of such 
group on such December 31.
    (2) If, with respect to any of the component members of the 
controlled group which are described in subparagraph (1) of this 
paragraph, the amount determined under such subparagraph exceeds 10 
percent of such member's investment yield (as defined in section 
304(c)), then any such excess shall be subtracted from the amount 
determined under subparagraph (1) of this paragraph with respect to such 
member and shall be divided equally among those remaining life insurance 
company members of the controlled group that do not have such an excess 
(until no such excess remains to be divided among those remaining 
members that have not had such an excess). The excess so divided among 
such remaining members shall be added to the amount determined under 
subparagraph (1) with respect to such members.
    (3) A controlled group may not adopt an apportionment plan, as 
provided in Sec. 1.1561-3, with respect to the amounts computed under 
the provisions of this paragraph.
    (e) Certain short taxable years. (1) If the return of a corporation 
is for a short period which does not include a December 31, and such 
corporation is a component member of a controlled group of corporations 
with respect to such short period, then for purposes of subtitle A of 
the Code:
    (i) The surtax exemption under section 11(d) of such corporation for 
such short period shall be an amount equal to $25,000 ($50,000 in the 
case of a taxable year ending in 1975), divided by the number of 
corporations which are component members of such controlled group on the 
last day of such short period;
    (ii) The amount to be used in computing the accumulated earnings 
credit under section 535(c) (2) and (3) of such corporation for such 
short period shall be an amount equal to $150,000 divided by the number 
of corporations which are members of such controlled group on the last 
day of such short period; and
    (iii) The amount to be used in computing the limitation on the small 
business deduction of life insurance companies under sections 804(a)(4) 
and 809(d)(10) of such corporation for such short period shall not 
exceed an amount equal to $25,000 divided by the number of life 
insurance companies taxable under section 802 which are component 
members of the controlled group on the last day of such short period.

For purposes of the preceding sentence, the term ``short period'' does 
not include any period if the income for such period is required to be 
included in a consolidated return under Sec. 1.1502-76. The 
determination of whether a corporation is a component member of a 
controlled group of corporations on the last day of a short period is 
made by applying the definition of ``component member'' contained in 
section 1563(b) and Sec. 1.1563-1 as if the last day of such short 
period were a December 31 occurring after December 31, 1974.
    (2) The provisions of this paragraph may be illustrated by the 
following examples:

    Example (1). On January 2, 1975, corporation X transfers cash to 
newly formed corporation Y (which begins business on that date)

[[Page 24]]

and receives all of the stock of Y in return. X also owns all of the 
stock of corporation Z on each day of 1974 and 1975. X uses the calendar 
year as its taxable year and Z uses a fiscal year ending on March 31. Y 
adopts a fiscal year ending on June 30 as its annual accounting period, 
and, therefore, files a return for the short taxable year beginning on 
January 2, 1975, and ending on June 30, 1975. On June 30, 1975, Y is a 
component member of a parent-subsidiary controlled group of corporations 
of which X, Y, and Z are component members. Accordingly, the surtax 
exemption of Y for the short taxable year ending on June 30, 1975, is 
$16,666.67 ($50,000/3). On December 31, 1975, X, Y, and Z are component 
members of a parent-subsidiary controlled group of corporations. 
Accordingly, the surtax exemption of each such corporation for its 
taxable year including December 31, 1975 (i.e., X's calendar year ending 
December 31, 1975, Z's fiscal year ending March 31, 1976, and Y's fiscal 
year ending June 30, 1976) is $16,666.67 ($50,000/3), or, if an 
apportionment plan is filed under Sec. 1.1561-3, the amount apportioned 
pursuant to such plan.
    Example (2). On January 1, 1975, corporation P owns all of the stock 
of corporations S-1, S-2, and S-3. P, S-1, S-2, and S-3 file separate 
returns on a calendar year basis. On July 31, 1975, S-1 is liquidated 
and therefore files a return for the short taxable year beginning on 
January 1, 1975, and ending on July 31, 1975. On August 31, 1975, S-2 is 
liquidated and therefore files a return for the short taxable year 
beginning on January 1, 1975, and ending on August 31, 1975. On July 31, 
1975, S-1 is a component member of a parent-subsidiary controlled group 
of corporations of which P, S-1, S-2, and S-3 are component members. 
Accordingly, the surtax exemption under section 11(d) of S-1 for the 
short taxable year ending on July 31, 1975, is $12,500 ($50,000/4). On 
August 31, 1975, S-2 is a component member of a parent-subsidiary 
controlled group of corporations of which P, S-2, and S-3 are component 
members. Accordingly, the surtax exemption of S-2 for the short taxable 
year ending on August 31, 1975, is $16,666.67 ($50,000/3). On December 
31, 1975, P and S-3 are component members of a parent-subsidiary 
controlled group of corporations. Accordingly, the surtax exemption of 
each such corporation for the calendar year 1975 is $25,000 ($50,000/2), 
or, if an apportionment plan is filed under Sec. 1.1561-3, the amount 
apportioned pursuant to such plan.

[T.D. 7528, 42 FR 64695, Dec. 28, 1977]



Sec. 1.1561-3  Apportionment of surtax exemption.

    (a) In general. (1) In the case of corporations which are component 
members of a controlled group of corporations on a December 31, the 
single $50,000 surtax exemption under section 11(d) may be apportioned 
among such members (for the taxable year of each such member which 
includes such December 31) if all such members consent, in the manner 
provided in paragraph (b) of this section, to an apportionment plan with 
respect to such December 31. Such plan shall provide for the 
apportionment of a fixed dollar amount to one or more of such members, 
but in no event shall the sum of the amounts so apportioned exceed 
$50,000. An apportionment plan shall not be considered as adopted with 
respect to a particular December 31 until each component member which is 
required to consent to the plan under paragraph (b)(1) of this section 
filed the original of a statement described in such paragraph (or, the 
original of a statement incorporating its consent is filed on its 
behalf). In the case of a return filed before a plan is adopted, the 
surtax exemption for purposes of such return shall be equally 
apportioned in accordance with the rules provided in Sec. 1.1561-
2(a)(1)(i). (If a valid apportionment plan is adopted after the return 
is filed and within the time prescribed by subparagraph (2) of this 
paragraph, such return should be amended (or a claim for refund should 
be made) to reflect the change from equal apportionment.)
    (2) A controlled group may adopt an apportionment plan with respect 
to a particular December 31 only if, at the time such plan is sought to 
be adopted, there is at least one year remaining in the statutory period 
(including any extensions thereof) for the assessment of a deficiency 
against any corporation the tax liability of which would be increased by 
the adoption of such plan. If there is less than one year remaining with 
respect to any such corporation, the director of the service center with 
which such corporation files its income tax return will ordinarily, upon 
request, enter into an agreement to extend such statutory period for the 
limited purpose of assessing any deficiency against such corporation 
attributable to the adoption of such apportionment plan.
    (3)(i) The amount apportioned to a component member of a controlled

[[Page 25]]

group of corporations in an apportionment plan adopted with respect to a 
particular December 31 shall constitute such member's surtax exemption 
for its taxable year including the particular December 31, and for all 
taxable years of such members including succeeding December 31's, unless 
the apportionment plan is amended in accordance with paragraph (c) of 
this section or is terminated under subdivision (ii) of this 
subparagraph. Thus, the apportionment plan (including any amendments 
thereof) has a continuing effect and need not be renewed annually.
    (ii) If an apportionment plan is adopted with respect to a 
particular December 31, such plan shall terminate with respect to a 
succeeding December 31, if:
    (a) The controlled group ceases to remain in existence during the 
calendar year ending on such succeeding December 31,
    (b) Any corporation which was a component member of such group on 
the particular December 31 is not a component member of such group on 
such succeeding December 31, or
    (c) Any corporation which was not a component member of such group 
on the particular December 31 is a component member of such group on 
such succeeding December 31.

An apportionment plan, once terminated with respect to a December 31, is 
no longer effective. Accordingly, unless a new apportionment plan is 
adopted, the surtax exemption of the component members of the controlled 
group for their taxable years which include such December 31 and all 
December 31's thereafter will be determined in accordance with the rules 
provided in paragraph (a)(1)(i) of Sec. 1.1561-2.
    (iii) For purposes of subdivision (ii) (a)--(a) A parent-subsidiary 
controlled group of corporations shall be considered as remaining in 
existence as long as its common parent corporation remains as a common 
parent.
    (b) A brother-sister controlled group of corporations shall be 
considered as remaining in existence as long as the requirements of 
paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be satisfied with 
respect to at least two corporations, taking into account the stock 
ownership of only those five or fewer persons whose stock ownership was 
taken into account at the time the apportionment plan adopted by the 
component members of such group first became effective.
    (c) A combined group of corporations shall be considered as 
remaining in existence as long as the brother-sister controlled group of 
corporations referred to in paragraph (a)(4)(i) of Sec. 1.1563-1 in 
respect of such combined group remains in existence (within the meaning 
of (b) of this subdivision), and at least one such corporation is a 
common parent of a parent-subsidiary controlled group of corporations 
referred to in such paragraph (a)(4)(i).
    (d) If, by reason of paragraph (a)(5)(i) of Sec. 1.1563-1, two or 
more insurance companies subject to taxation under section 802 are 
treated as an insurance group separate from any corporations which are 
members of a controlled group described in paragraph (a) (2), (3), or 
(4) of Sec. 1.1563-1, such insurance group shall be considered as 
remaining in existence as long as the controlled group described in 
paragraph (a) (2), (3), or (4) of such section, as the case may be, 
remains in existence (within the meaning of (a), (b), or (c) of this 
subdivision), and there are at least two insurance companies which 
satisfy the requirements of paragraph (a)(5)(i) of such section.
    (iv) If an apportionment plan is terminated with respect to a 
particular December 31 by reason of an occurrence described in 
subdivision (ii) (b) or (c) of this subparagraph, each corporation which 
is a component member of the controlled group on such particular 
December 31 should, on or before the date it files its income tax return 
for the taxable year which includes such particular December 31, notify 
the service center with which it files such return of such termination. 
If an apportionment plan is terminated with respect to a particular 
December 31 by reason of an occurrence described in subdivision (ii)(a) 
of this subparagraph, each corporation which was a component member of 
the controlled group on the preceding December 31 should, on or before 
the date it files its income tax

[[Page 26]]

return for the taxable year which includes such particular December 31, 
notify the service center with which it files such return of such 
termination.
    (b) Consents to plan. (1)(i) The consent of a component member 
(other than a wholly-owned subsidiary) to an apportionment plan with 
respect to a particular December 31 shall be made by means of a 
statement, signed by any person who is duly authorized to act on behalf 
of the consenting member, stating that such member consents to the 
apportionment plan with respect to such December 31. The statement shall 
set forth in the name, address, taxpayer account number, and taxable 
year of the consenting component member, the amount apportioned to such 
member under the plan, and the service center where the original of the 
statement is to be filed. The consent of more than one component member 
may be incorporated in a single statement. The original of a statement 
of consent shall be filed with the service center with which the 
component member of the group on such December 31 which has the taxable 
year ending first on or after such date filed its return for such 
taxable year. (If two or more component members have the same such 
taxable year, a statement of consent may be filed with the service 
center with which the return for any such taxable year is filed.) The 
original of a statement of consent shall have attached thereto 
information (referred to in this paragraph as ``group identification'') 
setting forth the name, address, taxpayer account number, and taxable 
year of each component member of the controlled group on such December 
31 (including wholly-owned subsidiaries) and the amount apportioned to 
each such member under the plan. If more than one original statement is 
filed, a statement may incorporate the group identification by reference 
to the name, address, taxpayer account number, and taxable year of a 
component member of the group which has attached such group 
identification to the original of its statement.
    (ii) Each component member of the group on such December 31 (other 
than wholly-owned subsidiaries) should attach a copy of its consent (or 
a copy of the statement incorporating its consent) to the income tax 
return, amended return, or claim for refund filed with its service 
center for the taxable year including such date. Such copy shall either 
have attached thereto information on group identification or shall 
incorporate such information by reference to the name, address, taxpayer 
account number, and taxable year of a component member of the group 
which has attached such information to its income tax return, amended 
return, or claim for refund filed with the same service center for the 
taxable year including such date.
    (2)(i) Each component member of a controlled group which is a 
wholly-owned subsidiary of such group with respect to a December 31 
shall be deemed to consent to an apportionment plan with respect to such 
December 31, provided each component member of the group which is not a 
wholly-owned subsidiary consents to the plan. For purposes of this 
section, a component member of a controlled group shall be considered to 
be a wholly-owned subsidiary of the group with respect to a December 31 
if, on each day preceding such date during its taxable year which 
includes such date, all of its stock is owned directly by one or more 
corporations which are component members of the group on such December 
31.
    (ii) Each wholly-owned subsidiary of a controlled group with respect 
to a December 31 should attach a statement containing the information 
which is required to be set forth in a statement of consent to an 
apportionment plan with respect to such December 31 to the income tax 
return, amended return, or claim for refund filed with its service 
center for the taxable year which includes such date. Such statement 
should either have attached thereto information on group identification 
or incorporate such information by reference to the name, address, 
taxpayer account number, and taxable year of a component member of the 
group which has attached such information to its income tax return, 
amended return, or claim for refund filed with the same service center 
for the taxable year including such date.
    (c) Amendment of plan. An apportionment plan adopted with respect to 
a

[[Page 27]]

December 31 by a controlled group of corporations may be amended with 
respect to such December 31, or with respect to any succeeding December 
31 for which the plan is effective under paragraph (a)(3) of this 
section. An apportionment plan must be amended with respect to a 
particular December 31 and the amendments to the plan shall be effective 
only if adopted in accordance with the rules prescribed in this section 
for the adoption of an original plan with respect to such December 31.
    (d) Component members filing consolidated returns. If the component 
members of a controlled group of corporations on a December 31 include 
corporations which join in the filing of a consolidated return, the 
corporations filing the consolidated return shall be treated as a single 
component member for purposes of this section. Thus, for example, only 
one consent, executed by the common parent, to an apportionment plan 
filed pursuant to this section is required on behalf of the component 
members filing the consolidated return.

[T.D. 7528, 42 FR 64697, Dec. 28, 1977; 43 FR 4603, Feb. 3, 1978]



Sec. 1.1562-0  Effective date.

    The provisions of Secs. 1.1562-1 through 1.1562-7 apply only to 
taxable years beginning before January 1, 1975.


(Secs. 1561(a), (83 Stat. 599; 26 U.S.C. 1561 (a)) and 7805 (68A Stat. 
917; 26 U.S.C. 7805, of the Internal Revenue Code))

[T.D. 7528, 42 FR 64702, Dec. 28, 1977]



Sec. 1.1562-1  Privilege of controlled group to elect multiple surtax exemptions.

    (a) Election--(1) In general. (i) Under section 1562(a)(1) a 
controlled group of corporations has the privilege of electing to have 
each of its component members make its returns without regard to section 
1561 (relating to single surtax exemption in the case of a controlled 
group of corporations). The election shall be made with respect to a 
particular December 31 and shall be valid only if each corporation which 
is required to consent to the election under the provisions of paragraph 
(a)(1) of Sec. 1.1562-3 gives its consent in the manner and within the 
time prescribed in such section. An election shall not be considered as 
made with respect to a particular December 31 until each corporation 
which is required to consent to the election under paragraph (c)(1) of 
Sec. 1.1562-3 files the original of a statement described in such 
paragraph (or, the original of a statement incorporating its consent is 
filed on its behalf). Accordingly, for purposes of returns filed before 
an election is made, the surtax exemption of component members of a 
controlled group of corporations shall be determined in accordance with 
section 1561 and the regulations thereunder. (If a valid election is 
made after the return is filed and within the time prescribed in 
Sec. 1.1562-3, such return should be amended (or a claim for refund 
should be made) to reflect the change in the amount of the surtax 
exemption (and the imposition of the additional tax) resulting from the 
election.)
    (ii) An election once made with respect to a particular December 31 
may not thereafter be withdrawn unless such election is terminated with 
respect to such December 31 in accordance with the provisions of section 
1562(c) and Sec. 1.1562-2.
    (iii) An election under section 1562(a)(1) may be made by a 
controlled group of corporations with respect to any December 31 (after 
December 31, 1962), unless:
    (a) A component member of such group on such December 31 joins, or 
is required to join, in the filing of a consolidated return for its 
taxable year which includes such date, or
    (b) Such controlled group is not eligible to make an election with 
respect to such December 31 by reason of section 1562(d).


See also section 243(b)(3)(A), relating to effect of election of 100-
percent dividends received deduction, which may prevent a controlled 
group from making an election under section 1562(a)(1) with respect to a 
particular December 31.
    (2) Years for which effective. (i) A valid election under section 
1562(a)(1) by a controlled group of corporations with respect to a 
particular December 31 is effective with respect to:

[[Page 28]]

    (a) The taxable year of each component member of such group on such 
December 31 which includes such December 31, and
    (b) Any succeeding taxable year of any corporation which is a 
component member of such group (or a successor group) on a succeeding 
December 31 included within any such succeeding taxable year.

Under section 1562(c) and Sec. 1.1562-2, an election under section 
1562(a)(1) may be terminated with respect to a December 31 referred to 
in either (a) or (b) of this subdivision. For years affected by 
termination, see paragraph (c) of Sec. 1.1562-2.
    (ii) For the application of an election under section 1562(a)(1) to 
certain short taxable years not including a December 31, see section 
1562(f)(2) and Sec. 1.1562-6.
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Corporation P is the common parent of a parent-subsidiary 
controlled group of corporations of which corporations P, S-1, and S-2 
are component members on December 31, 1964. On December 31, 1965, the 
controlled group of corporations consists of the same component members 
as on December 31, 1964, except that corporation S-3 is also a component 
member on December 31, 1965. On December 31, 1966, the controlled group 
of corporations consists of the same component members as on December 
31, 1965, except that S-1 is no longer a component member on December 
31, 1966. In January 1965, the controlled group makes a valid election 
under section 1562(a)(1) with respect to December 31, 1964. Under 
subdivision (i)(a) of this subparagraph, the election (unless 
terminated) is effective with respect to the taxable years of P, S-1, 
and S-2 which include December 31, 1964. Under subdivision (i)(b) of 
this subparagraph, the election (unless terminated) is also effective 
with respect to the taxable years of P, S-1, S-2, and S-3 which include 
December 31, 1965, and with respect to the taxable years of P, S-2, and 
S-3 which include December 31, 1966.

    (b) Effect of election--(1) General. If an election under section 
1562(a)(1) is effective with respect to a taxable year of a corporation, 
then:
    (i) Section 1561 shall not apply to such corporation for such 
taxable year, but
    (ii) The additional tax imposed by section 1562(b) shall apply to 
such corporation for such taxable year (except as otherwise provided in 
subparagraph (3) of this paragraph).
    (2) Additional tax. The additional tax imposed by section 1562(b) is 
an amount equal to 6 percent of so much of a corporation's taxable 
income for the taxable year as does not exceed the amount of such 
corporation's surtax exemption for such taxable year. However, if a 
corporation computes its tax under section 1201 (relating to alternative 
tax) and is subject to the additional tax imposed by section 1562(b) for 
such taxable year, the additional tax applies only to an amount equal to 
the taxable income reduced by the excess of the net long-term capital 
gain over the net short-term capital loss for such taxable year (to the 
extent such amount does not exceed the amount of such corporation's 
surtax exemption for such taxable year).
    (3) Exceptions. The additional tax imposed by section 1562(b) shall 
not apply to a corporation for any taxable year if:
    (i) Such corporation is the only component member of a controlled 
group on the December 31 included within such taxable year which has 
taxable income for the taxable years including such date, or
    (ii) Such corporation's surtax exemption is disallowed for such year 
under any provision of the Code. For purposes of this subdivision, if 
the component members of a controlled group of corporations on a 
December 31 are limited in the aggregate to a single $25,000 surtax 
exemption for their taxable years which include such date, then the 
surtax exemption of each such component member shall be considered to be 
disallowed for such taxable year regardless of how the $25,000 is 
allocated among such members. For example, if pursuant to the authority 
provided in section 269(b), the Commissioner allocates a single $25,000 
surtax exemption equally between two corporations which are the only 
component members of an electing controlled group of corporations, the 
surtax exemption of each such corporation shall be considered to be 
disallowed.

The application of this subparagraph in respect of a taxable year of a 
component member of a controlled group of corporations does not 
constitute the

[[Page 29]]

termination of an election made under section 1562(a)(1). Accordingly, 
such election continues in effect for the subsequent taxable years of 
such corporation and the other corporations which are component members 
of the controlled group, unless the election is terminated under section 
1562(c).
    (4) Taxable income defined. For purposes of this paragraph, the term 
``taxable income'' means:
    (i) In the case of a corporation subject to tax under section 511(a) 
(relating to tax on unrelated business income of charitable, etc., 
organizations at corporation rates), its ``unrelated business taxable 
income'' (as defined in section 512),
    (ii) In the case of a life insurance company, its ``life insurance 
company taxable income'' (as defined in section 802(b)),
    (iii) In the case of a regulated investment company, its 
``investment company taxable income'' (as defined in section 852(b)(2)),
    (iv) In the case of a real estate investment trust, its ``real 
estate investment trust taxable income'' (as defined in section 
857(b)(2)), and
    (v) In the case of an electing small business corporation, its 
``taxable income'' (as defined in section 1373(d)).
    (5) Tax treated as imposed by section 11, etc. For purposes of 
applying other sections of the Code, if for a taxable year a corporation 
is subject to both the tax imposed by section 11 and to the additional 
tax imposed by section 1562(b), then the additional tax is treated as if 
it were imposed by section 11. If a corporation is subject to a tax 
imposed by any section of chapter 1 of the Code other than section 11 
but such tax is computed by reference to section 11, the additional tax 
is treated for purposes of the Code as imposed by such other section. 
(For example, the tax imposed by section 831(a) is ``computed as 
provided in section 11''; therefore if a corporation is subject to both 
the tax imposed by section 831(a) and the additional tax imposed by 
section 1562(b) for any taxable year, the additional tax is treated as 
imposed by section 831(a) for such taxable year.) Accordingly, the 
credits against the tax imposed by chapter 1 of the Code allowable, for 
example, under sections 38 (relating to credit against tax for 
investment in certain depreciable property) and 33 (relating to credit 
for taxes of foreign countries and possessions of the United States) may 
be applied against the additional tax.
    (6) Special rules. For purposes of sections 244 (relating to 
dividends received on certain preferred stock), 247 (relating to 
dividends paid on certain preferred stock of public utilities), 804 
(a)(3) (relating to deduction for partially tax-exempt interest in the 
case of a life insurance company), and 922 (relating to special 
deduction for Western Hemisphere trade corporations), the normal tax 
rate referred to in such sections shall be determined without regard to 
the additional tax imposed by section 1562(b). For example, in the case 
of a corporation subject to the additional tax imposed by section 
1562(b) for its taxable year ending December 31, 1965, the percentage 
computed under section 244(a)(2)(B) for such taxable year would be 48 
percent.

[T.D. 6845, 30 FR 9744, Aug. 5, 1965, as amended by T.D. 6960, 33 FR 
9302, June 25, 1968; T.D. 7181, 37 FR 8067, Apr. 25, 1972]



Sec. 1.1562-2  Termination of election.

    (a) In general. An election under section 1562(a)(1) is terminated 
by any one of the occurrences described in paragraph (b) of this 
section. For years affected by termination, see paragraph (c) of this 
section.
    (b) Methods of termination--(1) Consent of the members. An election 
may be terminated with respect to a particular December 31 by consent of 
the component members of a controlled group of corporations. A 
termination by consent shall be made with respect to a particular 
December 31 and shall be valid only if each corporation which is 
required to consent to the termination under paragraph (a)(1) of 
Sec. 1.1562-3 gives its consent in the manner and within the time 
prescribed in such section. A termination by consent shall not be 
considered as made with respect to a particular December 31 until each 
corporation which is required to consent to the termination under 
paragraph (c)(1) of Sec. 1.1562-3 files the original of a statement 
described in such paragraph

[[Page 30]]

(or, the original of a statement incorporating its consent is filed on 
its behalf).
    (2) Refusal by new member to consent. (i) If on a December 31 a 
controlled group of corporations which has made an election under 
section 1562(a)(1) includes a new member which files a statement that it 
does not consent to the election with respect to such December 31, then 
such election shall terminate with respect to such date. Such statement 
shall be signed by any person who is duly authorized to act on behalf of 
the new member, and shall be attached to the income tax return of such 
new member for its taxable year which includes such December 31, filed 
on or before the date prescribed by law (including extensions of time) 
for the filing of such return. The statement shall set forth the name, 
address, taxpayer account number, and taxable year of each corporation 
which was a component member of the controlled group on such December 
31. In the event of a termination under this subparagraph, each 
component member of the controlled group on such December 31 (other than 
such new member) should, within 30 days after such new member files the 
statement of refusal to consent, file notification of the termination 
with the district director with whom it filed (or will file) an income 
tax return for its taxable year which includes such December 31.
    (ii) For purposes of subdivision (i) of this subparagraph, a 
corporation shall be considered to be a new member of a controlled group 
of corporations on a December 31 if such corporation:
    (a) Is a component member of such group on such December 31, and
    (b) Was not a member of such group on the January 1 immediately 
preceding such December 31.
    (3) Consolidated returns. (i) If any corporation which is a 
component member of a controlled group of corporations on a December 31 
joins, or is required to join, in the filing of a consolidated return 
for its taxable year which includes such date, then an election under 
section 1562(a)(1) which is effective with respect to preceding taxable 
years of component members of the group shall terminate with respect to 
such December 31. In the event of a termination under this subparagraph, 
each component member of the controlled group on such December 31 which 
does not join in the filing of a consolidated return for the taxable 
year which includes such date, should, within 30 days after such 
consolidated return is filed, file notification of the termination with 
the district director with whom it filed (or will file) an income tax 
return for its taxable year which includes such December 31.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. On each day of 1964 and 1965, Brown, an individual, owns 
all the stock of corporations M and P. Corporation P, in turn, owns all 
the stock of corporation S. Each corporation files a separate return for 
its taxable year ending on December 31, 1964. On April 30, 1965, the 
controlled group of corporations consisting of M, P, and S makes an 
election under section 1562(a)(1) with respect to December 31, 1964. On 
March 15, 1966, P and S join in the filing of a consolidated return for 
their taxable years ending December 31, 1965, and M files a separate 
return for its taxable year ending on such date. Under this 
subparagraph, the election by the controlled group with respect to 
December 31, 1964, is terminated with respect to December 31, 1965. On 
or before April 14, 1966, M should file notification of the termination 
with the district director with whom it filed its income tax return for 
1965.

    (4) Controlled group no longer in existence. If a controlled group 
of corporations is considered as going out of existence with respect to 
a particular December 31 under paragraph (b) of Sec. 1.1562-5, and if 
there is no successor group in respect of such controlled group under 
the rules provided in paragraph (c) of such section, then an election 
under section 1562(a)(1) with respect to such controlled group shall 
terminate with respect to such December 31.
    (c) Effect of termination. A termination under subparagraph (1), 
(2), (3), or (4) of paragraph (b) of this section is effective with 
respect to the December 31 referred to in such subparagraph. An 
election, once terminated, is no longer effective. Thus, a termination 
is effective with respect to the taxable year of each component member 
of a controlled group of corporations which includes such December 31 
and with respect to all succeeding taxable years of

[[Page 31]]

each corporation which is a component member of such group (or a 
successor group). Moreover, after a termination, the controlled group 
(and any successor group) may not make a new election except as provided 
in section 1562(d) and Sec. 1.1562-4.

[T.D. 6845, 30 FR 9745, Aug. 5, 1965]



Sec. 1.1562-3  Consents to election and termination.

    (a) Consents required--(1) General. An election under paragraph 
(a)(1) of Sec. 1.1562-1, or a termination by consent under paragraph 
(b)(1) of Sec. 1.1562-2, may be made by a controlled group of 
corporations with respect to a particular December 31 only if each 
corporation, which was a component member of such group (or a successor 
group) on any December 31 falling within the period beginning on the 
particular December 31 and ending on the most recently past December 31, 
consents to the election or termination within the time prescribed in 
paragraph (b) of this section and in the manner prescribed in paragraph 
(c) of this section. Such election or termination may be made with 
respect to a particular December 31 whether or not the electing or 
terminating group ceases to remain in existence under the principles of 
paragraph (a) of Sec. 1.1562-5 before such election or termination is 
made. In the case of an election with respect to December 31, 1963, if 
each corporation which is required to consent to the election under the 
rules provided in Treasury Decision 6733, approved May 11, 1964 (29 FR 
6320, C.B. 1964-1 (Part 1), 635) gives its consent in the manner 
provided in such Treasury Decision before December 31, 1964, then a 
valid election under section 1562(a)(1) shall be considered to have been 
made with respect to December 31, 1963.
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following examples:

    Example (1). P Corporation is the common parent of a parent-
subsidiary controlled group of which corporations P, S-1, and S-2 are 
component members on December 31, 1965. On December 31, 1966, the 
controlled group consists of the same component members as on December 
31, 1965, except that S-1 is no longer a component member on December 
31, 1966. On December 31, 1967, the controlled group of corporations 
consists of the same component members as on December 31, 1966, except 
that corporation S-3 is also a component member on December 31, 1967. In 
January 1968, the controlled group desires to make an election under 
section 1562(a)(1) with respect to December 31, 1965. Such election may 
be made only if P, S-1 (even though S-1 was not a component member of 
the group on December 31, 1966, or December 31, 1967), S-2, and S-3 
(even though S-3 was not a component member of the group on December 31, 
1965, or December 31, 1966) consent to the election.
    Example (2). Assume the same facts as in example (1) and further 
assume that in January 1968, the controlled group makes a valid election 
with respect to December 31, 1965. If, in July 1968, the controlled 
group desires to terminate the election with respect to December 31, 
1966, P, S-2, and S-3 must consent to the termination.

    (b) Time for consents--(1) Consents to election. The consent of each 
component member of a controlled group of corporations which is required 
with respect to an election for a particular December 31, shall be made 
at any time after such December 31 and before the expiration of 3 years 
after the date on which the income tax return, for the taxable year of 
the component member of the group on such December 31 which has the 
taxable year ending first on or after such date, is required to be filed 
(determined without regard to any extensions of time for the filing of 
such return). See section 1562(e)(1).
    (2) Consents to termination. The consent of each component member of 
a controlled group of corporations which is required with respect to a 
termination for a particular December 31, shall be made at any time 
after such December 31 and before the expiration of 3 years after such 
date. See section 1562(e)(2).
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). The component members of a controlled group of 
corporations on December 31, 1965, consist of 2 calendar-year 
corporations, X and Y. The group desires to make an election under 
section 1562(a)(1) with respect to December 31, 1965. Under subparagraph 
(1) of this paragraph, the required consents to the election must be 
made after December 31, 1965, and on or before March 15, 1969. The 
result is the same whether or not X or Y (or both) ceases to be a 
component member of the group after December 31, 1965,

[[Page 32]]

and whether or not X or Y (or both) is granted an extension of time for 
the filing of its income tax return for 1965.
    Example (2). Assume the same facts as in example (1) except that X 
files its income tax return on the basis of a fiscal year ending January 
31, and Y files its income tax return on the basis of a fiscal year 
ending on June 30. Under subparagraph (1) of this paragraph, the last 
day on which the required consents may be made with respect to an 
election for December 31, 1965, is April 15, 1969.
    Example (3). Assume the same facts as in example (1) or (2) except 
that an election under section 1562(a)(1) is effective for X's and Y's 
taxable years including December 31, 1965. Assume further that the group 
desires to terminate the election with respect to December 31, 1965. 
Under subparagraph (2) of this paragraph, the required consents to the 
termination must be made after December 31, 1965, and on or before 
December 31, 1968.

    (c) Manner of consenting--(1) General rule. (i) The consent of a 
corporation to an election or termination with respect to a particular 
December 31 (other than a corporation which is a wholly-owned subsidiary 
in respect of such election or termination) shall be made by means of a 
statement, signed by any person who is duly authorized to act on behalf 
of the consenting corporation, stating that such corporation consents to 
an election or termination (as the case may be) with respect to such 
December 31. Such statement shall set forth the name, address, and 
taxpayer account number of the consenting member and the internal 
revenue district where the original of the statement is to be filed. The 
consent of more than one component member may be incorporated in a 
single statement. The original of a statement of consent shall be filed 
with the district director with whom the component member of the group 
on the particular December 31 which has the taxable year ending first on 
or after such date filed its return for such taxable year. (If two or 
more component members have the same such taxable year, a statement of 
consent may be filed with the district director with whom the return for 
any such taxable year is filed.) The original of a statement shall have 
attached thereto information (referred to in this paragraph as ``group 
identification'') setting forth the name, address, taxpayer account 
number, and taxable year of each component member of the controlled 
group on such December 31 (including wholly-owned subsidiaries). If the 
particular December 31 is a December 31 other than the December 31 
immediately preceding the date on which such statement is filed then, as 
part of the ``group identification'', the original of the statement 
shall also set forth the information required in the preceding sentence 
with respect to each other corporation which was a component member of 
the group (or a successor group) on any December 31 occurring after the 
particular December 31 on which the consenting corporation was a 
component member of such group. If more than one original statement is 
filed, a statement may incorporate the group identification by reference 
to the name, address, taxpayer account number, and taxable year of a 
component member of the group which has attached such group 
identification to the original of its statement.
    (ii) Each corporation which was a component member of the electing 
(or terminating) controlled group (or a successor group) on a December 
31 falling within the period beginning on the particular December 31 and 
ending on the most recently past December 31 (other than a wholly-owned 
subsidiary in respect of such election or termination) should attach a 
copy of its consent (or a copy of the statement incorporating its 
consent) to each income tax return, amended return, or claim for refund 
filed with its district director for a taxable year which includes any 
such December 31. Such copy should either have attached thereto 
information on group identification or incorporate such information by 
reference to the name, address, taxpayer account number, and taxable 
year of a component member of the group which has attached such 
information to its income tax return, amended return, or claim for 
refund filed with the same district director for a taxable year which 
includes any such December 31.
    (2) Wholly-owned subsidiaries. (i) Each corporation which is a 
wholly-owned subsidiary of a controlled group of corporations in respect 
of an election or termination with respect to a particular December 31 
shall be deemed to

[[Page 33]]

consent to such election or termination (as the case may be). For 
purposes of this section, a corporation shall be considered to be a 
wholly-owned subsidiary of a controlled group in respect of an election 
or termination with respect to a particular December 31 if, on each day 
falling within the period beginning on the first day of such 
corporation's taxable year which included such December 31 and ending on 
the day on which such election or termination is made (or, if such 
corporation was not in existence on each day of such period, on each day 
falling within such period during which the corporation was in 
existence), all the stock of such corporation is owned directly by one 
or more corporations which are component members of such group (or a 
successor group) on any December 31 falling within such period.
    (ii) Each wholly-owned subsidiary should attach a statement to an 
income tax return, amended return, or claim for refund filed with its 
district director for each taxable year which contains a December 31 
falling within the period described in the last sentence of subdivision 
(i) of this subparagraph, stating that an election or termination (as 
the case may be) is effective for such taxable year and containing the 
information which would be required to be set forth in a statement of 
consent to the election or termination filed pursuant to subparagraph 
(1)(i) of this paragraph. Information on group identification may either 
be attached to the statement or incorporated by reference to the name, 
address, taxpayer account number, and taxable year of a component member 
of the group which has attached such group identification to an income 
tax return, amended return, or claim for refund filed with the same 
district director for the taxable year including such date.
    (d) Effect of consent. Under section 1562(e), any consent to an 
election under section 1562(a)(1) or a termination under section 
1562(c)(1) is deemed to be a consent to the application of section 
1562(g)(1) (relating to tolling of statute of limitations on assessment 
of deficiencies). See Sec. 1.1562-7.

[T.D. 6845, 30 FR 9746, Aug. 5, 1965]



Sec. 1.1562-4  Election after termination.

    (a) In general. Under section 1562(d), if a controlled group of 
corporations has made a valid election under section 1562(a)(1), and 
such election is terminated by any one of the occurrences described in 
paragraph (b) of Sec. 1.1562-2, then such group (or any controlled group 
which is a successor to such group within the meaning of paragraph (c) 
of Sec. 1.1562-5) is not eligible to make an election under section 
1562(a)(1) with respect to any December 31 before the sixth December 31 
after the particular December 31 with respect to which such termination 
was effective. For the particular December 31 with respect to which a 
termination is effective, see paragraph (c) of Sec. 1.1562-2.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. In 1965, a controlled group of corporations makes a valid 
election under section 1562(a)(1) with respect to December 31, 1964. In 
1967, the election is terminated with respect to December 31, 1964, by 
consent pursuant to paragraph (b)(1) of Sec. 1.1562-2. The group (or any 
successor group) is not eligible to make another election with respect 
to any December 31 before December 31, 1970 (i.e., the sixth December 31 
after December 31, 1964, the particular December 31 with respect to 
which such termination was effective). If in this example the election 
had been terminated with respect to December 31, 1965, instead of 
December 31, 1964, the group (or any successor group) would not be 
eligible to make another election with respect to any December 31 before 
December 31, 1971.

[T.D. 6845, 30 FR 9747, Aug. 5, 1965]



Sec. 1.1562-5  Continuing and successor controlled groups.

    (a) Controlled group continuing in existence. For purposes of 
Secs. 1.1561-3 and 1.1562-1 through 1.1562-4:
    (1) Parent-subsidiary group. A parent-subsidiary controlled group of 
corporations shall be considered as remaining in existence as long as 
(i) such group is not considered, under paragraph (c)(3) of this 
section, to be a successor controlled group in respect of another 
controlled group, and (ii) its common parent corporation remains as a 
common parent and satisfies the requirements of paragraph (a)(2)(i)(b) 
of Sec. 1.1563-1 with respect to the ownership of stock of at least one 
corporation.

[[Page 34]]

    (2) Brother-sister group. A brother-sister controlled group of 
corporations shall be considered as remaining in existence as long as 
the requirements of paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be 
satisfied with respect to at least two corporations, taking into account 
the stock ownership of only those five or fewer persons whose stock 
ownership was taken into account with respect to the election under 
section 1562(a)(1).
    (3) Combined group. A combined group of corporations shall be 
considered as remaining in existence as long as (i) the brother-sister 
controlled group of corporations referred to in paragraph (a)(4)(i) of 
Sec. 1.1563-1 in respect of such combined group remains in existence 
(within the meaning of subparagraph (2) of this paragraph), and (ii) at 
least one such corporation is a common parent of a parent-subsidiary 
controlled group of corporations referred to in such paragraph 
(a)(4)(i).
    (4) Insurance group. If, by reason of paragraph (a)(5)(i) of 
Sec. 1.1563-1, two or more insurance companies subject to taxation under 
section 802 are treated as an insurance group separate from any 
corporations which are members of a controlled group described in 
paragraph (a) (2), (3), or (4) of Sec. 1.1563-1, such insurance group 
shall be considered as remaining in existence as long as (i) the 
controlled group described in paragraph (a) (2), (3), or (4) of such 
section, as the case may be, remains in existence (within the meaning of 
subparagraph (1), (2), or (3) of this paragraph), and (ii) there are at 
least two insurance companies which satisfy the requirements of 
paragraph (a)(5)(i) of such section.
    (b) Controlled group no longer in existence--(1) General. Except as 
provided in subparagraph (3) of this paragraph, a controlled group of 
corporations is considered as going out of existence with respect to a 
December 31 if such group ceases to remain in existence under the 
principles of paragraph (a) of this section during the calendar year 
ending on such date.
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following examples, in which each corporation 
referred to uses the calendar year as its taxable year:

    Example (1). Corporation P was organized on January 1, 1964, and 
acquired all the stock of corporation S-1 on February 1, 1964, and all 
the stock of corporation S-2 on March 1, 1965. On April 1, 1965, P sold 
all its S-1 stock to the public. Beginning on February 1, 1964, P is the 
common parent corporation of a parent-subsidiary controlled group of 
corporations. Under paragraph (a)(1) of this section, the controlled 
group remains in existence throughout the remainder of 1964 and 
throughout 1965 even though after April 1, 1965, P satisfies the stock 
ownership requirements of paragraph (a)(2)(i) (b) of Sec. 1.1563-1 only 
with respect to the stock of S-2, a corporation which was not a member 
of the group at the time the group was formed, and even though S-1 
ceased to be a member of the group after the group was formed. 
Accordingly, if the controlled group makes a valid election under 
section 1562(a)(1) with respect to December 31, 1964, such election will 
remain in effect with respect to December 31, 1965, unless terminated 
under section 1562(c) (1), (2), or (3). Moreover, if such election were 
made and subsequently terminated with respect to December 31, 1964, the 
group would not be eligible (by reason of section 1562(d)) to make an 
election under section 1562(a)(1) with respect to December 31, 1965.
    Example (2). Assume the same facts as in example (1) except that 
corporation S-2 is a franchised corporation as defined in section 
1563(f)(4) for its 1965 taxable year. On December 31, 1965, S-2 is 
treated as an excluded member of the parent-subsidiary controlled group 
of which P is the common parent. See section 1563(b)(2)(E). 
Nevertheless, such controlled group is considered as remaining in 
existence throughout 1965.
    Example (3). Assume the same facts as in example (1) except that P 
sold its S-1 stock on February 28, 1965, instead of April 1, 1965. Under 
the principles of paragraph (a)(1) of this section, the parent-
subsidiary controlled group ceases to remain in existence on February 
28, 1965. Accordingly, under subparagraph (1) of this paragraph, such 
group is considered as going out of existence with respect to December 
31, 1965. Thus, if the group makes a valid election under section 
1562(a)(1) with respect to December 31, 1964, such election terminates 
with respect to December 31, 1965. Moreover, the new controlled group of 
corporations consisting of P and S-2 is not precluded (by reason of 
section 1562(d)) from making an election under section 1562(a)(1) with 
respect to December 31, 1965.
    Example (4). Smith, an individual, owns 80 percent of the only class 
of stock of corporations W and X on each day of 1966 and 1967. W, in 
turn, owns 80 percent of the only class of stock of corporation Y on 
each day of 1966.

[[Page 35]]

On April 15, 1967, X purchases 80 percent of the only class of 
corporation Z and on April 30, 1967, W sells all its stock in Y. Under 
paragraph (a)(3) of this section, the combined group remains in 
existence throughout 1966 and 1967 since (i) the brother-sister 
controlled group of corporations referred to in paragraph (a)(4)(i) of 
Sec. 1.1563-1 in respect of such combined group remains in existence, 
and (ii) at least one corporation is a common parent of a parent-
subsidiary controlled group referred to in such paragraph.
    Example (5). Assume the same facts as in example (4) except that Y 
and Z are life insurance companies subject to taxation under section 802 
of the Code. Further assume that throughout 1966 and 1967 Y owns all the 
stock of corporation S, and Z owns all the stock of corporation T. S and 
T are life insurance companies subject to taxation under section 802. 
Before April 15, 1967, under paragraph (a)(5)(i) of Sec. 1.1563-1, Y and 
S are treated as an insurance group of corporations. After April 30, 
1967, under paragraph (a)(4) of this section, Z and T are treated as an 
insurance group which remains in existence throughout 1966 and 1967, 
since the combined group remains in existence within the meaning of 
paragraph (a)(3) of this section throughout 1966 and 1967, and there are 
at all times at least two insurance companies which satisfy the 
requirements of paragraph (a)(5)(i) of Sec. 1.1563-1. (However, after 
April 30, 1967, Y and S cease to be members of the combined group and 
are considered to be a new controlled group of corporations.)
    Example (6). Jones, an individual, owns all the stock of 
corporations M and N on each day of 1966. On February 1, 1967, he gives 
all the stock of M to his 18-year-old son who continues to hold the M 
stock throughout the remainder of 1967. Since Jones (or his son) owns, 
or is considered as owning under paragraph (b)(6)(i) of Sec. 1.1563-3, 
all the stock of M and N on each day of 1967, under paragraph (a)(2) of 
this section the brother-sister controlled group consisting of M and N 
remains in existence throughout 1967.

    (3) Special rule. If:
    (i) Under subparagraph (1) of this paragraph, a controlled group of 
corporations would (without regard to this subparagraph) be considered 
as going out of existence with respect to a December 31 because two or 
more corporations cease to be members of such group during the calendar 
year ending on such date,
    (ii) Under paragraph (c) of this section, there is no successor 
group in respect of such group, and
    (iii) At least two of such corporations are considered to be 
component members of such group on such December 31 by reason of the 
additional member rule of paragraph (b)(3) of Sec. 1.1563-1,

then such group shall be considered as going out of existence with 
respect to the December 31 immediately succeeding such December 31. For 
example, assume that corporations P and S file their returns on the 
basis of the calendar year. P owns all the stock of S from January 1, 
1965, through December 1, 1965. On December 2, 1965, P sells the stock 
of S to the public. Under subparagraph (1) of this paragraph the 
controlled group consisting of P and S would (without regard to this 
subparagraph) be considered as going out of existence with respect to 
December 31, 1965, because P and S ceased to be members of the group on 
December 2, 1965. However, since there is no successor group in respect 
of the controlled group, and P and S are considered to be component 
members of such group on December 31, 1965, by reason of the additional 
member rule of paragraph (b)(3) of Sec. 1.1563-1, under this 
subparagraph the group is considered as going out of existence with 
respect to December 31, 1966, and not December 31, 1965.
    (c) Successor groups--(1) Transactions involving a former owner or 
owners. If, as a result of the transfer of stock of a corporation or 
corporations (whether by sale, exchange, distribution, contribution to 
capital, or otherwise), a controlled group (``old group'') goes out of 
existence, and a new controlled group (``new group'') comes into 
existence, then the new group shall be considered to be a successor to 
the old group, provided one of the following applies:
    (i) A person or persons who own stock of the new group that meets 
the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) owned stock which met such stock ownership requirement 
with respect to the old group;
    (ii) A person or persons who owned more than 50 percent of the fair 
market value of the stock of the common parent of the old group owns, 
with respect to the new group, stock that meets the more-than-50-percent 
stock ownership requirement of section 1563(a)(2)(B); or

[[Page 36]]

    (iii) A person or persons who owned stock that met the more-than-50-
percent stock ownership requirement of section 1563(a)(2)(B) with 
respect to the old group owns more than 50 percent of the fair market 
value of the stock of the common parent of the new group.

For purposes of this paragraph, the term ``owns'' includes direct 
ownership and ownership with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3. For purposes of this subparagraph, if as 
a result of the transfer of stock, a parent-subsidiary controlled group 
or a brother-sister controlled group becomes a part of a combined group, 
then such parent-subsidiary or brother-sister group shall be considered 
as going out of existence as a result of such transfer. Also for 
purposes of this subparagraph, if as a result of the transfer of stock, 
a combined group goes out of existence and a parent-subsidiary or 
brother-sister group which was part of such combined group remains, then 
such parent-subsidiary or brother-sister group shall be considered to be 
a new controlled group which came into existence as a result of such 
transfer.
    (2) Examples. The principles of subparagraph (1) of this paragraph 
may be illustrated by the following examples:

    Example (1). On each day of 1971, unrelated individuals Grey, Black, 
and Green own the following amounts of the only class of outstanding 
stock of each of corporations R and T: Grey owns 40 percent, Black owns 
40 percent, and Green owns 20 percent. On March 1, 1972, Grey sells all 
his stock in both corporations to unrelated individual Clay. As a result 
of the transfer, the brother-sister controlled group consisting of R and 
T goes out of existence. Since Black and Green, who owned stock which 
met the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) with respect to the old group, owns stock of the new group 
(consisting of R and T) that meets the more-than-50-percent stock 
ownership requirement of section 1563(a)(2)(B), the new group is 
considered to be the successor to the old group. If Green also sold all 
his stock in both corporations to unrelated individual Barnes, Black 
would be the only stockholder of the new group whose stock ownership was 
taken into account in meeting the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B) with respect to the old group. 
Since Black would not own stock of the new group that meets the more-
than-50-percent stock ownership requirement of section 1563(a)(2)(B), 
the new group would not be considered a successor to the controlled 
group which went out of existence.
    Example (2). On each day of 1971, all the outstanding stock of 
corporation P is owned in the following manner: Smith owns 30 percent, 
Jones owns 30 percent, and White owns 40 percent. P owns all the stock 
of corporation S1, S2, W1 and 
W2. On December 31, 1971, P, S1, S2, 
W1, and W2 are component members of the same 
controlled group. If on March 1, 1972, P distributes all the stock of 
S1 and S2 equally to Smith and Jones and all the 
stock of W1 and W2 to White, the controlled group 
consisting of P, S1, S2, W1, and 
W2 goes out of existence. Since Smith and Jones, who together 
owned stock which met the more-than-50-percent stock ownership 
requirement of section 1563 (a)(2)(B) with respect to the old group, now 
together own stock of the new group (consisting of S1 and 
S2) that meets the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B), such new group is considered the 
successor to the old group. On the other hand, since White, the sole 
shareholder of W1 and W2, did not own stock which 
met such stock ownership requirement with respect to the old group, the 
new group consisting of W1 and W2 is not 
considered a successor of the old group.

    (3) Transactions involving two common parents. If, as a result of 
the transfer of stock of a corporation or corporations (whether by sale, 
exchange, distribution, contribution to capital, or otherwise):
    (i) A parent-subsidiary controlled group of corporations goes out of 
existence because its common parent corporation ceases to be a common 
parent, and
    (ii) The stockholders (immediately before the transfer) of such 
common parent corporation, as a result of owning stock in such common 
parent, own (immediately after the transfer) more than 50 percent of the 
fair market value of the stock of a corporation which is the common 
parent corporation of a controlled group of corporations immediately 
after the transfer,

the resulting controlled group shall be considered to be a successor 
group in respect of the controlled group which went out of existence as 
a result of the transfer.
    (4) Example. The provisions of subparagraph (3) of this paragraph 
may be illustrated by the following example:

    Example. Corporation Y, the common parent of a parent-subsidiary 
controlled group,

[[Page 37]]

acquires the assets of corporation X, the common parent of another 
controlled group, in a statutory merger. The stockholders of X exchange 
their X stock for 60 percent of the fair market value of all of the 
outstanding shares of Y. Since, as a result of the exchange, (i) the 
parent-subsidiary controlled group of which X was the common parent goes 
out of existence because X ceases to be a common parent, and (ii) the 
stockholders of X, as a result of owning stock in X, own immediately 
after the exchange more than 50 percent of the fair market value of the 
stock of Y (the common parent of a controlled group of corporations 
immediately after the exchange), the controlled group of which Y is the 
common parent after the merger is considered to be a successor group in 
respect of the controlled group of which X was the common parent, and 
the group of which Y was the common parent before the merger is 
considered, under paragraph (a)(1) of this section, as no longer in 
existence. Thus, for example, if before the merger the controlled group 
of which X was the common parent was not eligible, by reason of the 
application of section 1562(d), to make an election under section 
1562(a)(1) with respect to a December 31 occurring before December 31, 
1970, then the successor controlled group would also be ineligible to 
make an election with respect to a December 31 occurring before December 
31, 1970, whether or not the controlled group of which Y was the common 
parent before the merger had an election in effect pursuant to section 
1562(a)(1).

[T.D. 6845, 30 FR 9747, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8067, Apr. 25, 1972]



Sec. 1.1562-6  Election for short taxable years.

    (a) Application of election to short taxable years--(1) General. If 
the return of a corporation is for a short period which does not include 
a December 31, and if such corporation is a component member of a 
controlled group of corporations with respect to such short period, then 
an election under section 1562(a)(1) by such group shall apply with 
respect to such short period if:
    (i) Such election is in effect with respect to both the December 31, 
immediately preceding such short period (hereinafter in this section 
referred to as the ``preceding December 31'') and the December 31 
immediately succeeding such short period (hereinafter in this section 
referred to as the ``succeeding December 31''), or
    (ii) Such election is in effect with respect to either the preceding 
December 31 or the succeeding December 31, and each corporation which is 
a component member of such group with respect to a short period falling 
between such dates consents to the application of such election to such 
short period. See subparagraph (4) of this paragraph for rules relating 
to an election with respect to certain short taxable years ending during 
1964.
    (2) Component members. For purposes of this section, the 
determination of whether a corporation is a component member of a 
controlled group of corporations with respect to a short period shall be 
made by applying the definition of component member contained in section 
1563(b) and paragraph (b) of Sec. 1.1563-1 as if the last day of such 
short period were a December 31 occurring after December 31, 1963.
    (3) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. On December 31, 1964, corporations P, S-1, and S-2 are 
component members of a parent-subsidiary controlled group of 
corporations. P, S-1, and S-2 each uses the calendar year as its taxable 
year. On February 1, 1965, S-1 transfers property to newly formed 
corporation S-3 (which begins business on that date) and receives all 
the stock of S-3 in return. S-3 adopts a fiscal year ending on November 
30 as its taxable year and, therefore, files a return for the short 
taxable year beginning on February 1, 1965, and ending on November 30, 
1965. On December 5, 1965, S-2 is liquidated, and therefore files a 
return for the short taxable year beginning on January 1, 1965, and 
ending on December 5, 1965. S-2 and S-3 are component members of the 
controlled group of corporations with respect to their short taxable 
years falling between December 31, 1964, and December 31, 1965, within 
the meaning of subparagraph (2) of this paragraph. Assume that the 
controlled group has an election under section 1562(a)(1) in effect with 
respect to either December 31, 1964, or December 31, 1965, but not both 
such dates. Under subparagraph (1)(ii) of this paragraph, S-2 and S-3 
must both file consents to the application of the section 1562(a)(1) 
election with respect to their short periods in order for the election 
to be effective with respect to either such short period.

    (4) Election for certain short taxable years ending during 1964. If:
    (i) A corporation is a component member of a controlled group of 
corporations with respect to a short taxable year beginning and ending 
in 1964,
    (ii) Each corporation which was a component member of such group on

[[Page 38]]

December 31, 1963 (determined without regard to paragraph (b)(2)(iii) of 
Sec. 1.1563-1, relating to the treatment of a corporation which has a 
taxable year ending on December 31, 1963, as an excluded member of a 
controlled group on such date) filed its income tax return on the basis 
of the calendar year ending on such date, and
    (iii) Such controlled group of corporations is considered as going 
out of existence with respect to December 31, 1964, pursuant to 
paragraph (b)(4) of Sec. 1.1562-2,

then, for purposes of paragraph (a)(1) (ii) of this section, an election 
by such controlled group under section 1562(a) (1) shall be deemed to 
have been in effect for the preceding December 31. Each corporation 
which is a component member of such group with respect to a short period 
falling between such preceding and succeeding December 31's must, on or 
before November 3, 1965, consent to the application of such election to 
its short period falling between such December 31's.
    (b) Status at time of filing return. If, on the date a corporation 
files its income tax return for a short period falling between a 
preceding and succeeding December 31 (with respect to which period it is 
a component member of a controlled group of corporations):
    (1) Election not effective. An election under section 1562(a)(1) is 
not effective with respect to either such preceding or succeeding 
December 31, then such member shall determine its surtax exemption for 
purposes of such return in accordance with section 1561(b).
    (2) Election effective for preceding December 31. An election under 
section 1562(a)(1) is effective with respect to such preceding December 
31, and if on the date the return is filed the election has not been 
terminated with respect to such succeeding December 31, then such member 
may compute its tax for purposes of such return on the assumption that 
the conditions of paragraph (a)(1)(i) of this section are satisfied with 
respect to such short period.
    (3) Election effective for preceding or succeeding December 31. An 
election under section 1562(a)(1) is effective with respect to either 
(but not both) such preceding or succeeding December 31, and the return 
is filed after such succeeding December 31, then the member's surtax 
exemption for purposes of such return shall be determined in accordance 
with section 1561(b) unless:
    (i) It attaches to such return its consent to the application of 
such election to such short period, and
    (ii) Each other corporation which is a component member of the group 
with respect to a short period falling between such December 31's files, 
within 30 days after such return is filed, a consent to the application 
of such election to its short period falling between such December 31's.
    (c) Election or termination after returns filed--(1) Election. If, 
after each component member of a controlled group with respect to a 
short period falling between a preceding and succeeding December 31 
files its return for such short period, the group makes an election 
under section 1562(a)(1) with respect to such succeeding December 31, 
then the election shall apply with respect to each such short period 
only if each such member files, within 30 days after such election is 
made, a consent to the application of such election to its short period.
    (2) Termination. If, after each component member of a controlled 
group with respect to a short period falling between a preceding and 
succeeding December 31 files its return for such short period, an 
election under section 1562(a)(1) which is effective with respect to 
such group with respect to such preceding December 31 is terminated with 
respect to such succeeding December 31, then such election shall apply 
with respect to each such short period only if each such member files, 
within 30 days after the termination occurs, a consent to the 
application of such election to its short period. For purposes of the 
preceding sentence, (i) the termination of an election by consent under 
section 1562(c)(1) shall be considered to occur on the date the 
termination is made, and (ii) the termination of an election under 
section 1562(c) (2), (3), or (4) shall be considered to occur on the 
date the event causing termination occurs (for example, on the date a 
new member files a refusal

[[Page 39]]

to consent, or on the date a consolidated return is filed) unless the 
election is made after such date, in which case the termination shall be 
considered to occur on the date the election is made.
    (d) Manner of consenting. A consent referred to in paragraph (b)(3) 
or (c) of this section shall be made by means of a statement, signed by 
any person who is duly authorized to act on behalf of the consenting 
corporation, stating that such corporation consents to the application 
of an election under section 1562(a)(1) with respect to its short 
period. Each such statement shall set forth the name, address, taxpayer 
account number, and taxable year of (1) each corporation which is a 
component member of the electing controlled group with respect to a 
short period falling between the preceding December 31 and the 
succeeding December 31, and (2) each corporation which is a component 
member of such group on either the preceding or succeeding December 31. 
Each consenting corporation shall file such statement with the district 
director with whom it files (or filed) its income tax return for the 
short period.

[T.D. 6845, 30 FR 9749, Aug. 5, 1965]



Sec. 1.1562-7  Extension of statutory periods of limitation.

    (a)(1) Under section 1562(g)(1), the statutory period for assessment 
of any deficiency against a corporation which is a component member of a 
controlled group of corporations with respect to any taxable year, to 
the extent such deficiency is attributable to an election under section 
1562(a)(1) or a termination by consent under section 1562(c)(1), shall 
not expire before the expiration of one year after the date such 
election or termination is made.
    (2) Under section 1562(g)(2), the statutory period for allowing or 
making credit or refund of any overpayment of tax by a corporation which 
is a component member of a controlled group of corporations with respect 
to any taxable year, to the extent such overpayment is attributable to 
an election under section 1562(a)(1) or a termination by consent under 
section 1562(c)(1), shall not expire before the expiration of one year 
after the date such election or termination is made.
    (b) For purposes of this section, the deficiency or overpayment in 
tax attributable to an election under section 1562(a)(1) or a 
termination by consent under section 1562(c)(1) shall be that amount of 
the increase or decrease in tax over the amount previously determined 
(as defined in section 1314(a)) for any taxable year which results from 
the application or nonapplication of section 1562, as the case may be. 
In determining the amount of such increase or decrease, due regard shall 
be given to the effect of any change in the amount of the surtax 
exemption (or the application or nonapplication of the additional tax 
under section 1562(b)) on credits allowable for any taxable year. Thus, 
for example, as a result of such change it may be necessary to recompute 
the amount of the investment credit allowable under section 38 for a 
taxable year for which the election or termination is effective and for 
other taxable years affected, or treated as affected, by an investment 
credit carryback or carryover (as defined in section 46(b)) determined 
with reference to the taxable years with respect to which such election 
or termination is effective.
    (c) The provisions of this section shall not be construed to:
    (1) Shorten the period within which an assessment of a deficiency 
may otherwise be made or the credit or refund of an overpayment may 
otherwise be allowed or made, or
    (2) Apply to a deficiency or overpayment for a taxable year if the 
tax liability for such taxable year has been compromised under section 
7122, or is the subject of a closing agreement under section 7121.

[T.D. 6845, 30 FR 9750, Aug. 5, 1965]



Sec. 1.1563-1  Definition of controlled group of corporations and component members.

    (a) Controlled group of corporations--(1) In general. For purposes 
of sections 1561 through 1563 and the regulations thereunder, the term 
``controlled group of corporations'' means any group of corporations 
which is either a ``parent-

[[Page 40]]

subsidiary controlled group'' (as defined in subparagraph (2) of this 
paragraph), a ``brother-sister controlled group'' (as defined in 
subparagraph (3) of this paragraph), a ``combined group'' (as defined in 
subparagraph (4) of this paragraph), or an ``insurance group'' (as 
defined in subparagraph (5) of this paragraph). For the exclusion of 
certain stock for purposes of applying the definitions contained in this 
paragraph, see section 1563(c) and Sec. 1.1563-2.
    (2) Parent-subsidiary controlled group. (i) The term ``parent-
subsidiary controlled group'' means one or more chains of corporations 
connected through stock ownership with a common parent corporation if:
    (a) Stock possessing at least 80 percent of the total combined 
voting power of all classes of stock entitled to vote or at least 80 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the common parent corporation, is owned 
(directly and with the application of paragraph (b)(1) of Sec. 1.1563-3, 
relating to options) by one or more of the other corporations; and
    (b) The common parent corporation owns (directly and with the 
application of paragraph (b)(1) of Sec. 1.1563-3, relating to options) 
stock possessing at least 80 percent of the total combined voting power 
of all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of stock of at least one of the 
other corporations, excluding, in computing such voting power or value, 
stock owned directly by such other corporations.
    (ii) The definition of a parent-subsidiary controlled group of 
corporations may be illustrated by the following examples:

    Example (1). P Corporation owns stock possessing 80 percent of the 
total combined voting power of all classes of stock entitled to vote of 
S Corporation. P is the common parent of a parent-subsidiary controlled 
group consisting of member corporations P and S.
    Example (2). Assume the same facts as in example (1). Assume further 
that S owns stock possessing 80 percent of the total value of shares of 
all classes of stock of T Corporation. P is the common parent of a 
parent-subsidiary controlled group consisting of member corporations P, 
S, and T. The result would be the same if P, rather than S, owned the T 
stock.
    Example (3). L Corporation owns 80 percent of the only class of 
stock of M Corporation and M, in turn, owns 40 percent of the only class 
of stock of O Corporation. L also owns 80 percent of the only class of 
stock of N Corporation and N, in turn, owns 40 percent of the only class 
of stock of O. L is the common parent of a parent-subsidiary controlled 
group consisting of member corporations L, M, N, and O.
    Example (4). X Corporation owns 75 percent of the only class of 
stock of Y and Z Corporations; Y owns all the remaining stock of Z; and 
Z owns all the remaining stock of Y. Since intercompany stockholdings 
are excluded (that is, are not treated as outstanding) for purposes of 
determining whether X owns stock possessing at least 80 percent of the 
voting power or value of at least one of the other corporations, X is 
treated as the owner of stock possessing 100 percent of the voting power 
and value of Y and of Z for purposes of subdivision (i)(b) of this 
subparagraph. Also, stock possessing 100 percent of the voting power and 
value of Y and Z is owned by the other corporations in the group within 
the meaning of subdivision (i)(a) of this subparagraph. (X and Y 
together own stock possessing 100 percent of the voting power and value 
of Z, and X and Z together own stock possessing 100 percent of the 
voting power and value of Y.) Therefore, X is the common parent of a 
parent-subsidiary controlled group of corporations consisting of member 
corporations X, Y, and Z.

    (3) Brother-sister controlled group. (i) The term ``brother-sister 
controlled group'' means two or more corporations if the same five or 
fewer persons who are individuals, estates, or trusts own (directly and 
with the application of the rules contained in paragraph (b) of 
Sec. 1.1563-3) stock possessing:
    (a) At least 80 percent of the total combined voting power of all 
classes of stock entitled to vote or at least 80 percent of the total 
value of shares of all classes of the stock of each corporation; and
    (b) More than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such person only to the extent such 
stock ownership is identical with respect to each such corporation.

The five or fewer persons whose stock ownership is considered for 
purposes of the 80 percent requirement must be the same persons whose 
stock ownership is

[[Page 41]]

considered for purposes of the more-than-50 percent requirement.
    (ii) The principles of this subparagraph may be illustrated by the 
following examples:

    Example (1). The outstanding stock of corporations P, Q, R, S, and 
T, which have only one class of stock outstanding is owned by the 
following unrelated individuals:

                                                  Corporations
----------------------------------------------------------------------------------------------------------------
                Individuals                    P       Q       R       S       T         Identical ownership
----------------------------------------------------------------------------------------------------------------
A.........................................     55%     51%     55%     55%     55%  51%.
B.........................................     45%     49%  ......  ......  ......  (45% in P & Q).
C.........................................  ......  ......     45%  ......  ......  ............................
D.........................................  ......  ......  ......     45%  ......  ............................
E.........................................  ......  ......  ......  ......     45%  ............................
                                                   -------------------------------------------------------------
  Total...................................    100%    100%    100%    100%    100%  ............................
----------------------------------------------------------------------------------------------------------------


Corporations P and Q are members of a brother-sister controlled group of 
corporations. Although the more-than-50 percent identical ownership 
requirement is met for all 5 corporations, corporations R, S, and T are 
not members becasue at least 80 percent of the stock of each of those 
corporations is not owned by the same 5 or fewer persons whose stock 
ownership is considered for purposes of the more-than-50 percent 
identical ownership requirement.
    Example (2). The outstanding stock of corporations U and V, which 
have only one class of stock outstanding, is owned by the following 
unrelated individuals:

------------------------------------------------------------------------
                                                        Corporations
                                                   ---------------------
                    Individuals                         U          V
                                                    (percent)  (percent)
------------------------------------------------------------------------
A.................................................         12         12
B.................................................         12         12
C.................................................         12         12
D.................................................         12         12
E.................................................         13         13
F.................................................         13         13
G.................................................         13         13
H.................................................         13         13
                                                              ----------
  Total...........................................        100        100
------------------------------------------------------------------------


Any group of five of the shareholders will own more than 50 percent of 
the stock in each corporation, in identical holdings. However, U and V 
are not members of brother-sister controlled group because at least 80 
percent of the stock of each corporation is not owned by the same five 
or fewer persons.
    Example (3). Corporation X and Y each have two classes of stock 
outstanding, voting common and non-voting common. (None of this stock is 
excluded from the definition of stock under section 1563(c).) Unrelated 
individuals A and B owns the following percentages of the class of stock 
entitled to vote (voting) and of the total value of shares of all 
classes of stock (value) in each of corporations X and Y:

------------------------------------------------------------------------
                                               Corporations
           Individuals           ---------------------------------------
                                           X                   Y
------------------------------------------------------------------------
A...............................  100% voting, 60%    75% voting, 60%
                                   value.              value.
B...............................  0% voting, 10%      25% voting, 10%
                                   value.              value.
------------------------------------------------------------------------


No other shareholder of X owns (or is considered to own) any stock in Y. 
X and Y are a brother-sister controlled group of corporations. The group 
meets the more-than-50 percent ownership requirements because A and B 
own more than 50 percent of the total value of shares of all classes of 
stock of X and Y in identical holdings. (The group also meets the more-
than-50 percent ownership requirement because of A's voting stock 
ownership.) The group meets the 80 percent requirement because A and B 
own at least 80 percent of the total combined voting power of all 
classes of stock entitled to vote.
    Example (4). Assume the same facts as in example (3) except that the 
value of the stock owned by A and B is not more than 50 percent of the 
total value of shares of all classes of stock of each corporation in 
identical holdings. X and Y are not a brother-sister controlled group of 
corporations. The group meets the more-than-50 percent ownership 
requirement because A owns more than 50 percent of the total combined 
voting power of the voting stock of each corporation. For purposes of 
the 80 percent requirement, B's voting stock in Y cannot be combined 
with A's voting stock in Y since B, who does not own any voting stock in 
X, is not a person whose ownership is considered for purposes of the 
more-than-50 percent requirement. Because no other shareholder owns 
stock in both X and Y, these other shareholders' stock ownership is not 
counted towards meeting either the more-than-50 percent ownership 
requirement or the 80-percent ownership requirement.


[[Page 42]]


    (iii) Paragraph (a)(3) of this section, as amended, by T.D. 8179 
applies to taxable years ending on or after December 31, 1970. See, 
however, the transitional rule in paragraph (d) of this section.
    (4) Combined group. (i) The term ``combined group'' means any group 
of three or more corporations, if:
    (a) Each such corporation is a member of either a parent-subsidiary 
controlled group of corporations or a brother-sister controlled group of 
corporations, and
    (b) At least one of such corporations is the common parent of a 
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
    (ii) The definition of a combined group of corporations may be 
illustrated by the following examples:

    Example (1). Smith, an individual, owns stock possessing 80 percent 
of the total combined voting power of all classes of the stock of 
corporations X and Y. Y, in turn, owns stock possessing 80 percent of 
the total combined voting power of all classes of the stock of 
corporation Z. Since:
    (a) X, Y, and Z are each members of either a parent-subsidiary or 
brother-sister controlled group of corporations, and
    (b) Y is the common parent of a parent-subsidiary controlled group 
of corporations consisting of Y and Z, and also is a member of a 
brother-sister controlled group of corporations consisting of X and Y,


X, Y, and Z are members of the same combined group.
    Example (2). Assume the same facts as in example (1), and further 
assume that corporation X owns 80 percent of the total value of shares 
of all classes of stock of corporation T, X, Y, Z, and T are members of 
the same combined group.

    (5) Insurance group. (i) The term ``insurance group'' means two or 
more insurance companies subject to taxation under section 802 each of 
which is a member of a controlled group of corporations described in 
subparagraph (2), (3), or (4) of this paragraph. Such insurance 
companies shall be treated as a controlled group of corporations 
separate from any other corporations which are members of the controlled 
group described in such subparagraph (2), (3), or (4). For purposes of 
this section and Sec. 1.1562-5, the common parent of the controlled 
group described in subparagraph (2) of this paragraph shall be referred 
to as the common parent of the insurance group.
    (ii) The definition of an insurance group may be illustrated by the 
following example:

    Example. Corporation P owns all the stock of corporation I which, in 
turn, owns all the stock of corporation X. P also owns all the stock of 
corporation Y which, in turn, owns all the stock of corporation J. I and 
J are life insurance companies subject to taxation under section 802 of 
the Code. Since I and J are members of a parent-subsidiary controlled 
group of corporations, such companies are treated as members of an 
insurance group separate from the parent-subsidiary controlled group 
consisting of P, X, and Y. For purposes of this section and Sec. 1.1562-
5, P is referred to as the common parent of the insurance group even 
though P is not a member of such group.

    (6) Voting power of stock. For purposes of Sec. 1.1562-5, this 
section, and Secs. 1.1563-2 and 1.1563-3, in determining whether the 
stock owned by a person (or persons) possesses a certain percentage of 
the total combined voting power of all classes of stock entitled to vote 
of a corporation, consideration will be given to all the facts and 
circumstances of each case. A share of stock will generally be 
considered as possessing the voting power accorded to such share by the 
corporate charter, by-laws, or share certificate. On the other hand, if 
there is any agreement, whether express or implied, that a shareholder 
will not vote his stock in a corporation, the formal voting rights 
possessed by his stock may be disregarded in determining the percentage 
of the total combined voting power possessed by the stock owned by other 
shareholders in the corporation, if the result is that the corporation 
becomes a component member of a controlled group of corporations. 
Moreover, if a shareholder agrees to vote his stock in a corporation in 
the manner specified by another shareholder in the corporation, the 
voting rights possessed by the stock owned by the first shareholder may 
be considered to be possessed by the stock owned by such other 
shareholder if the result is that the corporation becomes a component 
member of a controlled group of corporations.
    (b) Component members--(1) In general. For purposes of sections 1561 
through 1563 and the regulations thereunder, a

[[Page 43]]

corporation is a component member of a controlled group of corporations 
on a December 31 (and with respect to the taxable year which includes 
such December 31) if such corporation:
    (i) Is a member of such controlled group on such December 31 and is 
not treated as an excluded member under subparagraph (2) of this 
paragraph, or
    (ii) Is not a member of such controlled group on such December 31 
but is treated as an additional member under subparagraph (3) of this 
paragraph.
    (2) Excluded members. (i) A corporation, which is a member of a 
controlled group of corporations on the December 31 included within its 
taxable year, but was a member of such group for less than one-half of 
the number of days in such taxable year which precede such December 31, 
shall be treated as an excluded member of such group on such December 
31.
    (ii) A corporation which is a member of a controlled group of 
corporations on any December 31 shall be treated as an excluded member 
of such group on such date if, for its taxable year including such date, 
such corporation is:
    (a) Exempt from taxation under section 501(a) (except a corporation 
which has unrelated business taxable income for such taxable year which 
is subject to tax under section 511) or 521,
    (b) A foreign corporation not subject to taxation under section 
882(a) for the taxable year,
    (c) An electing small business corporation (as defined in section 
1371(b)) not subject to the tax imposed by section 1378,
    (d) A franchised corporation (as defined in section 1563(f)(4) and 
Sec. 1.1563- 4), or
    (e) An insurance company subject to taxation under section 802 or 
821, except that an insurance company taxable under section 802 which 
(without regard to this subdivision) is a component member of an 
insurance group described in paragraph (a)(5) of this section shall not 
be treated as an excluded member of such insurance group.
    (iii) A corporation which has a taxable year ending on December 31, 
1963, shall be treated as an excluded member of a controlled group on 
such date.
    (3) Additional members. A corporation which:
    (i) Is not a member of a controlled group of corporations on the 
December 31 included within its taxable year, and
    (ii) Is not described, with respect to such taxable year, in 
subparagraph (2)(ii) (a), (b), (c), (d), or (e), or (2)(iii) of this 
paragraph,

shall be treated as an additional member of such group on such December 
31 if it was a member of such group for one-half (or more) of the number 
of days in such taxable year which precede such December 31.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Brown, an individual, owns all of the stock of 
corporations W and X on each day of 1964. W and X each uses the calendar 
year as its taxable year. On January 1, 1964, Brown also owns all the 
stock of corporation Y (a fiscal year corporation with a taxable year 
beginning on July 1, 1964, and ending on June 30, 1965), which stock he 
sells on October 15, 1964. On December 31, 1964, Brown purchases all the 
stock of corporation Z (a fiscal year corporation with a taxable year 
beginning on September 1, 1964, and ending on August 31, 1965). On 
December 31, 1964, W, X, and Z are members of the same controlled group. 
However, the component members of the group on such December 31 are W, 
X, and Y. Under subparagraph (2)(i) of this paragraph, Z is treated as 
an excluded member of the group on December 31, 1964, since Z was a 
member of the group for less than one-half of the number of days (29 out 
of 121 days) during the period beginning on September 1, 1964 (the first 
day of its taxable year) and ending on December 30, 1964. Under 
subparagraph (3) of this paragraph, Y is treated as an additional member 
of the group on December 31, 1964, since Y was a member of the group for 
at least one-half of the number of days (107 out of 183 days) during the 
period beginning on July 1, 1964 (the first day of its taxable year) and 
ending on December 30, 1964.
    Example (2). On January 1, 1964, corporation P owns all the stock of 
corporation S, which in turn owns all the stock of corporation S-1. On 
November 1, 1964, P purchases all of the stock of corporation X from the 
public and sells all of the stock of S to the public. Corporation X owns 
all the stock of corporation Y during 1964. P, S, S-1, X, and Y file 
their returns on the basis of the calendar year. On December 31, 1964, 
P, X, and Y are members of a parent-subsidiary controlled group of 
corporations; also, corporations S and S-1 are members of a different 
parent-subsidiary controlled group on such date. However,

[[Page 44]]

since X and Y have been members of the parent-subsidiary controlled 
group of which P is the common parent for less than one-half the number 
of days during the period January 1 through December 30, 1964, they are 
not component members of such group on such date. On the other hand, X 
and Y have been members of a parent-subsidiary controlled group of which 
X is the common parent for at least one-half the number of days during 
the period January 1 through December 30, 1964, and therefore they are 
component members of such group on December 31, 1964. Also since S and 
S-1 were members of the parent-subsidiary controlled group of which P is 
the common parent for at least one-half the number of days in the 
taxable years of each such corporation during the period January 1 
through December 30, 1964, P, S, and S-1 are component members of such 
group on December 31, 1964.
    Example (3). Throughout 1964, corporation M owns all the stock of 
corporation F which, in turn, owns all the stock of corporations L-1, L-
2, X, and Y. M is a domestic mutual insurance company subject to 
taxation under section 821, F is a foreign corporation not engaged in 
trade or business within the United States, L-1 and L-2 are domestic 
life insurance companies subject to taxation under section 802, and X 
and Y are domestic corporations subject to tax under section 11 of the 
Code. Each corporation uses the calendar year as its taxable year. On 
December 31, 1964, M, F, L-1, L-2, X, and Y are members of a parent-
subsidiary controlled group of corporations. However, under subparagraph 
(2)(ii) of this paragraph, M, F, L-1, and L-2 are treated as excluded 
members of the group on December 31, 1964. Thus, on December 31, 1964, 
the component members of the parent-subsidiary controlled group of which 
M is the common parent include only X and Y. Furthermore, since 
subparagraph (2)(ii)(e) of this paragraph does not result in L-1 and L-2 
being treated as excluded members of an insurance group, L-1 and L-2 are 
component members of an insurance group on December 31, 1964.

    (5) Application of constructive ownership rules. For purposes of 
subparagraphs (2)(i) and (3) of this paragraph, it is necessary to 
determine whether a corporation was a member of a controlled group of 
corporations for one-half (or more) of the number of days in its taxable 
year which precede the December 31 falling within such taxable year. 
Therefore, the constructive ownership rules contained in paragraph (b) 
of Sec. 1.1563-3 (to the extent applicable in making such determination) 
must be applied on a day-by-day basis. For example, if P Corporation 
owns all the stock of X Corporation on each day of 1964, and on December 
30, 1964, acquires an option to purchase all the stock of Y Corporation 
(a calendar-year taxpayer which has been in existence on each day of 
1964), the application of paragraph (b)(1) of Sec. 1.1563-3 on a day-by-
day basis results in Y being a member of the brother-sister controlled 
group on only one day of Y's 1964 year which precedes December 31, 1964. 
Accordingly, since Y is not a member of such group for one-half or more 
of the number of days in its 1964 year preceding December 31, 1964, Y is 
treated as an excluded member of such group on December 31, 1964.
    (c) Overlapping groups--(1) In general. If on a December 31 a 
corporation is a component member of a controlled group of corporations 
by reason of ownership of stock possessing at least 80 percent of the 
total value of shares of all classes of stock of the corporation, and if 
on such December 31 such corporation is also a component member of 
another controlled group of corporations by reason of ownership of other 
stock (that is, stock not used to satisfy the at-least-80-percent total 
value test) possessing at least 80 percent of the total combined voting 
power of all classes of stock of the corporation entitled to vote, then 
such corporation shall be treated as a component member only of the 
controlled group of which it is a component member by reason of the 
ownership of at least 80 percent of the total value of its shares.
    (2) Brother-sister controlled groups. (i) If on a December 31, a 
corporation would, without application of this subparagraph, be a 
component member of more than one brother-sister controlled group on 
such date, such corporation shall be treated as a component member of 
only one such group on such date. Such a corporation may select which 
group in which it is to be included by filing an election as provided in 
this subparagraph. The election shall be in the form of a statement 
designating the group in which the corporation is to be included. The 
statement shall provide all the information with respect to stock 
ownership which is reasonably necessary to satisfy the Internal Revenue 
officer with whom it is filed that the corporation would, but

[[Page 45]]

for the election, be a component member of more than one controlled 
group. Once filed, the election is irrevocable and effective until such 
time that a change in the stock ownership of the corporation results in 
termination of membership in the controlled group in which such 
corporation has been included.
    (ii) Except as provided in subdivision (iii) of this subparagraph, 
the statement shall be signed by a person duly authorized to act on 
behalf of such corporation and shall be filed on or before the due date 
(including extension of time) for the filing of the income tax return of 
such corporation for the taxable year. However, in the case of an 
election with respect to December 31, 1970, the statement shall be 
considered as timely filed if filed on or before December 15, 1971. In 
the event no election is filed in accordance with the provisions of this 
subdivision, then the district director with audit jurisdiction of such 
corporation's return for the taxable year which includes such December 
31 shall determine the group in which such corporation is to be 
included, and such determination shall be binding for all subsequent 
years unless the corporation files a valid election with respect to any 
such subsequent year.
    (iii) If more than one corporation would, without application of 
this subparagraph, be a component member of more than one controlled 
group, a single statement shall be signed by persons duly authorized to 
act on behalf of each such corporation. Such statement shall designate 
the group in which each corporation is to be included. The statement 
shall be attached to the income tax return of the corporation that, 
among those corporations which would (without the application of this 
subparagraph) belong to more than one group, has the taxable year 
including such December 31 which ends on the earliest date. However, in 
the case of an election with respect to December 31, 1970, the statement 
may be filed by December 15, 1971, with the service center director with 
whom such corporation's return is filed for the taxable year which 
includes such December 31. In the event no election is filed in 
accordance with the provisions of this subdivision, then the district 
director with audit jurisdiction of such corporation's return for the 
taxable year that includes such December 31 shall determine the group in 
which each corporation is to be included, and such determination shall 
be binding for all subsequent years unless the corporations file a valid 
election with respect to any such subsequent year.
    (iv) The provisions of this subparagraph may be illustrated by the 
following examples (in which it is assumed that all the individuals are 
unrelated):

    Example (1). On each day of 1970 all the outstanding stock of 
corporations M, N, and P is held in the following manner:

------------------------------------------------------------------------
                                                       Corporations
                   Individuals                   -----------------------
                                                     M       N       P
------------------------------------------------------------------------
A...............................................     55%     40%      5%
B...............................................     40%     20%     40%
C...............................................      5%     40%     55%
------------------------------------------------------------------------


Since the more-than-50-percent stock ownership requirement of section 
1563(a)(2)(B) is met with respect to corporations M and N and with 
respect to corporations N and P, but not with respect to corporations M, 
N, and P, corporation N would, without the application of this 
subparagraph, be a component member on December 31, 1970, of overlapping 
groups consisting of M and N and of N and P. If N does not file an 
election in accordance with subdivision (ii) of this subparagraph, the 
district director with audit jurisdiction of N's return will determine 
the group in which N is to be included.
    Example (2). On each day of 1970, all the outstanding stock of 
corporations S, T, W, X, and Z is held in the following manner:

------------------------------------------------------------------------
                                                  Corporations
             Individuals              ----------------------------------
                                         S      T      W      X      Z
------------------------------------------------------------------------
D....................................    52%    52%    52%    52%    52%
E....................................    40%     2%     2%     2%     2%
F....................................     2%    40%     2%     2%     2%
G....................................     2%     2%    40%     2%     2%
H....................................     2%     2%     2%    40%     2%
I....................................     2%     2%     2%     2%    40%
------------------------------------------------------------------------


On December 31, 1970, the more-than-50-percent stock ownership 
requirement of section 1563(a)(2)(B) may be met with regard to any 
combination of the corporations but all five corporations cannot be 
included as component members of a single controlled group because the 
inclusion of all the corporations in a single group would be dependent 
upon taking into account the stock ownership of

[[Page 46]]

more than five persons. Therefore, if the corporations do not file a 
statement in accordance with subdivision (iii) of this subparagraph, the 
district director with audit jurisdiction of the return of the 
corporation whose taxable year ends on the earliest date will determine 
the group in which each corporation is to be included. The corporations 
or the district director, as the case may be, may designate that three 
corporations be included in one group and two corporations in another, 
or that any four corporations be included in one group and that the 
remaining corporation not be included in any group.

    (d) Transitional rules--(1) In general. Treasury decision 8179 
amended paragraph (a)(3) of this section to revise the definition of a 
brother-sister controlled group of corporations. In general, those 
amendments are effective for taxable years ending on or after December 
31, 1970.
    (2) Limited nonretroactivity. (i) Under the authority of section 
7805(b), the Internal Revenue Service will treat an old group as a 
brother-sister controlled group corporations for purposes of applying 
sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of 
the Code and sections 202, 203, 204, and 302 of the Employment 
Retirement Income Security Act of 1974 (ERISA) in a plan year or taxable 
year beginning before March 2, 1988. To the extent necessary to prevent 
an adverse effect on any old member (or any other corporation), or on 
any plan or other entity described in such sections (including plans, 
etc., of corporations not part of such old group), that would result 
solely from the retroactive effect of the amendment to this section by 
T.D. 8179. An adverse effect includes the disqualification of a plan or 
the disallowance of a deduction or credit for a contribution to a plan. 
The Internal Revenue Service, however, will not treat an old member as a 
member of an old group to the extent that such treatment will have an 
adverse effect on that old member.
    (ii) Section 7805(b) will not be applied pursuant to paragraph 
(d)(2)(i) of this section to treat an old member of an old group as a 
member of a brother-sister controlled group to prevent an adverse effect 
for a taxable year if, for that taxable year, that old member treats or 
has treated itself as not being a member of that old group for purposes 
of section 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 
of the Code and sections 202, 203, 204, and 302 and title IV of ERISA 
for such taxable year (such as by filing, with respect to such taxable 
year, a return, amended return, or claim for credit or refund in which 
the amount of any deduction, credit, limitation, or tax due is 
determined by treating itself as not being a member of the old group for 
purposes of those sections). However, the fact that one or more (but not 
all) of the old members do not qualify for section 7805(b) treatment 
because of the preceding sentence will not preclude that old member (or 
members) from being treated as a member of the old group under paragraph 
(d)(2)(i) of this section in order to prevent the disallowance of a 
deduction or credit of another old member (or other corporation) or to 
prevent the disqualification of, or other adverse effect on, another old 
member's plan (or other entity) described in the sections of the Code 
and ERISA enumerated in such paragraph.
    (3) Election of general nonretroactivity. In the case of a taxable 
year ending on or after December 31, 1970, and before March 2, 1988. An 
old group will be treated as a brother-sister controlled group of 
corporations for all purposes of the Code for such taxable year if--
    (i) Each old member files a statement consenting to such treatment 
for such taxable year with the District Director having audit 
jurisdiction over its return within six months after March 2, 1988, and
    (ii) No old member (A) files or has filed, with respect to such 
taxable year, a return, amended return, or claim for credit or refund in 
which the amount of any deduction, credit, limitation, or tax due is 
determined by treating any old member as not a member of the old group 
or (B) treats the employees of all members of the old group as not being 
employed by a single employer for purposes of sections 401, 404(a), 
408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections 
202, 203, 204, and 302 of ERISA for such taxable year.
    (4) Definitions. For purposes of this paragraph (d) of this section-
-
    (i) An ``old group'' is a brother-sister controlled group of 
corporations, determined by applying paragraph (a)(3) of

[[Page 47]]

this section as in effect before the amendments made by Treasury 
decision 8179, that is not a brother-sister controlled group of 
corporations, determined by applying paragraph (a)(3) of this section as 
amended by such Treasury decision, and
    (ii) An ``old member'' is any corporation that is a member of an old 
group.
    (5) Election to choose between membership in more than one 
controlled group. If--
    (i) An old member has filed an election under paragraph (c)(2) of 
this section to be treated as a component member of an old group for a 
December 31 before March 2, 1988, and
    (ii) That corporation would (without regard to such paragraph) be a 
component member of more than one brother-sister controlled group (not 
including an old group) on the December 31, that corporation may make an 
election under that paragraph by filing an amended return on or before 
September 2, 1988. This paragraph (d)(5) does not apply to a corporation 
that is treated as a member of an old group under paragraph (d)(3) of 
this section.
    (6) Refunds. See section 6511(a) for period of limitation on filing 
claims for credit or refund.

[T.D. 6845, 30 FR 9751, Aug. 5, 1965, as amended by T.D. 6960, 33 FR 
9302, June 25, 1968; T.D. 7181, 37 FR 8068, Apr. 25, 1972; T.D. 7293, 38 
FR 32803, Nov. 28, 1973; T.D. 8179, 53 FR 6612, Mar. 2, 1988; 53 FR 
8302, Mar. 14, 1988]



Sec. 1.1563-2  Excluded stock.

    (a) Certain stock excluded. For purposes of sections 1561 through 
1563 and the regulations thereunder, the term ``stock'' does not 
include:
    (1) Nonvoting stock which is limited and preferred as to dividends, 
and
    (2) Treasury stock.
    (b) Stock treated as excluded stock--(1) Parent-subsidiary 
controlled group. If a corporation (hereinafter in this paragraph 
referred to as ``parent corporation'') owns 50 percent or more of the 
total combined voting power of all classes of stock entitled to vote or 
50 percent or more of the total value of shares of all classes of stock 
in another corporation (hereinafter in this paragraph referred to as 
``subsidiary corporation''), the provisions of subparagraph (2) of this 
paragraph shall apply. For purposes of this subparagraph, stock owned by 
a corporation means stock owned directly plus stock owned with the 
application of the constructive ownership rules of paragraph (b) (1) and 
(4) of Sec. 1.1563-3, relating to options and attribution from 
corporations. In determining whether the stock owned by a corporation 
possesses the requisite percentage of the total combined voting power of 
all classes of stock entitled to vote of another corporation, see 
paragraph (a)(6) of Sec. 1.1563-1.
    (2) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether the parent 
corporation or the subsidiary corporation is a member of a parent-
subsidiary controlled group of corporations within the meaning of 
paragraph (a)(2) of Sec. 1.1563-1, the following stock of the subsidiary 
corporation shall, except as otherwise provided in paragraph (c) of this 
section, be treated as if it were not outstanding:
    (i) Plan of deferred compensation. Stock in the subsidiary 
corporation held by a trust which is part of a plan of deferred 
compensation for the benefit of the employees of the parent corporation 
or the subsidiary corporation. The term ``plan of deferred 
compensation'' shall have the same meaning such term has in section 
406(a)(3) and the regulations thereunder.
    (ii) Principal stockholders and officers. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an individual who is a 
principal stockholder or officer of the parent corporation. A principal 
stockholder of the parent corporation is an individual who owns 
(directly and with the application of the rules contained in paragraph 
(b) of Sec. 1.1563-3) 5 percent or more of the total combined voting 
power of all classes of stock entitled to vote or 5 percent or more of 
the total value of shares of all classes of stock of the parent 
corporation. An officer of the parent corporation includes the 
president, vice-presidents, general manager, treasurer, secretary, and 
comptroller of such corporation, and any other person who performs 
duties corresponding to those

[[Page 48]]

normally performed by persons occupying such positions.
    (iii) Employees. Stock in the subsidiary corporation owned (directly 
and with the application of the rules contained in paragraph (b) of 
Sec. 1.1563-3) by an employee of the subsidiary corporation if such 
stock is subject to conditions which substantially restrict or limit the 
employee's right (or if the employee constructively owns such stock, the 
direct owner's right) to dispose of such stock and which run in favor of 
the parent or subsidiary corporation. In general, any condition which 
extends, directly or indirectly, to the parent corporation or the 
subsidiary corporation preferential rights with respect to the 
acquisition of the employee's (or direct owner's) stock will be 
considered to be a condition described in the preceding sentence. It is 
not necessary, in order for a condition to be considered to be in favor 
of the parent corporation or the subsidiary corporation, that the parent 
or subsidiary be extended a discriminatory concession with respect to 
the price of the stock. For example, a condition whereby the parent 
corporation is given a right of first refusal with respect to any stock 
of the subsidiary corporation offered by an employee for sale is a 
condition which substantially restricts or limits the employee's right 
to dispose of such stock and runs in favor of the parent corporation. 
Moreover, any legally enforceable condition which prohibits the employee 
from disposing of his stock without the consent of the parent (or a 
subsidiary of the parent) will be considered to be a substantial 
limitation running in favor of the parent corporation.
    (iv) Controlled exempt organization. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an organization (other 
than the parent corporation):
    (a) To which section 501 (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by the parent 
corporation or subsidiary corporation, by an individual, estate, or 
trust that is a principal stockholder of the parent corporation, by an 
officer of the parent corporation, or by any combination thereof.

The terms ``principal stockholder of the parent corporation'' and 
``officer of the parent corporation'' shall have the same meanings in 
this subdivision as in subdivision (ii) of this subparagraph. The term 
``control'' as used in this subdivision means control in fact and the 
determination of whether the control requirement of (b) of this 
subdivision is met will depend upon all the facts and circumstances of 
each case, without regard to whether such control is legally enforceable 
and irrespective of the method by which such control is exercised or 
exercisable.
    (3) Brother-sister controlled group. If five or fewer persons 
(hereinafter referred to as common owners) who are individuals, estates, 
or trusts own (directly and with the application of the rules contained 
in paragraph (b) of Sec. 1.1563-3) stock possessing 50 percent or more 
of the total combined voting power of all classes of stock entitled to 
vote or 50 percent or more of the total value of shares of all classes 
of stock in a corporation, the provisions of subparagraph (4) of this 
paragraph shall apply. In determining whether the stock owned by such 
person or persons possesses the requisite percentage of the total 
combined voting power of all classes of stock entitled to vote of a 
corporation, see paragraph (a)(6) of Sec. 1.1563-1.
    (4) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether a 
corporation is a member of a brother-sister controlled group of 
corporations within the meaning of paragraph (a)(3) of Sec. 1.1563-1, 
the following stock of such corporation shall, except as otherwise 
provided in paragraph (c) of this section, be treated as if it were not 
outstanding:
    (i) Exempt employees' trust. Stock in such corporation held by an 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a), if such trust is for the benefit of the employees 
of such corporation.
    (ii) Employees. Stock in such corporation owned (directly and with 
the application of the rules contained in

[[Page 49]]

paragraph (b) of Sec. 1.1563-3) by an employee of such corporation if 
such stock is subject to conditions which run in favor of a common owner 
of such corporation (or in favor of such corporation) and which 
substantially restrict or limit the employee's right (or if the employee 
constructively owns such stock, the record owner's right) to dispose of 
such stock. The principles of subparagraph (2)(iii) of this paragraph 
shall apply in determining whether a condition satisfies the 
requirements of the preceding sentence. Thus, in general, a condition 
which extends, directly or indirectly, to a common owner or such 
corporation preferential rights with respect to the acquisition of the 
employee's (or record owner's) stock will be considered to be a 
condition which satisfies such requirements. For purposes of this 
subdivision, if a condition which restricts or limits an employee's 
right (or record owner's right) to dispose of his stock also applies to 
the stock in such corporation held by such common owner pursuant to a 
bona fide reciprocal stock purchase arrangement, such condition shall 
not be treated as one which restricts or limits the employee's (or 
record owner's) right to dispose of such stock. An example of a 
reciprocal stock purchase arrangement is an agreement whereby a common 
owner and the employee are given a right of first refusal with respect 
to stock of the employer corporation owned by the other party. If, 
however, the agreement also provides that the common owner has the right 
to purchase the stock of the employer corporation owned by the employee 
in the event that the corporation should discharge the employee for 
reasonable cause, the purchase arrangement would not be reciprocal 
within the meaning of this subdivision.
    (iii) Controlled exempt organization. Stock in such corporation 
owned (directly and with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3) by an organization:
    (a) To which section 501(c)(3) (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by such corporation, 
by an individual, estate, or trust that is a principal stockholder of 
such corporation, by an officer of such corporation, or by any 
combination thereof.

The terms ``principal stockholder'' and ``officer'' shall have the same 
meanings in this subdivision as in subparagraph (2)(ii) of this 
paragraph. The term ``control'' as used in this subdivision means 
control in fact and the determination of whether the control requirement 
of (b) of this subdivision is met will depend upon all the facts and 
circumstances of each case, without regard to whether such control is 
legally enforceable and irrespective of the method by which such control 
is exercised or exercisable.
    (5) Other controlled groups. The provisions of subparagraphs (1), 
(2), (3), and (4) of this paragraph shall apply in determining whether a 
corporation is a member of a combined group (within the meaning of 
paragraph (a)(4) of Sec. 1.1563-1) or an insurance group (within the 
meaning of paragraph (a)(5) of Sec. 1.1563-1). For example, under 
paragraph (a)(4) of Sec. 1.1563-1, in order for a corporation to be a 
member of a combined group such corporation must be a member of a 
parent-subsidiary group or a brother-sister group. Accordingly, the 
excluded stock rules provided by this paragraph are applicable in 
determining whether the corporation is a member of such group.
    (6) Meaning of employee. For purposes of this section Secs. 1.1563-3 
and 1.1563-4, the term ``employee'' has the same meaning such term is 
given in section 3306(i) of the Code (relating to definitions for 
purposes of the Federal Unemployment Tax Act). Accordingly, the term 
employee as used in such sections includes an officer of a corporation.
    (7) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). Corporation P owns 70 of the 100 shares of the only 
class of stock of corporation S. The remaining shares of S are owned as 
follows: 4 shares by Jones (the general manager of P), and 26 shares by 
Smith (who also owns 5 percent of the total combined voting power of the 
stock of P). P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S. Since Jones is an 
officer of P and Smith is a principal stockholder of P, under 
subparagraph (2)(ii) of this paragraph the S stock owned by Jones and 
Smith is

[[Page 50]]

treated as not outstanding for purposes of determining whether P and S 
are members of a parent-subsidiary controlled group of corporations 
within the meaning of paragraph (a)(2) of Sec. 1.1563-1. Thus, P is 
considered to own stock possessing 100 percent (70/70) of the total 
voting power and value of all the S stock. Accordingly, P and S are 
members of a parent-subsidiary controlled group of corporations.
    Example (2). Assume the same facts as in example (1) and further 
assume that Jones owns 15 shares of the 100 shares of the only class of 
stock of corporation S-1, and corporation S owns 75 shares of such 
stock. P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S-1 since P is 
considered as owning 52.5 percent (70 percentx 75 percent) of the S-1 
stock with the application of paragraph (b)(4) of Sec. 1.1563-3. Since 
Jones is an officer of P, under subparagraph (2)(ii) of this paragraph, 
the S-1 stock owned by Jones is treated as not outstanding for purposes 
of determining whether S-1 is a member of the parent-subsidiary 
controlled group of corporations. Thus, S is considered to own stock 
possessing 88.2 percent (75/85) of the voting power and value of the S-1 
stock. Accordingly, P, S, and S-1 are members of a parent-subsidiary 
controlled group of corporations.
    Example (3). Corporation X owns 60 percent of the only class of 
stock of corporation Y. Davis, the president of Y, owns the remaining 40 
percent of the stock of Y. Davis has agreed that if he offers his stock 
in Y for sale he will first offer the stock to X at a price equal to the 
fair market value of the stock on the first date the stock is offered 
for sale. Since Davis is an employee of Y within the meaning of section 
3306(i) of the Code, and his stock in Y is subject to a condition which 
substantially restricts or limits his right to dispose of such stock and 
runs in favor of X, under subparagraph (2)(iii) of this paragraph such 
stock is treated as if it were not outstanding for purposes of 
determining whether X and Y are members of a parent-subsidiary 
controlled group of corporations. Thus, X is considered to own stock 
possessing 100 percent of the voting power and value of the stock of Y. 
Accordingly, X and Y are members of a parent-subsidiary controlled group 
of corporations. The result would be the same if Davis's wife, instead 
of Davis, owned directly the 40 percent stock interest in Y and such 
stock was subject to a right of first refusal running in favor of X.

    (c) Exception--(1) General. If stock of a corporation is owned by a 
person directly or with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3 and such ownership results in the 
corporation being a component member of a controlled group of 
corporations on a December 31, then the stock shall not be treated as 
excluded stock under the provisions of paragraph (b) of this section if 
the result of applying such provisions is that such corporation is not a 
component member of a controlled group of corporations on such December 
31.
    (2) Illustration. The provisions of this paragraph may be 
illustrated by the following example:

    Example. On each day of 1965, corporation P owns directly 50 of the 
100 shares of the only class of stock of corporation S. Jones, an 
officer of P, owns directly 30 shares of S stock and P has an option to 
acquire such 30 shares from Jones. The remaining shares of S are owned 
by unrelated persons. If, pursuant to the provisions of paragraph 
(b)(2)(ii) of this section, the 30 shares of S stock owned directly by 
Jones is treated as not outstanding, the result is that P would be 
treated as owning stock possessing only 71 percent (50/70) of the total 
voting power and value of S stock, and S would not be a component member 
of a controlled group of corporations on December 31, 1965. However, 
since P is considered as owning the 30 shares of S stock with the 
application of paragraph (b)(1) of this section, and such ownership plus 
the S stock directly owned by P (50 shares) results in S being a 
component member of a controlled group of corporations on December 31, 
1965, the provisions of this paragraph apply. Therefore, the provisions 
of paragraph (b)(2)(ii) of this section do not apply with respect to the 
30 shares of S stock, and on December 31, 1965, S is a component member 
of a controlled group of corporations consisting of P and S.

[T.D. 6845, 30 FR 9753, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 4, 1972]



Sec. 1.1563-3  Rules for determining stock ownership.

    (a) In general. In determining stock ownership for purposes of 
Secs. 1.1562-5, 1.1563-1, 1.1563-2, and this section, the constructive 
ownership rules of paragraph (b) of this section apply to the extent 
such rules are referred to in such sections. The application of such 
rules shall be subject to the operating rules and special rules 
contained in paragraphs (c) and (d) of this section.
    (b) Constructive ownership--(1) Options. If a person has an option 
to acquire any outstanding stock of a corporation, such stock shall be 
considered as owned by such person. For purposes of this subparagraph, 
an option

[[Page 51]]

to acquire such an option, and each one of a series of such options, 
shall be considered as an option to acquire such stock. For example, 
assume Smith owns an option to purchase 100 shares of the outstanding 
stock of M Corporation. Under this subparagraph, Smith is considered to 
own such 100 shares. The result would be the same if Smith owned an 
option to acquire the option (or one of a series of options) to purchase 
100 shares of M stock.
    (2) Attribution from partnerships. (i) Stock owned, directly or 
indirectly, by or for a partnership shall be considered as owned by any 
partner having an interest of 5 percent or more in either the capital or 
profits of the partnership in proportion to his interest in capital or 
profits, whichever such proportion is the greater.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Green, Jones, and White, unrelated individuals, are 
partners in the GJW partnership. The partners' interests in the capital 
and profits of the partnership are as follows:

------------------------------------------------------------------------
                                                    Capital     Profits
                     Partner                     -----------------------
                                                    Percent     Percent
------------------------------------------------------------------------
Green...........................................          36          25
Jones...........................................          60          71
White...........................................           4           4
------------------------------------------------------------------------


The GJW partnership owns the entire outstanding stock (100 shares) of X 
Corporation. Under this subparagraph, Green is considered to own the X 
stock owned by the partnership in proportion to his interest in capital 
(36 percent) or profits (25 percent), whichever such proportion is the 
greater. Therefore, Green is considered to own 36 shares of the X stock. 
However, since Jones has a greater interest in the profits of the 
partnership, he is considered to own the X stock in proportion to his 
interest in such profits. Therefore, Jones is considered to own 71 
shares of the X stock. Since White does not have an interest of 5 
percent or more in either the capital or profits of the partnership, he 
is not considered to own any shares of the X stock.

    (3) Attribution from estates or trusts. (i) Stock owned, directly or 
indirectly, by or for an estate or trust shall be considered as owned by 
any beneficiary who has an actuarial interest of 5 percent or more in 
such stock, to the extent of such actuarial interest. For purposes of 
this subparagraph, the actuarial interest of each beneficiary shall be 
determined by assuming the maximum exercise of discretion by the 
fiduciary in favor of such beneficiary and the maximum use of such stock 
to satisfy his rights as a beneficiary. A beneficiary of an estate or 
trust who cannot under any circumstances receive any interest in stock 
held by the estate or trust, including the proceeds from the disposition 
thereof, or the income therefrom, does not have an actuarial interest in 
such stock. Thus, where stock owned by a decedent's estate has been 
specifically bequeathed to certain beneficiaries and the remainder of 
the estate is bequeathed to other beneficiaries, the stock is 
attributable only to the beneficiaries to whom it is specifically 
bequeathed. Similarly, a remainderman of a trust who cannot under any 
circumstances receive any interest in the stock of a corporation which 
is a part of the corpus of the trust (including any accumulated income 
therefrom or the proceeds from a disposition thereof) does not have an 
actuarial interest in such stock. However, an income beneficiary of a 
trust does have an actuarial interest in stock if he has any right to 
the income from such stock even though under the terms of the trust 
instrument such stock can never be distributed to him. The factors and 
methods prescribed in Sec. 20.2031-7 of this chapter (Estate Tax 
Regulations) for use in ascertaining the value of an interest in 
property for estate tax purposes shall be used for purposes of this 
subdivision in determining a beneficiary's actuarial interest in stock 
owned directly or indirectly by or for a trust.
    (ii) For the purposes of this subparagraph, property of a decedent 
shall be considered as owned by his estate if such property is subject 
to administration by the executor or administrator for the purposes of 
paying claims against the estate and expenses of administration 
notwithstanding that, under local law, legal title to such property 
vests in the decedent's heirs, legatees or devisees immediately upon 
death. With respect to an estate, the term ``beneficiary'' includes any 
person entitled to receive property of the decedent pursuant to a will 
or pursuant to laws of descent and distribution. A

[[Page 52]]

person shall no longer be considered a beneficiary of an estate when all 
the property to which he is entitled has been received by him, when he 
no longer has a claim against the estate arising out of having been a 
beneficiary, and when there is only a remote possibility that it will be 
necessary for the estate to seek the return of property or to seek 
payment from him by contribution or otherwise to satisfy claims against 
the estate or expenses of administration. When pursuant to the preceding 
sentence, a person ceases to be a beneficiary, stock owned by the estate 
shall not thereafter be considered owned by him.
    (iii) Stock owned, directly or indirectly, by or for any portion of 
a trust of which a person is considered the owner under Subpart E, Part 
I, Subchapter J of the Code (relating to grantors and others treated as 
substantial owners) is considered as owned by such person.
    (iv) This subparagraph does not apply to stock owned by any 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a).
    (4) Attribution from corporations. (i) Stock owned, directly or 
indirectly, by or for a corporation shall be considered as owned by any 
person who owns (within the meaning of section 1563(d)) 5 percent or 
more in value or its stock in that proportion which the value of the 
stock which such person so owns bears to the value of all the stock in 
such corporation.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Brown, an individual, owns 60 shares of the 100 shares of 
the only class of outstanding stock of corporation P. Smith, an 
individual, owns 4 shares of the P stock, and corporation X owns 36 
shares of the P stock. Corporation P owns, directly and indirectly, 50 
shares of the stock of corporation S. Under this subparagraph, Brown is 
considered to own 30 shares of the S stock (\60/100\x50), and X is 
considered to own 18 shares of the S stock (\36/100\x50). Since Smith 
does not own 5 percent or more in value of the P stock, he is not 
considered as owning any of the S stock owned by P. If, in this example, 
Smith's wife had owned directly 1 share of the P stock, Smith (and his 
wife) would each own 5 shares of the P stock, and therefore Smith (and 
his wife) would be considered as owning 2.5 shares of the S stock (\5/
100\x50).

    (5) Spouse. (i) Except as provided in subdivision (ii) of this 
subparagraph, an individual shall be considered to own the stock owned, 
directly or indirectly, by or for his spouse, other than a spouse who is 
legally separated from the individual under a decree of divorce, whether 
interlocutory or final, or a decree of separate maintenance.
    (ii) An individual shall not be considered to own stock in a 
corporation owned, directly or indirectly, by or for his spouse on any 
day of a taxable year of such corporation, provided that each of the 
following conditions are satisfied with respect to such taxable year:
    (a) Such individual does not, at any time during such taxable year, 
own directly any stock in such corporation.
    (b) Such individual is not a member of the board of directors or an 
employee of such corporation and does not participate in the management 
of such corporation at any time during such taxable year.
    (c) Not more than 50 percent of such corporation's gross income for 
such taxable year was derived from royalties, rents, dividends, 
interest, and annuities.
    (d) Such stock in such corporation is not, at any time during such 
taxable year, subject to conditions which substantially restrict or 
limit the spouse's right to dispose of such stock and which run in favor 
of the individual or his children who have not attained the age of 21 
years. The principles of paragraph (b)(2)(iii) of Sec. 1.1563-2 shall 
apply in determining whether a condition is a condition described in the 
preceding sentence.
    (iii) For purposes of subdivision (ii) (c) of this subparagraph, the 
gross income of a corporation for a taxable year shall be determined 
under section 61 and the regulations thereunder. The terms 
``royalties'', ``rents'', ``dividends'', ``interest'', and ``annuities'' 
shall have the same meanings such terms are given for purposes of 
section 1244(c). See paragraph (e)(1)(ii), (iii), (iv), (v), and (vi) of 
Sec. 1.1244(c)-1.
    (6) Children, grandchildren, parents, and grandparents. (i) An 
individual shall be considered to own the stock owned, directly or 
indirectly, by or for

[[Page 53]]

his children who have not attained the age of 21 years, and, if the 
individual has not attained the age of 21 years, the stock owned, 
directly or indirectly, by or for his parents.
    (ii) If an individual owns (directly, and with the application of 
the rules of this paragraph but without regard to this subdivision) 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote or more than 50 percent of the 
total value of shares of all classes of stock in a corporation, then 
such individual shall be considered to own the stock in such corporation 
owned, directly or indirectly, by or for his parents, grandparents, 
grandchildren, and children who have attained the age of 21 years. In 
determining whether the stock owned by an individual possesses the 
requisite percentage of the total combined voting power of all classes 
of stock entitled to vote of a corporation, see paragraph (a)(6) of 
Sec. 1.1563-1.
    (iii) For purposes of section 1563, and Secs. 1.1563-1 through 
1.1563-4, a legally adopted child of an individual shall be treated as a 
child of such individual by blood.
    (iv) The provisions of this subparagraph may be illustrated by the 
following example:

    Example (a) Facts. Individual F owns directly 40 shares of the 100 
shares of the only class of stock of Z Corporation. His son, M (20 years 
of age), owns directly 30 shares of such stock, and his son, A (30 years 
of age), owns directly 20 shares of such stock. The remaining 10 shares 
of the Z stock are owned by an unrelated person.
    (b) F's ownership. Individual F owns 40 shares of the Z stock 
directly and is considered to own the 30 shares of Z stock owned 
directly by M. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, F is 
treated as owning 70 shares or 70 percent of the total voting power and 
value of the Z stock, he is also considered as owning the 20 shares 
owned by his adult son, A. Accordingly, F is considered as owning a 
total of 90 shares of the Z stock.
    (c) M's ownership. Minor son, M, owns 30 shares of the Z stock 
directly, and is considered to own the 40 shares of Z stock owned 
directly by his father, F. However, M is not considered to own the 20 
shares of Z stock owned directly by his brother, A, and constructively 
by F, because stock constructively owned by F by reason of family 
attribution is not considered as owned by him for purposes of making 
another member of his family the constructive owner of such stock. See 
paragraph (c)(2) of this section. Accordingly, M owns and is considered 
as owning a total of 70 shares of the Z stock.
    (d) A's ownership. Adult son, A, owns 20 shares of the Z stock 
directly. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, A is 
treated as owning only the Z stock which he owns directly, he does not 
satisfy the condition precedent for the attribution of Z stock from his 
father. Accordingly, A is treated as owning only the 20 shares of Z 
stock which he owns directly.

    (c) Operating rules and special rules--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, stock constructively 
owned by a person by reason of the application of subparagraph (1), (2), 
(3), (4), (5), or (6) of paragraph (b) of this section shall, for 
purposes of applying such subparagraphs, be treated as actually owned by 
such person.
    (2) Members of family. Stock constructively owned by an individual 
by reason of the application of subparagraph (5) or (6) of paragraph (b) 
of this section shall not be treated as owned by him for purposes of 
again applying such subparagraphs in order to make another the 
constructive owner of such stock.
    (3) Precedence of option attribution. For purposes of this section, 
if stock may be considered as owned by a person under subparagraph (1) 
of paragraph (b) of this section (relating to option attribution) and 
under any other subparagraph of such paragraph, such stock shall be 
considered as owned by such person under subparagraph (1) of such 
paragraph.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). A, 30 years of age, has a 90 percent interest in the 
capital and profits of a partnership. The partnership owns all the 
outstanding stock of corporation X and X owns 60 shares of the 100 
outstanding shares of corporation Y. Under subparagraph (1) of this 
paragraph, the 60 shares of Y constructively owned by the partnership by 
reason of subparagraph (4) of paragraph (b) of this section is treated 
as actually owned by the partnership for purposes of applying 
subparagraph (2) of paragraph (b) of this section. Therefore, A is 
considered as owning 54 shares of the Y stock (90 percent of 60 shares).

[[Page 54]]

    Example (2). Assume the same facts as in example (1). Assume further 
that B, who is 20 years of age and the brother of A, directly owns 40 
shares of Y stock. Although the stock of Y owned by B is considered as 
owned by C (the father of A and B) under paragraph (b)(6)(i) of this 
section, under subparagraph (2) of this paragraph such stock may not be 
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of 
this section in order to make A the constructive owner of such stock.
    Example (3). Assume the same facts assumed for purposes of example 
(2), and further assume that C has an option to acquire the 40 shares of 
Y stock owned by his son, B. The rule contained in subparagraph (2) of 
this paragraph does not prevent the reattribution of such 40 shares to A 
because, under subparagraph (3) of this paragraph, C is considered as 
owning the 40 shares by reason of option attribution and not by reason 
of family attribution. Therefore, since A satisfies the more-than-50-
percent stock ownership test contained in paragraph (b)(6)(ii) of this 
section with respect to Y, the 40 shares of Y stock constructively owned 
by C are reattributed to A, and A is considered as owning a total of 94 
shares of Y stock.

    (d) Special rule of section 1563 (f)(3)(B)--(1) In general. If the 
same stock of a corporation is owned (within the meaning of section 
1563(d)) by two or more persons, then such stock shall be treated as 
owned by the person whose ownership of such stock results in the 
corporation being a component member of a controlled group on a December 
31 which has at least one other component member on such date.
    (2) Component member of more than one group. (i) If, by reason of 
subparagraph (1) of this paragraph, a corporation would (but for this 
subparagraph) become a component member of more than one controlled 
group on a December 31, such corporation shall be treated as a component 
member of only one such controlled group on such date. The determination 
as to which group such corporation is treated as a component member of 
shall be made in accordance with the rules contained in subdivisions 
(ii), (iii), and (iv) of this subparagraph.
    (ii) In any case in which a corporation is a component member of a 
controlled group of corporations on a December 31 as a result of 
treating each share of its stock as owned only by the person who owns 
such share directly, then each such share shall be treated as owned by 
the person who owns such share directly.
    (iii) If the application of subdivision (ii) of this subparagraph 
does not result in a corporation being treated as a component member of 
only one controlled group on a December 31, then the stock of such 
corporation described in subparagraph (1) of this paragraph shall be 
treated as owned by the one person described in such subparagraph who 
owns, directly and with the application of the rules contained in 
paragraph (b) (1), (2), (3), and (4) of this section, the stock 
possessing the greatest percentage of the total value of shares of all 
classes of stock of the corporation.
    (iv) If the application of subdivision (ii) or (iii) of this 
subparagraph does not result in a corporation being treated as a 
component member of only one controlled group of corporations on a 
December 31, then the determination of that group of which such 
corporation is to be treated as a component member shall be made by the 
district director with audit jurisdiction of such corporation's return 
for the taxable year that includes such December 31 unless such 
corporation files an election as provided in this subdivision. The 
election shall be in the form of a statement, signed by a person 
authorized to act on behalf of such corporation, designating the group 
in which the corporation has elected to be included. The statement shall 
provide all the information with respect to stock ownership which is 
reasonably necessary to satisfy the district director that the 
corporation would, but for the election, be a component member of more 
than one controlled group. The statement shall be filed on or before the 
due date (including extensions of time) for the filing of the income tax 
return of such corporation for the taxable year. However, in the case of 
an election with respect to December 31, 1970, the statement shall be 
considered as timely filed if filed on or before December 15, 1971. Once 
filed, the election is irrevocable and effective until subdivision (ii) 
or (iii) of this subparagraph applies or until there is a substantial 
change in the stock ownership of such corporation.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the

[[Page 55]]

following examples, in which each corporation referred to uses the 
calendar year as its taxable year and the stated facts are assumed to 
exist on each day of 1970 (unless otherwise provided in the example):

    Example (1). Jones owns all the stock of corporation X and has an 
option to purchase from Smith all the outstanding stock of corporation 
Y. Smith owns all the outstanding stock of corporation Z. Since the Y 
stock is considered as owned by two or more persons, under subparagraph 
(2)(ii) of this paragraph the Y stock is treated as owned only by Smith 
since he has direct ownership of such stock. Therefore, on December 31, 
1970, Y and Z are component members of the same brother-sister 
controlled group. If, however, Smith had owned his stock in corporation 
Z for less than one-half of the number of days of Z's 1970 taxable year, 
then under subparagraph (1) of this paragraph the Y stock would be 
treated as owned only by Jones since his ownership results in Y being a 
component member of a controlled group on December 31, 1970.
    Example (2). Individual H owns directly all the outstanding stock of 
corporation M. W (the wife of H) owns directly all the outstanding stock 
of corporation N. Neither spouse is considered as owning the stock 
directly owned by the other because each of the conditions prescribed in 
paragraph (b) (5)(ii) of this section is satisfied with respect to each 
corporation's 1970 taxable year. H owns directly 60 percent of the only 
class of stock of corporation P and W owns the remaining 40 percent of 
the P stock. Under subparagraph (2)(iii) of this paragraph, the stock of 
P is treated as owned only by H since H owns (directly and with the 
application of the rules contained in paragraph (b) (1), (2), (3), and 
(4) of this section) the stock possessing the greatest percentage of the 
total value of shares of all classes of stock of P. Accordingly, on 
December 31, 1970, P is treated as a component member of a brother-
sister group consisting of M and P.
    Example (3). Unrelated individuals A and B each own 49 percent of 
all the outstanding stock of corporation R, which in turn owns 70 
percent of the only class of outstanding stock of corporation S. The 
remaining 30 percent of the stock of corporation S is owned by unrelated 
individual C. C also owns the remaining 2 percent of the stock of 
corporation R. Under the attribution rule of paragraph (b)(4) of this 
section A and B are each considered to own 34.3 percent of the stock of 
corporation S. Accordingly, since five or fewer persons own at least 80 
percent of the stock of corporations R and S and also own more than 50 
percent identically (A's and B's identical ownership each is 34.3 
percent, C's identical ownership is 2 percent), on December 31, 1970, 
corporations R and S are treated as component members of the same 
brother-sister controlled group.

[T.D. 6845, 30 FR 9755, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 25, 1972; T.D. 7779, 46 FR 29474, June 2, 1981; T.D. 8179, 53 
FR 6613, Mar. 2, 1988]



Sec. 1.1563-4  Franchised corporations.

    (a) In general. For purposes of paragraph (b)(2)(ii)(d) of 
Sec. 1.1563-1, a member of a controlled group of corporations shall be 
considered to be a franchised corporation for a taxable year if each of 
the following conditions is satisfied for one-half (or more) of the 
number of days preceding the December 31 included within such taxable 
year (or, if such taxable year does not include a December 31, for one-
half or more of the number of days in such taxable year preceding the 
last day of such year):
    (1) Such member is franchised to sell the products of another 
member, or the common owner, of such controlled group.
    (2) More than 50 percent (determined on the basis of cost) of all 
the goods held by such member primarily for sale to its customers are 
acquired from members or the common owner of the controlled group, or 
both.
    (3) The stock of such member is to be sold to an employee (or 
employees) of such member pursuant to a bona fide plan designed to 
eliminate the stock ownership of the parent corporation (as defined in 
paragraph (b)(1) of Sec. 1.1563-2) or of the common owner (as defined in 
paragraph (b)(3) of Sec. 1.1563-2) in such member.
    (4) Such employee owns (or such employees in the aggregate own) 
directly more than 20 percent of the total value of shares of all 
classes of stock of such member. For purposes of this subparagraph, the 
determination of whether an employee (or employees) owns the requisite 
percentage of the total value of the stock of the member shall be made 
without regard to paragraph (b) of Sec. 1.1563-2, relating to certain 
stock treated as excluded stock. Furthermore, if the corporation has 
more than one class of stock outstanding, the relative voting rights as 
between each such class of stock shall be disregarded in making such 
determination.

[[Page 56]]

    (b) Plan for elimination of stock ownership. (1) A plan referred to 
in paragraph (a)(3) of this section must:
    (i) Provide a reasonable selling price for the stock of the member, 
and
    (ii) Require that a portion of the employee's compensation or 
dividends, or both, from such member be applied to the purchase of such 
stock (or to the purchase of notes, bonds, debentures, or similar 
evidences of indebtedness of such member held by the parent corporation 
or the common owner).

It is not necessary, in order to satisfy the requirements of subdivision 
(ii) of this subparagraph, that the plan require that a percentage of 
every dollar of the compensation and dividends be applied to the 
purchase of the stock (or the indebtedness). The requirements of such 
subdivision are satisfied if an otherwise qualified plan provides that 
under certain specified conditions (such as a requirement that the 
member earn a specified profit) no portion of the compensation and/or 
dividends need be applied to the purchase of the stock (or 
indebtedness), provided such conditions are reasonable.
    (2) A plan for the elimination of the stock ownership of the parent 
corporation or of the common owner will satisfy the requirements of 
paragraph (a)(3) of this section and subparagraph (1) of this paragraph 
even though it does not require that the stock of the member be sold to 
an employee (or employees) if it provides for the redemption of the 
stock of the member held by the parent or common owner and under the 
plan the amount of such stock to be redeemed during any period is 
calculated by reference to the profits of such member during such 
period.

[T.D. 6845, 30 FR 9757, Aug. 5, 1965]



Sec. 1.1564-1  Limitations on additional benefits for members of controlled groups.

    (a) In general. Section 1564(a)(1) provides that, with respect to 
any December 31 after 1969 and before 1975, only one component member of 
a controlled group of corporations (as defined in section 1563(a)) shall 
be allowed the full amount of:
    (1) The $25,000 surtax exemption under section 1562 (relating to 
election of multiple surtax exemptions),
    (2) The $100,000 amount under section 535(c) (2) and (3) (relating 
to the accumulated earnings credit), and
    (3) The $25,000 limitation on the small business deduction of life 
insurance companies under sections 804(a)(4) and 809(d)(10).

The amounts otherwise allowed to the other component members of such 
controlled group for their taxable years which include such December 31 
shall be reduced to the amounts set forth in the following schedule:

------------------------------------------------------------------------
                                                    Amount       Small
                                        Surtax    under sec.   business
      Taxable years including--        exemption  535(c) (2)   deduction
                                                    and (3)   limitation
------------------------------------------------------------------------
Dec. 31, 1970.......................     $20,833     $83,333     $20,833
Dec. 31, 1971.......................      16,667      66,667      16,667
Dec. 31, 1972.......................      12,500      50,000      12,500
Dec. 31, 1973.......................       8,333      33,333       8,333
Dec. 31, 1974.......................       4,167      16,667       4,167
------------------------------------------------------------------------

    (b) Election. (1) Section 1564(a)(2) provides that, with respect to 
any December 31 after 1969 and before 1975, the component members of a 
controlled group of corporations shall elect which component member or 
members of such group shall be allowed for their taxable years which 
includes such December 31 the full amounts described in paragraph (a) 
(1), (2), and (3) of this section. In making such election, the members 
may allocate such full amounts among themselves in any manner they 
choose. For example, the group may select one of its members to receive 
the full amount of the $25,000 surtax exemption under section 1562 and 
another of its members to receive the full $100,000 amount under section 
535(c)(2), or it may select one of its members to claim both, such full 
amounts.
    (2) The election shall be made with respect to a particular December 
31 and shall be valid only if each corporation which is a component 
member of the controlled group on such December 31 gives its consent. 
The consents shall be made by means of a statement, signed by persons 
duly authorized to act on behalf of each of the component members (other 
than wholly owned subsidiaries), stating which member has been selected 
to receive the amount which is not reduced under paragraph (a) of this 
section. The member so selected shall attach the statement to its income 
tax

[[Page 57]]

return for the taxable year including such December 31. The statement 
shall set forth the name, address, employer identification number, and 
taxable years of each of the other component members (including wholly 
owned subsidiaries) of the controlled group. Such other members shall 
attach a copy of the statement to their income tax returns for their 
taxable years including such December 31. An election plan adopted by a 
controlled group with respect to a particular December 31 shall be valid 
only for the taxable year of each member of the group which includes 
such December 31.
    (3) Each component member of a controlled group which is a wholly 
owned subsidiary of such group with respect to a December 31 shall be 
deemed to consent to an election with respect to such December 31, 
provided each component member of the group which is not a wholly owned 
subsidiary consents to the election plan. A component member of a 
controlled group shall be considered to be a wholly owned subsidiary of 
the group with respect to a December 31 if, on each day preceding such 
date during its taxable year which includes such date, all of its stock 
is owned directly by one or more corporations which are component 
members of the group on such December 31.

[T.D. 7181, 37 FR 8071, Apr. 25, 1972]



Procedure and Administration--Table of Contents




                         INFORMATION AND RETURNS

                           returns and records

    Source: Sections 1.6001-1 to 1.6091-4 contained in T.D. 6500, 25 FR 
12108, Nov. 26, 1960, unless otherwise noted.

                Records, Statements, and Special Returns



Sec. 1.6001-1  Records.

    (a) In general. Except as provided in paragraph (b) of this section, 
any person subject to tax under subtitle A of the Code (including a 
qualified State individual income tax which is treated pursuant to 
section 6361(a) as if it were imposed by chapter 1 of subtitle A), or 
any person required to file a return of information with respect to 
income, shall keep such permanent books of account or records, including 
inventories, as are sufficient to establish the amount of gross income, 
deductions, credits, or other matters required to be shown by such 
person in any return of such tax or information.
    (b) Farmers and wage-earners. Individuals deriving gross income from 
the business of farming, and individuals whose gross income includes 
salaries, wages, or similar compensation for personal services rendered, 
are required with respect to such income to keep such records as will 
enable the district director to determine the correct amount of income 
subject to the tax. It is not necessary, however, that with respect to 
such income individuals keep the books of account or records required by 
paragraph (a) of this section. For rules with respect to the records to 
be kept in substantiation of traveling and other business expenses of 
employees, see Sec. 1.162-17.
    (c) Exempt organizations. In addition to such permanent books and 
records as are required by paragraph (a) of this section with respect to 
the tax imposed by section 511 on unrelated business income of certain 
exempt organizations, every organization exempt from tax under section 
501(a) shall keep such permanent books of account or records, including 
inventories, as are sufficient to show specifically the items of gross 
income, receipts and disbursements. Such organizations shall also keep 
such books and records as are required to substantiate the information 
required by section 6033. See section 6033 and Secs. 1.6033-1 through 
1.6033-3.
    (d) Notice by district director requiring returns statements, or the 
keeping of records. The district director may require any person, by 
notice served upon him, to make such returns, render such statements, or 
keep such specific records as will enable the district director to 
determine whether or not such person is liable for tax under subtitle A 
of the Code, including qualified State individual income taxes, which 
are treated pursuant to section 6361(a) as if they were imposed by 
chapter 1 of subtitle A.
    (e) Retention of records. The books or records required by this 
section shall

[[Page 58]]

be kept at all times available for inspection by authorized internal 
revenue officers or employees, and shall be retained so long as the 
contents thereof may become material in the administration of any 
internal revenue law.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7122, 36 FR 
11025, June 8, 1971; T.D. 7577, 43 FR 59357, Dec. 20, 1978; T.D. 8308, 
55 FR 35593, Aug. 31, 1990]



Sec. 1.6001-2  Returns.

    For rules relating to returns required to be made by every 
individual, estate, or trust which is liable for one or more qualified 
State individual income taxes, as defined in section 6362, for a taxable 
year, see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations 
on procedure and Administration).

[T.D. 7577, 43 FR 59357, Dec. 20, 1978]

                        tax returns or statements



Sec. 1.6011-1  General requirement of return, statement, or list.

    (a) General rule. Every person subject to any tax, or required to 
collect any tax, under Subtitle A of the Code, shall make such returns 
or statements as are required by the regulations in this chapter. The 
return or statement shall include therein the information required by 
the applicable regulations or forms.
    (b) Use of prescribed forms. Copies of the prescribed return forms 
will so far as possible be furnished taxpayers by district directors. A 
taxpayer will not be excused from making a return, however, by the fact 
that no return form has been furnished to him. Taxpayers not supplied 
with the proper forms should make application therefor to the district 
director in ample time to have their returns prepared, verified, and 
filed on or before the due date with the internal revenue office where 
such returns are required to be filed. Each taxpayer should carefully 
prepare his return and set forth fully and clearly the information 
required to be included therein. Returns which have not been so prepared 
will not be accepted as meeting the requirements of the Code. In the 
absence of a prescribed form, a statement made by a taxpayer disclosing 
his gross income and the deductions therefrom may be accepted as a 
tentative return, and, if filed within the prescribed time, the 
statement so made will relieve the taxpayer from liability for the 
addition to tax imposed for the delinquent filing of the return, 
provided that without unnecessary delay such a tentative return is 
supplemented by a return made on the proper form.
    (c) Tax withheld on nonresident aliens and foreign corporations. For 
requirements respecting the return of the tax required to be withheld 
under chapter 3 of the Code on nonresident aliens and foreign 
corporations and tax-free covenant bonds, see Sec. 1.1461-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8713, June 17, 1967]



Sec. 1.6011-2  Returns, etc., of DISC's and former DISC's.

    (a) Records and information. Every DISC and former DISC (as defined 
in section 992(a)) must comply with section 6001 and the regulations 
thereunder, relating to required records, statements, and special 
returns. Thus, for example, a DISC is required to maintain the books of 
account or records described in Sec. 1.6001-1(a). In addition, every 
DISC must furnish to each of its shareholders on or before the last day 
of the second month following the close of the taxable year of the DISC 
a copy of Schedule K (Form 1120-DISC) disclosing the amounts of actual 
distributions and deemed distributions from the DISC to such shareholder 
for the taxable year of the DISC. In the case of a deficiency 
distribution to meet qualification requirements, see Sec. 1.992-3(a)(4) 
for requirements that distribution be designated in the form of a 
communication sent to a shareholder and service center at the time of 
distribution.
    (b) Returns--(1) Requirement of return. Every DISC (as defined in 
section 992(a)(1)) shall make a return of income. A former DISC (as 
defined in section 992(a)(3)) shall also make a return of income in 
addition to any other return required. The return required of a DISC or 
former DISC under this section shall be made on Form 1120-DISC. The 
provisions of Sec. 1.6011-1 shall apply with respect to a DISC and 
former DISC. A former DISC should indicate

[[Page 59]]

clearly on Form 1120-DISC that it is making a return of income as a 
former DISC (for example, by labeling at the top of the Form 1120-DISC 
``Former DISC''). In the case of a former DISC, those items on the form 
which pertain to the computation of taxable income shall not be 
completed, but Schedules J, K, L, and M must be completed. Except as 
otherwise specifically provided in the Code or regulations, the return 
of a DISC or former DISC is considered to be an income tax return.
    (2) Existence of DISC. A corporation which is a DISC and which is in 
existence during any portion of a taxable year is required to make a 
return for that fractional part of its taxable year during which it was 
in existence.

[T.D. 7533, 43 FR 6603, Feb. 15, 1978]



Sec. 1.6011-3  Requirement of statement from payees of certain gambling winnings.

    (a) General rule. Except as provided in paragraph (c) of this 
section, any person receiving a payment with respect to a wager in a 
sweepstakes, wagering pool, lottery, or other wagering transaction 
(including a parimutuel pool with respect to horse races, dog races, or 
jai alai) shall make a statement to the payer of such winnings upon the 
payer's demand. Such statements shall accompany the payer's return made 
with respect to the payment as required pursuant to section 3402(q) or 
6041, as the case may be.
    (b) Contents of statement. The statement referred to in paragraph 
(a) shall contain information (in addition to that required under 
section 6041(c)) as to the amount, if any, of winnings from identical 
wagers to which the recipient is entitled. If any person other than the 
recipient is entitled to all or a portion of the payment, the statement 
shall also include information as to the amount, if any, of winnings 
from identical wagers to which each such person is entitled. The 
statement shall be provided on Form W-2G or, if persons other than the 
recipient are entitled to all or a portion of such payment, on Form 
5754.
    (c) Exception. The requirement of paragraph (a) of this section does 
not apply with respect to any payment of winnings--
    (1) From a slot machine play, or a bingo or keno game,
    (2) Which is subject to withholding under section 3402(q) without 
regard to the existence of winnings from identical wagers, or
    (3) For which no return of information under section 6041 is 
required of the payer.
    (d) Meaning of terms, For purposes of this section, the terms 
``sweepstakes'', ``wagering pool'', ``lottery'', ``other wagering 
transaction'' and ``identical wagers'' shall have the same meanings as 
ascribed to them under Sec. 31.3402(q)-1.

[T.D. 7919, 48 FR 46297, Oct. 12, 1983]



Sec. 1.6011-4  Requirement of statement disclosing participation in certain transactions by taxpayers.

    (a) In general. Every taxpayer that has participated, as described 
in paragraph (c)(3) of this section, in a reportable transaction within 
the meaning of paragraph (b) of this section and who is required to file 
a tax return must attach to its return for the taxable year described in 
paragraph (e) of this section a disclosure statement in the form 
prescribed by paragraph (d) of this section. The fact that a transaction 
is a reportable transaction shall not affect the legal determination of 
whether the taxpayer's treatment of the transaction is proper.
    (b) Reportable transactions--(1) In general. A reportable 
transaction is a transaction described in any of the paragraphs (b)(2) 
through (7) of this section. The term transaction includes all of the 
factual elements relevant to the expected tax treatment of any 
investment, entity, plan, or arrangement, and includes any series of 
steps carried out as part of a plan. There are six categories of 
reportable transactions: listed transactions, confidential transactions, 
transactions with contractual protection, loss transactions, 
transactions with a significant book-tax difference, and transactions 
involving a brief asset holding period.
    (2) Listed transactions. A listed transaction is a transaction that 
is the same as or substantially similar to one of

[[Page 60]]

the types of transactions that the Internal Revenue Service (IRS) has 
determined to be a tax avoidance transaction and identified by notice, 
regulation, or other form of published guidance as a listed transaction.
    (3) Confidential transactions--(i) In general. A confidential 
transaction is a transaction that is offered to a taxpayer under 
conditions of confidentiality. A transaction is considered offered to a 
taxpayer under conditions of confidentiality if the taxpayer's 
disclosure of the tax treatment or the tax structure of the transaction 
is limited in any manner by an express or implied understanding or 
agreement with or for the benefit of any person who makes or provides a 
statement, oral or written, to the taxpayer (or for whose benefit a 
statement is made or provided to the taxpayer) as to the potential tax 
consequences that may result from the transaction, whether or not such 
understanding or agreement is legally binding. A transaction also will 
be considered offered to a taxpayer under conditions of confidentiality 
if the taxpayer knows or has reason to know that the taxpayer's use or 
disclosure of information relating to the tax treatment or tax structure 
of the transaction is limited in any other manner (such as where the 
transaction is claimed to be proprietary or exclusive) for the benefit 
of any person, other than the taxpayer, who makes or provides a 
statement, oral or written, to the taxpayer (or for whose benefit a 
statement is made or provided to the taxpayer) as to the potential tax 
consequences that may result from the transaction. All the facts and 
circumstances relating to the transaction will be considered when 
determining whether a transaction is offered to a taxpayer under 
conditions of confidentiality, including the prior conduct of the 
parties.
    (ii) Exceptions--(A) Securities law. A transaction is not considered 
offered to a taxpayer under conditions of confidentiality if disclosure 
of the tax treatment or tax structure of the transaction is subject to 
restrictions reasonably necessary to comply with securities laws and 
such disclosure is not otherwise limited.
    (B) Mergers and acquisitions. In the case of a proposed taxable or 
tax-free acquisition of historic assets of a corporation (other than an 
investment company, as defined in section 351(e), that is not publicly 
traded) that constitute an active trade or business the acquirer intends 
to continue, or a proposed taxable or tax-free acquisition of more than 
50 percent of the stock of a corporation (other than an investment 
company, as defined in section 351(e), that is not publicly traded) that 
owns historic assets used in an active trade or business the acquirer 
intends to continue, the transaction is not considered a confidential 
transaction under this paragraph (b)(3) if the taxpayer is permitted to 
disclose the tax treatment and tax structure of the transaction no later 
than the earlier of the date of the public announcement of discussions 
relating to the transaction, the date of the public announcement of the 
transaction, or the date of the execution of an agreement (with or 
without conditions) to enter into the transaction. However, this 
exception is not available where the taxpayer's ability to consult any 
tax advisor (including a tax advisor independent from all other entities 
involved in the transaction) regarding the tax treatment or tax 
structure of the transaction is limited in any way.
    (iii) Presumption. Unless the facts and circumstances indicate 
otherwise, a transaction is not considered offered to a taxpayer under 
conditions of confidentiality if every person who makes or provides a 
statement, oral or written, to the taxpayer (or for whose benefit a 
statement is made or provided to the taxpayer) as to the potential tax 
consequences that may result from the transaction, provides express 
written authorization to the taxpayer in substantially the following 
form: ``the taxpayer (and each employee, representative, or other agent 
of the taxpayer) may disclose to any and all persons, without limitation 
of any kind, the tax treatment and tax structure of the transaction and 
all materials of any kind (including opinions or other tax analyses) 
that are provided to the taxpayer relating to such tax treatment and tax 
structure''. Except as provided in paragraph (b)(3)(ii) of this section,

[[Page 61]]

this presumption is available only in cases in which each written 
authorization permits the taxpayer to disclose the tax treatment and tax 
structure of the transaction immediately upon commencement of 
discussions with the person providing the authorization and each written 
authorization is given no later than 30 days from the day the person 
providing the written authorization first makes or provides a statement 
to the taxpayer regarding the tax consequences of the transaction. A 
transaction that is claimed to be exclusive or proprietary to any party 
other than the taxpayer will not be considered a confidential 
transaction under this paragraph (b)(3) if written authorization to 
disclose is provided to the taxpayer in accordance with this paragraph 
(b)(3)(iii) and the transaction is not otherwise confidential.
    (4) Transactions with contractual protection--(i) In general. A 
transaction with contractual protection is a transaction for which the 
taxpayer or a related party (as described in section 267(b) or 707(b)) 
has the right to a full or partial refund of fees (as described in 
paragraph (b)(4)(ii) of this section) if all or part of the intended tax 
consequences from the transaction are not sustained. A transaction with 
contractual protection also is a transaction for which fees (as 
described in paragraph (b)(4)(ii) of this section) are contingent on the 
taxpayer's realization of tax benefits from the transaction. All the 
facts and circumstances relating to the transaction will be considered 
when determining whether a fee is refundable or contingent, including 
the right to reimbursements of amounts that the parties to the 
transaction have not designated as fees or any agreement to provide 
services without reasonable compensation.
    (ii) Fees. Paragraph (b)(4)(i) of this section only applies with 
respect to fees paid by or on behalf of the taxpayer or a related party 
to any person who makes or provides a statement, oral or written, to the 
taxpayer or related party (or for whose benefit a statement is made or 
provided to the taxpayer or related party) as to the potential tax 
consequences that may result from the transaction.
    (iii) Exceptions--(A) Termination of transaction. A transaction is 
not considered to have contractual protection solely because a party to 
the transaction has the right to terminate the transaction upon the 
happening of an event affecting the taxation of one or more parties to 
the transaction.
    (B) Previously reported transaction. If a person makes or provides a 
statement to a taxpayer as to the potential tax consequences that may 
result from a transaction only after the taxpayer has entered into the 
transaction and reported the consequences of the transaction on a filed 
tax return, and the person has not previously received fees from the 
taxpayer relating to the transaction, then any refundable or contingent 
fees are not taken into account in determining whether the transaction 
has contractual protection. This paragraph (b)(4)(iii)(B) does not 
provide any substantive rules regarding when a person may charge 
refundable or contingent fees with respect to a transaction. See 
Circular 230, 31 CFR Part 10, for the regulations governing practice 
before the IRS.
    (5) Loss transactions--(i) In general. A loss transaction is any 
transaction resulting in the taxpayer claiming a loss under section 165 
of at least--
    (A) $10 million in any single taxable year or $20 million in any 
combination of taxable years for corporations;
    (B) $10 million in any single taxable year or $20 million in any 
combination of taxable years for partnerships that have only 
corporations as partners (looking through any partners that are 
themselves partnerships), whether or not any losses flow through to one 
or more partners; or $2 million in any single taxable year or $4 million 
in any combination of taxable years for all other partnerships, whether 
or not any losses flow through to one or more partners;
    (C) $2 million in any single taxable year or $4 million in any 
combination of taxable years for individuals, S corporations, or trusts, 
whether or not any losses flow through to one or more shareholders or 
beneficiaries; or
    (D) $50,000 in any single taxable year for individuals or trusts, 
whether or not the loss flows through from an S corporation or 
partnership, if the loss

[[Page 62]]

arises with respect to a section 988 transaction (as defined in section 
988(c)(1) relating to foreign currency transactions).
    (ii) Cumulative losses. In determining whether a transaction results 
in a taxpayer claiming a loss that meets the threshold amounts over a 
combination of taxable years as described in paragraph (b)(5)(i) of this 
section, only losses claimed in the taxable year that the transaction is 
entered into and the five succeeding taxable years are combined.
    (iii) Section 165 loss. (A) For purposes of this section, in 
determining the thresholds in paragraph (b)(5)(i) of this section, the 
amount of a section 165 loss is adjusted for any salvage value and for 
any insurance or other compensation received. See Sec. 1.165-1(c)(4). 
However, a section 165 loss does not take into account offsetting gains, 
or other income or limitations. For example, a section 165 loss does not 
take into account the limitation in section 165(d) (relating to wagering 
losses) or the limitations in sections 165(f), 1211, and 1212 (relating 
to capital losses). The full amount of a section 165 loss is taken into 
account for the year in which the loss is sustained, regardless of 
whether all or part of the loss enters into the computation of a net 
operating loss under section 172 or a net capital loss under section 
1212 that is a carryback or carryover to another year. A section 165 
loss does not include any portion of a loss, attributable to a capital 
loss carryback or carryover from another year, that is treated as a 
deemed capital loss under section 1212.
    (B) For purposes of this section, a section 165 loss includes an 
amount deductible pursuant to a provision that treats a transaction as a 
sale or other disposition, or otherwise results in a deduction under 
section 165. A section 165 loss includes, for example, a loss resulting 
from a sale or exchange of a partnership interest under section 741 and 
a loss resulting from a section 988 transaction.
    (6) Transactions with a significant book-tax difference--(i) In 
general. A transaction with a significant book-tax difference is a 
transaction where the amount for tax purposes of any item or items of 
income, gain, expense, or loss from the transaction differs by more than 
$10 million on a gross basis from the amount of the item or items for 
book purposes in any taxable year. For purposes of this determination, 
offsetting items shall not be netted for either tax or book purposes. 
For purposes of this paragraph (b)(6), the amount of an item for book 
purposes is determined by applying U.S. generally accepted accounting 
principles (U.S. GAAP) for worldwide income. However, if a taxpayer, in 
the ordinary course of its business, keeps books for reporting financial 
results to shareholders, creditors, or regulators on a basis other than 
U.S. GAAP, and does not maintain U.S. GAAP books for any purpose, then 
the taxpayer may determine the amount of a book item for purposes of 
this paragraph (b)(6) by using the books maintained by the taxpayer, 
provided the books are kept on the same basis consistently from year to 
year. Adjustments to any reserve for taxes are disregarded for purposes 
of determining the book-tax difference.
    (ii) Applicability--(A) In general. This paragraph (b)(6) applies 
only to--
    (1) Taxpayers that are reporting companies under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a) and related business entities (as 
described in section 267(b) or 707(b)); or
    (2) Business entities that have $250 million or more in gross assets 
for book purposes at the end of any financial accounting period that 
ends with or within the entity's taxable year in which the transaction 
occurs (for purposes of this determination, the assets of all related 
business entities (as defined in section 267(b) or 707(b)) must be 
aggregated).
    (B) Consolidated returns. For purposes of this paragraph (b)(6), in 
the case of taxpayers that are members of a group of affiliated 
corporations filing a consolidated return, transactions solely between 
or among members of the group will be disregarded. Moreover, where two 
or more members of the group participate in a transaction that is not 
solely between or among members of the group, items shall be aggregated 
(as if such members were a single taxpayer), but any offsetting items 
shall not be netted.

[[Page 63]]

    (C) Foreign persons. In the case of a taxpayer that is a foreign 
person (other than a foreign corporation that is treated as a domestic 
corporation for Federal tax purposes under section 269B, 953(d), 1504(d) 
or any other provision of the Internal Revenue Code), only assets that 
are U.S. assets under Sec. 1.884-1(d) shall be taken into account for 
purposes of paragraph (b)(6)(ii)(A)(2) of this section, and only 
transactions that give rise to income that is effectively connected with 
the conduct of a trade or business within the United States (or to 
losses, expenses, or deductions allocated or apportioned to such income) 
shall be taken into account for purposes of this paragraph (b)(6).
    (D) Owners of disregarded entities. In the case of an eligible 
entity that is disregarded as an entity separate from its owner for 
Federal tax purposes, items of income, gain, loss, or expense that 
otherwise are considered items of the entity for book purposes shall be 
treated as items of its owner, and items arising from transactions 
between the entity and its owner shall be disregarded, for purposes of 
this paragraph (b)(6).
    (E) Partners of partnerships. In the case of a taxpayer that is a 
member or a partner of an entity that is treated as a partnership for 
Federal tax purposes, items of income, gain, loss, or expense that are 
allocable to the taxpayer for Federal tax purposes, but otherwise are 
considered items of the entity for book purposes, shall be treated as 
items of the taxpayer for purposes of this paragraph (b)(6).
    (7) Transactions involving a brief asset holding period. A 
transaction involving a brief asset holding period is any transaction 
resulting in the taxpayer claiming a tax credit exceeding $250,000 
(including a foreign tax credit) if the underlying asset giving rise to 
the credit is held by the taxpayer for 45 days or less. For purposes of 
determining the holding period, the principles of section 246(c)(3) and 
(c)(4) apply. Transactions resulting in a foreign tax credit for 
withholding taxes or other taxes imposed in respect of a dividend that 
are not disallowed under section 901(k) (including transactions eligible 
for the exception for securities dealers under section 901(k)(4)) are 
excluded from this paragraph (b)(7).
    (8) Exceptions--(i) In general. A transaction will not be considered 
a reportable transaction, or will be excluded from any individual 
category of reportable transaction under paragraphs (b)(3) through (7) 
of this section, if the Commissioner makes a determination by published 
guidance that the transaction is not subject to the reporting 
requirements of this section. The Commissioner may make a determination 
by individual letter ruling under paragraph (f) of this section that an 
individual letter ruling request on a specific transaction or type of 
transaction satisfies the reporting requirements of this section with 
regard to that transaction or type of transaction for the taxpayer who 
requests the individual letter ruling.
    (ii) Special rule for RICs. For purposes of this section, a 
regulated investment company (RIC) as defined in section 851 or an 
investment vehicle that is owned 95 percent or more by one or more RICs 
at all times during the course of the transaction are not required to 
disclose a transaction that is described in any of paragraphs (b)(3) 
through (7) of this section unless the transaction is also a listed 
transaction.
    (iii) Special rule for lease transactions. For purposes of this 
section, leasing transactions of the type excepted from the registration 
requirements under section 6111(d) of the Code and the list maintenance 
requirements under section 6112 as described in Notice 2001-18 (2001-1 
C.B. 731) (see Sec. 601.601(d)(2) of this chapter) are excluded from 
paragraphs (b)(3) through (7) of this section.
    (c) Definitions. For purposes of this section, the following terms 
are defined as follows:
    (1) Taxpayer. The term taxpayer means any person described in 
section 7701(a)(1), including S corporations. Except as otherwise 
specifically provided in this section, the term taxpayer also includes 
an affiliated group of corporations that joins in the filing of a 
consolidated return under section 1501.
    (2) Corporation. When used specifically in this section, the term 
corporation means an entity that is required to file a return for a 
taxable year on any

[[Page 64]]

1120 series form, or successor form, excluding S corporations.
    (3) Participation--(i) In general--(A) Listed transactions. A 
taxpayer has participated in a listed transaction if the taxpayer's tax 
return reflects tax consequences or a tax strategy described in the 
published guidance that lists the transaction under paragraph (b)(2) of 
this section. A taxpayer also has participated in a listed transaction 
if the taxpayer knows or has reason to know that the taxpayer's tax 
benefits are derived directly or indirectly from tax consequences or a 
tax strategy described in published guidance that lists a transaction 
under paragraph (b)(2) of this section. Published guidance may identify 
other types or classes of persons that will be treated as participants 
in a listed transaction.
    (B) Confidential transactions. A taxpayer has participated in a 
confidential transaction if the taxpayer's tax return reflects a tax 
benefit from the transaction and the taxpayer's disclosure of the tax 
treatment or tax structure of the transaction is limited in the manner 
described in paragraph (b)(3) of this section. If a partnership's, S 
corporation's or trust's disclosure is limited, and the partner's, 
shareholder's, or beneficiary's disclosure is not limited, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the confidential transaction.
    (C) Transactions with contractual protection. A taxpayer has 
participated in a transaction with contractual protection if the 
taxpayer's tax return reflects a tax benefit from the transaction and, 
as described in paragraph (b)(4) of this section, the taxpayer has the 
right to the full or partial refund of fees or the fees are contingent. 
If a partnership, S corporation, or trust has the right to a full or 
partial refund of fees or has a contingent fee arrangement, and the 
partner, shareholder, or beneficiary does not individually have the 
right to the refund of fees or a contingent fee arrangement, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the transaction with contractual 
protection.
    (D) Loss transactions. A taxpayer has participated in a loss 
transaction if the taxpayer's tax return reflects a section 165 loss and 
the amount of the section 165 loss equals or exceeds the threshold 
amount applicable to the taxpayer as described in paragraph (b)(5)(i) of 
this section. If a taxpayer is a partner in a partnership, shareholder 
in an S corporation, or beneficiary of a trust and a section 165 loss as 
described in paragraph (b)(5) of this section flows through the entity 
to the taxpayer (disregarding netting at the entity level), the taxpayer 
has participated in a loss transaction if the taxpayer's tax return 
reflects a section 165 loss and the amount of the section 165 loss that 
flows through to the taxpayer equals or exceeds the threshold amounts 
applicable to the taxpayer as described in paragraph (b)(5)(i) of this 
section. For this purpose, a tax return is deemed to reflect the full 
amount of a section 165 loss described in paragraph (b)(5) of this 
section allocable to the taxpayer under this paragraph (c)(3)(i)(D), 
regardless of whether all or part of the loss enters into the 
computation of a net operating loss under section 172 or net capital 
loss under section 1212 that the taxpayer may carry back or carry over 
to another year.
    (E) Transactions with a significant book-tax difference. A taxpayer 
has participated in a transaction with a significant book-tax difference 
if the taxpayer's tax treatment of an item from the transaction differs 
from the book treatment of that item as described in paragraph (b)(6) of 
this section. In determining whether a transaction results in a 
significant book-tax difference for a taxpayer, differences that arise 
solely because a subsidiary of the taxpayer is consolidated with the 
taxpayer, in whole or in part, for book purposes, but not for tax 
purposes, are not taken into account.
    (F) Transactions involving a brief asset holding period. A taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects items giving rise to a tax credit 
described in paragraph (b)(7) of this section. If a taxpayer is a 
partner in a partnership, shareholder in an S corporation, or 
beneficiary of a trust and the items giving rise to a tax credit 
described in paragraph (b)(7) of this section flow through the entity to

[[Page 65]]

the taxpayer (disregarding netting at the entity level), the taxpayer 
has participated in a transaction involving a brief asset holding period 
if the taxpayer's tax return reflects the tax credit and the amount of 
the tax credit claimed by the taxpayer exceeds $250,000.
    (G) Shareholders of foreign corporations--(1) In general. A 
reporting shareholder of a foreign corporation participates in a 
transaction described in paragraphs (b)(2) through (5) and (b)(7) of 
this section if the foreign corporation would be considered to 
participate in the transaction under the rules of this paragraph (c)(3) 
if it were a domestic corporation filing a tax return that reflects the 
items from the transaction. A reporting shareholder participates in a 
transaction described in paragraph (b)(6) of this section only if the 
foreign corporation would be considered to participate in the 
transaction under the rules of this paragraph (c)(3) if it were a 
domestic corporation and the transaction reduces or eliminates an income 
inclusion that otherwise would be required under section 551, 951, or 
1293. A reporting shareholder (and any successor in interest) is 
considered to participate in a transaction under this paragraph 
(c)(3)(i)(G) only for its first taxable year with or within which ends 
the first taxable year of the foreign corporation in which the foreign 
corporation participates in the transaction, and for the reporting 
shareholder's five succeeding taxable years.
    (2) Reporting shareholder. The term reporting shareholder means a 
United States shareholder (as defined in section 551(a)) in a foreign 
personal holding company (as defined in section 552), a United States 
shareholder (as defined in section 951(b)) in a controlled foreign 
corporation (as defined in section 957), or a 10 percent shareholder (by 
vote or value) of a qualified electing fund (as defined in section 
1295).
    (ii) Examples. The following examples illustrate the provisions of 
paragraph (c)(3)(i) of this section:

    Example 1. Notice 95-53 (1995-2 C.B. 334) (see Sec. 601.601(d)(2) of 
this chapter), describes a lease stripping transaction in which one 
party (the transferor) assigns the right to receive future payments 
under a lease of tangible property and receives consideration which the 
transferor treats as current income. The transferor later transfers the 
property subject to the lease in a transaction intended to qualify as a 
transferred basis transaction, for example, a transaction described in 
section 351. The transferee corporation claims the deductions associated 
with the high basis property subject to the lease. The transferor's and 
transferee corporation's tax returns reflect tax positions described in 
Notice 95-53. Therefore, the transferor and transferee corporation have 
participated in the listed transaction. In the section 351 transaction, 
the transferor will have received stock with low value and high basis 
from the transferee corporation. If the transferor subsequently 
transfers the high basis/low value stock to a taxpayer in another 
transaction intended to qualify as a transferred basis transaction and 
the taxpayer uses the stock to generate a loss, and if the taxpayer 
knows or has reason to know that the tax loss claimed was derived 
indirectly from the lease stripping transaction, then the taxpayer has 
participated in the listed transaction. Accordingly, the taxpayer must 
disclose the transaction and the manner of the taxpayer's participation 
in the transaction under the rules of this section. If a bank lends 
money to the transferor, transferee corporation, or taxpayer for use in 
their transactions, the bank has not participated in the listed 
transaction because the bank's tax return does not reflect tax 
consequences or a tax strategy described in the listing notice (nor does 
the bank's tax return reflect a tax benefit derived from tax 
consequences or a tax strategy described in the listing notice), nor is 
the bank described as a participant in Notice 95-53.
    Example 2. XYZ is a limited liability company treated as a 
partnership for tax purposes. X, Y, and Z are members of XYZ. X is an 
individual, Y is an S corporation, and Z is a partnership. XYZ enters 
into a confidential transaction under paragraph (b)(3) of this section. 
X is bound by the confidentiality agreement, but Y and Z are not bound 
by the agreement. As a result of the transaction, XYZ, X, Y, and Z all 
reflect a tax benefit on their tax returns. Because XYZ's and X's 
disclosure of the tax treatment and tax structure are limited in the 
manner described in paragraph (b)(3) of this section and their tax 
returns reflect a tax benefit from the transaction, both XYZ and X have 
participated in the confidential transaction. Neither Y nor Z has 
participated in the confidential transaction because they are not 
subject to the confidentiality agreement.
    Example 3. Partnership AB has gross assets with a book value of over 
$250 million. Partner A is an SEC reporting company and partner B is an 
individual. AB enters into a

[[Page 66]]

transaction that results in a book-tax difference for AB of $25 million. 
The transaction is a reportable transaction for AB under paragraph 
(b)(6) of this section because the book-tax difference exceeds $10 
million. As a result of A's partnership interest in AB and the 
allocation of items relating to the transaction to A, A has a book-tax 
difference of $11 million. The transaction is a reportable transaction 
for A under paragraph (b)(6) of this section because the $11 million 
book-tax difference exceeds $10 million. However, even though $14 
million of the book-tax difference would be allocated to B, the 
transaction is not a reportable transaction for B under paragraph (b)(6) 
of this section because B, an individual, is not subject to paragraph 
(b)(6) of this section.
    Example 4. (i) P corporation, the parent corporation of a group of 
corporations that file a consolidated tax return, owns 60% of the stock 
of T corporation. T files its own tax return and is not included as a 
member of the P group on the P group consolidated tax return. For book 
purposes, some or all of T's income is included by the group of 
corporations that includes P. T engages in a transaction that results in 
items of book income but does not result in items of income for tax 
purposes. P and T are SEC reporting companies.
    (ii) T participated in the transaction. T has no items of taxable 
income but has items of book income. If items from the transaction 
result in a book-tax difference determined in accordance with paragraph 
(b)(6) of this section of $10 million in any single year, T will be 
required to file Form 8886. The P group did not participate in the 
transaction, and does not have a book-tax difference for purposes of 
paragraph (b)(6) of this section because, even if the P group included 
$10 million in book income, the book tax difference arises solely 
because T is not part of P's consolidated group for tax purposes.
    (iii) If the facts were changed so that P corporation owned 80% of 
the stock of T and T was a member of the P consolidated group for tax 
purposes, the P group would be the taxpayer that participated in the 
transaction. If, in any single year, the transaction produced items of 
income for book purposes of $10 million but no items of taxable income, 
P would be required to file Form 8886. This result would not change if T 
separately reported its items for book purposes, if P reported none of 
T's items on its consolidated financial statements, or if the P 
consolidated financial statements included only part of a $10 million 
book-tax difference relating to items from T's transaction.

    Example 5. Domestic corporations X and Y each own 50 percent of the 
voting stock of CFC, a controlled foreign corporation. X, Y, and CFC 
each use the calendar year as their taxable year. CFC is not engaged in 
the conduct of a trade or business within the United States and has no 
U.S. source income. Accordingly, CFC is not required to file a U.S. 
Federal income tax return. See Sec. 1.6012-2(g). Under paragraph 
(c)(3)(i)(G)(2) of this section, X and Y are reporting shareholders with 
respect to CFC. CFC purchases a Euro-denominated bond on June 1, 2003, 
for 104,400,000 Euros. The bond matures on June 7, 2003, and CFC 
collects 104,500,000 Euros, equal to the bond's 100,000,000 Euro face 
amount plus 5,000,000 Euros of accrued but unpaid interest, less a 10% 
foreign withholding tax of 500,000 Euros. The average dollar-Euro 
exchange rate for the year is $.80 = 1 Euro, so CFC adds $400,000 to its 
post-1986 foreign income taxes pool as a result of the transaction. See 
sections 986(a)(1) and 902(c)(2). Under paragraph (c)(3)(i)(G)(1) of 
this section, X and Y have each participated in a transaction involving 
a brief asset holding period described in paragraph (b)(7) of this 
section for their taxable years 2003 through 2008 because both X and Y 
are reporting shareholders of CFC, and CFC would have been considered to 
have participated in a reportable transaction if it were a domestic 
corporation.

    (4) Substantially similar. The term substantially similar includes 
any transaction that is expected to obtain the same or similar types of 
tax consequences and that is either factually similar or based on the 
same or similar tax strategy. Receipt of an opinion regarding the tax 
consequences of the transaction is not relevant to the determination of 
whether the transaction is the same as or substantially similar to 
another transaction. Further, the term substantially similar must be 
broadly construed in favor of disclosure. The following examples 
illustrate situations where a transaction is the same as or 
substantially similar to a listed transaction under paragraph (b)(2) of 
this section. (Such transactions may also be reportable transactions 
under paragraphs (b)(3) through (7) of this section.) The following 
examples illustrate the provisions of this paragraph (c)(4):

    Example 1. Notice 2000-44 (2000-2 C.B. 255) (see Sec. 601.601(d)(2) 
of this chapter), sets forth a listed transaction involving offsetting 
options transferred to a partnership where the taxpayer claims basis in 
the partnership for the cost of the purchased options but does not 
adjust basis under section 752 as a result

[[Page 67]]

of the partnership's assumption of the taxpayer's obligation with 
respect to the options. Transactions using short sales, futures, 
derivatives or any other type of offsetting obligations to inflate basis 
in a partnership interest would be the same as or substantially similar 
to the transaction described in Notice 2000-44. Moreover, use of the 
inflated basis in the partnership interest to diminish gain that would 
otherwise be recognized on the transfer of a partnership asset would 
also be the same as or substantially similar to the transaction 
described in Notice 2000-44.
    Example 2. Notice 2001-16 (2001-1 C.B. 730) (see Sec. 601.601(d)(2) 
of this chapter), sets forth a listed transaction involving a seller (X) 
who desires to sell stock of a corporation (T), an intermediary 
corporation (M), and a buyer (Y) who desires to purchase the assets (and 
not the stock) of T. M agrees to facilitate the sale to prevent the 
recognition of the gain that T would otherwise report. Notice 2001-16 
describes M as a member of a consolidated group that has a loss within 
the group or as a party not subject to tax. Transactions utilizing 
different intermediaries to prevent the recognition of gain would be the 
same as or substantially similar to the transaction described in Notice 
2001-16. An example is a transaction in which M is a corporation that 
does not file a consolidated return but which buys T stock, liquidates 
T, sells assets of T to Y, and offsets the gain recognized on the sale 
of those assets with currently generated losses.

    (5) Tax. For purposes of this section, the term tax means Federal 
income tax.
    (6) Tax benefit. A tax benefit includes deductions, exclusions from 
gross income, nonrecognition of gain, tax credits, adjustments (or the 
absence of adjustments) to the basis of property, status as an entity 
exempt from Federal income taxation, and any other tax consequences that 
may reduce a taxpayer's Federal income tax liability by affecting the 
amount, timing, character, or source of any item of income, gain, 
expense, loss, or credit.
    (7) Tax return. For purposes of this section, the term tax return 
means a Federal income tax return and a Federal information return.
    (8) Tax treatment. The tax treatment of a transaction is the 
purported or claimed Federal income tax treatment of the transaction.
    (9) Tax structure. The tax structure of a transaction is any fact 
that may be relevant to understanding the purported or claimed Federal 
income tax treatment of the transaction.
    (d) Form and content of disclosure statement. The IRS will release 
Form 8886, ``Reportable Transaction Disclosure Statement'' (or a 
successor form), for use by taxpayers in accordance with this paragraph 
(d). A taxpayer required to file a disclosure statement under this 
section must file a completed Form 8886 in accordance with the 
instructions to the form. The Form 8886 is the disclosure statement 
required under this section. The form must be attached to the 
appropriate tax returns as provided in paragraph (e) of this section. If 
a copy of a disclosure statement is required to be sent to the Office of 
Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must 
be sent to: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size 
Business Division, 1111 Constitution Ave., NW., Washington, DC 20224, or 
to such other address as provided by the Commissioner.
    (e) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction must be attached to the 
taxpayer's tax return for each taxable year for which a taxpayer 
participates in a reportable transaction. In addition, a copy of the 
disclosure statement must be sent to OTSA at the same time that any 
disclosure statement is first filed with the taxpayer's tax return. If a 
reportable transaction results in a loss which is carried back to a 
prior year, the disclosure statement for the reportable transaction must 
be attached to the taxpayer's application for tentative refund or 
amended tax return for that prior year. In the case of a taxpayer that 
is a partnership or S corporation, the disclosure statement for a 
reportable transaction must be attached to the partnership's or S 
corporation's tax return for each taxable year in which the partnership 
or S corporation participates in the transaction under the rules of 
paragraph (c)(3)(i) of this section.
    (2) Special rules--(i) Listed transactions. If a transaction becomes 
a listed transaction after the filing of the taxpayer's final tax return 
reflecting either tax consequences or a tax strategy described in the 
published guidance

[[Page 68]]

listing the transaction (or a tax benefit derived from tax consequences 
or a tax strategy described in the published guidance listing the 
transaction) and before the end of the statute of limitations period for 
that return, then a disclosure statement must be filed as an attachment 
to the taxpayer's tax return next filed after the date the transaction 
is listed.
    (ii) Loss transactions. If a transaction becomes a loss transaction 
because the losses equal or exceed the threshold amounts as described in 
paragraph (b)(5)(i) of this section, a disclosure statement must be 
filed as an attachment to the taxpayer's tax return for the first 
taxable year in which the threshold amount is reached and to any 
subsequent tax return that reflects any amount of section 165 loss from 
the transaction.
    (3) Multiple disclosures. The taxpayer must disclose the transaction 
in the time and manner provided for under the provisions of this section 
regardless of whether the taxpayer also plans to disclose the 
transaction under other published guidance, for example, Rev. Proc. 94-
69 (1994-2 C.B. 804) (see Sec. 601.601(d)(2) of this chapter).
    (4) Example. The following example illustrates the application of 
this paragraph (e):

    Example. In January of 2004, F, a domestic calendar year 
corporation, enters into a transaction that is not a listed transaction 
when entered into and is not a transaction described in any of the 
paragraphs (b)(3) through (7) of this section. All the tax benefits from 
the transaction are reported on F's 2004 tax return. On March 1, 2008, 
the IRS publishes a notice identifying the transaction as a listed 
transaction described in paragraph (b)(2) of this section. Thus, upon 
issuance of the notice, the transaction becomes a reportable transaction 
described in paragraph (b) of this section. The statute of limitations 
for F's 2004 taxable year is still open. F is required to file Form 8886 
for the transaction as an attachment to F's next filed Federal income 
tax return and must send a copy of Form 8886 to OTSA. If F's 2007 
Federal income tax return has not been filed on or before the date the 
Service identifies the transaction as a listed transaction, Form 8886 
must be attached to F's 2007 return and at that time a copy of Form 8886 
must be sent to OTSA.
    (f) Rulings and protective disclosures--(1) Requests for ruling. A 
taxpayer may, on or before the date that disclosure would otherwise be 
required under this section, submit a request to the IRS for a ruling as 
to whether a transaction is subject to the disclosure requirements of 
this section. If the request fully discloses all relevant facts relating 
to the transaction, the potential obligation of that taxpayer to 
disclose the transaction will be suspended during the period that the 
ruling request is pending and, if the IRS subsequently concludes that 
the transaction is a reportable transaction subject to disclosure under 
this section, until the 60th day after the issuance of the ruling (or, 
if the request is withdrawn, 60 days after the date that the request is 
withdrawn). Furthermore, in that taxpayer's individual ruling, the 
Commissioner in his discretion may determine that the submission 
satisfies the disclosure rules under this section for that particular 
transaction or type of transaction.
    (2) Protective disclosures. If a taxpayer is uncertain whether a 
transaction must be disclosed under this section, the taxpayer may 
disclose the transaction in accordance with the requirements of this 
section, and indicate on the disclosure statement that the taxpayer is 
uncertain whether the transaction is required to be disclosed under this 
section and that the disclosure statement is being filed on a protective 
basis.
    (3) Rulings on the merits of a transaction. If a taxpayer requests a 
ruling on the merits of a specific transaction on or before the date 
that disclosure would otherwise be required under this section, and 
receives a favorable ruling as to the transaction, the disclosure rules 
under this section will be deemed to have been satisfied by that 
taxpayer with regard to that transaction, so long as the request fully 
discloses all relevant facts relating to the transaction which would 
otherwise be required to be disclosed under this section.
    (g) Retention of documents. In accordance with the instructions to 
Form 8886, the taxpayer must retain a copy of all documents and other 
records related to a transaction subject to disclosure under this 
section that are material to an understanding of the tax

[[Page 69]]

treatment or tax structure of the transaction. The documents must be 
retained until the expiration of the statute of limitations applicable 
to the final taxable year for which disclosure of the transaction was 
required under this section. (This document retention requirement is in 
addition to any document retention requirements that section 6001 
generally imposes on the taxpayer.) The documents may include the 
following: marketing materials related to the transaction; written 
analyses used in decision-making related to the transaction; 
correspondence and agreements between the taxpayer and any advisor, 
lender, or other party to the reportable transaction that relate to the 
transaction; documents discussing, referring to, or demonstrating the 
purported or claimed tax benefits arising from the reportable 
transaction; and documents, if any, referring to the business purposes 
for the reportable transaction. A taxpayer is not required to retain 
earlier drafts of a document if the taxpayer retains a copy of the final 
document (or, if there is no final document, the most recent draft of 
the document) and the final document (or most recent draft) contains all 
the information in the earlier drafts of the document that is material 
to an understanding of the purported tax treatment or tax structure of 
the transaction.
    (h) Effective dates. This section applies to Federal income tax 
returns filed after February 28, 2000. However, paragraphs (a) through 
(g) of this section apply to transactions entered into on or after 
February 28, 2003. All the rules in paragraphs (a) through (g) of this 
section may be relied upon for transactions entered into on or after 
January 1, 2003, and before February 28, 2003. Otherwise, the rules that 
apply with respect to transactions entered into before February 28, 2003 
are contained in Sec. 1.6011-4T in effect prior to February 28, 2003 
(see 26 CFR part 1 revised as of April 1, 2002, 2002-28 I.R.B. 90, and 
2002-45 I.R.B. 818 (see Sec. 601.601(d)(2) of this chapter)).

[T.D. 9046, 68 FR 10163, Mar. 4, 2003]



Sec. 1.6012-1  Individuals required to make returns of income.

    (a) Individual citizen or resident--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, an income tax return 
must be filed by every individual for each taxable year beginning before 
January 1, 1973, during which he receives $600 or more of gross income, 
and for each taxable year beginning after December 31, 1972, during 
which he receives $750 or more of gross income, if such individual is:
    (i) A citizen of the United States, whether residing at home or 
abroad,
    (ii) A resident of the United States even though not a citizen 
thereof, or
    (iii) An alien bona fide resident of Puerto Rico during the entire 
taxable year.
    (2) Special rules. (i) For taxable years beginning before January 1, 
1970, an individual who is described in subparagraph (1) of this 
paragraph and who has attained the age of 65 before the close of his 
taxable year must file an income tax return only if he receives $1,200 
or more of gross income during his taxable year.
    (ii) For taxable years beginning after December 31, 1969, and before 
January 1, 1973, an individual described in subparagraph (1) of this 
paragraph (other than an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,700 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,300 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,300 
or more. However, if such individual or his spouse has attained the age 
of 65 before the close of the taxable year an income tax return must be 
filed by such individual only if their

[[Page 70]]

combined gross income is $2,900 or more. If both the individual and his 
spouse have attained the age of 65 before the close of the taxable year 
such return must be filed only if their combined gross income is $3,500 
or more. However, this subdivision (ii)(b) shall not apply if the 
individual and his spouse did not have the same household as their home 
at the close of their taxable year, if such spouse files a separate 
return for a taxable year which includes any part of such individual's 
taxable year, or if any other taxpayer is entitled to an exemption for 
such individual or his spouse under section 151(e) for such other 
taxpayer's taxable year beginning in the calendar year in which such 
individual's taxable year begins. For example, a married student more 
than half of whose support is furnished by his father must file an 
income tax return if he receives $600 or more of gross income during his 
taxable year.
    (iii) For taxable years beginning after December 31, 1972, an 
individual described in subparagraph (1) of this paragraph (other than 
an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,750 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,500 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,500 
or more. However, if such individual or his spouse has attained the age 
of 65 before the close of the taxable year an income tax return must be 
filed by such individual only if their combined gross income is $3,250 
or more. If both the individual and his spouse attain the age of 65 
before the close of the taxable year such return must be filed only if 
their combined gross income is $4,000 or more. However, this subdivision 
(iii)(b) shall not apply if the individual and his spouse did not have 
the same household as their home at the close of their taxable year, if 
such spouse files a separate return for a taxable year which includes 
any part of such individual's taxable year, or if any other taxpayer is 
entitled to an exemption for the taxpayer or his spouse under section 
151(e) for such other taxpayer's taxable year beginning in the calendar 
year in which such individual's taxable year begins. For example, a 
married student more than half of whose support is furnished by his 
father must file an income tax return if he receives $750 or more of 
gross income during the taxable year.
    (iv) For purposes of section 6012(a) (1)(A)(ii) and subdivisions 
(ii)(b) and (iii)(b) of this subparagraph, an individual and his spouse 
are considered to have the same household as their home at the close of 
a taxable year if the same household constituted the principal place of 
abode of both the individual and his spouse at the close of such taxable 
year (or on the date of death, if the individual or his spouse died 
within the taxable year). The individual and his spouse will be 
considered to have the same household as their home at the close of the 
taxable year notwithstanding a temporary absence from the household due 
to special circumstances, as, for example, in the case of a nonpermanent 
failure on the part of the individual and his spouse to have a common 
abode by reason of illness, education, business, vacation, or military 
service. For example, A, a calendar-year individual under 65 years of 
age, is married to B, also under 65 years of age, and is a member of the 
Armed Forces of the United States. During 1970 A is transferred to an 
overseas base. A and B give up their home, which they had jointly 
occupied until that time; B moves to the home of her parents for the 
duration of A's absence. They fully intend to set up a new joint 
household upon A's return. Neither A nor B must file a return for 1970 
if their combined gross income for the year is less than $2,300 and if 
no other taxpayer is entitled to a dependency exemption for A or B under 
section 151(e).

[[Page 71]]

    (v) In the case of a short taxable year referred to in section 
443(a)(1), an individual described in subparagraph (1) of this paragraph 
shall file an income tax return if his gross income received during such 
short taxable year equals or exceeds his own personal exemption allowed 
by section 151(b) (prorated as provided in section 443(c)) and, when 
applicable, his additional exemption for age 65 or more allowed by 
section 151(c)(1) (prorated as provided in section 443(c)).
    (vi) For rules relating to returns required to be made by every 
individual who is liable for one or more qualified State individual 
income taxes, as defined in section 6362, for a taxable year, see 
paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration).
    (vii) For taxable years beginning after December 31, 1978, an 
individual who receives payments during the calendar year in which the 
taxable year begins under section 3507 (relating to advance payment of 
earned income credit) must file an income tax return.
    (3) Earned income from without the United States and gain from sale 
of residence. For the purpose of determining whether an income tax 
return must be filed for any taxable year beginning after December 31, 
1957, gross income shall be computed without regard to the exclusion 
provided for in section 911 (relating to earned income from sources 
without the United States). For the purpose of determining whether an 
income tax return must be filed for any taxable year ending after 
December 31, 1963, gross income shall be computed without regard to the 
exclusion provided for in section 121 (relating to sale of residence by 
individual who has attained age 65). In the case of an individual 
claiming an exclusion under section 121, he shall attach Form 2119 to 
the return required under this paragraph and in the case of an 
individual claiming an exclusion under section 911, he shall attach Form 
2555 to the return required under this paragraph.
    (4) Return of income of minor. A minor is subject to the same 
requirements and elections for making returns of income as are other 
individuals. Thus, for example, for a taxable year beginning after 
December 31, 1972, a return must be made by or for a minor who has an 
aggregate of $1,750 of gross income from funds held in trust for him and 
from his personal services, regardless of the amount of his taxable 
income. The return of a minor must be made by the minor himself or must 
be made for him by his guardian or other person charged with the care of 
the minor's person or property. See paragraph (b)(3) of Sec. 1.6012-3. 
See Sec. 1.73-1 for inclusion in the minor's gross income of amounts 
received for his personal services. For the amount of tax which is 
considered to have been properly assessed against the parent, if not 
paid by the child, see section 6201(c) and paragraph (c) of 
Sec. 301.6201-1 of this chapter (Regulations on Procedure and 
Administration).
    (5) Returns made by agents. The return of income may be made by an 
agent if, by reason of disease or injury, the person liable for the 
making of the return is unable to make it. The return may also be made 
by an agent if the taxpayer is unable to make the return by reason of 
continuous absence from the United States (including Puerto Rico as if a 
part of the United States) for a period of at least 60 days prior to the 
date prescribed by law for making the return. In addition, a return may 
be made by an agent if the taxpayer requests permission, in writing, of 
the district director for the internal revenue district in which is 
located the legal residence or principal place of business of the person 
liable for the making of the return, and such district director 
determines that good cause exists for permitting the return to be so 
made. However, assistance in the preparation of the return may be 
rendered under any circumstances. Whenever a return is made by an agent 
it must be accompanied by a power of attorney (or copy thereof) 
authorizing him to represent his principal in making, executing, or 
filing the return. A form 2848, when properly completed, is sufficient. 
In addition, where one spouse is physically unable by reason of disease 
or injury to sign a joint return, the other spouse may, with the oral 
consent of the one who is incapacitated, sign the incapacitated spouse's 
name in the proper place on the return followed

[[Page 72]]

by the words ``By -------------------- Husband (or Wife),'' and by the 
signature of the signing spouse in his own right, provided that a dated 
statement signed by the spouse who is signing the return is attached to 
and made a part of the return stating:
    (i) The name of the return being filed,
    (ii) The taxable year,
    (iii) The reason for the inability of the spouse who is 
incapacitated to sign the return, and
    (iv) That the spouse who is incapacitated consented to the signing 
of the return.

The taxpayer and his agent, if any, are responsible for the return as 
made and incur liability for the penalties provided for erroneous, 
false, or fraudulent returns.
    (6) Form of return. Form 1040 is prescribed for general use in 
making the return required under this paragraph. Form 1040A is an 
optional short form which, in accordance with paragraph (a)(7) of this 
section, may be used by certain taxpayers. A taxpayer otherwise entitled 
to use Form 1040A as his return for any taxable year may not make his 
return on such form if he elects not to take the standard deduction 
provided in section 141, and in such case he must make his return on 
Form 1040. For taxable years beginning before January 1, 1970, a 
taxpayer entitled under section 6014 and Sec. 1.6014-1 to elect not to 
show his tax on his return must, if he desires to exercise such 
election, make his return on Form 1040A. Form 1040W is an optional short 
form which, in accordance with paragraph (a)(8) of this section, may be 
used only with respect to taxable years beginning after December 31, 
1958, and ending before December 31, 1961.
    (7)(i) Use of Form 1040A. Form 1040A may be filed only by those 
individuals entitled to use such form as provided by and in accordance 
with the instructions for such form.
    (ii) Computation and payment of tax. Unless a taxpayer is entitled 
to elect under section 6014 and Sec. 1.6014-1 not to show the tax on 
Form 1040A and does so elect, he shall compute and show on his return on 
Form 1040A the amount of the tax imposed by subtitle A of the Code and 
shall, without notice and demand therefor, pay any unpaid balance of 
such tax not later than the date fixed for filing the return.
    (iii) Change of election to use Form 1040A. A taxpayer who has 
elected to make his return on Form 1040A may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2 relating to 
change of election to take, or not to take the standard deduction.
    (8) Use of Form 1040W for certain taxable years--(i) In general. An 
individual may use Form 1040W as his return for any taxable year 
beginning after December 31, 1958, and ending before December 31, 1961, 
in which the gross income of the individual, regardless of the amount 
thereof:
    (a) Consists entirely of remuneration for personal services 
performed as an employee (whether or not such remuneration constitutes 
wages as defined in section 3401(a)), dividends, or interest, and
    (b) Does not include more than $200 from dividends and interest.

For purposes of determining whether gross income from dividends and 
interest exceeds $200, dividends from domestic corporations are taken 
into account to the extent that they are includible in gross income. For 
purposes of this subparagraph, any reference to Form 1040 in Secs. 1.4-
2, 1.142-1, and 1.144-1 and this section shall also be deemed a 
reference to Form 1040W.
    (ii) Change of election to use Form 1040W. A taxpayer who has 
elected to make his return on Form 1040W may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2, relating to 
change of election to take, or not to take, the standard deduction.
    (iii) Joint return of husband and wife on Form 1040W. A husband and 
wife, eligible under section 6013 and the regulations thereunder to file 
a joint return for the taxable year, may, subject to the provisions of 
this subparagraph, make a joint return on Form 1040W for any taxable 
year beginning after December 31, 1958, and ending before December 31, 
1961, in which the aggregate gross income of the spouses (regardless

[[Page 73]]

of amount) consists entirely of remuneration for personal services 
performed as an employee (whether or not such remuneration constitutes 
wages as defined in section 3401(a)), dividends, or interest, and does 
not include more than $200 from dividends and interest. For purposes of 
determining whether gross income from sources to which the $200 
limitation applies exceeds such amount in cases where both spouses 
receive dividends from domestic corporations, the amount of such 
dividends received by each spouse is taken into account to the extent 
that such dividends are includible in gross income. See section 116 and 
Secs. 1.116-1 and 1.116-2. If a joint return is made by husband and wife 
on Form 1040W, the liability for the tax shall be joint and several.
    (9) Items of tax preference. For a taxable year ending after 
December 31, 1969, an individual shall attach Form 4625 to the return 
required by this paragraph if during the year the individual:
    (i) Has items of tax preference (described in section 57) in excess 
of its minimum tax exemption (determined under Sec. 1.58-1) or
    (ii) Uses a net operating loss carryover from a prior taxable year 
in which it deferred minimum tax under section 56(b).
    (b) Return of nonresident alien individual--(1) Requirement of 
return--(i) In general. Except as otherwise provided in subparagraph (2) 
of this paragraph, every nonresident alien individual (other than one 
treated as a resident under section 6013 (g) or (h)) who is engaged in 
trade or business in the United States at any time during the taxable 
year or who has income which is subject to taxation under subtitle A of 
the Code shall make a return on Form 1040NR. For this purpose it is 
immaterial that the gross income for the taxable year is less than the 
minimum amount specified in section 6012(a) for making a return. Thus, a 
nonresident alien individual who is engaged in a trade or business in 
the United States at any time during the taxable year is required to 
file a return on Form 1040 NR even though (a) he has no income which is 
effectively connected with the conduct of a trade or business in the 
United States, (b) he has no income from sources within the United 
States, or (c) his income is exempt from income tax by reason of an 
income tax convention or any section of the Code. However, if the 
nonresident alien individual has no gross income for the taxable year, 
he is not required to complete the return schedules but must attach a 
statement to the return indicating the nature of any exclusions claimed 
and the amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a nonresident alien 
individual includes treaty income, as defined in paragraph (b)(1) of 
Sec. 1.871-12, a statement shall be attached to the return on Form 
1040NR showing with respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form, or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source. A nonresident alien individual (other than one treated as a 
resident under section 6013 (g) or (h)) who at no time during the 
taxable year is engaged in a trade or business in the United States is 
not required to make a return for the taxable year if his tax liability 
for the taxable year is fully satisfied by the withholding of tax at 
source under chapter 3 of the Code. This subdivision does not apply to a 
nonresident alien individual who has income for the taxable year which 
is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating to 
students or trainees) or Sec. 1.871-10 (relating to real property 
income) as income which is effectively connected for the taxable year 
with the conduct of a trade or business in the United States by that 
individual, or to a nonresident alien individual making a claim under 
Sec. 301.6402-3 of this chapter (Procedure and Administration 
Regulations) for the refund of an overpayment of tax for

[[Page 74]]

the taxable year. In addition, this subdivision does not apply to a 
nonresident alien individual who has income for the taxable year that is 
treated under section 871(b)(1) as effectively connected with the 
conduct of a trade or business within the United States by reason of the 
operation of section 897. For purposes of this subdivision, some of the 
items of income from sources within the United States upon which the tax 
liability will not have been fully satisfied by the withholding of tax 
at source under chapter 3 of the Code are:
    (a) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at the source,
    (b) In the case of bonds or other evidences of indebtedness issued 
after September 28, 1965, amounts described in section 871(a)(1)(C),
    (c) Capital gains described in section 871(a)(2) and paragraph (d) 
of Sec. 1.871- 7, and
    (d) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of 
Sec. 1.1441-4, is not subject to withholding of tax at the source.
    (ii) Return of individual for taxable year of change of U.S. 
citizenship or residence. (a) If an alien individual becomes a citizen 
or resident of the United States during the taxable year and is a 
citizen or resident of the United States on the last day of such year, 
he must make a return on Form 1040 for the taxable year. However, a 
separate schedule is required to be attached to this return to show the 
income tax computation for the part of the taxable year during which the 
alien was neither a citizen nor resident of the United States, unless an 
election under section 6013 (g) or (h) is in effect for the alien. A 
Form 1040NR, clearly marked ``Statement'' across the top, may be used as 
such a separate schedule.
    (b) If an individual abandons his U.S. citizenship or residence 
during the taxable year and is not a citizen or resident of the United 
States on the last day of such year, he must make a return on Form 
1040NR for the taxable year, even if an election under section 6013(g) 
was in effect for the taxable year preceding the year of abandonment. 
However, a separate schedule is required to be attached to this return 
to show the income tax computation for the part of the taxable year 
during which the individual was a citizen or resident of the United 
States. A Form 1040, clearly marked ``Statement'' across the top, may be 
used as such a separate schedule.
    (c) A return is required under this subdivision (ii) only if the 
individual is otherwise required to make a return for the taxable year.
    (iii) Beneficiaries of estates or trusts. A nonresident alien 
individual who is a beneficiary of an estate or trust which is engaged 
in trade or business in the United States is not required to make a 
return for the taxable year merely because he is deemed to be engaged in 
trade or business within the United States under section 875(2). 
However, such nonresident alien beneficiary will be required to make a 
return if he otherwise satisfies the conditions of subparagraph (1)(i) 
of this paragraph for making a return.
    (iv) Certain alien residents of Puerto Rico. This paragraph does not 
apply to a nonresident alien individual who is a bona fide resident of 
Puerto Rico during the taxable year. See section 876 and paragraph 
(a)(1)(iii) of this section.
    (3) Representative or agent for nonresident alien individual--(i) 
Cases where power of attorney is not required. The responsible 
representative or agent within the United States of a nonresident alien 
individual shall make on behalf of his nonresident alien principal a 
return of, and shall pay the tax on, all income coming within his 
control as representative or agent which is subject to the income tax 
under subtitle A of the Code. The agency appointment will determine how 
completely the agent is substituted for the principal for tax purposes. 
Any person who collects interest or dividends on deposited securities of 
a nonresident alien individual, executes ownership certificates in 
connection therewith, or sells such securities under special 
instructions shall not be deemed merely by reason of such acts to be the 
responsible representative or agent of the nonresident

[[Page 75]]

alien individual. If the responsible representative or agent does not 
have a specific power of attorney from the nonresident alien individual 
to file a return in his behalf, the return shall be accompanied by a 
statement to the effect that the representative or agent does not 
possess specific power of attorney to file a return for such individual 
but that the return is being filed in accordance with the provisions of 
this subdivision.
    (ii) Cases where power of attorney is required. Whenever a return of 
income of a nonresident alien individual is made by an agent acting 
under a duly authorized power of attorney for that purpose, the return 
shall be accompanied by the power of attorney in proper form, or a copy 
thereof, specifically authorizing him to represent his principal in 
making, executing, and filing the income tax return. Form 2848 may be 
used for this purpose. The agent, as well as the taxpayer, may incur 
liability for the penalties provided for erroneous, false, or fraudulent 
returns. For the requirements regarding signing of returns, see 
Sec. 1.6061-1. The rules of paragraph (e) of Sec. 601.504 of this 
chapter (Statement of Procedural Rules) shall apply under this 
subparagraph in determining whether a copy of a power of attorney must 
be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the nonresident alien individual is otherwise 
required to make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a nonresident alien individual, see section 
874(a) and the regulations thereunder.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such instructions, is 
required to be filed. For corresponding rules applicable to taxable 
years beginning before January 1, 1967, see 26 CFR 1.6012-1(b) (Revised 
as of January 1, 1967).
    (c) Cross reference. For returns by fiduciaries for individuals, 
estates, and trusts, see Sec. 1.6012-3.


(Sec. 1445 (98 Stat. 655; 26 U.S.C. 1445), sec. 6012 (68A Stat. 732; 26 
U.S.C. 6012), and 7805 (68A Stat. 917; 26 U.S.C. 7805) of the Internal 
Revenue Code of 1954)

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-1, see the List of CFR Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.6012-2  Corporations required to make returns of income.

    (a) In general--(1) Requirement of return. Except as provided in 
paragraphs (e) and (g)(1) of this section with respect to charitable and 
other organizations having unrelated business income and to certain 
foreign corporations, respectively, every corporation, as defined in 
section 7701(a)(3), subject to taxation under subtitle A of the Code 
shall make a return of income regardless of whether it has taxable 
income or regardless of the amount of its gross income.
    (2) Existence of corporation. A corporation in existence during any 
portion of a taxable year is required to make a return. If a corporation 
was not in existence throughout an annual accounting period (either 
calendar year or fiscal year), the corporation is required to make a 
return for that fractional part of a year during which it was in 
existence. A corporation is not in existence after it ceases business 
and dissolves, retaining no assets, whether or not under State law it 
may thereafter be treated as continuing as a corporation for certain 
limited purposes connected with winding up its affairs, such as for the 
purpose of suing and being sued. If the corporation has valuable claims 
for which it will bring suit during this period, it has retained assets 
and therefore continues in existence. A corporation does not go out of 
existence if it is turned over to receivers or trustees who continue to 
operate it. If a corporation has received a charter but has never 
perfected its organization and has transacted no business and has no

[[Page 76]]

income from any source, it may upon presentation of the facts to the 
district director be relieved from the necessity of making a return. In 
the absence of a proper showing of such facts to the district director, 
a corporation will be required to make a return.
    (3) Form of return. The return required of a corporation under this 
section shall be made on Form 1120 unless the corporation is a type for 
which a special form is prescribed. The special forms of returns and 
schedules required of particular types of corporations are set forth in 
paragraphs (b) to (g), inclusive, of this section.
    (b) Personal holding companies. A personal holding company, as 
defined in section 542, including a foreign corporation within the 
definition of such section, shall attach Schedule PH, Computation of 
U.S. Personal Holding Company Tax, to the return required by paragraph 
(a) or (g), as the case may be, of this section.
    (c) Insurance companies--(1) Life insurance companies. A life 
insurance company subject to tax under section 802 or 811 shall make a 
return on Form 1120L. There shall be filed with the return (i) a copy of 
the annual statement, the form of which has been approved by the 
National Association of Insurance Commissioners, which is filed by the 
company for the year covered by such return with the insurance 
departments of States, Territories, and the District of Columbia, and 
which shows the reserves used by the company in computing the taxable 
income reported on its return, and (ii) copies of Schedule A (real 
estate) and Schedule D (bonds and stocks) of such annual statement.
    (2) Mutual insurance companies. A mutual insurance company (other 
than a life or marine insurance company and other than a fire insurance 
company subject to the tax imposed by section 831) or an interinsurer or 
reciprocal underwriter subject to tax under section 821 shall make a 
return on Form 1120M. See paragraph (a)(3) of Sec. 1.821-1. There shall 
be filed with the return (i) a copy of the annual statement, the form of 
which has been approved by the National Association of Insurance 
Commissioners, which is filed by the company for the year covered by 
such return with the insurance departments of States, Territories, and 
the District of Columbia, and (ii) copies of Schedule A (real estate) 
and Schedule D (bonds and stocks) of such annual statement.
    (3) Other insurance companies. Every insurance company (other than a 
life or mutual insurance company), every mutual marine insurance 
company, and every mutual fire insurance company, subject to tax under 
section 831, and every mutual savings bank conducting a life insurance 
business and subject to tax under section 594, shall make a return on 
Form 1120. See paragraph (c) of Sec. 1.831-1. There shall be filed with 
the return a copy of the annual statement, the form of which has been 
approved by the National Association of Insurance Commissioners, which 
contains the underwriting and investment exhibit for the year covered by 
such return.
    (4) Foreign insurance companies. The provisions of subparagraphs 
(1), (2), and (3) of this paragraph concerning the returns and 
statements of insurance companies subject to tax under section 802 or 
811, section 821, and section 831, respectively, are applicable to 
foreign insurance companies subject to tax under such sections, except 
that the copy of the annual statement, the form of which has been 
approved by the National Association of Insurance Commissioners, 
required to be submitted with the return shall, in the case of a foreign 
insurance company, be a copy of the statement relating to the United 
States business of such company.
    (d) Affiliated groups. For the forms to be used by affiliated 
corporations filing a consolidated return, see Sec. 1.1502-75.
    (e) Charitable and other organizations with unrelated business 
income. Every organization described in section 511(a)(2) which is 
subject to the tax imposed by section 511(a)(1) on its unrelated 
business taxable income shall make a return on Form 990-T for each 
taxable year if it has gross income, included in computing unrelated 
business taxable income for such taxable year, of $1,000 or more. The 
filing of a return of unrelated business income does not relieve the 
organization of the duty of filing other required returns.
    (f) Farmers' cooperatives. Farmers' cooperative organizations 
described in

[[Page 77]]

section 521 are required to make a return of income whether or not such 
organizations are subject to the taxes imposed by sections 11 and 1201 
as prescribed in section 522 or 1381. The return shall be made on Form 
990-C.
    (g) Returns by foreign corporations. (1) Requirement of return--(i) 
In general. Except as otherwise provided in subparagraph (2) of this 
paragraph, every foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year or 
which has income which is subject to taxation under subtitle A of the 
Code (relating to income taxes) shall make a return on Form 1120-F. 
Thus, for example, a foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year is 
required to file a return on Form 1120-F even though (a) it has no 
income which is effectively connected with the conduct of a trade or 
business in the United States, (b) it has no income from sources within 
the United States, or (c) its income is exempt from income tax by reason 
of an income tax convention or any section of the Code. However, if the 
foreign corporation has no gross income for the taxable year, it is not 
required to complete the return schedules but must attach a statement to 
the return indicating the nature of any exclusions claimed and the 
amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a foreign corporation 
includes treaty income, as defined in paragraph (b)(1) of Sec. 1.871-12, 
a statement shall be attached to the return on Form 1120-F showing with 
respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (iii) Balance sheet and reconciliation of income. At the election of 
the taxpayer, the balance sheets and reconciliation of income, as shown 
on Form 1120-F, may be limited to:
    (a) The assets of the corporation located in the United States and 
to its other assets used in the trade or business conducted in the 
United States, and
    (b) Its income effectively connected with the conduct of a trade or 
business in the United States and its other income from sources within 
the United States.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source--(a) In general. A foreign corporation which at no time during 
the taxable year is engaged in a trade or business in the United States 
is not required to make a return for the taxable year if its tax 
liability for the taxable year is fully satisfied by the withholding of 
tax at source under chapter 3 of the Code. For purposes of this 
subdivision, some of the items of income from sources within the United 
States upon which the tax liability will not have been fully satisfied 
by the withholding of tax at source under chapter 3 of the Code are:
    (1) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at source,
    (2) In the case of bonds or other evidence of indebtedness issued 
after September 25, 1965, amounts described in section 881(a)(3),
    (3) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of 
Sec. 1.1441-4, is not subject to withholding of tax at source.
    (b) Corporations not included. This subdivision (i) shall not apply:
    (1) To a foreign corporation which has income for the taxable year 
which is treated under section 882(d) or (e) and Sec. 1.882-2 as income 
which is effectively connected for the taxable year with the conduct of 
a trade or business in the United States by that corporation,
    (2) To a foreign corporation making a claim under Sec. 301.6402-3 of 
this chapter (Procedure and Administration Regulations) for the refund 
of an overpayment of tax for the taxable year, or
    (3) To a foreign corporation described in paragraph (c)(2)(i) of 
Sec. 1.532-1 whose accumulated taxable income for the

[[Page 78]]

taxable year is determined under paragraph (b)(2) of Sec. 1.535-1.
    (ii) Beneficiaries of estates or trusts. A foreign corporation which 
is a beneficiary of an estate or trust which is engaged in trade or 
business in the United States is not required to make a return for the 
taxable year merely because it is deemed to be engaged in trade or 
business within the United States under section 875(2). However, such 
foreign corporation will be required to make a return if it otherwise 
satisfies the conditions of subparagraph (1)(i) of this paragraph for 
making a return.
    (iii) Special returns and schedules. The provisions of paragraphs 
(b) through (f) of this section shall apply to a foreign corporation 
except that a foreign corporation which is an insurance company to which 
paragraph (c)(3) of this section applies shall make a return on Form 
1120-F and not on Form 1120. If a foreign corporation which is an 
insurance company to which paragraph (c) (1) or (2) of this section 
applies has income for the taxable year from sources within the United 
States which is not effectively connected for that year with the conduct 
of a trade or business in the United States by that corporation, the 
corporation shall attach to its return on Form 1120L or 1120M, as the 
case may be, a separate schedule showing the nature and amount of the 
items of such income, the rate of tax applicable thereto, and the amount 
of tax withheld therefrom under chapter 3 of the Code.
    (3) Representative or agent for foreign corporation--(i) Cases where 
power of attorney is not required. The responsible representative or 
agent within the United States of a foreign corporation shall make on 
behalf of his principal a return of, and shall pay the tax on, all 
income coming within his control as representative or agent which is 
subject to the income tax under subtitle A of the Code. The agency 
appointment will determine how completely the agent is substituted for 
the principal for tax purposes. Any person who collects interest or 
dividends on deposited securities of a foreign corporation, executes 
ownership certificates in connection therewith, or sells such securities 
under special instructions shall not be deemed merely by reason of such 
acts to be the responsible representative or agent of the foreign 
corporation. If the responsible representative or agent does not have a 
specific power of attorney from the foreign corporation to file a return 
in its behalf, the return shall be accompanied by a statement to the 
effect that the representative or agent does not possess specific power 
of attorney to file a return for such corporation but that the return is 
being filed in accordance with the provisions of this subdivision.
    (ii) Cases where power of attorney is required. Whenever a return of 
income of a foreign corporation is made by an agent acting under a duly 
authorized power of attorney for that purpose, the return shall be 
accompanied by the power of attorney in proper form, or a copy thereof 
specifically authorizing him to represent his principal in making, 
executing, and filing the income tax return. Form 2848 may be used for 
this purpose. The agent, as well as the taxpayer, may incur liability 
for the penalties provided for erroneous, false, or fraudulent returns. 
For the requirements regarding signing of returns, see Sec. 1.6062-1. 
The rules of paragraph (e) of Sec. 601.504 of this chapter (Statement of 
Procedural Rules) shall apply under this subparagraph in determining 
whether a copy of a power of attorney must be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the foreign corporation is otherwise required to 
make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a foreign corporation, see section 882(c)(2) 
and the regulations thereunder, and paragraph (b) (2) and (3) of 
Sec. 1.535-1.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such

[[Page 79]]

instructions, is required to be filed. For corresponding rules 
applicable to taxable years beginning before January 1, 1967, see 26 CFR 
1.6012-2(g) (Revised as of January 1, 1967).
    (h) Electing small business corporations. An electing small business 
corporation, whether or not subject to the tax imposed by section 1378, 
shall make a return on Form 1120-S. See also section 6037 and the 
regulations thereunder.
    (i) Items of tax preference--(1) In general. Every corporation 
required to make a return under this section, and having items of tax 
preference (described in section 57 and the regulation thereunder) in an 
amount specified by Form 4626, shall file such form as part of its 
return.
    (2) Organizations with unrelated business income and foreign 
corporations. Regardless of the provisions of paragraphs (e) and (g) of 
this section, any organization described in either such paragraph having 
items of tax preference (described in section 57 and the regulations 
thereunder) in any amount entering into the computation or unrelated 
business income is required to make a return on form 990-T or form 120F, 
respectively, and to attach the required form as part of such return.
    (j) Other provisions. For returns by fiduciaries for corporations, 
see Sec. 1.6012-3. For information returns by corporations regarding 
payments of dividends, see Secs. 1.6042-1 to 1.6042-3, inclusive; 
regarding corporate dissolutions or liquidations, see Sec. 1.6043-1; 
regarding distributions in liquidation, see Sec. 1.6043-2; regarding 
payments of patronage dividends, see Secs. 1.6044-1 to 1.6044-4, 
inclusive; and regarding certain payments of interest, see Secs. 1.6049-
1 and 1.6049-2. For information returns of officers, directors, and 
shareholders of foreign personal holding companies, as defined in 
section 552, see Secs. 1.6035-1 and 1.6035-2. For returns as to 
formation or reorganization of foreign corporations, see Secs. 1.6046-1 
to 1.6046-3, inclusive.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-2, see the List of CFR Sections Affecting in the Finding 
Aids section of this volume.



Sec. 1.6012-3  Returns by fiduciaries.

    (a) For estates and trusts--(1) In general. Every fiduciary, or at 
least one of joint fiduciaries, must make a return of income on form 
1041 (or by use of a composite return pursuant to Sec. 1.6012-5) and 
attach the required form if the estate or trust has items of tax 
preference (as defined in section 57 and the regulations thereunder) in 
any amount:
    (i) For each estate for which he acts if the gross income of such 
estate for the taxable year is $600 or more;
    (ii) For each trust for which he acts, except a trust exempt under 
section 501(a), if such trust has for the taxable year any taxable 
income, or has for the taxable year gross income of $600 or more 
regardless of the amount of taxable income; and
    (iii) For each estate and each trust for which he acts, except a 
trust exempt under section 501(a), regardless of the amount of income 
for the taxable year, if any beneficiary of such estate or trust is a 
nonresident alien.
    (iv) For each trust electing to be taxed as, or as part of, an 
estate under section 645 for which a trustee acts, and for each related 
estate joining in a section 645 election for which an executor acts, if 
the aggregate gross income of the electing trust(s) and related estate, 
if any, joining in the election for the taxable year is $600 or more. 
(For the respective filing requirements of the trustee of each electing 
trust and executor of any related estate, see Sec. 1.645-1).
    (2) Wills and trust instruments. At the request of the Internal 
Revenue Service, a copy of the will or trust instrument (including any 
amendments), accompanied by a written declaration of the fiduciary under 
the penalties of perjury that it is a true and complete copy, shall be 
filed together with a statement by the fiduciary indicating the 
provisions of the will or trust instrument (including any amendments) 
which, in the fiduciary's opinion, determine the extent to which the 
income of the estate or trust is taxable to the estate or trust, the 
beneficiaries, or the grantor, respectively.
    (3) Domiciliary and ancillary representatives. In the case of an 
estate required to file a return under subparagraph (1)

[[Page 80]]

of this paragraph, having both domiciliary and ancillary 
representatives, the domiciliary and ancillary representatives must each 
file a return on Form 1041. The domiciliary representative is required 
to include in the return rendered by him as such domiciliary 
representative the entire income of the estate. The return of the 
ancillary representative shall be filed with the district director for 
his internal revenue district and shall show the name and address of the 
domiciliary representative, the amount of gross income received by the 
ancillary representative, and the deductions to be claimed against such 
income, including any amount of income properly paid or credited by the 
ancillary representative to any legatee, heir, or other beneficiary. If 
the ancillary representative for the estate of a nonresident alien is a 
citizen or resident of the United States, and the domiciliary 
representative is a nonresident alien, such ancillary representative is 
required to render the return otherwise required of the domiciliary 
representative.
    (4) Two or more trusts. A trustee of two or more trusts must make a 
separate return for each trust, even though such trusts were created by 
the same grantor for the same beneficiary or beneficiaries.
    (5) Trusts with unrelated business income. Every fiduciary for a 
trust described in section 511(b)(2) which is subject to the tax imposed 
on its unrelated business taxable income by section 511(b)(1) shall make 
a return on Form 990-T for each taxable year if the trust has gross 
income, included in computing unrelated business taxable income for such 
taxable year, of $1,000 or more. The filing of a return of unrelated 
business income does not relieve the fiduciary of such trust from the 
duty of filing other required returns.
    (6) Charitable remainder trusts. Every fiduciary for a charitable 
remainder annuity trust (as defined in Sec. 1.664-2) or a charitable 
remainder unitrust (as defined in Sec. 1.664-3) shall make a return on 
Form 1041-B for each taxable year of the trust even though it is 
nonexempt because it has unrelated business taxable income. The return 
on Form 1041-B shall be made in accordance with the instructions for the 
form and shall be filed with the designated Internal Revenue office on 
or before the 15th day of the fourth month following the close of the 
taxable year of the trust. A copy of the instrument governing the trust, 
accompanied by a written declaration of the fiduciary under the 
penalties of perjury that it is a true and complete copy, shall be 
attached to the return for the first taxable year of the trust.
    (7) Certain trusts described in section 4947(a)(1). For taxable 
years beginning after December 31, 1980, in the case of a trust 
described in section 4947(a)(1) which has no taxable income for a 
taxable year, the filing requirements of section 6012 and this section 
shall be satisfied by the filing, pursuant to Sec. 53.6011-1 of this 
chapter (Foundation Excise Tax Regulations) and Sec. 1.6033-2(a), by the 
fiduciary of such trust of--
    (i) Form 990-PF if such trust is treated as a private foundation, or
    (ii) Form 990 if such trust is not treated as a private foundation.

When the provisions of this paragraph (a)(7) are met, the fiduciary 
shall not be required to file Form 1041.
    (8) Estate and trusts liable for qualified tax. In the case of an 
estate or trust which is liable for one or more qualified State 
individual income taxes, as defined in section 6362, for a taxable year, 
see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration) for rules relating to returns required to 
be made.
    (9) A trust any portion of which is treated as owned by the grantor 
or another person pursuant to sections 671 through 678. In the case of a 
trust any portion of which is treated as owned by the grantor or another 
person under the provisions of subpart E (section 671 and following) 
part I, subchapter J, chapter 1 of the Internal Revenue Code see 
Sec. 1.671-4.
    (b) For other persons--(1) Decedents. The executor or administrator 
of the estate of a decedent, or other person charged with the property 
of a decedent, shall make the return of income required in respect of 
such decedent. For the decedent's taxable year which ends with the date 
of his death, the return shall cover the period during which he was 
alive. For the filing of returns of income for citizens and alien 
residents of the United States, and

[[Page 81]]

alien residents of Puerto Rico, see paragraph (a) of Sec. 1.6012-1. For 
the filing of a joint return after death of spouse, see paragraph (d) of 
Sec. 1.6013-1.
    (2) Nonresident alien individuals--(i) In general. A resident or 
domestic fiduciary or other person charged with the care of the person 
or property of a nonresident alien individual shall make a return for 
that individual and pay the tax unless:
    (a) The nonresident alien individual makes a return of, and pays the 
tax on, his income for the taxable year,
    (b) A responsible representative or agent in the United States of 
the nonresident alien individual makes a return of, and pays the tax on, 
the income of such alien individual for the taxable year, or
    (c) The nonresident alien individual has appointed a person in the 
United States to act as his agent for the purpose of making a return of 
income and, if such fiduciary is required to file a Form 1041 for an 
estate or trust of which such alien individual is a beneficiary, such 
fiduciary attaches a copy of the agency appointment to his return on 
Form 1041.
    (ii) Income to be returned. A return of income shall be required 
under this subparagraph only if the nonresident alien individual is 
otherwise required to make a return in accordance with paragraph (b) of 
Sec. 1.6012-1. The provisions of that paragraph shall apply in 
determining the form of return to be used and the income to be returned.
    (iii) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a nonresident alien individual, see section 874 
and the regulations thereunder.
    (iv) Alien resident of Puerto Rico. This subparagraph shall not 
apply to the return of a nonresident alien individual who is a bona fide 
resident of Puerto Rico during the entire taxable year. See Sec. 1.876-
1.
    (v) Cross reference. For requirements of withholding tax at source 
on nonresident alien individuals and of returns with respect to such 
withheld taxes, see Secs. 1.1441-1 to 1.1465-1, inclusive.
    (3) Persons under a disability. A fiduciary acting as the guardian 
of a minor, or as the guardian or committee of an insane person, must 
make the return of income required in respect of such person unless, in 
the case of a minor, the minor himself makes the return or causes it to 
be made.
    (4) Corporations. A receiver, trustee in dissolution, trustee in 
bankruptcy, or assignee, who, by order of a court of competent 
jurisdiction, by operation of law or otherwise, has possession of or 
holds title to all or substantially all the property or business of a 
corporation, shall make the return of income for such corporation in the 
same manner and form as corporations are required to make such returns. 
Such return shall be filed whether or not the receiver, trustee, or 
assignee is operating the property or business of the corporation. A 
receiver in charge of only a small part of the property of a 
corporation, such as a receiver in mortgage foreclosure proceedings 
involving merely a small portion of its property, need not make the 
return of income. See also Sec. 1.6041-1, relating to returns regarding 
information at source; Secs. 1.6042-1 to 1.6042-3, inclusive, relating 
to returns regarding payments of dividends; Secs. 1.6044-1 to 1.6044-4, 
inclusive, relating to returns regarding payments of patronage 
dividends; and Secs. 1.6049-1 and 1.6049-2, relating to returns 
regarding certain payments of interest.
    (5) Individuals in receivership. A receiver who stands in the place 
of an individual must make the return of income required in respect of 
such individual. A receiver of only part of the property of an 
individual need not file a return, and the individual must make his own 
return.
    (c) Joint fiduciaries. In the case of joint fiduciaries, a return is 
required to be made by only one of such fiduciaries. A return made by 
one of joint fiduciaries shall contain a statement that the fiduciary 
has sufficient knowledge of the affairs of the person for whom the 
return is made to enable him to make the return, and that the return is, 
to the best of his knowledge and belief, true and correct.
    (d) Other provisions. For the definition of the term ``fiduciary'', 
see section 7701(a)(6) and the regulations

[[Page 82]]

thereunder. For information returns required to be made by fiduciaries 
under section 6041, see Sec. 1.6041-1. As to further duties and 
liabilities of fiduciaries, see section 6903 and Sec. 301.6903-1 of this 
chapter (Regulations on Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6012-3, see the List of CFR Sections Affecting in the Finding 
Aids section of this volume.



Sec. 1.6012-4  Miscellaneous returns.

    For returns by regulated investment companies of tax on 
undistributed capital gain designated for special treatment under 
section 852(b)(3)(D), see Sec. 1.852-9. For returns with respect to tax 
withheld on nonresident aliens and foreign corporations and on tax-free 
covenant bonds, see Secs. 1.1461-1 to 1.1465-1, inclusive. For returns 
of tax on transfers to avoid income tax, see Sec. 1.1494-1. For the 
requirement of an annual report by persons completing a Government 
contract, see 26 CFR (1939) 17.16 (Treasury Decision 4906, approved June 
23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 4909, approved 
June 28, 1939) , as made applicable to section 1471 of the 1954 Code by 
Treasury Decision 6091, approved August 16, 1954 (19 FR 5167, C.B. 1954-
2, 47). See also Sec. 1.1471-1.

[T.D. 7332, 39 FR 44231, Dec. 23, 1974]

    Editorial Note: For the convenience of the user Secs. 16.15 and 
17.16 of 26 CFR (1939) are set forth below:

    Sec. 16.15  Annual reports for income taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax returns are required to be filed an annual 
report on the prescribed form of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act and the 
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a 
statement, preferably in columnar form, showing separately for each such 
contract or subcontract completed by the contracting party within the 
income-taxable year the total contract price, the cost of performing the 
contract or subcontract and the resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon all contracts 
and subcontracts completed within the income-taxable year and the amount 
of the excess profit, if any, for the income-taxable year covered by the 
report. A copy of the report made to the Secretary of the Army (see 
Sec. 16.14) with respect to each contract or subcontract covered in the 
annual report, shall be filed as a part of such annual report. In case 
the income-taxable year of the contracting party is a period of less 
than twelve months (see Sec. 16.1), the report required by this section 
shall be made for such period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part completed by a contracting party within an income-taxable year 
must be filed on or before the 15th day of the ninth month following the 
close of the contracting party's income-taxable year. It is important 
that the contracting party render on or before the due date an annual 
report as nearly complete and final as it is possible for the 
contracting party to prepare. An extension of time granted the 
contracting party for filing its Federal income tax return does not 
serve to extend the time for filing the annual report required by this 
section. Authority consistent with authorizations for granting 
extensions of time for filing Federal income tax returns is hereby 
delegated to the various collectors of internal revenue for granting 
extensions of time for filing the reports required by this section. 
Application for extensions of time for filing such reports should be 
addressed to the district director of internal revenue for the district 
in which the contracting party files its Federal income tax returns and 
must contain a full recital of the causes for the delay.
    Sec. 17.16  Annual reports for income-taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file, with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax return is required to be filed, annual 
reports on the prescribed forms of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act. If any 
contracts or subcontracts so completed by the contracting party were 
entered into for the construction or manufacture of any complete naval 
vessel or any portion thereof, the profit and excess profit on all such 
contracts and subcontracts completed within the income-taxable year 
ending after April 3, 1939 shall be computed in accordance with the 
provisions of Sec. 17.6. If any contracts

[[Page 83]]

or subcontracts so completed by the contracting party were entered into 
for the construction or manufacture of any complete naval aircraft or 
any portion thereof, the profit and excess profit on all such contracts 
and subcontracts completed within the income-taxable year ending after 
April 3, 1939 shall be computed in accordance with the provisions of 
Sec. 17.7. There shall be included as a part of the annual report a 
statement, preferably in columnar form, showing separately for each 
contract or subcontract completed by the contracting party within the 
income-taxable year and covered by the report, the total contract price, 
the cost of performing the contract or subcontract and resulting profit 
or loss on each contract or subcontract together with a summary 
statement showing in detail the computation of the net profit or net 
loss upon each group of contracts and subcontracts covered by the report 
and the amount of the excess profit, if any, with respect to each group 
of contracts and subcontracts covered by the report. A copy of the 
report made to the Secretary of the Navy (see Sec. 17.15) with respect 
to each contract or subcontract covered in the annual report, shall be 
filed as a part of such annual report. In case the income-taxable year 
of the contracting party is a period of less than twelve months (see 
Sec. 17.1), the reports required by this section shall be made for such 
period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts completed by a contracting party within an income-taxable 
year ending after April 3, 1939 shall be filed on or before the 15th day 
of the ninth month following the close of the contracting party's 
income-taxable year. It is important that the contracting party render 
on or before the due date annual reports as nearly complete and final as 
it is possible for the contracting party to prepare. An extension of 
time granted the contracting party for filing its Federal income tax 
return does not serve to extend the time for filing the annual reports 
required by this section. Authority consistent with authorizations for 
granting extensions of time for filing Federal income tax returns is 
hereby delegated to the various district directors of internal revenue 
for granting extensions of time for filing the reports required by this 
section. Application for extension of time for filing such reports 
should be addressed to the district director of internal revenue for the 
district in which the contracting party files its Federal income tax 
returns and must contain a full recital of the causes for the delay.



Sec. 1.6012-5  Composite return in lieu of specified form.

    The Commissioner may authorize the use, at the option of a person 
required to make a return, of a composite return in lieu of any form 
specified in this part for use by such a person, subject to such 
conditions, limitations, and special rules governing the preparation, 
execution, filing, and correction thereof as the Commissioner may deem 
appropriate. Such composite return shall consist of a form prescribed by 
the Commissioner and an attachment or attachments of magnetic tape or 
other approved media. Notwithstanding any provisions in this part to the 
contrary, a single form and attachment may comprise the returns of more 
than one such person. To the extent that the use of a composite return 
has been authorized by the Commissioner, references in this part to a 
specific form for use by such a person shall be deemed to refer also to 
a composite return under this section.

[T.D. 7200, 37 FR 16544, Aug. 16, 1972]



Sec. 1.6012-6  Returns by political organizations.

    (a) Requirement of return--(1) In general. For taxable years 
beginning after December 31, 1974, every political organization 
described in section 527(e)(1), and every fund described in section 
527(f)(3) or section 527(g), and every organization described in section 
501(c) and exempt from taxation under section 501(a) shall make a return 
of income within the time provided in section 6072(b), if a tax is 
imposed on such an organization or fund by section 527(b).
    (2) Taxable years beginning after December 31, 1971, and before 
January 1, 1975. For taxable years beginning after December 31, 1971, 
and before January 1, 1975, any political organization which would be 
described in section 527(e)(1) if such section applied to such years 
shall not be required to make a return if such organization would not be 
required to make a return under paragraph (a)(1) of this section.
    (b) Form of return. The return required by an organization or fund 
upon which a tax is imposed by section 527(b) shall be made on Form 
1120-POL.

[T.D. 7516, 42 FR 57312, Nov. 2, 1977; 43 FR 2721, Jan. 19, 1978]

[[Page 84]]



Sec. 1.6013-1  Joint returns.

    (a) In general. (1) A husband and wife may elect to make a joint 
return under section 6013(a) even though one of the spouses has no gross 
income or deductions. For rules for determining whether individuals 
occupy the status of husband and wife for purposes of filing a joint 
return, see paragraph (a) of Sec. 1.6013-4. For any taxable year with 
respect to which a joint return has been filed, separate returns shall 
not be made by the spouses after the time for filing the return of 
either has expired. See, however, paragraph (d)(5) of this section for 
the right of an executor to file a late separate return for a deceased 
spouse and thereby disaffirm a timely joint return made by the surviving 
spouse.
    (2) A joint return of a husband and wife (if not made by an agent of 
one or both spouses) shall be signed by both spouses. The provisions of 
paragraph (a)(5) of Sec. 1.6012-1, relating to returns made by agents, 
shall apply where one spouse signs a return as agent for the other, or 
where a third party signs a return as agent for one or both spouses.
    (b) Nonresident alien. A joint return shall not be made if either 
the husband or wife at any time during the taxable year is a nonresident 
alien, unless an election is in effect for the taxable year under 
section 6013 (g) or (h) and the regulations thereunder.
    (c) Different taxable years. Except as otherwise provided in this 
section, a husband and wife shall not file a joint return if they have 
different taxable years.
    (d) Joint return after death. (1) Section 6013(a)(2) provides that a 
joint return may be made for the survivor and the deceased spouse or for 
both deceased spouses if the taxable years of such spouses begin on the 
same day and end on different days only because of the death of either 
or both. Thus, if a husband and wife make this return on a calendar year 
basis, and the wife dies on August 1, 1956, a joint return may be made 
with respect to the calendar year 1956 of the husband and the taxable 
year of the wife beginning on January 1, 1956, and ending with her death 
on August 1, 1956. Similarly, if husband and wife both make their 
returns on the basis of a fiscal year beginning on July 1 and the wife 
dies on October 1, 1956, a joint return may be made with respect to the 
fiscal year of the husband beginning on July 1, 1956, and ending on June 
30, 1957, and with respect to the taxable year of the wife beginning on 
July 1, 1956, and ending with her death on October 1, 1956.
    (2) The provision allowing a joint return to be made for the taxable 
year in which the death of either or both spouses occurs is subject to 
two limitations. The first limitation is that if the surviving spouse 
remarries before the close of his taxable year, he shall not make a 
joint return with the first spouse who died during the taxable year. In 
such a case, however, the surviving spouse may make a joint return with 
his new spouse provided the other requirements with respect to the 
filing of a joint return are met. The second limitation is that the 
surviving spouse shall not make a joint return with the deceased spouse 
if the taxable year of either spouse is a fractional part of a year 
under section 443(a)(1) resulting from a change of accounting period. 
For example, if a husband and wife make their returns on the calendar 
year basis and the wife dies on March 1, 1956, and thereafter the 
husband receives permission to change his annual accounting period to a 
fiscal year beginning July 1, 1956, no joint return shall be made for 
the short taxable year ending June 30, 1956. Similarly, if a husband and 
wife who make their returns on a calendar year basis receive permission 
to change to a fiscal year beginning July 1, 1956, and the wife dies on 
June 1, 1956, no joint return shall be made for the short taxable year 
ending June 30, 1956.
    (3) Section 6013(a)(3) provides for the method of making a joint 
return in the case of the death of one spouse or both spouses. The 
general rule is that, in the case of the death of one spouse, or of both 
spouses, the joint return with respect to the decedent may be made only 
by his executor or administrator, as defined in paragraph (c) of 
Sec. 1.6013-4. An exception is made to this general rule whereby, in the 
case of the death of one spouse, the joint return may be made by the 
surviving spouse with respect to both him and the decedent if all the 
following conditions exist:

[[Page 85]]

    (i) No return has been made by the decedent for the taxable year in 
respect of which the joint return is made;
    (ii) No executor or administrator has been appointed at or before 
the time of making such joint return; and
    (iii) No executor or administrator is appointed before the last day 
prescribed by law for filing the return of the surviving spouse.

These conditions are to be applied with respect to the return for each 
of the taxable years of the decedent for which a joint return may be 
made if more than one such taxable year is involved. Thus, in the case 
of husband and wife on the calendar year basis, if the wife dies in 
February 1957, a joint return for the husband and wife for 1956 may be 
made if the conditions set forth in this subparagraph are satisfied with 
respect to such return. A joint return also may be made by the survivor 
for both himself and the deceased spouse for the calendar year 1957 if 
it is separately determined that the conditions set forth in this 
subparagraph are satisfied with respect to the return for such year. If, 
however, the deceased spouse should, prior to her death, make a return 
for 1956, the surviving spouse may not thereafter make a joint return 
for himself and the deceased spouse for 1956.
    (4) If an executor or administrator is appointed at or before the 
time of making the joint return or before the last day prescribed by law 
for filing the return of the surviving spouse, the surviving spouse 
cannot make a joint return for himself and the deceased spouse whether 
or not a separate return for the deceased spouse is made by such 
executor or administrator. In such a case, any return made solely by the 
surviving spouse shall be treated as his separate return. The joint 
return, if one is to be made, must be made by both the surviving spouse 
and the executor or administrator. In determining whether an executor or 
administrator is appointed before the last day prescribed by law for 
filing the return of the surviving spouse, an extension of time for 
making the return is included.
    (5) If the surviving spouse makes the joint return provided for in 
subparagraph (3) of this paragraph and thereafter an executor or 
administrator of the decedent is appointed, the executor or 
administrator may disaffirm such joint return. This disaffirmance, in 
order to be effective, must be made within one year after the last day 
prescribed by law for filing the return of the surviving spouse 
(including any extension of time for filing such return) and must be 
made in the form of a separate return for the taxable year of the 
decedent with respect to which the joint return was made. In the event 
of such proper disaffirmance the return made by the survivor shall 
constitute his separate return, that is, the joint return made by him 
shall be treated as his return and the tax thereon shall be computed by 
excluding all items properly includible in the return of the deceased 
spouse. The separate return made by the executor or administrator shall 
constitute the return of the deceased spouse for the taxable year.
    (6) The time allowed the executor or administrator to disaffirm the 
joint return by the making of a separate return does not establish a new 
due date for the return of the deceased spouse. Accordingly, the 
provisions of sections 6651 and 6601, relating to delinquent returns and 
delinquency in payment of tax, are applicable to such return made by the 
executor in disaffirmance of the joint return.
    (e) Return of surviving spouse treated as joint return. For 
provisions relating to the treatment of the return of a surviving spouse 
as a joint return for each of the next two taxable years following the 
year of the death of the spouse, see section 2 and Sec. 1.2-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7274, 38 FR 
11345, May 7, 1973; T.D. 7670, 45 FR 6929, Jan. 31, 1980]



Sec. 1.6013-2  Joint return after filing separate return.

    (a) In general. (1) Where an individual has filed a separate return 
for a taxable year for which a joint return could have been made by him 
and his spouse under section 6013(a), and the time prescribed by law for 
filing the return for such taxable year has expired, such individual and 
his spouse may, under conditions hereinafter set forth, make a joint 
return for such taxable year. The joint return filed pursuant to section 
6013(b) shall constitute the return

[[Page 86]]

of the husband and wife for such year, and all payments, credits, 
refunds, or other repayments, made or allowed with respect to the 
separate return of either spouse are to be taken into account in 
determining the extent to which the tax based on the joint return has 
been paid.
    (2) If a joint return is made under section 6013(b), any election, 
other than the election to file a separate return, made by either spouse 
in his separate return for the taxable year with respect to the 
treatment of any income, deduction, or credit of such spouse shall not 
be changed in the making of the joint return where such election would 
have been irrevocable if the joint return had not been made. Thus, if 
one spouse has made an irrevocable election to adopt and use the last-
in, first-out inventory method under section 472, this election may not 
be changed upon making the joint return under section 6013(b).
    (3) A joint return made under section 6013(b) after the death of 
either spouse shall, with respect to the decedent, be made only by his 
executor or administrator. Thus, where no executor or administrator has 
been appointed, a joint return cannot be made under section 6013(b).
    (4) A nonresidential alien treated as a resident under section 6013 
(g) or (h) for any taxable year ending on or after December 31, 1975, 
and the alien's U.S. citizen or resident spouse may file a joint return 
for that taxable year, even though one or both of the spouses have 
previously filed separate returns for that taxable year. In this case, 
the rule in paragraph (a)(3) of this section does not apply.
    (b) Limitations with respect to making of election. A joint return 
shall not be made under section 6013(b)(1) with respect to a taxable 
year:
    (1) Beginning on or before July 30, 1996, unless there is paid in 
full at or before the time of the filing of the joint return the amount 
shown as tax upon such joint return; or
    (2) After the expiration of three years from the last day prescribed 
by law for filing the return for such taxable year determined without 
regard to any extension of time granted to either spouse; or
    (3) After there has been mailed to either spouse, with respect to 
such taxable year, a notice of deficiency under section 6212, if the 
spouse, as to such notice, files a petition with the Tax Court of the 
United States within the time prescribed in section 6213; or
    (4) After either spouse has commenced a suit in any court for the 
recovery of any part of the tax for such taxable year; or
    (5) After either spouse has entered into a closing agreement under 
section 7121 with respect to such taxable year, or after any civil or 
criminal case arising against either spouse with respect to such taxable 
year has been compromised under section 7122.
    (c) When return deemed filed; assessment and collection; credit or 
refund. (1) For the purpose of section 6501, relating to the period of 
limitations upon assessment and collection, and section 6651, relating 
to delinquent returns, a joint return made under section 6013(b) shall 
be deemed to have been filed, giving due regard to any extension of time 
granted to either spouse, on the following date:
    (i) Where both spouses filed separate returns, prior to making the 
joint return under section 6013(b), on the date the last separate return 
of either spouse was filed for the taxable year, but not earlier than 
the last date prescribed by law for the filing of the return of either 
spouse;
    (ii) Where only one spouse was required and did file a return prior 
to the making of the joint return under section 6013(b), on the date of 
the filing of the separate return, but not earlier than the last day 
prescribed by law for the filing of such return; or
    (iii) Where both spouses were required to file a return, but only 
one spouse did so file, on the date of the filing of the joint return 
under section 6013(b).
    (2) For the purpose of section 6511, relating to refunds and 
credits, a joint return made under section 6013(b) shall be deemed to 
have been filed on the last date prescribed by law for filing the return 
for such taxable year, determined without regard to any extension of 
time granted to either spouse for filing the return or paying the tax.

[[Page 87]]

    (d) Additional time for assessment. In the case of a joint return 
made under section 6013(b), the period of limitations provided in 
sections 6501 and 6502 shall not be less than one year after the date of 
the actual filing of such joint return. The expiration of the one year 
is to be determined without regard to the rules provided in paragraph 
(c)(1) of this section, relating to the application of sections 6501 and 
6651 with respect to a joint return made under section 6013(b).
    (e) Additions to the tax and penalties. (1) Where the amount shown 
as the tax by the husband and wife on a joint return made under section 
6013(b) exceeds the aggregate of the amounts shown as tax on the 
separate return of each spouse, and such excess is attributable to 
negligence, intentional disregard of rules and regulations, or fraud at 
the time of the making of such separate return, there shall be assessed, 
collected, and paid in the same manner as if it were a deficiency an 
additional amount as provided by the following:
    (i) If any part of such excess is attributable to negligence, or 
intentional disregard of rules and regulations, at the time of the 
making of such separate return, but without any intent to defraud, this 
additional amount shall be 5 percent of the total amount of the excess.
    (ii) If any part of such excess is attributable to fraud with intent 
to evade tax at the time of the making of such separate return, this 
additional amount shall be 50 percent of the total amount of the excess. 
The latter addition is in lieu of the 50 percent addition to the tax 
provided in section 6653(b).
    (2) For purposes of section 7206 (1) and (2) and section 7207 
(relating to criminal penalties in the case of fraudulent returns), the 
term ``return'' includes a separate return filed by a spouse with 
respect to a taxable year for which a joint return is made under section 
6013(b) after the filing of a separate return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7670, 45 FR 
6929, Jan. 31, 1980; T.D. 8725, 62 FR 39117, July 22, 1997]



Sec. 1.6013-3  Treatment of joint return after death of either spouse.

    For purposes of section 21 (relating to change in rates during a 
taxable year), section 443 (relating to returns for a period of less 
than 12 months), and section 7851(a)(1)(A) (relating to the 
applicability of certain provisions of the Internal Revenue Code of 1954 
and the Internal Revenue Code of 1939), where the husband and wife have 
different taxable years because of death of either spouse, the joint 
return shall be treated as if the taxable years of both ended on the 
date of the closing of the surviving spouse's taxable year. Thus, in 
cases where the Internal Revenue Code of 1939 otherwise would apply to 
the taxable year of the decedent spouse and the Internal Revenue Code of 
1954 would apply to the taxable year of the surviving spouse, this 
provision makes the Internal Revenue Code of 1954 applicable to the 
taxable years of both spouses if a joint return is filed.



Sec. 1.6013-4  Applicable rules.

    (a) Status as husband and wife. For the purpose of filing a joint 
return under section 6013, the status as husband and wife of two 
individuals having taxable years beginning on the same day shall be 
determined:
    (1) If the taxable year of each individual is the same, as of the 
close of such year; and
    (2) If the close of the taxable year is different by reason of the 
death of one spouse, as of the time of such death.

An individual legally separated from his spouse under a decree of 
divorce or of separate maintenance shall not be considered as married. 
However, the mere fact that spouses have not lived together during the 
course of the taxable year shall not prohibit them from making a joint 
return. A husband and wife who are separated under an interlocutory 
decree of divorce retain the relationship of husband and wife until the 
decree becomes final. The fact that the taxpayer and his spouse are 
divorced or legally separated at any time after the close of the taxable 
year shall not deprive them of their right to file a joint return for 
such taxable year under section 6013.

[[Page 88]]

    (b) Computation of income, deductions, and tax. If a joint return is 
made, the gross income and adjusted gross income of husband and wife on 
the joint return are computed in an aggregate amount and the deductions 
allowed and the taxable income are likewise computed on an aggregate 
basis. Deductions limited to a percentage of the adjusted gross income, 
such as the deduction for charitable, etc., contributions and gifts, 
under section 170, will be allowed with reference to such aggregate 
adjusted gross income. A similar rule is applied in the case of the 
limitation of section 1211(b) on the allowance of losses resulting from 
the sale or exchange of capital assets (see Sec. 1.1211-1). Although 
there are two taxpayers on a joint return, there is only one taxable 
income. The tax on the joint return shall be computed on the aggregate 
income and the liability with respect to the tax shall be joint and 
several. For computation of tax in the case of a joint return, see 
Sec. 1.2-1. For tax in the case of a joint return of husband and wife 
electing to pay the optional tax under section 3, see Sec. 1.3-1. For 
the election not to show on a joint return the amount of tax due in 
connection therewith, see paragraph (c) of Sec. 1.6014-1 and paragraph 
(d) of Sec. 1.6014-2. For separate computations of the self-employment 
tax of each spouse on a joint return, see paragraph (b) of Sec. 1.6017-
1.
    (c) Definition of executor or administrator. For purposes of section 
6013 the term ``executor or administrator'' means the person who is 
actually appointed to such office and not a person who is merely in 
charge of the property of the decedent.
    (d) Return signed under duress. If an individual asserts and 
establishes that he or she signed a return under duress, the return is 
not a joint return. The individual who signed such return under duress 
is not jointly and severally liable for the tax shown on the return or 
any deficiency in tax with respect to the return. The return is adjusted 
to reflect only the tax liability of the individual who voluntarily 
signed the return, and the liability is determined at the applicable 
rates in section 1(d) for married individuals filing separate returns. 
Section 6212 applies to the assessment of any deficiency in tax on such 
return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7102, 36 FR 
5497, Mar. 24, 1971; T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6013-6  Election to treat nonresident alien individual as resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if, at the close of that year, one spouse is a citizen 
or resident of the United States and the other spouse is a nonresident 
alien. The effect of the election is that each spouse is treated as a 
resident of the United States for purposes of chapters 1, 5, and 24 and 
sections 6012, 6013, 6072, and 6091 of the Code for the entire taxable 
year. An election made under this section is in effect for the taxable 
year for which made and for all subsequent years of the husband and 
wife, except:
    (i) Any taxable year for which the election is suspended, as 
described in paragraph (a)(3) of this section, and
    (ii) Any taxable year for which the election is terminated in 
accordance with paragraph (b) of this section and all subsequent taxable 
years.

A husband and wife may not make an election if an election previously 
made under this section by either spouse has been terminated under 
paragraph (b) of this section.
    (2) Particular rules. (i) As used in paragraph (a)(3) of this 
section, the term ``U.S. spouse'' means any married individual who is a 
citizen or resident of the United States at any time during a taxable 
year.
    (ii) An individual's residence is determined by application of the 
principles of Secs. 301.7701(b)-1 through 301.7701(b)-9 of this chapter 
relating to what constitutes residence in the United States by an alien 
individual.
    (iii) Whether two individuals are married at the close of a taxable 
year is determined by application of the rules in Sec. 1.6013-4(a).
    (iv) The provisions of section 879 and the regulations thereunder 
shall not

[[Page 89]]

apply for any taxable year for which an election under this section is 
in effect.
    (v) An individual who makes an election under this section may not, 
for United States income tax purposes, claim under any United States 
income tax treaty not to be a U.S. resident. The relationship of U.S. 
income tax treaties and the election under this section is illustrated 
by the following example.

    Example. H, a U.S. citizen, is married to W, a nonresident alien of 
the United States and a domiciliary of country X. H and W maintain their 
only permanent home in country X. W receives both U.S. source and 
country X source interest during the taxable year. The interest is not 
effectively connected with a permanent establishment or a fixed base in 
any country. H and W make the section 6013 (g) election. Under article 
ii (1) of the United States--country X Income Tax Convention interest 
derived and beneficially owned by a resident of one contracting state is 
exempt from tax in the other contracting state. Article 4 (1) of the 
treaty provides that an individual is a resident of a contracting state 
if subject to tax in that country by reason of the individual's 
domicile, residence, or citizenship. Under article 4 (1) of the treaty, 
W is a resident of country X by virtue of her domocile in country X and 
also of the United States by virtue of the section 6013 (g) election. 
Article 4 (2) of the treaty provides that if an individual is a resident 
of both the United States and country X by reason of article 4 (1), the 
individual shall be deemed to be a resident of the contracting state in 
which he or she has a permanent home available. Because W's sole 
permanent home is in country X, under article 4 (2) of the treaty W is 
treated as a resident of country X for purposes of the treaty. Because W 
has elected under section 6013(g) to be treated as a U.S. resident (and 
thus to be taxed on worldwide income), W may not, for U.S. income tax 
purposes, claim under the treaty not to be a U.S. resident. W, 
therefore, is subject to U.S. income tax on the interest. For purposes 
of country X income tax, W is considered a resident of country X under 
the treaty.

    (3) Suspension of election. (i) An election made under this section 
is suspended and is not in effect for a taxable year subsequent to the 
first taxable year for which made if neither spouse is a U.S. spouse 
during that subsequent taxable year. Thus, for example, the election is 
in suspense if both spouses are nonresident aliens for the entire 
taxable year.
    (ii) If either spouse dies during any taxable year for which the 
election under this section is in effect, other than the first taxable 
year for which the election is to be in effect, the taxable year shall 
include, solely for purposes of this paragraph (a)(3), only those days 
during the taxable year on which both spouses are alive. Thus, for 
example, if the U.S. spouse dies during the taxable year, the election 
is not suspended for that year even if the surviving nonresident alien 
spouse never acquires U.S. citizenship or residency. Similarly, if the 
nonresident alien spouse dies during the taxable year, the election is 
not suspended for that year even if the surviving U.S. spouse 
subsequently abandons U.S. citizenship or residency. However, if neither 
spouse was a U.S. spouse at any time during the period of the taxable 
year when both spouses were alive, the election is suspended for that 
year even if the surviving spouse subsequently acquires U.S. citizenship 
or residency.

For the effect of the death of either spouse on the status of the 
election in subsequent taxable years, see paragraph (b)(2) of this 
section.
    (4) Time and manner of making an election. (i) A husband and wife 
shall make the election under this section by attaching a statement to a 
joint return for the first taxable year for which the election is to be 
in effect. The election must be made before the expiration of the period 
prescribed by section 6511(a) (or section 6511(c) if the period is 
extended by agreement) for making a claim for credit or refund. If 
either or both spouses die after the close of the taxable year but 
before the joint return is filed, the election may be made by the 
executor, administrator, or other person charged with the property of 
the deceased spouse. If the election is made with a joint amended 
return, the amended return should be made on Form 1040 or 1040A, the 
word ``Amended'' should be written clearly on the front of the return, 
and an amended return also must be filed for each subsequent taxable 
year as to which a return previously has been filed by either spouse.
    (ii) The statement must contain a declaration that the election is 
being made and that the requirements of paragraph (a)(1) of this section 
are met for the taxable year. The statement

[[Page 90]]

must also contain the name, address, and taxpayer identifying number of 
each spouse. If the election is being made on behalf of a deceased 
spouse, the statement must contain the name and address of the executor, 
administrator, or other person making the election on behalf of the 
decreased spouse. The statement must be signed by both persons making 
the election.
    (b) Termination of election--(1) Revocation. (i) An election under 
this section shall terminate if either spouse revokes the election. An 
election that is revoked terminates as of the first taxable year for 
which the last day prescribed by section 6072(a) and 6081(a) for filing 
the return of tax has not yet occurred.
    (ii) Revocation of the election is made by filing a statement of 
revocation in the following manner. If the spouse revoking the election 
is required to file a return under section 6012, the statement is filed 
by attaching it to the return for the first taxable year to which the 
revocation applies. If the spouse revoking the election is not required 
to file a return under section 6012, but files a claim for refund under 
section 6511, the statement is filed by attaching it to the claim for 
refund. If the spouse revoking the election is not required to file a 
return and does not file a claim for refund, the statement is filed by 
submitting it to the service center director with whom was filed the 
most recent joint return of the spouses. The revocation may, if the 
revoking spouse dies after the close of the first taxable year to which 
the revocation applies but before the return, claim for refund, or 
statement of revocation is filed, be made by the executor, administrator 
or other person charged with the property of the deceased spouse.
    (iii) A revocation of the election is effective as of a particular 
taxable year if it is filed on or before the last day prescribed by 
section 6072(a) and 6081(a) for filing the return of tax for that 
taxable year. However, the revocation is not final until that last day.
    (iv) The statement of revocation must contain a declaration that the 
election under this section is being revoked. The statement must also 
contain the name, address, and taxpayer identifying number of each 
spouse. If the revocation is being made on behalf of a deceased spouse, 
the statement must contain the name and address of the executor, 
administrator, or other person revoking the election on behalf of the 
deceased spouse. The statement must also include a list of the States, 
foreign countries, and possessions of the United States which have 
community property laws and in which:
    (A) Each spouse is domiciled, or
    (B) real property is located from which either of the spouses 
receives income.

The statement must be signed by the person revoking the election.
    (2) Death. An election under this section shall terminate if either 
spouse dies. An election that terminates on account of death terminates 
as of the first taxable year of the surviving spouse following the 
taxable year in which the death occurred. However, if the surviving 
spouse is a citizen or resident of the United States who is entitled to 
the benefits of section 2, the election terminates as of the first 
taxable year following the last taxable year for which the surviving 
spouse is entitled to the benefits of section 2. If both spouses die 
within the same taxable year, the election terminates as of the first 
day after the close of the taxable year in which the deaths occurred.
    (3) Legal separation. An election under this section terminates if 
the spouses legally separate under a degree of divorce or of separate 
maintenance. An election that terminates on account of legal separation 
terminates as of the close of the taxable year preceding the taxable 
year in which the separation occurs. The rules in Sec. 1.6013-4(a) are 
relevant in determining whether two spouses are legally separated.
    (4) Inadequate records. An election under this section may be 
terminated by the Commissioner if it is determined that either spouse 
has failed to keep adequate records. An election that is terminated on 
account of inadequate records terminates as of the close of the taxable 
year preceding the taxable year for which the Commissioner determines 
that the election should be terminated. Adequate records are the books, 
records, and other information resonably necessary

[[Page 91]]

to ascertain the amount of liability for taxes under chapters 1, 5, and 
24 of the code of either spouse for the taxable year. Adequate records 
also includes the granting of access to the books and records.
    (c) Illustrations. The application of this section is illustrated by 
the following examples. In each case the individual's taxable year is 
the calendar year and the spouses are not legally separated.

    Example (1). W, a U.S. citizen for the entire taxable year 1979, is 
married to H, a nonresident alien individual. W and H may make the 
section 6013(g) election for 1979 by filing the statement of election 
with a joint return. If W and H make the election, income from sources 
within and without the United States received by W and H in 1979 and 
subsequent years must be included in gross income for each taxable year 
unless the election later is terminated or suspended. While W and H must 
file a joint return for 1979, joint or separate returns may be filed for 
subsequent years.
    Example (2). H and W are husband and wife and are both nonresident 
alien individuals. In June 1980 H becomes a U.S. resident and remains a 
resident for the balance of the year. H and W may make the section 
6013(g) election for 1980. If H and W make the election, income from 
sources within and without the United States received by H and W for the 
entire taxable year 1980 and subsequent years must be included in gross 
income for each taxable year, unless the election later is terminated or 
suspended.
    Example (3) . W, a U.S. resident on December 31, 1981, is married to 
H, a nonresident alien. W and H make the section 6013(g) election and 
file joint returns for 1981 and succeeding years. On January 10, 1987, W 
becomes a nonresident alien. H has remained a nonresident alien. W and H 
may file a joint return or separate returns for 1987. As neither W or H 
is a U.S. resident at any time during 1988, their election is suspended 
for 1988. If W and H have U.S. source or foreign source income 
effectively connected with the conduct of a U.S. trade or business in 
1988, they must file separate returns as nonresident aliens. W becomes a 
U.S. resident again on January 5, 1990. Their election no longer is in 
suspense. Income from sources within and without the United States 
received by W or H in the years their election is not suspended must be 
included in gross income for each taxable year.
    Example (4). H, a U.S. citizen for the entire taxable year 1979, is 
married to W, who is not a U.S. citizen. While W believes that she is a 
U.S. resident, H and W make the section 6013(g) election for 1979 to 
cover the possibility that later it would be determined that she is a 
nonresident alien during 1979. The election for 1979 will not be 
considered evidence that W was a nonresident alien in prior years. 
Income from sources within and without the United States received by H 
amd W in 1979 and subsequent years must be included in gross income for 
each taxable year, unless the election later is terminated or suspended.

[T.D. 7670, 45 FR 6929, Jan. 31, 1980, as amended by T.D. 7842, 47 FR 
49842, Nov. 3, 1982; T.D. 8411, 57 FR 15241, Apr. 27, 1992]



Sec. 1.6013-7  Joint return for year in which nonresident alien becomes resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if one spouse is a citizen or resident of the United 
States on the last day of that taxable year and the other spouse is a 
nonresident alien at the beginning of that taxable year and a citizen or 
resident of the United States at the close of that taxable year. Two 
married individuals who are nonresident aliens at the beginning of a 
taxable year and who are U.S. citizens or residents on the last day of 
that taxable year qualify for the election. The effect of the election 
is that each spouse is treated as a resident of the United States for 
purposes of chapters 1, 5, and 24 and sections 6012, 6013, 6072, and 
6091 of the code for all of that taxable year. A husband and wife may 
not make an election if an election has previously been made under this 
section by either spouse.
    (2) Particular rules. The rules in subdivisions (ii) through (v) of 
Sec. 1.6013-6(a)(2) are applicable to this section.
    (3) Time and manner of making an election. A husband and wife shall 
make the election under this section in accordance with the rules in 
Sec. 1.6013-6(a)(4).
    (b) Section 6013(g) election in effect. If an election under section 
6013(g) is in effect for a year subsequent to the first taxable year for 
which made and during that subsequent year the husband and wife meet the 
requirements of section 6013(h) and paragraph (a)(1) of this section, 
then the election under section 6013(g) shall apply to that subsequent

[[Page 92]]

taxable year. A separate election under section 6013(h) is not required 
for that subsequent taxable year.

[T.D. 7670, 45 FR 6931, Jan. 31, 1980]



Sec. 1.6014-1  Tax not computed by taxpayer for taxable years beginning before January 1, 1970.

    (a) In general. If an individual is entitled under paragraph (a)(7) 
of Sec. 1.6012-1 to use as his return Form 1040A, he may elect not to 
show thereon the amount of the tax due in connection with such return if 
his gross income is less than $5,000.
    (b) Computation and payment of tax. A taxpayer who, in accordance 
with paragraph (a) of this section, elects not to show the tax on Form 
1040A is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration).
    (c) Joint return. (1) A husband and wife who, pursuant to paragraph 
(a)(7) of Sec. 1.6012-1, file a joint return on Form 1040A may elect not 
to show the tax on such return if their aggregate gross income for the 
taxable year is less than $5,000.
    (2) The tax computed for the taxpayer who files Form 1040A and 
elects not to show thereon the tax due shall be the lesser of the 
following amounts:
    (i) A tax computed as though the return on Form 1040A constituted 
the separate returns of the spouses, or
    (ii) A tax computed as though the return on Form 1040A constituted a 
joint return.
    (d) Married individuals filing separate returns. In the case of a 
married individual who files a separate return and who elects under this 
section not to show his tax on Form 1040A his tax shall be computed with 
reference to the 10-percent standard deduction rather than the minimum 
standard deduction.
    (e) This section shall apply to taxable years beginning before 
January 1, 1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR 
11678, Dec. 6, 1961; T.D. 6792, 30 FR 531, Jan. 15, 1965; T.D. 7102, 36 
FR 5497, Mar. 24, 1971]



Sec. 1.6014-2  Tax not computed by taxpayer for taxable years beginning after December 31, 1969.

    (a) In general. An individual subject to the tax imposed by section 
1 of the Code may, in accordance with the instructions applicable to the 
income tax return to be filed, elect, for any taxable year beginning 
after December 31, 1969, not to show on his income tax return for such 
year the amount of tax due in connection with such return.
    (b) Restriction on making an election. The election pursuant to this 
section shall not be made by an individual who does not file his return 
(or amended return) making such election on or before the date 
prescribed in section 6072(a) for the filing of the original return 
(determined without regard to any extension of time).
    (c) Effects of election. (1) A taxpayer who, in accordance with the 
provisions of this section, elects not to show the tax on his income tax 
return is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration). The computation 
of tax by the Internal Revenue Service shall be treated for purposes of 
this chapter as if made by the taxpayer, and such computation or the 
issuance of a notice or refund pursuant thereto shall not relieve the 
taxpayer of liability for any deficiency (although the deficiency is 
based upon an amount of tax different from that computed for the 
taxpayer by the Internal Revenue Service) or affect the rights of the 
Internal Revenue Service with respect to any subsequent audit or other 
review of the taxpayer's return.

[[Page 93]]

    (2) Where the election provided for in this section is made by a 
taxpayer who takes the standard deduction and who has adjusted gross 
income of less than $10,000, such election constitutes an election to 
pay the tax imposed by section 3.
    (3) A taxpayer who makes an election under section 6014 shall not be 
precluded from claiming:
    (i) Status as a head of household or a surviving spouse;
    (ii) The credit under section 31 (relating to tax withheld on 
wages);
    (iii) The credit under section 37 (relating to retirement income);
    (iv) The credit under section 38 (relating to investment in certain 
depreciable property);
    (v) The credit under section 39 (relating to certain uses of 
gasoline and lubricating oil);
    (vi) The credit under section 41 (relating to contributions to 
candidates for public office);
    (vii) The credit under section 42 (relating to personal exemptions);
    (viii) The credit under section 43 (relating to earned income);
    (ix) The credit under section 44 (relating to purchase of new 
principal residence); or
    (x) The credit under section 45 (relating to overpayments of tax).
    (d) Joint returns. (1) A husband and wife who file a joint return 
may elect not to show the tax on such return in accordance with the 
rules prescribed in paragraphs (a) and (b) of this section.
    (2) The tax computed for a husband and wife who elect pursuant to 
this section not to show their tax on their joint income tax return 
shall be the lesser of the following amounts:
    (i) A tax computed as though the return of income constituted a 
joint return, or
    (ii) If sufficient information is provided for the taxable income of 
each spouse to be determined, a tax computed as though the return of 
income constituted the separate returns of the spouses.
    (e) Married individuals filing separate returns. This section shall 
apply to married individuals filing separate returns unless otherwise 
provided in the instructions accompanying a return. The instructions may 
require the taxpayer to attach to his return a statement to the effect 
that his tax and the tax of his spouse were determined in accordance 
with the rules of sections 141(d) and 142(a).
    (f) Revocation of election. An election pursuant to this section may 
be revoked on an amended return (whether such return is filed before or 
after the date prescribed in section 6072(a) for filing the original 
return).

[T.D. 7102, 36 FR 5497, Mar. 24, 1971, as amended by T.D. 7298, 38 FR 
35234, Dec. 26, 1973; T.D. 7391, 40 FR 55856, Dec. 2, 1975]



Sec. 1.6015-0  Table of contents.

    This section lists captions contained in Secs. 1.6015-1 through 
1.6015-9.

   Sec. 1.6015-1  Relief from joint and several liability on a joint 
                                 return.

    (a) In general.
    (b) Duress.
    (c) Prior closing agreement or offer in compromise.
    (1) In general.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings.
    (3) Examples.
    (d) Fraudulent scheme.
    (e) Res judicata and collateral estoppel.
    (f) Community property laws.
    (1) In general.
    (2) Example.
    (g) Scope of this section and Secs. 1.6015-2 through 1.6015-9.
    (h) Definitions.
    (1) Requesting spouse.
    (2) Nonrequesting spouse.
    (3) Item.
    (4) Erroneous item.
    (5) Election or request.
    (i) [Reserved]
    (j) Transferee liability.
    (1) In general.
    (2) Example.

Sec. 1.6015-2  Relief from liability applicable to all qualifying joint 
                                 filers.

    (a) In general.
    (b) Understatement.
    (c) Knowledge or reason to know.
    (d) Inequity.
    (e) Partial relief.
    (1) In general.
    (2) Example.

[[Page 94]]

Sec. 1.6015-3  Allocation of liability for individuals who are no longer 
     married, are legally separated, or are not members of the same 
                               household.

    (a) Election to allocate liability.
    (b) Definitions.
    (1) Divorced.
    (2) Legally separated.
    (3) Members of the same household.
    (i) Temporary absences.
    (ii) Separate dwellings.
    (c) Limitations.
    (1) No refunds.
    (2) Actual knowledge.
    (i) In general.
    (A) Omitted income.
    (B) Deduction or credit.
    (1) Erroneous deductions in general.
    (2) Fictitious or inflated deduction.
    (ii) Partial knowledge.
    (iii) Knowledge of the source not sufficient.
    (iv) Factors supporting actual knowledge.
    (v) Abuse exception.
    (3) Disqualified asset transfers.
    (i) In general.
    (ii) Disqualified asset defined.
    (iii) Presumption.
    (4) Examples.
    (d) Allocation.
    (1) In general.
    (2) Allocation of erroneous items.
    (i) Benefit on the return.
    (ii) Fraud.
    (iii) Erroneous items of income.
    (iv) Erroneous deduction items.
    (3) Burden of proof.
    (4) General allocation method.
    (i) Proportionate allocation.
    (ii) Separate treatment items.
    (iii) Child's liability.
    (iv) Allocation of certain items.
    (A) Alternative minimum tax.
    (B) Accuracy-related and fraud penalties.
    (5) Examples.
    (6) Alternative allocation methods.
    (i) Allocation based on applicable tax rates.
    (ii) Allocation methods provided in subsequent published guidance.
    (iii) Example.

                    Sec. 1.6015-4  Equitable relief.

          Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief.
    (b) Time period for filing a request for relief.
    (1) In general.
    (2) Definitions.
    (i) Collection activity.
    (ii) Section 6330 notice.
    (3) Requests for relief made before commencement of collection 
activity.
    (4) Examples.
    (5) Premature requests for relief.
    (c) Effect of a final administrative determination.

    Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to 
               participate in administrative proceedings.

    (a) In general.
    (b) Information submitted.
    (c) Effect of opportunity to participate.
    (2) Waiver of the restrictions on collection.

                    Sec. 1.6015-7  Tax Court review.

    (a) In general.
    (b) Time period for petitioning the Tax Court.
    (c) Restrictions on collection and suspension of the running of the 
period of limitations.
    (1) Restrictions on collection under Sec. 1.6015-2 or 1.6015-3.
    (2) Waiver of the restrictions on collection.
    (3) Suspension of the running of the period of limitations.
    (i) Relief under Sec. 1.6015-2 or 1.6015-3.
    (ii) Relief under Sec. 1.6015-4.
    (4) Definitions.
    (i) Levy.
    (ii) Proceedings in court.
    (iii) Assessment to which the election relates.

                  Sec. 1.6015-8 Applicable liabilities.

    (a) In general.
    (b) Liabilities paid on or before July 22, 1998.
    (c) Examples.

                      Sec. 1.6015-9 Effective date.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-1  Relief from joint and several liability on a joint return.

    (a) In general. (1) An individual who qualifies and elects under 
section 6013 to file a joint Federal income tax return with another 
individual is jointly and severally liable for the joint Federal income 
tax liabilities for that year. A spouse or former spouse may be relieved 
of joint and several liability for Federal income tax for that year 
under the following three relief provisions:
    (i) Innocent spouse relief under Sec. 1.6015-2.
    (ii) Allocation of deficiency under Sec. 1.6015-3.
    (iii) Equitable relief under Sec. 1.6015-4.
    (2) A requesting spouse may submit a single claim electing relief 
under both

[[Page 95]]

or either Secs. 1.6015-2 and 1.6015-3, and requesting relief under 
Sec. 1.6015-4. However, equitable relief under Sec. 1.6015-4 is 
available only to a requesting spouse who fails to qualify for relief 
under Secs. 1.6015-2 and 1.6015-3. If a requesting spouse elects the 
application of either Sec. 1.6015-2 or 1.6015-3, the Internal Revenue 
Service will consider whether relief is appropriate under the other 
elective provision and, to the extent relief is unavailable under 
either, under Sec. 1.6015-4. If a requesting spouse seeks relief only 
under Sec. 1.6015-4, the Secretary may not grant relief under 
Sec. 1.6015-2 or 1.6015-3 in the absence of an affirmative election made 
by the requesting spouse under either of those sections. If in the 
course of reviewing a request for relief only under Sec. 1.6015-4, the 
IRS determines that the requesting spouse may qualify for relief under 
Sec. 1.6015-2 or 1.6015-3 instead of Sec. 1.6015-4, the Internal Revenue 
Service will correspond with the requesting spouse to see if the 
requesting spouse would like to amend his or her request to elect the 
application of Sec. 1.6015-2 or 1.6015-3. If the requesting spouse 
chooses to amend the claim for relief, the requesting spouse must submit 
an affirmative election under Sec. 1.6015-2 or 1.6015-3. The amended 
claim for relief will relate back to the original claim for purposes of 
determining the timeliness of the claim.
    (3) Relief is not available for liabilities that are required to be 
reported on a joint Federal income tax return but are not income taxes 
imposed under Subtitle A of the Internal Revenue Code (e.g., domestic 
service employment taxes under section 3510).
    (b) Duress. For rules relating to the treatment of returns signed 
under duress, see Sec. 1.6013-4(d).
    (c) Prior closing agreement or offer in compromise--(1) In general. 
A requesting spouse is not entitled to relief from joint and several 
liability under Sec. 1.6015-2, 1.6015-3, or 1.6015-4 for any tax year 
for which the requesting spouse has entered into a closing agreement 
with the Commissioner that disposes of the same liability that is the 
subject of the claim for relief. In addition, a requesting spouse is not 
entitled to relief from joint and several liability under Sec. 1.6015-2, 
1.6015-3, or 1.6015-4 for any tax year for which the requesting spouse 
has entered into an offer in compromise with the Commissioner. For rules 
relating to the effect of closing agreements and offers in compromise, 
see sections 7121 and 7122, and the regulations thereunder.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings. The rule in paragraph (c)(1) of this section regarding the 
unavailability of relief from joint and several liability when the 
liability to which the claim for relief relates was the subject of a 
prior closing agreement entered into by the requesting spouse, shall not 
apply to an agreement described in section 6224(c) with respect to 
partnership items (or any penalty, addition to tax, or additional amount 
that relates to adjustments to partnership items) that is entered into 
while the requesting spouse is a party to a pending partnership-level 
proceeding conducted under the provisions of subchapter C of chapter 63 
of subtitle F of the Internal Revenue Code (TEFRA partnership 
proceeding). If, however, a requesting spouse enters into a closing 
agreement pertaining to any penalty, addition to tax, or additional 
amount that relates to adjustments to partnership items, at a time when 
the requesting spouse is not a party to a pending TEFRA partnership 
proceeding (e.g., in connection with an affected items proceeding), then 
the provisions of paragraph (c)(1) shall apply. Similarly, if a 
requesting spouse enters into a closing agreement with respect to both 
partnership items (including affected items) and nonpartnership items, 
while the requesting spouse is a party to a pending TEFRA partnership 
proceeding, the provisions of paragraph (c)(1) shall apply to the 
portion of the closing agreement that relates to nonpartnership items 
and the provisions of this paragraph (c)(2) shall apply to the remainder 
of the closing agreement.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. H and W file joint returns for taxable years 2002-2004, 
on which they claim losses attributable to H's limited partnership 
interest in Partnership A. In January 2006, the Internal Revenue Service 
commences an audit under the provisions of subchapter C of

[[Page 96]]

chapter 63 of subtitle F of the Internal Revenue Code (TEFRA partnership 
proceeding) regarding Partnership A's 2002-2004 taxable years, and sends 
H and W a notice under section 6223(a)(1). In September 2007, H files a 
bankruptcy petition under chapter 7 of the Bankruptcy Code and receives 
a discharge in April 2008. In August 2008, H and W enter into a closing 
agreement with the Internal Revenue Service, in which H and W agree to 
the disallowance of some of the claimed losses from Partnership A for 
taxable years 2002 through 2007. W may not later claim relief from joint 
and several liability under section 6015 as to the disallowed losses 
attributable to Partnership A for taxable years 2002 to 2007. This is 
because at the time W entered into the closing agreement, H's 
partnership items attributable to Partnership A had converted to 
nonpartnership items as a result of H's filing of the bankruptcy 
petition. The conversion of H's items also terminated W's status as a 
partner in the TEFRA partnership proceeding regarding Partnership A. 
Consequently, the closing agreement did not pertain to partnership items 
and W was not a party to a pending partnership-level proceeding 
regarding Partnership A when she entered into the closing agreement. 
Accordingly, the exception in paragraph (c)(2) of this section for 
agreements relating to TEFRA partnership proceedings does not apply.
    Example 2. H and W file a joint return for taxable year 2002, on 
which they claim $25,000 in losses attributable to H's general 
partnership interest in Partnership B. In November 2003, the Service 
proposes a deficiency in tax relating to H's and W's 2002 joint return 
arising from omitted taxable interest income in the amount of $2,000 
that is attributable to H. In July 2005, the Internal Revenue Service 
commences a TEFRA partnership proceeding regarding Partnership B's 2002 
and 2003 taxable years, and sends H and W a notice under section 
6223(a)(1). In March 2006, H and W enter into a closing agreement with 
the Service. The closing agreement provides for the disallowance of the 
claimed losses from Partnership B in excess of H's and W's out-of-pocket 
expenditures relating to Partnership B for taxable year 2002 and any 
subsequent year(s) in which H and W claimed losses from Partnership B. 
In addition, H and W agree to the imposition of the accuracy-related 
penalty under section 6662 with respect to the disallowed losses 
attributable to partnership B. In the closing agreement, H and W also 
agree to the deficiency resulting from the omitted interest income for 
taxable year 2002. W may not later claim relief from joint and several 
liability under section 6015 as to the deficiency in tax attributable to 
the omitted income of $2,000 for taxable year 2002, because this portion 
of the closing agreement pertains to nonpartnership items. In contrast, 
W may claim relief from joint and several liability as to the disallowed 
losses and accuracy-related penalty attributable to Partnership B for 
taxable year 2002 or any subsequent year(s). This is because this 
portion of the closing agreement pertains to partnership and affected 
items and was entered into at a time when W was a party to the pending 
partnership-level proceeding regarding Partnership B. Consequently, W 
never had the opportunity to raise the innocent spouse defense in the 
course of that TEFRA partnership proceeding. (See Sec. 1.6015-5(b)(5) 
relating to premature claims).
    (d) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to the other spouse as part of a fraudulent scheme, 
relief is not available under section 6015, and section 6013(d)(3) 
applies to the return. For purposes of this section, a fraudulent scheme 
includes a scheme to defraud the Service or another third party, 
including, but not limited to, creditors, ex-spouses, and business 
partners.
    (e) Res judicata and collateral estoppel. A requesting spouse is 
barred from relief from joint and several liability under section 6015 
by res judicata for any tax year for which a court of competent 
jurisdiction has rendered a final decision on the requesting spouse's 
tax liability if relief under section 6015 was at issue in the prior 
proceeding, or if the requesting spouse meaningfully participated in 
that proceeding and could have raised relief under section 6015. A 
requesting spouse has not meaningfully participated in a prior 
proceeding if, due to the effective date of section 6015, relief under 
section 6015 was not available in that proceeding. Also, any final 
decisions rendered by a court of competent jurisdiction regarding issues 
relevant to section 6015 are conclusive and the requesting spouse may be 
collaterally estopped from relitigating those issues.
    (f) Community property laws--(1) In general. In determining whether 
relief is available under Sec. 1.6015-2, 1.6015-3, or 1.6015-4, items of 
income, credits, and deductions are generally allocated to the spouses 
without regard to the operation of community property laws. An erroneous 
item is attributed to the individual whose activities gave rise to such 
item. See Sec. 1.6015-3(d)(2).
    (2) Example. The following example illustrates the rule of this 
paragraph (f):


[[Page 97]]


    Example. (i) H and W are married and have lived in State A (a 
community property state) since 1987. On April 15, 2003, H and W file a 
joint Federal income tax return for the 2002 taxable year. In August 
2005, the Internal Revenue Service proposes a $17,000 deficiency with 
respect to the 2002 joint return. A portion of the deficiency is 
attributable to $20,000 of H's unreported interest income from his 
individual bank account. The remainder of the deficiency is attributable 
to $30,000 of W's disallowed business expense deductions. Under the laws 
of State A, H and W each own \1/2\ of all income earned and property 
acquired during the marriage.
    (ii) In November 2005, H and W divorce and W timely elects to 
allocate the deficiency. Even though the laws of State A provide that 
\1/2\ of the interest income is W's, for purposes of relief under this 
section, the $20,000 unreported interest income is allocable to H, and 
the $30,000 disallowed deduction is allocable to W. The community 
property laws of State A are not considered in allocating items for this 
purpose.

    (g) Scope of this section and Secs. 1.6015-2 through 1.6015-9. This 
section and Secs. 1.6015-2 through 1.6015-9 do not apply to any portion 
of a liability for any taxable year for which a claim for credit or 
refund is barred by operation of law or rule of law.
    (h) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who filed a joint return and elects relief from Federal 
income tax liability arising from that return under Sec. 1.6015-2 or 
1.6015-3, or requests relief from Federal income tax liability arising 
from that return under Sec. 1.6015-4.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
with whom the requesting spouse filed the joint return for the year for 
which relief from liability is sought.
    (3) Item. An item is that which is required to be separately listed 
on an individual income tax return or any required attachments. Items 
include, but are not limited to, gross income, deductions, credits, and 
basis.
    (4) Erroneous item. An erroneous item is any item resulting in an 
understatement or deficiency in tax to the extent that such item is 
omitted from, or improperly reported (including improperly 
characterized) on an individual income tax return. For example, 
unreported income from an investment asset resulting in an 
understatement or deficiency in tax is an erroneous item. Similarly, 
ordinary income that is improperly reported as capital gain resulting in 
an understatement or deficiency in tax is also an erroneous item. In 
addition, a deduction for an expense that is personal in nature that 
results in an understatement or deficiency in tax is an erroneous item 
of deduction. An erroneous item is also an improperly reported item that 
affects the liability on other returns (e.g., an improper net operating 
loss that is carried back to a prior year's return). Penalties and 
interest are not erroneous items. Rather, relief from penalties and 
interest will generally be determined based on the proportion of the 
total erroneous items from which the requesting spouse is relieved. If a 
penalty relates to a particular erroneous item, see Sec. 1.6015-
3(d)(4)(iv)(B).
    (5) Election or request. A qualifying election under Sec. 1.6015-2 
or 1.6015-3, or request under Sec. 1.6015-4, is the first timely claim 
for relief from joint and several liability for the tax year for which 
relief is sought. A qualifying election also includes a requesting 
spouse's second election to seek relief from joint and several liability 
for the same tax year under Sec. 1.6015-3 when the additional 
qualifications of paragraphs (h)(5)(i) and (ii) of this section are met-
-
    (i) The requesting spouse did not qualify for relief under 
Sec. 1.6015-3 when the Internal Revenue Service considered the first 
election solely because the qualifications of Sec. 1.6015-3(a) were not 
satisfied; and
    (ii) At the time of the second election, the qualifications for 
relief under Sec. 1.6015-3(a) are satisfied.
    (i) [Reserved]
    (j) Transferee liability--(1) In general. The relief provisions of 
section 6015 do not negate liability that arises under the operation of 
other laws. Therefore, a requesting spouse who is relieved of joint and 
several liability under Sec. 1.6015-2, 1.6015-3, or 1.6015-4 may 
nevertheless remain liable for the unpaid tax (including additions to 
tax, penalties, and interest) to the extent provided by Federal or state 
transferee liability or property laws. For the rules regarding the 
liability of transferees, see sections 6901 through 6904 and the 
regulations thereunder. In addition, the requesting spouse's property 
may

[[Page 98]]

be subject to collection under Federal or state property laws.
    (2) Example. The following example illustrates the rule of this 
paragraph (j):

    Example. H and W timely file their 1998 joint income tax return on 
April 15, 1999. H dies in March 2000, and the executor of H's will 
transfers all of the estate's assets to W. In July 2001, the Internal 
Revenue Service assesses a deficiency for the 1998 return. The items 
giving rise to the deficiency are attributable to H. W is relieved of 
the liability under section 6015, and H's estate remains solely liable. 
The Internal Revenue Service may seek to collect the deficiency from W 
to the extent permitted under Federal or state transferee liability or 
property laws.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-2  Relief from liability applicable to all qualifying joint filers.

    (a) In general. A requesting spouse may be relieved of joint and 
several liability for tax (including additions to tax, penalties, and 
interest) from an understatement for a taxable year under this section 
if the requesting spouse elects the application of this section in 
accordance with Secs. 1.6015-1(h)(5) and 1.6015-5, and--
    (1) A joint return was filed for the taxable year;
    (2) On the return there is an understatement attributable to 
erroneous items of the nonrequesting spouse;
    (3) The requesting spouse establishes that in signing the return he 
or she did not know and had no reason to know of the understatement; and
    (4) It is inequitable to hold the requesting spouse liable for the 
deficiency attributable to the understatement.
    (b) Understatement. The term understatement has the meaning given to 
such term by section 6662(d)(2)(A) and the regulations thereunder.
    (c) Knowledge or reason to know. A requesting spouse has knowledge 
or reason to know of an understatement if he or she actually knew of the 
understatement, or if a reasonable person in similar circumstances would 
have known of the understatement. For rules relating to a requesting 
spouse's actual knowledge, see Sec. 1.6015-3(c)(2). All of the facts and 
circumstances are considered in determining whether a requesting spouse 
had reason to know of an understatement. The facts and circumstances 
that are considered include, but are not limited to, the nature of the 
erroneous item and the amount of the erroneous item relative to other 
items; the couple's financial situation; the requesting spouse's 
educational background and business experience; the extent of the 
requesting spouse's participation in the activity that resulted in the 
erroneous item; whether the requesting spouse failed to inquire, at or 
before the time the return was signed, about items on the return or 
omitted from the return that a reasonable person would question; and 
whether the erroneous item represented a departure from a recurring 
pattern reflected in prior years' returns (e.g., omitted income from an 
investment regularly reported on prior years' returns).
    (d) Inequity. All of the facts and circumstances are considered in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable for an understatement. One relevant factor 
for this purpose is whether the requesting spouse significantly 
benefitted, directly or indirectly, from the understatement. A 
significant benefit is any benefit in excess of normal support. Evidence 
of direct or indirect benefit may consist of transfers of property or 
rights to property, including transfers that may be received several 
years after the year of the understatement. Thus, for example, if a 
requesting spouse receives property (including life insurance proceeds) 
from the nonrequesting spouse that is beyond normal support and 
traceable to items omitted from gross income that are attributable to 
the nonrequesting spouse, the requesting spouse will be considered to 
have received significant benefit from those items. Other factors that 
may also be taken into account, if the situation warrants, include the 
fact that the requesting spouse has been deserted by the nonrequesting 
spouse, the fact that the spouses have been divorced or separated, or 
that the requesting spouse received benefit on the return from the 
understatement. For guidance concerning the criteria to be used in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable under this section, see

[[Page 99]]

Rev. Proc. 2000-15 (2000-1 C.B. 447), or other guidance published by the 
Treasury and IRS (see Sec. 601.601(d)(2) of this chapter).
    (e) Partial relief--(1) In general. If a requesting spouse had no 
knowledge or reason to know of only a portion of an erroneous item, the 
requesting spouse may be relieved of the liability attributable to that 
portion of that item, if all other requirements are met with respect to 
that portion.
    (2) Example. The following example illustrates the rules of this 
paragraph (e):

    Example. H and W are married and file their 2004 joint income tax 
return in March 2005. In April 2006, H is convicted of embezzling $2 
million from his employer during 2004. H kept all of his embezzlement 
income in an individual bank account, and he used most of the funds to 
support his gambling habit. H and W had a joint bank account into which 
H and W deposited all of their reported income. Each month during 2004, 
H transferred an additional $10,000 from the individual account to H and 
W's joint bank account. W paid the household expenses using this joint 
account, and regularly received the bank statements relating to the 
account. W had no knowledge or reason to know of H's embezzling 
activities. However, W did have knowledge and reason to know of $120,000 
of the $2 million of H's embezzlement income at the time she signed the 
joint return because that amount passed through the couple's joint bank 
account. Therefore, W may be relieved of the liability arising from 
$1,880,000 of the unreported embezzlement income, but she may not be 
relieved of the liability for the deficiency arising from $120,000 of 
the unreported embezzlement income of which she knew and had reason to 
know.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-3  Allocation of deficiency for individuals who are no longer married, are legally separated, or are not members of the same household.

    (a) Election to allocate deficiency. A requesting spouse may elect 
to allocate a deficiency if, as defined in paragraph (b) of this 
section, the requesting spouse is divorced, widowed, or legally 
separated, or has not been a member of the same household as the 
nonrequesting spouse at any time during the 12-month period ending on 
the date an election for relief is filed. For purposes of this section, 
the marital status of a deceased requesting spouse will be determined on 
the earlier of the date of the election or the date of death in 
accordance with section 7703(a)(1). Subject to the restrictions of 
paragraph (c) of this section, an eligible requesting spouse who elects 
the application of this section in accordance with Secs. 1.6015-1(h)(5) 
and 1.6015-5 generally may be relieved of joint and several liability 
for the portion of any deficiency that is allocated to the nonrequesting 
spouse pursuant to the allocation methods set forth in paragraph (d) of 
this section. Relief may be available to both spouses filing the joint 
return if each spouse is eligible for and elects the application of this 
section.
    (b) Definitions--(1) Divorced. A determination of whether a 
requesting spouse is divorced for purposes of this section will be made 
in accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (2) Legally separated. A determination of whether a requesting 
spouse is legally separated for purposes of this section will be made in 
accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (3) Members of the same household--(i) Temporary absences. A 
requesting spouse and a nonrequesting spouse are considered members of 
the same household during either spouse's temporary absences from the 
household if it is reasonable to assume that the absent spouse will 
return to the household, and the household or a substantially equivalent 
household is maintained in anticipation of such return. Examples of 
temporary absences may include, but are not limited to, absence due to 
incarceration, illness, business, vacation, military service, or 
education.
    (ii) Separate dwellings. A husband and wife who reside in the same 
dwelling are considered members of the same household. In addition, a 
husband and wife who reside in two separate dwellings are considered 
members of the same household if the spouses are not estranged or one 
spouse is temporarily absent from the other's household within the 
meaning of paragraph (b)(3)(i) of this section.

[[Page 100]]

    (c) Limitations--(1) No refunds. Relief under this section is only 
available for unpaid liabilities resulting from understatements of 
liability. Refunds are not authorized under this section.
    (2) Actual knowledge--(i) In general. If, under section 
6015(c)(3)(C), the Secretary demonstrates that, at the time the return 
was signed, the requesting spouse had actual knowledge of an erroneous 
item that is allocable to the nonrequesting spouse, the election to 
allocate the deficiency attributable to that item is invalid, and the 
requesting spouse remains liable for the portion of the deficiency 
attributable to that item. The Service, having both the burden of 
production and the burden of persuasion, must establish, by a 
preponderance of the evidence, that the requesting spouse had actual 
knowledge of the erroneous item in order to invalidate the election.
    (A) Omitted income. In the case of omitted income, knowledge of the 
item includes knowledge of the receipt of the income. For example, 
assume W received $5,000 of dividend income from her investment in X Co. 
but did not report it on the joint return. H knew that W received $5,000 
of dividend income from X Co. that year. H had actual knowledge of the 
erroneous item (i.e., $5,000 of unreported dividend income from X Co.), 
and no relief is available under this section for the deficiency 
attributable to the dividend income from X Co. This rule applies equally 
in situations where the other spouse has unreported income although the 
spouse does not have an actual receipt of cash (e.g., dividend 
reinvestment or a distributive share from a flow-through entity shown on 
Schedule K-1, ``Partner's Share of Income, Credits, Deductions, etc.'').
    (B) Deduction or credit--(1) Erroneous deductions in general. In the 
case of an erroneous deduction or credit, knowledge of the item means 
knowledge of the facts that made the item not allowable as a deduction 
or credit.
    (2) Fictitious or inflated deduction. If a deduction is fictitious 
or inflated, the IRS must establish that the requesting spouse actually 
knew that the expenditure was not incurred, or not incurred to that 
extent.
    (ii) Partial knowledge. If a requesting spouse had actual knowledge 
of only a portion of an erroneous item, then relief is not available for 
that portion of the erroneous item. For example, if H knew that W 
received $1,000 of dividend income and did not know that W received an 
additional $4,000 of dividend income, relief would not be available for 
the portion of the deficiency attributable to the $1,000 of dividend 
income of which H had actual knowledge. A requesting spouse's actual 
knowledge of the proper tax treatment of an item is not relevant for 
purposes of demonstrating that the requesting spouse had actual 
knowledge of an erroneous item. For example, assume H did not know W's 
dividend income from X Co. was taxable, but knew that W received the 
dividend income. Relief is not available under this section. In 
addition, a requesting spouse's knowledge of how an erroneous item was 
treated on the tax return is not relevant to a determination of whether 
the requesting spouse had actual knowledge of the item. For example, 
assume that H knew of W's dividend income, but H failed to review the 
completed return and did not know that W omitted the dividend income 
from the return. Relief is not available under this section.
    (iii) Knowledge of the source not sufficient. Knowledge of the 
source of an erroneous item is not sufficient to establish actual 
knowledge. For example, assume H knew that W owned X Co. stock, but H 
did not know that X Co. paid dividends to W that year. H's knowledge of 
W's ownership in X Co. is not sufficient to establish that H had actual 
knowledge of the dividend income from X Co. In addition, a requesting 
spouse's actual knowledge may not be inferred when the requesting spouse 
merely had reason to know of the erroneous item. Even if H's knowledge 
of W's ownership interest in X Co. indicates a reason to know of the 
dividend income, actual knowledge of such dividend income cannot be 
inferred from H's reason to know. Similarly, the IRS need not establish 
that a requesting spouse knew of the source of an erroneous item in 
order to establish that the requesting spouse had actual knowledge of 
the item itself. For example, assume H knew that W received

[[Page 101]]

$1,000, but he did not know the source of the $1,000. W and H omit the 
$1,000 from their joint return. H has actual knowledge of the item 
giving rise to the deficiency ($1,000), and relief is not available 
under this section.
    (iv) Factors supporting actual knowledge. To demonstrate that a 
requesting spouse had actual knowledge of an erroneous item at the time 
the return was signed, the IRS may rely upon all of the facts and 
circumstances. One factor that may be relied upon in demonstrating that 
a requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse made a deliberate effort to avoid learning about 
the item in order to be shielded from liability. This factor, together 
with all other facts and circumstances, may demonstrate that the 
requesting spouse had actual knowledge of the item, and the requesting 
spouse's election would be invalid with respect to that entire item. 
Another factor that may be relied upon in demonstrating that a 
requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse and the nonrequesting spouse jointly owned the 
property that resulted in the erroneous item. Joint ownership is a 
factor supporting a finding that the requesting spouse had actual 
knowledge of an erroneous item. For purposes of this paragraph, a 
requesting spouse will not be considered to have had an ownership 
interest in an item based solely on the operation of community property 
law. Rather, a requesting spouse who resided in a community property 
state at the time the return was signed will be considered to have had 
an ownership interest in an item only if the requesting spouse's name 
appeared on the ownership documents, or there otherwise is an indication 
that the requesting spouse asserted dominion and control over the item. 
For example, assume H and W live in State A, a community property state. 
After their marriage, H opens a bank account in his name. Under the 
operation of the community property laws of State A, W owns \1/2\ of the 
bank account. However, W does not have an ownership interest in the 
account for purposes of this paragraph (c)(2)(iv) because the account is 
not held in her name and there is no other indication that she asserted 
dominion and control over the item.
    (v) Abuse exception. If the requesting spouse establishes that he or 
she was the victim of domestic abuse prior to the time the return was 
signed, and that, as a result of the prior abuse, the requesting spouse 
did not challenge the treatment of any items on the return for fear of 
the nonrequesting spouse's retaliation, the limitation on actual 
knowledge in this paragraph (c) will not apply. However, if the 
requesting spouse involuntarily executed the return, the requesting 
spouse may choose to establish that the return was signed under duress. 
In such a case, Sec. 1.6013-4(d) applies.
    (3) Disqualified asset transfers--(i) In general. The portion of the 
deficiency for which a requesting spouse is liable is increased (up to 
the entire amount of the deficiency) by the value of any disqualified 
asset that was transferred to the requesting spouse. For purposes of 
this paragraph (c)(3), the value of a disqualified asset is the fair 
market value of the asset on the date of the transfer.
    (ii) Disqualified asset defined. A disqualified asset is any 
property or right to property that was transferred from the 
nonrequesting spouse to the requesting spouse if the principal purpose 
of the transfer was the avoidance of tax or payment of tax (including 
additions to tax, penalties, and interest).
    (iii) Presumption. Any asset transferred from the nonrequesting 
spouse to the requesting spouse during the 12-month period before the 
mailing date of the first letter of proposed deficiency (e.g., a 30-day 
letter or, if no 30-day letter is mailed, a notice of deficiency) is 
presumed to be a disqualified asset. The presumption also applies to any 
asset that is transferred from the nonrequesting spouse to the 
requesting spouse after the mailing date of the first letter of proposed 
deficiency. The presumption does not apply, however, if the requesting 
spouse establishes that the asset was transferred pursuant to a decree 
of divorce or separate maintenance or a written instrument incident to 
such a decree. If the presumption does not apply, but the Internal 
Revenue Service can establish that the purpose of the transfer was the 
avoidance of tax or payment of tax, the

[[Page 102]]

asset will be disqualified, and its value will be added to the amount of 
the deficiency for which the requesting spouse remains liable. If the 
presumption applies, a requesting spouse may still rebut the presumption 
by establishing that the principal purpose of the transfer was not the 
avoidance of tax or payment of tax.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. Actual knowledge of an erroneous item. (i) H and W file 
their 2001 joint Federal income tax return on April 15, 2002. On the 
return, H and W report W's self-employment income, but they do not 
report W's self-employment tax on that income. H and W divorce in July 
2003. In August 2003, H and W receive a 30-day letter from the Internal 
Revenue Service proposing a deficiency with respect to W's unreported 
self-employment tax on the 2001 return. On November 4, 2003, H files an 
election to allocate the deficiency to W. The erroneous item is the 
self-employment income, and it is allocable to W. H knows that W earned 
income in 2001 as a self-employed musician, but he does not know that 
self-employment tax must be reported on and paid with a joint return.
    (ii) H's election to allocate the deficiency to W is invalid 
because, at the time H signed the joint return, H had actual knowledge 
of W's self-employment income. The fact that H was unaware of the tax 
consequences of that income (i.e., that an individual is required to pay 
self-employment tax on that income) is not relevant.
    Example 2. Actual knowledge not inferred from a requesting spouse's 
reason to know. (i) H has long been an avid gambler. H supports his 
gambling habit and keeps all of his gambling winnings in an individual 
bank account, held solely in his name. W knows about H's gambling habit 
and that he keeps a separate bank account, but she does not know whether 
he has any winnings because H does not tell her, and she does not 
otherwise know of H's bank account transactions. H and W file their 2001 
joint Federal income tax return on April 15, 2002. On October 31, 2003, 
H and W receive a 30-day letter proposing a $100,000 deficiency relating 
to H's unreported gambling income. In February 2003, H and W divorce, 
and in March 2004, W files an election under section 6015(c) to allocate 
the $100,000 deficiency to H.
    (ii) While W may have had reason to know of the gambling income 
because she knew of H's gambling habit and separate account, W did not 
have actual knowledge of the erroneous item (i.e., the gambling 
winnings). The Internal Revenue Service may not infer actual knowledge 
from W's reason to know of the income. Therefore, W's election to 
allocate the $100,000 deficiency to H is valid.
    Example 3. Actual knowledge and failure to review return. (i) H and 
W are legally separated. In February 1999, W signs a blank joint Federal 
income tax return for 1998 and gives it to H to fill out. The return was 
timely filed on April 15, 1999. In September 2001, H and W receive a 30-
day letter proposing a deficiency relating to $100,000 of unreported 
dividend income received by H with respect to stock of ABC Co. owned by 
H. W knew that H received the $100,000 dividend payment in August 1998, 
but she did not know whether H reported that payment on the joint 
return.
    (ii) On January 30, 2002, W files an election to allocate the 
deficiency from the 1998 return to H. W claims she did not review the 
completed joint return, and therefore, she had no actual knowledge that 
there was an understatement of the dividend income. W's election to 
allocate the deficiency to H is invalid because she had actual knowledge 
of the erroneous item (dividend income from ABC Co.) at the time she 
signed the return. The fact that W signed a blank return is irrelevant. 
The result would be the same if W had not reviewed the completed return 
or if W had reviewed the completed return and had not noticed that the 
item was omitted.
    Example 4. Actual knowledge of an erroneous item of income. (i) H 
and W are legally separated. In June 2004, a deficiency is proposed with 
respect to H's and W's 2002 joint Federal income tax return that is 
attributable to $30,000 of unreported income from H's plumbing business 
that should have been reported on a Schedule C. No Schedule C was 
attached to the return. At the time W signed the return, W knew that H 
had a plumbing business but did not know whether H received any income 
from the business. W's election to allocate to H the deficiency 
attributable to the $30,000 of unreported plumbing income is valid.
    (ii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W knew that H received 
$20,000 of plumbing income. W's election to allocate to H the deficiency 
attributable to the $20,000 of unreported plumbing income (of which W 
had actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $10,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    (iii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W did not know the exact 
amount of H's plumbing income. W did know, however, that H received at 
least $8,000 of plumbing income. W's election to allocate to H the 
deficiency attributable to $8,000 of unreported plumbing income (of 
which W had actual knowledge) is invalid. W's election to allocate to H 
the deficiency

[[Page 103]]

attributable to the remaining $22,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    (iv) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported $26,000 of plumbing income on the return and 
omitted $4,000 of plumbing income from the return. At the time W signed 
the return, W knew that H was a plumber, but she did not know that H 
earned more than $26,000 that year. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income is 
valid because she did not have actual knowledge that H received plumbing 
income in excess of $26,000.
    (v) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported only $20,000 of plumbing income on the return and 
omitted $10,000 of plumbing income from the return. At the time W signed 
the return, W knew that H earned at least $26,000 that year as a 
plumber. However, W did not know that, in reality, H earned $30,000 that 
year as a plumber. W's election to allocate to H the deficiency 
attributable to the $6,000 of unreported plumbing income (of which W had 
actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    Example 5. Actual knowledge of a deduction that is an erroneous 
item. (i) H and W are legally separated. In February 2005, a deficiency 
is asserted with respect to their 2002 joint Federal income tax return. 
The deficiency is attributable to a disallowed $1,000 deduction for 
medical expenses H claimed he incurred. At the time W signed the return, 
W knew that H had not incurred any medical expenses. W's election to 
allocate to H the deficiency attributable to the disallowed medical 
expense deduction is invalid because W had actual knowledge that H had 
not incurred any medical expenses.
    (ii) Assume the same facts as in paragraph (i) of this Example 6 
except that, at the time W signed the return, W did not know whether H 
had incurred any medical expenses. W's election to allocate to H the 
deficiency attributable to the disallowed medical expense deduction is 
valid because she did not have actual knowledge that H had not incurred 
any medical expenses.
    (iii) Assume the same facts as in paragraph (i) of this Example 6 
except that the Internal Revenue Service disallowed $400 of the $1,000 
medical expense deduction. At the time W signed the return, W knew that 
H had incurred some medical expenses but did not know the exact amount. 
W's election to allocate to H the deficiency attributable to the 
disallowed medical expense deduction is valid because she did not have 
actual knowledge that H had not incurred medical expenses (in excess of 
the floor amount under section 213(a)) of more than $600.
    (iv) Assume the same facts as in paragraph (i) of this Example 6 
except that H claims a medical expense deduction of $10,000 and the 
Internal Revenue Service disallows $9,600. At the time W signed the 
return, W knew H had incurred some medical expenses but did not know the 
exact amount. W also knew that H incurred medical expenses (in excess of 
the floor amount under section 213(a)) of no more than $1,000. W's 
election to allocate to H the deficiency attributable to the portion of 
the overstated deduction of which she had actual knowledge ($9,000) is 
invalid. W's election to allocate the deficiency attributable to the 
portion of the overstated deduction of which she had no knowledge ($600) 
is valid.
    Example 6. Disqualified asset presumption. (i) H and W are divorced. 
In May 1999, W transfers $20,000 to H, and in April 2000, H and W 
receive a 30-day letter proposing a $40,000 deficiency on their 1998 
joint Federal income tax return. The liability remains unpaid, and in 
October 2000, H elects to allocate the deficiency under this section. 
Seventy-five percent of the net amount of erroneous items are allocable 
to W, and 25% of the net amount of erroneous items are allocable to H.
    (ii) In accordance with the proportionate allocation method (see 
paragraph (d)(4) of this section), H proposes that $30,000 of the 
deficiency be allocated to W and $10,000 be allocated to himself. H 
submits a signed statement providing that the principal purpose of the 
$20,000 transfer was not the avoidance of tax or payment of tax, but he 
does not submit any documentation indicating the reason for the 
transfer. H has not overcome the presumption that the $20,000 was a 
disqualified asset. Therefore, the portion of the deficiency for which H 
is liable ($10,000) is increased by the value of the disqualified asset 
($20,000). H is relieved of liability for $10,000 of the $30,000 
deficiency allocated to W, and remains jointly and severally liable for 
the remaining $30,000 of the deficiency (assuming that H does not 
qualify for relief under any other provision).
    Example 7. Disqualified asset presumption inapplicable. On May 1, 
2001, H and W receive a 30-day letter regarding a proposed deficiency on 
their 1999 joint Federal income tax return relating to unreported 
capital gain from H's sale of his investment in Z stock. W had no actual 
knowledge of the stock sale. The deficiency is assessed in November 
2001, and in December 2001, H and W divorce. According to a decree of 
divorce, H must transfer \1/2\ of his interest in mutual fund A to W. 
The transfer takes place in February 2002. In August 2002, W elects to 
allocate the deficiency to H. Although the transfer of \1/2\ of H's 
interest in mutual fund A took place after the 30-day letter was mailed, 
the mutual fund interest is not presumed to be a disqualified asset 
because the transfer of H's interest in

[[Page 104]]

the fund was made pursuant to a decree of divorce.
    Example 8. Overcoming the disqualified asset presumption. (i) H and 
W are married for 25 years. Every September, on W's birthday, H gives W 
a gift of $500. On February 28, 2002, H and W receive a 30-day letter 
from the Internal Revenue Service relating to their 1998 joint 
individual Federal income tax return. The deficiency relates to H's 
Schedule C business, and W had no knowledge of the items giving rise to 
the deficiency. H and W are legally separated in June 2003, and, despite 
the separation, H continues to give W $500 each year for her birthday. H 
is not required to give such amounts pursuant to a decree of divorce or 
separate maintenance.
    (ii) On January 27, 2004, W files an election to allocate the 
deficiency to H. The $1,500 transferred from H to W from February 28, 
2001 (a year before the 30-day letter was mailed) to the present is 
presumed disqualified. However, W may overcome the presumption that such 
amounts were disqualified by establishing that such amounts were 
birthday gifts from H and that she has received such gifts during their 
entire marriage. Such facts would show that the amounts were not 
transferred for the purpose of avoidance of tax or payment of tax.

    (d) Allocation--(1) In general. (i) An election to allocate a 
deficiency limits the requesting spouse's liability to that portion of 
the deficiency allocated to the requesting spouse pursuant to this 
section.
    (ii) Only a requesting spouse may receive relief. A nonrequesting 
spouse who does not also elect relief under this section remains liable 
for the entire amount of the deficiency. Even if both spouses elect to 
allocate a deficiency under this section, there may be a portion of the 
deficiency that is not allocable, for which both spouses remain jointly 
and severally liable.
    (2) Allocation of erroneous items. For purposes of allocating a 
deficiency under this section, erroneous items are generally allocated 
to the spouses as if separate returns were filed, subject to the 
following four exceptions:
    (i) Benefit on the return. An erroneous item that would otherwise be 
allocated to the nonrequesting spouse is allocated to the requesting 
spouse to the extent that the requesting spouse received a tax benefit 
on the joint return.
    (ii) Fraud. The Internal Revenue Service may allocate any item 
between the spouses if the Internal Revenue Service establishes that the 
allocation is appropriate due to fraud by one or both spouses.
    (iii) Erroneous items of income. Erroneous items of income are 
allocated to the spouse who was the source of the income. Wage income is 
allocated to the spouse who performed the services producing such wages. 
Items of business or investment income are allocated to the spouse who 
owned the business or investment. If both spouses owned an interest in 
the business or investment, the erroneous item of income is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment, subject to the limitations of 
paragraph (c) of this section. In the absence of clear and convincing 
evidence supporting a different allocation, an erroneous income item 
relating to an asset that the spouses owned jointly is generally 
allocated 50% to each spouse, subject to the limitations in paragraph 
(c) of this section and the exceptions in paragraph (c)(2)(iv) of this 
section. For rules regarding the effect of community property laws, see 
Sec. 1.6015-1(f) and paragraph (c)(2)(iv) of this section.
    (iv) Erroneous deduction items. Erroneous deductions related to a 
business or investment are allocated to the spouse who owned the 
business or investment. If both spouses owned an interest in the 
business or investment, an erroneous deduction item is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment. In the absence of clear and 
convincing evidence supporting a different allocation, an erroneous 
deduction item relating to an asset that the spouses owned jointly is 
generally allocated 50% to each spouse, subject to the limitations in 
paragraph (c) of this section and the exceptions in paragraph (d)(4) of 
this section. Deduction items unrelated to a business or investment are 
also generally allocated 50% to each spouse, unless the evidence shows 
that a different allocation is appropriate.
    (3) Burden of proof. Except for establishing actual knowledge under 
paragraph (c)(2) of this section, the requesting spouse must prove that 
all of the qualifications for making an election under this section are 
satisfied and

[[Page 105]]

that none of the limitations (including the limitation relating to 
transfers of disqualified assets) apply. The requesting spouse must also 
establish the proper allocation of the erroneous items.
    (4) General allocation method--(i) Proportionate allocation. (A) The 
portion of a deficiency allocable to a spouse is the amount that bears 
the same ratio to the deficiency as the net amount of erroneous items 
allocable to the spouse bears to the net amount of all erroneous items. 
This calculation may be expressed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY02.004


where X = the portion of the deficiency allocable to the spouse.
    (B) The proportionate allocation applies to any portion of the 
deficiency other than--
    (1) Any portion of the deficiency attributable to erroneous items 
allocable to the nonrequesting spouse of which the requesting spouse had 
actual knowledge;
    (2) Any portion of the deficiency attributable to separate treatment 
items (as defined in paragraph (d)(4)(ii) of this section);
    (3) Any portion of the deficiency relating to the liability of a 
child (as defined in paragraph (d)(4)(iii) of this section) of the 
requesting spouse or nonrequesting spouse;
    (4) Any portion of the deficiency attributable to alternative 
minimum tax under section 55;
    (5) Any portion of the deficiency attributable to accuracy-related 
or fraud penalties;
    (6) Any portion of the deficiency allocated pursuant to alternative 
allocation methods authorized under paragraph (d)(6) of this section.
    (ii) Separate treatment items. Any portion of a deficiency that is 
attributable to an item allocable solely to one spouse and that results 
from the disallowance of a credit, or a tax or an addition to tax (other 
than tax imposed by section 1 or section 55) that is required to be 
included with a joint return (a separate treatment item) is allocated 
separately to that spouse. If such credit or tax is attributable in 
whole or in part to both spouses, then the IRS will determine on a case 
by case basis how such item will be allocated. Once the proportionate 
allocation is made, the liability for the requesting spouse's separate 
treatment items is added to the requesting spouse's share of the 
liability.
    (iii) Child's liability. Any portion of a deficiency relating to the 
liability of a child of the requesting and nonrequesting spouse is 
allocated jointly to both spouses. For purposes of this paragraph, a 
child does not include the taxpayer's stepson or stepdaughter, unless 
such child was legally adopted by the taxpayer. If the child is the 
child of only one of the spouses, and the other spouse had not legally 
adopted such child, any portion of a deficiency relating to the 
liability of such child is allocated solely to the parent spouse.
    (iv) Allocation of certain items--(A) Alternative minium tax. Any 
portion of a deficiency relating to the alternative minimum tax under 
section 55 will be allocated appropriately.
    (B) Accuracy-related and fraud penalties. Any accuracy-related or 
fraud penalties under section 6662 or 6663 are allocated to the spouse 
whose item generated the penalty.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d). In each example, assume that the requesting spouse or 
spouses qualify to elect to allocate the deficiency, that any election 
is timely made, and that the deficiency remains unpaid. In addition, 
unless otherwise stated, assume that neither spouse has actual knowledge 
of the erroneous items allocable to the other spouse. The examples are 
as follows:
    Example 1. Allocation of erroneous items. (i) H and W file a 2003 
joint Federal income tax

[[Page 106]]

return on April 15, 2004. On April 28, 2006, a deficiency is assessed 
with respect to their 2003 return. Three erroneous items give rise to 
the deficiency--
    (A) Unreported interest income, of which W had actual knowledge, 
from H's and W's joint bank account;
    (B) A disallowed business expense deduction on H's Schedule C; and
    (C) A disallowed Lifetime Learning Credit for W's post-secondary 
education, paid for by W.
    (ii) H and W divorce in May 2006, and in September 2006, W timely 
elects to allocate the deficiency. The erroneous items are allocable as 
follows:
    (A) The interest income would be allocated \1/2\ to H and \1/2\ to 
W, except that W has actual knowledge of it. Therefore, W's election to 
allocate the portion of the deficiency attributable to this item is 
invalid, and W remains jointly and severally liable for it.
    (B) The business expense deduction is allocable to H.
    (C) The Lifetime Learning Credit is allocable to W.
    Example 2. Proportionate allocation. (i) W and H timely file their 
2001 joint Federal income tax return on April 15, 2002. On August 16, 
2004, a $54,000 deficiency is assessed with respect to their 2001 joint 
return. H and W divorce on October 14, 2004, and W timely elects to 
allocate the deficiency. Five erroneous items give rise to the 
deficiency--
    (A) A disallowed $15,000 business deduction allocable to H;
    (B) $20,000 of unreported income allocable to H;
    (C) A disallowed $5,000 deduction for educational expense allocable 
to H;
    (D) A disallowed $40,000 charitable contribution deduction allocable 
to W; and
    (E) A disallowed $40,000 interest deduction allocable to W.
    (ii) In total, there are $120,000 worth of erroneous items, of which 
$80,000 are attributable to W and $40,000 are attributable to H.

           W's items                                                         H's items
-------------------------------------------------------------    -----------------------------------------------
  $40,000  charitable deduction                                     $15,000  business deduction
   40,000  interest deduction                                        20,000  unreported income
                                                                      5,000  education deduction
----------                                                       -----------
  $80,000                                                           $40,000
 

    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \2/3\ ($80,000/$120,000). W's liability is limited to 
$36,000 of the deficiency (\2/3\ of $54,000). The Internal Revenue 
Service may collect up to $36,000 from W and up to $54,000 from H (the 
total amount collected, however, may not exceed $54,000). If H also made 
an election, there would be no remaining joint and several liability, 
and the Internal Revenue Service would be permitted to collect $36,000 
from W and $18,000 from H.
    Example 3. Proportionate allocation with joint erroneous item. (i) 
On September 4, 2001, W elects to allocate a $3,000 deficiency for the 
1998 tax year to H. Three erroneous items give rise to the deficiency--
    (A) Unreported interest in the amount of $4,000 from a joint bank 
account;
    (B) A disallowed deduction for business expenses in the amount of 
$2,000 attributable to H's business; and
    (C) Unreported wage income in the amount of $6,000 attributable to 
W's second job.
    (ii) The erroneous items total $12,000. Generally, income, 
deductions, or credits from jointly held property that are erroneous 
items are allocable 50% to each spouse. However, in this case, both 
spouses had actual knowledge of the unreported interest income. 
Therefore, W's election to allocate the portion of the deficiency 
attributable to this item is invalid, and W and H remain jointly and 
severally liable for this portion. Assume that this portion is $1,000. W 
may allocate the remaining $2,000 of the deficiency.

           H's items                                                         W's items
-------------------------------------------------------------    -----------------------------------------------
   $2,000  business deduction                                        $6,000  wage income
 

    Total allocable items: $8,000
    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \3/4\ ($6,000/$8,000). W's liability is limited to 
$1,500 of the deficiency (\3/4\ of $2,000) allocated to her. The 
Internal Revenue Service may collect up to $2,500 from W (\3/4\ of the 
total allocated deficiency plus $1,000 of the deficiency attributable to 
the joint bank account interest) and up to $3,000 from H (the total 
amount collected, however, cannot exceed $3,000).

[[Page 107]]

    (iv) Assume H also elects to allocate the 1998 deficiency. H is 
relieved of liability for \3/4\ of the deficiency, which is allocated to 
W. H's relief totals $1,500 (\3/4\ of $2,000). H remains liable for 
$1,500 of the deficiency (\1/4\ of the allocated deficiency plus $1,000 
of the deficiency attributable to the joint bank account interest).
    Example 4. Separate treatment items (STIs). (i) On September 1, 
2006, a $28,000 deficiency is assessed with respect to H's and W's 2003 
joint return. The deficiency is the result of 4 erroneous items--
    (A) A disallowed Lifetime Learning Credit of $2,000 attributable to 
H;
    (B) A disallowed business expense deduction of $8,000 attributable 
to H;
    (C) Unreported income of $24,000 attributable to W; and
    (D) Unreported self-employment tax of $14,000 attributable to W.
    (ii) H and W both elect to allocate the deficiency.
    (iii) The $2,000 Lifetime Learning Credit and the $14,000 self-
employment tax are STIs totaling $16,000. The amount of erroneous items 
included in computing the proportionate allocation ratio is $32,000 
($24,000 unreported income and $8,000 disallowed business expense 
deduction). The amount of the deficiency subject to proportionate 
allocation is reduced by the amount of STIs ($28,000-$16,000 = $12,000).
    (iv) Of the $32,000 of proportionate allocation items, $24,000 is 
allocable to W, and $8,000 is allocable to H.

W's share of allocable items           H's share of allocable items
\3/4\ ($24,000/$32,000)                \1/4\ ($8,000/$32,000)
 

    (v) W's liability for the portion of the deficiency subject to 
proportionate allocation is limited to $9,000 (\3/4\ of $12,000) and H's 
liability for such portion is limited to $3,000 (\1/4\ of $12,000).
    (vi) After the proportionate allocation is completed, the amount of 
the STIs is added to each spouse's allocated share of the deficiency.

           W's share of total deficiency                                     H's share of total deficiency
-------------------------------------------------------------    -----------------------------------------------
  $ 9,000  allocated deficiency                                      $3,000  allocated deficiency
   14,000  self-employment tax                                        2,000  Lifetime Learning Credit
----------                                                       -----------
  $23,000                                                            $5,000
 

    (vii) Therefore, W's liability is limited to $23,000 and H's 
liability is limited to $5,000.
    Example 5. Requesting spouse receives a benefit on the joint return 
from the nonrequesting spouse's erroneous item. (i) In 2001, H reports 
gross income of $4,000 from his business on Schedule C, and W reports 
$50,000 of wage income. On their 2001 joint Federal income tax return, H 
deducts $20,000 of business expenses resulting in a net loss from his 
business of $16,000. H and W divorce in September 2002, and on May 22, 
2003, a $5,200 deficiency is assessed with respect to their 2001 joint 
return. W elects to allocate the deficiency. The deficiency on the joint 
return results from a disallowance of all of H's $20,000 of deductions.
    (ii) Since H used only $4,000 of the disallowed deductions to offset 
gross income from his business, W benefitted from the other $16,000 of 
the disallowed deductions used to offset her wage income. Therefore, 
$4,000 of the disallowed deductions are allocable to H and $16,000 of 
the disallowed deductions are allocable to W. W's liability is limited 
to $4,160 (\4/5\ of $5,200). If H also elected to allocate the 
deficiency, H's election to allocate the $4,160 of the deficiency to W 
would be invalid because H had actual knowledge of the erroneous items.
    Example 6. Calculation of requesting spouse's benefit on the joint 
return when the nonrequesting spouse's erroneous item is partially 
disallowed. Assume the same facts as in Example 5, except that H deducts 
$18,000 for business expenses on the joint return, of which $16,000 are 
disallowed. Since H used only $2,000 of the $16,000 disallowed 
deductions to offset gross income from his business, W received benefit 
on the return from the other $14,000 of the disallowed deductions used 
to offset her wage income. Therefore, $2,000 of the disallowed 
deductions are allocable to H and $14,000 of the disallowed deductions 
are allocable to W. W's liability is limited to $4,550 (\7/8\ of 
$5,200).

    (6) Alternative allocation methods--(i) Allocation based on 
applicable tax rates. If a deficiency arises from two or more

[[Page 108]]

erroneous items that are subject to tax at different rates (e.g., 
ordinary income and capital gain items), the deficiency will be 
allocated after first separating the erroneous items into categories 
according to their applicable tax rate. After all erroneous items are 
categorized, a separate allocation is made with respect to each tax rate 
category using the proportionate allocation method of paragraph (d)(4) 
of this section.
    (ii) Allocation methods provided in subsequent published guidance. 
Additional alternative methods for allocating erroneous items under 
section 6015(c) may be prescribed by the Treasury and IRS in subsequent 
revenue rulings, revenue procedures, or other appropriate guidance.
    (iii) Example. The following example illustrates the rules of this 
paragraph (d)(6):

    Example. Allocation based on applicable tax rates. H and W timely 
file their 1998 joint Federal income tax return. H and W divorce in 
1999. On July 13, 2001, a $5,100 deficiency is assessed with respect to 
H's and W's 1998 return. Of this deficiency, $2,000 results from 
unreported capital gain of $6,000 that is attributable to W and $4,000 
of capital gain that is attributable to H (both gains being subject to 
tax at the 20% marginal rate). The remaining $3,100 of the deficiency is 
attributable to $10,000 of unreported dividend income of H that is 
subject to tax at a marginal rate of 31%. H and W both timely elect to 
allocate the deficiency, and qualify under this section to do so. There 
are erroneous items subject to different tax rates; thus, the 
alternative allocation method of this paragraph (d)(6) applies. The 
three erroneous items are first categorized according to their 
applicable tax rates, then allocated. Of the total amount of 20% tax 
rate items ($10,000), 60% is allocable to W and 40% is allocable to H. 
Therefore, 60% of the $2,000 deficiency attributable to these items (or 
$1,200) is allocated to W. The remaining 40% of this portion of the 
deficiency ($800) is allocated to H. The only 31% tax rate item is 
allocable to H. Accordingly, H is liable for $3,900 of the deficiency 
($800 + $3,100), and W is liable for the remaining $1,200.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-4  Equitable relief.

    (a) A requesting spouse who files a joint return for which a 
liability remains unpaid and who does not qualify for full relief under 
Sec. 1.6015-2 or 1.6015-3 may request equitable relief under this 
section. The Internal Revenue Service has the discretion to grant 
equitable relief from joint and several liability to a requesting spouse 
when, considering all of the facts and circumstances, it would be 
inequitable to hold the requesting spouse jointly and severally liable.
    (b) This section may not be used to circumvent the limitation of 
Sec. 1.6015-3(c)(1) (i.e., no refunds under Sec. 1.6015-3). Therefore, 
relief is not available under this section to obtain a refund of 
liabilities already paid, for which the requesting spouse would 
otherwise qualify for relief under Sec. 1.6015-3.
    (c) For guidance concerning the criteria to be used in determining 
whether it is inequitable to hold a requesting spouse jointly and 
severally liable under this section, see Rev. Proc. 2000-15 (2000-1 C.B. 
447), or other guidance published by the Treasury and IRS (see 
Sec. 601.601(d)(2) of this chapter).

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief. To elect the application of Sec. 1.6015-2 or 
1.6015-3, or to request equitable relief under Sec. 1.6015-4, a 
requesting spouse must file Form 8857, ``Request for Innocent Spouse 
Relief'' (or other specified form); submit a written statement 
containing the same information required on Form 8857, which is signed 
under penalties of perjury; or submit information in the manner 
prescribed by the Treasury and IRS in forms, relevant revenue rulings, 
revenue procedures, or other published guidance (see Sec. 601.601(d)(2) 
of this chapter).
    (b) Time period for filing a request for relief--(1) In general. To 
elect the application of Sec. 1.6015-2 or 1.6015-3, or to request 
equitable relief under Sec. 1.6015-4, a requesting spouse must file Form 
8857 or other similar statement with the Internal Revenue Service no 
later than two years from the date of the first collection activity 
against the requesting spouse after July 22, 1998, with respect to the 
joint tax liability.
    (2) Definitions--(i) Collection activity. For purposes of this 
paragraph (b), collection activity means a section 6330 notice; an 
offset of an overpayment of

[[Page 109]]

the requesting spouse against a liability under section 6402; the filing 
of a suit by the United States against the requesting spouse for the 
collection of the joint tax liability; or the filing of a claim by the 
United States in a court proceeding in which the requesting spouse is a 
party or which involves property of the requesting spouse. Collection 
activity does not include a notice of deficiency; the filing of a Notice 
of Federal Tax Lien; or a demand for payment of tax. The term property 
of the requesting spouse, for purposes of this paragraph (b), means 
property in which the requesting spouse has an ownership interest (other 
than solely through the operation of community property laws), including 
property owned jointly with the nonrequesting spouse.
    (ii) Section 6330 notice. A section 6330 notice refers to the notice 
sent, pursuant to section 6330, providing taxpayers notice of the 
Service's intent to levy and of their right to a collection due process 
(CDP) hearing.
    (3) Requests for relief made before commencement of collection 
activity. An election or request for relief may be made before 
collection activity has commenced. For example, an election or request 
for relief may be made in connection with an audit or examination of the 
joint return or a demand for payment, or pursuant to the CDP hearing 
procedures under section 6320 in connection with the filing of a Notice 
of Federal Tax Lien. For more information on the rules regarding 
collection due process for liens, see the Treasury regulations under 
section 6320. However, no request for relief may be made before the date 
specified in paragraph (b)(5) of this section.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b):

    Example 1. On January 11, 2000, a section 6330 notice is mailed to H 
and W regarding their 1997 joint Federal income tax liability. The 
Internal Revenue Service levies on W's employer on June 5, 2000. The 
Internal Revenue Service levies on H's employer on July 10, 2000. An 
election or request for relief must be made by January 11, 2002, which 
is two years after the Internal Revenue Service sent the section 6330 
notice.
    Example 2. The Internal Revenue Service offsets an overpayment 
against a joint liability for 1995 on January 12, 1998. The offset only 
partially satisfies the liability. The Internal Revenue Service takes no 
other collection actions. On July 24, 2001, W elects relief with respect 
to the unpaid portion of the 1995 liability. W's election is timely 
because the Internal Revenue Service has not taken any collection 
activity after July 22, 1998; therefore, the two-year period has not 
commenced.
    Example 3. Assume the same facts as in Example 2, except that the 
Internal Revenue Service sends a section 6330 notice on January 22, 
1999. W's election is untimely because it is filed more than two years 
after the first collection activity after July 22, 1998.
    Example 4. H and W do not remit full payment with their timely filed 
joint Federal income tax return for the 1989 tax year. No collection 
activity is taken after July 22, 1998, until the United States files a 
suit against both H and W to reduce the tax assessment to judgment and 
to foreclose the tax lien on their jointly-held business property on 
July 1, 1999. H elects relief on October 2, 2000. The election is timely 
because it is made within two years of the filing of a collection suit 
by the United States against H.
    Example 5. W files a Chapter 7 bankruptcy petition on July 10, 2000. 
On September 5, 2000, the United States files a proof of claim for her 
joint 1998 income tax liability. W elects relief with respect to the 
1998 liability on August 20, 2002. The election is timely because it is 
made within two years of the date the United States filed the proof of 
claim in W's bankruptcy case.

    (5) Premature requests for relief. The Internal Revenue Service will 
not consider premature claims for relief under Sec. 1.6015-2, 1.6015-3, 
or 1.6015-4. A premature claim is a claim for relief that is filed for a 
tax year prior to the receipt of a notification of an audit or a letter 
or notice from the IRS indicating that there may be an outstanding 
liability with regard to that year. Such notices or letters do not 
include notices issued pursuant to section 6223 relating to TEFRA 
partnership proceedings. A premature claim is not considered an election 
or request under Sec. 1.6015-1(h)(5).
    (c) Effect of a final administrative determination--(1) In general. 
A requesting spouse is entitled to only one final administrative 
determination of relief under Sec. 1.6015-1 for a given assessment, 
unless the requesting spouse properly submits a second request for 
relief that is described in Sec. 1.6015-1(h)(5).

[[Page 110]]

    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example: In January 2001, W becomes a limited partner in partnership 
P, and in February 2001, she starts her own business from which she 
earns $100,000 of net income for the year. H and W file a joint return 
for tax year 2001, on which they claim $20,000 in losses from their 
investment in P, and they omit W's self-employment tax. In March 2003, 
the Internal Revenue Service commences an audit under the provisions of 
subchapter C of chapter 63 of subtitle F of the Internal Revenue Code 
(TEFRA partnership proceeding) and sends H and W a notice under section 
6223(a)(1). In September 2003, the Internal Revenue Service audits H's 
and W's 2001 joint return regarding the omitted self-employment tax. H 
may file a claim for relief from joint and several liability for the 
self-employment tax liability because he has received a notification of 
an audit indicating that there may be an outstanding liability on the 
joint return. However, his claim for relief regarding the TEFRA 
partnership proceeding is premature under paragraph (b)(5) of this 
section. H will have to wait until the Internal Revenue Service sends 
him a notice of computational adjustment or assesses the liability 
resulting from the TEFRA partnership proceeding before he files a claim 
for relief with respect to any such liability. The assessment relating 
to the TEFRA partnership proceeding is separate from the assessment for 
the self-employment tax; therefore, H's subsequent claim for relief for 
the liability from the TEFRA partnership proceeding is not precluded by 
his previous claim for relief from the self-employment tax liability 
under this paragraph (c).

[T.D. 9003, 67 FR 47285, July 18, 2002, as amended at 67 FR 54735, Aug. 
26, 2002]



Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to participate in administrative proceedings.

    (a) In general. (1) When the Internal Revenue Service receives an 
election under Sec. 1.6015-2 or 1.6015-3, or a request for relief under 
Sec. 1.6015-4, the Internal Revenue Service must send a notice to the 
nonrequesting spouse's last known address that informs the nonrequesting 
spouse of the requesting spouse's claim for relief. For further guidance 
regarding the definition of last known address, see Sec. 301.6212-2 of 
this chapter. The notice must provide the nonrequesting spouse with an 
opportunity to submit any information that should be considered in 
determining whether the requesting spouse should be granted relief from 
joint and several liability. A nonrequesting spouse is not required to 
submit information under this section. Upon the request of either 
spouse, the Internal Revenue Service will share with one spouse the 
information submitted by the other spouse, unless such information would 
impair tax administration.
    (2) The Internal Revenue Service must notify the nonrequesting 
spouse of the Service's preliminary and final determinations with 
respect to the requesting spouse's claim for relief under section 6015.
    (b) Information submitted. The Internal Revenue Service will 
consider all of the information (as relevant to each particular relief 
provision) that the nonrequesting spouse submits in determining whether 
relief from joint and several liability is appropriate, including 
information relating to the following--
    (1) The legal status of the requesting and nonrequesting spouses' 
marriage;
    (2) The extent of the requesting spouse's knowledge of the erroneous 
items or underpayment;
    (3) The extent of the requesting spouse's knowledge or participation 
in the family business or financial affairs;
    (4) The requesting spouse's education level;
    (5) The extent to which the requesting spouse benefitted from the 
erroneous items;
    (6) Any asset transfers between the spouses;
    (7) Any indication of fraud on the part of either spouse;
    (8) Whether it would be inequitable, within the meaning of 
Secs. 1.6015-2(d) and 1.6015-4, to hold the requesting spouse jointly 
and severally liable for the outstanding liability;
    (9) The allocation or ownership of items giving rise to the 
deficiency; and
    (10) Anything else that may be relevant to the determination of 
whether relief from joint and several liability should be granted.
    (c) Effect of opportunity to participate. The failure to submit 
information pursuant to paragraph (b) of this section does not affect 
the nonrequesting spouse's ability to seek relief from joint and several 
liability for the same tax year. However, information that

[[Page 111]]

the nonrequesting spouse submits pursuant to paragraph (b) of this 
section is relevant in determining whether relief from joint and several 
liability is appropriate for the nonrequesting spouse should the 
nonrequesting spouse also submit an application for relief.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-7  Tax Court review.

    (a) In general. Requesting spouses may petition the Tax Court to 
review the denial of relief under Sec. 1.6015-1.
    (b) Time period for petitioning the Tax Court. Pursuant to section 
6015(e), the requesting spouse may petition the Tax Court to review a 
denial of relief under Sec. 1.6015-1 within 90 days after the date 
notice of the Service's final determination is mailed by certified or 
registered mail (90-day period). If the IRS does not mail the requesting 
spouse a final determination letter within 6 months of the date the 
requesting spouse files an election under Sec. 1.6015-2 or 1.6015-3, the 
requesting spouse may petition the Tax Court to review the election at 
any time after the expiration of the 6-month period, and before the 
expiration of the 90-day period. The Tax Court also may review a claim 
for relief if Tax Court jurisdiction has been acquired under another 
section of the Internal Revenue Code such as section 6213(a) or 6330(d).
    (c) Restrictions on collection and suspension of the running of the 
period of limitations--(1) Restrictions on collection under Sec. 1.6015-
2 or 1.6015-3. Unless the Internal Revenue Service determines that 
collection will be jeopardized by delay, no levy or proceeding in court 
shall be made, begun, or prosecuted against a requesting spouse electing 
the application of Sec. 1.6015-2 or 1.6015-3 for the collection of any 
assessment to which the election relates until the expiration of the 90-
day period described in paragraph (b) of this section, or if a petition 
is filed with the Tax Court, until the decision of the Tax Court becomes 
final under section 7481. For more information regarding the date on 
which a decision of the Tax Court becomes final, see section 7481 and 
the regulations thereunder. Notwithstanding the above, if the requesting 
spouse appeals the Tax Court's decision, the Internal Revenue Service 
may resume collection of the liability from the requesting spouse on the 
date the requesting spouse files the notice of appeal, unless the 
requesting spouse files an appeal bond pursuant to the rules of section 
7485. Jeopardy under this paragraph (c)(1) means conditions exist that 
would require an assessment under section 6851 or 6861 and the 
regulations thereunder.
    (2) Waiver of the restrictions on collection. A requesting spouse 
may, at any time (regardless of whether a notice of the Service's final 
determination of relief is mailed), waive the restrictions on collection 
in paragraph (c)(1) of this section.
    (3) Suspension of the running of the period of limitations--(i) 
Relief under Sec. 1.6015-2 or 1.6015-3. The running of the period of 
limitations in section 6502 on collection against the requesting spouse 
of the assessment to which an election under Sec. 1.6015-2 or 1.6015-3 
relates is suspended for the period during which the Internal Revenue 
Service is prohibited by paragraph (c)(1) of this section from 
collecting by levy or a proceeding in court and for 60 days thereafter. 
However, if the requesting spouse signs a waiver of the restrictions on 
collection in accordance with paragraph (c)(2) of this section, the 
suspension of the period of limitations in section 6502 on collection 
against the requesting spouse will terminate on the date that is 60 days 
after the date the waiver is filed with the Internal Revenue Service.
    (ii) Relief under Sec. 1.6015-4. If a requesting spouse seeks only 
equitable relief under Sec. 1.6015-4, the restrictions on collection of 
paragraph (c)(1) of this section do not apply. Accordingly, the request 
for relief does not suspend the running of the period of limitations on 
collection.
    (4) Definitions--(i) Levy. For purposes of this paragraph (c), levy 
means an administrative levy or seizure described by section 6331.
    (ii) Proceedings in court. For purposes of this paragraph (c), 
proceedings in court means suits filed by the United States for the 
collection of Federal tax. Proceedings in court does not refer to the 
filing of pleadings and claims and other participation by the Internal 
Revenue Service or the United States

[[Page 112]]

in suits not filed by the United States, including Tax Court cases, 
refund suits, and bankruptcy cases.
    (iii) Assessment to which the election relates. For purposes of this 
paragraph (c), the assessment to which the election relates is the 
entire assessment of the deficiency to which the election relates, even 
if the election is made with respect to only part of that deficiency.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-8  Applicable liabilities.

    (a) In general. Section 6015 applies to liabilities that arise after 
July 22, 1998, and to liabilities that arose prior to July 22, 1998, 
that were not paid on or before July 22, 1998.
    (b) Liabilities paid on or before July 22, 1998. A requesting spouse 
seeking relief from joint and several liability for amounts paid on or 
before July 22, 1998, must request relief under section 6013(e) and the 
regulations thereunder.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. H and W file a joint Federal income tax return for 1995 
on April 15, 1996. There is an understatement on the return attributable 
to an omission of H's wage income. On October 15, 1998, H and W receive 
a 30-day letter proposing a deficiency on the 1995 joint return. W pays 
the outstanding liability in full on November 30, 1998. In March 1999, W 
files Form 8857, requesting relief from joint and several liability 
under section 6015(b). Although W's liability arose prior to July 22, 
1998, it was unpaid as of that date. Therefore, section 6015 is 
applicable.
    Example 2. H and W file their 1995 joint Federal income tax return 
on April 15, 1996. On October 14, 1997, a deficiency of $5,000 is 
assessed regarding a disallowed business expense deduction attributable 
to H. On June 30, 1998, the Internal Revenue Service levies on the 
$3,000 in W's bank account in partial satisfaction of the outstanding 
liability. On August 31, 1998, W files a request for relief from joint 
and several liability. The liability arose prior to July 22, 1998. 
Section 6015 is applicable to the $2,000 that remained unpaid as of July 
22, 1998, and section 6013(e) is applicable to the $3,000 that was paid 
prior to July 22, 1998.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-9  Effective date.

    Sections 1.6015-0 through 1.6015-9 are applicable for all elections 
under Sec. 1.6015-2 or 1.6015-3 or any requests for relief under 
Sec. 1.6015-4 filed on or after July 18, 2002.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015(a)-1  Declaration of estimated income tax by individuals.

    (a) Requirement--(1) Taxable years beginning after December 31, 
1971. With respect to taxable years beginning after December 31, 1971, a 
declaration of estimated income tax by an individual is not required if 
the estimated tax (as defined in section 6015(c)) can reasonably be 
expected to be less than $100. In all other cases a declaration of 
estimated income tax shall be made by every individual if the following 
conditions are met and if such individual is not a nonresident alien 
individual who is excepted under section 6015(i) and Sec. 1.6015(i)-1 
from the requirements of making a declaration:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $20,000, in the case of:
    (1) A single individual including a head of a household (as defined 
in section 2(b)) or a surviving spouse (as defined in section 2(a)); or
    (2) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, if his spouse has not received wages 
(as defined in section 3401(a)) for the taxable year; or
    (b) $10,000, in the case of a married individual entitled under 
section 6015(b) to file a joint declaration with his spouse, if both he 
and his spouse have received wages (as defined in section 3401(a)) for 
the taxable year; or
    (c) $5,000, in the case of a married individual not entitled under 
section 6015(b) to file a joint declaration with his spouse; or
    (ii) The gross income can reasonably be expected to include more 
than $500 from sources other than wages (as defined in section 3401(a)).
    (2) Taxable years beginning after December 31, 1966, and before 
January 1, 1972. With respect to taxable years beginning after December 
31, 1966, and before January 1, 1972, a declaration of estimated income 
tax by an individual is not required if the estimated tax (as defined in 
section 6015(c)) can reasonably be expected to be less than $40. In

[[Page 113]]

all other cases a declaration of estimated income tax shall be made by 
every individual if the following conditions are met and if such 
individual is not a nonresident alien individual who is excepted under 
section 6015(i) and Sec. 1.6015(i)-1 from the requirement of making a 
declaration:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $5,000, in the case of:
    (1) A single individual other than a head of a household (as defined 
in section 1(b)(2) for taxable years ending before January 1, 1971, or 
as defined in section 2(b) of the Code as amended by the Tax Reform Act 
of 1969 for taxable years beginning after December 31, 1970) or a 
surviving spouse (as defined in section 2(b) for taxable years ending 
before January 1, 1971, or as defined in section 2(a) of the Code as 
amended by the Tax Reform Act of 1969 for taxable years beginning after 
December 31, 1970);
    (2) A married individual not entitled under section 6015(b) to file 
a joint declaration with his spouse; or
    (3) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, but only if the aggregate gross 
income of such individual and his spouse for the taxable year can 
reasonably be expected to exceed $10,000; or
    (b) $10,000, in the case of:
    (1) A head of household (as defined in section 1(b)(2) for taxable 
years ending before January 1, 1971, or as defined in section 2(b) of 
the Code as amended by the Tax Reform Act of 1969 for taxable years 
beginning after December 31, 1970); or
    (2) A surviving spouse (as defined in section 2(b) for taxable years 
ending before January 1, 1971, or as defined in section 2(a) of the Code 
as amended by the Tax Reform Act of 1969 for taxable years beginning 
after December 31, 1970); or
    (ii) The gross income can reasonably be expected to include more 
than $200 from sources other than wages (as defined in section 3401(a)).
    (3) Taxable years beginning before January 1, 1967. With respect to 
taxable years beginning before January 1, 1967, and after December 31, 
1960, a declaration of estimated income tax by an individual is not 
required if the estimated tax (as defined in section 6015(c)) can 
reasonably be expected to be less than $40. In all other cases a 
declaration shall be made by every citizen of the United States, whether 
residing at home or abroad, every individual residing in the United 
States though not a citizen thereof, every nonresident alien who is a 
resident of Canada, Mexico, or Puerto Rico and who has wages subject to 
withholding at the source under section 3402, and every nonresident 
alien who has been, or expects to be, a resident of Puerto Rico during 
the entire taxable year, if:
    (i) The gross income for the taxable year can reasonably be expected 
to exceed:
    (a) $5,000, in the case of:
    (1) A single individual other than a head of a household (as defined 
in section 1(b)(2)); or
    (2) A married individual not entitled under section 6015(b) to file 
a joint declaration with his spouse; or
    (3) A married individual entitled under section 6015(b) to file a 
joint declaration with his spouse, but only if the aggregate gross 
income of such individual and his spouse for the taxable year can 
reasonably be expected to exceed $10,000; or
    (b) $10,000, in the case of:
    (1) A head of a household (as defined in section 1(b)(2)); or
    (2) A surviving spouse (as defined in section 2(b)); or
    (ii) The gross income can reasonably be expected to include more 
than $200 from sources other than wages (as defined in section 3401(a)).
    (b) Income of child. In estimating his gross income for the taxable 
year a parent should not take into account the income of his minor 
child. Such income is not includible in the gross income of the parent. 
See section 73 and Sec. 1.73-1.
    (c) Exemption of spouse. For the purpose of determining whether a 
declaration of estimated tax is required under the provisions of 
paragraph (a)(3) of this section, a married person filing a separate 
declaration may not take into account the exemption of his spouse, if

[[Page 114]]

his spouse has, or is reasonably expected to have, gross income, or is 
reasonably expected to be the dependent of another taxpayer for the 
taxable year.
    (d) Nonresident alien individuals. For the rules exempting certain 
nonresident alien individuals from the requirement of making a 
declaration of estimated income tax, see Sec. 1.6015(i)-1.
    (e) Examples. The application of the provisions of this section may 
be illustrated by the following examples:

    Example (1). H maintains as his home a household which is the 
principal place of abode of himself and his two dependent children. H's 
wife died in 1970 and he has not remarried. H and his wife filed a joint 
return for 1970. H's salary from January 1, to June 30, 1972, is at the 
annual rate of $18,000. However, effective July 1, 1972, his annual 
salary is increased to $24,000, and under the facts then existing it is 
reasonable to assume that his salary for the remaining portion of 1972 
will remain unchanged and that his total salary for the year will, 
therefore, be $21,000. Since H is a surviving spouse (as defined in 
section 2(a)) and his gross income can reasonably be expected to exceed 
$20,000, he is required to file a declaration of estimated tax for 1972. 
Since it was not reasonable to assume that H's gross income for 1972 
would exceed $20,000 until July 1972 (after June 1 and before September 
2), H is not required to file a declaration until September 15, 1972. 
However, if H's estimated tax (as defined in section 6015(c)) can 
reasonably be expected to be less than $100, he is not required to file 
a declaration of estimated tax. See section 6073 and Secs. 1.6073-1 to 
1.6073-4, inclusive, for rules as to when a declaration must be filed.
    Example (2). H, a taxpayer making his return on the calendar year 
basis, has an annual salary of $12,000 in 1972. W, H's wife, received 
wages (as defined in section 3401(a)) in December 1972. W did not 
receive wages prior to December. Assuming that H and W are entitled to 
file a joint declaration of estimated tax under section 6015(b), H would 
not be required to file a declaration for 1972 until January 15, 1973, 
since prior to December 1972 W had not received wages. Since W received 
wages after September 1, 1972, H must file a declaration on or before 
January 15, 1973, because, under the rule contained in paragraph 
(a)(1)(i)(b) of this section, H's gross income could reasonably be 
expected to exceed $10,000 for 1972. However, no declaration would be 
required if H's estimated tax (as defined in section 6015(c)) could 
reasonably be expected to be less than $100. No declaration is required 
prior to January 15, 1973, because, under the rule contained in 
paragraph (a)(1)(i)(a)(2) of this section, H's gross income for 1972 
could not reasonably be expected to exceed $20,000.
    Example (3). P is a taxpayer making his return on the calendar year 
basis. P is engaged in the practice of his profession on his own account 
and has gross income of $2,000 from such profession for the 2 months of 
January and February 1972. He reasonably expects that his gross income 
from his profession will continue to average $1,000 each month 
throughout the year and that he will have no income from any other 
source during 1972. Since P has gross income which does not constitute 
wages subject to withholding, he is required to file a declaration of 
estimated tax for that year since he has income of more than $500 from 
sources other than wages, unless he reasonably expects his estimated tax 
to be less than $100.
    Example (4). S, a married taxpayer, has been regularly employed for 
many years. As of January 1, 1972, his weekly wages are $305. For many 
years, S has also owned stock in a corporation which has regularly paid 
him annual dividends ranging from $575 to $600. Because his gross income 
can reasonably be expected to include more than $500 from sources other 
than wages, S is required to make a declaration of estimated tax for 
1972, unless he reasonably expects his estimated tax to be less than 
$100.

    (f) Declarations made by agents. The declaration of income may be 
made by an agent if, by reason of disease or injury, the person liable 
for the making of the declaration is unable to make it. The declaration 
may also be made by an agent if the taxpayer is unable to make the 
declaration by reason of continuous absence from the United States 
(including Puerto Rico as if a part of the United States) for a period 
of at least 60 days prior to the date prescribed by law for making the 
declaration. In addition, a declaration may be made by an agent if the 
taxpayer requests permission, in writing, of the district director for 
the internal revenue district in which is located the legal residence or 
principal place of business of the person liable for the making of the 
declaration, and such district director determines that good cause 
exists for permitting the declaration to be so made. However, assistance 
in the preparation of the declaration may be rendered under any 
circumstances. Whenever a declaration is made by an agent it must be 
accompanied by a power of attorney (or copy thereof) authorizing him to 
represent his principal in making, executing, or

[[Page 115]]

filing the declaration. A form 2848, when properly completed, is 
sufficient. In addition, where one spouse is physically unable by reason 
of disease or injury to sign a joint declaration, the other spouse may, 
with the oral consent of the one who is incapacitated, sign the 
incapacitated spouse's name in the proper place in the declaration 
followed by the words ``By ------------, Husband (or Wife)'', and by the 
signature of the signing spouse in his own right, provided that a dated 
statement signed by the spouse who is signing the declaration is 
attached to and made a part of the declaration stating:
    (1) The name of the declaration being filed,
    (2) The taxable year,
    (3) The reason for the inability of the spouse who is incapacitated 
to sign the declaration, and
    (4) That the spouse who is incapacitated consented to the signing of 
the declaration.

The taxpayer and his agent, if any, are responsible for the declaration 
as made and incur liability for the penalties provided for erroneous, 
false, or fraudulent declarations.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6817, 30 FR 
4537, Apr. 8, 1965; T.D. 7117, 36 FR 9422, May 25, 1971; T.D. 7274, 38 
FR 11345, May 7, 1973; T.D. 7282, 38 FR 19027, July 17, 1973; T.D. 7332, 
39 FR 44232, Dec. 23, 1974]



Sec. 1.6015(b)-1  Joint declaration by husband and wife.

    (a) In general. A husband and wife may make a joint declaration of 
estimated tax even though they are not living together. However, a joint 
declaration may not be made if they are separated under a decree of 
divorce or of separate maintenance. A joint declaration may not be made 
if the taxpayer's spouse is a nonresident alien (including a nonresident 
alien who is a bona fide resident of Puerto Rico during the entire 
taxable year) or if his spouse has a different taxable year. If the 
gross income of each spouse meets the requirements of section 6015(a), 
either a joint declaration must be made or a separate declaration must 
be made by each. If a joint declaration is made, the amount estimated as 
the income tax imposed by chapter 1 (other than by section 56) must be 
computed on the aggregate estimated taxable income of the spouses (see 
section 6013(d)(3) and Sec. 1.2-1), while (for taxable years beginning 
after December 31, 1966) the amount estimated as the self-employment tax 
imposed by chapter 2 must be computed on the separate estimated self-
employment income of each spouse. See sections 1401 and 1402 and 
Sec. 1.6017-1(b)(1). The liability with respect to the estimated tax, in 
the case of a joint declaration, shall be joint and several.
    (b) Application to separate returns. The fact that a joint 
declaration of estimated tax is made by them will not preclude a husband 
and his wife from filing separate returns. In case a joint declaration 
is made but a joint return is not made for the same taxable year, the 
payments made on account of the estimated tax for such year may be 
treated as payments on account of the tax liability of either the 
husband or wife for the taxable year or may be divided between them in 
such manner as they may agree. In the event the husband and wife fail to 
agree to a division, such payments shall be allocated between them in 
accordance with the following rule. The portion of such payments to be 
allocated to a spouse shall be that portion of the aggregate of all such 
payments as the amount of tax imposed by chapter 1 (other than by 
section 56) shown on the separate return of the taxpayer (plus, for 
taxable years beginning after December 31, 1966, the amount of tax 
imposed by chapter 2 shown on the return of the taxpayer) bears to the 
sum of the taxes imposed by chapter 1 (other than by section 56) shown 
on the separate returns of the taxpayer and his spouse (plus, for 
taxable years beginning after December 31, 1966, the sum of the taxes 
imposed by chapter 2 shown on the returns of the taxpayer and his 
spouse). For example, assume that for calendar yedar 1972 H and his 
Spouse W make a joint declaration of estimated tax and, pursuant 
thereto, pay a total of $19,500 of estimated tax. H and W subsequenty 
file separate returns for 1972 showing tax imposed by chapter 1 (other 
than by section 56) in the amount of $11,500 and $8,000, respectively. 
In addition, H's return shows a tax imposed by

[[Page 116]]

chapter 2 in the amount of $500. H and W fail to agree to a division of 
the estimated tax paid. The amount of the aggregate estimated tax 
payments allocated to H is computed as follows:

(1) Amount of tax, imposed by chapter 1 (other than by           $11,500
 section 56) shown on H's return.............................
(2) Plus: Amount of tax imposed by chapter 2 shown on H's            500
 return......................................................
                                                              ----------
(3) Total taxes imposed by chapter 1 (other than by section       12,000
 56) and by chapter 2 shown on H's return....................
(4) Amount of tax imposed by chapter 1 (other than by section     $8,000
 56) shown on W's return.....................................
                                                              ----------
(5) Total taxes imposed by chapter 1 (other than by section       20,000
 56) and by chapter 2 shown on both H's and W's returns......
                                                              ==========
(6) Proportion of such taxes shown on H's return to total            60%
 amount of such taxes shown on both H's and W's returns
 ($12,000/20,000)............................................
(7) Amount of estimated tax payments allocated to H (60% of      $11,700
 $10,500)....................................................
 


Accordingly, H's return would show remaining tax liability in the amount 
of $300 ($12,000 taxes shown less $11,700 estimated tax allocated).
    (c) Death of spouse. (1) A joint declaration may not be made after 
the death of either the husband or wife. However, if it is reasonable 
for a surviving spouse to assume that there will be filed a joint return 
for himself and the deceased spouse for his taxable year and the last 
taxable year of the deceased spouse he may, in making a separate 
declaration for his taxable year which includes the period comprising 
such last taxable year of his spouse, estimate the amount of the tax 
imposed by chapter 1 (other than by section 56) on his and his spouse's 
taxable income on an aggregate basis and compute his estimated tax with 
respect to such chapter 1 tax in the same manner as though a joint 
declaration had been filed.
    (2) If a joint declaration is made by husband and wife and 
thereafter one spouse dies, no further payments of estimated tax on 
account of such joint declaration are required from the estate of the 
decedent. The surviving spouse, however, shall be liable for the payment 
of any subsequent installments of the joint estimated tax unless an 
amended declaration setting forth the separate estimated tax for the 
taxable year is made by such spouse. Such separate estimated tax shall 
be paid at the times and in the amounts determined under the rules 
prescribed in section 6153. For the purpose of (i) the making of such 
amended declaration by the surviving spouse, and (ii) the allocation of 
payments made pursuant to a joint declaration between the surviving 
spouse and the legal representative of the decedent in the event a joint 
return is not filed, the payments made pursuant to the joint declaration 
may be divided between the decedent and the surviving spouse in such 
proportion as the surviving spouse and the legal representative of the 
decedent may agree. In the event the surviving spouse and the legal 
representative of the decedent fail to agree to a division, such 
payments shall be allocated in accordance with the following rule. The 
portion of such payments to be allocated to the surviving spouse shall 
be that portion of the aggregate amount of such payments as the amount 
of tax imposed by chapter 1 (other than by section 56) shown on the 
separate return of the surviving spouse (plus, for taxable years 
beginning after December 31, 1966, the amount of tax imposed by chapter 
2 shown on the return of the surviving spouse) bears to the sum imposed 
by chapter 1 (other than by section 56) shown on the separate returns of 
the surviving spouse and of the decedent (plus, for taxable years 
beginning after December 31, 1966, the sum of the taxes imposed by 
chapter 2 shown on the returns of the surviving spouse and of the 
decedent); and the balance of such payments shall be allocated to the 
decedent. This rule may be illustrated by analogizing the surviving 
spouse described in this rule to H in the example contained in paragraph 
(b) of this section and the decedent in this rule to W in that example.
    (d) Signing of declaration. A joint declaration of a husband and 
wife (if not made by an agent of one or both spouses) shall be signed by 
both spouses. The provisions of paragraph (f) of Sec. 1.6015(a)-1, 
relating to returns made by agents, shall apply where one spouse signs a 
declaration as agent for the other, or where a third party signs a 
declaration as agent for one or both spouses.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T. D. 7274, 38 FR 
11345, May 7, 1973; T.D. 7427, 41 FR 34027, Aug. 12, 1976]

[[Page 117]]



Sec. 1.6015(c)-1  Definition of estimated tax.

    (a) In general. In the case of an individual, the term ``estimated 
tax'' means:
    (1) The amount which the individual estimates as the amount of the 
income tax imposed by chapter 1 (other than the tax imposed by section 
56 or for taxable years ending before September 30, 1968, the tax 
surcharge imposed by section 51) for the taxable year (and including the 
amount which he estimates as the amount of any qualified State 
individual income taxes which are treated pursuant to section 6361(a) as 
if they were imposed by chapter 1 for the taxable year), plus
    (2) For taxable years beginning after December 31, 1966, the amount 
which the individual estimates as the amount of the self-employment tax 
imposed by chapter 2 for the taxable year, minus
    (3) The amount which the individual estimates as the sum of any 
credits against tax provided by part IV of subchapter A of chapter 1. 
These credits are those provided by section 31 (relating to tax withheld 
on wages), section 32 (relating to tax withheld at source on nonresident 
aliens and foreign corporations and on tax-free covenant bonds), section 
33 (relating to foreign taxes), section 34 (relating to the credit for 
dividends received on or before December 31, 1964), section 35 (relating 
to partially tax-exempt interest), section 37 (relating to the elderly), 
section 38 (relating to the investment credit), section 39 (relating to 
certain uses of gasoline, special fuels, and lubricating oil), section 
40 (relating to expenses of work incentive programs), section 41 
(relating to contributions to candidates), section 42 (relating to 
general tax credit), section 43 (relating to earned income), section 44 
(relating to purchase of new principal residence), section 44A (relating 
to expenses for household and dependent care services necessary for 
gainful employment), section 44B (relating to credit for employment of 
certain new employees), and section 45 (relating to overpayments of 
tax), minus,
    (4) In the case of an individual who is subject to one or more 
qualified State individual income taxes, the amount which he estimates 
as the sum of the credits allowed against such taxes pursuant to section 
6362(b)(2) (B) or (C) or section 6362(c)(4) and paragraph (c) of 
Sec. 301.6362-4 of this chapter (Regulations on Procedure and 
Administration) (relating to the credit for income taxes of other States 
or political subdivisions thereof) and paragraph (c)(2) of 
Sec. 301.6361-1 (relating to the credit for tax withheld from wages on 
account of qualified State individual income taxes), and minus
    (5) For taxable years ending after February 29, 1980, the amount 
which the individual estimates will be the amount of such individual's 
overpayment of windfall profit tax imposed by section 4986 of the Code 
for the taxable year. For this purpose, the amount of such overpayment 
is the amount by which such individual's aggregate windfall profit tax 
liability for the taxable year as a producer of crude oil is reasonably 
expected to be exceeded by withholding of windfall profit tax for the 
taxable year.
    (b) Example. A, a self-employed individual not subject to any 
qualified State individual income tax, estimates that his liabilities 
for income tax and self-employment tax for 1973 will be $1,600 and $400, 
respectively. A is required to declare and pay an estimated tax of 
$2,000 for that year.


(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 7577, 43 FR 59358, Dec. 20, 1978, as amended by T.D. 8016, 50 FR 
11854, Mar. 26, 1985]



Sec. 1.6015(d)-1  Contents of declaration of estimated tax.

    (a) In general. (1) The declaration of estimated tax by an 
individual shall be made on Form 1040-ES. For the purpose of making the 
declaration, the amount of gross income which the taxpayer can 
reasonably be expected to receive or accrue, depending upon the method 
of accounting upon which taxable income is computed, and the amount of 
the estimated allowable deductions and credits to be taken into account 
in computing the amount of estimated tax shall be determined upon

[[Page 118]]

the basis of the facts and circumstances existing as at the time 
prescribed for the filing of the declaration as well as those reasonably 
to be anticipated for the taxable year. If, therefore, the taxpayer is 
employed at the date prescribed for filing his declaration at a given 
wage or salary, it should, in the absence of circumstances indicating 
the contrary, be presumed by him for the purpose of the declaration that 
such employment will continue to the end of the taxable year at the wage 
or salary received by him as of such date. In the case of income other 
than wages and salary the regularity in the payment of income, such as 
dividends, interest, rents, royalties, and income arising from estates 
and trusts is a factor to be taken into consideration. Thus, if the 
taxpayer owns shares of stock in a corporation and dividends have been 
paid regularly for several years upon such stock, the taxpayer in the 
preparation of his declaration should, in the absence of information 
indicating a change in the dividend policy, include the prospective 
dividends from the corporation for the taxable year as well as those 
actually received in such year prior to the filing of the declaration. 
In the case of a taxpayer engaged in business on his own account, there 
shall be made an estimate of gross income and deductions and credits in 
the light of the best available information affecting the trade, 
business, or profession.
    (2) In the case of any individual who can, at the time of the 
preparation of his declaration, reasonably anticipate that his gross 
income will be of such amount and character as to enable him to elect 
upon his return for such year to compute the tax under section 3 
(relating to optional tax), in lieu of the tax imposed by section 1, the 
declaration of estimated tax may be made upon the basis set forth in 
section 3 and Sec. 1.3-1. The filing of a declaration computed upon the 
basis of section 3 shall not constitute the making of an election under 
section 4 (relating to rules for optional tax) nor will it permit the 
filing of a return on the basis of the optional tax under section 3 
unless the taxpayer otherwise comes within the provisions of sections 3 
and 4. For the purpose of computing the tax liability in the case of 
married persons, if the taxable income of one spouse is determined 
without regard to the standard deduction, the standard deduction is not 
allowed to either. (See, however, paragraph (c) of Sec. 1.142-1 for 
exceptions where spouses are legally separated under a decree of divorce 
or separate maintenance.) Hence, where separate declarations are filed, 
one spouse should not use section 3 in computing the estimated tax 
unless the other spouse also uses section 3 or employs the standard 
deduction in computing the estimated tax.
    (b) Computation of estimated tax. In computing the estimated tax the 
taxpayer should take into account the following:
    (1) The amount estimated as the income tax imposed by chapter 1 
(other than by section 56) for the taxable year after the application of 
any allowable amounts estimated as the credit for foreign taxes, the 
dividends received credit (for dividends received on or before December 
31, 1964), the credit for partially tax-exempt interest, the retirement 
income credit, the investment credit, the credit for expenses of work 
incentive programs, the credit for contributions to candidates, the 
credit for overpayments of tax, but without regard to the credit under 
section 31 for tax withheld on wages or to the credit under section 39 
for certain uses of gasoline, special fuels, and lubricating oils;
    (2) For taxable years beginning after December 31, 1966 (and, if the 
taxpayer so desires, for an earlier taxable year), the amount estimated 
as the tax on self-employment income imposed by chapter 2;
    (3) The amounts estimated by the taxpayer as the credits under 
section 31 for tax withheld on wages and under section 39 for certain 
uses of gasoline, special fuels, and lubricating oils;
    (4) For taxable years ending after February 29, 1980, the amount 
which the taxpayer estimates will be the amount of such taxpayer's 
overpayment of windfall profit tax imposed by section 4986 of the Code 
for the taxable year. For this purpose, the amount of such overpayment 
is the amount by which such individual's aggregate

[[Page 119]]

windfall profit tax liability for the taxable year as a producer of 
crude oil is reasonably expected to be exceeded by withholding of 
windfall profit tax for the taxable year.
    (5) The excess, if any, of the sum of the amounts shown under 
subparagraphs (b) (1) and (2) of this paragraph over the sum of the 
amounts shown under subparagraphs (b)(3) and (4) of this paragraph shall 
be the estimated tax for the taxable year.
    (c) Use of prescribed form. Copies of Form 1040-ES will so far as 
possible be furnished taxpayers by district directors. A taxpayer will 
not be excused from making a declaration, however, by the fact that no 
form has been furnished to him. Taxpayers not supplied with the proper 
form should make application therefor to the district director in ample 
time to have their declarations prepared, verified, and filed with the 
district director on or before the date prescribed for filing the 
declaration. If the prescribed form is not available, a statement 
disclosing the amount estimated as the tax, the estimated credits, and 
the estimated tax after deducting such credits should be filed as a 
tentative declaration within the prescribed time, accompanied by the 
payment of the required installment. Such tentative declaration should 
be supplemented, without unnecessary delay, by a declaration made on the 
proper form.


(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34028, Aug. 12, 1976; T.D. 8016, 50 FR 11854, Mar. 26, 1985]



Sec. 1.6015(e)-1  Amendment of declaration.

    In the making of a declaration of estimated tax, the taxpayer is 
required to take into account the then existing facts and circumstances 
as well as those reasonably to be anticipated relating to prospective 
gross income, allowable deductions, and estimated credits for the 
taxable year. Amended or revised declarations may be made in any case in 
which the taxpayer estimates that his gross income, deductions, or 
credits will differ from the gross income, deductions, or credits 
reflected in the previous declaration. An amended declaration may also 
be made based upon a change in the number of exemptions to which the 
taxpayer may be entitled for the then current taxable year. However, 
only one amended declaration may be filed during any interval between 
installment dates. See paragraph (d) of Sec. 1.6073-1. An amended 
declaration may be filed jointly by husband and wife even though 
separate declarations have previously been filed. An amended declaration 
may be made on either Form 1040-ES (marked ``Amended''). See, however, 
paragraph (c) of Sec. 1.6015(d)-1 for procedure to be followed if the 
prescribed form is not available.

[T.D. 7427, 41 FR 34028, Aug. 12, 1976]



Sec. 1.6015(f)-1  Return as declaration or amendment.

    (a) Time for filing return. (1)(i) If a taxpayer pays in full the 
amount computed on the return as payable, and
    (a) If a taxpayer (other than a taxpayer referred to in (b) of this 
subdivision):
    (1) On the calendar year basis, files his return on or before 
January 31 of the succeeding calendar year, or
    (2) On a fiscal year basis, files his return on or before the last 
day of the first month immediately succeeding the close of such fiscal 
year, or
    (b) If an individual referred to in section 6073(b), relating to 
income from farming, or, with respect to taxable years beginning after 
December 31, 1962, from fishing:
    (1) On the calendar year basis, for taxable years beginning before 
January 1, 1969, files his return on or before February 15, or
    (2) On a fiscal year basis, for taxable years beginning before 
January 1, 1969, files his return on or before the 15th day of the 
second month after the close of his fiscal year, or
    (3) On the calendar year basis, for taxable years beginning after 
December 31, 1968, files his return on or before March 1, or
    (4) On a fiscal year basis, for taxable years beginning after 
December 31, 1968, files his return on or before the first day of the 
third month after the close of his fiscal year, then:

[[Page 120]]

    (ii)(a) If the declaration is not required to be filed during the 
taxable year, but is required to be filed on or before January 15 of the 
succeeding year (or the date corresponding thereto in the case of a 
fiscal year), such return shall be considered as such declaration; or
    (b) If a declaration was filed during the taxable year, such return 
shall be considered as the amendment of the declaration permitted by 
section 6015(e) to be filed on or before January 15 of the succeeding 
year (or the date corresponding thereto in the case of a fiscal year).

Hence, for example, an individual taxpayer on the calendar year basis 
who, subsequent to September 1, 1963, first meets the requirements of 
section 6015(a) which necessitate the filing of a declaration for 1963, 
may satisfy the requirements as to the filing of such declaration by 
filing his return for 1963 on or before January 31, 1964 (February 15, 
1964, in the case of a farmer or fisherman), and paying in full at the 
time of such filing the tax shown thereon to be payable. Likewise, if a 
taxpayer files on or before September 15, 1963, a timely declaration for 
such year and subsequent thereto and on or before January 31, 1964, 
files his return for 1963, and pays at the time of such filing the tax 
shown by the return to be payable, such return shall be treated as an 
amended declaration timely filed.
    (2) For the purpose of section 6015(f) a taxpayer may file his 
return on or before the last day of the first month following the close 
of the taxable year even though he has not been furnished Form W-2 by 
his employer. In such case the taxpayer shall compute, as accurately as 
possible, his wages for such year and the tax withheld for which he is 
entitled to a credit, reporting such wages and tax on his return, 
together with all other pertinent information necessary to the 
determination of his tax liability for such year.
    (b) Effect on addition to the tax. Compliance with the provisions of 
section 6015(f) will enable a taxpayer to avoid the addition to the tax 
imposed by section 6654 with respect to an underpayment of the 
installment not required to be paid until January 15 of the succeeding 
calendar year (or the corresponding date in the case of a fiscal year). 
With respect to an underpayment of any earlier installment, compliance 
with section 6015(f) will not relieve the taxpayer from the addition to 
the tax imposed by section 6654. However, the period of the underpayment 
under section 6654(c), with respect to any earlier installment, will 
terminate on January 15 of the succeeding calendar year (or the 
corresponding date in the case of a fiscal year). For example, a 
taxpayer discovers on January 14, 1956, that he has underpaid his 
estimated tax for the calendar year 1955. He may, in lieu of filing an 
amended declaration on January 15, 1956, and paying the balance of the 
estimated tax determined thereon, file his final return on January 31, 
1956, and pay in full the amount computed thereon as payable. By so 
doing, he will avoid the addition to the tax with respect to the 
underpayment of the installment required to be paid by January 15, 1956. 
The periods of underpayment, under section 6654(c), as to the 
installments required to be paid on April 15, 1955, June 15, 1955, and 
September 15, 1955, also terminate on January 15, 1956.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7028, 35 FR 
3806, Feb. 27, 1970; 35 FR 4293, Mar. 10, 1970]



Sec. 1.6015(g)-1  Short taxable years of individuals.

    (a) Requirement of declaration. No declaration may be made for a 
period of more than 12 months. For purposes of this section a taxable 
year of 52 or 53 weeks, in the case of a taxpayer who computes his 
taxable income in accordance with the election permitted by section 
441(f) shall be deemed a period of 12 months. For special rules 
affecting the time for filing declarations and paying estimated tax by 
such a taxpayer, see paragraph (b) of Sec. 1.441-2. A separate 
declaration for a fractional part of a year is required where, for 
example, there is a change, with the approval of the Commissioner, in 
the basis of computing taxable income from one taxable year to another 
taxable year. The periods to be covered by such separate declarations in 
the several cases are those set forth in section

[[Page 121]]

443. No declaration is required if the short taxable year is:
    (1) A period of less than four months.
    (2) A period of at least four months but less than six months and 
the requirements of section 6015(a) are first met after the 1st day of 
the fourth month.
    (3) A period of at least six months but less than nine months and 
the requirements of section 6015(a) are first met after the 1st day of 
the sixth month, or
    (4) A period of nine months or more and the requirements of section 
6015(a) are first met after the 1st day of the ninth month.

In the case of a decedent, no declaration need be filed subsequent to 
the date of death. As to the requirement for an amended declaration if 
death of one spouse occurs after filing a joint declaration, see 
paragraph (c) of Sec. 1.6015(b)-1.
    (b) Income and income tax placed on annual basis. For the purpose of 
determining whether the anticipated income and tax for a short taxable 
year resulting from a change of annual accounting period, necessitates 
the filing of a declaration, income and income tax imposed by chapter 1 
(other than by section 56) shall be placed on an annual basis in the 
manner prescribed in section 443(b)(1). Thus, for example, an unmarried 
taxpayer who changes from a fiscal year basis to a calendar year basis 
beginning January 1, 1973, will have a short taxable year beginning July 
1, 1972, and ending December 31, 1972. If his anticipated gross income 
for such short taxable year consists solely of wages (as defined in 
section 3401(a)) in the amount of $11,000, his total gross income and 
his gross income from such wages for the purpose of determining whether 
a declaration is required is $22,000, the amount obtained by placing 
anticipated income of $11,000 upon an annual basis. Since the taxpayer's 
anticipated gross income from wages when placed upon an annual basis is 
in excess of $20,000, he is required to file a declaration of estimated 
tax for the short taxable year unless the estimated tax can reasonably 
be expected to be less than $100. However, for taxable years beginning 
after December 31, 1966, the amount which the individual estimates as 
the amount of self-employment tax imposed by chapter 2 shall be computed 
on the actual self-employment income for the short period.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34028, Aug. 12, 1976]



Sec. 1.6015(h)-1  Estates and trusts.

    An estate or trust, though generally taxed as an individual, is not 
required to file a declaration.



Sec. 1.6015(i)-1  Nonresident alien individuals.

    (a) Exception from requirement of making a declaration. No 
declaration of estimated income tax is required to be made under section 
6015(a) and Sec. 1.6015(a)-1 by a nonresident alien individual unless:
    (1) Such individual has wages, as defined in section 3401(a), and 
the regulations thereunder, upon which tax is required to be withheld 
under section 3402,
    (2) Such individual has income (other than compensation for personal 
services upon which tax is required to be withheld at source under 
section 1441) which is effectively connected for the taxable year with 
the conduct of a trade or business in the United States by such 
individual, or
    (3) Such individual has been, or expects to be, a resident of Puerto 
Rico during the entire taxable year.
    (b) Rules applicable to nonresident alien individuals required to 
make a declaration--(1) Tests to be applied. A nonresident alien 
individual who is not excepted by paragraph (a) of this section from the 
requirement of making a declaration of income tax is required to file a 
declaration if his gross income meets the requirements of section 
6015(a) and Sec. 1.6015(a)-1. In making the determination under section 
6015(a)(1) as to whether the amount of the gross income of a nonresident 
alien individual is such as to require making a declaration of estimated 
income tax, only the tests relating to a single individual (other than a 
head of household) or to a married individual not entitled to file a 
joint declaration with his spouse shall apply, since a nonresident alien 
individual may not make a joint

[[Page 122]]

declaration by reason of section 6015(b) and is not a head of household. 
Only in a rare case would a nonresident alien individual be a surviving 
spouse.
    (2) Determination of gross income. To determine the gross income of 
a nonresident alien individual who is not, or does not expect to be, a 
resident of Puerto Rico during the entire taxable year, see section 872 
and Secs. 1.872-1 and 1.872-2. To determine the gross income of a 
nonresident alien individual who is, or expects to be, a resident of 
Puerto Rico during the entire taxable year, see section 876 and 
Sec. 1.876-1. For purposes of applying paragraph (a)(2) of this section, 
income which is effectively connected for the taxable year with the 
conduct of a trade or business in the United States includes all income 
which is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating 
to students and trainees) or Sec. 1.871-10 (relating to real property 
income) as income which is effectively connected for such year with the 
conduct of a trade or business in the United States.
    (c) Effective date. This section shall apply for taxable years 
beginning after December 31, 1966. For corresponding rules applicable to 
taxable years beginning before January 1, 1967, see 26 CFR 1.6015(a)-
1(d) (Rev. as of Jan. 1, 1971).

[T.D. 7332, 39 FR 44232, Dec. 23, 1974]



Sec. 1.6015(j)-1  Applicability.

    Section 6015 is applicable only with respect to taxable years 
beginning after December 31, 1954. Sections 58, 59, and 60 of the 
Internal Revenue Code of 1939 and the regulations thereunder, shall 
continue in force with respect to taxable years beginning before January 
1, 1955.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960. Redesignated by T.D. 7332, 39 FR 
44232, Dec. 23, 1974]



Sec. 1.6016-1  Declarations of estimated income tax by corporations.

    (a) Requirement. For taxable years ending on or after December 31, 
1955, a declaration of estimated tax shall be made by every corporation 
(including unincorporated business enterprises electing to be taxed as 
domestic corporations under section 1361), which is subject to taxation 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code 
(relating to insurance companies), if its income tax under such sections 
or such subchapter L for the taxable year can reasonably be expected to 
exceed the sum of $100,000 plus the amount of any estimated credits 
allowable under section 32 (relating to tax withheld at source on 
nonresident aliens and foreign corporations and on tax-free covenant 
bonds), section 33 (relating to taxes of foreign countries and 
possessions of the United States), and section 38 (relating to 
investment in certain depreciable property).
    (b) Definition of estimated tax. The term ``estimated tax'', in the 
case of a corporation, means the excess of the amount which such 
corporation estimates as its income tax liability for the taxable year 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code, 
over the sum of $100,000 and any estimated credits under sections 32, 
33, and 38. However, for the rule with respect to the limitation upon 
the $100,000 exemption for members of certain electing affiliated 
groups, see section 243(b)(3)(C)(v) and the regulations thereunder.
    (c) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). M, a corporation subject to tax under section 11, 
reasonably anticipates that it will have taxable income of $224,000 for 
the calendar year 1964. The normal tax and surtax result in an expected 
liability of $105,000. M determines that it will not have any allowable 
credits under sections 32, 33, and 38 for 1964. Since M's expected tax 
($105,000) exceeds the exemption ($100,000), a declaration of estimated 
tax is required to be filed, reporting an estimated tax of $5,000 
($105,000-$100,000) for the calendar year 1964.
    Example (2). Under the facts stated in example (1), except that M 
estimates it will have an allowable foreign tax credit under section 33 
in the amount of $4,000 and an allowable investment credit under section 
38 in the amount of $3,000, no declaration is required, since M's 
expected tax ($105,000) does not exceed the $100,000 plus the allowable 
credits totaling $7,000.

[T.D. 6768, 29 FR 14921, Nov. 4, 1964]



Sec. 1.6016-2  Contents of declaration of estimated tax.

    (a) In general. The declaration of estimated tax by a corporation 
shall be

[[Page 123]]

made on Form 1120-ES. For the purpose of making the declaration, the 
estimated tax should be based upon the amount of gross income which the 
taxpayer can reasonably be expected to receive or accrue as the case may 
be, depending upon the method of accounting upon the basis of which the 
taxable income is computed, and the amount of the estimated allowable 
deductions and credits to be taken into account. Such amounts of gross 
income, deductions, and credits should be determined upon the basis of 
facts and circumstances existing as at the time prescribed for the 
filing of the declaration as well as those reasonably to be anticipated 
for the taxable year.
    (b) Use of prescribed form. Copies of Form 1120-ES will so far as 
possible be furnished taxpayers by district directors. A taxpayer will 
not be excused from making a declaration, however, by the fact that no 
form has been furnished. Taxpayers not supplied with the proper form 
should make application therefor to the district director in ample time 
to have their declarations prepared, verified, and filed with the 
district director on or before the date prescribed for filing the 
declaration. If the prescribed form is not available a statement 
disclosing the estimated income tax after the exemption and the credits, 
if any, should be filed as a tentative declaration within the prescribed 
time, accompanied by the payment of the required installment. Such 
tentative declaration should be supplemented, without unnecessary delay, 
by a declaration made on the proper form.



Sec. 1.6016-3  Amendment of declaration.

    In the making of a declaration of estimated tax the corporation is 
required to take into account the then existing facts and circumstances 
as well as those reasonably to be anticipated relating to prospective 
gross income, allowable deductions, and estimated credits for the 
taxable year. Amended or revised declarations may be made in any case in 
which the corporation estimates that its gross income, deductions, or 
credits will materially change the estimated tax reported in the 
previous declaration. However, for the rule with respect to the number 
of amended declarations which may be filed for taxable years beginning 
after December 31, 1963, see paragraph (d)(2) of Sec. 1.6074-1. Such 
amended declaration may be made on either Form 1120-ES (marked 
``Amended'') or on the reverse side of the installment notice furnished 
the corporation by the district director. See, however, paragraph (b) of 
Sec. 1.6016-2 for procedure to be followed if the prescribed form is not 
available.

[T.D. 6768, 29 FR 14922, Nov. 4, 1964]



Sec. 1.6016-4  Short taxable year.

    (a) Requirement of declaration. No declaration may be made for a 
period of more than 12 months. For purposes of this section a taxable 
year of 52 or 53 weeks, in the case of a corporation which computes its 
taxable income in accordance with the election permitted by section 
441(f), shall be deemed a period of 12 months. For special rules 
affecting the time for filing declarations and paying estimated tax by 
such corporation, see paragraph (b) of Sec. 1.441-2. A separate 
declaration is required where a corporation is required to submit an 
income tax return for a period of less than 12 months, but only if such 
short period ends on or after December 31, 1955. However, no declaration 
is required if the short taxable year:
    (1) Begins on or before December 31, 1963, and is:
    (i) A period of less than 9 months, or
    (ii) A period of 9 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year, or
    (2) Begins after December 31, 1963, and is:
    (i) A period of less than 4 months, or
    (ii) A period of 4 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year.
    (b) Income placed on an annual basis. In cases where the short 
taxable year results from a change of annual accounting period, for the 
purpose of determining whether the anticipated income for a short 
taxable year will result in an estimated tax liability requiring the 
filing of a declaration, such income shall be placed on an annual basis 
in the manner prescribed in section 443(b)(1). If a tax computed on

[[Page 124]]

such annualized income exceeds the sum of $100,000 and any credits under 
part IV, of subchapter A, chapter 1 of the Code, the estimated tax shall 
be the same part of the excess so computed as the number of months in 
the short period is of 12 months. Thus, for example, a corporation which 
changes from a calendar year basis to a fiscal year basis beginning 
October 1, 1956, will have a short taxable year beginning January 1, 
1956, and ending September 30, 1956. If on or before August 31, 1956, 
the taxpayer anticipates that it will have income of $264,000 for the 9-
month taxable year the estimated tax is computed as follows:

(1) Anticipated taxable income for 9 months.................    $264,000
(2) Annualized income ($264,000x12/9).......................     352,000
(3) Tax liability on item (2)...............................     177,540
(4) Item (3) reduced by $100,000 (there are no credits under      77,540
 part IV, subchapter A, chapter 1 of the Code)..............
(5) Estimated tax for 9-month period ($77,540x9/12).........      58,155
 


Since the tax liability on the annualized income is in excess of 
$100,000, a declaration is required to be filed, reporting an estimated 
tax of $58,155 for the 9-month taxable period. This paragraph has no 
application where the short taxable year does not result from a change 
in the taxpayer's annual accounting period.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6768, 29 FR 
14922, Nov. 4, 1964]



Sec. 1.6017-1  Self-employment tax returns.

    (a) In general. (1) Every individual, other than a nonresident 
alien, having net earnings from self-employment, as defined in section 
1402, of $400 or more for the taxable year shall make a return of such 
earnings. For purposes of this section, an individual who is a resident 
of the Virgin Islands, Puerto Rico, or (for any taxable year beginning 
after 1960) Guam or American Samoa is not to be considered a nonresident 
alien individual. See paragraph (d) of Sec. 1.1402(b)-1. A return is 
required under this section if an individual has self-employment income, 
as defined in section 1402(b), even though he may not be required to 
make a return under section 6012 for purposes of the tax imposed by 
section 1 or 3. Provisions applicable to returns under section 6012(a) 
shall be applicable to returns under this section.
    (2) Except as otherwise provided in this subparagraph, the return 
required by this section shall be made on Form 1040. The form to be used 
by residents of the Virgin Islands, Guam, or American Samoa is From 
1040SS. In the case of a resident of Puerto Rico who is not required to 
make a return of income under section 6012(a), the form to be used is 
Form 1040SS, except that Form 1040PR shall be used if it is furnished by 
the Internal Revenue Service to such resident for use in lieu of Form 
1040SS.
    (b) Joint returns. (1) In the case of a husband and wife filing a 
joint return under section 6013, the tax on self-employment income is 
computed on the separate self-employment income of each spouse, and not 
on the aggregate of the two amounts. The requirement of section 
6013(d)(3) that in the case of a joint return the tax is computed on the 
aggregate income of the spouses is not applicable with respect to the 
tax on self-employment income. Where the husband and wife each has net 
earnings from self-employment of $400 or more, it will be necessary for 
each to complete separate schedules of the computation of self-
employment tax with respect to the net earnings of each spouse, despite 
the fact that a joint return is filed. If the net earnings from self-
employment of either the husband or the wife are less than $400, such 
net earnings are not subject to the tax on self-employment income, even 
though they must be shown on the joint return for purposes of the tax 
imposed by section 1 or 3.
    (2) Except as otherwise expressly provided, section 6013 is 
applicable to the return of the tax on self-employment income; 
therefore, the liability with respect to such tax in the case of a joint 
return is joint and several.
    (c) Social security account numbers. (1) Every individual making a 
return of net earnings from self-employment for any period commencing 
before January 1, 1962, is required to show thereon his social security 
account number, or, if he has no such account number, to make 
application therefor on Form SS-5 before filing such return. However, 
the failure to apply for or receive

[[Page 125]]

a social security account number will not excuse the individual from the 
requirement that he file such return on or before the due date thereof. 
Form SS-5 may be obtained from any district office of the Social 
Security Administration or from any district director. The application 
shall be filed with a district office of the Social Security 
Administration or, in the case of an individual not in the United 
States, with the district office of the Social Security Administration 
at Baltimore, Md. An individual who has previously secured a social 
security account number as an employee shall use that account number on 
his return of net earnings from self-employment.
    (2) For provisions applicable to the securing of identifying numbers 
and the reporting thereof on returns and schedules for periods 
commencing after December 31, 1961, see Sec. 1.6109-1.
    (d) Declaration of estimated tax with respect to taxable years 
beginning after December 31, 1966. For taxable years beginning after 
December 31, 1966, section 6015 provides that the term ``estimated tax'' 
includes the amount which an individual estimates as the amount of self-
employment tax imposed by chapter 2 for the taxable year. Thus, 
individuals upon whom self-employment tax is imposed by section 1401 
must make a declaration of estimated tax if they meet the requirements 
of section 6015(a); except as otherwise provided under section 6015(i).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6691, 28 FR 
12816, Dec. 3, 1963; T.D. 7427, 41 FR 34028, Aug. 12, 1976]

                           information returns



Sec. 1.6031(a)-1  Return of partnership income.

    (a) Domestic partnerships--(1) Return required. Except as provided 
in paragraphs (a)(3) and (c) of this section, every domestic partnership 
must file a return of partnership income under section 6031 (partnership 
return) for each taxable year on the form prescribed for the partnership 
return. The partnership return must be filed for the taxable year of the 
partnership regardless of the taxable years of the partners. For taxable 
years of a partnership and of a partner, see section 706 and Sec. 1.706-
1. For the rules governing partnership statements to partners and 
nominees, see Sec. 1.6031(b)-1T. For the rules requiring the disclosure 
of certain transactions, see Sec. 1.6011-4T.
    (2) Content of return. The partnership return must contain the 
information required by the prescribed form and the accompanying 
instructions.
    (3) Special rule. A partnership that has no income, deductions, or 
credits for federal income tax purposes for a taxable year is not 
required to file a partnership return for that year.
    (4) Failure to file. For the consequences of a failure to comply 
with the requirements of section 6031(a) and this paragraph (a), see 
sections 6229(a), 6231(f), 6698, and 7203.
    (b) Foreign partnerships--(1) General rule. A foreign partnership is 
not required to file a partnership return, if the foreign partnership 
does not have gross income that is (or is treated as) effectively 
connected with the conduct of a trade or business within the United 
States (ECI) and does not have gross income (including gains) derived 
from sources within the United States (U.S.-source income). Except as 
provided in paragraphs (b)(2) and (3) of this section, a foreign 
partnership that has ECI or has U.S.-source income that is not ECI must 
file a partnership return for its taxable year in accordance with the 
rules for domestic partnerships in paragraph (a) of this section.
    (2) Foreign partnerships with de minimis U.S.-source income and de 
minimis U.S. partners. A foreign partnership (other than a withholding 
foreign partnership, as defined in Sec. 1.1441-5(c)(2)(i)) that has 
$20,000 or less of U.S.-source income and has no ECI during its taxable 
year is not required to file a partnership return if, at no time during 
the partnership taxable year, one percent or more of any item of 
partnership income, gain, loss, deduction, or credit is allocable in the 
aggregate to direct United States partners. The United States partners 
must directly report their shares of the allocable items of partnership 
income, gain, loss, deduction, and credit.
    (3) Filing obligations for certain other foreign partnerships with 
no ECI--(i) General requirements for modified filing obligations. A 
foreign partnership will

[[Page 126]]

be subject to the modified filing obligations in paragraphs (b)(3)(ii) 
and (iii) of this section if, in addition to satisfying the requirements 
contained in paragraphs (b)(3)(ii) and (iii) of this section--
    (A) The partnership is not a withholding foreign partnership as 
defined in Sec. 1.1441-5(c)(2)(i);
    (B) Forms 1042 and 1042-S are filed by the partnership with respect 
to the amounts subject to reporting under Sec. 1.1461-1(b) and (c), 
unless the partnership is not required to file such returns under 
Sec. 1.1461-1(b)(2) and (c)(4), in which case Forms 1042 and 1042-S must 
be filed by another withholding agent or agents; and
    (C) The tax liability of the partners withrespect to such amounts 
has been fully satisfied by the withholding of tax at the source, if 
applicable, under chapter 3 of the Internal Revenue Code.
    (ii) Foreign partnerships with U.S.-source income but no U.S. 
partners. A foreign partnership that has U.S.-source income is not 
required to file a partnership return if the partnership has no ECI and 
no United States partners at any time during the partnership's taxable 
year.
    (iii) Foreign partnerships with U.S.-source income and U.S. 
partners. Except as provided in paragraph (b)(2) of this section, a 
foreign partnership with one or more United States partners that has 
U.S.-source income but no ECI must file a partnership return. However, 
such a foreign partnership need not file Statements of Partner's Share 
of Income, Credit, Deduction, etc. (Schedules K-1) for any partners 
other than its direct United States partners and its passthrough 
partners (whether U.S. or foreign) through which United States partners 
hold an interest in the foreign partnership. Schedules K-1 that are not 
excepted from filing under this paragraph (b)(3)(iii) must contain the 
same information required of a domestic partnership filing under 
paragraph (a) of this section.
    (4) Information or returns required of partners who are United 
States persons--(i) In general. If a United States person is a partner 
in a partnership that is not required to file a partnership return, the 
district director or director of the relevant service center may require 
that person to render the statements or provide the information 
necessary to verify the accuracy of the reporting by that person of any 
items of partnership income, gain, loss, deduction, or credit.
    (ii) Controlled foreign partnerships. Certain United States persons 
who are partners in a foreign partnership controlled (within the meaning 
of section 6038(e)(1)) by United States persons may be required to 
provide information with respect to the partnership under section 6038.
    (5) Certain partnership elections. For a partnership that is not 
otherwise required to file a partnership return, if an election that can 
only be made by the partnership under section 703 (affecting the 
computation of taxable income derived from a partnership) is to be made 
by or for the partnership, a return on the form prescribed for the 
partnership return must be filed for the partnership. Unless otherwise 
provided in the form or the accompanying instructions, a return filed 
solely to make an election need only contain a written statement citing 
paragraph (b)(5)(ii) of this section, listing the name and address of 
the partnership making the election, and clearly identifying the 
specific election being made. A return filed under paragraph (b)(5)(ii) 
of this section solely to make an election is not a partnership return. 
Thus, such a return is not a return filed under section 6031(a) for 
purposes of sections 6501 (except regarding the specific election 
issue), 6231(a)(1)(A), and 6233. The return must be signed by--
    (i) Each partner that is a partner in the partnership at the time 
the election is made; or
    (ii) Any partner of the partnership who is authorized (under local 
law or the partnership's organizational documents) to make the election 
and who represents to having such authorization under penalties of 
perjury.
    (6) Exclusion for certain organizations. The return requirement of 
section 6031 and this section does not apply to the International 
Telecommunications Satellite Organization, the International Maritime 
Satellite Organization, or any organization that is a successor of 
either.

[[Page 127]]

    (c) Partnerships excluded from the application of subchapter K of 
the Internal Revenue Code--(1) Wholly excluded--(i) Year of election. An 
eligible partnership as described in Sec. 1.761-2(a) that elects to be 
excluded from all the provisions of subchapter K of chapter 1 of the 
Internal Revenue Code in the manner specified by Sec. 1.761-2(b)(2)(i) 
must timely file the form prescribed for the partnership return for the 
taxable year for which the election is made. In lieu of the information 
otherwise required, the return must contain or be accompanied by the 
information required by Sec. 1.761-2(b)(2)(i).
    (ii) Subsequent years. Except as otherwise provided in paragraph 
(c)(1)(i) of this section, an eligible partnership that elects to be 
wholly excluded from the application of subchapter K is not required to 
file a partnership return.
    (2) Deemed excluded. An eligible partnership that is deemed to have 
elected exclusion from the application of subchapter K beginning with 
its first taxable year, as specified in Sec. 1.761-2(b)(2)(ii), is not 
required to file a partnership return.
    (d) Definitions--(1) Partnership. For the meaning of the term 
partnership, see Sec. 1.761-1(a).
    (2) United States person. In applying this section, a United States 
person is a person described in section 7701(a)(30); the government of 
the United States, a State, or the District of Columbia (including an 
agency or instrumentality thereof); or a corporation created or 
organized in Guam, the Commonwealth of Northern Mariana Islands, the 
U.S. Virgin Islands, and American Samoa, if the requirements of section 
881(b)(1)(A), (B), and (C) are met for such corporation. The term does 
not include an alien individual who is a resident of Puerto Rico, Guam, 
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, 
or American Samoa, as determined under Sec. 301.7701(b)-1(d) of this 
chapter.
    (3) United States partner. In applying this section, a United States 
partner is any United States person who holds a direct or indirect 
interest in the partnership.
    (4) Indirect interest. An indirect interest is any interest held 
through one or more passthrough partners, as defined in section 
6231(a)(9).
    (e) Procedural requirements--(1) Place for filing. The return of a 
partnership must be filed with the service center prescribed in the 
relevant IRS revenue procedure, publication, form, or instructions to 
the form (see Sec. 601.601(d)(2)).
    (2) Time for filing. The return of a partnership must be filed on or 
before the fifteenth day of the fourth month following the close of the 
taxable year of the partnership.
    (3) Magnetic media filing. For magnetic media filing requirements 
with respect to partnerships, see section 6011(e)(2) and the regulations 
thereunder.
    (f) Effective dates. This section applies to taxable years of a 
partnership beginning after December 31, 1999, except that paragraph 
(b)(3) of this section applies to taxable years of a foreign partnership 
beginning after December 31, 2000.

[T.D. 8841, 64 FR 61500, Nov. 12, 1999, as amended by T.D. 9000, 67 FR 
41328, June 18, 2002]



Sec. 1.6031(b)-1T  Statements to partners (temporary).

    (a) Statement required to be furnished to partners--(1) In general. 
Except as provided in this paragraph (a)(1) and paragraph (a)(2)(ii) of 
this section, any partnership required under section 6031(a) and the 
regulations thereunder to file a partnership return for a taxable year 
shall furnish to every person who was a partner (within the meaning of 
section 7701(a)(2)) at any time during the taxable year a written 
statement containing the information described in paragraph (a)(3) of 
this section. This section shall not apply to a real estate mortgage 
investment conduit (REMIC) treated as a partnership under subtitle F of 
the Code by reason of section 860F(e). For the reporting requirements 
applicable to REMICs see Sec. 1.6031(b)-2T.
    (2) Special rules applicable to partnership interests held by 
nominees--(i) Statements furnished to nominees. For any partnership 
taxable year beginning after October 22, 1986, a partnership shall 
provide a person that holds (directly or indirectly) an interest in such 
partnership as a nominee on behalf of

[[Page 128]]

another person at any time during such year with a statement under 
paragraph (a)(1) of this section with respect to such interest if--
    (A) Such nominee has not furnished the statement required under 
Sec. 1.6031(c)-1T(a)(1)(i) to the partnership with respect to such other 
person;
    (B) Such nominee either holds legal title to such partnership 
interest in its own name or is identified in a statement provided to the 
partnership pursuant to Sec. 1.6031(c)-1T(a)(1)(i) by another nominee as 
the person on whose behalf such other nominee holds such interest; and
    (C) Such nominee is not a person described in Sec. 1.6031(c)-
1T(a)(2) (relating to the special rule for clearing agencies).

In such case, the partnership shall assume, for purposes of this 
section, that the nominee is the beneficial owner of the partnership 
interest.
    (ii) Statements not required to be furnished to partners holding 
partnership interests through nominees. A partnership shall not be 
required to furnish a statement under paragraph (a)(1) of this section 
to a partner with respect to any portion of such partner's interest in 
the partnership that is owned through a nominee if--
    (A) Such nominee has not furnished (or is not required to furnish 
under Sec. 1.6031(c)-1T(a)(2)), a statement to the partnership under 
Sec. 1.6031(c)-1T(a)(1)(i) with respect to such partner; and
    (B) Such partner has not furnished (or is not required to furnish) a 
statement to the partnership under Sec. 1.6031(c)-1T(a)(3), with respect 
to such interest in the partnership.
    (3) Contents of statement. The statement required under paragraph 
(a)(1) of this section shall include the following information:
    (i) The partner's distributive share of partnership income, gain, 
loss, deduction, or credit required to be shown on the partnership 
return (or, for taxable years beginning before January 1, 1987, the 
partner's distributive share of partnership income, gain, loss, 
deduction, or credit shown on the partnership return); and
    (ii) To the extent provided by form or the accompanying 
instructions, any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the partner with 
respect to items related to the partnership.
    (b) Time for furnishing statement. The statement required to be 
furnished by the partnership under paragraph (a)(1) of this section 
shall be furnished on or before the day on which the partnership return 
for that taxable year is required to be filed (determined with regard to 
extensions). For partnership returns the due date for which (determined 
without regard to extensions) is before January 1, 1987, the statement 
required to be furnished by the partnership under paragraph (a)(1) of 
this section shall be furnished on or before the day on which the 
partnership return is filed.
    (c) Statement may be provided to agent. If a partner designates 
another person, such as an attorney or an investment advisor, as the 
partner's (or nominee's) agent in dealing with the partnership, the 
partnership may provide the statement required under paragraph (a)(1) of 
this section with respect to such partner to such other person instead 
of the partner.
    (d) Penalties. For penalties for failure to comply with the 
requirements of section 6031(b) and paragraph (a) of this section, see 
section 6722(a).
    (e) Effective date. Except as otherwise provided in this section, 
the provisions of this section apply to partnership taxable years 
beginning after September 3, 1982.

[T.D. 8225, 53 FR 34490, Sept. 7, 1988]



Sec. 1.6031(b)-2T  REMIC reporting requirements (temporary). [Reserved]



Sec. 1.6031(c)-1T  Nominee reporting of partnership information (temporary).

    (a) Statements required to be furnished to partnership--(1) 
Statement from nominee--(i) In general. Except as otherwise provided in 
this section, any person who holds, directly or indirectly, an interest 
in a partnership (required under section 6031(a) and the regulations 
thereunder to file a partnership return for a taxable year) as a nominee 
on behalf of another person at any time during the partnership taxable 
year

[[Page 129]]

shall furnish to the partnership a written statement (or statements) for 
that taxable year with respect to such other person containing the 
information described in paragraph(a)(1)(ii) of this section.
    (ii) Contents of statement. The statement required under paragraph 
(a)(1)(i) of this section shall, except as otherwise provided in 
paragraph (a)(4) of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
nominee;
    (B) The name, address, and taxpayer identification number of such 
other person;
    (C) Whether such other person is--
    (1) A person that is not a United States person;
    (2) A foreign government, an international organization, or any 
wholly-owned agency or instrumentality of either of the foregoing; or
    (3) A tax-exempt entity (within the meaning of section 168(h)(2));
    (D) A description of any interest in the partnership held by the 
nominee on behalf of such other person at the beginning of the 
partnership taxable year;
    (E) A description of any interest in the partnership that the 
nominee acquires (within the meaning of paragraph (g)(1) of this 
section) on behalf of such other person during the partnership taxable 
year, the method of acquisition (e.g., purchase, exchange, acquisition 
at death, gift, or commencement of nominee relationship) and acquisition 
cost (within the meaning of paragraph (g)(2) of this section) of such 
interest, and the date of the acquisition of such interest; and
    (F) A description of any interest in the partnership that the 
nominee transfers (within the meaning of paragraph (g)(5) of this 
section) on behalf of such other person during the partnership taxable 
year, the net proceeds from the transfer (within the meaning of 
paragraph (g)(6) of this section) of such interest, and the date of the 
transfer of such interest.

A description of a partnership interest must include sufficient detail 
to enable the partnership to furnish to such other person the statement 
required under Sec. 1.6031(b)-1T (a).
    (2) Special rule for clearing agencies. A clearing agency registered 
pursuant to the provisions of section 17A of the Securities Exchange Act 
of 1934 (or its nominee) that holds an interest in a partnership as a 
nominee on behalf of another person shall not be required to furnish any 
statement described in paragraph (a)(1)(i) of this section with respect 
to such interest.
    (3) Special rule for brokers and financial institutions--(i) 
Additional statement required. Any broker (within the meaning of 
paragraph (g)(3) of this section) or financial institution (within the 
meaning of paragraph (g)(4) of this section) that holds an interest in a 
partnership indirectly through a nominee described in paragraph (a)(2) 
of this section at any time during a partnership taxable year shall 
furnish (in addition to any statement (or statements) required under 
paragraph (a)(1)(i) of this section) to the partnership a written 
statement (or statements) containing the information described in 
paragraph (a)(3)(ii) of this section with respect to any interest in 
such partnership that it holds (directly or indirectly) for its own 
account at any time during such partnership taxable year.
    (ii) Contents of statement. The statement required under paragraph 
(a)(3)(i) of this section shall, except as otherwise provided in 
paragraph (a)(4) of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
broker or financial institution;
    (B) Whether such broker of financial institution is a person that is 
not a United States person;
    (C) A description of any interest in the partnership held by the 
broker or financial institution for its own account at the beginning of 
the partnership taxable year;
    (D) A description of any interest in the partnership that the broker 
or financial institution acquires for its own account during the 
partnership taxable year, the method of acquisition and acquisition cost 
of such interest, and the date of the acquisition of such interest; and
    (E) A description of any interest in the partnership that the broker 
or financial institution transfers for its

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own account during the partnership taxable year, the net proceeds from 
the transfer of such interest, and the date of the transfer of such 
interest.

A description of a partnership interest held by a broker or financial 
institution for its own account must include sufficient detail to enable 
the partnership to furnish to the broker or financial institution the 
statement required under Sec. 1.6031(b)-1T (a).
    (4) Exception--(i) In general. Except as otherwise provided in this 
paragraph (a)(4), any statement required under paragraph (a) (1)(i) or 
(3)(i) of this section for a taxable year is not required to include--
    (A) That part of the information described in paragraph (a) 
(1)(ii)(E) and (3)(ii)(D) of this section regarding the method of 
acquisition and acquisition cost; or
    (B) That part of the information described in paragraph 
(a)(1)(ii)(F) and (3)(ii)(E) of this section regarding the net proceeds 
from the transfer;

to the extent that, prior to the beginning of the partnership taxable 
year, the partnership has provided the nominee with a written statement 
that the nominee need not provide such information to the partnership, 
and the partnership has not modified or revoked such statement. For 
purposes of the preceding sentence, the modification or revocation of a 
statement furnished to a nominee is effective for a partnership taxable 
year if and only if the partnership notifies the nominee of such 
modification or revocation by a written statement more than 60 days 
before the beginning of the partnership taxable year. The nominee shall 
retain a copy of any statement that is furnished to it by the 
partnership under this paragraph (a)(4) in the nominee's records so long 
as the contents thereof may become material in the administration of any 
internal revenue law.
    (ii) Effect of election under section 754. Paragraph (a)(4)(i)(A) of 
this section shall not apply to a partnership taxable year if--
    (A) The partnership has an election in effect under section 754 
(relating to optional adjustment to basis of partnership property) for 
such taxable year; and
    (B) The nominee knows or has reason to know of such election more 
than 60 days before the beginning of such taxable year.
    (5) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example (1). B, a broker, holds 50 units of interest in Partnership 
P, a calendar year partnership, in street name for customer A, the 
beneficial owner. B holds the units on behalf of A at all times during 
1989. B must furnish a statement to P for calendar year 1989 under 
paragraph (a)(1)(i) of this section that includes the information 
required under paragraph (a)(1)(ii) (A) through (D) of this section. The 
description of the partnership interest held by B on A's behalf on 
January 1, 1989, must identify the number of units of P held by B on A's 
behalf at that time (50), and the class of the partnership interest 
(including the Committee on Uniform Security Identification Procedures 
(CUSIP) number of the partnership interest, if known).
    Example (2). The facts are the same as in example (1), except that 
pursuant to A's instructions, B sells 25 of A's units of interest in P 
on August 1, 1989, receiving net proceeds from the transfer of $500. In 
addition to the information described in example (1), the statement that 
B must furnish to P must include the class of the partnership interest 
transferred (including the CUSIP number of the partnerhsip interest, if 
known), the number of units transferred (25), the net proceeds from the 
transfer ($500), and the date of the transfer (August 1, 1989.)
    Example (3). The facts are the same as in example (1), except that A 
is not the beneficial owner, but rather holds the units as a nominee on 
behalf of C, the beneficial owner, at all times during 1989. In addition 
to the statement that B must furnish to P (as described in Example (1) 
of this paragraph (a)(5)), A must furnish a statement to P for calendar 
year 1989 under paragraph (a)(1)(i) of this section that includes the 
information required under paragraph (a)(1)(ii) (A) through (D) of this 
section. If both A and B provide P with the statement required under 
paragraph (a)(1)(i) of this section, P must provide C with the statement 
required under Sec. 1.6031(b)-1T (a)(1).

    (b) Time for furnishing statements. A nominee may furnish to the 
partnership any statement required under paragraph (a) of this section 
annually, quarterly, monthly, or on any other basis, provided that all 
statements required to be furnished under paragraph

[[Page 131]]

(a) of this section for a partnership taxable year shall be furnished on 
or before the last day of the first month following the close of such 
partnership taxable year.
    (c) Use of magnetic media. A nominee required to furnish a written 
statement under paragraph (a) of this section, may, in lieu of 
furnishing such written statement, furnish the required information on 
magnetic tape or by other media if the partnership and the nominee so 
agree.
    (d) Use of single document. Any person who holds interests in a 
partnership as a nominee on behalf of more than one other person during 
the partnership taxable year, may, in lieu of furnishing to the 
partnership a separate statement for each such other person, furnish to 
the partnership a single document which includes, for each such other 
person, the information described in paragraph (a)(1)(ii) of this 
section. To the extent that a single document is used, references in 
this section to the statement required under paragraph (a)(1)(i) of this 
section shall be deemed to refer also to the information included in a 
single document under this paragraph (d).
    (e) Retention of information. The nominee shall retain a copy of any 
statement that is furnished to the partnership under this section in the 
nominee's records so long as the contents thereof may become material in 
the administration of any internal revenue law.
    (f) Use of agent. If a partnership has designated another person, 
such as a clearing organization, as the partnership's agent for purposes 
of receiving the statements required under paragraph (a) of this 
section, such statements may be furnished to that other person instead 
of the partnership. If a nominee has designated another person as its 
agent for purposes of furnishing to the partnership (or its agent) the 
statements required under paragraph (a) of this section, that other 
person may furnish such statements to the partnership (or its agent) on 
behalf of the nominee.
    (g) Meaning of terms. For purposes of this section, the following 
terms have the meanings set forth below:
    (1) The term acquires means--
    (i) A purchase or other acquisition of a partnership interest; or
    (ii) The commencement of a nominee relationship, including the 
substitution of one nominee for another.
    (2) The term acquisition cost means the sum of any money paid and 
the fair market value of any property (other than money) transferred to 
acquire a partnership interest increased by any expenses paid or 
incurred with respect to the acquisition (such as broker's fees or 
commissions).
    (3) The term broker shall have the meaning set forth in paragraph 
(a)(1) of Sec. 1.6045ca-1.
    (4) The term financial institution means a financial institution 
such as a bank, mutual savings bank, savings and loan association, 
building and loan association, cooperative bank, homestead association, 
credit union, industrial loan association or bank or other similar 
organization.
    (5) The term transfer means--
    (i) A sale, exchange, or other disposition of a partnership 
interest; or
    (ii) The termination of a nominee relationship, including the 
substitution of one nominee for another.
    (6) The term net proceeds from the transfer means the sum of any 
money and the fair market value of any property (other than money) 
received in connection with a transfer of a partnership interest reduced 
by any expenses paid or incurred with respect to the transfer (such as 
broker's fees or commissions).
    (7) The term person includes the United States, a State, the 
District of Columbia, a foreign government, a political subdivision of a 
State or foreign government, or an international organization.
    (h) Statement required by nominees that do not comply with 
Sec. 1.6031(c)-1T (a)--(1) In general. Any person that--
    (i) Holds an interest in a partnership as a nominee (other than a 
nominee described in paragraph (a)(3) of this section) on behalf of 
another person at any time during the partnership taxable year;
    (ii) Does not furnish to such partnership the statement required 
under paragraph (a)(1)(i) of this section for such other person with 
respect to such interest in the partnership; and

[[Page 132]]

    (iii) Receives from such partnership the statement described in 
paragraph (a)(1) of Sec. 1.6031(b)-1T with respect to such interest in 
the partnership;

shall furnish to such other person a written statement containing the 
information described in paragraph (h)(2) of this section with respect 
to such interest in the partnership.
    (2) Contents of statement. The statement required under paragraph 
(h)(1) of this section shall contain the following information:
    (i) The distributive share of partnership income, gain, loss, 
deduction or credit required to be shown on the partnership return that 
is allocable to such interest in the partnership; and
    (ii) Any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the beneficial owner 
of such interest in the partnership in connection with items related to 
the partnership.
    (3) Time for furnishing statements. A nominee shall furnish the 
statement required under paragraph (h)(1) of this section within 30 days 
after receiving the statement described in paragraph (a) of 
Sec. 1.6031(b)-1T.
    (i) REMICs. This section shall not apply with respect to any 
interest in a real estate mortgage investment conduit (REMIC) treated as 
a partnership under subtitle F of the Code by reason of section 860F(e). 
For the nominee reporting requirements with respect to REMICs see 
Sec. 1.6031(c)-2T.
    (j) Penalties. [Reserved]
    (k) Effective date--(1) In general. Except as otherwise provided in 
paragraph (k)(2) of this section, the provisions of this section shall 
apply to partnership taxable years beginning after October 22, 1986.
    (2) Transitional rule for taxable years beginning before January 1, 
1989. For partnership taxable years beginning before January 1, 1989, --
    (i) Any statement that a nominee is required to furnish to a 
partnership under paragraph (a)(1) of this section shall not be required 
to include the following information:
    (A) The information described in paragraph (a)(1)(ii)(C) of this 
section;
    (B) That part of the information described in paragraph 
(a)(1)(ii)(E) of this section regarding the method of acquisition and 
acquisition cost of a partnership interest; or
    (C) That part of the information described in paragraph 
(a)(1)(ii)(F) of this section regarding the net proceeds from the 
transfer of a partnership interest.
    (ii) A broker or financial institution shall not be required to 
furnish the additional statement described in paragraph (a)(3)(i) of 
this section.

[T.D. 8225, 53 FR 34491, Sept. 7, 1988]



Sec. 1.6031(c)-2T  Nominee reporting of REMIC information (temporary). [Reserved]



Sec. 1.6032-1  Returns of banks with respect to common trust funds.

    Every bank (as defined in section 581) maintaining a common trust 
fund shall make a return of income of the common trust fund, regardless 
of the amount of its taxable income. Member banks of an affiliated group 
that serve as co-trustees with respect to a common trust fund must act 
jointly in making a return for the fund. If a bank maintains more than 
one common trust fund, a separate return shall be made for each. No 
particular fund is prescribed for making the return under this section, 
but form 1065 may be used if it is designated by the bank as the return 
of a common trust fund. The return shall be made for the taxable year of 
the common trust fund and shall be filed on or before the 15th day of 
the fourth month following the close of such taxable year with the 
district director for the district in which the income tax return of the 
bank is filed. Such return shall state specifically with respect to the 
fund the items of gross income and the deductions allowed by subtitle A 
of the Code, shall include each participant's name and address, the 
participant's proportionate share of taxable income or net loss 
(exclusive of gains and losses from sales or exchanges of capital 
assets), the participant's proportionate share of gains and losses from 
sales or exchanges of capital assets, and the participant's share of 
items which enter into the determination of the tax imposed by section 
56. See Sec. 1.584-2 and Sec. 1.58-5. If the common trust fund is 
maintained by two or more banks that

[[Page 133]]

are members of the same affiliated group, the return must also identify 
the member bank in the group that has contributed each participant's 
property or money to the fund. A copy of the plan of the common trust 
fund must be filed with the return. If, however, a copy of such plan has 
once been filed with a return, it need not again be filed if the return 
contains a statement showing when and where it was filed. If the plan is 
amended in any way after such copy has been filed, a copy of the 
amendment must be filed with the return for the taxable year in which 
the amendment was made. For the signing of a return of a bank with 
respect to common trust funds, see Sec. 1.6062-1, relating to the manner 
prescribed for the signing of a return of a corporation.

[T.D. 7564, 43 FR 40497, Sept. 12, 1978, as amended by T.D. 7935, 49 FR 
1695, Jan. 13, 1984]



Sec. 1.6033-1  Returns by exempt organizations; taxable years beginning before January 1, 1970.

    (a) In general. (1) Except as provided in section 6033(a) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual return of information 
specifically stating its items of gross income, receipts and 
disbursements, and such other information as may be prescribed in the 
instructions issued with respect to the return. Such information return 
shall be filed annually regardless of the amount or source of the income 
or receipts of the organization. Except as provided in paragraph (d) of 
this section, such return shall be filed annually regardless of whether 
such organization is chartered by, or affiliated or associated with, any 
central, parent, or other organization.
    (2)(i) Except as otherwise provided in this subparagraph, every 
organization exempt from taxation under section 501 (a), and required to 
file a return under section 6033 and this section, other than an 
organization described in section 401 (a), 501(c) (3), or 501(d), shall 
file its annual return on Form 990. However, such an exempt 
organization, instead of filing Form 990, may file its annual return on 
Form 990 (SF), a short form, if its gross receipts for the taxable year 
do not exceed $10,000 and its total assets on the last day of its 
taxable year do not exceed $10,000.
    (ii) For purposes of this subparagraph and subparagraph (4) of this 
paragraph, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus, ``gross receipts'' includes, 
but is not limited to, (a) the gross amount received as contributions, 
gifts, grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (b) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, (c) 
gross sales or receipts from business activities (including business 
activities unrelated to the purpose for which the organization received 
an exemption, the net income or loss from which may be required to be 
reported on Form 990-T), (d) the gross amount received from the sale of 
assets without reduction for cost or other basis and expenses of sale, 
and (e) the gross amount received as investment income such as interest, 
dividends, rents, and royalties.
    (3) Every employees' trust described in section 401 (a) which is 
exempt from taxation under section 501 (a) shall file an annual return 
on Form 990-P. The return shall include the information required by 
paragraph (b)(5) (ii) of Sec. 1.401-1. In addition, the trust must file 
the information required to be filed by the employer pursuant to the 
provisions of Sec. 1.404(a)-2, unless the employer has notified the 
trustee in writing that he has or will timely file such information. If 
the trustee has received such notification from the employer, then such 
notification, or a copy thereof, shall be retained by the trust as a 
part of its records.
    (4) Except as otherwise provided in this subparagraph, every 
organization described in section 501(c) (3), which is required to file 
a return under section 6033 and this section, shall file its annual 
return on Form 990-A. However, such an exempt organization, instead

[[Page 134]]

of filing Form 990-A, may file its annual return on Form 990-A (SF), a 
short form, if its gross receipts for the taxable year do not exceed 
$10,000 and its total assets on the last day of its taxable year do not 
exceed $10,000. For purposes of this subparagraph, ``gross receipts'' 
shall be defined in the manner prescribed in subparagraph (2) (ii) of 
this paragraph. The forms prescribed by this subparagraph shall be as 
follows:
    (i) Form 990-A shall consist of parts I and II. Part I shall 
contain, in addition to information required in part II, such 
information as may be prescribed in the return and instructions which is 
required to be furnished by section 6033(a) or which is necessary to 
show whether or not such organization is exempt from tax under section 
501(a). Part II, which shall be open to public inspection pursuant to 
section 6104 and other applicable sections and the regulations 
thereunder, shall contain principally the information required by 
section 6033(b) and the regulations thereunder. The information 
contained in part II, to be furnished by the organization in duplicate 
in the manner prescribed by the instructions issued with respect to the 
return, is as follows:
    (a) Its gross income for the year. For this purpose, gross income 
includes tax-exempt income, but does not include contributions, gifts, 
grants, and similar amounts received. Whether or not an item constitutes 
a contribution, gift, grant, or similar amount, depends upon all the 
surrounding facts and circumstances.
    (b) Its expenses attributable to such income and incurred within the 
year.
    (c) Its disbursements out of income (including prior years' 
accumulations) made within the year for the purposes for which it is 
exempt. Information shall be included as to the class of activity with a 
separate total for each activity as well as the name, address, and 
amount received by each individual or organization receiving cash, other 
property, or services within the taxable year. If the donee is related 
by blood, marriage, adoption, or employment (including children of 
employees) to any person or corporation having an interest in the exempt 
organization, such as a creator, donor, director, trustee, or officer, 
the relationship of the donee shall be stated. Activities shall be 
classified according to purpose in greater detail than merely 
charitable, educational, religious, or scientific. For example, payments 
for nursing service, for laboratory construction, for fellowships, or 
for assistance to indigent families shall be so identified. Where the 
fair market value of the property at the time of disbursement is used as 
the measure of the disbursement, the book value of such property (and a 
statement of how book value was determined) shall also be furnished, and 
any difference between the fair market value at the time of disbursement 
and the book value should be reflected in the books of account. The 
expenses allocable to making the disbursements shall be set forth in 
such detail as is prescribed by the form or instructions.
    (d) Its accumulation of income within the year. The amount of such 
accumulation is obtained by subtracting from the amount in (a) of this 
subdivision the sum of the amounts determined in (b) and (c) of this 
subdivision and the expenses allocable to carrying out the purposes for 
which it is exempt.
    (e) Its aggregate accumulation of income at the beginning and end of 
the year. The aggregate accumulation of income shall be divided between 
that which is attributable to the gain or loss on the sale of assets 
(excluding inventory items) and that which is attributable to all other 
income. For this purpose expenses and disbursements shall be allocated 
on the basis of accounting records, the governing instrument, or 
applicable local law.
    (f) Its disbursements out of principal in the current and prior 
years for the purposes for which it is exempt. In addition, the same 
type of information shall be required with respect to disbursements out 
of principal made in the current year as is prescribed by (c) of this 
subdivision with respect to disbursements out of income.
    (g) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information on the 
assets, liabilities, and net worth shall be furnished

[[Page 135]]

on the schedule provided for this purpose on the Form 990-A. Such 
schedule shall be supplemented by attachments where appropriate.
    (h) The total of the contributions and gifts received by it during 
the year. A statement shall be included showing the gross amount of 
contributions and gifts collected by the organization, the expenses 
incurred by the organization in collecting such amount, and the net 
proceeds.
    (i) In addition to the information required in (a) through (h) of 
this subdivision, the organization shall furnish such specific 
information and answer such specific questions as are required by the 
form or instructions.
    (ii) Form 990-A (SF) is a short form consisting of a single part 
which contains such information as may be prescribed in the return and 
instructions which is required to be furnished by section 6033(a) or 
which is necessary to show whether or not such organization is exempt 
from tax under section 501(a). In addition, Form 990-A (SF) shall 
contain the information required by section 6033(b) which must be 
furnished in the manner prescribed in the instructions issued with 
respect to the return. Form 990-A (SF) shall be open to public 
inspection pursuant to section 6104 and other applicable sections and 
the regulations thereunder.
    (5)(i) Every religious or apostolic association or corporation 
described in section 501 (d) which is exempt from taxation under section 
501(a) shall file a return on Form 1065 for each taxable year, stating 
specifically the items of gross income and deductions, and its taxable 
income. There shall be attached to the return as a part thereof a 
statement showing the name and address of each member of the association 
or corporation and the amount of his distributive share of the taxable 
income of the association or corporation for such year.
    (ii) If the taxable year of any member is different from the taxable 
year of the association or corporation, the distributive share of the 
taxable income of the association or corporation to be included in the 
gross income of the member for his taxable year shall be based upon the 
taxable income of the association or corporation for its taxable year 
ending with or within the taxable year of the member.
    (b) Accounting period for filing return. A return on Form 990, 990-
A, 990 (SF), 990-A (SF), or 990-P shall be on the basis of the 
established annual accounting period of the organization. If the 
organization has no such established accounting period, such return 
shall be on the basis of the calendar year.
    (c) Returns when exempt status not established. An information 
return on Form 990, 990-A, 990 (SF), or 990-A (SF) is not required to be 
filed by an organization claiming an exempt status under section 501(a) 
prior to the establishment by the organization of such exempt status 
under section 501 and Sec. 1.501(a)-1. If the date for filing an income 
tax return and paying the tax occurs before the tax-exempt status of the 
organization has been established, the organization is required to file 
the income tax return and pay the tax. However, see sections 6081 and 
6161 and the regulations thereunder for extensions of time for filing 
the return and paying the tax. Upon establishment of its exempt status, 
the organization may file a claim for a refund of income taxes paid for 
the period for which its exempt status is established.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c), although required 
to file a separate annual return for itself under section 6033 and 
paragraph (a) of this section, may file annually, in addition to such 
separate annual return, a group return on Form 990 or 990-A, 990 (SF), 
or 990-A (SF), as may be appropriate. Form 990 (SF) or 990-A (SF) may be 
used where each local organization qualifies under paragraph (a) of this 
section. Such group return may be filed for two or more of the local 
organizations, chapters, or the like (referred to in this paragraph as 
``local organizations'') which are (i) affiliated with such central 
organization at the close of its annual accounting period, (ii) subject 
to the general supervision or control of the central organization, and 
(iii) exempt from taxation under the same paragraph of section 501(c) of 
the Code, although the

[[Page 136]]

local organizations are not necessarily exempt under the paragraph under 
which the central organization is exempt.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in writing have authorized the central organization 
to include them in the group return, and which have made and filed, with 
the central organization, their statements, specifically stating their 
items of gross income, receipts, and disbursements, and such other 
information relating to them as is required to be stated in the group 
return. Such an authorization by a local organization shall be made 
annually, under the penalties of perjury, and shall be signed by a duly 
authorized officer of the local organization in his official capacity 
and shall contain the following statement, or a statement of like 
import: ``I hereby declare under the penalties of perjury that this 
authorization (including any accompanying schedules and statements) has 
been examined by me and to the best of my knowledge and belief is true, 
correct and complete and made in good faith for the taxable year 
stated.'' Such authorizations and statements shall be permanently 
retained by the central organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name and address of each of the local 
organizations and the total number thereof included in such return, and 
a schedule showing the name and address of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, 990-A, 
990 (SF), or 990-A (SF), whichever is appropriate, and shall be 
considered the return of each local organization included therein. The 
tax-exempt status of a local organization must be established under a 
group exemption letter issued to the central organization before a group 
return including the local organization will be considered as the return 
of the local organization. See Sec. 1.501(a)-1 for requirements for 
establishing a tax-exempt status.
    (e) Time and place for filing. The annual return of information on 
Form 990, 990-A, 990 (SF), 990-A (SF), or 990-P shall be filed on or 
before the 15th day of the fifth calendar month following the close of 
the period for which the return is required to be filed. The annual 
return on Form 1065 required to be filed by a religious or apostolic 
association or corporation shall be filed on or before the 15th day of 
the fourth month following the close of the taxable year for which the 
return is required to be filed. Each such return shall be filed in 
accordance with the instructions applicable thereto.
    (f) Penalties. For criminal penalties for failure to file a return 
and filing a false or fraudulent return, see sections 7203, 7206, and 
7207.
    (g) Organizations not required to file annual returns. (1) (i) 
Annual returns on Form 990-A or Form 990-A (SF) are not required to be 
filed by an organization described in section 501 (c) (3) which has 
established its right to exemption from taxation under section 501 (a) 
and which is:
    (a) Organized and operated exclusively for religious purposes;
    (b) Operated, supervised, or controlled by or in connection with an 
organization which is organized and operated exclusively for religious 
purposes;
    (c) An educational organization which normally maintains a regular 
faculty and curriculum and normally has a regularly organized body of 
pupils or students in attendance at the place where its educational 
activities are regularly carried on; or

[[Page 137]]

    (d) A charitable organization, or an organization for the prevention 
of cruelty to children or animals, which is supported, in whole or in 
part, by funds contributed by the United States or any State or 
political subdivision thereof, or which is primarily supported by 
contributions of the general public.
    (ii) An educational organization which normally maintains and has a 
regular faculty, curriculum, and student body and meets the conditions 
of subdivision (i)(c) of this subparagraph, which relieves it from the 
requirement of filing annual returns, shall not be considered as having 
thereafter failed to continue meeting such conditions if it is 
temporarily compelled to curtail or discontinue its normal and regular 
activities during the existence of abnormal circumstances and 
conditions.
    (iii) An organization organized and operated exclusively for 
charitable purposes or for the prevention of cruelty to children or 
animals is ``primarily supported by contributions of the general 
public'' for any accounting period if more than 50 percent of its income 
and receipts for such period is actually derived from voluntary 
contributions and gifts made by the general public, as distinguished 
from a few contributors or donors or from related or associated persons. 
For purposes of this subdivision, the words ``related or associated 
persons'' refer to persons of a particular group who are connected with 
or are interested in the activities of the organization, such as 
founders, incorporators, shareholders, members, fiduciaries, officers, 
employees, or the like, or who are connected with such persons by family 
or business relationships. An organization claiming an exception from 
the filing of an information return under this subdivision must maintain 
adequate records in order to substantiate such claim. Furthermore, if it 
is doubtful to an organization that it falls within this exception for 
filing annual information returns, it must file the return on Form 990-A 
or Form 990-A (SF).
    (2) The annual return on Form 990 or Form 990 (SF) need not be filed 
by:
    (i) A fraternal beneficiary society, order, or association, 
described in section 501(c)(8), or
    (ii) An organization described in section 501(c)(1) if it is a 
corporation wholly owned by the United States or any agency or 
instrumentality thereof, or is a wholly owned subsidiary of such a 
corporation,

which has established its exemption from tax under section 501(a).
    (3) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from tax under section 501(a) from filing 
annual returns do not abridge or impair in any way the powers and 
authority of district directors or directors of service centers provided 
for in other provisions of the Code and in the regulations thereunder to 
require the filing of such returns by such organizations. See section 
6001 and Sec. 1.6001-1.
    (h) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization which has established its right to 
exemption from tax under section 501(a) and has also established that it 
is not required to file annually the return of information on Form 990, 
990-A, 990 (SF), or 990-A (SF) shall immediately notify in writing the 
district director for the internal revenue district in which its 
principal office is located of any changes in its character, operations, 
or purpose for which it was originally created.
    (2) Every organization which has established its right to exemption 
from tax, whether or not it is required to file an annual return of 
information, shall submit such additional information as may be required 
by the district director for the purpose of enabling him to inquire 
further into its exempt status and to administer the provisions of 
subchapter F (section 501 and following), chapter 1 of the Code, and of 
section 6033. See section 6001 and Sec. 1.6001-1 with respect to the 
authority of the district director or directors of service centers to 
require such additional information and with respect to the permanent 
books of account or records to be kept by such organizations.
    (3) An organization which has established its right to exemption 
from tax under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not,

[[Page 138]]

however, relieved from the duty of filing other returns of information. 
See, for example, sections 6041 and 6051 and the regulations thereunder.
    (i) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) and described in section 501(c) (2), (3), 
(5), (6), or (17) or section 401(a) which are subject to tax on 
unrelated business taxable income are also required to file returns on 
Form 990-T. See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of 
Sec. 1.6012-3 for requirements with respect to such returns.
    (j) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning before January 1, 
1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5075, Apr. 14, 1964; T.D. 6972, 33 FR 12907, Sept. 12, 1968; T.D. 6980, 
33 FR 16446, Nov. 9, 1968; T.D. 7122, 36 FR 11026, June 8, 1971]



Sec. 1.6033-2  Returns by exempt organizations (taxable years beginning after December 31, 1969) and returns by certain nonexempt organizations (taxable years 
          beginning after December 31, 1980).

    (a) In general. (1) Except as provided in section 6033(a)(2) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual information return 
specifically setting forth its items of gross income, gross receipts and 
disbursements, and such other information as may be prescribed in the 
instructions issued with respect to the return. Except as provided in 
paragraph (d) of this section, such return shall be filed annually 
regardless of whether such organization is chartered by, or affiliated 
or associated with, any central, parent, or other organization.
    (2)(i) Except as otherwise provided in this paragraph and paragraph 
(g) of this section, every organization exempt from taxation under 
section 501(a), and required to file a return under section 6033 and 
this section (including, for taxable years ending before December 31, 
1972, private foundations, as defined in section 509(a)), other than an 
organization described in section 401(a) or 501(d), shall file its 
annual return on Form 990. For taxable years ending on or after December 
31, 1972, every private foundation shall file Form 990-PF as its annual 
information return. For taxable years beginning after December 31, 1977, 
every section 501(c)(21) black lung trust shall file an annual 
information return on Form 990-BL or any other form prescribed by the 
Internal Revenue Service for that purpose.
    (ii) The information generally required to be furnished by an 
organization exempt under section 501(a) is:
    (a) Its gross income for the year. For this purpose, gross income 
includes tax-exempt income, but does not include contributions, gifts, 
grants, and similar amounts received. Whether an item constitutes a 
contribution, gift, grant, or similar amount depends upon all the 
surrounding facts and circumstances. The computation of gross income 
shall be made by subtracting the cost of goods sold from all receipts 
other than gross contributions, gifts, grants, and similar amounts 
received and nonincludible dues and assessments from members and 
affiliates.
    (b) To the extent not included in gross income, its dues and 
assessments from members and affiliates for the year.
    (c) Its expenses incurred within the year attributable to gross 
income.
    (d) Its disbursements (including prior years' accumulations) made 
within the year for the purposes for which it is exempt.
    (e) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information relating 
to the assets, liabilities, and net worth shall be furnished on the 
schedule provided for this purpose on the return required by this 
section. Such schedule shall be supplemented by attachments where 
appropriate.
    (f) The total of the contributions, gifts, grants and similar 
amounts received by it during the taxable year, and the names and 
addresses of all persons who contributed, bequeathed, or devised $5,000 
or more (in money or other property) during the taxable year. In the 
case of a private foundation (as defined in section 509(a)), the names 
and addresses of all persons who became substantial contributors (as 
defined in section 507(d)(2)) during the

[[Page 139]]

taxable year shall be furnished. In addition, for its first taxable year 
beginning after December 31, 1969, each private foundation shall furnish 
the names and addresses of all persons who became substantial 
contributors before such taxable year. For special rules with respect to 
contributors and donors, see subdivision (iii) of this subparagraph.
    (g) The names and addresses of all officers, directors, or trustees 
(or any person having responsibilities or powers similar to those of 
officers, directors, or trustees) of the organization, and, in the case 
of a private foundation, all persons who are foundation managers, within 
the meaning of section 4946(b)(1). Organizations described in section 
501(c)(3) must also attach a schedule showing the names and addresses of 
the five employees (if any) who received the greatest amount of annual 
compensation in excess of $30,000; the total number of other employees 
who received annual compensation in excess of $30,000; the names and 
addresses of the five independent contractors (if any) who performed 
personal services of a professional nature for the organization (such as 
attorneys, accountants, and doctors, whether such services are performed 
by such persons in their individual capacity or as employees of a 
professional service corporation) and who received the greatest amount 
of compensation in excess of $30,000 from the organization for the year 
for the performance of such services; and the total number of other such 
independent contractors who received in excess of $30,000 for the year 
for the performance of such services.
    (h) A schedule showing the compensation and other payments made 
during the organization's annual accounting period (or during the 
calendar year ending within such period) which are includible in the 
gross income of each individual whose name is required to be listed in 
(g) of this subdivision.
    (i) For any taxable year ending on or after December 31, 1971, such 
information as is required by Forms 4848 and 4849 and, only with respect 
to any such taxable year ending before December 31, 1972, such 
information as is required by Form 2950. Such forms are required by this 
section to be filed by an organization exempt from tax under section 
501(a) which is an employer who maintains a funded pension or annuity 
plan for its employees. See paragraph (g) of this section for exceptions 
from filing. Form 4849 need not be filed by the organization if the 
fiduciary for the plan has given written notification to the 
organization that such form will be filed as an attachment to Form 990-P 
filed by the fiduciary. Form 4848 (and Form 4849 if required to be filed 
by the organization) shall be filed as a separate return on or before 
the due date for Form 990. For rules relating to the extension of time 
for filing, see section 6081 and the regulations thereunder and the 
instructions for Form 4848. A central organization which files Form 990 
as a group return under paragraph (d) of this section may also file Form 
4848 as a group return. The rules provided by paragraph (d) of this 
section with respect to a group return filed on Form 990 shall apply to 
a group return filed on Form 4848. Unless otherwise expressly provided 
therein, an authorization to include a local organization in a group for 
purposes of filing Form 990 as a group return shall be treated as an 
authorization to include such local organization in a group for purposes 
of filing Form 4848 as a group return. A group return on Form 4848 shall 
be filed in accordance with this section and the instructions to Form 
4848 and shall be considered the return of each local organization 
included therein. In addition to the information required to be 
furnished by Forms 4848 and 4849, the district director may require any 
further information that he considers necessary to determine 
qualification of the plan under section 401 or the taxability under 
section 403(b) of a beneficiary under an annuity purchased by a section 
501(c)(3) organization.
    (j) In the case of a private foundation liable for tax imposed under 
chapter 42, such information as is required by Form 4720.
    (k) Its lobbying expenditures, grass roots expenditures, exempt 
purpose expenditures, lobbying nontaxable amount, and grass roots 
nontaxable amount for the taxable year and for prior taxable years that 
are base years (within the meaning of Sec. 1.501(h)-

[[Page 140]]

3(c)(7)), if the organization has an election under section 501(h) in 
effect for the taxable year. An organization that is a member of an 
affiliated group of organizations (as defined in Sec. 56.4911-7(e)) but 
that is not a member of a limited affiliated group (as defined in 
Sec. 56.4911-10(b)) shall report this information based on the 
expenditures of all members of the group during the taxable year of the 
group that ends with or within the member's taxable year and for prior 
taxable years of the group that are base years (within the meaning of 
Sec. 56.4911-9(b)). For additional information required to be furnished 
by members of an affiliated group of organizations, and by controlling 
members in a limited affiliated group, see Secs. 56.4911-9(d) and 
56.4911-10(f)(1), respectively.
    (iii) Special rules. In providing the names and addresses of 
contributors and donors under subdivision (ii)(f) of this subparagraph:
    (a) An organization described in section 501(c)(3) which meets the 
33\1/3\ percent-of-support test of the regulations under section 
170(b)(1)(A)(vi) (without regard to whether such organization otherwise 
qualifies as an organization described in section 170(b)(1)(A)) is 
required to provide the name and address of a person who contributed, 
bequeathed, or devised $5,000 or more during the year only if his amount 
is in excess of 2 percent of the total contributions, bequests and 
devises received by the organization during the year.
    (b) An organization other than a private foundation is required to 
report only the names and addresses of contributors of whom it has 
actual knowledge. For instance, an organization need not require an 
employer who withholds contributions from the compensation of employees 
and pays over to the organization periodically the total amounts 
withheld, to specify the amounts paid over with respect to a particular 
employee. In such case, unless the organization has actual knowledge 
that a particular employee gave more than $5,000 (and in excess of 2 
percent if (a) of this subdivision is applicable), the organization need 
report only the name and address of the employer, and the total amount 
paid over by him.
    (c) Separate and independent gifts made by one person in a 
particular year need be aggregated to determine if his contributions and 
bequests exceed $5,000 (and in excess of 2 percent if (a) of this 
subdivision is applicable), only if such gifts are of $1,000 or more.
    (d)(1) Organizations described in section 501(c) (8) or (10) (and, 
for taxable years beginning after December 31, 1970, organizations 
described in section 501(c)(7)) that receive contributions or bequests 
to be used exclusively for purposes described in section 170(c)(4), 
2055(a)(3), or 2522(a)(3), must attach a schedule with respect to all 
gifts which aggregate more than $1,000 from any one person showing the 
name of the donor, the amount of the contribution or bequest, the 
specific purpose for which such amount was received, and the specific 
use to which such amount was put. In the case of an amount set aside for 
such purposes, the organization shall indicate the manner in which such 
amount is held (for instance, whether such amount is commingled with 
amounts held for other purposes). If the contribution or bequest was 
transferred to another organization, the schedule must include the name 
of the transferee organization, a description of the nature of such 
organization, and a description of the relationship between the 
transferee and transferor organizations.
    (2) For taxable years beginning after December 31, 1970, such 
organizations must also attach a statement showing the total dollar 
amount of contributions and bequests received for such purposes which 
are $1,000 or less.
    (iv) Listing of States. A private foundation is required to attach 
to its return required by this section a list of all States:
    (a) To which the organization reports in any fashion concerning its 
organization, assets, or activities, or
    (b) With which the organization has registered (or which it has 
otherwise notified in any manner) that it intends to be, or is, a 
charitable organization or a holder of property devoted to a charitable 
purpose.
    (3)(i) For taxable years beginning after December 31, 1969, and 
ending before December 31, 1971, every employee's trust described in 
section 401(a)

[[Page 141]]

which is exempt from taxation under section 501(a) shall file an annual 
return on Form 990-P. The return shall include the information required 
by paragraph (b)(5)(ii) of Sec. 1.401-1. For such years, in addition, 
the trust must file the information required to be filed by the employer 
pursuant to the provisions of Sec. 1.404(a)-2, unless the employer has 
notified the trustee in writing that he has filed or will timely file 
such information. If the trustee has received such notification from the 
employer, then such notification, or a copy thereof, shall be retained 
by the trust as a part of its records.
    (ii) For taxable years ending on or after December 31, 1971, and 
before December 31, 1975, every employee's trust described in section 
401(a) which is exempt from taxation under section 501(a) shall file an 
annual return on Form 990-P. The trust shall furnish such information as 
is required by such form and the instructions issued with respect 
thereto.
    (4) For taxable years beginning after December 31, 1980, trusts 
described in section 4947(a)(1) and nonexempt private foundations shall 
comply with the requirements of section 6033 and this section in the 
same manner as organizations described in section 501(c)(3) which are 
exempt from tax under section 501(a). This section shall be applied for 
taxable years beginning after December 31, 1980 as if trusts described 
in section 4947(a)(1) and nonexempt private foundations were described 
in section 501(c)(3). Therefore, for purposes of this section, all 
references to exempt organizations shall include section 4947(a)(1) 
trusts and nonexempt private foundations and all references to private 
foundations shall include section 4947(a)(1) trusts that would be 
private foundations if they were described in section 501(c)(3) and all 
nonexempt private foundations. Similarly, for purposes of paragraph 
(a)(2)(ii)(d), the purposes for which a section 4947(a)(1) trust or a 
nonexempt private foundation is organized shall be treated as the 
purposes for which it is exempt. For purposes of this section, the term 
``nonexempt private foundation'' means a taxable organization (other 
than a section 4947(a)(1) trust) that is a private foundation. See 
section 509(b) and Sec. 1.509(b)-1. See also section 642(c)(6) and 
Sec. 1.642(c)-4.
    (b) Accounting period for filing return. A return required by this 
section shall be on the basis of the established annual accounting 
period of the organization. If the organization has no such established 
accounting period, such return shall be on the basis of the calendar 
year.
    (c) Returns when exempt status not established. An organization 
claiming an exempt status under section 501(a) prior to the 
establishment of such exempt status under section 501 and Sec. 1.501(a)-
1, shall file a return required by this section in accordance with the 
instructions applicable thereto. In such case the organization must 
indicate on such return that it is being filed in the belief that the 
organization is exempt under section 501(a), but that the Internal 
Revenue Service has not yet recognized such exemption.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c) (other than a 
private foundation), although required to file a separate annual return 
for itself under section 6033 and paragraph (a) of this section, may 
file annually, in addition to such separate annual return, a group 
return on Form 990. Such group return may be filed for two or more of 
the local organizations, chapters, or the like (referred to in this 
paragraph as ``local organizations'') which are (i) affiliated with such 
central organization at the close of its annual accounting period, (ii) 
subject to the general supervision or control of the central 
organization, and (iii) exempt from taxation under the same paragraph of 
section 501(c) of the Code, although the local organizations are not 
necessarily exempt under the paragraph under which the central 
organization is exempt. Such group return may not be filed for a local 
organization which is a private foundation.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in

[[Page 142]]

writing have authorized the central organization to include them in the 
group return, and which have made and filed, with the central 
organization, their statements, specifically stating their items of 
gross income, receipts, and disbursements, and such other information 
relating to them as is required to be stated in the group return. Such 
an authorization and statement by a local organization shall be made 
under the penalties of perjury, shall be signed by a duly authorized 
officer of the local organization in his official capacity, and shall 
contain the following statement, or a statement of like import: ``I 
hereby declare under the penalties of perjury that this authorization 
(including any accompanying schedules and statements) has been examined 
by me and to the best of my knowledge and belief is true, correct and 
complete and made in good faith.'' Such authorization and statement with 
respect to a local organization shall be retained by the central 
organization until the expiration of 6 years after the last taxable year 
for which a group return filed by such central organization includes 
such local organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name, address, and employer 
identification number of each of the local organizations and the total 
number thereof included in such return, and a schedule showing the name, 
address, and employer identification number of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, and 
shall be considered the return of each local organization included 
therein. The tax exempt status of a local organization must be 
established under a group exemption letter issued to the central 
organization before a group return including the local organization will 
be considered as the return of the local organization. See 
Sec. 1.501(a)-1 for requirements for establishing a tax-exempt status.
    (5) In providing the information required by paragraph (a)(2)(ii) 
(f), (g), and (h) of this section, such information may be provided:
    (i) With respect to the central or parent organization on its Form 
990, and with respect to the local organizations on separate schedules 
attached to the group return for the year, or
    (ii) On a consolidated basis for all the local organizations and the 
central or parent organization on the group return.

Such information need be provided only with respect to those local 
organizations which are not excepted from filing under the provisions of 
paragraph (g) of this section. A central or parent organization shall 
indicate whether it has provided such information in the manner 
described in subdivision (i) or in subdivision (ii) of this 
subparagraph, and may not change the manner in which it provides such 
information without the consent of the Commissioner.
    (e) Time and place for filing. The annual return required by this 
section shall be filed on or before the 15th day of the fifth calendar 
month following the close of the period for which the return is required 
to be filed. The annual return on Form 1065 required to be filed by a 
religious or apostolic association or corporation shall be filed on or 
before the 15th day of the fourth month following the close of the 
taxable year for which the return is required to be filed. Each such 
return shall be filed in accordance with the instructions applicable 
thereto.
    (f) Penalties and additions to tax. For penalties and additions to 
tax for failure to file a return and filing a false or fraudulent 
return, see sections 6652, 7203, 7206, and 7207.
    (g) Organizations not required to file annual returns. (1) Annual 
returns required by this section are not required to be filed by an 
organization exempt

[[Page 143]]

from taxation under section 501(a) which is:
    (i) A church, an interchurch organization of local units of a 
church, a convention or association of churches, or an integrated 
auxiliary of a church (as defined in paragraph (h) of this section);
    (ii) An exclusively religious activity of any religious order;
    (iii) An organization (other than a private foundation) the gross 
receipts of which in each taxable year are normally not more than $5,000 
(as described in subparagraph (3) of this paragraph);
    (iv) A mission society sponsored by or affiliated with one or more 
churches or church denominations, more than one-half of the activities 
of which society are conducted in, or directed at persons in foreign 
countries;
    (v) A State institution, the income of which is excluded from gross 
income under section 115(a);
    (vi) An organization described in section 501(c)(1); or
    (vii) An educational organization (below college level) that is 
described in section 170(b)(1)(A)(ii), that has a program of a general 
academic nature, and that is affiliated (within the meaning of paragraph 
(h)(2) of this section) with a church or operated by a religious order.
    (2) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from taxation under section 501(a) from 
filing annual returns do not abridge or impair in any way the powers and 
authority of district directors or directors of service centers provided 
for in other provisions of the Code and in regulations thereunder to 
require the filing of returns or notices by such organizations. See 
section 6001 and Sec. 1.6001-1.
    (3) For purposes of subparagraph (1)(iii) of this paragraph, the 
gross receipts (as defined in subparagraph (4) of this paragraph) of an 
organization are normally not more than $5,000 if:
    (i) In the case of an organization which has been in existence for 1 
year or less, the organization has received, or donors have pledged to 
give, gross receipts of $7,500 or less during the first taxable year of 
the organization,
    (ii) In the case of an organization which has been in existence for 
more than one but less than 3 years, the average of the gross receipts 
received by the organization in its first 2 taxable years is $6,000 or 
less, and
    (iii) In the case of an organization which has been in existence for 
3 years or more, the average of the gross receipts received by the 
organization in the immediately preceding 3 taxable years, including the 
year for which the return would be required to be filed, is $5,000 or 
less.
    (4) For purposes of this paragraph and paragraph (a)(2) of this 
section, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus ``gross receipts'' includes, 
but is not limited to (i) the gross amount received as contributions, 
gifts, grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (ii) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, 
(iii) gross sales or receipts from business activities (including 
business activities unrelated to the purpose for which the organization 
qualifies for exemption, the net income or loss from which may be 
required to be reported on Form 990-T), (iv) the gross amount received 
from the sale of assets without reduction for cost or other basis and 
expenses of sale, and (v) the gross amount received as investment 
income, such as interest, dividends, rents, and royalties.
    (5) [Reserved]
    (6) The Commissioner may relieve any organization or class of 
organizations from filing, in whole or in part, the annual return 
required by this section where he determines that such returns are not 
necessary for the efficient administration of the internal revenue laws.

[[Page 144]]

    (h) Integrated auxiliary--(1) In general. For purposes of this 
title, the term integrated auxiliary of a church means an organization 
that is--
    (i) Described both in sections 501(c)(3) and 509(a) (1), (2), or 
(3);
    (ii) Affiliated with a church or a convention or association of 
churches; and
    (iii) Internally supported.
    (2) Affiliation. An organization is affiliated with a church or a 
convention or association of churches, for purposes of paragraph 
(h)(1)(ii) of this section, if--
    (i) The organization is covered by a group exemption letter issued 
under applicable administrative procedures, (such as Rev. Proc. 80-27 
(1980-1 C.B. 677); See Sec. 601.601(a)(2)(ii)(b)), to a church or a 
convention or association of churches;
    (ii) The organization is operated, supervised, or controlled by or 
in connection with (as defined in Sec. 1.509(a)-4) a church or a 
convention or association of churches; or
    (iii) Relevant facts and circumstances show that it is so 
affiliated.
    (3) Facts and circumstances. For purposes of paragraph (h)(2)(iii) 
of this section, relevant facts and circumstances that indicate an 
organization is affiliated with a church or a convention or association 
of churches include the following factors. However, the absence of one 
or more of the following factors does not necessarily preclude 
classification of an organization as being affiliated with a church or a 
convention or association of churches--
    (i) The organization's enabling instrument (corporate charter, trust 
instrument, articles of association, constitution or similar document) 
or by-laws affirm that the organization shares common religious 
doctrines, principles, disciplines, or practices with a church or a 
convention or association of churches;
    (ii) A church or a convention or association of churches has the 
authority to appoint or remove, or to control the appointment or removal 
of, at least one of the organization's officers or directors;
    (iii) The corporate name of the organization indicates an 
institutional relationship with a church or a convention or association 
of churches;
    (iv) The organization reports at least annually on its financial and 
general operations to a church or a convention or association of 
churches;
    (v) An institutional relationship between the organization and a 
church or a convention or association of churches is affirmed by the 
church, or convention or association of churches, or a designee thereof; 
and
    (vi) In the event of dissolution, the organization's assets are 
required to be distributed to a church or a convention or association of 
churches, or to an affiliate thereof within the meaning of this 
paragraph (h).
    (4) Internal support. An organization is internally supported, for 
purposes of paragraph (h)(1)(iii) of this section, unless it both--
    (i) Offers admissions, goods, services or facilities for sale, other 
than on an incidental basis, to the general public (except goods, 
services, or facilities sold at a nominal charge or for an insubstantial 
portion of the cost); and
    (ii) Normally receives more than 50 percent of its support from a 
combination of governmental sources, public solicitation of 
contributions, and receipts from the sale of admissions, goods, 
performance of services, or furnishing of facilities in activities that 
are not unrelated trades or businesses.
    (5) Special rule. Men's and women's organizations, seminaries, 
mission societies, and youth groups that satisfy paragraphs (h)(1) (i) 
and (ii) of this section are integrated auxiliaries of a church 
regardless of whether such an organization meets the internal support 
requirement under paragraph (h)(1)(iii) of this section.
    (6) Effective date. This paragraph (h) applies for returns filed for 
taxable years beginning after December 31, 1969. For returns filed for 
taxable years beginning after December 31, 1969 but beginning before 
December 20, 1995, the definition for the term integrated auxiliary of a 
church set forth in Sec. 1.6033-2(g)(5) (as contained in the 26 CFR 
edition revised as of April 1, 1995) may be used as an alternative 
definition to such term set forth in this paragraph (h).

[[Page 145]]

    (7) Examples of internal support. The internal support test of this 
paragraph (h) is illustrated by the following examples, in each of which 
it is assumed that the organization's provision of goods and services 
does not constitute an unrelated trade or business:

    Example 1. Organization A is described in sections 501(c)(3) and 
509(a)(2) and is affiliated (within the meaning of this paragraph (h)) 
with a church. Organization A publishes a weekly newspaper as its only 
activity. On an incidental basis, some copies of Organization A's 
publication are sold to nonmembers of the church with which it is 
affiliated. Organization A advertises for subscriptions at places of 
worship of the church. Organization A is internally supported, 
regardless of its sources of financial support, because it does not 
offer admissions, goods, services, or facilities for sale, other than on 
an incidental basis, to the general public. Organization A is an 
integrated auxiliary.
    Example 2. Organization B is a retirement home described in sections 
501(c)(3) and 509(a)(2). Organization B is affiliated (within the 
meaning of this paragraph (h)) with a church. Admission to Organization 
B is open to all members of the community for a fee. Organization B 
advertises in publications of general distribution appealing to the 
elderly and maintains its name on non-denominational listings of 
available retirement homes. Therefore, Organization B offers its 
services for sale to the general public on more than an incidental 
basis. Organization B receives a cash contribution of $50,000 annually 
from the church. Fees received by Organization B from its residents 
total $100,000 annually. Organization B does not receive any government 
support or contributions from the general public. Total support is 
$150,000 ($100,000 + $50,000), and $100,000 of that total is from 
receipts from the performance of services (66\2/3\% of total support). 
Therefore, Organization B receives more than 50 percent of its support 
from receipts from the performance of services. Organization B is not 
internally supported and is not an integrated auxiliary.
    Example 3. Organization C is a hospital that is described in 
sections 501(c)(3) and 509(a)(1). Organization C is affiliated (within 
the meaning of this paragraph (h)) with a church. Organization C is open 
to all persons in need of hospital care in the community, although most 
of Organization C's patients are members of the same denomination as the 
church with which Organization C is affiliated. Organization C maintains 
its name on hospital listings used by the general public, and 
participating doctors are allowed to admit all patients. Therefore, 
Organization C offers its services for sale to the general public on 
more than an incidental basis. Organization C annually receives $250,000 
in support from the church, $1,000,000 in payments from patients and 
third party payors (including Medicare, Medicaid and other insurers) for 
patient care, $100,000 in contributions from the public, $100,000 in 
grants from the federal government (other than Medicare and Medicaid 
payments) and $50,000 in investment income. Total support is $1,500,000 
($250,000 + $1,000,000 + $100,000 + $100,000 + $50,000), and $1,200,000 
($1,000,000 + $100,000 + $100,000) of that total is support from 
receipts from the performance of services, government sources, and 
public contributions (80% of total support). Therefore, Organization C 
receives more than 50 percent of its support from receipts from the 
performance of services, government sources, and public contributions. 
Organization C is not internally supported and is not an integrated 
auxiliary.

    (i) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization which is exempt from taxation under 
section 501(a) and is not required to file annually an information 
return required by this section shall immediately notify in writing the 
district director for the internal revenue district in which its 
principal office is located of any changes in its character, operations, 
or purpose for which it was originally created.
    (2) Every organization which is exempt from tax, whether or not it 
is required to file an annual information return, shall submit such 
additional information as may be required by the Internal Revenue 
Service for the purpose of inquiring into its exempt status and 
administering the provisions of subchapter F (section 501 and 
following), chapter 1 of subtitle A of the Code, section 6033, and 
chapter 42 of subtitle D of the Code. See section 6001 and Sec. 1.6001-1 
with respect to the authority of the district directors or directors of 
service centers to require such additional information and with respect 
to the books of account or records to be kept by such organizations.
    (3) An organization which has established its exemption from 
taxation under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not relieved of the duty of filing other returns of 
information. See, for example, sections 6041, 6043, 6051, 6057, and 6058 
and the regulations thereunder.

[[Page 146]]

    (j) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) which are subject to tax on unrelated 
business taxable income are also required to file returns on Form 990-T. 
See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of Sec. 1.6012-3 
for requirements with respect to such returns.
    (k) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning after December 31, 
1969.

[T.D. 7122, 36 FR 11026, June 8, 1971; 36 FR 11730, June 18, 1971]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6033-2, see the List of Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.6033-3  Additional provisions relating to private foundations.

    (a) In general. The foundation managers (as defined in section 
4946(b)) of every organization (including a trust described in section 
4947(a)(1)) which is (or is treated as) a private foundation (as defined 
in section 509) the assets of which are at least $5,000 at any time 
during a taxable year shall include the following information on its 
annual return in addition to that information required under 
Sec. 1.6033-2(a):
    (1) An itemized statement of its securities and all other assets at 
the close of the year, showing both book and market value,
    (2) An itemized list of all grants and contributions made or 
approved for future payment during the year, showing the amount of each 
such grant or contribution, the name and address of the recipient (other 
than a recipient who is not a disqualified person and who receives, from 
the foundation, grants to indigent or needy persons that, in the 
aggregate, do not exceed $1,000 during the year), any relationship 
between any individual recipient and the foundation's managers or 
substantial contributors, and a concise statement of the purpose of each 
such grant or contribution,
    (3) The address of the principal office of the foundation and (if 
different) of the place where its books and records are maintained,
    (4) The names and addresses of its foundation managers (within the 
meaning of section 4946(b)), that are substantial contributors (within 
the meaning of section 507(d)(2)) or that own 10 percent or more of the 
stock of any corporation of which the foundation owns 10 percent or more 
of the stock, or corresponding interests in partnerships or other 
entities, in which the foundation has a 10 percent or greater interest.

For purposes of subparagraph (2) of this paragraph, the business address 
of an individual grant recipient or foundation manager may be used by 
the foundation in its annual return in lieu of the home address of such 
recipient or manager, and the term ``relationship'' shall include, but 
is not limited to, any case in which an individual recipient of a grant 
or contribution by a private foundation is (i) a member of the family 
(as defined in section 4946(d)) of a substantial contributor or 
foundation manager of such foundation, (ii) a partner of such 
substantial contributor or foundation manager, or (iii) an employee of 
such substantial contributor or foundation manager or of an organization 
which is effectively controlled (within the meaning of section 
4946(a)(1)(H)(i) and the regulations thereunder), directly or 
indirectly, by one or more such substantial contributors or foundation 
managers.
    (b) Notice to public of availability of annual return. A copy of the 
notice required by section 6104(d) (relating to public inspection of 
private foundations' annual returns), and proof of publication thereof, 
shall be filed with the annual return required by Sec. 1.6033-2(a). A 
copy of such notice as published, and a statement signed by a foundation 
manager stating that such notice was published, setting forth the date 
of publication and the publication in which it appeared, shall be 
sufficient proof of publication for purposes of this paragraph.
    (c) Special rules--(1) Furnishing of copies to State officers. The 
foundation managers of a private foundation shall furnish a copy of the 
annual return required by section 6033 and Sec. 1.6033-2 to the Attorney 
General of:

[[Page 147]]

    (i) Each State which the foundation is required to list on its 
return pursuant to Sec. 1.6033-2(a)(2)(iv),
    (ii) The State in which is located the principal office of the 
foundation, and
    (iii) The State in which the foundation was incorporated or created.

The annual return shall be sent to each Attorney General described in 
paragraphs (c)(1) (i), (ii), or (iii) of this section at the same time 
as it is sent to the Internal Revenue Service. Upon request the 
foundation managers shall also furnish a copy of the annual return to 
the Attorney General or other appropriate State officer (within the 
meaning of section 6104 (c)(2)) of any State. The foundation managers 
shall attach to each copy of the annual return sent to State officers 
under this subparagraph a copy of the Form 4720, if any, filed by the 
foundation for the year.
    (2) Cross-reference. For additional rules with respect to private 
foundations' returns and the public inspection of such returns, see 
section 6104(d) and the regulations thereunder.
    (d) Special rules for certain foreign organizations. The provisions 
of paragraphs (b) and (c) of this section shall not apply with respect 
to an organization described in section 4948(b). The foundation managers 
of such organizations are not required to publish notice of availability 
of the annual return for inspection, to make the annual return available 
at the principal office of the foundation for public inspection under 
section 6104(d), or to send copies of the annual return to State 
officers.
    (e) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning after December 31, 
1980.

[T.D. 8026, 50 FR 20756, May 20, 1985]



Sec. 1.6034-1  Information returns required of trusts described in section 4947(a)(2) or claiming charitable or other deductions under section 642(c).

    (a) In general. Every trust (other than a trust described in 
paragraph (b) of this section) claiming a charitable or other deduction 
under section 642(c) for the taxable year shall file, with respect to 
such taxable year, a return of information on form 1041-A. In addition, 
for taxable years beginning after December 31, 1969, every trust (other 
than a trust described in paragraph (b) of this section) described in 
section 4947 (a) (2) (including trusts described in section 664) shall 
file such return for each taxable year, unless all transfers in trust 
occurred before May 27, 1969. The return shall set forth the name and 
address of the trust and the following information concerning the trust 
in such detail as is prescribed by the form or in the instructions 
issued with respect to such form:
    (1) The amount of the charitable or other deduction taken under 
section 642(c) for the taxable year (and, for taxable years beginning 
prior to January 1, 1970, showing separately for each class of activity 
for which disbursements were made (or amounts were permanently set 
aside) the amounts which, during such year, were paid out (or which were 
permanently set aside) for charitable or other purposes under section 
642(c));
    (2) The amount paid out during the taxable year which represents 
amounts permanently set aside in prior years for which charitable or 
other deductions have been taken under section 642(c), and separately 
listing for each class of activity, for which disbursements were made, 
the total amount paid out;
    (3) The amount for which charitable or other deductions have been 
taken in prior years under section 642(c) and which had not been paid 
out at the beginning of the taxable year;
    (4)(i) The amount paid out of principal in the taxable year for 
charitable, etc., purposes, and separately listing for each such class 
of activity, for which disbursements were made, the total amount paid 
out;
    (ii) The total amount paid out of principal in prior years for 
charitable, etc., purposes;
    (5) The gross income of the trust for the taxable year and the 
expenses attributable thereto, in sufficient detail to show the 
different categories of income and of expense; and
    (6) A balance sheet showing the assets, liabilities, and net worth 
of the trust as of the beginning of the taxable year.

[[Page 148]]

    (b) Exceptions--(1) In general. A trust is not required to file a 
Form 1041-A for any taxable year with respect to which the trustee is 
required by the terms of the governing instrument and applicable local 
law to distribute currently all of the income of the trust. For this 
purpose, the income of the trust shall be determined in accordance with 
section 643(b) and Secs. 1.643(b)-1 and 1.643(b)-2.
    (2) Trusts described in section 4947(a)(1). For taxable years 
beginning after December 31, 1980, a trust described in section 
4947(a)(1) is not required to file a Form 1041-A.
    (c) Time and place for filing return. The return on form 1041-A 
shall be filed on or before the 15th day of the 4th month following the 
close of the taxable year of the trust, with the internal revenue 
officer designated by the instructions applicable to such form. For 
extensions of time for filing returns under this section, see 
Sec. 1.6081-1.
    (d) Other provisions. For publicity of information on Form 1041-A, 
see section 6104 and the regulations thereunder in part 301 of this 
chapter. For provisions relating to penalties for failure to file a 
return required by this section, see section 6652(d). For the criminal 
penalties for a willful failure to file a return and filing a false or 
fraudulent return, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7563, 43 FR 
40221, Sept. 11, 1978; T.D. 8026, 50 FR 20757, May 20, 1985]



Sec. 1.6035-1  Returns of U.S. officers, directors and 10-percent shareholders of foreign personal holding companies for taxable years beginning after September 
          3, 1982.

    (a) Requirement of returns--(1) In general. For taxable years of a 
foreign personal holding company beginning after September 3, 1982, each 
United States citizen or resident who is an officer, director, or 10-
percent shareholder of the foreign personal holding company (as defined 
in section 552) shall file with his income tax return, on or before the 
date that return is due, Form 5471 and the applicable schedules to be 
completed in accordance with the instructions setting forth corporate, 
shareholder, and income information for the foreign personal holding 
company's annual accounting period that ends with or within the 
officer's, director's, or shareholder's taxable year. In the case of a 
foreign personal holding company which is a specified foreign 
corporation (as defined in section 898), the taxable year of such 
corporation shall be treated as its annual accounting period.
    (2) General corporate information. The general foreign personal 
holding company information required by this section with respect to 
each taxable year is as follows:
    (i) The name and address and employer identification number (if any) 
of the corporation;
    (ii) The kind of business in which the corporation is engaged;
    (iii) The date of its incorporation;
    (iv) The country under the laws of which the corporation is 
incorporated;
    (v) A description of each class of stock issued and outstanding by 
the corporation for the beginning and end of the annual accounting 
period;
    (vi) The number of shares and par value of common stock of the 
corporation issued and outstanding as of the beginning and end of the 
taxable year;
    (vii) The number of shares and par value of preferred stock of the 
corporation issued and outstanding as of the beginning and end of the 
taxable year, the rate of dividend on such stock and whether such 
dividend is cumulative or noncumulative; and
    (viii) Any other information required by the appropriate form and 
its instructions.

For purposes of this paragraph, the term ``share'' includes any security 
convertible into a share in the corporation and any option granted by 
the corporation with respect to any share in the corporation.
    (3) Shareholder information. The shareholder information required by 
this section is as follows:
    (i) The name, address and taxpayer identification number (if any) of 
each person, whether foreign or U.S., who was a shareholder during the 
taxable year and the class and number of shares held by each, together 
with an explanation of any changes in stock holdings during the taxable 
year,

[[Page 149]]

    (ii) The name and address of each holder during the taxable year of 
securities convertible into stock of the corporation and the class, 
number, and face value of the securities held by each, together with and 
explanation of any changes in the holdings of such securities during the 
taxable year,
    (iii) The name and address of each holder during the taxable year of 
any option granted by the corporation with respect to any share in the 
corporation, and a full description of the options held by each, 
together with an explanation of any changes in the holdings of such 
options during the taxable year, and
    (iv) Any other information required by the appropriate form and its 
instructions.
    (4) Income information. The income information required by this 
section is the gross income, deductions and credits, taxable income, 
foreign personal holding company income, and undistributed foreign 
personal holding company income for the taxable year and other 
information required by the appropriate form and its instructions.
    (b) Persons required to file return--(1) In general. The 
determination of whether a United States citizen or resident is person 
who is an officer, director, or 10-percent shareholder required to file 
a return with respect to any foreign corporation is made as of the date 
that Form 5471 is required to be filed. If there is no such person 
required to file on that date (because, for example, the corporation has 
been dissolved), then filing is required of the persons who were 
officers, directors or 10-percent shareholders on the last day of the 
most recent taxable year of the corporation for which there was such a 
person who was a United States citizen or resident.
    (2) 10-percent shareholder. (i) The term ``10-percent shareholder'' 
means any individual who owns directly or indirectly (within the meaning 
of section 544) 10 percent or more in value of the outstanding stock of 
a foreign corporation.
    (ii) An individual who does not own 10 percent or more in value of 
the outstanding stock directly but is required to file solely by 
attribution of another United States person's stock ownership is excused 
from filing if the direct owner that is an individual furnishes all the 
information required.
    (3) Two or more persons required to submit the same information. If 
two or more persons are required to furnish the information for the same 
foreign personal holding company for the same period, one person may 
make one return on Form 5471. The single Form 5471 may be filed with the 
income tax return of any one of the persons and shall disclose the name, 
address, and identifying number of each other person or persons on whose 
behalf the return is filed. Each person on whose behalf the return is 
filed remains liable for any penalties imposed under sections 6679, 
7203, 7206, and 7207.
    (4) Statement required. Any United States citizen or resident 
required to furnish information under this section with his return who 
does not do so by reason of the provisions of subparagraph (2)(ii) or 
(3) of this paragraph shall file a statement with his income tax return 
indicating that such requirement has been or will be satisfied and 
identifying the return with which the information was or will be filed 
and the place of filing.
    (c) Separate returns for each corporation. If a person is required 
to file returns under section 6035 and this section with respect to more 
than one foreign personal holding company, separate returns must be 
filed with respect to each company.
    (d) Corrective filing. If an information return with respect to a 
taxable year of a foreign personal holding company beginning after 
September 3, 1982, is filed before [date which is 30 days after the date 
of publication of a Treasury decision in the Federal Register] and that 
return does not contain all of the information required by this section, 
then the filer of the return shall file an amended information return 
containing all of such information within 90 days after June 4, 1985.
    (e) Penalties--(1) Criminal penalties. For criminal penalties for 
failure to file a return and filing a false or fraudulent return, see 
sections 7203, 7206, and 7207.

[[Page 150]]

    (2) Civil penalties. For civil penalties for failure to file a 
proper foreign personal holding company information return, see section 
6679 and the regulations thereunder.

[T.D. 8028, 50 FR 23408, June 4, 1985; 50 FR 26359, June 26, 1985, as 
amended by T.D. 8573, 59 FR 64301, Dec. 14, 1994]



Sec. 1.6035-2  Returns of U.S. officers and directors of foreign personal holding companies for taxable years beginning before September 4, 1982.

    For rules relating to information returns required to be filed by 
officers and directors of foreign personal holding companies for taxable 
years beginning before September 4, 1982, see section 6035(a) (as in 
effect before the enactment of the Tax Equity and Fiscal Responsibility 
Act of 1982) and 26 CFR 1.6035-1 (Revised as of April 1, 1981).

[T.D. 8028, 50 FR 23409, June 4, 1985]



Sec. 1.6035-3  Returns of 50-percent U.S. shareholders of foreign personal holding companies for taxable years beginning before September 4, 1982.

    For rules relating to information returns required to be filed by 
shareholders of foreign personal holding companies for taxable years 
beginning before September 4, 1982, see section 6035(b) (as in effect 
before the enactment of the Tax Equity and Fiscal Responsibility Act of 
1982) and 26 CFR 1.6035-2 (Revised as of April 1, 1961).

[T.D. 8028, 50 FR 23409, June 4, 1985]



Sec. 1.6036-1  Notice of qualification as executor or receiver.

    For provisions relating to the notice required of fiduciaries, see 
the regulations under section 6036 contained in part 301 of this chapter 
(Regulations on Procedure and Administration).



Sec. 1.6037-1  Return of electing small business corporation.

    (a) In general. Every small business corporation (as defined in 
section 1371(a)) which has made an election under section 1372(a) not to 
be subject to the tax imposed by chapter 1 of the Code shall file, with 
respect to each taxable year for which the election is in effect, a 
return of income on Form 1120-S. The return shall set forth the items of 
gross income and the deductions allowable in computing taxable income as 
required by the return form or in the instructions issued with respect 
thereto and shall be signed in accordance with section 6062 by the 
person authorized to sign a return. The return shall also set forth the 
following information concerning the electing small business 
corporation:
    (1) The names and addresses of all persons owning stock in the 
corporation at any time during the taxable year;
    (2) The number of shares of stock owned by each shareholder at all 
times during the taxable year;
    (3) The amount of money and other property distributed by the 
corporation during the taxable year to each shareholder;
    (4) The date of each distribution of money and other property; and
    (5) Such other information as is required by the form or by the 
instructions issued with respect to such form.
    (b) Time and place for filing return. The return shall be filed on 
or before the 15th day of the third month following the close of the 
taxable year with the internal revenue officer designated in the 
instructions applicable to Form 1120-S. (See section 6072.)
    (c) Other provisions. The return on Form 1120-S will be treated as a 
return filed by the corporation under section 6012, relating to persons 
required to make returns of income, for purposes of the provisions of 
chapter 66 of the Code, relating to limitations. Thus, for example, the 
period of limitation on assessment and collection of any corporate tax 
found to be due upon a subsequent determination that the corporation was 
not entitled to the benefits of subchapter S, chapter 1 of the Code, 
will run from the date of filing the return under section 6037, or from 
the date prescribed for filing such return, whichever is the later. For 
the rules requiring the disclosure of certain transactions, see 
Sec. 1.6011-4T.
    (d) Penalties. For criminal penalties for failure to file a return, 
supply information, or pay tax, and for filing a false or fraudulent 
return, statement,

[[Page 151]]

or other document, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 9000, 67 FR 41328, June 18, 2002]



Sec. 1.6038-1  Information returns required of domestic corporations with respect to annual accounting periods of certain foreign corporations beginning before 
          January 1, 1963.

    (a) Requirement of return. For taxable years beginning after 
December 31, 1960, every domestic corporation shall make a separate 
annual information return on Form 2952, in duplicate, with respect to 
each foreign corporation which it controls, as defined in paragraph (b) 
of this section, and with respect to each foreign subsidiary, as defined 
in paragraph (c) of this section, for each annual accounting period 
(described in paragraph (d) of this section) of each such controlled 
foreign corporation or foreign subsidiary beginning after December 31, 
1960, and before January 1, 1963. Such information shall not be required 
to be furnished, however, with respect to a corporation defined in 
section 1504(d) of the Code which makes a consolidated return for the 
taxable year. For annual accounting periods beginning after December 31, 
1962, see Sec. 1.6038-2.
    (b) Control. A domestic corporation shall be deemed to be in control 
of a foreign corporation if at any time during its taxable year it owns 
more than 50 percent of the voting stock of such foreign corporation.
    (c) Foreign subsidiary. A foreign corporation more than 50 percent 
of the voting stock of which is owned by a controlled foreign 
corporation at any time during the annual accounting period of such 
controlled foreign corporation shall be considered a foreign subsidiary.
    (d) Period covered by return--(1) Controlled foreign corporation. 
The information with respect to a controlled foreign corporation shall 
be furnished for its annual accounting period ending with or within the 
domestic corporation's taxable year.
    (2) Foreign subsidiary. The information with respect to a foreign 
subsidiary shall be furnished for such subsidiary's annual accounting 
period ending with or within the controlled foreign corporation's annual 
accounting period.
    (3) Annual accounting period defined. For purposes of this section, 
the annual accounting period of a controlled foreign corporation or of a 
foreign subsidiary is the annual period on the basis of which the 
controlled foreign corporation or foreign subsidiary regularly computes 
its income in keeping its books. The term ``annual accounting period'' 
may refer to a period of less than 1 year, where for example the foreign 
income, war profits, and excess profits taxes are determined on the 
basis of an accounting period of less than 1 year as described in 
section 902(c)(2).
    (e) Contents of return. The return on Form 2952 shall contain the 
following information with respect to each controlled corporation and 
each foreign subsidiary:
    (1) The name and address of the corporation;
    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The nature of the corporation's business;
    (5) As regards the outstanding stock of the corporation:
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and the end of the annual accounting period;
    (6) A list showing the name and address of, and the number of shares 
of each class of the corporation's stock held by, each citizen or 
resident of the United States, and each domestic corporation, who is a 
shareholder of record owning at any time during the annual accounting 
period 5 percent or more in value of any class of the corporation's 
outstanding stock;
    (7) The amount of the corporation's gross receipts, net profits 
before taxes and provision for foreign income taxes, for the annual 
accounting period, as reflected on the financial statements required 
under paragraph (f) of this section to be filed with the return; and

[[Page 152]]

    (8) A summary showing the total amount of each of the following 
types of transactions of the corporation, which took place during the 
annual accounting period, with the domestic corporation or any 
shareholder of the domestic corporation owning at the time of the 
transaction 10 percent or more of the value of any class of stock 
outstanding of the domestic corporation:
    (i) Sales and purchases of stock in trade;
    (ii) Purchases of property of a character which is subject to the 
allowance for depreciation;
    (iii) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or like 
services;
    (iv) Commissions paid and commissions received;
    (v) Rents and royalties paid and rents and royalties received;
    (vi) Amounts loaned and amounts borrowed (other than open accounts 
which arise and are collected in the ordinary course of business);
    (vii) Dividends paid and dividends received;
    (viii) Interest paid and interest received; and
    (ix) Premiums received for insurance or reinsurance.

If the domestic corporation is a bank, as defined in section 581, or is 
controlled within the meaning of section 368(c) by a bank, the term 
``transactions'' shall not, as to a corporation with respect to which a 
return is filed, include banking transactions entered into on behalf of 
customers; in any event, however, deposits in accounts between a 
controlled foreign corporation or a foreign subsidiary and the domestic 
corporation or a 10-percent shareholder described in this subparagraph 
and withdrawals from such accounts shall be summarized by reporting end-
of-month balances.
    (f) Financial statements. The following information with respect to 
each controlled foreign corporation and each foreign subsidiary shall be 
attached to and filed as part of the return required by this section:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing:
    (i) The corporation's assets,
    (ii) The corporation's liabilities, and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.

The statements listed in subparagraphs (1), (2), and (3) of this 
paragraph shall be prepared in conformity with generally accepted 
accounting principles, and in such form and detail as is customary for 
the corporation's accounting records.
    (g) Method of reporting. All amounts furnished under paragraphs (e) 
and (f) of this section shall be expressed in United States currency 
with a statement of the exchange rates used.
    (h) Time and place for filing return. Returns on Form 2952 required 
under paragraph (a) of this section shall be filed with the domestic 
corporation's income tax return on or before the fifteenth day of the 
third month following the close of such corporation's taxable year.
    (i) Extensions of time for filing. District directors are authorized 
to grant reasonable extensions of time for filing returns on Form 2952 
in accordance with the applicable provisions of Sec. 1.6081-1. An 
application by a domestic corporation for an extension of time for 
filing a return of income shall also be considered as an application for 
an extension of time for filing returns on Form 2952.
    (j) Failure to furnish information--(1) Effect on foreign tax 
credit. (i) Failure by a domestic corporation to furnish, in accordance 
with the provisions of this section, any return or any information in 
any return, required to be filed for a taxable year under authority of 
section 6038 on or before the date prescribed in paragraph (h) of this 
section (determined with regard to any extension of time for such 
filing) shall affect the application of section 902 as provided in 
subparagraph (2) of this paragraph. Such failure shall affect the 
application of section 902 to such domestic corporation or to any person 
who acquires from any person any portion (but only to the extent of such

[[Page 153]]

portion) of the interest of such domestic corporation in any controlled 
foreign corporation or foreign subsidiary.
    (ii) Where the domestic corporation, having filed the return 
required by this section except for an omission of, or error with 
respect to, some of the information referred to in paragraphs (e) and 
(f) of this section, establishes to the satisfaction of the Commissioner 
that such omission or error was inadvertent or for reasonable cause and 
that such domestic corporation has substantially complied with this 
section, such omission or error shall not constitute a failure under 
this section.
    (2) Reduction of foreign taxes. In the application of section 902 to 
the domestic corporation or person referred to in subparagraph (1)(i) of 
this paragraph for any taxable year, the amount of taxes paid or deemed 
paid by each controlled foreign corporation and each foreign subsidiary 
for the accounting period or periods for which the domestic corporation 
was required for the taxable year of the failure to furnish information 
under this section shall be reduced by 10 percent. The 10 percent 
reduction is not limited to the taxes paid or deemed paid by the 
controlled foreign corporation or foreign subsidiary with respect to 
which there is a failure to file information but shall apply to the 
taxes paid or deemed paid by all controlled foreign corporations and 
foreign subsidiaries.
    (3) Reduction for continued failure. (i) If the failure, referred to 
in subparagraph (1)(i) of this paragraph, continues for 90 days or more 
after date of written notice by the district director to the domestic 
corporation, then the amount of the reduction referred to in 
subparagraph (2) of this paragraph shall be 10 percent plus an 
additional 5 percent for each 3-month period, or fraction thereof, 
during which such failure continues after the expiration of such 90-day 
period.
    (ii) Taxes paid by a foreign subsidiary when once reduced for a 
failure shall not be reduced again for the same failure in their status 
as taxes deemed paid by a controlled foreign corporation. Where a 
failure continues, each additional periodic 5 percent reduction, 
referred to in subdivision (i) of this subparagraph, shall be considered 
as part of the one reduction.
    (4) Reasonable cause. (i) For purposes of subsection (b) of section 
6038 and this section the time prescribed for furnishing information 
under this paragraph, and the beginning of the 90-day period after 
notice by the district director, shall be treated as being not earlier 
than the last day on which (as shown to the satisfaction of the district 
director) reasonable cause existed for failure to furnish such 
information.
    (ii) A domestic corporation, which wishes to avoid a reduction in 
foreign tax credit as provided in subparagraphs (2) and (3) of this 
paragraph for failure to furnish information in accordance with this 
section, must make an affirmative showing of all facts alleged as a 
reasonable cause for such failure in the form of a written statement 
containing a declaration that it is made under the penalties of perjury.
    (5) Penalties. The information required by section 6038 of the Code 
must be furnished even though there are no foreign taxes which would be 
reduced under the provisions of subparagraph (2) of this paragraph. For 
criminal penalties for failure to file a return and filing a false or 
fraudulent return, see sections 7203, 7206, and 7207 of the Code.

[T.D. 6506, 25 FR 12241, Nov. 30, 1960, as amended by T.D. 6621, 27 FR 
11878, Dec. 1, 1962]



Sec. 1.6038-2  Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after 
          December 31, 1962.

    (a) Requirement of return. Every U.S. person shall make a separate 
annual information return with respect to each annual accounting period 
(described in paragraph (e) of this section) beginning after December 
31, 1962, of each foreign corporation which that person controls (as 
defined in paragraph (b) of this section) for an uninterrupted period of 
30 days or more during such annual accounting period. Such information 
shall not be required to be furnished, however, with respect to a 
corporation defined in section 1504(d) of the Code which makes a 
consolidated return for the taxable year.

[[Page 154]]

The return shall be made, with respect to annual accounting periods 
ending with or within the United States person's taxable year, on--
    (1) Form 2952 if such taxable year ends before December 31, 1982,
    (2) Form 5471 if such taxable year ends on or after December 31, 
1983, or
    (3) Either Form 5471 or Form 2952 if such taxable year ends on or 
after December 31, 1982 and before December 31, 1963.
    (b) Control. A person shall be deemed to be in control of a foreign 
corporation if at any time during that person's taxable year it owns 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote, or more than 50 percent of the 
total value of shares of all classes of stock of the foreign 
corporation. A person in control of a corporation which, in turn, owns 
more than 50 percent of the combined voting power, or of the value, of 
all classes of stock of another corporation is also treated as being in 
control of such other corporation. The provisions of this paragraph may 
be illustrated by the following example:

    Example. Corporation A owns 51 percent of the voting stock in 
Corporation B. Corporation B owns 51 percent of the voting stock in 
Corporation C. Corporation C in turn owns 51 percent of the voting stock 
in Corporation D. Corporation D is controlled by Corporation A.

    (c) Attribution rules. For the purpose of determining control of 
domestic or foreign corporations the constructive ownership rules of 
section 318(a) shall apply except that:
    (1) Stock owned by or for a partner or a beneficiary of an estate or 
trust shall not be considered owned by the partnership, estate, or trust 
when the effect is to consider a United States person as owning stock 
owned by a person who is not a United States person;
    (2) A corporation will not be considered as owning stock owned by or 
for a 50 percent or more shareholder when the effect is to consider a 
United States person as owning stock owned by a person who is not a 
United States person; and
    (3) If 10 percent or more in value of the stock in a corporation is 
owned, directly or indirectly, by or for any person, section 
318(a)(2)(C) shall apply.

The constructive ownership rules of section 318(a) apply only for 
purposes of determining control as defined in paragraph (b) of this 
section.
    (d) U.S. person. For purposes of section 6038 and this section, the 
term ``United States person'' has the meaning assigned to it by section 
7701(a)(30) of the Code, except that--
    (1) With respect to a corporation organized under the laws of the 
Commonwealth of Puerto Rico, such term does not include an individual 
who is a bona fide resident of Puerto Rico, if a dividened received by 
such individual during the taxable year from such corporation would be 
excluded from gross income under section 933(1),
    (2) With respect to a corporation organized under the laws of the 
Virgin Islands, such term does not include an individual who is a bona 
fide resident of the Virgin Islands and whose income tax obligation 
under Subtitle A (relating to income taxes) of the Code for the taxable 
year is satisfied pursuant to section 28(a) of the Revised Organic Act 
of the Virgin Islands, approved July 22, 1954 (48 U.S.C. 1642), by 
paying tax on income derived from all sources both within and outside 
the Virgin Islands into the treasury of the Virgin Islands,
    (3) With respect to a corporation organized under the laws of Guam 
or the Northern Mariana Islands, such term does not include an 
individual who is a bona fide resident of Guam or the Northern Mariana 
Islands, respectively, and who is relieved of liability for income tax 
to the United States under section 935(c)(3) of the Code or section 601 
of the Covenant to Establish a Commonwealth of the Northern Mariana 
Islands in Political Union with the United States of America (Pub. L. 
94-241), respectively, for such individual's taxable year referred to in 
paragraph (e) of this section, and
    (4) With respect to a corporation organized under the laws of any 
possession of the United States (other than Guam, the Northern Mariana 
Islands, Puerto Rico, or the Virgin Islands), such term does not include 
an individual who is a bona fide resident of such possession for the 
entire taxable

[[Page 155]]

year and whose income derived from sources within any possession of the 
United States is not, by reason of section 931(a), includible in gross 
income under subtitle A (relating to income taxes) of the Code for the 
taxable year.
    (5) For taxable years ending after December 31, 1987, with respect 
to a corporation organized under the laws of American Samoa, the term 
does not include an individual who is a bona fide resident of American 
Samoa, provided--
    (i) 80 percent or more of the gross income of the corporation for 
the 3-year period ending at the close of the taxable year (or for such 
part of such period as such corporation or any predecessor has been in 
existence) was derived from sources within American Samoa or was 
effectively connected with the conduct of a trade or business in 
American Samoa; and
    (ii) 50 percent or more of the gross income of such corporation for 
such period (or part) was derived from the conduct of an active trade or 
business within American Samoa.

An individual for whom an election under section 6013 (g) or (h) is in 
effect shall, subject to the exceptions contained in this paragraph (d), 
be considered a United States person for purposes of section 6038 and 
this section.
    (e) Period covered by return. The information required under 
paragraphs (f) and (g) of this section with respect to a foreign 
corporation shall be furnished for the annual accounting period of the 
foreign corporation ending with or within the United States person's 
taxable year. For purposes of this section, the annual accounting period 
of a foreign corporation is the annual period on the basis of which that 
corporation regularly computes its income in keeping its books. In the 
case of a specified foreign corporation (as defined in section 898), the 
taxable year of such corporation shall be treated as its annual 
accounting period. The term annual accounting period may refer to a 
period of less than one year, where, for example, the foreign income, 
war profits, and excess profits taxes are determined on the basis of an 
accounting period of less than one year as described in section 
902(c)(5). If more than one annual accounting period ends with or within 
the United States person's taxable year, separate annual information 
returns shall be submitted for each annual accounting period.
    (f) Contents of return. The return on Form 2952 or Form 5471 shall 
contain so much of the following information, and in such form or 
manner, as the form shall prescribe with respect to each foreign 
corporation:
    (1) The name, address, and employer identification number, if any, 
of the corporation;
    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The name, address, and identifying number of any branch office 
or agent of the foreign corporation located in the United States;
    (6) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address;
    (7) The nature of the corporation's business and the principal 
places where conducted;
    (8) As regards the outstanding stock of the corporation--
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and end of the annual accounting period;
    (9) A list showing the name, address, and identifying number of, and 
the number of shares of each class of the corporation's stock held by, 
each United States person who is a shareholder owning at any time during 
the annual accounting period 5 percent or more in value of any class of 
the corporation's outstanding stock;
    (10) For the annual accounting period, the amount of the 
corporation's:
    (i) Current earnings and profits;
    (ii) Foreign income, war profits, and excess profits taxes paid or 
accrued;
    (iii) Distributions out of current earnings and profits for the 
period;

[[Page 156]]

    (iv) Distributions other than those described in paragraph 
(f)(10)(iii) of this section and the source thereof; and
    (v) For Forms 5471 filed for taxable years ending after December 15, 
1990, such earnings and profits information as the form shall prescribe, 
including post-1986 undistributed earnings described in section 
902(c)(1), pre-1987 amounts, total earnings and profits, and previously 
taxed earnings and profits described in section 959(c); and
    (11) A summary showing the total amount of each of the following 
types of transactions of the corporation, which took place during the 
annual accounting period, with the person required to file this return, 
any other corporation controlled by that person, or any United States 
person owning at the time of the transaction 10 percent or more in value 
of any class of stock outstanding of the foreign corporation, or of any 
corporation controlling that foreign corporation:
    (i) Sales and purchases of stock in trade;
    (ii) Purchases of tangible property other than stock in trade;
    (iii) Sales and purchases of patents, inventions, models, or designs 
(whether or not patented), copyrights, trademarks, secret formulas or 
processes, or any other similar property rights;
    (iv) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or like 
services;
    (v) Commission paid and commissions received;
    (vi) Rents and royalties paid and rents and royalties received;
    (vii) Amount loaned and amounts borrowed (except open accounts 
resulting from sales and purchases reported under other items listed in 
this paragraph (f)(11) that arise and are collected in full in the 
ordinary course of business);
    (viii) Dividends paid and dividends received;
    (ix) Interest paid and interest received; and
    (x) Premiums received for insurance or reinsurance.

For purposes of this paragraph (f)(11), if the United States person is a 
bank, as defined in section 581, or is controlled within the meaning of 
section 368(c) by a bank, the term ``transactions'' shall not, as to a 
corporation with respect to which a return is filed, include banking 
transactions entered into on behalf of customers; in any event, however, 
deposits in accounts between a foreign corporation, controlled (within 
the meaning of paragraph (b) of this section) by a United States person, 
and a person described in this paragraph (f)(11) and withdrawals from 
such accounts shall be summarized by reporting end-of-month balances.
    (g) Financial statements. The following information with respect to 
the foreign corporation shall be attached to and filed as part of the 
return required by this section. Forms 5471 filed after September 30, 
1991, shall contain this information in such form or manner as the form 
shall prescribe with respect to each foreign corporation:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing--
    (i) The corporation's asset;
    (ii) The corporation's liabilities; and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.

The information listed in this paragraph (g) shall be prepared in 
conformity with generally accepted accounting principles, and in such 
detail as is customary for the corporation's accounting records.
    (h) Method of reporting. Except as provided in this paragraph (h), 
all amounts furnished under paragraphs (f) and (g) of this section shall 
be expressed in United States dollars with a statement of the exchange 
rates used. The following rules shall apply for taxable years ending 
after December 31, 1994, with respect to returns filed after December 
31, 1995. All amounts furnished under paragraph (g) of this section 
shall be expressed in United States dollars computed and translated in 
conformity with United States generally accepted accounting principles. 
Amounts furnished under paragraph

[[Page 157]]

(g)(1) of this section shall also be furnished in the foreign 
corporation's functional currency as required on the form. Earnings and 
profits amounts furnished under paragraphs (f)(10) (i), (iii), (iv), and 
(v) of this section shall be expressed in the foreign corporation's 
functional currency except to the extent the form requires specific 
items to be translated into United States dollars. Tax amounts furnished 
under paragraph (f)(10)(ii) of this section shall be furnished in the 
foreign currency in which the taxes are payable and in United States 
dollars translated in accordance with section 986(a). All amounts 
furnished under paragraph (f)(11) of this section shall be expressed in 
U.S. dollars translated from functional currency at the weighted average 
exchange rate for the year as defined in Sec. 1.989(b)-1. The foreign 
corporation's functional currency is determined under section 985. All 
statements submitted on or with the return required under this section 
shall be rendered in the English language.
    (i) Time and place for filing return. Returns on Form 2952 or Form 
5471 required under paragraph (a) of this section shall be filed with 
the United States person's income tax return on or before the date 
required by law for the filing of that person's income tax return. 
District directors and directors of service centers are authorized to 
grant reasonable extensions of time for filing returns on Form 2952 or 
Form 5471 in accordance with the applicable provisions of Sec. 1.6081-1 
of this chapter. An application for an extension of time for filing a 
return of income shall also be considered as an application for an 
extension of time for filing returns on Form 2952 or Form 5471.
    (j) Two or more persons required to submit the same information--(1) 
Return jointly made. If two or more persons are required to furnish 
information with respect to the same foreign corporation for the same 
period, such persons may, in lieu of making separate returns, jointly 
make one return. Such joint return shall be filed with the income tax 
return of any one of the persons making such joint return.
    (2) Persons excepted from furnishing information--(i) Conditions. 
Any person required to furnish information under this section with 
respect to a foreign corporation need not furnish that information 
provided all of the following conditions are met:
    (A) Such person does not directly own an interest in the foreign 
corporation;
    (B) Such person is required to furnish the information solely by 
reason of attribution of stock ownership from a United States person 
under paragraph (c) of this section; and
    (C) The person from whom the stock ownership is attributed furnishes 
all of the information required under this section of the person to whom 
the stock ownership is attributed. (For a rule regarding attribution 
from a nonresident alien, see paragraph (l) of this section).
    (ii) If an individual who is a United States person required to 
furnish information with respect to a foreign corporation under section 
6038 is entitled under a treaty to be treated as a nonresident of the 
United States, and if the individual claims this treaty benefit, and if 
there are no other United States persons that are required to furnish 
information under section 6038 with respect to the foreign corporation, 
then the individual may satisfy the requirements of paragraphs (f)(10), 
(f)(11), (g), and (h) of this section by filing the audited foreign 
financial statements of the foreign corporation with the individual's 
return required under section 6038.
    (iii) Illustrations. The rule of this paragraph (j)(2) is 
illustrated by the following examples:

    Example (1). A, a U.S. person owns 100 percent of the stock of M, a 
domestic corporation. A also owns 100 percent of the stock of N, a 
foreign corporation organized under the laws of foreign country Y. A, in 
filing the information return required by this section with respect to N 
Corporation, in fact furnishes all of the information required of M 
Corporation with respect to N Corporation. M Corporation need not file 
the information.
    Example (2). X, a domestic corporation owns 100 percent of the stock 
of Y, a domestic corporation, Y Corporation owns 100 percent of the 
stock of Z, a foreign corporation. X Corporation is not excused by this 
paragraph (j)(2) from filing information with respect to Z Corporation 
because X Corporation is deemed to control Z Corporation under the 
provisions of paragraph (b) of this

[[Page 158]]

section without recourse to the attribution rules in paragraph (c) of 
this section.

    (3) Statement required. Any United States person required to furnish 
information under this section with his return who does not do so by 
reason of the provisions of paragraph (j)(1) or (2) of this section 
shall file a statement with his income tax return indicating that such 
liability has been (or, in the case of a joint return made under 
paragraph (j)(1) of this section, will be) satisfied and identifying the 
return with which the information was or will be filed and the place of 
filing.
    (k) Failure to furnish information--(1) Dollar amount penalty--(i) 
In general. If any person required to file Form 2952 or Form 5471 under 
section 6038 and this section fails to furnish any information described 
in paragraphs (f) and (g) of this section within the time prescribed by 
paragraph (i) of this section, such person shall pay a penalty of $1,000 
for each annual accounting period of each foreign corporation with 
respect to which such failure occurs.
    (ii) Increase in penalty for continued failure after notification. 
If a failure described in paragraph (k)(1)(i) of this section continues 
for more than 90 days after the date on which the district director 
mails notice of such failure to the person required to file Form 2952 or 
Form 5471, such person shall pay a penalty of $1,000, in addition to the 
penalty imposed by section 6038(b)(1) and paragraph (k)(1)(i) of this 
section, for each 30-day period (or fraction thereof) during which such 
failure continues after such 90-day period has expired. The additional 
penalty imposed by section 6038(b)(2) and this paragraph (k)(1)(ii) 
shall be limited to a maximum of $24,000 for each failure.
    (iii) Effective date. The penalty imposed by section 6038(b) and 
this paragraph (k)(1) shall apply with respect to information for annual 
accounting periods ending after September 3, 1982.
    (2) Penalty of reducing foreign tax credit--(i) Effect on foreign 
tax credit. Failure of a United States person to furnish, in accordance 
with the provisions of this section, any return or any information in 
any return, required to be filed for a taxable year under authority of 
section 6038 on or before the date prescribed in paragraph (i) of this 
section may affect the application of section 901 as provided in 
paragraph (k)(2)(ii) of this section and may affect the application of 
sections 902 and 960 as provided in paragraph (k)(2)(iii) of this 
section. Such failure may affect the application of sections 902 and 960 
to any such United States person which is a corporation or to any person 
who acquires from any other person any portion (but only to the extent 
of such portion) of the interest of such other person in any such 
foreign corporation.
    (ii) Application of section 901. In the application of section 901 
to a United States person referred to in paragraph (k)(2)(i) of this 
section, the amount of taxes paid or deemed paid by such person for any 
taxable year, with or within which the annual accounting peroid of a 
foreign corporation for which such person failed to furnish information 
required under this section ended, may be reduced by 10 percent. 
However, no tax reduced under paragraph (k)(2)(iii) of this section or 
deemed paid under section 904(c) shall be reduced under the provisions 
of this paragraph (k)(2)(ii).
    (iii) Application of sections 902 and 960. In the application of 
sections 902 and 960 to a United States person referred to in paragraph 
(k)(2)(i) of this section for any taxable year, the amount of taxes paid 
or deemed paid by each foreign corporation for the accounting period or 
periods for which such person was required for the taxable year of the 
failure to furnish information under this section may be reduced by 10 
percent. The 10-percent reduction is not limited to the taxes paid or 
deemed paid by the foreign corporation with respect to which there is a 
failure to file information but may apply to the taxes paid or deemed 
paid by all foreign corporations controlled by that person. In applying 
subsections (a) and (b) of section 902, and in applying subsection (a) 
of section 960, the reduction provided by this paragraph (k)(2) shall 
not apply for purposes of determining the amount of accumulated profits 
in excess of income, war profits, and excess profits taxes.
    (iv) Reduction for continued failure after notice. (A) If the 
failure referred to in paragraph (k)(2)(i) of this section continues for 
more than 90 days after

[[Page 159]]

the date on which the district director mails notice of such failure to 
such United States person, then the amount of the reduction referred to 
in paragraphs (k)(2) (ii) and (iii) of this section may be 10 percent 
plus an additional 5 percent for each 3-month period, or fraction 
thereof, during which such failure continues after the expiration of 
such 90-day period.
    (B) No taxes shall be reduced under this paragraph (k)(2) more than 
once for the same failure. Taxes paid by a foreign corporation when once 
reduced for a failure shall not be reduced again for the same failure in 
their status as taxes deemed paid by a corporate shareholder. Where a 
failure continues, each additional periodic 5-percent reduction, 
referred to in paragraph (k)(2)(iv)(A) of this section, shall be 
considered as part of the one reduction.
    (v) Limitation on reduction of foreign tax credit. The amount of the 
reduction under this paragraph (k)(2) for each failure to furnish 
information with respect to a foreign corporation as required under this 
section shall not exceed the greater of:
    (A) $10,000, or
    (B) The income of the foreign corporation for its annual accounting 
period with respect to which the failure occurs. For purposes of this 
section if a person is required to furnish information with respect to 
more than one foreign corporation, controlled (within the meaning of 
paragraph (b) of this section) by that person, each failure to submit 
information for each such corporation constitutes a separate failure.
    (vi) Offset for dollar amount penalty imposed. The total amount of 
the reduction or reductions which, but for this paragraph (k)(2)(vi), 
may be made under this paragraph (k)(2) with respect to any separate 
failure, shall not exceed the maximum amount of such reductions which 
may be imposed, reduced (but not below zero) by the amount of the dollar 
amount penalty imposed by paragraph (k)(1) of this section with respect 
to such separate failure.
    (3) Reasonable cause. (i) For purposes of section 6038 (b) and (c) 
and this section, the time prescribed for furnishing information under 
paragraph (i) of this section, and the beginning of the 90-day period 
after mailing of notice by the district director under paragraphs 
(k)(1)(ii) and (2)(iv)(A) of this section, shall be treated as being not 
earlier than the last day on which reasonable cause existed for failure 
to furnish the information.
    (ii) To show that reasonable cause existed for failure to furnish 
information as required by section 6038 and this section, the person 
required to report such information must make an affirmative showing of 
all facts alleged as reasonable cause for such failure in a written 
statement containing a declaration that it is made under the penalties 
of prejury. The statement must be filed with the district director for 
the district or the director of the service center where the return is 
required to be filed. The district director or the director of the 
service center shall determine whether the failure to furnish 
information was due to reasonable cause, and if so, the period of time 
for which such reasonable cause existed. In the case of a return that 
has been filed as required by this section except for an omission of, or 
error with respect to, some of the information required, if the person 
who filed the return establishes to the satisfaction of the district 
director or the director of the service center that the person has 
substantially complied with this section, then the omission or error 
shall not constitute a failure under this section.
    (4) Other penalties. The information required by section 6038 and 
this section must be furnished even though there are no foreign taxes 
which would be reduced under the provisions of this section, and even 
though the information required may not affect the amount of any tax due 
under the Internal Revenue Code. For criminal penalties for failure to 
file a return and filing a false or fraudulent return, see sections 
7203, 7206, and 7207 of the Code.
    (5) Illustrations. 1'The provisions of this paragraph may 
be illustrated by the following examples.

    Example (1). M, a domestic corporation owns 100 percent of the stock 
of N, a foreign corporation. Both M and N use the calendar year as a 
taxable year and annual accounting period, and all of the following 
events occur in or with respect to the 1980 taxable year. The dividend 
from N is the only dividend from a foreign corporation received by

[[Page 160]]

M during the taxable year, and the foreign taxes listed are the only 
foreign taxes paid or deemed paid by M and N for the taxable year. On 
March 15, 1981, M filed its income tax return and paid its income tax, 
but M did not file Form 2952 with respect to N's 1980 annual accounting 
period. On June 1, 1961, the district director mailed notice to M of M's 
failure to file Form 2952 with respect to N. On November 30, 1981, M 
filed a complete Form 2952 with respect to N's 1980 annual accounting 
period.

(a) Gains, profits, and income of N........................     $100,000
(b) Foreign tax paid by N with respect to such gains,             40,000
 profits, and income.......................................
(c) Reduction of foreign tax paid by N (for purposes of M's        6,000
 section 902 deemed paid credit) resulting from M's failure
 to file information with respect to N as required under
 section 6038(a) and this section: failure to file within
 the time prescribed in paragraph (i) of this section, 10-
 percent reduction; continued failure for one additional 3-
 month period after 90-day period after notice mailed, 5-
 percent reduction; total reduction, 15 percent ($40,000
 times 15 percent).........................................
(d) Foreign tax paid by N after section 6038(c)(1)(B)             34,000
 reduction.................................................
(e) Dividend paid by N to M................................       45,000
(f) Accumulated profits of N as defined in section               100,000
 902(c)(1) (determined without regard to the section
 6038(c)(1)(B) reduction)..................................
(g) Accumulated profits of N as described in section 902(a)       60,000
 (determined without regard to the section 6038(c)(1)(B)
 reduction)................................................
(h) For purposes of the section 902 credit, M is deemed to        25,500
 have paid the same proportion of foreign taxes paid
 (reduced as provided under section 6038(c)) with respect
 to the accumulated profits described in section 902(a)
 (determined without regard to the reduction provided under
 section 6038(c)) as the amount of the dividend (determined
 without regard to section 78) bears to such amount of
 accumulated profits.......................................
 
            (45,000/60,000)x34,000=25,500..................
 


M must include $25,500 in gross income as a dividend under the 
provisions of section 78 of the Code. This example illustrates that the 
reductions in foreign taxes paid by the foreign corporation provided 
under section 8038(c) are taken into account in determining the amount 
included in gross income of the domestic corporation under section 78 of 
the Code as foreign taxes deemed paid, but such reductions are not taken 
into account in computing accumulated profits for purposes of 
determining the portion of foreign taxes deemed paid with respect to a 
particular dividend. The dollar amount penalty imposed by section 8038 
(b) and paragraph (k)(1) of this section does not apply with respect to 
information for annual accounting periods ending before September 4, 
1982, and therefore does not apply to M with respect to M's failure to 
file Form 2952 in this example.
    Example (2). The facts are the same as in example (1) except that 
all of the events occur in or with respect to the 1982 taxable year. On 
March 15, 1983. M filed its income tax return and paid its income tax, 
but M did not file Form 2952 or Form 5471 with respect to N's 1982 
annual accounting period. On June 1, 1983, the district director mailed 
notice to M of M's failure to file Form 2952 or Form 5471 with respect 
to N. On November 30, 1983, M filed a complete Form 5471 with respect to 
N's 1982 annual accounting period. Under paragraph (k)(1)(i) of this 
section, M is subject to a penalty of $1,000. Under paragraph (k)(1)(ii) 
of this section, that penalty is increased by $4,000 because the failure 
continued for 92 days (three full 30-day periods and a fraction of a 
fourth 30-day period) after the end of the 90-day period following 
mailing of the notice by the district director, bringing M's dollar 
amount penalty under paragraph (k)(1) of this section to $5,000. For 
purpose of determining the foreign tax credit available to M, there may 
be imposed a reduction of foreign tax paid by N of $6,000, which would 
be the total of reductions under paragraph (k)(2) of this section with 
respect to M's failure to file under section 6038 for N's 1982 annual 
accounting period, before application of paragraph (k)(2)(vi) of this 
section. Under said paragraph (k)(2)(vi), the amount of the foreign tax 
reduction imposed is reduced by the amount of the dollar amount penalty, 
leaving a foreign tax reduction penalty of $1,000 which may be imposed 
in addition to the $5,000 dollar amount penalty. If imposed, the $1,000 
tax reduction would then be applied in the calculation of taxes deemed 
paid by M under section 902 as in example (1), items (c), (d), and (h).
    (l) Other persons excepted from filing. For tax years of foreign 
corporations ending on or after December 29, 1999, any person required 
to furnish information under this section with respect to a foreign 
corporation does not have to furnish that information if the following 
conditions are met--

[[Page 161]]

    (1) Such person does not own a direct or indirect interest in the 
foreign corporation; and
    (2) Such person is required to furnish information solely by reason 
of attribution of stock ownership from a nonresident alien(s) under 
paragraph (c) of this section.

[T.D. 8040, 50 FR 30163, July 24, 1985, as amended by T.D. 8573, 59 FR 
64302, Dec. 14, 1994; T.D. 8733, 62 FR 53385, Oct. 14, 1997; T.D. 8850, 
64 FR 72550, Dec. 28, 1999]



Sec. 1.6038-3  Information returns required of certain United States persons with respect to controlled foreign partnerships (CFPs).

    (a) Persons required to make return--(1) Controlling fifty-percent 
partners. The term controlling fifty-percent partner means a United 
States person that controlled (as defined in paragraph (b)(1) of this 
section) the foreign partnership at any time during the partnership's 
tax year (as defined in paragraph (b)(8) of this section). Except as 
provided in paragraph (c), (d), or (e) of this section, for each tax 
year of a foreign partnership during which the partnership has one or 
more controlling fifty-percent partners, each controlling fifty-percent 
partner must complete and file Form 8865, ``Return of U.S. Persons With 
Respect To Certain Foreign Partnerships,'' containing the information 
described in paragraph (g) of this section.
    (2) Controlling ten-percent partners. If at any point during a 
foreign partnership's tax year (as defined in paragraph (b)(8) of this 
section) a United States person owned a ten-percent or greater interest 
in the partnership while the partnership was controlled by United States 
persons owning ten-percent or greater interests, such United States 
person is a controlling ten-percent partner. See paragraph (b)(1) of 
this section for the definition of control. However, a United States 
person is not a controlling ten-percent partner with respect to a 
particular foreign partnership for a particular tax year of the foreign 
partnership if at any point during that year the partnership had a 
controlling fifty-percent partner, as defined in paragraph (a)(1) of 
this section. Except as provided in paragraph (c), (d), or (e) of this 
section, for each tax year of a partnership during which the partnership 
has controlling ten-percent partners, each controlling ten-percent 
partner must complete and file Form 8865 containing the information 
described in paragraph (g)(1) of this section.
    (3) Separate returns for each partnership. A United States person 
required to report under this paragraph (a) must file a separate Form 
8865 for each foreign partnership with respect to which the person is a 
controlling fifty-percent partner or a controlling ten-percent partner.
    (b) Ownership determinations and definitions--(1) Control. Control 
of a foreign partnership is ownership of more than a fifty-percent 
interest in the partnership.
    (2) Fifty-percent interest. A fifty-percent interest in a 
partnership is an interest equal to fifty percent of the capital 
interest in such partnership, an interest equal to fifty percent of the 
profits interest in such partnership, or an interest to which fifty 
percent of the deductions or losses of such partnership are allocated.
    (3) Ten-percent interest. A ten-percent interest in a partnership is 
an interest equal to ten percent of the capital interest in such 
partnership, an interest equal to ten percent of the profits interest in 
such partnership, or an interest to which ten percent of the deductions 
or losses of such partnership are allocated.
    (4) Constructive ownership rules. For purposes of determining an 
interest in a partnership, the constructive ownership rules of section 
267(c) (other than section 267(c)(3)) apply, taking into account that 
such rules refer to corporations and not to partnerships. However, an 
interest will be attributed from a nonresident alien under the family 
attribution rules of section 267(c)(2) and (4) only if the person to 
whom the interest is attributed owns a direct or indirect (under the 
rules of 267(c)(1) or (5)) interest in the foreign partnership.
    (5) Determination of amount of interest. Whether a person owns a 
fifty-percent interest, or a ten-percent interest, as described in 
paragraphs (b)(2) and (3) of this section, is determined for each tax

[[Page 162]]

year of the foreign partnership by reference to the agreement of the 
partners relating to such interests during that tax year.
    (6) Definition of United States person. The term United States 
person is defined in section 7701(a)(30).
    (7) Definition of a foreign partnership. A foreign partnership is a 
partnership described in section 7701(a)(5).
    (8) Tax year of a foreign partnership. The tax year of a foreign 
partnership is determined under section 706.
    (9) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Sole U.S. partner does not own more than a fifty-percent 
interest. No United States person owns any interest (directly or 
constructively) in FPS, a foreign partnership whose tax year under 
section 706 is the calendar year. On January 1, 2001, US, a United 
States person with the calendar year as its tax year, contributes 
property to FPS in exchange for a 40% interest in a section 721 
transaction. No United States persons acquire directly or constructively 
any other interests in FPS during FPS's 2001 tax year. US is not a 
controlling fifty-percent partner during FPS's 2001 tax year. US did not 
own during that tax year, either directly or constructively, more than a 
50% interest in the partnership under paragraphs (b)(2) and (4) of this 
section. Also, US is not a controlling ten-percent partner; although US 
owned a 10% or greater interest, US persons owning at least 10% 
interests did not control FPS. Therefore, US does not have to file with 
its 2001 income tax return a Form 8865 with respect to FPS under section 
6038. (But see section 6038B for the reporting obligations of US with 
respect to its transfer of property to FPS and section 6046A for the 
reporting obligation of US with respect to its acquisition of an 
interest in FPS. See also Sec. 1.6046A-1(f)(1) regarding the overlap 
between sections 6038B and 6046A.
    Example 2. Controlling ten-percent partners. Assume the same facts 
as in Example 1. In addition, on January 1, 2002, US1, a United States 
person unrelated to US and a calendar year taxpayer, purchases a 15% 
interest in FPS from a foreign partner of FPS. Neither US nor US1 is a 
controlling fifty-percent partner during FPS's 2002 tax year because 
neither one owns more than a 50% percent interest in FPS during that 
year. However, US and US1 are controlling ten-percent partners for that 
year because each owns at least a 10% interest (US owns a 40% interest 
and US1 owns a 15% interest) and together they control FPS because 
collectively they own more than a 50% interest in FPS. As controlling 
ten-percent partners, under section 6038, each is required to file a 
Form 8865 with its 2002 income tax return. (US1 must also report its 
acquisition of the 15% interest in FPS under section 6046A on its Form 
8865 filed with its 2002 income tax return.)
    Example 3. Constructive ownership rules. Assume the same facts as in 
Example 2. In addition, on January 1, 2003, US2, a United States person 
and the brother of US, purchases 50% of the stock of FC, a foreign 
corporation. FC owns a 20% interest in FPS. Thus, under sections 
6038(e)(3) and 267(c)(1), US2 indirectly owns a 10% interest in FPS (10% 
is US2's proportionate share of FC's 20% interest in FPS), and under 
sections 6038(e)(3) and 267(c)(2), US2 is attributed US's 40% interest. 
Additionally, US directly owns a 40% interest in FPS and is attributed 
US2's 10% interest pursuant to section 6038(e)(3) and section 267(c)(2). 
Therefore, US2 is considered to own a 50% interest (10% indirectly and 
40% from US) in FPS, and US is considered to own a 50% interest in FPS 
(40% directly and 10% from US2). FPS has no controlling fifty-percent 
partners, because neither US, US1, nor US2, owns a greater than 50% 
interest. However, US, US1, and US2 are each controlling ten-percent 
partners and each must file Form 8865 pursuant to section 6038 for FPS's 
2003 tax year ending December 31, 2003. Each must attach Form 8865 to 
its tax return for its 2003 tax year.
    Example 4. Controlling fifty-percent partners. Assume the same facts 
as in Example 3. In addition, on June 1, 2004, US acquires an additional 
1% direct interest in FPS. US is now a controlling fifty-percent partner 
of FPS, because US owns a 41% interest directly and a 10% interest 
constructively from US2. US2 is also a controlling fifty-percent 
partner, because US2 owns 10% indirectly and 41% constructively from US. 
Both US and US2 are required to file Form 8865 containing all the 
information required to be submitted by controlling fifty-percent 
partners. (But see paragraph (c)(1) of this section, which contains 
filing exceptions when there are multiple controlling fifty-percent 
partners). US1 is no longer a controlling ten-percent partner because 
FPS now has at least one controlling fifty-percent partner, and US1 does 
not qualify as a controlling fifty-percent partner. Therefore, US1 is 
not required to file Form 8865 under section 6038.
    Example 5. Constructive ownership from a nonresident alien. US, a 
United States person, does not own directly or constructively an 
interest in FPS, a foreign partnership. The tax year of FPS is the 
calendar year. NRA, a nonresident alien, is the mother of US. In 2002, 
NRA acquires a 55% interest in FPS. Because US owns neither a direct nor 
a constructive interest in FPS under sections 6038(e)(3) and 267(c)(1) 
or (5), NRA's interest is not attributed to US under sections 6038(e)(3) 
and 267(c)(2). If in 2003 NRA becomes a United

[[Page 163]]

States person, NRA's interest will be attributed to US. However, US is 
excused from filing Form 8865 if US satisfies the requirements of the 
constructive owners exception in paragraph (c)(2) of this section. In 
2003, NRA is a controlling fifty-percent partner and must file a Form 
8865 under section 6038 for FPS's 2003 tax year.

    (c) Exceptions when more than one United States person is required 
to file Form 8865 pursuant to section 6038--(1) Multiple controlling 
fifty-percent partners--(i) In general. If, with respect to the same 
foreign partnership for the same tax year, more than one United States 
person is a controlling fifty-percent partner, then in lieu of each 
controlling fifty-percent partner filing a separate Form 8865, only one 
Form 8865 from one of the controlling fifty-percent partners is 
required, provided all of the requirements of paragraph (c)(1)(ii) of 
this section are satisfied. A person that is a controlling fifty-percent 
partner solely because of an interest to which deductions or losses are 
allocated may file the single return only if there is no United States 
person that is a controlling fifty-percent partner by reason of an 
interest in capital or profits.
    (ii) Requirements--(A) The person undertaking the filing obligation 
must file Form 8865 with that person's income tax return in the manner 
provided by Form 8865 and the accompanying instructions. The return must 
contain all of the information that would have been required to be 
reported by this section if each controlling fifty-percent partner had 
filed its own Form 8865.
    (B) Any controlling fifty-percent partner not filing Form 8865 must 
file with its income tax return a statement titled ``Controlled Foreign 
Partnership Reporting'' containing the following information--
    (1) A statement that the person qualified as a controlling fifty-
percent partner, but is not submitting Form 8865 pursuant to the 
multiple controlling fifty-percent partners exception;
    (2) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner;
    (3) A representation that the filing requirement has been or will be 
satisfied;
    (4) The name and address of the person filing the single return;
    (5) The Internal Revenue Service Center where the single return is 
required to be filed; and
    (6) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. If the requirements listed in paragraph (c)(1)(ii) 
of this section are not satisfied, a United States person that did not 
file a Form 8865 pursuant to this paragraph will be subject to the 
penalties in paragraph (k) of this section, unless the reasonable cause 
provision in paragraph (k)(4) of this section is satisfied.
    (2) Certain constructive owners excepted from furnishing 
information--(i) In general. A United States person that does not own a 
direct interest in the foreign partnership and that is required to file 
Form 8865 under this section solely by reason of constructive ownership 
from a United States person(s) pursuant to paragraph (b)(4) of this 
section (an indirect partner) is not required to file Form 8865 if all 
of the requirements listed in paragraph (c)(2)(ii) of this section are 
met.
    (ii) Requirements--(A) The United States person(s) whose interest 
the indirect partner constructively owns reports all the information 
such person(s) is required to submit under this section, unless such 
person also is required to file solely by reason of constructive 
ownership from a United States person(s) pursuant to paragraph (b)(4) of 
this section, or another person reports the information pursuant to 
paragraph (c)(1) of this section.
    (B) The indirect partner files with its income tax return a 
statement titled ``Controlled Foreign Partnership Reporting'' containing 
the following information--
    (1) A representation that the indirect partner was required to file 
Form 8865, but is not doing so pursuant to the constructive owners 
exception;
    (2) The names and addresses of the United States persons whose 
interests the indirect partner constructively owns;

[[Page 164]]

    (3) The name and address of the foreign partnership with respect to 
which the indirect partner would have had to have filed Form 8865 but 
for this exception; and
    (4) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. A United States person that pursuant to this 
paragraph (c)(2) does not file a return will be subject to the penalties 
in paragraph (k) of this section if the requirements listed in paragraph 
(c)(2)(ii) of this section are not satisfied, unless such failure is due 
to reasonable cause, as defined in paragraph (k)(4) of this section.
    (iv) Overlap with multiple controlling fifty-percent partners 
exception--(A) If a United States person qualifies for both the 
exception in paragraph (c)(1) of this section and the exception in this 
paragraph (c)(2), such person may only utilize the multiple controlling 
fifty-percent partners exception in paragraph (c)(1) of this section to 
avoid filing Form 8865.
    (B) Example. The following example illustrates the operation of this 
paragraph (c)(2)(iv):

    Example. US is a U.S. citizen. US owns 100% of the stock of DC, a 
domestic corporation. DC owns a 60% direct interest in FPS, a foreign 
partnership. DC and US are the only U.S. persons that own interests 
directly or constructively in FPS. DC owns directly a greater than 50% 
interest in FPS. US constructively owns DC's interest pursuant to 
sections 6038(e)(3) and 267(c)(1). Therefore, both DC and US are 
controlling fifty-percent partners. US qualifies for both the exception 
in paragraph (c)(1) of this section (multiple controlling fifty-percent 
partners) and the exception in paragraph (c)(2) of this section 
(constructive owner exception). US may only utilize the paragraph (c)(1) 
exception to avoid its filing obligation. Accordingly, DC may file a 
single Form 8865 on behalf of US and itself. However, that form must 
contain all the information that would have been submitted had DC and US 
each submitted a separate Form 8865.

    (3) Members of an affiliated group of corporations filing a 
consolidated return. If one or more members of an affiliated group of 
corporations filing a consolidated return are required under section 
6038 to file a Form 8865 for a particular foreign partnership, the 
common parent corporation may file one Form 8865 on behalf of all of the 
members of the group required to report under section 6038. Except with 
respect to group members who also qualify under the exception in 
paragraph (c)(2) of this section, the Form 8865 must contain all the 
information that would have been required to be submitted if each group 
member were required to file its own Form 8865.
    (d) Exception for certain trusts. Trusts relating to state and local 
government employee retirement plans are not required to report under 
this section, unless the instructions to Form 8865 provide otherwise.
    (e) Reporting under this section not required with respect to 
partnerships excluded from the application of subchapter K. The 
reporting requirements of this section will not apply to any United 
States person in respect of an eligible partnership as described in 
Sec. 1.761-2(a) if such partnership has validly elected to be excluded 
from all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in the manner specified in Sec. 1.761-2(b)(2)(i), or such 
partnership is deemed to have elected to be excluded from all of the 
provisions of subchapter K of chapter 1 of the Internal Revenue Code in 
accordance with the provisions of Sec. 1.761-2(b)(2)(ii).
    (f) Period covered by return. The information required under this 
section must be furnished for the tax year of the foreign partnership 
ending with or within the United States person's tax year. See section 
706 for rules regarding tax years of partnerships.
    (g) Contents of return--(1) Information required to be submitted by 
controlling fifty-percent partners and controlling ten-percent partners. 
All controlling fifty-percent partners and all controlling ten-percent 
partners must submit the following information on Form 8865 in the form 
and manner and to the extent prescribed by Form 8865 and its 
instructions--
    (i) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner or a controlling ten-percent partner;
    (ii) A statement of the income, gain, losses, deductions and credits 
allocated

[[Page 165]]

to the direct interest in the partnership of the person reporting under 
section 6038;
    (iii) A list of all partnerships (foreign or domestic) in which the 
foreign partnership owned a direct interest, or owned a constructive 
interest of ten percent of more under the rules of section 267(c)(1) or 
(5), during the partnership's tax year for which the Form 8865 is being 
filed;
    (iv) Information about all foreign entities that were disregarded as 
entities separate from their owner under Secs. 301.7701-2 and 301.7701-3 
that were owned by the foreign partnership during the partnership's tax 
year for which the Form 8865 is being filed;
    (v) A summary of the transactions that took place during the 
partnership's tax year between the partnership and the person filing the 
return, between the partnership and any other partnership of which the 
person filing the return is a controlling fifty-percent partner, and 
between the partnership and any corporation controlled (under section 
6038(e)(2) and the regulations thereunder) by the person filing the 
return; and
    (vi) Any other information that Form 8865 or its accompanying 
instructions require to be submitted.
    (2) Additional information required to be submitted by controlling 
fifty-percent partners. In addition to the information required pursuant 
to paragraph (g)(1) of this section, controlling fifty-percent partners 
must also submit the following information in the form and manner and to 
the extent required by Form 8865 and its instructions--
    (i) A list of the names, addresses and tax identification numbers 
(if any) of each United States person that owned a direct interest of 
ten percent or more in the partnership during the partnership's tax 
year, and of each United States and foreign person whose interests in 
the partnership the controlling fifty-percent partner constructively 
owned under paragraph (b)(4) of this section during the partnership's 
tax year;
    (ii) A list of transactions between the partnership and any United 
States person owning at the time of the transaction at least a 10-
percent direct interest (as defined in paragraph (b)(3) of this section) 
in the foreign partnership;
    (iii) A statement of the aggregate of the partners' distributive 
shares of items of income, gain, losses, deductions and credits;
    (iv) A statement of income, gain, losses, deductions and credits 
allocated to each United States person holding a direct interest in the 
foreign partnership of ten percent or more; and
    (v) Any other information Form 8865 or its accompanying instructions 
require controlling fifty-percent partners to submit.
    (h) Method of reporting. Except as otherwise provided on Form 8865 
or the accompanying instructions, all amounts required to be furnished 
on Form 8865 must be expressed in United States dollars. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (i) Time and place for filing return--(1) In general. Form 8865 must 
be filed with the United States person's income tax return on or before 
the due date (including extensions) of that return. If the United States 
person is not required to file an income tax return for its tax year 
with which or within which the foreign partnership's tax year ends, but 
is required to file an information return for that year (for example, 
Form 1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return 
of Organization Exempt from Income Tax''), the Form 8865 must be filed 
with the United States person's information return filed on or before 
the due date (including extensions) of that return.
    (2) Duplicate return. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also be 
filed.
    (j) [Reserved]. For further guidance, see Sec. 1.6038-3T(j).
    (k) Failure to comply with reporting requirement--(1) In general. 
Any United States person required to file Form 8865 under Section 6038 
and this section that fails to comply (as defined in paragraph (k)(2) of 
this section) with the reporting requirements of this section, will be 
subject to the penalties described in paragraph (k)(3) of this section.
    (2) Failure to comply. A failure to comply is separately determined 
for

[[Page 166]]

each foreign partnership for which a United States person has a section 
6038 reporting obligation. A failure to comply with the requirements of 
section 6038 includes the following--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Penalties. A United States person that fails to comply (as 
defined in paragraph (k)(2) of this section) with the reporting 
requirements of this section must pay the following penalties, subject 
to the reasonable cause exception in paragraph (k)(4) of this section:
    (i) Dollar amount penalty--(A) $10,000 penalty. A penalty of $10,000 
shall be imposed for each tax year of each foreign partnership with 
respect to which a failure to comply occurs.
    (B) Increase in penalty. If a failure to comply with the applicable 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the United States 
person required to file Form 8865, the person must pay an additional 
penalty of $10,000 for each 30-day period (or fraction thereof) during 
which the failure continues after the 90-day period has expired.
    (C) Limitation. The additional penalty imposed on any United States 
person by section 6038(b)(2) and paragraph (k)(3)(i)(B) of this section 
is limited to a maximum of $50,000 for each partnership for each tax 
year with respect to which the failure occurs.
    (ii) Penalty of reducing foreign tax credit--(A) Effect on foreign 
tax credit. Failure to comply with the reporting requirements of section 
6038 and this section may cause a reduction of foreign tax credits under 
section 901 (taxes of foreign countries and of possessions of the United 
States). In applying section 901 to a United States person for any tax 
year with or within which its foreign partnership's tax year ended, the 
amount of taxes paid (and deemed paid under sections 902 and 960) by the 
United States person will be reduced by 10 percent if the person fails 
to comply. However, no tax deemed paid under section 904(c) will be 
reduced under the provisions of this paragraph (k)(3)(ii).
    (B) Reduction for continued failure. If a failure to comply with the 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the person 
required to file Form 8865, then the amount of the reduction in 
paragraph (k)(3)(ii)(A) of this section will be 10 percent, plus an 
additional 5 percent for each 3-month period (or fraction thereof) 
during which the failure continues after the 90-day period has expired.
    (C) Limitation on reduction. The amount of the reduction under 
paragraphs (k)(3)(ii)(A) and (B) of this section for each failure to 
furnish information required under this section will not exceed the 
greater of $10,000, or the gross income of the foreign partnership for 
its tax year with respect to which the failure occurred.
    (D) Offset for dollar amount penalty imposed. The total amount of 
the reduction which, but for this paragraph (k)(3)(ii)(D), may be made 
under this paragraph (k)(3)(ii) with respect to any separate failure, 
may not exceed the maximum amount of the reductions that may be imposed, 
reduced (but not below zero) by the dollar amount penalty imposed by 
paragraph (k)(3)(i) of this section with respect to the failure.
    (4) Reasonable cause limitation. The time prescribed for filing a 
complete Form 8865, and the beginning of the 90-day period after the 
Commissioner or the Commissioner's delegate mails notice under 
paragraphs (k)(3)(i)(B) and (ii)(B) of this section, will be treated as 
being not earlier than the last day on which reasonable cause existed 
for failure to furnish the information. The United States person may 
show reasonable cause by providing a written statement to the 
Commissioner's delegate having jurisdiction over the person's return to 
which the Form 8865 should have been attached, setting forth the reasons 
for the failure to comply. Whether a failure to comply

[[Page 167]]

was due to reasonable cause will be determined by the Commissioner, or 
the Commissioner's delegate, under all the facts and circumstances.
    (5) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038, see section 6501(c)(8).
    (l) Effective date. Except as otherwise provided, this section shall 
apply for tax years of a foreign partnership ending on or after December 
31, 2000. For tax years of a foreign partnership prior to December 23, 
2002, see Sec. 1.6038-3(j) in effect prior to these amendments (see 26 
CFR part 1 revised April 1, 2002).

[T.D. 8850, 64 FR 72550, Dec. 28, 1999, as amended by T.D. 9033, 67 FR 
78175, Dec. 23, 2002]



Sec. 1.6038-3T  Information returns required of certain United States persons with respect to controlled foreign partnership (CFPs) (temporary).

    (a) Through (i)(2) [Reserved]. For further guidance, see 
Sec. 1.6038-3(a) through (i)(2).
    (j) Overlap with section 6031. A partner may be required to file 
Form 8865 under this section and the foreign partnership in which it is 
a partner may also be required to file a Form 1065 or Form 1065-B under 
section 6031(e) for the same partnership tax year. For cases where a 
United States person is a controlling fifty-percent partner or a 
controlling ten-percent partner with respect to a foreign partnership, 
and that foreign partnership completes and files Form 1065 or Form 1065-
B, the instructions for Form 8865 will specify the filing requirements 
that address this overlap in reporting obligations.
    (k) [Reserved]. For further guidance, see Sec. 1.6038-3(k).
    (l) Effective date. This section shall apply to tax years of a 
foreign partnership ending on or after December 23, 2002. The 
applicability of this section expires on December 20, 2005.

[T.D. 9033, 67 FR 78176, Dec. 23, 2002]



Sec. 1.6038A-0  Table of contents.

    This section lists the captions that appear in the regulations under 
section 6038A.

          Sec. 1.6038A-1 General requirements and definitions.

(a) Purpose and scope.
(b) In general.
(c) Reporting corporation.
(1) In general.
(2) 25-percent foreign-owned.
(3) 25-percent foreign shareholder.
(i) In general.
(ii) Total voting power and value.
(iii) Direct 25-percent foreign shareholder.
(iv) Indirect 25-percent foreign shareholder.
(4) Application to prior open years.
(5) Exceptions.
(i) Treaty country residents having no permanent establishment.
(ii) Qualified exempt shipping income.
(iii) Status as a foreign related party.
(d) Related party.
(e) Attribution rules.
(1) Attribution under section 318.
(2) Attribution of transactions with related parties engaged in by a 
          partnership.
(f) Foreign person.
(g) Foreign related party.
(h) Small corporation exception.
(i) Safe harbor for reporting corporations with related party 
          transactions of de minimis value.
(1) In general.
(2) Aggregate value of gross payments made or received.
(j) Related reporting corporations.
(k) Consolidated return groups.
(1) Required information.
(2) Maintenance of records and authorization of agent.
(3) Monetary penalties.
(l) District Director.
(m) Examples.
(n) Effective dates.
(1) Section 1.6038A-1.
(2) Section 1.6038A-2.
(3) Section 1.6038A-3.
(4) Section 1.6038A-4.
(5) Section 1.6038A-5.
(6) Section 1.6038A-6.
(7) Section 1.6038A-7.

                  Sec. 1.6038A-2 Requirement of return.

(a) Form 5472 required.
(1) In general.
(2) Reportable transaction.
(b) Contents of return.
(1) Reporting corporation.
(2) Related party.
(3) Foreign related party transactions for which only monetary 
          consideration is paid or received by the reporting 
          corporation.
(4) Foreign related party transactions involving nonmonetary 
          consideration or less than full consideration.
(5) Additional information.
(6) Reasonable estimate.
(i) Estimate within 25 percent of actual amount.

[[Page 168]]

(ii) Other estimates.
(7) Small amounts.
(8) Accrued payments and receipts.
(c) Method of reporting.
(d) Time and place for filing returns.
(e) Untimely filed return.
(f) Exceptions.
(1) No reportable transactions.
(2) Transactions solely with a domestic reporting corporation.
(3) Transactions with a corporation subject to reporting under section 
          6038.
(4) Transactions with a foreign sales corporation.
(g) Filing Form 5472 when transactions with related parties engaged in 
          by a partnership are attributed to a reporting corporation.
(h) Effective dates for certain reporting corporations.

                   Sec. 1.6038A-3 Record maintenance.

(a) General maintenance requirements.
(1) Section 6001 and section 6038A.
(2) Safe harbor.
(3) Examples.
(b) Other maintenance requirements.
(1) Indirectly related records.
(2) Foreign related party or third-party maintenance.
(3) Translation of records.
(4) Exception for foreign governments.
(c) Specific records to be maintained for safe harbor.
(1) In general.
(2) Descriptions of categories of documents to be maintained.
(i) Original entry books and transaction records.
(ii) Profit and loss statements.
(iii) Pricing documents.
(iv) Foreign country and third party filings.
(v) Ownership and capital structure records.
(vi) Records of loans, services, and other non-sales transactions.
(3) Material profit and loss statements.
(4) Existing records test.
(5) Significant industry segment test.
(i) In general.
(ii) Form of the statements.
(iii) Special rule for component sales.
(iv) Level of specificity required.
(v) Examples.
(6) High profit test.
(i) In general.
(ii) Return on assets test.
(iii) Additional rules.
(7) Definitions.
(i) U.S.-connected products or services.
(ii) Industry segment.
(iii) Gross revenue of an industry segment.
(iv) Identifiable assets of an industry segment.
(v) Operating profit of an industry segment.
(vi) Product.
(vii) Related products or services.
(viii) Model.
(ix) Product line.
(8) Example.
(i) Facts.
(ii) Existing records test.
(iii) Signficant industry segments.
(iv) High profit test.
(v) Material profit and loss statements.
(d) Liability for certain partnership record maintenance.
(e) Agreements with the District Director or the Assistant Commissioner 
          (International).
(1) In general.
(2) Content of agreement.
(i) In general.
(ii) Significant industry segment test.
(iii) Example.
(3) Circumstances of agreement.
(4) Agreement as part of APA process.
(f) U.S. maintenance.
(1) General rule.
(2) Non-U.S. maintenance requirements.
(3) Prior taxable years.
(4) Scheduled production for high volume or other reasons.
(5) Required U.S. maintenance.
(g) Period of retention.
(h) Application of record maintenance rules to banks and other financial 
          institutions. [Reserved]
(i) Effective dates.

                    Sec. 1.6038A-4 Monetary penalty.

(a) Imposition of monetary penalty.
(1) In general.
(2) Liability for certain partnership transactions.
(3) Calculation of monetary penalty.
(b) Reasonable cause.
(1) In general.
(2) Affirmative showing required.
(i) In general.
(ii) Small corporations.
(iii) Facts and circumstances taken into account.
(c) Failure to maintain records or to cause another to maintain records.
(d) Increase in penalty where failure continues after notification.
(1) In general.
(2) Additional penalty for another failure.
(3) Cessation of accrual.
(4) Continued failures.
(e) Other penalties.
(f) Examples.
    Example (1)--Failure to file Form 5472.
Example (2)--Failure to maintain records.
(g) Effective dates.

                 Sec. 1.6038A-5 Authorization of agent.

(a) Failure to authorize.
(b) Authorization by related party.
(1) In general.
(2) Authorization for prior years.
(c) Foreign affiliated groups.
(1) In general.

[[Page 169]]

(2) Application of noncompliance penalty adjustment.
(d) Legal effect of authorization of agent.
(1) Agent for purposes of commencing judicial proceedings.
(2) Foreign related party found where reporting corporation found.
(e) Successors in interest.
(f) Deemed compliance.
(1) In general.
(2) Reason to know.
(3) Effect of deemed compliance.
(g) Effective dates.

             Sec. 1.6038A-6 Failure to furnish information.

(a) In general.
(b) Coordination with treaties.
(c) Enforcement proceeding not required.
(d) De minimis failure.
(e) Suspension of statute of limitations.
(f) Effective dates.

                      Sec. 1.6038A-7 Noncompliance.

(a) In general.
(b) Determination of the amount.
(c) Separate application.
(d) Effective dates.

[T.D. 8353, 56 FR 28060, June 19, 1991]



Sec. 1.6038A-1  General requirements and definitions.

    (a) Purpose and scope. This section and Secs. 1.6038A-2 through 
1.6038A-7 provide rules for certain foreign-owned U.S. corporations and 
foreign corporations engaged in trade or business within the United 
States (reporting corporations) relating to information that must be 
furnished, records that must be maintained, and the authorization of the 
reporting corporation to act as agent for related foreign persons for 
purposes of sections 7602, 7603, and 7604 that must be executed. Section 
6038A(a) and this section require that a reporting corporation furnish 
certain information annually and maintain certain records relating to 
transactions between the reporting corporation and certain related 
parties. This section also provides definitions of terms used in section 
6038A. Section 1.6038A-2 provides guidance concerning the information to 
be submitted and the filing of the required return. Section 1.6038A-3 
provides guidance concerning the maintenance of records. Section 
1.6038A-4 provides guidance concerning the application of the monetary 
penalty for the failure either to furnish information or to maintain 
records. Section 1.6038A-5 provides guidance concerning the 
authorization of an agent for purposes of sections 7602, 7603, and 7604. 
Section 1.6038A-6 provides guidance concerning the failure to furnish 
information requested by a summons. Finally, Sec. 1.6038A-7 provides 
guidance concerning the application of the noncompliance penalty for 
failure by the related party to authorize an agent or by the reporting 
corporation to substantially comply with a summons.
    (b) In general. A reporting corporation must furnish the information 
described in Sec. 1.6038A-2 by filing an annual information return (Form 
5472 or any successor), and must maintain records as described in 
Sec. 1.6038A-3.
    (c) Reporting corporation--(1) In general. For purposes of section 
6038A, a reporting corporation is either a domestic corporation that is 
25-percent foreign-owned as defined in paragraph (c)(2) of this section, 
or a foreign corporation that is 25-percent foreign-owned and engaged in 
trade or business within the United States. After November 4, 1990, a 
foreign corporation engaged in a trade or business within the United 
States at any time during a taxable year is a reporting corporation. See 
section 6038C.
    (2) 25-percent foreign-owned. A corporation is 25-percent foreign-
owned if it has at least one direct or indirect 25-percent foreign 
shareholder at any time during the taxable year.
    (3) 25-percent foreign shareholder--(i) In general. A foreign person 
is a 25-percent foreign shareholder of a corporation if the person owns 
at least 25 percent of--
    (A) The total voting power of all classes of stock of the 
corporation entitled to vote, or
    (B) The total value of all classes of stock of the corporation.
    (ii) Total voting power and value. In determining whether one 
foreign person owns 25 percent of the total voting power of all classes 
of stock of a corporation entitled to vote or 25 percent of the total 
value of all classes of stock of a corporation, consideration will be 
given to all the facts and circumstances of each case, under principles 
similar to Sec. 1.957-1(b)(2) (consideration of arrangements to shift 
formal voting power away from a foreign person).

[[Page 170]]

    (iii) Direct 25-percent foreiqn shareholder. A foreign person is a 
direct 25-percent foreign shareholder if it owns directly at least 25 
percent of the stock of the reporting corporation, either by vote or by 
value.
    (iv) Indirect 25-percent foreign shareholder. A foreign person is an 
indirect 25-percent foreign shareholder if it owns indirectly (or under 
the attribution rules of section 318 is considered to own indirectly) at 
least 25 percent of the stock of the reporting corporation, either by 
vote or by value.
    (4) Application to prior open years. For taxable years beginning 
before July 11, 1989, the definition of a reporting corporation under 
this paragraph applies in determining whether a foreign-owned 
corporation is a reporting corporation. An examination may be reopened 
if the statute of limitations period for that taxable year has not 
expired. A taxable year may not be reopened under section 6038A for 
examination purposes if the taxable year is open under section 6511 only 
for purposes of the carryback of net operating losses or net capital 
losses.
    (5) Exceptions--(i) Treaty country residents having no permanent 
establishment. A foreign corporation that has no permanent establishment 
in the United States under an applicable income tax convention is not a 
reporting corporation for purposes of section 6038A and this section. 
Accordingly, such a foreign corporation is not subject to Secs. 1.6038A-
2, 1.6038A-3, and 1.6038A-5. It must timely and fully provide the 
required notice to the Commissioner under section 6114. See section 6114 
and the regulations thereunder for the notice that such a corporation 
must file and the applicable penalties for failure to file such notice.
    (ii) Qualified exempt shipping income. A foreign corporation whose 
gross income is exempt from U.S. taxation under section 883 is not a 
reporting corporation provided that it timely and fully complies with 
the reporting requirements required to claim such exemption. In the 
event that such a corporation does not timely and fully comply with the 
reporting requirements under sections 887 and 883, it will be a 
reporting corporation subject to section 6038A, including the 
application of the monetary penalty for failure to file required 
information.
    (iii) Status as foreign related party. Nothing in this paragraph 
affects the determination of whether a person is a foreign related party 
as defined in paragraph (g) of this section.
    (d) Related party. The term ``related party'' means--
    (1) Any direct or indirect 25-percent foreign shareholder of the 
reporting corporation,
    (2) Any person who is related within the meaning of sections 267(b) 
or 707(b)(1) to the reporting corporation or to a 25-percent foreign 
shareholder of the reporting corporation, or
    (3) Any other person who is related to the reporting corporation 
within the meaning of section 482 and the regulations thereunder. 
However, the term ``related party'' does not include any corporation 
filing a consolidated federal income tax return with the reporting 
corporation.
    (e) Attribution rules--(1) Attribution under section 318. For 
purposes of determining whether a corporation is 25-percent foreign-
owned and whether a person is a related party under section 6038A, the 
constructive ownership rules of section 318 shall apply, and the 
attribution rules of section 267(c) also shall apply to the extent they 
attribute ownership to persons to whom section 318 does not attribute 
ownership. However, ``10 percent'' shall be substituted for ``50 
percent'' in section 318(a)(2)(C), and section 318(a)(3) (A), (B), and 
(C) shall not be applied so as to consider a U.S. person as owning stock 
that is owned by a person who is not a U.S. person. Additionally, 
section 318(a)(3)(C) and Sec. 1.318-1(b) shall not be applied so as to 
consider a U.S. corporation as being a reporting corporation if, but for 
the application of such sections, the U.S. corporation would not be 25-
percent foreign owned.
    (2) Attribution of transactions with related parties engaged in by a 
partnership. The transactions in which a domestic or foreign partnership 
engages shall be attributed to any reporting corporation whose interest 
in the capital or profits of the partnership, either directly or 
indirectly, combined with the interests of all related parties of the 
reporting corporation partner, equals

[[Page 171]]

25 percent or more of the total partnership interests. Attribution of 
such transactions shall be made only to the extent of the partnership 
interest held by that reporting corporation partner. See sections 875 
and 702(a) and the regulations thereunder. (Attribution shall not be 
made however, of transactions directly between the partnership and a 
reporting corporation.) Accordingly, a reporting corporation partner 
that is deemed to engage in transactions with related parties under this 
rule is subject to the information reporting requirements of 
Sec. 1.6038A-2, to the record maintenance requirements of Sec. 1.6038A-
3, to the monetary penalty under Sec. 1.6038A-4, to the requirement of 
authorization of agent under Sec. 1.6038A-5, to the rules of 
Sec. 1.6038A-6 relating to the requirement to produce records, and to 
the noncompliance penalty adjustment under Sec. 1.6038A-7.
    (f) Foreign person. For purposes of section 6038A, a foreign person 
is--
    (1) Any individual who is not a citizen or resident of the United 
States, but not including any individual for whom an election under 
section 6013 (g) or (h) (relating to an election to file a joint return) 
is in effect;
    (2) Any individual who is a citizen of any possession of the United 
States and who is not otherwise a citizen or resident of the United 
States;
    (3) Any partnership, association, company, or corporation that is 
not created or organized in the United States or under the law of the 
United States or any State thereof;
    (4) Any foreign trust or foreign estate, as defined in section 
7701(a)(31); or
    (5) Any foreign government (or agency or instrumentality thereof). 
To the extent that a foreign government is engaged in the conduct of 
commercial activity as defined under section 892 and the regulations 
thereunder, it will be treated as a foreign person under section 6038A 
and this section only for purposes of the information reporting 
requirements of Sec. 1.6038A-2. A foreign government will not be treated 
as a foreign related party for purposes of Secs. 1.6038A-3 and 1.6038A-
5.

For purposes of section 6038A, a possession of the United States shall 
be considered to be a foreign country.
    (g) Foreign related party. A foreign related party is a foreign 
person as defined under paragraph (f) of this section that is also a 
related party as defined under paragraph (d) of this section.
    (h) Small corporation exception. A reporting corporation that has 
less than $10,000,000 in U.S. gross receipts for a taxable year is not 
subject to Secs. 1.6038A-3 and 1.6038A-5 for that taxable year. Such a 
corporation, however, remains subject to the information reporting 
requirements of Sec. 1.6038A-2 and the general record maintenance 
requirements of section 6001. For purposes of this paragraph, U.S. gross 
receipts includes all amounts received or accrued to the extent that 
such amounts are taken into account for the determination and 
computation of the gross income of the corporation. For purposes of this 
test, the U.S. gross receipts of all related reporting corporations 
shall be aggregated.
    (i) Safe harbor for reporting corporations with related party 
transactions of de minimis value--(1) In general. A reporting 
corporation is not subject to Secs. 1.6038A-3 and 1.6038A-5 for any 
taxable year in which the aggregate value of all gross payments it makes 
to and receives from foreign related parties with respect to related 
party transactions (including monetary consideration, nonmonetary 
consideration, and the value of transactions involving less than full 
consideration), is not more than $5,000,000 and is less than 10 percent 
of its U.S. gross income. Such a corporation, however, remains subject 
to the information reporting requirements of Sec. 1.6038A-2 and the 
general record maintenance requirements of section 6001. For purposes of 
this paragraph, U.S. gross income means the gross income reportable by 
the reporting corporation (or the aggregate gross income reportable by 
all related reporting corporations) for U.S. income tax purposes. Gross 
payments made to or received from foreign related parties cannot be 
netted; rather, the gross payments made to and received from foreign 
related parties are to be aggregated. Thus, for example, if a reporting 
corporation receives $4,700,000 of gross payments from a related party 
and makes $500,000 of gross payments to the

[[Page 172]]

same related party, it has aggregate gross payments of $5,200,000, and, 
therefore, does not qualify for the safe harbor under this paragraph.
    (2) Aggregate value of gross payments made or received. The 
aggregate value of gross payments made to (or received from) a foreign 
related party with respect to foreign related party transactions is 
determined by totaling the dollar amounts of foreign related party 
transactions as described in Sec. 1.6038A-2(b) (3) and (4) on all Forms 
5472 filed by the reporting corporation or related reporting 
corporations.
    (j) Related reporting corporations. A reporting corporation is 
related to another reporting corporation if it is related to that other 
reporting corporation under the principles described in paragraphs (d) 
and (e) of this section.
    (k) Consolidated return groups--(1) Required information. If a 
reporting corporation is a member of an affiliated group for which a 
U.S. consolidated income tax return is filed, the return requirement of 
Sec. 1.6038A-2 may be satisfied by filing a consolidated Form 5472. The 
common parent, as identified on Form 851, must attach a schedule to the 
consolidated Form 5472 stating which members of the U.S. affiliated 
group are reporting corporations under section 6038A, and which of those 
are joining in the consolidated Form 5472. The schedule must provide the 
name, address, and taxpayer identification number of each member whose 
transactions are included on the consolidated Form 5472. A member is not 
required to join in filing a consolidated Form 5472 merely because other 
members of the group choose to file one or more Forms 5472 on a 
consolidated basis.
    (2) Maintenance of records and authorization of agent. Either the 
common parent or the principal operating company of an affiliated group 
filing a consolidated income tax return may be authorized under 
Sec. 1.6038A-5 to act as the agent for foreign related persons engaged 
in transactions with members of the group solely for purposes of section 
7602, 7603, and 7604 under section 6038A(e)(1) and Sec. 1.6038A-5. Each 
member of the group, however, must maintain the records required under 
section 6038A (a) and Sec. 1.6038A-3 relating to its related party 
transactions.
    (3) Monetary penalties. The common parent (or principal operating 
company) and all reporting corporations that join in the filing of a 
consolidated Form 5472 are liable jointly and severally for penalties 
for failure to file Form 5472 and for failure to mantain records under 
section 6038A(d) and Sec. 1.6038A-4(e). See Sec. 1.1502-77(a) regarding 
the scope of agency of the common parent corporation.
    (l) District Director. For purposes of the regulations under section 
6038A, the term ``District Director'' means any District Director, or 
the Assistant Commissioner (International) when performing duties 
similar to those of a District Director with respect to any person over 
which the Assistant Commissioner (International) has appropriate 
jurisdiction.
    (m) Examples. The following examples illustrate the rules of this 
section.

    Example 1. P, a U.S. partnership that is engaged in a U.S. trade or 
business, is 75 percent owned by FC1, a foreign corporation that, in 
turn, is wholly owned by another foreign corporation, FC2. The remaining 
25 percent of P is owned by Corp, a domestic corporation, that is wholly 
owned by FC3. P engages in transactions solely with FC2 and FC3. These 
transactions are attributed to FC1 and Corp. Under section 875, FC1 is 
considered as being engaged in a U.S. trade or business. For purposes of 
section 6038A and this section, FC1 and Corp are reporting corporations 
and must report their pro rata shares of the value of the transactions 
with FC2 and FC3. Thus, Corp must report 25 percent of P's transactions 
with FC3 and FC1 must report 75 percent of P's transactions with FC2.
    Example 2. FC2 and FC3 are both foreign corporations that are wholly 
owned by FC1, also a foreign corporation. FC2 engages in a trade or 
business in the United States through a branch. The branch engages in 
related party transactions with FC1. FC2 is a reporting corporation. FC3 
is a foreign related party. FC1 is a direct 25-percent foreign 
shareholder of both FC2 and FC3. Neither FC1 nor FC3 is a reporting 
corporation.
    Example 3. FC1 owns 25 percent of total voting power in each of FC2 
and FC3. FC2 and FC3 each own 20 percent of the total voting power of 
Corp, a domestic corporation. The remaining stock of Corp is owned by an 
unrelated domestic corporation. Neither FC2 nor FC3 is engaged in a U.S. 
trade or business. Under section 318(a)(2)(C) and paragraph (e) of this 
section, FC1 constructively owns its

[[Page 173]]

proportionate share of the stock of Corp owned directly by FC2 and FC3. 
Thus, FCl is treated as constructively owning five percent of Corp 
through each of FC2 and FC3 or a total of 10 percent of the Corp stock. 
Consequently, Corp is not a reporting corporation because no 25 percent 
shareholder exists.
    Example 4. FP owns 100 percent of FCl which, in turn, owns 100 
percent of FC2. FC2 owns 100 percent of FC3 which owns 100 percent of 
RC. FP, FC1, and FC2 are indirect 25-percent foreign shareholders of RC, 
and FC3 is a direct 25-percent foreign shareholder.
    Example 5. FP owns 100 percent of USS, a U.S. corporation, and 25 
percent of FS, a foreign corporation. The remaining 75 percent of FS is 
publicly owned by numerous small shareholders. Sales transactions occur 
between USS and FS. Applying the rules of this section, USS is a 
reporting corporation. It is determined that USS and FS are each 
controlled by FP under section 482 and the regulations thereunder. 
Therefore, FS is related to USS within the meaning of section 482 and is 
a related party to USS. Accordingly, the sales transactions between USS 
and FS are subject to section 6038A.
    Example 6. The facts are the same as in Example 5, except that the 
remaining 75 percent of FS is owned by one shareholder that is unrelated 
to the FP group and it is determined that FS is not controlled by FP for 
purposes of section 482. Under these facts, FS is not a related party of 
either FP or USS. Accordingly, section 6038A does not apply to the sales 
transactions between FS and USS.
    Example 7. P, a U.S. multinational, is a holding company that wholly 
owns X, a U.S. operating company, which in turn wholly owns FS, a 
controlled foreign corporation. Applying the rule of section 
318(a)(3)(C), FS is deemed to own the stock of X that is actually held 
by P. However, under the rules of paragraph (e) of this section, X will 
not be a reporting corporation by reason of section 318.

    (n) Effective dates--(1) Section 1.6038A-1. Paragraphs (c) (relating 
to the definition of a reporting corporation), (d) (relating to the 
definition of a related party), (e)(1) (relating to the application of 
section 318), and (f) (relating to the definition of a foreign person) 
of this section are effective for taxable Years beginning after July 10, 
1989. The remaining paragraphs of this section are effective December 
10, 1990, without regard to when the taxable year began.
    (2) Section 1.6038A-2. Section 1.6038A-2 (relating to the 
requirement to file Form 5472) is generally effective for taxable years 
beginning after July 10, 1989. However, Sec. 1.6038A-2 as it applies to 
reporting corporations whose sole trade or business in the United States 
is a banking, financing, or similar business as defined in Sec. 1.864-
4(c)(5)(i) is effective for taxable years beginning after December 10, 
1990.
    (3) Section 1.6038A-3. Section 1.6038A-3 (relating to the record 
maintenance requirement) is generally effective December 10, 1990. 
However, records described in Sec. 1.6038A-3 in existence on or after 
March 20, 1990, must be maintained, without regard to when the taxable 
year to which the records relate began.
    (4) Section 1.6038A-4. Section 1.6038A-4 (relating to the monetary 
penalty) is generally effective for taxable years beginning after July 
10, 1989, for the failure to file Form 5472. For the failure to maintain 
records or the failure to produce documents under Sec. 1.6038A-4(f)(2), 
the section is effective December 10, 1990, without regard to when the 
taxable year to which the records relate began.
    (5) Section 1.6038A-5. Section 1.6038A-5 (relating to the 
authorization of agent requirement) is effective December 10, 1990, 
without regard to when the taxable year to which the records relate 
began.
    (6) Section 1.6038A-6. Section 1.6038A-6 (relating to the failure to 
furnish information under a summons) is effective November 6, 1990, 
without regard to when the taxable year to which the summons relates 
began.
    (7) Section 1.6038A-7. Section 1.6038A-7 (relating to the 
noncompliance penalty adjustment) is effective December 10, 1990, 
without regard to when the taxable year began.

[T.D. 8353, 56 FR 28061, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991]



Sec. 1.6038A-2  Requirement of return.

    (a) Form 5472 required--(1) In general. Each reporting corporation 
as defined in Sec. 1.6038A-1(c) (or members of an affiliated group 
filing together as described in Sec. 1.6038A-1(k)) shall make a separate 
annual information return on Form 5472 with respect to each related 
party as defined in Sec. 1.6038A-1(d) with which the reporting 
corporation (or any group member joining in a consolidated Form 5472) 
has had any reportable transaction during the taxable

[[Page 174]]

year. The information required by section 6038A and this section must be 
furnished even though it may not affect the amount of any tax due under 
the Code.
    (2) Reportable transaction. A reportable transaction is any 
transaction of the types listed in paragraphs (b) (3) and (4) of this 
section. However, if neither party to the transaction is a United States 
person as defined in section 7701(a)(30) and the transaction--
    (i) Will not generate in any taxable year gross income from sources 
within the United States or income effectively connected, or treated as 
effectively connected, with the conduct of a trade or business within 
the United States, and
    (ii) Will not generate in any taxable year any expense, loss, or 
other deduction that is allocable or apportionable to such income, the 
transaction is not a reportable transaction.
    (b) Contents of return--(1) Reporting corporation. Form 5472 must 
provide the following information in the manner the form prescribes with 
respect to each reporting corporation:
    (i) Its name, address (including mailing code), and U.S. taxpayer 
identification number; each country in which the reporting corporation 
files an income tax return as a resident under the tax laws of that 
country; its country or countries of organization, and incorporation; 
its total assets for U.S. reporting corporation; the places where it 
conducts its business; and its principal business activity.
    (ii) The name, address, and U.S. taxpayer identification number, if 
applicable, of all its direct and indirect 25-percent foreign 
shareholders (for an indirect 25-percent foreign shareholder, explain 
the attribution of ownership); each country in which each 25-percent 
foreign shareholder files an income tax return as a resident under the 
tax laws of that country; the places where each 25-percent shareholder 
conducts its business; and the country or countries of organization, 
citizenship, and incorporation of each 25-percent foreign shareholder.
    (iii) The number of Forms 5472 filed for the taxable year and the 
aggregate value in U.S. dollars of gross payments as defined in 
Sec. 1.6038A-1(h)(2) made with respect to all foreign related party 
transactions reported on all Forms 5472.
    (2) Related party. The reporting corporation must provide 
information on Form 5472, set forth in the manner the form prescribes, 
about each related party, whether foreign or domestic, with which the 
reporting corporation had a transaction of the types described in 
paragraphs (b) (3) and (4) of this section during its taxable year, 
including the following information:
    (i) The name, U.S. taxpayer identification number, if applicable, 
and address of the related party.
    (ii) The nature of the reated party's business and the principal 
place or places where it conducts its business.
    (iii) Each country in which the related party files an income tax 
return as a resident under the tax laws of that country.
    (iv) The relationship of the reporting corporation to the related 
party.
    (3) Foreign related party transactions for which only monetary 
consideration is paid or received by the reporting corporation. If the 
related party is a foreign person, the reporting corporation must set 
forth on Form 5472 the dollar amounts of all reportable transactions for 
which monetary consideration (including U.S. and foreign currency) was 
the sole consideration paid or received during the taxable year of the 
reporting corporation. The total amount of such transactions, as well as 
the separate amounts for each type of transaction described below, must 
be reported on Form 5472, in the manner the form prescribes. Where 
actual amounts are not determinable, a reasonable estimate (as described 
in paragraph (b)(6) of this section) is permitted. The types of 
transactions described in this paragraph are:
    (i) Sales and purchases of stock in trade (inventory);
    (ii) Sales and purchases of tangible property other than stock in 
trade;
    (iii) Rents and royalties paid and received (other than amounts 
reported under paragraph (b)(3)(iv) of this section);
    (iv) Sales, purchases, and amounts paid and received as 
consideration for the use of all intangible property, including (but not 
limited to) copyrights,

[[Page 175]]

designs, formulas, inventions, models, patents, processes, trademarks, 
and other similar intangible property rights;
    (v) Consideration paid and received for technical, managerial, 
engineering, construction, scientific, or other services;
    (vi) Commissions paid and received;
    (vii) Amounts loaned and borrowed (except open accounts resulting 
from sales and purchases reported under other items listed in this 
paragraph (b)(3) that arise and are collected in full in the ordinary 
course of business);
    (viii) Interest paid and received;
    (ix) Premiums paid and received for insurance and reinsurance; and
    (x) Other amounts paid or received not specifically identified in 
this paragraph (b)(3) to the extent that such amounts are taken into 
account for the determination and computation of the taxable income of 
the reporting corporation.

Amounts required to be reported under paragraph (b)(3)(vii) of this 
section shall be reported as monthly averages or outstanding balances at 
the beginning and end of the taxable year, as the form shall prescribe.
    (4) Foreign related party transactions involving nonmonetary 
consideration or less than full consideration. If the related party is a 
foreign person, the reporting corporation must provide on Form 5472 a 
description of any reportable transaction, or group of reportable 
transactions, listed in paragraph (b)(3) of this section, for which any 
part of the consideration paid or received was not monetary 
consideration, or for which less than full consideration was paid or 
received. A description required under paragraph (b)(4) of this section 
shall include sufficient information from which to determine the nature 
and approximate monetary value of the transaction or group of 
transactions, and shall include:
    (i) A description of all property (including monetary 
consideration), rights, or obligations transferred from the reporting 
corporation to the foreign related party and from the foreign related 
party to the reporting corporation;
    (ii) A description of all services performed by the reporting 
corporation for the foreign related party and by the foreign related 
party for the reporting corporation; and
    (iii) A reasonable estimate of the fair market value of all 
properties and services exchanged, if possible, or some other reasonable 
indicator of value.

If, for any transaction, the entire consideration received includes both 
tangible and intangible property and the consideration paid is solely 
monetary consideration, the transaction should be reported under 
paragraph (b)(3) of this section if the intangible property was related 
and incidental to the transfer of the tangible property (for example, a 
right to warranty services.)
    (5) Additional information. In addition to the information required 
under paragraphs (b) (3) and (4) of this section, a reporting 
corporation must provide on Form 5472, in the manner the form 
prescribes, the following information:
    (i) If the reporting corporation imports goods from a foreign 
related party, whether the costs taken into account in computing the 
basis or inventory cost of such goods are greater than the costs taken 
into account in computing the valuation of the goods for customs 
purposes, adjusted pursuant to section 1059A and the regulations 
thereunder, and if so, the reasons for the difference.
    (ii) If the costs taken into account in computing the basis or 
inventory cost of such goods are greater than the costs taken into 
account in computing the valuation of the goods for customs purposes, 
whether the documents supporting the reporting corporation's treatment 
of the items set forth in paragraph (b)(5)(i) of this section are in 
existence and available in the United States at the time Form 5472 is 
filed.
    (6) Reasonable estimate--(i) Estimate within 25 percent of actual 
amount. Any amount reported under this section is considered to be a 
reasonable estimate if it is at least 75 percent and not more than 125 
percent of the actual amount.
    (ii) Other estimates. If any amount reported under this paragraph 
(b) of this section fails to meet the reasonable estimate test of 
paragraph (b)(6)(i) of this section, the reporting corporation 
nevertheless may show that such amount is a reasonable estimate by 
making an

[[Page 176]]

affirmative showing of relevant facts and circumstances in a written 
statement containing a declaration that it is made under the penalties 
of perjury. The District Director shall determine whether the amount 
reported was a reasonable estimate.
    (7) Small amounts. If any actual amount required under this section 
does not exceed $50,000, the amount may be reported as ``$50,000 or 
less.''
    (8) Accrued payments and receipts. For purposes of this section, in 
the case of an accrual basis taxpayer, the terms ``paid'' and 
``received'' shall include accrued payments and receipts, respectively.
    (c) Method of reporting. All statements required on or with the Form 
5472 under this section and Sec. 1.6038A-5 shall be in the English 
language. All amounts required to be reported under paragraph (b) of 
this section shall be expressed in United States currency, with a 
statement of the exchange rates used.
    (d) Time and place for filing returns. A Form 5472 required under 
this section shall be filed with the reporting corporation's income tax 
return for the taxable year by the due date (including extensions) of 
that return. A duplicate Form 5472 (including any attachments and 
schedules) shall be filed at the same time with the Internal Revenue 
Service Center, Philadelphia, PA 19255.
    (e) Untimely filed return. If the reporting corporation's income tax 
return is untimely filed, Form 5472 (with a duplicate to Philadelphia) 
nonetheless shall be timely filed at the service center where the return 
is due. When the income tax return is ultimately filed, a copy of Form 
5472 must be attached.
    (f) Exceptions--(1) No reportable transactions. A reporting 
corporation is not required to file Form 5472 if it has no transactions 
of the types listed in paragraphs (b) (3) and (4) of this section during 
the taxable year with any related party.
    (2) Transactions solely with a domestic reporting corporation. If 
all of a foreign reporting corporation's reportable transactions are 
with one or more related domestic reporting corporations that are not 
members of the same affiliated group, the foreign reporting corporation 
shall furnish on Form 5472 only the information required under 
paragraphs (b) (1) and (2) of this section, if the domestic reporting 
corporations provide the information required under paragraphs (b) (3) 
through (5) of this section. Such a foreign reporting corporation 
nonetheless is subject to the record maintenance requirements of 
Sec. 1.6038A-3 and the requirements of Secs. 1.6038A-5 and 1.6038A-6. 
The name, address, and taxpayer identification number of each domestic 
reporting corporation that provided such information must be indicated 
on Form 5472 in the space provided for the information under paragraphs 
(b) (1) and (2) of this section.
    (3) Transactions with a corporation subject to reporting under 
section 6038. A reporting corporation is not required to make a return 
of information on Form 5472 with respect to a related foreign 
corporation for a taxable year for which a U.S. person that controls the 
foreign related corporation makes a return of information on Form 5471 
that is required under section 6038 and this section, if that return 
contains information required under Sec. 1.6038-2(f)(11) with respect to 
the reportable transactions between the reporting corporation and the 
related corporation for that taxable year. Such a reporting corporation 
also is not subject to Secs. 1.6038A-3 and 1.6038A-5. It remains subject 
to the general record maintenance requirements of section 6001.
    (4) Transactions with a foreign sales corporation. A reporting 
corporation is not required to make a return of information on Form 5472 
with respect to a related corporation that qualifies as a foreign sales 
corporation for a taxable year for which the foreign sales corporation 
files Form 1120-FSC.
    (g) Filing Form 5472 when transactions with related parties engaged 
in by a partnership are attributed to a reporting corporation. If 
transactions engaged in by a partnership are attributed under 
Sec. 1.6038A-1(e)(2) to a reporting corporation, the reporting 
corporation need report on Form 5472 only the percentage of the value of 
the transaction or transactions equal to the percentage of its 
partnership interest. Thus, for example, if a partnership buys $1000 of 
widgets from the foreign parent of a reporting corporation whose 
partnership

[[Page 177]]

interest in the partnership equals 50 percent of the partnership 
interests (and the remaining 50 percent is held by unrelated parties), 
the reporting corporation must report $500 of purchases from a foreign 
related party on Form 5472.
    (h) Effective dates for certain reporting corporations. For 
effective dates for this section, see Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28063, June 19, 1991]



Sec. 1.6038A-3  Record maintenance.

    (a) General maintenance requirements--(1) Section 6001 and section 
6038A. A reporting corporation must keep the permanent books of account 
or records as required by section 6001 that are sufficient to establish 
the correctness of the federal income tax return of the corporation, 
including information, documents, or records (``records'') to the extent 
they may be relevant to determine the correct U.S. tax treatment of 
transactions with related parties. Under section 6001, the District 
Director may require any person to make such returns, render such 
statements, or keep such specific records as will enable the District 
Director to determine whether or not that person is liable for any of 
the taxes to which the regulations under part I have application. See 
section 6001 and the regulations thereunder. Such records must be 
permanent, accurate, and complete, and must clearly establish income, 
deductions, and credits. Additionally, in appropriate cases, such 
records include sufficient relevant cost data from which a profit and 
loss statement may be prepared for products or services transferred 
between a reporting corporation and its foreign related parties. This 
requirement includes records of the reporting corporation itself, as 
well as to records of any foreign related party that may be relevant to 
determine the correct U.S. tax treatment of transactions between the 
reporting corporation and foreign related parties. The relevance of such 
records with respect to related party transactions shall be determined 
upon the basis of all the facts and circumstances. Section 6038A and 
this section provide detailed guidance regarding the required 
maintenance of records with respect to such transactions and specify 
penalties for noncompliance. Banks and other financial institutions 
shall follow the specific record maintenance rules described in 
paragraph (h) of this section.
    (2) Safe harbor. A safe harbor for record maintenance is provided 
under paragraph (c) of this section, which sets forth detailed guidance 
concerning the types of records to be maintained with respect to related 
party transactions. The safe harbor consists of an all-inclusive list of 
record types that could be relevant to different taxpayers under a 
variety of facts and circumstances. It does not constitute a checklist 
of records that every reporting corporation must maintain or that 
generally should be requested by the Service. A specific reporting 
corporation is required to maintain, and the Service will request, only 
those records enumerated in the safe harbor (including material profit 
and loss statements) that may be relevant to its business or industry 
and to the correct U.S. tax treatment of its transactions with its 
foreign related parties. Accordingly, not every item listed in the safe 
harbor must be maintained by every reporting corporation. A corporation 
that maintains or causes another person to maintain the records listed 
in paragraph (c)(2) of this section that may be relevant to its foreign 
related party transactions and to its business or industry will be 
deemed to have met the record maintenance requirements of section 6038A.
    (3) Examples. The following examples illustrate the rules of this 
paragraph.

    Example 1. RC, a U.S. reporting corporation, is owned by two 
shareholders, F and P. F is a foreign corporation that owns 30 percent 
of the stock of RC. P is a domestic corporation that owns the remaining 
70 percent. RC purchases tangible property from F; however, the only 
potential audit issue with respect to these transactions is their 
treatment under section 482. It is determined that F does not in fact 
control RC and the two corporations do not constitute a group of 
``controlled taxpayers'' for purposes of section 482 and the regulations 
thereunder. There are no other reportable transactions between RC and F. 
Under Sec. 1.6038A-1(g), F is a foreign related party with respect to 
RC. Accordingly, RC is required to report its purchases of property from 
F under the reporting requirements of Sec. 1.6038A-2. Nevertheless, 
because section 482 is not applicable to the transactions between RC and 
F, the records

[[Page 178]]

created by F with respect to its sales to RC are not relevant for 
purposes of determining the correct tax treatment of these transactions. 
RC is required to maintain its own records of these transactions under 
the requirements of section 6001, but the transactions are not subject 
to the record maintenance requirements of this section. If, however, on 
audit it is determined that F does control RC, all records relevant to 
determining the arm's length consideration for the tangible property 
under section 482 will be subject to these requirements.
    Example 2. FP, a foreign person, owns 30 percent of the stock of RC, 
a reporting corporation. The remaining 70 percent of RC stock is held by 
persons that are not 25-percent foreign shareholders. It is determined 
that FP is related to RC within the meaning of section 482 and the 
regulations thereunder. The only transactions between FP and RC are FP's 
capital contributions, dividends paid from RC to FP, and loans from FP 
to RC. Under section 6001, RC is required to maintain all documentation 
necessary to establish the U.S. tax treatment of the capital 
contributions, dividends, and loans. RC is not required to maintain 
records in other categories listed in paragraph (c)(3) of this section 
because they are not relevant to the transactions between FP and RC. 
Records of FP not related to these transactions are not subject to the 
record maintenance requirements under section 6038A(a) and this section.
    Example 3. G, a foreign multinational group, creates Sub, a wholly-
owned U.S. subsidiary, in order to purchase tangible property from 
unrelated parties in the United States and resell such property to G. 
The property purchased by Sub is either used in G's business or resold 
to other unrelated parties by G. Sub's sole function is to act as a 
buyer for G and these purchases are the only transactions that G has 
with any U.S. affiliates. Under all the facts and circumstances of this 
case, it is determined that an analysis of the group's worldwide profit 
attributable to the property it purchases from Sub is not relevant for 
purposes of determining the tax treatment of the sales from Sub to G. 
Therefore, the records with respect to the profitability of G are not 
subject to the record maintenance requirements of this section. However, 
all records related to the appropriate method under section 482 for 
determining an arm's-length consideration for the property sold by Sub 
to G are subject to the record maintenance requirements of this section.
    Example 4. S, a U.S. reporting corporation, is the purchasing agent 
for its multinational parent group. It arranges for the purchase and 
export of miscellaneous tangible property to X, Y, and Z, each of which 
is a foreign related party. The miscellaneous tangible property is 
purchased from unrelated third parties for resale to X, Y, and Z. These 
resales of miscellaneous tangible property constitute the sole 
transactions between S and X, Y, and Z. The purchasing agent activity of 
S is not an integral part of the business activity of S or of any 
beneficiary of the purchasing agent services provided by S as defined in 
Sec. 1.482-2(b)(7). Under Sec. 1.482-2(b)(7), the arm's-length charge is 
deemed to be equal to the costs or deductions incurred with respect to 
the provision of the purchasing agent services. S is required to 
maintain records to permit verification upon audit of such costs or 
deductions. The records of X, Y, and Z are not relevant to the costs or 
deductions incurred by S with respect to its purchasing agent 
activities. Therefore, under section 6038A and this section, only the 
records maintained by S that permit verification of the costs and 
deductions of the purchasing agent services are relevant. Accordingly, 
solely with respect to these transactions, records of X, Y, and Z need 
not be maintained under section 6038A or this section. If, however, upon 
audit, it is determined that S is not merely engaging in services not 
integral to its business as defined in Sec. 1.482-2(b)(7), the record 
maintenance requirements under section 6038A(a) and this section will be 
applicable to the records of S, X, Y and Z to the extent that such 
records are relevant for determining the correct tax treatment of 
transactions engaged in by X, Y, or Z with S. If S has other 
transactions with X, S must maintain or cause to be maintained records 
that may be relevant with respect to those transactions.

    (b) Other maintenance requirements--(1) Indirectly related records. 
This section applies to records that are directly or indirectly related 
to transactions between the reporting corporation and any foreign 
related parties. An example of records that are indirectly related to 
such transactions is records possessed by a foreign subsidiary of a 
foreign related party that document the raw material or component costs 
of a product that is manufactured or assembled by the subsdiary and sold 
as a finished product by the foreign related party to the reporting 
corporation.
    (2) Foreign related party or third-party maintenance. If records 
that are required to be maintained under this section are in the control 
of a foreign related party, the records may be obtained or compiled (if 
not already in the possession of the foreign related party or already 
compiled) under the direction of the reporting corporation and then 
maintained by the reporting corporation, the foreign related party,

[[Page 179]]

or a third party. Thus, for example, a foreign related party may either 
itself maintain such records outside the United States or permit a third 
party to maintain such records outside the United States, provided that 
the conditions described in paragraph (f) of this section are met. Upon 
a request for such records by the Service, a foreign related party or 
third party may make arrangements with the District Director to furnish 
the records directly, rather than through the reporting corporation.
    (3) Translation of records. When records are provided to the Service 
under a request for production, any portion of such records must be 
translated into the English language within 30 days of a request for 
translation of that portion by the District Director. To the extent that 
any requested documents are identical to documents that have already 
been translated, an explanation of how such documents are identical 
instead may be provided. An extension of this time period may be 
requested under paragraph (f)(4) of this section. Appropriate extensions 
will be liberally granted for translation requests where circumstances 
warrant. If a good faith effort is made to translate accurately the 
requested documents within the specified time period, the reporting 
corporation will not be subject to the penalties in Secs. 1.6038A-4 and 
1.6038A-7.
    (4) Exception for foreign governments. A foreign government is not 
subject to the obligation to maintain records under this section.
    (5) Records relating to conduit financing arrangements. See 
Sec. 1.881-4 relating to conduit financing arrangements.
    (c) Specific records to be maintained for safe harbor--(1) In 
general. A reporting corporation that maintains or causes another person 
to maintain the records specified in this paragraph (c) that are 
relevant to its business or industry and to the correct U.S. tax 
treatment of its transactions with its foreign related parties will 
deemed to have met the record maintenance requirements of this section. 
This paragraph provides general descriptions of the categories of 
records to be maintained; the particular title or label applied by a 
reporting corporation or related party does not control. Functional 
equivalents of the specified documents are acceptable. Record 
maintenance in accordance with this safe harbor, however, requires only 
the maintenance of types of documents described in paragraph (c)(2) of 
this section that are directly or indirectly related to transactions 
between the reporting corporation and any foreign related party. 
Additionally, to the extent the reporting corporation establishes that 
records in a particular category are not applicable to the industry or 
business of the reporting corporation and any foreign related party, 
maintenance of such records is not required under this paragraph. Record 
maintenance in accordance with this paragraph (c) generally does not 
require the original creation of records that are ordinarily not created 
by the reporting corporation or its related parties. (If, however, a 
document that is actually created is described in this paragraph (c), it 
is to be maintained even if the document is not of the type ordinarily 
created by the reporting corporation or its related parties.) There are 
two exceptions to the rule. First, basic accounting records that are 
sufficient to document the U.S. tax effects of transactions between 
related parties must be created and retained, if they do not otherwise 
exist. Second, records sufficient to produce material profit and loss 
statements as described in paragraphs (c)(2) (ii) and (3) of this 
section that are relevant for determining the U.S. tax treatment of 
transactions between the reporting corporation and foreign related 
parties must be created if such records are not ordinarily maintained. 
All internal records storage and retrieval systems used for each taxable 
year must be retained.
    (2) Descriptions of categories of documents to be maintained. The 
following records must be maintained in order to satisfy this paragraph 
(c) to the extent they may be relevant to determine the correct U.S. tax 
treatment of transactions between the reporting corporation and any 
foreign related party.
    (i) Original entry books and transaction records. This category 
includes books and records of original entry or their functional 
equivalents, however designated or labelled, that are relevant

[[Page 180]]

to transactions between any foreign related party and the reporting 
corporation. Examples include, but are not limited to, general ledgers, 
sales journals, purchase order books, cash receipts books, cash 
disbursement books, canceled checks and bank statements, workpapers, 
sales contracts, and purchase invoices. Descriptive material to 
explicate entries in the foregoing types of records, such as a chart of 
accounts or an accounting policy manual, is included in this category.
    (ii) Profit and loss statements. This category includes records from 
which the reporting corporation can compile and supply, within a 
reasonable time, material profit and loss statements of the reporting 
corporation and all related parties as defined in Sec. 1.6038A-1 (d) 
(the ``related party group'') that reflect profit or loss of the related 
party group attributable to U.S.-connected products or services as 
defined in paragraph (c)(7)(i) of this section. The determination of 
whether a profit and loss statement is material is made under the rules 
provided in paragraph (c)(3) of this section. The material profit and 
loss statements described in this paragraph (c)(2)(ii) must reflect the 
consolidated revenue and expenses of all members of the related party 
group. Thus, records in this category include the documentation of the 
cost of raw materials used by a related party to manufacture finished 
goods that are then sold by another related party to the reporting 
corporation. The records should be kept under U.S. generally accepted 
accounting principles if they are ordinarily maintained in such manner; 
if not, an explanation of the material differences between the 
accounting principles used and U.S. generally accepted accounting 
principles must be made available. The statements need not reflect 
tracing of the actual costs borne by the group with respect to its U.S.-
connected products or services; rather, any reasonable method may be 
used to allocate the group's worldwide costs to the revenues generated 
by the sales of those products or services. An explanation of the 
methods used to allocate specific items to a particular profit and loss 
statement must be made available. The explanation of material 
differences between accounting principles and the explanation of 
allocation methods must be sufficient to permit a comparison of the 
profitability of the group to that of the reporting corporation 
attributable to the provision of U.S.-connected products or services.
    (iii) Pricing documents. This category includes all documents 
relevant to establishing the appropriate price or rate for transactions 
between the reporting corporation and any foreign related party. 
Examples include, but are not limited to, documents related to 
transactions involving the same or similar products or services entered 
into by the reporting corporation or a foreign related party with 
related and unrelated parties; shipping and export documents; commission 
agreements; documents relating to production or assembly facilities; 
third-party and intercompany purchase invoices; manuals, specifications, 
and similar documents relating to or describing the performance of 
functions conducted at particular locations; intercompany correspondence 
discussing any instructions or assistance relating to such transactions 
provided to the reporting corporations by the related foreign person (or 
vice versa); intercompany and intracompany correspondence concerning the 
price or the negotiation of the price used in such transactions; 
documents related to the value and ownership of intangibles used or 
developed by the reporting corporation or the foreign related party; 
documents related to cost of goods sold and other expenses; and 
documents related to direct and indirect selling, and general and 
administrative expenses (for example, relating to advertising, sales 
promotions, or warranties).
    (iv) Foreign country and third party filings. This category includes 
financial and other documents relevant to transactions between a 
reporting corporation and any foreign related party filed with or 
prepared for any foreign government entity, any independent commission, 
or any financial institution.
    (v) Ownership and capital structure records. This category includes 
records or charts showing the relationship between the reporting 
corporation and the foreign related party; the location, ownership, and 
status (for example, joint venture, partnership, branch, or

[[Page 181]]

division) of all entities and offices directly or indirectly involved in 
the transactions between the reporting corporation and any foreign 
related party; a worldwide organization chart; records showing the 
management structure of all foreign affiliates; and loan documents, 
agreements, and other documents relating to any transfer of the stock of 
the reporting corporation that results in the change of the status of a 
foreign person as a foreign related party.
    (vi) Records of loans, services, and other non-sales transactions. 
This category includes relevant documents relating to loans (including 
all deposits by one foreign related party or reporting corporation with 
an unrelated party and a subsequent loan by that unrelated party to a 
foreign related party or reporting corporation that is in substance a 
direct loan between a reporting corporation and a foreign related 
party); guarantees of a foreign related party of debts of the reporting 
corporation, and vice versa; hedging arrangements or other risk shifting 
or currency risk shifting arrangements involving the reporting 
corporation and any foreign related party; security agreements between 
the reporting corporation and any foreign related party; research and 
development expense allocations between any foreign related party and 
the reporting corporation; service transactions between any foreign 
related party and the reporting corporation, including, for example, a 
description of the allocation of charges for management services, time 
or travel records, or allocation studies; import and export transactions 
between a reporting corporation and any foreign related party; the 
registration of patents and copyrights with respect to transactions 
between the reporting corporation and any foreign related party: and 
documents regarding lawsuits in foreign countries that relate to such 
transactions between a reporting corporation and any foreign related 
party (for example, product liability suits for U.S. products).
    (vii) Records relating to conduit financing arrangements. See 
Sec. 1.881-4 relating to conduit financing arrangements.
    (3) Material profit and loss statements. For purposes of paragraph 
(c)(2)(ii) of this section, the determination of whether a profit and 
loss statement is material will be made according to the following 
rules. An agreement between the reporting corporation and the District 
Director as described in paragraph (e) of this section may identify 
material profit and loss statements of the related party group and 
describe the items to be included in any profit and loss statements for 
which records are to be maintained to satisfy the requirements of 
paragraph (c)(2)(ii) of this section. In the absence of such an 
agreement, a profit and loss statement will be material if it meets any 
of the following tests: the existing records test described in paragraph 
(c)(4) of this section, the significant industry segment test described 
in paragraph (c)(5) of this section, or the high profit test described 
in paragraph (c)(6) of this section.
    (4) Existing records test. A profit and loss statement is material 
under the existing records test described in this paragraph (c)(4) if 
any member of the related party group creates or compiles such statement 
in the course of its business operations and the statement reflects the 
profit or loss of the related party group attributable to the provision 
of U.S.-connected products or services (regardless of whether the profit 
and loss attributable to U.S.-connected products or services is shown 
separately or included within the calculation of aggregate figures on 
the statement). For example, a profit and loss statement is described in 
this paragraph if it was produced for internal accounting or management 
purposes, or for disclosure to shareholders, financial institutions, 
government agencies, or any other persons. Such existing statements and 
the records from which they were complied (to the extent such records 
relate to profit and loss attributable to U.S.-connected products or 
services) are subject to the record maintenance requirements described 
in paragraph (c)(2)(ii) of this section.
    (5) Significant industry segment test--(i) In general. A profit and 
loss statement is material under the significant industry segment test 
described in this paragraph (c)(5) if--

[[Page 182]]

    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The worldwide gross revenue attributable to such industry 
segment is 10 percent or more of the worldwide gross revenue 
attributable to the group's combined industry segments; and
    (C) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $25 million or more in the taxable year.
    (ii) Form of the statements. Profit and loss statements compiled for 
the group's provision of U.S.-connected products or services in each 
significant industry segment must reflect revenues and expenses 
attributable to the operations in such segment by all members of the 
related party group. Statements may show each related party's revenues 
and expenses separately, or may be prepared in a consolidated format. 
Any reasonable method may be used to allocate the group's worldwide 
costs within the industry segment to the U.S.-connected products or 
services within that segment. An explanation of the methods used to 
prepare consolidated statements and to allocate specific items to a 
particular profit and loss statement must be made available, and the 
records from which the consolidations and allocations were prepared must 
be maintained.
    (iii) Special rule for component sales. Where the U.S.-connected 
products or services consist of components that are incorporated into 
other products or services before sale to customers, the portion of the 
total gross revenue derived from sales of the finished products or 
services attributable to the components may be determined on the basis 
of relative costs of production. Thus, where relevant for determining 
whether the $25 million threshold in paragraph (c)(5)(i)(C) of this 
section has been met, the amount of gross revenue derived by the related 
party group from the provision of the finished products or services may 
be reduced by multiplying it by a fraction, the numerator of which is 
the costs of production of the related party group attributable to the 
component products or services that constitute U.S.-connected products 
or services and the denominator of which is the costs of production of 
the related party group attributable to the finished products in which 
such components are incorporated.
    (iv) Level of specificity required. In applying the significant 
industry segment test of this paragraph (c)(5), groups of related 
products and services must be chosen to provide a reasonable level of 
specificity that results in the greatest number of separate significant 
industry segments in comparison to other possible classifications. This 
determination must be made on the basis of the particular facts 
presented by the operations of the related party group. The following 
rules, however, provide general guidelines for making such 
classifications. First, the related party group's operations that 
involve the provision of U.S.-connected products should be grouped into 
product lines. The rules of this paragraph (c)(5) should then be applied 
to determine if any such product line would, standing alone, constitute 
a significant industry segment when compared to the related party 
group's operations as a whole. Any significant industry segments 
determined at the level of product lines should be further segregated, 
and tested for significant industry segments, at the level of separate 
products. Finally, any significant industry segments determined at the 
level of separate products should be segregated, and tested for 
significant industry segments, at the level of separate models. Similar 
principles should be applied in classifying and testing types of 
services. A profit and loss statement reflecting the related party 
group's provision of any product or service (or group of products or 
services as classified under these rules) that constitutes a significant 
industry segment will be considered material for purposes of this 
paragraph (c)(5). For definitions of the terms ``product'', ``related 
products or services'', ``model'', and ''product line'', see paragraph 
(c)(7) of this section.

[[Page 183]]

    (v) Examples. The rules for determining reasonable levels of 
specificity for significant industry segments may be illustrated by the 
following examples.

    Example 1. A related party group is engaged in the manufacture and 
worldwide sales of automobiles and aftermarket parts. The group's 
operations within the categories of ``automobiles'' and ``aftermarket 
parts''. are each sufficient to constitute significant industry segments 
for the group under the rules of this paragraph (c)(5). No narrower 
classification of aftermarket parts results in any significant industry 
segments. Automobiles produced by the group are generally classified for 
marketing purposes by trade names; aggregating groups of automobiles by 
these trade names results in three significant industry segments, those 
for trade names A, B, and C. Finally, two car models sold under the 
trade name A (``A1'' and ``A2'') and one car model sold under the trade 
name B (``B3''), produce sufficient revenue to constitute significant 
industry segments. Such classifications into trade names and car models 
are generally used in the related party group's industry; moreover, 
different types of classifications would produce fewer significant 
industry segments. Accordingly, a reasonable level of specificity for 
this related party group's industry segments would be eight categories 
of products consisting of ``automobiles'', ``aftermarket parts'', ``A'', 
``B'', ``C'', ``A1'', ``A2'', and ``B3''.
    Example 2. A related party group is engaged in manufacturing 
electronic goods that are distributed at retail in the United States by 
the reporting corporation. The group sells three types of products in 
the United States: televisions, radios, and video cassette recorders 
(VCRs). Each of these three broad product areas constitutes a 
significant industry segment for the group as a whole. VCRs can be 
further segregated by price into high-end and low-end models, and the 
provision of each constitutes a significant industry segment for the 
group. Revenues from only one VCR model, model number VCRX-10, are 
sufficiently large to make the provision of that model a significant 
industry segment. With respect to televisions, the group normally 
accounts for these products by size. Using this classification, portable 
televisions, medium-sized televisions, and consoles each constitute 
significant industry segments. Narrower classifications by television 
model numbers result in no additional significant industry segments. 
Finally, a single radio product line, those sold under the trade name R, 
produces sufficient revenue to constitute a significant industry 
segment, but no other radio models or product groups are large enough to 
constitute a significant industry segment. In each case, these 
classifications conform to normal business practices in the industry and 
result in the greatest possible number of significant industry segments 
for this related party group. Accordingly, a reasonable level of 
specificity for this related party group's industry segments would 
include the ten categories consisting of ``VCRs'', ``high-end VCRs'', 
``low-end VCRs'', ``model number VCRX-10'', ``televisions'', ``portable 
televisions'', ``medium-sized televisions'', ``console televisions'', 
``radios'', and ``radio trade name R''.

    (6) High profit test--(i) In general. A profit and loss statement is 
material under the high profit test described in this paragraph (c)(6) 
if--
    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $100 million or more in the taxable year; and
    (C) The return on assets test described in paragraph (c)(6)(ii) of 
this section is satisfied with respect to the products and services 
attributable to such segment.

Accordingly, a significant industry segment (as determined under 
paragraph (c)(5) of this section) must be divided into any narrower 
industry segments that meet the high profit test of this paragraph 
(c)(6), even if such narrower segments would not, standing alone, meet 
the significant industry segment test of paragraph (c)(5) of this 
section.
    (ii) Return on assets test. An industry segment meets the return on 
assets test if the rate of return on assets earned by the related party 
group on its worldwide operations within this industry segment exceeds 
15 percent, and is at least 200 percent of the return on assets earned 
by the group in all industry segments combined. For purposes of this 
paragraph, the rate of return on assets earned by an industry segment is 
determined by dividing that segment's operating profit (as defined in 
paragraph (c)(7)(v) of this section) by its identifiable assets (as 
defined in paragraph (c)(7)(iv) of this section).

[[Page 184]]

    (iii) Additional rules. The rules in paragraphs (c)(5)(ii) through 
(iv) of this section describing the application of the significant 
industry segment test shall apply in a similar manner for purposes of 
the high profit test.
    (7) Definitions. The following definitions apply for purposes of 
paragraphs (c)(2)(ii), (c)(5), and (c)(6) of this section.
    (i) U.S.-connected products or services. The term U.S.-connected 
products or services means products or services that are imported to or 
exported from the United States by transfers between the reporting 
corporation and any of its foreign related parties.
    (ii) Industry segment. An industry segment is a segment of the 
related party group's combined operations that is engaged in providing a 
product or service or a group of related products or services (as 
defined in paragraph (c)(7)(vii) of this section) primarily to customers 
that are not members of the related party group.
    (iii) Gross revenue of an industry segment. Gross revenue of an 
industry segment includes receipts (prior to reduction for cost of goods 
sold) both from sales to customers outside of the related party group 
and from sales or transfers to other industry segments within the 
related party group (but does not include sales or transfers between 
members of the related party group within the same industry segment). 
Interest from sources outside the related party group and interest 
earned on trade receivables between industry segments is included in 
gross revenue if the asset on which the interest is earned is included 
among the industry segment's identifiable assets, but interest earned on 
advances or loans to other industry segments is not included.
    (iv) Identifiable assets of an industry segment. The identifiable 
assets of an industry segment are those tangible and intangible assets 
of the related party group that are used by the industry segment, 
including assets that are used exclusively by that industry segment and 
an allocated portion of assets used jointly by two or more industry 
segments. The value of an identifiable asset may be determined using any 
reasonable method (such as book value or fair market value) applied 
consistently. Any allocation of assets among industry segments must be 
made on a reasonable basis, and a description of such basis must be 
provided. Assets of an industry segment that transfers products or 
services to another industry segment shall not be allocated to the 
receiving segment. Assets that represent part of the related party 
group's investment in an industry segment, such as goodwill, shall be 
included in the industry segment's identifiable assets. Assets 
maintained for general corporate purposes (that is, those not used in 
the operations of any industry segment) shall not be allocated to 
industry segments.
    (v) Operating profit of an industry segment. The operating profit of 
an industry segment is its gross revenue (as defined in paragraph 
(c)(7)(iii) of this section) minus all operating expenses. None of the 
following shall be added or deducted in computing the operating profit 
of an industry segment: revenue earned at the corporate level and not 
derived from the operations of any industry segment; general corporate 
expenses; interest expense; domestic and foreign income taxes; and other 
extraordinary items not reflecting the ongoing business operations of 
the industry segment.
    (vi) Product. The term product means an item of property (or 
combination of component parts) that is the result of a production 
process, is primarily sold to unrelated parties (or incorporated by the 
related party group into other products sold to unrelated parties), and 
performs a specific function.
    (vii) Related products or services. The term related products or 
services means groupings of products and types of services that reflect 
reasonable accounting, marketing, or other business practices within the 
industries in which the related party group operates.
    (viii) Model. The term model means a classification of products that 
incorporate particular components, options, styles, and any other unique 
features resulting in product differentiation. Examples of models are 
electronic products that are sold or accounted for under a single model 
number and automobiles sold under a single model name.

[[Page 185]]

    (ix) Product line. The term product line means a group of products 
that are aggregated into a single classification for accounting, 
marketing, or other business purposes. Examples of product lines are 
groups of products that perform similar functions; products that are 
marketed under the same trade names, brand names, or trademarks; and 
products that are related economically (that is, having similar rates of 
profitability, similar degrees of risk, and similar opportunities for 
growth).
    (8) Example. The application of the rules for determining material 
profit and loss statements under paragraphs (c)(4) through (7) of this 
section is illustrated by the following example.

    Example. (i) Facts. A multinational enterprise manufactures 50 
different agricultural and chemical products that are sold through Subl, 
its wholly owned U.S. subsidiary, and other subsidiaries located in 
foreign countries. The parent company of the enterprise, P, is a foreign 
corporation. The corporations participating in the enterprise form a 
related party group, and Subl is a reporting corporation for purposes of 
section 6038A. Under the facts and circumstances of this case, an 
analysis of the group's worldwide profit attributable to its products 
sold in the U.S. is relevant for determining an arm's length 
consideration under section 482 for the transfers of goods between Subl 
and its foreign affiliates.
    (ii) Existing records test. For management purposes, the group 
prepares profit and loss statements that are segmented by sales in 
different geographic markets. One of these statements shows the combined 
worldwide profitability of the group. Another statement shows the 
profitability of the group attributable to its North American sales. 
Both of these profit and loss statements reflect aggregate figures that 
include sales to unrelated parties of products that have been 
transferred from P and other group members to Subl (that is, the group's 
``U.S.-connected products''). The two statements meet the existing 
records test described in paragraph (c)(4) of this section.
    (iii) Significant industry segments. The group's worldwide gross 
revenue in all industry segments is $2 billion. An analysis of the 
group's 50 products demonstrates that they are reasonably grouped into 
eight industry segments (each of which earns roughly $250 million in 
worldwide gross revenue). Segments 1 through 6 relate to agricultural 
products and Segments 7 and 8 relate to other chemical products. More 
specific categories would result in groupings that generate less than 10 
percent of the group's worldwide gross revenue (that is, less than $200 
million each); these narrower categories would thus fail the gross 
revenue percentage test of paragraph (c)(5)(i)(B) of this section. The 
gross revenue in each of the eight segments from the sale to unrelated 
parties of U.S.-connected products is as follows: $180 million for 
Segment 1; $30 million for Segment 2; and less than $25 million for each 
of Segments 3 through 8. Under the $25 million threshold test of 
paragraph (c)(5)(i)(C) of this section, the group's significant industry 
segments are thus limited to Segments 1 and 2. In addition, the combined 
operations of the group related to agricultural products (encompassing 
Segments 1 through 6 on an aggregated basis), constitute a single 
significant industry segment.
    (iv) High profit test. One highly profitable product line within 
Segment 1, HPPL, accounts for $120 million gross revenue from Sub1's 
domestic sales of U.S.-connected products (and thus exceeds the $100 
million gross revenue threshold in paragraph (c)(6)(i)(B) of this 
section). The return on the identifiable assets attributable to the HPPL 
product line is 85 percent, which is more than 15 percent and more than 
twice the return on assets earned by the group from its worldwide 
operations in its combined industry segments. The group's industry 
segment for HPPL thus meets the high profit test described in paragraph 
(c)(6) of this section.
    (v) Material Profit and Loss Statements. The group's material profit 
and loss statements consist of statements for combined worldwide sales 
and North American sales (under the existing records test); Segment 1, 
Segment 2, and aggregated Segments 1-6 (under the significant industry 
segment test); and HPPL (under the high profit test). Under paragraph 
(c) of this section, Subl is required to retain the combined worldwide 
sales and North American sales profit and loss statements and to 
maintain sufficient records so that it can compile and supply upon 
request statements of the group's profitability from sales of its U.S.-
connected products within Segment l, Segment 2, aggregated Segments 1-6, 
and HPPL. These records need not be in the possession of Subl and may be 
kept under the control of and produced by P or any third party. The 
statements for Segment l, Segment 2, aggregated Segments 1-6, and HPPL 
do not require tracing of actual costs to the U.S.-connected products; 
rather, these statements may be prepared by using any reasonable method 
to allocate a portion of the industry segment's overall operating costs 
to the sales of U.S.-connected products within that segment.

    (d) Liability for certain partnership record maintenance. A 
reporting corporation to which transactions engaged in by a partnership 
are attributed under Sec. 1.6038A-1 (e)(2) is subject to the

[[Page 186]]

record maintenance requirements of this section to the extent of the 
transactions so attributed.
    (e) Agreements with the District Director--(1) In general. The 
District Director who has audit jurisdiction over the reporting 
corporation may negotiate and enter into an agreement with a reporting 
corporation that establishes the records the reporting corporation must 
maintain or cause another to maintain, how the records must be 
maintained, the period of retention for the records, and by whom the 
records must be maintained in order to satisfy the reporting 
corporation's obligations under this section.
    (2) Content of agreement--(i) In general. The agreement may include 
provisions relating to the authorization of agent requirement, the 
record maintenance requirement, and the production and translation time 
periods that vary the rules contained in these regulations under section 
6038A. The District Director will generally require a reporting 
corporation to maintain only those records specified under the safe 
harbor provisions of paragraph (c) of this section that permit an 
adequate audit of the income tax return of the reporting corporation and 
to provide such authorizations of agent that permit adequate access to 
such records. In most instances, required record maintenance for a 
particular reporting corporation under a negotiated agreement will be 
less than the broad range of records described under the safe harbor 
provisions. Additionally, a provision specifying the effective date and 
the expiration date of the agreement that may vary the effective date of 
the regulations may be included.
    (ii) Significant industry segment test. A District Director may 
determine which industry segment profit and loss statements are material 
for purposes of requiring the maintenance of records (under either 
paragraph (a)(1) of this section or the safe harbor described in 
paragraph (a)(2) of this section). The industry segments that the 
District Director determines are material need not be the industry 
segments that meet the significant industry segment test under paragraph 
(c)(5) of this section or the high profit test under paragraph (c)(6) of 
this section. For this purpose, a reporting corporation will be required 
to maintain only those records from which profit and loss statements for 
the related party group may be constructed with respect to industry 
segments identified by the District Director. To the extent that 
existing profit and loss statements are similar in scope and level of 
detail to statements for industry segments that would otherwise be 
described under the tests of paragraphs (c)(5) and (6) of this section, 
the District Director shall accept the existing statements instead of 
the statements that would otherwise be required under paragraphs (c)(5) 
and (6) of this section.
    (iii) Example. The following example illustrates the rules of 
paragraph (e)(2)(ii) of this section.

    Example. The District Director determines that RC, a reporting 
corporation that is a manufacturer of related chemical products, has two 
industry segments, Segment 1 and Segment 2. While both industry segments 
meet the significant industry segment test of paragraph (c)(5) of this 
section, Segment 1 has a relatively low volume of sales to foreign 
related parties. Additionally, Segment 1 consists of products that 
produce only a small profit margin because the product is generic and 
other companies also sell the product. The District Director enters into 
an agreement with RC that requires only records from which a profit and 
loss statement for the related party group can be constructed for 
Segment 2. Therefore, RC is not required to maintain records for Segment 
1 from which a profit and loss statement for the related party group can 
be constructed. The other record maintenance requirements under this 
section apply, however.

    (3) Circumstances of agreement. The District Director generally will 
enter into an agreement under this paragraph (e) upon request by the 
reporting corporation when the District Director believes that the 
District has or can obtain sufficient knowledge of the business or 
industry of the reporting corporation to limit the record maintenance 
requirement to particular documents.
    (4) Agreement as part of APA process. An agreement with a reporting 
corporation under this paragraph (e) may be entered into as a part of 
the Advance Pricing Agreement (APA) process at any time during the APA 
process, insofar as the agreement relates to the subject matter of the 
APA.

[[Page 187]]

    (f) U.S. maintenance--(1) General rule. Records that must be 
maintained under this section must be maintained within the United 
States, unless the conditions described in paragraph (f)(2) of this 
section are met.
    (2) Non-U.S. maintenance requirements. A reporting corporation may 
maintain outside the United States records not ordinarily maintained in 
the United States but required to be maintained in the United States 
under this section. However, the reporting corporation must either:
    (i) Deliver to the Service the original documents (or duplicates) 
requested within 60 days of the request by the Service for such records 
and provide translations of such documents within 30 days of a request 
for translations of specific documents; or
    (ii) Move the original documents (or duplicates) requested to the 
United States within 60 days of the request of the Service for such 
records; provide the Service with an index to the requested records, the 
name and address of a custodian located within the United States having 
control over the records, and the address where the records are located 
within 60 days of the Service's request for the records; and continue to 
maintain the records within the United States throughout the period of 
retention described in paragraph (g) of this section. For summons 
procedures with respect to records that have been moved to the United 
States, see sections 6038A(e), 7602, 7603, and 7604.

With respect to any material profit and loss statements required to be 
created (either under paragraph (c) of this section or under an 
agreement with the District Director), unless otherwise specified, ``120 
days'' shall be substituted for ``60 days'' in this paragraph (f)(2), 
and labels and text with respect to such statements must be in the 
English language.
    (3) Prior taxable years. The non-U.S. maintenance requirements 
described in paragraph (f)(2) of this section apply to records located 
outside the United States that were in existence on or after March 20, 
1990, without regard to the taxable year to which such records relate.
    (4) Scheduled production for high volume or other reasons. Upon a 
written request, for good cause shown, the District Director may grant 
an extension of the time for the production or translation of the 
requested documents. Such requests should be made within 30 days of the 
request for records by the Service. If an extension is needed because of 
the volume of records requested or the amount of translation requested, 
the District Director may allow production or translation to be 
scheduled over a period of time so that not all records need be produced 
or translated at the same time.
    (5) Required U.S. maintenance. The District Director (with the 
concurrence of the Assistant Commissioner (International)), may require, 
for cause, the maintenance within the United States of any records 
specified in paragraph (f)(1) of this section. Such a requirement will 
be imposed only if there exists a clear pattern of failure to maintain 
or timely produce the required records. The assessment of a monetary 
penalty under section 6038A(d) and Sec. 1.6038A-4 for failure to 
maintain records is not necessarily sufficient to require the 
maintenance of records within the United States.
    (g) Period of retention. Records required to be maintained by 
section 6038A(a) and this section shall be kept as long as they may be 
relevant or material to determining the correct tax treatment of any 
transaction between the reporting corporation and a related party, but 
in no case less than the applicable statute of limitations on assessment 
and collection with respect to the taxable year in which the transaction 
or item to which the records relate affects the U.S. tax liability of 
the reporting corporation. See section 6001 and the regulations 
thereunder.
    (h) Application of record maintenance rules to banks and other 
financial institutions. [Reserved]
    (i) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28065, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991, as amended by T.D. 8611, 60 FR 41015, Aug. 11, 1995]



Sec. 1.6038A-4  Monetary penalty.

    (a) Imposition of monetary penalty--(1) In general. If a reporting 
corporation

[[Page 188]]

fails to furnish the information described in Sec. 1.6038A-2 within the 
time and manner prescribed in Sec. 1.6038A-2 (d) and (e), fails to 
maintain or cause another to maintain records as required by 
Sec. 1.6038A-3, or (in the case of records maintained outside the United 
States) fails to meet the non-U.S. record maintenance requirements 
within the applicable time prescribed in Sec. 1.6038A-3(f), a penalty of 
$10,000 shall be assessed for each taxable year with respect to which 
such failure occurs. Such a penalty may be imposed by the District 
Director or the Director of the Internal Revenue Service Center where 
the Form 5472 is filed. The filing of a substantially incomplete Form 
5472 constitutes a failure to file Form 5472. Where, however, the 
information described in Sec. 1.6038A-2 (b)(3) through (5) is not 
required to be reported, a Form 5472 filed without such information is 
not a substantially incomplete Form 5472.
    (2) Liability for certain partnership transactions. A reporting 
corporation to which transactions engaged in by a partnership are 
attributed under Sec. 1.6038A-1(e)(2) is subject to the rules of this 
section to the extent failures occur with respect to the partnership 
transactions so attributed.
    (3) Calculation of monetary penalty. If a reporting corporation 
fails to maintain records as required by Sec. 1.6038A-3 of transactions 
with multiple related parties, the monetary penalty may be assessed for 
each failure to maintain records with respect to each related party. The 
monetary penalty, however, shall be imposed on a reporting corporation 
only once for a taxable year with respect to each related party for a 
failure to furnish the information required on Form 5472, for a failure 
to maintain or cause another to maintain records, or for a failure to 
comply with the non-U.S. maintenance requirements described in 
Sec. 1.6038A-3(f). An additional penalty for another failure may be 
imposed, however, under the rules of paragraph (d)(2) of this section. 
Thus, unless such failures continue after notification as described in 
paragraph (d) of this section, the maximum penalty under this paragraph 
with respect to each related party for all such failures in a taxable 
year is $10,000. The members of a group of corporations filing a 
consolidated return are jointly and severally liable for any monetary 
penalty that may be imposed under this section.
    (b) Reasonable cause--(1) In general. Certain failures may be 
excused for reasonable cause, including not timely filing Form 5472, not 
maintaining or causing another to maintain records as required by 
Sec. 1.6038A-3, and not complying with the non-U.S. maintenance 
requirements described in Sec. 1.6038A-3(f). If an affirmative showing 
is made that the taxpayer acted in good faith and there is reasonable 
cause for a failure that results in the assessment of the monetary 
penalty, the period during which reasonable cause exists shall be 
treated as beginning on the day reasonable cause is established and 
ending not earlier than the last day on which reasonable cause existed 
for any such failure. Additionally, the beginning of the 90-day period 
after mailing of a notice by the District Director or the Director of an 
Internal Revenue Service Center of a failure described in paragraph (d) 
of this section shall be treated as not earlier than the last day on 
which reasonable cause existed.
    (2) Affirmative showing required--(i) In general. To show that 
reasonable cause exists for purposes of paragraph (b)(1) of this 
section, the reporting corporation must make an affirmative showing of 
all the facts alleged as reasonable cause for the failure in a written 
statement containing a declaration that it is made under penalties of 
perjury. The statement must be filed with the District Director (in the 
case of failure to maintain or furnish requested information permitted 
to be maintained outside the United States within the time required 
under Sec. 1.6038A-3(f) or a failure to file Form 5472) or the Director 
of the Internal Revenue Service Center where the Form 5472 is required 
to be filed (in the case of failure to file Form 5472). The District 
Director or the Director of the Internal Revenue Service Center where 
the Form 5472 is required to be filed, as appropriate, shall determine 
whether the failure was due to reasonable cause, and if so, the period 
of time for which reasonable cause existed. If a return has been filed 
as required by

[[Page 189]]

Sec. 1.6038A-2 or records have been maintained as required by 
Sec. 1.6038A-3, except for an omission of, or error with respect to, 
some of the information required or a record to be maintained, the 
omission or error shall not constitute a failure for purposes of section 
6038A(d) if the reporting corporation that filed the return establishes 
to the satisfaction of the District Director or the Director of the 
Internal Revenue Service Center that it has substantially complied with 
the filing of Form 5472 or the requirement to maintain records.
    (ii) Small corporations. The District Director shall apply the 
reasonable cause exception liberally in the case of a small corporation 
that had no knowledge of the requirements imposed by section 6038A; has 
limited presence in and contact with the United States; and promptly and 
fully complies with all requests by the District Director to file Form 
5472, and to furnish books, records, or other materials relevant to the 
reportable transaction. A small corporation is a corporation whose gross 
receipts for a taxable year are $20,000,000 or less.
    (iii) Facts and circumstances taken into account. The determination 
of whether a taxpayer acted with reasonable cause and in good faith is 
made on a case-by-case basis, taking into account all pertinent facts 
and circumstances. Circumstances that may indicate reasonable cause and 
good faith include an honest misunderstanding of fact or law that is 
reasonable in light of the experience and knowledge of the taxpayer. 
Isolated computational or transcriptional errors generally are not 
inconsistent with reasonable cause and good faith. Reliance upon an 
information return or on the advice of a professional (such as an 
attorney or accountant) does not necessarily demonstrate reasonable 
cause and good faith. Similarly, reasonable cause and good faith is not 
necessarily indicated by reliance on facts that, unknown to the 
taxpayer, are incorrect. Reliance on an information return, professional 
advice or other facts, however, constitutes reasonable cause and good 
faith if, under all the circumstances, the reliance was reasonable. A 
taxpayer, for example, may have reasonable cause for not filing a Form 
5472 or for not maintaining records under section 6038A if the taxpayer 
has a reasonable belief that it is not owned by a 25-percent foreign 
shareholder. A reasonable belief means that the taxpayer does not know 
or has no reason to know that it is owned by a 25-percent foreign 
shareholder. For example, a reporting corporation would not know or have 
reason to know that it is owned by a 25-percent foreign shareholder if 
its belief that it is not so owned is consistent with other information 
reported or otherwise furnished to or known by the reporting 
corporation. A taxpayer may have reasonable cause for not treating a 
foreign corporation as a related party for purposes of section 6038A 
where the foreign corporation is a related party solely by reason of 
Sec. 1.6038A-1(d)(3) (under the principles of section 482), and the 
taxpayer had a reasonable belief that its relationship with the foreign 
corporation did not meet the standards for related parties under section 
482.
    (c) Failure to maintain records or to cause another to maintain 
records. A failure to maintain records or to cause another to maintain 
records is determined by the District Director upon the basis of the 
reporting corporation's overall compliance (including compliance with 
the non-U.S. maintenance requirements under Sec. 1.6038A-3(f)(2)) with 
the record maintenance requirements. It is not an item-by-item 
determination. Thus, for example, a failure to maintain a single or 
small number of items may not constitute a failure for purposes of 
section 6038A(d), unless the item or items are essential to the correct 
determination of transactions between the reporting corporation and any 
foreign related parties. The District Director shall notify the 
reporting corporation in writing of any determination that it has failed 
to comply with the record maintenance requirement.
    (d) Increase in penalty where failure continues after notification--
(1) In general. If any failure described in this section continues for 
more than 90 days after the day on which the District Director or the 
Director of the Internal Revenue Service Center where the Form 5472 is 
required to be filed mails

[[Page 190]]

notice of the failure to the reporting corporation, the reporting 
corporation shall pay a penalty (in addition to the penalty described in 
paragraph (a) of this section) of $10,000 with respect to each related 
party for which a failure occurs for each 30-day period during which the 
failure continues after the expiration of the 90-day period. Any 
uncompleted fraction of a 30-day period shall count as a 30-day period 
for purposes of this paragraph (d).
    (2) Additional penalty for another failure. An additional penalty 
for a taxable year may be imposed, however, if at a time subsequent to 
the time of the imposition of the monetary penalty described in 
paragraph (a) of this section, a second failure is determined and the 
second failure continues after notification under paragraph (d)(1) of 
this section. Thus, if a taxpayer fails to file Form 5472 and is 
assessed a monetary penalty and later, upon audit, is determined to have 
failed to maintain records, an additional penalty for the failure to 
maintain records may be assessed under the rules of this paragraph if 
the failure to maintain records continues after notification under this 
paragraph.
    (3) Cessation of accrual. The monetary penalty will cease to accrue 
if the reporting corporation either files Form 5472 (in the case of a 
failure to file Form 5472), furnishes information to substantially 
complete Form 5472, or demonstrates compliance with respect to the 
maintenance of records (in the case of a failure to maintain records) 
for the taxable year in which the examination occurs and subsequent 
years to the satisfaction of the District Director. The monetary penalty 
also will cease to accrue if requested information, documents, or 
records, kept outside the United States under the requirements of 
Sec. 1.6038A-3(f) and not produced within the time specified are 
produced or moved to the United States under the rules of paragraph 
(f)(2)(ii) of this section.
    (4) Continued failures. If a failure under this section relating to 
a taxable year beginning before July 11, 1989 occurs, and if the failure 
continues following 90 days after the notice of failure under this 
paragraph is sent, the amount of the additional penalty to be assessed 
under this paragraph is $10,000 for each 30-day period beginning after 
November 5, 1990, during which the failure continues. There is no 
limitation on the amount of the monetary penalty that may be assessed 
after November 5, 1990.
    (e) Other penalties. For criminal penalties for failure to file a 
return and filing a false or fraudulent return, see sections 7203 and 
7206 of the Code. For the penalty relating to an underpayment of tax, 
see section 6662.
    (f) Examples. The following examples illustrate the rules of this 
section.

    Example 1 Failure to file Form 5472. Corp X, a U.S. reporting 
corporation, engages in related party transactions with FC. Corp X does 
not timely file a Form 5472 or maintain records relating to the 
transactions with FC for Year 1 or subsequent years. The Service Center 
with which Corp X files its income tax return imposes a $10,000 penalty 
for each of Years 1, 2, and 3 under section 6038A (d) and this section 
for failure to provide information as required on Form 5472 and mails a 
notice of failure to provide inrormation. Corp X does not file Form 
5472. Ninety days following the mailing of the notice of failure to Corp 
X an additional penaly of $10,000 is imposed. On the 135th day following 
the mailing of the notice of failure, Corp X files Form 5472 for Years 
1, 2, and 3. The total penalty owed by Corp X for Year 1 is $30,000. 
($10,000 for not timely filing Form 5472, $10,000 for the first 30-day 
period following the expiration of the 90-day period, and $10,000 for 
the fraction of the second 30-day period). The penalty for Years 2 and 3 
for the failure to file Form 5472 is also $30,000 for each year, 
calculated in the same manner as for Year 1. The total penalty for 
failure to file Form 5472 for Years 1, 2, and 3 is $90,000.
    Example 2 Failure to maintain records. Assume the same facts as in 
Example 1. In Year 5, Corp X is audited for Years 1 through 3. Corp X 
has not been maintaining records relating to the transactions with FC. 
The District Director issues a notice of failure to maintain records. 
Corp X has already been subject to the monetary penalty of $10,000 for 
each of Years 1, 2, and 3 for failure to file Form 5472 and, therefore, 
a monetary penalty under paragraph (a) of this section for failure to 
maintain records is not assessed. However, an additional penalty is 
assessed after the 90th day following the mailing of the notice of 
failure to maintain records. Corp X develops a record maintenance system 
as required by section 6038A and Sec. 1.6038A-3. On the 180th day 
following the mailing of the notice of failure to maintain records, Corp 
X demonstrates to the satisfaction of the District Director that the 
newly

[[Page 191]]

developed record maintenance system will comply with the requirements of 
Sec. 1.6038A-3 and the increase in the monetary penalty after 
notification ceases to accrue. The additional penalty for failure to 
maintain records is $30,000. An additional penalty of $30,000 per year 
is assessed for each of years 2 and 3 for the failure to maintain 
records for a total of $90,000.

    (g) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28072, June 19, 1991]



Sec. 1.6038A-5  Authorization of agent.

    (a) Failure to authorize. The rules of Sec. 1.6038A-7 shall apply to 
any transaction between a foreign related party and a reporting 
corporation (including any transaction engaged in by a partnership that 
is attributed to the reporting corporation under Sec. 1.6038A-1(e)(2)), 
unless the foreign related party authorizes (in the manner described in 
paragraph (b) of this section) the reporting corporation to act as its 
limited agent solely for purposes of sections 7602, 7603, and 7604 with 
respect to any request by the Service to examine records or produce 
testimony that may be relevant to the tax treatment of such a 
transaction or with respect to any summons by the Service for such 
records or testimony. The fact that a reporting corporation is 
authorized to act as an agent for a foreign related party is to be 
disregarded for purposes of determining whether the foreign related 
party either has a trade or business in the United States for purposes 
of the Code or a permanent establishment or fixed base in the United 
States for purposes of an income tax treaty.
    (b) Authorization by related party--(1) In general. Upon request by 
the Service, a foreign related party shall authorize as its agent 
(solely for purposes of sections 7602, 7603, and 7604) the reporting 
corporation with which it engages in transactions. The authorization 
must be signed by the foreign related party or an officer of the foreign 
related party possessing the authority to authorize an agent for 
purposes of Rule 4 of the Federal Rules of Civil Procedure. The 
reporting corporation will accept this appointment by providing a 
statement to that effect, signed by an officer of the reporting 
corporation possessing the authority to accept such an appointment. The 
agency shall be effective at all times. For taxable years beginning 
after July 10, 1989, the authorization and acceptance must be provided 
to the Service within 30 days of a request by the Service to the 
reporting corporation for such an authorization. The authorization must 
contain a heading and statement as set forth below. A foreign government 
is not subject to the authorization of agent requirement.

                         AUTHORIZATION OF AGENT

    ``[Name of foreign related party] hereby expressly authorizes [name 
of reporting corporation] to act as its agent solely for purposes of 
sections 7602, 7603, and 7604 of the Internal Revenue Code with respect 
to any request to examine records or produce testimony that may be 
relevant to the U.S. income tax treatment of any transaction between 
[name of the above-named foreign related party] and [name of reporting 
corporation] or with respect to any summons for such records or 
testimony.
________________________________________________________________________
Signature of or for [name of foreign related party]
________________________________________________________________________
(Title)
________________________________________________________________________
(Date)
    (If signed by a corporate officer, partner, or fiduciary on behalf 
of a foreign related party: I certify that I have the authority to 
execute this authorization of agent to act on behalf of [name of foreign 
related party]).
________________________________________________________________________
    Type or print your name below if signing for a foreign related party 
that is not an individual.
________________________________________________________________________
    [Name of reporting corporation] accepts this appointment to act as 
agent for [name of foreign related party] for the above purpose.
________________________________________________________________________
Signature for (Name of Reporting Corporation]
________________________________________________________________________
(Title)
________________________________________________________________________
(Date)
    I certify that I have the authority to accept this appointment to 
act as agent on behalf of (name of foreign related party] and agree to 
accept service of process for the above purposes.
    Type or print your name below.
________________________________________________________________________

    (2) Authorization for prior years. A foreign related party shall 
authorize a reporting corporation to act as its agent

[[Page 192]]

with respect to taxable years for which a Form 5472 is required to be 
filed prior to the date on which the final regulations under section 
6038A are published by providing the above executed authorization of 
agent within 30 days of a request by the Service for such an 
authorization.
    (c) Foreign affiliated groups--(1) In general. A foreign corporation 
that has effective legal authority to make the authorization of agent 
under paragraph (b) of this section on behalf of any group of foreign 
related parties may execute such an authorization for any members of the 
group. A single authorization may be made on a consolidated basis. In 
such a case, the common parent must attach a schedule to the 
authorization of agent stating which members of the group would 
otherwise be required to separately authorize the reporting corporation 
as agent. The schedule must provide the name, address, relationship to 
the reporting corporation, and U.S. taxpayer identification number, if 
applicable, of each member.
    (2) Application of noncompliance penalty adjustment. In 
circumstances where a consolidated authorization of agent has been 
executed, if the agency authorization for any member of the group is not 
legally effective for purposes of sections 7602, 7603, and 7604, the 
noncompliance penalty adjustment under section 6038A(e) and 
Sec. 1.6038A-7 shall apply.
    (d) Legal effect of authorization of agent. The legal consequences 
of a foreign related party authorizing a reporting corporation to act as 
its agent for purposes of sections 7602, 7603, and 7604 of the Code are 
as follows.
    (1) Agent for purposes of commencing judicial proceedings. A 
reporting corporation that is authorized by a foreign related party to 
act as its agent for purposes of sections 7602, 7603, and 7604 
(including service of process) is also the agent of the foreign related 
party for purposes of--
    (i) The filing of a petition to quash under section 6038A(e)(4)(A) 
or a petition to review an Internal Revenue Service determination of 
noncompliance under section 6038A(e)(4)(B), and
    (ii) The commencement of a judicial proceeding to enforce a summons 
under section 7604, whether commenced in conjunction with a petition to 
quash under section 6038A(e)(4)(A) or commenced as a separate proceeding 
in the federal district court for the district in which the person to 
whom the summons is issued resides or is found.
    (2) Foreign related party found where reporting corporation found. 
For any purposes relating to sections 7602, 7603, or 7604 (including 
service of process), a foreign related party that authorizes a reporting 
corporation to act on its behalf under section 6038A(e)(1) and this 
section may be found anywhere where the reporting corporation has 
residence or is found.
    (e) Successors in interest. A successor in interest to a related 
party must execute the authorization of agent as described in paragraph 
(b) of this section.
    (f) Deemed compliance--(1) In general. In exceptional circumstances, 
the District Director may treat a reporting corporation as authorized to 
act as agent for a related party for purposes of sections 7602, 7603, 
and 7604 in the absence of an actual agency appointment by the foreign 
related party, in circumstances where the actual absence of an 
appointment is reasonable. Factors to be considered include--
    (i) If neither the reporting corporation nor the other party to the 
transaction knew or had reason to know that the two parties were related 
at the time of the transaction, and
    (ii) The extent to which the taxpayer establishes to the 
satisfaction of the District Director that all transactions between the 
reporting corporation and the related party were on arm's length terms 
and did not involve the participation of any known related party.
    (2) Reason to know. Whether the reporting corporation or other party 
had reason to know that the two parties were related at the time of the 
transaction will be determined by all the facts and circumstances.
    (3) Effect of deemed compliance. If a reporting corporation is 
deemed under this paragraph (f) to have been authorized to act as an 
agent for a foreign related party for purposes of sections 7602, 7603, 
and 7604, such deemed compliance is applicable only for that particular 
transaction and other reportable transactions entered into prior to

[[Page 193]]

the time when the reporting corporation knew or had reason to know that 
the related party, in fact, was related. The noncompliance rule of 
Sec. 1.6038A-7 shall apply to any transaction subsequent to that time 
with the same related party, unless the related party actually 
authorizes the reporting corporation to act as its agent under paragraph 
(a) of this section. In addition, the record maintenance requirements of 
Sec. 1.6038A-3 will apply to all subsequent transactions and, with 
respect to prior transactions, will apply to relevant records in 
existence at the time the relationship was discovered.
    (g) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28073, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991]



Sec. 1.6038A-6  Failure to furnish information.

    (a) In general. The rules of Sec. 1.6038A-7 may be applied with 
respect to a transaction between a foreign related party and the 
reporting corporation (including any transaction engaged in by a 
partnership that is attributed to the reporting corporation under 
Sec. 1.6038A-1(e)(2)) if a summons is issued to the reporting 
corporation to produce any records or testimony, either directly or as 
agent for such related party, to determine the correct treatment under 
title 1 of the Code of such a transaction between the reporting 
corporation and the related party; and if--
    (1)(i) The summons is not quashed in a proceeding, if any, begun 
under section 6038A(e)(4) and is not determined to be invalid in a 
proceeding, if any, begun under section 7604 to enforce such summons; 
and
    (ii) The reporting corporation does not substantially and timely 
comply with the summons, and the District Director has sent by certified 
or registered mail a notice under section 6038A(e)(2)(C) to the 
reporting corporation that it has not so complied; or
    (2) The reporting corporation fails to maintain or to cause another 
to maintain records as required by Sec. 1.6038A-3, and by reason of that 
failure, the summons is quashed in a proceeding under section 
6038A(e)(4) or in a proceeding begun under section 7604 to enforce the 
summons, or the reporting corporation is not able to provide the records 
requested in the summons.
    (b) Coordination with treaties. Where records of a related party are 
obtainable on a timely and efficient basis under information exchange 
procedures provided under a tax treaty or tax information exchange 
agreement (TIEA), the Service generally will make use of such procedures 
before issuing a summons. The absence or pendency of a treaty or TIEA 
request may not be asserted as grounds for refusing to comply with a 
summons or as a defense against the assertion of the noncompliance 
penalty adjustment under Sec. 1.6038A-7. For purposes of this paragraph, 
information is available on a timely and efficient basis if it can be 
obtained within 180 days of the request.
    (c) Enforcement proceeding not required. The District Director is 
not required to begin an enforcement proceeding to enforce the summons 
in order to apply the rules of Sec. 1.6038A-7.
    (d) De minimis failure. Where a reporting corporation's failure to 
comply with the requirement to furnish information under this section is 
de minimis, the District Director, in the exercise of discretion, may 
choose not to apply the noncompliance penalty. Thus, for example, in 
cases where a particular document or group of documents is not furnished 
upon request or summons, the District Director (in the District 
Director's sole discretion), may choose not to apply the noncompliance 
penalty if the District Director deems the document or documents not to 
have significant or sufficient value in the determination of the 
correctness of the tax treatment of the related party transaction.
    (e) Suspension of statute of limitations. If the reporting 
corporation brings an action under section 6038A(e)(4)(A) (proceeding to 
quash) or (e)(4)(B) (review of secretarial determination of 
noncompliance), the running of any period of limitation under section 
6501 (relating to assessment and collection of tax) or under section 
6531 (relating to criminal prosecutions) for the taxable year or years 
to which the summons that is the subject of such proceeding relates 
shall be suspended for

[[Page 194]]

the period during which such proceeding, and appeals therein, are 
pending. In no event shall any such period expire before the 90th day 
after the day on which there is a final determination in such 
proceeding.
    (f) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038A-7  Noncompliance.

    (a) In general. In the case of any failure described in 
Sec. 1.6038A-5 or Sec. 1.6038A-6, the rules of this Sec. 1.6038A-7 apply 
to the reporting corporation. In such a case--
    (1) The amount of the deduction allowed under subtitle A for any 
amount paid or incurred by the reporting corporation to the related 
party in connection with such transaction, and
    (2) The cost to the reporting corporation of any property acquired 
in such transaction from the related party or transferred by such 
corporation in such transaction to the related party, may be determined 
by the District Director.
    (b) Determination of the amount. The amount of the deduction or the 
cost to the reporting corporation shall be the amount determined by the 
District Director (in the District Director's sole discretion) from the 
District Director's own knowledge or from such information as the 
District Director may choose to obtain through testimony or otherwise. 
The District Director shall consider any information or materials that 
have been submitted by the reporting corporation or a foreign related 
party. The District Director, however, may disregard any information, 
documents, or records submitted by the reporting corporation or the 
related party if (in the District Director's sole discretion) the 
District Director deems that they are insufficiently probative of the 
relevant facts.
    (c) Separate application. If the noncompliance penalty of this 
section applies with respect to transactions with a related party of the 
reporting corporation, it will not be applied with respect to any other 
related parties of the reporting corporation solely upon the basis of 
that failure. Thus, for example, if a reporting corporation engages in 
transactions with related party A and related party B, and the reporting 
corporation does not respond to a summons for records related to the 
transactions between the reporting corporation and related party A, the 
noncompliance penalty imposed as a result of such failure will not apply 
to the transactions between the reporting corporation and related party 
B. If a separate summons is issued for records relating to the 
transactions between the reporting corporation and related party B and 
the reporting corporation does not produce such records, the 
noncompliance penalty may be applied to those transactions.
    (d) Effective dates. For effective dates for this section, see 
Sec. 1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038B-1  Reporting of certain transfers to foreign corporations.

    (a) Purpose and scope. This section sets forth information reporting 
requirements under section 6038B concerning certain transfers of 
property to foreign corporations. Paragraph (b) of this section provides 
general rules explaining when and how to carry out the reporting 
required under section 6038B with respect to the transfers to foreign 
corporations. Paragraph (c) of this section and Sec. 1.6038B-1T(d) 
specify the information that is required to be reported with respect to 
certain transfers of property that are described in section 
6038B(a)(1)(A) and 367(d), respectively. Section 1.6038B-1(e) describes 
the filing requirements for property transfers described in section 
367(e). Paragraph (f) of this section sets forth the consequences of a 
failure to comply with the requirements of section 6038B and this 
section. For effective dates, see paragraph (g) of this section. For 
rules regarding transfers to foreign partnerships, see section 
6038B(a)(1)(B) and any regulations thereunder.
    (b) Time and manner of reporting--(1) In general-- (i) Reporting 
procedure. Except for stock or securities qualifying under the special 
reporting rule of paragraph (b)(2) of this section, and certain 
exchanges described in section 354 (listed below), any U.S. person that 
makes a transfer described in section 6038B(a)(1)(A), 367(d) or (e), is 
required to report pursuant to section 6038B and the rules of this 
section and must attach the required information to Form

[[Page 195]]

926, ``Return by Transferor of Property to a Foreign Corporation.'' For 
special rules regarding cash transfers made in tax years beginning after 
February 5, 1999, see paragraphs (b)(3) and (g) of this section. For 
purposes of determining a U.S. transferor that is subject to section 
6038B, the rules of Sec. 1.367(a)-1T(c) and Sec. 1.367(a)-3(d) shall 
apply with respect to a transfer described in section 367(a), and the 
rules of Sec. 1.367(a)-1T(c) shall apply with respect to a transfer 
described in section 367(d). Additionally, if in an exchange described 
in section 354, a U.S. person exchanges stock of a foreign corporation 
in a reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock of a domestic or foreign corporation for stock of a 
foreign corporation pursuant to an asset reorganization described in 
section 368(a)(1)(C), (D), or (F), that is not treated as an indirect 
stock transfer under section 367(a), then the U.S. person exchanging 
stock is not required to report under section 6038B. Notwithstanding any 
statement to the contrary on Form 926, the form and attachments must be 
attached to, and filed by the due date (including extensions) of, the 
transferor's income tax return for the taxable year that includes the 
date of the transfer (as defined in Sec. 1.6038B-1T(b)(4)). Any 
attachment to Form 926 required under the rules of this section is filed 
subject to the transferor's declaration under penalties of perjury on 
Form 926 that the information submitted is true, correct, and complete 
to the best of the transferor's knowledge and belief.
    (ii) Reporting by corporate transferor. If the transferor is a 
corporation, Form 926 must be signed by an authorized officer of the 
corporation. If, however, the transferor is a member of an affiliated 
group under section 1504(a)(1) that files a consolidated Federal income 
tax return, but the transferor is not the common parent corporation, an 
authorized officer of the common parent corporation must sign Form 926.
    (iii) Transfers of jointly-owned property. If two or more persons 
transfer jointly-owned property to a foreign corporation in a transfer 
with respect to which a notice is required under this section, then each 
person must report with respect to the particular interest transferred, 
specifying the nature and extent of the interest. However, a husband and 
wife who jointly file a single Federal income tax return may file a 
single Form 926 with their tax return.
    (2) Exceptions and special rules for transfers of stock or 
securities under section 367(a)--(i) Transfers on or after July 20, 
1998. A U.S. person that transfers stock or securities on or after July 
20, 1998 in a transaction described in section 6038B(a)(1)(A) will be 
considered to have satisfied the reporting requirement under section 
6038B and paragraph (b)(1) of this section if either--
    (A) The U.S. transferor owned less than 5 percent of both the total 
voting power and the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)), and either:
    (1) The U.S. transferor qualified for nonrecognition treatment with 
respect to the transfer (i.e., the transfer was not taxable under 
Secs. 1.367(a)-3(b) or (c)); or
    (2) The U.S. transferor is a tax-exempt entity and the income was 
not unrelated business income; or
    (3) The transfer was taxable to the U.S. transferor under 
Sec. 1.367(a)-3(c), and such person properly reported the income from 
the transfer on its timely-filed (including extensions) Federal income 
tax return for the taxable year that includes the date of the transfer; 
or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec. 1.83-6(d)(1) and the fair market value of the property 
transferred did not exceed $100,000; or
    (B) The U.S. transferor owned 5 percent or more of the total voting 
power or the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)) and either:
    (1) The transferor (or one or more successors) properly entered into 
a gain recognition agreement under Sec. 1.367(a)-8; or
    (2) The transferor is a tax-exempt entity and the income was not 
unrelated business income; or
    (3) The transferor properly reported the income from the transfer on 
its

[[Page 196]]

timely-filed (including extensions) Federal income tax return for the 
taxable year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec. 1.83-6(d)(1) and the fair market value of the property 
transferred did not exceed $100,000.
    (ii) Transfers before July 20, 1998. With respect to transfers 
occurring after December 16, 1987, and prior to July 20, 1998, a U.S. 
transferor that transferred U.S. or foreign stock or securities in a 
transfer described in section 367(a) is not subject to section 6038B if 
such person is described in paragraph (b)(2)(i)(A) of this section.
    (3) Special rule for transfers of cash. A U.S. person that transfers 
cash to a foreign corporation in a transfer described in section 
6038B(a)(1)(A) must report the transfer if--
    (i) Immediately after the transfer such person holds directly, 
indirectly, or by attribution (determined under the rules of section 
318(a), as modified by section 6038(e)(2)) at least 10 percent of the 
total voting power or the total value of the foreign corporation; or
    (ii) The amount of cash transferred by such person or any related 
person (determined under section 267(b)(1) through (3) and (10) through 
(12)) to such foreign corporation during the 12-month period ending on 
the date of the transfer exceeds $100,000.
    (4) [Reserved]. For further guidance, see Sec. 1.6038B-1T(b)(4).
    (c) Information required with respect to transfers described in 
section 6038B(a)(1)(A). A United States person that transfers property 
to a foreign corporation in an exchange described in section 
6038B(a)(1)(A) (including cash transferred in taxable years beginning 
after February 5, 1999, and other unappreciated property) must provide 
the following information, in paragraphs labeled to correspond with the 
number or letter set forth in this paragraph (c) and Sec. 1.6038B-
1T(c)(1) through (5). If a particular item is not applicable to the 
subject transfer, the taxpayer must list its heading and state that it 
is not applicable. For special rules applicable to transfers of stock or 
securities, see paragraph (b)(2)(ii) of this section.
    (1) through (5) [Reserved]. For further guidance, see Sec. 1.6038B-
1T(c)(1) through (5).
    (6) Application of section 367(a)(5). If the asset is transferred in 
an exchange described in section 361(a) or (b), a statement that the 
conditions set forth in the second sentence of section 367(a)(5) and any 
regulations under that section have been satisfied, and an explanation 
of any basis or other adjustments made pursuant to section 367(a)(5) and 
any regulations thereunder.
    (d) [Reserved]. For further guidance, see Sec. 1.6038B-1T(d).
    (e) Transfers subject to section 367(e)--(1) In general. If a 
domestic corporation (distributing corporation) makes a distribution 
described in section 367(e)(1) or section 367(e)(2), the distributing 
corporation must comply with the reporting requirements of this 
paragraph (e). Unless otherwise provided in this section, a distributing 
corporation making a distribution described in sections 367(e)(1) or 
367(e)(2) must file a Form 926, ``Return by a U.S. Transferor of 
Property to a Foreign Corporation (under section 367),'' as amended and 
modified by this section.
    (2) Reporting requirements for section 367(e)(1) distributions of 
domestic controlled corporations. A domestic distributing corporation 
making a distribution of the stock or securities of a domestic 
corporation under section 355 is not required to file a Form 926, as 
described in paragraph (e)(1) of this section, and shall have no other 
reporting requirements under section 6038B.
    (3) Reporting requirements for section 367(e)(1) distributions of 
foreign controlled corporations. If the distributing corporation makes a 
section 355 distribution of the stock or securities of a foreign 
controlled corporation to distributee shareholders who are not qualified 
U.S. persons, as defined in Sec. 1.367(e)-1(b)(1), then the distributing 
corporation shall complete Part 1 of the Form 926 and attach a signed 
copy of such form to its U.S. income tax return for the year of the 
distribution. The distributing corporation shall also attach to its U.S. 
income tax return for the year of distribution a statement signed under 
the penalties of perjury entitled, ``Addendum to Form 926.'' The

[[Page 197]]

addendum shall contain a brief description of the transaction, state the 
number of shares distributed to distributees who are not qualified U.S. 
persons (applying the rules contained in Sec. 1.367(e)-1(d)), and state 
the basis and fair market value of the distributed stock or securities 
(including a list stating the amounts that were distributed to 
distributees who were not qualified U.S. persons and distributees who 
were qualified U.S. persons).
    (4) Reporting rules for section 367(e)(2) distributions by domestic 
liquidating corporations. If the distributing corporation makes a 
distribution of property in complete liquidation under section 332 to a 
foreign distributee corporation that meets the stock ownership 
requirements of section 332(b) with respect to the stock of the 
distributing corporation, then the distributing corporation shall 
complete a Form 926 and attach a signed copy of such form to its U.S. 
income tax return for the year of the distribution. The property 
description contained in Part III of the Form 926 shall contain a 
description of all property distributed by the liquidating corporation 
(regardless of whether the property qualifies for nonrecognition). The 
description shall also identify the property excepted from gain 
recognition under Sec. 1.367(e)-2(b)(2)(ii) and (iii). If the 
distributing corporation distributes property that will be used by the 
foreign distributee corporation in a U.S. trade or business and the 
distributing corporation does not recognize gain on such distribution 
under Sec. 1.367(e)-2(b)(2)(i), then the distributing corporation may 
satisfy the requirements of this section by completing Part 1 of the 
Form 926, noting thereon that the information required by the Form 926 
is contained in the statement required by Sec. 1.367(e)-
2(b)(2)(i)(C)(2), and attaching a signed copy of the Form 926 to its 
U.S. income tax return for the year of the distribution.
    (f) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a U.S. person is required to file a notice (or otherwise 
comply) under paragraph (b) of this section and fails to comply with the 
applicable requirements of section 6038B and this section, then with 
respect to the particular property as to which there was a failure to 
comply--
    (i) That property shall not be considered to have been transferred 
for use in the active conduct of a trade or business outside of the 
United States for purposes of section 367(a) and the regulations 
thereunder;
    (ii) The U.S. person shall pay a penalty under section 6038B(b)(1) 
equal to 10 percent of the fair market value of the transferred property 
at the time of the exchange, but in no event shall the penalty exceed 
$100,000 unless the failure with respect to such exchange was due to 
intentional disregard (described under paragraph (g)(4) of this 
section); and
    (iii) The period of limitations on assessment of tax upon the 
transfer of that property does not expire before the date which is 3 
years after the date on which the Secretary is furnished the information 
required to be reported under this section. See section 6501(c)(8) and 
any regulations thereunder.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B is--
    (i) The failure to report at the proper time and in the proper 
manner any material information required to be reported under the rules 
of this section; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section. Thus, a transferor 
that timely files Form 926 with the attachments required under the rules 
of this section shall, nevertheless, have failed to comply if, for 
example, the transferor reports therein that property will be used in 
the active conduct of a trade or business outside of the United States, 
but in fact the property continues to be used in a trade or business 
within the United States.
    (3) Reasonable cause exception. The provisions of paragraph (f)(1) 
of this section shall not apply if the transferor shows that a failure 
to comply was due to reasonable cause and not willful neglect. The 
transferor may do so by providing a written statement to the district 
director having jurisdiction of the taxpayer's return for the year of 
the transfer, setting forth the reasons for

[[Page 198]]

the failure to comply. Whether a failure to comply was due to reasonable 
cause shall be determined by the district director under all the facts 
and circumstances.
    (4) Definition of intentional disregard. If the transferor fails to 
qualify for the exception under paragraph (f)(3) of this section and if 
the taxpayer knew of the rule or regulation that was disregarded, the 
failure will be considered an intentional disregard of section 6038B, 
and the monetary penalty under paragraph (f)(1)(ii) of this section will 
not be limited to $100,000. See Sec. 1.6662-3(b)(2).
    (g) This section applies to transfers occurring on or after July 20, 
1998, except for transfers of cash made in tax years beginning on or 
before February 5, 1999, which are not required to be reported under 
section 6038B, and except for paragraph (e) of this section, which 
applies to transfers that are subject to Secs. 1.367(e)-1(f) and 
1.367(e)-2(e). See Sec. 1.6038B-1T for transfers occurring prior to July 
20, 1998. See also Sec. 1.6038B-1T(e) in effect prior to August 9, 1999 
(as contained in 26 CFR part 1 revised April 1, 1999), for transfers 
described in section 367(e) that are not subject to Secs. 1.367(e)-1(f) 
and 1.367(e)-2(e).

[T.D. 8770, 63 FR 33568, June 19, 1998, as amended by T.D. 8817, 64 FR 
5715, Feb. 5, 1999; 64 FR 15686, 15687, Apr. 1, 1999; T.D. 8834, 64 FR 
43082, Aug. 9, 1999; T.D. 8850, 64 FR 72553, Dec. 28, 1999]



Sec. 1.6038B-1T  Reporting of certain transactions to foreign corporations (temporary).

    (a) through (b)(2) [Reserved]. For further guidance, see 
Sec. 1.6038B-1(a) through (b)(2).
    (b)(3) [Reserved]
    (4) Date of transfer--(i) In general. For purposes of this section, 
the date of a transfer described in section 367 is the first date on 
which title to, possession of, or rights to the use of stock, 
securities, or other property passes pursuant to the plan for purposes 
of subtitle A of the Internal Revenue Code. A transfer will not be 
considered to begin with a decision of a board of directors or similar 
action unless the transaction otherwise takes effect for purposes of 
subtitle A of the Internal Revenue Code on that date.
    (ii) Termination of section 1504(d) election. A transfer deemed to 
occur as a result of the termination of an election under section 
1504(d) will be considered to occur on the date the contiguous country 
corporation first fails to continue to qualify for the election under 
section 1504(d). The rule of this paragraph (b)(3)(ii) is illustrated by 
the following example.
    Example. Domestic corporation W previously made a valid election 
under section 1504(d) to have its Mexican subsidiary S treated as a 
domestic corporation. On August 1, 1986, W disposes of its right, title, 
and interest in 10 percent of the stock of S by selling such stock to an 
unrelated United States person who is not a director of S. S first fails 
to continue to qualify for the election under section 1504(d) on August 
1, 1986, since on such date it ceases to be directly or indirectly 
wholly owned or controlled by W. The constructive transfer of assets 
from ``domestic'' corporation S to Mexican corporation S is considered 
to occur on that date.
    (iii) Change in classification. A transfer deemed to occur as a 
result of a change in classification of an entity caused by a change in 
the governing documents, articles, or agreements of the entity (as 
described in Sec. 1.367(a)-1T(c)(6)) will be considered to occur on the 
date that such changes take effect for purposes of subtitle A of the 
Internal Revenue Code.
    (iv) U.S. resident under section 6013 (g) or (h). A transfer made by 
an alien individual who is considered to be a U.S. resident by reason of 
a timely election under section 6013 (g) or (h) will be considered to 
occur, for purposes of this section (but not for purposes of section 
367), on the later of--
    (A) The date on which the election under section 6013 (g) or (h) is 
made; or
    (B) The date on which the transfer would otherwise be considered to 
occur under the rules of this paragraph (b)(3).

The rule of this paragraph (b)(3)(iv) is illustrated by the following 
example.
    Example. D is a nonresident alien individual who is married to a 
United States citizen. On March 1, 1986, D transfers property to a 
foreign corporation in an exchange described in section 351. On April 
15, 1987, D and the spouse timely file with their tax return for the 
taxable year ended December 31, 1986, an election under section 6013(g) 
for D to be treated as a United States resident. The election is 
effective on January 1, 1986. For purposes of section 6038 B, the 
transfer described

[[Page 199]]

in section 367(a) made by D in connection with the section 351 exchange 
is considered to occur on April 15, 1987, the date on which the timely 
election was made under section 6013(g).

    (c) Introductory text [Reserved]. For further guidance, see 
Sec. 1.6038B-1(c).
    (1) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (2) Transfer. Provide the following information concerning the 
transfer:
    (i) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of transferee foreign corporation;
    (ii) A general description of the transfer, and any wider 
transaction of which it forms a part, including a chronology of the 
transfers involved and an identification of the other parties to the 
transaction to the extent known.
    (3) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (4) Property transferred. Provide a description of the property 
transferred. The description must be divided into the following 
categories, and must include the estimated fair market value and 
adjusted basis of the property, as well as any additional information 
specified below.
    (i) Active business property. Describe any transferred property 
(other than stock or securities) to be used in the active conduct of a 
trade or business outisde of the United States. Provide here a general 
description of the business conducted (or to be conducted) by the 
transferee, including the location of the business, the number of its 
employees, the nature of the business, and copies of the most recently 
prepared balance sheet and profit and loss statement. Property listed 
within this category may be identified by general type. For example, 
upon the transfer of the assets of a manufacturing operation, a 
reasonable description of the property to be used in the business might 
include the categories of office equipment and supplies, computers and 
related equipment, motor vehicles, and several major categories of 
manufacturing equipment. However, any property that is includible both 
in this subdivision (i) and in subdivision (iii) of this paragraph 
(c)(4) (property subject to depreciation recapture under Sec. 1.367(a)-
4T (b)) must be identified in the manner required in subdivision (iii). 
If property is considered to be transferred for use in the active 
conduct of a trade or business under a special rule in Sec. 1.367(a)-4T, 
specify the applicable rule and provide information supporting the 
application of the rule. If property is subject to section 367(a)(1) 
regardless of its use in a trade or business under the rules of 
Sec. 1.367(a)-4T or Sec. 1.367(a)-5T, list the property only in response 
to subdivision (vii) of this paragraph (c)(4).
    (ii) Stock or securities. Describe any transferred stock or 
securities, including the class or type, amount, and characteristics of 
the transferred stock or securities, as well as the name, address, place 
of incorporation, and general description of the corporation issuing the 
stock. In addition, provide the following information if applicable:
    (A) Active trade or business stock. If the stock or securities are 
considered to be transferred for use in the active conduct of a trade or 
business outside of the United States under the rules of Sec. 1.367(a)-
3T(d)(2), provide information supporting the application of the rule.
    (B) Application of special rules. If any provision of Sec. 1.367(a)-
3T applies to except the transfer of stock or securities from the rule 
of section 367(a)(1), provide information supporting the claimed 
application of such provision (including information supporting the 
nonapplicability of either anti-abuse rule under Sec. 1.367(a)-3T(h)). 
If the transferor is entering into an agreement to recognize gain upon a 
later disposition of the transferred stock by the transferee foreign 
corporation under Sec. 1.367(a)-3T(g), attach the agreement and waiver 
as required by the rules of that paragraph.
    (iii) Depreciated property. Describe any property that is subject to 
depreciation recapture under the rules of Sec. 1.367(a)-4T(b). Property 
within this category must be separately identified to the same extent as 
was required for

[[Page 200]]

purposes of the previously claimed depreciation deduction. Specify with 
respect to each such asset the relevant recapture provision, the number 
of months in which such property was in use within the United States, 
the total number of months the property was in use, the fair market 
value of the property, a schedule of the depreciation deduction taken 
with respect to the property, and a calculation of the amount of 
depreciation required to be recaptured.
    (iv) Property to be leased. Describe any property to be leased to 
other persons by the transferee foreign corporation (unless such 
property is considered to be transferred for use in the active conduct 
of a trade or business and was thus listed under subdivision (i) of this 
paragraph (c)(4)). If the rules of Sec. 1.367(a)-4T(c)(2) apply to 
except the transfer from the rule of section 367(a)(1), provide 
information supporting the claimed application of such provision.
    (v) Property to be sold. Describe any transferred property that is 
to be sold or otherwise disposed of by the transferee foreign 
corporation, as described in Sec. 1.367(a)-4T(d).
    (vi) Transfers to FSCs. Describe any property that is subject to the 
special rule of Sec. 1.367(a)-4T(g) for transfers to FSCs. Provide 
information supporting the claimed application of that rule.
    (vii) Tainted property. Describe any property that is subject to 
Sec. 1.367(a)-5T (concerning property that is subject to the rule of 
section 367(a)(1) regardless of whether it is transferred for use in the 
active conduct of a trade or business outside of the United States). 
Such description must be divided into the relevant categories, as 
follows:
    (A) Inventory, etc. Property described in Sec. 1.367(a)-5T(b);
    (B) Installment obligations, etc. Property described in 
Sec. 1.367(a)-5T(c);
    (C) Foreign currency, etc. Property described in Sec. 1.367(a)-
5T(d);
    (D) Intangible property. Property described in Sec. 1.367(a)-5T(e); 
and
    (E) Leased property. Property described in Sec. 1.367(a)-4T(f).

If any exception provided in Sec. 1.367(a)-5T applies to the transferred 
property (making section 367(a)(1) not applicable to the transfer), 
provide information supporting the claimed application of such 
exception.
    (viii) Foreign loss branch. Provide the information specified in 
paragraph (c)(5) of this section.
    (ix) Other intangibles. Describe an intangible property sold or 
licensed by the transferor to the transferee foreign corporation, and 
set forth the general terms of each sale or license.
    (5) Transfer of foreign branch with previously deducted losses. If 
the property transferred is property of a foreign branch with previously 
deducted losses subject to the rules of Sec. 1.367(a)-6T, provide the 
following information:
    (i) Branch operation. Describe the foreign branch the property of 
which is transferred, in accordance with the definition of 
Sec. 1.367(a)-6T(g).
    (ii) Branch property. Describe the property of the foreign branch, 
including its adjusted basis and fair market value. For this purpose 
property must be identified with reasonable particularity, but may be 
identified by category rather than listing every asset separately. 
Substantially similar property may be listed together for this purpose, 
and property of minor value may be grouped into functional categories. 
For example, a reasonable description of the property of a business 
office might include the following categories: Word processing or data 
processing equipment, other office equipment and furniture, and office 
supplies.
    (iii) Previously deducted losses. Set forth a detailed calculation 
of the sum of the losses incurred by the foreign branch before the 
transfer, and a detailed calculation of any reduction of such losses, in 
accordance with Sec. 1.367(a)-6T (d) and (e).
    (iv) Character of gain. Set forth a statement of the character of 
the gain required to be recognized, in accordance with Sec. 1.367(a)-
6T(c)(1).
    (6) [Reserved]. For further guidance, see Sec. 1.6038B-1(c)(6).
    (d) Transfers subject to section 367(d)--(1) Initial transfer. A 
U.S. person that transfers inntangible property to a foreign corporation 
in an exchange described in section 351 or 361 must provide the 
following information in paragraphs labelled to correspond with the 
number or letter set forth below. If a particular item is not applicable 
to the

[[Page 201]]

subject transfer, list its heading and state that it is not applicable. 
The information required by subdivisions (i) through (iii) need only be 
provided if such information was not otherwise provided under paragraph 
(c) of this section. (Note that the U.S. transferor may subsequently be 
required to file another return under paragraph (d)(2) of this section.)
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (ii) Transfer. Provide information concerning the transfer, 
including:
    (A) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of the transferee foreign corporation;
    (B) A general description of the transfer, and any wider transaction 
of which it forms a part, including a chronology of the transfers 
involved and an identification of the other parties to the transaction 
to the extent known.
    (iii) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (iv) Intangible property transferred. Provide a description of the 
intangible property transferred, including its adjusted basis. 
Generally, each intangible asset must be separately identified. 
Operating intangibles and foreign goodwill or going concern value, as 
defined in Sec. 1.367(a)-1T(d)(5) (ii) and (iii), should be so 
identified and classified.
    (v) Annual payment. Provide and explain the calculation of the 
annual deemed payment for the use of the intangible property required to 
be recognized by the transferor under the rules of section 367(d).
    (vi) Election to treat as sale. List any intangible with respect to 
which an election is being made under Sec. 1.367(d)-1T(g)(2) to treat 
the transfer as a sale. Include the fair market value of the intangible 
on the date of the transfer and a calculation of the gain required to be 
recognized in the year of the transfer by reason of the election.
    (vii) Coordination with loss rules. List any intangible property 
subject to section 367(d) the transfer of which also gives rise to the 
recognition of gain under section 904(f)(3) or Sec. 1.367(a)-6T. Provide 
a calculation of the gain required to be recognized with respect to such 
property, in accordance with the provisions of Sec. 1.367(d)-1T(g)(4).
    (viii) Other intangibles. Describe any intangible property sold or 
licensed by the transferor to the transferee foreign corporation, and 
set forth the general terms of each sale or license.
    (2) Subsequent transfers. If a U.S. person transfers intangible 
property to a foreign corporation in an exchange described in section 
351 or 361, and at any time thereafter (within the useful life of the 
intangible property) either that U.S. person disposes of the stock of 
the transferee foreign corporation or the transferee foreign corporation 
disposes of the transferred intangible, then the U.S. person must 
provide the following information in paragraphs labelled to correspond 
with the number or letter set forth below. The information required by 
subdivisions (i) and (ii) need only be provided if such information was 
not otherwise provided in the same return, pursuant to paragraph (c) or 
(d)(1) of this section. For purposes of determining the date on which a 
return under this subparagraph (2) is required to be filed, the date of 
transfer is the date of the subsequent transfer of stock or intangible 
property.
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (ii) Initial transfer. Provide the following information concerning 
the initial transfer:
    (A) The date of the transfer;
    (B) The name, U.S. taxpayer identification number (if any), address, 
and country of incorporation of the transferee foreign corporation; and
    (C) A general description of the transfer and any wider transaction 
of which it formed a part.
    (iii) Subsequent transfer. Provide the following information 
concerning the subsequent transfer:
    (A) A general description of the subsequent transfer and any wider 
transaction of which it forms a part;

[[Page 202]]

    (B) A calculation of any gain required to be recognized by the U.S. 
person under the rules of Sec. 1.367(d)-1T (d) through (f); and
    (C) The name, address, and identifying number of each person that 
under the rules of Sec. 1.367(d)-1T (e) or (f) will be considered to 
receive contingent annual payments for the use of the intangible 
property.
    (e) [Reserved]. For further guidance, see Sec. 1.6038B-1(e).
    (f) [Reserved]. For further guidance, see Sec. 1.6038B-1(f).
    (g) Effective date. This section applies to transfers occurring 
after December 31, 1984. See Sec. 1.6038B-1T(a) through (b)(2), (c) 
introductory text, and (f) (26 CFR part 1, revised April 1, 1998) for 
transfers occurring prior to July 20, 1998. See Sec. 1.6038B-1 for 
transfers occurring on or after July 20, 1998.

[T.D. 8087, 51 FR 17957, May 16, 1986, as amended by T.D. 8682, 61 FR 
42177, Aug. 14, 1996; T.D. 8770, 63 FR 33570, June 19, 1998; T.D. 8834, 
64 FR 43083, Aug. 9, 1999]



Sec. 1.6038B-2  Reporting of certain transfers to foreign partnerships.

    (a) Reporting requirements--(1) Requirement to report transfers. A 
United States person that transfers property to a foreign partnership in 
a contribution described in section 721 (including section 721(b)) must 
report that transfer on Form 8865 ``Information Return of U.S. Persons 
With Respect to Certain Foreign Partnerships'' pursuant to section 6038B 
and the rules of this section, if--
    (i) Immediately after the transfer, the United States person owns, 
directly, indirectly, or by attribution, at least a 10-percent interest 
in the partnership, as defined in section 6038(e)(3)(C) and the 
regulations thereunder; or
    (ii) The value of the property transferred, when added to the value 
of any other property transferred in a section 721 contribution by such 
person (or any related person) to such partnership during the 12-month 
period ending on the date of the transfer, exceeds $100,000.
    (2) Indirect transfer through a domestic partnership--For purposes 
of this section, if a domestic partnership transfers property to a 
foreign partnership in a section 721 transaction, the domestic 
partnership's partners shall be considered to have transferred a 
proportionate share of the property to the foreign partnership. However, 
if the domestic partnership properly reports all of the information 
required under this section with respect to the contribution, no partner 
of the transferor partnership, whether direct or indirect (through tiers 
of partnerships), is also required to report under this section. For 
illustrations of this rule, see Examples 4 and 5 of paragraph (a)(7) of 
this section.
    (3) Indirect transfer through a foreign partnership. [Reserved]
    (4) Requirement to report dispositions--(i) In general. If a United 
States person was required to report a transfer to a foreign partnership 
of appreciated property under paragraph (a)(1) or (2) of this section, 
and the foreign partnership disposes of the property while such United 
States person remains a direct or indirect partner, that United States 
person must report the disposition by filing Form 8865. The form must be 
attached to, and filed by the due date (including extensions) of, the 
United States person's income tax return for the year in which the 
disposition occurred.
    (ii) Disposition of contributed property in nonrecognition 
transaction. If a foreign partnership disposes of contributed 
appreciated property in a nonrecognition transaction and substituted 
basis property is received in exchange, and the substituted basis 
property has built-in gain under Sec. 1.704-3(a)(8), the original 
transferor is not required to report the disposition. However, the 
transferor must report the disposition of the substituted basis property 
in the same manner as provided for the contributed property.
    (5) Time for filing Form 8865. The Form 8865 on which a transfer is 
reported must be attached to the transferor's timely filed (including 
extensions) income tax return for the tax year that includes the date of 
the transfer. If the person required to report under this section is not 
required to file an income tax return for its tax year during which the 
transfer occurred, but is required to file an information return for 
that year (for example, Form 1065,

[[Page 203]]

``U.S. Partnership Return of Income,'' or Form 990, ``Return of 
Organization Exempt from Income Tax''), the person should attach the 
Form 8865 to its information return.
    (6) Returns to be made--(i) Separate returns for each partnership. 
If a United States person transfers property reportable under this 
section to more than one foreign partnership in a taxable year, the 
United States person must submit a separate Form 8865 for each 
partnership.
    (ii) Duplicate form to be filed. If required by the instructions 
accompanying Form 8865, a duplicate Form 8865 (including attachments and 
schedules) must also be filed by the due date for submitting the 
original Form 8865 under paragraph (a)(5)(i) or (ii) of this section, as 
applicable.
    (7) Examples. The application of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. On November 1, 2001, US, a United States person that uses 
the calendar year as its taxable year, contributes $200,000 to FP, a 
foreign partnership, in a transaction subject to section 721. After the 
contribution, US owns a 5% interest in FP. US must report the 
contribution by filing Form 8865 for its taxable year ending December 
31, 2001. On March 1, 2002, US makes a $40,000 section 721 contribution 
to FP, after which US owns a 6% interest in FP. US must report the 
$40,000 contribution by filing Form 8865 for its taxable year ending 
December 31, 2002, because the contribution, when added to the value of 
the other property contributed by US to FP during the 12-month period 
ending on the date of the transfer, exceeds $100,000.
    Example 2. F, a nonresident alien, is the brother of US, a United 
States person. F owns a 15% interest in FP, a foreign partnership. US 
contributes $99,000 to FP, in exchange for a 1-percent partnership 
interest. Under sections 6038(e)(3)(C) and 267(c)(2), US is considered 
to own at least a 10-percent interest in FP and, therefore, US must 
report the $99,000 contribution under this section.
    Example 3. US, a United States person, owns 40 percent of FC, a 
foreign corporation. FC owns a 20-percent interest in FP, a foreign 
partnership. Under section 267(c)(1), US is considered to own 8 percent 
of FP due to its ownership of FC. US contributes $50,000 to FP in 
exchange for a 5-percent partnership interest. Immediately after the 
contribution, US is considered to own at least a 10-percent interest in 
FP and, therefore, must report the $50,000 contribution under this 
section.
    Example 4. US, a United States person, owns a 60-percent interest in 
USP, a domestic partnership. On March 1, 2001, USP contributes $200,000 
to FP, a foreign partnership, in exchange for a 5-percent partnership 
interest. Under paragraph (a)(2) of this section, US is considered as 
having contributed $120,000 to FP ($200,000 x 60%). However, under 
paragraph (a)(2), if USP properly reports the contribution to FP, US is 
not required to report its $120,000 contribution. If US directly 
contributes $5,000 to FP on June 10, 2001, US must report the $5,000 
contribution because US is considered to have contributed more than 
$100,000 to FP in the 12-month period ending on the date of the $5,000 
contribution.
    Example 5.  US, a United States person, owns an 80-percent interest 
in USP, a domestic partnership. USP owns an 80-percent interest in USP1, 
a domestic partnership. On March 1, 2001, USP1 contributes $200,000 to 
FP, a foreign partnership, in exchange for a 3-percent partnership 
interest. Under paragraph (a)(2) of this section, USP is considered to 
have contributed $160,000 ($200,000 x 80%) to FP. US is considered to 
have contributed $128,000 to FP ($200,000 x 80% x 80%). However, if USP1 
reports the transfer of the $200,000 to FP, neither US nor USP are 
required to report under this section the amounts they are considered to 
have contributed. Additionally, regardless of whether USP1 reports the 
$200,000 contribution, if USP reports the $160,000 contribution it is 
considered to have made, US does not have to report under this section 
the $128,000 contribution US is considered to have made.

    (b) Transfers by trusts relating to state and local government 
employee retirement plans. Trusts relating to state and local government 
employee retirement plans are not required to report transfers under 
this section, unless otherwise specified in the instructions to Form 
8865.
    (c) Information required with respect to transfers of property. With 
respect to transfers required to be reported under paragraph (a)(1) or 
(2) of this section, the return must contain information in such form or 
manner as Form 8865 (and its accompanying instructions) prescribes with 
respect to reportable events, including--
    (1) The name, address, and U.S. taxpayer identification number of 
the United States person making the transfer;
    (2) The name, U.S. taxpayer identification number (if any), and 
address of the transferee foreign partnership, and the type of entity 
and country under whose laws the partnership was created or organized;

[[Page 204]]

    (3) A general description of the transfer, and of any wider 
transaction of which it forms a part, including the date of transfer;
    (4) The names and addresses of the other partners in the foreign 
partnership, unless the transfer is solely of cash and the transferor 
holds less than a ten-percent interest in the transferee foreign 
partnership immediately after the transfer. However, for tax years of 
U.S. persons beginning on or after January 1, 2000, the person reporting 
pursuant to section 6038B (the transferor) must provide the names and 
addresses of each United States person that owned a ten-percent or 
greater direct interest in the foreign partnership during the 
transferor's tax year in which the transfer occurred, and the names and 
addresses of any other United States or foreign persons that were direct 
partners in the foreign partnership during that tax year and that were 
related to the transferor during that tax year. See paragraph (i)(4) of 
this section for the definition of a related person;
    (5) A description of the partnership interest received by the United 
States person, including a change in partnership interest;
    (6) A separate description of each item of contributed property that 
is appreciated property subject to the allocation rules of section 
704(c)(except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is intangible 
property, including its estimated fair market value and adjusted basis; 
and
    (7) A description of other contributed property, not specified in 
paragraph (c)(6) of this section, aggregated by the following categories 
(with, in each case, a brief description of the property)--
    (i) Stock in trade of the transferor (inventory);
    (ii) Tangible property (other than stock in trade) used in a trade 
or business of the transferor;
    (iii) Cash;
    (iv) Stock, notes receivable and payable, and other securities; and
    (v) Other property.
    (d) Information required with respect to dispositions of property. 
In respect of dispositions required to be reported under paragraph 
(a)(4) of this section, the return must contain information in such form 
or manner as Form 8865 (and its accompanying instructions) prescribes 
with respect to reportable events, including--
    (1) The date and manner of disposition;
    (2) The gain and depreciation recapture amounts, if any, realized by 
the partnership; and
    (3) Any such amounts allocated to the United States person.
    (e) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, all amounts reported as required under 
this section must be expressed in United States currency, with a 
statement of the exchange rates used. All statements required on or with 
Form 8865 pursuant to this section must be in the English language.
    (f) Reporting under this section not required of partnerships 
excluded from the application of subchapter K--(1) Election to be wholly 
excluded. The reporting requirements of this section will not apply to 
any United States person in respect of an eligible partnership as 
described in Sec. 1.761-2(a), if such partnership has validly elected to 
be excluded from all of the provisions of subchapter K of chapter 1 of 
the Internal Revenue Code in the manner specified in Sec. 1.761-
2(b)(2)(i).
    (2) Deemed excluded. The reporting requirements of this section will 
not apply to any United States person in respect of an eligible 
partnership as described in Sec. 1.761-2(a), if such partnership is 
validly deemed to have elected to be excluded from all of the provisions 
of subchapter K of chapter 1 of the Internal Revenue Code in accordance 
with the provisions of Sec. 1.761-2(b)(2)(ii).
    (g) Deemed contributions. Deemed contributions resulting from IRS-
initiated section 482 adjustments are not required to be reported under 
section 6038B. However, taxpayers must report deemed contributions 
resulting from taxpayer-initiated adjustments. Such information will be 
furnished timely if filed by the due date, including extensions, for 
filing the taxpayer's income

[[Page 205]]

tax return for the year in which the adjustment is made.
    (h) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a United States person is required to file a return under 
paragraph (a) of this section and fails to comply with the reporting 
requirements of section 6038B and this section, then such person is 
subject to the following penalties:
    (i) The United States person is subject to a penalty equal to 10 
percent of the fair market value of the property at the time of the 
contribution. Such penalty with respect to a particular transfer is 
limited to $100,000, unless the failure to comply with respect to such 
transfer was due to intentional disregard.
    (ii) The United States person must recognize gain (reduced by the 
amount of any gain recognized, with respect to that property, by the 
transferor after the transfer) as if the contributed property had been 
sold for fair market value at the time of the contribution. Adjustments 
to the basis of the partnership's assets and any relevant partner's 
interest as a result of gain being recognized under this provision will 
be made as though the gain was recognized in the year in which the 
failure to report was finally determined.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B includes--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; and
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Reasonable cause exception. Under section 6038B(c)(2) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the transferor shows that a failure to comply was due to 
reasonable cause and not willful neglect. The transferor may attempt to 
do so by providing a written statement to the district director having 
jurisdiction of the taxpayer's return for the year of the transfer, 
setting forth the reasons for the failure to comply. Whether a failure 
to comply was due to reasonable cause will be determined by the district 
director under all the facts and circumstances.
    (4) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038B, see section 6501(c)(8).
    (i) Definitions--(1) Appreciated property. Appreciated property is 
property that has a fair market value in excess of basis.
    (2) Domestic partnership. A domestic partnership is a partnership 
described in section 7701(a)(4).
    (3) Foreign partnership. A foreign partnership is a partnership 
described in section 7701(a)(5).
    (4) Related person. Persons are related persons if they bear a 
relationship described in section 267(b)(1) through (3) or (10) through 
(12), after application of section 267(c) (except for (c)(3)), or in 
section 707(b)(1)(B).
    (5) Substituted basis property. Substituted basis property is 
property described in section 7701(a)(42).
    (6) Taxpayer-initiated adjustment. A taxpayer-initiated adjustment 
is a section 482 adjustment that is made by the taxpayer pursuant to 
Sec. 1.482-1(a)(3).
    (7) United States person. A United States person is a person 
described in section 7701(a)(30).
    (j) Effective dates-- (1) In general. Except as otherwise provided 
in this section, this section applies to transfers made on or after 
January 1, 1998. However, for a transfer made on or after January 1, 
1998, but before January 1, 1999, the filing requirements of this 
section may be satisfied by--
    (i) Filing a Form 8865 with the taxpayer's income tax return 
(including a partnership return of income) for the first taxable year 
beginning on or after January 1, 1999; or
    (ii) Filing a Form 926 (modified to reflect that the transferee is a 
partnership, not a corporation) with the taxpayer's income tax return 
(including a partnership return of income) for the taxable year in which 
the transfer occurred.
    (2) Transfers made between August 5, 1997 and January 1, 1998. A 
United States person that made a transfer of property between August 5, 
1997, and January 1, 1998, that is required to be

[[Page 206]]

reported under section 6038B may satisfy its reporting requirement by 
reporting in accordance with the provisions of this section or in 
accordance with the provisions of Notice 98-17 (1998-11 IRB 6)(see 
Sec. 601.601(d)(2) of this chapter).
    (3) Special rule for transfers made before January 1, 2000. Even if 
not reported in accordance with the rules provided in paragraph (a)(5) 
of this section, or paragraph (j) (1) or (2) of this section, a transfer 
that occurred before January 1, 2000 will nevertheless be considered 
timely reported if the transferor reports it on a Form 8865 attached to 
an amended tax return for the transferor's tax year in which the 
transfer occurred, provided such amended return is filed no later than 
September 15, 2000.

[T.D. 8817, 64 FR 5715, Feb. 5, 1999; 64 FR 15686, Apr. 1, 1999; T.D. 
8850, 64 FR 72554, Dec. 28, 1999]



Sec. 1.6039-1  Information returns required of corporations with respect to certain stock option transactions occurring on or after January 1, 1964.

    (a) Requirement of return under section 6039(a)(1). Every 
corporation which transfers stock to any person pursuant to such 
person's exercise on or after January 1, 1964, of a qualified stock 
option described in section 422(b), or a restricted stock option 
described in section 424(b), shall make, for each calendar year in which 
such a transfer occurs, an information return on Form 3921 with respect 
to each transfer made during such year. The return shall include the 
following information:
    (1) The name, address and employer identification number of the 
corporation transferring the stock;
    (2) The name, address, and identifying number of the person to whom 
the share or shares of stock were transferred;
    (3) The name and address of the corporation the stock of which is 
the subject of the option (if other than the corporation transferring 
the stock);
    (4) The date the option was granted;
    (5) The date the shares were transferred to the person exercising 
the option;
    (6) The fair market value of the stock at the time the option was 
exercised;
    (7) The number of shares of stock transferred pursuant to the 
option;
    (8) The type of option under which the transferred shares were 
acquired; and
    (9) Such other information as may be required by the return or by 
the instructions issued with respect thereto.
    (b) Requirement of return under section 6039(a)(2). (1) Every 
corporation which records, or has by its agent recorded, a transfer of 
the title to stock acquired by the transferor pursuant to his exercise 
on or after January 1, 1964, of:
    (i) An option granted under an employee stock purchase plan which 
meets the requirements of section 423(b), and with respect to which the 
special rule of section 423(c) applied, or
    (ii) A restricted stock option which meets the requirements of 
section 424(b), and with respect to which the special rule of section 
424(c)(1) applies,

shall make, for each calendar year in which such a recorded transfer of 
title to such stock occurs, an information return on Form 3922 with 
respect to each transfer containing the information required by 
subparagraph (2) of this paragraph.
    (2) The return required by subparagraph (1) of this paragraph shall 
contain the following information:
    (i) The name and address of the corporation whose stock is being 
transferred;
    (ii) The name, address, and identifying number of the transferor;
    (iii) The date such stock was transferred to the transferor;
    (iv) The number of shares to which title is being transferred; and
    (v) The type of option under which the transferred shares were 
acquired.
    (3) If the return required by this paragraph is made by the 
authorized ``transfer agent'' of the corporation, it shall be deemed to 
have been made by the corporation. The term ``transfer agent'', as used 
in this paragraph, means any designee authorized to keep the stock 
ownership records of a corporation and to record a transfer of title of 
the stock of such corporation on behalf of such corporation.
    (4) Where a corporation is required by this paragraph to make an 
information

[[Page 207]]

return for the calendar year, such return will only have to supply 
information relating to the first recorded transfer of title to the 
share or shares of stock. Thus, for example, if the owner has record 
title to a share or shares of stock transferred to a recognized broker 
or financial institution and the stock is subsequently sold by such 
broker or institution (on behalf of the owner) the corporation is only 
required to report information relating to the transfer of record title 
to the broker or financial institution. Similarly, a return is required 
when a share of stock is transferred by the optionee to himself and 
another person (or persons) as joint tenants, tenants by the entireties 
or tenants in common. However, when stock is originally issued to the 
optionee and another person (or persons) as joint tenants, or as tenants 
by the entirety, and a stock certificate was not previously actually 
issued to the optionee as a sole owner, the return required by this 
paragraph shall be made (at such time and in such manner as is provided 
by this section with respect to a transfer by the optionee) in respect 
of the first transfer of the title to such stock by the optionee.
    (5) Every corporation which transfers any share of stock pursuant to 
the exercise of an option described in this paragraph shall identify 
such stock in a manner sufficient to enable the accurate reporting of 
the transfer of record title to such shares. Such identification may be 
accomplished by assigning to the certificates of stock issued pursuant 
to the exercise of such options a special serial number, or color.
    (c) Time, place, and manner of filing. (1) The returns on Forms 3921 
and 3922 required by section 6039(a) (1) and (2) and paragraphs (a) and 
(b) of this section shall be filed as attachments to a summary report on 
Form 4067 which must be signed by the person required to file the 
returns or its duly authorized agent. With respect to returns on Form 
3921, the summary report on Form 4067 shall indicate the number of 
returns filed, the number of shares transferred pursuant to exercise of 
options, the dates on which the options exercised were offered or 
granted, the fair market value of shares subject to option on such 
dates, the method by which such value was determined, the type of 
options under which the transferred shares were acquired, and such other 
information as may be required by the form or by the instructions issued 
with respect thereto. With respect to returns on Form 3922, the summary 
report on Form 4067 shall indicate the number of returns filed, the 
number of shares transferred, the type of options under which the 
transferred shares were acquired and such other information as may be 
required by the form or by the instructions issued with respect thereto. 
The summary report on Form 4067 and the attached returns on Forms 3921 
and 3922 required for any calendar year shall be filed on or before 
February 28 of the following year with any of the Internal Revenue 
Service Centers.
    (2) If a return is made by the authorized ``transfer agent'' of the 
corporation, as described in paragraph (b)(3) of this section, it shall 
be filed with the district director for the district where the income 
tax return of the principal corporation is filed after the close of the 
calendar year for which the return is required, but on or before 
February 28th of the following calendar year.
    (3) For provisions relating to the extension of time for filing the 
returns required by this section, see Sec. 1.6081-1.
    (4) For provisions relating to the time for performance of an act 
when the last day prescribed for performance falls on Saturday, Sunday, 
or a legal holiday, see Sec. 301.7503-1 of this chapter (Regulations on 
Procedure and Administration).
    (d) Stock to which this section applies. The rules of this section 
shall apply to any full share of stock acquired pursuant to the exercise 
of any qualified or restricted stock option, or any option granted under 
an employee stock purchase plan, irrespective of whether the transfer of 
stock pursuant to such excercise qualified for the special tax treatment 
of section 421 and the regulations thereunder. In addition, the rules of 
paragraph (b) of this section shall apply to any full shares of stock 
received in respect of stock which was originally acquired pursuant to 
the exercise of an option described in the preceding sentence. See 
section 425(b). For

[[Page 208]]

definitions of the terms ``exercise'' and ``transfer'' see paragraphs 
(f) and (g) of Sec. 1.421-7. A return is required under paragraph (b) of 
this section irrespective of whether the transfer of the title 
constitutes a disposition of such stock as defined by section 425(c).

[T.D. 6887, 31 FR 8813, June 24, 1966]



Sec. 1.6039-2  Statements to persons with respect to whom information is furnished.

    (a) Requirement and form of statement. Every corporation required to 
make a return on Form 3921 or 3922 under section 6039(a) and 
Sec. 1.6039-1 shall furnish to each person whose identifying number is 
(or should be) shown on such return a written statement containing the 
information required to be shown on such return. This requirement may be 
met by furnishing a copy of the appropriate return to such person. A 
statement shall be considered to be furnished to a person within the 
meaning of this section if it is mailed to such person at his last known 
address.
    (b) Time for furnishing statements--(1) In general. Each statement 
required by this section to be furnished to any person for a calendar 
year shall be furnished to such person on or before January 31, of the 
year following the year for which the statement is required.
    (2) Extension of time. For good cause shown upon written application 
of the corporation required to furnish statements under this section, 
the district director may grant an extension of time not exceeding 30 
days in which to furnish such statements. The application shall be 
addressed to the district director with whom the income tax returns of 
the applicant-corporation are filed and shall contain a full recital of 
the reasons for requesting the extension to aid the district director in 
determining the period of the extension, if any, which will be granted. 
Such a request in the form of a letter to the district director signed 
by the applicant (or its agent) will suffice as an application. The 
application shall be filed on or before the date prescribed in 
subparagraph (1) of this paragraph for furnishing the statements 
required by this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see 
Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (c) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section, see Sec. 301.6678-1 
of this chapter (Regulations on Procedure and Administration).

[T.D. 6887, 31 FR 8814, June 24, 1966]



Sec. 1.6041-1  Return of information as to payments of $600 or more.

    (a) General rule. (1) Information returns required--(i) Payments 
required to be reported. Except as otherwise provided in Secs. 1.6041-3 
and 1.6041-4, every person engaged in a trade or business shall make an 
information return for each calendar year with respect to payments it 
makes during the calendar year in the course of its trade or business to 
another person of fixed or determinable income described in paragraph 
(a)(1)(i) (A) or (B) of this section. For purposes of the regulations 
under this section, the person described in this paragraph (a)(1)(i) is 
a payor.
    (A) Salaries, wages, commissions, fees, and other forms of 
compensation for services rendered aggregating $600 or more.
    (B) Interest (including original issue discount), rents, royalties, 
annuities, pensions, and other gains, profits, and income aggregating 
$600 or more.
    (ii) Information returns required under other provisions of the 
Internal Revenue Code. The payments described in paragraphs (a)(1)(i) 
(A) and (B) of this section shall not include any payments of amounts 
with respect to which an information return is required by, or may be 
required under authority of, section 6042(a) (relating to dividends), 
section 6043(a)(2) (relating to distributions in liquidation), section 
6044(a) (relating to patronage dividends), section 6045 (relating to 
brokers' transactions with customers), sections 6049(a) (1) and (2) 
(relating to interest), section 6050N(a) (relating to royalties), or 
section 6050P (a) or (b) (relating to

[[Page 209]]

cancellation of indebtedness). In addition, the payments described in 
paragraphs (a)(1)(i) (A) and (B) of this section shall not include 
amounts excepted from the definition of dividends under section 
6042(b)(2) and Sec. 1.6042-3(b)(1), amounts described in section 
6044(b), amounts excepted from reporting under Sec. 1.6045-1(g), amounts 
excepted from the definition of interest under section 6049(b)(2) (C) or 
(D), Sec. 1.6049-4(c), or 1.6049-5(b)(6) through (15). Notwithstanding 
the preceding sentence, interest with respect to a notional principal 
contract excluded from the definition of interest under Sec. 1.6049-
5(b)(15) is reportable under this section. The term interest as used in 
this paragraph (a)(1)(ii) otherwise includes all interest, other than 
interest coming within the definition of interest provided in 
Sec. 1.6049-5(a). For example, a closely held corporation borrows money 
from one of its officers on a promissory note not in registered form 
bearing annual stated interest of $300. The corporation also pays 
royalties to the officer amounting to $400 a year. An information return 
is required under this paragraph (a)(1) to report the payments to the 
officer because the interest does not come within the definition of 
interest in Sec. 1.6049-5(a) and the aggregate of interest and royalties 
exceeds $600.
    (2) Prescribed form. The return required by subparagraph (1) of this 
paragraph shall be made on Forms 1096 and 1099 except that (i) the 
return with respect to distributions to beneficiaries of a trust or of 
an estate shall be made on Form 1041, and (ii) the return with respect 
to certain payments of compensation to an employee by his employer shall 
be made on Forms W-3 and W-2 under the provisions of Sec. 1.6041-2 
(relating to return of information as to payments to employees). Where 
Form 1099 is required to be filed under this section, a separate Form 
1099 shall be furnished for each person to whom payments described in 
subdivision (i), (ii), or (iii) of subparagraph (1) of this paragraph 
are made. For time and place for filing Forms 1096 and 1099, see 
Sec. 1.6041-6. For the requirement to submit the information required by 
Form 1099 on magnetic media for payments after December 31, 1983, see 
section 6011(e) and Sec. 301.6011-2 of this chapter (Procedure and 
Administration Regulations).
    (b) Persons engaged in trade or business--(1) In general. The term 
``all persons engaged in a trade or business'', as used in section 
6041(a), includes not only those so engaged for gain or profit, but also 
organizations the activities of which are not for the purpose of gain or 
profit. Thus, the term includes the organizations referred to in section 
401(a), 501(c), 501(d) and 521 and in paragraph (i) of this section. On 
the other hand, section 6041(a) applies only to payments in the course 
of trade or business; hence it does not apply to an amount paid by the 
proprietor of a business to a physician for medical services rendered by 
the physician to the proprietor's child.
    (2) Special rule for REMICs. For purposes of chapter 1 subtitle F, 
chapter 61A, part IIIB, the terms ``all persons engaged in a trade or 
business'' and ``any service-recipient engaged in a trade or business'' 
includes a real estate mortgage investment conduit or REMIC (as defined 
in section 860D).
    (c) Fixed or determinable income. Income is fixed when it is to be 
paid in amounts definitely predetermined. Income is determinable 
whenever there is a basis of calculation by which the amount to be paid 
may be ascertained. The income need not be paid annually or at regular 
intervals. The fact that the payments may be increased or decreased in 
accordance with the happening of an event does not for purposes of this 
section make the payments any the less determinable. A payment made 
jointly to two or more payees may be fixed and determinable income to 
one payee even though the payment is not fixed and determinable income 
to another payee. For example, property insurance proceeds paid jointly 
to the owner of damaged property and to a contractor that repairs the 
property may be fixed and determinable income to the contractor but not 
fixed and determinable income to the owner, and should be reported to 
the contractor. A salesman working by the month for a commission on 
sales which is paid or credited monthly receives determinable income.
    (d) Payments specifically included--(1) In general. Amounts paid in 
respect of

[[Page 210]]

life insurance, endowment, or annuity contracts are required to be 
reported in returns of information under this section--
    (i) Unless the payment is made in respect of a life insurance or 
endowment contract by reason of the death of the insured and is not 
required to be reported by paragraph (b) of Sec. 1.6041-2,
    (ii) Unless the payment is made by reason of the surrender prior to 
maturity or lapse of a policy, other than a policy which was purchased 
(a) by a trust described in section 401(a) which is exempt from tax 
under section 501(a), (b) as part of a plan described in section 403(a), 
or (c) by an employer described in section 403(b) (1) (A),
    (iii) Unless the payment is interest as defined in Sec. 1.6049-2 and 
is made after December 31, 1962,
    (iv) Unless the payment is a payment with respect to which a return 
is required by Sec. 1.6047-1, relating to employee retirement plans 
covering owner-employees,
    (v) Unless the payment is payment with respect to which a return is 
required by Sec. 1.6052-1, relating to payment of wages in the form of 
group-term life insurance.
    (2) Professional fees. Fees for professional services paid to 
attorneys, physicians, and members of other professions are required to 
be reported in returns of information if paid by persons engaged in a 
trade or business and paid in the course of such trade or business.
    (3) Prizes and awards. Amounts paid as prizes and awards that are 
required to be included in gross income under section 74 and Sec. 1.74-1 
when paid in the course of a trade or business are required to be 
reported in returns of information under this section.
    (4) Disability payments. Amounts paid as disability payments under 
section 105(d) are required to be reported in returns of information 
under this section.
    (5) Notional principal contracts. Except as provided in paragraphs 
(b)(5)(i) and (ii) of this section, amounts paid after December 31, 
2000, with respect to notional principal contracts referred to in 
Sec. 1.863-7 or 1.988-2(e) to persons who are not described in 
Sec. 1.6049-4(c)(1)(ii) are required to be reported in returns of 
information under this section. The amount required to be reported under 
this paragraph (d)(5) is limited to the amount of cash paid from the 
notional principal contract as described in Sec. 1.446-3(d). A non-
periodic payment is reportable for the year in which an actual payment 
is made. Any amount of interest determined under the provisions of 
Sec. 1.446-3(g)(4) (dealing with interest in the case of a significant 
non-periodic payment) is reportable under this paragraph (d)(5) and not 
under section 6049 (see Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4) 
for reporting exceptions regarding payments to foreign persons. See, 
however, Sec. 1.1461-1(c)(1) for reporting amounts described under this 
paragraph (d)(5) that are paid to foreign persons. The provisions of 
Sec. 1.6049-5(d) shall apply for determining whether a payment with 
respect to a notional principal contract is made to a foreign person. 
See Sec. 1.6049-4(a) for a definition of payor. For purposes of this 
paragraph (d)(5), a payor includes a middleman defined in Sec. 1.6049-
4(f)(4).
    (i) An amount paid with respect to a notional principal contract is 
not required to be reported if the payment is made outside the United 
States (as defined in Sec. 1.6049-5(e)) by a non-U.S. payor or a non-
U.S. middleman.
    (ii) An amount paid with respect to a notional principal contract is 
not required to be reported if the payment is made outside the United 
States (as defined in Sec. 1.6049-5(e)) by a payor that has no actual 
knowledge that the payee is a U.S. person, and the payor is--
    (A) A U.S. payor or U.S. middleman that is not a U.S. person (such 
as a controlled foreign corporation defined in section 957(a) or certain 
foreign corporations or foreign partnerships engaged in a U.S. trade or 
business); or
    (B) A foreign branch of a U.S. bank. See Sec. 1.6049-5(c)(5) for a 
definition of a U.S. payor, a U.S. middleman, a non-U.S. payor, and a 
non-U.S. middleman.
    (e) Payment made on behalf of another person--(1) In general. A 
person that makes a payment in the course of its trade or business on 
behalf of another person is the payor that must make a return of 
information under this section with respect to that payment if the 
payment is described in paragraph

[[Page 211]]

(a) of this section and, under all the facts and circumstances, that 
person--
    (i) Performs management or oversight functions in connection with 
the payment (this would exclude, for example, a person who performs mere 
administrative or ministerial functions such as writing checks at 
another's direction); or
    (ii) Has a significant economic interest in the payment (i.e., an 
economic interest that would be compromised if the payment were not 
made, such as by creation of a mechanic's lien on property to which the 
payment relates, or a loss of collateral).
    (2) Determination of payor obligated to report. If two or more 
persons meet the requirements for making a return of information with 
respect to a payment, as set forth in paragraph (e)(1) of this section, 
the person obligated to report the payment is the person closest in the 
chain to the payee, unless the parties agree in writing that one of the 
other parties meeting the requirements set forth in paragraph (e)(1) of 
this section will report the payment.
    (3) Special rule for payment by employee to employer. 
Notwithstanding the provisions of paragraph (e)(1) of this section, an 
employee acting in the course of his employment who makes a payment to 
his employer on behalf of another person is not required to make a 
return of information with respect to that payment.
    (4) Optional method to report. A person that makes a payment on 
behalf of another person but is not required to make an information 
return under paragraph (e)(1) of this section may elect to do so 
pursuant to the procedures established by the Commissioner. See, e.g., 
Rev. Proc. 84-33 (1984-1 C.B. 502) (optional method for a paying agent 
to report and deposit amounts withheld for payors under the statutory 
provisions of backup withholding) (see Sec. 601.601(d)(2) of this 
chapter).
    (5) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. Bank B provides financing to C, a real estate developer, 
for a construction project. B makes disbursements from the account for 
labor, materials, services, and other expenses related to the 
construction project. In connection with the payments, B performs the 
following functions: approves payments to the general contractor or 
subcontractors; ensures that loan proceeds are properly applied and that 
all approved bills are properly paid to avoid mechanics' or 
materialmen's liens; conducts site inspections to determine whether work 
has been completed (but does not check the quality of the work). B is 
performing management or oversight functions in connection with the 
payments and is subject to the information reporting requirements of 
section 6041 with respect to payments.
    Example 2. Mortgage company D holds a mortgage on business property 
owned by E. When the property is damaged by a storm, E's insurance 
company issues a check payable to both D and E in settlement of E's 
claim. Pursuant to the contract between D and E, D holds the insurance 
proceeds in an escrow account and makes disbursements, according to E's 
instructions, to contractors and subcontractors performing repairs on 
the property. D is not performing management or oversight functions, but 
D has a significant economic interest in the payments because the 
purpose of the arrangement is to ensure that property on which D holds a 
mortgage is repaired or replaced. D is subject to the information 
reporting requirements of section 6041 with respect to the payments to 
contractors.
    Example 3. Settlement agent F provides real estate closing services 
to real estate brokers and agents. F deposits money received from the 
buyer or lender in an escrow account and makes payments from the account 
to real estate agents or brokers, appraisers, land surveyors, building 
inspectors, or similar service providers according to the provisions of 
the real estate contract and written instructions from the lender. F may 
also make disbursements pursuant to oral instructions of the seller or 
purchaser at closing. F is not performing management or oversight 
functions and does not have a significant economic interest in the 
payments, and is not subject to the information reporting requirements 
of section 6041. For the rules relating to F's obligation to report the 
gross proceeds of the sale, see section 6045(e) and Sec. 1.6045-4.
    Example 4. Assume the same facts as in Example 3. In addition, the 
seller instructs F to hire a contractor to perform repairs on the 
property. F selects the contractor, negotiates the cost, monitors the 
progress of the project, and inspects the work to ensure it complies 
with the contract. With respect to the payments to the contractor, F is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 5. G is a rental agent who manages certain rental property 
on behalf of property owner H. G finds tenants, arranges leases,

[[Page 212]]

collects rent, responds to tenant inquiries regarding maintenance, and 
hires and makes payments to repairmen. G subtracts her commission and 
any maintenance payments from rental payments and remits the remainder 
to H. With respect to payments to repairmen, G is performing management 
or oversight functions and is subject to the information reporting 
requirements of section 6041. With respect to the payment of rent to H, 
G is subject to the information reporting requirements of section 6041 
regardless of whether she performs management or oversight functions or 
has a significant economic interest in the payment. See Sec. 1.6041-3(d) 
for rules relating to rental agents. See Sec. 1.6041-1(f) to determine 
the amount that G should report to H as rent.
    Example 6. Literary agent J receives a payment from publisher L of 
fees earned by J's client, author K. J deposits the payment into a bank 
account in J's name. From time to time and as directed by K, J makes 
payments from these funds to attorneys, managers, and other third 
parties for services rendered to K. After subtracting J's commission, J 
pays K the net amount. J does not order or direct the provision of 
services by the third parties to K, and J exercises no discretion in 
making the payments to the third parties or to K. J is not performing 
management or oversight functions and does not have a significant 
economic interest in the payments and is not subject to the information 
reporting requirements of section 6041 in connection with the payments 
to K or to the third parties. For the rules relating to L's obligation 
to report the payment of the fees to K, see paragraphs (a)(1)(i) and (f) 
of this section. For the rules relating to K's obligation to report the 
payment of the commission to J and the payments to the third parties for 
services, see paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 7. Attorney P deposits into a client trust fund a settlement 
payment from R, the defendant in a breach of contract action for lost 
profits in which P represented plaintiff Q. P makes payments from the 
client trust fund to service providers such as expert witnesses and 
private investigators for expenses incurred in the litigation. P decides 
whom to hire, negotiates the amount of payment, and determines that the 
services have been satisfactorily performed. In the event of a dispute 
with a service provider, P withholds payment until the dispute is 
settled. With respect to payments to the service providers, P is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 8. Assume the same facts as in Example 7. In addition, 
assume that after paying the service providers and deducting his legal 
fee, P pays Q the remaining funds that P had received from the 
settlement with R. With respect to the payment to Q, P is not performing 
management or oversight functions, does not have a significant economic 
interest in the payment, and is not subject to the information reporting 
requirements of section 6041. For the rules relating to R's obligation 
to report the payment of the settlement proceeds to P, see section 
6045(f) and the regulations thereunder. For the rules relating to R's 
obligation to report the payment of the settlement proceeds to Q, see 
paragraphs (a)(1)(i) and (f) of this section. For the rules relating to 
Q's obligation to report the payment of attorney fees to P, see 
paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 9. Medical insurer S operates as the administrator of a 
health care program under a contract with a state. S makes payments of 
government funds to health care providers who provide care to eligible 
patients. S receives and reviews claims submitted by patients or health 
care providers, determines if the claims meet all the requirements of 
the program (e.g., that the care is authorized and that the patients are 
eligible beneficiaries), and determines the amount of payment. S is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041 with respect to the 
payments.
    Example 10. Race track employee T holds deposits made by horse owner 
U in a special escrow account in U's name. U enters into a contract with 
jockey V to ride U's horse in a race at the track. As directed by U, T 
pays V the fee for riding U's horse from U's escrow account. T is not 
performing management or oversight functions, does not have a 
significant economic interest in the payment, and is not subject to the 
information reporting requirements of section 6041. For the rules 
relating to U's obligation to report the payment of the fee to V, see 
paragraph (a)(1)(i) of this section.
    Example 11. X is a certified public accountant employed by Firm Y, 
and is not a partner. Client Z pays X directly for accounting services. 
X remits the amount received to Y, as required by the terms of his 
employment. X does not have any reporting obligation with respect to the 
payment to Y. For the rules relating to Z's obligation to report the 
payment to Y for services, see paragraphs (a)(1)(i) and (d)(2) of this 
section.
    Example 12. Bank contracts with Title Company with respect to the 
disbursement of funds on a construction loan. Pursuant to their 
arrangement, the contractor sends draw requests to Title Company, which 
inspects the work, verifies the amount requested, and then sends the 
draw request to Bank with supporting documents. Bank pays Title Company 
the amount of the draw request, and Title Company insures Bank against 
any loss if it cannot obtain the necessary lien waivers. Bank has a 
significant

[[Page 213]]

economic interest in the payment as a mortgagee, and Title Company 
exercises management or oversight over the payment. Since Title Company 
is closest in the chain to the contractor, Title Company should report 
the payment, unless the parties agree in writing that Bank will report 
the payment.

    (f) Amount to be reported when fees, expenses or commissions are 
deducted--(1) In general. The amount to be reported as paid to a payee 
is the amount includible in the gross income of the payee (which in many 
cases will be the gross amount of the payment or payments before fees, 
commissions, expenses, or other amounts owed by the payee to another 
person have been deducted), whether the payment is made jointly or 
separately to the payee and another person. The Commissioner may, by 
guidance published in the Internal Revenue Bulletin, illustrate the 
circumstances under which the gross amount or less than the gross amount 
may be reported.
    (2) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Attorney P represents client Q in a breach of contract 
action for lost profits against defendant R. R settles the case for 
$100,000 damages and $40,000 for attorney fees. Under applicable law, 
the full $140,000 is includible in Q's gross taxable income. R issues a 
check payable to P and Q in the amount of $140,000. R is required to 
make an information return reporting a payment to Q in the amount of 
$140,000. For the rules with respect to R's obligation to report the 
payment to P, see section 6045(f) and the regulations thereunder.
    Example 2. Assume the same facts as in Example 1, except that R 
issues a check to Q for $100,000 and a separate check to P for $40,000. 
R is required to make an information return reporting a payment to Q in 
the amount of $140,000. For the rules with respect to R's obligation to 
report the payment to P, see section 6045(f) and the regulations 
thereunder.
    (g) Payment made in medium other than cash. If any payment required 
to be reported on Form 1099 is made in property other than money, the 
fair market value of the property at the time of payment is the amount 
to be included on such form.
    (h) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (i) Payments made by the United States or a State. Information 
returns on:
    (1) Forms 1096 and 1099 and
    (2) Forms W-3 and W-2 (when made under the provisions of 
Sec. 1.6041-2)

of payments made by the United States or a State, or political 
subdivision thereof, or the District of Columbia, or any agency or 
instrumentality of any one or more of the foregoing, shall be made by 
the officer or employee of the United States, or of such State, or 
political subdivision, or of the District of Columbia, or of such agency 
or instrumentality, as the case may be, having control of such payments 
or by the officer or employee appropriately designated to make such 
returns.
    (j) Effective date. The provisions of paragraphs (b), (c), (e), and 
(f) apply to payments made after December 31, 2002.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12794, Dec. 28, 1962, T.D. 6888, 31 FR 9205, July 6, 1966; T.D. 7284, 38 
FR 20827, Aug. 3, 1973; T.D. 7580, 43 FR 60159, Dec. 26, 1978; T.D. 
7888, 48 FR 17587, Apr. 25, 1983; T.D. 8458, 57 FR 61313, Dec. 24, 1992; 
T.D. 8734, 62 FR 53471, Oct. 14, 1997; T.D. 8804, 64 FR 11378, Mar. 9, 
1999; T.D. 8881, 65 FR 32205, May 22, 2000; T.D. 9010, 67 FR 48756, July 
26, 2002]



Sec. 1.6041-2  Return of information as to payments to employees.

    (a)(1) In general. Wages, as defined in section 3401, paid to an 
employee are required to be reported on Form W-2. See section 6011 and 
the Employment Tax Regulations thereunder. All other payments of 
compensation, including the cash value of payments made in any medium 
other than cash, to an employee by his employer in the course of the 
trade or business of the employer must also be reported on Form W-2 if 
the total of such payments and the amount of the employee's wages (as 
defined in section 3401), if any, required to be reported on Form W-2 
aggregates $600 or more in a calendar year. For example, if a payment of 
$700 was made

[[Page 214]]

to an employee and $400 thereof represents wages subject to withholding 
under section 3402 and the remaining $300 represents compensation not 
subject to withholding, such wages and compensation must both be 
reported on Form W-2. A separate Form W-2 shall be furnished for each 
employee for whom a return must be made. At the election of the 
employer, components of amounts required to be reported on Form W-2 
pursuant to the provisions of this subparagraph may be reported on more 
than one Form W-2.
    (2) Transmittal form. The transmittal form for a return on Form W-2 
made pursuant to the provisions of subparagraph (1) of this paragraph 
shall be Form W-3. In a case where an employer must file a Form W-3 
under this paragraph and also under Sec. 31.6011(a)-4 or 
Sec. 31.6011(a)-5 of this chapter (Employment Tax Regulations), the Form 
W-3 filed under such Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 shall also 
be used as the transmittal form for a return on Form W-2 made pursuant 
to the provisions of this paragraph.
    (3) Time for filing--(i) General rule. In a case where an employer 
must file Forms W-3 and W-2 under this paragraph and also under 
Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this chapter (Employment Tax 
Regulations), the time for filing such forms under this paragraph shall 
be the same as the time (including extensions thereof) for filing such 
forms under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5.
    (ii) Exception. In a case where an employer is not required to file 
Forms W-3 and W-2 under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter, returns on Forms W-3 and W-2 required under this paragraph (a) 
for any calendar year shall be filed on or before February 28 (March 31 
if filed electronically) of the following year.
    (iii) Cross reference. For extensions of time for filing returns, 
see section 6081 and the regulations thereunder.
    (4) Place for filing. The returns on Forms W-3 and W-2 required 
under this paragraph shall be filed pursuant to the rules contained in 
Sec. 31.6091-1 of this chapter (Employment Tax Regulations), relating to 
the place for filing certain returns.
    (b) Distributions under employees' trust or plan. (1) Amounts which 
are:
    (i) Distributed or made available to a beneficiary, and to which 
section 402 (relating to employees' trusts) or section 403 (relating to 
employee annuity plans) applies, or
    (ii) Described in section 72(m)(3)(B), shall be reported on Forms 
1096 and 1099 to the extent such amounts are includible in the gross 
income of such beneficiary if the amounts so includible aggregate $600 
or more in any calendar year. In addition, every trust described in 
section 501(c)(17) which makes one or more payments (including 
separation and sick and accident benefits) totaling $600 or more in 1 
year to an individual must file an annual information return on Form 
1096, accompanied by a statement on Form 1099, for each such individual. 
Payments made by an employer or a person other than the trustee of the 
trust should not be considered in determining whether the $600 minimum 
has been paid by the trustee. The provisions of this subparagraph shall 
not be applicable to payments of supplemental unemployment compensation 
benefits made after December 31, 1970, which are treated as if they were 
wages for purposes of section 3401(a). Such amounts are required to be 
reported on Forms W-3 and W-2. See paragraph (b)(14) of Sec. 31.3401(a)-
1 of this chapter (Employment Tax Regulations).
    (2) Any amount with respect to which a statement is required by 
Sec. 1.6047-1, relating to employee retirement plans covering owner-
employees, shall not be included in amounts required to be reported 
under section 6041.
    (c) Payments to foreign persons. See Sec. 1.6041-4 for reporting 
exemptions regarding payments to foreign persons. See Sec. 1.6049-5(d) 
for determining whether a payment is made to a foreign person.

[T.D. 7284, 38 FR 20827, Aug. 3, 1973, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978; T.D. 8734, 62 FR 53472, Oct. 14, 1997; T.D. 8895, 
65 FR 50406, Aug. 18, 2000]



Sec. 1.6041-2T  Return of information as to payments to employees (temporary).

    (a)(1) through (4) [Reserved]

[[Page 215]]

    (5) Statement for employees. An employer that is required under 
Sec. 1.6041-2(a) to file Form W-2 with respect to an employee is also 
required under section 6041(d) and 6051 to furnish a written statement 
to the employee. This written statement must be furnished on Form W-2 in 
accordance with section 6051 and the regulations.
    (b) and (c). For further guidance, see Sec. 1.6041-2(b) and (c).

[T.D. 8942, 66 FR 10193, Feb. 14, 2001]



Sec. 1.6041-3  Payments for which no return of information is required under section 6041.

    Returns of information are not required under section 6041 and 
Secs. 1.6041-1 and 1.6041-2 for payments described in paragraphs (a) 
through (q) of this section. See Sec. 1.6041-4 for reporting exemptions 
regarding payments to foreign persons.
    (a) Payments of income required to be reported on Forms 1120-S, 941, 
W-2, and W-3 (however, see Sec. 1.6041-2(a) with respect to Forms W-2 
and W-3).
    (b) Payments by a broker to his customer (but for reporting 
requirements as to certain of such payments, see sections 6042, 6045, 
and 6049 and the regulations thereunder in this part).
    (c) Payments of bills for merchandise, telegrams, telephone, 
freight, storage, and similar charges.
    (d) Payments of rent made to rental agents (but the agent is 
required to report payments of rent to the landlord in accordance with 
Sec. 1.6041-1(a)(1)(i)(B) and (2)).
    (e) Payments representing earned income for services rendered 
without the United States made to a citizen of the United States, if it 
is reasonable to believe that such amounts will be excluded from gross 
income under the provisions of section 911 and the regulations 
thereunder.
    (f) Compensation and profits paid or distributed by a partnership to 
the individual partners (but for reporting requirements, see 
Sec. 1.6031-1).
    (g) Payments of commissions to general agents by fire insurance 
companies or other companies insuring property, except when specifically 
directed by the Commissioner to be filed.
    (h)(1) In general. Payments made under reimbursement or other 
expense allowance arrangements that meet the requirements of section 
62(c) of the Code and Sec. 1.62-2, that do not exceed the amount of the 
expenses substantiated (i.e., amounts which are treated as paid under an 
accountable plan), and that are received by an employee on or after 
January 1, 1989, with respect to expenses paid or incurred on or after 
January 1, 1989.
    (2) Transition rule. Payments made under reimbursement or other 
expense allowance arrangements that are received by an employee on or 
after January 1, 1989, but prior to July 1, 1990, to the extent that the 
employee is required to account (within the meaning of the term 
``account'' as set forth in Sec. 1.162-17(b)(4) or 1.274-5T(f)(4), 
whichever is applicable) and does so account to the payor for such 
expenses, provided the payor has made a reasonable, good faith effort to 
comply with the requirements of section 62(c). In general, compliance 
with the provisions of this section, as in effect for payments made 
under reimbursement or other expense allowance arrangements that were 
received by an employee before January 1, 1989, with respect to expenses 
paid or incurred before January 1, 1989, will constitute such reasonable 
good faith compliance. In no event, however, will reasonable good faith 
compliance exist if a payor fails to report payments made under an 
arrangement (other than a per diem or mileage allowance type 
arrangement) under which an employee is not required to substantiate 
expenses paid or incurred or is not required to return amounts in excess 
of the substantiated expenses.
    (i) Payments of interest on obligations of the United States, or a 
State, Territory, or political subdivision thereof, or the District of 
Columbia, or any agency or instrumentality of any one or more of the 
foregoing (but for requirements for reporting certain such payments by 
the United States or any agency or instrumentality thereof, see 
Secs. 1.1461-1 to 1.1461-3, inclusive).
    (j) Payments of interest on corporate bonds (but for reporting 
requirements as to payments on certain corporate bonds, see Sec. 1.6049-
5.
    (k) Amounts paid as an allowance or reimbursement for traveling or 
other

[[Page 216]]

bona fide ordinary and necessary expenses, including an allowance for 
meals and lodging or a per diem allowance in lieu of subsistence, to 
persons in the service of an international organization (without regard 
to whether there is a requirement to account for such amounts) if-
    (1) The organization is designated as an international organization 
by the President of the United States in Executive Orders issued 
pursuant to 22 U.S.C. 288, and
    (2) The organization has immunity with respect to the invoilability 
of its archives pursuant to an international agreement having full force 
and effect in the United States.
    (l) A payment to an informer as an award, fee, or reward for 
information relating to criminal activity, but only if such payment is 
made by the United States, a State, Territory, or political subdivision 
thereof, or the District of Columbia, or any agency or instrumentality 
of any one or more of the foregoing, or, with respect to payments made 
after December 31, 1987, by an organization that is described in section 
501(c)(3) and that makes such payments in furtherance of a charitable 
purpose to lessen the burdens of government within the meaning of 
Sec. 1.501(c)(3)-1(d)(2).
    (m) On and after September 9, 1968, payments by a person carrying on 
the banking business of interest on a deposit evidenced by a negotiable 
time certificate of deposit (but for reporting requirements as to 
payments made after December 31, 1962, of interest on certain deposits, 
see sec. 6049 and the regulations thereunder in this part).
    (n) Payments to individuals as scholarships or fellowship grants 
within the meaning of section 117(b)(1), whether or not ``qualified 
scholarships'' as described in section 117(b). This exception does not 
apply to any amount of a scholarship or fellowship grant that represents 
payment for services within the meaning of section 117(c). Instead, 
these amounts are required to be reported as wages on Form W-2. See 
Sec. 1.1461-1(c) for applicable reporting requirements for amounts paid 
to foreign persons.
    (o) Per diem of certain alien trainees described under section 
1441(c)(6).
    (p) Payments made to the following persons:
    (1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except a 
corporation engaged in providing medical and health care services or 
engaged in the billing and collecting of payments in respect to the 
providing of medical and health care services. However, no reporting is 
required where payment is made to a hospital or extended care facility 
described in section 501(c)(3) which is exempt from taxation under 
section 501(a) or to a hospital or extended care facility owned and 
operated by the United States, a State, the District of Columbia, a 
possession of the United States, or a political subdivision, agency or 
instrumentality of any of the foregoing. For reporting requirements as 
to payments by cooperatives, and to certain other payments, see sections 
6042, 6044, and 6049 and the regulations thereunder in this part.
    (2) An organization exempt from taxation under section 501(a), as 
described in Sec. 1.6049-4(c)(1)(ii)(B)(1), or an individual retirement 
plan, as described in Sec. 1.6049-4(c)(1)(ii)(C).
    (3) The United States, as described in Sec. 1.6049-4(c)(1)(ii)(D).
    (4) A State, the District of Columbia, a possession of the United 
States, or any political subdivision of any of the foregoing, as 
described in Sec. 1.6049-4(c)(1)(ii)(E).
    (5) A foreign government or political subdivision of a foreign 
government, as described in Sec. 1.6049-4(c)(1)(ii)(F).
    (6) An international organization, as described in Sec. 1.6049-
4(c)(1)(ii)(G).
    (7) A foreign central bank of issue, as described in Sec. 1.6049-
4(c)(1)(ii)(H) and the Bank for International Settlements.
    (8) Any wholly owned agency or instrumentality of any person 
described in paragraph (q) (2), (3), (4), (5), (6), or (7) of this 
section.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.6041-3, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and on GPO Access.

[[Page 217]]



Sec. 1.6041-4  Foreign-related items and other exceptions.

    (a) Exempted foreign-related items--(1) Returns of information are 
not required for payments that a payor can, prior to payment, associate 
with documentation upon which it may rely to treat as made to a foreign 
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed to 
be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or (5). 
However, such payments may be reportable under Sec. 1.1461-1(b) and (c). 
For purposes of this paragraph (a)(1), the provisions in Sec. 1.6049-
5(c) (regarding rules applicable to documentation of foreign status and 
definition of U.S. payor and non-U.S. payor) shall apply. See 
Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules regarding 
scholarships, grants, pensions, annuities, etc. The provisions of 
Sec. 1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Internal Revenue Code and the regulations under that chapter.
    (2) Returns of information are not required for payments of amounts 
from sources outside the United States (determined under the provisions 
of part I, subchapter N, chapter 1 of the Internal Revenue Code and the 
regulations under those provisions) made by a non-U.S. payor or non-U.S. 
middleman outside the United States. For a definition of non-U.S. payor 
and non-U.S. middleman, see Sec. 1.6049-5(c)(5). For circumstances in 
which a payment is considered to be made outside the United States, see 
Sec. 1.6049-5(e).
    (3) Returns of information are not required for amounts paid by a 
foreign intermediary described in Sec. 1.1441-1(c)(13) that it has 
received in its capacity as an intermediary and that are associated with 
a valid withholding certificate described in Sec. 1.1441-1(e)(3)(ii) or 
(iii) and payments made by a U.S. branch of a foreign bank or of a 
foreign insurance company described in Sec. 1.1441-1(b)(2)(iv) (other 
than a U.S. branch that is treated as a U.S. person) that are associated 
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(v), which certificate the intermediary or branch has furnished 
to the payor or middleman from whom it has received the payment, unless, 
and to the extent, the intermediary or branch knows that the payments 
are required to be reported under Sec. 1.6041-1 and were not so 
reported. For example, if a foreign intermediary or U.S. branch 
described in Sec. 1.1441-1(b)(2)(iv) fails to provide information 
regarding U.S. persons that are not exempt from reporting under 
Sec. 1.6041-3(q) to the person from whom the intermediary or U.S. branch 
receives the payment, the foreign intermediary or U.S. branch must 
report the payment on an information return. The exception of this 
paragraph (a)(3) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
    (4) Returns of information are not required for amounts paid with 
respect to notional principal contracts referred to in Sec. 1.863-7 or 
1.988-2(e) which the payor may treat as effectively connected income of 
a foreign payee under the provisions of Sec. 1.1441-4(a)(3) or if the 
payee provides a representation in a master agreement that governs the 
transactions in notional principal contracts between the parties (for 
example, an International Swap and Derivatives Association (ISDA) 
Agreement, including the Schedule thereto) or in the confirmation on the 
particular notional principal contract transaction that the counterparty 
is a foreign person. See, however, Sec. 1.1461-1(c)(2)(i) for applicable 
reporting requirements.
    (5) Returns of information are not required for the period that the 
amounts paid represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (a)(5) shall terminate when 
payment is deemed to occur in accordance with the provisions of 
Sec. 1.1441-2(e)(3).
    (6) For rules concerning direct sellers, see Sec. 1.6041A-
1(d)(3)(i)(C).
    (b) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (a) of this section are presumed made to 
U.S. payees who are not exempt recipients if, prior to payment, the 
payor or middleman cannot

[[Page 218]]

reliably associate the payment either with a Form W-9 furnished by one 
of the joint owners in the manner required in Secs. 31.3406(d)-1 through 
31.3406(d)-5 of this chapter, or with documentation described in 
paragraph (a)(1) of this section furnished by each joint owner upon 
which the payor or middleman can rely to treat each joint owner as a 
foreign payee or foreign beneficial owner.
    (c) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (d) Effective date. The provisions of this section apply to payments 
made after December 31, 2000.

[T.D. 8734, 62 FR 53473, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]



Sec. 1.6041-5  Information as to actual owner.

    When a person receiving a payment described in section 6041 is not 
the actual owner of the income received, the name and address of the 
actual owner shall be furnished upon demand of the person paying the 
income, and in default of compliance with such demand the payee becomes 
liable for the penalties provided. See section 7203.



Sec. 1.6041-6  Returns made on Forms 1096 and 1099 under section 6041; contents and time and place for filing.

    Returns made under section 6041 on Forms 1096 and 1099 for any 
calendar year shall be filed on or before February 28 (March 31 if filed 
electronically) of the following year with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for such forms. The name and address of the person making the payment 
and the name and address of the recipient of the payment shall be stated 
on Form 1099. If the present address of the recipient is not available, 
the last known post office address must be given. See section 6109 and 
the regulations thereunder for rules requiring the inclusion of 
identifying numbers in Form 1099.

[T.D. 7284, 38 FR 20828, Aug. 3, 1973, as amended by T.D. 8895, 65 FR 
50406, Aug. 18, 2000]



Sec. 1.6041-7  Magnetic media requirement.

    (a) General. For rules relating to permission to submit the 
information required by Form 1099 or W-2 on magnetic tape or other 
media, see Sec. 1.9101-1. See also paragraph (b)(2) of Sec. 31.6011(a)-7 
of this chapter (Employment Tax Regulations) for additional rules 
relating to Form W-2. High-volume filers of information returns must 
file their returns on magnetic media. See section 6011(e) and 
Sec. 301.6011-2 of this chapter (Procedure and Administration 
Regulations) for the requirements for filing on magnetic media.
    (b) Returns on magnetic tape by departments of health care carriers. 
(1) For calendar years beginning on or after January 1, 1971, a health 
care carrier, or an agent thereof, making payment of fees or other 
compensation to providers of medical and health care services, may make 
a separate return on magnetic tape for each separate department within a 
specific line of such carrier's business, so long as all of such returns 
taken together contain all of the information required by section 6041 
with respect to each provider of medical and health care services to 
whom such health care carrier makes payments aggregating $600 or more 
during the calendar year. Examples of separate departments within a 
specific line of such carrier's business (such as health and accident 
insurance) include, but are not limited to, separate departments to 
process claims of individual and group policyholders; and separate 
departments established along geographic lines.
    (2) For purposes of this paragraph, the term ``health care carrier'' 
means any person making health care payments: (i) In exchange for the 
payment of a premium, (ii) in accordance with an employee benefit 
program, or (iii) in connection with a government-sponsored health care 
program.

[T.D. 7106, 36 FR 6422, Apr. 3, 1971, as amended by T.D. 8734, 62 FR 
53473, Oct. 14, 1997]



Sec. 1.6041-8  Cross-reference to penalties.

    For provisions relating to the penalty provided for failure to file 
timely a correct information return required under section 6041(a) or 
(b), see

[[Page 219]]

Sec. 301.6721-1 of this chapter (Procedure and Administration 
Regulations). For provisions relating to the penalty provided for 
failure to furnish timely a correct payee statement required under 
section 6041(d), see Sec. 301.6722-1 of this chapter. See Sec. 301.6724-
1 of this chapter for the waiver of a penalty if the failure is due to 
reasonable cause and is not due to willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997]



Sec. 1.6041A-1  Returns regarding payments of remuneration for services and certain direct sales.

    (a) through (c) [Reserved]
    (d) Exceptions to return requirement. [Reserved]
    (1) and (2) [Reserved]
    (3) Foreign transactions--(i) In general. No return shall be 
required under section 6041A with respect to payments described in this 
paragraph (d)(3).
    (A) Returns of information are not required for payments that a 
payor can, prior to payment, associate with documentation upon which it 
may rely to treat as made to a foreign beneficial owner in accordance 
with Sec. 1.1441-1(e)(1)(ii) or as made to a foreign payee in accordance 
with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign payee under 
Sec. 1.6049-5(d)(2), (3), (4), or (5). However, such payments may be 
reportable under Sec. 1.1461-1(b) and (c). For purposes of this 
paragraph (d)(3)(i)(A), the provisions in Sec. 1.6049-5(c) (regarding 
rules applicable to documentation of foreign status and definition of 
U.S. payor and non-U.S. payor) shall apply. The provisions of 
Sec. 1.1441-1 shall apply by substituting the term payor for the term 
withholding agent.
    (B) Returns of information are not required for payments of 
remuneration for services from sources outside the United States 
(determined under the provisions of part I, subchapter N, chapter 1 of 
the Internal Revenue Code and the regulations under those provisions) if 
payments are made outside the United States by a non-U.S. payor or non 
U.S. middleman. For a definition of non U.S. payor or non-U.S. 
middleman, see Sec. 1.6049-5(c)(5). For circumstances in which a payment 
is considered to be made outside the United States, see Sec. 1.6049-
5(e).
    (C) Returns of information are not required under sections 6041 or 
6041A for amounts paid outside of the United States (within the meaning 
of Sec. 1.6049-5(e)) as remuneration for services as a direct seller 
(within the meaning of section 3508) performed outside of the United 
States or for sales described in section 6041A(b) made outside of the 
United States of consumer products for resale outside of the United 
States.
    (ii) Payor. The term payor has the same meaning as described in 
Sec. 1.6049-4(a)(2).
    (iii) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (d)(3)(i) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor or middleman cannot reliably associate the payment either with 
a Form W-9 furnished by one of the joint owners in the manner required 
in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (d)(3)(i)(A) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner.
    (iv) Conversion into United States dollars of amounts paid in 
foreign currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (v) Effective date. The provisions of this paragraph (d)(3) apply to 
payments made after December 31, 2000.
    (e) [Reserved]
    (f) Statements to be furnished to persons with respect to whom 
information is required to be furnished--(1) [Reserved]
    (2) Time for furnishing statement. [Reserved]
    (3) Contents of statement. [Reserved]
    (g) [Reserved]
    (h) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6041A(a) or (b), see Sec. 301.6721-1 of this 
chapter (Procedure and Administration Regulations). For provisions 
relating to the penalty provided for failure to furnish timely a correct 
payee statement required under section 6041A(e), see Sec. 301.6722-1 of 
this chapter. See Sec. 301.6724-1 of this chapter for the

[[Page 220]]

waiver of a penalty if the failure is due to reasonable cause and is not 
due to willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]



Sec. 1.6042-1  Return of information as to dividends paid in calendar years before 1963.

    (a) Requirement of return--(1) In general. Except as provided in 
subparagraphs (2) and (3) of this paragraph, every domestic corporation, 
or foreign corporation engaged in business within the United States or 
having an office or place of business or a fiscal or paying agent in the 
United States, making payments during any calendar year before 1963 of 
$10 or more of dividends and distributions (other than distributions in 
liquidation) to any shareholder who is an individual (citizen or 
resident of the United States), a resident fiduciary, or a resident 
partnership any member of which is a citizen or resident shall file for 
the calendar year a return setting forth the amount of such payments for 
such calendar year. A separate return on Form 1099, showing the name and 
address of the payer and the shareholder, and the amount paid, shall be 
prepared with respect to each shareholder. These returns shall be 
accompanied by transmittal Form 1096.
    (2) Federal land bank associations and certain other corporations. A 
corporation described in section 501(c) (12), (15), or (16), or section 
521(b)(1), or a Federal land bank association or a production credit 
association, making a payment of a dividend, or a distribution, to any 
shareholder in any calendar year before 1963 shall file an information 
return with respect to such payments when they total $100 or more during 
the calendar year.
    (3) Savings and loan associations, etc. A savings and loan 
association, a cooperative bank, a homestead association, a credit 
union, or a building and loan association is required to file an 
information return with respect to distributions made to a shareholder 
during any calendar year before 1963 only if the amount thereof paid to 
the shareholder during the calendar year, or such amount when aggregated 
with other payments made to the shareholder during such year of 
interest, rents, royalties, annuities, pensions, and other gains, 
profits, and income, as described in paragraph (a)(2)(ii) of 
Sec. 1.6041-1, totals $600 or more. For this purpose, the term 
``distributions to a shareholder'' includes periodical distributions of 
earnings on running installment shares of stock paid or credited by a 
building and loan association to its holders of that class of stock, and 
the sum received upon withdrawal from a building and loan association in 
excess of the amounts paid in on account of membership fees and stock 
subscriptions, consisting of accumulated profits.
    (b) Nontaxable or partly nontaxable distributions. In the case of a 
distribution which is made from a depletion or depreciation reserve, or 
which for any other reason is deemed by the corporation to be nontaxable 
or partly nontaxable to its shareholders, the corporation shall fill in 
the information on both sides of Form 1096.
    (c) Information as to actual owner--(1) In general. When the person 
receiving a payment with respect to which an information return is 
required under authority of the Code is not the actual owner of the 
income received, the name and address of the actual owner or payee shall 
be furnished upon demand of the person paying the income, and in default 
of a compliance with such demand the payee becomes liable for the 
penalties provided. See section 7203. Dividends on stock are prima facie 
the income of the record owner of the stock. If a record owner of stock 
who is not the actual owner thereof receives dividends on such stock in 
any calendar year before 1963, he shall file a Form 1087 disclosing the 
name and address of the actual owner or payee, the name of the issuing 
corporation, the number of shares of such stock, and the amount of 
dividends received with respect to such stock during the calendar year. 
(For the reporting by a nominee of dividends received by him on behalf 
of another person in any calendar year after 1962, see Sec. 1.6042-2.) 
Unless such a disclosure is made the record owner will be held liable 
for any tax based upon such dividends. A separate Form 1087 shall be 
filed by the record owner for each of the stockholdings of each

[[Page 221]]

actual owner for whom he acts as nominee. However, where the record 
owner is a banking institution, trust company, or brokerage firm, it 
may, provided it maintains such records as will permit a prompt 
substantiation of each payment of dividends made to the actual owner, 
file one Form 1087 for each actual owner for whom it acts as nominee and 
report thereon the total amount of the dividends paid to such actual 
owner (without itemization as to the issuing company, class of stock, 
etc.).
    (2) Exceptions. The filing of Form 1087 is not required if:
    (i) The record owner is required to file a fiduciary return on Form 
1041, or a withholding return on Form 1042, disclosing the name and 
address of the actual owner or payee;
    (ii) The actual owner or payee is a nonresident alien individual, 
foreign partnership, or foreign corporation and the tax has been 
withheld at the source before receipt of the dividends by the record 
owner;
    (iii) The record owner is a banking institution, a trust company, or 
a brokerage firm which prepares the individual income tax return of the 
actual owner, provided the verification on the return with respect to 
the preparation thereof is executed by such record owner;
    (iv) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 which 
reflects the name and address of the actual owner or payee;
    (v) The actual owner is an organization exempt from taxation under 
section 501(a) and is exempt from the requirement of filing a return 
under section 6033 and paragraph (g) of Sec. 1.6033-1; or
    (vi) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return.

See Sec. 1.1441-1, relating to withholding of tax on nonresident alien 
individuals, and Sec. 1.1442-1, relating to withholding of tax on 
nonresident foreign corporations.
    (d) Time and place for filing. Returns made under this section on 
Forms 1096 and 1099 and Form 1087 for any calendar year shall be filed 
on or before February 28 of the following year with any of the Internal 
Revenue Service Centers, the addresses of which are listed in the 
instructions for such forms.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12795, Dec. 28, 1962]



Sec. 1.6042-2  Returns of information as to dividends paid.

    (a) Requirement of reporting--(1) In general. An information return 
on Form 1099 shall be made under section 6042(a) by--
    (i) Every person who makes a payment of dividends (as defined in 
Sec. 1.6042-3) to any other person during a calendar year. The 
information return shall show the aggregate amount of the dividends, the 
name, address, and taxpayer identifying number of the person to whom 
paid, the amount of tax deducted and withheld under section 3406 from 
the dividends, if any, and such other information as required by the 
forms. An information return is generally not required if the amount of 
dividends paid to the other person during the calendar year aggregates 
less than $10 or if the payment is made to a person who is an exempt 
recipient described in Sec. 1.6049-4(c)(1)(ii) unless the payor backup 
withholds under section 3406 on such payment (because, for example, the 
payee has failed to furnish a Form W-9 on request), in which case the 
payor must make a return under this section, unless the payor refunds 
the amount withheld pursuant to Sec. 31.6413(a)-3 of this chapter.
    (ii) Every person, except to the extent that he acts as a nominee 
described in paragraph (a)(1)(iii) of this section, who receives 
payments of dividends as a nominee on behalf of another person shall 
make a return of information under this section for the calendar year of 
the payment . The information return shall show the aggregate amount of 
the dividends, the name, address, and taxpayer identification number of 
the person on whose behalf the dividends are received, the

[[Page 222]]

amount of tax deducted and withheld under section 3406 from the 
dividends, if any, and such other information as required by the forms. 
An information return is generally not required if the amount of the 
dividends received on behalf of the other person during the calendar 
year aggregates less than $10. However, a return of information is not 
required under this section if--
    (A) The record owner is, pursuant to section 6012(a) (3) or (4) and 
Sec. 1.6012-3, required to file a fiduciary return on Form 1041 that is 
filed for the estate or trust disclosing the name, address, and 
identifying number of both the record owner and actual owner and 
furnishes Form K-1 to each actual owner containing the information 
required to be shown on the form, including amounts withheld under 
section 3406;
    (B) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is, pursuant to section 6012(a) (3) or (4) and Sec. 1.6012-3, 
required to file a fiduciary return on Form 1041 that is filed for the 
estate or trust disclosing the name, address, and identifying number of 
both the record owner and the actual owner and furnishes Form K-1 to 
each actual owner containing the information required to be shown on the 
form, including amounts withheld under section 3406; or
    (C) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return but only if 
the name, address, and identifying number of the record owner are 
included on or with the annual return filed for the tax exempt 
organization).
    (iii) Every person who is a nominee acting as a custodian of a unit 
investment trust described in section 851(f)(1) and paragraph (d) of 
Sec. 1.851-7 who, during a calendar year after 1968, receives payments 
of dividends in such capacity, shall make an information return on Forms 
1096 and 1099, for such calendar year showing the information required 
by such forms and instructions thereto and the name, address, and 
identifying number of the nominee identified as such. This subdivision 
shall not apply if the regulated investment company agrees with the 
nominee to satisfy the requirements of section 6042 and the regulations 
thereunder with respect to each holder of an interest in the unit 
investment trust whose shares are being held by the nominee as custodian 
and within the time limit for furnishing statements prescribed by 
Sec. 1.6042-4, files with the Internal Revenue Service office where such 
company's return is to be filed for the taxable year, a statement that 
the holders of the unit investment trust with whom the agreement was 
made have been directly notified by the regulated investment company. 
Such statement shall include the name, sponsor, and custodian of each 
unit investment trust whose holders have been directly notified. The 
nominee's requirements under this subdivision shall be deemed met if the 
regulated investment company transmits a copy of such statement to the 
nominee within such period; provided, however, if the regulated 
investment company fails or is unable to satisfy the requirements of 
section 6042 with respect to the holders of interest in the unit 
investment trust, it shall so notify the Internal Revenue Service within 
45 days following the close of its taxable year. The custodian shall, 
upon notice by the Internal Revenue Service that the regulated 
investment company has failed to comply with the agreement, satisfy the 
requirements of this subdivision within 30 days of such notice.
    (2) Definitions. The term ``person'' when used in this section does 
not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, dividends paid 
by or to one of these entities need not be reported. For purposes of 
this section, a person who receives a dividend shall be considered to 
have received it as a nominee if he is not the actual owner of such 
dividend and if he was required under Sec. 1.6109-1 to furnish his 
identifying number to the payer of the dividend (or would have been so 
required if the total of such dividends for the year had been $10 or 
more), and

[[Page 223]]

such number was (or would have been) required to be included on an 
information return filed by the payer with respect to the dividend. 
However, a person shall not be considered to be a nominee as to any 
portion of a dividend which is actually owned by another person whose 
name is also shown on the information return filed by the payer or 
nominee with respect to such dividend. Thus, in the case of stock 
jointly owned by a husband and wife, the husband will not be considered 
as receiving any portion of a dividend on that stock as a nominee for 
his wife if his wife's name is included on the information return filed 
by the payer with respect to the dividend.
    (3) Determination of person to whom a dividend is paid or for whom 
it is received. For purposes of applying the provisions of this section, 
the person whose identifying number is required to be included by the 
payer of a dividend on an information return with respect to such 
dividend shall be considered the person to whom the dividend is paid. In 
the case of a dividend received by a nominee on behalf of another 
person, the person whose identifying number is required to be included 
on an information return made by the nominee with respect to such 
dividend shall be considered the person on whose behalf such dividend is 
received by the nominee. Thus, in the case of a dividend made payable to 
a person other than the record owner of the stock with respect to which 
the dividend is paid, the record owner of the stock shall be considered 
the person to whom the dividend is paid for purposes of applying the 
reporting requirements in this section, since his identifying number is 
required to be included on the information return filed under this 
section by the payer of the dividend. Similarly, if a stockbroker 
receives a dividend on stock held in street name for the joint account 
of a husband and wife, the dividend is considered as received on behalf 
of the husband since his identifying number should be shown on the 
information return filed by the nominee under this section. Thus, if the 
wife has a separate account with the same stockbroker, any dividends 
received by the stockbroker for her separate account should not be 
aggregated with the dividends received for the joint account for 
purposes of information reporting. For regulations relating to the use 
of identifying numbers, see Sec. 1.6109-1.
    (4) Inclusion of other payments. The Form 1099 filed by any person 
with respect to payments of dividends to another person during a 
calendar year may, at the election of the maker, include other payments 
made by him to such other person during such year which are required to 
be reported on Form 1099. Similarly, the Form 1099 filed by a nominee 
with respect to payments of dividends received by him on behalf of any 
other person during a calendar year may include payments of interest 
received by him on behalf of such person during such year which are 
required to be reported on Form 1099.
    (b) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (c) Time and place for filing. The returns required under this 
section for any calendar year shall be filed after September 30 of such 
year, but not before the payer's final payment for the year, and on or 
before February 28 (March 31 if filed electronically) of the following 
year with any of the Internal Revenue Service Centers, the addresses of 
which are listed in the instructions for Form 1096. For extensions of 
time for filing returns under this section, see Sec. 1.6081-1.
    (d) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6042(a), see Sec. 301.6721-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (e) Magnetic media requirement. For rules relating to permission to 
submit the information required by Form 1087

[[Page 224]]

or 1099 on magnetic tape or other media, see Sec. 1.9101-1. For the 
requirement to submit the information required by Form 1099 on magnetic 
media for payments after December 31, 1983, see section 6011(e) and 
Sec. 301.6011-2 of this chapter (Procedure and Administration 
Regulations).

[T.D. 6628, 27 FR 12796, Dec. 29, 1962, as amended by T.D. 6677, 28 FR 
10147, Sept. 17, 1963; T.D. 6879, 31 FR 3493, Mar. 8, 1966; T.D. 6883, 
31 FR 6589, May 3, 1966; T.D. 7000, 34 FR 996, Jan. 23, 1969; T.D. 7187, 
37 FR 13258, July 6, 1972; T.D. 8734, 62 FR 53474, Oct. 14, 1997; T.D. 
8804, 64 FR 11378, Mar. 9, 1999; T.D. 8895, 65 FR 50406, Aug. 18, 2000]



Sec. 1.6042-3  Dividends subject to reporting.

    (a) In general. Except as provided in paragraph (b) of this section, 
the term dividend for purposes of this section and Secs. 1.6042-2 and 
1.6042-4 means the amounts described in the following paragraphs (a) (1) 
through (3) of this section--
    (1) Any distribution made by a corporation to its shareholders which 
is a dividend as defined in section 316; and
    (2) Any payment made by a stockbroker to any person as a substitute 
for a dividend. Such a payment includes any payment made in lieu of a 
dividend to a person whose stock has been borrowed. See Sec. 1.6045-2(h) 
for coordination of the reporting requirements under sections 6042 and 
6045(d) with respect to such payments; and
    (3) A distribution from a regulated investment company (irrespective 
of the fact that any part of the distribution may not represent ordinary 
income (i.e., may, for example, represent a capital gain dividend as 
defined in section 852(b)(3)(C)).
    (b) Exceptions--(1) In general. For purposes of Secs. 1.6042-2 and 
1.6042-4, the amounts described in paragraphs (b)(1)(i) through (vii) of 
this section are not dividends.
    (i) Amounts paid by an insurance company to a policyholder, other 
than a dividend upon its capital stock.
    (ii) Payments (however denominated) by a mutual savings bank, 
savings and loan association, or similar organization, in respect of 
deposits, investment certificates, or withdrawable or repurchasable 
shares. See, however, section 6049 and the regulations under that 
section for provisions requiring reporting of these payments.
    (iii) Distributions or payments that a payor can, prior to payment, 
reliably associate with documentation upon which it may rely to treat as 
made to a foreign beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with 
Sec. 1.6049-5(d)(1) or presumed to be made to a foreign payee under 
Sec. 1.6049-5(d) (2), (3), (4), or (5). However, such payments may be 
reportable under Sec. 1.1461-1(b) and (c). For purposes of this 
paragraph (b)(1)(iii), the provisions in Sec. 1.6049-5(c) (regarding 
rules applicable to documentation of foreign status and definition of 
U.S. payor and non-U.S. payor) shall apply. The provisions of 
Sec. 1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Internal Revenue Code (Code).
    (iv) Distributions or payments from sources outside the United 
States (as determined under the provisions of part I, subchapter N, 
chapter 1 of the Code and the regulations under those provisions) paid 
outside the United States by a non-U.S. payor or a non-U.S. middleman. 
For a definition of non-U.S. payor and non-U.S. middleman, see 
Sec. 1.6049-5(c)(5). For circumstances in which a payment is considered 
to be made outside the United States, see Sec. 1.6049-5(e).
    (v) Distributions or payments for the period that the amounts 
represent assets blocked as described in Sec. 1.1441-2(e)(3). The 
exemption in this paragraph (b)(1)(v) shall terminate when payment is 
deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
    (vi) Payments made by a foreign intermediary described in 
Sec. 1.1441-1(c)(13) of amounts that it has received in its capacity as 
an intermediary and that are associated with a valid withholding 
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) and payments 
made by a U.S. branch of a foreign bank or of a foreign insurance 
company described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch 
that is treated as a U.S. person) that are associated with a valid 
withholding certificate described in Sec. 1.1441-

[[Page 225]]

1(e)(3)(v), which certificate the intermediary or branch has furnished 
to the payor or middleman from whom it has received the payment, unless, 
and to the extent, the intermediary or branch knows that the payments 
are required to be reported under Sec. 1.6042-2 and were not so 
reported. For example, if a foreign intermediary or U.S. branch 
described in Sec. 1.1441-1(b)(2)(iv) fails to provide information 
regarding U.S. persons that are not exempt from reporting under 
Sec. 1.6049-4(c)(1)(ii) to the person from whom the intermediary or U.S. 
branch receives the payment, the amount paid by the foreign intermediary 
or U.S. branch to such person is a dividend. The exception of this 
paragraph (b)(1)(vi) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
    (vii) With respect to amounts paid or credited after December 31, 
1982, any amount paid or credited to any person described in 
Sec. 1.6049-4(c)(1)(ii), unless a tax is withheld under section 3406 and 
is not refunded by the payor in accordance with Sec. 31.6413(a)-3 of 
this chapter (Employment Tax Regulations).
    (2) Payor. The term payor has the same meaning as described in 
Sec. 1.6049-4(a)(2).
    (3) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under this paragraph (b) are presumed made to U.S. payees 
who are not exempt recipients if, prior to payment, the payor or 
middleman cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (b)(1)(iii) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner. For purposes of 
applying this paragraph (b)(3), the grace period described in 
Sec. 1.6049-5(d)(2)(ii) shall apply only if each payee qualifies for 
such grace period.
    (4) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (5) Effective date--(i) General rule. The provisions of this 
paragraph (b) apply to payments made after December 31, 2000.
    (ii) Transition rules. The validity of a withholding certificate 
(namely, Form W-8 or other form upon which the payor is permitted to 
rely to hold the payee as a foreign person) that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a withholding certificate that is valid on or after January 
1, 1999, remains valid until its validity expires under the regulations 
in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised 
April 1, 1999) but in no event shall such withholding certificate remain 
valid after December 31, 2000. The rule in this paragraph (b)(5)(ii), 
however, does not apply to extend the validity period of a withholding 
certificate that expires solely by reason of changes in the 
circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (b)(5)(ii), 
a payor may choose not to take advantage of the transition rule in this 
paragraph (b)(5)(ii) with respect to one or more withholding 
certificates valid under the regulations in effect prior to January 1, 
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, 
to require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in Sec. 1.1441-1(e)(4)(ii), regardless of when the certificate 
is obtained.
    (c) Special rule. If a person makes a payment which may be a 
dividend, or if a nominee receives a payment which may be a dividend, 
but such person or nominee is unable to determine the portion of the 
payment which is a dividend (as defined in paragraphs (a) and

[[Page 226]]

(b) of this section) at the time he files his return under Sec. 1.6042-
2, he shall, for purposes of such section, treat the entire amount of 
such payment as a dividend.

[T.D. 6628, 27 FR 12797, Dec. 28, 1962, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 7987, 49 FR 42719, Oct. 24, 1984; T.D. 8029, 
50 FR 23680, June 5, 1985; T.D. 8734, 62 FR 53475, Oct. 14, 1997; T.D. 
8804, 63 FR 72186, Dec. 31, 1998; 64 FR 73411, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000]



Sec. 1.6042-4  Statements to recipients of dividend payments.

    (a) Requirement. A person required to make an information return 
under section 6042(a)(1) and Sec. 1.6042-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for dividend payments.
    (b) Form of the statement. The statement required by paragraph (a) 
of this section must be either the official Form 1099 prescribed by the 
Internal Revenue Service for the respective calendar year or an 
acceptable substitute statement that contains provisions that are 
substantially similar to those of the official Form 1099 for the 
respective calendar year. For further guidance on how to prepare an 
acceptable substitute statement, see Rev. Proc. 95-30 (1995-27 I.R.B. 9) 
(or its successor), republished as ``Rules and Specifications for 
Private Printing of Substitute Forms 1096, 1098, 1099 Series, 5498, and 
W-2G.'' See Sec. 601.601(d)(2) of this chapter.
    (c) Aggregation of payments. A payor may aggregate on one Form 1099 
all payments made to a recipient with respect to each separate account 
during a calendar year.
    (d) Manner of providing statements to recipients--(1) In general. 
The Form 1099, or acceptable substitute statement, must be provided to 
the recipient either in person or by first-class mail to the recipient's 
last known address in a statement mailing.
    (2) Statement mailing requirement. The mailing required under 
section 6042(c) of a Form 1099 to a payee-recipient must qualify as a 
statement mailing. A statement mailing must contain the required Form 
1099 or acceptable substitute statement (written statement) and must 
comply with enclosure and envelope restrictions.
    (i) Enclosure restrictions. To qualify as a statement mailing, the 
mailing cannot contain any enclosures except those listed in this 
paragraph (d)(2)(i). Moreover, no promotional or advertising material is 
permitted in the mailing of the written statement. Even a de minimis 
amount of promotional or advertising material violates the statement 
mailing requirement. However, a logo on the envelope containing the 
written statement and on nontax enclosures described in paragraph 
(d)(2)(i) (A) through (D) of this section does not violate the written 
statement requirement. The written statement required under section 
6042(c) and paragraph (a) of this section may be perforated to a check 
or to a statement of the recipient-payee's specific account with the 
payor described in paragraph (d)(2)(i) (A) or (C) of this section. The 
enclosure to which the written statement is perforated must contain, in 
a bold and conspicuous type, the legend: ``Important Tax Return Document 
Attached.'' The enclosures permitted in a mailing are limited to--
    (A) A check with respect to the account reported on the written 
statement;
    (B) A letter explaining why a check with respect to such account is 
not enclosed with the written statement (for example, because a dividend 
has not been declared payable);
    (C) A statement of the taxpayer-recipient's specific account with 
the payor if payments on such account are reflected on the written 
statement;
    (D) A letter limited to an explanation of the tax consequences of 
the information set forth on the enclosed written statement;
    (E) Payee statements related to other Forms 1099, Form 1098, and 
Form 5498 (or the account balance on a Form 5498), Forms W-2 and W-2G; 
and
    (F) Any document concerning the solicitation of the Form W-9, as 
described in Sec. 31.3406(h)-3(a) of this chapter, or of the Form W-8 as 
described in Sec. 1.1441-1(e)(1).
    (ii) Envelope and delivery restrictions--(A) Envelope restrictions. 
The outside of the envelope in which the written statement is mailed and 
each nontax

[[Page 227]]

enclosure enclosed in the envelope must contain, in a bold and 
conspicuous type, the legend: ``Important Tax Return Document 
Enclosed.'' For purposes of this paragraph (d)(2)(ii), a nontax 
enclosure is any item listed in paragraphs (d)(2)(i)(A) through (C) of 
this section. However, a payor is not required to include the legend on 
the outside of an envelope containing only the enclosures in paragraph 
(d)(2)(i)(D) through (F) of this section.
    (B) Delivery restrictions. The requirement to provide the written 
statement in person or by first-class mail may be satisfied by sending 
the written statement and any enclosures described in paragraph 
(d)(2)(i) of this section by intra-office mail, provided that intra-
office mail is used by the payor in sending account activity, balance 
information, and other correspondence to the payee. If a payor does not 
personally deliver the written statement (i.e., the Form 1099 or its 
acceptable substitute) to the recipient or mail it to the recipient in a 
statement mailing as described in this paragraph (d), the payor is 
considered to have failed to mail the statement required under section 
6042(c) and will be subject to the penalty under section 6722.
    (e) Time for furnishing statements--(1) In general. Each statement 
required by section 6042(c) and this section to be furnished to any 
person for a calendar year must be furnished to such person after 
November 30 of the year and on or before January 31 (February 10 in the 
case of a nominee filing under Sec. 1.6042-2(a)(1)(iii)) of the 
following year, but no statement may be furnished before the final 
dividend for the calendar year has been paid. However, the statement may 
be furnished at any time after April 30 if it is furnished with the 
final dividend for the calendar year.

    (2) Extensions of time. For good cause upon written application of 
the person required to furnish statements under this section, the 
Director, Martinsburg Computing Center, may grant an extension of time 
not exceeding 30 days in which to furnish such statements. The 
application must be addressed to the Director, Martinsburg Computing 
Center, and must contain a full recital of the reasons for requesting 
the extension to aid the Director in determining the period of the 
extension, if any, that will be granted. Such a request in the form of a 
letter to the Director, Martinsburg Computing Center, signed by the 
applicant will suffice as an application. The application must be filed 
on or before the date prescribed in paragraph (e)(1) of this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see section 
7503 and Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (f) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6042(c), see Sec. 301.6722-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (g) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and before 
January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or successor 
revenue procedures). See Sec. 601.601(d)(2) of this chapter.

[T.D. 8637, 60 FR 66110, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997]



Sec. 1.6043-1  Return regarding corporate dissolution or liquidation.

    (a) Requirement of returns. Within 30 days after the adoption of any 
resolution or plan for or in respect of the dissolution of a corporation 
or the liquidation of the whole or any part of its capital stock, the 
corporation shall file a return on Form 966, containing the information 
required by paragraph (b) of this section and by such form. Such return 
shall be filed with the district director for the district in which the 
income tax return of the corporation is filed. Further, if after the 
filing of a Form 966 there is an amendment of or supplement to the 
resolution or plan, an additional Form 966, based on the

[[Page 228]]

resolution or plan as amended or supplemented, must be filed within 30 
days after the adoption of such amendment or supplement. A return must 
be filed under section 6043 and this section in respect of a liquidation 
whether or not any part of the gain or loss to the shareholders upon the 
liquidation is recognized under the provisions of section 1002.
    (b) Contents of return--(1) In general. There shall be attached to 
and made a part of the return required by section 6043 and paragraph (a) 
of this section a certified copy of the resolution or plan, together 
with any amendments thereof or supplements thereto, and such return 
shall in addition contain the following information:
    (i) The name and address of the corporation;
    (ii) The place and date of incorporation;
    (iii) The date of the adoption of the resolution or plan and the 
dates of any amendments thereof or supplements thereto; and
    (iv) The internal revenue district in which the last income tax 
return of the corporation was filed and the taxable year covered 
thereby.
    (2) Returns in respect of amendments or supplements. If a return has 
been filed pursuant to section 6043 and this section, any additional 
return made necessary by an amendment of or a supplement to the 
resolution or plan will be deemed sufficient if it gives the date the 
prior return was filed and contains a duly certified copy of the 
amendment or supplement and all other information required by this 
section and by Form 966 which was not given in the prior return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968; T.D. 7926, 48 FR 55847, Dec. 16, 1983]



Sec. 1.6043-2  Return of information respecting distributions in liquidation.

    (a) Unless the distribution is one in respect of which information 
is required to be filed pursuant to Sec. 1.332-6(b), 1.368-3(a), or 
1.1081-11, every corporation making any distribution of $600 or more 
during a calendar year to any shareholder in liquidation of the whole or 
any part of its capital stock shall file a return of information on 
Forms 1096 and 1099, giving all the information required by such form 
and by the regulations in this part. A separate Form 1099 must be 
prepared for each shareholder to whom such distribution was made, 
showing the name and address of such shareholder, the number and class 
of shares owned by him in liquidation of which such distribution was 
made, and the total amount distributed to him on each class of stock. If 
the amount distributed to such shareholder on any class of stock 
consisted in whole or in part of property other than money, the return 
on such form shall in addition show the amount of money distributed, if 
any, and shall list separately each class of property other than money 
distributed, giving a description of the property in each such class and 
a statement of its fair market value at the time of the distribution. 
Such forms, accompanied by transmittal Form 1096 showing the number of 
Forms 1099 filed therewith, shall be filed on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which such distribution was made with any of the Internal 
Revenue Service Centers, the addresses of which are listed in the 
instructions for Form 1096.
    (b) If the distribution is in complete liquidation of a domestic 
corporation pursuant to a plan of liquidation in accordance with which 
all the capital stock of the corporation is cancelled or redeemed, and 
the transfer of all property under the liquidation occurs within some 
one calendar month pursuant to section 333, and any shareholder claims 
the benefit of such section, the return on Form 1096 shall show:
    (1) The amount of earnings and profits of the corporation 
accumulated after February 28, 1913, determined as of the close of such 
calendar month, without diminution by reason of distributions made 
during such calendar month, but including in such computation all items 
of income and expense accrued up to the date on which the transfer of 
all the property under the liquidation is completed;
    (2) The ratable share of such earnings and profits of each share of 
stock canceled or redeemed in the liquidation;

[[Page 229]]

    (3) The date and circumstances of the acquisition by the corporation 
of any or securities distributed to shareholders in the liquidation;
    (4) If the liquidation is pursuant to section 333(g), a schedule 
showing the amount of earnings and profits to which the corporation has 
succeeded after December 31, 1963, pursuant to any corporate 
reorganization or pursuant to a liquidation to which section 332 
applies, except earnings and profits which on December 31, 1963, 
constituted earnings and profits of a corporation referred to in section 
333(g)(3), and except earnings and profits which were earned after such 
date by a corporation referred to in section 333(g)(3); and
    (5) If the liquidation occurs after December 31, 1966, and is 
pursuant to section 333(g)(2), the amount of earnings and profits of the 
corporation accumulated after February 28, 1913, and before January 1, 
1967, and the ratable share of such earnings and profits of each share 
of stock canceled or redeemed in the liquidation.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968; T.D. 8734, 62 FR 53476, Oct. 14, 1997; T.D. 8804, 63 
FR 72188, Dec. 31, 1998; T.D. 8895, 65 FR 50406, Aug. 18, 2000]



Sec. 1.6043-3  Return regarding liquidation, dissolution, termination, or substantial contraction of organizations exempt from taxation under section 501(a).

    (a) In general--(1) Requirement to provide information. Except as 
provided in paragraph (b) of this section, for taxable years beginning 
after December 31, 1969, every organization which for any of its last 5 
taxable years preceding any liquidation, dissolution, termination, or 
substantial contraction of the organization was exempt from taxation 
under section 501(a) shall provide the information will respect to such 
liquidation, dissolution, termination, or substantial contraction 
required by the instructions accompanying the organization's annual 
return of information. The information required by this section shall be 
provided with, and at the time prescribed for filing, the organization's 
annual return of information for the period during which any 
liquidation, dissolution (or the adopting of a resolution or plan for 
the dissolution or liquidation in whole or part), termination or 
substantial contraction occurred with respect to the organization. An 
organization which is no longer exempt from taxation under section 
501(a) shall use the annual return of information it would have been 
required to file when the organization was exempt.
    (2) Transitional rule. In the case of an annual return of 
information of an organization which was filed before September 11, 
1978, if the organization had failed to provide the information with 
such return in accordance with paragraph (a)(1) of this section, the 
organization may comply with this section by providing the information 
with the organization's first annual return of information filed after 
such date.
    (b) Exceptions. The following organizations are not required to 
provide the information under paragraph (a) of this section:
    (1) Churches, their integrated auxiliaries, or conventions or 
associations of churches;
    (2) Any organization which is not a private foundation (as defined 
in section 509(a)) and the gross receipts of which in each taxable year 
are normally not more than $5,000;
    (3) Any organization which has terminated its private foundation 
status under section 507(b)(1)(B) with respect to a liquidation, 
dissolution, termination, or substantial contraction which is in 
connection with the termination under section 507(b)(1)(B);
    (4) Any organization described in section 401(a) if the employer who 
established such organization files a return which provides the 
information under paragraph (a) of this section;
    (5) Any organization described in section 501(c)(1) and any 
corporation described in section 501(c)(2) which holds title to property 
for such 501(c)(1) organizations;
    (6) Any organization described in section 501(c)(14)(A) subject to a 
group exemption letter issued to a state regulatory body; and
    (7) Any subordinate unit of a central organization (other than a 
private foundation) which established its exempt status under the group 
ruling procedure of regulations Sec. 601.201 (n)(7),

[[Page 230]]

if the central or parent organization files an annual information return 
for the group in accordance withSec. 1.6033-2(d); and
    (8) Any organization no longer exempt from taxation under section 
501(a) and which during the period of its exemption under such section 
was neither described in section 501(c)(3) nor a corporation described 
in section 501(c)(2) which held title to property for an organization 
described in section 501(c)(3).

The Commissioner may relieve any organization or class or organizations 
from filing the return required by section 6043(b) of this section, 
where it is determined that such information is not necessary for the 
efficient administration of the internal revenue laws.
    (c) Penalties. For provisions relating to the penalty provided for 
failure to furnish any information required by this section, see section 
6652(d) and the regulations thereunder.
    (d) Definitions. (1)(i) The term ``substantial contraction'', as 
used in this section, shall include any partial liquidation or any other 
significant disposition of assets, other than transfers for full and 
adequate consideration or distributions out of current income. For 
purposes of this subparagraph, the term ``significant disposition of 
assets'' shall not include any disposition for a taxable year where the 
aggregate of--
    (A) The dispositions for the taxable year and
    (B) Where any disposition for the taxable year is part of a series 
of related dispositions made during such prior taxable years, the total 
of the related dispositions made during prior taxable years, is less 
than 25 percent of the fair market value of the net assets of the 
organization at the beginning of the taxable year (in the case of (A) of 
this subdivision) or at the beginning of the first taxable year in which 
any of the series of related dispositions was made (in the case of (B) 
of this subdivision). A ``significant disposition of assets'' may result 
from the transfer of assets to a single organization or to several 
organizations, and it may occur in a single taxable year (as in (A) of 
this subdivision) or over the course of two or more taxable years (as in 
(B) of this subdivision). The determination whether a significant 
disposition has occurred through a series of related dispositions 
(within the meaning of (B) of this subdivision) will be determined from 
all the facts and circumstances of the particular case. Ordinarily, a 
distribution described in section 170(b)(1)(D)(ii) shall not be taken 
into account as a significant disposition of assets within the meaning 
of this subparagraph.
    (ii) The provisions of this subparagraph may be illustrated by the 
following examples:
    Example (1). M, an organization described is section 501(c)(4), is 
on the calendar year basis. It has net assets worth $100,000 as of 
January 1, 1971. In 1971, in addition to distributions out of current 
income, M transfers $10,000 to N, $10,000 to O, and $10,000 to P. Such 
dispositions to N, O, and P are not distributions described in section 
170(b)(1)(E)(ii). N, O, and P are all organizations described in section 
501(c)(4). Under subdivision (i)(a) of this subparagraph, M has made a 
significant disposition of its assets in 1971 since M has disposed of 
more than 25 percent of its net assets (with respect to the fair market 
value of such assets as of January 1, 1971). Thus. M is subject to the 
provisions of section 6043(b) and this section for the year 1971.
    Example (2). U, a tax-exempt private foundation on the calendar year 
basis, has net assets worth $100,000 as of January 1, 1971. As part of a 
series of related dispositions in 1971 and 1972. U transfers in 1971, in 
addition to distributions out of current income, $10,000 to private 
foundation X and $10,000 to private foundation Y, and in 1972, in 
addition to distributions out of current income, U transfers $10,000 to 
private foundation Z. Such dispositions to X, Y, and Z are not 
distributions described in section 170(b)(1)(E)(ii). Under subdivision 
(i) of this subparagraph, U is treated as having made a series of 
related dispositions in 1971 and 1972. The aggregate of the 1972 
disposition (under subdivision (i)(a)of this subparagraph) and the 
series of related dispositions (under subdivision (i)(b) of this 
subparagraph) is $30,000, which is more than 25 percent of the fair 
market value of U's net assets as of the beginning of 1971 ($100,000), 
the first year in which any such disposition was made. Thus, U has made 
a significant disposition of its assets and is subject to the provisions 
of section 6043(b) and this section for the year 1972.
    Example (3). Assume in Example (1) that in 1973 M makes a $5,000 
disposition related to the 1971 disposition. Under subdivision (i)(B) of 
this subparagraph M is treated as having made a series of related 
dispositions in 1971

[[Page 231]]

and 1973. The aggregate of the 1971 disposition under subdivision (i)(A) 
of this subparagraph and the 1973 related disposition under subdivision 
(i)(B) of this subparagraph is $35,000, which is more than 25 percent of 
the fair market value of M's net assets as of the beginning of 1971, the 
first year in which any disposition was made. Thus M has made a 
significant disposition of its assets and is subject to the provisions 
of section 6043(b) and this section for the year 1973.

    (2) For the definition of the term ``normally'' as used in paragraph 
(b)(2) of this section, see Sec. 1.6033-2(g)(3).
    (3) For examples of the term ``integrated auxiliaries'' as used in 
paragraph (b)(1) of this section, see Sec. 1.6033-2(g)(1)(i)(a).

[T.D. 7563, 43 FR 40221, Sept. 11, 1978]



Sec. 1.6043-4T  Information returns relating to certain acquisitions of control and changes in capital structure (temporary).

    (a) Information returns for an acquisition of control or a 
substantial change in capital structure--(1) General rule. If there is 
an acquisition of control (as defined in paragraph (c) of this section) 
or a substantial change in the capital structure (as defined in 
paragraph (d) of this section) of a domestic corporation (``reporting 
corporation''), the reporting corporation must file a completed form 
8806 (or any successor form) in accordance with the instructions to that 
form. Form 8806 will request the information required in paragraphs 
(a)(1)(i) through (v) of this section.
    (i) Reporting corporation. Provide the name, address, and taxpayer 
identification number (TIN) of the reporting corporation;
    (ii) Common parent, if any, of the reporting corporation. If the 
reporting corporation was a subsidiary member of an affiliated group 
filing a consolidated return immediately prior to the acquisition of 
control or the substantial change in capital structure, provide the 
name, address, and TIN of the common parent of that affiliated group;
    (iii) Acquiring corporation. Provide the name, address and TIN of 
any corporation that acquired control of the reporting corporation 
within the meaning of paragraph (c) of this section or combined with or 
received assets from the reporting corporation pursuant to a substantial 
change in capital structure within the meaning of paragraph (d) of this 
section (``acquiring corporation''). State whether the acquiring 
corporation is foreign (as defined in section 7701(a)(5)) or is a dual 
resident corporation (as defined in Sec. 1.1503-2(c)(2)). In either 
case, state whether the acquiring corporation was newly formed prior to 
its involvement in the transaction.
    (iv) Common parent, if any, of acquiring corporation. If the 
acquiring corporation named in paragraph (a)(1)(iii) of this section was 
a subsidiary member of an affiliated group filing a consolidated return 
immediately prior to the acquisition of control or the substantial 
change in capital structure, provide the name, address, and TIN of the 
common parent of that affiliated group.
    (v) Information about acquisition of control or substantial change 
in capital structure. Provide--
    (A) A description of the transaction or transactions that gave rise 
to the acquisition of control or the substantial change in capital 
structure of the corporation;
    (B) The date or dates of the transaction or transactions that gave 
rise to the acquisition of control or the substantial change in capital 
structure;
    (C) A description of and a statement of the fair market value of any 
stock provided to the reporting corporation's shareholders in exchange 
for their stock if the reporting corporation reasonably determines that 
the shareholders are not required to recognize gain (if any) from the 
recei