[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 (Secs. 1.61 to 1.169)
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
Findings Aids:
Table of CFR Titles and Chapters........................ 1065
Alphabetical List of Agencies Appearing in the CFR...... 1083
Table of OMB Control Numbers............................ 1093
List of CFR Sections Affected........................... 1111
[[Page iv]]
----------------------------
Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.61-1
refers to title 26, part
1, section 61-1.
----------------------------
[[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
[email protected].
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
fax your order to 202-512-2250, 24 hours a day. For payment by check,
write to the Superintendent of Documents, Attn: New Orders, P.O. Box
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, [email protected].
[[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, Secs. 1.61 to 1.169)
--------------------------------------------------------------------
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, Jan. 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, Alcohol and Tobacco Tax Regulations, and
Regulations Under Tax Conventions.
Editorial Note: Treasury Decision 6091, 19 FR 5167, Aug. 17, 1954,
provides in part as follows:
Paragraph 1. All regulations (including all Treasury decisions)
prescribed by, or under authority duly delegated by, the Secretary of
the Treasury, or jointly by the Secretary and the Commissioner of
Internal Revenue, or by the Commissioner of Internal Revenue with the
approval of the Secretary of the Treasury, or jointly by the
Commissioner of Internal Revenue and the Commissioner of Customs or the
Commissioner of Narcotics with the approval of the Secretary of the
Treasury, applicable under any provision of law in effect on the date of
enactment of the Code, to the extent such provision of law is repealed
by the Code, are hereby prescribed under and made applicable to the
provisions of the Code corresponding to the provision of law so repealed
insofar as any such regulation is not inconsistent with the Code. Such
regulations shall become effective as regulations under the various
provisions of the Code as of the dates the corresponding provisions of
law are repealed by the Code, until superseded by regulations issued
under the Code.
Par. 2. With respect to any provision of the Code which depends for
its application upon the promulgation of regulations or which is to be
applied in such manner as may be prescribed by regulations, all
instructions or rules in effect immediately prior to the enactment of
the Code, to the extent such instructions or rules could be prescribed
as regulations under authority of such provision of the Code, shall be
applied as regulations under such provision insofar as such instructions
or rules are not inconsistent with the Code. Such instructions or rules
shall be applied as regulations under the applicable provision of the
Code as of the date such provision takes effect.
Par. 3. If any election made or other act done pursuant to any
provision of the Internal Revenue Code of 1939 or prior internal revenue
laws would (except for the enactment of the Code) be effective for any
period subsequent to such enactment, and if corresponding provisions are
contained in the Code, such election or other act shall be given the
same effect under the corresponding provisions of the Code to the extent
not inconsistent therewith. The term ``act'' includes, but is not
limited to, an allocation, identification, declaration, agreement,
option, waiver, relinquishment, or renunciation.
Par. 4. The limits of the various internal revenue districts have not
been changed by the enactment of the Code. Furthermore, delegations of
authority made pursuant to the provisions of Reorganization Plan No. 26
of 1950 and Reorganization Plan No. 1 of 1952 (as well as redelegations
thereunder), including those governing the authority of the Commissioner
of Internal Revenue, the Regional Commissioners of Internal Revenue, or
the District Directors of Internal Revenue, are applicable to the
provisions of the Code to the extent consistent therewith.
[[Page 5]]
SUBCHAPTER A--INCOME TAX (CONTINUED)
PART 1--INCOME TAXES--Table of Contents
COMPUTATION OF TAXABLE INCOME
Definition of Gross Income, Adjusted Gross Income, and Taxable Income
Sec.
1.61-1 Gross income.
1.61-2 Compensation for services, including fees, commissions, and
similar items.
1.61-2T Taxation of fringe benefits--1985 through 1988 (temporary).
1.61-3 Gross income derived from business.
1.61-4 Gross income of farmers.
1.61-5 Allocations by cooperative associations; per-unit retain
certificates--tax treatment as to cooperatives and patrons.
1.61-6 Gains derived from dealings in property.
1.61-7 Interest.
1.61-8 Rents and royalties.
1.61-9 Dividends.
1.61-10 Alimony and separate maintenance payments; annuities; income
from life insurance and endowment contracts.
1.61-11 Pensions.
1.61-12 Income from discharge of indebtedness.
1.61-13 Distributive share of partnership gross income; income in
respect of a decedent; income from an interest in an estate or
trust.
1.61-14 Miscellaneous items of gross income.
1.61-15 Options received as payment of income.
1.61-21 Taxation of fringe benefits.
1.62-1 Adjusted gross income.
1.62-1T Adjusted gross income (temporary).
1.62-2 Reimbursements and other expense allowance arrangements.
1.63-1 Change of treatment with respect to the zero bracket amount and
itemized deductions.
1.63-2 Cross reference.
1.67-1T 2-percent floor on miscellaneous itemized deductions
(temporary).
1.67-2T Treatment of pass-through entities (temporary).
1.67-3 Allocation of expenses by real estate mortgage investment
conduits.
1.67-3T Allocation of expenses by real estate mortgage investment
conduits (temporary).
1.67-4T Allocation of expenses by nongrantor trusts and estates
(temporary). [Reserved]
Items Specifically Included in Gross Income
1.71-1 Alimony and separate maintenance payments; income to wife or
former wife.
1.71-1T Alimony and separate maintenance payments (temporary).
1.71-2 Effective date; taxable years ending after March 31, 1954,
subject to the Internal Revenue Code of 1939.
1.72-1 Introduction.
1.72-2 Applicability of section.
1.72-3 Excludable amounts not income.
1.72-4 Exclusion ratio.
1.72-5 Expected return.
1.72-6 Investment in the contract.
1.72-7 Adjustment in investment where a contract contains a refund
feature.
1.72-8 Effect of certain employer contributions with respect to
premiums or other consideration paid or contributed by an
employee.
1.72-9 Tables.
1.72-10 Effect of transfer of contracts on investment in the contract.
1.72-11 Amounts not received as annuity payments.
1.72-12 Effect of taking an annuity in lieu of a lump sum upon the
maturity of a contract.
1.72-13 Special rule for employee contributions recoverable in three
years.
1.72-14 Exceptions from application of principles of section 72.
1.72-15 Applicability of section 72 to accident or health plans.
1.72-16 Life insurance contracts purchased under qualified employee
plans.
1.72-17 Special rules applicable to owner-employees.
1.72-17A Special rules applicable to employee annuities and
distributions under deferred compensation plans to self-
employed individuals and owner-employees.
1.72-18 Treatment of certain total distributions with respect to self-
employed individuals.
1.72(e)-1T Treatment of distributions where substantially all
contributions are employee contributions (temporary).
1.72(p)-1 Loans treated as distributions.
1.73-1 Services of child.
1.74-1 Prizes and awards.
1.75-1 Treatment of bond premiums in case of dealers in tax-exempt
securities.
1.77-1 Election to consider Commodity Credit Corporation loans as
income.
1.77-2 Effect of election to consider commodity credit loans as income.
1.78-1 Dividends received from certain foreign corporations by certain
domestic corporations choosing the foreign tax credit.
1.79-0 Group-term life insurance--definitions of certain terms.
1.79-1 Group-term life insurance--general rules.
1.79-2 Exceptions to the rule of inclusion.
[[Page 6]]
1.79-3 Determination of amount equal to cost of group-term life
insurance.
1.79-4T Questions and answers relating to the nondiscrimination
requirements for group-term life insurance (temporary).
1.82-1 Payments for or reimbursements of expenses of moving from one
residence to another residence attributable to employment or
self-employment.
1.83-1 Property transferred in connection with the performance of
services.
1.83-2 Election to include in gross income in year of transfer.
1.83-3 Meaning and use of certain terms.
1.83-4 Special rules.
1.83-5 Restrictions that will never lapse.
1.83-6 Deduction by employer.
1.83-7 Taxation of nonqualified stock options.
1.83-8 Applicability of section and transitional rules.
1.84-1 Transfer of appreciated property to political organizations.
1.85-1 Unemployment compensation.
1.88-1 Nuclear decommissioning costs.
Items Specifically Excluded From Gross Income
1.101-1 Exclusion from gross income of proceeds of life insurance
contracts payable by reason of death.
1.101-2 Employees' death benefits.
1.101-3 Interest payments.
1.101-4 Payment of life insurance proceeds at a date later than death.
1.101-5 Alimony, etc., payments.
1.101-6 Effective date.
1.101-7 Mortality table used to determine exclusion for deferred
payments of life insurance proceeds.
1.102-1 Gifts and inheritances.
1.103-1 Interest upon obligations of a State, territory, etc.
1.103-2 Dividends from shares and stock of Federal agencies or
instrumentalities.
1.103-3 Interest upon notes secured by mortgages executed to Federal
agencies or instrumentalities.
1.103-4 Interest upon United States obligations.
1.103-5 Treasury bond exemption in the case of trusts or partnerships.
1.103-6 Interest upon United States obligations in the case of
nonresident aliens and foreign corporations, not engaged in
business in the United States.
1.103-7 Industrial development bonds.
1.103-8 Interest on bonds to finance certain exempt facilities.
1.103-9 Interest on bonds to finance industrial parks.
1.103-10 Exemption for certain small issues of industrial development
bonds.
1.103-11 Bonds held by substantial users.
1.103-16 Obligations of certain volunteer fire departments.
1.103(n)-1T Limitation on aggregate amount of private activity bonds
(temporary).
1.103(n)-2T Private activity bond defined (temporary).
1.103(n)-3T Private activity bond limit (temporary).
1.103(n)-4T Elective carryforward of unused private activity bond limit
(temporary).
1.103(n)-5T Certification of no consideration for allocation
(temporary).
1.103(n)-6T Determinations of population (temporary).
1.103(n)-7T Election to allocate State ceiling to certain facilities
for local furnishing of electricity (temporary).
1.103A-2 Qualified mortgage bond.
1.104-1 Compensation for injuries or sickness.
1.105-1 Amounts attributable to employer contributions.
1.105-2 Amounts expended for medical care.
1.105-3 Payments unrelated to absence from work.
1.105-4 Wage continuation plans.
1.105-5 Accident and health plans.
1.105-6 Special rules for employees retired before January 27, 1975.
1.105-11 Self-insured medical reimbursement plan.
1.106-1 Contributions by employer to accident and health plans.
1.107-1 Rental value of parsonages.
1.108-1 Stock-for-debt exception not to apply in de minimis cases.
1.108-2 Acquisition of indebtedness by a person related to the debtor.
1.108-3 Intercompany losses and deductions.
1.108-4 Election to reduce basis of depreciable property under section
108(b)(5) of the Internal Revenue Code .
1.108-5 Time and manner for making election under the Omnibus Budget
Reconciliation Act of 1993.
1.108-6 Limitations on the exclusion of income from the discharge of
qualified real property business indebtedness.
1.108(c)-1T [Reserved]
1.109-1 Exclusion from gross income of lessor of real property of value
of improvements erected by lessee.
1.110-1 Qualified lessee construction allowances.
1.111-1 Recovery of certain items previously deducted or credited.
1.112-1 Combat zone compensation of members of the Armed Forces.
1.113-1 Mustering-out payments for members of the Armed Forces.
1.117-1 Exclusion of amounts received as a scholarship or fellowship
grant.
1.117-2 Limitations.
1.117-3 Definitions.
1.117-4 Items not considered as scholarships or fellowship grants.
1.117-5 Federal grants requiring future service as a Federal employee.
[[Page 7]]
1.118-1 Contributions to the capital of a corporation.
1.119-1 Meals and lodging furnished for the convenience of the
employer.
1.120-1 Statutory subsistence allowance received by police.
1.120-3 Notice of application for recognition of status of qualified
group legal services plan.
1.121-1 Exclusion of gain from sale or exchange of a principal
residence.
1.121-2 Limitations.
1.121-3 Reduced maximum exclusion for taxpayers failing to meet certain
requirements.
1.121-3T Reduced maximum exclusion for taxpayers failing to meet
certain requirements (temporary).
1.121-4 Special rules.
1.122-1 Applicable rules relating to certain reduced uniformed services
retirement pay.
1.123-1 Exclusion of insurance proceeds for reimbursement of certain
living expenses.
1.125-2T Question and answer relating to the benefits that may be
offered under a cafeteria plan (temporary).
1.125-3 Effect of the Family and Medical Leave Act (FMLA) on the
operation of cafeteria plans.
1.125-4 Permitted election changes.
1.127-1 Amounts received under a qualified educational assistance
program.
1.127-2 Qualified educational assistance program.
1.132-0 Outline of regulations under section 132.
1.132-1 Exclusion from gross income for certain fringe benefits.
1.132-1T Exclusion from gross income of certain fringe benefits--1985
through 1988 (temporary).
1.132-2 No-additional-cost services.
1.132-2T No-additional-cost service--1985 through 1988 (temporary).
1.132-3 Qualified employee discounts.
1.132-3T Qualified employee discount--1985 through 1988 (temporary).
1.132-4 Line of business limitation.
1.132-4T Line of business limitation--1985 through 1988 (temporary).
1.132-5 Working condition fringes.
1.132-5T Working condition fringe--1985 through 1988 (temporary).
1.132-6 De minimis fringes.
1.132-6T De minimis fringe--1985 through 1988 (temporary).
1.132-7 Employer-operated eating facilities.
1.132-7T Treatment of employer-operated eating facilities--1985 through
1988 (temporary).
1.132-8 Fringe benefit nondiscrimination rules.
1.132-8T Nondiscrimination rules--1985 through 1988 (temporary).
1.133-1T Questions and answers relating to interest on certain loans
used to acquire employer securities (temporary).
1.141-0 Table of contents.
Tax Exemption Requirements for State and Local Bonds
1.141-1 Definitions and rules of general application.
1.141-2 Private activity bond tests.
1.141-3 Definition of private business use.
1.141-4 Private security or payment test.
1.141-5 Private loan financing test.
1.141-6 Allocation and accounting rules.
1.141-7 Special rules for output facilities.
1.141-8 $15 million limitation for output facilities.
1.141-9 Unrelated or disproportionate use test.
1.141-10 Coordination with volume cap. [Reserved]
1.141-11 Acquisition of nongovernmental output property. [Reserved]
1.141-12 Remedial actions.
1.141-13 Refunding issues. [Reserved]
1.141-14 Anti-abuse rules.
1.141-15 Effective dates.
1.141-16 Effective dates for qualified private activity bond
provisions.
1.142-0 Table of contents.
1.142-1 Exempt facility bonds.
1.142-2 Remedial actions.
1.142-3 Refunding issues. [Reserved]
1.142-4 Use of proceeds to provide a facility.
1.142(a)(5)-1 Exempt facility bonds: Sewage facilities.
1.142(f)(4)-1 Manner of making election to terminate tax-exempt bond
financing.
1.144-0 Table of contents.
1.144-1 Qualified small issue bonds, qualified student loan bonds, and
qualified redevelopment bonds.
1.144-2 Remedial actions.
1.144-3 Standard deduction for individuals choosing income averaging.
[Reserved]
1.145-0 Table of contents.
1.145-1 Qualified 501(c)(3) bonds.
1.145-2 Application of private activity bond regulations.
1.147-0 Table of contents.
1.147-1 Other requirements applicable to certain private activity
bonds.
1.147-2 Remedial actions.
1.147(b)-1 Bond maturity limitation--treatment of working capital.
1.148-0 Scope and table of contents.
1.148-1 Definitions and elections.
1.148-2 General arbitrage yield restriction rules.
1.148-3 General arbitrage rebate rules.
1.148-4 Yield on an issue of bonds.
1.148-5 Yield and valuation of investments.
1.148-6 General allocation and accounting rules.
1.148-7 Spending exceptions to the rebate requirement.
[[Page 8]]
1.148-8 Small issuer exception to rebate requirement.
1.148-9 Arbitrage rules for refunding issues.
1.148-10 Anti-abuse rules and authority of Commissioner.
1.148-11 Effective dates.
1.149(b)-1 Federally guaranteed bonds.
1.149(d)-1 Limitations on advance refundings.
1.149(e)-1 Information reporting requirements for tax-exempt bonds.
1.149(g)-1 Hedge bonds.
1.150-1 Definitions.
1.150-2 Proceeds of bonds used for reimbursement.
1.150-4 Change in use of facilities financed with tax-exempt private
activity bonds.
1.150-5 Filing notices and elections.
Regulations Applicable to Certain Bonds Sold Prior to July 8, 1997
1.148-1A Definitions and elections.
1.148-2A General arbitrage yield restriction rules.
1.148-3A General arbitrage rebate rules.
1.148-4A Yield on an issue of bonds.
1.148-5A Yield and valuation of investments.
1.148-6A General allocation and accounting rules.
1.148-9A Arbitrage rules for refunding issues.
1.148-10A Anti-abuse rules and authority of Commissioner.
1.148-11A Effective dates.
1.149(d)-1A Limitations on advance refundings.
1.150-1A Definitions.
Deductions for Personal Exemptions
1.151-1 Deductions for personal exemptions.
1.151-2 Additional exemptions for dependents.
1.151-3 Definitions.
1.151-4 Amount of deduction for each exemption under section 151.
1.152-1 General definition of a dependent.
1.152-2 Rules relating to general definition of dependent.
1.152-3 Multiple support agreements.
1.152-4 Support test in case of child of divorced or separated parents.
1.152.4T Dependency exemption in the case of a child of divorced
parents, etc. (temporary).
1.153-1 Determination of marital status.
1.154 Statutory provisions; cross references.
Itemized Deductions for Individuals and Corporations
1.161-1 Allowance of deductions.
1.162-1 Business expenses.
1.162-2 Traveling expenses.
1.162-3 Cost of materials.
1.162-4 Repairs.
1.162-5 Expenses for education.
1.162-6 Professional expenses.
1.162-7 Compensation for personal services.
1.162-8 Treatment of excessive compensation.
1.162-9 Bonuses to employees.
1.162-10 Certain employee benefits.
1.162-10T Questions and answers relating to the deduction of employee
benefits under the Tax Reform Act of 1984; certain limits on
amounts deductible (temporary).
1.162-11 Rentals.
1.162-12 Expenses of farmers.
1.162-13 Depositors' guaranty fund.
1.162-14 Expenditures for advertising or promotion of good will.
1.162-15 Contributions, dues, etc.
1.162-16 Cross reference.
1.162-17 Reporting and substantiation of certain business expenses of
employees.
1.162-18 Illegal bribes and kickbacks.
1.162-19 Capital contributions to Federal National Mortgage
Association.
1.162-20 Expenditures attributable to lobbying, political campaigns,
attempts to influence legislation, etc., and certain
advertising.
1.162-21 Fines and penalties.
1.162-22 Treble damage payments under the antitrust laws.
1.162-25 Deductions with respect to noncash fringe benefits.
1.162-25T Deductions with respect to noncash fringe benefits
(temporary).
1.162-27 Certain employee remuneration in excess of $1,000,000.
1.162-28 Allocation of costs to lobbying activities.
1.162-29 Influencing legislation.
1.163-1 Interest deduction in general.
1.163-2 Installment purchases where interest charge is not separately
stated.
1.163-3 Deduction for discount on bond issued on or before May 27,
1969.
1.163-4 Deduction for original issue discount on certain obligations
issued after May 27, 1969.
1.163-5 Denial of interest deduction on certain obligations issued
after December 31, 1982, unless issued in registered form.
1.163-5T Denial of interest deduction on certain obligations issued
after December 31, 1982, unless issued in registered form
(temporary).
1.163-6T Reduction of deduction where section 25 credit taken
(temporary).
1.163-7 Deduction for OID on certain debt instruments.
1.163-8T Allocation of interest expense among expenditures (temporary).
1.163-9T Personal interest (temporary).
1.163-10T Qualified residence interest (temporary).
1.163-12 Deduction of original issue discount on instrument held by
related foreign person.
1.163-13 Treatment of bond issuance premium.
[[Page 9]]
1.163(d)-1 Time and manner for making election under the Omnibus Budget
Reconciliation Act of 1993.
1.164-1 Deduction for taxes.
1.164-2 Deduction denied in case of certain taxes.
1.164-3 Definitions and special rules.
1.164-4 Taxes for local benefits.
1.164-5 Certain retail sales taxes and gasoline taxes.
1.164-6 Apportionment of taxes on real property between seller and
purchaser.
1.164-7 Taxes of shareholder paid by corporation.
1.164-8 Payments for municipal services in atomic energy communities.
1.165-1 Losses.
1.165-2 Obsolescence of nondepreciable property.
1.165-3 Demolition of buildings.
1.165-4 Decline in value of stock.
1.165-5 Worthless securities.
1.165-6 Farming losses.
1.165-7 Casualty losses.
1.165-8 Theft losses.
1.165-9 Sale of residential property.
1.165-10 Wagering losses.
1.165-11 Election in respect of losses attributable to a disaster.
1.165-12 Denial of deduction for losses on registration-required
obligations not in registered form.
1.165-13T Questions and answers relating to the treatment of losses on
certain straddle transactions entered into before the
effective date of the Economic Recovery Tax Act of 1981, under
section 108 of the Tax Reform Act of 1984 (temporary).
1.166-1 Bad debts.
1.166-2 Evidence of worthlessness.
1.166-3 Partial or total worthlessness.
1.166-4 Reserve for bad debts.
1.166-5 Nonbusiness debts.
1.166-6 Sale of mortgaged or pledged property.
1.166-7 Worthless bonds issued by an individual.
1.166-8 Losses of guarantors, endorsers, and indemnitors incurred on
agreements made before January 1, 1976.
1.166-9 Losses of guarantors, endorsers, and indemnitors incurred, on
agreements made after December 31, 1975, in taxable years
beginning after such date.
1.166-10 Reserve for guaranteed debt obligations.
1.167(a)-1 Depreciation in general.
1.167(a)-2 Tangible property.
1.167(a)-3 Intangibles.
1.167(a)-4 Leased property.
1.167(a)-5 Apportionment of basis.
1.167(a)-5T Application of section 1060 to section 167 (temporary).
1.167(a)-6 Depreciation in special cases.
1.167(a)-7 Accounting for depreciable property.
1.167(a)-8 Retirements.
1.167(a)-9 Obsolescence.
1.167(a)-10 When depreciation deduction is allowable.
1.167(a)-11 Depreciation based on class lives and asset depreciation
ranges for property placed in service after December 31, 1970.
1.167(a)-12 Depreciation based on class lives for property first placed
in service before January 1, 1971.
1.167(a)-13T Certain elections for intangible property (temporary).
1.167(a)-14 Treatment of certain intangible property excluded from
section 197.
1.167(b)-0 Methods of computing depreciation.
1.167(b)-1 Straight line method.
1.167(b)-2 Declining balance method.
1.167(b)-3 Sum of the years-digits method.
1.167(b)-4 Other methods.
1.167(c)-1 Limitations on methods of computing depreciation under
section 167(b) (2), (3), and (4).
1.167(d)-1 Agreement as to useful life and rates of depreciation.
1.167(e)-1 Change in method.
1.167(f)-1 Reduction of salvage value taken into account for certain
personal property.
1.167(g)-1 Basis for depreciation.
1.167(h)-1 Life tenants and beneficiaries of trusts and estates.
1.167(i)-1 Depreciation of improvements in the case of mines, etc.
1.167(l)-1 Limitations on reasonable allowance in case of property of
certain public utilities.
1.167(l)-2 Public utility property; election as to post-1969 property
representing growth in capacity.
1.167(l)-3 Multiple regulation, asset acquisitions, reorganizations,
etc.
1.167(l)-4 Public utility property; election to use asset depreciation
range system.
1.167(m)-1 Class lives.
1.168-5 Special rules.
1.168(d)-0 Table of contents for the applicable convention rules.
1.168(d)-1 Applicable convention--Half-year and mid-quarter
conventions.
1.168(f)(8)-1T Safe-harbor lease information returns concerning
qualified mass commuting vehicles (temporary).
1.168(h)-1 Like-kind exchanges involving tax-exempt use property.
1.168(i)-0 Table of contents for the general asset account rules.
1.168(i)-1 General asset accounts.
1.168(i)-2 Lease term.
1.168(j)-1T Questions and answers concerning tax-exempt entity leasing
rules (temporary).
1.168A-1 Amortization of emergency facilities; general rule.
1.168A-2 Election of amortization.
1.168A-3 Election to discontinue amortization.
[[Page 10]]
1.168A-4 Definitions.
1.168A-5 Adjusted basis of emergency facility.
1.168A-6 Depreciation of portion of emergency facility not subject to
amortization.
1.168A-7 Payment by United States of unamortized cost of facility.
1.169-1 Amortization of pollution control facilities.
1.169-2 Definitions.
1.169-3 Amortizable basis.
1.169-4 Time and manner of making elections
Authority: 26 U.S.C. 7805, unless otherwise noted.
Section 1.61-2T also issued under 26 U.S.C. 61.
Section 1.61-21 also issued under 26 U.S.C. 61.
Sections 1.62-1T and 1.62-2 also issued under 26 U.S.C. 62;
Sections 1.67-2T and 1.67-3T also issued under 26 U.S.C. 67(c);
Section 1.67-3 also issued under 26 U.S.C. 67(c).
Sections 1.72-4, 1.72-5, 1.72-6, 1.72-7, 1.72-8, and 1.72-11 also
issued under 26 U.S.C. 72(c).
Section 1.101-7 also issued under 26 U.S.C. 101(d)(2)(B)(ii);
Section 1.103-10 also issued under 26 U.S.C. 103(b)(6);
Section 1.103A-2 also issued under 26 U.S.C. 103A(j);
Section 1.108-1 also issued under 26 U.S.C. 108(e)(8) and
108(e)(10(B);
Section 1.108-2 also issued under 26 U.S.C. 108;
Section 1.108-3 also issued under 26 U.S.C. 108, 267, and 1502.
Section 1.108-4 also issued under 26 U.S.C. 108.
Section 1.108-5 also issued under 26 U.S.C. 108.
Section 1.108(c)-1 also issued under the authority of 26 U.S.C.
108(d)(9);
Section 1.110-1 also issued under 26 U.S.C. 110(d);
Sections 1.132-0 through 1.132-8T also issued under 26 U.S.C. 132;
Sections 1.148-0 through 1.148-11 also issued under 26 U.S.C. 148
(f), (g), and (i);
Sections 1.148-6 also issued under 26 U.S.C. 148 (f), (g), and (i);
Section 1.149(b)-1 also issued under 26 U.S.C. 149(b)(3)(B) (v);
Section 1.149(d)-1 also issued under 26 U.S.C. 149(d)(7);
Section 1.149(e)-1 also issued under 26 U.S.C. 149(e);
Section 1.149(g)-1 also issued under 26 U.S.C. 149(g)(5);
Sections 1.150-4 also issued under 26 U.S.C. 150 (c)(5);
Section 1.163-8T also issued under 26 U.S.C. 469(k)(4);
Section 1.163-9T also issued under 26 U.S.C. 163(h)(3)(D);
Section 1.163-11T is also issued under 26 U.S.C. 163(h);
Section 1.165-12 also issued under 26 U.S.C. 165(j)(3);
Section 1.166-10 also issued under 26 U.S.C. 166(f);
Section 1.168(d)-1 also issued under 26 U.S.C. 168(d)(3);
Section 1.168(f)(8)-1T also added under sec. 112(c), Black Lung
Benefits Revenue Act of 1981 (Pub. L. 97-119);
Section 1.168(h)-1 also issued under 26 U.S.C. 168.
Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4).
Section 1.168(i)-2 also issued under 26 U.S.C. 168.
Section 1.168(j)-1T also added under 26 U.S.C. 168(j)(10).
Source: T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21,
1960, unless otherwise noted.
COMPUTATION OF TAXABLE INCOME
Definition of Gross Income, Adjusted Gross Income, and Taxable Income
Sec. 1.61-1 Gross income.
(a) General definition. Gross income means all income from whatever
source derived, unless excluded by law. Gross income includes income
realized in any form, whether in money, property, or services. Income
may be realized, therefore, in the form of services, meals,
accommodations, stock, or other property, as well as in cash. Section 61
lists the more common items of gross income for purposes of
illustration. For purposes of further illustration, Sec. 1.61-14
mentions several miscellaneous items of gross income not listed
specifically in section 61. Gross income, however, is not limited to the
items so enumerated.
(b) Cross references. Cross references to other provisions of the
Code are to be found throughout the regulations under section 61. The
purpose of these cross references is to direct attention to the more
common items which are included in or excluded from gross income
entirely, or treated in some special manner. To the extent that another
section of the Code or of the regulations thereunder, provides specific
treatment for any item of income, such
[[Page 11]]
other provision shall apply notwithstanding section 61 and the
regulations thereunder. The cross references do not cover all possible
items.
(1) For examples of items specifically included in gross income, see
Part II (section 71 and following), Subchapter B, Chapter 1 of the Code.
(2) For examples of items specifically excluded from gross income,
see part III (section 101 and following), Subchapter B, Chapter 1 of the
Code.
(3) For general rules as to the taxable year for which an item is to
be included in gross income, see section 451 and the regulations
thereunder.
Sec. 1.61-2 Compensation for services, including fees, commissions, and similar items.
(a) In general. (1) Wages, salaries, commissions paid salesmen,
compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips, bonuses (including Christmas
bonuses), termination or severance pay, rewards, jury fees, marriage
fees and other contributions received by a clergyman for services, pay
of persons in the military or naval forces of the United States, retired
pay of employees, pensions, and retirement allowances are income to the
recipients unless excluded by law. Several special rules apply to
members of the Armed Forces, National Oceanic and Atmospheric
Administration, and Public Health Service of the United States; see
paragraph (b) of this section.
(2) The Code provides special rules including the following items in
gross income:
(i) Distributions from employees' trusts, see sections 72, 402, and
403, and the regulations thereunder;
(ii) Compensation for child's services (in child's gross income),
see section 73 and the regulations thereunder;
(iii) Prizes and awards, see section 74 and the regulations
thereunder.
(3) Similarly, the Code provides special rules excluding the
following items from gross income in whole or in part:
(i) Gifts, see section 102 and the regulations thereunder;
(ii) Compensation for injuries or sickness, see section 104 and the
regulations thereunder;
(iii) Amounts received under accident and health plans, see section
105 and the regulations thereunder;
(iv) Scholarship and fellowship grants, see section 117 and the
regulations thereunder;
(v) Miscellaneous items, see section 122.
(b) Members of the Armed Forces, National Oceanic and Atmospheric
Administration, and Public Health Service. (1) Subsistence and uniform
allowances granted commissioned officers, chief warrant officers,
warrant officers, and enlisted personnel of the Armed Forces, National
Oceanic and Atmospheric Administration, and Public Health Service of the
United States, and amounts received by them as commutation of quarters,
are excluded from gross income. Similarly, the value of quarters or
subsistence furnished to such persons is excluded from gross income.
(2) For purposes of this section, quarters or subsistence includes
the following allowances for expenses incurred after December 31, 1993,
by members of the Armed Forces, members of the commissioned corps of the
National Oceanic and Atmospheric Administration, and members of the
commissioned corps of the Public Health Service, to the extent that the
allowances are not otherwise excluded from gross income under another
provision of the Internal Revenue Code: a dislocation allowance,
authorized by 37 U.S.C. 407; a temporary lodging allowance, authorized
by 37 U.S.C. 405; a temporary lodging expense, authorized by 37 U.S.C.
404a; and a move-in housing allowance, authorized by 37 U.S.C. 405. No
deduction is allowed under this chapter for any expenses reimbursed by
such excluded allowances. For the exclusion from gross income of--
(i) Disability pensions, see section 104(a)(4) and the regulations
thereunder;
(ii) Miscellaneous items, see section 122.
(3) The per diem or actual expense allowance, the monetary allowance
in lieu of transportation, and the mileage allowance received by members
of the Armed Forces, National Oceanic and Atmospheric Administration,
and the Public Health Service, while in a travel
[[Page 12]]
status or on temporary duty away from their permanent stations, are
included in their gross income except to the extent excluded under the
accountable plan provisions of Sec. 1.62-2.
(c) Payment to charitable, etc., organization on behalf of person
rendering services. The value of services is not includible in gross
income when such services are rendered directly and gratuitously to an
organization described in section 170(c). Where, however, pursuant to an
agreement or understanding, services are rendered to a person for the
benefit of an organization described in section 170(c) and an amount for
such services is paid to such organization by the person to whom the
services are rendered, the amount so paid constitutes income to the
person performing the services.
(d) Compensation paid other than in cash--(1) In general. Except as
otherwise provided in paragraph (d)(6)(i) of this section (relating to
certain property transferred after June 30, 1969), if services are paid
for in property, the fair market value of the property taken in payment
must be included in income as compensation. If services are paid for in
exchange for other services, the fair market value of such other
services taken in payment must be included in income as compensation. If
the services are rendered at a stipulated price, such price will be
presumed to be the fair market value of the compensation received in the
absence of evidence to the contrary. For special rules relating to
certain options received as compensation, see Secs. 1.61-15, 1.83-7, and
section 421 and the regulations thereunder. For special rules relating
to premiums paid by an employer for an annuity contract which is not
subject to section 403(a), see section 403(c) and the regulations
thereunder and Sec. 1.83-8(a). For special rules relating to
contributions made to an employees' trust which is not exempt under
section 501, see section 402(b) and the regulations thereunder and
Sec. 1.83-8(a).
(2) Property transferred to employee or independent contractor. (i)
Except as otherwise provided in section 421 and the regulations
thereunder and Sec. 1.61-15 (relating to stock options), and paragraph
(d)(6)(i) of this section, if property is transferred by an employer to
an employee or if property is transferred to an independent contractor,
as compensation for services, for an amount less than its fair market
value, then regardless of whether the transfer is in the form of a sale
or exchange, the difference between the amount paid for the property and
the amount of its fair market value at the time of the transfer is
compensation and shall be included in the gross income of the employee
or independent contractor. In computing the gain or loss from the
subsequent sale of such property, its basis shall be the amount paid for
the property increased by the amount of such difference included in
gross income
(ii)(a) Cost of life insurance on the life of the employee.
Generally, life insurance premiums paid by an employer on the life of
his employee where the proceeds of such insurance are payable to the
beneficiary of such employee are part of the gross income of the
employee. However, the amount includible in the employee's gross income
is determined with regard to the provisions of section 403 and the
regulations thereunder in the case of an individual contract issued
after December 31, 1962, or a group contract, which provides incidental
life insurance protection and which satisfies the requirements of
section 401(g) and Sec. 1.401-9, relating to the nontransferability of
annuity contracts. For the special rules relating to the includibility
in an employee's gross income of an amount equal to the cost of certain
group term life insurance on the employee's life which is carried
directly or indirectly by his employer, see section 79 and the
regulations thereunder. For special rules relating to the exclusion of
contributions by an employer to accident and health plans for the
employee, see section 106 and the regulations thereunder.
(b) Cost of group-term life insurance on the life of an individual
other than an employee. The cost (determined under paragraph (d)(2) of
Sec. 1.79-3) of group-term life insurance on the life of an individual
other than an employee (such as the spouse or dependent of the employee)
provided in connection with the performance of services by the employee
is includible in the gross income of the employee.
[[Page 13]]
(3) Meals and living quarters. The value of living quarters or meals
which an employee receives in addition to his salary constitutes gross
income unless they are furnished for the convenience of the employer and
meet the conditions specified in section 119 and the regulations
thereunder. For the treatment of rental value of parsonages or rental
allowance paid to ministers, see section 107 and the regulations
thereunder; for the treatment of statutory subsistence allowances
received by police, see section 120 and the regulations thereunder.
(4) Stock and notes transferred to employee or independent
contractor. Except as otherwise provided by section 421 and the
regulations thereunder and Sec. 1.61-15 (relating to stock options), and
paragraph (d)(6)(i) of this section, if a corporation transfers its own
stock to an employee or independent contractor as compensation for
services, the fair market value of the stock at the time of transfer
shall be included in the gross income of the employee or independent
contractor. Notes or other evidences of indebtedness received in payment
for services constitute income in the amount of their fair market value
at the time of the transfer. A taxpayer receiving as compensation a note
regarded as good for its face value at maturity, but not bearing
interest, shall treat as income as of the time of receipt its fair
discounted value computed at the prevailing rate. As payments are
received on such a note, there shall be included in income that portion
of each payment which represents the proportionate part of the discount
originally taken on the entire note.
(5) Property transferred on or before June 30, 1969, subject to
restrictions. Notwithstanding paragraph (d) (1), (2), or (4) of this
section, if any property is transferred after September 24, 1959, by an
employer to an employee or independent contractor as compensation for
services, and such property is subject to a restriction which has a
significant effect on its value at the time of transfer, the rules of
Sec. 1.421-6(d)(2) shall apply in determining the time and the amount of
compensation to be included in the gross income of the employee or
independent contractor. This (5) is also applicable to transfers subject
to a restriction which has a significant effect on its value at the time
of transfer and to which Sec. 1.83-8(b) (relating to transitional rules
with respect to transfers of restricted property) applies. For special
rules relating to options to purchase stock or other property which are
issued as compensation for services, see Sec. 1.61-15 and section 421
and the regulations thereunder.
(6) Certain property transferred, premiums paid, and contributions
made in connection with the performance of services after June 30, 1969-
-(i) Exception. Paragraph (d) (1), (2), (4), and (5) of this section and
Sec. 1.61-15 do not apply to the transfer of property (as defined in
Sec. 1.83-3(e)) after June 30, 1969, unless Sec. 1.83-8 (relating to the
applicability of section 83 and transitional rules) applies. If section
83 applies to a transfer of property, and the property is not subject to
a restriction that has a significant effect on the fair market value of
such property, then the rules contained in paragraph (d) (1), (2), and
(4) of this section and Sec. 1.61-15 shall also apply to such transfer
to the extent such rules are not inconsistent with section 83.
(ii) Cross references. For rules relating to premiums paid by an
employer for an annuity contract which is not subject to section 403(a),
see section 403(c) and the regulations thereunder. For rules relating to
contributions made to an employees' trust which is not exempt under
section 501(a), see section 402(b) and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6696, 28 FR
13450, Dec. 12, 1963; T.D. 6856, 30 FR 13316, Oct. 20, 1965; T.D. 7544,
43 FR 31913, July 24, 1978; T.D. 7623, 44 FR 28800, May 17, 1979; T.D.
8256, 54 FR 28582, July 6, 1989; T.D. 8607, 60 FR 40076, Aug. 7, 1995]
Sec. 1.61-2T Taxation of fringe benefits--1985 through 1988 (temporary).
(a) Fringe benefits--(1) In general. Section 61(a)(1) provides that,
except as otherwise provided in subtitle A, gross income includes
compensation for services, including fees, commissions, fringe benefits,
and similar items. Examples of fringe benefits include: an employer-
provided automobile, a flight
[[Page 14]]
on an employer-provided aircraft, an employer-provided free or
discounted commercial airline flight, an employer-provided vacation, and
employer-provided discount on property or services, and emkployer-
provided membership in a country club or other social club, and an
employer-provided ticket to an entertainment or sporting event.
(2) Fringe benefits excluded from income. To the extent that a
particular fringe benefit is specifically excluded from gross income
pursuant to another section of subtitle A, that section shall govern the
treatment of the fringe benefit. Thus, if the requirements of the
governing section are satisfied, the fringe benefits may be excludable
from gross income. Examples of excludable fringe benefits are qualified
tuition reductions provided to an employee (section 177(d)); meals and
lodging furnished to an employee for the convenience of the employer
(section 119); and benefits provided under a dependent care assistance
program (section 129). Similarly, the value of the use by an employee of
an employer-provided vehicle or a flight provided to an employee on an
employer-provided aircraft may be excludable from income under section
105 (because, for example, the trnsportation is provided for medical
reasons) if and to the extent that the requirements of that section are
satisfied. Section 61 and the regulations thereunder shall apply,
however, to the extent that they are not inconsistent with such other
section. For example, many fringe benefits specifically addressed in
other sections of subtitle A are excluded from gross income only to the
extent that they do not exceed specific dollar or percentage limits, or
only if certain other requirements are met. If the limits are exceeded
or the requirements are not met, some or all of the fringe benefit may
be includible in gross income. See paragraph (b)(3) of this section.
(3) Compensation for services. A fringe benefit provided in
connection with the performance of services shall be considered to have
been provided as compensation for servcies. Refraining from the
performance of services (such as pursuant to a covenant not to compete)
is deemed to be the performance of services for purposes of this
section.
(4) Recipient of a fringe benefit--(i) Definition. A fringe benefit
is included in the income of the ``recipient'' of the fringe benefit.
The recipient of a fringe benefit is the person performing the services
in connection with which the fringe benefit is provided. Thus, a person
may be considered to be a recipient, even though that person did not
actually receive the fringe benefit. For example, a fringe benefit
provided to any person is connection with the performance of services by
another person is considered to have been provided to the person who
performs the services and not the person who receives the fringe
benefit. In addition, if a fringe benefit is provided to a person, but
taxable to a second person as the recipient, such benefit is referred to
as provided to the second person and use by the first person is
considered use by the second person. For example, provision of an
automobile to an employee's spouse by the employer is taxable to the
employee as the recipient. The automobile is referred to as available to
the employee and use by the employee's spouse is considered use by the
employee.
(ii) Recipient may be other than an employee. The recipient of a
fringe benefit need not be an employee of the provider of the fringe
benefit, but may be a partner, director, or an independent contractor.
For convenience, the term ``employee'' includes a reference to any
recipient of a fringe benefit, unless otherwise specifically provided in
this section.
(5) Provider of a fringe benefit. The ``provider'' of a fringe
benefit is that person for whom the services are performed, regardless
of whether that person actually provides the fringe benefit to the
recipient. The provider of a fringe benefit need not be the employer of
the recipient of the fringe benefit, but may be, for example, a client
or customer of an independent contractor. For convenience, the term
``employer'' includes a reference to any provider of a fringe benefit,
unless otherwise specifically provided in this section.
(6) Effective date. This section is effective from January 1, 1985,
to December 31, 1988, with respect to fringe benefits
[[Page 15]]
furnished before January 1, 1989. No inference may be drawn from the
promulgation or terms of this section concerning the application of law
in effect prior to January 1, 1985.
(b) Valuation of fringe benefits--(1) In general. An employee must
include in gross income the amount by which the fair market value of the
fringe benefit exceeds the sum of (i) the amount, if any, paid for the
benefit, and (ii) the amount, if any, specifically excluded from gross
income by some other section of subtitle A. Therefore, for example, if
the employee pays fair market value for what is received, no amount is
includible in the gross income of the employee.
(2) Fair market value. In general, fair market value is determined
on the basis of all the facts and circumstances. Specifically, the fair
market value of a fringe benefit is that amount a (hypothetical person
would have to pay a hypothetical third party to obtain (i.e., purchase
or lease) the particular fringe benefit. Thus, for example, the effect
of any special relationship that may exist between the employer and the
employee must be disregarded. This also means that an employee's
subjective perception of the value of a fringe benefit is not relevant
to the determination of a fringe benefit's fair market value. In
addition, the cost incurred by the employer is not determinative of the
fair market value of the fringe benefit. For special rules relating to
the valuation of certain fringe benefits, see paragraph (c) of this
section.
(3) Exclusion from income based on cost. If a statutory exclusion
phrased in terms of cost applies to the provision of a fringe benefit,
section 61 does not require the inclusion in the recipient's gross
income of the difference between the fair market value and the
excludable cost of that fringe benefit. For example, section 129
provides an exclusion from an employee's gross income for amounts paid
or incurred by an employer to provide dependent care assistance to
employees. Even if the fair market value of the dependent care
assistance exceeds the employer's cost, the excess is not subject to
inclusion under section 61 and this section. If the statutory cost
exclusion is a limited amount, however, then the fair market value of
the fringe benefit attributable to any excess cost is subject to
inclusion.
(4) Fair market value of the availability of an employer-provided
vehicle. If the vehicle special valuation rules of paragraph (d), (e),
or (f) of this section are not used by a taxpayer entitled to use such
rules, the value of the availability of an employer-provided vehicle is
determined under the general valuation principles set forth in this
section. In general, such valuation must be determined by reference to
the cost to a hypothetical person of leasing from a hypothetical third
party the same or comparable vehicle on the same or comparable terms in
the geographic area in which the vehicle is available for use. Unless
the employee can substantiate that the same or comparable vehicle could
have been leased on a cents-per-mile basis, the value of the
availability of the vehicle cannot be determined by reference to a
cents-per-mile rate applied to the number of miles the vehicle is
driven. An example of a comparable lease term is the amount of time that
the vehicle is available to the employee for use, e.g., a one-year
period.
(5) Fair market value of a flight on an employer-provided aircraft.
If the non-commercial flight special valuation rule of paragraph (g) of
this section is not used (or is not properly used) by a taxpayer
entitled to use such rule, the value of a flight on an employer-provided
aircraft is determined under the general valuation principles set forth
in this section. An example of how the general valuation principles
would apply is that if an employee whose flight is primarily personal
controls the use of an aircraft with respect to such flight, such flight
is valued by reference to how much it would cost a hypothetical person
to charter the same or comparable aircraft for the same or comparable
flight. The cost to charter the aircraft must be allocated among all
employees on board the aircraft based on all the facts and
circumstances, including which employees controlled the use of the
aircraft. Notwithstanding the allocation required by the preceding
sentence, no additional amount shall be included in
[[Page 16]]
the income of any employee whose flight is properly valued under the
special valuation rule of paragraph (g) of this section.
(c) Special valuation rules--(1) In general. Paragraphs (d) through
(j) of this section provide special valuation rules that may be used
under certain circumstances for certain commonly provided fringe
benefits. Paragraph (d) provides a lease valuation rule relating to
employer-provided automobiles. Paragraph (e) provides a cents-per-mile
valuation rule relating to employer-provided vehicles. Paragraph (f)
provides a commuting valuation rule relating to employer-provided
vehicles. Paragraph (g) provides a flight valuation rule relating to
flights on employer-provided aircraft. Paragraph (h) provides a flight
valuation rule relating to flights on commercial airlines. Paragraph(i)
is reserved. Paragraph (j) provides a meal valuation rule relating to
employer-operated eating facilities for employees. For general rules
relating to the valuation of fringe benefits not eligible for valuation
under the special valuation rules, see paragraph (d) of this section.
(2) Use of the special valuation rules--(i) In general. The Special
valuation rules may be used for income, employment tax, and reporting
purposes. Use of any of the special valuation rules is optional. An
employer need not use the same vehicle special valuation rule for all
vehicles provided to all employees. For example, an employer may use the
automobile lease valuation rule for automobiles provided to some
employees, and the commuting and vehicle cents-per-mile valuation rules
for automobiles provided to other employees. Except as otherwise
provided, however, if either the commercial flight valuation rule or the
noncommercial flight valuation rule is used, such rule must be used by
an employer to value all flights taken by employees in a calendar year.
Effective January 1, 1986, if an employer uses one of the special rules
to value the benefit provided to an employee, the employee may not use
another special rule to value that benefit. The employee may, however,
use general valuation rules based on facts and circumstances (see
paragraph (b) of this section). Effective January 1, 1986, an employee
may only use a special valuation rule if the employer uses the rule. If
a special rule is used, it must be used for all purposes. If an employer
properly uses a special rule and the employee uses the special rule, the
employee must include in gross income the amount determined by the
employer under the special rule less any amount reimbursed by the
employee to the employer. The employer and the employee may use the
special rules to determine the amount of the reimbursement due the
employer by the employee. If an employer properly uses a special rule
and properly determines the amount of an employee's working condition
fringe under section 132 and Sec. 1.132-1T (under the general rule or
under a special rule), and the employee uses the special valuation rule,
the employee must include in gross income the amount determined by the
employer less any amount reimbursed by the employee to the employer.
(ii) Transitional rules--(A) Use of vehicle special valuation rules
for 1985 and 1986. For purposes of valuing the use or availability of a
vehicle, the consistency rules provided in paragraphs (d)(6) and (e)(5)
of this section (relating to the automobile lease valuation rule and the
vehicle cents-per-mile valuation rule, respectively) apply for 1987 and
thereafter. Therefore, for 1985 and 1986 an employer (and employee,
subject to paragraph (c)(2)(i) of this section) may use any applicable
special valuation rule (or no special valuation rule) to value the use
or availability of a vehicle, subject to paragraph (c)(2)(ii)(B) of this
section.
(B) Consistency Rules for 1985 and 1986. If an employer uses the
automobile lease valuation rule of paragraph (d) of this section in 1985
or 1986 with respect to an automobile, such rule must be used for the
entire calendar year with respect to the automobile except for any
period during which the commuting valuation rule of paragraph (f) of
this section is properly used. If an employer uses the vehicle cents-
per-mile valuation rule of pararaph (e) of this section in 1985 or 1986
with respect to a vehicle, such rule must be used for the entire
calendar year with respect to the vehicle except for any period during
which the commuting valuation
[[Page 17]]
rule of paragraph (f) of this section is properly used. The rules of
this paragraph (c)(2)(ii)(B) also apply to employees using the special
valuation rules of paragraphs (d) or (e) of this section.
(C) Employee's use of special valuation rules for 1985. An employee
may use a special valuation rule (other than the rule in paragraph (e)
of this section relating to the vehicle cents-per-mile valuation rule)
during 1985 even if the employer does not use the same special valuation
rule during 1985. An employee's use of a special valuation rule in 1986
and thereafter must be consistent with his employer's use of the rule as
required under paragraph (c)(2)(i) of this section.
(D) Examples. The following examples illustrate the rules of
paragraph (c)(2)(ii) of this section:
Example (1). Assume that an employer properly uses the automobile
lease valuation rule in 1985. The employer may use the vehicle cents-
per-mile valuation rule in 1986 if the requirements of the vehicle
cents-per-mile valuation rule are satisfied.
Example (2). Assume that an employer does not use a special
valuation rule to value the availability of an automobile in 1985. The
employer may use any of the special valuation rules in 1986 if the
requirements of the rule chosen are satisfied. The same applies for
1987.
Example (3). Assume that an employer properly uses the vehicle
cents-per-mile valuation rule in 1985. The employer may continue to use
to the rule or use any of the other special valuation rules to value the
benefit provided in 1986 if the requirements of the rule chosen are
satisfied. Alternatively, the employer may use none of the special
valuation rules in 1986 but use any of the rules in 1987 if the
requirements of the rule chosen are satisfied.
Example (4). Assume that an employee properly uses the automobile
lease valuation rule in 1985. In 1986 and thereafter the employee may
use a special valuation rule only if the employee's employer uses the
same special valuation rule. The employee may use general valuation
principles to value the benefit provided in 1986 and thereafter.
(3) Election to use the special valuation rules--A particular
special valuation rule is deemed to have been elected by the employer
(and, if applicable, by the employee), if the employer (and, if
applicable, the employee) determines the value of the fringe benefit
provided by applying the special valuation rule and treats such value as
the fair market value of the fringe benefit for income, employment tax,
and reporting purposes. Neither the employer nor the employee is
required to notify the Internal Revenue Service of the election.
(4) Application of section 414 to employers. For purposes of
paragraphs (c) through (j) of this section, except as otherwise provided
therein, the term ``employer'' includes all entities required to be
treated as a single employer under section 414 (b), (c), or (m).
(5) Valuation formulas contained in the special valuation rules. The
valuation formulas contained in the special valuation rules are provided
only for use in connection with such rules. Thus, when a special
valuation rule is properly applied to a fringe benefit, the Commissioner
will accept the value calculated pursuant to the rule as the fair market
value of that fringe benefit. However, when a special valuation rule is
not properly applied to a fringe benefit (see, for example, paragraph
(g)(11) of this section), or when a special valuation rule is not used
to value a fringe benefit by a taxpayer entitled to use the rule, the
fair market value of that fringe benefit may not be determined by
reference to any value calculated under any special valuation rule.
Under the circumstances described in the preceding sentence, the fair
market value of the fringe benefit must be determined pursuant to
paragraph (b) of this section.
(6) Modification of the special valuation rules. The Commissioner
may, if he deems it necessary, add, delete, or modify the special
valuation rules, including the valuation formulas contained herein, on a
prospective basis.
(7) Special Accounting Period. If the employer is using the special
accounting rule provided in Announcement 85-113 (1985-31 I.R.B., August
5, 1985) (relating to the reporting of and withholding on the value of
noncash fringe benefits), benefits which are deemed provided in a
subsequent calendar year pursuant to such rule are considered as
provided in such subsequent calendar year for purposes of the special
valuation rules. Thus, if a particular special valuation rule is in
effect for a calendar year, it applies to benefits deemed provided
during such calendar year under the special accounting rule.
[[Page 18]]
(d) Automobile lease valuation rule--(1) In general--(i) Annual
Lease Value. Under the special valuation rule of this paragraph (d), if
an employer provides an employee with an automobile that is available to
the employee for an entire calendar year, the value of the benefit
provided in the Annual Lease Value (determined under paragraph (d)(2) of
this section) of that automobile. Except as otherwise provided, for an
automobile that is available to an employee for less than an entire
calendar year, the value of the benefit provided is either a pro-rated
Annual Lease Value or the Daily Lease Value (as defined in paragraph
(d)(4) of this section), whichever is applicable. Absent any statutory
exclusion relating to the employer-provided automobile (see, for
example, section 132(a)(3) and Sec. 1.132-5T(b)), the amount of the
Annual Lease Value (or a pro-rated Annual Lease Value or the Daily Lease
Value, as applicable) is included in the gross income of the employee.
(ii) Definition of automobile. For purposes of this paragraph (d),
the term ``automobile'' means any four-wheeled vehicle manufactured
primarily for use on public streets, roads, and highways.
(2) Calculation of Annual Lease Valu e--(i) In general. The Annual
Lease Value of a particular automobile is calculated as follows:
(A) Determine the fair market value of the automobile as of the
first date on which the automobile is made available to any employee of
the employer for personal use. For an automobile first made available to
any employee for personal use prior to January 1, 1985, determine the
fair market value as of January 1, 1985. For rules relating to
determination of the fair market value of an automobile for purposes of
this paragraph (d), see paragraph (d)(5) of this section.
(B) Select the dollar range in column 1 of the Annual Lease Value
Table, set forth in paragraph (d)(2)(iii) of this section, corresponding
to the fair market value of the automobile. Except as otherwise provided
in paragraphs (d)(2) (iv) and (v) of this section, the Annual Lease
Value for each year of availability of the automobile is the
corresponding amount in column 2 of the Table.
(ii) Use by employee only in 1985. If the employee, but not the
employer, is using the special rule of this paragraph (d), the employee
may calculate the Annual Lease Value in the same manner as described in
paragraph (d)(2)(i)(A) of this section, except that the fair market
value of the automobile is determined as of the first date on which the
automobile is made available to the employee for personal use or, for an
automobile made available to the employee for personal use prior to
January 1, 1985, by determining the fair market value as of January 1,
1985. If the employer is also using the special rule of this paragraph
(d), however, then the employee to whom the automobile is made available
must use the special rule, if at all, by using the Annual Lease Value
calculated by the employer. The rules of this paragraph (d)(2)(ii) apply
only for 1985.
(iii) Annual Lease Value Table.
------------------------------------------------------------------------
Annual
Automobile fair market value lease
value
(1) (2)
------------------------------------------------------------------------
$0 to $999................................................... $600
$1,000 to $1,999............................................. 850
$2,000 to $2,999............................................. 1,100
$3,000 to $3,999............................................. 1,350
$4,000 to $4,999............................................. 1,600
$5,000 to $5,999............................................. 1,850
$6,000 to $6,999............................................. 2,100
$7,000 to $7,999............................................. 2,350
$8,000 to $8,999............................................. 2,600
$9,000 to $9,999............................................. 2,850
$10,000 to $10,999........................................... 3,100
$11,000 to $11,999........................................... 3,350
$12,000 to $12,999........................................... 3,600
$13,000 to $13,999........................................... 3,850
$14,000 to $14,999........................................... 4,100
$15,000 to $15,999........................................... 4,350
$16,000 to $16,999........................................... 4,600
$17,000 to $17,999........................................... 4,850
$18,000 to $18,999........................................... 5,100
$19,000 to $19,999........................................... 5,350
$20,000 to $20,999........................................... 5,600
$21,000 to $21,999........................................... 5,580
$22,000 to $22,999........................................... 6,100
$23,000 to $23,999........................................... 6,350
$24,000 to $24,999........................................... 6,600
$25,000 to $25,999........................................... 6,850
$26,000 to $27,999........................................... 7,250
$28,000 to $29,999........................................... 7,750
$30,000 to $31,999........................................... 8,250
$32,000 to $33,999........................................... 8,750
$34,000 to $35,999........................................... 9,250
$36,000 to $37,999........................................... 9,750
$38,000 to $39,999........................................... 10,250
$40,000 to $41,999........................................... 10,750
$42,000 to $43,999........................................... 11,250
$44,000 to $45,999........................................... 11,750
$46,000 to $47,999........................................... 12,250
[[Page 19]]
$48,000 to $49,999........................................... 12,750
$50,000 to $51,999........................................... 13,250
$52,000 to $53,999........................................... 13,750
$54,000 to $55,999........................................... 14,250
$56,000 to $57,999........................................... 14,750
$58,000 to $59,999........................................... 15,250
------------------------------------------------------------------------
For vehicles having a fair market value in excess of $59,999, the Annual
Lease Value is equal to: (.25 x the fair market value of the automobile)
+ $500.
(iv) Recalculation of annual lease value. The Annual Lease Values
determined under the rules of this paragraph (d) are based on a four-
year lease term. Therefore, except as otherwise provided in paragraph
(d)(2)(v) of this section, the Annual Lease Value calculated by applying
paragraph (d)(2) (i) or (ii) of this section shall remain in effect for
the period that begins with the first date the special valuation rule of
paragraph (d) of this section is applied by the employer to the
automobile and ends on December 31 of the fourth full calendar year
following that date. The Annual Lease Value for each subsequent four-
year period is calculated by determining the fair market value of the
automobile as of the January 1 following the period described in the
previous sentence and selecting the amount in column 2 of the Annual
Lease Value Table corresponding to the appropriate dollar range in
column 1 of the Table. If, however, the employer is using the special
accounting rule provided in Announcement 85-113 (1985-31 I.R.B., August
5, 1985) (relating to the reporting of and withholding on the value of
noncash fringe benefits), the employer may calculate the Annual Lease
Value for each subsequent four-year period as of the beginning of the
special accounting period that begins immediately prior to the January 1
described in the previous sentence. For example, assume that pursuant to
Announcement 85-113, an employer uses the special accounting rule.
Assume further that beginning on November 1, 1985, the special
accounting period is November 1 to October 31 and that the employer
elects to use the special valuation rule of this paragraph (d) as of
January 1, 1985. The employer may recalculate the Annual Lease Value as
of November 1, 1988, rather than as of January 1, 1989.
(v) Transfer of the automobile to another employee. Unless the
primary purpose of the transfer is to reduce Federal taxes, if an
employer transfers an automobile from one employee to another employee,
the employer may recalculate the Annual Lease Value based on the fair
market value of the automobile as of January 1 of the year of transfer.
If, however, the employer is using the special accounting rule provided
in Announcement 85-113 (1985-31 I.R.B., August 5, 1985) (relating to the
reporting of and withholding on the value of noncash fringe benefits),
the employer may recalculate the Annual Lease Value based on the fair
market value of the automobile as of the beginning of the special
accounting period in which the transfer occurs. If the employer does not
recalculate the Annual Lease Value, and the employee to whom the
automobile is transferred uses the special valuation rule, the employee
may not recalculate the Annual Lease Value.
(3) Services included in, or excluded from, the Annual Lease Value
Table--(i) Maintenance and insurance included. The Annual Lease Values
contained in the Annual Lease Value Table include the fair market value
of maintenance of, and insurance for, the automobile. Neither an
employer nor an employee may reduce the Annual Lease Value by the fair
market value of any service included in the Annual Lease Value that is
not provided by the employer, such as reducing the Annual Lease Value by
the fair market value of a maintenance service contract or insurance. An
employer or employee may take into account the services actually
provided with respect to the automobile by valuing the availability of
the automobile under the general valuation rules of paragraph (b) of
this section.
(ii) Fuel excluded--(A) In general. The Annual Lease Values do not
include the fair market value of fuel provided by the employer,
regardless of whether fuel is provided in kind or its cost is reimbursed
by or charged to the employer.
[[Page 20]]
(B) Valuation of fuel provided in kind. The provision of fuel in
kind may be valued at fair market value based on all the facts and
circumstances or, in the alternative, it may be valued at 5.5 cents per
mile for all miles driven by the employee. However, the provision of
fuel in kind may not be valued at 5.5 cents per mile for miles driven
outside the United States, Canada, and Mexico. For purposes of this
section, the United States includes the United States and its
territories.
(C) Valuation of fuel where cost reimbursed by or charged to
employer. The fair market value of fuel, the cost of which is reimbursed
by or charged to an employer, is generally the amount of the actual
reimbursement or the amount charged, provided the purchase of the fuel
is at arm's length. If an employer with a fleet of at least 20
automobiles that meet the requirements of paragraph (d)(5)(v)(C) of this
section reimburses employees for the cost of fuel or allows employees to
charge the employer for the cost of the fuel, however, the fair market
value of fuel provided to those automobiles may be determined by
reference to the employer's fleet-average cents-per-mile fuel cost. The
fleet-average cents-per-mile fuel cost in equal to the fleet-average
per-gallon fuel cost divided by the fleet-average miles-per-gallon rate.
The averages described in the preceding sentence must be determined by
averaging the per-gallon fuel costs and miles-per-gallon rates of a
representative sample of the automobiles in the fleet equal to the
greater of ten percent of the automobiles in the fleet or 20 automobiles
for a representative period, such as a two month period.
(iii) All other services excluded. The fair market value of any
service not specifically identified in paragraph (d)(3)(i) of this
section that is provided by the employer with respect to an automobile
(such as the services of a chauffeur) must be added to the Annual Lease
Value of the automobile in determining the fair market value of the
benefit provided.
(4) Availability of an automobile for less than an entire calendar
year--(i) Pro-rated Annual Lease Value used for continuous availability
of 30 or more days. Except as otherwise provided in paragraph (d)(4)(iv)
of this section, for periods of continuous availability of 30 or more
days, but less than an entire calendar year, the value of the
availability of the employer-provided automobile is the pro-rated Annual
Lease Value. The pro-rated Annual Lease Value is calculated by
multiplying the applicable Annual Lease Value by a fraction, the
numerator of which is the number of days of availability and the
denominator of which is 365.
(ii) Daily Lease Value used for continuous availability of less than
30 days. Except as otherwise provided in paragraph (d)(4)(iii) of this
section, for periods of continuous availability of one or more but less
than 30 days, the value of the availability of the employer-provided
automobile is the Daily Lease Value. The Daily Lease Value is calculated
by multiplying the applicable Annual Lease Value by a fraction, the
numerator of which is four times the number of days of availability and
the denominator of which is 365.
(iii) Election to treat all periods as periods of at least 30 days.
A pro-rated Annual Lease Value may be applied with respect to a period
of continuous availability of less than 30 days, by treating the
automobile as if it had been available for 30 days, if to do so would
result in a lower valuation than applying the Daily Lease Value to the
shorter period of actual availability.
(iv) Periods of unavailability--(A) General rule. In general, a pro-
rated Annual Lease Value (as provided in paragraph (d)(4)(i) of this
section) is used to value the availability of an employer-provided
automobile when the automobile is available to an employee for a period
of continuous availability of at least 30 days but less than the entire
calendar year. Neither an employer nor an employee may use a pro-rated
Annual Lease Value when the reduction of Federal taxes is the primary
reason the automobile is unavailable to an employee during the calendar
year.
(B) Unavailability for personal reasons of the employee. If an
automobile is unavailable to an employee because of personal reasons of
the employee, such as while the employee is on vacation, a pro-rated
Annual Lease Value may not
[[Page 21]]
be used. For example, assume an automobile is available to an employee
during the first five months of the year and during the last five months
of the year. Assume further that the period of unavailability occurs
because the employee is on vacation. The Annual Lease Value, if it is
applied, must be applied with respect to the entire 12 month period. The
Annual Lease Value may not be pro-rated to take into account the two-
month period of unavailability.
(5) Fair market value--(i) In general. For purposes of determining
the Annual Lease Value of an automobile under the Annual Lease Value
Table, the fair market value of an automobile is that amount a
hypothetical person would have to pay a hypothetical third party to
purchase the particular automobile provided. Thus, for example, any
special relationship that may exist between the employee and the
employer must be disregarded. Also, the employee's subjective perception
of the value of the automobile is not relevant to the determination of
the automobile's fair market value. In addition, except as provided in
paragraph (d)(5) (ii) of this section, the cost incurred by the employer
of either purchasing of leasing the automobile is not determinative of
the fair market value of the automobile.
(ii) Safe-harbor valuation rule. For purposes of calculating the
Annual Lease Value of an automobile under this paragraph (d), the safe-
harbor value of the automobile may be used as the fair market value of
the automobile For an automobile owned by the employer, the safe-harbor
value of the automobile is the employer's cost of purchasing the
automobile, provided the purchase is made at arm's length. For an
automobile leased by the employer, the safe-harbor value of the
automobile is the value determined under paragraph (d)(5)(iii) of this
section.
(iii) Use of nationally recognized pricing guides. The fair market
value of an automobile that is (A) provided to an employee prior to
January 1, 1985, (B) being revalued pursuant to paragraphs (d)(2) (iv)
or (v) of this section, or (C) is a leased automobile being valued
pursuant to paragraph (d)(5)(ii) of this section, may be determined by
using the retail value of such automobile as reported in a nationally
recognized publication that regularly reports new or used automobile
retail values, whichever is applicable. The values contained in (and
obtained from) the publication must be reasonable with respect to the
automobile being valued.
(iv) Fair market value of special equipment--(A) Certain equipment
excluded. The fair market value of an automobile does not include the
fair market value of any telephone or any specialized equipment that is
added to or carried in the automobile if the presence of such equipment
is necessitated by, and attributable to, the business needs of the
employer.
(B) Use of specialized equipment outside of employer's business. The
value of specialized equipment must be included, however, if the
employee to whom the automobile is available uses the specialized
equipment in a trade of business of the employee other than the
employee's trade or business of being an employee of the employer.
(C) Equipment susceptible to personal use. The exclusion rule
provided in this paragraph (d)(5)(iv) does not apply to specialized
equipment susceptible to personal use.
(v) Fleet-average valuation rule--(A) In general. An employer with a
fleet of 20 or more automobiles may use a fleet-average value for
purposes of calculating the Annual Lease Values of the automobiles in
the fleet. The fleet-average value is the average of the fair market
values of each automobile in the fleet. The fair market value of each
automobile in the fleet shall be determined, pursuant to the rules of
paragraphs (d)(5) (i) through (iv) of this section, as of the later of
January 1, 1985, or the first date on which the automobile is made
available to any employee of the employer for personal use.
(B) Period for use of rule. The fleet-average valuation rule of this
paragraph (d)(5)(v) may be used by an employer as of January 1 of any
calendar year following the calendar year in which the employer acquires
a fleet of 20 or more automobiles. The Annual Lease Value calculated for
the automobiles in the fleet, based on the fleet-average value,
[[Page 22]]
shall remain in effect for the period that begins with the first January
1 the fleet-average valuation rule of this paragraph (d)(5)(v) is
applied by the employer to the automobiles in the fleet and ends on
December 31 of the subsequent calendar year. The Annual Lease Value for
each subsequent two year period is calculated by determining the fleet-
average value of the automobiles in the fleet as of the first January 1
of such period. An employer may cease using the fleet-average valuation
rule as of any January 1. The fleet-average valuation rule does not
apply as of January 1 of the year in which the number of automobiles in
the employer's fleet declines to fewer than 20. If, however, the
employer is using the special accounting rule provided in Announcement
85-113 (I.R.B. No. 31, August 5, 1985), the employer may apply the rules
of this paragraph (d)(5)(v)(B) on the basis of the special accounting
period rather than the calendar year. (This is accomplished by
substituting (1) the beginning of the special accounting period that
begins immediately prior to the January 1 described in this paragraph
(d)(5)(v)(B) for January 1 wherever it appears in this paragraph
(d)(5)(v)(B) and (2) the end of such accounting period for December 31.)
The revaluation rules of paragraph (d)(2) (iv) and (v) of this section
do not apply to automobiles valued under this paragraph (d)(5)(v).
(C) Limitations on use of fleet-average rule. The rule provided in
this paragraph (d)(5)(v) may not be used for any automobile whose fair
market value (determined pursuant to paragraphs (d)(5) (i) through (iv)
of this section as of either the first date on which the automobile is
made available to any employee of the employer for personal use or, if
later, January 1, 1985) exceeds $16,500. In addition, the rule provided
in this paragraph (d)(5)(v) may only be used for automobiles that the
employer reasonably expects will regularly be used in the employer's
trade or business. Infrequent use of the vehicle, such as for trips to
the airport or between the employer's multiple business premises, does
not constitute regular use of the vehicle in the employer's trade or
business.
(D) Additional automobiles added to the fleet. If the rule provided
in this paragraph (d)(5)(v) is used by an employer, it must be used for
every automobile included in or added to the fleet that meets the
requirements of paragraph (d)(5)(v)(C) of this section. The fleet-
average value in effect at the time an automobile is added to the fleet
is treated as the fair market value of the automobile for purposes of
determining the Annual Lease Value of the automobile until the fleet-
average value changes pursuant to paragraph (d)(5)(v)(B) of this
section.
(E) Use of the fleet-average rule by employees. An employee can only
use the fleet-average value if it is used by the employer. If an
employer uses the fleet-average value, and the employee uses the special
valuation rule of paragraph (d) of this section, the employee must use
the fleet-average value.
(6) Consistency rules--(i) Use of the automobile lease valuation
rule by an employer. Except as provided in paragraph (d)(5) (v)(B) of
this section, an employer may adopt the automobile lease valuation rule
of this paragraph (d) for an automobile only if the rule is adopted with
respect to the later of the period that begins on January 1, 1987, or
the first period in which the automobile is made available to an
employee of the employer for personal use or, if the commuting valuation
rule of paragraph (f) of this section is used when the automobile is
first made available to an employee of the employer for personal use,
the first period in which the commuting valuation rule is not used.
(ii) An employer must use the automobile lease valuation rule for
all subsequent periods. Once the automobile lease valuation rule has
been adopted for an automobile by an employer, the rule must be used by
the employer for all subsequent periods in which the employer makes the
automobile available to any employee, except that the employer may, for
any period during which use of the automobile qualifies for the
commuting valuation rule of paragraph (f) of this section, use the
commuting valuation rule with respect to the automobile.
[[Page 23]]
(iii) Use of the automobile lease valuation rule by an employee.
Except as provided in paragraph (c)(2)(ii)(C) of this section, an
employee may adopt the automobile lease valuation rule for an automobile
only if the rule is adopted (A) by the employer and (B) with respect to
the first period in which the automobile for which the employer
(consistent with paragraph (d)(6)(i) of this section) adopted the rule
is made available to that employee for personal use, or, if the
commuting valuation rule of paragraph (f) of this section is used when
the automobile is first made available to that employee for personal
use, the first period in which the commuting valuation rule is not used.
(iv) An employee must use the automobile lease valuation rule for
all subsequent periods. Once the automobile lease valuation rule has
been adopted for an automobile by an employee, the rule must be used by
the employee for all subsequent periods in which the automobile for
which the rule is used is available to the employee, except that the
employee may, for any period during which use of the automobile
qualifies for use of the commuting valuation rule of paragraph (f) of
this section and for which the employer uses the rule, use the commuting
valuation rule with respect to the automobile.
(v) Replacement automobiles. Notwithstanding anything in this
paragraph (D)(6) to the contrary, if the automobile lease valuation rule
is used by an employer, or by an employer and an employee, with respect
to a particular automobile, and a replacement automobile is provided to
the employee for the primary purpose of reducing Federal taxes, then the
employer, or the employer and the employee, using the rule must continue
to use the rule with respect to the replacement automobile.
(e) Vehicle cents-per-mile valuation rule--(1) In general--(i)
General rule. Under the vehicle cents-per-mile valuation rule of this
paragraph (e), if an employer provides an employee with the use of a
vehicle that (A) the employer reasonably expects will be regularly used
in the employer's trade or business throughout the calendar year (or
such shorter period as the vehicle may be owned or leased by the
employer) or (B) satisfies the requirements of paragraph (e)(1)(ii) of
this section, the value of the benefit provided in the calendar year is
the standard mileage rate provided in the applicable Revenue Ruling or
Revenue Procedure (``cents-per-mile rate'') multiplied by the total
number of miles the vehicle is driven by the employee for personal
purposes. For 1985, the standard mileage rate is 21 cents per mile for
the first 15,000 miles and 11 cents per mile for all miles over 15,000.
See Rev. Proc. 85-49. The standard mileage rate must be applied to
personal miles independent of business miles. Thus, for example, if an
employee drives 20,000 personal miles and 35,000 business miles in 1985,
the value of the personal use of the vehicle is $3,700
(15,000x$.21+5,000x$.11). For purposes of this section, the use of a
vehicle for personal purposes is any use of the vehicle other than use
in the employee's trade or business of being an employee of the
employer. Infrequent use of the vehicle, such as for trips to the
airport or between the employer's multiple business premises, does not
constitute regular use of the vehicle in the employer's trade or
business.
(ii) Mileage rule. A vehicle satisfies the requirements of this
paragraph (e)(1)(ii) in a calendar year if (A) it is actually driven at
least 10,000 miles in the year, and (B) use of the vehicle during the
year is primarily by employees. For example, if a vehicle is used by
only one employee during the year and that employee drives a vehicle at
least 10,000 miles in a calendar year, such vehicle satisfies the
requirements of this paragraph (e)(1)(ii) even if all miles driven by
the employee are personal. The requirements of this paragraph
(e)(1)(ii), however, will not be satisfied if during the year the
vehicle is transferred among employees in such a way which enables an
employee whose use was at a rate significantly less that 10,000 miles
per year to meet the 10,000 mile threshold. Assume that an employee uses
a vehicle for the first six months of the year and drives 2,000 miles,
and that vehicle is then used by other employees who drive the vehicle
8,000 miles in the last six months of the year. Because the rate at
which miles were driven in the first six months of the year would result
in only 4,000
[[Page 24]]
miles being driven in the year, and because the first employee did not
use the vehicle during the last six months of the year, the requirements
of this paragraph (e)(1)(ii) are not satisfied. The requirement of
paragraph (e)(1)(ii)(B) of this section is deemed satisfied if employees
use the vehicle on a consistent basis for commuting. If the employer
does not own or lease the vehicle during a portion of the year, the
10,000 mile threshold is to be reduced proportionately to reflect the
periods when the employer owned or leased the vehicle. For purposes of
this paragraph (e)(1)(ii), use of the vehicle by an individual (other
than the employee) whose use would be taxed to the employee is not
considered use by the employee.
(iii) Limitation on use of the vehicle cents-per-mile valuation
rule. The value of the use of an automobile (as defined in paragraph
(d)(1)(ii) of this section) may not be determined under the vehicle
cents-per-mile valuation rule of this paragraph (e) if the fair market
value of the automobile (determined pursuant to paragraphs (d)(5) (i)
through (iv) of this section as of the later of January 1, 1985, or the
first date on which the automobile is made available to any employee of
the employer for personal use) exceeds $12,800. No inference may be
drawn from the promulgation or terms of this section concerning the
application of law in effect prior to January 1, 1985.
(2) Definition of vehicle. For purposes of this paragraph (e), the
term ``vehicle'' means any motorized wheeled vehicle manufactured
primarily for use on public streets, roads, and highways. The term
``vehicle'' includes an automobile as defined in paragraph (d)(1)(ii) of
this section.
(3) Services included in, or excluded from, the cents-per-mile rate-
-(i) Maintenance and insurance included. The cents-per-mile rate
includes the fair market value of maintenance of, and insurance for, the
vehicle. An employer may not reduce the cents-per-mile rate by the fair
market value of any service included in the cents-per-mile rate but not
provided by the employer. An employer or employee may take into account
the services provided with respect to the automobile by valuing the
availability of the automobile under the general valuation rules of
paragraph (b) of this section.
(ii) Fuel provided by the employer--(A) Miles driven in the United
States, Canada, and Mexico. With respect to miles driven in the United
States, Canada, and Mexico, the cents-per-mile rate includes the fair
market value of fuel provided by the employer. If fuel is not provided
by the employer, the cents-per-mile rate may be reduced by no more than
5.5 cents or the amount specified in any applicable Revenue Ruling or
Revenue Procedure. For purposes of this section, the United States
includes the United States and its territories.
(B) Miles driven outside the United States, Canada, and Mexico. With
respect to miles driven outside the United States, Canada, and Mexico,
the fair market value of fuel provided by the employer is not reflected
in the cents-per-mile rate. Accordingly, the cents-per-mile rate may be
reduced but by no more than 5.5 cents or the amount specified in any
applicable Revenue Ruling or Revenue Procedure. If the employer provides
the fuel in kind, it must be valued based on all the facts and
circumstances. If the employer reimburses the employee for the cost of
fuel or allows the employee to charge the employer for the cost of fuel,
the fair market value of the fuel is generally the amount of the actual
reimbursement or the amount charged, provided the purchase of fuel is at
arm's length.
(4) Valuation of personal use only. The vehicle cents-per-mile
valuation rule of this paragraph (e) may only be used to value the miles
driven for personal purposes. Thus, the employer must include an amount
in an employee's income with respect to the use of a vehicle that is
equal to the product of the number of personal miles driven by the
employee and the appropriate cents-per-mile rate. The employer may not
include in income a greater or lesser amount; for example, the employer
may not include in income 100 percent (all business and personal miles)
of the value of the use of the vehicle. The term ``personal miles''
means all miles driven by the employee except miles
[[Page 25]]
driven by the employee is the employee's trade or business of being an
employee of the employer.
(5) Consistency rules--(i) Use of the vehicle cents-per-mile
valuation rule by an employer. An employer must adopt the vehicle cents-
per-mile valuation rule of this paragraph (e) for a vehicle by the later
of the period that begins on January 1, 1987, or the first period in
which the vehicle is used by an employee of the employer for personal
use or, if the commuting valuation rule of paragraph (f) of this section
is used when the vehicle is first used by an employee of the employer
for personal use, the first period in which the commuting valuation rule
is not used.
(ii) An employer must use the vehicle cents-per-mile valuation rule
for all subsequent periods. Once the vehicle cents-per-mile valuation
rule has been adopted for a vehicle by an employer, the rule must be
used by the employer for all subsequent periods in which the vehicle
qualifies for use of the rule, except that (A) the employer may, for any
period during which use of the vehicle qualifies for the commuting
valuation rule of paragraph (f) of this section, use the commuting
valuation rule with respect to the vehicle, and (B) if the employer
elects to use the automobile lease valuation rule of paragraph (d) of
this section for a period in which the vehicle does not qualify for use
of the vehicle cents-per-mile valuation rule, then the employer must
comply with the requirements of paragraph (d)(6) of this section. If the
vehicle fails to qualify for use of the vehicle cents-per-mile valuation
rule during a subsequent period, the employer may adopt for such
subsequent period and thereafter any other special valuation rule for
which the vehicle then qualifies. For purposes of paragraph (d)(6) of
this section, the first day on which an automobile with respect to which
the vehicle cents-per-mile rule had been used fails to qualify for use
of the vehicle cents-per-mile valuation rule may be deemed to be the
first day on which the automobile is available to an employee of the
employer for personal use.
(iii) Use of the vehicle cents-per-mile valuation rule by an
employee. An employee may adopt the vehicle cents-per-mile valuation
rule for a vehicle only if the rule is adopted (A) by the employer and
(B) with respect to the first period in which the vehicle for which the
employer (consistent with paragraph (e)(5)(i) of this section) adopted
the rule is available to that employee for personal use or, if the
commuting valuation rule of paragraph (f) of this section is used by
both the employer and the employee when the vehicle is first used by an
employee for personal use, the first period in which the commuting
valuation rule is not used.
(iv) An employee must use the vehicle cents-per-mile valuation rule
for all subsequent periods. Once the vehicle cents-per-mile valuation
rule has been adopted for a vehicle by an employee, the rule must be
used by the employee for all subsequent periods of personal use of the
vehicle by the employee for which the rule is used by the employer,
except that the employee may, for any period during which use of the
vehicle qualifies for use of the commuting valuation rule of paragraph
(f) of this section and for which such rule is used by the employer, use
the commuting valuation rule with respect to the vehicle.
(v) Replacement vehicles. Notwithstanding anything in this paragraph
(e)(5) to the contrary, if the vehicle cents-per-mile valuation rule is
used by an employer, or by an employer and an employee, with respect to
a particular vehicle, and a replacement vehicle is provided to the
employee for the primary purpose of reducing Federal taxes, then the
employer, or the employer and the employee, using the rule must continue
to use the rule with respect to the replacement vehicle if the
replacement vehicle qualifies for use of the rule.
(f) Commuting valuation rule--(1) In general. Under the commuting
valuation rule of this paragraph (f), the value of the commuting use of
an employer-provided vehicle may be determined pursuant to paragraph
(f)(3) of this section if the following criteria are met by the employer
and employees with respect to the vehicle:
(i) The vehicle is owned or leased by the employer and is provided
to one or more employees for use in connection
[[Page 26]]
with the employer's trade or business and is used in the employer's
trade or business;
(ii) For bona fide noncompensatory business reasons, the employer
requires the employee to commute to and/or from work in the vehicle;
(iii) The employer has established a written policy under which the
employee may not use the vehicle for personal purposes, other than for
commuting or de minimis personal use (such as a stop for a personal
errand on the way between a business delivery and the employee's home);
(iv) Except for de minimis personal use, the employee does not use
the vehicle for any personal purpose other than commuting; and
(v) The employee required to use the vehicle for commuting is not a
control employee of the employer (as defined in paragraphs (f) (5) and
(6) of this section).
If the vehicle is a chauffeur-driven vehicle, the commuting valuation
rule of this paragraph (f) may not be used to value the commuting use of
any passenger who commutes in the vehicle. The rule may be used,
however, to value the commuting use of the chauffeur. Personal use of a
vehicle is all use of the vehicle by the employee that is not used in
the employee's trade or business of being an employee of the employer.
(2) Special rules. Notwithstanding anything in paragraph (f)(1) of
this section to the contrary, the following special rules apply--
(i) Written policy not required in 1985. The policy described in
paragraph (f)(1)(iii) of this section prohibiting personal use need not
be written with respect to the commuting use which occurs prior to
January 1, 1986;
(ii) Commuting use during 1985. For commuting use that occurs after
December 31, 1984, but before January 1, 1986, the restrictions of
paragraph (f)(1)(v) of this section shall be applied by substituting
``an employee who is an officer or a five-percent owner of the
employer'' in lieu of ``a control employee''. For purposes of
determining who is a five-percent owner, any individual who owns (or is
considered as owning) five or more percent of the fair market value of
an entity (the ``owned entity'') is considered a five-percent owner of
all entities that would be aggregated with the owned entity under the
rules of section 414 (b), (c), or (m). An employee who is an officer of
an employer shall be treated as an officer of all entities treated as a
single employer pursuant to section 414 (b), (c), or (m). The
definitions provided in paragraphs (f)(5)(i) and (f)(6) of this section
may be used to define an officer; and
(iii) Control employee exception. If the vehicle in which the
employee is required to commute is not an automobile as defined in
paragraph (d)(1)(ii) of this section, the restrictions of paragraph
(f)(1)(v) of this section do not apply.
(3) Commuting value--(i) $1.50 per one-way commute. If the
requirements of this paragraph (f) are satisfied, the value of the
commuting use of an employer-provided vehicle is $1.50 per one-way
commute (e.g., from home to work or from work to home).
(ii) Value per employee. If there is more than one employee who
commutes in the vehicle, such as in the case of an employer-sponsored
car pool, the amount includible in the income of each employee is $1.50
per one-way commute. Thus, the amount includible for each round-trip
commute is $3.00 per employee.
(4) Definition of vehicle. For purposes of this paragraph (f), the
term ``vehicle'' means any motorized wheeled vehicle manufactured
primarily for use on public streets, roads, and highways. The term
``vehicle'' includes an automobile as defined in paragraph (d)(1)(ii) of
this section.
(5) Control employee defined--Non-government employer. For purposes
of this paragraph (f), a control employee of a non-government employer
is any employee--
(i) Who is a Board- or shareholder-appointed, confirmed, or elected
officer of the employer,
(ii) Who is a director of the employer, or
(iii) Who owns a one-percent or greater equity, capital, or profits
interest in the employer.
For purposes of determining who is a one-percent owner under paragraph
(f)(5)(iii) of this section, any individual
[[Page 27]]
who owns (or is considered as owning under section 318(a) or principles
similar to section 318(a) for entities other than corporations) one
percent or more of the fair market value of an entity (the ``owned
entity'') is considered a one-percent owner of all entities which would
be aggregated with the owned entity under the rules of section 414 (b),
(c), or (m). An employee who is an officer of an employer shall be
treated as an officer of all entities treated as a single employer
pursuant to section 414 (b), (c) or (m).
(6) Control employee defined--Government employer. For purposes of
this paragraph (f), a control employee of a government employer if any--
(i) Elected official,
(ii) Federal employee who is appointed by the President and
confirmed by the Senate. In the case of commissioned officers of the
United States Armed Forces, an officer is any individual with the rank
of brigadier general or above or the rank of rear admiral (lower half)
or above; or
(iii) State or local executive officer comparable to the individuals
described in paragraph (f)(6) (i) and (ii) of this section.
For purposes of this paragraph (f), the term ``government'' includes any
Federal, state, or local governmental unit, and any agency or
instrumentality thereof.
(g) Non-commercial flight valuation rule--(1) In general. Under the
non-commercial flight valuation rule of this paragraph (g), if an
employee is provided with a flight on an employer-provided aircraft, the
value of the flight is calculated using the aircraft valuation formula
provided in paragraph (g)(5) of this section. Except as otherwise
provided, for purposes of this paragraph (g), a flight provided to a
person whose flight would be taxable to an employee as the recipient is
referred to as provided to the employee, and a flight taken by such
person is considered a flight taken by the employee.
(2) Eligible flights and eligible aircraft. The valuation rule of
this paragraph (g) may be used to value flights on all employer-provided
aircraft, including helicopters. The valuation rule of this paragraph
(g) may be used to value international as well as domestic flights. The
valuation rule of this paragraph (g) may not be used to value a flight
on any commercial aircraft on which air transportation is sold to the
public on a per-seat basis. For a special valuation rule relating to
certain flights on commercial aircraft, see paragraph (h) of this
section.
(3) Definition of a flight--(i) General rule. Except as otherwise
provided in paragraph (g)(3)(iii) of this section (relating to
intermediate stops), for purposes of this paragraph (g), an individual's
flight is the distance (in statute miles) between the place at which the
individual boards the aircraft and the place at which the individual
deplanes.
(ii) Valuation of each flight. Under the valuation rule of this
paragraph (g), value is determined separately for each flight. Thus, a
round-trip is comprised of at least two flights. For example, an
employee who takes a personal trip on an employer-provided aircraft from
New York, New York to Denver, Colorado, Denver to Los Angeles,
California, and Los Angeles to New York has taken three flights and must
apply the aircraft valuation formula separately to each flight. The
value of a flight must be determined on a passenger-by-passenger basis.
For example, if an individual accompanies an employee and the flight
taken by the individual would be taxed to the employee, the employee
would be taxed on the special rule value of the flight by the employee
and by the individual.
(iii) Intermediate stop. If the primary purpose of a landing is
necessitated by weather conditions, by an emergency, for purposes of
refueling or obtaining other services relating to the aircraft, or for
purposes of the employer's business unrelated to the employee whose
flight is being valued (``an intermediate stop''), the distance between
the place at which the trip originates and the place at which the
intermediate stop occurs is not considered a flight. For example, assume
that an employee's trip originates in St. Louis, Missouri, on route to
Seattle, Washington, but, because of weather conditions, the aircraft
lands in Denver, Colorado, and the employee stays in Denver overnight.
Assume further that the next day the aircraft flies to Seattle
[[Page 28]]
where the employee deplanes. The employee's flight is the distance
between the airport in St. Louis and the airport in Seattle. Assume that
a trip originates in New York, New York, with five passengers and makes
an intermediate stop in Chicago, Illinois, before going on to Los
Angeles, California. If one of the five passengers deplanes in Chicago,
the distance of that passenger's flight would be the distance between
the airport in New York and the airport in Chicago. The intermediate
stop is disregarded when measuring the flights taken by each of the
other passengers. Their flights would be the distance between the
airport in New York and the airport in Los Angeles.
(4) Personal and non-personal flights--(i) In general. The valuation
rule of this paragraph (g) applies to personal flights on employer-
provided aircraft. A personal flight is one the value of which is not
excludable under another section of subtitle A, such as under section
132(d) (relating to a working condition fringe). However, solely for
purposes of paragraphs (g)(4)(ii) and (g)(4)(iii) of this section,
references to personal flights do not include flights a portion of which
would not be excludable by reason of section 274.(c).
(ii) Trip primarily for employer's business. If an employee
combines, in one trip, personal and business flights on an employer-
provided aircraft and the employee's trip is primarily for the
employer's business (see Sec. 1.162-2(b)(2)), the employee must include
in income the excess of the value of all the flights that comprise the
trip over the value of the flights that would have been taken had there
been no personal flights but only business flights. For example, assume
that an employee flies on an employer-provided aircraft from Chicago,
Illinois to Miami, Florida, for the employer's business and that from
Miami the employee flies on the employer-provided aircraft to Orlando,
Florida, for personal purposes and then flies back to Chicago. Assume
further that the primary purpose of the trip is for the employer's
business. The amount includible in income is the excess of the value of
the three flights (Chicago to Miami, Miami to Orlando, and Orlando to
Chicago), over the value of the flights that would have been taken had
there been no personal flights but only business flights (Chicago to
Miami and Miami to Chicago).
(iii) Primarily personal trip. In an employee combines, in one trip,
personal and business flights on an employer-provided aircraft and the
aircraft's trip is primarily personal (see Sec. 1.162-2(b)(2)), the
amount includible in the employee's income is the value of the personal
flights that would have been taken had there been no business flights
but only personal flights. For example, assume that an employee flies on
an employer-provided aircraft from San Francisco, California, to Los
Angeles, California, for the employer's business and that from Los
Angeles the employee flies on an employer-provided aircraft to Palm
Springs, California, primarily for personal reasons and then flies back
to San Francisco. Assume further that the primary purpose of the trip is
personal. The amount includible in the employee's income is the value of
personal flights that would have been taken had there been no business
flights but only personal flights (San Francisco to Palm Springs and
Palm Springs to San Francisco).
(iv) Application of section 274(c). The value of employer-provided
travel outside the United States away from home may not be excluded from
the employee's gross income as a working condition fringe, by either the
employer or the employee, to the extent not deductible by reason of
section 274(c). The valuation rule of this paragraph (g) applies to that
portion of the value of any flight not excludable by reason of section
274(c). Such value must be included in income in addition to the amounts
determined under paragraphs (g)(4)(ii) and (g)(4)(iii) of this section.
(v) Flight by individuals who are not personal guests. If an
individual who is not an employee of the employer providing the aircraft
is on a flight, and the individual is not the personal guest of any
employee, the flight by the individual is not taxable to any employee of
the employer providing the aircraft. The rule in the preceding sentence
applies where the individual is provided the flight by the employer for
noncompensatory business reasons of the employer. For example, assume
that G,
[[Page 29]]
and employee of company Y, accompanies A, an employee of company X, on
company X's aircraft for the purpose of inspecting land under
consideration for purchase by company X from company Y. The flight by G
is not taxable to A.
(5) Aircraft valuation formula. Under the valuation rule of this
paragraph (g), the value of a flight is determined by multiplying the
base aircraft valuation formula for the period during which the flight
was taken by the appropriate aircraft multiple (as provided in paragraph
(g)(7) of this section) and then adding the applicable terminal charge.
The base aircraft valuation formula (also known as the Standard Industry
Fare Level formula or SIFL) in effect on June 30, 1985, is as follows:
($.1402 per mile for the first 500 miles, $.1069 per mile for miles
between 501 and 1500, and $.1028 per mile for miles over 1500). The
terminal charge in effect on June 30, 1985, is $25.62. The SIFL cents-
per-mile rates in the formula and the terminal charge are calculated by
the Department of Transportation and are revised semi-annually.
(6) SIFL formula in effect for a particular flight. For purposes of
this paragraph (g), in determining the value of a particular flight
during the first six months of a calendar year, the SIFL formula (and
terminal charge) in effect on December 31 of the preceding year applies,
and in determining the value of a particular flight during the last six
months of a calendar year, the SIFL formula (and terminal charge) in
effect on June 30 of that year applies. The following is the SIFL
formula in effect on December 31, 1984: ($.1480 per mile for the first
500 miles, $.1128 per mile for miles between 501 and 1500, and $.1085
per mile for miles over 1500). The terminal charge in effect on December
31, 1984, is $27.05.
(7) Aircraft multiples--(i) In general. The aircraft multiples are
based on the maximum certified takeoff weight of the aircraft. For
purposes of applying the aircraft valuation formula described in
paragraph (g)(5) of this section, the aircraft multiples are as follows:
[In percent]
------------------------------------------------------------------------
Aircraft multiple
for a--
---------------------
Maximum certified takeoff weight of the aircraft Non-
Control control
employee employee
------------------------------------------------------------------------
6,000 lbs. or less................................ 62.5 15.6
6,001 to 10,000 lbs............................... 125.0 23.4
10,001 to 25,000 lbs.............................. 300.0 31.3
25,001 lbs. or more............................... 400.0 31.3
------------------------------------------------------------------------
(ii) Flights treated as provided a to control employee. Except as
provided in paragraph (g)(10) of this section, any flight provided to an
individual whose flight would be taxable to a control employee (as
defined in paragraph (g)(8) and (9) of this section) as the recipient
shall be valued as if such flight has been provided to that control
employee. For example, assume that the chief executive officer of an
employer, his spouse, and his two children fly on an employer-provided
aircraft for personal purposes. Assume further that the maximum
certified takeoff weight of the aircraft is 12,000 lbs. The amount
includible in the employee's income is 4 x ((300 percent x base aircraft
valuation formula) plus the applicable terminal charge).
(8) Control employee defined--Nongovernment employer. For purposes
of this paragraph (g), a control employee of a non-government employer
is any employee--
(i) Who is a Board- or shareholder- appointed, confirmed, or elected
officer of the employer, limited to the lesser of (A) one-percent of all
employees (increased to the next highest integer, if not an integer) or
(B) ten employees;
(ii) Whose compensation equals or exceeds the compensation of the
top one percent most highly-paid employees of the employer (increased to
the next highest integer, if not an integer) limited to a maximum of 25
employees;
(iii) Who owns a ten-percent or greater equity, capital or profits
interest in the employer; or
(iv) Who is a director of the employer.
For purposes of this paragraph (g), any employee who is a family member
(within the meaning of section 267(c)(4)) of a control employee is also
a control employee. Pursuant to this paragraph (g)(8), an employee may
be a control employee under more than one
[[Page 30]]
of the requirements listed in paragraphs (g)(8) (i) through (iv) of this
section. For example, an employee may be both an officer under paragraph
(g)(8)(i) of this section and a highly-paid employee under paragraph
(g)(8)(ii) of this section. In this case, for purposes of the officer
limitation rule of paragraph (g)(8)(i) of this section and the highly-
paid employee limitation rule of paragraph (g)(8)(ii) of this section,
the employee would be counted as reducing both such limitation rules. In
no event shall an employee whose compensation is less than $50,000 be a
control employee under paragraph (g)(8)(ii) of this section. For
purposes of determining who is a ten-percent owner under paragraph
(g)(8)(iii) of this section, any individual who owns (or is considered
as owning under section 318(a) or principles similar to section 318(a)
for entities other than corporations) ten percent or more of the fair
market value of an entity (the ``owned entity'') is considered a ten-
percent owner of all entities which would be aggregated with the owned
entity under the rules of section 414 (b), (c), or (m). For purposes of
determining who is an officer under paragraph (g)(8)(i) of this section,
notwithstanding anything in this section to the contrary, if the
employer would be aggregated with other employers under the rules of
section 414 (b), (c), or (m), the officer definition and the limitations
are applied to each separate employer rather than to the aggregated
employer. If applicable, the officer limitation rule of paragraph
(g)(8)(i) of this section is applied to employees in descending order of
their compensation. Thus, if an employer has 11 board-appointed
officers, the employee with the least compensation of those officers
would not be an officer under paragraph (g)(8)(i) of this section. For
purposes of this paragraph (g), the term ``compensation'' means the
amount reported on a Form W-2 as income for the prior calendar year.
Compensation includes all amounts received from all entities treated as
a single employer under section 414 (b), (c), or (m).
(9) Control employee defined--Government. For purposes of this
paragraph (g), a control employee of a government employer is any--
(i) Elected officials;
(ii) Federal employee who is appointed by the President and
confirmed by the Senate. In the case of commissioned officers of the
United States Armed Forces, an officer is any individual with the rank
or brigadier general or above or the rank of rear admiral (lower half)
or above; or
(iii) State or local executive officer comparable to the individuals
in paragraph (g)(9)(i) and (ii) of this section.
For purposes of this paragraph (g), the term ``government'' includes any
Federal, state, or local government unit, and any agency or
instrumentality thereof.
(10) Seating capacity rule--(i) In general. Where 50 percent of more
of the regular passenger seating capacity of an aircraft (as used by the
employer) is occupied by individuals whose flights are primarily for the
employer's business (and whose flights are excludable from income under
section 132(d)), the value of a flight on that aircraft by any employee
who is not flying primarily for the employer's business (or who is
flying primarily for the employer's business but the value of whose
flight is not excludable under section 132(d) by reason of section
274(c)) is deemed to be zero. See Sec. 1.132-5T which limits the
exclusion under section 132(d) to situations where the employee receives
the flight in connection with the performance of services for the
employer providing the aircraft. For purposes of this paragraph (g)(10),
the term ``employee'' includes only employees and partners of the
employer providing the aircraft and does not include independent
contractors and directors of the employer.
For purposes of this paragraph (g)(10), the second sentence of paragraph
(g)(1) of this section will not apply. Instead, a flight taken by an
individual who is either treated as an employee pursuant to section
132(f)(1) or whose flight is treated as a flight taken by an employee
pursuant to section 132(f)(2) is considered a flight taken by an
employee. If (A) a flight is considered taken by an individual other
than an employee (as defined in this paragraph (g)(10)), (B) the value
of that individual's flight is not excludable under section 132(d), and
(C) the seating capacity
[[Page 31]]
rule of this paragraph (g)(10) otherwise applies, then the value of the
flight provided to such an individual is the value of a flight provided
to a non-control employee (even if the individual who would be taxed on
the value of such individual's flight is a control employee).
(ii) Application of 50-percent test to multiple flights. The seating
capacity rule of this paragraph (g)(10) must be met both at the time the
individual whose flight is being valued boards the aircraft and at the
time the individual deplanes. For example, assume that employee A boards
an employer-provided aircraft for personal purposes in New York, New
York, and that at that time 80 percent of the regular passenger seating
capacity of the aircraft is occupied by individuals whose flights are
primarily for the employer's business (and whose flights are excludable
from income under section 132(d)) (``the business passengers''). If the
aircraft flies directly to Hartford, Connecticut where all of the
passengers, including A, deplane, the requirements of the seating
capacity rule of this paragraph (g)(10) have been satisfied. If instead,
some of the passengers, including A, remain on the aircraft in Hartford
and the aircraft continues on to Boston, Massachusetts, where they all
deplane, the requirements of the seating capacity rule of this paragraph
(g)(10) will not be satisfied unless at least 50 percent of the seats
comprising the aircraft's regular passenger seating capacity were
occupied by the business passengers at the time A deplanes in Boston.
(iii) Regular passenger seating capacity. The regular passenger
seating capacity of an aircraft is the maximum number of seats that have
at any time been on the aircraft (while owned or leased by the
employer). Except to the extent excluded pursuant to paragraph
(g)(10)(v) of this section, regular seating capacity includes all seats
which may be occupied by members of the flight crew. It is irrelevant
that on a particular flight, less than the maximum number of seats are
available for use, because, for example, some of the seats are removed.
When determining the maximum number of seats, those seats that cannot at
any time be legally used during takeoff and are not any time used during
takeoff are not counted.
(iv) Examples. The rules of paragraph (g)(10)(iii) of this section
are illustrated by the following examples:
Example (1). Employer A and employer B order the same aircraft,
except that A orders it with 10 seats and B orders it with eight seats.
A always uses its aircraft as a 10-seat aircraft; B always uses its
aircraft as an eight-seat aircraft. The regular passenger seating
capacity of A's aircraft is 10 and of B's aircraft is eight.
Example (2). Assume the same facts as in example (1), except that
whenever A's chief executive officer and spouse use the aircraft eight
seats are removed. Even if substantially all of the use of the aircraft
is by the chief executive officer and spouse the regular passenger
seating capacity of the aircraft is 10.
Example (3). Assume the same facts as in example (1), except that
whenever more than eight people want to fly in B's aircraft, two extra
seats are added. Even if substantially all of the use of the aircraft
occurs with eight seats, the regular passenger seating capacity of the
aircraft is 10.
(v) Seats occupied by flight crew. When determining the regular
passenger seating capacity of an aircraft, any seat occupied by a member
of the flight crew (whether or not such individual is an employee of the
employer providing the aircraft) shall not be counted, unless the
purpose of the flight by such individual is not primarily to serve as a
member of the flight crew. If the seat occupied by a member of the
flight crew is not counted as a passenger seat pursuant to the previous
sentence, such member of the flight crew is disregarded in applying the
50 percent test described in the first sentence of paragraph (g)(10)(i)
of this section. For example, assume that, prior to the application of
this paragraph (g)(10)(v), the regular passenger seating capacity of an
aircraft is two seats.
Assume further that an employee pilots the aircraft and that the
employee's flight is not primarily for the employer's business. If the
employee's spouse occupies the other seat for personal purposes, the
seating capacity rule is not met and the value of both
[[Page 32]]
flights must be included in the employee's income. If, however, the
employee's flight were primarily for the employer's business (unrelated
to serving as a member of the flight crew), then the seating capacity
rule is met and the value of the flight for the employee's spouse is
deemed to be zero. If the employee's flight were primarily to serve as a
member of the flight crew, then the seating capacity rule is not met and
the value of a flight by any passenger for primarily personal reasons is
not deemed to be zero.
(11) Erroneous use of the non-commercial flight valuation rule--(i)
In general. If the non-commercial flight valuation rule of this
paragraph (g) is used by an employer or a control employee, as the case
may be, on a return as originally filed, on the grounds that either the
control employee is not in fact a control employee, or that the aircraft
is within a specific weight classification, and either position is
subsequently determined to be erroneous, the valuation rule of this
paragraph (g) (including paragraph (g)(13) of this section) is not
available to value the flight taken by that control employee by the
person or persons taking the erroneous position. With respect to the
weight classifications, the previous sentence does not apply if the
position taken is that the weight of the aircraft is greater than it is
subsequently determined to be. If, with respect to a flight by a control
employee, the seating capacity rule of paragraph (g)(10) of this section
is used by an employer or the control employee, as the case may be, on a
return as originally filed, and it is subsequently determined that the
requirements of paragraph (g)(10) of this section were not met, the
valuation rule of this paragraph (g) (including paragraph (g)(13) of
this section) is not available to value the flight taken by that control
employee by the person or persons taking the erroneous position.
(ii) Value of flight excluded as a working condition fringe. If
either an employer or an employee, on a return as originally filed,
excludes from the employee's income or wages the value of a flight on
the grounds that the flight was excludable as a working condition fringe
under section 132, and that position is subsequently determined to be
erroneous, the valuation rule of this paragraph (g) (including paragraph
(g)(13) of this section) is not available to value the flight taken by
that employee by the person or persons taking the erroneous position.
(12) Consistency rules--(i) Use by the employer. Except as otherwise
provided in paragraphs (g)(11) and (g)(13)(iv) of this section, if the
non-commercial flight valuation rule of this paragraph (g) is used by an
employer to value flights provided in a calendar year, the rule must be
used to value all flights provided in the calendar year.
(ii) Use by the employee. Except as otherwise provided in paragraphs
(g)(11) and (g)(13)(iv) of this section, if the non-commercial flight
valuation rule of this paragraph (g) is used by an employee to value a
flight taken in a calendar year, the rule must be used to value all
flights taken in the calendar year.
(13) Transitional valuation rule--(i) In general. If the value of a
flight determined under this paragraph (g)(13) is lower than the value
of the flight otherwise determined under paragraph (g) of this section,
the value of the flight is the lower amount. The transitional valuation
rule of this paragraph (g)(13) is available only for flights provided
after December 31, 1984, and before January 1, 1986.
(ii) Transitional valuation rule aircraft multiples. The appropriate
aircraft multiples under the transitional valuation rule are as follows:
(A) 125 percent of the base aircraft valuation formula, plus the
applicable terminal charge, for any flight by any employee who is not a
key employee (as defined in paragraph (g)(13)(iii) of this section.)
(B) 125 percent of the base aircraft valuation formula, plus the
applicable terminal charge, for a flight by a key employee if there is a
primary business purpose of the trip by the aircraft. For purposes of
this paragraph (g)(13)(ii) (B), entertaining an employee or other
individual is not a business purpose.
(C) 600 percent of the base aircraft valuation formula, plus the
applicable terminal charge, for a flight by a key employee if there is
not primary business for the trip by the aircraft.
[[Page 33]]
Where there is no business purpose for the trip by the aircraft, the
alternative valuation rule may not be used to value a flight by a key
employee. For purposes of this section, compensating an employee is not
a business purpose.
(iii) Key employee defined. A ``key employee'' is any employee who
is a five-percent owner or an officer of the employer, or who, with
respect to a particular trip by the aircraft, controls the use of the
aircraft. For purposes of determining who is a five-percent owner, any
individual who owns (or is considered as owning) five or more percent of
the fair market value of an entity (the ``owned entity'') is considered
a five-percent owner of all entities that would be aggregated with the
owned entity under the rules of section 414(b), (c), or (m).
(iv) Erroneous use of transitional valuation rule. If the
transitional valuation rule is used by an employer or a key employee, as
the case may be, on a return as originally filed, on the grounds that--
(A) The key employee is not in fact a key employee,
(B) An aircraft trip had a primary business purpose, or
(C) An aircraft trip had some business purpose,
and such position is subsequently determined to be erroneous, neither
the transitional valuation rule nor the non-commercial flight valuation
rule of this paragraph (g) is available to value such flight taken by
that key employee by the person or persons taking the erroneous
position.
(h) Commercial flight valuation rule--(1) In general. Under the
commercial flight valuation rule of this paragraph (h), the value of a
space-available flight (as defined in paragraph (h)(2) of this section)
on a commercial aircraft is 25 percent of the actual carrier's highest
unrestricted coach fare in effect for the particular flight taken.
(2) Space-available flight. The commercial flight valuation rule of
this paragraph (h) is available to value a space-available flight. The
term ``space-available flight'' means a flight on a commercial aircraft
(i) for which the airline (the acutal carrier) incurs no substantial
additional cost (including forgone revenue) determined without regard to
any amount paid for the flight and (ii) which is subject to the same
types of restrictions customarily associated with flying on an employee
``standby'' or ``space-available'' basis. A flight may be a space-
available flight even if the airline that is the actual carrier is not
the employer of the employee.
(3) Commercial aircraft. If the actual carrier does not offer, in
the ordinary course of its business, air transportation to customers on
a per-seat basis, the commercial flight valuation rule of this paragraph
(h) is not available. Thus, if, in the ordinary course of its line of
business, the employer only offers air transportation to customers on a
charter basis, the commerical flight valuation rule of this paragraph
(h) may not be used to value a space-available flight on the employer's
aircraft. Similarly, if, in the ordinary course of its line of business,
an employer only offers air transportation to customers for the
transport of cargo, the commercial flight valuation rule of this
paragraph (h) may not be used to value a space-available flight on the
employer's aircraft.
(4) Timing of inclusion. The date that the flight is taken is the
relevant date for purposes of applying section 61(a)(1) and this section
to a space-available flight on a commercial aircraft. The date of
purchase or issuance of a pass or ticket is not relevant. Thus, this
section applies to a flight taken on or after January 1, 1985,
regardless of the date on which the pass or ticket for the flight was
purchased or issued.
(5) Consistency rules--(i) Use by employer. If the commercial flight
valuation rule of this paragraph (h) is used by an employer to value
flights provided in a calendar year, the rule must be used to value all
flights provided in the calendar year.
(ii) Use by employee. If the commercial flight valuation rule of
this paragraph (h) is used by an employee to value a flight taken in a
calendar year, the rule must be used to value all flights taken by such
employee in the calendar year.
(i) [Reserved]
(j) Valuation of meals provided at an employer-operated eating
facility for employees--(1) In general. The valuation
[[Page 34]]
rule of this paragraph (j) may be used to value a meal provided at an
employer-operated eating facility for employees (as defined in
Sec. 1.132-7T). For rules relating to an exclusion for the value of
meals provided at an employer-operated eating facility for employees,
see Sec. 1.132-7T.
(2) Valuation formula--(i) In general. The value of all meals
provided at an employer-operated eating facility for employees during a
calendar year is 150 percent of the direct operaitng costs of the eating
facility (``total meal value''). For purposes of this paragraph (j), the
definition of direct operating costs provided in Sec. 1.132-7T applies.
The taxable value of meals provided at an eating facility may be
determined in two ways. The ``individual meal subsidy'' may be treated
as the taxable value of a meal provided at the eating facility (see
paragraph (j)(2)(ii) of this section). Alternatively, the employer may
allocate the ``total meal subsidy'' among employees (see paragraph
(j)(2)(iii) of this section).
(ii) ``Individual meal subsidy'' defined. The ``individual meal
subsidy'' is determined by multiplying the price charged for a
particular meal by a fraction, the numerator of which is the total meal
value and the denominator of which is the gross receipts of the eating
facility, and then subtracting the amount paid for the meal. The taxable
value of meals provided to a particular employee during a calendar year,
therefore, is the sum of the individual meal subsidies provided to the
employee during the calendar year.
(iii) Allocation of ``total meal subsidy.'' Instead of using the
individual meal value method, the employer may allocate the ``total meal
subsidy'' (total meal value less the gross receipts of the facility)
among employees in any manner reasonable under the circumstances.
[T.D. 8063, 50 FR 52285, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28582, July 6, 1989; T.D. 8457, 57 FR 62195, Dec. 30, 1992]
Sec. 1.61-3 Gross income derived from business.
(a) In general. In a manufacturing, merchandising, or mining
business, ``gross income'' means the total sales, less the cost of goods
sold, plus any income from investments and from incidental or outside
operations or sources. Gross income is determined without subtraction of
depletion allowances based on a percentage of income to the extent that
it exceeds cost depletion which may be required to be included in the
amount of inventoriable costs as provided in Sec. 1.471-11 and without
subtraction of selling expenses, losses or other items not ordinarily
used in computing costs of goods sold or amounts which are of a type for
which a deduction would be disallowed under section 162 (c), (f), or (g)
in the case of a business expense. The cost of goods sold should be
determined in accordance with the method of accounting consistently used
by the taxpayer. Thus, for example, an amount cannot be taken into
account in the computation of cost of goods sold any earlier than the
taxable year in which economic performance occurs with respect to the
amount (see Sec. 1.446-1(c)(1)(ii)).
(b) State contracts. The profit from a contract with a State or
political subdivision thereof must be included in gross income. If
warrants are issued by a city, town, or other political subdivision of a
State, and are accepted by the contractor in payment for public work
done, the fair market value of such warrants should be returned as
income. If, upon conversion of the warrants into cash, the contractor
does not receive and cannot recover the full value of the warrants so
returned, he may deduct any loss sustained from his gross income for the
year in which the warrants are so converted. If, however, he realizes
more than the value of the warrants so returned, he must include the
excess in his gross income for the year in which realized.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7207, 37 FR 20767, Oct. 5, 1972; T.D. 7285, 38 FR 26184,
Sept. 19, 1973; T.D. 8408, 57 FR 12419, Apr. 10, 1992]
Sec. 1.61-4 Gross income of farmers.
(a) Farmers using the cash method of accounting. A farmer using the
cash receipts and disbursements method of accounting shall include in
his gross income for the taxable year--
[[Page 35]]
(1) The amount of cash and the value of merchandise or other
property received during the taxable year from the sale of livestock and
produce which he raised,
(2) The profits from the sale of any livestock or other items which
were purchased,
(3) All amounts received from breeding fees, fees from rent of
teams, machinery, or land, and other incidental farm income,
(4) All subsidy and conservation payments received which must be
considered as income, and
(5) Gross income from all other sources.
The profit from the sale of livestock or other items which were
purchased is to be ascertained by deducting the cost from the sales
price in the year in which the sale occurs, except that in the case of
the sale of purchased animals held for draft, breeding, or dairy
purposes, the profits shall be the amount of any excess of the sales
price over the amount representing the difference between the cost and
the depreciation allowed or allowable (determined in accordance with the
rules applicable under section 1016(a) and the regulations thereunder).
However, see section 162 and the regulations thereunder with respect to
the computation of taxable income on other than the crop method where
the cost of seeds or young plants purchased for further development and
cultivation prior to sale is involved. Crop shares (whether or not
considered rent under State law) shall be included in gross income as of
the year in which the crop shares are reduced to money or the equivalent
of money. See section 263A for rules regarding costs that are required
to be capitalized.
(b) Farmers using an accrual method of accounting. A farmer using an
accrual method of accounting must use inventories to determine his gross
income. His gross income on an accrual method is determined by adding
the total of the items described in subparagraphs (1) through (5) of
this paragraph and subtracting therefrom the total of the items
described in subparagraphs (6) and (7) of this paragraph. These items
are as follows:
(1) The sales price of all livestock and other products held for
sale and sold during the year;
(2) The inventory value of livestock and products on hand and not
sold at the end of the year;
(3) All miscellaneous items of income, such as breeding fees, fees
from the rent of teams, machinery, or land, or other incidental farm
income;
(4) Any subsidy or conservation payments which must be considered as
income;
(5) Gross income from all other sources;
(6) The inventory value of the livestock and products on hand and
not sold at the beginning of the year; and
(7) The cost of any livestock or products purchased during the year
(except livestock held for draft, dairy, or breeding purposes, unless
included in inventory).
All livestock raised or purchased for sale shall be added in the
inventory at their proper valuation determined in accordance with the
method authorized and adopted for the purpose. Livestock acquired for
draft, breeding, or dairy purposes and not for sale may be included in
the inventory (see subparagraphs (2), (6), and (7) of this paragraph)
instead of being treated as capital assets subject to depreciation,
provided such practice is followed consistently from year to year by the
taxpayer. When any livestock included in an inventory are sold, their
cost must not be taken as an additional deduction in computing taxable
income, because such deduction is reflected in the inventory. See the
regulations under section 471. See section 263A for rules regarding
costs that are required to be capitalized. Crop shares (whether or not
considered rent under State law) shall be included in gross income as of
the year in which the crop shares are reduced to money or the equivalent
of money.
(c) Special rules for certain receipts. In the case of the sale of
machinery, farm equipment, or any other property (except stock in trade
of the taxpayer, or property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the
[[Page 36]]
taxpayer primarily for sale to customers in the ordinary course of his
trade or business), any excess of the proceeds of the sale over the
adjusted basis of such property shall be included in the taxpayer's
gross income for the taxable year in which such sale is made. See,
however, section 453 and the regulations thereunder for special rules
relating to certain installment sales. If farm produce is exchanged for
merchandise, groceries, or the like, the market value of the article
received in exchange is to be included in gross income. Proceeds of
insurance, such as hail or fire insurance on growing crops, should be
included in gross income to the extent of the amount received in cash or
its equivalent for the crop injured or destroyed. See section 451(d) for
special rule relating to election to include crop insurance proceeds in
income for taxable year following taxable year of destruction. For
taxable years beginning after July 12, 1972, where a farmer is engaged
in producing crops and the process of gathering and disposing of such
crops is not completed within the taxable year in which such crops are
planted, the income therefrom may, with the consent of the Commissioner
(see section 446 and the regulations thereunder), be computed upon the
crop method. For taxable years beginning on or before July 12, 1972,
where a farmer is engaged in producing crops which take more than a year
from the time of planting to the time of gathering and disposing, the
income therefrom may, with the consent of the Commissioner (see section
446 and the regulations thereunder), be computed upon the crop method.
In any case in which the crop method is used, the entire cost of
producing the crop must be taken as a deduction for the year in which
the gross income from the crop is realized, and not earlier.
(d) Definition of ``farm''. As used in this section, the term
``farm'' embraces the farm in the ordinarily accepted sense, and
includes stock, dairy, poultry, fruit, and truck farms; also
plantations, ranches, and all land used for farming operations. All
individuals, partnerships, or corporations that cultivate, operate, or
manage farms for gain or profit, either as owners or tenants, are
designated as farmers. For more detailed rules with respect to the
determination of whether or not an individual is engaged in farming, see
Sec. 1.175-3. For rules applicable to persons cultivating or operating a
farm for recreation or pleasure, see sections 162 and 165, and the
regulations thereunder.
(e) Cross references. (1) For election to include Commodity Credit
Corporation loans as income, see section 77 and regulations thereunder.
(2) For definition of gross income derived from farming for purposes
of limiting deductibility of soil and water conservation expenditures,
see section 175 and regulations thereunder.
(3) For definition of gross income from farming in connection with
declarations of estimated income tax, see section 6073 and regulations
thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7198, 37 FR 13679, July 13, 1972; T.D. 8729, 62 FR
44546, Aug. 22, 1997]
Sec. 1.61-5 Allocations by cooperative associations; per-unit retain certificates--tax treatment as to cooperatives and patrons.
(a) In general. Amounts allocated on the basis of the business done
with or for a patron by a cooperative association, whether or not
entitled to tax treatment under section 522, in cash, merchandise,
capital stock, revolving fund certificates, retain certificates,
certificates of indebtedness, letters of advice or in some other manner
disclosing to the patron the dollar amount allocated, shall be included
in the computation of the gross income of such patron for the taxable
year in which received to the extent prescribed in paragraph (b) of this
section, regardless of whether the allocation is deemed, for the purpose
of section 522, to be made at the close of a preceding taxable year of
the cooperative association. The determination of the extent of
taxability of such amounts is in no way dependent upon the method of
accounting employed by the patron or upon the method, cash, accrual, or
otherwise, upon which the taxable income of such patron is computed.
[[Page 37]]
(b) Extent of taxability. (1) Amounts allocated to a patron on a
patronage basis by a cooperative association with respect to products
marketed for such patron, or with respect to supplies, equipment, or
services, the cost of which was deductible by the patron under section
162 or section 212, shall be included in the computation of the gross
income of such patron, as ordinary income, to the following extent:
(i) If the allocation is in cash, the amount of cash received.
(ii) If the allocation is in merchandise, the amount of the fair
market value of such merchandise at the time of receipt by the patron.
(iii) If the allocation is in the form of revolving fund
certificates, retain certificates, certificates of indebtedness, letters
of advice, or similar documents, the amount of the fair market value of
such document at the time of its receipt by the patron. For purposes of
this subdivision, any document containing an unconditional promise to
pay a fixed sum of money on demand or at a fixed or determinable time
shall be considered to have a fair market value at the time of its
receipt by the patron, unless it is clearly established to the contrary.
However, for purposes of this subdivision, any document which is payable
only in the discretion of the cooperative association, or which is
otherwise subject to conditions beyond the control of the patron, shall
be considered not to have any fair market value at the time of its
receipt by the patron, unless it is clearly established to the contrary.
(iv) If the allocation is in the form of capital stock, the amount
of the fair market value, if any, of such capital stock at the time of
its receipt by the patron.
(2) If any allocation to which subparagraph (1) of this paragraph
applies is received in the form of a document of the type described in
subparagraph (1) (iii) or (iv) of this paragraph and is redeemed in full
or in part or is otherwise disposed of, there shall be included in the
computation of the gross income of the patron, as ordinary income, in
the year of redemption or other disposition, the excess of the amount
realized on the redemption or other disposition over the amount
previously included in the computation of gross income under such
subparagraph.
(3)(i) Amounts which are allocated on a patronage basis by a
cooperative association with respect to supplies, equipment, or
services, the cost of which was not deductible by the patron under
section 162 or section 212, are not includible in the computation of the
gross income of such patron. However, in the case of such amounts which
are allocated with respect to capital assets (as defined in section
1221) or property used in the trade or business within the meaning of
section 1231, such amounts shall, to the extent set forth in
subparagraph (1) of this paragraph, be taken into account by such patron
in determining the cost of the property to which the allocation relates.
Notwithstanding the preceding sentence, to the extent that such amounts
are in excess of the unrecovered cost of such property, and to the
extent that such amounts relate to such property which the patron no
longer owns, they shall be included in the computation of the gross
income of such patron.
(ii) If any patronage dividend is allocated to the patron in the
form of a document of the type described in subparagraph (1) (iii) or
(iv) of this paragraph, and if such allocation is with respect to
capital assets (as defined in section 1221) or property used in the
trade or business within the meaning of section 1231, any amount
realized on the redemption or other disposition of such document which
is in excess of the amount which was taken into account upon the receipt
of the document by the patron shall be taken into account by such patron
in the year of redemption or other disposition as an adjustment to basis
or as an inclusion in the computation of gross income, as the case may
be.
(iii) Any adjustment to basis in respect of an amount to which
subdivision (i) or (ii) of this subparagraph applies shall be made as of
the first day of the taxable year in which such amount is received.
(iv) The application of the provisions of this subparagraph may be
illustrated by the following examples:
Example (1). On July 1, 1959, P, a patron of a cooperative
association, purchases a tractor for use in his farming business from
such
[[Page 38]]
association for $2,200. The tractor has an estimated useful life of five
years and an estimated salvage value of $200. P files his income tax
returns on a calendar year basis and claims depreciation on the tractor
for the year 1959 of $200 pursuant to his use of the straight-line
method at the rate of $400 per year. On July 1, 1960, the cooperative
association allocates to P with respect to his purchase of the tractor a
dividend of $300 in cash. P will reduce his depreciation allowance with
respect to the tractor for 1960 (and subsequent taxable years) to
$333.33, determined as follows:
Cost of tractor, July 1, 1959.................................. $2,200
Less:
Depreciation for 1959 (6 mos.).................... $200
Adjustment as of Jan. 1, 1960, for cash patronage 300
dividend.........................................
Salvage value..................................... 200
----------
700
--------
Basis for depreciation for the remaining 4\1/2\ years of 1,500
estimated life..........................................
Basis for depreciation divided by the 4\1/2\ years of remaining 333.33
life..........................................................
Example (2). Assume the same facts as in example (1), except that on
July 1, 1960, the cooperative association allocates a dividend to P with
respect to his purchase of the tractor in the form of a revolving fund
certificate having a face amount of $300. The certificate is redeemable
in cash at the discretion of the directors of the association and is
subject to diminution by any future losses of the association, and has
no fair market value when received by P. Since the certificate had no
fair market value when received by P, no amount with respect to such
certificate was taken into account by him in the year 1960. In 1965, P
receives $300 cash from the association in full redemption of the
certificate. Prior to 1965, he had recovered through depreciation $2,000
of the cost of the tractor, leaving an unrecovered cost of $200 (the
salvage value). For the year 1965, the redemption proceeds of $300 are
applied against the unrecovered cost of $200, reducing the basis to
zero, and the balance of the redemption proceeds, $100, is includible in
the computation of P's gross income.
Example (3). Assume the same facts as in example (2), except that
the certificate is redeemed in full on July 1, 1962. The full $300
received on redemption of the certificate will be applied against the
unrecovered cost of the tractor as of January 1, 1962, computed as
follows:
Cost of tractor, July 1, 1959.................................. $2,200
Less:
Depreciation for 1959 (6 mos.).................... $200
Depreciation for 1960............................. 400
Depreciation for 1961............................. 400
----------
1,000
--------
Unrecovered cost on Jan. 1, 1962......................... 1,200
Adjustment as of Jan. 1, 1962, for proceeds of the redemption 300
of the revolving fund certificate.............................
----------
Unrecovered cost on Jan. 1, 1962, after adjustment............. 900
Less: Salvage value........................................ 200
----------
Basis for depreciation on Jan. 1, 1962................... 700
If P uses the tractor in his business until June 30,
1964, he would be entitled to the following
depreciation allowances with respect to the tractor:
For 1962............................................ 280
For 1963............................................ 280
For 1964 (6 mos.)................................... 140
----------
700
--------
Balance to be depreciated...................................... 0
Example (4). Assume the same facts as in example (3), except that P
sells the tractor in 1961. The entire $300 received in 1962 in
redemption of the revolving fund certificate is includible in the
computation of P's gross income for the year 1962.
(c) Special rule. If, for any taxable year ending before December 3,
1959, a taxpayer treated any patronage dividend received in the form of
a document described in paragraph (b) (1) (iii) or (iv) of this section
in accordance with the regulations then applicable (whether such
dividend is subject to paragraph (b) (1) or (3) of this section), such
taxpayer is not required to change the treatment of such patronage
dividends for any such prior taxable year. On the other hand, the
taxpayer may, if he so desires, amend his income tax returns to treat
the receipt of such patronage dividend in accordance with the provisions
of this section, but no provision in this paragraph shall be construed
as extending the period of limitations within which a claim for credit
or refund may be filed under section 6511.
(d) Per-unit retain certificates; tax treatment of cooperative
associations; distribution and reinvestment alternative. (1)(i) In the
case of a taxable year to which this paragraph applies to a cooperative
association, such association shall, in computing the amount paid or
returned to a patron with respect to products marketed for such patron,
take into account the stated dollar amount of any per-unit retain
certificate (as defined in paragraph (g) of this section)--
(a) Which is issued during the payment period for such year (as
defined in subparagraph (3) of this paragraph) with respect to such
products,
[[Page 39]]
(b) With respect to which the patron is a qualifying patron (as
defined in subparagraph (2) of this paragraph), and
(c) Which clearly states the fact that the patron has agreed to
treat the stated dollar amount thereof as representing a cash
distribution to him which he has reinvested in the cooperative
association.
(ii) No amount shall be taken into account by a cooperative
association by reason of the issuance of a per-unit retain certificate
to a patron who was not a qualifying patron with respect to such
certificate. However, any amount paid in redemption of a per-unit retain
certificate which was issued to a patron who was not a qualifying patron
with respect to such certificate shall be taken into account by the
cooperative in the year of redemption, as an amount paid or returned to
such patron with respect to products marketed for him. This subdivision
shall apply only to per-unit retain certificates issued with respect to
taxable years of the cooperative association to which this paragraph
applied to the association (that is, taxable years with respect to which
per-unit retain certificates were issued to one or more patrons who are
qualifying patrons).
(2)(i) A patron shall be considered to be a ``qualifying patron''
with respect to a per-unit retain certificate if there is in effect an
agreement between the cooperative association and such patron which
clearly provides that such patron agrees to treat the stated dollar
amounts of all per-unit retain certificates issued to him by the
association as representing cash distributions which he has
constructively received and which he has, of his own choice, reinvested
in the cooperative association. Such an agreement may be included in a
by-law of the cooperative which is adopted prior to the time the
products to which the per-unit retain certificates relate are marketed.
However, except where there is in effect a ``written agreement''
described in subdivision (ii) of this subparagraph, a patron shall not
be considered to be a ``qualifying patron'' with respect to a per-unit
retain certificate if it has been established by a determination of the
Tax Court of the United States, or any other court of competent
jurisdiction, which has become final, that the stated dollar amount of
such certificate, or of a similar certificate issued under similar
circumstances to such patron or any other patron by the cooperative
association, is not required to be included (as ordinary income) in the
gross income of such patron, or such other patron, for the taxable year
of the patron in which received.
(ii) The ``written agreement'' referred to in subdivision (i) of
this subparagraph is an agreement in writing, signed by the patron, on
file with the cooperative association, and revocable as provided in this
subdivision. Unless such an agreement specifically provides to the
contrary, it shall be effective for per-unit retain certificates issued
with respect to the taxable year of the cooperative association in which
the agreement is received by the association, and unless revoked, for
per-unit retain certificates issued with respect to all subsequent
taxable years. A ``written agreement'' must be revocable by the patron
at any time after the close of the taxable year in which it is made. To
be effective, a revocation must be in writing, signed by the patron, and
furnished to the cooperative association. A revocation shall be
effective only for per-unit retain certificates issued with respect to
taxable years of the cooperative association following the taxable year
in which it is furnished to the association. Notwithstanding the
preceding sentence, a revocation shall not be effective for per-unit
retain certificates issued with respect to products marketed for the
patron under a pooling arrangement in which such patron participated
before such revocation. The following is an example of an agreement
which would meet the requirements of this subparagraph:
I agree that, for purposes of determining the amount I have received
from this cooperative in payment for my goods, I shall treat the face
amount of any per-unit retain certificates issued to me on and after ---
------- as representing a cash distribution which I have constructively
received and which I have reinvested in the cooperative.
________________________________________________________________________
(Signed)
[[Page 40]]
(3) For purposes of this paragraph and paragraph (e) of this
section, the payment period for any taxable year of the cooperative is
the period beginning with the first day of such taxable year and ending
with the 15th day of the 9th month following the close of such year.
(4) This paragraph shall apply to any taxable year of a cooperative
association if, with respect to such taxable year, the association has
issued per-unit retain certificates to one or more of its patrons who
are qualifying patrons with respect to such certificates within the
meaning of subparagraph (2) of this paragraph.
(e) Tax treatment of cooperative association; taxable years for
which paragraph (d) does not apply. (1) In the case of a taxable year to
which paragraph (d) of this section does not apply to a cooperative
association, such association shall, in computing the amount paid or
returned to a patron with respect to products marketed for such patron,
take into account the fair market value (at the time of issue) of any
per-unit retain certificates which are issued by the association with
respect to such products during the payment period for such taxable
year.
(2) An amount paid in redemption of a per-unit retain certificate
issued with respect to a taxable year of the cooperative association for
which paragraph (d) of this section did not apply to the association,
shall, to the extent such amount exceeds the fair market value of the
certificate at the time of its issue, be taken into account by the
association in the year of redemption, as an amount paid or returned to
a patron with respect to products marketed for such patron.
(3) For purposes of this paragraph and paragraph (f)(2) of this
section, any per-unit retain certificate containing an unconditional
promise to pay a fixed sum of money on demand or at a fixed or
determinable time shall be considered to have a fair market value at the
time of its issue, unless it is clearly established to the contrary. On
the other hand, any per-unit retain certificate (other than capital
stock) which is redeemable only in the discretion of the cooperative
association, or which is otherwise subject to conditions beyond the
control of the patron, shall be considered not to have any fair market
value at the time of its issue, unless it is clearly established to the
contrary.
(f) Tax treatment of patron. (1) The following rules apply for
purposes of computing the amount includible in gross income with respect
to a per-unit retain certificate which was issued to a patron by a
cooperative association with respect to a taxable year of such
association for which paragraph (d) of this section applies.
(i) If the patron is a qualifying patron with respect to such
certificate (within the meaning of paragraph (d) (2) of this section),
he shall, in accordance with his agreement, include (as ordinary income)
the stated dollar amount of the certificate in gross income for his
taxable year in which the certificate is received by him.
(ii) If the patron is not a qualifying patron with respect to such
certificate, no amount is includible in gross income on the receipt of
the certificate; however, any gain on the redemption, sale, or other
disposition of such certificate shall, to the extent of the stated
dollar amount thereof, be considered as gain from the sale or exchange
of property which is not a capital asset.
(2) The amount of the fair market value of a per-unit retain
certificate which is issued to a patron by a cooperative association
with respect to a taxable year of the association for which paragraph
(d) of this section does not apply shall be included, as ordinary
income, in the gross income of the patron for the taxable year in which
the certificate is received. Any gain on the redemption, sale, or other
disposition of such a per-unit retain certificate shall, to the extent
its stated dollar amount exceeds its fair market value at the time of
issue, be treated as gain on the redemption, sale, or other disposition
of property which is not a capital asset.
(g) ``Per-unit retain certificate'' defined. For purposes of
paragraphs (d), (e), and (f), of this section, the term ``per-unit
retain certificate'' means any capital stock, revolving fund
certificate, retain certificate, certificate of indebtedness, letter of
advice, or other written notice--
[[Page 41]]
(1) Which is issued to a patron with respect to products marketed
for such patron;
(2) Which discloses to the patron the stated dollar amount allocated
to him on the books of the cooperative association; and
(3) The stated dollar amount of which is fixed without reference to
net earnings.
(h) Effective date. This section shall not apply to any amount the
tax treatment of which is prescribed in section 1385 and Sec. 1.1385-1.
Paragraphs (d), (e), and (f) of this section shall apply to per-unit
retain certificates as defined in paragraph (g) of this section issued
by a cooperative association during taxable years of the association
beginning after April 30, 1966, with respect to products marketed for
patrons during such years.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6855, 30 FR
13134, Oct. 15, 1965]
Sec. 1.61-6 Gains derived from dealings in property.
(a) In general. Gain realized on the sale or exchange of property is
included in gross income, unless excluded by law. For this purpose
property includes tangible items, such as a building, and intangible
items, such as goodwill. Generally, the gain is the excess of the amount
realized over the unrecovered cost or other basis for the property sold
or exchanged. The specific rules for computing the amount of gain or
loss are contained in section 1001 and the regulations thereunder. When
a part of a larger property is sold, the cost or other basis of the
entire property shall be equitably apportioned among the several parts,
and the gain realized or loss sustained on the part of the entire
property sold is the difference between the selling price and the cost
or other basis allocated to such part. The sale of each part is treated
as a separate transaction and gain or loss shall be computed separately
on each part. Thus, gain or loss shall be determined at the time of sale
of each part and not deferred until the entire property has been
disposed of. This rule may be illustrated by the following examples:
Example (1). A, a dealer in real estate, acquires a 10-acre tract
for $10,000, which he divides into 20 lots. The $10,000 cost must be
equitably apportioned among the lots so that on the sale of each A can
determine his taxable gain or deductible loss.
Example (2). B purchases for $25,000 property consisting of a used
car lot and adjoining filling station. At the time, the fair market
value of the filling station is $15,000 and the fair market value of the
used car lot is $10,000. Five years later B sells the filling station
for $20,000 at a time when $2,000 has been properly allowed as
depreciation thereon. B's gain on this sale is $7,000, since $7,000 is
the amount by which the selling price of the filling station exceeds the
portion of the cost equitably allocable to the filling station at the
time of purchase reduced by the depreciation properly allowed.
(b) Nontaxable exchanges. Certain realized gains or losses on the
sale or exchange of property are not ``recognized'', that is, are not
included in or deducted from gross income at the time the transaction
occurs. Gain or loss from such sales or exchanges is generally
recognized at some later time. Examples of such sales or exchanges are
the following:
(1) Certain formations, reorganizations, and liquidations of
corporations, see sections 331, 333, 337, 351, 354, 355, and 361;
(2) Certain formations and distributions of partnerships, see
sections 721 and 731;
(3) Exchange of certain property held for productive use or
investment for property of like kind, see section 1031;
(4) A corporation's exchange of its stock for property, see section
1032;
(5) Certain involuntary conversions of property if replaced, see
section 1033;
(6) Sale or exchange of residence if replaced, see section 1034;
(7) Certain exchanges of insurance policies and annuity contracts,
see section 1035; and
(8) Certain exchanges of stock for stock in the same corporation,
see section 1036.
(c) Character of recognized gain. Under Subchapter P, Chapter 1 of
the Code, relating to capital gains and losses, certain gains derived
from dealings in property are treated specially, and under certain
circumstances the maximum rate of tax on such gains is 25 percent, as
provided in section 1201. Generally, the property subject to this
[[Page 42]]
treatment is a ``capital asset'', or treated as a ``capital asset''. For
definition of such assets, see sections 1221 and 1231, and the
regulations thereunder. For some of the rules either granting or denying
this special treatment, see the following sections and the regulations
thereunder:
(1) Transactions between partner and partnership, section 707;
(2) Sale or exchange of property used in the trade or business and
involuntary conversions, section 1231;
(3) Payment of bonds and other evidences of indebtedness, section
1232;
(4) Gains and losses from short sales, section 1233;
(5) Options to buy or sell, section 1234;
(6) Sale or exchange of patents, section 1235;
(7) Securities sold by dealers in securities, section 1236;
(8) Real property subdivided for sale, section 1237;
(9) Amortization in excess of depreciation, section 1238;
(10) Gain from sale of certain property between spouses or between
an individual and a controlled corporation, section 1239;
(11) Taxability to employee of termination payments, section 1240.
Sec. 1.61-7 Interest.
(a) In general. As a general rule, interest received by or credited
to the taxpayer constitutes gross income and is fully taxable. Interest
income includes interest on savings or other bank deposits; interest on
coupon bonds; interest on an open account, a promissory note, a
mortgage, or a corporate bond or debenture; the interest portion of a
condemnation award; usurious interest (unless by State law it is
automatically converted to a payment on the principal); interest on
legacies; interest on life insurance proceeds held under an agreement to
pay interest thereon; and interest on refunds of Federal taxes. For
rules determining the taxable year in which interest, including interest
accrued or constructively received, is included in gross income, see
section 451 and the regulations thereunder. For the inclusion of
interest in income for the purpose of the retirement income credit, see
section 37 and the regulations thereunder. For credit of tax withheld at
source on interest on tax-free covenant bonds, see section 32 and the
regulations thereunder. For rules relating to interest on certain
deferred payments, see section 483 and the regulations thereunder.
(b) Interest on Government obligations--(1) Wholly tax-exempt
interest. Interest upon the obligations of a State, Territory, or a
possession of the United States, or any political subdivision of any of
the foregoing, or of the District of Columbia, is wholly exempt from
tax. Interest on certain United States obligations issued before March
1, 1941, is exempt from tax to the extent provided in the acts of
Congress authorizing the various issues. See section 103 and the
regulations thereunder.
(2) Partially tax-exempt interest. Interest earned on certain United
States obligations is partly tax exempt and partly taxable. For example,
the interest on United States Treasury bonds issued before March 1,
1941, to the extent that the principal of such bonds exceeds $5,000, is
exempt from normal tax but is subject to surtax. See sections 35 and
103, and the regulations thereunder.
(3) Fully taxable interest. In general, interest on United States
obligations issued on or after March 1, 1941, and obligations issued by
any agency or instrumentality of the United States after that date, is
fully taxable; but see section 103 and the regulations thereunder. A
taxpayer using the cash receipts and disbursements method of accounting
who owns United States savings bonds issued at a discount has an
election as to when he will report the interest; see section 454 and the
regulations thereunder.
(c) Obligations bought at a discount; bonds bought when interest
defaulted or accrued. When notes, bonds, or other certificates of
indebtedness are issued by a corporation or the Government at a discount
and are later redeemed by the debtor at the face amount, the original
discount is interest, except as otherwise provided by law. See also
paragraph (b) of this section for the rules relating to Government
bonds. If
[[Page 43]]
a taxpayer purchases bonds when interest has been defaulted or when the
interest has accrued but has not been paid, any interest which is in
arrears but has accrued at the time of purchase is not income and is not
taxable as interest if subsequently paid. Such payments are returns of
capital which reduce the remaining cost basis. Interest which accrues
after the date of purchase, however, is taxable interest income for the
year in which received or accrued (depending on the method of accounting
used by the taxpayer).
(d) Bonds sold between interest dates; amounts received in excess of
original issue discount; interest on life insurance. When bonds are sold
between interest dates, part of the sales price represents interest
accrued to the date of the sale and must be reported as interest income.
Amounts received in excess of the original issue discount upon the
retirement or sale of a bond or other evidence of indebtedness may under
some circumstances constitute capital gain instead of ordinary income.
See section 1232 and the regulations thereunder. Interest payments on
amounts payable as employees' death benefits (whether or not section
101(b) applies thereto) and on the proceeds of life insurance policies
payable by reason of the insured's death constitute gross income under
some circumstances. See section 101 and the regulations thereunder for
details. Where accrued interest on unwithdrawn insurance policy
dividends is credited annually and is subject to withdrawal annually by
the taxpayer, such interest credits constitute gross income to such
taxpayer as of the year of credit. However, if under the terms of the
insurance policy the interest on unwithdrawn policy dividends is subject
to withdrawal only on the anniversary date of the policy (or some other
date specified therein), then such interest shall constitute gross
income to the taxpayer for the taxable year in which such anniversary
date (or other specified date) falls.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6723, 29 FR
5342, Apr. 21, 1964; T.D. 6873, 31 FR 941, Jan. 25, 1966]
Sec. 1.61-8 Rents and royalties.
(a) In general. Gross income includes rentals received or accrued
for the occupancy of real estate or the use of personal property. For
the inclusion of rents in income for the purpose of the retirement
income credit, see section 37 and the regulations thereunder. Gross
income includes royalties. Royalties may be received from books,
stories, plays, copyrights, trademarks, formulas, patents, and from the
exploitation of natural resources, such as coal, gas, oil, copper, or
timber. Payments received as a result of the transfer of patent rights
may under some circumstances constitute capital gain instead of ordinary
income. See section 1235 and the regulations thereunder. For special
rules for certain income from natural resources, see Subchapter I
(section 611 and following), Chapter 1 of the Code, and the regulations
thereunder.
(b) Advance rentals; cancellation payments. Except as provided in
section 467 and the regulations thereunder, gross income includes
advance rentals, which must be included in income for the year of
receipt regardless of the period covered or the method of accounting
employed by the taxpayer. An amount received by a lessor from a lessee
for cancelling a lease constitutes gross income for the year in which it
is received, since it is essentially a substitute for rental payments.
As to amounts received by a lessee for the cancellation of a lease, see
section 1241 and the regulations thereunder.
(c) Expenditures by lessee. As a general rule, if a lessee pays any
of the expenses of his lessor such payments are additional rental income
of the lessor. If a lessee places improvements on real estate which
constitute, in whole or in part, a substitute for rent, such
improvements constitute rental income to the lessor. Whether or not
improvements made by a lessee result in rental income to the lessor in a
particular case depends upon the intention of the parties, which may be
indicated either by the terms of the lease or by the surrounding
circumstances. For the exclusion from gross income of income (other than
rent) derived by a lessor of real property on the termination of a
lease, representing the value of such property attributable to buildings
erected or other improvements made
[[Page 44]]
by a lessee, see section 109 and the regulations thereunder. For the
exclusion from gross income of a lessor corporation of certain of its
income taxes on rental income paid by a lessee corporation under a lease
entered into before January 1, 1954, see section 110 and the regulations
thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 8820, 64 FR 26851, May 18, 1999]
Sec. 1.61-9 Dividends.
(a) In general. Except as otherwise specifically provided, dividends
are included in gross income under sections 61 and 301. For the
principal rules with respect to dividends includible in gross income,
see section 316 and the regulations thereunder. As to distributions made
or deemed to be made by regulated investment companies, see sections 851
through 855, and the regulations thereunder. As to distributions made by
real estate investment trusts, see sections 856 through 858, and the
regulations thereunder. See section 116 for the exclusion from gross
income of $100 ($50 for dividends received in taxable years beginning
before January 1, 1964) of dividends received by an individual, except
those from certain corporations. Furthermore, dividends may give rise to
a credit against tax under section 34, relating to dividends received by
individuals (for dividends received on or before December 31, 1964), and
under section 37, relating to retirement income.
(b) Dividends in kind; stock dividends; stock redemptions. Gross
income includes dividends in property other than cash, as well as cash
dividends. For amounts to be included in gross income when distributions
of property are made, see section 301 and the regulations thereunder. A
distribution of stock, or rights to acquire stock, in the corporation
making the distribution is not a dividend except under the circumstances
described in section 305(b). However, the term ``dividend'' includes a
distribution of stock, or rights to acquire stock, in a corporation
other than the corporation making the distribution. For determining when
distributions in complete liquidation shall be treated as dividends, see
section 333 and the regulations thereunder. For rules determining when
amounts received in exchanges under section 354 or exchanges and
distributions under section 355 shall be treated as dividends, see
section 356 and the regulations thereunder.
(c) Dividends on stock sold. When stock is sold, and a dividend is
both declared and paid after the sale, such dividend is not gross income
to the seller. When stock is sold after the declaration of a dividend
and after the date as of which the seller becomes entitled to the
dividend, the dividend ordinarily is income to the seller. When stock is
sold between the time of declaration and the time of payment of the
dividend, and the sale takes place at such time that the purchaser
becomes entitled to the dividend, the dividend ordinarily is income to
him. The fact that the purchaser may have included the amount of the
dividend in his purchase price in contemplation of receiving the
dividend does not exempt him from tax. Nor can the purchaser deduct the
added amount he advanced to the seller in anticipation of the dividend.
That added amount is merely part of the purchase price of the stock. In
some cases, however, the purchaser may be considered to be the recipient
of the dividend even though he has not received the legal title to the
stock itself and does not himself receive the dividend. For example, if
the seller retains the legal title to the stock as trustee solely for
the purpose of securing the payment of the purchase price, with the
understanding that he is to apply the dividends received from time to
time in reduction of the purchase price, the dividends are considered to
be income to the purchaser.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6777, 29 FR
17807, Dec. 16, 1964]
Sec. 1.61-10 Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts.
(a) In general. Alimony and separate maintenance payments,
annuities, and income from life insurance and endowment contracts in
general constitute gross income, unless excluded by law. Annuities paid
by religious, charitable,
[[Page 45]]
and educational corporations are generally taxable to the same extent as
other annuities. An annuity charged upon devised land is taxable to the
donee-annuitant to the extent that it becomes payable out of the rents
or other income of the land, whether or not it is a charge upon the
income of the land.
(b) Cross references. For the detailed rules relating to--
(1) Alimony and separate maintenance payments, see section 71 and
the regulations thereunder;
(2) Annuities, certain proceeds of endowment and life insurance
contracts, see section 72 and the regulations thereunder;
(3) Life insurance proceeds paid by reason of death of insured,
employees' death benefits, see section 101 and the regulations
thereunder;
(4) Annuities paid by employees' trusts, see section 402 and the
regulations thereunder;
(5) Annuities purchased for employee by employer, see section 403
and the regulations thereunder.
Sec. 1.61-11 Pensions.
(a) In general. Pensions and retirement allowances paid either by
the Government or by private persons constitute gross income unless
excluded by law. Usually, where the taxpayer did not contribute to the
cost of a pension and was not taxable on his employer's contributions,
the full amount of the pension is to be included in his gross income.
But see sections 72, 402, and 403, and the regulations thereunder. When
amounts are received from other types of pensions, a portion of the
payment may be excluded from gross income. Under some circumstances,
amounts distributed from a pension plan in excess of the employee's
contributions may constitute long-term capital gain, rather than
ordinary income.
(b) Cross references. For the inclusion of pensions in income for
the purpose of the retirement income credit, see section 37 and the
regulations thereunder. Detailed rules concerning the extent to which
pensions and retirement allowances are to be included in or excluded
from gross income are contained in other sections of the Code and the
regulations thereunder. Amounts received as pensions or annuities under
the Social Security Act (42 U.S.C. ch. 7) or the Railroad Retirement Act
(45 U.S.C. ch. 9) are excluded from gross income. For other partial and
total exclusions from gross income, see the following:
(1) Annuities in general, section 72 and the regulations thereunder;
(2) Employees' annuities, sections 402 and 403 and the regulations
thereunder;
(3) References to other acts of Congress exempting veterans'
pensions and railroad retirement annuities and pensions, section 122.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6856, 30 FR
13316, Oct. 20, 1965]
Sec. 1.61-12 Income from discharge of indebtedness.
(a) In general. The discharge of indebtedness, in whole or in part,
may result in the realization of income. If, for example, an individual
performs services for a creditor, who in consideration thereof cancels
the debt, the debtor realizes income in the amount of the debt as
compensation for his services. A taxpayer may realize income by the
payment or purchase of his obligations at less than their face value. In
general, if a shareholder in a corporation which is indebted to him
gratuitously forgives the debt, the transaction amounts to a
contribution to the capital of the corporation to the extent of the
principal of the debt.
(b) Proceedings under Bankruptcy Act. (1) Income is not realized by
a taxpayer by virtue of the discharge, under section 14 of the
Bankruptcy Act (11 U.S.C. 32), of his indebtedness as the result of an
adjudication in bankruptcy, or by virtue of an agreement among his
creditors not consummated under any provision of the Bankruptcy Act, if
immediately thereafter the taxpayer's liabilities exceed the value of
his assets. Furthermore, unless one of the principal purposes of seeking
a confirmation under the Bankruptcy Act is the avoidance of income tax,
income is not realized by a taxpayer in the case of a cancellation or
reduction of his indebtedness under--
[[Page 46]]
(i) A plan of corporate reorganization confirmed under Chapter X of
the Bankruptcy Act (11 U.S.C., ch. 10);
(ii) An ``arrangement'' or a ``real property arrangement'' confirmed
under Chapter XI or XII, respectively, of the Bankruptcy Act (11 U.S.C.,
ch. 11, 12); or
(iii) A ``wage earner's plan'' confirmed under Chapter XIII of the
Bankruptcy Act (11 U.S.C., ch. 13).
(2) For adjustment of basis of certain property in the case of
cancellation or reduction of indebtedness resulting from a proceeding
under the Bankruptcy Act, see the regulations under section 1016.
(c) Issuance and repurchase of debt instruments--(1) Issuance. An
issuer does not realize gain or loss upon the issuance of a debt
instrument. For rules relating to an issuer's interest deduction for a
debt instrument issued with bond issuance premium, see Sec. 1.163-13.
(2) Repurchase--(i) In general. An issuer does not realize gain or
loss upon the repurchase of a debt instrument. However, if a debt
instrument provides for payments denominated in, or determined by
reference to, a nonfunctional currency, an issuer may realize a currency
gain or loss upon the repurchase of the instrument. See section 988 and
the regulations thereunder. For purposes of this paragraph (c)(2), the
term repurchase includes the retirement of a debt instrument, the
conversion of a debt instrument into stock of the issuer, and the
exchange (including an exchange under section 1001) of a newly issued
debt instrument for an existing debt instrument.
(ii) Repurchase at a discount. An issuer realizes income from the
discharge of indebtedness upon the repurchase of a debt instrument for
an amount less than its adjusted issue price (within the meaning of
Sec. 1.1275-1(b)). The amount of discharge of indebtedness income is
equal to the excess of the adjusted issue price over the repurchase
price. See section 108 and the regulations thereunder for additional
rules relating to income from discharge of indebtedness. For example, to
determine the repurchase price of a debt instrument that is repurchased
through the issuance of a new debt instrument, see section 108(e)(10).
(iii) Repurchase at a premium. An issuer may be entitled to a
repurchase premium deduction upon the repurchase of a debt instrument
for an amount greater than its adjusted issue price (within the meaning
of Sec. 1.1275-1(b)). See Sec. 1.163-7(c) for the treatment of
repurchase premium.
(iv) Effective date. This paragraph (c)(2) applies to debt
instruments repurchased on or after March 2, 1998.
(d) Cross references. For exclusion from gross income of--
(1) Income from discharge of indebtedness in certain cases, see
sections 108 and 1017, and regulations thereunder;
(2) Forgiveness of Government payments to encourage exploration,
development, and mining for defense purposes, see section 621 and
regulations thereunder.
(e) Cross reference. For rules relating to the treatment of
liabilities on the sale or other disposition of encumbered property, see
Sec. 1.1001-2.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6984, 33 FR
19174, Dec. 24, 1968; T.D. 7741, 45 FR 81745, Dec. 12, 1980; T.D. 8746,
62 FR 68175, Dec. 31, 1997]
Sec. 1.61-13 Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust.
(a) In general. A partner's distributive share of partnership gross
income (under section 702(c)) constitutes gross income to him. Income in
respect of a decedent (under section 691) constitutes gross income to
the recipient. Income from an interest in an estate or trust constitutes
gross income under the detailed rules of Part I (section 641 and
following), Subchapter J, Chapter 1 of the Code. In many cases, these
sections also determine who is to include in his gross income the income
from an estate or trust.
(b) Creation of sinking fund by corporation. If a corporation, for
the sole purpose of securing the payment of its bonds or other
indebtedness, places property in trust or sets aside certain amounts in
a sinking fund under the control of a trustee who may be authorized to
invest and reinvest such sums from time to time, the property
[[Page 47]]
or fund thus set aside by the corporation and held by the trustee is an
asset of the corporation, and any gain arising therefrom is income of
the corporation and shall be included as such in its gross income.
Sec. 1.61-14 Miscellaneous items of gross income.
(a) In general. In addition to the items enumerated in section
61(a), there are many other kinds of gross income. For example, punitive
damages such as treble damages under the antitrust laws and exemplary
damages for fraud are gross income. Another person's payment of the
taxpayer's income taxes constitutes gross income to the taxpayer unless
excluded by law. Illegal gains constitute gross income. Treasure trove,
to the extent of its value in United States currency, constitutes gross
income for the taxable year in which it is reduced to undisputed
possession.
(b) Cross references. (1) Prizes and awards, see section 74 and
regulations thereunder;
(2) Damages for personal injury or sickness, see section 104 and the
regulations thereunder;
(3) Income taxes paid by lessee corporation, see section 110 and
regulations thereunder;
(4) Scholarships and fellowship grants, see section 117 and
regulations thereunder;
(5) Miscellaneous exemptions under other acts of Congress, see
section 122;
(6) Tax-free covenant bonds, see section 1451 and regulations
thereunder.
(7) Notional principal contracts, see Sec. 1.446-3.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6856, 30 FR
13316, Oct. 20, 1965; T.D. 8491, 58 FR 53127, Oct. 14, 1993]
Sec. 1.61-15 Options received as payment of income.
(a) In general. Except as otherwise provided in Sec. 1.61-2(d)(6)(i)
(relating to certain restricted property transferred after June 30,
1969), if any person receives an option in payment of an amount
constituting compensation of such person (or any other person), such
option is subject to the rules contained in Sec. 1.421-6 for purposes of
determining when income is realized in connection with such option and
the amount of such income. In this regard, the rules of Sec. 1.421-6
apply to an option received in payment of an amount constituting
compensation regardless of the form of the transaction. Thus, the rules
of Sec. 1.421-6 apply to an option transferred for less than its fair
market value in a transaction taking the form of a sale or exchange if
the difference between the amount paid for the option and its fair
market value at the time of transfer is the payment of an amount
constituting compensation of the transferee or any other person. This
section, for example, makes the rules of Sec. 1.421-6 applicable to
options granted in whole or partial payment for services of an
independent contractor. If an amount of money or property is paid for an
option to which this paragraph applies, then the amount paid shall be
part of the basis of such option.
(b) Options to which paragraph (a) does not apply. (1) Paragraph (a)
of this section does not apply to:
(i) An option which is subject to the rules contained in section
421; and
(ii) An option which is not granted as the payment of an amount
constituting compensation, such as an option which is acquired solely as
an investment (including an option which is part of an investment unit
described in paragraph (b) of Sec. 1.1232-3). For rules relating to the
taxation of options described in this subdivision, see section 1234 and
the regulations thereunder.
(2) If a person acquires an option which is not subject to the rules
contained in section 421, and if such option has a readily ascertainable
fair market value, such person may establish that such option was not
acquired as payment of an amount constituting compensation by showing
that the amount of money or its equivalent paid for the option equaled
the readily ascertainable fair market value of the option. If a person
acquires an option which is not subject to the rules contained in
section 421, and if such option does not have a readily ascertainable
fair market value, then to establish that such option was not acquired
as payment of an amount constituting compensation, such person must show
that, from an examination of all the surrounding circumstances, there
was no reason for
[[Page 48]]
the option to have been granted as the payment of an amount constituting
compensation. For example, such person must show that he had neither
rendered nor was obligated to render substantial services in
consideration for the granting of the option. In determining whether an
option, such as an option acquired in connection with an obligation as
part of an investment unit, has been granted as compensation for
services, the ordinary services performed by an investor in his own
self-interest in connection with his investing activities will not be
treated as the consideration for the grant of the option. For example,
if a small business investment company takes an active part in the
management of its debtor small business company, the rendering of such
management services will not be treated as the consideration for the
granting of the option, provided such services are rendered for an
independent consideration, or are merely protective of the small
business investment company's investment in the borrower. See paragraph
(c) of Sec. 1.421-6 for the meaning of the term ``readily ascertainable
fair market value.''
(c) Statement required in connection with certain options. (1) Any
person acquiring any option to purchase securities (other than an option
described in subparagraph (2) of this paragraph) shall attach a
statement to his income tax return for the taxable year in which the
option was acquired. For the definition of the term ``securities'', see
section 165(g)(2).
(2) The statement otherwise required by subparagraph (1) of this
paragraph shall not be required with respect to the following options:
(i) Options subject to the rules contained in section 305(a) or
section 421;
(ii) Options acquired as part of an investment unit consisting of an
option and a debenture, note, or other similar obligation--
(a) If such unit is acquired as part of a public offering and the
amount of money or its equivalent paid for such unit is not less than
the public offering price, or
(b) If such unit is actively traded on an established market and the
amount of money or its equivalent paid for such unit is not less than
the price paid for such unit in contemporaneous purchases of such unit
by persons independent of both the seller and the taxpayer;
(iii) Options acquired as part of a public offering, if the amount
of money or its equivalent paid for such option is not less than the
public offering price; and
(iv) Options which are actively traded on an established market and
which are acquired for money or its equivalent at a price not less than
the price paid for such options in contemporaneous purchases of such
options by persons independent of both the seller and the taxpayer.
(3) The statement required by subparagraph (1) of this paragraph
shall contain the following information:
(i) Name and address of the taxpayer;
(ii) Description of the securities subject to the option (including
number of shares of stock);
(iii) Period during which the option is exercisable;
(iv) Whether the option had a readily ascertainable fair market
value at date of grant; and
(v) Whether the option is subject to paragraph (a) of this section.
(4) If the statement required by subparagraph (1) of this paragraph
indicates either that the option is not subject to paragraph (a) of this
section, or that the option is subject to paragraph (a) of this section
but that such option had a readily ascertainable fair market value at
date of grant, then such statement shall contain the following
additional information:
(i) Option price;
(ii) Value at date of grant of securities subject to the option;
(iii) Restrictions (if any) on exercise or transfer of option;
(iv) Restrictions (if any) on transfer of securities subject to the
option;
(v) Value of the option (if readily ascertainable);
(vi) How value of option was determined;
(vii) Amount of money (or its equivalent) paid for the option;
(viii) Person from whom the option was acquired;
[[Page 49]]
(ix) A concise description of the circumstances surrounding the
acquisition of the option and any other factors relied upon by the
taxpayer to establish that the option is not subject to paragraph (a) of
this section, or, if the option is treated by the taxpayer as subject to
paragraph (a) of this section, that the option had a readily
ascertainable fair market value at date of grant.
(d) Effective date. This section shall apply to options granted
after July 11, 1963, other than options required to be granted pursuant
to the terms of a written contract entered into on or before such date.
[T.D. 6696, 28 FR 13450, Dec. 12, 1963, as amended by T.D. 6706, 29 FR
2911, Mar. 3, 1964; T.D. 6984, 33 FR 19175, Dec. 24, 1968; T.D. 7554, 43
FR 31913, July 24, 1978]
Sec. 1.61-21 Taxation of fringe benefits.
(a) Fringe benefits--(1) In general. Section 61(a)(1) provides that,
except as otherwise provided in subtitle A of the Internal Revenue Code
of 1986, gross income includes compensation for services, including
fees, commissions, fringe benefits, and similar items. For an outline of
the regulations under this section relating to fringe benefits, see
paragraph (a)(7) of this section. Examples of fringe benefits include:
an employer-provided automobile, a flight on an employer-provided
aircraft, an employer-provided free or discounted commercial airline
flight, an employer-provided vacation, an employer-provided discount on
property or services, an employer-provided membership in a country club
or other social club, and an employer-provided ticket to an
entertainment or sporting event.
(2) Fringe benefits excluded from income. To the extent that a
particular fringe benefit is specifically excluded from gross income
pursuant to another section of subtitle A of the Internal Revenue Code
of 1986, that section shall govern the treatment of that fringe benefit.
Thus, if the requirements of the governing section are satisfied, the
fringe benefits may be excludable from gross income. Examples of
excludable fringe benefits include qualified tuition reductions provided
to an employee (section 117(d)); meals or lodging furnished to an
employee for the convenience of the employer (section 119); benefits
provided under a dependent care assistance program (section 129); and
no-additional-cost services, qualified employee discounts, working
condition fringes, and de minimis fringes (section 132). Similarly, the
value of the use by an employee of an employer-provided vehicle or a
flight provided to an employee on an employer-provided aircraft may be
excludable from income under section 105 (because, for example, the
transportation is provided for medical reasons) if and to the extent
that the requirements of that section are satisfied. Section 134
excludes from gross income ``qualified military benefits.'' An example
of a benefit that is not a qualified military benefit is the personal
use of an employer-provided vehicle. The fact that another section of
subtitle A of the Internal Revenue Code addresses the taxation of a
particular fringe benefit will not preclude section 61 and the
regulations thereunder from applying, to the extent that they are not
inconsistent with such other section. For example, many fringe benefits
specifically addressed in other sections of subtitle A of the Internal
Revenue Code are excluded from gross income only to the extent that they
do not exceed specific dollar or percentage limits, or only if certain
other requirements are met. If the limits are exceeded or the
requirements are not met, some or all of the fringe benefit may be
includible in gross income pursuant to section 61. See paragraph (b)(3)
of this section.
(3) Compensation for services. A fringe benefit provided in
connection with the performance of services shall be considered to have
been provided as compensation for such services. Refraining from the
performance of services (such as pursuant to a covenant not to compete)
is deemed to be the performance of services for purposes of this
section.
(4) Person to whom fringe benefit is taxable--(i) In general. A
taxable fringe benefit is included in the income of the person
performing the services in connection with which the fringe benefit is
furnished. Thus, a fringe benefit may be taxable to a person even though
that person did not actually receive the fringe benefit. If a fringe
benefit is furnished to someone other than the
[[Page 50]]
service provider such benefit is considered in this section as furnished
to the service provider, and use by the other person is considered use
by the service provider. For example, the provision of an automobile by
an employer to an employee's spouse in connection with the performance
of services by the employee is taxable to the employee. The automobile
is considered available to the employee and use by the employee's spouse
is considered use by the employee.
(ii) All persons to whom benefits are taxable referred to as
employees. The person to whom a fringe benefit is taxable need not be an
employee of the provider of the fringe benefit, but may be, for example,
a partner, director, or an independent contractor. For convenience, the
term ``employee'' includes any person performing services in connection
with which a fringe benefit is furnished, unless otherwise specifically
provided in this section.
(5) Provider of a fringe benefit referred to as an employer. The
``provider'' of a fringe benefit is that person for whom the services
are performed, regardless of whether that person actually provides the
fringe benefit to the recipient. The provider of a fringe benefit need
not be the employer of the recipient of the fringe benefit, but may be,
for example, a client or customer of the employer or of an independent
contractor. For convenience, the term ``employer'' includes any provider
of a fringe benefit in connection with payment for the performance of
services, unless otherwise specifically provided in this section.
(6) Effective date. Except as otherwise provided, this section is
effective as of January 1, 1989 with respect to fringe benefits provided
after December 31, 1988. See Sec. 1.61-2T for rules in effect from
January 1, 1985, to December 31, 1988.
(7) Outline of this section. The following is an outline of the
regulations in this section relating to fringe benefits:
Sec. 1.61-21 (a) Fringe benefits.
(1) In general.
(2) Fringe benefits excluded from income.
(3) Compensation for services.
(4) Person to whom fringe benefit is taxable.
(5) Provider of a fringe benefit referred to as an employer.
(6) Effective date.
(7) Outline of this section.
Sec. 1.61-21 (b) Valuation of fringe benefits
(1) In general.
(2) Fair market value.
(3) Exclusion from income based on cost.
(4) Fair market value of the availability of an employer-provided
vehicle.
(5) Fair market value of chauffeur services.
(6) Fair market value of a flight on an employer-provided piloted
aircraft.
(7) Fair market value of the use of an employer-provided aircraft
for which the employer does not furnish a pilot.
Sec. 1.61-21 (c) Special valuation rules.
(1) In general.
(2) Use of the special valuation rules.
(3) Additional rules for using special valuation.
(4) Application of section 414 to employers.
(5) Valuation formulae contained in the special valuation rules.
(6) Modification of the special valuation rules.
(7) Special accounting rule.
Sec. 1.61-21 (d) Automobile lease valuation rule.
(1) In general.
(2) Calculation of Annual Lease Value.
(3) Services included in, or excluded from, the Annual Lease Value
Table.
(4) Availability of an automobile for less than an entire calendar
year.
(5) Fair market value.
(6) Special rules for continuous availability of certain
automobiles.
(7) Consistency rules.
Sec. 1.61-21 (e) Vehicle cents-per-mile valuation rule.
(1) In general.
(2) Definition of vehicle.
(3) Services included in, or excluded from, the cents-per-mile rate.
(4) Valuation of personal use only.
(5) Consistency rules.
Sec. 1.61-21 (f) Commuting valuation rule.
(1) In general.
(2) Special rules.
(3) Commuting value.
(4) Definition of vehicle.
(5) Control employee defined--Non-government employer.
(6) Control employee defined--Government employer.
(7) ``Compensation'' defined.
Sec. 1.61-21 (g) Non-commercial flight valuation rule.
(1) In general.
(2) Eligible flights and eligible aircraft.
(3) Definition of a flight.
(4) Personal and non-personal flights.
(5) Aircraft valuation formula.
(6) Discretion to provide new formula.
(7) Aircraft multiples.
(8) Control employee defined--Non-government employer.
[[Page 51]]
(9) Control employee defined--Government employer.
(10) ``Compensation'' defined.
(11) Treatment of former employees.
(12) Seating capacity rule.
(13) Erroneous use of the non-commercial flight valuation rule.
(14) Consistency rules.
Sec. 1.61-21 (h) Commercial flight valuation rule.
(1) In general.
(2) Space-available flight.
(3) Commercial aircraft.
(4) Timing of inclusion.
(5) Consistency rules.
Sec. 1.61-21 (i) [Reserved]
Sec. 1.61-21 (j) Valuation of meals provided at an employer-operated
eating facility for employees.
(1) In general.
(2) Valuation formula.
Sec. 1.61-21 (k) Commuting valuation rule for certain employees.
(1) In general.
(2) Trip-by-trip basis.
(3) Commuting value.
(4) Definition of employer-provided transportation.
(5) Unsafe conditions.
(6) Qualified employee defined.
(7) Examples.
(8) Effective date.
(b) Valuation of fringe benefits--(1) In general. An employee must
include in gross income the amount by which the fair market value of the
fringe benefit exceeds the sum of--
(i) The amount, if any, paid for the benefit by or on behalf of the
recipient, and
(ii) The amount, if any, specifically excluded from gross income by
some other section of subtitle A of the Internal Revenue Code of 1986.
Therefore, for example, if the employee pays fair market value for what
is received, no amount is includible in the gross income of the
employee. In general, the determination of the fair market value of a
fringe benefit must be made before subtracting out the amount, if any,
paid for the benefit and the amount, if any, specifically excluded from
gross income by another section of subtitle A. See paragraphs (d)(2)(ii)
and (e)(1)(iii) of this section.
(2) Fair market value. In general, fair market value is determined
on the basis of all the facts and circumstances. Specifically, the fair
market value of a fringe benefit is the amount that an individual would
have to pay for the particular fringe benefit in an arm's-length
transaction. Thus, for example, the effect of any special relationship
that may exist between the employer and the employee must be
disregarded. Similarly, an employee's subjective perception of the value
of a fringe benefit is not relevant to the determination of the fringe
benefit's fair market value nor is the cost incurred by the employer
determinative of its fair market value. For special rules relating to
the valuation of certain fringe benefits, see paragraph (c) of this
section.
(3) Exclusion from income based on cost. If a statutory exclusion
phrased in terms of cost applies to the provision of a fringe benefit,
section 61 does not require the inclusion in the recipient's gross
income of the difference between the fair market value and the
excludable cost of that fringe benefit. For example, section 129
provides an exclusion from an employee's gross income for amounts
contributed by an employer to a dependent care assistance program for
employees. Even if the fair market value of the dependent care
assistance exceeds the employer's cost, the excess is not subject to
inclusion under section 61 and this section. However, if the statutory
cost exclusion is a limited amount, the fair market value of the fringe
benefit attributable to any excess cost is subject to inclusion. This
would be the case, for example, where an employer pays or incurs a cost
of more than $5,000 to provide dependent care assistance to an employee.
(4) Fair market value of the availability of an employer-provided
vehicle--(i) In general. If the vehicle special valuation rules of
paragraph (d), (e), or (f) of this section do not apply with respect to
an employer-provided vehicle, the value of the availability of that
vehicle is determined under the general valuation principles set forth
in this section. In general, that value equals the amount that an
individual would have to pay in an arm's-length transaction to lease the
same or comparable vehicle on the same or comparable conditions in the
geographic area in which the vehicle is available for use. An example of
a comparable condition is the amount of time that the vehicle is
available to the employee for use, e.g., a one-year
[[Page 52]]
period. Unless the employee can substantiate that the same or comparable
vehicle could have been leased on a cents-per-mile basis, the value of
the availability of the vehicle cannot be computed by applying a cents-
per-mile rate to the number of miles the vehicle is driven.
(ii) Certain equipment excluded. The fair market value of a vehicle
does not include the fair market value of any specialized equipment not
susceptible to personal use or any telephone that is added to or carried
in the vehicle, provided that the presence of that equipment or
telephone is necessitated by, and attributable to, the business needs of
the employer. However, the value of specialized equipment must be
included, if the employee to whom the vehicle is available uses the
specialized equipment in a trade or business of the employee other than
the employee's trade or business of being an employee of the employer.
(5) Fair market value of chauffeur services--(i) Determination of
value--(A) In general. The fair market value of chauffeur services
provided to the employee by the employer is the amount that an
individual would have to pay in an arm's-length transaction to obtain
the same or comparable chauffeur services in the geographic area for the
period in which the services are provided. In determining the applicable
fair market value, the amount of time, if any, the chauffeur remains on-
call to perform chauffeur services must be included. For example, assume
that A, an employee of corporation M, needs a chauffeur to be on-call to
provide services to A during a twenty-four hour period. If during that
twenty-four hour period, the chauffeur actually drives A for only six
hours, the fair market value of the chauffeur services would have to be
the value of having a chauffeur on-call for a twenty-four hour period.
The cost of taxi fare or limousine service for the six hours the
chauffeur actually drove A would not be an accurate measure of the fair
market value of chauffeur services provided to A. Moreover, all other
aspects of the chauffeur's services (including any special
qualifications of the chauffeur (e.g., training in evasive driving
skills) or the ability of the employee to choose the particular
chauffeur) must be taken into consideration.
(B) Alternative valuation with reference to compensation paid.
Alternatively, the fair market value of the chauffeur services may be
determined by reference to the compensation (as defined in paragraph
(b)(5)(ii) of this section) received by the chauffeur from the employer.
(C) Separate valuation for chauffeur services. The value of
chauffeur services is determined separately from the value of the
availability of an employer-provided vehicle.
(ii) Definition of compensation--(A) In general. For purposes of
this paragraph (b)(5)(ii), the term ``compensation'' means compensation
as defined in section 414(q)(7) and the fair market value of nontaxable
lodging (if any) provided by the employer to the chauffeur in the
current year.
(B) Adjustments to compensation--For purposes of this paragraph
(b)(5)(ii), a chauffeur's compensation is reduced proportionately to
reflect the amount of time during which the chauffeur performs
substantial services for the employer other than as a chauffeur and is
not on-call as a chauffeur. For example, assume a chauffeur is paid
$25,000 a year for working a ten-hour day, five days a week and also
receives $5,000 in nontaxable lodging. Further assume that during four
hours of each day, the chauffeur is not on-call to perform services as a
chauffeur because that individual is performing secretarial functions
for the employer. Then, for purposes of determining the fair market
value of this chauffeur's services, the employer may reduce the
chauffeur's compensation by \4/10\ or $12,000 (.4x ($25,000+$5,000) =
$12,000). Therefore, in this example, the fair market value of the
chauffeur's services is $18,000 ($30,000 -$12,000). However, for
purposes of this paragraph (b)(5)(ii), a chauffeur's compensation is not
to be reduced by any amounts paid to the chauffeur for time spent ``on-
call,'' even though the chauffeur actually performs other services for
the employer during such time. For purposes of this paragraph
(b)(5)(ii), a determination that a chauffeur is performing substantial
services for the employer other than as a chauffeur is
[[Page 53]]
based upon the facts and circumstances of each situation. An employee
will be deemed to be performing substantial services for the employer
other than as a chauffeur if a certain portion of each working day is
regularly spent performing other services for the employer.
(iii) Calculation of chauffeur services for personal purposes of the
employee. The fair market value of chauffeur services provided to the
employee for personal purposes may be determined by multiplying the fair
market value of chauffeur services, as determined pursuant to paragraph
(b)(5)(i) (A) or (B) of this section, by a fraction, the numerator of
which is equal to the sum of the hours spent by the chauffeur actually
providing personal driving services to the employee and the hours spent
by the chauffeur in ``personal on-call time,'' and the denominator of
which is equal to all hours the chauffeur spends in driving services of
any kind paid for by the employer, including all hours that are ``on-
call.''
(iv) Definition of on-call time. For purposes of this paragraph, the
term ``on-call time'' means the total amount of time that the chauffeur
is not engaged in the actual performance of driving services, but during
which time the chauffeur is available to perform such services. With
respect to a round-trip, time spent by a chauffeur waiting for an
employee to make a return trip is generally not treated as on-call time;
rather such time is treated as part of the round-trip.
(v) Definition of personal on-call time. For purposes of this
paragraph, the term ``personal on-call time'' means the amount of time
outside the employee's normal working hours for the employer when the
chauffeur is available to the employee to perform driving services.
(vi) Presumptions. (A) An employee's normal working hours will be
presumed to consist of a ten hour period during which the employee
usually conducts business activities for that employer.
(B) It will be presumed that if the chauffeur is on-call to provide
driving services to an employee during the employee's normal working
hours, then that on-call time will be performed for business purposes.
(C) Similarly, if the chauffeur is on-call to perform driving
services to an employee after normal working hours, then that on-call
time will be presumed to be ``personal on-call time.''
(D) The presumptions set out in paragraph (b)(5)(vi) (A), (B), and
(C) of this section may be rebutted. For example, an employee may
demonstrate by adequate substantiation that his or her normal working
hours consist of more than ten hours. Furthermore, if the employee keeps
adequate records and is able to substantiate that some portion of the
driving services performed by the chauffeur after normal working hours
is attributable to business purposes, then personal on-call time may be
reduced by an amount equal to such personal on-call time multiplied by a
fraction, the numerator of which is equal to the time spent by the
chauffeur after normal working hours driving the employee for business
purposes, and the denominator of which is equal to the total time spent
by the chauffeur driving the employee after normal working hours for all
purposes.
(vii) Examples. The rules of this paragraph (b)(5) may be
illustrated by the following examples:
Example (1). An employer makes available to employee A an automobile
and a full-time chauffeur B (who performs no other services for A's
employer) for an entire calendar year. Assume that the automobile lease
valuation rule of paragraph (d) of this section is used and that the
Annual Lease Value of the automobile is $9,250. Assume further that B's
compensation for the year is $12,000 (as defined in section 414(q)(7))
and that B is furnished lodging with a value of $3,000 that is
excludable from B's gross income. The maximum amount subject to
inclusion in A's gross income for use of the automobile and chauffeur is
therefore $24,250 ($12,000+$3,000+$9,250). If 70 percent of the miles
placed on the automobile during the year are for A's employer's
business, then $6,475 is excludable from A's gross income with respect
to the automobile as a working condition fringe ($9,250x.70). Thus,
$2,775 is includible in A's gross income with respect to the automobile
($9,250-$6,475). With respect to the chauffeur, if 20 percent of the
chauffeur's time is spent actually driving A or being on-call to drive A
for personal purposes; then $3,000 is includible in A's income
(.20x$15,000). Eighty percent of $15,000, or $12,000, is excluded from
A's income as a working condition fringe.
[[Page 54]]
Example (2). Assume the same facts as in example (1) except that in
addition to providing chauffeur services, B is responsible for
performing substantial non-chauffeur-related duties (such as clerical or
secretarial functions) during which time B is not ``on-call'' as a
chauffeur. If B spends only 75 percent of the time performing chauffeur
services, then the maximum amount subject to inclusion in A's gross
income for use of the automobile and chauffeur is $20,500
(($15,000x.75)+$9,250). If B is actually driving A for personal purposes
or is on-call to drive A for personal purposes for 20 percent of the
time during which B is available to provide chauffeur services, then
$2,250 is includible in A's gross income (.20x$11,250). The income
inclusion with respect to the automobile is the same as in example (1).
Example (3). Assume the same facts as in example (2) except that
while B is performing non-chauffeur-related duties, B is on call as A's
chauffeur. No part of B's compensation is excluded when determining the
value of the benefit provided to A. Thus, as in example (1), $3,000 is
includible in A's gross income with respect to the chauffeur.
(6) Fair market value of a flight on an employer-provided piloted
aircraft--(i) In general. If the non-commercial flight special valuation
rule of paragraph (g) of this section does not apply, the value of a
flight on an employer-provided piloted aircraft is determined under the
general valuation principles set forth in this paragraph.
(ii) Value of flight. If an employee takes a flight on an employer-
provided piloted aircraft and that employee's flight is primarily
personal (see Sec. 1.162-2(b)(2)), the value of the flight is equal to
the amount that an individual would have to pay in an arm's-length
transaction to charter the same or a comparable piloted aircraft for
that period for the same or a comparable flight. A flight taken under
these circumstances may not be valued by reference to the cost of
commercial airfare for the same or a comparable flight. The cost to
charter the aircraft must be allocated among all employees on board the
aircraft based on all the facts and circumstances unless one or more of
the employees controlled the use of the aircraft. Where one or more
employees control the use of the aircraft, the value of the flight shall
be allocated solely among such controlling employees, unless a written
agreement among all the employees on the flight otherwise allocates the
value of such flight. Notwithstanding the allocation required by the
preceding sentence, no additional amount shall be included in the income
of any employee whose flight is properly valued under the special
valuation rule of paragraph (g) of this section. For purposes of this
paragraph (b)(6), ``control'' means the ability of the employee to
determine the route, departure time and destination of the flight. The
rules provided in paragraph (g)(3) of this section will be used for
purposes of this section in defining a flight. Notwithstanding the
allocation required by the preceding sentence, no additional amount
shall be included in the income of an employee for that portion of any
such flight which is excludible from income pursuant to section 132(d)
or Sec. 1.132-5 as a working condition fringe.
(iii) Examples. The rules of paragraph (b)(6) of this section may be
illustrated by the following examples:
Example (1). An employer makes available to employees A and B a
piloted aircraft in New York, New York. A wants to go to Los Angeles,
California for personal purposes. B needs to go to Chicago, Illinois for
business purposes, and then wants to go to Los Angeles, California for
personal purposes. Therefore, the aircraft first flies to Chicago, and B
deplanes and then boards the plane again. The aircraft then flies to Los
Angeles, California where A and B deplane. The value of the flight to
employee A will be no more than the amount that an individual would have
to pay in an arm's length transaction to charter the same or a
comparable piloted aircraft for the same or comparable flight from New
York City to Los Angeles. No amount will be imputed to employee A for
the stop at Chicago. As to employee B, the value of the personal flight
will be no more than the value or the flight from Chicago to Los
Angeles. Pursuant to the rules set forth in Sec. 1.132-5(k), the flight
from New York to Chicago will not be included in employee B's income
since that flight was taken solely for business purposes. The charter
cost must be allocated between A and B, since both employees controlled
portions of the flight. Assume that the employer allocates according to
the relative value of each employee's flight. If the charter value of
A's flight from New York City to Los Angeles is $1,000 and the value of
B's flight from Chicago to Los Angeles is $600 and the value of the
actual flight from New York to Chicago to Los Angeles is $1,200, then
the amount to be allocated to employee A is $750 ($1,000/
[[Page 55]]
($1,000+$600)x$1,200) and the amount to be allocated to employee B is
$450 ($600/($1000+$600)x$1,200).
Example (2). Assume the same facts as in example (1), except that
employee A also deplanes at Chicago, Illinois, but for personal
purposes. The value of the flight to employee A then becomes the value
of a flight from New York to Chicago to Los Angeles, i.e., $1,200.
Therefore, the amount to be allocated to employee A is $800 ($1,200/
($1,200+$600)x$1,200) and the amount to be allocated to employee B is
$400 ($600/($1,200+$600)x $1,200).
(7) Fair market value of the use of an employer-provided aircraft
for which the employer does not furnish a pilot. (i) In general. If the
non-commercial flight special valuation rule of paragraph (g) of this
section does not apply and if an employer provides an employee with the
use of an aircraft without a pilot, the value of the use of the
employer-provided aircraft is determined under the general valuation
principles set forth in this paragraph (b)(7).
(ii) Value of flight. In general, if an employee takes a flight on
an employer-provided aircraft for which the employer does not furnish a
pilot, the value of that flight is equal to the amount that an
individual would have to pay in an arm's-length transaction to lease the
same or comparable aircraft on the same or comparable terms for the same
period in the geographic area in which the aircraft is used. For
example, if an employer makes its aircraft available to an employee who
will pilot the aircraft for a two-hour flight, the value of the use of
the aircraft is the amount that an individual would have to pay in an
arm's-length transaction to rent a comparable aircraft for that period
in the geographic area in which the aircraft is used. As another
example, assume that an employee uses an employer-provided aircraft to
commute between home and work. The value of the use of the aircraft is
the amount that an individual would have to pay in an arm's-length
transaction to rent a comparable aircraft for commuting in the
geographic area in which the aircraft is used. If the availability of
the flight is of benefit to more than one employee, then such value
shall be allocated among such employees on the basis of the relevant
facts and circumstances.
(c) Special valuation rules--(1) In general. Paragraphs (d) through
(k) of this section provide special valuation rules that may be used
under certain circumstances for certain commonly provided fringe
benefits. For general rules relating to the valuation of fringe benefits
not eligible for valuation under the special valuation rules or fringe
benefits with respect to which the special valuation rules are not used,
see paragraph (b) of this section.
(2) Use of the special valuation rules--(i) For benefits provided
before January 1, 1993. The special valuation rules may be used for
income tax, employment tax, and reporting purposes. The employer has the
option to use any of the special valuation rules. However, an employee
may only use a special valuation rule if the employer uses the rule.
Moreover, an employee may only use the special rule that the employer
uses to value the benefit provided; the employee may not use another
special rule to value that benefit. The employee may always use general
valuation rules based on facts and circumstances (see paragraph (b) of
this section) even if the employer uses a special rule. If a special
rule is used, it must be used for all purposes. If an employer properly
uses a special rule and the employee uses the special rule, the employee
must include in gross income the amount determined by the employer under
the special rule reduced by the sum of--
(A) Any amount reimbursed by the employee to the employer, and
(B) Any amount excludable from income under another section of
subtitle A of the Internal Revenue Code of 1986. If an employer properly
uses a special rule and properly determines the amount of an employee's
working condition fringe under section 132 and Sec. 1.132-5 (under the
general rule or under a special rule), and the employee uses the special
valuation rule, the employee must include in gross income the amount
determined by the employer less any amount reimbursed by the employee to
the employer. The employer and employee may use the special rules to
determine the amount of the reimbursement due the employer by the
employee. Thus, if an employee reimburses an employer for the value
[[Page 56]]
of a benefit as determined under a special valuation rule, no amount is
includable in the employee's gross income with respect to the benefit.
The provisions of this paragraph are effective for benefits provided
before January 1, 1993.
(ii) For benefits provided after December 31, 1992. The special
valuation rules may be used for income tax, employment tax, and
reporting purposes. The employer has the option to use any of the
special valuation rules. An employee may use a special valuation rule
only if the employer uses that rule or the employer does not meet the
condition of paragraph (c)(3)(ii)(A) of this section, but one of the
other conditions of paragraph (c)(3)(ii) of this section is met. The
employee may always use general valuation rules based on facts and
circumstances (see paragraph (b) of this section) even if the employer
uses a special rule. If a special rule is used, it must be used for all
purposes. If an employer properly uses a special rule and the employee
uses the special rule, the employee must include in gross income the
amount determined by the employer under the special rule reduced by the
sum of--
(A) Any amount reimbursed by the employee to the employer; and
(B) Any amount excludable from income under another section of
subtitle A of the Internal Revenue Code of 1986. If an employer properly
uses a special rule and properly determines the amount of an employee's
working condition fringe under section 132 and Sec. 1.132-5 (under the
general rule or under a special rule), and the employee uses the special
valuation rule, the employee must include in gross income the amount
determined by the employer less any amount reimbursed by the employee to
the employer. The employer and employee may use the special rules to
determine the amount of the reimbursement due the employer by the
employee. Thus, if an employee reimburses an employer for the value of a
benefit as determined under a special valuation rule, no amount is
includible in the employee's gross income with respect to the benefit.
The provisions of this paragraph are effective for benefits provided
after December 31, 1992.
(iii) Vehicle special valuation rules--(A) Vehicle by vehicle basis.
Except as provided in paragraphs (d)(7)(v) and (e)(5)(v) of this
section, the vehicle special valuation rules of paragraphs (d), (e), and
(f) of this section apply on a vehicle by vehicle basis. An employer
need not use the same vehicle special valuation rule for all vehicles
provided to all employees. For example, an employer may use the
automobile lease valuation rule for automobiles provided to some
employees, and the commuting and vehicle cents-per-mile valuation rules
for automobiles provided to other employees. For purposes of valuing the
use or availability of a vehicle, the consistency rules provided in
paragraphs (d)(7) and (e)(5) of this section (relating to the automobile
lease valuation rule and the vehicle cents-per-mile valuation rule,
respectively) apply.
(B) Shared vehicle usage. If an employer provides a vehicle to
employees for use by more than one employee at the same time, such as
with an employer-sponsored vehicle commuting pool, the employer may use
any of the special valuation rules that may be applicable to value the
use of the vehicle by the employees. The employer must use the same
special valuation rule to value the use of the vehicle by each employee
who shares such use. The employer must allocate the value of the use of
the vehicle based on the relevant facts and circumstances among the
employees who share use of the vehicle. For example, assume that an
employer provides an automobile to four of its employees and that the
employees use the automobile in an employer-sponsored vehicle commuting
pool. Assume further that the employer uses the automobile lease
valuation rule of paragraph (d) of this section and that the Annual
Lease Value of the automobile is $5,000.
The employer must treat $5,000 as the value of the availability of the
automobile to the employees, and must apportion the $5,000 value among
the employees who share the use of the automobile based on the relevant
facts and circumstances. Each employee's share of the value of the
availability of the automobile is then to be reduced by the amount, if
any, of each employee's
[[Page 57]]
working condition fringe exclusion and the amount reimbursed by the
employee to the employer.
(iv) Commercial and noncommercial flight valuation rules. Except as
otherwise provided, if either the commercial flight valuation rule or
the non-commercial flight valuation rule is used, that rule must be used
by an employer to value all eligible flights taken by all employees in a
calendar year. See paragraph (g)(14) of this section for the applicable
consistency rules.
(3) Additional rules for using special valuation--(i) Election to
use special valuation rules for benefits provided before January 1,
1993. A particular special valuation rule is deemed to have been elected
by the employer (and, if applicable, by the employee), if the employer
(and, if applicable, the employee) determines the value of the fringe
benefit provided by applying the special valuation rule and treats that
value as the fair market value of the fringe benefit for income,
employment tax, and reporting purposes. Neither the employer nor the
employee must notify the Internal Revenue Service of the election. The
provisions of this paragraph are effective for benefits provided before
January 1, 1993.
(ii) Conditions on the use of special valuation rules for benefits
provided after December 31, 1992. Neither the employer nor the employee
may use a special valuation rule to value a benefit provided after
December 31, 1992, unless one of the following conditions is satisfied--
(A) The employer treats the value of the benefit as wages for
reporting purposes within the time for filing the returns for the
taxable year (including extensions) in which the benefit is provided;
(B) The employee includes the value of the benefit in income within
the time for filing the returns for the taxable year (including
extensions) in which the benefit is provided;
(C) The employee is not a control employee as defined in paragraphs
(f)(5) and (f)(6) of this section; or
(D) The employer demonstrates a good faith effort to treat the
benefit correctly for reporting purposes.
(4) Application of section 414 to employers. For purposes of
paragraphs (c) through (k) of this section, except as otherwise provided
therein, the term ``employer'' includes all entities required to be
treated as a single employer under section 414 (b), (c), (m), or (o).
(5) Valuation formulae contained in the special valuation rules. The
valuation formula contained in the special valuation rules are provided
only for use in connection with those rules. Thus, when a special
valuation rule is properly applied to a fringe benefit, the Commissioner
will accept the value calculated pursuant to the rule as the fair market
value of that fringe benefit. However, when a special valuation rule is
not properly applied to a fringe benefit (see, for example, paragraph
(g)(13) of this section), or when a special valuation rule is used to
value a fringe benefit by a taxpayer not entitled to use the rule, the
fair market value of that fringe benefit may not be determined by
reference to any value calculated under any special valuation rule.
Under the circumstances described in the preceding sentence, the fair
market value of the fringe benefit must be determined pursuant to the
general valuation rules of paragraph (b) of this section.
(6) Modification of the special valuation rules. The Commissioner
may, to the extent necessary for tax administration, add, delete, or
modify any special valuation rule, including the valuation formulae
contained herein, on a prospective basis by regulation, revenue ruling
or revenue procedure.
(7) Special accounting rule. If the employer is using the special
accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31,
August 5, 1985) (see Sec. 601.601(d)(2)(ii)(b) of this chapter)
(relating to the reporting of and withholding on the value of noncash
fringe benefits), benefits which are deemed provided in a subsequent
calendar year pursuant to that rule are considered as provided in that
subsequent calendar year for purposes of the special valuation rules.
Thus, if a particular special valuation rule is in effect for a calendar
year, it applies to benefits deemed provided during that calendar year
under the special accounting rule.
(d) Automobile lease valuation rule--(1) In general--(i) Annual
Lease Value.
[[Page 58]]
Under the special valuation rule of this paragraph (d), if an employer
provides an employee with an automobile that is available to the
employee for an entire calendar year, the value of the benefit provided
is the Annual Lease Value (determined under paragraph (d)(2) of this
section) of that automobile. Except as otherwise provided, for an
automobile that is available to an employee for less than an entire
calendar year, the value of the benefit provided is either a pro-rated
Annual Lease Value or the Daily Lease Value (both as defined in
paragraph (d)(4) of this section), whichever is applicable. Absent any
statutory exclusion relating to the employer-provided automobile (see,
for example, section 132(a)(3) and Sec. 1.132-5(b)), the amount of the
Annual Lease Value (or a pro-rated Annual Lease Value or the Daily Lease
Value, as applicable) is included in the gross income of the employee.
(ii) Definition of automobile. For purposes of this paragraph (d),
the term ``automobile'' means any four-wheeled vehicle manufactured
primarily for use on public streets, roads, and highways.
(2) Calculation of Annual Lease Value--(i) In general. The Annual
Lease Value of a particular automobile is calculated as follows:
(A) Determine the fair market value of the automobile as of the
first date on which the automobile is made available to any employee of
the employer for personal use. For an automobile first made available to
any employee for personal use prior to January 1, 1985, determine the
fair market value as of January l of the first year the special
valuation rule of this paragraph (d) is used with respect to the
automobile. For rules relating to determination of the fair market value
of an automobile for purposes of this paragraph (d), see paragraph
(d)(5) of this section.
(B) Select the dollar range in column 1 of the Annual Lease Value
Table, set forth in paragraph (d)(2)(iii) of this section corresponding
to the fair market value of the automobile. Except as otherwise provided
in paragraphs (d)(2) (iv) and (v) of this section, the Annual Lease
Value for each year of availability of the automobile is the
corresponding amount in column 2 of the Table.
(ii) Calculation of Annual Lease Value of automobile owned or leased
by both an employer and an employee--(A) Purchased automobiles.
Notwithstanding anything in this section to the contrary, if an employee
contributes an amount toward the purchase price of an automobile in
return for a percentage ownership interest in the automobile, the Annual
Lease Value or the Daily Lease Value, whichever is applicable, is
determined by reducing the fair market value of the employer-provided
automobile by the lesser of--
(1) The amount contributed, or
(2) An amount equal to the employee's percentage ownership interest
multiplied by the unreduced fair market value of the automobile.
If the automobile is subsequently revalued, the revalued amount
(determined without regard to this paragraph (d)(2)(ii)(A)) is reduced
by an amount which is equal to the employee's percentage ownership
interest in the vehicle). If the employee does not receive an ownership
interest in the employer-provided automobile, then the Annual Lease
Value or the Daily Lease Value, whichever is applicable, is determined
without regard to any amount contributed. For purposes of this paragraph
(d)(2)(ii)(A), an employee's ownership interest in an automobile will
not be recognized unless it is reflected in the title of the automobile.
An ownership interest reflected in the title of an automobile will not
be recognized if under the facts and circumstances the title does not
reflect the benefits and burdens of ownership.
(B) Leased automobiles. Notwithstanding anything in this section to
the contrary, if an employee contributes an amount toward the cost to
lease an automobile in return for a percentage interest in the
automobile lease, the Annual Lease Value or the Daily Lease Value,
whichever is applicable, is determined by reducing the fair market value
of the employer-provided automobile by the amount specified in the
following sentence. The amount specified in this sentence is the
unreduced fair market value of a vehicle multiplied by the lesser of--
[[Page 59]]
(1) The employee's percentage interest in the lease, or
(2) A fraction, the numerator of which is the amount contributed and
the denominator of which is the entire lease cost.
If the automobile is subsequently revalued, the revalued amount
(determined without regard to this paragraph (d)(2)(ii)(B)) is reduced
by an amount which is equal to the employee's percentage interest in the
lease) multiplied by the revalued amount. If the employee does not
receive an interest in the automobile lease, then the Annual Lease Value
or the Daily Lease Value, whichever is applicable, is determined without
regard to any amount contributed. For purposes of this paragraph
(d)(2)(ii)(B), an employee's interest in an automobile lease will not be
recognized unless the employee is a named co-lessee on the lease. An
interest in a lease will not be recognized if under the facts and
circumstances the lease does not reflect the true obligations of the
lessees.
(C) Example. The rules of paragraph (d)(2)(ii) (A) and (B) of this
section are illustrated by the following example:
Example. Assume that an employer pays $15,000 and an employee pays
$5,000 toward the purchase of an automobile. Assume further that the
employee receives a 25 percent interest in the automobile and is named
as a co-owner on the title to the automobile. Under the rule of
paragraph (d)(2)(ii)(A) of this section, the Annual Lease Value of the
automobile is determined by reducing the fair market value of the
automobile ($20,000) by the $5,000 employee contribution. Thus, the
Annual Lease Value of the automobile under the table in paragraph
(d)(2)(iii) of this section is $4,350. If the employee in this example
does not receive an ownership interest in the automobile and is provided
the use of the automobile for two years, the Annual Lease Value would be
determined without regard to the $5,000 employee contribution. Thus, the
Annual Lease Value would be $5,600. The $5,000 employee contribution
would reduce the amount includible in the employee's income after taking
into account the amount, if any, excluded from income under another
provision of subtitle A of the Internal Revenue Code, such as the
working condition fringe exclusion. Thus, if the employee places 50
percent of the mileage on the automobile for the employer's business
each year, then the amount includible in the employee's income in the
first year would be ($5,600-2,800-2,800), or $0, the amount includible
in the employee's income in the second year would be ($5,600-2,800-2,200
($5,000-2,800)) or $600 and the amount includible in the third year
would be ($5,600-2,800) or $2,800 since the employee's contribution has
been completely used in the first two years.
(iii ) Annual Lease Value Table.
------------------------------------------------------------------------
Automobile fair market value Annual
-------------------------------------------------------------- lease
value
(1) ----------
(2)
------------------------------------------------------------------------
$0 to 999.................................................... $600
1,000 to 1,999............................................... 850
2,000 to 2,999............................................... 1,100
3,000 to 3,999............................................... 1,350
4,000 to 4,999............................................... 1,600
5,000 to 5,999............................................... 1,850
6,000 to 6,999............................................... 2,100
7,000 to 7,999............................................... 2,350
8,000 to 8,999............................................... 2,600
9,000 to 9,999............................................... 2,850
10,000 to 10,999............................................. 3,100
11,000 to 11,999............................................. 3,350
12,000 to 12,999............................................. 3,600
13,000 to 13,999............................................. 3,850
14,000 to 14,999............................................. 4,100
15,000 to 15,999............................................. 4,350
16,000 to 16,999............................................. 4,600
17,000 to 17,999............................................. 4,850
18,000 to 18,999............................................. 5,100
19,000 to 19,999............................................. 5,350
20,000 to 20,999............................................. 5,600
21,000 to 21,999............................................. 5,850
22,000 to 22,999............................................. 6,100
23,000 to 23,999............................................. 6,350
24,000 to 24,999............................................. 6,600
25,000 to 25,999............................................. 6,850
26,000 to 27,999............................................. 7,250
28,000 to 29,999............................................. 7,750
30,000 to 31,999............................................. 8,250
32,000 to 33,999............................................. 8,750
34,000 to 35,999............................................. 9,250
36,000 to 37,999............................................. 9,750
38,000 to 39,999............................................. 10,250
40,000 to 41,999............................................. 10,750
42,000 to 43,999............................................. 11,250
44,000 to 45,999............................................. 11,750
46,000 to 47,999............................................. 12,250
48,000 to 49,999............................................. 12,750
50,000 to 51,999............................................. 13,250
52,000 to 53,999............................................. 13,750
54,000 to 55,999............................................. 14,250
56,000 to 57,999............................................. 14,750
58,000 to 59,999............................................. 15,250
------------------------------------------------------------------------
For vehicles having a fair market value in excess of $59,999, the Annual
Lease Value is equal to: (.25 x the fair market value of the automobile)
+ $500.
(iv) Recalculation of Annual Lease Value. The Annual Lease Values
determined under the rules of this paragraph (d) are based on four-year
lease terms. Therefore, except as otherwise provided in paragraph
(d)(2)(v) of this section, the Annual Lease Value calculated by applying
paragraph (d)(2) (i)
[[Page 60]]
or (ii) of this section shall remain in effect for the period that
begins with the first date the special valuation rule of paragraph (d)
of this section is applied by the employer to the automobile and ends on
December 31 of the fourth full calendar year following that date. The
Annual Lease Value for each subsequent four-year period is calculated by
determining the fair market value of the automobile as of the first
January 1 following the period described in the previous sentence and
selecting the amount in column 2 of the Annual Lease Value Table
corresponding to the appropriate dollar range in column 1 of the Table.
If, however, the employer is using the special accounting rule provided
in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (relating to
the reporting of and withholding on the value of noncash fringe
benefits), the employer may calculate the Annual Lease Value for each
subsequent four-year period as of the beginning of the special
accounting period that begins immediately prior to the January 1
described in the previous sentence. For example, assume that pursuant to
Announcement 85-113, an employer uses the special accounting rule.
Assume further that beginning on November 1, 1988, the special
accounting period is November 1 to October 31 and that the employer
elects to use the special valuation rule of this paragraph (d) as of
January 1, 1989. The employer may recalculate the Annual Lease Value as
of November 1, 1992, rather than as of January 1, 1993.
(v) Transfer of the automobile to another employee. Unless the
primary purpose of the transfer is to reduce Federal taxes, if an
employer transfers the use of an automobile from one employee to another
employee, the employer may recalculate the Annual Lease Value based on
the fair market value of the automobile as of January 1 of the calendar
year of transfer. If, however, the employer is using the special
accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31,
August 5, 1985) (relating to the reporting of and withholding on the
value of noncash fringe benefits), the employer may recalculate the
Annual Lease Value based on the fair market value of the automobile as
of the beginning of the special accounting period in which the transfer
occurs. If the employer does not recalculate the Annual Lease Value, and
the employee to whom the automobile is transferred uses the special
valuation rule, the employee may not recalculate the Annual Lease Value.
(3) Services included in, or excluded from, the Annual Lease Value
Table--(i) Maintenance and insurance included. The Annual Lease Values
contained in the Annual Lease Value Table include the fair market value
of maintenance of, and insurance for, the automobile. Neither an
employer nor an employee may reduce the Annual Lease Value by the fair
market value of any service included in the Annual Lease Value that is
not provided by the employer, such as reducing the Annual Lease Value by
the fair market value of a maintenance service contract or insurance. An
employer or employee who wishes to take into account only the services
actually provided with respect to an automobile may value the
availability of the automobile under the general valuation rules of
paragraph (b) of this section.
(ii) Fuel excluded--(A) In general. The Annual Lease Values do not
include the fair market value of fuel provided by the employer, whether
fuel is provided in kind or its cost is reimbursed by or charged to the
employer. Thus, if an employer provides fuel, the fuel must be valued
separately for inclusion in income.
(B) Valuation of fuel provided in kind. The provision of fuel in
kind may be valued at fair market value based on all the facts and
circumstances or, in the alternative, it may be valued at 5.5 cents per
mile for all miles driven by the employee. However, the provision of
fuel in kind may not be valued at 5.5 cents per mile for miles driven
outside the United States, Canada or Mexico. For purposes of this
section, the United States includes the United States, its possessions
and its territories.
(C) Valuation of fuel where cost reimbursed by or charged to an
employer. The fair market value of fuel, the cost of which is reimbursed
by or charged to an employer, is generally the amount of the actual
reimbursement or the amount charged, provided the purchase of the fuel
is at arm's-length.
[[Page 61]]
(D) Fleet-average cents-per-mile fuel cost. If an employer with a
fleet of at least 20 automobiles that meets the requirements of
paragraph (d)(5)(v)(D) of this section reimburses employees for the cost
of fuel or allows employees to charge the employer for the cost of fuel,
the fair market value of fuel provided to those automobiles may be
determined by reference to the employer's fleet-average cents-per-mile
fuel cost. The fleet-average cents-per-mile fuel cost is equal to the
fleet-average per-gallon fuel cost divided by the fleet-average miles-
per-gallon rate. The averages described in the preceding sentence must
be determined by averaging the per-gallon fuel costs and miles-per-
gallon rates of a representative sample of the automobiles in the fleet
equal to the greater of ten percent of the automobiles in the fleet or
20 automobiles for a representative period, such as a two-month period.
In lieu of determining the fleet-average cents-per-mile fuel cost, if an
employer is using the fleet-average valuation rule of paragraph
(d)(5)(v) of this section and if determining the amount of the actual
reimbursement or the amount charged for the purchase of fuel would
impose unreasonable administrative burdens on the employer, the
provision of fuel may be valued under the rule provided in paragraph
(d)(3)(ii)(B) of this section.
(iii) Treatment of other services. The fair market value of any
service not specifically identified in paragraph (d)(3)(i) of this
section that is provided by the employer with respect to an automobile
(other than the services of a chauffeur) must be added to the Annual
Lease Value of the automobile in determining the fair market value of
the benefit provided. See paragraph (b) (5) of this section for rules
relating to the valuation of chauffeur services.
(4) Availability of an automobile for less than an entire calendar
year--(i) Pro-rated Annual Lease Value used for continuous availability
of at least 30 days.--(A) In general. Except as otherwise provided in
paragraph (d)(4)(iv) of this section, for periods of continuous
availability of at least 30 days, but less than an entire calendar year,
the value of the availability of an automobile provided by an employer
electing to use the automobile lease valuation rule of this paragraph
(d) is the pro-rated Annual Lease Value. The pro-rated Annual Lease
Value is calculated by multiplying the applicable Annual Lease Value by
a fraction, the numerator of which is the number of days of availability
and the denominator of which is 365.
(B) Special rule for continuous availability of at least 30 days
that straddles two reporting years. If an employee is provided with the
continuous availability of an automobile for at least 30 days, but the
continuous period straddles two calendar years (or two special
accounting periods if the special accounting rule of Announcement 85-113
(1985-31 I.R.B. 31, August 5, 1985) (relating to the reporting of and
withholding on noncash fringe benefits) is used), the pro-rated Annual
Lease Value, rather than the Daily Lease Value, may be applied with
respect to such period of continuous availability.
(ii) Daily Lease Value used for continuous availability of less than
30 days. Except as otherwise provided in paragraph (d)(4)(iii) of this
section, for periods of continuous availability of one or more but less
than 30 days, the value of the availability of the employer-provided
automobile is the Daily Lease Value. The Daily Lease Value is calculated
by multiplying the applicable Annual Lease Value by a fraction, the
numerator of which is four times the number of days of availability and
the denominator of which is 365.
(iii) Election to treat all periods as periods of at least 30 days.
The value of the availability of an employer-provided automobile for a
period of continuous availability of less than 30 days may be determined
by applying the pro-rated Annual Lease Value by treating the automobile
as if it had been available for 30 days, if doing so would result in a
lower valuation than applying the Daily Lease Value to the shorter
period of actual availability.
(iv) Periods of unavailability--(A) General rule. In general, a pro-
rated Annual Lease Value (as provided in paragraph (d)(4)(i) of this
section) is used to value the availability of an employer-provided
automobile when the automobile is available to an employee for a
continuous period of at least 30 days but
[[Page 62]]
less than the entire calendar year. Neither an employer nor an employee,
however, may use a pro-rated Annual Lease Value when the reduction of
Federal taxes is the primary reason the automobile is unavailable to an
employee at certain times during the calendar year.
(B) Unavailability for personal reasons of the employee. If an
automobile is unavailable to an employee because of personal reasons of
the employee, such as while the employee is on vacation, a pro-rated
Annual Lease Value, if used, must not take into account such periods of
unavailability. For example, assume that an automobile is available to
an employee during the first five months of the year and during the last
five months of the year. Assume further that the period of
unavailability occurs because the employee is on vacation. The Annual
Lease Value, if it is applied, must be applied with respect to the
entire 12-month period. The Annual Lease Value may not be pro-rated to
take into account the two-month period of unavailability.
(5) Fair market value--(i) In general. For purposes of determining
the Annual Lease Value of an automobile under the Annual Lease Value
Table, the fair market value of an automobile is the amount that an
individual would have to pay in an arm's-length transaction to purchase
the particular automobile in the jurisdiction in which the vehicle is
purchased or leased. That amount includes all amounts attributable to
the purchase of an automobile such as sales tax and title fees as well
as the purchase price of the automobile. Any special relationship that
may exist between the employee and the employer must be disregarded.
Also, the employee's subjective perception of the value of the
automobile is not relevant to the determination of the automobile's fair
market value, and, except as provided in paragraph (d)(5)(ii) of this
section, the cost incurred by the employer in connection with the
purchase or lease of the automobile is not determinative of the fair
market value of the automobile.
(ii) Safe-harbor valuation rule--(A) General rule. For purposes of
calculating the Annual Lease Value of an automobile under this paragraph
(d), the safe-harbor value of the automobile may be used as the fair
market value of the automobile.
(B) Automobiles owned by the employer. For an automobile owned by
the employer, the safe-harbor value of the automobile is the employer's
cost of purchasing the automobile (including sales tax, title, and other
expenses attributable to such purchase), provided the purchase is made
at arm's-length. Notwithstanding the preceding sentence, the safe-harbor
value of this paragraph (d)(5)(ii)(B) is not available with respect to
an automobile manufactured by the employer. Thus, for example, if one
entity manufactures an automobile and sells it to an entity with which
it is aggregated pursuant to paragraph (c)(4) of this section, this
paragraph (d)(5)(ii)(B) does not apply to value the automobile by the
aggregated employer. In this case, value must be determined under
paragraph (d)(5)(i) of this section.
(C) Automobiles leased by the employer. For an automobile leased but
not manufactured by the employer, the safe-harbor value of the
automobile is either the manufacturer's suggested retail price of the
automobile less eight percent (including sales tax, title, and other
expenses attributable to such purchase), or the value determined under
paragraph (d)(5)(iii) of this section.
(iii) Use of nationally recognized pricing sources. The fair market
value of an automobile that is--
(A) Provided to an employee prior to January 1, 1985,
(B) Being revalued pursuant to paragraph (d)(2) (iv) or (v) of this
section, or
(C) A leased automobile being valued pursuant to paragraph
(d)(5)(ii) of this section, may be determined by reference to the retail
value of such automobile as reported by a nationally recognized pricing
source that regularly reports new or used automobile retail values,
whichever is applicable. That retail value must be reasonable with
respect to the automobile being valued. Pricing sources consist of
publications and electronic data bases.
(iv) Fair market value of special equipment. When determining the
fair market value of an automobile, the employer may exclude the fair
market
[[Page 63]]
value of any specialized equipment or telephone that is added to or
carried in the automobile provided that the presence of that equipment
or telephone is necessitated by, and attributable to, the business needs
of the employer. The value of the specialized equipment must be included
if the employee to whom the automobile is available uses the specialized
equipment in a trade or business of the employee other than the
employee's trade or business of being an employee of the employer.
(v) Fleet-average valuation rule--(A) In general. An employer with a
fleet of 20 or more automobiles meeting the requirements of this
paragraph (d)(5)(v) (including the business-use and fair market value
conditions of paragraph (d)(5)(v)(D) of this section) may use a fleet-
average value for purposes of calculating the Annual Lease Values of the
automobiles in the fleet. The fleet-average value is the average of the
fair market values of all automobiles in the fleet. The fair market
value of each automobile in the fleet shall be determined, pursuant to
the rules of paragraphs (d)(5) (i) through (iv) of this section, as of
the date described in paragraph (d)(2)(i)(A) of this section.
(B) Period for use of rule. The fleet-average valuation rule of this
paragraph (d)(5)(v) may be used by an employer as of January 1 of any
calendar year following the calendar year in which the employer acquires
a sufficient number of automobiles to total a fleet of 20 or more
automobiles. The Annual Lease Value calculated for the automobiles in
the fleet, based on the fleet-average value, shall remain in effect for
the period that begins with the first January 1 the fleet-average
valuation ru1e of this paragraph (d)(5)(v) is applied by the employer to
the automobiles in the fleet and ends on December 31 of the subsequent
calendar year. The Annual Lease Value for each subsequent two-year
period is calculated by determining the fleet-average value of the
automobiles in the fleet as of the first January 1 of such period. An
employer may cease using the fleet-average valuation rule as of any
January 1. If, however, the employer is using the special accounting
rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985)
(relating to the reporting of and withholding on noncash fringe
benefits), the employer may apply the rules of this paragraph
(d)(5)(v)(B) on the basis of the special accounting period rather than
the calendar year. (This is accomplished by substituting (1) the
beginning of the special accounting period that begins immediately prior
to the January 1 described in this paragraph (d)(5)(v)(B) for January 1
wherever it appears in this paragraph (d)(5)(v) (B) and (2) the end of
such accounting period for December 31.) If the number of qualifying
automobiles in the employer's fleet declines to fewer than 20 for more
than 50 percent of the days in a year, then the fleet-average valuation
rule does not apply as of January 1 of such year. In this case, the
Annual Lease Value must be determined separately for each remaining
automobile. The revaluation rules of paragraphs (d)(2) (iv) and (v) of
this section do not apply to automobiles valued under this paragraph
(d)(5)(v).
(C) Automobiles included in the fleet. An employer may include in a
fleet any automobile that meets the requirements of this paragraph
(d)(5)(v) and is available to any employee of the employer for personal
use. An employer may include in the fleet only automobiles the
availability of which is valued under the automobile lease valuation
rule of this paragraph (d). An employer need not include in the fleet
all automobiles valued under the automobile lease valuation rule. An
employer may have more than one fleet for purposes of the fleet-average
rule of this paragraph (d)(5)(v). For example, an employer may group
automobiles in a fleet according to their physical type or use.
(D) Limitations on use of fleet-average rule. The rule provided in
this paragraph (d)(5)(v) may not be used for any automobile the fair
market value of which (determined pursuant to paragraphs (d)(5) (i)
through (iv) of this section as of either the first date on which the
automobile is made available to any employee of the employer for
personal use or, if later, January 1, 1985) exceeds $16,500. The fair
market value limitation of $16,500 shall be adjusted pursuant to section
280F(d)(7) of the Internal Revenue Code of 1986. The first such
adjustment shall be for calendar
[[Page 64]]
year 1989 (substitute October 1986 for October 1987 in applying the
formula). In addition, the rule provided in this paragraph (d)(5)(v) may
only be used for automobiles that the employer reasonably expects will
regularly be used in the employer's trade or business. For rules
concerning when an automobile is regularly used in the employer's
business, see paragraph (e)(1)(iv) of this section.
(E) Additional automobiles added to the fleet. The fleet-average
value in effect at the time an automobile is added to a fleet is treated
as the fair market value of the additional automobile for purposes of
determining the Annual Lease Value of the automobile until the fleet-
average value changes pursuant to paragraph (d)(5)(v)(B) of this
section.
(F) Use of the fleet-average rule by employees. An employee may only
use the fleet-average rule if it is used by the employer. If an employer
uses the fleet-average rule, and the employee uses the special valuation
rule of paragraph (d) of this section, the employee must use the fleet-
average value determined by the employer.
(6) Special rules for continuous availability of certain
automobiles--(i) Fleet automobiles. If an employer is using the fleet-
average valuation ru1e of paragraph (d)(5)(v) of this section and the
employer provides an employee with the continuous availability of an
automobile from the same fleet during a period (though not necessarily
the same fleet automobile for the entire period), the employee is
treated as having the use of a single fleet automobile for the entire
period, e.g., an entire calendar year. Thus, when applying the
automobile lease valuation rule of this paragraph (d), the employer may
treat the fleet-average value as the fair market value of the automobile
deemed available to the employee for the period for purposes of
calculating the Annual Lease Value, (or pro-rated Annual Lease Value or
Daily Lease Value whichever is applicable) of the automobile. If an
employer provides an employee with the continuous availability of more
than one fleet automobile during a period, the employer may treat the
fleet-average value as the fair market value of each automobile provided
to the employee provided that the rules of paragraph (d)(5)(v)(D) of
this section are satisfied.
(ii) Demonstration automobiles--(A) In general. If an automobile
dealership provides an employee with the continuous availability of a
demonstration automobile (as defined in Sec. 1.132-5(o)(3)) during a
period (though not necessarily the same demonstration automobile for the
entire period), the employee is treated as having the use of a single
demonstration automobile for the entire period, e.g., an entire calendar
year. If an employer provides an employee with the continuous
availability of more than one demonstration automobile during a period,
the employer may treat the value determined under paragraph
(d)(6)(ii)(B) of this section as the fair market value of each
automobile provided to the employee. For rules relating to the treatment
as a working condition fringe of the qualified automobile demonstration
use of a demonstration automobile by a full-time automobile salesman,
see Sec. 1.132-5(o).
(B) Determining the fair market value of a demonstration automobile.
When applying the automobile lease valuation rule of this paragraph (d),
the employer may treat the average of the fair market values of the
demonstration automobiles which are available to an employee and held in
the dealership's inventory during the calendar year as the fair market
value of the demonstration automobile deemed available to the employee
for the period for purposes of calculating the Annual Lease Value of the
automobile. If under the facts and circumstances it is inappropriate to
take into account, with respect to an employee, certain models of
demonstration automobiles, the value of the benefit is determined
without reference to the fair market values of such models. For example,
assume that an employee has the continuous availability for an entire
calendar year of one demonstration automobile, although not the same one
for the entire year. Assume further that the fair market values of the
automobiles in the dealership inventory during the year range from
$8,000 to $20,000. If there is not a substantial period (such as three
[[Page 65]]
months) during the year when the employee uses demonstration automobiles
valued at less than $16,000, then those automobiles are not considered
in determining the value of the benefit provided to the employee. In
this case, the average of the fair market values of the demonstration
automobiles in the dealership's inventory valued at $16,000 or more is
treated as the fair market value of the automobile deemed available to
the employee for the calendar year for purposes of calculating the
Annual Lease Value of the automobile.
(7) Consistency rules--(i) Use of the automobile lease valuation
rule by an employer. Except as provided in paragraph (d)(5)(v)(B) of
this section, an employer may adopt the automobile lease valuation rule
of this paragraph (d) for an automobile only if the rule is adopted to
take effect by the later of--
(A) January 1, 1989, or
(B) The first day on which the automobile is made available to an
employee of the employer for personal use (or, if the commuting
valuation rule of paragraph (f) of this section is used when the
automobile is first made available to an employee of the employer for
personal use, the first day on which the commuting valuation rule is not
used).
(ii) An employer must use the automobile lease valuation rule for
all subsequent years. Once the automobile lease valuation rule has been
adopted for an automobile by an employer, the rule must be used by the
employer for all subsequent years in which the employer makes the
automobile available to any employee except that the employer may, for
any year during which (or for any employee for whom) use of the
automobile qualifies for the commuting valuation rule of paragraph (f)
of this section, use the commuting valuation rule with respect to the
automobile.
(iii) Use of the automobile lease valuation rule by an employee. An
employee may adopt the automobile lease valuation rule for an automobile
only if the rule is adopted--
(A) By the employer, and
(B) Beginning with the first day on which the automobile for which
the employer (consistent with paragraph (d)(7)(i) of this section)
adopted the rule is made available to that employee for personal use
(or, if the commuting valuation rule of paragraph (f) of this section is
used when the automobile is first made available to that employee for
personal use, the first day on which the commuting valuation rule is not
used).
(iv) An employee must use the automobile lease valuation rule for
all subsequent years. Once the automobile lease valuation rule has been
adopted for an automobile by an employee, the rule must be used by the
employee for all subsequent years in which the automobile for which the
rule is used is available to the employee. However, the employee may,
for any year during which use of the automobile qualifies for use of the
commuting valuation rule of paragraph (f) of this section and for which
the employer uses such rule, use the commuting valuation rule with
respect to the automobile.
(v) Replacement automobiles. Notwithstanding anything in this
paragraph (d)(7) to the contrary, if the automobile lease valuation rule
is used by an employer, or by an employer and an employee, with respect
to a particular automobile, and a replacement automobile is provided to
the employee for the primary purpose of reducing Federal taxes, then the
employer, or the employer and the employee, using the rule must continue
to use the rule with respect to the replacement automobile.
(e) Vehicle cents-per-mile valuation rule--(1) In general--(i)
General rule. Under the vehicle cents-per-mile valuation rule of this
paragraph (e), if an employer provides an employee with the use of a
vehicle that--
(A) The employer reasonably expects will be regularly used in the
employer's trade or business throughout the calendar year (or such
shorter period as the vehicle may be owned or leased by the employer),
or
(B) Satisfies the requirements of paragraph (e)(1)(ii) of this
section, the value of the benefit provided in the calendar year is the
standard mileage rate provided in the applicable Revenue Ruling or
Revenue Procedure (``cents-per-mile rate'') multiplied by the total
number of miles the vehicle is driven by the employee for personal
purposes. The cents-per-mile rate is to be applied
[[Page 66]]
prospectively from the first day of the taxable year following the date
of publication of the applicable Revenue Ruling or Revenue Procedure. An
employee who uses an employer-provided vehicle, in whole or in part, for
a trade or business other than the employer's trade or business, may
take a deduction for such business use based upon the vehicle cents-per-
mile rule as long as such deduction is at the same standard mileage rate
as that used in calculating the employee's income inclusion. The
standard mileage rate must be applied to personal miles independent of
business miles. Thus, for example, if the standard mileage rate were 24
cents per mile for the first 15,000 miles and 11 cents per mile for all
miles over 15,000 and an employee drives 20,000 personal miles and
45,000 business miles in a year, the value of the personal use of the
vehicle is $4,150 ((15,000x$.24)+(5,000x$.11)). For purposes of this
section, the use of a vehicle for personal purposes is any use of the
vehicle other than use in the employee's trade or business of being an
employee of the employer.
(ii) Mileage rule. A vehicle satisfies the requirements of this
paragraph (e)(1)(ii) for a calendar year if--
(A) It is actually driven at least 10,000 miles in that year; and
(B) Use of the vehicle during the year is primarily by employees.
For example, if a vehicle is used by only one employee during the
calendar year and that employee drives the vehicle at least 10,000 miles
during the year, the vehicle satisfies the requirements of this
paragraph (e)(1)(ii) even if all miles driven by the employee are
personal. A vehicle is considered used during the year primarily by
employees in accordance with the requirement of paragraph (e)(1)(ii)(B)
of this section if employees use the vehicle on a consistent basis for
commuting. If the employer does not own or lease the vehicle during a
portion of the year, the 10,000 mile threshold is to be reduced
proportionately to reflect the periods when the employer did not own or
lease the vehicle. For purposes of this paragraph (e)(1)(ii), use of the
vehicle by an individual (other than the employee) whose use would be
taxed to the employee is not considered use by the employee.
(iii) Limitation on use of the vehicle cents-per-mile valuation
rule--(A) In general. Except as otherwise provided in the last sentence
of this paragraph (e)(1)(iii)(A), the value of the use of an automobile
(as defined in paragraph (d)(1)(ii) of this section) may not be
determined under the vehicle cents-per-mile valuation rule of this
paragraph (e) for a calendar year if the fair market value of the
automobile (determined pursuant to paragraphs (d)(5) (i) through (iv) of
this section as of the later of January 1, 1985, or the first date on
which the automobile is made available to any employee of the employer
for personal use) exceeds the sum of the maximum recovery deductions
allowable under section 280F(a)(2) for a five-year period for an
automobile first placed in service during that calendar year (whether or
not the automobile is actually placed in service during that year) as
adjusted by section 280F(d)(7). With respect to a vehicle placed in
service prior to January 1, 1989, the limitation on value will be not
less than $12,800. With respect to a vehicle placed in service in or
after 1989, the limitation on value is $12,800 as adjusted by section
280F(d)(7).
(B) Application of limitation with respect to a vehicle owned by
both an employer and an employee. If an employee contributes an amount
towards the purchase price of a vehicle in return for a percentage
ownership interest in the vehicle, for purposes of determining whether
the limitation of this paragraph (e)(1)(iii) applies, the fair market
value of the vehicle is reduced by the lesser of--
(1) The amount contributed, or
(2) An amount equal to the employee's percentage ownership interest
multiplied by the unreduced fair market value of the vehicle. If the
employee does not receive an ownership interest in the employer-provided
vehicle, then the fair market value of the vehicle is determined without
regard to any amount contributed. For purposes of this paragraph
(e)(1)(iii)(B), an employee's ownership interest in a vehicle will not
be recognized unless it is reflected in the title of the vehicle. An
ownership interest reflected in the title
[[Page 67]]
of a vehicle will not be recognized if under the facts and circumstances
the title does not reflect the benefits and burdens of ownership.
(C) Application of limitation with respect to a vehicle leased by
both an employer and employee. If an employee contributes an amount
toward the cost to lease a vehicle in return for a percentage interest
in the vehicle lease, for purposes of determining whether the limitation
of this paragraph (e)(1)(iii) applies, the fair market value of the
vehicle is reduced by the amount specified in the following sentence.
The amount specified in this sentence is the unreduced fair market value
of a vehicle multiplied by the lesser of--
(1) The employee's percentage interest in the lease, or
(2) A fraction, the numerator of which is the amount contributed and
the denominator of which is the entire lease cost. If the employee does
not receive an interest in the vehicle lease, then the fair market value
is determined without regard to any amount contributed. For purposes of
this paragraph (e)(1)(iii)(C), an employee's interest in a vehicle lease
will not be recognized unless the employee is a named co-lessee on the
lease. An interest in a lease will not be recognized if under the facts
and circumstances, the lease does not reflect the true obligations of
the lessees.
(iv) Regular use in an employer's trade or business. Whether a
vehicle is regularly used in an employer's trade or business is
determined on the basis of all facts and circumstances. A vehicle is
considered regularly used in an employer's trade or business for
purposes of paragraph (e)(1)(i)(A) of this section if one of the
following safe harbor conditions is satisfied:
(A) At least 50 percent of the vehicle's total annual mileage is for
the employer's business; or
(B) The vehicle is generally used each workday to transport at least
three employees of the employer to and from work in an employer-
sponsored commuting vehicle pool. Infrequent business use of the
vehicle, such as for occasional trips to the airport or between the
employer's multiple business premises, does not constitute regular use
of the vehicle in the employer's trade or business.
(v) Application of rule to shared usage. If an employer regularly
provides a vehicle to employees for use by more than one employee at the
same time, such as with an employer-sponsored vehicle commuting pool,
the employer may use the vehicle cents-per-mile valuation rule to value
the use of the vehicle by each employee who shares such use. See
Sec. 1.61-21(c)(2)(ii)(B) for provisions relating to the allocation of
the value of an automobile to more than one employee.
(2) Definition of vehicle. For purposes of this paragraph (e), the
term ``vehicle'' means any motorized wheeled vehicle manufactured
primarily for use on public streets, roads, and highways. The term
``vehicle'' includes an automobile as defined in paragraph (d)(1)(ii) of
this section.
(3) Services included in, or excluded from, the cents-per-mile rate-
-(i) Maintenance and insurance included. The cents-per-mile rate
includes the fair market value of maintenance of, and insurance for, the
vehicle. The cents-per-mile rate may not be reduced by the fair market
value of any service included in the cents-per-mile rate but not
provided by the employer. An employer or employee who wishes to take
into account only the particular services provided with respect to a
vehicle may value the availability of the vehicle under the general
valuation rules of paragraph (b) of this section.
(ii) Fuel provided by the employer--(A) Miles driven in the United
States, Canada, or Mexico. With respect to miles driven in the United
States, Canada, or Mexico, the cents-per-mile rate includes the fair
market value of fuel provided by the employer. If fuel is not provided
by the employer, the cents-per-mile rate may be reduced by no more than
5.5 cents or the amount specified in any applicable Revenue Ruling or
Revenue Procedure. For purposes of this section, the United States
includes the United States, its possessions and its territories.
(B) Miles driven outside the United States, Canada, or Mexico. With
respect to miles driven outside the United States, Canada, or Mexico,
the fair market value of fuel provided by the
[[Page 68]]
employer is not reflected in the cents-per-mile rate. Accordingly, the
cents-per-mile rate may be reduced but by no more than 5.5 cents or the
amount specified in any applicable Revenue Ruling or Revenue Procedure.
If the employer provides the fuel in kind, it must be valued based on
all the facts and circumstances. If the employer reimburses the employee
for the cost of fuel or allows the employee to charge the employer for
the cost of fuel, the fair market value of the fuel is generally the
amount of the actual reimbursement or the amount charged, provided the
purchase of fuel is at arm's length.
(iii) Treatment of other services. The fair market value of any
service not specifically identified in paragraph (e)(3)(i) of this
section that is provided by the employer with respect to a vehicle is
not reflected in the cents-per-mile rate. See paragraph (b)(5) of this
section for rules relating to valuation of chauffeur services.
(4) Valuation of personal use only. The vehicle cents-per-mile
valuation rule of this paragraph (e) may only be used to value the miles
driven for personal purposes. Thus, the employer must include an amount
in an employee's income with respect to the use of a vehicle that is
equal to the product of the number of personal miles driven by the
employee and the appropriate cents-per-mile rate. The term ``personal
miles'' means all miles for which the employee used the automobile
except miles driven in the employee's trade or business of being an
employee of the employer. Unless additional services are provided with
respect to the vehicle (see paragraph (e)(3)(iii) of this section), the
employer may not include in income a greater amount; for example, the
employer may not include in income 100 percent (all business and
personal miles) of the value of the use of the vehicle.
(5) Consistency rules--(i) Use of the vehicle cents-per-mile
valuation rule by an employer. An employer must adopt the vehicle cents-
per-mile valuation rule of this paragraph (e) for a vehicle to take
effect by the later of--
(A) January 1, 1989, or
(B) The first day on which the vehicle is used by an employee of the
employer for personal use (or, if the commuting valuation rule of
paragraph (f) of this section is used when the vehicle is first used by
an employee of the employer for personal use, the first day on which the
commuting valuation rule is not used).
(ii) An employer must use the vehicle cents-per-mile valuation rule
for all subsequent years. Once the vehicle cents-per-mile valuation rule
has been adopted for a vehicle by an employer, the rule must be used by
the employer for all subsequent years in which the vehicle qualifies for
use of the rule, except that the employer may, for any year during which
use of the vehicle qualifies for the commuting valuation rule of
paragraph (f) of this section, use the commuting valuation rule with
respect to the vehicle. If the vehicle fails to qualify for use of the
vehicle cents-per-mile valuation rule during a subsequent year, the
employer may adopt for such subsequent year and thereafter any other
special valuation rule for which the vehicle then qualifies. If the
employer elects to use the automobile lease valuation rule of paragraph
(d) of this section for a period in which the automobile does not
qualify for use of the vehicle cents-per-mile valuation rule, then the
employer must comply with the requirements of paragraph (d)(7) of this
section. For purposes of paragraph (d)(7) of this section, the first day
on which the automobile with respect to which the vehicle cents-per-mile
rule had been used fails to qualify for use of the vehicle cents-per-
mile valuation rule may be deemed to be the first day on which the
automobile is available to an employee of the employer for personal use.
(iii) Use of the vehicle cents-per-mile valuation rule by an
employee. An employee may adopt the vehicle cents-per-mile valuation
rule for a vehicle only if the rule is adopted--
(A) By the employer, and
(B) Beginning with respect to the first day on which the vehicle for
which the employer (consistent with paragraph (e)(5)(i) of this section)
adopted the rule is available to that employee for personal use (or, if
the commuting valuation rule of paragraph (f) of this section is used
when the vehicle is first used by an employee for
[[Page 69]]
personal use, the first day on which the commuting valuation rule is not
used).
(iv) An employee must use the vehicle cents-per-mile valuation rule
for all subsequent years. Once the vehicle cents-per-mile valuation rule
has been adopted for a vehicle by an employee, the rule must be used by
the employee for all subsequent years of personal use of the vehicle by
the employee for which the rule is used by the employer. However, see
paragraph (f) of this section for rules relating to the use of the
commuting valuation rule for a subsequent year.
(v) Replacement vehicles. Notwithstanding anything in this paragraph
(e)(5) to the contrary, if the vehicle cents-per-mile valuation rule is
used by an employer, or by an employer and an employee, with respect to
a particular vehicle. and a replacement vehicle is provided to the
employee for the primary purpose of reducing Federal taxes, then the
employer, or the employer and the employee, using the rule must continue
to use the rule with respect to the replacement vehicle if the
replacement vehicle qualifies for use of the rule.
(f) Commuting valuation rule--(1) In general. Under the commuting
valuation rule of this paragraph (f), the value of the commuting use of
an employer-provided vehicle may be determined pursuant to paragraph
(f)(3) of this section if the following criteria are met by the employer
and employees with respect to the vehicle:
(i) The vehicle is owned or leased by the employer and is provided
to one or more employees for use in connection with the employer's trade
or business and is used in the employer's trade or business;
(ii) For bona fide noncompensatory business reasons, the employer
requires the employee to commute to and/or from work in the vehicle;
(iii) The employer has established a written policy under which
neither the employee, nor any individual whose use would be taxable to
the employee, may use the vehicle for personal purposes, other than for
commuting or de minimis personal use (such as a stop for a personal
errand on the way between a business delivery and the employee's home);
(iv) Except for de minimis personal use, the employee does not use
the vehicle for any personal purpose other than commuting; and
(v) The employee required to use the vehicle for commuting is not a
control employee of the employer (as defined in paragraphs (f) (5) and
(6) of this section).
Personal use of a vehicle is all use of the vehicle by an employee that
is not used in the employee's trade or business of being an employee of
the employer. An employer-provided vehicle that is generally used each
workday to transport at least three employees of the employer to and
from work in an employer-sponsored commuting vehicle pool is deemed to
meet the requirements of paragraphs (f)(1) (i) and (ii) of this section.
(2) Special rules. Notwithstanding anything in paragraph (f)(1) of
this section to the contrary, the following special rules apply--
(i) Chauffeur-driven vehicles. If a vehicle is chauffeur-driven, the
commuting valuation rule of this paragraph (f) may not be used to value
the commuting use of any person (other than the chauffeur) who rides in
the vehicle. (See paragraphs (d) and (e) of this section for other
vehicle special valuation rules.) The special rule of this paragraph (f)
may be used to value the commuting-only use of the vehicle by the
chauffeur if the conditions of paragraph (f)(1) of this section are
satisfied. For purposes of this paragraph (f)(2), an individual will not
be considered a chauffeur if he or she performs non-driving services for
the employer, is not available to perform driving services while
performing such other services and whose only driving services consist
of driving a vehicle used for commuting by other employees of the
employer.
(ii) Control employee exception. If the vehicle in which the
employee is required to commute is not an automobile as defined in
paragraph (d)(1)(ii) of this section, the restriction of paragraph
(f)(1)(v) of this section (relating to control employees) does not
apply.
(3) Commuting value--(i) $1.50 per one-way commute. If the
requirements of this paragraph (f) are satisfied, the
[[Page 70]]
value of the commuting use of an employer-provided vehicle is $1.50 per
one-way commute (e.g., from home to work or from work to home). The
value provided in this paragraph (f)(3) includes the value of any goods
or services directly related to the vehicle (e.g., fuel).
(ii) Value per employee. If there is more than one employee who
commutes in the vehicle, such as in the case of an employer-sponsored
commuting vehicle pool, the amount includible in the income of each
employee is $1.50 per one-way commute. Thus, the amount includible for
each round-trip commute is $3.00 per employee. See paragraphs (d)(7)(vi)
and (e)(5)(vi) of this section for use of the automobile lease valuation
and vehicle cents-per-mile valuation special rules for valuing the use
or availability of the vehicle in the case of an employer-sponsored
vehicle or automobile commuting pool.
(4) Definition of vehicle. For purposes of this paragraph (f), the
term ``vehicle'' means any motorized wheeled vehicle manufactured
primarily for use on public streets, roads, and highways. The term
``vehicle'' includes an automobile as defined in paragraph (d)(1)(ii) of
this section.
(5) Control employee defined--Non-government employer. For purposes
of this paragraph (f), a control employee of a non-government employer
is any employee--
(i) Who is a Board- or shareholder-appointed, confirmed, or elected
officer of the employer whose compensation equals or exceeds $50,000,
(ii) Who is a director of the employer,
(iii) Whose compensation equals or exceeds $100,000, or
(iv) Who owns a one-percent or greater equity, capital, or profits
interest in the employer.
For purposes of determining who is a one-percent owner under paragraph
(f)(5)(iv) of this section, any individual who owns (or is considered as
owning under section 318(a) or principles similar to section 318(a) for
entities other than corporations) one percent or more of the fair market
value of an entity (the ``owned entity'') is considered a one-percent
owner of all entities which would be aggregated with the owned entity
under the rules of section 414 (b), (c), (m), or (o). For purposes of
determining who is an officer or director with respect to an employer
under this paragraph (f)(5), notwithstanding anything in this section to
the contrary, if an entity would be aggregated with other entities under
the rules of section 414 (b), (c), (m), or (o), the officer definition
(but not the compensation requirement) and the director definition apply
to each such separate entity rather tha to the aggregated employer. An
employee who is an officer or a director of an entity (the ``first
entity'') shall be treated as an officer or a director of all entities
aggregated with the first entity under the rules of section 414 (b),
(c), (m), or (o). Instead of applying the control employee definition of
this paragraph (f)(5), an employer may treat all, and only, employees
who are ``highly compensated'' employees (as defined in Sec. 1.132-8(g))
as control employees for purposes of this paragraph (f).
(6) Control employee defined--Government employer. For purposes of
this paragraph (f), a control employee of a government employer is any--
(i) Elected official, or
(ii) Employee whose compensation equals or exceeds the compensation
paid to a Federal Government employee holding a position at Executive
Level V, determined under Chapter 11 of title 2, United States Code, as
adjusted by section 5318 of Title 5 United States Code.
For purposes of this paragraph (f), the term ``government'' includes any
Federal, state or local governmental unit, and any agency or
instrumentality thereof. Instead of applying the control employee
definition of paragraph (f)(6), an employer may treat all and only
employees who are ``highly compensated'' employees (as defined in
Sec. 1.132-8(f)) as control employees for purposes of this paragraph
(f).
(7) ``Compensation'' defined. For purposes of this paragraph (f),
the term ``compensation'' has the same meaning as in section 414(q)(7).
Compensation includes all amounts received from all entities treated as
a single employer under section 414 (b), (c), (m), or (o). Levels of
compensation shall be adjusted at the same time and in the same manner
as provided in section
[[Page 71]]
415(d). The first such adjustment shall be for calendar year 1988.
(g) Non-commercial flight valuation rule--(1) In general. Under the
non-commercial flight valuation rule of this paragraph (g), except as
provided in paragraph (g)(12) of this section, if an employee is
provided with a flight on an employer-provided aircraft, the value of
the flight is calculated using the aircraft valuation formula of
paragraph (g)(5) of this section. For purposes of this paragraph (g),
the value of a flight on an employer-provided aircraft by an individual
who is less than two years old is deemed to be zero. See paragraph
(b)(1) of this section for rules relating to the amount includible in
income when an employee reimburses the employee's employer for all or
part of the fair market value of the benefit provided.
(2) Eligible flights and eligible aircraft. The valuation rule of
this paragraph (g) may be used to value flights on all employer-provided
aircraft, including helicopters. The valuation rule of this paragraph
(g) may be used to value international as well as domestic flights. The
valuation rule of this paragraph (g) may not be used to value a flight
on any commercial aircraft on which air transportation is sold to the
public on a per-seat basis. For a special valuation rule relating to
certain flights on commercial aircraft, see paragraph (h) of this
section.
(3) Definition of a flight--(i) General rule. Except as otherwise
provided in paragraph (g)(3)(iii) of this section (relating to
intermediate stops), for purposes of this paragraph (g), a flight is the
distance (in statute miles, i.e., 5,280 feet per statute mile) between
the place at which the individual boards the aircraft and the place at
which the individual deplanes.
(ii) Valuation of each flight. Under the valuation rule of this
paragraph (g), value is determined separately for each flight. Thus, a
round-trip is comprised of at least two flights. For example, an
employee who takes a personal trip on an employer-provided aircraft from
New York City to Denver, then Denver to Los Angeles, and finally Los
Angeles to New York City has taken three flights and must apply the
aircraft valuation formula separately to each flight. The value of a
flight must be determined on a passenger-by-passenger basis. For
example, if an individual accompanies an employee and the flight taken
by the individual would be taxed to the employee, the employee would be
taxed on the special rule value of the flight by the employee and the
flight by the individual.
(iii) Intermediate stop. If a landing is necessitated by weather
conditions, by an emergency, for purposes of refueling or obtaining
other services relating to the aircraft or for any other purpose
unrelated to the personal purposes of the employee whose flight is being
valued, that landing is an intermediate stop. Additional mileage
attributable to an intermediate stop is not considered when determining
the distance of an employee's flight.
(iv) Examples. The rules of paragraph (g)(3)(iii) of this section
may be illustrated by the following examples:
Example (1). Assume that an employee's trip originates in St. Louis,
Missouri, with Seattle, Washington as its destination, but, because of
weather conditions, the aircraft lands in Denver, Colorado, and the
employee stays in Denver overnight. Assume further that the next day the
aircraft flies to Seattle where the employee deplanes. The employee's
flight is the distance between the airport in St. Louis and the airport
in Seattle.
Example (2). Assume that a trip originates in New York, New York,
with five passengers and that the aircraft makes a stop in Chicago,
Illinois, so that one of the passengers can deplane for a purpose
unrelated to the personal purposes of the other passengers whose flights
are being valued. The aircraft then goes on to Los Angeles, California,
where the other four passengers will deplane. The flight of the
passenger who deplaned in Chicago is the distance between the airport in
New York and the airport in Chicago. The stop in Chicago is disregarded
as an intermediate stop, however, when measuring the flights taken by
each of the other four passengers. Their flights would be the distance
between the airport in New York and the airport in Los Angeles.
(4) Personal and non-personal flights--(i) In general. The valuation
rule of this paragraph (g) applies to personal flights on employer-
provided aircraft. A personal flight is one the value of which is not
excludable under another section of subtitle A of the Internal Revenue
Code of 1986, such as under section 132(d) (relating to a working
[[Page 72]]
condition fringe). However, solely for purposes of paragraphs (g)(4)(ii)
and (g)(4)(iii) of this section, references to personal flights do not
include flights a portion of which would not be excludable from income
by reason of section 274(c).
(ii) Trip primarily for employer's business. If an employee
combines, in one trip, personal and business flights on an employer-
provided aircraft and the employee's trip is primarily for the
employer's business (see Sec. 1.162-2(b)(2)), the employee must include
in income the excess of the value of all the flights that comprise the
trip over the value of the flights that would have been taken had there
been no personal flights but only business flights. For example, assume
that an employee flies on an employer-provided aircraft from Chicago,
Illinois, to Miami, Florida, for the employer's business and that from
Miami the employee flies on the employer-provided aircraft to Orlando,
Florida, for personal purposes and then flies back to Chicago. Assume
further that the primary purpose of the trip is for the employer's
business. The amount includible in income is the excess of the value of
the three flights (Chicago to Miami, Miami to Orlando, and Orlando to
Chicago), over the value of the flights that would have been taken had
there been no personal flights but only business flights (Chicago to
Miami and Miami to Chicago).
(iii) Primarily personal trip. If an employee combines, in one trip,
personal and business flights on an employer-provided aircraft and the
employee's trip is primarily personal (see Sec. 1.162-2(b)(2)), the
amount includible in the employee's income is the value of the personal
flights that would have been taken had there been no business flights
but only personal flights. For example, assume that an employee flies on
an employer-provided aircraft from San Francisco, California, to Los
Angeles, California, for the employer's business and that from Los
Angeles the employee flies on an employer-provided aircraft to Palm
Springs, California, primarily for personal reasons and then flies back
to San Francisco. Assume further that the primary purpose of the trip is
personal. The amount includible in the employee's income is the value of
personal flights that would have been taken had there been no business
flights but only personal flights (San Francisco to Palm Springs and
Palm Springs to San Francisco).
(iv) Application of section 274(c). The value of employer- provided
travel outside the United States away from home may not be excluded from
the employee's gross income as a working condition fringe, by either the
employer or the employee, to the extent not deductible by reason of
section 274(c). The valuation rule of this paragraph (g) applies to that
portion of the value any flight not excludable by reason of section
274(c). Such value is includible in income in addition to the amounts
determined under paragraphs (g)(4)(ii) and (g)(4)(iii) of this section.
(v) Flights by individuals who are not personal guests. If an
individual who is not an employee of the employer providing the aircraft
is on a flight, and the individual is not the personal guest of any
employee of the employer, the flight by the individual is not taxable to
any employee of the employer providing the aircraft. The rule in the
preceding sentence applies where the individual is provided the flight
by the employer for noncompensatory business reasons of the employer.
For example, assume that G, an employee of company Y, accompanies A, an
employee of company X, on company X's aircraft for the purpose of
inspecting land under consideration for purchase by company X from
company Y. The flight by G is not taxable to A. No inference may be
drawn from this paragraph (g)(4)(v) concerning the taxation of a flight
provided to an individual who is neither an employee of the employer nor
a personal guest of any employee of the employer.
(5) Aircraft valuation formula. Under the valuation rule of this
paragraph (g), the value of a flight is determined under the base
aircraft valuation formula (also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the SIFL cents-per-mile rates
applicable for the period during which the flight was taken by the
appropriate aircraft multiple (as provided in paragraph (g)(7) of this
section) and then adding the applicable terminal charge. The SIFL cents-
per-mile rates
[[Page 73]]
in the formula and the terminal charge are calculated by the Department
of Transportation and are revised semi-annually. The base aircraft
valuation formula in effect from January 1, 1989 through June 30, 1989,
is as follows: a terminal charge of $26.48 plus ($.1449 per mile for the
first 500 miles, $.1105 per mile for miles between 501 and 1500, and
$.1062 per mile for miles over 1500). For example, if a flight taken on
January 15, 1989, by a non-control employee on an employer-provided
aircraft with a maximum certified takeoff weight of 26,000 lbs. is 2,000
miles long, the value of the flight determined under this paragraph
(g)(5) is: $100.36 ((.313x(($.1449x500)+($.1105x1,000)+
($.1062x500)))+$26.48). The aircraft valuation formula applies
separately to each flight being valued under this paragraph (g).
Therefore, the number of miles an employee has flown on employer-
provided aircraft flights prior to the flight being valued does not
affect the determination of the value of the flight.
(6) Discretion to provide new formula. The Commissioner may
prescribe a different base aircraft valuation formula by regulation,
Revenue Ruling or Revenue Procedure in the event that the calculation of
the Standard Industry Fare Level is discontinued.
(7) Aircraft multiples--(i) In general. The aircraft multiples are
based on the maximum certified takeoff weight of the aircraft. When
applying the aircraft valuation formula to a flight, the appropriate
aircraft multiple is multiplied by the product of the applicable SIFL
cents-per-mile rates multiplied by the number of miles in the flight and
then the terminal charge is added to the product. For purposes of
applying the aircraft valuation formula described in paragraph (g)(5) of
this section, the aircraft multiples are as follows:
------------------------------------------------------------------------
Aircraft Aircraft
multiple multiple
Maximum certified take-off weight of the for a for a non-
aircraft control control
employee employee
(percent) (percent)
------------------------------------------------------------------------
6,000 lbs. or less............................ 62.5 15.6
6,001-10,000 lbs.............................. 125 23.4
10,001-25,000 lbs............................. 300 31.3
25,001 lbs. or more........................... 400 31.3
------------------------------------------------------------------------
(ii) Flights treated as provided to a control employee. Except as
provided in paragraph (g)(12) of this section, any fIight provided to an
individual whose flight would be taxable to a control employee (as
defined in paragraphs (g) (8) and (9) of this section) as the recipient
shall be valued as if such flight had been provided to that control
employee. For example, assume that the chief executive officer of an
employer, his spouse, and his two children fly on an employer-provided
aircraft for personal purposes. Assume further that the maximum
certified takeoff weight of the aircraft is 12,000 lbs. The amount
includible in the employee's income is 4x((300 percentxthe applicable
SIFL cents-per-mile rates provided in paragraph (g)(5) of this section
multiplied by the number of miles in the flight) plus the applicable
terminal charge).
(8) Control employee defined--Non-government employer--(i)
Definition. For purposes of this paragraph (g), a control employee of a
non-government employer is any employee--
(A) Who is a Board- or shareholder-appointed, confirmed, or elected
officer of the employer, limited to the lesser of--
(1) One percent of all employees (increased to the next highest
integer, if not an integer) or
(2) Ten employees;
(B) Who is among the top one percent most highly-paid employees of
the employer (increased to the next highest integer, if not an integer)
limited to a maximum of 50;
(C) Who owns a five-percent or greater equity, capital, or profits
interest in the employer; or
(D) Who is a director of the employer.
(ii) Special rules for control employee definition--(A) In general.
For purposes of this paragraph (g), any employee who is a family member
(within the meaning of section 267(c)(4)) of a control employee is also
a control employee. For purposes of paragraph (g)(8)(i)(B) of this
section, the term ``employee'' does not include any individual unless
such individual is a common-law employee, partner, or one-percent or
greater shareholder of the employer. Pursuant to this paragraph (g)(8),
an employee may be a control employee under more than one of the
[[Page 74]]
requirements listed in paragraphs (g)(8)(i) (A) through (D) of this
section. For example, an employee may be both an officer under paragraph
(g)(8)(i)(A) of this section and a highly-paid employee under paragraph
(g)(8)(i)(B) of this section. In this case, for purposes of the officer
limitation rule of paragraph (g)(8)(i)(A) of this section and the
highly-paid employee limitation rule of paragraph (g)(8)(i)(B) of this
section, the employee would be counted in applying both limitations. For
purposes of determining the one-percent limitation under paragraphs
(g)(8)(i) (A) and (B) of this section, an employer shall exclude from
consideration employees described in Sec. 1.132-8(b)(3). Instead of
applying the control employee definition of this paragraph (g)(8), an
employer may treat all (and only) employees who are ``highly
compensated'' employees (as defined in Sec. 1.132-8(f)) as control
employees for purposes of this paragraph (g).
(B) Special rules for officers, owners, and highly-paid control
employees. In no event shall an employee whose compensation is less than
$50,000 be a control employee under paragraph (g)(8)(i) (A) or (B) of
this section. For purposes of determining who is a five-percent (or one-
percent) owner under this paragraph (g)(8), any individual who owns (or
is considered as owning under section 318(a) or principles similar to
section 318(a) for entities other than corporations) five percent (or
one-percent) or more of the fair market value of an entity (the ``owned
entity'') is considered a five-percent (or one-percent) owner of all
entities which would be aggregated with the owned entity under the rules
of section 414(b), (c), (m), or (o). For purposes of determining who is
an officer or director with respect to an employer under this paragraph
(g)(8), notwithstanding anything in this section to the contrary, if the
employer would be aggregated with other employers under the rules of
section 414 (b), (c), (m), or (o), the officer definition and the
limitations and the director definition are applied to each such
separate employer rather than to the aggregated employer. An employee
who is an officer or director of one employer (the ``first employer'')
shall not be counted as an officer or a director of any other employer
aggregated with the first employer under the rules of section 414 (b),
(c), or (m). If applicable, the officer limitations rule of paragraph
(g)(8)(i)(A) of this section is applied to employees in descending order
of their compensation. Thus, if an employer has 11 board-appointed
officers and the limit imposed under paragraph (g)(8)(i)(A) of this
section is 10 officers, the employee with the least compensation of
those officers would not be a control employee under paragraph
(g)(8)(i)(A) of this section.
(9) Control employee defined--Government employer. For purposes of
this paragraph (g), a control employee of a government employer is any--
(i) Elected official, or
(ii) Employee whose compensation equals or exceeds the compensation
paid to a Federal Government employee holding a position at Executive
Level V, determined under Chapter 11 of title 2, United States Code, as
adjusted by section 5318 of title 5 United States Code.
For purposes of paragraph (f), the term ``government'' includes any
Federal, state or local governmental unit, and any agency or
instrumentality thereof. lnstead of applying the control employee
definition of paragraph (f)(6), an employer may treat all and only
employees who are ``highly compensated'' employees (as defined in
Sec. 1.132-8(f)) as control employees for purposes of this paragraph
(f).
(10) ``Compensation'' defined. For purposes of this paragraph (g),
the term ``compensation'' has the same meaning as in section 414(q)(7).
Compensation includes all amounts received from all entities treated as
a single employer under section 414 (b), (c), (m), or (o). Levels of
compensation shall be adjusted at the same time and in the same manner
as provided in section 415(d). The first such adjustment was for
calendar year 1988.
(11) Treatment of former employees. For purposes of this paragraph
(g), an employee who was a control employee of the employer (as defined
in this paragraph (g)) at any time after reaching age 55, or within
three years of separation from the service of the employer, is a control
employee with respect to flights taken after separation from the
[[Page 75]]
service of the employer. An individual who is treated as a control
employee under this paragraph (g)(11) is not counted when determining
the limitation of paragraph (g)(8)(i) (A) and (B) of this section. Thus,
the total number of individuals treated as control employees under such
paragraphs may exceed the limitations of such paragraphs to the extent
that this paragraph (g)(11) applies.
(12) Seating capacity rule--(i) In general--(A) General rule. Where
50 percent or more of the regular passenger seating capacity of an
aircraft (as used by the employer) is occupied by individuals whose
flights are primarily for the employer's business (and whose flights are
excludable from income under section 132(d)), the value of a flight on
that aircraft by any employee who is not flying primarily for the
employer's business (or who is flying primarily for the employer's
business but the value of whose flight is not excludable under section
132(d) by reason of section 274(c)) is deemed to be zero. See
Sec. 1.132-5 which limits the working condition fringe exclusion under
section 132(d) to situations where the employee receives the flight in
connection with the performance of services for the employer providing
the aircraft.
(B) Special rules--(1) Definition of ``employee.'' For purposes of
this paragraph (g)(12), the term ``employee'' includes only employees of
the employer, including a partner of a partnership, providing the
aircraft and does not include independent contractors and directors of
the employer. A flight taken by an individual other than an ``employee''
as defined in the preceding sentence is considered a flight taken by an
employee for purposes of this paragraph (g)(12) only if that individual
is treated as an employee pursuant to section 132(f)(1) or that
individual's flight is treated as a flight taken by an employee pursuant
to section 132(f)(2). If--
(i) A flight by an individual is not considered a flight taken by an
employee (as defined in this paragraph (g)(12)(i)),
(ii) The value of that individual's flight is not excludable under
section 132(d), and
(iii) The seating capacity rule of this paragraph (g) (12) otherwise
applies, then the value of the flight provided to such an individual is
the value of a flight provided to a non-control employee pursuant to
paragraph (g)(5) of this section (even if the individual who would be
taxed on the value of the flight is a control employee).
(2) Example. The special rules of paragraph (g)(12)(i)(B)(1) of this
section are illustrated by the following example:
Example. Assume that 60 percent of the regular passenger seating
capacity of an employer's aircraft is occupied by individuals whose
flights are primarily for the employer's business and are excludable
from income under section 132(d). If a control employee, his spouse, and
his dependent child fly on the employer's aircraft for primarily
personal reasons, the value of the three flights is deemed to be zero.
If, however, the control employee's cousin were provided a flight on the
employer's aircraft, the value of the flight taken by the cousin is
determined by applying the aircraft valuation formula of paragraph
(g)(5) of this section (including the terminal charge) and the non-
control employee aircraft multiples of paragraph (g)(7) of this section.
(ii) Application of 50-percent test to multiple flights. The seating
capacity rule of this paragraph (g)(12) must be met both at the time the
individual whose flight is being valued boards the aircraft and at the
time the individual deplanes. For example, assume that employee A boards
an employer-provided aircraft for personal purposes in New York, New
York, and that at that time 80 percent of the regular passenger seating
capacity of the aircraft is occupied by individuals whose flights are
primarily for the employer's business (and whose flights are excludable
from income under section 132(d)) (``the business passengers''). If the
aircraft flies directly to Hartford, Connecticut where all of the
passengers, including A, deplane, the requirements of the seating
capacity rule of this paragraph (g)(12) have been satisfied. If instead,
some of the passengers, including A, remain on the aircraft in Hartford
and the aircraft continues on to Boston, Massachusetts, where they all
deplane, the requirements of the seating capacity rule of this paragraph
(g)(12) will not be satisfied with respect to A's flight from New York
to Boston unless
[[Page 76]]
at least 50 percent of the seats comprising the aircraft's regular
passenger seating capacity were occupied by the business passengers at
the time A deplanes in Boston.
(iii) Regular passenger seating capacity. (A) General rule. Except
as otherwise provided, the regular passenger seating capacity of an
aircraft is the maximum number of seats that have at any time on or
prior to the date of the flight been on the aircraft (while owned or
leased by the employer). Except to the extent excluded pursuant to
paragraph (g)(12)(v) of this section, regular seating capacity includes
all seats which may be occupied by members of the flight crew. It is
irrelevant that, on a particular flight, less than the maximum number of
seats are available for use because, for example, some of the seats are
removed.
(B) Special rules. When determining the maximum number of seats that
have at any time on or prior to the date of the flight been on the
aircraft (while owned or leased by the employer), seats that could not
at any time be legally used during takeoff and have not at any time been
used during takeoff are not counted. As of the date an employer
permanently reduces the seating capacity of an aircraft, the regular
passenger seating capacity is the reduced number of seats on the
aircraft. The previous sentence shall not apply if at any time within 24
months after such reduction any seats are added in the aircraft. Unless
the conditions of this paragraph (g)(12)(iii)(B) are satisfied,
jumpseats and removable seats used solely for purposes of flight crew
training are counted for purposes of the seating capacity rule of this
paragraph (g)(12).
(iv) Examples. The rules of paragraph (g)(12)(iii) of this section
are illustrated by the following examples:
Example (1). Employer A and employer B order the same aircraft,
except that A orders it with 10 seats and B orders it with eight seats.
A always uses its aircraft as a 10-seat aircraft; B always uses its
aircraft as an eight-seat aircraft. The regular passenger seating
capacity of A's aircraft is 10 and of B's aircraft is eight.
Example (2). Assume the same facts as in example (1), except that
whenever A's chief executive officer and spouse use the aircraft eight
seats are removed. Even if substantially all of the use of the aircraft
is by the chief executive officer and spouse, the regular passenger
seating capacity of the aircraft is 10.
Example (3). Assume the same facts as in example (1), except that
whenever more than eight people want to fly in B's aircraft, two extra
seats are added. Even if substantially all of the use of the aircraft
occurs with eight seats, the regular passenger seating capacity of the
aircraft is 10.
Example (4). Employer C purchases an aircraft with 12 seats. Three
months later C remodels the interior of the aircraft and permanently
removes four of the seats. Upon completion of the remodeling, the
regular passenger seating capacity of the aircraft is eight. If,
however, any seats are added within 24 months after the remodeling, the
regular seating capacity of the aircraft is treated as 12 throughout the
entire period.
(v) Seats occupied by flight crew. When determining the regular
passenger seating capacity of an aircraft, any seat occupied by a member
of the flight crew (whether or not such individual is an employee of the
employer providing the aircraft) shall not be counted, unless the
purpose of the flight by such individual is not primarily to serve as a
member of the flight crew. If the seat occupied by a member of the
flight crew is not counted as a passenger seat pursuant to the previous
sentence, such member of the flight crew is disregarded in applying the
50-percent test described in the first sentence of paragraph (g)(12)(i)
of this section. For example, assume that prior to application of this
paragraph (g)(12)(v) the regular passenger seating capacity of an
aircraft is one. Assume further that an employee pilots the aircraft and
that the employee's flight is nor primarily for the employer's business.
If the employee's spouse occupies the other seat for personal purposes,
the seating capacity rule is not met and the value of both flights must
be included in the employee's income. If, however, the employee's flight
were primarily for the employer's business (unrelated to serving as a
member of the flight crew), then the seating capacity rule is met and
the value of the flight for the employee's spouse is deemed to be zero.
If the employee's flight were primarily to serve as a member of the
flight crew, then the seating capacity rule is not met and the value of
a flight by any
[[Page 77]]
passenger for primarily personal reasons is not deemed to be zero.
(13) Erroneous use of the non-commercial flight valuation rule--(i)
Certain errors in the case of a flight by a control employee. If--
(A) The non-commercial flight valuation rule of this paragraph (g)
is applied by an employer or a control employee, as the case may be, on
a return as originally filed or on an amended return on the grounds that
either--
(1) The control employee is not in fact a control employee, or
(2) The aircraft is within a specific weight classification, and
(B) Either position is subsequently determined to be erroneous, the
valuation rule of this paragraph (g) is not available to value the
flight taken by that control employee by the person or persons taking
the erroneous position. With respect to the weight classifications, the
previous sentence does not apply if the position taken is that the
weight of the aircraft is greater than it is subsequently determined to
be. If, with respect to a flight by a control employee, the seating
capacity rule of paragraph (g)(12) of this section is used by an
employer or the control employee, as the case may be, on a return as
originally filed or on an amended return, the valuation rule of this
paragraph (g) is not available to value the flight taken by that control
employee by the person or persons taking the erroneous position.
(ii) Value of flight excluded as a working condition fringe. If
either an employer or an employee, on a return as originally filed or on
an amended return, excludes from the employee's income or wages all or
any part of the value of a flight on the grounds that the flight was
excludable as a working condition fringe under section 132, and that
position is subsequently determined to be erroneous, the valuation rule
of this paragraph (g) is not available to value the flight taken by that
employee by the person or persons taking the erroneous position.
Instead, the general valuation rules of paragraphs (b) (5) and (6) of
this section apply.
(14) Consistency rules--(i) Use by the employer. Except as otherwise
provided in paragraph (g)(13) of this section or Sec. 1.132-5 (m)(4), if
the non-commercial flight valuation rule of this paragraph (g) is used
by an employer to value any flight provided to an employee in a calendar
year, the rule must be used to value all flights provided to all
employees in the calendar year.
(ii) Use by the employee. Except as otherwise provided in paragraph
(g)(13) of this section or Sec. 1.132-5 (m)(4), if the non-commercial
flight valuation rule of this paragraph (g) is used by an employee to
value a flight provided by an employer in a calendar year, the rule must
be used to value all flights provided to the employee by that employer
in the calendar year.
(h) Commercial flight valuation rule--(1) In general. Under the
commercial flight valuation rule of this paragraph (h), the value of a
space-available flight (as defined in paragraph (h) (2) of this section)
on a commercial aircraft is 25 percent of the actual carrier's highest
unrestricted coach fare in effect for the particular flight taken. The
rule of this paragraph (h) is available only to an individual described
in Sec. 1.132-1(b)(1).
(2) Space-available flight. The commercial flight valuation rule of
this paragraph (h) is available to value a space-available flight. The
term ``space-available flight'' means a flight on a commercial aircraft-
-
(i) Which is subject to the same types of restrictions customarily
associated with flying on an employee ``stand-by'' or ``space-
available'' basis, and
(ii) Which meets the definition of a no-additional-cost service
under section 132(b), except that the flight is provided to an
individual other than the employee or an individual treated as the
employee under section 132(f). Thus, a flight is not a space-available
flight if the employer guarantees the employee a seat on the flight or
if the nondiscrimination requirements of section 132(h)(1) and
Sec. 1.132-8 are not satisfied. A flight may be a space-available flight
even if the airline that is the actual carrier is not the employer of
the employee.
(3) Commercial aircraft. If the actual carrier does not offer, in
the ordinary course of its business, air transportation to customers on
a per-seat basis, the commercial flight valuation rule of this paragraph
(h) is not available.
[[Page 78]]
Thus, if, in the ordinary course of its line of business, the employer
only offers air transportation to customers on a charter basis, the
commercial flight valuation rule of this paragraph (h) may not be used
to value a space-available flight on the employer's aircraft. If the
commercial flight valuation rule is not available, the flight may be
valued under the non-commercial flight valuation rule of paragraph (g)
of this section.
(4) Timing of inclusion. The date that the flight is taken is the
relevant date for purposes of applying section 61(a)(1) and this section
to a space-available flight on a commercial aircraft. The date of
purchase or issuance of a pass or ticket is not relevant. Thus, this
section applies to a flight taken on or after January 1, 1989,
regardless of the date on which the pass or ticket for the flight was
purchased or issued.
(5) Consistency rules--(i) Use by employer. If the commercial flight
valuation rule of this paragraph (h) is used by an employer to value any
flight provided in a calendar year, the rule must be used to value all
flights eligible for use of the rule provided in the calendar year.
(ii) Use by employee. If the commercial flight valuation rule of
this paragraph (h) is used by an employee to value a flight provided by
an employer in a calendar year, the rule must be used to value all
flights provided by that employer eligible for use of the rule taken by
such employee in the calendar year.
(i) [Reserved.]
(j) Valuation of meals provided at an employer-operated eating
facility for employees--(1) In general. The valuation rule of this
paragraph (j) may be used to value a meal provided at an employer-
operated eating facility for employees (as defined in Sec. 1.132-7). For
rules relating to an exclusion for the value of meals provided at an
employer-operated eating facility for employees, see section 132(e)(2)
and Sec. 1.132-7.
(2) Valuation formula--(i) In general. The value of all meals
provided at an employer-operated eating facility for employees during a
calendar year (``total meal value'') is 150 percent of the direct
operating costs of the eating facility determined separately with
respect to such eating facility whether or not the direct operating
costs test is applied separately to such eating facility under
Sec. 1.132-7(b)(2). For purposes of this paragraph (j), the definition
of direct operating costs provided in Sec. 1.132-7(b) and the
adjustments specified in Sec. 1.132-7(a)(2) apply. The taxable value of
meals provided at an eating facility may be determined in two ways. The
``individual meal subsidy'' may be treated as the taxable value of a
meal provided at the eating facility (see paragraph (j)(2)(ii) of this
section) to a particular employee. Alternatively, the employer may
allocate the ``total meal subsidy'' among employees (see paragraph
(j)(2)(iii) of this section).
(ii) ``Individual meal subsidy'' defined. The ``individual meal
subsidy'' is determined by multiplying the amount paid by the employee
for a particular meal by a fraction, the numerator of which is the total
meal value and the denominator of which is the gross receipts of the
eating facility for the calendar year and then subtracting the amount
paid by the employee for the meal. The taxable value of meals provided
to a particular employee during a calendar year, therefore, is the sum
of the individual meal subsidies provided to the employee during the
calendar year. This rule is available only if there is a charge for each
meal selection and if each employee is charged the same price for any
given meal selection.
(iii) Allocation of ``total meal subsidy.'' Instead of using the
individual meal subsidy method provided in paragraph (j)(2)(ii) of this
section, the employer may allocate the ``total meal subsidy'' (total
meal value less the gross receipts of the facility) among employees in
any manner reasonable under the circumstances. It will be presumed
reasonable for an employer to allocate the total meal subsidy on a per-
employee basis if the employer has information that would substantiate
to the satisfaction of the Commissioner that each employee was provided
approximately the same number of meals at the facility.
(k) Commuting valuation rule for certain employees--(1) In general.
Under the rule of this paragraph (k), the value of
[[Page 79]]
the commuting use of employer-provided transportation may be determined
under paragraph (k)(3) of this section if the following criteria are met
by the employer and employee with respect to the transportation:
(i) The transportation is provided, solely because of unsafe
conditions, to an employee who would ordinarily walk or use public
transportation for commuting to or from work;
(ii) The employer has established a written policy (e.g., in the
employer's personnel manual) under which the transportation is not
provided for the employee's personal purposes other than for commuting
due to unsafe conditions and the employer's practice in fact corresponds
with the policy;
(iii) The transportation is not used for personal purposes other
than commuting due to unsafe conditions; and
(iv) The employee receiving the employer-provided transportation is
a qualified employee of the employer (as defined in paragraph (k)(6) of
this section).
(2) Trip-by-trip basis. The special valuation rule of this paragraph
(k) applies on a trip-by-trip basis. If an employer and employee fail to
meet the criteria of paragraph (k)(1) of this section with respect to
any trip, the value of the transportation for that trip is not
determined under paragraph (k)(3) of this section and the amount
includible in the employee's income is determined by reference to the
fair market value of the transportation.
(3) Commuting value--(i) $1.50 per one-way commute. If the
requirements of this paragraph (k) are satisfied, the value of the
commuting use of the employer-provided transportation is $1.50 per one-
way commute (i.e., from home to work or from work to home).
(ii) Value per employee. If transportation is provided to more than
one qualified employee at the same time, the amount includible in the
income of each employee is $1.50 per one-way commute.
(4) Definition of employer-provided transportation. For purposes of
this paragraph (k), ``employer-provided transportation'' means
transportation by vehicle (as defined in paragraph (f)(4) of this
section) that is purchased by the employer (or that is purchased by the
employee and reimbursed by the employer) from a party that is not
related to the employer for the purpose of transporting a qualified
employee to or from work. Reimbursements made by an employer to an
employee to cover the cost of purchasing transportation (e.g., hiring
cabs) must be made under a bona fide reimbursement arrangement.
(5) Unsafe conditions. Unsafe conditions exist if a reasonable
person would, under the facts and circumstances, consider it unsafe for
the employee to walk to or from home, or to walk to or use public
transportation at the time of day the employee must commute. One of the
factors indicating whether it is unsafe is the history of crime in the
geographic area surrounding the employee's workplace or residence at the
time of day the employee must commute.
(6) Qualified employee defined--(i) In general. For purposes of this
paragraph (k), a qualified employee is one who meets the following
requirements with respect to the employer:
(A) The employee performs services during the current year, is paid
on an hourly basis, is not claimed under section 213(a)(1) of the Fair
Labor Standards Act of 1938 (as amended), 29 U.S.C. 201-219 (FLSA), to
be exempt from the minimum wage and maximum hour provisions of the FLSA,
and is within a classification with respect to which the employer
actually pays, or has specified in writing that it will pay,
compensation for overtime equal to or exceeding one and one-half times
the regular rate as provided by section 207 of the FLSA; and
(B) The employee does not receive compensation from the employer in
excess of the amount permitted by section 414(q)(1)(C) of the Code.
(ii) ``Compensation'' and ``paid on an hourly basis'' defined. For
purposes of this paragraph (k), ``compensation'' has the same meaning as
in section 414(q)(7). Compensation includes all amounts received from
all entities treated as a single employer under section 414 (b), (c),
(m), or (o). Levels of compensation shall be adjusted at the same time
and in the same manner as provided in section 415(d). If an employee's
compensation is stated on an
[[Page 80]]
annual basis, the employee is treated as ``paid on an hourly basis'' for
purposes of this paragraph (k) as long as the employee is not claimed to
be exempt from the minimum wage and maximum hour provisions of the FLSA
and is paid overtime wages either equal to or exceeding one and one-half
the employee's regular hourly rate of pay.
(iii) FLSA compliance required. An employee will not be considered a
qualified employee for purposes of this paragraph (k), unless the
employer is in compliance with the recordkeeping requirements concerning
that employee's wages, hours, and other conditions and practices of
employment as provided in section 211(c) of the FLSA and 29 CFR part
516.
(iv) Issues arising under the FLSA. If questions arise concerning an
employee's classification under the FLSA, the pronouncements and rulings
of the Administrator of the Wage and Hour Division, Department of Labor
are determinative.
(v) Non-qualified employees. If an employee is not a qualified
employee within the meaning of this paragraph (k)(6), no portion of the
value of the commuting use of employer-provided transportation is
excluded under this paragraph (k).
(7) Examples. This paragraph (k) is illustrated by the following
examples:
Example 1. A and B are word-processing clerks employed by Y, an
accounting firm in a large metropolitan area, and both are qualified
employees under paragraph (k)(6) of this section. The normal working
hours for A and B are from 11:00 p.m. until 7:00 a.m. and public
transportation, the only means of transportation available to A or B,
would be considered unsafe by a reasonable person at the time they are
required to commute from home to work. In response, Y hires a car
service to pick up A and B at their homes each evening for purposes of
transporting them to work. The amount includible in the income of both A
and B is $1.50 for the one-way commute from home to work.
Example 2. Assume the same facts as in Example 1, except that Y also
hires a car service to return A and B to their homes each morning at the
conclusion of their shifts and public transportation would not be
considered unsafe by a reasonable person at the time of day A and B
commute to their homes. The value of the commute from work to home is
includible in the income of both A and B by reference to fair market
value since unsafe conditions do not exist for that trip.
Example 3. C is an associate for Z, a law firm in a metropolitan
area. The normal working hours for C's law firm are from 9 a.m. until 6
p.m., but C's ordinary office hours are from 10 a.m. until 8 p.m. Public
transportation, the only means of transportation available to C at the
time C commutes from work to home during the evening, would be
considered unsafe by a reasonable person. In response, Z hires a car
service to take C home each evening. C does not receive annual
compensation from Z in excess of the amount permitted by section
414(q)(1)(C) of the Code. However, C is treated as an employee exempt
from the provisions of the FLSA and, accordingly, is not paid overtime
wages. Therefore, C is not a qualified employee within the meaning of
paragraph (k)(6) of this section. The value of the commute from work to
home is includible in C's income by reference to fair market value.
(8) Effective date. This paragraph (k) applies to employer-provided
transportation provided to a qualified employee on or after July 1,
1991.
[T.D. 8256, 54 FR 28582, July 6, 1989, as amended by T.D. 8389, 57 FR
1870, Jan. 16, 1992; T.D. 8457, 57 FR 62195, Dec. 30, 1992]
Sec. 1.62-1 Adjusted gross income.
(a)-(b) [Reserved]
(c) Deductions allowable in computing adjusted gross income. The
deductions specified in section 62(a) for purposes of computing adjusted
gross income are--
(1) Deductions set forth in Sec. 1.62-1T(c); and
(2) Deductions allowable under part VI, subchapter B, chapter 1 of
the Internal Revenue Code, (section 161 and following) that consist of
expenses paid or incurred by the taxpayer in connection with the
performance of services as an employee under a reimbursement or other
expense allowance arrangement (as defined in Sec. 1.62-2) with his or
her employer. For the rules pertaining to expenses paid or incurred in
taxable years beginning before January 1, 1989, see Sec. 1.62-1T (c)(2)
and (f) (as contained in 26 CFR part 1 (Secs. 1.61 to 1.169) revised
April 1, 1992).
(d) through (h) [Reserved]
(i) Effective date. Paragraph (c) of this section is effective for
taxable years beginning on or after January 1, 1989.
[T.D. 8451, 57 FR 57668, Dec. 7, 1992; 57 FR 60568, Dec. 21, 1992]
[[Page 81]]
Sec. 1.62-1T Adjusted gross income (temporary).
(a) Basis for determining the amount of certain deductions. The term
``adjusted gross income'' means the gross income computed under section
61 minus such of the deductions allowed by chapter 1 of the Code as are
specified in section 62(a). Adjusted gross income is used as the basis
for determining the following:
(1) The limitation on the amount of miscellaneous itemized
deductions (under section 67).
(2) The limitation on the amount of the deduction for casualty
losses (under section 165(h)(2)),
(3) The limitation on the amount of the deduction for charitable
contributions (under section 170(b)(1)),
(4) The limitation on the amount of the deduction for medical and
dental expenses (under section 213),
(5) The limitation on the amount of the deduction for qualified
retirement contributions for active participants in certain pension
plans (under section 219(g)), and
(6) The phase-out of the exemption from the disallowance of passive
activity losses and credits (under section 469(i)(3)).
(b) Double deduction not permitted. Section 62 (a) merely specifies
which of the deductions provided in chapter 1 of the Code shall be
allowed in computing adjusted gross income. It does not create any new
deductions. The fact that a particular item may be described in more
than one of the paragraphs under section 62(a) does not permit the item
to be deducted twice in computing adjusted gross income or taxable
income.
(c) Deductions allowable in computing adjusted gross income. The
deductions specified in section 62(a) for purposes of computing adjusted
gross income are:
(1) Deductions allowable under chapter 1 of the Code (other than by
part VII (section 211 and folllowing), subchapter B of such chapter)
that are attributable to a trade or business carried on by the taxpayer
not consisting of services performed as an employee;
(2) [Reserved]
(3) For taxable years beginning after December 31, 1986, deductions
allowable under section 162 that consist of expenses paid or incurred by
a qualified performing artist (as defined in section 62(b)) in
connection with the performance by him or her of services in the
performing arts as an employee;
(4) Deductions allowable under part VI as losses from the sale or
exchange of property;
(5) Deductions allowable under part VI, section 212, or section 611
that are attributable to property held for the production of rents or
royalties;
(6) Deductions for depreciation or depletion allowable under
sections 167 or 611 to a life tenant of property or to an income
beneficiary of property held in trust or to an heir, legatee, or devisee
of an estate;
(7) Deductions allowed by section 404 for contributions on behalf of
a self-employed individual;
(8) Deductions allowed by section 219 for contributions to an
individual retirement account described in section 408(a), or for an
individual retirement annuity described in section 408(b);
(9) Deductions allowed by section 402(e)(3) with respect to a lump-
sum distribution;
(10) For taxable years beginning after December 31, 1972, deductions
allowed by section 165 for losses incurred in any transaction entered
into for profit though not connected with a trade or business, to the
extent that such losses include amounts forfeited to a bank, mutual
savings bank, savings and loan association, building and loan
association, cooperative bank or homestead association as a penalty for
premature withdrawal of funds from a time savings account, certificate
of deposit, or similar class of deposit;
(11) For taxable years beginning after December 31, 1976, deductions
for alimony and separate maintenance payments allowed by section 215;
(12) Deductions allowed by section 194 for the amortization of
reforestation expenditures; and
(13) Deductions allowed by section 165 for the repayment (made in a
taxable year beginning after December 28, 1980) to a trust described in
paragraph (9) or (17) of section 501(c) of supplemental unemployment
compensation benefits received from such trust if such repayment is
required because of the receipt of trade readjustment allowances under
section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).
[[Page 82]]
(d) Expenses directly related to a trade or business. For the
purpose of the deductions specified in section 62, the performance of
personal services as an employee does not constitute the carrying on of
a trade or business, except as otherwise expressly provided. The
practice of a profession, not as an employee, is considered the conduct
of a trade or business within the meaning of such section. To be
deductible for the purposes of determining adjusted gross income,
expenses must be those directly, and not those merely remotely,
connected with the conduct of a trade or business. For example, taxes
are deductible in arriving at adjusted gross income only if they
constitute expenditures directly attributable to a trade or business or
to property from which rents or royalties are derived. Thus, property
taxes paid or incurred on real property used in a trade or business are
deductible, but state taxes on net income are not deductible even though
the taxpayer's income is derived from the conduct of a trade or
business.
(e) Reimbursed and unreimbursed employee expenses--(1) In general.
Expenses paid or incurred by an employee that are deductible from gross
income under part VI in computing taxable income (determined without
regard to section 67) and for which the employee is reimbursed by the
employer, its agent, or third party (for whom the employee performs a
benefit as an employee of the employer) under an express agreement for
reimbursement or pursuant to an express expense allowance arrangement
may be deducted from gross income in computing adjusted gross income.
Except as provided in paragraphs (e)(2) and (e)(4) of this section, for
taxable years beginning after December 31, 1986, if the amount of a
reimbursement made by an employer, its agent, or third party to an
employee is less than the total amount of the business expenses paid or
incurred by the employee, the determination of to which of the
employee's business expenses the reimbursement applies and the amount of
each expense that is covered by the reimbursement is made on the basis
of all of the facts and circumstances of the particular case.
(2) Facts and circumstances unclear on business expenses for meals
and entertainment. If--
(i) The facts and circumstances do not make clear--
(A) That a reimbursement does not apply to business expenses for
meals or entertainment, or
(B) The amount of business expenses for meals or entertainment that
is covered by the reimbursement, and
(ii) The employee pays or incurs business expenses for meals or
entertainment,
the amount of the reimbursement that applies to such expenses (or
portion thereof with respect to which the facts and circumstances are
unclear) shall be determined by multiplying the amount of the employee's
business expenses for meals and entertainment (or portion thereof with
respect to which the facts and circumstances are unclear) by a fraction,
the numerator of which is the total amount of the reimbursement (or
portion thereof with respect to which the facts and circumstances are
unclear) and the denominator of which is the aggregate amount of all the
business expenses of the employee (or portion thereof with respect to
which the facts and circumstances are unclear).
(3) Deductibility of unreimbursed expenses. The amount of expenses
that is determined not to be reimbursed pursuant to paragraph (e) (1) or
(2) of this section is deductible from adjusted gross income in
determining the employee's taxable income subject to the limitations
applicable to such expenses (e.g., the 2-percent floor of section 67 and
the 80-percent limitation on meal and entertainment expenses provided
for in section 274(n)).
(4) Unreimbursed expenses of State legislators. For taxable years
beginning after December 31, 1986, any portion of the amount allowed as
a deduction to State legislators pursuant to section 162(h)1)(B) that is
not reimbursed by the State or a third party shall be allocated between
lodging and meals in the same ratio as the amounts allowable for lodging
and meals under the Federal per diem applicable to the legislator's
State capital at the end of the legislator's taxable year (see Appendix
1-A of the Federal Travel Regulations (FTR), which as of March 28, 1988,
are
[[Page 83]]
contained in GSA Bulletin FPMR A-40, Supplement 20). For purposes of
this paragraph (e)(4), the amount allowable for meals under the Federal
per diem shall be the amount of the Federal per diem allowable for meals
and incidental expenses reduced by $2 per legislative day (or other
amount allocated to incidental expenses in 1-7.5(a)(2) of the FTR). The
unreimbursed portion of each type of expense is deductible from adjusted
gross income in determining the State legislator's taxable income
subject to the limitations applicable to such expenses. For example, the
unreimbursed portion allocable to meals shall be reduced by 20 percent
pursuant to section 274(n) before being subjected to the 2-percent floor
of section 67 for purposes of computing the taxable income of a State
legislator. See Sec. 1.67-1T(a)(2).
(5) Expenses paid directly by an employer, its agent, or third
party. In the case of an employer, its agent, or a third party who
provides property or services to an employee or who pays an employee's
expenses directly instead of reimbursing the employee, see section 132
and the regulations thereunder for the income tax treatment of such
expenses.
(6) Examples. The provisions of this paragraph (e) may be
illustrated by the following examples:
Example (1). During 1987, A, an employee, while on business trips
away from home pays $300 for travel fares, $200 for lodging and $100 for
meals. In addition, A pays $50 for business meals in the area of his
place of employment (``local meals''), $250 for continuing education
courses, and $100 for business-related entertainment (other than meals).
The total amount of the reimbursements received by A for his employee
expenses from his employer is $750, and it is assumed that A's expenses
meet the deductibility requirements of sections 162 and 274. A includes
the amount of the reimbursement in his gross income. A's employer
designates the reimbursement to cover in full A's expenses for travel
fares, lodging, and meals while away from home, local meals, and
entertainment, and no facts or circumstances indicate a contrary
intention of the employer. Because the facts and circumstances make
clear the amount of A's business expenses for meals and entertainment
that is covered by the reimbursement, the reimbursement will be
allocated to these expenses. In determining his adjusted gross income
under section 62, A may deduct the full amount of the reimbursement for
travel fares, lodging, and meals while away from home, local meals, and
entertainment. In determining his taxable income under section 63, A may
deduct his expenses for continuing education courses to the extent
allowable by sections 67 and 162.
Example (2). Assume the facts are the same as in example (1) except
that the facts and circumstances make clear that the reimbursement
covers all types of deductible expenses but they do not make clear the
amount of each type of expense that is covered by the reimbursement. The
amount of the reimbursement that is allocated to A's business expenses
for meals and entertainment is $187.50. This amount is determined by
multiplying the total amount of A's business expenses for meals and
entertainment ($250) by the ratio of A's total reimbursement to A's
total business expenses ($750/$1,000). The remaining amount of the
reimbursement, $562.50 ($750-$187.50), is allocated to A's business
expenses other than meal and entertainment expenses. Therefore, in
determining his adjusted gross income under section 62, A may deduct
$750 for reimbursed business expenses (including meals and
entertainment). In determining his taxable income under section 63, A
may deduct (subject to the limitations and conditions of sections 67,
162, and 274) the unreimbursed portion of his expenses for meals and
entertainment ($62.50 ($250-$187.50), and other employee business
expenses ($187.50 ($750-$562.50)).
Example (3). Assume the facts are the same as in example (1) except
that the amount of the reimbursement is $500. Assume further that the
facts and circumstances make clear that the reimbursement covers $100 of
expenses for meals and that the remaining $400 of the reimbursement
covers all types of deductible expenses (including any expenses for
meals in excess of the $100 already designated) other than expenses for
entertainment. The amount of the reimbursement that is allocated to A's
business expenses for meals and entertainment is $125. This amount is
equal to the sum of the amount of the reimbursement that clearly applies
to meals ($100) and the amount of the reimbursement with respect to
which the facts are unclear that is allocated to meals ($25). The latter
amount is determined by multiplying the total amount of A's business
expenses for meals and entertainment with respect to which the facts are
unclear ($50) by the ratio of A's total reimbursement with respect to
which the facts are unclear to A's total business expenses with respect
to which the facts are unclear ($400/$800). The remaining amount of the
reimbursement, $375 ($500-$125) is allocated to A's business expenses
other than meals and entertainment. Therefore, in determining his
adjusted gross income under section 62, A may deduct
[[Page 84]]
$500 for reimbursed business expenses (including meals). In determining
his taxable income under section 63, A may deduct (subject to the
limitations and conditions of sections 67, 162, and 274) the
unreimbursed portion of his expenses for meals ($25 ($150-$125)),
entertainment ($100), and other employee business expenses ($375 ($750-
$375)).
Example (4). During 1987 B, a research scientist, is employed by
Corporation X. B gives a speech before members of Association Y, a
professional organization of scientists, describing her most recent
research findings. Pursuant to a reimbursement arrangement, Y reimburses
B for the full amount of her travel fares to the site of the speech and
for the full amount of her expenses for lodging and meals while there. B
includes the amount of the reimbursement in her gross income. B may
deduct the full amount of her travel expenses pursuant to section
62(a)(2)(A) in computing her adjusted gross income.
(f) [Reserved]
(g) Moving expenses. For taxable years beginning after December 31,
1986, a taxpayer described in section 217(a) shall not take into account
the deduction described in section 217 relating to moving expenses in
computing adjusted gross income under section 62 even if the taxpayer is
reimbursed for his or her moving expenses. Such a taxpayer shall include
the amount of any reimbursement for moving expenses in income pursuant
to section 82. The deduction described in section 217 shall be taken
into account in computing the taxable income of the taxpayer under
section 63. Pursuant to section 67(b)(6), the 2-percent floor described
in section 67(a) does not apply to moving expenses.
(h) Cross-reference. See 26 CFR 1.62-1 (Rev. as of April 1, 1986)
with respect to pre-1987 deductions for travel, meal, lodging,
transportation, and other trade or business expenses of an employee,
reimbursed expenses of an employee, expenses of an outside salesperson,
long-term capital gains, contributions described in section 405(c) to a
bond purchase plan on behalf of a self-employed individual, moving
expenses, amounts not received as benefits pursuant to section
1379(b)(3), and retirement bonds described in section 409 (allowed by
section 219).
[T.D. 8189, 53 FR 9873, Mar. 28, 1988, as amended by T.D. 8276, 54 FR
51024, Dec. 12, 1989; T.D. 8324, 55 FR 51691, Dec. 17, 1990; T.D. 8451,
57 FR 57668, Dec. 7, 1992]
Sec. 1.62-2 Reimbursements and other expense allowance arrangements.
(a) Table of contents. The contents of this section are as follows:
(a) Table of contents.
(b) Scope.
(c) Reimbursement or other expense allowance arrangement.
(1) Defined.
(2) Accountable plans.
(i) In general.
(ii) Special rule for failure to return excess.
(3) Nonaccountable plans.
(i) In general.
(ii) Special rule for failure to return excess.
(4) Treatment of payments under accountable plans.
(5) Treatment of payments under nonaccountable plans.
(d) Business connection.
(1) In general.
(2) Other bona fide expenses.
(3) Reimbursement requirement.
(i) In general.
(ii) Per diem allowances.
(e) Substantiation.
(1) In general.
(2) Expenses governed by section 274(d).
(3) Expenses not governed by section 274(d).
(f) Returning amounts in excess of expenses.
(1) In general.
(2) Per diem or mileage allowances.
(g) Reasonable period.
(1) In general.
(2) Safe harbors.
(i) Fixed date method.
(ii) Periodic payment method.
(3) Pattern of overreimbursements.
(h) Withholding and payment of employment taxes.
(1) When excluded from wages.
(2) When included in wages.
(i) Accountable plans.
(A) General rule.
(B) Per diem or mileage allowances.
(1) In general.
(2) Reimbursements.
(3) Advances.
(4) Special rules.
(ii) Nonaccountable plans.
(i) Application.
(j) Examples.
(k) Anti-abuse provision.
(l) Cross references.
(m) Effective dates.
[[Page 85]]
(b) Scope. For purposes of determining ``adjusted gross income,''
section 62(a)(2)(A) allows an employee a deduction for expenses allowed
by part VI (section 161 and following), subchapter B, chapter 1 of the
Code, paid by the employee, in connection with the performance of
services as an employee of the employer, under a reimbursement or other
expense allowance arrangement with a payor (the employer, its agent, or
a third party). Section 62(c) provides that an arrangement will not be
treated as a reimbursement or other expense allowance arrangement for
purposes of section 62(a)(2)(A) if--
(1) Such arrangement does not require the employee to substantiate
the expenses covered by the arrangement to the payor, or
(2) Such arrangement provides the employee the right to retain any
amount in excess of the substantiated expenses covered under the
arrangement.
This section prescribes rules relating to the requirements of section
62(c).
(c) Reimbursement or other expense allowance arrangement--(1)
Defined. For purposes of Secs. 1.62-1, 1.62-1T, and 1.62-2, the phrase
``reimbursement or other expense allowance arrangement'' means an
arrangement that meets the requirements of paragraphs (d) (business
connection, (e) (substantiation), and (f) (returning amounts in excess
of expenses) of this section. A payor may have more than one arrangement
with respect to a particular employee, depending on the facts and
circumstances. See paragraph (d)(2) of this section (payor treated as
having two arrangements under certain circumstances).
(2) Accountable plans--(i) In general. Except as provided in
paragraph (c)(2)(ii) of this section, if an arrangement meets the
requirements of paragraphs (d), (e), and (f) of this section, all
amounts paid under the arrangement are treated as paid under an
``accountable plan.''
(ii) Special rule for failure to return excess. If an arrangement
meets the requirements of paragraphs (d), (e), and (f) of this section,
but the employee fails to return, within a reasonable period of time,
any amount in excess of the amount of the expenses substantiated in
accordance with paragraph (e) of this section, only the amounts paid
under the arrangement that are not in excess of the substantiated
expenses are treated as paid under an accountable plan.
(3) Nonaccountable plans--(i) In general. If an arrangement does not
satisfy one or more of the requirements of paragraphs (d), (e), or (f)
of this section, all amounts paid under the arrangement are treated as
paid under a ``nonaccountable plan.'' If a payor provides a
nonaccountable plan, an employee who receives payments under the plan
cannot compel the payor to treat the payments as paid under an
accountable plan by voluntarily substantiating the expenses and
returning any excess to the payor.
(ii) Special rule for failure to return excess. If an arrangement
meets the requirements of paragraphs (d), (e), and (f) of this section,
but the employee fails to return, within a reasonable period of time,
any amount in excess of the amount of the expenses substantiated in
accordance with paragraph (e) of this section, the amounts paid under
the arrangement that are in excess of the substantiated expenses are
treated as paid under a nonaccountable plan.
(4) Treatment of payments under accountable plans. Amounts treated
as paid under an accountable plan are excluded from the employee's gross
income, are not reported as wages or other compensation on the
employee's Form W-2, and are exempt from the withholding and payment of
employment taxes (Federal Insurance Contributions Act (FICA), Federal
Unemployment Tax Act (FUTA), Railroad Retirement Tax Act (RRTA),
Railroad Unemployment Repayment Tax (RURT), and income tax.) See
paragraph (l) of this section for cross references.
(5) Treatment of payments under nonaccountable plans. Amounts
treated as paid under a nonaccountable plan are included in the
employee's gross income, must be reported as wages or other compensation
on the employee's Form W-2, and are subject to withholding and payment
of employment taxes (FICA, FUTA, RRTA, RURT, and income tax). See
paragraph (h) of this
[[Page 86]]
section. Expenses attributable to amounts included in the employee's
gross income may be deducted, provided the employee can substantiate the
full amount of his or her expenses (i.e., the amount of the expenses, if
any, the reimbursement for which is treated as paid under an accountable
plan as well as those for which the employee is claiming the deduction)
in accordance with Secs. 1.274-5T and 1.274(d)-1 or Sec. 1.162-17, but
only as a miscellaneous itemized deduction subject to the limitations
applicable to such expenses (e.g., the 80-percent limitation on meal and
entertainment expenses provided in section 274(n) and the 2-percent
floor provided in section 67).
(d) Business connection--(1) In general. Except as provided in
paragraphs (d)(2) and (d)(3) of this section, an arrangement meets the
requirements of this paragraph (d) if it provides advances, allowances
(including per diem allowances, allowances only for meals and incidental
expenses, and mileage allowances), or reimbursements only for business
expenses that are allowable as deductions by part VI (section 161 and
the following), subchapter B, chapter 1 of the Code, and that are paid
or incurred by the employee in connection with the performance of
services as an employee of the employer. The payment may be actually
received from the employer, its agent, or a third party for whom the
employee performs a service as an employee of the employer, and may
include amounts charged directly or indirectly to the payor through
credit card systems or otherwise. In addition, if both wages and the
reimbursement or other expense allowance are combined in a single
payment, the reimbursement or other expense allowance must be identified
either by making a separate payment or by specifically identifying the
amount of the reimbursement or other expense allowance.
(2) Other bona fide expenses. If an arrangement provides advances,
allowances, or reimbursements for business expenses described in
paragraph (d)(1) of this section (i.e., deductible employee business
expenses) and for other bona fide expenses related to the employer's
business (e.g., travel that is not away from home) that are not
deductible under part VI (section 161 and the following), subchapter B,
chapter 1 of the Code, the payor is treated as maintaining two
arrangements. The portion of the arrangement that provides payments for
the deductible employee business expenses is treated as one arrangement
that satisfies this paragraph (d). The portion of the arrangement that
provides payments for the nondeductible employee expenses is treated as
a second arrangement that does not satisfy this paragraph (d) and all
amounts paid under this second arrangement will be treated as paid under
a nonaccountable plan. See paragraphs (c)(5) and (h) of this section.
(3) Reimbursement requirement--(i) In general. If a payor arranges
to pay an amount to an employee regardless of whether the employee
incurs (or is reasonably expected to incur) business expenses of a type
described in paragraph (d)(1) or (d)(2) of this section, the arrangement
does not satisfy this paragraph (d) and all amounts paid under the
arrangement are treated as paid under a nonaccountable plan. See
paragraphs (c)(5) and (h) of this section.
(ii) Per diem allowances. An arrangement providing a per diem
allowance for travel expenses of a type described in paragraph (d)(1) or
(d)(2) of this section that is computed on a basis similar to that used
in computing the employee's wages or other compensation (e.g., the
number of hours worked, miles traveled, or pieces produced) meets the
requirements of this paragraph (d) only if, on December 12, 1989, the
per diem allowance was identified by the payor either by making a
separate payment or by specifically identifying the amount of the per
diem allowance, or a per diem allowance computed on that basis was
commonly used in the industry in which the employee is employed. See
section 274(d) and Sec. 1.274(d)-1. A per diem allowance described in
this paragraph (d)(3)(ii) may be adjusted in a manner that reasonably
reflects actual increases in employee business expenses occurring after
December 12, 1989.
(e) Substantiation--(1) In general. An arrangement meets the
requirements of this paragraph (e) if it requires each business expense
to be substantiated to
[[Page 87]]
the payor in accordance with paragraph (e)(2) or (e)(3) of this section,
whichever is applicable, within a reasonable period of time. See
Sec. 1.274-5T or Sec. 1.162-17.
(2) Expenses governed by section 274(d). An arrangement that
reimburses travel, entertainment, use of a passenger automobile or other
listed property, or other business expenses governed by section 274(d)
meets the requirements of this paragraph (e)(2) if information
sufficient to satisfy the substantiation requirements of section 274(d)
and the regulations thereunder is submitted to the payor. See
Sec. 1.274-5. Under section 274(d), information sufficient to
substantiate the requisite elements of each expenditure or use must be
submitted to the payor. For example, with respect to travel away from
home, Sec. 1.274-5(b)(2) requires that information sufficient to
substantiate the amount, time, place, and business purpose of the
expense must be submitted to the payor. Similarly, with respect to use
of a passenger automobile or other listed property, Sec. 1.274-5(b)(6)
requires that information sufficient to substantiate the amount, time,
use, and business purpose of the expense must be submitted to the payor.
See Sec. 1.274-5(g), however, which grants the Commissioner authority to
prescribe rules permitting the amount of certain expenses to be deemed
substantiated to the payor (in lieu of substantiating the actual amount
of such expenses) by means of per diem or mileage rates for travel away
from home or transportation expenses. See also Sec. 1.274-5(j)(1), which
grants the Commissioner the authority to establish a method under which
a taxpayer may use a specified amount for meals while traveling away
from home in lieu of substantiating the actual cost of meals, and
Sec. 1.274-5(j)(2), which grants the Commissioner the authority to
establish a method under which a taxpayer may use mileage rates to
determine the amount of the ordinary and necessary expenses of using a
vehicle for local transportation and transportation to, from, and at the
destination while traveling away from home in lieu of substantiating the
actual costs. Substantiation of the amount of a business expense in
accordance with rules prescribed pursuant to the authority granted by
Sec. 1.274-5(g) or (j) will be treated as substantiation of the amount
of such expense for purposes of this section.
(3) Expenses not governed by section 274(d). An arrangement that
reimburses business expenses not governed by section 274(d) meets the
requirements of this paragraph (e)(3) if information is submitted to the
payor sufficient to enable the payor to identify the specific nature of
each expense and to conclude that the expense is attributable to the
payor's business activities. Therefore, each of the elements of an
expenditure or use must be substantiated to the payor. It is not
sufficient if an employee merely aggregates expenses into broad
categories (such as ``travel'') or reports individual expenses through
the use of vague, nondescriptive terms (such as ``miscellaneous business
expenses''). See Sec. 1.162-17(b).
(f) Returning amounts in excess of expenses--(1) In general. Except
as provided in paragraph (f)(2) of this section, an arrangement meets
the requirements of this paragraph (f) if it requires the employee to
return to the payor within a reasonable period of time may amount paid
under the arrangement in excess of the expenses substantiated in
accordance with paragraph (e) of this section. The determination of
whether an arrangement requires an employee to return amounts in excess
of substantiated expenses will depend on the facts and circumstances. An
arrangement whereby money is advanced to an employee to defray expenses
will be treated as satisfying the requirements of this paragraph (f)
only if the amount of money advanced is reasonably calculated not to
exceed the amount of anticipated expenditures, the advance of money is
made on a day within a reasonable period of the day that the anticipated
expenditures are paid or incurred, and any amounts in excess of the
expenses substantiated in accordance with paragraph (e) of this section
are required to be returned to the payor within a reasonable period of
time after the advance is received.
(2) Per diem or mileage allowances. The Commissioner may, in his
discretion, prescribe rules in pronouncements of
[[Page 88]]
general applicability under which a reimbursement or other expense
allowance arrangement that provides per diem allowances providing for
ordinary and necessary expenses of traveling away from home (exclusive
of transportation costs to and from destination) or mileage allowances
providing for ordinary and necessary expenses of local travel and
tranportation while traveling away from home will be treated as
satisfying the requirements of this paragraph (f), even though the
arrangement does not require the employee to return the portion of such
an allowance that relates to the days or miles of travel substantiated
and that exceeds the amount of the employee's expenses deemed
substantiated pursuant to rules prescribed under section 274(d),
provided the allowance is paid at a rate for each day or mile of travel
that is reasonably calculated not to exceed the amount of the employee's
expenses or anticipated expenses and the employee is required to return
to the payor within a reasonable period of time any portion of such
allowance which relates to days or miles of travel not substantiated in
accordance with paragraph (e) of this section.
(g) Reasonable period--(1) In general. The determination of a
reasonable period of time will depend on the facts and circumstances.
(2) Safe harbors--(i) Fixed date method. An advance made within 30
days of when an expense is paid or incurred, an expense substantiated to
the payor within 60 days after it is paid or incurred, or an amount
returned to the payor within 120 days after an expense is paid or
incurred will be treated as having occurred within a reasonable period
of time.
(ii) Periodic statement method. If a payor provides employees with
periodic statements (no less frequently than quarterly) stating the
amount, if any, paid under the arrangement in excess of the expenses the
employee has substantiated in accordance with paragraph (e) of this
section, and requesting the employee to substantiate any additional
business expenses that have not yet been substantiated (whether or not
such expenses relate to the expenses with respect to which the original
advance was paid) and/or to return any amounts remaining unsubstantiated
within 120 days of the statement, an expense substantiated or an amount
returned within that period will be treated as being substantiated or
returned within a reasonable period of time.
(3) Pattern of overreimbursements. If, under a reimbursement or
other expense allowance arrangement, a payor has a plan or practice to
provide amounts to employees in excess of expenses substantiated in
accordance with paragraph (e) of this section and to avoid reporting and
withholding on such amounts, the payor may not use either of the safe
harbors provided in paragraph (g)(2) of this section for any years
during which such plan or practice exists.
(h) Withholding and payment of employment taxes--(1) When excluded
from wages. If an arrangement meets the requirements of paragraphs (d),
(e), and (f) of this section, the amounts paid under the arrangement
that are not in excess of the expenses substantiated in accordance with
paragraph (e) of this section (i.e., the amounts treated as paid under
an accountable plan) are not wages and are not subject to withholding
and payment of employment taxes. If an arrangement provides advances,
allowances, or reimbursements for meal and entertainment expenses and a
portion of the payment is treated as paid under a nonaccountable plan
under paragraph (d)(2) of this section due solely to section 274(n),
then notwithstanding paragraph (h)(2)(ii) of this section, these
nondeductible amounts are neither treated as gross income nor subject to
withholding and payment of employment taxes.
(2) When included in wages--(i) Accountable plans--(A) General rule.
Except as provided in paragraph (h)(2)(i)(B) of this section, if the
expenses covered under an arrangement that meets the requirements of
paragraphs (d), (e), and (f) of this section are not substantiated to
the payor in accordance with paragraph (e) of this section within a
reasonable period of time or if any amounts in excess of the
substantiated expenses are not returned to the payor in accordance with
paragraph (f) of this section within a reasonable period of time, the
amount
[[Page 89]]
which is treated as paid under a nonaccountable plan under paragraph
(c)(3)(ii) of this section is subject to withholding and payment of
employment taxes no later than the first payroll period following the
end of the reasonable period. A payor may treat any amount not
substantiated or returned within the periods specified in paragraph
(g)(2) of this section as not substantiated or returned within a
reasonable period of time.
(B) Per diem or mileage allowances--(1) In general. If a payor pays
a per diem or mileage allowance under an arrangement that meets the
requirements of the paragraphs (d), (e), and (f) of this section, the
portion, if any, of the allowance paid that relates to days or miles of
travel substantiated in accordance with paragraph (e) of this section
and that exceeds the amount of the employee's expenses deemed
substantiated for such travel pursuant to rules prescribed under section
274(d) and Sec. 1.274(d)-1 or Sec. 1.274-5T(j) is treated as paid under
a nonaccountable plan. See paragraph (c)(3)(ii) of this section. Because
the employee is not required to return this excess portion, the
reasonable period of time provisions of paragraph (g) of this section
(relating to the return of excess amounts) do not apply to this excess
portion.
(2) Reimbursements. Except as provided in paragraph (h)(2)(i)(B)(4)
of this section, in the case of a per diem or mileage allowance paid as
a reimbursement at a rate for each day or mile of travel that exceeds
the amounts of the employee's expenses deemed substantiated for a day or
mile of travel, the excess portion described in paragraph (h)(2)(i) of
this section is subject to withholding and payment of employment taxes
in the payroll period in which the payor reimburses the expenses for the
days or miles of travel substantiated in accordance with paragraph (e)
of this section.
(3) Advances. Except as provided in paragraph (h)(2)(i)(B)(4) of
this section, in the case of a per diem or mileage allowance paid as an
advance at a rate for each day or mile of travel that exceeds the amount
of the employee's expenses deemed substantiated for a day or mile of
travel, the excess portion described in paragraph (h)(2)(i) of this
section is subject to withholding and payment of employment taxes no
later than the first payroll period following the payroll period in
which the expenses with respect to which the advance was paid (i.e., the
days or miles of travel) are substantiated in accordance with paragraph
(e) of this section. The expenses with respect to which the advance was
paid must be substantiated within a reasonable period of time. See
paragraph (g) of this section.
(4) Special rules. The Commissioner may, in his discretion,
prescribe special rules in pronouncements of general applicability
regarding the timing of withholding and payment of employment taxes on
per diem and mileage allowances.
(ii) Nonaccountable plans. If an arrangement does not satisfy one or
more of the requirements of paragraphs (d), (e), or (f) of this section,
all amounts paid under the arrangement are wages and are subject to
withholding and payment of employment taxes when paid.
(i) Application. The requirements of paragraphs (d) (business
connection), (e) (substantiation), and (f) (returning amounts in excess
of expenses) of this section will be applied on an employee-by-employee
basis. Thus, for example, the failure by one employee to substantiate
expenses under an arrangement in accordance with paragraph (e) of this
section will not cause amounts paid to other employees to be treated as
paid under a nonaccountable plan.
(j) Examples. The rules contained in this section may be illustrated
by the following examples:
Example(1). Reimbursement requirement. Employer S pays its engineers
$200 a day. On those days that an engineer travels away from home on
business for Employer S, Employer S designates $50 of the $200 as paid
to reimburse the engineer's travel expenses. Because Employer S would
pay an engineer $200 a day regardless of whether the engineer was
traveling away from home, the arrangement does not satisfy the
reimbursement requirement of paragraph (d)(3)(i) of this section. Thus,
no part of the $50 Employer S designated as a reimbursement is treated
as paid under an accountable plan. Rather, all payments under the
arrangement are treated as paid under a nonaccountable plan. Employer S
must report the entire $200 as wages or other compensation on the
employees'
[[Page 90]]
Forms W-2 and must withhold and pay employment taxes on the entire $200
when paid.
Example (2). Reimbursement requirement, multiple arrangements.
Airline T pays all its employees a salary. Airline T also pays an
allowance under an arrangement that otherwise meets the requirements of
paragraphs (d), (e), and (f) of this section to its pilots and flight
attendants who travel away from their home base airports, whether or not
they are ``away from home.'' Because the allowance is paid only to those
employees who incur (or are reasonably expected to incur) expenses of a
type described in paragraph (d)(1) or (d)(2) of this section, the
arrangement satisfies the reimbursement requirement of paragraph
(d)(3)(i) of this section. Under paragraph (d)(2) of this section,
Airline T is treated as maintaining two arrangements. The portion of the
arrangement providing the allowances for away from home travel is
treated as an accountable plan. The portion of the arrangement providing
the allowances for non-away from home travel is treated as a
nonaccountable plan. Airline T must report the non-away from home
allowances as wages or other compensation on the employees' Forms W-2
and must withhold and pay employment taxes on these payments when paid.
Example (3). Reimbursement requirement. Corporation R pays all its
salespersons a salary. Corporation R also pays a travel allowance under
an arrangement that otherwise meets the requirements of paragraphs (d),
(e), and (f) of this section. This allowance is paid to all
salespersons, including salespersons that Corporation R knows, or has
reason to know, do not travel away from their offices on Corporation R
business and would not be reasonably expected to incur travel expenses.
Because the allowance is not paid only to those employees who incur (or
are reasonably expected to incur) expenses of a type described in
paragraph (d)(1) or (d)(2) of this section, the arrangement does not
satisfy the reimbursement requirement of paragraph (d)(3)(i) of this
section. Thus, no part of the allowance Corporation R designated as a
reimbursement is treated as paid under an accountable plan. Rather, all
payments under the arrangement are treated as paid under a
nonaccountable plan. Corporation R must report all payments under the
arrangement as wages or other compensation on the employees' Forms W-2
and must withhold and pay employment taxes on the payments when paid.
Example (4). Separate arrangement, miscellaneous expenses. Under an
arrangement that meets the requirements of paragraphs (d), (e), and (f)
of this section, County U reimburses its employees for lodging and meal
expenses incurred when they travel away from home on County U business.
For its own convenience, County U also separately pays certain of its
employees a $25 monthly allowance to cover the cost of small
miscellaneous office expenses. County U does not require its employees
to substantiate these miscellaneous expenses and does not require them
to return the amounts by which the monthly allowance exceeds the
miscellaneous expenses. The monthly allowance arrangement is a
nonaccountable plan. County U must report the monthly allowances as
wages or other compensation on the employees' Forms W-2 and must
withhold and pay employment taxes on the monthly allowances when paid.
The nonaccountable plan providing the monthly allowances is treated as
separate from the accountable plan providing reimbursements for lodging
and meal expenses incurred for travel away from home on County U
business.
Example (5). Excessive advances. In anticipation of employee
business expenses that Corporation V does not reasonably expect to
exceed $400 in any quarter, Corporation V nonetheless advances $1,000 to
Employee A for such expenses. Whenever Employee A substantiates an
expense in accordance with paragraph (e) of this section, Corporation V
provides an additional advance in an amount equal to the amount
substantiated, thereby providing a continuing advance of $1,000. Because
the amounts advanced under this arrangement are not reasonably
calculated so as not to exceed the amount of anticipated expenditures
and because the advance of money is not made on a day within a
reasonable period of the day that the anticipated expenditures are paid
or incurred, the arrangement is a nonaccountable plan. The arrangement
fails to satisfy the requirements of paragraphs (d) (business
connection) and (f) (reasonable calculation of advances) of this
section. Thus, Corporation V must report the entire amount of each
advance as wages or other compensation and must withhold and pay
employment taxes on the entire amount of each advance when paid.
Example (6). Excess mileage advance. Under an arrangement that meets
the requirements of paragraphs (d), (e), and (f) of this section,
Employer W pays its employees a mileage allowance at a rate of 30 cents
per mile (when the amount deemed substantiated for each mile of travel
substantiated is 26 cents per mile) to cover automobile business
expenses. The allowance is paid at a rate for each mile of travel that
is reasonably calculated not to exceed the amount of the employee's
expenses or anticipated expenses. Employer W does not require the return
of the portion of the mileage allowance (4 cents) that exceeds the
amount deemed substantiated for each mile of travel substantiated in
accordance with paragraph (e) of this section. In June, Employer W
advances Employee B $150 for 500 miles to be traveled by Employee B
during the month. In July, Employee B substantiates 500 miles of
business travel. The amount deemed substantiated by Employee
[[Page 91]]
B is $130. However, Employer W does not require Employee B to return the
remaining $20 of the advance. No later than the first payroll period
following the payroll period in which the business miles of travel are
substantiated, Employer W must withhold and pay employment taxes on $20
(500 miles x 4 cents per mile).
Example (7). Excess per diem reimbursement. Under an arrangement
that meets the requirements of paragraphs (d), (e), and (f) of this
section, Employer X pays its employees a per diem allowance to cover
lodging, meal, and incidental expenses incurred for travel away from
home on Employer X business at a rate equal to 120 percent of the amount
deemed substantiated for each day of travel to the localities to which
the employees travel. Employer X does not require the employees to
return the 20 percent by which the reimbursement for those expenses
exceeds the amount deemed substantiated for each day of travel
substantiated in accordance with paragraph (e) of this section. Employee
C substantiates six days of business travel away from home: Two days in
a locality for which the amount deemed substantiated is $100 a day and
four days in a locality for which the amount deemed substantiated is
$125 a day. Employer X reimburses Employee C $840 for the six days of
travel away from home (2x(120%x$100)+4x(120%x$125)), and does not
require Employee C to return the excess portion ($140 excess portion =
(2 daysx$20 ($120-$100)+4 daysx$25 ($150-$125)). For the payroll period
in which Employer X reimburses the expenses, Employer X must withhold
and pay employment taxes on $140.
Example (8). Return Requirement. Employer Y provides expense
allowances to certain of its employees to cover business expenses of a
type described in paragraph (d)(1) of this section under an arrangement
that requires the employees to substantiate their expenses within a
reasonable period of time and to return any excess amounts within a
reasonable period of time. Each time an employee returns an excess
amount to Employer Y, however, Employer Y pays the employee a ``bonus''
equal to the amount returned by the employee. The arrangement fails to
satisfy the requirements of paragraph (f) (returning amounts in excess
of expenses) of this section. Thus, Employer Y must report the entire
amount of the expense allowance payments as wages or other compensation
and must withhold and pay employment taxes on the payments when paid.
Compare example (6) (where the employee is not required to return the
portion of the mileage allowance that exceeds the amount deemed
substantiated for each mile of travel substantiated).
Example (9). Timely substantiation. Employer Z provides a $500
advance to Employee D for a trip away from home on Employer Z business.
Employee D incurs $500 in business expenses on the trip. Employer Z uses
the periodic statement method safe harbor. At the end of the quarter
during which the trip occurred, Employer Z sends a quarterly statement
to Employee D stating that $500 was advanced to Employee D during the
quarter and that no expenses were substantiated and no excess amounts
returned. The statement advises Employee D that Employee D must
substantiate any additional business expenses within 120 days of the
date of the statement, and must return any unsubstantiated excess within
the 120-day period. Employee D fails to substantiate any expenses or to
return the excess within the 120-day period. Employer Z treats the $500
as wages and withholds and pays employment taxes on the $500. After the
120-day period has expired, Employee D substantiates the $500 in travel
expenses in accordance with paragraph (e) of this section. Employer Z
properly reported and withheld and paid employment taxes on the $500 and
no adjustments may be made. Employee D must include the $500 in gross
income and may deduct the $500 of expenses as a miscellaneous itemized
deduction subject to the 2-percent floor provided in section 67.
(k) Anti-abuse provision. If a payor's reimbursement or other
expense allowance arrangement evidences a pattern of abuse of the rules
of section 62(c) and this section, all payments made under the
arrangement will be treated as made under a nonaccountable plan.
(l) Cross references. For employment tax regulations relating to
reimbursement and expense allowance arrangements, see Secs. 31.3121 (a)-
3, 31.3231(e)-(3), 31.3306(b)-2, and 31.3401(a)-4, which generally apply
to payments made under reimbursement or other expense allowance
arrangements received by an employee on or after July 1, 1990 with
respect to expenses paid or incurred on or after July 1, 1990. For
reporting requirements, see Sec. 1.6041-3(i), which generally applies to
payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1989 with
respect to expenses paid or incurred on or after January 1, 1989.
(m) Effective dates. This section generally applies to payments made
under reimbursement or other expense allowance arrangements received by
an employee in taxable years of the employee beginning on or after
January 1, 1989, with respect to expenses paid or incurred in taxable
years beginning on or after January 1, 1989. Paragraph (h) of
[[Page 92]]
this section generally applies to payments made under reimbursement or
other expense allowance arrangements received by an employee on or after
July 1, 1990 with respect to expenses paid or incurred on or after July
1, 1990. Paragraphs (d)(3)(ii) and (h)(2)(i)(B) of this section apply to
payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1991 with
respect to expenses paid or incurred on or after January 1, 1991.
Paragraph (e)(2) of this section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee with respect to expenses paid or incurred after December 31,
1997.
[T.D. 8324, 55 FR 51691, Dec. 17, 1990; 56 FR 8911, Mar. 4, 1991, as
amended by T.D. 8451, 57 FR 57668, Dec. 7, 1992; T.D. 8666, 61 FR 27005,
May 30, 1996; T.D. 8784, 63 FR 52600, Oct. 1, 1998; T.D. 8864, 65 FR
4122, Jan. 26, 2000]
Sec. 1.63-1 Change of treatment with respect to the zero bracket amount and itemized deductions.
(a) In general. An individual who files a return on which the
individual itemizes deductions in accordance with section 63(g) may
later make a change of treatment by recomputing taxable income for the
taxable year to which that return relates without itemizing deductions.
Similarly, an individual who files a return on which the individual
computes taxable income without itemizing deductions may later make a
change of treatment by itemizing deductions in accordance with section
63(g) in recomputing taxable income for the taxable year to which that
return relates.
(b) No extension of time for claiming credit or refund. A change of
treatment described in paragraph (a) of this section does not extend the
period of time prescribed in section 6511 within which the taxpayer may
make a claim for credit or refund of tax.
(c) Special requirements if spouse filed separate return--(1)
Requirements. If the spouse of the taxpayer filed a separate return for
a taxable year corresponding to the taxable year of the taxpayer, the
taxpayer may not make a change of treatment described in paragraph (a)
of this section for that year unless--
(i) The spouse makes a change of treatment on the separate return
consistent with the change of treatment sought by the taxpayer; and
(ii) The taxpayer and the taxpayer's spouse file a consent in
writing to the assessment of any deficiency of either spouse to the
extent attributable to the change of treatment, even though the
assessment of the deficiency would otherwise be prevented by the
operation of any law or rule of law. The consent must be filed with the
district director for the district in which the taxpayer applies for the
change of treatment, and the period during which a deficiency may be
assessed shall be established by agreement of the spouses and the
district director.
(2) Corresponding taxable year. A taxable year of one spouse
corresponds to a taxable year of the other spouse if both taxable years
end in the same calendar year. If the taxable year of one spouse ends
with death, however, the corresponding taxable year of the surviving
spouse is that in which the death occurs.
(d) Inapplicable if tax liability has been compromised. The taxpayer
may not make a change of treatment described in paragraph (a) of this
section for any taxable year if--
(1) The tax liability of the taxpayer for the taxable year has been
compromised under section 7122; or
(2) The tax liability of the taxpayer's spouse for a taxable year
corresponding to the taxable year of the taxpayer has been compromised
under section 7122. See paragraph (c)(2) of this section for the
determination of a corresponding taxable year.
(e) Effective date. This section applies to taxable years beginning
after 1976.
[T.D. 7585, 44 FR 1105, Jan. 4, 1979]
Sec. 1.63-2 Cross reference.
For rules with respect to charitable contribution deductions for
nonitemizing taxpayers, see section 63 (b)(1)(C) and (i) and section
170(i) of the Internal Revenue Code of 1954.
(Secs. 170(a)(1) and 7805 of the Internal Revenue Code of 1954 (68A
Stat. 58, 26 U.S.C. 170(a)(1); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 8002, 49 FR 50666, Dec. 31, 1984]
[[Page 93]]
Sec. 1.67-1T 2-percent floor on miscellaneous itemized deductions (temporary).
(a) Type of expenses subject to the floor--(1) In general. With
respect to individuals, section 67 disallows deductions for
miscellaneous itemized deductions (as defined in paragraph (b) of this
section) in computing taxable income (i.e., so-called ``below-the-line''
deductions) to the extent that such otherwise allowable deductions do
not exceed 2 percent of the individual's adjusted gross income (as
defined in section 62 and the regulations thereunder). Examples of
expenses that, if otherwise deductible, are subject to the 2-percent
floor include but are not limited to--
(i) Unreimbursed employee expenses, such as expenses for
transportation, travel fares and lodging while away from home, business
meals and entertainment, continuing education courses, subscriptions to
professional journals, union or professional dues, professional
uniforms, job hunting, and the business use of the employee's home.
(ii) Expenses for the production or collection of income for which a
deduction is otherwise allowable under section 212 (1) and (2), such as
investment advisory fees, subscriptions to investment advisory
publications, certain attorneys' fees, and the cost of safe deposit
boxes,
(iii) Expenses for the determination of any tax for which a
deduction is otherwise allowable under section 212(3), such as tax
counsel fees and appraisal fees, and
(iv) Expenses for an activity for which a deduction is otherwise
allowable under section 183.
See section 62 with respect to deductions that are allowable in
computing adjusted gross income (i.e., so-called ``above-the-line''
deductions).
(2) Other limitations. Except as otherwise provided in paragraph (d)
of this section, to the extent that any limitation or restriction is
placed on the amount of a miscellaneous itemized deduction, that
limitation shall apply prior to the application of the 2-percent floor.
For example, in the case of an expense for food or beverages, only 80
percent of which is allowable as a deduction because of the limitations
provided in section 274(n), the otherwise deductible 80 percent of the
expense is treated as a miscellaneous itemized deduction and is subject
to the 2-percent limitation of section 67.
(b) Definition of miscellaneous itemized deductions. For purposes of
this section, the term ``miscellaneous itemized deductions'' means the
deductions allowable from adjusted gross income in determining taxable
income, as defined in section 63, other than--
(1) The standard deduction as defined in section 63(c),
(2) Any deduction allowable for impairment-related work expenses as
defined in section 67(d),
(3) The deduction under section 72(b)(3) (relating to deductions if
annuity payments cease before the investment is recovered),
(4) The deductions allowable under section 151 for personal
exemptions,
(5) The deduction under section 163 (relating to interest),
(6) The deduction under section 164 (relating to taxes),
(7) The deduction under section 165(a) for losses described in
subsection (c)(3) or (d) of section 165,
(8) The deduction under section 170 (relating to charitable
contributions and gifts),
(9) The deduction under section 171 (relating to deductions for
amortizable bond premiums),
(10) The deduction under section 213 (relating to medical and dental
expenses),
(11) The deduction under section 216 (relating to deductions in
connection with cooperative housing corporations),
(12) The deduction under section 217 (relating to moving expenses),
(13) The deduction under section 691(c) (relating to the deduction
for estate taxes in the case of income in respect of the decedent),
(14) The deduction under 1341 (relating to the computation of tax if
a taxpayer restores a substantial amount held under claim of right), and
(15) Any deduction allowable in connection with personal property
used in a short sale.
(c) Allocation of expenses. If a taxpayer incurs expenses that
relate to
[[Page 94]]
both a trade or business activity (within the meaning of section 162)
and a production of income or tax preparation activity (within the
meaning of section 212), the taxpayer shall allocate such expenses
between the activities on a reasonable basis.
(d) Members of Congress--(1) In general. With respect to the
deduction for living expenses of Members of Congress referred to in
section 162(a), the 2-percent floor described in section 67 and
paragraph (a) of this section shall be applied to the deduction before
the application of the $3,000 limitation on deductions for living
expenses referred to in section 162(a). (For purposes of this paragraph
(d), the term ``Member(s) of Congress'' includes any Delegate or
Resident Commissioner.) The amount of miscellaneous itemized deductions
of a Member of Congress that is disallowed pursuant to section 67 and
paragraph (a) of this section shall be allocated between deductions for
living expenses (within the meaning of section 162(a)) and other
miscellaneous itemized deductions. The amount of deductions for living
expenses of a Member of Congress that is disallowed pursuant to section
67 and paragraph (a) of this section is determined by multiplying the
aggregate amount of such living expenses (determined without regard to
the $3,000 limitation of section 162(a) but with regard to any other
limitations) by a fraction, the numerator of which is the aggregate
amount disallowed pursuant to section 67 and paragraph (a) of this
section with respect to miscellaneous itemized deductions of the Member
of Congress and the denominator of which is the amount of miscellaneous
itemized deductions (including deductions for living expenses) of the
Member of Congress (determined without regard to the $3,000 limitation
of section 162(a) but without regard to any other limitations). The
amount of deductions for miscellaneous itemized deductions (other than
deductions for living expenses) of a Member of Congress that are
disallowed pursuant to section 67 and paragraph (a) of this section is
determined by multiplying the amount of miscellaneous itemized
deductions (other than deductions for living expenses) of the Member of
Congress (determined with regard to any limitations) by the fraction
described in the preceding sentence.
(2) Example. The provisions of this paragraph (d) may be illustrated
by the following example:
Example For 1987 A, a Member of Congress, has adjusted gross income
of $100,000, and miscellaneous itemized deductions of $10,750 of which
$3,750 is for meals, $3,000 is for other living expenses, and $4,000 is
for other miscellaneous itemized deductions (none of which is subject to
any percentage limitations other than the 2-percent floor of section
67). The amount of A's business meal expenses that are disallowed under
section 274(n) is $750 ($3,750x20%). The amount of A's miscellaneous
itemized deductions that are disallowed under section 67 is $2,000
($100,000x2%). The portion of the amount disallowed under section 67
that is allocated to A's living expenses is $1,200. This portion is
equal to the amount of A's deductions for living expenses allowable
after the application of section 274(n) and before the application of
section 67 ($6,000) multiplied by the ratio of A's total miscellaneous
itemized deductions disallowed under section 67 to A's total
miscellaneous itemized deductions, determined without regard to the
$3,000 limitation of section 162(a) ($2,000/$10,000). Thus, after
application of section 274(n) and section 67, A's deduction for living
expenses is $4,800 ($6,750-$750-$1,200). However, pursuant to section
162(a), A may deduct only $3,000 of such expenses. The amount of A's
other miscellaneous itemized deductions that are disallowed under
section 67 is $800 ($4,000x$2,000/$10,000). Thus, $3,200 ($4,000-$800)
of A's miscellaneous itemized deductions (other than deductions for
living expenses) are allowable after application of section 67. A's
total allowable miscellaneous itemized deductions are $6,200
($3,000+$3,200).
(e) State legislators. See Sec. 1.62-1T(e)(4) with respect to rules
regarding state legislator's expenses.
[T.D. 8189, 53 FR 9875, Mar. 28, 1988]
Sec. 1.67-2T Treatment of pass-through entities (temporary).
(a) Application of section 67. This section provides rules for the
application of section 67 to partners, shareholders, beneficiaries,
participants, and others with respect to their interests in pass-through
entities (as defined in paragraph (g) of this section). In general, an
affected investor (as defined in paragraph (h) of this section) in a
pass-through entity shall separately take into account as an item of
income and
[[Page 95]]
as an item of expense an amount equal to his or her allocable share of
the affected expenses (as defined in paragraph (i) of this section) of
the pass-through entity for purposes of determining his or her taxable
income. Except as provided in paragraph (e)(1)(ii)(B) of this section,
the expenses so taken into account shall be treated as paid or incurred
by the affected investor in the same manner as paid or incurred by the
pass-through entity. For rules regarding the application of section 67
to affected investors in--
(1) Partnerships, S corporations, and grantor trusts, see paragraph
(b) of this section,
(2) Real estate mortgage investment conduits, see paragraph (c) of
this section,
(3) Common trust funds, see paragraph (d) of this section,
(4) Nonpublicly offered regulated investment companies, see
paragraph (e) of this section, and
(5) Publicly offered regulated investment companies, see paragraph
(p) of this section.
(b) Partnerships, S corporations, and grantor trusts--(1) In
general. Pursuant to section 702(a) and 1366(a) of the Code and the
regulations thereunder, each partner of a partnership or shareholder of
an S corporation shall take into account separately his or her
distributive or pro rata share of any items of deduction of such
partnership or corporation that are defined as miscellaneous itemized
deductions pursuant to section 67(b). The 2-percent limitation described
in section 67 does not apply to the partnership or corporation with
respect to such deductions, but such deductions shall be included in the
deductions of the partner or shareholder to which that limitation
applies. Similarly, the limitation applies to the grantor or other
person treated as the owner of a grantor trust with respect to items
that are paid or incurred by a grantor trust and are treated as
miscellaneous itemized deductions of the grantor or other person
pursuant to Subpart E, Part 1, Subchapter J, Chapter 1 of the Code, but
not to the trust itself. The 2-percent limitation applies to amounts
otherwise deductible in taxable years of partners, shareholders, or
grantors beginning after December 31, 1986, regardless of the taxable
year of the partnership, corporation, or trust.
(2) Example. The provisions of this paragraph (b) may be illustrated
by the following example:
Example. P, a partnership, incurs $1,000 in expenses to which
section 212 applies during its taxable year. A, an individual, is a
partner in P. A's distributive share of the expenses to which section
212 applies is $20, determined without regard to the 2-percent
limitation of section 67. Pursuant to section 702(a), A must take $20 of
expenses to which section 212 applies into account in determining his
income tax. Pursuant to section 67, in determining his taxable income A
may deduct his miscellaneous itemized deductions (including his $20
distributive share of deductions from P) to the extent the total amount
exceeds 2 percent of his adjusted gross income.
(c) Real estate mortgage investment conduit. See Sec. 1.67-3T for
rules regarding the application of section 67 to holders of interests in
REMICs.
(d) Common trust funds--(1) In general. For purposes of determining
the taxable income of an affected investor that is a participant in a
common trust fund--
(i) The ordinary taxable income and ordinary net loss of the common
trust fund shall be computed under section 584(d)(2) without taking into
account any affected expenses, and
(ii) Each affected investor shall be treated as having paid or
incurred an expense described in section 212 in an amount equal to the
affected investor's proportionate share of the affected expenses.
The 2-percent limitation described in section 67 applies to amounts
otherwise deductible in taxable years of participants beginning after
December 31, 1986, regardless of the taxable year of the common trust
fund.
(2) Example. The provisions of this paragraph (d) may be illustrated
by the following example:
Example. During 1987, the gross income and deductions of common
trust fund C, a calendar year taxpayer, consist of the following items:
(i) $50,000 of short-term capital gains; (ii) $150,000 of long-term
capital gains; (iii) $1,000,000 of dividend income; (iv) $10,000 of
deductions that are not affected expenses; and (v) $60,000 of deductions
that are affected expenses. The proportionate share of Trust T
[[Page 96]]
in the income and losses of C is one percent. In computing its taxable
income for 1987, T, a calendar year taxpayer, shall take into account
the following items: (A) $500 of short-term capital gains (one percent
of $50,000, C's short-term capital gains); (B) $1,500 of long-term
capital gains (one percent of $150,000, C's long-term capital gains);
(C) $9,900 of ordinary taxable income (one percent of $990,000, the
excess of $100,000, C's gross income after excluding capital gains and
losses, over $10,000, C's deductions that are not affected expenses);
(D) $600 of expenses described in section 212 (one percent of $60,000,
C's affected expenses).
(e) Nonpublicly offered regulated investment companies--(1) In
general. For purposes of determining the taxable income of an affected
investor that is a shareholder of a nonpublicly offered regulated
investment company (as defined in paragraph (g)(3) of this section)
during a calendar year--
(i) The current earnings and profits of the nonpublicly offered
regulated investment company shall be computed without taking into
account any affected RIC expenses that are allocated among affected
investors, and
(ii) The affected investor shall be treated--
(A) As having received or accrued a dividend in an amount equal to
the affected investor's allocable share of the affected RIC expenses of
the nonpublicly offered regulated investment company for the calendar
year, and
(B) As having paid or incurred an expense described in section 212
(or section 162 in the case of an affected investor that is a
nonpublicly offered regulated investment company) in an amount equal to
the affected investor's allocable share of the affected RIC expenses of
the nonpublicly offered regulated investment company for the calendar
year
in the affected investor's taxable year with which (or within which) the
calendar year with respect to which the expenses are allocated ends. An
affected investor's allocable share of the affected RIC expenses is the
amount allocated to that affected investor pursuant to paragraph (k) of
this section.
(2) Shareholders that are not affected investors. A shareholder of a
nonpublicly offered regulated investment company that is not an affected
investor shall not take into account in computing its taxable income any
amount of income or expense with respect to its allocable share of
affected RIC expenses.
(3) Example. The provisions of this paragraph (e) may be illustrated
by the following example:
Example. During calendar year 1987, nonpublicly offered regulated
investment company M distributes to individual shareholder A, a calendar
year taxpayer, capital gain dividends of $1,000 and other dividends of
$5,000. A's allocable share of the affected RIC expenses of M is $200.
In computing A's taxable income for 1987, A shall take into account the
following items: (i) $1,000 of long-term capital gains (the capital gain
dividends received by A); (ii) $5,200 of dividend income (the sum of the
other dividends received by A and A's allocable share of the affected
RIC expenses of M); and (iii) $200 of expenses described in section 212
(A's allocable share of the affected RIC expenses of M). A is allowed a
deduction for miscellaneous itemized deductions (including A's $200
allocable share of the affected RIC expenses of M, which is treated as
an expense described in section 212) for 1987 only to the extent the
aggregate of such deductions exceeds 2 percent of A's adjusted gross
income for 1987.
(f) Cross-reference. See Sec. 1.67-1T with respect to limitations on
deductions for expenses described in section 212 (including amounts
treated as such expenses under this section).
(g) Pass-through entity--(1) In general. Except as provided in
paragraph (g)(2) of this section, for purposes of section 67(c) and this
section, a pass-through entity is--
(i) A trust (or any portion thereof) to which Subpart E, Part 1,
Subchapter J, Chapter 1 of the Code applies,
(ii) A partnership,
(iii) An S corporation,
(iv) A common trust fund described in section 584,
(v) A nonpublicly offered regulated investment company,
(vi) A real estate mortgage investment conduit, and
(vii) Any other person--
(A) Which is not subject to the income tax imposed by Subtitle A,
Chapter 1, or which is allowed a deduction in computing such tax for
distributions to owners or beneficiaries, and
(B) The character of the income of which may affect the character of
the income recognized with respect to that person by its owners or
beneficiaries.
[[Page 97]]
Entities that do not meet the requirements of paragraph (g)(1)(vii) (A)
and (B) of this section, such as qualified pension plans, individual
retirement accounts, and insurance companies holding assets in separate
asset accounts to fund variable contracts defined in section 817(d), are
not described in this paragraph (g)(1).
(2) Exception. For purposes of section 67(c) and this section, a
pass-through entity does not include:
(i) An estate;
(ii) A trust (or any portion thereof) not described in paragraph
(g)(1)(i) of this section,
(iii) A cooperative described in section 1381(a)(2), determined
without regard to subparagraphs (A) and (C) thereof, or
(iv) A real estate investment trust.
(3) Nonpublicly offered regulated investment company--(i) In
general. For purposes of this section, the term ``nonpublicly offered
regulated investment company'' means a regulated investment company to
which Part I of Subchapter M of the Code applies that is not a publicly
offered regulated investment company.
(ii) Publicly offered regulated investment company. For purposes of
this section, the term ``publicly offered regulated investment company''
means a regulated investment company to which Part I of Subchapter M of
the Code applies the shares of which are--
(A) Continuously offered pursuant to a public offering (within the
meaning of section 4 of the Securities Act of 1933, as amended (15
U.S.C. 77a to 77aa)),
(B) Regularly traded on an established securities market, or
(C) Held by or for no fewer than 500 persons at all times during the
taxable year.
(h) Affected investor--(1) In general. For purposes of this section,
the term ``affected investor'' means a partner, shareholder,
beneficiary, participant, or other interest holder in a pass-through
entity at any time during the pass-through entity's taxable year that
is--
(i) An individual (other than a nonresident alien whose income with
respect to his or her interest in the pass-through entity is not
effectively connected with the conduct of a trade or business within the
United States),
(ii) A person, including a trust or estate, that computes its
taxable income in the same manner as in the case of an individual; or
(iii) A pass-through entity if one or more of its partners,
shareholders, beneficiaries, participants, or other interest holders is
(A) a pass-through entity or (B) a person described in paragraph (h)(1)
(i) or (ii) of this section.
(2) Examples. The provisions of this paragraph (h) may be
illustrated by the following examples:
Example (1). Corporation X holds shares of nonpublicly offered
regulated investment company R in its capacity as a nominee or custodian
for individual A, the beneficial owner of the shares. Because the owner
of the shares for Federal income tax purposes is an individual, the
shares are owned by an affected investor.
Example (2). Individual retirement account I owns shares of a
nonpublicly offered regulated investment company. Because an individual
retirement account is not a person described in paragraph (h)(1) of this
section, the shares are not owned by an affected investor.
(i) Affected expenses--(1) In general. In general, for purposes of
this section, the term ``affected expenses'' means expenses that, if
paid or incurred by an individual, would be deductible, if at all, as
miscellaneous itemized deductions as defined in section 67(b).
(2) Special rule for nonpublicly offered regulated investment
companies. In the case of a nonpublicly offered regulated investment
company, the term ``affected expenses'' means only affected RIC
expenses.
(j) Affected RIC expenses--(1) In general. In general, for purposes
of this section the term ``affected RIC expenses'' means the excess of--
(i) The aggregate amount of the expenses (other than expenses
described in sections 62(a)(3) and 67(b) and Sec. 1.67-1T(b)) paid or
incurred in the calendar year that are allowable as a deduction in
determining the investment company taxable income (without regard to
section 852(b)(2)(D)) of the nonpublicly offered regulated investment
company for a taxable year that begins or ends with or within the
calendar year, over
[[Page 98]]
(ii) The amount of expenses taken into account under paragraph
(j)(1)(i) of this section that are allocable to the following items
(whether paid separately or included as part of a fee paid to an
investment advisor or other person for a variety of services):
(A) Registration fees;
(B) Directors' or trustees' fees;
(C) Periodic meetings of directors, trustees, or shareholders;
(D) Transfer agent fees;
(E) Legal and accounting fees (other than fees for income tax return
preparation or income tax advice); and
(F) Shareholder communications required by law (e.g. the preparation
and mailing of prospectuses and proxy statements).
Expenses described in paragraph (j)(1)(ii) (A) through (F) of this
section do not include, for example, expenses allocable to investment
advice, marketing activities, shareholder communications and other
services not specifically described in paragraph (j)(1)(ii) (A) through
(F) of this section, and custodian fees.
(2) Safe harbor. If a nonpublicly offered regulated investment
company makes an election under this paragraph (j)(2), the affected RIC
expenses for a calendar year shall be treated as equal to 40 percent of
the amount determined under paragraph (j)(1)(i) of this section for that
calendar year. The nonpublicly offered regulated investment company
shall make the election by attaching to its income tax return for the
taxable year that includes the last day of the first calendar year for
which the nonpublicly offered regulated investment company makes the
election a statement that it is making an election under paragraph
(j)(2) of this section. An election made pursuant to this paragraph
(j)(2) shall remain in effect for all subsequent calendar years unless
revoked with the consent of the Commissioner.
(3) Reduction for unused RIC expenses. The amount determined under
paragraph (j)(1)(i) of this section shall be reduced by the nonpublicly
offered regulated investment company's net operating loss, if any, for
the taxable year ending with or within the calendar year. In computing
the nonpublicly offered regulated investment company's net operating
loss for purposes of this section, the deduction for dividends paid
shall not be allowed and any net capital gain for the taxable year shall
be excluded.
(4) Exception. The affected RIC expenses of a nonpublicly offered
regulated investment company will be treated as zero if the amount of
its gross income for the calendar year (determined without regard to
capital gain net income) is not greater than 1 percent of the sum of (i)
such gross income and (ii) the amount of its interest income for the
calendar year that is not includible in gross income pursuant to section
103.
(k) Allocation of expenses among nonpublicly offered regulated
investment company shareholders--(1) General rule. A nonpublicly offered
regulated investment company shall allocate to each of its affected
investors that is a shareholder at any time during the calendar year,
the affected investor's allocable share of the affected RIC expenses of
the nonpublicly offered regulated investment company for that calendar
year. (See paragraph (m) of this section for rules regarding estimates
with respect to the amount of an affected investor's share of affected
RIC expenses upon which certain persons can rely for certain purposes.)
A nonpublicly offered regulated investment company may use any
reasonable method to make the allocation. A method of allocation shall
not be reasonable if--
(i) The method can be expected to have the effect, if applied to all
affected RIC expenses and all shareholders (whether or not affected
investors), of allocating to the shareholders an amount of affected RIC
expenses that is less than the affected RIC expenses of the nonpublicly
offered regulated investment company for the calendar year,
(ii) The method can be expected to have the effect of allocating a
disproportionately high share of the affected RIC expenses of the
nonpublicly offered regulated investment company to shareholders that
are not affected investors or affected investors, the amount of whose
miscellaneous itemized deductions (including their allocable share of
affected RIC expenses)
[[Page 99]]
exceeds the 2-percent floor described in section 67, or
(iii) A principal purpose of the method of allocation is to avoid
allocating affected RIC expenses to persons described in paragraph
(h)(1) (i) or (ii) of this section whose miscellaneous itemized
deductions (inclusive of their allocable share of affected RIC expenses)
may not exceed the 2-percent floor described in section 67.
(2) Reasonable allocation method described--(i) In general. The
allocation method described in this paragraph (k)(2) shall be treated as
a reasonable allocation method. Under the method described in this
paragraph, an affected investor's allocable share of the affected RIC
expenses of a nonpublicly offered regulated investment company is the
amount that bears the same ratio to the amount of affected RIC expenses
of the nonpublicly offered regulated investment company for the calendar
year as--
(A) The amount of dividends paid to the affected investor during the
calendar year, bears to
(B) The sum of--
(1) The aggregate amount of dividends paid by the nonpublicly
offered regulated investment company during the calendar year to all
shareholders, and
(2) Any amount on which tax is imposed under section 852(b)(1) for
any taxable year of the nonpublicly offered regulated investment company
ending within or with the calendar year.
(ii) Exception. Paragraph (k)(2)(i) of this section does not apply
if the amount of the deduction for dividends paid during the calendar
year is zero.
(iii) Dividends paid. For purposes of this paragraph (k)(2)--
(A) Dividends that are treated as paid during a calendar year
pursuant to section 852(b)(7) are treated as paid during that calendar
year and not during the succeeding calendar year.
(B) The term ``dividends paid'' does not include capital gain
dividends (as defined in section 852(b)(3)(C)), exempt-interest
dividends (as defined in section 852(b)(5)(A)), or any amount to which
section 302(a) applies.
(C) The dividends paid during a calendar year is determined without
regard to section 855(a).
(3) Reasonable allocation made by District Director. If a
nonpublicly offered regulated investment company does not make a
reasonable allocation of affected RIC expenses to its affected investors
as required by paragraph (k)(1) of this section, a reasonable allocation
shall be made by the District Director of the internal revenue district
in which the principal place of business or principal office or agency
of the nonpublicly offered regulated investment company is located.
(4) Examples. The provisions of this paragraph (k) may be
illustrated by the following examples:
Example (1). Nonpublicly offered regulated investment company M, in
calculating its investment company taxable income, claims a dividends
paid deduction for a portion of redemption distributions (to which
section 302(a) applies) to shareholders, as well as for nonredemption
distributions. M allocates affected expenses among shareholders who have
received nonredemption distributions by multiplying the amount of
nonredemption distributions distributed to each shareholder by a
fraction, the numerator of which is the affected RIC expenses of M and
the denominator of which is M's investment company taxable income,
determined on a calendar year basis and without regard to deductions
described in section 852(b)(2)(D). No affected RIC expenses are
allocated with respect to the redemption distributions. This allocation
method can be expected to have the effect of allocating among the
shareholders an amount of expenses that is less than the total amount of
affected RIC expenses of M. Accordingly, the allocation method is not
reasonable.
Example (2). Nonpublicly offered regulated investment company N has
two classes of stock, a ``capital'' class and an ``income'' class.
Owners of the capital class receive the benefit of all capital
appreciation on the stocks owned by N, and bear the burden of certain
capital expenditures of N; owners of the income class receive the
benefit of all other income of N, and bear the burden of all expenses of
N that are deductible under section 162. M allocates all affected RIC
expenses among shareholders of the income class shares under a method
that would be reasonable if the income class were the only class of N
stock. Corporations and other shareholders that are not affected
investors own a higher proportion of income class shares than of capital
class shares. The affected RIC expenses of N are properly allocated
among the shareholders who bear the burden of those expenses.
Accordingly, the allocation method does not have the effect of
allocating a disproportionately high share of
[[Page 100]]
the affected RIC expenses of N to shareholders that are not affected
investors merely because a disproportionate share of income class shares
are owned by shareholders that are not affected investors. The
allocation method is reasonable.
Example (3). Nonpublicly offered regulated investment company O has
two classes of stock, Class A and Class B. Shares of Class A, which may
be purchased without payment of a sales or brokerage commission, are
charged with the expenses of a Rule 12b-1 distribution plan of O. Shares
of Class B, which may be purchased only upon payment of a sales or
brokerage commission, are not charged with the expenses of the Rule 12b-
1 distribution plan of O. O allocates all affected RIC expenses among
shareholders of Class A and Class B shares under a method that would be
reasonable if Class A or Class B shares, respectively, were the only
class of O stock. The affected RIC expenses attributable to the Rule
12b-1 plan are allocated to the shareholders of Class A shares.
Shareholders that are not affected investors own a higher proportion of
Class A shares than of Class B shares. The affected RIC expenses of O
are properly allocated among the shareholders who bear the burden of
those expenses. Accordingly, the allocation method does not have the
effect of allocating a disproportionately high share of the affected RIC
expenses of O to shareholders that are not affected investors merely
because a disproportionately high share of Class A shares are owned by
persons that are not affected investors. The allocation method is
reasonable.
Example (4). Assume the facts are the same as in example (3) except
that a portion of the affected RIC expenses attributable to the Rule
12b-1 plan are allocated to the shareholders of Class B shares, and
shareholders that are not affected investors own a higher proportion of
Class B shares than of Class A shares. Thus, the affected RIC expenses
are not allocated among the class of shareholders that bear the burden
of the expenses. Accordingly, the allocation method has the effect of
allocating a disproportionate share of the affected RIC expenses of O to
the shareholders of Class B shares. Because shareholders that are not
affected investors own a higher proportion of Class B shares than Class
A shares, the method can be expected to allocate a disproportionately
high share of the affected RIC expenses of O to shareholders that are
not affected investors. Accordingly, the allocation method is not
reasonable.
(l) Affected RIC expenses not subject to backup withholding. The
amount of dividend income that an affected investor in a nonpublicly
offered regulated investment company is treated as having received or
accrued under paragraph (e)(1)(ii) of this section is not subject to
backup withholding under section 3406.
(m) Reliance by nominees and pass-through investors on notices--(1)
General rule. Persons described in paragraph (m)(3) of this section may,
for the purposes described in that paragraph (m)(3), treat an affected
investor's allocable share of the affected RIC expenses of a nonpublicly
offered regulated investment company as being equal to an amount
determined by the nonpublicly offered regulated investment company on
the basis of a reasonable estimate (e.g., of allocable expenses as a
percentage of dividend distributions or allocable expenses per share)
that is (i) reported in writing by the nonpublicly offered regulated
investment company to the person or (ii) reported in a newspaper or
financial publication having a nationwide circulation (e.g., the Wall
Street Journal or Standard and Poor's Weekly Dividend Record).
(2) Estimates must be reasonable. In general, for purposes of
paragraph (m)(1) of this section, estimates of affected RIC expenses of
a nonpublicly offered regulated investment company will be treated as
reasonable only if the nonpublicly offered regulated investment company
makes a reasonable effort to offset material understatements (or
overstatements) of affected RIC expenses for a period by increasing (or
decreasing) estimates of affected RIC expenses for a subsequent period.
Understatements or overstatements of affected RIC expenses that are not
material may be corrected by making offsetting adjustments in future
periods, provided that understatements and overstatements are treated
consistently.
(3) Application. Paragraph (m)(1) of this section shall apply to the
following persons for the following purposes:
(i) A nominee who, pursuant to section 6042(a)(1)(B) and paragraph
(n)(2) of this section, is required to report dividends paid by a
nonpublicly offered regulated investment company to the Internal Revenue
Service and to the person to whom the payment is made,
[[Page 101]]
for purposes of reporting to the Internal Revenue Service and the person
to whom the payment is made the amount of affected RIC expenses
allocated to such person.
(ii) An affected investor to whom a nominee (to which paragraph
(m)(3)(i) of this section applies) reports, for purposes of calculating
the affected investor's taxable income and the amount of its affected
expenses.
(iii) A shareholder that is a pass-through entity, for purposes of
calculating its taxable income and the amount of its affected expenses.
(n) Return of information and reporting to affected investors by a
nonpublicly offered regulated investment company--(1) In general--(i)
Return of information. A nonpublicly offered regulated investment
company shall make an information return (e.g., Form 1099-DIV, Dividends
and Distributions, for 1987) with respect to each affected investor to
which an allocation of affected RIC expenses is required to be made
pursuant to paragraph (k) of this section and for which the nonpublicly
offered regulated investment company is required to make an information
return to the Internal Revenue Service pursuant to section 6042 (or
would be required to make such information return but for the $10
threshold described in section 6042 (a)(1) (A) and (B). The nonpublicly
offered regulated investment company shall make the information return
for each calendar year and shall state separately on such return--
(A) The amount of affected RIC expenses required to be allocated to
the affected investor for the calendar year pursuant to paragraph (k) of
this section,
(B) The sum of--
(1) The aggregate amount of the dividends paid to the affected
investor during the calendar year, and
(2) The amount of the affected RIC expenses required to be allocated
to the affected investor for the calendar year pursuant to paragraph (k)
of this section, and
(C) Such other information as may be specified by the form or its
instructions.
(ii) Statement to be furnished to affected investors. A nonpublicly
offered regulated investment company shall provide to each affected
investor for each calendar year (whether or not the nonpublicly offered
regulated investment company is required to make an information return
with respect to the affected investor pursuant to section 6042), a
written statement showing the following information:
(A) The information described in paragraph (n)(1)(i) of this section
with respect to the affected investor;
(B) The name and address of the nonpublicly offered regulated
investment company;
(C) The name and address of the affected investor; and
(D) If the nonpublicly offered regulated investment company is
required to report the amount of the affected investor's allocation of
affected RIC expense to the Internal Revenue Service pursuant to
paragraph (n)(1)(i) of this section a statement to that effect.
(iii) Affected investor's shares held by a nominee. If an affected
investor's shares in a nonpublicly offered regulated investment company
are held in the name of a nominee, the nonpublicly offered regulated
investment company may make the information return described in
paragraph (n)(1)(i) of this section with respect to the nominee in lieu
of the affected investor and may provide the written statement described
in paragraph (n)(1)(ii) of this section to such nominee in lieu of the
affected investor.
(2) By a nominee--(i) In general. Except as otherwise provided for
in paragraph (n)(2)(iii) of this section, in any case in which a
nonpublicly offered regulated investment company provides, pursuant to
paragraph (n)(1)(iii) of this section, a written statement to the
nominee of an affected investor for a calendar year, the nominee shall--
(A) If the nominee is required to make an information return
pursuant to section 6042 (or would be required to make an information
return but for the $10 threshold described in section 6042(a)(1) (A) and
(B), make an information return (e.g., Form 1099-DIV, Dividends and
Distributions, for 1987) for the calendar year with respect to each
affected investor and state separately on such information return the
information described in paragraph (n)(1)(i) of this section, and
[[Page 102]]
(B) Furnish each affected investor with a written statement for the
calendar year showing the information required by paragraph (n)(2)(ii)
of this section (whether or not the nominee is required to make an
information return with respect to the affected investor pursuant to
section 6042).
(ii) Form of statement. The written statement required to be
furnished for a calendar year pursuant to paragraph (n)(2)(i)(B) of this
section shall show the following information:
(A) The affected investor's proportionate share of the items
described in paragraph (n)(1)(i) of this section for the calendar year,
(B) The name and address of the nominee,
(C) The name and address of the affected investor, and
(D) If the nominee is required to report the affected investor's
share of the allocable investment expenses to the Internal Revenue
Service pursuant to paragraph (n)(2)(i)(A) of this section, a statement
to that effect.
(iii) Return not required. A nominee is not required to make an
information return with respect to an affected investor pursuant to
paragraph (n)(2)(i)(A) of this section if the nominee is excluded from
the requirements of section 6042 pursuant to Sec. 1.6042-2(a)(1) (ii) or
(iii).
(iv) Statement not required. A nominee is not required to furnish a
written statement to an affected investor pursuant to paragraph
(n)(2)(i)(B) of this section if the nonpublicly offered regulated
investment company furnishes the written statement to the affected
investor pursuant to an agreement with the nominee described in
Sec. 1.6042-2(a)(1)(iii).
(v) Special rule. Paragraph (n)(1) (i) and (ii) of this section
applies to a nonpublicly offered regulated investment company that
agrees with the nominee to satisfy the requirements of section 6042 as
described in Sec. 1.6042-2(a)(1)(iii) with respect to the affected
investor.
(3) Time and place for furnishing returns. The returns required by
paragraph (n)(1)(i) and (2)(i)(A) of this section for any calendar year
shall be filed at the time and place that a return required under
section 6042 is required to be filed. See Sec. 1.6042-2(c) .
(4) Time for furnishing statements. The statements required by
paragraph (n)(1)(ii) and (2)(i)(B) of this section to be furnished by a
nonpublicly offered regulated investment company and a nominee,
respectively, to an affected investor for a calendar year shall be
furnished to such affected investor on or before January 31 of the
following year.
(5) Duplicative returns and statements not required--(i) Information
return. The requirements of paragraph (n)(1)(i) and (2)(i)(A) of this
section for the making of an information return shall be met by the
timely filing of an information return pursuant to section 6042 that
contains the information required by paragraph (n)(1)(i).
(ii) Written statement. The requirements of paragraph (n)(1)(ii) and
(2)(i)(B) of this section for the furnishing of a written statement
(including the statement required by paragraph (n)(1)(ii)(D) and
(2)(ii)(D) of this section) shall be met by furnishing the affected
investor a copy of the information return to which section 6042 applies
(whether or not the nonpublicly offered regulated investment company or
nominee is required to file an information return with respect to the
affected investor pursuant to section 6042) that contains the
information required by paragraph (n)(1)(ii) or (2)(ii), whichever is
applicable, of this section. Nonpublicly offered regulated investment
companies and nominees may use a substitute form that contains
provisions substantially similar to those of the prescribed form if the
nonpublicly offered regulated investment company or nominee complies
with all revenue procedures relating to substitute forms in effect at
the time. The statement shall be furnished either in person or in a
statement mailed by first-class mail that includes adequate notice that
the statement is enclosed. A statement shall be considered to be
furnished to an affected investor within the meaning of this section if
it is mailed to such affected investor at its last known address.
(o) Return of information by a common trust fund. With respect to
each affected investor to which paragraph (d) of this section applies,
the common trust fund shall state on the return it
[[Page 103]]
is required to make pursuant to section 6032 for its taxable year, the
following information:
(1) The amount of the affected investor's proportionate share of the
affected expenses for the taxable year as described in paragraph
(d)(1)(ii) of this section.
(2) The amount of the affected investor's proportionate share of
ordinary taxable income or ordinary net loss for the taxable year
determined pursuant to paragraph (d)(1)(i) of this section, and
(3) Such other information as may be specified by the form or its
instructions.
(p) Publicly offered regulated investment companies. [Reserved]
[T.D. 8189, 53 FR 9876, Mar. 28, 1988; 53 FR 13464, Apr. 25, 1988]
Sec. 1.67-3 Allocation of expenses by real estate mortgage investment conduits.
(a) Allocation of allocable investment expenses. [Reserved]
(b) Treatment of allocable investment expenses. [Reserved]
(c) Computation of proportionate share. [Reserved]
(d) Example. [Reserved]
(e) Allocable investment expenses not subject to backup withholding.
[Reserved]
(f) Notice to pass-through interest holders--(1) Information
required. A REMIC must provide to each pass-through interest holder to
which an allocation of allocable investment expense is required to be
made under Sec. 1.67-3T(a)(1) notice of the following--
(i) If, pursuant to paragraph (f)(2)(i) or (ii) of this section,
notice is provided for a calendar quarter, the aggregate amount of
expenses paid or accrued during the calendar quarter for which the REMIC
is allowed a deduction under section 212;
(ii) If, pursuant to paragraph (f)(2)(ii) of this section, notice is
provided to a regular interest holder for a calendar year, the aggregate
amount of expenses paid or accrued during each calendar quarter that the
regular interest holder held the regular interest in the calendar year
and for which the REMIC is allowed a deduction under section 212; and
(iii) The proportionate share of these expenses allocated to that
pass-through interest holder, as determined under Sec. 1.67-3T(c).
(2) Statement to be furnished--(i) To residual interest holder. For
each calendar quarter, a REMIC must provide to each pass-through
interest holder who holds a residual interest during the calendar
quarter the notice required under paragraph (f)(1) of this section on
Schedule Q (Form 1066), as required in Sec. 1.860F-4(e).
(ii) To regular interest holder. For each calendar year, a single-
class REMIC (as described in Sec. 1.67-3T(a)(2)(ii)(B)) must provide to
each pass-through interest holder who held a regular interest during the
calendar year the notice required under paragraph (f)(1) of this
section. Quarterly reporting is not required. The information required
to be included in the notice may be separately stated on the statement
described in Sec. 1.6049-7(f) instead of on a separate statement
provided in a separate mailing. See Sec. 1.6049-7(f)(4). The separate
statement provided in a separate mailing must be furnished to each pass-
through interest holder no later than the last day of the month
following the close of the calendar year.
(3) Returns to the Internal Revenue Service--(i) With respect to
residual interest holders. Any REMIC required under paragraphs (f)(1)
and (2)(i) of this section to furnish information to any pass-through
interest holder who holds a residual interest must also furnish such
information to the Internal Revenue Service as required in Sec. 1.860F-
4(e)(4).
(ii) With respect to regular interest holders. A single-class REMIC
(as described in Sec. 1.67-3T(a)(2)(ii)(B)) must make an information
return on Form 1099 for each calendar year, with respect to each pass-
through interest holder who holds a regular interest to which an
allocation of allocable investment expenses is required to be made
pursuant to Sec. 1.67-3T(a)(1) and (2)(ii). The preceding sentence
applies with respect to a holder for a calendar year only if the REMIC
is required to make an information return to the Internal Revenue
Service with respect to that holder for that year pursuant to section
6049 and Sec. 1.6049-7(b)(2)(i) (or would
[[Page 104]]
be required to make an information return but for the $10 threshold
described in section 6049(a)(1) and Sec. 1.6049-7(b)(2)(i)). The REMIC
must state on the information return--
(A) The sum of--
(1) The aggregate amounts includible in gross income as interest (as
defined in Sec. 1.6049-7(a)(1)(i) and (ii)), for the calendar year; and
(2) The sum of the amount of allocable investment expenses required
to be allocated to the pass-through interest holder for each calendar
quarter during the calendar year pursuant to Sec. 1.67-3T(a); and
(B) Any other information specified by the form or its instructions.
(4) Interest held by nominees and other specified persons--(i) Pass-
through interest holder's interest held by a nominee. If a pass-through
interest holder's interest in a REMIC is held in the name of a nominee,
the REMIC may make the information return described in paragraphs
(f)(3)(i) and (ii) of this section with respect to the nominee in lieu
of the pass-through interest holder and may provide the written
statement described in paragraphs (f)(2)(i) and (ii) of this section to
that nominee in lieu of the pass-through interest holder.
(ii) Regular interests in a single-class REMIC held by certain
persons. If a person specified in Sec. 1.6049-7(e)(4) holds a regular
interest in a single-class REMIC (as described in Sec. 1.67-
3T(a)(2)(ii)(B)), then the single-class REMIC must provide the
information described in paragraphs (f)(1) and (f)(3)(ii)(A) and (B) of
this section to that person with the information specified in
Sec. 1.6049-7(e)(2) as required in Sec. 1.6049-7(e).
(5) Nominee reporting--(i) In general. In any case in which a REMIC
provides information pursuant to paragraph (f)(4) of this section to a
nominee of a pass-through interest holder for a calendar quarter or, as
provided in paragraph (f)(2)(ii) of this section, for a calendar year--
(A) The nominee must furnish each pass-through interest holder with
a written statement described in paragraph (f)(2)(i) or (ii) of this
section, whichever is applicable, showing the information described in
paragraph (f)(1) of this section; and
(B) The nominee must make an information return on Form 1099 for
each calendar year, with respect to the pass-through interest holder and
state on this information return the information described in paragraphs
(f)(3)(ii) (A) and (B) of this section, if--
(1) The nominee is a nominee for a pass-through interest holder who
holds a regular interest in a single-class REMIC (as described in
Sec. 1.67-3T(a)(2)(ii)(B)); and
(2) The nominee is required to make an information return pursuant
to section 6049 and Sec. 1.6049-7 (b)(2)(i) and (b)(2)(ii)(B) (or would
be required to make an information return but for the $10 threshold
described in section 6049(a)(2) and Sec. 1.6049-7(b)(2)(i)) with respect
to the pass-through interest holder.
(ii) Time for furnishing statement. The statement required by
paragraph (f)(5)(i)(A) of this section to be furnished by a nominee to a
pass-through interest holder for a calendar quarter or calendar year
must be furnished to this holder no later than 30 days after receiving
the written statement described in paragraph (f)(2)(i) or (ii) of this
section from the REMIC. If, however, pursuant to paragraph (f)(2)(ii) of
this section, the information is separately stated on the statement
described in Sec. 1.6049-7(f), then the information must be furnished to
the pass-through interest holder in the time specified in Sec. 1.6049-
7(f)(5).
(6) Special rules--(i) Time and place for furnishing returns. The
returns required by paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this
section for any calendar year must be filed at the time and place that a
return required under section 6049 and Sec. 1.6049-7(b)(2) is required
to be filed. See Sec. 1.6049-4(g) and Sec. 1.6049-7(b)(2)(iv).
(ii) Duplicative returns not required. The requirements of
paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for the making of
an information return are satisfied by the timely filing of an
information return pursuant to section 6049 and Sec. 1.6049-7(b)(2) that
contains the information required by paragraph (f)(3)(ii) of this
section.
[T.D. 8431, 57 FR 40321, Sept. 3, 1992]
[[Page 105]]
Sec. 1.67-3T Allocation of expenses by real estate mortgage investment conduits (temporary).
(a) Allocation of allocable investment expenses--(1) In general. A
real estate mortgage investment conduit or REMIC (as defined in section
860D) shall allocate to each of its pass-through interest holders that
holds an interest at any time during the calendar quarter the holder's
proportionate share (as determined under paragraph (c) of this section)
of the aggregate amount of allocable investment expenses of the REMIC
for the calendar quarter.
(2) Pass-through interest holder--(i) In general--(A) Meaning of
term. Except as provided in paragraph (a)(2)(ii) of this section, the
term ``pass-through interest holder'' means any holder of a REMIC
residual interest (as definition in section 860G(a)(2)) that is--
(1) An individual (other than a nonresident alien whose income with
respect to his or her interest in the REMIC is not effectively connected
with the conduct of a trade or business within the United States),
(2) A person, including a trust or estate, that computes its taxable
income in the same manner as in the case of an individual, or
(3) A pass-through entity (as defined in paragraph (a)(3) of this
section) if one or more of its partners, shareholders, beneficiaries,
participants, or other interest holders is (i) a pass-through entity or
(ii) a person described in paragraph (a)(2)(i)(A) (1) or (2) of this
section.
(B) Examples. The provisions of this paragraph (a)(2)(i) may be
illustrated by the following examples:
Example (1). Corporation X holds a residual interest in REMIC R in
its capacity as a nominee or custodian for individual A, the beneficial
owner of the interest. Because the owner of the interest for Federal
income tax purposes is an individual, the interest is owned by a pass-
through interest holder.
Example (2). Individual retirement account I holds a residual
interest in a REMIC. Because an individual retirement account is not a
person described in paragraph (a)(2)(i)(A) of this section, the interest
is not held by a pass-through interest holder.
(ii) Single-class REMIC--(A) In general. In the case of a single-
class REMIC, the term ``pass-through interest holder'' means any holder
of either--
(1) A REMIC regular interest (as defined in section 860G(a)(1)), or
(2) A REMIC residual interest, that is described in paragraph
(a)(2)(i)(A) (1), (2), or (3) of this section.
(B) Single-class REMIC. For purposes of paragraph (a)(2)(ii)(A) of
this section, a single-class REMIC IS either--
(1) A REMIC that would be classified as an investment trust under
Sec. 301.7701-4(c)(1) but for its qualification as a REMIC under section
860D and Sec. 1.860D-1T, or
(2) A REMIC that--
(i) Is substantially similar to an investment trust under
Sec. 301.7701-4(c)(1), and
(ii) Is structured with the principal purpose of avoiding the
requirement of paragraphs (a)(1) and (2)(ii)(A) of this section to
allocate allocable investment expenses to pass-through interest holders
that hold regular interests in the REMIC.
For purposes of this paragraph (a)(2)(ii)(B), in determining whether a
REMIC would be classified as an investment trust or is substantially
similar to an investment trust, all interests in the REMIC shall be
treated as ownership interests in the REMIC, without regard to whether
or not they would be classified as debt for Federal income tax purposes
in the absence of a REMIC election.
(C) Examples. The provisions of paragraph (a)(2)(ii) of this section
must be illustrated by the following examples:
Example (1). Corporation M transfers mortgages to a bank under a
trust agreement as described in Example (2) of Sec. 301.7701-4(c)(2).
There are two classes of certificates. Holders of class C certificates
are entitled to receive 90 percent of the payment of principal and
interest on the mortgages; holders of class D certificates are entitled
to receive the remaining 10 percent. The two classes of certificates are
identical except that, in the event of a default on the underlying
mortgages, the payment rights of class D certificates holders are
subordinated to the rights of class C certificate holders. M sells the
class C certificates to investors and retains the class D certificates.
The trust would be classified as an investment trust under
Sec. 301.7701-4(c)(1) but for its qualification a REMIC under section
860D the class C certificates represent regular interests in the
[[Page 106]]
REMIC and the class D certificates represent residual interest in the
REMIC. The REMIC is a single-class REMIC within the meaning of paragraph
(a)(2)(ii)(B)(1) of this section and, accordingly, holders of both the
class C and class D certificates who are described in paragraph
(a)(2)(i)(A) (1), (2), or (3) of this section are treated as pass-
through interest holders.
Example (2). Assume that the facts are the same as in Example (1)
except that M structures the REMIC to include a second regular interest
represented by class E certificates. The principal purpose of M in
structuring the REMIC to include class E certificates is to avoid
allocating allocable investment expenses to class C certificate holders.
The class E certificate holders are entitled to receive the payments
otherwise due the class D certificate holders until they have been paid
a stated amount of principal plus interest. The fair market value of the
class E certificate is ten percent of the fair market value of the class
D certificate and, therefore, less than one percent of the fair market
value of the REMIC. The REMIC would not be classified as an investment
trust under Sec. 301.7701-4(c)(1) because the existence of the class E
certificates is not incidental to the trust's purpose of facilitating
direct investment in the assets of the trust. Nevertheless, because the
fair market value of the class E certificates is de minimis, the REMIC
is substantially similar to an investment trust under Sec. 301.7701-
4(c)(1). In addition, avoidance of the requirement to allocate allocable
investment expenses to regular interest holders is the principal purpose
of M in structuring the REMIC to include class E certificates.
Therefore, the REMIC is a single-class REMIC within the meaning of
paragraph (a)(2)(ii)(B)(2) of this section, and, accordingly, holders of
both residual and regular interests who are described in paragraph
(a)(2)(i)(A) (1), (2), or (3) of this section are treated as pass-
through interest holders.
(3) Pass-through entity--(i) In general. Except as provided in
paragraph (a)(3)(ii) of this section, for purposes of this section, a
pass-through entity is--
(A) A trust (or any portion thereof) to which Subpart E, Part 1,
Subchapter J, Chapter 1 of the Code applies,
(B) A partnership,
(C) An S corporation,
(D) A common trust fund described in section 584,
(E) A nonpublicly offered regulated investment company (as defined
in paragraph (a)(5)(i) of this section),
(F) A REMIC, and
(G) Any other person--
(1) Which is not subject to income tax imposed by Subtitle A,
Chapter 1, or which is allowed a deduction in computing such tax for
distributions to owners or beneficiaries, and
(2) The character of the income of which may affect the character of
the income recognized with respect to that person by its owners or
beneficiaries.
Entities that do not meet the requirements of paragraphs (a)(3)(i)(G)
(1) and (2), such as qualified pension plans, individual retirement
accounts, and insurance companies holding assets in separate asset
accounts to fund variable contracts defined in section 817(d), are not
described in this paragraph (a)(3)(i).
(ii) Exception. For purposes of this section, a pass-through entity
does not include--
(A) An estate,
(B) A trust (or any portion thereof) not described in paragraph
(a)(3)(i)(A) of this section,
(C) A cooperative described without regard to subparagraphs (A) and
(C) thereof, or
(D) A real estate investment trust.
(4) Allocable investment expenses. The term ``allocable investment
expenses'' means the aggregate amount of the expenses paid or accrued in
the calendar quarter for which a deduction is allowable under section
212 in determining the taxable income of the REMIC for the calendar
quarter.
(5) Nonpublicly offered regulated investment company--(i) In
general. For purposes of this section, the term ``nonpublicly offered
regulated investment company'' means a regulated investment company to
which Part I of Subchapter M of the Code applies that is not a publicly
offered regulated investment company.
(ii) Publicly offered regulated investment company. For purposes of
this section, the term ``publicly offered regulated investment company''
means a regulated investment company to which Part I of subchapter M of
the Code applies, the shares of which are--
(A) Continuously offered pursuant to a public offering (within the
meaning of section 4 of the Securities Act of 1933, as amended (15
U.S.C. 77a to 77aa)),
(B) Regularly traded on an established securities market, or
[[Page 107]]
(C) Held by or for no fewer than 500 persons at all times during the
taxable year.
(b) Treatment of allocable investment expenses--(1) By pass-through
interest holders--(i) Taxable year ending with calendar quarter. A pass-
through interest holder whose taxable year is the calendar year or ends
with a calendar quarter shall be treated as having--
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section 212 (or section
162 in the case of a pass-through interest holder that is a regulated
investment company), in an amount equal to the pass-through interest
holder's proportionate share of the allocable investment expenses of the
REMIC for those calendar quarters that fall within the holder's taxable
year.
(ii) Taxable year not ending with calendar quarter. A pass-through
interest holder whose taxable year does not end with a calendar quarter
shall be treated as having--
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section 212 (or section
162 in the case of a pass-through interest holder that is a regulated
investment company), in an amount equal to the sum of--
(C) The pass-through interest holder's proportionate share of the
allocable investment expenses of the REMIC for those calendar quarters
that fall within the holder's taxable year, and
(D) For each calendar quarter that overlaps the beginning or end of
the taxable year, the sum of the daily amounts of the allocable
investment expenses allocated to the holder pursuant to paragraph
(c)(1)(ii) of this section for the days in the quarter that fall within
the holder's taxable year.
(2) Proportionate share of allocable investment expenses. For
purposes of paragraph (b) of this section, a pass-through interest
holder's proportionate share of the allocable investment expenses is the
amount allocated to the pass-through interest holder pursuant to
paragraph (a)(1) of this section.
(3) Cross-reference. See Sec. 1.67-1T with respect to limitations on
deductions for expenses described in section 212 (including amounts
treated as such expenses under this section).
(4) Interest income to holders of regular interests in certain
REMICs. Any amount allocated under this section to the holder of a
regular interest in a single-class REMIC (as described in paragraph
(a)(2)(ii)(B) of this section) shall be treated as interest income.
(5) No adjustment to basis. The basis of any holder's interest in a
REMIC shall not be increased or decreased by the amount of the holder's
proportionate share of allocable investment expenses.
(6) Interest holders other than pass-through interest holders. An
interest holder of a REMIC that is not a pass-through interest holder
shall not take into account in computing its taxable income any amount
of income or expense with respect to its proportionate share of
allocable investment expenses.
(c) Computation of proportionate share--(1) In general. For purposes
of paragraph (a)(1) of this section, a REMIC shall compute a pass-
through interest holder's proportionate share of the REMIC's allocable
investment expenses by--
(i) Determining the daily amount of the allocable investment
expenses for the calendar quarter by dividing the total amount of such
expenses by the number of days in that calendar quarter.
(ii) Allocating the daily amount of the allocable investment
expenses to the pass-through interest holder in proportion to its
respective holdings on that day, and
(iii) Totaling the interest holder's daily amounts of allocable
investment expenses for the calendar quarter.
(2) Other holders taken into account. For purposes of paragraph
(c)(1)(ii) of this section, a pass-through interest holder's
proportionate share of the daily amount of the allocable investment
expenses is determined by taking into account all holders of residual
interests in the REMIC, whether or not pass-through interest holders.
(3) Single-class REMIC--(i) Daily allocation. In lieu of the
allocation specified in paragraph (c)(1)(ii) of this section, a single-
class REMIC (as described in paragraph (a)(2)(ii)(B) of this section)
shall allocate the daily
[[Page 108]]
amount of the allocable investment expenses to each pass-through
interest holder in proportion to the amount of income accruing to the
holder with respect to its interest in the REMIC on that day.
(ii) Other holders taken into account. For purposes of paragraph
(c)(3)(i) of this section, the amount of the allocable investment
expenses that is allocated on any day to each pass-through interest
holder shall be determined by multiplying the daily amount of allocable
investment expenses (determined pursuant to paragraph (c)(1)(i) of this
section) by a fraction, the numerator of which is equal to the amount of
income that accrues (but not less than zero) to the pass-through
interest holder on that day and the denominator of which is the total
amount of income (as determined under paragraph (c)(3)(iii) of this
section) that accrues to all regular and residual interest holders,
whether or not pass-through interest holders, on that day.
(iii) Total income accruing. The total amount of income that accrues
to all regular and residual interest holders is the sum of--
(A) The amount includible under section 860B in the gross income
(but not less than zero) of the regular interest holders, and
(B) The amount of REMIC taxable income (but not less than zero)
taken into account under section 860C by the residual interest holders.
(4) Dates of purchase and disposition. For purposes of this section,
a pass-through interest holder holds an interest on the date of its
purchase but not on the date of its disposition.
(d) Example. The provisions of this section may be illustrated by
the following example:
Example (i) During the calendar quarter ending March 31, 1989, REMIC
X, which is not a single-class REMIC, incurs $900 of allocable
investment expenses. At the beginning of the calendar quarter, X has 4
residual interest holders, who hold equal proportionate shares, and 10
regular interest holders. The residual interest holders, all of whom
have calendar-year taxable years, are as follows:
A, an individual,
C, a C corporation that is a nominee for individual I.
S, an S corporation, and
M, a C corporation that is not a nominee.
(ii) Except for A, all of the residual interest holders hold their
interests in X for the entire calendar quarter. On January 31, 1989, A
sells his interest to S. Thus, for the first month of the calendar
quarter, each residual interest holder holds a 25 percent interest
(100%/4 interest holders) in X. For the last two months, S's holding is
increased to 50 percent and A's holding is decreased to zero. The daily
amount of allocable investment expenses for the calendar quarter is $10
($900/90 days).
(iii) The amount of allocable investment expenses apportioned to the
residual interest holders is as follows:
(A) $75 ($10 x 25% x 30 days) is allocated to A for the 30 days that
A holds an interest in X during the calendar quarter. A includes $75 in
gross income in calendar year 1989. The amount of A's expenses described
in section 212 is increased by $75 in calendar year 1989. A's deduction
under section 212 (including the $75 amount of the allocation) is
subject to the limitations contained in section 67.
(B) $225 ($10 x 25% x 90 days) is allocated to C. Because C is a
nominee for I, C does not include $225 in gross income or increase its
deductible expenses by $225. Instead, I includes $225 in gross income in
calendar year 1989, her taxable year. The amount of I's expenses
described in section 212 is increased by $225. I's deduction under
section 212 (including the $225 amount of the allocation) is subject to
the limitations contained in section 67.
(C) $375 (($10 x 25% x 30 days) + ($10 x 50% x 60 days)) is
allocated to S. S includes in gross income $375 of allocable investment
expenses in calendar year 1989. The amount of S's expenses described in
section 212 for that taxable year is increased by $375. S allocates the
$375 to its shareholders in accordance with the rules described in
sections 1366 and 1377 in calendar year 1989. Thus, each shareholder of
S includes its pro rata share of the $375 in gross income in its taxable
year in which or with which calendar year 1989 ends. The amount of each
shareholder's expenses described in section 212 is increased by the
amount of the shareholder's allocation for the shareholder's taxable
year in which or with which calendar year 1989 ends. The shareholder's
deduction under section 212 (including the allocation under this
section) is subject to the limitations contained in section 67.
(D) No amount is allocated to M. However, M's interest is taken into
account for purposes of determining the proportionate share of those
residual interest holders to whom an allocation is required to be made.
(iv) No allocation is made to the 10 regular interest holders
pursuant to paragraph (a) of this section. In addition, the interests
held by these interest holders are not taken into account for purposes
of determining the proportionate share of the residual interest
[[Page 109]]
holders to whom an allocation is required to be made.
(e) Allocable investment expenses not subject to backup withholding.
The amount of allocable investment expenses required to be allocated to
a pass-through interest holder pursuant to paragraph (a)(1) of this
section is not subject to backup withholding under section 3406.
(f) Notice to pass-through interest holders--(1) Information
required. A REMIC must provide to each pass-through interest holder to
which an allocation of allocable investment expense is required to be
made under paragraph (a)(1) of this section notice of the following--
(i) If, pursuant to paragraph (f)(2) (i) or (ii) of this section,
notice is provided for a calendar quarter, the aggregate amount of
expenses paid or accrued during the calendar quarter for which the REMIC
is allowed a deduction under section 212;
(ii) If, pursuant to paragraph (f)(2)(ii) of this section, notice is
provided to a regular interest holder for a calendar year, the aggregate
amount of expenses paid or accrued during each calendar quarter that the
regular interest holder held the regular interest in the calendar year
and for which the REMIC is allowed a deduction under section 212; and
(iii) The proportionate share of these expenses allocated to that
pass-through interest holder, as determined under paragraph (c) of this
section.
(2) Statement to be furnished--(i) To residual interest holder. For
each calendar quarter, a REMIC shall provide to each pass-through
interest holder who holds a residual interest during the calendar
quarter the notice required under paragraph (f)(1) of this section on
Schedule Q (Form 1066), as required in Sec. 1.860F-4(e).
(ii) To regular interest holder--(A) In general. For each calendar
year, a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of
this section) must provide to each pass-through interest holder who held
a regular interest during the calendar year the notice required under
paragraph (f)(1) of this section. Quarterly reporting is not required.
The information required to be included in the notice may be separately
stated on the statement described in Sec. 1.6049-7(f) instead of on a
separate statement provided in a separate mailing. See Sec. 1.6049-
7(f)(4). The separate statement provided in a separate mailing must be
furnished to each pass-through interest holder no later than the last
day of the month following the close of the calendar year.
(B) Special rule for 1987. The information required under paragraph
(f)(2)(ii)(A) of this section for any calendar quarter of 1987 shall be
mailed (or otherwise delivered) to each pass-through interest holder who
holds a regular interest during that calendar quarter no later than
March 28, 1988.
(3) Returns to the Internal Revenue Service--(i) With respect to
residual interest holders. Any REMIC required under paragraphs (f)(1)
and (2)(i) of this section to furnish information to any pass-through
interest holder who holds a residual interest shall also furnish such
information to the Internal Revenue Service as required in Sec. 1.860F-
4(e)(4).
(ii) With respect to regular interest holders. A single-class REMIC
(as described in paragraph (a)(2)(ii)(B) of this section) shall make an
information return on Form 1099 for each calendar year beginning after
December 31, 1987, with respect to each pass-through interest holder who
holds a regular interest to which an allocation of allocable investment
expenses is required to be made pursuant to paragraphs (a)(1) and
(2)(ii) of this section. The preceding sentence applies with respect to
a holder for a calendar year only if the REMIC is required to make an
information return to the Internal Revenue Service with respect to that
holder for that year pursuant to section 6049 and Sec. 1.6049-7(b)(2)(i)
(or would be required to make an information return but for the $10
threshold described in section 6049(a)(1) and Sec. 1.6049-7(b)(2)(i)).
The REMIC shall state on the information return--
(A) The sum of--
(1) The aggregate amounts includible in gross income as interest (as
defined in Sec. 1.6049-7(a)(1) (i) and (ii)), for the calendar year, and
(2) The sum of the amount of allocable investment expenses required
to
[[Page 110]]
be allocated to the pass-through interest holder for each calendar
quarter during the calendar year pursuant to paragraph (a) of this
section, and
(B) Any other information specified by the form or its instructions.
(4) Interest held by nominees and other specified persons--(i) Pass-
through interest holder's interest held by a nominee. If a pass-through
interest holder's interest in a REMIC is held in the name of a nominee,
the REMIC may make the information return described in paragraphs (f)(3)
(i) and (ii) of this section with respect to the nominee in lieu of the
pass-through interest holder and may provide the written statement
described in paragraphs (f)(2) (i) and (ii) of this section to that
nominee in lieu of the pass-through interest holder.
(ii) Regular interests in a single-class REMIC held by certain
persons. For calendar quarters and calendar years after December 31,
1991, if a person specified in Sec. 1.6049-7(e)(4) holds a regular
interest in a single-class REMIC (as described in paragraph
(a)(2)(ii)(B) of this section), then the single-class REMIC must provide
the information described in paragraphs (f)(1) and (f)(3)(ii) (A) and
(B) of this section to that person with the information specified in
Sec. 1.6049-7(e)(2) as required in Sec. 1.6049-7(e).
(5) Nominee reporting--(i) In general. In any case in which a REMIC
provides information pursuant to paragraph (f)(4) of this section to a
nominee of a pass-through interest holder for a calendar quarter or, as
provided in paragraph (f)(2)(ii) of this section, for a calendar year--
(A) The nominee shall furnish each pass-through interest holder with
a written statement described in paragraph (f)(2) (i) or (ii) of this
section, whichever is applicable, showing the information described in
paragraph (f)(1) of this section, and
(B) If--
(1) The nominee is a nominee for a pass-through interest holder who
holds a regular interest in a single-class REMIC (as described in
paragraph (a)(2)(ii)(B) of this section), and
(2) The nominee is required to make an information return pursuant
to section 6049 and Sec. 1.6049-7(b)(2)(i) and (b)(2)(ii)(B) (or would
be required to make an information return but for the $10 threshold
described in section 6049(a)(2) and Sec. 1.6049-7(b)(2)(i)) with respect
to the pass-through interest holder,
the nominee shall make an information return on Form 1099 for each
calendar year beginning after December 31, 1987, with respect to the
pass-through interest holder and state on this information return the
information described in paragraph (f)(3)(ii) (A) and (B) of this
section.
(ii) Time for furnishing statement. The statement required by
paragraph (f)(5)(i)(A) of this section to be furnished by a nominee to a
pass-through interest holder for a calendar quarter or calendar year
shall be furnished to this holder no later than 30 days after receiving
the written statement described in paragraph (f)(2) (i) or (ii) of this
section from the REMIC. If, however, pursuant to paragraph (f)(2)(ii) of
this section, the information is separately stated on the statement
described in Sec. 1.6049-7(f), then the information must be furnished to
the pass-through interest holder in the time specified in Sec. 1.6049-
7(f)(5).
(6) Special rules--(i) Time and place for furnishing returns. The
returns required by paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this
section for any calendar year shall be filed at the time and place that
a return required under section 6049 and Sec. 1.6049-7(b)(2) is required
to be filed. See Sec. 1.6049-4(g) and Sec. 1.6049-7(b)(2)(iv).
(ii) Duplicative returns not required. The requirements of
paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for the making of
an information return shall be met by the timely filing of an
information return pursuant to section 6049 and Sec. 1.6049-7(b)(2) that
contains the information required by paragraph (f)(3)(ii) of this
section.
[T.D. 8186, 53 FR 7507, Mar 9, 1988, as amended by T.D. 8366, 56 FR
49515, Sept. 30, 1991]
[[Page 111]]
Sec. 1.67-4T Allocation of expenses by nongrantor trusts and estates (temporary). [Reserved]
Items Specifically Included in Gross Income
Sec. 1.71-1 Alimony and separate maintenance payments; income to wife or former wife.
(a) In general. Section 71 provides rules for treatment in certain
cases of payments in the nature of or in lieu of alimony or an allowance
for support as between spouses who are divorced or separated. For
convenience, the payee spouse will hereafter in this section be referred
to as the ``wife'' and the spouse from whom she is divorced or separated
as the ``husband.'' See section 7701(a)(17). For rules relative to the
deduction by the husband of periodic payments not attributable to
transferred property, see section 215 and the regulations thereunder.
For rules relative to the taxable status of income of an estate or trust
in case of divorce, etc., see section 682 and the regulations
thereunder.
(b) Alimony or separate maintenance payments received from the
husband--(1) Decree of divorce or separate maintenance. (i) In the case
of divorce or legal separation, paragraph (1) of section 71(a) requires
the inclusion in the gross income of the wife of periodic payments
(whether or not made at regular intervals) received by her after a
decree of divorce or of separate maintenance. Such periodic payments
must be made in discharge of a legal obligation imposed upon or incurred
by the husband because of the marital or family relationship under a
court order or decree divorcing or legally separating the husband and
wife or a written instrument incident to the divorce status or legal
separation status.
(ii) For treatment of payments attributable to property transferred
(in trust or otherwise), see paragraph (c) of this section.
(2) Written separation agreement. (i) Where the husband and wife are
separated and living apart and do not file a joint income tax return for
the taxable year, paragraph (2) of section 71(a) requires the inclusion
in the gross income of the wife of periodic payments (whether or not
made at regular intervals) received by her pursuant to a written
separation agreement executed after August 16, 1954. The periodic
payments must be made under the terms of the written separation
agreement after its execution and because of the marital or family
relationship. Such payments are includable in the wife's gross income
whether or not the agreement is a legally enforceable instrument.
Moreover, if the wife is divorced or legally separated subsequent to the
written separation agreement, payments made under such agreement
continue to fall within the provisions of section 71(a)(2).
(ii) For purposes of section 71(a)(2) any written separation
agreement executed on or before August 16, 1954, which is altered or
modified in writing by the parties in any material respect after that
date will be treated as an agreement executed after August 16, 1954,
with respect to payments made after the date of alteration or
modification.
(iii) For treatment of payments attributable to property transferred
(in trust or otherwise), see paragraph (c) of this section.
(3) Decree for support. (i) Where the husband and wife are separated
and living apart and do not file a joint income tax return for the
taxable year, paragraph (3) of section 71(a) requires the inclusion in
the gross income of the wife of periodic payments (whether or not made
at regular intervals) received by her after August 16, 1954, from her
husband under any type of court order or decree (including an
interlocutory decree of divorce or a decree of alimony pendente lite)
entered after March 1, 1954, requiring the husband to make the payments
for her support or maintenance. It is not necessary for the wife to be
legally separated or divorced from her husband under a court order or
decree; nor is it necessary for the order or decree for support to be
for the purpose of enforcing a written separation agreement.
(ii) For purposes of section 71(a)(3), any decree which is altered
or modified by a court order entered after March 1, 1954, will be
treated as a decree entered after such date.
(4) Scope of section 71(a). Section 71(a) applies only to payments
made because
[[Page 112]]
of the family or marital relationship in recognition of the general
obligation to support which is made specific by the decree, instrument,
or agreement. Thus, section 71(a) does not apply to that part of any
periodic payment which is attributable to the repayment by the husband
of, for example, a bona fide loan previously made to him by the wife,
the satisfaction of which is specified in the decree, instrument, or
agreement as a part of the general settlement between the husband and
wife.
(5) Year of inclusion. Periodic payments are includible in the
wife's income under section 71(a) only for the taxable year in which
received by her. As to such amounts, the wife is to be treated as if she
makes her income tax returns on the cash receipts and disbursements
method, regardless of whether she normally makes such returns on the
accrual method. However, if the periodic payments described in section
71(a) are to be made by an estate or trust, such periodic payments are
to be included in the wife's taxable year in which they are includible
according to the rules as to income of estates and trusts provided in
sections 652, 662, and 682, whether or not such payments are made out of
the income of such estates or trusts.
(6) Examples. The foregoing rules are illustrated by the following
examples in which it is assumed that the husband and wife file separate
income tax returns on the calendar year basis:
Example (1). W files suit for divorce from H in 1953. In
consideration of W's promise to relinquish all marital rights and not to
make public H's financial affairs, H agrees in writing to pay $200 a
month to W during her lifetime if a final decree of divorce is granted
without any provision for alimony. Accordingly, W does not request
alimony and no provision for alimony is made under a final decree of
divorce entered December 31, 1953. During 1954, H pays W $200 a month,
pursuant to the promise. The $2,400 thus received by W is includible in
her gross income under the provisions of section 71(a)(1). Under section
215, H is entitled to a deduction of $2,400 from his gross income.
Example (2). During 1945, H and W enter into an antenuptial
agreement, under which, in consideration of W's relinquishment of all
marital rights (including dower) in H's property, and, in order to
provide for W's support and household expenses, H promises to pay W $200
a month during her lifetime. Ten years after their marriage, W sues H
for divorce but does not ask for or obtain alimony because of the
provision already made for her support in the antenuptial agreement.
Likewise, the divorce decree is silent as to such agreement and H's
obligation to support W. Section 71(a) does not apply to such a case.
If, however, the decree were modified so as to refer to the antenuptial
agreement, or if reference had been made to the antenuptial agreement in
the court's decree or in a written instrument incident to the divorce
status, section 71(a)(1) would require the inclusion in W's gross income
of the payments received by her after the decree. Similarly, if a
written separation agreement were executed after August 16, 1954, and
incorporated the payment provisions of the antenuptial agreement,
section 71(a)(2) would require the inclusion in W's income of payments
received by W after W begins living apart from H, whether or not the
divorce decree was subsequently entered and whether or not W was living
apart from H when the separation agreement was executed, provided that
such payments were made after such agreement was executed and pursuant
to its terms. As to including such payments in W's income, if made by a
trust created under the antenuptial agreement, regardless of whether
referred to in the decree or a later instrument, or created pursuant to
the written separation agreement, see section 682 and the regulations
thereunder.
Example (3). H and W are separated and living apart during 1954. W
sues H for support and on February 1, 1954, the court enters a decree
requiring H to pay $200 a month to W for her support and maintenance. No
part of the $200 a month support payments is includible in W's income
under section 71(a)(3) or deductible by H under section 215. If,
however, the decree had been entered after March 1, 1954, or had been
altered or modified by a court order entered after March 1, 1954, the
payments received by W after August 16, 1954, under the decree as
altered or modified would be includible in her income under section
71(a)(3) and deductible by H under section 215.
Example (4). W sues H for divorce in 1954. On January 15, 1954, the
court awards W temporary alimony of $25 a week pending the final decree.
On September 1, 1954, the court grants W a divorce and awards her $200 a
month permanent alimony. No part of the $25 a week temporary alimony
received prior to the decree is includible in W's income under section
71(a), but the $200 a month received during the remainder of 1954 by W
is includible in her income for 1954. Under section 215, H is entitled
to deduct such $200 payments from his income. If, however, the decree
awarding W temporary alimony had been entered after March 1, 1954, or
had been altered or modified by a court order entered
[[Page 113]]
after March 1, 1954, temporary alimony received by her after August 16,
1954, would be includible in her income under section 71(a)(3) and
deductible by H under section 215.
(c) Alimony and separate maintenance payments attributable to
property. (1)(i) In the case of divorce or legal separation, paragraph
(1) of section 71(a) requires the inclusion in the gross income of the
wife of periodic payments (whether or not made at regular intervals)
attributable to property transferred, in trust or otherwise, and
received by her after a decree of divorce or of separate maintenance.
Such property must have been transferred in discharge of a legal
obligation imposed upon or incurred by the husband because of the
marital or family relationship under a decree of divorce or separate
maintenance or under a written instrument incident to such divorce
status or legal separation status.
(ii) Where the husband and wife are separated and living apart and
do not file a joint income tax return for the taxable year, paragraph
(2) of section 71(a) requires the inclusion in the gross income of the
wife of periodic payments (whether or not made at regular intervals)
received by her which are attributable to property transferred, in trust
or otherwise, under a written separation agreement executed after August
16, 1954. The property must be transferred because of the marital or
family relationship. The periodic payments attributable to the property
must be received by the wife after the written separation agreement is
executed.
(iii) The periodic payments received by the wife attributable to
property transferred under subdivisions (i) and (ii) of this
subparagraph and includible in her gross income are not to be included
in the gross income of the husband.
(2) The full amount of periodic payments received under the
circumstances described in section 71(a) (1), (2), and (3) is required
to be included in the gross income of the wife regardless of the source
of such payments. Thus, it matters not that such payments are
attributable to property in trust, to life insurance, endowment, or
annuity contracts, or to any other interest in property, or are paid
directly or indirectly by the husband from his income or capital. For
example, if in order to meet an alimony or separate maintenance
obligation of $500 a month the husband purchases or assigns for the
benefit of his wife a commercial annuity contract paying such amount,
the full $500 a month received by the wife is includible in her income,
and no part of such amount is includible in the husband's income or
deductible by him. See section 72(k) and the regulations thereunder.
Likewise, if property is transferred by the husband, subject to an
annual charge of $5,000, payable to his wife in discharge of his alimony
or separate maintenance obligation under the divorce or separation
decree or written instrument incident to the divorce status or legal
separation status or if such property is transferred pursuant to a
written separation agreement and subject to a similar annual charge, the
$5,000 received annually is, under section 71(a) (1) or (2), includible
in the wife's income, regardless of whether such amount is paid out of
income or principal of the property.
(3) The same rule applies to periodic payments attributable to
property in trust. The full amount of periodic payments to which section
71(a) (1) and (2) applies is includible in the wife's income regardless
of whether such payments are made out of trust income. Such periodic
payments are to be included in the wife's income under section 71(a) (1)
or (2) and are to be excluded from the husband's income even though the
income of the trust would otherwise be includible in his income under
Subpart E, Part I, Subchapter J, Chapter 1 of the Code, relating to
trust income attributable to grantors and others as substantial owners.
As to periodic payments received by a wife attributable to property in
trust in cases to which section 71(a) (1) or (2) does not apply because
the husband's obligation is not specified in the decree or an instrument
incident to the divorce status or legal separation status or the
property was not transferred under a written separation agreement, see
section 682 and the regulations thereunder.
[[Page 114]]
(4) Section 71(a) (1) or (2) does not apply to that part of any
periodic payment attributable to that portion of any interest in
property transferred in discharge of the husband's obligation under the
decree or instrument incident to the divorce status or legal separation
status, or transferred pursuant to the written separation agreement,
which interest originally belonged to the wife. It will apply, however,
if she received such interest from her husband in contemplation of or as
an incident to the divorce or separation without adequate and full
consideration in money or money's worth, other than the release of the
husband or his property from marital obligations. An example of the
first rule is a case where the husband and wife transfer securities,
which were owned by them jointly, in trust to pay an annuity to the
wife. In this case, the full amount of that part of the annuity received
by the wife attributable to the husband's interest in the securities
transferred in discharge of his obligation under the decree, or
instrument incident to the divorce status or legal separation status, or
transferred under the written separation agreement, is taxable to her
under section 71(a) (1) or (2), while that portion of the annuity
attributable to the wife's interest in the securities so transferred is
taxable to her only to the extent it is out of trust income as provided
in Part I (sections 641 and following), Subchapter J, Chapter 1 of the
Code. If, however, the husband's transfer to his wife is made before
such property is transferred in discharge of his obligation under the
decree or written instrument, or pursuant to the separation agreement in
an attempt to avoid the application of section 71(a) (1) or (2) to part
of such payments received by his wife, such transfers will be considered
as a part of the same transfer by the husband of his property in
discharge of his obligation or pursuant to such agreement. In such a
case, section 71(a) (1) or (2) will be applied to the full amount
received by the wife. As to periodic payments received under a joint
purchase of a commercial annuity contract, see section 72 and the
regulations thereunder.
(d) Periodic and installment payments. (1) In general, installment
payments discharging a part of an obligation the principal sum of which
is, in terms of money or property, specified in the decree, instrument,
or agreement are not considered ``periodic payments'' and therefore are
not to be included under section 71(a) in the wife's income.
(2) An exception to the general rule stated in subparagraph (1) of
this paragraph is provided, however, in cases where such principal sum,
by the terms of the decree, instrument, or agreement, may be or is to be
paid over a period ending more than 10 years from the date of such
decree, instrument, or agreement. In such cases, the installment payment
is considered a periodic payment for the purposes of section 71(a) but
only to the extent that the installment payment, or sum of the
installment payments, received during the wife's taxable year does not
exceed 10 percent of the principal sum. This 10-percent limitation
applies to installment payments made in advance but does not apply to
delinquent installment payments for a prior taxable year of the wife
made during her taxable year.
(3)(i) Where payments under a decree, instrument, or agreement are
to be paid over a period ending 10 years or less from the date of such
decree, instrument, or agreement, such payments are not installment
payments discharging a part of an obligation the principal sum of which
is, in terms of money or property, specified in the decree, instrument,
or agreement (and are considered periodic payments for the purposes of
section 71(a)) only if such payments meet the following two conditions:
(a) Such payments are subject to any one or more of the
contingencies of death of either spouse, remarriage of the wife, or
change in the economic status of either spouse, and
(b) Such payments are in the nature of alimony or an allowance for
support.
(ii) Payments meeting the requirements of subdivision (i) are
considered periodic payments for the purposes of section 71(a)
regardless of whether--
(a) The contingencies described in subdivision (i)(a) of this
subparagraph are set forth in the terms of the decree, instrument, or
agreement, or are imposed by local law, or
[[Page 115]]
(b) The aggregate amount of the payments to be made in the absence
of the occurrence of the contingencies described in subdivision (i)(a)
of this subparagraph is explicitly stated in the decree, instrument, or
agreement or may be calculated from the face of the decree, instrument,
or agreement, or
(c) The total amount which will be paid may be calculated
actuarially.
(4) Where payments under a decree, instrument, or agreement are to
be paid over a period ending more than ten years from the date of such
decree, instrument, or agreement, but where such payments meet the
conditions set forth in subparagraph (3)(i) of this paragraph, such
payments are considered to be periodic payments for the purpose of
section 71 without regard to the rule set forth in subparagraph (2) of
this paragraph. Accordingly, the rules set forth in subparagraph (2) of
this paragraph are not applicable to such payments.
(5) The rules as to periodic and installment payments are
illustrated by the following examples:
Example (1). Under the terms of a written instrument, H is required
to make payments to W which are in the nature of alimony, in the amount
of $100 a month for nine years. The instrument provides that if H or W
dies the payments are to cease. The payments are periodic.
Example (2). The facts are the same as in example (1) except that
the written instrument explicitly provides that H is to pay W the sum of
$10,800 in monthly payments of $100 over a period of nine years. The
payments are periodic.
Example (3). Under the terms of a written instrument, H is to pay W
$100 a month over a period of nine years. The monthly payments are not
subject to any of the contingencies of death of H or W, remarriage of W,
or change in the economic status of H or W under the terms of the
written instrument or by reason of local law. The payments are not
periodic.
Example (4). A divorce decree in 1954 provides that H is to pay W
$20,000 each year for the next five years, beginning with the date of
the decree, and then $5,000 each year for the next ten years. Assuming
the wife makes her returns on the calendar year basis, each payment
received in the years 1954 to 1958, inclusive, is treated as a periodic
payment under section 71(a)(1), but only to the extent of 10 percent of
the principal sum of $150,000. Thus, for such taxable years, only
$15,000 of the $20,000 received is includible under section 71(a)(1) in
the wife's income and is deductible by the husband under section 215.
For the years 1959 to 1968, inclusive, the full $5,000 received each
year by the wife is includible in her income and is deductible from the
husband's income.
(e) Payments for support of minor children. Section 71(a) does not
apply to that part of any periodic payment which, by the terms of the
decree, instrument, or agreement under section 71(a), is specifically
designated as a sum payable for the support of minor children of the
husband. The statute prescribes the treatment in cases where an amount
or portion is so fixed but the amount of any periodic payment is less
than the amount of the periodic payment specified to be made. In such
cases, to the extent of the amount which would be payable for the
support of such children out of the originally specified periodic
payment, such periodic payment is considered a payment for such support.
For example, if the husband is by terms of the decree, instrument, or
agreement required to pay $200 a month to his divorced wife, $100 of
which is designated by the decree, instrument, or agreement to be for
the support of their minor children, and the husband pays only $150 to
his wife, $100 is nevertheless considered to be a payment by the husband
for the support of the children. If, however, the periodic payments are
received by the wife for the support and maintenance of herself and of
minor children of the husband without such specific designation of the
portion for the support of such children, then the whole of such amounts
is includible in the income of the wife as provided in section 71(a).
Except in cases of a designated amount or portion for the support of the
husband's minor children, periodic payments described in section 71(a)
received by the wife for herself and any other person or persons are
includible in whole in the wife's income, whether or not the amount or
portion for such other person or persons is designated.
Sec. 1.71-1T Alimony and separate maintenance payments (temporary).
(a) In general.
Q-1 What is the income tax treatment of alimony or separate
maintenance payments?
[[Page 116]]
A-1 Alimony or separate maintenance payments are, under section 71,
included in the gross income of the payee spouse and, under section 215,
allowed as a deduction from the gross income of the payor spouse.
Q-2 What is an alimony or separate maintenance payment?
A-2 An alimony or separate maintenance payment is any payment
received by or on behalf of a spouse (which for this purpose includes a
former spouse) of the payor under a divorce or separation instrument
that meets all of the following requirements:
(a) The payment is in cash (see A-5).
(b) The payment is not designated as a payment which is excludible
from the gross income of the payee and nondeductible by the payor (see
A-8).
(c) In the case of spouses legally separated under a decree of
divorce or separate maintenance, the spouses are not members of the same
household at the time the payment is made (see A-9).
(d) The payor has no liability to continue to make any payment after
the death of the payee (or to make any payment as a substitute for such
payment) and the divorce or separation instrument states that there is
no such liability (see A-10).
(e) The payment is not treated as child support (see A-15).
(f) To the extent that one or more annual payments exceed $10,000
during any of the 6-post-separation years, the payor is obligated to
make annual payments in each of the 6-post-separation years (see A-19).
Q-3 In order to be treated as alimony or separate maintenance
payments, must the payments be ``periodic'' as that term was defined
prior to enactment of the Tax Reform Act of 1984 or be made in discharge
of a legal obligation of the payor to support the payee arising out of a
marital or family relationship?
A-3 No. The Tax Reform Act of 1984 replaces the old requirements
with the requirements described in A-2 above. Thus, the requirements
that alimony or separate maintenance payments be ``periodic'' and be
made in discharge of a legal obligation to support arising out of a
marital or family relationship have been eliminated.
Q-4 Are the instruments described in section 71(a) of prior law the
same as divorce or separation instruments described in section 71, as
amended by the Tax Reform Act of 1984?
A-4 Yes.
(b) Specific requirements.
Q-5 May alimony or separate maintenance payments be made in a form
other than cash?
A-5 No. Only cash payments (including checks and money orders
payable on demand) qualify as alimony or separate maintenance payments.
Transfers of services or property (including a debt instrument of a
third party or an annuity contract), execution of a debt instrument by
the payor, or the use of property of the payor do not qualify as alimony
or separate maintenance payments.
Q-6 May payments of cash to a third party on behalf of a spouse
qualify as alimony or separate maintenance payments if the payments are
pursuant to the terms of a divorce or separation instrument?
A-6 Yes. Assuming all other requirements are satisfied, a payment
of cash by the payor spouse to a third party under the terms of the
divorce or separation instrument will qualify as a payment of cash which
is received ``on behalf of a spouse''. For example, cash payments of
rent, mortgage, tax, or tuition liabilities of the payee spouse made
under the terms of the divorce or separation instrument will qualify as
alimony or separate maintenance payments. Any payments to maintain
property owned by the payor spouse and used by the payee spouse
(including mortgage payments, real estate taxes and insurance premiums)
are not payments on behalf of a spouse even if those payments are made
pursuant to the terms of the divorce or separation instrument. Premiums
paid by the payor spouse for term or whole life insurance on the payor's
life made under the terms of the divorce or separation instrument will
qualify as payments on behalf of the payee spouse to the extent that the
payee spouse is the owner of the policy.
Q-7 May payments of cash to a third party on behalf of a spouse
qualify as alimony or separate maintenance payments if the payments are
made to the
[[Page 117]]
third party at the written request of the payee spouse?
A-7 Yes. For example, instead of making an alimony or separate
maintenance payment directly to the payee, the payor spouse may make a
cash payment to a charitable organization if such payment is pursuant to
the written request, consent or ratification of the payee spouse. Such
request, consent or ratification must state that the parties intend the
payment to be treated as an alimony or separate maintenance payment to
the payee spouse subject to the rules of section 71, and must be
received by the payor spouse prior to the date of filing of the payor's
first return of tax for the taxable year in which the payment was made.
Q-8 How may spouses designate that payments otherwise qualifying as
alimony or separate maintenance payments shall be excludible from the
gross income of the payee and nondeductible by the payor?
A-8 The spouses may designate that payments otherwise qualifying as
alimony or separate maintenance payments shall be nondeductible by the
payor and excludible from gross income by the payee by so providing in a
divorce or separation instrument (as defined in section 71(b)(2)). If
the spouses have executed a written separation agreement (as described
in section 71(b)(2)(B)), any writing signed by both spouses which
designates otherwise qualifying alimony or separate maintenance payments
as nondeductible and excludible and which refers to the written
separation agreement will be treated as a written separation agreement
(and thus a divorce or separation instrument) for purposes of the
preceding sentence. If the spouses are subject to temporary support
orders (as described in section 71(b)(2)(C)), the designation of
otherwise qualifying alimony or separate payments as nondeductible and
excludible must be made in the original or a subsequent temporary
support order. A copy of the instrument containing the designation of
payments as not alimony or separate maintenance payments must be
attached to the payee's first filed return of tax (Form 1040) for each
year in which the designation applies.
Q-9 What are the consequences if, at the time a payment is made,
the payor and payee spouses are members of the same household?
A-9 Generally, a payment made at the time when the payor and payee
spouses are members of the same household cannot qualify as an alimony
or separate maintenance payment if the spouses are legally separated
under a decree of divorce or of separate maintenance. For purposes of
the preceding sentence, a dwelling unit formerly shared by both spouses
shall not be considered two separate households even if the spouses
physically separate themselves within the dwelling unit. The spouses
will not be treated as members of the same household if one spouse is
preparing to depart from the household of the other spouse, and does
depart not more than one month after the date the payment is made. If
the spouses are not legally separated under a decree of divorce or
separate maintenance, a payment under a written separation agreement or
a decree described in section 71(b)(2)(C) may qualify as an alimony or
separate maintenance payment notwithstanding that the payor and payee
are members of the same household at the time the payment is made.
Q-10 Assuming all other requirements relating to the qualification
of certain payments as alimony or separate maintenance payments are met,
what are the consequences if the payor spouse is required to continue to
make the payments after the death of the payee spouse?
A-10 None of the payments before (or after) the death of the payee
spouse qualify as alimony or separate maintenance payments.
Q-11 What are the consequences if the divorce or separation
instrument fails to state that there is no liability for any period
after the death of the payee spouse to continue to make any payments
which would otherwise qualify as alimony or separate maintenance
payments?
A-11 If the instrument fails to include such a statement, none of
the payments, whether made before or after the death of the payee
spouse, will qualify as alimony or separate maintenance payments.
[[Page 118]]
Example (1). A is to pay B $10,000 in cash each year for a period of
10 years under a divorce or separation instrument which does not state
that the payments will terminate upon the death of B. None of the
payments will qualify as alimony or separate maintenance payments.
Example (2). A is to pay B $10,000 in cash each year for a period of
10 years under a divorce or separation instrument which states that the
payments will terminate upon the death of B. In addition, under the
instrument, A is to pay B or B's estate $20,000 in cash each year for a
period of 10 years. Because the $20,000 annual payments will not
terminate upon the death of B, these payments will not qualify as
alimony or separate maintenance payments. However, the separate $10,000
annual payments will qualify as alimony or separate maintenance
payments.
Q-12 Will a divorce or separation instrument be treated as stating
that there is no liability to make payments after the death of the payee
spouse if the liability to make such payments terminates pursuant to
applicable local law or oral agreement?
A-12 No. Termination of the liability to make payments must be
stated in the terms of the divorce or separation instrument.
Q-13 What are the consequences if the payor spouse is required to
make one or more payments (in cash or property) after the death of the
payee spouse as a substitute for the continuation of pre-death payments
which would otherwise qualify as alimony or separate maintenance
payments?
A-13 If the payor spouse is required to make any such substitute
payments, none of the otherwise qualifying payments will qualify as
alimony or separate maintenance payments. The divorce or separation
instrument need not state, however, that there is no liability to make
any such substitute payment.
Q-14 Under what circumstances will one or more payments (in cash or
property) which are to occur after the death of the payee spouse be
treated as a substitute for the continuation of payments which would
otherwise qualify as alimony or separate maintenance payments?
A-14 To the extent that one or more payments are to begin to be
made, increase in amount, or become accelerated in time as a result of
the death of the payee spouse, such payments may be treated as a
substitute for the continuation of payments terminating on the death of
the payee spouse which would otherwise qualify as alimony or separate
maintenance payments. The determination of whether or not such payments
are a substitute for the continuation of payments which would otherwise
qualify as alimony or separate maintenance payments, and of the amount
of the otherwise qualifying alimony or separate maintenance payments for
which any such payments are a substitute, will depend on all of the
facts and circumstances.
Example (1). Under the terms of a divorce decree, A is obligated to
make annual alimony payments to B of $30,000, terminating on the earlier
of the expiration of 6 years or the death of B. B maintains custody of
the minor children of A and B. The decree provides that at the death of
B, if there are minor children of A and B remaining, A will be obligated
to make annual payments of $10,000 to a trust, the income and corpus of
which are to be used for the benefit of the children until the youngest
child attains the age of majority. These facts indicate that A's
liability to make annual $10,000 payments in trust for the benefit of
his minor children upon the death of B is a substitute for $10,000 of
the $30,000 annual payments to B. Accordingly, $10,000 of each of the
$30,000 annual payments to B will not qualify as alimony or separate
maintenance payments.
Example (2). Under the terms of a divorce decree, A is obligated to
make annual alimony payments to B of $30,000, terminating on the earlier
of the expiration of 15 years or the death of B. The divorce decree
provides that if B dies before the expiration of the 15 year period, A
will pay to B's estate the difference between the total amount that A
would have paid had B survived, minus the amount actually paid. For
example, if B dies at the end of the 10th year in which payments are
made, A will pay to B's estate $150,000 ($450,000-$300,000). These facts
indicate that A's liability to make a lump sum payment to B's estate
upon the death of B is a substitute for the full amount of each of the
annual $30,000 payments to B. Accordingly, none of the annual $30,000
payments to B will qualify as alimony or separate maintenance payments.
The result would be the same if the lump sum payable at B's death were
discounted by an appropriate interest factor to account for the
prepayment.
(c) Child support payments.
Q-15 What are the consequences of a payment which the terms of the
divorce or separation instrument fix as
[[Page 119]]
payable for the support of a child of the payor spouse?
A-15 A payment which under the terms of the divorce or separation
instrument is fixed (or treated as fixed) as payable for the support of
a child of the payor spouse does not qualify as an alimony or separate
maintenance payment. Thus, such a payment is not deductible by the payor
spouse or includible in the income of the payee spouse.
Q-16 When is a payment fixed (or treated as fixed) as payable for
the support of a child of the payor spouse?
A-16 A payment is fixed as payable for the support of a child of
the payor spouse if the divorce or separation instrument specifically
designates some sum or portion (which sum or portion may fluctuate) as
payable for the support of a child of the payor spouse. A payment will
be treated as fixed as payable for the support of a child of the payor
spouse if the payment is reduced (a) on the happening of a contingency
relating to a child of the payor, or (b) at a time which can clearly be
associated with such a contingency. A payment may be treated as fixed as
payable for the support of a child of the payor spouse even if other
separate payments specifically are designated as payable for the support
of a child of the payor spouse.
Q-17 When does a contingency relate to a child of the payor?
A-17 For this purpose, a contingency relates to a child of the
payor if it depends on any event relating to that child, regardless of
whether such event is certain or likely to occur. Events that relate to
a child of the payor include the following: the child's attaining a
specified age or income level, dying, marrying, leaving school, leaving
the spouse's household, or gaining employment.
Q-18 When will a payment be treated as to be reduced at a time
which can clearly be associated with the happening of a contingency
relating to a child of the payor?
A-18 There are two situations, described below, in which payments
which would otherwise qualify as alimony or separate maintenance
payments will be presumed to be reduced at a time clearly associated
with the happening of a contingency relating to a child of the payor. In
all other situations, reductions in payments will not be treated as
clearly associated with the happening of a contingency relating to a
child of the payor.
The first situation referred to above is where the payments are to
be reduced not more than 6 months before or after the date the child is
to attain the age of 18, 21, or local age of majority. The second
situation is where the payments are to be reduced on two or more
occasions which occur not more than one year before or after a different
child of the payor spouse attains a certain age between the ages of 18
and 24, inclusive. The certain age referred to in the preceding sentence
must be the same for each such child, but need not be a whole number of
years.
The presumption in the two situations described above that payments
are to be reduced at a time clearly associated with the happening of a
contingency relating to a child of the payor may be rebutted (either by
the Service or by taxpayers) by showing that the time at which the
payments are to be reduced was determined independently of any
contingencies relating to the children of the payor. The presumption in
the first situation will be rebutted conclusively if the reduction is a
complete cessation of alimony or separate maintenance payments during
the sixth post-separation year (described in A-21) or upon the
expiration of a 72-month period. The presumption may also be rebutted in
other circumstances, for example, by showing that alimony payments are
to be made for a period customarily provided in the local jurisdiction,
such as a period equal to one-half the duration of the marriage.
Example: A and B are divorced on July 1, 1985, when their children,
C (born July 15, 1970) and D (born September 23, 1972), are 14 and 12,
respectively. Under the divorce decree, A is to make alimony payments to
B of $2,000 per month. Such payments are to be reduced to $1,500 per
month on January 1, 1991 and to $1,000 per month on January 1, 1995. On
January 1, 1991, the date of the first reduction in payments, C will be
20 years 5 months and 17 days old. On January 1, 1995, the date of the
second reduction in payments, D will be 22 years 3 months and 9 days
old. Each of the reductions in payments is to
[[Page 120]]
occur not more than one year before or after a different child of A
attains the age of 21 years and 4 months. (Actually, the reductions are
to occur not more than one year before or after C and D attain any of
the ages 21 years 3 months and 9 days through 21 years 5 months and 17
days.) Accordingly, the reductions will be presumed to clearly be
associated with the happening of a contingency relating to C and D.
Unless this presumption is rebutted, payments under the divorce decree
equal to the sum of the reduction ($1,000 per month) will be treated as
fixed for the support of the children of A and therefore will not
qualify as alimony or separate maintenance payments.
(d) Excess front-loading rules.
Q-19 What are the excess front-loading rules?
A-19 The excess front-loading rules are two special rules which may
apply to the extent that payments in any calendar year exceed $10,000.
The first rule is a minimum term rule, which must be met in order for
any annual payment, to the extent in excess of $10,000, to qualify as an
alimony or separate maintenance payment (see A-2(f)). This rule requires
that alimony or separate maintenance payments be called for, at a
minimum, during the 6 ``post-separation years''. The second rule is a
recapture rule which characterizes payments retrospectively by requiring
a recalculation and inclusion in income by the payor and deducation by
the payee of previously paid alimony or separate maintenance payment to
the extent that the amount of such payments during any of the 6 ``post-
separation years'' falls short of the amount of payments during a prior
year by more than $10,000.
Q-20 Do the excess front-loading rules apply to payments to the
extent that annual payments never exceed $10,000?
A-20 No. For example, A is to make a single $10,000 payment to B.
Provided that the other requirements of section 71 are met, the payment
will qualify as an alimony or separate maintenance payment. If A were to
make a single $15,000 payment to B, $10,000 of the payment would qualify
as an alimony or separate maintenance payment and $5,000 of the payment
would be disqualified under the minimum term rule because payments were
not to be made for the minimum period.
Q-21 Do the excess front-loading rules apply to payments received
under a decree described in section 71(b)(2)(C)?
A-21 No. Payments under decrees described in section 71(b)(2)(C)
are to be disregarded entirely for purposes of applying the excess
front-loading rules.
Q-22 Both the minimum term rule and the recapture rule refer to 6
``post-separation years''. What are the 6 ``post separation years''?
A-22 The 6 ``post-separation years'' are the 6 consecutive calendar
years beginning with the first calendar year in which the payor pays to
the payee an alimony or separate maintenance payment (except a payment
made under a decree described in section 71(b)(2)(C)). Each year within
this period is referred to as a ``post-separation year''. The 6-year
period need not commence with the year in which the spouses separate or
divorce, or with the year in which payments under the divorce or
separation instrument are made, if no payments during such year qualify
as alimony or separate maintenance payments. For example, a decree for
the divorce of A and B is entered in October, 1985. The decree requires
A to make monthly payments to B commencing November 1, 1985, but A and B
are members of the same household until February 15, 1986 (and as a
result, the payments prior to January 16, 1986, do not qualify as
alimony payments). For purposes of applying the excess front-loading
rules to payments from A to B, the 6 calendar years 1986 through 1991
are post-separation years. If a spouse has been making payments pursuant
to a divorce or separation instrument described in section 71(b)(2) (A)
or (B), a modification of the instrument or the substitution of a new
instrument (for example, the substitution of a divorce decree for a
written separation agreement) will not result in the creation of
additional post-separation years. However, if a spouse has been making
payments pursuant to a divorce or separation instrument described in
section 71(b)(2)(C), the 6-year period does not begin until the first
calendar year in which alimony or separate maintenance payments are made
[[Page 121]]
under a divorce or separation instrument described in section 71(b)(2)
(A) or (B).
Q-23 How does the minimum term rule operate?
A-23 The minimum term rule operates in the following manner. To the
extent payments are made in excess of $10,000, a payment will qualify as
an alimony or separate maintenance payment only if alimony or separate
maintenance payments are to be made in each of the 6 post-separation
years. For example, pursuant to a divorce decree, A is to make alimony
payments to B of $20,000 in each of the 5 calendar years 1985 through
1989. A is to make no payment in 1990. Under the minimum term rule, only
$10,000 will qualify as an alimony payment in each of the calendar years
1985 through 1989. If the divorce decree also required A to make a $1
payment in 1990, the minimum term rule would be satisfied and $20,000
would be treated as an alimony payment in each of the calendar years
1985 through 1989. The recapture rule would, however, apply for 1990.
For purposes of determining whether alimony or separate maintenance
payments are to be made in any year, the possible termination of such
payments upon the happening of a contingency (other than the passage of
time) which has not yet occurred is ignored (unless such contingency may
cause all or a portion of the payment to be treated as a child support
payment).
Q-24 How does the recapture rule operate?
A-24 The recapture rule operates in the following manner. If the
amount of alimony or separate maintenance payments paid in any post-
separation year (referred to as the ``computation year'') falls short of
the amount of alimony or separate maintenance payments paid in any prior
post-separation year by more than $10,000, the payor must compute an
``excess amount'' for the computation year. The excess amount for any
computation year is the sum of excess amounts determined with respect to
each prior post-separation year. The excess amount determined with
respect to a prior post-separation year is the excess of (1) the amount
of alimony or separate maintenance payments paid by the payor spouse
during such prior post-separation year, over (2) the amount of the
alimony or separate maintenance payments paid by the payor spouse during
the computation year plus $10,000. For purposes of this calculation, the
amount of alimony or separate maintenance payments made by the payor
spouse during any post-separation year preceding the computation year is
reduced by any excess amount previously determined with respect to such
year. The rules set forth above may be illustrated by the following
example. A makes alimony payments to B of $25,000 in 1985 and $12,000 in
1986. The excess amount with respect to 1985 that is recaptured in 1986
is $3,000 ($25,000- ($12,000+$10,000)). For purposes of subsequent
computation years, the amount deemed paid in 1985 is $22,000. If A makes
alimony payments to B of $1,000 in 1987, the excess amount that is
recaptured in 1987 will be $12,000. This is the sum of an $11,000 excess
amount with respect to 1985 ($22,000-$1,000+$10,000)) and a $1,000
excess amount with respect to 1986 ($12,000-($1,000+$10,000)). If, prior
to the end of 1990, payments decline further, additional recapture will
occur. The payor spouse must include the excess amount in gross income
for his/her taxable year begining with or in the computation year. The
payee spouse is allowed a deduction for the excess amount in computing
adjusted gross income for his/her taxable year beginning with or in the
computation year. However, the payee spouse must compute the excess
amount by reference to the date when payments were made and not when
payments were received.
Q-25 What are the exceptions to the recapture rule?
A-25 Apart from the $10,000 threshold for application of the
recapture rule, there are three exceptions to the recapture rule. The
first exception is for payments received under temporary support orders
described in section 71(b)(2)(C) (see A-21). The second exception is for
any payment made pursuant to a continuing liability over the period of
the post-separation years to pay a fixed portion of the payor's income
from a business or property or from compensation for employment or self-
employment. The third exception is
[[Page 122]]
where the alimony or separate manitenance payments in any post-
separation year cease by reason of the death of the payor or payee or
the remarriage (as defined under applicable local law) of the payee
before the close of the computation year. For example, pursuant to a
divorce decree, A is to make cash payments to B of $30,000 in each of
the calendar years 1985 through 1990. A makes cash payments of $30,000
in 1985 and $15,000 in 1986, in which year B remarries and A's alimony
payments cease. The recapture rule does not apply for 1986 or any
subsequent year. If alimony or separate maintenance payments made by A
decline or cease during a post-separation year for any other reason
(including a failure by the payor to make timely payments, a
modification of the divorce or separation instrument, a reduction in the
support needs of the payee, or a reduction in the ability of the payor
to provide support) excess amounts with respect to prior post-separation
years will be subject to recapture.
(e) Effective dates.
Q-26 When does section 71, as amended by the Tax Reform Act of
1984, become effective?
A-26 Generally, section 71, as amended, is effective with respect
to divorce or separation instruments (as defined in section 71(b)(2))
executed after December 31, 1984. If a decree of divorce or separate
maintenance executed after December 31, 1984, incorporates or adopts
without change the terms of the alimony or separate maintenance payments
under a divorce or separation instrument executed before January 1,
1985, such decree will be treated as executed before January 1, 1985. A
change in the amount of alimony or separate maintenance payments or the
time period over which such payments are to continue, or the addition or
deletion of any contingencies or conditions relating to such payments is
a change in the terms of the alimony or separate maintenance payments.
For example, in November 1984, A and B executed a written separation
agreement. In February 1985, a decree of divorce is entered in
substitution for the written separation agreement. The decree of divorce
does not change the terms of the alimony A pays to B. The decree of
divorce will be treated as executed before January 1, 1985 and hence
alimony payments under the decree will be subject to the rules of
section 71 prior to amendment by the Tax Reform Act of 1984. If the
amount or time period of the alimony or separate maintenance payments
are not specified in the pre-1985 separation agreement or if the decree
of divorce changes the amount or term of such payments, the decree of
divorce will not be treated as executed before January 1, 1985, and
alimony payments under the decree will be subject to the rules of
section 71, as amended by the Tax Reform Act of 1984.
Section 71, as amended, also applies to any divorce or separation
instrument executed (or treated as executed) before January 1, 1985 that
has been modified on or after January 1, 1985, if such modification
expressly provides that section 71, as amended by the Tax Reform Act of
1984, shall apply to the instrument as modified. In this case, section
71, as amended, is effective with respect to payments made after the
date the instrument is modified.
(Secs. 1041(d)(4) (98 Stat. 798, 26 U.S.C. 1041(d)(4), 152(e)(2)(A) (98
Stat. 802, 26 U.S.C. 152(e)(2)(A), 215(c) (98 Stat. 800, 26 U.S.C.
215(c)) and 7805 (68A Stat. 917, 26 U.S.C. 7805) of the Internal Revenue
Code of 1954.
[T.D. 7973, 49 FR 34455, Aug. 31, 1984; 49 FR 36645, Sept. 19, 1984]
Sec. 1.71-2 Effective date; taxable years ending after March 31, 1954, subject to the Internal Revenue Code of 1939.
Pursuant to section 7851(a)(1)(C), the regulations prescribed in
Sec. 1.71-1, to the extent that they relate to payments under a written
separation agreement executed after August 16, 1954, and to the extent
that they relate to payments under a decree for support received after
August 16, 1954, under a decree entered after March 1, 1954, shall also
apply to taxable years beginning before January 1, 1954, and ending
after August 16, 1954, although such years are subject to the Internal
Revenue Code of 1939.
Sec. 1.72-1 Introduction.
(a) General principle. Section 72 prescribes rules relating to the
inclusion
[[Page 123]]
in gross income of amounts received under a life insurance, endowment,
or annuity contract unless such amounts are specifically excluded from
gross income under other provisions of Chapter 1 of the Code. In
general, these rules provide that amounts subject to the provisions of
section 72 are includible in the gross income of the recipient except to
the extent that they are considered to represent a reduction or return
of premiums or other consideration paid.
(b) Amounts to be considered as a return of premiums. For the
purpose of determining the extent to which amounts received represent a
reduction or return of premiums or other consideration paid, the
provisions of section 72 distinguish between ``amounts received as an
annuity'' and ``amounts not received as an annuity''. In general,
``amounts received as an annuity'' are amounts which are payable at
regular intervals over a period of more than one full year from the date
on which they are deemed to begin, provided the total of the amounts so
payable or the period for which they are to be paid can be determined as
of that date. See paragraph (b) (2) and (3) of Sec. 1.72-2. Any other
amounts to which the provisions of section 72 apply are considered to be
``amounts not received as an annuity''. See Sec. 1.72-11.
(c) ``Amounts received as an annuity.'' (1) In the case of ``amounts
received as an annuity'' (other than certain employees' annuities
described in section 72(d) and in Sec. 1.72-13), a proportionate part of
each amount so received is considered to represent a return of premiums
or other consideration paid. The proportionate part of each annuity
payment which is thus excludable from gross income is determined by the
ratio which the investment in the contract as of the date on which the
annuity is deemed to begin bears to the expected return under the
contract as of that date. See Sec. 1.72-4.
(2) In the case of employees' annuities of the type described in
section 72(d), no amount received as an annuity in a taxable year to
which the Internal Revenue Code of 1954 applies is includible in the
gross income of a recipient until the aggregate of all amounts received
thereunder and excluded from gross income under the applicable income
tax law exceeds the consideration contributed (or deemed contributed) by
the employee under Sec. 1.72-8. Thereafter, all amounts so received are
includible in the gross income of the recipient. See Sec. 1.72-13.
(d) ``Amounts not received as an annuity''. In the case of ``amounts
not received as an annuity'', if such amounts are received after an
annuity has begun and during its continuance, amounts so received are
generally includible in the gross income of the recipient. Amounts not
received as an annuity which are received at any other time are
generally includible in the gross income of the recipient only to the
extent that such amounts, when added to all amounts previously received
under the contract which were excludable from the gross income of the
recipient under the income tax law applicable at the time of receipt,
exceed the premiums or other consideration paid (see Sec. 1.72-11).
However, if the aggregate of premiums or other consideration paid for
the contract includes amounts for which a deduction was allowed under
section 404 as contributions on behalf of an owner-employee, the amounts
received under the circumstances of the preceding sentence shall be
includible in gross income until the amount so included equals the
amount for which the deduction was so allowed. See paragraph (b) of
Sec. 1.72-17.
(e) Classification of recipients. For the purpose of the regulations
under section 72, a recipient shall be considered an ``annuitant'' if he
receives amounts under an annuity contract during the period that the
annuity payments are to continue, whether for a term certain or during
the continuing life or lives of the person or persons whose lives
measure the duration of such annuity. However, a recipient shall be
considered a ``beneficiary'' rather than an ``annuitant'' if the amounts
he receives under a contract are received after the term of the annuity
for a life or lives has expired and such amounts are paid by reason of
the fact that the contract guarantees that payments of some minimum
amount or for some minimum period shall be made. For special
[[Page 124]]
rules with respect to beneficiaries, see paragraphs (a)(1)(iii) and (c)
of Sec. 1.72-11.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10134, Sept. 17, 1963]
Sec. 1.72-2 Applicability of section.
(a) Contracts. (1) The contracts under which amounts paid will be
subject to the provisions of section 72 include contracts which are
considered to be life insurance, endowment, and annuity contracts in
accordance with the customary practice of life insurance companies. For
the purposes of section 72, however, it is immaterial whether such
contracts are entered into with an insurance company. The term
``endowment contract'' also includes the ``face-amount certificates''
described in section 72(1).
(2) If two or more annuity obligations or elements to which section
72 applies are acquired for a single consideration, such as an
obligation to pay an annuity to A for his life accompanied by an
obligation to pay an annuity to B for his life, there being a single
consideration paid for both obligations (whether paid by one or more
persons in equal or different amounts, and whether paid in a single sum
or otherwise), such annuity elements shall be considered to comprise a
single contract for the purpose of the application of section 72 and the
regulations thereunder. For rules relating to the allocation of
investment in the contract in the case of annuity elements payable to
two or more persons, see paragraph (b) of Sec. 1.72-6.
(3)(i) Sections 402 and 403 provide that certain distributions by
employees' trusts and certain payments under employee plans are taxable
under section 72. For taxable years beginning before January 1, 1964,
section 72(e)(3), as in effect before such date, does not apply to such
distributions or payments. For purposes of applying section 72 to such
distributions and payments (other than those described in subdivision
(iii) of this subparagraph), each separate program of the employer
consisting of interrelated contributions and benefits shall be
considered a single contract. Therefore, all distributions or payments
(other than those described in subdivision (iii) of this subparagraph)
which are attributable to a separate program of interrelated
contributions and benefits are considered as received under a single
contract. A separate program of interrelated contributions and benefits
may be financed by the purchase from an insurance company of one or more
group contracts or one or more individual contracts, or may be financed
partly by the purchase of contracts from an insurance company and partly
through an investment fund, or may be financed completely through an
investment fund. A program may be considered separate for purposes of
section 72 although it is only a part of a plan which qualifies under
section 401. There may be several trusts under one separate program, or
several separate programs may make use of a single trust. See, however,
subdivision (iii) of this subparagraph for rules relating to what
constitutes a ``contract'' for purposes of applying section 72 to
distributions commencing before October 20, 1960.
(ii) The following types of benefits, and the contributions used to
provide them, are examples of separate programs of interrelated
contributions and benefits:
(a) Definitely determinable retirement benefits.
(b) Definitely determinable benefits payable prior to retirement in
case of disability.
(c) Life insurance.
(d) Accident and health insurance.
However, retirement benefits and life insurance will be considered part
of a single separate program of interrelated contributions and benefits
to the extent they are provided under retirement income, endowment, or
other contracts providing life insurance protection. See examples (6),
(7), and (8) contained in subdivision (iv) of this subparagraph for
illustrations of the principles of this subdivision. See, also,
Sec. 1.72-15 for rules relating to the taxation of amounts received
under an employee plan which provides both retirement benefits and
accident and health benefits.
(iii) If any amount which is taxable under section 72 by reason of
section 402 or 403 is actually distributed or made available to any
person under an employees' trust or plan (other than the Civil Service
Retirement Act, 5
[[Page 125]]
U.S.C. ch. 14) before October 20, 1960, section 72 shall,
notwithstanding any other provisions in this subparagraph, be applied to
all the distributions with respect to such person (or his beneficiaries)
under such trust or plan (whether received before or after October 20,
1960) as though such distributions were provided under a single
contract. For purposes of applying section 72 to distributions to which
this subdivision applies, therefore, the term ``contract'' shall be
considered to include the entire interest of an employee in each trust
or plan described in sections 402 and 403 to the extent that
distributions thereunder are subject to the provisions of section 72.
Section 72 shall be applied to distributions received under the Civil
Service Retirement Act in the manner prescribed in subdivision (i) of
this subparagraph (see example (4) in subdivision (iv) of this
subparagraph).
(iv) The application of this subparagraph may be illustrated by the
following examples:
Example (1). On January 1, 1961, X Corporation established a
noncontributory profit-sharing plan for its employees providing that the
amount standing to the account of each participant will be paid to him
at the time of his retirement and also established a contributory
pension plan for its employees providing for the payment to each
participant of a lifetime pension after retirement. The profit-sharing
plan is designed to enable the employees to participate in the profits
of X Corporation; the amount of the contributions to it are determined
by reference to the profits of X Corporation; and the amount of any
distribution is determined by reference to the amount of contributions
made on behalf of any participant and the earnings thereon. On the other
hand, the pension plan is designed to provide a lifetime pension for a
retired employee; the amount of the pension is to be determined by a
formula set forth in the plan; and the amount of contributions to the
plan is the amount necessary to provide such pensions. In view of the
fact that each of these plans constitutes a separate program of
interrelated contributions and benefits, the distributions from each
shall be treated as received under a separate contract. If these plans
had been established before October 20, 1960, then, in the case of an
employee who receives a distribution under the plans before October 20,
1960, the determination as to whether that distribution and all
subsequent distributions to such employee are received under a single
contract or under more than one contract shall be made by applying the
rules in subdivision (iii) of this subparagraph. On the other hand, in
the case of an employee who does not receive any distribution under
these plans before October 20, 1960, the determination as to whether
distributions to him are received under a single contract or under more
than one contract shall be made in accordance with the rules illustrated
by this example.
Example (2). On January 1, 1961, Z Corporation established a profit-
sharing plan for its employees providing that any employee may make
contributions, not in excess of 6 percent of his compensation, to a
trust and that the employer would make matching contributions out of
profits. Under the plan, a participant may receive a periodic
distribution of the amount standing in his account during any period
that he is absent from work due to a personal injury or sickness. On
separation from service, the participant is entitled to receive a
distribution of the balance standing in his account in accordance with
one of several options. One option provides for the immediate
distribution of one-half of the account and for the periodic
distribution of the remaining one-half of the account. In addition, any
participant may, after the completion of five years of participation,
withdraw any part of his account, but in the case of such a withdrawal,
the participant forfeits his rights to participate in the plan for a
period of two years. Thus, a participant may receive distributions
before separation from service; he may receive a distribution of a lump
sum upon separation from service; he may also receive periodic
distributions upon separation from service. However, since it is the
total amount received under all the options that is interrelated with
the contributions to the plan and not the amount received under any one
option, this profit-sharing plan consists of only one separate program
of interrelated contributions and benefits and all distributions under
the plan (regardless of the option under which received) are treated as
received under one contract. However, if, instead of providing that the
amount standing in an employee's account would be paid to him during any
period that he is absent from work due to a personal injury or sickness,
the plan provided that a portion of the amount in the employee's account
would be used to purchase incidental accident and health insurance, this
plan would consist of two separate programs of interrelated
contributions and benefits. The accident and health insurance, and the
contributions used to purchase it, would be considered as one separate
program of interrelated contributions and benefits and, therefore, a
separate
[[Page 126]]
contract; whereas, the remaining contributions and benefits would be
considered another separate program of interrelated contributions and
benefits and, consequently, another separate contract.
Example (3). On January 1, 1961, N Corporation established a profit-
sharing plan for its employees providing that the employees may make
contributions, not in excess of 6 percent of their compensation, to a
trust and that N Corporation would make matching contributions out of
its profits. Under the plan, the employee may elect each year to have
his and the employer's contributions for such year placed in either a
savings arrangement or a retirement arrangement. Such an election is
irrevocable. Under the savings arrangement, contributions to such
arrangement for any one year and the earnings thereon will be
distributed five years later. The retirement arrangement provides that
all contributions thereto and the earnings thereon will be distributed
when the employee is separated from the service of N Corporation. Since
the distributions under the retirement arrangement are attributable
solely to the contributions made to such arrangement and are not
affected in any manner by contributions or distributions under the
savings arrangement or any other plan, such distributions are treated as
received under a separate program of interrelated contributions and
benefits. Similarly, since distributions during any year under the
savings arrangement are attributable only to contributions to such
arrangement made during the fifth preceding year and are not affected in
any manner by any other contributions to or distributions from such
arrangement or any other plan, the savings arrangement constitutes a
series of separate programs of interrelated contributions and benefits.
The contributions to the savings arrangement for any year and the
distribution in a subsequent year based thereon constitute a separate
contract for purposes of section 72.
Example (4). The Civil Service Retirement Act (5 U.S.C. Ch. 14)
which provides retirement benefits for participating employees, consists
of a compulsory program and a voluntary program. Under the compulsory
program, all participating employees are required to make certain
contributions and, upon retirement, are provided retirement benefits
computed on the basis of compensation and length of service. Under the
voluntary program, such participating employees are permitted to make
contributions in addition to those required under the compulsory program
and, upon retirement, are provided additional retirement benefits
computed on the basis of their voluntary contributions. Distributions
received under the Act constitute distributions from two separate
contracts for purposes of section 72. Distributions received under the
compulsory program are considered as received under a separate program
of interrelated contributions and benefits since they are computed
solely under the compulsory program and are not affected by any
contributions or distributions under the voluntary program or under any
other plan. For similar reasons, distributions which are attributable to
the voluntary contributions are considered as received under a separate
program of interrelated contributions and benefits.
Example (5). On January 1, 1961, M Corporation established a
contributory pension plan for its employees and created a trust to which
it makes contributions to fund such plan. The plan provides that each
participant will receive after age 65 a pension of 1\1/2\ percent of his
compensation for each year of service performed subsequent to the
establishment of such plan. In order to fund part of the benefits under
the plan, the trustee purchased a group annuity contract. The remaining
part of the benefits are to be paid out of a separate investment fund.
This pension plan constitutes a single program of interrelated
contributions and benefits and, therefore, all distributions received by
an employee under the plan are considered as received under a single
contract for purposes of section 72.
Example (6). On January 1, 1961, Y Corporation established a
noncontributory pension plan (including incidental death benefits) for
its employees and created a trust to which it makes contributions to
fund such plan. The plan provides that each participant will receive
after age 65 a pension of 1\1/2\ percent of his compensation for each
year of service performed subsequent to the establishment of such plan.
In addition, such plan provides for the payment of a death benefit if
the employee dies before age 65. The trustee funded the death benefits
through the purchase of a group term insurance policy and funded the
retirement benefits through the purchase of a group annuity contract.
Because of a subsequent change in funding from the deferred annuity
method to the deposit administration method, the trustee purchased a
second group annuity contract to provide the retirement benefits under
the plan accruing after the effective date of the change in method of
funding. Thus, retirement benefits distributed to an employee whose
service with Y Corporation commenced before the effective date of the
change in method of funding will be attributable to both group annuity
contracts. This pension plan includes two separate programs of
interrelated contributions and benefits. The death benefits, and the
contributions required to provide them, are considered as one separate
program of interrelated contributions and benefits; whereas,
[[Page 127]]
the retirement benefits, and the contributions required to provide them,
are considered as another separate program of interrelated contributions
and benefits. Therefore, any retirement benefits received by an
employee, whether attributable to one or both of the group annuity
contracts, shall be considered as received under a single contract for
purposes of section 72. In determining the tax treatment of any such
retirement benefits under section 72, no amount of the premiums used to
purchase the group term insurance policy shall be taken into account,
since such premiums, and the death benefits which they purchased,
constitute a separate program of interrelated contributions and
benefits.
Example (7). Assume the same facts as in example (6) except that, in
lieu of funding the benefits in the manner described in that example,
the trustee purchased individual retirement income contracts from an
insurance company. Additional individual retirement income contracts are
purchased in order to fund any increase in benefits resulting from
increases in salary. Therefore, distributions to a particular employee
may be attributable to a single retirement income contract or to more
than one such contract. All distributions received by an employee under
the pension plan, whether attributable to one or more retirement income
contracts and whether made directly from the insurance company to the
employee or made through the trustee, are considered as received under a
single contract for purposes of section 72. For rules relating to the
tax treatment of contributions and distributions under retirement
income, endowment, or other life insurance contracts purchased by a
trust described in section 401(a) and exempt under section 501(a), see
paragraph (a) (2), (3), and (4) of Sec. 1.402(a)-1.
Example (8). Assume the same facts as in example (6) except that, in
lieu of funding the benefits in the manner described in that example,
the trustee funded the death benefits and part of the retirement
benefits by purchasing individual retirement income contracts from an
insurance company. The remaining part of the retirement benefits (such
as any increase in benefits resulting from increases in salary) are to
be paid out of a separate investment fund. This pension plan includes,
with respect to each participant, two separate contracts for purposes of
section 72. The retirement income contract purchased by the trust for
each participant is a separate program of interrelated contributions and
benefits and all distributions attributable to such contract (whether
made directly from the insurance company to the employee or made through
the trustee) are considered as received under a single contract. For
rules relating to the tax treatment of contributions and distributions
under retirement income, endowment, or other life insurance contracts
purchased by a trust described in section 401(a) and exempt under
section 501(a), see paragraph (a) (2), (3), and (4) of Sec. 1.402(a)-1.
The remaining distributions under the plan are considered as received
under another separate program of interrelated contributions and
benefits.
(b) Amounts. (1)(i) In general, the amounts to which section 72
applies are any amounts received under the contracts described in
paragraph (a)(1) of this section. However, if such amounts are
specifically excluded from gross income under other provisions of
Chapter 1 of the Code, section 72 shall not apply for the purpose of
including such amounts in gross income. For example, section 72 does not
apply to amounts received under a life insurance contract if such
amounts are paid by reason of the death of the insured and are
excludable from gross income under section 101(a). See also sections
101(d), relating to proceeds of life insurance paid at a date later than
death, and 104(a)(4), relating to compensation for injuries or sickness.
(ii) Section 72 does not exclude from gross income any amounts
received under an agreement to hold an amount and pay interest thereon.
See paragraph (a) of Sec. 1.72-14. However, section 72 does apply to
amounts received by a surviving annuitant under a joint and survivor
annuity contract since such amounts are not considered to be paid by
reason of the death of an insured. For a special deduction for the
estate tax attributable to the inclusion of the value of the interest of
a surviving annuitant under a joint and survivor annuity contract in the
estate of the deceased primary annuitant, see section 691(d) and the
regulations thereunder.
(2) Amounts subject to section 72 in accordance with subparagraph
(1) of this paragraph are considered ``amounts received as an annuity''
only in the event that all of the following tests are met:
(i) They must be received on or after the ``annuity starting date''
as that term is defined in paragraph (b) of Sec. 1.72-4;
(ii) They must be payable in periodic installments at regular
intervals (whether annually, semiannually, quarterly, monthly, weekly,
or otherwise) over a period of more than one full
[[Page 128]]
year from the annuity starting date; and
(iii) Except as indicated in subparagraph (3) of this paragraph, the
total of the amounts payable must be determinable at the annuity
starting date either directly from the terms of the contract or
indirectly by the use of either mortality tables or compound interest
computations, or both, in conjunction with such terms and in accordance
with sound actuarial theory.
For the purpose of determining whether amounts subject to section 72(d)
and Sec. 1.72-13 are ``amounts received as an annuity'', however, the
provisions of subdivision (i) of this subparagraph shall be disregarded.
In addition, the term ``amounts received as an annuity'' does not
include amounts received to which the provisions of paragraph (b) or (c)
of Sec. 1.72-11 apply, relating to dividends and certain amounts
received by a beneficiary in the nature of a refund. If an amount is to
be paid periodically until a fund plus interest at a fixed rate is
exhausted, but further payments may be made thereafter because of
earnings at a higher interest rate, the requirements of subdivision
(iii) of this subparagraph are met with respect to the payments
determinable at the outset by means of computations involving the fixed
interest rate, but any payments received after the expiration of the
period determinable by such computations shall be taxable as dividends
received after the annuity starting date in accordance with paragraph
(b)(2) of Sec. 1.72-11.
(3)(i) Notwithstanding the requirement of subparagraph (2)(iii) of
this paragraph, if amounts are to be received for a definite or
determinable time (whether for a period certain or for a life or lives)
under a contract which provides:
(a) That the amount of the periodic payments may vary in accordance
with investment experience (as in certain profit-sharing plans), cost of
living indices, or similar fluctuating criteria, or
(b) For specified payments the value of which may vary for income
tax purposes, such as in the case of any annuity payable in foreign
currency,
each such payment received shall be considered as an amount received as
an annuity only to the extent that it does not exceed the amount
computed by dividing the investment in the contract, as adjusted for any
refund feature, by the number of periodic payments anticipated during
the time that the periodic payments are to be made. If payments are to
be made more frequently than annually, the amount so computed shall be
multiplied by the number of periodic payments to be made during the
taxable year for the purpose of determining the total amount which may
be considered received as an annuity during such year. To this extent,
the payments received shall be considered to represent a return of
premium or other consideration paid and shall be excludable from gross
income in the taxable year in which received. See paragraph (d) (2) and
(3) of Sec. 1.72-4. To the extent that the payments received under the
contract during the taxable year exceed the total amount thus considered
to be received as an annuity during such year, they shall be considered
to be amounts not received as an annuity and shall be included in the
gross income of the recipient. See section 72(e) and paragraph (b)(2) of
Sec. 1.72-11.
(ii) For purposes of subdivision (i) of this subparagraph, the
number of periodic payments anticipated during the time payments are to
be made shall be determined by multiplying the number of payments to be
made each year (a) by the number of years payments are to be made, or
(b) if payments are to be made for a life or lives, by the multiple
found by the use of the appropriate tables contained in Sec. 1.72-9, as
adjusted in accordance with the table in paragraph (a)(2) of Sec. 1.72-
5.
(iii) For an example of the computation to be made in accordance
with this subparagraph and a special election which may be made in a
taxable year subsequent to a taxable year in which the total payments
received under a contract described in this subparagraph are less than
the total of the amounts excludable from gross income in such year under
subdivision (i) of
[[Page 129]]
this subparagraph, see paragraph (d)(3) of Sec. 1.72-4.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6497, 25 FR
10019, Oct. 20, 1960; T.D. 6885, 31 FR 7798, June 2, 1966]
Sec. 1.72-3 Excludable amounts not income.
In general, amounts received under contracts described in paragraph
(a)(1) of Sec. 1.72-2 are not to be included in the income of the
recipient to the extent that such amounts are excludable from gross
income as the result of the application of section 72 and the
regulations thereunder.
Sec. 1.72-4 Exclusion ratio.
(a) General rule. (1)(i) To determine the proportionate part of the
total amount received each year as an annuity which is excludable from
the gross income of a recipient in the taxable year of receipt (other
than amounts received under (a) certain employee annuities described in
section 72(d) and Sec. 1.72-13, or (b) certain annuities described in
section 72(o) and Sec. 1.122-1), an exclusion ratio is to be determined
for each contract. In general, this ratio is determined by dividing the
investment in the contract as found under Sec. 1.72-6 by the expected
return under such contract as found under Sec. 1.72-5. Where a single
consideration is given for a particular contract which provides for two
or more annuity elements, an exclusion ratio shall be determined for the
contract as a whole by dividing the investment in such contract by the
aggregate of the expected returns under all the annuity elements
provided thereunder. However, where the provisions of paragraph (b)(3)
of Sec. 1.72-2 apply to payments received under such a contract, see
paragraph (b)(3) of Sec. 1.72-6. In the case of a contract to which
Sec. 1.72-6(d) (relating to contracts in which amounts were invested
both before July 1, 1986, and after June 30, 1986) applies, the
exclusion ratio for purposes of this paragraph (a) is determined in
accordance with Sec. 1.72-6(d) and, in particular, Sec. 1.72-6(d)(5)(i).
(ii) The exclusion ratio for the particular contract is then applied
to the total amount received as an annuity during the taxable year by
each recipient. See, however, paragraph (e)(3) of Sec. 1.72-5. Any
excess of the total amount received as an annuity during the taxable
year over the amount determined by the application of the exclusion
ratio to such total amount shall be included in the gross income of the
recipient for the taxable year of receipt.
(2) The principles of subparagraph (1) may be illustrated by the
following example:
Example Taxpayer A purchased an annuity contract providing for
payments of $100 per month for a consideration of $12,650. Assuming that
the expected return under this contract is $16,000 the exclusion ratio
to be used by A is $12,650/16,000; or 79.1 percent (79.06 rounded to the
nearest tenth). If 12 such monthly payments are received by A during his
taxable year, the total amount he may exclude from his gross income in
such year is $949.20 ($1,200x79.1 percent).The balance of $250.80
($1,200 less $949.20) is the amount to be included in gross income. If A
instead received only five such payments during the year, he should
exclude $395.50 (500x79.1 percent) of the total amounts received.
For examples of the computation of the exclusion ratio in cases where
two annuity elements are acquired for a single consideration, see
paragraph (b)(1) of Sec. 1.72-6.
(3) The exclusion ratio shall be applied only to amounts received as
an annuity within the meaning of that term under paragraph (b) (2) and
(3) of Sec. 1.72-2. Where the periodic payments increase in amount after
the annuity starting date in a manner not provided by the terms of the
contract at such date, the portion of such payments representing the
increase is not an amount received as an annuity. For the treatment of
amounts not received as an annuity, see section 72(e) and Sec. 1.72-11.
For special rules where paragraph (b)(3) of Sec. 1.72-2 applies to
amounts received, see paragraph (d)(3) of this section.
(4) After an exclusion ratio has been determined for a particular
contract, it shall be applied to any amounts received as an annuity
thereunder unless or until one of the following occurs:
(i) The contract is assigned or transferred for a valuable
consideration (see section 72(g) and paragraph (a) of Sec. 1.72-10);
(ii) The contract matures or is surrendered, redeemed, or discharged
in
[[Page 130]]
accordance with the provisions of paragraph (c) or (d) of Sec. 1.72-11;
(iii) The contract is exchanged (or is considered to have been
exchanged) in a manner described in paragraph (e) of Sec. 1.72-11.
(b) Annuity starting date. (1) Except as provided in subparagraph
(2) of this paragraph, the annuity starting date is the first day of the
first period for which an amount is received as an annuity, except that
if such date was before January 1, 1954, then the annuity starting date
is January 1, 1954. The first day of the first period for which an
amount is received as an annuity shall be whichever of the following is
the later:
(i) The date upon which the obligations under the contract became
fixed, or
(ii) The first day of the period (year, half-year, quarter, month,
or otherwise, depending on whether payments are to be made annually,
semiannually, quarterly, monthly, or otherwise) which ends on the date
of the first annuity payment.
(2) Notwithstanding the provisions of paragraph (b)(1) of this
section, the annuity starting date shall be determined in accordance
with whichever of the following provisions is appropriate:
(i) In the case of a joint and survivor annuity contract described
in section 72(i) and paragraph (b)(3) of Sec. 1.72-5, the annuity
starting date is January 1, 1954, or the first day of the first period
for which an amount is received as an annuity by the surviving
annuitant, whichever is the later;
(ii) In the case of the transfer of an annuity contract for a
valuable consideration, as described in section 72(g) and paragraph (a)
of Sec. 1.72-10, the annuity starting date shall be January 1, 1954, or
the first day of the first period for which the transferee received an
amount as an annuity, whichever is the later;
(iii) If the provisions of paragraph (e) of Sec. 1.72-11 apply to an
exchange of one contract for another, or to a transaction deemed to be
such an exchange, the annuity starting date of the contract received (or
deemed received) in exchange shall be January 1, 1954, or the first day
of the first period for which an amount is received as an annuity under
such contract, whichever is the later; and
(iv) In the case of an employee who has retired from work because of
personal injuries or sickness, and who is receiving amounts under a plan
that is a wage continuation plan under section 105(d) and Sec. 1.105-4,
the annuity starting date shall be the date the employee reaches
mandatory retirement age, as defined in Sec. 1.105-4(a)(3)(i)(B). (See
also Secs. 1.72-15 and 1.105-6 for transitional and other special
rules.)
(c) Fiscal year taxpayers. Fiscal year taxpayers receiving amounts
as annuities in a taxable year to which the Internal Revenue Code of
1954 applies shall determine the annuity starting date in accordance
with section 72(c)(4) and this section. The annuity starting date for
fiscal year taxpayers receiving amounts as an annuity in a taxable year
to which the Internal Revenue Code of 1939 applies shall be January 1,
1954, except where the first day of the first period for which an amount
is received by such a taxpayer as an annuity is subsequent thereto and
before the end of a fiscal year to which the Internal Revenue Code of
1939 applied. In such case, the latter date shall be the annuity
starting date. In all cases where a fiscal year taxpayer received an
amount as an annuity in a taxable year to which the Internal Revenue
Code of 1939 applied and subsequent to the annuity starting date
determined in accordance with the provisions of this paragraph, such
amount shall be disregarded for the purposes of section 72 and the
regulations thereunder.
(d) Exceptions to the general rule. (1) Where the provisions of
section 72 would otherwise require an exclusion ratio to be determined,
but the investment in the contract (determined under Sec. 1.72-6) is an
amount of zero or less, no exclusion ratio shall be determined and all
amounts received under such a contract shall be includible in the gross
income of the recipient for the purposes of section 72.
(2) Where the investment in the contract is equal to or greater than
the total expected return under such contract found under Sec. 1.72-5,
the exclusion
[[Page 131]]
ratio shall be considered to be 100 percent and all amounts received as
an annuity under such contract shall be excludable from the recipient's
gross income. See, for example, paragraph (f)(1) of Sec. 1.72-5. In the
case of a contract to which Sec. 1.72-6(d) (relating to contracts in
which amounts were invested both before July 1, 1986, and after June 30,
1986) applies, this paragraph (d)(2) is applied in the manner prescribed
in Sec. 1.72-6(d) and, in particular, Sec. 1.72-6(d)(5)(ii).
(3)(i) If a contract provides for payments to be made to a taxpayer
in the manner described in paragraph (b)(3) of Sec. 1.72-2, the
investment in the contract shall be considered to be equal to the
expected return under such contract and the resulting exclusion ratio
(100%) shall be applied to all amounts received as an annuity under such
contract. For any taxable year, payments received under such a contract
shall be considered to be amounts received as an annuity only to the
extent that they do not exceed the portion of the investment in the
contract which is properly allocable to that year and hence excludable
from gross income as a return of premiums or other consideration paid
for the contract. The portion of the investment in the contract which is
properly allocable to any taxable year shall be determined by dividing
the investment in the contract (adjusted for any refund feature in the
manner described in paragraph (d) of Sec. 1.72-7) by the applicable
multiple (whether for a term certain, life, or lives) which would
otherwise be used in determining the expected return for such a contract
under Sec. 1.72-5. The multiple shall be adjusted in accordance with the
provisions of the table in paragraph (a)(2) of Sec. 1.72-5, if any
adjustment is necessary, before making the above computation. If
payments are to be made more frequently than annually and the number of
payments to be made in the taxable year in which the annuity begins are
less than the number of payments to be made each year thereafter, the
amounts considered received as an annuity (as otherwise determined under
this subdivision) shall not exceed, for such taxable year (including a
short taxable year), an amount which bears the same ratio to the portion
of the investment in the contract considered allocable to each taxable
year as the number of payments to be made in the first year bears to the
number of payments to be made in each succeeding year. Thus, if payments
are to be made monthly, only seven payments will be made in the first
taxable year, and the portion of the investment in the contract
allocable to a full year of payments is $600, the amounts considered
received as an annuity in the first taxable year cannot exceed $350
($600x\7/12\). See subdivision (iii) of this subparagraph for an example
illustrating the determination of the portion of the investment in the
contract allocable to one taxable year of the taxpayer.
(ii) If subdivision (i) of this subparagraph applies to amounts
received by a taxpayer and the total amount of payments he receives in a
taxable year is less than the total amount excludable for such year
under subdivision (i) of this subparagraph, the taxpayer may elect, in a
succeeding taxable year in which he receives another payment, to
redetermine the amounts to be received as an annuity during the current
and succeeding taxable years. This shall be computed in accordance with
the provisions of subdivision (i) of this subparagraph except that:
(a) The difference between the portion of the investment in the
contract allocable to a taxable year, as found in accordance with
subdivision (i) of this subparagraph, and the total payments actually
received in the taxable year prior to the election shall be divided by
the applicable life expectancy of the annuitant (or annuitants), found
in accordance with the appropriate table in Sec. 1.72-9 (and adjusted in
accordance with paragraph (a)(2) of Sec. 1.72-5), or by the remaining
term of a term certain annuity, computed as of the first day of the
first period for which an amount is received as an annuity in the
taxable year of the election; and
(b) The amount determined under (a) of this subdivision shall be
added to the portion of the investment in the contract allocable to each
taxable year (as otherwise found). To the extent that the total periodic
payments received under the contract in the taxable year
[[Page 132]]
of the election or any succeeding taxable year does not equal this total
sum, such payments shall be excludable from the gross income of the
recipient. To the extent such payments exceed the sum so found, they
shall be fully includible in the recipient's gross income. See
subdivision (iii) of this subparagraph for an example illustrating the
redetermination of amounts to be received as an annuity and subdivision
(iv) of this subparagraph for the method of making the election provided
by this subdivision.
(iii) The application of the principles of paragraph (d)(3) (i) and
(ii) of this section may be illustrated by the following example:
Example. Taxpayer A, a 64 year old male, files his return on a
calendar year basis and has a life expectancy of 15.6 years on June 30,
1954, the annuity starting date of a contract to which Sec. 1.72-2(b)(3)
applies and which he purchased for $20,000. The contract provides for
variable annual payments for his life. He receives a payment of $1,000
on June 30, 1955, but receives no other payment until June 30, 1957. He
excludes the $1,000 payment from his gross income for the year 1955
since this amount is less than $1,324.50, the amount determined by
dividing his investment in the contract ($20,000) by his life expectancy
adjusted for annual payments, 15.1 (15.6-0.5), as of the original
annuity starting date. Taxpayer A may elect, in his return for the
taxable year 1957, to redetermine amounts to be received as an annuity
under his contract as of June 30, 1956. For the purpose of determining
the extent to which amounts received in 1957 or thereafter shall be
considered amounts received as an annuity (to which a 100 percent
exclusion ratio shall apply) he shall add $118.63 to the $1,324.50
originally determined to be receivable as an annuity under the contract,
making a total of $1,443.13. This is determined by dividing the
difference between what was excludable in 1955 and 1956, $2,649
(2x$1,324.50) and what he actually received in those years ($1,000) by
his life expectancy adjusted for annual payments, 13.9 (14.4-0.5), as of
his age at his nearest birthday (66) on the first day of the first
period for which he received an amount as an annuity in the taxable year
of election (June 30, 1956). The result, $1,443.13, is excludable in
that year and each year thereafter as an amount received as an annuity
to which the 100% exclusion ratio applies. It will be noted that in this
example the taxpayer received amounts less than the excludable amounts
in two successive years and deferred making his election until the third
year, and thus was able to accumulate the portion of the investment in
the contract allocable to each taxable year to the extent he failed to
receive such portion in both years. Assuming that he received $1,500 in
the taxable year of his election, he would include $56.87 in his gross
income and exclude $1,443.13 therefrom for that year.
(iv) If the taxpayer chooses to make the election described in
subdivision (ii) of this subparagraph, he shall file with his return a
statement that he elects to make a redetermination of the amounts
excludable from gross income under his annuity contract in accordance
with the provisions of paragraph (d)(3) of Sec. 1.72-4. This statement
shall also contain the following information:
(a) The original annuity starting date and his age on that date,
(b) The date of the first day of the first period for which he
received an amount in the current taxable year,
(c) The investment in the contract originally determined (as
adjusted for any refund feature), and
(d) The aggregate of all amounts received under the contract between
the date indicated in (a) of this subdivision and the day after the date
indicated in (b) of this subdivision to the extent such amounts were
excludable from gross income.
He shall include in gross income any amounts received during the taxable
year for which the return is made in accordance with the redetermination
made under this subparagraph.
(v) In the case of a contract to which Sec. 1.72-6(d) (relating to
contracts in which amounts were invested both before July 1, 1986, and
after June 30, 1986) applies, this paragraph (d)(3) is applied in the
manner prescribed in Sec. 1.72-6(d) and, in particular, Sec. 1.72-
6(d)(5)(iii). This application may be illustrated by the following
example:
Example B, a male calendar year taxpayer, purchases a contract which
provides for variable annual payments for life and to which Sec. 1.72-
2(b)(3) applies. The annuity starting date of the contract is June 30,
1990, when B is 64 years old. B receives a payment of $1,000 on June 30,
1991, but receives no other payment until June 30, 1993. B's total
investment in the contract is $25,000. B's pre-July 1986 investment in
the contract is $12,000. If B makes the election described in Sec. 1.72-
6(d)(6), separate computations are required to determine the amounts
received as an annuity and excludable from gross income with
[[Page 133]]
respect to the pre-July 1986 investment in the contract and the post-
June 1986 investment in the contract. In the separate computations, B
first determines the applicable portions of the total payment received
which are allocable to the pre-July 1986 investment in the contract and
the post-June 1986 investment in the contract. The portion of the
payment received allocable to the pre-July 1986 investment in the
contract is $480 ($12,000/$25,000 x $1,000). The portion of the payment
received allocable to the post-June 1986 investment in the contract is
$520 ($13,000/$25,000 x $1,000).
Second, B determines the pre-July 1986 investment in the contract
and the post-June 1986 investment in the contract allocable to the
taxable year by dividing the pre-July 1986 and post-June 1986
investments in the contract by the applicable life expectancy multiple.
The life expectancy multiple applicable to pre-July 1986 investment in
the contract is B's life expectancy as of the original annuity starting
date adjusted for annual payments and is determined under Table I of
Sec. 1.72-9 [15.1 (15.6-0.5)]. The life expectancy multiple applicable
to post-June 1986 investment in the contract is determined under Table V
of Sec. 1.72-9 (20.3 (20.8-0.5)). Thus, the pre-July 1986 investment in
the contract allocable to each taxable year is $794.70 ($12,000/15.1),
and the post-June 1986 investment in the contract so allocable is
$640.39 ($13,000/20.3). Because the applicable portions of the total
payment received in 1991 under the contract ($480 allocable to the pre-
July 1986 investment in the contract and $520 allocable to the post-June
1986 investment in the contract) are treated as amounts received as an
annuity and are excludable from gross income to the extent they do not
exceed the portion of the corresponding investment in the contract
allocable to 1991 ($794.70 pre-July 1986 investment in the contract and
$640.39 post-June 1986 investment in the contract), the entire amount of
each applicable portion of the total payment is excludable from gross
income. B may elect, in the return filed for taxable year 1993, to
redetermine amounts to be received as an annuity under the contract as
of June 30, 1992. The extent to which the amounts received in 1993 or
thereafter shall be considered amounts received as an annuity is
determined as follows:
Pre-July 1986 investment in the contract allocable to $1,589.40
taxable years 1991 and 1992 ($794.70 x 2).................
Less: Portion of total payments allocable to pre-July 1986 480.00
investment in the contract actually received as an annuity
in taxable years 1991 and 1992............................
------------
1,109.40
Divided by: Life expectancy multiple applicable to pre-July 13.9
1986 investment in the contract for B, age 66 (14.4--0.5).
------------
79.81
Plus: Amount originally determined with respect to pre-July 794.70
1986 investment in the contract...........................
------------
Pre-July 1986 amount....................................... 874.51
============
Post-June 1986 investment in the contract allocable to $1,280.78
taxable years 1991 and 1992 ($640.39 x 2).................
Less: Portion of total payments allocable to post-June 1986 520.00
investment in the contract actually received as an annuity
in taxable years 1991 and 1992............................
------------
760.78
Divided by: Life expectancy multiple applicable to post- 18.7
June 1986 investment in the contract for B, age 66 (19.2-
0.5)......................................................
------------
40.68
Plus: Amount originally determined with respect to post- 640.39
June 1986 investment in the contract......................
------------
Post-June 1986 amount...................................... 681.07
(vi) The method of making an election to perform the separate
computations illustrated in paragraph (d)(3)(v) of this section is
described in Sec. 1.72-6(d)(6).
(e) Exclusion ratio in the case of two or more annuity elements
acquired for a single consideration. (1)(i) Where two or more annuity
elements are provided under a contract described in paragraph (a)(2) of
Sec. 1.72-2, an exclusion ratio shall be determined for the contract as
a whole and applied to all amounts received as an annuity under any of
the annuity elements. To obtain this ratio, the investment in the
contract determined in accordance with Sec. 1.72-6 shall be divided by
the aggregate of the expected returns found with respect to each of the
annuity elements in accordance with Sec. 1.72-5. For this purpose, it is
immaterial that payments under one or more of the annuity elements
involved have not commenced at the time when an amount is first received
as an annuity under one or more of the other annuity elements.
[[Page 134]]
(ii) The exclusion ratio found under subdivision (i) of this
subparagraph does not apply to:
(a) An annuity element payable to a surviving annuitant under a
joint and survivor annuity contract to which section 72(i) and
paragraphs (b)(3) and (e)(3) of Sec. 1.72-5 apply, or to
(b) A contract under which one or more of the constituent annuity
elements provides for payments described in paragraph (b)(3) of
Sec. 1.72-2.
For rules with respect to a contract providing for annuity elements
described in (b) of this subdivision, see subparagraph (2) of this
paragraph.
(2) If one or more of the annuity elements under a contract
described in paragraph (a)(2) of Sec. 1.72-2 provides for payments to
which paragraph (b)(3) of Sec. 1.72-2 applies:
(i) With respect to the annuity elements to which paragraph (b)(3)
of Sec. 1.72-2 does not apply, an exclusion ratio shall be determined by
dividing the portion of the investment in the entire contract which is
properly allocable to all such elements (in the manner provided in
paragraph (b)(3)(ii) of Sec. 1.72-6) by the aggregate of the expected
returns thereunder and such ratio shall be applied in the manner
described in subdivision (i) of subparagraph (1); and
(ii) With respect to the annuity elements to which paragraph (b)(3)
of Sec. 1.72-2 does apply, the investment in the entire contract shall
be reduced by the portion thereof found in subdivision (i) of this
subparagraph and the resulting amount shall be used to determine the
extent to which the aggregate of the payments received during the
taxable year under all such elements is excludable from gross income.
The amount so excludable shall be allocated to each recipient under such
elements in the same ratio that the total of payments he receives each
year bears to the total of the payments received by all such recipients
during the year. The exclusion ratio with respect to the amounts so
allocated shall be 100 percent. See paragraph (f)(2) of Sec. 1.72-5 and
paragraph (b)(3) of Sec. 1.72-6.
(iii) In the case of a contract to which Sec. 1.72-6(d) (relating to
contracts in which amounts were invested both before July 1, 1986, and
after June 30, 1986) applies, this paragraph (e) is applied in the
manner prescribed in Sec. 1.72-6(d) and, in particular, Sec. 1.72-
6(d)(5)(iv).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7352, 40 FR
16663, Apr. 14, 1975; T.D. 8115, 51 FR 45691, Dec. 19, 1986; 52 FR
10223, Mar. 31, 1987]
Sec. 1.72-5 Expected return.
(a) Expected return for but one life. (1) If a contract to which
section 72 applies provides that one annuitant is to receive a fixed
monthly income for life, the expected return is determined by
multiplying the total of the annuity payments to be received annually by
the multiple shown in Table I or V (whichever is applicable) of
Sec. 1.72-9 under the age (as of the annuity starting date) and, if
applicable, sex of the measuring life (usually the annuitant's). Thus,
where a male purchases a contract before July 1, 1986, providing for an
immediate annuity of $100 per month for his life and, as of the annuity
starting date (in this case the date of purchase), the annuitant's age
at his nearest birthday is 66, the expected return is computed as
follows:
Monthly payment of $100x12 months equals annual payment of.... $1,200
Multiple shown in Table I, male, age 66....................... 14.4
---------
Expected return (1,200x14.4).................................. 17,280
If, however, the taxpayer had purchased the contract after June 30,
1986, the expected return would be $23,040, determined by multiplying
19.2 (multiple shown in Table V, age 66) by $1,200.
(2)(i) If payments are to be made quarterly, semiannually, or
annually, an adjustment of the applicable multiple shown in Table I or V
(whichever is applicable) may be required. A further adjustment may be
required where the interval between the annuity starting date and the
date of the first payment is less than the interval between future
payments. Neither adjustment shall be made, however, if the payments are
to be made more frequently than quarterly. The amount of the adjustment,
if any, is to be found in accordance with the following table:
[[Page 135]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
If the number of whole months from the annuity starting
date to the first payment date is-- 0-1 2 3 4 5 6 7 8 9 10 11 12
--------------------------------------------------------------------------------------------------------------------------------------------------------
And the payments under the contract are to be made:
Annually............................................ +0.5 +0.4 +0.3 +0.2 +0.1 0 0 -0.1 -0.2 -0.3 -0.4 -0.5
-----------------------------------------------------------------------------------------------
Semiannually........................................ +.2 +.1 0 0 -.1 -.2 ....... ....... ....... ....... ....... .......
-----------------------------------------------------------------------------------------------
Quarterly........................................... +.1 0 -.1 ..... ..... ..... ....... ....... ....... ....... ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
Thus, for a male, age 66, the multiple found in Table I, adjusted for
quarterly payments the first of which is to be made one full month after
the annuity starting date, is 14.5 (14.4+0.1); for semiannual payments
the first of which is to be made six full months from the annuity
starting date, the adjusted multiple is 14.2 (14.4-0.2); for annual
payments the first of which is to be made one full month from the
annuity starting date, the adjusted multiple is 14.9 (14.4+0.5). If the
annuitant in the example shown in subparagraph (1) of this paragraph
were to receive an annual payment of $1,200 commencing 12 full months
after his annuity starting date, the amount of the expected return would
be $16,680 ($1,200x13.9 [14.4-0.5]). Similarly, for an annuitant, age
50, the multiple found in Table V, adjusted for quarterly payments the
first of which is to be made one full month after the annuity starting
date, is 33.2 (33.1+0.1); for semiannual payments the first of which is
to be made six full months from the annuity starting date, the adjusted
multiple is 32.9 (33.1-0.2); for annual payments the first of which is
to be made one full month from the annuity starting date, the adjusted
multiple is 33.6 (33.1+0.5).
(ii) Notwithstanding the table in subdivision (i) of this
subparagraph, adjustments of multiples for early or other than monthly
payments determined prior to February 19, 1956, under the table
prescribed in paragraph 1(b)(4) of T.D. 6118 (19 FR 9897, C.B. 1955-1,
699), approved December 30, 1954, need not be redetermined.
(3) If the contract provides for fixed payments to be made to an
annuitant until death or until the expiration of a specified limited
period, whichever occurs earlier, the expected return of such temporary
life annuity is determined by multiplying the total of the annuity
payments to be received annually by the multiple shown in Table IV or
VIII (whichever is applicable) of Sec. 1.72-9 for the age (as of the
annuity starting date) and, if applicable, sex of the annuitant and the
nearest whole number of years in the specified period. For example, if a
male annuitant, age 60 (at his nearest birthday), is to receive $60 per
month for five years or until he dies, whichever is earlier, and there
is no post-June 1986, investment in the contract, the expected return
under such a contract is $3,456, computed as follows:
Monthly payments of $60x12 months equals annual payment of.... $720
Multiple shown in Table IV for male, age 60, for term of 5 4.8
years........................................................
---------
Expected return for 5 year temporary life annuity of $720 per $3,456
year ($720x4.8)..............................................
If the annuitant purchased the same contract after June 30, 1986, the
expected return under the contract would be $3,528, computed as follows:
Monthly payments of $60x12 months equals annual payment $720.00
of....................................................
Multiple shown in Table VIII for annuitant, age 60, for 4.9
term of 5 years.......................................
----------------
Expected return for 5-year temporary life annuity of $3,528.00
$720 per year ($720x4.9)..............................
The adjustment provided by subparagraph (2) of this paragraph shall not
be made with respect to the multiple found in Table IV or VIII
(whichever is applicable).
(4) If the contract provides for payments to be made to an annuitant
for the annuitant's lifetime, but the amount of the annual payments is
to
[[Page 136]]
be decreased after the expiration of a specified limited period, the
expected return is computed by considering the contract as a combination
of a whole life annuity for the smaller amount plus a temporary life
annuity for an amount equal to the difference between the larger and the
smaller amount. For example, if a male annuitant, age 60, is to receive
$150 per month for five years or until his earlier death, and is to
receive $90 per month for the remainder of his lifetime after such five
years, the expected return is computed as if the annuitant's contract
consisted of a whole life annuity for $90 per month plus a five year
temporary life annuity of $60 per month. In such circumstances, the
expected return if there is no post-June 1986 investment in the contract
is computed as follows:
Monthly payments of $90x12 months equals annual payment $1,080
of....................................................
Multiple shown in Table I for male, age 60............. 18.2
----------------
Expected return for whole life annuity of $1,080 per $19,656
year..................................................
Expected return for 5-year temporary life annuity of $3,456
$720 per year (as found in subparagraph (3) of this
paragraph (a))........................................
----------------
Total expected return.............................. $23,112
If the annuitant purchased the same contract after June 30, 1986, the
expected return would be $29,664, computed as follows:
Monthly payments of $90x12 months equals annual payment $1,080
of....................................................
Multiple shown in Table V for annuitant, age 60........ 24.2
----------------
Expected return for whole life annuity of $1,080 per $26,136
year..................................................
Plus: Expected return for 5-year temporary life annuity $3,528
of $720 per year (as found in subparagraph (3) of this
paragraph (a))........................................
----------------
Total expected return.............................. $29,664
If payments are to be made quarterly, semiannually, or annually, an
appropriate adjustment of the multiple found in Table I or V (whichever
is applicable) for the whole life annuity should be made in accordance
with subparagraph (2) of this paragraph.
(5) If the contract described in subparagraph (4) of this paragraph
provided that the amount of the annual payments to the annuitant were to
be increased (instead of decreased) after the expiration of a specified
limited period, the expected return would be computed as if the
annuitant's contract consisted of a whole life annuity for the larger
amount minus a temporary life annuity for an amount equal to the
difference between the larger and smaller amount. Thus, if the annuitant
described in subparagraph (4) of this paragraph were to receive $90 per
month for five years or until his earlier death, and to receive $150 per
month for the remainder of his lifetime after such five years, the
expected return would be computed by subtracting the expected return
under a five year temporary life annuity of $60 per month from the
expected return under a whole life annuity of $150 per month. In such
circumstances, the expected return if there is no post-June 1986
investment in the contract is computed as follows:
Monthly payments of $150x12 months equals annual $1,800
payment of............................................
Multiple shown in Table 1 (male, age 60)............... 18.2
----------------
Expected return for annuity for whole life of $1,800 $32,760
per year..............................................
Less expected return for 5-year temporary life annuity $3,456
of $720 per year (as found in subparagraph (3)).......
----------------
Net expected return................................ $29,304
If the annuitant purchased the same contract after June 30, 1986, the
expected return would be $40,032, computed as follows:
Monthly payments of $150x12 months equals annual $1,800
payments of...........................................
Multiple shown in Table V (age 60)..................... 24.2
----------------
Expected return for annuity for whole life of $1,800 $43,560
per year..............................................
[[Page 137]]
Less expected return for 5-year temporary life annuity $3,528
of $720 per year (as found in subparagraph (3) of this
paragraph (a))........................................
----------------
Net expected return................................ $40,032
If payments are to be made quarterly, semiannually, or annually, an
appropriate adjustment of the multiple found in Table I or V (whichever
is applicable) for the whole life annuity should be made in accordance
with subparagraph (2) of this paragraph.
(b) Expected return under joint and survivor and joint annuities.
(1) In the case of a joint and survivor annuity contract involving two
annuitants which provides the first annuitant with a fixed monthly
income for life and, after the death of the first annuitant, provides an
identical monthly income for life to a second annuitant, the expected
return shall be determined by multiplying the total amount of the
payments to be received annually by the multiple obtained from Table II
or VI (whichever is applicable) of Sec. 1.72-9 under the ages (as of the
annuity starting date) and, if applicable, sexes of the living
annuitants. For example, a husband purchases a joint and survivor
annuity contract providing for payments of $100 per month for life and,
after his death, for the same amount to his wife for the remainder of
her life. As of the annuity starting date his age at his nearest
birthday is 70 and that of his wife at her nearest birthday is 67. If
there is no post-June 1986 investment in the contract, the expected
return is computed as follows:
Monthly payments of $100x12 months equals annual $1,200
payment of............................................
Multiple shown in Table II (male, age 70, female, age 19.7
67)...................................................
----------------
Expected return ($1,200x19.7).......................... $23,640
If the annuitants purchased the same contract after June 30, 1986, the
expected return would be $26,400, computed as follows:
Monthly payments of $100x12 months equals annual $1,200
payment of............................................
Multiple shown in Table VI (ages 70, 67)............... 22.0
----------------
Expected return ($1,200x22.0).......................... $26,400
If payments are to be made quarterly, semiannually, or annually, an
appropriate adjustment of the multiple found in Table II or VI
(whichever is applicable) should be made in accordance with paragraph
(a)(2) of this section.
(2) If a contract of the type described in subparagraph (1) of this
paragraph provides that a different (rather than an identical) monthly
income is payable to the second annuitant, the expected return is
computed in the following manner. The applicable multiple in Table II or
VI (whichever is applicable) is first found as in the example in
subparagraph (1) of this paragraph. The multiple applicable to the first
annuitant is then found in Table I or V (whichever is applicable) as
though the contract were for a single life annuity. The multiple from
Table I or V is then subtracted from the multiple obtained from Table II
or VI and the resulting multiple is applied to the total payments to be
received annually under the contract by the second annuitant. The result
is the expected return with respect to the second annuitant. The portion
of the expected return with respect to payments to be made during the
first annuitant's life is then computed by applying the multiple found
in Table I or V to the total annual payments to be received by such
annuitant under the contract. The expected returns with respect to each
of the annuitants separately are then aggregated to obtain the expected
return under the entire contract.
Example (1). A husband purchases a joint and survivor annuity
providing for payments of $100 per month for his life and, after his
death, payments to his wife of $50 per month for her life. As of the
annuity starting date his age at his nearest birthday is 70 and that of
his wife at her nearest birthday is 67. There is no post-June 1986
investment in the contract.
Multiple from Table II (male, age 70, female, age 67).. 19.7
Multiple from Table I (male, age 70)................... 12.1
----------------
Difference (multiple applicable to second annuitant)... 7.6
================
Portion of expected return, second annuitant ($600x7.6) $4,560
[[Page 138]]
Portion of expected return, first annuitant $14,520
($1,200x12.1).........................................
----------------
Expected return under the contract................. $19,080
The expected return thus found, $19,080, is to be used in computing the
amount to be excluded from gross income. Thus, if the investment in the
contract in this example is $14,310, the exclusion ratio is $14,310/
$19,080; or 75 percent. The amount excludable from each monthly payment
made to the husband is 75 percent of $100, or $75, and the remaining $25
of each payment received by him shall be included in his gross income.
After the husband's death, the amount excludable by the second annuitant
(the surviving wife) would be 75 percent of each monthly payment of $50,
or $37.50, and the remaining $12.50 of each payment shall be included in
her gross income.
Example (2). If the same contract were purchased after June 30,
1986, the expected return would be $22,800, computed as follows:
Multiple from Table VI (ages 70, 67)................... 22.0
Multiple from Table V (age 70)......................... 16.0
----------------
Difference (multiple applicable to second annuitant)... 6.0
================
Portion of expected return, second annuitant ($600x6.0) $3,600
Plus: Portion of expected return, first annuitant $19,200
($1,200x16.0).........................................
----------------
Expected return under the contract..................... $22,800
If the investment in the contract is $14,310, the exclusion ratio is
$14,310/$22,800, or 62.8 percent. Thus, the husband would exclude $62.80
of each $100 payment received by him. After his death, his wife would
exclude 62.8 percent, or $31.40, of each $50 monthly payment.
Example (3). If amounts were invested in the same contract both
before July 1, 1986, and after June 30, 1986, and the election described
in Sec. 1.72-6(d)(6) were made, two exclusion ratios would be determined
pursuant to Sec. 1.72-6(d). Assume that the husband's total investment
in the contract is $14,310 and that $7,310 is the pre-July 1986
investment in the contract. The pre-July 1986 exclusion ratio would be
$7,310/$19,080, or 38.3 percent. The post-June 1986 exclusion ratio
would be $7,000/$22,800, or 30.7 percent. The husband would exclude
$69.00 ($38.30+$30.70) of the $100 monthly payment received by him. The
remaining $31.00 would be included in his gross income. After the
husband's death, the amount excludable by his wife would be $34.50 (38.3
percent of $50 plus 30.7 percent of $50). The remaining $15.50 would be
included in gross income.
The same method is used if the payments are to be increased after the
death of the first annuitant. Thus, if the payments to be made until the
husband's death were $50 per month and his widow were to receive $100
per month thereafter until her death, the 7.6 multiple in example (1)
above would be applied to the $100 payments, yielding an expected return
with respect to this portion of the annuity contract of $9,120
($1,200x7.6). An expected return of $7,260 ($600x12.1) would be obtained
with respect to the payments to be made to the husband, yielding a total
expected return under the contract of $16,380 ($9,120 plus $7,260). If
payments are to be made quarterly, semiannually, or annually, an
appropriate adjustment of the multiples found in Tables I and II or
Tables V and VI (whichever are applicable) should be made in accordance
with paragraph (a)(2) of this section.
(3) In the case of a joint and survivor annuity contract in respect
of which the first annuitant died in 1951, 1952, or 1953, and the basis
of the surviving annuitant's interest in the contract was determinable
under section 113(a)(5) of the Internal Revenue Code of 1939, such basis
shall be considered the ``aggregate of premiums or other consideration
paid'' by the surviving annuitant for the contract. (For rules governing
this determination, see 26 CFR (1939) 39.22(b)(2)-2 and 39.113(a)(5)-1
(Regulations 118).) In determining such an annuitant's investment in the
contract, such aggregate shall be reduced by any amounts received under
the contract by the surviving annuitant before the annuity starting
date, to the extent such amounts were excludable from his gross income
at the time of receipt. The expected return of the surviving annuitant
in such cases shall be determined in the manner prescribed in paragraph
(a) of this section, as though the surviving annuitant alone were
involved. For this purpose, the appropriate multiple for the survivor
shall be obtained from Table I as of the annuity starting date
determined in accordance with paragraph (b)(2)(i) of Sec. 1.72-4.
[[Page 139]]
(4) If a contract involving two annuitants provides for fixed
monthly payments to be made as a joint life annuity until the death of
the first annuitant to die (in other words, only as long as both remain
alive), the expected return under such contract shall be determined by
multiplying the total of the annuity payments to be received annually
under the contract by the multiple obtained from Table IIA or VIA
(whichever is applicable) of Sec. 1.72-9 under the ages (as of the
annuity starting date) and, if applicable, sexes of the annuitants. If,
however, payments are to be made under the contract quarterly,
semiannually, or annually, an appropriate adjustment of the multiple
found in Table IIA or VIA shall be made in accordance with paragraph
(a)(2) of this section.
(5) If a joint and survivor annuity contract involving two
annuitants provides that a specified amount shall be paid during their
joint lives and a different specified amount shall be paid to the
survivor upon the death of whichever of the annuitants is the first to
die, the following preliminary computation shall be made in all cases
preparatory to determining the expected return under the contract:
(i) From Table II or VI (whichever is applicable), obtain the
multiple under both of the annuitants' ages (as of the annuity starting
date) and, if applicable, their appropriate sexes;
(ii) From Table IIA or VIA (whichever is applicable), obtain the
multiple applicable to both annuitants' ages (as of the annuity starting
date) and, if applicable, their appropriate sexes;
(iii) Apply the multiple found in subdivision (i) of this
subparagraph to the total of the amounts to be received annually after
the death of the first to die; and
(iv) Apply the multiple found in subdivision (ii) of this
subparagraph to the difference between the total of the amounts to be
received annually before and the total of the amounts to be received
annually after the death of the first to die.
If the original annual payment is in excess of the annual payment to be
made after the death of the first to die, the expected return is the sum
of the amounts determined under subdivisions (iii) and (iv) of this
subparagraph. This may be illustrated by the following examples:
Example (1). A husband purchases a joint and survivor annuity
providing for payments of $100 a month for as long as both he and his
wife live, and, after the death of the first to die, payments to the
survivor of $75 a month for life. As of the annuity starting date, his
age at his nearest birthday is 70 and that of his wife at her nearest
birthday is 67. If there is no post-June 1986 investment in the
contract, the expected return under the contract is computed as follows:
Multiple from Table II (male age 70, female age 67).... 19.7
Multiple from Table IIA (male age 70, female age 67)... 9.3
================
Portion of expected return ($900x19.7--sum per year $17,730
after first death)....................................
Plus: Portion of expected return ($300x9.3--amount of $2,790
change in sum at first death).........................
Expected return under the contract................. $20,520
The total expected return in this example, $20,520, is to be used in
computing the amount to be excluded from gross income. Thus, if the
investment in the contract is $17,887, the exclusion ratio is $17,887/
$20,520, or 87.2 percent. The amount excludable from each monthly
payment made while both are alive is 87.2 percent of $100, or $87.20,
and the remaining $12.80 of each payment shall be included in gross
income. After the death of the first to die, the amount excludable by
the survivor shall be 87.2 percent of each monthly payment of $75, or
$65.40, and the remaining $9.60 of each payment shall be included in
gross income.
Example (2). Assume the same facts as in example (1), except that
the contract is purchased after June 30, 1986.
The expected return under the contract is computed as follows:
Multiple from Table VI (ages 70, 67)................... 22.0
Multiple from Table VIA (ages 70, 67).................. 12.4
================
Portion of expected return ($900x22.0--sum per year $19,800
after first death)....................................
Plus: Portion of expected return ($300x12.4--amount of $3,720
change in sum at first death).........................
----------------
Expected return under the contract................. $23,520
Thus, if the investment in the contract is $17,887, the exclusion ratio
is $17,887/$23,520, or 76.1 percent. The amount excludable from
[[Page 140]]
each monthly payment made while both are alive would be 76.1 percent of
$100, or $76.10, and the remaining $23.90 of each payment would be
included in gross income. After the death of the first to die, the
amount excludable by the survivor would be 76.1 percent of each monthly
payment of $75, or $57.08, and the remaining $17.92 of each payment
would be included in gross income.
Example (3). Assume the same facts as in examples (1) and (2),
except that the total investment in the contract is $17,887, and that
the pre-July 1986 investment in the contract is $8,000. Assume also that
one of the annuitants makes the election described in Sec. 1.72-6(d)(6).
Separate computations shall be performed pursuant to Sec. 1.72-6(d) to
determine the amount excludable from gross income. The pre-July 1986
exclusion ratio would be $8,000/$20,520, or 39 percent. The post-June
1986 exclusion ratio would be $9,887/$23,520, or 42 percent. The amount
excludable from each monthly payment made while both are alive would be
$81 ((.39x100)+(.42x100)), and the remaining $19 would be included in
gross income. After the death of the first to die, the amount excludable
by the survivor would be $60.75 ((.39x75)+(.42x75)), and the remaining
$14.25 would be included in gross income.
If the original annual payment is less than the annual payment to be
made after the death of the first to die, the expected return is the
difference between the amounts determined under subdivisions (iii) and
(iv) of this subparagraph. If, however, payments are to be made
quarterly, semiannually, or annually under the contract, the multiples
obtained from both Tables II and IIA or Tables VI and VIA (whichever are
applicable) shall first be adjusted in a manner prescribed in paragraph
(a)(2) of this section.
(6) If a contract provides for the payment of life annuities to two
persons during their respective lives and, after the death of one
(without regard to which one dies first), provides that the survivor
shall receive for life both his own annuity payments and the payments
made formerly to the deceased person, the expected return shall be
determined in accordance with paragraph (e)(4) of this section.
(7) If paragraph (b)(3) of Sec. 1.72-2 applies to payments provided
under a contract and this paragraph applies to such payments, the
principles of this paragraph shall be used in making the computations
described in paragraph (d)(3) of Sec. 1.72-4. This may be illustrated by
the following examples, examples (1) through (3) of which assume that
there is no post-June 1986 investment in the contract:
Example (1). Taxpayer A, a male age 63, pays $24,000 for a contract
which provides that the proceeds (both income and return of capital)
from eight units of an investment fund shall be paid monthly to him for
his life and that after his death the proceeds from six such units shall
be paid monthly to B, a female age 55, for her life. The portion of the
investment in the contract allocable to each taxable year of A is
$955.20 and that allocable to each taxable year of B is $716.40. This is
determined in the following manner:
Multiple from Table II (male, age 63, and female, age 28.1
55)...................................................
Number of units to be paid, in effect, as a joint and x6
survivor annuity......................................
----------------
Number of total annual unit payments anticipatable with 168.6
respect to the joint and survivor annuity element.....
----------------
Multiple from Table I (male, age 63)................... 16.2
Number of units to be paid, in effect, as a single life x2
annuity...............................................
----------------
Number of total annual unit payments anticipatable with 32.4
respect to A alone....................................
----------------
Total number of unit payments anticipatable............ 201
================
Portion of investment in the contract allocable to unit $119.40
payments ($24,000/201) on an annual basis.............
Number of units payable to A while he continues to live x8
----------------
Portion of the investment in the contract allocable to $955.20
each taxable year of A................................
----------------
Portion of investment in the contract allocable to unit $119.40
payments ($24,000/201) on an annual basis.............
Number of units payable to B for her life after A's x6
death.................................................
----------------
Portion of the investment in the contract allocable to $716.40
each taxable year of B................................
For the purpose of the above computation it is immaterial whether or not
A lives to or beyond the life expectancy shown for him in Table I.
[[Page 141]]
Example (2). Assume that Taxpayer A in example (1) receives payments
for five years which are at least as large as the portion of the
investment in the contract allocable to such years, but in the sixth
year he receives a total of only $626.40 rather than the $955.20
allocable to such year. A is 69 and B is 61 at the beginning of the
first monthly period for which an amount is payable in the seventh
taxable year. A makes the election in that year provided under paragraph
(d)(3) of Sec. 1.72-4. The difference between the portion of the
investment in the contract allocable to the sixth year and the amount
actually received in that year is $328.80 ($955.20 less $626.40). In
this case, 139.2 unit payments are anticipatable (on an annual basis),
since the appropriate multiple from Table II of Sec. 1.72-9, 23.2,
multiplied by the number of units payable, in effect, as a joint and
survivor annuity yields this result (6x23.2). A's appropriate multiple
from Table I of Sec. 1.72-9 for the two units which will cease to be
paid at his death is 12.6, and the total number of unit payments
anticipatable (on an annual basis) is, therefore, 164.4 (2x12.6 plus
139.2). Dividing the difference previously found ($328.80) by the total
number of unit payments thus determined (164.4) indicates that A will
have an additional allocation of the investment in the contract of $16
to the seventh and every succeeding full taxable year (8 unitsx$2), and
B will have an additional allocation of the investment in the contract
of $12 (6 unitsx$2) to each taxable year in which she receives 12
monthly payments subsequent to the death of A. The total allocable to
each taxable year of A is, therefore, $971.20, and that allocable to
each taxable year of B will be $728.40.
Example (3). If, in example (2), A had died at the end of the fifth
year, in the sixth year B would have received a payment of $469.80 (that
portion of the $626.40 that A would have received which is in the same
ratio that 6 units bear to 8 units) and would thus have received $246.60
less than the portion of the investment in the contract originally
determined to be allocable to each of her taxable years. In these
circumstances, B would be entitled to elect to redetermine the portion
of the investment in the contract allocable to the taxable year of
election and all subsequent years. The new amount allocable thereto
would be found by dividing the $246.60 difference by her life expectancy
as of the first day of the first period for which she received an amount
as an annuity in the seventh year of the annuity contract, and adding
the result to her originally determined allocation of $716.40.
Example (4). On July 1, 1986, Taxpayer C, age 60, pays $28,000 for a
contract which provides that the proceeds (both income and return of
capital) from 10 units of an investment fund shall be paid monthly to C
for C's life and that after C's death the proceeds from 4 such units
shall be paid monthly to D, age 57, for D's life. The portion of the
investment in the contract allocable to each taxable year of C is
$1,037.00 and that allocable to each taxable year of D is $414.80. This
is determined as follows:
Multiple from Table VI (ages 60, 57)................... 31.2
Number of units to be paid, in effect, as a joint and x4
survivor annuity......................................
----------------
Number of total annual unit payments anticipatable with 124.8
respect to the joint and survivor annuity element.....
================
Multiple from Table V (age 60)......................... 24.2
Number of units to be paid, in effect, as a single life x6
annuity...............................................
----------------
Number of total annual unit payments anticipatable with 145.2
respect to C alone....................................
----------------
Total number of unit payments anticipatable............ 270
================
Portion of investment in the contract allocable to unit 103.70
payments ($28,000/270) on an annual basis.............
Number of units payable to C while C continues to live. x10
----------------
Portion of the investment in the contract allocable to $1,037.00
each taxable year of C................................
----------------
Portion of investment in the contract allocable to unit $103.70
payments ($28,000/270) on an annual basis.............
Number of units payable to D for D's life after C's x4
death.................................................
----------------
Portion of the investment in the contract allocable to $414.80
each taxable year of D................................
For purposes of the above computation it is immaterial whether or not C
lives to or beyond the life expectancy shown in Table V.
Example (5). Assume the same facts as in example (4), except that
C's total investment in the contract is $28,000, and C's pre-July 1986
investment in the contract is $16,000. If C makes the election described
in Sec. 1.72-6(d)(6), separate computations are required to determine
the amount excludable from gross income with respect to the pre-July
1986 investment in the contract and the post-June 1986 investment in the
contract. The annuitant shall apply the appropriate pre-July 1986 and
post-June 1986 life expectancy multiples to the applicable portions of
the
[[Page 142]]
units to be paid as a joint and survivor annuity, and as a single life
annuity.
Pre-July 1986 Computation (all references to unit payments are to
the pre-July 1986 applicable portion of such payments):
Multiple from Table II (male, age 60, female, age 57).. 27.6
Number of units to be paid, in effect, as a joint and x4
survivor annuity......................................
----------------
Number of total annual unit payments anticipatable with 110.40
respect to the joint and survivor annuity element.....
================
Multiple from Table I (male, age 60)................... 18.2
Number of units to be paid, in effect, as a single life x6
annuity...............................................
----------------
Number of total annual unit payments anticipatable with 109.20
respect to C alone....................................
================
Total number of unit payments anticipatable............ 219.6
================
Portion of pre-July 1986 investment in the contract $72.86
allocable to unit payments ($16,000/219.60) on an
annual basis..........................................
----------------
Number of units payable to C while C continues to live. x10
----------------
Portion of pre-July 1986 investment in the contract 728.60
allocable to each taxable year of C...................
----------------
Portion of pre-July 1986 investment in the contract 72.86
allocable to unit payments ($16,000/219.60) on an
annual basis..........................................
Number of units payable to D for D's life after C's x4
death.................................................
----------------
Portion of pre-July 1986 investment in the contract $291.44
allocable to each taxable year of D...................
Post-June 1986 Computation (all references to unit payments are to
the post-June 1986 applicable portion of such payments):
Multiple from Table VI (ages 60, 57)................... 31.2
Number of units to be paid, in effect, as a joint and x4
survivor annuity......................................
----------------
Number of total annual unit payments anticipatable with 124.80
respect to the joint and survivor annuity element.....
================
Multiple from Table V (age 60)......................... 24.2
Number of units to be paid, in effect, as a single life x6
annuity...............................................
----------------
Number of total annual unit payments anticipatable with 145.20
respect to C alone....................................
----------------
Total number of unit payments anticipatable............ 270
================
Portion of post-June 1986 investment in the contract $44.44
allocable to unit payments ($12,000/270) on an annual
basis.................................................
Number of units payable to C while C continues to live. x10
----------------
Portion of post-June 1986 investment in the contract $444.40
allocable to each taxable year of C...................
================
Portion of post-June 1986 investment in the contract 44.44
allocable to unit payments ($12,000/270) on an annual
basis.................................................
Number of units payable to D for D's life after C's x4
death.................................................
----------------
Portion of post-June 1986 investment in the contract $177.78
allocable to each taxable year of D...................
Total computation:
Total portion of the investment in the contract $1,173.00
allocable to each taxable year of C
($728.60+$444.40)...................................
Total portion of the investment in the contract $469.22
allocable to each taxable year of D
($291.44+$177.78)...................................
Example (6). Assume that taxpayer C in example (4) receives payments
for four years which are at least as large as the portion of the
investment in the contract allocable to such years, but in the fifth
year receives a total of only $600 rather than the $1,037 allocable to
such year. C is 65 and D is 62 at the beginning of the first monthly
period for which an amount is payable in the sixth taxable year. C makes
the election in that year provided under paragraph (d)(3) of Sec. 1.72-
4. The difference between the portion of the investment in the contract
allocable to the fifth year and the amount actually received
[[Page 143]]
in that year is $437 ($1,037-$600). In this case, 106 unit payments are
anticipatable with respect to the joint and survivor annuity element,
since the appropriate multiple from Table VI of Sec. 1.72-9, 26.5,
multiplied by the number of units payable, in effect, as a joint and
survivor annuity yields this result (4 x 26.0). C's appropriate multiple
from Table V of Sec. 1.72-9 for the six units which will cease to be
paid at C's death is 20.0, and the number of unit payments anticipatable
with respect to C alone is 120 (6 x 20). The total number of unit
payments anticipatable is, therefore, 226 (120 plus 106). Dividing the
difference previously found ($437) by the total number of unit payments
thus determined (226) indicates that C will have an additional
allocation of the investment in the contract of $19.30 to the sixth and
every succeeding full taxable year (10 units x $1.93), and D will have
an additional allocation of the investment in the contract of $7.72 (4
units x $1.93) to each taxable year in which D receives 12 monthly
payments subsequent to the death of C. The total allocable to each
taxable year of C is, therefore, $1,056.30, and that allocable to each
taxable year of D will be $422.52.
Example (7). If, in example (6), C had died at the end of the fourth
year, in the fifth year D would have received a payment of $240 (that
portion of the $600 that C would have received which is in the same
ratio that 4 units bear to 10 units) and would thus have received
$174.80 less than the portion of the investment in the contract
allocable to each of D's taxable years. In these circumstances, D would
be entitled to elect to redetermine the portion of the investment in the
contract allocable to the taxable year of election and all subsequent
years. The new amount allocable thereto would be found by dividing the
$174.80 difference by D's life expectancy as of the first day of the
first period for which D received an amount as an annuity in the sixth
year of the annuity contract, and adding the result to D's originally
determined allocation of $414.80.
(c) Expected return for term certain. In the case of a contract
providing for specific periodic payments which are to be paid for a term
certain such as a fixed number of months or years, without regard to
life expectancy, the expected return is determined by multiplying the
fixed number of years or months for which payments are to be made on or
after the annuity starting date by the amount of the payment provided in
the contract for each such period.
(d) Expected return with respect to amount certain. In the case of
contracts involving no life or lives as a measurement of their duration,
but under which a determinable total amount is to be paid in
installments of lesser amounts paid at periodic intervals, the expected
return shall be the total amount guaranteed. If an amount is to be paid
periodically until a fund plus interest at a fixed rate is exhausted,
but further payments may be made thereafter because of earnings at a
higher interest rate, this paragraph shall apply to the total amount
anticipatable as a result of the amount of the fund plus the fixed
interest thereon. Any amount which may be paid as the result of earnings
at a greater interest rate shall be disregarded in determining the
expected return. If such an amount is later received, it shall be
considered an amount not received as an annuity after the annuity
starting date. See paragraph (b)(2) of Sec. 1.72-11.
(e) Expected return where two or more annuity elements providing for
fixed payments are acquired for a single consideration. (1) In the case
of a contract described in paragraph (a)(2) of Sec. 1.72-2, which
provides for specified payments to be made under two or more annuity
elements, the expected return shall be found for the contract as a whole
by aggregating the expected returns found with respect to each annuity
element. If individual life annuity elements are involved (including
joint and survivor annuities where the primary annuitant died before
January 1, 1954) the expected return for each of them shall be
determined in the manner prescribed in paragraph (a) of this section. If
joint and survivor annuity elements are involved, the expected return
for such elements shall be determined under the appropriate subparagraph
of paragraph (b) of this section. If terms certain or amounts certain
are involved, the expected returns for such elements shall be determined
under paragraph (c) or (d) of this section, respectively.
(2) The aggregate expected return found in accordance with the rules
set forth in subparagraph (1) of this paragraph shall constitute the
expected return for the contract as a whole. The investment in the
contract shall be divided by the amount thus determined to obtain the
exclusion ratio for the contract as a whole, This exclusion ratio shall
be applied to all amounts
[[Page 144]]
received as a annuity under the contract by any recipient (in accordance
with the provisions of Sec. 1.72-4), except in the case of amounts
received by a surviving annuitant under a joint and survivor annuity
element to which the provisions of section 72(i) and paragraph (b)(3) of
this section would apply if it were a separate contract. See
subparagraph (3) of this paragraph.
(3) In the case of a contract providing two or more annuity
elements, one of which is a joint and survivor annuity element of the
type described in section 72(i) and paragraph (b)(3) of this section,
the general exclusion ratio for the contract as a whole, for the purpose
of computations with respect to all the other annuity elements shall be
determined in accordance with the principles of subparagraphs (1) and
(2) of this paragraph. A special exclusion ratio shall thereafter be
determined for the surviving annuitant receiving payments under the
annuity element described in section 72(i) and paragraph (b)(3) of this
section by using the investment in the contract and the expected return
determined in accordance with the provisions of paragraph (b)(3) of this
section.
(4) In the case of a contract providing for payments to be made to
two persons in the manner described in paragraph (b)(6) of this section,
the expected return is to be computed as though there were two joint and
survivor annuities under the same contract, in the following manner.
First, the multiple appropriate to the ages (as of the annuity starting
date) and, if applicable, sexes of the annuitants involved shall be
found in Table II or VI (whichever is applicable) of Sec. 1.72-9 and
adjusted, if necessary, in the manner described in paragraph (a)(2) of
this section. Second, the multiple so found shall be applied to the sum
of the payments to be made each year to both annuitants. The result is
the expected return for the contract as a whole.
(5) For rules relating to expected return where two or more annuity
elements are acquired for a single consideration and one or more of such
elements does not specify a fixed payment for each period, see paragraph
(f) of this section.
(f) Expected return with respect to obligations providing for
payments described in paragraph (b)(3) of Sec. 1.72-2. (1) If a contract
to which section 72 applies provides only for payments to be made in a
manner described in paragraph (b)(3) of Sec. 1.72-2, the expected return
for such contract as a whole shall be an amount equal to the investment
in the contract found in accordance with section 72(c)(1) and Sec. 1.72-
6, as adjusted for any refund feature in accordance with Sec. 1.72-7.
(2) If a contract to which section 72 applies provides for annuity
elements, one or more of which (but not all) provide for payments to be
made in a manner described in paragraph (b)(3) of Sec. 1.72-2:
(i) With respect to the portion of the contract providing for
annuity elements to which paragraph (b)(3) of Sec. 1.72-2 does not
apply, the expected return shall be the aggregate of the expected
returns found for each of such elements in accordance with the
appropriate paragraph of this section; and
(ii) With respect to all annuity elements to which paragraph (b)(3)
of Sec. 1.72-2 does apply, the expected return for all such elements
shall be an amount equal to the portion of the investment in the
contract allocable to such elements in accordance with the provisions of
paragraph (e)(2)(ii) of Sec. 1.72-4 and paragraph (b)(3)(ii)(b) of
Sec. 1.72-6.
(g) Expected return with respect to contracts subject to Sec. 1.72-
6(d). In the case of a contract to which Sec. 1.72-6(d) (relating to
contracts in which amounts were invested both before July 1, 1986, and
after June 30, 1986) applies, an expected return is computed using the
multiples in Tables I through IV of Sec. 1.72-9 with respect to the pre-
July 1986 investment in the contract and a second expected return is
computed using the multiples in Tables V through VIII of Sec. 1.72-9
with respect to the post-June 1986 investment in the contract.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as
amended by T.D. 8115, 51 FR 45694, Dec. 19, 1986]
[[Page 145]]
Sec. 1.72-6 Investment in the contract.
(a) General rule. (1) For the purpose of computing the ``investment
in the contract'', it is first necessary to determine the ``aggregate
amount of premiums or other consideration paid'' for such contract. See
section 72(c)(1). This determination is made as of the later of the
annuity starting date of the contract or the date on which an amount is
first received thereunder as an annuity. The amount so found is then
reduced by the sum of the following amounts in order to find the
investment in the contract:
(i) The total amount of any return of premiums or dividends received
(including unrepaid loans or dividends applied against the principal or
interest on such loans) on or before the date on which the foregoing
determination is made, and
(ii) The total of any other amounts received with respect to the
contract on or before such date which were excludable from the gross
income of the recipient under the income tax law applicable at the time
of receipt.
Amounts to which subdivision (ii) of this subparagraph applies shall
include, for example, amounts considered to be return of premiums or
other consideration paid under section 22(b)(2) of the Internal Revenue
Code of 1939 and amounts considered to be an employer-provided death
benefit under section 22(b)(1)(B) of such Code. For rules relating to
the extent to which an employee or his beneficiary may include employer
contributions in the aggregate amount of premiums or other consideration
paid, see Sec. 1.72-8. If the aggregate amount of premiums or other
consideration paid for the contract includes amounts for which
deductions were allowed under section 404 as contributions on behalf of
a self-employed individual, such amounts shall not be included in the
investment in the contract.
(2) For the purpose of subparagraph (1) of this paragraph, amounts
received subsequent to the receipt of an amount as an annuity or
subsequent to the annuity starting date, whichever is the later, shall
be disregarded. See, however, Sec. 1.72-11.
(3) The application of this paragraph may be illustrated by the
following examples:
Example (1). In 1950, B purchased an annuity contract for $10,000
which was to provide him with an annuity of $1,000 per year for life. He
received $1,000 in each of the years 1950, 1951, 1952, and 1953, prior
to the annuity starting date (January 1, 1954). Under the Internal
Revenue Code of 1939, $300 of each of these payments (3 percent of
$10,000) was includible in his gross income, and the remaining $700 was
excludable therefrom during each of the taxable years mentioned. In
computing B's investment in the contract as of January 1, 1954, the
total amount excludable from his gross income during the years 1950
through 1953 ($2,800) must be subtracted from the consideration paid
($10,000). Accordingly, B's investment in the contract as of January 1,
1954, is $7,200 ($10,000 less $2,800).
Example (2). In 1945, C contracted for an annuity to be paid to him
beginning December 31, 1960. In 1945 and in each successive year until
1960, he paid a premium of $5,000. Assuming he receives no payments of
any kind under the contract until the date on which he receives the
first annual payment as an annuity (December 31, 1960), his investment
in the contract as of the annuity starting date (December 31, 1959) will
be $75,000 ($5,000 paid each year for the 15 years from 1945 to 1959,
inclusive).
Example (3). Assume the same facts as in example (2), except that
prior to the annuity starting date C has already received from the
insurer dividends of $1,000 each in 1949, 1954, and 1959, such dividends
not being includible in his gross income in any of those years. C's
investment in the contract, as of the annuity starting date, will then
be $72,000 ($75,000-$3,000).
(b) Allocation of the investment in the contract where two or more
annuity elements are acquired for a single consideration. (1) In the
case of a contract described in Sec. 1.72-2(a)(2) which provides for two
or more annuity elements, the investment in the contract determined
under paragraph (a) shall be allocated to each of the annuity elements
in the ratio that the expected return under each annuity element bears
to the aggregate of the expected returns under all the annuity elements.
The exclusion ratio for the contract as a whole shall be determined by
dividing the investment in the contract (after adjustment for the
present value of any or all refund features) by the aggregate of the
expected returns under all the annuity elements. This may be illustrated
by the following examples:
[[Page 146]]
Example (1). If a contract provides for annuity payments of $1,000
per year for life (with no refund feature) to both A and B, a male and
female, respectively, each 70 years of age as of the annuity starting
date, such contract is acquired for consideration of $19,575 (without
regard to whether paid by A, B, or both), and there is no post-June 1986
investment in the contract, the investment in the contract shall be
allocated by determining the exclusion ratio for the contract as a whole
in the following manner:
Expectancy of A under Table I and Sec. 1.72-5(a)(2), 11.6 $11,600
(12.1-0.5), multiplied by $1,000.............................
Plus: Expectancy of B computed in a similar manner 14,500
($1,000x14.5 [15.0-0.5]).....................................
---------
Total expected return..................................... 26,100
The exclusion ratio for both A and B is then $19,575/$26,100, or 75
percent. A and B shall each exclude from gross income three-fourths
($750) of each $1,000 annual payment received and shall include the
remaining one-fourth ($250) of each $1,000 annual payment received in
gross income.
Example (2). Assume the same facts as in example (1) except that of
the total investment in the contract of $19,575, the pre-July 1986
investment in the contract is $10,000. If the election described in
Sec. 1.72-6(d)(6) is made with respect to the contract, the investment
in the contract shall be allocated by determining an exclusion ratio for
the contract as a whole based on separately computed exclusion ratios
with respect to the pre-July 1986 investment in the contract and the
post-June 1986 investment in the contract in the following manner:
Expectancy of A under Table I and Sec. 1.72-5(a)(2), 11.6 $11,600
(12.1-0.5), multiplied by $1,000.............................
Plus: Expectancy of B under Table I and Sec. 1.72-5(a)(2), $14,500
14.5 (15.0-0.5), multiplied by $1,000........................
---------
Pre-July 1986 expected return................................. $26,100
Expectancy of A under Table V and Sec. 1.72-5(a)(2), 15.5 $15,500
(16.0-0.5), multiplied by $1,000.............................
Plus: Expectancy of B under Table V and Sec. 1.72-5(a)(2), $15,500
15.5 (16.0-0.5), multiplied by $1,000........................
---------
Post-June 1986 expected return................................ $31,000
=========
Pre-July 1986 exclusion ratio ($10,000/$26,100)............... 38.3
Post-June 1986 exclusion ratio ($9,575/31,000)................ 30.9
A and B shall each exclude from gross income $692 (38.3
percent of $1,000+30.9 percent of $1,000) of each $1,000
payment and include the remaining $308 in gross income
(2) In the case of a contract providing for specified annual annuity
payments to be made to two persons during their joint lives and the
payment of the aggregate of the two individual payments to the survivor
for his life, the investment in the contract shall be allocated in
accordance with the provisions of subparagraph (1) of this paragraph.
For this purpose, the investment in the contract (without regard to the
fact that differing amounts may have been contributed by the two
annuitants) shall be divided by the expected return determined in
accordance with paragraph (e)(4) of Sec. 1.72-5. The resulting exclusion
ratio shall then be applied to any amounts received as an annuity by
either annuitant.
(3) In the case of a contract providing two or more annuity
elements, one or more of which provides for payments to be made in a
manner described in paragraph (b)(3) of Sec. 1.72-2, the investment in
the contract shall be allocated to the various annuity elements in the
following manner.
(i) If all the annuity elements provide for payments to be made in
the manner described in paragraph (b)(3) of Sec. 1.72-2, the investment
in the contract shall be allocated on the basis of the amounts received
by each recipient by apportioning the amount determined to be excludable
under that section to each recipient in the same ratio as the total of
the amounts received by him in the taxable year bears to the total of
the amounts received by all recipients during the same period; and
(ii) If one or more, but not all, of the annuity elements provide
for payments to be made in a manner described in paragraph (b)(3) of
Sec. 1.72-2:
(a) With respect to all annuity elements to which that section does
not apply, the investment in the contract for all such elements shall be
the portion of the investment in the contract as a whole (found in
accordance with the provisions of this section) which is properly
allocable to all such elements; and
[[Page 147]]
(b) With respect to all annuity elements to which paragraph (b)(3)
of Sec. 1.72-2 does apply, the investment in the contract for all such
elements shall be the investment in the contract as a whole (found in
accordance with the provisions of this section) as reduced by the
portion thereof determined under (a) of this subdivision.
For the purpose of determining, pursuant to (a) of this subdivision, the
portion of the investment in the contract as a whole properly allocable
to a particular annuity element, reference shall be made to the present
value of such annuity element determined in accordance with paragraph
(e)(1)(iii) (b) of Sec. 1.101-2.
(iii) In the case of a contract to which paragraph (d) of this
section applies, this paragraph (b) is applied in the manner prescribed
in paragraph (d) and, in particular, paragraph (d)(5)(v) of this
section.
(c) Special rules. (1) For the special rule for determining the
investment in the contract for a surviving annuitant in cases where the
prior annuitant of a joint and survivor annuity contract died in 1951,
1952, or 1953, see paragraph (b)(3) of Sec. 1.72-5.
(2) For special rules relating to the determination of the
investment in the contract where employer contributions are involved,
see Sec. 1.72-8. See also paragraph (b) of Sec. 1.72-16 for a special
rule relating to the determination of the premiums or other
consideration paid for a contract where an employee is taxable on the
premiums paid for life insurance protection that is purchased by and
considered to be a distribution from an exempt employees' trust.
(3) For the determination of an adjustment in investment in the
contract in cases where a contract contains a refund feature, see
Sec. 1.72-7.
(4) In the case of ``face-amount certificates'' described in section
72(1), the amount of consideration paid for purposes of computing the
investment in the contract shall include any amount added to the
holder's basis by reason of section 1232(a)(3)(E) (relating to basis
adjustment for amount of original issue discount ratably included in
gross income as interest under section 1232(a)(3)).
(d) Pre-July 1986 and post-June 1986 investment in the contract. (1)
This paragraph (d) applies to an annuity contract if:
(i) The investment in the contract includes a pre-July 1986
investment in the contract and a post-June 1986 investment in the
contract (both as defined in Sec. 1.72-6(d)(3));
(ii) The use of a multiple found in Tables I through VIII of
Sec. 1.72-9 is required to determine the expected return under the
contract; and
(iii) The election described in paragraph (d)(6) of this section is
made with respect to the contract.
(2) In the case of annuity contract to which this paragraph (d)
applies--
(i) All computations required to determine the amount excludable
from gross income shall be performed separately with respect to the pre-
July 1986 investment in the contract and the post-June 1986 investment
in the contract as if each such amount were the entire investment in the
contract;
(ii) The multiples in Tables I through IV shall be used for
computations involving the pre-July 1986 investment in the contract and
the multiples in Tables V through VIII shall be used for computations
involving the post-June 1986 investment in the contract; and
(iii) The amount excludable from gross income shall be the sum of
the amounts determined under the separate computations required by
paragraph (d)(2)(i) of this section.
(3) For purposes of the regulations under section 72, the pre-July
1986 investment in the contract and post-June 1986 investment in the
contract are determined in accordance with the following rules:
(i)(A) Except as provided in Sec. 1.72-9, if the annuity starting
date of the contract occurs before July 1, 1986, the pre-July 1986
investment in the contract is the total investment in the contract as of
the annuity starting date;
(B) Except as provided in Sec. 1.72-9, if the annuity starting date
of the contract occurs after June 30, 1986, and the contract does not
provide for a disqualifying form of payment or settlement, the pre-July
1986 investment in the contract is the investment in the contract
computed as of June 30, 1986,
[[Page 148]]
as if June 30, 1986, had been the later of the annuity starting date of
the contract or the date on which an amount is first received thereunder
as an annuity;
(C) If the annuity starting date of the contract occurs after June
30, 1986, and the contract provides, at the option of the annuitant or
of any other person (including, in the case of an employee's annuity, an
option exercisable only by, or with the consent of, the employer), for a
disqualifying form of payment or settlement, the pre-July 1986
investment in the contract is zero (i.e., the total investment in the
contract is post-June 1986 investment in the contract).
(ii) The post-June 1986 investment in the contract is the amount by
which the total investment in the contract as of the annuity starting
date exceeds the pre-July 1986 investment in the contract.
(iii) For purposes of paragraph (d)(3)(i) of this section, a
disqualifying form of payment or settlement is any form of payment or
settlement (whether or not selected) that permits the receipt of amounts
under the contract in a form other than a life annuity. For example,
each of the following options provides for a disqualifying form of
payment or settlement:
(A) An option to receive a lump sum in full discharge of the
obligation under the contract.
(B) An option to receive an amount under the contract after June 30,
1986, and before the annuity starting date.
(C) An option to receive an annuity for a period certain.
(D) An option to receive payments under a refund feature (within the
meaning of paragraphs (b) and (c) of Sec. 1.72-7) that is substantially
equivalent to an annuity for a period certain.
(E) An option to receive a temporary life annuity (within the
meaning of Sec. 1.72-5 (a)(3)) that is substantially equivalent to an
annuity for a period certain.
An option to receive alternative forms of life annuity is not a
disqualifying option for purposes of paragraph (d)(3)(i) of this
section. Thus, if the sole options provided under a contract are a
single life annuity and a joint and survivor life annuity, paragraph
(d)(3)(i) (C) of this section does not apply to such contract.
(iv) For purposes of paragraph (d)(3)(iii) of this section, a refund
feature is substantially equivalent to an annuity for a period certain
if its value determined under Table VII of Sec. 1.72-9 exceeds 50
percent. Similarly, a temporary life annuity is substantially equivalent
to an annuity for a period certain if the multiple determined under
Table VIII of Sec. 1.72-9 exceeds 50 percent of the maximum duration of
the annuity.
(4) In any separate computation under this paragraph (d), only the
applicable portion of other amounts (such as the total expected return
under the contract, or the total amount guaranteed under the contract as
of the annuity starting date) shall be taken into account if the use of
the entire amount in such computation is inconsistent with the use in
the computation of only a portion of the investment in the contract. For
example, such use is generally inconsistent if the computation requires
a comparison of the investment in the contract and such other amount for
the purpose of using the greater (or lesser) amount or the difference
between the two. For purposes of the first sentence of this paragraph
(d)(4), the applicable portion is the amount that bears the same ratio
to the entire amount as the pre-July 1986, investment in the contract or
the post-June 1986 investment in the contract, whichever is applicable,
bears to the total investment in the contract as of the annuity starting
date.
(5) Application to particular computations. (i) In the case of a
contract to which this paragraph (d) applies, the exclusion ratio for
purposes of Sec. 1.72-4 (a) is the sum of the exclusion ratios
separately computed in accordance with this paragraph (d). The exclusion
ratio with respect to the pre-July 1986 investment in the contract is
determined by dividing the pre-July 1986 investment in the contract by
the expected return as found under Sec. 1.72-5 by applying the
appropriate multiples of Tables I through IV of Sec. 1.72-9. Similarly,
the exclusion ratio with respect to the post-June 1986 investment in the
contract is determined by dividing the
[[Page 149]]
post-June 1986 investment in the contract by the expected return as
found under Sec. 1.72-5 by applying the appropriate multiples in Tables
V through VIII of Sec. 1.72-9.
(ii) The applicability of Sec. 1.72-4(d)(2) to a contract to which
this paragraph (d) applies shall be determined separately with respect
to the post-June 1986 investment in the contract and the pre-July 1986
investment in the contract and in each such determination only the
applicable portion of the total expected return under the contract shall
be taken into account. If Sec. 1.72-4(d)(2) applies with respect to
either such investment in the contract, the separately computed
exclusion ratio shall be considered to be the applicable portion of 100
percent.
(iii) If Sec. 1.72-4(d)(3) applies to a contract to which this
paragraph (d) applies--
(A) The applicable portions (as defined in paragraph (d)(4) of this
section) of payments received under the contract for a taxable year
shall be separately computed;
(B) The pre-July 1986 investment in the contract and the post-June
1986 investment in the contract shall be separately allocated to the
taxable year; and
(C) The separate applicable portions of the payments received under
the contract for the taxable year shall be considered to be amounts
received as an annuity (for which the exclusion ratio is 100 percent)
only to the extent they do not exceed the portions of the corresponding
investments in the contract which are properly allocable to that year.
See the example in Sec. 1.72-4(d)(3)(v).
(iv) If Sec. 1.72-4(e) applies to a contract to which this paragraph
(d) applies, the exclusion ratio shall be separately computed with
respect to the pre-July 1986 investment in the contract and the post-
June 1986 investment in the contract. For purposes of the separate
computations under Sec. 1.72-4(e)(2)(ii), only the applicable portion of
payments received shall be taken into account and the exclusion ratio
(100%) shall be applied to the separately computed portion allocated to
each participant.
(v) If paragraph (b)(3) of this section applies to a contract to
which this paragraph (d) applies, separate allocations are required with
respect to the pre-July 1986 investment in the contract and the post-
June 1986 investment in the contract.
For purposes of the separate computations required to determine the
portion of the investment in the contract properly allocable to a
particular annuity element, only the applicable portion of the present
value of the annuity element determined in accordance with Sec. 1.101-
2(e)(1)(iii)(b) is taken into account.
(vi) If Sec. 1.72-7 applies to a contract to which this paragraph
(d) applies, separate computations are required to determine the
adjustment to the pre-July 1986 investment in the contract and the post-
June 1986 investment in the contract. For purposes of such separate
computations, only the applicable portions of the amounts described in
Sec. 1.72-7 (b)(3)(ii), (c)(1)(ii)(B), (c)(2)(vii)(B), and (d)(1)(ii)
are taken into account. Similarly, in the case of computations with
respect to the guarantee of a specified amount under Sec. 1.72-7(d)(1),
only the applicable portion of such amount is taken into account.
(6) This paragraph (d) applies to a contract only if the first
taxpayer to receive an amount as an annuity under the contract elects to
perform separate computations with respect to the pre-July 1986
investment in the contract and the post-June 1986 investment in the
contract as if each such amount were the entire investment in contract.
If two or more annuitants receive an amount as an annuity under the
contract at the same time (such as under a joint-and-last-survivorship
annuity contract), an election by one of the annuitants is treated as an
election by each of the annuitants. The election is made by attaching a
statement to the first return filed by the taxpayer for the first
taxable year in which an amount is received as an annuity under the
contract. The statement must indicate that the taxpayer is electing to
apply the provisions of paragraph (d) of Sec. 1.72-6, and must also
contain the name, address, and taxpayer identification number of each
annuitant under the contract, and the amount of the
[[Page 150]]
pre-July 1986 investment in the contract.
(7) If the investment in the contract includes a post-June 1986
investment in the contract and the election described in paragraph
(d)(6) of this section is not made--
(i) The amount excludable from gross income shall be determined
without regard to the separate computations described in this paragraph
(d); and
(ii) Only the multiples found in Tables V through VIII shall be used
in determining the amount excludable from gross income.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10134, Sept. 17, 1963; T.D. 7311, 39 FR 11880, Apr. 1, 1974; T.D. 8115,
51 FR 45700, Dec. 19, 1986; 52 FR 10223, Mar. 31, 1987]
Sec. 1.72-7 Adjustment in investment where a contract contains a refund feature.
(a) Definition of a contract containing a refund feature. A contract
to which section 72 applies, contains a refund feature if:
(1) The total amount receivable as an annuity under such contract
depends, in whole or in part, on the continuing life of one or more
persons,
(2) The contract provides for payments to be made to a beneficiary
or the estate of an annuitant on or after the death of the annuitant if
a specified amount or a stated number of payments has not been paid to
the annuitant or annuitants prior to death, and
(3) Such payments are in the nature of a refund of the consideration
paid. See paragraph (c)(1) of Sec. 1.72-11.
(b) Adjustment of investment for the refund feature in the case of a
single life annuity. Where a single life annuity contract to which
section 72 applies contains a refund feature and the special rule of
paragraph (d) of this section does not apply, the investment in the
contract shall be adjusted in the following manner:
(1) Determine the number of years necessary for the guaranteed
amount to be fully paid by dividing the maximum amount guaranteed as of
the annuity starting date by the amount to be received annually under
the contract to the extent such amount reduces the guaranteed amount.
The number of years should be stated in terms of the nearest whole year,
considering for this purpose a fraction of one-half or more as an
additional whole year.
(2) Consult Table III or VII (whichever is applicable) of Sec. 1.72-
9 for the appropriate percentage under the whole number of years found
in subparagraph (1) of this paragraph and the age (as of the annuity
starting date) and, if applicable, sex of the annuitant.
(3) Multiply the percentage found in subparagraph (2) of this
paragraph by whichever of the following is the smaller: (i) The
investment in the contract found in accordance with Sec. 1.72-6 or (ii)
the total amount guaranteed as of the annuity starting date.
(4) Subtract the amount found in subparagraph (3) of this paragraph
from the investment in the contract found in accordance with Sec. 1.72-
6.
The resulting amount is the investment in the contract adjusted for the
present value of the refund feature without discount for interest and is
to be used in determining the exclusion ratio to be applied to the
payments received as an annuity. The percentage found in Tables III or
VII shall not be adjusted in a manner described in paragraph (a)(2) of
Sec. 1.72-5. These principles may be illustrated by the following
examples:
Example (1). On January 1, 1954, a husband, age 65, purchased for
$21,053, an immediate installment refund annuity payable $100 per month
for life. The contract provided that in the event the husband did not
live long enough to recover the full purchase price, payments were to be
made to his wife until the total payments under the contract equaled the
purchase price. The investment in the contract adjusted for the purpose
of determining the exclusion ratio is computed in the following manner:
Cost of the annuity contract (investment in the contract, $21,053
unadjusted)...............................................
Amount to be received annually............................. $1,200
Number of years for which payment guaranteed ($21,053 17.5
divided by $1,200)........................................
Rounded to nearest whole number of years................... 18
Percentage located in Table III for age 65 (age of the 30
annuitant as of the annuity starting date) and 18 (the
number of whole years) (percent)..........................
[[Page 151]]
Subtract value of the refund feature to the nearest dollar $6,316
(30 percent of $21,053)...................................
------------
Investment in the contract adjusted for the present value $14,737
of the refund feature without discount for interest.......
Example (2). Assume the same facts as in example (1), except that
the total investment in the contract was made after June 30, 1986. The
investment in the contract adjusted for the purpose of determining the
exclusion ratio is computed as follows:
Cost of the annuity contract (investment in the contract, $21,053
unadjusted)...............................................
Amount to be received annually............................. $1,200
Number of years for which payment guaranteed ($21,053/ 17.5
$1,200)...................................................
Rounded to nearest whole number of years................... 18
Percentage in Table VII for age 65 and 18 years (percent).. 15
Subtract value of the refund feature to the nearest dollar $3,158
(15 percent of $21,053)...................................
------------
Investment in the contract adjusted for the present value $17,895
of the refund feature without discount for interest.......
Example (3). Assume the same facts as in example (1), except that
the pre-July 1986 investment in the contract is $10,000 and the post-
June 1986 investment in the contract is $11,053. If the annuitant makes
the election described in Sec. 1.72-6(d)(6), separate computations must
be performed pursuant to Sec. 1.72-6(d) to determine the adjusted
investment in the contract. The pre-July 1986 investment in the contract
and the post-June 1986 investment in the contract adjusted for the
purpose of determining the exclusion ratios are, respectively, $7,000
and $9,395, determined as follows:
Pre-July 1986 investment in the contract (unadjusted)...... $10,000
Pre-July 1986 portion of the amount to be received annually $570.00
($10,000/$21,053x$1,200)..................................
Number of years for which payment guaranteed ($10,000/ 17.50
$570).................................................
Rounded to nearest whole number of years............... 18
Percentage in Table III for age 65 and 18 years 30
(percent).............................................
Subtract value of the refund feature to the nearest $3,000
dollar (30 percent of $10,000)........................
Pre-July 1986 investment in the contract adjusted for the $7,000
present value of the refund feature without discount for
interest..................................................
============
Post-June 1986 investment in the contract (unadjusted)..... $11,053
Post-June 1986 portion of the amount to be received $630
annually ($11,053/$21,053x$1,200).........................
Number of years for which payment guaranteed ($11,053/$630) 17.54
Rounded to nearest whole number of years................... 18
Percentage in Table VII for age 65 and 18 years (percent).. 15
Subtract value of the refund feature to the nearest dollar $1,658
(15 percent of $11,053)...................................
------------
Post-June 1986 investment in the contract adjusted for the $9,395
present value of the refund feature without discount for
interest..................................................
If, in the above examples, the guaranteed amount had exceeded the
investment in the contract (or applicable portion thereof), the
percentage found in Table III or VII (whichever is applicable) should
have been applied to the lesser of these amounts since any excess of the
guaranteed amount over the investment in the contract (as found under
Sec. 1.72-6) would not have constituted a refund of premiums or other
consideration paid. In such a case, however, a different multiple might
have been obtained from Table III or VII (whichever is applicable) since
the number of years for which payments were guaranteed would have been
greater.
(c) Adjustment of investment for the refund feature in the case of a
joint and survivor annuity. (1) Except as provided in paragraph (c)(2)
of this section, if a joint and survivor annuity contract described in
paragraph (b) (1), (2) or (6) of Sec. 1.72-5 contains a refund feature
and the special rule of paragraph (d) of this section does not apply,
the investment in the contract shall be adjusted in the following
manner:
(i) Find the percentage determined under the following formula:
[[Page 152]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.042
In which:
V = The percentage, rounded to the nearest whole percent,
x = The age at the nearest birthday of the primary annuitant,
y = The age at the nearest birthday of the survivor annuitant,
N = The guaranteed amount divided by the annual annuity payable to the
primary annuitant, rounded to the nearest integer,
P = The annual annuity continued to the survivor annuitant divided by
the annual annuity payable to the primary annuitant,
[GRAPHIC] [TIFF OMITTED] TC05OC91.043
(ii) Multiply the percentage found in paragraph (c)(1)(i) of this
section by the lesser of (A) the investment in the contract found in
accordance with Sec. 1.72-6, or (B) the total amount guaranteed as of
the annuity starting date.
(iii) Subtract the amount found in paragraph (c)(1)(ii) of this
section from the investment in the contract found in accordance with
Sec. 1.72-6.
In the case of a contract providing for payments to be made to two
persons in the manner described in paragraph (b)(6) of Sec. 1.72-5, this
paragraph (c)(1) is applied as though the older person were the primary
annuitant and the younger person were the survivor annuitant. For
purposes of this paragraph (c)(1), the number of survivors at
agex (lx) is determined under the following table:
------------------------------------------------------------------------
x lx
------------------------------------------------------------------------
5.................................................... 1000000.
6.................................................... 999729.
7.................................................... 999493.
8.................................................... 999284.
9.................................................... 999069.
10................................................... 998849.
11................................................... 998620.
12................................................... 998382.
13................................................... 998135.
14................................................... 997876.
15................................................... 997606.
16................................................... 997322.
17................................................... 997025.
18................................................... 996714.
19................................................... 996387.
20................................................... 996044.
21................................................... 995684.
22................................................... 995304.
23................................................... 994905.
24................................................... 994484.
25................................................... 994041.
26................................................... 993573.
27................................................... 993080.
28................................................... 992563.
29................................................... 992024.
30................................................... 991461.
31................................................... 990876.
32................................................... 990269.
33................................................... 989638.
34................................................... 988984.
35................................................... 988303.
36................................................... 987593.
37................................................... 986846.
38................................................... 986055.
39................................................... 985210.
40................................................... 984298.
41................................................... 983310.
42................................................... 982230.
43................................................... 981046.
[[Page 153]]
44................................................... 979742.
45................................................... 978302.
46................................................... 976709.
47................................................... 974945.
48................................................... 972992.
49................................................... 970832.
50................................................... 968447.
51................................................... 966000.
52................................................... 963313.
53................................................... 960375.
54................................................... 957175.
55................................................... 953705.
56................................................... 949954.
57................................................... 945912.
58................................................... 941568.
59................................................... 936908.
60................................................... 931903.
61................................................... 926451.
62................................................... 920540.
63................................................... 914090.
64................................................... 907011.
65................................................... 899221.
66................................................... 890428.
67................................................... 880797.
68................................................... 870298.
69................................................... 858904.
70................................................... 846565.
71................................................... 832316.
72................................................... 816861.
73................................................... 800078.
74................................................... 781837.
75................................................... 762012.
76................................................... 740743.
77................................................... 717689.
78................................................... 692780.
79................................................... 665977.
80................................................... 637260.
81................................................... 607339.
82................................................... 575531.
83................................................... 541919.
84................................................... 506647.
85................................................... 469931.
86................................................... 432459.
87................................................... 394138.
88................................................... 355393.
89................................................... 316712.
90................................................... 278663.
91................................................... 242020.
92................................................... 207150.
93................................................... 174602.
94................................................... 144828.
95................................................... 118151.
96................................................... 94871.7
97................................................... 74863.6
98................................................... 58042.2
99................................................... 44176.1
100.................................................. 32956.4
101.................................................. 24044.8
102.................................................. 17104.1
103.................................................. 11815.5
104.................................................. 7886.75
105.................................................. 5054.94
106.................................................. 3086.95
107.................................................. 1778.82
108.................................................. 955.465
109.................................................. 470.955
110.................................................. 208.668
111.................................................. 80.7899
112.................................................. 26.2340
113.................................................. 6.69620
114.................................................. 1.19385
115.................................................. .111460
------------------------------------------------------------------------
(2) If the multiples in Tables I through IV of Sec. 1.72-9 are used
to determine any portion of the expected return under a contract
described in paragraph (c)(1) of this section, only the post-June 1986
investment in the contract (if any) shall be adjusted in the manner
described in paragraph (c)(1) of this section, and the pre-July 1986
investment in the contract shall, in the case of a contract described in
paragraph (b) (1) or (6) of Sec. 1.72-5, be adjusted in the following
manner:
(i) Determine the number of years necessary for the guaranteed
amount to be fully paid by dividing the maximum amount guaranteed as of
the annuity starting date by the amount to be received annually under
the contract. The number of years should be stated in terms of the
nearest whole year, considering for this purpose a fraction of one-half
or more as an additional whole year.
(ii) Consult Table III of Sec. 1.72-9 for the appropriate
percentages under the whole number of years found in subdivision (i) of
this subparagraph and the age (as of the annuity starting date) and sex
of each annuitant. If the annuitants are not of the same sex, substitute
for the female annuitant a male annuitant 5 years younger, or for the
male annuitant a female annuitant 5 years older, so that Table III will
be entered in both cases with the ages of annuitants of the same sex.
(iii) Find the sum of the two percentages found in accordance with
subdivision (ii) of this subparagraph.
(iv) To the age of the elder of the two annuitants (as determined
under subdivision (ii) of this subparagraph), add the number of years
(indicated in the table below) opposite the number of years by which
such annuitants' ages differ:
------------------------------------------------------------------------
Addition to
Number of years difference in age (2 male annuitants or 2 older age
female annuitants) in years
------------------------------------------------------------------------
0 to 1, inclusive.......................................... 9
2 to 3, inclusive.......................................... 8
4 to 5, inclusive.......................................... 7
6 to 8, inclusive.......................................... 6
9 to 11, inclusive......................................... 5
12 to 15, inclusive........................................ 4
16 to 20, inclusive........................................ 3
21 to 27, inclusive........................................ 2
28 to 42, inclusive........................................ 1
Over 42.................................................... 0
------------------------------------------------------------------------
[[Page 154]]
(v) Consult Table III for the appropriate percentage under the whole
number of years found in subdivision (i) of this subparagraph and the
age and sex of the elder annuitant as adjusted under subdivision (iv) of
this subparagraph.
(vi) Subtract the percentage obtained in subdivision (v) of this
subparagraph from the sum of the percentages found under subdivision
(iii) of this subparagraph. If the result is less than one, subdivisions
(vii) and (viii) of this subparagraph shall be disregarded and no
adjustment made to the investment in the contract.
(vii) Multiply the percentage found in subdivision (vi) of this
subparagraph by whichever of the following is the smaller: (A) the
investment in the contract found in accordance with Sec. 1.72-6 or (B)
the total amount guaranteed as of the annuity starting date.
(viii) Subtract the amount found in subdivision (vii) of this
subparagraph from the investment in the contract found in accordance
with Sec. 1.72-6.
(3) The principles of this paragraph (c) may be illustrated by the
following examples:
Example (1). Prior to July 1, 1986, Taxpayer A, a 70-year-old male,
purchases a joint and last survivor annuity for $33,050. The contract
provides for payments of $100 a month to be paid first to himself for
life and then to B, his 40-year-old daughter, if she survives him. The
contract further provides that in the event both die before ten years'
payments have been made, payments will be continued to C, a beneficiary,
or to C's estate, until ten years' payments have been made. If there is
no post-June 1986 investment in the contract, the investment in the
contract adjusted for the purpose of determining the exclusion ratio is
computed in the following manner:
Cost of the annuity contract (investment in the contract $33,050
unadjusted)...............................................
Guaranteed amount ($1,200x10).............................. $12,000
============
Percentage in Table III for male, age 70 (or female, age 21
75) for duration of the guarantee (10)....................
Percentage in Table III for female, age 40 (or male, age 2
35) for duration of the guarantee (10)....................
------------
Sum of percentages obtained............................ 23
============
Difference in years of age between two males, aged 70 and 35
35 (or 2 females, aged 75 and 40).........................
Addition, in years, to older age........................... 1
Percentage in Table III for male one year older than A..... 22
Difference between percentages obtained (23 percent less 22 1
percent)..................................................
Value of the refund feature to the nearest dollar (1 $120
percent of $12,000).......................................
------------
Investment in the contract adjusted for present value $32,930
of the refund feature.................................
Example (2). The facts are the same as in example (1), except that
the total investment in the contract was made after June 30, 1986, A is
73 years of age, and B is A's 70 year old spouse. The percentage
determined under the formula in paragraph (c)(1)(i) of this section is
two percent. Thus, the amount determined under paragraph (c)(1)(ii) of
this section is $240 (2 percent of $12,000), and the investment in the
contract adjusted for the present value of the refund feature is $32,810
($33,050--$240).
(4) If an annuity described in paragraph (b) of Sec. 1.72-5 contains
a refund feature and the manner of determining the adjustment to the
investment in the contract (or to any part of such investment) is not
prescribed or requires use of the formula in paragraph (c)(1)(i) of this
section, the Commissioner will determine the amount of the adjustment
upon request. The request must contain the date of birth of each
annuitant, the guaranteed amount, the annual annuity payable to each
annuitant, and the annuity starting date. Send the request to the
Commissioner of Internal Revenue, Attention: OP:E:EP:GA, Washington,
D.C. 20224.
(d) Adjustment of investment in the contract where paragraph (b)(3)
of Sec. 1.72-2 applies to payments. (1) If paragraph (b)(3) of
Sec. 1.72-2 applies to payments to be made under a contract and this
section also applies because of the provision for a refund feature, an
adjustment shall be made to the investment in the contract in accordance
with this paragraph before making the computations required by paragraph
(d)(3) of Sec. 1.72-4 and paragraph (d)(7) of Sec. 1.72-5. In the case
of the guarantee of a specified amount, the adjustment shall be made by
applying the appropriate multiple from Table III or VII (whichever
[[Page 155]]
is applicable), as otherwise determined under this section, to the
investment in the contract or the guranteed amount, whichever is the
lesser. The guarantee period shall be found by dividing the amount
guaranteed by the amount determined by placing the payments received
during the first taxable year (to guaranteed amount) on an annual basis.
Thus, if monthly payments are first received by a taxpayer on a calendar
year basis in August, his total payments (to the extent that they reduce
the guaranteed amount) for the taxable year would be divided by 5 and
multiplied by 12. The guaranteed amount would then be divided by the
result of this computation to obtain the guarantee period. If the
contract merely guarantees that proceeds from a unit or units of a fund
shall be paid for a fixed number of years or the life (or lives) of an
annuitant (or annuitants), whichever is the longer, the fixed number of
years is the guarantee period. The appropriate percentage in Table III
or VII shall be applied to whichever of the following is the smaller:
(i) the investment in the contract; or (ii) the product of the payments
received in the first taxable year, placed on an annual basis,
multiplied by the number of years for which payment of the proceeds of a
unit or units is guaranteed.
(2) The principles of this paragraph may be illustrated by the
following examples:
Example (1). Taxpayer A, a 50-year-old male purchases for $25,000 a
contract which provides for variable monthly payments to be paid to him
for his life. The contract also provides that if he should die before
receiving payments for fifteen years, payments shall continue according
to the original formula to his estate or beneficiary until payments have
been made for that period. Beginning with the month of September, A
receives payments which total $450 for the first taxable year of
receipt. This amount, placed on an annual basis, is $1,350 ($450 divided
by 4, or $112.50; $112.50 multiplied by 12, or $1,350). If there is no
post-June 1986 investment in the contract, the guaranteed amount is
considered to be $20,250 ($1,350x15), and the multiple from Table III
(found in the same manner as in paragraph (b) of this section), 9
percent, applied to $20,250 (since this amount is less than the
investment in the contract), results in a refund adjustment of
$1,822,50. The latter amount, subtracted from the investment in the
contract of $25,000, results in an adjusted investment in the contract
of $23,177.50. If A dies before receiving payments for 15 years and the
remaining payments are made to B, his beneficiary, B shall exclude the
entire amount of such payments from his gross income until the amounts
so received by B, together with the amount received by A and excludable
from A's gross income, equal or exceed $25,000. Any excess and any
payments thereafter received by B shall be fully includible in gross
income.
Example (2). Assume the same facts as in example (1), except that
the total investment in the contract was made after June 30, 1986. The
applicable multiple found in Table VII is 3 percent. When this is
applied to the guaranteed amount of $20,250, it results in a refund
adjustment of $607.50. The adjusted investment in the contract in
$24,392.50 ($25,000--$607.50).
(e) Adjustment of the investment in the contract where more than one
annuity element is provided for a single consideration. In the case of
contracts to which paragraph (b) of Sec. 1.72-6 applies for the purpose
of allocating the investment in the contract to two or more annuity
elements which are provided for a single consideration, if one or more
of such elements involves a refund feature, the portion of the
investment in the contract properly allocable to each such element shall
be adjusted for the refund feature before aggregating all the
investments in order to obtain the exclusion ratio which is to apply to
the contract as a whole.
Example (1). If taxpayer A, an insured 70 years of age, upon
maturity of an endowment policy which cost him a net amount of $86,000,
elected a dual settlement consisting of (1) monthly payments for his
life aggregating $4,146 per year with 10 years' payments certain, and
(2) monthly payments for his 60-year-old brother, B, aggregating $2,820
per year with 20 years' payments certain, the exclusion ratio to be used
by both A and B if there is no post-June 1986 investment in the contract
would be determined in the following manner:
A's expected return (A's payments per year of $4,146 $50,166.60
multiplied by his life expectancy from Table 1 of
12.1)...............................................
B's expected return (B's payments per year of $2,820 $51,324.00
multiplied by his life expectancy from Table 1 of
18.2)...............................................
------------------
[[Page 156]]
Sum of expected returns to be used in determining $101,490.60
exclusion ratio.................................
==================
Percentage of total expected return attributable to 49.4
A's expectancy of life ($50,166.60/$101,490.60).....
Percentage of total expected return attributable to 50.6
B's expectancy of life ($51,324/$101,490.60)........
Portion of investment in the contract allocable to $42,484.00
A's annuity (49.4 percent of $86,000)...............
Portion of investment in the contract allocable to $43,516.00
B's annuity (50.6 percent of $86,000)...............
Value of the refund feature with respect to A's $8,707.00
annuity (percentage from Table III for male, age 70,
and duration 10, or 21 percent, multiplied by lesser
of guaranteed amount and allocable portion of
investment in the contract, $41,460)................
A's allocable portion of the investment in the $33,777.00
contract adjusted for refund feature ($42,484 less
$8,707.00)..........................................
Value of the refund feature with respect to B's $10,879.00
annuity (percentage from Table III for male, age 60,
and duration 20, or 25 percent, multiplied by lesser
of guaranteed amount and allocable portion of
investment in the contract, $43,516)................
B's allocable portion of the investment in the $32,637.00
contract adjusted for refund feature ($43,516 less
$10,879.00).........................................
Sum of A's and B's allocable portions of the $66,414.00
investment in the contract after adjustment for the
refund feature......................................
Exclusion ratio for the contract as a whole (total 65.4
adjusted investment in the contract, $66,414,
divided by the total expected return from above,
$101,490.60) (percent)..............................
Example (2). Assume the same facts as in example (1) except that the
total investment in the contract was made after June 30, 1986. The
exclusion ratio to be used by both A and B would be 56.9 percent,
determined as follows:
A's expected return (A's payments per year of $4,146 $66,336.00
multiplied by his life expectancy from Table V of
16.0)...............................................
B's expected return (B's payments per year of $2,820 $68,244.00
multiplied by his life expectancy from Table V of
24.2)...............................................
------------------
Sum of expected returns to be used in determining $134,580.00
exclusion ratio.....................................
==================
Percentage of total expected return attributable to 49.3
A's expectancy of life ($66,336.00/$134,580.00).....
Percentage of total expected return attributable to 50.7
B's expectancy of life ($68,244.00/$134,580.00).....
Portion of investment in the contract allocable to $42,398.00
A's annuity (49.3 percent of $86,000)...............
Portion of investment in the contract allocable to $43,602.00
B's annuity (50.7 percent of $86,000)...............
Value of the refund feature with respect to A's $4,560.60
annuity (percentage from Table VII for age 70 and
duration 10, or 11 percent, multiplied by lesser of
the guaranteed amount and allocable portion of
investment in the contract, $41,460)................
A's allocable portion of the investment in the $37,837.40
contract adjusted for refund feature ($42,398 less
$4,560.60)..........................................
Value of the refund feature with respect to B's $4,796.22
annuity (percentage from Table VII for age 60 and
duration 20, or 11 percent, multiplied by lesser of
guaranteed amount and allocable portion of
investment in the contract, $43,602)................
B's allocable portion of the investment in the $38,805.78
contract adjusted for refund feature ($43,602 less
$4,796.22)..........................................
------------------
Sum of A's and B's allocable portions of the $76,643.18
investment in the contract after adjustment for the
refund feature......................................
[[Page 157]]
Exclusion ratio for the contract as a whole (total 56.9
adjusted investment in the contract, $76,643.18,
divided by the total expected return from above,
$134,580.00) (percent)..............................
(f) Adjustment of investment in the contract with respect to
contracts subject to Sec. 1.72-6(d). In the case of a contract to which
Sec. 1.72-6(d) (relating to contracts in which amounts were invested
both before July 1, 1986, and after June 30, 1986) applies, this section
is applied in the manner prescribed in Sec. 1.72-6(d) and, in
particular, Sec. 1.72-6(d)(5)(vi).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as
amended by T.D. 8115, 51 FR 45702, Dec. 19, 1986]
Sec. 1.72-8 Effect of certain employer contributions with respect to premiums or other consideration paid or contributed by an employee.
(a) Contributions in the nature of compensation--(1) Amounts
includible in gross income of employee under subtitle A of the Code or
prior income tax laws. Section 72(f) provides that for the purposes of
section 72 (c), (d), and (e), amounts contributed by an employer for the
benefit of an employee or his beneficiaries shall constitute
consideration paid or contributed by the employee to the extent that
such amounts were includible in the gross income of the employee under
subtitle A of the Code or prior income tax laws. Amounts to which this
paragraph applies include, for example, contributions made by an
employer to or under a trust or plan which fails to qualify under the
provisions of section 401(a), provided that the employee's rights to
such contributions are nonforfeitable at the time the contributions are
made. See sections 402(b) and 403(c) and the regulations thereunder.
This subparagraph also applies to premiums paid by an employer (other
than premiums paid on behalf of an owner-employee) for life insurance
protection for an employee if such premiums are includible in the gross
income of the employee when paid. See Sec. 1.72-16. However, such
premiums shall only be considered as premiums and other consideration
paid by the employee with respect to any benefits attributable to the
contract providing the life insurance protection. See Sec. 1.72-16.
(2) Amounts not includible in gross income of employee at time
contributed if paid directly to employee at that time. Except as
provided in subparagraph (3) of this paragraph, section 72(f) provides
that for the purposes of section 72 (c), (d), and (e), amounts
contributed by an employer for the benefit of an employee or his
beneficiaries shall constitute consideration paid or contributed by the
employee to the extent that such amounts would not have been includible
in the gross income of the employee at the time contributed had they
been paid directly to the employee at that time. Amounts to which this
subparagraph applies include, for example, contributions made by an
employer after December 31, 1950, and before January 1, 1963, if made on
account of foreign services rendered by an employee during a period in
which the employee qualified as a bona fide resident of a foreign
country under section 911(a) of the Internal Revenue Code of 1954, or
under section 116(a) of the Internal Revenue Code of 1939. In such a
case, it would be immaterial whether such contributions were made under
a qualified plan or otherwise. See subparagraph (4) of this paragraph
for rules governing the determination of the amount of employer foreign
service contributions to which this subparagraph applies. On the other
hand, if contributions are made by an employer to a qualified plan at a
time when compensation paid directly to the employee concerned with
respect to the same services rendered would have been includible in the
gross income of the employee, such as in the case of an employee of a
State government where contributions are made in 1955 with respect to
services rendered by the employee prior to the year 1939, this
subparagraph does not apply to such contributions.
(3) Limitation--(i) In general. Except as provided in subdivision
(ii) of this subparagraph, the provisions of subparagraph (2) of this
paragraph shall not apply to amounts which were contributed by the
employer after December 31, 1962, and which would not have been
includible in the gross income of
[[Page 158]]
the employee by reason of the application of section 911, if such
amounts had been paid directly to the employee at the time of
contribution. Employer contributions attributable to foreign services
performed by the employee after December 31, 1962, do not constitute,
for purposes of section 72 (c), (d), and (e), consideration paid or
contributed by the employee.
(ii) Exception. The provisions of subdivision (i) of this
subparagraph shall not apply to amounts which were contributed by the
employer to provide pension or annuity credits (determined in accordance
with the provisions of subparagraph (4) of this paragraph) to the extent
such credits are--
(a) Attributable to foreign services performed before January 1,
1963, with respect to which the employee qualified for the benefits of
section 911(a) (or corresponding provisions of prior revenue laws), and
(b) Provided pursuant to pension or annuity plan provisions in
existence on March 12, 1962, and on that date applicable to such
services.
Amounts described in this subdivision constitute, for purposes of
section 72 (c), (d), and (e), consideration paid or contributed by the
employee even though such amounts are contributed by the employer after
December 31, 1962.
(4) Determination of employer foreign service contributions which
constitute consideration paid or contributed by employee. For purposes
of subparagraphs (2) and (3)(ii) of this paragraph, employer foreign
service contributions which constitute, for purposes of section 72 (c),
(d), and (e), consideration paid or contributed by the employee shall be
determined as follows:
(i) Treatment of identifiable contributions. If, under the terms of
the pension or annuity plan under which employer contributions were
made, such contributions may be identified as--
(a) Attributable to foreign services performed before January 1,
1963, with respect to which the employee qualified for the benefits of
section 911(a) (or corresponding provisions of prior revenue laws), and
(b) Made under pension or annuity plan provisions in existence on
March 12, 1962, which were applicable to the services referred to in (a)
of this subdivision on that date,
the amount of employer contributions so identified shall be considered
paid or contributed by the employee.
(ii) Alternative rule for unidentifiable contributions. If employer
contributions may not be identified in the manner described in
subdivision (i) of this subparagraph, the amount of employer
contributions attributable to foreign services performed before January
1, 1963, and considered paid or contributed by the employee shall be
determined on the basis of an estimated allocation which is reasonable
and consistent with the circumstances and the provisions of the pension
or annuity plan under which such contributions are made. For example, if
an employee's benefits under a pension or annuity plan, which is
unchanged after March 12, 1962, are determined with respect to his basic
compensation during his entire period of credited service, the amount of
employer contributions considered paid or contributed by the employee
shall be an amount which bears the same ratio to total employer
contributions for such employee under the pension or annuity plan as his
basic compensation attributable to foreign services performed before
January 1, 1963, with respect to which he qualified for the benefits of
section 911(a) (or corresponding provisions of prior revenue laws) bears
to his total basic compensation. On the other hand, if an employee's
benefits under a pension or annuity plan, which is unchanged after March
12, 1962, are determined with respect to his basic compensation during
his final five years of credited service, the amount of employer
contributions considered paid or contributed by the employee shall be an
amount which bears the same ratio to total employer contributions for
such employee as his number of years of credited service before January
1, 1963, with respect to which he qualified for the benefits of section
911(a) (or corresponding provisions of prior revenue laws) bears to his
total number of years of credited service.
(5) Amounts not includible in gross income of employee under
subtitle A of the Code or prior income tax laws. Amounts contributed by
an employer which were
[[Page 159]]
not includible in the gross income of the employee under Subtitle A of
the Code or prior income tax laws, but which would have been includible
therein had they been paid directly to the employee, do not constitute
consideration paid or contributed by the employee for the purposes of
section 72. For example, contributions made by an employer under a
qualified employees' trust or plan, which contributions would have been
includible in the gross income of the employee had such contributions
been paid to him directly as compensation, do not constitute
consideration paid or contributed by the employee. Accordingly, the
aggregate amount of premiums or other consideration paid or contributed
by an employee, insofar as compensatory employer contributions are
concerned, consists solely of the (i) sum of all amounts actually
contributed by the employee, plus (ii) contributions in the nature of
compensation which are deemed to be paid or contributed by the employee
under this paragraph.
(b) Contributions in the nature of death benefits. In the case of an
employee's beneficiary, the aggregate amount of premiums or other
consideration paid or deemed to be paid or contributed by the employee
shall also include:
(1) Amounts (other than amounts paid as an annuity) to the extent
such amounts are excludable from the beneficiary's gross income as a
death benefit under section 101(b), and
(2) Any amount or amounts of death benefits which are treated as
additional consideration contributed by the employee under section
101(b)(2)(D) and the regulations thereunder, or which were excludable
from the beneficiary's gross income as a death benefit under section
22(b)(1)(B) of the Internal Revenue Code of 1939 and the regulations
thereunder.
Accordingly, in the case of an employee's beneficiary, any such amount
shall be added to any amount or amounts deemed paid or contributed by
the employee under paragraph (a)(1) of this section and to any amounts
actually contributed by the employee for the purpose of finding the
aggregate amount of premiums or other consideration paid or contributed
by the employee.
(c) Amounts ``made available'' to an employee or his beneficiary.
Any amount which, although not actually paid, is made available to and
includable in the gross income of an employee or his beneficiary under
the rules of sections 402 and 403 and the regulations thereunder, shall
be considered an amount contributed by the employee and shall be
aggregated with amounts, if any, to which paragraphs (a) and (b) of this
section apply for the purpose of determining the aggregate amount of
premiums or other consideration paid by the employee.
(d) Amounts includable in gross income of employee when his rights
under annuity contract change to nonforfeitable rights. Any amount
which, by reason of section 403(d) and after the application of
paragraph (b) of Sec. 1.403 (b)-1, is required to be included in an
employee's gross income for the year when his rights under an annuity
contract change from forfeitable to nonforfeitable rights shall be
considered an amount contributed by the employee and shall be aggregated
with amounts, if any, to which paragraphs (a), (b), and (c) of this
section apply for the purpose of determining the aggregate amount of
premiums or other consideration paid or contributed by the employee for
such annuity contract. In other words, if, under section 403(d), an
employee of an organization exempt from tax under section 501(a) or
521(a) is required to include an amount in gross income by reason of his
rights under an annuity contract changing from forfeitable to
nonforfeitable rights, such amount, to the extent it is not excludable
from gross income under paragraph (b) of Sec. 1.403 (b)-1, shall be
considered an amount contributed by such employee for the annuity
contract.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6665, 28 FR
7245, July 16, 1963; T.D. 6783, 29 FR 18356, Dec. 24, 1964]
Sec. 1.72-9 Tables.
The following tables are to be used in connection with computations
under section 72 and the regulations thereunder. Tables I, II, IIA, III,
and IV are to be used if the investment in the contract does not include
a post-June 1986 investment in the contract (as defined in Sec. 1.72-
6(d)(3)). Tables V, VI, VIA, VII,
[[Page 160]]
and VIII are to be used if the investment in the contract includes a
post-June 1986 investment in the contract (as defined in Sec. 1.72-
6(d)(3)).
In the case of a contract under which amounts are received as an
annuity after June 30, 1986, a taxpayer receiving such amounts may elect
to treat the entire investment in the contract as post-June 1986
investment in the contract and thus apply Tables V through VIII. A
taxpayer may make the election for any taxable year in which such
amounts are received by attaching to the taxpayer's return for such
taxable year a statement that the taxpayer is electing under Sec. 1.72-9
to treat the entire investment in the contract as post-June 1986
investment in the contract. The statement must contain the taxpayer's
name, address, and taxpayer identification number. The election is
irrevocable and applies with respect to all amounts that the taxpayer
receives as an annuity under the contract in the taxable year for which
the election is made or in any subsequent taxable year. (Note that for
purposes of the examples in Secs. 1.72-4 through 1.72-11 the election
described in this section is disregarded (i.e., it assumed that the
taxpayer does not make an election under this section).) See also
Sec. 1.72-6(d)(3) for rules treating the entire investment in a contract
as post-June 1986 investment in a contract if the annuity starting date
of the contract is after June 30, 1986, and the contract provides for a
disqualifying form of payment or settlement, such as an option to
receive a lump sum in full discharge of the obligation under the
contract. In addition, see Sec. 1.72-6(d) for special rules concerning
the tables to be used and the separate computations required if the
investment in the contract includes both a pre-July 1986 investment in
the contract and a post-June 1986 investment in the contract and the
election described in Sec. 1.72-6(d)(6) is made with respect to the
contract.
Table I--Ordinary Life Annuities--One Life--Expected Return Multiples
------------------------------------------------------------------------
Ages
------------------------------------------------------------- Multiples
Male Female
------------------------------------------------------------------------
6............................................... 11 65.0
7............................................... 12 64.1
8............................................... 13 63.2
9............................................... 14 62.3
10.............................................. 15 61.4
11.............................................. 16 60.4
12.............................................. 17 59.5
13.............................................. 18 58.6
14.............................................. 19 57.7
15.............................................. 20 56.7
16.............................................. 21 55.8
17.............................................. 22 54.9
18.............................................. 23 53.9
19.............................................. 24 53.0
20.............................................. 25 52.1
21.............................................. 26 51.1
22.............................................. 27 50.2
23.............................................. 28 49.3
24.............................................. 29 48.3
25.............................................. 30 47.4
26.............................................. 31 46.5
27.............................................. 32 45.6
28.............................................. 33 44.6
29.............................................. 34 43.7
30.............................................. 35 42.8
31.............................................. 36 41.9
32.............................................. 37 41.0
33.............................................. 38 40.0
34.............................................. 39 39.1
35.............................................. 40 38.2
36.............................................. 41 37.3
37.............................................. 42 36.5
38.............................................. 43 35.6
39.............................................. 44 34.7
40.............................................. 45 33.8
41.............................................. 46 33.0
42.............................................. 47 32.1
43.............................................. 48 31.2
44.............................................. 49 30.4
45.............................................. 50 29.6
46.............................................. 51 28.7
47.............................................. 52 27.9
48.............................................. 53 27.1
49.............................................. 54 26.3
50.............................................. 55 25.5
51.............................................. 56 24.7
52.............................................. 57 24.0
53.............................................. 58 23.2
54.............................................. 59 22.4
55.............................................. 60 21.7
56.............................................. 61 21.0
57.............................................. 62 20.3
58.............................................. 63 19.6
59.............................................. 64 18.9
60.............................................. 65 18.2
61.............................................. 66 17.5
62.............................................. 67 16.9
63.............................................. 68 16.2
64.............................................. 69 15.6
[[Page 161]]
65.............................................. 70 15.0
66.............................................. 71 14.4
67.............................................. 72 13.8
68.............................................. 73 13.2
69.............................................. 74 12.6
70.............................................. 75 12.1
71.............................................. 76 11.6
72.............................................. 77 11.0
73.............................................. 78 10.5
74.............................................. 79 10.1
75.............................................. 80 9.6
76.............................................. 81 9.1
77.............................................. 82 8.7
78.............................................. 83 8.3
79.............................................. 84 7.8
80.............................................. 85 7.5
81.............................................. 86 7.1
82.............................................. 87 6.7
83.............................................. 88 6.3
84.............................................. 89 6.0
85.............................................. 90 5.7
86.............................................. 91 5.4
87.............................................. 92 5.1
88.............................................. 93 4.8
89.............................................. 94 4.5
90.............................................. 95 4.2
91.............................................. 96 4.0
92.............................................. 97 3.7
93.............................................. 98 3.5
94.............................................. 99 3.3
95.............................................. 100 3.1
96.............................................. 101 2.9
97.............................................. 102 2.7
98.............................................. 103 2.5
99.............................................. 104 2.3
100............................................. 105 2.1
101............................................. 106 1.9
102............................................. 107 1.7
103............................................. 108 1.5
104............................................. 109 1.3
105............................................. 110 1.2
106............................................. 111 1.0
107............................................. 112 .8
108............................................. 113 .7
109............................................. 114 .6
110............................................. 115 .5
111............................................. 116 0
------------------------------------------------------------------------
[[Page 162]]
Table II--Ordinary Joint Life and Last Survivor Annuities--Two Lives--Expected Return Multiples
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-------------------------------------------------------------------------------------------------------------------------------------------
Female 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 73.5 73.0 72.6 72.2 71.8 71.4 71.0 70.7 70.4 70.0 69.7 69.5 69.2 68.9 68.7
7............................... 12................ 73.0 72.6 72.1 71.7 71.3 70.9 70.5 70.1 69.8 69.4 69.1 68.8 68.5 68.3 68.0
8............................... 13................ 72.6 72.1 71.6 71.2 70.8 70.4 70.0 69.6 69.2 68.9 68.5 68.2 67.9 67.6 67.3
9............................... 14................ 72.2 71.7 71.2 70.7 70.3 69.9 69.4 69.0 68.7 68.3 67.9 67.6 67.3 67.0 66.7
10.............................. 15................ 71.8 71.3 70.8 70.3 69.8 69.4 68.9 68.5 68.1 67.7 67.4 67.0 66.7 66.4 66.1
11.............................. 16................ 71.4 70.9 70.4 69.9 69.4 68.9 68.5 68.0 67.6 67.2 66.8 66.5 66.1 65.8 65.4
12.............................. 17................ 71.0 70.5 70.0 69.4 68.9 68.5 68.0 67.5 67.1 66.7 66.3 65.9 65.5 65.2 64.8
13.............................. 18................ 70.7 70.1 69.6 69.0 68.5 68.0 67.5 67.1 66.6 66.2 65.8 65.4 65.0 64.6 64.2
14.............................. 19................ 70.4 69.8 69.2 68.7 68.1 67.6 67.1 66.6 66.1 65.7 65.3 64.8 64.4 64.0 63.7
15.............................. 20................ 70.0 69.4 68.9 68.3 67.7 67.2 66.7 66.2 65.7 65.2 64.8 64.3 63.9 63.5 63.1
16.............................. 21................ 69.7 69.1 68.5 67.9 67.4 66.8 66.3 65.8 65.3 64.8 64.3 63.8 63.4 63.0 62.6
17.............................. 22................ 69.5 68.8 68.2 67.6 67.0 66.5 65.9 65.4 64.8 64.3 63.8 63.4 62.9 62.5 62.0
18.............................. 23................ 69.2 68.5 67.9 67.3 66.7 66.1 65.5 65.0 64.4 63.9 63.4 62.9 62.4 62.0 61.5
19.............................. 24................ 68.9 68.3 67.6 67.0 66.4 65.8 65.2 64.6 64.0 63.5 63.0 62.5 62.0 61.5 61.0
20.............................. 25................ 68.7 68.0 67.3 66.7 66.1 65.4 64.8 64.2 63.7 63.1 62.6 62.0 61.5 61.0 60.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------------------------
Male Female Male 21 22 23 24 25 26 27 28 29 30 31 32 33 34
----------------------------------------------------------------------------------------------------------------------------------
Female 26 27 28 29 30 31 32 33 34 35 36 37 38 39
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6................................... 11..................... 68.4 68.2 68.0 67.8 67.6 67.5 67.3 67.1 67.0 66.8 66.7 66.6 66.5 66.4
7................................... 12..................... 67.8 67.5 67.3 67.1 66.9 66.7 66.5 66.4 66.2 66.1 65.9 65.8 65.7 65.6
8................................... 13..................... 67.1 66.8 66.6 66.4 66.2 66.0 65.8 65.6 65.4 65.3 65.1 65.0 64.9 64.7
9................................... 14..................... 66.4 66.2 65.9 65.7 65.4 65.2 65.0 64.8 64.7 64.5 64.3 64.2 64.1 63.9
10.................................. 15..................... 65.8 65.5 65.2 65.0 64.7 64.5 64.3 64.1 63.9 63.7 63.6 63.4 63.3 63.1
11.................................. 16..................... 65.1 64.8 64.6 64.3 64.1 63.8 63.6 63.4 63.2 63.0 62.8 62.6 62.5 62.3
12.................................. 17..................... 64.5 64.2 63.9 63.6 63.4 63.1 62.9 62.7 62.4 62.2 62.0 61.9 61.7 61.5
13.................................. 18..................... 63.9 63.6 63.3 63.0 62.7 62.4 62.2 61.9 61.7 61.5 61.3 61.1 60.9 60.8
14.................................. 19..................... 63.3 63.0 62.7 62.3 62.0 61.8 61.5 61.2 61.0 60.8 60.6 60.4 60.2 60.0
15.................................. 20..................... 62.7 62.4 62.0 61.7 61.4 61.1 60.8 60.6 60.3 60.1 59.8 59.6 59.4 59.2
16.................................. 21..................... 62.2 61.8 61.4 61.1 60.8 60.5 60.2 59.9 59.6 59.4 59.1 58.9 58.7 58.5
17.................................. 22..................... 61.6 61.2 60.9 60.5 60.2 59.8 59.5 59.2 58.9 58.7 58.4 58.2 57.9 57.7
18.................................. 23..................... 61.1 60.7 60.3 59.9 59.6 59.2 58.9 58.6 58.3 58.0 57.7 57.5 57.2 57.0
19.................................. 24..................... 60.6 60.2 59.7 59.4 59.0 58.6 58.3 57.9 57.6 57.3 57.0 56.8 56.5 56.3
20.................................. 25..................... 60.1 59.6 59.2 58.8 58.4 58.0 57.7 57.3 57.0 56.7 56.4 56.1 55.8 55.6
[[Page 163]]
21.................................. 26..................... 59.6 59.1 58.7 58.3 57.9 57.5 57.1 56.7 56.4 56.0 55.7 55.4 55.1 54.9
22.................................. 27..................... 59.1 58.7 58.2 57.7 57.3 56.9 56.5 56.1 55.8 55.4 55.1 54.8 54.5 54.2
23.................................. 28..................... 58.7 58.2 57.7 57.2 56.8 56.4 55.9 55.5 55.2 54.8 54.4 54.1 53.8 53.5
24.................................. 29..................... 58.3 57.7 57.2 56.8 56.3 55.8 55.4 55.0 54.6 54.2 53.8 53.5 53.2 52.8
25.................................. 30..................... 57.9 57.3 56.8 56.3 55.8 55.3 54.9 54.4 54.0 53.6 53.2 52.9 52.5 52.2
26.................................. 31..................... 57.5 56.9 56.4 55.8 55.3 54.8 54.4 53.9 53.5 53.1 52.7 52.3 51.9 51.6
27.................................. 32..................... 57.1 56.5 55.9 55.4 54.9 54.4 53.9 53.4 53.0 52.5 52.1 51.7 51.3 50.9
28.................................. 33..................... 56.7 56.1 55.5 55.0 54.4 53.9 53.4 52.9 52.4 52.0 51.6 51.1 50.7 50.3
29.................................. 34..................... 56.4 55.8 55.2 54.6 54.0 53.5 53.0 52.4 52.0 51.5 51.0 50.6 50.2 49.3
30.................................. 35..................... 56.0 55.4 54.8 54.2 53.6 53.1 52.5 52.0 51.5 51.0 50.5 50.1 49.6 49.2
31.................................. 36..................... 55.7 55.1 54.4 53.8 53.2 52.7 52.1 51.6 51.0 50.5 50.0 49.5 49.1 48.7
32.................................. 37..................... 55.4 54.8 54.1 53.5 52.9 52.3 51.7 51.1 50.6 50.1 49.5 49.1 48.6 48.1
33.................................. 38..................... 55.1 54.5 53.8 53.2 52.5 51.9 51.3 50.7 50.2 49.6 49.1 48.6 48.1 47.6
34.................................. 39..................... 54.9 54.2 53.5 52.8 52.2 51.6 50.9 50.3 49.8 49.2 48.7 48.1 47.6 47.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
--------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
--------------------------------------------------------------------------------------------------------------------------------------------
Female 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6.............................. 11................ 66.3 66.2 66.1 66.0 65.9 65.9 65.8 65.7 65.7 65.6 65.6 65.5 65.5 65.5 65.4
7.............................. 12................ 65.4 65.3 65.3 65.2 65.1 65.0 64.9 64.9 64.8 64.8 64.7 64.7 64.6 64.6 64.5
8.............................. 13................ 64.6 64.5 64.4 64.3 64.2 64.2 64.1 64.0 64.0 63.9 63.8 63.8 63.7 63.7 63.7
9.............................. 14................ 63.8 63.7 63.6 63.5 63.4 63.3 63.2 63.2 63.1 63.0 63.0 62.9 62.9 62.8 62.8
10............................. 15................ 63.0 62.9 62.8 62.7 62.6 62.5 62.4 62.3 62.2 62.2 62.1 62.0 62.0 61.9 61.9
11............................. 16................ 62.2 62.1 61.9 61.8 61.7 61.6 61.5 61.4 61.4 61.3 61.2 61.2 61.1 61.0 61.0
12............................. 17................ 61.4 61.3 61.1 61.0 60.9 60.8 60.7 60.6 60.5 60.4 60.4 60.3 60.2 60.2 60.1
13............................. 18................ 60.6 60.5 60.3 60.2 60.1 60.0 59.9 59.8 59.7 59.6 59.5 59.4 59.4 59.3 59.2
14............................. 19................ 59.8 59.7 59.5 59.4 59.3 59.1 59.0 58.9 58.8 58.7 58.6 58.6 58.5 58.4 58.4
15............................. 20................ 59.0 58.9 58.7 58.6 58.4 58.3 58.2 58.1 58.0 57.9 57.8 57.7 57.6 57.6 57.5
16............................. 21................ 58.3 58.1 57.9 57.8 57.6 57.5 57.4 57.2 57.1 57.0 56.9 56.8 56.8 56.7 56.6
17............................. 22................ 57.5 57.3 57.2 57.0 56.8 56.7 56.6 56.4 56.3 56.2 56.1 56.0 55.9 55.8 55.7
18............................. 23................ 56.8 56.6 56.4 56.2 56.0 55.9 55.7 55.6 55.5 55.4 55.2 55.1 55.1 55.0 54.9
19............................. 24................ 56.0 55.8 55.6 55.4 55.3 55.1 54.9 54.8 54.7 54.5 54.4 54.3 54.2 54.1 54.0
20............................. 25................ 55.3 55.1 54.9 54.7 54.5 54.3 54.1 54.0 53.8 53.7 53.6 53.5 53.4 53.3 53.2
21............................. 26................ 54.6 54.4 54.1 53.9 53.7 53.5 53.4 53.2 53.0 52.9 52.8 52.6 52.5 52.4 52.3
22............................. 27................ 53.9 53.6 53.4 53.2 53.0 52.8 52.6 52.4 52.2 52.1 51.9 51.8 51.7 51.6 51.5
23............................. 28................ 53.2 52.9 52.7 52.5 52.2 52.0 51.8 51.6 51.5 51.3 51.1 51.0 50.9 50.7 50.6
24............................. 29................ 52.5 52.3 52.0 51.7 51.5 51.3 51.1 50.9 50.7 50.5 50.3 50.2 50.0 49.9 49.8
25............................. 30................ 51.9 51.6 51.3 51.0 50.8 50.5 50.3 50.1 49.9 49.7 49.6 49.4 49.2 49.1 49.0
26............................. 31................ 51.2 50.9 50.6 50.3 50.1 49.8 49.6 49.4 49.2 49.0 48.8 48.6 48.4 48.3 48.1
27............................. 32................ 50.6 50.3 50.0 49.7 49.4 49.1 48.9 48.6 48.4 48.2 48.0 47.8 47.6 47.5 47.3
[[Page 164]]
28............................. 33................ 50.0 49.6 49.3 49.0 48.7 48.4 48.2 47.9 47.7 47.5 47.2 47.1 46.9 46.7 46.5
29............................. 34................ 49.4 49.0 48.7 48.3 48.0 47.7 47.5 47.2 47.0 46.7 46.5 46.3 46.1 45.9 45.7
30............................. 35................ 48.8 48.4 48.1 47.7 47.4 47.1 46.8 46.5 46.2 46.0 45.8 45.5 45.3 45.2 45.0
31............................. 36................ 48.2 47.8 47.5 47.1 46.8 46.4 46.1 45.8 45.6 45.3 45.0 44.8 44.6 44.4 44.2
32............................. 37................ 47.7 47.3 46.9 46.5 46.1 45.8 45.5 45.2 44.9 44.6 44.3 44.1 43.9 43.7 43.4
33............................. 38................ 47.2 46.7 46.3 45.9 45.5 45.2 44.8 44.5 44.2 43.9 43.7 43.4 43.2 42.9 42.7
34............................. 39................ 46.7 46.2 45.8 45.4 45.0 44.6 44.2 43.9 43.6 43.3 43.0 42.7 42.5 42.2 42.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 165]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
------------------------------------------------------------------------------------------------------
Male Female Male 50 51 52 53 54 55 56 57 58 59 60 61 62 63
------------------------------------------------------------------------------------------------------
Female 55 56 57 58 59 60 61 62 63 64 65 66 67 68
--------------------------------------------------------------------------------------------------------------------------------------------------------
6............................. 11............... 65.4 65.4 65.3 65.3 65.3 65.3 65.3 65.2 65.2 65.2 65.2 65.2 65.2 65.2
7............................. 12............... 64.5 64.5 64.4 64.4 64.4 64.4 64.3 64.3 64.3 64.3 64.3 64.3 64.3 64.2
8............................. 13............... 63.6 63.6 63.5 63.5 63.5 63.5 63.4 63.4 63.4 63.4 63.4 63.4 63.3 63.3
9............................. 14............... 62.7 62.7 62.7 62.6 62.6 62.6 62.5 62.5 62.5 62.5 62.5 62.4 62.4 62.4
10............................ 15............... 61.8 61.8 61.8 61.7 61.7 61.7 61.6 61.6 61.6 61.6 61.6 61.5 61.5 61.5
11............................ 16............... 61.0 60.9 60.9 60.8 60.8 60.8 60.7 60.7 60.7 60.7 60.6 60.6 60.6 60.6
12............................ 17............... 60.1 60.0 60.0 59.9 59.9 59.9 59.8 59.8 59.8 59.8 59.7 59.7 59.7 59.7
13............................ 18............... 59.2 59.1 59.1 59.0 59.0 59.0 58.9 58.9 58.9 58.9 58.8 58.8 58.8 58.8
14............................ 19............... 58.3 58.2 58.2 58.2 58.1 58.1 58.0 58.0 58.0 57.9 57.9 57.9 57.9 57.9
15............................ 20............... 57.4 57.4 57.3 57.3 57.2 57.2 57.1 57.1 57.1 57.0 57.0 57.0 57.0 56.9
16............................ 21............... 56.5 56.5 56.4 56.4 56.3 56.3 56.2 56.2 56.2 56.1 56.1 56.1 56.1 56.0
17............................ 22............... 55.7 55.6 55.5 55.5 55.4 55.4 55.3 55.3 55.3 55.2 55.2 55.2 55.1 55.1
18............................ 23............... 54.8 54.7 54.7 54.6 54.6 54.5 54.5 54.4 54.4 54.3 54.3 54.3 54.2 54.2
19............................ 24............... 53.9 53.9 53.8 53.7 53.7 53.6 53.6 53.5 53.5 53.4 53.4 53.4 53.3 53.3
20............................ 25............... 53.1 53.0 52.9 52.8 52.8 52.7 52.7 52.6 52.6 52.5 52.5 52.4 52.4 52.4
21............................ 26............... 52.2 52.1 52.0 52.0 51.9 51.8 51.8 51.7 51.7 51.6 51.6 51.5 51.5 51.5
22............................ 27............... 51.4 51.3 51.2 51.1 51.0 51.0 50.9 50.8 50.8 50.7 50.7 50.6 50.6 50.6
23............................ 28............... 50.5 50.4 50.3 50.2 50.2 50.1 50.0 50.0 49.9 49.8 49.8 49.7 49.7 49.7
24............................ 29............... 49.7 49.6 49.5 49.4 49.3 49.2 49.1 49.1 49.0 49.0 48.9 48.9 48.8 48.8
25............................ 30............... 48.8 48.7 48.6 48.5 48.4 48.3 48.3 48.2 48.1 48.1 48.0 48.0 47.9 47.9
26............................ 31............... 48.0 47.9 47.8 47.7 47.6 47.5 47.4 47.3 47.3 47.2 47.1 47.1 47.0 47.0
27............................ 32............... 47.2 47.1 46.9 46.8 46.7 46.6 46.5 46.5 46.4 46.3 46.2 46.2 46.1 46.1
28............................ 33............... 46.4 46.3 46.1 46.0 45.9 45.8 45.7 45.6 45.5 45.4 45.4 45.3 45.2 45.2
29............................ 34............... 45.6 45.4 45.3 45.2 45.1 44.9 44.8 44.7 44.7 44.6 44.5 44.4 44.4 44.3
30............................ 35............... 44.8 44.6 44.5 44.4 44.2 44.1 44.0 43.9 43.8 43.7 43.6 43.6 43.5 43.4
31............................ 36............... 44.0 43.9 43.7 43.6 43.4 43.3 43.2 43.1 43.0 42.9 42.8 42.7 42.6 42.0
32............................ 37............... 43.3 43.1 42.9 42.8 42.6 42.5 42.4 42.2 42.1 42.0 41.9 41.9 41.8 41.7
33............................ 38............... 42.5 42.3 42.1 42.0 41.8 41.7 41.5 41.4 41.3 41.2 41.1 41.0 40.9 40.8
34............................ 39............... 41.8 41.6 41.4 41.2 41.0 40.9 40.7 40.6 40.5 40.4 40.3 40.2 40.1 40.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 166]]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78
-------------------------------------------------------------------------------------------------------------------------------------------
Female 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1
7............................... 12................ 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.2 64.1 64.1
8............................... 13................ 63.3 63.3 63.3 63.3 63.3 63.3 63.3 63.3 63.3 63.2 63.2 63.2 63.2 63.2 63.2
9............................... 14................ 62.4 62.4 62.4 62.4 62.4 62.4 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3
10.............................. 15................ 61.5 61.5 61.5 61.5 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4
11.............................. 16................ 60.6 60.6 60.6 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5
12.............................. 17................ 59.7 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.6 59.5 59.5
13.............................. 18................ 58.8 58.7 58.7 58.7 58.7 58.7 58.7 58.7 58.7 58.7 58.6 58.6 58.6 58.6 58.6
14.............................. 19................ 57.8 57.8 57.8 57.8 57.8 57.8 57.8 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7
15.............................. 20................ 56.9 56.9 56.9 56.9 56.9 56.8 56.8 56.8 56.8 56.8 56.8 56.8 56.8 56.8 56.8
16.............................. 21................ 56.0 56.0 56.0 56.0 55.9 55.9 55.9 55.9 55.9 55.9 55.9 55.9 55.9 55.9 55.8
17.............................. 22................ 55.1 55.1 55.1 55.0 55.0 55.0 55.0 55.0 55.0 55.0 55.0 54.9 54.9 54.9 54.9
18.............................. 23................ 54.2 54.2 54.1 54.1 54.1 54.1 54.1 54.1 54.0 54.0 54.0 54.0 54.0 54.0 54.0
19.............................. 24................ 53.3 53.2 53.2 53.2 53.2 53.2 53.2 53.1 53.1 53.1 53.1 53.1 53.1 53.1 53.1
20.............................. 25................ 52.4 52.3 52.3 52.3 52.3 52.2 52.2 52.2 52.2 52.2 52.2 52.2 52.2 52.1 52.1
21.............................. 26................ 51.4 51.4 51.4 51.4 51.3 51.3 51.3 51.3 51.3 51.3 51.3 51.2 51.2 51.2 51.2
22.............................. 27................ 50.5 50.5 50.5 50.5 50.4 50.4 50.4 50.4 50.4 50.3 50.3 50.3 50.3 50.3 50.3
23.............................. 28................ 49.6 49.6 49.6 49.5 49.5 49.5 49.5 49.5 49.4 49.4 49.4 49.4 49.4 49.4 49.4
24.............................. 29................ 48.7 48.7 48.7 48.6 48.6 48.6 48.6 48.5 48.5 48.5 48.5 48.5 48.5 48.4 48.4
25.............................. 30................ 47.8 47.8 47.8 47.7 47.7 47.7 47.6 47.6 47.6 47.6 47.6 47.5 47.5 47.5 47.5
26.............................. 31................ 46.9 46.9 46.8 46.8 46.8 46.8 46.7 46.7 46.7 46.7 46.6 46.6 46.6 46.6 46.6
27.............................. 32................ 46.0 46.0 45.9 45.9 45.9 45.8 45.8 45.8 45.8 45.7 45.7 45.7 45.7 45.7 45.7
28.............................. 33................ 45.1 45.1 45.1 45.0 45.0 44.9 44.9 44.9 44.9 44.8 44.8 44.8 44.8 44.8 44.8
29.............................. 34................ 44.3 44.2 44.2 44.1 44.1 44.0 44.0 44.0 44.0 43.9 43.9 43.9 43.9 43.9 43.8
30.............................. 35................ 43.4 43.3 43.3 43.2 43.2 43.1 43.1 43.1 43.1 43.0 43.0 43.0 43.0 42.9 42.9
31.............................. 36................ 42.5 42.4 42.4 42.3 42.3 42.3 42.2 42.2 42.2 42.1 42.1 42.1 42.1 42.0 42.0
32.............................. 37................ 41.6 41.6 41.5 41.5 41.4 41.4 41.3 41.3 41.3 41.2 41.2 41.2 41.2 41.1 41.1
33.............................. 38................ 40.8 40.7 40.7 40.6 40.5 40.5 40.5 40.4 40.4 40.3 40.3 40.3 40.3 40.2 40.2
34.............................. 39................ 39.9 39.9 39.8 39.7 39.7 39.6 39.6 39.5 39.5 39.5 39.4 39.4 39.4 39.3 39.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------------------------
Male Female Male 79 80 81 82 83 84 85 86 87 88 89 90 91 92
----------------------------------------------------------------------------------------------------------------------------------
Female 84 85 86 87 88 89 90 91 92 93 94 95 96 97
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6................................... 11..................... 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.1 65.0 65.0 65.0 65.0 65.0
7................................... 12..................... 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1
8................................... 13..................... 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2
9................................... 14..................... 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3
[[Page 167]]
10.................................. 15..................... 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4
11.................................. 16..................... 60.5 60.5 60.5 60.5 60.5 60.5 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4
12.................................. 17..................... 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5
13.................................. 18..................... 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6
14.................................. 19..................... 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7
15.................................. 20..................... 56.8 56.8 56.8 56.8 56.8 56.8 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7
16.................................. 21..................... 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8
17.................................. 22..................... 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9
18.................................. 23..................... 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 54.0 53.9
19.................................. 24..................... 53.1 53.1 53.1 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0
20.................................. 25..................... 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1
21.................................. 26..................... 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2 51.2
22.................................. 27..................... 50.3 50.3 50.3 50.3 50.3 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2
23.................................. 28..................... 49.4 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3
24.................................. 29..................... 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4
25.................................. 30..................... 47.5 47.5 47.5 47.5 47.5 47.5 47.5 47.5 47.4 47.4 47.4 47.4 47.4 47.4
26.................................. 31..................... 46.6 46.6 46.6 46.6 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5
27.................................. 32..................... 45.7 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6
28.................................. 33..................... 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7
29.................................. 34..................... 43.8 43.8 43.8 43.8 43.8 43.8 43.8 43.8 43.8 43.7 43.7 43.7 43.7 43.7
30.................................. 35..................... 42.9 42.9 42.9 42.9 42.9 42.9 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8
31.................................. 36..................... 42.0 42.0 42.0 42.0 42.0 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9
32.................................. 37..................... 41.1 41.1 41.1 41.1 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0
33.................................. 38..................... 40.2 40.2 40.2 40.2 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1
34.................................. 39..................... 39.3 39.3 39.3 39.3 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108
----------------------------------------------------------------------------------------------------------------------------------------------------
Female 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6.............................................. 11................................ 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0
7.............................................. 12................................ 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1 64.1
8.............................................. 13................................ 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2 63.2
9.............................................. 14................................ 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3 62.3
10............................................. 15................................ 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4 61.4
11............................................. 16................................ 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4 60.4
12............................................. 17................................ 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5 59.5
13............................................. 18................................ 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6 58.6
14............................................. 19................................ 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7 57.7
15............................................. 20................................ 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7 56.7
16............................................. 21................................ 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8 55.8
[[Page 168]]
17............................................. 22................................ 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9 54.9
18............................................. 23................................ 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9 53.9
19............................................. 24................................ 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0 53.0
20............................................. 25................................ 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1 52.1
21............................................. 26................................ 51.2 51.2 51.2 51.2 51.2 51.2 51.1 51.1 51.1 51.1 51.1 51.1 51.1 51.1 51.1 51.1
22............................................. 27................................ 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2 50.2
23............................................. 28................................ 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3 49.3
24............................................. 29................................ 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.4 48.3 48.3
25............................................. 30................................ 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4
26............................................. 31................................ 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5 46.5
27............................................. 32................................ 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6
28............................................. 33................................ 44.7 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6 44.6
29............................................. 34................................ 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7 43.7
30............................................. 35................................ 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8 42.8
31............................................. 36................................ 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9 41.9
32............................................. 37................................ 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0 41.0
33............................................. 38................................ 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.1 40.0
34............................................. 39................................ 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.2 39.1 39.1 39.1 39.1 39.1
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 35 36 37 38 39 40 41 42 43 44 45 46 47
-------------------------------------------------------------------------------------------------------------------------
Female 40 41 42 43 44 45 46 47 48 49 50 51 52
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 46.2 45.7 45.3 44.8 44.4 44.0 43.6 43.3 43.0 42.6 42.3 42.0 41.8
36....................................... 41......................... 45.7 45.2 44.8 44.3 43.9 43.5 43.1 42.7 42.3 42.0 41.7 41.4 41.1
37....................................... 42......................... 45.3 44.8 44.3 43.8 43.4 42.9 42.5 42.1 41.8 41.4 41.1 40.7 40.4
38....................................... 43......................... 44.8 44.3 43.8 43.3 42.9 42.4 42.0 41.6 41.2 40.8 40.5 40.1 39.8
39....................................... 44......................... 44.4 43.9 43.4 42.9 42.4 41.9 41.5 41.0 40.6 40.2 39.9 39.5 39.2
40....................................... 45......................... 44.0 43.5 42.9 42.4 41.9 41.4 41.0 40.5 40.1 39.7 39.3 38.9 38.6
41....................................... 46......................... 43.6 43.1 42.5 42.0 41.5 41.0 40.5 40.0 39.6 39.2 38.8 38.4 38.0
42....................................... 47......................... 43.3 42.7 42.1 41.6 41.0 40.5 40.0 39.6 39.1 38.7 38.2 37.8 37.5
43....................................... 48......................... 43.0 42.3 41.8 41.2 40.6 40.1 39.6 39.1 38.6 38.2 37.7 37.3 36.9
44....................................... 49......................... 42.6 42.0 41.4 40.8 40.2 39.7 39.2 38.7 38.2 37.7 37.2 36.8 36.4
45....................................... 50......................... 42.3 41.7 41.1 40.5 39.9 39.3 38.8 38.2 37.7 37.2 36.8 36.3 35.9
46....................................... 51......................... 42.0 41.4 40.7 40.1 39.5 38.9 38.4 37.8 37.3 36.8 36.3 35.9 35.4
47....................................... 52......................... 41.8 41.1 40.4 39.8 39.2 38.6 38.0 37.5 36.9 36.4 35.9 35.4 35.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 169]]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 48 49 50 51 52 53 54 55 56 57 58 59 60
-------------------------------------------------------------------------------------------------------------------------
Female 53 54 55 56 57 58 59 60 61 62 63 64 65
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 41.5 41.3 41.0 40.8 40.6 40.4 40.3 40.1 40.0 39.8 39.7 39.6 39.5
36....................................... 41......................... 40.8 40.6 40.3 40.1 39.9 39.7 39.5 39.3 39.2 39.0 38.9 38.8 38.6
37....................................... 42......................... 40.2 39.9 39.6 39.4 39.2 39.0 38.8 38.6 38.4 38.3 38.1 38.0 37.9
38....................................... 43......................... 39.5 39.2 39.0 38.7 38.5 38.3 38.1 37.9 37.7 37.5 37.3 37.2 37.1
39....................................... 44......................... 38.9 38.6 38.3 38.0 37.8 37.6 37.3 37.1 36.9 36.8 36.6 36.4 36.3
40....................................... 45......................... 38.3 38.0 37.7 37.4 37.1 36.9 36.6 36.4 36.2 36.0 35.9 35.7 35.5
41....................................... 46......................... 37.7 37.3 37.0 36.7 36.5 36.2 36.0 35.7 35.5 35.3 35.1 35.0 34.8
42....................................... 47......................... 37.1 36.8 36.4 36.1 35.8 35.6 35.3 35.1 34.8 34.6 34.4 34.2 34.1
43....................................... 48......................... 36.5 36.2 35.8 35.5 35.2 34.9 34.7 34.4 34.2 33.9 33.7 33.5 33.3
44....................................... 49......................... 36.0 35.6 35.3 34.9 34.6 34.3 34.0 33.8 33.5 33.3 33.0 32.8 32.6
45....................................... 50......................... 35.5 35.1 34.7 34.4 34.0 33.7 33.4 33.1 32.9 32.6 32.4 32.2 31.9
46....................................... 51......................... 35.0 34.6 34.2 33.8 33.5 33.1 32.8 32.5 32.2 32.0 31.7 31.5 31.3
47....................................... 52......................... 34.5 34.1 33.7 33.3 32.9 32.6 32.2 31.9 31.6 31.4 31.1 30.9 30.6
48....................................... 53......................... 34.0 33.6 33.2 32.8 32.4 32.0 31.7 31.4 31.1 30.8 30.5 30.2 30.0
49....................................... 54......................... 33.6 33.1 32.7 32.3 31.9 31.5 31.2 30.8 30.5 30.2 29.9 29.6 29.4
50....................................... 55......................... 33.2 32.7 32.3 31.8 31.4 31.0 30.6 30.3 29.9 29.6 29.3 29.0 28.8
51....................................... 56......................... 32.8 32.3 31.8 31.4 30.9 30.5 30.1 29.8 29.4 29.1 28.8 28.5 28.2
52....................................... 57......................... 32.4 31.9 31.4 30.9 30.5 30.1 29.7 29.3 28.9 28.6 28.2 27.9 27.6
53....................................... 58......................... 32.0 31.5 31.0 30.5 30.1 29.6 29.2 28.8 28.4 28.1 27.7 27.4 27.1
54....................................... 59......................... 31.7 31.2 30.6 30.1 29.7 29.2 28.8 28.3 27.9 27.6 27.2 26.9 26.5
55....................................... 60......................... 31.4 30.8 30.3 29.8 29.3 28.8 28.3 27.9 27.5 27.1 26.7 26.4 26.0
56....................................... 61......................... 31.1 30.5 29.9 29.4 28.9 28.4 27.9 27.5 27.1 26.7 26.3 25.9 25.5
57....................................... 62......................... 30.8 30.2 29.6 29.1 28.6 28.1 27.6 27.1 26.7 26.2 25.8 25.4 25.1
58....................................... 63......................... 30.5 29.9 29.3 28.8 28.2 27.7 27.2 26.7 26.3 25.8 25.4 25.0 24.6
59....................................... 64......................... 30.2 29.6 29.0 28.5 27.9 27.4 26.9 26.4 25.9 25.4 25.0 24.6 24.2
60....................................... 65......................... 30.0 29.4 28.8 28.2 27.6 27.1 26.5 26.0 25.5 25.1 24.6 24.2 23.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 61 62 63 64 65 66 67 68 69 70 71 72 73
-------------------------------------------------------------------------------------------------------------------------
Female 66 67 68 69 70 71 72 73 74 75 76 77 78
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 39.4 39.3 39.2 39.1 39.0 38.9 38.9 38.8 38.8 38.7 38.7 38.6 38.6
36....................................... 41......................... 38.5 38.4 38.3 38.2 38.2 38.1 38.0 38.0 37.9 37.9 37.8 37.8 37.7
37....................................... 42......................... 37.7 37.6 37.5 37.4 37.3 37.3 37.2 37.1 37.1 37.0 36.9 36.9 36.9
38....................................... 43......................... 36.9 36.8 36.7 36.6 36.5 36.4 36.4 36.3 36.2 36.2 36.1 36.0 36.0
39....................................... 44......................... 36.2 36.0 35.9 35.8 35.7 35.6 35.5 35.5 35.4 35.3 35.3 35.2 35.2
40....................................... 45......................... 35.4 35.3 35.1 35.0 34.9 34.8 34.7 34.6 34.6 34.5 34.4 34.4 34.3
41....................................... 46......................... 34.6 34.5 34.4 34.2 34.1 34.0 33.9 33.8 33.8 33.7 33.6 33.5 33.5
[[Page 170]]
42....................................... 47......................... 33.9 33.7 33.6 33.5 33.4 33.2 33.1 33.0 33.0 32.9 32.8 32.7 32.7
43....................................... 48......................... 33.2 33.0 32.9 32.7 32.6 32.5 32.4 32.3 32.2 32.1 32.0 31.9 31.9
44....................................... 49......................... 32.5 32.3 32.1 32.0 31.8 31.7 31.6 31.5 31.4 31.3 31.2 31.1 31.1
45....................................... 50......................... 31.8 31.6 31.4 31.3 31.1 31.0 30.8 30.7 30.6 30.5 30.4 30.4 30.3
46....................................... 51......................... 31.1 30.9 30.7 30.5 30.4 30.2 30.1 30.0 29.9 29.8 29.7 29.6 29.5
47....................................... 52......................... 30.4 30.2 30.0 29.8 29.7 29.5 29.4 29.3 29.1 29.0 28.9 28.8 28.7
48....................................... 53......................... 29.8 29.5 29.3 29.2 29.0 28.8 28.7 28.5 28.4 28.3 28.2 28.1 28.0
49....................................... 54......................... 29.1 28.9 28.7 28.5 28.3 28.1 28.0 27.8 27.7 27.6 27.5 27.4 27.3
50....................................... 55......................... 28.5 28.3 28.1 27.8 27.6 27.5 27.3 27.1 27.0 26.9 26.7 26.6 26.5
51....................................... 56......................... 27.9 27.7 27.4 27.2 27.0 26.8 26.6 26.5 26.3 26.2 26.0 25.9 25.8
52....................................... 57......................... 27.3 27.1 26.8 26.6 26.4 26.2 26.0 25.8 25.7 25.5 25.4 25.2 25.1
53....................................... 58......................... 26.8 26.5 26.2 26.0 25.8 25.6 25.4 25.2 25.0 24.8 24.7 24.6 24.4
54....................................... 59......................... 26.2 25.9 25.7 25.4 25.2 25.0 24.7 24.6 24.4 24.2 24.0 23.9 23.8
55....................................... 60......................... 25.7 25.4 25.1 24.9 24.6 24.4 24.1 23.9 23.8 23.6 23.4 23.3 23.1
56....................................... 61......................... 25.2 24.9 24.6 24.3 24.1 23.8 23.6 23.4 23.2 23.0 22.8 22.6 22.5
57....................................... 62......................... 24.7 24.4 24.1 23.8 23.5 23.3 23.0 22.8 22.6 22.4 22.2 22.0 21.9
58....................................... 63......................... 24.3 23.9 23.6 23.3 23.0 22.7 22.5 22.2 22.0 21.8 21.6 21.4 21.3
59....................................... 64......................... 23.8 23.5 23.1 22.8 22.5 22.2 21.9 21.7 21.5 21.2 21.0 20.9 20.7
60....................................... 65......................... 23.4 23.0 22.7 22.3 22.0 21.7 21.4 21.2 20.9 20.7 20.5 20.3 20.1
61....................................... 66......................... 23.0 22.6 22.2 21.9 21.6 21.3 21.0 20.7 20.4 20.2 20.0 19.8 19.6
62....................................... 67......................... 22.6 22.2 21.8 21.5 21.1 20.8 20.5 20.2 19.9 19.7 19.5 19.2 19.0
63....................................... 68......................... 22.2 21.8 21.4 21.1 20.7 20.4 20.1 19.8 19.5 19.2 19.0 18.7 18.5
64....................................... 69......................... 21.9 21.5 21.1 20.7 20.3 20.0 19.6 19.3 19.0 18.7 18.5 18.2 18.0
65....................................... 70......................... 21.6 21.1 20.7 20.3 19.9 19.6 19.2 18.9 18.6 18.3 18.0 17.8 17.5
66....................................... 71......................... 21.3 20.8 20.4 20.0 19.6 19.2 18.8 18.5 18.2 17.9 17.6 17.3 17.1
67....................................... 72......................... 21.0 20.5 20.1 19.6 19.2 18.8 18.5 18.1 17.8 17.5 17.2 16.9 16.7
68....................................... 73......................... 20.7 20.2 19.8 19.3 18.9 18.5 18.1 17.8 17.4 17.1 16.8 16.5 16.2
69....................................... 74......................... 20.4 19.9 19.5 19.0 18.6 18.2 17.8 17.4 17.1 16.7 16.4 16.1 15.8
70....................................... 75......................... 20.2 19.7 19.2 18.7 18.3 17.9 17.5 17.1 16.7 16.4 16.1 15.8 15.5
71....................................... 76......................... 20.0 19.5 19.0 18.5 18.0 17.6 17.2 16.8 16.4 16.1 15.7 15.4 15.1
72....................................... 77......................... 19.8 19.2 18.7 18.2 17.8 17.3 16.9 16.5 16.1 15.8 15.4 15.1 14.8
73....................................... 78......................... 19.6 19.0 18.5 18.0 17.5 17.1 16.7 16.2 15.8 15.5 15.1 14.8 14.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 171]]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------
Male Female Male 74 75 76 77 78 79 80 81 82 83 84 85
----------------------------------------------------------------------------------------------------------------
Female 79 80 81 82 83 84 85 86 87 88 89 90
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35........................................... 40.............................. 38.6 38.5 38.5 38.5 38.4 38.4 38.4 38.4 38.4 38.4 38.3 38.3
36........................................... 41.............................. 37.7 37.6 37.6 37.6 37.6 27.5 37.5 37.5 37.5 37.5 37.5 37.4
37........................................... 42.............................. 36.8 36.8 36.7 36.7 36.7 36.7 36.6 36.6 36.6 36.6 36.6 36.6
38........................................... 43.............................. 36.0 35.9 35.9 35.9 35.8 35.8 35.8 35.8 35.7 35.7 35.7 35.7
39........................................... 44.............................. 35.1 35.1 35.0 35.0 35.0 34.9 34.9 34.9 34.9 34.8 34.8 34.8
40........................................... 45.............................. 34.3 34.2 34.2 34.1 34.1 34.1 34.1 34.0 34.0 34.0 34.0 34.0
41........................................... 46.............................. 33.4 33.4 33.3 33.3 33.3 33.2 33.2 33.2 33.2 33.1 33.1 33.1
42........................................... 47.............................. 32.6 32.6 32.5 32.5 32.4 32.4 32.4 32.3 32.3 32.3 32.3 32.3
43........................................... 48.............................. 31.8 31.8 31.7 31.7 31.6 31.6 31.5 31.5 31.5 31.5 31.4 31.4
44........................................... 49.............................. 31.0 30.9 30.9 30.8 30.8 30.8 30.7 30.7 30.7 30.6 30.6 30.6
45........................................... 50.............................. 30.2 30.1 30.1 30.0 30.0 29.9 29.9 29.9 29.8 29.8 29.8 29.8
46........................................... 51.............................. 29.4 29.4 29.3 29.2 29.2 29.2 29.1 29.1 29.0 29.0 29.0 28.9
47........................................... 52.............................. 28.7 28.6 28.5 28.5 28.4 28.4 28.3 28.3 28.2 28.2 28.2 28.1
48........................................... 53.............................. 27.9 27.8 27.8 27.7 27.6 27.6 27.5 27.5 27.5 27.4 27.4 27.4
49........................................... 54.............................. 27.2 27.1 27.0 26.9 26.9 26.8 26.8 26.7 26.7 26.6 26.6 26.6
50........................................... 55.............................. 26.4 26.3 26.3 26.2 26.1 26.1 26.0 26.0 25.9 25.9 25.8 25.8
51........................................... 56.............................. 25.7 25.6 25.5 25.5 25.4 25.3 25.3 25.2 25.2 25.1 25.1 25.0
52........................................... 57.............................. 25.0 24.9 24.8 24.7 24.7 24.6 24.5 24.5 24.4 24.4 24.3 24.3
53........................................... 58.............................. 24.3 24.2 24.1 24.0 23.9 23.9 23.8 23.7 23.7 23.6 23.6 23.5
54........................................... 59.............................. 23.6 23.5 23.4 23.3 23.2 23.2 23.1 23.0 23.0 22.9 22.9 22.8
55........................................... 60.............................. 23.0 22.9 22.8 22.7 22.6 22.5 22.4 22.3 22.3 22.2 22.2 22.1
56........................................... 61.............................. 22.3 22.2 22.1 22.0 21.9 21.8 21.7 21.6 21.6 21.5 21.5 21.4
57........................................... 62.............................. 21.7 21.6 21.5 21.3 21.2 21.1 21.1 21.0 20.9 20.8 20.8 20.7
58........................................... 63.............................. 21.1 21.0 20.8 20.7 20.6 20.5 20.4 20.3 20.2 20.2 20.1 20.0
59........................................... 64.............................. 20.5 20.4 20.2 20.1 20.0 19.9 19.8 19.7 19.6 19.5 19.4 19.4
60........................................... 65.............................. 19.9 19.8 19.6 19.5 19.4 19.3 19.1 19.0 19.0 18.9 18.8 18.7
61........................................... 66.............................. 19.4 19.2 19.1 18.9 18.8 18.7 18.5 18.4 18.3 18.3 18.2 18.1
62........................................... 67.............................. 18.8 18.7 18.5 18.3 18.2 18.1 18.0 17.8 17.7 17.7 17.6 17.5
63........................................... 68.............................. 18.3 18.1 18.0 17.8 17.6 17.5 17.4 17.3 17.2 17.1 17.0 16.9
64........................................... 69.............................. 17.8 17.6 17.4 17.3 17.1 17.0 16.8 16.7 16.6 16.5 16.4 16.3
65........................................... 70.............................. 17.3 17.1 16.9 16.7 16.6 16.4 16.3 16.2 16.0 15.9 15.8 15.8
66........................................... 71.............................. 16.9 16.6 16.4 16.3 16.1 15.9 15.8 15.6 15.5 15.4 15.3 15.2
67........................................... 72.............................. 16.4 16.2 16.0 15.8 15.6 15.4 15.3 15.1 15.0 14.9 14.8 14.7
68........................................... 73.............................. 16.0 15.7 15.5 15.3 15.1 15.0 14.8 14.6 14.5 14.4 14.3 14.2
69........................................... 74.............................. 15.6 15.3 15.1 14.9 14.7 14.5 14.3 14.2 14.0 13.9 13.8 13.7
70........................................... 75.............................. 15.2 14.9 14.7 14.5 14.3 14.1 13.9 13.7 13.6 13.4 13.3 13.2
71........................................... 76.............................. 14.8 14.5 14.3 14.1 13.8 13.6 13.5 13.3 13.1 13.0 12.8 12.7
72........................................... 77.............................. 14.5 14.2 13.9 13.7 13.5 13.2 13.0 12.9 12.7 12.5 12.4 12.3
[[Page 172]]
73........................................... 78.............................. 14.1 13.8 13.6 13.3 13.1 12.9 12.7 12.5 12.3 12.1 12.0 11.8
74........................................... 79.............................. 13.8 13.5 13.2 13.0 12.7 12.5 12.3 12.1 11.9 11.7 11.6 11.4
75........................................... 80.............................. 13.5 13.2 12.9 12.6 12.4 12.2 11.9 11.7 11.5 11.4 11.2 11.0
76........................................... 81.............................. 13.2 12.9 12.6 12.3 12.1 11.8 11.6 11.4 11.2 11.0 10.8 10.7
77........................................... 82.............................. 13.0 12.6 12.3 12.1 11.8 11.5 11.3 11.1 10.8 10.7 10.5 10.3
78........................................... 83.............................. 12.7 12.4 12.1 11.8 11.5 11.2 11.0 10.7 10.5 10.3 10.1 10.0
79........................................... 84.............................. 12.5 12.2 11.8 11.5 11.2 11.0 10.7 10.5 10.2 10.0 9.8 9.6
80........................................... 85.............................. 12.3 11.9 11.6 11.3 11.0 10.7 10.4 10.2 10.0 9.7 9.5 9.3
81........................................... 86.............................. 12.1 11.7 11.4 11.1 10.7 10.5 10.2 9.9 9.7 9.5 9.3 9.1
82........................................... 87.............................. 11.9 11.5 11.2 10.8 10.5 10.2 10.0 9.7 9.4 9.2 9.0 8.8
83........................................... 88.............................. 11.7 11.4 11.0 10.7 10.3 10.0 9.7 9.5 9.2 9.0 8.7 8.5
84........................................... 89.............................. 11.6 11.2 10.8 10.5 10.1 9.8 9.5 9.3 9.0 8.7 8.5 8.3
85........................................... 90.............................. 11.4 11.0 10.7 10.3 10.0 9.6 9.3 9.1 8.8 8.5 8.3 8.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------
Male Female Male 86 87 88 89 90 91 92 93 94 95 96 97
----------------------------------------------------------------------------------------------------------------
Female 91 92 93 94 95 96 97 98 99 100 101 102
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35........................................... 40.............................. 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3
36........................................... 41.............................. 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4
37........................................... 42.............................. 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5
38........................................... 43.............................. 35.7 35.7 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6
39........................................... 44.............................. 34.8 34.8 34.8 34.8 34.8 34.8 34.7 34.7 34.7 34.7 34.7 34.7
40........................................... 45.............................. 33.9 33.9 33.9 33.9 33.9 33.9 33.9 33.9 33.9 33.9 33.9 33.9
41........................................... 46.............................. 33.1 33.1 33.1 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0
42........................................... 47.............................. 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.1 32.1 32.1
43........................................... 48.............................. 31.4 31.4 31.4 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3
44........................................... 49.............................. 30.6 30.5 30.5 30.5 30.5 30.5 30.5 30.5 30.5 30.5 30.5 30.4
45........................................... 50.............................. 29.7 29.7 29.7 29.7 29.7 29.7 29.7 29.6 29.6 29.6 29.6 29.6
46........................................... 51.............................. 28.9 28.9 28.9 28.9 28.9 28.8 28.8 28.8 28.8 28.8 28.8 28.8
47........................................... 52.............................. 28.1 28.1 28.1 28.1 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0
48........................................... 53.............................. 27.3 27.3 27.3 27.3 27.2 27.2 27.2 27.2 27.2 27.2 27.2 27.2
49........................................... 54.............................. 26.5 26.5 26.5 26.5 26.5 26.4 26.4 26.4 26.4 26.4 26.4 26.4
50........................................... 55.............................. 25.8 25.7 25.7 25.7 25.7 25.7 25.6 25.6 25.6 25.6 25.6 25.6
51........................................... 56.............................. 25.0 25.0 24.9 24.9 24.9 24.9 24.9 24.9 24.8 24.8 24.8 24.8
52........................................... 57.............................. 24.3 24.2 24.2 24.2 24.1 24.1 24.1 24.1 24.1 24.1 24.1 24.0
53........................................... 58.............................. 23.5 23.5 23.4 23.4 23.4 23.4 23.4 23.3 23.3 23.3 23.3 23.3
54........................................... 59.............................. 22.8 22.7 22.7 22.7 22.7 22.6 22.6 22.6 22.6 22.6 22.6 22.5
[[Page 173]]
55........................................... 60.............................. 22.1 22.0 22.0 22.0 21.9 21.9 21.9 21.9 21.8 21.8 21.8 21.8
56........................................... 61.............................. 21.4 21.3 21.3 21.3 21.2 21.2 21.2 21.1 21.1 21.1 21.1 21.1
57........................................... 62.............................. 20.7 20.6 20.6 20.6 20.5 20.5 20.5 20.4 20.4 20.4 20.4 20.4
58........................................... 63.............................. 20.0 19.9 19.9 19.9 19.8 19.8 19.8 19.8 19.7 19.7 19.7 19.7
59........................................... 64.............................. 19.3 19.3 19.2 19.2 19.2 19.1 19.1 19.1 19.0 19.0 19.0 19.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 98 99 100 101 102 103 104 105 106 107 108
-------------------------------------------------------------------------------------------------------
Female 103 104 105 106 107 108 109 110 111 112 113
--------------------------------------------------------------------------------------------------------------------------------------------------------
35............................ 40.............. 38.3 38.3 38.3 38.3 38.3 38.3 38.2 38.2 38.2 38.2 38.2
36............................ 41.............. 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.4 37.3
37............................ 42.............. 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5
38............................ 43.............. 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6 35.6
39............................ 44.............. 34.7 34.7 34.7 34.7 34.7 34.7 34.7 34.7 34.7 34.7 34.7
40............................ 45.............. 33.9 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8
41............................ 46.............. 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0
42............................ 47.............. 32.1 32.1 32.1 32.1 32.1 32.1 32.1 32.1 32.1 32.1 32.1
43............................ 48.............. 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3
44............................ 49.............. 30.4 30.4 30.4 30.4 30.4 30.4 30.4 30.4 30.4 30.4 30.4
45............................ 50.............. 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6
46............................ 51.............. 28.8 28.8 28.8 28.8 28.8 28.8 28.8 28.8 28.8 28.8 28.7
47............................ 52.............. 28.0 28.0 28.0 28.0 28.0 28.0 28.0 27.9 27.9 27.9 27.9
48............................ 53.............. 27.2 27.2 27.2 27.2 27.2 27.1 27.1 27.1 27.1 27.1 27.1
49............................ 54.............. 26.4 26.4 26.4 26.4 26.4 26.3 26.3 26.3 26.3 26.3 26.3
50............................ 55.............. 25.6 25.6 25.6 25.6 25.6 25.6 25.6 25.6 25.5 25.5 25.5
51............................ 56.............. 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.7
52............................ 57.............. 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0 24.0
53............................ 58.............. 23.3 23.3 23.3 23.3 23.3 23.3 23.2 23.2 23.2 23.2 23.2
54............................ 59.............. 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5
55............................ 60.............. 21.8 21.8 21.8 21.8 21.8 21.8 21.8 21.8 21.8 21.7 21.7
56............................ 61.............. 21.1 21.1 21.1 21.1 21.1 21.0 21.0 21.0 21.0 21.0 21.0
57............................ 62.............. 20.4 20.4 20.4 20.3 20.3 20.3 20.3 20.3 20.3 20.3 20.3
58............................ 63.............. 19.7 19.7 19.7 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6
59............................ 64.............. 19.0 19.0 19.0 19.0 19.0 18.9 18.9 18.9 18.9 18.9 18.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------
Male Female Male 86 87 88 89 90 91 92 93 94 95 96 97
----------------------------------------------------------------------------------------------------------------
Female 91 92 93 94 95 96 97 98 99 100 101 102
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
60........................................... 65.............................. 18.7 18.6 18.6 18.5 18.5 18.5 18.4 18.4 18.4 18.4 18.3 18.3
[[Page 174]]
61........................................... 66.............................. 18.1 18.0 17.9 17.9 17.9 17.8 17.8 17.8 17.7 17.7 17.7 17.7
62........................................... 67.............................. 17.4 17.4 17.3 17.3 17.2 17.2 17.1 17.1 17.1 17.1 17.0 17.0
63........................................... 68.............................. 16.8 16.8 16.7 16.7 16.6 16.6 16.5 16.5 16.5 16.4 16.4 16.4
64........................................... 69.............................. 16.2 16.2 16.1 16.1 16.0 16.0 15.9 15.9 15.9 15.8 15.8 15.8
65........................................... 70.............................. 15.7 15.6 15.5 15.5 15.4 15.4 15.3 15.3 15.3 15.2 15.2 15.2
66........................................... 71.............................. 15.1 15.0 15.0 14.9 14.8 14.8 14.7 14.7 14.7 14.6 14.6 14.6
67........................................... 72.............................. 14.6 14.5 14.4 14.4 14.3 14.2 14.2 14.1 14.1 14.1 14.1 14.0
68........................................... 73.............................. 14.1 14.0 13.9 13.8 13.8 13.7 13.6 13.6 13.6 13.5 13.5 13.5
69........................................... 74.............................. 13.6 13.5 13.4 13.3 13.2 13.2 13.1 13.1 13.0 13.0 13.0 12.9
70........................................... 75.............................. 13.1 13.0 12.9 12.8 12.7 12.7 12.6 12.5 12.5 12.5 12.4 12.4
71........................................... 76.............................. 12.6 12.5 12.4 12.3 12.2 12.2 12.1 12.1 12.0 12.0 11.9 11.9
72........................................... 77.............................. 12.1 12.0 11.9 11.8 11.8 11.7 11.6 11.6 11.5 11.5 11.4 11.4
73........................................... 78.............................. 11.7 11.6 11.5 11.4 11.3 11.2 11.2 11.1 11.0 11.0 11.0 10.9
74........................................... 79.............................. 11.3 11.2 11.1 11.0 10.9 10.8 10.7 10.7 10.6 10.6 10.5 10.5
75........................................... 80.............................. 10.9 10.8 10.7 10.5 10.5 10.4 10.3 10.2 10.2 10.1 10.1 10.0
76........................................... 81.............................. 10.5 10.4 10.3 10.2 10.1 10.0 9.9 9.8 9.7 9.7 9.7 9.6
77........................................... 82.............................. 10.2 10.0 9.9 9.8 9.7 9.6 9.5 9.4 9.3 9.3 9.2 9.2
78........................................... 83.............................. 9.8 9.7 9.5 9.4 9.3 9.2 9.1 9.0 9.0 8.9 8.9 8.8
79........................................... 84.............................. 9.5 9.3 9.2 9.2 8.9 8.8 8.8 8.7 8.6 8.5 8.5 8.4
80........................................... 85.............................. 9.2 9.0 8.9 8.7 8.6 8.5 8.4 8.3 8.3 8.2 8.1 8.1
81........................................... 86.............................. 8.9 8.7 8.6 8.4 8.3 8.2 8.1 8.0 7.9 7.9 7.8 7.7
82........................................... 87.............................. 8.6 8.4 8.3 8.1 8.0 7.9 7.8 7.7 7.6 7.5 7.5 7.4
83........................................... 88.............................. 8.3 8.2 8.0 7.9 7.7 7.6 7.5 7.4 7.3 7.2 7.2 7.1
84........................................... 89.............................. 8.1 7.9 7.8 7.6 7.5 7.3 7.2 7.1 7.0 7.0 6.9 6.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 98 99 100 101 102 103 104 105 106 107 108
-------------------------------------------------------------------------------------------------------
Female 103 104 105 106 107 108 109 110 111 112 113
--------------------------------------------------------------------------------------------------------------------------------------------------------
60............................ 65.............. 18.3 18.3 18.3 18.3 18.3 18.3 18.3 18.2 18.2 18.2 18.2
61............................ 66.............. 17.7 17.7 17.6 17.6 17.6 17.6 17.6 17.6 17.6 17.6 17.5
62............................ 67.............. 17.0 17.0 17.0 17.0 17.0 17.0 16.9 16.9 16.9 16.9 16.9
63............................ 68.............. 16.4 16.4 16.4 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.2
64............................ 69.............. 15.8 15.8 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.6
65............................ 70.............. 15.2 15.2 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.0 15.0
66............................ 71.............. 14.6 14.6 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.4 14.4
67............................ 72.............. 14.0 14.0 14.0 14.0 13.9 13.9 13.9 13.9 13.9 13.9 13.8
68............................ 73.............. 13.5 13.4 13.4 13.4 13.4 13.4 13.3 13.3 13.3 13.3 13.2
[[Page 175]]
69............................ 74.............. 12.9 12.9 12.9 12.8 12.8 12.8 12.8 12.8 12.8 12.7 12.7
70............................ 75.............. 12.4 12.4 12.3 12.3 12.3 12.3 12.3 12.2 12.2 12.2 12.1
71............................ 76.............. 11.9 11.9 11.8 11.8 11.8 11.8 11.7 11.7 11.7 11.7 11.6
72............................ 77.............. 11.4 11.4 11.3 11.3 11.3 11.3 11.2 11.2 11.2 11.2 11.1
73............................ 78.............. 10.9 10.9 10.9 10.8 10.8 10.8 10.7 10.7 10.7 10.7 10.6
74............................ 79.............. 10.5 10.4 10.4 10.4 10.3 10.3 10.3 10.3 10.2 10.2 10.1
75............................ 80.............. 10.0 10.0 9.9 9.9 9.9 9.8 9.8 9.8 9.8 9.7 .......
76............................ 81.............. 9.6 9.5 9.5 9.5 9.4 9.4 9.4 9.4 9.3 9.3 .......
77............................ 82.............. 9.2 9.1 9.1 9.1 9.0 9.0 9.0 8.9 8.9 8.9 .......
78............................ 83.............. 8.8 8.7 8.7 8.7 8.6 8.6 8.5 8.5 8.5 8.4 .......
79............................ 84.............. 8.4 8.4 8.3 8.3 8.2 8.2 8.2 8.1 8.1 8.0 .......
80............................ 85.............. 8.0 8.0 7.9 7.9 7.9 7.8 7.8 7.7 7.7 7.6 .......
81............................ 86.............. 7.7 7.6 7.6 7.6 7.5 7.5 7.4 7.4 7.3 7.3 .......
82............................ 87.............. 7.4 7.3 7.3 7.2 7.2 7.1 7.1 7.0 7.0 6.9 .......
83............................ 88.............. 7.1 7.0 6.9 6.9 6.8 6.8 6.7 6.7 6.7 6.6 .......
84............................ 89.............. 6.8 6.7 6.6 6.6 6.5 6.5 6.4 6.4 6.3 ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 86 87 88 89 90 91 92 93 94 95 96
-------------------------------------------------------------------------------------------------------
Female 91 92 93 94 95 96 97 98 99 100 101
--------------------------------------------------------------------------------------------------------------------------------------------------------
85............................ 90.............. 7.9 7.7 7.5 7.4 7.2 7.1 7.0 6.9 6.8 6.7 6.6
86............................ 91.............. 7.7 7.5 7.3 7.1 7.0 6.8 6.7 6.6 6.5 6.4 6.4
87............................ 92.............. 7.5 7.3 7.1 6.9 6.8 6.6 6.5 6.4 6.3 6.2 6.1
88............................ 93.............. 7.3 7.1 6.9 6.7 6.6 6.4 6.3 6.2 6.1 6.0 5.9
89............................ 94.............. 7.1 6.9 6.7 6.5 6.4 6.2 6.1 6.0 5.9 5.8 5.7
90............................ 95.............. 7.0 6.8 6.6 6.4 6.2 6.1 5.9 5.8 5.7 5.6 5.5
91............................ 96.............. 6.8 6.6 6.4 6.2 6.1 5.9 5.8 5.7 5.5 5.4 5.3
92............................ 97.............. 6.7 6.5 6.3 6.1 5.9 5.8 5.6 5.5 5.4 5.3 5.2
93............................ 98.............. 6.6 6.4 6.2 6.0 5.8 5.7 5.5 5.4 5.2 5.1 5.0
94............................ 99.............. 6.5 6.3 6.1 5.9 5.7 5.5 5.4 5.2 5.1 5.0 4.9
95............................ 100............. 6.4 6.2 6.0 5.8 5.6 5.4 5.3 5.1 5.0 4.9 4.7
96............................ 101............. 6.4 6.1 5.9 5.7 5.5 5.3 5.2 5.0 4.9 4.7 4.6
97............................ 102............. 6.3 6.1 5.8 5.6 5.4 5.2 5.1 4.9 4.8 4.6 4.5
98............................ 103............. 6.2 6.0 5.8 5.5 5.3 5.1 5.0 4.8 4.7 4.5 4.4
99............................ 104............. 6.2 5.9 5.7 5.5 5.2 5.1 4.9 4.7 4.6 4.4 4.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 176]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------
Male Female Male 97 98 99 100 101 102 103 104 105 106
----------------------------------------------------------------------------------------------
Female 102 103 104 105 106 107 108 109 110 111
--------------------------------------------------------------------------------------------------------------------------------------------------------
85................................ 90................... 6.6 6.5 6.4 6.4 6.3 6.2 6.2 6.1 6.1 6.0
86................................ 91................... 6.3 6.2 6.2 6.1 6.0 6.0 5.9 5.9 5.8 5.7
87................................ 92................... 6.1 6.0 5.9 5.8 5.8 5.7 5.6 5.6 5.5 5.4
88................................ 93................... 5.8 5.8 5.7 5.6 5.5 5.5 5.4 5.3 5.3 5.1
89................................ 94................... 5.6 5.5 5.5 5.4 5.3 5.2 5.2 5.1 5.0 .......
90................................ 95................... 5.4 5.3 5.2 5.2 5.1 5.0 4.9 4.9 4.8 .......
91................................ 96................... 5.2 5.1 5.1 5.0 4.9 4.8 4.7 4.6 4.5 .......
92................................ 97................... 5.1 5.0 4.9 4.8 4.7 4.6 4.5 4.4 ....... .......
93................................ 98................... 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 ....... .......
94................................ 99................... 4.8 4.7 4.6 4.5 4.4 4.3 4.1 ....... ....... .......
95................................ 100.................. 4.6 4.5 4.4 4.3 4.2 4.1 4.0 ....... ....... .......
96................................ 101.................. 4.5 4.4 4.3 4.2 4.1 3.9 ....... ....... ....... .......
97................................ 102.................. 4.4 4.3 4.1 4.0 3.9 3.7 ....... ....... ....... .......
98................................ 103.................. 4.3 4.1 4.0 3.9 3.7 ....... ....... ....... ....... .......
99................................ 104.................. 4.1 4.0 3.9 3.7 ....... ....... ....... ....... ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 177]]
Table IIA--Annuities for Joint Life Only--Two Lives--Expected Return Multiples
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-------------------------------------------------------------------------------------------------------------------------------------------
Female 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 56.6 56.1 55.7 55.1 54.6 54.1 53.5 52.9 52.3 51.7 51.1 50.5 49.8 49.1 48.4
7............................... 12................ 56.1 55.7 55.2 54.7 54.2 53.7 53.1 52.6 52.0 51.4 50.8 50.2 49.5 48.9 48.2
8............................... 13................ 55.7 55.2 54.8 54.3 53.8 53.3 52.8 52.2 51.6 51.1 50.5 49.9 49.2 48.6 47.9
9............................... 14................ 55.1 54.7 54.3 53.8 53.3 52.9 52.3 51.8 51.3 50.7 50.1 49.5 48.9 48.3 47.7
10.............................. 15................ 54.6 54.2 53.8 53.3 52.9 52.4 51.9 51.4 50.9 50.3 49.8 49.2 48.6 48.0 47.4
11.............................. 16................ 54.1 53.7 53.3 52.9 52.4 52.0 51.5 51.0 50.5 50.0 49.4 48.8 48.3 47.7 47.1
12.............................. 17................ 53.5 53.1 52.8 52.3 51.9 51.5 51.0 50.6 50.1 49.6 49.0 48.5 47.9 47.3 46.7
13.............................. 18................ 52.9 52.6 52.2 51.8 51.4 51.0 50.6 50.1 49.6 49.1 48.6 48.1 47.5 47.0 46.4
14.............................. 19................ 52.3 52.0 51.6 51.3 50.9 50.5 50.1 49.6 49.2 48.7 48.2 47.7 47.2 46.6 46.1
15.............................. 20................ 51.7 51.4 51.1 50.7 50.3 50.0 49.6 49.1 48.7 48.2 47.8 47.3 46.8 46.2 45.7
16.............................. 21................ 51.1 50.8 50.5 50.1 49.8 49.4 49.0 48.6 48.2 47.8 47.3 46.8 46.3 45.8 45.3
17.............................. 22................ 50.5 50.2 49.9 49.5 49.2 48.8 48.5 48.1 47.7 47.3 46.8 46.4 45.9 45.4 44.9
18.............................. 23................ 49.8 49.5 49.2 48.9 48.6 48.3 47.9 47.5 47.2 46.8 46.3 45.9 45.4 45.0 44.5
19.............................. 24................ 49.1 48.9 48.6 48.3 48.0 47.7 47.3 47.0 46.6 46.2 45.8 45.4 45.0 44.5 44.0
20.............................. 25................ 48.4 48.2 47.9 47.7 47.4 47.1 46.7 46.4 46.1 45.7 45.3 44.9 44.5 44.0 43.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------------------------
Male Female Male 21 22 23 24 25 26 27 28 29 30 31 32 33 34
----------------------------------------------------------------------------------------------------------------------------------
Female 26 27 28 29 30 31 32 33 34 35 36 37 38 39
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6................................... 11..................... 47.7 47.0 46.3 45.6 44.8 44.1 43.3 42.5 41.8 41.0 40.2 39.4 38.6 37.8
7................................... 12..................... 47.5 46.8 46.1 45.4 44.6 43.9 43.2 42.4 41.6 40.9 40.1 39.3 38.5 37.7
8................................... 13..................... 47.3 46.6 45.9 45.2 44.5 43.7 43.0 42.2 41.5 40.7 39.9 39.2 38.4 37.6
9................................... 14..................... 47.0 46.3 45.6 45.0 44.2 43.5 42.8 42.1 41.3 40.6 39.8 39.0 38.3 37.5
10.................................. 15..................... 46.7 46.1 45.4 44.7 44.0 43.3 42.6 41.9 41.1 40.4 39.7 38.9 38.1 37.4
11.................................. 16..................... 46.4 45.8 45.1 44.5 43.8 43.1 42.4 41.7 41.0 40.2 39.5 38.8 38.0 37.2
12.................................. 17..................... 46.1 45.5 44.9 44.2 43.6 42.9 42.2 41.5 40.8 40.1 39.3 38.6 37.9 37.1
13.................................. 18..................... 45.8 45.2 44.6 43.9 43.3 42.6 42.0 41.3 40.6 39.9 39.2 38.4 37.7 37.0
14.................................. 19..................... 45.5 44.9 44.3 43.7 43.0 42.4 41.7 41.0 40.4 39.7 39.0 38.3 37.5 36.8
15.................................. 20..................... 45.1 44.6 44.0 43.4 42.7 42.1 41.5 40.8 40.1 39.5 38.8 38.1 37.4 36.6
16.................................. 21..................... 44.8 44.2 43.6 43.0 42.4 41.8 41.2 40.5 39.9 39.2 38.6 37.9 37.2 36.5
17.................................. 22..................... 44.4 43.8 43.3 42.7 42.1 41.5 40.9 40.3 39.6 39.0 38.3 37.7 37.0 36.3
18.................................. 23..................... 44.0 43.5 42.9 42.4 41.8 41.2 40.6 40.0 39.4 38.7 38.1 37.4 36.8 36.1
19.................................. 24..................... 43.6 43.1 42.5 42.0 41.4 40.9 40.3 39.7 39.1 38.5 37.8 37.2 36.5 35.9
20.................................. 25..................... 43.1 42.6 42.1 41.6 41.1 40.5 40.0 39.4 38.8 38.2 37.6 36.9 36.3 35.7
21.................................. 26..................... 42.7 42.2 41.7 41.2 40.7 40.2 39.6 39.1 38.5 37.9 37.3 36.7 36.1 35.4
[[Page 178]]
22.................................. 27..................... 42.2 41.8 41.3 40.8 40.3 39.8 39.3 38.7 38.2 37.6 37.0 36.4 35.8 35.2
23.................................. 28..................... 41.7 41.3 40.8 40.4 39.9 39.4 38.9 38.4 37.8 37.3 36.7 36.1 35.5 34.9
24.................................. 29..................... 41.2 40.8 40.4 39.9 39.5 39.0 38.5 38.0 37.5 36.9 36.4 35.8 35.2 34.6
25.................................. 30..................... 40.7 40.3 39.9 39.5 39.0 38.6 38.1 37.6 37.1 36.6 36.0 35.5 34.9 34.4
26.................................. 31..................... 40.2 39.8 39.4 39.0 38.6 38.1 37.7 37.2 36.7 36.2 35.7 35.2 34.6 34.1
27.................................. 32..................... 39.6 39.3 38.9 38.5 38.1 37.7 37.2 36.8 36.3 35.8 35.3 34.8 34.3 33.7
28.................................. 33..................... 39.1 38.7 38.4 38.0 37.6 37.2 36.8 36.3 35.9 35.4 34.9 34.5 33.9 33.4
29.................................. 34..................... 38.5 38.2 37.8 37.5 37.1 36.7 36.3 35.9 35.5 35.0 34.6 34.1 33.6 33.1
30.................................. 35..................... 37.9 37.6 37.3 36.9 36.6 36.2 35.8 35.4 35.0 34.6 34.1 33.7 33.2 32.7
31.................................. 36..................... 37.3 37.0 36.7 36.4 36.0 35.7 35.3 34.9 34.6 34.1 33.7 33.3 32.8 32.3
32.................................. 37..................... 36.7 36.4 36.1 35.8 35.5 35.2 34.8 34.5 34.1 33.7 33.3 32.9 32.4 32.0
33.................................. 38..................... 36.1 35.8 35.5 35.2 34.9 34.6 34.3 33.9 33.6 33.2 32.8 32.4 32.0 31.6
34.................................. 39..................... 35.4 35.2 34.9 34.6 34.4 34.1 33.7 33.4 33.1 32.7 32.3 32.0 31.6 31.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
-------------------------------------------------------------------------------------------------------------------------------------------
Female 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 37.0 36.2 35.4 34.6 33.8 33.0 32.2 31.4 30.6 29.8 29.0 28.2 27.5 26.7 25.9
7............................... 12................ 36.9 36.1 35.3 34.5 33.7 32.9 32.1 31.3 30.5 29.8 29.0 28.2 27.4 26.7 25.9
8............................... 13................ 36.8 36.0 35.2 34.4 33.7 32.9 32.1 31.3 30.5 29.7 28.9 28.2 27.4 26.6 25.9
9............................... 14................ 36.7 35.9 35.1 34.4 33.6 32.8 32.0 31.2 30.4 29.7 28.9 28.1 27.3 26.6 25.8
10.............................. 15................ 36.6 35.8 35.1 34.3 33.5 32.7 31.9 31.2 30.4 29.6 28.8 28.1 27.3 26.5 25.8
11.............................. 16................ 36.5 35.7 34.9 34.2 33.4 32.6 31.9 31.1 30.3 29.5 28.8 28.0 27.3 26.5 25.7
12.............................. 17................ 36.4 35.6 34.8 34.1 33.3 32.5 31.8 31.0 30.2 29.5 28.7 28.0 27.2 26.4 25.7
13.............................. 18................ 36.2 35.5 34.7 34.0 33.2 32.4 31.7 30.9 30.2 29.4 28.7 27.9 27.1 26.4 25.7
14.............................. 19................ 36.1 35.3 34.6 33.8 33.1 32.3 31.6 30.8 30.1 29.3 28.6 27.8 27.1 26.3 25.6
15.............................. 20................ 35.9 35.2 34.5 33.7 33.0 32.2 31.5 30.7 30.0 29.3 28.5 27.8 27.0 26.3 25.6
16.............................. 21................ 35.8 35.0 34.3 33.6 32.9 32.1 31.4 30.6 29.9 29.2 28.4 27.7 27.0 26.2 25.5
17.............................. 22................ 35.6 34.9 34.2 33.4 32.7 32.0 31.3 30.5 29.8 29.1 28.3 27.6 26.9 26.2 25.4
18.............................. 23................ 35.4 34.7 34.0 33.3 32.6 31.9 31.2 30.4 29.7 29.0 28.3 27.5 26.8 26.1 25.4
19.............................. 24................ 35.2 34.5 33.8 33.1 32.4 31.7 31.0 30.3 29.6 28.9 28.2 27.4 26.7 26.0 25.3
20.............................. 25................ 35.0 34.3 33.7 33.0 32.3 31.6 30.9 30.2 29.5 28.8 28.1 27.3 26.6 25.9 25.2
21.............................. 26................ 34.8 34.1 33.5 32.8 32.1 31.4 30.7 30.0 29.3 28.6 27.9 27.2 26.5 25.8 25.1
22.............................. 27................ 34.5 33.9 33.3 32.6 31.9 31.3 30.6 29.9 29.2 28.5 27.8 27.1 26.4 25.7 25.1
23.............................. 28................ 34.3 33.7 33.0 32.4 31.7 31.1 30.4 29.7 29.1 28.4 27.7 27.0 26.3 25.6 25.0
24.............................. 29................ 34.0 33.4 32.8 32.2 31.5 30.9 30.2 29.6 28.9 28.2 27.6 26.9 26.2 25.5 24.9
25.............................. 30................ 33.8 33.2 32.6 32.0 31.3 30.7 30.1 29.4 28.8 28.1 27.4 26.8 26.1 25.4 24.8
[[Page 179]]
26.............................. 31................ 33.5 32.9 32.3 31.7 31.1 30.5 29.9 29.2 28.6 27.9 27.3 26.6 26.0 25.3 24.6
27.............................. 32................ 33.2 32.6 32.1 31.5 30.9 30.3 29.6 29.0 28.4 27.8 27.1 26.5 25.8 25.2 24.5
28.............................. 33................ 32.9 32.3 31.8 31.2 30.6 30.0 29.4 28.8 28.2 27.6 27.0 26.3 25.7 25.0 24.4
29.............................. 34................ 32.6 32.0 31.5 30.9 30.4 29.8 29.2 28.6 28.0 27.4 26.8 26.2 25.5 24.9 24.3
30.............................. 35................ 32.2 31.7 31.2 30.6 30.1 29.5 29.0 28.4 27.8 27.2 26.6 26.0 25.4 24.7 24.1
31.............................. 36................ 31.9 31.4 30.9 30.3 29.8 29.3 28.7 28.1 27.6 27.0 26.4 25.8 25.2 24.6 24.0
32.............................. 37................ 31.5 31.0 30.5 30.0 29.5 29.0 28.4 27.9 27.3 26.8 26.2 25.6 25.0 24.4 23.8
33.............................. 38................ 31.1 30.7 30.2 29.7 29.2 28.7 28.2 27.6 27.1 26.5 26.0 25.4 24.8 24.2 23.6
34.............................. 39................ 30.7 30.3 29.8 29.3 28.9 28.4 27.9 27.3 26.8 26.3 25.7 25.2 24.6 24.0 23.5
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------------------------------------------
Male Female Male 50 51 52 53 54 55 56 57 58 59 60 61 62 63
----------------------------------------------------------------------------------------------------------------------------------
Female 55 56 57 58 59 60 61 62 63 64 65 66 67 68
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6................................... 11..................... 25.2 24.4 23.7 22.9 22.2 21.5 20.8 20.1 19.4 18.7 18.0 17.4 16.7 16.1
7................................... 12..................... 25.1 24.4 23.6 22.9 22.2 21.5 20.8 20.1 19.4 18.7 18.0 17.4 16.7 16.1
8................................... 13..................... 25.1 24.4 23.6 22.9 22.2 21.4 20.7 20.0 19.4 18.7 18.0 17.4 16.7 16.1
9................................... 14..................... 25.1 24.3 23.6 22.9 22.1 21.4 20.7 20.0 19.3 18.7 18.0 17.3 16.7 16.1
10.................................. 15..................... 25.0 24.3 23.6 22.8 22.1 21.4 20.7 20.0 19.3 18.6 18.0 17.3 16.7 16.1
11.................................. 16..................... 25.0 24.3 23.5 22.8 22.1 21.4 20.7 20.0 19.3 18.6 18.0 17.3 16.7 16.1
12.................................. 17..................... 25.0 24.2 23.5 22.8 22.1 21.4 20.7 20.0 19.3 18.6 18.0 17.3 16.7 16.0
13.................................. 18..................... 24.9 24.2 23.5 22.7 22.0 21.3 20.6 19.9 19.3 18.6 17.9 17.3 16.7 16.0
14.................................. 19..................... 24.9 24.1 23.4 22.7 22.0 21.3 20.6 19.9 19.2 18.6 17.9 17.3 16.6 16.0
15.................................. 20..................... 24.8 24.1 23.4 22.7 22.0 21.3 20.6 19.9 19.2 18.5 17.9 17.3 16.6 16.0
16.................................. 21..................... 24.8 24.0 23.3 22.6 21.9 21.2 20.5 19.9 19.2 18.5 17.9 17.2 16.6 16.0
17.................................. 22..................... 24.7 24.0 23.3 22.6 21.9 21.2 20.5 19.8 19.2 18.5 17.8 17.2 16.6 16.0
18.................................. 23..................... 24.7 23.9 23.2 22.5 21.8 21.1 20.5 19.8 19.1 18.5 17.8 17.2 16.6 15.9
19.................................. 24..................... 24.6 23.9 23.2 22.5 21.8 21.1 20.4 19.8 19.1 18.4 17.8 17.2 16.5 15.9
20.................................. 25..................... 24.5 23.8 23.1 22.4 21.7 21.1 20.4 19.7 19.1 18.4 17.8 17.1 16.5 15.9
21.................................. 26..................... 24.4 23.7 23.1 22.4 21.7 21.0 20.3 19.7 19.0 18.4 17.7 17.1 16.5 15.9
22.................................. 27..................... 24.4 23.7 23.0 22.3 21.6 21.0 20.3 19.6 19.0 18.3 17.7 17.1 16.5 15.9
23.................................. 28..................... 24.3 23.6 22.9 22.2 21.6 20.9 20.2 19.6 18.9 18.3 17.7 17.0 16.4 15.8
24.................................. 29..................... 24.2 23.5 22.8 22.2 21.5 20.8 20.2 19.5 18.9 18.3 17.6 17.0 16.4 15.8
25.................................. 30..................... 24.1 23.4 22.8 22.1 21.4 20.8 20.1 19.5 18.8 18.2 17.6 17.0 16.4 15.8
26.................................. 31..................... 24.0 23.3 22.7 22.0 21.4 20.7 20.1 19.4 18.8 18.2 17.5 16.9 16.3 15.7
27.................................. 32..................... 23.9 23.2 22.6 21.9 21.3 20.6 20.0 19.4 18.7 18.1 17.5 16.9 16.3 15.7
28.................................. 33..................... 23.8 23.1 22.5 21.8 21.2 20.6 19.9 19.3 18.7 18.1 17.4 16.8 16.2 15.6
29.................................. 34..................... 23.6 23.0 22.4 21.7 21.1 20.5 19.8 19.2 18.6 18.0 17.4 16.8 16.2 15.6
30.................................. 35..................... 23.5 22.9 22.3 21.6 21.0 20.4 19.8 19.1 18.5 17.9 17.3 16.7 16.1 15.6
31.................................. 36..................... 23.4 22.7 22.1 21.5 20.9 20.3 19.7 19.1 18.5 17.9 17.3 16.7 16.1 15.5
32.................................. 37..................... 23.2 22.6 22.0 21.4 20.8 20.2 19.6 19.0 18.4 17.8 17.2 16.6 16.0 15.5
[[Page 180]]
33.................................. 38..................... 23.1 22.5 21.9 21.3 20.7 20.1 19.5 18.9 18.3 17.7 17.1 16.5 16.0 15.4
34.................................. 39..................... 22.9 22.3 21.7 21.1 20.5 20.0 19.4 18.8 18.2 17.6 17.0 16.5 15.9 15.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78
-------------------------------------------------------------------------------------------------------------------------------------------
Female 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 15.5 14.9 14.3 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.6 9.1 8.7 8.2
7............................... 12................ 15.5 14.9 14.3 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.6 9.1 8.7 8.2
8............................... 13................ 15.5 14.9 14.3 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.6 9.1 8.7 8.2
9............................... 14................ 15.5 14.9 14.3 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.7 8.2
10.............................. 15................ 15.4 14.8 14.3 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.7 8.2
11.............................. 16................ 15.4 14.8 14.2 13.7 13.1 12.6 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.7 8.2
12.............................. 17................ 15.4 14.8 14.2 13.7 13.1 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.6 8.2
13.............................. 18................ 15.4 14.8 14.2 13.6 13.1 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.6 8.2
14.............................. 19................ 15.4 14.8 14.2 13.6 13.1 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.6 8.2
15.............................. 20................ 15.4 14.8 14.2 13.6 13.1 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.6 8.2
16.............................. 21................ 15.4 14.8 14.2 13.6 13.1 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.1 8.6 8.2
17.............................. 22................ 15.4 14.8 14.2 13.6 13.0 12.5 12.0 11.5 10.9 10.5 10.0 9.5 9.1 8.6 8.2
18.............................. 23................ 15.3 14.7 14.2 13.6 13.0 12.5 12.0 11.4 10.9 10.4 10.0 9.5 9.1 8.6 8.2
19.............................. 24................ 15.3 14.7 14.1 13.6 13.0 12.5 12.0 11.4 10.9 10.4 10.0 9.5 9.1 8.6 8.2
20.............................. 25................ 15.3 14.7 14.1 13.6 13.0 12.5 11.9 11.4 10.9 10.4 10.0 9.5 9.0 8.6 8.2
21.............................. 26................ 15.3 14.7 14.1 13.5 13.0 12.5 11.9 11.4 10.9 10.4 9.9 9.5 9.0 8.6 8.2
22.............................. 27................ 15.3 14.7 14.1 13.5 13.0 12.4 11.9 11.4 10.9 10.4 9.9 9.5 9.0 8.6 8.2
23.............................. 28................ 15.2 14.6 14.1 13.5 13.0 12.4 11.9 11.4 10.9 10.4 9.9 9.5 9.0 8.6 8.2
24.............................. 29................ 15.2 14.6 14.0 13.5 12.9 12.4 11.9 11.4 10.9 10.4 9.9 9.5 9.0 8.6 8.2
25.............................. 30................ 15.2 14.6 14.0 13.5 12.9 12.4 11.9 11.4 10.9 10.4 9.9 9.5 9.0 8.6 8.2
26.............................. 31................ 15.1 14.6 14.0 13.4 12.9 12.4 11.9 11.3 10.8 10.4 9.9 9.4 9.0 8.6 8.2
27.............................. 32................ 15.1 14.5 14.0 13.4 12.9 12.4 11.8 11.3 10.8 10.4 9.9 9.4 9.0 8.6 8.2
28.............................. 33................ 15.1 14.5 13.9 13.4 12.9 12.3 11.8 11.3 10.8 10.3 9.9 9.4 9.0 8.6 8.1
29.............................. 34................ 15.0 14.5 13.9 13.4 12.8 12.3 11.8 11.3 10.8 10.3 9.9 9.4 9.0 8.5 8.1
30.............................. 35................ 15.0 14.4 13.9 13.3 12.8 12.3 11.8 11.3 10.8 10.3 9.8 9.4 9.0 8.5 8.1
31.............................. 36................ 14.9 14.4 13.8 13.3 12.8 12.2 11.7 11.2 10.8 10.3 9.8 9.4 8.9 8.5 8.1
32.............................. 37................ 14.9 14.3 13.8 13.3 12.7 12.2 11.7 11.2 10.7 10.3 9.8 9.4 8.9 8.5 8.1
33.............................. 38................ 14.8 14.3 13.8 13.2 12.7 12.2 11.7 11.2 10.7 10.2 9.8 9.3 8.9 8.5 8.1
34.............................. 39................ 14.8 14.2 13.7 13.2 12.7 12.2 11.7 11.2 10.7 10.2 9.8 9.3 8.9 8.5 8.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 181]]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
-------------------------------------------------------------------------------------------------------------------------------------------
Female 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 7.8 7.4 7.1 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
7............................... 12................ 7.8 7.4 7.1 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
8............................... 13................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
9............................... 14................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
10.............................. 15................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
11.............................. 16................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
12.............................. 17................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 4.0 3.7 3.5
13.............................. 18................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.1 4.8 4.5 4.2 4.0 3.7 3.5
14.............................. 19................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
15.............................. 20................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
16.............................. 21................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
17.............................. 22................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
18.............................. 23................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
19.............................. 24................ 7.8 7.4 7.0 6.7 6.3 6.0 5.7 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
20.............................. 25................ 7.8 7.4 7.0 6.7 6.3 6.0 5.6 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
21.............................. 26................ 7.8 7.4 7.0 6.7 6.3 6.0 5.6 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
22.............................. 27................ 7.8 7.4 7.0 6.7 6.3 6.0 5.6 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
23.............................. 28................ 7.8 7.4 7.0 6.6 6.3 6.0 5.6 5.3 5.0 4.8 4.5 4.2 4.0 3.7 3.5
24.............................. 29................ 7.8 7.4 7.0 6.6 6.3 6.0 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
25.............................. 30................ 7.8 7.4 7.0 6.6 6.3 6.0 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
26.............................. 31................ 7.8 7.4 7.0 6.6 6.3 6.0 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
27.............................. 32................ 7.7 7.4 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
28.............................. 33................ 7.7 7.4 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
29.............................. 34................ 7.7 7.3 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
30.............................. 35................ 7.7 7.3 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
31.............................. 36................ 7.7 7.3 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
32.............................. 37................ 7.7 7.3 7.0 6.6 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.7 3.5
33.............................. 38................ 7.7 7.3 6.9 6.6 6.2 5.9 5.6 5.3 5.0 4.7 4.5 4.2 3.9 3.7 3.5
34.............................. 39................ 7.7 7.3 6.9 6.6 6.2 5.9 5.6 5.3 5.0 4.7 4.4 4.2 3.9 3.7 3.5
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------------------------
Male Female Male 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108
-------------------------------------------------------------------------------------------------------------------------------------------
Female 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
7............................... 12................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
8............................... 13................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
9............................... 14................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
[[Page 182]]
10.............................. 15................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
11.............................. 16................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
12.............................. 17................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
13.............................. 18................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
14.............................. 19................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
15.............................. 20................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
16.............................. 21................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
17.............................. 22................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
18.............................. 23................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
19.............................. 24................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
20.............................. 25................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
21.............................. 26................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
22.............................. 27................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
23.............................. 28................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
24.............................. 29................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
25.............................. 30................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
26.............................. 31................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
27.............................. 32................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
28.............................. 33................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
29.............................. 34................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
30.............................. 35................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
31.............................. 36................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
32.............................. 37................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
33.............................. 38................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
34.............................. 39................ 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 35 36 37 38 39 40 41 42 43 44 45 46 47
-------------------------------------------------------------------------------------------------------------------------
Female 40 41 42 43 44 45 46 47 48 49 50 51 52
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 30.3 29.9 29.4 29.0 28.5 28.0 27.5 27.0 26.5 26.0 25.5 24.9 24.4
36....................................... 41......................... 29.9 29.5 29.0 28.6 28.2 27.7 27.2 26.7 26.2 25.7 25.2 24.7 24.2
37....................................... 42......................... 29.4 29.0 28.6 28.2 27.8 27.3 26.9 26.4 25.9 25.5 25.0 24.4 23.9
38....................................... 43......................... 29.0 28.6 28.2 27.8 27.4 27.0 26.5 26.1 25.6 25.2 24.7 24.2 23.7
39....................................... 44......................... 28.5 28.2 27.8 27.4 27.0 26.6 26.2 25.8 25.3 24.8 24.4 23.9 23.4
40....................................... 45......................... 28.0 27.7 27.3 27.0 26.6 26.2 25.8 25.4 25.0 24.5 24.1 23.6 23.1
41....................................... 46......................... 27.5 27.2 26.9 26.5 26.2 25.8 25.4 25.0 24.6 24.2 23.8 23.3 22.9
[[Page 183]]
42....................................... 47......................... 27.0 26.7 26.4 26.1 25.8 25.4 25.0 24.6 24.2 23.8 23.4 23.0 22.6
43....................................... 48......................... 26.5 26.2 25.9 25.6 25.3 25.0 24.6 24.2 23.9 23.5 23.1 22.7 22.2
44....................................... 49......................... 26.0 25.7 25.5 25.2 24.8 24.5 24.2 23.8 23.5 23.1 22.7 22.3 21.9
45....................................... 50......................... 25.5 25.2 25.0 24.7 24.4 24.1 23.8 23.4 23.1 22.7 22.4 22.0 21.6
46....................................... 51......................... 24.9 24.7 24.4 24.2 23.9 23.6 23.3 23.0 22.7 22.3 22.0 21.6 21.2
47....................................... 52......................... 24.4 24.2 23.9 23.7 23.4 23.1 22.9 22.6 22.2 21.9 21.6 21.2 20.9
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 48 49 50 51 52 53 54 55 56 57 58 59 60
-------------------------------------------------------------------------------------------------------------------------
Female 53 54 55 56 57 58 59 60 61 62 63 64 65
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 23.8 23.3 22.7 22.1 21.6 21.0 20.4 19.8 19.3 18.7 18.1 17.5 17.0
36....................................... 41......................... 23.6 23.1 22.5 22.0 21.4 20.8 20.3 19.7 19.1 18.6 18.0 17.4 16.9
37....................................... 42......................... 23.4 22.9 22.3 21.8 21.2 20.7 20.1 19.6 19.0 18.4 17.9 17.3 16.8
38....................................... 43......................... 23.2 22.6 22.1 21.6 21.1 20.5 20.0 19.4 18.9 18.3 17.8 17.2 16.7
39....................................... 44......................... 22.9 22.4 21.9 21.4 20.9 20.3 19.8 19.3 18.7 18.2 17.7 17.1 16.6
40....................................... 45......................... 22.7 22.2 21.7 21.2 20.7 20.1 19.6 19.1 18.6 18.0 17.5 17.0 16.5
41....................................... 46......................... 22.4 21.9 21.4 20.9 20.4 19.9 19.4 18.9 18.4 17.9 17.4 16.9 16.3
42....................................... 47......................... 22.1 21.6 21.2 20.7 20.2 19.7 19.2 18.7 18.2 17.7 17.2 16.7 16.2
43....................................... 48......................... 21.8 21.4 20.9 20.5 20.0 19.5 19.0 18.6 18.1 17.6 17.1 16.6 16.1
44....................................... 49......................... 21.5 21.1 20.6 20.2 19.8 19.3 18.8 18.4 17.9 17.4 16.9 16.4 15.9
45....................................... 50......................... 21.2 20.8 20.4 19.9 19.5 19.1 18.6 18.1 17.7 17.2 16.7 16.3 15.8
46....................................... 51......................... 20.9 20.5 20.1 19.7 19.2 18.8 18.4 17.9 17.5 17.0 16.6 16.1 15.6
47....................................... 52......................... 20.5 20.1 19.8 19.4 19.0 18.5 18.1 17.7 17.3 16.8 16.4 15.9 15.5
48....................................... 53......................... 20.2 19.8 19.4 19.1 18.7 18.3 17.9 17.5 17.0 16.6 16.2 15.7 15.3
49....................................... 54......................... 19.8 19.5 19.1 18.8 18.4 18.0 17.6 17.2 16.8 16.4 16.0 15.5 15.1
50....................................... 55......................... 19.4 19.1 18.8 18.4 18.1 17.7 17.3 16.9 16.6 16.2 15.8 15.3 14.9
51....................................... 56......................... 19.1 18.8 18.4 18.1 17.8 17.4 17.0 16.7 16.3 15.9 15.5 15.1 14.7
52....................................... 57......................... 18.7 18.4 18.1 17.8 17.4 17.1 16.8 16.4 16.0 15.7 15.3 14.9 14.5
53....................................... 58......................... 18.3 18.0 17.7 17.4 17.1 16.8 16.4 16.1 15.8 15.4 15.1 14.7 14.3
54....................................... 59......................... 17.9 17.6 17.3 17.0 16.8 16.4 16.1 15.8 15.5 15.1 14.8 14.4 14.1
55....................................... 60......................... 17.5 17.2 16.9 16.7 16.4 16.1 15.8 15.5 15.2 14.9 14.5 14.2 13.9
56....................................... 61......................... 17.0 16.8 16.6 16.3 16.0 15.8 15.5 15.2 14.9 14.6 14.3 13.9 13.6
57....................................... 62......................... 16.6 16.4 16.2 15.9 15.7 15.4 15.1 14.9 14.6 14.3 14.0 13.7 13.4
58....................................... 63......................... 16.2 16.0 15.8 15.5 15.3 15.1 14.8 14.5 14.3 14.0 13.7 13.4 13.1
59....................................... 64......................... 15.7 15.5 15.3 15.1 14.9 14.7 14.4 14.2 13.9 13.7 13.4 13.1 12.8
60....................................... 65......................... 15.3 15.1 14.9 14.7 14.5 14.3 14.1 13.9 13.6 13.4 13.1 12.8 12.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 184]]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 61 62 63 64 65 66 67 68 69 70 71 72 73
-------------------------------------------------------------------------------------------------------------------------
Female 66 67 68 69 70 71 72 73 74 74 76 77 78
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 16.4 15.8 15.3 14.7 14.2 13.7 13.1 12.6 12.1 11.6 11.1 10.7 10.2
36....................................... 41......................... 16.3 15.8 15.2 14.7 14.1 13.6 13.1 12.6 12.1 11.6 11.1 10.6 10.2
37....................................... 42......................... 16.2 15.7 15.1 14.6 14.1 13.6 13.0 12.5 12.0 11.5 11.1 10.6 10.1
38....................................... 43......................... 16.1 15.6 15.1 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.6 10.1
39....................................... 44......................... 16.0 15.5 15.0 14.5 13.9 13.4 12.9 12.4 11.9 11.5 11.0 10.5 10.1
40....................................... 45......................... 15.9 15.4 14.9 14.4 13.9 13.4 12.9 12.4 11.9 11.4 11.0 10.5 10.0
41....................................... 46......................... 15.8 15.3 14.8 14.3 13.8 13.3 12.8 12.3 11.8 11.4 10.9 10.5 10.0
42....................................... 47......................... 15.7 15.2 14.7 14.2 13.7 13.2 12.7 12.3 11.8 11.3 10.9 10.4 10.0
43....................................... 48......................... 15.6 15.1 14.6 14.1 13.6 13.1 12.7 12.2 11.7 11.3 10.8 10.4 9.9
44....................................... 49......................... 15.5 15.0 14.5 14.0 13.5 13.1 12.6 12.1 11.7 11.2 10.8 10.3 9.9
45....................................... 50......................... 15.3 14.8 14.4 13.9 13.4 13.0 12.5 12.0 11.6 11.1 10.7 10.3 9.8
46....................................... 51......................... 15.2 14.7 14.2 13.8 13.3 12.9 12.4 12.0 11.5 11.1 10.6 10.2 9.8
47....................................... 52......................... 15.0 14.6 14.1 13.7 13.2 12.8 12.3 11.9 11.4 11.0 10.6 10.1 9.7
48....................................... 53......................... 14.9 14.4 14.0 13.5 13.1 12.6 12.2 11.8 11.3 10.9 10.5 10.1 9.7
49....................................... 54......................... 14.7 14.3 13.8 13.4 13.0 12.5 12.1 11.7 11.3 10.8 10.4 10.0 9.6
50....................................... 55......................... 14.5 14.1 13.7 13.3 12.8 12.4 12.0 11.6 11.2 10.7 10.3 9.9 9.5
51....................................... 56......................... 14.3 13.9 13.5 13.1 12.7 12.3 11.9 11.5 11.1 10.7 10.3 9.9 9.5
52....................................... 57......................... 14.1 13.7 13.3 12.9 12.5 12.1 11.7 11.3 10.9 10.6 10.2 9.8 9.4
53....................................... 58......................... 13.9 13.6 13.2 12.8 12.4 12.0 11.6 11.2 10.8 10.5 10.1 9.7 9.3
54....................................... 59......................... 13.7 13.4 13.0 12.6 12.2 11.9 11.5 11.1 10.7 10.3 10.0 9.6 9.2
55....................................... 60......................... 13.5 13.2 12.8 12.4 12.1 11.7 11.3 11.0 10.6 10.2 9.9 9.5 9.1
56....................................... 61......................... 13.3 12.9 12.6 12.2 11.9 11.5 11.2 10.8 10.5 10.1 9.8 9.4 9.0
57....................................... 62......................... 13.0 12.7 12.4 12.1 11.7 11.4 11.0 10.7 10.3 10.0 9.6 9.3 8.9
58....................................... 63......................... 12.8 12.5 12.2 11.8 11.5 11.2 10.9 10.5 10.2 9.8 9.5 9.2 8.8
59....................................... 64......................... 12.6 12.3 11.9 11.6 11.3 11.0 10.7 10.4 10.0 9.7 9.4 9.1 8.7
60....................................... 65......................... 12.3 12.0 11.7 11.4 11.1 10.8 10.5 10.2 9.9 9.6 9.3 8.9 8.6
61....................................... 66......................... 12.0 11.8 11.5 11.2 10.9 10.6 10.3 10.0 9.7 9.4 9.1 8.8 8.5
62....................................... 67......................... 11.8 11.5 11.2 11.0 10.7 10.4 10.1 9.8 9.6 9.3 9.0 8.7 8.4
63....................................... 68......................... 11.5 11.2 11.0 10.7 10.5 10.2 9.9 9.7 9.4 9.1 8.8 8.5 8.2
64....................................... 69......................... 11.2 11.0 10.7 10.5 10.2 10.0 9.7 9.5 9.2 8.9 8.7 8.4 8.1
65....................................... 70......................... 10.9 10.7 10.5 10.2 10.0 9.8 9.5 9.3 9.0 8.8 8.5 8.2 8.0
66....................................... 71......................... 10.6 10.4 10.2 10.0 9.8 9.5 9.3 9.1 8.8 8.6 8.3 8.1 7.8
67....................................... 72......................... 10.3 10.1 9.9 9.7 9.5 9.3 9.1 8.9 8.6 8.4 8.1 7.9 7.7
68....................................... 73......................... 10.0 9.8 9.7 9.5 9.3 9.1 8.9 8.6 8.4 8.2 8.0 7.7 7.5
69....................................... 74......................... 9.7 9.6 9.4 9.2 9.0 8.8 8.6 8.4 8.2 8.0 7.8 7.6 7.3
70....................................... 75......................... 9.4 9.3 9.1 8.9 8.8 8.6 8.4 8.2 8.0 7.8 7.6 7.4 7.2
71....................................... 76......................... 9.1 9.0 8.8 8.7 8.5 8.3 8.1 8.0 7.8 7.6 7.4 7.2 7.0
72....................................... 77......................... 8.8 8.7 8.5 8.4 8.2 8.1 7.9 7.7 7.6 7.4 7.2 7.0 6.8
[[Page 185]]
73....................................... 78......................... 8.5 8.4 8.2 8.1 8.0 7.8 7.7 7.5 7.3 7.2 7.0 6.8 6.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------------------------
Male Female Male 74 75 76 77 78 79 80 81 82 83 84 85 86
-------------------------------------------------------------------------------------------------------------------------
Female 79 80 81 82 83 84 85 86 87 88 89 90 91
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
35....................................... 40......................... 9.7 9.3 8.9 8.5 8.1 7.7 7.3 6.9 6.6 6.2 5.9 5.6 5.3
36....................................... 41......................... 9.7 9.3 8.9 8.4 8.0 7.7 7.3 6.9 6.6 6.2 5.9 5.6 5.3
37....................................... 42......................... 9.7 9.3 8.8 8.4 8.0 7.6 7.3 6.9 6.5 6.2 5.9 5.6 5.3
38....................................... 43......................... 9.7 9.2 8.8 8.4 8.0 7.6 7.2 6.9 6.5 6.2 5.9 5.6 5.3
39....................................... 44......................... 9.6 9.2 8.8 8.4 8.0 7.6 7.2 6.9 6.5 6.2 5.9 5.6 5.3
40....................................... 45......................... 9.6 9.2 8.8 8.4 8.0 7.6 7.2 6.9 6.5 6.2 5.9 5.5 5.2
41....................................... 46......................... 9.6 9.2 8.7 8.3 7.9 7.6 7.2 6.8 6.5 6.2 5.8 5.5 5.2
42....................................... 47......................... 9.5 9.1 8.7 8.3 7.9 7.5 7.2 6.8 6.5 6.2 5.8 5.5 5.2
43....................................... 48......................... 9.5 9.1 8.7 8.3 7.9 7.5 7.2 6.8 6.5 6.1 5.8 5.5 5.2
44....................................... 49......................... 9.5 9.0 8.6 8.2 7.9 7.5 7.1 6.8 6.4 6.1 5.8 5.5 5.2
45....................................... 50......................... 9.4 9.0 8.6 8.2 7.8 7.5 7.1 6.8 6.4 6.1 5.8 5.5 5.2
46....................................... 51......................... 9.4 9.0 8.6 8.2 7.8 7.4 7.1 6.7 6.4 6.1 5.8 5.5 5.2
47....................................... 52......................... 9.3 8.9 8.5 8.1 7.8 7.4 7.1 6.7 6.4 6.1 5.8 5.5 5.2
48....................................... 53......................... 9.3 8.9 8.5 8.1 7.7 7.4 7.0 6.7 6.4 6.0 5.7 5.4 5.1
49....................................... 54......................... 9.2 8.8 8.4 8.1 7.7 7.3 7.0 6.7 6.3 6.0 5.7 5.4 5.1
50....................................... 55......................... 9.1 8.8 8.4 8.0 7.7 7.3 7.0 6.6 6.3 6.0 5.7 5.4 5.1
51....................................... 56......................... 9.1 8.7 8.3 8.0 7.6 7.3 6.9 6.6 6.3 6.0 5.7 5.4 5.1
52....................................... 57......................... 9.0 8.6 8.3 7.9 7.6 7.2 6.9 6.6 6.2 5.9 5.6 5.4 5.1
53....................................... 58......................... 8.9 8.6 8.2 7.9 7.5 7.2 6.9 6.5 6.2 5.9 5.6 5.3 5.1
54....................................... 59......................... 8.9 8.5 8.2 7.8 7.5 7.1 6.8 6.5 6.2 5.9 5.6 5.3 5.0
55....................................... 60......................... 8.8 8.4 8.1 7.7 7.4 7.1 6.8 6.4 6.1 5.8 5.6 5.3 5.0
56....................................... 61......................... 8.7 8.4 8.0 7.7 7.3 7.0 6.7 6.4 6.1 5.8 5.5 5.3 5.0
57....................................... 62......................... 8.6 8.3 7.9 7.6 7.3 7.0 6.7 6.4 6.1 5.8 5.5 5.2 5.0
58....................................... 63......................... 8.5 8.2 7.9 7.5 7.2 6.9 6.6 6.3 6.0 5.7 5.5 5.2 4.9
59....................................... 64......................... 8.4 8.1 7.8 7.5 7.1 6.8 6.5 6.3 6.0 5.7 5.4 5.2 4.9
60....................................... 65......................... 8.3 8.0 7.7 7.4 7.1 6.8 6.5 6.2 5.9 5.6 5.4 5.1 4.9
61....................................... 66......................... 8.2 7.9 7.6 7.3 7.0 6.7 6.4 6.1 5.9 5.6 5.3 5.1 4.8
62....................................... 67......................... 8.1 7.8 7.5 7.2 6.9 6.6 6.4 6.1 5.8 5.5 5.3 5.0 4.8
63....................................... 68......................... 8.0 7.7 7.4 7.1 6.8 6.6 6.3 6.0 5.7 5.5 5.2 5.0 4.7
64....................................... 69......................... 7.8 7.6 7.3 7.0 6.7 6.5 6.2 5.9 5.7 5.4 5.2 4.9 4.7
65....................................... 70......................... 7.7 7.4 7.2 6.9 6.6 6.4 6.1 5.9 5.6 5.4 5.1 4.9 4.7
66....................................... 71......................... 7.6 7.3 7.1 6.8 6.5 6.3 6.0 5.8 5.5 5.3 5.1 4.8 4.6
67....................................... 72......................... 7.4 7.2 6.9 6.7 6.4 6.2 6.0 5.7 5.5 5.2 5.0 4.8 4.6
68....................................... 73......................... 7.3 7.0 6.8 6.6 6.3 6.1 5.9 5.6 5.4 5.2 4.9 4.7 4.5
69....................................... 74......................... 7.1 6.9 6.7 6.4 6.2 6.0 5.8 5.5 5.3 5.1 4.9 4.7 4.5
70....................................... 75......................... 7.0 6.8 6.5 6.3 6.1 5.9 5.7 5.4 5.2 5.0 4.8 4.6 4.4
[[Page 186]]
71....................................... 76......................... 6.8 6.6 6.4 6.2 6.0 5.8 5.6 5.3 5.1 4.9 4.7 4.5 4.3
72....................................... 77......................... 6.6 6.4 6.3 6.1 5.9 5.7 5.5 5.3 5.0 4.9 4.7 4.5 4.3
73....................................... 78......................... 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 5.0 4.8 4.6 4.4 4.2
74....................................... 79......................... 6.3 6.1 6.0 5.8 5.6 5.4 5.2 5.0 4.9 4.7 4.5 4.3 4.1
75....................................... 80......................... 6.1 6.0 5.8 5.6 5.5 5.3 5.1 4.9 4.8 4.6 4.4 4.2 4.1
76....................................... 81......................... 6.0 5.8 5.6 5.5 5.3 5.2 5.0 4.8 4.7 4.5 4.3 4.1 4.0
77....................................... 82......................... 5.8 5.6 5.5 5.3 5.2 5.0 4.9 4.7 4.5 4.4 4.2 4.1 3.9
78....................................... 83......................... 5.6 5.5 5.3 5.2 5.0 4.9 4.7 4.6 4.4 4.3 4.1 4.0 3.8
79....................................... 84......................... 5.4 5.3 5.2 5.0 4.9 4.7 4.6 4.5 4.3 4.2 4.0 3.9 3.7
80....................................... 85......................... 5.2 5.1 5.0 4.9 4.7 4.6 4.5 4.3 4.2 4.1 3.9 3.8 3.6
81....................................... 86......................... 5.0 4.9 4.8 4.7 4.6 4.5 4.3 4.2 4.1 3.9 3.8 3.7 3.6
82....................................... 87......................... 4.9 4.8 4.7 4.5 4.4 4.3 4.2 4.1 4.0 3.8 3.7 3.6 3.5
83....................................... 88......................... 4.7 4.6 4.5 4.4 4.3 4.2 4.1 3.9 3.8 3.7 3.6 3.5 3.4
84....................................... 89......................... 4.5 4.4 4.3 4.2 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3
85....................................... 90......................... 4.3 4.2 4.1 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2
86....................................... 91......................... 4.1 4.1 4.0 3.9 3.8 3.7 3.6 3.6 3.5 3.4 3.3 3.2 3.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 87 88 89 90 91 92 93 94 95 96 97
-------------------------------------------------------------------------------------------------------
Female 92 93 94 95 96 97 98 99 100 101 102
--------------------------------------------------------------------------------------------------------------------------------------------------------
35............................ 40.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.1 2.9 2.7
36............................ 41.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.1 2.9 2.7
37............................ 42.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.1 2.9 2.7
38............................ 43.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.1 2.8 2.6
39............................ 44.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.0 2.8 2.6
40............................ 45.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3 3.0 2.8 2.6
41............................ 46.............. 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.2 3.0 2.8 2.6
42............................ 47.............. 4.9 4.7 4.4 4.2 3.9 3.7 3.5 3.2 3.0 2.8 2.6
43............................ 48.............. 4.9 4.7 4.4 4.1 3.9 3.7 3.5 3.2 3.0 2.8 2.6
44............................ 49.............. 4.9 4.7 4.4 4.1 3.9 3.7 3.4 3.2 3.0 2.8 2.6
45............................ 50.............. 4.9 4.6 4.4 4.1 3.9 3.7 3.4 3.2 3.0 2.8 2.6
46............................ 51.............. 4.9 4.6 4.4 4.1 3.9 3.7 3.4 3.2 3.0 2.8 2.6
47............................ 52.............. 4.9 4.6 4.4 4.1 3.9 3.7 3.4 3.2 3.0 2.8 2.6
48............................ 53.............. 4.9 4.6 4.4 4.1 3.9 3.6 3.4 3.2 3.0 2.8 2.6
49............................ 54.............. 4.9 4.6 4.3 4.1 3.9 3.6 3.4 3.2 3.0 2.8 2.6
50............................ 55.............. 4.8 4.6 4.3 4.1 3.9 3.6 3.4 3.2 3.0 2.8 2.6
[[Page 187]]
51............................ 56.............. 4.8 4.6 4.3 4.1 3.8 3.6 3.4 3.2 3.0 2.8 2.6
52............................ 57.............. 4.8 4.5 4.3 4.1 3.8 3.6 3.4 3.2 3.0 2.8 2.6
53............................ 58.............. 4.8 4.5 4.3 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6
54............................ 59.............. 4.8 4.5 4.3 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6
55............................ 60.............. 4.7 4.5 4.3 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6
56............................ 61.............. 4.7 4.5 4.2 4.0 3.8 3.6 3.3 3.1 2.9 2.8 2.6
57............................ 62.............. 4.7 4.5 4.2 4.0 3.8 3.5 3.3 3.1 2.9 2.7 2.6
58............................ 63.............. 4.7 4.4 4.2 4.0 3.7 3.5 3.3 3.1 2.9 2.7 2.5
59............................ 64.............. 4.6 4.4 4.2 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 98 99 100 101 102 103 104 105 106 107 108
-------------------------------------------------------------------------------------------------------
Female 103 104 105 106 107 108 109 110 111 112 113
--------------------------------------------------------------------------------------------------------------------------------------------------------
35............................ 40.............. 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
36............................ 41.............. 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.2 1.0 0.8 0.7
37............................ 42.............. 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
38............................ 43.............. 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
39............................ 44.............. 2.4 2.3 2.1 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
40............................ 45.............. 2.4 2.2 2.1 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
41............................ 46.............. 2.4 2.2 2.1 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
42............................ 47.............. 2.4 2.2 2.0 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
43............................ 48.............. 2.4 2.2 2.0 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
44............................ 49.............. 2.4 2.2 2.0 1.9 1.7 1.5 1.3 1.1 1.0 0.8 0.7
45............................ 50.............. 2.4 2.2 2.0 1.8 1.7 1.5 1.3 1.1 1.0 0.8 0.7
46............................ 51.............. 2.4 2.2 2.0 1.8 1.7 1.5 1.3 1.1 1.0 0.8 0.7
47............................ 52.............. 2.4 2.2 2.0 1.8 1.7 1.5 1.3 1.1 1.0 0.8 0.7
48............................ 53.............. 2.4 2.2 2.0 1.8 1.7 1.5 1.3 1.1 1.0 0.8 0.7
49............................ 54.............. 2.4 2.2 2.0 1.8 1.7 1.5 1.3 1.1 1.0 0.8 0.7
50............................ 55.............. 2.4 2.2 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7
51............................ 56.............. 2.4 2.2 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7
52............................ 57.............. 2.4 2.2 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7
53............................ 58.............. 2.4 2.2 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7
54............................ 59.............. 2.4 2.2 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7
55............................ 60.............. 2.4 2.2 2.0 1.8 1.6 1.4 1.3 1.1 1.0 0.8 0.7
56............................ 61.............. 2.4 2.2 2.0 1.8 1.6 1.4 1.3 1.1 1.0 0.8 0.7
57............................ 62.............. 2.4 2.2 2.0 1.8 1.6 1.4 1.3 1.1 0.9 0.8 0.7
58............................ 63.............. 2.4 2.2 2.0 1.8 1.6 1.4 1.3 1.1 0.9 0.8 0.7
59............................ 64.............. 2.3 2.2 2.0 1.8 1.6 1.4 1.3 1.1 0.9 0.8 0.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 188]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 87 88 89 90 91 92 93 94 95 96 97
-------------------------------------------------------------------------------------------------------
Female 92 93 94 95 96 97 98 99 100 101 102
--------------------------------------------------------------------------------------------------------------------------------------------------------
60............................ 65.............. 4.6 4.4 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5
61............................ 66.............. 4.6 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5
62............................ 67.............. 4.5 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5
63............................ 68.............. 4.5 4.3 4.1 3.8 3.6 3.4 3.2 3.0 2.9 2.7 2.5
64............................ 69.............. 4.5 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.7 2.5
65............................ 70.............. 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.5
66............................ 71.............. 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4
67............................ 72.............. 4.3 4.1 3.9 3.7 3.5 3.3 3.1 3.0 2.8 2.6 2.4
68............................ 73.............. 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.8 2.6 2.4
69............................ 74.............. 4.2 4.0 3.8 3.6 3.5 3.3 3.1 2.9 2.7 2.6 2.4
70............................ 75.............. 4.2 4.0 3.8 3.6 3.4 3.2 3.1 2.9 2.7 2.5 2.4
71............................ 76.............. 4.1 3.9 3.8 3.6 3.4 3.2 3.0 2.9 2.7 2.5 2.3
72............................ 77.............. 4.1 3.9 3.7 3.5 3.3 3.2 3.0 2.8 2.7 2.5 2.3
73............................ 78.............. 4.0 3.8 3.7 3.5 3.3 3.1 3.0 2.8 2.6 2.5 2.3
74............................ 79.............. 3.9 3.8 3.6 3.4 3.3 3.1 2.9 2.8 2.6 2.4 2.3
75............................ 80.............. 3.9 3.7 3.5 3.4 3.2 3.0 2.9 2.7 2.6 2.4 2.2
76............................ 81.............. 3.8 3.6 3.5 3.3 3.2 3.0 2.8 2.7 2.5 2.4 2.2
77............................ 82.............. 3.7 3.6 3.4 3.3 3.1 3.0 2.8 2.6 2.5 2.3 2.2
78............................ 83.............. 3.7 3.5 3.4 3.2 3.1 2.9 2.7 2.6 2.4 2.3 2.1
79............................ 84.............. 3.6 3.4 3.3 3.1 3.0 2.8 2.7 2.5 2.4 2.2 2.1
80............................ 85.............. 3.5 3.4 3.2 3.1 2.9 2.8 2.6 2.5 2.3 2.2 2.0
81............................ 86.............. 3.4 3.3 3.1 3.0 2.9 2.7 2.6 2.4 2.3 2.1 2.0
82............................ 87.............. 3.3 3.2 3.1 2.9 2.8 2.7 2.5 2.4 2.2 2.1 2.0
83............................ 88.............. 3.2 3.1 3.0 2.9 2.7 2.6 2.5 2.3 2.2 2.0 1.9
84............................ 89.............. 3.1 3.0 2.9 2.8 2.7 2.5 2.4 2.3 2.1 2.0 1.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
-------------------------------------------------------------------------------------------------------
Male Female Male 98 99 100 101 102 103 104 105 106 107 108
-------------------------------------------------------------------------------------------------------
Female 103 104 105 106 107 108 109 110 111 112 113
--------------------------------------------------------------------------------------------------------------------------------------------------------
60............................ 65.............. 2.3 2.1 2.0 1.8 1.6 1.4 1.3 1.1 0.9 0.8 0.7
61............................ 66.............. 2.3 2.1 2.0 1.8 1.6 1.4 1.2 1.1 0.9 0.8 0.7
62............................ 67.............. 2.3 2.1 1.9 1.8 1.6 1.4 1.2 1.1 0.9 0.8 0.7
63............................ 68.............. 2.3 2.1 1.9 1.7 1.6 1.4 1.2 1.1 0.9 0.8 0.7
64............................ 69.............. 2.3 2.1 1.9 1.7 1.6 1.4 1.2 1.1 0.9 0.8 0.7
65............................ 70.............. 2.3 2.1 1.9 1.7 1.6 1.4 1.2 1.1 0.9 0.8 0.7
66............................ 71.............. 2.3 2.1 1.9 1.7 1.5 1.4 1.2 1.1 0.9 0.8 0.7
67............................ 72.............. 2.2 2.1 1.9 1.7 1.5 1.4 1.2 1.0 0.9 0.7 0.7
[[Page 189]]
68............................ 73.............. 2.2 2.0 1.9 1.7 1.5 1.4 1.2 1.0 0.9 0.7 0.7
69............................ 74.............. 2.2 2.0 1.8 1.7 1.5 1.3 1.2 1.0 0.9 0.7 0.6
70............................ 75.............. 2.2 2.0 1.8 1.7 1.5 1.3 1.2 1.0 0.9 0.7 0.6
71............................ 76.............. 2.2 2.0 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.7 0.6
72............................ 77.............. 2.1 2.0 1.8 1.6 1.5 1.3 1.1 1.0 0.8 0.7 0.6
73............................ 78.............. 2.1 1.9 1.8 1.6 1.4 1.3 1.1 1.0 0.8 0.7 0.6
74............................ 79.............. 2.1 1.9 1.7 1.6 1.4 1.3 1.1 1.0 0.8 0.7 0.6
75............................ 80.............. 2.1 1.9 1.7 1.6 1.4 1.3 1.1 1.0 0.8 0.7 .......
76............................ 81.............. 2.0 1.9 1.7 1.5 1.4 1.2 1.1 0.9 0.8 0.7 .......
77............................ 82.............. 2.0 1.8 1.7 1.5 1.4 1.2 1.1 0.9 0.8 0.7 .......
78............................ 83.............. 2.0 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.8 0.7 .......
79............................ 84.............. 1.9 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.8 0.7 .......
80............................ 85.............. 1.9 1.7 1.6 1.4 1.3 1.1 1.0 0.9 0.7 0.7 .......
81............................ 86.............. 1.8 1.7 1.5 1.4 1.3 1.1 1.0 0.8 0.7 0.6 .......
82............................ 87.............. 1.8 1.7 1.5 1.4 1.2 1.1 1.0 0.8 0.7 0.6 .......
83............................ 88.............. 1.8 1.6 1.5 1.3 1.2 1.1 0.9 0.8 0.7 0.6 .......
84............................ 89.............. 1.7 1.6 1.4 1.3 1.2 1.0 0.9 0.8 0.7 ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 190]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------
Male Female Male 87 88 89 90 91 92 93 94 95 96
----------------------------------------------------------------------------------------------
Female 92 93 94 95 96 97 98 99 100 101
--------------------------------------------------------------------------------------------------------------------------------------------------------
85................................ 90................... 3.1 2.9 2.8 2.7 2.6 2.5 2.3 2.2 2.1 1.9
86................................ 91................... 3.0 2.8 2.7 2.6 2.5 2.4 2.3 2.1 2.0 1.9
87................................ 92................... 2.9 2.8 2.6 2.5 2.4 2.3 2.2 2.1 1.9 1.8
88................................ 93................... 2.8 2.7 2.6 2.4 2.3 2.2 2.1 2.0 1.9 1.7
89................................ 94................... 2.6 2.6 2.5 2.4 2.2 2.1 2.0 1.9 1.8 1.7
90................................ 95................... 2.5 2.4 2.4 2.3 2.2 2.0 1.9 1.8 1.7 1.6
91................................ 96................... 2.4 2.3 2.2 2.2 2.1 2.0 1.9 1.7 1.6 1.5
92................................ 97................... 2.3 2.2 2.1 2.0 2.0 1.9 1.8 1.7 1.6 1.5
93................................ 98................... 2.2 2.1 2.0 1.9 1.9 1.8 1.7 1.6 1.5 1.4
94................................ 99................... 2.1 2.0 1.9 1.8 1.7 1.7 1.6 1.5 1.4 1.3
95................................ 100.................. 1.9 1.9 1.8 1.7 1.6 1.6 1.5 1.4 1.3 1.2
96................................ 101.................. 1.8 1.7 1.7 1.6 1.5 1.5 1.4 1.3 1.2 1.1
97................................ 102.................. 1.7 1.6 1.6 1.5 1.4 1.4 1.3 1.2 1.1 1.1
98................................ 103.................. 1.6 1.5 1.4 1.4 1.3 1.3 1.2 1.1 1.0 1.0
99................................ 104.................. 1.4 1.4 1.3 1.3 1.2 1.1 1.1 1.0 1.0 0.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages
----------------------------------------------------------------------------------------------
Male Female Male 97 98 99 100 101 102 103 104 105 106
----------------------------------------------------------------------------------------------
Female 102 103 104 105 106 107 108 109 110 111
--------------------------------------------------------------------------------------------------------------------------------------------------------
85................................ 90................... 1.8 1.7 1.5 1.4 1.3 1.1 1.0 0.9 0.8 0.7
86................................ 91................... 1.7 1.6 1.5 1.3 1.2 1.1 1.0 0.8 0.7 0.7
87................................ 92................... 1.7 1.6 1.4 1.3 1.2 1.1 0.9 0.8 0.7 0.6
88................................ 93................... 1.6 1.5 1.4 1.3 1.1 1.0 0.9 0.8 0.7 0.6
89................................ 94................... 1.6 1.4 1.3 1.2 1.1 1.0 0.9 0.7 0.7 .......
90................................ 95................... 1.5 1.4 1.3 1.2 1.0 0.9 0.8 0.7 0.6 .......
91................................ 96................... 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 .......
92................................ 97................... 1.4 1.3 1.1 1.0 0.9 0.8 0.7 0.7 ....... .......
93................................ 98................... 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 ....... .......
94................................ 99................... 1.2 1.1 1.0 0.9 0.8 0.7 0.7 ....... ....... .......
95................................ 100.................. 1.1 1.0 1.0 0.9 0.8 0.7 0.6 ....... ....... .......
96................................ 101.................. 1.1 1.0 0.9 0.8 0.7 0.7 ....... ....... ....... .......
97................................ 102.................. 1.0 0.9 0.8 0.7 0.7 0.6 ....... ....... ....... .......
98................................ 103.................. 0.9 0.8 0.7 0.7 0.6 ....... ....... ....... ....... .......
99................................ 104.................. 0.8 0.7 0.7 0.6 ....... ....... ....... ....... ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 191]]
Table III--Percent Value of Refund Feature
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Duration of guaranteed amount--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 1 2 3 4 5 6 7 8 9 10 11 12 13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6.......................................... 11............................ ....... ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1
7.......................................... 12............................ ....... ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1
8.......................................... 13............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
9.......................................... 14............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
10......................................... 15............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
11......................................... 16............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
12......................................... 17............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
13......................................... 18............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
14......................................... 19............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
15......................................... 20............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
16......................................... 21............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
17......................................... 22............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
18......................................... 23............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
19......................................... 24............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
20......................................... 25............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
21......................................... 26............................ ....... ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1
22......................................... 27............................ ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1 1
23......................................... 28............................ ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1 1
24......................................... 29............................ ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1 1
25......................................... 30............................ ....... ....... ....... ....... ....... ....... 1 1 1 1 1 1 1
26......................................... 31............................ ....... ....... ....... ....... ....... 1 1 1 1 1 1 1 1
27......................................... 32............................ ....... ....... ....... ....... ....... 1 1 1 1 1 1 1 1
28......................................... 33............................ ....... ....... ....... ....... ....... 1 1 1 1 1 1 1 1
29......................................... 34............................ ....... ....... ....... ....... ....... 1 1 1 1 1 1 1 2
30......................................... 35............................ ....... ....... ....... ....... 1 1 1 1 1 1 1 2 2
31......................................... 36............................ ....... ....... ....... ....... 1 1 1 1 1 1 1 2 2
32......................................... 37............................ ....... ....... ....... ....... 1 1 1 1 1 1 2 2 2
33......................................... 38............................ ....... ....... ....... 1 1 1 1 1 1 1 2 2 2
34......................................... 39............................ ....... ....... ....... 1 1 1 1 1 1 2 2 2 2
35......................................... 40............................ ....... ....... ....... 1 1 1 1 1 2 2 2 2 2
36......................................... 41............................ ....... ....... ....... 1 1 1 1 1 2 2 2 2 3
37......................................... 42............................ ....... ....... 1 1 1 1 1 2 2 2 2 3 3
38......................................... 43............................ ....... ....... 1 1 1 1 1 2 2 2 2 3 3
39......................................... 44............................ ....... ....... 1 1 1 1 2 2 2 2 3 3 3
40......................................... 45............................ ....... ....... 1 1 1 1 2 2 2 3 3 3 4
41......................................... 46............................ ....... ....... 1 1 1 1 2 2 2 3 3 3 4
42......................................... 47............................ ....... ....... 1 1 1 2 2 2 3 3 3 4 4
[[Page 192]]
43......................................... 48............................ ....... 1 1 1 1 2 2 2 3 3 4 4 4
44......................................... 49............................ ....... 1 1 1 1 2 2 3 3 3 4 4 5
45......................................... 50............................ ....... 1 1 1 2 2 2 3 3 4 4 5 5
46......................................... 51............................ ....... 1 1 1 2 2 3 3 3 4 4 5 5
47......................................... 52............................ ....... 1 1 1 2 2 3 3 4 4 5 5 6
48......................................... 53............................ ....... 1 1 2 2 2 3 3 4 5 5 6 6
49......................................... 54............................ ....... 1 1 2 2 3 3 4 4 5 5 6 7
50......................................... 55............................ ....... 1 1 2 2 3 3 4 5 5 6 7 7
51......................................... 56............................ ....... 1 1 2 3 3 4 4 5 6 6 7 8
52......................................... 57............................ 1 1 2 2 3 3 4 5 5 6 7 8 8
53......................................... 58............................ 1 1 2 2 3 4 4 5 6 7 7 8 9
54......................................... 59............................ 1 1 2 2 3 4 5 5 6 7 8 9 10
55......................................... 60............................ 1 1 2 3 3 4 5 6 7 8 8 9 10
56......................................... 61............................ 1 1 2 3 4 4 5 6 7 8 9 10 11
57......................................... 62............................ 1 1 2 3 4 5 6 7 8 9 10 11 12
58......................................... 63............................ 1 2 2 3 4 5 6 7 8 9 10 12 13
59......................................... 64............................ 1 2 3 4 5 6 7 8 9 10 11 12 14
60......................................... 65............................ 1 2 3 4 5 6 7 8 10 11 12 13 15
61......................................... 66............................ 1 2 3 4 5 6 8 9 10 12 13 14 16
62......................................... 67............................ 1 2 3 4 6 7 8 10 11 12 14 15 17
63......................................... 68............................ 1 2 4 5 6 7 9 10 12 13 15 16 18
64......................................... 69............................ 1 3 4 5 7 8 9 11 13 14 16 17 19
65......................................... 70............................ 1 3 4 6 7 9 10 12 13 15 17 19 20
66......................................... 71............................ 1 3 4 6 8 9 11 13 14 16 18 20 22
67......................................... 72............................ 2 3 5 6 8 10 12 14 15 17 19 21 23
68......................................... 73............................ 2 3 5 7 9 11 13 14 16 18 21 23 25
69......................................... 74............................ 2 4 6 7 9 11 13 16 18 20 22 24 26
70......................................... 75............................ 2 4 6 8 10 12 14 17 19 21 23 26 28
71......................................... 76............................ 2 4 6 9 11 13 15 18 20 22 25 27 29
72......................................... 77............................ 2 5 7 9 12 14 16 19 21 24 26 29 31
73......................................... 78............................ 2 5 7 10 12 15 18 20 23 25 28 30 33
74......................................... 79............................ 3 5 8 11 13 16 19 22 24 27 30 32 35
75......................................... 80............................ 3 6 8 11 14 17 20 23 26 29 31 34 37
76......................................... 81............................ 3 6 9 12 15 18 21 24 27 30 33 36 39
77......................................... 82............................ 3 7 10 13 16 20 23 26 29 32 35 38 41
78......................................... 83............................ 4 7 11 14 17 21 24 28 31 34 37 40 43
79......................................... 84............................ 4 8 11 15 19 22 26 29 33 36 39 42 45
[[Page 193]]
80......................................... 85............................ 4 8 12 16 20 24 27 31 34 38 41 44 47
81......................................... 86............................ 4 9 13 17 21 25 29 33 36 40 43 46 49
82......................................... 87............................ 5 9 14 18 23 27 31 35 38 42 45 48 51
83......................................... 88............................ 5 10 15 19 24 28 33 37 40 44 47 50 53
84......................................... 89............................ 5 11 16 21 26 30 34 38 42 46 49 52 55
85......................................... 90............................ 6 11 17 22 27 32 36 41 44 48 51 55 57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Duration of guaranteed amount--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 14 15 16 17 18 19 20 21 22 23 24 25 26
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
6.......................................... 11............................ 1 1 1 1 1 1 1 1 1 1 2 2 2
7.......................................... 12............................ 1 1 1 1 1 1 1 1 1 1 2 2 2
8.......................................... 13............................ 1 1 1 1 1 1 1 1 1 1 2 2 2
9.......................................... 14............................ 1 1 1 1 1 1 1 1 1 1 2 2 2
10......................................... 15............................ 1 1 1 1 1 1 1 1 1 2 2 2 2
11......................................... 16............................ 1 1 1 1 1 1 1 1 1 2 2 2 2
12......................................... 17............................ 1 1 1 1 1 1 1 1 1 2 2 2 2
13......................................... 18............................ 1 1 1 1 1 1 1 1 2 2 2 2 2
14......................................... 19............................ 1 1 1 1 1 1 1 1 2 2 2 2 2
15......................................... 20............................ 1 1 1 1 1 1 1 1 2 2 2 2 2
16......................................... 21............................ 1 1 1 1 1 1 1 2 2 2 2 2 2
17......................................... 22............................ 1 1 1 1 1 1 1 2 2 2 2 2 2
18......................................... 23............................ 1 1 1 1 1 1 2 2 2 2 2 2 2
19......................................... 24............................ 1 1 1 1 1 2 2 2 2 2 2 2 2
20......................................... 25............................ 1 1 1 1 1 2 2 2 2 2 2 2 3
21......................................... 26............................ 1 1 1 1 2 2 2 2 2 2 2 3 3
22......................................... 27............................ 1 1 1 1 2 2 2 2 2 2 3 3 3
23......................................... 28............................ 1 1 1 2 2 2 2 2 2 2 3 3 3
24......................................... 29............................ 1 1 2 2 2 2 2 2 2 3 3 3 3
25......................................... 30............................ 1 1 2 2 2 2 2 2 3 3 3 3 3
26......................................... 31............................ 1 2 2 2 2 2 2 3 3 3 3 3 4
27......................................... 32............................ 2 2 2 2 2 2 3 3 3 3 3 4 4
28......................................... 33............................ 2 2 2 2 2 3 3 3 3 3 4 4 4
29......................................... 34............................ 2 2 2 2 2 3 3 3 3 4 4 4 5
30......................................... 35............................ 2 2 2 2 3 3 3 3 4 4 4 5 5
31......................................... 36............................ 2 2 2 3 3 3 3 4 4 4 5 5 5
32......................................... 37............................ 2 2 3 3 3 3 4 4 4 5 5 5 6
33......................................... 38............................ 2 3 3 3 3 4 4 4 5 5 5 6 6
34......................................... 39............................ 3 3 3 3 4 4 4 5 5 5 6 6 7
35......................................... 40............................ 3 3 3 4 4 4 5 5 5 6 6 7 7
36......................................... 41............................ 3 3 4 4 4 5 5 5 6 6 7 7 8
37......................................... 42............................ 3 3 4 4 4 5 5 6 6 7 7 8 8
[[Page 194]]
38......................................... 43............................ 3 4 4 4 5 5 6 6 7 7 8 8 9
39......................................... 44............................ 4 4 4 5 5 6 6 7 7 8 8 9 9
40......................................... 45............................ 4 4 5 5 6 6 7 7 8 8 9 9 10
41......................................... 46............................ 4 5 5 6 6 7 7 8 8 9 9 10 11
42......................................... 47............................ 5 5 5 6 6 7 8 8 9 9 10 11 12
43......................................... 48............................ 5 6 6 7 8 8 9 9 10 11 12 12
44......................................... 49............................ 5 6 6 7 7 8 9 9 10 11 12 12 13
45......................................... 50............................ 6 6 7 7 8 9 9 10 11 12 12 13 14
46......................................... 51............................ 6 7 7 8 9 9 10 11 12 12 13 14 15
47......................................... 52............................ 7 7 8 9 9 10 11 12 12 13 14 15 16
48......................................... 53............................ 7 8 8 9 10 11 12 12 13 14 15 16 17
49......................................... 54............................ 8 8 9 10 11 11 12 13 14 15 16 17 18
50......................................... 55............................ 8 9 10 11 11 12 13 14 15 16 17 18 20
51......................................... 56............................ 9 10 10 11 12 13 14 15 16 17 18 20 21
52......................................... 57............................ 9 10 11 12 13 14 15 16 17 18 20 21 22
53......................................... 58............................ 10 11 12 13 14 15 16 17 19 20 21 22 24
54......................................... 59............................ 11 12 13 14 15 16 17 18 20 21 22 24 25
55......................................... 60............................ 11 13 14 15 16 17 18 20 21 22 24 25 26
56......................................... 61............................ 12 13 15 16 17 18 20 21 22 24 25 27 28
57......................................... 62............................ 13 14 16 17 18 20 21 22 24 25 27 28 30
58......................................... 63............................ 14 15 17 18 19 21 22 24 25 27 28 30 31
59......................................... 64............................ 15 16 18 19 21 22 24 25 27 28 30 31 33
60......................................... 65............................ 16 18 19 20 22 24 25 27 28 30 32 33 35
61......................................... 66............................ 17 19 20 22 23 25 27 28 30 32 33 35 37
62......................................... 67............................ 18 20 22 23 25 27 28 30 32 33 35 37 38
63......................................... 68............................ 20 21 23 25 26 28 30 32 33 35 37 39 40
64......................................... 69............................ 21 23 24 26 28 30 32 33 35 37 39 41 42
65......................................... 70............................ 22 24 26 28 30 32 33 35 37 39 41 42 44
66......................................... 71............................ 24 26 28 29 31 33 35 37 39 41 43 44 46
67......................................... 72............................ 25 27 29 31 33 35 37 39 41 43 45 46 48
68......................................... 73............................ 27 29 31 33 35 37 39 41 43 45 47 48 50
69......................................... 74............................ 28 30 33 35 37 39 41 43 45 47 48 50 52
70......................................... 75............................ 30 32 34 37 39 41 43 45 47 49 50 52 54
71......................................... 76............................ 32 34 36 39 41 43 45 47 49 51 52 54 56
72......................................... 77............................ 34 36 38 41 43 45 47 49 51 53 54 56 58
73......................................... 78............................ 35 38 40 43 45 47 49 51 53 55 56 58 59
74......................................... 79............................ 37 40 42 45 47 49 51 53 55 57 58 60 61
75......................................... 80............................ 39 42 44 47 49 51 53 55 57 58 60 62 63
76......................................... 81............................ 41 44 46 49 51 53 55 57 59 60 62 63 65
[[Page 195]]
77......................................... 82............................ 43 46 48 51 53 55 57 59 61 62 64 65 66
78......................................... 83............................ 45 48 50 53 55 57 59 61 62 64 65 67 68
79......................................... 84............................ 48 50 53 55 57 59 61 63 64 66 67 68 70
80......................................... 85............................ 50 52 55 57 59 61 63 64 66 67 69 70 71
81......................................... 86............................ 52 54 57 59 61 63 65 66 68 69 70 72 73
82......................................... 87............................ 54 56 59 61 63 65 66 68 69 71 72 73 74
83......................................... 88............................ 56 58 61 63 65 66 68 70 71 72 73 74 75
84......................................... 89............................ 58 60 63 65 67 68 70 71 73 74 75 76 77
85......................................... 90............................ 60 62 65 67 68 70 71 73 74 75 76 77 .......
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Duration of guaranteed amount--[Years]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 27 28 29 30 31 32 33 34 35
--------------------------------------------------------------------------------------------------------------------------------------------------------
6............................... 11................. 2 2 2 2 2 2 2 2 2
7............................... 12................. 2 2 2 2 2 2 2 2 3
8............................... 13................. 2 2 2 2 2 2 2 2 3
9............................... 14................. 2 2 2 2 2 2 2 3 3
10.............................. 15................. 2 2 2 2 2 2 3 3 3
11.............................. 16................. 2 2 2 2 2 2 3 3 3
12.............................. 17................. 2 2 2 2 2 3 3 3 3
13.............................. 18................. 2 2 2 2 2 3 3 3 3
14.............................. 19................. 2 2 2 2 3 3 3 3 3
15.............................. 20................. 2 2 2 3 3 3 3 3 3
16.............................. 21................. 2 2 3 3 3 3 3 3 4
17.............................. 22................. 2 2 3 3 3 3 3 4 4
18.............................. 23................. 2 3 3 3 3 3 4 4 4
19.............................. 24................. 3 3 3 3 3 4 4 4 4
20.............................. 25................. 3 3 3 3 4 4 4 4 5
21.............................. 26................. 3 3 3 4 4 4 4 5 5
22.............................. 27................. 3 3 4 4 4 4 5 5 5
23.............................. 28................. 3 3 4 4 4 5 5 5 5
24.............................. 29................. 3 4 4 4 5 5 5 5 6
25.............................. 30................. 4 4 4 5 5 5 6 6 6
26.............................. 31................. 4 4 5 5 5 6 6 6 7
27.............................. 32................. 4 5 5 5 6 6 6 7 7
28.............................. 33................. 5 5 5 6 6 6 7 7 8
29.............................. 34................. 5 5 6 6 6 7 7 8 8
30.............................. 35................. 5 6 6 6 7 7 8 8 9
31.............................. 36................. 6 6 6 7 7 8 8 9 9
32.............................. 37................. 6 7 7 7 8 8 9 10 10
33.............................. 38................. 7 7 7 8 8 9 10 10 11
34.............................. 39................. 7 8 8 9 9 10 10 11 12
35.............................. 40................. 8 8 9 9 10 10 11 12 12
[[Page 196]]
36.............................. 41................. 8 9 9 10 10 11 12 13 13
37.............................. 42................. 9 9 10 11 11 12 13 13 14
38.............................. 43................. 9 10 11 11 12 13 13 14 15
39.............................. 44................. 10 11 11 12 13 14 14 15 16
40.............................. 45................. 11 11 12 13 14 15 15 16 17
41.............................. 46................. 11 12 13 14 15 16 16 17 18
42.............................. 47................. 12 13 14 15 16 17 18 18 19
43.............................. 48................. 13 14 15 16 17 18 19 20 21
44.............................. 49................. 14 15 16 17 18 19 20 21 22
45.............................. 50................. 15 16 17 18 19 20 21 22 23
46.............................. 51................. 16 17 18 19 20 21 22 24 25
47.............................. 52................. 17 18 19 20 21 23 24 25 26
48.............................. 53................. 18 19 20 22 23 24 25 26 28
49.............................. 54................. 19 21 22 23 24 25 27 28 29
50.............................. 55................. 21 22 23 24 26 27 28 29 31
51.............................. 56................. 22 23 25 26 27 28 30 31 32
52.............................. 57................. 23 25 26 27 29 30 31 33 34
53.............................. 58................. 25 26 28 29 30 32 33 34 36
54.............................. 59................. 26 28 29 31 32 33 35 36 38
55.............................. 60................. 28 29 31 32 34 35 36 38 39
56.............................. 61................. 29 31 32 34 35 37 38 40 41
57.............................. 62................. 31 33 34 36 37 39 40 41 43
58.............................. 63................. 33 34 36 37 39 40 42 43 45
59.............................. 64................. 35 36 38 39 41 42 44 45 47
60.............................. 65................. 36 38 40 41 43 44 46 47 48
61.............................. 66................. 38 40 41 43 44 46 47 49 50
62.............................. 67................. 40 42 43 45 46 48 49 51 52
63.............................. 68................. 42 44 45 47 48 50 51 52 54
64.............................. 69................. 44 46 47 49 50 52 53 54 55
65.............................. 70................. 46 47 49 50 52 53 55 56 57
66.............................. 71................. 48 49 51 52 54 55 56 58 59
67.............................. 72................. 50 51 53 54 56 57 58 59 61
68.............................. 73................. 52 53 55 56 57 59 60 61 62
69.............................. 74................. 53 55 56 58 59 60 62 63 64
70.............................. 75................. 55 57 58 60 61 62 62 64 65
71.............................. 76................. 57 59 60 61 63 64 65 66 67
72.............................. 77................. 59 60 62 63 64 65 66 67 68
73.............................. 78................. 61 62 64 65 66 67 68 69 70
[[Page 197]]
74.............................. 79................. 63 64 65 66 67 68 69 70 71
75.............................. 80................. 64 66 67 68 69 70 71 72 72
76.............................. 81................. 66 67 68 69 70 71 72 73 .........
77.............................. 82................. 68 69 70 71 72 73 74 ......... .........
78.............................. 83................. 69 70 71 72 73 74 ......... ......... .........
79.............................. 84................. 71 72 73 74 75 ......... ......... ......... .........
80.............................. 85................. 72 73 74 75 ......... ......... ......... ......... .........
81.............................. 86................. 74 75 75 ......... ......... ......... ......... ......... .........
82.............................. 87................. 75 76 ......... ......... ......... ......... ......... ......... .........
83.............................. 88................. 76 ......... ......... ......... ......... ......... ......... ......... .........
84.............................. 89................. ......... ......... ......... ......... ......... ......... ......... ......... .........
85.............................. 90................. ......... ......... ......... ......... ......... ......... ......... ......... .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Duration of guaranteed amount--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 1 2 3 4 5 6 7 8 9 10 11 12 13 14
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
86..................................... 91....................... 6 12 18 24 29 34 38 43 47 50 54 57 59 62
87..................................... 92....................... 7 13 19 25 31 36 40 45 49 52 56 59 61 64
88..................................... 93....................... 7 14 21 27 32 38 42 47 51 55 58 61 63 66
89..................................... 94....................... 8 15 22 28 34 40 45 49 53 57 60 63 65 68
90..................................... 95....................... 8 16 23 30 36 42 47 51 55 59 62 65 67 70
91..................................... 96....................... 9 17 25 32 38 44 49 53 57 61 64 67 69 71
92..................................... 97....................... 9 18 26 34 40 46 51 55 59 63 66 69 71 73
93..................................... 98....................... 10 20 28 36 42 48 53 58 62 65 68 70 73 75
94..................................... 99....................... 11 21 30 37 44 50 55 60 64 67 70 72 74 76
95..................................... 100...................... 12 22 31 39 46 52 58 62 66 69 72 74 76 78
96..................................... 101...................... 12 24 33 42 49 55 60 64 68 71 73 76 78 79
97..................................... 102...................... 13 25 35 44 51 57 62 66 70 73 75 77 79 .......
98..................................... 103...................... 14 27 37 46 54 60 65 69 72 75 77 79 ....... .......
99..................................... 104...................... 15 29 40 49 56 62 67 71 74 77 79 ....... ....... .......
100.................................... 105...................... 17 31 43 52 59 65 70 74 76 79 ....... ....... ....... .......
101.................................... 106...................... 18 33 46 55 63 68 73 76 79 ....... ....... ....... ....... .......
102.................................... 107...................... 20 36 49 59 66 71 75 78 ....... ....... ....... ....... ....... .......
103.................................... 108...................... 22 40 53 62 69 74 78 ....... ....... ....... ....... ....... ....... .......
104.................................... 109...................... 24 43 57 66 73 77 ....... ....... ....... ....... ....... ....... ....... .......
105.................................... 110...................... 27 48 61 70 76 ....... ....... ....... ....... ....... ....... ....... ....... .......
106.................................... 111...................... 53 66 74 ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
107.................................... 112...................... 35 53 71 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
108.................................... 113...................... 40 64 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 198]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Duration of guaranteed amount--[Years]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 15 16 17 18 19 20 21 22 23 24 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
86.............................. 91................. 64 66 68 70 72 73 74 75 76 77 .......
87.............................. 92................. 66 68 70 72 73 74 76 77 78 ....... .......
88.............................. 93................. 68 70 72 73 75 76 77 78 ....... ....... .......
89.............................. 94................. 70 72 73 75 76 77 78 ....... ....... ....... .......
90.............................. 95................. 72 73 75 76 77 79 ....... ....... ....... ....... .......
91.............................. 96................. 73 75 76 78 79 ....... ....... ....... ....... ....... .......
92.............................. 97................. 75 76 78 79 ....... ....... ....... ....... ....... ....... .......
93.............................. 98................. 76 78 79 ....... ....... ....... ....... ....... ....... ....... .......
94.............................. 99................. 78 79 ....... ....... ....... ....... ....... ....... ....... ....... .......
95.............................. 100................ 79 ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table IV--Temporary Life Annuities \1\--One Life--Expected Return Multiples
[See footnote at end of table]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Temporary period--maximum duration of annuity--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 1 2 3 4 5 6 7 8 9 10
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0 to 8......................................... 0 to 13.......................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
9.............................................. 14............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
10............................................. 15............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
11............................................. 16............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
12............................................. 17............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
13............................................. 18............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
14............................................. 19............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
15............................................. 20............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
16............................................. 21............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
17............................................. 22............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
18............................................. 23............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
19............................................. 24............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
20............................................. 25............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
21............................................. 26............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
22............................................. 27............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
23............................................. 28............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
24............................................. 29............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
25............................................. 30............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
26............................................. 31............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
27............................................. 32............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
28............................................. 33............................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
29............................................. 34............................... 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
30............................................. 35............................... 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
[[Page 199]]
31............................................. 36............................... 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
32............................................. 37............................... 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
33............................................. 38............................... 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
34............................................. 39............................... 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.9 9.8
35............................................. 40............................... 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.9 9.8
36............................................. 41............................... 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.9 9.8
37............................................. 42............................... 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.8 9.8
38............................................. 43............................... 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.8 9.8
39............................................. 44............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.9 8.8 9.8
40............................................. 45............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
41............................................. 46............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
42............................................. 47............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
43............................................. 48............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
44............................................. 49............................... 1.0 2.0 3.0 4.0 4.9 5.9 6.8 7.8 8.7 9.7
45............................................. 50............................... 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.8 8.7 9.6
46............................................. 51............................... 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.8 8.7 9.6
47............................................. 52............................... 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.7 8.7 9.6
48............................................. 53............................... 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.7 8.6 9.5
49............................................. 54............................... 1.0 2.0 3.0 3.9 4.9 5.8 6.8 7.7 8.6 9.5
50............................................. 55............................... 1.0 2.0 3.0 3.9 4.9 5.8 6.8 7.7 8.6 9.5
51............................................. 56............................... 1.0 2.0 3.0 3.9 4.9 5.8 6.7 7.7 8.6 9.4
52............................................. 57............................... 1.0 2.0 3.0 3.9 4.9 5.8 6.7 7.6 8.5 9.4
53............................................. 58............................... 1.0 2.0 2.9 3.9 4.9 5.8 6.7 7.6 8.5 9.3
54............................................. 59............................... 1.0 2.0 2.9 3.9 4.8 5.8 6.7 7.6 8.4 9.3
55............................................. 60............................... 1.0 2.0 2.9 3.9 4.8 5.8 6.7 7.5 8.4 9.2
56............................................. 61............................... 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.5 8.4 9.2
57............................................. 62............................... 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.5 8.3 9.1
58............................................. 63............................... 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.4 8.3 9.1
59............................................. 64............................... 1.0 2.0 2.9 3.9 4.8 5.7 6.5 7.4 8.2 9.0
60............................................. 65............................... 1.0 2.0 2.9 3.8 4.8 5.6 6.5 7.3 8.1 8.9
61............................................. 66............................... 1.0 2.0 2.9 3.8 4.7 5.6 6.5 7.3 8.1 8.8
62............................................. 67............................... 1.0 2.0 2.9 3.8 4.7 5.6 6.4 7.2 8.0 8.8
63............................................. 68............................... 1.0 2.0 2.9 3.8 4.7 5.6 6.4 7.2 7.9 8.7
64............................................. 69............................... 1.0 1.9 2.9 3.8 4.7 5.5 6.3 7.1 7.9 8.6
65............................................. 70............................... 1.0 1.9 2.9 3.8 4.6 5.5 6.3 7.1 7.8 8.5
66............................................. 71............................... 1.0 1.9 2.9 3.8 4.6 5.4 6.2 7.0 7.7 8.4
67............................................. 72............................... 1.0 1.9 2.9 3.7 4.6 5.4 6.2 6.9 7.6 8.3
68............................................. 73............................... 1.0 1.9 2.8 3.7 4.6 5.4 6.1 6.8 7.5 8.2
69............................................. 74............................... 1.0 1.9 2.8 3.7 4.5 5.3 6.1 6.8 7.4 8.0
70............................................. 75............................... 1.0 1.9 2.8 3.7 4.5 5.3 6.0 6.7 7.3 7.9
71............................................. 76............................... 1.0 1.9 2.8 3.7 4.5 5.2 5.9 6.6 7.2 7.8
[[Page 200]]
72............................................. 77............................... 1.0 1.9 2.8 3.6 4.4 5.2 5.8 6.5 7.1 7.6
73............................................. 78............................... 1.0 1.9 2.8 3.6 4.4 5.1 5.8 6.4 7.0 7.5
74............................................. 79............................... 1.0 1.9 2.8 3.6 4.3 5.0 5.7 6.3 6.8 7.3
75............................................. 80............................... 1.0 1.9 2.7 3.5 4.3 5.0 5.6 6.2 6.7 7.1
76............................................. 81............................... 1.0 1.9 2.7 3.5 4.2 4.9 5.5 6.1 6.5 7.0
77............................................. 82............................... 1.0 1.9 2.7 3.5 4.2 4.8 5.4 5.9 6.4 6.8
78............................................. 83............................... 1.0 1.9 2.7 3.4 4.1 4.7 5.3 5.8 6.2 6.6
79............................................. 84............................... 1.0 1.8 2.7 3.4 4.1 4.7 5.2 5.7 6.1 6.4
80............................................. 85............................... 1.0 1.8 2.6 3.4 4.0 4.6 5.1 5.5 5.9 6.2
81............................................. 86............................... 1.0 1.8 2.6 3.3 3.9 4.5 5.0 5.4 5.7 6.0
82............................................. 87............................... 1.0 1.8 2.6 3.3 3.9 4.4 4.8 5.2 5.6 5.8
83............................................. 88............................... .9 1.8 2.6 3.2 3.8 4.3 4.7 5.1 5.4 5.6
84............................................. 89............................... .9 1.8 2.5 3.2 3.7 4.2 4.6 4.9 5.2 5.4
85............................................. 90............................... .9 1.8 2.5 3.1 3.6 4.1 4.5 4.8 5.0 5.2
86............................................. 91............................... .9 1.8 2.5 3.1 3.6 4.0 4.3 4.6 4.8 5.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Temporary period--maximum duration of annuity--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 11 12 13 14 15 16 17 18 19 20
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0 to 8......................................... 0 to 13.......................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
9.............................................. 14............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
10............................................. 15............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
11............................................. 16............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
12............................................. 17............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
13............................................. 18............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
14............................................. 19............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
15............................................. 20............................... 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.7 19.7
16............................................. 21............................... 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.8 18.7 19.7
17............................................. 22............................... 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.8 18.7 19.7
18............................................. 23............................... 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.8 18.7 19.7
19............................................. 24............................... 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.7 18.7 19.7
20............................................. 25............................... 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.7 18.7 19.7
21............................................. 26............................... 10.9 11.9 12.9 13.8 14.8 15.8 16.8 17.7 18.7 19.6
22............................................. 27............................... 10.9 11.9 12.9 13.8 14.8 15.8 16.7 17.7 18.7 19.6
23............................................. 28............................... 10.9 11.9 12.9 13.8 14.8 15.8 16.7 17.7 18.7 19.6
24............................................. 29............................... 10.9 11.9 12.9 13.8 14.8 15.8 16.7 17.7 18.6 19.6
25............................................. 30............................... 10.9 11.9 12.8 13.8 14.8 15.7 16.7 17.7 18.6 19.6
[[Page 201]]
26............................................. 31............................... 10.9 11.9 12.8 13.8 14.8 15.7 16.7 17.6 18.6 19.5
27............................................. 32............................... 10.9 11.9 12.8 13.8 14.8 15.7 16.7 17.6 18.6 19.5
28............................................. 33............................... 10.9 11.8 12.8 13.8 14.7 15.7 16.6 17.6 18.5 19.5
29............................................. 34............................... 10.9 11.8 12.8 13.8 14.7 15.7 16.6 17.6 18.5 19.4
30............................................. 35............................... 10.9 11.8 12.8 13.7 14.7 15.6 16.6 17.5 18.4 19.4
31............................................. 36............................... 10.8 11.8 12.8 13.7 14.7 15.6 16.5 17.5 18.4 19.3
32............................................. 37............................... 10.8 11.8 12.7 13.7 14.6 15.6 16.5 17.4 18.4 19.3
33............................................. 38............................... 10.8 11.8 12.7 13.7 14.6 15.6 16.5 17.4 18.3 19.2
34............................................. 39............................... 10.8 11.8 12.7 13.6 14.6 15.5 16.4 17.4 18.3 19.2
35............................................. 40............................... 10.8 11.7 12.7 13.6 14.6 15.5 16.4 17.3 18.2 19.1
36............................................. 41............................... 10.8 11.7 12.7 13.6 14.5 15.4 16.3 17.2 18.1 19.0
37............................................. 42............................... 10.8 11.7 12.6 13.6 14.5 15.4 16.3 17.2 18.1 18.9
38............................................. 43............................... 10.7 11.7 12.6 13.5 14.4 15.3 16.2 17.1 18.0 18.9
39............................................. 44............................... 10.7 11.6 12.6 13.5 14.4 15.3 16.2 17.1 17.9 18.8
40............................................. 45............................... 10.7 11.6 12.5 13.5 14.4 15.2 16.1 17.0 17.8 18.7
41............................................. 46............................... 10.7 11.6 12.5 13.4 14.3 15.2 16.1 16.9 17.8 18.6
42............................................. 47............................... 10.6 11.6 12.5 13.4 14.3 15.1 16.0 16.8 17.7 18.5
43............................................. 48............................... 10.6 11.5 12.4 13.3 14.2 15.1 15.9 16.7 17.6 18.4
44............................................. 49............................... 10.6 11.5 12.4 13.3 14.1 15.0 15.8 16.7 17.5 18.3
45............................................. 50............................... 10.5 11.4 12.3 13.2 14.1 14.9 15.7 16.6 17.4 18.1
46............................................. 51............................... 10.5 11.4 12.3 13.2 14.0 14.8 15.7 16.5 17.2 18.0
47............................................. 52............................... 10.5 11.4 12.2 13.1 13.9 14.7 15.6 16.3 17.1 17.8
48............................................. 53............................... 10.4 11.3 12.2 13.0 13.8 14.7 15.4 16.2 17.0 17.7
49............................................. 54............................... 10.4 11.3 12.1 12.9 13.8 14.6 15.3 16.1 16.8 17.5
50............................................. 55............................... 10.3 11.2 12.0 12.9 13.7 14.5 15.2 16.0 16.7 17.4
51............................................. 56............................... 10.3 11.1 12.0 12.8 13.6 14.3 15.1 15.8 16.5 17.2
52............................................. 57............................... 10.2 11.1 11.9 12.7 13.5 14.2 14.9 15.6 16.3 17.0
53............................................. 58............................... 10.2 11.0 11.8 12.6 13.4 14.1 14.8 15.5 16.1 16.8
54............................................. 59............................... 10.1 10.9 11.7 12.5 13.2 14.0 14.6 15.3 15.9 16.5
55............................................. 60............................... 10.1 10.9 11.6 12.4 13.1 13.8 14.5 15.1 15.7 16.3
56............................................. 61............................... 10.0 10.8 11.5 12.3 13.0 13.7 14.3 14.9 15.5 16.1
57............................................. 62............................... 9.9 10.7 11.4 12.2 12.8 13.5 14.1 14.7 15.3 15.8
58............................................. 63............................... 9.8 10.6 11.3 12.0 12.7 13.3 13.9 14.5 15.0 15.5
59............................................. 64............................... 9.8 10.5 11.2 11.9 12.5 13.2 13.7 14.3 14.8 15.3
60............................................. 65............................... 9.7 10.4 11.1 11.7 12.4 13.0 13.5 14.0 14.5 15.0
61............................................. 66............................... 9.6 10.3 11.0 11.6 12.2 12.8 13.3 13.8 14.2 14.7
62............................................. 67............................... 9.5 10.2 10.8 11.4 12.0 12.5 13.1 13.5 14.0 14.3
63............................................. 68............................... 9.4 10.0 10.7 11.3 11.8 12.3 12.8 13.2 13.7 14.0
64............................................. 69............................... 9.3 9.9 10.5 11.1 11.6 12.1 12.5 13.0 13.3 13.7
65............................................. 70............................... 9.1 9.8 10.3 10.9 11.4 11.9 12.3 12.7 13.0 13.3
66............................................. 71............................... 9.0 9.6 10.2 10.7 11.2 11.6 12.0 12.4 12.7 13.0
[[Page 202]]
67............................................. 72............................... 8.9 9.5 10.0 10.5 10.9 11.3 11.7 12.0 12.3 12.6
68............................................. 73............................... 8.7 9.3 9.8 10.3 10.7 11.1 11.4 11.7 12.0 12.2
69............................................. 74............................... 8.6 9.1 9.6 10.0 10.4 10.8 11.1 11.4 11.6 11.8
70............................................. 75............................... 8.4 8.9 9.4 9.8 10.2 10.5 10.8 11.0 11.2 11.4
71............................................. 76............................... 8.3 8.7 9.2 9.6 9.9 10.2 10.4 10.7 10.9 11.0
72............................................. 77............................... 8.1 8.6 8.9 9.3 9.6 9.9 10.1 10.3 10.5 10.6
73............................................. 78............................... 7.9 8.3 8.7 9.0 9.3 9.6 9.8 9.9 10.1 10.2
74............................................. 79............................... 7.7 8.1 8.5 8.8 9.0 9.2 9.4 9.6 9.7 9.8
75............................................. 80............................... 7.6 7.9 8.2 8.5 8.7 8.9 9.1 9.2 9.3 9.4
76............................................. 81............................... 7.4 7.7 8.0 8.2 8.4 8.6 8.7 8.8 8.9 9.0
77............................................. 82............................... 7.1 7.5 7.7 7.9 8.1 8.3 8.4 8.5 8.5 8.6
78............................................. 83............................... 6.9 7.2 7.4 7.6 7.8 7.9 8.0 8.1 8.2 8.2
79............................................. 84............................... 6.7 7.0 7.2 7.3 7.5 7.6 7.7 7.7 7.8 7.8
80............................................. 85............................... 6.5 6.7 6.9 7.1 7.2 7.3 7.3 7.4 7.4 7.4
81............................................. 86............................... 6.3 6.5 6.6 6.8 6.9 6.9 7.0 7.0 7.1 .........
82............................................. 87............................... 6.0 6.2 6.4 6.5 6.5 6.6 6.7 6.7 ......... .........
83............................................. 88............................... 5.8 6.0 6.1 6.2 6.2 6.3 6.3 ......... ......... .........
84............................................. 89............................... 5.6 5.7 5.8 5.9 5.9 6.0 ......... ......... ......... .........
85............................................. 90............................... 5.3 5.5 5.5 5.6 5.6 ......... ......... ......... ......... .........
86............................................. 91............................... 5.1 5.2 5.3 5.3 ......... ......... ......... ......... ......... .........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Ages Temporary period--maximum duration of annuity--[Years]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Male Female 21 22 23 24 25 26 27 28 29 30
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0 to 8......................................... 0 to 13.......................... 20.7 21.7 22.7 23.6 24.6 25.6 26.5 27.5 28.4 29.4
9.............................................. 14............................... 20.7 21.7 22.7 23.6 24.6 25.5 26.5 27.5 28.4 29.4
10............................................. 15............................... 20.7 21.7 22.7 23.6 24.6 25.5 26.5 27.5 28.4 29.4
11............................................. 16............................... 20.7 21.7 22.6 23.6 24.6 25.5 26.5 27.4 28.4 29.3
12............................................. 17............................... 20.7 21.7 22.6 23.6 24.6 25.5 26.5 27.4 28.4 29.3
13............................................. 18............................... 20.7 21.7 22.6 23.6 24.6 25.5 26.5 27.4 28.4 29.3
14............................................. 19............................... 20.7 21.7 22.6 23.6 24.5 25.5 26.4 27.4 28.3 29.3
15............................................. 20............................... 20.7 21.6 22.6 23.6 24.5 25.5 26.4 27.4 28.3 29.2
16............................................. 21............................... 20.7 21.6 22.6 23.6 24.5 25.5 26.4 27.3 28.3 29.2
17............................................. 22............................... 20.7 21.6 22.6 23.5 24.5 25.4 26.4 27.3 28.2 29.2
18............................................. 23............................... 20.7 21.6 22.6 23.5 24.5 25.4 26.3 27.3 28.2 29.1
19............................................. 24............................... 20.6 21.6 22.5 23.5 24.4 25.4 26.3 27.2 28.1 29.1
20............................................. 25............................... 20.6 21.6 22.5 23.5 24.4 25.3 26.3 27.2 28.1 29.0
21............................................. 26............................... 20.6 21.5 22.5 23.4 24.4 25.3 26.2 27.1 28.0 28.9
22............................................. 27............................... 20.6 21.5 22.5 23.4 24.3 25.3 26.2 27.1 28.0 28.9
[[Page 203]]
23............................................. 28............................... 20.6 21.5 22.4 23.4 24.3 25.2 26.1 27.0 27.9 28.8
24............................................. 29............................... 20.5 21.5 22.4 23.3 24.2 25.2 26.1 27.0 27.8 28.7
25............................................. 30............................... 20.5 21.4 22.4 23.3 24.2 25.1 26.0 26.9 27.8 28.6
26............................................. 31............................... 20.5 21.4 22.3 23.2 24.1 25.0 25.9 26.8 27.7 28.5
27............................................. 32............................... 20.4 21.3 22.3 23.2 24.1 25.0 25.8 26.7 27.6 28.4
28............................................. 33............................... 20.4 21.3 22.2 23.1 24.0 24.9 25.8 26.6 27.5 28.3
29............................................. 34............................... 20.3 21.2 22.1 23.0 23.9 24.8 25.7 26.5 27.4 28.2
30............................................. 35............................... 20.3 21.2 22.1 23.0 23.8 24.7 25.6 26.4 27.2 28.1
31............................................. 36............................... 20.2 21.1 22.0 22.9 23.8 24.6 25.5 26.3 27.1 27.9
32............................................. 37............................... 20.2 21.1 21.9 22.8 23.7 24.5 25.4 26.2 27.0 27.8
33............................................. 38............................... 20.1 21.0 21.9 22.7 23.6 24.4 25.2 26.0 26.8 27.6
34............................................. 39............................... 20.0 20.9 21.8 22.6 23.5 24.3 25.1 25.9 26.7 27.4
35............................................. 40............................... 20.0 20.8 21.7 22.5 23.3 24.2 25.0 25.7 26.5 27.2
36............................................. 41............................... 19.9 20.7 21.6 22.4 23.2 24.0 24.8 25.6 26.3 27.0
37............................................. 42............................... 19.8 20.6 21.5 22.3 23.1 23.9 24.6 25.4 26.1 26.8
38............................................. 43............................... 19.7 20.5 21.4 22.2 23.0 23.7 24.5 25.2 25.9 26.6
39............................................. 44............................... 19.6 20.4 21.2 22.0 22.8 23.6 24.3 25.0 25.7 26.4
40............................................. 45............................... 19.5 20.3 21.1 21.9 22.6 23.4 24.1 24.8 25.5 26.1
41............................................. 46............................... 19.4 20.2 21.0 21.7 22.5 23.2 23.9 24.6 25.2 25.9
42............................................. 47............................... 19.3 20.1 20.8 21.6 22.3 23.0 23.7 24.3 25.0 25.6
43............................................. 48............................... 19.2 19.9 20.7 21.4 22.1 22.8 23.4 24.1 24.7 25.3
44............................................. 49............................... 19.0 19.8 20.5 21.2 21.9 22.6 23.2 23.8 24.4 25.0
45............................................. 50............................... 18.9 19.6 20.3 21.0 21.7 22.3 22.9 23.5 24.1 24.6
46............................................. 51............................... 18.7 19.4 20.1 20.8 21.5 22.1 22.7 23.2 23.8 24.3
47............................................. 52............................... 18.6 19.3 19.9 20.6 21.2 21.8 22.4 22.9 23.4 23.9
48............................................. 53............................... 18.4 19.1 19.7 20.4 21.0 21.5 22.1 22.6 23.1 23.5
49............................................. 54............................... 18.2 18.9 19.5 20.1 20.7 21.2 21.7 22.2 22.7 23.1
50............................................. 55............................... 18.0 18.7 19.3 19.8 20.4 20.9 21.4 21.9 22.3 22.7
51............................................. 56............................... 17.8 18.4 19.0 19.6 20.1 20.6 21.1 21.5 21.9 22.3
52............................................. 57............................... 17.6 18.2 18.7 19.3 19.8 20.2 20.7 21.1 21.5 21.8
53............................................. 58............................... 17.4 17.9 18.5 19.0 19.4 19.9 20.3 20.7 21.0 21.3
54............................................. 59............................... 17.1 17.7 18.2 18.7 19.1 19.5 19.9 20.2 20.6 20.8
55............................................. 60............................... 16.9 17.4 17.9 18.3 18.7 19.1 19.5 19.8 20.1 20.3
56............................................. 61............................... 16.6 17.1 17.5 18.0 18.4 18.7 19.0 19.3 19.6 19.8
57............................................. 62............................... 16.3 16.8 17.2 17.6 18.0 18.3 18.6 18.9 19.1 19.3
58............................................. 63............................... 16.0 16.5 16.9 17.2 17.6 17.9 18.1 18.4 18.6 18.8
59............................................. 64............................... 15.7 16.1 16.5 16.8 17.1 17.4 17.7 17.9 18.1 18.2
60............................................. 65............................... 15.4 15.8 16.1 16.4 16.7 17.0 17.2 17.4 17.5 17.7
61............................................. 66............................... 15.1 15.4 15.7 16.0 16.3 16.5 16.7 16.9 17.0 17.1
62............................................. 67............................... 14.7 15.0 15.3 15.6 15.8 16.0 16.2 16.3 16.4 16.5
63............................................. 68............................... 14.4 14.6 14.9 15.1 15.3 15.5 15.7 15.8 15.9 16.0
64............................................. 69............................... 14.0 14.3 14.5 14.7 14.9 15.0 15.2 15.3 15.3 15.4
[[Page 204]]
65............................................. 70............................... 13.6 13.8 14.1 14.2 14.4 14.5 14.6 14.7 14.8 14.9
66............................................. 71............................... 13.2 13.4 13.6 13.8 13.9 14.0 14.1 14.2 14.2 14.3
67............................................. 72............................... 12.8 13.0 13.2 13.3 13.4 13.5 13.6 13.7 13.7 13.7
68............................................. 73............................... 12.4 12.6 12.7 12.8 12.9 13.0 13.1 13.1 13.2 13.2
69............................................. 74............................... 12.0 12.1 12.3 12.4 12.4 12.5 12.6 12.6 12.6 12.6
70............................................. 75............................... 11.6 11.7 11.8 11.9 12.0 12.0 12.0 12.1 12.1 12.1
71............................................. 76............................... 11.2 11.3 11.3 11.4 11.5 11.5 11.5 11.6 11.6 .........
72............................................. 77............................... 10.7 10.8 10.9 10.9 11.0 11.0 11.0 11.0 ......... .........
73............................................. 78............................... 10.3 10.4 10.4 10.5 10.5 10.5 10.5 ......... ......... .........
74............................................. 79............................... 9.9 9.9 10.0 10.0 10.1 10.1 ......... ......... ......... .........
75............................................. 80............................... 9.5 9.5 9.6 9.6 9.6 ......... ......... ......... ......... .........
76............................................. 81............................... 9.1 9.1 9.1 9.1 ......... ......... ......... ......... ......... .........
77............................................. 82............................... 8.6 8.7 8.7 ......... ......... ......... ......... ......... ......... .........
78............................................. 83............................... 8.2 8.3 ......... ......... ......... ......... ......... ......... ......... .........
79............................................. 84............................... 7.8 ......... ......... ......... ......... ......... ......... ......... ......... .........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Footnote to Table IV:
\1\ The multiples in this table are not applicable to annuities for a term certain; for such cases see paragraph (c) of Sec. 1.72-5.
[[Page 205]]
Table V--Ordinary Life Annuities One Life--Expected Return Multiples
------------------------------------------------------------------------
Age Multiple
------------------------------------------------------------------------
5...................................................... 76.6
6...................................................... 75.6
7...................................................... 74.7
8...................................................... 73.7
9...................................................... 72.7
10..................................................... 71.7
11..................................................... 70.7
12..................................................... 69.7
13..................................................... 68.8
14..................................................... 67.8
15..................................................... 66.8
16..................................................... 65.8
17..................................................... 64.8
18..................................................... 63.9
19..................................................... 62.9
20..................................................... 61.9
21..................................................... 60.9
22..................................................... 59.9
23..................................................... 59.0
24..................................................... 58.0
25..................................................... 57.0
26..................................................... 56.0
27..................................................... 55.1
28..................................................... 54.1
29..................................................... 53.1
30..................................................... 52.2
31..................................................... 51.2
32..................................................... 50.2
33..................................................... 49.3
34..................................................... 48.3
35..................................................... 47.3
36..................................................... 46.4
37..................................................... 45.4
38..................................................... 44.4
39..................................................... 43.5
40..................................................... 42.5
41..................................................... 41.5
42..................................................... 40.6
43..................................................... 39.6
44..................................................... 38.7
45..................................................... 37.7
46..................................................... 36.8
47..................................................... 35.9
48..................................................... 34.9
49..................................................... 34.0
50..................................................... 33.1
51..................................................... 32.2
52..................................................... 31.3
53..................................................... 30.4
54..................................................... 29.5
55..................................................... 28.6
56..................................................... 27.7
57..................................................... 26.8
58..................................................... 25.9
59..................................................... 25.0
60..................................................... 24.2
61..................................................... 23.3
62..................................................... 22.5
63..................................................... 21.6
64..................................................... 20.8
65..................................................... 20.0
66..................................................... 19.2
67..................................................... 18.4
68..................................................... 17.6
69..................................................... 16.8
70..................................................... 16.0
71..................................................... 15.3
72..................................................... 14.6
73..................................................... 13.9
74..................................................... 13.2
75..................................................... 12.5
76..................................................... 11.9
77..................................................... 11.2
78..................................................... 10.6
79..................................................... 10.0
80..................................................... 9.5
81..................................................... 8.9
82..................................................... 8.4
83..................................................... 7.9
84..................................................... 7.4
85..................................................... 6.9
86..................................................... 6.5
87..................................................... 6.1
88..................................................... 5.7
89..................................................... 5.3
90..................................................... 5.0
91..................................................... 4.7
92..................................................... 4.4
93..................................................... 4.1
94..................................................... 3.9
95..................................................... 3.7
96..................................................... 3.4
97..................................................... 3.2
98..................................................... 3.0
99..................................................... 2.8
100.................................................... 2.7
101.................................................... 2.5
102.................................................... 2.3
103.................................................... 2.1
104.................................................... 1.9
105.................................................... 1.8
106.................................................... 1.6
107.................................................... 1.4
108.................................................... 1.3
109.................................................... 1.1
110.................................................... 1.0
111.................................................... .9
112.................................................... .8
113.................................................... .7
114.................................................... .6
115.................................................... .5
------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 5 6 7 8 9 10 11 12 13 14
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 83.8 83.3 82.8 82.4 82.0 81.6 81.2 80.9 80.6 80.3
6................................................... 83.3 82.8 82.3 81.8 81.4 81.0 80.6 80.3 79.9 79.6
7................................................... 82.8 82.3 81.8 81.3 80.9 80.4 80.0 79.6 79.3 78.9
8................................................... 82.4 81.8 81.3 80.8 80.3 79.9 79.4 79.0 78.6 78.3
9................................................... 82.0 81.4 80.9 80.3 79.8 79.3 78.9 78.4 78.0 77.6
10.................................................. 81.6 81.0 80.4 79.9 79.3 78.8 78.3 77.9 77.4 77.0
11.................................................. 81.2 80.6 80.0 79.4 78.9 78.3 77.8 77.3 76.9 76.4
[[Page 206]]
12.................................................. 80.9 80.3 79.6 79.0 78.4 77.9 77.3 76.8 76.3 75.9
13.................................................. 80.6 79.9 79.3 78.6 78.0 77.4 76.9 76.3 75.8 75.3
14.................................................. 80.3 79.6 78.9 78.3 77.6 77.0 76.4 75.9 75.3 74.8
15.................................................. 80.0 79.3 78.6 77.9 77.3 76.6 76.0 75.4 74.9 74.3
16.................................................. 79.8 79.0 78.3 77.6 76.9 76.3 75.6 75.0 74.4 73.9
17.................................................. 79.5 78.8 78.0 77.3 76.6 75.9 75.3 74.6 74.0 73.4
18.................................................. 79.3 78.5 77.8 77.0 76.3 75.6 74.9 74.3 73.6 73.0
19.................................................. 79.1 78.3 77.5 76.8 76.0 75.3 74.6 73.9 73.3 72.6
20.................................................. 78.9 78.1 77.3 76.5 75.8 75.0 74.3 73.6 72.9 72.3
21.................................................. 78.7 77.9 77.1 76.3 75.5 74.8 74.0 73.3 72.6 71.9
22.................................................. 78.6 77.7 76.9 76.1 75.3 74.5 73.8 73.0 72.3 71.6
23.................................................. 78.4 77.6 76.7 75.9 75.1 74.3 73.5 72.8 72.0 71.3
24.................................................. 78.3 77.4 76.6 75.7 74.9 74.1 73.3 72.6 71.8 71.1
25.................................................. 78.2 77.3 76.4 75.6 74.8 73.9 73.1 72.3 71.6 70.8
26.................................................. 78.0 77.2 76.3 75.4 74.6 73.8 72.9 72.1 71.3 70.6
27.................................................. 77.9 77.1 76.2 75.3 74.4 73.6 72.8 71.9 71.1 70.3
28.................................................. 77.8 76.9 76.1 75.2 74.3 73.4 72.6 71.8 70.9 70.1
29.................................................. 77.7 76.8 76.0 75.1 74.2 73.3 72.5 71.6 70.8 70.0
30.................................................. 77.7 76.8 75.9 75.0 74.1 73.2 72.3 71.5 70.6 69.8
31.................................................. 77.6 76.7 75.8 74.9 74.0 73.1 72.2 71.3 70.5 69.6
32.................................................. 77.5 76.6 75.7 74.8 73.9 73.0 72.1 71.2 70.3 69.5
33.................................................. 77.5 76.5 75.6 74.7 73.8 72.9 72.0 71.1 70.2 69.3
34.................................................. 77.4 76.5 75.5 74.6 73.7 72.8 71.9 71.0 70.1 69.2
35.................................................. 77.3 76.4 75.5 74.5 73.6 72.7 71.8 70.9 70.0 69.1
36.................................................. 77.3 76.3 75.4 74.5 73.5 72.6 71.7 70.8 69.9 69.0
37.................................................. 77.2 76.3 75.4 74.4 73.5 72.6 71.6 70.7 69.8 68.9
38.................................................. 77.2 76.2 75.3 74.4 73.4 72.5 71.6 70.6 69.7 68.8
39.................................................. 77.2 76.2 75.3 74.3 73.4 72.4 71.5 70.6 69.6 68.7
40.................................................. 77.1 76.2 75.2 74.3 73.3 72.4 71.4 70.5 69.6 68.6
41.................................................. 77.1 76.1 75.2 74.2 73.3 72.3 71.4 70.4 69.5 68.6
42.................................................. 77.0 76.1 75.1 74.2 73.2 72.3 71.3 70.4 69.4 68.5
43.................................................. 77.0 76.1 75.1 74.1 73.2 72.2 71.3 70.3 69.4 68.5
44.................................................. 77.0 76.0 75.1 74.1 73.1 72.2 71.2 70.3 69.3 68.4
45.................................................. 77.0 76.0 75.0 74.1 73.1 72.2 71.2 70.2 69.3 68.4
46.................................................. 76.9 76.0 75.0 74.0 73.1 72.1 71.2 70.2 69.3 68.3
47.................................................. 76.9 75.9 75.0 74.0 73.1 72.1 71.1 70.2 69.2 68.3
48.................................................. 76.9 75.9 75.0 74.0 73.0 72.1 71.1 70.1 69.2 68.2
49.................................................. 76.9 75.9 74.9 74.0 73.0 72.0 71.1 70.1 69.1 68.2
50.................................................. 76.9 75.9 74.9 73.9 73.0 72.0 71.0 70.1 69.1 68.2
51.................................................. 76.8 75.9 74.9 73.9 73.0 72.0 71.0 70.1 69.1 68.1
52.................................................. 76.8 75.9 74.9 73.9 72.9 72.0 71.0 70.0 69.1 68.1
53.................................................. 76.8 75.8 74.9 73.9 72.9 71.9 71.0 70.0 69.0 68.1
54.................................................. 76.8 75.8 74.8 73.9 72.9 71.9 71.0 70.0 69.0 68.1
55.................................................. 76.8 75.8 74.8 73.9 72.9 71.9 70.9 70.0 69.0 68.0
56.................................................. 76.8 75.8 74.8 73.8 72.9 71.9 70.9 69.9 69.0 68.0
57.................................................. 76.8 75.8 74.8 73.8 72.9 71.9 70.9 69.9 69.0 68.0
58.................................................. 76.8 75.8 74.8 73.8 72.8 71.9 70.9 69.9 68.9 68.0
59.................................................. 76.7 75.8 74.8 73.8 72.8 71.9 70.9 69.9 68.9 68.0
60.................................................. 76.7 75.8 74.8 73.8 72.8 71.8 70.9 69.9 68.9 67.9
61.................................................. 76.7 75.7 74.8 73.8 72.8 71.8 70.9 69.9 68.9 67.9
62.................................................. 76.7 75.7 74.8 73.8 72.8 71.8 70.8 69.9 68.9 67.9
63.................................................. 76.7 75.7 74.8 73.8 72.8 71.8 70.8 69.9 68.9 67.9
64.................................................. 76.7 75.7 74.7 73.8 72.8 71.8 70.8 69.8 68.9 67.9
65.................................................. 76.7 75.7 74.7 73.8 72.8 71.8 70.8 69.8 68.9 67.9
66.................................................. 76.7 75.7 74.7 73.7 72.8 71.8 70.8 69.8 68.9 67.9
67.................................................. 76.7 75.7 74.7 73.7 72.8 71.8 70.8 69.8 68.8 67.9
68.................................................. 76.7 75.7 74.7 73.7 72.8 71.8 70.8 69.8 68.8 67.9
69.................................................. 76.7 75.7 74.7 73.7 72.7 71.8 70.8 69.8 68.8 67.8
70.................................................. 76.7 75.7 74.7 73.7 72.7 71.8 70.8 69.8 68.8 67.8
71.................................................. 76.7 75.7 74.7 73.7 72.7 71.8 70.8 69.8 68.8 67.8
72.................................................. 76.7 75.7 74.7 73.7 72.7 71.8 70.8 69.8 68.8 67.8
73.................................................. 76.7 75.7 74.7 73.7 72.7 71.7 70.8 69.8 68.8 67.8
74.................................................. 76.7 75.7 74.7 73.7 72.7 71.7 70.8 69.8 68.8 67.8
75.................................................. 76.7 75.7 74.7 73.7 72.7 71.7 70.8 69.8 68.8 67.8
76.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.8 69.8 68.8 67.8
77.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.8 69.8 68.8 67.8
78.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
79.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
80.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
81.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
82.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
[[Page 207]]
83.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
84.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
85.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
86.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
87.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
88.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.8 68.8 67.8
89.................................................. 76.6 75.7 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
90.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
91.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
92.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
93.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
94.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
95.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
96.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
97.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
98.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
99.................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
100................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
101................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
102................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
103................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
104................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
105................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
106................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
107................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
108................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
109................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
110................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
111................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
112................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
113................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
114................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
115................................................. 76.6 75.6 74.7 73.7 72.7 71.7 70.7 69.7 68.8 67.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 15 16 17 18 19 20 21 22 23 24
--------------------------------------------------------------------------------------------------------------------------------------------------------
15.................................................. 73.8 73.3 72.9 72.4 72.0 71.6 71.3 70.9 70.6 70.3
16.................................................. 73.3 72.8 72.3 71.9 71.4 71.0 70.7 70.3 70.0 69.6
17.................................................. 72.9 72.3 71.8 71.3 70.9 70.5 70.0 69.7 69.3 69.0
18.................................................. 72.4 71.9 71.3 70.8 70.4 69.0 69.5 69.9 68.7 68.3
19.................................................. 72.0 71.4 70.9 70.4 69.8 69.4 68.9 68.5 68.1 67.7
20.................................................. 71.6 71.0 70.5 69.9 69.4 68.8 68.4 67.9 67.5 67.1
21.................................................. 71.3 70.7 70.0 69.5 68.9 68.4 67.9 67.4 66.9 66.5
22.................................................. 70.9 70.3 69.7 69.0 68.5 67.9 67.4 66.9 66.4 65.9
23.................................................. 70.6 70.0 69.3 68.7 68.1 67.5 66.9 66.4 65.9 65.4
24.................................................. 70.3 69.6 69.0 68.3 67.7 67.1 66.5 65.9 65.4 64.9
25.................................................. 70.1 69.3 68.6 68.0 67.3 66.7 66.1 65.5 64.9 64.4
26.................................................. 69.8 69.1 68.3 67.6 67.0 66.3 65.7 65.1 64.5 63.9
27.................................................. 69.6 68.8 68.1 67.3 66.7 66.0 65.3 64.7 64.1 63.5
28.................................................. 69.3 68.6 67.8 67.1 66.4 65.7 65.0 64.3 63.7 63.1
29.................................................. 69.1 68.4 67.6 66.8 66.1 65.4 64.7 64.0 63.3 62.7
30.................................................. 69.0 68.2 67.4 66.6 65.8 65.1 64.4 63.7 63.0 62.3
31.................................................. 68.8 68.0 67.2 66.4 65.6 64.8 64.1 63.4 62.7 62.0
32.................................................. 68.6 67.8 67.0 66.2 65.4 64.6 63.8 63.1 62.4 61.7
33.................................................. 68.5 67.6 66.8 66.0 65.2 64.4 63.6 62.8 62.1 61.4
34.................................................. 68.3 67.5 66.6 65.8 65.0 64.2 63.4 62.6 61.9 61.1
35.................................................. 68.2 67.4 66.5 65.6 64.8 64.0 63.2 62.4 61.6 60.9
36.................................................. 68.1 67.2 66.4 65.5 64.7 63.8 63.0 62.2 61.4 60.6
37.................................................. 68.0 67.1 66.2 65.4 64.5 63.7 62.8 62.0 61.2 60.4
38.................................................. 67.9 67.0 66.1 65.2 64.4 63.5 62.7 61.8 61.0 60.2
39.................................................. 67.8 66.9 66.0 65.1 64.2 63.4 62.5 61.7 60.8 60.0
40.................................................. 67.7 66.8 65.9 65.0 64.1 63.3 62.4 61.5 60.7 59.9
41.................................................. 67.7 66.7 65.8 64.9 64.0 63.1 62.3 61.4 60.5 59.7
42.................................................. 67.6 66.7 65.7 64.8 63.9 63.0 62.2 61.3 60.4 59.6
43.................................................. 67.5 66.6 65.7 64.8 63.8 62.9 62.1 61.2 60.3 59.4
44.................................................. 67.5 66.5 65.6 64.7 63.8 62.9 62.0 61.1 60.2 59.3
45.................................................. 67.4 66.5 65.5 64.6 63.7 62.8 61.9 61.0 60.1 59.2
[[Page 208]]
46.................................................. 67.4 66.4 65.4 64.6 63.6 62.7 61.8 60.9 60.0 59.1
47.................................................. 67.3 66.4 65.4 64.5 63.6 62.6 61.7 60.8 59.9 59.0
48.................................................. 67.3 66.3 65.4 64.4 63.5 62.6 61.6 60.7 59.8 58.9
49.................................................. 67.2 66.3 65.3 64.4 63.5 62.5 61.6 60.7 59.7 58.8
50.................................................. 67.2 66.2 65.3 64.3 63.4 62.5 61.5 60.6 59.7 58.8
51.................................................. 67.2 66.2 65.3 64.3 63.4 62.4 61.5 60.5 59.6 58.7
52.................................................. 67.1 66.2 65.2 64.3 63.3 62.4 61.4 60.5 59.6 58.6
53.................................................. 67.1 66.2 65.2 64.2 63.3 62.3 61.4 60.4 59.5 58.6
54.................................................. 67.1 66.1 65.2 64.2 63.2 62.3 61.3 60.4 59.5 58.5
55.................................................. 67.1 66.1 65.1 64.2 63.2 62.3 61.3 60.4 59.4 58.5
56.................................................. 67.0 66.1 65.1 64.1 63.2 62.2 61.3 60.3 59.4 58.4
57.................................................. 67.0 66.1 65.1 64.1 63.2 62.2 61.2 60.3 59.3 58.4
58.................................................. 67.0 66.0 65.1 64.1 63.1 62.2 61.2 60.3 59.3 58.4
59.................................................. 67.0 66.0 65.0 64.1 63.1 62.1 61.2 60.2 59.3 58.3
60.................................................. 67.0 66.0 65.0 64.1 63.1 62.1 61.2 60.2 59.2 58.3
61.................................................. 67.0 66.0 65.0 64.0 63.1 62.1 61.1 60.2 59.2 58.3
62.................................................. 66.9 66.0 65.0 64.0 63.1 62.1 61.1 60.2 59.2 58.2
63.................................................. 66.9 66.0 65.0 64.0 63.0 62.1 61.1 60.1 59.2 58.2
64.................................................. 66.9 65.9 65.0 64.0 63.0 62.1 61.1 60.1 59.2 58.2
65.................................................. 66.9 65.9 65.0 64.0 63.0 62.0 61.1 60.1 59.1 58.2
66.................................................. 66.9 65.9 64.9 64.0 63.0 62.0 61.1 60.1 59.1 58.2
67.................................................. 66.9 65.9 64.9 64.0 63.0 62.0 61.1 60.1 59.1 58.1
68.................................................. 66.9 65.9 64.9 64.0 63.0 62.0 61.0 60.1 59.1 58.1
69.................................................. 66.9 65.9 64.9 63.9 63.0 62.0 61.0 60.0 59.1 58.1
70.................................................. 66.9 65.9 64.9 63.9 63.0 62.0 61.0 60.0 59.1 58.1
71.................................................. 66.9 65.9 64.9 63.9 62.9 62.0 61.0 60.0 59.1 58.1
72.................................................. 66.9 65.9 64.9 63.9 62.9 62.0 61.0 60.0 59.0 58.1
73.................................................. 66.8 65.9 64.9 63.9 62.9 62.0 61.0 60.0 59.0 58.1
74.................................................. 66.8 65.9 64.9 63.9 62.9 62.0 61.0 60.0 59.0 58.1
75.................................................. 66.8 65.9 64.9 63.9 62.9 61.9 61.0 60.0 59.0 58.1
76.................................................. 66.8 65.9 64.9 63.9 62.9 61.9 61.0 60.0 59.0 58.0
76.................................................. 66.8 65.9 64.9 63.9 62.9 61.9 61.0 60.0 59.0 58.0
77.................................................. 66.8 65.9 64.9 63.9 63.9 62.9 61.0 60.0 59.0 58.0
78.................................................. 66.8 65.8 64.9 63.9 62.9 61.9 61.0 60.0 59.0 58.0
79.................................................. 66.8 65.8 64.9 63.9 62.9 61.9 61.0 60.0 59.0 58.0
80.................................................. 66.8 65.9 64.9 63.9 62.9 61.9 60.9 60.0 59.0 58.0
81.................................................. 66.8 65.8 64.9 63.9 62.9 61.9 60.9 60.0 59.0 58.0
82.................................................. 66.8 65.8 64.9 63.9 62.9 61.9 60.9 60.0 59.0 58.0
83.................................................. 66.8 65.8 64.9 63.9 62.9 61.9 60.9 60.0 59.0 58.0
84.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
85.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
86.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
87.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
88.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
89.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
90.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
91.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 60.0 59.0 58.0
92.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
93.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
94.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
95.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
96.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
97.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
98.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
99.................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
100................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
101................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
102................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
103................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
104................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
105................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
106................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
107................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
108................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
109................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
110................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
111................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
112................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
113................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
114................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
115................................................. 66.8 65.8 64.8 63.9 62.9 61.9 60.9 59.9 59.0 58.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 209]]
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 25 26 27 28 29 30 31 32 33 34
--------------------------------------------------------------------------------------------------------------------------------------------------------
25.................................................. 63.9 63.4 62.9 62.5 62.1 61.7 61.3 61.0 60.7 60.4
26.................................................. 63.4 62.9 62.4 61.9 61.5 61.1 60.7 60.4 60.0 59.7
27.................................................. 62.9 62.4 61.9 61.4 60.9 60.5 60.1 59.7 59.4 59.0
28.................................................. 62.5 61.9 61.4 60.9 60.4 60.0 59.5 59.1 58.7 58.4
29.................................................. 62.1 61.5 60.9 60.4 59.9 59.4 59.0 58.5 58.1 57.7
30.................................................. 61.7 61.1 60.5 60.0 59.4 58.9 58.4 58.0 57.5 57.1
31.................................................. 61.3 60.7 60.1 59.5 59.0 58.4 57.9 57.4 57.0 56.5
32.................................................. 61.0 60.4 59.7 59.1 58.5 58.0 57.4 56.9 56.4 56.0
33.................................................. 60.7 60.0 59.4 58.7 58.1 57.5 57.0 56.4 55.9 55.5
34.................................................. 60.4 59.7 59.0 58.4 57.7 57.1 56.5 56.0 55.5 54.9
35.................................................. 60.1 59.4 58.7 58.0 57.4 56.7 56.1 55.6 55.0 54.5
36.................................................. 59.9 59.1 58.4 57.7 57.0 56.4 55.8 55.1 54.6 54.0
37.................................................. 59.6 58.9 58.1 57.4 56.7 56.0 55.4 54.8 54.2 53.6
38.................................................. 59.4 58.6 57.9 57.9 56.4 55.7 55.1 54.4 53.8 53.2
39.................................................. 59.2 58.4 57.7 56.9 56.2 55.4 54.7 54.1 53.4 52.8
40.................................................. 59.0 58.2 57.4 56.7 55.9 55.2 54.5 53.8 53.1 52.4
41.................................................. 58.9 58.0 57.2 56.4 55.7 54.9 54.2 53.5 52.8 52.1
42.................................................. 58.7 57.9 57.1 56.2 55.5 54.7 53.9 53.2 52.5 51.8
43.................................................. 58.6 57.7 56.9 56.1 55.3 54.5 53.7 52.9 52.2 51.5
44.................................................. 58.4 57.6 56.7 55.9 55.1 54.3 53.5 52.7 52.0 51.2
45.................................................. 58.3 57.4 56.6 55.7 54.9 54.1 53.3 52.5 51.7 51.0
46.................................................. 58.2 57.3 56.5 55.6 54.8 53.9 53.1 52.3 51.5 50.7
47.................................................. 58.1 57.2 56.3 55.5 54.6 53.8 52.9 52.1 51.3 50.5
48.................................................. 58.0 57.1 56.2 55.3 54.5 53.6 52.8 51.9 51.1 50.3
49.................................................. 57.9 57.0 56.1 55.2 54.4 53.5 52.6 51.8 51.0 50.1
50.................................................. 57.8 56.9 56.0 55.1 54.2 53.4 52.5 51.7 50.8 50.0
51.................................................. 57.8 56.9 55.9 55.0 54.1 53.3 52.4 51.5 50.7 49.8
52.................................................. 57.7 56.8 55.9 55.0 54.1 53.2 52.3 51.4 50.5 49.7
53.................................................. 57.6 56.7 55.8 54.9 54.0 53.1 52.2 51.3 50.4 49.6
54.................................................. 57.6 56.7 55.7 54.8 53.9 53.0 52.1 51.2 50.3 49.4
55.................................................. 57.5 56.6 55.7 54.7 53.8 52.9 52.0 51.1 40.2 49.3
56.................................................. 57.5 56.5 55.6 54.7 53.8 52.8 51.9 51.0 50.1 49.2
57.................................................. 57.4 56.5 55.6 54.6 53.7 52.8 51.9 50.9 50.0 49.1
58.................................................. 57.4 56.5 55.5 54.6 53.6 52.7 51.8 50.9 50.0 49.1
59.................................................. 57.4 56.4 55.5 54.5 53.6 52.7 51.7 50.8 49.9 49.0
60.................................................. 57.3 56.4 55.4 54.5 53.6 52.6 51.7 50.8 49.8 48.9
61.................................................. 57.3 56.4 55.4 54.5 53.5 52.6 51.6 50.7 49.8 48.9
62.................................................. 57.3 56.3 55.4 54.4 53.5 52.5 51.6 50.7 49.7 48.8
63.................................................. 57.3 56.3 55.3 54.4 53.4 52.5 51.6 50.6 49.7 48.7
64.................................................. 57.2 56.3 55.3 54.4 53.4 52.5 51.5 50.6 49.6 48.7
65.................................................. 57.2 56.3 55.3 54.3 53.4 52.4 51.5 50.5 49.6 48.7
66.................................................. 57.2 56.2 55.3 54.3 53.4 52.4 51.5 50.5 49.6 48.6
67.................................................. 57.2 56.2 55.3 54.3 53.3 52.4 51.4 50.5 49.5 48.6
68.................................................. 57.2 56.2 55.2 54.3 53.3 52.4 51.4 50.4 49.5 48.6
69.................................................. 57.1 56.2 55.2 54.3 53.3 52.3 51.4 50.4 49.5 48.5
70.................................................. 57.1 56.2 55.2 54.2 53.3 52.3 51.4 50.4 49.4 48.5
71.................................................. 57.1 56.2 55.2 54.2 53.3 52.3 51.3 50.4 49.4 48.5
72.................................................. 57.1 56.1 55.2 54.2 53.2 52.3 51.3 50.4 49.4 48.5
73.................................................. 57.1 56.1 55.2 54.2 53.2 52.3 51.3 50.3 49.4 48.4
74.................................................. 57.1 56.1 55.2 54.2 53.2 52.3 51.3 50.3 49.4 48.4
75.................................................. 57.1 56.1 55.1 54.2 53.2 52.2 51.3 50.3 49.4 48.4
76.................................................. 57.1 56.1 55.1 54.2 53.2 52.2 51.3 50.3 49.3 48.4
77.................................................. 57.1 56.1 55.1 54.2 53.2 52.2 51.3 50.3 49.3 48.4
78.................................................. 57.1 56.1 55.1 54.2 53.2 52.2 51.3 50.3 49.3 48.4
79.................................................. 57.1 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.4
80.................................................. 57.1 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.3
81.................................................. 57.0 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.3
82.................................................. 57.0 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.3
83.................................................. 57.0 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.3
84.................................................. 57.0 56.1 55.1 54.1 53.2 52.2 51.2 50.3 49.3 48.3
85.................................................. 57.0 56.1 55.1 54.1 53.2 52.2 51.2 50.2 49.3 48.3
86.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
87.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
88.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
89.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
90.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
91.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
92.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
93.................................................. 57.0 56.1 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
94.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
95.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
[[Page 210]]
96.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
97.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
98.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
99.................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
100................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
101................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
102................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
103................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
104................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
105................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
106................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
107................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
108................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
109................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
110................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
111................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
112................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
113................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
114................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
115................................................. 57.0 56.0 55.1 54.1 53.1 52.2 51.2 50.2 49.3 48.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 35 36 37 38 39 40 41 42 43 44
--------------------------------------------------------------------------------------------------------------------------------------------------------
35.................................................. 54.0 53.5 53.0 52.6 52.2 51.8 51.4 51.1 50.8 50.5
36.................................................. 53.5 53.0 52.5 52.0 51.6 51.2 50.8 50.4 50.1 49.8
37.................................................. 53.0 52.5 52.0 51.5 51.0 50.6 50.2 49.8 49.5 49.1
38.................................................. 52.6 52.0 51.5 51.0 50.5 50.0 49.6 49.2 48.8 48.5
39.................................................. 52.2 51.6 51.0 50.5 50.0 49.5 49.1 48.6 48.2 47.8
40.................................................. 51.8 51.2 50.6 50.0 49.5 49.0 48.5 48.1 47.6 47.2
41.................................................. 51.4 50.8 50.2 49.6 49.1 48.5 48.0 47.5 47.1 46.7
42.................................................. 51.1 50.4 49.8 49.2 48.6 48.1 47.5 47.0 46.6 46.1
43.................................................. 50.8 50.1 49.5 48.8 48.2 47.6 47.1 46.6 46.0 45.6
44.................................................. 50.5 49.8 49.1 48.5 47.8 47.2 46.7 46.1 45.6 45.1
45.................................................. 50.2 49.5 48.8 48.1 47.5 46.9 46.3 45.7 45.1 44.6
46.................................................. 50.0 49.2 48.5 47.8 47.2 46.5 45.9 45.3 44.7 44.1
47.................................................. 49.7 49.0 48.3 47.5 46.8 46.2 45.5 44.9 44.3 43.7
48.................................................. 49.5 48.8 48.0 47.3 46.6 45.9 45.2 44.5 43.9 43.3
49.................................................. 49.3 48.5 47.8 47.0 46.3 45.6 44.9 44.2 43.6 42.9
50.................................................. 49.2 48.4 47.6 46.8 46.0 45.3 44.6 43.9 43.2 42.6
51.................................................. 49.0 48.2 47.4 46.6 45.8 45.1 44.3 43.6 42.9 44.2
52.................................................. 48.8 48.0 47.2 46.4 45.6 44.8 44.1 43.3 42.6 41.9
53.................................................. 48.7 47.9 47.0 46.2 45.4 44.6 43.9 43.1 42.4 41.7
54.................................................. 48.6 47.7 46.9 46.0 45.2 44.4 43.6 42.9 42.1 41.4
55.................................................. 48.5 47.6 46.7 45.9 45.1 44.2 43.4 42.7 41.9 41.2
56.................................................. 48.3 47.5 46.6 45.8 44.9 44.1 43.3 42.5 41.7 40.9
57.................................................. 48.3 47.4 46.5 45.6 44.8 43.9 43.1 42.3 41.5 40.7
58.................................................. 48.2 47.3 46.4 45.5 44.7 43.8 43.0 42.1 41.3 40.5
59.................................................. 48.1 47.2 46.3 45.4 44.5 43.7 42.8 42.0 41.2 40.4
60.................................................. 48.0 47.1 46.2 45.3 44.4 43.6 42.7 41.9 41.0 40.2
61.................................................. 47.9 47.0 46.1 45.2 44.3 43.5 42.6 41.7 40.9 40.0
62.................................................. 47.9 47.0 46.0 45.1 44.2 43.4 42.5 41.6 40.8 39.9
63.................................................. 47.8 46.9 46.0 45.1 44.2 43.3 42.4 41.5 40.6 39.8
64.................................................. 47.8 46.8 45.9 45.0 44.1 43.2 42.3 41.4 40.5 39.7
65.................................................. 47.7 46.8 45.9 44.9 44.0 43.1 42.2 41.3 40.4 39.6
66.................................................. 47.7 46.7 45.8 44.9 44.0 43.1 42.2 41.3 40.4 39.5
67.................................................. 47.6 46.7 45.8 44.8 43.9 43.0 42.1 41.2 40.3 39.4
68.................................................. 47.6 46.7 45.7 44.8 43.9 42.9 42.0 41.1 40.2 39.3
69.................................................. 47.6 46.6 45.7 44.8 43.8 42.9 42.0 41.1 40.2 39.3
70.................................................. 47.5 46.6 45.7 44.7 43.8 42.9 41.9 41.0 40.1 39.2
71.................................................. 47.5 46.6 45.6 44.7 43.8 42.8 41.9 41.0 40.1 39.1
72.................................................. 47.5 46.6 45.6 44.7 43.7 42.8 41.9 40.9 40.0 39.1
73.................................................. 47.5 46.5 45.6 44.6 43.7 42.8 41.8 40.9 40.0 39.0
74.................................................. 47.5 46.5 45.6 44.6 43.7 42.7 41.8 40.9 39.9 39.0
75.................................................. 47.4 46.5 45.5 44.6 43.6 42.7 41.8 40.8 39.9 39.0
76.................................................. 47.4 46.5 45.5 44.6 43.6 42.7 41.7 40.8 39.9 38.9
77.................................................. 47.4 46.5 45.5 44.6 43.6 42.7 41.7 40.8 39.8 38.9
78.................................................. 47.4 46.4 45.5 44.5 43.6 42.6 41.7 40.7 39.8 38.9
[[Page 211]]
79.................................................. 47.4 46.4 45.5 44.5 43.6 42.6 41.7 40.7 39.8 38.9
80.................................................. 47.4 46.4 45.5 44.5 43.6 42.6 41.7 40.7 39.8 38.8
81.................................................. 47.4 46.4 45.5 44.5 43.5 42.6 41.6 40.7 39.8 38.8
82.................................................. 47.4 46.4 45.4 44.5 43.5 42.6 41.6 40.7 39.7 38.8
83.................................................. 47.4 46.4 45.4 44.5 43.5 42.6 41.6 40.7 39.7 38.8
84.................................................. 47.4 46.4 45.4 44.5 43.5 42.6 41.6 40.7 39.7 38.8
85.................................................. 47.4 46.4 45.4 44.5 43.5 42.6 41.6 40.7 39.7 38.8
86.................................................. 47.3 46.4 45.4 44.5 43.5 42.5 41.6 40.6 39.7 38.8
87.................................................. 47.3 46.4 45.4 44.5 43.5 42.5 41.6 40.6 39.7 38.7
88.................................................. 47.3 46.4 45.4 44.5 43.5 42.5 41.6 40.6 39.7 38.7
89.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 38.7
90.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 38.7
91.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 39.7
92.................................................. 47.3 46.4 45.4 44.4 44.4 43.5 42.5 41.6 40.6 38.7
93.................................................. 47.3 46.4 45.4 43.5 42.5 41.6 40.6 39.7 39.7 38.7
94.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 38.7
95.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 38.7
96.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.7 38.7
97.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.6 38.7
98.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.6 40.6 39.6 38.7
99.................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
100................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
101................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
102................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
103................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
104................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
105................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
106................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
107................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
108................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
109................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
110................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
111................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
112................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
113................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
114................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
114................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
115................................................. 47.3 46.4 45.4 44.4 43.5 42.5 41.5 40.6 39.6 38.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 45 46 47 48 49 50 51 52 53 54
--------------------------------------------------------------------------------------------------------------------------------------------------------
45.................................................. 44.1 43.6 43.2 42.7 42.3 42.0 41.6 41.3 41.0 40.7
46.................................................. 43.6 43.1 42.6 42.2 41.8 41.4 41.0 40.6 40.3 40.0
47.................................................. 43.2 42.6 42.1 41.7 41.2 40.8 40.4 40.0 39.7 39.3
48.................................................. 42.7 42.2 41.7 41.2 40.7 40.2 39.8 39.4 39.0 38.7
49.................................................. 42.3 41.8 41.2 40.7 40.2 39.7 39.3 38.8 38.4 38.1
50.................................................. 42.0 41.4 40.8 40.2 39.7 39.2 38.7 38.3 37.9 37.5
51.................................................. 41.6 41.0 40.4 39.8 39.3 38.7 38.2 37.8 37.3 36.9
52.................................................. 41.3 40.6 40.0 39.4 38.8 38.3 37.8 37.3 36.8 36.4
53.................................................. 41.0 40.3 39.7 39.0 38.4 37.9 37.3 36.8 36.3 35.8
54.................................................. 40.7 40.0 39.3 38.7 38.1 37.5 36.9 36.4 35.8 35.3
55.................................................. 40.4 39.7 39.0 38.4 37.7 37.1 36.5 35.9 35.4 34.9
56.................................................. 40.2 39.5 38.7 38.1 37.4 36.8 36.1 35.6 35.0 34.4
57.................................................. 40.0 39.2 38.5 37.8 37.1 36.4 35.8 35.2 34.6 34.0
58.................................................. 39.7 39.0 38.2 37.5 36.8 36.1 35.5 34.8 34.2 33.6
59.................................................. 39.6 38.8 38.0 37.3 36.6 35.9 35.2 34.5 33.9 33.3
60.................................................. 39.4 38.6 37.8 37.1 36.3 35.6 34.9 34.2 33.6 32.9
61.................................................. 39.2 38.4 37.6 36.9 36.1 35.4 34.6 33.9 33.3 32.6
62.................................................. 39.1 38.3 37.5 36.7 35.9 35.1 34.4 33.7 33.0 32.3
63.................................................. 38.9 38.1 37.3 36.5 35.7 34.9 34.2 33.5 32.7 32.0
64.................................................. 38.8 38.0 37.2 36.3 35.5 34.8 34.0 33.2 32.5 31.8
65.................................................. 38.7 37.9 37.0 36.2 35.4 34.6 33.8 33.0 32.3 31.6
66.................................................. 38.6 37.8 36.9 36.1 35.2 34.4 33.6 32.9 32.1 31.4
67.................................................. 38.5 37.7 36.8 36.0 35.1 34.3 33.5 32.7 31.9 31.2
68.................................................. 38.4 37.6 36.7 35.8 35.0 34.2 33.4 32.5 31.8 31.0
69.................................................. 38.4 37.5 36.6 35.7 34.9 34.1 33.2 32.4 31.6 30.8
70.................................................. 38.3 37.4 36.5 35.7 34.8 34.0 33.1 32.3 31.5 30.7
[[Page 212]]
71.................................................. 38.2 37.3 36.5 35.6 34.7 33.9 33.0 32.2 31.4 30.5
72.................................................. 38.2 37.3 36.4 35.5 34.6 33.8 32.9 32.1 31.2 30.4
73.................................................. 38.1 37.2 36.3 35.4 34.6 33.7 32.8 32.0 31.1 30.3
74.................................................. 38.1 37.2 36.3 35.4 34.5 33.6 32.8 31.9 31.1 30.2
75.................................................. 38.1 37.1 36.2 35.3 34.5 33.6 32.7 31.8 31.0 30.1
76.................................................. 38.0 37.1 36.2 35.3 34.4 33.5 32.6 31.8 30.9 30.1
77.................................................. 38.0 37.1 36.2 35.3 34.4 33.5 32.6 31.7 30.8 30.0
78.................................................. 38.0 37.0 36.1 35.2 34.3 33.4 32.5 31.7 30.8 29.9
79.................................................. 37.9 37.0 36.1 35.2 34.3 33.4 32.5 31.6 30.7 29.9
80.................................................. 37.9 37.0 36.1 35.2 34.2 33.4 32.5 31.6 30.7 29.8
81.................................................. 37.9 37.0 36.0 35.1 34.2 33.3 32.4 31.5 30.7 29.8
82.................................................. 37.9 36.9 36.0 35.1 34.2 33.3 32.4 31.5 30.6 29.7
83.................................................. 37.9 36.9 36.0 35.1 34.2 33.3 32.4 31.5 30.6 29.7
84.................................................. 37.8 36.9 36.9 35.0 34.2 33.2 32.3 31.4 30.6 29.7
85.................................................. 37.8 36.9 36.0 35.1 34.1 33.2 32.3 31.4 30.5 29.6
86.................................................. 38.8 36.9 36.0 35.0 34.1 33.2 32.3 31.4 30.5 29.6
87.................................................. 37.8 36.9 35.9 35.0 34.1 33.2 32.3 31.4 30.5 29.6
88.................................................. 37.8 36.9 35.9 35.0 34.1 33.2 32.3 31.4 30.5 29.6
89.................................................. 37.8 36.9 35.9 35.0 34.1 33.2 32.3 31.4 30.5 29.6
90.................................................. 37.8 36.9 35.9 35.0 34.1 33.2 32.3 31.3 30.5 29.6
91.................................................. 37.8 36.8 35.9 35.0 34.1 33.2 32.2 31.3 30.4 29.5
92.................................................. 37.8 36.8 35.9 35.0 34.1 33.2 32.2 31.3 30.4 29.5
93.................................................. 37.8 36.8 35.9 35.0 34.1 33.1 32.2 31.3 30.4 29.5
94.................................................. 37.8 36.8 35.9 35.0 34.1 33.1 32.2 31.3 30.4 29.5
95.................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
96.................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
97.................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
98.................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
99.................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
101................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
102................................................. 37.8 36.8 35.9 35.0 34.0 33.1 32.2 31.3 30.4 29.5
103................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
104................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
105................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
106................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
107................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
108................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
109................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
110................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
111................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
112................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
113................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
114................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
115................................................. 37.7 36.8 35.9 34.9 34.0 33.1 32.2 31.3 30.4 29.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 55 56 57 58 59 60 61 62 63 64
--------------------------------------------------------------------------------------------------------------------------------------------------------
55.................................................. 34.4 33.9 33.5 33.1 32.7 32.3 32.0 31.7 31.4 31.1
56.................................................. 33.9 33.4 33.0 32.5 32.1 31.7 31.4 31.0 30.7 30.4
57.................................................. 33.5 33.0 32.5 32.0 31.6 31.2 30.8 30.4 30.1 29.8
58.................................................. 33.1 32.5 32.0 31.5 31.1 30.6 30.2 29.9 29.5 29.2
59.................................................. 32.7 32.1 31.6 31.1 30.6 30.1 29.7 29.3 28.9 28.6
60.................................................. 32.3 31.7 31.2 30.6 30.1 29.7 29.2 28.8 28.4 28.0
61.................................................. 32.0 31.4 30.8 30.2 29.7 29.2 28.7 28.3 27.8 27.4
62.................................................. 31.7 31.0 30.4 29.9 29.3 28.8 28.3 27.8 27.3 26.9
63.................................................. 31.4 30.7 30.1 29.5 28.9 28.4 27.8 27.3 26.9 26.4
64.................................................. 31.1 30.4 29.8 29.2 28.6 28.0 27.4 26.9 26.4 25.9
65.................................................. 30.9 30.2 29.5 28.9 28.2 27.6 27.1 26.5 26.0 25.5
66.................................................. 30.6 29.9 29.2 28.6 27.9 27.3 26.7 26.1 25.6 25.1
67.................................................. 30.4 29.7 29.0 28.3 27.6 27.0 26.4 25.8 25.2 24.7
68.................................................. 30.2 29.5 28.8 28.1 27.4 26.7 26.1 25.5 24.9 24.3
69.................................................. 30.1 29.3 28.6 27.8 27.1 26.5 25.8 25.2 24.6 24.0
70.................................................. 29.9 29.1 28.4 27.6 26.9 26.2 25.6 24.9 24.3 23.7
71.................................................. 29.7 29.0 28.2 27.5 26.7 26.0 25.3 24.7 24.0 23.4
72.................................................. 29.6 28.8 28.1 27.3 26.5 25.8 25.1 24.4 23.8 23.1
73.................................................. 29.5 28.7 27.9 27.1 26.4 25.6 24.9 24.2 23.5 22.9
74.................................................. 29.4 28.6 27.8 27.0 26.2 25.5 24.7 24.0 23.3 22.7
[[Page 213]]
75.................................................. 29.3 28.5 27.7 26.9 26.1 25.3 24.6 23.8 23.1 22.4
76.................................................. 29.2 28.4 27.6 26.8 26.0 25.2 24.4 23.7 23.0 22.3
77.................................................. 29.1 28.3 27.5 26.7 25.9 25.1 24.3 23.6 22.8 22.1
78.................................................. 29.1 28.2 27.4 26.6 25.8 25.0 24.2 23.4 22.7 21.9
79.................................................. 29.0 28.2 27.3 26.5 25.7 24.9 24.1 23.3 22.6 21.8
80.................................................. 29.0 28.1 27.3 26.4 25.6 24.8 24.0 23.2 22.4 21.7
81.................................................. 28.9 28.1 27.2 26.4 25.5 24.7 23.9 23.1 22.3 21.6
82.................................................. 28.9 28.0 27.2 26.3 25.5 24.6 23.8 23.0 22.3 21.5
83.................................................. 28.8 28.0 27.1 26.3 25.4 24.6 23.8 23.0 22.2 21.4
84.................................................. 28.8 27.9 27.1 26.2 25.4 24.5 23.7 22.9 22.1 21.3
85.................................................. 28.8 27.9 27.0 26.2 25.3 24.5 23.7 22.8 22.0 21.3
86.................................................. 28.7 27.9 27.0 26.1 25.3 24.5 23.6 22.8 22.0 21.2
87.................................................. 28.7 27.8 27.0 26.1 25.3 24.4 23.6 22.8 21.9 21.1
88.................................................. 28.7 27.8 27.0 26.1 25.2 24.4 23.5 22.7 21.9 21.1
89.................................................. 28.7 27.8 26.9 26.1 25.2 24.4 23.5 22.7 21.9 21.1
90.................................................. 28.7 27.8 26.9 26.1 25.2 24.3 23.5 22.7 21.8 21.0
91.................................................. 28.7 27.8 26.9 26.0 25.2 24.3 23.5 22.6 21.8 21.0
92.................................................. 28.6 27.8 26.9 26.0 25.2 24.3 23.5 22.6 21.8 21.0
93.................................................. 28.6 27.8 26.9 26.0 25.1 24.3 23.4 22.6 21.8 20.9
94.................................................. 28.6 27.7 26.9 26.0 25.1 24.3 23.4 22.6 21.7 20.9
95.................................................. 28.6 27.7 26.9 26.0 25.1 24.3 23.4 22.6 21.7 20.9
96.................................................. 28.6 27.7 26.9 26.0 25.1 24.2 23.4 22.6 21.7 20.9
97.................................................. 28.6 27.7 26.8 26.0 25.1 24.2 23.4 22.5 21.7 20.9
98.................................................. 28.6 27.7 26.8 26.0 25.1 24.2 23.4 22.5 21.7 20.9
99.................................................. 28.6 27.7 26.8 26.0 25.1 24.2 23.4 22.5 21.7 20.9
100................................................. 28.6 27.7 26.8 26.0 25.1 24.2 23.4 22.5 21.7 20.8
101................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.4 22.5 21.7 20.8
102................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.7 20.8
103................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.7 20.8
104................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
105................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
106................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
107................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
108................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
109................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
110................................................. 28.6 27.7 26.8 25.9 25.1 24.2 23.3 22.5 21.6 20.8
111................................................. 28.6 27.7 26.8 25.9 25.0 24.2 23.3 22.5 21.6 20.8
112................................................. 28.6 27.7 26.8 25.9 25.0 24.2 23.3 22.5 21.6 20.8
113................................................. 28.6 27.7 26.8 25.9 25.0 24.2 23.3 22.5 21.6 20.8
114................................................. 28.6 27.7 26.8 25.9 25.0 24.2 23.3 22.5 21.6 20.8
115................................................. 28.6 27.7 26.8 25.9 25.0 24.2 23.3 22.5 21.6 20.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 65 66 67 68 69 70 71 72 73 74
--------------------------------------------------------------------------------------------------------------------------------------------------------
65.................................................. 25.0 24.6 24.2 23.8 23.4 23.1 22.8 22.5 22.2 22.0
66.................................................. 24.6 24.1 23.7 23.3 22.9 22.5 22.2 21.9 21.6 21.4
67.................................................. 24.2 23.7 23.2 22.8 22.4 22.0 21.7 21.3 21.0 20.8
68.................................................. 23.8 23.3 22.8 22.3 21.9 21.5 21.2 20.8 20.5 20.2
69.................................................. 23.4 22.9 22.4 21.9 21.5 21.1 20.7 20.3 20.0 19.6
70.................................................. 23.1 22.5 22.0 21.5 21.1 20.6 20.2 19.8 19.4 19.1
71.................................................. 22.8 22.2 21.7 21.2 20.7 20.2 19.8 19.4 19.0 18.6
72.................................................. 22.5 21.9 21.3 20.8 20.3 19.8 19.4 18.9 18.5 18.2
73.................................................. 22.2 21.6 21.0 20.5 20.0 19.4 19.0 18.5 18.1 17.7
74.................................................. 22.0 21.4 20.8 20.2 19.6 19.1 18.6 18.2 17.7 17.3
75.................................................. 21.8 21.1 20.5 19.9 19.3 18.8 18.3 17.8 17.3 16.9
76.................................................. 21.6 20.9 20.3 19.7 19.1 18.5 18.0 17.5 17.0 16.5
77.................................................. 21.4 20.7 20.1 19.4 18.8 18.3 17.7 17.2 16.7 16.2
78.................................................. 21.2 20.5 19.9 19.2 18.6 18.0 17.5 16.9 16.4 15.9
79.................................................. 21.1 20.4 19.7 19.0 18.4 17.8 17.2 16.7 16.1 15.6
80.................................................. 21.0 20.2 19.5 18.9 18.2 17.6 17.0 16.4 15.9 15.4
81.................................................. 20.8 20.1 19.4 18.7 18.1 17.4 16.8 16.2 15.7 15.1
82.................................................. 20.7 20.0 19.3 18.6 17.9 17.3 16.6 16.0 15.5 14.9
83.................................................. 20.6 19.9 19.2 18.5 17.8 17.1 16.5 15.9 15.3 14.7
84.................................................. 20.5 19.8 19.1 18.4 17.7 17.0 16.3 15.7 15.1 14.5
85.................................................. 20.5 19.7 19.0 18.3 17.6 16.9 16.2 15.6 15.0 14.4
86.................................................. 20.4 19.6 18.9 18.2 17.5 16.8 16.1 15.5 14.8 14.2
87.................................................. 20.4 19.6 18.8 18.1 17.4 16.7 16.0 15.4 14.7 14.1
[[Page 214]]
88.................................................. 20.3 19.5 18.8 18.0 17.3 16.6 15.9 15.3 14.6 14.0
89.................................................. 20.3 19.5 18.7 18.0 17.2 16.5 15.8 15.2 14.5 13.9
90.................................................. 20.2 19.4 18.7 17.9 17.2 16.5 15.8 15.1 14.5 13.8
91.................................................. 20.2 19.4 18.6 17.9 17.1 16.4 15.7 15.0 14.4 13.7
92.................................................. 20.2 19.4 18.6 17.8 17.1 16.4 15.7 15.0 14.3 13.7
93.................................................. 20.1 19.3 18.6 17.8 17.1 16.3 15.6 14.9 14.3 13.6
94.................................................. 20.1 19.3 18.5 17.8 17.0 16.3 15.6 14.9 14.2 13.6
95.................................................. 20.1 19.3 18.5 17.8 17.0 16.3 15.6 14.9 14.2 13.5
96.................................................. 20.1 19.3 18.5 17.7 17.0 16.2 15.5 14.8 14.2 13.5
97.................................................. 20.1 19.3 18.5 17.7 17.0 16.2 15.5 14.8 14.1 13.5
98.................................................. 20.1 19.3 18.5 17.7 16.9 16.2 15.5 14.8 14.1 13.4
99.................................................. 20.0 19.2 18.5 17.7 16.9 16.2 15.5 14.7 14.1 13.4
100................................................. 20.0 19.2 18.4 17.7 16.9 16.2 15.4 14.7 14.0 13.4
101................................................. 20.0 19.2 18.4 17.7 16.9 16.1 15.4 14.7 14.0 13.3
102................................................. 20.0 19.2 18.4 17.6 16.9 16.1 15.4 14.7 14.0 13.3
103................................................. 20.0 19.2 18.4 17.6 16.9 16.1 15.4 14.7 14.0 13.3
104................................................. 20.0 19.2 18.4 17.6 16.9 16.1 15.4 14.7 14.0 13.3
105................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.4 14.6 13.9 13.3
106................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.3 14.6 13.9 13.3
107................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.3 14.6 13.9 13.2
108................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.3 14.6 13.9 13.2
109................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.3 14.6 13.9 13.2
110................................................. 20.0 19.2 18.4 17.6 16.8 16.1 15.3 14.6 13.9 13.2
111................................................. 20.0 19.2 18.4 17.6 16.8 16.0 15.3 14.6 13.9 13.2
112................................................. 20.0 19.2 18.4 17.6 16.8 16.0 15.3 14.6 13.9 13.2
113................................................. 20.0 19.2 18.4 17.6 16.8 16.0 15.3 14.6 13.9 13.2
114................................................. 20.0 19.2 18.4 17.6 16.8 16.0 15.3 14.6 13.9 13.2
115................................................. 20.0 19.2 18.4 17.6 16.8 16.0 15.3 14.6 13.9 13.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 75 76 77 78 79 80 81 82 83 84
--------------------------------------------------------------------------------------------------------------------------------------------------------
75.................................................. 16.5 16.1 15.8 15.4 15.1 14.9 14.6 14.4 14.2 14.0
76.................................................. 16.1 15.7 15.4 15.0 14.7 14.4 14.1 13.9 13.7 13.5
77.................................................. 15.8 15.4 15.0 14.6 14.3 14.0 13.7 13.4 13.2 13.0
78.................................................. 15.4 15.0 14.6 14.2 13.9 13.5 13.2 13.0 12.7 12.5
79.................................................. 15.1 14.7 14.3 13.9 13.5 13.2 12.8 12.5 12.3 12.0
80.................................................. 14.9 14.4 14.0 13.5 13.2 12.8 12.5 12.2 11.9 11.6
81.................................................. 14.6 14.1 13.7 13.2 12.8 12.5 12.1 11.8 11.5 11.2
82.................................................. 14.4 13.9 13.4 13.0 12.5 12.2 11.8 11.5 11.1 10.9
83.................................................. 14.2 13.7 13.2 12.7 12.3 11.9 11.5 11.1 10.8 10.5
84.................................................. 14.0 13.5 13.0 12.5 12.0 11.6 11.2 10.9 10.5 10.2
85.................................................. 13.8 13.3 12.8 12.3 11.8 11.4 11.0 10.6 10.2 9.9
86.................................................. 13.7 13.1 12.6 12.1 11.6 11.2 10.8 10.4 10.0 9.7
87.................................................. 13.5 13.0 12.4 11.9 11.4 11.0 10.6 10.1 9.8 9.4
88.................................................. 13.4 12.8 12.3 11.8 11.3 10.8 10.4 10.0 9.6 9.2
89.................................................. 13.3 12.7 12.2 11.6 11.1 10.7 10.2 9.8 9.4 9.0
90.................................................. 13.2 12.6 12.1 11.5 11.0 10.5 10.1 9.6 9.2 8.8
91.................................................. 13.1 12.5 12.0 11.4 10.9 10.4 9.9 9.5 9.1 8.7
92.................................................. 13.1 12.5 11.9 11.3 10.8 10.3 9.8 9.4 8.9 8.5
93.................................................. 13.0 12.4 11.8 11.3 10.7 10.2 9.7 9.3 8.8 8.4
94.................................................. 12.9 12.3 11.7 11.2 10.6 10.1 9.6 9.2 8.7 8.3
95.................................................. 12.9 12.3 11.7 11.1 10.6 10.1 9.6 9.1 8.6 8.2
96.................................................. 12.9 12.2 11.6 11.1 10.5 10.0 9.5 9.0 8.5 8.1
97.................................................. 12.8 12.2 11.6 11.0 10.5 9.9 9.4 8.9 8.5 8.0
98.................................................. 12.8 12.2 11.5 11.0 10.4 9.9 9.4 8.9 8.4 8.0
99.................................................. 12.7 12.1 11.5 10.9 10.4 9.8 9.3 8.8 8.3 7.9
100................................................. 12.7 12.1 11.5 10.9 10.3 9.8 9.2 8.7 8.3 7.8
101................................................. 12.7 12.1 11.4 10.8 10.3 9.7 9.2 8.7 8.2 7.8
102................................................. 12.7 12.0 11.4 10.8 10.2 9.7 9.2 8.7 8.2 7.7
103................................................. 12.6 12.0 11.4 10.8 10.2 9.7 9.1 8.6 8.1 7.7
104................................................. 12.6 12.0 11.4 10.8 10.2 9.6 9.1 8.6 8.1 7.6
105................................................. 12.6 12.0 11.3 10.7 10.2 9.6 9.1 8.5 8.0 7.6
106................................................. 12.6 11.9 11.3 10.7 10.1 9.6 9.0 8.5 8.0 7.5
107................................................. 12.6 11.9 11.3 10.7 10.1 9.6 9.0 8.5 8.0 7.5
108................................................. 12.6 11.9 11.3 10.7 10.1 9.5 9.0 8.5 8.0 7.5
109................................................. 12.6 11.9 11.3 10.7 10.1 9.5 9.0 8.4 7.9 7.5
110................................................. 12.6 11.9 11.3 10.7 10.1 9.5 9.0 8.4 7.9 7.4
[[Page 215]]
111................................................. 12.5 11.9 11.3 10.7 10.1 9.5 8.9 8.4 7.9 7.4
112................................................. 12.5 11.9 11.3 10.6 10.1 9.5 8.9 8.4 7.9 7.4
113................................................. 12.5 11.9 11.2 10.6 10.0 9.5 8.9 8.4 7.9 7.4
114................................................. 12.5 11.9 11.2 10.6 10.0 9.5 8.9 8.4 7.9 7.4
115................................................. 12.5 11.9 11.2 10.6 10.0 9.5 8.9 8.4 7.9 7.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 85 86 87 88 89 90 91 92 93 94
--------------------------------------------------------------------------------------------------------------------------------------------------------
85.................................................. 9.6 9.3 9.1 8.9 8.7 8.5 8.3 8.2 8.0 7.9
86.................................................. 9.3 9.1 8.8 8.6 8.3 8.2 8.0 7.8 7.7 7.6
87.................................................. 9.1 8.8 8.5 8.3 8.1 7.9 7.7 7.5 7.4 7.2
88.................................................. 8.9 8.6 8.3 8.0 7.8 7.6 7.4 7.2 7.1 6.9
89.................................................. 8.7 8.3 8.1 7.8 7.5 7.3 7.1 6.9 6.8 6.6
90.................................................. 8.5 8.2 7.9 7.6 7.3 7.1 6.9 6.7 6.5 6.4
91.................................................. 8.3 8.0 7.7 7.4 7.1 6.9 6.7 6.5 6.3 6.2
92.................................................. 8.2 7.8 7.5 7.2 6.9 6.7 6.5 6.3 6.1 5.9
93.................................................. 8.0 7.7 7.4 7.1 6.8 6.5 6.3 6.1 5.9 5.8
94.................................................. 7.9 7.6 7.2 6.9 6.6 6.4 6.2 5.9 5.8 5.6
95.................................................. 7.8 7.5 7.1 6.8 6.5 6.3 6.0 5.8 5.6 5.4
96.................................................. 7.7 7.3 7.0 6.7 6.4 6.1 5.9 5.7 5.5 5.3
97.................................................. 7.6 7.3 6.9 6.6 6.3 6.0 5.8 5.5 5.3 5.1
98.................................................. 7.6 7.2 6.8 6.5 6.2 5.9 5.6 5.4 5.2 5.0
99.................................................. 7.5 7.1 6.7 6.4 6.1 5.8 5.5 5.3 5.1 4.9
100................................................. 7.4 7.0 6.6 6.3 6.0 5.7 5.4 5.2 5.0 4.8
101................................................. 7.3 6.9 6.6 6.2 5.9 5.6 5.3 5.1 4.9 4.7
102................................................. 7.3 6.9 6.5 6.2 5.8 5.5 5.3 5.0 4.8 4.6
103................................................. 7.2 6.8 6.4 6.1 5.8 5.5 5.2 4.9 4.7 4.5
104................................................. 7.2 6.8 6.4 6.0 5.7 5.4 5.1 4.8 4.6 4.4
105................................................. 7.1 6.7 6.3 6.0 5.6 5.3 5.0 4.8 4.5 4.3
106................................................. 7.1 6.7 6.3 5.9 5.6 5.3 5.0 4.7 4.5 4.2
107................................................. 7.1 6.6 6.2 5.9 5.5 5.2 4.9 4.6 4.4 4.2
108................................................. 7.0 6.6 6.2 5.8 5.5 5.2 4.9 4.6 4.3 4.1
109................................................. 7.0 6.6 6.2 5.8 5.5 5.1 4.8 4.5 4.3 4.1
110................................................. 7.0 6.6 6.2 5.8 5.4 5.1 4.8 4.5 4.3 4.0
111................................................. 7.0 6.5 6.1 5.7 5.4 5.1 4.8 4.5 4.2 4.0
112................................................. 7.0 6.5 6.1 5.7 5.4 5.0 4.7 4.4 4.2 3.9
113................................................. 6.9 6.5 6.1 5.7 5.4 5.0 4.7 4.4 4.2 3.9
114................................................. 6.9 6.5 6.1 5.7 5.3 5.0 4.7 4.4 4.1 3.9
115................................................. 6.9 6.5 6.1 5.7 5.3 5.0 4.7 4.4 4.1 3.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 95 96 97 98 99 100 101 102 103 104
--------------------------------------------------------------------------------------------------------------------------------------------------------
95.................................................. 5.3 5.1 5.0 4.8 4.7 4.6 4.5 4.4 4.3 4.2
96.................................................. 5.1 5.0 4.8 4.7 4.5 4.4 4.3 4.2 4.1 4.0
97.................................................. 5.0 4.8 4.7 4.5 4.4 4.3 4.1 4.0 3.9 3.8
98.................................................. 4.8 4.7 4.5 4.4 4.2 4.1 4.0 3.9 3.8 3.7
99.................................................. 4.7 4.5 4.4 4.2 4.1 4.0 3.8 3.7 3.6 3.5
100................................................. 4.6 4.4 4.3 4.1 4.0 3.8 3.7 3.6 3.5 3.3
101................................................. 4.5 4.3 4.1 4.0 3.8 3.7 3.6 3.4 3.3 3.2
102................................................. 4.4 4.2 4.0 3.9 3.7 3.6 3.4 3.3 3.2 3.1
103................................................. 4.3 4.1 3.9 3.8 3.6 3.5 3.3 3.2 3.0 2.9
104................................................. 4.2 4.0 3.8 3.7 3.5 3.3 3.2 3.1 2.9 2.8
105................................................. 4.1 3.9 3.7 3.6 3.4 3.2 3.1 2.9 2.8 2.7
106................................................. 4.0 3.8 3.6 3.5 3.3 3.1 3.0 2.8 2.7 2.5
107................................................. 4.0 3.8 3.6 3.4 3.2 3.1 2.9 2.7 2.6 2.4
108................................................. 3.9 3.7 3.5 3.3 3.1 3.0 2.8 2.7 2.5 2.3
109................................................. 3.8 3.6 3.4 3.3 3.1 2.9 2.7 2.6 2.4 2.3
110................................................. 3.8 3.6 3.4 3.2 3.0 2.8 2.7 2.5 2.3 2.2
111................................................. 3.8 3.5 3.3 3.2 3.0 2.8 2.6 2.4 2.3 2.1
112................................................. 3.7 3.5 3.3 3.1 2.9 2.8 2.6 2.4 2.2 2.1
113................................................. 3.7 3.5 3.3 3.1 2.9 2.7 2.5 2.4 2.2 2.0
114................................................. 3.7 3.5 3.3 3.1 2.9 2.7 2.5 2.3 2.1 2.0
115................................................. 3.7 3.4 3.2 3.0 2.8 2.7 2.5 2.3 2.1 1.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 216]]
Table VI--Ordinary Joint Life and Last Survivor Annuities; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 105 106 107 108 109 110 111 112 113 114 115
--------------------------------------------------------------------------------------------------------------------------------------------------------
105.................................................. 2.5 2.4 2.3 2.2 2.1 2.0 2.0 1.9 1.8 1.8 1.8
106.................................................. 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.7 1.6 1.6
107.................................................. 2.3 2.2 2.1 1.9 1.8 1.7 1.7 1.6 1.5 1.5 1.4
108.................................................. 2.2 2.1 1.9 1.8 1.7 1.6 1.5 1.5 1.4 1.3 1.3
109.................................................. 2.1 2.0 1.8 1.7 1.6 1.5 1.4 1.3 1.3 1.2 1.1
110.................................................. 2.0 1.9 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.1 1.0
111.................................................. 2.0 1.8 1.7 1.5 1.4 1.3 1.2 1.1 1.0 .9 .9
112.................................................. 1.9 1.7 1.6 1.5 1.3 1.2 1.1 1.0 .9 .8 .8
113.................................................. 1.8 1.7 1.5 1.4 1.3 1.1 1.0 .9 .8 .7 .7
114.................................................. 1.8 1.6 1.5 1.3 1.2 1.1 .9 .8 .7 .6 .6
115.................................................. 1.8 1.6 1.4 1.3 1.1 1.0 .9 .8 .7 .6 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIA--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 5 6 7 8 9 10 11 12 13 14
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 69.5 69.0 68.4 67.9 67.3 66.7 66.1 65.5 64.8 64.1
6................................................... 69.0 68.5 68.0 67.5 66.9 66.4 65.8 65.1 64.5 63.8
7................................................... 68.4 68.0 67.5 67.0 66.5 66.0 65.4 64.8 64.2 63.5
8................................................... 67.9 67.5 67.0 66.6 66.1 65.5 65.0 64.4 63.8 63.2
9................................................... 67.3 66.9 66.5 66.1 65.6 65.1 64.6 64.0 63.4 62.8
10.................................................. 66.7 66.4 66.0 65.5 65.1 64.6 64.1 63.6 63.0 62.5
11.................................................. 66.1 65.8 65.4 65.0 64.6 64.1 63.6 63.1 62.6 62.1
12.................................................. 65.5 65.1 64.8 64.4 64.0 63.6 63.1 62.7 62.2 61.7
13.................................................. 64.8 64.5 64.2 63.8 63.4 63.0 62.6 62.2 61.7 61.2
14.................................................. 64.1 63.8 63.5 63.2 62.8 62.5 62.1 61.7 61.2 60.7
15.................................................. 63.4 63.1 62.9 62.6 62.2 61.9 61.5 61.1 60.7 60.2
16.................................................. 62.7 62.4 62.2 61.9 61.6 61.3 60.9 60.5 60.1 59.7
17.................................................. 61.9 61.7 61.5 61.2 60.9 60.6 60.3 59.9 59.6 59.2
18.................................................. 61.2 61.0 60.7 60.5 60.2 60.0 59.7 59.3 59.0 58.6
19.................................................. 60.4 60.2 60.0 59.8 59.5 59.3 59.0 58.7 58.4 58.0
20.................................................. 59.6 59.4 59.2 59.0 58.8 58.6 58.3 58.0 57.7 57.4
21.................................................. 58.8 58.7 58.5 58.3 58.1 57.8 57.6 57.3 57.1 56.8
22.................................................. 58.0 57.8 57.7 57.5 57.3 57.1 56.9 56.6 56.4 56.1
23.................................................. 57.2 57.0 56.9 56.7 56.5 56.4 56.1 55.9 55.7 55.4
24.................................................. 56.3 56.2 56.1 55.9 55.8 55.6 55.4 55.2 55.0 54.7
25.................................................. 55.5 55.4 55.2 55.1 55.0 54.8 54.6 54.4 54.2 54.0
26.................................................. 54.6 54.5 54.4 54.3 54.1 54.0 53.8 53.7 53.5 53.3
27.................................................. 53.8 53.7 53.6 53.4 53.3 53.2 53.0 52.9 52.7 52.5
28.................................................. 52.9 52.8 52.7 52.6 52.5 52.4 52.2 52.1 51.9 51.7
29.................................................. 52.0 51.9 51.8 51.7 51.6 51.5 51.4 51.3 51.1 51.0
30.................................................. 51.1 51.0 51.0 50.9 50.8 50.7 50.6 50.4 50.3 50.2
31.................................................. 50.2 50.2 50.1 50.0 49.9 49.8 49.7 49.6 49.5 49.3
32.................................................. 49.3 49.3 49.2 49.1 49.0 49.0 48.9 48.8 48.6 48.5
33.................................................. 48.4 48.4 48.3 48.2 48.2 48.1 48.0 47.9 47.8 47.7
34.................................................. 47.5 47.5 47.4 47.4 47.3 47.2 47.1 47.0 47.0 46.8
35.................................................. 46.6 46.6 46.5 46.5 46.4 46.3 46.3 46.2 46.1 46.0
36.................................................. 45.7 45.7 45.6 45.6 45.5 45.4 45.4 45.3 45.2 45.1
37.................................................. 44.8 44.7 44.7 44.6 44.6 44.5 44.5 44.4 44.3 44.3
38.................................................. 43.9 43.8 43.8 43.7 43.7 43.6 43.6 43.5 43.5 43.4
39.................................................. 42.9 42.9 42.9 42.8 42.8 42.7 42.7 42.6 42.6 42.5
40.................................................. 42.0 42.0 42.0 41.9 41.9 41.8 41.8 41.7 41.7 41.6
41.................................................. 41.1 41.1 41.0 41.0 41.0 40.9 40.9 40.8 40.8 40.7
42.................................................. 40.2 40.1 40.1 40.1 40.1 40.0 40.0 39.9 39.9 39.8
43.................................................. 39.2 39.2 39.2 39.2 39.1 39.1 39.1 39.0 39.0 39.0
44.................................................. 38.3 38.3 38.3 38.3 38.2 38.2 38.2 38.1 38.1 38.1
45.................................................. 37.4 37.4 37.4 37.3 37.3 37.3 37.3 37.2 37.2 37.2
46.................................................. 36.5 36.5 36.5 36.4 36.4 36.4 36.4 36.3 36.3 36.3
47.................................................. 35.6 35.6 35.5 35.5 35.5 35.5 35.5 35.4 35.4 35.4
48.................................................. 34.7 34.7 34.6 34.6 34.6 34.6 34.6 34.5 34.5 34.5
49.................................................. 33.8 33.8 33.7 33.7 33.7 33.7 33.7 33.7 33.6 33.6
50.................................................. 32.9 32.9 32.8 32.8 32.8 32.8 32.8 32.8 32.7 32.7
51.................................................. 32.0 32.0 31.9 31.9 31.9 31.9 31.9 31.9 31.9 31.8
52.................................................. 31.1 31.1 31.1 31.0 31.0 31.0 31.0 31.0 31.0 30.9
53.................................................. 30.2 30.2 30.2 30.2 30.1 30.1 30.1 30.1 30.1 30.1
54.................................................. 29.3 29.3 29.3 29.3 29.3 29.2 29.2 29.2 29.2 29.2
55.................................................. 28.4 28.4 28.4 28.4 28.4 28.4 28.4 28.3 28.3 28.3
56.................................................. 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5
57.................................................. 26.7 26.7 26.7 26.6 26.6 26.6 26.6 26.6 26.6 26.6
58.................................................. 25.8 25.8 25.8 25.8 25.8 25.8 25.8 25.7 25.7 25.7
[[Page 217]]
59.................................................. 24.9 24.9 24.9 24.9 24.9 24.9 24.9 24.9 24.9 24.9
60.................................................. 24.1 24.1 24.1 24.1 24.1 24.0 24.0 24.0 24.0 24.0
61.................................................. 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2
62.................................................. 22.4 22.4 22.4 22.4 22.4 22.4 22.3 22.3 22.3 22.3
63.................................................. 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5 21.5
64.................................................. 20.7 20.7 20.7 20.7 20.7 20.7 20.7 20.7 20.7 20.7
65.................................................. 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9
66.................................................. 19.1 19.1 19.1 19.1 19.1 19.1 19.1 19.1 19.1 19.1
67.................................................. 18.3 18.3 18.3 18.3 18.3 18.3 18.3 18.3 18.3 18.3
68.................................................. 17.5 17.5 17.5 17.5 17.5 17.5 17.5 17.5 17.5 17.5
69.................................................. 16.8 16.8 16.8 16.7 16.7 16.7 16.7 16.7 16.7 16.7
70.................................................. 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0
71.................................................. 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.2
72.................................................. 14.6 14.6 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5
73.................................................. 13.9 13.9 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8
74.................................................. 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2
75.................................................. 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
76.................................................. 11.9 11.9 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8
77.................................................. 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2
78.................................................. 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6
79.................................................. 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
80.................................................. 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.4 9.4
81.................................................. 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9
82.................................................. 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4
83.................................................. 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9
84.................................................. 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
87.................................................. 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.7 3.7 3.7 3.7 3.7 3.7 3.6 3.6 3.6 3.6
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIA--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 15 16 17 18 19 20 21 22 23 24
--------------------------------------------------------------------------------------------------------------------------------------------------------
15.................................................. 59.8 59.3 58.8 58.2 57.6 57.0 56.4 55.8 55.1 54.5
16.................................................. 59.3 58.8 58.3 57.8 57.2 56.7 56.1 55.5 54.8 54.2
17.................................................. 58.8 58.3 57.8 57.3 56.8 56.3 55.7 55.1 54.5 53.9
18.................................................. 58.2 57.8 57.3 56.9 56.4 55.9 55.3 54.7 54.2 53.5
19.................................................. 57.6 57.2 56.8 56.4 55.9 55.4 54.9 54.4 53.8 53.2
20.................................................. 57.0 56.7 56.3 55.9 55.4 54.9 54.5 53.9 53.4 52.8
21.................................................. 56.4 56.1 55.7 55.3 54.9 54.5 54.0 53.5 53.0 52.4
22.................................................. 55.8 55.5 55.1 54.7 54.4 53.9 53.5 53.0 52.5 52.0
[[Page 218]]
23.................................................. 55.1 54.8 54.5 54.2 53.8 53.4 53.0 52.5 52.1 51.6
24.................................................. 54.5 54.2 53.9 53.5 53.2 52.8 52.4 52.0 51.6 51.1
25.................................................. 53.8 53.5 53.2 52.9 52.6 52.2 51.9 51.5 51.1 50.6
26.................................................. 53.0 52.8 52.5 52.3 52.0 51.6 51.3 50.9 50.5 50.1
27.................................................. 52.3 52.1 51.8 51.6 51.3 51.0 50.7 50.3 50.0 49.6
28.................................................. 51.5 51.3 51.1 50.9 50.6 50.3 50.0 49.7 49.4 49.0
29.................................................. 50.8 50.6 50.4 50.2 49.9 49.7 49.4 49.1 48.8 48.4
30.................................................. 50.0 49.8 49.6 49.4 49.2 49.0 48.7 48.4 48.1 47.8
31.................................................. 49.2 49.0 48.9 48.7 48.5 48.3 48.0 47.8 47.5 47.2
32.................................................. 48.4 48.2 48.1 47.9 47.7 47.5 47.3 47.1 46.8 46.5
33.................................................. 47.6 47.4 47.3 47.1 47.0 46.8 46.6 46.3 46.1 45.9
34.................................................. 46.7 46.6 46.5 46.3 46.2 46.0 45.8 45.6 45.4 45.2
35.................................................. 45.9 45.8 45.7 45.5 45.4 45.2 45.1 44.9 44.7 44.4
36.................................................. 45.0 44.9 44.8 44.7 44.6 44.4 44.3 44.1 43.9 43.7
37.................................................. 44.2 44.1 44.0 43.9 43.8 43.6 43.5 43.3 43.2 43.0
38.................................................. 43.3 43.2 43.1 43.0 42.9 42.8 42.7 42.5 42.4 42.2
39.................................................. 42.4 42.4 42.3 42.2 42.1 42.0 41.9 41.7 41.6 41.4
40.................................................. 41.6 41.5 41.4 41.3 41.2 41.1 41.0 40.9 40.8 40.6
41.................................................. 40.7 40.6 40.5 40.5 40.4 40.3 40.2 40.1 40.0 39.8
42.................................................. 39.8 39.7 39.7 39.6 39.5 39.4 39.4 39.3 39.1 39.0
43.................................................. 38.9 38.9 38.8 38.7 38.7 38.6 38.5 38.4 38.3 38.2
44.................................................. 38.0 38.0 37.9 37.9 37.8 37.7 37.7 37.6 37.5 37.4
45.................................................. 37.1 37.1 37.0 37.0 36.9 36.9 36.8 36.7 36.6 36.5
46.................................................. 36.2 36.2 36.2 36.1 36.1 36.0 35.9 35.9 35.8 35.7
47.................................................. 35.3 35.3 35.3 35.2 35.2 35.1 35.1 35.0 34.9 34.9
48.................................................. 34.5 34.4 34.4 34.4 34.3 34.3 34.2 34.2 34.1 34.0
49.................................................. 33.6 33.5 33.5 33.5 33.4 33.4 33.4 33.3 33.2 33.2
50.................................................. 32.7 32.7 32.6 32.6 32.6 32.5 32.5 32.4 32.4 32.3
51.................................................. 31.8 31.8 31.8 31.7 31.7 31.7 31.6 31.6 31.5 31.5
52.................................................. 30.9 30.9 30.9 30.9 30.8 30.8 30.8 30.7 30.7 30.6
53.................................................. 30.0 30.0 30.0 30.0 30.0 29.9 29.9 29.9 29.8 29.8
54.................................................. 29.2 29.2 29.1 29.1 29.1 29.1 29.0 29.0 29.0 28.9
55.................................................. 28.3 28.3 28.3 28.3 28.2 28.2 28.2 28.2 28.1 28.1
56.................................................. 27.4 27.4 27.4 27.4 27.4 27.3 27.3 27.3 27.3 27.2
57.................................................. 26.6 26.6 26.5 26.5 26.5 26.5 26.5 26.5 26.4 26.4
58.................................................. 25.7 25.7 25.7 25.7 25.7 25.6 25.6 25.6 25.6 25.6
59.................................................. 24.9 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.7 24.7
60.................................................. 24.0 24.0 24.0 24.0 24.0 23.9 23.9 23.9 23.9 23.9
61.................................................. 23.2 23.2 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.0
62.................................................. 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.2 22.2 22.2
63.................................................. 21.5 21.5 21.5 21.5 21.5 21.4 21.4 21.4 21.4 21.4
64.................................................. 20.7 20.7 20.7 20.6 20.6 20.6 20.6 20.6 20.6 20.6
65.................................................. 19.9 19.8 19.8 19.8 19.8 19.8 19.8 19.8 19.8 19.8
66.................................................. 19.1 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0
67.................................................. 18.3 18.3 18.3 18.3 18.2 18.2 18.2 18.2 18.2 18.2
68.................................................. 17.5 17.5 17.5 17.5 17.5 17.5 17.5 17.5 17.4 17.4
69.................................................. 16.7 16.7 16.7 16.7 16.7 16.7 16.7 16.7 16.7 16.7
70.................................................. 16.0 16.0 16.0 16.0 16.0 16.0 15.9 15.9 15.9 15.9
71.................................................. 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
72.................................................. 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5
73.................................................. 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8
74.................................................. 13.2 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1
75.................................................. 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
76.................................................. 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8
77.................................................. 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2
78.................................................. 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6
79.................................................. 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
80.................................................. 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4
81.................................................. 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9
82.................................................. 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4
83.................................................. 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.8 7.8
84.................................................. 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
87.................................................. 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
[[Page 219]]
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIA--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 25 26 27 28 29 30 31 32 33 34
--------------------------------------------------------------------------------------------------------------------------------------------------------
25.................................................. 50.2 49.7 49.2 48.6 48.1 47.5 46.9 46.2 45.6 44.9
26.................................................. 49.7 49.2 48.7 48.2 47.7 47.1 46.5 45.9 45.3 44.6
27.................................................. 49.2 48.7 48.3 47.8 47.3 46.7 46.2 45.6 45.0 44.3
28.................................................. 48.6 48.2 47.8 47.3 46.8 46.3 45.8 45.2 44.6 44.0
29.................................................. 48.1 47.7 47.3 46.8 46.4 45.9 45.4 44.8 44.3 43.7
30.................................................. 47.5 47.1 46.7 46.3 45.9 45.4 44.9 44.4 43.9 43.3
31.................................................. 46.9 46.5 46.2 45.8 45.4 44.9 44.5 44.0 43.5 42.9
32.................................................. 46.2 45.9 45.6 45.2 44.8 44.4 44.0 43.5 43.0 42.5
33.................................................. 45.6 45.3 45.0 44.6 44.3 43.9 43.5 43.0 42.6 42.1
34.................................................. 44.9 44.6 44.3 44.0 43.7 43.3 42.9 42.5 42.1 41.6
35.................................................. 44.2 44.0 43.7 43.4 43.1 42.7 42.4 42.0 41.6 41.1
36.................................................. 43.5 43.3 43.0 42.7 42.4 42.1 41.8 41.4 41.0 40.6
37.................................................. 42.8 42.5 42.3 42.1 41.8 41.5 41.2 40.8 40.5 40.1
38.................................................. 42.0 41.8 41.6 41.4 41.1 40.8 40.6 40.2 39.9 39.5
39.................................................. 41.3 41.1 40.9 40.7 40.4 40.2 39.9 39.6 39.3 39.0
40.................................................. 40.5 40.3 40.1 39.9 39.7 39.5 39.2 39.0 38.7 38.4
41.................................................. 39.7 39.5 39.4 39.2 39.0 38.8 38.5 38.3 38.0 37.7
42.................................................. 38.9 38.8 38.6 38.4 38.3 38.1 37.8 37.6 37.4 37.1
43.................................................. 38.1 38.0 37.8 37.7 37.5 37.3 37.1 36.9 36.7 36.4
44.................................................. 37.3 37.2 37.0 36.9 36.7 36.6 36.4 36.2 36.0 35.8
45.................................................. 36.5 36.3 36.2 36.1 36.0 35.8 35.6 35.5 35.3 35.1
46.................................................. 35.6 35.5 35.4 35.3 35.2 35.0 34.9 34.7 34.5 34.4
47.................................................. 34.8 34.7 34.6 34.5 34.4 34.3 34.1 34.0 33.8 33.6
48.................................................. 34.0 33.9 33.8 33.7 33.6 33.5 33.4 33.2 33.1 32.9
49.................................................. 33.1 33.0 33.0 32.9 32.8 32.7 32.6 32.4 32.3 32.2
50.................................................. 32.3 32.2 32.1 32.1 32.0 31.9 31.8 31.7 31.5 31.4
51.................................................. 31.4 31.4 31.3 31.2 31.2 31.1 31.0 30.9 30.8 30.6
52.................................................. 30.6 30.5 30.5 30.4 30.3 30.3 30.2 30.1 30.0 29.9
53.................................................. 29.7 29.7 29.6 29.6 29.5 29.5 29.4 29.3 29.2 29.1
54.................................................. 28.9 28.9 28.8 28.8 28.7 28.6 28.6 28.5 28.4 28.3
55.................................................. 28.1 28.0 28.0 27.9 27.9 27.8 27.8 27.7 27.6 27.5
56.................................................. 27.2 27.2 27.1 27.1 27.0 27.0 26.9 26.9 26.8 26.7
57.................................................. 26.4 26.3 26.3 26.3 26.2 26.2 26.1 26.1 26.0 25.9
58.................................................. 25.5 25.5 25.5 25.4 25.4 25.4 25.3 25.3 25.2 25.1
59.................................................. 24.7 24.7 24.6 24.6 24.6 24.5 24.5 24.5 24.4 24.3
60.................................................. 23.9 23.8 23.8 23.8 23.8 23.7 23.7 23.6 23.6 23.5
61.................................................. 23.0 23.0 23.0 23.0 22.9 22.9 22.9 22.8 22.8 22.7
62.................................................. 22.2 22.2 22.2 22.1 22.1 22.1 22.1 22.0 22.0 21.9
63.................................................. 21.4 21.4 21.3 21.3 21.3 21.3 21.3 21.2 21.2 21.2
64.................................................. 20.6 20.6 20.5 20.5 20.5 20.5 20.5 20.4 20.4 20.4
65.................................................. 19.8 19.8 19.7 19.7 19.7 19.7 19.7 19.6 19.6 19.6
66.................................................. 19.0 19.0 19.0 18.9 18.9 18.9 18.9 18.9 18.8 18.8
67.................................................. 18.2 18.2 18.2 18.2 18.2 18.1 18.1 18.1 18.1 18.1
[[Page 220]]
68.................................................. 17.4 17.4 17.4 17.4 17.4 17.4 17.4 17.3 17.3 17.3
69.................................................. 16.7 16.7 16.7 16.6 16.6 16.6 16.6 16.6 16.6 16.6
70.................................................. 15.9 15.9 15.9 15.9 15.9 15.9 15.9 15.9 15.8 15.8
71.................................................. 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.1 15.1 15.1
72.................................................. 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.4 14.4 14.4
73.................................................. 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.7 13.7
74.................................................. 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.1
75.................................................. 12.5 12.5 12.5 12.4 12.4 12.4 12.4 12.4 12.4 12.4
76.................................................. 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8 11.8
77.................................................. 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.1
78.................................................. 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.5
79.................................................. 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
80.................................................. 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4
81.................................................. 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9
82.................................................. 8.4 8.4 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3
83.................................................. 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8
84.................................................. 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
87.................................................. 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 35 36 37 38 39 40 41 42 43 44
--------------------------------------------------------------------------------------------------------------------------------------------------------
35.................................................. 40.7 40.2 39.7 39.2 38.6 38.0 37.4 36.8 36.2 35.5
36.................................................. 40.2 39.7 39.3 38.7 38.2 37.7 37.1 36.5 35.9 35.2
37.................................................. 39.7 39.3 38.8 38.3 37.8 37.3 36.7 36.2 35.6 34.9
38.................................................. 39.2 38.7 38.3 37.9 37.4 36.9 36.3 35.8 35.2 34.6
39.................................................. 38.6 38.2 37.8 37.4 36.9 36.4 35.9 35.4 34.9 34.3
40.................................................. 38.0 37.7 37.3 36.9 36.4 36.0 35.5 35.0 34.5 34.0
41.................................................. 37.4 37.1 36.7 36.3 35.9 35.5 35.1 34.6 34.1 33.6
42.................................................. 36.8 36.5 36.2 35.8 35.4 35.0 34.6 34.1 33.7 33.2
43.................................................. 36.2 35.9 35.6 35.2 34.9 34.5 34.1 33.7 33.2 32.8
44.................................................. 35.5 35.2 34.9 34.6 34.3 34.0 33.6 33.2 32.8 32.3
45.................................................. 34.8 34.6 34.3 34.0 33.7 33.4 33.0 32.7 32.3 31.8
46.................................................. 34.1 33.9 33.7 33.4 33.1 32.8 32.5 32.1 31.8 31.4
47.................................................. 33.4 33.2 33.0 32.8 32.5 32.2 31.9 31.6 31.2 30.8
48.................................................. 32.7 32.5 32.3 32.1 31.8 31.6 31.3 31.0 30.7 30.3
49.................................................. 32.0 31.8 31.6 31.4 31.2 30.9 30.7 30.4 30.1 29.8
50.................................................. 31.3 31.1 30.9 30.7 30.5 30.3 30.0 29.8 29.5 29.2
51.................................................. 30.5 30.4 30.2 30.0 29.8 29.6 29.4 29.2 28.9 28.6
[[Page 221]]
52.................................................. 29.7 29.6 29.5 29.3 29.1 28.9 28.7 28.5 28.3 28.0
53.................................................. 29.0 28.9 28.7 28.6 28.4 28.2 28.1 27.9 27.6 27.4
54.................................................. 28.2 28.1 28.0 27.8 27.7 27.5 27.4 27.2 27.0 26.8
55.................................................. 27.4 27.3 27.2 27.1 27.0 26.8 26.7 26.5 26.3 26.1
56.................................................. 26.7 26.6 26.5 26.3 26.2 26.1 26.0 25.8 25.6 25.4
57.................................................. 25.9 25.8 25.7 25.6 25.5 25.4 25.2 25.1 24.9 24.8
58.................................................. 25.1 25.0 24.9 24.8 24.7 24.6 24.5 24.4 24.2 24.1
59.................................................. 24.3 24.2 24.1 24.1 24.0 23.9 23.8 23.6 23.5 23.4
60.................................................. 23.5 23.4 23.4 23.3 23.2 23.1 23.0 22.9 22.8 22.7
61.................................................. 22.7 22.6 22.6 22.5 22.4 22.4 22.3 22.2 22.1 22.0
62.................................................. 21.9 21.9 21.8 21.7 21.7 21.6 21.5 21.4 21.3 21.2
63.................................................. 21.1 21.1 21.0 21.0 20.9 20.8 20.8 20.7 20.6 20.5
64.................................................. 20.3 20.3 20.2 20.2 20.1 20.1 20.0 20.0 19.9 19.8
65.................................................. 19.6 19.5 19.5 19.4 19.4 19.3 19.3 19.2 19.1 19.1
66.................................................. 18.8 18.8 18.7 18.7 18.6 18.6 18.5 18.5 18.4 18.4
67.................................................. 18.0 18.0 18.0 17.9 17.9 17.9 17.8 17.8 17.7 17.6
68.................................................. 17.3 17.3 17.2 17.2 17.2 17.1 17.1 17.0 17.0 16.9
69.................................................. 16.5 16.5 16.5 16.5 16.4 16.4 16.4 16.3 16.3 16.2
70.................................................. 15.8 15.8 15.8 15.7 15.7 15.7 15.6 15.6 15.6 15.5
71.................................................. 15.1 15.1 15.1 15.0 15.0 15.0 15.0 14.9 14.9 14.9
72.................................................. 14.4 14.4 14.4 14.3 14.3 14.3 14.3 14.2 14.2 14.2
73.................................................. 13.7 13.7 13.7 13.7 13.7 13.6 13.6 13.6 13.6 13.5
74.................................................. 13.1 13.0 13.0 13.0 13.0 13.0 13.0 12.9 12.9 12.9
75.................................................. 12.4 12.4 12.4 12.4 12.3 12.3 12.3 12.3 12.3 12.2
76.................................................. 11.8 11.8 11.7 11.7 11.7 11.7 11.7 11.7 11.6 11.6
77.................................................. 11.1 11.1 11.1 11.1 11.1 11.1 11.1 11.1 11.0 11.0
78.................................................. 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.4
79.................................................. 10.0 10.0 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9
80.................................................. 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.3 9.3 9.3
81.................................................. 8.9 8.8 8.8 8.8 8.8 8.8 8.8 8.8 8.8 8.8
82.................................................. 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3
83.................................................. 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8
84.................................................. 7.3 7.3 7.3 7.3 7.3 7.3 7.3 7.3 7.3 7.3
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.4 6.4 6.4 6.4 6.4 6.4
87.................................................. 6.1 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.6 5.6 5.6
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.6 4.6
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.6 2.6
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIA--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 45 46 47 48 49 50 51 52 53 54
--------------------------------------------------------------------------------------------------------------------------------------------------------
45.................................................. 31.4 30.9 30.5 30.0 29.4 28.9 28.3 27.7 27.1 26.5
[[Page 222]]
46.................................................. 30.9 30.5 30.0 29.6 29.1 28.5 28.0 27.4 26.9 26.3
47.................................................. 30.5 30.0 29.6 29.2 28.7 28.2 27.7 27.1 26.6 26.0
48.................................................. 30.0 29.6 29.2 28.7 28.3 27.8 27.3 26.8 26.3 25.7
49.................................................. 29.4 29.1 28.7 28.3 27.9 27.4 26.9 26.5 25.9 25.4
50.................................................. 28.9 28.5 28.2 27.4 27.4 27.0 26.5 26.1 25.6 25.1
51.................................................. 28.3 28.0 27.7 27.3 26.9 26.5 26.1 25.7 25.2 24.7
52.................................................. 27.7 27.4 27.1 26.8 26.5 26.1 25.7 25.3 24.8 24.4
53.................................................. 27.1 26.9 26.6 26.3 25.9 25.6 25.2 24.8 24.4 24.0
54.................................................. 26.5 26.3 26.0 25.7 25.4 25.1 24.7 24.4 24.0 23.6
55.................................................. 25.9 25.7 25.4 25.1 24.9 24.6 24.2 23.9 23.5 23.2
56.................................................. 25.2 25.0 24.8 24.6 24.3 24.0 23.7 23.4 23.1 22.7
57.................................................. 24.6 24.4 24.2 24.0 23.7 23.5 23.2 22.9 22.6 22.2
58.................................................. 23.9 23.7 23.5 23.3 23.1 22.9 22.6 22.4 22.1 21.7
59.................................................. 23.2 23.1 22.9 22.7 22.5 22.3 22.1 21.8 21.5 21.2
60.................................................. 22.5 22.4 22.2 22.1 21.9 21.7 21.5 21.2 21.0 20.7
61.................................................. 21.8 21.7 21.6 21.4 21.2 21.1 20.9 20.6 20.4 20.2
62.................................................. 21.1 21.0 20.9 20.7 20.6 20.4 20.2 20.0 19.8 19.6
63.................................................. 20.4 20.3 20.2 20.1 19.9 19.8 19.6 19.4 19.2 19.0
64.................................................. 19.7 19.6 19.5 19.4 19.3 19.1 19.0 18.8 18.6 18.5
65.................................................. 19.0 18.9 18.8 18.7 18.6 18.5 18.3 18.2 18.0 17.9
66.................................................. 18.3 18.2 18.1 18.0 17.9 17.8 17.7 17.6 17.4 17.3
67.................................................. 17.6 17.5 17.4 17.3 17.3 17.2 17.1 16.9 16.8 16.7
68.................................................. 16.9 16.8 16.7 16.7 16.6 16.5 16.4 16.3 16.2 16.1
69.................................................. 16.2 16.1 16.1 16.0 15.9 15.8 15.8 15.7 15.6 15.4
70.................................................. 15.5 15.4 15.4 15.3 15.3 15.2 15.1 15.0 14.9 14.8
71.................................................. 14.8 14.8 14.7 14.7 14.6 14.5 14.5 14.4 14.3 14.2
72.................................................. 14.1 14.1 14.1 14.0 14.0 13.9 13.8 13.8 13.7 13.6
73.................................................. 13.5 13.5 13.4 13.4 13.3 13.3 13.2 13.2 13.1 13.0
74.................................................. 12.8 12.8 12.8 12.7 12.7 12.7 12.6 12.6 12.5 12.4
75.................................................. 12.2 12.2 12.2 12.1 12.1 12.1 12.0 12.0 11.9 11.9
76.................................................. 11.6 11.6 11.6 11.5 11.5 11.5 11.4 11.4 11.3 11.3
77.................................................. 11.0 11.0 11.0 10.9 10.9 10.9 10.8 10.8 10.8 10.7
78.................................................. 10.4 10.4 10.4 10.4 10.3 10.3 10.3 10.2 10.2 10.2
79.................................................. 9.9 9.8 9.8 9.8 9.8 9.8 9.7 9.7 9.7 9.6
80.................................................. 9.3 9.3 9.3 9.3 9.2 9.2 9.2 9.2 9.1 9.1
81.................................................. 8.8 8.8 8.7 8.7 8.7 8.7 8.7 8.7 8.6 8.6
82.................................................. 8.3 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.1 8.1
83.................................................. 7.8 7.8 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.6
84.................................................. 7.3 7.3 7.3 7.3 7.3 7.2 7.2 7.2 7.2 7.2
85.................................................. 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.7
86.................................................. 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.3 6.3
87.................................................. 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 5.9
88.................................................. 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.2 5.2 5.2 5.2
90.................................................. 5.0 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9
91.................................................. 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6
92.................................................. 4.4 4.4 4.4 4.3 4.3 4.3 4.3 4.3 4.3 4.3
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8
95.................................................. 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 223]]
Table VIa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 55 56 57 58 59 60 61 62 63 64
--------------------------------------------------------------------------------------------------------------------------------------------------------
55.................................................. 22.7 22.3 21.9 21.4 20.9 20.4 19.9 19.4 18.8 18.3
56.................................................. 22.3 21.9 21.5 21.1 20.6 20.1 19.6 19.1 18.6 18.0
57.................................................. 21.9 21.5 21.1 20.7 20.3 19.8 19.3 18.8 18.3 17.8
58.................................................. 21.4 21.1 20.7 20.3 19.9 19.5 19.0 18.5 18.0 17.5
59.................................................. 20.9 20.6 20.3 19.9 19.5 19.1 18.7 18.2 17.7 17.3
60.................................................. 20.4 20.1 19.8 19.5 19.1 18.7 18.3 17.9 17.4 17.0
61.................................................. 29.9 19.6 19.3 19.0 18.7 18.3 17.9 17.5 17.1 16.7
62.................................................. 19.4 19.1 18.8 18.5 18.2 17.9 17.5 17.1 16.8 16.3
63.................................................. 18.8 18.6 18.3 18.0 17.7 17.4 17.1 16.8 16.4 16.0
64.................................................. 18.3 18.0 17.8 17.5 17.3 17.0 16.7 16.3 16.0 15.6
65.................................................. 17.7 17.5 17.3 17.0 16.8 16.5 16.2 15.9 15.6 15.3
66.................................................. 17.1 16.9 16.7 16.5 16.3 16.0 15.8 15.5 15.2 14.9
67.................................................. 16.5 16.3 16.2 16.0 15.8 15.5 15.3 15.0 14.7 14.5
68.................................................. 15.9 15.8 15.6 15.4 15.2 15.0 14.8 14.6 14.3 14.0
69.................................................. 15.3 15.2 15.0 14.9 14.7 14.5 14.3 14.1 13.9 13.6
70.................................................. 14.7 14.6 14.5 14.3 14.2 14.0 13.8 13.6 13.4 13.2
71.................................................. 14.1 14.0 13.9 13.8 13.6 13.5 13.3 13.1 12.9 12.7
72.................................................. 13.5 13.4 13.3 13.2 13.1 12.9 12.8 12.6 12.4 12.3
73.................................................. 13.0 12.9 12.8 12.7 12.5 12.4 12.3 12.1 12.0 11.8
74.................................................. 12.4 12.3 12.2 12.1 12.0 11.9 11.8 11.6 11.5 11.3
75.................................................. 11.8 11.7 11.7 11.6 11.5 11.4 11.3 11.1 11.0 10.9
76.................................................. 11.2 11.2 11.1 11.0 10.9 10.9 10.8 10.6 10.5 10.4
77.................................................. 10.7 10.6 10.6 10.5 10.4 10.3 10.3 10.2 10.0 9.9
78.................................................. 10.1 10.1 10.0 10.0 9.9 9.8 9.8 9.7 9.6 9.5
79.................................................. 9.6 9.6 9.5 9.5 9.4 9.3 9.3 9.2 9.1 9.0
80.................................................. 9.1 9.0 9.0 9.0 8.9 8.9 8.8 8.7 8.7 8.6
81.................................................. 8.6 8.5 8.5 8.5 8.4 8.4 8.3 8.3 8.2 8.1
82.................................................. 8.1 8.1 8.0 8.0 8.0 7.9 7.9 7.8 7.8 7.7
83.................................................. 7.6 7.6 7.6 7.5 7.5 7.5 7.4 7.4 7.3 7.3
84.................................................. 7.2 7.1 7.1 7.1 7.1 7.0 7.0 7.0 6.9 6.9
85.................................................. 6.7 6.7 6.7 6.7 6.6 6.6 6.6 6.5 6.5 6.5
86.................................................. 6.3 6.3 6.3 6.3 6.2 6.2 6.2 6.2 6.1 6.1
87.................................................. 5.9 5.9 5.9 5.9 5.9 5.8 5.8 5.8 5.8 5.7
88.................................................. 5.6 5.5 5.5 5.5 5.5 5.5 5.5 5.4 5.4 5.4
89.................................................. 5.2 5.2 5.2 5.2 5.2 5.1 5.1 5.1 5.1 5.1
90.................................................. 4.9 4.9 4.9 4.9 4.9 4.8 4.8 4.8 4.8 4.8
91.................................................. 4.6 4.6 4.6 4.6 4.6 4.5 4.5 4.5 4.5 4.5
92.................................................. 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.2 4.2 4.2
93.................................................. 4.1 4.1 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
94.................................................. 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.7
95.................................................. 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.5 3.5
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.3 3.3 3.3
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.1 3.1
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6
101................................................. 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.2
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.7 1.7 1.7 1.7
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIA--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 65 66 67 68 69 70 71 72 73 74
--------------------------------------------------------------------------------------------------------------------------------------------------------
65.................................................. 14.9 14.5 14.1 13.7 13.3 12.9 12.5 12.0 11.6 11.2
66.................................................. 14.5 14.2 13.8 13.4 13.1 12.6 12.2 11.8 11.4 11.0
67.................................................. 14.1 13.8 13.5 13.1 12.8 12.4 12.0 11.6 11.2 10.8
68.................................................. 13.7 13.4 13.1 12.8 12.5 12.1 11.7 11.4 11.0 10.6
69.................................................. 13.3 13.1 12.8 12.5 12.1 11.8 11.4 11.1 10.7 10.4
[[Page 224]]
70.................................................. 12.9 12.6 12.4 12.1 11.8 11.5 11.2 10.8 10.5 10.1
71.................................................. 12.5 12.2 12.0 11.7 11.4 11.2 10.9 10.5 10.2 9.9
72.................................................. 12.0 11.8 11.6 11.4 11.1 10.8 10.5 10.2 9.9 9.6
73.................................................. 11.6 11.4 11.2 11.0 10.7 10.5 10.2 9.9 9.7 9.4
74.................................................. 11.2 11.0 10.8 10.6 10.4 10.1 9.9 9.6 9.4 9.1
75.................................................. 10.7 10.5 10.4 10.2 10.0 9.8 9.5 9.3 9.1 8.8
76.................................................. 10.3 10.1 9.9 9.8 9.6 9.4 9.2 9.0 8.8 8.5
77.................................................. 9.8 9.7 9.5 9.4 9.2 9.0 8.8 8.6 8.4 8.2
78.................................................. 9.4 9.2 9.1 9.0 8.8 8.7 8.5 8.3 8.1 7.9
79.................................................. 8.9 8.8 8.7 8.6 8.4 8.3 8.1 8.0 7.8 7.6
80.................................................. 8.5 8.4 8.3 8.2 8.0 7.9 7.8 7.6 7.5 7.3
81.................................................. 8.0 8.0 7.9 7.9 7.7 7.5 7.4 7.3 7.1 7.0
82.................................................. 7.6 7.5 7.5 7.4 7.3 7.2 7.1 6.9 6.8 6.7
83.................................................. 7.2 7.1 7.1 7.0 6.9 6.8 6.7 6.6 6.5 6.4
84.................................................. 6.8 6.7 6.7 6.6 6.5 6.4 6.4 6.3 6.2 6.0
85.................................................. 6.4 6.4 6.3 6.2 6.2 6.1 6.0 5.9 5.8 5.7
86.................................................. 6.0 6.0 5.9 5.9 5.8 5.8 5.7 5.6 5.5 5.4
87.................................................. 5.7 5.6 5.6 5.6 5.5 5.4 5.4 5.3 5.2 5.2
88.................................................. 5.3 5.3 5.3 5.2 5.2 5.1 5.1 5.0 5.0 4.9
89.................................................. 5.0 5.0 5.0 4.9 4.9 4.8 4.8 4.7 4.7 4.6
90.................................................. 4.7 4.7 4.7 4.6 4.6 4.6 4.5 4.5 4.4 4.4
91.................................................. 4.5 4.4 4.4 4.4 4.3 4.3 4.3 4.2 4.2 4.1
92.................................................. 4.2 4.2 4.1 4.1 4.1 4.1 4.0 4.0 3.9 3.9
93.................................................. 3.9 3.9 3.9 3.9 3.9 3.8 3.8 3.8 3.7 3.7
94.................................................. 3.7 3.7 3.7 3.7 3.6 3.6 3.6 3.6 3.5 3.5
95.................................................. 3.5 3.5 3.5 3.5 3.4 3.4 3.4 3.4 3.3 3.3
96.................................................. 3.3 3.3 3.3 3.3 3.3 3.2 3.2 3.2 3.2 3.1
97.................................................. 3.1 3.1 3.1 3.1 3.1 3.1 3.0 3.0 3.0 3.0
98.................................................. 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.8 2.8
99.................................................. 2.8 2.8 2.8 2.7 2.7 2.7 2.7 2.7 2.7 2.6
100................................................. 2.6 2.6 2.6 2.6 2.6 2.5 2.5 2.5 2.5 2.5
101................................................. 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.3 2.3
102................................................. 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2
103................................................. 2.1 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0 2.0
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 .19 1.9
105................................................. 1.7 1.7 1.7 1.7 .17 1.7 1.7 1.7 1.7 1.7
106................................................. 1.6 1.6 .16 1.6 1.6 1.6 1.6 1.6 1.5 1.5
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .6 .6 .6 .6 .6
114................................................. .6 .6 .6 .6 .6 .6 .5 .5 .5 .5
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 75 76 77 78 79 80 81 82 83 84
--------------------------------------------------------------------------------------------------------------------------------------------------------
75.................................................. 8.6 8.3 8.0 7.7 7.4 7.1 6.8 6.5 6.2 5.9
76.................................................. 8.3 8.0 7.8 7.5 7.2 6.9 6.7 6.4 6.1 5.8
77.................................................. 8.0 7.8 7.5 7.3 7.0 6.8 6.5 6.2 5.9 5.7
78.................................................. 7.7 7.5 7.3 7.0 6.8 6.6 6.3 6.0 5.8 5.5
79.................................................. 7.4 7.2 7.0 6.8 6.6 6.3 6.1 5.9 5.6 5.4
80.................................................. 7.1 6.9 6.8 6.6 6.3 6.1 5.9 5.7 5.5 5.2
81.................................................. 6.8 6.7 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1
82.................................................. 6.5 6.4 6.2 6.0 5.9 5.7 5.5 5.3 5.1 4.9
83.................................................. 6.2 6.1 5.9 5.8 5.6 5.5 5.3 5.1 4.9 4.7
84.................................................. 5.9 5.8 5.7 5.5 5.4 5.2 5.1 4.9 4.7 4.6
85.................................................. 5.6 5.5 5.4 5.3 5.2 5.0 4.9 4.7 4.6 4.4
86.................................................. 5.4 5.3 5.1 5.0 4.9 4.8 4.7 4.5 4.4 4.2
87.................................................. 5.1 5.0 4.9 4.8 4.7 4.6 4.4 4.3 4.2 4.1
88.................................................. 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4.0 3.9
89.................................................. 4.5 4.5 4.4 4.3 4.2 4.1 4.0 3.9 3.8 3.7
90.................................................. 4.3 4.2 4.2 4.1 4.0 3.9 3.8 3.8 3.7 3.5
91.................................................. 4.1 4.0 4.0 3.9 3.8 3.7 3.7 3.6 3.5 3.4
92.................................................. 3.9 3.8 3.7 3.7 3.6 3.6 3.5 3.4 3.3 3.2
93.................................................. 3.7 3.6 3.6 3.5 3.4 3.4 3.3 3.2 3.2 3.1
[[Page 225]]
94.................................................. 3.5 3.4 3.4 3.3 3.3 3.2 3.2 3.1 3.0 3.0
95.................................................. 3.3 3.2 3.2 3.2 3.1 3.1 3.0 3.0 2.9 2.8
96.................................................. 3.1 3.1 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.7
97.................................................. 2.9 2.9 2.9 2.9 2.8 2.8 2.7 2.7 2.6 2.6
98.................................................. 2.8 2.8 2.7 2.7 2.7 2.6 2.6 2.6 2.5 2.5
99.................................................. 2.6 2.6 2.6 2.6 2.5 2.5 2.5 2.4 2.4 2.3
100................................................. 2.5 2.5 2.4 2.4 2.4 2.4 2.3 2.3 2.3 2.2
101................................................. 2.3 2.3 2.3 2.3 2.2 2.2 2.2 2.2 2.1 2.1
102................................................. 2.2 2.1 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0
103................................................. 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.9 1.8
104................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.7 1.7 1.7
105................................................. 1.7 1.7 1.7 1.7 1.6 1.6 1.6 1.6 1.6 1.6
106................................................. 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.4
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3
108................................................. 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .8 .8
112................................................. .8 .8 .8 .7 .7 .7 .7 .7 .7 .7
113................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
114................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 85 86 87 88 89 90 91 92 93 94
--------------------------------------------------------------------------------------------------------------------------------------------------------
85.................................................. 4.2 4.1 3.9 3.8 3.6 3.4 3.3 3.2 3.0 2.9
86.................................................. 4.1 3.9 3.8 3.6 3.5 3.3 3.2 3.1 2.9 2.8
87.................................................. 3.9 3.8 3.6 3.5 3.4 3.2 3.1 3.0 2.8 2.7
88.................................................. 3.8 3.6 3.5 3.4 3.2 3.1 3.0 2.9 2.8 2.6
89.................................................. 3.6 3.5 3.4 3.2 3.1 3.0 2.9 2.8 2.7 2.6
90.................................................. 3.4 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5
91.................................................. 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 2.4
92.................................................. 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 2.4 2.3
93.................................................. 3.0 2.9 2.8 2.8 2.7 2.6 2.5 2.4 2.3 2.3
94.................................................. 2.9 2.8 2.7 2.6 2.6 2.5 2.4 2.3 2.3 2.2
95.................................................. 2.8 2.7 2.6 2.5 2.5 2.4 2.3 2.2 2.2 2.1
96.................................................. 2.6 2.6 2.5 2.4 2.4 2.3 2.2 2.2 2.1 2.0
97.................................................. 2.5 2.5 2.4 2.3 2.3 2.2 2.2 2.1 2.0 2.0
98.................................................. 2.4 2.4 2.3 2.2 2.2 2.1 2.1 2.0 2.0 1.9
99.................................................. 2.3 2.2 2.2 2.1 2.1 2.0 2.0 1.9 1.9 1.8
100................................................. 2.2 2.1 2.1 2.0 2.0 1.9 1.9 1.9 1.8 1.8
101................................................. 2.1 2.0 2.0 1.9 1.9 1.9 1.8 1.8 1.7 1.7
102................................................. 1.9 1.9 1.9 1.8 1.8 1.8 1.7 1.7 1.6 1.6
103................................................. 1.8 1.8 1.8 1.7 1.7 1.7 1.6 1.6 1.5 1.5
104................................................. 1.7 1.7 1.6 1.6 1.6 1.5 1.5 1.5 1.5 1.4
105................................................. 1.6 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.4 1.3
106................................................. 1.4 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.2
107................................................. 1.3 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1.2
108................................................. 1.2 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1
109................................................. 1.1 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
110................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
111................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
112................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
113................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
114................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 95 96 97 98 99 100 101 102 103 104
--------------------------------------------------------------------------------------------------------------------------------------------------------
95.................................................. 2.0 2.0 1.9 1.8 1.8 1.7 1.6 1.6 1.5 1.4
96.................................................. 2.0 1.9 1.9 1.8 1.7 1.7 1.6 1.5 1.5 1.4
97.................................................. 1.9 1.9 1.8 1.7 1.7 1.6 1.6 1.5 1.4 1.3
98.................................................. 1.8 1.8 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.3
99.................................................. 1.8 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.4 1.3
100................................................. 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.4 1.3 1.3
[[Page 226]]
101................................................. 1.6 1.6 1.6 1.5 1.5 1.4 1.4 1.3 1.3 1.2
102................................................. 1.6 1.5 1.5 1.5 1.4 1.4 1.3 1.3 1.2 1.2
103................................................. 1.5 1.5 1.4 1.4 1.4 1.3 1.3 1.2 1.2 1.1
104................................................. 1.4 1.4 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.1
105................................................. 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.1 1.1 1.0
106................................................. 1.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1 1.0 1.0
107................................................. 1.1 1.1 1.1 1.1 1.1 1.0 1.0 1.0 1.0 9
108................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 .9 .9 .9
109................................................. 1.0 .9 .9 .9 .9 .9 .9 .9 .8 .8
110................................................. .9 .9 .8 .8 .8 .8 .8 .8 .8 .8
111................................................. .8 .8 .8 .8 .8 .7 .7 .7 .7 .7
112................................................. .7 .7 .7 .7 .7 .7 .7 .7 .6 .6
113................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
114................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIAa--Annuities for Joint Life Only; Two Lives--Expected Return Multiples
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 105 106 107 108 109 110 111 112 113 114 115
--------------------------------------------------------------------------------------------------------------------------------------------------------
105....................................... 1.0 1.0 .9 .9 .8 .7 .7 .6 .6 .5 .5
106....................................... 1.0 .9 .9 .8 .8 .7 .7 .6 .6 .5 .5
107....................................... .9 .9 .8 .8 .7 .7 .7 .6 .6 .5 .5
108....................................... .9 .8 .8 .8 .7 .7 .6 .6 .5 .5 .5
109....................................... .8 .8 .7 .7 .7 .7 .6 .6 .5 .5 .5
110....................................... .7 .7 .7 .7 .7 .6 .6 .6 .5 .5 .5
111....................................... .7 .7 .7 .6 .6 .6 .6 .5 .5 .5 .5
112....................................... .6 .6 .6 .6 .6 .6 .5 .5 .5 .5 .5
113....................................... .6 .6 .6 .5 .5 .5 .5 .5 .5 .5 .5
114....................................... .5 .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
115....................................... .5 .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VII--Percent Value of Refund Feature; Duration of Guaranteed Amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 0 0 0 0 0 0 0 0 0 0
6................................................... 0 0 0 0 0 0 0 0 0 0
7................................................... 0 0 0 0 0 0 0 0 0 0
8................................................... 0 0 0 0 0 0 0 0 0 0
9................................................... 0 0 0 0 0 0 0 0 0 0
10.................................................. 0 0 0 0 0 0 0 0 0 0
11.................................................. 0 0 0 0 0 0 0 0 0 0
12.................................................. 0 0 0 0 0 0 0 0 0 0
13.................................................. 0 0 0 0 0 0 0 0 0 0
14.................................................. 0 0 0 0 0 0 0 0 0 0
15.................................................. 0 0 0 0 0 0 0 0 0 0
16.................................................. 0 0 0 0 0 0 0 0 0 0
17.................................................. 0 0 0 0 0 0 0 0 0 0
18.................................................. 0 0 0 0 0 0 0 0 0 0
19.................................................. 0 0 0 0 0 0 0 0 0 0
20.................................................. 0 0 0 0 0 0 0 0 0 0
21.................................................. 0 0 0 0 0 0 0 0 0 0
22.................................................. 0 0 0 0 0 0 0 0 0 0
23.................................................. 0 0 0 0 0 0 0 0 0 0
24.................................................. 0 0 0 0 0 0 0 0 0 0
25.................................................. 0 0 0 0 0 0 0 0 0 0
26.................................................. 0 0 0 0 0 0 0 0 0 0
27.................................................. 0 0 0 0 0 0 0 0 0 0
28.................................................. 0 0 0 0 0 0 0 0 0 0
29.................................................. 0 0 0 0 0 0 0 0 0 0
30.................................................. 0 0 0 0 0 0 0 0 0 0
31.................................................. 0 0 0 0 0 0 0 0 0 0
32.................................................. 0 0 0 0 0 0 0 0 0 0
33.................................................. 0 0 0 0 0 0 0 0 0 0
34.................................................. 0 0 0 0 0 0 0 0 0 0
35.................................................. 0 0 0 0 0 0 0 0 0 0
[[Page 227]]
36.................................................. 0 0 0 0 0 0 0 0 0 0
37.................................................. 0 0 0 0 0 0 0 0 0 1
38.................................................. 0 0 0 0 0 0 0 0 0 1
39.................................................. 0 0 0 0 0 0 0 0 1 1
40.................................................. 0 0 0 0 0 0 0 1 1 1
41.................................................. 0 0 0 0 0 0 0 1 1 1
42.................................................. 0 0 0 0 0 0 1 1 1 1
43.................................................. 0 0 0 0 0 0 1 1 1 1
44.................................................. 0 0 0 0 0 1 1 1 1 1
45.................................................. 0 0 0 0 0 1 1 1 1 1
46.................................................. 0 0 0 0 1 1 1 1 1 1
47.................................................. 0 0 0 0 1 1 1 1 1 1
48.................................................. 0 0 0 0 1 1 1 1 1 1
49.................................................. 0 0 0 1 1 1 1 1 1 2
50.................................................. 0 0 0 1 1 1 1 1 1 2
51.................................................. 0 0 0 1 1 1 1 1 2 2
52.................................................. 0 0 0 1 1 1 1 1 2 2
53.................................................. 0 0 1 1 1 1 1 2 2 2
54.................................................. 0 0 1 1 1 1 1 2 2 2
55.................................................. 0 0 1 1 1 1 2 2 2 2
56.................................................. 0 0 1 1 1 1 2 2 2 3
57.................................................. 0 0 1 1 1 2 2 2 3 3
58.................................................. 0 1 1 1 1 2 2 2 3 3
59.................................................. 0 1 1 1 1 2 2 3 3 4
60.................................................. 0 1 1 1 2 2 2 3 3 4
61.................................................. 0 1 1 1 2 2 3 3 4 4
62.................................................. 0 1 1 2 2 2 3 4 4 5
63.................................................. 0 1 1 2 2 3 3 4 5 5
64.................................................. 0 1 1 2 2 3 4 4 5 6
65.................................................. 0 1 2 2 3 3 4 5 6 6
66.................................................. 1 1 2 2 3 4 5 5 6 7
67.................................................. 1 1 2 3 3 4 5 6 7 8
68.................................................. 1 1 2 3 4 5 6 7 8 9
69.................................................. 1 1 2 3 4 5 6 7 8 10
70.................................................. 1 2 3 4 5 6 7 8 9 11
71.................................................. 1 2 3 4 5 6 8 9 10 12
72.................................................. 1 2 3 4 6 7 8 10 11 13
73.................................................. 1 2 4 5 6 8 9 11 13 14
74.................................................. 1 3 4 5 7 9 10 12 14 16
75.................................................. 1 3 4 6 8 9 11 13 15 17
76.................................................. 2 3 5 7 9 10 12 15 17 19
77.................................................. 2 4 5 7 9 12 14 16 18 21
78.................................................. 2 4 6 8 10 13 15 18 20 23
79.................................................. 2 4 7 9 11 14 17 19 22 25
80.................................................. 2 5 7 10 13 15 18 21 24 27
81.................................................. 3 5 8 11 14 17 20 23 26 29
82.................................................. 3 6 9 12 15 19 22 25 28 32
83.................................................. 3 7 10 13 17 20 24 27 31 34
84.................................................. 4 7 11 15 19 22 26 30 33 37
85.................................................. 4 8 12 16 20 24 28 32 36 40
86.................................................. 4 9 13 18 22 27 31 35 39 42
87.................................................. 5 10 15 20 24 29 33 37 41 45
88.................................................. 5 11 16 21 26 31 36 40 44 48
89.................................................. 6 12 18 23 28 33 38 43 47 50
90.................................................. 7 13 19 25 31 36 41 45 49 53
91.................................................. 7 14 21 27 33 38 43 48 52 55
92.................................................. 8 15 22 29 35 40 45 50 54 58
93.................................................. 9 17 24 31 37 43 48 52 56 60
94.................................................. 9 18 26 33 39 45 50 54 58 62
95.................................................. 10 19 27 35 41 47 52 57 60 64
96.................................................. 11 20 29 36 43 49 54 59 62 66
97.................................................. 11 21 30 38 45 51 56 61 64 68
98.................................................. 12 23 32 40 47 53 58 63 66 69
99.................................................. 13 24 34 42 49 55 60 65 68 71
100................................................. 14 26 36 44 52 58 63 67 70 73
101................................................. 14 27 38 47 54 60 65 69 72 75
102................................................. 15 29 40 49 56 62 67 71 74 77
103................................................. 17 31 42 52 59 65 69 73 76 78
104................................................. 18 33 45 55 62 67 72 75 78 80
[[Page 228]]
105................................................. 19 36 48 58 65 70 74 77 80 82
106................................................. 21 38 51 61 68 73 77 79 82 84
107................................................. 23 42 55 64 71 75 79 81 84 85
108................................................. 25 45 58 67 73 78 81 83 85 87
109................................................. 28 49 62 71 76 80 83 85 87 88
110................................................. 31 52 66 74 79 82 85 87 88 89
111................................................. 34 57 70 77 82 85 87 88 90 91
112................................................. 37 61 73 80 84 87 88 90 91 92
113................................................. 41 66 77 83 86 88 90 91 92 93
114................................................. 45 70 80 85 88 90 92 93 93 94
115................................................. 50 75 83 88 90 92 93 94 94 95
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VII--Percent Value of Refund Feature; Duration of Guaranteed Amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
11 12 13 14 15 16 17 18 19 20
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 0 0 0 0 0 0 0 0 0 0
6................................................... 0 0 0 0 0 0 0 0 0 0
7................................................... 0 0 0 0 0 0 0 0 0 0
8................................................... 0 0 0 0 0 0 0 0 0 0
9................................................... 0 0 0 0 0 0 0 0 0 0
10.................................................. 0 0 0 0 0 0 0 0 0 0
11.................................................. 0 0 0 0 0 0 0 0 0 0
12.................................................. 0 0 0 0 0 0 0 0 0 0
13.................................................. 0 0 0 0 0 0 0 0 0 0
14.................................................. 0 0 0 0 0 0 0 0 0 0
15.................................................. 0 0 0 0 0 0 0 0 0 0
16.................................................. 0 0 0 0 0 0 0 0 0 0
17.................................................. 0 0 0 0 0 0 0 0 0 0
18.................................................. 0 0 0 0 0 0 0 0 0 0
19.................................................. 0 0 0 0 0 0 0 0 0 0
20.................................................. 0 0 0 0 0 0 0 0 0 1
21.................................................. 0 0 0 0 0 0 0 0 0 1
22.................................................. 0 0 0 0 0 0 0 0 1 1
23.................................................. 0 0 0 0 0 0 0 1 1 1
24.................................................. 0 0 0 0 0 0 0 1 1 1
25.................................................. 0 0 0 0 0 0 1 1 1 1
26.................................................. 0 0 0 0 0 0 1 1 1 1
27.................................................. 0 0 0 0 0 1 1 1 1 1
28.................................................. 0 0 0 0 1 1 1 1 1 1
29.................................................. 0 0 0 0 1 1 1 1 1 1
30.................................................. 0 0 0 1 1 1 1 1 1 1
31.................................................. 0 0 0 1 1 1 1 1 1 1
32.................................................. 0 0 1 1 1 1 1 1 1 1
33.................................................. 0 0 1 1 1 1 1 1 1 1
34.................................................. 0 1 1 1 1 1 1 1 1 1
35.................................................. 0 1 1 1 1 1 1 1 1 1
36.................................................. 1 1 1 1 1 1 1 1 1 1
37.................................................. 1 1 1 1 1 1 1 1 1 1
38.................................................. 1 1 1 1 1 1 1 1 1 2
39.................................................. 1 1 1 1 1 1 1 1 2 2
40.................................................. 1 1 1 1 1 1 1 2 2 2
41.................................................. 1 1 1 1 1 1 2 2 2 2
42.................................................. 1 1 1 1 1 2 2 2 2 2
43.................................................. 1 1 1 1 2 2 2 2 2 3
44.................................................. 1 1 1 2 2 2 2 2 3 3
45.................................................. 1 1 2 2 2 2 2 3 3 3
46.................................................. 1 2 2 2 2 2 3 3 3 3
47.................................................. 1 2 2 2 2 2 3 3 3 4
48.................................................. 2 2 2 2 2 3 3 3 4 4
49.................................................. 2 2 2 2 3 3 3 4 4 4
50.................................................. 2 2 2 3 3 3 3 4 4 5
51.................................................. 2 2 3 3 3 3 4 4 4 5
52.................................................. 2 2 3 3 3 4 4 5 5 5
53.................................................. 2 3 3 3 4 4 5 5 5 6
54.................................................. 3 3 3 4 4 4 5 5 6 7
55.................................................. 3 3 4 4 4 5 5 6 7 7
[[Page 229]]
56.................................................. 3 3 4 4 5 5 6 7 7 8
57.................................................. 3 4 4 5 5 6 6 7 8 9
58.................................................. 4 4 5 5 6 6 7 8 9 9
59.................................................. 4 5 5 6 6 7 8 9 9 10
60.................................................. 4 5 6 6 7 8 9 10 10 11
61.................................................. 5 6 6 7 8 9 10 10 11 13
62.................................................. 5 6 7 8 9 10 11 12 13 14
63.................................................. 6 7 8 9 10 11 12 13 14 15
64.................................................. 7 8 8 9 10 12 13 14 15 17
65.................................................. 7 8 9 10 12 13 14 15 17 18
66.................................................. 8 9 10 12 13 14 15 17 18 20
67.................................................. 9 10 11 13 14 15 17 18 20 22
68.................................................. 10 11 13 14 15 17 19 20 22 24
69.................................................. 11 12 14 15 17 19 20 22 24 26
70.................................................. 12 14 15 17 19 20 22 24 26 28
71.................................................. 13 15 17 18 20 22 24 26 28 30
72.................................................. 15 17 18 20 22 24 26 28 30 32
73.................................................. 16 18 20 22 24 26 28 31 33 35
74.................................................. 18 20 22 24 26 28 31 33 35 37
75.................................................. 19 22 24 26 28 31 33 35 38 40
76.................................................. 21 24 26 28 31 33 36 38 40 43
77.................................................. 23 26 28 31 33 36 38 41 43 45
78.................................................. 25 28 31 33 36 38 41 43 46 48
79.................................................. 28 30 33 36 38 41 44 46 48 51
80.................................................. 30 33 36 38 41 44 46 49 51 53
81.................................................. 32 35 38 41 44 47 49 51 54 56
82.................................................. 35 38 41 44 47 49 52 54 56 58
83.................................................. 38 41 44 47 49 52 54 57 59 61
84.................................................. 40 44 47 49 52 55 57 59 61 63
85.................................................. 43 46 49 52 55 57 59 62 63 65
86.................................................. 46 49 52 55 57 60 62 64 66 67
87.................................................. 48 52 55 57 60 62 64 66 68 69
88.................................................. 51 54 57 60 62 64 66 68 70 71
89.................................................. 54 57 60 62 65 67 68 70 72 73
90.................................................. 56 59 62 64 67 69 70 72 74 75
91.................................................. 59 62 64 67 69 71 72 74 75 76
92.................................................. 61 64 66 69 71 72 74 75 77 78
93.................................................. 63 66 68 70 72 74 75 77 78 79
94.................................................. 65 68 70 72 74 75 77 78 79 80
95.................................................. 67 69 72 74 75 77 78 79 81 82
96.................................................. 69 71 73 75 77 78 80 81 82 83
97.................................................. 70 73 75 77 78 80 81 82 83 84
98.................................................. 72 74 76 78 79 81 82 83 84 85
99.................................................. 74 76 78 79 81 82 83 84 85 86
100................................................. 75 78 79 81 82 83 84 85 86 86
101................................................. 77 79 81 82 83 84 85 86 87 87
102................................................. 79 81 82 83 84 85 86 87 88 88
103................................................. 80 82 83 85 86 87 87 88 89 89
104................................................. 82 84 85 86 87 88 88 89 90 90
105................................................. 84 85 86 87 88 89 89 90 90 91
106................................................. 85 86 87 88 89 90 90 91 91 92
107................................................. 87 88 89 89 90 91 91 92 92 93
108................................................. 88 89 90 90 91 92 92 93 93 93
109................................................. 89 90 91 92 92 93 93 93 94 94
110................................................. 90 91 92 92 93 93 94 94 94 95
111................................................. 92 92 93 93 94 94 95 95 95 95
112................................................. 93 93 94 94 95 95 95 96 96 96
113................................................. 94 94 95 95 95 96 96 96 96 97
114................................................. 95 95 95 96 96 96 97 97 97 97
115................................................. 95 96 96 96 97 97 97 97 97 98
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VII--Percent Value of Refund Feature; Duration of Guaranteed Amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
21 22 23 24 25 26 27 28 29 30
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 0 0 0 0 0 0 0 0 0 0
6................................................... 0 0 0 0 0 0 0 0 0 0
[[Page 230]]
7................................................... 0 0 0 0 0 0 0 0 0 0
8................................................... 0 0 0 0 0 0 0 0 0 1
9................................................... 0 0 0 0 0 0 0 0 1 1
10.................................................. 0 0 0 0 0 0 0 1 1 1
11.................................................. 0 0 0 0 0 0 1 1 1 1
12.................................................. 0 0 0 0 0 0 1 1 1 1
13.................................................. 0 0 0 0 0 1 1 1 1 1
14.................................................. 0 0 0 0 1 1 1 1 1 1
15.................................................. 0 0 0 1 1 1 1 1 1 1
16.................................................. 0 0 1 1 1 1 1 1 1 1
17.................................................. 0 0 1 1 1 1 1 1 1 1
18.................................................. 0 1 1 1 1 1 1 1 1 1
19.................................................. 1 1 1 1 1 1 1 1 1 1
20.................................................. 1 1 1 1 1 1 1 1 1 1
21.................................................. 1 1 1 1 1 1 1 1 1 1
22.................................................. 1 1 1 1 1 1 1 1 1 1
23.................................................. 1 1 1 1 1 1 1 1 1 1
24.................................................. 1 1 1 1 1 1 1 1 1 1
25.................................................. 1 1 1 1 1 1 1 1 1 1
26.................................................. 1 1 1 1 1 1 1 1 1 1
27.................................................. 1 1 1 1 1 1 1 1 1 2
28.................................................. 1 1 1 1 1 1 1 1 2 2
29.................................................. 1 1 1 1 1 1 1 2 2 2
30.................................................. 1 1 1 1 1 1 2 2 2 2
31.................................................. 1 1 1 1 1 2 2 2 2 2
32.................................................. 1 1 1 1 2 2 2 2 2 2
33.................................................. 1 1 1 2 2 2 2 2 2 2
34.................................................. 1 1 2 2 2 2 2 2 2 3
35.................................................. 1 2 2 2 2 2 2 2 3 3
36.................................................. 2 2 2 2 2 2 2 3 3 3
37.................................................. 2 2 2 2 2 2 3 3 3 3
38.................................................. 2 2 2 2 2 3 3 3 3 4
39.................................................. 2 2 2 2 3 3 3 3 4 4
40.................................................. 2 2 3 3 3 3 3 4 4 4
41.................................................. 2 3 3 3 3 3 4 4 4 5
42.................................................. 3 3 3 3 3 4 4 4 5 5
43.................................................. 3 3 3 4 4 4 4 5 5 6
44.................................................. 3 3 4 4 4 4 5 5 6 6
45.................................................. 3 4 4 4 5 5 5 6 6 7
46.................................................. 4 4 4 5 5 5 6 6 7 7
47.................................................. 4 4 5 5 5 6 6 7 7 8
48.................................................. 4 5 5 5 6 6 7 7 8 9
49.................................................. 5 5 5 6 6 7 8 8 9 10
50.................................................. 5 5 6 6 7 8 8 9 10 10
51.................................................. 5 6 6 7 8 8 9 10 11 11
52.................................................. 6 7 7 8 8 9 10 11 11 12
53.................................................. 7 7 8 8 9 10 11 12 13 14
54.................................................. 7 8 8 9 10 11 12 13 14 15
55.................................................. 8 9 9 10 11 12 13 14 15 16
56.................................................. 9 9 10 11 12 13 14 15 16 18
57.................................................. 9 10 11 12 13 14 15 17 18 19
58.................................................. 10 11 12 13 14 16 17 18 19 21
59.................................................. 11 12 13 15 16 17 18 20 21 22
60.................................................. 12 14 15 16 17 19 20 21 23 24
61.................................................. 14 15 16 17 19 20 22 23 25 26
62.................................................. 15 16 18 19 20 22 23 25 27 28
63.................................................. 16 18 19 21 22 24 25 27 29 30
64.................................................. 18 19 21 23 24 26 28 29 31 33
65.................................................. 20 21 23 25 26 28 30 31 33 35
66.................................................. 21 23 25 27 28 30 32 34 35 37
67.................................................. 23 25 27 29 31 32 34 36 38 40
68.................................................. 25 27 29 31 33 35 37 38 40 42
69.................................................. 28 29 31 33 35 37 39 41 43 44
70.................................................. 30 32 34 36 38 40 42 43 45 47
71.................................................. 32 34 36 38 40 42 44 46 47 49
72.................................................. 35 37 39 41 43 45 46 48 50 51
73.................................................. 37 39 41 43 45 47 49 51 52 54
74.................................................. 40 42 44 46 48 50 51 53 54 56
75.................................................. 42 44 46 48 50 52 54 55 57 58
[[Page 231]]
76.................................................. 45 47 49 51 53 54 56 58 59 60
77.................................................. 47 50 51 53 55 57 58 60 61 62
78.................................................. 50 52 54 56 57 59 61 62 63 64
79.................................................. 53 55 56 58 60 61 63 64 65 66
80.................................................. 55 57 59 60 62 63 65 66 67 68
81.................................................. 58 59 61 63 64 66 67 68 69 70
82.................................................. 60 62 63 65 66 68 69 70 71 72
83.................................................. 62 64 66 67 68 70 71 72 73 74
84.................................................. 65 66 68 69 70 71 72 73 74 75
85.................................................. 67 68 70 71 72 73 74 75 76 77
86.................................................. 69 70 72 73 74 75 76 77 77 78
87.................................................. 71 72 73 75 76 76 77 78 79 80
88.................................................. 73 74 75 76 77 78 79 80 80 81
89.................................................. 74 76 77 78 79 79 80 81 81 82
90.................................................. 76 77 78 79 80 81 81 82 83 83
91.................................................. 78 79 79 80 81 82 83 83 84 84
92.................................................. 79 80 81 82 82 83 84 84 85 85
93.................................................. 80 81 82 83 83 84 85 85 86 86
94.................................................. 81 82 83 84 84 85 85 86 86 87
95.................................................. 82 83 84 85 85 86 86 87 87 88
96.................................................. 83 84 85 86 86 87 87 88 88 88
97.................................................. 84 85 86 86 87 87 88 88 89 89
98.................................................. 85 86 87 87 88 88 89 89 89 90
99.................................................. 86 87 87 88 88 89 89 90 90 90
100................................................. 87 88 88 89 89 90 90 90 91 91
101................................................. 88 89 89 90 90 90 91 91 91 92
102................................................. 89 89 90 90 91 91 91 92 92 92
103................................................. 90 90 91 91 91 92 92 92 93 93
104................................................. 91 91 91 92 92 92 93 93 93 93
105................................................. 91 92 92 92 93 93 93 94 94 94
106................................................. 92 93 93 93 93 94 94 94 94 95
107................................................. 93 93 94 94 94 94 95 95 95 95
108................................................. 94 94 94 94 95 95 95 95 95 96
109................................................. 94 95 95 95 95 95 96 96 96 96
110................................................. 95 95 95 96 96 96 96 96 96 96
111................................................. 96 96 96 96 96 96 97 97 97 97
112................................................. 96 96 96 97 97 97 97 97 97 97
113................................................. 97 97 97 97 97 97 97 98 98 98
114................................................. 97 97 97 98 98 98 98 98 98 98
115................................................. 98 98 98 98 98 98 98 98 98 98
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VII--Percent Value of Refund Feature; Duration of Guaranteed Amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
31 32 33 34 35 36 37 38 39 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 0 1 1 1 1 1 1 1 1 1
6................................................... 0 1 1 1 1 1 1 1 1 1
7................................................... 1 1 1 1 1 1 1 1 1 1
8................................................... 1 1 1 1 1 1 1 1 1 1
9................................................... 1 1 1 1 1 1 1 1 1 1
10.................................................. 1 1 1 1 1 1 1 1 1 1
11.................................................. 1 1 1 1 1 1 1 1 1 1
12.................................................. 1 1 1 1 1 1 1 1 1 1
13.................................................. 1 1 1 1 1 1 1 1 1 1
14.................................................. 1 1 1 1 1 1 1 1 1 1
15.................................................. 1 1 1 1 1 1 1 1 1 1
16.................................................. 1 1 1 1 1 1 1 1 1 1
17.................................................. 1 1 1 1 1 1 1 1 1 1
18.................................................. 1 1 1 1 1 1 1 1 1 2
19.................................................. 1 1 1 1 1 1 1 1 2 2
20.................................................. 1 1 1 1 1 1 1 2 2 2
21.................................................. 1 1 1 1 1 1 2 2 2 2
22.................................................. 1 1 1 1 1 2 2 2 2 2
23.................................................. 1 1 1 2 2 2 2 2 2 2
24.................................................. 1 1 2 2 2 2 2 2 2 2
25.................................................. 1 2 2 2 2 2 2 2 2 3
26.................................................. 2 2 2 2 2 2 2 2 3 3
[[Page 232]]
27.................................................. 2 2 2 2 2 2 2 3 3 3
28.................................................. 2 2 2 2 2 2 3 3 3 3
29.................................................. 2 2 2 2 2 3 3 3 3 4
30.................................................. 2 2 2 3 3 3 3 3 4 4
31.................................................. 2 2 3 3 3 3 3 4 4 4
32.................................................. 2 3 3 3 3 3 4 4 4 5
33.................................................. 3 3 3 3 3 4 4 4 5 5
34.................................................. 3 3 3 3 4 4 4 5 5 5
35.................................................. 3 3 3 4 4 4 5 5 5 6
36.................................................. 3 4 4 4 4 5 5 5 6 6
37.................................................. 4 4 4 4 5 5 6 6 6 7
38.................................................. 4 4 5 5 5 6 6 7 7 8
39.................................................. 4 5 5 5 6 6 7 7 8 8
40.................................................. 5 5 5 6 6 7 7 8 8 9
41.................................................. 5 5 6 6 7 7 8 9 9 10
42.................................................. 6 6 6 7 7 8 9 9 10 11
43.................................................. 6 7 7 8 8 9 9 10 11 12
44.................................................. 7 7 8 8 9 10 10 11 12 13
45.................................................. 7 8 8 9 10 10 11 12 13 14
46.................................................. 8 9 9 10 11 11 12 13 14 15
47.................................................. 9 9 10 11 12 12 13 14 15 16
48.................................................. 9 10 11 12 13 14 15 16 17 18
49.................................................. 10 11 12 13 14 15 16 17 18 19
50.................................................. 11 12 13 14 15 16 17 18 20 21
51.................................................. 12 13 14 15 16 17 19 20 21 22
52.................................................. 13 14 15 17 18 19 20 21 23 24
53.................................................. 15 16 17 18 19 20 22 23 24 26
54.................................................. 16 17 18 19 21 22 23 25 26 28
55.................................................. 17 18 20 21 22 24 25 27 28 30
56.................................................. 19 20 21 23 24 26 27 29 30 32
57.................................................. 20 22 23 25 26 28 29 31 32 34
58.................................................. 22 24 25 27 28 30 31 33 34 36
59.................................................. 24 25 27 28 30 32 33 35 36 38
60.................................................. 26 27 29 31 32 34 35 37 38 40
61.................................................. 28 29 31 33 34 36 37 39 40 42
62.................................................. 30 32 33 35 36 38 40 41 42 44
63.................................................. 32 34 35 37 39 40 42 43 45 46
64.................................................. 34 36 38 39 41 42 44 45 47 48
65.................................................. 37 38 40 42 43 45 46 47 49 50
66.................................................. 39 41 42 44 45 47 48 50 51 52
67.................................................. 41 43 45 46 48 49 50 52 53 54
68.................................................. 44 45 47 48 50 51 52 54 55 56
69.................................................. 46 48 49 51 52 53 54 56 57 58
70.................................................. 48 50 51 53 54 55 57 58 59 60
71.................................................. 51 52 54 55 56 57 59 60 61 62
72.................................................. 53 54 56 57 58 59 60 62 62 63
73.................................................. 55 57 58 59 60 61 62 63 64 65
74.................................................. 57 59 60 61 62 63 64 65 66 67
75.................................................. 59 61 62 63 64 65 66 67 68 69
76.................................................. 62 63 64 65 66 67 68 69 69 70
77.................................................. 64 65 66 67 68 69 70 70 71 72
78.................................................. 66 67 68 69 70 70 71 72 73 73
79.................................................. 67 68 69 70 71 72 73 73 74 75
80.................................................. 69 70 71 72 73 74 74 75 76 76
81.................................................. 71 72 73 74 74 75 76 76 77 78
82.................................................. 73 74 74 75 76 77 77 78 78 79
83.................................................. 74 75 76 77 77 78 79 79 80 80
84.................................................. 76 77 77 78 79 79 80 80 81 81
85.................................................. 78 78 79 79 80 81 81 82 82 83
86.................................................. 79 80 80 81 81 82 82 83 83 84
87.................................................. 80 81 81 82 83 83 83 84 84 85
88.................................................. 82 82 83 83 84 84 85 85 85 86
89.................................................. 83 83 84 84 85 85 85 86 86 87
90.................................................. 84 84 85 85 86 86 86 87 87 87
91.................................................. 85 85 86 86 87 87 87 88 88 88
92.................................................. 86 86 87 87 87 88 88 88 89 89
93.................................................. 87 87 87 88 88 88 89 89 89 90
94.................................................. 87 88 88 88 89 89 89 90 90 90
95.................................................. 88 88 89 89 89 90 90 90 91 91
[[Page 233]]
96.................................................. 89 89 89 90 90 90 91 91 91 91
97.................................................. 89 90 90 90 91 91 91 91 92 92
98.................................................. 90 90 91 91 91 91 92 92 92 92
99.................................................. 91 91 91 92 92 92 92 92 93 93
100................................................. 91 92 92 92 92 92 93 93 93 93
101................................................. 92 92 92 93 93 93 93 93 94 94
102................................................. 92 93 93 93 93 94 94 94 94 94
103................................................. 93 93 93 94 94 94 94 94 94 95
104................................................. 94 94 94 94 94 95 95 95 95 95
105................................................. 94 94 95 95 95 95 95 95 95 95
106................................................. 95 95 95 95 95 95 96 96 96 96
107................................................. 95 95 96 96 96 96 96 96 96 96
108................................................. 96 96 96 96 96 96 96 96 97 97
109................................................. 96 96 96 97 97 97 97 97 97 97
110................................................. 97 97 97 97 97 97 97 97 97 97
111................................................. 97 97 97 97 97 97 98 98 98 98
112................................................. 97 97 98 98 98 98 98 98 98 98
113................................................. 98 98 98 98 98 98 98 98 98 98
114................................................. 98 98 98 98 98 98 98 98 98 99
115................................................. 98 98 98 99 99 99 99 99 99 99
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIII--Temporary Life Annuities; \1\ One Life--Expected Return Multiples
[See footnote at end of tables]
Temporary Period--Maximum Duration of Annuity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
6................................................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
7................................................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
8................................................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
9................................................... 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
10.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
11.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
12.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
13.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
14.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
15.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
16.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
17.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
18.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
19.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
20.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
21.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
22.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
23.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
24.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
25.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
26.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
27.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
28.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
29.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
30.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
31.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
32.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
33.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
34.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
35.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
36.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
37.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 9.9
38.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 9.9
39.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 9.9
40.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
41.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
42.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 8.9 9.9
43.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
[[Page 234]]
44.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
45.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 7.9 8.9 9.9
46.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
47.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
48.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.9
49.................................................. 1.0 2.0 3.0 4.0 5.0 6.0 6.9 7.9 8.9 9.8
50.................................................. 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.9 9.8
51.................................................. 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.9 9.8
52.................................................. 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.8 9.8
53.................................................. 1.0 2.0 3.0 4.0 5.0 5.9 6.9 7.9 8.8 9.8
54.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.9 8.8 9.8
55.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
56.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
57.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.8 9.7
58.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.9 7.8 8.7 9.7
59.................................................. 1.0 2.0 3.0 4.0 4.9 5.9 6.8 7.8 8.7 9.6
60.................................................. 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.8 8.7 9.6
61.................................................. 1.0 2.0 3.0 3.9 4.9 5.9 6.8 7.7 8.7 9.6
62.................................................. 1.0 2.0 3.0 3.9 4.9 5.8 6.8 7.7 8.6 9.5
63.................................................. 1.0 2.0 3.0 3.9 4.9 5.8 6.8 7.7 8.6 9.5
64.................................................. 1.0 2.0 3.0 3.9 4.9 5.8 6.7 7.6 8.5 9.4
65.................................................. 1.0 2.0 3.0 3.9 4.9 5.8 6.7 7.6 8.5 9.3
66.................................................. 1.0 2.0 2.9 3.9 4.8 5.8 6.7 7.6 8.4 9.3
67.................................................. 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.5 8.4 9.2
68.................................................. 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.5 8.3 9.1
69.................................................. 1.0 2.0 2.9 3.9 4.8 5.7 6.6 7.4 8.2 9.0
70.................................................. 1.0 2.0 2.9 3.9 4.8 5.6 6.5 7.3 8.1 8.9
71.................................................. 1.0 2.0 2.9 3.8 4.7 5.6 6.5 7.3 8.1 8.8
72.................................................. 1.0 2.0 2.9 3.8 4.7 5.6 6.4 7.2 8.0 8.7
73.................................................. 1.0 2.0 2.9 3.8 4.7 5.5 6.3 7.1 7.9 8.6
74.................................................. 1.0 1.9 2.9 3.8 4.6 5.5 6.3 7.0 7.7 8.4
75.................................................. 1.0 1.9 2.9 3.8 4.6 5.4 6.2 6.9 7.6 8.3
76.................................................. 1.0 1.9 2.8 3.7 4.6 5.4 6.1 6.8 7.5 8.1
77.................................................. 1.0 1.9 2.8 3.7 4.5 5.3 6.0 6.7 7.3 7.9
78.................................................. 1.0 1.9 2.8 3.7 4.5 5.2 5.9 6.6 7.2 7.7
79.................................................. 1.0 1.9 2.8 3.6 4.4 5.1 5.8 6.4 7.0 7.5
80.................................................. 1.0 1.9 2.8 3.6 4.4 5.1 5.7 6.3 6.8 7.3
81.................................................. 1.0 1.9 2.8 3.6 4.3 5.0 5.6 6.1 6.6 7.0
82.................................................. 1.0 1.9 2.7 3.5 4.2 4.9 5.4 6.0 6.4 6.8
83.................................................. 1.0 1.9 2.7 3.5 4.1 4.8 5.3 5.8 6.2 6.5
84.................................................. 1.0 1.8 2.7 3.4 4.1 4.6 5.2 5.6 6.0 6.3
85.................................................. 1.0 1.8 2.6 3.3 4.0 4.5 5.0 5.4 5.7 6.0
86.................................................. 1.0 1.8 2.6 3.3 3.9 4.4 4.8 5.2 5.5 5.7
87.................................................. .9 1.8 2.5 3.2 3.8 4.3 4.7 5.0 5.3 5.5
88.................................................. .9 1.8 2.5 3.1 3.7 4.1 4.5 4.8 5.0 5.2
89.................................................. .9 1.8 2.5 3.1 3.6 4.0 4.3 4.6 4.8 4.9
90.................................................. .9 1.7 2.4 3.0 3.4 3.8 4.1 4.4 4.5 4.7
91.................................................. .9 1.7 2.4 2.9 3.3 3.7 4.0 4.2 4.3 4.4
92.................................................. .9 1.7 2.3 2.8 3.2 3.5 3.8 4.0 4.1 4.2
93.................................................. .9 1.7 2.3 2.7 3.1 3.4 3.6 3.8 3.9 4.0
94.................................................. .9 1.6 2.2 2.7 3.0 3.3 3.5 3.6 3.7 3.8
95.................................................. .9 1.6 2.2 2.6 2.9 3.1 3.3 3.4 3.5 3.6
96.................................................. .9 1.6 2.1 2.5 2.8 3.0 3.2 3.3 3.3 3.4
97.................................................. .9 1.6 2.1 2.4 2.7 2.9 3.0 3.1 3.2 3.2
98.................................................. .9 1.5 2.0 2.4 2.6 2.8 2.9 3.0 3.0 3.0
99.................................................. .9 1.5 2.0 2.3 2.5 2.6 2.7 2.8 2.8 2.8
100................................................. .9 1.5 1.9 2.2 2.4 2.5 2.6 2.6 2.6 2.7
101................................................. .8 1.4 1.8 2.1 2.3 2.4 2.4 2.5 2.5 2.5
102................................................. .8 1.4 1.8 2.0 2.1 2.2 2.3 2.3 2.3 2.3
103................................................. .8 1.4 1.7 1.9 2.0 2.1 2.1 2.1 2.1 2.1
104................................................. .8 1.3 1.6 1.8 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. .8 1.3 1.5 1.7 1.7 1.8 1.8 1.8 1.8 1.8
106................................................. .8 1.2 1.4 1.5 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. .7 1.1 1.3 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. .7 1.1 1.2 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. .7 1.0 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. .7 .9 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .6 .8 .9 .9 .9 .9 .9 .9 .9 .9
[[Page 235]]
112................................................. .6 .7 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .6 .6 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .5 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIII--Temporary Life Annuities;\1\ One Life--Expected Return Multiples
[See footnote at end of tables]
Temporary Period--Maximum Duration of Annuity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
11 12 13 14 15 16 17 18 19 20
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 19.9
6................................................... 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 19.9
7................................................... 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 19.9
8................................................... 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 18.9 19.9
9................................................... 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 18.9 19.9
10.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 18.9 19.9
11.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 17.0 17.9 18.9 19.9
12.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 17.0 17.9 18.9 19.9
13.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 17.0 17.9 18.9 19.9
14.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 16.9 17.9 18.9 19.9
15.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 16.9 17.9 18.9 19.9
16.................................................. 11.0 12.0 13.0 14.0 15.0 16.0 16.9 17.9 18.9 19.9
17.................................................. 11.0 12.0 13.0 14.0 15.0 15.9 16.9 17.9 18.9 19.9
18.................................................. 11.0 12.0 13.0 14.0 15.0 15.9 16.9 17.9 18.9 19.9
19.................................................. 11.0 12.0 13.0 14.0 15.0 15.9 16.9 17.9 18.9 19.9
20.................................................. 11.0 12.0 13.0 14.0 14.9 15.9 16.9 17.9 18.9 19.9
21.................................................. 11.0 12.0 13.0 14.0 14.9 15.9 16.9 17.9 18.9 19.9
22.................................................. 11.0 12.0 13.0 14.0 14.9 15.9 16.9 17.9 18.9 19.9
23.................................................. 11.0 12.0 13.0 13.9 14.9 15.9 16.9 17.9 18.9 19.9
24.................................................. 11.0 12.0 13.0 13.9 14.9 15.9 16.9 17.9 18.9 19.9
25.................................................. 11.0 12.0 13.0 13.9 14.9 15.9 16.9 17.9 18.9 19.9
26.................................................. 11.0 12.0 12.9 13.9 14.9 15.9 16.9 17.9 18.9 19.9
27.................................................. 11.0 12.0 12.9 13.9 14.9 15.9 16.9 17.9 18.9 19.9
28.................................................. 11.0 12.0 12.9 13.9 14.9 15.9 16.9 17.9 18.9 19.8
29.................................................. 11.0 12.0 12.9 13.9 14.9 15.9 16.9 17.9 18.9 19.8
30.................................................. 11.0 11.9 12.9 13.9 14.9 15.9 16.9 17.9 18.8 19.8
31.................................................. 11.0 11.9 12.9 13.9 14.9 15.9 16.9 17.9 18.8 19.8
32.................................................. 11.0 11.9 12.9 13.9 14.9 15.9 16.9 17.8 18.8 19.8
33.................................................. 11.0 11.9 12.9 13.9 14.9 15.9 16.9 17.8 18.8 19.8
34.................................................. 10.9 11.9 12.9 13.9 14.9 15.9 16.8 17.8 18.8 19.8
35.................................................. 10.9 11.9 12.9 13.9 14.9 15.9 16.8 17.8 18.8 19.7
36.................................................. 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.8 19.7
37.................................................. 10.9 11.9 12.9 13.9 14.9 15.8 16.8 17.8 18.7 19.7
38.................................................. 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.8 18.7 19.7
39.................................................. 10.9 11.9 12.9 13.9 14.8 15.8 16.8 17.7 18.7 19.6
40.................................................. 10.9 11.9 12.9 13.8 14.8 15.8 16.7 17.7 18.7 19.6
41.................................................. 10.9 11.9 12.9 13.8 14.8 15.8 16.7 17.7 18.6 19.6
42.................................................. 10.9 11.9 12.8 13.8 14.8 15.7 16.7 17.6 18.6 19.5
43.................................................. 10.9 11.9 12.8 13.8 14.8 15.7 16.7 17.6 18.6 19.5
44.................................................. 10.9 11.8 12.8 13.8 14.7 15.7 16.6 17.6 18.5 19.4
45.................................................. 10.9 11.8 12.8 13.8 14.7 15.7 16.6 17.5 18.5 19.4
46.................................................. 10.9 11.8 12.8 13.7 14.7 15.6 16.6 17.5 18.4 19.3
47.................................................. 10.8 11.8 12.8 13.7 14.7 15.6 16.5 17.5 18.4 19.3
48.................................................. 10.8 11.8 12.7 13.7 14.6 15.6 16.5 17.4 18.3 19.2
49.................................................. 10.8 11.8 12.7 13.7 14.6 15.5 16.4 17.4 18.3 19.2
50.................................................. 10.8 11.7 12.7 13.6 14.6 15.5 16.4 17.3 18.2 19.1
51.................................................. 10.8 11.7 12.7 13.6 14.5 15.4 16.3 17.2 18.1 19.0
52.................................................. 10.8 11.7 12.6 13.6 14.5 15.4 16.3 17.2 18.0 18.9
53.................................................. 10.7 11.7 12.6 13.5 14.4 15.3 16.2 17.1 18.0 18.8
54.................................................. 10.7 11.6 12.6 13.5 14.4 15.3 16.2 17.0 17.9 18.7
55.................................................. 10.7 11.6 12.5 13.4 14.3 15.2 16.1 16.9 17.8 18.6
56.................................................. 10.7 11.6 12.5 13.4 14.3 15.1 16.0 16.8 17.6 18.4
57.................................................. 10.6 11.5 12.4 13.3 14.2 15.1 15.9 16.7 17.5 18.3
58.................................................. 10.6 11.5 12.4 13.3 14.1 15.0 15.8 16.6 17.4 18.1
[[Page 236]]
59.................................................. 10.6 11.4 12.3 13.2 14.0 14.9 15.7 16.4 17.2 17.9
60.................................................. 10.5 11.4 12.3 13.1 13.9 14.7 15.5 16.3 17.0 17.7
61.................................................. 10.5 11.3 12.2 13.0 13.8 14.6 15.4 16.1 16.8 17.5
62.................................................. 10.4 11.3 12.1 12.9 13.7 14.5 15.2 15.9 16.6 17.2
63.................................................. 10.3 11.2 12.0 12.8 13.6 14.3 15.0 15.7 16.3 17.0
64.................................................. 10.3 11.1 11.9 12.7 13.4 14.1 14.8 15.5 16.1 16.7
65.................................................. 10.2 11.0 11.8 12.5 13.2 13.9 14.6 15.2 15.8 16.3
66.................................................. 10.1 10.9 11.6 12.4 13.1 13.7 14.4 14.9 15.5 16.0
67.................................................. 10.0 10.8 11.5 12.2 12.9 13.5 14.1 14.7 15.2 15.6
68.................................................. 9.9 10.6 11.4 12.0 12.7 13.3 13.8 14.3 14.8 15.3
69.................................................. 9.8 10.5 11.2 11.8 12.4 13.0 13.5 14.0 14.4 14.8
70.................................................. 9.6 10.3 11.0 11.6 12.2 12.7 13.2 13.7 14.0 14.4
71.................................................. 9.5 10.2 10.8 11.4 11.9 12.4 12.9 13.3 13.6 13.9
72.................................................. 9.4 10.0 10.6 11.2 11.7 12.1 12.5 12.9 13.2 13.5
73.................................................. 9.2 9.8 10.4 10.9 11.4 11.8 12.1 12.5 12.7 13.0
74.................................................. 9.0 9.6 10.1 10.6 11.0 11.4 11.7 12.0 12.3 12.5
75.................................................. 8.8 9.4 9.9 10.3 10.7 11.0 11.3 11.6 11.8 12.0
76.................................................. 8.6 9.1 9.6 10.0 10.3 10.6 10.9 11.1 11.3 11.4
77.................................................. 8.4 8.9 9.3 9.7 10.0 10.2 10.5 10.6 10.8 10.9
78.................................................. 8.2 8.6 9.0 9.3 9.6 9.8 10.0 10.2 10.3 10.4
79.................................................. 7.9 8.3 8.7 9.0 9.2 9.4 9.5 9.7 9.8 9.8
80.................................................. 7.7 8.0 8.3 8.6 8.8 9.0 9.1 9.2 9.3 9.3
81.................................................. 7.4 7.7 8.0 8.2 8.4 8.5 8.6 8.7 8.8 8.8
82.................................................. 7.1 7.4 7.6 7.8 8.0 8.1 8.2 8.2 8.3 8.3
83.................................................. 6.8 7.1 7.3 7.4 7.5 7.6 7.7 7.8 7.8 7.8
84.................................................. 6.5 6.7 6.9 7.0 7.1 7.2 7.3 7.3 7.3 7.4
85.................................................. 6.2 6.4 6.6 6.7 6.7 6.8 6.8 6.9 6.9 6.9
86.................................................. 5.9 6.1 6.2 6.3 6.4 6.4 6.4 6.5 6.5 6.5
87.................................................. 5.6 5.8 5.9 5.9 6.0 6.0 6.0 6.1 6.1 6.1
88.................................................. 5.3 5.4 5.5 5.6 5.6 5.6 5.7 5.7 5.7 5.7
89.................................................. 5.1 5.1 5.2 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 4.8 4.9 4.9 4.9 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.5 4.6 4.6 4.6 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.3 4.3 4.3 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.0 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.8 3.8 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.6 3.6 3.6 3.6 3.7 3.7 3.7 3.7 3.7 3.7
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIII--Temporary Life Annuities; \1\ One Life--Expected Return Multiples
[See footnote at end of tables]
Temporary Period--Maximum Duration of Annuity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
21 22 23 24 25 26 27 28 29 30
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.9 29.9
[[Page 237]]
6................................................... 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.9 29.9
7................................................... 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.9 29.9
8................................................... 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.9 29.8
9................................................... 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.9 29.8
10.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.8 29.8
11.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.9 28.8 29.8
12.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.8 28.8 29.8
13.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.9 27.8 28.8 29.8
14.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.8 27.8 28.8 29.8
15.................................................. 20.9 21.9 22.9 23.9 24.9 25.9 26.8 27.8 28.8 29.8
16.................................................. 20.9 21.9 22.9 23.9 24.9 25.8 26.8 27.8 28.8 29.8
17.................................................. 20.9 21.9 22.9 23.9 24.9 25.8 26.8 27.8 28.8 29.8
18.................................................. 20.9 21.9 22.9 23.9 24.8 25.8 26.8 27.8 28.8 29.7
19.................................................. 20.9 21.9 22.9 23.9 24.8 25.8 26.8 27.8 28.8 29.7
20.................................................. 20.9 21.9 22.9 23.8 24.8 25.8 26.8 27.8 28.7 29.7
21.................................................. 20.9 21.9 22.9 23.8 24.8 25.8 26.8 27.8 28.7 29.7
22.................................................. 20.9 21.9 22.8 23.8 24.8 25.8 26.8 27.7 28.7 29.7
23.................................................. 20.9 21.9 22.8 23.8 24.8 25.8 26.7 27.7 28.7 29.7
24.................................................. 20.9 21.8 22.8 23.8 24.8 25.8 26.7 27.7 28.7 29.6
25.................................................. 20.9 21.8 22.8 23.8 24.8 25.7 26.7 27.7 28.6 29.6
26.................................................. 20.8 21.8 22.8 23.8 24.8 25.7 26.7 27.7 28.6 29.6
27.................................................. 20.8 21.8 22.8 23.8 24.7 25.7 26.7 27.6 28.6 29.5
28.................................................. 20.8 21.8 22.8 23.7 24.7 25.7 26.6 27.6 28.6 29.5
29.................................................. 20.8 21.8 22.8 23.7 24.7 25.7 26.6 27.6 28.5 29.5
30.................................................. 20.8 21.8 22.7 23.7 24.7 25.6 26.6 27.5 28.5 29.4
31.................................................. 20.8 21.8 22.7 23.7 24.6 25.6 26.6 27.5 28.4 29.4
32.................................................. 20.8 21.7 22.7 23.7 24.6 25.6 26.5 27.5 28.4 29.3
33.................................................. 20.8 21.7 22.7 23.6 24.6 25.5 26.5 27.4 28.4 29.3
34.................................................. 20.7 21.7 22.7 23.6 24.6 25.5 26.4 27.4 28.3 29.2
35.................................................. 20.7 21.7 22.6 23.6 24.5 25.5 26.4 27.3 28.2 29.2
36.................................................. 20.7 21.6 22.6 23.5 24.5 25.4 26.3 27.3 28.2 29.1
37.................................................. 20.7 21.6 22.6 23.5 24.4 25.4 26.3 27.2 28.1 29.0
38.................................................. 20.6 21.6 22.5 23.4 24.4 25.3 26.2 27.1 28.0 28.9
39.................................................. 20.6 21.5 22.5 23.4 24.3 25.2 26.1 27.0 27.9 28.8
40.................................................. 20.6 21.5 22.4 23.3 24.3 25.2 26.1 27.0 27.8 28.7
41.................................................. 20.5 21.4 22.4 23.3 24.2 25.1 26.0 26.9 27.7 28.6
42.................................................. 20.5 21.4 22.3 23.2 24.1 25.0 25.9 26.8 27.6 28.5
43.................................................. 20.4 21.3 22.2 23.2 24.0 24.9 25.8 26.6 27.5 28.3
44.................................................. 20.4 21.3 22.2 23.1 24.0 24.8 25.7 26.5 27.3 28.2
45.................................................. 20.3 21.2 22.1 23.0 23.9 24.7 25.6 26.4 27.2 28.0
46.................................................. 20.2 21.1 22.0 22.9 23.8 24.6 25.4 26.2 27.0 27.8
47.................................................. 20.2 21.1 21.9 22.8 23.6 24.5 25.3 26.1 26.8 27.6
48.................................................. 20.1 21.0 21.8 22.7 23.5 24.3 25.1 25.9 26.6 27.4
49.................................................. 20.0 20.9 21.7 22.6 23.4 24.2 25.0 25.7 26.4 27.1
50.................................................. 19.9 20.8 21.6 22.4 23.2 24.0 24.8 25.5 26.2 26.9
51.................................................. 19.8 20.7 21.5 22.3 23.1 23.8 24.6 25.3 25.9 26.6
52.................................................. 19.7 20.6 21.4 22.1 22.9 23.6 24.3 25.0 25.7 26.3
53.................................................. 19.6 20.4 21.2 22.0 22.7 23.4 24.1 24.7 25.3 25.9
54.................................................. 19.5 20.3 21.0 21.8 22.5 23.2 23.8 24.4 25.0 25.6
55.................................................. 19.3 20.1 20.8 21.6 22.2 22.9 23.5 24.1 24.6 25.2
56.................................................. 19.2 19.9 20.6 21.3 22.0 22.6 23.2 23.7 24.3 24.7
57.................................................. 19.0 19.7 20.4 21.1 21.7 22.3 22.8 23.4 23.8 24.3
58.................................................. 18.8 19.5 20.2 20.8 21.4 21.9 22.5 22.9 23.4 23.8
59.................................................. 18.6 19.3 19.9 20.5 21.1 21.6 22.0 22.5 22.9 23.2
60.................................................. 18.4 19.0 19.6 20.2 20.7 21.2 21.6 22.0 22.4 22.7
61.................................................. 18.1 18.7 19.3 19.8 20.3 20.7 21.1 21.5 21.8 22.1
62.................................................. 17.8 18.4 18.9 19.4 19.9 20.3 20.6 21.0 21.2 21.5
63.................................................. 17.5 18.1 18.5 19.0 19.4 19.8 20.1 20.4 20.6 20.8
64.................................................. 17.2 17.7 18.1 18.6 18.9 19.3 19.5 19.8 20.0 20.2
65.................................................. 16.8 17.3 17.7 18.1 18.4 18.7 18.9 19.2 19.3 19.5
66.................................................. 16.5 16.9 17.3 17.6 17.9 18.1 18.3 18.5 18.7 18.8
67.................................................. 16.1 16.4 16.8 17.1 17.3 17.5 17.7 17.9 18.0 18.1
68.................................................. 15.6 16.0 16.3 16.5 16.7 16.9 17.1 17.2 17.3 17.4
69.................................................. 15.2 15.5 15.7 16.0 16.1 16.3 16.4 16.5 16.6 16.7
70.................................................. 14.7 15.0 15.2 15.4 15.5 15.7 15.8 15.8 15.9 15.9
71.................................................. 14.2 14.4 14.6 14.8 14.9 15.0 15.1 15.2 15.2 15.2
72.................................................. 13.7 13.9 14.1 14.2 14.3 14.4 14.4 14.5 14.5 14.5
73.................................................. 13.2 13.3 13.5 13.6 13.7 13.7 13.8 13.8 13.8 13.9
[[Page 238]]
74.................................................. 12.6 12.8 12.9 13.0 13.0 13.1 13.1 13.1 13.2 13.2
75.................................................. 12.1 12.2 12.3 12.4 12.4 12.5 12.5 12.5 12.5 12.5
76.................................................. 11.5 11.6 11.7 11.8 11.8 11.8 11.8 11.9 11.9 11.9
77.................................................. 11.0 11.1 11.1 11.2 11.2 11.2 11.2 11.2 11.2 11.2
78.................................................. 10.4 10.5 10.5 10.6 10.6 10.6 10.6 10.6 10.6 10.6
79.................................................. 9.9 9.9 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
80.................................................. 9.4 9.4 9.4 9.4 9.5 9.5 9.5 9.5 9.5 9.5
81.................................................. 8.8 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9
82.................................................. 8.3 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4
83.................................................. 7.8 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9
84.................................................. 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
87.................................................. 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table VIII--Temporary Life Annuities;\1\ One Life--Expected Return Multiples
[See footnote at end of tables]
Temporary Period--Maximum Duration of Annuity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Years--
Age ---------------------------------------------------------------------------------------------------
31 32 33 34 35 36 37 38 39 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
5................................................... 30.8 31.8 32.8 33.8 34.8 35.8 36.8 37.7 38.7 39.7
6................................................... 30.8 31.8 32.8 33.8 34.8 35.8 36.8 37.7 38.7 39.7
7................................................... 30.8 31.8 32.8 33.8 34.8 35.8 36.7 37.7 38.7 39.7
8................................................... 30.8 31.8 32.8 33.8 34.8 35.7 36.7 37.7 38.7 39.7
9................................................... 30.8 31.8 32.8 33.8 34.8 35.7 36.7 37.7 38.7 39.6
10.................................................. 30.8 31.8 32.8 33.8 34.7 35.7 36.7 37.7 38.6 39.6
11.................................................. 30.8 31.8 32.8 33.8 34.7 35.7 36.7 37.7 38.6 39.6
12.................................................. 30.8 31.8 32.8 33.7 34.7 35.7 36.7 37.6 38.6 39.6
13.................................................. 30.8 31.8 32.7 33.7 34.7 35.7 36.6 37.6 38.6 39.5
14.................................................. 30.8 31.8 32.7 33.7 34.7 35.7 36.6 37.6 38.6 39.5
15.................................................. 30.8 31.7 32.7 33.7 34.7 35.6 36.6 37.6 38.5 39.5
16.................................................. 30.8 31.7 32.7 33.7 34.6 35.6 36.6 37.5 38.5 39.4
17.................................................. 30.7 31.7 32.7 33.7 34.6 35.6 36.5 37.5 38.5 39.4
18.................................................. 30.7 31.7 32.7 33.6 34.6 35.6 36.5 37.5 38.4 39.4
19.................................................. 30.7 31.7 32.6 33.6 34.6 35.5 36.5 37.4 38.4 39.3
20.................................................. 30.7 31.7 32.6 33.6 34.5 35.5 36.4 37.4 38.3 39.3
[[Page 239]]
21.................................................. 30.7 31.6 32.6 33.6 34.5 35.5 36.4 37.4 38.3 39.2
22.................................................. 30.6 31.6 32.6 33.5 34.5 35.4 36.4 37.3 38.2 39.2
23.................................................. 30.6 31.6 32.5 33.5 34.4 35.4 36.3 37.3 38.2 39.1
24.................................................. 30.6 31.5 32.5 33.5 34.4 35.3 36.3 37.2 38.1 39.0
25.................................................. 30.6 31.5 32.5 33.4 34.3 35.3 36.2 37.1 38.1 39.0
26.................................................. 30.5 31.5 32.4 33.4 34.3 35.2 36.2 37.1 38.0 38.9
27.................................................. 30.5 31.4 32.4 33.3 34.2 35.2 36.1 37.0 37.9 38.8
28.................................................. 30.5 31.4 32.3 33.3 34.2 35.1 36.0 36.9 37.8 38.7
29.................................................. 30.4 31.4 32.3 33.2 34.1 35.0 35.9 36.8 37.7 38.6
30.................................................. 30.4 31.3 32.2 33.1 34.1 35.0 35.8 36.7 37.6 38.5
31.................................................. 30.3 31.2 32.2 33.1 34.0 34.9 35.8 36.6 37.5 38.3
32.................................................. 30.3 31.2 32.1 33.0 33.9 34.8 35.6 36.5 37.4 38.2
33.................................................. 30.2 31.1 32.0 32.9 33.8 34.7 35.5 36.4 37.2 38.0
34.................................................. 30.1 31.0 31.9 32.8 33.7 34.6 35.4 36.2 37.1 37.9
35.................................................. 30.1 31.0 31.8 32.7 33.6 34.4 35.3 36.1 36.9 37.7
36.................................................. 30.0 30.9 31.7 32.6 33.5 34.3 35.1 35.9 36.7 37.4
37.................................................. 29.9 30.8 31.6 32.5 33.3 34.1 34.9 35.7 36.5 37.2
38.................................................. 29.8 30.7 31.5 32.3 33.2 34.0 34.7 35.5 36.2 37.0
39.................................................. 29.7 30.5 31.4 32.2 33.0 33.8 34.5 35.3 36.0 36.7
40.................................................. 29.6 30.4 31.2 32.0 32.8 33.6 34.3 35.0 35.7 36.4
41.................................................. 29.4 30.2 31.0 31.8 32.6 33.3 34.1 34.7 35.4 36.0
42.................................................. 29.3 30.1 30.9 31.6 32.4 33.1 33.8 34.4 35.1 35.7
43.................................................. 29.1 29.9 30.7 31.4 32.1 32.8 33.5 34.1 34.7 35.3
44.................................................. 28.9 29.7 30.5 31.2 31.9 32.5 33.2 33.8 34.3 34.9
45.................................................. 28.8 29.5 30.2 30.9 31.6 32.2 32.8 33.4 33.9 34.4
46.................................................. 28.5 29.3 30.0 30.6 31.3 31.9 32.4 33.0 33.5 33.9
47.................................................. 28.3 29.0 29.7 30.3 30.9 31.5 32.0 32.5 33.0 33.4
48.................................................. 28.1 28.7 29.4 30.0 30.6 31.1 31.6 32.1 32.5 32.9
49.................................................. 27.8 28.4 29.0 29.6 30.2 30.7 31.1 31.5 31.9 32.3
50.................................................. 27.5 28.1 28.7 29.2 29.7 30.2 30.6 31.0 31.4 31.7
51.................................................. 27.2 27.8 28.3 28.8 29.3 29.7 30.1 30.4 30.7 31.0
52.................................................. 26.8 27.4 27.9 28.4 28.8 29.2 29.5 29.8 30.1 30.3
53.................................................. 26.5 27.0 27.4 27.9 28.3 28.6 28.9 29.2 29.4 29.6
54.................................................. 26.1 26.5 27.0 27.4 27.7 28.0 28.3 28.5 28.7 28.9
55.................................................. 25.6 26.1 26.5 26.8 27.1 27.4 27.6 27.8 28.0 28.1
56.................................................. 25.2 25.6 25.9 26.2 26.5 26.7 26.9 27.1 27.2 27.3
57.................................................. 24.7 25.0 25.3 25.6 25.8 26.0 26.2 26.3 26.5 26.5
58.................................................. 24.1 24.4 24.7 25.0 25.2 25.3 25.5 25.6 25.7 25.7
59.................................................. 23.6 23.8 24.1 24.3 24.4 24.6 24.7 24.8 24.9 24.9
60.................................................. 23.0 23.2 23.4 23.6 23.7 23.8 23.9 24.0 24.0 24.1
61.................................................. 22.3 22.5 22.7 22.9 23.0 23.1 23.1 23.2 23.2 23.3
62.................................................. 21.7 21.9 22.0 22.1 22.2 22.3 22.3 22.4 22.4 22.4
63.................................................. 21.0 21.1 21.3 21.4 21.4 21.5 21.5 21.6 21.6 21.6
64.................................................. 20.3 20.4 20.5 20.6 20.6 20.7 20.7 20.7 20.8 20.8
65.................................................. 19.6 19.7 19.8 19.8 19.9 19.9 19.9 19.9 19.9 20.0
66.................................................. 18.9 19.0 19.0 19.1 19.1 19.1 19.1 19.1 19.1 19.1
67.................................................. 18.2 18.2 18.3 18.3 18.3 18.3 18.3 18.3 18.4 18.4
68.................................................. 17.4 17.5 17.5 17.5 17.5 17.6 17.6 17.6 17.6 17.6
69.................................................. 16.7 16.7 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8
70.................................................. 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0
71.................................................. 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3 15.3
72.................................................. 14.6 14.6 14.6 14.6 14.6 14.6 14.6 14.6 14.6 14.6
73.................................................. 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9
74.................................................. 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2
75.................................................. 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
76.................................................. 11.9 11.9 11.9 11.9 11.9 11.9 11.9 11.9 11.9 11.9
77.................................................. 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2
78.................................................. 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6 10.6
79.................................................. 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
80.................................................. 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5
81.................................................. 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9 8.9
82.................................................. 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4 8.4
83.................................................. 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9
84.................................................. 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4 7.4
85.................................................. 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
86.................................................. 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5
87.................................................. 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
88.................................................. 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
[[Page 240]]
89.................................................. 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
90.................................................. 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
91.................................................. 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7
92.................................................. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
93.................................................. 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1
94.................................................. 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
95.................................................. 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7
96.................................................. 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4
97.................................................. 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
98.................................................. 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
99.................................................. 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
100................................................. 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7
101................................................. 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
102................................................. 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
103................................................. 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
104................................................. 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
105................................................. 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
106................................................. 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6
107................................................. 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
108................................................. 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3
109................................................. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
110................................................. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
111................................................. .9 .9 .9 .9 .9 .9 .9 .9 .9 .9
112................................................. .8 .8 .8 .8 .8 .8 .8 .8 .8 .8
113................................................. .7 .7 .7 .7 .7 .7 .7 .7 .7 .7
114................................................. .6 .6 .6 .6 .6 .6 .6 .6 .6 .6
115................................................. .5 .5 .5 .5 .5 .5 .5 .5 .5 .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The multiples in this table are not applicable to annuities for a term certain; for such cases see paragraph (c) of Sec. 1.72-5.
If (a) the terms of the contract involve a life or lives, and are such
that the above tables cannot be correctly applied, and (b) the amounts
received under the contract are at least partly ``amounts received as an
annuity'' under a contract to which section 72 applies, the taxpayer may
submit with his return an actuarial computation based upon the
applicable annuity table (described below) with ages set back one year,
showing the appropriate factors applied in his case, subject to the
approval of the Commissioner upon examination of such return. The
applicable annuity table is the 1937 Standard Annuity Table (if the
investment in the contract does not include a post-June 1986 investment
in the contract) or the gender-neutral version of the 1983 Basic Table
(if the investment in the contract includes a post-June 1986 investment
in the contract). In the case of a contract to which Sec. 1.72-6(d)
(relating to contracts in which amounts were invested both before July
1, 1986, and after June 30, 1986) applies, the actuarial computation
shall be based on both tables in accordance with the principles of
Sec. 1.72-6(d). Computations involving factors to compensate for the
effects of contingencies other than mortality, such as marriage or
remarriage, re-employment, recovery from disability, or the like, will
not be approved.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as
amended by T.D. 8115, 51 FR 45706, Dec. 19, 1986; T.D. 8115, 60 FR
16381, Mar. 30, 1995 ]
Sec. 1.72-10 Effect of transfer of contracts on investment in the contract.
(a) If a contract to which section 72 applies, or any interest
therein, is transferred for a valuable consideration, by assignment or
otherwise, only the actual value of the consideration given for such
transfer and the amount of premiums or other consideration subsequently
paid by the transferee shall be included in the transferee's aggregate
of premiums or other consideration paid. In accordance with the
provisions of section 72(g)(3) and paragraph (b) of Sec. 1.72-4, an
annuity
[[Page 241]]
starting date shall be determined for the transferee without regard to
the annuity starting date, if any, of the transferor. In determining the
transferee's investment in the contract, the aggregate amount of
premiums or other consideration paid shall be reduced by all amounts
received by the transferee before the receipt of an amount as an annuity
or before the annuity starting date, whichever is the later, to the
extent that such amounts were excludable from his gross income under the
applicable income tax law at the time of receipt. For the treatment of
amounts received by the transferee subsequent to both the annuity
starting date and the date of receipt of a payment as an annuity, but
not received as annuity payments, see Sec. 1.72-11. For a limitation on
adjustments to the basis of annuity contracts sold, see section 1021.
(b) In the case of a transfer of such a contract without valuable
consideration, the annuity starting date and the expected return under
the contract shall be determined as though no such transfer had taken
place. See paragraph (b) of Sec. 1.72-4. The transferee shall include
the aggregate of premiums or other consideration paid or deemed to have
been paid by his transferor in the aggregate of premiums or other
consideration as though paid by him. In determining the transferee's
investment in the contract, the transferee's aggregate amount of
premiums or other consideration paid (as so found) shall be reduced by
all amounts either received or deemed to have been received by himself
or his transferor before the annuity starting date, or before the date
on which an amount is first received as an annuity, whichever is the
later, to the extent that such amounts were excludable from the gross
income of the actual recipient under the applicable income tax law at
the time of receipt. For treatment of amounts received subsequent to
both the above dates by such transferee, but not received as annuity
payments, see Sec. 1.72-11.
Sec. 1.72-11 Amounts not received as annuity payments.
(a) Introductory. (1) This section applies to amounts received under
a contract to which section 72 applies if either:
(i) Paragraph (b) of Sec. 1.72-2 is inapplicable to such amounts.
(ii) Paragraph (b) of Sec. 1.72-2 is applicable but the annuity
payments received differ either in amount, duration, or both, from those
originally provided under the contract, or
(iii) Paragraph (b) of Sec. 1.72 is applicable, but such annuity
payments are received by a beneficiary after the death of an annuitant
(or annuitants) in full discharge of the obligation under the contract
and solely because of a guarantee.
The payments referred to in subdivision (i) of this subparagraph include
all amounts other than ``amounts received as an annuity'' as that term
is defined in paragraphs (b) (2) and (3) of Sec. 1.72-2. If such amounts
are received as dividends or payments in the nature of dividends, or as
a return of premiums, see paragraph (b) of this section. If such amounts
are paid in full discharge of the obligation under the contract and are
in the nature of a refund of the consideration, see paragraph (c) of
this section. If such amounts are paid upon the surrender, redemption,
or maturity of the contract, see paragraph (d) of this section. The
payments referred to in subdivision (ii) of this subparagraph include
all annuity payments which are paid as the result of a modification or
an exchange of the annuity obligations originally provided under a
contract for different annuity obligations (whether or not such
modification or exchange is accompanied by the payment of an amount to
which subdivision (i) of this subparagraph applies). If the duration of
the new annuity obligations differs from the duration of the old annuity
obligations, paragraph (e) of this section applies to the new annuity
obligations and paragraph (d) of this section applies to any lump sum
payment received. If, however, the duration of the new annuity
obligations is the same as the duration of the old obligations,
paragraph (f) of this section applies to the new obligations and to any
lump sum received in connection therewith. The annuity payments referred
to in subdivision (iii) of this subparagraph are annuity payments which
are made to a beneficiary after
[[Page 242]]
the death of annuitant (or annuitants) in full discharge of the
obligations under a contract because of a provision in the contract
requiring the payment of a guaranteed amount or minimum number of
payments for a fixed period; see paragraph (c) of this section.
(2) The principles of this section apply, to the extent appropriate
thereto, to amounts paid which are taxable under section 72 (except, for
taxable years beginning before January 1, 1964, section 72(e)(3)) in
accordance with sections 402 and 403 and the regulations thereunder.
However, if contributions used to purchase the contract include amounts
for which a deduction was allowed under section 404 as contributions on
behalf of an owner-employee, the rules of this section are modified by
the rules of paragraph (b) of Sec. 1.72-17. Further, in applying the
provisions of this section, the aggregate premiums or other
consideration paid shall not include contributions on behalf of self-
employed individuals to the extent that deductions were allowed under
section 404 for such contributions. Nor, shall the aggregate of premiums
or other consideration paid include amounts used to purchase life,
accident, health, or other insurance protection for an owner-employee.
See paragraph (b)(4) of Sec. 1.72-16 and paragraph (c) of Sec. 1.72-17.
The principles of this section also apply to payments made in the manner
described in paragraph (b)(3)(i) of Sec. 1.72-2.
(b) Amounts received in the nature of dividends or similar
distributions. (1) If dividends (or payments in the nature of dividends
or a return of premiums or other consideration) are received under a
contract to which section 72 applies and such payments are received
before the annuity starting date or before the date on which an amount
is first received as an annuity, whichever is the later, such payments
are includible in the gross income of the recipient only to the extent
that they, taken together with all previous payments received under the
contract which were excludable from the gross income of the recipient
under the applicable income tax law, exceed the aggregate of premiums or
other consideration paid or deemed to have been paid by the recipient.
Such payments shall also be subtracted from the consideration paid (or
deemed paid) both for the purpose of determining an exclusion ratio to
be applied to subsequent amounts paid as an annuity and for the purpose
of determining the applicability of section 72(d) and Sec. 1.72-13,
relating to employee contributions recoverable in three years.
(2) If dividends or payments in the nature of dividends are paid
under a contract to which section 72 applies and such payments are
received on or after the annuity starting date or the date on which an
amount is first received as an annuity, whichever is later, such
payments shall be fully includible in the gross income of the recipient.
The receipt of such payments shall not affect the aggregate of premiums
or other consideration paid nor the amounts contributed or deemed to
have been contributed by an employee as otherwise calculated for
purposes of section 72. Since the investment in the contract and the
expected return are not affected by a payment which is fully includible
in the gross income of the recipient under this rule, the exclusion
ratio will not be affected by such payment and will continue to be
applied to amounts received as annuity payments in the future as though
such payment had not been made. This subparagraph shall apply to amounts
received under a contract described in paragraph (b)(3)(i) of Sec. 1.72-
2 to the extent that the amounts received exceed the portion of the
investment in the contract allocable to each taxable year in accordance
with paragraph (d)(3) of Sec. 1.72-4. Hence, such excess is fully
includible in the gross income of the recipient.
(c) Amounts received in the nature of a refund of the consideration
under a contract and in full discharge of the obligation thereof. (1)
Any amount received under a contract to which section 72 applies, if it
is at least in part a refund of the consideration paid, including
amounts payable to a beneficiary after the death of an annuitant by
reason of a provision in the contract for a life annuity with minimum
period of payments certain or with a minimum amount which must be paid
in any event, shall be considered an amount received in the nature of a
refund of
[[Page 243]]
the consideration paid for such contract. If such an amount is in full
discharge of an obligation to pay a fixed amount (whether in a lump sum
or otherwise) or to pay amounts for a fixed number of years (including
amounts described in paragraph (b)(3)(i) of Sec. 1.72-2), it shall be
included in the gross income of the recipient only to the extent that
it, when added to amounts previously received under the contract which
were excludable from gross income under the law applicable at the time
of receipt, exceeds the aggregate of premiums or other consideration
paid. See section 73(e)(2)(A). This paragraph shall not apply if the
total of the amounts to be paid in discharge of the obligation can in
any event exceed the total of the annuity payments which would otherwise
fully discharge the obligation. For rules to be applied in such a case,
see paragraph (e) of this section.
(2) The principles of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example (1). A, a male employee, retired on December 31, 1954, at
the age of 60. A life annuity of $75 per month was payable to him
beginning January 31, 1955. The annuity contract guaranteed that if A
did not live for at least ten years after his retirement his
beneficiary, B, would receive the monthly payments for any balance of
such ten-year period which remained at the date of A's death. Under
section 72, A was deemed to have paid $3,600 toward the cost of the
annuity. A lived for five years after his retirement receiving a total
of $4,500 in annuity payments. After A's death, B began receiving the
monthly payments of $75 beginning with the January 31, 1960 payment. B
will exclude such payments from his gross income throughout 1960, 1961,
and 1962, and will exclude only $18 of the first payment in 1963 from
his gross income for that year. Thereafter, B will include the entire
amount of all such payments in his gross income for the taxable year of
receipt. This result is determined as follows:
A's investment in the contract (unadjusted).................... $3,600
Multiple from Table III of Sec. 1.72-9 for male, age 11
60, where duration of guaranteed amount is 10 years
(percent)............................................
Subtract value of the refund feature to the nearest dollar (11 396
percent of $3,600)............................................
--------
Investment in the contract adjusted for the present value of 3,204
the refund feature without discount for interest..............
--------
Aggregate of premiums or other consideration paid.............. 3,600
A's exclusion ratio ($3,204/$16,380 [$900x18.2]) 19.6
(percent)............................................
Subtract amount excludable during five years A received 882
payments (19.6 percent of $4,500 [$900x5])....................
Remainder of aggregate of premiums or other consideration paid 2,718
excludable from gross income of B under section 72(e).........
As a result of the above computation, the number of payments to B which
will exhaust the remainder of consideration paid which is excludable
from gross income of the recipient is 36\6/25\ ($2,718/$75) and B will
exclude the payments from his gross income for three years, then exclude
only $18 of the first payment for the fourth year from his gross income,
and thereafter include the entire amount of all payments he receives in
his gross income.
Example (2). The facts are the same as in example (1), except that
B, the beneficiary, elects to receive $50 per month for his life in lieu
of the payments guaranteed under the original contractual obligation.
Since such amounts will be received as an annuity and may, because of
the length of time B may live, exceed the amount guaranteed, they are
not amounts to which this paragraph applies. See paragraph (e) of this
section.
Example (3). The facts are the same as in example (1), except that
B, the beneficiary, elects to receive the remaining guaranteed amount in
installments which are larger or smaller than the $75 per month provided
until, under the terms of the contract, the guaranteed amount is
exhausted. The rule of subparagraph (1) of this paragraph and the
computation illustrated in example (1) apply to such installments since
the total of such installments will not exceed the original amount
guaranteed to be paid at A's death in any event.
Example (4). C pays $12,000 for a contract providing that he is to
be paid an annuity of $1,000 per year for 15 years. His exclusion ratio
is therefore 80 percent ($12,000/$15,000). He directs that the annuity
is to be paid to D, his beneficiary, if he should die before the full
15-year period has expired. C dies after 5 years and D is paid $1,000 in
1960. D will include $200 ($1,000-$800 [80 percent of $1,000]) in his
gross income for the taxable year in which he receives the $1,000 since
section 72(e) and this section do not apply to the annuity payments made
in accordance with the
[[Page 244]]
provisions and during the term of the contract. D will continue with the
same exclusion ratio used by C (80 percent).
Example (5). In 1954, E paid $50,000 into a fund and was promised an
annual income for life the amount of which would depend in part upon the
earnings realized from the investment of the fund in accordance with an
agreed formula. The contract also specified that if E should die before
ten years had elapsed, his beneficiary, F, would be paid the amounts
determined annually under the formula until ten payments had been
received by E and F together. E died in 1960, having received five
payments totaling $30,000. Assuming that $22,000 of this amount was
properly excludable from E's gross income prior to his death, F will
exclude from his gross income the payments he receives until the taxable
year in which his total receipts from the fund exceed $28,000 ($50,000-
$22,000). F will include any excess over the $28,000 in his gross income
for that taxable year. Thereafter, F will include in his gross income
the entire amount of any payments made to him from the fund.
Example (6). Assume the facts are the same as in example (1), except
that the total investment in the contract is made after June 30, 1986,
that A is to receive payments under the life annuity contract beginning
on January 31, 1987, and that B will begin to receive the monthly
payments on January 31, 1992. B will exclude the $75 monthly payments
from gross income throughout 1992, 1993, and 1994. B will exclude only
the first two monthly payments and $21 of the third monthly payment in
1995. This is determined as follows:
A's investment in the contract (unadjusted)................. $3,600
Multiple from Table VII, age 60, 10 years (percent)......... 4
Subtract value of the refund feature (4 percent of $144
$3,600...............................................
-----------
Investment in the contract adjusted for the present value of $3,456
the refund feature without discount for interest...........
Aggregate of premiums or other consideration paid........... $3,600.00
A's exclusion ratio ($3,456/$21,780 [$900x24.2]) (percent) 15.9
Subtract amount excludable during five years A received $715.50
payments (15.9 percent of $4,500 [$900x5])...............
-----------
Remainder of aggregate of premiums or other consideration $2,884.50
paid excludable from gross income of B under section
72(e)....................................................
As a result of the above computation, the number of payments to B which
will exhaust the remainder of consideration paid which is excludable
from gross income of the recipient is 38 23/50 ($2,884.50/75) and B will
exclude the payments from gross income for three years, then exclude
only the first two monthly payments and $34.50 of the third. Thereafter
B shall include the entire amount of all payments received in gross
income.
(3) For the purpose of applying the rule contained in subparagraph
(1) of this paragraph, it is immaterial whether the recipient of the
amount received in full discharge of the obligation is the same person
as the recipient of amounts previously received under the contract which
were excludable from gross income, except in the case of a contract
transferred for a valuable consideration, with respect to which see
paragraph (a) of Sec. 1.72-10. For the limit on the tax, for taxable
years beginning before January 1, 1964, attributable to the receipt of a
lump sum to which this paragraph applies, see paragraph (g) of this
section.
(d) Amounts received upon the surrender, redemption, or maturity of
a contract. (1) Any amount received upon the surrender, redemption, or
maturity of a contract to which section 72 applies, which is not
received as an annuity under the regulations of paragraph (b) of
Sec. 1.72-2, shall be included in the gross income of the recipient to
the extent that it, when added to amounts previously received under the
contract and which were excludable from the gross income of the
recipient under the law applicable at the time of receipt, exceeds the
aggregate of premiums or other consideration paid. See section
72(e)(2)(B). If amounts are to be received as an annuity, whether in
lieu of or in addition to amounts described in the preceding sentence,
such amounts shall be included in the gross income of the recipient in
accordance with the provisions of paragraph (e) or (f) of this section,
whichever is applicable. The rule stated in the first sentence of this
paragraph shall not apply to payments received as an annuity or
otherwise after the date of the first receipt of an amount as an annuity
subsequent to the maturity, redemption, or surrender of the original
contract. If amounts are so received and are other than amounts received
as an annuity, they are includible in the gross income of the recipient.
See section 72(e)(1)(A) and paragraph (b)(2) of this section.
[[Page 245]]
(2) For the purpose of applying the rule contained in subparagraph
(1) of this paragraph, it is immaterial whether the recipient of the
amount received upon the surrender, redemption, or maturity of the
contract is the same as the recipient of amounts previously received
under the contract which were excludable from gross income, except in
the case of a contract transferred for a valuable consideration, with
respect to which see paragraph (a) of Sec. 1.72-10. For the limit on the
amount of tax, for taxable years beginning before January 1, 1964,
attributable to the receipt of certain lump sums to which this paragraph
applies, see paragraph (g) of this section.
(e) Periodic payments received for a different term. If, after the
date on which an amount is first received as an annuity under a contract
to which section 72 applies, the terms of the contract are modified or
the annuity obligations are exchanged so that periodic payments are to
be received for a different term than originally provided under the
contract (whether or not accompanied by the receipt of a lump sum to
which paragraph (d) of this section applies), the rules of this
paragraph shall apply to such payments. Hence, the provisions of section
72(e) and paragraphs (b), (c), (d), and (f) of this section are
inapplicable for the purpose of determining the includibility of such
payments in gross income and the general principles of section 72 with
respect to the use of an exclusion ratio shall be applied to such
payments as if they were provided under a new contract received in
exchange for the contract providing the original annuity payments. If
such payments are received as the result of the surrender, redemption,
or discharge of a contract to which section 72 applies, they shall be
considered to be received as an annuity under a contract exchanged for
the contract whose redemption, surrender, or discharge was involved. For
the purpose of determining the extent to which the payments so received
are to be included in the gross income of the recipient, an exclusion
ratio shall be determined for such contract as of the later of January
1, 1954, or the first day of the first period for which an amount is
received as an annuity thereunder, whichever is the later. See paragraph
(b) of Sec. 1.72-4. In determining the investment in the contract for
this purpose, any lump sum amount received at the time of the exchange
shall not be considered an amount to which paragraph (a)(2) of
Sec. 1.72-6 applies. However, such lump sum shall be subtracted from the
aggregate of premiums or other consideration paid to the extent it is
excludable as an amount not received as an annuity under this section as
if it were an amount received before the annuity starting date of the
contract obtained in exchange.
(f) Periodic payments received for the same term after a lump sum
withdrawal. (1) If, after the date of the first receipt of a payment as
an annuity, the annuitant receives a lump sum and is thereafter to
receive annuity payments in a reduced amount under the contract for the
same term, life, or lives as originally specified in the contract, a
portion of the contract shall be considered to have been surrendered or
redeemed in consideration of the payment of such lump sum and the
exclusion ratio originally determined for the contract shall continue to
apply to the amounts received as an annuity without regard to the fact
that such amounts are less than the original amounts which were to be
paid periodically. The lump sum shall be includible in the gross income
of the recipient in accordance with the provisions of subparagraph (2)
of this paragraph. However, except in the case of amounts to which
sections 402 and 403 apply, the tax, for taxable years beginning before
January 1, 1964, attributable to the inclusion of all or part of the
lump sum in gross income shall not exceed the amount determined under
section 72(e)(3) and paragraph (g) of this section. For taxable years
beginning after December 31, 1963, such amounts may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging).
(2) There shall be excluded from gross income that portion of the
lump sum which bears the same ratio to the aggregate premiums or other
consideration paid for the contract, as reduced by all amounts
previously received under the contract and excludable from
[[Page 246]]
the gross income of the recipient under the applicable income tax law,
as:
(i) In the case of payments to be made in the manner described in
paragraph (b)(2) of Sec. 1.72-2, the amount of the reduction in the
annuity payments to be made thereafter bears to the annuity payments
originally provided under the contract, or
(ii) In the case of a contract providing for payments to be made in
the manner described in paragraph (b)(3)(i) of Sec. 1.72-2, the amount
of the reduction in the number of units per period to be paid thereafter
bears to the number of units per period payable under the contract
immediately before the lump sum withdrawal.
(3) This paragraph may be illustrated by the following examples:
Example (1). Taxpayer A pays $20,000 for an annuity contract
providing for payments to him of $100 per month for his life. At the
annuity starting date he has a life expectancy of 20 years. His expected
return is therefore $24,000 and the exclusion ratio is five-sixths. He
continues to receive the original annuity payments for 5 years,
receiving a total of $6,000, and properly excludes a total of $5,000
from his gross income in his income tax returns for those years. At the
beginning of the next year, A agrees with the insurer to take a reduced
annuity of $75 per month and a lump sum payment of $4,000 in cash. Of
the lump sum he receives, he will include $250 and exclude $3,750 from
his gross income for his taxable year of receipt, determined as follows:
Aggregate of premiums or other consideration paid.......... $20,000
Less amounts received as an annuity to the extent they were $5,000
excludable from A's income................................
------------
Remainder of the consideration............................. $15,000
============
Ratio of the reduction in the amount of the annuity 25/$100 or
payments to the original annuity payments................. \1/4\
Lump sum received.......................................... $4,000
Less one-fourth of the remainder of the consideration (\1/ $3,750
4\ of $15,000)............................................
------------
Portion of the lump sum includible in gross income......... $250
For taxable years beginning before January 1, 1964, the limit on tax of
section 72(e)(3), as in effect before such date, applies to the portion
of the lump sum includible in gross income. For taxable years beginning
after December 31, 1963, such portion may be taken into account in
computations under sections 1301 through 1305 (relating to income
averaging). If, in this example, the annuity were a pension payable to A
as a retired employee, but the facts were otherwise the same (assuming
that, for instance, the $20,000 aggregate of premiums or other
consideration paid were A's contributions as determined under section
72(f) and Sec. 1.72-8) the result would be the same except that the tax
attributable to the inclusion of the $250 in A's gross income, for
taxable years beginning before January 1, 1964, would not be limited by
section 72(e)(3), as in effect before such date. If such a lump sum is
received in a taxable year beginning after December 31, 1963, the
portion of such sum includible in gross income may be taken into account
in computations under sections 1301 through 1305 (relating to income
averaging).
Example (2). Taxpayer B pays $30,000 for a contract providing for
monthly payments to be made to him for 15 years with respect to the
principal and earnings of 10 units of an investment fund. B receives
$12,000 during the first 5 years of participation and of this amount he
has properly excluded a total of $10,000 from his gross income in his
income returns for the taxable years, since $2,000 of $2,400 he received
in each such year represented his investment divided by the term of the
annuity ($30,000/15). At the beginning of the 6th year, B agrees to take
$11,000 in a lump sum and thereafter to accept the payments arising with
respect to five units for the remaining 10 years of payments in full
discharge of the original obligations of the contract. B shall include
$1,000 in his gross income for the 6th year as the result of the lump
sum he receives and allocates $1,000 of his original investment in the
contract to each of the remaining 10 years with respect to the payments
which will continue, determined as follows:
Aggregate of premiums or other consideration paid............. $30,000
Total amount received and excludable from gross income........ $10,000
---------
Remainder of the consideration................................ $20,000
=========
Ratio of units discontinued to the total units originally \5/10\
provided..................................................... or \1/2\
Lump sum received at the time of reduction in the number of $11,000
units to be paid.............................................
Less one-half of the remainder of the consideration (\1/2\ of $10,000
$20,000).....................................................
---------
Portion of the lump sum received and includible in gross $1,000
income.......................................................
=========
Remainder of the consideration less the portion of such $10,000
remainder attributable to the excludable portion of the lump
sum ($20,000-$10,000)........................................
Remainder of the consideration properly allocable to each $1,000
taxable year for the remaining 10 years ($10,000/10).........
For the taxable years beginning before January 1, 1964, the limit on tax
of section 72(e)(3), as in effect before such date, applies to the
portion of the lump sum received and includible in gross income. For
taxable years
[[Page 247]]
beginning after December 31, 1963, such portion may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging).
(g) Limit on tax attributable to the receipt of a lump sum. (1) For
taxable years beginning before January 1, 1964, if the entire amount of
the proceeds received upon the redemption, maturity, surrender, or
discharge of a contract to which section 72 applies is received in a
lump sum and paragraph (c), (d), or (f) of this section is applicable in
determining the portion of such amount which is includible in gross
income, the tax attributable to such portion shall not exceed the tax
which would have been attributable thereto had such portion been
received ratably in the taxable year in which received and the 2
preceding taxable years. The amount of tax attributable to the
includible portion of the lump sum received shall be the lesser of:
(i) The difference between the amount of tax for the taxable year of
receipt computed by including such portion in gross income and the
amount of tax for such taxable year computed by excluding such portion
from gross income; or
(ii) The difference between the total amount of tax for the taxable
year of receipt and the 2 preceding taxable years computed by including
one-third of such portion in gross income for each of the 3 taxable
years, and the total amount of the tax for the taxable year of receipt
and the 2 preceding taxable years computed by entirely excluding such
portion from the gross income of all 3 taxable years.
For the definition of ``taxable year'', see section 441(b). This
subparagraph shall not apply, for taxable years beginning before January
1, 1964, to payments excepted from the application of section 72(e)(3),
as in effect before such date, under the provisions of section 402 or
403. See paragraph (a) of Sec. 1.72-2 and paragraph (d) of Sec. 1.72-14.
(2) For taxable years beginning after December 31, 1963, any amount
includible in gross income to which this section relates may be taken
into account in computations under sections 1301 through 1305 (relating
to income averaging).
(h) Amounts deemed to be paid or received by a transferee. Amounts
deemed to have been paid or received by a transferee for the purposes of
Sec. 1.72-10 shall also be deemed to have been so paid or received by
such transferee for the purposes of this section. Thus, if a donee is
deemed to have paid the premiums or other consideration actually paid by
his transferor for the purposes of section 72(g) and paragraph (b) of
Sec. 1.72-10, such consideration shall be deemed premiums or other
consideration paid by the donee for the purposes of this section.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6885, 31 FR
7798, June 2, 1966; T.D. 8115, 51 FR 45734, Dec. 19, 1986]
Sec. 1.72-12 Effect of taking an annuity in lieu of a lump sum upon the maturity of a contract.
If a contract to which section 72 applies provides for the payment
of a lump sum in full discharge of the obligation thereunder and the
obligee entitled thereto, prior to receiving any portion of such lump
sum and within 60 days after the date on which such lump sum first
becomes payable, exercises an option or irrevocably agrees with the
obligor to take, in lieu thereof, payments which will constitute
``amounts received as an annuity'', as that term is defined in paragraph
(b) of Sec. 1.72-2, no part of such lump sum shall be deemed to have
been received by the obligee at the time he was first entitled thereto
merely because he would have been entitled to such amount had he not
exercised the option or made such an agreement with the obligor.
Sec. 1.72-13 Special rule for employee contributions recoverable in three years.
(a) Amounts received as an annuity. (1) Section 72(d) provides a
special rule for the treatment of amounts received as an annuity by an
employee (or by the beneficiary or beneficiaries of an employee) under a
contract to which section 72 applies. This special rule is applicable
only in the event that:
(i) At least part of the consideration paid for the contract is
contributed by the employer, and
(ii) The aggregate amount receivable as an annuity under such
contract by
[[Page 248]]
the employee (or by his beneficiary or beneficiaries if the employee
died before any amount was received as an annuity under the contract)
within the 3-year period beginning on the date (whether or not before
January 1, 1954) on which an amount is first received as an annuity
equals or exceeds the total consideration contributed (or deemed
contributed under section 72(f) and Sec. 1.72-8) by the employee as of
such date as reduced by all amounts previously received and excludable
from the gross income of the recipient under the applicable income tax
law.
In such an event, section 72(d) provides that all amounts received as an
annuity under the contract during a taxable year to which the Code
applies shall be excluded from gross income until the total of the
amounts excluded under that section plus all amounts excluded under
prior income tax laws equals or exceeds the consideration contributed
(or deemed contributed) by the employee. The excess, if any, and all
amounts received by any recipient thereafter (whether or not received as
an annuity), shall be fully included in gross income. See paragraph (b)
of this section.
(2) If the aggregate amount receivable as an annuity under the
contract within three years from the date on which an amount is first
received as an annuity thereunder will not equal or exceed the
consideration contributed (or deemed contributed) by the employee in
accordance with the provisions of Sec. 1.72-8, computed as of such date,
the special rule of section 72(d) shall not apply to amounts received as
an annuity under the contract and the general rules of section 72 shall
apply thereto.
(3) The aggregate of the amounts receivable as an annuity within the
prescribed 3-year period shall be the total of all annuity payments
anticipatable by an employee (or a beneficiary or beneficiaries of an
employee, if the employee died before any amount was received as an
annuity) under the contract as a whole as defined in paragraph (a) of
Sec. 1.72-2. See paragraph (a)(3) of Sec. 1.72-2 for rules for
determining what constitutes ``the contract'' in the case of
distributions from an employees' trust or plan.
(4) If subparagraphs (1) and (3) of this paragraph apply to amounts
received as an annuity under a contract, the rule prescribed in
subparagraph (1) of this paragraph shall apply to all amounts so
received thereunder regardless of the fact that they may be payable (i)
to more than one beneficiary, (ii) for the same or different intervals,
(iii) in different sums, or (iv) for a different period certain, life,
or lives.
(5) For purposes of section 72(d), contributions which are made with
respect to a self-employed individual and which are allowed as a
deduction under section 404(a) are not considered contributions by the
employee, but such contributions are considered contributions by the
employer. A contribution which is deemed paid in a prior taxable year
under the provisions of section 404(a)(6) shall be considered made with
respect to a self-employed individual if the individual on whose behalf
the contribution is made was self-employed for the taxable year in which
the contribution is deemed paid, whether or not such individual is self-
employed at the time the contribution is actually paid. Contributions
with respect to a self-employed individual who is an owner-employee used
to purchase life, accident, health, or other insurance protection for
such owner-employee shall not be treated as consideration for the
contract contributed by the employee in computing the employee
contributions for purposes of section 72(d).
(b) Amounts not received as an annuity. If the rule of paragraph (a)
of this section applies to a contract and, after the date on which an
annuity payment is first received, amounts are received other than as an
annuity under such contract in a taxable year to which the Code applies,
they shall be included in the gross income of the recipient in
accordance with the provisions of Sec. 1.72-11. Thus, if such amounts
are received as a dividend or a similar distribution after the date on
which an amount is first received as an annuity under the contract, they
shall be included in the gross income of the recipient (in accordance
with section 72(e)(1)(A) and paragraph (b)(2) of Sec. 1.72-11. All other
amounts not received as an annuity shall be included in the gross income
of the recipient in accordance with the
[[Page 249]]
provisions of section 72(e)(1)(B) and paragraph (c), (d), or (f),
whichever is applicable, of Sec. 1.72-11. See section 72(e)(2).
(c) Amounts received after the exhaustion of employee contributions.
(1) Amounts received under a contract to which the rule of paragraph (a)
of this section applies (whether or not such amounts are received as an
annuity) shall be included in the gross income of the recipient if such
amounts are received after the date on which the aggregate of all
amounts excluded from gross income by the recipients under section 72(d)
and prior income tax laws equalled or exceeded the consideration
contributed (or deemed contributed) by the employee.
(2) If the rule of paragraph (a) of this section applies to amounts
received by an employee (or his beneficiary or beneficiaries) under a
joint and survivor annuity contract, payments made to a prior annuitant
may entirely exhaust the amounts excludable from gross income. In such
case, amounts paid to the surviving annuitant (or annuitants) shall be
included in gross income by such recipients.
(d) Application of section 72(d) to a contract, trust, or plan
providing for payments in a manner described in paragraph (b)(3)(i) of
Sec. 1.72-2. For the purpose of applying section 72(d) and this section,
any amount received in the nature of a periodic payment under a
contract, trust, or plan which provides for the payment of amounts in a
manner described in paragraph (b)(3)(i) of Sec. 1.72-2 shall be
considered an amount received as an annuity notwithstanding the
provisions of any other section of the regulations under section 72. The
special exclusion rule of section 72(d) and paragraph (a) of this
section shall apply to all amounts so received if the first amount
received, when multiplied by the number of periodic payments to be made
within the three years beginning on the date of its receipt, results in
an amount in excess of the aggregate premiums or other consideration
contributed (or deemed contributed) by the employee as of that date. If
more than one series of periodic payments is to be paid under the same
contract, trust, or plan, all payments anticipatable, whether because
fixed in amount or determinable in the manner described in the preceding
sentence, shall be aggravated for the purpose of determining the
applicability of section 72 (d) to the contract, trust, or plan as a
whole.
(e) Inapplicability of section 72(d) and this section. Section 72(d)
and this section do not apply to:
(1) Amounts received as proceeds of a life insurance contract to
which section 101(a) applies, nor to
(2) Amounts paid to a surviving annuitant under a joint and survivor
annuity contract to which paragraph (b)(3) of Sec. 1.72-5 applies, nor
to
(3) Amounts paid to an annuitant under Chapter 73 of Title 10 of the
United States Code with respect to which section 72(o) and Sec. 1.122-1
apply.
See also paragraph (d) of Sec. 1.72-14.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6497, 25 FR
10021, Oct. 20, 1960; T.D. 6676, 28 FR 10135, Sept. 17, 1963; T.D. 7043,
35 FR 8477, June 2, 1970]
Sec. 1.72-14 Exceptions from application of principles of section 72.
(a) Payments of interest. If any amount is received under an
agreement to pay interest on a sum or sums held by the obligor, such
amount shall not be excludable from the gross income of the recipient
under the provisions of section 72 to the extent that it is an actual
interest payment. See section 72(j). An amount shall be considered to be
held under an agreement to pay interest thereon if the amount payable
after the term of the annuity (whether for a term certain or for a life
or lives) is substantially equal to or larger than the aggregate amount
of premiums or other consideration paid therefor. For this purpose,
however, the aggregate amount of premiums or other consideration paid
shall include all contributions made by an employer and not merely those
to which section 72(f) applies.
(b) Alimony payments. To the extent that payments made to a wife are
includable in her gross income by reason of either or both section 71
and 682, they shall not be excluded from the wife's gross income under
the principles of section 72 although made under a contract to which
that section applies. However, section 72 shall apply in the case of
amounts received under
[[Page 250]]
such a contract if a husband and wife are entitled to make and do make a
single return jointly.
(c) Certain ``face-amount certificates.'' The principles of section
72 do not apply to ``face-amount certificates'' described in section
72(1) which were issued before January 1, 1955.
(d) Employer plans. The provisions of Secs. 1.72-1 to 1.72-13,
inclusive, shall be disregarded to the extent that they are inconsistent
with the treatment of amounts received provided in section 402 (relating
to the taxability of a beneficiary of an employees' trust), section 403
(relating to the taxation of employee annuities), or the regulations
under either of such sections.
Sec. 1.72-15 Applicability of section 72 to accident or health plans.
(a) Applicability of section. This section provides the rules for
determining the taxation of amounts received from an employer-
established plan which provides for distributions that are taxable under
section 72 (or for distributions that are taxable under section 402
(a)(2) or (e), or section 403(a)(2), in the case of lump sum
distributions) and which also provides for distributions that may be
excludable from gross income under section 104 or 105 as accident or
health benefits. For example, this section will apply to a pension plan
described in section 401 and exempt under section 501 which provides for
the payment of pensions at retirement and the payment of an earlier
pension in the event of permanent disability. This section will also
apply to a profit-sharing plan described in section 401 and exempt under
section 501 which provides for periodic distribution of the amount
standing to the account of a participant during any period that the
participant is absent from work due to a personal injury or sickness and
for the distribution of any balance standing to the account of the
participant upon his separation from service. For purposes of this
section, the term ``contributions of the employee'' includes
contributions by the employer which were includible in the employee's
gross income. For special rules for taxable years ending before January
27, 1975, relating to certain accident or health benefits which were
treated as distributions to which section 72 applied, see paragraph (i)
of this section.
(b) General rule. Section 72 does not apply to any amount received
as an accident or health benefit, and the tax treatment of any such
amount shall be determined under sections 104 and 105. See paragraphs
(c) and (d) of this section, paragraph (d) of Sec. 1.104-1, and
Secs. 1.105-1 through 1.105-5. Section 72 (or, in the case of certain
total distributions, section 402(a)(2) or section 403(a)(2)) does apply
to any amount which is received under a plan to which this section
applies and which is not an accident or health benefit. See paragraph
(e) of this section.
(c) Accident or health benefits attributable to employee
contributions. (1) If a plan to which this section applies provides that
any portion of the accident or health benefits is attributable to the
contributions of the employee to such plan, then such portion of such
benefits is excludable from gross income under section 104(a)(3) and
paragraph (d) of Sec. 1.104-1. Neither section 72 nor section 105
applies to any accident or health benefits (whether paid before or after
retirement) attributable to contributions of the employee. Since such
portion is excludable under section 104(a)(3), such portion is not
subject to the dollar limitation of section 105(d) and if such portion
is payable after the retirement of the employee, it is excludable
without regard to the provisions of Sec. 1.105-4 and section 72.
(2) In determining the taxation of any amounts received as accident
or health benefits from a plan to which this secton applies, the first
step is to determine the portion, if any, of the contributions of the
employee which is used to provide the accident or health benefits and
the portion of the accident or health benefits attributable to such
portion of the employee's contributions. If such a plan expressly
provides that the accident or health benefits are provided in whole or
in part by employee contributions and the portion of employee
contributions to be used for such purpose, the contributions so used
will be treated as used to provide accident or health benefits. However,
if the plan does not expressly provide that the accident or health
benefits are to
[[Page 251]]
be provided with employee contributions and the portion of employee
contributions to be used for such purpose, it will be presumed that none
of the employee contributions is used to provide such benefits. Thus, in
the case of a contributory pension plan, it will be presumed that the
disability pension is provided by employer contributions, unless the
plan expressly provides otherwise, or in the case of a contributory
profit-sharing plan providing that a portion of the amount standing to
the account of each participant will be used to purchase accident or
health insurance, it will be presumed that such insurance is purchased
with employer contributions, unless the plan expressly provides
otherwise. Similarly, unless the plan expressly provides otherwise, it
will be presumed that if a contributory profit-sharing plan provides for
periodic distributions from the account of a participant during any
absence from work because of a personal injury or sickness, all such
distributions which do not exceed the contributions of the employer plus
earnings thereon are provided by employer contributions.
(3) Any employee contributions that are treated under subparagraph
(2) of this paragraph as used to provide accident or health benefits
shall not be included for any purpose under section 72 as employee
contributions or as aggregate premiums or other consideration paid.
Thus, in the case of a pension plan, or in the case of a profit-sharing
plan providing that a portion of the amount standing to the account of
each participant will be used to purchase accident or health insurance,
any employee whose contributions are so used must make the adjustment
provided by this subparagraph irrespective of whether such employee
receives any accident or health benefits under such plan. However, in
the case of a profit-sharing plan providing for periodic distributions
from the account of a participant during any absence from work because
of a personal injury or sickness, an adjustment under this subparagraph
is required only when an employee receives distributions in excess of
the employer contributions and earnings thereon or receives
distributions consisting in whole or in part of his own contributions.
(4) If any of the employee contributions are treated under
subparagraph (2) of this paragraph as used to provide any of the
accident or health benefits, the portion of the benefits attributable to
employee contributions shall be determined in accordance with
Sec. 1.105-1. Any accident or health benefits that are excludable under
section 104(a)(3) shall not be included in the expected return for
purposes of section 72.
(d) Accident or health benefits attributable to employer
contributions. Any amounts received as accident or health benefits and
not attributable to contributions of the employee are includable in
gross income except to the extent that such amounts are excludable from
gross income under section 105 (b), (c), or (d) and the regulations
thereunder. Thus, such amounts may be excludable under section 105(d) as
payments under a wage continuation plan. However, if such payments, when
added to other such payments attributable to employer contributions,
exceed the limitations of section 105(d), then the excess is includable
in gross income under section 105(a). Such excess is not excludable
under section 72. See, however, paragraph (i) of this section, for
special rules for taxable years ending before January 27, 1975, relating
to certain accident or health benefits which were treated as
distributions to which section 72 applied.
(e) Other benefits under the plan. The taxability of amounts that
are received under a plan to which this section applies and that are not
accident or health benefits is determined under section 72 (or, in the
case of certain total distributions, under section 402(a)(2) or section
403(a)(2)) without regard to any exclusion or inclusion of accident or
health benefits under sections 104 and 105. For example, the investment
in the contract or aggregate premiums paid is determined without regard
to the exclusion of any amount under section 104 or 105, and the annuity
starting date is determined without regard to the receipt of any
accident or health benefits. However, if any employee contributions are
used to provide any accident or health benefits,
[[Page 252]]
the investment in the contract or aggregate premiums paid must be
adjusted as provided in paragraph (c)(3) of this section.
(f) Examples. The principles of this section may be illustrated by
the following examples:
Example (1). A, an employee, is a participant in a contributory
pension plan described in section 401(a) and exempt under section
501(a). Such plan provides for the payment of a pension to each
participant when he retires at age 65 or when he retires earlier if the
retirement is due to permanent and total disability. In 1964, A, who was
age 52, became totally and permanently disabled because of an injury,
was hospitalized, and commenced to receive a pension of $74 a week under
this plan. The weekly amounts received by A do not exceed 75 percent of
his ``regular weekly rate of wages'' under section 105(d). A had
contributed $11,500 to the plan. The plan does not expressly provide
that any portion of the disability pension is purchased with employee
contributions. Accordingly, it is presumed that no portion of the
disability pension is purchased with A's contributions. The disability
pension which A receives qualifies as payments under a wage continuation
plan for purposes of section 105(d) and Sec. 1.105-4, and if such
payments are the only accident or health benefits which are attributable
to the contributions of his employer, such payments are entirely
excludable under section 105(d) until A reaches age 65, his mandatory
retirement age under the plan. The payments which A receives after he
becomes age 65 are taxable under section 72. The payments which A
receives do constitute an annuity as defined in paragraph (b) of
Sec. 1.72-2, but since the amounts which he will receive during the
first three years after attaining age 65 exceed his contributions, he
shall exclude under Sec. 1.72-13 the entire amount of all payments that
he receives as an annuity after attaining age 65 until such amounts
equal his contributions to the plan, or $11,500. Thereafter, the
payments that he receives under the plan are includible in gross income.
Example (2). B, an employee, is a participant in a contributory
profit-sharing plan described in section 401(a) and exempt under section
501(a). Such plan provides that, in the event a participant is absent
from work because of a personal injury or sickness, he will be paid $125
a week out of his account in such plan. Such weekly amount does not
exceed 75 percent of B's ``regular weekly rate of wages'' under section
105(d). Any amount standing to the account of a participant at the time
of his separation from service will be paid to him at such time. During
1964, B incurred a personal injury, was hospitalized, and as a result
was absent from work for nine weeks. He received nine weekly payments of
$125, or a total of $1,125, on account of such absence from work. At the
time B was injured, he had contributed $5,000 to the plan. The plan did
not expressly provide that a participant's contributions are to be used
to provide for the distributions during disability. Accordingly, it is
presumed that B's contributions were not used to provide the accident or
health benefits under the plan. Since these weekly payments are paid
because of B's absence from work due to the injury, and since such
payments are considered as attributable to contributions of his
employer, such payments are required under section 105(a) to be included
in B's gross income except to the extent that they are excludable under
section 105(d). If B receives no other payments under a wage
continuation plan attributable to contributions of his employer, during
the first 30 days in the period of absence $75 of each weekly payment is
excludable from gross income under section 105(d), but $50 of each
weekly payment is includable in gross income under section 105(a).
Amounts attributable to the period of absence in excess of 30 days are
excludable from gross income under section 105(d) to the extent of $100
a week and includible in gross income under section 105(a) to the extent
of $25 a week. The excludable portion of payments does not reduce B's
investment in the contract or the amount of premiums considered to have
been paid by B for purposes of any subsequent computations under section
72.
Example (3). The facts are the same as in example (2) except that B
was absent from work for 130 weeks. At the time B was injured, his
employer had contributed $10,000 to the plan on his account, and $6,000
of earnings of the plan had been allocated to his account. Thus, at the
time he was injured, B's account included $21,000, and $14,000 of such
amount consists of employer contributions of $10,000 plus earnings of
$4,000 thereon. The first 112 weekly payments (totaling $14,000) which B
receives are treated in the manner set forth in example (2). However,
since the remaining payments exceed the employer contributions plus
earnings thereon, such remaining payments are considered to be
distributions of B's contributions plus earnings thereon. Since the
total of such payments, or $2,250, is less than B's contributions to the
plan, $5,000, the entire amount of such payments is excludable from B's
gross income, but a corresponding adjustment with respect to the return
of B's contributions shall be made to his consideration in determining
the taxation of any lump sum paid to B upon separation from service.
(g) Payments to or on behalf of a self-employed individual. A self-
employed individual is not considered an employee
[[Page 253]]
for purposes of section 105, relating to amounts received by employees
under accident and health plans, nor for purposes of excluding under
section 104(a)(3) amounts received by him under an accident and health
plan as referred to in section 105(e). See section 105(g) and paragraph
(a) of Sec. 1.105-1. Therefore, the other paragraphs of this section are
not applicable to amounts received by or on behalf of a self-employed
individual. Except where accident or health benefits are provided
through an insurance contract or an arrangement having the effect of
insurance, all amounts received by or on behalf of a self-employed
individual from a plan described in section 401(a) and exempt under
section 501(a) or a plan described in section 403(a) shall be taxed as
otherwise provided in section 72, 402, or 403. If the accident or health
benefits are paid under an insurance contract or under an arrangement
having the effect of insurance, section 104(a)(3) shall apply. Section
72 shall not apply to any amounts received under such circumstances. For
the treatment of the amounts paid for such accident or health benefits,
see section 404(e)(3) and paragraph (f) of Sec. 1.404(e)-1.
(h) Medical benefits for retired employees, etc. Employer
contributions to provide medical benefits described in section 401(h)
under a qualified pension or annuity plan are not includible in the
gross income of the employee on whose behalf such contributions were
made. Similarly, if the trustee of a trust forming a part of a qualified
pension plan applies employer contributions which have been contributed
to provide medical benefits described in section 401(h) or earnings
thereon, to purchase insurance contracts which provide such benefits,
the amount so applied is not includible in the gross income of the
employee on whose behalf such insurance was purchased. The payment of
medical benefits described in section 401(h) as defined in paragraph (a)
of Sec. 1.401-14 under a plan established by an employer shall be
treated in the same manner as the payment of any other accident or
health benefits under an employer-established plan. See paragraphs (b),
(c), and (d) of this section.
(i) Special rules. (1) Special rule for taxable years ending before
January 27, 1975. A taxpayer who has reached retirement age, as defined
in Sec. 1.79-2(b)(3) (hereinafter referred to as ``initial retirement
age''), before January 27, 1975, and who has received payments under a
plan described in paragraph (a) of this section, which are wage
continuation benefits to which section 105(d) and this section apply, or
which are treated as such by reason of the employee having so agreed
under Sec. 1.105-6, shall be entitled to an exclusion, in taxable years
ending before January 27, 1975, with respect to payments received after
initial retirement age but before mandatory retirement age, as defined
in Sec. 1.105-4(a)(3)(i)(B), which is the greater of:
(i) The amount actually excluded on an original return under section
72 (b) or (d) with respect to payments received after initial retirement
age, to the extent such amount does not exceed an amount properly
excludable under section 72 (b) or (d) if this paragraph and paragraph
(b) of this section did not apply; or
(ii) The amount that would have been properly excludable under
section 105(d) during the same period.
(2) Investment in the annuity contract. A taxpayer described in
paragraph (i)(1) of this section, shall redetermine his investment in,
consideration for, or basis of his annuity contract (hereinafter
referred to in this paragraph as the ``investment in the contract'') in
accordance with the applicable rules of section 72 and the regulations
thereunder, and the rules of this paragraph. In making such
redetermination the taxpayer's investment in his contract shall be
decreased, by the excess (if any) of the amount which the taxpayer is
entitled to exclude under paragraph (i)(1) of this section over the
amount which could have been excluded under section 105(d) (subject to
the limitations contained in such provision). Such investment in the
contract shall be decreased only by the excess of the amount excluded
under section 72 in taxable years ending before January 27, 1975, over
the amount which could have been excluded under section 105(d) during
the same period. For example, the investment in the contract shall not
be decreased in the case of an individual who was retired from work on
account
[[Page 254]]
of injury or sickness or a full taxable year, if the amount excluded
under section 72 was less than $5,200, since the entire amount could
have been excluded under section 105(d). On the other hand, if the
amount excluded under section 72 was equal to or greater than $5,200 for
a full taxable year, for example, $6,000 for the full taxable year, then
$5,200 shall be treated as excluded under section 105(d) and the
investment in the contract shall be reduced by $800 ($6,000-$5,200).
(3) Surviving annuitants and beneficiaries. (i) The rights of a
surviving annuitant or beneficiary, with respect to the application of
the rules of section 72, shall be based on the employee's investment in
his annuity contract, as adjusted in accordance with the provisions of
this paragraph. Thus, where an employee dies after having recomputed his
investment as provided in paragraph (i)(2) of this section, and his
contract provided a survivorship element, the survivor would assume the
employee's recomputed investment for purposes of determining
excludability of amounts under section 72.
(ii) Where a beneficiary failed to increase the amount treated as an
employee's contribution toward his annuity contract to reflect the
employee death benefit under section 101(b) and Sec. 1.72-8(b), because
the employee had treated his initial retirement age as his annuity
starting date, such beneficiary may apply section 101(b) as if the
appropriate addition to basis had been made in the year of the
employee's death, but only if the employee had not reached his mandatory
retirement age (as defined in section Sec. 1.105-4(a)(3)(i)(B)). For
purposes of this paragraph, the amount treated as the secton 101(b)
death benefit would be valued as of the date of the employee's death.
(4) Records. (i) For purposes of section 72 (b) and (d), and this
section, the taxpayer shall maintain such records as are necessary to
substantiate the amount treated as his investment in his annuity
contract.
(ii) The Commissioner may prescribe a form and instructions with
respect to the taxpayer's past and current treatment of amounts received
under section 72 or 105, and the taxpayer's computation, or
recomputation, of his investment in his annuity contract. Such form may
be required to be filed with the taxpayer's returns for years in which
amounts are excluded under section 72 or 105.
(5) Cross references. (i) See section 72(b)(4) and Sec. 1.72-4(b)
with respect to annuity starting dates.
(ii) See Secs. 1.72-8(b) and 1.101-2(a)(2) with respect to treating
certain amounts received by an estate or beneficiary as employee death
benefits.
(iii) See Sec. 1.105-4(a)(3)(i)(B) for the definition of ``mandatory
retirement age.''
(iv) See Sec. 1.105-6 with respect to the application of section
105(d) to certain amounts received as retirement annuities before
January 27, 1975, where the employee would otherwise have been eligible
for benefits to which section 105(d) applies.
(6) Examples. The provisions of this paragraph may be illustrated by
the following examples. In such examples assume that the plan does not
expressly provide that any portion of the disability pension is
purchased with employee contributions. Accordingly, it is presumed that
no portion of the disability pension is purchased with employee
contributions. Also, assume that in each case the taxpayer retired only
after he had been absent from work for at least 30 days on account of
personal injuries or sickness:
Example (1). A, a calendar year taxpayer, retired because of
disability on January 1, 1968, his 58th birthday, receiving $80 per week
($4,160 per year) under a plan which qualifies as a wage continuation
plan under section 105(d) and Sec. 1.105-4. Under the plan, A's initial
retirement age is age 60 (January 1, 1970), and his mandatory retirement
age is 65 (January 1, 1975). A's consideration for the contract was
$10,000. For payments received in 1968 and 1969 A excluded the entire
amount under section 105(d). Payments received with respect to periods
after A's initial retirement age (January 1, 1970) were excluded under
section 72(d) until his entire $10,000 consideration for his contract
had been excluded. Thus, A applied section 72(d) to exclude $4,160 each
year for taxable years 1970 and 1971, and $1,680 ($10,000-
($4,160+$4,160)) for 1972. In late 1974 A realized that he was entitled
to treat the full amount received under his annuity as excludable under
secton 105(d) rather than section 72 for the taxable years 1970 through
1974. Consequently, A
[[Page 255]]
filed amended returns for 1972 and 1973 excluding an additional $2,480
($4,160-$1,680) and $4,160, respectively, claiming refunds based upon
such additional exclusions. Moreover, A's annuity starting date is
January 1, 1975 (A's mandatory retirement age), and he excludes under
section 72(d) for 1975, 1976, and 1977, $4,160, $4,160 and $1,680
($10,000-($4,160+$4,160)), respectively.
Example (2). B, a calendar year taxpayer retired because of
disability, July 1, 1970, on his 58th birthday, receiving $1,000 per
month under a plan which qualifies as a wage continuation plan for
purposes of section 105(d) and Sec. 1.105-4. Under the plan, B's initial
retirement age is age 60 (July 1, 1972), and his mandatory retirement
age is 65 (July 1, 1977). B's consideration for the contract was
$25,000. For payments received in 1970 and 1971 B excluded under section
105(d) $2,600 and $5,200, respectively, of the $6,000 (6x$1,000) and
$12,000 (12x$1,000) received under the plan. For the period January 1,
1972, through June 30, 1972, B excluded an additional $2,600 under
section 105(d). For the period July 1, 1972, through December 31, 1972,
B excluded under section 72(d)(1) the entire $6,000 in payments received
under the plan. Similarly, under section 72(d)(1), B excluded the entire
$12,000 in payments received under the plan in 1973, and in 1974 B
excluded the remaining $7,000 of his annuity basis. In 1975, B realized
that he will be entitled to take full advantage of the exclusion under
section 105(d) for periods through June 30, 1977, when he would reach
age 65. B need not file amended returns for 1972, 1973, and 1974, even
though the amounts he excluded under section 72(d) (exceeded the amount
he was entitled to exclude under section 105(d)). He must, however,
recompute the amount that will be treated as his investment in his
annuity contract. Thus, on July 1, 1977, B's annuity starting date, his
investment in his annuity contract would be $13,000, recomputed as
follows:
B's original investment....................................... $25,000
Less amounts excluded under section 72 to the extent they
exceed amounts that would have been excludable during the
same period under section 105(d):
1972 ($6,000-2,600)....................................... 3,400
1973 ($12,000-5,200)...................................... 6,800
1974 ($7,000-5,200)....................................... 1,800
---------
Total................................................... 12,000
B's recomputed investment in his annuity contract............. $13,000
=========
Example (3). Assume the same facts as in example (2) except that B's
investment in his annuity contract is $37,000, and he excluded under
section 72(b) 16.9 percent, or $2,028, of the $12,000 received per year.
Thus, for the period July 1, 1972, through December 31, 1972, B excluded
under section 72(b) $1,014 (16.9 percent of $6,000), and $2,028 in both
1973 and 1974. B files amended returns for 1972, 1973 and 1974 claiming
the exclusion under section 105(d). Thus, B restored to income $1,014
for 1972, and $2,028 for both 1973 and 1974, claiming $2,600 ($5,200-
$2,600) exclusion under section 105(d) for 1972 and a $5,200 exclusion
in both 1973 and 1974. Thus, for 1972 B is entitled to an additional
exclusion of $1,586 ($2,600-$1,014), and, for both 1973 and 1974, an
additional exclusion of $3,172 ($5,200-$2,028). On July 1, 1977, B's
investment in the contract is $37,000.
Example (4). C, a calendar year taxpayer, retired because of
disability on January 1, 1965, his 58th birthday, receiving payments of
$500 per month under a plan which qualifies as a wage continuation plan
for purposes of section 105(d) and Sec. 1.105-4. C had contributed
$18,000 toward the cost of his annuity contract. Under the plan, C's
initial retirement age is age 60 (January 1, 1967) and C's mandatory
retirement age is age 70 (January 1, 1977). For taxable years 1965 and
1966 C excluded from gross income under section 105(d) $5,200 of the
$6,000 (12x$500) he received from his employer as wage continuation
benefits. On January 1, 1967, C began excluding all of the benefits C
received in accordance with the rules of section 72(d). Thus, for 1967,
1968 and 1969, C excluded 100 percent of the annuity payments. For his
taxable years 1970 through 1973, C included in his gross income all
annuity payments. In 1974, C realized that he will be entitled to use
the exclusion under section 105(d) through December 31, 1976 (until he
reaches age 70). In 1974, C filed a timely claim for refund for his
taxable years 1971, 1972, and 1973 (refunds for taxable year 1970 and
prior years were barred by the statute of limitations), and continues to
claim the exclusion under section 105(d) for 1974, 1975, and 1976. For
1977, C treats January 1, 1977, as the annuity starting date, and treats
$15,600 as the investment in the contract. The $15,600 represents the
$18,000 original investment in the contract reduced by the excess,
$2,400, of the amount excluded under section 72 for 1967, 1968 and 1969
($18,000) over the amount excludable under section 105(d) ($5,200x3) for
such years.
Example (5). (i) D, a calendar year taxpayer, retired because of
disability on June 30, 1965, receiving $100 per month under a plan which
qualifies as a wage continuation plan for purposes of section 105(d) and
Sec. 1.105-4. Under the plan, the initial retirement age of D, whose
birthday is January 1, is age 60 (January 1, 1967), and D's mandatory
retirement age is age 70 (January 1, 1977). D had contributed $6,000
toward the cost of the annuity contract under such plan. For 1965 and
1966, D excluded under section 105(d) the entire amount received under
the plan ($1600 and $1,200 respectively). For 1967 through 1973, D
excluded $330 per year under section 72(b), or 27.5 percent of the
$1,200 payment received under the plan per year.
(ii) In 1974, D realized that he will be entitled to use the
exclusion provided in section
[[Page 256]]
105(d) up until January 1, 1977, when he reaches his mandatory
retirement age, and that he improperly applied section 72 to payments
received in the years 1967 through 1973. In 1974, D filed a timely claim
for refund with respect to the section 105(d) wage continuation
benefits, for 1971, 1972 and 1973 (refunds for taxable year 1970 and
prior years were barred by the statute of limitations), and continues to
claim the section 105(d) exclusion for 1974, 1975 and 1976. D is
entitled to an additional exclusion of $870 ($1,200-$330) for each of
the years 1971, 1972 and 1973.
(iii) Upon reaching mandatory retirement age on January 1, 1977, D
treats such date as the annuity starting date, and treats $6,000 as the
investment in the contract. The investment in the contract is not
reduced, because the amount excluded under section 72(b) for 1967
through 1970 ($330 per year) does not exceed the amount excludable under
section 105(d) ($1,200 per year), and the $330 per year excluded for
1971, 1972, and 1973 were restored to the investment in the contract.
Therefore, assuming that D would be entitled to exclude 41.3 percent of
the payments under the plan if the annuity starting date is January 1,
1977, D would be entitled to exclude $495.60 (41.3 percent of $1,200)
per annum.
Example (6). Assume the facts stated in example (5) except that D's
investment in his annuity contract is $100,000 and he received payments
equaling $10,000 per year. Assume also, that D had excluded under
section 72(b) 54.9 percent of the payments received under the plan
through 1974. Consequently, he excluded $5,490 (54.9 percent of $10,000)
from his gross income for the years 1967 through 1974. D need not file
amended returns for 1971, 1972, 1973, and 1974, even though the amount
he excluded under section 72(b) exceeded the amounts he was entitled to
exclude under section 105(d). He must, however, recompute the amount
that will be treated as his investment in his annuity contract. Thus, on
January 1, 1977, D's annuity starting date, his investment in his
annuity contract would be $97,680. This figure represents the original
investment ($100,000) reduced by the amount excluded under section 72(b)
for the years 1967-1974 (8x$5,490 = $43,920) over the amount properly
excludable during those years under section 105(d) ($5,200x8 = $41,600).
Example (7). Assume the same facts as in example (6) except that D's
mandatory retirement age is 63 (January 1, 1970). D would redetermine
his exclusion ratio for purposes of section 72(b) as of January 1, 1970,
since D's mandatory retirement age is D's annuity starting date. D would
treat $99,130 as his investment in his annuity contract as of such date
for purposes of section 72(b). Assuming refunds for 1970 and prior
taxable years were barred by the statute of limitations, the $99,130
represents the original investment of $100,000 reduced by the excess of
the amount excluded under section 72(b) for 1967, 1968, and 1969
($5,490x3 = $16,470) over the amount otherwise excludable during those
years under section 105(d) ($5,200x3 = $15,600). Therefore, assuming
that D would be entitled to exclude 61.2 of the payments received under
the plan if the annuity starting date is January 1, 1970, D would be
entitled to exclude $6,120 (61.2 percent of the $10,000 received under
the plan) per annum for 1971 and subsequent years. However, D is not
entitled to exclude the additional $630 ($6,120-$5,490) for 1970,
because credit or refund for 1970 and prior years is barred by the
statute of limitations.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10135, Sept. 17, 1963; T.D. 6722, 29 FR 5069, Apr. 14, 1964; T.D. 6770,
29 FR 15366, Nov. 17, 1964; T.D. 7352, 40 FR 16664, Apr. 14, 1975]
Sec. 1.72-16 Life insurance contracts purchased under qualified employee plans.
(a) Applicability of section. This section provides rules for the
tax treatment of premiums paid under qualified pension, annuity, or
profit-sharing plans for the purchase of life insurance contracts and
rules for the tax treatment of the proceeds of such a life insurance
contract and of annuity contracts purchased under such plans. For
purposes of this section, the term ``life insurance contract'' means a
retirement income, an endowment, or other contract providing life
insurance protection. The rules of this section apply to plans covering
only common-law employees as well as to plans covering self-employed
individuals.
(b) Treatment of cost of life insurance protection. (1) The rules of
this paragraph are applicable to any life insurance contract--
(i) Purchased as a part of a plan described in section 403(a), or
(ii) Purchased by a trust described in section 401(a) which is
exempt from tax under section 501(a) if the proceeds of such contract
are payable directly or indirectly to a participant in such trust or to
a beneficiary of such participant.
The proceeds of a contract described in subdivision (ii) of this
subparagraph will be considered payable indirectly to a participant or
beneficiary of such participant where they are payable to the trustee
but under the terms of the
[[Page 257]]
plan the trustee is required to pay over all of such proceeds to the
beneficiary.
(2) If under a plan or trust described in subparagraph (1) of this
paragraph, amounts which were allowed as a deduction under section 404,
or earnings of the trust, are applied toward the purchase of a life
insurance contract described in subparagraph (1) of this paragraph, the
cost of the life insurance protection under such contract shall be
included in the gross income of the participant for the taxable year or
years in which such contributions or earnings are so applied.
(3) If the amount payable upon death at any time during the year
exceeds the cash value of the insurance policy at the end of the year,
the entire amount of such excess is considered current life insurance
protection. The cost of such insurance will be considered to be a
reasonable net premium cost, as determined by the Commissioner, for such
amount of insurance for the appropriate period.
(4) The amount includible in the gross income of the employee under
this paragraph shall be considered as premiums or other consideration
paid or contributed by the employee only with respect to any benefits
attributable to the contract (within the meaning of paragraph (a)(3) of
Sec. 1.72-2) providing the life insurance protection. However, if under
the rules of this paragraph an owner-employee is required to include any
amounts in his gross income, such amounts shall not in any case be
treated as part of his investment in the contract.
(5) The determination of the cost of life insurance protection may
be illustrated by the following example:
Example. An annual premium policy purchased by a qualified trust for
a common-law employee provides an annuity of $100 per month upon
retirement at age 65, with a minimum death benefit of $10,000. The
insurance payable if death occurred in the first year would be $10,000.
The cash value at the end of the first year is 0. The net insurance is
therefore $10,000 minus 0, or $10,000. Assuming that the Commissioner
has determined that a reasonable net premium cost for the employee's age
is $5.85 per $1,000, the premium for $10,000 of life insurance is
therefore $58.50, and this is the amount to be reported as income by the
employee for his taxable year in which the premium is paid. The balance
of the premium is the amount contributed for the annuity, which is not
taxable to the employee under a plan meeting the requirements of section
401(a), except as provided under section 402(a). Assuming that the cash
value at the end of the second year is $500, the net insurance would
then be $9,500 for the second year. With a net 1-year term rate of $6.30
for the employee's age in the second year, the amount to be reported as
income to the employee would be $59.85.
(6) This paragraph shall not apply if the trust has a right under
any circumstances to retain any part of the proceeds of the life
insurance contract. But see paragraph (c)(4) of this section relating to
the taxability of the distribution of such proceeds to a beneficiary.
(c) Treatment of proceeds of life insurance and annuity contracts.
(1) If under a qualified pension, annuity, or profit-sharing plan, there
is purchased either--
(i) A life insurance contract described in paragraph (b)(1) of this
section, and the employee either paid the cost of the insurance or was
taxable on the cost of the insurance under paragraph (b) of this
section, or
(ii) An annuity contract,
the amounts payable under any such contract by reason of the death of
the employee are taxable under the rules of subparagraph (2) of this
paragraph, except in the case of a joint and survivor annuity.
(2)(i) In the case of an annuity contract, the death benefit is the
accumulation of the premiums (plus earnings thereon) which is intended
to fund pension or other deferred benefits under a pension, annuity, or
profit-sharing plan. Such death benefits are not in the nature of life
insurance and are not excludable from gross income under section 101(a).
(ii) In the case of a life insurance contract under which there is a
reserve accumulation which is intended to fund pension or other deferred
benefits under a pension, annuity, or profit-sharing plan, such reserve
accumulation constitutes the source of the cash value of the contract
and approximates the amount of such cash value. The portion of the
proceeds paid upon the death of the insured employee which is equal to
the cash value immediately before death is not excludable from gross
income under section 101(a). The
[[Page 258]]
remaining portion, if any, of the proceeds paid to the beneficiary by
reason of the death of the insured employee--that is, the amount in
excess of the cash value--constitutes current insurance protection and
is excludable under section 101(a).
(iii) The death benefit under an annuity contract, or the portion of
the death proceeds under a life insurance contract which is equal to the
cash value of the contract immediately before death, constitutes a
distribution under the plan consisting in whole or in part of deferred
compensation and is taxable to the beneficiary in accordance with
section 72(m)(3) and the provisions of this paragraph, except to the
extent that the limited exclusion from income provided in section 101(b)
is applicable.
(iv) In the case of a life insurance contract under which the
benefits are paid at a date or dates later than the death of the
employee, section 101(d) is applicable only to the portion of the
benefits which is attributable to the amount excludable under section
101(a). The portion of such benefits which is attributable to the cash
value of the contract immediately before death is taxable under section
72, and in such case, any amount excludable under section 101(b) is
treated as additional consideration paid by the employee in accordance
with section 101(b)(2)(D).
(3) The application of the rules under subparagraph (2) of this
paragraph with respect to the taxability of proceeds of a life insurance
contract paid by reason of the death of an insured common-law employee
who has paid no contributions under the plan is illustrated by the
following examples:
Example (1).
Total face amount of the contract payable in a lump sum at $25,000
time of death................................................
Cash value of the contract immediately before death........... 11,000
---------
Excess over cash value, excludable under section 101(a)....... 14,000
=========
Cash value subject to limited exclusion under section 101(b).. 11,000
Excludable under section 101(b) (assuming that there is no 5,000
other death benefit paid by or on behalf of any employer with
respect to the employee).....................................
---------
Balance taxable in accordance with section 402(a)(2) or 6,000
403(a)(2) (assuming a total distribution in one taxable year
of the distributee)..........................................
Portion of premiums taxed to employee under the provisions of 940
paragraph (b) of this section and considered as contributions
of the employee..............................................
---------
Balance taxable as long-term capital gain..................... 5,060
Example (2). The facts are the same as in example (1), except that
the contract provides that the beneficiary may elect within 60 days
after the death of the employee either to take the $25,000 or to receive
10 annual installments of $3,000 each, and the beneficiary elects to
receive the 10 installments. In addition, the employee's rights to the
cash value immediately before his death were forfeitable at least to the
extent of $5,000. Section 101(d) is applicable to the amount excludable
under section 101(a), that is, $14,000. The portion of each annual
installment of $3,000 which is attributable to this $14,000 is
determined by allocating each installment in accordance with the ratio
which this $14,000 bears to the total amount which was payable at death
($25,000). Accordingly, the portion of each annual installment which is
subject to section 101(d) is $1,680 (\14/25\ of $3,000), of which $1,400
(\1/10\ of $14,000) is excludable under section 101(a), and the
remaining $280 is includible in the gross income of the beneficiary.
However, if the beneficiary is a surviving spouse as defined in section
101(d)(3), the exclusion provided by section 101(d)(1)(B) is applicable
to such $280. The remaining portion of each annual $3,000 installment,
$1,320, is attributable to the cash value of the contract and is treated
under section 72, as follows:
Amount actually contributed by the employee................... 0
Amount considered contributed by employee by reason of section $5,000
101(b).......................................................
Portion of premiums taxed to employee under the provisions of $940
paragraph (b) of this section and considered as contributions
of the employee..............................................
---------
Investment in the contract.................................... $5,940
Expected return, 10x$1,320.................................... $13,200
Exclusion ratio, $5,940/$13,200............................... 0.45
Annual exclusion, 0.45x$1,320................................. $594
Accordingly, $594 of the $1,320 portion of each annual installment is
excludable each year under section 72, and the remaining $726 is
includible. Thus, if the beneficiary is not a surviving spouse, a total
of $1,006 ($280 plus $726) of each annual $3,000 installment is
includible in income each year. If the beneficiary is a surviving
spouse, and can exclude all of the $280 under section 101(d)(1)(B), the
amount includible in gross income each year is $726 of each annual
$3,000 installment.
(4) If an employee neither paid the total cost of the life insurance
protection provided under a life insurance contract, nor was taxable
under paragraph (b) of this section with respect
[[Page 259]]
thereto, no part of the proceeds of such a contract which are paid to
the beneficiaries of the employee as a death benefit is excludable under
section 101(a). The entire distribution is taxable to the beneficiaries
under section 402(a) or 403(a) except to the extent that a limited
exclusion may be allowable under section 101(b).
[T.D. 6676, 28 FR 10135, Sept. 17, 1963]
Sec. 1.72-17 Special rules applicable to owner-employees.
(a) In general. Under section 401(c) and section 403(a), certain
self-employed individuals may participate in qualified pension, annuity,
and profit-sharing plans, and the amounts received by such individuals
from such plans are taxable under section 72. Section 72(m) and this
section contain special rules for the taxation of amounts received from
qualified pension, profit-sharing, or annuity plans covering an owner-
employee. For purposes of section 72 and the regulations thereunder, the
term ``employee'' shall include the self-employed individual who is
treated as an employee by section 401(c)(1) (see paragraph (b) of
Sec. 1.401-10), and the term ``owner-employee'' has the meaning assigned
to it in section 401(c)(3) (see paragraph (d) of Sec. 1.401-10). See
also paragraph (a)(2) of Sec. 1.401-10 for the rule for determining when
a plan covers an owner-employee. For purposes of this section, a self-
employed individual may not treat as consideration for the contract
contributed by the employee any contributions under the plan for which
deductions were allowed under section 404 and which, consequently, are
considered employer contributions.
(b) Certain amounts received before annuity starting date. (1) The
rules of this paragraph are applicable to amounts received from a
qualified pension, profit-sharing, or annuity plan by an employee (or
his beneficiary) who is or was an owner-employee with respect to such
plan when such amounts--
(i) Are received before the annuity starting date; and
(ii) Are not received as an annuity.
For the definition of annuity starting date, see paragraph (b) of
Sec. 1.72-4 and subparagraph (4) of this paragraph. As to what
constitutes amounts not received as an annuity, see paragraphs (c) and
(d) of Sec. 1.72-11.
(2) Amounts to which this paragraph applies shall be included in the
recipient's gross income for the taxable year in which received.
However, the sum of the amounts so included under this subparagraph in
all taxable years shall not exceed the aggregate deductions allowed
under section 404 for premiums or other consideration paid under the
plan on behalf of the employee while he was an owner-employee, including
any such deductions taken in the taxable year of receipt.
(3) Any amounts to which this paragraph applies and which are not
includible in gross income under the rules of subparagraph (2) of this
paragraph shall be subject to the provisions of section 72(e) and
Sec. 1.72-11. However, for taxable years beginning before January 1,
1964, section 72(e)(3), as in effect before such date, shall not apply
to such amounts. For taxable years beginning after December 31, 1963,
such amounts (other than amounts subject to a penalty under section
72(m)(5) and paragraph (e) of this section) may be taken into account in
computations under sections 1301 through 1305 (relating to income
averaging).
(4) Under section 401(d)(4), a qualified pension, profit-sharing, or
annuity plan may not provide for distributions to an owner-employee
before he reaches age 59\1/2\ years, except in the case of his earlier
disability. Therefore, in the case of a distribution from a qualified
plan to an individual for whom contributions have been made to the plan
as an owner-employee, the annuity starting date cannot be prior to the
time such individual attains the age 59\1/2\ years unless he is entitled
to benefits before reaching such age because of his disability. For
taxable years beginning after December 31, 1966, see section 72(m)(7)
and paragraph (f) of this section for the meaning of disabled. For
taxable years beginning before January 1, 1967, see section 213(g)(3)
for the meaning of disabled.
(5) The rules of this paragraph are not applicable to amounts
credited to an individual in his capacity as a policy-holder of an
annuity, endowment, or life insurance contract which are in the nature
of a dividend or refund of
[[Page 260]]
premium, and which are applied in accordance with paragraph (a)(4) of
Sec. 1.404(a)-8 towards the purchase of benefits under the policy.
(6) The rules of this paragraph may be illustrated by the following
example:
Example. B, a self-employed individual, received $8,000 as a
distribution under a qualified pension plan before the annuity starting
date. At the time of such distribution, $10,000 had been contributed
(the whole amount being allowed as a deduction) under the plan on behalf
of such individual while he was a common-law employee and $5,000 had
been contributed under the plan on his behalf while he was an owner-
employee, of which $2,500 was allowed as a deduction. In addition, B had
contributed $1,000 on his own behalf as an employee under the plan. Of
the $8,000, $2,500 (the amount allowed as a deduction with respect to
contributions on behalf of the individual while he was an owner-
employee) is includable in gross income under subparagraph (2) of this
paragraph. With respect to the remaining $5,500, B has a basis of
$3,500, consisting of the $2,500 contributed on his behalf while he was
an owner-employee which was not allowed as a deduction and the $1,000
which B contributed as an employee. The difference between the $5,500
and B's basis of $3,500, or $2,000, is includable in gross income under
section 72(e).
(c) Amounts paid for life, accident, health, or other insurance.
Amounts used to purchase life, accident, health, or other insurance
protection for an owner-employee shall not be taken into account in
computing the following:
(1) The aggregate amount of premiums or other consideration paid for
the contract for purposes of determining the investment in the contract
under section 72(c)(1)(A) and Sec. 1.72-6;
(2) The consideration for the contract contributed by the employee
for purposes of section 72(d)(1) and Sec. 1.72-13, which provide the
method of taxing employees' annuities where the employee's contributions
will be recoverable within 3 years; and
(3) The aggregate premiums or other consideration paid for purposes
of section 72(e)(1)(B) and Sec. 1.72-11, which provide the rules for
taxing amounts not received as annuities prior to the annuity starting
date.
The cost of such insurance protection will be considered to be a
reasonable net premium cost, as determined by the Commissioner, for the
appropriate period.
(d) Amounts constructively received. (1) If during any taxable year
an owner-employee assigns or pledges (or agrees to assign or pledge) any
portion of his interest in a trust described in section 401(a) which is
exempt from tax under section 501(a), or any portion of the value of a
contract purchased as part of a plan described in section 403(a), such
portion shall be treated as having been received by such owner-employee
as a distribution from the trust or as an amount received under the
contract during such taxable year.
(2) If during any taxable year an owner-employee receives, either
directly or indirectly, any amount from any insurance company as a loan
under a contract purchased by a trust described in section 401(a) which
is exempt from tax under section 501(a) or purchased as part of a plan
described in section 403(a), and issued by such insurance company, such
amount shall be treated as an amount received under the contract during
such taxable year. An owner-employee will be considered to have received
an amount under a contract if a premium, which is otherwise in default,
is paid by the insurance company in the form of a loan against the cash
surrender value of the contract. Further, an owner-employee will be
considered to have received an amount to which this subparagraph applies
if an amount is received from the issuer of a face-amount certificate as
a loan under such a certificate purchased as part of a qualified trust
or plan.
(e) Penalties applicable to certain amounts received by owner-
employees. (1)(i) The rules of this paragraph are applicable to amounts,
to the extent includable in gross income, received from a trust
described in section 401(a) or under a plan described in section 403(a)
by or on behalf of an individual who is or has been an owner-employee
with respect to such plan or trust--
(a) Which are received before the owner-employee reaches the age
59\1/2\ years and which are attributable to contributions paid on behalf
of such owner-employee (whether or not paid by him) while he was an
owner-employee (see subdivision (ii) of this subparagraph),
[[Page 261]]
(b) Which are in excess of the benefits provided for such owner-
employee under the plan formula (see subdivision (iii) of this
subparagraph), or
(c) Which are received by reason of a distribution of the owner-
employee's entire interest under the provisions of section 401(e)(2)(E),
relating to excess contributions on behalf of an owner-employee which
are willfully made.
(ii) The amounts referred to in subdivision (i)(a) of this
subparagraph do not include--
(a) Amounts received by reason of the owner-employee becoming
disabled, or
(b) Amounts received by the owner-employee in his capacity as a
policy-holder of an annuity, endowment, or life insurance contract which
are in the nature of a dividend or similar distribution.
Amounts attributable to contributions paid on behalf of an owner-
employee and which are paid to a person other than the owner-employee
before the owner-employee dies or reaches the age 59\1/2\ shall be
considered received by the owner-employee for purposes of this
paragraph. For taxable years beginning after December 31, 1966, see
section 72(m)(7) and paragraph (f) of this section for the meaning of
disabled. For taxable years beginning before January 1, 1967, see
section 213(g)(3) for the meaning of disabled. For taxable years
beginning after December 31, 1968, if an amount is not included in the
amounts referred to in subdivision (i)(a) of this subparagraph solely by
reason of the owner-employee becoming disabled and if a penalty would
otherwise be applicable with respect to all or a portion of such amount,
then for the taxable year in which such amount is received, there must
be submitted with the owner-employee's income tax return a doctor's
statement as to the impairment, and a statement by the owner-employee
with respect to the effect of such impairment upon his substantial
gainful activity and the date such impairment occurred. For taxable
years which are subsequent to the first taxable year beginning after
December 31, 1968, with respect to which the statements referred to in
the preceding sentence are submitted, the owner-employee may, in lieu of
such statements, submit a statement declaring the continued existence
(without substantial diminution) of the impairment and its continued
effect upon his substantial gainful activity.
(iii) This paragraph applies to amounts described in subdivision
(i)(b) of this subparagraph (relating to excess benefits) even though a
portion of such amounts may be attributable to contributions made on
behalf of an individual while he was not an owner-employee and even
though the amounts are received by his successor. However, these amounts
do not include the portion of a distribution to which section 402(a)(2)
or 403(a)(2) (relating to certain total distributions in one taxable
year) applies.
(iv)(a) For purposes of subdivision (i)(a) of this subparagraph, the
portion of any distribution or payment attributable to contributions on
behalf of an employee-participant while he was an owner-employee
includes the contributions made on his behalf while he was an owner-
employee and the increments in value attributable to such contributions.
(b) The increments in value of an individual's account may be
allocated to contributions on his behalf while he was an owner-employee
either by maintaining a separate account, or an accounting, which
reflects the actual increment attributable to such contributions, or by
the method described in (c) of this subdivision.
(c) Where an individual is covered under the same plan both as an
owner-employee and as a nonowner-employee, the portion of the increment
in value of his interest attributable to contributions made on his
behalf while he was an owner-employee may be determined by multiplying
the total increment in value in his account by a fraction. The numerator
of the fraction is the total contributions made on behalf of the
individual as an owner-employee, weighted for the number of years that
each contribution was in the plan. The denominator is the total
contributions made on behalf of the individual, whether or not an owner-
employee, weighted for the number of years each contribution was in the
plan. The contributions are weighted for the number of years in the plan
by multiplying
[[Page 262]]
each contribution by the number of years it was in the plan. For
purposes of this computation, any forfeiture allocated to the account of
the individual is treated as a contribution to the account made at the
time so allocated.
(d) The method described in (c) of this subdivision may be
illustrated by the following example:
Example. B was a member of the XYZ Partnership and a participant in
the partnership's profit-sharing plan which was created in 1963. Until
the end of 1967, B's interest in the partnership was less than 10
percent. On January 1, 1968, B obtained an interest in excess of 10
percent in the partnership and continued to participate in the profit-
sharing plan until 1972. During 1972, prior to the time he attained the
age of 59\1/2\ years and during a time when he was not disabled, B
withdrew his entire interest in the profit-sharing plan. At that time
his interest was $15,000, $9,600 contributions and $5,400 increment
attributable to the contributions. The portion of the increment
attributable to contributions while B was an owner-employee is $667.80,
determined as follows:
------------------------------------------------------------------------
A B C
-----------------------------------------
Number of
years Contribution
Contribution contribution weighted for
was in trust- years in
- trust (AxB)
------------------------------------------------------------------------
1972.......................... $1,000 0 0
1971.......................... 800 1 800
1970.......................... 1,200 2 2,400
1969.......................... 600 3 1,800
1968.......................... 200 4 800
1967.......................... 400 5 2,000
1966.......................... 2,000 6 12,000
1965.......................... 1,000 7 7,000
1964.......................... 1,500 8 12,000
1963.......................... 900 9 8,100
-----------------------------------------
Total....................... $9,600 46,900
------------------------------------------------------------------------
Total weighted contributions as owner-employee (1968-1972)--5,800.
Total weighted contributions--46,900.
$5,400x(5,800/46,900) = $667.80
(2)(i) If the aggregate of the amounts to which this paragraph
applies received by any person in his taxable year equals or exceeds
$2,500 the tax with respect to such amount shall be the greater of--
(a) The increase in tax attributable to the inclusion of the amounts
so received in his gross income for the taxable year in which received,
or
(b) 110 percent of the aggregate increase in taxes, for such taxable
year and the four immediately preceding taxable years, which would have
resulted if such amounts had been included in such person's gross income
ratably over such taxable years. However, if deductions were allowed
under section 404 for contributions to the plan on behalf of the
individual as an owner-employee for less than four prior taxable years
(whether or not consecutive), the number of immediately preceding
taxable years taken into account shall be the number of prior taxable
years in which such deductions were allowed.
(ii) If the aggregate of the amounts to which this paragraph applies
received by any person in his taxable year is less than $2,500, the tax
with respect to such amounts shall be 110 percent of the increase in tax
which results from including such amounts in the person's gross income
for the taxable year in which received.
(3)(i) For purposes of making the ratable inclusion computations of
subparagraph (2)(i) of this paragraph, the taxable income of the
recipient for each taxable year involved (notwithstanding section 63,
relating to definition of taxable income) shall be treated as being not
less than the amount required to be treated as includible in the taxable
year pursuant to the ratable inclusion.
(ii) For purposes of subparagraph (2)(i)(a) and (ii) of this
paragraph, the recipient's taxable income (notwithstanding section 63,
relating to definition of taxable income) shall be treated as being not
less than the aggregate of the amounts to which this paragraph applies
reduced by the deductions allowed the recipient for such taxable year
under section 151 (relating to deductions for personal exemptions).
(iii) In any case in which the application of subdivision (i) or
(ii) of this subparagraph results in an increase in taxable income for
any taxable year, the resulting increase in taxes imposed by section 1
or 3 for such taxable year shall be reduced by the credits against tax
provided by section 31 (tax withheld on wages) and section 39 (certain
uses of gasoline and lubricating oil), but shall not be reduced by any
other credits against tax.
[[Page 263]]
(4) The application of the rules of subparagraph (2)(i) and (3) of
this paragraph may be illustrated by the following example:
Example. B, a sole proprietor and a calendar-year basis taxpayer,
established a qualified pension trust to which he made annual
contributions for 10 years of 10 percent of his earned income. B
withdrew his entire interest in the trust during 1973 when he was 55
years old and not disabled and for which, without regard to the
distribution, he had a net operating loss and for which he is allowed
under section 151 a deduction for one personal exemption. The portion of
the distribution includible in B's gross income is $25,750. In addition,
B had a net operating loss for 1972. The other 3 taxable years involved
in the computation under subparagraph (2)(i) of this paragraph were
years of substantial income. For purposes of determining B's increase in
tax attributable to the receipt of the $25,750 (before the application
of the provisions of subparagraph (2)(i)(b) of this paragraph), B's
taxable income for the year he received the $25,750 is treated, under
subparagraph (3)(ii) of this paragraph, as being $25,000 ($25,750 minus
$750, the amount of the deduction allowed for each personal exemption
under section 151 for 1973). For purposes of determining whether 110
percent of the aggregate increase in taxes which would have resulted if
20 percent of the amount of the withdrawal had been included in B's
gross income for the year of receipt and for each of the 4 preceding
taxable years is greater (and thus is the amount of his increase in tax
attributable to the receipt of the $25,750), B's taxable income for the
taxable year of receipt, and for the immediately preceding taxable year,
is treated, under subparagraph (3)(i) of this paragraph, as being $5,150
($25,750 divided by 5).
(f) Meaning of disabled. (1) For taxable years beginning after
December 31, 1966, section 72(m)(7) provides that an individual shall be
considered to be disabled if he is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration. In determing whether an
individual's impairment makes him unable to engage in any substantial
gainful activity, primary consideration shall be given to the nature and
severity of his impairment. Consideration shall also be given to other
factors such as the individual's education, training, and work
experience. The substantial gainful activity to which section 72(m)(7)
refers is the activity, or a comparable activity, in which the
individual customarily engaged prior to the arising of the disability
(or prior to retirement if the individual was retired at the time the
disability arose).
(2) Whether or not the impairment in a particular case constitutes a
disability is to be determined with reference to all the facts in the
case. The following are examples of impairments which would ordinarily
be considered as preventing substantial gainful activity:
(i) Loss of use of two limbs;
(ii) Certain progressive diseases which have resulted in the
physical loss or atrophy of a limb, such as diabetes, multiple
sclerosis, or Buerger's disease;
(iii) Diseases of the heart, lungs, or blood vessels which have
resulted in major loss of heart or lung reserve as evidenced by X-ray,
electrocardiogram, or other objective findings, so that despite medical
treatment breathlessness, pain, or fatigue is produced on slight
exertion, such as walking several blocks, using public transportation,
or doing small chores;
(iv) Cancer which is inoperable and progressive;
(v) Damage to the brain or brain abnormality which has resulted in
severe loss of judgment, intellect, orientation, or memory;
(vi) Mental diseases (e.g. psychosis or severe psychoneurosis)
requiring continued institutionalization or constant supervision of the
individual;
(vii) Loss or diminution of vision to the extent that the affected
individual has a central visual acuity of no better than 20/200 in the
better eye after best correction, or has a limitation in the fields of
vision such that the widest diameter of the visual fields subtends an
angle no greater than 20 degrees;
(viii) Permanent and total loss of speech;
(ix) Total deafness uncorrectible by a hearing aid.
The existence of one or more of the impairments described in this
subparagraph (or of an impairment of greater severity) will not,
however, in and of itself always permit a finding that an individual is
disabled as defined in section 72(m)(7). Any impairment, whether
[[Page 264]]
of lesser or greater severity, must be evaluated in terms of whether it
does in fact prevent the individual from engaging in his customary or
any comparable substantial gainful activity.
(3) In order to meet the requirements of section 72(m)(7), an
impairment must be expected either to continue for a long and indefinite
period or to result in death. Ordinarily, a terminal illness because of
disease or injury would result in disability. Indefinite is used in the
sense that it cannot reasonably be anticipated that the impairment will,
in the foreseeable future, be so diminished as no longer to prevent
substantial gainful activity. For example, an individual who suffers a
bone fracture which prevents him from working for an extended period of
time will not be considered disabled, if his recovery can be expected in
the foreseeable future; if the fracture persistently fails to knit, the
individual would ordinarily be considered disabled.
(4) An impairment which is remediable does not constitute a
disability within the meaning of section 72(m)(7). An individual will
not be deemed disabled if, with reasonable effort and safety to himself,
the impairment can be diminished to the extent that the individual will
not be prevented by the impairment from engaging in his customary or any
comparable substantial gainful activity.
(g) Years to which this section applies. This section applies to
taxable years ending before September 3, 1974. For taxable years ending
after September 2, 1974, see Sec. 1.72-17A.
[T.D. 6676, 28 FR 10136, Sept. 17, 1963, as amended by T.D. 6885, 31 FR
7800, June 2, 1966; T.D. 6985, 33 FR 19811, Dec. 27, 1968; T.D. 7114, 36
FR 9018, May 18, 1971; T.D. 7636, 44 FR 47049, Aug. 10, 1979]
Sec. 1.72-17A Special rules applicable to employee annuities and distributions under deferred compensation plans to self-employed individuals and owner-
employees.
(a) In general. Section 72(m) and this section contain special rules
for the taxation of amounts received from qualified pension, profit-
sharing, or annuity plans covering an owner-employee. This section
applies to such amounts for taxable years of the recipient ending after
September 2, 1974, unless another date is specified. For purposes of
this section, the term ``employee'' shall include the self-employed
individual who is treated as an employee by section 401(c)(1), and the
term ``owner-employee'' has the meaning assigned to it in section
401(c)(3). Paragraph (b) of this section provides rules dealing with the
computation of consideration paid by self-employed individuals and
paragraph (c) of this section provides rules dealing with such
computation when insurance is purchased for owner-employees. Paragraph
(d) of this section provides rules for constructive receipt and, for
purposes of these rules, treats as an owner-employee an individual for
whose benefit an individual retirement account or annuity described in
section 408 (a) or (b) is maintained after December 31, 1974. Paragraph
(e) of this section provides rules for penalties provided by section
72(m)(5) with respect to certain distributions received by owner-
employees or their successors. Paragraph (f) of this section provides
rules for determining whether a person is disabled within the meaning of
section 72(m)(7). See Sec. 1.72-16, relating to life insurance contracts
purchased under qualified employee plans, for rules under section
72(m)(3).
(b) Computation of consideration paid by self-employed individuals.
Under section 72(m)(2), consideration paid or contributed for the
contract by any self-employed individual shall for purposes of section
72 be deemed not to include any contributions paid or contributed under
a plan described in paragraph (a), or any other plan of deferred
compensation described in section 404(a) (whether or not qualified), if
the contributions are--
(1) Paid under such plan with respect to a time during which the
employee was an employee only by reason of sections 401(c)(1) and
404(a)(8), and
(2) Deductible under section 404 by the employer, including an
employer within the meaning of sections 401(c)(4) and 404(a)(8), of such
self-employed individual at the time of such payment, or subsequent to
such time of payment.
For purposes of this paragraph the term ``consideration paid or
contributed for the contract'' has the same meaning as under
subparagraphs (1),
[[Page 265]]
(2), and (3) of paragraph (c) of this section.
(c) Amounts paid for life, accident, health, or other insurance.
Under section 72(m)(2), amounts used to purchase life, accident, health,
or other insurance protection for an owner-employee shall not be taken
into account in computing the following:
(1) The aggregate amount of premiums or other consideration paid for
the contract for purposes of determining the investment in the contract
under section 72(c)(1)(A) and Sec. 1.72-6;
(2) The consideration for the contract contributed by the employee
for purposes of section 72(d)(1) and Sec. 1.72-13, which provide the
method of taxing employee's annuities where the employee's contributions
will be recoverable within 3 years; and
(3) The aggregate premiums or other consideration paid for purposes
of section 72(e)(1)(B) and Sec. 1.72-11, which provide the rules for
taxing amounts not received as annuities prior to the annuity starting
date.
The cost of such insurance protection will be considered to be a
reasonable net premium cost, as determined by the Commissioner, for the
appropriate period.
(d) Amounts constructively received. (1) The references in this
paragraph (d) to section 72(m)(4) are to that section as in effect on
August 13, 1982. Section 236(b)(1) of the Tax Equity and Fiscal
Responsibility Act of 1982 (96 Stat. 324) repealed section 72(m)(4),
generally effective for assignments, pledges and loans made after August
13, 1982, and added section 72(p). See section 72(p) and Sec. 1.72(p)-1
for rules governing the income tax treatment of certain assignments,
pledges and loans from qualified employer plans made after August 13,
1982.
(2) Under section 72(m)(4)(A), if during any taxable year an owner-
employee assigns or pledges (or agrees to assign or pledge) any portion
of his interest in a trust described in section 401(a) which is exempt
from tax under section 501(a), or any portion of the value of a contract
purchased as part of a plan described in section 403(a), such portion
shall be treated as having been received by such owner-employee as a
distribution from the trust or as an amount received under the contract
during such taxable year.
(3)(i) Under paragraphs (4)(A) and (6) of section 72(m), if after
December 31, 1974, during any taxable year an individual for whose
benefit an individual retirement account or annuity described in section
408 (a) or (b) is maintained assigns or pledges (or agrees to assign or
pledge) any portion of his interest in such account or annuity, such
portion shall be treated as having been received by such individual as a
distribution from such account or trust during such taxable year. See
subsections (d) and (f) of section 408 and the regulations thereunder
for the tax treatment of an amount treated as a distribution under this
subparagraph.
(ii) Notwithstanding subdivision (i) of this subparagraph, if an
individual retirement account or annuity, or portion thereof, is subject
to the additional tax imposed by section 408(f), that amount shall be
deemed not to be a distribution under section 72(m)(4)(A) and
subdivision (i) of this subparagraph.
(4) Under section 72(m)(4)(B), if during any taxable year an owner-
employee receives, either directly or indirectly, any amount from any
insurance company as a loan under a contract purchased by a trust
described in section 401(a) which is exempt from tax under section
501(a) or purchased as part of a plan described in section 403(a), and
issued by such insurance company, such amount shall be treated as an
amount received under the contract during such taxable year. An owner-
employee will be considered to have received an amount under a contract
if a premium, which is otherwise in default, is paid by the insurance
company in the form of a loan against the cash surrender value of the
contract. Further, an owner-employee will be considered to have received
an amount to which this subparagraph applies if an amount is received
from the issuer of a face-amount certificate as a loan under such a
certificate purchased as part of a qualified trust or plan.
(e) Penalties applicable to certain amounts received with respect to
owner-employees under section 72(m)(5). (1)(i) For taxable years of the
recipient beginning after December 31, 1975, if any
[[Page 266]]
person receives an amount to which subparagraph (2) of this paragraph
applies, his tax under Chapter 1 for the taxable year in which such
amount is received shall be increased by an amount equal to 10 percent
of the portion of the amount so received which is includible in his
gross income for such taxable year.
(ii) For taxable years of the recipient beginning before January 1,
1976, see subparagraph (3) of this paragraph.
(2)(i) This subparagraph is applicable to amounts, to the extent
includible in gross income, received from a qualified trust described in
section 401(a) or under a plan described in section 403(a) by or on
behalf of an individual who is or has been an owner-employee with
respect to such trust or plan--
(A) Which are received before the owner-employee reaches the age of
59\1/2\ years, and which are attributable to contributions paid on
behalf of such owner-employee by his employer (that is employer
contributions within the meaning of section 401(c)(5)(A) and the
increments in value attributable to such employer contributions) and the
increments in value attributable to contributions made by him as an
owner-employee while he was an owner-employee (that is, the increments
attributable to owner-employee contributions within the meaning of
section 401(c)(5)(B), but not such contributions; see subdivision (ii)
of this subparagraph).
(B) Which are in excess of the benefits provided for such owner-
employee under the plan formula (see subdivision (iii) of this
subparagraph), or
(C) Which are subject to the transitional rules with respect to
willful excess contributions made on behalf of an owner-employee in his
employer's taxable years which begin before January 1, 1976 (see
subdivision (v) of this subparagraph).
(ii) The amounts referred to in subdivision (i)(A) of this
subparagraph do not include--
(A) Amounts received by reason of the owner-employee becoming
disabled (see paragraph (f) of this section).
(B) Amounts received by the owner-employee in his capacity as a
policyholder of an annuity, endowment, or life insurance contract which
are in the nature of a dividend or similar distribution, or
(C) Amounts attributable to contributions (and increments in value
thereon) made for years for which the recipient was not an owner-
employee.
If an amount is not included in the amounts referred to in subdivision
(i)(A) of this subparagraph solely by reason of the owner-employee's
becoming disabled and if a penalty would otherwise be applicable with
respect to all or a portion of such amount, then for the owner-
employee's taxable year in which such amount is received, there must be
submitted with his income tax return a doctor's statement as to the
impairment, and a statement by the owner-employee with respect to the
effect of such impairment upon his substantial gainful activity and the
date such impairment occurred. For taxable years which are subsequent to
the first taxable year with respect to which the statements referred to
in the preceding sentence are submitted, the owner-employee may, in lieu
of such statements, submit a statement declaring the continued existence
(without substantial diminution) of the impairment and its continued
effect upon his substantial gainful activity.
(iii) This subparagraph applies to amounts described in subdivision
(i)(B) of this subparagraph (relating to benefits in excess of the plan
formula) even though a portion of such amounts may be attributable to
contributions made on behalf of an individual while he was not an owner-
employee and even if he is deceased and the amounts are received by his
successor.
(iv)(A) The rules described in subdivisions (i)(A) and (iii) of this
subparagraph, relating to the treatment under section 72(m)(5)(A)(i) of
certain premature distributions, may be illustrated by the following
example:
Example. (1) A was a member of the X partnership, consisting of
partners A through I, and a participant in the partnership's qualified
profit-sharing plan which was established on January 1, 1972. A's
taxable years, the X partnership's taxable years, the plan years, and
other relevant years are all calendar years at all relevant times. For
the three calendar years, 1972 through 1974, A was an owner-employee in
the X partnership. On January 1, 1975, new partners J and K became
partners in the X partnership, and as of
[[Page 267]]
that date, each of partners A through K held a \1/11\ interest in the
capital and profits of the X partnership. On that date, A became a
partner who was not an owner-employee. A continued in this status for
the 2 calendar years 1975 and 1976. On January 1, 1977, when A was 50
years old and not disabled, he liquidated his interest in the X
partnership and became an employee of an unrelated employer. On that
date, A received a distribution representing his entire interest in the
X partnership's plan of $54,000 cash in violation of the plan provision
required by section 401(d)(4)(B). As of that date, the distribution was
attributable to the following sources and times, computed by the plan in
a manner consistent with the subparagraph:
----------------------------------------------------------------------------------------------------------------
A B C D
---------------------------------------------------------------------------
Increments in Increments in
Calendar years X contributions A's contributions value value
on behalf of A made as an attributable to attributable to
deductible under employee column A yearly column B yearly
sec. 404 contributions contributions
----------------------------------------------------------------------------------------------------------------
1977................................ 0 0 0 0
1976................................ $7,500 $2,500 $900 $300
1975................................ 7,500 2,500 4,000 1,300
1974................................ 7,500 2,500 1,800 700
1973................................ 2,500 2,500 1,200 1,200
1972................................ 2,500 2,500 1,300 1,300
---------------------------------------------------------------------------
Totals........................ 27,500 12,500 9,200 4,800
----------------------------------------------------------------------------------------------------------------
(2) The amount of the $54,000 distribution to which subdivision
(i)(A) of this subparagraph applies is $20,000, computed as follows:
X contributions on behalf of A made in years A was an owner-
employee:
1974........................................................ $7,500
1973........................................................ 2,500
1972........................................................ 2,500
---------
Total..................................................... 12,500
=========
Increments in value attributable to such contributions:
1974........................................................ 1,800
1973........................................................ 1,200
1972........................................................ 1,300
---------
Total..................................................... 4,300
=========
Increments in value attributable to contributions made by A as
an employee for years in which he was an owner-employee:
1974........................................................ 700
1973........................................................ 1,200
1972........................................................ 1,300
---------
Total..................................................... 3,200
=========
Grand total............................................... 20,000
=========
In this example, the $20,000 amount computed above would be includible
in A's gross income for 1977 and would be subject to the 10 percent tax
described in subparagraph (1)(i) of this paragraph.
(3) Subdivision (i)(A) of this subparagraph does not apply to the
contributions made by X on behalf of A for 1976 and 1975 ($7,500 each
year, totaling $15,000) nor to the increments in value attributable to
those contributions ($900 for 1976 and $4,000 for 1975, totaling
$4,900), because A was not an owner-employee with respect to these two
years, 1976 and 1975, on account of which these employer contributions
were made. For the same reason, subdivision (i)(A) of this subparagraph
does not apply to the increments in value attributable to A's
contributions for 1976 and 1975 ($300 and $1,300, respectively, totaling
$1,600).
See section 4972(c) for the amount of employee contributions which is
permitted to be contributed by an owner-employee (as an employee)
without subjecting an owner-employee to the tax on excess contributions.
(4) Subdivision (i)(A) of this subparagraph does not apply to the
contributions made by A, as an employee during the years when he was an
owner-employee ($2,500 during each of the years 1972, 1973, and 1974,
totaling $7,500), because the distribution was received in a taxable
year of A ending after September 2, 1974; see subparagraph (3) of this
paragraph. Furthermore, because the distribution of the amount of A's
contributions ($12,500) constitutes consideration for the contract paid
by A for purposes of section 72, the $7,500 amount described in the
preceding sentence is not includible in his gross income, and that
amount is not subject to the rules of this subparagraph; see subdivision
(i) of this subparagraph, and paragraphs (b) and (c) of this section.
(B) The increments in value of an individual's account may be
allocated to contributions on his behalf, by his employer or by such
individual as an owner-employee, while he was an owner-employee either
by maintaining a separate account, or an accounting,
[[Page 268]]
which reflects the actual increment attributable to such contributions,
or by the method described in (C) of this subdivision.
(C) Where an individual is covered under the same plan both as an
owner-employee and as a non-owner-employee, the portion of the increment
in value of his interest attributable to contributions made on his
behalf while he was an owner-employee may be determined by multiplying
the total increment in value in his account by a fraction. The numerator
of the fraction is the total contributions made on behalf of the
individual as an owner-employee, weighted for the number of years that
each contribution was in the plan. The denominator is the total
contributions made on behalf of the individual, whether or not as an
owner-employee, weighted for the number of years each contribution was
in the plan. The contributions are weighted for the number of years in
the plan by multiplying each contribution by the number of years it was
in the plan. For purposes of this computation, any forfeiture allocated
to the account of the individual is treated as a contribution to the
account made at the time so allocated. For purposes of this computation,
where the individual has received a prior distribution from such
account, an appropriate adjustment must be made to reflect such prior
distribution.
(D) The method described in (C) of this subdivision may be
illustrated by the following example:
Example. B was a member of the XYZ Partnership and a participant in
the partnership's profit-sharing plan which was created in 1973. Until
the end of 1977, B's interest in the partnership was less than 10
percent. On January 1, 1978, B obtained an interest in excess of 10
percent in the partnership and continued to participate in the profit-
sharing plan until 1982. During 1982, prior to the time he attained the
age of 59\1/2\ years and during a time when he was not disabled, B, who
had not received any prior plan distributions, withdrew his entire
interest in the profit-sharing plan. At the time his interest was
$15,000, $9,600 contributions and $5,400 increment attributable to the
contributions. The portion of the increment attributable to
contributions while B was an owner-employee is $667.80, determined as
follows:
------------------------------------------------------------------------
A B C
-----------------------------------------
Contribution
Number of weighted for
Contribution years years in
contribution trust (A x
was in trust B)
------------------------------------------------------------------------
1982.......................... $1,000 0 0
1981.......................... 800 1 800
1980.......................... 1,200 2 2,400
1979.......................... 600 3 1,800
1978.......................... 200 4 800
1977.......................... 400 5 2,000
1976.......................... 2,000 6 12,000
1975.......................... 1,000 7 7,000
1974.......................... 1,500 8 12,000
1973.......................... 900 9 8,100
-----------------------------------------
Total................... 9,600 ............ 46,900
------------------------------------------------------------------------
Total weighted contributions as owner-employee (1978-1982) = $5,800.
Total weighted contributions = $46,900.
[GRAPHIC] [TIFF OMITTED] TC14NO91.169
(E)(1) The rules set forth in subdivision (iv)(E)(2) of this
subparagraph shall be used to determine the amounts to which subdivision
(i)(A) of this subparagraph applies in the case of a distribution of
less than the entire balance of the employee's account from a plan in
which he has been covered at different times as owner-employee or as an
employee other than an owner-employee.
(2) Distributions or payments from a plan for any employee taxable
year shall be deemed to be attributable to contributions to the plan,
and increments thereon, in the following order--
(i) Excess contributions, within the meaning of section 4972 (b),
designated as such by the trustee;
(ii) Employee contributions;
(iii) Employer contributions, other than those described in( i), and
the increments in value attributable to the employee's own contributions
and his employer's contributions on the basis of the taxable years of
his employer in succeeding order of time whether or not the employee was
an owner-employee for any such year.
For purposes of (iii) of this subdivision, the time of contributions
made on the basis of any employer taxable year shall take into account
the rule specified in section 404(a)(6), relating to time when
contributions deemed made.
(v) The amounts referred to in subdivision (i)(C) of this
subparagraph are amounts which are received by reason
[[Page 269]]
of a distribution of the owner-employee's entire interest under the
provisions of section 401(e)(2)(E), as in effect on September 1, 1974,
relating to excess contributions on behalf of an owner-employee which
are willfully made. Notwithstanding the preceding sentence, an owner-
employee's entire interest in all plans with respect to which he is an
owner-employee (within the meaning of subsections (d)(8)(C) and
(e)(2)(E)(ii) of section 401, as in effect on September 1, 1974) does
not include any distribution or payment attributable to his employer's
contributions or his own contributions made with respect to his
employer's taxable years beginning after December 31, 1975. However, his
entire interest in all plans does include all of the distribution or
payment attributable to his employer's contributions and his own
contributions made with respect to all of his employer's taxable years
beginning before January 1, 1976, if any portion thereof is attributable
in whole or in part to such a willful excess contribution and such
entire interest is received because of a willful excess contribution
pursuant to section 401(e)(2)(E)(ii). A distribution or payment is
described in the preceding sentence even though it is received in an
owner-employee's taxable year beginning after December 31, 1975. For
purposes of computing the increments in value attributable to employer
taxable years which begin before January 1, 1976, and such increments
attributable to such years beginning after December 31, 1975, the rules
specified in subdivision (iv)(B), (C), (D), and (E) of this subparagraph
shall be applied to the extent applicable. See Sec. 1.401(e)-4(c) for
transitional rules with respect to contributions described in this
subdivision.
(3)(i) For taxable years of the recipient beginning before January
1, 1976, the tax with respect to amounts to which subparagraph (2) of
this paragraph applies shall be computed under subparagraphs (B), (C),
(D), and (E) of section 72(m)(5) as such subparagraphs were in effect
prior to the amendments made by subsections (g)(1) and (2)(A) of section
2001 of the Employee Retirement Income Security Act of 1974 (88 Stat.
957) except as provided in subdivisions (ii) and (iii) of this
subparagraph (see paragraph (e) of Sec. 1.72-17). For purposes of the
preceding sentence, amounts to which subparagraph (2) of this paragraph
applies in the case of an amount described in section 72(m)(5)(A)(i)
shall be determined under subdivisions (i)(a) and (ii) of Sec. 1.72-
17(e)(1), except as provided in subdivision (ii) of this subparagraph.
For purposes of the first sentence of this subdivision, amounts to which
subparagraph (2) of this paragraph applies in the case of an amount
described in section 72(m)(5)(A)(ii) shall be determined under
subdivisions (i)(b) and (iii) of Sec. 1.72-17(e)(1), except as provided
in subdivision (iii) of this subparagraph.
(ii) For purposes of applying section 72(m)(5)(A)(i), after the
amendment made by section 2001(h)(3) of such Act, and subdivisions
(i)(a) and (ii) of Sec. 1.72-17(e)(1), to a distribution or payment
received in recipient taxable years ending after September 2, 1974, and
beginning before January 1, 1976, with respect to contributions made on
behalf of an owner-employee which were made by him as an owner-employee
(that is, employee contributions within the meaning of section
401(c)(5)(B)) the portion of any distribution or payment attributable to
such contributions shall not include such contributions but shall
include the increments in value attributable to such contributions.
(iii) For purposes of applying section 72(m)(5)(D) and subdivisions
(i)(b) and (iii) of Sec. 1.72-17(e)(1) to recipient taxable years
beginning after December 31, 1973, and beginning before January 1, 1976,
in the case of distributions or payments made after December 31, 1973,
the amounts to which section 402 (a)(2) or 403(a)(2) applies after the
amendments made by section 2005(b) (1) and (2) of such Act (88 Stat. 990
and 991) (which are amounts to which subdivision (i)(b) of Sec. 1.72-
17(e)(1) does not apply) shall be deemed to be the amount which is
treated as a gain from the sale or exchange of a capital asset held for
more than 6 months under either of such sections.
(f) Meaning of disabled. (1) Section 72(m)(7) provides that an
individual shall be considered to be disabled if he is unable to engage
in any substantial
[[Page 270]]
gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration. In determining whether an
individual's impairment makes him unable to engage in any substantial
gainful activity, primary consideration shall be given to the nature and
severity of his impairment. Consideration shall also be given to other
factors such as the individual's education, training, and work
experience. The substantial gainful activity to which section 72(m)(7)
refers is the activity, or a comparable activity, in which the
individual customarily engaged prior to the arising of the disability or
prior to retirement if the individual was retired at the time the
disability arose.
(2) Whether or not the impairment in a particular case constitutes a
disability is to be determined with reference to all the facts in the
case. The following are examples of impairments which would ordinarily
be considered as preventing substantial gainful activity:
(i) Loss of use of two limbs;
(ii) Certain progressive diseases which have resulted in the
physical loss or atrophy of a limb, such as diabetes, multiple
sclerosis, or Buerger's disease;
(iii) Diseases of the heart, lungs, or blood vessels which have
resulted in major loss of heart or lung reserve as evidenced by X-ray,
electrocardiogram, or other objective findings, so that despite medical
treatment breathlessness, pain, or fatigue is produced on slight
exertion, such as walking several blocks, using public transportation,
or doing small chores;
(iv) Cancer which is inoperable and progressive;
(v) Damage to the brain or brain abnormality which has resulted in
severe loss of judgment, intellect, orientation, or memory;
(vi) Mental diseases (e.g. psychosis or severe psychoneurosis)
requiring continued institutionalization or constant supervision of the
individual;
(vii) Loss or diminution of vision to the extent that the affected
individual has a central visual acuity of no better than 20/200 in the
better eye after best correction, or has a limitation in the fields of
vision such that the widest diameter of the visual fields subtends an
angle no greater than 20 degrees;
(viii) Permanent and total loss of speech;
(ix) Total deafness uncorrectible by a hearing aid.
The existence of one or more of the impairments described in this
subparagraph (or of an impairment of greater severity) will not,
however, in and of itself always permit a finding that an individual is
disabled as defined in section 72(m)(7). Any impairment, whether of
lesser or greater severity, must be evaluated in terms of whether it
does in fact prevent the individual from engaging in his customary or
any comparable substantial gainful activity.
(3) In order to meet the requirements of section 72(m)(7), an
impairment must be expected either to continue for a long and indefinite
period or to result in death. Ordinarily, a terminal illness because of
disease or injury would result in disability. The term ``indefinite'' is
used in the sense that it cannot reasonably be anticipated that the
impairment will, in the foreseeable future, be so diminished as no
longer to prevent substantial gainful activity. For example, an
individual who suffers a bone fracture which prevents him from working
for an extended period of time will not be considered disabled, if his
recovery can be expected in the foreseeable future; if the fracture
persistently fails to knit, the individual would ordinarily be
considered disabled.
(4) An impairment which is remediable does not constitute a
disability within the meaning of section 72(m)(7). An individual will
not be deemed disabled if, with reasonable effort and safety to himself,
the impairment can be diminished to the extent that the individual will
not be prevented by the impairment from engaging in his customary or any
comparable substantial gainful activity.
[T.D. 7636, 44 FR 47049, Aug. 10, 1979, as amended by T.D. 8894, 65 FR
46591, July 31, 2000]
[[Page 271]]
Sec. 1.72-18 Treatment of certain total distributions with respect to self-employed individuals.
(a) In general. The Self-Employed Individuals Tax Retirement Act of
1962 permits self-employed individuals to be treated as employees for
purposes of participation in pension, profit-sharing, and annuity plans
described in sections 401(a) and 403(a). In general, amounts received by
a distributee or payee which are attributable to contributions made on
behalf of a participant while he was self-employed are taxed in the same
manner as amounts which are attributable to contributions made on behalf
of a common-law employee. However, such amounts which are paid in one
taxable year representing the total distributions payable to a
distributee or payee with respect to an employee are not eligible for
the capital gains treatment of section 402(a)(2) or 403(a)(2). This
section sets forth the treatment of such distributions, except where
such a distribution is subject to the penalties of section 72(m)(5) and
paragraph (e) of Sec. 1.72-17.
(b) Distributions to which this section applies. (1)(i) Except as
provided in subparagraphs (2) and (3) of this paragraph, this section
applies to amounts distributed to a distributee in one taxable year of
the distributee in the case of an employees' trust described in section
401(a) which is exempt under section 501(a), or to amounts paid to a
payee in one taxable year of the payee in the case of an annuity plan
described in section 403(a), which constitute the total distributions
payable, or the total amounts payable, to the distributee or payee with
respect to an employee.
(ii) For the total distributions or amounts payable to a distributee
or payee to be considered paid within one taxable year of the
distributee or payee for purposes of this section, all amounts to the
credit of the employee-participant through the end of such taxable year
which are payable to the distributee or payee must be distributed or
paid within such taxable year. Thus, the provisions of this section are
not applicable to a distribution or payment to a distributee or payee if
the trust or plan retains any amounts after the close of such taxable
year which are payable to the same distributee or payee even though the
amounts retained may be attributable to contributions on behalf of the
employee-participant while he was a common-law employee in the business
with respect to which the plan was established.
(iii) For purposes of this section, the total amounts payable to a
distributee or the amounts to the credit of the employee do not include
United States Retirement Plan Bonds held by a trust to the credit of the
employee. Thus, a distribution to a distributee by a qualified trust may
constitute a distribution to which this section applies even though the
trust retains retirement plan bonds registered in the name of the
employee on whose behalf the distribution is made which are to be
distributed to the same distributee. Moreover, the proceeds of a
retirement bond received as part of a distribution which constitutes the
total distributions payable to the distributee are not entitled to the
special tax treatment of this section. See section 405(d) and paragraph
(a)(1) of Sec. 1.405-3.
(iv) If the amounts payable to a distributee from a qualified trust
with respect to an employee-participant includes an annuity contract,
such contract must be distributed along with all other amounts payable
to the distributee in order to have a distribution to which this section
applies. However, the proceeds of an annuity contract received in a
total distribution will not be entitled to the tax treatment of this
section unless the contract is surrendered in the taxable year of the
distributee in which the total distribution was received.
(v) In the case of a qualified annuity plan, the term ``total
amounts'' means all annuities payable to a payee. If more than one
annuity contract is received under the plan by a distributee, this
section shall not apply to an amount received on surrender of any such
contracts unless all contracts under the plan payable to the payee are
surrendered within one taxable year of the payee.
(vi)(a) The provisions of this section are applicable where the
total amounts payable to a distributee or payee are
[[Page 272]]
paid within one taxable year of the distributee or payee whether or not
a portion of the employee-participant's interest which is payable to
another distributee or payee is paid within the same taxable year.
However, a distributee or payee who, in prior taxable years received
amounts (except amounts described in (b) of this subdivision) after the
employee-participant ceases to be eligible for additional contributions
to be made on his behalf, does not receive a distribution or payment to
which this section applies, even though the total amount remaining to be
paid to such distributee or payee with respect to such employee is paid
within one taxable year. On the other hand, a distribution to a
distributee or payee prior to the time that the employee-participant
ceases to be eligible for additional contributions on his behalf does
not preclude the application of this section to a later distribution to
the same distributee or payee.
(b) The receipt of an amount which constitutes--
(1) A payment in the nature of a dividend or similar distribution to
an individual in his capacity as a policyholder of an annuity,
endowment, or life insurance contract, or
(2) A return of excess contributions which were not willfully made,
does not prevent the application of this section to a total distribution
even though the amount is received after the employee-participant ceases
to be eligible for additional contributions and in a taxable year other
than the taxable year in which the total amount is received.
(vii) For purposes of this section, the total amounts payable to a
distributee or payee, or the amounts to the credit of the employee, do
not include any amounts which have been placed in a separate account for
the funding of medical benefits described in section 401(h) as defined
in paragraph (a) of Sec. 1.401-14. Thus, a distribution by a qualified
trust or annuity plan may constitute a distribution to which this
section applies even though amounts attributable to the funding of
section 401(h) medical benefits as defined in paragraph (a) of
Sec. 1.401-14 are not so distributed.
(2) This section shall apply--
(i) Only if the distribution or payment is made--
(a) On account of the employee's death at any time,
(b) After the employee has attained the age 59\1/2\ years, or
(c) After the employee has become disabled; and
(ii) Only to so much of the distribution or payment as is
attributable to contributions made on behalf of an employee while he was
a self-employed individual in the business with respect to which the
plan was established. Any distribution or payment, or any portion
thereof, which is not so attributable shall be subject to the rules of
taxation which apply to any distribution or payment that is attributable
to contributions on behalf of common-law employees.
For taxable years beginning after December 31, 1966, see section
72(m)(7) and paragraph (f) of Sec. 1.72-17 for the meaning of disabled.
For taxable years beginning before January 1, 1967, see section
213(g)(3) for the meaning of disabled. For taxable years beginning after
December 31, 1968, if this section is applicable by reason of the
distribution or payment being made after the employee has become
disabled, then for the taxable year in which the amounts to which this
section applies are distributed or paid, there shall be submitted with
the recipient's income tax return a doctor's statement as to the nature
and effect of the employee's impairment.
(3) This section shall not apply to--
(i) Distributions or payments to which the penalty provisions of
section 72(m)(5) and paragraph (e) of Sec. 1.72-17 apply,
(ii) Distributions or payments from a trust or plan made to or on
behalf of an individual prior to the time such individual ceases to be
eligible for additional contributions (except the contribution
attributable to the last year of service) to be made to the trust or
plan on his behalf as a self-employed individual, and
(iii) Distributions or payments made to the employee from a plan or
trust unless contributions which were allowed as a deduction under
section 404
[[Page 273]]
have been made on behalf of such employee as a self-employed individual
under such trust or plan for 5 or more taxable years (whether or not
consecutive) prior to the taxable year in which such distributions or
payments are made. Distributions or payments to which this section does
not apply by reason of this subdivision are taxed as otherwise provided
in section 72. However, for taxable years beginning before January 1,
1964, section 72(e)(3), as in effect before such date, is not
applicable. For taxable years beginning after December 31, 1963, such
distributions or payments may be taken into account in computations
under sections 1301 through 1305 (relating to income averaging).
(4) The portion of any distribution or payment attributable to
contributions on behalf of an employee-participant while he was self-
employed includes the contributions made on his behalf while he was
self-employed and the increments in value attributable to such
contributions. Where the amounts to the credit of an employee-
participant include amounts attributable to contributions on his behalf
while he was a self-employed individual and amounts attributable to
contributions on his behalf while he was a common-law employee, the
increment in value attributable to the employee-participant's interest
shall be allocated to the contributions on his behalf while he was self-
employed either by maintaining a separate account, or an accounting,
which reflects the actual increment attributable to such contributions,
or by the method described in paragraph (e)(1)(iv)(c) of Sec. 1.72-17.
However, if the latter method is used, the numerator of the fraction is
the total contributions made on behalf of the individual as a self-
employed individual, weighted for the number of years that each
contribution was in the plan.
(c) Amounts includible in gross income. (1) Where a total
distribution or payment to which this section applies is made to one
distributee or payee and includes the total amount remaining to the
credit of the employee-participant on whose behalf the distribution or
payment was made, the distributee or payee shall include in gross income
an amount equal to the portion of the distribution or payment which
exceeds the employee-participant's investment in the contract. For
purposes of this paragraph, the investment in the contract shall be
reduced by any amounts previously received from the plan or trust by or
on behalf of the employee-participant which were excludable from gross
income as a return of the investment in the contract.
(2) In the case of a distribution to which this section applies and
which is made to more than one distributee or payee, each element of the
amounts to the credit of an employee-participant shall be allocated
among the several distributees or payees on the basis of the ratio of
the value of the distributee's or payee's distribution or payment to the
total amount to the credit of the employee-participant. The elements to
be so allocated include the investment in the contract, the increments
in value, and the portion of the amounts to the credit of the employee-
participant which is attributable to the contributions on behalf of the
employee-participant while he was a self-employed individual.
(d) Computation of tax. (1) The tax attributable to the amounts to
which this section applies for the taxable year in which such amounts
are received is the greater of--
(i) 5 times the increase in tax which would result from the
inclusion in gross income of the recipient of 20 percent of so much of
the amount so received as is includible in gross income, or
(ii) 5 times the increase which would result if the taxable income
of the recipient for such taxable year equaled 20 percent of the excess
of the aggregate of the amounts so received and includible in gross
income over the amount of the deductions allowed the recipient for such
taxable year under section 151 (relating to deduction for personal
exemptions).
In any case in which the application of subdivision (ii) of this
subparagraph results in an increase in taxable income for any taxable
year, the resulting increase in taxes imposed by section 1 or 3 for such
taxable year shall be reduced by the credit against tax provided by
section 31 (tax withheld on wages), but
[[Page 274]]
shall not be reduced by any other credits against tax.
(2) The application of the rules of this paragraph may be
illustrated by the following example:
Example. B, a sole proprietor and a calendar-year basis taxpayer,
established a qualified pension trust to which he made annual
contributions for 10 years of 10 percent of his earned income. B
withdrew his entire interest in the trust during 1973, for which year,
without regard to the distribution, he had a net operating loss and is
allowed under section 151 a deduction for one personal exemption. At the
time of the withdrawal, B was 64 years old. The amount of the
distribution that is includible in his gross income is $25,750. Because
of B's net operating loss, the tax attributable to the distribution is
determined under the rule of subparagraph (1)(ii) of this paragraph. For
purposes of determining the tax attributable to the $25,750, B's taxable
income for 1973 is treated, under subparagraph (1)(ii) of this
paragraph, as being 20 percent of $25,000 ($25,750 minus $750, the
amount of the deduction allowed for each personal exemption under
section 151 for 1973). Thus, under subparagraph (1) of this paragraph,
the tax attributable to the $25,750 would be 5 times the increase which
would result if the taxable income of B for the taxable year he received
such amount equaled $5,000. B has had no amounts withheld from wages and
thus is not entitled to reduce the increase in taxes by the credit
against tax provided in section 31 and may not reduce the increase in
taxes by any other credits against tax.
[T.D. 6676, 28 FR 10138, Sept. 17, 1963, as amended by T.D. 6722, 29 FR
5070, Apr. 14, 1964, T.D. 6885, 31 FR 7800, June 2, 1966, T.D. 6985, 33
FR 19812, Dec. 27, 1968; T.D. 7114, 36 FR 9018, May 18, 1971]
Sec. 1.72(e)-1T Treatment of distributions where substantially all contributions are employee contributions (temporary).
Q-1: How did the Tax Reform Act (TRA) of 1984 change the law with
regard to the treatment of non-annuity distributions (i.e., amounts
distributed prior to the annuity starting date and not received as
annuities) from a qualified plan that is treated as a single contract
under section 72 and under which substantially all of the contributions
are employee contributions?
A-1: (a) Prior to the amendment of section 72(e) by the TRA of 1984,
non-annuity distributions from such a qualified plan generally were
allocable, first, to nondeductible employee contributions and thus were
not includible in gross income. After distributions equaled the balance
of nondeductible employee contributions, further non-annuity
distributions generally were includible in gross income.
(b) Pursuant to section 72(e)(7), as added by the TRA of 1984, non-
annuity distributions from such a qualified plan that are allocable to
investment in the plan after August 13, 1982 (as determined in
accordance with section 72(e)(5)(B)), generally will be treated, first,
as allocable to income and, second, as allocable to nondeductible
employee contributions. Distributions allocable to income are includible
in gross income. Distributions allocable to nondeductible employee
contributions are not includible in gross income.
Q-2: To which qualified plans and contracts does section 72(e)(7)
apply?
A-2: Section 72(e)(7) applies to any plan or contract under which
substantially all of the contributions are employee contributions if--
(a) Such plan is described in section 401(a) and the related trust
or trusts are exempt from tax under section 501(a); or
(b) Such contract is--
(1) Purchased by a trust described in (a) above,
(2) Purchased as part of a plan described in section 403(a), or
(3) Described in section 403(b).
Q-3: What is the definition of a qualified plan or contract under
which substantially all of the contributions are employee contributions?
A-3: (a) A qualified plan or contract under which substantially all
of the contributions are employee contributions is a plan or contract
with respect to which 85 percent or more of the total contributions
during the ``representative period'' are employee contributions. The
``representative period'' means the five-plan-year period preceding the
plan year during which a distribution occurs. However, if less than 85
percent of the total contributions for all plan years during which the
plan or contract is in existence prior to the plan year of distribution
are employee contributions, then the plan or contract is not one with
respect
[[Page 275]]
to which substantially all of the contributions are employee
contributions.
(b) For purposes of the 85 percent test, contributions made to a
predecessor plan or contract are aggregated with contributions made to
the plan or contract to which the 85 percent test is being applied (the
successor plan or contract). For purposes of the preceding sentence, a
predecessor plan or contract is a plan or contract the terms of which
are substantially the same as the successor plan or contract.
Q-4: What is the definition of employee contributions for purposes
of section 72(e)(7)?
A-4: For purposes of section 72(e)(7), employee contributions are
those amounts contributed by the employee and those amounts considered
contributed by the employee under section 72(f). For example, amounts
contributed to a section 401(k) qualified cash or deferred arrangement,
pursuant to an employee's election to defer such amounts, are employer
contributions to the extent that such amounts are not currently
includible in gross income. In addition, deductible employee
contributions under section 72(o) are disregarded in their entirety
(i.e., treated as neither employee contributions nor employer
contributions) in determining whether substantially all the
contributions are employee contributions.
Q-5: How is the 85 percent test of section 72(e)(7) applied to a
qualified plan or contract?
A-5: (a) Except as provided in paragraphs (b), (c), and (d), the 85
percent test is applied separately with respect to each contract under
section 72.
(b) If a single qualified plan described in section 401(a) or
section 403(a) comprises more than one contract under section 72,
regardless of whether such plan includes multiple trusts or combinations
of profit-sharing and pension features, these contracts are aggregated
for purposes of applying the 85 percent test. Thus, if substantially all
of the contributions under a qualified plan comprising two contracts
under section 72 are employee contributions, section 72(e)(5)(D) shall
not apply to non-annuity distributions under either of the contracts.
(c) With respect to the plans maintained by the Federal Government
or by instrumentalities of the Federal Government, the 85 percent test
shall be applied by aggregating all such plans. This aggregation rule
applies only to those plans that are actively administered by the
Federal Government or an instrumentality thereof. Thus, if a plan of the
Federal Government is administered by a commercial financial
institution, it would not be aggregated with other plans of the Federal
Government and its instrumentalities for purposes of applying the 85
percent test.
(d) In the case of a contract described in section 403(b), the 85
percent test is applied separately to each such contract.
Q-6: Is a loan from a qualified plan or contract described in
section 72(e)(7) treated as a distribution under section 72(e)(4)(A)?
A-6: Yes. Pursuant to section 72(e)(4)(A), if an employee receives,
either directly or indirectly, any amount as a loan from a qualified
plan or contract described in section 72(e)(7), such amount shall be
treated as a distribution from the plan or contract of an amount not
received as an annuity. Similarly, if an employee assigns or pledges, or
agrees to assign or pledge, any portion of the value of any qualified
plan or contract, such portion shall be treated as a distribution from
the plan or contract of an amount not received as an annuity.
Q-7: Does the five percent penalty for premature distributions from
annuity contracts, as described in section 72(q), apply to distributions
from a qualified plan or contract described in section 72(e)(7)?
A-7: No.
Q-8: When is section 72(e)(7) effective?
A-8: Section 72(e)(7) is effective for amounts received or loans
made on or after October 17, 1984. For purposes of this effective date
provision, loan amounts outstanding on October 16, 1984, which are
renegotiated, extended, renewed, or revised after that date generally
are treated as loans made on the date of the renegotiation, etc.
[T.D. 8073, 51 FR 4314, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986]
[[Page 276]]
Sec. 1.72(p)-1 Loans treated as distributions.
The questions and answers in this section provide guidance under
section 72(p) pertaining to loans from qualified employer plans
(including government plans and tax-sheltered annuities and employer
plans that were formerly qualified). The examples included in the
questions and answers in this section are based on the assumption that a
bona fide loan is made to a participant from a qualified defined
contribution plan pursuant to an enforceable agreement (in accordance
with paragraph (b) of Q&A-3 of this section), with adequate security and
with an interest rate and repayment terms that are commercially
reasonable. (The particular interest rate used, which is solely for
illustration, is 8.75 percent compounded annually.) In addition, unless
the contrary is specified, it is assumed in the examples that the amount
of the loan does not exceed 50 percent of the participant's
nonforfeitable account balance, the participant has no other outstanding
loan (and had no prior loan) from the plan or any other plan maintained
by the participant's employer or any other person required to be
aggregated with the employer under section 414(b), (c) or (m), and the
loan is not excluded from section 72(p) as a loan made in the ordinary
course of an investment program as described in Q&A-18 of this section.
The regulations and examples in this section do not provide guidance on
whether a loan from a plan would result in a prohibited transaction
under section 4975 of the Internal Revenue Code or on whether a loan
from a plan covered by Title I of the Employee Retirement Income
Security Act of 1974 (88 Stat. 829) (ERISA) would be consistent with the
fiduciary standards of ERISA or would result in a prohibited transaction
under section 406 of ERISA. The questions and answers are as follows:
Q-1: In general, what does section 72(p) provide with respect to
loans from a qualified employer plan?
A-1: (a) Loans. Under section 72(p), an amount received by a
participant or beneficiary as a loan from a qualified employer plan is
treated as having been received as a distribution from the plan (a
deemed distribution), unless the loan satisfies the requirements of Q&A-
3 of this section. For purposes of section 72(p) and this section, a
loan made from a contract that has been purchased under a qualified
employer plan (including a contract that has been distributed to the
participant or beneficiary) is considered a loan made under a qualified
employer plan.
(b) Pledges and assignments. Under section 72(p), if a participant
or beneficiary assigns or pledges (or agrees to assign or pledge) any
portion of his or her interest in a qualified employer plan as security
for a loan, the portion of the individual's interest assigned or pledged
(or subject to an agreement to assign or pledge) is treated as a loan
from the plan to the individual, with the result that such portion is
subject to the deemed distribution rule described in paragraph (a) of
this Q&A-1. For purposes of section 72(p) and this section, any
assignment or pledge of (or agreement to assign or to pledge) any
portion of a participant's or beneficiary's interest in a contract that
has been purchased under a qualified employer plan (including a contract
that has been distributed to the participant or beneficiary) is
considered an assignment or pledge of (or agreement to assign or pledge)
an interest in a qualified employer plan. However, if all or a portion
of a participant's or beneficiary's interest in a qualified employer
plan is pledged or assigned as security for a loan from the plan to the
participant or the beneficiary, only the amount of the loan received by
the participant or the beneficiary, not the amount pledged or assigned,
is treated as a loan.
Q-2: What is a qualified employer plan for purposes of section
72(p)?
A-2: For purposes of section 72(p) and this section, a qualified
employer plan means--
(a) A plan described in section 401(a) which includes a trust exempt
from tax under section 501(a);
(b) An annuity plan described in section 403(a);
(c) A plan under which amounts are contributed by an individual's
employer for an annuity contract described in section 403(b);
[[Page 277]]
(d) Any plan, whether or not qualified, established and maintained
for its employees by the United States, by a State or political
subdivision thereof, or by an agency or instrumentality of the United
States, a State or a political subdivision of a State; or
(e) Any plan which was (or was determined to be) described in
paragraph (a), (b), (c), or (d) of this Q&A-2.
Q-3: What requirements must be satisfied in order for a loan to a
participant or beneficiary from a qualified employer plan not to be a
deemed distribution?
A-3: (a) In general. A loan to a participant or beneficiary from a
qualified employer plan will not be a deemed distribution to the
participant or beneficiary if the loan satisfies the repayment term
requirement of section 72(p)(2)(B), the level amortization requirement
of section 72(p)(2)(C), and the enforceable agreement requirement of
paragraph (b) of this Q&A-3, but only to the extent the loan satisfies
the amount limitations of section 72(p)(2)(A).
(b) Enforceable agreement requirement. A loan does not satisfy the
requirements of this paragraph unless the loan is evidenced by a legally
enforceable agreement (which may include more than one document) and the
terms of the agreement demonstrate compliance with the requirements of
section 72(p)(2) and this section. Thus, the agreement must specify the
amount and date of the loan and the repayment schedule. The agreement
does not have to be signed if the agreement is enforceable under
applicable law without being signed. The agreement must be set forth
either--
(1) In a written paper document;
(2) In an electronic medium that is reasonably accessible to the
participant or the beneficiary and that is provided under a system that
satisfies the following requirements:
(i) The system must be reasonably designed to preclude any
individual other than the participant or the beneficiary from requesting
a loan.
(ii) The system must provide the participant or the beneficiary with
a reasonable opportunity to review and to confirm, modify, or rescind
the terms of the loan before the loan is made.
(iii) The system must provide the participant or the beneficiary,
within a reasonable time after the loan is made, a confirmation of the
loan terms either through a written paper document or through an
electronic medium that is reasonably accessible to the participant or
the beneficiary and that is provided under a system that is reasonably
designed to provide the confirmation in a manner no less understandable
to the participant or beneficiary than a written document and, under
which, at the time the confirmation is provided, the participant or the
beneficiary is advised that he or she may request and receive a written
paper document at no charge, and, upon request, that document is
provided to the participant or beneficiary at no charge; or
(3) In such other form as may be approved by the Commissioner.
Q-4: If a loan from a qualified employer plan to a participant or
beneficiary fails to satisfy the requirements of Q&A-3 of this section,
when does a deemed distribution occur?
A-4: (a) Deemed distribution. For purposes of section 72, a deemed
distribution occurs at the first time that the requirements of Q&A-3 of
this section are not satisfied, in form or in operation. This may occur
at the time the loan is made or at a later date. If the terms of the
loan do not require repayments that satisfy the repayment term
requirement of section 72(p)(2)(B) or the level amortization requirement
of section 72(p)(2)(C), or the loan is not evidenced by an enforceable
agreement satisfying the requirements of paragraph (b) of Q&A-3 of this
section, the entire amount of the loan is a deemed distribution under
section 72(p) at the time the loan is made. If the loan satisfies the
requirements of Q&A-3 of this section except that the amount loaned
exceeds the limitations of section 72(p)(2)(A), the amount of the loan
in excess of the applicable limitation is a deemed distribution under
section 72(p) at the time the loan is made. If the loan initially
satisfies the requirements of section 72(p)(2)(A), (B) and (C) and the
enforceable agreement requirement of paragraph (b) of Q&A-3 of this
section, but payments are not made in accordance with the terms
applicable
[[Page 278]]
to the loan, a deemed distribution occurs as a result of the failure to
make such payments. See Q&A-10 of this section regarding when such a
deemed distribution occurs and the amount thereof and Q&A-11 of this
section regarding the tax treatment of a deemed distribution.
(b) Examples. The following examples illustrate the rules in
paragraph (a) of this Q&A-4 and are based upon the assumptions described
in the introductory text of this section:
Example 1. (i) A participant has a nonforfeitable account balance of
$200,000 and receives $70,000 as a loan repayable in level quarterly
installments over five years.
(ii) Under section 72(p), the participant has a deemed distribution
of $20,000 (the excess of $70,000 over $50,000) at the time of the loan,
because the loan exceeds the $50,000 limit in section 72(p)(2)(A)(i).
The remaining $50,000 is not a deemed distribution.
Example 2. (i) A participant with a nonforfeitable account balance
of $30,000 borrows $20,000 as a loan repayable in level monthly
installments over five years.
(ii) Because the amount of the loan is $5,000 more than 50% of the
participant's nonforfeitable account balance, the participant has a
deemed distribution of $5,000 at the time of the loan. The remaining
$15,000 is not a deemed distribution. (Note also that, if the loan is
secured solely by the participant's account balance, the loan may be a
prohibited transaction under section 4975 because the loan may not
satisfy 29 CFR 2550.408b-1(f)(2).)
Example 3. (i) The nonforfeitable account balance of a participant
is $100,000 and a $50,000 loan is made to the participant repayable in
level quarterly installments over seven years. The loan is not eligible
for the section 72(p)(2)(B)(ii) exception for loans used to acquire
certain dwelling units.
(ii) Because the repayment period exceeds the maximum five-year
period in section 72(p)(2)(B)(i), the participant has a deemed
distribution of $50,000 at the time the loan is made.
Example 4. (i) On August 1, 2002, a participant has a nonforfeitable
account balance of $45,000 and borrows $20,000 from a plan to be repaid
over five years in level monthly installments due at the end of each
month. After making monthly payments through July 2003, the participant
fails to make any of the payments due thereafter.
(ii) As a result of the failure to satisfy the requirement that the
loan be repaid in level monthly installments, the participant has a
deemed distribution. See paragraph (c) of Q&A-10 of this section
regarding when such a deemed distribution occurs and the amount thereof.
Q-5: What is a principal residence for purposes of the exception in
section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in
five years?
A-5: Section 72(p)(2)(B)(ii) provides that the requirement in
section 72(p)(2)(B)(i) that a plan loan be repaid within five years does
not apply to a loan used to acquire a dwelling unit which will within a
reasonable time be used as the principal residence of the participant (a
principal residence plan loan). For this purpose, a principal residence
has the same meaning as a principal residence under section 121.
Q-6: In order to satisfy the requirements for a principal residence
plan loan, is a loan required to be secured by the dwelling unit that
will within a reasonable time be used as the principal residence of the
participant?
A-6: A loan is not required to be secured by the dwelling unit that
will within a reasonable time be used as the participant's principal
residence in order to satisfy the requirements for a principal residence
plan loan.
Q-7: What tracing rules apply in determining whether a loan
qualifies as a principal residence plan loan?
A-7: The tracing rules established under section 163(h)(3)(B) apply
in determining whether a loan is treated as for the acquisition of a
principal residence in order to qualify as a principal residence plan
loan.
Q-8: Can a refinancing qualify as a principal residence plan loan?
A-8: (a) Refinancings. In general, no, a refinancing cannot qualify
as a principal residence plan loan. However, a loan from a qualified
employer plan used to repay a loan from a third party will qualify as a
principal residence plan loan if the plan loan qualifies as a principal
residence plan loan without regard to the loan from the third party.
(b) Example. The following example illustrates the rules in
paragraph (a) of this Q&A-8 and is based upon the assumptions described
in the introductory text of this section:
Example. (i) On July 1, 2003, a participant requests a $50,000 plan
loan to be repaid in level monthly installments over 15 years. On August
1, 2003, the participant acquires a principal residence and pays a
portion of the purchase price with a $50,000 bank loan. On
[[Page 279]]
September 1, 2003, the plan loans $50,000 to the participant, which the
participant uses to pay the bank loan.
(ii) Because the plan loan satisfies the requirements to qualify as
a principal residence plan loan (taking into account the tracing rules
of section 163(h)(3)(B)), the plan loan qualifies for the exception in
section 72(p)(2)(B)(ii).
Q-9: Does the level amortization requirement of section 72(p)(2)(C)
apply when a participant is on a leave of absence without pay?
A-9: (a) Leave of absence. The level amortization requirement of
section 72(p)(2)(C) does not apply for a period, not longer than one
year (or such longer period as may apply under section 414(u) and
paragraph (b) of this Q&A-9), that a participant is on a bona fide leave
of absence, either without pay from the employer or at a rate of pay
(after applicable employment tax withholdings) that is less than the
amount of the installment payments required under the terms of the loan.
However, the loan (including interest that accrues during the leave of
absence) must be repaid by the latest permissible term of the loan and
the amount of the installments due after the leave ends must not be less
than the amount required under the terms of the original loan.
(b) Military service. In accordance with section 414(u)(4), if a
plan suspends the obligation to repay a loan made to an employee from
the plan for any part of a period during which the employee is
performing service in the uniformed services (as defined in 38 U.S.C.
chapter 43), whether or not qualified military service, such suspension
shall not be taken into account for purposes of section 72(p) or this
section. Thus, if a plan suspends loan repayments for any part of a
period during which the employee is performing military service
described in the preceding sentence, such suspension shall not cause the
loan to be deemed distributed even if the suspension exceeds one year
and even if the term of the loan is extended. However, the loan will not
satisfy the repayment term requirement of section 72(p)(2)(B) and the
level amortization requirement of section 72(p)(2)(C) unless loan
repayments resume upon the completion of such period of military service
and the loan is repaid thereafter by amortization in substantially level
installments over a period that ends not later than the latest
permissible term of the loan.
(c) Latest permissible term of a loan. For purposes of this Q&A-9,
the latest permissible term of a loan is the latest date permitted under
section 72(p)(2)(B) (i.e., five years from the date of the loan,
assuming that the replacement loan does not qualify for the exception at
section 72(p)(2)(B)(ii) for principal residence plan loans) plus any
additional period of suspension permitted under paragraph (b) of this
Q&A-9.
(d) Examples. The following examples illustrate the rules of this
Q&A-9 and are based upon the assumptions described in the introductory
text of this section:
Example 1. (i) On July 1, 2003, a participant with a nonforfeitable
account balance of $80,000 borrows $40,000 to be repaid in level monthly
installments of $825 each over 5 years. The loan is not a principal
residence plan loan. The participant makes 9 monthly payments and
commences an unpaid leave of absence that lasts for 12 months. The
participant was not performing military service during this period.
Thereafter, the participant resumes active employment and resumes making
repayments on the loan until the loan is repaid. The amount of each
monthly installment is increased to $1,130 in order to repay the loan by
June 30, 2008.
(ii) Because the loan satisfies the requirements of section
72(p)(2), the participant does not have a deemed distribution.
Alternatively, section 72(p)(2) would be satisfied if the participant
continued the monthly installments of $825 after resuming active
employment and on June 30, 2008 repaid the full balance remaining due.
Example 2. (i) The facts are the same as in Example 1, except the
participant was on leave of absence performing service in the uniformed
services (as defined in chapter 43 of title 38, United States Code) for
two years and the rate of interest charged during this period of
military service is reduced to 6 percent compounded annually under 50
App. section 526 (relating to the Soldiers' and Sailors' Civil Relief
Act Amendments of 1942). After the military service ends on April 2,
2006, the participant resumes active employment on April 19, 2006,
continues the monthly installments of $825 thereafter, and on June 30,
2010, repays the full balance remaining due ($6,487).
(ii) Because the loan satisfies the requirements of section 72(p)(2)
and paragraph (b) of this Q&A-9, the participant does not have a deemed
distribution. Alternatively, section 72(p)(2) would also be satisfied if
the amount
[[Page 280]]
of each monthly installment after April 19, 2006, is increased to $930
in order to repay the loan by June 30, 2010 (without any balance
remaining due then).
Q-10: If a participant fails to make the installment payments
required under the terms of a loan that satisfied the requirements of
Q&A-3 of this section when made, when does a deemed distribution occur
and what is the amount of the deemed distribution?
A-10: (a) Timing of deemed distribution. Failure to make any
installment payment when due in accordance with the terms of the loan
violates section 72(p)(2)(C) and, accordingly, results in a deemed
distribution at the time of such failure. However, the plan
administrator may allow a cure period and section 72(p)(2)(C) will not
be considered to have been violated if the installment payment is made
not later than the end of the cure period, which period cannot continue
beyond the last day of the calendar quarter following the calendar
quarter in which the required installment payment was due.
(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this
section when made, but there is a failure to pay the installment
payments required under the terms of the loan (taking into account any
cure period allowed under paragraph (a) of this Q&A-10), then the amount
of the deemed distribution equals the entire outstanding balance of the
loan (including accrued interest) at the time of such failure.
(c) Example. The following example illustrates the rules in
paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions
described in the introductory text of this section:
Example. (i) On August 1, 2002, a participant has a nonforfeitable
account balance of $45,000 and borrows $20,000 from a plan to be repaid
over 5 years in level monthly installments due at the end of each month.
After making all monthly payments due through July 31, 2003, the
participant fails to make the payment due on August 31, 2003 or any
other monthly payments due thereafter. The plan administrator allows a
three-month cure period.
(ii) As a result of the failure to satisfy the requirement that the
loan be repaid in level installments pursuant to section 72(p)(2)(C),
the participant has a deemed distribution on November 30, 2003, which is
the last day of the three-month cure period for the August 31, 2003
installment. The amount of the deemed distribution is $17,157, which is
the outstanding balance on the loan at November 30, 2003. Alternatively,
if the plan administrator had allowed a cure period through the end of
the next calendar quarter, there would be a deemed distribution on
December 31, 2003 equal to $17,282, which is the outstanding balance of
the loan at December 31, 2003.
Q-11: Does section 72 apply to a deemed distribution as if it were
an actual distribution?
A-11: (a) Tax basis. If the employee's account includes after-tax
contributions or other investment in the contract under section 72(e),
section 72 applies to a deemed distribution as if it were an actual
distribution, with the result that all or a portion of the deemed
distribution may not be taxable.
(b) Section 72(t) and (m). Section 72(t) (which imposes a 10 percent
tax on certain early distributions) and section 72(m)(5) (which imposes
a separate 10 percent tax on certain amounts received by a 5-percent
owner) apply to a deemed distribution under section 72(p) in the same
manner as if the deemed distribution were an actual distribution.
Q-12: Is a deemed distribution under section 72(p) treated as an
actual distribution for purposes of the qualification requirements of
section 401, the distribution provisions of section 402, the
distribution restrictions of section 401(k)(2)(B) or 403(b)(11), or the
vesting requirements of Sec. 1.411(a)-7(d)(5) (which affects the
application of a graded vesting schedule in cases involving a prior
distribution)?
A-12: No; thus, for example, if a participant in a money purchase
plan who is an active employee has a deemed distribution under section
72(p), the plan will not be considered to have made an in-service
distribution to the participant in violation of the qualification
requirements applicable to money purchase plans. Similarly, the deemed
distribution is not eligible to be rolled over to an eligible retirement
plan and is not considered an impermissible distribution of an amount
attributable to elective contributions in a section 401(k) plan. See
also Sec. 1.402(c)-2, Q&A-4(d) and Sec. 1.401(k)-1(d)(6)(ii).
Q-13: How does a reduction (offset) of an account balance in order
to repay a
[[Page 281]]
plan loan differ from a deemed distribution?
A-13: (a) Difference between deemed distribution and plan loan
offset amount. (1) Loans to a participant from a qualified employer plan
can give rise to two types of taxable distributions--
(i) A deemed distribution pursuant to section 72(p); and
(ii) A distribution of an offset amount.
(2) As described in Q&A-4 of this section, a deemed distribution
occurs when the requirements of Q&A-3 of this section are not satisfied,
either when the loan is made or at a later time. A deemed distribution
is treated as a distribution to the participant or beneficiary only for
certain tax purposes and is not a distribution of the accrued benefit. A
distribution of a plan loan offset amount (as defined in Sec. 1.402(c)-
2, Q&A-9(b)) occurs when, under the terms governing a plan loan, the
accrued benefit of the participant or beneficiary is reduced (offset) in
order to repay the loan (including the enforcement of the plan's
security interest in the accrued benefit). A distribution of a plan loan
offset amount could occur in a variety of circumstances, such as where
the terms governing the plan loan require that, in the event of the
participant's request for a distribution, a loan be repaid immediately
or treated as in default.
(b) Plan loan offset. In the event of a plan loan offset, the amount
of the account balance that is offset against the loan is an actual
distribution for purposes of the Internal Revenue Code, not a deemed
distribution under section 72(p). Accordingly, a plan may be prohibited
from making such an offset under the provisions of section 401(a),
401(k)(2)(B) or 403(b)(11) prohibiting or limiting distributions to an
active employee. See Sec. 1.402(c)-2, Q&A-9(c), Example 6. See also Q&A-
19 of this section for rules regarding the treatment of a loan after a
deemed distribution.
Q-14: How is the amount includible in income as a result of a deemed
distribution under section 72(p) required to be reported?
A-14: The amount includible in income as a result of a deemed
distribution under section 72(p) is required to be reported on Form
1099-R (or any other form prescribed by the Commissioner).
Q-15: What withholding rules apply to plan loans?
A-15: To the extent that a loan, when made, is a deemed distribution
or an account balance is reduced (offset) to repay a loan, the amount
includible in income is subject to withholding. If a deemed distribution
of a loan or a loan repayment by benefit offset results in income at a
date after the date the loan is made, withholding is required only if a
transfer of cash or property (excluding employer securities) is made to
the participant or beneficiary from the plan at the same time. See
Secs. 35.3405-1, f-4, and 31.3405(c)-1, Q&A-9 and Q&A-11, of this
chapter for further guidance on withholding rules.
Q-16: If a loan fails to satisfy the requirements of Q&A-3 of this
section and is a prohibited transaction under section 4975, is the
deemed distribution of the loan under section 72(p) a correction of the
prohibited transaction?
A-16: No, a deemed distribution is not a correction of a prohibited
transaction under section 4975. See Secs. 141.4975-13 and 53.4941(e)-
1(c)(1) of this chapter for guidance concerning correction of a
prohibited transaction.
Q-17: What are the income tax consequences if an amount is
transferred from a qualified employer plan to a participant or
beneficiary as a loan, but there is an express or tacit understanding
that the loan will not be repaid?
A-17: If there is an express or tacit understanding that the loan
will not be repaid or, for any reason, the transaction does not create a
debtor-creditor relationship or is otherwise not a bona fide loan, then
the amount transferred is treated as an actual distribution from the
plan for purposes of the Internal Revenue Code, and is not treated as a
loan or as a deemed distribution under section 72(p).
Q-18: If a qualified employer plan maintains a program to invest in
residential mortgages, are loans made pursuant to the investment program
subject to section 72(p)?
A-18: (a) Residential mortgage loans made by a plan in the ordinary
course
[[Page 282]]
of an investment program are not subject to section 72(p) if the
property acquired with the loans is the primary security for such loans
and the amount loaned does not exceed the fair market value of the
property. An investment program exists only if the plan has established,
in advance of a specific investment under the program, that a certain
percentage or amount of plan assets will be invested in residential
mortgages available to persons purchasing the property who satisfy
commercially customary financial criteria. A loan will not be considered
as made under an investment program if--
(1) Any of the loans made under the program matures upon a
participant's termination from employment;
(2) Any of the loans made under the program is an earmarked asset of
a participant's or beneficiary's individual account in the plan; or
(3) The loans made under the program are made available only to
participants or beneficiaries in the plan.
(b) Paragraph (a)(3) of this Q&A-18 shall not apply to a plan which,
on December 20, 1995, and at all times thereafter, has had in effect a
loan program under which, but for paragraph (a)(3) of this Q&A-18, the
loans comply with the conditions of paragraph (a) of this Q&A-18 to
constitute residential mortgage loans in the ordinary course of an
investment program.
(c) No loan that benefits an officer, director, or owner of the
employer maintaining the plan, or their beneficiaries, will be treated
as made under an investment program.
(d) This section does not provide guidance on whether a residential
mortgage loan made under a plan's investment program would result in a
prohibited transaction under section 4975, or on whether such a loan
made by a plan covered by Title I of ERISA would be consistent with the
fiduciary standards of ERISA or would result in a prohibited transaction
under section 406 of ERISA. See 29 CFR 2550.408b-1.
Q-19: If there is a deemed distribution under section 72(p), is the
interest that accrues thereafter on the amount of the deemed
distribution an indirect loan for income tax purposes and what effect
does the deemed distribution have on subsequent loans?
A-19: (a) General rule. Except as provided in paragraph (b) of this
Q&A-19, a deemed distribution of a loan is treated as a distribution for
purposes of section 72. Therefore, a loan that is deemed to be
distributed under section 72(p) ceases to be an outstanding loan for
purposes of section 72, and the interest that accrues thereafter under
the plan on the amount deemed distributed is disregarded for purposes of
applying section 72 to the participant or the beneficiary. Even though
interest continues to accrue on the outstanding loan (and is taken into
account for purposes of determining the tax treatment of any subsequent
loan in accordance with paragraph (b) of this Q&A-19), this additional
interest is not treated as an additional loan (and thus, does not result
in an additional deemed distribution) for purposes of section 72(p).
However, a loan that is deemed distributed under section 72(p) is not
considered distributed for all purposes of the Internal Revenue Code.
See Q&A-11 through Q&A-16 of this section.
(b) Effect on subsequent loans--(1) Application of section
72(p)(2)(A). A loan that is deemed distributed under section 72(p)
(including interest accruing thereafter) and that has not been repaid
(such as by a plan loan offset) is considered outstanding for purposes
of applying section 72(p)(2)(A) to determine the maximum amount of any
subsequent loan to the participant or beneficiary.
(2) Additional security for subsequent loans. If a loan is deemed
distributed to a participant or beneficiary under section 72(p) and has
not been repaid (such as by a plan loan offset), then no payment made
thereafter to the participant or beneficiary is treated as a loan for
purposes of section 72(p)(2) unless the loan otherwise satisfies section
72(p)(2) and this section and either of the following conditions is
satisfied:
(i) There is an arrangement among the plan, the participant or
beneficiary, and the employer, enforceable under applicable law, under
which repayments will be made by payroll withholding. For this purpose,
an arrangement will not fail to be enforceable merely because a party
has the right to revoke the arrangement prospectively.
[[Page 283]]
(ii) The plan receives adequate security from the participant or
beneficiary that is in addition to the participant's or beneficiary's
accrued benefit under the plan.
(3) Condition no longer satisfied. If, following a deemed
distribution that has not been repaid, a payment is made to a
participant or beneficiary that satisfies the conditions in paragraph
(b)(2) of this Q&A-19 for treatment as a plan loan and, subsequently,
before repayment of the second loan, the conditions in paragraph (b)(2)
of this Q&A-19 are no longer satisfied with respect to the second loan
(for example, if the loan recipient revokes consent to payroll
withholding), the amount then outstanding on the second loan is treated
as a deemed distribution under section 72(p).
Q-20: May a participant refinance an outstanding loan or have more
than one loan outstanding from a plan?
A-20: (a) Refinancings and multiple loans--(1) General rule. A
participant who has an outstanding loan that satisfies section 72(p)(2)
and this section may refinance that loan or borrow additional amounts
if, under the facts and circumstances, the loans collectively satisfy
the amount limitations of section 72(p)(2)(A) and the prior loan and the
additional loan each satisfy the requirements of section 72(p)(2)(B) and
(C) and this section. For this purpose, a refinancing includes any
situation in which one loan replaces another loan.
(2) Loans that repay a prior loan and have a later repayment date.
For purposes of section 72(p)(2) and this section (including the amount
limitations of section 72(p)(2)(A)), if a loan that satisfies section
72(p)(2) is replaced by a loan (a replacement loan) and the term of the
replacement loan ends after the latest permissible term of the loan it
replaces (the replaced loan), then the replacement loan and the replaced
loan are both treated as outstanding on the date of the transaction. For
purposes of the preceding sentence, the latest permissible term of the
replaced loan is the latest date permitted under section 72(p)(2)(C)
(i.e., five years from the original date of the replaced loan, assuming
that the replaced loan does not qualify for the exception at section
72(p)(2)(B)(ii) for principal residence plan loans and that no
additional period of suspension applied to the replaced loan under Q&A-9
(b) of this section). Thus, for example, if the term of the replacement
loan ends after the latest permissible term of the replaced loan and the
sum of the amount of the replacement loan plus the outstanding balance
of all other loans on the date of the transaction, including the
replaced loan, fails to satisfy the amount limitations of section
72(p)(2)(A), then the replacement loan results in a deemed distribution.
This paragraph (a)(2) does not apply to a replacement loan if the terms
of the replacement loan would satisfy section 72(p)(2) and this section
determined as if the replacement loan consisted of two separate loans,
the replaced loan (amortized in substantially level payments over a
period ending not later than the last day of the latest permissible term
of the replaced loan) and, to the extent the amount of the replacement
loan exceeds the amount of the replaced loan, a new loan that is also
amortized in substantially level payments over a period ending not later
than the last day of the latest permissible term of the replacement
loan.
(b) Examples. The following examples illustrate the rules of this
Q&A-20 and are based on the assumptions described in the introductory
text of this section:
Example 1. (i) A participant with a vested account balance that
exceeds $100,000 borrows $40,000 from a plan on January 1, 2005, to be
repaid in 20 quarterly installments of $2,491 each. Thus, the term of
the loan ends on December 31, 2009. On January 1, 2006, when the
outstanding balance on the loan is $33,322, the loan is refinanced and
is replaced by a new $40,000 loan from the plan to be repaid in 20
quarterly installments. Under the terms of the refinanced loan, the loan
is to be repaid in level quarterly installments (of $2,491 each) over
the next 20 quarters. Thus, the term of the new loan ends on December
31, 2010.
(ii) Under section 72(p)(2)(A), the amount of the new loan, when
added to the outstanding balance of all other loans from the plan, must
not exceed $50,000 reduced by the excess of the highest outstanding
balance of loans from the plan during the 1-year period ending on
December 31, 2005, over the outstanding balance of loans from the plan
on January 1, 2006, with such outstanding balance to be determined
immediately prior to the new $40,000 loan. Because the term of the
[[Page 284]]
new loan ends later than the term of the loan it replaces, under
paragraph (a)(2) of this Q&A-20, both the new loan and the loan it
replaces must be taken into account for purposes of applying section
72(p)(2), including the amount limitations in section 72(p)(2)(A). The
amount of the new loan is $40,000, the outstanding balance on January 1,
2006, of the loan it replaces is $33,322, and the highest outstanding
balance of loans from the plan during 2005 was $40,000. Accordingly,
under section 72(p)(2)(A), the sum of the new loan and the outstanding
balance on January 1, 2006, of the loan it replaces must not exceed
$50,000 reduced by $6,678 (the excess of the $40,000 maximum outstanding
loan balance during 2005 over the $33,322 outstanding balance on January
1, 2006, determined immediately prior to the new loan) and, thus, must
not exceed $43,322. The sum of the new loan ($40,000) and the
outstanding balance on January 1, 2006, of the loan it replaces
($33,322) is $73,322. Since $73,322 exceeds the $43,322 limit under
section 72(p)(2)(A) by $30,000, there is a deemed distribution of
$30,000 on January 1, 2006.
(iii) However, no deemed distribution would occur if, under the
terms of the refinanced loan, the amount of the first 16 installments on
the refinanced loan were equal to $2,907, which is the sum of the $2,491
originally scheduled quarterly installment payment amount under the
first loan, plus $416 (which is the amount required to repay, in level
quarterly installments over 5 years beginning on January 1, 2006, the
excess of the refinanced loan over the January 1, 2006, balance of the
first loan ($40,000 minus $33,322 equals $6,678)), and the amount of the
4 remaining installments was equal to $416. The refinancing would not be
subject to paragraph (a)(2) of this Q&A-20 because the terms of the new
loan would satisfy section 72(p)(2) and this section (including the
substantially level amortization requirements of section 72(p)(2)(B) and
(C)) determined as if the new loan consisted of 2 loans, one of which is
in the amount of the first loan ($33,322) and is amortized in
substantially level payments over a period ending December 31, 2009 (the
last day of the term of the first loan) and the other of which is in the
additional amount ($6,678) borrowed under the new loan. Similarly, the
transaction also would not result in a deemed distribution (and would
not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the
refinanced loan provided for repayments to be made in level quarterly
installments (of $2,990 each) over the next 16 quarters.
Example 2. (i) The facts are the same as in Example 1(i), except
that the applicable interest rate used by the plan when the loan is
refinanced is significantly lower due to a reduction in market rates of
interest and, under the terms of the refinanced loan, the amount of the
first 16 installments on the refinanced loan is equal to $2,848 and the
amount of the next 4 installments on the refinanced loan is equal to
$406. The $2,848 amount is the sum of $2,442 to repay the first loan by
December 31, 2009 (the term of the first loan), plus $406 (which is the
amount to repay, in level quarterly installments over 5 years beginning
on January 1, 2006, the $6,678 excess of the refinanced loan over the
January 1, 2006, balance of the first loan).
(ii) The transaction does not result in a deemed distribution (and
is not subject to paragraph (a)(2) of this Q&A-20) because the terms of
the new loan would satisfy section 72(p)(2) and this section (including
the substantially level amortization requirements of section 72(p)(2)(B)
and (C)) determined as if the new loan consisted of 2 loans, one of
which is in the amount of the first loan ($33,322) and is amortized in
substantially level payments over a period ending December 31, 2009 (the
last day of the term of the first loan), and the other of which is in
the additional amount ($6,678) borrowed under the new loan. The
transaction would also not result in a deemed distribution (and not be
subject to paragraph (a)(2) of this Q&A-20) if the terms of the new loan
provided for repayments to be made in level quarterly installments (of
$2,931 each) over the next 16 quarters.
Q-21: Is a participant's tax basis under the plan increased if the
participant repays the loan after a deemed distribution?
A-21: (a) Repayments after deemed distribution. Yes, if the
participant or beneficiary repays the loan after a deemed distribution
of the loan under section 72(p), then, for purposes of section 72(e),
the participant's or beneficiary's investment in the contract (tax
basis) under the plan increases by the amount of the cash repayments
that the participant or beneficiary makes on the loan after the deemed
distribution. However, loan repayments are not treated as after-tax
contributions for other purposes, including sections 401(m) and
415(c)(2)(B).
(b) Example. The following example illustrates the rules in
paragraph (a) of this Q&A-21 and is based on the assumptions described
in the introductory text of this section:
Example. (i) A participant receives a $20,000 loan on January 1,
2003, to be repaid in 20 quarterly installments of $1,245 each. On
December 31, 2003, the outstanding loan balance ($19,179) is deemed
distributed as a result of a failure to make quarterly installment
payments that were due on September 30, 2003 and December 31, 2003. On
June 30, 2004, the
[[Page 285]]
participant repays $5,147 (which is the sum of the three installment
payments that were due on September 30, 2003, December 31, 2003, and
March 31, 2004, with interest thereon to June 30, 2004, plus the
installment payment due on June 30, 2004). Thereafter, the participant
resumes making the installment payments of $1,245 from September 30,
2004 through December 31, 2007. The loan repayments made after December
31, 2003 through December 31, 2007 total $22,577.
(ii) Because the participant repaid $22,577 after the deemed
distribution that occurred on December 31, 2003, the participant has
investment in the contract (tax basis) equal to $22,577 (14 payments of
$1,245 each plus a single payment of $5,147) as of December 31, 2007.
Q-22: When is the effective date of section 72(p) and the
regulations in this section?
A-22: (a) Statutory effective date. Section 72(p) generally applies
to assignments, pledges, and loans made after August 13, 1982.
(b) Regulatory effective date. This section applies to assignments,
pledges, and loans made on or after January 1, 2002.
(c) Loans made before the regulatory effective date--(1) General
rule. A plan is permitted to apply Q&A-19 and Q&A-21 of this section to
a loan made before the regulatory effective date in paragraph (b) of
this Q&A-22 (and after the statutory effective date in paragraph (a) of
this Q&A-22) if there has not been any deemed distribution of the loan
before the transition date or if the conditions of paragraph (c)(2) of
this Q&A-22 are satisfied with respect to the loan.
(2) Consistency transition rule for certain loans deemed distributed
before the regulatory effective date. (i) The rules in this paragraph
(c)(2) of this Q&A-22 apply to a loan made before the regulatory
effective date in paragraph (b) of this Q&A-22 (and after the statutory
effective date in paragraph (a) of this Q&A-22) if there has been any
deemed distribution of the loan before the transition date.
(ii) The plan is permitted to apply Q&A-19 and Q&A-21 of this
section to the loan beginning on any January 1, but only if the plan
reported, in Box 1 of Form 1099-R, for a taxable year no later than the
latest taxable year that would be permitted under this section (if this
section had been in effect for all loans made after the statutory
effective date in paragraph (a) of this Q&A-22), a gross distribution of
an amount at least equal to the initial default amount. For purposes of
this section, the initial default amount is the amount that would be
reported as a gross distribution under Q&A-4 and Q&A-10 of this section
and the transition date is the January 1 on which a plan begins applying
Q&A-19 and Q&A-21 of this section to a loan.
(iii) If a plan applies Q&A-19 and Q&A-21 of this section to such a
loan, then the plan, in its reporting and withholding on or after the
transition date, must not attribute investment in the contract (tax
basis) to the participant or beneficiary based upon the initial default
amount.
(iv) This paragraph (c)(2)(iv) of this Q&A-22 applies if--
(A) The plan attributed investment in the contract (tax basis) to
the participant or beneficiary based on the deemed distribution of the
loan;
(B) The plan subsequently made an actual distribution to the
participant or beneficiary before the transition date; and
(C) Immediately before the transition date, the initial default
amount (or, if less, the amount of the investment in the contract so
attributed) exceeds the participant's or beneficiary's investment in the
contract (tax basis). If this paragraph (c)(2)(iv) of this Q&A-22
applies, the plan must treat the excess (the loan transition amount) as
a loan amount that remains outstanding and must include the excess in
the participant's or beneficiary's income at the time of the first
actual distribution made on or after the transition date.
(3) Examples. The rules in paragraph (c)(2) of this Q&A-22 are
illustrated by the following examples, which are based on the
assumptions described in the introductory text of this section (and,
except as specifically provided in the examples, also assume that no
distributions are made to the participant and that the participant has
no investment in the contract with respect to the plan). Example 1,
Example 2, and Example 4 of this paragraph (c)(3) of this Q&A-22
illustrate the application of the rules in paragraph (c)(2) of this
[[Page 286]]
Q&A-22 to a plan that, before the transition date, did not treat
interest accruing after the initial deemed distribution as resulting in
additional deemed distributions under section 72(p). Example 3 of this
paragraph (c)(3) of this Q&A-22 illustrates the application of the rules
in paragraph (c)(2) of this Q&A-22 to a plan that, before the transition
date, treated interest accruing after the initial deemed distribution as
resulting in additional deemed distributions under section 72(p). The
examples are as follows:
Example 1. (i) In 1998, when a participant's account balance under a
plan is $50,000, the participant receives a loan from the plan. The
participant makes the required repayments until 1999 when there is a
deemed distribution of $20,000 as a result of a failure to repay the
loan. For 1999, as a result of the deemed distribution, the plan
reports, in Box 1 of Form 1099-R, a gross distribution of $20,000 (which
is the initial default amount in accordance with paragraph (c)(2)(ii) of
this Q&A-22) and, in Box 2 of Form 1099-R, a taxable amount of $20,000.
The plan then records an increase in the participant's tax basis for the
same amount ($20,000). Thereafter, the plan disregards, for purposes of
section 72, the interest that accrues on the loan after the 1999 deemed
distribution. Thus, as of December 31, 2001, the total taxable amount
reported by the plan as a result of the deemed distribution is $20,000
and the plan's records show that the participant's tax basis is the same
amount ($20,000). As of January 1, 2002, the plan decides to apply Q&A-
19 of this section to the loan. Accordingly, it reduces the
participant's tax basis by the initial default amount of $20,000, so
that the participant's remaining tax basis in the plan is zero.
Thereafter, the amount of the outstanding loan is not treated as part of
the account balance for purposes of section 72. The participant attains
age 59\1/2\ in the year 2003 and receives a distribution of the full
account balance under the plan consisting of $60,000 in cash and the
loan receivable. At that time, the plan's records reflect an offset of
the loan amount against the loan receivable in the participant's account
and a distribution of $60,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of
$60,000 in Box 1 of Form 1099-R and a taxable amount of $60,000 in Box 2
of Form 1099-R.
Example 2. (i) The facts are the same as in Example 1, except that
in 1999, immediately prior to the deemed distribution, the participant's
account balance under the plan totals $50,000 and the participant's tax
basis is $10,000. For 1999, the plan reports, in Box 1 of Form 1099-R, a
gross distribution of $20,000 (which is the initial default amount in
accordance with paragraph (c)(2)(ii) of this Q&A-22) and reports, in Box
2 of Form 1099-R, a taxable amount of $16,000 (the $20,000 deemed
distribution minus $4,000 of tax basis ($10,000 times ($20,000/$50,000))
allocated to the deemed distribution). The plan then records an increase
in tax basis equal to the $20,000 deemed distribution, so that the
participant's remaining tax basis as of December 31, 1999, totals
$26,000 ($10,000 minus $4,000 plus $20,000). Thereafter, the plan
disregards, for purposes of section 72, the interest that accrues on the
loan after the 1999 deemed distribution. Thus, as of December 31, 2001,
the total taxable amount reported by the plan as a result of the deemed
distribution is $16,000 and the plan's records show that the
participant's tax basis is $26,000. As of January 1, 2002, the plan
decides to apply Q&A-19 of this section to the loan. Accordingly, it
reduces the participant's tax basis by the initial default amount of
$20,000, so that the participant's remaining tax basis in the plan is
$6,000. Thereafter, the amount of the outstanding loan is not treated as
part of the account balance for purposes of section 72. The participant
attains age 59\1/2\ in the year 2003 and receives a distribution of the
full account balance under the plan consisting of $60,000 in cash and
the loan receivable. At that time, the plan's records reflect an offset
of the loan amount against the loan receivable in the participant's
account and a distribution of $60,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of
$60,000 in Box 1 of Form 1099-R and a taxable amount of $54,000 in Box 2
of Form 1099-R.
Example 3. (i) In 1993, when a participant's account balance in a
plan is $100,000, the participant receives a loan of $50,000 from the
plan. The participant makes the required loan repayments until 1995 when
there is a deemed distribution of $28,919 as a result of a failure to
repay the loan. For 1995, as a result of the deemed distribution, the
plan reports, in Box 1 of Form 1099-R, a gross distribution of $28,919
(which is the initial default amount in accordance with paragraph
(c)(2)(ii) of this Q&A-22) and, in Box 2 of Form 1099-R, a taxable
amount of $28,919. For 1995, the plan also records an increase in the
participant's tax basis for the same amount ($28,919). Each year
thereafter through 2001, the plan reports a gross distribution equal to
the interest accruing that year on the loan balance, reports a taxable
amount equal to the interest accruing that year on the loan balance
reduced by the participant's tax basis allocated to the gross
distribution, and records a net increase in the participant's tax basis
equal to that taxable amount. As of December 31, 2001, the taxable
amount reported by the plan as a result of the loan totals $44,329 and
the plan's records for purposes of section
[[Page 287]]
72 show that the participant's tax basis totals the same amount
($44,329). As of January 1, 2002, the plan decides to apply Q&A-19 of
this section. Accordingly, it reduces the participant's tax basis by the
initial default amount of $28,919, so that the participant's remaining
tax basis in the plan is $15,410 ($44,329 minus $28,919). Thereafter,
the amount of the outstanding loan is not treated as part of the account
balance for purposes of section 72. The participant attains age 59\1/2\
in the year 2003 and receives a distribution of the full account balance
under the plan consisting of $180,000 in cash and the loan receivable
equal to the $28,919 outstanding loan amount in 1995 plus interest
accrued thereafter to the payment date in 2003. At that time, the plan's
records reflect an offset of the loan amount against the loan receivable
in the participant's account and a distribution of $180,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of
$180,000 in Box 1 of Form 1099-R and a taxable amount of $164,590 in Box
2 of Form 1099-R ($180,000 minus the remaining tax basis of $15,410).
Example 4. (i) The facts are the same as in Example 1, except that
in 2000, after the deemed distribution, the participant receives a
$10,000 hardship distribution. At the time of the hardship distribution,
the participant's account balance under the plan totals $50,000. For
2000, the plan reports, in Box 1 of Form 1099-R, a gross distribution of
$10,000 and, in Box 2 of Form 1099-R, a taxable amount of $6,000 (the
$10,000 actual distribution minus $4,000 of tax basis ($10,000 times
($20,000/$50,000)) allocated to this actual distribution). The plan then
records a decrease in tax basis equal to $4,000, so that the
participant's remaining tax basis as of December 31, 2000, totals
$16,000 ($20,000 minus $4,000). After 1999, the plan disregards, for
purposes of section 72, the interest that accrues on the loan after the
1999 deemed distribution. Thus, as of December 31, 2001, the total
taxable amount reported by the plan as a result of the deemed
distribution plus the 2000 actual distribution is $26,000 and the plan's
records show that the participant's tax basis is $16,000. As of January
1, 2002, the plan decides to apply Q&A-19 of this section to the loan.
Accordingly, it reduces the participant's tax basis by the initial
default amount of $20,000, so that the participant's remaining tax basis
in the plan is reduced from $16,000 to zero. However, because the
$20,000 initial default amount exceeds $16,000, the plan records a loan
transition amount of $4,000 ($20,000 minus $16,000). Thereafter, the
amount of the outstanding loan, other than the $4,000 loan transition
amount, is not treated as part of the account balance for purposes of
section 72. The participant attains age 59\1/2\ in the year 2003 and
receives a distribution of the full account balance under the plan
consisting of $60,000 in cash and the loan receivable. At that time, the
plan's records reflect an offset of the loan amount against the loan
receivable in the participant's account and a distribution of $60,000 in
cash.
(ii) In accordance with paragraph (c)(2)(iv) of this Q&A-22, the
plan must report in Box 1 of Form 1099-R a gross distribution of $64,000
and in Box 2 of Form 1099-R a taxable amount for the participant for the
year 2003 equal to $64,000 (the sum of the $60,000 paid in the year 2003
plus $4,000 as the loan transition amount).
(d) Effective date for Q&A-19(b)(2) and Q&A-20. Q&A-19(b)(2) and
Q&A-20 of this section apply to assignments, pledges, and loans made on
or after January 1, 2004.
[T.D. 8894, 65 FR 46591, July 31, 2000, as amended by T.D. 9021, 67 FR
71824, Dec. 3, 2002; 68 FR 9532, 9533, Feb. 28, 2003]
Sec. 1.73-1 Services of child.
(a) Compensation for personal services of a child shall, regardless
of the provisions of State law relating to who is entitled to the
earnings of the child, and regardless of whether the income is in fact
received by the child, be deemed to be the gross income of the child and
not the gross income of the parent of the child. Such compensation,
therefore, shall be included in the gross income of the child and shall
be reflected in the return rendered by or for such child. The income of
a minor child is not required to be included in the gross income of the
parent for income tax purposes. For requirements for making the return
by such child, or for such child by his guardian, or other person
charged with the care of his person or property, see section 6012.
(b) In the determination of taxable income or adjusted gross income,
as the case may be, all expenditures made by the parent or the child
attributable to amounts which are includible in the gross income of the
child and not of the parent solely by reason of section 73 are deemed to
have been paid or incurred by the child. In such determination, the
child is entitled to take deductions not only for expenditures made on
his behalf by his parent which would be commonly considered as business
expenses, but also for other expenditures such as charitable
contributions made by the parent in the name
[[Page 288]]
of the child and out of the child's earnings.
(c) For purposes of section 73, the term ``parent'' includes any
individual who is entitled to the services of the child by reason of
having parental rights and duties in respect of the child. See section
6201(c) and the regulations in Part 301 of this chapter (Procedure and
Administration) for assessment of tax against the parent in certain
cases.
Sec. 1.74-1 Prizes and awards.
(a) Inclusion in gross income. (1) Section 74(a) requires the
inclusion in gross income of all amounts received as prizes and awards,
unless such prizes or awards qualify as an exclusion from gross income
under subsection (b), or unless such prize or award is a scholarship or
fellowship grant excluded from gross income by section 117. Prizes and
awards which are includible in gross income include (but are not limited
to) amounts received from radio and television giveaway shows, door
prizes, and awards in contests of all types, as well as any prizes and
awards from an employer to an employee in recognition of some
achievement in connection with his employment.
(2) If the prize or award is not made in money but is made in goods
or services, the fair market value of the goods or services is the
amount to be included in income.
(b) Exclusion from gross income. Section 74(b) provides an exclusion
from gross income of any amount received as a prize or award, if (1)
such prize or award was made primarily in recognition of past
achievements of the recipient in religious, charitable, scientific,
educational, artistic, literary, or civic fields; (2) the recipient was
selected without any action on his part to enter the contest or
proceedings; and (3) the recipient is not required to render substantial
future services as a condition to receiving the prize or award. Thus,
such awards as the Nobel prize and the Pulitzer prize would qualify for
the exclusion. Section 74(b) does not exclude prizes or awards from an
employer to an employee in recognition of some achievement in connection
with his employment.
(c) Scholarships and fellowship grants. See section 117 and the
regulations thereunder for provisions relating to scholarships and
fellowship grants.
Sec. 1.75-1 Treatment of bond premiums in case of dealers in tax-exempt securities.
(a) In general. (1) Section 75 requires certain adjustments to be
made by dealers in securities with respect to premiums paid on municipal
bonds which are held for sale to customers in the ordinary course of the
trade or business. The adjustments depend upon the method of accounting
used by the taxpayer in computing the gross income from the trade or
business. See paragraphs (b) and (c) of this section.
(2) The term ``municipal bond'' under section 75 means any
obligation issued by a government or political subdivision thereof if
the interest on the obligation is excludable from gross income under
section 103. However, such term does not include an obligation--
(i) If the earliest maturity or call date of the obligation is more
than 5 years from the date of acquisition by the taxpayer or the
obligation is sold or otherwise disposed of by the taxpayer within 30
days after the date of acquisition by him, and
(ii) If, in case of an obligation acquired after December 31, 1957,
the amount realized upon its sale (or, in the case of any other
disposition, its fair market value at the time of disposition) is higher
than its adjusted basis.
For purposes of this subparagraph, the amount realized on the sale of
the obligation, or the fair market value of the obligation, shall not
include any amount attributable to interest, and the adjusted basis
shall be computed without regard to any adjustment for amortization of
bond premium required under section 75 and section 1016(a)(6). For
purposes of determining whether the obligation is sold or otherwise
disposed of by the taxpayer within 30 days after the date of its
acquisition by him, it is immaterial whether or not such 30-day period
is entirely within one taxable year.
(3) The term ``cost of securities sold'' means the amount
ascertained by subtracting the inventory value of the
[[Page 289]]
closing inventory of a taxable year from the sum of the inventory value
of the opening inventory for such year and the cost of securities and
other property purchased during such year which would properly be
included in the inventory of the taxpayer if on hand at the close of the
taxable year.
(b) Inventories not valued at cost. (1) In the case of a dealer in
securities who computes gross income from his trade or business by the
use of inventories and values such inventories on any basis other than
cost, the adjustment required by section 75 is, except as provided in
subparagraph (2) of this paragraph, the reduction of ``cost of
securities sold'' by the amount equal to the amortizable bond premium
which would be disallowed as a deduction under section 171(a)(2) with
respect to the municipal bond if the dealer were an ordinary investor
holding such bond. Such amortizable bond premium is computed under
section 171(b) by reference to the cost or other original basis of the
bond on the date of acquisition (determined without regard to section
1013, relating to inventory value on a subsequent date).
(2) With respect to an obligation acquired after December 31, 1957,
which has as its earliest maturity or call date a date more than five
years from the date on which it was acquired by the taxpayer, the
following rules shall apply:
(i) If the taxpayer holds the obligation at the end of the taxable
year, he is not required by section 75 to reduce the ``cost of
securities sold'' for such year with respect to the obligation.
(ii) If the taxpayer sells or otherwise disposes of the obligation
during the taxable year, he shall reduce the ``cost of securities sold''
for the taxable year of the sale or disposition unless he sold the
obligation for more than its adjusted basis or otherwise disposed of it
when its fair market value was more than its adjusted basis. For
purposes of determining whether or not the taxpayer sold the obligation
for more than its adjusted basis, or otherwise disposed of it when its
fair market value was more than its adjusted basis, the amount realized
on the sale of the obligation, or the fair market value of the
obligation, shall not include any amount attributable to interest, and
the adjusted basis shall be computed without regard to any adjustment
for amortization of bond premium required under sections 75 and
1016(a)(6). The amount of the reduction referred to in the first
sentence of this subdivision is the total amount by which the adjusted
basis of the obligation would be required to be reduced under section
1016(a)(5) were the obligation subject to the amortizable bond premium
provisions of section 171; that is, the amount of the amortizable bond
premium attributable to the period during which the obligation was held
which would be disallowed as a deduction under section 171(a)(2) if the
taxpayer were an ordinary investor.
(3) This paragraph may be illustrated by the following examples:
Example (1). X, a dealer in securities who values his inventories on
a basis other than cost, makes his income tax returns on the calendar
year basis. On July 1, 1954, he bought, for $1,060 each, three municipal
bonds (A, B, an C) having a face obligation of $1,000, and maturing on
July 1, 1959. Bond A is sold on December 31, 1954, bond B is sold on
December 31, 1955, and bond C is sold on June 30, 1956. For each bond
the amortizable bond premium to maturity is $60, the period from date of
acquisition to maturity is 60 months, and the amortizable bond premium
per month is $1. The adjustment for each of the years 1954, 1955, and
1956 is as follows:
----------------------------------------------------------------------------------------------------------------
Adjustment to ``cost of
securities sold'' for--
Bond Date acquired Date sold -----------------------------
1954 1955 1956
----------------------------------------------------------------------------------------------------------------
A.................................. July 1, 1954.......... Dec. 31, 1954........ $6 ........ ........
B.................................. July 1, 1954.......... Dec. 31, 1955........ 6 $12 ........
C.................................. July 1, 1954.......... Jun. 30, 1956........ 6 12 $6
-----------------------------
Total....................................................................... 18 24 6
----------------------------------------------------------------------------------------------------------------
[[Page 290]]
Example (2). Y is a dealer in securities who values his inventories
on a basis other than cost. He makes his income tax returns on the
calendar year basis. On January 1, 1958, Y bought five bonds (D, E, F,
G, and H) issued by various municipalities. Each bond has a face
obligation of $1,000 and was purchased for $1,060. The interest on each
is excludable from gross income under section 103. Bonds D, E, and F
mature on December 31, 1962, and bonds G and H mature on December 31,
1967. The amortizable bond premium per month is $1 with respect to bonds
D, E, and F, and is $.50 with respect to bonds G and H. The following
table indicates the reduction in ``cost of securities sold'' which Y
should make for the years shown, assuming that he sells the bonds on the
dates and for the prices set forth:
----------------------------------------------------------------------------------------------------------------
Adjustment to ``cost of
Sale securities sold'' for--
Bond Date sold price -----------------------------
1958 1959 1960
----------------------------------------------------------------------------------------------------------------
D......................................... Feb. 1, 1959................ $1,090 $12 $1 ........
E......................................... Jan. 30, 1958............... 1,100 None ........ ........
F......................................... Jan. 30, 1958............... 1,000 1 ........ ........
G......................................... Dec. 31, 1960............... 1,065 None None None
H......................................... Dec. 31, 1960............... 1,050 None None $18
-----------------------------
Total............................................................... ........ 13 1 18
----------------------------------------------------------------------------------------------------------------
An adjustment to ``cost of securities sold'' must be made with respect
to bond D (even though it was ultimately sold at a gain) because the
bond neither had an earliest maturity or call date of more than 5 years
from the date on which Y acquired it, nor was it disposed of within 30
days after such date. An adjustment must be made for the years 1958 and
1959 since section 75(a)(1) requires that an adjustment be made with
respect to such a bond at the close of each taxable year in which it is
held. On the other hand, since bonds E, F, G, and H either were disposed
of within 30 days after the date of such acquisition or had an earliest
maturity or call date more than 5 years from the date of acquisition,
and were acquired after December 31, 1957, it is necessary to determine
whether Y disposed of them at a loss so as to require an adjustment
under section 75. No adjustment is necessary with respect to bonds E and
G because they were sold at a gain. An adjustment to ``cost of
securities sold'' is required with respect to bonds F and H because they
were sold at a loss. As in the case of bond D, an adjustment with
respect to bond F is made in 1958 in accordance with section 75(a)(1);
however, the adjustment with respect to bond H is made entirely in 1960,
the taxable year in which Y sold that bond, in accordance with the last
sentence of section 75(a). If Y had acquired bonds before January 1,
1958, it would be unnecessary to determine whether they were disposed of
at a loss since that factor is significant only with respect to bonds
acquired on or after that date.
(c) Inventories not used or inventories valued at cost. (1) In the
case of a dealer in securities who computes gross income from his trade
or business without the use of inventories or by use of inventories
valued at cost, the adjustment required by section 75 is a reduction of
the adjusted basis of each municipal bond sold or otherwise disposed of
during the taxable year. The amount of such reduction is the total
amount by which the adjusted basis of the bond would be required to be
reduced under section 1016(a)(5) were the bond subject to the
amortizable bond premium provisions of section 171; that is, the amount
of the amortizable bond premium attributable to the period during which
the bond was held which would be disallowed as a deduction under section
171(a)(2) if the taxpayer were an ordinary investor.
(2) Subparagraph (1) of this paragraph may be illustrated by the
following example:
Example. Z, a dealer in securities who values his inventories on the
basis of cost, makes his income tax returns on the calendar year basis.
On January 1, 1954, he buys, for $1,060 each, three municipal bonds (I,
J, and K) having a face obligation of $1,000, and maturing on January 1,
1959. Bond I is sold on December 31, 1954, bond J is sold on June 30,
1955, and bond K is sold on December 31, 1956. For each bond, the
amortizable bond premium to maturity is $60, the period from the date of
acquisition to maturity is 60 months, and the amortizable bond premium
per month is $1.
[[Page 291]]
----------------------------------------------------------------------------------------------------------------
Adjustment for--
Bond Date acquired Date sold -----------------------------
1954 1955 1956
----------------------------------------------------------------------------------------------------------------
I.................................. Jan. 1, 1954 ........ Dec. 31, 1954........ $12 ........ ........
J.................................. Jan. 1, 1954 ........ June 30, 1955........ None $18 ........
K.................................. Jan. 1, 1954 ........ Dec. 31, 1956........ None None $36
----------------------------------------------------------------------------------------------------------------
(d) Bonds acquired before July 1, 1950. Under section 203(c) of the
Revenue Act of 1950, adjustment is required for a municipal bond
acquired before July 1, 1950, only with respect to taxable years
beginning on or after that date. Accordingly, if the municipal bond was
acquired before July 1, 1950, then for purposes of section 75 the
amortizable bond premium under section 171 must be computed after
adjusting the bond premium to the extent proper to reflect unamortized
bond premium for so much of the holding period (as determined under
section 1223) as precedes the taxable year of the dealer beginning on or
after July 1, 1950. Thus, in example (1) of paragraph (b) and in the
example in paragraph (c) of this section, the first taxable year
beginning on or after July 1, 1950, is, for each dealer, the taxable
year beginning January 1, 1951. If each dealer had purchased for $1,060
on April 1, 1950, a municipal bond having a face obligation of $1,000
and maturing April 1, 1955, and had sold such bond on February 28, 1955,
the adjustment under section 75 would be computed as follows:
------------------------------------------------------------------------
Dealer X Dealer Z
------------------------------------------------------------------------
Bond premium........................................ $60 $60
Adjustment for holding period prior to Jan. 1, 1951. 9 9
-------------------
Amortizable bond premium to maturity, as adjusted... 51 51
Amortizable bond premium per month.................. 1 1
Total adjustments under sec. (o), 1939 Code, for 36 None
years 1951-53......................................
Adjustment under sec. 75 for 1954................... 12 None
Adjustment under sec. 75 for 1955................... 2 50
------------------------------------------------------------------------
[T.D. 6647, 28 FR 3519, Apr. 11, 1963]
Sec. 1.77-1 Election to consider Commodity Credit Corporation loans as income.
A taxpayer who receives a loan from the Commodity Credit Corporation
may, at his election, include the amount of such loan in his gross
income for the taxable year in which the loan is received. If a taxpayer
makes such an election (or has made such an election under section 123
of the Internal Revenue Code of 1939 or under section 223(d) of the
Revenue Act of 1939 (53 Stat. 897)), then for subsequent taxable years
he shall include in his gross income all amounts received during those
years as loans from the Commodity Credit Corporation, unless he secures
the permission of the Commissioner to change to a different method of
accounting. Application for permission to change such method of
accounting and the basis upon which the return is made shall be filed
with the Commission of Internal Revenue, Washington, D.C. 20224, within
90 days after the beginning of the taxable year to be covered by the
return.
Sec. 1.77-2 Effect of election to consider commodity credit loans as income.
(a) If a taxpayer elects or has elected under section 77, section
123 of the Internal Revenue Code of 1939, or section 223(d) of the
Revenue Act of 1939 (53 Stat. 897), as amended, to include in his gross
income the amount of a loan from the Commodity Credit Corporation for
the taxable year in which it is received, then--
(1) No part of the amount realized by the Commodity Credit
Corporation upon the sale or other disposition of the commodity pledged
for such loan shall be recognized as income to the taxpayer, unless the
taxpayer receives an amount in addition to that advanced to him as the
loan, in which event such additional amount shall be included in the
gross income of the taxpayer for the taxable year in which it is
received, and
(2) No deductible loss to the taxpayer shall be recognized on
account of any deficiency realized by the Commodity Credit Corporation
on such loan if the taxpayer was relieved from liability for such
deficiency.
[[Page 292]]
(b) The application of paragraph (a) of this section may be
illustrated by the following example:
Example. A, a taxpayer who elected for his taxable year 1952 to
include in gross income amounts received as loans from the Commodity
Credit Corporation, received as loans $500 in 1952, $700 in 1953, and
$900 in 1954. In 1956 all the pledged commodity was sold by the
Commodity Credit Corporation for an amount $100 and $200 less than the
loans with respect to the commodity pledged in 1952 and 1953,
respectively, and for an amount $150 greater than the loan with respect
to the commodity pledged in 1954. A, in making his return for 1956,
shall include in gross income the sum of $150 if it is received during
that year, but will not be allowed a deduction for the deficiencies of
$100 and $200 unless he is required to satisfy such deficiencies and
does satisfy them during that year.
Sec. 1.78-1 Dividends received from certain foreign corporations by certain domestic corporations choosing the foreign tax credit.
(a) Taxes deemed paid by certain domestic corporations treated as a
section 78 dividend. Any reduction under section 907(a) of the foreign
income taxes deemed to be paid with respect to foreign oil and gas
extraction income does not affect the amount treated as a section 78
dividend. If a domestic corporation chooses to have the benefits of the
foreign tax credit under section 901 for any taxable year, an amount
which is equal to the foreign income taxes deemed to be paid by such
corporation for such year under section 902(a) in accordance with
Secs. 1.902-1 and 1.902-2 and Sec. 1.902(b)(2), or under section
960(a)(1) in accordance with Sec. 1.960-7, shall, to the extent provided
by this section, be treated as a dividend (hereinafter referred to as a
section 78 dividend) received by such domestic corporation from the
foreign corporation described in section 902(a) in accordance with
Secs. 1.902-1 and 1.902-2 or section 960(c)(1) in accordance with
Sec. 1.960-7, as the case may be. A section 78 dividend shall be treated
as a dividend for all purposes of the Code, except that it shall not be
treated as a dividend under section 245, relating to dividends received
from certain foreign corporations, or increase the earnings and profits
of the domestic corporation. For purposes of determining the source of a
section 78 dividend in computing the limitation on the foreign tax
credit under section 904, see Sec. 1.902(h)(1) and the regulations under
section 960. For special rules relating to the determination of the
foreign tax credit under section 902 with respect to certain minimum
distributions received from controlled foreign corporations and the
effect of such rules upon the gross-up under section 78, see paragraph
(c) of Sec. 1.963-4. For rules respecting the reduction of foreign
income taxes under section 6038(b) in applying section 902(a) in
accordance with Secs. 1.902-1 and 1.902-2 or section 960(c)(1) in
accordance with Sec. 1.960-7, where there has been a failure to furnish
certain information and for an illustration of the effect of such
reduction upon the amount of a section 78 dividend, see paragraph (l) of
Sec. 1.6038-2.
(b) Certain taxes not treated as a section 78 dividend. Foreign
income taxes deemed paid by a domestic corporation under section 902(a)
in accordance with Secs. 1.902-1 and 1.902-2 or section 960(c)(1) in
accordance with Sec. 1.960-7, shall not, to the extent provided by
paragraph (b) of Sec. 1.960-3, be treated as a section 78 dividend where
such taxes are imposed on certain distributions from the earnings and
profits of a controlled foreign corporation attributable to an amount
which is, or has been, included in gross income of the domestic
corporation under section 951.
(c) United Kingdom income tax included in gross income under treaty.
Any amount of United Kingdom income tax appropriate to a dividend paid
by a corporation which is a resident of the United Kingdom shall not be
treated as a section 78 dividend by a domestic corporation to the extent
that such tax is included in the gross income of such domestic
corporation in accordance with Article XIII (1) of the income tax
convention between the United States and the United Kingdom, as amended
by Article II of the supplementary protocol between such Governments
signed on August 19, 1957 (9 UST 1331). See Sec. 507.117 of this
chapter, relating to credit against United States tax liability for
income tax paid or deemed to have been paid to the United Kingdom.
(d) Taxable year in which section 78 dividend is received. A section
78 dividend shall be considered received in the
[[Page 293]]
taxable year of a domestic corporation in which--
(1) The corporation receives the dividend by reason of which there
are deemed paid under section 902(a) in accordance with Secs. 1.902-1
and 1.902-2 the foreign income taxes which give rise to such section 78
dividend, or
(2) The corporation includes in gross income under section 951(a)
the amounts by reason of which there are deemed paid under section
960(a)(1) in accordance with Sec. 1.960-7 the foreign income taxes which
give rise to such section 78 dividend, notwithstanding that such foreign
income taxes may be carried back or carried over to another taxable year
under section 904(d) and are deemed to be paid or accrued in such other
taxable year.
(e) Effective dates for the application of section 78--(1) In
general. This section shall apply to amounts of foreign income taxes
deemed paid under section 902(a) in accordance with Secs. 1.902-1 and
1.902-2, or under section 960(a)(1) in accordance with Sec. 1.960-7, by
reason of a distribution received by a domestic corporation--
(i) After December 31, 1964, or
(ii) Before January 1, 1965, in a taxable year of such domestic
corporation beginning after December 31, 1962, but only to the extent
that such distribution is made out of the accumulated profits of a
foreign corporation for a taxable year of such foreign corporation
beginning after December 31, 1962.
For special rules relating to determination of accumulated profits for
such purposes, see the regulation under section 902.
(2) Amounts under section 951 treated as distributions. For purposes
of this paragraph, any amount attributable to the earnings and profits
for the taxable year of a first-tier corporation (as defined in
paragraph (b)(1) of Sec. 1.960-1) which is included in the gross income
of a domestic corporation under section 951(a) shall be treated as a
distribution received by such domestic corporation on the last day in
such taxable year on which such first-tier corporation is a controlled
foreign corporation.
(f) Illustrations. The application of this section may be
illustrated by the examples provided in Sec. 1.902-1, Sec. 1.904-5,
Sec. 1.960-3, Sec. 1.960-4, and Sec. 1.963-4.
[T.D. 6805, 30 FR 3208, Mar. 9, 1965, as amended by T.D. 7120, 36 FR
10859, June 4, 1971; 36 FR 11924, June 23, 1971; T.D. 7481, 42 FR 20130,
Apr. 18, 1977; T.D. 7490; 42 FR 30497, June 15, 1977; 42 FR 32536, June
27, 1977; T.D. 7649, 44 FR 60086, Oct. 18, 1979; T.D. 7961, 49 FR 26225,
June 27, 1984]
Sec. 1.79-0 Group-term life insurance--definitions of certain terms.
The following definitions apply for purposes of section 79, this
section, and Secs. 1.79-1, 1.79-2, and 1.79-3.
Carried directly or indirectly. A policy of life insurance is
``carried directly or indirectly'' by an employer if--
(a) The employer pays any part of the cost of the life insurance
directly or through another person; or
(b) The employer or two or more employers arrange for payment of the
cost of the life insurance by their employees and charge at least one
employee less than the cost of his or her insurance, as determined under
Table I of Sec. 1.79-3(d)(2), and at least one other employee more than
the cost of his or her insurance, determined in the same way.
Employee. An ``employee'' is--
(a) A person who performs services if his or her relationship to the
person for whom services are performed is the legal relationship of
employer and employee described in Sec. 31.3401(c)-1; or
(b) A full-time life insurance salesperson described in section
7701(a)(20); or
(c) A person who formerly performed services as an employee.
A person who formerly performed services as an employee and currently
performs services for the same employer as an independent contractor is
considered an employee only with respect to insurance provided because
of the person's former services as an employee.
Group of employees. A ``group of employees'' is all employees of an
employer, or less than all employees if membership in the group is
determined solely on the basis of age, marital status, or factors
related to employment. Examples of factors related to employment are
membership in a union some or all of whose members are employed by the
employer, duties performed,
[[Page 294]]
compensation received, and length of service. Ordinarily the purchase of
something other than group-term life insurance is not a factor related
to employment. For example, if an employer provides credit life
insurance to all employees who purchase automobiles, these employees are
not a ``group of employees'' because membership is not determined solely
on the basis of age, marital status, or factors related to employment.
On the other hand, participation in an employer's pension, profit-
sharing or accident and health plan is considered a factor related to
employment even if employees are required to contribute to the cost of
the plan. Ownership of stock in the employer corporation is not a factor
related to employment. However, participation in an employer's stock
bonus plan may be a factor related to employment and a ``group of
employees'' may include employees who own stock in the employer
corporation.
Permanent benefit. A ``permanent benefit'' is an economic value
extending beyond one policy year (for example, a paid-up or cash
surrender value) that is provided under a life insurance policy.
However, the following features are not permanent benefits:
(a) A right to convert (or continue) life insurance after group life
insurance coverage terminates;
(b) Any other feature that provides no economic benefit (other than
current insurance protection) to the employee; or
(c) A feature under which term life insurance is provided at a level
premium for a period of five years or less.
Policy. The term ``policy'' includes two or more obligations of an
insurer (or its affiliates) that are sold in conjunction. Obligations
that are offered or available to members of a group of employees are
sold in conjunction if they are offered or available because of the
employment relationship. The actuarial sufficiency of the premium
charged for each obligation is not taken into account in determining
whether the obligations are sold in conjunction. In addition,
obligations may be sold in conjunction even if the obligations are
contained in separate documents, each document is filed with and
approved by the applicable state insurance commission, or each
obligation is independent of any other obligation. Thus, a group of
individual contracts under which life insurance is provided to a group
of employees may be a policy. Similarly, two benefits provided to a
group of employees, one term life insurance and the other a permanent
benefit, may be a policy, even if one of the benefits is provided only
to employees who decline the other benefit. However, an employer may
elect to treat two or more obligations each of which provides no
permanent benefits as separate policies if the premiums are properly
allocated among such policies. An employer also may elect to treat an
obligation which provides permanent benefits as a separate policy if--
(a) The insurer sells the obligation directly to the employee who
pays the full cost thereof;
(b) The participation of the employer with respect to sales of the
obligation to employees is limited to selection of the insurer and the
type of coverage and to sales assistance activities such as providing
employee lists to the insurer, permitting the insurer to use the
employer's premises for solicitation, and collecting premiums through
payroll deduction;
(c) The insurer sells the obligation on the same terms and in
substantial amounts to individuals who do not purchase (and whose
employers do not purchase) any other obligation from the insurer; and
(d) No employer-provided benefit is conditioned on purchase of the
obligation.
[T.D. 7623, 44 FR 28797, May 17, 1979, as amended by T.D. 7917, 48 FR
45762, Oct. 7, 1983]
Sec. 1.79-1 Group-term life insurance--general rules.
(a) What is group-term life insurance? Life insurance is not group-
term life insurance for purposes of section 79 unless it meets the
following conditions:
(1) It provides a general death benefit that is excludable from
gross income under section 101(a).
(2) It is provided to a group of employees.
[[Page 295]]
(3) It is provided under a policy carried directly or indirectly by
the employer.
(4) The amount of insurance provided to each employee is computed
under a formula that precludes individual selection. This formula must
be based on factors such as age, years of service, compensation, or
position. This condition may be satisfied even if the amount of
insurance provided is determined under a limited number of alternative
schedules that are based on the amount each employee elects to
contribute. However, the amount of insurance provided under each
schedule must be computed under a formula that precludes individual
selection.
(b) May group-term life insurance be combined with other benefits?
No part of the life insurance provided under a policy that provides a
permanent benefit is group-term life insurance unless--
(1) The policy or the employer designates in writing the part of the
death benefit provided to each employee that is group-term life
insurance; and
(2) The part of the death benefit that is provided to an employee
and designated as the group-term life insurance benefit for any policy
year is not less than the difference between the total death benefit
provided under the policy and the employee's deemed death benefit (DDB)
at the end of the policy year determined under paragraph (d)(3) of this
section.
(c) May a group include fewer than 10 employees? (1) As a general
rule, life insurance provided to a group of employees cannot qualify as
group-term life insurance for purposes of section 79 unless, at some
time during the calendar year, it is provided to at least 10 full-time
employees who are members of the group of employees. For purposes of
this rule, all life insurance provided under policies carried directly
or indirectly by the employer is taken into account in determining the
number of employees to whom life insurance is provided.
(2) The general rule of paragraph (c)(1) of this section does not
apply if the following conditions are met:
(i) The insurance is provided to all full-time employees of the
employer or, if evidence of insurability affects eligibility, to all
full-time employees who provide evidence of insurability satisfactory to
the insurer.
(ii) The amount of insurance provided is computed either as a
uniform percentage of compensation or on the basis of coverage brackets
established by the insurer. However, the amount computed under either
method may be reduced in the case of employees who do not provide
evidence of insurability satisfactory to the insurer. In general, no
bracket may exceed 2\1/2\ times the next lower bracket and the lowest
bracket must be at least 10 percent of the highest bracket. However, the
insurer may establish a separate schedule of coverage brackets for
employees who are over age 65, but no bracket in the over-65 schedule
may exceed 2\1/2\ times the next lower bracket and the lowest bracket in
the over-65 schedule must be at least 10 percent of the highest bracket
in the basic schedule.
(iii) Evidence of insurability affecting employee's eligibility for
insurance or the amount of insurance provided to that employee is
limited to a medical questionnaire completed by the employee that does
not require a physical examination.
(3) The general rule of paragraph (c)(1) of this section does not
apply if the following conditions are met:
(i) The insurance is provided under a common plan to the employees
of two or more unrelated employers.
(ii) The insurance is restricted to, but mandatory for, all
employees of the employer who belong to or are represented by an
organization (such as a union) that carries on substantial activities in
addition to obtaining insurance.
(iii) Evidence of insurability does not affect an employee's
eligibility for insurance or the amount of insurance provided to that
employee.
(4) For purposes of paragraph (c) (2) and (3) of this section,
employees are not taken into account if they are denied insurance for
the following reasons:
(i) They are not eligible for insurance under the terms of the
policy because they have not been employed for a waiting period,
specified in the policy, which does not exceed six months.
[[Page 296]]
(ii) They are part-time employees. Employees whose customary
employment is for not more than 20 hours in any week, or 5 months in any
calendar year, are presumed to be part-time employees.
(iii) They have reached the age of 65.
(5) For purposes of paragraph (c) (1) and (2) of this section,
insurance is considered to be provided to an employee who elects not to
receive insurance unless, in order to receive the insurance, the
employee is required to contribute to the cost of benefits other than
term life insurance. Thus, if an employee could receive term life
insurance by contributing to its cost, the employee is taken into
account in determining whether the insurance is provided to 10 or more
employees even if such employee elects not to receive the insurance.
However, an employee who must contribute to the cost of permanent
benefits to obtain term life insurance is not taken into account in
determining whether the term life insurance is provided to 10 or more
employees unless the term life insurance is actually provided to such
employee.
(d) How much must an employee receiving permanent benefits include
in income?--(1) In general. If an insurance policy that meets the
requirements of this section provides permanent benefits to an employee,
the cost of the permanent benefits reduced by the amount paid for
permanent benefits by the employee is included in the employee's income.
The cost of the permanent benefits is determined under the formula in
paragraph (d)(2) of this section.
(2) Formula for determining cost of the permanent benefits. In each
policy year the cost of the permanent benefits for any particular
employee must be no less than:
X(DDB2-DDB1)
where
DDB2 is the employee's deemed death benefit at the end of the
policy year:
DDB1 is the employee's deemed death benefit at the end of the
preceding policy year; and
X is the net single premium for insurance (the premium for one dollar of
paid-up whole-life insurance) at the employee's attained age at the
beginning of the policy year.
(3) Formula for determining deemed death benefit. The deemed death
benefit (DDB) at the end of any policy year for any particular employee
is equal to:
R/Y
where
R is the net level premium reserved at the end of that policy year for
all benefits provided to the employee by the policy or, if greater, the
cash value of the policy at the end of that policy year; and
Y is the net single premium for insurance (the premium for one dollar of
paid-up whole life insurance) at the employee's age at the end of that
policy year.
(4) Mortality tables and interest rates used. For purposes of
paragraph (d) (2) and (3) of this section, the net level premium reserve
(R) and the net single premium (X or Y) shall be based on the 1958 CSO
Mortality Table and 4 percent interest.
(5) Dividends. If an insurance policy that meets the requirements of
this section provides permanent benefits, part or all of the dividends
under the policy may be includible in the employee's income. If the
employee pays nothing for the permanent benefits, all dividends under
the policy that are actually or constructively received by the employee
are includible in the employee's income. In all other cases, the amount
of dividends included in the employee's income is equal to
(D+C)-(PI+DI+AP)
where
D is the total amount of dividends actually or constructively received
under the policy by the employee in the current and all preceding
taxable years of the employee;
C is the total cost of the permanent benefits for the current and all
preceding taxable years of the employee determined under the formulas in
paragraph (d) (2) and (6) of this section:
PI is the total amount of premium included in the employee's income
under paragraph (d)(1) of this section for the current and all preceding
taxable years of the employee;
DI is the total amount of dividends included in the employee's income
under this paragraph (d)(5) in all preceding taxable years of the
employee; and
AP is the total amount paid for permanent benefits by the employee in
the current and all preceding taxable years of the employee.
[[Page 297]]
(6) Different policy and taxable years. (i) If a policy year begins
in one employee taxable year and ends in another employee taxable year,
the cost of the permanent benefits, determined under the formula in
paragraph (d)(2) of this section, is allocated between the employee
taxable years.
(ii) The cost of permanent benefits for a policy year is allocated
first to the employee taxable year in which the policy year begins. The
cost of permanent benefits allocated to that policy year is equal to:
FxC
where
F is the fraction of the premium for that policy year that is paid on or
before the last day of the employee taxable year; and
C is the cost of permanent benefits for the policy year determined under
the formula in paragraph (d)(2) of this section.
(iii) Any part of the cost of permanent benefits that is not
allocated to the employee taxable year in which the policy year begins
is allocated to the subsequent employee taxable year.
(iv) The cost of permanent benefits for an employee taxable year is
the sum of the costs of permanent benefits allocated to that year under
paragraph (d)(6) (ii) and (iii) of this section.
(7) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. An employer provides insurance to employee A under a policy
that meets the requirements of this section. Under the policy, A, who is
47 years old, received $70,000 of group-term life insurance and elects
to receive a permanent benefit under the policy. A pays $2 for each
$1,000 of group-term life insurance through payroll deductions and the
employer pays the remainder of the premium for the group-term life
insurance. The employer also pays one half of the premium specified in
the policy for the permanent benefit. A pays the other half of the
premium for the permanent benefit through payroll deductions. The policy
specifies that the annual premium paid for the permanent benefit is
$300. However, the amount of premium allocated to the permanent benefit
by the formula in paragraph (d)(2) of this section is $350. A is a
calendar year taxpayer; the policy year begins January 1. In year 2000,
$200 is includible in A's income because of insurance provided by the
employer. This amount is computed as follows:
(1) Cost of permanent benefits................................ $350
(2) Amounts considered paid by A for permanent benefits (\1/2\ 150
x $300)......................................................
(3) Line (1) minus line (2)................................... 200
(4) Cost of $70,000 of group-term life insurance under Table I 126
of Sec. 1.79-3..............................................
(5) Cost of $50,000 of group-term life insurance under Table I 90
of Sec. 1.79-3..............................................
(6) Cost of group-term insurance in excess of $50,000 (line 36
(4) minus line(5))...........................................
(7) Amount considered paid by A for group-term life insurance 140
(70 x $2)....................................................
(8) Line (6) minus line (7) (but not less than 0)............. 0
(9) Amount includible in income (line (3) plus line (8))...... 200
(e) What is the effect of State law limits? Section 79 does not
apply to life insurance in excess of the limits under applicable state
law on the amount of life insurance that can be provided to an employee
under a single contract of group-term life insurance.
(f) Cross references. (1) See section 79(b) and Sec. 1.79-2 for
rules relating to group-term life insurance provided to certain retired
individuals.
(2) See section 61(a) and the regulations thereunder for rules
relating to life insurance not meeting the requirements of section 79,
this section, or Sec. 1.79-2, such as insurance provided on the life of
a non-employee (for example, an employee's spouse), insurance not
provided as compensation for personal services performed as an employee,
insurance not provided under a policy carried directly or indirectly by
the employer, or permanent benefits.
(3) See sections 106 and Sec. 1.106-1 for rules relating to certain
insurance that does not provide general death benefits, such as travel
insurance or accident and health insurance (including amounts payable
under a double indemnity clause or rider).
(g) [Reserved]
(h) Effective date. Section 1.79-0 applies to insurance provided in
employee taxable years beginning on or after January 1, 1977 (except as
provided in 26 CFR 1.79-1(g) (revised as of April 1, 1983) with respect
to insurance provided in employee taxable years beginning in 1977).
Sections 1.79-1 through 1.79-3 apply to insurance provided in employee
taxable years beginning after December 31, 1982. See 26 CFR 1.79-1
through 1.79-3 (revised as of April 1, 1983) for rules applicable to
insurance
[[Page 298]]
provided in employee taxable years beginning before January 1, 1983.
(Secs. 79(c) and 7805 of the Internal Revenue Code of 1954 (78 Stat. 36,
26 U.S.C. 79(c); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7623, 44 FR 28797, May 17, 1979, as amended by T.D. 7917, 48 FR
45762, Oct. 7, 1983; T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8821, 64
FR 29790, June 3, 1999]
Sec. 1.79-2 Exceptions to the rule of inclusion.
(a) In general. (1) Section 79(b) provides exceptions for the cost
of group-term life insurance provided under certain policies otherwise
described in section 79(a). The policy or policies of group-term life
insurance which are described in section 79(a) but which qualify for one
of the exceptions set forth in section 79(b) are described in paragraphs
(b) through (d) of this section. Paragraph (b) of this section discusses
the exception provided in section 79(b) (1); paragraph (c) of this
section discusses the exception provided in section 79(b)(2); and
paragraph (d) of this section discusses the exception provided in
section 79(b)(3).
(2)(i) If a policy of group-term life insurance qualifies for an
exception provided by section 79(b), then the amount equal to the cost
of such insurance is excluded from the application of the provisions of
section 79(a).
(ii) If a policy, or portion of a policy of group-term life
insurance qualifies for an exception provided by section 79(b), the
amount (if any) paid by the employee toward the purchase of such
insurance is not to be taken into account as an amount referred to in
section 79 (a)(2). In the case of a policy or policies of group-term
life insurance which qualify for an exception provided by section 79(b)
(1) or (3), the amount paid by the employee which is not to be taken
into account as an amount referred to in section 79(a) (2) is the amount
paid by the employee for the particular policy or policies of group-term
life insurance which qualify for an exception provided under such
section. If the exception provided in section 79(b)(2) is applicable
only to a portion of the group-term life insurance on the employee's
life, the amount considered to be paid by the employee toward the
purchase of such portion is the amount equal to the excess of the cost
of such portion of the insurance over the amount otherwise includible in
the employee's gross income with respect to the group-term life
insurance on his life carried directly or indirectly by such employer.
(iii) The rules of this subparagraph may be illustrated by the
following example:
Example. A is an employee of X Corporation and is also an employee
of Y Corporation, a subsidiary of X Corporation. A is provided, under a
separate plan arranged by each of his employers, group-term life
insurance on his life. During his taxable year, under the group-term
life insurance plan of X Corporation, A is provided $60,000 of group-
term life insurance on his life, and A pays $360.00 toward the purchase
of such insurance. Under the group-term life insurance plan of Y
Corporation, A is provided $65,000 of group-term life insurance on his
life, but does not pay any part of the cost of such insurance. At the
beginning of his taxable year, A terminates his employment with the X
Corporation after he has reached the retirement age with respect to such
employer, and the policy carried by the X Corporation qualifies for the
exception provided by section 79(b)(1). For that taxable year, the cost
of the group-term life insurance on A's life which is provided under the
plan of X Corporation is not taken into account in determining the
amount includible in A's gross income under section 79(a), and A may not
take into account as an amount described in section 79(a)(2) the $360.00
he pays toward the purchase of such insurance.
(b) Retired and disabled employees--(1) In general. Section 79(b)(1)
provides an exception for the cost of group-term life insurance on the
life of an individual which is provided under a policy or policies
otherwise described in section 79(a) if the individual has terminated
his employment (as defined in subparagraph (2) of this paragraph) with
such employer and either has reached the retirement age with respect to
such employer (as defined in subparagraph (3) of this paragraph), or has
become disabled (as defined in subparagraph (4)(i) of this paragraph).
If an individual who has terminated his employment attains retirement
age or has become disabled during his taxable year, or if an employee
who has attained retirement age or has become disabled terminates his
employment during the taxable year, the exception
[[Page 299]]
provided by section 79(b)(1) applies only to the portion of the cost of
group-term life insurance which is provided subsequent to the happening
of the last event which qualifies the policy of insurance on the
employee's life for the exception provided in such section.
(2) Termination of employment. For purposes of section 79(b)(1), an
individual has terminated his employment with an employer providing such
individual group-term life insurance when such individual no longer
renders services to that employer as an employee of such employer.
(3) Retirement age. For purposes of section 79(b)(1) and this
section, the meaning of the term ``retirement age'' is determined in
accordance with the following rules--
(i)(a) If the employee is covered under a written pension or annuity
plan of the employer providing such individual group-term life insurance
on his life (whether or not such plan is qualified under section 401(a)
or 403(a)), then his retirement age shall be considered to be the
earlier of--
(1) The earliest age indicated by such plan at which an active
employee has the right (or an inactive individual would have the right
had he continued in employment) to retire without disability and without
the consent of his employer and receive immediate retirement benefits
computed at either the full rate or a rate proportionate to completed
service as set forth in the normal retirement formula of the plan, i.e.,
without actuarial or similar reduction because of retirement before some
later specified age, or
(2) The age at which it has been the practice of the employer to
terminate, due to age, the services of the class of employees to which
he last belonged.
(b) For purposes of (a) of this subdivision, if an employee is
covered under more than one pension or annuity plan of the employer, his
retirement age shall be determined with regard to that plan which covers
that class of employees of the employer to which the employee last
belonged. If the class of employees to which the employee last belonged
is covered under more than one pension or annuity plan, then the
employee's retirement age shall be determined with regard to that plan
which covers the greatest number of the employer's employees.
(ii) In the absence of a written employee's pension or annuity plan
described in subdivision (i) of this subparagraph, retirement age is the
age, if any, at which it has been the practice of the employer to
terminate, due to age, the services of the class of employees to which
the particular employee last belonged, provided such age is reasonable
in view of all the pertinent facts and circumstances.
(iii) If neither subdivision (i) or (ii) of this subparagraph
applies, the retirement age is considered to be age 65.
(4) Disabled. (i) For taxable years beginning after December 31,
1966, an individual is considered disabled for purposes of section
79(b)(1) and subparagraph (1) of this paragraph if he is disabled within
the meaning of section 72(m)(7) and paragraph (f) of Sec. 1.72-17. For
taxable years beginning before January 1, 1967, an individual is
considered disabled for purposes of section 79(b)(1) and subparagraph
(1) of this paragraph if he is disabled within the meaning of section
213(g)(3), relating to the meaning of disabled, but the determination of
the individual's status shall be made without regard to the provisions
of section 213(g)(4), relating to the determination of status.
(ii)(a) In any taxable year in which an individual seeks to apply
the exception set forth in section 79(b)(1) by reason of his being
disabled within the meaning of subdivision (i) of this subparagraph, and
in which the aggregate amount of insurance on the individual's life
subject to the rule of inclusion set forth in section 79(a), but
determined without regard to the amount of any insurance subject to any
exception set forth in section 79(b), is greater than $50,000 of such
insurance, the substantiation required by (b) or (c) of this subdivision
must be submitted with the individual's tax return.
(b) For the first taxable year for which the individual seeks to
apply the exception set forth in section 79(b)(1) by reason of his being
disabled within the meaning of subdivision (i) of this subparagraph,
there must be submitted with his income tax return a doctor's statement
as to his impairment. There
[[Page 300]]
must also be submitted with the return a statement by the individual
with respect to the effect of the impairment upon his substantial
gainful activity, and the date such impairment occurred. For subsequent
taxable years, the taxpayer may, in lieu of such statements, submit a
statement declaring the continued existence (without substantial
diminution) of the impairment and its continued effect upon his
substantial gainful activity.
(c) In lieu of the substantiation required to be submitted by (b) of
this subdivision for the taxable year, the individual may submit a
signed statement issued to him by the insurer to the effect that the
individual is disabled within the meaning of subdivision (i) of this
paragraph. Such statement must set forth the basis for the insurer's
determination that the individual was so disabled, and, for the first
taxable year in which the individual is so disabled, the date such
disability occurred.
(c) Employer or charity a beneficiary--(1) General rule. Section
79(b)(2) provides an exception with respect to the amounts referred to
in section 79 (a) for the cost of any portion of the group-term life
insurance on the life of an employee provided during part or all of the
taxable year of the employee under which the employer is directly or
indirectly the beneficiary, or under which a person described in section
170(c) (relating to definition of charitable contributions) is the sole
beneficiary, for the entire period during such taxable year for which
the employee receives such insurance.
(2) Employer is a beneficiary. For purposes of section 79(b)(2) and
subparagraph (1) of this paragraph, the determination of whether the
employer is directly or indirectly the beneficiary under a policy or
policies of group-term life insurance depends upon the facts and
circumstances of the particular case. Such determination is not made
solely with regard to whether the employer possesses all the incidents
of ownership in the policy. Thus, for example, if the employer is the
nominal beneficiary under a policy of group-term life insurance on the
life of his employee but there is an arrangement whereby the employer is
required to pay over all (or a portion) of the proceeds of such policy
to the employee's estate or his beneficiary, the employer is not
considered a beneficiary under such policy (or such portion of the
policy).
(3) Charity a beneficiary. (i) For purposes of section 79(b)(2) and
subparagraph (1) of this paragraph, a person described in section 170(c)
is a beneficiary under a policy providing group-term life insurance if
such person is designated the beneficiary under the policy by any
assignment or designation of beneficiary under the policy which, under
the law of the jurisdiction which is applicable to the policy, has the
effect of making such person the beneficiary under such policy (whether
or not such designation is revocable during the taxable year). Such a
designation may be made by the employee with respect to any portion of
the group-term life insurance on his life. However, no deduction is
allowed under section 170, relating to charitable, etc., contributions
and gifts, with respect to any such assignment or designation.
(ii) A person described in section 170(c) must be designated the
sole beneficiary under the policy or portion of the policy. Such
requirement is satisfied if the person described in section 170(c) is
the beneficiary under such policy or portion of the policy, and there is
no contingent or similar beneficiary under such policy or such portion
other than a person described in section 170(c). A general ``preference
beneficiary clause'' in a policy governing payment where there is no
designated beneficiary in existence at the death of the employee will
not of itself be considered to create a contingent or similar
beneficiary. A person described in section 170(c) may be designated the
beneficiary under a portion of the policy if such person is designated
the sole beneficiary under a beneficiary designation which is expressed,
for example, as a fraction of the amount of insurance on the insured's
life.
(iii) If a person described in section 170(c) is designated, before
May 1, 1964, the beneficiary under the policy (or portion thereof) and
such person remains the beneficiary for the period beginning May 1,
1964, and ending with the close of the first taxable year of
[[Page 301]]
the employee ending after April 30, 1964, such person shall be treated
as the beneficiary under the policy (or the portion thereof) for the
period beginning January 1, 1964, and ending April 30, 1964.
(d) Insurance contracts purchased under qualified employee plans.
(1) Section 79(b)(3) provides an exception with respect to the cost of
any group-term life insurance which is provided under a life insurance
contract purchased as a part of a plan described in section 403(a), or
purchased by a trust described in section 401(a) which is exempt from
tax under section 501(a) if the proceeds of such contract are payable
directly or indirectly to a participant in such trust or to a
beneficiary of such participant. The provisions of section 72(m)(3) and
Sec. 1.72-16 apply to the cost of such group-term life insurance, and,
therefore, no part of such cost is excluded from the gross income of the
employee by reason of the provisions of section 79.
(2) Whether the life insurance protection on an employee's life is
provided under a qualified employee plan referred to in subparagraph (1)
of this paragraph depends upon the provisions of such plan. In
determining whether a pension, profit-sharing, stock bonus, or annuity
plan satisfies the requirements for qualification set forth in sections
401(a) or 403(a), only group-term life insurance which is provided under
such plan is taken into account.
[T.D. 6888, 31 FR 9201, July 6, 1966, as amended by T.D. 6919, 32 FR
7390, May 18, 1967; T.D. 6985, 33 FR 19812, Dec. 27, 1968; T.D. 7623, 44
FR 28800, May 17, 1979]
Sec. 1.79-3 Determination of amount equal to cost of group-term life insurance.
(a) In general. This section prescribes the rules for determining
the amount equal to the cost of group-term life insurance on an
employee's life which is to be included in his gross income pursuant to
the rule of inclusion set forth in section 79(a). Such amount is
determined by--
(1) Computing the cost of the portion of the group-term life
insurance on the employee's life to be taken into account (determined in
accordance with the rules set forth in paragraph (b) of this section)
for each ``period of coverage'' (as defined in paragraph (c) of this
section) and aggregating the costs so determined, then
(2) Reducing the amount determined under subparagraph (1) of this
paragraph by the amount determined in accordance with the rules set
forth in paragraph (e) of this section, relating to the amount paid by
the employee toward the purchase of group-term life insurance.
(b) Determination of the portion of the group-term life insurance on
the employee's life to be taken into account. (1) For each ``period of
coverage'' (as defined in paragraph (c) of this section), the portion of
the group-term life insurance to be taken into account in computing the
amount includible in an employee's gross income for purposes of
paragraph (a)(1) of this section is the sum of the proceeds payable upon
the death of the employee under each policy, or portion of a policy, of
group-term life insurance on such employee's life to which the rule of
inclusion set forth in section 79(a) applies, less $50,000 of such
insurance. Thus, the amount of any proceeds payable under a policy, or
portion of a policy, which qualifies for one of the exceptions to the
rule of inclusion provided by section 79(b) is not taken into account.
For the regulations relating to such exceptions to the rule of
inclusion, see Sec. 1.79-2.
(2) For purposes of making the computation required by subparagraph
(1) of this paragraph in any case in which the amount payable under the
policy, or portion thereof, varies during the period of coverage, the
amount payable under such policy during such period is considered to be
the average of the amount payable under such policy at the beginning and
the end of such period.
(3)(i) For purposes of making the computation required by
subparagraph (1) of this paragraph in any case in which the amount
payable under the policy is not payable as a specific amount upon the
death of the employee in full discharge of the liability of the insurer,
and such form of payment is not one of alternative methods of payment,
the amount payable under such policy is the present value of the
[[Page 302]]
agreement by the insurer under the policy to make the payments to the
beneficiary or beneficiaries entitled to such amounts upon the
employee's death. For each period of coverage, such present value is to
be determined as if the first and last day of such period is the date of
death of the employee.
(ii) The present value of the agreement by the insurer under the
policy to make payments shall be determined by the use of the mortality
tables and interest rate employed by the insurer with respect to such a
policy in calculating the amount held by the insurer (as defined in
section 101(d)(2)), unless the Commissioner otherwise determines that a
particular mortality table and interest rate, representative of the
mortality table and interest rate used by commercial insurance companies
with respect to such policies, shall be used to determine the present
value of the policy for purposes of this subdivision.
(iii) For purposes of making the computation required by subdivision
(i) of this subparagraph in any case in which it is necessary to
determine the age of an employee's beneficiary and such beneficiary
remains the same (under the policy, or the portion of the policy, with
respect to which the determination of the present value of the agreement
of the insurer to pay benefits is being made) for the entire period
during the employee's taxable year for which such policy is in effect,
the age of such beneficiary is such beneficiary's age at his nearest
birthday on June 30th of the calendar year.
(iv) If the policy of group-term life insurance on the employee's
life is such that the present value of the agreement by the insurer
under the policy to pay benefits cannot be determined by the rules
prescribed in this subparagraph, the taxpayer may submit with his return
a computation of such present value, consistent with the actuarial and
other assumptions set forth in this subparagraph, showing the
appropriate factors applied in his case. Such computation shall be
subject to the approval of the Commissioner upon examination of such
return.
(c) Period of coverage. For purposes of this section, the phrase
``period of coverage'' means any one calendar month period, or part
thereof, during the employee's taxable year during which the employee is
provided group-term life insurance on his life to which the rule of
inclusion set forth in section 79(a) applies. The phrase ``part
thereof'' as used in the preceding sentence means any continuous period
which is less than the one calendar month period referred to in the
preceding sentence for which premiums are charged by the insurer.
(d) The cost of the portion of the group-term life insurance on an
employee's life. (1) This paragraph sets forth the rules for determining
the cost, for each period of coverage, of the portion of the group-term
life insurance on the employee's life to be taken into account in
computing the amount includible in the employee's gross income for
purposes of paragraph (a)(1) of this section. The portion of the group-
term life insurance on the employee's life to be taken into account is
determined in accordance with the provisions of paragraph (b) of this
section. Table I, which is set forth in subparagraph (2) of this
paragraph, determines the cost for each $1,000 of such portion of the
group-term life insurance on the employee's life for each one-month
period. The cost of the portion of the group-term life insurance on the
employee's life for each period of coverage of one month is obtained by
multiplying the number of thousand dollars of such insurance computed to
the nearest tenth which is provided during such period by the
appropriate amount set forth in Table I. In any case in which group-term
life insurance is provided for a period of coverage of less than one
month, the amount set forth in Table I is prorated over such period of
coverage.
(2) For the cost of group-term life insurance provided after June
30, 1999, the following table sets forth the cost of $1,000 of group-
term life insurance provided for one month, computed on the basis of 5-
year age brackets. See 26 CFR 1.79-3(d)(2) in effect prior to July 1,
1999, and contained in the 26 CFR part 1 edition revised as of April 1,
1999, for a table setting forth the cost of group-term life insurance
provided before July 1, 1999. For purposes of Table
[[Page 303]]
I, the age of the employee is the employee's attained age on the last
day of the employee's taxable year.
Table I.--Uniform Premiums for $1,000 of Group-Term Life Insurance
Protection
------------------------------------------------------------------------
Cost per
$1,000 of
5-year age bracket protection
for one
month
------------------------------------------------------------------------
Under 25.................................................. $0.05
25 to 29.................................................. .06
30 to 34.................................................. .08
35 to 39.................................................. .09
40 to 44.................................................. .10
45 to 49.................................................. .15
50 to 54.................................................. .23
55 to 59.................................................. .43
60 to 64.................................................. .66
65 to 69.................................................. 1.27
70 and above.............................................. 2.06
------------------------------------------------------------------------
(3) The net premium cost of group-term life insurance as provided in
Table I of subparagraph (2) of this paragraph applies only to the cost
of group-term life insurance subject to the rule of inclusion set forth
in section 79(a). Therefore, such net premium cost is not applicable to
the determination of the cost of group-term life insurance provided
under a policy which is not subject to such rule of inclusion.
(e) Effective date--(1) General effective date for table. Except as
provided in paragraph (e)(2) of this section, the table in paragraph
(d)(2) of this section is applicable July 1, 1999. Until January 1,
2000, an employer may calculate imputed income for all its employees
under age 30 using the 5-year age bracket for ages 25 to 29.
(2) Effective date for table for purposes of Sec. 1.79-0. For a
policy of life insurance issued under a plan in existence on June 30,
1999, which would not be treated as carried directly or indirectly by an
employer under Sec. 1.79-0 (taking into account the Table I in effect on
that date), until January 1, 2003, an employer may use either the table
in paragraph (d)(2) of this section or the table in effect prior to July
1, 1999 (as described in paragraph (d)(2) of this section) for
determining if the policy is carried directly or indirectly by the
employer.
(f) Amount paid by the employee toward the purchase of group-term
life insurance. (1) Except as otherwise provided in subparagraph (2) of
this paragraph, if an employee pays any amount toward the purchase of
group-term life insurance provided for a taxable year which is subject
to the rule of inclusion set forth in paragraph (a)(2) of Sec. 1.79-1,
the sum of all such amounts is the amount referred to in section
79(a)(2) and paragraph (a)(2) of this section. The rule of the preceding
sentence applies even though the payments made by the employee are made
with respect to a period of coverage during which no portion of the
group-term life insurance on his life is taken into account under
paragraph (b)(1) of this section.
(2) In determining the amount paid by the employee for purposes of
section 79(a)(2) and paragraph (a)(2) of this section, there is not
taken into account any amounts paid by the employee for group-term life
insurance provided (or to be provided) for a different taxable year
(other than amounts applicable to regular pay periods extending into the
next taxable year). Thus, for example, if part of an employee's payment
during a taxable year represents a prepayment for insurance to be
provided after his retirement, such part does not reduce the amount
includible in his gross income for the current taxable year.
Furthermore, in determining such amount, there is not taken into account
any amount paid by an employee toward the purchase of group-term life
insurance which qualifies for one of the exceptions described in section
79(b). The amount paid by an employee toward the purchase of group-term
life insurance which qualifies for one of the exceptions described in
section 79(b) is determined under the rules of paragraph (a)(2) of
Sec. 1.79-2.
(3) If payments are made by the employer and his employees to
provide group-term life insurance which is subject to the rule of
inclusion set forth in section 79(a) as well as to provide other
benefits for the employees, and if the amount paid by the employee
toward the purchase of such insurance cannot be determined by the
provisions of the policy or plan under which such benefits are provided,
then the determination of the portion of the cost of group-term life
insurance (computed in accordance with the provisions of this section)
which is attributable to the contributions of the employee shall be made
in accordance with the provisions
[[Page 304]]
of this subparagraph. The amount paid by the employee toward the
purchase of all the group-term life insurance on his life for his
taxable year (or for the portion of his taxable year if such portion is
the basis of the computation) under such group policy shall be an amount
determined first by ascertaining the total amount paid by all employees
who are covered for multiple benefits which is allocable toward the
purchase of group-term life insurance on their lives for the year, and
then by ascertaining the pro rata portion of such total amount
attributable to the individual employee. The total amount paid by all
employees who are covered for multiple benefits which is allocable
toward the purchase of group-term life insurance on their lives with
respect to such year shall be an amount which bears the same ratio to
the total amount paid by all employees for multiple benefits with
respect to such year as the aggregate premiums paid to the insurer for
group-term life insurance on such employees' lives with respect to such
year bears to the aggregate premiums paid to the insurer for such
multiple benefits with respect to such year. The pro rata portion of
such total amount attributable to the individual employee for the cost
of group-term life insurance on his life shall be an amount which bears
the same ratio to the total amount paid by all employees which is
allocable toward the purchase of group-term insurance on their lives
with respect to such year as the amount of group-term life insurance on
the life of the employee at a specified time during the year, as
determined by the employer, bears to the total amount of group-term life
insurance on the lives of all employees insured for such multiple
benefits at such time.
(g) Effect of provision of other benefits--(1) In general. This
paragraph discusses the effect of the provision of certain benefits
other than group-term life insurance on the life of the employee if the
provision of such benefits is contingent upon the underwriting of group-
term life insurance on the employee's life to which the rule of
inclusion set forth in section 79(a) applies.
(2) Dependent coverage. An amount equal to the cost of group-term
life insurance on the life of the spouse or other family member of the
employee which is provided under a policy of group-term life insurance
carried directly or indirectly by his employer is not subject to the
provisions of section 79 since it is not on the life of the employee.
See paragraph (d)(2)(ii)(b) of Sec. 1.61-2 for rules regarding the tax
treatment of such insurance.
(3) Disability provisions. Payments made for disability benefits
provided under a group-term life insurance contract are considered to
constitute payments made for accident and health insurance. Thus,
employer contributions to provide such benefits are excluded from gross
income by reason of the provisions of section 106.
(4) Cost of other benefits. If a benefit described in this paragraph
is provided under a policy under which both the employer and his
employees contribute, then, except as otherwise provided in this
subparagraph, the employer and the employees will be treated as
contributing toward the payment of such benefit at the same rate as they
contribute toward the cost of group-term life insurance on the
employees' lives. A separate allocation of employer and employee
contributions for such benefits is permissible only if--
(i) Such separate allocation is set forth in the group policy and is
applicable to all the employees covered under such policy;
(ii) Such separate allocation is followed in transactions between
the insurer and the group-policyholder; and
(iii) The allocation set forth in the policy satisfies the
requirements of the law of the jurisdiction which is applicable to the
contract regarding any minimum or maximum contribution rate by the
employer or the employees.
(Secs. 79(c) and 7805 of the Internal Revenue Code of 1954 (78 Stat. 36,
26 U.S.C. 79(c); 68A Stat. 917, 28 U.S.C. 7805))
[T.D. 6888, 31 FR 9203, July 6, 1966, as amended by T.D. 7623, 44 FR
28800, May 17, 1979; T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8273, 54
FR 47979, Nov. 20, 1989; T.D. 8424, 57 FR 33635, July 30, 1992; T.D.
8821, 64 FR 29790, June 3, 1999]
[[Page 305]]
Sec. 1.79-4T Questions and answers relating to the nondiscrimination requirements for group-term life insurance (temporary).
Q-1: When does section 79, as amended by the Tax Reform Act of 1984,
become effective?
A-1: (a) Generally, section 79, as amended, applies to taxable years
(of the employee receiving insurance coverage) beginning after December
31, 1983. There are, however, several exceptions to this effective date
where there is coverage under a group-term life insurance plan of the
employer that was in existence on January 1, 1984, or a comparable
successor to such a plan maintained by the employer or a successor
employer.
(b) First, the new rules of section 79 (b) and (e), that require the
inclusion in income of a retired employee of amounts attributable to the
cost of group-term life insurance in excess of $50,000 and that include
former employees within the definition of the term ``employee,'' will
not apply to any employee who retired from employment on or before
January 1, 1984.
(c) Second, in the case of an individual who retires after January
1, 1984, and before January 1, 1987, the new rules of section 79 (b) and
(e) do not apply if (1) the individual attained age 55 on or before
January 1, 1984, and (2) the plan was maintained by the same employer
who employed the individual during 1983, or by a successor employer.
(d) Third, in the case of an individual who retires after December
31, 1986, the new rules of section 79 (b) and (e) do not apply if (1)
the individual attained age 55 on or before January 1, 1984, (2) the
plan was maintained by the same employer who employed the individual
during 1983, or by a successor employer, and (3) the plan is not, after
December 31, 1986, a discriminatory group-term life insurance plan (not
taking into account any group-term life insurance coverage provided to
employees who retired before January 1, 1987).
(e) For purposes of determining whether a plan is, after December
31, 1986, a discriminatory group-term life insurance plan, there shall
be ignored any insurance coverage provided pursuant to a state law
requirement that an insurer continue to provide insurance coverage for a
period of time not in excess of two months following the termination of
a policy.
Q-2: What is meant by a ``group-term life insurance plan of the
employer that was in existence on January 1, 1984''?
A-2: A group-term life insurance plan of the employer was in
existence on January 1, 1984, only if the group policy or policies
providing group-term life insurance benefits under the plan were
executed on or before January 1, 1984, and were not terminated prior to
such date. The applicability of section 79, as amended, to an employee
will not be affected by the transfer of the employee between employers
treated as a single employer under section 79(d)(7) if the employee
continues, after the transfer, to be provided with group-term life
insurance benefits under a plan that is comparable (determined under the
principles set forth in Q&A 3) to the plan provided by the former
employer.
Q-3: When is a plan of group-term life insurance a ``comparable
successor'' to another such plan?
A-3: A plan of group-term life insurance will be a comparable
successor to another plan of group-term life insurance (the first plan)
only if the plan does not differ from the first plan in any significant
aspect with respect to individuals who are potentially eligible for
benefits provided under the grandfather provisions in Q&A 1. These
individuals consist of those persons who are covered under a plan of
group-term life insurance of the employer that was in existence on
January 1, 1984, or a comparable successor to such a plan maintained by
the employer or a successor employer, and who either retired on or
before January 1, 1984, or who both attained age 55 on or before January
1, 1984, and were employed by the employer maintaining the plan (or a
predecessor of that employer) during the year 1983. Accordingly, if
significant additional or reduced benefits are provided only to
individuals who are not described in the preceding sentence, the plan
will be considered a comparable successor plan. A plan will not fail to
be a comparable successor
[[Page 306]]
plan merely because the employer purchases a policy or policies
identical to the employer's first plan from a different insurance
company. If the new plan provides significant additional or reduced
benefits (either as to the type or amount available) to employees, or
provides benefits to a category of employees that was formerly excluded
from participating in the plan, the plan is generally not a comparable
successor to the first plan. However, a plan will not be considered as
providing significant additional or reduced benefits merely because a
participant's coverage is based on a percentage of compensation and the
participant's compensation for the taxable year has been increased or
decreased. Furthermore, a plan will not be considered a non-comparable
successor plan merely because it is amended, either to decrease benefits
provided to key employees or to increase benefits provided to non-key
employees, solely in order to comply with the nondiscrimination
requirements of section 79(d). Finally, a plan will not be considered a
non-comparable successor plan merely because a policy that is part of a
discriminatory plan is terminated in order to end discriminatory
coverage.
Q-4: For purposes of determining the effective date of section 79,
as amended by the Tax Reform Act of 1984, what is a ``successor
employer''?
A-4: A successor employer is an employer who employs a group of
individuals formerly employed by another employer as a result of a
business merger, acquisition or division.
Q-5: Under what circumstances will separate policies of group-term
life insurance of an employer be considered to be a single plan in
determining whether the employer's plan of group-term life insurance is
discriminatory?
A-5: All policies providing group-term life insurance to a common
key employee or key employees (as defined in this Q&A) carried directly
or indirectly by an employer (or by a group of employers described in
section 79(d)(7)) will be considered as a single plan for purposes of
determining whether an employer's group-term life insurance plan is
discriminatory. For example, if a key employee receives $50,000 of
group-term life insurance coverage under one policy and the same key
employee receives an additional $250,000 of coverage under a separate
group-term life insurance policy, the two policies will be treated as a
single plan in determining whether the group-term life insurance
provided by the employer is discriminatory. If it is discriminatory, the
key employees covered by either policy will not receive the benefit of
section 79(a)(1) or section 79(c) for either policy. The result is the
same even if each policy, considered alone, would be nondiscriminatory.
A policy that provides group-term life insurance to a key employee and a
policy under which the same key employee is eligible to receive group-
term life insurance upon separation from service will be considered to
provide group-term life insurance to a common key employee. In addition,
an employer may treat two or more policies that do not provide group-
term life insurance to a common key employee as constituting a single
plan for purposes of satisfying the nondiscrimination provisions of
section 79(d). For example, if the employer provides group-term life
insurance coverage for non-key employees under one policy and provides
group-term life insurance coverage for key employees under a second
policy, the two policies may be considered together in determining
whether the requirements of section 79(d) are satisfied with regard to
the second policy. For purposes of this section, the term ``key
employee'' has the meaning given to such term by paragraph (1) of
section 416(i), except that subparagraph (A)(iv) of such paragraph shall
be applied by not taking into account employees described in section
79(d)(3)(B) who are not participants in the plan. For purposes of this
section, all references to ``plan year'' or ``plan years'' in section
416(g)(4)(C) and section 416(i) shall be deleted and replaced with
``taxable year of the employer'' or ``taxable years of the employer,''
respectively.
Q-6: In the case of a discriminatory group-term life insurance plan,
what amounts should be included in the gross income of a key employee?
A-6: (a) In the case of a discriminatory group-term life insurance
plan, each key employee must include in gross income for the taxable
year the
[[Page 307]]
cost of his or her insurance benefit for that year provided by the
employer under the plan.
(b) The cost of group-term life insurance coverage provided by an
employer for a key employee during the employee's taxable year is
determined by apportioning the net premium (group premium less policy
dividends, premium refunds or experience rating credits) allocable to
the group-term life insurance coverage during the key employee's taxable
year, less the actual cost allocated to other key employees pursuant to
the method described in the subparagraph (d) of this answer, if
applicable, among the covered employees. In the event that the employer
has other forms and types of coverage with the same insurer, the
employer must make a reasonable allocation of the total premiums paid to
the insurer. For example, where an employer has both health insurance
coverage and a plan of group-term life insurance with the same insurer,
and there is no volume discount, the net premium for the plan of group-
term life insurance must include the excess, if any, of the payments the
employer makes for the health insurance coverage over the payments the
employer would make for such coverage if the plan of group-term life
insurance for which this calculation is being made did not exist.
(c) In general, the portion of the net premium for group-term life
insurance that should be apportioned to a key employee, other than a key
employee to whom the method in subparagraph (d) of this answer is
applicable, is determined by: (1) Calculating a ``tabular'' premium for
the entire group (with the exception of all key employees to whom the
method in subparagraph (d) of this answer is applicable), in the manner
described below, (2) determining the ratio of the total actual net
premium (less the actual cost allocated to key employees pursuant to the
method in the subparagraph (d) of this answer) to the total tabular
premium and (3) multiplying the tabular premium for the key employee at
his or her attained age by such ratio. Thus, if the total actual net
premium is 125 percent of the total tabular premium for all covered
employees and the tabular premium at the key employee's attained age is
$2.00 per thousand per month, the cost for such employee would be $2.50
per thousand per month ($2.00 times 125 percent). For these purposes the
table used to calculate tabular premiums will be determined as follows:
(i) If the group policy contains a reasonable table (based on
recognized mortality assumptions) of premium rates on an attained age
basis (which table may use age brackets not exceeding five years) with
reference to which the group premium is determined, such table will be
used;
(ii) If such table is not available, the 1960 Basic Group Table
published by the Society of Actuaries will be used.
(d) In cases where the mortality charge for group-term life
insurance coverage provided to a key employee is calculated separately
by the insurer (for example, where the charge for the coverage provided
to a key employee is based on a medical examination) and the amount of
such mortality charge plus a proportionate share of the loading charge
for the coverage provided to the group is higher than the amount that
would be allocable to such employee under the allocation method in
subparagraph (c) the cost of group-term life insurance coverage for that
employee shall be that higher amount.
Q-7: Must all active and former employees be considered in applying
the coverage tests in section 79(d)(3) to determine whether or not a
plan of group-term life insurance is discriminatory with respect to
coverage?
A-7: No. Generally, a plan of group-term life insurance which covers
both active and former employees will not satisfy the nondiscrimination
requirements of section 79(d) unless the coverage tests in section
79(d)(3) are satisfied with respect to both the active and the former
employees of the employer, except to the extent they are excluded from
tests for discrimination by application of the grandfather provisions
set forth in Q&A 1. However, for purposes of determining whether a plan
is discriminatory with respect to coverage, the coverage tests must be
applied separately to active and former employees. In addition, if the
plan limits participation by former employees to employees who retired
from employment
[[Page 308]]
with the employer, then only retired employees must be considered in
applying the coverage tests to former employees. Also, in applying the
coverage tests in section 79(d)(3), the employer may make reasonable
mortality assumptions regarding former employees who are not covered
under the plan but must be considered in applying the coverage tests.
Furthermore, only those former employees who terminated employment on or
after the earliest date of termination from employment for any former
employee covered by the plan must be considered. Finally, for purposes
of determining whether a plan of group-term life insurance of the
employer (or a successor employer) that was in existence on January 1,
1984 (or a comparable successor to such a plan) is discriminatory, after
December 31, 1986, with respect to group-term life insurance coverage
for former employees, coverage provided to employees who retired on or
before December 31, 1986, shall not be taken into account.
Q-8: Will a group-term life insurance plan be considered
discriminatory if active employees receive greater benefits as a
percentage of compensation than former employees, or vice versa?
A-8: No. For purposes of determining whether a plan is
discriminatory with respect to the type and amount of benefits
available, insurance coverage for former employees must be tested
separately from insurance coverage for active employees. For example, a
group-term life insurance plan that provides group-term life insurance
benefits equal to 200 percent of compensation for all active employees
and 100 percent of final compensation (based on the average annual
compensation for the final five years) for all former employees would
satisfy the nondiscrimination requirements of section 79(d). However, a
group-term life insurance plan that provides group-term life insurance
benefits equal to 200 percent of compensation for all active employees
and 100 percent of final compensation (based on the average annual
compensation for the final five years) only for key employees who are no
longer employed by the employer (or a successor employer) would not
satisfy the nondiscrimination requirement of section 79(d)(2)(A).
Q-9: Under what circumstances will the amount of benefits available
under a plan of group-term life insurance be considered not to
discriminate in favor of participants who are key employees?
A-9: A plan of group-term life insurance will be considered not to
discriminate in favor of participants who are key employees, as to the
amount of benefits available, if the plan provides a fixed amount of
insurance which is the same for all covered employees. In other
circumstances, the determination of whether a plan is nondiscriminatory
will be based on all of the facts and circumstances. Such plans will be
considered not to discriminate in favor of participants who are key
employees, as to the amount of benefits available, if the plan contains
no group of employees described in the following sentence that, if
tested separately, would fail to satisfy the requirements of section
79(d)(2)(A). The group subject to separate testing under the preceding
sentence consists of a key employee and all other participants
(including other key employees) who receive, under the plan, an amount
of insurance (as a multiple of compensation (either total compensation
or the basic or regular rate of compensation)) that is equal to or
greater than the amount of insurance received by such key employee. As
described in Q&As 7&8, active and former employees are tested separately
under section 79(d)(2)(A).
Example: Assume that a plan of group-term life insurance has 500
participants, 10 of whom are key employees. Under the plan, 400 of the
non-key employees receive an amount of insurance equal to 100 percent of
compensation, while all of the key employees and 90 of the non-key
employees receive an amount of insurance equal to 200 percent of
compensation. The plan will be considered not to discriminate in favor
of the participants who are key employees because, tested separately,
the group of participants receiving an amount of insurance equal to or
greater than 200 percent of compensation would satisfy the requirements
of section 79(d)(2)(A) (by reason of section 79(d)(3)(A)(ii)). If one of
the key employees received an amount of insurance equal to 300 percent
of compensation, the plan would be considered to discriminate in favor
of participants who are key employees, because, tested separately, the
group consisting of the single key employee receiving an amount of
[[Page 309]]
insurance equal to or greater than 300 percent of compensation would
fail to satisfy the requirements of section 79(d)(2)(A).
In determining the groups of employees that are tested separately
for this purpose, allowance shall be made for reasonable differences in
amount of insurance (as a multiple of compensation) due to rounding, the
use of compensation brackets or other similar factors. Thus, if a plan
bases group-term life insurance coverage on ``compensation brackets,''
it is not intended that any participants will be treated as receiving an
amount of insurance (as a multiple of compensation) that is greater (or
less) than that of any other participant merely because the first
participant's compensation is at the lower (or higher) end of a
compensation bracket while the second participant's compensation is at
the higher (or lower) end of a compensation bracket. However, any
compensation brackets utilized by a plan will be examined to determine
if the brackets, or compensation groupings, result in discrimination in
favor of key employees. In addition, a plan does not meet the
requirements for nondiscrimination as to the type and amount of benefits
available under the plan unless all types of benefits (including
permanent benefits) and all terms and conditions with respect to such
benefits which are available to any participant who is a key employee
are also available on a nondiscriminatory basis to non-key employee
participants.
Q-10: How is additional coverage purchased by employees under a plan
of group-term life insurance treated for purposes of determining whether
a plan of group-term life insurance is discriminatory?
A-10: (a) The extent to which employees purchase additional coverage
under a plan of group-term life insurance is not taken into account for
purposes of determining whether a plan of group-term life insurance is
discriminatory. For example, a plan providing insurance to all employees
of 1 times annual compensation, which gives all employees the option to
purchase additional insurance of 1 times annual compensation at their
own expense, would not be considered discriminatory as to the type and
amount of benefits available, even if the group (or groups) of
participants who purchase additional insurance, if tested separately,
would not satisfy the requirements of section 79(d)(2)(A). Solely for
this purpose, the choice of an amount of group-term life insurance as a
benefit under a cafeteria plan will be treated as the purchase of group-
term life insurance by an employee. If additional insurance coverage is
available to any key employee that is not available, on a
nondiscriminatory basis, to non-key employees, the plan will be
considered discriminatory, even if the full cost of such additional
insurance coverage is paid by the employee(s) electing such benefits.
(b) If the employer bears a part of the expense of any additional
coverage that is purchased by an employee under a plan of group-term
life insurance, the additional insurance shall be treated, in part, as
an amount of insurance provided by the employer under the plan and, in
part, as an amount of insurance purchased by the employee. Except to the
extent provided in subparagraph (a) above, the portion of insurance
treated as an amount of insurance purchased by the employee is not taken
into account for purposes of determining whether the plan is
discriminatory. Whether such insurance (together with any other
insurance provided by the employer under the plan) will cause the plan
to be considered to discriminate in favor of participants who are key
employees is determined under the rules of Q&A 9.
Q-11: What effect do the provisions of section 79(d)(1) have if a
plan of group-term life insurance is discriminatory for only part of a
year?
A-11: If a plan of group-term life insurance is discriminatory at
any time during the key employee's taxable year, then it is a
discriminatory group-term life insurance plan for that taxable year and
the provisions of section 79(d)(1) will be applicable with respect to
all group-term life insurance costs allocable to that employee for that
year.
Q-12: Are the section 79(d) provisions independent from the
requirements contained in Treas. Reg. Sec. 1.79-1?
A-12: Yes. Treasury regulation Sec. 1.79-1(c)(1) provides that life
insurance provided to a group of employees cannot
[[Page 310]]
qualify as group-term life insurance if it is provided to less than ten
full-time employees unless certain requirements are satisfied. The
satisfaction of these requirements does not guarantee that the plan will
be nondiscriminatory, and vice versa. Treasury regulation Sec. 1.79-
1(a)(4) provides that life insurance is not group-term life insurance
unless the amount of insurance provided to each employee is computed
under a formula that precludes individual selection. The mere fact that
a life insurance policy is nondiscriminatory is not determinative as to
whether the policy precludes individual selection, and vice versa.
[T.D. 8073, 51 FR 4315, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986]
Sec. 1.82-1 Payments for or reimbursements of expenses of moving from one residence to another residence attributable to employment or self-employment.
(a) Reimbursements in gross income--(1) In general. Any amount
received or accrued, directly or indirectly, by an individual as a
payment for or reimbursement of expenses of moving from one residence to
another residence attributable to employment or self-employment is
includible in gross income under section 82 as compensation for services
in the taxable year received or accrued. For rules relating to the year
a deduction may be allowed for expenses of moving from one residence to
another residence, see section 217 and the regulations thereunder.
(2) Amounts received or accrued as reimbursement or payment. For
purposes of this section, amounts are considered as being received or
accrued by an individual as reimbursement or payment whether received in
the form of money, property, or services. A cash basis taxpayer will
include amounts in gross income under section 82 when they are received
or treated as received by him. Thus, for example, if an employer moves
an employee's household goods and personal effects from the employee's
old resident to his new residence using the employer's facilities, the
employee is considered as having received a payment in the amount of the
fair market value of the services furnished at the time the services are
furnished by the employer. If the employer pays a mover for moving the
employee's household goods and personal effects, the employee is
considered as having received the payment at the time the employer pays
the mover, rather than at the time the mover moves the employee's
household goods and personal effects. Where an employee receives a loan
or advance from an employer to enable him to pay his moving expenses,
the employee will not be deemed to have received a reimbursement of
moving expenses until such time as he accounts to his employer if he is
not required to repay such loan or advance and if he makes such
accounting within a reasonable time. Such loan or advance will be deemed
to be a reimbursement of moving expenses at the time of such accounting
to the extent used by the employee for such moving expenses.
(3) Direct or indirect payments or reimbursements. For purposes of
this section amounts are considered as being received or accrued whether
received directly (paid or provided to an individual by an employer, a
client, a customer, or similar person) or indirectly (paid to a third
party on behalf of an individual by an employer, a client, a customer,
or similar person). Thus, if an employer pays a mover for the expenses
of moving an employee's household goods and personal effects from one
residence to another residence, the employee has indirectly received a
payment which is includible in his gross income under section 82.
(4) Expenses of moving from one residence to another residence. An
expense of moving from one residence to another residence is any
expenditure, cost, loss, or similar item paid or incurred in connection
with a move from one residence to another residence. Moving expenses
include (but are not limited to) any expenditure, cost, loss, or similar
item directly or indirectly resulting from the acquisition, sale, or
exchange of property, the transportation of goods or property, or travel
(by the taxpayer or any other person) in connection with a change in
residence. Such expenses include items described in section 217(b)
(relating to the
[[Page 311]]
definition of moving expenses), irrespective of the dollar limitations
contained in section 217(b)(3) and the conditions contained in section
217(c), as well as items not described in section 217 (b), such as a
loss sustained on the sale or exchange of personal property, storage
charges, taxes, or expenses of refitting rugs or draperies.
(5) Attributable to employment or self-employment. Any amount
received or accrued from an employer, a client, a customer, or similar
person in connection with the performance of services for such employer,
client, customer, or similar person, is attributable to employment or
self-employment. Thus, for example, if an employer reimburses an
employee for a loss incurred on the sale of the employee's house,
reimbursement is attributable to the performance of services if made
because of the employer-employee relationship. Similarly, if an employer
in order to prevent an employee's sustaining a loss on a sale of a house
acquires the property from the employee at a price in excess of fair
market value, the employee is considered to have received a payment
attributable to employment to the extent that such payment exceeds the
fair market value of the property.
(b) Effective date--(1) In general. Except as provided in
subparagraph (2) of this paragraph, paragraph (a) of this section is
applicable only to amounts received or accrued in taxable years
beginning after December 31, 1969.
(2) Election with respect to payments or reimbursements for expenses
paid or incurred before January 1, 1971. Paragraph (a) of this section
does not apply with respect to moving expenses paid or incurred before
January 1, 1971, in connection with the commencement of work by an
employee at a new principal place of work where such employee had been
notified by his employer on or before December 19, 1969, of such move
and the employee makes an election under paragraph (h) of Sec. 1.217-2.
[T.D. 7195, 37 FR 13533, July 11, 1972, as amended by T.D. 7578, 43 FR
59355, Dec. 20, 1978]
Sec. 1.83-1 Property transferred in connection with the performance of services.
(a) Inclusion in gross income--(1) General rule. Section 83 provides
rules for the taxation of property transferred to an employee or
independent contractor (or beneficiary thereof) in connection with the
performance of services by such employee or independent contractor. In
general, such property is not taxable under section 83(a) until it has
been transferred (as defined in Sec. 1.83-3(a)) to such person and
become substantially vested (as defined in Sec. 1.83-3(b)) in such
person. In that case, the excess of--
(i) The fair market value of such property (determined without
regard to any lapse restriction, as defined in Sec. 1.83-3(i)) at the
time that the property becomes substantially vested, over
(ii) The amount (if any) paid for such property,
shall be included as compensation in the gross income of such employee
or independent contractor for the taxable year in which the property
becomes substantially vested. Until such property becomes substantially
vested, the transferor shall be regarded as the owner of such property,
and any income from such property received by the employee or
independent contractor (or beneficiary thereof) or the right to the use
of such property by the employee or independent contractor constitutes
additional compensation and shall be included in the gross income of
such employee or independent contractor for the taxable year in which
such income is received or such use is made available. This paragraph
applies to a transfer of property in connection with the performance of
services even though the transferor is not the person for whom such
services are performed.
(2) Life insurance. The cost of life insurance protection under a
life insurance contract, retirement income contract, endowment contract,
or other contract providing life insurance protection is taxable
generally under section 61 and the regulations thereunder during the
period such contract remains substantially nonvested (as defined in
Sec. 1.83-3(b)). The cost of such life insurance protection is the
reasonable
[[Page 312]]
net premium cost, as determined by the Commissioner, of the current life
insurance protection (as defined in Sec. 1.72-16(b)(3)) provided by such
contract.
(3) Cross references. For rules concerning the treatment of
employers and other transferors of property in connection with the
performance of services, see section 83(h) and Sec. 1.83-6. For rules
concerning the taxation of beneficiaries of an employees' trust that is
not exempt under section 501(a), see section 402(b) and the regulations
thereunder.
(b) Subsequent sale, forfeiture, or other disposition of nonvested
property. (1) If substantially nonvested property (that has been
transferred in connection with the performance of services) is
subsequently sold or otherwise disposed of to a third party in an arm's
length transaction while still substantially nonvested, the person who
performed such services shall realize compensation in an amount equal to
the excess of--
(i) The amount realized on such sale or other disposition, over
(ii) The amount (if any) paid for such property.
Such amount of compensation is includible in his gross income in
accordance with his method of accounting. Two preceding sentences also
apply when the person disposing of the property has received it in a
non-arm's length transaction described in paragraph (c) of this section.
In addition, section 83(a) and paragraph (a) of this section shall
thereafter cease to apply with respect to such property.
(2) If substantially nonvested property that has been transferred in
connection with the performance of services to the person performing
such services is forfeited while still substantially nonvested and held
by such person, the difference between the amount paid (if any) and the
amount received upon forfeiture (if any) shall be treated as an ordinary
gain or loss. This paragraph (b)(2) does not apply to property to which
Sec. 1.83-2(a) applies.
(3) This paragraph (b) shall not apply to, and no gain shall be
recognized on, any sale, forfeiture, or other disposition described in
this paragraph to the extent that any property received in exchange
therefor is substantially nonvested. Instead, section 83 and this
section shall apply with respect to such property received (as if it
were substituted for the property disposed of).
(c) Dispositions of nonvested property not at arm's length. If
substantially nonvested property (that has been transferred in
connection with the performance of services) is disposed of in a
transaction which is not at arm's length and the property remains
substantially nonvested, the person who performed such services realizes
compensation equal in amount to the sum of any money and the fair market
value of any substantially vested property received in such disposition.
Such amount of compensation is includible in his gross income in
accordance with his method of accounting. However, such amount of
compensation shall not exceed the fair market value of the property
disposed of at the time of disposition (determined without regard to any
lapse restriction), reduced by the amount paid for such property. In
addition, section 83 and these regulations shall continue to apply with
respect to such property, except that any amount previously includible
in gross income under this paragraph (c) shall thereafter be treated as
an amount paid for such property. For example, if in 1971 an employee
pays $50 for a share of stock which has a fair market value of $100 and
is substantially monvested at that time and later in 1971 (at a time
when the property still has a fair market value of $100 and is still
substantially nonvested) the employee disposes of, in a transaction not
at arm's length, the share of stock to his wife for $10, the employee
realizes compensation of $10 in 1971. If in 1972, when the share of
stock has a fair market value of $120, it becomes substantially vested,
the employee realizes additional compensation in 1972 in the amount of
$60 (the $120 fair market value of the stock less both the $50 price
paid for the stock and the $10 taxed as compensation in 1971). For
purposes of this paragraph, if substantially nonvested property has been
transferred to a person other than the person who performed the
services, and
[[Page 313]]
the transferee dies holding the property while the property is still
substantially nonvested and while the person who performed the services
is alive, the transfer which results by reason of the death of such
transferee is a transfer not at arm's length.
(d) Certain transfers upon death. If substantially nonvested
property has been transferred in connection with the performance of
services and the person who performed such services dies while the
property is still substantially nonvested, any income realized on or
after such death with respect to such property under this section is
income in respect of a decedent to which the rules of section 691 apply.
In such a case the income in respect of such property shall be taxable
under section 691 (except to the extent not includible under section
101(b)) to the estate or beneficiary of the person who performed the
services, in accordance with section 83 and the regulations thereunder.
However, if an item of income is realized upon such death before July
21, 1978, because the property became substantially vested upon death,
the person responsible for filing decedent's income tax return for
decedent's last taxable year may elect to treat such item as includible
in gross income for decedent's last taxable year by including such item
in gross income on the return or amended return filed for decedent's
last taxable year.
(e) Forfeiture after substantial vesting. If a person is taxable
under section 83(a) when the property transferred becomes substantially
vested and thereafter the person's beneficial interest in such property
is nevertheless forfeited pursuant to a lapse restriction, any loss
incurred by such person (but not by a beneficiary of such person) upon
such forfeiture shall be an ordinary loss to the extent the basis in
such property has been increased as a result of the recognition of
income by such person under section 83(a) with respect to such property.
(f) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). On November 1, 1978, X corporation sells to E, an
employee, 100 shares of X corporation stock at $10 per share. At the
time of such sale the fair market value of the X corporation stock is
$100 per share. Under the terms of the sale each share of stock is
subject to a substantial risk of forfeiture which will not lapse until
November 1, 1988. Evidence of this restriction is stamped on the face of
E's stock certificates, which are therefore nontransferable (within the
meaning of Sec. 1.83-3(d)). Since in 1978 E's stock is substantially
nonvested, E does not include any of such amount in his gross income as
compensation in 1978. On November 1, 1988, the fair market value of the
X corporation stock is $250 per share. Since the X corporation stock
becomes substantially vested in 1988, E must include $24,000 (100 shares
of X corporation stock x $250 fair market value per share less $10 price
paid by E for each share) as compensation for 1988. Dividends paid by X
to E on E's stock after it was transferred to E on November 1, 1973, are
taxable to E as additional compensation during the period E's stock is
substantially nonvested and are deductible as such by X.
Example (2). Assume the facts are the same as in example (1), except
that on November 1, 1985, each share of stock of X corporation in E's
hands could as a matter of law be transferred to a bona fide purchaser
who would not be required to forfeit the stock if the risk of forfeiture
materialized. In the event, however, that the risk materializes, E would
be liable in damages to X. On November 1, 1985, the fair market value of
the X corporation stock is $230 per share. Since E's stock is
transferable within the meaning of Sec. 1.83-3(d) in 1985, the stock is
substantially vested and E must include $22,000 (100 shares of X
corporation stock x $230 fair market value per share less $10 price paid
by E for each share) as compensation for 1985.
Example (3). Assume the facts are the same as in example (1) except
that, in 1984 E sells his 100 shares of X corporation stock in an arm's
length sale to I, an investment company, for $120 per share. At the time
of this sale each share of X corporation's stock has a fair market value
of $200. Under paragraph (b) of this section, E must include $11,000
(100 shares of X corporation stock x $120 amount realized per share less
$10 price paid by E per share) as compensation for 1984 notwithstanding
that the stock remains nontransferable and is still subject to a
substantial risk of forfeiture at the time of such sale. Under
Sec. 1.83-4(b)(2), I's basis in the X corporation stock is $120 per
share.
[T.D. 7554, 43 FR 31913, July 24, 1978]
Sec. 1.83-2 Election to include in gross income in year of transfer.
(a) In general. If property is transferred (within the meaning of
Sec. 1.83-3(a)) in connection with the performance of services, the
person performing such services may elect to include in
[[Page 314]]
gross income under section 83(b) the excess (if any) of the fair market
value of the property at the time of transfer (determined without regard
to any lapse restriction, as defined in Sec. 1.83-3(i)) over the amount
(if any) paid for such property, as compensation for services. The fact
that the transferee has paid full value for the property transferred,
realizing no bargain element in the transaction, does not preclude the
use of the election as provided for in this section. If this election is
made, the substantial vesting rules of section 83(a) and the regulations
thereunder do not apply with respect to such property, and except as
otherwise provided in section 83(d)(2) and the regulations thereunder
(relating to the cancellation of a nonlapse restriction), any subsequent
appreciation in the value of the property is not taxable as compensation
to the person who performed the services. Thus, property with respect to
which this election is made shall be includible in gross income as of
the time of transfer, even though such property is substantially
nonvested (as defined in Sec. 1.83-3(b)) at the time of transfer, and no
compensation will be includible in gross income when such property
becomes substantially vested (as defined in Sec. 1.83-3(b)). In
computing the gain or loss from the subsequent sale or exchange of such
property, its basis shall be the amount paid for the property increased
by the amount included in gross income under section 83(b). If property
for which a section 83(b) election is in effect is forfeited while
substantially nonvested, such forfeiture shall be treated as a sale or
exchange upon which there is realized a loss equal to the excess (if
any) of--
(1) The amount paid (if any) for such property, over,
(2) The amount realized (if any) upon such forfeiture.
If such property is a capital asset in the hands of the taxpayer, such
loss shall be a capital loss. A sale or other disposition of the
property that is in substance a forfeiture, or is made in contemplation
of a forfeiture, shall be treated as a forfeiture under the two
immediately preceding sentences.
(b) Time for making election. Except as provided in the following
sentence, the election referred to in paragraph (a) of this section
shall be filed not later than 30 days after the date the property was
transferred (or, if later, January 29, 1970) and may be filed prior to
the date of transfer. Any statement filed before February 15, 1970,
which was amended not later than February 16, 1970, in order to make it
conform to the requirements of paragraph (e) of this section, shall be
deemed a proper election under section 83(b).
(c) Manner of making election. The election referred to in paragraph
(a) of this section is made by filing one copy of a written statement
with the internal revenue office with whom the person who performed the
services files his return. In addition, one copy of such statement shall
be submitted with this income tax return for the taxable year in which
such property was transferred.
(d) Additional copies. The person who performed the services shall
also submit a copy of the statement referred to in paragraph (c) of this
section to the person for whom the services are performed. In addition,
if the person who performs the services and the transferee of such
property are not the same person, the person who performs the services
shall submit a copy of such statement to the transferee of the property.
(e) Content of statement. The statement shall be signed by the
person making the election and shall indicate that it is being made
under section 83(b) of the Code, and shall contain the following
information:
(1) The name, address and taxpayer identification number of the
taxpayer;
(2) A description of each property with respect to which the
election is being made;
(3) The date or dates on which the property is tansferred and the
taxable year (for example, ``calendar year 1970'' or ``fiscal year
ending May 31, 1970'') for which such election was made;
(4) The nature of the restriction or restrictions to which the
property is subject;
(5) The fair market value at the time of transfer (determined
without regard to any lapse restriction, as defined in Sec. 1.83-3(i))
of each property with respect to which the election is being made;
[[Page 315]]
(6) The amount (if any) paid for such property; and
(7) With respect to elections made after July 21, 1978, a statement
to the effect that copies have been furnished to other persons as
provided in paragraph (d) of this section.
(f) Revocability of election. An election under section 83(b) may
not be revoked except with the consent of the Commissioner. Consent will
be granted only in the case where the transferee is under a mistake of
fact as to the underlying transaction and must be requested within 60
days of the date on which the mistake of fact first became known to the
person who made the election. In any event, a mistake as to the value,
or decline in the value, of the property with respect to which an
election under section 83(b) has been made or a failure to perform an
act contemplated at the time of transfer of such property does not
constitute a mistake of fact.
[T.D. 7554, 43 FR 31915, July 24, 1978]
Sec. 1.83-3 Meaning and use of certain terms.
(a) Transfer--(1) In general. For purposes of section 83 and the
regulations thereunder, a transfer of property occurs when a person
acquires a beneficial ownership interest in such property (disregarding
any lapse restriction, as defined in Sec. 1.83-3(i)).
(2) Option. The grant of an option to purchase certain property does
not constitute a transfer of such property. However, see Sec. 1.83-7 for
the extent to which the grant of the option itself is subject to section
83. In addition, if the amount paid for the transfer of property is an
indebtedness secured by the transferred property, on which there is no
personal liability to pay all or a substantial part of such
indebtedness, such transaction may be in substance the same as the grant
of an option. The determination of the substance of the transaction
shall be based upon all the facts and circumstances. The factors to be
taken into account include the type of property involved, the extent to
which the risk that the property will decline in value has been
transferred, and the likelihood that the purchase price will, in fact,
be paid. See also Sec. 1.83-4(c) for the treatment of forgiveness of
indebtedness that has constituted an amount paid.
(3) Requirement that property be returned. Similarly, no transfer
may have occurred where property is transferred under conditions that
require its return upon the happening of an event that is certain to
occur, such as the termination of employment. In such a case, whether
there is, in fact, a transfer depends upon all the facts and
circumstances. Factors which indicate that no transfer has occurred are
described in paragraph (a) (4), (5), and (6) of this section.
(4) Similarity to option. An indication that no transfer has
occurred is the extent to which the conditions relating to a transfer
are similar to an option.
(5) Relationship to fair market value. An indication that no
transfer has occurred is the extent to which the consideration to be
paid the transferee upon surrendering the property does not approach the
fair market value of the property at the time of surrender. For purposes
of paragraph (a) (5) and (6) of this section, fair market value includes
fair market value determined under the rules of Sec. 1.83-5(a)(1),
relating to the valuation of property subject to nonlapse restrictions.
Therefore, the existence of a nonlapse restriction referred to in
Sec. 1.83-5(a)(1) is not a factor indicating no transfer has occurred.
(6) Risk of loss. An indication that no transfer has occurred is the
extent to which the transferee does not incur the risk of a beneficial
owner that the value of the property at the time of transfer will
decline substantially. Therefore, for purposes of this (6), risk of
decline in property value is not limited to the risk that any amount
paid for the property may be lost.
(7) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). On January 3, 1971, X corporation sells for $500 to S,
a salesman of X, 10 shares of stock in X corporation with a fair market
value of $1,000. The stock is nontransferable and subject to return to
the corporation (for $500) if S's sales do not reach a certain level by
December 31, 1971. Disregarding the restriction concerning S's sales
(since the restrictions is a lapse restriction), S's interest in the
stock is that of a beneficial owner and therefore a transfer occurs on
January 3, 1971.
[[Page 316]]
Example (2). On November 17, 1972, W sells to E 100 shares of stock
in W corporation with a fair market value of $10,000 in exchange for a
$10,000 note without personal liability. The note requires E to make
yearly payments of $2,000 commencing in 1973. E collects the dividends,
votes the stock and pays the interest on the note. However, he makes no
payments toward the face amount of the note. Because E has no personal
liability on the note, and since E is making no payments towards the
face amount of the note, the likelihood of E paying the full purchase
price is in substantial doubt. As a result E has not incurred the risks
of a beneficial owner that the value of the stock will decline.
Therefore, no transfer of the stock has occurred on November 17, 1972,
but an option to purchase the stock has been granted to E.
Example (3). On January 3, 1971, X corporation purports to transfer
to E, an employee, 100 shares of stock in X corporation. The X stock is
subject to the sole restriction that E must sell such stock to X on
termination of employment for any reason for an amount which is equal to
the excess (if any) of the book value of the X stock at termination of
employment over book value on January 3, 1971. The stock is not
transferable by E and the restrictions on transfer are stamped on the
certificate. Under these facts and circumstances, there is no transfer
of the X stock within the meeting of section 83.
Example (4). Assume the same facts as in example (3) except that E
paid $3,000 for the stock and that the restriction required E upon
termination of employment to sell the stock to M for the total amount of
dividends that have been declared on the stock since September 2, 1971,
or $3,000 whichever is higher. Again, under the facts and circumstances,
no transfer of the X stock has occurred.
Example (5). On July 4, 1971, X corporation purports to transfer to
G, an employee, 100 shares of X stock. The stock is subject to the sole
restriction that upon termination of employment G must sell the stock to
X for the greater of its fair market value at such time or $100, the
amount G paid for the stock. On July 4, 1971 the X stock has a fair
market value of $100. Therefore, G does not incur the risk of a
beneficial owner that the value of the stock at the time of transfer
($100) will decline substantially. Under these facts and circumstances,
no transfer has occurred.
(b) Substantially vested and substantially nonvested property. For
purposes of section 83 and the regulations thereunder, property is
substantially nonvested when it is subject to a substantial risk of
forfeiture, within the meaning of paragraph (c) of this section, and is
nontransferable, within the meaning of paragraph (d) of this section.
Property is substantially vested for such purposes when it is either
transferable or not subject to a substantial risk of forfeiture.
(c) Substantial risk of forfeiture--(1) In general. For purposes of
section 83 and the regulations thereunder, whether a risk of forfeiture
is substantial or not depends upon the facts and circumstances. A
substantial risk of forfeiture exists where rights in property that are
transferred are conditioned, directly or indirectly, upon the future
performance (or refraining from performance) of substantial services by
any person, or the occurrence of a condition related to a purpose of the
transfer, and the possibility of forfeiture is substantial if such
condition is not satisfied.
Property is not transferred subject to a substantial risk of forfeiture
to the extent that the employer is required to pay the fair market value
of a portion of such property to the employee upon the return of such
property. The risk that the value of property will decline during a
certain period of time does not constitute a substantial risk of
forfeiture. A nonlapse restriction, standing by itself, will not result
in a substantial risk of forfeiture.
(2) Illustrations of substantial risks of forfeiture. The regularity
of the performance of services and the time spent in performing such
services tend to indicate whether services required by a condition are
substantial. The fact that the person performing services has the right
to decline to perform such services without forfeiture may tend to
establish that services are insubstantial. Where stock is transferred to
an underwriter prior to a public offering and the full enjoyment of such
stock is expressly or impliedly conditioned upon the successful
completion of the underwriting, the stock is subject to a substantial
risk of forfeiture. Where an employee receives property from an employer
subject to a requirement that it be returned if the total earnings of
the employer do not increase, such property is subject to a substantial
risk of forfeiture. On the other hand, requirements that the property be
returned to the employer if the employee
[[Page 317]]
is discharged for cause or for committing a crime will not be considered
to result in a substantial risk of forfeiture. An enforceable
requirement that the property be returned to the employer if the
employee accepts a job with a competing firm will not ordinarily be
considered to result in a substantial risk of forfeiture unless the
particular facts and circumstances indicate to the contrary. Factors
which may be taken into account in determining whether a convenant not
to compete constitutes a substantial risk of forfeiture are the age of
the employee, the availability of alternative employment opportunities,
the likelihood of the employee's obtaining such other employment, the
degree of skill possessed by the employee, the employee's health, and
the practice (if any) of the employer to enforce such covenants.
Similarly, rights in property transferred to a retiring employee subject
to the sole requirement that it be returned unless he renders consulting
services upon the request of his former employer will not be considered
subject to a substantial risk of forfeiture unless he is in fact
expected to perform substantial services.
(3) Enforcement of forfeiture condition. In determining whether the
possibility of forfeiture is substantial in the case of rights in
property transferred to an employee of a corporation who owns a
significant amount of the total combined voting power or value of all
classes of stock of the employer corporation or of its parent
corporation, there will be taken into account (i) the employee's
relationship to other stockholders and the extent of their control,
potential control and possible loss of control of the corporation, (ii)
the position of the employee in the corporation and the extent to which
he is subordinate to other employees, (iii) the employee's relationship
to the officers and directors of the corporation, (iv) the person or
persons who must approve the employee's discharge, and (v) past actions
of the employer in enforcing the provisions of the restrictions. For
example, if an employee would be considered as having received rights in
property subject to a substantial risk of forfeiture, but for the fact
that the employee owns 20 percent of the single class of stock in the
transferor corporation, and if the remaining 80 percent of the class of
stock is owned by an unrelated individual (or members of such an
individual's family) so that the possibility of the corporation
enforcing a restriction on such rights is substantial, then such rights
are subject to a substantial risk of forfeiture. On the other hand, if 4
percent of the voting power of all the stock of a corporation is owned
by the president of such corporation and the remaining stock is so
diversely held by the public that the president, in effect, controls the
corporation, then the possibility of the corporation enforcing a
restriction on rights in property transferred to the president is not
substantial, and such rights are not subject to a substantial risk of
forfeiture.
(4) Examples. The rules contained in paragraph (c)(1) of this
section may be illustrated by the following examples. In each example it
is assumed that, if the conditions on transfer are not satisfied, the
forfeiture provision will be enforced.
Example (1). On November 1, 1971, corporation X transfers in
connection with the performance of services to E, an employee, 100
shares of corporation X stock for $90 per share. Under the terms of the
transfer, E will be subject to a binding commitment to resell the stock
to corporation X at $90 per share if he leaves the employment of
corporation X for any reason prior to the expiration of a 2-year period
from the date of such transfer. Since E must perform substantial
services for corporation X and will not be paid more than $90 for the
stock, regardless of its value, if he fails to perform such services
during such 2-year period, E's rights in the stock are subject to a
substantial risk of forfeiture during such period.
Example (2). On November 10, 1971, corporation X transfers in
connection with the performance of services to a trust for the benefit
of employees, $100x. Under the terms of the trust any child of an
employee who is an enrolled full-time student at an accredited
educational institution as a candidate for a degree will receive an
annual grant of cash for each academic year the student completes as a
student in good standing, up to a maximum of four years. E, an employee,
has a child who is enrolled as a full-time student at an accredited
college as a candidate for a degree. Therefore, E has a beneficial
interest in the assets of the trust equalling the value of four cash
grants. Since E's child must complete one year of college in order to
receive a cash grant, E's interest in the trust
[[Page 318]]
assets are subject to a substantial risk of forfeiture to the extent E's
child has not become entitled to any grants.
Example (3). On November 25, 1971, corporation X gives to E, an
employee, in connection with his performance of services to corporation
X, a bonus of 100 shares of corporation X stock. Under the terms of the
bonus arrangement E is obligated to return the corporation X stock to
corporation X if he terminates his employment for any reason. However,
for each year occurring after November 25, 1971, during which E remains
employed with corporation X, E ceases to be obligated to return 10
shares of the corporation X stock. Since in each year occurring after
November 25, 1971, for which E remains employed he is not required to
return 10 shares of corporation X's stock, E's rights in 10 shares each
year for 10 years cease to be subject to a substantial risk of
forfeiture for each year he remains so employed.
Example (4). (a) Assume the same facts as in example (3) except that
for each year occurring after November 25, 1971, for which E remains
employed with corporation X, X agrees to pay, in redemption of the bonus
shares given to E if he terminates employment for any reason, 10 percent
of the fair market value of each share of stock on the date of such
termination of employment. Since corporation X will pay E 10 percent of
the value of his bonus stock for each of the 10 years after November 25,
1971, in which he remains employed by X, and the risk of a decline in
value is not a substantial risk of forfeiture, E's interest in 10
percent of such bonus stock becomes substantially vested in each of
those years.
(b) The following chart illustrates the fair market value of the
bonus stock and the fair market value of the portion of bonus stock that
becomes substantially vested on November 25, for the following years:
------------------------------------------------------------------------
Fair market value of
-----------------------
Portion of
Year stock that
All stock becomes
vested
------------------------------------------------------------------------
1972............................................ $200 $20
1973............................................ 300 30
1974............................................ 150 15
1975............................................ 150 15
1976............................................ 100 10
------------------------------------------------------------------------
If E terminates his employment on July 1, 1977, when the fair market
value of the bonus stock is $100, E must return the bonus stock to X,
and X must pay, in redemption of the bonus stock, $50 (50 percent of the
value of the bonus stock on the date of termination of employment). E
has recognized income under section 83(a) and Sec. 1.83-1(a) with
respect to 50 percent of the bonus stock, and E's basis in that portion
of the stock equals the amount of income recognized, $90. Under
Sec. 1.83-1(e), the $40 loss E incurred upon forfeiture ($90 basis less
$50 redemption payment) is an ordinary loss.
Example (5). On January 7, 1971, corporation X, a computer service
company, transfers to E, 100 shares of corporation X stock for $50. E is
a highly compensated salesman who sold X's products in a three-state
area since 1960. At the time of transfer each share of X stock has a
fair market value of $100. The stock is transferred to E in connection
with his termination of employment with X. Each share of X stock is
subject to the sole condition that E can keep such share only if he does
not engage in competition with X for a 5-year period in the three-state
area where E had previously sold X's products. E, who is 45 years old,
has no intention of retiring from the work force. In order to earn a
salary comparable to his current compensation, while preventing the risk
of forfeiture from arising, E will have to expend a substantial amount
of time and effort in another industry or market to establish the
necessary business contacts. Thus, under these facts and circumstances
E's rights in the stock are subject to a substantial risk of forfeiture.
(d) Transferability of property. For purposes of section 83 and the
regulations thereunder, the rights of a person in property are
transferable if such person can transfer any interest in the property to
any person other than the transferor of the property, but only if the
rights in such property of such transferee are not subject to a
substantial risk of forfeiture. Accordingly, property is transferable if
the person performing the services or receiving the property can sell,
assign, or pledge (as collateral for a loan, or as security for the
performance of an obligation, or for any other purpose) his interest in
the property to any person other than the transferor of such property
and if the transferee is not required to give up the property or its
value in the event the substantial risk of forfeiture materializes. On
the other hand, property is not considered to be transferable merely
because the person performing the services or receiving the property may
designate a beneficiary to receive the property in the event of his
death.
(e) Property. For purposes of section 83 and the regulations
thereunder, the term ``property'' includes real and personal property
other than either money or an unfunded and unsecured promise to pay
money or property in the future. The term also includes a
[[Page 319]]
beneficial interest in assets (including money) which are transferred or
set aside from the claims of creditors of the transferor, for example,
in a trust or escrow account. See, however, Sec. 1.83-8(a) with respect
to employee trusts and annuity plans subject to section 402(b) and
section 403(c). In the case of a transfer of a life insurance contract,
retirement income contract, endowment contract, or other contract
providing life insurance protection, only the cash surrender value of
the contract is considered to be property. Where rights in a contract
providing life insurance protection are substantially nonvested, see
Sec. 1.83-1(a)(2) for rules relating to taxation of the cost of life
insurance protection.
(f) Property transferred in connection with the performance of
services. Property transferred to an employee or an independent
contractor (or beneficiary thereof) in recognition of the performance
of, or the refraining from performance of, services is considered
transferred in connection with the performance of services within the
meaning of section 83. The existence of other persons entitled to buy
stock on the same terms and conditions as an employee, whether pursuant
to a public or private offering may, however, indicate that in such
circumstances a transfer to the employee is not in recognition of the
performance of, or the refraining from performance of, services. The
transfer of property is subject to section 83 whether such transfer is
in respect of past, present, or future services.
(g) Amount paid. For purposes of section 83 and the regulations
thereunder, the term ``amount paid'' refers to the value of any money or
property paid for the transfer of property to which section 83 applies,
and does not refer to any amount paid for the right to use such property
or to receive the income therefrom. Such value does not include any
stated or unstated interest payments. For rules regarding the
calculation of the amount of unstated interest payments, see Sec. 1.483-
1(c). When section 83 applies to the transfer of property pursuant to
the exercise of an option, the term ``amount paid'' refers to any amount
paid for the grant of the option plus any amount paid as the exercise
price of the option. For rules regarding the forgiveness of indebtedness
treated as an amount paid, see Sec. 1.83-4(c).
(h) Nonlapse restriction. For purposes of section 83 and the
regulations thereunder, a restriction which by its terms will never
lapse (also referred to as a ``nonlapse restriction'') is a permanent
limitation on the transferability of property--
(1) Which will require the transferee of the property to sell, or
offer to sell, such property at a price determined under a formula, and
(2) Which will continue to apply to and be enforced against the
transferee or any subsequent holder (other than the transferor).
A limitation subjecting the property to a permanent right of first
refusal in a particular person at a price determined under a formula is
a permanent nonlapse restriction. Limitations imposed by registration
requirements of State or Federal security laws or similar laws imposed
with respect to sales or other dispositions of stock or securities are
not nonlapse restrictions. An obligation to resell or to offer to sell
property transferred in connection with the performance of services to a
specific person or persons at its fair market value at the time of such
sale is not a nonlapse restriction. See Sec. 1.83-5(c) for examples of
nonlapse restrictions.
(i) Lapse restriction. For purposes of section 83 and the
regulations thereunder, the term ``lapse restriction'' means a
restriction other than a nonlapse restriction as defined in paragraph
(h) of this section, and includes (but is not limited to) a restriction
that carries a substantial risk of forfeiture.
(j) Sales which may give rise to suit under section 16(b) of the
Securities Exchange Act of 1934--(1) In general. For purposes of section
83 and the regulations thereunder if the sale of property at a profit
within six months after the purchase of the property could subject a
person to suit under section 16(b) of the Securities Exchange Act of
1934, the person's rights in the property are treated as subject to a
substantial risk of forfeiture and as not transferable until the earlier
of (i) the expiration of such six-month period, or (ii) the first
[[Page 320]]
day on which the sale of such property at a profit will not subject the
person to suit under section 16(b) of the Securities Exchange Act of
1934. However, whether an option is ``transferable by the optionee'' for
purposes of Sec. 1.83-7(b)(2)(i) is determined without regard to section
83(c)(3) and this paragraph (j).
(2) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). On January 1, 1983, X corporation sells to P, a
beneficial owner of 12% of X corporation stock, in connection with P's
performance of services, 100 shares of X corporation stock at $10 per
share. At the time of the sale the fair market value of the X
corporation stock is $100 per share. P, as a beneficial owner of more
10% of X corporation stock, is liable to suit under section 16(b) of the
Securities Exchange Act of 1934 for recovery of any profit from any sale
and purchase or purchase and sale of X corporation stock within a six-
month period, but no other restrictions apply to the stock. Because the
section 16(b) restriction is applicable to P, P's rights in the 100
shares of stock purchased on January 1, 1983, are treated as subject to
a substantial risk of forfeiture and as not transferable through June
29, 1983. P chooses not to make an election under section 83 (b) and
therefore does not include any amount with respect to the stock purchase
in gross income as compensation on the date of purchase. On June 30,
1983, the fair market value of X corporation stock is $250 per share. P
must include $24,000 (100 shares of X corporation stock x $240 ($250
fair market value per share less $10 price paid by P for each share)) in
gross income as compensation on June 30, 1983. If, in this example,
restrictions other than section 16(b) applied to the stock, such other
restrictions (but not section 16(b)) would be taken into account in
determining whether the stock is subject to a substantial risk of
foreiture and is nontransferable for periods after June 29, 1983.
Example (2). Assume the same facts as in example (1) except that P
is not an insider on or after May 1, 1983, and the section 16(b)
restriction does not apply beginning on that date. On May 1, 1983, P
must include in gross income as compensation the difference between the
fair market value of the stock on that date and the amount paid for the
stock.
Example (3). Assume the same facts as in example (1) except that on
June 1, 1983, X corporation sells to P an additional 100 shares of X
corporation stock at $20 per share. At the time of the sale the fair
market value of the X corporation stock is $150 per share. On June 30,
1983, P must include $24,000 in gross income as compensation with
respect to the January 1, 1983 purchase. On November 30, 1983, the fair
market value of X corporation stock is $200 per share. Accordingly, on
that date P must include $18,000 (100 shares of X corporation stock x
$180 ($200 fair market value per share less $20 price paid by P for each
share)) in gross income as compensation with respect to the June 1, 1983
purchase.
(3) Effective date. This paragraph applies property transferred
after December 31, 1981.
(k) Special rule for certain accounting rules. (1) For purposes of
section 83 and the regualtions thereunder, property is subject to
substantial risk of forfeiture and is not transferable so long as the
property is subject to a restriction on transfer to comply with the
``Pooling-of-Interests Accounting'' rules set forth in Accounting Series
Release Numbered 130 ((10/5/72) 37 FR 20937; 17 CFR 211.130) and
Accounting Series Release Numbered 135 ((1/18/73) 38 FR 1734; 17 CFR
211.135).
(2) Effective date. This paragraph applies to property transferred
after December 31, 1981.
[T.D. 7554, 43 FR 31916, July 24, 1978, as amended by T.D. 8042, 50 FR
31713, Aug. 6, 1985; 50 FR 39664, Sept. 30, 1985]
Sec. 1.83-4 Special rules.
(a) Holding period. Under section 83(f), the holding period of
transferred property to which section 83(a) applies shall begin just
after such property is substantially vested. However, if the person who
has performed the services in connection with which property is
transferred has made an election under section 83(b), the holding period
of such property shall begin just after the date such property is
transferred. If property to which section 83 and the regulations
thereunder apply is transferred at arm's length, the holding period of
such property in the hands of the transferee shall be determined in
accordance with the rules provided in section 1223.
(b) Basis. (1) Except as provided in paragraph (b)(2) of this
section, if property to which section 83 and the regulations thereunder
apply is acquired by any person (including a person who acquires such
property in a subsequent transfer which is not at arm's length), while
such property is still substantially nonvested, such person's basis
[[Page 321]]
for the property shall reflect any amount paid for such property and any
amount includible in the gross income of the person who performed the
services (including any amount so includible as a result of a
disposition by the person who acquired such property.) Such basis shall
also reflect any adjustments to basis provided under sections 1015 and
1016.
(2) If property to which Sec. 1.83-1 applies is transferred at arm's
length, the basis of the property in the hands of the transferee shall
be determined under section 1012 and the regulations thereunder.
(c) Forgiveness of indebtedness treated as an amount paid. If an
indebtedness that has been treated as an amount paid under Sec. 1.83-
1(a)(1)(ii) is subsequently cancelled, forgiven or satisfied for an
amount less than the amount of such indebtedness, the amount that is
not, in fact, paid shall be includible in the gross income of the
service provider in the taxable year in which such cancellation,
forgiveness or satisfaction occurs.
[T.D. 7554, 43 FR 31918, July 24, 1978]
Sec. 1.83-5 Restrictions that will never lapse.
(a) Valuation. For purposes of section 83 and the regulations
thereunder, in the case of property subject to a nonlapse restriction
(as defined in Sec. 1.83-3(h)), the price determined under the formula
price will be considered to be the fair market value of the property
unless established to the contrary by the Commissioner, and the burden
of proof shall be on the commissioner with respect to such value. If
stock in a corporation is subject to a nonlapse restriction which
requires the transferee to sell such stock only at a formula price based
on book value, a reasonable multiple of earnings or a reasonable
combination thereof, the price so determined will ordinarily be regarded
as determinative of the fair market value of such property for purposes
of section 83. However, in certain circumstances the formula price will
not be considered to be the fair market value of property subject to
such a formula price restriction, even though the formula price
restriction is a substantial factor in determining such value. For
example, where the formula price is the current book value of stock, the
book value of the stock at some time in the future may be a more
accurate measure of the value of the stock than the current book value
of the stock for purposes of determining the fair market value of the
stock at the time the stock becomes substantially vested.
(b) Cancellation--(1) In general. Under section 83(d)(2), if a
nonlapse restriction imposed on property that is subject to section 83
is cancelled, then, unless the taxpayer establishes--
(i) That such cancellation was not compensatory, and
(ii) That the person who would be allowed a deduction, if any, if
the cancellation were treated as compensatory, will treat the
transaction as not compensatory, as provided in paragraph (c)(2) of this
section, the excess of the fair market value of such property (computed
without regard to such restriction) at the time of cancellation, over
the sum of--
(iii) The fair market value of such property (computed by taking the
restriction into account) immediately before the cancellation, and
(iv) The amount, if any, paid for the cancellation, shall be treated
as compensation for the taxable year in which such cancellation occurs.
Whether there has been a noncompensatory cancellation of a nonlapse
restriction under section 83(d)(2) depends upon the particular facts and
circumstances. Ordinarily the fact that the employee or independent
contractor is required to perform additional services or that the salary
or payment of such a person is adjusted to take the cancellation into
account indicates that such cancellation has a compensatory purpose. On
the other hand, the fact that the original purpose of a restriction no
longer exists may indicate that the purpose of such cancellation is
noncompensatory. Thus, for example, if a so-called ``buy-sell''
restriction was imposed on a corporation's stock to limit ownership of
such stock and is being cancelled in connection with a public offering
of the stock, such cancellation will generally be regarded as
noncompensatory. However, the mere fact that the employer is willing to
forego a deduction under section 83(h) is insufficient evidence to
[[Page 322]]
establish a noncompensatory cancellation of a nonlapse restriction. The
refusal by a corporation or shareholder to repurchase stock of the
corporation which is subject to a permanent right of first refusal will
generally be treated as a cancellation of a nonlapse restriction. The
preceding sentence shall not apply where there is no nonlapse
restriction, for example, where the price to be paid for the stock
subject to the right of first refusal is the fair market value of the
stock. Section 83(d)(2) and this (1) do not apply where immediately
after the cancellation of a nonlapse restriction the property is still
substantially nonvested and no section 83(b) election has been made with
respect to such property. In such a case the rules of section 83(a) and
Sec. 1.83-1 shall apply to such property.
(2) Evidence of noncompensatory cancellation. In addition to the
information necessary to establish the factors described in paragraph
(b)(1) of this section, the taxpayer shall request the employer to
furnish the taxpayer with a written statement indicating that the
employer will not treat the cancellation of the nonlapse restriction as
a compensatory event, and that no deduction will be taken with respect
to such cancellation. The taxpayer shall file such written statement
with his income tax return for the taxable year in which or with which
such cancellation occurs.
(c) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). On November 1, 1971, X corporation whose shares are
closely held and not regularly traded, transfers to E, an employee, 100
shares of X corporation stock subject to the condition that, if he
desires to dispose of such stock during the period of his employment, he
must resell the stock to his employer at its then existing book value.
In addition, E or E's estate is obligated to offer to sell the stock at
his retirement or death to his employer at its then existing book value.
Under these facts and circumstances, the restriction to which the shares
of X corporation stock are subject is a nonlapse restriction.
Consequently, the fair market value of the X stock is includible in E's
gross income as compensation for taxable year 1971. However, in
determining the fair market value of the X stock, the book value formula
price will ordinarily be regarded as being determinative of such value.
Example (2). Assume the facts are the same as in example (1), except
that the X stock is subject to the condition that if E desires to
dispose of the stock during the period of his employment he must resell
the stock to his employer at a multiple of earnings per share that is in
this case a reasonable approximation of value at the time of transfer to
E. In addition, E or E's estate is obligated to offer to sell the stock
at his retirement or death to his employer at the same multiple of
earnings. Under these facts and circumstances, the restriction to which
the X corporation stock is subject is a nonlapse restriction.
Consequently, the fair market value of the X stock is includible in E's
gross income for taxable year 1971. However, in determining the fair
market value of the X stock, the multiple-of-earnings formula price will
ordinarily be regarded as determinative of such value.
Example (3). On January 4, 1971, X corporation transfers to E, an
employee, 100 shares of stock in X corporation. Each such share of stock
is subject to an agreement between X and E whereby E agrees that such
shares are to be held solely for investment purposes and not for resale
(a so-called investment letter restriction). E's rights in such stock
are substantially vested upon transfer, causing the fair market value of
each share of X corporation stock to be includible in E's gross income
as compensation for taxable year 1971. Since such an investment letter
restriction does not constitute a nonlapse restriction, in determining
the fair market value of each share, the investment letter restriction
is disregarded.
Example (4). On September 1, 1971, X corporation transfers to B, an
independent contractor, 500 shares of common stock in X corporation in
exchange for B's agreement to provide services in the construction of an
office building on property owned by X corporation. X corporation has
100 shares of preferred stock outstanding and an additional 500 shares
of common stock outstanding. The preferred stock has a liquidation value
of $1,000x, which is equal to the value of all assets owned by X.
Therefore, the book value of the common stock in X corporation is $0.
Under the terms of the transfer, if B wishes to dispose of the stock, B
must offer to sell the stock to X for 150 percent of the then existing
book value of B's common stock. The stock is also subject to a
substantial risk of forfeiture until B performs the agreed-upon
services. B makes a timely election under section 83(b) to include the
value of the stock in gross income in 1971. Under these facts and
circumstances, the restriction to which the shares of X corporation
common stock are subject is a nonlapse restriction. In determining the
fair market value of the X common stock at the time of transfer, the
book value formula price would ordinarily be regarded as determinative
of such value.
[[Page 323]]
However, the fair market value of X common stock at the time of
transfer, subject to the book value restriction, is greater than $0
since B was willing to agree to provide valuable personal services in
exchange for the stock. In determining the fair market value of the
stock, the expected book value after construction of the office building
would be given great weight. The likelihood of completion of
construction would be a factor in determining the expected book value
after completion of construction.
[T.D. 7554, 43 FR 31918, July 24, 1978]
Sec. 1.83-6 Deduction by employer.
(a) Allowance of deduction--(1) General rule. In the case of a
transfer of property in connection with the performance of services, or
a compensatory cancellation of a nonlapse restriction described in
section 83(d) and Sec. 1.83-5, a deduction is allowable under section
162 or 212 to the person for whom the services were performed. The
amount of the deduction is equal to the amount included as compensation
in the gross income of the service provider under section 83 (a), (b),
or (d)(2), but only to the extent the amount meets the requirements of
section 162 or 212 and the regulations thereunder. The deduction is
allowed only for the taxable year of that person in which or with which
ends the taxable year of the service provider in which the amount is
included as compensation. For purposes of this paragraph, any amount
excluded from gross income under section 79 or section 101(b) or
subchapter N is considered to have been included in gross income.
(2) Special Rule. For purposes of paragraph (a)(1) of this section,
the service provider is deemed to have included the amount as
compensation in gross income if the person for whom the services were
performed satisfies in a timely manner all requirements of section 6041
or section 6041A, and the regulations thereunder, with respect to that
amount of compensation. For purposes of the preceding sentence, whether
a person for whom services were performed satisfies all requirements of
section 6041 or section 6041A, and the regulations thereunder, is
determined without regard to Sec. 1.6041-3(c) (exception for payments to
corporations). In the case of a disqualifying disposition of stock
described in section 421(b), an employer that otherwise satisfies all
requirements of section 6041 and the regulations thereunder will be
considered to have done so timely for purposes of this paragraph (a)(2)
if Form W-2 or Form W-2c, as appropriate, is furnished to the employee
or former employee, and is filed with the federal government, on or
before the date on which the employer files the tax return claiming the
deduction relating to the disqualifying disposition.
(3) Exceptions. Where property is substantially vested upon
transfer, the deduction shall be allowed to such person in accordance
with his method of accounting (in conformity with sections 446 and 461).
In the case of a transfer to an employee benefit plan described in
Sec. 1.162-10(a) or a transfer to an employees' trust or annuity plan
described in section 404(a)(5) and the regulations thereunder, section
83(h) and this section do not apply.
(4) Capital expenditure, etc. No deduction is allowed under section
83(h) to the extent that the transfer of property constitutes a capital
expenditure, an item of deferred expense, or an amount properly
includible in the value of inventory items. In the case of a capital
expenditure, for example, the basis of the property to which such
capital expenditure relates shall be increased at the same time and to
the same extent as any amount includible in the employee's gross income
in respect of such transfer. Thus, for example, no deduction is allowed
to a corporation in respect of a transfer of its stock to a promoter
upon its organization, notwithstanding that such promoter must include
the value of such stock in his gross income in accordance with the rules
under section 83.
(5) Effective date. Paragraphs (a)(1) and (2) of this section apply
to deductions for taxable years beginning on or after January 1, 1995.
However, taxpayers may also apply paragraphs (a)(1) and (2) of this
section when claiming deductions for taxable years beginning before that
date if the claims are not barred by the statute of limitations.
Paragraphs (a) (3) and (4) of this section are effective as set forth in
Sec. 1.83-8(b).
(b) Recognition of gain or loss. Except as provided in section 1032,
at the time
[[Page 324]]
of a transfer of property in connection with the performance of services
the transferor recognizes gain to the extent that the transferor
receives an amount that exceeds the transferor's basis in the property.
In addition, at the time a deduction is allowed under section 83(h) and
paragraph (a) of this section, gain or loss is recognized to the extent
of the difference between (1) the sum of the amount paid plus the amount
allowed as a deduction under section 83(h), and (2) the sum of the
taxpayer's basis in the property plus any amount recognized pursuant to
the previous sentence.
(c) Forfeitures. If, under section 83(h) and paragraph (a) of this
section, a deduction, an increase in basis, or a reduction of gross
income was allowable (disregarding the reasonableness of the amount of
compensation) in respect of a transfer of property and such property is
subsequently forfeited, the amount of such deduction, increase in basis
or reduction of gross income shall be includible in the gross income of
the person to whom it was allowable for the taxable year of forfeiture.
The basis of such property in the hands of the person to whom it is
forfeited shall include any such amount includible in the gross income
of such person, as well as any amount such person pays upon forfeiture.
(d) Special rules for transfers by shareholders--(1) Transfers. If a
shareholder of a corporation transfers property to an employee of such
corporation or to an independent contractor (or to a beneficiary
thereof), in consideration of services performed for the corporation,
the transaction shall be considered to be a contribution of such
property to the capital of such corporation by the shareholder, and
immediately thereafter a transfer of such property by the corporation to
the employee or independent contractor under paragraphs (a) and (b) of
this section. For purposes of this (1), such a transfer will be
considered to be in consideration for services performed for the
corporation if either the property transferred is substantially
nonvested at the time of transfer or an amount is includible in the
gross income of the employee or independent contractor at the time of
transfer under Sec. 1.83-1(a)(1) or Sec. 1.83-2(a). In the case of such
a transfer, any money or other property paid to the shareholder for such
stock shall be considered to be paid to the corporation and transferred
immediately thereafter by the corporation to the shareholder as a
distribution to which section 302 applies. For special rules that may
applyto a corporation's transfer of its own stock to any person in
consideration of services performed for another corporation or
partnership, see Sec. 1.1032-3. The preceding sentence applies to
transfers of stock and amounts paid for such stock occurring on or after
May 16, 2000.
(2) Forfeiture. If, following a transaction described in paragraph
(d)(1) of this section, the transferred property is forfeited to the
shareholder, paragraph (c) of this section shall apply both with respect
to the shareholder and with respect to the corporation. In addition, the
corporation shall in the taxable year of forfeiture be allowed a loss
(or realize a gain) to offset any gain (or loss) realized under
paragraph (b) of this section. For example, if a shareholder transfers
property to an employee of the corporation as compensation, and as a
result the shareholder's basis of $200x in such property is allocated to
his stock in such corporation and such corporation recognizes a short-
term capital gain of $800x, and is allowed a deduction of $1,000x on
such transfer, upon a subsequent forfeiture of the property to the
shareholder, the shareholder shall take $200x into gross income, and the
corporation shall take $1,000x into gross income and be allowed a short-
term capital loss of $800x.
(e) Options. [Reserved]
(f) Reporting requirements. [Reserved]
[T.D. 7554, 43 FR 31919, July 24, 1978, as amended by T.D. 8599, July
19, 1995; T.D. 8883, 65 FR 31076, May 16, 2000]
Sec. 1.83-7 Taxation of nonqualified stock options.
(a) In general. If there is granted to an employee or independent
contractor (or beneficiary thereof) in connection with the performance
of services, an option to which section 421 (relating generally to
certain qualified and other options) does not apply, section 83(a) shall
apply to such grant if the option has a readily ascertainable fair
market
[[Page 325]]
value (determined in accordance with paragraph (b) of this section) at
the time the option is granted. The person who performed such services
realizes compensation upon such grant at the time and in the amount
determined under section 83(a). If section 83(a) does not apply to the
grant of such an option because the option does not have a readily
ascertainable fair market value at the time of grant, sections 83(a) and
83(b) shall apply at the time the option is exercised or otherwise
disposed of, even though the fair market value of such option may have
become readily ascertainable before such time. If the option is
exercised, sections 83(a) and 83(b) apply to the transfer of property
pursuant to such exercise, and the employee or independent contractor
realizes compensation upon such transfer at the time and in the amount
determined under section 83(a) or 83(b). If the option is sold or
otherwise disposed of in an arm's length transaction, sections 83(a) and
83(b) apply to the transfer of money or other property received in the
same manner as sections 83(a) and 83(b) would have applied to the
transfer of property pursuant to an exercise of the option.
(b) Readily ascertainable defined--(1) Actively traded on an
established market. Options have a value at the time they are granted,
but that value is ordinarily not readily ascertainable unless the option
is actively traded on an established market. If an option is actively
traded on an established market, the fair market value of such option is
readily ascertainable for purposes of this section by applying the rules
of valuation set forth in Sec. 20.2031-2.
(2) Not actively traded on an established market. When an option is
not actively traded on an established market, it does not have a readily
ascertainable fair market value unless its fair market value can
otherwise be measured with reasonable accuracy. For purposes of this
section, if an option is not actively traded on an established market,
the option does not have a readily ascertainable fair market value when
granted unless the taxpayer can show that all of the following
conditions exist:
(i) The option is transferable by the optionee;
(ii) The option is exerciseable immediately in full by the optionee;
(iii) The option or the property subject to the option is not
subject to any restriction or condition (other than a lien or other
condition to secure the payment of the purchase price) which has a
significant effect upon the fair market value of the option; and
(iv) The fair market value of the option privilege is readily
ascertainable in accordance with paragraph (b)(3) of this section.
(3) Option privilege. The option privilege in the case of an option
to buy is the opportunity to benefit during the option's exercise period
from any increase in the value of property subject to the option during
such period, without risking any capital. Similarly, the option
privilege in the case of an option to sell is the opportunity to benefit
during the exercise period from a decrease in the value of property
subject to the option. For example, if at some time during the exercise
period of an option to buy, the fair market value of the property
subject to the option is greater than the option's exercise price, a
profit may be realized by exercising the option and immediately selling
the property so acquired for its higher fair market value. Irrespective
of whether any such gain may be realized immediately at the time an
option is granted, the fair market value of an option to buy includes
the value of the right to benefit from any future increase in the value
of the property subject to the option (relative to the option exercise
price), without risking any capital. Therefore, the fair market value of
an option is not merely the difference that may exist at a particular
time between the option's exercise price and the value of the property
subject to the option, but also includes the value of the option
privilege for the remainder of the exercise period. Accordingly, for
purposes of this section, in determining whether the fair market value
of an option is readily ascertainable, it is necessary to consider
whether the value of the entire option privilege can be measured with
reasonable accuracy. In determining whether the value of the option
privilege is readily ascertainable, and in determining the amount of
such value when
[[Page 326]]
such value is readily ascertainable, it is necessary to consider--
(i) Whether the value of the property subject to the option can be
ascertained;
(ii) The probability of any ascertainable value of such property
increasing or decreasing; and
(iii) The length of the period during which the option can be
exercised.
(c) Reporting requirements. [Reserved]
[T.D. 7554, 43 FR 31920, July 24, 1978]
Sec. 1.83-8 Applicability of section and transitional rules.
(a) Scope of section 83. Section 83 is not applicable to--
(1) A transaction concerning an option to which section 421 applies;
(2) A transfer to or from a trust described in section 401(a) for
the benefit of employees or their beneficiaries, or a transfer under an
annuity plan that meets the requirements of section 404(a)(2) for the
benefit of employees or their beneficiaries;
(3) The transfer of an option without a readily ascertainable fair
market value (as defined in Sec. 1.83-7(b)(1)); or
(4) The transfer of property pursuant to the exercise of an option
with a readily ascertainable fair market value at the date of grant.
Section 83 applies to a transfer to or from a trust or under an annuity
plan for the benefit of employees, independent contractors, or their
beneficiaries (except as provided in paragraph (a)(2) of this section),
but to the extent a transfer is subject to section 402(b) or 403(c),
section 83 applies to such a transfer only as provided for in section
402(b) or 403(c).
(b) Transitional rules--(1) In general. Except as otherwise provided
in this paragraph, section 83 and the regulations thereunder shall apply
to property transferred after June 30, 1969.
(2) Binding written contracts. Section 83 and the regulations
thereunder shall not apply to property transferred pursuant to a binding
written contract entered into before April 22, 1969. For purposes of
this paragraph, a binding written contract means only a written contract
under which the employee or independent contractor has an enforceable
right to compel the transfer of property or to obtain damages upon the
breach of such contract. A contract which provides that a person's right
to such property is contingent upon the happening of an event (including
the passage of time) may satisfy the requirements of this paragraph.
However, if the event itself, or the determination of whether the event
has occurred, rests with the board of directors or any other individual
or group acting on behalf of the employer (other than an arbitrator),
the contract will not be treated as giving the person an enforceable
right for purposes of this paragraph.
The fact that the board of directors has the power (either expressly or
impliedly) to terminate employment of an officer pursuant to a contract
that contemplates the completion of services over a fixed or
ascertainable period does not negate the existence of a binding written
contract. Nor will the binding nature of the contract be negated by a
provision in such contract which allows the employee or independent
contractor to terminate the contract for any year and receive cash
instead of property if such election would cause a substantial penalty,
such as a forfeiture of part or all of the property received in
connection with the performance of services in an earlier year.
(3) Options granted before April 22, 1969. Section 83 shall not
apply to property received upon the exercise of an option granted before
April 22, 1969.
(4) Certain written plans. Section 83 shall not apply to property
transferred (whether or not by the exercise of an option) before May 1,
1970, pursuant to a written plan adopted and approved before July 1,
1969. A plan is to be considered as having been adopted and approved
before July 1, 1969, only if prior to such date the transferor of the
property undertook an ascertainable course of conduct which under
applicable State law does not require further approval by the board of
directors or the stockholders of any corporation. For example, if a
corporation transfers property to an employee in connection with the
performance of services pursuant to a plan adopted and approved before
July 1, 1969, by the board of directors of such corporation, it is not
necessary that the stockholders have
[[Page 327]]
adopted or approved such plan if State law does not require such
approval. However, such approval is necessary if required by the
articles of incorporation or the bylaws or if, by its terms, such plan
will not become effective without such approval.
(5) Certain options granted pursuant to a binding written contract.
Section 83 shall not apply to property transferred before January 1,
1973, upon the exercise of an option granted pursuant to a binding
written contract (as defined in paragraph (b)(2) of this section)
entered into before April 22, 1969, between a corporation and the
transferor of such property requiring the transferor to grant options to
employees of such corporation (or a subsidiary of such corporation) to
purchase a determinable number of shares of stock of such corporation,
but only if the transferee was an employee of such corporation (or a
subsidiary of such corporation) on or before April 22, 1969.
(6) Certain tax free exchanges. Section 83 shall not apply to
property transferred in exchange for (or pursuant to the exercise of a
conversion privilege contained in) property transferred before July 1,
1969, or in exchange for property to which section 83 does not apply (by
reason of paragraphs (1), (2), (3), or (4) of section 83(i)), if section
354, 355, 356, or 1036 (or so much of section 1031 as relates to section
1036) applies, or if gain or loss is not otherwise required to be
recognized upon the exercise of such conversion privilege, and if the
property received in such exchange is subject to restrictions and
conditions substantially similar to those to which the property given in
such exchange was subject.
[T.D. 7554, 43 FR 31921, July 24, 1978]
Sec. 1.84-1 Transfer of appreciated property to political organizations.
(a) Transfer defined. A transfer after May 7, 1974, of property to a
political organization (as defined in section 527(e)(1), and including a
newsletter fund to the extent provided under section 527(g)) is treated
as a sale of the property to the political organization if the fair
market value of the property exceeds its adjusted basis. The transferor
is treated as having realized an amount equal to the fair market value
of the property on the date of the transfer. For purposes of this
section, a transfer is any assignment, conveyance, or delivery of
property other than a bona fide sale for an adequate and full
consideration in money or money's worth, whether the transfer is in
trust or otherwise, whether the transfer is direct or indirect and
whether the property is real or personal, tangible or intangible. Thus,
for example, a sale at less than fair market value (other than an
ordinary trade discount), or a receipt of property by a political
organization under an agency agreement entitling the organization to
sell the property and retain all or a portion of the proceeds of the
sale, is a transfer within the meaning, of this section. The term
``transfer'' also includes an illegal contribution of property.
(b) Amount realized. A transferor to whom this section applies
realizes an amount equal to the fair market value of the property on the
date of the transfer. For purposes of this section, the definition of
fair market value set forth in Sec. 1.170A-1(c) (2) and (3) is
incorporated by reference.
(c) Amount recognized. A transferor to whom this section applies is
treated as having sold the property to the political organization on the
date of the transfer. Therefore, the rules of chapter 1 of subtitle A
(relating to income tax) apply to the gain realized under this section
as if this gain were an amount realized upon the sale of the property.
These rules include those of section 55 and section 56 (relating to
minimum tax for tax preference), section 306 (relating to disposition of
certain stock), section 1201 (relating to the alternative tax on certain
capital gains), section 1245 (relating to gain from dispositions of
certain depreciable property), and section 1250 (relating to gain from
dispositions of certain depreciable realty).
(d) Holding period. The holding period of property transferred to a
political organization to which this section applies begins on the day
after the date of acquisition of the property by the political
organization.
[T.D. 7671, 45 FR 8003, Feb. 6, 1980]
[[Page 328]]
Sec. 1.85-1 Unemployment compensation.
(a) Introduction. Section 85 prescribes rules relating to the
inclusion in gross income of unemployment compensation (as defined in
paragraph (b)(1) of this section) paid in taxable years beginning after
December 31, 1978, pursuant to governmental programs. In general, these
rules provide that unemployment compensation paid pursuant to
governmental programs is includible in the gross income of a taxpayer if
the taxpayer's modified adjusted gross income (as defined in paragraph
(b)(2) of this section) exceeds a statutory base amount (as defined in
paragraph (b)(3) of this section). If there is such an excess, however,
the amount included in gross income is limited under paragraph (c)(1) of
this section to the lesser of one-half of such excess or the amount of
the unemployment compensation. If such taxpayer's modified adjusted
gross income does not exceed the applicable statutory base amount, none
of the unemployment compensation is included in the taxpayer's gross
income.
(b) Definitions--(1) Unemployment compensation--(i) General rule.
Except as provided in paragraph (b)(1)(iii) of this section, the term
``unemployment compensation'' means any amount received under a law of
the United States, or of a State, which is in the nature of unemployment
compensation. Thus, section 85 applies only to unemployment compensation
paid pursuant to governmental programs and does not apply to amounts
paid pursuant to private nongovernmental unemployment compensation plans
(which are includible in income without regard to section 85).
Generally, unemployment compensation programs are those designed to
protect taxpayers against the loss of income caused by involuntary
layoff. Ordinarily, unemployment compensation is paid in cash and on a
periodic basis. The amount of the payments is usually computed in
accordance with formula based on the taxpayer's length of prior
employment and wages. Such payments, however, may be made in a lump sum
or other than in cash or on some other basis.
(ii) Disability and worker's compensation payments. Amounts in the
nature of unemployment compensation also include cash disability
payments made pursuant to a governmental program as a substitute for
case unemployment payments to an unemployed taxpayer who is ineligible
for such payments solely because of the disability. Usually these
disability payments are paid in the same weekly amount and for the same
period as the unemployment compensation benefits to which the unemployed
taxpayer otherwise would have been entitled. Amounts received under
workmen's compensation acts as compensation for personal injuries or
sickness are not amounts in the nature of unemployment compensation. See
section 104(a)(1) relating to the exclusion from gross income of such
amounts.
(iii) Employee contributions to a governmental plan. If a
governmental unemployment compensation program is funded in part by an
employee's contribution which is not deductible by the employee, an
amount paid to such employee under the program is not to be considered
unemployment compensation until an amount equal to the total
nondeductible contributions paid by the employee to such program has
been paid to such employee.
(iv) Examples of governmental unemployment compensation programs.
Governmental unemployment compensation programs include (but are not
limited to) programs established under:
(A) A State law approved by the Secretary of Labor pursuant to
section 3304 of the Internal Revenue Code of 1954.
(B) Chapter 85 of title 5, United States Code, relating to
unemployment compensation for Federal employees generally and for ex-
servicemen.
(C) Trade Act of 1974, sections 231 and 232 (19 U.S.C. 2291 and
2292).
(D) Disaster Relief Act of 1974, section 407 (42 U.S.C. 5177).
(E) The Airline Deregulation Act of 1978 (49 U.S.C. 1552(b)).
(F) The Railroad Unemployment Insurance Act, section 2 (45 U.S.C.
352).
(2) Modified adjusted gross income. The term ``modified adjusted
gross income'' means the sum of the following amounts:
(i) Adjusted gross income (as defined in section 62);
[[Page 329]]
(ii) All disability payments of the type that are eligible for
exclusion from gross income under section 105(d); and
(iii) All amounts of unemployment compensation (as defined in
paragraph (b)(1) of this section).
(3) Base amount. The term ``base amount'' means--
(i) $25,000 in the case of a joint return under section 6013.
(ii) Zero in the case of a taxpayer who--
(A) Is married (within the meaning of section 143) at the close of
the taxable year,
(B) Does not file a joint return for such taxable year, and
(C) Does not live apart (as defined in paragraph (b)(4) of this
section) from his or her spouse at all times during the taxable year.
(iii) $20,000 in the case of all other taxpayers.
(4) Living apart. A taxpayer does not ``live apart'' from his or her
spouse at all times during a taxable year if for any period during the
taxable year the taxpayer is a member of the same household as such
taxpayer's spouse. A taxpayer is a member of a household for any period,
including temporary absences due to special circumstances, during which
the household is the taxpayer's place of abode. A temporary absence due
to special circumstances includes a nonpermanent absence caused by
illness, education, business, vacation, or military service.
(c) Limitations--(1) General rule. If for a taxable year, a
taxpayer's modified adjusted gross income does not exceed the applicable
statutory base amount, no amount of unemployment compensation is
included in gross income for the taxable year. If there is such an
excess, the taxpayer includes in gross income for the taxable year the
lesser of the following:
(i) One-half of the excess of the taxpayer's modified adjusted gross
income over such taxpayer's base amount, or
(ii) The amount of unemployment compensation.
(2) Exception for fraudulently received unemployment compensation.
If a taxpayer fraudulently receives unemployment compensation under any
governmental unemployment compensation program, then the entire amount
of such fraudulently received unemployment compensation must be included
in the taxpayer's gross income for the taxable year in which the
benefits were received. Thus, the limitation in section 85 and in
paragraph (c)(1) of this section, does not apply to such amounts.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). H and W are married taxpayers who for calendar year
1979 file a joint income tax return. During 1979 H receives $4,500 of
disability income that is eligible for an exclusion under section
105(d). W works for part of 1979 and receives $20,000 as compensation
and also receives $5,000 of unemployment compensation in 1979. Assume
that H and W's adjusted gross income is $20,000. The modified adjusted
gross income of H and W is $29,500 ($4,500 + $20,000 + $5,000). Since
their modified adjusted gross income ($29,500) is greater than their
base amount ($25,000), some of the unemployment compensation received by
W must be included in their gross income on their 1979 joint income tax
return. Under paragraph (c)(1) of this section, of the $5,000 which is
unemployment compensation, the lesser of $2,250 (($29,500--$25,000)/2)
or $5,000 must be included in their gross income. Thus, $2,250 of the
$5,000 received by W in 1979 is included in the gross income of H and W
on their joint income tax return for 1979.
Example (2). Assume the same facts in example (1) except H received
$5,000 of disability income that is eligible for an exclusion under
section 105(d) and W receives $28,000 as compensation, and $4,000 which
is unemployment compensation. Assume that H and W's adjusted gross
income is $28,000. The modified adjusted gross income of H and W is
$37,000 ($4,000 + $28,000 + $5,000). Since their modified adjusted gross
income ($37,000) is greater than their base amount ($25,000), all of the
unemployment compensation received by W must be included in their gross
income on their 1979 joint income tax return. Under paragraph (c)(1) of
this section, of the $4,000 which is unemployment compensation, the
lesser of $6,000 (($37,000--$25,000)/2) or $4,000 must be included in
their gross income. Thus, all of the $4,000 unemployment compensation
received by W is included in the gross income of H and W on their joint
income tax return for 1979.
(d) Cross reference. See section 6050B, relating to the requirement
that every person who makes payments of unemployment compensation
aggregating $10 or more to any individual during
[[Page 330]]
any calendar year file an information return with the Internal Revenue
Service.
[T.D. 7705, 45 FR 46069, July 9, 1980]
Sec. 1.88-1 Nuclear decommissioning costs.
(a) In general. Section 88 provides that the amount of nuclear
decommissioning costs directly or indirectly charged to the customers of
a taxpayer that is engaged in the furnishing or sale of electric energy
generated by a nuclear power plant must be included in the gross income
of such taxpayer in the same manner as amounts charged for electric
energy. For this purpose, decommissioning costs directly or indirectly
charged to the customers of a taxpayer include all decommissioning costs
that consumers are liable to pay by reason of electric energy furnished
by the taxpayer during the taxable year, whether payable to the
taxpayer, a trust, State government, or other entity, and even though
the taxpayer may not control the investment or current expenditure of
the amount and the amount may not be paid to the taxpayer at the time
decommissioning costs are incurred. However, decommissioning costs
payable to a taxpayer holding a qualified leasehold interest (as
described in paragraph (b)(2)(ii) of Sec. 1.468A-1) are included in the
gross income of such taxpayer, and not in the gross income of the
lessor.
(b) Examples. The following examples illustrate the application of
the principles of paragraph (a) of this section:
Example (1). X corporation, an accrual method taxpayer engaged in
the sale of electric energy generated by a nuclear power plant owned by
X, is authorized by the public utility commission of State A to collect
nuclear decommissioning costs from ratepayers residing in State A. With
respect to the sale of electric energy, X includes in income amounts
that have been billed to customers as well as estimated unbilled amounts
that relate to energy provided by X after the previous billing but
before the end of the taxable year (``accrued unbilled amounts''). The
decommissioning costs are included in the monthly bills provided by X to
its ratepayers and the entire amount billed is remitted directly to X.
Under paragraph (a) of this section, the decommissioning costs must be
included in the gross income of X in the same manner as amounts charged
for electric energy (i.e., by including in income decommissioning costs
that relate to amounts billed as well as decommissioning costs that
relate to accrued unbilled amounts). The same rule would apply if the
decommissioning costs charged to ratepayers were separately billed and
the amounts billed were remitted to State A to be held in trust for the
purpose of decommissioning the nuclear power plant owned by X. In that
case, X must include in gross income decommissioning costs that relate
to amounts billed as well as decommissioning costs that relate to
accrued unbilled amounts.
Example (2). Assume the same facts as in Example (1), except that X
and M, a municipality located in State A, have entered into a life-of-
unit contract pursuant to which (i) M is entitled to 20 percent of the
electric energy generated by the nuclear power plant owned by X, and
(ii) M is obligated to pay 20 percent of the plant operating costs,
including decommissioning costs, incurred by X. Under paragraph (a) of
this section, the decommissioning costs that relate to electric energy
consumed or distributed by M during any taxable year must be included in
the gross income of X for such taxable year. The result contained in
this example would be the same if M was a State or an agency or
instrumentality of a State or a political subdivision thereof.
(c) Cross reference. For special rules relating to the deduction for
amounts paid to a nuclear decommissioning fund, see Sec. 1.468A-1
through Sec. 1.468A-5, 1.468A-7, 1.468A-8.
(d) Effective date. (1) Section 88 and this section apply to nuclear
decommissioning costs directly or indirectly charged to the customers of
a taxpayer on or after July 18, 1984, and with respect to taxable years
ending on or after such date.
(2) If the amount of nuclear decommissioning costs directly or
indirectly charged to the customers of a taxpayer before July 18, 1984,
was includible in gross income in a different manner than amounts
charged for electric energy, such amount must be included in gross
income for the taxable year in which includible in gross income under
the method of accounting of the taxpayer that was in effect when such
amount was charged to customers.
[T.D. 8184, 53 FR 6804, Mar. 3, 1988]
[[Page 331]]
Items Specifically Excluded From Gross Income
Sec. 1.101-1 Exclusion from gross income of proceeds of life insurance contracts payable by reason of death.
(a)(1) In general. Section 101(a)(1) states the general rule that
the proceeds of life insurance policies, if paid by reason of the death
of the insured, are excluded from the gross income of the recipient.
Death benefit payments having the characteristics of life insurance
proceeds payable by reason of death under contracts, such as workmen's
compensation insurance contracts, endowment contracts, or accident and
health insurance contracts, are covered by this provision. For
provisions relating to death benefits paid by or on behalf of employers,
see section 101(b) and Sec. 1.101-2. The exclusion from gross income
allowed by section 101(a) applies whether payment is made to the estate
of the insured or to any beneficiary (individual, corporation, or
partnership) and whether it is made directly or in trust. The extent to
which this exclusion applies in cases where life insurance policies have
been transferred for a valuable consideration is stated in section
101(a)(2) and in paragraph (b) of this section. In cases where the
proceeds of a life insurance policy, payable by reason of the death of
the insured, are paid other than in a single sum at the time of such
death, the amounts to be excluded from gross income may be affected by
the provisions of section 101 (c) (relating to amounts held under
agreements to pay interest) or section 101(d) (relating to amounts
payable at a date later than death). See Secs. 1.101-3 and 1.101-4.
However, neither section 101(c) nor section 101(d) applies to a single
sum payment which does not exceed the amount payable at the time of
death even though such amount is actually paid at a date later than
death.
(2) Cross references. For rules governing the taxability of
insurance proceeds constituting benefits payable on the death of an
employee--
(i) Under pension, profit-sharing, or stock bonus plans described in
section 401(a) and exempt from tax under section 501(a), or under
annuity plans described in section 403(a), see section 72 (m)(3) and
paragraph (c) of Sec. 1.72-16;
(ii) Under annuity contracts to which paragraph (a) or (b) of
Sec. 1.403(b)-1 applies, see paragraph (c)(3) of Sec. 1.403(b)-1; or
(iii) Under eligible State deferred compensation plans described in
section 457(b), see paragraph (c) of Sec. 1.457-1.
For the definition of a life insurance company, see section 801.
(b) Transfers of life insurance policies. (1) In the case of a
transfer, by assignment or otherwise, of a life insurance policy or any
interest therein for a valuable consideration, the amount of the
proceeds attributable to such policy or interest which is excludable
from the transferee's gross income is generally limited to the sum of
(i) the actual value of the consideration for such transfer, and (ii)
the premiums and other amounts subsequently paid by the transferee (see
section 101(a)(2) and example (1) of subparagraph (5) of this
paragraph). However, this limitation on the amount excludable from the
transferee's gross income does not apply (except in certain special
cases involving a series of transfers), where the basis of the policy or
interest transferred, for the purpose of determining gain or loss with
respect to the transferee, is determinable, in whole or in part, by
reference to the basis of such policy or interest in the hands of the
transferor (see section 101(a)(2)(A) and examples (2) and (4) of
subparagraph (5) of this paragraph). Neither does the limitation apply
where the policy or interest therein is transferred to the insured, to a
partner of the insured, to a partnership in which the insured is a
partner, or to a corporation in which the insured is a shareholder or
officer (see section 101(a)(2)(B)). For rules relating to gratuitous
transfers, see subparagraph (2) of this paragraph. For special rules
with respect to certain cases where a series of transfers is involved,
see subparagraph (3) of this paragraph.
(2) In the case of a gratuitous transfer, by assignment or
otherwise, of a life insurance policy or any interest therein, as a
general rule the amount of the proceeds attributable to such policy or
interest which is excludable
[[Page 332]]
from the transferee's gross income under section 101(a) is limited to
the sum of (i) the amount which would have been excludable by the
transferor (in accordance with this section) if no such transfer had
taken place, and (ii) any premiums and other amounts subsequently paid
by the transferee. See example (6) of subparagraph (5) of this
paragraph. However, where the gratuitous transfer in question is made by
or to the insured, a partner of the insured, a partnership in which the
insured is a partner, or a corporation in which the insured is a
shareholder or officer, the entire amount of the proceeds attributable
to the policy or interest transferred shall be excludable from the
transferee's gross income (see section 101(a)(2)(B) and example (7) of
subparagraph (5) of this paragraph).
(3) In the case of a series of transfers, if the last transfer of a
life insurance policy or an interest therein is for a valuable
consideration--
(i) The general rule is that the final transferee shall exclude from
gross income, with respect to the proceeds of such policy or interest
therein, only the sum of--
(a) The actual value of the consideration paid by him, and
(b) The premiums and other amounts subsequently paid by him;
(ii) If the final transfer is to the insured, to a partner of the
insured, to a partnership in which the insured is a partner, or to a
corporation in which the insured is a shareholder or officer, the final
transferee shall exclude the entire amount of the proceeds from gross
income;
(iii) Except where subdivision (ii) of this subparagraph applies, if
the basis of the policy or interest transferred, for the purpose of
determining gain or loss with respect to the final transferee, is
determinable, in whole or in part, by reference to the basis of such
policy or interest therein in the hands of the transferor, the amount of
the proceeds which is excludable by the final transferee is limited to
the sum of--
(a) The amount which would have been excludable by his transferor if
no such transfer had taken place, and
(b) Any premiums and other amounts subsequently paid by the final
transferee himself.
(4) For the purposes of section 101(a)(2) and subparagraphs (1) and
(3) of this paragraph, a ``transfer for a valuable consideration'' is
any absolute transfer for value of a right to receive all or a part of
the proceeds of a life insurance policy. Thus, the creation, for value,
of an enforceable contractual right to receive all or a part of the
proceeds of a policy may constitute a transfer for a valuable
consideration of the policy or an interest therein. On the other hand,
the pledging or assignment of a policy as collateral security is not a
transfer for a valuable consideration of such policy or an interest
therein, and section 101 is inapplicable to any amounts received by the
pledgee or assignee.
(5) The application of this paragraph may be illustrated by the
following examples:
Example (1). A pays premiums of $500 for an insurance policy in the
face amount of $1,000 upon the life of B, and subsequently transfers the
policy to C for $600. C receives the proceeds of $1,000 upon the death
of B. The amount which C can exclude from his gross income is limited to
$600 plus any premiums paid by C subsequent to the transfer.
Example (2). The X Corporation purchases for a single premium of
$500 an insurance policy in the face amount of $1,000 upon the life of
A, one of its employees, naming the X Corporation as beneficiary. The X
Corporation transfers the policy to the Y Corporation in a tax-free
reorganization (the policy having a basis for determining gain or loss
in the hands of the Y Corporation determined by reference to its basis
in the hands of the X Corporation). The Y Corporation receives the
proceeds of $1,000 upon the death of A. The entire $1,000 is to be
excluded from the gross income of the Y Corporation.
Example (3). The facts are the same as in example (2) except that,
prior to the death of A, the Y Corporation transfers the policy to the Z
Corporation for $600. The Z Corporation receives the proceeds of $1,000
upon the death of A. The amount which the Z Corporation can exclude from
its gross income is limited to $600 plus any premiums paid by the Z
Corporation subsequent to the transfer of the policy to it.
Example (4). The facts are the same as in example (3) except that,
prior to the death of A, the Z Corporation transfers the policy to the M
Corporation in a tax-free reorganization (the policy having a basis for
determining gain or loss in the hands of the M
[[Page 333]]
Corporation determined by reference to its basis in the hands of the Z
Corporation). The M Corporation receives the proceeds of $1,000 upon the
death of A. The amount which the M Corporation can exclude from its
gross income is limited to $600 plus any premiums paid by the Z
Corporation and the M Corporation subsequent to the transfer of the
policy to the Z Corporation.
Example (5). The facts are the same as in example (3) except that,
prior to the death of A, the Z Corporation transfers the policy to the N
Corporation, in which A is a shareholder. The N Corporation receives the
proceeds of $1,000 upon the death of A. The entire $1,000 is to be
excluded from the gross income of the N Corporation.
Example (6). A pays premiums of $500 for an insurance policy in the
face amount of $1,000 upon his own life, and subsequently transfers the
policy to his wife B for $600. B later transfers the policy without
consideration to C, who is the son of A and B. C receives the proceeds
of $1,000 upon the death of A. The amount which C can exclude from his
gross income is limited to $600 plus any premiums paid by B and C
subsequent to the transfer of the policy to B.
Example (7). The facts are the same as in example (6) except that,
prior to the death of A, C transfers the policy without consideration to
A, the insured. A's estate receives the proceeds of $1,000 upon the
death of A. The entire $1,000 is to be excluded from the gross income of
A's estate.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6783, 29 FR
18356, Dec. 24, 1964; T.D. 7836, 47 FR 42337, Sept. 27, 1982]
Sec. 1.101-2 Employees' death benefits.
(a) In general. (1) Section 101(b) states the general rule that
amounts up to $5,000 which are paid to the beneficiaries or the estate
of an employee, or former employee, by or on behalf of an employer and
by reason of the death of the employee shall be excluded from the gross
income of the recipient. This exclusion from gross income applies
whether payment is made to the estate of the employee or to any
beneficiary (individual, corporation, or partnership), whether it is
made directly or in trust, and whether or not it is made pursuant to a
contractual obligation of the employer. The exclusion applies whether
payment is made in a single sum or otherwise, subject to the provisions
of section 101 (c), relating to amounts held under an agreement to pay
interest thereon (see Sec. 1.101-3). The exclusion from gross income
also applies to any amount not actually paid which is otherwise taxable
to a beneficiary of an employee because it was made available as a
distribution from an employee's trust.
(2) The exclusion does not apply to amounts constituting income
payable to the employee during his life as compensation for his
services, such as bonuses or payments for unused leave or uncollected
salary, nor to certain other amounts with respect to which the deceased
employee possessed, immediately before his death, a nonforfeitable right
to receive the amounts while living (see section 101(b)(2)(B) and
paragraph (d) of this section). Further, the exclusion does not apply to
amounts received as an annuity under a joint and survivor annuity
obligation where the employee was the primary annuitant and the annuity
starting date occurred before the death of the employee (see section 101
(b)(2)(C) and paragraph (e)(1)(ii) of this section). In the case of
amounts received by a beneficiary as an annuity (but not as a survivor
under a joint and survivor annuity with respect to which the employee
was the primary annuitant), the exclusion is applied indirectly by means
of the provisions of section 72 and the regulations thereunder (see
section 101(b)(2)(D) and paragraph (e)(1) (iii) and (iv) of this
section). Thus, for example, the exclusion applies to amounts which are
received by a survivor of an employee retired on disability under the
provisions of the Civil Service retirement law (5 U.S.C. 8301 or any
former corresponding provisions of law) or the Retired Serviceman's
Family Protection Plan or Survivor Benefit Plan (10 U.S.C. 1431 et
seq.), provided such employee dies before attaining mandatory retirement
age (as defined in Sec. 1.105-4 (a)(3)(i)(B)).
(3) The total amount excludable with respect to any employee may not
exceed $5,000, regardless of the number of employers or the number of
beneficiaries. For allocation of the exclusion among beneficiaries, see
paragraph (c) of this section. For rules governing the taxability of
benefits payable on the death of an employee under pension,
profitsharing, or stock bonus plans described in section 401(a) and
exempt under section 501(a), under annuity plans described in section
403(a), or
[[Page 334]]
under annuity contracts to which paragraph (a) or (b) of Sec. 1.403(b)-1
applies, see sections 72(m)(3), 402(a), and 403 and the regulations
thereunder.
(b) Payments under certain employee benefit plans--(1) In general.
Where a payment is made by reason of the death of an employee by an
employer-provided welfare fund or a trust, including a stock bonus,
pension, or profitsharing trust described in section 401 (a), or by an
insurance company (if such payment does not constitute ``life
insurance'' within the purview of section 101(a), the payment shall be
considered to have been made by or on behalf of the employer to the
extent that it exceeds amounts contributed by, or deemed contributed by,
the deceased employee.
(2) Cross references. For provisions governing the taxability of
distributions payable on the death of an employee participant--
(i) Under a trust described in section 401(a) and exempt from tax
under section 501(a), see paragraph (c) of Sec. 1.72-16 and paragraph
(a)(5) of Sec. 1.402 (a)-1;
(ii) Under an annuity plan described in section 403(a), see
paragraph (c) of Sec. 1.72-16 and paragraph (c) of Sec. 1.403 (a)-1;
(iii) Under annuity contracts to which paragraph (a) or (b) of
Sec. 1.403 (b)-1 applies, see paragraph (c) (2) and (3) of
Sec. 1.403(b)-1;
(iv) Under eligible State deferred compensation plans described in
section 457 (b), see paragraph (c) of Sec. 1.457-1.
(c) Allocation of the exclusion. (1) Where the aggregate payments by
or on behalf of an employer or employers as death benefits to the
beneficiaries or the estate of a deceased employee exceed $5,000, the
$5,000 exclusion shall be apportioned among them in the same proportion
as the amount received by or the present value of the amount payable to
each bears to the total death benefits paid or payable by or on behalf
of the employer or employers.
(2) The application of the rule in subparagraph (1) of this
paragraph may be illustrated by the following example:
Example. The M Corporation, the employer of A, a deceased employee
who died November 30, 1954, makes payments in 1955 to the beneficiaries
of A as follows: $5,000 to W, A's widow, $2,000 to B, the son of A, and
$3,000 to C, the daughter of A. No other amounts are paid by any other
employer of A to his estate or beneficiaries. By application of the
apportionment rule stated above, W, the widow, will exclude $2,500
($5,000/$10,000, or one-half, of $5,000); B, the son, will exclude
$1,000 ($2,000/$10,000, or one-fifth, of $5,000); and C, the daughter,
will exclude $1,500 ($3,000/$10,000, or three-tenths, of $5,000).
(d) Nonforfeitable rights. (1) Except as provided in subparagraphs
(3) and (4) of this paragraph, the exclusion provided by section 101(b)
does not apply to amounts with respect to which the deceased employee
possessed, immediately before his death, a nonforfeitable right to
receive the amounts while living. Section 101(b)(2)(B). For the purpose
of section 101(b) and this paragraph, an employee shall be considered to
have had a nonforfeitable right with respect to--
(i) Any amount to which he would have been entitled--
(a) If he had made an appropriate election or demand, or
(b) Upon termination of his employment (see examples (5) and (6) of
subparagraph (2) of this paragraph); or
(ii) The present value (immediately before his death) of--
(a) Amounts payable as an annuity (as defined in paragraph (b) of
Sec. 1.72-2, whether immediate or deferred) by or on behalf of the
employer (see example (1) of subparagraph (2) of this paragraph), or
(b) Amounts which would have been so payable if the employee had
terminated his employment and continued to live;
or
(iii) Any amount to the extent it is paid in lieu of amounts
described in either subdivision (i) or (ii) of this subparagraph. See
examples (2), (3), and (4) of subparagraph (2) of this paragraph.
For purposes of subdivision (iii) of this subparagraph, any amount paid
in discharge of an obligation which arose solely because of the
existence of a particular fact or circumstance subsequent to the
employee's death shall not be considered an amount paid in lieu of
amounts described in subdivision (i) or (ii) of this subparagraph.
Subdivision (iii) of this subparagraph shall apply,
[[Page 335]]
however, to the extent indicated therein, to amounts payable without
regard to any such contingency (to the extent that such amounts are
equal to or less than those described in subdivision (i) and (ii) of
this subparagraph which are not paid). See paragraph (e)(1)(iii)(b) of
this section for rules with respect to finding the present value of an
annuity immediately before the employee's death.
(2) The application of paragraph (d)(1) of this section may be
illustrated by the following examples, in which it is assumed that the
plans are not ``qualified plans'' and that no employer is an
organization referred to in section 170(b)(1)(A) (ii) or (vi) or a
religious organization (other than a trust) which is exempt from tax
under section 501(a):
Example (1). A, who was a participant under the X Company pension
plan, retired on December 31, 1953. He had made no contributions to the
plan. Upon his retirement, he became entitled to monthly payments of
$100 payable for life, or 120 months certain. A died on October 31,
1954, having received 10 monthly payments of $100 each. After his death,
the monthly payments became payable to his estate for the remaining 110
months certain. No exclusion from gross income is allowed to A's estate
(or any beneficiary who receives the right to such payments from the
estate), since the employee's right to the monthly payments was
nonforfeitable at the date of his death. It will be noted that in this
example it is unnecessary to consider the present value of the annuity
to A just before his death since the payments to be made include only
those certain to be made in any event under the plan whether or not A
continued to live.
Example (2). C, a participant under the Y Company pension plan, died
on December 15, 1954, while actively in the employment of the company,
survived by a widow and minor children. Because of his years of service,
he would have been entitled to an annuity for life, his own
contributions to the plan and interest thereon being guaranteed, if he
had retired or terminated his employment at a time immediately before
his death. The plan further provides that--(a) if, but only if, an
employee is survived by a widow and minor children, his widow is to
receive an annuity for her life without regard to whether or not the
employee had begun his annuity; (b) any payments made with respect to
his widow's annuity are to reduce the guaranteed amount to an equal
extent; and (c) if the employee is not so survived, the guaranteed
amount is payable to his beneficiary or estate, but no amount is payable
to anyone with respect to what would have been the widow's annuity. In
view of these provisions, that portion of the present value of the
annuity payable to C's widow which exceeds the guaranteed amount shall
be considered paid neither as an amount, nor in lieu of an amount, which
C had a nonforfeitable right to receive while living. The reason for
this result is that the payment of such excess is contingent upon C's
being survived by a widow and minor children, a circumstance existing
subsequent to his death. Conversely, to the extent that the present
value of the annuity payable to C's widow does not exceed the guaranteed
amount, annuity payments attributable to such present value shall be
considered paid in lieu of an amount which C had a nonforfeitable right
to receive while living.
Example (3). D, a participant under the Y Company pension plan, died
on January 1, 1955, while actively in the employment of the company. The
Y Company plan provides that where an employee dies in service, the
present value of the accumulated credits which he could have obtained at
that time if he had instead separated from the service shall be paid in
a single sum to his surviving spouse or to his estate if no widow
survives him. The present value of D's accumulated credits, at the time
of his death, was $10,000. However, the plan also provides that a
surviving spouse may elect to take, in lieu of a single sum, an annuity
the present value of which exceeds such sum by $2,500. D's widow elects
to receive an annuity (the present value of which is $12,500).
Therefore, $2,500 is an amount to which the exclusion of section 101(b)
and this section shall apply.
Example (4). A, an employee of the X Company, continues to work
after reaching the normal retirement age of 60 years, although he could
have retired at that age and obtained an annuity of $3,000 per year for
his life. A is not entitled to any part of the annuity while he is
employed and receiving compensation. A dies at the age of 67 while still
in active employment. Since he had passed normal retirement age, his
additional years of service did not entitle him to a larger annuity at
age 67 than that which he could have obtained at age 60. However, the
plan of the X Company provides that in the event of an employee's death
prior to separation from the service, his widow is to be paid an annuity
for her life in the same amount per year as that which the employee
could have obtained if he had instead retired; but if no widow survives
him, the present value of the annuity which the employee could have
obtained at a time just before his death is to be paid to a named
beneficiary or the estate of the employee. Assuming that the present
value of the annuity to A's widow, whose age is 61, is $36,000 and the
present value of the annuity which would have been
[[Page 336]]
payable to A at age 67 if he had then retired is $23,500, the present
value of the widow's annuity, to the extent of $23,500, is an amount
which is payable in lieu of amounts which the employee had a
nonforfeitable right to receive while living because it does not exceed
the value of his nonforfeitable rights and is not otherwise paid. On the
other hand, the $12,500 excess of the value of the widow's annuity
($36,000) over the value of the employee's annuity ($23,500) is an
amount to which section 101(b) applies since the employee had no right
to any part of it. If no other death benefits are payable, a $5,000
exclusion is available (see section 101(b)(2)(D) and paragraph (e) of
this section).
Example (5). The trustee of the X Corporation noncontributory
profit-sharing plan is required under the provisions of the plan to pay
to the beneficiary of B, an employee of the X Corporation who died on
July 1, 1955, the benefit due on account of the death of B. The
provisions of the profit-sharing plan give each participating employee
in case of termination of employment a 10-percent vested interest in the
amount accumulated in his account for each year of participation in the
plan. In case of death, the entire credit in the participant's account
is to be paid to his beneficiary. At the time of B's death, he had been
a participant for three years and the accumulation in his account was
$8,000. After his death this amount is paid to his beneficiary. At the
time of B's death, the amount distributable to him on account of
termination of employment would have been $2,400 (30 percent of $8,000).
The difference of $5,600 ($8,000 minus $2,400), payable to the
beneficiary of B, is an amount payable solely by reason of B's death.
Accordingly, $5,000 of the $5,600 may be excluded from the gross income
of the beneficiary receiving such payment (assuming no other death
benefits are involved). However, if it is assumed that the facts are the
same as above, except that at the time of his death B has been a
participant for 6 years, the amount distributable to him on account of
termination of employment would have been $4,800 (60 percent of $8,000).
The difference of $3,200 ($8,000 minus $4,800), payable to B's
beneficiary, is an amount payable solely by reason of B's death.
Accordingly, only $3,200 may be excluded from the gross income of the
beneficiary receiving such payment (assuming no other death benefits are
involved).
Example (6). The X Corporation instituted a trust, forming part of a
pension plan, for its employees, the cost thereof being borne entirely
by the corporation. The plan provides, in part, that after 10 or more
years of service and attaining the age of 55, an employee can elect to
retire and receive benefits before the normal retirement date contingent
upon the employer's approval. If he retires without the employer's
consent, or voluntarily leaves the company, no benefits are or will be
payable. The plan further provides that if the employee is involuntarily
separated or dies before retirement, he or his beneficiary,
respectively, will receive a percentage of the reserve provided for the
employee in the trust fund on the following basis: 10 to 15 years of
service, 25 percent; 15 to 20 years of service, 50 percent; 20 to 25
years of service, 75 percent; 25 or more years of service, 100 percent.
A, an employee of the X Corporation for 17 years, died at the age of 56
while in the employ of the corporation. At the time of his death,
$15,000 was the reserve provided for him in the trust. His beneficiary
receives $7,500, an amount equal to 50 percent of the reserve provided
for A's retirement; accordingly, $5,000 of the $7,500 may be excluded
from the gross income of the beneficiary receiving such payment
(assuming no other death benefits are involved) since A, prior to his
death, had only a forfeitable right to receive $7,500.
(3)(i) Notwithstanding the rule stated in subparagraph (1) of this
paragraph and illustrated in subparagraph (2) of this paragraph, the
exclusion from gross income provided by section 101(b) applies to the
receipt of certain amounts, paid under ``qualified'' plans, with respect
to which the deceased employee possessed, immediately before his death,
a nonforfeitable right to receive the amounts while living (see section
101(b)(2)(B) (i) and (ii)). The payments to which this exclusion applies
are--
(a) ``Total distributions payable'' by a stock bonus, pension, or
profit-sharing trust described in section 401(a) which is exempt from
tax under section 501(a), and
(b) ``Total amounts'' paid under an annuity contract under a plan
described in section 403(a), provided such distributions or amounts are
paid in full within one taxable year of the distributee (see example (3)
of subdivision (ii) of this subparagraph). For the purposes of applying
section 101(b), ``Total distributions payable'' means the balance to the
credit of an employee which becomes payable to a distributee on account
of the employee's death, either before or after separation from the
service (see section 402(a)(3)(C), the regulations thereunder, and
examples (2) and (4) of subdivision (ii) of this subparagraph); and
``total amounts'' means the balance to the credit of an employee which
becomes payable to the payee by reason of the employee's
[[Page 337]]
death, either before or after separation from the service (see section
403(a)(2)(B), the regulations thereunder, and example (1) of subdivision
(ii) of this subparagraph). See subparagraph (4) of this paragraph
relating to the exclusion of amounts which are received under annuity
contracts purchased by certain exempt organizations and with respect to
which the deceased employee possessed, immediately before his death, a
nonforfeitable right to receive the amounts while living.
(ii) The application of the provisions of subdivision (i) of this
subparagraph may be illustrated by the following examples:
Example (1). The widow of an employee elects, under a
noncontributory ``qualified'' plan, to receive in a lump sum the present
value of the annuity which C, the deceased employee, could have obtained
at a time just before his death if he had retired at that time. Such
present value is $6,000. Of this amount, $5,000 is excludable from the
widow's gross income despite the fact that C had a nonforfeitable right
to the amount in lieu of which the payment is made, since such payment
is an amount to which subdivision (i) of this subparagraph applies
(assuming no other death benefits are involved).
Example (2). The trustee of the X Corporation noncontributory,
``qualified'', profit- sharing plan is required under the provisions of
the plan to pay to the beneficiary of B, an employee of the X
Corporation who died on July 1, 1955, the benefit due on account of the
death of B. The provisions of the profit-sharing plan give each
participating employee, in case of termination of employment, a 10
percent vested interest in the amount accumulated in his account for
each year of participation in the plan, but, in case of death, the
entire credit to the participant's account is to be paid to his
beneficiary. At the time of B's death, he had been a participant for
five years. The accumulation in his account was $8,000, and the amount
which would have been distributable to him in the event of termination
of employment was $4,000 (50 percent of $8,000). After his death, $8,000
is paid to his beneficiary in a lump sum. (It may be noted that these
are the same facts as in example (5) of subparagraph (2) of this
paragraph except that the employee has been a participant for five years
instead of three and the plan is a ``qualified'' plan.) It is immaterial
that the employee had a nonforfeitable right to $4,000, because the
payment of the $8,000 to the beneficiary is the payment of the ``total
distributions payable'' within one taxable year of the distributee to
which subdivision (i) of this subparagraph applies. Assuming no other
death benefits are involved, the beneficiary may exclude $5,000 of the
$8,000 payment from gross income.
Example (3). The facts are the same as in example (2) except that
the beneficiary is entitled to receive only the $4,000 to which the
employee had a nonforfeitable right and elects, 30 days after B's death,
to receive it over a period of ten years. Since the ``total
distributions payable'' are not paid within one taxable year of the
distributee, no exclusion from gross income is allowable with respect to
the $4,000.
Example (4). The X Corporation instituted a trust, forming part of a
``qualified'' profit-sharing plan for its employees, the cost thereof
being borne entirely by the corporation. The plan provides, in part,
that if, after 10 or more years of service, an employee leaves the
employ of the corporation, either voluntarily or involuntarily, before
retirement, a percentage of the reserve provided for the employee in the
trust fund will be paid to the employee as follows: 10 to 15 years of
service, 25 percent; 15 to 20 years of service, 50 percent; 20 to 25
years of service, 75 percent; 25 or more years of service, 100 percent.
The plan further provides that if an employee dies before reaching
retirement age, his beneficiary will receive a percentage of the reserve
provided for the employee in the trust fund, on the same basis as shown
in the preceding sentence. A, an employee of the X Corporation for 17
years, died before attaining retirement age while in the employ of the
corporation. At the time of his death, $15,000 was the reserve provided
for him in the trust fund. His beneficiary receives $7,500 in a lump
sum, an amount equal to 50 percent of the reserve provided for A's
retirement. The beneficiary may exclude from gross income (assuming no
other death benefits are involved) $5,000 of the $7,500, since the
latter amount constitutes ``total distributions payable'' paid within
one taxable year of the distributee, to which subdivision (i) of this
subparagraph applies.
(4)(i) Notwithstanding the rule stated in subparagraph (1) of this
paragraph and illustrated in subparagraph (2) of this paragraph, the
exclusion from gross income under section 101(b) also applies (but only
to the extent provided in the next sentence) to amounts with respect to
which the deceased employee possessed, immediately before his death, a
nonforfeitable right to receive the amounts while living--
(a) If such amounts are paid under an annuity contract purchased by
an employer which is an organization referred to in section 170(b)(1)(A)
(ii) or (vi) or which is a religious organization (other than a trust)
and which is exempt from tax under section 501(a).
[[Page 338]]
(b) If such amounts are paid as part of a ``total payment'' with
respect to the deceased employee; and
(c) If such ``total payment'' is paid in full within one taxable
year of the payee beginning after December 31, 1957.
However, the amount that is excludable under section 101(b) by reason of
this subparagraph shall not exceed an amount which bears the same ratio
to the amount which would be includible in the payee's gross income if
it were not for the second sentence of section 101(b)(2)(B) and this
subparagraph, as the amount contributed by the employer for the annuity
contract that was excludable from the deceased employee's gross income
under paragraph (b) of Sec. 1.403(b)-1 bears to the total amount
contributed by the employer for the annuity contract. See section
101(b)(2)(B)(iii). For purposes of this subparagraph, a ``total
payment'' means a payment of the balance to the credit of an employee
with respect to all ``section 403(b) annuities'' purchased by the
employer which becomes payable to the payee by reason of the employee's
death, either before or after separation from the service. An annuity
contract will be regarded as a ``section 403(b) annuity'' if any amount
contributed (or considered as contributed under paragraph (b)(2) of
Sec. 1.403(b)-1) by the employer for such contract was excludable from
the employee's gross income under paragraph (b) of Sec. 1.403(b)-1.
Under this definition, therefore, an annuity contract may be regarded as
a ``section 403(b) annuity'' even though some of the employer's
contributions for the contract were not excludable from the employee's
gross income under paragraph (b) of Sec. 1.403(b)-1 because, for
example, the employer was not an exempt organization when such
contributions were paid. For purposes of computing the ratio described
in this subdivision in such a case, the total amount contributed by the
employer for the contract includes the amounts contributed by the
employer when it was not an exempt organization.
(ii) This subparagraph does not relate to any amounts with respect
to which the deceased employee did not possess, immediately before his
death, a nonforfeitable right to receive the amounts while living. Such
amounts are excludable under the provisions of section 101(b) without
regard to section 101(b)(2)(B) and this subparagraph. Thus, if a ``total
payment'' received by a beneficiary of a deceased employee under an
annuity contract purchased by an organization described in subdivision
(i)(a) of this subparagraph consists both of amounts with respect to
which the deceased employee possessed, immediately before his death, a
nonforfeitable right to receive the amounts while living and of amounts
with respect to which the deceased employee did not possess such a
nonforfeitable right, only those amounts with respect to which the
deceased employee possessed such a nonforfeitable right are amounts to
which this subparagraph applies. Therefore, for purposes of computing
the ratio described in subdivision (i) of this subparagraph in such a
case, there shall be taken into account only the employer contributions
attributable to those amounts with respect to which the deceased
employee possessed, immediately before his death, a nonforfeitable right
to receive the amounts while living. See example (3) of subdivision (v)
of this subparagraph. In no event, however, may the total amount
excludable under section 101(b) with respect to any employee exceed
$5,000 (See paragraph (a)(3) of this section).
(iii)(a) In any case when the deceased employee's interest in the
employer's contributions for an annuity contract was forfeitable at the
time the contributions were made but, at a subsequent date prior to his
death, such interest changed to a nonforfeitable interest, then, for
purposes of computing the ratio described in subdivision (i) of this
subparagraph, the cash surrender value of the contract on the date of
the change (except to the extent attributable to employee contributions)
shall be considered as the amount contributed by the employer for the
contract. In such a case, if only part of the deceased employee's
interest in the annuity changed from a forfeitable to a nonforfeitable
interest, then only the corresponding part of the cash surrender value
of the contract on the date of the change shall be considered as the
[[Page 339]]
amount contributed by the employer for the contract. Similarly, if part
of the deceased employee's interest in the annuity contract changed from
a forfeitable to a nonforfeitable interest on a particular date and
another part of his interest so changed on a subsequent date, it is
necessary, in order to compute the amount contributed by the employer
for the contract, to first determine (under the rules in the preceding
sentence) the amount that is considered as the amount contributed by the
employer with respect to each change, and then to add these amounts
together. For purposes of computing the ratio described in subdivision
(i) of this subparagraph in all of the above cases, the amount
contributed by the employer that was excludable from the employee's
gross income under paragraph (b) of Sec. 1.403(b)-1 is that amount
which, under paragraph (b)(2) of such section, was considered as
employer contributions and which, under such paragraph (b) of
Sec. 1.403(b)-1, was excludable from the deceased employee's gross
income for the taxable year in which the change occurred.
(b) This subdivision (iii) may be illustrated by the following
examples:
Example (1). X Organization contributed $4,000 toward the purchase
of an annuity contract for A, an employee who died in 1970. At the time
they were made, A's interest in such contributions was forfeitable. A
made no contributions toward the purchase of the annuity contract. On
January 1, 1960, A's entire interest in the annuity contract changed to
a nonforfeitable interest. At the time of such change, the cash
surrender value of the contract was $5,000. For purposes of the ratio
described in subdivision (i) of this subparagraph, the total amount
contributed by X Organization for the annuity contract is $5,000. If any
part of such $5,000 was excludable under paragraph (b) of Sec. 1.403(b)-
1 from A's gross income for his taxable year in which the change
occurred, the amount so excludable shall be considered as the amount
contributed for the contract by the employer that was excludable from
the employee's gross income under paragraph (b) of Sec. 1.403(b)-1.
Example (2). Assume the same facts as in example (1) except that
only one-half of A's interest in the annuity contract changed to a
nonforfeitable interest on January 1, 1960, and that no other part of
his interest so changed during his lifetime. For purposes of the ratio
described in subdivision (i) of this subparagraph, the total amount
contributed by X Organization for the annuity contract is $2,500 (\1/2\
of the cash surrender value of the annuity contract on the date of the
change). To the extent such $2,500 was, under paragraph (b) of
Sec. 1.403(b)-1, excludable from A's gross income for the taxable year
of the change, it is considered as the amount contributed by the
employer that was excludable under paragraph (b) of Sec. 1.403(b)-1.
Example (3). Assume the same facts as in example (1) except that
one-half of A's interest in the annuity contract changed to a
nonforfeitable interest on January 1, 1960, and the other half of his
interest changed to a nonforfeitable interest on January 1, 1965. On
January 1, 1965, the cash surrender value of the annuity contract was
$6,000. For purposes of the ratio described in subdivision (i) of this
subparagraph, the total amount contributed by X organization for the
annuity contract is $5,500 (i.e., \1/2\x$5,000 plus \1/2\x$6,000). The
amount contributed by the employer that was excludable from A's gross
income under paragraph (b) of Sec. 1.403(b)-1 is an amount equal to the
sum of the amount that was, under such paragraph, excludable from A's
gross income for the taxable year during which the first change occurred
and the amount that was, under such paragraph, excludable from A's gross
income for the taxable year in which the second change occurred.
(iv) For purposes of this subparagraph, an annuity contract will be
considered to have been purchased by an employer which is an
organization referred to in section 170(b)(1)(A) (ii) or (vi) or which
is a religious organization (other than a trust) and which is exempt
from tax under section 501(a), if any of the contributions paid toward
the purchase price of such contract by the employer were paid at a time
when the employer was such an organization. Thus an annuity contract may
be regarded as purchased by such an organization even though part of the
organization's contributions for such annuity contract were paid at a
time when the organization was not such an exempt organization.
(v) The application of this subparagraph may be illustrated by the
following examples:
Example (1). The widow of A, a deceased employee, elects, under an
annuity contract purchased for A by X Organization, to receive in a lump
sum the present value of such annuity contract as of the date of A's
death. Such present value is $6,000 and is received by the widow in a
taxable year beginning after December 31, 1957. X Organization
contributed $3,000 toward the purchase of the
[[Page 340]]
annuity contract and A contributed $2,000 toward such purchase. A's
interest in X Organization's contributions was nonforfeitable at the
time such contributions were made. Thus, just before his death, A's
entire interest in the annuity contract was a nonforfeitable interest
and, if he had retired at that time, he could have received the present
value of $6,000. The whole amount of the $3,000 contributed by X
Organization for the annuity contract was excludable from A's gross
income under paragraph (b) of Sec. 1.403(b)-1. This annuity contract was
the only annuity contract purchased by X Organization for A and was not
purchased as part of a qualified plan. However, all the contributions
paid by X Organization were paid at a time when X Organization was an
organization referred to in section 170(b)(1)(A)(ii) and exempt from tax
under section 501(a). The amount that A's widow may exclude from gross
income (assuming no other death benefits) is computed in the following
manner:
(a) Amount includible in gross income without regard to second $4,000
sentence of section 101(b)(2)(B) ($6,000 minus $2,000
contributed for contract by A)...............................
(b) Total employer contributions for the contract............. $3,000
(c) Amount of employer contributions for the contract that was $3,000
excludable under paragraph (b) of Sec. 1.403(b)-1...........
(d) Percent of total employer contributions for the contract 100%
that were excludable under paragraph (b) of Sec. 1.403(b)-1
((c) / (b))..................................................
(e) Amount to which section 101(b) exclusion applies ((d) x $4,000
(a)).........................................................
Example (2). The facts are the same as in example (1) except that
only $2,000 of X Organization's contributions for the annuity contract
was excludable from A's gross income under paragraph (b) of
Sec. 1.403(b)-1 and that the remaining $1,000 was includible in A's
gross income for the taxable years during which such amounts were
contributed by X Organization. The amount that A's widow may exclude
from gross income (assuming no other death benefits) is computed in the
following manner:
(a) Amount includible in gross income without regard to second $3,000
sentence of section 101(b)(2)(B) ($6,000 minus $2,000
contributed for contract by A and $1,000 of X Organization's
contributions includible in A's gross income)................
(b) Total employer contributions for the contract............. $3,000
(c) Amount of employer contributions for the contract that was $2,000
excludable under paragraph (b) of Sec. 1.403(b)-1...........
(d) Percent of total employer contributions for the contract 67%
that were excludable under paragraph (b) of Sec. 1.403(b)-1
((c) /(b))...................................................
(e) Amount to which section 101(b) exclusion applies ((d) x $2,000
(a)).........................................................
Example (3). The widow of B, a deceased employee, elects, under an
annuity contract purchased for B by Y Organization, to receive in a lump
sum the present value of such annuity contract as of the date of B's
death. Such present value is $6,000 and is received by the widow in a
taxable year beginning after December 31, 1957. Y Organization
contributed $4,000 toward the purchase of the contract; whereas B made
no contributions toward the purchase of the contract. This annuity
contract was the only annuity contract purchased by Y Organization for B
and was not purchased as part of a ``qualified'' plan. However, all the
contributions paid by Y Organization were paid at a time when it was an
organization referred to in section 170(b)(1)(A)(ii) and exempt from tax
under section 501(a). B's interest in Y Organization's contributions
was, at the time they were paid, forfeitable. However, prior to his
death, one-half of B's interest in the annuity contract changed from a
forfeitable to a nonforfeitable interest. Therefore, just before his
death, B could have obtained $3,000 under the annuity contract if he had
retired at that time. On the date of the change, the cash surrender
value of the annuity contract was $5,000. As a result of the change,
$1,500 was, under paragraph (b) of Sec. 1.403(b)-1, excludable from B's
gross income, and $600 was includible in his gross income for the
taxable year in which the change occurred. Part of the value of the
annuity contract on the date of the change was attributable to
contributions made by Y Organization prior to January 1, 1958, and,
consequently, was neither excludable from B's gross income under
paragraph (b) of Sec. 1.403(b)-1 nor includible in B's gross income (see
paragraph (b) of Sec. 1.403(d)-1). The amount that B's widow may exclude
from gross income (assuming no other death benefits) is computed in the
following manner:
(a) Amount of ``total payment'' with respect to which A had a $3,000
forfeitable right at time of death. (\1/2\x$6,000)...........
(b) Amount includible in gross income without regard to second $2,400
sentence of section 101(b)(2)(B) (\1/2\x$6,000 less $600
includible in B's gross income for year when his rights
changed to nonforfeitable rights)............................
(c) Total employer contributions for the contract (\1/2\ of $2,500
cash surrender value of contract on date B's rights changed
to nonforfeitable rights)....................................
(d) Amount of employer contributions for the contract that was $1,500
excludable under paragraph (b) of Sec. 1.403(b)-1...........
(e) Percent of total employer contributions for the contract 60%
that were excludable under paragraph (b) of Sec. 1.403(b)-1
((d/(c)).....................................................
(f) Amount to which section 101(b) exclusion applies by reason $1,440
of the second sentence of section 101(b)(2)(B) ((e)x(b)).....
(g) Total amount to which section 101(b) exclusion applies $4,440
((a)+(f))....................................................
(e) Annuity payments. (1) Where death benefits are paid in the form
of annuity payments, the following rules shall govern for purposes of
the exclusion provided in section 101(b):
(i) The exclusion from gross income provided by section 101(b) does
not apply to amounts, paid as an annuity,
[[Page 341]]
with respect to which the employee possessed, immediately before his
death, a nonforfeitable right to receive the amounts while living, or to
amounts paid as an annuity in lieu thereof. See paragraph (d) of this
section.
(ii) Under section 101(b)(2)(C), no exclusion is allowable for
amounts received by a surviving annuitant under a joint and survivor's
annuity contract if the annuity starting date (as defined in section
72(c)(4) and paragraph (b) of Sec. 1.72-4) occurs before the death of
the employee. If the annuity starting date occurs after the death of the
employee, the joint and survivor's annuity contract shall be treated as
an annuity to which section 101(b)(2)(D) applies. See subdivision (iii)
of this subparagraph.
(iii)(a) Subject to the other limitations stated in section 101(b)
and in this section (see section 101(b)(2)(D)), the amount to which the
exclusion of section 101(b) shall apply, with respect to ``amounts
received as an annuity'' (as defined in paragraph (b) of Sec. 1.72-2)
shall be the amount by which the present value of the annuity to be paid
to the beneficiary, computed as of the date of the employee's death,
exceeds the value (if any) of whichever of the following is the larger:
(1) Amounts contributed by the employee (determined in accordance
with the provisions of section 72 and the regulations thereunder), or
(2) Amounts with respect to which the employee possessed,
immediately before his death, a nonforfeitable right to receive the
amounts while living, or amounts paid in lieu thereof (see paragraph (d)
of this section).
(b) The present value of an annuity (immediately before the death of
the employee), to the employee, or (immediately after the death of the
employee), to his estate or beneficiary, shall be determined as follows:
(1) In the case of an annuity paid by an insurance company or by an
organization (other than an insurance company) regularly engaged in
issuing annuity contracts with an insurance company as the coinsurer or
reinsurer of the obligations under the contract, by use of the discount
interest rates and mortality tables used by the insurance company
involved to determine the installment benefits; and
(2) In the case of an annuity issued after November 23, 1984, to
which paragraph (e)(1)(iii)(b)(1) of this section is not applicable, by
use of the appropriate tables in Sec. 20.2031-7 of this chapter (Estate
Tax Regulations).
(iv) Any amount subject to section 101(b)(2)(D) which is excludable
under section 101(b) (see subdivision (iii) of this subparagraph) shall,
for purposes of section 72, be treated as additional consideration paid
by the employee. See paragraph (b) of Sec. 1.72-8.
(v) Where more than one beneficiary, or more than one death benefit,
is involved, the exclusion provided by section 101(b) shall be
apportioned to the various beneficiaries and benefits in accordance with
the proportion that the present value of each benefit bears to the total
present value of all the benefits.
(2) The application of the principles of this paragraph may be
illustrated by the following examples:
Example (1). (i) A died on January 1, 1969. Under the plan of the X
Corporation, W, who is the widow of employee A, and who is 55 years old
at the time of A's death, is entitled to an immediate annuity of $2,000
per year during her life and C, the minor child of A, is entitled to
receive $1,000 per year for 15 years. A made no contributions under the
plan and died while still employed by the X Corporation. At the time of
A's death, the amount in his account is $18,000. Under the terms of the
plan, this amount would have been distributable to him on account of
voluntary termination of employment, but would not have been payable
after his death except in the form of the annuities just described. This
amount, accordingly, constitutes a nonforfeitable interest in lieu of
which the annuities are paid. The exclusion does not apply, except to
the extent that the present value of the annuities exceeds $18,000,
whether or not the plan is ``qualified'', since the total of the amount
in A's account will not be paid within one taxable year of the
distributees. See subparagraph (1)(i) of this paragraph.
(ii) The computation of the exclusion applicable to the interests of
W and C (assuming that the payments will not be made by an insurance
company or some other organization regularly engaged in issuing annuity
contracts) is, by application of the tables in Sec. 20.2031-7 of this
chapter (Estate Tax Regulations), as follows: The present value of W's
interest is $26,243.60, determined by multiplying the annual payment of
$2,000 by
[[Page 342]]
13.1218 (the factor in Table I for a person aged 55); the present value
of C's interest is $11,517.40, determined by multiplying the yearly
payment of $1,000 by 11.5174 (the factor in Table II for payments for a
term certain of 15 years). The present value of both annuities is
$37,761 and (assuming no other death benefits are involved), the total
amount excludable is $5,000, because the total present value of the
annuities exceeds the employee's nonforfeitable interest by more than
$5,000 ($37,761 minus $18,000 equal $19,761). The exclusion allocable to
W's interest is $26,243.60/$37,761 times $5,000, or $3,474.96; the
exclusion allocable to C's interest is $11,517.40/$37,761 times $5,000,
or $1,525.04. That portion of the death benefit exclusion as so
determined for each beneficiary is to be treated as consideration paid
by the employee for purposes of section 72.
Example (2). The facts are the same as in example (1), except that
the nonforfeitable interest of A, at the time of his death, amounted to
$33,761. Since the present value of both annuities ($37,761) exceeds the
value of such nonforfeitable interest by only $4,000, the latter amount
is the total amount excludable from the gross income of the
beneficiaries. This $4,000 exclusion is to be divided in the same
proportions as those indicated in example (1). Thus, the exclusion
allocable to W's interest is $26,243.60/$37,761 times $4,000, or
$2,779.97; and the exclusion allocable to the interest of C is
$11,517.40/$37,761 times $4,000, or $1,220.03. That portion of the death
benefit exclusion as so determined for each beneficiary is to be treated
as consideration paid by the employee for purposes of section 72.
(f) Distributions on behalf of a self- employed individual. (1)
Under sections 401(c)(1) and 403(a)(3), certain self-employed
individuals may be covered by a pension or profit-sharing plan described
in section 401(a) and exempt under section 501(a) or under an annuity
plan described in section 403(a). However, a payment pursuant to the
provisions of any such plan by reason of the death of an individual who
participated in such a plan as a self-employed individual immediately
before his retirement or death to the beneficiary or estate of such
individual does not qualify for the exclusion provided by section
101(b).
(2) The application of this paragraph may be illustrated by the
following examples:
Example (1). From 1950 to 1965, A was an employee of B, a sole
proprietor. In 1963, B established a qualified pension plan covering A
and all other persons who had been employed by B for more than 3 years.
In 1965, A acquired from B a 40-percent interest in the capital and
profits of the business. A continued to participate in the pension plan
as a self-employed individual. In 1970, A died and his widow, in
compliance with one of the provisions of the pension plan, elected to
receive all of the benefits accrued to A prior to his death in a lump-
sum distribution. As A participated in the plan as a self-employed
individual immediately prior to his death, A's widow may not exclude any
portion of such distribution from her gross income under section 101(b).
Example (2). A, an attorney, is employed by the X Company in their
legal department. He is covered by the pension plan that X has
established for its employees. Under the terms of A's contract of
employment with X, A is permitted to carry on the private practice of
law in his off-duty hours. A establishes his own pension plan with
respect to his earnings from his private practice. On A's death, his
widow elected to receive a lump-sum distribution with respect to any
benefits accrued to A under both X's pension plan and A's own pension
plan. To the extent that such payment otherwise complies with the
requirements of section 101(b), up to $5,000 of the amount paid by X may
be excluded from her gross income. No part of the distribution from A's
own pension plan may be excluded from her gross income under section
101(b) because A participated in the plan as a self-employed individual
immediately before his death.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR
5070, Apr. 14, 1964; T.D. 6783, 29 FR 18357, Dec. 24, 1964; T.D. 7352,
40 FR 16666, Apr. 14, 1975; T.D. 7428, 41 FR 34619, Aug. 16, 1976; T.D.
7836, 47 FR 42337, Sept. 27, 1982; T.D. 7955, 49 FR 19975, May 11, 1984;
T.D. 8540, 59 FR 30102, 30103, June 10, 1994]
Sec. 1.101-3 Interest payments.
(a) Applicability of section 101(c). Section 101(c) provides that if
any amount excluded from gross income by section 101(a) (relating to
life insurance proceeds) or section 101(b) (relating to employees' death
benefits) is held under an agreement to pay interest thereon, the
interest payments shall be included in gross income. This provision
applies to payments made (either by an insurer or by or on behalf of an
employer) of interest earned on any amount so excluded from gross income
which is held without substantial diminution of the principal amount
during the period when such interest payments are being made or credited
to the beneficiaries or estate of the insured or the employee.
[[Page 343]]
For example, if a monthly payment is $100, of which $99 represents
interests and $1 represents diminution of the principal amount, the
principal amount shall be considered held under an agreement to pay
interest thereon and the interest payment shall be included in the gross
income of the recipient. Section 101(c) applies whether the election to
have an amount held under an agreement to pay interest thereon is made
by the insured or employee or by his beneficiaries or estate, and
whether or not an interest rate is explicitly stated in the agreement.
Section 101(d), relating to the payment of life insurance proceeds at a
date later than death, shall not apply to any amount to which section
101(c) applies. See section 101(d)(4). However, both section 101(c) and
section 101(d) may apply to payments received under a single life
insurance contract. For provisions relating to the application of this
rule to payments received under a permanent life insurance policy with a
family income rider attached, see paragraph (h) of Sec. 1.101-4.
(b) Determination of ``present value''. For the purpose of
determining whether section 101(c) or section 101(d) applies, the
present value (at the time of the insured's death) of any amount which
is to be paid at a date later than death shall be determined by the use
of the interest rate and mortality tables used by the insurer in
determining the size of the payments to be made.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR
10127, Oct. 28, 1961]
Sec. 1.101-4 Payment of life insurance proceeds at a date later than death.
(a) In general. (1)(i) Section 101(d) states the provisions
governing the exclusion from gross income of amounts (other than those
to which section 101(c) applies) received under a life insurance
contract and paid by reason of the death of the insured which are paid
to a beneficiary on a date or dates later than the death of the insured.
However, if the amounts payable as proceeds of life insurance to which
section 101(a)(1) applies cannot in any event exceed the amount payable
at the time of the insured's death, such amounts are fully excludable
from the gross income of the recipient (or recipients) without regard to
the actual time of payment and no further determination need be made
under this section. Section 101(d)(1)(A) provides an exclusion from
gross income of any amount determined by a proration, under applicable
regulations, of ``an amount held by an insurer with respect to any
beneficiary''. The quoted phrase is defined in section 101(d)(2). For
the regulations governing the method of computation of this proration,
see paragraphs (c) through (f) of this section. The prorated amounts are
to be excluded from the gross income of the beneficiary regardless of
the taxable year in which they are actually received (see example (2) of
subparagraph (2) of this paragraph).
(ii) Section 101(d)(1)(B) provides an additional exclusion where
life insurance proceeds are paid to the surviving spouse of an insured.
For purposes of this exclusion, the term ``surviving spouse'' means the
spouse of the insured as of the date of death, including a spouse
legally separated, but not under a decree of absolute divorce (section
101(d)(3)). To the extent that the total payments, under one or more
agreements, made in excess of the amounts determined by proration under
section 101(d)(1)(A) do not exceed $1,000 in the taxable year of
receipt, they shall be excluded from the gross income of the surviving
spouse (whether or not payment of any part of such amounts is guaranteed
by the insurer). Amounts excludable under section 101(d)(1)(B) are not
``prorated'' amounts.
(2) The principles of this paragraph may be illustrated by the
following examples:
Example (1). A surviving spouse elects to receive all of the life
insurance proceeds with respect to one insured, amounting to $150,000,
in ten annual installments of $16,500 each, based on a certain
guaranteed interest rate. The prorated amount is $15,000 ($150,000/10).
As the second payment, the insurer pays $17,850, which exceeds the
guaranteed payment by $1,350 as the result of earnings of the insurer in
excess of those required to pay the guaranteed installments. The
surviving spouse shall include $1,850 in gross income and exclude
$16,000--determined in the following manner:
Fixed payment (including guaranteed interest)................. $16,500
Excess interest............................................... 1,350
---------
[[Page 344]]
Total payment............................................. 17,850
Prorated amount............................................... 15,000
---------
Excess over prorated amount............................... 2,850
Annual excess over prorated amount excludable under section 1,000
101(d)(1)(B).................................................
---------
Amount includible in gross income......................... 1,850
Example (2). Assume the same facts as in example (1), except that
the third and fourth annual installments, totalling $33,000 (2x$16,500),
are received in a single subsequent taxable year of the surviving
spouse. The prorated amount of $15,000 of each annual installment,
totalling $30,000, shall be excluded even though the spouse receives
more than one annual installment in the single subsequent taxable year.
However, the surviving spouse is entitled to only one exclusion of
$1,000 under section 101(d)(1)(B) for each taxable year of receipt. The
surviving spouse shall include $2,000 in her gross income for the
taxable year with respect to the above installment payments ($33,000
less the sum of $30,000 plus $1,000).
Example (3). Assume the same facts as in example (1), except that
the surviving spouse dies before receiving all ten annual installments
and the remaining installments are paid to her estate or beneficiary. In
such a case, $15,000 of each installment would continue to be excludable
from the gross income of the recipient, but any amounts received in
excess thereof would be fully includible.
(b) Amount held by an insurer. (1) For the purpose of the proration
referred to in section 101(d)(1), an ``amount held by an insurer with
respect to any beneficiary'' means an amount equal to the present value
to such beneficiary (as of the date of death of the insured) of an
agreement by the insurer under a life insurance policy (whether as an
option or otherwise) to pay such beneficiary an amount or amounts at a
date or dates later than the death of the insured (section 101(d)(2)).
The present value of such agreement is to be computed as if the
agreement under the life insurance policy had been entered into on the
date of death of the insured, except that such value shall be determined
by the use of the mortality table and interest rate used by the insurer
in calculating payments to be made to the beneficiary under such
agreement. Where an insurance policy provides an option for the payment
of a specific amount upon the death of the insured in full discharge of
the contract, such lump sum is the amount held by the insurer with
respect to all beneficiaries (or their beneficiaries) under the
contract. See, however, paragraph (e) of this section.
(2) In the case of two or more beneficiaries, the ``amount held by
the insurer'' with respect to each beneficiary depends on the
relationship of the different benefits payable to such beneficiaries.
Where the amounts payable to two or more beneficiaries are independent
of each other, the ``amount held by the insurer with respect to each
beneficiary'' shall be determined and prorated over the periods involved
independently. Thus, if a certain amount per month is to be paid to A
for his life, and, concurrently, another amount per month is to be paid
to B for his life, the ``amount held by the insurer'' shall be
determined and prorated for both A and B independently, but the
aggregate shall not exceed the total present value of such payments to
both. On the other hand, if the obligation to pay B was contingent on
his surviving A, the ``amount held by the insurer'' shall be considered
an amount held with respect to both beneficiaries simultaneously.
Furthermore, it is immaterial whether B is a named beneficiary or merely
the ultimate recipient of payments for a term of years. For the special
rules governing the computation of the proration of the ``amount held by
an insurer'' in determining amounts excludable under the provisions of
section 101(d), see paragraphs (c) to (f), inclusive, of this section.
(3) Notwithstanding any other provision of this section, if the
policy was transferred for a valuable consideration, the total ``amount
held by an insurer'' cannot exceed the sum of the consideration paid
plus any premiums or other consideration paid subsequent to the transfer
if the provisions of section 101(a)(2) and paragraph (b) of Sec. 1.101-1
limit the excludability of the proceeds to such total.
(c) Treatment of payments for life to a sole beneficiary. If the
contract provides for the payment of a specified lump sum, but, pursuant
to an agreement between the beneficiary and the insurer, payments are to
be made during the life of the beneficiary in lieu of such lump sum, the
lump sum shall be divided by the life expectancy of the beneficiary
determined in accordance with
[[Page 345]]
the mortality table used by the insurer in determining the benefits to
be paid. However, if payments are to be made to the estate or
beneficiary of the primary beneficiary in the event that the primary
beneficiary dies before receiving a certain number of payments or a
specified total amount, such lump sum shall be reduced by the present
value (at the time of the insured's death) of amounts which may be paid
by reason of the guarantee, in accordance with the provisions of
paragraph (e) of this section, before making this calculation. To the
extent that payments received in each taxable year do not exceed the
amount found from the above calculation, they are ``prorated amounts''
of the ``amount held by an insurer'' and are excludable from the gross
income of the beneficiary without regard to whether he lives beyond the
life expectancy used in making the calculation. If the contract in
question does not provide for the payment of a specific lump sum upon
the death of the insured as one of the alternative methods of payment,
the present value (at the time of the death of the insured) of the
payments to be made the beneficiary, determined in accordance with the
interest rate and mortality table used by the insurer in determining the
benefits to be paid, shall be used in the above calculation in lieu of a
lump sum.
(d) Treatment of payments to two or more beneficiaries--(1)
Unrelated payments. If payments are to be made to two or more
beneficiaries, but the payments to be made to each are to be made
without regard to whether or not payments are made or continue to be
made to the other beneficiaries, the present value (at the time of the
insured's death) of such payments to each beneficiary shall be
determined independently for each such beneficiary. The present value so
determined shall then be divided by the term for which the payments are
to be made. If the payments are to be made for the life of the
beneficiary, the divisor shall be the life expectancy of the
beneficiary. To the extent that payments received by a beneficiary do
not exceed the amount found from the above calculation, they are
``prorated amounts'' of the ``amount held by an insurer'' with respect
to such beneficiary and are excludable from the gross income of the
beneficiary without regard to whether he lives beyond any life
expectancy used in making the calculation. For the purpose of the
calculation described above, both the ``present value'' of the payments
to be made periodically and the ``life expectancy'' of the beneficiary
shall be determined in accordance with the interest rate and mortality
table used by the insurer in determining the benefits to be paid. If
payments are to be made to the estate or beneficiary of a primary
beneficiary in the event that such beneficiary dies before receiving a
certain number of payments or a specified total amount, the ``present
value'' of payments to such beneficiary shall not include the present
value (at the time of the insured's death) of amounts which may be paid
by reason of such a guarantee. See paragraph (e) of this section.
(2) Related payments. If payments to be made to two or more
beneficiaries are in the nature of a joint and survivor annuity (as
described in paragraph (b) of Sec. 1.72-5), the present value (at the
time of the insured's death) of the payments to be made to all such
beneficiaries shall be divided by the life expectancy of such
beneficiaries as a group. To the extent that the payments received by a
beneficiary do not exceed the amount found from the above calculation,
they are ``prorated amounts'' of the ``amount held by an insurer'' with
respect to such beneficiary and are excludable from the gross income of
the beneficiary without regard to whether all the beneficiaries involved
live beyond the life expectancy used in making the calculation. For the
purpose of the calculation described above, both the ``present value''
of the payments to be made periodically and the ``life expectancy'' of
all the beneficiaries as a group shall be determined in accordance with
the interest rate and mortality table used by the insurer in determining
the benefits to be paid. If the contract provides that certain payments
are to be made in the event that all the beneficiaries of the group die
before a specified number of payments or a specified total amount is
received by them, the present value
[[Page 346]]
of payments to be made to the group shall not include the present value
(at the time of the insured's death) of amounts which may be paid by
reason of such a guarantee. See paragraph (e) of this section.
(3) Payments to secondary beneficiaries. Payments made by reason of
the death of a beneficiary (or beneficiaries) under a contract providing
that such payments shall be made in the event that the beneficiary (or
beneficiaries) die before receiving a specified number of payments or a
specified total amount shall be excluded from the gross income of the
recipient to the extent that such payments are made solely by reason of
such guarantee.
(e) Treatment of present value of guaranteed payments. In the case
of payments which are to be made for a life or lives under a contract
providing that further amounts shall be paid upon the death of the
primary beneficiary (or beneficiaries) in the event that such
beneficiary (or beneficiaries) die before receiving a specified number
of payments or a specified total amount, the present value (at the time
of the insured's death) of all payments to be made under the contract
shall not include, for purposes of prorating the amount held by the
insurer, the present value of the payments which may be made to the
estate or beneficiary of the primary beneficiary. In such a case, any
lump sum amount used to measure the value of the amount held by an
insurer with respect to the primary beneficiary must be reduced by the
value at the time of the insured's death of any amounts which may be
paid by reason of the guarantee provided for a secondary beneficiary or
the estate of the primary beneficiary before prorating such lump sum
over the life or lives of the primary beneficiaries. Such present value
(of the guaranteed payment) shall be determined by the use of the
interest rate and mortality tables used by the insurer in determining
the benefits to be paid.
(f) Treatment of payments not paid periodically. Payments made to
beneficiaries other than periodically shall be included in the gross
income of the recipients, but only to the extent that they exceed
amounts payable at the time of the death of the insured to each such
beneficiary or, where no such amounts are specified, the present value
of such payments at that time.
(g) Examples. The principles of this section may be illustrated by
the following examples:
Example (1). A life insurance policy provides for the payment of
$20,000 in a lump sum to the beneficiary at the death of the insured.
Upon the death of the insured, the beneficiary elects an option to leave
the proceeds with the company for five years and then receive payment of
$24,000, having no claim of right to any part of such sum before the
entire five years have passed. Upon the payment of the larger sum,
$24,000, the beneficiary shall include $4,000 in gross income and
exclude $20,000 therefrom. If it is assumed that the same insurer has
determined the benefits to be paid, the same result would obtain if no
lump sum amount were provided for at the death of the insured and the
beneficiary were to be paid $24,000 five years later. In neither of
these cases would the surviving spouse be able to exclude any additional
amount from gross income since both cases involve an amount held by an
insurer under an agreement to pay interest thereon to which section
101(c) applies, rather than an amount to be paid periodically after the
death of the insured to which section 101(d) applies.
Example (2). A life insurance policy provides that $1,200 per year
shall be paid the sole beneficiary (other than a surviving spouse) until
a fund of $20,000 and interest which accrues on the remaining balance is
exhausted. A guaranteed rate of interest is specified, but excess
interest may be credited according to the earnings of the insurer.
Assuming that the fund will be exhausted in 20 years if only the
guaranteed interest is actually credited, the beneficiary shall exclude
$1,000 of each installment received ($20,000 divided by 20) and any
installments received, whether by the beneficiary or his estate or
beneficiary, in excess of 20 shall be fully included in the gross income
of the recipient. If, instead, the excess interest were to be paid each
year, any portion of each installment representing an excess over $1,000
would be fully includible in the recipient's gross income. Thus, if an
installment of $1,350 were received, $350 of it would be included in
gross income.
Example (3). Assume that the sole life insurance policy of a
decedent provides only for the payment of $5,000 per year for the life
of his surviving spouse, beginning with the insured's death. If the
present value of the proceeds, determined by reference to the interest
rate and the mortality table used by the insurance company, is $60,000,
and such beneficiary's life expectancy is 20 years,
[[Page 347]]
$3,000 of each $5,000 payment ($60,000 divided by 20) is excludable as
the prorated portion of the ``amount held by an insurer''. For each
taxable year in which a payment is made, an additional $1,000 is
excludable from the gross income of the surviving spouse. Hence, if she
receives only one $5,000 payment in her taxable year, only $1,000 is
includible in her gross income in that year with respect to such payment
($5,000 less the total amount excludable, $4,000). Assuming that the
policy also provides for payments of $2,000 per year for 10 years to the
daughter of the insured, the present value of the payments to the
daughter is to be computed separately for the purpose of determining the
excludable portion of each payment to her. Assuming that such present
value is $15,000, $1,500 of each payment of $2,000 received by the
daughter is excludable from her gross income ($15,000 divided by 10).
The remaining $500 shall be included in the gross income of the
daughter.
Example (4). Beneficiaries A and B, neither of whom is the surviving
spouse of the insured, are each to receive annual payments of $1,800 for
each of their respective lives upon the death of the insured. The
contract does not provide for payments to be made in any other manner.
Assuming that the present value of the payments to be made to A, whose
life expectancy according to the insurer's mortality table is 30 years,
is $36,000, A shall exclude $1,200 of each payment received ($36,000
divided by 30). Assuming that the present value of the payments to be
made to B, whose life expectancy according to the insurer's mortality
table is 20 years, is $27,000, B shall exclude $1,350 of each payment
received ($27,000 divided by 20).
Example (5). A life insurance policy provides for the payment of
$76,500 in a lump sum to the beneficiary, A, at the death of the
insured. Upon the insured's death, however, A selects an option for the
payment of $2,000 per year for her life and for the same amount to be
paid after her death to B, her daughter, for her life. Assuming that
since A is 51 years of age and her daughter is 28 years of age, the
insurer determined the amount of the payments by reference to a
mortality table under which the life expectancy for the lives of both A
and B, joint and survivor, is 51 years, $1,500 of each $2,000 payment to
either A or B ($76,500 divided by 51, or $1,500) shall be excluded from
the gross income of the recipient. However, if A is the surviving spouse
of the insured and no other contracts of insurance whose proceeds are to
be paid to her at a date later than death are involved, A shall exclude
the entire payment of $2,000 in any taxable year in which she receives
but one such payment because of the additional exclusion under section
101(d)(1)(B).
Example (6). Beneficiaries A and B, neither of whom is the surviving
spouse of the insured, are each to receive annual payments of $1,800 for
each of their respective lives upon the death of the insured, but after
the death of either, the survivor is to receive the payments formerly
made to the deceased beneficiary until the survivor dies. Assuming that
the life expectancy, joint and survivor, of A and B in accordance with
the mortality table used by the insurer is 32 years and assuming that
the total present value of the benefits to both (determined in
accordance with the interest rate used by the insurer) is $80,000, A and
B shall each exclude $1,250 of each installment of $1,800 ($80,000
divided by the life expectancy, 32, multiplied by the fraction of the
annual payment payable to each, one-half) until the death of either.
Thereafter, the survivor shall exclude $2,500 of each installment of
$3,600 ($80,000 divided by 32).
Example (7). A life insurance policy provides for the payment of
$75,000 in a lump sum to the beneficiary, A, at the death of the
insured. A, upon the insured's death, however, selects an option for the
payment of $4,000 per year for life, with a guarantee that any part of
the $75,000 lump sum not paid to A before his death shall be paid to B
(or his estate). A's beneficiary. Assuming that, under the criteria used
by the insurer in determining the benefits to be paid, the present value
of the guaranteed amount to B is $13,500 and that A's life expectancy is
25 years, the lump sum shall be reduced by the present value of the
guarantee to B ($75,000 less $13,500, or $61,500) and divided by A's
life expectancy ($61,500 divided by 25, or $2,460). Hence, $2,460 of
each $4,000 payment is excludable from A's gross income. If A is the
surviving spouse of the insured and no other contracts of insurance
whose proceeds are to be paid to her at a date later than death are
involved, A shall exclude $3,460 of each $4,000 payment from gross
income in any taxable year in which but one such payment is received.
Under these facts, if any amount is paid to B by reason of the fact that
A dies before receiving a total of $75,000, the residue of the lump sum
paid to B shall be excluded from B's gross income since it is wholly in
lieu of the present value of such guarantee plus the present value of
the payments to be made to the first beneficiary, and is therefore
entirely an ``amount held by an insurer'' paid at a date later than
death (see paragraph (d)(3) of this section).
Example (8). Assume that an insurance policy does not provide for
the payment of a lump sum, but provides for the payment of $1,200 per
year for a beneficiary's life upon the death of the insured, and also
provides that if ten payments are not made to the beneficiary before
death a secondary beneficiary (whether named by the insured or by the
first beneficiary) shall receive the remainder of the ten payments in
similar installments. If, according to the criteria used by the
insurance company in determining
[[Page 348]]
the benefits, the present value of the payments to the first beneficiary
is $12,000 and the life expectancy of such beneficiary is 15 years, $800
of each payment received by the first beneficiary is excludable from
gross income. Assuming that the same figures obtain even though the
payments are to be made at the rate of $100 per month, the yearly
exclusion remains the same unless more or less than twelve months'
installments are received by the beneficiary in a particular taxable
year. In such a case two-thirds of the total received in the particular
taxable year with respect to such beneficiary shall be excluded from
gross income. Under either of the above alternatives, any amount
received by the second beneficiary by reason of the guarantee of ten
payments is fully excludable from the beneficiary's gross income since
it is wholly in lieu of the present value of such guarantee plus the
present value of the payments to be made to the first beneficiary and is
therefore entirely an ``amount held by an insurer'' paid at a date later
than death (see paragraph (d)(3) of this section).
(h) Applicability of both section 101(c) and 101(d) to payments
under a single life insurance contract--(1) In general. Section 101(d)
shall not apply to interest payments on any amount held by an insurer
under an agreement to pay interest thereon (see sections 101(c) and
101(d)(4) and Sec. 1.101-3). On the other hand, both section 101(c) and
section 101(d) may be applicable to payments received under a single
life insurance contract, if such payments consist both of interest on an
amount held by an insurer under an agreement to pay interest thereon and
of amounts held by the insurer and paid on a date or dates later than
the death of the insured. One instance when both section 101(c) and
section 101(d) may be applicable to payments received under a single
life insurance contract is in the case of a permanent life insurance
policy with a family income rider attached. A typical family income
rider is one which provides additional term insurance coverage for a
specified number of years from the register date of the basic policy.
Under the policy with such a rider, if the insured dies at any time
during the term period, the beneficiary is entitled to receive (i)
monthly payments of a specified amount commencing as of the date of
death and continuing for the balance of the term period, and (ii) a lump
sum payment of the proceeds under the basic policy to be paid at the end
of the term period. If the insured dies after the expiration of the term
period, the beneficiary receives only the proceeds under the basic
policy. If the insured dies before the expiration of the term period,
part of each monthly payment received by the beneficiary during the term
period consists of interest on the proceeds of the basic policy (such
proceeds being retained by the insurer until the end of the term
period). The remaining part consists of an installment (principal plus
interest) of the proceeds of the terms insurance purchased under the
family income rider. The amount of term insurance which is provided
under the family income rider is, therefore, that amount which, at the
date of the insured's death, will provide proceeds sufficient to fund
such remaining part of each monthly payment. Since the proceeds under
the basic policy are held by the insurer until the end of the term
period, that portion of each monthly payment which consists of interest
on such proceeds is interest on an amount held by an insurer under an
agreement to pay interest thereon and is includible in gross income
under section 101(c). On the other hand, since the remaining portion of
each monthly payment consists of an installment payment (principal plus
interest) of the proceeds of the term insurance, it is a payment of an
amount held by the insurer and paid on a date later than the death of
the insured to which section 101(d) and this section applies (including
the $1,000 exclusion allowed the surviving spouse under section
101(d)(1)(B)). The proceeds of the basic policy, when received in a lump
sum at the end of the term period, are excludable from gross income
under section 101(a).
(2) Example of tax treatment of amounts received under a family
income rider. The following example illustrates the application of the
principles contained in subparagraph (1) of this paragraph to payments
received under a permanent life insurance policy with a family income
rider attached:
Example. The sole life insurance policy of the insured provides for
the payment of $100,000 to the beneficiary (the insured's spouse) on his
death. In addition, there is attached to the policy a family income
rider
[[Page 349]]
which provides that, if the insured dies before the 20th anniversary of
the basic policy, the beneficiary shall receive (i) monthly payments of
$1,000 commencing on the date of the insured's death and ending with the
payment prior to the 20th anniversary of the basic policy, and (ii) a
single payment of $100,000 payable on the 20th anniversary of the basic
policy. On the date of the insured's death, the beneficiary (surviving
spouse of the insured) is entitled to 36 monthly payments of $1,000 and
to the single payment of $100,000 on the 20th anniversary of the basic
policy. The value of the proceeds of the term insurance at the date of
the insured's death is $28,409.00 (the present value of the portion of
the monthly payments to which section 101(d) applies computed on the
basis that the interest rate used by the insurer in determining the
benefits to be paid under the contract is 2\1/4\ percent). The amount of
each monthly payment of $1,000 which is includible in the beneficiary's
gross income is determined in the following manner:
(a) Total amount of monthly payment......................... $1,000.00
(b) Amount includible in gross income under section 101(c) 185.00
as interest on the $100,000 proceeds under the basic policy
held by the insurer until 20th anniversary of the basic
policy (computed on the basis that the interest rate used
by the insurer in determining the benefits to be paid under
the contract is 2\1/4\ percent)............................
(c) Amount to which section 101(d) applies ((a) minus (b)).. 815.00
(d) Amount excludable from gross income under section 101(d) 789.14
($28,409/36)...............................................
(e) Amount includible in gross income under section 101(d) 25.86
without taking into account the $1,000 exclusion allowed
the beneficiary as the surviving spouse ((c) minus (d))....
The beneficiary, as the surviving spouse of the insured, is entitled to
exclude the amounts otherwise includible in gross income under section
101(d) (item (e)) to the extent such amounts do not exceed $1,000 in the
taxable year of receipt. This exclusion is not applicable, however, with
respect to the amount of each payment which is includible in gross
income under section 101(c) (item (b)). In this example, therefore, the
beneficiary must include $185 of each monthly payment in gross income
(amount includible under section 101(c)), but may exclude the $25.86
which is otherwise includible under section 101(d). The payment of
$100,000 which is payable to the beneficiary on the 20th anniversary of
the basic policy will be entirely excludable from gross income under
section 101(a).
(3) Limitation on amount considered to be an ``amount held by an
insurer''. See paragraph (b)(3) of this section for a limitation on the
amount which shall be considered an ``amount held by an insurer'' in the
case of proceeds of life insurance which are paid subsequent to the
transfer of the policy for a valuable consideration.
(4) Effective date. The provisions of this paragraph are applicable
only with respect to amounts received during taxable years beginning
after October 28, 1961, irrespective of the date of the death of the
insured.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR
10127, Oct. 28, 1961; 26 FR 10275, Nov. 2, 1961]
Sec. 1.101-5 Alimony, etc., payments.
Proceeds of life insurance policies paid by reason of the death of
the insured to his separated wife, or payment excludable as death
benefits under section 101(b) paid to a deceased employee's separated
wife, if paid to discharge legal obligations imposed by a decree of
divorce or separate maintenance, by a written separation agreement
executed after August 16, 1954, or by a decree of support entered after
March 1, 1954, shall be included in the gross income of the separated
wife if section 71 or 682 is applicable to the payments made. For
definition of ``wife'', see section 7701(a)(17) and the regulations
thereunder.
Sec. 1.101-6 Effective date.
(a) Except as otherwise provided in paragraph (h)(4) of Sec. 1.101-
4, the provisions of section 101 of the Internal Revenue Code of 1954
and Secs. 1.101-1, 1.101-2, 1.101-3, 1.101-4, and 1.101-5 are applicable
only with respect to amounts received by reason of the death of an
insured or an employee occurring after August 16, 1954. In the case of
such amounts, these sections are applicable even though the receipt of
such amounts occurred in a taxable year beginning before January 1,
1954, to which the Internal Revenue Code of 1939 applies.
(b) Section 22(b)(1) of the Internal Revenue Code of 1939 and the
regulations pertaining thereto shall apply to amounts received by reason
of the death of an insured or an employee occurring before August 17,
1954, regardless of the date of receipt.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR
10128, Oct. 28, 1961]
[[Page 350]]
Sec. 1.101-7 Mortality table used to determine exclusion for deferred payments of life insurance proceeds.
(a) Mortality table. Notwithstanding any provision of Sec. 1.101-4
that otherwise would permit the use of a mortality table not described
in this section, the mortality table set forth in Sec. 1.72-7(c)(1) must
be used to determine--
(1) The amount held by an insurer with respect to a beneficiary for
purposes of section 101(d)(2) and Sec. 1.101-4; and
(2) The period or periods with respect to which payments are to be
made for purposes of section 101(d)(1) and Sec. 1.101-4.
(b) Examples. The principles of this section may be illustrated by
the following examples:
Example (1). A life insurance policy provides only for the payment
of $5,000 per year for the life of the beneficiary, A, beginning with
the insured's death. If A is 59 years of age at the time of the
insured's death, the period with respect to which the payments are to be
made is 25 years. This period is determined by using the mortality table
set forth in Sec. 1.72-7(c)(1), and is shown in Table V of Sec. 1.72-9
(which contains life expectancy tables determined using this mortality
table). If the present value of the proceeds, determined by reference to
the interest rate used by the insurance company and the mortality table
set forth in Sec. 1.72-7(c)(1), is $75,000, $3,000 of each $5,000
payment ($75,000 divided by 25) is excluded from the gross income of A.
Example (2). A life insurance policy provides for the payment of
$82,500 in a lump sum to the beneficiary, A, at the death of the
insured. Upon the insured's death, however, A selects an option for the
payment of $2,000 per year for life and for the same amount to be paid
after A's death to B for B's life. If A is 51 years of age and B is 28
years of age at the death of the insured, the period with respect to
which the payments are to be made is 55 years. This period is determined
by using the mortality table set forth in Sec. 1.72-7(c)(1), and is
shown in Table VI of Sec. 1.72-9 (which contains life expectancy tables
determined using this mortality table). Accordingly $1,500 of each
$2,000 payment ($82,500 divided by 55) is excluded from the gross income
of the recipient.
(c) Effective date. This section applies to amounts received with
respect to deaths occurring after October 22, 1986, in taxable years
ending after October 22, 1986.
[T.D. 8161, 52 FR 35415, Sept. 21, 1987. Redesignated and amended by
T.D. 8272, 54 FR 47980, Nov. 20, 1989]
Sec. 1.102-1 Gifts and inheritances.
(a) General rule. Property received as a gift, or received under a
will or under statutes of descent and distribution, is not includible in
gross income, although the income from such property is includible in
gross income. An amount of principal paid under a marriage settlement is
a gift. However, see section 71 and the regulations thereunder for rules
relating to alimony or allowances paid upon divorce or separation.
Section 102 does not apply to prizes and awards (see section 74 and
Sec. 1.74-1) nor to scholarships and fellowship grants (see section 117
and the regulations thereunder).
(b) Income from gifts and inheritances. The income from any property
received as a gift, or under a will or statute of descent and
distribution shall not be excluded from gross income under paragraph (a)
of this section.
(c) Gifts and inheritances of income. If the gift, bequest, devise,
or inheritance is of income from property, it shall not be excluded from
gross income under paragraph (a) of this section. Section 102 provides a
special rule for the treatment of certain gifts, bequests, devises, or
inheritances which by their terms are to be paid, credited, or
distributed at intervals. Except as provided in section 663(a)(1) and
paragraph (d) of this section, to the extent any such gift, bequest,
devise, or inheritance is paid, credited, or to be distributed out of
income from property, it shall be considered a gift, bequest, devise, or
inheritance of income from property. Section 102 provides the same
treatment for amounts of income from property which is paid, credited,
or to be distributed under a gift or bequest whether the gift or bequest
is in terms of a right to payments at intervals (regardless of income)
or is in terms of a right to income. To the extent the amounts in either
case are paid, credited, or to be distributed at intervals out of
income, they are not to be excluded under section 102 from the
taxpayer's gross income.
[[Page 351]]
(d) Effect of Subchapter J. Any amount required to be included in
the gross income of a beneficiary under sections 652, 662, or 668 shall
be treated for purposes of this section as a gift, bequest, devise, or
inheritance of income from property. On the other hand, any amount
excluded from the gross income of a beneficiary under section 663(a)(1)
shall be treated for purposes of this section as property acquired by
gift, bequest, devise, or inheritance.
(e) Income taxed to grantor or assignor. Section 102 is not intended
to tax a donee upon the same income which is taxed to the grantor of a
trust or assignor of income under section 61 or sections 671 through
677, inclusive.
Sec. 1.103-1 Interest upon obligations of a State, territory, etc.
(a) Interest upon obligations of a State, territory, a possession of
the United States, the District of Columbia, or any political
subdivision thereof (hereinafter collectively or individually referred
to as ``State or local governmental unit'') is not includable in gross
income, except as provided under section 103 (c) and (d) and the
regulations thereunder.
(b) Obligations issued by or on behalf of any State or local
governmental unit by constituted authorities empowered to issue such
obligations are the obligations of such a unit. However, section
103(a)(1) and this section do not apply to industrial development bonds
except as otherwise provided in section 103(c). See section 103(c) and
Secs. 1.103-7 through 1.103-12 for the rules concerning interest paid on
industrial development bonds. See section 103(d) for rules concerning
interest paid on arbitrage bonds. Certificates issued by a political
subdivision for public improvements (such as sewers, sidewalks, streets,
etc.) which are evidence of special assessments against specific
property, which assessments become a lien against such property and
which the political subdivision is required to enforce, are, for
purposes of this section, obligations of the political subdivision even
though the obligations are to be satisfied out of special funds and not
out of general funds or taxes. The term ``political subdivision'', for
purposes of this section denotes any division of any State or local
governmental unit which is a municipal corporation or which has been
delegated the right to exercise part of the sovereign power of the unit.
As thus defined, a political subdivision of any State or local
governmental unit may or may not, for purposes of this section, include
special assessment districts so created, such as road, water, sewer,
gas, light, reclamation, drainage, irrigation, levee, school, harbor,
port improvement, and similar districts and divisions of any such unit.
[T.D. 7199, 37 FR 15486, Aug. 3, 1972]
Sec. 1.103-2 Dividends from shares and stock of Federal agencies or instrumentalities.
(a) Issued before March 28, 1942. (1) Section 26 of the Federal Farm
Loan Act of July 17, 1916 (12 U.S.C. 931), provides that Federal land
banks and Federal land bank associations, including the capital and
reserve or surplus therein and the income derived therefrom, shall be
exempt from taxation, except taxes upon real estate. Section 7 of the
Federal Reserve Act of December 23, 1913 (12 U.S.C. 531), provides that
Federal reserve banks, including the capital stock and surplus therein
and the income derived therefrom, shall be exempt from taxation, except
taxes upon real estate. Section 13 of the Federal Home Loan Bank Act (12
U.S.C. 1433) provides that the Federal Home Loan Bank including its
franchise, its capital, reserves, and surplus, its advances, and its
income shall be exempt from all taxation, except taxes upon real estate.
Section 5(h) of the Home Owners' Loan Act of 1933 (12 U.S.C. 1464(h))
provides that shares of Federal savings and loan associations shall,
both as to their value and the income therefrom, be exempt from all
taxation (except surtaxes, estate, inheritance, and gift taxes) imposed
by the United States. Under the above-mentioned provisions, income
consisting of dividends on stock of Federal land banks, Federal land
bank associations, Federal home loan banks, and Federal reserve banks is
not, in the case of stock issued before March 28, 1942, includable in
gross income. Income consisting of dividends on share accounts of
Federal savings and loan associations is includable in gross income but,
in the case of
[[Page 352]]
shares issued before March 28, 1942, is not subject to the normal tax on
income. For taxability of such income in the case of such stock or
shares issued on or after March 28, 1942, see section 6 of the Public
Debt Act of 1942 (31 U.S.C. 742a) and paragraph (b) of this section. For
the time at which a stock or share is issued within the meaning of this
section, see paragraph (b) of this section.
(2) Regardless of the exemption from income tax of dividends paid on
the stock of Federal reserve banks, dividends paid by member banks are
treated like dividends of ordinary corporations.
(3) Dividends on the stock of the central bank for cooperatives, the
production credit corporations, production credit associations, and
banks for cooperatives, organized under the provisions of the Farm
Credit Act of 1933 (12 U.S.C. 1138), constitute income to the
recipients, subject to both the normal tax and surtax (see section 63 of
the Farm Credit Act of 1933 (12 U.S.C. 1138c)).
(b) Issued on or after March 28, 1942. (1) By virtue of the
provisions of section 6 of the Public Debt Act of 1942 (31 U.S.C. 742a),
the tax exemption provisions set forth in paragraph (a) of this section
with respect to income consisting of dividends on stock of the Federal
land banks, Federal land bank associations, and Federal reserve banks,
or on share accounts of Federal savings and loan associations, are not
applicable in the case of dividends on such stock or shares issued on or
after March 28, 1942.
(2) For the purposes of this section, a stock or share is deemed to
be issued at the time and to the extent that payment therefor is made to
the agency or instrumentality. The date of issuance of the certificate
or other evidence of ownership of such stock or share is not
determinative if payment is made at an earlier or later date. Where old
stock is retired in exchange for new stock of a different character or
preference, the new stock shall be deemed to have been issued at the
time of the exchange rather than when the old stock was paid for. These
rules may be illustrated by the following examples:
Example (1). A, the owner of an investment share account, consisting
of 10 shares, in a Federal savings and loan association, has a single
certificate issued before March 28, 1942, evidencing such ownership. In
order that A may dispose of half of such shares, the association at his
request issues, after March 27, 1942, two 5-share certificates in
substitution for the 10-share certificate. The shares evidenced by the
two new certificates are deemed to have been issued before March 28,
1942, the shares having been paid for before such date.
Example (2). The X Bank, a member of a Federal reserve bank, owns 50
shares of Federal reserve bank stock, evidenced by a single stock
certificate issued before March 28, 1942. On December 31, 1942, the X
Bank reduces the amount of its capital stock, as a result of which it is
required to reduce the amount of its Federal reserve bank stock to 40
shares. It surrenders the 50-share certificate to the Federal reserve
bank and receives a new 40-share certificate. The 40 shares evidenced by
such certificate are deemed to have been issued before March 28, 1942.
On December 31, 1943, the X Bank increases the amount of its capital
stock, as a result of which it is required to purchase 10 additional
shares of the Federal reserve bank stock. The Federal reserve bank
issues a 10-share certificate evidencing ownership of the new shares. Of
the 50 shares then owned by the X Bank, 40 were issued prior to March
28, 1942, and 10 were issued after March 27, 1942.
Example (3). A, the owner of a savings share account in the amount
of $100 in a Federal savings and loan association, has a passbook
containing a certificate issued prior to March 28, 1942, evidencing such
ownership. Subsequent to March 27, 1942, A deposits $10,000 in the
account. With respect to the $10,000 deposit, the share is deemed to
have been issued after March 27, 1942.
Sec. 1.103-3 Interest upon notes secured by mortgages executed to Federal agencies or instrumentalities.
Section 26 of the Federal Farm Loan Act (12 U.S.C. 931), and section
210 of such act, as added by section 2 of the act of March 4, 1923 (12
U.S.C. 1111), provide that first mortgages executed to Federal land
banks, joint-stock land banks, or Federal intermediate credit banks, and
the income derived therefrom, shall be exempt from taxation.
Accordingly, income consisting of interest on promissory notes held by
such banks and secured by such first mortgages is not subject to the
income tax.
[[Page 353]]
Sec. 1.103-4 Interest upon United States obligations.
(a) Issued before March 1, 1941. (1) Interest upon obligations of
the United States issued on or before September 1, 1917, is exempt from
tax. In the case of obligations issued by the United States after
September 1, 1917, and in the case of obligations of a corporation
organized under act of Congress, if such corporation is an
instrumentality of the United States, the interest is exempt from tax
only if and to the extent provided in the acts authorizing the issue
thereof, as amended and supplemented.
(2) Interest on Treasury bonds issued before March 1, 1941, is
exempt from Federal income taxes except surtaxes imposed upon the income
or profits of individuals, associations, or corporations. However,
interest on an aggregate of not exceeding $5,000 principal amount of
such bonds is also exempt from surtaxes. Interest in excess of the
interest on an aggregate of not exceeding $5,000 principal amount of
such bonds is subject to surtax and must be included in gross income.
(3) Interest credited to postal savings accounts upon moneys
deposited before March 1, 1941, in postal savings banks is wholly exempt
from income tax.
(b) Issued on or after March 1, 1941. (1) Under the provisions of
sections 4 and 5 of the Public Debt Act of 1941 (31 U.S.C. 742a),
interest upon obligations issued on or after March 1, 1941, by the
United States, or any agency or instrumentality thereof, shall not have
any exemption, as such, from Federal income tax except in respect of any
such obligations which the Federal Maritime Board and Maritime
Administration (formerly United States Maritime Commission) or the
Federal Housing Administration has, before March 1, 1941, contracted to
issue at a future date. The interest on such obligations so contracted
to be issued shall bear such tax-exemption privileges as were at the
time of such contract provided in the law authorizing their issuance.
For the purposes hereof, under section 4(a) of the Public Debt Act of
1941, a Territory and a possession of the United States (or any
political subdivisions thereof), and the District of Columbia, and any
agency or instrumentality of any one or more of the foregoing, shall not
be considered as an agency or instrumentality of the United States.
(2) In the case of obligations issued as the result of a refunding
operation, as, for example, where a corporation exchanges bonds for
previously issued bonds, the refunding obligations are deemed, for the
purposes of this section, to have been issued at the time of the
exchange rather than at the time the original bonds were issued.
Sec. 1.103-5 Treasury bond exemption in the case of trusts or partnerships.
(a) When the income of a trust is taxable to beneficiaries, as in
the case of a trust the income of which is to be distributed to the
beneficiaries currently, each beneficiary is entitled to exemption as if
he owned directly a proportionate part of the Treasury bonds held in
trust. When, on the other hand, income is taxable to the trustee, as in
the case of a trust the income of which is accumulated for the benefit
of unborn or unascertained persons, the trust, as the owner of the bonds
held in trust, is entitled to the exemption on account of such
ownership. In general, see sections 652(b) and 662(b) and the
regulations thereunder.
(b) As the income of a partnership is taxable to the individual
partners, each partner is entitled to exemption as if he owned directly
a proportionate part of the bonds held by the partnership. For rules
relating to partially tax-exempt interest see section 702(a)(7) and the
regulations thereunder.
Sec. 1.103-6 Interest upon United States obligations in the case of nonresident aliens and foreign corporations, not engaged in business in the United States.
By virtue of section 4 of the Victory Liberty Loan Act of March 3,
1919 (31 U.S.C. 750), amending section 3 of the Fourth Liberty Bond Act
of July 9, 1918 (31 U.S.C. 750), the interest received on and after
March 3, 1919, on bonds, notes, and certificates of indebtedness of the
United States while beneficially owned by a nonresident alien
individual, or a foreign corporation, partnership, or association, if
such individual, corporation, partnership, or association is not engaged
in business in
[[Page 354]]
the United States, is exempt from income taxes. Such exemption applies
only to such bonds, notes, or certificates as have been issued before
March 1, 1941. Interest derived by a nonresident alien individual, or by
a foreign corporation, partnership, or association on such bonds, notes,
or certificates issued on or after March 1, 1941, is subject to tax as
in the case of taxpayers generally as provided in paragraph (b) of
Sec. 1.103-4.
Sec. 1.103-7 Industrial development bonds.
(a) In general. Under section 103(c)(1) and this section, an
industrial development bond issued after April 30, 1968, shall be
treated as an obligation not described in section 103(a)(1) and
Sec. 1.103-1. Accordingly, interest paid on such a bond is includable in
gross income unless the bond was issued by a State, or local
governmental unit to finance certain exempt facilities (see section
103(c)(4) and Sec. 1.103-8), to finance an industrial park (see section
103(c)(5) and Sec. 1.103-9), or as part of an exempt small issue (see
section 103(c)(6) and Sec. 1.103-10). For applicable rules when an
industrial development bond is held by a substantial user (or a person
related to a substantial user) of such an exempt facility, or an
industrial park, or a facility financed with the proceeds of such an
exempt small issue, see section 103(c)(7) and Sec. 1.103-11. See also
Sec. 1.103-12 for the transitional provisions concerning the interest
paid on certain industrial development bonds issued before January 1,
1969, and certain other industrial development bonds. Even if section
103(c) does not prevent a bond from being treated as an obligation
described in section 103(a)(1) and Sec. 1.103-1, such bond shall
nevertheless be treated as an obligation which is not described in
section 103(a)(1) and Sec. 1.103-1 if under section 103(d) it is an
arbitrage bond. For purposes of section 103(c), the term ``issue''
includes a single obligation such as a single note issued in connection
with a bank loan as well as a series of notes or bonds.
(b) Industrial development bonds--(1) Definition. For purposes of
this section, the term ``industrial development bond'' means any
obligation--
(i) Which is issued as part of an issue all or a major portion of
the proceeds of which are to be used directly or indirectly in any trade
or business carried on by any person who is not an exempt person (as
defined in subparagraph (2) of this paragraph), and
(ii) The payment of the principal or interest on which, under the
terms of such obligation or any underlying arrangement (as described in
subparagraph (4) of this paragraph), is in whole or in major part (i.e.,
major portion)--
(a) Secured by any interest in property used or to be used in a
trade or business,
(b) Secured by any interest in payments in respect of property used
or to be used in a trade or business, or
(c) To be derived from payments in respect of property, or borrowed
money, used or to be used in a trade or business.
See subparagraphs (3) and (4) of this paragraph for the trade or
business test and the security interest test respectively. See
Sec. 1.103-8(a)(6) to determine the amount of proceeds of an issue for
which the amount payable during each annual period over the term of the
issue is less than the amount of interest accruing thereon in such
period, e.g., in the case of an issue sold by the issuer for less than
its face amount.
(2) Exempt person. The term ``exempt person'' means a governmental
unit as defined in this subparagraph, or an organization which is
described in section 501(c)(3) and this subparagraph and is exempt from
taxation under section 501(a). For purposes of this subparagraph, the
term ``governmental unit'' means a State or local governmental unit (as
defined in Sec. 1.103-1). For purposes of this subparagraph, the term
``governmental unit'' also includes the United States of America (or an
agency or instrumentality of the United States of America), but only in
the case of obligations (i) issued on or before August 3, 1972, or (ii)
issued after August 3, 1972, with respect to which a bond resolution or
any other official action was taken and in reliance on such action
either (a) construction of such facility to be financed with such
obligations commenced or (b) a binding
[[Page 355]]
contract was entered into, or an irrevocable bid was submitted, prior to
August 3, 1972, or (iii) issued after August 3, 1972, with respect to a
program approved by Congress prior to such date but only if (a) a
portion of such program has been financed by obligations issued prior to
such date, to which section 103(a) applied pursuant to a ruling issued
by the Commissioner or his delegate prior to such date and (b)
construction of one or more facilities comprising a part of such program
commenced prior to such date. For purposes of this subparagraph, a tax-
exempt organization is an exempt person only with respect to a trade or
business it carries on which is not an unrelated trade or business.
Whether a particular trade or business carried on by a tax-exempt
organization is an unrelated trade or business is determined by applying
the rules of section 513(a) (relating to general rule for unrelated
trade or business) and the regulations thereunder to the tax-exempt
organization without regard to whether the organization is an
organization subject to the tax imposed by section 511 (relating to
imposition of tax on unrelated business income of charitable, etc.,
organizations).
(3) Trade or business test. (i) The trade or business test relates
to the use of the proceeds of a bond issue. The test is met if all or a
major portion of the proceeds of a bond issue is used in a trade or
business carried on by a nonexempt person. For example, if all or a
major portion of the proceeds of a bond issue is to be loaned to one or
more private business users, or is to be used to acquire, construct, or
reconstruct facilities to be leased or sold to such private business
users, and such proceeds or facilities are to be used in trades or
businesses carried on by them, such proceeds are to be used in a trade
or business carried on by persons who are not exempt persons, and the
debt obligations comprising the bond issue satisfy the trade or business
test. If, however, less than a major portion of the proceeds of an issue
is to be loaned to nonexempt persons or is to be used to acquire or
construct facilities which will be used in a trade or business carried
on by a nonexempt person, the debt obligations will not be industrial
development bonds. Also, when publicly-owned facilities which are
intended for general public use, such as toll roads or bridges, are
constructed with the proceeds of a bond issue and used by nonexempt
persons in their trades or businesses on the same basis as other members
of the public, such use does not constitute a use in the trade or
business of a nonexempt person for purposes of the trade or business
test.
(ii) In determining whether a debt obligation meets the trade or
business test, the indirect, as well as the direct, use of the proceeds
is to be taken into account. For example, the debt obligations
comprising a bond issue do not fail to satisfy the trade or business
test merely because the State or local governmental unit uses the
proceeds to engage in a series of financing transactions for property to
be used by private business users in trades or businesses carried on by
them. Similarly, if such proceeds are to be used to construct facilities
to be leased or sold to any nonexempt person for use in a trade or
business it carries on, such proceeds are to be used in a trade or
business carried on by a nonexempt person and the debt obligations
comprising such issue satisfy the trade or business test. If such
proceeds are to be used to construct facilities to be leased or sold to
an exempt person who will, in turn, lease or sell the facilities to a
nonexempt person for use in a trade or business, such proceeds are to be
used in a trade or business carried on by a nonexempt person and the
debt obligations comprising such issue satisfy the trade or business
test. In addition, proceeds will be treated as being used in the trade
or business of a nonexempt person in situations involving other
arrangements, whether in a single transaction or in a series of
transactions, whereby a nonexempt person uses property acquired with the
proceeds of a bond issue in its trade or business.
(iii) The use of more than 25 percent of the proceeds of an issue of
obligations in the trades or businesses of nonexempt persons will
constitute the use of a major portion of such proceeds in such manner.
In the case of the direct or indirect use of the proceeds of an issue of
obligations or the direct or indirect use of a facility constructed,
[[Page 356]]
reconstructed, or acquired with such proceeds, the use by all nonexempt
persons in their trades or businesses must be aggregated to determine
whether the trade or business test is satisfied. If more than 25 percent
of the proceeds of a bond issue is used in the trades or businesses of
nonexempt persons, the trade or business test is satisfied. For special
rules with respect to the acquisition of the output of facilities, see
subparagraph (5) of this paragraph.
(4) Security interest test. The security interest test relates to
the nature of the security for, and the source of, the payment of either
the principal or interest on a bond issue. The nature of the security
for, and the source of, the payment may be determined from the terms of
the bond indenture or on the basis of an underlying arrangement. An
underlying arrangement to provide security for, or the source of, the
payment of the principal or interest on an obligation may result from
separate agreements between the parties or may be determined on the
basis of all the facts and circumstances surrounding the issuance of the
bonds. The property which is the security for, or the source of, the
payment of either the principal or interest on a debt obligation need
not be property acquired with bond proceeds. The security interest test
is satisfied if, for example, a debt obligation is secured by unimproved
land or investment securities used, directly or indirectly, in any trade
or business carried on by any private business user. A pledge of the
full faith and credit of a State or local governmental unit will not
prevent a debt obligation from otherwise satisfying the security
interest test. For example, if the payment of either the principal or
interest on a bond issue is secured by both a pledge of the full faith
and credit of a State or local governmental unit and any interest in
property used or to be used in a trade or business, the bond issue
satisfies the security interest test. For rules with respect to the
acquisition of the output of facilities see subparagraph (5) of this
paragraph.
(5) Trade or business test and security interest test with respect
to certain output contracts. (i) The use by one or more nonexempt
persons of a major portion of the subparagraph (5) output of facilities
such as electric energy, gas, or water facilities constructed,
reconstructed, or acquired with the proceeds of an issue satisfies the
trade or business test and the security interest test if such use has
the effect of transferring to nonexempt persons the benefits of
ownership of such facilities, and the burdens of paying the debt service
on governmental obligations used directly or indirectly to finance such
facilities, so as to constitute the indirect use by them of a major
portion of such proceeds. Such benefits and burdens are transferred and
a major portion of the proceeds of an issue is used indirectly by the
users of the subparagraph (5) output of such a facility which is owned
and operated by an exempt person where--
(a)(1) One nonexempt person agrees pursuant to a contract to take,
or to take or pay for, a major portion (more than 25 percent) of the
subparagraph (5) output (within the meaning of subdivision (ii) of this
subparagraph) of such a facility (whether or not conditional upon the
production of such output) or (2) two or more nonexempt persons, each of
which pays annually a guaranteed minimum payment exceeding 3 percent of
the average annual debt service with respect to the obligations in
question, agree, pursuant to contracts, to take, or to take or pay for,
a major portion (more than 25 percent) of the subparagraph (5) output of
such a facility (whether or not conditioned upon the production of such
output), and
(b) Payment made or to be made with respect to such contract or
contracts by such nonexempt person or persons exceeds a major part (more
than 25 percent) of the total debt service with respect to such issue of
obligations.
(ii) For purposes of this subparagraph--
(a) Where a contract described in subdivision (i) of this
subparagraph may be extended by the issuer of obligations described
therein, the term of the contract shall be considered to include the
period for which such contract may be so extended.
(b) The subparagraph (5) output of a facility shall be determined by
multiplying the number of units produced or to be produced by the
facility in 1 year
[[Page 357]]
by the number of years in the contract term of the issue of obligations
issued to provide such facility. The number of units produced or to be
produced by a facility in 1 year shall be determined by reference to its
nameplate capacity (or where there is no nameplate capacity, its maximum
capacity) without any reduction for reserves or other unutilized
capacity. The contract term of an issue begins on the date the output of
a facility is first taken, pursuant to a take or a take or pay contract,
by a nonexempt person and ends on the latest maturity date of any
obligation of the issue (determined without regard to any optional
redemption dates). If, however, on or before the date of issue of a
prior issue of governmental obligations issued to provide a facility,
the issuer makes a commitment in the bond indenture or related document
to refinance such prior issue with one or more subsequent issues of
governmental obligations, then the contract term of the issue shall be
determined with regard to the latest redemption date of any obligation
of the last such refinancing issue with respect to such facility
(determined without regard to any optional redemption dates). Where it
appears that the term of an issue (or the terms of two or more issues)
is extended for purposes of extending the contract term of an issue and
thereby increasing the subparagraph (5) output of the facility provided
by such issue, the subparagraph (5) output of such facility shall be
determined by the Commissioner without regard to the provisions of this
subdivision (b).
(c) The total debt service with respect to an issue of obligations
shall be the total dollar amount (excluding any penalties) payable with
respect to such issue over its entire term. The entire term of an issue
begins on its date of issue and ends on the latest maturity date of any
obligation of the issue (determined without regard to any optional
redemption dates). If, however, on or before the date of issue of a
prior issue of governmental obligations the issuer makes a commitment in
the bond indenture or related document to refinance such prior issue
with one or more subsequent issues of governmental obligations, the
entire term of the issue shall be determined with regard to the latest
redemption date of any obligation of the last such refinancing issue
(determined without regard to any optional redemption dates).
(d) Two or more nonexempt persons who are related persons (within
the meaning of section 103(c)(6)(C)) shall be treated as one nonexempt
person.
(c) Examples. The application of the rules contained in section
103(c) (2) and (3) and paragraph (b) of this section are illustrated by
the following examples:
Example (1). State A and corporation X enter into an arrangement
under which A is to provide a factory which X will lease for 20 years.
The arrangement provides (1) that A will issue $10 million of bonds, (2)
that the proceeds of the bond issue will be used to purchase land and to
construct and equip a factory in accordance with X's specifications, (3)
that X will rent the facility (land, factory, and equipment) for 20
years at an annual rental equal to the amount necessary to amortize the
principal and pay the interest on the outstanding bonds, and (4) that
such payments by X and the facility itself will be the security for the
bonds. The bonds are industrial development bonds since they are part of
an issue of obligations (1) all of the proceeds of which are to be used
(by purchasing land and constructing and equipping the factory) in a
trade or business by a nonexempt person, and (2) the payment of the
principal and interest on which is secured by the facility and payments
to be made with respect thereto.
Example (2). The facts are the same as in example (1) except that
(1) X will purchase the facility, and (2) annual payments equal to the
amount necessary to amortize the principal and pay the interest on the
outstanding bonds will be made by X. The bonds are industrial
development bonds for the reasons set forth in example (1).
Example (3). State B and corporation X enter into an arrangement
under which B is to loan $10 million to X. The arrangement provides (1)
that B will issue $10 million of bonds, (2) that the proceeds of the
bond issue will be loaned to X to provide additional working capital and
to finance the acquisition of certain new machinery, (3) that X will
repay the loan in annual installments equal to the amount necessary to
amortize the principal and pay the interest on the outstanding bonds,
and (4) that the payments on the loan and the machinery will be the
security for only the payment of the principal on the bonds. The bonds
are industrial development bonds since they are part of an issue of
obligations (1) all of the proceeds of which are to be used in a trade
or business by a nonexempt person, and (2) the payment of
[[Page 358]]
the principal on which is secured by payments to be made in respect of
property to be used in a trade or business. The result would be the same
if only the payment of the interest on the bonds were secured by
payments on the loan and machinery.
Example (4). The facts are the same as in example (1), (2), or (3)
except that the annual payments required to be made by corporation X
exceed the amount necessary to amortize the principal and pay the
interest on the outstanding bonds. The bonds are industrial development
bonds for the reasons set forth in such examples. The fact that
corporation X is required to pay an amount in excess of the amount
necessary to pay the principal and interest on the bonds does not affect
their status as industrial development bonds. Similarly, if the annual
payments required to be made by corporation X were sufficient to pay
only a major portion of either the principal or the interest on the
outstanding bonds, the bonds would be industrial development bonds for
the reasons set forth in such examples.
Example (5). The facts are the same as in example (1), (2), (3), or
(4) except that the issuer is a political subdivision which has taxing
power and the bonds are general obligation bonds. Since both the trade
or business and the security interest tests are met, the bonds are
industrial development bonds notwithstanding the fact that they
constitute an unconditional obligation of the issuer payable from its
general revenues.
Example (6). (a) State C issues its general obligation bonds to
purchase land and construct a hotel for use by the general public (i.e.,
tourists, visitors, travelers on business, etc.). The bond indenture
provides (1) that C will own and operate the project for the period
required to redeem the bonds, and (2) that the project itself and the
revenues derived therefrom are the security for the bonds. The bonds are
not industrial development bonds since (1) the proceeds are to be used
by an exempt person in a trade or business carried on by such person,
and (2) a major portion of such proceeds is not to be used, directly or
indirectly, in a trade or business carried on by a nonexempt person. Use
of the hotel by hotel guests who are travelling in connection with
trades or businesses of nonexempt persons is not an indirect use of the
hotel by such nonexempt persons for purposes of section 103(c).
(b) The facts are the same as in paragraph (a) of this example
except that corporation Y enters into a long-term agreement with C that
Y will rent more than one-fourth of the rooms on an annual basis for a
period approximately equal to one half of the term of the bonds. The
bonds are industrial development bonds because (1) a major portion of
the proceeds used to construct the hotel is to be used in the trade or
business of corporation Y (a nonexempt person) and (2) a major portion
of the principal and interest on such issue will be derived from
payments in respect of the property used in the trade or business of Y.
Example (7). (a) State D and corporation Y enter into an agreement
under which Y will lease for 20 years three floors of a 12- story office
building to be constructed by D on land which it will acquire. D will
occupy the grade floor and the remaining eight floors of the building.
The portion of the costs of acquiring the land and constructing the
building which are allocated to the space to be leased by Y is not in
excess of 25 percent of the total costs of acquiring the land and
constructing the building. Such costs, whether attributable to the
acquisition of land or the construction of the building, were allocated
to leased space in the same proportion that the reasonable rental value
of such leased space bears to the reasonable rental value of the entire
building. From the facts and circumstances presented, it is determined
that such allocation was reasonable. The arrangement between D and Y
provides that D will issue $10 million of bonds, that the proceeds of
the bond issue will be used to purchase land and construct an office
building, that Y will lease the designated floor space for 20 years at
its reasonable rental value, and that such rental payments and the
building itself shall be security for the bonds. The bonds are not
industrial development bonds since a major portion of the proceeds is
not to be used, directly or indirectly, in the trade or business of a
nonexempt person.
(b) The facts are the same as in paragraph (a) of this example
except that corporation Y will lease four floors, and the costs
allocated to these floors are in excess of 25 percent of D's investment
in the land and building. The bonds are industrial development bonds
because (1) a major portion of the building is to be used in the trade
or business of a nonexempt person, and (2) a major portion of the
principal and interest on such issue is secured by the rental payments
on the building.
Example (8). The facts are the same as in paragraph (b) of example
(7) except that, instead of leasing any space to corporation Y, State D
will lease the four floors to numerous unrelated private business users
to be used in their trades or businesses. No lease will have a term
exceeding 2 years. A major portion of the principal and interest will be
paid from the revenues that D will derive from such leases. The fact
that the activities of D, an exempt person, may amount to a trade or
business of leasing property is not material, and the bonds are
industrial development bonds for the reasons set forth in paragraph (b)
of example (7). The result would be the same in the case of long-term
leases.
Example (9). State E issues its obligations to finance the
construction of dormitories
[[Page 359]]
for educational institution Z which is an organization described in
section 501(c)(3) and exempt from tax under section 501(a). The
dormitories are to be owned and operated by Z and their operation does
not constitute an unrelated trade or business. The bonds are not
industrial development bonds since the proceeds are to be used by an
exempt person in a trade or business carried on by such person which is
not an unrelated trade or business, as determined by applying section
513(a) to Z.
Example (10). State F issues its obligations to finance the
construction of a toll road and the cost of erecting related facilities
such as gasoline service stations and restaurants. Such related
facilities represent less than 25 percent of the total cost of the
project and are to be leased or sold to nonexempt persons. The toll road
is to be owned and operated by F. The revenues from the toll road and
from the rental of related facilities are the security for the bonds.
The bonds are not industrial development bonds since a major portion of
the proceeds is not to be used, directly or indirectly, in the trades or
businesses of nonexempt persons. The fact that vehicles owned by
nonexempt persons engaged in their trades or businesses may use the road
in common with, or as a part of, the general public is not material.
Example (11). City G issues its obligations to finance the
construction of a municipal auditorium which it will own and operate.
The use of the auditorium will be open to anyone who wishes to use it
for a short period of time on a rate-scale basis. The rights of such a
user are only those of a transient occupant rather than the full legal
possessory interests of a lessee. It is anticipated that the auditorium
will be used by schools, church groups, and fraternities, and numerous
commercial organizations. The revenues from the rentals of the
auditorium and the auditorium building itself will be the security for
the bonds. The bonds are not industrial development bonds because such
use is not a use in the trade or business of a nonexempt person.
Example (12). The facts are the same as in example (11) except that
one nonexempt person will have a 20-year rental agreement providing for
exclusive use of the entire auditorium for more than 3 months of each
year at a rental comparable to that charged short-term users. The bonds
are industrial development bonds since such use is a use in the trade or
business of a nonexempt person and, therefore, a major portion of the
proceeds of the issue will be used in the trade or business of a
nonexempt person and a major portion of the principal or interest on
such issue will be secured by a facility used in such trade or business
and by payments with respect to such facility.
Example (13). In order to construct an electric generating facility
of a size sufficient to take advantage of the economies of scale: (1)
City H will issue $50 million of its 25-year bonds and Z (a privately
owned electric utility) will use $100 million of its funds for
construction of a facility they will jointly own as tenants in common.
(2) Each of the participants will share in the ownership, output, and
operating expenses of the facility in proportion to its contribution to
the cost of the facility, that is, one-third by H and two-thirds by Z.
(3) H's bonds will be secured by H's ownership in the facility and by
revenues to be derived from the sale of H's share of the annual output
of the facility. (4) Because H will need only 50 percent of its share of
the annual output of the facility, it agrees to sell to Z 25 percent of
its share of such annual output for a period of 20 years pursuant to a
contract under which Z agrees to take or pay for such power in all
events. The facility will begin operation, and Z will begin to receive
power, 4 years after the City H obligations are issued. The contract
term of the issue will, therefore, be 21 years. (5) H also agrees to
sell the remaining 25 percent of its share of the annual output to
numerous other private utilities under a prevailing rate schedule
including demand charges. (6) No contracts will be executed obligating
any person other than Z to purchase any specified amount of the power
for any specified period of time and no one such person (other than Z)
will pay a demand charge or other minimum payment under conditions
which, under paragraph (b)(5) of this section, result in a transfer of
the benefits of ownership and the burdens of paying the debt service on
obligations used directly or indirectly to provide such facilities. The
bonds are not industrial development bonds because H's one-third
interest in the facility (financed with bond proceeds) shall be treated
as a separate property interest and, although 25 percent of H's interest
in the annual output of the facility will be used directly or indirectly
in the trade or business of Z, a nonexempt person, under the rule of
paragraph (b)(5) of this section, such portion constitutes less than a
major portion of the subparagraph (5) output of the facility. If more
than 25 percent of the subparagraph (5) output of the facility were to
be sold to Z pursuant to the take or pay contract, the bonds would be
industrial development bonds since they would be secured by H's
ownership in the facility and revenues therefrom, and under the rules of
paragraph (b)(5) of this section a major portion of the proceeds of the
bond issue would be used in the trade or business of Z, a nonexempt
person.
Example (14). J, a political subdivision of a State, will issue
several series of bonds from time to time and will use the proceeds to
rehabilitate urban areas. More than 25 percent of the proceeds of each
issue will be used for
[[Page 360]]
the rehabilitation and construction of buildings which will be leased or
sold to nonexempt persons for use in their trades or businesses. There
is no limitation either on the number of issues or the aggregate amount
of bonds which may be outstanding. No group of bondholders has any legal
claim prior to any other bondholders or creditors with respect to
specific revenues of J, and there is no arrangement whereby revenues
from a particular project are paid into a trust or constructive trust,
or sinking fund, or are otherwise segregated or restricted for the
benefit of any group of bondholders. There is, however, an unconditional
obligation by J to pay the principal and interest on each issue of
bonds. Further, it is apparent that J requires the revenues from the
lease or sale of buildings to nonexempt persons in order to pay in full
the principal and interest on the bonds in question. The bonds are
industrial development bonds because a major portion of the proceeds
will be used in the trades or businesses of nonexempt persons and,
pursuant to an underlying arrangement, payment of the principal and
interest is, in major part, to be derived from payments in respect of
property or borrowed money used in the trades or businesses of nonexempt
persons.
Example (15). Power Authority K, a political subdivision created by
the legislature in State X to own and operate certain power generating
facilities, sells all of the power from its existing facilities to four
private utility systems under contracts executed in 1970, whereby such
four systems are required to take or pay for specified portions of the
total power output until the year 2000. Currently, existing facilities
supply all of the present needs of the four utility systems but their
future power requirements are expected to increase substantially. K
issues 20-year general obligation bonds to construct a large nuclear
generating facility. A fifth private utility system contracts with K to
take or pay for 30 percent of the subparagraph (5) output of the new
facility. The balance of the power output of the new facility will be
available for sale as required, but initially it is not anticipated
there will be any need for such power. The revenues from the contract
with the fifth private utility system will be sufficient to pay less
than 25 percent of the principal or interest on the bonds. The balance,
which will exceed 25 percent of the principal or interest on such bonds,
will be paid from revenues from the contracts with the four systems from
sale of power produced by the old facilities. The bonds will be
industrial development bonds because a major portion of the proceeds
will be used in the trade or business of a nonexempt person, and payment
of the principal and interest, pursuant to an underlying arrangement,
will be derived in major part from payments in respect of property used
in the trades or businesses of nonexempt persons.
(d) Certain refunding issues--(1) General rule. In the case of an
issue of obligations issued to refund the outstanding face amount of an
issue of obligations, the proceeds of the refunding issue will be
considered to be used for the purpose for which the proceeds of the
issue to be refunded were used. The rules of this subparagraph shall
apply regardless of the date of issuance of the issue to be refunded and
shall apply to refunding issues to be issued to refund prior refunding
issues.
(2) Obligations issued prior to effective date. In the case of an
issue of obligations issued to refund the outstanding face amount of an
issue of obligations issued on or before April 30, 1968 (or before
January 1, 1969, if the transitional rules of Sec. 1.103-12 are
applicable) which would have been industrial development bonds within
the meaning of section 103(c)(2) had they been issued after such date,
the refunding issue shall not be considered to be an issue of industrial
development bonds if it does not make funds available for any purpose
other than the debt service on the obligations. For rules as to
arbitrage bonds, see section 103(d).
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). In 1969, State A issued $20 million of 20-year revenue
bonds the proceeds of which were used to contruct a sports facility
which qualifies as an exempt facility described in section 103(c)(4)(B)
and paragraph (c) of Sec. 1.103-8. The sports facility will be owned and
operated by X, a nonexempt person, for the use of the general public. In
1975, A issues $15 million of revenue bonds in order to refund the
outstanding face amount of the 1969 issue. Since the proceeds of the
1969 issue were used for an exempt facility, the proceeds of the 1975
refunding issue will be considered to be used for the same purposes and
section 103(c)(1) shall not apply to the 1975 refunding issue. The
result would have been the same if the original issue had been issued in
1965. For rules as to a refunding obligation held by substantial users
of facilities constructed with the proceeds of the issue refunded, see
section 103(c)(7) and Sec. 1.103-11.
Example (2). In 1967, prior to the effective date of section 103(c),
city B issued $10 million of revenue bonds the proceeds of which
[[Page 361]]
were used to construct a manufacturing facility for corporation Y, a
nonexempt person. Lease payments by Y were security for the bonds. In
1975, B issue $7 million of revenue bonds in order to retire the
outstanding face amount of the 1967 issue. The interest rate of the 1975
issue is one and one-half percentage points lower than the interest rate
on the 1967 issue. Both issues sold at par. All of the terms of the 1975
issue are the same as the terms of the 1967 issue with the exception of
the interest rate. The 1975 refunding issue will not be considered to be
an issue of industrial development bonds since the refunding issue will
not make funds available for any purpose other than the debt service on
the outstanding obligations.
Example (3). The facts are the same as in example (2) except that
the interest rate on the refunding issue is the same as the interest
rate on the issue to be refunded. Assume further that city B issued the
1975 refunding issue in order to extend the term of the obligations
issued in 1967 as the result of its inability to pay such obligations
due to insufficient revenues. The results will be the same as in example
(2) for the reasons stated therein.
[T.D. 7199, 37 FR 15486, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972, as
amended by T.D. 7869, 48 FR 1708, Jan. 14, 1983]
Sec. 1.103-8 Interest on bonds to finance certain exempt facilities.
(a) In general--(1) General rule. (i) Under section 103(b)(4),
interest paid on an issue of obligations issued by a State or local
governmental unit (as defined in Sec. 1.103-1) is not includable in
gross income if substantially all of the proceeds of such issue is to be
used to provide one or more of the exempt facilities listed in
subparagraphs (A) through (J) of section 103(b)(4) and in this section.
However, interest on an obligation of such issue is includable in gross
income if the obligation is held by a substantial user or a related
person (as described in section 103(b)(13) and Sec. 1.103-11). If
substantially all of the proceeds of a bond issue is to be used to
provide such exempt facilities, the debt obligations are treated as
obligations described in section 103(a)(1) and Sec. 1.103-1 even though
such obligations are industrial development bonds as defined in section
103(b)(2) and Sec. 1.103-7. Substantially all of the proceeds of an
issue of governmental obligations are used to provide an exempt facility
if 90 percent or more of such proceeds are so used. For purposes of this
``substantially all'' test, two rules apply. First, proceeds are reduced
by amounts properly allocable on a pro rata basis between providing the
exempt facility and other uses of the proceeds. Second, amounts used to
provide an exempt facility include amounts paid or incurred which are
chargeable to the facility's capital account or would be so chargeable
either with a proper election by a taxpayer (for example, under section
266) or but for a proper election by a taxpayer to deduct such amounts.
In the event the amount payable with respect to an issue during each
annual period over its term is less than the amount of interest accruing
thereon in such period, e.g., in the case of an issue sold by the issuer
for less than its face amount, see paragraph (a)(6) of this section to
determine the amount of proceeds of the issue.
(ii) The provisions of subdivision (i) of this subparagraph shall
also apply to an issue of obligations substantially all of the proceeds
of which is to be used to provide exempt facilities described in this
section and for either or both of the following purposes: (a) To acquire
or develop land as the site for an industrial park described in section
103(b)(5) and Sec. 1.103-9, (b) to provide facilities to be used by an
exempt person.
(iii) Section 103(b)(4) only becomes applicable where the bond issue
meets both the trade or business and the security interest tests so that
obligations are industrial development bonds within the meaning of
section 103(b)(2). For rules as to exempt facilities including property
functionally related and subordinate to such facilities, see
subparagraph (3) of this paragraph. For rules with respect to the
ultimate use of proceeds of obligations, see subparagraph (4) of this
paragraph. For rules which limit the application of the provisions of
this section see subparagraph (5) of this paragraph. For the
interrelationship of the rules provided in this section and the
exemption for certain small issues provided in section 103(b)(6), see
Sec. 1.103-10.
(2) Public use requirement. To qualify under section 103(b)(4) and
this section as an exempt facility, a facility must serve or be
available on a regular basis for general public use, or be a part of a
facility so used, as contrasted with
[[Page 362]]
similar types of facilities which are constructed for the exclusive use
of a limited number of nonexempt persons in their trades or businesses.
For example, a private dock or wharf owned by or leased to, and serving
only a single manufacturing plant would not qualify as a facility for
general public use, but a hangar or repair facility at a municipal
airport, or a dock or a wharf, would qualify even if it is owned by, or
leased or permanently assigned to, a nonexempt person provided that such
nonexempt person directly serves the general public, such as a common
passenger carrier or freight carrier. Similarly, an airport owned or
operated by a nonexempt person for general public use is a facility for
public use, as is a dock or wharf which is a part of a public port.
However, a landing strip which, by reason of a formal or informal
agreement or by reason of geographic location, will not be available for
general public use does not satisfy the public use requirement. Sewage
or solid waste disposal facilities and air or water pollution control
facilities, described in sections 103(b)(4) (E) and (F) and paragraphs
(f) and (g) of this section, will be treated in all events as serving a
general public use although they may be part of a nonpublic facility
such as a manufacturing facility used in the trade or business of a
nonexempt user.
(3) Functionally related and subordinate. An exempt facility
includes any land, building, or other property functionally related and
subordinate to such facility. Property is not functionally related and
subordinate to a facility if it is not of a character and size
commensurate with the character and size of such facility. Since
substantially all of the proceeds of a bond issue must be used for the
exempt facility (or for any combination of exempt facilities, industrial
parks, and facilities to be used by exempt persons), including property
functionally related and subordinate thereto, an insubstantial amount of
the proceeds of a bond issue may be used for facilities which are
neither exempt facilities (or a combination of exempt facilities,
industrial parks and facilities to be used by exempt persons) nor
functionally related and subordinate to exempt facilities. Thus, for
example, where substantially all of the proceeds of an urban
redevelopment bond issue are to be used by a State urban redevelopment
agency for residential real property for family units within the meaning
of section 103(b)(4)(A) and paragraph (b) of this section, an
insubstantial amount may be used for an industrial or commercial project
or for any other purpose that is not functionally related and
subordinate to the residential real property for family units.
(4) Ultimate use of proceeds. The question whether substantially all
of the proceeds of an issue of obligations are to be used to provide one
or more of the exempt facilities listed in subparagraphs (A) through (J)
of section 103(b)(4) and in this section is to be resolved by reference
to the ultimate use of such proceeds. For example, such proceeds will be
treated as used to provide residential rental property whether the State
or local governmental unit (i) constructs such property and leases or
sells it to any person who is not an exempt person for use in such
person's trade or business of leasing such property; (ii) lends the
proceeds to any such person for such purpose; or (iii) lends the
proceeds to banks or other financial institutions in order to increase
the supply of funds for mortgage lending under conditions requiring such
banks or other financial institutions to use such proceeds only for
further lending for residential rental property.
(5) Limitation. (i) A facility qualifies under this section only to
the extent that there is a valid reimbursement allocation under
Sec. 1.150-2 with respect to expenditures that are incurred before the
issue date of the bonds to provide the facility and that are to be paid
with the proceeds of the issue. In addition, if the original use of the
facility begins before the issue date of the bonds, the facility does
not qualify under this section if any person that was a substantial user
of the facility at any time during the 5-year period before the issue
date or any related person to that user receives (directly or
indirectly) 5 percent or more of the proceeds of the issue for the
user's interest in the facility and is a substantial user of the
facility at any time
[[Page 363]]
during the 5-year period after the issue date, unless--
(A) An official intent for the facility is adopted under Sec. 1.150-
2 within 60 days after the date on which acquisition, construction, or
reconstruction of that facility commenced; and
(B) For an acquisition, no person that is a substantial user or
related person after the acquisition date was also a substantial user
more than 60 days before the date on which the official intent was
adopted.
(ii) A facility, the original use of which commences (or the
acquisition of which occurs) on or after the issue date of bonds to
provide that facility, qualifies under this section only to the extent
that an official intent for the facility is adopted under Sec. 1.150-2
by the issuer of the bonds within 60 days after the commencement of the
construction, reconstruction, or acquisition of that facility. Temporary
construction or other financing of a facility prior to the issuance of
the bonds to provide that facility will not cause that facility to be
one that does not qualify under this paragraph (a)(5)(ii).
(iii) For purposes of paragraph (a)(5)(i) of this section,
substantial user has the meaning used in section 147(a)(1), related
person has the meaning used in section 144(a)(3), and a user that is a
governmental unit within the meaning of Sec. 1.103-1 is disregarded.
(iv) Except to the extent provided in Secs. 1.142-4(d), 1.148-
11A(i), and 1.150-2(j), this paragraph (a)(5) applies to bonds issued
after June 30, 1993, and sold before July 8, 1997. See Sec. 1.142-4(d)
for rules relating to bonds sold on or after July 8, 1997.
(6) Deep discount obligations. (i) Except as otherwise provided in
paragraph (a)(7) of this section, the proceeds of any issue of
obligations sold by the issuer after June 4, 1982, shall include any
imputed proceeds of the issue. The imputed proceeds of an issue equal
the sum of the amounts of imputed proceeds for each annual period
(hereinafter, bond year) over the term of the issue.
(ii) The amount of imputed proceeds for a bond year equals--
(a) The sum of the amounts of interest that will accrue with respect
to each obligation that is part of the issue in such year, reduced (but
not below zero) by
(b) The sum of the amounts of principal and interest that become
payable with respect to the issue in that bond year.
(iii) Interest will be deemed to accrue with respect to an
obligation on an amount that, as of the commencement of that year, is
equal to the sum of--
(a) The purchase price (as defined in Sec. 1.103-13(d)(2)) allocable
to the obligation and
(b) The aggregate of the amounts of interest accruing in each prior
bond year with respect to the obligation, reduced by all amounts that
became payable with respect to the obligation in prior bond years. Any
amount that becomes payable during the 30 day period following any bond
year will be deemed to have become payable in such bond year. Thus, to
the extent interest on an obligation accruing during a bond year does
not become payable within 30 days from the end of such year, it is
treated as reinvested under the same terms as the obligation. For
purposes of this subparagraph (6), the rate at which such interest
accrues is equal to the yield of the obligation. Yield is computed in
the same manner as set forth in Sec. 1.103-13(c)(1)(ii) for computing
yield on governmental obligations (assuming annual compounding of
interest). Such computations shall be made without regard to optional
call dates.
(7) Deep discount obligations; special rules. (i) There are no
imputed proceeds with respect to an obligation if--
(a) The obligation does not have a stated interest rate
(determinable at the date of issue) that increases over the term of the
obligation, and
(b) The purchase price of the obligation is at least 95 percent of
its face amount.
At the option of the issuer, any obligation described in the preceding
sentence may be disregarded in computing the imputed proceeds of the
issue. Payments with respect to such obligations are also disregarded in
determining the amount payable with respect to the issue in that bond
year. If each obligation which is part of an issue is described in this
subdivision (i), there are no imputed proceeds with respect to the
issue.
[[Page 364]]
(ii) If the actual rate at which interest is to accrue over the term
of an obligation is indeterminable at the date of issue then, in
computing the yield of the obligation for purposes of this paragraph,
such rate shall be determined as if the conditions as of the date of
issue will not change over the term of the obligation. Thus, for
example, if interest on an obligation is to be paid semiannually at a
rate equal to 80 percent of the yield on six month Treasury bills at the
most recent public sale immediately prior to the corresponding interest
payment date and the yield on six month Treasury bills sold immediately
preceding the issue date is 10 percent, then the six month Treasury bill
rate is deemed to be a constant 10 percent for purposes of determining
the amount of imputed proceeds of the issue. Therefore, all interest
payments on the obligation would be deemed to be made at a rate of 8
percent.
(8) Examples. The principles of this paragraph may be illustrated by
the following examples:
Example (1). State A issues its bonds and plans to use substantially
all of the proceeds from such bond issue to purchase land and build a
facility which will be used for one of the purposes described in section
103(b)(4) and this section. The arrangement provides that (1) A will
issue bonds with a face amount of $21 million and with all accrued
interest payable annually, the proceeds of which (after deducting bond
election costs, costs of publishing notices, attorneys' fees, printing
costs, trustees' fees for fiscal agents, and similar expenses) will be
$20 million; (2) $18 million of the proceeds of the bond issue will be
used to purchase land and to construct such facility; (3) $2 million of
the proceeds will be used for an unrelated facility which will be used
by X, a nonexempt person, in a separate trade or business and for a
purpose not described in section 103(b) (4) or (5); (4) X will rent both
facilities for 20 years at an annual rental equal to the amount
necessary to amortize the principal and pay the interest annually on the
outstanding bonds; and (5) such payments by X and the facilities will be
the security for the bonds. On these facts, substantially all of the
proceeds will be used in connection with an exempt facility described in
section 103(b)(4) and this section. Accordingly, section 103(b)(1) does
not apply to the bonds unless such bonds are thereafter held by a person
who is a substantial user of the facilities or a related person within
the meaning of section 103(b)(13) and Sec. 1.103-11.
Example (2). On July 1, 1982, State B sells an issue of its
obligations to an underwriter in anticipation of a public offering. The
initial offering price is $18,627,639.69 of which $17,000,000 is to be
used to construct a pollution control facility described in section
103(b)(4)(F). X Corporation, a nonexempt person, is to use the facility
and, in exchange, is obligated to pay an amount equal to the face amount
of the issue when it becomes due. The obligations are issued on August
1, 1982. The face amount of the issue is $30,000,000. The issue is a
term issue with all obligations maturing on August 1, 1987. The issue
bears no stated rate of interest; there are no interest coupons on the
obligations. The bonds are industrial development bonds with a yield
(based upon annual compounding) of ten percent. Based on these facts,
the amount of imputed proceeds with respect to the issue is determined
as follows:
----------------------------------------------------------------------------------------------------------------
Purchase price
plus Imputed
Date accumulated Interest proceeds
interest
----------------------------------------------------------------------------------------------------------------
Aug. 1, 1983................................................... $18,627,639.69 $1,862,763.97 $1,862,763.97
Aug. 1, 1984................................................... 20,490,403.68 2,049,040.37 2,049,040.37
Aug. 1, 1985................................................... 22,539,444.03 2,253,944.40 2,253,944.40
Aug. 1, 1986................................................... 24,793,388.43 2,479,338.84 2,479,338.84
Aug. 1, 1987................................................... 27,272,727.27 2,727,272.73 0
------------------------------------------------
Total imputed proceeds....................................... ............... .............. 8,645,087.58
----------------------------------------------------------------------------------------------------------------
Therefore, proceeds of the issue equal $27,272,727.27 less issuance
costs. Substantially all of the bond proceeds are not used to provide an
exempt facility, and section 103(b)(1) applies to the issue.
Example (3). The facts are the same as example (2) except that the
issue has a face amount and purchase price of $18,500,000. The issue
also provides for one payment in addition to the redemption payment, in
the amount of $10,267,668 payable on or after August 1, 1986, one year
before maturity. Section 103(b)(1) applies to the issue.
Example (4). On July 1, 1982, City E sells an issue of industrial
development bonds to provide for a convention facility, as described in
section 103(b)(4)(C). Assume that the bonds are issued on that date as
well. The issue has
[[Page 365]]
a face amount of $15,240,000 and a purchase price of $11,929,382.53. The
estimated cost of the facility is $11,000,000. The bonds are ``zero
coupon'' bonds, i.e., there are no interest coupons. Each series is
initially offered for less than 95 percent of its face amount. The issue
matures serially over a five year period, with each series being
allocated a part of the purchase price of the issue. The following chart
indicates the purchase price and yield for each series and debt service
for the issue:
[[Page 366]]
[Amount allocable to each series]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1984 series 1985 series 1986 series 1987 series Interest
Date 1983 series at 8.5 at 8.75 at 9.25 at 9.75 accruing on Amount due Imputed
at 8 percent percent percent percent percent issue* proceeds
--------------------------------------------------------------------------------------------------------------------------------------------------------
July 1, 1983................................ 2,939,814.82 2,697,020.54 2,468,629.60 2,228.732.51 1,595,185.06 ............ ............ 0
235,185.18 229,246.75 216,005.09 206,157.76 155,530.54 1,042,125.32 3,175,000 ........
July 1, 1984................................ ............ 2,926,267.29 2,684,634.69 2,434,890.27 1,750,715.60 ............ ............ 0
............ 248,732.71 234,905.54 225,227.35 170,694.77 879,560.37 3,175,000 ........
July 1, 1985................................ ............ ............ 2,919,540.23 2,660,117.62 1,921,410.37 ............ ............ 0
............ ............ 255,459.77 246,060.88 187,337.51 688,858.16 3,175,000 ........
July 1, 1986................................ ............ ............ ............ 2,906,178.50 2,108,747.88 ............ ............ 0
............ ............ ............ 268,821.50 205,602.92 474,424.42 3,175,000 ........
July 1, 1987................................ ............ ............ ............ ............ 2,314,350.80 ............ ............ 0
............ ............ ............ ............ 225,649.20 225,649.20 2,540,000 ........
-----------------------------------------------------------------------------------------------------------
Total..................................... ............ ............ ............ ............ ............ ............ 15,240,000 ........
--------------------------------------------------------------------------------------------------------------------------------------------------------
*This column (interest accruing on the issue) contains the sums of the interest that accrues on each series in each bond year. The amount of interest
accruing on the issue is computed by adding the amount of interest accruing on each series outstanding for that bond year (the bottom number in the
line for each bond year). The amount of interest annually accruing on each series also is added to the purchase price of the series to determine the
amount of interest accruing in subsequent years, inasmuch as there are no payments with respect to the outstanding series prior to maturity. Thus, the
``principal'' amount, of the top of the two numbers given in such line for each bond year, is the purchase price allocable to that series plus the
amount of interest that accrued on that series in prior years.
[[Page 367]]
There are no imputed proceeds because the amount payable on the issue in
each bond year exceeds the total amount of interest accruing on the
issue during such bond year. Section 103(b)(1) does not apply to the
bonds unless such bonds are held by a person who is a substantial user
of the facility or a related person within the meaning of section
103(b)(13) and Sec. 1.103-11.
Example (5). On July 1, 1982, City C issues industrial development
bonds in the face amount of $30 million to construct a sports facility
described in section 103(b)(4)(B) to be leased to D, a nonexempt person,
with payments on the bonds secured by the lease. C receives $30 million
in exchange for the bonds which will be used to provide the facility.
The bonds mature on July 1, 2002. Each bond provides for an annual
interest payment equal to ten percent of the face amount of the bond,
with the last payment thereon (on July 1, 2002) including a return of
the principal amount of the bond. The proceeds of the issue are $30
million. Section 103(b)(1) does not apply to the bonds unless such bonds
are held by a person who is a substantial user of the facility or a
related person within the meaning of section 103(b)(13) and Sec. 1.103-
11.
Example (6). The facts are the same as example (5) except that each
bond provides for an annual interest payment equal to nine percent of
its face amount and is sold with the option to tender the bond to D for
purchase at par 5 years after the sale date of July 1, 1982 (i.e., the
bonds are sold with a ``put'' option). Such bonds also provide a put
option annually thereafter. There are no imputed proceeds (without
regard to Sec. 1.103-8(a)(7)), and the result is the same as example
(5).
Example (7). On July 1, 1982, City F sells an issue of industrial
development bonds in the face amount of $20 million to acquire a parking
facility as described in section 103(b)(4)(D). The estimated cost of the
facility is $17,800,000. The issue is issued on the same date and will
mature serially over the following ten years. Each bond that is part of
the issue bears annual interest coupons, each of which is in an amount
equal to ten percent of the face amount of the bond. Each maturity has a
face amount of $2,000,000. The issue is initially offered to the public
for $19,700,000, allocable to each maturity as follows:
------------------------------------------------------------------------
Purchase
Maturity price
------------------------------------------------------------------------
July 1, 1983............................................... $1,990,000
July 1, 1984............................................... $1,980,000
July 1, 1985............................................... $1,980,000
July 1, 1986............................................... $1,970,000
July 1, 1987............................................... $1,970,000
July 1, 1988............................................... $1,970,000
July 1, 1989............................................... $1,960,000
July 1, 1990............................................... $1,960,000
July 1, 1991............................................... $1,960,000
July 1, 1992............................................... $1,960,000
------------------------------------------------------------------------
Based on the foregoing issue proceeds equal $19,700,000 less issuance
costs. There are no imputed proceeds with respect to this issue inasmuch
as each bond pays interest at a constant rate in each bond year and the
purchase price of each bond is at least 95 percent of its face amount.
Substantially all of the proceeds are to be used to provide the exempt
facility. Accordingly, section 103(b)(1) does not apply to the bonds
unless such bonds are thereafter held by a person who is a substantial
user of the facility or a related person within the meaning of section
103(b)(13) and Sec. 1.103-11.
(b) Residential rental property--(1) General rule for obligations
issued after April 24, 1979. Section 103(b)(1) shall not apply to any
obligation which is issued after April 24, 1979, and is part of an issue
substantially all of the proceeds of which are to be used to provide a
residential rental project in which 20 percent or more of the units are
to be occupied by individuals or families of low or moderate income (as
defined in paragraph (b)(8)(v) of this section). In the case of a
targeted area project, the minimum percentage of units which are to be
occupied by individuals of low or moderate income is 15 percent. See
generally Sec. 1.103-7 for rules relating to refunding issues.
(2) Registration requirement. Any obligation (including any
refunding obligation) issued after December 31, 1981, to provide a
residential rental project must be issued as part of an issue, each
obligation of which is in registered form (as defined in paragraph
(b)(8)(ii) of this section).
(3) Transitional rule. For purposes of this section, obligations
issued after April 24, 1979, may be treated as issued before April 25,
1979, if the transitional requirements of section 1104 of the Mortgage
Subsidy Bond Tax Act of 1980 (94 Stat. 2670) are satisfied.
(4) Residential rental project. (i) In general. A residential rental
project is a building or structure, together with any functionally
related and subordinate facilities, containing one or more similarly
constructed units--
(a) Which are used on other than a transient basis, and
[[Page 368]]
(b) Which satisfy the requirements of paragraph (b)(5)(i) of this
section and are available to members of the general public in accordance
with the requirement of paragraph (a)(2) of this section.
Substantially all of each project must contain such units and
functionally related and subordinate facilities. Hotels, motels,
dormitories, fraternity and sorority houses, rooming houses, hospitals,
nursing homes, sanitariums, rest homes, and trailer parks and courts for
use on a transient basis are not residential rental projects.
(ii) Multiple buildings. (a) Proximate buildings or structures
(hereinafter ``buildings'') which have similarly constructed units are
treated as part of the same project if they are owned for Federal tax
purposes by the same person and if the buildings are financed pursuant
to a common plan.
(b) Buildings are proximate if they are located on a single tract of
land. The term ``tract'' means any parcel or parcels of land which are
contiguous except for the interposition of a road, street, stream or
similar property. Otherwise, parcels are contiguous if their boundaries
meet at one or more points.
(c) A common plan of financing exists if, for example, all such
buildings are provided by the same issue or several issues subject to a
common indenture.
(iii) Functionally related and subordinate facilities. Under
paragraph (a)(3) of this section, facilities that are functionally
related and subordinate to residential rental projects include
facilities for use by the tenants, for example, swimming pools, other
recreational facilities, parking areas, and other facilities which are
reasonably required for the project, for example, heating and cooling
equipment, trash disposal equipment or units for resident managers or
maintenance personnel.
(iv) Owner-occupied residences. For purposes of section 103
(b)(4)(A) and this paragraph (b), the term ``residential rental
project'' does not include any building or structure which contains
fewer than five units, one unit of which is occupied by an owner of the
units.
(5) Requirement must be continuously satisfied--(i) Rental
requirement. Once available for occupancy, each unit (as defined in
paragraph (b)(8)(i) of this section) in a residential rental project
must be rented or available for rental on a continuous basis during the
longer of--
(a) The remaining term of the obligation, or
(b) The qualified project period (as defined in paragraph (b)(7) of
this section).
(ii) Low or moderate income occupancy requirement. Individuals or
families of low or moderate income must occupy that percentage of
completed units in such project applicable to the project under
paragraph (b)(1) of this section continuously during the qualified
project period. For this purpose, a unit occupied by an individual or
family who at the commencement of the occupancy is of low or moderate
income is treated as occupied by such an individual or family during
their tenancy in such unit, even though they subsequently cease to be of
low or moderate income. Moreover, such unit is treated as occupied by an
individual or family of low or moderate income until reoccupied, other
than for a temporary period, at which time the character of the unit
shall be redetermined. In no event shall such temporary period exceed 31
days.
(6) Effect of post-issuance noncompliance--(i) In general. Unless
corrected within a reasonable period, noncompliance with the
requirements of this paragraph (b) shall cause the project to be treated
as other than a project described in section 103 (b)(4)(A) and this
paragraph (b) as of the date of issue. After an issue to provide such
project ceases to qualify, subsequent conformity with the requirements
will not alter the taxable status of such issue.
(ii) Correction of noncompliance. If the issuer corrects any
noncompliance arising from events occurring after the issuance of the
obligation within a reasonable period, such noncompliance (e.g., an
unauthorized sublease) shall not cause the project to be a project not
described in this paragraph (b). A reasonable period is at least 60 days
after such error is first discovered or would have been discovered by
the exercise of reasonable diligence.
[[Page 369]]
(iii) Involuntary loss. (a) The requirements of paragraph (b) shall
cease to apply to a project in the event of involuntary noncompliance
caused by fire, seizure, requisition, foreclosure, transfer of title by
deed in lieu of foreclosure, change in a Federal law or an action of a
Federal agency after the date of issue which prevents an issuer from
enforcing the requirements of this paragraph, or condemnation or similar
event but only if, within a reasonable period, either the obligation
used to provide such project is retired or amounts received as a
consequence of such event are used to provide a project which meets the
requirement of section 103 (b)(4)(A) and this paragraph (b).
(b) The provisions of paragraph (b)(6)(iii)(a) of this section shall
cease to apply to a project subject to foreclosure, transfer of title by
deed in lieu of foreclosure or similar event if, at anytime during that
part of the qualified project period subsequent to such event, the
obligor on the acquired purpose obligation (as defined in Sec. 1.103-
13(b)(4)(iv)(a)) or a related person (as defined in Sec. 1.103-10(e))
obtains an ownership interest in such project for tax purposes.
(7) Qualified project period. The term ``qualified project period''
means--
(i) For obligations issued after April 24, 1979, and prior to
September 4, 1982, a period of 20 years commencing on the later of the
date that the project becomes available for occupancy or the date of
issue of the obligations. The requirement of paragraph (b)(5)(ii) of
this section shall be deemed met if the owner of the project contracts
with a Federal or state agency to maintain at least 20 percent (or 15
percent in the case of targeted areas) of the units for low or moderate
income individuals or families (as defined in paragraph (b)(8)(v) of
this section) for 20 years in consideration for rent subsidies for such
individuals or families for such period.
(ii) For obligations issued after September 3, 1982, a period
beginning on the later of the first day on which at least 10 percent of
the units in the project are first occupied or the date of issue of an
obligation described in section 103(b)(4)(A) and this paragraph and
ending on the later of the date--
(a) Which is 10 years after the date on which at least 50 percent of
the units in the project are first occupied,
(b) Which is a qualified number of days after the date on which any
of the units in the project is first occupied, or
(c) On which any assistance provided with respect to the project
under section 8 of the United States Housing Act of 1937 terminates.
For purposes of this paragraph (b)(7)(ii), the term ``qualified number
of days'' means 50 percent of the total number of days comprising the
term of the obligation with the longest maturity in the issue used to
provide the project. In the case of a refunding of such an issue, the
longest maturity is equal to the sum of the period the prior issue was
outstanding and the longest term of any refunding obligations.
(8) Other definitions. For purposes of this paragraph--
(i) Unit. The term ``unit'' means any accommodation containing
separate and complete facilities for living, sleeping, eating, cooking,
and sanitation. Such accommodations may be served by centrally located
equipment, such as air conditioning or heating. Thus, for example, an
apartment containing a living area, a sleeping area, bathing and
sanitation facilities, and cooking facilities equipped with a cooking
range, refrigerator, and sink, all of which are separate and distinct
from other apartments, would constitute a unit.
(ii) In registered form. The term ``in registered form'' has the
same meaning as in section 6049. With respect to obligations issued
after December 31, 1982, such term shall have the same meaning as
prescribed in section 103(j) (including the regulations thereunder).
(iii) Targeted area project. The term ``targeted area project''
means a project located in a qualified census tract (as defined in
Sec. 6a.103A-2(b)(4)) or an area of chronic economic distress (as
defined in Sec. 6a.103A-2(b)(5)).
(iv) Building or structure. The term ``building or structure''
generally means a discrete edifice or other man-made construction
consisting of an independent foundation, outer walls, and roof. A single
unit which is not an
[[Page 370]]
entire building but is merely a part of a building is not a building or
structure within the meaning of this section. As such, while single
townhouses are not buildings if their foundation, outer walls, and roof
are not independent, detached houses and rowhouses are buildings.
(v) Low or moderate income. Individuals and families of low or
moderate income shall be determined in a manner consistent with
determinations of lower income families under section 8 of the United
States Housing Act of 1937, as amended, except that the percentage of
median gross income which qualifies as low or moderate income shall be
80 percent. Therefore, occupants of a unit are considered individuals or
families of low or moderate income only if their adjusted income
(computed in the manner prescribed with Sec. 1.167(k)-3(b)(3)) does not
exceed 80 percent of the median gross income for the area.
Notwithstanding the foregoing, the occupants of a unit shall not be
considered to be of low or moderate income if all the occupants are
students (as defined in section 151(e)(4)), no one of whom is entitled
to file a joint return under section 6013. The method of determining low
or moderate income in effect on the date of issue will be determinative
for such issue, even if such method is subsequently changed. In the
event programs under section 8(f) of the Housing Act of 1937, as
amended, are terminated prior to the date of issue, the applicable
method shall be that in effect immediately prior to the date of such
termination.
(9) Examples. The following examples illustrate the application of
this paragraph (b).
Example (1). In August 1982, City X issues $10 million of registered
bonds with a term of 20 years to be used to finance the construction of
an apartment building to be available to members of the general public.
X loans the proceeds of the bonds to Corporation M, the tax owner of the
project. The loan is secured by a promissory note from M and a mortgage
on the project. The mortgage requires annual payments sufficient to
amortize the principal and interest on the bonds. Corporation M
maintains 20 percent of the units in the project for low or moderate
income individuals and meets all of the requirements of this section
until 2002, at which time M converts the project to offices. The bonds
are industrial development bonds, but because the proceeds are used for
construction of residential rental property, which is an exempt facility
under section 103(b)(4)(A) and paragraph (b) of this section, section
103(b)(1) does not apply.
Example (2). The facts are the same as in example (1), except that
the building is constructed adjacent to a factory, and the factory
employees are to be given preference in selecting tenants. The bonds are
industrial development bonds and the facility is not an exempt facility
under section 103(b)(4)(A) and paragraph (b) of this section because it
is not a facility constructed for use by the general public.
Example (3). The facts are the same as in example (1), except that
the proceeds of the obligation are provided to N, a cooperative housing
corporation, to finance the construction of a cooperative housing
project. N sells stock in such cooperative to shareholders, some of whom
occupy the units in the cooperative and some of whom rent the units to
other persons. Such project is not a residential rental project within
the meaning of section 103(b)(4)(A) and Sec. 1.103-8(b) because less
than all of the units in the building are used for rental. Further, the
bonds are mortgage subsidy bonds under section 103A because more than a
significant portion of the proceeds are used to provide financing for
residences, some of which are owner-occupied and some of which are used
in the trade or business of rental.
Example (4). On February 1, 1984, County Z issues registered
obligations with a term of 3 years and loans the proceeds to Corporation
V to construct a garden apartment project for tenants who are 65 years
or older. The mortgage on the project secures the loan. At the end of 3
years, V obtains permanent financing for the project from a commercial
lender. The project is not a targeted area project. V has not contracted
with any Federal or State agency to provide rental assistance under
section 8 of the United States Housing Act of 1937. As a condition for
providing financing for construction, Z requires that the deed to the
project contain a covenant that requires the project be used for elderly
tenants and restricts occupancy of 20 percent of the units in the
project to individuals or families of low or moderate income. Further,
the deed provides that ``Such covenant shall run with and bind the land,
from the date that ten percent of the units in the project are first
occupied until ten years after the date that at least half the units are
first occupied. The right to enforce these restrictions is vested in
County Z.'' In 1990, however, less than 20 percent of the units are
occupied by families or individuals of low or moderate incomes, and
three months after learning of this condition County Z had not
[[Page 371]]
commenced enforcement of the covenant. Although on the date of issue the
proceeds of the obligation were used to provide a residential rental
project, the obligation will not be treated as providing a residential
rental project within the meaning of section 103(b)(4)(A) as of February
1, 1984, because the project did not meet the requirements of this
paragraph for at least 10 years after at least 50 percent of the units
are first occupied.
Example (5). On January 15, 1983, State X issues registered
obligations with a term of 15 years, the proceeds of which are loaned to
Corporation P to construct an apartment building. The project will be a
``targeted area project'', within the meaning of Sec. 1.103-
8(b)(8)(iii). Corporation P intends to rent all the units to individuals
for their residences, maintaining 15 percent of the units in the project
for individuals having low or moderate incomes, for 15 years. In 1988,
however, Corporation P converts 80 percent of the units to condominiums.
Corporation P repays the loan to State X which, in turn, redeems the
obligations. The obligations are not used to provide a residential
rental project within the meaning of section 103(b)(4)(A), and all the
interest paid or to be paid on such obligations will be includable in
gross income.
Example (6). On January 15, 1984, State Z issues registered
obligations with a term of 15 years the proceeds of which will be used
to acquire and renovate a residential apartment building. Z sells the
project to Corporation U and receives a 30-year mortgage. On June 1,
1985, the first occupants of the project commence their tenancies. At
least 50 percent of the units in the project are occupied on July 1,
1985. On January 15, 1988, Z issues 35-year refunding bonds the proceeds
of which are used to retire the obligations issued in 1984. The prior
issue will be discharged by March 15, 1988. In order to meet the
requirement of Sec. 1.103-8(b)(5)(ii), at least 20 percent of such units
must be occupied by individuals of low or moderate income until January
1, 2005.
Example (7). The facts are the same as in example (6) except that in
1987, the apartment building is substantially destroyed by fire. The
building was insured at its fair market value. U does not intend to
reconstruct the building but uses a portion of the insurance proceeds to
repay the unpaid balance of the mortgage. Z uses this amount to redeem
the outstanding bonds at the first available call date. Since the
project was substantially destroyed by fire and the outstanding bonds
are retired at the first available call date, the requirements of
section 103(b)(4)(A) and this paragraph (b) are satisfied with respect
to the obligations.
Example (8). The facts are the same as in example (6) except that in
1987 U defaults on the mortgage, and Z obtains title to the project
without instituting foreclosure proceedings. Z sells the project to S
and uses the proceeds to retire the outstanding bonds. Since S did not
obtain the project with obligations described in section 103(b)(4), S is
not required to meet the requirements of section 103(b)(4)(A) and this
paragraph. Further, the 1984 obligations are obligations described in
section 103(b)(4)(A).
Example (9). In September 1983, State W issues $10 million of
registered bonds with a term of 3 years, the proceeds of which are to be
loaned to Corporation V to finance the construction of an apartment
building in a rural community. At the end of 3 years, V obtains
permanent financing from Federal Agency T. Agency T will not allow the
deed to contain any restrictive covenant relating to the use of the
project. Under Federal law, however, T requires that V maintain all of
the units in the project for rental to low-income farmworkers for the
term of the mortgage, which is 20 years. Further, the mortgage between T
and V provides that if T determines that low-income housing is no longer
required in the community in which the project is constructed then the
repayment of the mortgage may be accelerated. T determines as of the
date of issue that low-income housing will be needed in the community
for at least 20 years. In 1987, the project fails to meet the
requirements of section 1.103-8(b)(5)(ii), relating to occupancy by
individuals or families of low or moderate income. Further, T does not
require V to correct the failure. Based on the foregoing, the bonds
issued by W will be treated as described in section 103(b)(4)(A).
Example (10). The facts are the same as in example (9) except that
in 1987, the Federal law is amended to provide that Agency T may not
enforce its low-income occupancy requirement. The result is the same.
Example (11). The facts are the same as in example (9) except that
in 1987 Agency T determines that due to a change in circumstances in the
community in which the project is located low-income rental housing is
no longer required. As such, T requires V to repay the mortgage. Since
the obligations have been repaid, W has no legal right to enforce the
requirements of paragraph (b) with respect to the project. Subsequent
nonconformity of the project with the requirements of Sec. 1.103-8(b)
under these circumstances will not cause the obligations issued by W to
be industrial development bonds within the meaning of section 103(b)(1).
(10) Obligations issued before April 25, 1979--(i) General rules.
Section 103(b)(1) shall not apply to obligations issued before April 25,
1979, which are part of an issue substantially all of the proceeds of
which are to be used to provide residential real property for family
units. In order to qualify under this
[[Page 372]]
paragraph (b) as an exempt facility, the facility must satisfy the
public use requirement of paragraph (a)(2) of this section by being
available for use by members of the general public.
(ii) Family units defined. For purposes of this paragraph (b) the
term ``family unit'' means a building or any portion thereof which
contains complete living facilities which are to be used on other than a
transient basis by one or more persons, and facilities functionally
related and subordinate thereto. Thus, an apartment which is to be used
on other than a transient basis as a residence by a single person or by
a family and which contains complete facilities for living, sleeping,
eating, cooking, and sanitation, constitutes a family unit. Such a unit
may be served by centrally located machinery and equipment as in a
typical apartment building. To qualify as a family unit, the living
facilities must be a separate, self-contained building or constitute one
unit in a building substantially all of which consists of similar units,
together with functionally related and subordinate facilities and areas.
Hotels, motels, dormitories, fraternity and sorority houses, rooming
houses, hospitals, sanitariums, rest homes, and trailer parks and courts
for use on a transient basis do not constitute residential real property
for family units.
(iii) Functionally related and subordinate facilities. Under
paragraph (a)(3) of this section, facilities which are functionally
related and subordinate to residential real property actually used for
family units include, for example, facilities for use by the occupants
such as a swimming pool, a parking area, and recreational facilities.
(c) Sports facilities--(1) General rule. Section 103(b)(4)(B)
provides that section 103(b)(1) shall not apply to obligations issued by
a State or local governmental unit which are part of an issue
substantially all of the proceeds of which are to be used to provide
sports facilities. In order to qualify as an exempt facility under
section 103(b)(4)(B) and this paragraph, the facility must satisfy the
public use requirement of paragraph (a)(2) of this section by being
available for use by members of the general public either as
participants or as spectators.
(2) Sports facility defined. (i) For purposes of section
103(b)(4)(B) and this paragraph, the term ``sports facilities'' includes
both outdoor and indoor facilities. The facility may be designed either
as a spectator or as a participation facility. For example, the term
includes both indoor and outdoor stadiums for baseball, football, ice
hockey, or other sports events, as well as facilities for the
participation of the general public in sports activities, such as golf
courses, ski slopes, swimming pools, tennis courts, and gymnasiums. The
term does not include, however, facilities such as a golf course,
swimming pool, or tennis court, which are constructed for use by members
of a private club or as integral or subordinate parts of a hotel or
motel, or the use of which will be restricted to a special class or
group or to guests of a particular hotel or motel, since they are not
facilities for the use of the general public as required by paragraph
(a)(2) of this section.
(ii) Under paragraph (a)(3) of this section, facilities which are
functionally related and subordinate to a sports facility, such as a
parking lot, clubhouse, ski slope warming house, bath house, or ski tow,
are considered to be part of a sports facility. A ski lodge which
consists primarily of overnight accommodations is not functionally
related and subordinate to a sports facility.
(d) Convention or trade show facilities--(1) General rule. Section
103(b)(4)(C) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are a
part of an issue substantially all of the proceeds of which are to be
used to provide convention or trade show facilities. In order to qualify
under section 103(b)(4)(C) and this paragraph as an exempt facility, the
facility must satisfy the public use requirement of paragraph (a)(2) of
this section by being available for an appropriate charge or rental, on
a rate scale basis, for use by members of the general public. The public
use requirement is not satisfied if the use of a convention or trade
show facility is limited by long-term leases to a single user or group
of users.
(2) Convention or trade show facilities defined. For purposes of
section 103(b)(4)(C) and this paragraph, the
[[Page 373]]
term ``convention or trade show facilities'' means special-purpose
buildings or structures, such as meeting halls and display areas, which
are generally used to house a convention or trade show, including, under
paragraph (a)(3) of this section, facilities functionally related and
subordinate to such facilities such as parking lots or railroad sidings.
A hotel or motel which is available to the general public, whether or
not it is intended primarily to house persons attending or participating
in a convention or trade show, is neither a convention or trade show
facility nor functionally related and subordinate thereto.
(e) Certain transportation facilities--(1) General rule. Section
103(b)(4)(D) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide (i) airports, docks, wharves, mass commuting facilities, or
public parking facilities, or (ii) storage or training facilities
directly related to any such facility. In order to qualify under section
103(b)(4)(D) and this paragraph as an exempt facility, the facility must
satisfy the public use requirement of paragraph (a)(2) of this section
by being available for use by members of the general public or for use
by common carriers or charter carriers which serve members of the
general public. A dock or wharf which is part of a public port (or a
public port to be constructed in accordance with a plan which has been
finally adopted on the date the obligations in question are issued)
satisfies the public use test. A parking lot will be available for use
by the general public unless more than an insubstantial portion thereof
will be used exclusively by or for the benefit of a nonexempt person by
reason of a formal or informal agreement or by reason of the remote
geographic location of the facility.
(2) Definitions. For purposes of section 103(b)(4)(D) and this
paragraph--
(i) With respect to bonds sold at or before 5:00 p.m. EST on
December 29, 1978, an airport includes service accommodations for the
public such as terminals, retail stores in such terminals, runways,
hangars, loading facilities, repair shops, parking areas, and facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to the airport, such as facilities for the preparation
of in-flight meals, restaurants, and accommodations for temporary or
overnight use by passengers, and other facilities functionally related
to the needs or convenience of passengers, shipping companies, and
airlines. The term ``airport'' does not include a landing strip which,
by reason of a formal or informal agreement, or by reason of geographic
location, will not be available for general public use.
(ii) With respect to bonds sold after 5:00 p.m. EST on December 29,
1978--
(a) An airport includes facilities which are directly related and
essential to--
(1) Servicing aircraft or enabling aircraft to take off and land, or
(2) Transferring passengers or cargo to or from aircraft.
A facility does not satisfy either of the foregoing requirements if the
facility need not be located at, or in close proximity to, the take-off
and landing area in order to perform its function. Examples of
facilities which satisfy those requirements are terminals, runways,
hangars, loading facilities, repair shops, and land-based navigation
aids such as radar installation.
(b) Under paragraph (a)(3) of this section, an airport includes
facilities other than those described in paragraph (e)(2)(ii)(a) only if
they are functionally related and subordinate to an airport (as defined
in paragraph (e)(2)(ii)(a)). A facility (or part thereof) is not
functionally related and subordinate to an airport if the facility (or
part thereof)--
(1) Is not of a character and size commensurate with the character
and size of the airport at or adjacent to which the facility is located,
or
(2) Is not located at or adjacent to that airport.
A facility may satisfy the character and size requirement although it
provides minimal benefits to other airports. For example, a facility for
the preparation of in-flight meals which has capacity sufficient to
prepare all in-flight meals for aircraft departing the airport where the
facility is located
[[Page 374]]
qualifies although some meals may be consumed in transit between other
airports. Other examples of facilities functionally related and
subordinate to an airport are restaurants and retail stores located in
terminals, ground transportation parking areas, and accommodations for
temporary or overnight use by passengers. Unimproved land (including
agricultural land) that is adjacent to an airport and that is impaired
by a significant level of airport noise is functionally related and
subordinate to the airport if after its acquisition that land will not
be converted to a use that is incompatible with the level of airport
noise. Adjacent land with existing improvements also may be functionally
related and subordinate to an airport by reason of impairment by a
significant level of airport noise but only if the use of such land
before its acquisition is incompatible with the airport noise level, its
use after acquisition is to be compatible, and the post-acquisition use
will be essentially different from the pre-acquisition use.
Notwithstanding the foregoing, an interest in such improved land
acquired solely to mitigate damages attributable to airport noise is
treated as functionally related and subordinate to the airport. Thus,
for example, amounts allocated to imposing a servitude on improved land
adjacent to an airport restricting its future use to uses compatible
with airport noise are treated as amounts allocated to property
functionally related and subordinate to an airport. For the purpose of
determining whether land is impaired by a significant level of airport
noise, any generally accepted noise estimating methodology may be used.
For example, a Noise Exposure Forecast (NEF), a method for composite
noise rating recommended by the Federal Aviation Administration to
measure the impact of airport noise, may be used for this purpose.
Compatibility may be determined by reference to regulations or general
guidelines published by the Federal Aviation Administration under
section 102 of the Aviation Safety and Noise Abatement Act of 1979 (49
U.S.C. 2102), or sections 11(3)(C) and 18(a)(4) of the Airport and
Airway Development Act of 1970, as amended (49 U.S.C. 1711(3)(C) and
1718(a)(4)), concerning uses of land impaired by a significant level of
airport noise, or, where available, by reference to the airport
compatibility plan specifically addressing what constitutes a compatible
use of that land.
(c) As an illustration of the rules of this paragraph (e)(2)(ii), an
office building (or office space within a building) or a computer
facility, either of which serves a system-wide or regional function of
an airline, is not considered part of an airport since that facility is
not described in either paragraph (e)(2)(ii)(a) or (b). However, a
maintenance or overhaul facility which services aircraft is considered
part of an airport under paragraph (e)(2)(ii)(a) since that facility is
directly related and essential to servicing aircraft and must be located
where aircraft take off and land in order to perform its function.
(d) A hotel located at or adjacent to an airport satisfies the
requirements of paragraph (e)(2)(ii)(b), that is, it is of a character
and size commensurate with the character and size of the airport at or
adjacent to which it is located, if the number of guest rooms in the
hotel is reasonable for the size of the airport, taking into account the
current and projected passenger usage of the terminal facility. If the
hotel contains meeting rooms, the number and size of these rooms must be
in reasonable proportion to the number of guest rooms in the hotel.
Limited recreational facilities will not prevent the hotel from being of
a character and size commensurate with the character and size of the
airport.
(iii) A dock or wharf includes property which, under paragraph
(a)(3) of this section, is functionally related and subordinate to a
dock or wharf such as the structure alongside which a vessel docks, the
equipment needed to receive and to discharge cargo and passengers from
the vessel, such as cranes and conveyors, related storage, handling,
office, and passenger areas, and similar facilities.
(iv) A mass commuting facility includes real property together with
improvements and personal property used therein, such as machinery,
equipment, and furniture, serving the general public commuting on a day-
to-day basis by
[[Page 375]]
bus, subway, rail, ferry, or other conveyance which moves over
prescribed routes. Such property also includes terminals and facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to the mass commuting facility, such as parking garages,
car barns, and repair shops. Use of mass commuting facilities by
noncommuters in common with commuters is immaterial. Thus, a terminal
leased to a common carrier bus line which serves both commuters and long
distance travelers would qualify as an exempt facility.
(3) Related storage or training facility. Section 103 (b)(4)(D)
includes only those storage and training facilities which are both (i)
directly related to a facility to which subparagraph (1)(i) or (ii) of
this paragraph applies and (ii) physically located on or adjacent to
such a facility. For example, a storage facility would include a grain
elevator, silo, warehouse, or oil and gas storage tank used in
connection with a dock or wharf and located on or adjacent to such dock
or wharf. Similarly, a training facility would include a building
located at or adjacent to an airport for the training of flight
personnel or a paved area immediately adjoining a bus garage used to
train bus drivers.
(4) Examples. The principles of this paragraph may be illustrated by
the following examples:
Example (1). B Airport Authority, a political subdivision of State
A, owns and operates B Airport. B Airport Authority adds several
runways. In view of the expanded area impaired by significant levels of
airport noise, the Authority proposes to issue bonds the proceeds of
which are to be used to acquire a hospital located adjacent to the
airport. The noise level on the acquired property is 40 NEF. By
reference to a noise exposure map setting forth noncompatible land uses
and by reference to guidelines published by the Federal Aviation
Administration, it is established that continued use of the land for a
hospital is not compatible with the noise level. Prior to issuing the
bonds, B contracts to lease the property to Corporation C to be used for
warehouse space. Within 18 months of the bonds' issuance C will remodel
the hospital (previously owned by D, who is unrelated to C) with its own
funds and rent the facility as a warehouse. Use as a warehouse is
determined to be compatible with the level of airport noise impairing
the land. The improved land and prospective revenues from the facility's
rental are security for the proposed issuance. Based on the foregoing,
the acquired land satisfies the public use test. Furthermore, it is
functionally related and subordinate to the airport because the
improvements are to be used in an essentially different manner than
prior to the land's acquisition. The bonds are industrial development
bonds. However, section 103(b)(1) does not apply unless the provisions
of section 103(b)(13) and Sec. 1.103-11 apply.
Example (2). The facts are the same as in Example (1) except that a
substantial portion of the proceeds of the bond issue is allocated to
the acquisition of a limited interest in an additional tract of land
(also impaired by airport noise measured at 40 NEF) on which an office
building stands. The limited interest holds B harmless for damages
caused by airport noise and restricts uses of the tract after the
building is retired to those compatible with noise levels caused by the
airport. Based on the foregoing, such interest satisfies the public use
test. Furthermore, the interest is functionally related and subordinate
to the airport because it is solely to mitigate damage attributable to
airport noise, in part by restricting future land uses. The bonds are
industrial development bonds. However, section 103(b)(1) does not apply
unless the provisions of section 103(b)(13) or Sec. 1.103-11 apply.
Example (3). On June 1, 1982, M Airport Authority, a political
subdivision of State O, issues obligations, the proceeds of which are
loaned to X Corporation, a nonexempt person. X uses the proceeds to
construct a hotel adjacent to the main terminal building at M Airport. X
will be unconditionally liable for repayment of the proposed
obligations. The hotel will be used to provide temporary and overnight
accommodations for airline passengers using M Airport. The number of
rooms in the hotel is reasonable for an airport of M's size, taking into
account the current and projected passenger usage of the terminal
facility. In addition to guest rooms, the hotel will contain a
restaurant, small retail stores (such as a gift shop and newstand), and
limited recreation facilities (such as a swimming pool). The hotel will
also contain several multipurpose rooms suitable for use as meeting
rooms. The number and size of these rooms will be in reasonable
proportion to the number and size of the guest rooms in the hotel. Use
of the guest rooms, restaurant and stores, recreational facilities, and
meeting rooms by air passengers arriving at or departing from M Airport
will be incidental to the use of the hotel by air passengers for
temporary and overnight accommodations. The hotel is of a character and
size commensurate with the character and size of M Airport.
Consequently, applying the provisions of Sec. 1.103-8(e)(2), the hotel
is functionally related and subordinate to M Airport. The obligations
are industrial development bonds. Section
[[Page 376]]
103(b)(1) does not apply to the obligations, however, unless the
provisions of section 103(b)(10) and Sec. 1.103-11 apply.
Example (4). On June 1, 1982, N Airport Authority, a political
subdivision of State P, issues obligations the proceeds of which are
loaned to Y Corporation, a nonexempt person. Y uses the proceeds to
construct a hotel adjacent to the main terminal building at N Airport. Y
Corporation will be unconditionally liable for repayment of the proposed
obligations. The hotel will contain extensive recreational facilities,
including a large roof-top swimming pool, tennis courts, and a health
club. In addition, facilities for conferences consisting of a ballroom-
sized meeting room capable of being partitioned by movable panels and
several smaller meeting rooms will be constructed. The number of rooms
in the hotel will substantially exceed the number which is reasonably
based on the current and projected passenger usage of the terminal
facility. Because of the presence of extensive recreational and
conference facilities, as well as the presence of on excessive number of
rooms at the hotel, the hotel fails to be of a character and size
commensurate with the character and size of N Airport. The result would
be the same if the hotel did not have extensive recreational facilities.
Consequently, the hotel is not functionally related and subordinate to N
Airport under Sec. 1.103-8(e)(2). The obligations are industrial
development bonds and interest thereon is not excluded from gross income
by reason of subsection (a)(1) or (b)(4) of section 103.
(f) Certain public utility facilities--(1) General rule. (i) Section
103(b)(4)(E) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide sewage disposal facilities, solid waste disposal facilities, or
facilities for the local furnishing of electric energy or gas. In order
to qualify under section 103(b)(4)(E) as an exempt facility, the
facility must satisfy the public use requirement of paragraph (a)(2) of
this section. A public utility facility described in this subparagraph
(with the exception of sewage and solid waste disposal facilities which
will be treated in all events as serving the general public) will
satisfy the public use requirement only if such facility, or the output
thereof, is available for use by members of the general public.
(ii) A facility for the local furnishing of electric energy or gas
is, for purposes of applying the public use test in paragraph (a)(2) of
this section, available for use by members of the general public if (a)
the owner or operator of the facility is obligated, by a legislative
enactment, local ordinance, regulation, or the equivalent thereof, to
furnish electric energy or gas to all persons who desire such services
and who are within the service area of the owner or operator of such
facility, and (b) it is reasonably expected that such facility will
serve or be available to a large segment of the general public in such
service area. For rules with respect to facilities for the furnishing of
water, see paragraph (h) of this section.
(2) Definitions. For purposes of section 103(b)(4)(E) and this
paragraph--
(i) The term ``sewage disposal facilities'' means any property used
for the collection, storage, treatment, utilization, processing, or
final disposal of sewage.
(ii)(a) The term ``solid waste disposal facilities'' means any
property or portion thereof used for the collection, storage, treatment,
utilization, processing, or final disposal of solid waste. Only
expenditures for that portion of property which is a solid waste
disposal facility qualify as expenditures for solid waste disposal
facilities. The fact that a facility which otherwise qualifies as a
solid waste disposal facility operates at a profit will not, of itself,
disqualify the facility as an exempt facility. However, whether a
collection or storage facility qualifies as a solid waste disposal
facility depends upon all of the facts and circumstances. Thus, land and
facilities for the collection of materials to form a slag heap which is
not preliminary to the recycling or other final disposal of such
materials within a reasonable period of time will not qualify. The term
does not include facilities for collection, storage, or disposal of
liquid or gaseous waste except where such facilities are facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to a solid waste disposal facility.
(b) The term ``solid waste'' shall have the same meaning as in
section 203(4) of the Solid Waste Disposal Act (42 U.S.C. 3252(4)),
except that for purposes of this paragraph, material will not qualify as
solid waste unless, on the date of issue of the obligations issued
[[Page 377]]
to provide the facility to dispose of such waste material, it is
property which is useless, unused, unwanted, or discarded solid
material, which has no market or other value at the place where it is
located. Thus, where any person is willing to purchase such property, at
any price, such material is not waste. Where any person is willing to
remove such property at his own expense but is not willing to purchase
such property at any price, such material is waste. Section 203(4) of
the Solid Waste Disposal Act provides that:
(4) The term ``solid waste'' means garbage, refuse, and other
discarded solid materials, including solid-waste materials resulting
from industrial, commercial, and agricultural operations, and from
community activities, but does not include solids or dissolved material
in domestic sewage or other significant pollutants in water resources,
such as silt, dissolved or suspended solids in industrial waste water
effluents, dissolved materials in irrigation return flows or other
common water pollutants.
(c) A facility which disposes of solid waste by reconstituting,
converting, or otherwise recycling it into material which is not waste
shall also qualify as a solid waste disposal facility if solid waste
(within the meaning of (b) of this subdivision (ii) constitutes at least
65 percent, by weight or volume, of the total materials introduced into
the recycling process. Such a recycling facility shall not fail to
qualify as a solid waste disposal facility solely because it operates at
a profit.
(d) For rules relating to property which has both a solid waste
disposal function and a function other than the disposal of solid waste,
see Sec. 17.1 of this chapter.
(iii) The term ``facilities for the local furnishing of electric
energy or gas'' means property which--
(a) Is either property of a character subject to the allowance for
depreciation provided in section 167 or land,
(b) Is used to produce, collect, generate, transmit, store,
distribute, or convey electric energy or gas.
(c) Is used in the trade or business of furnishing electric energy
or gas, and
(d) Is a part of a system providing service to the general populace
of one or more communities or municipalities, but in no event more than
2 contiguous counties (or a political equivalent) whether or not such
counties are located in one State.
For purposes of this subdivision, a city which is not within, or does
not consist of, one or more counties (or a political equivalent) shall
be treated as a county (or a political equivalent). A facility for the
generation of electric energy otherwise qualifying under this
subdivision will not be disqualified because it is connected to a system
for interconnection with other public utility systems for the emergency
transfer of electric energy. The facilities need not be located in the
area served by them. Also, the term ``facilities for the local
furnishing of electric energy or gas'' does not include coal, oil, gas,
nuclear cores, or other materials performing a similar function.
(g) Air or water pollution control facilities--(1) General rule.
Section 103(b)(4)(F) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide air or water pollution control facilities. Such facilities are
in all events treated as serving the general public and, thus, satisfy
the public use requirement of paragraph (a)(2) of this section.
(2) Definitions. (i) For purposes of section 103(b)(4)(F) and this
paragraph, property is a pollution control facility to the extent that
the test of either subdivision (iii) or (iv) of this subparagraph is
satisfied, but only if--
(a) It is property which is described in subdivision (ii) of this
subparagraph and is either of a character subject to the allowance for
depreciation provided in section 167 or land, and
(b) Either (1) a Federal, State, or local agency exercising
jurisdiction has certified that the facility, as designed, is in
furtherance of the purpose of abating or controlling atmospheric
pollutants or contaminants, or water pollution, as the case may be, or
(2) the facility is designed to meet or exceed applicable Federal,
State, and local requirements for the control of atmospheric pollutants
or contaminants, or water pollution, as the case may be, in effect at
the time the obligations, the proceeds of which are to be used to
provide such facilities, are issued.
[[Page 378]]
(ii) Property is described in this subdivision if it is property to
be used, in whole or in part, to abate or control water or atmospheric
pollution or contamination by removing, altering, disposing, or storing
pollutants, contaminants, wastes, or heat. In the case of property to be
used to control water pollution, such property includes the necessary
intercepting sewers, pumping, power, and other equipment, and their
appurtenances. For rules relating to facilities which remove pollutants
from fuel or certain other items, see subdivision (vi) of this
subparagraph.
(iii) In the case of an expenditure for property which is designed
for no significant purpose other than the control of pollution, the
total expenditure for such property satisfies the test of this
subdivision. Thus, where property which is to serve no function other
than the control of pollution is to be added to an existing
manufacturing or production facility, the total expenditure for such
property satisfies the test of this subdivision. Also, if an expenditure
for property would not be made but for the purpose of controlling
pollution, and if the expenditure has no significant purpose other than
the purpose of pollution control, the total expenditure for such
property satisfies the test of this subdivision even though such
property serves one or more functions in addition to its function as a
pollution control facility.
(iv) In the case of property to be placed in service for the purpose
of controlling pollution and for a significant purpose other than
controlling pollution, only the incremental cost of such facility
satisfies the test of this subdivision. The ``incremental cost'' of
property is the excess of its total cost over that portion of its cost
expended for a purpose other than the control of pollution.
(v) An expenditure has a significant purpose other than the control
of pollution if it results in an increase in production or capacity, or
in a material extension of the useful life of a manufacturing or
production facility or a part thereof.
(h) Water facilities--(1) General rule. Section 103(b)(4)(G)
provides that section 103(b)(1) shall not apply to obligations issued by
a State or local governmental unit which are part of an issue
substantially all of the proceeds of which are to be used to provide
facilities for the furnishing of water which are available, on
reasonable demand, to members of the general public. A water facility
will satisfy the public use test of paragraph (a)(2) of this section if
it will provide water, on reasonable demand, to any member of the
general public within the service area of the water system of which such
facility is a part.
(2) Definition. For purposes of section 103(b)(4)(G) and this
paragraph, the ``water facilities'' include artesian wells, reservoirs,
dams, related equipment and pipelines, and other facilities used to
furnish water for domestic, industrial, irrigation, or other purposes.
(3) Effective date. The provisions of this paragraph apply in the
case of facilities provided by obligations issued after January 1, 1969.
In the case of facilities provided by obligations issued on or before
such date to which section 103(b) is applicable, the provisions of
paragraph (f) of this section shall apply. For such purposes, wherever
the term ``local furnishing of electric energy or gas'' appears in
paragraph (f) of this section, such term shall be deemed to read ``local
furnishing of electric energy, gas, or water.''
(i) Examples. The application of section 103(b)(4) and this section
are illustrated by the following examples:
Example (1). City B plans to issue $10 million of bonds to be used
to construct a sports stadium. The revenues from the facility and the
facility itself will be the security for the bonds. A professional
football team rents the facility on a long-term leasee for part of the
year and a professional baseball team rents the sports facility for the
remainder of the year. Tickets are sold by the teams to the general
public. The bonds are industrial development bonds, but since the
proceeds are used for a spectator facility for general public use, which
is an exempt facility under section 103(b)(4)(B) and paragraph (c) of
this section, section 103(b)(1) does not apply unless the provisions of
section 103(b)(13) and Sec. 1.103-11 apply.
Example (2). City C plans to issue $10 million of bonds to be used
to construct a convention hall which it will own. City C plans to lease
the convention hall for 25 years to corporation Y, a nonexempt person,
which will operate and maintain it. The terms of the lease obligate Y to
make the convention
[[Page 379]]
hall generally available for civic, business, and recreational shows,
meetings, performances, and similar activities serving or benefiting the
community. Lease payments from Y and the facility will be security for
the bonds. The bonds are industrial development bonds, but since the
proceeds are to be used for a facility for general public use, which is
an exempt facility under section 103(b)(4)(C) and paragraph (d) of this
section, section 103(b)(1) does not apply unless the provisions of
section 103(b)(13) and Sec. 1.103-11 apply.
Example (3). City D issues $100 million of its bonds and uses the
proceeds to finance construction of an airport for the use of the
general public. D will own and operate the airport. A major portion of
the rentable space in the terminal building is leased on a long-term
basis to common carrier and non-scheduled airlines. The bonds will be
secured by the airport landing and runway charges and by payments with
respect to such long-term leases from such commercial airlines. Such
commercial airline payments are expected to constitute more than 50
percent of the total revenues from the airport. The bonds are industrial
development bonds, but since the proceeds are to be used for an airport
for use by the general public and by carriers serving the general
public, which is an exempt facility under section 103(b)(4)(D) and
paragraph (e) of this section, section 103(b)(1) does not apply unless
the provisions of section 103(b)(13) and Sec. 1.103-11 apply. The result
would be the same if D hired an airport management firm to operate the
airport.
Example (4). City E issues $6 million of its bonds and uses the
proceeds to finance construction of a landing strip for airplanes to be
located adjacent to the factories of corporations Y and Z. The landing
strip will be used in the trades or businesses of Y and Z and by any
member of the general public wishing to use it. However, due to its
location, general public use will be negligible. The lease payments by Y
and Z for the use of the facility are the security for the bonds. The
bonds are industrial development bonds and the facility is not an exempt
facility under section 103(b)(4)(D) and paragraph (c) of this section
because it is not a facility constructed for general public use.
Example (5). State F and corporation Z enter into an arrangement
which provides that F will issue $10 million of its bonds and use the
proceeds to construct a facility for Z the only purpose of which is to
control air and water pollution at Z's plant. The principal and interest
on the bonds will be secured by the charges which F will impose on Z.
The bonds are industrial development bonds, but since the proceeds are
to be used for air and water pollution facilities designed to abate
pollution by private persons, such facilities are for the benefit of the
general public and are exempt facilities under section 103(b)(4)(F) and
paragraph (g) of this section. Accordingly, section 103(b)(1) does not
apply unless the provisions of section 103(b)(13) and Sec. 1.103-11
apply.
Example (6). City G issues $20 million of its bonds and will use $6
million to finance residential rental property which qualifies as an
exempt facility under section 103(b)(4)(A) and paragraph (b) of this
section, $9 million to finance construction of a stadium which qualifies
as an exempt facility under section 103(b)(4)(B) and paragraph (c) of
this section, and $5 million for convention facilities which qualify as
exempt facilities under section 103(b)(4)(C) and paragraph (d) of this
section. The facilities will be used in the trades or businesses of
nonexempt persons and rental payments with respect to such facilities
and the facilities themselves will be the security for the bonds. The
bonds are industrial development bonds, but since all the proceeds are
to be used for facilities which are exempt facilities under section
103(b)(4), section 103(b)(1) does not apply unless the provisions of
section 103(b)(10) and Sec. 1.103-11 apply. The result would be the
same, if; instead of using $9 million to finance construction of a
stadium, the $9 million were used to finance construction of a capitol
building. [Reg. Sec. 1.103-8].
[T.D. 7199, 37 FR 15490, Aug. 3, 1972]
Editorial Note: For Federal Register citations affecting Sec. 1.103-
8, see the List of CFR Sections Affected, which appears in the Finding
Aids section of the printed volume and on GPO Access.
Sec. 1.103-9 Interest on bonds to finance industrial parks.
(a) General rule. (1) Under section 103(c)(5), interest paid on an
issue of obligations issued by a State or local governmental unit (as
defined in Sec. 1.103-1) is not includable in gross income if
substantially all of the proceeds of such issue is to be used to finance
the acquisition or development of land as the site for an industrial
park (referred to in this section as ``industrial park bonds'').
However, interest on an obligation of such an issue is includable in
gross income if the obligation is held by a substantial user or a
related person (as described in section 103(c)(7) and Sec. 1.103-11). If
substantially all of the proceeds of a bond issue is to be so used to
finance an industrial park, the debt obligations are treated as
obligations described in section 103(a)(1) and Sec. 1.103-1 even though
[[Page 380]]
such obligations are industrial development bonds within the meaning of
section 103(c)(2) and Sec. 1.103-7. Whether substantially all of the
proceeds of an issue of governmental obligations are used to finance an
industrial park is determined consistently with the rules for exempt
facilities in Sec. 1.103-8(a)(1)(i).
(2) The provisions of subparagraph (1) of this paragraph shall also
apply to an issue of obligations substantially all of the proceeds of
which is to be used to acquire or develop land as the site for an
industrial park described in section 103(c)(5) and this section and for
either or both of the following purposes: (i) To finance exempt
facilities described in section 103(c)(4) and Sec. 1.103-8, (ii) to
finance facilities to be used by an exempt person.
(3) Section 103(c)(5) only becomes applicable where the bond issue
meets both the trade or business and the security interest tests so that
the obligations are industrial development bonds within the meaning of
section 103(c)(2). For the interrelationship of the rules provided in
this section and the exemption for certain small issues provided in
section 103(c)(6), see Sec. 1.103-10.
(b) Definition of an industrial park. For purposes of section
103(c)(5) and this section, the term ``industrial park'' means a tract
of land, other than a tract of land intended for use by a single
enterprise, suitable primarily for use as building sites by a group of
enterprises engaged in industrial, distribution, or wholesale businesses
if either--
(1) The control and administration of the tract is vested in an
exempt person (within the meaning of paragraph (b)(2) of Sec. 1.103-7),
or
(2) The uses of the tract are normally (i) regulated by protective
minimum restrictions, ordinarily including the size of individual sites,
parking and loading regulations, and building setback lines, and (ii)
designed to be compatible, under a comprehensive plan, with the
community in which the industrial park is located and with the uses of
the surrounding land.
(c) Development of land defined. For purposes of section 103(c)(5)
and this section, the term ``development of land'' includes the
provision of certain improvements to an industrial park site if such
improvements are incidental to the use of the land as an industrial
park. Such incidental improvements include the building or installation
of incidental water, sewer, sewage and waste disposal, drainage, or
similar facilities (whether surface, subsurface, or both). Such
incidental improvements include the provision of incidental
transportation facilities, such as hard-surface roads (including curbs
and gutters) and railroad spurs and sidings; power distribution
facilities, such as gas and electric lines; and communication
facilities. The provision of structures or buildings of any kind is not
included within the meaning of the term ``development of land,'' except
for those structures or buildings which are necessary in connection with
the incidental improvements encompassed by the term, such as, for
example, a water pumphouse and storage tank needed in connection with
the incidental provision of water facilities in an industrial park.
(d) Examples. The application of the rules contained in section
103(c)(5) and this section are illustrated by the following examples:
Example (1). City A and corporations X, Y, and Z (unrelated
companies) enter into an arrangement under which A is to acquire a tract
of land suitable for use as an industrial park. The arrangement provides
that: (1) A will issue $10 million of bonds to be used for the
acquisition and development of a suitable tract of land; (2) the tract
will be controlled and administered by A, pursuant to a comprehensive
zoning plan, for the use of a group of enterprises; (3) A will install
necessary water, sewer, and drainage facilities on the tract; (4) A will
sell substantial portions of the developed tract to X for use as a
factory site and to Y for use as a warehouse site; (5) A will lease a
sizeable portion of the tract to Z for 20 years as a distribution center
site; and (6) the developed tract and the proceeds from the sale or
lease of parts of the tract will be the security for the bonds. The
bonds are industrial development bonds. Since, however, the proceeds of
the issue are to be used for the acquisition and development of a tract
of land as the site for an industrial park under section 103(c)(5),
section 103(c)(1) does not apply unless the provisions of section
103(c)(7) and Sec. 1.103-11 apply.
Example (2). The facts are the same as in example (1) except that $1
million of the proceeds of the $10 million issue are to be used
[[Page 381]]
for the construction of a factory by corporation W or X. The bonds are
industrial development bonds. Under these circumstances, substantially
all of the proceeds are treated as used or to be used for the
acquisition and development of a tract of land as the site for an
industrial park described in section 103(c)(5). Accordingly, section
103(c)(1) does not apply unless the provisions of section 103(c)(7) and
Sec. 1.103-11 apply.
[T.D. 7199, 37 FR 15494, Aug. 3, 1972, as amended by T.D. 7511, 42 FR
54285, Oct. 5, 1977]
Sec. 1.103-10 Exemption for certain small issues of industrial development bonds.
(a) In general. Section 103(b)(6) applies to certain industrial
development bond issues (referred to in this section as ``exempt small
issues'') and bonds issued to refund certain issues (referred to in this
section as ``exempt small refunding issues''). If an issue is an exempt
small issue or an exempt small refunding issue, then under the
requirements of section 103(b)(6) and this section the interest paid on
the debt obligations is not includable in gross income, and the
obligations are treated as obligations described in section 103(a)(1)
and Sec. 1.103-1, even though such obligations are industrial
development bonds as defined in section 103(b)(2) and Sec. 1.103-7.
However, interest on an obligation of such an issue is includable in
gross income if the obligation is held by a substantial user of the
financed facilities or a related person (as described in section
103(b)(7) and Sec. 1.103-11). Section 103(b)(6) only becomes applicable
where the bond issue meets both the trade or business and the security
interest tests so that the obligations are industrial development bonds
within the meaning of section 103(b)(2). For bonds issued before January
1, 1979, in taxable years ending before such date, and for capital
expenditures made before January 1, 1979, with respect to such bonds,
paragraphs (b), (c), and (d) of this section shall be applied by
substituting $5 million for $10 million.
(b) Small issue exemption--(1) $1 million or less. Section
103(b)(6)(A) provides that section 103(b)(1) shall not apply to any debt
obligation issued by a State or local governmental unit as part of an
issue where--
(i) The aggregate authorized face amount of such issue (determined
by aggregating the outstanding face amount of any prior exempt small
issues described in paragraph (d) of this section and the face amount of
the issue of obligations in question) is $1 million or less; and
(ii) Substantially all of the proceeds of such issue is to be used
for the acquisition, construction, reconstruction, or improvement of
land or property of a character subject to the allowance for
depreciation under section 167. Proceeds which are loaned to a borrower
for use as working capital or to finance inventory are not used in the
manner described in the preceding sentence. Whether substantially all of
the proceeds of an issue of governmental obligations are used in such
manner is determined consistently with the rules for exempt facilities
in Sec. 1.103-8(a)(1)(i). Any obligation which is an industrial
development bond within the meaning of section 103(b)(2) and which
satisfies the $1 million small issue exemption requirements is an exempt
small issue. See paragraph (c)(1) of this section for the treatment of
refunding issues of $1 million or less.
(2) $10 million or less. (i) Under section 103(b)(6)(D), the issuing
State or local governmental unit may elect to have an aggregate
authorized face amount of $10 million or less, in lieu of the $1 million
exemption otherwise provided for in section 103(b)(6)(A), with respect
to issues of obligations that are industrial development bonds (within
the meaning of section 103(b)(2)) issued after October 24, 1968. If the
election is made in a timely manner, the bonds will be treated as
obligations of a State or local governmental unit described in section
103(a)(1) and Sec. 1.103-1 if the sum of--
(a) The aggregate face amount of the issue including the aggregate
outstanding face amount of any prior $1 million or $10 million exempt
small issues taken into account under section 103(b)(6)(B) and paragraph
(d) of this section, and
(b) The aggregate amount of ``section 103(b)(6)(D) capital
expenditures'' (within the meaning of paragraph (b)(2)(ii) of this
section),
is $10 million or less. In the case of an issue of obligations that
qualified for exemption under section 103(b)(6)(A)
[[Page 382]]
and this paragraph, if a section 103(b)(6)(D) capital expenditure made
after the date of issue has the effect of making taxable the interest on
the issue, under section 103(b)(6)(G) the loss of tax exemption for the
interest shall begin only with the date on which the expenditure that
caused the issue to cease to qualify under the $10 million limit was
paid or incurred. See paragraph (b)(2)(vi) of this section for the time
and manner in which the issuer may elect the $10 million exemption. See
section 103(b)(6)(H) and paragraph (c)(2) of this section for the
treatment of certain refinancing issues of $10 million of less.
(ii) The term ``section 103(b)(6)(D) capital expenditure'' is
defined in this subdivision. Special rules for applying such definition
in the case of certain expenditures paid or incurred by a State or local
governmental unit are prescribed in subdivision (iii) of this
subparagraph. Except as excluded by subdivision (iv) or (v) of this
subparagraph, an expenditure (regardless of how paid, whether in cash,
notes, or stock in a taxable or nontaxable transaction) is a section
103(b)(6)(D) capital expenditure if--
(a) The capital expenditure was financed other than out of the
proceeds of issues to the extent such issues are taken into account
under paragraph (b)(2)(i)(a) of this section.
(b) The capital expenditures were paid or incurred during the 6-year
period which begins 3 years before the date of issuance of the issue in
question and ends 3 years after such date,
(c) The principal user of the facility in connection with which the
property resulting from the capital expenditures is used and the
principal user of the facility financed by the proceeds of the issue in
question is the same person or are two or more related persons (as
defined in section 103(b)(6)(C) and paragraph (e) of this section),
(d) Both facilities referred to in (c) of this subdivision were
(during the period described in (b) of this subdivision or a part
thereof) located in the same incorporated municipality or in the same
county outside of the incorporated municipalities in such county), and
(e) The capital expenditures were properly chargeable to the capital
account of any person or State or local governmental unit (whether or
not such person is the principal user of the facility or a related
person) determined, for this purpose, without regard to any rule of the
Code which permits expenditures properly chargeable to capital account
to be treated as current expenses. With respect to obligations issued on
or after August 8, 1972, determinations under the preceding sentence
shall be made by including any expenditure which may, under any rule or
election under the Code, be treated as a capital expenditure (whether or
not such expenditure is so treated). With respect to obligations issued
on or after August 8, 1972, for purposes of this subparagraph, capital
expenditures made with respect to a contiguous or integrated facility
which is located on both sides of a border between two or more political
jurisdictions are made with respect to a facility located in all such
jurisdictions and, therefore, shall be treated as if they were made in
each such political jurisdiction.
(iii) Amounts properly chargeable to capital account under
subdivision (ii) (e) of this subparagraph include capital expenditures
made by a State or local governmental unit with respect to an exempt
facility or an industrial park, within the 6-year period described in
subdivision (ii)(b) of this subparagraph, out of the proceeds of bond
issues to which section 103(b)(1) did not apply by reason of section
103(b) (4) or (5) (relating to certain exempt activities and industrial
parks). Thus, for example, the cost to the lessor of a leased plantsite
financed out of the proceeds of an issue for an exempt air pollution
control facility under section 103(b)(4)(F) and paragraph (g) of
Sec. 1.103-8 would constitute a section 103(b)(6)(D) capital
expenditure. However, in the case of an industrial park, only the land
costs allocated on an area basis to the plantsite and the actual cost of
any improvements made on the plantsite, or to be used principally in
connection with the actual plantsite occupied by a principal user or a
related person, shall be taken into account as capital expenditures.
Where the actual amount
[[Page 383]]
of capital expenditures made with respect to a facility by a person
(including a State or local governmental unit) other than the user of
such facility (or a related person) cannot be ascertained, the fair
market value of the property with respect to which the capital
expenditures were made, at the time of such capital expenditures, shall
be deemed to be the amount of such capital expenditures. In the case of
a transaction which is not in form a purchase but which is treated as a
purchase for Federal income tax purposes, the purchase price for Federal
income tax purposes shall constitute a capital expenditure.
(iv) A section 103(b)(6)(D) capital expenditure shall not include
any ``excluded expenditure'' described in (a) through (e) of this
subdivision (iv).
(a) A capital expenditure is an excluded expenditure if either it is
made by a public utility company which is not the principal user of the
facility financed by the proceeds of the issue in question (or a related
person) with respect to property of such company, or it is made by a
State or local governmental unit with respect to property of such unit,
and if in either case it meets all of the following three conditions:
Such property of such company or unit (as the case may be) must be used
to provide gas, water, sewage disposal services, electric energy, or
telephone service. Such property must be installed in, or connected to,
the facility but must not consist of property which is such an integral
part of the facility that the cost of such property is ordinarily
included as part of the acquisition, construction, or reconstruction
cost of such facility. Such property must be of a type normally paid for
by the user (or a related person) in the form of periodic fees based
upon time or use.
(b) A capital expenditure is an excluded expenditure if it is made
by a person other than the user, a related person, or a State or local
governmental unit and if it is made with respect to tangible personal
property (within the meaning of paragraph (c) of Sec. 1.48-1), or
intangible personal property, leased to the user (or a related person)
of a facility. However, the preceding sentence shall apply only if such
personal property is leased by the manufacturer of such tangible or
intangible personal property, or by a person in the trade or business of
leasing property the same as, or similar to, such personal property, and
only if, pursuant to general business practice, property of such type is
ordinarily the subject of a lease.
(c) A capital expenditure is an excluded expenditure if it is made
to replace property damaged or destroyed by fire, storm, or other
casualty, to the extent that these expenditures do not exceed in dollar
amount the fair market value (determined immediately before the
casualty) of the property replaced.
(d) A capital expenditure is an excluded expenditure if it is
required by a change made after the date of issue in a Federal or State
law, or a local ordinance which has general application, or if it is
required by a change made after such date in rules and regulations of
general application issued under such law or ordinance.
(e) A capital expenditure is an excluded expenditure if it is
required by or arises out of circumstances which could not reasonably be
foreseen on the date of issue or which arise out of a mistake of law or
fact. However, the aggregate dollar amount taken into account under this
subdivision (e) with respect to any issue may not exceed $1 million.
With respect to expenditures incurred prior to December 11, 1971, the
dollar amount specified in the preceding sentence shall be $250,000.
(v)(a) If the assets of a corporation are acquired by another
corporation in a transaction to which section 381(a) (relating to
carryovers in certain corporate acquisitions) applies, the exchange of
consideration by the acquiring corporation for such assets is not a
section 103(b)(6)(D) capital expenditure by such acquiring corporation.
(b) However, if an exchange referred to in (a) of this subdivision
occurs during the 6-year period beginning 3 years before the date of
issuance of an issue of obligations and ending 3 years after such date,
the transferor and transferee shall be treated as having been related
persons for the portion of such 6-year period preceding the date of the
exchange for purposes of determining
[[Page 384]]
whether section 103(b)(6)(D) capital expenditures have been made. For
purposes of this subdivision (b), the date of an exchange to which
section 381 applies shall be the date of distribution or transfer within
the meaning of paragraph (b) of Sec. 1.381(b)-1.
(c) If section 351(a) applies to a transfer of property to a
corporation solely in exchange for its stock or securities, the issuance
of such stock or securities in such exchange is not a section
103(b)(6)(D) capital expenditure by such corporation.
(d) However, if such a transfer referred to in (c) of this
subdivision occurs during the 6-year period beginning 3 years before the
date of issuance of an issue of obligations and ending 3 years after
such date, and if, with respect to the property transferred,
expenditures made within such period would have been section
103(b)(6)(D) capital expenditures if the transferor and transferee had
been related persons for such period, then such expenditures shall be
considered to be section 103(b)(6)(D) capital expenditures made by the
transferee. In addition, if a transferor and transferee are related
persons immediately following such transfer, such transferor and
transferee shall also be treated as having been related persons for the
portion of such 6-year period preceding the date of such transfer.
(e) For purposes of this subdivision (v), the term ``issue of
obligations'' means an issue being tested for purposes of qualifying or
continuing to qualify under an election pursuant to section 103(b)(6)(D)
as to which an amount which would be a section 103(b)(6)(D) capital
expenditure solely by reason of (b) or (d) of this subdivision must be
taken into account.
(f) If with respect to an issue of obligations an expenditure would
not have been a section 103(b)(6)(D) capital expenditure but for the
application of (b) or (d) of this subdivision, and if such section
103(b)(6)(D) capital expenditure has the effect of making taxable the
interest on an issue of obligations which qualified for exemption under
section 103(b)(6)(A) and this paragraph, the loss of tax exemption for
such interest shall begin not earlier than the date of such exchange or
transfer referred to in this subdivision (v).
(vi) The issuer may make the election provided by section
103(b)(6)(D) and this paragraph (b)(2) (assuming that the bonds
otherwise qualify under section 103(b)(6) by noting the election
affirmatively at or before the time of issuance of the issue in question
on its books or records with respect to the issue. The term ``books or
records'' includes the bond resolution or other similar legislation for
the issue in question as well as the bond transcript or other
compilation of bond and bond-related documents. If the issuer fails to
make an election at the time and in the manner prescribed in this
paragraph (b)(2), the issue will not be treated as described in section
103(b)(6)(D), and interest thereon will be includible in gross income.
(c) Refunding or refinancing issue exemption--(1) $1 million or less
refunding issue. Section 103(b)(6)(A) also provides that section
103(b)(1) shall not apply to any debt obligation issued by a State or
local governmental unit as part of an issue the aggregate authorized
face amount of which is $1 million or less, if substantially all of the
proceeds of such issue are to be used--
(i) To redeem part of all of a prior issue substantially all of the
proceeds of which were used to acquire, construct, reconstruct, or
improve land or property of a character subject to the allowance for
depreciation, or
(ii) To redeem part or all of a prior exempt small refunding issue.
(2) 10 million or less refinancing issue. Section 103(b)(6)(H)
provides that section 103(b)(1) shall not apply to any debt obligation
issued by a governmental unit as part of an issue which is $10 million
or less if the condition of section 103(b)(6)(H) is met and if
substantially all of the proceeds are to be used--
(i) To redeem part or all of one or more prior exempt small issues,
or
(ii) To redeem part or all of one or more prior exempt small
refunding issues.
The condition of section 103(b)(6)(H) is that an election by the issuer
of the $10 million exemption in lieu of the $1 million limit for a
refunding issue may be
[[Page 385]]
made only if each prior issue being redeemed is an issue which qualified
either for the $1 million exemption or, by reason of an election under
section 103(b)(6)(D), for the $10 million exemption. In addition, in
applying the capital expenditures test under section 103(b)(6)(D)(ii)
and paragraph (b)(2)(i)(b) of this section to refinancing issues,
section 103(b)(6)(D) capital expenditures are taken into account only
for purposes of determining whether prior issues which were made under
the section 103(b)(6)(D) election qualified under section 103(b)(6)(A)
and would have continued to qualify under that section but for the
redemption.
(d) Certain prior issues taken into account--(1) In general. Section
103(b)(6)(B) provides, in effect, that if (i) a prior issue specified in
subparagraph (2) of this paragraph is an exempt small issue (including
for this purpose an exempt small refunding issue) under section
103(b)(6)(A) and this section, and (ii) such prior issue is outstanding
at the time of issuance of a subsequent issue, then in determining the
aggregate face amount of such subsequent issue (for purposes of
determining whether such issue is a $1 million or $10 million exempt
small issue under section 103(b)(6)(A) and this section) there shall be
taken into account the outstanding face amount of such prior exempt
small issue. For purposes of this paragraph, the outstanding face amount
of a prior exempt small issue does not include the face amount of any
obligation which is to be redeemed from the proceeds of such subsequent
issue.
(2) Prior issues specified. The face amount of an outstanding prior
exempt small issue is taken into account under subparagraph (1) of this
paragraph if--
(i) The proceeds of both the prior exempt small issue and of the
subsequent issue (whether or not the State or local governmental unit
issuing such obligation is the same unit for each such issue) are or
will be used primarily with respect to facilities located or to be
located in the same incorporated municipality or located or to be
located in the same county outside of an incorporated municipality in
such county (and, for purposes of this subdivision, on or after August
8, 1972, a contiguous or integrated facility which is located on both
sides of a border between two or more political jurisdictions shall be
treated as if it is entirely within each such political jurisdiction),
and
(ii) The principal user of the financed facilities referred to in
subdivision (i) of this subparagraph is or will be the same person or
two or more related persons (as defined in section 103(b)(6)(C) and
paragraph (e) of this section).
(3) Rules of application. The rules of this paragraph shall apply--
(i) Only in the case of outstanding prior exempt small issues which
are industrial development bonds to which section 103(b)(1) would have
applied but for the provisions of section 103(b)(6). Thus, for example,
the provisions of this paragraph do not apply in respect of a prior
issue of obligations issued on or before April 30, 1968. In addition,
the provisions of this paragraph do not apply in respect of a prior
issue for an exempt facility under section 103(b)(4) and Sec. 1.103-8,
or for an industrial park under section 103(b)(5) and Sec. 1.103-9,
whether or not the issue might also have qualified as an exempt small
issue under section 103(b)(6)(A) and this section.
(ii) To all prior exempt small issues which meet the requirements of
this paragraph. Thus, for example, in determining the aggregate face
amount of an issue under section 103(b)(6)(A), the outstanding face
amount of prior $1 million or $10 million exempt small issues which meet
the requirements of this paragraph shall be taken into account in
determining the aggregate face amount of a subsequent issue being tested
for the $1 million small issue exemption. Similarly, in determining the
aggregate face amount of an issue under section 103(b)(6)(A) and (D),
the outstanding face amount of prior $1 million or $10 million exempt
small issues which meet the requirements of this paragraph shall be
taken into account in determining the aggregate face amount of a
subsequent issue being tested for the $10 million small issue exemption.
(e) Related persons. For purposes of section 103(b) and Secs. 1.103-
7 through 1.103-11, the term ``related person''
[[Page 386]]
means a person who is related to another person if, on the date of issue
of an issue of obligations--
(1) The relationship between such persons would result in a
disallowance of losses under section 267 (relating to disallowance of
losses, etc., between related taxpayers) and section 707(b) (relating to
losses disallowed, etc., between partners and controlled partnerships)
and the regulations thereunder, or
(2) Such persons are members of the same controlled group of
corporations, as defined in section 1563(a), relating to definition of
controlled group of corporations (except that ``more than 50 percent''
shall be substituted for ``at least 80 percent'' each place it appears
in section 1563(a)) and the regulations thereunder.
(f) Disqualification of certain small issues. (1) Section 103(b)(6)
shall not apply to any obligation issued after April 24, 1979, which is
part of an issue, a significant portion of the proceeds of which are to
be used directly or indirectly to provide residential real property for
family units. For purposes of the preceding sentence, the term
``residential real property for family units'' means residential rental
projects (within the meaning of Sec. 1.103-8(b)) and owner-occupied
residences (within the meaning of section 103A).
(2) For purposes of paragraph (f)(1), a significant portion of the
proceeds of an issue are used to provide residential real property for
family units if 5 percent or more of the proceeds are so used.
(g) Examples. The application of the rules contained in section
103(b)(6) and this section are illustrated by the following examples:
Example (1). County A and corporation X enter into an arrangement
under which the county will provide a factory which X will lease for 25
years. The arrangement provides (1) that A will issue $1 million of
bonds on March 1, 1970, (2) that the proceeds of the bond issue will be
used to acquire land in County A (but not in an incorporated
municipality) and to construct and equip a factory on such land in
accordance with X's specifications, (3) that X will rent the facility
for 25 years at an annual rental equal to the amount necessary to
amortize the principal and pay the interest on the outstanding bonds,
and (4) that such payments by X and the facility itself shall be the
security for the bonds. Although the bonds issued are industrial
development bonds, the bonds are an exempt small issue under section
103(b)(6)(A) and this section since the aggregate authorized face amount
of the bond issue is $1 million or less and all of the proceeds of the
bond issue are to be used to acquire and improve land and acquire and
construct depreciable property. The result would be the same if the
arrangement provided that X would purchase the facility from A.
Example (2). The facts are the same as in example (1) except that,
instead of acquiring land and constructing a new factory, the
arrangement provides that A will acquire a vacant existing factory
building and rebuild and equip the building in accordance with X's
specifications. The bonds are an exempt small issue for the same reasons
as in example (1).
Example (3). The facts are the same as in example (1) or (2) except
that the financed facilities are additions to facilities which were
financed by an issue of bonds to which section 103(b)(1) does not apply
because such bonds were issued prior to May 1, 1968, or were subject to
the transitional provisions of Sec. 1.103-12. The bonds are an exempt
small issue since neither of the prior bond issues are taken into
account under section 103(b)(6)(B) and this section in determining the
status of industrial development bonds which are issued after April 30,
1968, and which are not subject to the transitional provisions of
Sec. 1.103-12.
Example (4). The facts are the same as in example (1) except that,
subsequently, corporation X proposes to County A that A build a $400,000
warehouse located in Town M (an unincorporated town located in County A)
for X under terms similar to the factory arrangement described in
example (1). On the proposed issue date of the subsequent bond issue,
$600,000 of the first exempt small issue will be outstanding. If A
issues $400,000 of bonds for such purposes, the bonds will be an exempt
small issue under section 103(b)(6) and this section since, under the
rules of section 103(b)(6)(B) and paragraph (d) of this section, if the
aggregate authorized face amount of the new issue and the outstanding
prior exempt small issue will be $1 million or less, the new issue will
be an exempt small issue. If, however, the aggregate authorized face
amount of the prior issue outstanding on the date of the subsequent
issue were in excess of $600,000, the subsequent issue would not qualify
as an exempt small issue because (1) the combined aggregate face amount
of the outstanding prior issue and the new issue would be in excess of
$1 million, (2) the facilities financed by both issues are to be located
in unincorporated areas in the same county, (3) the same taxpayer will
be the principal user of both facilities, and (4) but
[[Page 387]]
for the rules of section 103(b)(6)(B) and paragraph (d) of this section
the prior issue would be an exempt small issue.
Example (5). The facts are the same as in example (1) except that
subsequently corporation X proposes to City P and City R (incorporated
municipalities located in County A) that P and R each issue bonds and
each build $1 million facilities to be located in Cities P and R for the
use of X under terms similar to the arrangement in example (1). Each of
the $1 million issues will be an exempt small issue because each
proposed facility is located within a different incorporated
municipality and the proceeds of the prior outstanding exempt small
issue were used to construct facilities outside of an incorporated area.
Example (6). The facts are the same as in example (1) except that
$95,000 of the $1 million will be used by the corporation as working
capital. The bonds are an exempt small issue for the same reason as in
example (1) since substantially all of the proceeds will be used for the
acquisition of land and the construction of depreciable property.
Example (7). The facts are the same as in example (1) except that on
November 1, 1969, County A issued $10 million of industrial development
bonds, all of the proceeds of which were issued for the acquisition of
land as the site for an industrial park within the meaning of section
103(b)(5) and Sec. 1.103-9. The proceeds of the $1 million of bonds
issued in 1970 will be used to construct a factory for corporation X to
be located in the industrial park. The bonds issued in 1970 are
industrial development bonds within the meaning of section 103(b)(2) and
Sec. 1.103-7. Since, however, the prior 1969 issue is not an issue to
which section 103(b)(6)(A) applied (see paragraph (d)(3)(i) of this
section), the bonds issued in 1970 are an exempt small issue for the
reasons stated in example (1).
Example (8). County B enters into three separate arrangements with
three unrelated corporations whereby the county will provide separate
storage facilities for each corporation. The arrangement provides (1)
that the county will issue bonds and loan to each corporation $250,000
of the proceeds which will be used to acquire land in the county and to
construct the facilities, (2) that the rental payments by the
corporations will be equal to the amount necessary to amortize the
principal and pay the interest on any outstanding bonds issued by the
county, and (3) that the payments by the corporations and the facilities
themselves shall be the security for the industrial development bonds.
For convenience, the county issues one series of bonds in the face
amount of $750,000 rather than three separate series of bonds of
$250,000 each. The issue is an exempt small issue under section
103(b)(6)(A) and paragraph (b)(1) of this section since the aggregate
authorized face amount of the bond issue is $1 million or less, and all
of the proceeds of the bond issue are to be used to acquire and improve
land and acquire and construct depreciable property.
Example (9). City C and corporation Y enter into an arrangement
under which C will provide a factory which Y will lease for 25 years.
The arrangement provides (1) that C will issue $4 million of bonds on
March 1, 1969, after making the election under section 103(b)(6)(D) and
paragraph (b)(2) of this section, (2) that the proceeds of the bond
issue will be used to acquire land in the city and to construct and
equip a factory on such land in accordance with Y's specifications, (3)
that Y will rent the facilities for 25 years at an annual rental equal
to the amount necessary to amortize the principal and pay the interest
on the outstanding bonds, (4) that such payments by Y and the facility
itself shall be the security for the bonds, and (5) that, if corporation
Y pays or incurs capital expenditures in excess of $1 million within 3
years from the date of issue which disqualify the bonds as an exempt
small issue under section 103(b)(6)(D), it will either furnish funds to
C to redeem such bonds at par or at a premium, or increase the rental
payments to C in an amount sufficient to pay a premium interest rate.
Although the bonds issued are industrial development bonds, they are an
exempt small issue under section 103(b)(6)(A) by reason of the election
under section 103(b)(6)(D) and paragraph (b)(2) of this section, since
the aggregate authorized face amount of the bond issue is $5 million or
less and all of the proceeds of the bond issue are to be used to acquire
and improve land and acquire and construct depreciable property. The
provisions for redemption of the bonds or an increase in rental if the
bonds are disqualified as an exempt small issue under section
103(b)(6)(A) will not disqualify an otherwise valid election under
section 103(b)(6)(D) and paragraph (b)(2) of this section.
Example (10). The facts are the same as in example (9) except that
corporation Y subsequently proposed to the city that it build a $1
million warehouse next to the plant for the use of Y under terms similar
to the factory arrangement. Assume further that the factory building was
completed by March 1, 1970, and that on January 15, 1972, the proposed
issue date of the subsequent bond issue, $2 million of the first exempt
small issue will be outstanding. In determining the aggregate authorized
face amount of the new issue, the original face amount of a prior
outstanding issue must be reduced by that portion which is to be
redeemed before it is added to the face amount of the new issue.
Therefore, if the city issues $3 million of bonds to redeem the
remaining $2 million of bonds and to construct the warehouse the bonds
will be an exempt small issue under section 103(b)(6)(A) if an election
is made
[[Page 388]]
under section 103(b)(6)(D) and paragraph (b)(2) of this section since
(1) the face amount of the new issue ($3 million), plus (2) the face
amount of the prior outstanding exempt small issue minus the amount of
such issue to be refunded ($2 million minus $2 million), plus (3)
capital expenditures during the preceding 3 years financed other than
out of the proceeds of outstanding issues to which section 103(b)(6)(A)
and paragraph (b) of this section applied ($2 million), do not exceed $5
million. If, however, the amount of the January 15, 1972, issue were
$3\1/2\ million, the issue would not qualify as an exempt small issue
under section 103(b)(6)(A) and paragraph (b)(2) of this section.
Example (11). The facts are the same as in example (9), except that
on June 15, 1971, Y purchases from an unrelated motor carrier business a
warehouse terminal in the same city at a cost of $250,000 and tractor-
trailers and other automotive equipment based at the terminal at a cost
of $1 million. This subsequent expenditure by Y has the effect of making
the interest on the city C bonds includable in the gross income of the
holders of such bonds as of June 15, 1971, because the face amount of
the March 1, 1969, issue ($4 million) plus the subsequent capital
expenditures within 3 years of the date of issue ($1,250,000) exceed $5
million. (See section 103(b)(6)(D) and paragraph (b)(2)(i) of this
section.)
Example (12). The facts are the same as in example (9), except that
in March, 1970, Y will move $3 million of additional used machinery and
equipment into the factory from its factory in another city. The
expenditures for such machinery and equipment were incurred by Y more
than 3 years prior to the date of issue of the bonds. The transfer of
such used equipment into city C does not constitute a section
103(b)(6)(D) capital expenditure within the meaning of paragraph
(b)(2)(ii) of this section since the expenditures with respect to such
property were incurred more than 3 years prior to the date of issue of
the bonds. Had the capital expenditures with respect to such property
been incurred during the 6-year period beginning 3 years before the date
of issue of the bonds and in the 3 years after such date, they would
constitute section 103(b)(6)(D) capital expenditures.
Example (13). The facts are the same as in example (9), except that
in March 1970, corporation Y enters into an arrangement with respect to
machinery and equipment to be used in the facility. The arrangement is
labeled by the parties as a lease but is treated as a sale for Federal
income tax purposes. The amount treated as the purchase price of the
machinery and equipment is a section 103(b)(6)(D) capital expenditure.
Example (14). On February 1, 1970, city D issues $5 million of its
bonds to finance construction of an addition to the manufacturing plant
of corporation Z. The bonds will be secured by the facility and lease
payments to be made by Z which will be sufficient to pay the principal
and interest on such bonds. Assume that the bonds qualify as an exempt
small issue under section 103(b)(6)(A) pursuant to an election under
section 103(b)(6)(D) and paragraph (b)(2) of this section. On February
1, 1971, D plans to issue $1 million of its bonds to construct a
pollution control facility to be leased to Z for use at its
manufacturing plant. The rental payments from the lease will be
sufficient to pay the principal and interest on the bonds. The bonds
will be secured by such facility and the lease payments. Capital
expenditures for the pollution control facility will be paid or incurred
beginning before February 1, 1973. Although the pollution control
facility is an exempt facility under section 103(b)(4)(F) and paragraph
(g) of Sec. 1.103-8, amounts used for the pollution control facility
shall be considered to be a section 103(b)(6)(D) capital expenditure and
the interest on the February 1, 1970, issue will become taxable as of
the date such capital expenditure began to be paid or incurred. See
section 103(b)(6)(G) and paragraph (b)(2)(i) of this section.
Example (15). On February 1, 1970, City E issues $500,000 of its
bonds to acquire and develop an industrial park within the meaning of
section 103(b)(5) and paragraph (b) of Sec. 1.103-9. The park consists
of 100 acres and is divided into one 50 acre plantsite and 4 smaller
sites. The aggregate acquisition cost of the undeveloped land is
$150,000 or an average per acre cost of $1,500. Roads, sidewalks,
sewers, utilities, sewage, and waste disposal facilities serving the
entire industrial park cost $300,000. On September 1, 1970, E leases to
corporation Y for 30 years the 50 acre plantsite (with an allocated cost
of $75,000) and a railroad spur track from the railroad right of way to
Y's plantsite for Y's exclusive use. The spur track was constructed
using $50,000 of the proceeds of the industrial park bond issue. E also
proposes to issue on September 1, 1970, $4,875,000 of its bonds to
construct and equip a building on the leased plantsite to be leased to Y
at an additional rental sufficient to pay the principal and interest on
this issue of bonds. The September 1, 1970, issue will be an exempt
small issue under section 103(b)(6)(A) pursuant to an election under
section 103(b)(6)(D) and paragraph (b)(2) of this section since the sum
of the amount of the second issue ($4,875,000) and the capital
expenditures allocated to the plantsite ($75,000 for 50 acres of land
plus $50,000 for the railroad spur tract, totaling $125,000) does not
exceed $5 million. The sum of $300,000 which was spent in development of
the industrial park provided facilities which will serve or benefit the
users generally and
[[Page 389]]
hence under paragraph (b)(2)(iii) of this section is not considered to
have provided facilities as to which Y will be the principal user.
Example (16). On June 1, 1970, corporation Z simultaneously enters
into separate arrangements with City F and City G under which each city
will issue a $5 million exempt small issue of bonds the proceeds of
which will be used by Z to construct separate facilities in each city.
By June 1, 1971, the facilities have been completed in the respective
cities. On January 1, 1972, Cities F and G, through a valid legal
proceeding, merge into a new City FG. Since in this case F and G were
separate cities on June 1, 1970 (the date of the bond issues), the
factories are not considered to be located in the same incorporated
municipality. Accordingly, each $5 million issue by City F and G will
continue to qualify as an exempt small issue.
Example (17). On June 1, 1973, City H issues an exempt small issue
of $4.75 million to finance a facility of corporation S to be located in
City H. On October 1, 1974, S and corporation T, previously unrelated to
S, consummated a statutory merger which qualifies as a reorganization
described in section 368(a)(1)(A) and thus as a transaction described in
section 381(a). In the transaction, T transferred to S assets with a
fair market value of $1.5 million in exchange for stock of S, $300,000
of securities of S, and $100,000 cash. On March 23, 1971, T made
$400,000 of capital expenditures for an addition to its factory located
in City H. For purposes of testing the H issue of June 1, 1973, such
expenditures would have been section 103(b)(6)(D) capital expenditures
if T and S had been related persons. Under the provisions of paragraph
(b)(2)(v)(a) of this section, the exchange of $1.5 million of stock,
securities, and cash by S does not constitute a section 103(b)(6)(D)
capital expenditure. Since, however, S and T are treated as related
persons starting 3 years prior to the date of issue of the obligations,
the $400,000 of expenditures by T constitute section 103(b)(6)(D)
capital expenditures. Thus, the interest on the June 1, 1973, issue of
obligations would become taxable (since the $5 million limit would be
exceeded) on the date of the merger.
Example (18). In 1965 City I issues $10 million of industrial
development bonds to construct and equip a factory for corporation Z. In
1975 the remaining principal amount of the bonds outstanding is $4.1
million. If I issues $4.5 million of bonds to redeem the balance of the
prior issue, and for other purposes, such issue cannot qualify as an
exempt small issue under section 103(b)(6)(D) and paragraph (b)(2) of
this section even though at the time of issue the interest on the 1965
bonds was tax-exempt since the prior issue must be one which qualified
under section 103(b)(6)(A) and this section. Further, the 1975 issue
will be an issue of industrial development bonds notwithstanding the
provisions of paragraph (d)(2) of Sec. 1.103-7 which provides that
certain bonds issued to refund an issue of obligations issued on or
before April 30, 1968 (or January 1, 1969, in certain cases) will not be
so treated. Paragraph (d)(2) of Sec. 1.103-7 is not applicable because
the 1975 issue makes funds available for a purpose other than the debt
service obligation on the 1965 bonds.
Example (19). In 1969 City J issues $4 million of industrial
development bonds which qualify as an exempt small issue under section
103(b)(6)(A) pursuant to an election under section 103(b)(6)(D) and
paragraph (b)(2) of this section. In 1971, by reason of a $2 million
addition to the factory built with the proceeds of the issue, the 1969
exempt small issue loses its tax-exempt status. In 1972, the city issues
a $5 million issue to redeem the prior 1969 issue. The redemption issue
will not qualify as an exempt small issue since the prior 1969 issue did
not continue to qualify under section 103(b)(6)(A) and this section.
[T.D. 7199, 37 FR 15494, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972; 37 FR
17826, Sept. 1, 1972, as amended by T.D. 7511, 42 FR 54285, Oct. 5,
1977; T.D. 7840, 47 FR 46084, Oct. 15, 1982; 51 FR 16299, May 2, 1986]
Sec. 1.103-11 Bonds held by substantial users.
(a) In general. Section 103(c) (4), (5), or (6) (relating
respectively to interest on bonds to finance certain exempt facilities,
interest on bonds to finance industrial parks, and the exemption for
certain small issues of industrial development bonds) does not apply, as
provided in section 103(c)(7), with respect to any obligation for any
period during which such obligation is held either by a person who is a
substantial user of the facilities with respect to which the proceeds of
such obligation were used or by a related person (within the meaning of
section 103(c)(6)(C) and paragraph (e) of Sec. 1.103-10). Therefore, in
such a case, interest paid on such an obligation is includable in the
gross income of a substantial user (or related person) for any period
during which such obligation is held by such user (or related person).
(b) Substantial user. In general, a substantial user of a facility
includes any nonexempt person who regularly uses a part of such facility
in his trade or business. However, unless a facility, or
[[Page 390]]
a part thereof, is constructed, reconstructed, or acquired specifically
for a nonexempt person or persons, such a nonexempt person shall be
considered to be a substantial user of a facility only if (1) the gross
revenue derived by such user with respect to such facility is more than
5 percent of the total revenue derived by all users of such facility or
(2) the amount of area of the facility occupied by such user is more
than 5 percent of the entire usable area of the facility. Under certain
facts and circumstances, where a nonexempt person has a contractual or
preemptive right to the exclusive use of property or a portion of
property, such person may be a substantial user of such property. A
substantial user may also be a lessee or sublessee of all or any portion
of the facility. A licensee or similar person may also be a substantial
user where his use is regular and is not merely a casual, infrequent, or
sporadic use of the facility. Absent special circumstances, individuals
who are physically present on or in the facility as employees of a
substantial user shall not be deemed to be substantial users.
(c) Examples. The application of section 103(c)(7) and this section
are illustrated by the following examples:
Example (1). Pursuant to an arrangement with corporation X, County A
issues $4 million of its bonds (an exempt small issue under section
103(c)(6)(A) pursuant to an election under section 103(c)(6)(D) and
paragraph (b)(2) of Sec. 1.103-10) and will use the proceeds to finance
construction of a manufacturing facility which is to be leased to X for
an annual rental of $500,000. X subleases space to a restaurant operator
at an annual rental of $25,000 for the operation of a canteen and lunch
counter for the convenience of X's employees. The canteen is required to
be open at least 5 days each week (except holidays) from 8:30 a.m. to 5
p.m., and the lunch counter must be in operation during the noon hour.
The canteen regularly sells cigarettes, candy, and soft drinks, and uses
advertising displays and dispensers with product names. The space
physically occupied and the amount of revenue derived by the restaurant
operator are more than 5 percent of the respective amounts with respect
to the entire facility. Both X and the restaurant operator are
substantial users. However, absent special circumstances none of X's
employees, the employees of the restaurant operator, or the customers or
salesmen who regularly visit the premises to do business either with X
or the restaurant operator are substantial users. Similarly, the
manufacturers, distributors, and dealers of products sold in the canteen
ordinarily are not substantial users.
Example (2). The facts are the same as in example (1) except that X
rents food and beverage vending machines from a local dealer. The
machines are regularly serviced by the local dealer under a contract
with X. Title to and ownership of the machines are retained by the
dealer. The local dealer is not deemed to be a substantial user if the
revenue derived by such dealer from, and the space occupied by, such
machines do not exceed 5 percent of the respective amounts with respect
to the entire facility.
Example (3). City B proposes to issue $2 million of bonds which
qualify as an exempt small issue under section 103(c)(6)(A) pursuant to
an election under section 103(c)(6)(D) and paragraph (b)(2) of
Sec. 1.103-10 in order to construct a medical building for certain
physicians and dentists. The facility will contain 30 offices to be
leased on equal terms and for the same rental rates to each physician or
dentist for use in his trade or business. Each physician or dentist will
be a substantial user of the facility since the facility is being
constructed specifically for such physicians and dentists. The result
would be the same in the case of an office building for general
commercial use.
Example (4). City C proposes to expand the airport it owns and
operates with the proceeds of its bonds which qualify as bonds issued
for an exempt facility under section 103(c)(4)(D) and paragraph (e) of
Sec. 1.103-8 and which are secured by a pledge of airport revenues. The
airport is serviced by several commercial airlines which have long-term
agreements with C for the use of runways, terminal space, and hangar and
storage facilities. Each of the airlines either occupies more than 5
percent of the usable space of, or derives more than 5 percent of the
revenue derived with respect to, the airport. C also leases counter and
vehicle servicing and parking areas to car rental companies, space for
restaurants, kiosks for the sale of newspapers and magazines, and space
for the operations of a charter plane company. The latter operates its
own planes, offers flying lessons and services, and stores private
planes for local businesses and individuals. An airport limousine
company has an exclusive franchise for passenger pickup at the terminal.
Other taxi, transfer, freight, and express companies regularly deliver
passengers and freight to the terminal but do not have space regularly
assigned to them, nor do they have operating agreements with C. Various
business concerns have advertising product displays in the terminal
building. In addition to regular telephone service, coin-operated
telephones, provided by the telephone company, are located throughout
the terminal, at locations specified by C.
[[Page 391]]
None of the above exceed the 5-percent limitations of paragraph (b) of
this section and the bond proceeds will not be specifically used for any
of them. Only the commercial airlines, which violate the 5-percent
limitations, are substantial users of the airport.
Example (5). City D issues $25 million of its revenue bonds and will
use $10 million of the proceeds to finance construction of a sports
facility which qualifies as an exempt facility under section
103(c)(4)(B) and paragraph (c) of Sec. 1.103-8, $8 million to acquire
and develop land as the site for an industrial park within the meaning
of section 103(c)(5) and Sec. 1.103-9, and $7 million to finance the
construction of an office building to be used exclusively by the city,
an exempt person. The revenues from the sports facility and the
industrial park and all the facilities themselves will be the security
for the bonds. The sports facility and the industrial park sites will be
used in the trades of businesses of nonexempt persons. The bonds are
industrial development bonds, but under the provisions of paragraph
(a)(1) of Sec. 1.103-8 and paragraph (a) of Sec. 1.103-9, the interest
on the $25 million issue will not be includable in gross income.
However, the interest on bonds held shall be includable in the gross
income of a substantial user of either the sports facility or the
industrial park if such substantial user holds any of the obligations of
the $25 million issue. The 5-percent limitations of paragraph (b) of
this section are applied separately with respect to each facility.
Example (6). Authority E issues $4 million of bonds which qualify as
an exempt small issue under section 103(c)(6)(A) pursuant to an election
under section 103(c)(6)(D) and paragraph (b)(2) of Sec. 1.103-10 in
order to construct a bank building on the grounds of an airport. In
addition, E issues $40 million to expand the airport. The bank will not
derive revenue in excess of 5 percent of the revenue derived with
respect to the airport nor will it occupy more than 5 percent of the
usable area of such airport. The bank will be a substantial user of the
bank building constructed with the proceeds of the $4 million issue
since the facility was constructed specifically for the bank. However,
the bank will not be a substantial user with respect to the airport
because it does not exceed the 5-percent limitations of paragraph (b) of
this section. Had E issued one issue of $44 million in order to expand
the airport and construct a bank building, the bank would be a
substantial user of the entire facility since the $44 million issue was
being used to construct a facility a portion of which was specifically
for the bank.
[T.D. 7199, 37 FR 15499, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972]
Sec. 1.103-16 Obligations of certain volunteer fire departments.
(a) General rule. An obligation of a volunteer fire department
issued after December 31, 1980, shall be treated as an obligation of a
political subdivision of a State for purposes of section 103(a)(1) if--
(1) The volunteer fire department is a qualified volunteer fire
department within the meaning of paragraph (b) of this section, and
(2) Substantially all of the proceeds of the issue of which the
obligation is a part are to be used for the acquisition, construction,
reconstruction, or improvement of a fire house or fire truck used or to
be used by the qualified volunteer fire department.
An obligation of a volunteer fire department shall not be treated as an
obligation of a political subdivision of a State for purposes of section
103(a)(1) unless both conditions set forth in this paragraph (a) are
satisfied. Thus, for example, if an obligation is issued by an ambulance
and rescue squad that is a qualified volunteer fire department as
required by paragraph (a)(1) of this section, but substantially all of
the proceeds of the issue of which the obligation is a part are to be
used for the furnishing of emergency medical services, rather than for
the purposes specified in paragraph (a)(2) of this section, the
obligation shall not be treated as an obligation of a political
subdivision of a State for purposes of section 103(a)(1).
(b) Definition of qualified volunteer fire department. For purposes
of this section, the term ``qualified volunteer fire department'' means
an organization--
(1) That is organized and operated to provide firefighting services
or emergency medical services in an area within the jurisdiction of a
political subdivision, and
(2) That is required to furnish firefighting services by written
agreement with the political subdivision, and
(3) That serves persons in an area within the jurisdiction of the
political subdivision that is not provided with any other firefighting
services.
The requirement of paragraph (b)(2) of this section that a qualified
volunteer fire department be required to furnish firefighting services
by written agreement with the political subdivision may be satisfied by
an ordinance or statute of the political subdivision that
[[Page 392]]
establishes, regulates, or funds the volunteer fire department. A
volunteer fire department does not fail to satisfy the requirement of
pargraph (b)(3) of this section by furnishing or receiving firefighting
services on an emergency basis, or by cooperative agreement with other
fire departments, to or from areas outside of the area that the
volunteer fire department is organized and operated to serve. The fact
that tax revenues of a political subdivision served by a volunteer fire
department contribute toward the support of the volunteer fire
department in the form of salary, purchase of equipment, or other
defrayment of expenses will not prevent the volunteer fire department
from being a ``qualified volunteer fire department'' within the meaning
of this paragraph (b). Moreover, an obligation of a volunteer fire
department receiving such support may qualify as an obligation of a
political subdivision within the meaning of section 103(a)(1)
independently of section 103(i) and this section if the requirements of
section 103(a)(1) are satisfied. See Sec. 1.103-1(b) for rules relating
to qualification under section 103(a)(1).
(c) ``Substantially all'' test. Substantially all of the proceeds of
an issue are used for the purposes specified in paragraph (a)(2) of this
section if 90 percent or more of the proceeds are so used. Thus, for
example, if more than 10 percent of the proceeds of an obligation issued
by a qualified volunteer fire department are used for the purchase of an
ambulance or for rescue equipment not to be used in providing fire
fighting services, interest on the obligation is not exempt from tax
under section 103(i) and this section. In computing this percentage--
(1) Costs are allocated between providing a firehouse or firetruck
and other uses of the proceeds on a pro rata basis; and
(2) The rules set forth in Sec. 1.103-8(a)(1)(i), relating to
amounts allocable to exempt and nonexempt uses and amounts chargeable to
capital account, apply.
(d) Refunding issues. An obligation which is part of an issue issued
by a qualified volunteer fire department after December 31, 1980, part
or all of the proceeds of which issue are used directly or indirectly to
pay principal, interest, call premium, or reasonable incidental costs of
refunding a prior issue qualifies as an obligation of a political
subdivision under section 103(i) and this section only if--
(1) The prior issue was issued by a qualified volunteer fire
department;
(2) Substantially all of the proceeds of the prior issue were used
for the purposes described in paragraph (a)(2) of this section;
(3) The prior issue was issued after December 31, 1980; and
(4) The refunding issue is issued not more than 180 days before the
date on which the last obligation of the prior issue is discharged
(within the meaning of Sec. 1.103-13)(b)(11)).
(e) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). The County M Volunteer Fire and Rescue Association
provides firefighting, ambulance, and emergency medical services in
County M. The board of county commissioners of County M contracts with
the County M Volunteer Fire and Rescue Association for these services,
and County M is not served by any other firefighting association. On
August 1, 1981, the Association issues an obligation for funds to
purchase a new fire truck, a new ambulance, and rescue equipment not to
be used for fighting fires. Funds to be used for the purchase of the
ambulance and rescue equipment constitute more than 10 percent of the
proceeds of the obligation. Thus, substantially all of the proceeds of
the obligations are not used for one of the purposes described in
paragraph (a)(2) of this section. Although the County M Volunteer Fire
and Rescue Association is a qualified volunteer fire department under
paragraph (b) of this section because it provides firefighting and
emergency medical services in an area within County M which is not
provided with any other firefighting services and is required to provide
these services by written agreement with County M, the August 1, 1981,
obligation of County M Volunteer Fire and Rescue Association will not be
treated as an obligation of a political subdivision of a State under
section 103(i) and paragraph (a) of this section because substantially
all of the proceeds of the obligation are not to be used for a purpose
described in section 103(i)(l)(B) and paragraph (a)(2) of this section.
Accordingly, interest on the August 1, 1981, obligation of County M
Volunteer Fire and Rescue Association is not exempt from gross income
under section 103(a)(1).
[[Page 393]]
Example (2). County N Volunteer Fire Department provides
firefighting services in County N by contract with the county, which is
not served by any other firefighting association. On June 15, 1982,
County N Volunteer Fire Department issues its obligation for funds to
construct an addition to its firehouse to house a rescue squad, the
rescue squad's vehicle, and rescue equipment not to be used in
firefighting. Although the County N Volunteer Fire Department is a
qualified volunteer fire department under paragraph (b) of this section,
interest on its June 15, 1982, obligation will not be exempt from tax
under section 103(i) and this section because the proceeds of this
obligation will not be used for the purposes described in paragraph (a)
of this section.
Example (3). The County O Volunteer Fire and Rescue Association
provides firefighting, ambulance, and emergency medical services in
County O. The board of county commissioners of County O contracts with
the County O Volunteer Fire and Rescue Association for these services,
and County O is not served by any other firefighting association. On
September 1, 1983, the Association issues its obligations for funds to
construct a new building to house its firefighting, ambulance, and
rescue functions. Although the ambulance and rescue equipment will
occupy space in the projected facility, the cost allocable on a pro rata
basis to providing housing for the ambulance and rescue equipment
represents less than 10 percent of the proceeds of the obligations.
Thus, substantially all of the proceeds of the obligations are used for
one of the purposes described in paragraph (a)(2) of this section. The
County O Volunteer Fire and Rescue Association is a qualified volunteer
fire department under paragraph (b) of this section because it provides
firefighting and emergency medical services in an area within County O
which is not provided with any other firefighting services and is
required to provide these services by written agreement with County O.
The obligations of County O Volunteer Fire and Rescue Association will
be treated as obligations of a political subdivision of a State under
section 103(i) and paragraph (a) of this section because the obligations
are those of a qualified volunteer fire department and because
substantially all of the proceeds of the obligations are to be used for
a purpose described in section 103(i)(1)(B) and paragraph (a)(2) of this
section. Accordingly, interest on the September 1, 1983, issue of
obligations of County O Volunteer Fire and Rescue Association is exempt
from gross income under section 103(a)(1).
[T.D. 7901, 48 FR 32981, July 20, 1983]
Sec. 1.103(n)-1T Limitation on aggregrate amount of private activity bonds (temporary).
Q-1: What does section 103(n) provide?
A-1: Interest on an issue of private activity bonds will not be tax
exempt unless the aggregrate amount of bonds issued pursuant to that
issue, when added to (i) the aggregate amount of private activity bonds
previously issued by the issuing authority during the calendar year and
(ii) the portion of that year's private activity bond limit that the
issuing authority has elected to carry forward to a future year, does
not exceed the issuing authority's private activity bond limit for that
calendar year. See A-4 of Sec. 1.103(n)-4T with respect to private
activity bonds issued under a carryforward election.
Q-2: What is the effective date of section 103(n)?
A-2: In general, section 103(n) applies to private activity bonds
issued after December 31, 1983. Section 103(n) does not apply to any
issue of obligations, however, if there was an inducement resolution (or
other comparable preliminary approval) for the project before June 19,
1984, and the issue for such project is issued before January 1, 1985.
An issue of obligations will be considered to be issued for the project
pursuant to the inducement resolution in existence before June 19, 1984,
to the extent that the nature, character, and purpose of the facility
has not changed in any material way, and to the extent that the capacity
of the facility has not increased materially; in addition, the issue of
obligations must be for the same or a related initial owner, manager, or
operator. See Sec. 1.103-10(e) for the definition of related persons.
See A-16 of Sec. 1.103(n)-3T with respect to certain projects
preliminarily approved before October 19, 1983. The transitional rules
provided by section 631(c) of the Tax Reform Act of 1984 do not apply to
section 103(n). See Sec. 1.103-13(b)(6) for the rules relating to the
date of issue of obligations.
Q-3: If an issue of private activity bonds causes the issuer's
private activity bond limit to be exceeded, what is the effect on that
issue?
[[Page 394]]
A-3: If an issue of private activity bonds causes the issuing
authority's private activity bond limit to be exceeded, no portion of
that issue will be treated as obligations described in section 103(a),
and interest paid on the issue will be subject to Federal income
taxation.
Q-4: If an issue of private activity bonds causes the issuer's
private activity bond limit to be exceeded, what is the effect on
previous issues of private activity bonds that met the requirements of
section 103(n) when issued?
A-4: Private activity bonds issued as part of an issue that met the
private activity bond limit when issued continue to meet the
requirements of section 103(n) even though a subsequent issue causes the
aggregate amount of private activity bonds issued by an issuing
authority to exceed the authority's private activity bond limit for the
calendar year.
Example. The following example illustrates the provisions of A-3 and
A-4 of this Sec. 1.103(n)-1T:
Example. The State ceiling for State Z for 1986 is $200 million.
City M, within the State, and State Z itself are authorized to issue
private activity bonds. Under the allocation formula provided by the
Governor of State Z, City M has a private activity bond limit of $50
million; the balance of the State ceiling is allocated to State Z. On
June 1, 1986, City M issues a $75 activity bonds. On September 1, 1986,
State Z issues a $150 million issue of private activity bonds. Based on
these facts, the obligations of City M do not meet the requirements of
section 103(n) since the aggregate amount of private activity bonds
issued by City M in 1986 exceeded its private activity bond limit for
such year; thus, such obligations are not described in section 103(a).
That the State Z issue caused the aggregate amount of private activity
bonds issued in the State during 1986 to exceed the State ceiling does
not cause such obligations to fail to meet the requirements of section
103(n).
Q-5: What is the aggregate amount of private activity bonds issued
as part of an issue?
A-5: The aggregate amount of private activity bonds issued as part
of an issue is the face amount of the issue.
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C. 103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39316, Oct. 5, 1984]
Sec. 1.103(n)-2T Private activity bond defined (temporary).
Q-1: What is the definition of the term ``private activity bond''?
A-1: In general, for purposes of Secs. 1.103(n)-1T through 1.103(n)-
6T, the term ``private activity bond'' means any industrial development
bond or student loan bond the interest on which is exempt from tax under
section 103(a) (without application of section 103(n)). See Sec. 1.103-
7(b) for the definition of the term ``industrial development bond.'' See
A-17 of this Sec. 1.103(n)-2T for the definition of the term ``student
loan bond.'' There are five exceptions to the general definition of the
term ``private activity bond''; the exceptions include the exception for
the Texas Veterans' Bond Program, the residential rental property
exception, the exception for certain facilities described in section
103(b)(4) (C) or (D), and the refunding obligation exception. These
exceptions are described in A-2 through A-16 of this Sec. 1.103(n)-2T.
In addition, the term ``private activity bond'' does not include any
issue of obligations if there was an inducement resolution (or other
comparable preliminary approval) for the project before June 19, 1984,
and the issue for that project is issued before January 1, 1985. See A-2
of Sec. 1.103(n)-1T.
Q-2: To which obligations does the exception for the Texas Veterans'
Bond Program apply?
A-2: The term ``private activity bond'' does not include general
obligation bonds issued under the Texas Veterans' Bond Program if the
proceeds of the issue, other than an amount that is not a major portion
of the proceeds, are used to make loans of up to $20,000 for the
purchase of land for purposes authorized by such program as in effect on
June 19, 1984. The use of the proceeds may be established by the
affidavit of the veteran receiving the loan. For purposes of this
exception to the definition of the term ``private activity bond,'' the
use of more than 25 percent of the proceeds of an issue of obligations
will constitute the use of a major portion of such proceeds.
Q-3: To which obligations does the residential rental property
exception apply?
[[Page 395]]
A-3: The term ``private activity bond'' does not include any
obligation issued to provide projects for residential rental property
(including property functionally related and subordinate to any such
facility), as described in section 103(b)(4)(A) and Sec. 1.103-8(b). In
addition, the term ``private activity bond'' does not include any
housing program obligation under section 11(b) of the United States
Housing Act of 1937.
Q-4: To which obligations does the exception for certain facilities
described in section 103(b)(4) (C) or (D) apply?
A-4: Section 103(n)(7)(C) provides that the term ``private activity
bond'' does not include any obligation issued as part of an issue to
provide convention or trade show facilities, as described in section
103(b)(4)(C) and Sec. 1.103-8(d) (including property functionally
related and subordinate to any such facilities), if the property so
described is owned by, or on behalf of, a governmental unit. In
addition, the term ``private activity bond'' does not include any
obligation issued as part of an issue to provide airports, docks,
wharfs, mass commuting facilities, or storage or training facilities
directly related to any of the foregoing facilities, as described in
section 103(b)(4)(D) and Sec. 1.103-8(e) (including property
functionally related and subordinate to any such facilities), if the
property so described is owned by, or on behalf of, a governmental unit.
See Sec. 1.103-8(a)(3), in general, for the definition of the term
``functionally related and subordinate.'' For purposes of this exception
to the definition of the term ``private activity bond,'' the term ``mass
commuting facilities'' includes ``qualified mass commuting vehicles,''
as defined in section 103(b)(9), that are associated with a mass
commuting facility described in Sec. 1.103-8(e)(2)(iv). Obligations
issued as part of an issue to provide parking facilities, as described
in section 103(b)(4)(D), are not excepted from the definition of the
term ``private activity bond;'' however, parking facilities may be
functionally related and subordinate to another facility described in
section 103(b)(4) (C) or (D).
Q-5: When is property described in section 103(b)(4) (C) or (D)
owned by, or on behalf of, a governmental unit?
A-5: In general, property described in section 103(b)(4) (C) or (D)
will be considered to be owned by a governmental unit if a governmental
unit is the owner of the property for Federal income tax purposes
generally. See A-5 of Sec. 1.103(n)-3T for the definition of the term
``governmental unit''. In general, property described in section
103(b)(4) (C) or (D) will be considered to be owned on behalf of a
governmental unit if a constituted authority empowered to issue
obligations on behalf of a governmental unit is the owner of the
property for Federal income tax purposes generally. Whether the property
is owned by, or on behalf of, a governmental unit will be determined on
the basis of the facts and circumstances of each particular case. The
fact that the governmental unit's or constituted authority's obligation
to pay principal and interest on an obligation is limited to revenues
from fees collected from users of the property provided with the
proceeds of such obligation will not, in itself, cause such property to
be treated as not owned by, or on behalf of, the governmental unit. In
order to qualify for the exception described in section 103(n)(7)(C),
the property must be owned by, or on behalf of, the governmental unit
throughout the term of the issue. See A-10 of this Sec. 1.103(n)-2T with
respect to the consequences of a transfer of ownership.
Q-6: Will property described in section 103(b)(4) (C) or (D) that is
leased to a non-governmental entity be treated as owned by, or on behalf
of, a governmental unit if the lessee is the owner of the property for
Federal income tax purposes generally solely by reason of the length of
the lease?
A-6: If property, or any portion thereof, is leased to a non-
governmental entity and if, for Federal income tax purposes generally,
the lessee is the owner of the property solely by reason of the length
of the lease, then, for purposes of Secs. 1.103(n)-1T through 1.103(n)-
6T (but not for other Federal income tax purposes, such as whether
payments under the lease constitute deductible rental payments), the
governmental unit will be treated as the owner of the property if the
lessee elects not to claim depreciation or an investment credit with
respect to such
[[Page 396]]
property. See A-7 of this Sec. 1.103(n)-2T for the rules describing the
method of making this election. For purposes of Secs. 1.103(n)-1T
through 1.103(n)-6T, the term ``non-governmental entity'' means a person
other than a governmental unit or a constituted authority empowered to
issue obligations on behalf of a governmental unit. The fact that a non-
governmental entity lessee elects not to claim depreciation or an
investment credit with respect to property does not, however, ensure
that the property will be treated as owned by, or on behalf of a
governmental unit for purposes of Secs. 1.103(n)-1T through 1.103(n)-6T.
Thus, for example, if the lessee is the owner of the property for
Federal income tax purposes generally other than solely because of the
length of the lease, the obligations issued as part of the issue are
private activity bonds notwithstanding that the lessee elected not to
claim depreciation or an investment credit with respect to the property.
Similarly, even if a governmental unit is the owner of property for
Federal income tax purposes generally, the property will not be treated
as owned by, or on behalf of, a governmental unit for purposes of
Secs. 1.103(n)-1T through 1.103(n)-6T if the lease under which such
property is leased to a non-governmental entity provides for significant
front end loading of rental accruals or payments. See A-12 of this
Sec. 1.103(n)-2T with respect to significant front end loading of rental
accruals or payments.
Q-7: What must a lessee do in order to elect not to take
depreciation or an investment credit with respect to property described
in section 103(b)(4) (C) or (D)?
A-7: The lessee must make the election at the time the lease is
executed. The election must include a description of the property with
respect to which the election is being made; the name, address, and TIN
of the issuing authority; the name, address, and TIN of the lessee; and
the date and face amount of the issue the proceeds of which are to be
used to provide the property. The election must be signed by the lessee,
if a natural person, or by a duly authorized official of the lessee. The
issuing authority must be provided with a copy of the election. The
issuing authority and the lessee must retain copies of the election in
their respective records for the entire term of the lease. In addition,
the lease, and any publicly recorded document recorded in lieu of such
lease, must state that neither the lessee nor any successor in interest
under the lease may claim depreciation or an investment credit with
respect to such property. This election may be made with respect to
property whether or not such property otherwise would be eligible for
depreciation or an investment tax credit. See section 7701(a)(41) for
the definition of the term ``TIN''.
Q-8: Is the election not to claim depreciation or an investment
credit revocable?
A-8: No, the election is irrevocable. In addition, the election is
binding on all successors in interest under the lease regardless of
whether the obligations remain outstanding. If a successor in interest
claims depreciation or an investment credit with respect to property for
which such an election has been made, such property will be considered
transferred to a non-governmental entity. See A-10 of this
Sec. 1.103(n)-2T with respect to the consequences of such a transfer.
Q-9: Where obligations are issued to provide all or any portion of a
facility described in section 103(b)(4) (C) or (D), must all of the
property described in section 103(b)(4) (C) or (D) that is part of such
facility be owned by, or on behalf of, a governmental unit in order for
such obligations to qualify for the exception to the definition of the
term ``private activity bond'' provided in section 103(n)(7)(C)?
A-9: Generally, yes. If obligations are issued to provide all or any
portion of a facility described in section 103(b)(4) (C) or (D), the
obligations comprising such issue will not qualify for the exception to
the definition of the term ``private activity bond'' provided in section
103(n)(7)(C) unless all of the property described in section 103(b)(4)
(C) or (D) that is part of (or functionally related and subordinate to)
the facility being financed is owned by, or on behalf of, a governmental
unit throughout the term of the issue. For
[[Page 397]]
this purpose, the facility being financed will be construed to include
the entire airport, dock, etc., under consideration and not merely the
part of the facility being provided with the proceeds of the issue. For
example, the term facility, when used in reference to an airport, will
be considered to include all property that is part of, or included in,
that airport under Sec. 1.103-8(e)(2)(ii)(a), including all property
functionally related and subordinate thereto under Sec. 1.103--8 (a)(3)
and (e)(2)(ii)(b ). Thus, if the proceeds of an issue are used to
provide a hangar at an airport described in section 103(b)(4)(D), that
airport is considered as being financed with such issue, and if any
portion of that airport, including property functionally related and
subordinate thereto, is treated as owned by a non-governmental entity,
that issue does not qualify for the exception of the definition of the
term ``private activity bond'' provided in section 103(n)(7)(C).
There are three exceptions to this rule, however. First, if any
property otherwise would be considered part of the facility financed and
such property was not provided with proceeds of any obligation described
in section 103(a), such property will not be considered part of the
facility being financed.
Second, if any property otherwise would be considered part of the
facility being financed and such property was part of such facility on
or before October 5, 1984, such property will not be considered part of
the facility being financed. For this purpose, property will be
considered part of the facility on or before October 5, 1984, if any
person was under a binding contract to acquire or construct such
property to be a part of such facility on October 5, 1984.
Third, property will not be considered part of the facility being
financed if such property (i) is land, a building, a structural
component of a building, or other structure (other than tangible
personal property (other than an air conditioning or heating unit)) and
such property is not physically supported by, does not physically
support, and is not physically connected to any property provided with
the proceeds of obligations that qualify for the exception to the
definition of the term ``private activity bond'' provided in section
103(n)(7)(C), or (ii) is tangible personal property (other than an air
conditioning or heating unit). For this purpose, contiguous parcels of
land will not be considered to support, to be supported by, or to be
physically connected to each other, and insignificant physical
connections (such as a connection by a sidewalk) will be disregarded.
For purposes of this A-9, the term ``tangible personal property'' shall
have the meaning given to it under section 48(a)(1)(A) and Sec. 1.48-
1(c). Examples. The following examples illustrate the provisions of A-9
of this Sec. 1.103(n)-2T:
Example (1). On January 1, 1986, Governmental Unit M issues
industrial development bonds to provide an airport, as described in
section 103(b)(4)(D), which will consist of land, runways, a terminal
and a functionally related and subordinate hotel. The hotel will be
leased to N, a non-governmental entity. The lease does not call for
significant front end loading of rental accruals or payments. For
Federal income tax purposes generally, M will own the entire airport
except that N will be the owner of the hotel solely by reason of the
length of the lease. N properly elects not to claim depreciation of an
investment credit with respect to the hotel. The industrial development
bonds are not private activity bonds.
Example (2). The facts are the same as in Example (1) except that N
does not make the election and claims depreciation with respect to the
hotel. The entire issue of industrial development bonds is treated as an
issue of private activity bonds.
Example (3). The facts are the same as in Example (2) except that
the hotel is provided other than with the proceeds of an obligation
described in section 103(a). The issue for the remainder of the airport
qualifies for the exception to the definition of the term ``private
activity bond'' provided in section 103(n)(7)(C).
Example (4). The facts are the same as in Example (2) except that
the hotel, including the hotel parking lot, the hotel grounds, and the
parcel of land on which they rest, are provided with a separate issue of
industrial development bonds. There are no significant connections
between the hotel and the airport. The issue for the hotel is an issue
of private activity bonds. The issue for the remainder of the airport
qualifies for the exception to the definition of the term ``private
activity bonds'' provided in section 103(n)(7)(C).
[[Page 398]]
Example (5). The facts are the same as Example (4) except that the
hotel is constructed upon land provided with the proceeds of the issue
used to provide the remainder of the airport. Both issues are treated as
issues of private activity bonds.
Example (6). On June 30, 1983, construction began on the City NN
airport, which consists of land, runways, a terminal, and hangars.
Corporation XX (a non-governmental entity) owns for Federal income tax
purposes generally several of the hangars, which it financed with
obligations described in section 103(a) issued on June 30, 1983. On
March 1, 1985, at a time when XX still owns the hangars, City NN issues
an issue of obligations described in section 103(b)(4)(D) to enlarge the
terminal at the City NN airport. City NN will own the addition to the
terminal for Federal income tax purposes generally. The obligations
comprising the March 1, 1985, issue will not be private activity bonds.
Q-10: What are the consequences if a governmental unit ceases to be
treated as owning property described in section 103(b)(4) (C) or (D)
where the property was provided by obligations that were not private
activity bonds on the date of issue due to the exception provided in
section 103(n)(7)(C)?
A-10: The obligations outstanding on the date such ownership ceases
are private activity bonds and are treated as if they are the last
private activity bonds issued by the issuer in the calendar year in
which the transfer of ownership occurs. Thus, if the aggregate amount of
bonds issued pursuant to such issue, when added to the aggregate amount
of the other private activity bonds actually issued or treated as issued
under this A-10 by the issuer during such year and the amount of any
carryforward elections made during the year, exceeds the issuer's
private activity bond limit for such year, the obligations are not
described in section 103(a) as of the date on which transfer of
ownership occurs; if such obligations do not comply with the
requirements of section 103(n), the obligations will be treated as not
described in section 103(a) as of the date such ownership ceases.
However, if on the date of issue the issuer intended to transfer
ownership of such property to a non-governmental entity during the term
of the issue, then the obligations are treated as the last private
activity bonds actually issued or treated as issued under this A-10 by
the issuer during the year in which such obligations were actually
issued; if such obligations do not comply with the requirements of
section 103(n), the obligations will be treated as not described in
section 103(a) as of the date of issue. The exception to the definition
of the term ``private activity bond'' for facilities described in
section 103(b)(4) (C) and (D) only applies if the property is owned by,
or on behalf of, a governmental unit while all or any part of the issue
or any refunding issue remains outstanding.
If all or a portion of the property is sold to a non-governmental
entity for its fair market value and all of the proceeds from the sale
(except for a de minimis amount less than $5,000) are used within six
months to redeem outstanding obligations, the obligations will not be
treated as private entity bonds.
Q-11: What are the consequences if private activity bonds are issued
to provide additions to a facility that was provided with obligations
that were not private activity bonds when issued by virtue of the
exception provided in section 103(n)(7)(C) and such additions are not
treated as owned by a governmental unit?
A-11: In order to qualify for the exception to the definition of the
term ``private activity bond'' for obligations described in section
103(b)(4) (C) or (D), all of the property described in section 103(b)(4)
(C) or (D) that is part of the facility provided with the proceeds
generally must be owned by, or on behalf of, a governmental unit. See A-
9 of this Sec. 1.103 (n)-2T. However, if the proceeds of an issue of
private activity bonds are used to make additions to a facility (other
than additions that are not considered to be part of the facility under
A-9 of this Sec. 1.103(n)-2T) that was provided with another issue of
industrial development bonds that were not private activity bonds when
issued by virtue of the exception provided in section 103(n)(7)(C), then
the prior issue will not cease to qualify for that exception.
Nevertheless, for purposes of determining the aggregate amount of
private activity bonds issued during the year that the issue to provide
the addition to the previously financed facility is issued, the portion
of the prior issue
[[Page 399]]
outstanding on the date of issue of the issue to provide the addition
will be treated as part of the issue to provide the addition.
Example. The following example illustrates the provisions of A-11 of
this Sec. 1.103 (n)-2T:
Example. On March 1, 1986, City P issues a $100 million issue of
industrial development bonds to provide an airport, as described in
section 103(b)(4)(D). City P uses substantially all of the proceeds to
acquire land and to construct runways and a terminal on that land. No
other property is constructed on the land. City P is the owner of the
land and the terminal for Federal income tax purposes generally. Thus,
the obligations comprising the March 1, 1986, issue are not private
activity bonds when issued. On September 1, 1988, City P leases a
portion of the land adjacent to the terminal to Corporation V (a non-
governmental entity) under a true lease for Federal income tax purposes.
City P's private activity bond limit for 1988 is $100 million, and as of
September 30, 1988, City P has not issued any private activity bond
during 1988. On September 30, 1988, City P issues a $20 million issue of
industrial development bonds, the proceeds of which are to be used to
construct a hotel that is functionally related and subordinate to the
airport. The hotel is to be constructed on the land that P leased to
Corporation V. The hotel will be owned by Corporation V for Federal
income tax purposes generally. On September 30, 1988, the outstanding
face amount of the March 1, 1986, issue is $100 million. Although the
obligations comprising the March 1, 1986, issue will not become private
activity bonds as a result of the subsequent issue, on September 30,
1988, City P is treated as issuing a $120 million issue of private
activity bonds. Since that amount exceeds City P's private activity bond
limit, the $20 million issue of private activity bonds issued on
September 30, 1988, does not meet the requirements of section 103(n). In
addition, any subsequent issuance of private activity bonds by City P
during 1988 will fail to meet the requirements of section 103(n). The
March 1, 1986, issue continues to be described in section 103(a).
Q-12: Section 103(n)(7)(C)(iv) provides that the exception for
certain facilities described in section 103(b)(4) (C) or (D) shall not
apply in any case where the facility is leased under a lease that has
significant front end loading of rental accruals or payments. What does
``significant front end loading of rental accruals or payments'' mean?
A-12: Where a lease requires rental payments that are significantly
higher in the early years of the lease than in later years, the lease
calls for significant front end loading of rental accruals or payments.
A lease that provides for flat rental payments during the entire lease
term does not violate the prohibition against significant front end
loading of rent. In addition, a lease may provide for adjustments in
rent for inflation or deflation, provided that such adjustments are to
be made on the basis of a generally recognized price index. In addition,
a lease may provide that rental payments are to be determined, in whole
or part, based on a percentage of income, production, etc., provided
that the percentage rate is kept constant (or increases) over the term
of the lease and that the threshold, if any, above which the percentage
applies is kept constant (or decreases) over the term of the lease.
Thus, for example, a lease that requires rental payments throughout the
term of the lease of $100,000 per year plus 5 percent of the gross
income from the facility in excess of $500,000 does not violate the
prohibition against significant front end loading of rent.
Examples. The following examples illustrate the provisions of A-4
through A-12 of this Sec. 1.103(n)-2T:
Example (1). On February 1, 1985, County Z issues obligations with a
term of 30 years. Substantially all of the proceeds of the obligations
are to be used to provide a trade show facility as described in section
103(b)(4)(C). Z leases the entire facility to Corporation S. For Federal
income tax purposes generally, S is treated as the owner of the facility
solely by reason of the length of the lease. The lease provides that the
lessee will elect not to claim depreciation or an investment credit with
respect to the facility and that S will provide Z with a copy of the
election. S makes the election, retains it in its records, and provides
County Z with a copy. The lease provides that neither the lessee nor any
successor in interest will claim a deduction for depreciation or an
investment credit with respect to such facility. The obligations are not
private activity bonds on the date of issue, provided that the lease
does not call for significant front end loading of rental accruals or
payments.
Example (2). The facts are the same as in Example (1) except that on
February 1, 1986, S assigns the lease to Corporation T. For its taxable
year ending March 31, 1986, Corporation T claims depreciation with
respect to the trade show facility. The obligations outstanding on the
date Corporation T claims
[[Page 400]]
depreciation on its Federal income tax return are treated as the last
private activity bonds actually issued or treated as issued by County Z
during 1986, and such obligations must comply with the requirements of
section 103(n). In addition, Corporation T is not entitled to claim
depreciation or an investment credit with respect to the trade show
facility during the balance of the term of the lease and will be subject
to the applicable penalties for so claiming depreciation.
Example (3). The facts are the same as in Example (1) except that
the obligations are redeemed on January 31, 1998; on January 31, 1999, S
assigns the lease to Corporation X; and on its Federal income tax return
for calendar year 1999, Corporation X claims depreciation with respect
to the facility. The obligations are not private activity bonds provided
that the lease does not call for significant front end loading of rental
accruals or payments. However, X is not entitled to claim depreciation
or an investment credit with respect to the trade show facility during
the balance of the term of the lease and will be subject to the
applicable penalties for so claiming those items.
Q-13: To which obligations does the refunding obligation exception
apply?
A-13: The term ``private activity bond'' does not include any
refunding obligation to the extent specified in this A-13. The term
``refunding obligation'' means an obligation that is part of an issue of
obligations the proceeds of which are used to pay any principal or
interest on any other issue of obligations described in section 103(a)
(referred to as the prior issue). The term ``refunding obligation'' does
not include any obligations issued more than 180 days before the prior
issue is discharged (``advance refundings''). The exception for
refunding obligations only applies to the extent that the aggregate
amount of the refunding issue does not exceed the outstanding face
amount of the prior issue, or portion thereof, being refunded. Thus, for
example, in the case of an obligation part of the proceeds of which are
to be used to refund a prior issue of private activity bonds and part of
the proceeds of which are to be used to provide a pollution control
facility under section 103(b)(4)(F), those proceeds to be used to refund
all or any part of the principal amount of the prior issue are not the
proceeds of a private activity bond; the balance of the proceeds are the
proceeds of a private activity bond. The refunding obligation exception
does not apply to obligations to the extent that amounts are used to pay
the costs of issuing refunding obligations. If an issue of obligations
consists of both obligations that qualify for the refunding obligation
exception and private activity bonds that do not meet the requirements
of section 103(n), the entire issue is treated as consisting of
obligations not described in section 103(a).
Q-14: Does the refunding obligation exception apply to obligations
issued to refund a prior issue of student loan bonds?
A-14: In the case of any student loan bond, the refunding obligation
exception applies only if, in addition to the requirements stated in A-
13 of this Sec. 1.103(n)-2T, the maturity date of the funding obligation
is not later than the later of (i) the maturity date of the obligation
to be refunded, or (ii) the date 17 years after the date on which the
refunded obligation was issued (or, in the case of a series of
refundings, the date on which the original obligation was issued).
Q-15: What is the ``maturity date'' of an obligation?
A-15: For purposes of section 103(n), the ``maturity date'' of an
obligation is the date on which interest ceases to accrue and the
obligation may either be paid or redeemed without penalty. The date is
determined without regard to optional redemption dates (including those
at the option of holders). If the issuer is required by the obligations
or the indenture to redeem portions of obligations or to make payments
of principal with respect to obligations in specified amounts and at
specified times, such mandatory redemptions or payments shall be treated
as separate obligations.
Q-16: Where private activity bonds are refunded with other
obligations described in section 103(a), does the refunding obligation
exception apply to the extent that the aggregate amount of the refunding
obligations exceeds the outstanding principal amount of the prior issue
due to the use of a portion of the proceeds of the refunding issue to
fund a reasonably required reserve or replacement fund?
A-16: Whether the prior issue was issued prior to January 1, 1984,
or
[[Page 401]]
thereafter, the refunding obligation exception to the definition of the
term ``private activity bond'' only applies to the extent that the
aggregate amount of the refunding obligation does not exceed the
outstanding principal amount of the prior issue. Thus, the additional
obligations issued to provide for a reasonably required reserve or
replacement fund are private activity bonds.
Q-17: What is a ``student loan bond''?
A-17: The term ``student loan bond'' means an obligation that is
issued as part of an issue all or a major portion of the proceeds of
which are to be used directly or indirectly to finance loans to
individuals for educational expenses. For purposes of this A-17, the use
of more than 25 percent of the proceeds of an issue of obligations to
finance loans to individuals for educational expenses will constitute
the use of a major portion of such proceeds in such manner.
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C.103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39316, Oct. 5, 1984]
Sec. 1.103(n)-3T Private activity bond limit (temporary).
Q-1: What is the ``State ceiling''?
A-1: In general, the State ceiling applicable to each State and the
District of Columbia for any calendar year prior to 1987 shall be the
greater of $200 million or an amount equal to $150 multiplied by the
State's (or the District of Columbia's) population. In the case of any
territory or possession of the United States, the State ceiling for any
calendar year prior to 1987 shall be an amount equal to $150 multiplied
by the population of such territory or possession. In the case of
calendar years after 1986, the two preceding sentences shall be applied
by substituting ``$100'' for ``$150.'' In the case of any State that had
an excess bond amount for 1983, the State ceiling for calendar year 1984
shall be the sum of the State ceiling determined under the general rule
plus 50 percent of the excess bond amount for 1983. The excess bond
amount for 1983 is the excess (if any) of (i) the aggregate amount of
private activity bonds issued by issuing authorities in such State
during the first 9 months of calendar year 1983 multiplied by \4/3\,
over (ii) the State ceiling determined under the general rule for 1984.
For purposes of determining the State ceiling amount applicable to any
any State for calendar year 1984, an issuer may rely upon the State
ceiling amount published by the Treasury Department for such calender
year. However, an issuer may compute a different excess bond amount for
1983 where the issuer or the State in which the issuer is located has
made a more accurate determination of the amount of private activity
bonds issued by issuing authorities in the issuer's State during 1983.
See A-7 of this Sec. 1.103(n)-3T for rules regarding a State containing
constitutional home rule cities.
Q-2: What is the private activity bond limit for a State agency?
A-2: Under section 103(n)(2) the private activity bond limit for any
agency of the State authorized to issue private activity bonds for any
calendar year shall be 50 percent of the State ceiling for such year
unless the State provides for a different allocation. For this purpose,
the State is considered an agency. See, however, A-17 of this
Sec. 1.103(n)-3T with respect to the penalty for failure to comply with
the requirements of section 631(a)(3) of the Tax Reform Act of 1984.
Q-3: How is private activity bond limit determined where a State has
more than one agency?
A-3: If any State has more than one agency (including the State)
authorized to issue private activity bonds, all such agencies shall be
treated as a single agency for purposes of determining the aggregate
private activity bond limit available for all such agencies. Each of the
State agencies is treated as having jurisdiction over the entire State.
Therefore, under A-8 of this Sec. 1.103(n)-3T the aggregate private
activity bond limit for all the State agencies is allocated to the State
since it possesses the broadest sovereign powers of any of the State
agencies. Each other State agency's private activity bond limit is zero
until it is assigned part of the private activity bond limit of another
governmental unit pursuant to these regulations.
Q-4: What is a State agency?
A-4: A State agency is an agency authorized by a State to issue
private activity bonds on behalf of the State. In
[[Page 402]]
addition, a special purpose governmental unit that derives its sovereign
powers from the State and may exercise its sovereign powers throughout
the State is a State agency. See A-5 of this Sec. 1.103(n)-3T for the
definition of the term ``special purpose governmental unit.'' The term
``State agency'' does not include issuing authorities empowered by a
State at the request of another governmental unit within the State to
issue private activity bonds to provide facilities within the
jurisdiction of such other governmental unit. For example, if County O
requests the legislature of State P to create an issuing authority
empowered to issue obligations to provide pollution control facilities
in County O, the authority is not a State agency.
Examples. The following examples illustrate the provisions of A-3
and A-4 of this Sec. 1.103(n)-3T:
Example (1). For 1987 State Q has a State ceiling of $200 million.
Neither the Governor nor the legislature of State Q has provided a
formula for allocating the State ceiling different from that provided by
section 103(n) (2) and (3). State Q has authorized the following State
agencies to issue private activity bonds on its behalf: Authority M,
Authority N, and Authority O. The aggregate private activity bond limit
available for State agencies of State Q is $100 million. As of January
1, 1987, none of this aggregate private activity bond limit has been
assigned to any of Authorities M, N, or O. On January 1, 1987, Authority
M issues $25 million of private activity bonds. During 1987, the duly
authorized official designated by State Q to allocate the aggregate
private activity bond limit among the three authorities does not
allocate any of the State's private activity bond limit to Authority M.
The January 1, 1987, issue does not meet the requirements of section
103(n) since Authority M has no private activity bond limit for 1987.
Example (2). Under the laws of State U, only the State legislature
can create constituted authorities empowered to issue private activity
bonds on behalf of governmental units within State U. Authority R was
created by the State U legislature at the request of County X. Authority
R is a constituted authority empowered to issue private activity bonds
on behalf of County X to provide facilities located in County X.
Authority S was created by the legislature to issue private activity
bonds to provide pollution control facilities throughout the State.
Authority S is a State agency as defined in A-4 of this Sec. 1.103(n)-
3T. Authority R it is not a State agency.
Q-5: What is a governmental unit?
A-5: The term ``governmental unit'' has the meaning given such term
by Sec. 1.103-1. For purposes of Secs. 1.103(n)-1T through 1.103(n)-6T,
a governmental unit is either a general purpose governmental unit or a
special purpose governmental unit. The term ``general purpose
governmental unit'' means a State, territory, possession of the United
States, the District of Columbia, or any general purpose political
subdivision thereof. The term ``general purpose political subdivision''
denotes any division of government that possesses the right to exercise
police powers, the power to tax, and the power of eminent domain and
that is governed, at least in part, by popularly elected officials
(e.g., county, city, town, township, parish, village). The term
``special purpose governmental unit'' means any governmental unit as
defined in Sec. 1.103-1 other than a general purpose governmental unit.
For example, a sewer authority with the power of eminent domain but
without police powers is a special purpose governmental unit. A
constituted authority empowered to issue private activity bonds on
behalf of a governmental unit is not a governmental unit.
Q-6: What is the private activity bond limit for a general purpose
governmental unit other than a State, the District of Columbia, a
territory, or a possession?
A-6: The private activity bond limit for any such general purpose
governmental unit for any calendar year is an amount equal to the
general purpose governmental unit's proportionate share of 50 percent of
the State ceiling amount for such calendar year. See A-10 of this
Sec. 1.103(n)-3T with respect to the rules for providing a different
allocation. The proportionate share of a general purpose governmental
unit is an amount that bears the same ratio to 50 percent of the State
ceiling for such year as the population of the jurisdiction of such
general purpose governmental unit bears to the population of the entire
State, District of Columbia, territory, or possession in which its
jurisdiction falls. See, however, A-17 of this Sec. 1.103(n)-3T with
respect to the penalty for failure to comply with the requirements of
section 631(a)(3) of the
[[Page 403]]
Tax Reform Act of 1984. See A-9 of this Sec. 1.103(n)-3T with respect to
the private activity bond limit of issuing authorities other than
general purpose governmental units.
Q-7: What is the private activity bond limit for a general purpose
governmental unit in a State with one or more constitutional homes rule
cities?
A-7: The private activity bond limit for a constitutional home rule
city for any calendar year is an amount equal to the constitutional home
rule city's proportionate share of 100 percent of the State ceiling
amount for the calendar year. The proportionate share of a
constitutional home rule city is an amount that bears the same ratio to
the State ceiling for such year as the population of the jurisdiction of
such constitutional home rule city bears to the population of the entire
State. The private activity bond limit for issuers other than
constitutional home rule cities is computed in the manner described in
A-2 through A-6 of this Sec. 1.103(n)-3T, except that in computing the
private activity bond limit for issuers other than such constitutional
home rule cities, the State ceiling amount for any calendar year shall
be reduced by the aggregate private activity bond limit for all
constitutional home rule cities in the State. The term ``constitutional
home rule city'' means, with respect to any calendar year, any political
subdivision of a State that, under a State constitution that was adopted
in 1970 and effective on July 1, 1971, had home rule powers on the first
day of the calendar year. See, however, A-17 of this Sec. 1.103(n)-3T
with respect to the penalty for failure to comply with the requirements
of section 631(a)(3) of the Tax Reform Act of 1984.
Q-8: How is the private activity bond limit of an issuing authority
determined under section 103(n)(3) when there are overlapping
jurisdictions?
A-8: If an area is within the jurisdiction of two or more
governmental units, that area will be treated as only within the
jurisdiction of the governmental unit having jurisdiction over the
smallest geographical area. However, the governmental unit with
jurisdiction over the smallest geographical area may enter into a
written agreement to allocate all or a designated portion of such
overlapping area to the governmental unit having jurisdiction over the
next smallest geographical area. Where two or more issuing authorities,
whether governmental units or constituted authorities, have authority to
issue private activity bonds and both issuing authorities have
jurisdiction over the identical geographical area, that area will be
treated as only within the jurisdiction of the one having the broadest
sovereign powers. However, the issuing authority having the broadest
sovereign powers may enter into a written agreement to allocate all or a
designated portion of such area to the one with the narrower sovereign
powers. All written agreements entered into pursuant to this A-8 must be
retained by the assignee in its records for the term of all private
activity bonds it issues in each calendar year to which such agreement
applies. See A-9 of this Sec. 1.103(n)-3T with respect to the private
activity bond limit of issuing authorities other than general purpose
governmental units.
Q-9: What is the private activity bond limit of an issuing authority
(other than a State agency) that is not a general purpose governmental
unit?
A-9: A constituted authority empowered to issue private activity
bonds on behalf of a governmental unit is treated as having jurisdiction
over the same geographical area as the governmental unit on behalf of
which it is empowered to issue private activity bonds. Since a
governmental unit has broader sovereign powers than a constituted
authority empowered to issue private activity bonds on its behalf, a
constituted authority has a private activity bond limit under section
103(n) (2) and (3) of zero. Similarly, a special purpose governmental
unit is treated for purposes of section 103(n) as having jurisdiction
over the same geographical area as that of the general purpose
governmental unit or units from which the special purpose governmental
unit derives its sovereign powers. Since a general purpose governmental
unit has broader sovereign powers than a special purpose governmental
unit, a special purpose governmental unit has a private activity bond
limit under section 103(n) (2) and (3) of zero. An issuer
[[Page 404]]
of qualified scholarship funding bonds, as defined in section 103(e), is
treated for purposes of section 103(n) as issuing on behalf of the State
or politicial subdivision or subdivisions that requested its
organization or its exercise of power to issue bonds. See A-13 and A-14
of this Sec. 103(n)-3T with respect to assignments of private activity
bond limit. For purposes of Secs. 1.103(n)-1T through 1.103(n)-6T, a
special purpose governmental unit shall be considered to derive its
authority from the smallest general purpose governmental unit that--
(i) Enacts a specific law (e.g., a provision of a State
constitution, charter, or statute) by or under which the special purpose
governmental unit is created, or
(ii) Otherwise empowers, approves, or requests the creation of the
special purpose governmental unit, or
(iii) Appoints members to the governing body of the special purpose
governmental unit,
and within which general purpose governmental unit falls the entire area
in which such special purpose governmental unit may exercise its
sovereign powers. If no one general purpose governmental unit meets such
criteria (e.g., a regional special purpose governmental unit that
exercises its sovereign powers within three counties pursuant to a
separate ordinance adopted by each such county), such special purpose
governmental unit shall be considered to derive its sovereign powers
from each of the general purpose governmental units comprising the
combination of smallest general purpose governmental units within which
falls the entire area in which such special purpose governmental unit
may exercise its sovereign powers and each of which meets (i), (ii), or
(iii) above.
Q-10: Does the issue comply with the requirements of section 103 (n)
under the following circumstances? Based on the most recent estimate of
the resident population of State Y published by the Bureau of the Census
before the beginning of 1988, the State ceiling for State Y is $200
million. Based on the same estimate, the population of City Q is one-
fourth of the population of State Y. No part of the geographical area
within the jurisidiction of City Q is within the jurisdiction of any
other governmental unit with jurisdiction over a smaller geographical
area. There are no consitutional home rule cities in State Y. Neither
the Governor nor the legislature of State Y has provided a different
formula for allocating the State ceiling than that provided by section
103(n) (2) and (3); thus, City Q's private activity bond limit for 1988
is $25 million (.25 x .50 x $200 million). As of March 1, 1988, City Q
has issued $15 million of private activity bonds during calender year
1988, none of which were issued pursuant to a carryforward election made
in a prior year. On March 1, 1988, City Q will issue $5 million of
private activity bonds to provide a pollution control facility as
described in section 103(b)(4) (F). C, a duly authorized official of
City Q responsible for issuing the bonds, provides a statement that will
be included in the bond indenture or a related document providing that--
(i) Under section 103(n) (2) and (3) of the Internal Revenue Code,
City Q has a private activity bond limit of $25 million for calendar
year 1988 (.25 x .50 x $200 million), none of which has been assigned to
it by another governmental unit,
(ii) State Y has not provided a different method of allocating the
State ceiling,
(iii) City Q has not assigned any portion of its private activity
bond limit to a constituted authority empowered to issue private
activity bonds on its behalf, or to any other governmental unit,
(iv) City Q has not elected to carry forward any of its private
activity bond limit for 1988 to another calendar year, nor has City Q in
any prior year made a carryforward election for the pollution control
facility,
(v) The aggregate amount of private activity bonds issued by City Q
during 1988 is $15 million, and
(vi) The issuance of $5 million of private activity bonds on March
1, 1988, will not violate the requirements of section 103 (n) and the
regulations thereunder.
In addition, C provides the certification described in section 103
(n) (12) (A).
[[Page 405]]
A-10: Based on these facts, the issue meets the requirements of
section 103(n) and Secs. 1.103(n)-1T through 1.103(n)-6T. See
Sec. 1.103-13(b)(8) for the definition of the terms ``bond indenture''
and``related documents.''
Q-11: May a State provide a different formula for allocating the
state ceiling?
A-11: A State, by law enacted at any time, may provide a different
formula for allocating the State ceiling among the governmental units in
the State (other than constitutional home rule cities) having authority
to issue private activity bonds, subject to the limitation provided in
A-12 of this Sec. 1.103(n)-3T. The governor of a State may proclaim a
different formula for allocating the State ceiling among the
governmental units in such State having authority to issue private
activity bonds. The authority of the governor to proclaim a different
formula shall not apply after the earlier of (i) the first day of the
first calendar year beginning after the legislature of the State has met
in regular session for more than 60 days after July 18, 1984, and (ii)
the effective date of any State legislation dealing with the allocation
of the State ceiling. If, on or before either date, the governor of any
State exercises the authority to provide a different allocation, such
allocation shall be effective until the date specified in (ii) of the
immediately preceding sentence. Unless otherwise provided in a State
constitutional amendment or by a law changing the home rule provisions
adopted in the manner provided by the State constitution, the allocation
of that portion of the State ceiling that is allocated to any
constitutional home rule city may not be changed by the governor or
State legislature unless such city agrees to such different allocation.
Q-12: Where a State provides an allocation formula different from
that provided in section 103 (n) (2) and (3), which allocation formula
applies to obligations issued prior to the adoption of the different
allocation formula?
A-12: Where a State provides a different allocation formula, the
determination as to whether a particular bond issue meets the
requirements of section 103(n) will be based upon the allocation formula
in effect at the time such bonds were issued. The amount that may be
reallocated pursuant to the later allocation formula is limited to the
State ceiling for such year reduced by the amount of private activity
bonds issued under the prior allocation formula in effect for such year.
Q-13: May an issuing authority assign a portion of its private
activity bond limit to another issuing authority if the governor or
legislature has not provided for an allocation formula different from
that provided in section 103(n) (2) and (3)?
A-13: Except as provided in this A-13 or in A-8, A-14, or A-15 of
this Sec. 1.103(n)-3T, no issuing authority may assign, directly or
indirectly, all or any portion of its private activity bond limit to any
other issuing authority, and no such attempted assignment will be
effective. However, a general purpose governmental unit may assign a
portion of its private activity bond limit to (i) a constituted
authority empowered to issue private activity bonds on behalf of the
assigning governmental unit, and (ii) a special purpose governmental
unit deriving sovereign powers from the governmental unit making the
assignment. In addition, a State may assign a portion of its private
activity bond limit to a constituted authority empowered to issue
private activity bonds on behalf of any governmental unit within such
State and to any governmental unit within such State. Finally, an
issuing authority that is assigned all or a portion of the private
activity bond limit of a governmental unit pursuant to the immediately
preceding two sentences may assign such amount or any part thereof to
the governmental unit from which it received the assignment. None of
these permissible types of assignments shall be effective, however,
unless made in writing by a duly authorized official of the governmental
unit making the assignment and a record of the assignment is maintained
by the assignee for the term of all private activity bonds it issues in
each calendar year to which such assignment applies. None of these
permissible types of assignments shall be effective if made
retroactively; provided, however, that retroactive assignments may be
made
[[Page 406]]
during 1984. In addition, except as provided in A-15 of this
Sec. 1.103(n)-3T, a purported assignment by a governmental unit of a
portion of its private activity bond limit to an issuing authority will
be ineffective to the extent that private activity bonds issued by such
authority provide facilities not located within the jurisdiction of the
governmental unit making the assignment, unless the sole beneficiary of
the facility is the governmental unit attempting to make the assignment.
Similarly, except as provided in A-15 of this Sec. 1.103(n)-3T, a
governmental unit may not allocate a portion of its private activity
bond limit to an issue of obligations to provide a facility not located
within the jurisdiction of that governmental unit unless the sole
beneficiary of the facility is the governmental unit attempting to
allocate its private activity bond limit to the issue. If an issuing
authority issues an issue of obligations a portion of the proceeds of
which are to be used to provide a facility not within its jurisdiction
other than one described in the immediately preceding sentence, that
issue will not meet the requirements of section 103(n) unless an issuing
authority within the jurisdiction of which the facility is to be located
specifically allocates a portion of its private activity bond limit to
such issue equal to the amount of proceeds to be used to provide such
facility.
Q-14: May an issuing authority assign a portion of its private
activity bond limit to another issuing authority if the governor or
legislature has provided for an allocation formula different from that
provided in section 103(n) (2) and (3)?
A-14: Yes, under certain conditions. In providing a different
formula for allocating the State ceiling, a State may permit an issuing
authority to assign all or a portion of its private activity bond limit
to other issuing authorities within the State, provided that such
assignment is made in writing and a record of that assignment is
maintained by the assignee in its records for the term of all private
activity bonds it issues in each calendar year to which such assignment
applies and a record of that assignment is maintained during such period
by the public official responsible for making allocations of the State
ceiling to issuing authorities within the State. The preceding sentence
will only apply where the different formula expressly permits such
assignments. Notwithstanding this A-14, no assignments may be made to
regional authorities without compliance with the provisions of A-15 of
this Sec. 1.103(n)-3T.
Q-15: May a general purpose governmental unit assign a portion of
its private activity bond limit to a regional authority empowered to
issue private activity bonds on behalf of two or more general purpose
governmental units?
A-15: Yes, under certain conditions. In order for an issue of
private activity bonds issued by such a regional authority to meet the
requirements of section 103(n), each of the governmental units on behalf
of which the regional authority issues private activity bonds must
assign to the regional authority a portion of its private activity bond
limit based on the ratio of its population to the aggregate population
of all such governmental units. The governmental unit within the
jurisdiction of which the facility to be provided by the private
activity bonds will be located, however, may elect to treat the regional
authority as if it were a constituted authority empowered to issue such
obligations solely on behalf of that governmental unit and, therefore,
may assign a portion of its limit to the authority solely to provide the
facility within its jurisdiction. Similarly, if a facility will solely
benefit one governmental unit, that governmental unit may make the
election described in the preceding sentence. In addition, any of the
governmental units on behalf of which the regional authority issues
private activity bonds, other than the governmental unit within the
jurisdiction of which the facility will be located, may elect to be
treated as if it had not empowered the authority to issue that issue of
private activity bonds on its behalf. In providing a different formula
for allocating the State ceiling, a State may permit a governmental unit
to assign all or a portion of its private activity bond limit to a
constituted authority empowered to issue private activity bonds on
behalf of two or more governmental units, all
[[Page 407]]
of which are located within the State. The preceding sentence will only
apply where the different formula expressly so provides. The principles
of this A-15 shall not apply to any regional authority created with a
principal purpose of avoiding the restrictions provided in A-13 or A-14
of this Sec. 1.103(n)-3T. The principles of this A-15 shall also apply
to a special purpose governmental unit providing facilities located
within the jurisdiction of two or more general purpose governmental
units from which it derives sovereign powers.
Examples. The following examples illustrate the provisions of A-8
through A-15 of this section:
Example (1). Authority ZZ is empowered by City Y to issue
obligations on its behalf to provide financing for pollution control
facilities located within the jurisdiction of City Y and the
geographical area within 10 miles of the limits of City Y. Authority ZZ
has no sovereign powers. Although the authority of Authority ZZ to issue
obligations enables it to provide facilities located outside of the
jurisdiction of City Y, Authority ZZ is treated as having jurisdiction
over the same geographical area as City Y. Since City Y has broader
sovereign powers than Authority ZZ, under section 103(n)(3) Authority ZZ
has a private activity bond limit of zero. On March 31, 1985, Authority
ZZ issues $5 million of private activity bonds. City Y has not assigned
any portion of its private activity bond limit to Authority ZZ. Thus,
the March 31, 1985, issue of private activity bonds is treated as an
issue of obligations not described in section 103(a), and the interest
on such obligations is subject to Federal income taxation.
Example (2). In 1972, State S, State T, and State V empowered
Authority Z to issue industrial development bonds on behalf of the three
States and to provide port facilities in a harbor serving residents of
all three States. S, T, and V have populations of 1,000,000, 2,000,000,
and 7,000,000, respectively. Authority Z will issue $100 million of
private activity bonds on September 1, 1985, to finance construction of
a dock to be located in State S. The obligations will not meet the
requirements of section 103(n) unless S, T, and V assign a portion of
their private activity bond limits to Authority Z pursuant to one of
three methods. First, S, T, and V may assign $10 million, $20 million,
and $70 million, respectively, of their private activity bond limits to
Authority Z for this issue. Second, S, T, and V may assign $100 million,
$0, and $0, respectively, of their private activity bond limits to
Authority Z for this issue. Third, either T or V (but not S) may
allocate $0 of its private activity bond limit to Authority Z for
purposes of this issue, and the remaining two States may allocate the
$100 million based upon their respective populations. For instance, if T
were to allocate $0 for purposes of this issue, S and V must allocate
$12.5 million and $87.5 million, respectively, of their private activity
bond limits to Authority Z.
Q-16: Must an issuing authority allocate any of its private activity
bond limit to certain preliminarily approved projects?
A-16: Yes. Section 631(a)(3) of the Tax Reform Act of 1984 provides
that, with respect to certain projects preliminarily approved by an
issuing authority before October 19, 1983, the issuing authority shall
allocate its share of the private activity bond limit for the calendar
year during which the obligations are to be issued first to those
projects. For purposes of this A-16 and A-17 and A-18 of this
Sec. 1.103(n)-3T, a general purpose governmental unit will be treated as
having preliminarily approved a project if the project was preliminarily
approved by it, by a constituted authority empowered to issue private
activity bonds on its behalf, or by a special purpose governmental unit
treated as having jurisdiction over the same geographical area as the
general purpose governmental unit. Thus, if a project was approved by a
constituted authority, the governmental unit on behalf of which such
issue is to be issued must assign a portion of its private activity bond
limit to the authority pursuant to section 631(a)(3) of the Act. If a
project was preliminarily approved by a constituted authority empowered
to issue private activity bonds on behalf or more than one general
purpose governmental unit or a special purpose governmental unit that
derives its sovereign powers from more than one general purpose
governmental unit, the project will be considered approved by each of
such general purpose governmental units in proportion to their relative
populations. The projects that receive priority under section 631(a)(3)
of the Act and this A-16 are those with respect to which--
(i) There was an inducement resolution (or other comparable
preliminary approval) for a project before October 19, 1983, by an
issuing authority,
(ii) A substantial user of the project notified such issuing
authority--
[[Page 408]]
(A) By August 17, 1984, that it intended to claim its rights under
section 631(a)(3) of the Tax Reform Act of 1984, and
(B) By December 31, 1984, as to the calendar year in which it
expects the obligations to provide the project to be issued, and
(iii) Construction of such project began before October 19, 1983, or
a substantial user was under a binding obligation on that date to incur
significant expenditures with respect to the project.
For purposes of the preceding sentence, the term ``significant
expenditures'' means expenditures that equal or exceed the lesser of $15
million or 20 percent of the estimated cost of the facilities. An
issuing authority may require, as part of the submission required by
(ii)(B) of this A-16, that a substantial user specify the aggregate
amount of private activity bonds necessary for the project. Section
631(a)(3) does not apply to a project to the extent that the aggregate
amount of obligations required for such project exceeds the amount, if
any, provided for in the inducement resolution or resolutions in
existence with respect to such project before October 19, 1983, or in
the statement that may be required by the issuing authority as part of
the submission required by (ii)(B) of this A-16. Similarly, section
631(a)(3) does not apply to a project to the extent of any material
change in its nature, character, purpose, or capacity. Section 631(a)(3)
does not apply to a project if the owner, operator, or manager of such
project is not the same (or a related person) as the owner, operator, or
manager named in the latest inducement resolution with respect to such
project in existence before October 19, 1983. Section 631(a)(3) of the
Act does not apply to any project if the obligations to provide the
project are not issued in the year specified in the submission required
by (ii)(B) of this A-16. In addition, section 631(a)(3) of the Act does
not apply to any project to the extent that the amount of obligations to
be issued for such project exceeds the share of the State ceiling to
which the issuing authority that authorized the project is entitled as
determined under section 103(n) (2) and (3) without regard to any
alternative formula for allocating the State ceiling. The requirements
of section 631(a)(3) will not apply where a State statute specifically
so provides.
Q-17: What is the penalty for failure to comply with the
requirements of section 631(a)(3) of the Act?
A-17: If any issuing authority fails to comply with the requirements
of section 631(a)(3) of the Act, its private activity bond limit for the
calendar year following the year in which the failure occurs shall be
reduced by the amount of private activity bonds with respect to which
the failure occurs. This penalty applies whether the issuing authority's
private activity bond limit is determined under the formula provided
under section 103(n) (2) and (3) or a different formula provided under
section 103(n)(6). The penalty is imposed on the issuing authority that
failed to comply with the requirements of section 631(a)(3) or, if in
the year in which the penalty is imposed the issuing authority does not
have a sufficient private activity bond limit to absorb the entire
penalty, on the general purpose governmental unit treated as having
jurisdiction over the same geographical area as the issuing authority.
For purposes of this A-17, the general purpose governmental unit's
private activity bond limit includes the private activity bond limit of
each issuing authority treated as having preliminarily approved the
project under A-16 of this Sec. 1.103(n)-3T. Thus, for example, if a
governmental unit failed to comply with the requirements of section
631(a)(3) of the Act with respect to a $5 million issue to be issued in
1985, and that governmental unit is assigned $15 million of the State
ceiling for 1986 pursuant to a formula provided under section 103(n)(6),
that governmental unit has a private activity bond limit of $10 million
for 1986. Similarly, where a project that was preliminarily approved by
an issuing authority that is not a governmental unit qualifies for $10
million of priority under section 631(a)(3) of the Act is not allocated
a total of $10 million by the governmental unit on behalf of which the
issuing authority is empowered to issue private activity bonds, the
issuing authority's private activity
[[Page 409]]
bond limit, if any, for the year following this failure is reduced by
$10 million; if the issuing authority's private activity bond limit for
the year following the failure is less than $10 million, the private
activity bond limit of the governmental unit on behalf of which the
private activity bonds would have been issued had the failure not
occurred (including if necessary, on a proportionate basis, the private
activity bond limit purported to have been assigned to each of the other
constituted authorities empowered to issue private activity bonds on
behalf of the governmental unit and each special purpose governmental
unit deriving all or part of its sovereign powers from the governmental
unit) is reduced by the difference between $10 million and the reduction
made in the issuing authority's private activity bond limit with respect
to such failure.
Q-18: Will a penalty be assessed for failure to allocate private
activity bond limit to all projects that meet the requirements section
631(a)(3) if the amount of obligations required by all such projects
preliminarily approved by (or treated as having been preliminarily
approved by) an issuing authority exceeds the private activity bond
limit of such issuing authority?
A-18: No penalty will be assessed if priority is given to those
eligible projects for which substantial expenditures were incurred
before October 19, 1983. An issuer may define the term ``substantial
expenditures'' in any reasonable manner based on the relevant facts and
circumstances and its private activity bond limit.
Examples. The following examples illustrate the provisions of A-16
through A-18:
Example (1). On October 1, 1983, County S approved an inducement
resolution for the issuance of up to $30 million of industrial
development bonds to provide a pollution control facility described in
section 103(b)(4)(F) for Corporation R. On October 5, 1983, R contracted
with Corporation Q to begin construction of the pollution control
facility immediately, and construction began on October 10, 1983. Not
later than August 17, 1984, Corporation R notified County S that it
intended to seek priority under section 631(a)(3) of the Tax Reform Act
of 1984. In addition, prior to December 31, 1984, Corporation R notified
County S that it expected the County to issue $25 million of industrial
development bonds for its project during calendar year 1985. Under
section 103(n)(3), County S has a private activity bond limit of $50
million for calendar year 1985, and neither the Governor nor the
legislature of the State has provided a different allocation formula
under section 103(n)(6). There are no other projects approved by County
S that have rights under section 631(a)(3). On March 1, 1985, County S
issues $25 million of industrial development bonds for the pollution
control facility for Corporation R. If County S allocates less than $25
million of its private activity bond limit to that project, its private
activity bond limit for 1986 will be reduced by the difference between
$25 million and the amount County S actually allocates to the project.
Example (2). The facts are the same as in Example (1) except that
during 1984 Corporation R fails to notify County S of the year in which
it expects the obligations to be issued. Upon such failure the pollution
control facility no longer qualifies for priority under section
631(a)(3), and County S will not be penalized if it does not not
allocate any of its private activity bond limit for 1985, or any future
year, to that project.
Example (3). The facts are the same as in Example (1) except that
under section 103(n)(3) County S has a private activity bond limit of
$10 million for 1985. County S will not be penalized if it allocates $10
million of its private activity bond limit to the project.
Example (4). The facts are the same as in Example (3) except that on
December 31, 1984, the Governor of the State provides a different
allocation from that provided under section 103(n) (2) and (3). (The
State has not enacted a statute specifically providing that section
631(a)(3) does not apply.) The different allocation provides that the
entire State ceiling is allocated to the State and that the State will
allocate the State ceiling to issuing authorities for specific projects
on a first-come, first-served basis. Corporation R qualifies for the
special rights granted by section 631(a)(3) of the Tax Reform Act to the
extent of County S's private activity bond limit as determined under
section 103(n)(3), i.e., $10 million. If the State fails to assign to
County S $10 million of the State ceiling or if County S, after
receiving such assignment, fails to allocate $10 million of private
activity bond limit to the project, County S's private activity bond
limit (if any) for 1986 will be reduced by the difference between $10
million and the amount of private activity bond limit allocated to the
project.
[[Page 410]]
Example (5). The facts are the same as in Example (1) except that
Corporation R notifies County S that it only requires $15 million for
the pollution control facility, County S only issues $15 million of
private activity bonds for the pollution control facility, and County S
only allocates $15 million of its private activity bond limit to such
obligations. County S will not be penalized for not allocating more than
$15 million of its private activity bond limit to Corporation R even
though the original inducement resolution provided for up to $25
million.
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C.103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39320, Oct. 5, 1984]
Sec. 1.103(n)-4T Elective carryforward of unused private activity bond limit (temporary).
Q-1: May an issuing authority carry forward any of its unused
private activity bond limit for a calendar year?
A-1: In any calendar year after 1983 in which an issuing authority's
private activity bond limit exceeds the aggregate amount of private
activity bonds issued during such calendar year by such issuing
authority, such issuing authority may elect to treat all, or any
portion, of such excess as a carryforward for any one or more projects
described in A-5 of this Sec. 1.103(n)-4T (carryforward projects).
Q-2: How is the election to carry forward an issuing authority's
unused private activity bond limit made?
A-2: (i) An issuing authority may make the election by means of a
statement, signed by an authorized public official responsible for
making allocations of such issuing authority's private activity bond
limit, that the issuing authority elects to carry forward its unused
private activity bond limit. The statement shall be filed with the
Internal Revenue Service Center, Philadelphia, Pennsylvania 19255.
Except with respect to elections to carry forward any unused private
activity bond limit for calendar year 1984, the election must be filed
prior to the end of the calendar year with respect to which the issuing
authority has the unused private activity bond limit; elections with
respect to unused private activity bond limit for calendar year 1984
must be filed prior to February 26, 1985. The statement is to be titled
``Carryforward election under section 103(n)''.
(ii) The statement required by (i) of this A-2 shall contain the
following information:
(A) The name, address, and TIN of the issuing authority,
(B) The issuing authority's private activity bond limit for the
calendar year,
(C) The aggregate amount of private activity bonds issued by the
issuing authority during the calendar year for which the election is
being made,
(D) The unused private activity bond limit of the issuing authority,
and
(E) For each carryforward project--
(1) A description of the project, including its address (by its
street address or, if none, by a general description designed to
indicate its specific location) and the general type of facility (e.g.,
an airport described in section 103(b)(4)(D)),
(2) The name, address, and TIN of the initial owner, operator, or
manager, and
(3) The amount to be carried forward for the project.
(iii) For purposes of (ii)(E) of this A-2, in the case of a
carryforward project for which the initial owner, operator, or manager
is to be selected pursuant to a competitive bidding process, the
election may include up to 3 prospective addresses for the project and
the name, address, and TIN of more than one prospective initial owner,
operator, or manager, if prior to the end of the calendar year for which
the election is made--
(A) In the case of elections for calendar years other than 1984, the
issuing authority has taken preliminary official action approving the
undertaking of the carryforward project,
(B) All persons included as prospective owners, operators, or
managers have met all applicable conditions (if any) to submit proposals
to provide the project, and
(C) The issuing authority has expended (or has entered into binding
contracts to expend) in connection with the planning and construction of
the carryforward project the lesser of $500,000 or 2\1/2\ percent of the
carryforward amount.
[[Page 411]]
(iv) For purposes of (ii) of this A-2, in the case of a carryforward
election for the purpose of issuing student loan bonds, the statement
need not include the address of a facility or the name, address, and TIN
of an initial owner, operator, or manager of a project but shall state
that the carryforward election is for the purpose of issuing student
loan bonds.
Q-3: Is a carryforward election revocable?
A-3: Any carryforward election, and any specification contained
therein, shall be irrevocable after the last day of the calendar year in
which the election is made. Thus, for example, obligations issued to
finance a carryforward project with a different initial owner, operator,
or manager from the owner, operator, or manager specified in the
carryforward election shall not be issued purusant to such carryforward
election. An insubstantial deviation from a specification contained in a
carryforward election shall not prevent obligations from being issued
pursuant to such carryforward election. In addition, where a
carryforward election is made with respect to more than one carryforward
project, a substantial deviation with respect to one carryforward
project shall not prevent obligations from being issued pursuant to such
carryforward election with respect to the other carryforward projects.
Q-4: How is a carryforward used?
A-4: Any private activity bonds issued during the three calendar
years (six calendar years in the case of a project described in section
103(b)(4)(F)) following the calendard year in which the carryforward
election was first made with respect to a carryforward project shall not
be taken into account in determining whether the issue meets the
requirements of section 103(n). If, however, the amount of private
activity bonds issued for the carryforward project exceeds the amount of
the carryforward elected with respect to the project, then the portion
of the issue that exceeds the carryforward shall be taken into account
in determining whether the issue meets with the requirements of section
103(n); if that portion of the issue does not meet the requirements of
section 103(n) then the entire issue is treated as consisting of
obligations not described in section 103(a). Carryforwards elected with
respect to any project shall be used in the order of the calendar years
in which they arose. Thus, for example, if an issuing authority makes
carryforward elections in 1986 and 1988 for a carryforward project and
issues private activity bonds for that project in 1989 and 1990, the
obligations issued in 1989 will be applied to the 1986 carryforward
election to the extent thereof.
Q-5: For what projects may a carryforward election be made?
A-5: A carryforward election may be made for any project described
in section 103(b) (4) or (5), and for the purpose of issuing student
loan bonds. Thus, for example, an issuing authority may elect to carry
forward its unused private activity bond limit in order to provide a
sports facility described in section 103(b)(4)(B). In addition, a
governmental unit may elect to carry forward its unused private activity
bond limit in order to issue qualified scholarship funding bonds. An
issuing authority may not, however, elect to carry forward its unused
private activity bond limit in order to issue an exempt small issue of
industrial development bonds under section 103(b)(6).
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C.103(n); 68A Stat. 917, 26 U.S.C. 7805); sec. 644(b) of the
Tax Reform Act of 1984 (98 Stat. 940); secs. 103(n) and 7805 of the
Internal Revenue Code of 1954 (98 Stat. 915, 26 U.S.C. 103(n); 68A Stat.
917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39325, Oct. 5, 1984, as amended by T.D. 8001, 49 FR
50389, Dec. 28, 1984]
Sec. 1.103(n)-5T Certification of no consideration for allocation (temporary).
Q-1: Who must certify that there was no consideration for an
allocation?
A-1: Section 103(n)(12)(A) provides that, with respect to any
private activity bond allocated any portion of the State ceiling, the
private activity bond will not be described under section 103(a) unless
the public official, if any, responsible for such allocation
(``responsible public official'') certifies under penalties of perjury
that to the best of his knowledge the allocation of
[[Page 412]]
the State ceiling to that private activity bond was not made in
consideration of any bribe, gift, gratuity, or direct or indirect
contribution to any political campaign. With respect to any issue of
private activity bonds, the responsible public official is the official
or officer of the issuing authority that in fact is responsible for
choosing which individual projects will be allocated a portion of the
State ceiling. If a body of several individuals is responsible for such
choices, any one member of such body qualifies as the responsible public
official.
Q-2: What is the penalty for willfully making an allocation in
consideration of any bribe, gift, gratuity, or direct or indirect
contribution to any political campaign?
A-2: Section 103(n)(12)(B) provides that any person willfully making
an allocation of any portion of the State ceiling in consideration of
any bribe, gift, gratuity, or direct or indirect contribution to any
political campaign will be subject to criminal penalty as though the
allocation were a willful attempt to evade tax imposed by the Internal
Revenue Code.
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C.103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39326, Oct. 5, 1984]
Sec. 1.103(n)-6T Determinations of population (temporary).
Q-1: What is the proper method for determining population?
A-1: All determinations of population must be made with respect to
any calendar year on the basis of the most recent census estimate
(whether final or provisional) of the resident population of the State
or other governmental unit published by the Bureau of the Census in the
``Current Population Reports'' series before the beginning of the
calendar year.
However, determinations of the population of a general purpose
governmental unit (other than a State, territory, or possession) within
a State, territory, or possession may not be based on estimates that do
not contain estimates for all of the general purpose governmental units
within such State, territory, or possession. Thus, a county may not
determine its population on the basis of a census estimate that does not
provide an estimate of the population of the other general purpose
governmental units within the State (e.g., cities, towns). If no census
estimate is available for all such general purpose governmental units,
the most recent decennial census of population may be relied on.
Example: The following example illustrates the provisions of A-1 of
this Sec. 1.103(n)-6T:
Example. County Q is located within State R. There are no
constitutional home rule cities in State R. State R has not adopted a
formula for allocating the State ceiling different from the formula
provided in section 103(n) (2) and (3). The geographical area within the
jurisdiction of County Q is not within the jurisdiction of any other
governmental unit having jurisdiction over a smaller geographical area.
As of December 31, 1984, the Bureau of the Census has published the
following estimates of resident population: ``Current Population
Reports; Series P-25: Population Estimates and Projections, Estimates of
the Population of States: July 1, 1981-1983'' and ``Current Population
Reports; Series P-26: Local Population Estimates: Population of State R,
Counties, Incorporated Places, and Minor Civil Divisions: July 1, 1981-
1982.'' The most recent population estimate for State R available prior
to 1985 provides population estimates as of July 1, 1983. The most
recent population extimates for County Q available prior to 1985 is the
estimate for July 1, 1982. Assuming that the State ceiling for State R
for 1985 is in excess of $200 million (i.e., $150 multiplied by the
estimated population of State R as of July 1, 1983, exceeds $200
million), County Q may determine its private activity bond limit by
using the following formula:
P = $150x.5xWxY/Z, where,
P = County Q's private activity bond limit,
W = the July 1, 1983, population estimate for State R,
Y = the July 1, 1982, population estimate for County Q, and
Z = the July 1, 1982, population estimate for State R.
If the State ceiling for State R is not in excess of $200 million,
County Q may determine its private activity bond limit by using the
following formula:
P = $200,000,000x.5xY/Z, where
P, Y, and Z have the same meaning as above.
(Secs. 103(n) and 7805 of the Internal Revenue Code of 1954 (98 Stat.
916, 26 U.S.C.103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7981, 49 FR 39326, Oct. 5, 1984]
[[Page 413]]
Sec. 1.103(n)-7T Election to allocate State ceiling to certain facilities for local furnishing of electricity (temporary).
(a) Election--(1) In general. The issuing authorities of the State
of New York (``New York'') may elect to use in 1984 up to one-half of
the amount that would have been New York's State ceiling (as defined in
section 103(n)(4) and A-1 of Sec. 1.103(n)-3T) for calendar years 1985,
1986, and 1987 for the purpose of issuing obligations to provide
facilities for the local furnishing of electric energy described in
section 644(a) of the Tax Reform Act of 1984 (the ``Act''). For purposes
of this paragraph, New York's State ceiling for calendar years 1985,
1986, and 1987 is considered equal to the State ceiling for 1984
(without taking into account any increase in the State ceiling for 1984
as a result of an election under section 644(b) and this section).
(2) Procedure. The election shall be made by filing the statement
described in this paragraph (a)(2) with the Internal Revenue Service
Center, Philadelphia, Pennsylvania, on or before December 31, 1984. The
statement shall be titled ``Allocation election under section 644 of the
Tax Reform Act of 1984,'' shall be signed by the Governor of New York or
his authorized representative, and shall contain the following
information:
(i) The name, address, and TIN of the issuing authority (or
authorities) that is expected to issue the obligations for the
facilities described in section 644(a) of the Act pursuant to the
election described in section 644(b) of the Act and this section, and
(ii) The amount of the State ceiling for each of calendar years
1985, 1986, and 1987 with respect to which the election is made.
(b) Effect of election--(1) In 1984. The amount of the State ceiling
for calendar years 1985, 1986, and 1987 with respect to which the
election is made will be considered part of New York's State ceiling for
calendar year 1984. For purposes of section 644(b) of the Act, such
amount will be considered used in 1984 only to the extent that
obligations are issued in 1984 to provide facilities for the local
furnishing of electric energy described in section 644(a) of the Act, or
to the extent that a proper election is made on or before December 31,
1984 (and is not revoked or amended between the time it is made and the
end of 1984) pursuant to section 103(n)(10) and Sec. 1.103(n)-4T to
carry forward all or part of such amount to provide such facilities
during the carryforward period applicable to calendar year 1984 State
ceiling.
(2) In 1985, 1986, and 1987. An election under section 644(b) of the
Act and this section to use in calendar year 1984 an amount of New
York's State ceiling for a subsequent calendar year reduces the State
ceiling for such subsequent calendar year by the amount with respect to
which the election is made, whether or not such amount is considered
used in 1984 pursuant to this paragraph (b). Thus, no obligations may be
issued pursuant to the election described in section 644(b) of the Act
and this section to provide a facility other than the facilities for the
furnishing of electric energy described in section 644(a) of the Act.
(3) Other effects. An election or the failure to make an election
under section 644(b) of the Act and this section shall not affect any
otherwise applicable rule that permits an issuing authority, for any
calendar year, to--
(i) Allocate a portion of its private activity bond limit,
(ii) Issue obligations within its private activity bond limit, or
(iii) Elect under section 103(n)(10) and Sec. 1.103(n)-4T to carry
forward any portion of its private activity bond limit,
in order to issue obligations to provide a facility described in section
644(a) of the Act.
(c) Revocation of election. An election made under section 644(b) of
the Act and this section may not be revoked or amended. An insubstantial
deviation from a specification contained in an election under section
644(b) of the Act and this section shall not prevent obligations from
being issued pursuant to such election.
(Sec. 644(b) of the Tax Reform Act of 1984 (98 Stat. 940); secs. 103(n)
and 7805 of the Internal Revenue Code of 1954 (98 Stat. 915, 26 U.S.C.
103(n); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 8001, 49 FR 50389, Dec. 28, 1984]
[[Page 414]]
Sec. 1.103A-2 Qualified mortgage bond.
(a)-(j) [Reserved]
(k) Information reporting requirement--(1) In general. An issue
meets the requirements of this paragraph only if the issuer in good
faith attempted to meet the information reporting requirements of this
paragraph. Except as otherwise provided in paragraph (k)(5)(iv) of this
section, the requirements of this paragraph apply to qualified veterans'
mortgage bonds issued after July 18, 1984, and to qualified mortgage
bonds issued after December 31, 1984. With respect to bonds issued after
December 31, 1986, see the regulations under section 149(e).
(2) Information required. (i) The issuer must, based on information
and reasonable expectations determined as of the date of issue, submit
on Form 8038 the information required therein; the issuer need not
however, include the information required by Form 8038 that is relevant
only to obligations described in section 103(l)(1) and the regulations
thereunder. The information that must be submitted includes--
(A) The name, address, and employer identification number of the
issuer,
(B) The date of issue,
(C) The face amount of each obligation which is part of the issue,
(D) The total purchase price of the issue,
(E) The amount allocated to a reasonably required reserve or
replacement fund,
(F) The amount of lendable proceeds,
(G) The stated interest rate of each maturity,
(H) The term of each maturity,
(I) In the case of an issue of qualified mortgage bonds, whether the
issuer has elected under Sec. 6a.103A-2(i)(4)(v) to pay arbitrage to the
United States,
(J) In the case of an issue of qualified mortgage bonds, the
issuer's market limitation as of the date of issue (as defined in
Sec. 6a.103A-2(g)), the amount of qualified mortgage bonds that the
issuer has elected not to issue under section 25(c)(2) and the
regulations thereunder, and the aggregate amount of qualified mortgage
bonds issued to date by the issuer during the calendar year, and
(K) In the case of an issue of qualified veterans' mortgage bonds,
the issuer's State veterans limit (as defined in section 103A(o)(3)(B)
and the regulations thereunder) and the aggregate amount of qualified
veterans' mortgage bonds issued to date by the issuer during the
calendar year and prior to the date of issue of the issue for which the
Form 8038 is being submitted.
(ii) With respect to issues issued after December 31, 1984, the
issuer must submit a report containing information on the borrowers of
the original proceeds of such issues. The report must be filed for each
reporting period in which the original proceeds of any of such issues
are used to provide mortgages. The issuer is not responsible for false
information provided by a borrower if the issuer did not know or have
reason to know that the information was false. The report must be filed
on the form prescribed by the Internal Revenue Service. If no form is
prescribed, or if the form prescribed is not readily available, the
issuer may use its own form provided that such form is in the format set
forth in paragraph (k)(3) of this section and contains the information
required by this paragraph (k)(2)(ii). The report must be titled
``Qualified Mortgage Bond Information Report'' or ``Qualified Veterans'
Mortgage Bond Information Report'', and must include the name, address,
and TIN of the issuer, the reporting period for which the information is
provided, and the following tables containing information concerning the
borrowers of the original proceeds of the issues subject to the
requirements of this paragraph (k)(2)(ii) with respect to mortgages
provided during the reporting period for which the report is filed:
(A) A table titled ``Number of Mortgage Loans by Income and
Acquisition Cost'' showing the number of mortgage loans (other than
those issued in connection with qualified home improvement and
rehabilitation loans) made during the reporting period according to the
annualized gross income of the borrowers (categorized in the following
intervals of income:
[[Page 415]]
$0-$9,999
$10,000-$19,999
$20,000-$29,999
$30,000-$39,999
$40,000-$49,999
$50,000-$74,999
$75,000 or more)
and according to the acquisition cost of each residence being financed
(categorized in the following intervals of acquisition cost:
$0-$19,999
$20,000-$39,999
$40,000-$59,999
$60,000-$79,999
$80,000-$99,999
$100,000-$119,999
$120,000-$149,999
$150,000-$199,999
$200,000 or more)
For each interval of income and acquisition cost the table must also be
categorized according to the number of borrowers that--
(1) Did not have a present ownership interest in a principal
residence at any time during the 3-year period ending on the date the
mortgage is executed (i.e., satisfied the 3-year requirement) and
purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not
located in targeted areas,
(3) Did have a present ownership interest in a principal residence
at any time during the 3-year period ending on the date the mortgage is
executed (i.e., did not satisfy the 3-year requirement) and purchased
residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences
not located in targeted areas.
With respect to issues of qualified veterans' mortgage bonds, for each
interval of income and acquisition cost the table need only be
categorized according to the number of borrowers that satisfied the 3-
year requirement and the number of borrowers that failed to satisfy the
3-year requirement.
(B) A table titled ``Volume of Mortgage Loans by Income and
Acquisition Cost'' showing the total principal amount of the mortgage
loans (other than qualified home improvement and rehabilitation loans)
provided during the reporting period according to annualized gross
income (categorized in the same intervals of income as the preceding
table) and according to the acquisition cost of the residences acquired
(categorized in the same acquisition cost intervals as the preceding
table). For each interval of income and acquisition cost the table must
also be categorized according to the total principal amount of the
mortgage loans of borrowers that--
(1) Satisfied the 3-year requirement and purchased residences in
targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not
located in targeted areas,
(3) Did not satisfy the 3-year requirement and purchased residences
in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences
not located in targeted areas.
With respect to issues of qualified verterans' mortgage bonds, for each
interval of income and acquisition cost the table need only be
categorized according to the total principal amount of the mortgage
loans of borrowers that satisified the 3-year requirement and the total
principal amount of the mortgage loans of borrowers that did not satisfy
the 3-year requirement.
(C) For issues other than qualified veterans' mortgage bonds, a
table titled ``Mortgage Subsidy Bonds for Qualified Home Improvement and
Rehabilitation Loans'' showing the number of borrowers obtaining
qualified home improvement loans and qualified rehabilitation loans and
the total of the principal amounts of such loans; the information
contained in the table must also be categorized according to whether the
residences with respect to which the loans were provided are located in
targeted areas.
(3) Format. (i) With respect to the report required by paragraph
(k)(2)(ii) of this section, if no form is prescribed by
[[Page 416]]
the Internal Revenue Service, or if the prescribed form is not readily
available, the issuer must submit the report in the format specified in
this paragraph (k)(3).
(ii) With respect to issues of qualified mortgage bonds, the format
of the report specified in this paragraph (k)(3) is the following:
Qualified Mortgage Bond Information Report
Name of issuer:
Address of issuer:
TIN of issuer:
Reporting period:
Number of Mortgage Loans by Income and Acquisition Cost
----------------------------------------------------------------------------------------------------------------
Satisfied Not Satisfied
3-year requirement: Annualized gross monthly income of ----------------------------------------------
borrowers Nontargeted Targeted Nontargeted Targeted Totals
area area area area
----------------------------------------------------------------------------------------------------------------
$0 to $9,999.............................................
$10,000 to $19,999.......................................
$20,000 to $29,999.......................................
$30,000 to $39,999.......................................
$40,000 to $49,999.......................................
$50,000 to $74,999.......................................
$75,000 or more..........................................
------------------------------------------------------
Total..............................................
Acquisition Cost
$0 to $19,999............................................
$20,000 to $39,999.......................................
$40,000 to $59,999.......................................
$60,000 to $79,999.......................................
$80,000 to $99,999.......................................
$100,000 to $119,999.....................................
$120,000 to $149,999.....................................
$150,000 to $199,999.....................................
$200,000 or more.........................................
------------------------------------------------------
Total..............................................
----------------------------------------------------------------------------------------------------------------
Volume of Mortgage Loans by Income and Acquisition Cost
----------------------------------------------------------------------------------------------------------------
Satisfied Not Satisfied
3-year requirement: Annualized gross monthly income of ----------------------------------------------
borrowers Nontargeted Targeted Nontargeted Targeted Totals
area area area area
----------------------------------------------------------------------------------------------------------------
$0 to $9,999.............................................
$10,000 to $19,999.......................................
$20,000 to $29,999.......................................
$30,000 to $39,999.......................................
$40,000 to $49,999.......................................
$50,000 to $74,999.......................................
$75,000 or more..........................................
------------------------------------------------------
Total..............................................
Acquisition Cost
$0 to $19,999............................................
$20,000 to $39,999.......................................
$40,000 to $59,999.......................................
$60,000 to $79,999.......................................
$80,000 to $99,999.......................................
$100,000 to $119,999.....................................
$120,000 to $149,999.....................................
$150,000 to $199,999.....................................
$200,000 or more.........................................
------------------------------------------------------
Total..............................................
----------------------------------------------------------------------------------------------------------------
Mortgage Subsidy Bonds for Qualified Home Improvement and Rehabilitation
Loans
------------------------------------------------------------------------
Nontargeted Targeted
area area Totals
------------------------------------------------------------------------
Number of qualified home improvement
loans..................................
Volume of qualified home improvement
loans..................................
Number of qualified rehabilitation loans
Volume of qualified rehabilitation loans
------------------------------------------------------------------------
(iii) The format of the report specified in this paragraph (k)(3)
for qualified veterans' mortgage bonds is the following:
[[Page 417]]
Qualified Veterans' Mortgage Bond Information Report
Name of issuer:
Address of issuer:
TIN of issuer:
Reporting period:
Number of Mortgage Loans by Income and Acquisition Cost
------------------------------------------------------------------------
3-year requirement: annualized gross Not
monthly income of borrowers Satisfied satisfied Totals
------------------------------------------------------------------------
$0 to $9,999...........................
$10,000 to $19,999.....................
$20,000 to $29,999.....................
$30,000 to $39,999.....................
$40,000 to $49,999.....................
$50,000 to $74,999.....................
$75,000 or more........................
--------------------------------
Total..............................
Acquistion Cost
$0 to $19,999..........................
$20,000 to $39,999.....................
$40,000 to $59,999.....................
$60,000 to $79,999.....................
$80,000 to $99,999.....................
$100,000 to $119,999...................
$120,000 to $149,999...................
$150,000 to $199,999...................
$200,000 or more.......................
Total..............................
------------------------------------------------------------------------
Number of Mortgage Loans by Income and Acquisition Cost
------------------------------------------------------------------------
3-year requirement: annualized gross Not
monthly income of borrowers Satisfied satisfied Totals
------------------------------------------------------------------------
$0 to $9,999...........................
$10,000 to $19,999.....................
$20,000 to $29,999.....................
$30,000 to $39,999.....................
$40,000 to $49,999.....................
$50,000 to $74,999.....................
$75,000 or more........................
--------------------------------
Total..............................
Acquistion Cost
$0 to $19,999..........................
$20,000 to $39,999.....................
$40,000 to $59,999.....................
$60,000 to $79,999.....................
$80,000 to $99,999.....................
$100,000 to $119,999...................
$120,000 to $149,999...................
$150,000 to $199,999...................
$200,000 or more.......................
--------------------------------
Total..............................
------------------------------------------------------------------------
(4) Definitions and special rules. (i) For purposes of this
paragraph the term ``annualized gross income'' means the borrower's
gross monthly income muliplied by 12. Gross monthly income is the sum of
monthly gross pay, any additional income from investments, pensions,
Veterans Administration (VA) compensation, part-time employment,
bonuses, dividends, interest, current overtime pay, net rental income,
etc., and other income (such as alimony and child support, if the
borrower has chosen to disclose such income). Information with respect
to gross monthly income may be obtained from available loan documents,
e.g., the sum of lines 23D and 23E on the Application for VA or FmHA
Home Loan Guaranty or for HUD/FHA Insured Mortgage (VA Form 26-1802a,
HUD 92900, Jan. 1982), or the total line from the Gross Monthly Income
section of FHLMC Residential Loan Application form (FHLMC 65 Rev. 8/78).
With respect to obligations issued prior to October 1, 1985, issuers may
submit data based on annualized gross income or, instead, based on the
adjusted income (as defined in Sec. 1.167(k)-3(b)(3)) of the mortgagor's
family for the previous calendar year. If data is submitted based on
adjusted income, the issuer must note this fact in the report.
(ii) For purposes of this paragraph, the term ``reporting period''
means the following periods:
(A) The period beginning January 1, 1985, and ending on September
30, 1985,
(B) The period beginning on October 1, 1985, and ending on June 30,
1986, and
(C) After June 30, 1986, each 1-year period beginning July 1 and
ending June 30.
(iii) See the regulations under section 103(l) for the definitions
of the terms ``date of issue'', ``maturity'', and ``term of issue''.
(iv) For purposes of this paragraph, verification of information
concernig a borrower's gross monthly income with other available
information concerning the borrower's income (e.g., Federal income tax
returns) is not required. In determining whether a borrower acquiring a
residence in a targeted area satisfies the 3-year requirement, the
issuer may rely on a statement signed by the borrower.
(5) Time for filing. (i) The report required by paragraph (k)(2)(i)
of this section shall be filed not later than the 15th day of the second
calendar month after the close of the calendar quarter in which the
obligation is issued. The statement may be filed at any time before such
date but must be complete
[[Page 418]]
based on facts and reasonable expectations as of the date of issue. The
statement need not be amended to report information learned subsequent
to the date of issue or to reflect changed circumstances with respect to
the issuer.
(ii) The report required by paragraph (k)(2)(ii) of this section
(relating to use of proceeds) shall be filed not later than the 15th day
of the second calendar month after the close of the reporting period,
except that the report for the reporting period ending September 30,
1985, is due not later than February 15, 1986. The report may be filed
at any time before such date but must be complete based on facts and
reasonable expectations as of the date the report is filed. The report
need not be amended to reflect information learned subsequent to the
date the report is filed or to reflect changed circumstances with
respect to any borrower.
(iii) The Commissioner may grant an extension of time for the filing
of a report required by paragraph (k)(2) (i) or (ii) of this section if
there is reasonable cause for the failure to file such report in a
timely fashion.
(iv) An issue of qualified veterans' mortgage bonds issued after
July 18, 1984, and prior to January 1, 1985, will be treated as
satisfying the information reporting requirement of this paragraph if a
Form 8038 with respect to the issue is properly filed not later than
February 15, 1985; the report described in paragraph (k)(2)(ii) of this
section need not be filed with respect to such issues.
(6) Place for filing. The reports required by paragraph (k)(2) (i)
and (ii) of this section are to be filed at the Internal Revenue Service
Center, Philadelphia, Pennsylvania 19255.
(l) Policy statement--(1) In general. (i) For obligations issued
after December 31, 1984, an issue meets the requirements of this
paragraph only if the applicable elected representative of the
governmental unit which is the issuer (or on behalf of which the issuing
authority is empowered to issue qualified mortgage bonds) has published
(after a public hearing following reasonable public notice) the report
described in paragraph (l)(3) of this section by the last day of the
year preceding the year in which such issue is issued and a copy of such
report has been submitted to the Commissioner on or before such last
day. The Commissioner may grant an extension of time for publishing and
filing the report if there is reasonable cause for the failure to
publish or file such report in a timely fashion. The requirements of
this paragraph will be treated as met if the issuer in good faith
attempted to meet the policy statement requirements of this paragraph.
(ii) With respect to reports required by paragraph (l)(1)(i) of this
section to be published and submitted to the Commissioner not later than
December 31, 1984, the Commissioner has determined that there is
reasonable cause for the failure to publish or file such reports in a
timely fashion; such a report will be considered published and filed in
a timely fashion if, not later than March 11, 1985, the report is
published (after a public hearing following reasonable public notice)
and a copy is submitted to the Commissioner. In addition, any report
submitted not later than December 31, 1984, with respect to which an
issuer in good faith attempted to satisfy the requirements of section
103A(j)(5) shall be treated as substantially satisfying the requirements
of this paragraph. For example, with respect to a report submitted not
later than December 31, 1984, an issuer shall not be treated as failing
to satisfy the requirements of section 103A(j)(5) based on the fact that
(A) the notice of public hearing failed to state the manner in which
affected residents may obtain copies of the proposed report prior to the
hearing, or (B) the proposed report was not available prior to or at the
public hearing. With respect to reports required to be published and
submitted to the Commissioner not later than December 31, 1986, the
Commissioner has determined that there is a reasonable cause for the
failure to publish and file such reports in a timely fashion; such
reports will be considered published and filed in a timely fashion if,
not later than December 31, 1987, the report is published (after having
a public hearing following reasonable public notice) and a copy is
submitted to the Commissioner.
[[Page 419]]
(2) Definitions and special rules. (i) In the case of an issuer that
issues qualified mortgage bonds on behalf of one or more governmental
units, a single report may be filed provided that such report is signed
(A) by the applicable elected representative of each governmental unit
on whose behalf obligations have been issued during any preceding
calendar year or (B) by the Governor of the State in which the issuer is
located.
(ii) See notice 103(k)(2)(E) and the regulations thereunder for the
definition of the term ``applicable elected representative''.
(iii) In the case of qualified mortgage bonds issued by, or on
behalf of, a governmental unit that did not reasonably expect during the
preceding calendar year to issue (or have issued on its behalf by any
other issuer) qualified mortgage bonds during the current calendar year,
the requirements of this paragraph will be treated as met if the
applicable governmental unit which is the issuer (or on behalf of which
the issuing authority is empowered to issue qualified mortgage bonds)
has published (after a public hearing following reasonable public
notice) the report described in paragraph (l)(3) of this section prior
to the issuance of any qualified mortgage bonds and a copy of such
report has been submitted to the Commissioner prior to such issuance.
(iv) For purposes of this paragraph a report will be considered to
be ``published'' when the applicable elected representative of the
governmental unit has made copies of the report available for
distribution to the public. Reasonable public notice of the manner in
which copies of the report may be obtained must be provided; such notice
may be included as part of the public notice required by paragraph
(l)(4) of this section.
(3) Report. (i) A report is described in this paragraph (l)(3) if it
contains the issuer's name, TIN, and the title ``Policy Report Under
Section 103A'' stated on the cover page of the report and if it
includes--
(A) A statement of the policies of the issuer with respect to
housing, development, and low-income housing assistance which such
issuer is to follow in issuing qualified mortgage bonds and mortgage
credit certificates, and
(B) An assessment of the compliance of such issuer during the 1-year
period preceding the date of the report with--
(1) The statement of policy on qualified mortgage bonds and mortgage
credit certificates that was set forth in the previous report, if any,
of the issuer, and
(2) The intent of Congress that State and local governments are
expected to use their authority to issue qualified mortgage bonds and
mortgage credit certificates to the greatest extent feasible (taking
into account prevailing interest rates and conditions in the housing
market) to assist lower income families to afford home ownership before
assisting higher income families.
(ii) For example, a report described in this paragraph (l)(3) may
(but is not required to) contain--
(A) A specific statement of the policies with respect to housing,
development, and low-income housing assistance which the issuer is to
follow in issuing qualified mortgage bonds and mortgage credit
certificates, including, for example, a statement as to--
(1) With respect to housing policies, (i) whether the proceeds will
be used to provide financing for the acquisition of residences, to
provide qualified home improvement loans, or to provide qualified
rehabilitation loans; (ii) whether all or a portion of the proceeds will
be targeted to new, existing, or any other particular class or type of
housing; (iii) how the existence of a need or absence of a need for such
targeting has been determined; (iv) the method by which the proceeds
will be targeted; (v) any other pertinent information relating to the
issuer's housing policies; and (vi) how the housing policies relate to
the issuer's development and low-income housing assistance policies;
(2) With respect to development policies, (i) whether all or a
portion of the proceeds will be targeted to specific areas (including
targeted areas as described in Sec. 6a.103A-2(b)(3)); (ii) a description
of the areas to which the proceeds will be targeted; (iii) the reasons
for selecting such areas; (iv) whether proceeds targeted to each area
are to
[[Page 420]]
be used to finance redevelopment of existing housing or new
construction; (v) any other pertinent information relating to the
issuer's development policies; and (vi) how the development policies
relate to the issuer's low-income housing assistance policies; and
(3) With respect to low-income housing assistance policies, (i)
whether all or a portion of the proceeds will be targeted to low-income
(i.e., 80 percent of median income), moderate-income (i.e., 100 percent
of median income), or any other class of borrowers; (ii) the method by
which the proceeds will be targeted to such borrowers; and (iii) any
other pertinent information relating to the issuer's low-income housing
assistance policies;
(B) An assessment of the compliance of the governmental unit or
issuing authority during the twelve-month period ending with the date of
the report with the statement of housing, development, and low-income
housing assistance policies with respect to qualified mortgage bonds and
mortgage credit certificates that were set forth in the report, if any,
published in the preceding year with respect to such governmental unit,
including, for example, a statement as to whether the governmental unit
or issuing authority successfully implemented its policies and, if not,
an analysis of the reasons for such failure; and
(C) An assessment of the compliance of the governmental unit or
issuing authority during the twelve-month period ending with the date of
the report with the intent of Congress that State and local governments
are expected to use their authority to issue qualified mortgage bonds
and mortgage credit certificates to the greatest extent feasible (taking
into account prevailing interest rates and conditions in the housing
market) to assist lower income families to afford home ownership before
assisting higher income families, including, for example, a description
of (1) the method used by the governmental unit or issuing authority to
distribute proceeds, (2) whether and how that method enabled the
governmental unit or issuing authority to assist lower income families
before higher income families, and (3) any income levels that have been
defined and used by the governmental unit or issuing authority in
connection with distribution of the proceeds (no specific definition of
lower income and higher income is imposed on governmental units or
issuing authorities).
(iii) For purposes of the assessments of compliance required by
paragraph (l)(3)(i)(B) of this section to be included in the report, the
``date of the report'' means June 30. For purposes of the report
required to be filed prior to January 1, 1986, an issuer need not
perform these assessments of compliance with respect to any period prior
to January 1, 1985.
(iv) An issuer that fails to establish policies with respect to the
criteria provided in paragraph (l)(3)(i) of this section will not be
treated as failing to satisfy the requirements of this paragraph. Thus,
for example, an issuer may state in its report that none of the proceeds
of the issue will be targeted to specific areas. Similarly, an issuer
that fails to successfully implement its policies will not be treated as
failing to satisfy the requirements of this paragraph.
(4) Public hearing. The public hearing required by paragraph (l)(1)
of this section means a forum providing a reasonable opportunity for
interested individuals to express their views, both orally and in
writing, on the report that the applicable representative proposes to
publish to satisfy the requirements of this paragraph (l). A public
hearing held prior to January 1, 1985, will not fail to satisfy the
requirements of this paragraph (l)(4) merely because the proposed policy
statement was not available prior to the public hearing. In general, a
governmental unit may select its own procedure for the hearing, provided
that interested individuals have a reasonable opportunity to express
their views. Thus, it may impose reasonable requirements on persons who
wish to participate in the hearing, such as a requirement that persons
desiring to speak at the hearing so request in writing at least 24 hours
before the hearing or that they limit their oral remarks to 10 minutes.
For purposes of this public hearing requirement, it is not necessary
that the applicable elected representative who will publish the report
be present at
[[Page 421]]
the hearing, that a report on the hearing be submitted to that official,
or that State administrative procedural requirements for public hearings
in general be observed. However, compliance with such State procedural
requirements (except those at variance with a specific requirement set
forth in this paragraph) will generally assure that the hearing
satisfies the requirements of this paragraph. The hearing may be
conducted by any individual appointed or employed to perform such
function by the governmental unit, its agencies, or by the issuer. Thus,
for example, for a report to be issued by an issuing authority that acts
on behalf of a county, the hearing may be conducted by the issuing
authority, the county, or an appointee or employee of either.
(5) Reasonable public notice. (i) The reasonable public notice
required by paragraph (l)(1) of this section means published notice
which is reasonably designed to inform residents of the geographical
area within the jurisdiction of the governmental unit that will publish
the report. The notice must state the time and place for the hearing and
contain the information required by paragraph (l)(5)(ii) of this
section. Notice is presumed reasonable if published no fewer than 14
days before the hearing. Notice is presumed reasonably designed to
inform affected residents only if published in one or more newspapers of
general circulation available to residents of that locality or if
announced by radio or televison broadcast to those residents.
(ii) The notice of hearing described in this paragraph (l)(5) must
state--
(A) The time and place for the hearing,
(B) Any applicable limitations regarding participation in the
hearing,
(C) With respect to any notice of hearing published after December
31, 1984, the manner in which affected residents may obtain copies of
the proposed report prior to the hearing, and
(D) With respect to any notice of hearing published after December
31, 1984, that the hearing will involve the issuer's policies with
respect to housing, development, and low-income housing assistance which
the issuer is to follow in issuing qualified mortgage bonds and mortgage
credit certificates.
(6) Procedure for public hearings of multiple jurisdiction issuers.
In the case of an issuer that issues qualified mortgage bonds on behalf
of two or more governmental units (``multiple jurisdiction issuer''),
each governmental unit on whose behalf the issuer reasonably expects to
issue qualified mortgage bonds during the succeeding calendar year must
hold a public hearing following reasonable public notice prior to the
publication of the report required by this paragraph. A multiple
jurisdiction issuer may hold a combined hearing as long as the combined
hearing is a joint undertaking that provides all residents of the
participating governmental units (i.e., each governmental unit on whose
behalf qualified mortgage bonds were issued by the authority and each
governmental unit on whose behalf the authority reasonably expects to
issue qualified mortgage bonds during the succeeding calendar year) a
reasonable opportunity to be heard. The location of any combined hearing
is presumed to provide a reasonable opportunity for all affected
residents to be heard if it is no farther than 100 miles from the seat
of government of each participating governmental unit beyond whose
geographic jurisdiction the hearing is conducted.
(7) Place for filing. The report is to be filed with the Internal
Revenue Service Center, Philadelphia, Pennsylvania 19255.
(m) State certification requirements--(1) In general. An issue meets
the requirements of this paragraph only if the issuer in good faith
attempted to meet the State certification requirements of this
paragraph. The requirements of this paragraph apply to obligations
issued after December 31, 1984; see section 149(e) and the regulations
thereunder with respect to obligations issued after December 31, 1986.
(2) Certification. (i) An issue satisfied the requirements of
section 103A(j)(4) and this paragraph (m)(2) only if the State official
designated by law (or, if there is no State official, the Governor)
certifies on or before the later of the date of issue or October 3,
1985, following a request for such certification
[[Page 422]]
by the issuer, that, as of the date the certification is executed, the
issue meets the requirements of section 103A(g) and the regulations
thereunder (relating to volume limitation). In the case of any
constitutional home rule city, the certification shall be made by the
chief executive officer of the city. To the extent consistent with State
and local law, the Governor (or the chief executive officer of any
constitutional home rule city) may delegate the responsibility to
execute the certification required by this paragraph.
(ii) The certifying official need not perform an independent
investigation in order to determine whether the issue meets the
requirements of section 103A(g). In determining the aggregate amount of
qualified mortgage bonds previously issued by an issuer during a
calendar year, the certifying official may rely on copies of the reports
submitted, to date, by the issuer pursuant to section 103A(j)(3) for
other issues of qualified mortgage bonds issued during that year and
copies of any elections previously made pursuant to section 25(c)(2) not
to issue qualified mortgage bonds, together with an affidavit executed
by an officer of the issuer responsible for issuing the bonds stating
that the issuer has not, to date during the calendar year, issued any
other qualified mortgage bonds, the amount, if any, of the issuer's
market limitation that it has, to date during the calendar year,
surrendered to other issuing authorities, and that it has not, to date
during the calendar year, made any other elections not to issue
qualified mortgage bonds. If, based on such information, the certifying
official determines that, as of the date the certification is executed,
the issue will not exceed the issuer's market limitation for the year,
the official may certify that the issue meets the requirements of
section 103A(g).
(3) Special rule. If 15 days elapse after the issuer files a proper
request for the certification described in paragraph (m)(2) of this
section and the issuer has not received from the State official
designated by law (or, if there is no State official, the Governor)
certification that the issue meets the requirements of section 103A(g)
and Sec. 6a.103A-2(g) or, in the alternative, a statement that the issue
does not meet such requirements, the issuer may, instead, submit an
affidavit executed by an officer of the issuer responsible for issuing
the bonds stating that--
(i) The issue meets the requirements of section 103(A)(g) and
Sec. 6a.103A-2(g),
(ii) At least 15 days before the execution of the affidavit the
issuer filed a proper request for the certification described in
paragraph (m)(2) of this section, and
(iii) The State official designated by law (or, if there is no State
official, the Governor) has not provided the certification described in
paragraph (m)(2) of this section.
In the case of obligations issued prior to October 4, 1985 the preceding
sentence shall be applied by substituting ``30 days'' for ``15 days''.
For purposes of this paragraph, a request for certification is proper if
the request includes the reports and affidavits described in paragraph
(m)(2)(ii) of this section.
(4) Filing. The certification (or affidavit) required by this
paragraph shall be filed with the Internal Revenue Service Center,
Philadelphia, PA 19255. The certification (or affidavit) shall be
submitted with the Form 8038 required to be filed by section 103A(j)(3)
and paragraph (k) of this Sec. 1.103A-2. The Commissioner may grant an
extension of time for filing the certification (or affidavit) if there
is a reasonable cause for the failure to file such statement in a timely
fashion.
(5) Effect of certification. The fact that an issuer obtains the
certification (or affidavit) described in this paragraph does not ensure
that the requirements of paragraph (g) of Sec. 6a.103A-2 are met.
Obligations that do not meet the requirements of paragraph (g) of
Sec. 6a.103A-2 are not described in section 103(a).
[T.D. 8049, 50 FR 35542, Sept. 3, 1985, as amended by T.D. 8129, 52 FR
7410, Mar. 11, 1987]
Sec. 1.104-1 Compensation for injuries or sickness.
(a) In general. Section 104(a) provides an exclusion from gross
income with respect to certain amounts described in paragraphs (b), (c),
(d) and (e) of this section, which are received for personal
[[Page 423]]
injuries or sickness, except to the extent that such amounts are
attributable to (but not in excess of) deductions allowed under section
213 (relating to medical, etc., expenses) for any prior taxable year.
See section 213 and the regulations thereunder.
(b) Amounts received under workmen's compensation acts. Section
104(a)(1) excludes from gross income amounts which are received by an
employee under a workmen's compensation act (such as the Longshoremen's
and Harbor Workers' Compensation Act, 33 U.S.C., c. 18), or under a
statute in the nature of a workmen's compensation act which provides
compensation to employees for personal injuries or sickness incurred in
the course of employment. Section 104(a)(1) also applies to compensation
which is paid under a workmen's compensation act to the survivor or
survivors of a deceased employee. However, section 104(a)(1) does not
apply to a retirement pension or annuity to the extent that it is
determined by reference to the employee's age or length of service, or
the employee's prior contributions, even though the employee's
retirement is occasioned by an occupational injury or sickness. Section
104(a)(1) also does not apply to amounts which are received as
compensation for a nonoccupational injury or sickness nor to amounts
received as compensation for an occupational injury or sickness to the
extent that they are in excess of the amount provided in the applicable
workmen's compensation act or acts. See, however, Secs. 1.105-1 through
1.105-5 for rules relating to exclusion of such amounts from gross
income.
(c) Damages received on account of personal injuries or sickness.
Section 104(a)(2) excludes from gross income the amount of any damages
received (whether by suit or agreement) on account of personal injuries
or sickness. The term ``damages received (whether by suit or
agreement)'' means an amount received (other than workmen's
compensation) through prosecution of a legal suit or action based upon
tort or tort type rights, or through a settlement agreement entered into
in lieu of such prosecution.
(d) Accident or health insurance. Section 104(a)(3) excludes from
gross income amounts received through accident or health insurance for
personal injuries or sickness (other than amounts received by an
employee, to the extent that such amounts (1) are attributable to
contributions of the employer which were not includible in the gross
income of the employee, or (2) are paid by the employer). Similar
treatment is also accorded to amounts received under accident or health
plans and amounts received from sickness or disability funds. See
section 105(e) and Sec. 1.105-5. If, therefore, an individual purchases
a policy accident or health insurance out of his own funds, amounts
received thereunder for personal injuries or sickness are excludable
from his gross income under section 104(a)(3). See, however, section 213
and the regulations thereunder as to the inclusion in gross income of
amounts attributable to deductions allowed under section 213 for any
prior taxable year. Section 104(a)(3) also applies to amounts received
by an employee for personal injuries or sickness from a fund which is
maintained exclusively by employee contributions. Conversely, if an
employer is either the sole contributor to such a fund, or is the sole
purchaser of a policy of accident or health insurance for his employees
(on either a group or individual basis), the exclusion provided under
section 104(a)(3) does not apply to any amounts received by his
employees through such fund or insurance. If the employer and his
employees contribute to a fund or purchase insurance which pays accident
or health benefits to employees, section 104(a)(3) does not apply to
amounts received thereunder by employees to the extent that such amounts
are attributable to the employer's contributions. See Sec. 1.105-1 for
rules relating to the determination of the amount attributable to
employer contributions. Although amounts paid by or on behalf of an
employer to an employee for personal injuries or sickness are not
excludable from the employee's gross income under section 104(a)(3),
they may be excludable therefrom under section 105. See Secs. 1.105-1
through 1.105-5, inclusive. For treatment of accident or health benefits
paid to or on behalf of a self- employed
[[Page 424]]
individual by a trust described in section 401(a) which is exempt under
section 501(a) or under a plan described in section 403(a), see
paragraph (g) of Sec. 1.72-15.
(e) Amounts received as pensions, etc., for certain personal
injuries or sickness. (1) Section 104(a)(4) excludes from gross income
amounts which are received as a pension, annuity, or similar allowance
for personal injuries or sickness resulting from active service in the
armed forces of any country, or in the Coast and Geodetic Survey, or the
Public Health Service. For purposes of this section, that part of the
retired pay of a member of an armed force, computed under formula No. 1
or 2 of 10 U.S.C. 1401, or under 10 U.S.C. 1402(d), on the basis of
years of service, which exceeds the retired pay that he would receive if
it were computed on the basis of percentage of disability is not
considered as a pension, annuity, or similar allowance for personal
injury or sickness, resulting from active service in the armed forces of
any country, or in the Coast and Geodetic Survey, or the Public Health
Service (see 10 U.S.C. 1403 (formerly 37 U.S.C. 272(h), section 402(h)
of the Career Compensation Act of 1949)). See paragraph (a)(3)(i)(a) of
Sec. 1.105-4 for the treatment of retired pay in excess of the part
computed on the basis of percentage of disability as amounts received
through a wage continuation plan. For the rules relating to certain
reduced uniformed services retirement pay, see paragraph (c)(2) of
Sec. 1.122-1. For rules relating to a waiver by a member or former
member of the uniformed services of a portion of disability retired pay
in favor of a pension or compensation receivable under the laws
administered by the Veterans Administration (38 U.S.C. 3105), see
Sec. 1.122-1(c)(3). For rules relating to a reduction of the disability
retired pay of a member or former member of the uniformed services under
the Dual Compensation Act of 1964 (5 U.S.C. 5531) by reason of Federal
employment, see Sec. 1.122-1(c)(4).
(2) Section 104(a)(4) excludes from gross income amounts which are
received by a participant in the Foreign Service Retirement and
Disability System in a taxable year of such participant ending after
September 8, 1960, as a disability annuity payable under the provisions
of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C.
1081; 60 Stat. 1021). However, if any amount is received by a survivor
of a disabled or incapacitated participant, such amount is not excluded
from gross income by reason of the provisions of section 104(a)(4).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR
5070, Apr. 14, 1964; T.D. 7043, 35 FR 8477, June 2, 1970]
Sec. 1.105-1 Amounts attributable to employer contributions.
(a) In general. Under section 105(a), amounts received by an
employee through accident or health insurance for personal injuries or
sickness must be included in his gross income to the extent that such
amounts (1) are attributable to contributions of the employer which were
not includible in the gross income of the employee, or (2) are paid by
the employer, unless such amounts are excluded therefrom under section
105(b), (c), or (d). For purposes of this section, the term ``amounts
received by an employee through an accident or health plan'' refers to
any amounts received through accident or health insurance, and also to
any amounts which, under section 105(e), are treated as being so
received. See Sec. 1.105-5. In determining the extent to which amounts
received for personal injuries or sickness by an employee through an
accident or health plan are subject to the provisions of section 105(a),
rather than section 104(a)(3), the provisions of paragraphs (b), (c),
(d), and (e) of this section shall apply. A self-employed individual is
not an employee for purposes of section 105 and Secs. 1.105-1 through
1.105-5. See paragraph (g) of Sec. 1.72-15. Thus, such an individual
will not be treated as an employee with respect to benefits described in
section 105 received from a plan in which he participates as an employee
within the meaning of section 401(c)(1) at the time he, his spouse, or
any of his dependents becomes entitled to receive such benefits.
(b) Noncontributory plans. All amounts received by employees through
an accident or health plan which is financed solely by their employer,
either by payment of premiums
[[Page 425]]
on an accident or health insurance policy (whether on a group or
individual basis), by contributions to a fund which pays accident or
health benefits, or by direct payment of the benefits under the plan,
are subject to the provisions of section 105(a), except to the extent
that they are excludable under section 105(b), (c), or (d). This rule
may be illustrated by the following examples:
Example (1). Employer A maintains a plan for his employees which
provides that he will continue to pay regular wages to employees who are
absent from work due to sickness or personal injuries. Employees make no
contributions to the plan and all benefits are paid by the employer.
Amounts received by employees under the plan are subject to section
105(a), and must be included in gross income unless excluded therefrom
under section 105(b), (c), or (d).
Example (2). Pursuant to a State nonoccupational disability benefits
law, employer B maintains an accident and health plan for his employees.
Although under the State law B is authorized to withhold from his
employees' wages a specified amount for employee contributions to the
State fund, in actual practice B does not so withhold and makes all
contributions out of his own funds. All amounts received by B's
employees from the State fund are subject to section 105(a), and must be
included in gross income unless excluded therefrom under section 105
(b), (c), or (d).
(c) Contributory plans. (1) In the case of amounts received by an
employee through an accident or health plan which is financed partially
by his employer and partially by contributions of the employee, section
105(a) applies to the extent that such amounts are attributable to
contributions of the employer which were not includible in the
employee's gross income. The portion of such amounts which is
attributable to such contributions of the employer shall be determined
in accordance with paragraph (d) of this section in the case of an
insured plan, or paragraph (e) of this section in the case of a
noninsured plan. As used in this section, the phrase ``contributions of
the employer'' means employer contributions which were not includible in
the gross income of the employee. See section 106 for the exclusion from
an employee's gross income of employer contributions to accident or
health plans.
(2) A separate determination of the portion of the amounts received
under the accident or health plan which is attributable to the
contributions of the employer shall be made with respect to each class
of employees in any case where the plan provides that some classes of
covered employees contribute but others do not, or that the employer
will make different contributions for different classes of employees, or
that different classes of employees will make different contributions,
and where in any such case both the contributions of the employer on
account of each such class of employees and the contributions of such
class of employees can be ascertained. For example, if employees
contribute during the first year of employment but not thereafter, there
will have to be a separate determination for first year employees,
provided that the amount of the contributions of the employer on account
of first-year employees and the contributions of such first-year
employees can be ascertained for the required periods to apply the rules
of paragraph (d) or (e) of this section. If in such a case the
contributions of the employer to the plan on account of first-year
employees are not distinguishable from his other contributions to the
plan, then the determination shall be made for all employees under the
plan, and such determination shall be used by all employees under the
plan.
(3) Except as provided in paragraph (c)(2) of Sec. 1.72-15, if the
plan provides accident or health benefits as well as other benefits for
the employees, and if the respective contributions made by the employer
and the employees to provide the accident or health benefits cannot be
ascertained, the determination of the portion of the accident or health
benefits received under such plan which is attributable to the
contributions of the employer shall be made in accordance with the rules
of paragraph (d) or (e) of this section on the basis of the
contributions of the employer and of the employees to the entire plan.
(4) A determination of the portion attributable to the contributions
of the employer, once made in accordance with the rules of this section,
shall as
[[Page 426]]
to such portion be used for all purposes. For example, if an employee
receives amounts under a wage continuation plan during the month of
January and terminates his services during February, the portion of such
amounts which is attributable to the contributions of the employer may
be determined in order to provide the employee with such information at
the time he is provided his Form W-2. The determination made for such
purpose will also be used by the employee to report his income for his
taxable year in which such amounts are received, without regard to the
experience under the plan for the rest of the year.
(d) Insured plans--(1) Individual policies. If an amount is received
from an insurance company by an employee under an individual policy of
accident or health insurance purchased by contributions of the employer
and the employee, the portion of the amount received which is
attributable to the employer's contributions shall be an amount which
bears the same ratio to the amount received as the portion of the
premiums paid by the employer for the current policy year bears to the
total premiums paid by the employer and the employee for that year. This
rule may be illustrated by the following example:
Example. Employer A maintains a plan whereby he pays two-thirds of
the annual premium cost on individual policies of accident and health
insurance for his employees. The remainder of each employee's premium is
paid by a payroll deduction from the wages of the employee. The annual
premium for employee X is $24, of which $16 is paid by the employer.
Thus, 16/24 or two-thirds of all amounts received by X under such
insurance policy are attributable to the contributions of the employer
and are subject to section 105(a), and the remaining one-third of such
amounts is excludable from X's gross income under section 104(a)(3).
(2) Group policies. If the accident or health coverage is provided
under or is a part of a group insurance policy purchased by
contributions of the employer and of the employees, and the net premiums
for such coverage for a period of at least three policy years are known
at the beginning of the calendar year, the portion of any amount
received by an employee which is attributable to the contributions of
the employer for such coverage shall be an amount which bears the same
ratio to the amount received as the portion of the net premiums
contributed by the employer for the last three policy years which are
known at the beginning of the calendar year, bears to the total of the
net premiums contributed by the employer and all employees for such
policy years. If the net premiums for such coverage for a period of at
least three policy years are not known at the beginning of the calendar
year but are known for at least one policy year, such determination
shall be made by using the net premiums for such coverage which are
known at the beginning of the calendar year. If the net premiums for
such coverage are not known at the beginning of the calendar year for
even one policy year, such determination shall be made by using either
(i) a reasonable estimate of the net premiums for the first policy year,
or (ii) if the net premiums for a policy year are ascertained during the
calendar year, by using such net premiums. These rules may be
illustrated by the following example:
Example. An employer maintains a plan under which a portion of the
cost of a group policy of accident and health insurance for his
employees is paid through payroll deductions from wages of the
employees. The remainder of the cost is borne by the employer. The
policy year begins on November 1 and ends on October 31. The net premium
for the policy year ended October 31, 1954, is not known on January 1,
1955, because certain retroactive premium adjustments, such as dividends
and credits, are not determinable until after January 1. Therefore, for
purposes of this computation the last three policy years are the policy
years ended October 31, 1951, 1952, and 1953. The net premium for the
policy year ended October 31, 1953, was $8,000, of which the employer
contributed $3,000; the net premium for the policy year ended October
31, 1952, was $9,000, of which the employer contributed $3,500; and the
net premium for the policy year ended October 31, 1951, was $7,000, of
which the employer contributed $1,500. The portion of any amount
received under the policy by an employee at any time during 1955 which
is attributable to the contributions of the employer is to be determined
by using the ratio of $8,000 ($3,000 plus $3,500 plus $1,500) to $24,000
($8,000 plus $9,000 plus $7,000. Thus, $8,000 / $24,000 or one-third, of
the amounts received by an employee at any time during
[[Page 427]]
1955 is attributable to contributions of the employer.
(e) Noninsured plans. If the accident or health benefits are a part
of a noninsured plan to which the employer and the employees contribute,
and such plan has been in effect for at least three years before the
beginning of the calendar year, the portion of the amount received which
is attributable to the employer's contributions shall be an amount which
bears the same ratio to the amount received as the contributions of the
employer for the period of three calendar years next preceding the year
of receipt bear to the total contributions of the employer and all the
employees for such period. If, at the beginning of the calendar year of
receipt, such plan has not been in effect for three years but has been
in effect for at least one year, such determination shall be based upon
the contributions made during the 1-year or 2-year period during which
the plan has been in effect. If such plan has not been in effect for one
full year at the beginning of the calendar year of receipt, such
determination may be based upon the portion of the year of receipt
preceding the time when the determination is made, or such determination
may be made periodically (such as monthly or quarterly) and used
throughout the succeeding period. For example, if an employee terminates
his services on April 15, 1955, and 1955 is the first year the plan has
been in effect, such determination may be based upon the contributions
of the employer and the employees during the period beginning with
January 1 and ending with April 15, or during the month of March, or
during the quarter consisting of January, February, and March.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR
5071, Apr. 14, 1964]
Sec. 1.105-2 Amounts expended for medical care.
Section 105(b) provides an exclusion from gross income with respect
to the amounts referred to in section 105(a) (see Sec. 1.105-1) which
are paid, directly or indirectly, to the taxpayer to reimburse him for
expenses incurred for the medical care (as defined in section 213(e)) of
the taxpayer, his spouse, and his dependents (as defined in section
152). However, the exclusion does not apply to amounts which are
attributable to (and not in excess of) deductions allowed under section
213 (relating to medical, etc., expenses) for any prior taxable year.
See section 213 and the regulations thereunder. Section 105(b) applies
only to amounts which are paid specifically to reimburse the taxpayer
for expenses incurred by him for the prescribed medical care. Thus,
section 105(b) does not apply to amounts which the taxpayer would be
entitled to receive irrespective of whether or not he incurs expenses
for medical care. For example, if under a wage continuation plan the
taxpayer is entitled to regular wages during a period of absence from
work due to sickness or injury, amounts received under such plan are not
excludable from his gross income under section 105(b) even though the
taxpayer may have incurred medical expenses during the period of
illness. Such amounts may, however, be excludable from his gross income
under section 105(d). See Sec. 1.105-4. If the amounts are paid to the
taxpayer solely to reimburse him for expenses which he incurred for the
prescribed medical care, section 105(b) is applicable even though such
amounts are paid without proof of the amount of the actual expenses
incurred by the taxpayer, but section 105(b) is not applicable to the
extent that such amounts exceed the amount of the actual expenses for
such medical care. If the taxpayer incurs an obligation for medical
care, payment to the obligee in discharge of such obligation shall
constitute indirect payment to the taxpayer as reimbursement for medical
care. Similarly, payment to or on behalf of the taxpayer's spouse or
dependents shall constitute indirect payment to the taxpayer.
Sec. 1.105-3 Payments unrelated to absence from work.
Section 105(c) provides an exclusion from gross income with respect
to the amounts referred to in section 105(a) to the extent that such
amounts (a) constitute payments for the permanent
[[Page 428]]
loss or permanent loss of use of a member or function of the body, or
the permanent disfigurement, of the taxpayer, his spouse, or a dependent
(as defined in section 152), and (b) are computed with reference to the
nature of the injury without regard to the period the employee is absent
from work. Loss of use or disfigurement shall be considered permanent
when it may reasonably be expected to continue for the life of the
individual. For purposes of section 105(c), loss or loss of use of a
member or function of the body includes the loss or loss of use of an
appendage of the body, the loss of an eye, the loss of substantially all
of the vision of an eye, and the loss of substantially all of the
hearing in one or both ears. The term ``disfigurement'' shall be given a
reasonable interpretation in the light of all the particular facts and
circumstances. Section 105(c) does not apply if the amount of the
benefits is determined by reference to the period the employee is absent
from work. For example, if an employee is absent from work as a result
of the loss of an arm, and under the accident and health plan
established by his employer, he is to receive $125 a week so long as he
is absent from work for a period not in excess of 52 weeks, section
105(c) is not applicable to such payments. See, however, section 105(d)
and Sec. 1.105-4. However, for purposes of section 105(c), it is
immaterial whether an amount is paid in a lump sum or in installments.
Section 105(c) does not apply to amounts which are treated as workmen's
compensation under paragraph (b) of Sec. 1.104-1, or to amounts paid by
reason of the death of the employee (see section 101).
Sec. 1.105-4 Wage continuation plans.
(a) In general. (1) Subject to the limitations provided in this
section, section 105(d) provides an exclusion from gross income with
respect to amounts referred to in section 105(a) which are paid to an
employee through a wage continuation plan and which constitute wages or
payments in lieu of wages for a period during which the employee is
absent from work on account of personal injuries or sickness.
(2)(i) Section 105(d) is applicable only if the wages or payments in
lieu of wages are paid pursuant to a wage continuation plan. (See
Sec. 1.105-6 for special rules for employees retired before January 27,
1975). The term ``wage continuation plan'' means an accident or health
plan, as defined in Sec. 1.105-5, under which wages, or payments in lieu
of wages, are paid to an employee for a period during which he is absent
from work on account of a personal injury or sickness. Such term
includes plans under which payments are continued as long as the
employee is absent from work on account of personal injury or sickness.
It includes plans under which there is a limitation on the period for
which benefits will be paid, such as 13 or 26 weeks, and also plans
under which benefits are continued until the employee is either able to
return to work or reaches mandatory retirement age. Such term also
includes a plan under which wages or payments in lieu of wages are paid
to an employee who is absent from work on account of personal injury or
sickness, even though the plan also provides that wages or payments in
lieu of wages may be paid to an employee who is absent from work for
reasons other than a personal injury or sickness.
(ii) Section 105(d) is applicable if, and only if, the employee is
absent from work and such absence is due to a personal injury or
sickness. Thus, if an employer has a plan for continuing the wages of
employees when they are absent from work, regardless of the cause of the
absence from work, section 105(d) is applicable to any payments made
under this plan to an employee whose absence from work is in fact due to
a personal injury or sickness. On the other hand, although the terms of
a plan provide that benefits are to be continued only as long as the
employee is absent from work on account of a personal injury or
sickness, section 105(d) does not apply to payments made to an employee
for a period of absence from work where such absence is not in fact due
to a personal injury or sickness.
(3)(i)(A) Section 105(d) applies only to amounts attributable to
periods during which the employee would be at work were it not for a
personal injury or sickness. Thus, an employee is not absent from work
if he is not expected to
[[Page 429]]
work because, for example, he has reached mandatory retirement age. If a
plan provides that an employee, who is absent from work on account of a
personal injury or sickness, will receive a disability pension or
annuity as long as he is disabled, section 105(d) is applicable to any
payments that he receives under this plan before reaching mandatory
retirement age, as defined in paragraph (a)(3)(i)(B) of this section.
Thus, section 105(d) would not apply to the payments that an employee
receives after reaching mandatory retirement age. The disability retired
pay received by a member on the retired list pursuant to section 402 of
the Career Compensation Act of 1949 (63 Stat. 802) or chapter 61 of
title 10, United States Code (10 U.S.C. 1201 et seq.) which is in excess
of the amounts excludable under section 104(a)(4) and paragraph (e) of
Sec. 1.104-1 shall be excluded from gross income subject to the
limitations of section 105(d) and this section, if such pay is received
before the member reaches mandatory retirement age. See Sec. 1.72-15 for
additional rules relating to the tax treatment of disability pensions.
For the rules relating to certain reduced uniformed services retirement
pay, see paragraph (c)(2) of Sec. 1.122-1. For rules relating to a
waiver by a member or former member of the uniformed services of a
portion of disability retired pay in favor of a pension or compensation
receivable under the laws administered by the Veterans Administration
(38 U.S.C. 3105), see Sec. 1.122-1(c)(3).
(B) The term ``mandatory retirement age'' as used in paragraph
(a)(3)(i)(A) of this section means the age set by an employer for the
mandatory retirement of employees in the class to which the taxpayer
last belonged, unless such age has been set at an age higher than that
at which it has been the practice of the employer to terminate, due to
age, the services of such employees, or for purposes of tax avoidance.
Where no age is set for mandatory retirement, such term means age 65,
or, if higher, the age at which it has been the practice of the employer
to terminate, due to age, the services of the class of employees to
which the taxpayer last belonged.
(ii) Similarly, an employee who incurs a personal injury or sickness
during his paid vacation is not allowed to exclude under section 105(d)
any of the vacation pay which he receives, since he is not absent from
work on account of the personal injury or sickness. Likewise, a teacher
who becomes sick during the summer or other vacation period when he is
not expected to teach, is not entitled to any exclusion under section
105(d) for the summer or vacation period. However, if an employee who
would otherwise be at work during a particular period is absent from
work and his absence is in fact due to a personal injury or sickness, a
payment which he receives for such period under a wage continuation plan
is subject to section 105(d).
(4) A period of absence from work shall commence the moment the
employee first becomes absent from work and shall end the moment the
employee first returns to work. However, the exclusion provided under
section 105(d) is applicable only to payments attributable to a period
of absence from work which is due to a personal injury or sickness, and
to payments attributable to a period when the employee would have been
at work but for such personal injury or sickness.
(5) For the purpose of section 105(d), whether an employee is absent
from work depends upon all the circumstances. For example, an employee,
who is a farm hand and who lives upon the premises of his employer, is
absent from work when he is unable to work even though he remains on the
premises of his employer. A member of the Armed Forces, who on a
particular day has no assigned duties but to stand ready for duty, is
absent from work if he is unable to answer any duty call that may be
made upon him. An employee is not absent from work when he performs any
services for his employer at his usual place or places of employment,
whether or not the services are the usual services performed by the
employee. Furthermore, the employee is not absent from work when he
performs substantial services for his employer, even though they are
performed at a place other than his usual place of employment. Thus, if
an employee returns to his usual place or places of employment and
performs any services for his employer, he has
[[Page 430]]
returned to work, but if he merely holds occasional short conferences
concerning his work with other employees or clients while hospitalized
or at home recuperating, such conferences do not constitute a return to
work.
(b) Determination of amount attributable to period of absence. The
amount which is paid to an employee as wages or payments in lieu of
wages for a period of absence from work due to a personal injury or
sickness shall be determined by reference to the plan under which the
amount is paid, and to the contract, statute, or regulation which
provides the terms of the employment. However, unless the plan,
contract, statute, or regulation provides otherwise, it will be presumed
that no wages or plan benefits are attributable to days (or portions of
days) which are not normal working days for the particular employee.
Also, section 105(d) does not apply to amounts earned prior to or
subsequent to the period of absence from work, even though received
during such period. These rules may be illustrated by the following
examples:
Example (1). Employee A, who receives regular wages of $70 per week,
normally works five days (Monday through Friday) during each week. A is
absent from work on a Friday and the succeeding Monday (two working
days) on account of a personal injury, but receives his regular wages
with respect to such period of absence under his employer's accident and
health plan. Unless the plan of A's employer, or the contract, statute,
or regulation under which A is employed, provides otherwise, it will be
presumed that A is not paid with respect to nonworking days (Saturday
and Sunday). Therefore, the amount received by A with respect to his
period of absence from work due to injury is $28, which is two days
regular wages. If the plan, or the employment contract, statute, or
regulation had provided that wages were paid on a 7-day per week basis
and that A must be available for call to work on Saturday and Sunday,
A's daily wage would have been $10, and the amount attributable to the
period of absence would have been $40 ($10 per day for four days).
Example (2). Employee B is a salesman who is paid on a commission
basis. The employer purchases for B an accident and health insurance
policy which provides that B shall receive $50 per week during any
period (after a 7-day waiting period) that he is unable to work due to
personal injuries or sickness. B incurs a personal injury and is
incapacitated for two weeks. He receives $50 under the insurance policy
with respect to the second week of absence. In addition, during the 2-
week period of absence he receives a check for $40 from his employer as
his commission on a sale which he made before becoming incapacitated.
Section 105(d) applies to the $50 received through the insurance policy,
but does not apply to the $40 commission which B earned prior to the
period of absence from work.
(c) Limitation in the case of absence from work due to sickness for
periods commencing prior to January 1, 1964. (1) In the case of a period
of absence from work on account of sickness commencing prior to January
1, 1964, the exclusion provided by section 105(d) does not apply to
amounts attributable to the first seven calendar days of each such
period, unless the employee is hospitalized on account of sickness for
at least one day during the period of absence from work. This 7-day rule
applies to each period of absence from work because of sickness,
regardless of the frequency of such absences or the closeness in time to
any prior period of absence from work because of sickness. For example,
employee A becomes absent from work because of sickness on Friday,
October 4, 1963, and returns to work on the morning of Monday, October
14, 1963. He suffers a relapse and again becomes absent from work on the
afternoon of Monday, October 14, 1963. A's return to work on the morning
of Monday, October 14, 1963, terminates the first period of absence from
work because of sickness, and a new period of absence from work because
of sickness begins on the afternoon of Monday, October 14, 1963. The 7-
day limitation does not apply if the absence from work is due to
personal injury. These rules may be illustrated by the following
examples:
Example (1). Employee C normally works five days (Monday through
Friday) during each week. On Saturday, October 5, 1963 (a nonworking
day), C becomes sick and as a result, he does not return to work until
Thursday, October 17, 1963. The period of absence from work due to
sickness commences on Monday, October 7, 1963, and terminates when C
returns to work on Thursday, October 17, 1963. If C is not hospitalized
during such period of absence from work, section 105(d) does not apply
to amounts which C receives under his employer's wage continuation plan
attributable to the 7-day period commencing Monday, October 7, 1963, and
ending Sunday, October 13, 1963, inclusive.
[[Page 431]]
Example (2). Employee D incurs a personal injury which causes him to
be absent from work two days. His regular wages are continued during
this period in accordance with the wage continuation plan of his
employer. Since D's absence from work was due to a personal injury,
rather than a sickness, the 7-day waiting period does not apply, and,
subject to the other requirements of section 105(d), D is entitled to an
exclusion with respect to the amounts received under the employer's plan
attributable to the 2-day period of absence.
(2) For the purpose of starting the 7-day waiting period, if the
period of absence due to sickness commences after the start of a working
day, the amount received with respect to the portion of such day that
the employee is absent from work shall be considered the amount
attributable to the first calendar day of the period of absence from
work due to sickness. This rule may be illustrated by the following
example:
Example. Employee E normally works from 9 a.m. until 5:30 p.m. on
five days (Monday through Friday) during each week. From noon on Friday,
September 6, 1963, until noon on Monday, September 16, 1963, E is absent
from work on account of sickness but is not hospitalized at any time
during this period. Section 105(d) does not apply to amounts received by
E under his employer's wage continuation plan which are attributable to
the calendar period beginning September 6, 1963, and ending September
12, 1963, inclusive. However, if the other requirements of section
105(d) are met, E may exclude from gross income amounts attributable to
the period beginning September 13, 1963, and ending at noon on September
16, 1963, inclusive.
(3) If the absence from work is due to sickness, the amount
attributable to the first seven calendar days of such absence includes
all amounts paid for such seven calendar days, regardless of the number
of work days included in such seven calendar days. For example, if one
of such seven calendar days an employee would have worked two 8-hour
shifts, the amount he is paid for the two shifts is considered to be an
amount attributable to only one calendar day.
(4) An employee is considered to be hospitalized for one day only if
he is admitted to and confined in a hospital as a bed patient for at
least one hospital day. Entry into a hospital as an in-and-out patient
does not constitute hospitalization for purposes of section 105(d). The
same applies to mere entry into the outpatient ward or the emergency
ward of a hospital.
(d) Exclusion not applicable to the extent that amounts exceed a
weekly rate of $100 for periods of absence commencing prior to January
1, 1964--(1) In general. Amounts received under a wage continuation
plan, attributable to periods of absence commencing before January 1,
1964, which are not excludable from gross income as being attributable
to contributions of the employee (see Sec. 1.105-1) must be included in
gross income under section 105(d) to the extent that the weekly rate of
such amounts exceeds $100. Thus, an employee, who receives $50 under his
employer's wage continuation plan on account of his being absent from
work for two days due to a personal injury, cannot exclude the entire
$50 under section 105(d) if the weekly rate of such benefits exceeds
$100. If an employee receives payments under a wage continuation plan
for less than a full pay period, the excludability of such payments
shall be determined under subparagraph (2) of this paragraph. In all
other cases, the weekly rate and excludability of such payments under a
wage continuation plan shall be determined under subparagraph (3) of
this paragraph. If, with respect to any pay period or portion thereof,
the employee receives amounts under two or more wage continuation plans
(whether such plans are maintained by or for the same employer or by
different employers), the weekly rate and excludability of amounts
received under each plan shall be determined under subparagraph (3) of
this paragraph and the weekly rate for purposes of section 105(d) shall
be the sum of all such weekly rates. This rule may be illustrated by the
following examples:
Example (1). An employee whose weekly salary is $120 is covered by
two wage continuation plans maintained by his employer. Plan A is a
contributory insured plan to which the employee contributes 60 percent
of the premiums and which provides a weekly payment of $30. Plan B is a
salary continuation plan completely financed by the employer. Since 60
percent of the cost of plan A is contributed by the employee, 60 percent
of the weekly payment of $30 ($18) is excluded from gross income under
section 104(a)(3). The remainder of each weekly payment ($12)
[[Page 432]]
is the weekly rate of plan A. Since the employer pays the entire cost of
plan B, the weekly rate of this plan is the total amount paid per week.
In the case of an employee whose weekly wages of $120 are continued
under plan B, the weekly rate for the employee for purposes of section
105(d) is $132 ($120 from plan B, plus $12 from plan A).
Example (2). Assume in Example (1) that plan A provides a waiting
period of four calendar days while plan B is effective immediately. For
the first four days of absence the weekly rate for purposes of section
105(d) is $120, and for periods after the first four days the weekly
rate for purposes of section 105(d) is $132.
(2) Daily exclusion. If an employee receives payments under a wage
continuation plan for less than a full pay period, the extent to which
such benefits are excludable under section 105(d) shall be determined by
computing the daily rate of the benefits which can be excluded under
section 105(d). Such daily rate is determined by dividing the weekly
rate at which wage continuation payments are excludable ($100) by the
number of work days in a normal work week. This rule may be illustrated
by the following example:
Example. Employee E is covered by a wage continuation plan
maintained by his employer providing that E's regular salary of $220
semimonthly will be continued in case he is absent from work on account
of a personal injury or sickness. E is absent from work on account of a
personal injury for three days and under the plan he received $66 as
wage continuation payments. The extent to which the $66 is excludable
under section 105(d) shall be determined by dividing $100 by 5, the
number of work days in a normal work week for E, resulting in a daily
exclusion of $20 and a total exclusion of $60.
(3) Determination of weekly rate at which amounts are paid under a
wage continuation plan. (i) For purposes of this subparagraph the pay
period of a particular wage continuation plan shall be determined by
reference to such plan. If, in the usual operation of the plan, benefits
are paid for the same periods as regular wages, then the pay period of
such benefits shall be the period for which a payment of wages is
ordinarily made to the employee by the employer. If plan benefits are
ordinarily paid for different periods than regular wages then the pay
period of such benefits shall be the period for which payment of such
benefits is ordinarily made.
(ii) The weekly rate shall be determined in accordance with the
following rules:
(a) Weekly pay period. If benefits are paid on the basis of a weekly
pay period, the weekly rate at which such benefits are paid shall be the
weekly amount of such benefits.
(b) Biweekly pay period. If benefits are paid on the basis of a
biweekly pay period, the weekly rate at which such benefits are paid
shall be one-half of the biweekly rate.
(c) Semimonthly pay period. If benefits are paid on the basis of a
semimonthly pay period, the weekly rate at which such benefits are paid
shall be the semimonthly rate multiplied by 24 and divided by 52.
(d) Monthly pay period. If benefits are paid on the basis of a
monthly pay period, the weekly rate at which such benefits are paid
shall be the monthly rate multiplied by 12 and divided by 52.
(e) Other pay periods. If benefits are paid on the basis of a period
other than a period described in (a) through (d), of this subdivision
the weekly rate at which such benefits are paid shall be determined by
ascertaining the annual rate at which such benefits are paid and
dividing such annual rate by 52.
(f) Examples. The operation of the rules of this subdivision may be
illustrated by the following examples:
Example (1). A's employer maintains a noncontributory plan which
provides for the continuation of regular salary during periods of
absence from work due to personal injury or sickness. A, an office
employee, receives regular salary of $520 per month, and he is paid on
the basis of a monthly pay period. Since benefits under the salary
continuation plan are paid for the same periods as regular salary, the
pay period of the plan is monthly. For purposes of section 105(d), the
weekly rate at which benefits are paid to A under the plan is $120,
determined as follows:
$520 (monthly rate)x12................. $6,240 (annual rate).
$6,240/52.............................. $120 (weekly rate).
Example (2). B, a factory employee of the same employer, is paid
regular wages on the basis of a 10-day pay period. B's regular wages are
$200 per pay period. If B is absent from work for 15 days, the weekly
rate of the amount he receives under his employer's plan will be
determined as follows:
365x$200/10............................ $7,300 (annual rate).
$7,300/52.............................. $140.38 (weekly rate).
[[Page 433]]
(iii) If the weekly rate for purposes of section 105(d) (as
determined in subdivision (ii) of this subparagraph) does not exceed
$100, the amount received which is not attributable to the 7-day waiting
period described in paragraph (c) of this section is fully excludable
from gross income. If the weekly rate for purposes of section 105(d) (as
determined in subdivision (ii) of this subparagraph) exceeds $100, the
amount received which is not attributable to the 7-day waiting period
provided in paragraph (c) of this section is only partially excludable.
The excludable portion of such amount shall bear the same ratio to such
amount as $100 bears to the weekly rate for purposes of section 105(d).
This rule may be illustrated by the following example:
Example. The weekly rate of benefits in the case of employee A in
example (1) of subdivision (ii) of this subparagraph was $120. If A does
not receive amounts under any other plan, this is the weekly rate for
purposes of section 105(d). Assume that A is absent from work on account
of a personal injury for one full month and receives full pay of $520
for such period of absence. Since there is no waiting period
requirement, the exclusion is $433.33 computed as follows:
$100/$120x$520 or $433.33.
(e) Limitation in the case of absence from work on account of
personal injury or sickness for periods commencing after December 31,
1963. (1) In the case of periods of absence from work on account of
sickness or personal injury commencing after December 31, 1963, the
exclusion provided by section 105(d) does not apply to amounts
attributable to the first 30 calendar days of each such period, if such
amounts are at a rate which exceeds 75 percent of the employee's
``regular weekly rate of wages'', as determined under subparagraph (5)
of this paragraph. If the amounts are at a rate of 75 percent or less of
the employee's ``regular weekly rate of wages'', the exclusion provided
by section 105(d) does not apply to amounts attributable to the first 7
calendar days of each such period, unless the employee is hospitalized
on account of personal injury or sickness for at least one day during
the period of absence from work. The 7- or 30-day waiting period
(whichever is applicable) applies to each period of absence from work
because of personal injury or sickness, regardless of the frequency of
such absences or the closeness in time to any prior period of absence
from work because of personal injury or sickness. The waiting period is
to be counted by beginning with the first work day for which the
employee was absent. These rules may be illustrated by the following
examples:
Example (1). Employee A is absent from work because of sickness on
Tuesday, January 7, 1964, and returns to work on the morning of
Thursday, February 13, 1964. He suffers a relapse and again becomes
absent from work on the afternoon of Thursday, February 13, 1964. A's
return to work on the morning of Thursday, February 13, 1964, terminates
the first period of absence from work because of sickness, and a new
period of absence from work because of sickness begins on the afternoon
of Thursday, February 13, 1964.
Example (2). Employee B normally works five days (Monday through
Friday) during each week. On Saturday, January 11, 1964 (a nonworking
day), B becomes sick or injured and as a result he does not return to
work until Monday, February 17, 1964. The period of absence from work
commences on Monday, January 13, 1964, and terminates when B returns to
work on Monday, February 17, 1964. Assuming B receives amounts under his
employer's wage continuation plan at a rate exceeding 75 percent of his
``regular weekly rate of wages'' (as determined under subparagraph (5)
of this paragraph), the exclusion provided by section 105(d) does not
apply to amounts B receives under his employer's wage continuation plan
which are attributable to the 30-day period commencing Monday, January
13, 1964, and ending Tuesday, February 11, 1964, inclusive. If B
receives amounts under his employer's wage continuation plan at a rate
which is 75 percent or less of his ``regular weekly rate of wages'' and
he is not hospitalized during the period of absence from work, the
exclusion provided by section 105(d) does not apply to amounts B
receives which are attributable to the 7-day period commencing Monday,
January 13, 1964, and ending Sunday, January 19, 1964, inclusive.
Example (3). Employee C is sick or incurs a personal injury which
causes him to be absent from work for two weeks. He receives amounts
under his employer's wage continuation plan at a rate which is 75
percent or less of his ``regular weekly rate of wages'' (as determined
under subparagraph (5) of this paragraph) and is hospitalized from the
eighth through the eleventh day of his absence. Since C was hospitalized
on account of personal injury or sickness for at least one day during
the period of absence, the 7-day
[[Page 434]]
waiting period does not apply, and, subject to the other requirements of
section 105(d), C is entitled to an exclusion with respect to the
amounts received under his employer's plan attributable to the two- week
period of absence. If C were receiving amounts under his employer's wage
continuation plan at a rate exceeding 75 percent of his ``regular weekly
rate of wages'', he would not be entitled to an exclusion under section
105(d).
(2) For the purpose of starting the 7- or 30-day waiting period,
whichever is applicable, if the period of absence commences after the
start of a working day, the amount received with respect to the portion
of such day that the employee is absent from work shall be considered an
amount attributable to the first calendar day of the period of absence
from work. This rule may be illustrated by the following example:
Example. Employee D normally works from 9 a.m. until 5:30 p.m. on
five days (Monday through Friday) during each week. From noon on
Wednesday, January 8, 1964, until noon on Monday, February 17, 1964, D
is absent from work on account of personal injury or sickness but is not
hospitalized at any time during this period. D receives amounts under
his employer's wage continuation plan at a rate not exceeding 75 percent
of his ``regular weekly rate of wages'' (as determined under
subparagraph (5) of this paragraph). Section 105(d) does not apply to
amounts received by D under his employer's wage continuation plan which
are attributable to the calendar period beginning January 8, 1964, and
continuing through January 14, 1964, inclusive. However, if the other
requirements of section 105(d) are met, D may exclude from gross income
amounts attributable to the remainder of the period of absence, ending
at noon on Monday, February 17, 1964.
(3) If the exclusion is subject to a 7- or 30-calendar-day waiting
period, any amount attributable to such 7- or 30- calendar-day waiting
period includes all amounts paid therefor, regardless of the number of
work days included in such 7 or 30 calendar days. For example, if on one
of the days included in the waiting period, an employee would have
worked two 8-hour shifts, the amount he is paid for the two shifts is
considered to be attributable to only one calendar day.
(4) An employee is considered to be hospitalized for one day only if
he is admitted to and confined in a hospital as a bed patient for at
least one hospital day. Entry into a hospital as an in-and-out-patient
does not constitute hospitalization for purposes of section 105(d). The
same applies to mere entry into the out-patient ward or the emergency
ward of a hospital.
(5)(i) In general, the ``regular weekly rate of wages'', for
purposes of section 105(d), shall be the average weekly wages paid for
the last four weekly periods falling within a full pay period or full
pay periods immediately preceding the commencement of the period of
absence. If the employee was absent from work for three or more normal
working days during any such pay period, and the amount of wages paid
for such pay period was less than the amount of wages paid for the
immediately preceding pay period during which the employee was not
absent from work for three or more normal working days, then the amount
of wages paid for the weekly period or weekly periods falling wholly or
partly within the pay period during which each such absence occurred
shall not be used in the determination of ``regular weekly rate of
wages''. In such a case, there shall be substituted the amount of wages
paid for the last weekly period or weekly periods falling within the pay
period or pay periods immediately preceding the pay period or pay
periods in which such absence or absences occurred during which the
employee was not absent from work for three or more normal working days.
(a) In order to compute wages paid for the last four weekly periods
falling within a full pay period or full pay periods immediately
preceding the commencement of the period of absence, or any substituted
weekly periods therefor, it will be necessary to convert the wages paid
for any pay period other than a weekly pay period into a weekly rate or
weekly rates of payment of such wages in accordance with the rules
stated in subdivision (iv) of this subparagraph. Such weekly rate or
weekly rates of wage payments are then used in determining the wages for
the last four weekly periods falling within a full pay period or full
pay periods immediately preceding the commencement of the period of
absence, or any substituted weekly periods therefor.
[[Page 435]]
(b) If the employee does not have four weekly periods falling within
a full pay period or full pay periods preceding his absence during which
he was not absent from work for three or more normal working days, then
the greatest number of available weekly periods shall be used,
consistent with the rules set forth in this subdivision (i), in
determining the ``regular weekly rate of wages.''
(c) If the employee has been employed for a full pay period or more
preceding his absence, and has worked for the number of days in a normal
work week, but was absent from work for three or more normal working
days during each of the pay periods preceding his absence, then the
``regular weekly rate of wages'' shall be determined by multiplying the
employee's actual wages paid for the total number of normal working days
in the pay period immediately preceding the employee's absence by the
number of days that the employee is expected to work in a normal work
week, and by dividing the product by the number of normal work days in
such pay period for which wages were paid.
(d) If the employee has not been employed for a full pay period
preceding his absence, and has worked for the number of days in a normal
work week, the ``regular weekly rate of wages'' shall be determined by
multiplying the employee's actual wages paid for the total number of
normal working days preceding the employee's absence by the number of
days that the employee is expected to work in a normal work week, and by
dividing the product by the number of normal work days for which wages
were paid.
(e) If the employee has not worked the number of days in a normal
work week, then there is no ``regular weekly rate of wages,'' and the
employee will not be permitted an exclusion under section 105(d) for
amounts attributable to the first 30 calendar days in the period of
absence.
(f) Wages paid by a former employer shall not be used in the
determination of ``regular weekly rate of wages'' as described in this
subparagraph.
(ii) In the case of a wage continuation plan of an employer under
which the benefits are computed as a specified percentage of average
wages, the formula for computing the employee's average wages included
in the plan may be used (in lieu of the formula provided in subdivision
(i) of this subparagraph) for determining the ``regular weekly rate of
wages'' for purposes of section 105(d), if under the plan--
(a) The definition of wages does not include any items which are not
considered ``wages'' as defined in subdivision (iii) of this
subparagraph,
(b) The period for computing average wages is not less than twenty-
eight successive calendar days, does not end earlier than five months
preceding the date on which the period of absence commences, and is one
in which the employee was at work at least 35 percent of the normal
working time, and
(c) The period and formula for computing average wages are applied
uniformly with respect to all employees eligible to receive benefits
under the plan. A plan will not fail to meet the conditions of this
subdivision merely because different portions of the employee's wages
are averaged over different periods for purposes of computing his
average wages, so long as each such period meets the requirements in (b)
and (c) of this subdivision.
(iii) For the purpose of determining ``regular weekly rate of
wages'' under subdivision (i) or (ii) of this subparagraph, whichever is
applicable, an employee's wages shall comprise basic salary, fees,
commissions, tips, gratuities, overtime, and any other type of taxable
compensation which is normally paid for services. However, wages shall
not include any type of compensation which is not normally paid, such as
bonuses and incentive payments. An employee's compensation, for the
purpose of determining his ``regular weekly rate of wages'', will not
include any compensation which is not currently includible in gross
income. For example, an employee's wages for the purpose of this
subdivision shall not include deferred compensation paid by the employer
which is not includible in gross income until received by the employee,
such as employer contributions to a qualified annuity under section
403(a), or employer contributions to an accident or health plan excluded
under section 106.
[[Page 436]]
(iv) The following rules shall be used to convert wages for pay
periods other than weekly pay periods into weekly rates of wage payments
to be used in determining ``regular weekly rate of wages'' as described
in subdivision (i) of this subparagraph.
(a) If wages are paid biweekly, the weekly rate of wage payments
shall be one-half of the biweekly wages paid.
(b) If the employee is paid semi-monthly, the weekly rate of wage
payments shall be the semimonthly wages paid multiplied by 24 and
divided by 52.
(c) If wages are paid monthly, the weekly rate of wage payments
shall be the monthly wages paid multiplied by 12 and divided by 52.
(d) If wages are paid on the basis of a pay period other than a
period described in (a) through (c) of this subdivision, the weekly rate
of wage payments shall be determined by ascertaining the annual rate of
wage payments and dividing by 52.
(e) For the purpose of this subparagraph, if separate portions of an
employee's wages are paid on the basis of different pay periods, the
weekly rate or weekly rates of wage payments of each portion of wages
paid with respect to each pay period shall first be determined under the
rules set forth in (a) through (d) of this subdivision and the average
weekly rate of each portion of wages, determined in accordance with the
rules set forth in subdivision (i) of this subparagraph, shall be
aggregated to determine the employee's ``regular weekly rate of wages''
for purposes of section 105(d).
(v) The provisions of subdivisions (i), (iii) and (iv) of this
subparagraph may be illustrated by the following examples:
Example (1). Employee A is a salesman who is paid a basic salary of
$60 per week and, in addition, is paid commissions on a weekly basis. A
became ill and did not report for work beginning Monday, February 17,
1964. For the four-week period preceding the commencement of the period
of absence, A was paid the following:
------------------------------------------------------------------------
Total
Week of-- Basic Commissions weekly
salary wages
------------------------------------------------------------------------
Jan. 20, 1964...................... $60 $10 $70
Jan. 27, 1964...................... 60 50 110
Feb. 3, 1964....................... 60 30 90
Feb. 10, 1964...................... 60 40 100
------------------------------------
Total 4-week wages............... .......... ........... 370
------------------------------------------------------------------------
A's wages, under the rules set forth in subdivision (iii) of this
subparagraph, consist of basic salary plus commissions. Since the amount
of A's average weekly wages paid for the last four weekly periods
falling within the four pay periods immediately preceding the
commencement of his period of absence from work is $92.50 ($370/4), such
amount is considered as the ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph) for purposes of
section 105(d).
Example (2). Assume, in example (1), that A normally works five days
during each week (Monday through Friday) and that he was also absent
from work for any reason from Monday, February 3, 1964, through
Wednesday, February 5, 1964. Since A was absent from work for three
normal working days during the pay period of February 3, 1964, and was
paid a lesser amount of wages for such pay period than in the
immediately preceding pay period during which he was not absent from
work (week of January 27), the weekly pay period beginning January 27,
1964 is substituted for the weekly pay period beginning February 3, 1964
in the determination of ``regular weekly rate of wages'' (as computed
under subdivision (i) of this subparagraph) for purposes of section
105(d). The ``regular weekly rate of wages'' is calculated to be $97.50,
as follows:
------------------------------------------------------------------------
Week of Total wages
------------------------------------------------------------------------
February 10........................................ $100
January 27 (substitute for week of Feb. 3)......... 110
January 27......................................... 110
January 20......................................... 70 ...........
--------
390/4 = $97.50....................................................
------------------------------------------------------------------------
Example (3). Employee B is a salesman who is paid a basic salary of
$75 and, in addition, is paid commissions for semi-monthly periods
ending on the 15th day and the last day of each month. He was absent
from work on account of a personal injury beginning Monday, February 17,
1964. He was paid the following amounts:
------------------------------------------------------------------------
Total
Pay period Salary Commissions wages
------------------------------------------------------------------------
Feb. 1-15, 1964............................ $75 $60 $135
Jan. 16-31, 1964........................... 75 50 125
------------------------------------------------------------------------
The four weekly periods falling within full pay periods preceding the
commencement of
[[Page 437]]
the period of absence are the weeks beginning February 9, February 2,
January 26, and January 19. B's wages are converted to weekly rates of
wage payments per pay period in accordance with the rule set forth in
subdivision (iv)(b) of this subparagraph as follows:
From February 1, 1964--February 15, 1964, inclusive:
[GRAPHIC] [TIFF OMITTED] TC14NO91.170
From January 16-31, inclusive:
[GRAPHIC] [TIFF OMITTED] TC14NO91.171
$125x24 = $3000.00 (annual rate)
$3000.00
----------------------------------
= $57.69 (weekly rate)
52E
The weekly rates are then used in determining the wages for four weekly
periods falling within the pay periods immediately preceding the
commencement of B's absence. B's ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph) is calculated to be
$60.17, as follows:
Feb. 9-15, inclusive............................. $62.31
February 2-8, inclusive.......................... 62.31
January 26-February 1, inclusive (\6/7\x$57.69+\1/ 58.35
7\x$62.31)......................................
January 19-25, inclusive......................... 57.69
----------
240.66/4 = $60.17
Example (4). Employee C is paid semi-monthly on the 5th and 20th of
each month and he began working for his present employer at the
beginning of the semi-monthly pay period commencing Tuesday, January 21,
1964. C received total wages of $200 for the pay period of January 21,
1964 through February 5, 1964, inclusive. He was not absent during that
pay period. C became sick and was absent from work beginning February 7,
1964. Since employee C does not have four weekly periods falling within
a full pay period or full pay periods preceding his absence, the average
wages for the last two weekly periods falling within such full pay
period will be C's ``regular weekly rate of wages'' (as computed under
subdivision (i) of this subparagraph) for purposes of section 105(d),
determined to be $92.31, as follows:
$200x24 = $4800 (annual rate)
$4800/52 = $92.31 (weekly rate)
Example (5). Employee D, an office worker, is paid weekly and is
expected to work five days during each week. He has been employed by his
present employer for three weeks, but has been absent from work for
three normal work days in each of the weeks preceding his illness. He
became ill and was absent from work on Monday, February 17, 1964. During
the weekly pay period immediately preceding his absence (week of
February 10) D was paid $48 salary. He was paid for two working days
during such weekly pay period. D's ``regular weekly rate of wages'' (as
computed under subdivision (i) of this subparagraph), is calculated to
be $120.00, determined as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.172
Example (6). Employee E is an hourly worker who is paid a salary of
$1.25 per hour. E is paid basic salary on a biweekly basis for the
periods beginning every other Thursday and ending every other Wednesday.
E is also paid monthly for his overtime work and is compensated for such
work at one and one-half times the hourly rate. E worked 16 hours of
overtime for his employer during the month of January. E was injured and
could not report for work on Friday, February 21, 1964. E returned to
work on Monday, March 16, 1964. E was paid as follows for the pay
periods indicated:
----------------------------------------------------------------------------------------------------------------
Hours Salary per hour
Pay period ---------------------------------------------------------------- Total salary
Regular Overtime Regular Overtime
----------------------------------------------------------------------------------------------------------------
Month of January 1964........... .............. 16 .............. $1.875 $30
Jan. 23-Feb. 5, 1964, inclusive. 80 .............. $1.25 .............. 100
Feb. 6-19, 1964, inclusive...... 80 .............. 1.25 .............. 100
----------------------------------------------------------------------------------------------------------------
[[Page 438]]
Under the rule set forth in subdivision (iv)(e) of this subparagraph,
the weekly rates of payment of salary and overtime must be determined
separately. Since basic salary is paid biweekly, the weekly rate of
payment is determined to be one-half of $100.00, or $50.00. The full pay
period immediately preceding the commencement of E's absence for
overtime compensation ended on January 31, 1964. E's overtime earnings
are converted to a weekly rate for such period, as follows:
$30.00 (overtime pay)x12 = $360.00
(annual rate)
$360.00/52 = $6.93 (weekly rate)
The average wages for the last four weekly periods falling within pay
periods immediately preceding the commencement of E's absence with
respect to basic salary (weeks of February 13, 6, January 30, and 23) is
$50.00. The average wages for the last four weekly periods falling
within the pay period immediately preceding the commencement of E's
absence with respect to overtime compensation (weeks of January 25, 18,
11, and 4) is $6.93. Accordingly, E's ``regular weekly rate of wages''
(as computed under subdivision (i) of this subparagraph) for the purpose
of section 105(d) is $56.93.
(6)(i) Amounts paid under a wage continuation plan must be converted
to a weekly rate in order to determine the percentage of benefits paid
in relation to the employee's ``regular weekly rate of wages'', since
such percentage is used in determining the waiting period, if any, after
which an exclusion is allowable under section 105(d). In order to
calculate the weekly rate at which benefits are being paid, reference is
made to the particular wage continuation plan. If, in the usual
operation of the plan, benefits are paid for the same periods as regular
wages, then the pay period of such benefits shall be the period for
which a payment of wages is ordinarily made to the employee by the
employer. If plan benefits are ordinarily paid for different periods
than regular wages, then the pay period of such benefits shall be the
period for which payment of such benefits is ordinarily made.
(ii) The weekly rate at which the benefits are paid under a wage
continuation plan shall be determined in accordance with the following
rules:
(a) If benefits are paid on the basis of a weekly pay period, the
weekly rate at which such benefits are paid shall be the weekly amount
of such benefits.
(b) If benefits are paid on the basis of a biweekly pay period, the
weekly rate at which such benefits are paid shall be one-half of the
biweekly rate.
(c) If benefits are paid on the basis of a semimonthly pay period,
the weekly rate at which such benefits are paid shall be the semimonthly
rate multiplied by 24 and divided by 52.
(d) If benefits are paid on the basis of a monthly pay period, the
weekly rate at which such benefits are paid shall be the monthly rate
multiplied by 12 and divided by 52.
(e) If benefits are paid on the basis of a period other than a
period described in (a) through (d) of this subdivision the weekly rate
at which such benefits are paid shall be determined by ascertaining the
annual rate at which such benefits are paid and dividing such annual
rate by 52.
(iii) The principles of subdivisions (i) and (ii) of this
subparagraph may be illustrated by the following example:
Example. A's employer maintains a noncontributory plan which
provides for a monthly benefit of $400 during periods of absence from
work due to personal injury or sickness. A, a salesman, receives regular
salary of $520 per calendar month plus commissions, depending upon the
amount of sales made by A during the month. During the month of January
1964, A was paid commissions of $180. A received a total benefit of $200
for an absence of two weeks because of illness occurring in February
1964. He was not hospitalized. Since benefits under the salary
continuation plan are paid for the same period as regular wages, the pay
period of the plan is monthly. A's ``regular weekly rate of wages'',
determined in accordance with the rules set forth in subparagraph (5)(i)
of this paragraph is $161.54. ($700x12)/52.
For purposes of determining the percentage of benefits paid in relation
to A's ``regular weekly rate of wages'', the weekly rate of the benefits
are calculated to be $92.31, as follows:
$400 (monthly rate)x12 = $4,800 (annual rate)
$4,800/52 = $92.31 (weekly rate)
Since $92.31 does not exceed 75 percent of A's ``regular weekly rate of
wages'', A is entitled to an exclusion under section 105(d) for the
second week of absence, subject to the other limitations provided in
this section.
(iv) For the purpose of determining whether or not the rate of
benefits paid under a wage continuation plan for a period of absence
exceeds 75 percent of the employee's ``regular weekly rate of
[[Page 439]]
wages'' (as determined under subparagraph (5) of this paragraph), it is
necessary to ascertain the average percentage of benefits paid in
relation to the employee's ``regular weekly rate of wages'' for the
first 30 calendar days in the period of absence. Such percentage is
derived from a fraction, the numerator of which is the sum of benefits
paid (attributable to employer contributions) for the period of absence
occurring within the first 30 calendar days, and the denominator of
which is the collective sum of the employee's ``regular weekly rate of
wages'' during such period. This rule may be illustrated by the
following examples:
Example (1). Employee A is paid a semi-monthly basic salary of $150
plus commissions. He normally works five days during each week (Monday
through Friday). During the month of January 1964, A received wages of
$150 plus commissions of $66.67 for each of the semimonthly pay periods.
A became ill on Monday, February 3, 1964, and as a result was absent
from work until Monday, February 17, 1964, but was not hospitalized.
Under the noncontributory wage continuation plan of A's employer, A
received no benefits for the first three working days' absence (Monday
through Wednesday) and was paid benefits at the rate of $100 a week
thereafter. A's ``regular weekly rate of wages,'' determined under the
rules set forth in subparagraph (5) of this paragraph, is $100. A is
considered to have received average benefits at a rate of 70 percent of
his ``regular weekly rate of wages'', computed as follows:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Regular
Benefits weekly
Week of absence paid rate of
wages
------------------------------------------------------------------------
1-Feb. 3........................................ $40 $100
2-Feb. 10....................................... 100 100
-----------------------
Total......................................... 140 200
------------------------------------------------------------------------
Average percentage of benefits paid-- 140/200 = 70%. Accordingly, A may
exclude amounts attributable to the second week of absence, subject to
the other limitations of section 105(d).
Example (2). Assume, in example (1), that A did not return to work
until Thursday, February 20, 1964. A is considered to have received
average benefits at the rate of 76.92 percent of his ``regular weekly
rate of wages'', computed as follows:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Regular
Benefits weekly
Week of absence paid rate of
wages
------------------------------------------------------------------------
1-Feb. 3........................................ $40 $100
2-Feb. 10....................................... 100 100
2\3/5\--Feb. 17................................. \1\ 60 \1\ 60
-----------------------
Total......................................... 200 260
------------------------------------------------------------------------
\1\ Three-fifths of 100.
Average percentage of benefits paid-- 200/260 = 76.92%. Accordingly, A
would not be permitted any exclusion under section 105(d).
(v) If with respect to any pay period or portion thereof the
employee receives amounts under two or more wage continuation plans
(whether such plans are maintained by or for the same employers or by
different employers), the weekly rate for purposes of section 105(d)
shall be the sum of the weekly rates received under all plans. This rule
may be illustrated by the following example:
Example. An employee who is absent because of personal injuries or
sickness receives $100 biweekly under wage continuation plan A
maintained by his employer. He contributes one-half of the premiums for
maintenance of the plan. Under wage continuation plan B maintained by
his employer the employee receives $400 monthly. Plan B is
noncontributory. The weekly rate at which benefits are paid for the
purpose of section 105(d) is computed as follows:
$100
Plan A-- ---------- = $50.00 (weekly rate)
2 25.00 (less amount
attributable
to employee
con-
tributions (\1/
2\))
---------- ...............
25.00 (weekly rate of
Plan A)
$400x12 ...............
Plan B-- ---------- = 92.31 (weekly rate of
Plan B)
52 $117.31 (combined
weekly rate at
which benefits
are paid)
------------------------------------------------------------------------
------------------------------------------------------------------------
The $25 attributable to contributions made by the employee under Plan A
would be subject to section 104(a)(3).
(f) Amount of exclusion for periods of absence commencing after
December 31, 1963--(1) In general. Amounts received
[[Page 440]]
under a wage continuation plan attributable to periods of absence
commencing after December 31, 1963, and which are not excludable from
gross income as being attributable to contributions of the employee (see
Sec. 1.105-1) are excludable from gross income of the employee to the
extent that such amounts do not exceed--
(i) A weekly rate of $75, during the first 30 calendar days in the
period of absence; and
(ii) A weekly rate of $100, after the first 30 calendar days in the
period of absence.
For example, an employee who normally works five days during each week
is absent from work for two days, is hospitalized during his absence,
and receives $75 under his employer's wage continuation plan, which
amount is at a rate of 75 percent of his ``regular weekly rate of
wages''. The employee cannot exclude the entire $75 under section
105(d), if the weekly rate of such benefits exceeds $75.
(2) Daily exclusion. An employee receiving payments under a wage
continuation plan must, in order to determine the amount of the
exclusion under section 105(d), compute the daily rate of the benefits.
Such daily rate is determined, for amounts attributable to the first 30
calendar days in the period of absence, by dividing the weekly rate at
which benefits are paid (as determined under paragraph (e)(6)(ii) of
this section), or the maximum weekly rate at which wage continuation
payments are excludable ($75), whichever is lower, by the number of work
days in a normal work week. In the case of amounts attributable to days
in a period of absence after the first 30 calendar days, the daily rate
for such period is determined by dividing the weekly rate at which
benefits are paid (as determined under paragraph (e)(6)(ii) of this
section), or the maximum weekly rate at which wage continuation payments
are excludable ($100), whichever is lower, by the number of work days in
a normal work week. The daily rate or daily rates of exclusion are then
multiplied by the number of normal work days in the period of absence
for which an exclusion is allowable in order to determine the total
allowable exclusion. These rules may be illustrated by the following
examples:
Example (1). Employee A is a salesman receiving salary and
commissions on a weekly basis. His employer maintains a noncontributory
wage continuation plan which provides for the continuation of A's basic
salary of $80 per week during periods of absence. A was absent from work
on account of sickness from Monday, February 3, 1964, through Sunday,
March 15, 1964, but was not hospitalized. His normal work week is from
Monday through Friday. The weekly amount of benefits paid to A ($80)
does not exceed 75 percent of his ``regular weekly rate of wages'' as
defined in paragraph (e)(5) of this section. Under section 105(d), the
daily rate of exclusion for amounts attributable to the first 30
calendar days in the period of absence, excluding the first 7 days
thereof (Monday, February 10, 1964, through Tuesday, March 3, 1964,
inclusive) is limited to $15 ($75, maximum weekly rate of exclusion
divided by 5 (number of normal work days in week)). The daily rate of
exclusion for amounts attributable to the period of absence in excess of
30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15,
1964, inclusive) is limited to $16 ($80, weekly rate of benefits divided
by 5). Thus, the total exclusion permitted to employee A by section
105(d) is $383.00 ($15 x 17 work days ($255) + $16 x 8 work days
($128)).
Example (2). Assume the facts in example (1) except that A is paid
benefits at the rate of $500 a month during periods of absence. The
weekly rate of the benefits computed under the rules stated in paragraph
(e)(6)(ii) of this section is $115.38, which amount does not exceed 75
percent of his ``regular weekly rate of wages'' as defined in paragraph
(e)(5) of this section. Under section 105(d), the daily rate of
exclusion for amounts attributable to the first 30 calendar days in the
period of absence, excluding the first 7 days thereof (Monday, February
10, 1964, through Tuesday, March 3, 1964, inclusive) is limited to $15
($75, maximum weekly rate of exclusion divided by 5). The daily rate of
exclusion for amounts attributable to the period of absence in excess of
30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15,
1964, inclusive) is limited to $20 ($100, maximum weekly rate of
exclusion divided by 5). Thus, the total exclusion permitted to employee
A by section 105(d) is $415.00 ($15 x 17 work days ($255) + $20 x 8 work
days ($160)).
Example (3). Employee B, an office worker works five days during
each week (Monday through Friday) and receives a salary of $85 per week.
His employer maintains a noncontributory wage continuation plan which
provides for no benefits during the first three days of absence, the
continuation of full salary for one week thereafter and benefits at
[[Page 441]]
the rate of $65 per week thereafter. B was absent from work on account
of sickness from Monday, March 16, 1964, through Tuesday, March 31,
1964, and was hospitalized from Wednesday, March 18, through Tuesday,
March 24. B received total benefits of $137 for the period of absence,
which does not exceed 75 percent of his ``regular weekly rate of wages''
as determined under paragraph (e)(5) of this section. B is permitted an
exclusion under section 105(d) of $127 calculated as follows:
----------------------------------------------------------------------------------------------------------------
Maximum weekly Days of
Period of absence Weekly rate of rate of Daily rate of absence in Maximum
benefits exclusion exclusion period exclusion
----------------------------------------------------------------------------------------------------------------
Mar. 16-18...................... 0 $75 0 3 0
Mar. 19-25...................... $85 75 $15 5 $75
Mar. 26-31...................... 65 75 13 4 52
-------------------------------------------------------------------------------
Total exclusion............... .............. .............. .............. .............. $127
----------------------------------------------------------------------------------------------------------------
(g) Definitions. The term ``personal injury'' as used in this
section, means an externally caused sudden hurt or damage to the body
brought about by an identifiable event. The term ``sickness'' as used in
this section, means mental illnesses and all bodily infirmities and
disorders other than ``personal injuries''. Diseases, whether resulting
from the occupation or otherwise, are not considered personal injuries,
but they are treated as a sickness.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6770, 29 FR
15366, Nov. 17, 1964; T.D. 7352, 40 FR 16666, Apr. 14, 1975]
Sec. 1.105-5 Accident and health plans.
(a) In general. Sections 104(a)(3) and 105 (b), (c), and (d) exclude
from gross income certain amounts received through accident or health
insurance. Section 105(e) provides that for purposes of sections 104 and
105 amounts received through an accident or health plan for employees,
and amounts received from a sickness and disability fund for employees
maintained under the law of a State, a Territory, or the District of
Columbia, shall be treated as amounts received through accident or
health insurance. In general, an accident or health plan is an
arrangement for the payment of amounts to employees in the event of
personal injuries or sickness. A plan may cover one or more employees,
and there may be different plans for different employees or classes of
employees. An accident or health plan may be either insured or
noninsured, and it is not necessary that the plan be in writing or that
the employee's rights to benefits under the plan be enforceable.
However, if the employee's rights are not enforceable, an amount will be
deemed to be received under a plan only if, on the date the employee
became sick or injured, the employee was covered by a plan (or a
program, policy, or custom having the effect of a plan) providing for
the payment of amounts to the employee in the event of personal injuries
or sickness, and notice or knowledge of such plan was reasonably
available to the employee. It is immaterial who makes payment of the
benefits provided by the plan. For example, payment may be made by the
employer, a welfare fund, a State sickness or disability benefits fund,
an association of employers or employees, or by an insurance company.
(b) Self-employed individuals. Under section 105(g), a self-employed
individual is not treated as an employee for purposes of section 105.
Therefore, for example, benefits paid under an accident or health plan
as referred to in section 105(e) to or on behalf of an individual who is
self-employed in the business with respect to which the plan is
established will not be treated as received through accident and health
insurance for purposes of sections 104(a)(3) and 105.
[T.D. 6722, 29 FR 5071, Apr. 14, 1964]
Sec. 1.105-6 Special rules for employees retired before January 27, 1975.
(a) Application of section 105(d) to amounts received as retirement
annuities. An employee who retired from work before January 27, 1975,
receiving payments under his employer-established plan (to which
Sec. 1.72-15(a) applies) which payments were not treated as
[[Page 442]]
amounts received under a wage continuation plan for purposes of section
105(d), may, as of the date the employee retired, treat such plan as
such a wage continuation plan to the extent such payments are received
prior to mandatory retirement age (as described in Sec. 1.105-
4(a)(3)(i)(B)), if--
(1) His employer had in operation at the time of his retirement a
program providing accident and health benefits under a wage continuation
plan to which section 105(d) would apply;
(2) The employer certifies, under procedures approved in advance
under paragraph (c) of this section, that the employee would have been
eligible for wage continuation benefits, under the terms and conditions
of his employer's plan, because of personal injuries or sickness;
(3) At the time of the employee's retirement there was no
substantive difference between the benefits being actually received and
the benefits he would have received had he retired under his employer's
wage continuation plan; and
(4) The employee agrees to the adjustments and conditions required
by the Commissioner with respect to amounts excluded under section 72
(b) or (d) in taxable years ending before January 27, 1975.
(b) Filing requirements. (1) The certification required in paragraph
(a)(2) and the agreement required in paragraph (a)(4) of this section
shall be filed on or before April 15, 1977, with the return, or timely
amended return or claim, made for the taxable year in which the employee
reached retirement age as described in Sec. 1.79-2(b)(3), or, for the
first taxable year for which the taxpayer files an income tax return
claiming an exclusion under section 105(d), as provided in paragraph (a)
of this section.
(2) The Commissioner may prescribe a form and instructions with
respect to the agreement provided for in paragraph (a)(4) of this
section.
(c) Employer certification--(1) Advance approval of procedures. Any
reasonable and consistently applied procedures, approved in advance by
the Internal Revenue Service, which require the employee to provide the
employer or the insurer with medical documentation sufficient to show
that an illness or disability existed as of the date of the employee's
retirement, which would have entitled him to retire on account of
personal injuries or sickness alone, are sufficient for purposes of this
paragraph.
(2) Place of submission. Request for advance approval of procedures
for certification shall be submitted to the district director.
(d) Cross reference. For special rules pertaining to taxpayers
retired on disability before January 27, 1975, see Sec. 1.72-15(i).
[T.D. 7352, 40 FR 16666, Apr. 14, 1975]
Sec. 1.105-11 Self-insured medical reimbursement plan.
(a) In general. Under section 105(a), amounts received by an
employee through a self-insured medical reimbursement plan which are
attributable to contributions of the employer, or are paid by the
employer, are included in the employee's gross income unless such
amounts are excludable under section 105(b). For amounts reimbursed to a
highly compensated individual to be fully excludable from such
individual's gross income under section 105(b), the plan must satisfy
the requirements of section 105(h) and this section. Section 105(h) is
not satisfied if the plan discriminates in favor of highly compensated
individuals as to eligibility to participate or benefits. All or a
portion of the reimbursements or payments on behalf of such individuals
under a discriminatory plan are not excludable from gross income under
section 105(b). However, benefits paid to participants who are not
highly compensated individuals may be excluded from gross income if the
requirements of section 105(b) are satisfied, even if the plan is
discriminatory.
(b) Self-insured medical reimbursement plan--(1) General rule--(i)
Definition. A self-insured medical reimbursement plan is a separate
written plan for the benefit of employees which provides for
reimbursement of employee medical expenses referred to in section
105(b). A plan or arrangement is self-insured unless reimbursement is
provided under an individual or group policy of accident or health
insurance issued by a licensed insurance company or under an arrangement
in the nature of a prepaid
[[Page 443]]
health care plan that is regulated under federal or state law in a
manner similar to the regulation of insurance companies. Thus, for
example, a plan of a health maintenance organization, established under
the Health Maintenance Organization Act of 1973, would qualify as a
prepaid health care plan. In addition, this section applies to a self-
insured medical reimbursement plan, determined in accordance with the
rules of this section, maintained by an employee organization described
in section 501(c)(9).
(ii) Shifting of risk. A plan underwritten by a policy of insurance
or a prepaid health care plan that does not involve the shifting of risk
to an unrelated third party is considered self-insured for purposes of
this section. Accordingly, a cost-plus policy or a policy which in
effect merely provides administrative or bookkeeping services is
considered self-insured for purposes of this section. However, a plan is
not considered self-insured merely because one factor the insurer uses
in determining the premium is the employer's prior claims experience.
(iii) Captive insurance company. A plan underwritten by a policy of
insurance issued by a captive insurance company is not considered self-
insured for purposes of this section if for the plan year the premiums
paid by companies unrelated to the captive insurance company equal or
exceed 50 percent of the total premiums received and the policy of
insurance is similar to policies sold to such unrelated companies.
(2) Other rules. The rules of this section apply to a self-insured
portion of an employer's medical plan or arrangement even if the plan is
in part underwritten by insurance. For example, if an employer's medical
plan reimburses employees for benefits not covered under the insured
portion of an overall plan, or for deductible amounts under the insured
portions, such reimbursement is subject to the rules of this section.
However, a plan which reimburses employees for premiums paid under an
insured plan is not subject to this section. In addition, medical
expense reimbursements not described in the plan are not paid pursuant
to a plan for the benefit of employees, and therefore are not excludable
from gross income under section 105(b). Such reimbursements will not
affect the determination of whether or not a plan is discriminatory.
(c) Prohibited discrimination--(1) In general. A self-insured
medical reimbursement plan does not satisfy the requirements of section
105(h) and this paragraph for a plan year unless the plan satisfies
subparagraphs (2) and (3) of this paragraph. However, a plan does not
fail to satisfy the requirements of this paragraph merely because
benefits under the plan are offset by benefits paid under a self-insured
or insured plan of the employer or another employer, or by benefits paid
under Medicare or other Federal or State law or similar foreign law. A
self-insured plan may take into account the benefits provided under
another plan only to the extent that the type of benefit subject to
reimbursement is the same under both plans. For example, an amount
reimbursed to an employee for a hospital expense under a medical plan
maintained by the employer of the employee's spouse may be offset
against the self-insured benefit where the self-insured plan covering
the employee provides the same type of hospital benefit.
(2) Eligibility to participate--(i) Percentage test. A plan
satisfies the requirements of this subparagraph if it benefits--
(A) Seventy percent or more of all employees, or
(B) Eighty percent or more of all the employees who are eligible to
benefit under the plan if 70 percent or more of all employees are
eligible to benefit under the plan.
(ii) Classification test. A plan satisfies the requirements of this
subparagraph if it benefits such employees as qualify under a
classification of employees set up by the employer which is found by the
Internal Revenue Service not to be discriminatory in favor of highly
compensated individuals. In general, this determination will be made
based upon the facts and circumstances of each case, applying the same
standards as are applied under section 410(b)(1)(B) (relating to
qualified pension, profit-
[[Page 444]]
sharing and stock bonus plans), without regard to the special rules in
section 401(a)(5) concerning eligibility to participate.
(iii) Exclusion of certain employees. Under section 105(h)(3), for
purposes of this subparagraph (2), there may be excluded from
consideration:
(A) Employees who have not completed 3 years of service prior to the
beginning of the plan year. For purposes of this section years of
service may be determined by any method that is reasonable and
consistent. A determination made in the same manner as (and not
requiring service in excess of how) a year of service is determined
under section 410(a)(3) shall be deemed to be reasonable. For purposes
of the 3-year rule, all of an employee's years of service with the
employer prior to a separation from service are not taken into account.
For purposes of the 3-year rule, an employee's years of service prior to
age 25, as a part-time or seasonal employee, as a member of a collective
bargaining unit, or as a nonresident alien, as each is described in this
subdivision, are not excluded by reason of being so described from
counting towards satisfaction of the rule. In addition, if the employer
is a predecessor employer (determined in a manner consistent with
section 414(a)), service for such predecessor is treated as service for
the employer.
(B) Employees who have not attained age 25 prior to the beginning of
the plan year.
(C) Part-time employees whose customary weekly employment is less
than 35 hours, if other employees in similar work with the same employer
(or, if no employees of the employer are in similar work, in similar
work in the same industry and location) have substantially more hours,
and seasonal employees whose customary annual employment is less than 9
months, if other employees in similar work with the same employer (or,
if no employees of the employer are in similar work, in similar work in
the same industry and location) have substantially more months.
Notwithstanding the preceding sentence, any employee whose customary
weekly employment is less than 25 hours or any employee whose customary
annual employment is less than 7 months may be considered as a part-time
or seasonal employee.
(D) Employees who are included in a unit of employees covered by an
agreement between employee representatives and one or more employers
which the Commissioner finds to be a collective bargaining agreement, if
accident and health benefits were the subject of good faith bargaining
between such employee representatives and such employer or employers.
For purposes of determining whether such bargaining occurred, it is not
material that such employees are not covered by another medical plan or
that the plan was not considered in such bargaining.
(E) Employees who are nonresident aliens and who receive no earned
income (within the meaning of section 911(b) and the regulations
thereunder) from the employer which constitutes income from sources
within the United States (within the meaning of section 861(a)(3) and
the regulations thereunder).
(3) Nondiscriminatory benefits--(i) In general. In general, benefits
subject to reimbursement under a plan must not discriminate in favor of
highly compensated individuals. Plan benefits will not satisfy the
requirements of this subparagraph unless all the benefits provided for
participants who are highly compensated individuals are provided for all
other participants. In addition, all the benefits available for the
dependents of employees who are highly compensated individuals must also
be available on the same basis for the dependents of all other employees
who are participants. A plan that provides optional benefits to
participants will be treated as providing a single benefit with respect
to the benefits covered by the option provided that (A) all eligible
participants may elect any of the benefits covered by the option and (B)
there are either no required employee contributions or the required
employee contributions are the same amount. This test is applied to the
benefits subject to reimbursement under the plan rather than the actual
benefit payments or claims under the plan. The presence or absence of
such discrimination will be determined by considering
[[Page 445]]
the type of benefit subject to reimbursement provided highly compensated
individuals, as well as the amount of the benefit subject to
reimbursement. A plan may establish a maximum limit for the amount of
reimbursement which may be paid a participant for any single benefit, or
combination of benefits. However, any maximum limit attributable to
employer contributions must be uniform for all participants and for all
dependents of employees who are participants and may not be modified by
reason of a participant's age or years of service. In addition, if a
plan covers employees who are highly compensated individuals, and the
type or the amount of benefits subject to reimbursement under the plan
are in proportion to employee compensation, the plan discriminates as to
benefits.
(ii) Discriminatory operation. Not only must a plan not discriminate
on its face in providing benefits in favor of highly compensated
individuals, the plan also must not discriminate in favor of such
employees in actual operation. The determination of whether plan
benefits discriminate in operation in favor of highly compensated
individuals is made on the basis of the facts and circumstances of each
case. A plan is not considered discriminatory merely because highly
compensated individuals participating in the plan utilize a broad range
of plan benefits to a greater extent than do other employees
participating in the plan. In addition, if a plan (or a particular
benefit provided by a plan) is terminated, the termination would cause
the plan benefits to be discriminatory if the duration of the plan (or
benefit) has the effect of discriminating in favor of highly compensated
individuals. Accordingly, the prohibited discrimination may occur where
the duration of a particular benefit coincides with the period during
which a highly compensated individual utilizes the benefit.
(iii) Retired employees. To the extent that an employer provides
benefits under a self-insured medical reimbursement plan to a retired
employee that would otherwise be excludible from gross income under
section 105(b), determined without regard to section 105(h), such
benefits shall not be considered a discriminatory benefit under this
paragraph (c). The preceding sentence shall not apply to a retired
employee who was a highly compensated individual unless the type, and
the dollar limitations, of benefits provided retired employees who were
highly compensated individuals are the same for all other retired
participants. If this subdivision applies to a retired participant, that
individual is not considered an employee for purposes of determining the
highest paid 25 percent of all employees under paragraph (d) of this
section solely by reason of receiving such plan benefits.
(4) Multiple plans, etc.--(i) General rule. An employer may
designate two or more plans as constituting a single plan that is
intended to satisfy the requirements of section 105(h)(2) and paragraph
(c) of this section, in which case all plans so designated shall be
considered as a single plan in determining whether the requirements of
such section are satisfied by each of the separate plans. A
determination that the combination of plans so designated does not
satisfy such requirements does not preclude a determination that one or
more of such plans, considered separately, satisfies such requirements.
A single plan document may be utilized by an employer for two or more
separate plans provided that the employer designates the plans that are
to be considered separately and the applicable provisions of each
separate plan.
(ii) Other rules. If the designated combined plan discriminates as
to eligibility to participate or benefits, the amount of excess
reimbursement will be determined under the rules of section 105(h)(7)
and paragraph (e) of this section by taking into account all
reimbursements made under the combined plan.
(iii) H.M.O. participants. For purposes of section 105(h)(2)(A) and
paragraph (c)(2) of this section, a self-insured plan will be deemed to
benefit an employee who has enrolled in a health maintenance
organization (HMO) that is offered on an optional basis by the employer
in lieu of coverage under the self-insured plan if, with respect to
[[Page 446]]
that employee, the employer's contributions to the HMO plan equal or
exceed those that would be made to the self-insured plan, and if the HMO
plan is designated in accordance with subdivision (i) with the self-
insured plan as a single plan. For purposes of section 105(h) and this
section, except as provided in the preceding sentence, employees covered
by, and benefits under, the HMO plan are not treated as part of the
self-insured plan.
(d) Highly compensated individuals defined. For purposes of section
105(h) and this section, the term ``highly compensated individual''
means an individual who is--
(1) One of the 5 highest paid officers,
(2) A shareholder who owns (with the application of section 318)
more than 10 percent in value of the stock of the employer, or
(3) Among the highest paid 25 percent of all employees (including
the 5 highest paid officers, but not including employees excludable
under paragraph (c)(2)(iii) of this section who are not participants in
any self-insured medical reimbursement plan of the employer, whether or
not designated as a single plan under paragraph (c)(4) of this section,
or in a health maintenance organization plan).
The status of an employee as an officer or stockholder is determined
with respect to a particular benefit on the basis of the employee's
officer status or stock ownership at the time during the plan year at
which the benefit is provided. In calculating the highest paid 25
percent of all employees, the number of employees included will be
rounded to the next highest number. For example, if there are 5
employees, the top two are in the highest paid 25 percent. The level of
an employee's compensation is determined on the basis of the employee's
compensation for the plan year. For purposes of the preceding sentence,
fiscal year plans may determine employee compensation on the basis of
the calendar year ending within the plan year.
(e) Excess reimbursement of highly compensated individual--(1) In
general. For purposes of section 105(h) and this section, a
reimbursement paid to a highly compensated individual is an excess
reimbursement if it is paid pursuant to a plan that fails to satisfy the
requirements of paragraph (c)(2) or (c)(3) for the plan year. The amount
reimbursed to a highly compensated individual which constitutes an
excess reimbursement is not excludable from such individual's gross
income under section 105(b).
(2) Discriminatory benefit. In the case of a benefit available to
highly compensated individuals but not to all other participants (or
which otherwise discriminates in favor of highly compensated individuals
as opposed to other participants), the amount of excess reimbursement
equals the total amount reimbursed to the highly compensated individual
with respect to the benefit.
(3) Discriminatory coverage. In the case of benefits (other than
discriminatory benefits described in subparagraph (2)) paid to a highly
compensated individual under a plan which fails to satisfy the
requirements of paragraph (c)(2) relating to nondiscrimination in
eligibility to participate, the amount of excess reimbursement is
determined by multiplying the total amount reimbursed to the individual
by a fraction. The numerator of the fraction is the total amount
reimbursed during that plan year to all highly compensated individuals.
The denominator of the fraction is the total amount reimbursed during
that plan year to all participants. In computing the fraction and the
total amount reimbursed to the individual, discriminatory benefits
described in subparagraph (2) are not taken into account. Accordingly,
any amount which is included in income by reason of the benefit's not
being available to all other participants will not be taken into
account.
(4) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Corporation M maintains a self-insured medical
reimbursement plan which covers all employees. The plan provides the
following maximum limits on the amount of benefits subject to
reimbursement: $5,000 for officers and $1,000 for all other
participants. During a plan year Employee A, one of the 5 highest paid
officers, received reimbursements in the amount of $4,000. Because the
amount of benefits provided for highly compensated individuals is not
provided for all other participants, the
[[Page 447]]
plan benefits are discriminatory. Accordingly, Employee A received an
excess reimbursement of $3,000 ($4,000-$1,000) which constitutes a
benefit available to highly compensated individuals, but not to all
other participants.
Example (2). Corporation N maintains a self-insured medical
reimbursement plan which covers all employees. The plan provides a broad
range of medical benefits subject to reimbursement for all participants.
However, only the 5 highest paid officers are entitled to dental
benefits. During the plan year Employee B, one of the 5 highest paid
officers, received dental payments under the plan in the amount of $300.
Because dental benefits are provided for highly compensated individuals,
and not for all other participants, the plan discriminates as to
benefits. Accordingly, Employee B received an excess reimbursement in
the amount of $300.
Example (3). Corporation O maintains a self-insured medical
reimbursement plan which discriminates as to eligibility by covering
only the highest paid 40% of all employees. Benefits subject to
reimbursement under the plan are the same for all participants. During a
plan year Employee C, a highly compensated individual, received benefits
in the amount of $1,000. The amount of excess reimbursement paid
Employee C during the plan year will be calculated by multiplying the
$1,000 by a fraction determined under subparagraph (3).
Example (4). Corporation P maintains a self-insured medical
reimbursement plan for its employees. Benefits subject to reimbursement
under the plan are the same for all plan participants. However, the plan
fails the eligibility tests of section 105(h)(3)(A) and thereby
discriminates as to eligibility. During the 1980 plan year Employee D, a
highly compensated individual, was hospitalized for surgery and incurred
medical expenses of $4,500 which were reimbursed to D under the plan.
During that plan year the Corporation P medical plan paid $50,000 in
benefits under the plan, $30,000 of which constituted benefits paid to
highly compensated individuals. The amount of excess reimbursement not
excludable by D under section 105(b) is $2,700:
[GRAPHIC] [TIFF OMITTED] TC14NO91.173
Example (5). Corporation Q maintains a self-insured medical
reimbursement plan for its employees. The plan provides a broad range of
medical benefits subject to reimbursement for participants. However,
only the five highest paid officers are entitled to dental benefits. In
addition, the plan fails the eligibility test of section 105(h)(3)(A)
and thereby discriminates as to eligibility. During the calendar 1981
plan year, Employee E, a highly compensated individual, received dental
benefits under the plan in the amount of $300, and no other employee
received dental benefits. In addition, Employee E was hospitalized for
surgery and incurred medical expenses, reimbursement for which was
available to all participants, of $4,500 which were reimbursed to E
under the plan. Because dental benefits are only provided for highly
compensated individuals, Employee E received an excess reimbursement
under paragraph (e)(2) above in the amount of $300. For the 1981 plan
year, the Corporation Q medical plan paid $50,300 in total benefits
under the plan, $30,300 of which constituted benefits paid to highly
compensated individuals. In computing the fraction under paragraph
(e)(3), discriminatory benefits described in paragraph (e)(2) are not
taken into account. Therefore, the amount of excess reimbursement not
excludable to Employee E with respect to the $4,500 of medical expenses
incurred is $2,700:
[GRAPHIC] [TIFF OMITTED] TC14NO91.174
and the total amount of excess reimbursements includable in E's income
for 1981 is $3,000.
Example (6). (i) Corporation R maintains a calendar year self-
insured medical reimbursement plan which covers all employees. The type
of benefits subject to reimbursement under the plan include all medical
care expenses as defined in section 213(e). The amount of reimbursement
available to any employee for any calendar year is limited to 5 percent
of the compensation paid to each employee during the calendar year. The
amount of compensation and reimbursement paid to Employees A-F for the
calendar year is as follows:
------------------------------------------------------------------------
Reimbursable
Employee Compensation amount paid
------------------------------------------------------------------------
A....................................... $100,000 $5,000
B....................................... 25,000 1,250
C....................................... 15,000 750
D....................................... 10,000 500
E....................................... 10,000 500
F....................................... 8,000 400
-----------------
8,400
------------------------------------------------------------------------
(ii) Because the amount of benefits subject to reimbursement under
the plan is in proportion to employee compensation the plan
discriminates as to benefits. In addition, Employees A and B are highly
compensated individuals. The amount of excess reimbursement paid
Employees A and B during the plan year will be determined under
paragraph (e)(2). Because benefits in excess of $400 (Employee F's
maximum benefit) are provided for highly compensated individuals and not
for all other participants, Employees
[[Page 448]]
A and B received, respectively, an excess reimbursement of $4,600 and
$850.
(f) Certain controlled groups. For purposes of applying the
provisions of section 105(h) and this section, all employees who are
treated as employed by a single employer under section 414 (b) and (c),
and the regulations thereunder (relating to special rules for qualified
pension, profit-sharing and stock bonus plans), shall be treated as
employed by a single employer.
(g) Exception for medical diagnostic procedures--(1) In general. For
purposes of applying section 105(h) and this section, reimbursements
paid under a plan for medical diagnostic procedures for an employee, but
not a dependent, are not considered to be a part of a plan described in
this section. The medical diagnostic procedures include routine medical
examinations, blood tests, and X-rays. Such procedures do not include
expenses incurred for the treatment, cure or testing of a known illness
or disability, or treatment or testing for a physical injury, complaint
or specific symptom of a bodily malfunction. For example, a routine
dental examination with X-rays is a medical diagnostic procedure, but X-
rays and treatment for a specific complaint are not. In addition, such
procedures do not include any activity undertaken for exercise, fitness,
nutrition, recreation, or the general improvement of health unless they
are for medical care as defined in section 213(e). The diagnostic
procedures must be performed at a facility which provides no services
(directly or indirectly) other than medical, and ancillary, services.
For purposes of the preceding sentence, physical proximity between a
medical facility and nonmedical facilities will not for that reason
alone cause the medical facility not to qualify. For example, an
employee's annual physical examination conducted at the employee's
personal physician's office is not considered a part of the medical
reimbursement plan and therefore is not subject to the nondiscrimination
requirements. Accordingly, the amount reimbursed may be excludable from
the employee's income if the requirements of section 105(b) are
satisfied.
(2) Transportation, etc. expenses. Transportation expenses primarily
for an allowable diagnostic procedure are included within the exception
described in this paragraph, but only to the extent they are ordinary
and necessary. Transportation undertaken merely for the general
improvement of health, or in connection with a vacation, is not within
the scope of this exception, nor are any incidental expenses for food or
lodging; therefore, amounts reimbursed for such expenses may be excess
reimbursements under paragraph (e).
(h) Time of inclusion. Excess reimbursments (determined under
paragraph (e)) paid to a highly compensated individual for a plan year
will be considered as received in the taxable year of the individual in
which (or with which) the plan year ends. The particular plan year to
which reimbursements relate shall be determined under the plan
provisions. In the absence of plan provisions reimbursements shall be
attributed to the plan year in which payment is made. For example, under
a calendar year plan an excess reimbursement paid to A in 1981 on
account of an expense incurred and subject to reimbursement for the 1980
plan year under the terms of the plan will be considered as received in
1980 by A.
(i) Self-insured contributory plan. A medical plan subject to this
section may provide for employer and employee contributions. See
Sec. 1.105-1(c). The tax treatment of reimbursements attributable to
employee contributions is determined under section 104(a)(3). The tax
treatment of reimbursements attributable to employer contributions is
determined under section 105. The amount of reimbursements which are
attributable to contributions of the employer shall be determined in
accordance with Sec. 1.105-1(e).
(j) Effective date. Section 105(h) and this section are effective
for taxable years beginning after December 31, 1979 and for amounts
reimbursed after December 31, 1979. In determining plan discrimination
and the taxability of excess reimbursements made for a plan year
beginning in 1979 and ending in 1980, a plan's eligibility and benefit
requirements as well as actual reimbursements made in the plan year
during 1979, will not be taken into account. In addition, this section
does
[[Page 449]]
not apply to expenses which are incurred in 1979 and paid in 1980.
(k) Special rules--(1) Relation to cafeteria plans. If a self-
insured medical reimbursement plan is included in a cafeteria plan as
described in section 125, the rules of this section will determine the
status of a benefit as a taxable or nontaxable benefit, and the rules of
section 125 will determine whether an employee is taxed as though he
elected all available taxable benefits (including taxable benefits under
a discriminatory medical reimbursement plan). This rule is illustrated
by the following example:
Example. Corporation M maintains a cafeteria plan described in
section 125. Under the plan an officer of the corporation may elect to
receive medical benefits provided by a self-insured medical
reimbursement plan which is subject to the rules of this section.
However, the self-insured medical reimbursement plan fails the
nondiscrimination rules under paragraph (c) of this section.
Accordingly, the amount of excess reimbursement is taxable to the
officer participating in the medical reimbursement plan pursuant to
section 105(h) and this section. Therefore, the self-insured medical
reimbursement plan will be considered a taxable benefit under section
125 and the regulations thereunder.
(2) Benefit subject to reimbursement. For purposes of this section,
a benefit subject to reimbursement is a benefit described in the plan
under which a claim for reimbursement or for a payment directly to the
health service provider may be filed by a plan participant. It does not
refer to actual claims or benefit reimbursements paid under a plan.
[T.D. 7754, 46 FR 3505, Jan. 15, 1981]
Sec. 1.106-1 Contributions by employer to accident and health plans.
The gross income of an employee does not include contributions which
his employer makes to an accident or health plan for compensation
(through insurance or otherwise) to the employee for personal injuries
or sickness incurred by him, his spouse, or his dependents, as defined
in section 152. The employer may contribute to an accident or health
plan either by paying the premium (or a portion of the premium) on a
policy of accident or health insurance covering one or more of his
employees, or by contributing to a separate trust or fund (including a
fund referred to in section 105(e)) which provides accident or health
benefits directly or through insurance to one or more of his employees.
However, if such insurance policy, trust, or fund provides other
benefits in addition to accident or health benefits, section 106 applies
only to the portion of the employer's contribution which is allocable to
accident or health benefits. See paragraph (d) of Sec. 1.104-1 and
Secs. 1.105-1 through 1.105-5, inclusive, for regulations relating to
exclusion from an employee's gross income of amounts received through
accident or health insurance and through accident or health plans.
Sec. 1.107-1 Rental value of parsonages.
(a) In the case of a minister of the gospel, gross income does not
include (1) the rental value of a home, including utilities, furnished
to him as a part of his compensation, or (2) the rental allowance paid
to him as part of his compensation to the extent such allowance is used
by him to rent or otherwise provide a home. In order to qualify for the
exclusion, the home or rental allowance must be provided as remuneration
for services which are ordinarily the duties of a minister of the
gospel. In general, the rules provided in Sec. 1.1402(c)-5 will be
applicable to such determination. Examples of specific services the
performance of which will be considered duties of a minister for
purposes of section 107 include the performance of sacerdotal functions,
the conduct of religious worship, the administration and maintenance of
religious organizations and their integral agencies, and the performance
of teaching and administrative duties at theological seminaries. Also,
the service performed by a qualified minister as an employee of the
United States (other than as a chaplain in the Armed Forces, whose
service is considered to be that of a commissioned officer in his
capacity as such, and not as a minister in the exercise of his
ministry), or a State, Territory, or possession of the United States, or
a political subdivision of any of the foregoing, or the District of
Columbia, is in the exercise of
[[Page 450]]
his ministry provided the service performed includes such services as
are ordinarily the duties of a minister.
(b) For purposes of section 107, the term ``home'' means a dwelling
place (including furnishings) and the appurtenances thereto, such as a
garage. The term ``rental allowance'' means an amount paid to a minister
to rent or otherwise provide a home if such amount is designated as
rental allowance pursuant to official action taken prior to January 1,
1958, by the employing church or other qualified organization, or if
such amount is designated as rental allowance pursuant to official
action taken in advance of such payment by the employing church or other
qualified organization when paid after December 31, 1957. The
designation of an amount as rental allowance may be evidenced in an
employment contract, in minutes of or in a resolution by a church or
other qualified organization or in its budget, or in any other
appropriate instrument evidencing such official action. The designation
referred to in this paragraph is a sufficient designation if it permits
a payment or a part thereof to be identified as a payment of rental
allowance as distinguished from salary or other remuneration.
(c) A rental allowance must be included in the minister's gross
income in the taxable year in which it is received, to the extent that
such allowance is not used by him during such taxable year to rent or
otherwise provide a home. Circumstances under which a rental allowance
will be deemed to have been used to rent or provide a home will include
cases in which the allowance is expended (1) for rent of a home, (2) for
purchase of a home, and (3) for expenses directly related to providing a
home. Expenses for food and servants are not considered for this purpose
to be directly related to providing a home. Where the minister rents,
purchases, or owns a farm or other business property in addition to a
home, the portion of the rental allowance expended in connection with
the farm or business property shall not be excluded from his gross
income.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6691, 28 FR
12817, Dec. 3, 1963]
Sec. 1.108-1 Stock-for-debt exception not to apply in de minimis cases.
(a) Overview. Section 108(e)(8) provides that the common law stock-
for-debt exception does not apply if stock issued for indebtedness is
nominal or token or if a proportionality test is not met. Paragraph (b)
of this section provides rules for the nominal or token determination
under section 108(e)(8)(A). Paragraph (c) of this section provides rules
for the proportionality test under section 108(e)(8)(B). Paragraph (d)
of this section provides certain general rules and definitions.
Paragraph (e) of this section provides an effective date.
(b) Issuance of nominal or token stock. Under section 108(e)(8)(A),
the common law stock-for-debt exception does not apply to indebtedness
discharged for stock that is nominal or token. All relevant facts and
circumstances must be considered in making this determination. If common
and preferred stock are issued for indebtedness, the determination is
made separately with respect to the common stock and the preferred
stock. The determination of whether common stock issued for unsecured
indebtedness is nominal or token is made on an aggregate basis with
respect to all common stock issued for unsecured indebtedness in the
title 11 case or insolvency workout. Preferred stock issued for
unsecured indebtedness is also tested on an aggregate basis with respect
to all preferred stock issued for unsecured indebtedness in the title 11
case or insolvency workout.
(c) Issuance of a disproportionately small amount of stock for
unsecured indebtedness--(1) Common stock issued for unsecured
indebtedness--(i) In general. The common law stock-for-debt exception
does not apply to an unsecured indebtedness discharged for common stock
in a title 11 case or insolvency workout if the individual common stock
ratio does not equal at least one-half of the group common stock ratio.
(ii) Individual common stock ratio defined. The individual common
stock ratio is the ratio of the value of the common stock issued for an
unsecured indebtedness to the amount of the unsecured indebtedness
allocated to that common stock. The amount of unsecured indebtedness
allocated to the
[[Page 451]]
common stock is the amount of the indebtedness for which the common
stock is issued (as defined in paragraph (d)(5) of this section),
reduced by the amount of other consideration, if any, transferred in
exchange for the indebtedness, including--
(A) The amount of any money;
(B) The issue price (determined under section 1273 or 1274) of any
new indebtedness;
(C) With respect to any preferred stock, the amount of indebtedness
allocated to the preferred stock under paragraph (c)(2)(ii) of this
section; and
(D) The value of any other property, including any disqualified
stock.
(iii) Group common stock ratio defined. The group common stock ratio
is the ratio of the aggregate value of all common stock issued for
unsecured indebtedness in the title 11 case or insolvency workout to the
aggregate amount of unsecured indebtedness allocated to that common
stock. The amount of unsecured indebtedness allocated to the common
stock is the aggregate amount of all unsecured indebtedness exchanged
for stock or cancelled in the title 11 case or insolvency workout,
reduced by the amount of other consideration, if any, issued for that
indebtedness, including--
(A) The amount of any money;
(B) The issue price (determined under section 1273 or 1274) of any
new indebtedness;
(C) With respect to any preferred stock, the amount of indebtedness
allocated to the preferred stock under paragraph (c)(2)(iii) of this
section; and
(D) The value of any other property, including any disqualified
stock.
(iv) Example. The following example illustrates these provisions.
Example. (A) X Corporation has three outstanding debts, Debt 1, Debt
2, and Debt 3. Debts 1 and 2 are unsecured and each has an adjusted
issue price of $100,000. Debt 3 is also unsecured, and it has an
adjusted issue price of $90,000 and accrued but unpaid interest of
$10,000. In a title 11 case, Debt 1 is exchanged for $50,000 cash and
$20,000 of common stock, Debt 2 is exchanged for $10,000 cash, and Debt
3 is exchanged for $5,000 common stock. The individual common stock
ratio for Debt 1 is 40 percent, which is determined by comparing the
value of the common stock issued for the indebtedness ($20,000) to the
amount of unsecured indebtedness allocated to that stock ($100,000
adjusted issue price less $50,000 cash received). The individual common
stock ratio for Debt 2 is 0 percent because no stock is received in
exchange for the indebtedness. The individual common stock ratio for
Debt 3 is 5 percent, which is determined by comparing the value of the
common stock issued for the indebtedness ($5,000) to the amount of
unsecured indebtedness allocated to that stock ($100,000 = $90,000
adjusted issue price and $10,000 of accrued but unpaid interest).
(B) The group common stock ratio is 10.4 percent, which is
determined by comparing the value of all of the common stock issued for
unsecured indebtedness in the title 11 case ($25,000) to the amount of
unsecured indebtedness allocated to the stock ($290,000 aggregate
adjusted issue price of all indebtedness exchanged for stock or
cancelled in the title 11 case plus $10,000 accrued but unpaid interest
less $60,000 cash received). Accordingly, section 108(e)(8)(B) is
satisfied only with respect to the common stock issued for Debt 1. The
stock-for-debt exception does not apply to Debt 2 or Debt 3.
(2) Preferred stock issued for unsecured indebtedness--(i) In
general. The common law stock-for-debt exception does not apply to an
unsecured indebtedness discharged for preferred stock in a title 11 case
or insolvency workout if the individual preferred stock ratio does not
equal at least one-half of the group preferred stock ratio.
(ii) Individual preferred stock ratio defined. The individual
preferred stock ratio is the ratio of the value of the preferred stock
issued for an unsecured indebtedness to the amount of the unsecured
indebtedness allocated to the preferred stock. The amount of the
unsecured indebtedness allocated to preferred stock is equal to the
lesser of the lowest redemption price (if any) or lowest liquidation
preference (if any) of the preferred stock (determined at issuance).
However, the allocable indebtedness may not be less than the fair market
value of the preferred stock or greater than the amount of the unsecured
indebtedness.
(iii) Group preferred stock ratio defined. The group preferred stock
ratio is the ratio of the aggregate value of all preferred stock issued
for unsecured indebtedness in the title 11 case or insolvency workout to
the aggregate amount of unsecured indebtedness allocated to the
preferred stock under paragraph (c)(2)(ii) of this section.
(d) Definitions and special rules. For purposes of this section:
[[Page 452]]
(1) Common stock. Common stock is all stock other than disqualified
stock and preferred stock.
(2) Disqualified stock. Disqualified stock is disqualified stock as
defined in section 108(e)(10)(B)(ii).
(3) Liquidation preference. A liquidation preference exists if the
stock's right to share in liquidation proceeds is limited and preferred.
(4) Preferred stock. Preferred stock is any stock (other than
disqualified stock) that has a limited or fixed redemption price or
liquidation preference and does not upon issuance have a right to
participate in corporate growth to a meaningful extent. Preferred stock
that is convertible into common stock is not treated as preferred stock
if the conversion right represents, in substance, a meaningful right to
participate in corporate growth. Solely for purposes of this paragraph
(d)(4), a right to participate in corporate growth is not established by
the fact that the redemption price or liquidation preference exceeds the
fair market value of the preferred stock.
(5) Amount of indebtedness. Generally, the amount of indebtedness is
the adjusted issue price of the indebtedness. Appropriate adjustments
are made for accrued but unpaid stated interest. (See the example in
paragraph (c)(1)(iv) of this section.)
(6) Undersecured indebtedness--(i) General rule. If an indebtedness
is secured by property with a value less than its adjusted issue price,
the indebtedness is considered to be two separate debts: a secured
indebtedness with an adjusted issue price equal to the value of the
property, and an unsecured indebtedness with an adjusted issue price
equal to the remainder. Absent strong evidence to the contrary, the
value of the property securing the indebtedness is presumed to be equal
to the issue price of any new secured indebtedness received for the
indebtedness plus the value of any other consideration (except stock or
new unsecured indebtedness) received for the indebtedness. A valuation
of that property by a court in a title 11 case is a factor in
determining value, but is not controlling.
(ii) Example. The following example illustrates these provisions:
Example Corporation X owes an indebtedness with an adjusted issue
price of $100,000. The indebtedness is secured by certain property owned
by Corporation X. Corporation X exchanges the indebtedness for $10,000
of stock and new secured indebtedness with an issue price of $70,000.
Under paragraph (d)(6)(i) of this section, the indebtedness is
bifurcated into a secured indebtedness of $70,000 (the issue price of
the new secured indebtedness received in exchange therefor) and an
unsecured indebtedness of $30,000 (the remainder of the adjusted issue
price of the indebtedness).
(e) Effective date. This section is effective with respect to any
issuance of stock for indebtedness on or before December 31, 1994, or
any issuance of stock for indebtedness in a title 11 or similar case (as
defined in section 368(a)(3)(A) of the Internal Revenue Code) that was
filed on or before December 31, 1993--
(1) Pursuant to a plan confirmed by the court in a title 11 case
after May 17, 1994; or
(2) If there is no title 11 case, pursuant to an insolvency workout
in which all issuances of stock for indebtedness occur after May 17,
1994.
[59 FR 12831, Mar. 18, 1994]
Sec. 1.108-2 Acquisition of indebtedness by a person related to the debtor.
(a) General rules. The acquisition of outstanding indebtedness by a
person related to the debtor from a person who is not related to the
debtor results in the realization by the debtor of income from discharge
of indebtedness (to the extent required by section 61(a)(12) and section
108) in an amount determined under paragraph (f) of this section. Income
realized pursuant to the preceding sentence is excludible from gross
income to the extent provided in section 108(a). The rules of this
paragraph apply if indebtedness is acquired directly by a person related
to the debtor in a direct acquisition (as defined in paragraph (b) of
this section) or if a holder of indebtedness becomes related to the
debtor in an indirect acquisition (as defined in paragraph (c) of this
section).
(b) Direct acquisition. An acquisition of outstanding indebtedness
is a direct acquisition under this section if a person related to the
debtor (or a person who becomes related to the debtor on
[[Page 453]]
the date the indebtedness is acquired) acquires the indebtedness from a
person who is not related to the debtor. Notwithstanding the foregoing,
the Commissioner may provide by Revenue Procedure or other published
guidance that certain acquisitions of indebtedness described in the
preceding sentence are not direct acquisitions for purposes of this
section.
(c) Indirect acquisition--(1) In general. An indirect acquisition is
a transaction in which a holder of outstanding indebtedness becomes
related to the debtor, if the holder acquired the indebtedness in
anticipation of becoming related to the debtor.
(2) Proof of anticipation of relationship. In determining whether
indebtedness was acquired by a holder in anticipation of becoming
related to the debtor, all relevant facts and circumstances will be
considered. Such facts and circumstances include, but are not limited
to, the intent of the parties at the time of the acquisition, the nature
of any contacts between the parties (or their respective affiliates)
before the acquisition, the period of time for which the holder held the
indebtedness, and the significance of the indebtedness in proportion to
the total assets of the holder group (as defined in paragraph (c)(5) of
this section). For example, if a holder acquired the indebtedness in the
ordinary course of its portfolio investment activities and the holder's
acquisition of the indebtedness preceded any discussions concerning the
acquisition of the holder by the debtor (or by a person related to the
debtor) or the acquisition of the debtor by the holder (or by a person
related to the holder), as the case may be, these facts, taken together,
would ordinarily establish that the holder did not acquire the
indebtedness in anticipation of becoming related to the debtor. The
absence of discussions between the debtor and the holder (or their
respective affiliates), however, does not by itself establish that the
holder did not acquire the indebtedness in anticipation of becoming
related to the debtor (if, for example, the facts and circumstances show
that the holder was considering a potential acquisition of or by the
debtor, or the relationship is created within a relatively short period
of time of the acquisition, or the indebtedness constitutes a
disproportionate portion of the holder group's assets).
(3) Indebtedness acquired within 6 months of becoming related.
Notwithstanding any other provision of this paragraph (c), a holder of
indebtedness is treated as having acquired the indebtedness in
anticipation of becoming related to the debtor if the holder acquired
the indebtedness less than 6 months before the date the holder becomes
related to the debtor.
(4) Disclosure of potential indirect acquisition--(i) In general. If
a holder of outstanding indebtedness becomes related to the debtor under
the circumstances described in paragraph (c)(4)(ii) or (iii) of this
section, the debtor is required to attach the statement described in
paragraph (c)(4)(iv) of this section to its tax return (or to a
qualified amended return within the meaning of Sec. 1.6664-2(c)(3)) for
the taxable year in which the debtor becomes related to the holder,
unless the debtor reports its income on the basis that the holder
acquired the indebtedness in anticipation of becoming related to the
debtor. Disclosure under this paragraph (c)(4) is in addition to, and is
not in substitution for, any disclosure required to be made under
section 6662, 6664 or 6694.
(ii) Indebtedness represents more than 25 percent of holder group's
assets--(A) In general. Disclosure under this paragraph (c)(4) is
required if, on the date the holder becomes related to the debtor,
indebtedness of the debtor represents more than 25 percent of the fair
market value of the total gross assets of the holder group (as defined
in paragraph (c)(5) of this section).
(B) Determination of total gross assets. In determining the total
gross assets of the holder group, total gross assets do not include any
cash, cash item, marketable stock or security, short-term indebtedness,
option, futures contract, notional principal contract, or similar item
(other than indebtedness of the debtor), nor do total gross assets
include any asset in which the holder has substantially reduced its risk
of loss. In addition, total gross assets do not
[[Page 454]]
include any ownership interest in or indebtedness of a member of the
holder group.
(iii) Indebtedness acquired within 6 to 24 months of becoming
related. Disclosure under this paragraph (c)(4) is required if the
holder acquired the indebtedness 6 months or more before the date the
holder becomes related to the debtor, but less than 24 months before
that date.
(iv) Contents of statement. A statement under this paragraph (c)(4)
must include the following--
(A) A caption identifying the statement as disclosure under
Sec. 1.108-2(c);
(B) An identification of the indebtedness with respect to which
disclosure is made;
(C) The amount of such indebtedness and the amount of income from
discharge of indebtedness is section 108(e)(4) were to apply;
(D) Whether paragraph (c)(4)(ii) or (iii) of this section applies to
the transaction; and
(E) A statement describing the facts and circumstances supporting
the debtor's position that the holder did not acquire the indebtedness
in anticipation of becoming related to the debtor.
(v) Failure to disclose. In addition to any other penalties that may
apply, if a debtor fails to provide a statement required by this
paragraph (c)(4), the holder is presumed to have acquired the
indebtedness in anticipation of becoming related to the debtor unless
the facts and circumstances clearly established that the holder did not
acquire the indebtedness in anticipation of becoming related to the
debtor.
(5) Holder group. For purposes of this paragraph (c), the holder
group consists of the holder of the indebtedness and all persons who are
both--
(i) Related to the holder before the holder becomes related to the
debtor; and
(ii) Related to the debtor after the holder becomes related to the
debtor.
(6) Holding period--(i) Suspensions. The running of the holding
periods set forth in paragraphs (c)(3) and (c)(4)(iii) of this section
is suspended during any period in which the holder or any person related
to the holder is protected (directly or indirectly) against risk of loss
by an option, a short sale, or any other device or transaction.
(ii) Tacking. For purposes of paragraphs (c)(3) and (c)(4)(iii) of
this section, the period for which a holder held the debtor's
indebtedness includes--
(A) The period for which the indebtedness was held by a corporation
to whose attributes the holder succeeded pursuant to section 381; and
(B) The period (ending on the date on which the holder becomes
related to the debtor) for which the indebtedness was held continuously
by members of the holder group (as defined in paragraph (c)(5) of this
section).
(d) Definitions--(1) Acquisition date. For purposes of this section,
the acquisition date is the date on which a direct acquisition of
indebtedness or an indirect acquisition of indebtedness occurs.
(2) Relationship. For purposes of this section, persons are
considered related if they are related within the meaning of sections
267(b) or 707(b)(1). However--
(i) Sections 267(b) and 707(b)(1) are applied as if section
267(c)(4) provided that the family of an individual consists of the
individual's spouse, the individual's children, grandchildren, and
parents, and any spouse of the individual's children or grandchildren;
and
(ii) Two entities that are treated as a single employer under
subsection (b) or (c) of section 414 are treated as having a
relationship to each other that is described in section 267(b).
(e) Exceptions--(1) Indebtedness retired within one year. This
section does not apply to a direct or indirect acquisition of
indebtedness with a stated maturity date on or before the date that is
one year after the acquisition date, if the indebtedness is, in fact,
retired on or before its stated maturity date.
(2) Acquisitions by securities dealers. (i) This section does not
apply to a direct acquisition or an indirect acquisition of indebtedness
by a dealer that acquires and disposes of such indebtedness in the
ordinary course of its business of dealing in securities if--
(A) The dealer accounts for the indebtedness as a security held
primarily for sale to customers in the ordinary course of business;
[[Page 455]]
(B) The dealer disposes of the indebtedness (or it matures while
held by the dealer) within a period consistent with the holding of the
indebtedness for sale to customers in the ordinary course of business,
taking into account the terms of the indebtedness and the conditions and
practices prevailing in the markets for similar indebtedness during the
period in which it is held; and
(C) The dealer does not sell or otherwise transfer the indebtedness
to a person related to the debtor (other than in a sale to a dealer that
in turn meets the requirements of this paragraph (e)(2)).
(ii) A dealer will continue to satisfy the conditions of this
paragraph (e)(2) with respect to indebtedness that is exchanged for
successor indebtedness in a transaction in which unrelated holders also
exchange indebtedness of the same issue, provided that the conditions of
this paragraph (e)(2) are met with respect to the successor
indebtedness.
(iii) For purposes of this paragraph (e)(2), if the period
consistent with the holding of indebtedness for sale to customers in the
ordinary course of business is 30 days or less, the dealer is considered
to dispose of indebtedness within that period if the aggregate principal
amount of indebtedness of that issue sold by the dealer to customers in
the ordinary course of business (or that mature and are paid while held
by the dealer) in the calendar month following the month in which the
indebtedness is acquired equals or exceeds the aggregate principal
amount of indebtedness of that issue held in the dealer's inventory at
the close of the month in which the indebtedness is acquired. If the
period consistent with the holding of indebtedness for sale to customers
in the ordinary course of business is greater than 30 days, the dealer
is considered to dispose of the indebtedness within that period if the
aggregate principal amount of indebtedness of that issue sold by the
dealer to customers in the ordinary course of business (or that mature
and are paid while held by the dealer) within that period equals or
exceeds the aggregate principal amount of indebtedness of that issue
held in inventory at the close of the day on which the indebtedness was
acquired.
(f) Amount of discharge of indebtedness income realized--(1) Holder
acquired the indebtedness by purchase on or less than six months before
the acquisition date. Except as otherwise provided in this paragraph
(f), the amount of discharge of indebtedness income realized under
paragraph (a) of this section is measured by reference to the adjusted
basis of the related holder (or of the holder that becomes related to
the debtor) in the indebtedness on the acquisition date if the holder
acquired the indebtedness by purchase on or less than six months before
the acquisition date. For purposes of this paragraph (f), indebtedness
is acquired ``by purchase'' if the indebtedness in the hands of the
holder is not substituted basis property within the meaning of section
7701(a)(42). However, indebtedness is also considered acquired by
purchase within six months before the acquisition date if the holder
acquired the indebtedness as transferred basis property (within the
meaning of section 7701(a)(43)) from a person who acquired the
indebtedness by purchase on or less than six months before the
acquisition date.
(2) Holder did not acquire the indebtedness by purchase on or less
than six months before the acquisition date. Except as otherwise
provided in this paragraph (f), the amount of discharge of indebtedness
income realized under paragraph (a) of this section is measured by
reference to the fair market value of the indebtedness on the
acquisition date if the holder (or the transferor to the holder in a
transferred basis transaction) did not acquire the indebtedness by
purchase on or less than six months before the acquisition date.
(3) Acquisitions of indebtedness in nonrecognition transactions.
[Reserved]
(4) Avoidance transactions. The amount of discharge of indebtedness
income realized by the debtor under paragraph (a) of this section is
measured by reference to the fair market value of the indebtedness on
the acquisition date if the indebtedness is acquired in a direct or an
indirect acquisition in which a principal purpose for the acquisition is
the avoidance of federal income tax.
[[Page 456]]
(g) Correlative adjustments--(1) Deemed issuance. For income tax
purposes, if a debtor realizes income from discharge of its indebtedness
in a direct or an indirect acquisition under this section (whether or
not the income is excludible under section 108(a)), the debtor's
indebtedness is treated as new indebtedness issued by the debtor to the
related holder on the acquisition date (the deemed issuance). The new
indebtedness is deemed issued with an issue price equal to the amount
used under paragraph (f) of this section to compute the amount realized
by the debtor under paragraph (a) of this section (i.e., either the
holder's adjusted basis or the fair market value of the indebtedness, as
the case may be). Under section 1273(a)(1), the excess of the stated
redemption price at maturity (as defined in section 1273(a)(2)) of the
indebtedness over its issue price is original issue discount (OID)
which, to the extent provided in sections 163 and 1272, is deductible by
the debtor and includible in the gross income of the related holder.
Notwithstanding the foregoing, the Commissioner may provide by Revenue
Procedure or other published guidance that the indebtedness is not
treated as newly issued indebtedness for purposes of designated
provisions of the income tax laws.
(2) Treatment of related holder. The related holder does not
recognize any gain or loss on the deemed issuance described in paragraph
(g)(1) of this section. The related holder's adjusted basis in the
indebtedness remains the same as it was immediately before the deemed
issuance. The deemed issuance is treated as a purchase of the
indebtedness by the related holder for purposes of section 1272(a)(7)
(pertaining to reduction of original issue discount where a subsequent
holder pays acquisition premium) and section 1276 (pertaining to
acquisitions of debt at a market discount).
(3) Loss deferral on disposition of indebtedness acquired in certain
exchanges. (i) Any loss otherwise allowable to a related holder on the
disposition at any time of indebtedness acquired in a direct or indirect
acquisition (whether or not any discharge of indebtedness income was
realized under paragraph (a) of this section) is deferred until the date
the debtor retires the indebtedness if--
(A) The related holder acquired the debtor's indebtedness in
exchange for its own indebtedness; and
(B) The issue price of the related holder's indebtedness was not
determined by reference to its fair market value (e.g., the issue price
was determined under section 1273(b)(4) or 1274(a) or any other
provision of applicable law).
(ii) Any comparable tax benefit that would otherwise be available to
the holder, debtor, or any person related to either, in any other
transaction that directly or indirectly results in the disposition of
the indebtedness is also deferred until the date the debtor retires the
indebtedness.
(4) Examples. The following examples illustrate the application of
this paragraph (g). In each example, all taxpayers are calendar-year
taxpayers, no taxpayer is insolvent or under the jurisdiction of a court
in a title 11 case and no indebtedness is qualified farm indebtedness
described in section 108(g).
Example 1. (i) P, a domestic corporation, owns 70 percent of the
single class of stock of S, a domestic corporation. S has outstanding
indebtedness that has an issue price of $10,000,000 and provides for
monthly interest payments of $80,000 payable at the end of each month
and a payment at maturity of $10,000,000. The indebtedness has a stated
maturity date of December 31, 1994. On January 1, 1992, P purchases S's
indebtedness from I, an individual not related to S within the meaning
of paragraph (d)(2) of this section, for cash in the amount of
$9,000,000. S repays the indebtedness in full at maturity.
(ii) Under section 61(a)(12), section 108(e)(4), and paragraphs (a)
and (f) of this section, S realizes $1,000,000 of income from discharge
of indebtedness on January 1, 1992.
(iii) Under paragraph (g)(1) of this section, the indebtedness is
treated as issued to P on January 1, 1992, with an issue price of
$9,000,000. Under section 1273(a), the $1,000,000 excess of the stated
redemption price at maturity of the indebtedness ($10,000,000) over its
issue price ($9,000,000) is original issue discount, which is includible
in gross income by P and deductible by S over the remaining term of the
indebtedness under sections 163(e) and 1272(a).
(iv) Accordingly, S deducts and P includes in income original issue
discount, in addition to stated interest, as follows: in 1992,
$289,144.88; in 1993, $331,286.06; and in 1994, $379,569.06.
[[Page 457]]
Example 2. The facts are the same as in Example 1, except that on
January 1, 1992, P sells S's indebtedness to J, who is not related to S
within the meaning of paragraph (d)(2) of this section, for $9,400,000
in cash. J holds S's indebtedness to maturity. On January 1, 1993, P's
adjusted basis in S's indebtedness is $9,289,144.88. Accordingly, P
realizes gain in the amount of $110,855.12 upon the disposition. S and J
continue to deduct and include the original issue discount on the
indebtedness in accordance with Example 1. The amount of original issue
discount includible by J is reduced by the $110,855.12 acquisition
premium as provided in section 1272(a)(7).
Example 3. The facts are the same as in Example 1, except that on
February 1, 1992 (one month after P purchased S's indebtedness), S
retires the indebtedness for an amount of cash equal to the fair market
value of the indebtedness. Assume that the fair market value of the
indebtedness is $9,022,621.41, which in this case equals the issue price
of indebtedness determined under paragraph (g)(1) of this section
($9,000,000) plus the accrued original issue discount through February 1
($22,621.41). Section 1.61-12(c)(3) provides that if indebtedness is
repurchased for a price that is exceeded by the issue price of the
indebtedness plus the amount of discount already deducted, the excess is
income from discharge of indebtedness. Therefore, S does not realize
income from discharge of indebtedness. The result would be the same if P
had contributed the indebtedness to the capital of S. Under section
108(e)(6), S would be treated as having satisfied the indebtedness with
an amount of money equal to P's adjusted basis and, under section
1272(d)(2), P's adjusted basis is equal to $9,022,621.41.
Example 4. (i) P, a domestic corporation, owns 70 percent of the
single class of stock of S, a domestic corporation. On January 1, 1986,
P issued indebtedness that has an issue price of $5,000,000 and provides
for no stated interest payments and a payment at maturity of
$10,000,000. The indebtedness has a stated maturity date of December 31,
1995. On January 1, 1992, S purchases P's indebtedness from K, a
partnership not related to P within the meaning of paragraph (d)(2) of
this section, for cash in the amount of $6,000,000. The sum of the
debt's issue price and previously deducted original issue discount is
$7,578,582.83. P repays the indebtedness in full at maturity.
(ii) Under section 61(a)(12), section 108(e)(4), and paragraphs (a)
and (f) of this section, P realizes $1,578,582.83 in income from
discharge of indebtedness ($7,578,582.83 minus $6,000,000) on January 1,
1992.
(iii) Under paragraph (g)(1) of this section, the indebtedness is
treated as issued to S on January 1, 1992, with an issue price of
$6,000,000. Under section 1273(a), the $4,000,000 excess of the stated
redemption price at maturity of the indebtedness ($10,000,000) over its
issue price ($6,000,000) is orignial issue discount, which is includible
in gross income by S and deductible by P over the remaining term of the
indebtedness under sections 163(e) and 1272(a).
(iv) Accordingly, P deducts and S includes in income original issue
discount as follows: in 1992, $817,316.20; in 1993, $928,650.49; in
1994, $1,055,150.67; and in 1995, $1,198,882.64.
(h) Effective date. This section applies to any transaction
described in paragraph (a) and in either paragraph (b) or (c) of this
section with an acquisition date on or after March 21, 1991. Although
this section does not apply to direct or indirect acquisitions occurring
before March 21, 1991, section 108(e)(4) is effective for any
transaction after December 31, 1980, subject to the rules of section 7
of the Bankruptcy Tax Act of 1980 (Pub. L. 96-589, 94 Stat. 3389, 3411).
Taxpayers may use any reasonable method of determining the amount of
discharge of indebtedness income realized and the treatment of
correlative adjustments under section 108(e)(4) for acquisitions of
indebtedness before March 21, 1991, if such method is applied
consistently by both the debtor and related holder.
[T.D. 8460, 57 FR 61808, Dec. 29, 1992]
Sec. 1.108-3 Intercompany losses and deductions.
(a) General rule. This section applies to certain losses and
deductions from the sale, exchange, or other transfer of property
between corporations that are members of a consolidated group or a
controlled group (an intercompany transaction). See section 267(f)
(controlled groups) and Sec. 1.1502-13 (consolidated groups) for
applicable definitions. For purposes of determining the attributes to
which section 108(b) applies, a loss or deduction not yet taken into
account under section 267(f) or Sec. 1.1502-13 (an intercompany loss or
deduction) is treated as basis described in section 108(b) that the
transferor retains in property. To the extent a loss not yet taken into
account is reduced under this section, it cannot subsequently be taken
into account under section 267(f) or Sec. 1.1502-13. For example, if S
and B are corporations filing a consolidated return, and S sells land
with a $100 basis to B for $90 and the $10 loss is deferred under
section 267(f) and
[[Page 458]]
Sec. 1.1502-13, the deferred loss is treated for purposes of section
108(b) as $10 of basis that S has in land (even though S has no
remaining interest in the land sold to B) and is subject to reduction
under section 108(b)(2)(E). Similar principles apply, with appropriate
adjustments, if S and B are members of a controlled group and S's loss
is deferred only under section 267(f).
(b) Effective date. This section applies with respect to discharges
of indebtedness occurring on or after September 11, 1995.
[T.D. 8597, 60 FR 36680, July 18, 1995]
Sec. 1.108-4 Election to reduce basis of depreciable property under section 108(b)(5) of the Internal Revenue Code .
(a) Description. An election under section 108(b)(5) is available
whenever a taxpayer excludes discharge of indebtedness income (COD
income) from gross income under sections 108(a)(1)(A), (B), or (C)
(concerning title 11 cases, insolvency, and qualified farm indebtedness,
respectively). See sections 108(d)(2) and (3) for the definitions of
title 11 case and insolvent. See section 108(g)(2) for the definition of
qualified farm indebtedness.
(b) Time and manner. To make an election under section 108(b)(5), a
taxpayer must enter the appropriate information on Form 982, Reduction
of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Basis Adjustment), and attach the form to the timely filed (including
extensions) Federal income tax return for the taxable year in which the
taxpayer has COD income that is excluded from gross income under section
108(a). An election under this section may be revoked only with the
consent of the Commissioner.
(c) Effective date. This section applies to elections concerning
discharges of indebtedness occurring on or after October 22, 1998.
[T.D. 8787, 63 FR 56562, Oct. 22, 1998]
Sec. 1.108-5 Time and manner for making election under the Omnibus Budget Reconciliation Act of 1993.
(a) Description. Section 108(c)(3)(C), as added by section 13150 of
the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 107 Stat.
446), allows certain noncorporate taxpayers to elect to treat certain
indebtedness described in section 108(c)(3) that is discharged after
December 31, 1992, as qualified real property business indebtedness.
This discharged indebtedness is excluded from gross income to the extent
allowed by section 108.
(b) Time and manner for making election. The election described in
this section must be made on the timely-filed (including extensions)
Federal income tax return for the taxable year in which the taxpayer has
discharge of indebtedness income that is excludible from gross income
under section 108(a). The election is to be made on a completed Form
982, in accordance with that Form and its instructions.
(c) Revocability of election. The election described in this section
is revocable with the consent of the Commissioner.
(d) Effective date. The rules set forth in this section are
effective December 27, 1993.
[T.D. 8688, 61 FR 65322, Dec. 12, 1996. Redesignated by T.D. 8787, 63 FR
56563, Oct. 22, 1998]
Sec. 1.108-6 Limitations on the exclusion of income from the discharge of qualified real property business indebtedness.
(a) Indebtedness in excess of value. With respect to any qualified
real property business indebtedness that is discharged, the amount
excluded from gross income under section 108(a)(1)(D) (concerning
discharges of qualified real property business indebtedness) shall not
exceed the excess, if any, of the outstanding principal amount of that
indebtedness immediately before the discharge over the net fair market
value of the qualifying real property, as defined in Sec. 1.1017-
1(c)(1), immediately before the discharge. For purposes of this section,
net fair market value means the fair market value of the qualifying real
property (notwithstanding section 7701(g)), reduced by the outstanding
principal amount of any qualified real property business indebtedness
(other than the discharged indebtedness) that is secured by such
property immediately before and after the discharge. Also, for purposes
of section 108(c)(2)(A) and this section, outstanding principal amount
means the
[[Page 459]]
principal amount of indebtedness together with all additional amounts
owed that, immediately before the discharge, are equivalent to
principal, in that interest on such amounts would accrue and compound in
the future, except that outstanding principal amount shall not include
amounts that are subject to section 108(e)(2) and shall be adjusted to
account for unamortized premium and discount consistent with section
108(e)(3).
(b) Overall limitation. The amount excluded from gross income under
section 108(a)(1)(D) shall not exceed the aggregate adjusted bases of
all depreciable real property held by the taxpayer immediately before
the discharge (other than depreciable real property acquired in
contemplation of the discharge) reduced by the sum of any--
(1) Depreciation claimed for the taxable year the taxpayer excluded
discharge of indebtedness from gross income under section 108(a)(1)(D);
and
(2) Reductions to the adjusted bases of depreciable real property
required under section 108(b) or section 108(g) for the same taxable
year.
(c) Effective date. This section applies to discharges of qualified
real property business indebtedness occurring on or after October 22,
1998.
[T.D. 8787, 63 FR 56563, Oct. 22, 1998]
Sec. 1.108(c)-1T [Reserved]
Sec. 1.109-1 Exclusion from gross income of lessor of real property of value of improvements erected by lessee.
(a) Income derived by a lessor of real property upon the
termination, through forfeiture or otherwise, of the lease of such
property and attributable to buildings erected or other improvements
made by the lessee upon the leased property is excluded from gross
income. However, where the facts disclose that such buildings or
improvements represent in whole or in part a liquidation in kind of
lease rentals, the exclusion from gross income shall not apply to the
extent that such buildings or improvements represent such liquidation.
The exclusion applies only with respect to the income realized by the
lessor upon the termination of the lease and has no application to
income, if any, in the form of rent, which may be derived by a lessor
during the period of the lease and attributable to buildings erected or
other improvements made by the lessee. It has no application to income
which may be realized by the lessor upon the termination of the lease
but not attributable to the value of such buildings or improvements.
Neither does it apply to income derived by the lessor subsequent to the
termination of the lease incident to the ownership of such buildings or
improvements.
(b) The provisions of this section may be illustrated by the
following example:
Example. The A Corporation leased in 1945 for a period of 50 years
unimproved real property to the B Corporation under a lease providing
that the B Corporation erect on the leased premises an office building
costing $500,000, in addition to paying the A Corporation a lease rental
of $10,000 per annum beginning on the date of completion of the
improvements, the sum of $100,000 being placed in escrow for the payment
of the rental. The building was completed on January 1, 1950. The lease
provided that all improvements made by the lessee on the leased property
would become the absolute property of the A Corporation on the
termination of the lease by forfeiture or otherwise and that the lessor
would become entitled on such termination to the remainder of the sum,
if any, remaining in the escrow fund. The B Corporation forfeited its
lease on January 1, 1955, when the improvements had a value of $100,000.
Under the provisions of section 109, the $100,000 is excluded from gross
income. The amount of $50,000 representing the remainder in the escrow
fund is forfeited to the A Corporation and is included in the gross
income of that taxpayer. As to the basis of the property in the hands of
the A Corporation, see Sec. 1.1019-1.
Sec. 1.110-1 Qualified lessee construction allowances.
(a) Overview. Amounts provided to a lessee by a lessor for property
to be constructed and used by the lessee pursuant to a lease are not
includible in the lessee's gross income if the amount is a qualified
lessee construction allowance under paragraph (b) of this section.
(b) Qualified lessee construction allowance--(1) In general. A
qualified lessee construction allowance means any amount received in
cash (or treated as a rent reduction) by a lessee from a lessor--
[[Page 460]]
(i) Under a short-term lease of retail space;
(ii) For the purpose of constructing or improving qualified long-
term real property for use in the lessee's trade or business at that
retail space; and
(iii) To the extent the amount is expended by the lessee in the
taxable year received on the construction or improvement of qualified
long-term real property for use in the lessee's trade or business at
that retail space.
(2) Definitions--(i) Qualified long-term real property is
nonresidential real property under section 168(e)(2)(B) that is part of,
or otherwise present at, the retail space referred to in paragraph
(b)(1)(i) of this section and which reverts to the lessor at the
termination of the lease. Thus, qualified long-term real property does
not include property qualifying as section 1245 property under section
1245(a)(3).
(ii) Short-term lease is a lease (or other agreement for occupancy
or use) of retail space for 15 years or less (as determined pursuant to
section 168(i)(3)).
(iii) Retail space is nonresidential real property under section
168(e)(2)(B) that is leased, occupied, or otherwise used by the lessee
in its trade or business of selling tangible personal property or
services to the general public. The term retail space includes not only
the space where the retail sales are made, but also space where
activities supporting the retail activity are performed (such as an
administrative office, a storage area, and employee lounge). Examples of
services typically sold to the general public include services provided
by hair stylists, tailors, shoe repairmen, doctors, lawyers,
accountants, insurance agents, stock brokers, securities dealers
(including dealers who sell securities out of inventory), financial
advisors and bankers. For purposes of this paragraph (b)(2)(iii), a
taxpayer is selling to the general public if the products or services
for sale are made available to the general public, even if the product
or service is targeted to certain customers or clients.
(3) Purpose requirement. An amount will meet the requirement in
paragraph (b)(1)(ii) of this section only to the extent that the lease
agreement for the retail space expressly provides that the construction
allowance is for the purpose of constructing or improving qualified
long-term real property for use in the lessee's trade or business at the
retail space. An ancillary agreement between the lessor and the lessee
providing for a construction allowance, executed contemporaneously with
the lease or during the term of the lease, is considered a provision of
the lease agreement for purposes of the preceding sentence, provided the
agreement is executed before payment of the construction allowance.
(4) Expenditure requirement--(i) In general. Expenditures referred
to in paragraph (b)(1)(iii) of this section may be treated as being made
first from the lessee's construction allowance. Tracing of the
construction allowance to the actual lessee expenditures for the
construction or improvement of qualified long-term real property is not
required. However, the lessee should maintain accurate records of the
amount of the qualified lessee construction allowance received and the
expenditures made for qualified long-term real property.
(ii) Time when expenditures deemed made. For purposes of paragraph
(b)(1)(iii) of this section, an amount is deemed to have been expended
by a lessee in the taxable year in which the construction allowance was
received by the lessee if--
(A) The amount is expended by the lessee within 8\1/2\ months after
the close of the taxable year in which the amount was received; or
(B) The amount is a reimbursement from the lessor for amounts
expended by the lessee in a prior year and for which the lessee has not
claimed any depreciation deductions.
(5) Consistent treatment by lessor. Qualified long-term real
property constructed or improved with any amount excluded from a
lessee's gross income by reason of paragraph (a) of this section must be
treated as nonresidential real property owned by the lessor (for
purposes of depreciation under 168(e)(2)(B) and determining gain or loss
under section 168(i)(8)(B)). For purposes of the preceding sentence, the
[[Page 461]]
lessor must treat the construction allowance as fully expended in the
manner required by paragraph (b)(1)(iii) of this section unless the
lessor is notified by the lessee in writing to the contrary. General tax
principles apply for purposes of determining when the lessor may begin
depreciation of its nonresidential real property. The lessee's exclusion
from gross income under paragraph (a) of this section, however, is not
dependent upon the lessor's treatment of the property as nonresidential
real property.
(c) Information required to be furnished--(1) In general. The lessor
and the lessee described in paragraph (b) of this section who are paying
and receiving a qualified lessee construction allowance, respectively,
must furnish the information described in paragraph (c)(3) of this
section in the time and manner prescribed in paragraph (c)(2) of this
section.
(2) Time and manner for furnishing information. The requirement to
furnish information under paragraph (c)(1) of this section is met by
attaching a statement with the information described in paragraph (c)(3)
of this section to the lessor's or the lessee's, as applicable, timely
filed (including extensions) Federal income tax return for the taxable
year in which the construction allowance was paid by the lessor or
received by the lessee (either in cash or treated as a rent reduction),
as applicable. A lessor or a lessee may report the required information
for several qualified lessee construction allowances on a combined
statement. However, a lessor's or a lessee's failure to provide
information with respect to each lease will be treated as a separate
failure to provide information for purposes of paragraph (c)(4) of this
section.
(3) Information required--(i) Lessor. The statement provided by the
lessor must contain the lessor's name (and, in the case of a
consolidated group, the parent's name), employer identification number,
taxable year and the following information for each lease:
(A) The lessee's name (in the case of a consolidated group, the
parent's name).
(B) The address of the lessee.
(C) The employer identification number of the lessee.
(D) The location of the retail space (including mall or strip center
name, if applicable, and store name).
(E) The amount of the construction allowance.
(F) The amount of the construction allowance treated by the lessor
as nonresidential real property owned by the lessor.
(ii) Lessee. The statement provided by the lessee must contain the
lessee's name (and, in the case of a consolidated group, the parent's
name), employer identification number, taxable year and the following
information for each lease:
(A) The lessor's name (in the case of a consolidated group, the
parent's name).
(B) The address of the lessor.
(C) The employer identification number of the lessor.
(D) The location of the retail space (including mall or strip center
name, if applicable, and store name).
(E) The amount of the construction allowance.
(F) The amount of the construction allowance that is a qualified
lessee construction allowance under paragraph (b) of this section.
(4) Failure to furnish information. A lessor or a lessee that fails
to furnish the information required in this paragraph (c) may be subject
to a penalty under section 6721.
(d) Effective date. This section is applicable to leases entered
into on or after October 5, 2000.
[T.D. 8901, 65 FR 53586, Sept. 5, 2000]
Sec. 1.111-1 Recovery of certain items previously deducted or credited.
(a) General. Section 111 provides that income attributable to the
recovery during any taxable year of bad debts, prior taxes, and
delinquency amounts shall be excluded from gross income to the extent of
the ``recovery exclusion'' with respect to such items. The rule of
exclusion so prescribed by statute applies equally with respect to all
other losses, expenditures and accruals made the basis of deductions
from gross income for prior taxable years, including war losses referred
to in section 127 of the Internal Revenue Code of 1939, but not
including deductions with respect
[[Page 462]]
to depreciation, depletion, amortization, or amortizable bond premiums.
The term ``recovery exclusion'' as used in this section means an amount
equal to the portion of the bad debts, prior taxes, and delinquency
amounts (the items specifically referred to in section 111), and of all
other items subject to the rule of exclusion which, when deducted or
credited for a prior taxable year, did not result in a reduction of any
tax of the taxpayer under subtitle A (other than the accumulated
earnings tax imposed by section 531 or the personal holding company tax
imposed by section 541) of the Internal Revenue Code of 1954 or
corresponding provisions of prior income tax laws (other than the World
War II excess profits tax imposed under subchapter E, chapter 2 of the
Internal Revenue Code of 1939).
(1) Section 111 items. The term ``section 111 items'' as used in
this section means bad debts, prior taxes, delinquency amounts, and all
other items subject to the rule of exclusion, for which a deduction or
credit was allowed for a prior taxable year. If a bad debt was
previously charged against a reserve by a taxpayer on the reserve method
of treating bad debts, it was not deducted, and it is therefore not
considered a section 111 item. Bad debts, prior taxes, and delinquency
amounts are defined in section 111(b) (1), (2), and (3), respectively.
An example of a delinquency amount is interest on delinquent taxes. An
example of the other items not expressly referred to in section 111 but
nevertheless subject to the rule of exclusion is a loss sustained upon
the sale of stock and later recovered, in whole or in part, through an
action against the party from whom such stock had been purchased.
(2) Definition of ``recovery''. Recoveries result from the receipt
of amounts in respect of the previously deducted or credited section 111
items, such as from the collection or sale of a bad debt, refund or
credit of taxes paid, or cancellation of taxes accrued. Care should be
taken in the case of bad debts which were treated as only partially
worthless in prior years to distinguish between the item described in
section 111, that is, the part of such debt which was deducted, and the
part not previously deducted, which is not a section 111 item and is
considered the first part collected. The collection of the part not
deducted is not considered a ``recovery''. Furthermore, the term
``recovery'' does not include the gain resulting from the receipt of an
amount on account of a section 111 item which, together with previous
such receipts, exceeds the deduction or credit previously allowed for
such item. For instance, a $100 corporate bond purchased for $40 and
later deducted as worthless is subsequently collected to the extent of
$50. The $10 gain (excess of $50 collection over $40 cost) is not a
recovery of a section 111 item. Such gain is in no case excluded from
gross income under section 111, regardless of whether the $40 recovery
is or is not excluded.
(3) Treatment of debt deducted in more than one year by reason of
partial worthlessness. In the case of a bad debt deducted in part for
two or more prior years, each such deduction of a part of the debt is
considered a separate section 111 item. A recovery with respect to such
debt is considered first a recovery of those items (or portions
thereof), resulting from such debt, for which there are recovery
exclusions. If there are recovery exclusions for two or more items
resulting from the same bad debt, such items are considered recovered in
the order of the taxable years for which they were deducted, beginning
with the latest. The recovery exclusion for any such item is determined
by considering the recovery exclusion with respect to the prior year for
which such item was deducted as being first used to offset all other
applicable recoveries in the year in which the bad debt is recovered.
(4) Special provisions as to worthless bonds, etc., which are
treated as capital losses. Certain bad debts arising from the
worthlessness of securities and certain nonbusiness bad debts are
treated as losses from the sale or exchange of capital assets. See
sections 165(g) and 166(d). The amounts of the deductions allowed for
any year under section 1211 on account of such losses for such year are
considered to be section 111 items. Any part of such losses which, under
section 1211, is a deduction for a subsequent year through the capital
loss
[[Page 463]]
carryover (any later receipt of an amount with respect to such deducted
loss is a recovery) is considered a section 111 item for the year in
which such loss was sustained.
(b) Computation of recovery exclusion--(1) Amount of recovery
exclusion allowable for year of recovery. For the year of any recovery,
the section 111 items which were deducted or credited for one prior year
are considered as a group and the recovery thereon is considered
separately from recoveries of any items which were deducted or credited
for other years. This recovery is excluded from gross income to the
extent of the recovery exclusion with respect to this group of items as
(i) determined for the original year for which such items were deducted
or credited (see subparagraph (2) of this paragraph) and (ii) reduced by
the excludable recoveries in intervening years on account of all section
111 items for such original year. A taxpayer claiming a recovery
exclusion shall submit, at the time the exclusion is claimed, the
computation of the recovery exclusion claimed for the original year for
which the items were deducted or credited, and computations showing the
amount recovered in intervening years on account of the section 111
items deducted or credited for the original year.
(2) Determination of recovery exclusion for original year for which
items were deducted or credited. (i) The recovery exclusion for the
taxable year for which section 111 items were deducted or credited (that
is, the ``original taxable year'') is the portion of the aggregate
amount of such deductions and credits which could be disallowed without
causing an increase in any tax of the taxpayer imposed under subtitle A
(other than the accumulated earnings tax imposed by section 531 or the
personal holding company tax imposed by section 541) of the Internal
Revenue Code of 1954 or corresponding provisions of prior income tax
laws (other than the World War II excess profits tax imposed under
subchapter E, chapter 2 of the Internal Revenue Code of 1939). For the
purpose of such recovery exclusion, consideration must be given to the
effect of net operating loss carryovers and carrybacks or capital loss
carryovers.
(ii) This rule shall be applied by determining the recovery
exclusion as the aggregate amount of the section 111 items for the
original year for which such items were deducted or credited reduced by
whichever of the following amounts is the greater:
(a) The difference between (1) the taxable income for such original
year and (2) the taxable income computed without regard to the section
111 items for such original year.
(b) In the case of a taxpayer subject to any income tax in lieu of
normal tax or surtax or both (except the alternative tax on capital
gains imposed by section 1201, which is disregarded), the difference
between (1) the income subject to such tax for such original year and
(2) the income subject to such tax computed without regard to the
section 111 items for such original year.
(Neither the amount determined under (1) nor the amount under (2) of (a)
or (b) of this subdivision shall in any case be considered less than
zero.) For this determination of the recovery exclusion, the aggregate
of the section 111 items must be further decreased by the portion
thereof which caused a reduction in tax in preceding or succeeding
taxable years through any net operating loss carryovers or carrybacks or
capital loss carryovers affected by such items. This decrease is the
aggregate of the largest amount determined for each of such preceding
and succeeding years under (a) and (b) of this subdivision, the
computation of each carryover or carryback to the preceding or
succeeding year being made under (1) of (a) and (b) of this subdivision
with regard to the section 111 items for the original year and such
computation being made under (2) of (a) and (b) of this subdivision
without regard to such items. For the purpose of the preceding sentence,
the computations under both (1) and (2) of (a) and (b) of this
subdivision shall be made without regard to any section 111 items for
such preceding or succeeding year and the carryovers and carrybacks to
such year shall be determined without regard to any section 111 items
for years subsequent to the original year.
(iii) The determination of the recovery exclusion for original
taxable years
[[Page 464]]
subject to the provisions of the Internal Revenue Code of 1939 shall be
made under 26 CFR (1939) 39.22(b)(12)-1(b)(2) (Regulations 118).
(3) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. A single individual with no dependents has for his 1954
taxable year the following income and deductions:
------------------------------------------------------------------------
With Without
deduction deduction
of of
section section
111 items 111 items
------------------------------------------------------------------------
Gross income...................................... $25,000 $25,000
=====================
Less deductions:
Depreciation.................................... 20,000 20,000
Business bad debts and taxes.................... 6,300 .........
Personal exemption.............................. 600 600
---------------------
26,900 20,600
=====================
Taxable income or (loss).......................... (1,900) 4,400
Adjustment under section 172(d)(3)................ 600 .........
---------------------
Net operating loss............................ (1,300) .........
------------------------------------------------------------------------
The full amount of the net operating loss of $1,300 is carried back and
allowed as a deduction for 1952. The aggregate of the section 111 items
for 1954 is $6,300 (bad debts and taxes). The recovery exclusion on
account of section 111 items for 1954 is $600, determined by reducing
the $6,300 aggregate of the section 111 items by $5,700, i.e., the sum
of (1) the difference between the amount of the taxable income for 1954
computed without regard to the section 111 items ($4,400) and the amount
of the taxable income for 1954 (not less than zero) computed by taking
such items into account, and (2) the amount of the net operating loss
($1,300) which caused the reduction in tax for 1952 by reason of the
carryback provisions. If in 1956 the taxpayer recovers $400 of the bad
debts, all of the recovery is excluded from the income by reason of the
recovery exclusion of $600 determined for the original year 1954. If in
1957 the taxpayer recovers an additional $300 of the bad debts, only
$200 is excluded from gross income. That is, the recovery exclusion of
$600 determined for the original year 1954 is reduced by the $400
recovered in 1956, leaving a balance of $200 which is used in 1957. The
balance of the amount recovered in 1957, $100 ($300 less $200), is
included in gross income for 1957.
(c) Provisions as to taxes imposed by section 531 (relating to the
accumulated earnings tax) and section 541 (relating to the tax on
personal holding companies). A recovery exclusion allowed for purposes
of subtitle A (other than section 531 or section 541) of the Internal
Revenue Code of 1954 shall also be allowed for the purpose of
determining the accumulated earnings tax under section 531 or the
personal holding company tax under section 541 regardless of whether or
not the section 111 items on which such recovery exclusion is based
resulted in a reduction of the tax under section 531 or section 541 of
the Internal Revenue Code of 1954 (or corresponding provisions of prior
income tax laws) for the prior taxable year. Furthermore, if there is
recovery of a section 111 item which was not allowable as a deduction or
credit for the prior taxable year for purposes of Subtitle A (not
including section 531 or section 541) or corresponding provisions of
prior income tax laws (other than Subchapter E, Chapter 2 of the
Internal Revenue Code of 1939, relating to World War II excess profits
tax), but was allowable for such prior taxable year in determining the
tax under section 531 or section 541 (or corresponding provisions of
prior income tax laws) then for the purpose of determining the tax under
section 531 or section 541 a recovery exclusion shall be allowable with
respect to such recovery if the section 111 item did not result in a
reduction of the tax under section 531 or section 541 (or corresponding
provisions of prior income tax laws).
Sec. 1.112-1 Combat zone compensation of members of the Armed Forces.
(a) Combat zone compensation exclusion--(1) Amount excluded. In
addition to the exemptions and credits otherwise applicable, section 112
excludes from gross income the following compensation of members of the
Armed Forces:
(i) Enlisted personnel. Compensation received for active service as
a member below the grade of commissioned officer in the Armed Forces of
the United States for any month during any part of which the member
served in a combat zone or was hospitalized at any place as a result of
wounds, disease, or injury incurred while serving in the combat zone.
(ii) Commissioned officers. Compensation not exceeding the monthly
dollar limit received for active service as a commissioned officer in
the Armed
[[Page 465]]
Forces of the United States for any month during any part of which the
officer served in a combat zone or was hospitalized at any place as a
result of wounds, disease, or injury incurred while serving in the
combat zone. The monthly dollar limit is the monthly amount excludable
from the officer's income under section 112(b) as amended. Beginning in
1966, the monthly dollar limit for periods of active service after 1965
became $500. As of September 10, 1993, the monthly dollar limit
continues to be $500.
(2) Time limits on exclusion during hospitalization. Compensation
received for service for any month of hospitalization that begins more
than 2 years after the date specified by the President in an Executive
Order as the date of the termination of combatant activities in the
combat zone cannot be excluded under section 112. Furthermore,
compensation received while hospitalized after January 1978 for wounds,
disease, or injury incurred in the Vietnam combat zone designated by
Executive Order 11216 cannot be excluded under section 112.
(3) Special terms. A commissioned warrant officer is not a
commissioned officer under section 112(b) and is entitled to the
exclusion allowed to enlisted personnel under section 112(a).
Compensation, for the purpose of section 112, does not include pensions
and retirement pay. Armed Forces of the United States is defined (and
members of the Armed Forces are described) in section 7701(a)(15).
(4) Military compensation only. Only compensation paid by the Armed
Forces of the United States to members of the Armed Forces can be
excluded under section 112, except for compensation paid by an agency or
instrumentality of the United States or by an international organization
to a member of the Armed Forces whose military active duty status
continues during the member's assignment to the agency or
instrumentality or organization on official detail. Compensation paid by
other employers (whether private enterprises or governmental entities)
to members of the Armed Forces cannot be excluded under section 112 even
if the payment is made to supplement the member's military compensation
or is labeled by the employer as compensation for active service in the
Armed Forces of the United States. Compensation paid to civilian
employees of the federal government, including civilian employees of the
Armed Forces, cannot be excluded under section 112, except as provided
in section 112(d)(2) (which extends the exclusion to compensation of
civilian employees of the federal government in missing status due to
the Vietnam conflict).
(b) Service in combat zone--(1) Active service. The exclusion under
section 112 applies only if active service is performed in a combat
zone. A member of the Armed Forces is in active service if the member is
actually serving in the Armed Forces of the United States. Periods
during which a member of the Armed Forces is absent from duty on account
of sickness, wounds, leave, internment by the enemy, or other lawful
cause are periods of active service. A member of the Armed Forces in
active service in a combat zone who becomes a prisoner of war or missing
in action in the combat zone is deemed, for the purpose of section 112,
to continue in active service in the combat zone for the period for
which the member is treated as a prisoner of war or as missing in action
for military pay purposes.
(2) Combat zone status. Except as provided in paragraphs (e) and (f)
of this section, service is performed in a combat zone only if it is
performed in an area which the President of the United States has
designated by Executive Order, for the purpose of section 112, as an
area in which Armed Forces of the United States are or have been engaged
in combat, and only if it is performed on or after the date designated
by the President by Executive Order as the date of the commencing of
combatant activities in that zone and on or before the date designated
by the President by Executive Order as the date of the termination of
combatant activities in that zone.
(3) Partial month service. If a member of the Armed Forces serves in
a combat zone for any part of a month, the member is entitled to the
exclusion for that month to the same extent as if the member has served
in that zone for the entire month. If a member of the
[[Page 466]]
Armed Forces is hospitalized for a part of a month as a result of
wounds, disease, or injury incurred while serving in that zone, the
member is entitled to the exclusion for the entire month.
(4) Payment time and place. The time and place of payment are
irrelevant in considering whether compensation is excludable under
section 112; rather, the time and place of the entitlement to
compensation determine whether the compensation is excludable under
section 112. Thus, compensation can be excluded under section 112
whether or not it is received outside a combat zone, or while the
recipient is hospitalized, or in a year different from that in which the
service was rendered for which the compensation is paid, provided that
the member's entitlement to the compensation fully accrued in a month
during which the member served in the combat zone or was hospitalized as
a result of wounds, disease, or injury incurred while serving in the
combat zone. For this purpose, entitlement to compensation fully accrues
upon the completion of all actions required of the member to receive the
compensation. Compensation received by a member of the Armed Forces for
services rendered while in active service can be excluded under section
112 even though payment is received subsequent to discharge or release
from active service. Compensation credited to a deceased member's
account for a period subsequent to the established date of the member's
death and received by the member's estate can be excluded from the gross
income of the estate under section 112 to the same extent that it would
have been excluded from the gross income of the member had the member
lived and received the compensation.
(5) Examples of combat zone compensation. The rules of this section
are illustrated by the following examples:
Example 1. On January 5, outside of a combat zone, an enlisted
member received basic pay for active duty services performed from the
preceding December 1 through December 31. On December 4 (and no other
date), the member performed services within a combat zone. The member
may exclude from income the entire payment received on January 5,
although the member served in the combat zone only one day during
December, received the payment outside of the combat zone, and received
the payment in a year other than the year in which the combat zone
services were performed.
Example 2. From March through December, an enlisted member became
entitled to 25 days of annual leave while serving in a combat zone. The
member used all 25 days of leave in the following year. The member may
exclude from income the compensation received for those 25 days, even if
the member performs no services in the combat zone in the year the
compensation is received.
Example 3. From March through December, a commissioned officer
became entitled to 25 days of annual leave while serving in a combat
zone. During that period the officer also received basic pay of $1,000
per month from which the officer excluded from income $500 per month
(exhausting the monthly dollar limit under section 112 for that period).
The officer used all 25 days of leave in the following year. The officer
may not exclude from income any compensation received in the following
year related to those 25 days of leave, since the officer had already
excluded from income the maximum amount of combat zone compensation for
the period in which the leave was earned.
Example 4. In November, while serving in a combat zone, an enlisted
member competing for a cash award submitted an employee suggestion.
After November, the member neither served in a combat zone nor was
hospitalized for wounds incurred in the combat zone. In June of the
following year, the member's suggestion was selected as the winner of
the competition and the award was paid. The award can be excluded from
income as combat zone compensation although granted and received outside
of the combat zone, since the member completed the necessary action to
win the award (submission of the suggestion) in a month during which the
member served in the combat zone.
Example 5. In July, while serving in a combat zone, an enlisted
member voluntarily reenlisted. After July, the member neither served in
a combat zone nor was hospitalized for wounds incurred in the combat
zone. In February of the following year, the member received a bonus as
a result of the July reenlistment. The reenlistment bonus can be
excluded from income as combat zone compensation although received
outside of the combat zone, since the member completed the necessary
action for entitlement to the reenlistment bonus in a month during which
the member served in the combat zone.
Example 6. In July, while serving outside a combat zone, an enlisted
member voluntarily reenlisted. In February of the following year, the
member, while performing services in a combat zone, received a bonus as
a result of the July reenlistment. The reenlistment bonus cannot be
excluded from income as combat zone compensation although received while
serving in the combat
[[Page 467]]
zone, since the member completed the necessary action for entitlement to
the reenlistment bonus in a month during which the member had neither
served in the combat zone nor was hospitalized for wounds incurred while
serving in a combat zone.
(c) Hospitalization--(1) Presumption of combat zone injury. If an
individual is hospitalized for wound, disease, or injury while serving
in a combat zone, the wound, disease, or injury will be presumed to have
been incurred while serving in a combat zone, unless the contrary
clearly appears. In certain cases, however, a wound, disease, or injury
may have been incurred while serving in a combat zone even though the
individual was not hospitalized for it while so serving. In exceptional
cases, a wound, disease, or injury will not have been incurred while
serving in a combat zone even though the individual was hospitalized for
it while so serving.
(2) Length of hospitalization. An individual is hospitalized only
until the date the individual is discharged from the hospital.
(3) Examples of combat zone injury. The rules of this paragraph (c)
are illustrated by the following examples:
Example 1. An individual is hospitalized for a disease in the combat
zone where the individual has been serving for three weeks. The
incubation period of the disease is two to four weeks. The disease is
incurred while serving in the combat zone.
Example 2. The facts are the same as in Example 1 except that the
incubation period of the disease is one year. The disease is not
incurred while serving in the combat zone.
Example 3. A member of the Air Force, stationed outside the combat
zone, is shot while participating in aerial combat over the combat zone,
but is not hospitalized until returning to the home base. The injury is
incurred while serving in a combat zone.
Example 4. An individual is hospitalized for a disease three weeks
after having departed from a combat zone. The incubation period of the
disease is two to four weeks. The disease is incurred while serving in a
combat zone.
(d) Married members. The exclusion under section 112 applies without
regard to the marital status of the recipient of the compensation. If
both spouses meet the requirements of the statute, then each spouse is
entitled to the benefit of an exclusion. In the case of a husband and
wife domiciled in a State recognized for Federal income tax purposes as
a community property State, any exclusion from gross income under
section 112 operates before apportionment of the gross income of the
spouses under community property law. For example, a husband and wife
are domiciled in a community property State and the member spouse is
entitled, as a commissioned officer, to the benefit of the exclusion
under section 112(b) of $500 for each month. The member receives $7,899
as compensation for active service for 3 months in a combat zone. Of
that amount, $1,500 is excluded from gross income under section 112(b)
and $6,399 is taken into account in determining the gross income of both
spouses.
(e) Service in area outside combat zone--(1) Combat zone treatment.
For purposes of section 112, a member of the Armed Forces who performs
military service in an area outside the area designated by Executive
Order as a combat zone is deemed to serve in that combat zone while the
member's service is in direct support of military operations in that
zone and qualifies the member for the special pay for duty subject to
hostile fire or imminent danger authorized under section 310 of title 37
of the United States Code, as amended (37 U.S.C. 310) (hostile fire/
imminent danger pay).
(2) Examples of combat zone treatment. The examples in this
paragraph (e)(2) are based on the following circumstances: Certain
areas, airspace, and adjacent waters are designated as a combat zone for
purposes of section 112 as of May 1. Some members of the Armed Forces
are stationed in the combat zone; others are stationed in two foreign
countries outside the combat zone, named Nearby Country and Destination
Country.
Example 1. B is a member of an Armed Forces ground unit stationed in
the combat zone. On May 31, B's unit crosses into Nearby Country. B
performs military service in Nearby Country in direct support of the
military operations in the combat zone from June 1 through June 8 that
qualifies B for hostile fire/imminent danger pay. B does not return to
the combat zone during June. B is deemed to serve in the combat zone
from June 1 through June 8. Accordingly, B is entitled to the exclusion
under section 112 for
[[Page 468]]
June. Of course, B is also entitled to the exclusion for any month (May,
in this example) in which B actually served in the combat zone.
Example 2. B is a member of an Armed Forces ground unit stationed in
the combat zone. On May 31, B's unit crosses into Nearby Country. On
June 1, B is wounded while performing military service in Nearby Country
in direct support of the military operations in the combat zone that
qualifies B for hostile fire/imminent danger pay. On June 2, B is
transferred for treatment to a hospital in the United States. B is
hospitalized from June through October for those wounds. B is deemed to
have incurred the wounds while serving in the combat zone on June 1.
Accordingly, B is entitled to the exclusion under section 112 for June
through October. Of course, B is also entitled to the exclusion for any
month (May, in this example) in which B actually served in the combat
zone.
Example 3. B is stationed in Nearby Country for the entire month of
June as a member of a ground crew servicing combat aircraft operating in
the combat zone. B's service in Nearby Country during June does not
qualify B for hostile fire/imminent danger pay. Accordingly, B is not
deemed to serve in the combat zone during June and is not entitled to
the exclusion under section 112 for that month.
Example 4. B is assigned to an air unit stationed in Nearby Country
for the entire month of June. In June, members of air units of the Armed
Forces stationed in Nearby Country fly combat and supply missions into
and over Destination Country in direct support of military operations in
the combat zone. B flies combat missions over Destination Country from
Nearby Country from June 1 through June 8. B's service qualifies B for
hostile fire/imminent danger pay. Accordingly, B is deemed to serve in
the combat zone during June and is entitled to the exclusion under
section 112. The result would be the same if B were to fly supply
missions into Destination Country from Nearby Country in direct support
of operations in the combat zone qualifying B for hostile fire/imminent
danger pay.
Example 5. Assigned to an air unit stationed in Nearby Country, B
was killed in June when B's plane crashed on returning to the airbase in
Nearby Country. B was performing military service in direct support of
the military operations in the combat zone at the time of B's death. B's
service also qualified B for hostile fire/imminent danger pay. B is
deemed to have died while serving in the combat zone or to have died as
a result of wounds, disease, or injury incurred while serving in the
combat zone for purposes of section 692(a) and section 692(b) (providing
relief from certain income taxes for members of the Armed Forces dying
in a combat zone or as a result of wounds, disease, or injury incurred
while serving in a combat zone) and section 2201 (providing relief from
certain estate taxes for members of the Armed Forces dying in a combat
zone or by reason of combat-zone-incurred wounds). The result would be
the same if B's mission had been a supply mission instead of a combat
mission.
Example 6. In June, B was killed as a result of an off-duty
automobile accident while leaving the airbase in Nearby Country shortly
after returning from a mission over Destination Country. At the time of
B's death, B was not performing military duty qualifying B for hostile
fire/imminent danger pay. B is not deemed to have died while serving in
the combat zone or to have died as the result of wounds, disease, or
injury incurred while serving in the combat zone. Accordingly, B does
not qualify for the benefits of section 692(a), section 692(b), or
section 2201.
Example 7. B performs military service in Nearby Country from June 1
through June 8 in direct support of the military operations in the
combat zone. Nearby Country is designated as an area in which members of
the Armed Forces qualify for hostile fire/imminent danger pay due to
imminent danger, even though members in Nearby Country are not subject
to hostile fire. B is deemed to serve in the combat zone from June 1
through June 8. Accordingly, B is entitled to the exclusion under
section 112 for June.
(f) Nonqualifying presence in combat zone--(1) Inapplicability of
exclusion. The following members of the Armed Forces are not deemed to
serve in a combat zone within the meaning of section 112(a)(1) or
section 112(b)(1) or to be hospitalized as a result of wounds, disease,
or injury incurred while serving in a combat zone within the meaning of
section 112(a)(2) or section 112(b)(2)--
(i) Members present in a combat zone while on leave from a duty
station located outside a combat zone;
(ii) Members who pass over or through a combat zone during the
course of a trip between two points both of which lie outside a combat
zone; or
(iii) Members present in a combat zone solely for their own personal
convenience.
(2) Exceptions for temporary duty or special pay. Paragraph (f)(1)
of this section does not apply to members of the Armed Forces who--
(i) Are assigned on official temporary duty to a combat zone
(including official temporary duty to the airspace of a combat zone); or
[[Page 469]]
(ii) Qualify for hostile fire/imminent danger pay.
(3) Examples of nonqualifying presence and its exceptions. The
examples in this paragraph (f)(3) are based on the following
circumstances: Certain areas, airspace, and adjacent waters are
designated as a combat zone for purposes of section 112 as of May 1.
Some members of the Armed Forces are stationed in the combat zone;
others are stationed in two foreign countries outside the combat zone,
named Nearby Country and Destination Country.
Example 1. B is a member of the Armed Forces assigned to a unit
stationed in Nearby Country. On June 1, B voluntarily visits a city
within the combat zone while on leave. B is not deemed to serve in a
combat zone since B is present in a combat zone while on leave from a
duty station located outside a combat zone.
Example 2. B is a member of the Armed Forces assigned to a unit
stationed in Nearby Country. During June, B takes authorized leave and
elects to spend the leave period by visiting a city in the combat zone.
While on leave in the combat zone, B is subject to hostile fire
qualifying B for hostile fire/imminent danger pay. Although B is present
in the combat zone while on leave from a duty station outside the combat
zone, B qualifies for the exclusion under section 112 because B
qualifies for hostile fire/imminent danger pay while in the combat zone.
Example 3. B is a member of the Armed Forces assigned to a ground
unit stationed in the combat zone. During June, B takes authorized leave
and elects to spend the leave period in the combat zone. B is not on
leave from a duty station located outside a combat zone, nor is B
present in a combat zone solely for B's own personal convenience.
Accordingly, B's combat zone tax benefits continue while B is on leave
in the combat zone.
Example 4. B is assigned as a navigator to an air unit stationed in
Nearby Country. On June 4, during the course of a flight between B's
home base in Nearby Country and another base in Destination Country, the
aircraft on which B serves as a navigator flies over the combat zone. B
is not on official temporary duty to the airspace of the combat zone and
does not qualify for hostile fire/imminent danger pay as a result of the
flight. Accordingly, B is not deemed to serve in a combat zone since B
passes over the combat zone during the course of a trip between two
points both of which lie outside the combat zone without either being on
official temporary duty to the combat zone or qualifying for hostile
fire/imminent danger pay.
Example 5. B is a member of the Armed Forces assigned to a unit
stationed in Nearby Country. B enters the combat zone on a 3-day pass. B
is not on official temporary duty and does not qualify for hostile fire/
imminent danger pay while present in the combat zone. Accordingly, B is
not deemed to serve in a combat zone since B is present in the combat
zone solely for B's own personal convenience.
Example 6. B, stationed in Nearby Country, is a military courier
assigned on official temporary duty to deliver military pouches in the
combat zone and in Destination Country. On June 1, B arrives in the
combat zone from Nearby Country, and on June 2, B departs for
Destination Country. Although B passes through the combat zone during
the course of a trip between two points outside the combat zone, B is
nevertheless deemed to serve in a combat zone while in the combat zone
because B is assigned to the combat zone on official temporary duty.
Example 7. B is a member of an Armed Forces ground unit stationed in
Nearby Country. On June 1, B took authorized leave and elected to spend
the leave period by visiting a city in the combat zone. On June 2, while
on leave in the combat zone, B was wounded by hostile fire qualifying B
for hostile fire/imminent danger pay. On June 3, B was transferred for
treatment to a hospital in the United States. B is hospitalized from
June through October for those wounds. Although B was present in the
combat zone while on leave from a duty station outside the combat zone,
B is deemed to have incurred the wounds while serving in the combat zone
on June 2, because B qualified for hostile fire/imminent danger pay
while in the combat zone. Accordingly, B is entitled to the exclusion
under section 112 for June through October.
Example 8. The facts are the same as in Example 7 except that B dies
on September 1 as a result of the wounds incurred in the combat zone. B
is deemed to have died as a result of wounds, disease, or injury
incurred while serving in the combat zone for purposes of section 692(a)
and section 692(b) (providing relief from certain income taxes for
members of the Armed Forces dying in a combat zone or as a result of
wounds, disease, or injury incurred while serving in a combat zone) and
section 2201 (providing relief from certain estate taxes for members of
the Armed Forces dying in a combat zone or by reason of combat-zone-
incurred wounds).
[T.D. 8489, 58 FR 47640, Sept. 10, 1993]
Sec. 1.113-1 Mustering-out payments for members of the Armed Forces.
For the purposes of the exclusion from gross income under section
113 of mustering-out payments with respect
[[Page 470]]
to service in the Armed Forces, mustering-out payments are payments made
to any recipients pursuant to the provisions of 38 U.S.C. 2105 (formerly
section 5 of the Mustering-out Payment Act of 1944 and section 505 of
the Veterans' Readjustment Assistance Act of 1952).
Sec. 1.117-1 Exclusion of amounts received as a scholarship or fellowship grant.
(a) In general. Any amount received by an individual as a
scholarship at an educational institution or as a fellowship grant,
including the value of contributed services and accommodations, shall be
excluded from the gross income of the recipient, subject to the
limitations set forth in section 117(b) and Sec. 1.117-2. The exclusion
from gross income of an amount which is a scholarship or fellowship
grant is controlled solely by section 117. Accordingly, to the extent
that a scholarship or a fellowship grant exceeds the limitations of
section 117(b) and Sec. 1.117-2, it is includible in the gross income of
the recipient notwithstanding the provisions of section 102 relating to
exclusion from gross income of gifts, or section 74(b) relating to
exclusion from gross income of certain prizes and awards. For
definitions, see Sec. 1.117-3.
(b) Exclusion of amounts received to cover expenses. (1) Subject to
the limitations provided in subparagraph (2) of this paragraph, any
amount received by an individual to cover expenses for travel (including
meals and lodging while traveling and an allowance for travel of the
individual's family), research, clerical help, or equipment is
excludable from gross income provided that such expenses are incident to
a scholarship or fellowship grant which is excludable from gross income
under section 117(a)(1). If, however, only a portion of a scholarship or
fellowship grant is excludable from gross income under section 117(a)(1)
because of the part-time employment limitation contained in section
117(b)(1) or because of the expiration of the 36-month period described
in section 117(b)(2)(B), only the amount received to cover expenses
incident to such excludable portion is excludable from gross income. The
requirement that these expenses be incident to the scholarship or the
fellowship grant means that the expenses of travel, research, clerical
help, or equipment must be incurred by the individual in order to
effectuate the purpose for which the scholarship or the fellowship grant
was awarded.
(2)(i) In the case of a scholarship or fellowship grant which is
awarded after July 28, 1956, the exclusion provided under subparagraph
(1) of this paragraph is not applicable unless the amount received by
the individual is specifically designated to cover expenses for travel,
research, clerical help, or equipment.
(ii) In the case of a scholarship or fellowship grant awarded before
July 29, 1956, the exclusion provided under subparagraph (1) of this
paragraph is not applicable unless the recipient establishes, by
competent evidence, that the amount was received to cover expenses for
travel, research, clerical help, or equipment, but such amount need not
be specifically designated. The fact that the recipient actually
incurred expenses for travel, research, clerical help, or equipment is
not sufficient to establish that the amount was received to cover such
expenses.
(iii) The exclusion provided under subparagraph (1) of this
paragraph is applicable only to the extent that the amount received for
travel, research, clerical help, or equipment is actually expended for
such expenses by the recipient during the term of the scholarship or
fellowship grant and within a reasonable time before and after such
term.
(3) The portion of any amount received to cover the expenses
described in subparagraph (1) of this paragraph which is not actually
expended for such expenses within the exclusion period described in
subparagraph (2) of this paragraph shall, if not returned to the grantor
within this period, be included in the gross income of the recipient for
the taxable year in which such exclusion period expires.
Sec. 1.117-2 Limitations.
(a) Individuals who are candidates for degrees--(1) In general.
Under the limitations provided by section 117(b)(1) in the case of an
individual who is a candidate for a degree at an educational
[[Page 471]]
institution, the exclusion from gross income shall not apply (except as
otherwise provided in subparagraph (2) of this paragraph) to that
portion of any amount received as payment for teaching, research, or
other services in the nature of parttime employment required as a
condition to receiving the scholarship or fellowship grant. Payments for
such part-time employment shall be included in the gross income of the
recipient in an amount determined by reference to the rate of
compensation ordinarily paid for similar services performed by an
individual who is not the recipient of a scholarship or a fellowship
grant. A typical example of employment under this subparagraph is the
case of an individual who is required, as a condition to receiving the
scholarship or the fellowship grant, to perform part-time teaching
services. A requirement that the individual shall furnish periodic
reports to the grantor of the scholarship or the fellowship grant for
the purpose of keeping the grantor informed as to the general progress
of the individual shall not be deemed to constitute the performance of
services in the nature of part-time employment.
(2) Exception. If teaching, research, or other services are required
of all candidates (whether or not recipients of scholarships or
fellowship grants) for a particular degree as a condition to receiving
the degree, such teaching, research, or other services on the part of
the recipient of a scholarship or fellowship grant who is a candidate
for such degree shall not be regarded as part-time employment within the
meaning of this paragraph. Thus, if all candidates for a particular
education degree are required, as part of their regular course of study
or curriculum, to perform part-time practice teaching services, such
services are not to be regarded as part-time employment within the
meaning of this paragraph.
(b) Individuals who are not candidates for degrees--(1) Conditions
for exclusion. In the case of an individual who is not a candidate for a
degree at an educational institution, the exclusion from gross income of
an amount received as a scholarship or a fellowship grant shall apply
(to the extent provided in subparagraph (2) of this paragraph) only if
the grantor of the scholarship or fellowship grant is--
(i) An organization described in section 501(c)(3) which is exempt
from tax under section 501(a),
(ii) The United States or an instrumentality or agency thereof, or a
State, a territory, or a possession of the United States, or any
political subdivision thereof, or the District of Columbia, or
(iii) For taxable years beginning after December 31, 1961, a foreign
government, an international organization, or a binational or
multinational educational and cultural foundation or commission created
or continued pursuant to section 103 of the Mutual Educational and
Cultural Exchange Act of 1961 (22 U.S.C. 2453).
(2) Extent of exclusion. (i) In the case of an individual who is not
a candidate for a degree, the amount received as a scholarship or a
fellowship grant which is excludable from gross income under section
117(a)(1) shall not exceed an amount equal to $300 times the number of
months for which the recipient received amounts under the scholarship or
fellowship grant during the taxable year. In determining the number of
months during the period for which the recipient received amounts under
a scholarship or fellowship grant, computation shall be made on the
basis of whole calendar months. A whole calendar month means a period of
time terminating with the day of the succeeding month numerically
corresponding to the day of the month of its beginning, less one, except
that if there be no corresponding day of the succeeding month the period
terminates with the last day of the succeeding month. For purposes of
this computation a fractional part of a calendar month consisting of a
period of time including 15 days or more shall be considered to be a
whole calendar month and a fractional part of a calendar month
consisting of a period of time including 14 days or less shall be
disregarded. For example, if an individual receives a fellowship grant
on September 13 which is to expire on June 12 of the following year, the
grant shall be considered to have extended for a period of 9 months. If
in the preceding example the grant expired on
[[Page 472]]
June 27, instead of June 12, the grant shall be considered to have
extended for a period of 10 months.
(ii) No exclusion shall be allowed under section 117(a)(1) to an
individual who is not a candidate for a degree after the recipient has,
as an individual who is not a candidate for a degree, been entitled to
an exclusion under that section for a period of 36 months. This
limitation applies if the individual has received any amount which was
either excluded or excludable from his gross income under section
117(a)(1) for any prior 36 months, whether or not consecutive. For
example, if the individual received a fellowship grant of $7,200 for 3
years (which he elected to receive in 36 monthly installments of $200),
his exclusion period would be exhausted even though he did not in any of
the 36 months make use of the maximum exclusion. Accordingly, such
individual would be entitled to no further exclusion from gross income
with respect to any additional grants which he may receive as an
individual who is not a candidate for a degree.
(iii) If an individual who is not a candidate for a degree receives
amounts from more than one scholarship or fellowship grant during the
taxable year, the total amounts received in the taxable year shall be
aggregated for the purpose of computing the amount which may be
excludable from gross income for such taxable year. If amounts are
received from more than one scholarship or fellowship grant during the
same month or months within the taxable year, such month or months shall
be counted only once for the purpose of determining the number of months
for which the individual received such amounts under the scholarships or
fellowship grants during the taxable year. For example, if an individual
receives a fellowship grant from one source for the months of January to
June of the taxable year and also receives a fellowship grant from
another source for the months of March through December of the same
taxable year, he shall be considered to have received amounts for 12
months of the taxable year. See example (4) in subparagraph (3) of this
paragraph for further illustration.
(3) Examples. The application of this paragraph may be further
illustrated by the following examples, it being assumed that in each
example the grantor is a grantor who is described in section
117(b)(2)(A) and subparagraph (1) of this paragraph:
Example (1). B, an individual who files his return on the calendar
year basis, is awarded a post-doctorate fellowship grant in March 1955.
The grant is to commence on September 1, 1955, and is to end on May 31,
1956, so that it will extend over a period of 9 months. The amount of
the fellowship grant is $4,500 and B receives this amount in monthly
installments of $500 on the first day of each month commencing September
1, 1955. During the taxable year 1955, B receives a total of $2,000 with
respect to the 4-month period September through December, inclusive. He
may exclude $1,200 from gross income in the taxable year 1955 ($300x4)
and must include the remaining $800 in gross income for that year. For
the year 1956, he will exclude $1,500 ($300x5) from gross income with
respect to the $2,500 which he receives in that year and must include in
gross income $1,000.
Example (2). Assume the same facts as in example (1) except that B
receives the full amount of the grant ($4,500) on September 1, 1955.
Since the amount received in the taxable year 1955 is for the full term
of the fellowship grant (9 months), B may exclude $2,700 ($300x9) from
gross income for the taxable year 1955. The remaining $1,800 must be
included in gross income for that year.
Example (3). C, an individual who files his return on the calendar
year basis, is awarded a post-doctorate fellowship grant in March 1955.
The amount of the grant is $4,500 for a period commencing on September
1, 1955, and ending 24 months thereafter. C receives the full amount of
the grant on September 1, 1955. C may exclude from gross income for the
taxable year 1955, the full amount of the grant ($4,500) since this
amount does not exceed an amount equal to $300 times the number of
months (24) for which he received the amount of the grant during that
taxable year.
Example (4). (i) F, an individual who files his return on the
calendar year basis, is awarded a post-doctorate fellowship grant (Grant
A) for two years commencing June 1, 1955, in the amount of $4,800. He
elects to receive his grant in monthly installments of $200 commencing
June 1, 1955. On March 1, 1956, F is awarded another post-doctorate
fellowship grant (Grant B) for two years commencing September 1, 1956,
in the amount of $7,200. He elects to receive this grant in monthly
installments of $300 commencing September 1, 1956.
(ii) For the calendar year 1955, F receives $1,400 from Grant A
which he is entitled to exclude from gross income since it does not
exceed an amount equal to $300 times the
[[Page 473]]
number of months (7) for which he received amounts under the grant in
the taxable year.
(iii) For the calendar year 1956, F receives $3,600 as the aggregate
of amounts received under fellowship grants ($2,400 from Grant A and
$1,200 from Grant B). F will be entitled to exclude the entire amount of
$3,600 from gross income for the calendar year 1956 since such amount
does not exceed an amount equal to $300 times the number of months (12)
for which he received amounts under the grants in the taxable year.
(iv) For the calendar year 1957, F receives $4,600 as the aggregate
of amounts received under fellowship grants ($1,000 from Grant A and
$3,600 from Grant B). F will be entitled to exclude $3,600 ($300x12)
from gross income for the calendar year 1957 and he will have to include
$1,000 in gross income.
(v) For the calendar year 1958, F receives $2,400 from Grant B. F is
entitled to exclude $1,500 ($300x5) from gross income for the calendar
year 1958 and he will have to include $900 in gross income. While F
receives amounts under fellowship Grant B for 8 months during the
calendar year 1958, he is limited to an amount equal to $300 times 5
(months) because of the fact that he has already been entitled to
exclude (and has in fact excluded) amounts received as a fellowship
grant for a period of 31 months. Accordingly, he can only exclude
amounts received under the fellowship grant for 5 months during the
calendar year 1958, because of the 36-month limitation period. The fact
that he was entitled to exclude only $1,400 ($200 a month for 7 months)
instead of the maximum amount of $2,100 ($300x7) in 1955, is immaterial
and the limitation period of 36 months is applicable.
(vi) The following chart illustrates the computation of the number
of months for which F received amounts under the fellowship grants
during the respective taxable years and the computation of the total
amounts received under the fellowship grants during each taxable year:
------------------------------------------------------------------------
Number
Period for which received and source of Amounts
months received
------------------------------------------------------------------------
1955:
June 1 to December 31............................. 7 ........
Grant A......................................... ........ $1,400
Grant B......................................... ........ None
-------------------
Aggregate..................................... 7 1,400
1956:
January 1 to August 31............................ 8 ........
Grant A......................................... ........ 1,600
Grant B......................................... ........ None
September 1 to December 31........................ 4 ........
Grant A......................................... ........ 800
Grant B......................................... ........ 1,200
-------------------
Aggregate..................................... 12 3,600
1957:
January 1 to May 31............................... 5 ........
Grant A......................................... ........ 1,000
Grant B......................................... ........ 1,500
June 1 to December 31............................. 7 ........
Grant A......................................... ........ None
Grant B......................................... ........ 2,100
-------------------
Aggregate..................................... 12 4,600
1958:
January 1 to August 31............................ 8 ........
Grant A......................................... ........ None
Grant B......................................... ........ 2,400
-------------------
Aggregate..................................... ........ 2,400
------------------------------------------------------------------------
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6782, 29 FR
18355, Dec. 24, 1964]
Sec. 1.117-3 Definitions.
(a) Scholarship. A scholarship generally means an amount paid or
allowed to, or for the benefit of, a student, whether an undergraduate
or a graduate, to aid such individual in pursuing his studies. The term
includes the value of contributed services and accommodations (see
paragraph (d) of this section) and the amount of tuition, matriculation,
and other fees which are furnished or remitted to a student to aid him
in pursuing his studies. The term also includes any amount received in
the nature of a family allowance as a part of a scholarship. However,
the term does not include any amount provided by an individual to aid a
relative, friend, or other individual in pursuing his studies where the
grantor is motivated by family or philanthropic considerations. If an
educational institution maintains or participates in a plan whereby the
tuition of a child of a faculty member of such institution is remitted
by any other participating educational institution attended by such
child, the amount of the tuition so remitted shall be considered to be
an amount received as a scholarship.
(b) Educational organization. For definition of ``educational
organization'' paragraphs (a) and (b) of section 117 adopt the
definition of that term which is prescribed in section 151(e)(4).
Accordingly, for purposes of section 117 the term ``educational
organization'' means only an educational organization which normally
maintains a regular faculty and curriculum and normally has a regularly
organized body of
[[Page 474]]
students in attendance at the place where its educational activities are
carried on. See section 151(e)(4) and regulations thereunder.
(c) Fellowship grant. A fellowship grant generally means an amount
paid or allowed to, or for the benefit of, an individual to aid him in
the pursuit of study or research. The term includes the value of
contributed services and accommodations (see paragraph (d) of this
section) and the amount of tuition, matriculation, and other fees which
are furnished or remitted to an individual to aid him in the pursuit of
study or research. The term also includes any amount received in the
nature of a family allowance as a part of a fellowship grant. However,
the term does not include any amount provided by an individual to aid a
relative, friend, or other individual in the pursuit of study or
research where the grantor is motivated by family or philanthropic
considerations.
(d) Contributed services and accommodations. The term ``contributed
services and accommodations'' means such services and accommodations as
room, board, laundry service, and similar services or accommodations
which are received by an individual as a part of a scholarship or
fellowship grant.
(e) Candidate for a degree. The term ``candidate for a degree''
means an individual, whether an undergraduate or a graduate, who is
pursuing studies or conducting research to meet the requirements for an
academic or professional degree conferred by colleges or universities.
It is not essential that such study or research be pursued or conducted
at an educational institution which confers such degrees if the purpose
thereof is to meet the requirements for a degree of a college or
university which does confer such degrees. A student who receives a
scholarship for study at a secondary school or other educational
institution is considered to be a ``candidate for a degree.''
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as
amended by T.D. 8032, 50 FR 27232, July 2, 1985]
Sec. 1.117-4 Items not considered as scholarships or fellowship grants.
The following payments or allowances shall not be considered to be
amounts received as a scholarship or a fellowship grant for the purpose
of section 117:
(a) Educational and training allowances to veterans. Educational and
training allowances to a veteran pursuant to section 400 of the
Servicemen's Readjustment Act of 1944 (58 Stat. 287) or pursuant to 38
U.S.C. 1631 (formerly section 231 of the Veterans' Readjustment
Assistance Act of 1952).
(b) Allowances to members of the Armed Forces of the United States.
Tuition and subsistence allowances to members of the Armed Forces of the
United States who are students at an educational institution operated by
the United States or approved by the United States for their education
and training, such as the United States Naval Academy and the United
States Military Academy.
(c) Amounts paid as compensation for services or primarily for the
benefit of the grantor. (1) Except as provided in paragraph (a) of
Secs. 1.117-2 and 1.117-5, any amount paid or allowed to, or on behalf
of, an individual to enable him to pursue studies or research, if such
amount represents either compensation for past, present, or future
employment services or represents payment for services which are subject
to the direction or supervision of the grantor.
(2) Any amount paid or allowed to, or on behalf of, an individual to
enable him to pursue studies or research primarily for the benefit of
the grantor.
However, amounts paid or allowed to, or on behalf of, an individual to
enable him to pursue studies or research are considered to be amounts
received as a scholarship or fellowship grant for the purpose of section
117 if the primary purpose of the studies or research is to further the
education and training of the recipient in his individual capacity and
the amount provided by the grantor for such purpose does not represent
compensation or payment for the services described in subparagraph (1)
of this paragraph. Neither the fact that the recipient is required to
furnish reports of his progress to the grantor, nor the fact that the
results of his studies or research may be of some incidental benefits to
the grantor shall, of itself, be considered to destroy the essential
[[Page 475]]
character of such amount as a scholarship or fellowship grant.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as
amended by T.D. 8032, 50 FR 27232, July 2, 1985]
Sec. 1.117-5 Federal grants requiring future service as a Federal employee.
(a) In general. Under section 117(c), amounts received by an
individual under a Federal program as a scholarship or grant for
qualified tuition and expenses at an institution of higher education are
excluded from the gross income of the recipient even though the
recipient is required to perform future service as a Federal employee.
See paragraph (c) of this section for the definitions of the terms
``qualified tuition and expenses'' and ``institution of higher
education.''
(b) Exception for uniformed services scholarship programs. The
requirements of this section do not apply to amounts received before
1985 by a member of a uniformed service who entered training before 1981
under the Armed Forces Health Professions Scholarship Program, National
Public Health Service Corps Scholarship Training Program, or other
substantially similar Federal programs requiring the recipient to work
for a uniformed Federal service after completion of studies. These
awards are governed by section 4 of Pub. L. 93-483 as amended by Pub. L.
95-171, Pub. L. 95-600 and Pub. L. 96-167. See section 101(3) of title
37, United States Code for the definition of the term ``uniformed
service.''
(c) Definitions--(1) Qualified tuition and related expenses. For
purposes of section 117(c) and this section, qualified tuition and
related expenses are those amounts which under the terms of the Federal
program are required to be used and in fact are used for payment of:
(i) Tuition and fees that are required for the recipient's
enrollment or attendance at an institution of higher education; and
(ii) Those amounts used for payment of fees, books, supplies and
equipment required for courses of instruction at such an institution.
Incidental expenses are not considered related expenses and thus are not
excludable from gross income under section 117(c). Incidental expenses
include room and board at an institution of higher education, expenses
for travel (including expenses for meals and lodging incurred during
travel and allowances for travel of the recipient's family), research,
clerical help, equipment and other expenses which are not required for
enrollment at the institution or in a course of instruction at such
institution.
(2) Institution of higher education. To qualify as an institution of
higher education under this section, the institution must be a public or
other nonprofit institution in any state which--
(i) Admits as regular students only individuals who have a
certificate of graduation from a high school or the recognized
equivalent of such a certificate;
(ii) Is legally authorized within the state to provide a program of
education beyond high school; and
(iii) Provides an education program for which it awards a bachelor's
or higher degree or which is acceptable for full credit towards such a
degree, or which trains and prepares students for gainful employment in
a recognized health profession. For purposes of this section, recognized
health professions are those health professions which are supervised or
monitored by appropriate state or Federal agencies or governing
professional associations and which require members to be currently
licensed or certified in order to practice.
(3) Service as a Federal employee--(i) In general. Except as
otherwise provided in paragraph (c)(3)(ii) of this section, service as a
Federal employee refers to employment of the recipient by the Federal
government to work directly for the Federal government. Thus, Federal
grants or scholarships which do not require the recipient to work
directly for the Federal government are not governed by the rules of
this section.
(ii) Service in a health manpower shortage area. For purposes of
this section an obligation under a grant for the recipient to serve in a
health related field in a health manpower shortage area as designated by
the Secretary of Health and Human Services according to the criteria of
the Public Health Services Act (42 U.S.C. 254(e)) and the
[[Page 476]]
regulations promulgated thereunder (42 CFR 5.1-5.4) will be considered
an obligation to serve as a Federal employee.
(d) Records required for exclusion from gross income. To exclude
amounts received under Federal programs requiring future services as a
Federal employee, the recipient must maintain records that establish
that the amounts received under such programs were used for qualified
tuition and related expenses as defined in paragraph (c)(1) of this
section. Qualifying uses may be established by providing to the Service,
upon request, copies of relevant bills, receipts, cancelled checks or
other convenient documentation or records which clearly reflect the use
of the money received under the grant. The recipient must also submit,
upon request, documentation establishing receipt of the grant and
setting out the terms and requirements of the particular grant.
(e) Applicability of rules of Secs. 117(a) and 117(b). Except where
a different rule has been expressly provided in this section, amounts
received under Federal grants requiring future service as a Federal
employee, and which meet the requirements for exclusion from gross
income under this section, are subject to the rules, limitations and
definitions specified in Secs. 117 (a) and (b) of the Code and
Secs. 1.117-1 through 1.117-4.
(f) Effective date. Except as provided in paragraph (b) of this
section, this section will apply to amounts received after December 31,
1980 under Federal programs which meet the requirements of this section.
[T.D. 8032, 50 FR 27232, July 2, 1985]
Sec. 1.118-1 Contributions to the capital of a corporation.
In the case of a corporation, section 118 provides an exclusion from
gross income with respect to any contribution of money or property to
the capital of the taxpayer. Thus, if a corporation requires additional
funds for conducting its business and obtains such funds through
voluntary pro rata payments by its shareholders, the amounts so received
being credited to its surplus account or to a special account, such
amounts do not constitute income, although there is no increase in the
outstanding shares of stock of the corporation. In such a case the
payments are in the nature of assessments upon, and represent an
additional price paid for, the shares of stock held by the individual
shareholders, and will be treated as an addition to and as a part of the
operating capital of the company. Section 118 also applies to
contributions to capital made by persons other than shareholders. For
example, the exclusion applies to the value of land or other property
contributed to a corporation by a governmental unit or by a civic group
for the purpose of inducing the corporation to locate its business in a
particular community, or for the purpose of enabling the corporation to
expand its operating facilities. However, the exclusion does not apply
to any money or property transferred to the corporation in consideration
for goods or services rendered, or to subsidies paid for the purpose of
inducing the taxpayer to limit production. See section 362 for the basis
of property acquired by a corporation through a contribution to its
capital by its stockholders or by nonstockholders.
Sec. 1.119-1 Meals and lodging furnished for the convenience of the employer.
(a) Meals--(1) In general. The value of meals furnished to an
employee by his employer shall be excluded from the employee's gross
income if two tests are met: (i) The meals are furnished on the business
premises of the employer, and (ii) the meals are furnished for the
convenience of the employer. The question of whether meals are furnished
for the convenience of the employer is one of fact to be determined by
analysis of all the facts and circumstances in each case. If the tests
described in subdivisions (i) and (ii) of this subparagraph are met, the
exclusion shall apply irrespective of whether under an employment
contract or a statute fixing the terms of employment such meals are
furnished as compensation.
(2) Meals furnished without a charge. (i) Meals furnished by an
employer without charge to the employee will be regarded as furnished
for the convenience of the employer if such meals are furnished for a
substantial noncompensatory business reason of the employer. If an
employer furnishes meals as a
[[Page 477]]
means of providing additional compensation to his employee (and not for
a substantial noncompensatory business reason of the employer), the
meals so furnished will not be regarded as furnished for the convenience
of the employer. Conversely, if the employer furnishes meals to his
employee for a substantial noncompensatory business reason, the meals so
furnished will be regarded as furnished for the convenience of the
employer, even though such meals are also furnished for a compensatory
reason. In determining the reason of an employer for furnishing meals,
the mere declaration that meals are furnished for a noncompensatory
business reason is not sufficient to prove that meals are furnished for
the convenience of the employer, but such determination will be based
upon an examination of all the surrounding facts and circumstances. In
subdivision (ii) of this subparagraph, there are set forth some of the
substantial noncompensatory business reasons which occur frequently and
which justify the conclusion that meals furnished for such a reason are
furnished for the convenience of the employer. In subdivision (iii) of
this subparagraph, there are set forth some of the business reasons
which are considered to be compensatory and which, in the absence of a
substantial noncompensatory business reason, justify the conclusion that
meals furnished for such a reason are not furnished for the convenience
of the employer. Generally, meals furnished before or after the working
hours of the employee will not be regarded as furnished for the
convenience of the employer, but see subdivision (ii) (d) and (f) of
this subparagraph for some exceptions to this general rule. Meals
furnished on nonworking days do not qualify for the exclusion under
section 119. If the employee is required to occupy living quarters on
the business premises of his employer as a condition of his employment
(as defined in paragraph (b) of this section), the exclusion applies to
the value of any meal furnished without charge to the employee on such
premises.
(ii)(a) Meals will be regarded as furnished for a substantial
noncompensatory business reason of the employer when the meals are
furnished to the employee during his working hours to have the employee
available for emergency call during his meal period. In order to
demonstrate that meals are furnished to the employee to have the
employee available for emergency call during the meal period, it must be
shown that emergencies have actually occurred, or can reasonably be
expected to occur, in the employer's business which have resulted, or
will result, in the employer calling on the employee to perform his job
during his meal period.
(b) Meals will be regarded as furnished for a substantial
noncompensatory business reason of the employer when the meals are
furnished to the employee during his working hours because the
employer's business is such that the employee must be restricted to a
short meal period, such as 30 or 45 minutes, and because the employee
could not be expected to eat elsewhere in such a short meal period. For
example, meals may qualify under this subdivision when the employer is
engaged in a business in which the peak work load occurs during the
normal lunch hours. However, meals cannot qualify under this subdivision
(b) when the reason for restricting the time of the meal period is so
that the employee can be let off earlier in the day.
(c) Meals will be regarded as furnished for a substantial
noncompensatory business reason of the employer when the meals are
furnished to the employee during his working hours because the employee
could not otherwise secure proper meals within a reasonable meal period.
For example, meals may qualify under this subdivision (c) when there are
insufficient eating facilities in the vicinity of the employer's
premises.
(d) A meal furnished to a restaurant employee or other food service
employee for each meal period in which the employee works will be
regarded as furnished for a substantial noncompensatory business reason
of the employer, irrespective of whether the meal is furnished during,
immediately before, or immediately after the working hours of the
employee.
(e) If the employer furnishes meals to employees at a place of
business and
[[Page 478]]
the reason for furnishing the meals to each of substantially all of the
employees who are furnished the meals is a substantial noncompensatory
business reason of the employer, the meals furnished to each other
employee will also be regarded as furnished for a substantial
noncompensatory business reason of the employer.
(f) If an employer would have furnished a meal to an employee during
his working hours for a substantial noncompensatory business reason, a
meal furnished to such an employee immediately after his working hours
because his duties prevented him from obtaining a meal during his
working hours will be regarded as furnished for a substantial
noncompensatory business reason.
(iii) Meals will be regarded as furnished for a compensatory
business reason of the employer when the meals are furnished to the
employee to promote the morale or goodwill of the employee, or to
attract prospective employees.
(3) Meals furnished with a charge. (i) If an employer provides meals
which an employee may or may not purchase, the meals will not be
regarded as furnished for the convenience of the employer. Thus, meals
for which a charge is made by the employer will not be regarded as
furnished for the convenience of the employer if the employee has a
choice of accepting the meals and paying for them or of not paying for
them and providing his meals in another manner.
(ii) If an employer furnishes an employee meals for which the
employee is charged an unvarying amount (for example, by subtraction
from his stated compensation) irrespective of whether he accepts the
meals, the amount of such flat charge made by the employer for such
meals is not, as such, part of the compensation includible in the gross
income of the employee; whether the value of the meals so furnished is
excludable under section 119 is determined by applying the rules of
subparagraph (2) of this paragraph. If meals furnished for an unvarying
amount are not furnished for the convenience of the employer in
accordance with the rules of subparagraph (2) of this paragraph, the
employee shall include in gross income the value of the meals regardless
of whether the value exceeds or is less than the amount charged for such
meals. In the absence of evidence to the contrary, the value of the
meals may be deemed to be equal to the amount charged for them.
(b) Lodging. The value of lodging furnished to an employee by the
employer shall be excluded from the employee's gross income if three
tests are met:
(1) The lodging is furnished on the business premises of the
employer,
(2) The lodging is furnished for the convenience of the employer,
and
(3) The employee is required to accept such lodging as a condition
of his employment.
The requirement of subparagraph (3) of this paragraph that the employee
is required to accept such lodging as a condition of his employment
means that he be required to accept the lodging in order to enable him
properly to perform the duties of his employment. Lodging will be
regarded as furnished to enable the employee properly to perform the
duties of his employment when, for example, the lodging is furnished
because the employee is required to be available for duty at all times
or because the employee could not perform the services required of him
unless he is furnished such lodging. If the tests described in
subparagraphs (1), (2), and (3) of this paragraph are met, the exclusion
shall apply irrespective of whether a charge is made, or whether, under
an employment contract or statute fixing the terms of employment, such
lodging is furnished as compensation. If the employer furnishes the
employee lodging for which the employee is charged an unvarying amount
irrespective of whether he accepts the lodging, the amount of the charge
made by the employer for such lodging is not, as such, part of the
compensation includible in the gross income of the employee; whether the
value of the lodging is excludable from gross income under section 119
is determined by applying the other rules of this paragraph. If the
tests described in subparagraph (1), (2), and (3) of this paragraph are
not met, the employee shall include in gross income the value of the
lodging regardless of whether it exceeds or is less than the amount
[[Page 479]]
charged. In the absence of evidence to the contrary, the value of the
lodging may be deemed to be equal to the amount charged.
(c) Business premises of the employer--(1) In general. For purposes
of this section, the term ``business premises of the employer''
generally means the place of employment of the employee. For example,
meals and lodging furnished in the employer's home to a domestic servant
would constitute meals and lodging furnished on the business premises of
the employer. Similarly, meals furnished to cowhands while herding their
employer's cattle on leased land would be regarded as furnished on the
business premises of the employer.
(2) Certain camps. For taxable years beginning after December 31,
1981, in the case of an individual who is furnished lodging by or on
behalf of his employer in a camp (as defined in paragraph (d) of this
section) in a foreign country (as defined in Sec. 1.911-2(h)), the camp
shall be considered to be part of the business premises of the employer.
(d) Camp defined--(1) In general. For the purposes of paragraph
(c)(2) of this section, a camp is lodging that is all of the following:
(i) Provided by or on behalf of the employer for the convenience of
the employer because the place at which the employee renders services is
in a remote area where satisfactory housing is not available to the
employee on the open market within a reasonable commuting distance of
that place;
(ii) Located, as near as practicable, in the vicinity of the place
at which the employee renders services; and
(iii) Furnished in a common area or enclave which is not available
to the general public for lodging or accommodations and which normally
accommodates ten or more employees.
(2) Satisfactory housing. For purposes of paragraph (d)(1)(i) of
this section, facts and circumstances that may be relevant in
determining whether housing available to the employee is satisfactory
include, but are not limited to, the size and condition of living space
and the availability and quality of utilities such as water, sewers or
other waste disposal facilities, electricity, or heat. The general
environment in which housing is located (e.g. climate, prevalence of
insects, etc.) does not of itself make housing unsatisfactory. The
general environment is relevant, however, if housing is inadequate to
protect the occupants from environmental conditions. The individual
employee's income level is not relevant in determining whether housing
is satisfactory; it may, however, be relevant in determining whether
satisfactory housing is available to the employee (see paragraph
(d)(3)(i)(B) of this section).
(3) Availability of satisfactory housing--(i) Facts and
circumstances. For purposes of paragraph (d)(1)(i) of this section,
facts and circumstances to be considered in determining whether
satisfactory housing is available to the employee on the open market
include but are not limited to:
(A) The number of housing units available on the open market in
relation to the number of housing units required for the employer's
employees;
(B) The cost of housing available on the open market;
(C) The quality of housing available on the open market; and
(D) The presence of warfare or civil insurrection within the area
where housing would be available which would subject U.S. citizens to
unusual risk of personal harm or property loss.
(ii) Presumptions. Satisfactory housing will generally be considered
to be unavailable to the employee on the open market if either of the
following conditions is satisfied:
(A) The foreign government requires the employer to provide housing
for its employees other than housing available on the open market; or
(B) An unrelated person awarding work to the employer requires that
the employer's employees occupy housing specified by such unrelated
person.
The condition of either paragraph (d)(3)(ii) (A) or (B) of this section
is not satisfied if the requirement described therein and imposed either
by a foreign government or unrelated person applies primarily to U.S.
employers and not to a significant number of third country employers or
applies primarily to employers of U.S. employees and not to a
significant number of employers of third country employees.
[[Page 480]]
(4) Reasonable commuting distance. For purposes of paragraph
(d)(1)(i) of this section, in determining whether a commuting distance
is reasonable, the accessibility of the place at which the employee
renders services due to geographic factors, the quality of the roads,
the customarily available transportation, and the usual travel time (at
the time of day such travel would be required) to the place at which the
employee renders services shall be taken into account.
(5) Common area or enclave. A cluster of housing units does not
satisfy paragraph (d)(1)(iii) of this section if it is adjacent to or
surrounded by substantially similar housing available to the general
public. Two or more common areas or enclaves that house employees who
work on the same project (for example, a highway project) are considered
to be one common area or enclave in determining whether they normally
accommodate ten or more employees.
(e) Rules. The exclusion provided by section 119 applies only to
meals and lodging furnished in kind by or on behalf of an employer to
his employee. If the employee has an option to receive additional
compensation in lieu of meals or lodging in kind, the value of such
meals and lodging is not excludable from gross income under section 119.
However, the mere fact that an employee, at his option, may decline to
accept meals tendered in kind will not of itself require inclusion of
the value thereof in gross income. Cash allowances for meals or lodging
received by an employee are includible in gross income to the extent
that such allowances constitute compensation.
(f) Examples. The provisions of section 119 may be illustrated by
the following examples:
Example (1). A waitress who works from 7 a.m. to 4 p.m. is furnished
without charge two meals a work day. The employer encourages the
waitress to have her breakfast on his business premises before starting
work, but does not require her to have breakfast there. She is required,
however, to have her lunch on such premises. Since the waitress is a
food service employee and works during the normal breakfast and lunch
periods, the waitress is permitted to exclude from her gross income both
the value of the breakfast and the value of the lunch.
Example (2). The waitress in example (1) is allowed to have meals on
the employer's premises without charge on her days off. The waitress is
not permitted to exclude the value of such meals from her gross income.
Example (3). A bank teller who works from 9 a.m. to 5 p.m. is
furnished his lunch without charge in a cafeteria which the bank
maintains on its premises. The bank furnishes the teller such meals in
order to limit his lunch period to 30 minutes since the bank's peak work
load occurs during the normal lunch period. If the teller had to obtain
his lunch elsewhere, it would take him considerably longer than 30
minutes for lunch, and the bank strictly enforces the 30-minute time
limit. The bank teller may exclude from his gross income the value of
such meals obtained in the bank cafeteria.
Example (4). Assume the same facts as in example (3), except that
the bank charges the bank teller an unvarying rate per meal regardless
of whether he eats in the cafeteria. The bank teller is not required to
include in gross income such flat amount charged as part of his
compensation, and he is entitled to exclude from his gross income the
value of the meals he receives for such flat charge.
Example (5). A Civil Service employee of a State is employed at an
institution and is required by his employer to be available for duty at
all times. The employer furnishes the employee with meals and lodging at
the institution without charge. Under the applicable State statute, his
meals and lodging are regarded as part of the employee's compensation.
The employee would nevertheless be entitled to exclude the value of such
meals and lodging from his gross income.
Example (6). An employee of an institution is given the choice of
residing at the institution free of charge, or of residing elsewhere and
receiving a cash allowance in addition to his regular salary. If he
elects to reside at the institution, the value to the employee of the
lodging furnished by the employer will be includible in the employee's
gross income because his residence at the institution is not required in
order for him to perform properly the duties of his employment.
Example (7). A construction worker is employed at a construction
project at a remote job site in Alaska. Due to the inaccessibility of
facilities for the employees who are working at the job site to obtain
food and lodging and the prevailing weather conditions, the employer is
required to furnish meals and lodging to the employee at the camp site
in order to carry on the construction project. The employee is required
to pay $40 a week for the meals and lodging. The weekly charge of $40 is
not, as such, part of the compensation includible in the gross income of
the employee, and under paragraphs (a) and (b) of this section the value
of the meals and lodging is excludable from his gross income.
[[Page 481]]
Example (8). A manufacturing company provides a cafeteria on its
premises at which its employees can purchase their lunch. There is no
other eating facility located near the company's premises, but the
employee can furnish his own meal by bringing his lunch. The amount of
compensation which any employee is required to include in gross income
is not reduced by the amount charged for the meals, and the meals are
not considered to be furnished for the convenience of the employer.
Example (9). A hospital maintains a cafeteria on its premises where
all of its 230 employees may obtain a meal during their working hours.
No charge is made for these meals. The hospital furnishes such meals in
order to have each of 210 of the employees available for any emergencies
that may occur, and it is shown that each such employee is at times
called upon to perform services during his meal period. Although the
hospital does not require such employees to remain on the premises
during meal periods, they rarely leave the hospital during their meal
period. Since the hospital furnishes meals to each of substantially all
of its employees in order to have each of them available for emergency
call during his meal period, all of the hospital employees who obtain
their meals in the hospital cafeteria may exclude from their gross
income the value of such meals.
[T.D. 6745, 29 FR 9380, July 9, 1964, as amended by T.D. 8006, 50 FR
2964, Jan. 23, 1985]
Sec. 1.120-1 Statutory subsistence allowance received by police.
(a) Section 120 excludes from the gross income of an individual
employed as a police official by a State, Territory, or possession of
the United States, by any of their political subdivisions, or by the
District of Columbia, any amount received as a statutory subsistence
allowance to the extent that such allowance does not exceed $5 per day.
For purposes of this section, the term ``statutory subsistence
allowance'' means an amount which is designated as a subsistence
allowance under the laws of a State, a Territory, or a possession of the
United States, any political subdivision of any of the foregoing, or the
District of Columbia and which is paid to an individual who is employed
as a police official of such governmental unit. A subsistence allowance
paid to a police official by any of the foregoing governmental units
which is not so provided by statute may not be excluded from gross
income under the provisions of section 120. The term ``police official''
includes an employee of any of the foregoing governmental units who has
police duties, such as a sheriff, a detective, a policeman, or a State
police trooper, however designated.
(b) The exclusion provided by section 120 is to be computed on a
daily basis, that is, for each day for which the statutory allowance is
paid. If the statute providing the allowance does not specify the daily
amount of such allowance, the allowance shall be converted to a daily
basis for the purpose of applying the limitation provided herein. For
example, if a State statute provides for a weekly subsistence allowance,
the daily amount is to be determined by dividing the weekly amount by
the number of days for which the allowance is paid. Thus, if a State
trooper receives a weekly statutory subsistence allowance of $40 would
be $8, that is, $40 divided by 5 for 5 days of the week, the daily
amount would be $8, that is, $40 divided by 5. However, for purposes of
this section, only $5 per day may be excluded, or $25 on a weekly basis.
(c) Expenses in respect of which the allowance under section 120 is
paid may not be deducted under any provision of the income tax laws
except to the extent that (1) such expenses exceed the amount of the
exclusion, and (2) the excess is otherwise allowable as a deduction. For
example, if a State statute provides a subsistence allowance of $3 per
day and the taxpayer, a state trooper, incurs expenditures of $4.50 for
meals while away from home overnight on official police duties only $3
would be excludable under this section. Expenses relating to such
exclusion ($3) may not be deducted under any provision of the income tax
laws. However, the remaining $1.50 may be an allowable deduction under
section 162 as traveling expenses while away from home in the
performance of official duties. See Sec. 1.162-2.
(d) In the case of taxable years ending after September 30, 1958,
section 120 and this section do not apply to amounts received as a
statutory subsistence allowance for any day after September 30, 1958.
[[Page 482]]
Sec. 1.120-3 Notice of application for recognition of status of qualified group legal services plan.
(a) In general. In order for a plan to be a qualified group legal
services plan for purposes of the exclusion from gross income provided
by section 120(a), the plan must give notice to the Internal Revenue
Service that it is applying for recognition of its status as a qualified
plan. Paragraph (b) of this section describes how the notice is to be
filed for the plan. Paragraph (c) of this section describes the action
that the Internal Revenue Service will take in response to the notice
submitted for the plan. Paragraph (d) of this section describes the
period of plan qualification.
(b) Filing of notice--(1) In general. A notice of application for
recognition of the status of a qualified group legal services plan must
be filed with the key district director of internal revenue as described
in Sec. 601.201(n). The notice must be filed on Form 1024, Application
for Recognition of Exemption Under section 501(a) or for Determination
Under section 120, with the accompanying Schedule L, and must contain
the information required by the form and any accompanying instructions.
The form may be filed by either the employer adopting the plan or the
person administering the plan. No Form 1024 and Schedule L may be filed
for a plan before an employer adopts the plan, or proposes to adopt the
plan contingent only upon the recognition of the plan as a qualified
plan.
(2) Plans to which more than one employer contributes. In general,
for purposes of section 120 the adoption of a plan by an employer
constitutes the adoption of a separate plan to which that employer alone
contributes, notwithstanding that, in form, the employer purports to
adopt a plan with respect to which the employer is one of two or more
contributing employers. Accordingly, a separate Schedule L must be filed
pursuant to the instructions accompanying Form 1024 for each employer
adopting a plan.
(3) Certain collectively bargained plans. Notwithstanding
subparagraph (2) of this paragraph, if a plan to which more than one
employer contributes is a plan to which this subparagraph (3) applies,
the plan is treated as a single plan for purposes of section 120.
Accordingly, only one Form 1024 and Schedule L is required to be filed
for the plan, regardless of the number of employers originally adopting
the plan. In addition, once a Form 1024 and Schedule L is filed, no
additional filing is required with respect to an employer who thereafter
adopts the plan. In general, this subparagraph (3) applies to any plan
that is maintained pursuant to a collective bargaining agreement between
employee representatives and more than one employer who is required by
the plan instrument or other agreement to contribute to the plan with
respect to employees (or their spouses or dependents) participating in
the plan. This subparagraph does not apply, however, if all employers
required to contribute to the plan are corporations which are members of
a controlled group of corporations within the meaning of section
1563(a), determined without regard to section 1563(e)(3)(C). If all
employers required to contribute to the plan are corporations which are
members of such a controlled group, the filing requirements described in
subparagraph (2) of this paragraph apply, notwithstanding that the plan
is maintained pursuant to a collective bargaining agreement.
(c) Internal Revenue Service action on notice of application for
recognition. The Internal Revenue Service will issue to the person
submitting Form 1024 and Schedule L a ruling or determination letter
stating that the plan is or is not a qualified group legal services
plan. For general procedural rules, see Sec. 601.201 (a) through (n), as
that section relates to rulings and determination letters.
(d) Period of plan qualification--(1) In general. In the case of a
favorable determination, the plan will be considered a qualified group
legal services plan. If a Form 1024 and Schedule L required to be filed
by or on behalf of an employer is filed before--
(i) The end of the first plan year (as determined under the plan),
(ii) The end of the plan year within which the employer adopts the
plan, or
(iii) July 29, 1980,
the period of plan qualification with respect to the employer will begin
on
[[Page 483]]
the date the plan is adopted by the employer (or, if later, January 1,
1977). If the form and schedule are not filed before the latest of the
dates described in subdivisions (i), (ii) and (iii), the period of plan
qualification with respect to the employer will begin on the date of
filing. In any case in which either the Form 1024 or Schedule L filed by
or on behalf of an employer is incomplete, the date of filing is the
date on which the incomplete form or schedule is filed, if the necessary
additional information is provided at the request of the Commissioner
within the additional time period allowed by the Commissioner. If the
additional information is not provided within the additional time
period, allowed, the date of filing is the date on which the additional
information is filed. If no separate Form 1024 and Schedule L are
required to be filed by or on behalf of an employer (see paragraph
(b)(3) of this section), the period of plan qualification with respect
to the employer will begin on the date the plan is adopted by the
employer (or, if later, January 1, 1977). In any case in which a plan is
materially modified to conform to the requirements of section 120,
either before or after a Form 1024 and Schedule L are filed, the period
of plan qualification will not include any period before the effective
date of the modification.
(2) Plans in existence on June 4, 1976. (i) Notwithstanding
paragraph (d)(1) of this section, a written group legal services plan
providing for employer contributions which was in existence on June 4,
1976, will be considered a qualified group legal services plan for the
period January 1, 1977, through April 2, 1977. However, if the plan is
maintained pursuant to one or more agreements which were in effect on
October 4, 1976, and which the Secretary of Labor finds to be collective
bargaining agreements, the period of deemed qualification will extend
beyond April 2, 1977, and end on the date on which the last of the
collective bargaining agreements relating to the plan terminates.
Extensions of a bargaining agreement which are agreed to after October
4, 1976, are to be disregarded. The period of deemed qualification for a
plan maintained pursuant to a collective bargaining agreement will not,
however, extend beyond December 31, 1981.
(ii) A written group legal services plan will be considered to have
been in existence on June 4, 1976, if on or before that date the plan
was reduced to writing and adopted by one or more employers. No amounts
need have been contributed under the plan as of June 4, 1976.
(iii) Notwithstanding that a plan is a qualified plan for the period
of deemed qualification described in this paragraph (d)(2), the rules of
paragraphs (c) and (d)(1) of this section still apply with respect to a
Form 1024 and Schedule L filed for the plan. For example, if a Form 1024
and Schedule L filed by or on behalf of an employer are filed before the
latest of the 3 dates described in paragraph (d)(1) of this section, in
the case of a favorable determination the plan will be a qualified plan
from the date the plan is adopted by the employer (or, if later, January
1, 1977), and any period of deemed qualification and the period of
qualification based upon the favorable determination will overlap.
However, in the case of a plan to which this paragraph (d)(2) applies,
if a Form 1024 and Schedule L required to be filed by or on behalf of an
employer is not filed before the latest of the 3 dates described in
paragraph (d)(1) of this section, the following rules shall apply. In
general, if Form 1024 and Schedule L are filed before the end of the
plan year following the plan year with or within which the plan's period
of deemed qualification expires, in the event of a favorable
determination the plan will be a qualified plan with respect to the
employer beginning on the earlier of the day following the date on which
the period of deemed qualification expires or the date on which the Form
1024 and Schedule L are filed. The period of plan qualification with
respect to an employer cannot, however, include any period before the
employer adopts the plan. If the Form 1024 and Schedule L are not filed
before the end of the plan year following the plan year with or within
which the plan's period of deemed qualification expires, in the case of
a favorable determination the plan will be a
[[Page 484]]
qualified plan with respect to an employer from the later of the date of
filing or adoption of the plan by the employer. The rules described in
paragraph (d)(1) of this section relating to incomplete filings and plan
modifications apply with respect to a filing described in this paragraph
(d)(2).
(e) Effective date. This section is effective for notices of
application for recognition of the status of a qualified group legal
services plan filed after May 29, 1980.
(Secs. 120(c)(4) and 7805 of the Internal Revenue Code of 1954, 90 Stat.
1926, 68A Stat. 917; (26 U.S.C. 120(c)(4), 7805))
[T.D. 7696, 45 FR 28320, Apr. 29, 1980]
Sec. 1.121-1 Exclusion of gain from sale or exchange of a principal residence.
(a) In general. Section 121 provides that, under certain
circumstances, gross income does not include gain realized on the sale
or exchange of property that was owned and used by a taxpayer as the
taxpayer's principal residence. Subject to the other provisions of
section 121, a taxpayer may exclude gain only if, during the 5-year
period ending on the date of the sale or exchange, the taxpayer owned
and used the property as the taxpayer's principal residence for periods
aggregating 2 years or more.
(b) Residence--(1) In general. Whether property is used by the
taxpayer as the taxpayer's residence depends upon all the facts and
circumstances. A property used by the taxpayer as the taxpayer's
residence may include a houseboat, a house trailer, or the house or
apartment that the taxpayer is entitled to occupy as a tenant-
stockholder in a cooperative housing corporation (as those terms are
defined in section 216(b)(1) and (2)). Property used by the taxpayer as
the taxpayer's residence does not include personal property that is not
a fixture under local law.
(2) Principal residence. In the case of a taxpayer using more than
one property as a residence, whether property is used by the taxpayer as
the taxpayer's principal residence depends upon all the facts and
circumstances. If a taxpayer alternates between 2 properties, using each
as a residence for successive periods of time, the property that the
taxpayer uses a majority of the time during the year ordinarily will be
considered the taxpayer's principal residence. In addition to the
taxpayer's use of the property, relevant factors in determining a
taxpayer's principal residence, include, but are not limited to--
(i) The taxpayer's place of employment;
(ii) The principal place of abode of the taxpayer's family members;
(iii) The address listed on the taxpayer's federal and state tax
returns, driver's license, automobile registration, and voter
registration card;
(iv) The taxpayer's mailing address for bills and correspondence;
(v) The location of the taxpayer's banks; and
(vi) The location of religious organizations and recreational clubs
with which the taxpayer is affiliated.
(3) Vacant land--(i) In general. The sale or exchange of vacant land
is not a sale or exchange of the taxpayer's principal residence unless--
(A) The vacant land is adjacent to land containing the dwelling unit
of the taxpayer's principal residence;
(B) The taxpayer owned and used the vacant land as part of the
taxpayer's principal residence;
(C) The taxpayer sells or exchanges the dwelling unit in a sale or
exchange that meets the requirements of section 121 within 2 years
before or 2 years after the date of the sale or exchange of the vacant
land; and
(D) The requirements of section 121 have otherwise been met with
respect to the vacant land.
(ii) Limitations--(A) Maximum limitation amount. For purposes of
section 121(b)(1) and (2) (relating to the maximum limitation amount of
the section 121 exclusion), the sale or exchange of the dwelling unit
and the vacant land are treated as one sale or exchange. Therefore, only
one maximum limitation amount of $250,000 ($500,000 for certain joint
returns) applies to the combined sales or exchanges of vacant land and
the dwelling unit. In applying the maximum limitation amount to sales or
exchanges that occur in different taxable years, gain from the sale or
exchange of the dwelling unit, up to the maximum limitation amount under
section 121(b)(1) or (2), is excluded first
[[Page 485]]
and each spouse is treated as excluding one-half of the gain from a sale
or exchange to which section 121(b)(2)(A) and Sec. 1.121-2(a)(3)(i)
(relating to the limitation for certain joint returns) apply.
(B) Sale or exchange of more than one principal residence in 2-year
period. If a dwelling unit and vacant land are sold or exchanged in
separate transactions that qualify for the section 121 exclusion under
this paragraph (b)(3), each of the transactions is disregarded in
applying section 121(b)(3) (restricting the application of section 121
to only 1 sale or exchange every 2 years) to the other transactions but
is taken into account as a sale or exchange of a principal residence on
the date of the transaction in applying section 121(b)(3) to that
transaction and the sale or exchange of any other principal residence.
(C) Sale or exchange of vacant land before dwelling unit. If the
sale or exchange of the dwelling unit occurs in a later taxable year
than the sale or exchange of the vacant land and after the date
prescribed by law (including extensions) for the filing of the return
for the taxable year of the sale or exchange of the vacant land, any
gain from the sale or exchange of the vacant land must be treated as
taxable on the taxpayer's return for the taxable year of the sale or
exchange of the vacant land. If the taxpayer has reported gain from the
sale or exchange of the vacant land as taxable, after satisfying the
requirements of this paragraph (b)(3) the taxpayer may claim the section
121 exclusion with regard to the sale or exchange of the vacant land
(for any period for which the period of limitation under section 6511
has not expired) by filing an amended return.
(4) Examples. The provisions of this paragraph (b) are illustrated
by the following examples:
Example 1. Taxpayer A owns 2 residences, one in New York and one in
Florida. From 1999 through 2004, he lives in the New York residence for
7 months and the Florida residence for 5 months of each year. In the
absence of facts and circumstances indicating otherwise, the New York
residence is A's principal residence. A would be eligible for the
section 121 exclusion of gain from the sale or exchange of the New York
residence, but not the Florida residence.
Example 2. Taxpayer B owns 2 residences, one in Virginia and one in
Maine. During 1999 and 2000, she lives in the Virginia residence. During
2001 and 2002, she lives in the Maine residence. During 2003, she lives
in the Virginia residence. B's principal residence during 1999, 2000,
and 2003 is the Virginia residence. B's principal residence during 2001
and 2002 is the Maine residence. B would be eligible for the 121
exclusion of gain from the sale or exchange of either residence (but not
both) during 2003.
Example 3. In 1991 Taxpayer C buys property consisting of a house
and 10 acres that she uses as her principal residence. In May 2005 C
sells 8 acres of the land and realizes a gain of $110,000. C does not
sell the dwelling unit before the due date for filing C's 2005 return,
therefore C is not eligible to exclude the $110,000 of gain. In March
2007 C sells the house and remaining 2 acres realizing a gain of
$180,000 from the sale of the house. C may exclude the $180,000 of gain.
Because the sale of the 8 acres occurred within 2 years from the date of
the sale of the dwelling unit, the sale of the 8 acres is treated as a
sale of the taxpayer's principal residence under paragraph (b)(3) of
this section. C may file an amended return for 2005 to claim an
exclusion for $70,000 ($250,000-$180,000 gain previously excluded) of
the $110,000 gain from the sale of the 8 acres.
Example 4. In 1998 Taxpayer D buys a house and 1 acre that he uses
as his principal residence. In 1999 D buys 29 acres adjacent to his
house and uses the vacant land as part of his principal residence. In
2003 D sells the house and 1 acre and the 29 acres in 2 separate
transactions. D sells the house and 1 acre at a loss of $25,000. D
realizes $270,000 of gain from the sale of the 29 acres. D may exclude
the $245,000 gain from the 2 sales.
(c) Ownership and use requirements--(1) In general. The requirements
of ownership and use for periods aggregating 2 years or more may be
satisfied by establishing ownership and use for 24 full months or for
730 days (365 x 2). The requirements of ownership and use may be
satisfied during nonconcurrent periods if both the ownership and use
tests are met during the 5-year period ending on the date of the sale or
exchange.
(2) Use. (i) In establishing whether a taxpayer has satisfied the 2-
year use requirement, occupancy of the residence is required. However,
short temporary absences, such as for vacation or other seasonal absence
(although accompanied with rental of the residence), are counted as
periods of use.
(ii) Determination of use during periods of out-of-residence care.
If a taxpayer
[[Page 486]]
has become physically or mentally incapable of self-care and the
taxpayer sells or exchanges property that the taxpayer owned and used as
the taxpayer's principal residence for periods aggregating at least 1
year during the 5-year period preceding the sale or exchange, the
taxpayer is treated as using the property as the taxpayer's principal
residence for any period of time during the 5-year period in which the
taxpayer owns the property and resides in any facility (including a
nursing home) licensed by a State or political subdivision to care for
an individual in the taxpayer's condition.
(3) Ownership--(i) Trusts. If a residence is owned by a trust, for
the period that a taxpayer is treated under sections 671 through 679
(relating to the treatment of grantors and others as substantial owners)
as the owner of the trust or the portion of the trust that includes the
residence, the taxpayer will be treated as owning the residence for
purposes of satisfying the 2-year ownership requirement of section 121,
and the sale or exchange by the trust will be treated as if made by the
taxpayer.
(ii) Certain single owner entities. If a residence is owned by an
eligible entity (within the meaning of Sec. 301.7701-3(a) of this
chapter) that has a single owner and is disregarded for federal tax
purposes as an entity separate from its owner under Sec. 301.7701-3 of
this chapter, the owner will be treated as owning the residence for
purposes of satisfying the 2-year ownership requirement of section 121,
and the sale or exchange by the entity will be treated as if made by the
owner.
(4) Examples. The provisions of this paragraph (c) are illustrated
by the following examples. The examples assume that Sec. 1.121-3
(relating to the reduced maximum exclusion) does not apply to the sale
of the property. The examples are as follows:
Example 1. Taxpayer A has owned and used his house as his principal
residence since 1986. On January 31, 1998, A moves to another state. A
rents his house to tenants from that date until April 18, 2000, when he
sells it. A is eligible for the section 121 exclusion because he has
owned and used the house as his principal residence for at least 2 of
the 5 years preceding the sale.
Example 2. Taxpayer B owns and uses a house as her principal
residence from 1986 to the end of 1997. On January 4, 1998, B moves to
another state and ceases to use the house. B's son moves into the house
in March 1999 and uses the residence until it is sold on July 1, 2001. B
may not exclude gain from the sale under section 121 because she did not
use the property as her principal residence for at least 2 years out of
the 5 years preceding the sale.
Example 3. Taxpayer C lives in a townhouse that he rents from 1993
through 1996. On January 18, 1997, he purchases the townhouse. On
February 1, 1998, C moves into his daughter's home. On May 25, 2000,
while still living in his daughter's home, C sells his townhouse. The
section 121 exclusion will apply to gain from the sale because C owned
the townhouse for at least 2 years out of the 5 years preceding the sale
(from January 19, 1997 until May 25, 2000) and he used the townhouse as
his principal residence for at least 2 years during the 5-year period
preceding the sale (from May 25, 1995 until February 1, 1998).
Example 4. Taxpayer D, a college professor, purchases and moves into
a house on May 1, 1997. He uses the house as his principal residence
continuously until September 1, 1998, when he goes abroad for a 1-year
sabbatical leave. On October 1, 1999, 1 month after returning from the
leave, D sells the house. Because his leave is not considered to be a
short temporary absence under paragraph (c)(2) of this section, the
period of the sabbatical leave may not be included in determining
whether D used the house for periods aggregating 2 years during the 5-
year period ending on the date of the sale. Consequently, D is not
entitled to exclude gain under section 121 because he did not use the
residence for the requisite period.
Example 5. Taxpayer E purchases a house on February 1, 1998, that he
uses as his principal residence. During 1998 and 1999, E leaves his
residence for a 2-month summer vacation. E sells the house on March 1,
2000. Although, in the 5-year period preceding the date of sale, the
total time E used his residence is less than 2 years (21 months), the
section 121 exclusion will apply to gain from the sale of the residence
because, under paragraph (c)(2) of this section, the 2-month vacations
are short temporary absences and are counted as periods of use in
determining whether E used the residence for the requisite period.
(d) Depreciation taken after May 6, 1997--(1) In general. The
section 121 exclusion does not apply to so much of the gain from the
sale or exchange of property as does not exceed the portion of the
depreciation adjustments (as defined in section 1250(b)(3)) attributable
[[Page 487]]
to the property for periods after May 6, 1997. Depreciation adjustments
allocable to any portion of the property to which the section 121
exclusion does not apply under paragraph (e) of this section are not
taken into account for this purpose.
(2) Example. The provisions of this paragraph (d) are illustrated by
the following example:
Example. On July 1, 1999, Taxpayer A moves into a house that he owns
and had rented to tenants since July 1, 1997. A took depreciation
deductions totaling $14,000 for the period that he rented the property.
After using the residence as his principal residence for 2 full years, A
sells the property on August 1, 2001. A's gain realized from the sale is
$40,000. A has no other section 1231 or capital gains or losses for
2001. Only $26,000 ($40,000 gain realized--$14,000 depreciation
deductions) may be excluded under section 121. Under section 121(d)(6)
and paragraph (d)(1) of this section, A must recognize $14,000 of the
gain as unrecaptured section 1250 gain within the meaning of section
1(h).
(e) Property used in part as a principal residence--(1) Allocation
required. Section 121 will not apply to the gain allocable to any
portion (separate from the dwelling unit) of property sold or exchanged
with respect to which a taxpayer does not satisfy the use requirement.
Thus, if a portion of the property was used for residential purposes and
a portion of the property (separate from the dwelling unit) was used for
non-residential purposes, only the gain allocable to the residential
portion is excludable under section 121. No allocation is required if
both the residential and non-residential portions of the property are
within the same dwelling unit. However, section 121 does not apply to
the gain allocable to the residential portion of the property to the
extent provided by paragraph (d) of this section.
(2) Dwelling unit. For purposes of this paragraph (e), the term
dwelling unit has the same meaning as in section 280A(f)(1), but does
not include appurtenant structures or other property.
(3) Method of allocation. For purposes of determining the amount of
gain allocable to the residential and non-residential portions of the
property, the taxpayer must allocate the basis and the amount realized
between the residential and the non-residential portions of the property
using the same method of allocation that the taxpayer used to determine
depreciation adjustments (as defined in section 1250(b)(3)), if
applicable.
(4) Examples. The provisions of this paragraph (e) are illustrated
by the following examples:
Example 1. Non-residential use of property not within the dwelling
unit. (i) Taxpayer A owns a property that consists of a house, a stable
and 35 acres. A uses the stable and 28 acres for non-residential
purposes for more than 3 years during the 5-year period preceding the
sale. A uses the entire house and the remaining 7 acres as his principal
residence for at least 2 years during the 5-year period preceding the
sale. For periods after May 6, 1997, A claims depreciation deductions of
$9,000 for the non-residential use of the stable. A sells the entire
property in 2004, realizing a gain of $24,000. A has no other section
1231 or capital gains or losses for 2004.
(ii) Because the stable and the 28 acres used in the business are
separate from the dwelling unit, the allocation rules under this
paragraph (e) apply and A must allocate the basis and amount realized
between the portion of the property that he used as his principal
residence and the portion of the property that he used for non-
residential purposes. A determines that $14,000 of the gain is allocable
to the non-residential-use portion of the property and that $10,000 of
the gain is allocable to the portion of the property used as his
residence. A must recognize the $14,000 of gain allocable to the non-
residential-use portion of the property ($9,000 of which is unrecaptured
section 1250 gain within the meaning of section 1(h), and $5,000 of
which is adjusted net capital gain). A may exclude $10,000 of the gain
from the sale of the property.
Example 2. Non-residential use of property not within the dwelling
unit and rental of the entire property. (i) In 1998 Taxpayer B buys a
property that includes a house, a barn, and 2 acres. B uses the house
and 2 acres as her principal residence and the barn for an antiques
business. In 2002, B moves out of the house and rents it to tenants. B
sells the property in 2004, realizing a gain of $21,000. Between 1998
and 2004 B claims depreciation deductions of $4,800 attributable to the
antiques business. Between 2002 and 2004 B claims depreciation
deductions of $3,000 attributable to the house. B has no other section
1231 or capital gains or losses for 2004.
(ii) Because the portion of the property used in the antiques
business is separate from the dwelling unit, the allocation rules under
this paragraph (e) apply. B must allocate basis and amount realized
between the portion of the property that she used as her principal
residence and the portion of the
[[Page 488]]
property that she used for non-residential purposes. B determines that
$4,000 of the gain is allocable to the non-residential portion of the
property and that $17,000 of the gain is allocable to the portion of the
property that she used as her principal residence.
(iii) B must recognize the $4,000 of gain allocable to the non-
residential portion of the property (all of which is unrecaptured
section 1250 gain within the meaning of section 1(h)). In addition, the
section 121 exclusion does not apply to the gain allocable to the
residential portion of the property to the extent of the depreciation
adjustments attributable to the residential portion of the property for
periods after May 6, 1997 ($3,000). Therefore, B may exclude $14,000 of
the gain from the sale of the property.
Example 3. Non-residential use of a separate dwelling unit. (i) In
2002 Taxpayer C buys a 3-story townhouse and converts the basement
level, which has a separate entrance, into a separate apartment by
installing a kitchen and bathroom and removing the interior stairway
that leads from the basement to the upper floors. After the conversion,
the property constitutes 2 dwelling units within the meaning of
paragraph (e)(2) of this section. C uses the first and second floors of
the townhouse as his principal residence and rents the basement level to
tenants from 2003 to 2007. C claims depreciation deductions of $2,000
for that period with respect to the basement apartment. C sells the
entire property in 2007, realizing gain of $18,000. C has no other
section 1231 or capital gains or losses for 2007.
(ii) Because the basement apartment and the upper floors of the
townhouse are separate dwelling units, C must allocate the gain between
the portion of the property that he used as his principal residence and
the portion of the property that he used for non-residential purposes
under paragraph (e) of this section. After allocating the basis and the
amount realized between the residential and non-residential portions of
the property, C determines that $6,000 of the gain is allocable to the
non-residential portion of the property and that $12,000 of the gain is
allocable to the portion of the property used as his residence. C must
recognize the $6,000 of gain allocable to the non-residential portion of
the property ($2,000 of which is unrecaptured section 1250 gain within
the meaning of section 1(h), and $4,000 of which is adjusted net capital
gain). C may exclude $12,000 of the gain from the sale of the property.
Example 4. Separate dwelling unit converted to residential use. The
facts are the same as in Example 3 except that in 2007 C incorporates
the basement of the townhouse into his principal residence by
eliminating the kitchen and building a new interior stairway to the
upper floors. C uses all 3 floors of the townhouse as his principal
residence for 2 full years and sells the townhouse in 2010, realizing a
gain of $20,000. Under section 121(d)(6) and paragraph (d) of this
section, C must recognize $2,000 of the gain as unrecaptured section
1250 gain within the meaning of section 1(h). Because C used the entire
3 floors of the townhouse as his principal residence for 2 of the 5
years preceding the sale of the property, C may exclude the remaining
$18,000 of the gain from the sale of the house.
Example 5. Non-residential use within the dwelling unit, property
depreciated. Taxpayer D, an attorney, buys a house in 2003. The house
constitutes a single dwelling unit but D uses a portion of the house as
a law office. D claims depreciation deductions of $2,000 during the
period that she owns the house. D sells the house in 2006, realizing a
gain of $13,000. D has no other section 1231 or capital gains or losses
for 2006. Under section 121(d)(6) and paragraph (d) of this section, D
must recognize $2,000 of the gain as unrecaptured section 1250 gain
within the meaning of section 1(h). D may exclude the remaining $11,000
of the gain from the sale of her house because, under paragraph (e)(1)
of this section, she is not required to allocate gain to the business
use within the dwelling unit.
Example 6. Non-residential use within the dwelling unit, property
not depreciated. The facts are the same as in Example 5, except that D
is not entitled to claim any depreciation deductions with respect to her
business use of the house. D may exclude $13,000 of the gain from the
sale of her house because, under paragraph (e)(1) of this section, she
is not required to allocate gain to the business use within the dwelling
unit.
(f) Effective date. This section is applicable for sales and
exchanges on or after Decmeber 24, 2002. For rules on electing to apply
the provisions of this section retroactively, see Sec. 1.121-4(j).
[T.D. 9030, 67 FR 78361, Dec. 24, 2002]
Sec. 1.121-2 Limitations.
(a) Dollar limitations--(1) In general. A taxpayer may exclude from
gross income up to $250,000 of gain from the sale or exchange of the
taxpayer's principal residence. A taxpayer is eligible for only one
maximum exclusion per principal residence.
(2) Joint owners. If taxpayers jointly own a principal residence but
file separate returns, each taxpayer may exclude from gross income up to
$250,000 of gain that is attributable to each taxpayer's interest in the
property, if the requirements of section 121 have otherwise been met.
[[Page 489]]
(3) Special rules for joint returns--(i) In general. A husband and
wife who make a joint return for the year of the sale or exchange of a
principal residence may exclude up to $500,000 of gain if--
(A) Either spouse meets the 2-year ownership requirements of
Sec. 1.121-1(a) and (c);
(B) Both spouses meet the 2-year use requirements of Sec. 1.121-1(a)
and (c); and
(C) Neither spouse excluded gain from a prior sale or exchange of
property under section 121 within the last 2 years (as determined under
paragraph (b) of this section).
(ii) Other joint returns. For taxpayers filing jointly, if either
spouse fails to meet the requirements of paragraph (a)(3)(i) of this
section, the maximum limitation amount to be claimed by the couple is
the sum of each spouse's limitation amount determined on a separate
basis as if they had not been married. For this purpose, each spouse is
treated as owning the property during the period that either spouse
owned the property.
(4) Examples. The provisions of this paragraph (a) are illustrated
by the following examples. The examples assume that Sec. 1.121-3
(relating to the reduced maximum exclusion) does not apply to the sale
of the property. The examples are as follows:
Example 1. Unmarried Taxpayers A and B own a house as joint owners,
each owning a 50 percent interest in the house. They sell the house
after owning and using it as their principal residence for 2 full years.
The gain realized from the sale is $256,000. A and B are each eligible
to exclude $128,000 of gain because the amount of realized gain
allocable to each of them from the sale does not exceed each taxpayer's
available limitation amount of $250,000.
Example 2. The facts are the same as in Example 1, except that A and
B are married taxpayers who file a joint return for the taxable year of
the sale. A and B are eligible to exclude the entire amount of realized
gain ($256,000) from gross income because the gain realized from the
sale does not exceed the limitation amount of $500,000 available to A
and B as taxpayers filing a joint return.
Example 3. During 1999, married Taxpayers H and W each sell a
residence that each had separately owned and used as a principal
residence before their marriage. Each spouse meets the ownership and use
tests for his or her respective residence. Neither spouse meets the use
requirement for the other spouse's residence. H and W file a joint
return for the year of the sales. The gain realized from the sale of H's
residence is $200,000. The gain realized from the sale of W's residence
is $300,000. Because the ownership and use requirements are met for each
residence by each respective spouse, H and W are each eligible to
exclude up to $250,000 of gain from the sale of their individual
residences. However, W may not use H's unused exclusion to exclude gain
in excess of her limitation amount. Therefore, H and W must recognize
$50,000 of the gain realized on the sale of W's residence.
Example 4. Married Taxpayers H and W sell their residence and file a
joint return for the year of the sale. W, but not H, satisfies the
requirements of section 121. They are eligible to exclude up to $250,000
of the gain from the sale of the residence because that is the sum of
each spouse's dollar limitation amount determined on a separate basis as
if they had not been married ($0 for H, $250,000 for W).
Example 5. Married Taxpayers H and W have owned and used their
principal residence since 1998. On February 16, 2001, H dies. On
September 24, 2001, W sells the residence and realizes a gain of
$350,000. Pursuant to section 6013(a)(3), W and H's executor make a
joint return for 2001. All $350,000 of the gain from the sale of the
residence may be excluded.
Example 6. Assume the same facts as Example 5, except that W does
not sell the residence until January 31, 2002. Because W's filing status
for the taxable year of the sale is single, the special rules for joint
returns under paragraph (a)(3) of this section do not apply and W may
exclude only $250,000 of the gain.
(b) Application of section 121 to only 1 sale or exchange every 2
years--(1) In general. Except as otherwise provided in Sec. 1.121-3
(relating to the reduced maximum exclusion), a taxpayer may not exclude
from gross income gain from the sale or exchange of a principal
residence if, during the 2-year period ending on the date of the sale or
exchange, the taxpayer sold or exchanged other property for which gain
was excluded under section 121. For purposes of this paragraph (b)(1),
any sale or exchange before May 7, 1997, is disregarded.
(2) Example. The following example illustrates the rules of this
paragraph (b). The example assumes that Sec. 1.121-3 (relating to the
reduced maximum exclusion) does not apply to the sale of the property.
The example is as follows:
Example. Taxpayer A owns a townhouse that he uses as his principal
residence for 2
[[Page 490]]
full years, 1998 and 1999. A buys a house in 2000 that he owns and uses
as his principal residence. A sells the townhouse in 2002 and excludes
gain realized on its sale under section 121. A sells the house in 2003.
Although A meets the 2-year ownership and use requirements of section
121, A is not eligible to exclude gain from the sale of the house
because A excluded gain within the last 2 years under section 121 from
the sale of the townhouse.
(c) Effective date. This section is applicable for sales and
exchanges on or after December 24, 2002. For rules on electing to apply
the provisions of this section retroactively, see Sec. 1.121-4(j).
[T.D. 9030, 67 FR 78361, Dec. 24, 2002]
Sec. 1.121-3 Reduced maximum exclusion for taxpayers failing to meet certain requirements.
(a) In general. In lieu of the limitation under section 121(b) and
Sec. 1.121-2, a reduced maximum exclusion limitation may be available
for a taxpayer who sells or exchanges property used as the taxpayer's
principal residence but fails to satisfy the ownership and use
requirements described in Sec. 1.121-1(a) and (c) or the 2-year
limitation described in Sec. 1.121-2(b).
(b) through (f) [Reserved]. For further guidance, see Sec. 1.121-
3T(b) through (f).
(g) Computation of reduced maximum exclusion. (1) The reduced
maximum exclusion is computed by multiplying the maximum dollar
limitation of $250,000 ($500,000 for certain joint filers) by a
fraction. The numerator of the fraction is the shortest of the period of
time that the taxpayer owned the property during the 5-year period
ending on the date of the sale or exchange; the period of time that the
taxpayer used the property as the taxpayer's principal residence during
the 5-year period ending on the date of the sale or exchange; or the
period of time between the date of a prior sale or exchange of property
for which the taxpayer excluded gain under section 121 and the date of
the current sale or exchange. The numerator of the fraction may be
expressed in days or months. The denominator of the fraction is 730 days
or 24 months (depending on the measure of time used in the numerator).
(2) Examples. The following examples illustrate the rules of this
paragraph (g):
Example 1. Taxpayer A purchases a house that she uses as her
principal residence. Twelve months after the purchase, A sells the house
due to a change in place of her employment. A has not excluded gain
under section 121 on a prior sale or exchange of property within the
last 2 years. A is eligible to exclude up to $125,000 of the gain from
the sale of her house (12/24 x $250,000).
Example 2. (i) Taxpayer H owns a house that he has used as his
principal residence since 1996. On January 15, 1999, H and W marry and W
begins to use H's house as her principal residence. On January 15, 2000,
H sells the house due to a change in W's place of employment. Neither H
nor W has excluded gain under section 121 on a prior sale or exchange of
property within the last 2 years.
(ii) Because H and W have not each used the house as their principal
residence for at least 2 years during the 5-year period preceding its
sale, the maximum dollar limitation amount that may be claimed by H and
W will not be $500,000, but the sum of each spouse's limitation amount
determined on a separate basis as if they had not been married. (See
Sec. 1.121-2(a)(3)(ii).)
(iii) H is eligible to exclude up to $250,000 of gain because he
meets the requirements of section 121. W is not eligible to exclude the
maximum dollar limitation amount. Instead, because the sale of the house
is due to a change in place of employment, W is eligible to claim a
reduced maximum exclusion of up to $125,000 of the gain (365/730 x
$250,000). Therefore, H and W are eligible to exclude up to $375,000 of
gain ($250,000 + $125,000) from the sale of the house.
(h) [Reserved]. For further guidance, see Sec. 1.121-3T(h).
(i) through (k) [Reserved].
(l) Effective date. This section is applicable for sales and
exchanges on or after December 24, 2002. For rules on electing to apply
the provisions of this section retroactively, see Sec. 1.121-4(j).
[T.D. 9030, 67 FR 78361, Dec. 24, 2002]
Sec. 1.121-3T Reduced maximum exclusion for taxpayers failing to meet certain requirements (temporary).
(a) [Reserved] For further guidance, see Sec. 1.121-3(a).
(b) Primary reason for sale or exchange. In order for a taxpayer to
claim a reduced maximum exclusion under section 121(c), the sale or
exchange must
[[Page 491]]
be by reason of a change in place of employment, health, or unforeseen
circumstances. A sale or exchange is by reason of a change in place of
employment, health, or unforeseen circumstances only if the primary
reason for the sale or exchange is a change in place of employment
(within the meaning of paragraph (c) of this section), health (within
the meaning of paragraph (d) of this section), or unforeseen
circumstances (within the meaning of paragraph (e) of this section).
Whether the requirements of this section are satisfied depends upon all
the facts and circumstances. If the taxpayer qualifies for a safe harbor
described in this section, the taxpayer's primary reason is deemed to be
a change in place of employment, health, or unforeseen circumstances. If
the taxpayer does not qualify for a safe harbor, factors that may be
relevant in determining the taxpayer's primary reason for the sale or
exchange include (but are not limited to) the extent to which--
(1) The sale or exchange and the circumstances giving rise to the
sale or exchange are proximate in time;
(2) The suitability of the property as the taxpayer's principal
residence materially changes;
(3) The taxpayer's financial ability to maintain the property
materially changes;
(4) The taxpayer uses the property as the taxpayer's residence
during the period of the taxpayer's ownership of the property;
(5) The circumstances giving rise to the sale or exchange are not
reasonably foreseeable when the taxpayer begins using the property as
the taxpayer's principal residence; and
(6) The circumstances giving rise to the sale or exchange occur
during the period of the taxpayer's ownership and use of the property as
the taxpayer's principal residence.
(c) Sale or exchange by reason of a change in place of employment--
(1) In general. A sale or exchange is by reason of a change in place of
employment if, in the case of a qualified individual described in
paragraph (f) of this section, the primary reason for the sale or
exchange is a change in the location of the individual's employment.
(2) Distance safe harbor. The primary reason for the sale or
exchange is deemed to be a change in place of employment (within the
meaning of paragraph (c)(1) of this section) if--
(i) The change in place of employment occurs during the period of
the taxpayer's ownership and use of the property as the taxpayer's
principal residence; and
(ii) The individual's new place of employment is at least 50 miles
farther from the residence sold or exchanged than was the former place
of employment, or, if there was no former place of employment, the
distance between the individual's new place of employment and the
residence sold or exchanged is at least 50 miles.
(3) Employment. For purposes of this paragraph (c), employment
includes the commencement of employment with a new employer, the
continuation of employment with the same employer, and the commencement
or continuation of self-employment.
(4) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. A is unemployed and owns a townhouse that she has owned
and used as her principal residence since 2002. In 2003 A obtains a job
that is 54 miles from her townhouse, and she sells the townhouse.
Because the distance between A's new place of employment and the
townhouse is at least 50 miles, the sale is within the safe harbor of
paragraph (c)(2) of this section and A is entitled to claim a reduced
maximum exclusion under section 121(c)(2).
Example 2. B is an officer in the United States Air Force stationed
in Florida. B purchases a house in Florida in 2001. In May 2002 B moves
out of his house to take a 3-year assignment in Germany. B sells his
house in January 2003. Because B's new place of employment in Germany is
at least 50 miles farther from the residence sold than is B's former
place of employment in Florida, the sale is within the safe harbor of
paragraph (c)(2) of this section and B is entitled to claim a reduced
maximum exclusion under section 121(c)(2).
Example 3. C is employed by Employer R at R's Philadelphia office. C
purchases a house in February 2001 that is 35 miles from R's
Philadelphia office. In May 2002 C begins a temporary assignment at R's
Wilmington office that is 72 miles from C's house, and moves out of the
house. In June 2004 C is assigned to work in R's London office, and as a
result, sells her house in August 2004. The
[[Page 492]]
sale of the house is not within the safe harbor of paragraph (c)(2) of
this section by reason of the change in place of employment from
Philadelphia to Wilmington because the Wilmington office is not 50 miles
farther from C's house than is the Philadelphia office. Furthermore, the
sale is not within the safe harbor by reason of the change in place of
employment to London because C is not using the house as her principal
residence when she moves to London. However, C is entitled to claim a
reduced maximum exclusion under section 121(c)(2) because, under the
facts and circumstances, the primary reason for the sale is the change
in C's place of employment.
Example 4. In July 2002 D buys a condominium that is 5 miles from
her place of employment and uses it as her principal residence. In
February 2003 D, who works as an emergency medicine physician, obtains a
job that is located 51 miles from D's condominium. D may be called in to
work unscheduled hours and, when called, must be able to arrive at work
quickly. Therefore, D sells her condominium and buys a townhouse that is
4 miles from her new place of employment. Because D's new place of
employment is only 46 miles farther from the condominium than is D's
former place of employment, the sale is not within the safe harbor of
paragraph (c)(2) of this section. However, D is entitled to claim a
reduced maximum exclusion under section 121(c)(2) because, under the
facts and circumstances, the primary reason for the sale is the change
in D's place of employment.
(d) Sale or exchange by reason of health--(1) In general. A sale or
exchange is by reason of health if the primary reason for the sale or
exchange is to obtain, provide, or facilitate the diagnosis, cure,
mitigation, or treatment of disease, illness, or injury of a qualified
individual described in paragraph (f) of this section, or to obtain or
provide medical or personal care for a qualified individual suffering
from a disease, illness, or injury. A sale or exchange that is merely
beneficial to the general health or well-being of the individual is not
a sale or exchange by reason of health.
(2) Physician's recommendation safe harbor. The primary reason for
the sale or exchange is deemed to be health if a physician (as defined
in section 213(d)(4)) recommends a change of residence for reasons of
health (as defined in paragraph (d)(1) of this section).
(3) Examples. The following examples illustrate the rules of this
paragraph (d):
Example 1. In 2002 A buys a house that she uses as her principal
residence. A is injured in an accident and is unable to care for
herself. As a result, A sells her house in 2003 and moves in with her
daughter so that the daughter can provide the care that A requires as a
result of her injury. Because, under the facts and circumstances, the
primary reason for the sale of A's house is A's health, A is entitled to
claim a reduced maximum exclusion under section 121(c)(2).
Example 2. H's father has a chronic disease. In 2002 H and W
purchase a house that they use as their principal residence. In 2003 H
and W sell their house in order to move into the house of H's father so
that they can provide the care he requires as a result of his disease.
Because, under the facts and circumstances, the primary reason for the
sale of their house is the health of H's father, H and W are entitled to
claim a reduced maximum exclusion under section 121(c)(2).
Example 3. H and W purchase a house in 2002 that they use as their
principal residence. Their son suffers from a chronic illness that
requires regular medical care. Later that year their doctor recommends
that their son begin a new treatment that is available at a medical
facility 100 miles away from their residence. In 2003 H and W sell their
house to be closer to the medical facility. Because, under the facts and
circumstances, the primary reason for the sale is to facilitate the
treatment of their son's chronic illness, H and W are entitled to claim
a reduced maximum exclusion under section 121(c)(2).
Example 4. B, who has chronic asthma, purchases a house in Minnesota
in 2002 that he uses as his principal residence. B's doctor tells B that
moving to a warm, dry climate would mitigate B's asthma symptoms. In
2003 B sells his house and moves to Arizona to relieve his asthma
symptoms. The sale is within the safe harbor of paragraph (d)(2) of this
section and B is entitled to claim a reduced maximum exclusion under
section 121(c)(2).
Example 5. In 2002 H and W purchase a house in Michigan that they
use as their principal residence. H's doctor tells H that he should get
more exercise, but H is not suffering from any disease that can be
treated or mitigated by exercise. In 2003 H and W sell their house and
move to Florida so that H can increase his general level of exercise by
playing golf year-round. Because the sale of the house is merely
beneficial to H's general health, the sale of the house is not by reason
of H's health. H and W are not entitled to claim a reduced maximum
exclusion under section 121(c)(2).
(e) Sale or exchange by reason of unforeseen circumstances--(1) In
general. A
[[Page 493]]
sale or exchange is by reason of unforeseen circumstances if the primary
reason for the sale or exchange is the occurrence of an event that the
taxpayer does not anticipate before purchasing and occupying the
residence.
(2) Specific event safe harbors. The primary reason for the sale or
exchange is deemed to be unforeseen circumstances (within the meaning of
paragraph (e)(1) of this section) if any of the events specified in
paragraphs (e)(2)(i) through (iii) of this section occur during the
period of the taxpayer's ownership and use of the residence as the
taxpayer's principal residence--
(i) The involuntary conversion of the residence;
(ii) Natural or man-made disasters or acts of war or terrorism
resulting in a casualty to the residence (without regard to
deductibility under section 165(h));
(iii) In the case of a qualified individual described in paragraph
(f) of this section--
(A) Death;
(B) The cessation of employment as a result of which the individual
is eligible for unemployment compensation (as defined in section 85(b));
(C) A change in employment or self-employment status that results in
the taxpayer's inability to pay housing costs and reasonable basic
living expenses for the taxpayer's household (including amounts for
food, clothing, medical expenses, taxes, transportation, court-ordered
payments, and expenses reasonably necessary to the production of income,
but not for the maintenance of an affluent or luxurious standard of
living);
(D) Divorce or legal separation under a decree of divorce or
separate maintenance; or
(E) Multiple births resulting from the same pregnancy; or
(iv) An event determined by the Commissioner to be an unforeseen
circumstance to the extent provided in published guidance of general
applicability or in a ruling directed to a specific taxpayer.
(3) Examples. The following examples illustrate the rules of this
paragraph (e):
Example 1. In 2003 A buys a house in California. After A begins to
use the house as her principal residence, an earthquake causes damage to
A's house. A sells the house in 2004. The sale is within the safe harbor
of paragraph (e)(2)(ii) of this section and A is entitled to claim a
reduced maximum exclusion under section 121(c)(2).
Example 2. H works as a teacher and W works as a pilot. In 2003 H
and W buy a house that they use as their principal residence. Later that
year W is furloughed from her job for six months. H and W are unable to
pay their mortgage during the period W is furloughed. H and W sell their
house in 2004. The sale is within the safe harbor of paragraph
(e)(2)(iii)(C) of this section and H and W are entitled to claim a
reduced maximum exclusion under section 121(c)(2).
Example 3. In 2003 H and W buy a two-bedroom condominium that they
use as their principal residence. In 2004 W gives birth to twins and H
and W sell their condominium and buy a four-bedroom house. The sale is
within the safe harbor of paragraph (e)(2)(iii)(E) of this section, and
H and W are entitled to claim a reduced maximum exclusion under section
121(c)(2).
Example 4. B buys a condominium in 2003 and uses it as his principal
residence. B's monthly condominium fee is $X. Three months after B moves
into the condominium, the condominium association decides to replace the
building's roof and heating system. Six months later, B's monthly
condominium fee doubles. B sells the condominium in 2004 because B is
unable to pay the new condominium fee along with the monthly mortgage
payment. The safe harbors of paragraph (e)(2) of this section do not
apply. However, under the facts and circumstances, the primary reason
for the sale is unforeseen circumstances, and B is entitled to claim a
reduced maximum exclusion under section 121(c)(2).
Example 5. In 2003 C buys a house that he uses as his principal
residence. The property is located on a heavily trafficked road. C sells
the property in 2004 because the traffic is more disturbing than he
expected. C is not entitled to claim a reduced maximum exclusion under
section 121(c)(2) because the safe harbors of paragraph (e)(2) of this
section do not apply and, under the facts and circumstances, the traffic
is not an unforeseen circumstance.
Example 6. In 2003 D and her fiance E buy a house and live in it as
their principal residence. In 2004 D and E cancel their wedding plans
and E moves out of the house. Because D cannot afford to make the
monthly mortgage payments alone, D and E sell the house in 2004. The
safe harbors of paragraph (e)(2) of this section do not apply. However,
under the facts and circumstances, the primary reason for the sale is
unforeseen circumstances, and D and E are each entitled to claim a
reduced maximum exclusion under section 121(c)(2).
[[Page 494]]
(f) Qualified individual. For purposes of this section, qualified
individual means--
(1) The taxpayer;
(2) The taxpayer's spouse;
(3) A co-owner of the residence;
(4) A person whose principal place of abode is in the same household
as the taxpayer; or
(5) For purposes of paragraph (d) of this section, a person bearing
a relationship specified in sections 152(a)(1) through 152(a)(8)
(without regard to qualification as a dependent) to a qualified
individual described in paragraphs (f)(1) through (4) of this section,
or a descendant of the taxpayer's grandparent.
(g) [Reserved]. For further guidance, see Sec. 1.121-3(g).
(h) Election to apply regulations retroactively. Taxpayers who would
otherwise qualify under this section to exclude gain from a sale or
exchange before December 24, 2002 but on or after May 7, 1997, may elect
to apply all of the provisions of this section for any years for which
the period of limitations under section 6511 has not expired. The
taxpayer makes the election under this paragraph (h) by filing a return
for the taxable year of the sale or exchange that does not include the
gain from the sale or exchange of the taxpayer's principal residence in
the taxpayer's gross income. Taxpayers who have filed a return for the
taxable year of the sale or exchange may elect to apply all the
provisions of this section for any years for which the period of
limitations under section 6511 has not expired by filing an amended
return.
(i) through (j) [Reserved]. See Sec. 1.121-3(i) through (j).
(k) Audit protection. The Internal Revenue Service will not
challenge a taxpayer's position that a sale or exchange of a principal
residence that occurred before December 24, 2002 but on or after May 7,
1997, qualifies for the reduced maximum exclusion under section 121(c)
if the taxpayer has made a reasonable, good faith effort to comply with
the requirements of section 121(c) and if the sale or exchange otherwise
qualifies under section 121.
(l) Effective date. For the applicability of this section, see
Sec. 1.121-3(l).
[T.D. 9031, 67 FR 78369, Dec. 24, 2002]
Sec. 1.121-4 Special rules.
(a) Property of deceased spouse--(1) In general. For purposes of
satisfying the ownership and use requirements of section 121, a taxpayer
is treated as owning and using property as the taxpayer's principal
residence during any period that the taxpayer's deceased spouse owned
and used the property as a principal residence before death if--
(i) The taxpayer's spouse is deceased on the date of the sale or
exchange of the property; and
(ii) The taxpayer has not remarried at the time of the sale or
exchange of the property.
(2) Example. The provisions of this paragraph (a) are illustrated by
the following example. The example assumes that Sec. 1.121-3 (relating
to the reduced maximum exclusion) does not apply to the sale of the
property. The example is as follows:
Example. Taxpayer H has owned and used a house as his principal
residence since 1987. H and W marry on July 1, 1999 and from that date
they use H's house as their principal residence. H dies on August 15,
2000, and W inherits the property. W sells the property on September 1,
2000, at which time she has not remarried. Although W has owned and used
the house for less than 2 years, W will be considered to have satisfied
the ownership and use requirements of section 121 because W's period of
ownership and use includes the period that H owned and used the property
before death.
(b) Property owned by spouse or former spouse--(1) Property
transferred to individual from spouse or former spouse. If a taxpayer
obtains property from a spouse or former spouse in a transaction
described in section 1041(a), the period that the taxpayer owns the
property will include the period that the spouse or former spouse owned
the property.
(2) Property used by spouse or former spouse. A taxpayer is treated
as using property as the taxpayer's principal residence for any period
that the taxpayer has an ownership interest in the property and the
taxpayer's spouse or former spouse is granted use of the property under
a divorce or separation
[[Page 495]]
instrument (as defined in section 71(b)(2)), provided that the spouse or
former spouse uses the property as his or her principal residence.
(c) Tenant-stockholder in cooperative housing corporation. A
taxpayer who holds stock as a tenant-stockholder in a cooperative
housing corporation (as those terms are defined in section 216(b)(1) and
(2)) may be eligible to exclude gain under section 121 on the sale or
exchange of the stock. In determining whether the taxpayer meets the
requirements of section 121, the ownership requirements are applied to
the holding of the stock and the use requirements are applied to the
house or apartment that the taxpayer is entitled to occupy by reason of
the taxpayer's stock ownership.
(d) Involuntary conversions--(1) In general. For purposes of section
121, the destruction, theft, seizure, requisition, or condemnation of
property is treated as a sale of the property.
(2) Application of section 1033. In applying section 1033 (relating
to involuntary conversions), the amount realized from the sale or
exchange of property used as the taxpayer's principal residence is
treated as being the amount determined without regard to section 121,
reduced by the amount of gain excluded from the taxpayer's gross income
under section 121.
(3) Property acquired after involuntary conversion. If the basis of
the property acquired as a result of an involuntary conversion is
determined (in whole or in part) under section 1033(b) (relating to the
basis of property acquired through an involuntary conversion), then for
purposes of satisfying the requirements of section 121, the taxpayer
will be treated as owning and using the acquired property as the
taxpayer's principal residence during any period of time that the
taxpayer owned and used the converted property as the taxpayer's
principal residence.
(4) Example. The provisions of this paragraph (d) are illustrated by
the following example:
Example. (i) On February 18, 1999, fire destroys Taxpayer A's house
which has an adjusted basis of $80,000. A had owned and used this
property as her principal residence for 20 years prior to its
destruction. A's insurance company pays A $400,000 for the house. A
realizes a gain of $320,000 ($400,000--$80,000). On August 27, 1999, A
purchases a new house at a cost of $100,000.
(ii) Because the destruction of the house is treated as a sale for
purposes of section 121, A will exclude $250,000 of the realized gain
from A's gross income. For purposes of section 1033, the amount realized
is then treated as being $150,000 ($400,000--$250,000) and the gain
realized is $70,000 ($150,000 amount realized--$80,000 basis). A elects
under section 1033 to recognize only $50,000 of the gain ($150,000
amount realized--$100,000 cost of new house). The remaining $20,000 of
gain is deferred and A's basis in the new house is $80,000 ($100,000
cost--$20,000 gain not recognized).
(iii) A will be treated as owning and using the new house as A's
principal residence during the 20-year period that A owned and used the
destroyed house.
(e) Sales or exchanges of partial interests--(1) Partial interests
other than remainder interests--(i) In general. Except as provided in
paragraph (e)(2) of this section (relating to sales or exchanges of
remainder interests), a taxpayer may apply the section 121 exclusion to
gain from the sale or exchange of an interest in the taxpayer's
principal residence that is less than the taxpayer's entire interest if
the interest sold or exchanged includes an interest in the dwelling
unit. For rules relating to the sale or exchange of vacant land, see
Sec. 1.121-1(b)(3).
(ii) Limitations--(A) Maximum limitation amount. For purposes of
section 121(b)(1) and (2) (relating to the maximum limitation amount of
the section 121 exclusion), sales or exchanges of partial interests in
the same principal residence are treated as one sale or exchange.
Therefore, only one maximum limitation amount of $250,000 ($500,000 for
certain joint returns) applies to the combined sales or exchanges of the
partial interests. In applying the maximum limitation amount to sales or
exchanges that occur in different taxable years, a taxpayer may exclude
gain from the first sale or exchange of a partial interest up to the
taxpayer's full maximum limitation amount and may exclude gain from the
sale or exchange of any other partial interest in the same principal
residence to the extent of any remaining maximum limitation amount, and
each spouse is treated as excluding one-half of the gain from a sale or
exchange to which section
[[Page 496]]
121(b)(2)(A) and Sec. 1.121-2(a)(3)(i)(relating to the limitation for
certain joint returns) apply.
(B) Sale or exchange of more than one principal residence in 2-year
period. For purposes of applying section 121(b)(3) (restricting the
application of section 121 to only 1 sale or exchange every 2 years),
each sale or exchange of a partial interest is disregarded with respect
to other sales or exchanges of partial interests in the same principal
residence, but is taken into account as of the date of the sale or
exchange in applying section 121(b)(3) to that sale or exchange and the
sale or exchange of any other principal residence.
(2) Sales or exchanges of remainder interests--(i) In general. A
taxpayer may elect to apply the section 121 exclusion to gain from the
sale or exchange of a remainder interest in the taxpayer's principal
residence.
(ii) Limitations--(A) Sale or exchange of any other interest. If a
taxpayer elects to exclude gain from the sale or exchange of a remainder
interest in the taxpayer's principal residence, the section 121
exclusion will not apply to a sale or exchange of any other interest in
the residence that is sold or exchanged separately.
(B) Sales or exchanges to related parties. This paragraph (e)(2)
will not apply to a sale or exchange to any person that bears a
relationship to the taxpayer that is described in section 267(b) or
707(b).
(iii) Election. The taxpayer makes the election under this paragraph
(e)(2) by filing a return for the taxable year of the sale or exchange
that does not include the gain from the sale or exchange of the
remainder interest in the taxpayer's gross income. A taxpayer may make
or revoke the election at any time before the expiration of a 3-year
period beginning on the last date prescribed by law (determined without
regard to extensions) for the filing of the return for the taxable year
in which the sale or exchange occurred.
(3) Example. The provisions of this paragraph (e) are illustrated by
the following example:
Example. In 1991 Taxpayer A buys a house that A uses as his
principal residence. In 2004 A's friend B moves into A's house and A
sells B a 50% interest in the house realizing a gain of $136,000. A may
exclude the $136,000 of gain. In 2005 A sells his remaining 50% interest
in the home to B realizing a gain of $138,000. A may exclude $114,000
($250,000--$136,000 gain previously excluded) of the $138,000 gain from
the sale of the remaining interest.
(f) No exclusion for expatriates. The section 121 exclusion will not
apply to any sale or exchange by an individual if the provisions of
section 877(a) (relating to the treatment of expatriates) applies to the
individual.
(g) Election to have section not apply. A taxpayer may elect to have
the section 121 exclusion not apply to a sale or exchange of property.
The taxpayer makes the election by filing a return for the taxable year
of the sale or exchange that includes the gain from the sale or exchange
of the taxpayer's principal residence in the taxpayer's gross income. A
taxpayer may make an election under this paragraph (g) to have section
121 not apply (or revoke an election to have section 121 not apply) at
any time before the expiration of a 3-year period beginning on the last
date prescribed by law (determined without regard to extensions) for the
filing of the return for the taxable year in which the sale or exchange
occurred.
(h) Residences acquired in rollovers under section 1034. If a
taxpayer acquires property in a transaction that qualifies under section
1034 (section 1034 property) for the nonrecognition of gain realized on
the sale or exchange of another property and later sells or exchanges
such property, in determining the period of the taxpayer's ownership and
use of the property under section 121 the taxpayer may include the
periods that the taxpayer owned and used the section 1034 property as
the taxpayer's principal residence (and each prior residence taken into
account under section 1223(7) in determining the holding period of the
section 1034 property).
(i) [Reserved]
(j) Election to apply regulations retroactively. Taxpayers who would
otherwise qualify under Secs. 1.121-1 through 1.121-4 to exclude gain
from a sale or exchange of a principal residence before December 24,
2002 but on or after May 7, 1997, may elect to apply Secs. 1.121-1
through 1.121-4 for any years for which the period of limitation under
[[Page 497]]
section 6511 has not expired. The taxpayer makes the election under this
paragraph (j) by filing a return for the taxable year of the sale or
exchange that does not include the gain from the sale or exchange of the
taxpayer's principal residence in the taxpayer's gross income. Taxpayers
who have filed a return for the taxable year of the sale or exchange may
elect to apply the provisions of these regulations for any years for
which the period of limitation under section 6511 has not expired by
filing an amended return.
(k) Audit protection. The Internal Revenue Service will not
challenge a taxpayer's position that a sale or exchange of a principal
residence occurring before December 24, 2002 but on or after May 7,
1997, qualifies for the section 121 exclusion if the taxpayer has made a
reasonable, good faith effort to comply with the requirements of section
121. Compliance with the provisions of the regulations project under
section 121 (REG-105235-99 (2000-2 C.B. 447)) generally will be
considered a reasonable, good faith effort to comply with the
requirements of section 121.
(l) Effective date. This section is applicable for sales and
exchanges on or after December 24, 2002. For rules on electing to apply
the provisions retroactively, see paragraph (j) of this section.
[T.D. 9030, 67 FR 78361, Dec. 24, 2002; 68 FR 6350, Feb. 7, 2003]
Sec. 1.122-1 Applicable rules relating to certain reduced uniformed services retirement pay.
(a) Rule applicable prior to January 1, 1966. In the case of a
member or former member of the uniformed services of the United States
(as defined in 37 U.S.C. 101(3)) who has made an election under
Subchapter I of Chapter 73 of Title 10 of the U.S. Code (also referred
to in this section as the Retired Serviceman's Family Protection Plan
(10 U.S.C. 1431)) to receive a reduced amount of retired or retainer
pay, gross income shall include the amount of any reduction made in his
retired or retainer pay before January 1, 1966, by reason of such
election, unless such reduction, or portion thereof, is otherwise
excluded from gross income under Part III of Subchapter B of Chapter 1
of the Internal Revenue Code of 1954 or any other provision of law.
(b) Rule applicable after December 31, 1965--(1) In a case of a
member or former member of the uniformed services of the United States
(as defined in 37 U.S.C. 101(3)), gross income shall not include the
amount of any reduction made in his or her retired or retainer pay after
December 31, 1965, by reason of--
(i) An election made under the Retired Serviceman's Family
Protection Plan (10 U.S.C. 1431), or
(ii) The provisions of Subchapter II of Chapter 73 of Title 10 of
the U.S. Code (also referred to in this section as the Survivor Benefit
Plan (10 U.S.C. 1447)).
(2)(i) In a case where a member or former member of the uniformed
services has, pursuant to the election described in paragraph (a) of
this section, received before January 1, 1966, a reduced amount of
retired or retainer pay, he shall, after December 31, 1965, exclude from
gross income under section 122(b) and this subdivision all amounts
received as uniformed services retired or retainer pay until there has
been so excluded an amount of retired or retainer pay equal to the
``consideration for the contract'' (as described in subdivision (iii) of
this subparagraph).
(ii) Upon the death of a member or former member of the uniformed
services, where the ``consideration for the contract'' (as described in
subdivision (iii) of this subparagraph) has not been excluded in whole
or in part from gross income under section 122(b) and subdivision (i) of
this subparagraph, the survivor of such member who is receiving an
annuity under Chapter 73 of Title 10 of the U.S. Code shall, after
December 31, 1965, exclude from gross income under section 72(o) and
this subdivision such annuity payments received after December 31, 1965,
until there has been so excluded annuity payments equalling the portion
of the ``consideration for the contract'' not previously excluded under
subdivision (i) of this subparagraph.
(iii) The term ``consideration for the contract'' as used in this
subparagraph means--
(a) The total amount of the reductions, if any, before January 1,
1966, in
[[Page 498]]
retired or retainer pay by reason of an election under Subchapter I of
Chapter 73 of Title 10 of the United States Code, plus
(b) The total amount, if any, deposited by the serviceman at any
time pursuant to the provisions of sections 1438 or 1452(d) of Title 10
of the United States Code, plus
(c) The total amount, if any, excludable from income under section
101(b)(2)(D) and paragraph (a)(2) of Sec. 1.101-2 with respect to a
survivor annuity provided by such retired or retainer pay, minus
(d) The total amount, if any, excluded from income before January 1,
1966, pursuant to the provisions of section 72 (b) and (d) with respect
to a survivor annuity provided by such retired or retainer pay.
(iv) In determining whether there has been a recovery of the
``consideration for the contract'' under subdivision (i) of this
subparagraph, the exclusion of retired pay from income after December
31, 1965, under sections 104(a)(4) and 105(d) shall not be considered as
recovery of all or part of the ``consideration for the contract.''
(c) Special rules. In any of the following situations, the
computation of the excludable portion of disability retired pay received
by the member or former member of the uniformed services shall be
governed by the following rules:
(1) An exclusion under section 122(a) and paragraph (b)(1) of this
section is applicable only in the taxable year in which a reduction in
retired pay is made under the Retired Serviceman's Family Protection
Plan (10 U.S.C. 1431) or the Survivor Benefit Plan (10 U.S.C. 1447).
(2) Where the member or former member of the uniformed services is
entitled to exclude the whole or a portion of his retired pay under the
provisions of section 104(a)(4) or section 105(d) and under section
122(a) and paragraph (b)(1) of this section, the exclusion under section
122(a) and paragraph (b)(1) of this section shall be applied prior to
the exclusions under sections 104(a)(4) and 105(d).
(3) Where the member or former member of the uniformed services
waives a portion of his disability retired pay, or such retired pay
reduced under the Retired Serviceman's Family Protection Plan (10 U.S.C.
1431),or the Survivor Benefit Plan (10 U.S.C. 1447) in favor of a
nontaxable pension or compensation receivable under laws administered by
the Veterans Administration (38 U.S.C. 3105), the waived amount of such
disability retired pay, or reduced amount thereof, shall first be
subtracted from any amounts which are excludable under the provisions of
sections 104(a)(4) or 105(d) so as to reduce the amounts otherwise
excludable under those sections.
(4) Where the member or former member of the uniformed services
receives (before any forfeiture) disability retired pay (whether or not
reduced under the Retired Serviceman's Family Protection Plan) or the
Survivor Benefit Plan which is partially excludable under section
104(a)(4), and also forfeits a portion of such disability retired pay
under the Dual Compensation Act of 1964 (5 U.S.C. 5531 or any former
corresponding provision of law), the amount of the forfeiture under such
Act shall be applied against disability retired pay (before any
forfeiture) in the same proportion that the excludable portion of such
pay under section 104(a)(4) bears to the total amount of such pay after
subtraction of any reduction under the Retired Serviceman's Family
Protection Plan (10 U.S.C. 1431) or the Survivor Benefit Plan (10 U.S.C.
1447).
(5) The exclusion provided by section 122(b) and paragraph (b)(2)(i)
of this section shall be available with respect to repayments made upon
removal from the temporary disability retired list even though such
repayments were previously excluded from gross income under section
104(a)(4) or 105(d).
However, the exclusion permitted by the prior sentence will apply only
to the extent the repaid amount has not been previously excluded under
section 122(b) and paragraph (b)(2)(i) of this section.
(d) Examples with respect to the Retired Serviceman's Family
Protection Plan. The rules discussed in this section relating to the
Retired Serviceman's Family Protection Plan (10 U.S.C. 1431) may be
illustrated by the following examples:
[[Page 499]]
Example (1). A, a member of the uniformed services, retires on
January 1, 1963, and receives nondisability retired pay computed to be
60 percent of his active duty pay of $10,000 per year, or $6,000 per
year, based upon 24 years of service. He elects, under the Retired
Serviceman's Family Protection Plan (10 U.S.C. 1431), to provide his
survivor with an annuity equal to one-fourth of his reduced retired pay.
His retired pay of $6,000 is reduced by $600, to $5,400, in order to
provide a survivor annuity of $1,350 per year or $112.50 per month. For
1963, 1964, and 1965, A must include in gross income the unreduced
amount of retired pay, or $6,000. For 1966 and subsequent years, he may
exclude under section 122(a) and paragraph (b)(1) of this section the
$600 total annual reductions to provide the survivor annuity, and may,
for 1966, further exclude from gross income under section 122(b) and
paragraph (b)(2)(i) of this section the $1,800 ``consideration for the
contract'' i.e., the total reductions which were made in 1963, 1964, and
1965, to provide the survivor annuity. Accordingly, A will include
$3,600 of retired pay in gross income for 1966 ($6,000 minus the sum of
$600 and $1,800).
Example (2). Assume the facts in Example (1) except that A retires
on disability resulting from active service and his disability is rated
at 40 percent. The entire amount of disability retirement pay, prior to
and including 1966, is excludable from gross income under sections
104(a)(4) and 105(d), and in 1966, section 122(a). Assume further that A
attains retirement age on December 31, 1966, dies on January 1, 1967,
and his widow then begins receiving a survivor annuity under the Retired
Serviceman's Family Protection Plan (10 U.S.C. 1431). A's widow may
exclude from gross income in 1967 and 1968 under section 72(o) and
paragraph (b)(2)(ii) of this section, the $1,800 of ``consideration for
the contract'' i.e., the reductions in 1963, 1964, and 1965 to provide
the survivor annuity. Thus, A's widow will exclude all of the survivor
annuity she receives in 1967 ($1,350) and $450 of the $1,350 annuity
received in 1968. In addition, if A had not attained retirement age at
the time of his death, his widow would, under section 101 and paragraph
(a)(2) of Sec. 1.101-2, exclude up to $5,000 subject to the limitations
of paragraph (b)(2)(ii) of this section.
Example (3). Assume, in the previous example, that A dies on January
1, 1965, and his widow then begins receiving a survivor annuity. Assume
further that A's widow is entitled to exclude under section 72(b) $1,000
of the $1,350 she received in 1965. Under section 72(o) and paragraph
(b)(2)(ii) of this section, A's widow for 1966 will exclude the $200
remaining consideration for the contract ($1,200-$1,000) and will
include $1,150 of the survivor annuity in gross income.
Example (4). B, a member of the uniformed services, retires on
January 1, 1966, after 32 years of active military service, and receives
disability retirement pay under section 1401 of title 10, limited to 75
percent of his active duty pay of $15,000 per year, or $11,250. His
disability rating is 30 percent. B has not reached retirement age (as
defined in Sec. 1.79-2(b)(3)). He elects under the Retired Serviceman's
Family Protection Plan (10 U.S.C. 1431) to provide his survivor with an
annuity equal to one-half of his reduced retired pay and, for that
purpose, his retired pay of $11,250 is reduced by $1,250 to provide an
annuity of $5,000 per year. B also elects to waive retired pay in the
amount of $1,000 in order to receive disability compensation in like
amount under laws administered by the Veterans Administration. In
addition, B is required to forfeit $4,088 of his retired pay under the
Dual Compensation Act of 1964 (5 U.S.C. 5532) ($11,250-$1,000 = $10,250
less one-half of excess thereof over $2,074) and by reason of his
Federal employment is not entitled to an exclusion of his retired pay
under section 105(d). B's taxable retired pay for 1966 is $3,002,
computed as follows:
Gross retired pay............................................ $11,250
Less: Section 122(a) exclusion............................. (1,250)
----------
Reduced retired pay.......................................... 10,000
Less: Retired pay waived to receive V.A. compensation...... (1,000)
----------
Adjusted retired pay-- 9,000
Less:
(i) Excludable retired pay computed under section $4,500
104(a)(4) as limited by 10 U.S.C. 1403..................
(ii) Less: Retired pay, not to exceed (i), waived to (1,000)
receive V.A. compensation...............................
----------
(iii) Net disability exclusion........................... (3,500)
Taxable retired pay before adjustment for Dual Compensation 5,500
forfeiture..................................................
Less:
Adjustment for Dual Compensation forfeiture of $4,088
5500/9000x$4,088 = $2,498 (rounded).......................... (2,498)
----------
Net taxable retired pay...................................... 3,002
Example (5). C, a member of the uniformed services retires on
January 1, 1966, and receives disability retirement pay of $11,250 per
year, which is reduced by $1,250 to provide a survivor annuity, and
$1,000 of which is waived in order to receive disability compensation in
like amount under laws administered by the Veterans Administration. C
has not reached retirement age for purposes of section 105(d) and is not
employed by the Federal Government. C's taxable disability retirement
pay for 1966 is $300 computed as follows:
Adjusted retired pay............................. $9,000
Less:
(i) Excludable retired pay under section (a)(4) $4,500
as limited by 10 U.S.C. 1403..................
(ii) Excludable retired pay under section 5,200
105(d)......................................
-----------
[[Page 500]]
(iii) Total.................................. 9,700
(iv) Less: Retired pay, not to exceed (iii), (1,000)
waived to receive V.A. compensation ``sick
pay'' exclusion.............................
-----------
(v) Net disability and ``sick pay'' exclusion ......... (8,700)
-----------
Net taxable retired pay.......................... 800
Example (6). D, a member of the uniformed services, retires for
physical disability resulting from active service on January 1, 1966,
after 35 years of service and with a disability rated at 20 percent. His
active duty pay is $4,000 per year and he attained retirement age prior
to retirement. He had an election in effect under the Retired
Serviceman's Family Protection Plan to provide his survivor with an
annuity and his retired pay is reduced therefor by $500 per year. He
waives $1,300 of his retired pay in order to receive compensation from
the Veterans Administration in like amount. His taxable retired pay for
1966 is $1,200 computed as follows:
Gross retired pay (75%x$4,000)................... $3,000
Less: Section 122(a) exclusion................. (500)
------------
Reduced retired pay.............................. 2,500
Less: V.A. waiver.............................. (1,300)
------------
Adjusted retired pay............................. 1,200
Less:
(i) Section 104(a)(4) exclusion.............. $800
(ii) Less: Retired pay, not to exceed (i), (800)
waived to receive V.A. compensation.........
-----------
(iii) Net disability exclusion............... 0
-----------
Net taxable retired pay.......................... ......... 1,200
(e) Principles applicable to the Survivor Benefit Plan. The
principles illustrated by the examples set forth in paragraph (d) of
this section apply to an annuity under the Survivor Benefit Plan (10
U.S.C. 1447).
[T.D. 7043, 35 FR 8478, June 2, 1970, as amended by T.D. 7562, 43 FR
38819, Aug. 31, 1978]
Sec. 1.123-1 Exclusion of insurance proceeds for reimbursement of certain living expenses.
(a) In general. (1) Gross income does not include insurance proceeds
received by an individual on or after January 1, 1969, pursuant to the
terms of an insurance contract for indemnification of the temporary
increase in living expenses resulting from the loss of use or occupancy
of his principal residence, or a part thereof, due to damage or
destruction by fire, storm, or other casualty. The term ``other
casualty'' has the same meaning assigned to such term under section
165(c)(3). The exclusion also applies in the case of an individual who
is denied access to his principal residence by governmental authorities
because of the occurrence (or threat of occurrence) of such a casualty.
The amount excludable under this section is subject to the limitation
set forth in paragraph (b) of this section.
(2) This exclusion applies to amounts received as reimbursement or
compensation for the reasonable and necessary increase in living
expenses incurred by the insured and members of his household to
maintain their customary standard of living during the loss period.
(3) This exclusion does not apply to an insurance recovery for the
loss of rental income. Nor does the exclusion apply to any insurance
recovery which compensates for the loss of, or damage to, real or
personal property. See section 165(c)(3) relating to casualty losses;
section 1231 relating to gain on an involuntary conversion of a capital
asset held for more than 1 year (6 months for taxable years beginning
before 1977; 9 months for taxable years beginning in 1977); and section
1033 relating to recognition of gain on an involuntary conversion. In
the case of property used by an insured partially as a principal
residence and partially for other purposes, the exclusion does not apply
to the amount of insurance proceeds which compensates for the portion of
increased expenses attributable to the nonresidential use of temporary
replacement property during the loss period. In the case of denial of
access to a principal residence by governmental authority, the exclusion
provided by this section does not apply to an insurance recovery
received by an individual as reimbursement for living expenses incurred
by reason of a governmental condemnation or order not related to a
casualty or the threat of a casualty.
[[Page 501]]
(4)(i) Subject to the limitation set forth in paragraph (b), the
amount excludable is the amount which is identified by the insurer as
being paid exclusively for increased living expenses resulting from the
loss of use or occupancy of the principal residence and pursuant to the
terms of the insurance contract.
(ii) When a lump-sum insurance settlement includes, but does not
specifically identify, compensation for property damage, loss of rental
income, and increased living expenses, the amount of such settlement
allocable to living expenses shall, in the case of uncontested claims,
be that portion of the settlement which bears the same ratio to the
total recovery as the amount of claimed increased living expense bears
to the total amount of claimed losses and expenses, to the extent not in
excess of the coverage limitations specified in the contract for such
losses and expenses.
(iii) In the case of a lump-sum settlement involving contested
claims, the insured shall establish the amount reasonably allocable to
increased living expenses, consistent with the terms of the contract and
other facts of the particular case.
(iv) In no event may the amount of a lump-sum settlement which is
allocable to increased living expenses exceed the coverage limitation
specified in the contract for increased living expenses. Where, however,
a coverage limitation is applicable to the total amount payable for
increased living expenses and, for example, loss of rental income, the
amount of an unitemized settlement which is allocable to increased
living expenses may not exceed the portion of the applicable coverage
limitation which bears the same ratio to such limitation as the amount
of increased living expenses bears to the sum of the amount of such
increased living expenses and the amount, if any, of lost rental income.
(5) The portion of any insurance recovery for increased living
expenses which exceeds the limitation set forth in paragraph (b) shall
be included in gross income under section 61 of the Code.
(b) Limitation--(1) Amount excludable. The amount excludable under
this section is limited to amounts received which are not in excess of
the amount by which (i) total actual living expenses incurred by the
insured and members of his household which result from the loss of use
or occupancy of their residence exceed (ii) the total normal living
expenses which would have been incurred during the loss period but are
not incurred as a result of the loss of use or occupancy of the
principal residence. Generally, the excludable amount represents such
excess expenses actually incurred by reason of a casualty, or threat
thereof, for renting suitable housing and for extraordinary expenses for
transportation, food, utilities, and miscellaneous services during the
period of repair or replacement of the damaged principal residence or
denial of access by governmental authority.
(2) Actual living expenses. For purposes of this section, actual
living expenses are the reasonable and necessary expenses incurred as a
result of the loss of use or occupancy of the principal residence to
maintain the insured and members of his household in accordance with
their customary standard of living. Actual living expenses must be of
such a nature as to qualify as a reimbursable expense under the terms of
the applicable insurance contract without regard to monetary limitations
upon coverage. Generally, actual living expenses include the cost during
the loss period of temporary housing, utilities furnished at the place
of temporary housing, meals obtained at restaurants which customarily
would have been prepared in the residence, transportation, and other
miscellaneous services. To the extent that the loss of use or occupancy
of the principal residence results merely in an increase in the amount
expended for items of living expenses normally incurred, such as food
and transportation, only the increase in such costs shall be considered
as actual living expenses in computing the limitation.
(3) Normal living expenses not incurred. Normal living expenses
consist of the same categories of expenses comprising actual living
expenses which would have been incurred but are not incurred as a result
of the casualty or
[[Page 502]]
threat thereof. If the loss of use of the residence results in a
decrease in the amount normally expended for a living expense item
during the loss period, the item of normal living expense is considered
not to have been incurred to the extent of the decrease for purposes of
computing the limitation.
(4) Examples. The application of this paragraph (b) may be
illustrated by the following examples:
Example (1). On March 1, 1970, A's principal residence, a dwelling
owned by A no part of which was rented to others or used for
nonresidential purposes, was extensively damaged by fire. The damaged
residence was under repair during the entire month of March making it
necessary for A and his spouse to obtain temporary lodging and to take
their meals at a restaurant. A and his spouse incur expenses of $200 for
lodging at a motel, $180 for meals which customarily would have been
prepared in his residence, and $25 for commercial laundry service which
customarily would have been done by A's wife. A makes (directly or
through mortgage insurance), or remains liable for, the required March
payment of $190 on the mortgage note on his residence. The mortgage
payment results from a contractual obligation having no causal
relationship to the occurrence of the casualty and is not considered as
an actual living expense resulting from the loss of use of the
residence. A's customary commuting expense of $40 for bus fares to and
from work is decreased by $20 for the month because of the motel's
closer proximity to his place of employment. Other transportation
expenses remain stable. Since there has been a decrease in the amount of
A's customary bus fares, normal transportation expenses are considered
not to have been incurred to the extent of the decrease. Finally, A does
not incur customary expenses of $150 for food obtained for home
preparation, $75 for utilities expenses, and $10 for laundry cleansers.
The limitation upon the excludable amount of an insurance recovery for
excess living expenses is $150, computed as follows:
Living Expenses
------------------------------------------------------------------------
Actual
resulting Normal not Increase
from incurred (decrease)
casualty
------------------------------------------------------------------------
Housing............................ $200.00 .......... $200.00
Utilities.......................... .......... $75.00 (75.00)
Meals.............................. 180.00 150.00 30.00
Transportation..................... .......... 20.00 (20.00)
Laundry............................ 25.00 10.00 150.00
------------------------------------
Total.......................... 405.00 255.00 15.00
------------------------------------------------------------------------
Example (2). Assume the same facts as in example (1) except that the
damaged residence is not owned by A but is rented to him for $100 per
month and that the risk of loss is upon the lessor. Since A would not
have incurred the normal rental of $100 for March, the excludable amount
is limited to $50 ($150 as in previous example less $100 normal rent not
incurred).
(c) Principal residence. Whether or not property is used by the
insured taxpayer and members of his household as their principal
residence depends upon all the facts and circumstances in each case. For
purposes of this section, a principal residence may be a dwelling or an
apartment leased to the insured as well as a dwelling or apartment owned
by the insured.
[T.D. 7118, 36 FR 10729, June 2, 1971, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980]
Sec. 1.125-2T Question and answer relating to the benefits that may be offered under a cafeteria plan (temporary).
Q-1: What benefits may be offered to participants under a cafeteria
plan?
A-1: (a) Generally, for cafeteria plan years beginning on or after
January 1, 1985, a cafeteria plan is a written plan under which
participants may choose among two or more benefits consisting of cash
and certain other permissible benefits. In general, benefits that are
excludable from the gross income of an employee under a specific section
of the Internal Revenue Code may be offered under a cafeteria plan.
However, scholarships and fellowships under section 117, vanpooling
under section 124, educational assistance under section 127 and certain
fringe benefits under section 132 may not be offered under a cafeteria
plan. In addition, meals and lodging under section 119, because they are
furnished for the convenience of the employer and thus are not elective
in lieu of other benefits or compensation provided by the employer, may
not be offered under a cafeteria plan. Thus, a cafeteria plan may offer
coverage under a group-term life insurance plan of up to $50,000
(section 79), coverage under an accident or health plan (sections 105
and 106), coverage under a qualified group legal services plan (section
120), coverage under a dependent care assistance program (section 129),
[[Page 503]]
and participation in a qualified cash or deferred arrangement that is
part of a profit-sharing or stock bonus plan (section 401(k)). In
addition, a cafeteria plan may offer group-term life insurance coverage
which is includable in gross income only because it is in excess of
$50,000 or is on the lives of the participant's spouse and/or children.
In addition, a cafeteria plan may offer participants the opportunity to
purchase, with after-tax employee contributions, coverage under a group-
term life insurance plan (section 79), coverage under an accident or
health plan (section 105(e)), coverage under a qualified group legal
services plan (section 120), or coverage under a dependent care
assistance program (section 129). Finally, a cafeteria plan may offer
paid vacation days if the plan precludes any participant from using, or
receiving cash for, in a subsequent plan year, any of such paid vacation
days remaining unused as of the end of the plan year. For purposes of
the preceding sentence, elective vacation days provided under a
cafeteria plan are not considered to be used until all nonelective paid
vacation days have been used.
(b) Note that benefits that may be offered under a cafeteria plan
may or may not be taxable depending upon whether such benefits qualify
for an exclusion from gross income. However, a cafeteria plan may not
offer a benefit that is taxable because such benefit fails to satisfy
any applicable eligibility, coverage, or nondiscrimination requirement.
Similarly, a plan may not offer a benefit for purchase with after-tax
employee contributions if such benefit would fail to satisfy any
eligibility, coverage, or nondiscrimination requirement that would apply
if such benefit were designed to be provided on a nontaxable basis with
employer contributions. Also, note that section 125(d)(2) provides that
a cafeteria plan may not offer a benefit that defers the receipt of
compensation (other than the opportunity to make elective contributions
under a qualified cash or deferred arrangement) and may not operate in a
manner that enables participants to defer the receipt of compensation.
[T.D. 8073, 51 FR 4318, Feb. 4, 1986]
Sec. 1.125-3 Effect of the Family and Medical Leave Act (FMLA) on the operation of cafeteria plans.
The following questions and answers provide guidance on the effect
of the Family and Medical Leave Act (FMLA), 29 U.S.C. 2601 et seq., on
the operation of cafeteria plans:
Q-1: May an employee revoke coverage or cease payment of his or her
share of group health plan premiums when taking unpaid FMLA, 29 U.S.C.
2601 et seq., leave?
A-1: Yes. An employer must either allow an employee on unpaid FMLA
leave to revoke coverage, or continue coverage but allow the employee to
discontinue payment of his or her share of the premium for group health
plan coverage (including a health flexible spending arrangement (FSA))
under a cafeteria plan for the period of the FMLA leave. See 29 CFR
825.209(e). FMLA does not require that an employer allow an employee to
revoke coverage if the employer pays the employee's share of premiums.
As discussed in Q&A-3, if the employer continues coverage during an FMLA
leave, the employer may recover the employee's share of the premiums
when the employee returns to work. FMLA also provides the employee a
right to be reinstated in the group health plan coverage (including a
health FSA) provided under a cafeteria plan upon returning from FMLA
leave if the employee's group health plan coverage terminated while on
FMLA leave (either by revocation or due to nonpayment of premiums). Such
an employee is entitled, to the extent required under FMLA, to be
reinstated on the same terms as prior to taking FMLA leave (including
family or dependent coverage), subject to any changes in benefit levels
that may have taken place during the period of FMLA leave as provided in
29 CFR 825.215(d)(1). See 29 CFR 825.209(e) and 825.215(d). In addition,
such an employee has the right to revoke or change elections under
Sec. 1.125-4 (e.g., because of changes in status or cost or coverage
changes as provided under Sec. 1.125-4) under the same terms and
conditions as are available to employees participating in the cafeteria
plan who are working and not on FMLA leave.
[[Page 504]]
Q-2: Who is responsible for making premium payments under a
cafeteria plan when an employee on FMLA leave continues group health
plan coverage?
A-2: FMLA provides that an employee is entitled to continue group
health plan coverage during FMLA leave whether or not that coverage is
provided under a health FSA or other component of a cafeteria plan. See
29 CFR 825.209(b). FMLA permits an employer to require an employee who
chooses to continue group health plan coverage while on FMLA leave to be
responsible for the share of group health premiums that would be
allocable to the employee if the employee were working, and, for this
purpose, treats amounts paid pursuant to a pre-tax salary reduction
agreement as amounts allocable to the employee. However, FMLA requires
the employer to continue to contribute the share of the cost of the
employee's coverage that the employer was paying before the employee
commenced FMLA leave. See 29 CFR 825.100(b) and 825.210(a).
Q-3: What payment options are required or permitted to be offered
under a cafeteria plan to an employee who continues group health plan
coverage while on unpaid FMLA leave, and what is the tax treatment of
these payments?
A-3: (a) In general. Subject to the limitations described in
paragraph (b) of this Q&A-3, a cafeteria plan may offer one or more of
the following payment options, or a combination of these options, to an
employee who continues group health plan coverage (including a health
FSA) while on unpaid FMLA leave; provided that the payment options for
employees on FMLA leave are offered on terms at least as favorable as
those offered to employees not on FMLA leave. These options are referred
to in this section as pre-pay, pay-as-you-go, and catch-up. See also the
FMLA notice requirements at 29 CFR 825.301(b)(1)(iv).
(1) Pre-pay. (i) Under the pre-pay option, a cafeteria plan may
permit an employee to pay, prior to commencement of the FMLA leave
period, the amounts due for the FMLA leave period. However, FMLA
provides that the employer may not mandate that an employee pre-pay the
amounts due for the leave period. See 29 CFR 825.210(c)(3) and (4).
(ii) Contributions under the pre-pay option may be made on a pre-tax
salary reduction basis from any taxable compensation (including from
unused sick days or vacation days). However, see Q&A-5 of this section
regarding additional restrictions on pre-tax salary reduction
contributions when an employee's FMLA leave spans two cafeteria plan
years.
(iii) Contributions under the pre-pay option may also be made on an
after-tax basis.
(2) Pay-as-you-go. (i) Under the pay-as-you-go option, employees may
pay their share of the premium payments on the same schedule as payments
would have been made if the employee were not on leave or under any
other payment schedule permitted by the Labor Regulations at 29 CFR
825.210(c) (e.g., on the same schedule as payments are made under
section 4980B (relating to coverage under the Consolidated Omnibus
Budget Reconciliation Act (COBRA), 26 U.S.C. 4980B), under the
employer's existing rules for payment by employees on leave without pay,
or under any other system voluntarily agreed to between the employer and
the employee that is not inconsistent with this section or with 29 CFR
825.210(c)).
(ii) Contributions under the pay-as-you-go option are generally made
by the employee on an after-tax basis. However, contributions may be
made on a pre-tax basis to the extent that the contributions are made
from taxable compensation (e.g., from unused sick days or vacation days)
that is due the employee during the leave period.
(iii) An employer is not required to continue the group health
coverage of an employee who fails to make required premium payments
while on FMLA leave, provided that the employer follows the notice
procedures required under FMLA. See 29 CFR 825.212. However, if the
employer chooses to continue the health coverage of an employee who
fails to pay his or her share of the premium payments while on FMLA
leave, FMLA permits the employer to recoup the premiums (to the extent
of the employee's share). See 29 CFR 825.212(b). Such recoupment may
[[Page 505]]
be made as set forth in paragraphs (a)(3)(i) and (ii) of this Q&A-3. See
also Q&A-6 of this section regarding coverage under a health FSA when an
employee fails to make the required premium payments while on FMLA
leave.
(3) Catch-up. (i) Under the catch-up option, the employer and the
employee may agree in advance that the group coverage will continue
during the period of unpaid FMLA leave, and that the employee will not
pay premiums until the employee returns from the FMLA leave. Where an
employee is electing to use the catch-up option, the employer and the
employee must agree in advance of the coverage period that: the employee
elects to continue health coverage while on unpaid FMLA leave; the
employer assumes responsibility for advancing payment of the premiums on
the employee's behalf during the FMLA leave; and these advance amounts
are to be paid by the employee when the employee returns from FMLA
leave.
(ii) When an employee fails to make required premium payments while
on FMLA leave, an employer is permitted to utilize the catch-up option
to recoup the employee's share of premium payments when the employee
returns from FMLA leave. See, e.g., 29 CFR 825.212(b). If the employer
chooses to continue group coverage under these circumstances, the prior
agreement of the employee, as set forth in paragraph (a)(3)(i) of this
Q&A-3, is not required.
(iii) Contributions under the catch-up option may be made on a pre-
tax salary reduction basis from any available taxable compensation
(including from unused sick days and vacation days) after the employee
returns from FMLA leave. The cafeteria plan may provide for the catch-up
option to apply on a pre-tax salary reduction basis if premiums have not
been paid on any other basis (i.e., have not been paid under the pre-pay
or pay-as-you-go options or on a catch-up after-tax basis).
(iv) Contributions under the catch-up option may also be made on an
after-tax basis.
(b) Exceptions. Whatever payment options are offered to employees on
non-FMLA leave must be offered to employees on FMLA leave. In accordance
with 29 CFR 825.210(c), cafeteria plans may offer one or more of the
payment options described in paragraph (a) of this Q&A-3, with the
following exceptions:
(1) FMLA does not permit the pre-pay option to be the sole option
offered to employees on FMLA leave. However, the cafeteria plan may
include pre-payment as an option for employees on FMLA leave, even if
such option is not offered to employees on non-FMLA leave-without-pay.
(2) FMLA allows the catch-up option to be the sole option offered to
employees on FMLA leave if and only if the catch-up option is the sole
option offered to employees on non-FMLA leave-without-pay.
(3) If the pay-as-you-go option is offered to employees on non-FMLA
leave-without-pay, the option must also be offered to employees on FMLA
leave. The employer may also offer employees on FMLA leave the pre-pay
option and/or the catch-up option.
(c) Voluntary waiver of employee payments. In addition to the
foregoing payment options, an employer may voluntarily waive, on a
nondiscriminatory basis, the requirement that employees who elect to
continue group health coverage while on FMLA leave pay the amounts the
employees would otherwise be required to pay for the leave period.
(d) Example. The following example illustrates this Q&A-3:
Example. (i) Employer Y allows employees to pay premiums for group
health coverage during an FMLA leave on an after-tax basis while the
employee is on unpaid FMLA leave. Under the terms of Y's cafeteria plan,
if an employee elects to continue health coverage during an unpaid FMLA
leave and fails to pay one or more of the after-tax premium payments due
for that coverage, the employee's salary after the employee returns from
FMLA leave is reduced to cover unpaid premiums (i.e. the premiums that
were to be paid by the employee on an after-tax basis during the FMLA
leave, but were paid by the employer instead).
(ii) In this Example, Y's cafeteria plan satisfies the conditions in
this Q&A-3. Y's cafeteria plan would also satisfy the conditions in this
Q&A-3 if the plan provided for coverage to cease in the event the
employee fails to make a premium payment when due during an unpaid FMLA
leave.
[[Page 506]]
Q-4: Do the special FMLA requirements concerning payment of premiums
by an employee who continues group health plan coverage under a
cafeteria plan apply if the employee is on paid FMLA leave?
A-4: No. The Labor Regulations provide that, if an employee's FMLA
leave is paid leave as described at 29 CFR 825.207 and the employer
mandates that the employee continue group health plan coverage while on
FMLA leave, the employee's share of the premiums must be paid by the
method normally used during any paid leave (e.g., by pre-tax salary
reduction if the employee's share of premiums were paid by pre-tax
salary reduction before the FMLA leave began). See 29 CFR 825.210(b).
Q-5: What restrictions apply to contributions when an employee's
FMLA leave spans two cafeteria plan years?
A-5: (a) No amount will be included in an employee's gross income
due to participation in a cafeteria plan during FMLA leave, provided
that the plan complies with other generally applicable cafeteria plan
requirements. Among other requirements, a plan may not operate in a
manner that enables employees on FMLA leave to defer compensation from
one cafeteria plan year to a subsequent cafeteria plan year. See section
125(d)(2).
(b) The following example illustrates this Q&A-5:
Example. (i) Employee A elects group health coverage under a
calendar year cafeteria plan maintained by Employer X. Employee A's
premium for health coverage is $100 per month throughout the 12-month
period of coverage. Employee A takes FMLA leave for 12 weeks beginning
on October 31 after making 10 months of premium payments totaling $1,000
(10 months x $100 = $1,000). Employee A elects to continue health
coverage while on FMLA leave and utilizes the pre-pay option by applying
his or her unused sick days in order to make the required premium
payments due while he or she is on FMLA leave.
(ii) Because A cannot defer compensation from one plan year to a
subsequent plan year, A may pre-pay the premiums due in November and
December (i.e., $100 per month) on a pre-tax basis, but A cannot pre-pay
the premium payment due in January on a pre-tax basis. If A participates
in the cafeteria plan in the subsequent plan year, A must either pre-pay
for January on an after-tax basis or use another option (e.g., pay-as-
you-go, catch-up, reduction in unused sick days, etc.) to make the
premium payment due in January.
Q-6: Are there special rules concerning employees taking FMLA leave
who participate in health FSAs offered under a cafeteria plan?
A-6: (a) In general. (1) A group health plan that is a flexible
spending arrangement (FSA) offered under a cafeteria plan must conform
to the generally applicable rules in this section concerning employees
who take FMLA leave. Thus, to the extent required by FMLA (see 29 CFR
825.209(b)), an employer must--
(i) Permit an employee taking FMLA leave to continue coverage under
a health FSA while on FMLA leave; and
(ii) If an employee is on unpaid FMLA leave, either--
(A) Allow the employee to revoke coverage; or
(B) Continue coverage, but allow the employee to discontinue payment
of his or her share of the premium for the health FSA under the
cafeteria plan during the unpaid FMLA leave period.
(2) Under FMLA, the plan must permit the employee to be reinstated
in health coverage upon return from FMLA leave on the same terms as if
the employee had been working throughout the leave period, without a
break in coverage. See 29 CFR 825.214(a) and 825.215(d)(1) and paragraph
(b)(2) of this Q&A-6. In addition, under FMLA, a plan may require an
employee to be reinstated in health coverage upon return from a period
of unpaid FMLA leave, provided that employees who return from a period
of unpaid leave not covered by the FMLA are also required to resume
participation upon return from leave.
(b) Coverage. (1) Regardless of the payment option selected under
Q&A-3 of this section, for so long as the employee continues health FSA
coverage (or for so long as the employer continues the health FSA
coverage of an employee who fails to make the required contributions as
described in Q&A-3(a)(2)(iii) of this section), the full amount of the
elected health FSA coverage, less any prior reimbursements, must be
available to the employee at all times, including the FMLA leave period.
[[Page 507]]
(2)(i) If an employee's coverage under the health FSA terminates
while the employee is on FMLA leave, the employee is not entitled to
receive reimbursements for claims incurred during the period when the
coverage is terminated. If an employee subsequently elects or the
employer requires the employee to be reinstated in the health FSA upon
return from FMLA leave for the remainder of the plan year, the employee
may not retroactively elect health FSA coverage for claims incurred
during the period when the coverage was terminated. Upon reinstatement
into a health FSA upon return from FMLA leave (either because the
employee elects reinstatement or because the employer requires
reinstatement), the employee has the right under FMLA: to resume
coverage at the level in effect before the FMLA leave and make up the
unpaid premium payments, or to resume coverage at a level that is
reduced and resume premium payments at the level in effect before the
FMLA leave. If an employee chooses to resume health FSA coverage at a
level that is reduced, the coverage is prorated for the period during
the FMLA leave for which no premiums were paid. In both cases, the
coverage level is reduced by prior reimbursements.
(ii) FMLA requires that an employee on FMLA leave have the right to
revoke or change elections (because of events described in Sec. 1.125-4)
under the same terms and conditions that apply to employees
participating in the cafeteria plan who are not on FMLA leave. Thus, for
example, if a group health plan offers an annual open enrollment period
to active employees, then, under FMLA, an employee on FMLA leave when
the open enrollment is offered must be offered the right to make
election changes on the same basis as other employees. Similarly, if a
group health plan decides to offer a new benefit package option and
allows active employees to elect the new option, then, under FMLA, an
employee on FMLA leave must be allowed to elect the new option on the
same basis as other employees.
(3) The following examples illustrate the rules in this Q&A-6:
Example 1. (i) Employee B elects $1,200 worth of coverage under a
calendar year health FSA provided under a cafeteria plan, with an annual
premium of $1,200. Employee B is permitted to pay the $1,200 through
pre-tax salary reduction amounts of $100 per month throughout the 12-
month period of coverage. Employee B incurs no medical expenses prior to
April 1. On April 1, B takes FMLA leave after making three months of
contributions totaling $300 (3 months x $100 = $300). Employee B's
coverage ceases during the FMLA leave. Consequently, B makes no premium
payments for the months of April, May, and June, and B is not entitled
to submit claims or receive reimbursements for expenses incurred during
this period. Employee B returns from FMLA leave and elects to be
reinstated in the health FSA on July 1.
(ii) Employee B must be given a choice of resuming coverage at the
level in effect before the FMLA leave (i.e., $1,200) and making up the
unpaid premium payments ($300), or resuming health FSA coverage at a
level that is reduced on a prorata basis for the period during the FMLA
leave for which no premiums were paid (i.e., reduced for 3 months or 1/4
of the plan year) less prior reimbursements (i.e., $0) with premium
payments due in the same monthly amount payable before the leave (i.e.,
$100 per month). Consequently, if B chooses to resume coverage at the
level in effect before the FMLA leave, B's coverage for the remainder of
the plan year would equal $1,200 and B's monthly premiums would be
increased to $150 per month for the remainder of the plan year, to make
up the $300 in premiums missed ($100 per month plus $50 per month ($300
divided by the remaining 6 months)). If B chooses prorated coverage, B's
coverage for the remainder of the plan year would equal $900, and B
would resume making premium payments of $100 per month for the remainder
of the plan year.
Example 2. (i) Assume the same facts as Example 1 except that B
incurred medical expenses totaling $200 in February and obtained
reimbursement of these expenses.
(ii) The results are the same as in Example 1, except that if B
chooses to resume coverage at the level in effect before the FMLA leave,
B's coverage for the remainder of the year would equal $1,000 ($1,200
reduced by $200) and the monthly payments for the remainder of the year
would still equal $150. If instead B chooses prorated coverage, B's
coverage for the remainder of the plan year would equal $700 ($1,200
prorated for 3 months, and then reduced by $200) and the monthly
payments for the remainder of the year would still equal $100.
Example 3. (i) Assume the same facts as Example 1 except that, prior
to taking FMLA leave, B elects to continue health FSA coverage during
the FMLA leave. The plan permits B (and B elects) to use the catch-up
[[Page 508]]
payment option described in Q&A-3 of this section, and as further
permitted under the plan, B chooses to repay the $300 in missed payments
on a ratable basis over the remaining 6-month period of coverage (i.e.,
$50 per month).
(ii) Thus, B's monthly premium payments for the remainder of the
plan year will be $150 ($100 + $50).
Q-7: Are employees entitled to non-health benefits while taking FMLA
leave?
A-7: FMLA does not require an employer to maintain an employee's
non-health benefits (e.g., life insurance) during FMLA leave. An
employee's entitlement to benefits other than group health benefits
under a cafeteria plan during a period of FMLA leave is to be determined
by the employer's established policy for providing such benefits when
the employee is on non-FMLA leave (paid or unpaid). See 29 CFR
825.209(h). Therefore, an employee who takes FMLA leave is entitled to
revoke an election of non-health benefits under a cafeteria plan to the
same extent as employees taking non-FMLA leave are permitted to revoke
elections of non-health benefits under a cafeteria plan. For example,
election changes are permitted due to changes of status or upon
enrollment for a new plan year. See Sec. 1.125-4. However, FMLA provides
that, in certain cases, an employer may continue an employee's non-
health benefits under the employer's cafeteria plan while the employee
is on FMLA leave in order to ensure that the employer can meet its
responsibility to provide equivalent benefits to the employee upon
return from unpaid FMLA. If the employer continues an employee's non-
health benefits during FMLA leave, the employer is entitled to recoup
the costs incurred for paying the employee's share of the premiums
during the FMLA leave period. See 29 CFR 825.213(b). Such recoupment may
be on a pre-tax basis. A cafeteria plan must, as required by FMLA,
permit an employee whose coverage terminated while on FMLA leave (either
by revocation or nonpayment of premiums) to be reinstated in the
cafeteria plan on return from FMLA leave. See 29 CFR 825.214(a) and
825.215(d).
Q-8: What is the applicability date of the regulations in this
section?
A-8: This section is applicable for cafeteria plan years beginning
on or after January 1, 2002.
[T.D. 8966, 66 FR 52677, Oct. 17, 2001; 66 FR 63920, Dec. 11, 2001]
Sec. 1.125-4 Permitted election changes.
(a) Election changes. A cafeteria plan may permit an employee to
revoke an election during a period of coverage and to make a new
election only as provided in paragraphs (b) through (g) of this section.
Section 125 does not require a cafeteria plan to permit any of these
changes. See paragraph (h) of this section for special provisions
relating to qualified cash or deferred arrangements, and paragraph (i)
of this section for special definitions used in this section.
(b) Special enrollment rights--(1) In general. A cafeteria plan may
permit an employee to revoke an election for coverage under a group
health plan during a period of coverage and make a new election that
corresponds with the special enrollment rights provided in section
9801(f).
(2) Examples. The following examples illustrate the application of
this paragraph (b):
Example 1. (i) Employer M provides health coverage for its employees
pursuant to a plan that is subject to section 9801(f). Under the plan,
employees may elect either employee-only coverage or family coverage. M
also maintains a calendar year cafeteria plan under which qualified
benefits, including health coverage, are funded through salary
reduction. M's employee, A, is married to B and they have a child, C. In
accordance with M's cafeteria plan, Employee A elects employee-only
health coverage before the beginning of the calendar year. During the
year, A and B adopt a child, D. Within 30 days thereafter, A wants to
revoke A's election for employee-only health coverage and obtain family
health coverage for A's spouse, C, and D as of the date of D's adoption.
Employee A satisfies the conditions for special enrollment of an
employee with a new dependent under section 9801(f)(2), so that A may
enroll in family coverage under M's accident or health plan in order to
provide coverage effective as of the date of D's adoption.
(ii) M's cafeteria plan may permit A to change A's salary reduction
election to family coverage for salary not yet currently available. The
increased salary reduction is permitted to reflect the cost of family
coverage from the date of adoption. (A's adoption of D is also a change
in status, and the
[[Page 509]]
election of family coverage is consistent with that change in status.
Thus, under paragraph (c) of this section, M's cafeteria plan could
permit A to elect family coverage prospectively in order to cover B, C,
and D for the remaining portion of the period of coverage.)
Example 2. (i) The employer plans and permissible coverage are the
same as in Example 1. Before the beginning of the calendar year,
Employee E elects employee-only health coverage under M's cafeteria
plan. Employee E marries F during the plan year. F's employer, N, offers
health coverage to N's employees, and, prior to the marriage, F had
elected employee-only coverage. Employee E wants to revoke the election
for employee-only coverage under M's cafeteria plan, and is considering
electing family health coverage under M's plan or obtaining family
health coverage under N's plan.
(ii) M's cafeteria plan may permit E to change E's salary reduction
election to reflect the change to family coverage under M's accident or
health plan because the marriage would result in special enrollment
rights under section 9801(f), pursuant to which an election of family
coverage under M's accident or health plan would be required to be
effective no later than the first day of the first calendar month
beginning after the completed request for enrollment is received by the
plan. Since no retroactive coverage is required in the event of marriage
under section 9801(f), E's salary reduction election may only be changed
on a prospective basis. (E's marriage to F is also a change in status
under paragraph (c) of this section, as illustrated in Example 1 of
paragraph (c)(4) of this section.)
(c) Changes in status--(1) Change in status rule. A cafeteria plan
may permit an employee to revoke an election during a period of coverage
with respect to a qualified benefits plan (defined in paragraph (i)(8)
of this section) to which this paragraph (c) applies and make a new
election for the remaining portion of the period (referred to in this
section as an election change) if, under the facts and circumstances--
(i) A change in status described in paragraph (c)(2) of this section
occurs; and
(ii) The election change satisfies the consistency rule of paragraph
(c)(3) of this section.
(2) Change in status events. The following events are changes in
status for purposes of this paragraph (c):
(i) Legal marital status. Events that change an employee's legal
marital status, including the following: marriage; death of spouse;
divorce; legal separation; and annulment.
(ii) Number of dependents. Events that change an employee's number
of dependents, including the following: birth; death; adoption; and
placement for adoption.
(iii) Employment status. Any of the following events that change the
employment status of the employee, the employee's spouse, or the
employee's dependent: a termination or commencement of employment; a
strike or lockout; a commencement of or return from an unpaid leave of
absence; and a change in worksite. In addition, if the eligibility
conditions of the cafeteria plan or other employee benefit plan of the
employer of the employee, spouse, or dependent depend on the employment
status of that individual and there is a change in that individual's
employment status with the consequence that the individual becomes (or
ceases to be) eligible under the plan, then that change constitutes a
change in employment under this paragraph (c) (e.g., if a plan only
applies to salaried employees and an employee switches from salaried to
hourly-paid with the consequence that the employee ceases to be eligible
for the plan, then that change constitutes a change in employment status
under this paragraph (c)(2)(iii)).
(iv) Dependent satisfies or ceases to satisfy eligibility
requirements. Events that cause an employee's dependent to satisfy or
cease to satisfy eligibility requirements for coverage on account of
attainment of age, student status, or any similar circumstance.
(v) Residence. A change in the place of residence of the employee,
spouse, or dependent.
(vi) Adoption assistance. For purposes of adoption assistance
provided through a cafeteria plan, the commencement or termination of an
adoption proceeding.
(3) Consistency rule--(i) Application to accident or health coverage
and group-term life insurance. An election change satisfies the
requirements of this paragraph (c)(3) with respect to accident or health
coverage or group-term life insurance only if the election change is on
account of and corresponds with a change in status that affects
eligibility
[[Page 510]]
for coverage under an employer's plan. A change in status that affects
eligibility under an employer's plan includes a change in status that
results in an increase or decrease in the number of an employee's family
members or dependents who may benefit from coverage under the plan.
(ii) Application to other qualified benefits. An election change
satisfies the requirements of this paragraph (c)(3) with respect to
other qualified benefits if the election change is on account of and
corresponds with a change in status that affects eligibility for
coverage under an employer's plan. An election change also satisfies the
requirements of this paragraph (c)(3) if the election change is on
account of and corresponds with a change in status that effects expenses
described in section 129 (including employment-related expenses as
defined in section 21(b)(2)) with respect to dependent care assistance,
or expenses described in section 137 (including qualified adoption
expenses as defined in section 137(d)) with respect to adoption
assistance.
(iii) Application of consistency rule. If the change in status is
the employee's divorce, annulment or legal separation from a spouse, the
death of a spouse or dependent, or a dependent ceasing to satisfy the
eligibility requirements for coverage, an employee's election under the
cafeteria plan to cancel accident or health insurance coverage for any
individual other than the spouse involved in the divorce, annulment or
legal separation, the deceased spouse or dependent, or the dependent
that ceased to satisfy the eligibility requirements for coverage,
respectively, fails to correspond with that change in status. Thus, if a
dependent dies or ceases to satisfy the eligibility requirements for
coverage, the employee's election to cancel accident or health coverage
for any other dependent, for the employee, or for the employee's spouse
fails to correspond with that change in status. In addition, if an
employee, spouse, or dependent gains eligibility for coverage under a
family member plan (as defined in paragraph (i)(5) of this section) as a
result of a change in marital status under paragraph (c)(2)(i) of this
section or a change in employment status under paragraph (c)(2)(iii) of
this section, an employee's election under the cafeteria plan to cease
or decrease coverage for that individual under the cafeteria plan
corresponds with that change in status only if coverage for that
individual becomes applicable or is increased under the family member
plan. With respect to group-term life insurance and disability coverage
(as defined in paragraph (i)(4) of this section), an election under a
cafeteria plan to increase coverage (or an election to decrease
coverage) in response to a change in status described in paragraph
(c)(2) of this section is deemed to correspond with that change in
status as required by paragraph (c)(3)(i) of this section.
(iv) Exception for COBRA. If the employee, spouse, or dependent
becomes eligible for continuation coverage under the group health plan
of the employee's employer as provided in section 4980B or any similar
state law, a cafeteria plan may permit the employee to elect to increase
payments under the employer's cafeteria plan in order to pay for the
continuation coverage.
(4) Examples. The following examples illustrate the application of
this paragraph (c):
Example 1. (i) Employer M provides health coverage (including a
health FSA) for its employees through its cafeteria plan. Before the
beginning of the calendar year, Employee A elects employee-only health
coverage under M's cafeteria plan and elects salary reduction
contributions to fund coverage under the health FSA. Employee A marries
B during the year. Employee B's employer, N, offers health coverage to
N's employees (but not including any health FSA), and, prior to the
marriage, B had elected employee-only coverage. Employee A wants to
revoke the election for employee-only coverage, and is considering
electing family health coverage under M's plan or obtaining family
health coverage under N's plan.
(ii) Employee A's marriage to B is a change in status under
paragraph (c)(2)(i) of this section, pursuant to which B has become
eligible for coverage under M's health plan under paragraph (c)(3)(i) of
this section. Two possible election changes by A correspond with the
change in status: Employee A may elect family health coverage under M's
plan to cover A and B; or A may cancel coverage under M's plan, if B
elects family health coverage under N's plan to cover A and B. Thus, M's
cafeteria plan may permit A to make either election change.
[[Page 511]]
(iii) Employee A may also increase salary reduction contributions to
fund coverage for B under the health FSA.
Example 2. (i) Employee C, a single parent, elects family health
coverage under a calendar year cafeteria plan maintained by Employer O.
Employee C and C's 21-year old child, D, are covered under O's health
plan. During the year, D graduates from college. Under the terms of the
health plan, dependents over the age of 19 must be full-time students to
receive coverage. Employee C wants to revoke C's election for family
health coverage and obtain employee-only coverage under O's cafeteria
plan.
(ii) D's loss of eligibility for coverage under the terms of the
health plan is a change in status under paragraph (c)(2)(iv) of this
section. A revocation of C's election for family coverage and new
election for employee-only coverage corresponds with the change in
status. Thus, O's cafeteria plan may permit C to elect employee-only
coverage.
Example 3. (i) Employee E is married to F and they have one child,
G. Employee E is employed by Employer P, and P maintains a calendar year
cafeteria plan that allows employees to elect no health coverage,
employee-only coverage, employee-plus-one-dependent coverage, or family
coverage. Under the plan, before the beginning of the calendar year, E
elects family health coverage for E, F, and G. E and F divorce during
the year and F loses eligibility for coverage under P's plan. G does not
lose eligibility for health coverage under P's plan upon the divorce. E
now wants to revoke E's election under the cafeteria plan and elect no
coverage.
(ii) The divorce is a change in status under paragraph (c)(2)(i). A
change in the cafeteria plan election to cancel health coverage for F is
consistent with that change in status. However, an election change to
cancel E's or G's health coverage does not satisfy the consistency rule
under paragraph (c)(3)(iii) of this section regarding cancellation of
coverage for an employee's other dependents in the event of divorce.
Therefore, the cafeteria plan may not permit E to elect no coverage.
However, an election to change to employee-plus-one-dependent health
coverage would correspond with the change in status, and thus the
cafeteria plan may permit E to elect employee-plus-one-dependent health
coverage.
(iii) In addition, under paragraph (f)(4) of this section, if F
makes an election change to cover G under F's employer's plan, then E
may make a corresponding change to elect employee-only coverage under
P's cafeteria plan.
Example 4. (i) Employer R maintains a calendar year cafeteria plan
under which full-time employees may elect coverage under one of three
benefit package options provided under an accident or health plan: an
indemnity option or either of two HMO options for employees who work in
the respective service areas of the two HMOs. Employee A, who works in
the service area of HMO 1, elects the HMO 1 option.
During the year, A is transferred to another work location which is
outside the HMO 1 service area and inside the HMO 2
service area.
(ii) The transfer is a change in status under paragraph (c)(2)(iii)
of this section (relating to a change in worksite), and, under the
consistency rule in paragraph (c)(3) of this section, the cafeteria plan
may permit A to make an election change to elect the indemnity option or
HMO 2 or to cancel accident or health coverage.
(iii) The change in work location has no effect on A's eligibility
under R's health FSA, so no change in A's health FSA is authorized under
this paragraph (c).
Example 5. (i) Employer S maintains a calendar year cafeteria plan
that allows employees to elect coverage under an accident or health plan
providing indemnity coverage and coverage under a health FSA. Prior to
the beginning of the calendar year, Employee B elects employee-only
indemnity coverage, and elects salary reduction contributions of $600
during the year to fund coverage under the health FSA for up to $600 of
reimbursements for the year. Employee B's spouse, C, has employee-only
coverage under an accident or health plan maintained by C's employer.
During the year, C terminates employment and loses coverage under that
plan. B now wants to elect family coverage under S's accident or health
plan and increase B's FSA election.
(ii) C's termination of employment is a change in status under
paragraph (c)(2)(iii) of this section, and the election change satisfies
the consistency rule of paragraph (c)(3) of this section. Therefore, the
cafeteria plan may permit B to elect family coverage under S's accident
or health plan and to increase B's FSA coverage.
Example 6. (i) Employer T provides group-term life insurance
coverage as described under section 79. Under T's plan, an employee may
elect life insurance coverage in an amount up to $50,000. T also
maintains a calendar year cafeteria plan under which qualified benefits,
including the group-term life insurance coverage, are funded through
salary reduction. Employee D has a spouse and a child. Before the
beginning of the year, D elects $10,000 of group-term life insurance
coverage. During the year, D is divorced.
(ii) The divorce is a change in status under paragraph (c)(2)(i) of
this section. Under paragraph (c)(3)(iii) of this section, either an
increase or a decrease in coverage is consistent with this change in
status. Thus, T's cafeteria plan may permit D to increase or to decrease
D's group-term life insurance coverage.
[[Page 512]]
Example 7. (i) Employee E is married to F and they have one child,
G. Employee E's employer, U, maintains a cafeteria plan under which
employees may elect no coverage, employee-only coverage, or family
coverage under a group health plan maintained by U, and may make a
separate vision coverage election under the plan. Before the beginning
of the calendar year, E elects family health coverage and no vision
coverage under U's cafeteria plan. Employee F's employer, V, maintains a
cafeteria plan under which employees may elect no coverage, employee-
only coverage, or family coverage under a group health plan maintained
by V, and may make a separate vision coverage election under the plan.
Before the beginning of the calendar year, F elects no health coverage
and employee-only vision coverage under V's plan. During the year, F
terminates employment with V and loses vision coverage under V's plan.
Employee E now wants to elect family vision coverage under U's group
health plan.
(ii) F's termination of employment is a change in status under
paragraph (c)(2)(iii) of this section, and the election change satisfies
the consistency rule of paragraph (c)(3) of this section. Therefore, U's
cafeteria plan may permit E to elect family vision coverage (covering E
and G as well as F) under U's group health plan.
Example 8. (i) Before the beginning of the year, Employee H elects
to participate in a cafeteria plan maintained by H's employer, W.
However, in order to change the election during the year so as to cancel
coverage, and by prior understanding with W, H terminates employment and
resumes employment one week later.
(ii) In this Example 8, under the facts and circumstances, a
principal purpose of the termination of employment was to alter the
election, and reinstatement of employment was understood at the time of
termination. Accordingly, H does not have a change in status under
paragraph (c)(2)(iii) of this section.
(iii) However, H's termination of employment would constitute a
change in status, permitting a cancellation of coverage during the
period of unemployment, if H's original cafeteria plan election for the
period of coverage was reinstated upon resumption of employment (for
example, if W's cafeteria plan contains a provision requiring an
employee who resumes employment within 30 days, without any other
intervening event that would permit a change in election, to return to
the election in effect prior to termination of employment).
(iv) If, instead, H terminates employment and cancels coverage
during a period of unemployment, and then returns to work more than 30
days following termination of employment, the cafeteria plan may permit
H the option of returning to the election in effect prior to termination
of employment or making a new election under the plan. Alternatively,
the cafeteria plan may prohibit H from returning to the plan during that
plan year.
Example 9. (i) Employee A has one child, B. Employee A's employer,
X, maintains a calendar year cafeteria plan that allows employees to
elect coverage under a dependent care FSA. Prior to the beginning of the
calendar year, A elects salary reduction contributions of $4,000 during
the year to fund coverage under the dependent care FSA for up to $4,000
of reimbursements for the year. During the year, B reaches the age of
13, and A wants to cancel coverage under the dependent care FSA.
(ii) When B turns 13, B ceases to satisfy the definition of
qualifying individual under section 21(b)(1) of the Internal Revenue
Code. Accordingly, B's attainment of age 13 is a change in status under
paragraph (c)(2)(iv) of this section that affects A's employment-related
expenses as defined in section 21(b)(2). Therefore, A may make a
corresponding change under X's cafeteria plan to cancel coverage under
the dependent care FSA.
Example 10. (i) Employer Y maintains a calendar year cafeteria plan
under which full-time employees may elect coverage under either an
indemnity option or an HMO. Employee C elects the employee-only
indemnity option. During the year, C marries D. D has two children from
a previous marriage, and has family group health coverage in a cafeteria
plan sponsored by D's employer, Z. C wishes to change from employee-only
indemnity coverage to HMO coverage for the family. D wishes to cease
coverage in Z's group health plan and certifies to Z that D will have
family coverage under C's plan (and Z has no reason to believe the
certification is incorrect).
(ii) The marriage is a change in status under paragraph (c)(2)(i) of
this section. Under the consistency rule in paragraph (c)(3) of this
section, Y's cafeteria plan may permit C to change his or her salary
reduction contributions to reflect the change from employee-only
indemnity to HMO family coverage, and Z may permit D to revoke coverage
under Z's cafeteria plan.
(d) Judgment, decree, or order--(1) Conforming election change. This
paragraph (d) applies to a judgment, decree, or order (order) resulting
from a divorce, legal separation, annulment, or change in legal custody
(including a qualified medical child support order as defined in section
609 of the Employee Retirement Income Security Act of 1974 (Public Law
93-406 (88 Stat. 829))) that requires accident or health coverage for an
employee's child or for a foster child who is a dependent of the
employee. A
[[Page 513]]
cafeteria plan will not fail to satisfy section 125 if it--
(i) Changes the employee's election to provide coverage for the
child if the order requires coverage for the child under the employee's
plan; or
(ii) Permits the employee to make an election change to cancel
coverage for the child if:
(A) The order requires the spouse, former spouse, or other
individual to provide coverage for the child; and
(B) That coverage is, in fact, provided.
(2) Example. The following example illustrates the application of
this paragraph (d):
Example. (i) Employer M maintains a calendar year cafeteria plan
that allows employees to elect no health coverage, employee-only
coverage, employee-plus-one-dependent coverage, or family coverage. M's
employee, A, is married to B and they have one child, C. Before the
beginning of the year, A elects employee-only health coverage. Employee
A divorces B during the year and, pursuant to A's divorce agreement with
B, M's health plan receives a qualified medical child support order (as
defined in section 609 of the Employee Retirement Income Security Act of
1974) during the plan year. The order requires M's health plan to cover
C.
(ii) Under this paragraph (d), M's cafeteria plan may change A's
election from employee-only health coverage to employee-plus-one-
dependent coverage in order to cover C.
(e) Entitlement to Medicare or Medicaid. If an employee, spouse, or
dependent who is enrolled in an accident or health plan of the employer
becomes entitled to coverage (i.e., becomes enrolled) under Part A or
Part B of Title XVIII of the Social Security Act (Medicare) (Public Law
89-97 (79 Stat. 291)) or Title XIX of the Social Security Act (Medicaid)
(Public Law 89-97 (79 Stat. 343)), other than coverage consisting solely
of benefits under section 1928 of the Social Security Act (the program
for distribution of pediatric vaccines), a cafeteria plan may permit the
employee to make a prospective election change to cancel or reduce
coverage of that employee, spouse, or dependent under the accident or
health plan. In addition, if an employee, spouse, or dependent who has
been entitled to such coverage under Medicare or Medicaid loses
eligibility for such coverage, the cafeteria plan may permit the
employee to make a prospective election to commence or increase coverage
of that employee, spouse, or dependent under the accident or health
plan.
(f) Significant cost or coverage changes--(1) In general. Paragraphs
(f)(2) through (5) of this section set forth rules for election changes
as a result of changes in cost or coverage. This paragraph (f) does not
apply to an election change with respect to a health FSA (or on account
of a change in cost or coverage under a health FSA).
(2) Cost changes--(i) Automatic changes. If the cost of a qualified
benefits plan increases (or decreases) during a period of coverage and,
under the terms of the plan, employees are required to make a
corresponding change in their payments, the cafeteria plan may, on a
reasonable and consistent basis, automatically make a prospective
increase (or decrease) in affected employees' elective contributions for
the plan.
(ii) Significant cost changes. If the cost charged to an employee
for a benefit package option (as defined in paragraph (i)(2) of this
section) significantly increases or significantly decreases during a
period of coverage, the cafeteria plan may permit the employee to make a
corresponding change in election under the cafeteria plan. Changes that
may be made include commencing participation in the cafeteria plan for
the option with a decrease in cost, or, in the case of an increase in
cost, revoking an election for that coverage and, in lieu thereof,
either receiving on a prospective basis coverage under another benefit
package option providing similar coverage or dropping coverage if no
other benefit package option providing similar coverage is available.
For example, if the cost of an indemnity option under an accident or
health plan significantly increases during a period of coverage,
employees who are covered by the indemnity option may make a
corresponding prospective increase in their payments or may instead
elect to revoke their election for the indemnity option and, in lieu
thereof, elect coverage under another benefit package option including
an HMO option (or
[[Page 514]]
drop coverage under the accident or health plan if no other benefit
package option is offered).
(iii) Application of cost changes. For purposes of paragraphs
(f)(2)(i) and (ii) of this section, a cost increase or decrease refers
to an increase or decrease in the amount of the elective contributions
under the cafeteria plan, whether that increase or decrease results from
an action taken by the employee (such as switching between full-time and
part-time status) or from an action taken by an employer (such as
reducing the amount of employer contributions for a class of employees).
(iv) Application to dependent care. This paragraph (f)(2) applies in
the case of a dependent care assistance plan only if the cost change is
imposed by a dependent care provider who is not a relative of the
employee. For this purpose, a relative is an individual who is related
as described in section 152(a)(1) through (8), incorporating the rules
of section 152(b)(1) and (2).
(3) Coverage changes--(i) Significant curtailment without loss of
coverage. If an employee (or an employee's spouse or dependent) has a
significant curtailment of coverage under a plan during a period of
coverage that is not a loss of coverage as described in paragraph
(f)(3)(ii) of this section (for example, there is a significant increase
in the deductible, the copay, or the out-of-pocket cost sharing limit
under an accident or health plan), the cafeteria plan may permit any
employee who had been participating in the plan and receiving that
coverage to revoke his or her election for that coverage and, in lieu
thereof, to elect to receive on a prospective basis coverage under
another benefit package option providing similar coverage. Coverage
under a plan is significantly curtailed only if there is an overall
reduction in coverage provided under the plan so as to constitute
reduced coverage generally. Thus, in most cases, the loss of one
particular physician in a network does not constitute a significant
curtailment.
(ii) Significant curtailment with loss of coverage. If an employee
(or the employee's spouse or dependent) has a significant curtailment
that is a loss of coverage, the plan may permit that employee to revoke
his or her election under the cafeteria plan and, in lieu thereof, to
elect either to receive on a prospective basis coverage under another
benefit package option providing similar coverage or to drop coverage if
no similar benefit package option is available. For purposes of this
paragraph (f)(3)(ii), a loss of coverage means a complete loss of
coverage under the benefit package option or other coverage option
(including the elimination of a benefits package option, an HMO ceasing
to be available in the area where the individual resides, or the
individual losing all coverage under the option by reason of an overall
lifetime or annual limitation). In addition, the cafeteria plan may, in
its discretion, treat the following as a loss of coverage--
(A) A substantial decrease in the medical care providers available
under the option (such as a major hospital ceasing to be a member of a
preferred provider network or a substantial decrease in the physicians
participating in a preferred provider network or an HMO);
(B) A reduction in the benefits for a specific type of medical
condition or treatment with respect to which the employee or the
employee's spouse or dependent is currently in a course of treatment; or
(C) Any other similar fundamental loss of coverage.
(iii) Addition or improvement of a benefit package option. If a plan
adds a new benefit package option or other coverage option, or if
coverage under an existing benefit package option or other coverage
option is significantly improved during a period of coverage, the
cafeteria plan may permit eligible employees (whether or not they have
previously made an election under the cafeteria plan or have previously
elected the benefit package option) to revoke their election under the
cafeteria plan and, in lieu thereof, to make an election on a
prospective basis for coverage under the new or improved benefit package
option.
(4) Change in coverage under another employer plan. A cafeteria plan
may permit an employee to make a prospective election change that is on
account of and corresponds with a change made
[[Page 515]]
under another employer plan (including a plan of the same employer or of
another employer) if--
(i) The other cafeteria plan or qualified benefits plan permits
participants to make an election change that would be permitted under
paragraphs (b) through (g) of this section (disregarding this paragraph
(f)(4)); or
(ii) The cafeteria plan permits participants to make an election for
a period of coverage that is different from the period of coverage under
the other cafeteria plan or qualified benefits plan.
(5) Loss of coverage under other group health coverage. A cafeteria
plan may permit an employee to make an election on a prospective basis
to add coverage under a cafeteria plan for the employee, spouse, or
dependent if the employee, spouse, or dependent loses coverage under any
group health coverage sponsored by a governmental or educational
institution, including the following--
(i) A State's children's health insurance program (SCHIP) under
Title XXI of the Social Security Act;
(ii) A medical care program of an Indian Tribal government (as
defined in section 7701(a)(40)), the Indian Health Service, or a tribal
organization;
(iii) A State health benefits risk pool; or
(iv) A Foreign government group health plan.
(6) Examples. The following examples illustrate the application of
this paragraph (f):
Example 1. (i) A calendar year cafeteria plan is maintained pursuant
to a collective bargaining agreement for the benefit of Employer M's
employees. The cafeteria plan offers various benefits, including
indemnity health insurance and a health FSA. As a result of mid-year
negotiations, premiums for the indemnity health insurance are reduced in
the middle of the year, insurance co-payments for office visits are
reduced under the indemnity plan by an amount which constitutes a
significant benefit improvement, and an HMO option is added.
(ii) Under these facts, the reduction in health insurance premiums
is a reduction in cost. Accordingly, under paragraph (f)(2)(i) of this
section, the cafeteria plan may automatically decrease the amount of
salary reduction contributions of affected participants by an amount
that corresponds to the premium change. However, the plan may not permit
employees to change their health FSA elections to reflect the mid-year
change in copayments under the indemnity plan.
(iii) Also, the decrease in co-payments is a significant benefit
improvement and the addition of the HMO option is an addition of a
benefit package option. Accordingly, under paragraph (f)(3)(ii) of this
section, the cafeteria plan may permit eligible employees to make an
election change to elect the indemnity plan or the new HMO option.
However, the plan may not permit employees to change their health FSA
elections to reflect differences in co-payments under the HMO option.
Example 2. (i) Employer N sponsors an accident or health plan under
which employees may elect either employee-only coverage or family health
coverage. The 12-month period of coverage under N's cafeteria plan
begins January 1, 2001. N's employee, A, is married to B. Employee A
elects employee-only coverage under N's plan. B's employer, O, offers
health coverage to O's employees under its accident or health plan under
which employees may elect either employee-only coverage or family
coverage. O's plan has a 12-month period of coverage beginning September
1, 2001. B maintains individual coverage under O's plan at the time A
elects coverage under N's plan, and wants to elect no coverage for the
plan year beginning on September 1, 2001, which is the next period of
coverage under O's accident or health plan. A certifies to N that B will
elect no coverage under O's accident or health plan for the plan year
beginning on September 1, 2001 and N has no reason to believe that A's
certification is incorrect.
(ii) Under paragraph (f)(4)(ii) of this section, N's cafeteria plan
may permit A to change A's election prospectively to family coverage
under that plan effective September 1, 2001.
Example 3. (i) Employer P sponsors a calendar year cafeteria plan
under which employees may elect either employee-only or family health
coverage. Before the beginning of the year, P's employee, C, elects
family coverage under P's cafeteria plan. C also elects coverage under
the health FSA for up to $200 of reimbursements for the year to be
funded by salary reduction contributions of $200 during the year. C is
married to D, who is employed by Employer Q. Q does not maintain a
cafeteria plan, but does maintain an accident or health plan providing
its employees with employee-only coverage. During the calendar year, Q
adds family coverage as an option under its health plan. D elects family
coverage under Q's plan, and C wants to revoke C's election for health
coverage and elect no health coverage under P's cafeteria plan for the
remainder of the year.
(ii) Q's addition of family coverage as an option under its health
plan constitutes a new coverage option described in paragraph
[[Page 516]]
(f)(3)(ii) of this section. Accordingly, pursuant to paragraph (f)(4)(i)
of this section, P's cafeteria plan may permit C to revoke C's health
coverage election if D actually elects family health coverage under Q's
accident or health plan. Employer P's plan may not permit C to change
C's health FSA election.
Example 4. (i) Employer R maintains a cafeteria plan under which
employees may elect accident or health coverage under either an
indemnity plan or an HMO. Before the beginning of the year, R's
employee, E elects coverage under the HMO at a premium cost of $100 per
month. During the year, E decides to switch to the indemnity plan, which
charges a premium of $140 per month.
(ii) E's change from the HMO to indemnity plan is not a change in
cost or coverage under this paragraph (f), and none of the other
election change rules under paragraphs (b) through (e) of this section
apply.
(iii) Although R's health plan may permit E to make the change from
the HMO to the indemnity plan, R's cafeteria plan may not permit E to
make an election change to reflect the increased premium. Accordingly,
if E switches from the HMO to the indemnity plan, E may pay the $40 per
month additional cost on an after-tax basis.
Example 5. (i) Employee A is married to Employee B and they have one
child, C. Employee A's employer, M, maintains a calendar year cafeteria
plan that allows employees to elect coverage under a dependent care FSA.
Child C attends X's on site child care center at an annual cost of
$3,000. Prior to the beginning of the year, A elects salary reduction
contributions of $3,000 during the year to fund coverage under the
dependent care FSA for up to $3,000 of reimbursements for the year.
Employee A now wants to revoke A's election of coverage under the
dependent care FSA, because A has found a new child care provider.
(ii) The availability of dependent care services from the new child
care provider (whether the new provider is a household employee or
family member of A or B or a person who is independent of A and B) is a
significant change in coverage similar to a benefit package option
becoming available. Because the FSA is a dependent care FSA rather than
a health FSA, the coverage rules of this section apply and M's cafeteria
plan may permit A to elect to revoke A's previous election of coverage
under the dependent care FSA, and make a corresponding new election to
reflect the cost of the new child care provider.
Example 6. (i) Employee D is married to Employee E and they have one
child, F. Employee D's employer, N, maintains a calendar year cafeteria
plan that allows employees to elect coverage under a dependent care FSA.
Child F is cared for by Y, D's household employee, who provides child
care services five days a week from 9 a.m. to 6 p.m. at an annual cost
in excess of $5,000. Prior to the beginning of the year, D elects salary
reduction contributions of $5,000 during the year to fund coverage under
the dependent care FSA for up to $5,000 of reimbursements for the year.
During the year, F begins school and, as a result, Y's regular hours of
work are changed to five days a week from 3 p.m. to 6 p.m. Employee D
now wants to revoke D's election under the dependent care FSA, and make
a new election under the dependent care FSA to an annual cost of $4,000
to reflect a reduced cost of child care due to Y's reduced hours.
(ii) The change in the number of hours of work performed by Y is a
change in coverage. Thus, N's cafeteria plan may permit D to reduce D's
previous election under the dependent care FSA to $4,000.
Example 7. (i) Employee G is married to Employee H and they have one
child, J. Employee G's employer, O, maintains a calendar year cafeteria
plan that allows employees to elect coverage under a dependent care FSA.
Child J is cared for by Z, G's household employee, who is not a relative
of G and who provides child care services at an annual cost of $4,000.
Prior to the beginning of the year, G elects salary reduction
contributions of $4,000 during the year to fund coverage under the
dependent care FSA for up to $4,000 of reimbursements for the year.
During the year, G raises Z's salary. Employee G now wants to revoke G's
election under the dependent care FSA, and make a new election under the
dependent care FSA to an annual amount of $4,500 to reflect the raise.
(ii) The raise in Z's salary is a significant increase in cost under
paragraph (f)(2)(ii) of this section, and an increase in election to
reflect the raise corresponds with that change in status. Thus, O's
cafeteria plan may permit G to elect to increase G's election under the
dependent care FSA.
Example 8. (i) Employer P maintains a calendar year cafeteria plan
that allows employees to elect employee-only, employee plus one
dependent, or family coverage under an indemnity plan. During the middle
of the year, Employer P gives its employees the option to select
employee-only or family coverage from an HMO plan. P's employee, J, who
had elected employee plus one dependent coverage under the indemnity
plan, decides to switch to family coverage under the HMO plan.
(ii) Employer P's midyear addition of the HMO option is an addition
of a benefit package option. Under paragraph (f) of this section,
Employee J may change his or her salary reduction contributions to
reflect the change from indemnity to HMO coverage, and also to reflect
the change from employee plus one dependent to family coverage (however,
an election of employee-only coverage under the new option would not
correspond with the addition of a new option). Employer
[[Page 517]]
P may not permit J to change J's health FSA election.
(g) Special requirements relating to the Family and Medical Leave
Act. An employee taking leave under the Family and Medical Leave Act
(FMLA) (Public Law 103-3 (107 Stat. 6)) may revoke an existing election
of accident or health plan coverage and make such other election for the
remaining portion of the period of coverage as may be provided for under
the FMLA. See Sec. 1.125-3 for additional rules.
(h) Elective contributions under a qualified cash or deferred
arrangement. The provisions of this section do not apply with respect to
elective contributions under a qualified cash or deferred arrangement
(within the meaning of section 401(k)) or employee contributions subject
to section 401(m). Thus, a cafeteria plan may permit an employee to
modify or revoke elections in accordance with section 401(k) and (m) and
the regulations thereunder.
(i) Definitions. Unless otherwise provided, the definitions in
paragraphs (i)(1) though (8) of this section apply for purposes of this
section.
(1) Accident or health coverage. Accident or health coverage means
coverage under an accident or health plan as defined in regulations
under section 105.
(2) Benefit package option. A benefit package option means a
qualified benefit under section 125(f) that is offered under a cafeteria
plan, or an option for coverage under an underlying accident or health
plan (such as an indemnity option, an HMO option, or a PPO option under
an accident or health plan).
(3) Dependent. A dependent means a dependent as defined in section
152, except that, for purposes of accident or health coverage, any child
to whom section 152(e) applies is treated as a dependent of both
parents, and, for purposes of dependent care assistance provided through
a cafeteria plan, a dependent means a qualifying individual (as defined
in section 21(b)(1)) with respect to the employee.
(4) Disability coverage. Disability coverage means coverage under an
accident or health plan that provides benefits due to personal injury or
sickness, but does not reimburse expenses incurred for medical care (as
defined in section 213(d)) of the employee or the employee's spouse and
dependents. For purposes of this section, disability coverage includes
payments described in section 105(c).
(5) Family member plan. A family member plan means a cafeteria plan
or qualified benefit plan sponsored by the employer of the employee's
spouse or the employee's dependent.
(6) FSA, health FSA. An FSA means a qualified benefits plan that is
a flexible spending arrangement as defined in section 106(c)(2) . A
health FSA means a health or accident plan that is an FSA.
(7) Placement for adoption. Placement for adoption means placement
for adoption as defined in regulations under section 9801.
(8) Qualified benefits plan. A qualified benefits plan means an
employee benefit plan governing the provision of one or more benefits
that are qualified benefits under section 125(f). A plan does not fail
to be a qualified benefits plan merely because it includes an FSA,
assuming that the FSA meets the requirements of section 125 and the
regulations thereunder.
(9) Similar coverage. Coverage for the same category of benefits for
the same individuals (e.g., family to family or single to single). For
example, two plans that provide coverage for major medical are
considered to be similar coverage. For purposes of this definition, a
health FSA is not similar coverage with respect to an accident or health
plan that is not a health FSA. A plan may treat coverage by another
employer, such as a spouse's or dependent's employer, as similar
coverage.
(j) Effective date--(1) General rule. Except as provided in
paragraph (j)(2) of this section, this section is applicable for
cafeteria plan years beginning on or after January 1, 2001.
(2) Delayed effective date for certain provisions. The following
provisions are applicable for cafeteria plan years beginning on or after
January 1, 2002: paragraph (c) of this section to the extent applicable
to qualified benefits other than an accident or health plan or a group-
term life insurance plan; paragraph (d)(1)(ii)(B) of this section
(relating to a spouse, former spouse, or other individual obtaining
accident or
[[Page 518]]
health coverage for an employee's child in response to a judgment,
decree, or order); paragraph (f) of this section (rules for election
changes as a result of cost or coverage changes); and paragraph (i)(9)
of this section (defining similar coverage).
[T.D. 8878, 65 FR 15550, Mar. 23, 2000, as amended by T.D. 8921, 66 FR
1840, Jan. 10, 2001; T.D. 8921, 66 FR 13013, Mar. 2, 2001; T.D. 8966, 66
FR 52680, Oct. 17, 2001]
Sec. 1.125-4T Permitted election changes (temporary).
(a) Election changes. A cafeteria plan may permit an employee to
revoke an election during a period of coverage and to make a new
election only as provided in paragraphs (b) through (i) of this section.
See paragraph (j) of this section for special provisions relating to
qualified cash or deferred arrangements.
(b) Special enrollment rights. A cafeteria plan may permit an
employee to revoke an election for accident or health coverage during a
period of coverage and make a new election that corresponds with the
special enrollment rights provided in section 9801(f), whether or not
the change in election is permitted under paragraph (c) of this section.
(c) Changes in status for accident or health coverage and group-term
life. (1) In general. A cafeteria plan may permit an employee to revoke
an election for accident or health coverage or group-term life insurance
coverage during a period of coverage and make a new election for the
remaining portion of the period if, under the facts and circumstances--
(i) A change in status occurs; and
(ii) The election change satisfies the consistency requirement in
paragraph (c)(3) of this section (consistency rule for accident or
health coverage) or (c)(4) of this section (consistency rule for group-
term life insurance coverage).
(2) Change in status events. The following events are changes in
status for purposes of this paragraph (c):
(i) Legal marital status. Events that change an employee's legal
marital status, including marriage, death of spouse, divorce, legal
separation, or annulment;
(ii) Number of dependents. Events that change an employee's number
of dependents (as defined in section 152), including birth, adoption,
placement for adoption (as defined in regulations under section 9801),
or death of a dependent;
(iii) Employment status. A termination or commencement of employment
by the employee, spouse, or dependent;
(iv) Work schedule. A reduction or increase in hours of employment
by the employee, spouse, or dependent, including a switch between part-
time and full-time, a strike or lockout, or commencement or return from
an unpaid leave of absence;
(v) Dependent satisfies or ceases to satisfy the requirements for
unmarried dependents. An event that causes an employee's dependent to
satisfy or cease to satisfy the requirements for coverage due to
attainment of age, student status, or any similar circumstance as
provided in the accident or health plan under which the employee
receives coverage; and
(vi) Residence or Worksite. A change in the place of residence or
work of the employee, spouse, or dependent.
(3) Consistency rule for accident or health coverage. (i) General
rule. (A) An employee's revocation of a cafeteria plan election during a
period of coverage and new election for the remaining portion of the
period (referred to below as an ``election change'') is consistent with
a change in status if, and only if--
(1) The change in status results in the employee, spouse, or
dependent gaining or losing eligibility for accident or health coverage
under either the cafeteria plan or an accident or health plan of the
spouse's or dependent's employer; and
(2) The election change corresponds with that gain or loss of
coverage.
(B) A change in status results in an employee, spouse, or dependent
gaining (or losing) eligibility for coverage under a plan only if the
individual becomes eligible (or ineligible) to participate in the plan.
A cafeteria plan may treat an individual as gaining (or losing)
eligibility for coverage if the individual becomes eligible (or
ineligible) for a particular benefit package option under a plan (e.g.,
a change in status
[[Page 519]]
results in an individual becoming eligible for a managed care option or
an indemnity option). If, as a result of a change in status, the
individual gains eligibility for elective coverage under a plan of the
spouse's or dependent's employer, the consistency rule of this paragraph
(c)(3)(i) is satisfied only if the individual elects the coverage under
the spouse's or dependent's employer. See the Examples in paragraph (k)
of this section for illustrations of the consistency rule.
(ii) Exception for COBRA. Notwithstanding paragraph (c)(3)(i) of
this section, if the employee, spouse, or dependent becomes eligible for
continuation coverage under the employer's group health plan as provided
in section 4980B or any similar State law, the employee may elect to
increase payments under the employer's cafeteria plan in order to pay
for the continuation coverage.
(4) Consistency rule for group-term life insurance coverage. Except
as provided in this paragraph (c)(4), the provisions of paragraph
(c)(3)(i) of this section apply to group-term life insurance coverage.
In the case of marriage, birth, adoption, or placement for adoption, a
cafeteria plan can allow an election change to increase (but not to
reduce) the amount of the employee's life insurance coverage. In the
case of divorce, legal separation, annulment, or death of a spouse or
dependent, a cafeteria plan may allow an election change to reduce (but
not to increase) the amount of the employee's life insurance coverage.
(d) Judgment, decree, or order. This paragraph (d) applies to a
judgment, decree, or order (``order'') resulting from a divorce, legal
separation, annulment, or change in legal custody (including a qualified
medical child support order defined in section 609 of the Employee
Retirement Income Security Act of 1974) that requires accident or health
coverage for an employee's child. Notwithstanding the provisions of
paragraph (c) of this section, a cafeteria plan may--
(1) Change the employee's election to provide coverage for the child
if the order requires coverage under the employee's plan; or
(2) Permit the employee to make an election change to cancel
coverage for the child if the order requires the former spouse to
provide coverage.
(e) Entitlement to Medicare or Medicaid. If an employee, spouse, or
dependent who is enrolled in an accident or health plan of the employer
becomes entitled to coverage (i.e., enrolled) under Part A or Part B of
Title XVIII of the Social Security Act (Medicare) or Title XIX of the
Social Security Act (Medicaid), other than coverage consisting solely of
benefits under section 1928 of the Social Security Act (the program for
distribution of pediatric vaccines), a cafeteria plan may permit the
employee to make an election change to cancel coverage of that employee,
spouse or dependent under the accident or health plan.
(f) Changes in status for other qualified benefits. [Reserved]
(g) Significant coverage or cost changes. [Reserved]
(1) Employer's plan. [Reserved]
(2) Plan of spouse's or dependent's employer. [Reserved]
(h) Cessation of required contributions. [Reserved]
(i) Special requirements concerning the Family and Medical Leave
Act. [Reserved]
(j) Elective contributions under a qualified cash or deferred
arrangement. The provisions of this section do not apply with respect to
elective contributions under a qualified cash or deferred arrangement
(within the meaning of section 401(k)) or employee contributions subject
to section 401(m). Thus, a cafeteria plan may permit an employee to
modify or revoke elections in accordance with sections 401(k) and 401(m)
and the regulations thereunder.
(k) Examples. The following examples illustrate the rules of this
section. In each case involving an accident or health plan, assume that
the plan is subject to section 9801(f) (providing for special enrollment
rights under certain group health plans).
Example 1. (i) Employer M provides health coverage for its employees
under which employees may elect either employee-only coverage or family
coverage. M also maintains a calendar year cafeteria plan under which
qualified benefits, including health coverage,
[[Page 520]]
are funded through salary reduction. M's employee, A, elects employee-
only health coverage before the beginning of the calendar year. During
the year, A adopts a child, C. Within 30 days thereafter, A wants to
revoke A's election for employee-only health coverage and obtain family
health coverage, as of the date of C's adoption. A satisfies the
conditions for special enrollment of an employee with a new dependent
under section 9801(f)(2), so that A may enroll in family coverage under
M's accident or health plan in order to provide coverage for C,
effective as of the date of C's adoption.
(ii) In this Example 1, M's cafeteria plan may permit A to change
the employee's salary reduction election to family coverage for salary
not yet currently available. The increased salary reduction could
reflect the cost of family coverage from the date of adoption. (The
adoption of C is also a change in status, and the election of family
coverage is consistent with that change in status. Thus, under the
change in status provisions of paragraph (c) of this section, M's
cafeteria plan could permit A to elect family coverage prospectively in
order to cover C for the remaining portion of the coverage period.)
Example 2. (i) The employer plans and permissible coverage are the
same as in Example 1. Before the beginning of the calendar year,
Employee A elects employee-only health coverage under M's cafeteria
plan. A marries B during the plan year. B's employer, N, offers health
coverage to N's employees, and, prior to the marriage, B had elected
employee-only coverage. A wants to revoke the election for employee-only
coverage, and is considering electing family health coverage under M's
plan or obtaining family health coverage under N's plan.
(ii) In this Example 2, A's marriage to B is a change in status. Two
possible election changes by A would be consistent with the change in
status: to cover A and B by electing family health coverage under M's
plan, or to cancel coverage under M's plan (with B electing family
health coverage under N's plan in order to cover A and B). Thus, M's
cafeteria plan may permit A to make either change in election. (M's
cafeteria plan could also permit A to change A's salary reduction
election to reflect the change to family coverage under M's group health
plan in accordance with paragraph (b) of this section because the
marriage would also create special enrollment rights under section
9801(f), pursuant to which an election of family coverage under M's plan
would be required to be effective no later than the first day of the
first calendar month beginning after the completed request for
enrollment is received by the plan.)
Example 3. (i) Employee G, a single parent, elects family health
coverage under a calendar year cafeteria plan maintained by Employer O.
G and G's 21-year old child, H, are covered under O's health plan.
During the year, H graduates from college. Under the terms of the health
plan, dependents over the age of 19 must be full-time students to
receive coverage. G wants to revoke G's election for family health
coverage and obtain employee-only coverage under O's cafeteria plan.
(ii) In this Example 3, H's loss of eligibility for coverage under
the terms of the health plan is a change in status. A revocation of G's
election for family coverage and new election of employee-only coverage
is consistent with the change in status. Thus, O's cafeteria plan may
permit G to elect employee-only coverage.
Example 4. (i) Employee J is married to K and they have one child,
S. A calendar year cafeteria plan maintained by Employer P allows
employees to elect no health coverage, employee-only coverage, employee-
plus-one-dependent coverage, or family coverage. Under the plan, before
the beginning of the calendar year, J elects family health coverage for
J, K, and S. J and K divorce during the year and, under the terms of P's
accident or health plan, K loses eligibility for P's health coverage. S
does not lose eligibility for health coverage under P's plan upon the
divorce. J now wants to revoke J's election under the cafeteria plan and
elect no coverage.
(ii) In this Example 4, the divorce is a change in status. A change
in the cafeteria plan election to cancel health coverage for K is
consistent with that change in status. However, the divorce does not
affect J's or S's eligibility for health coverage. Therefore, an
election change to cancel J's or S's health coverage is not consistent
with the change in status. The cafeteria plan, however, may permit J to
elect employee-plus-one-dependent health coverage.
Example 5. (i) The facts are the same as Example 4, except that,
before the beginning of the year, Employee J elected employee-only
health coverage (rather than family coverage). Pursuant to J's divorce
agreement with K, P's health plan receives a qualified medical child
support order (as defined in section 609 of the Employee Retirement
Income Security Act) during the plan year. The order requires P's health
plan to cover S.
(ii) In this Example 5, P's cafeteria plan may change J's election
from employee-only health coverage to employee-plus-one-dependent
coverage in order to cover S.
Example 6. (i) Before the beginning of the coverage period, Employee
L elects to participate in a cafeteria plan maintained by L's Employer,
Q. However, in order to change the election during the coverage period
so as to cancel coverage, and by prior understanding with Q, L
terminates employment and resumes employment one week later.
[[Page 521]]
(ii) In this Example 6, under the facts and circumstances, in which
a principal purpose of the termination of employment was to alter the
election and reinstatement of employment was understood at the time of
termination, L does not have a change in status. However, L's
termination of employment would constitute a change in status,
permitting a cancellation of coverage during the period of unemployment,
if L's original cafeteria plan election was reinstated upon resumption
of employment (for example, because of a cafeteria plan provision
requiring an employee who resumes employment within 30 days, without any
other intervening event that would permit a change in election, to
return to the election in effect prior to termination of employment).
Example 7. (i) Employer R maintains a calendar year cafeteria plan
under which full-time employees may elect coverage under one of three
benefit package options provided under an accident or health plan: an
indemnity option or either of two HMO options for employees that work in
the respective service areas of the two HMOs. Employee T, who works in
the service area of HMO 1, elects the HMO 1 option.
During the year, T is transferred to another work location which is
outside the HMO 1 service area and inside the HMO 2
service area.
(ii) In this Example 7, the transfer is a change in status and,
under the consistency rule, the cafeteria plan may permit T to make an
election change to either the indemnity option or HMO 2, or to
cancel accident or health coverage.
Example 8. (i) A calendar year cafeteria plan maintained by Employer
S allows employees to elect coverage under an accident or health plan
providing indemnity coverage and under a flexible spending arrangement
(FSA). Prior to the beginning of the calendar year, Employee U elects
employee-only indemnity coverage, and coverage under the FSA for up to
$600 of reimbursements for the year to be funded by salary reduction
contributions of $600 during the year. U's spouse, V, has employee-only
coverage under an accident or health plan maintained by V's employer.
During the year, V terminates employment and loses coverage under that
plan. U now wants to elect family coverage under S's accident or health
plan and increase U's FSA election.
(ii) In this Example 8, V's termination of employment is a change in
status. The cafeteria plan may permit U to elect family coverage under
S's accident or health plan, and to increase U's FSA coverage.
Example 9. (i) Employer T provides group-term life insurance
coverage as described under section 79. Under T's plan, an employee may
elect life insurance coverage in an amount up to the lesser of his or
her salary or $50,000. T also maintains a calendar year cafeteria plan
under which qualified benefits, including the group-term life insurance
coverage, are funded through salary reduction. Before the beginning of
the calendar year, Employee W elects $10,000 of life insurance coverage,
with W's spouse, X, as the beneficiary. During the year, a child is
placed for adoption with W and X. W wants to increase W's election for
life insurance coverage to $50,000 (without changing the designation of
X as the beneficiary).
(ii) In this Example 9, the placement of a child for adoption with W
is a change in status. The increase in coverage is consistent with the
change in status. Thus, W's cafeteria plan may permit W to increase W's
life insurance coverage.
(1) Effective date. This section is applicable for plan years
beginning after December 31, 1998, and on or before November 6, 2000.
[T.D. 8738, 62 FR 60166, Nov. 7, 1997; 63 FR 8528, Feb. 19, 1998; T.D.
8878, 65 FR 15553, Mar. 23, 2000]
Sec. 1.127-1 Amounts received under a qualified educational assistance program.
(a) Exclusion from gross income. The gross income of an employee
does not include--
(1) Amounts paid to, or on behalf of the employee under a qualified
educational assistance program described in Sec. 1.127-2, or
(2) The value of education provided to the employee under such a
program.
(b) Disallowance of excluded amounts as credit or deduction. Any
amount excluded from the gross income of an employee under paragraph (a)
of this section shall not be allowed as a credit or deduction to such
employee under any other provision of this part.
(c) Amounts received under a nonqualified program. Any amount
received under an educational assistance program that is not a
``qualified program'' described in Sec. 1.127-2 will not be excluded
from gross income under paragraph (a) of this section. All or part of
the amounts received under such a nonqualified program may, however, be
excluded under section 117 or deducted under section 162 or section 212
(as the case may be), if the requirements of such section are satisfied.
(d) Definitions. For rules relating to the meaning of the terms
``employee'' and ``employer'', see paragraph (h) of Sec. 1.127-2.
[[Page 522]]
(e) Effective date. This section is effective for taxable years of
the employee beginning after December 31, 1978, and before January 1,
1984.
[T.D. 7898, 48 FR 31017, July 6, 1983]
Sec. 1.127-2 Qualified educational assistance program.
(a) In general. A qualified educational assistance program is a plan
established and maintained by an employer under which the employer
provides educational assistance to employees. To be a qualified program,
the requirements described in paragraphs (b) through (g) of this section
must be satisfied. It is not required that a program be funded or that
the employer apply to the Internal Revenue Service for a determination
that the plan is a qualified program. However, under Sec. 601.201
(relating to rulings and determination letters), an employer may request
that the Service determine whether a plan is a qualified program.
(b) Separate written plan. The program must be a separate written
plan of the employer. This requirement means that the terms of the
program must be set forth in a separate document or documents providing
only educational assistance within the meaning of paragraph (c) of this
section. The requirement for a separate plan does not, however, preclude
an educational assistance program from being part of a more
comprehensive employer plan that provides a choice of nontaxable
benefits to employees.
(c) Educational assistance--(1) In general. The benefits provided
under the program must consist solely of educational assistance. The
term ``educational assistance'' means--
(i) The employer's payment of expenses incurred by or on behalf of
an employee for education, or
(ii) The employer's provision of education to an employee.
(2) Alternative benefits. Benefits will not be considered to consist
solely of educational assistance if the program, in form or in actual
operation, provides employees with a choice between educational
assistance and other remuneration includible in the employee's gross
income.
(3) Certain benefits not considered educational assistance. The term
``educational assistance'' does not include the employer's payment for,
or provision of--
(i) Tools or supplies (other than textbooks) that the employee may
retain after completing a course of instruction,
(ii) Meals, lodging, or transportation, or
(iii) Education involving sports, games, or hobbies, unless such
education involves the business of the employer or is required as part
of a degree program. The phrase ``sports, games, or hobbies'' does not
include education that instructs employees how to maintain and improve
health so long as such education does not involve the use of athletic
facilities or equipment and is not recreational in nature.
(4) Education defined. As used in section 127, Sec. 1.127-1, and
this section, the term ``education'' includes any form of instruction or
training that improves or develops the capabilities of an individual.
Education paid for or provided under a qualified program may be
furnished directly by the employer, either alone or in conjunction with
other employers, or through a third party such as an educational
institution. Education is not limited to courses that are job related or
part of a degree program.
(d) Exclusive benefit. The program may benefit only the employees of
the employer, including, at the employer's option, individuals who are
employees within the meaning of paragraph (h)(1) of this section. A
program that provides benefits to spouses or dependents of employees is
not a qualified program within the meaning of this section.
(e) Prohibited discrimination--(1) Eligibility for benefits. The
program must benefit the employer's employees generally. Among those
benefited may be employees who are officers, shareholders, self-employed
or highly compensated. A program is not for the benefit of employees
generally, however, if the program discriminates in favor of employees
described in the preceeding sentence (or in favor of their spouses and
dependents who are themselves employees) in requirements relating to
eligibility for benefits. Thus, although a program need not provide
benefits for all employees, it must benefit those
[[Page 523]]
employees who qualify under a classification of employees that does not
discriminate in favor of the employees with respect to whom
discrimination is prohibited. The classification of employees to be
considered benefited will consist of that group of employees who are
actually eligible for educational assistance under the program, taking
into account the eligibility requirements set forth in the written plan,
the eligibility requirements reflected in the types of educational
assistance available under the program, and any other conditions that
may affect the availability of benefits under the program. Thus, for
example, if an employer's plan provides that all employees are eligible
for educational assistance, yet limits that assistance to courses of
study leading to postgraduate degrees in fields relating to the
employer's business, then only those employees able to pursue such a
course of study are considered actually eligible for educational
assistance under the program. Whether any classification of employees
discriminates in favor of employees with respect to whom discrimination
is prohibited will generally be determined by applying the same
standards as are applied under section 410(b)(1)(B) (relating to
qualified pension, profit-sharing and stock bonus plans), without regard
to section 401(a)(5). For purposes of making this determination, there
shall be excluded from consideration employees not covered by the
program who are included in a unit of employees covered by an agreement
which the Secretary of Labor finds to be a collective bargaining
agreement between employee representatives and one or more employers, if
the Internal Revenue Service finds that educational assistance benefits
were the subject of good faith bargaining between the employee
representatives and the employer or employers. For purposes of
determining whether such bargaining occurred, it is not material that
the employees are not covered by another educational assistance program
or that the employer's present program was not considered in the
bargaining.
(2) Factors not considered in determining the existence of
prohibited discrimination. A program shall not be considered
discriminatory under this paragraph (e) merely because--
(i) Different types of educational assistance available under the
program are utilized to a greater degree by employees with respect to
whom discrimination is prohibited than by other employees, or
(ii) With respect to a course of study for which benefits are
otherwise available, successful completion of the course, attaining a
particular course grade, or satisfying a reasonable condition subsequent
(such as remaining employed for one year after completing the course)
are required or considered in determining the availability of benefits.
(f) Benefit limitation--(1) In general. Under section 127(b)(3), a
program is a qualified program for a program year only if no more than
5% of the amounts paid or incurred by the employer for educational
assistance benefits during the year are provided to the limitation class
described in subparagraph (2). For purposes of this paragraph (f), the
program year must be specified in the written plan as either the
calendar year or the taxable year of the employer.
(2) Limitation class. The limitation class consists of--
(i) Shareholders. Individuals who, on any day of the program year,
own more than 5% of the total number of shares of outstanding stock of
the employer, or
(ii) Owners. In the case of an employer's trade or business which is
not incorporated, individuals who, on any day of the program year, own
more than 5% of the capital or profits interest in the employer, and
(iii) Spouses or dependents. Individuals who are spouses or
dependents of shareholders or owners described in subdivision (i) or
(ii). For purposes of determining stock ownership, the attribution rules
described in paragraph (h)(4) of this section apply. The regulations
prescribed under section 414(c) are applicable in determining an
individual's interest in the capital or profits of an unincorporated
trade or business.
(g) Notification of employees. A program is not a qualified program
unless employees eligible to participate in the program are given
reasonable notice of
[[Page 524]]
the terms and availability of the program.
(h) Definitions. For purposes of this section and Sec. 1.127-1--
(1) Employee. The term ``employee'' includes--
(i) A retired, disabled or laid-off employee,
(ii) A present employee who is on leave, as, for example, in the
Armed Forces of the United States, or
(iii) An individual who is self-employed within the meaning of
section 401(c)(1).
(2) Employer. An individual who owns the entire interest in an
unincorporated trade or business shall be treated as his or her own
employer. A partnership is treated as the employer of each partner who
is an employee within the meaning of section 401(c)(1).
(3) Officer. An officer is an individual who is an officer within
the meaning of regulations prescribed under section 414(c).
(4) Shareholder. The term ``shareholder'' includes an individual who
is a shareholder as determined by the attribution rules under section
1563 (d) and (e), without regard to section 1563(e)(3)(C).
(5) Highly compensated. The term ``highly compensated'' has the same
meaning as it does for purposes of section 410(b)(1)(B).
(i) Substantiation. An employee receiving payments under a qualified
educational assistance program must be prepared to provide
substantiation to the employer such that it is reasonable to believe
that payments or reimbursements made under the program constitute
educational assistance within the meaning of paragraph (c) of this
section.
[T.D. 7898, 48 FR 31017, July 6, 1983]
Sec. 1.132-0 Outline of regulations under section 132.
The following is an outline of regulations in this section relating
to exclusions from gross income for certain fringe benefits:
Sec. 1.132-0 Outline of regulations under section 132.
Sec. 1.132-1 Exclusion from gross income for certain fringe benefits.
Sec. 1.132-1 (a) In general.
Sec. 1.132-1 (b) Definition of employee.
(1) No-additional-cost services and qualified employee discounts.
(2) Working condition fringes.
(3) On-premises athletic facilities.
(4) De minimis fringes.
(5) Dependent child.
Sec. 1.132-1 (c) Special rules for employers--Effect of section 414.
Sec. 1.132-1 (d) Customers not to include employees.
Sec. 1.132-1 (e) Treatment of on-premises athletic facilities.
(1) In general.
(2) Premises of the employer.
(3) Application of rules to membership in an athletic facility.
(4) Operation by the employer.
(5) Nonapplicability of nondiscrimination rules.
Sec. 1.132-1 (f) Nonapplicability of section 132 in certain cases.
(1) Tax treatment provided for in another section.
(2) Limited statutory exclusions.
Sec. 1.132-1 (g) Effective date.
Sec. 1.132-2 No-additional-cost services.
Sec. 1.132-2 (a) In general.
(1) Definition.
(2) Excess capacity services.
(3) Cash rebates.
(4) Applicability of nondiscrimination rules.
(5) No substantial additional cost.
(6) Payments for telephone service.
Sec. 1.132-2 (b) Reciprocal agreements.
Sec. 1.132-2 (c) Example.
Sec. 1.132-3 Qualified employee discounts.
Sec. 1.132-3 (a) In general.
(1) Definition.
(2) Qualified property or services.
(3) No reciprocal agreement exception.
(4) Property of services provided without charge, at a reduced
price, or by rebates.
(5) Property or services provided directly by the employer or
indirectly through a third party.
(6) Applicability of nondiscrimination rules.
Sec. 1.132-3 (b) Employee discount.
(1) Definition.
(2) Price to customers.
(3) Damaged, distressed, or returned goods.
Sec. 1.132-3 (c) Gross profit percentage.
(1) In general.
(2) Line of business.
(3) Generally accepted accounting principles.
Sec. 1.132-3 (d) Treatment of leased sections of department stores.
(1) In general.
(2) Employees of the leased section.
Sec. 1.132-3 (e) Excess discounts.
Sec. 1.132-4 Line of business limitation.
Sec. 1.132-4 (a) In general.
(1) Applicability.
(2) Definition.
[[Page 525]]
(3) Aggregation of two-digit classifications.
Sec. 1.132-4 (b) Grandfather rule for certain retail stores.
(1) In general.
(2) Taxable year of affiliated group.
(3) Definition of ``sales''.
(4) Retired and disabled employees.
(5) Increase of employee discount.
Sec. 1.132-4 (c) Grandfather rule for telephone service provided to pre-
divestiture retirees.
Sec. 1.132-4 (d) Special rule for certain affiliates of commercial
airlines.
(1) General rule.
(2) ``Airline affiliated group'' defined.
(3) ``Qualified affiliate'' defined.
Sec. 1.132-4 (e) Grandfather rule for affiliated groups operating
airlines.
Sec. 1.132-4 (f) Special rule for qualified air transportation
organizations.
Sec. 1.132-4 (g) Relaxation of line of business requirement.
Sec. 1.132-4 (h) Line of business requirement does not expand benefits
eligible for exclusion.
Sec. 1.132-5 Working condition fringes.
Sec. 1.132-5 (a) In general.
(1) Definition.
(2) Trade or business of the employee.
Sec. 1.132-5 (b) Vehicle allocation rules.
(1) In general.
(2) Use of different employer-provided vehicles.
(3) Provision of a vehicle and chauffeur services.
Sec. 1.132-5 (c) Applicability of substantiation requirements of
sections 162 and 274(d).
(1) In general.
(2) Section 274(d) requirements.
Sec. 1.132-5 (d) Safe harbor substantiation rules.
(1) In general.
(2) Period for use of safe harbor rules.
Sec. 1.132-5 (e) Safe harbor substantiation rule for vehicles not used
for personal purposes.
Sec. 1.132-5 (f) Safe harbor substantiation rule for vehicles not
available to employees for personal use other than commuting.
Sec. 1.132-5 (g) Safe harbor substantiation rule for vehicles used in
connection with the business of farming that are available to
employees for personal use.
(1) In general.
(2) Vehicles available to more than one individual.
(3) Examples.
Sec. 1.132-5 (h) Qualified nonpersonal use vehicles.
(1) In general.
(2) Shared usage of qualified nonpersonal use vehicles.
Sec. 1.132-5 (i) [Reserved]
Sec. 1.132-5 (j) Application of section 280F.
Sec. 1.132-5 (k) Aircraft allocation rule.
Sec. 1.132-5 (l) [Reserved]
Sec. 1.132-5 (m) Employer-provided transportation for security concerns.
(1) In general.
(2) Demonstration of bona fide business-oriented security concerns.
(3) Application of security rules to spouses and dependents.
(4) Working condition safe harbor for travel on employer-provided
aircraft.
(5) Bodyguard/chauffeur provided for a bona fide business-oriented
security concern.
(6) Special valuation rule for government employees.
(7) Government employer and employee defined.
(8) Examples.
Sec. 1.132-5 (n) Product testing.
(1) In general.
(2) Employer-imposed limits.
(3) Discriminating classifications.
(4) Factors that negate the existence of a product testing program.
(5) Failure to meet the requirements of this paragraph (n).
(6) Example.
Sec. 1.132-5 (o) Qualified automobile demonstration use.
(1) In general.
(2) Full-time automobile salesman.
(3) Demonstration automobile.
(4) Substantial restrictions on personal use.
(5) Sales area.
(6) Applicability of substantiation requirements of sections 162 and
274(d).
(7) Special valuation rules.
Sec. 1.132-5 (p) Parking.
(1) In general.
(2) Reimbursement of parking expenses.
(3) Parking on residential property.
(4) Dates of applicability.
Sec. 1.132-5 (q) Nonapplicability of nondiscrimination rules.
Sec. 1.132-5 (r) Volunteers.
(1) In general.
(2) Limit on application of this paragraph.
(3) Definitions.
(4) Example.
Sec. 1.132-6 De minimis fringes.
Sec. 1.132-6 (a) In general.
Sec. 1.132-6 (b) Frequency.
(1) Employee-measured frequency.
(2) Employer-measured frequency.
Sec. 1.132-6 (c) Administrability.
Sec. 1.132-6 (d) Special rules.
(1) Transit passes.
(2) Occasional meal money or local transportation fare.
(3) Use of special rules or examples to establish a general rule.
(4) Benefits exceeding value and frequency limits.
Sec. 1.132-6 (e) Examples.
(1) Benefits excludable from income.
(2) Benefits not excludable as de minimis fringes.
Sec. 1.132-6 (f) Nonapplicability of nondiscrimination rules.
[[Page 526]]
Sec. 1.132-7 Employer-operated eating facilities.
Sec. 1.132-7 (a) In general.
(1) Conditions for exclusion.
(2) Employer-operated eating facility for employees.
(3) Operation by the employer.
(4) Example.
Sec. 1.132-7 (b) Direct operating costs.
(1) In general.
(2) Multiple dining rooms or cafeterias.
(3) Payment to operator of facility.
Sec. 1.132-7 (c) Valuation of non-excluded meals provided at an
employer-operated eating facility for employees.
Sec. 1.132-8 Fringe benefit nondiscrimination rules.
Sec. 1.132-8 (a) Application of nondiscrimination rules.
(1) General rule.
(2) Consequences of discrimination.
(3) Scope of the nondiscrimination rules provided in this section.
Sec. 1.132-8 (b) Aggregation of Employees.
(1) Section 132(a) (1) and (2).
(2) Section 132(e)(2).
(3) Classes of employees who may be excluded.
Sec. 1.132-8 (c) Availability on substantially the same terms.
(1) General rule.
(2) Certain terms relating to priority.
Sec. 1.132-8 (d) Testing for discrimination.
(1) Classification test.
(2) Classifications that are per se discriminatory.
(3) Former employees.
(4) Restructuring of benefits.
(5) Employer-operated eating facilities for employees.
Sec. 1.132-8 (e) Cash bonuses or rebates.
Sec. 1.132-8 (f) Highly compensated employee.
(1) Government and non-government employees.
(2) Former employees.
Sec. 1.132-9 Qualified transportation fringes.
Sec. 1.132-9 (a) Table of contents.
Sec. 1.132-9 (b) Questions and answers.
[T.D. 8256, 54 FR 28600, July 6, 1989, as amended by T.D. 8457, 57 FR
62196, Dec. 30, 1992]
Sec. 1.132-1 Exclusion from gross income for certain fringe benefits.
(a) In general. Gross income does not include any fringe benefit
which qualifies as a--
(1) No-additional-cost service,
(2) Qualified employee discount,
(3) Working condition fringe, or
(4) De minimis fringe.
Special rules apply with respect to certain on-premises gyms and other
athletic facilities (Sec. 1.132-1(e)), demonstration use of employer-
provided automobiles by full-time automobile salesmen (Sec. 1.132-5(o)),
parking provided to an employee on or near the business premises of the
employer (Sec. 1.132-5(p)), and on-premises eating facilities
(Sec. 1.132-7).
(b) Definition of employee--(1) No-additional-cost services and
qualified employee discounts. For purposes of section 132(a)(1)
(relating to no-additonal-cost services) and section 132(a)(2) (relating
to qualified employee discounts), the term ``employee'' (with respect to
a line of business of an employer means--
(i) Any individual who is currently employed by the employer in the
line of business,
(ii) Any individual who was formerly employed by the employer in the
line of business and who separated from service with the employer in the
line of business by reason of retirement or disability, and
(iii) Any widow or widower of an individual who died while employed
by the employer in the line of business or who separated from service
with the employer in the line of business by reason of retirement or
disability.
For purposes of this paragraph (b)(1), any partner who performs services
for a partnership is considered employed by the partnership. In
addition, any use by the spouse or dependent child (as defined in
paragraph (b)(5) of this section) of the employee will be treated as use
by the employee. For purposes of section 132(a)(1) (relating to no-
additional-cost services), any use of air transportation by a parent of
an employee (determined without regard to section 132(f)(1)(B) and
paragraph (b)(1)(iii) of this section) will be treated as use by the
employee.
(2) Working condition fringes. For purposes of section 132(a)(3)
(relating to working condition fringes), the term ``employee'' means--
(i) Any individual who is currently employed by the employer,
(ii) Any partner who performs services for the partnership,
(iii) Any director of the employer, and
(iv) Any independent contractor who performs services for the
employer.
Notwithstanding anything in this paragraph (b)(2) to the contrary, an
independent contractor who performs services for the employer cannot
exclude
[[Page 527]]
the value of parking or the use of consumer goods provided pursuant to a
product testing program under Sec. 1.132-5(n); in addition, any director
of the employer cannot exclude the value of the use of consumer goods
provided pursuant to a product testing program under Sec. 1.132-5(n).
(3) On-premises athletic facilities. For purposes of section
132(h)(5) (relating to on-premises athletic facilities), the term
``employee'' means--
(i) Any individual who is currently employed by the employer,
(ii) Any individual who was formerly employed by the employer and
who separated from service with the employer by reason of retirement or
disability, and
(iii) Any widow or widower of an individual who died while employed
by the employer or who separated from service with the employer by
reason of retirement or disability.
For purposes of this paragraph (b)(3), any partner who performs services
for a partnership is considered employed by the partnership. In
addition, any use by the spouse or dependent child (as defined in
paragraph (b)(5) of this section) of the employee will be treated as use
by the employee.
(4) De minimis fringes. For purposes of section 132(a)(4) (relating
to de minimis fringes), the term ``employee'' means any recipient of a
fringe benefit.
(5) Dependent child. The term ``dependent child'' means any son,
stepson, daughter, or stepdaughter of the employee who is a dependent of
the employee, or both of whose parents are deceased and who has not
attained age 25. Any child to whom section 152(e) applies will be
treated as the dependent of both parents.
(c) Special rules for employers--Effect of section 414. All
employees treated as employed by a single employer under section 414
(b), (c), (m), or (o) will be treated as employed by a single employer
for purposes of this section. Thus, employees of one corporation that is
part of a controlled group of corporations may under certain
circumstances be eligible to receive section 132 benefits from the other
corporations that comprise the controlled group. However, the
aggregation of employers described in this paragraph (c) does not change
the other requirements for an exclusion, such as the line of business
requirement. Thus, for example, if a controlled group of corporations
consists of two corporations that operate in different lines of
business, the corporations are not treated as operating in the same line
of business even though the corporations are treated as one employer.
(d) Customers not to include employees. For purposes of section 132
and the regulations thereunder, the term ``customer'' means any customer
who is not an employee. However, the preceding sentence does not apply
to section 132(c)(2) (relating to the gross profit percentage for
determining a qualified employee discount). Thus, an employer that
provides employee discounts cannot exclude sales made to employees in
determining the aggregate sales to customers.
(e) Treatment of on-premises athletic facilities--(1) In general.
Gross income does not include the value of any on-premises athletic
facility provided by an employer to its employees. For purposes of
section 132(h)(5) and this paragraph (e), the term ``on-premises
athletic facility'' means any gym or other athletic facility (such as a
pool, tennis court, or golf course)--
(i) Which is located on the premises of the employer, (ii) Which is
operated by the employer, and (iii) Substantially all of the use of
which during the calendar year is by employees of the employer, their
spouses, and their dependent children.
For purposes of paragraph (e) (1) (iii) of this section, the term
``dependent children'' has the same meaning as the plural of the term
``dependent child'' in paragraph (b)(5) of this section. The exclusion
of this paragraph (e) does not apply to any athletic facility if access
to the facility is made available to the general public through the sale
of memberships, the rental of the facility, or a similar arrangement.
(2) Premises of the employer. The athletic facility need not be
located on the employer's business premises. However, the athletic
facility must be located on premises of the employer. The exclusion
provided in this paragraph (e) applies whether the premises are owned or
leased by the employer; in addition,
[[Page 528]]
the exclusion is available even if the employer is not a named lessee on
the lease so long as the employer pays reasonable rent. The exclusion
provided in this paragraph (e) does not apply to any athletic facility
that is a facility for residential use. Thus, for example, a resort with
accompanying athletic facilities (such as tennis courts, pool, and gym)
would not qualify for the exclusion provided in this paragraph (e). An
athletic facility is considered to be located on the employer's premises
if the facility is located on the premises of a voluntary employees'
beneficiary association funded by the employer.
(3) Application of rules to membership in an athletic facility. The
exclusion provided in this paragraph (e) does not apply to any
membership in an athletic facility (including health clubs or country
clubs) unless the facility is owned (or leased) and operated by the
employer and substantially all the use of the facility is by employees
of the employer, their spouses, and their dependent children. Therefore,
membership in a health club or country club not meeting the rules
provided in this paragraph (e) would not qualify for the exclusion.
(4) Operation by the employer. An employer is considered to operate
the athletic facility if the employer operates the facility through its
own employees, or if the employer contracts out to another to operate
the athletic facility. For example, if an employer hires an independent
contractor to operate the athletic facility for the employer's
employees, the facility is considered to be operated by the employer. In
addition, if an athletic facility is operated by more than one employer,
it is considered to be operated by each employer. For purposes of
paragraph (e) (1) (iii) of this section, substantially all of the use of
a facility that is operated by more than one employer must be by
employees of the various employers, their spouses, and their dependent
children. Where the facility is operated by more than one employer, an
employer that pays rent either directly to the owner of the premises or
to a sublessor of the premises is eligible for the exclusion. If an
athletic facility is operated by a voluntary employees' beneficiary
association funded by an employer, the employer is considered to operate
the facility.
(5) Nonapplicability of nondiscrimination rules. The
nondiscrimination rules of section 132 and Sec. 1.132-8 do not apply to
on-premises athletic facilities.
(f) Nonapplicability of section 132 in certain cases--(1) Tax
treatment provided for in another section. If the tax treatment or a
particular fringe benefit is expressly provided for in another section
of Chapter 1 of the Internal Revenue Code of 1986, section 132 and the
applicable regulations (except for section 132 (e) and the regulations
thereunder) do not apply to such fringe benefit. For example, because
section 129 provides an exclusion from gross income for amounts paid or
incurred by an employer for dependent care assistance for an employee,
the exclusions under section 132 and this section do not apply to the
provision by an employer to an employee of dependent care assistance.
Similarly, because section 117 (d) applies to tuition reductions, the
exclusions under section 132 do not apply to free or discounted tuition
provided to an employee by an organization operated by the employer,
whether the tuition is for study at or below the graduate level. Of
course, if the amounts paid by the employer are for education relating
to the employee's trade or business of being an employee of the employer
so that, if the employee paid for the education, the amount paid could
be deducted under section 162, the costs of the education may be
eligible for exclusion as a working condition fringe.
(2) Limited statutory exclusions. If another section of Chapter 1 of
the Internal Revenue Code of 1986 provides an exclusion from gross
income based on the cost of the benefit provided to the employee and
such exclusion is a limited amount, section 132 and the regulations
thereunder may apply to the extent the cost of the benefit exceeds the
statutory exclusion.
(g) Effective date. Sections 1.132-0, 1.132-1, 1.132-2, 1.132-3,
1.132-4, 1.132-5, 1.132-6, 1.132-7 and 1.132-8 are effective as of
January 1, 1989, except that Secs. 1.132-1(b)(1) with respect to the use
of air transportation by a parent of an employee and 1.132-4(d) are
effective as of January 1, 1985. Furthermore, in
[[Page 529]]
Sec. 1.132-5, the eleventh sentence of paragraph (m)(1), Examples 6 and
7 in paragraph (m)(8), and paragraphs (m)(2)(i), (m)(2)(v), (m)(3)(iv),
(m)(6), (m)(7), and (r) are effective December 30, 1992; however,
taxpayers may treat the rules as applicable to benefits provided on or
after January 1, 1989. For the applicable rules relating to employer-
provided transportation for security concerns prior to December 30,
1992, see Sec. 1.132-5(m) (as contained in 26 CFR part 1 (Secs. 1.61 to
1.169) revised April 1, 1992). See Secs. 1.132-1T, 1.132-2T, 1.132-3T,
1.132-4T, 1.132-5T, 1.132-6T, 1.132-7T and 1.132-8T for rules in effect
for benefits received from January 1, 1985, to December 31, 1988.
[T.D. 8256, 54 FR 28601, July 6, 1989, as amended by T.D. 8457, 57 FR
62196, Dec. 30, 1992; 58 FR 7296, Feb. 5, 1993]
Sec. 1.132-1T Exclusion from gross income of certain fringe benefits--1985 through 1988 (temporary).
(a) In general. Gross income does not include any fringe benefit
which qualifies as a--
(1) No-additional-cost service,
(2) Qualified employee discount,
(3) Working condition fringe, or
(4) De minimis fringe.
Special rules apply with respect to certain on-premises gyms and other
athletic facilities (Sec. 1.132-1T(e)), demonstration use of employer-
provided automobiles by full-time automobile salesmen (Sec. 1.132-
1T(n)), parking provided to an employee on or near the business premises
of the employer (Sec. 1.132-5T(o)), and on-premises eating facilities
(Sec. 1.132-7T).
(b) Definition of employee--(1) No-additional-cost services and
qualified employee discounts. For purposes of section 132(a)(1)
(relating to no-additional-cost services) and section 132(a)(2)
(relating to qualified employee discounts), the term ``employee'' (with
respect to a line of business of an employer) means--
(i) Any individual who is currently employed by the employer in the
line of business,
(ii) Any individual who was formerly employed by the employer in the
line of business and who separated from service with the employer in the
line of business by reason of retirement or disability, and
(iii) Any widow or widower of an individual who died while employed
by the employer in the line of business or who separated from service
with the employer in the line of business by reason of retirement or
disability.
For purposes of this paragraph (b)(1), any partner who performs services
for a partnership is considered employed by the partnership. In
addition, any use by the spouse or dependent child (as defined in this
paragraph (b)) of the employee will be treated as use by the employee.
(2) Working condition fringes. For purposes of section 132(a)(2)
(relating to working condition fringes), the term ``employee'' means--
(i) Any individual who is currently employed by the employer,
(ii) Any partner who performs services for the partnership,
(iii) Any director of the employer, and
(iv) Any independent contractor who performs services for the
employer.
Notwithstanding anything in this paragraph (b)(2) to the contrary, any
independent contractor who performs services for the employer cannot
exclude the value of parking or the use of consumer goods provided
pursuant to a product testing program under Sec. 1.132-5T (n); in
addition, any director of the employer cannot exclude the value of the
use of consumer goods provided pursuant to a product testing program
under Sec. 1.132-5T (n).
(3) De minimis fringe. For purpose of section 132(a)(4) (relating to
de minimis fringes), the term ``employee'' means any recipient of a
fringe benefit.
(4) Dependent child. For purposes of this paragraph (b), the term
``dependent child'' means any son, stepson, daughter or stepdaughter of
the employee who is a dependent of the employee, or both of whose
parents are deceased. Any child to whom section 152(e) applies will be
treated as the dependent of both parents.
(c) Special rules for employers--Effect of section 414. All
employees treated as employed by a single employer under section 414(b),
(c) or (m) will be treated as employed by a single employer for
[[Page 530]]
purposes of this section. Thus, employees of one corporation that is
part of a controlled group of corporations may under certain
circumstances be eligible to receive section 132 benefits from the other
corporations that comprise the controlled group. However, the
aggregation of employers described in this paragraph (c) does not change
the other requirements for an exclusion, such as the line of business
requirement. Thus, for example, if a controlled group of corporations
consists of two corporations that operate in different lines of
business, the corporations are not treated as operating in the same line
of business even though the corporations are treated as one employer.
(d) Customers not to include employees. For purposes of section 132
and the regulations thereunder, the term ``customer'' means customers
who are not employees. However, the preceding sentence does not apply to
section 132(c)(2) (relating to the gross profit percentage for
determining a qualified employee discount). Thus, an employer that
provides employee discounts cannot exclude sales made to employees in
determining the aggregate sales to customers.
(e) Treatment of on-premises athletic facilities--(1) In general.
Gross income does not include the value of any on-premises athletic
facility provided by the employer to its employees. For purposes of
section 132 and this paragraph (e), the term ``on-premises athletic
facility'' means any gym or other athletic facility (such as a pool,
tennis court, or golf course)--
(i) Which is located on the premises of the employer,
(ii) Which is operated by the employer, and
(iii) Where substantially all of the use of which is, during the
calendar year, by employees of the employer, their spouses, and their
dependent children.
For purposes of this paragraph (e)(1)(iii), the term ``dependent
children'' has the same meaning as the plural of the term ``dependent
child'' in paragraph (b)(4) of this section. The exclusion of this
paragraph (e) does not apply to any athletic facility if access to the
facility is made available to the general public through the sale of
memberships, the rental of the facility, etc.
(2) Premises of the employer. The athletic facility need not be
located on the employer's business premises. However, the athletic
facility must be located on premises of the employer. The exclusion
provided in this paragraph (e) applies whether the premises are owned or
leased by the employer; in addition, the exclusion is available even if
the employer is not a named lesse on the lease so long as the employer
pays reasonable rent. The exclusion provided in this paragraph (e) does
not apply to any athletic facility that is a facility for residential
use. Thus, for example, a resort with accompanying athletic facilities
(such as tennis courts, pool, and gym) would not qualify for the
exclusion provided in this paragraph (e).
(3) Application of rules to membership in an athletic facility. The
exclusion provided in this paragraph (e) does not apply to any
membership in an athletic facility (including health clubs or country
clubs) unless the facility is owned (or leased) and operated by the
employer and substantially all the use of the facility is by employees
of the employer, their spouses, and their dependent children. Therefore,
membership in health club or country club not meeting the rules provided
in this paragraph (e) would not quality for the exclusion.
(4) Operation by the employer. An employer is considered to operate
the athletic facility if the employer itself operates the facility
through its own employees, or if the employer contracts out to another
to operate the athletic facility. For example, if an employer hires an
independent contractor to operate the athletic facility for the
employer's employees, the facility is considered to be operated by the
employer. In addition, if an athletic facility is operated by more than
one employer, it is considered to be operated by each employer. For
purposes of paragraph (e)(1)(iii) of this section, substantially all the
use of a facility operated by more than one employer must be by
employees of all of the employers, their spouses, and their dependent
children. Where the facility is operated by more than one employer, an
employer
[[Page 531]]
that either pays rent directly to the owner of the premises or pays rent
to a named lessor of the premises is eligible for the exclusion.
(5) Nonapplicability of nondiscrimination rules. The
nondiscrimination rules of section 132 and Sec. 1.132-8T do not apply to
on-premises athletic facilities.
(f) Nonapplicability of section 132. If the tax treatment of a
particular fringe benefit is expressely provided for in another section
of Chapter 1, section 132 and the applicable regulations (except for
section 132 (e) and the regulations thereunder) do not apply to such
fringe benefits. For example, since section 129 provides an exclusion
from gross income for amounts paid or incurred by the employer for
dependent care assistance for an employee, the exclusions under section
132 and this section do not apply to the provision by an employer to an
employee of dependent care assistance.
[T.D. 8063, 50 FR 52297, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-2 No-additional-cost services.
(a) In general--(1) Definition. Gross income does not include the
value of a no-additional-cost service. A ``no-additional-cost service''
is any service provided by an employer to an employee for the employee's
personal use if--
(i) The service is offered for sale by the employer to its customers
in the ordinary course of the line of business of the employer in which
the employee performs substantial services, and
(ii) The employer incurs no substantial additional cost in providing
the service to the employee (including foregone revenue and excluding
any amount paid by or on behalf of the employee for the service).
For rules relating to the line of business limitation, see Sec. 1.132-4.
For purposes of this section, a service will not be considered to be
offered for sale by the employer to its customers if that service is
primarily provided to employees and not to the employer's customers.
(2) Excess capacity services. Services that are eligible for
treatment as no-additional-cost services include excess capacity
services such as hotel accommodations; transportation by aircraft,
train, bus, subway, or cruise line; and telephone services. Services
that are not eligible for treatment as no-additional-cost services are
non-excess capacity services such as the facilitation by a stock
brokerage firm of the purchase of stock. Employees who receive non-
excess capacity services may, however, be eligible for a qualified
employee discount of up to 20 percent of the value of the service
provided. See Sec. 1.132-3.
(3) Cash rebates. The exclusion for a no-additional-cost service
applies whether the service is provided at no charge or at a reduced
price. The exclusion also applies if the benefit is provided through a
partial or total cash rebate of an amount paid for the service.
(4) Applicability of nondiscrimination rules. The exclusion for a
no-additional-cost service applies to highly compensated employees only
if the service is available on substantially the same terms to each
member of a group of employees that is defined under a reasonable
classification set up by the employer that does not discriminate in
favor of highly compensated employees. See Sec. 1.132-8.
(5) No substantial additional cost--(i) In general. The exclusion
for a no-additional-cost service applies only if the employer does not
incur substantial additional cost in providing the service to the
employee. For purposes of the preceding sentence, the term ``cost''
includes revenue that is forgone because the service is provided to an
employee rather than a nonemployee. (For purposes of determining whether
any revenue is forgone, it is assumed that the employee would not have
purchased the service unless it were available to the employee at the
actual price charged to the employee.) Whether an employer incurs
substantial additional cost must be determined without regard to any
amount paid by the employee for the service. Thus, any reimbursement by
the employee for the cost of providing the service does not affect the
determination of whether the employer incurs substantial additional
cost.
(ii) Labor intensive services. An employer must include the cost of
labor
[[Page 532]]
incurred in providing services to employees when determining whether the
employer has incurred substantial additional cost. An employer incurs
substantial additional cost, whether non-labor costs are incurred, if a
substantial amount of time is spent by the employer or its employees in
providing the service to employees. This would be the result whether the
time spent by the employer or its employees in providing the services
would have been ``idle,'' or if the services were provided outside
normal business hours. An employer generally incurs no substantial
additional cost, however, if the services provided to the employee are
merely incidental to the primary service being provided by the employer.
For example, the in-flight services of a flight attendant and the cost
of in-flight meals provided to airline employees traveling on a space-
available basis are merely incidental to the primary service being
provided (i.e., air transportation). Similarly, maid service provided to
hotel employees renting hotel rooms on a space-available basis is merely
incidental to the primary service being provided (i.e., hotel
accommodations).
(6) Payments for telephone service. Payment made by an entity
subject to the modified final judgment (as defined in section 559(c)(5)
of the Tax Reform Act of 1984) of all or part of the cost of local
telephone service provided to an employee by a person other than an
entity subject to the modified final judgment shall be treated as
telephone service provided to the employee by the entity making the
payment for purposes of this section. The preceding sentence also
applies to a rebate of the amount paid by the employee for the service
and a payment to the person providing the service. This paragraph (a)(6)
applies only to services and employees described in Sec. 1.132-4 (c).
For a special line of business rule relating to such services and
employees, see Sec. 1.132-4 (c).
(b) Reciprocal agreements. For purposes of the exclusion from gross
income for a no-additional-cost service, an exclusion is available to an
employee of one employer for a no-additional-cost service provided by an
unrelated employer only if all of the following requirements are
satisfied--
(1) The service provided to such employee by the unrelated employer
is the same type of service generally provided to nonemployee customers
by both the line of business in which the employee works and the line of
business in which the service is provided to such employee (so that the
employee would be permitted to exclude from gross income the value of
the service if such service were provided directly by the employee's
employer);
(2) Both employers are parties to a written reciprocal agreement
under which a group of employees of each employer, all of whom perform
substantial services in the same line of business, may receive no-
additional-cost services from the other employer; and
(3) Neither employer incurs any substantial additional cost
(including forgone revenue) in providing such service to the employees
of the other employer, or pursuant to such agreement. If one employer
receives a substantial payment from the other employer with respect to
the reciprocal agreement, the paying employer will be considered to have
incurred a substantial additional cost pursuant to the agreement, and
consequently services performed under the reciprocal agreement will not
qualify for exclusion as no-additional-cost services.
(c) Example. The rules of this section are illustrated by the
following example:
Example. Assume that a commercial airline permits its employees to
take personal flights on the airline at no charge and receive reserved
seating. Because the employer forgoes potential revenue by permitting
the employees to reserve seats, employees receiving such free flights
are not eligible for the no-additional-cost exclusion.
[T.D. 8256, 54 FR 28602, July 6, 1989]
Sec. 1.132-2T No-additional-cost service--1985 through 1988 (temporary).
(a) In general--(1) Definition. Gross income does not include the
value of a no-additional-cost service. The term ``no-additional-cost
service'' means any service provided by an employer to an employee for
the employee's personal use if--
(i) The service is offered for sale to customers in the ordinary
course of the line of business of the employer in
[[Page 533]]
which the employee performs substantial services, and
(ii) The employer incurs no substantial additional cost in providing
the service to the employee (including forgone revenue and excluding any
amount paid by or on behalf of the employee for the service).
For rules relating to the line of business limitation, see Sec. 1.132-
4T.
(2) Examples. Services that are eligible for treatment as no-
additional-cost services are excess capacity services such as hotel
accommodations; transportation by aircraft, train, bus, subway, or
cruise line; and telephone services. Services that are not eligible for
treatment as no-additonal-cost services are non-excess capacity services
such as the facilitation by a stock brokerage firm of the purchase of
stock. Employees who receive non-excess capacity services may, however,
be eligible for a qualified employee discount of up to 20 percent of the
value of the service provided. See Sec. 1.132-3T.
(3) Cash rebates. The exclusion for a no-additional-cost service
applies whether the service is provided at no charge or at a reduced
price. The exclusion also applies if the benefit is provided through a
partial or total cash rebate of an amount paid for the service.
(4) Applicability of nondiscrimination rules. The exclusion for a
no-additional-cost service applies to officers, owners, and highly
compensated employees only if the service is available on substantially
the same terms to each member of a group of employees that is defined
under a reasonable classification set up by the employer that does not
discriminate in favor of officers, owners, or highly compensated
employees. See Sec. 1.132-8T.
(5) No substantial additional cost--(i) In general. The exclusion
for a non-additional-cost service applies only if the employer does not
incur substantial additional cost in providing the service to the
employee. For purposes of the preceding sentence, the term ``cost''
includes revenue that is forgone because the service is provided to an
employee rather than a nonemployee. (For purposes of determining whether
any revenue is forgone, it is assumed that the employee would not have
purchased the service unless it were available to the employee at the
actual price charged to the employee.) Whether an employer incurs
substantial additional cost must be determined without regard to any
amount paid by the employee for the service. Thus, any reimbursement by
the employee for the cost of providing the service does not affect the
determination of whether the employer incurs substantial additional
cost.
(ii) Labor intensive services. An employer must include the cost of
labor incurred in providing services to employees when determining
whether the employer has incurred substantial additional cost. An
employer has incurred substantial additional cost. An employer incurs
substantial additional cost, whether or not non-labor costs are
incurred, if a substantial amount of time is spent by the employer or
its employees in providing the service to employees. This would be the
result whether or not the time spent by the employer or its employees in
providing the services would have been ``idle'', or if the services were
provided outside normal business hours. An employer generally incurs no
substantial additional cost, however, if the employee services provided
are merely incidental to the primary service being provided by the
employer. For example, the in-flight services of a flight attendant
provided to airline employees traveling on a space-available basis are
merely incidental to the primary service being provided (i.e., air
transportation). In addition, the cost of in-flight meals provided to
airline employees is not considered substantial in relation to the air
transportation being provided.
(b) Reciprocal agreements. For purposes of the exclusion for a no-
additional-cost service, any service provided by an employer to an
employee of another employer shall be treated as provided by the
employer of such employee if all of the following requirements are
satisfied:
(1) The service is provided pursuant to a written reciprocal
agreement between the employers under which a group of employees of each
employer, all of whom perform substantial services in the same line of
business, may
[[Page 534]]
receive no-additional-cost services from the other employer;
(2) The service provided pursuant to the agreement to the employees
of both employers is the same type of service provided by the employers
to customers both in the line of business in which the employees perform
substantial services and the line of business in which the service is
provided to customers; and
(3) Neither employer incurs substantial additional cost (including
forgone revenue) in providing the service to the employees of the other
employer or pursuant to the agreement.
If one employer receives a substantial payment from the other employer
with respect to the reciprocal agreement, the paying employer will be
considered to have incurred a substantial additional cost pursuant to
the agreement.
[T.D. 8063, 50 FR 52298, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-3 Qualified employee discounts.
(a) In general--(1) Definition. Gross income does not include the
value of a qualified employee discount. A ``qualified employee
discount'' is any employee discount with respect to qualified property
or services provided by an employer to an employee for use by the
employee to the extent the discount does not exceed--
(i) The gross profit percentage multiplied by the price at which the
property is offered to customers in the ordinary course of the
employer's line of business, for discounts on property, or
(ii) Twenty percent of the price at which the service is offered to
customers, for discounts on services.
(2) Qualified property or services--(i) In general. The term
``qualified property or services'' means any property or services that
are offered for sale to customers in the ordinary course of the line of
business of the employer in which the employee performs substantial
services. For rules relating to the line of business limitation, see
Sec. 1.132-4.
(ii) Exception for certain property. The term ``qualified property''
does not include real property and it does not include personal property
(whether tangible or intangible) of a kind commonly held for investment.
Thus, an employee may not exclude from gross income the amount of an
employee discount provided on the purchase of securities, commodities,
or currency, or of either residential or commercial real estate, whether
or not the particular purchase is made for investment purposes.
(iii) Property and services not offered in ordinary course of
business. The term ``qualified property or services'' does not include
any property or services of a kind that is not offered for sale to
customers in the ordinary course of the line of business of the
employer. For example, employee discounts provided on property or
services that are offered for sale primarily to employees and their
families (such as merchandise sold at an employee store or through an
employer-provided catalog service) may not be excluded from gross
income. For rules relating to employer-operated eating facilities, see
Sec. 1.132-7, and for rules relating to employer-operated on-premises
athletic facilities, see Sec. 1.132-1(e).
(3) No reciprocal agreement exception. The exclusion for a qualified
employee discount does not apply to property or services provided by
another employer pursuant to a written reciprocal agreement that exists
between employers to provide discounts on property and services to
employees of the other employer.
(4) Property or services provided without charge, at a reduced
price, or by rebates. The exclusion for a qualified employee discount
applies whether the property or service is provided at no charge (in
which case only part of the discount may be excludable as a qualified
employee discount) or at a reduced price. The exclusion also applies if
the benefit is provided through a partial or total cash rebate of an
amount paid for the property or service.
(5) Property or services provided directly by the employer or
indirectly through a third party. A qualified employee discount may be
provided either directly by the employer or indirectly through a third
party. For example, an employee of an appliance manufacturer may receive
a qualified employee discount on the manufacturer's appliances purchased
at a retail store that offers
[[Page 535]]
such appliances for sale to customers. The employee may exclude the
amount of the qualified employee discount whether the employee is
provided the appliance at no charge or purchases it at a reduced price,
or whether the employee receives a partial or total cash rebate from
either the employer-manufacturer or the retailer. If an employee
receives additional rights associated with the property that are not
provided by the employee's employer to customers in the ordinary course
of the line of business in which the employee performs substantial
services (such as the right to return or exchange the property or
special warranty rights), the employee may only receive a qualified
employee discount with respect to the property and not the additional
rights. Receipt of such additional rights may occur, for example, when
an employee of a manufacturer purchases property manufactured by the
employee's employer at a retail outlet.
(6) Applicability of nondiscrimination rules. The exclusion for a
qualified employee discount applies to highly compensated employees only
if the discount is available on substantially the same terms to each
member of a group of employees that is defined under a reasonable
classification set up by the employer that does not discriminate in
favor of highly compensated employees. See Sec. 1.132-8.
(b) Employee discount--(1) Definition. The term ``employee
discount'' means the excess of--
(i) The price at which the property or service is being offered by
the employer for sale to customers, over
(ii) The price at which the property or service is provided by the
employer to an employee for use by the employee. A transfer of property
by an employee without consideration is treated as use by the employee
for purposes of this section. Thus, for example, if an employee receives
a discount on property offered for sale by his employer to customers and
the employee makes a gift of the property to his parent, the property
will be considered to be provided for use by the employee; thus, the
discount will be eligible for exclusion as a qualified employee
discount.
(2) Price to customers--(i) Determined at time of sale. In
determining the amount of an employee discount, the price at which the
property or service is being offered to customers at the time of the
employee's purchase is controlling. For example, assume that an employer
offers a product to customers for $20 during the first six months of a
calendar year, but at the time the employee purchases the product at a
discount, the price at which the product is being offered to customers
is $25. In this case, the price from which the employee discount is
measured is $25. Assume instead that, at the time the employee purchases
the product at a discount, the price at which the product is being
offered to customers is $15 and the price charged the employee is $12.
The employee discount is measured from $15, the price at which the
product is offered for sale to customers at the time of the employee
purchase. Thus, the employee discount is $15 -$12, or $3.
(ii) Quantity discount not reflected. The price at which a property
or service is being offered to customers cannot reflect any quantity
discount unless the employee actually purchases the requisite quantity
of the property or service.
(iii) Price to employer's customers controls. In determining the
amount of an employee discount, the price at which a property or service
is offered to customers of the employee's employer is controlling. Thus,
the price at which the property is sold to the wholesale customers of a
manufacturer will generally be lower than the price at which the same
property is sold to the customers of a retailer. However, see paragraph
(a)(5) of this section regarding the effect of a wholesaler providing to
its employees additional rights not provided to customers of the
wholesaler in the ordinary course of its business.
(iv) Discounts to discrete customer or consumer groups. Subject to
paragraph (2)(ii) of this section, if an employer offers for sale
property or services at one or more discounted prices to discrete
customer or consumer groups, and
[[Page 536]]
sales at all such discounted prices comprise at least 35 percent of the
employer's gross sales for a representative period, then in determining
the amount of an employee discount, the price at which such property or
service is being offered to customers for purposes of this section is a
discounted price. The applicable discounted price is the current
undiscounted price, reduced by the percentage discount at which the
greatest percentage of the employer's discounted gross sales are made
for such representative period. If sales at different percentage
discounts equal the same percentage of the employer's gross sales, the
price at which the property or service is being provided to customers
may be reduced by the average of the discounts offered to each of the
two groups. For purposes of this section, a representative period is the
taxable year of the employer immediately preceding the taxable year in
which the property or service is provided to the employee at a discount.
If more than one employer would be aggregated under section 414 (b),
(c), (m), or (o), and not all of the employers have the same taxable
year, the employers required to be aggregated must designate the 12-
month period to be used in determining gross sales for a representative
period. The 12-month period designated, however, must be used on a
consistent basis.
(v) Examples. The rules provided in this paragraph (b)(2) are
illustrated by the following examples:
Example (1). Assume that a wholesale employer offers property for
sale to two discrete customer groups at differing prices. Assume further
that during the prior taxable year of the employer, 70 percent of the
employer's gross sales are made at a 15 percent discount and 30 percent
at no discount. For purposes of this paragraph (b)(2), the current
undiscounted price at which the property or service is being offered by
the employer for sale to customers may be reduced by the 15 percent
discount.
Example (2). Assume that a retail employer offers a 20 percent
discount to members of the American Bar Association, a 15 percent
discount to members of the American Medical Association, and a ten
percent discount to employees of the Federal Government. Assume further
that during the prior taxable year of the employer, sales to American
Bar Association members equal 15 percent of the employer's gross sales,
sales to American Medical Association members equal 20 percent of the
employer's gross sales, and sales to Federal Government employees equal
25 percent of the employer's gross sales. For purposes of this paragraph
(b)(2), the current undiscounted price at which the property or service
is being offered by the employer for sale to customers may be reduced by
the ten percent Federal Government discount.
(3) Damaged, distressed, or returned goods. If an employee pays at
least fair market value for damaged, distressed, or returned property,
such employee will not have income attributable to such purchase.
(c) Gross profit percentage--(1) In general--(i) General rule. An
exclusion from gross income for an employee discount on qualified
property is limited to the price at which the property is being offered
to customers in the ordinary course of the employer's line of business,
multiplied by the employer's gross profit percentage. The term ``gross
profit percentage'' means the excess of the aggregate sales price of the
property sold by the employer to customers (including employees) over
the employer's aggregate cost of the property, then divided by the
aggregate sales price.
(ii) Calculation of gross profit percentage. The gross profit
percentage must be calculated separately for each line of business based
on the aggregate sales price and aggregate cost of property in that line
of business for a representative period. For purposes of this section, a
representative period is the taxable year of the employer immediately
preceding the taxable year in which the discount is available. For
example, if the aggregate amount of sales of property in an employer's
line of business for the prior taxable year was $800,000, and the
aggregate cost of the property for the year was $600,000, the gross
profit percentage would be 25 percent ($800,000 minus $600,000, then
divided by $800,000). If two or more employers are required to aggregate
under section 414 (b), (c), (m), or (o) (aggregated employer), and if
all of the aggregated employers do not share the same taxable year, then
the aggregated employers must designate the 12-month period to be used
in determining the gross profit percentage. The 12-month period
designated, however, must be used on a consistent basis. If
[[Page 537]]
an employee performs substantial services in more than one line of
business, the gross profit percentage of the line of business in which
the property is sold determines the amount of the excludable employee
discount.
(iii) Special rule for employers in their first year of existence.
An employer in its first year of existence may estimate the gross profit
percentage of a line of business based on its mark-up from cost.
Alternatively, an employer in its first year of existence may determine
the gross profit percentage by reference to an appropriate industry
average.
(iv) Redetermination of gross profit percentage. If substantial
changes in an employer's business indicate at any time that it is
inappropriate for the prior year's gross profit percentage to be used
for the current year, the employer must, within a reasonable period,
redetermine the gross profit percentage for the remaining portion of the
current year as if such portion of the year were the first year of the
employer's existence.
(2) Line of business. In general, an employer must determine the
gross profit percentage on the basis of all property offered to
customers (including employees) in each separate line of business. An
employer may instead select a classification of property that is
narrower than the applicable line of business. However, the
classification must be reasonable. For example, if an employer computes
gross profit percentage according to the department in which products
are sold, such classification is reasonable. Similarly, it is reasonable
to compute gross profit percentage on the basis of the type of
merchandise sold (such as high mark-up and low mark-up classifications).
It is not reasonable, however, for an employer to classify certain low
mark-up products preferred by certain employees (such as highly
compensated employees) with high mark-up products or to classify certain
high mark-up products preferred by other employees with low mark-up
products.
(3) Generally accepted accounting principles. In general, the
aggregate sales price of property must be determined in accordance with
generally accepted accounting principles. An employer must compute the
aggregate cost of property in the same manner in which it is computed
for the employer's Federal income tax liability; thus, for example,
section 263A and the regulations thereunder apply in determining the
cost of property.
(d) Treatment of leased sections of department stores--(1) In
general--(i) General rule. For purposes of determining whether employees
of a leased section of a department store may receive qualified employee
discounts at the department store and whether employees of the
department store may receive qualified employee discounts at the leased
section of the department store, the leased section is treated as part
of the line of business of the person operating the department store,
and employees of the leased section are treated as employees of the
person operating the department store as well as employees of their
employer. The term ``leased section of a department store'' means a
section of a department store where substantially all of the gross
receipts of the leased section are from over-the-counter sales of
property made under a lease, license, or similar arrangement where it
appears to the general public that individuals making such sales are
employed by the department store. A leased section of a department store
which, in connection with the offering of beautician services,
customarily makes sales of beauty aids in the ordinary course of
business is deemed to derive substantially all of its gross receipts
from over-the-counter sales of property.
(ii) Calculation of gross profit percentage. For purposes of
paragraph (d) of this section, when calculating the gross profit
percentage of property and services sold at a department store, sales of
property and services sold at the department store, as well as sales of
property and services sold at the leased section, are considered. The
rule provided in the preceding sentence does not apply, however, if it
is more reasonable to calculate the gross profit percentage for the
department store and leased section separately, or if it would be
inappropriate to combine them (such as where either the department store
or the leased section but not both provides employee discounts).
[[Page 538]]
(2) Employees of the leased section--(i) Definition. For purposes of
this paragraph (d), ``employees of the leased section'' means all
employees who perform substantial services at the leased section of the
department store regardless of whether the employees engage in over-the-
counter sales of property or services. The term ``employee'' has the
same meaning as in section 132(f) and Sec. 1.132-1(b)(1).
(ii) Discounts offered to either department store employees or
employees of the leased section. If the requrements of this paragraph
(d) are satisfied, employees of the leased section may receive qualified
employee discounts at the department store whether or not employees of
the department store are offered discounts at the leased section.
Similarly, employees of the department store may receive a qualified
employee discount at the leased section whether or not employees of the
leased section are offered discounts at the department store.
(e) Excess discounts. Unless excludable under a provision of the
Internal Revenue Code of 1986 other than section 132(a)(2), an employee
discount provided on property is excludable to the extent of the gross
profit percentage multiplied by the price at which the property is being
offered for sale to customers. If an employee discount exceeds the gross
profit percentage, the excess discount is includible in the employee's
income. For example, if the discount on employer-purchased property is
30 percent and the employer's gross profit percentage for the period in
the relevant line of business is 25 percent, then 5 percent of the price
at which the property is being offered for sale to customers is
includible in the empoyee's income. With respect to services, an
employee discount of up to 20 percent may be excludable. If an employee
discount exceeds 20 percent, the excess discount is includible in the
employee's income. For example, assume that a commercial airline
provides a pass to each of its employees permitting the employees to
obtain a free round-trip coach ticket with a confirmed seat to any
destination the airline services. Neither the exclusion of section
132(a)(1) (relating to no-additional-cost services) nor any other
statutory exclusion applies to a flight taken primarily for personal
purposes by an employee under this program. However, an employee
discount of up to 20 percent may be excluded as a qualified employee
discount. Thus, if the price charged to customers for the flight taken
is $300 (under restrictions comparable to those actually placed on
travel associated with the employee airline ticket), $60 is excludible
from gross income as a qualified employee discount and $240 is
includible in gross income.
[T.D. 8256, 54 FR 28603, July 6, 1989]
Sec. 1.132-3T Qualified employee discount--1985 through 1988 (temporary).
(a) In general--(1) Definition. Gross income does not include the
value of a qualified employee discount. The term ``qualified employee
discount'' means any employee discount with respect to qualified
property or services provided by an employer to an employee for the
employee's personal use to the extent the discount does not exceed--
(i) The gross profit percentage of the price at which the property
is offered to customers, for discounts on property, or
(ii) 20 percent of the price at which the services are offered to
customers, for discounts on services.
(2) Qualified property or services--(i) In general. The term
``qualified property or services'' means any property or services that
are offered for sale to customers in the ordinary course of the line of
business of the employer in which the employee performs substantial
services. For rules relating to the line of business limitation, see
Sec. 1.132-4T.
(ii) Exception for certain property. The term ``qualified property''
does not include real property and it does not include personal property
(whether tangible or intangible) of a kind commonly held for investment.
Thus, an employee may not exclude from gross income the amount of an
employee discount provided on the purchase of either residential or
commercial real estate, securities, commodities, or currency, whether or
not the particular purchase is made for investment purposes.
[[Page 539]]
(iii) Property and services not offered in ordinary course of
business. The term ``qualified property or services'' does not include
any property or services of a kind that is not offered for sale to
customers in the ordinary course of the line of business of the
employer. For example, employee discounts provided on property or
services that are offered for sale only to employees and their families
(such as merchandise sold at an employee store or through an employer-
provided catalog service) may not be excluded from gross income.
(3) No reciprocal agreement exception. The exclusion for a qualified
employee discount does not apply to property or services provided by
another employer pursuant to a written reciprocal agreement that exists
between employers to provide discounts on property and services to
employees of the other employer.
(4) Cash or third-party rebates--(i) Property or services provided
without charge or at a reduced price. The exclusion for a qualified
employee discount applies whether the property or service is provided at
no charge (in which case only part of the discount may be excludable as
a qualified employee discount) or at a reduced price. The exclusion also
applies if the benefit is provided through a partial or total cash
rebate of an amount paid for the property or service.
(ii) Property or services provided directly by the employer or
indirectly through a third party. A qualified employee discount may be
provided either directly by the employer or indirectly through a third
party. For example, an employee of an appliance manufacturer may receive
a qualified employee discount on the manufacturer's appliances purchased
at a retail store that offers such appliances for sale to customers. The
employee may exclude the amount of the qualified employee discount
whether the employee is provided the appliance at no charge or purchases
it at a reduced price, or whether the employee receives a partial or
total cash rebate from either the employer-manufacturer or the retailer.
If an employee receives additional rights associated with the property
that are not provided by the employee's employer to customers in the
ordinary course of the line of business in which the employee performs
substantial services (such as the right to return or exchange the
property or special warranty rights), the employee may only receive a
qualified employee discount with respect to the property and not the
additional rights. Receipt of such additional rights may occur, for
example, when an employee of a manufacturer purchases property
manufactured by the employee's employer at a retail outlet.
(5) Applicability of nondiscrimination rules. The exclusion for a
qualified employee discount applies to officers, owners, and highly
compensated employees only if the discount is available on substantially
the same terms to each member of a group of employees that is defined
under a reasonable classification set up by the employer that does not
discriminate in favor of officers, owners, or highly compensated
employees. See Sec. 1.132-8T.
(b) Employee discount--(1) Definition. The term ``employee
discount'' means the excess of--
(i) The price at which the property or service is being offered by
the employer for sale to customers, over
(ii) The price at which the property or service is provided by the
employer to an employee for use by the employee.
A transfer of property by an employee without consideration is
considered use by the employee for purposes of this section. Thus, for
example, if an employee receives a discount on property offered for sale
by his employer to customers and the employee makes a gift of the
property to his parent, the property will be considered to be provided
for use by the employee, thus enabling the discount to be eligible for
exclusion as a qualified employee discount.
(2) Price to customers--(i) Determined at time of sale. In
determining the amount of an employee discount, the price at which the
property or service is being offered to customers at the time of the
employee's purchase is controlling. For example, assume that an employer
offers a product to customers for $20 during the first six months of a
calendar year, but at the time the employee purchases the product at a
discount, the price at which the product is being offered to customers
is $25. In
[[Page 540]]
this case, the price from which the employee discount is measured is
$25.
(ii) Quantity discount not reflected. The price referred to in
paragraph (b)(2)(i) of this section cannot reflect any quantity discount
unless the employee actually purchases the requisite quantity of the
property or service.
(iii) Customers of employee's employer controls. In determining the
amount of an employee discount, the price at which the property or
service is offered to customers of the employee's employer is
controlling. Thus, the price at which property is sold to the wholesale
customers of a manufacturer will generally be lower than the price at
which the same property is sold to the customers of a retailer. However,
see paragraph (a)(4)(ii) of this section regarding the effect of a
wholesaler providing to its employees additional rights not provided to
customers of the wholesaler in the ordinary course of its business.
(iv) Discounts to discrete customer or consumer groups. In
determining the amount of an employee discount, if an employer offers
for sale property or services at one or more discounted prices to
discrete customer or consumer groups, and sales at all such discounted
prices comprise at least 35 percent of the employer's gross sales for a
representative period, then the price at which property or service is
being offered to customers is a discounted price. The applicable
discounted price is the current undiscounted price, reduced by the
percentage discount at which the greatest percentage of the employer's
gross sales are made for such representative period. If sales at
different percentage discounts equal the same percentage of the
employer's gross sales, the price at which the property or service is
being provided to customers may be reduced by the average of the two
group discounts. For purposes of this section, a representative period
is the taxable year of the employer immediately preceding the taxable
year in which the property or service is provided to the employee at a
discount. If more than one employer would be aggregated under section
414 (b), (c), or (m), and all of the employers do not have the same
taxable year, the employers required to be aggregated must designate the
12-month period to be used in determining gross sales for a
representative period.
(v) Examples. The rules provided in this paragraph (b)(2) are
illustrated by the following examples:
Example (1). Assume that a wholesale employer offers property for
sale to two discrete customer groups at differing prices. Assume further
that during the prior taxable year of the employer, 70 percent of the
employer's gross sales are made at a 15-percent discount and 30 percent
at no discount. The current undiscounted price at which the property or
service is being offered by the employer for sale to customers may be
reduced by the 15-percent discount.
Example (2). Assume that a retail employer offers a 20 percent
discount to members of the American Bar Association, a 15 percent
discount to members of the American Medical Association, and a ten
percent discount to employees of the Federal Government. Assume further
that during the prior taxable year of the employer, sales to American
Bar Association members equal 15 percent of the employer's gross sales,
sales to American Medical Association members equal 20 percent of the
employer's gross sales, and sales to Federal Government employees equal
25 percent of the employer's gross sales. The current undiscounted price
at which the property or service is being offered by the employer for
sale to customers may be reduced by the ten percent Federal Government
discount.
(3) Damaged, distressed, or returned goods. If an employee pays at
least fair market value for damaged, distressed, or returned property,
such employee will not have income attributable to such purchase.
(c) Gross profit percentage--(1) In general--(i) General rule. An
exclusion from gross income for an employee discount on qualified
property is limited to the price at which the property is being offered
to customers in the ordinary course of the employer's line of business,
multiplied by the employer's gross profit percentage. The term ``gross
profit percentage'' means the excess of the aggregate sales price of the
property sold by the employer to customers (including employees) over
the employer's aggregate cost of the property, then divided by the
aggregate sales price.
(ii) Calculation of gross profit percentage. The gross profit
percentage must be calculated separately for each line of business based
on the aggregate
[[Page 541]]
sales price and aggregate cost of property in that line of business for
a representative period. For purposes of this section, a representative
period is the taxable year of the employer immediately preceding the
taxable year in which the discount is available. For example, if the
aggregate sales of property in an employer's line of business for the
prior taxable year were $800,000, and the aggregate cost of the property
for the year were $600,000, the gross profit percentage would be 25
percent ($800,000 minus $600,000, then divided by $800,000). If more
than one employer would be aggregated under section 414 (b), (c), or
(m), and all of the employers do not have the same taxable year, the
employers required to be aggregated must designate the 12-month period
to be used in determining the gross profit percentage. If an employee
performs substantial services in more than one line of business, the
gross profit percentage of the line of business in which the property is
sold determines the amount of the excludable employee discount.
(iii) Special rule for employers in their first year of existence.
An employer in its first year of existence may estimate the gross profit
percentage of a line of business based on its mark-up from the cost.
Alternatively, an employer in its first year of existence may determine
the gross profit percentage by reference to an appropriate industry
average.
(iv) Redetermination of gross profit percentage. If substantial
changes in an employer's business indicate at any time that it is
inappropriate for the prior years' gross profit percentage to be used
for the current year, the employer must, within a reasonable period,
redetermine the gross profit percentage for the remaining portion of the
current year as if such portion of the year were the first year of the
employer's existence.
(2) Line of business. In general, an employer must determine the
gross profit percentage on the basis of all property offered to
customers (including employees) in each separate line of business. An
employer may instead select a classification of property that is
narrower than the applicable line of business. However, such
classification must be reasonable. For example, if an employer computes
gross profit percentage according to the department in which products
are sold, such classification is reasonable. Similarly, it is reasonable
to compute gross profit percentage on the basis of the type of
merchandise sold (such as high mark-up and low mark-up classifications).
It is not reasonable, however, for an employer to classify certain low
mark-up products preferred by certain employees (such as officers,
owners, and highly compensated employees) with high mark-up products or
to classify certain high mark-up products preferred by other employees
with low mark-up products.
(3) Generally accepted accounting principles. In general, the
aggregate sales price of property must be determined in accordance with
generally accepted accounting principles. An employer must compute the
aggregate cost of property in the same manner in which it is computed
for the employer's Federal income tax liability, pursuant to the
inventory rules in section 471 and the regulations thereunder.
(d) Treatment of leased sections of department stores--(1) In
general--(i) General rule. For purposes of determining whether employees
of a leased section of a department store may receive qualified
employees discounts at the department store and whether employees of the
department store may receive qualified employee discounts at the leased
section of the department store, the leased section is treated as part
of the line of business of the person operating the department store,
and employees of the leased section are treated as employees of the
person operating the department store as well as employees of their
employer. The term ``leased section of a department store'' means a
section of a department store where substantially all of the gross
receipts of the leased section are over-the-counter sales of property
made under a lease, license, or similar arrangement where it appears to
the general public that individuals making such sales are employed by
the department store. An example of a leased section of a department
store is a cosmetics firm that leases floor space from a department
store.
[[Page 542]]
(ii) Calculation of gross profit percentage. When calculating the
gross profit percentage of property and services sold at the department
store under paragraph (c) of this section, sales of property and
services sold at the department store, as well as sales of property and
services sold at the leased section, are considered. The rule provided
in the preceding sentence does not apply, however, if it is reasonable
to calculate the gross profit percentage for the department store and
leased section separately, or if it would be inappropriate to combine
them (such as where either the department store or the leased section,
but not both, provides employee discounts).
(2) Employees of the leased section--(i) Definition. For purposes of
this paragraph (d), ``employees of the leased section'' means all
employees who perform substantial services at the leased section
regardless of whether the employees engage in over-the-counter sales of
property or services. The term ``employee'' has the same meaning as in
section 133(f).
(ii) Discounts offered to either department store employees or
employees of the leased section. If the requirements of this paragraph
(d) are satisfied, employees of the leased section may receive qualified
employee discounts at the department store regardless of whether
employees of the department store are offered discounts at the leased
section. Similarly, regardless of whether employees of the leased
section are offered discounts at the department store, employees of the
department store may receive qualified employee discounts at the leased
section.
(e) Excess discounts. Unless excludable under a statutory provision
other than section 132(a)(2), an employee discount provided on property
is excludable to the extent of the gross profit percentage multiplied by
the price at which the property is being offered for sale to customers.
If an employee discount exceeds the gross profit percentage, the excess
discount is includible in the employee's income. For example, if the
discount on property is 30 percent and the employer's gross profit
percentage for the period in the relevant line of business is 25
percent, then 5 percent of the price at which the property is being
offered for sale to customers is includible in the emloyee's income.
With respect to services, an employee discount of up to 20 percent may
be excludable. If an employee discount exceeds 20 percent, the excess
discount is includible in the employee's income.
[T.D. 8063, 50 FR 52299, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-4 Line of business limitation.
(a) In general--(1) Applicability--(i) General rule. A no-
additional-cost service or a qualified employee discount provided to an
employee is only available with respect to property or services that are
offered for sale to customers in the ordinary course of the same line of
business in which the employee receiving the property or service
performs substantial services. Thus, an employee who does not perform
substantial services in a particular line of business of the employer
may not exclude from income under section 132 (a)(1) or (a)(2) the value
of services or employee discounts received on property or services in
that line of business. For rules that relax the line of business
requirement, see paragraphs (b) through (g) of this section.
(ii) Property and services sold to employees rather than customers.
Because the property or services must be offered for sale to customers
in the ordinary course of the same line of business in which the
employee performs substantial services, the line of business limitation
is not satisfied if the employer's products or services are sold
primarily to employees of the employer, rather than to customers. Thus,
for example, an employer in the banking line of business is not
considered in the variety store line of business if the employer
establishes an employee store that offers variety store items for sale
to the employer's employees. See Sec. 1.132-7 for rules relating to
employer-operated eating facilities, and see Sec. 1.132-1(e) for rules
relating to employer-operated on-premises athletic facilities.
(iii) Performance of substantial services in more than one line of
business. An employee who performs services in more than one of the
employer's lines of
[[Page 543]]
business may only exclude no-additional-cost services and qualified
employee discounts in the lines of business in which the employee
performs substantial services.
(iv) Performance of services that directly benefit more than one
line of business--(A) In general. An employee who performs substantial
services that directly benefit more than one line of business of an
employer is treated as performing substantial services in all such line
of business. For example, an employee who maintains accounting records
for an employer's three lines of business may receive qualified employee
discounts in all three lines of business. Similarly, if an employee of a
minor line of business of an employer that is significantly interrelated
with a major line of business of the employer performs substantial
services that directly benefit both the major and the minor lines of
business, the employee is treated as performing substantial services for
both the major and the minor lines of business.
(B) Examples. The rules provided in this paragraph (a)(1)(iv) are
illustrated by the following examples:
Example (1). Assume that employees of units of an employer provide
repair or financing services, or sell by catalog, with respect to retail
merchandise sold by the employer. Such employees may be considered to
perform substantial services for the retail merchandise line of business
under paragraph (a)(1)(iv)(A) of this section.
Example (2). Assume that an employer operates a hospital and a
laundry service. Assume further that some of the gross receipts of the
laundry service line of business are from laundry services sold to
customers other than the hospital employer. Only the employees of the
laundry service who perform substantial services which directly benefit
the hospital line of business (through the provision of laundry services
to the hospital) will be treated as performing substantial services for
the hospital line of business. Other employees of the laundry service
line of business will not be treated as employees of the hospital line
of business.
Example (3). Assume the same facts as in example (2), except that
the employer also operates a chain of dry cleaning stores. Employees who
perform substantial services which directly benefit the dry cleaning
stores but who do not perform substantial services that directly benefit
the hospital line of business will not be treated as performing
substantial services for the hospital line of business.
(2) Definition--(i) In general. An employer's line of business is
determined by reference to the Enterprise Standard Industrial
Classification Manual (ESIC Manual) prepared by the Statistical Policy
Division of the U.S. Office of Management and Budget. An employer is
considered to have more than one line of business if the employer offers
for sale to customers property or services in more than one two-digit
code classification referred to in the ESIC Manual.
(ii) Examples. Examples of two-digit classifications are general
retail merchandise stores; hotels and other lodging places; auto repair,
services, and garages; and food stores.
(3) Aggregation of two-digit classifications. If, pursuant to
paragraph (a)(2) of this section, an employer has more than one line of
business, such lines of business will be treated as a single line of
business where and to the extent that one or more of the following
aggregation rules apply:
(i) If it is uncommon in the industry of the employer for any of the
separate lines of business of the employer to be operated without the
others, the separate lines of business are treated as one line of
business.
(ii) If it is common for a substantial number of employees (other
than those employees who work at the headquarters or main office of the
employer) to perform substantial services for more than one line of
business of the employer, so that determination of which employees
perform substantial services for which line or lines of business would
be difficult, then the separate lines of business of the employer in
which such employees perform substantial services are treated as one
line of business. For example, assume that an employer operates a
delicatessen with an attached service counter at which food is sold for
consumption on the premises. Assume further that most but not all
employees work both at the delicatessen and at the service counter.
Under the aggregation rule of this paragraph (a)(3)(ii), the
delicatessen and the service counter are treated as one line of
business.
[[Page 544]]
(iii) If the retail operations of an employer that are located on
the same premises are in separate lines of business but would be
considered to be within one line of business under paragraph (a)(2) of
this section if the merchandise offered for sale in such lines of
business were offered for sale at a department store, then the
operations are treated as one line of business. For example, assume that
on the same premises an employer sells both women's apparel and jewelry.
Because, if sold together at a department store, the operations would be
part of the same line of business, the operations are treated as one
line of business.
(b) Grandfather rule for certain retail stores--(1) In general. The
line of business limitation may be relaxed under the special grandfather
rule of this paragraph (b). Under this special grandfather rule, if--
(i) On October 5, 1983, at least 85 percent of the employees of one
member of an affiliated group (as defined in section 1504 without regard
to subsections (b)(2) and (b)(4) thereof) (``first member'') were
entitled to receive employee discounts at retail department stores
operated by another member of the affiliated group (``second member''),
and
(ii) More than 50 percent of the previous year's sales of the
affiliated group are attributable to the operation of retail department
stores, then, for purposes of the exclusion from gross income of a
qualified employee discount, the first member is treated as engaged in
the same line of business as the second member (the opeator of the
retail department stores). Therefore, employees of the first member of
the affiliated group may exclude from income qualified employee
discounts received at the retail department stores operated by the
second member. However, employees of the second member of the affiliated
group may not under this paragraph (b)(1) exclude any discounts received
on property or services offered for sale to customers by the first
member of the affiliated group.
(2) Taxable year of affiliated group. If not all of the members of
an affiliated group have the same taxable year, the affiliated group
must designate the 12-month period to be used in determining the
``previous year's sales'' (as referred to in the grandfather rule of
this paragraph (b)). The 12-month period designated, however, must be
used on a consistent basis.
(3) Definition of ``sales.'' For purposes of this paragraph (b), the
term ``sales'' means the gross receipts of an affiliated group, based
upon the accounting methods used by its members.
(4) Retired and disabled employees. For purposes of this paragraph
(b), an employee includes any individual who was, or whose spouse was,
formerly employed by the first member of an affiliated group and who
separated from service with the member by reason of retirement or
disability if the second member of the group provided employee discounts
to that individual on October 5, 1983.
(5) Increase of employee discount. If, after October 5, 1983, the
employee discount described in this paragraph (b) is increased, the
grandfather rule of this paragraph (b) does not apply to the amount of
the increase. For example, if on January 1, 1989, the employee discount
is increased from 10 percent to 15 percent, the grandfather rule will
not apply to the additional 5 percent discount.
(c) Grandfather rule for telephone service provided to
predivestiture retirees. All entities subject to the modified final
judgment (as defined in section 559(c)(5) of the Tax Reform Act of 1984)
shall be treated as a single employer engaged in the same line of
business for purposes of determining whether telephone service provided
to certain employees is a no-additional-cost service. The preceding
sentence applies only in the case of an employee who by reason of
retirement or disability separated before January 1, 1984, from the
service of an entity subject to the modified final judgment. This
paragraph (c) only applies to services provided to such employees as of
January 1, 1984. For a special no-additional-cost service rule relating
to such employees and such services, see Sec. 1.132-2(a)(6).
(d) Special rule for certain affiliates of commercial airlines--(1)
General rule. If a qualified affiliate is a member of an airline
affiliated group and employees
[[Page 545]]
of the qualified affiliate who are directly engaged in providing
airline-related services are entitled to no-additional-cost service with
respect to air transportation provided by such other member, then, for
purposes of applying Sec. 1.132-2 (relating to no-additional-cost
services with respect to such air transportation), such qualified
affiliate shall be treated as engaged in the same line of business as
such other member.
(2) ``Airline affiliated group'' defined. An ``airline affiliated
group'' is an affiliated group (as defined in section 1504 (a)) one of
whose members operates a commercial airline that provides air
transportation to customers on a per-seat basis.
(3) ``Qualified affiliate'' defined. A ``qualified affiliate'' is
any corporation that is predominantly engaged in providing airline-
related services. The term ``airline-related services'' means any of the
following services provided in connection with air transportation:
(i) Catering,
(ii) Baggage handling,
(iii) Ticketing and reservations,
(iv) Flight planning and weather analysis, and
(v) Restaurants and gift shops located at an airport.
(e) Grandfather rule for affiliated groups operating airlines. The
line of business limitation may be relaxed under the special grandfather
rule of this paragraph (e). Under this special grandfather rule, if, as
of September 12, 1984--
(1) An individual--
(i) Was an employee (within the meaning of Sec. 1.132-1 (b)) of one
member of an affiliated group (as defined in section 1504(a)) (``first
corporation''), and
(ii) Was eligible for no-additional-cost services in the form of air
transportation provided by another member of such affiliated group
(``second corporation''),
(2) At least 50 percent of the individuals performing services for
the first corporation were, or had been employees of, or had previously
performed services for, the second corporation, and
(3) The primary business of the affiliated group was air
transportation of passengers, then, for purposes of applying sections
132(a) (1) and (2), with respect to no-additional-cost services and
qualified employee discounts provided after December 31, 1984, for that
individual by the second corporation, the first corporation is treated
as engaged in the same air transporation line of business as the second
corporation. For purposes of the preceding sentence, an employee of the
second corporation who is performing services for the first corporation
is also treated as an employee of the first corporation.
(f) Special rule for qualified air transportation organizations. A
qualified air transportation organization is treated as engaged in the
line of business of providing air transportation with respect to any
individual who performs services for the organization if those services
are peformed primarily for persons engaged in providing air
transportation, and are of a kind which (if performed on September 12,
1984) would qualify the individual for no-additional-cost services in
the form of air transportation. The term ``qualified air transportation
organization'' means any organization--
(1) If such organization (or a predecessor) was in existence on
September 12, 1984,
(2) If such organization is--
(i) A tax-exempt organization under section(c)(6) whose membership
is limited to entities engaged in the transportation by air of
individuals or property for compensation or hire, or
(ii) Is a corporation all the stock of which is owned entirely by
entities described in paragraph (f)(2)(i) of this section, and
(3) If such organization is operated in furtherance of the
activities of its members or owners.
(g) Relaxation of line of business requirement. The line of business
requirement may be relaxed under an elective grandfather rule provided
in section 4977. For rules relating to the section 4977 election, see
Sec. 54.4977-1T.
(h) Line of business requirement does not expand benefits eligible
for exclusion. The line of business requirement limits the benefits
eligible for the no-additional-cost service and qualified employee
discount exclusions to property or services provided by an employer to
its customers in the ordinary course of the line of business of the
employer in
[[Page 546]]
which the employee performs substantial services. The requirement is
intended to ensure that employers do not offer, on a tax-free or reduced
basis, property or services to employees that are not offered to the
employer's customers, even if the property or services offered to the
customers and the employees are within the same line of business (as
defined in this section).
[T.D. 8256, 54 FR 28606, July 6, 1989]
Sec. 1.132-4T Line of business limitation--1985 through 1988 (temporary).
(a) In general--(1) Applicability--(i) General rule. A no-
additional-cost service or qualified employee discount provided to an
employee must be for property or services that are offered for sale to
customers in the ordinary course of the same line of business in which
the employee receiving the property or service performs substantial
services. Thus, an employee who does not perform substantial services in
a particular line of business of the employer may not exclude the value
of services or employee discounts received on property or services in
that line of business.
(ii) Property and services sold to employees rather than customers.
Since the property or services must be offered for sale to customers in
the ordinary course of the same line of business in which the employee
performs substantial services, the line of business limitation is not
satisfied if the employer's products or services are sold to employees
of the employer, rather than to customers. Thus, for example, an
employer in the banking line of business is not considered in the
variety store line of business if the employer establishes an employee
store that offers variety store items for sale to the employer's
employees.
(iii) Performance of substantial services in more than one line of
business. An employee who performs services in more than one of the
employer's lines of business may only exclude no-additional-cost
services and qualified employee discounts in the lines of business in
which the employee performs substantial services.
(iv) Performance of services that directly benefit more than one
line of business--(A) In general. An employee who performs substantial
services that directly benefit more than one line of business of an
employer is treated as performing substantial services in all such lines
of business. For example, an employee who maintains accounting records
for an employer's three lines of business may receive qualified employee
discounts in all three lines of business.
(B) Significantly interrelated minor line of business. The employees
of a minor line of business of an employer that is significantly
interrelated with a major line of business of the employer who perform
substantial services that directly benefit both the major and the minor
lines of business are treated as employees of both the major and the
minor lines of business. Employees of the minor line of business who do
not perform substantial services which directly benefit the major line
of business are not treated as employees of the major line of business.
A minor line of business is significantly interrelated with a major line
of business when, for example, the activity of the minor line of
business is directly related to but is a minor part of the major line of
business (such as laundry services provided at a hospital).
(C) Examples. The rules provided in this paragraph are illustrated
in the following examples:
Example (1). Assume that employees of units of an employer provide
repair or financing services, or sell by catalog, with respect to retail
merchandise sold by the employer. Such employees may be considered as
employees of the retail merchandise line of business under this
paragraph (a)(1)(iv).
Example (2). Assume that an employer operates a hospital and a
laundry service. Assume further that some of the gross receipts of the
laundry service line of business are from laundry services sold to
customers other than the hospital employer. Only the employees of the
laundry service who perform substantial services which directly benefit
the hospital line of business (through the provision of laundry services
to the hospital) will be treated as employees of the hospital line of
business. Other employees of the laundry service line of business will
not be treated as employees of the hospital line of business.
Example (3). Assume the same facts as in example (2), except that
the minor line of
[[Page 547]]
business also operates a chain of dry cleaning stores. Employees who
perform substantial services which directly benefit the dry cleaning
stores but who do not perform substantial services that directly benefit
the hospital line of business will not be treated as employees of the
hospital line of business.
(2) Definition--(i) In general. An employer's line of business is
determined by reference to the Enterprise Standard Industrial
Classification Manual (ESIC Manual) prepared by the Statistical Policy
Division of the U.S. Office of Management and Budget. An employer is
considered to have more than one line of business if the employer offers
for sale to customers property or services in more than one two-digit
code classification referred to in the ESIC Manual.
(ii) Examples. Examples of two-digit classifications are general
retail merchandise stores; hotels and other lodging places; auto repair,
services, and garages; and food stores.
(3) Aggregation of two-digit classifications. If, pursuant to
paragraph (a)(2) of this section, an employer has more than one line of
business, such lines of business will be treated as a single line of
business where and to the extent that one or more of the following
aggregation rules apply:
(i) If it is uncommon in the industry of the employer for any of the
separate lines of business of the employer to be operated without the
others, the separate lines of business are treated as one line of
business.
(ii) If it is common for a substantial number of employees (other
than those employees who work at the headquarters or main office of the
employer) to perform substantial services for more than one line of
business of the employer, so that determination of which employees
perform substantial services for which line of business would be
difficult, then the separate lines of business of the employer in which
such employees perform substantial services are treated as one line of
business. For example, assume that an employer operates a delicatessen
with an attached service counter at which food is sold for consumption
on the premises. Assume further that most but not all employees work
both at the delicatessen and at the service counter. The delicatessen
and the service counter are treated as one line of business.
(iii) If the retail operations of an employer that are located on
the same premises are in separate lines of business but would be
considered to be within one line of business under paragraph (a)(2) of
this section if the merchandise offered for sale in such lines of
business were offered for sale at a department store, then the
operations are treated as one line of business. For example, assume that
on the same premises an employer sells both women's apparel and jewelry.
Since, if sold together at a department store, the operations would be
part of the same line of business, the operations are treated as one
line of business.
(b) Grandfather rule for certain retail stores--(1) In general. The
line of business limitation may be relaxed under a special grandfather
rule. If--
(i) On October 5, 1983, 85 percent of the employees of one member of
an affiliated group (as defined in section 1504 without regard to
subsections (b)(2) and (b)(4) thereof) were entitled to employee
discounts at retail department stores operated by another member of the
affiliated group, and
(ii) More than 50 percent of the current year's sales of the
affiliated group are attributable to the operation of retail department
stores,
then for purposes of the exclusion from gross income of a qualified
employee discount, the first member is treated as engaged in the same
line of business as the second member (the operator of the retail
department stores). Therefore, employees of the first member of the
affiliated group may exclude qualified employee discounts received at
the retail department stores operated by the second member. However,
employees of the second member of the affiliated group may not exclude
any discounts received on property or services offered for sale to
customers by the first member of the affiliated group.
(2) Taxable year of affiliated group. If all of the members do not
have the same taxable year, the affiliated group must designate the 12-
month period to be used in determining the ``current year's sales'' (as
referred to in this paragraph (b)). The 12-month period
[[Page 548]]
designated, however, must be used consistently.
(3) Definition of ``sales''. For purposes of this paragraph (b), the
term ``sales'' means the gross receipts of the affiliated group, based
upon the accounting methods used by its members.
(4) Retired and disabled employees. For purposes of this paragraph
(b), an employee includes any individual who was, or whose spouse was,
formerly employed by the first member of the affiliated group and who
separated from service with the member by reason of retirement or
disability if the second member of the group provided employee discounts
to such individuals on October 5, 1983.
(5) Increase of employee discount. If, after October 5, 1983, the
employee discount described in this paragraph (b) is increased, the
grandfather rule of this paragraph (b) does not apply to the amount of
the increase. For example, if on January 1, 1985, the employee discount
is increased from 10 percent to 15 percent, the grandfather rule will
not apply to the additional five percent discount.
(c) Relaxation of line of business requirement. The line of business
requirement may be relaxed under an elective grandfather rule provided
in section 4977. For rules relating to the section 4977 election, see
Sec. 54.4977-1.
[T.D. 8063, 50 FR 52301, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-5 Working condition fringes.
(a) In general--(1) Definition. Gross income does not include the
value of a working condition fringe. A ``working condition fringe'' is
any property or service provided to an employee of an employer to the
extent that, if the employee paid for the property or service, the
amount paid would be allowable as a deduction under section 162 or 167.
(i) A service or property offered by an employer in connection with
a flexible spending account is not excludable from gross income as a
working condition fringe. For purposes of the preceding sentence, a
flexible spending account is an agreement (whether or not written)
entered into between an employer and an employee that makes available to
the employee over a time period a certain level of unspecified non-cash
benefits with a pre-determined cash value.
(ii) If, under section 274 or any other section, certain
substantiation requirements must be met in order for a deduction under
section 162 or 167 to be allowable, then those substantiation
requirements apply when determining whether a property or service is
excludable as a working condition fringe.
(iii) An amount that would be deductible by the employee under a
section other than section 162 or 167, such as section 212, is not a
working condition fringe.
(iv) A physical examination program provided by the employer is not
excludable as a working condition fringe even if the value of such
program might be deductible to the employee under section 213. The
previous sentence applies without regard to whether the employer makes
the program mandatory to some or all employees.
(v) A cash payment made by an employer to an employee will not
qualify as a working condition fringe unless the employer requires the
employee to--
(A) Use the payment for expenses in connection with a specific or
pre-arranged activity or undertaking for which a deduction is allowable
under section 162 or 167,
(B) Verify that the payment is actually used for such expenses, and
(C) Return to the employer any part of the payment not so used.
(vi) The limitation of section 67(a) (relating to the two-percent
floor on miscellaneous itemized deductions) is not considered when
determining the amount of a working condition fringe. For example,
assume that an employer provides a $1,000 cash advance to Employee A and
that the conditions of paragraph (a)(1)(v) of this section are not
satisfied. Even to the extent A uses the allowance for expenses for
which a deduction is allowable under section 162 and 167, because such
cash payment is not a working condition fringe, section 67(a) applies.
The $1,000 payment is includible in A's gross income and subject to
income and employment tax withholding. If, however, the conditions of
paragraph (a)(1)(v) of this section are satisfied with respect to the
[[Page 549]]
payment, then the amount of A's working condition fringe is determined
without regard to section 67(a). The $1,000 payment is excludible from
A's gross income and not subject to income and employment tax reporting
and withholding.
(2) Trade or business of the employee--(i) General. If the
hypothetical payment for a property or service would be allowable as a
deduction with respect to a trade or business of an employee other than
the employee's trade or business of being an employee of the employer,
it cannot be taken into account for purposes of determining the amount,
if any, of the working condition fringe.
(ii) Examples. The rule of paragraph (a)(2)(i) of this section may
be illustrated by the following examples:
Example (1). Assume that, unrelated to company X's trade or business
and unrelated to employee A's trade or business of being an employee of
company X, A is a member of the board of directors of company Y. Assume
further that company X provides A with air transportation to a company Y
board of director's meeting. A may not exclude from gross income the
value of the air transportation to the meeting as a working condition
fringe. A may, however, deduct such amount under section 162 if the
section 162 requirements are satisfied. The result would be the same
whether the air transportation was provided in the form of a flight on a
commercial airline or a seat on a company X airplane.
Example (2). Assume the same facts as in example (1) except that A
serves on the board of directors of company Z and company Z regularly
purchases a significant amount of goods and services from company X.
Because of the relationship between Company Z and A's employer, A's
membership on Company Z's board of directors is related to A's trade or
business of being an employee of Company X. Thus, A may exclude from
gross income the value of air transportation to board meetings as a
working condition fringe.
Example (3). Assume the same facts as in example (1) except that A
serves on the board of directors of a charitable organization. Assume
further that the service by A on the charity's board is substantially
related to company X's trade or business. In this case, A may exclude
from gross income the value of air transportation to board meetings as a
working condition fringe.
Example (4). Assume the same facts as in example (3) except that
company X also provides A with the use of a company X conference room
which A uses for monthly meetings relating to the charitable
organization. Also assume that A uses company X's copy machine and word
processor each month in connection with functions of the charitable
organization. Because of the substantial business benefit that company X
derives from A's service on the board of the charity, A may exclude as a
working condition fringe the value of the use of company X property in
connection with the charitable organization.
(b) Vehicle allocation rules--(1) In general--(i) General rule. In
general, with respect to an employer-provided vehicle, the amount
excludable as a working condition fringe is the amount that would be
allowable as a deduction under section 162 or 167 if the employee paid
for the availability of the vehicle. For example, assume that the value
of the availability of an employer-provided vehicle for a full year is
$2,000, without regard to any working condition fringe (i.e., assuming
all personal use). Assume Further that the employee drives the vehicle
6,000 miles for his employer's business and 2,000 miles for reasons
other than the employer's business. In this situation, the value of the
working condition fringe is $2,000 multiplied by a fraction, the
numerator of which is the business-use mileage (6,000 miles) and the
denominator of which is the total mileage (8,000 miles). Thus, the value
of the working condition fringe is $1,500. The total amount includible
in the employee's gross income on account of the availability of the
vehicle is $500 ($2,000-$1,500). For purposes of this section, the term
``vehicle'' has the meaning given the term in Sec. 1.61-21(e)(2).
Generally, when determining the amount of an employee's working
condition fringe, miles accumulated on the vehicle by all employees of
the employer during the period in which the vehicle is available to the
employee are considered. For example, assume that during the year in
which the vehicle is available to the employee in the above example,
other employees accumulate 2,000 additional miles on the vehicle (while
the employee is not in the automobile). In this case, the value of the
working condition fringe is $2,000 multiplied by a fraction, the
numerator of which is the business-use mileage by the employee
(including all mileage
[[Page 550]]
(business and personal) accumulated by other employees) (8,000 miles)
and the denominator of which is the total mileage (including all mileage
accumulated by other employees) (10,000 miles). Thus, the value of the
working condition fringe is $1,600; the total amount includible in the
employee's gross income on account of the availability of the vehicle is
$400 ($2,000-$1,600). If, however, substantially all of the use of the
automobile by other employees in the employer's business is limited to a
certain period, such as the last three months of the year, the miles
driven by the other employees during that period would not be considered
when determining the employee's working condition fringe exclusion.
Similarly, miles driven by other employees are not considered if the
pattern of use of the employer-provided automobiles is designed to
reduce Federal taxes. For example, assume that an employer provides
employees A and B each with the availability of an employer-provided
automobile and that A uses the automobile assigned to him 80 percent for
the employer's business and that B uses the automobile assigned to him
30 percent for the employer's business. If A and B alternate the use of
their assigned automobiles each week in such a way as to achieve a
reduction in federal taxes, then the employer may count only miles
placed on the automobile by the employee to whom the automobile is
assigned when determining each employee's working condition fringe.
(ii) Use by an individual other than the employee. For purposes of
this section, if the availability of a vehicle to an individual would be
taxed to an employee, use of the vehicle by the individual is included
in references to use by the employee.
(iii) Provision of an expensive vehicle for personal use. If an
employer provides an employee with a vehicle that an employee may use in
part for personal purposes, there is no working condition fringe
exclusion with respect to the personal miles driven by the employee; if
the employee paid for the availability of the vehicle, he would not be
entitled to deduct under section 162 or 167 any part of the payment
attributable to personal miles. The amount of the inclusion is not
affected by the fact that the employee would have chosen the
availability of a less expensive vehicle. Moreover, the result is the
same even though the decision to provide an expensive rather than an
inexpensive vehicle is made by the employer for bona fide
noncompensatory business reasons.
(iv) Total value inclusion. In lieu of excluding the value of a
working condition fringe with respect of an automobile, an employer
using the automobile lease valuation rule of Sec. 1.61-21(d) may include
in an employee's gross income the entire Annual Lease Value of the
automobile. Any deduction allowable to the employee under section 162 or
167 with respect to the automobile may be taken on the employee's income
tax return. The total inclusion rule of this paragraph (b)(1)(iv) is not
available if the employer is valuing the use or availability of a
vehicle under general valuation principles or a special valuation rule
other than the automobile lease valuation rule. See Secs. 1.162-25 and
1.162-25T for rules relating to the employee's deduction.
(v) Shared usage. In calculating the working condition fringe
benefit exclusion with respect to a vehicle provided for use by more
than one employee, an employer shall compute the working condition
fringe in a manner consistent with the allocation of the value of the
vehicle under section 1.61-21(c)(2)(ii)(B).
(2) Use of different employer-provided vehicles. The working
condition fringe exclusion must be applied on a vehicle-by-vehicle
basis. For example, assume that automobile Y is available to employee D
for 3 days in January and for 5 days in March, and automobile Z is
available to D for a week in July. Assume further that the Daily Lease
Value, as defined in Sec. 1.61-21(d)(4)(ii), of each automobile is $50.
For the eight days of availability of Y in January and March, D uses Y
90 percent for business (by mileage). During July, D uses Z 60 percent
for business (by mileage). The value of the working condition fringe is
determined separately for each automobile. Therefore, the working
condition fringe for Y is $360 ($400x.90) leaving an income inclusion
[[Page 551]]
of $40. The working condition fringe for Z is $210 ($350x.60), leaving
an income inclusion of $140. If the value of the availability of an
automobile is determined under the Annual Lease Value rule for one
period and Daily Lease Value rule for a second period (see Sec. 1.61-
21(d)), the working condition fringe exclusion must be calculated
separately for the two periods.
(3) Provision of a vehicle and chauffeur services--(i) General rule.
In general, with respect to the value of chauffeur services provided by
an employer, the amount excludable as a working condition fringe is the
amount that would be allowable as a deduction under section 162 and 167
if the employee paid for the chauffeur services. The working condition
fringe with respect to a chauffeur is determined separately from the
working condition fringe with respect to the vehicle. An employee may
exclude from gross income the excess of the value of the chauffeur
services over the value of the chauffeur services for personal purposes
(such as commuting) as determined under Sec. 1.61-21(b)(5). See
Sec. 1.61-21(b)(5) for additional rules and examples concerning the
valuation of chauffeur services. See Sec. 1.132-5(m)(5) for rules
relating to an exclusion from gross income for the value of bodyguard/
chauffeur services. When determining whether miles placed on the vehicle
are for the employer's business, miles placed on the vehicle by a
chauffeur between the chauffeur's residence and the place at which the
chauffeur picks up (or drops off) the employee are with respect to the
employee (but not the chauffeur) considered to be miles placed on the
vehicle for the employer's business and thus eligible for the working
condition fringe exclusion. Thus, because miles placed on the vehicle by
a chauffeur between the chauffeur's residence and the place at which the
chauffeur picks up (or drops off) the employee are not considered
business miles with respect to the chauffeur, the value of the
availability of the vehicle for commuting is includible in the gross
income of the chauffeur. For general and special rules concerning the
valuation of the use of employer-provided vehicles, see paragraphs (b)
through (f) of Sec. 1.61-21.
(ii) Examples. The rules of paragraph (b)(3)(i) of this section are
illustrated by the following examples:
Example (1). Assume that an employer makes available to an employee
an automobile and a chauffeur. Assume further that the value of the
chauffeur services determined in accordance with Sec. 1.61-21 is $30,000
and that the chauffeur spends 30 percent of each workday driving the
employee for personal purposes. There may be excluded from the
employee's income 70 percent of $30,000, or $21,000, leaving an income
inclusion with respect to the chauffeur services of $9,000.
Example (2). Assume that the value of the availability of an
employer-provided vehicle for a year is $4,850 and that the value of
employer-provided chauffeur services with respect to the vehicle for the
year is $20,000. Assume further that 40 percent of the miles placed on
the vehicle are for the employer's business and that 60 percent are for
other purposes. In addition, assume that the chauffeur spends 25 percent
of each workday driving the employee for personal purposes (i.e., 2
hours). The value of the chauffeur services includible in the employee's
income is 25 percent of $20,000, or $5,000. The excess of $20,000 over
$5,000 or $15,000 is excluded from the employee's income as a working
condition fringe. The amount excludable as a working condition fringe
with respect to the vehicle is 40 percent of $4,850, or $1,940 and the
amount includible is $4,850-$1,940, or $2,910.
(c) Applicability of substantiation requirements of sections 162 and
274 (d)--(1) In general. The value of property or services provided to
an employee may not be excluded from the employee's gross income as a
working condition fringe, by either the employer or the employee, unless
the applicable substantiation requirements of either section 274(d) or
section 162 (whichever is applicable) and the regulations thereunder are
satisfied. The substantiation requirements of section 274(d) apply to an
employee even if the requirements of section 274 do not apply to the
employee's employer for deduction purposes (such as when the employer is
a tax-exempt organization or a governmental unit).
(2) Section 274(d) requirements. The substantiation requirements of
section 274(d) are satisfied by ``adequate records or sufficient
evidence corroborating the [employee's] own statement''. Therefore, such
records or evidence provided by the employee, and
[[Page 552]]
relied upon by the employer to the extent permitted by the regulations
promulgated under section 274(d), will be sufficient to substantiate a
working condition fringe exclusion.
(d) Safe harbor substantiation rules--(1) In general. Section 1.274-
6T provides that the substantiation requirements of section 274(d) and
the regulations thereunder may be satisfied, in certain circumstances,
by using one or more of the safe harbor rules prescribed in Sec. 1.274-
6T. If the employer uses one of the safe harbor rules prescribed in
Sec. 1.274-6T during a period with respect to a vehicle (as defined in
Sec. 1.61-21(e)(2)), that rule must be used by the employer to
substantiate a working condition fringe exclusion with respect to that
vehicle during the period. An employer that is exempt from Federal
income tax may still use one of the safe harbor rules (if the
requirements of that section are otherwise met during a period) to
substantiate a working condition fringe exclusion with respect to a
vehicle during the period. If the employer uses one of the methods
prescribed in Sec. 1.274-6T during a period with respect to an employer-
provided vehicle, that method may be used by an employee to substantiate
a working condition fringe exclusion with respect to the same vehicle
during the period, as long as the employee includes in gross income the
amount allocated to the employee pursuant to Sec. 1.274-6T and this
section. (See Sec. 1.61-21(c)(2) for other rules concerning when an
employee must include in income the amount determined by the employer.)
If, however, the employer uses the safe harbor rule prescribed in
Sec. 1.274-6T(a) (2) or (3) and the employee without the employer's
knowledge uses the vehicle for purposes other than de minimis personal
use (in the case of the rule prescribed in Sec. 1.274-6T(a)(2)), or for
purposes other than de minimis personal use and commuting (in the case
of the rule prescribed in Sec. 1.274-6T(a)(3)), then the employees must
include an additional amount in income for the unauthorized use of the
vehicle.
(2) Period for use of safe harbor rules. The rules prescribed in
this paragraph (d) assume that the safe harbor rules prescribed in
Sec. 1.274-6T are used for a one-year period. Accordingly, references to
the value of the availability of a vehicle, amounts excluded as a
working condition fringe, etc., are based on a one-year period. If the
safe harbor rules prescribed in Sec. 1.274-6T are used for a period of
less than a year, the amounts referred to in the previous sentence must
be adjusted accordingly. For purposes of this section, the term
``personal use'' has the same meaning as prescribed in Sec. 1.274-6T
(e)(5).
(e) Safe harbor substantiation rule for vehicles not used for
personal purposes. For a vehicle described in Sec. 1.274-6T(a)(2)
(relating to certain vehicles not used for personal purposes), the
working condition fringe exclusion is equal to the value of the
availability of the vehicle if the employer uses the method prescribed
in Sec. 1.274-6T(a)(2).
(f) Safe harbor substantiation rule for vehicles not available to
employees for personal use other than commuting. For a vehicle described
in Sec. 1.274-6T(a)(3) (relating to certain vehicles not used for
personal purposes other than commuting), the working condition fringe
exclusion is equal to the value of the availability of the vehicle for
purposes other than commuting if the employer uses the method prescribed
in Sec. 1.274-6T(a)(3). This rule applies only if the special rule for
valuing commuting use, as prescribed in Sec. 1.61-21(f), is used and the
amount determined under the special rule is either included in the
employee's income or reimbursed by the employee.
(g) Safe harbor substantiation rule for vehicles used in connection
with the business of farming that are available to employees for
personal use--(1) In general. For a vehicle described in Sec. 1.274-
6T(b) (relating to certain vehicles used in connection with the business
of farming), the working condition fringe exclusion is calculated by
multiplying the value of the availability of the vehicle by 75 percent.
(2) Vehicles available to more than one individual. If the vehicle
is available to more than one individual, the employer must allocate the
gross income inclusion attributable to the vehicle (25 percent of the
value of the availability of the vehicle) among the employees (and other
individuals whose use would not be attributed to an employee) to whom
[[Page 553]]
the vehicle was available. This allocation must be done in a reasonable
manner to reflect the personal use of the vehicle by the individuals. An
amount that would be allocated to a sole proprietor reduces the amounts
that may be allocated to employees but is otherwise to be disregarded
for purposes of this paragraph (g). For purposes of this paragraph (g),
the value of the availability of a vehicle may be calculated as if the
vehicle were available to only one employee continuously and without
regard to any working condition fringe exclusion.
(3) Examples. The following examples illustrate a reasonable
allocation of gross income with respect to an employer-provided vehicle
between two employees:
Example (1). Assume that two farm employees share the use of a
vehicle that for a calendar year is regularly used directly in
connection with the business of farming and qualifies for use of the
rule in Sec. 1.274-6T(b). Employee A uses the vehicle in the morning
directly in connection with the business of farming and employee B uses
the vehicle in the afternoon directly in connection with the business of
farming. Assume further that employee B takes the vehicle home in the
evenings and on weekends. The employer should allocate all the income
attributable to the availability of the vehicle to employee B.
Example (2). Assume that for a calendar year, farm employees C and D
share the use of a vehicle that is regularly used directly in connection
with the business of farming and qualifies for use of the rule in
Sec. 1.2.4-6T(b). Assume further that the employees alternate taking the
vehicle home in the evening and alternate the availability of the
vehicle for personal purposes on weekends. The employer should allocate
the income attributable to the availability of the vehicle for personal
use (25 percent of the value of the availability of the vehicle) equally
between the two employees.
Example (3). Assume the same facts as in example (2) except that C
is the sole proprietor of the farm. Based on these facts, C should
allocate the same amount of income to D as was allocated to D in example
(2). No other income attributable to the availability of the vehicle for
personal use should be allocated.
(h) Qualified nonpersonal use vehicles. (1) In general. Except as
provided in paragraph (h)(2) of this section, 100 percent of the value
of the use of a qualified nonpersonal use vehicle (as described in
Sec. 1.274-5T(k)) is excluded from gross income as a working condition
fringe, provided that, in the case of a vehicle described in paragraph
(k) (3) through (8) of that section, the use of the vehicle conforms to
the requirements of that paragraph.
(2) Shared usage of qualified nonpersonal use vehicles. In general,
a working condition fringe under paragraph (h) of this section is
available to the driver and all passengers of a qualified nonpersonal
use vehicle. However, a working condition fringe under this paragraph
(h) is available only with respect to the driver and not with respect to
any passengers of a qualified nonpersonal use vehicle described in
Sec. 1.274-5T(k)(2)(ii) (L) or (P). In this case, the passengers must
comply with provisions of this section (excluding this paragraph (h)) to
determine the applicability of the working condition fringe exclusion.
For example, if an employer provides a passenger bus with a capacity of
25 passengers to its employees for purposes of transporting employees to
and/or from work, the driver of the bus may exclude from gross income as
a working condition fringe 100 percent of the value of the use of the
vehicle. The value of the commuting use of the employer-provided bus by
the employee-passengers is includible in their gross incomes. See
Sec. 1.61-21(f) for a special rule to value the commuting-only use of
employer-provided vehicles.
(i) [Reserved]
(j) Application of section 280F. In determining the amount, if any,
of an employee's working condition fringe, section 280F and the
regulations thereunder do not apply. For example, assume that an
employee has available for a calendar year an employer-provided
automobile with a fair market value of $28,000. Assume further that the
special rule provided in Sec. 1.61-21(d) is used yielding an Annual
Lease Value, as defined in Sec. 1.61-21(d), of $7,750, and that all of
the employee's use of the automobile is for the employer's business. The
employee would be entitled to exclude as a working condition fringe the
entire Annual Lease Value, despite the fact that if the employee paid
for the availability of the automobile, an income inclusion
[[Page 554]]
would be required under Sec. 1.280F-6(d)(1). This paragraph (j) does not
affect the applicability of section 280F to the employer with respect to
such employer-provided automobile, nor does it affect the applicability
of section 274 to either the employer or the employee. For rules
concerning substantiation of an employee's working condition fringe, see
paragraph (c) of this section.
(k) Aircraft allocation rule. In general, with respect to a flight
on an employer-provided aircraft, the amount excludable as a working
condition fringe is the amount that would be allowable as a deduction
under section 162 or 167 if the employee paid for the flight on the
aircraft. For example, if employee P and P's spouse fly on P's
employer's airplane primarily for business reasons of P's employer so
that P could deduct the expenses relating to the trip to the extent of
P's payments, the value of the flights is excludable from gross income
as a working condition fringe. However, if P's children accompany P on
the trip primarily for personal reasons, the value of the flights by P's
children are includible in P's gross income. See Sec. 1.61-21 (g) for
special rules for valuing personal flights on employer-provided
aircraft.
(l) [Reserved]
(m) Employer-provided transportation for security concerns--(1) In
general. The amount of a working condition fringe exclusion with respect
to employer-provided transportation is the amount that would be
allowable as a deduction under section 162 or 167 if the employee paid
for the transportation. Generally, if an employee pays for
transportation taken for primarily personal purposes, the employee may
not deduct any part of the amount paid. Thus, the employee may not
generally exclude the value of employer-provided transportation as a
working condition fringe if such transportation is primarily personal.
If, however, for bona fide business-oriented security concerns, the
employee purchases transportation that provides him or her with
additional security, the employee may generally deduct the excess of the
amount actually paid for the transportation over the amount the employee
would have paid for the same mode of transportation absent the bona fide
business-oriented security concerns. This is the case whether or not the
employee would have taken the same mode of transportation absent the
bona fide business-oriented security concerns. With respect to a
vehicle, the phrase ``the same mode of transportation'' means use of the
same vehicle without the additional security aspects, such as
bulletproof glass. With respect to air transportation, the phrase ``the
same mode of transportation'' means comparable air transportation. These
same rules apply to the determination of an employee's working condition
fringe exclusion. For example, if an employer provides an employee with
a vehicle for commuting and, because of bona fide business-oriented
security concerns, the vehicle is specially designed for security, then
the employee may exclude from gross income the value of the special
security design as a working condition fringe. The employee may not
exclude the value of the commuting from income as a working condition
fringe because commuting is a nondeductible personal expense. However,
if an independent security study meeting the requirements of paragraph
(m)(2)(v) of this section has been performed with respect to a
government employee, the government employee may exclude the value of
the personal use (other than commuting) of the employer-provided vehicle
that the security study determines to be reasonable and necessary for
local transportation. Similarly, if an employee travels on a personal
trip in an employer-provided aircraft for bona fide business-oriented
security concerns, the employee may exclude the excess, if any, of the
value of the flight over the amount the employee would have paid for the
same mode of transportation, but for the bona fide business-oriented
security concerns. Because personal travel is a nondeductible expense,
the employee may not exclude the total value of the trip as a working
condition fringe.
(2) Demonstration of bona fide business-oriented security concerns--
(i) In general. For purposes of this paragraph (m), a bona fide
business-oriented security concern exists only if the facts and
circumstances establish a specific basis for concern regarding the
safety of the employee. A generalized concern for an
[[Page 555]]
employee's safety is not a bona fide business-oriented security concern.
Once a bona fide business-oriented security concern is determined to
exist with respect to a particular employee, the employer must
periodically evaluate the situation for purposes of determining whether
the bona fide business-oriented security concern still exists. Example
of factors indicating a specific basis for concern regarding the safety
of an employee are--
(A) A threat of death or kidnapping of, or serious bodily harm to,
the employee or a similarly situated employee because of either
employee's status as an employee of the employer; or
(B) A recent history of violent terrorist activity (such as
bombings) in the geographic area in which the transportation is
provided, unless that activity is focused on a group of individuals
which does not include the employee (or a similarly situated employee of
an employer), or occurs to a significant degree only in a location
within the geographic area where the employee does not travel.
(ii) Establishment of overall security program. Notwithstanding
anything in paragraph (m)(2)(i) of this section to the contrary, no bona
fide business-oriented security concern will be deemed to exist unless
the employee's employer establishes to the satisfaction of the
Commissioner that an overall security program has been provided with
respect to the employee involved. An overall security program is deemed
to exist if the requirements of paragraph (m)(2)(iv) of this section are
satisfied (relating to an independent security study).
(iii) Overall security program--(A) Defined. An overall security
program is one in which security is provided to protect the employee on
a 24-hour basis. The employee must be protected while at the employee's
residence, while commuting to and from the employee's workplace, and
while at the employee's workplace. In addition, the employee must be
protected while traveling both at home and away from home, whether for
business or personal purposes. An overall security program must include
the provision of a bodyguard/chauffeur who is trained in evasive driving
techniques; an automobile specially equipped for security; guards, metal
detectors, alarms, or similar methods of controlling access to the
employee's workplace and residence; and, in appropriate cases, flights
on the employer's aircraft for business and personal reasons.
(B) Application. There is no overall security program when, for
example, security is provided at the employee's workplace but not at the
employee's residence. In addition, the fact that an employer requires an
employee to travel on the employer's aircraft, or in an employer-
provided vehicle that contains special security features, does not alone
constitute an overall security program. The preceding sentence applies
regardless of the existence of a corporate or other resolution requiring
the employee to travel in the employer's aircraft or vehicle for
personal as well as business reasons.
(iv) Effect of an independent security study. An overall security
program with respect to an employee is deemed to exist if the conditions
of this paragraph (m)(2)(iv) are satisfied:
(A) A security study is performed with respect to the employer and
the employee (or a similarly situated employee of the employer) by an
independent security consultant;
(B) The security study is based on an objective assessment of all
facts and circumstances;
(C) The recommendation of the security study is that an overall
security program (as defined in paragraph (m)(2)(iii) of this section)
is not necessary and the recommendation is reasonable under the
circumstances; and
(D) The employer applies the specific security recommendations
contained in the security study to the employee on a consistent basis.
The value of transportation-related security provided pursuant to a
security study that meets the requirements of this paragraph (m)(2)(iv)
may be excluded from income if the security study conclusions are
reasonable and, but for the bona fide business-oriented security
concerns, the employee would not have had such security. No exclusion
from income applies to security provided by the employer that is not
recommended in the security study.
[[Page 556]]
Security study conclusions may be reasonable even if, for example, it is
recommended that security be limited to certain geographic areas, as in
the case in which air travel security is provided only in certain
foreign countries.
(v) Independent security study with respect to government employees.
For purposes of establishing the existence of an overall security
program under paragraph (m)(2)(ii) of this section with respect to a
particular government employee, a security study conducted by the
government employer (including an agency or instrumentality thereof)
will be treated as a security study pursuant to paragraph (m)(2)(iv) of
this section if, in lieu of the conditions of paragraphs (m)(2)(iv)(A)
through (D) of this section, the following conditions are satisfied:
(A) The security study is conducted by a person expressly designated
by the government employer as having the responsibility and independent
authority to determine both the need for employer-provided security and
the appropriate protective services in response to that determination;
(B) The security study is conducted in accordance with written
internal procedures that require an independent and objective assessment
of the facts and circumstances, such as the nature of the threat to the
employee, the appropriate security response to that threat, an estimate
of the length of time protective services will be necessary, and the
extent to which employer-provided transportation may be necessary during
the period of protection;
(C) With respect to employer-provided transportation, the security
study evaluates the extent to which personal use, including commuting,
by the employee and the employee's spouse and dependents may be
necessary during the period of protection and makes a recommendation as
to what would be considered reasonable personal use during that period;
and
(D) The employer applies the specific security recommendations
contained in the study to the employee on a consistent basis.
(3) Application of security rules to spouses and dependents. (i) In
general. If a bona fide business-oriented security concern exists with
respect to an employee (because, for example, threats are made on the
life of an employee), the bona fide business-oriented security concern
is deemed to exist with respect to the employee's spouse and dependents
to the extent provided in this paragraph (m)(3).
(ii) Certain transportation. If a working condition fringe exclusion
is available under this paragraph (m) for transportation in a vehicle or
aircraft provided for a bona fide business-oriented security concern
with respect to an employee, the requirements of this paragraph (m) are
deemed to be satisfied with respect to transportation in the same
vehicle or aircraft provided at the same time to the employee's spouse
and dependent children.
(iii) Other. Except as provided in paragraph (m)(3)(ii) of this
section, a bona fide business oriented security concern is deemed to
exist for the spouse and dependent children of the employer only if the
requirements of paragraph (m)(2) (iii) or (iv) of this section are
applied independently to such spouse and dependent children.
(iv) Spouses and dependents of government employees. The security
rules of this paragraph (m)(3) apply to the spouse and dependents of a
government employee. However, the value of local vehicle transportation
provided to the government employee's spouse and dependents for personal
purposes, other than commuting, during the period that a bona fide
business-oriented security concern exists with respect to the government
employee will not be included in the government employee's gross income
if the personal use is determined to be reasonable and necessary by the
security study described in paragraph (m)(2)(v) of this section.
(4) Working condition safe harbor for travel on employer-provided
aircraft. Under the safe harbor rule of this paragraph (m)(4), if, for a
bona fide business-oriented security concern, the employer requires that
an employee travel on an employer-provided aircraft for a personal trip,
the employer and the employee may exclude from the employee's gross
income, as a working condition fringe, the excess value of the aircraft
trip over the safe harbor airfare without having to show what
[[Page 557]]
method of transportation the employee would have flown but for the bona
fide business-oriented security concern. For purposes of the safe harbor
rule of this paragraph (m)(4), the value of the safe harbor airfare is
determined under the non-commercial flight valuation rule of Sec. 1.61-
21(g) (regardless of whether the employer or employee elects to use such
valuation rule) by multiplying an aircraft multiple of 200-percent by
the applicable cents-per-mile rates and the number of miles in the
flight and then adding the applicable terminal charge. The value of the
safe harbor airfare determined under this paragraph (m)(4) must be
included in the employee's income (to the extent not reimbursed by the
employee) regardless of whether the employee or the employer uses the
special valuation rule of Sec. 1.61-21(g). The excess of the value of
the aircraft trip over this amount may be excluded from gross income as
a working condition fringe. If, for a bona fide business-oriented
security concern, the employer requires that an employee's spouse and
dependents travel on an employer-provided aircraft for a personal trip,
the special rule of this paragraph (m)(4) is available to exclude the
excess value of the aircraft trips over the safe harbor airfares.
(5) Bodyguard/chauffeur provided for a bona fide business-oriented
security concern. If an employer provides an employee with vehicle
transportation and a bodyguard/chauffeur for a bona fide business-
oriented security concern, and but for the bona fide business-oriented
security concern the employee would not have had a bodyguard or a
chauffeur, then the entire value of the services of the bodyguard/
chauffeur is excludable from gross income as a working condition fringe.
For purposes of this section, a bodyguard/chauffeur must be trained in
evasive driving techniques. An individual who performs services as a
driver for an employee is not a bodyguard/chauffeur if the individual is
not trained in evasive driving techniques. Thus, no part of the value of
the services of such an individual is excludable from gross income under
this paragraph (m)(5). (See paragraph (b)(3) of this section for rules
relating to the determination of the working condition fringe exclusion
for chauffeur services.)
(6) Special valuation rule for government employees. If
transportation is provided to a government employee for commuting during
the period that a bona fide business-oriented security concern under
Sec. 1.132-5(m) exists, the commuting use may be valued by reference to
the values set forth in Sec. 1.61-21(e)(1)(i) or (f)(3) (vehicle cents-
per-mile or commuting valuation of $1.50 per one-way commute,
respectively) without regard to the additional requirements contained in
Sec. 1.61-21 (e) or (f) and is deemed to have met the requirements of
Sec. 1.61-21(c).
(7) Government employer and employee defined. For purposes of this
paragraph (m), ``government employer'' includes any Federal, State, or
local government unit, and any agency or instrumentality thereof. A
``government employee'' is any individual who is employed by the
government employer.
(8) Examples. The provisions of this paragraph (m) may be
illustrated by the following examples:
Example (1). Assume that in response to several death threats on the
life of A, the president of X a multinational company, X establishes an
overall security program for A, including an alarm system at A's home
and guards at A's workplace, the use of a vehicle that is specially
equipped with alarms, bulletproof glass, and armor plating, and a
bodyguard/chauffeur. Assume further that A is driven for both personal
and business reasons in the vehicle. Also, assume that but for the bona
fide business-oriented security concerns, no part of the overall
security program would have been provided to A. With respect to the
transportation provided for security reasons, A may exclude as a working
condition fringe the value of the special security features of the
vehicle and the value attributable to the bodyguard/chauffeur. Thus, if
the value of the specially equipped vehicle is $40,000, and the value of
the vehicle without the security features is $25,000, A may determine
A's inclusion in income attributable to the vehicle as if the vehicle
were worth $25,000. A must include in income the value of the
availability of the vehicle for personal use.
Example (2). Assume that B is the chief executive officer of Y, a
multinational corporation. Assume further that there have been
kidnapping attempts and other terrorist activities in the foreign
countries in which B performs services and that at least some of such
activities have been directed against B or similarly situated employees.
ln response
[[Page 558]]
to these activities, Y provides B with an overall security program,
including an alarm system at B's home and bodyguards at B's workplace, a
bodyguard/chauffeur, and a vehicle specially designed for security
during B's overseas travels. In addition, assume that Y requires B to
travel in Y's airplane for business and personal trips taken to, from,
and within these foreign countries. Also, assume that but for bona fide
business-oriented security concerns, no part of the overall security
program would have been provided to B. B may exclude as a working
condition fringe the value of the special security features of the
automobile and the value attributable to the bodyguards and the
bodyguard/chauffeur. B may also exclude the excess, if any, of the value
of the flights over the amount A would have paid for the same mode of
transportation but for the security concerns. As an alternative to the
preceding sentence, B may use the working condition safe harbor
described in paragraph (m)(4) of this section and exclude as a working
condition fringe the excess, if any, of the value of personal flights in
the Y airplane over the safe harbor airfare determined under the method
described in paragraph (m)(4) of this section. If this alternative is
used, B must include in income the value of the availability of the
vehicle for personal use and the value of the safe harbor.
Example (3). Assume the same facts as in example (2) except that Y
also requires B to travel in Y's airplane within the United States, and
provides B with a chauffeur-driven limousine for business and personal
travel in the United States. Assume further that Y also requires B's
spouse and dependents to travel in Y's airplane for personal flights in
the United States. If no bona fide business-oriented security concern
exists with respect to travel in the United States, B may not exclude
from income any portion of the value of the availability of the
chauffeur or limousine for personal use in the United States. Thus, B
must include in income the value of the availability of the vehicle and
chauffeur for personal use. In addition, B may not exclude any portion
of the value attributable to personal flights by B or B's spouse and
dependents on Y's airplane. Thus, B must include in income the value
attributable to the personal use of Y's airplane. See Sec. 1.61-21 for
rules relating to the valuation of an employer-provided vehicle and
chauffeur, and personal flights on employer-provided airplanes.
Example (4). Assume that company Z retains an independent security
consultant to perform a security study with respect to its chief
executive officer. Assume further that, based on an objective assessment
of the facts and circumstances, the security consultant reasonably
recommends that 24-hour protection is not necessary but that the
employee be provided security at his workplace and for ground
transportation, but not for air transportation. If company Z follows the
recommendations on a consistent basis, an overall security program will
be deemed to exist with respect to the workplace and ground
transportation security only.
Example (5). Assume the same facts as in example (4) except that
company Z only provides the employee security while commuting to and
from work, but not for any other ground transportation. Because the
recommendations of the independent security study are not applied on a
consistent basis, an overall security program will not be deemed to
exist. Thus, the value of commuting to and from work is not excludable
from income. However, the value of a bodyguard with professional
security training who does not provide chauffeur or other personal
services to the employee or any member of the employee's family may be
excludable as a working condition fringe if such expense would be
otherwise allowable as a deduction by the employee under section 162 or
167.
Example (6). J is a United States District Judge. At the beginning
of a 3-month criminal trial in J's court, a member of J's family
receives death threats. M, the division (within government agency W)
responsible for evaluating threats and providing protective services to
the Federal judiciary, directs its threat analysis unit to conduct a
security study with respect to J and J's family. The study is conducted
pursuant to internal written procedures that require an independent and
objective assessment of any threats to members of the Federal judiciary
and their families, a statement of the requisite security response, if
any, to a particular threat (including the form of transportation to be
furnished to the employee as part of the security program), and a
description of the circumstances under which local transportation for
the employee and the employee's spouse and dependents may be necessary
for personal reasons during the time protective services are provided.
M's study concludes that a bona fide business-oriented security concern
exists with respect to J and J's family and determines that 24-hour
protection of J and J's family is not necessary, but that protection is
necessary during the course of the criminal trial whenever J or J's
family is away from home. Consistent with that recommendation, J is
transported every day in a government vehicle for both personal and
business reasons and is accompanied by two bodyguard/chauffeurs who have
been trained in evasive driving techniques. In addition, J's spouse is
driven to and from work and J's children are driven to and from school
and occasional school activities. Shortly after the trial is concluded,
M's threat analysis unit determines that J and J's family no longer need
special protection because the danger posed by the threat no longer
exists
[[Page 559]]
and, accordingly, vehicle transportation is no longer provided. Because
the security study conducted by M complies with the conditions of
Sec. 1.132-5(m)(2)(v), M has satisfied the requirement for an
independent security study and an overall security program with respect
to J is deemed to exist. Thus, with respect to the transportation
provided for security concerns, J may exclude as a working condition
fringe the value of any special security features of the government
vehicle and the value attributable to the two bodyguard/chauffeurs. See
Example (1) of this paragraph (m)(8). The value of vehicle
transportation provided to J and J's family for personal reasons, other
than commuting, may also be excluded during the period of protection,
because its provision was consistent with the recommendation of the
security study.
Example (7). Assume the same facts as in Example (6) and that J's
one-way commute between home and work is 10 miles. Under paragraph
(m)(6) of this section, the Federal Government may value transportation
provided to J for commuting purposes pursuant to the value set forth in
either the vehicle cents-per-mile rule of Sec. 1.61-21(e) or the
commuting valuation rule of Sec. 1.61-21(f). Because the commuting
valuation rule yields the least amount of taxable income to J under the
circumstances, W values the transportation provided to J for commuting
at $1.50 per one-way commute, even though J is a control employee within
the meaning of Sec. 1.61-21(f)(6).
(n) Product testing--(1) In general. The fair market value of the
use of consumer goods, which are manufactured for sale to nonemployees,
for product testing and evaluation by an employee of the manufacturer
outside the employer's workplace, is excludible from gross income as a
working condition fringe if--
(i) Consumer testing and evaluation of the product is an ordinary
and necessary business expense of the employer;
(ii) Business reasons necessitate that the testing and evaluation of
the product be performed off the employer's business premises by
employees (i.e., the testing and evaluation cannot be carried out
adequately in the employer's office or in laboratory testing
facilities);
(iii) The product is furnished to the employee for purposes of
testing and evaluation;
(iv) The product is made available to the employee for no longer
than necessary to test and evaluate its performance and (to the extent
not exhausted) must be returned to the employer at completion of the
testing and evaluation period;
(v) The employer imposes limits on the employee's use of the product
that significantly reduce the value of any personal benefit to the
employee; and
(vi) The employee must submit detailed reports to the employer on
the testing and evaluation. The length of the testing and evaluation
period must be reasonable in relation to the product being tested.
(2) Employer-imposed limits. The requirement of paragraph (n)(1)(v)
of this section is satisfied if--
(i) The employer places limits on the employee's ability to select
among different models or varieties of the consumer product that is
furnished for testing and evaluation purposes; and
(ii) The employer generally prohibits use of the product by persons
other than the employee and, in appropriate cases, requires the
employee, to purchase or lease at the employee's own expense the same
type of product as that being tested (so that personal use by the
employee's family will be limited). In addition, any charge by the
employer for the personal use by an employee of a product being tested
shall be taken into account in determining whether the requirement of
paragraph (n)(1)(v) of this section is satisfied.
(3) Discriminating classifications. If an employer furnishes
products under a testing and evaluation program only, or presumably, to
certain classes of employees (such as highly compensated employees, as
defined in Sec. 1.132-8(g)), this fact may be relevant when determining
whether the products are furnished for testing and evaluation purposes
or for compensation purposes, unless the employer can show a business
reason for the classification of employees to whom the products are
furnished (e.g., that automobiles are furnished for testing and
evaluation by an automobile manufacturer to its design engineers and
supervisory mechanics).
(4) Factors that negate the existence of a product testing program.
If an employer fails to tabulate and examine
[[Page 560]]
the results of the detailed reports submitted by employees within a
reasonable period of time after expiration of the testing period, the
program will not be considered a product testing program for purposes of
the exclusion of this paragraph (n). Existence of one or more of the
following factors may also establish that the program is not a bona fide
product testing program for purposes of the exclusion of this paragraph
(n):
(i) The program is in essence a leasing program under which
employees lease the consumer goods from the employer for a fee;
(ii) The nature of the product and other considerations are
insufficient to justify the testing program; or
(iii) The expense of the program outweighs the benefits to be gained
from testing and evaluation.
(5) Failure to meet the requirements of this paragraph (n). The fair
market value of the use of property for product testing and evaluation
by an employee outside the employee's workplace, under a product testing
program that does not meet all of the requirements of this paragraph
(n), is not excludable from gross income as a working condition fringe
under this paragraph (n).
(6) Example. The rules of this paragraph (n) may be illustrated by
the following example:
Example. Assume that an employer that manufactures automobiles
establishes a product testing program under which 50 of its 5,000
employees test and evaluate the automobiles for 30 days. Assume further
that the 50 employees represent a fair cross-section of all of the
employees of the employer, such employees submit detailed reports to the
employer on the testing and evaluation, the employer tabulates and
examines the test results within a reasonable time, and the use of the
automobiles is restricted to the employees. If the employer imposes the
limits described in paragraph (n)(2) of this section, the employees may
exclude the value of the use of the automobile during the testing and
evaluation period.
(o) Qualified automobile demonstration use--(1) In general. The
value of qualified automobile demonstration use is excludable from gross
income as a working condition fringe. ``Qualified automobile
demonstration use'' is any use of a demonstration automobile by a full-
time automobile salesman in the sales area in which the automobile
dealer's sales office is located if--
(i) Such use is provided primarily to facilitate the salesman's
performance of services for the employer; and
(ii) There are substantial restrictions on the personal use of the
automobile by the salesman.
(2) Full-time automobile salesman--(i) Defined. The term ``full-time
automobile salesman'' means any individual who--
(A) Is employed by an automobile dealer;
(B) Customarily spends at least half of a normal business day
performing the functions of a floor salesperson or sales manager;
(C) Directly engages in substantial promotion and negotiation of
sales to customers;
(D) Customarily works a number of hours considered full-time in the
industry (but at a rate not less than 1,000 hours per year); and
(E) Derives at least 25 percent of his or her gross income from the
automobi1e dealership directly as a result of the activities described
in paragraphs (o)(2)(i) (B) and (C) of this section.
For purposes of paragraph (o)(2)(i) (E) of this section, income is not
considered to be derived directly as a result of activities described in
paragraphs (o)(2)(i) (B) and (C) of this section to the extent that the
income is attributable to an individual's ownership interest in the
dealership. An individual will not be considered to engage in direct
sales activities if the individual's sales-related activities are
substantially limited to review of sales price offers from customers. An
individual, such as the general manager of an automobi1e dealership, who
receives a sales commission on the sale of an automobile is not a full-
time automobile salesman unless the requirements of this paragraph
(o)(2)(i) are met. The exclusion provided in this paragraph (o) is
available to an individual who meets the definition of this paragraph
(o)(2)(i) whether the individual performs services in addition to those
described in this paragraph (o)(2)(i). For example, an individual who is
an owner of the automobile dealership but who otherwise meets the
[[Page 561]]
requirements of this paragraph (o)(2)(i) may exclude from gross income
the value of qualified automobile demonstration use. However, the
exclusion of this paragraph (o) is not available to owners of large
automobile dealerships who do not customarily engage in significant
sales activities.
(ii) Use by an individual other than a full-time automobile
salesman. Personal use of a demonstration automobile by an individual
other than a full-time automobile salesman is not treated as a working
condition fringe. Therefore, any personal use, including commuting use,
of a demonstration automobile by a part-time salesman, automobile
mechanic, or other individual who is not a full-time automobile salesman
is not ``qualified automobile demonstration use'' and thus not
excludable from gross income. This is the case whether or not the
personal use is within the sales area (as defined in paragraph (o)(5) of
this section).
(3) Demonstration automobile. The exclusion provided in this
paragraph (o) applies only to qualified use of a demonstration
automobile. A demonstration automobile is an automobile that is--
(i) Currently in the inventory of the automobile dealership; and
(ii) Available for test drives by customers during the normal
business hours of the employee.
(4) Substantial restrictions on personal use. Substantial
restrictions on the personal use of a demonstration automobile exist
when all of the following conditions are satisfied:
(i) Use by individuals other than the full-time automobile salesmen
(e.g., the salesman's family) is prohibited;
(ii) Use for personal vacation trips is prohibited;
(iii) The storage of personal possessions in the automobile is
prohibited; and
(iv) The total use by mileage of the automobile by the salesman
outside the salesman's normal working hours is limited.
(5) Sales area--(i) In general. Qualified automobile demonstration
use consists of use in the sales area in which the automobile dealer's
sales office is located. The sales area is the geographic area
surrounding the automobile dealer's sales office from which the office
regularly derives customers.
(ii) Sales area safe harbor. With respect to a particular full-time
salesman, the automobile dealer's sales area may be treated as the area
within a radius of the larger of--
(A) 75 miles or
(B) The one-way commuting distance (in miles) of the particular
salesman from the dealer's sales office.
(6) Applicability of substantiation requirements of sections 162 and
274(d). Notwithstanding anything in this section to the contrary, the
value of the use of a demonstration automobile may not be excluded from
gross income as a working condition fringe, by either the employer or
the employee, unless, with respect to the restrictions of paragraph
(o)(4) of this section, the substantiation requirements of section
274(d) and the regulations thereunder are satisfied. See Sec. 1.132-5(c)
for general and safe harbor rules relating to the applicability of the
substantiation requirements of section 274(d).
(7) Special valuation rules. See Sec. 1.61-21(d)(6)(ii) for special
rules that may be used to value the availability of demonstration
automobiles.
(p) Parking--(1) In general. The value of parking provided to an
employee on or near the business premises of the employer is excludable
from gross income as a working condition fringe under the special rule
of this paragraph (p). If the rules of this paragraph (p) are satisfied,
the value of parking is excludable from gross income whether the amount
paid by the employee for parking would be deductible under section 162.
The working condition fringe exclusion applies whether the employer owns
or rents the parking facility or parking space.
(2) Reimbursement of parking expenses. A reimbursement to the
employee of the ordinary and necessary expenses of renting a parking
space on or near the business premises of the employer is excludable
from gross income as a working condition fringe, if, but for the parking
expense, the employee would not have been entitled to receive and retain
such amount from the employer. If, however an employee is entitled to
retain a general transportation allowance or a similar benefit whether
or
[[Page 562]]
not the employee has parking expenses, no portion of that allowance is
excludable from gross income under this paragraph (p) even if it is used
for parking expenses.
(3) Parking on residential property. With respect to an employee,
this paragraph (p) does not apply to any parking facility or space
located on property owned or leased by the employee for residential
purposes.
(4) Dates of applicability. This paragraph (p) applies to benefits
provided before January 1, 1993. For benefits provided after December
31, 1992, see Sec. 1.132-9.
(q) Nonapplicability of nondiscrimination rules. Except to the
extent provided in paragraph (n)(3) of this section (relating to
discriminating classifications of a product testing program), the
nondiscrimination rules of section 132 (h)(1) and Sec. 1.132-8 do not
apply in determining the amount, if any, of a working condition fringe.
(r) Volunteers--(1) In general. Solely for purposes of section
132(d) and paragraph (a)(1) of this section, a bona fide volunteer
(including a director or officer) who performs services for an
organization exempt from tax under section 501(a), or for a government
employer (as defined in paragraph (m)(7) of this section), is deemed to
have a profit motive under section 162.
(2) Limit on application of this paragraph. This paragraph (r) shall
not be used to support treatment of the bona fide volunteer as having a
profit motive for purposes of any provision of the Internal Revenue Code
of 1986 (Code) other than section 132(d). Nothing in this paragraph (r)
shall be interpreted as determining the employment status of a bona fide
volunteer for purposes of any section of the Code other than section
132(d).
(3) Definitions--(i) Bona fide volunteer. For purposes of this
paragraph (r), an individual is considered a ``bona fide volunteer'' if
the individual does not have a profit motive for purposes of section
162. For example, an individual is considered a ``bona fide volunteer''
if the total value of the benefits provided with respect to the
volunteer services is substantially less than the total value of the
volunteer services the individual provides to an exempt organization or
government employer.
(ii) Liability insurance coverage for a bona fide volunteer. For
purposes of this paragraph (r), the receipt of liability insurance
coverage by a volunteer, or an exempt organization or government
employer's undertaking to indemnify the volunteer for liability, does
not by itself confer a profit motive on the volunteer, provided the
insurance coverage or indemnification relates to acts performed by the
volunteer in the discharge of duties, or the performance of services, on
behalf of the exempt organization or government employer.
(4) Example. The following example illustrates the provisions of
paragraph (r) of this section.
Example. A is a manager and full-time employee of P, a tax-exempt
organization described in section 501(c)(3). B is a member of P's board
of directors. Other than $25 to defray expenses for attending board
meetings, B receives no compensation for serving as a director and does
not have a profit motive. Therefore, B is a bona fide volunteer by
application of paragraph (r)(3)(i) of this section and is deemed to have
a profit motive under paragraph (r)(1) of this section for purposes of
section 132(d). In order to provide liability insurance coverage, P
purchases a policy that covers actions arising from A's and B's
activities performed as part of their duties to P. The value of the
policy and payments made to or on behalf of A under the policy are
excludable for A's gross income as a working condition fringe, because A
has a profit motive under section 162 and would be able to deduct
payments for liability insurance coverage had he paid for it himself.
The receipt of liability insurance coverage by B does not confer a
profit motive on B by application of paragraph (r)(3)(ii) of this
section. Thus, the value of the policy and payments made to or on behalf
of B under the policy are excludable from B's income as a working
condition fringe. For the year in which the liability insurance coverage
is provided to A and B, P may exclude the value of the benefit on the
Form W-2 it issues to A or on any Form 1099 it might otherwise issue to
B.
(s) Application of section 274(a)(3)--(1) In general. If an
employer's deduction under section 162(a) for dues paid or incurred for
membership in any club organized for business, pleasure, recreation, or
other social purpose is disallowed by section 274(a)(3), the amount, if
any, of an employee's working condition fringe benefit relating to
[[Page 563]]
an employer-provided membership in the club is determined without regard
to the application of section 274(a) to the employee. To be excludible
as a working condition fringe benefit, however, the amount must
otherwise qualify for deduction by the employee under section 162(a). If
an employer treats the amount paid or incurred for membership in any
club organized for business, pleasure, recreation, or other social
purpose as compensation under section 274(e)(2), then the expense is
deductible by the employer as compensation and no amount may be excluded
from the employee's gross income as a working condition fringe benefit.
See Sec. 1.274-2(f)(2)(iii)(A).
(2) Treatment of tax-exempt employers. In the case of an employer
exempt from taxation under subtitle A of the Internal Revenue Code, any
reference in this paragraph (s) to a deduction disallowed by section
274(a)(3) shall be treated as a reference to the amount which would be
disallowed as a deduction by section 274(a)(3) to the employer if the
employer were not exempt from taxation under subtitle A of the Internal
Revenue Code.
(3) Examples. The following examples illustrate this paragraph (s):
Example 1. Assume that Company X provides Employee B with a country
club membership for which it paid $20,000. B substantiates, within the
meaning of paragraph (c) of this section, that the club was used 40
percent for business purposes. The business use of the club (40 percent)
may be considered a working condition fringe benefit, notwithstanding
that the employer's deduction for the dues allocable to the business use
is disallowed by section 274(a)(3), if X does not treat the club
membership as compensation under section 274(e)(2). Thus, B may exclude
from gross income $8,000 (40 percent of the club dues, which reflects
B's business use). X must report $12,000 as wages subject to withholding
and payment of employment taxes (60 percent of the value of the club
dues, which reflects B's personal use). B must include $12,000 in gross
income. X may deduct as compensation the amount it paid for the club
dues which reflects B's personal use provided the amount satisfies the
other requirements for a salary or compensation deduction under section
162.
Example 2. Assume the same facts as Example 1 except that Company X
treats the $20,000 as compensation to B under section 274(e)(2). No
portion of the $20,000 will be considered a working condition fringe
benefit because the section 274(a)(3) disallowance will apply to B.
Therefore, B must include $20,000 in gross income.
(t) Application of section 274(m)(3)--(1) In general. If an
employer's deduction under section 162(a) for amounts paid or incurred
for the travel expenses of a spouse, dependent, or other individual
accompanying an employee is disallowed by section 274(m)(3), the amount,
if any, of the employee's working condition fringe benefit relating to
the employer-provided travel is determined without regard to the
application of section 274(m)(3). To be excludible as a working
condition fringe benefit, however, the amount must otherwise qualify for
deduction by the employee under section 162(a). The amount will qualify
for deduction and for exclusion as a working condition fringe benefit if
it can be adequately shown that the spouse's, dependent's, or other
accompanying individual's presence on the employee's business trip has a
bona fide business purpose and if the employee substantiates the travel
within the meaning of paragraph (c) of this section. If the travel does
not qualify as a working condition fringe benefit, the employee must
include in gross income as a fringe benefit the value of the employer's
payment of travel expenses with respect to a spouse, dependent, or other
individual accompanying the employee on business travel. See Secs. 1.61-
21(a)(4) and 1.162-2(c). If an employer treats as compensation under
section 274(e)(2) the amount paid or incurred for the travel expenses of
a spouse, dependent, or other individual accompanying an employee, then
the expense is deductible by the employer as compensation and no amount
may be excluded from the employee's gross income as a working condition
fringe benefit. See Sec. 1.274-2(f)(2)(iii)(A).
(2) Treatment of tax-exempt employers. In the case of an employer
exempt from taxation under subtitle A of the Internal Revenue Code, any
reference in this paragraph (t) to a deduction disallowed by section
274(m)(3) shall be treated as a reference to the amount which would be
disallowed as a deduction by section 274(m)(3) to the employer if the
employer were not exempt from taxation
[[Page 564]]
under subtitle A of the Internal Revenue Code.
[T.D. 8256, 54 FR 28608, July 6, 1989, as amended by 8451, 57 FR 57669,
Dec. 7, 1992; T.D. 8457, 57 FR 62196, Dec. 30, 1992; T.D. 8666, 61 FR
27006, May 30, 1996; T.D. 8933, 66 FR 2244, Jan. 11, 2001]
Sec. 1.132-5T Working condition fringe--1985 through 1988 (temporary).
(a) In general--(1) Definition. Gross income does not include the
value of a working condition fringe. The term ``working condition
fringe'' means any property or service provided to an employee of an
employer to the extent that, if the employee paid for the property or
service, the amount paid would be allowable as a deduction under section
162 or 167. If, under section 274 or any other section, certain
substantiation requirements must be met in order for a deduction under
section 162 or 167 to be allowable, those substantiation requirements
apply to the determination of a working condition fringe. An amount that
would be deductible by the employee under, for example, section 212 is
not a working condition fringe.
(2) Trade or business of the employee. If the hypothetical payment
for the property or service would be allowable as a deduction with
respect to a trade or business of the employee other than the employee's
trade or business of being an employee of the employer, it cannot be
taken into account for purposes of determining the amount, if any, of
the working condition fringe. For example, assume that, unrelated to
company X's trade or business and unrelated to company X's employee's
trade or business of being an employee of company X, the employee is a
member of the board of directors of company Y. Assume further that
company X provides the employee with air transportation to a company Y
board of director's meeting. The employee may not exclude the value of
the air transportation to the meeting as a working condition fringe. The
employee may, however, deduct such amount under section 162 if the
section 162 requirements are satisfied. The result would be the same
whether the air transportation was provided in the form of a flight on a
commercial airline or a seat on a company X airplane.
(b) Vehicle allocation rules--(1) In general--(i) General rule. In
general, with respect to an employer-provided vehicle, the amount
excludable as a working condition fringe is the amount that would be
allowable as a deduction under section 162 or 167 if the employee paid
for the availability of the vehicle. For example, assume that the value
of the availability of an employer-provided vehicle for a full year is
$2,000, without regard to any working condition fringe (i.e., assuming
all personal use). Assume further that the employee drives the vehicle
6,000 miles for his employer's business and 2,000 miles for reasons
other than the employer's business. In this situation, the value of the
working condition fringe is $2,000 multiplied by a fraction, the
numerator of which is the business-use mileage (6,000 miles) and the
denominator of which is the total mileage (8,000 miles). Thus, the value
of the working condition fringe is $1,500. The total amount includable
in the employee's gross income on account of the availability of the
vehicle is $500. For purposes of this section, the term ``vehicle'' has
the same meaning given the term in Sec. 1.61-2T(e)(2). Generally, when
determining the amount of an employee's working condition fringe, miles
accumulated on the vehicle by all employees of the employer during the
period in which the vehicle is available to the employee must be
considered. For example, assume that an employee of the employer is
provided the availability of an automobile for one year. Assume further
that during the year, the automobile is regularly used in the employer's
business by other employees. All miles accumulated on the automobile by
all employees of the employer during the year must be considered. If,
however, substantially all the use of the automobile by other employees
in the employer's business is permitted during a certain period, such as
the last three months of the year, the miles driven by the other
employees during that period would not be considered when determining
the employee's working condition fringe exclusion.
(ii) Use by an individual other than the employee. For purposes of
this section,
[[Page 565]]
if the availability of a vehicle to an individual would be taxed to an
employee, use of the vehicle by the individual is included in references
to use by the employee.
(iii) Provision of an expensive vehicle for personal use. Assume an
employer provides an employee with an expensive vehicle that an employee
may use in part for personal purposes. Even though the decision to
provide an expensive rather than an inexpensive vehicle is made by the
employer for bona fide noncompensatory business reasons, there is no
working condition fringe exclusion with respect to the personal miles
driven by the employee. If the employee paid for the availability of the
vehicle, he would not be entitled to deduct any part of the payment
attributable to personal miles.
(2) Use of different employer-provided automobiles. The working
condition fringe exclusion must be applied on an automobile by
automobile basis. For example, assume that automobile Y is available to
employee D for 3 days in January and for 5 days in March, and automobile
Z is available to D for a week in July. Assume further that the Daily
Lease Value, as defined in Sec. 1.61-2T, of each automobile is $50. For
the eight days of availability of Y in January and March, D uses Y 90
percent for business (by mileage). During July, D uses Z 60 percent for
business (by mileage). The value of the working condition fringe is
determined separately for each automobile. Therefore, the working
condition fringe for Y is $360 ($400 x .90) leaving an income inclusion
of $40. The working condition fringe for Z is $210 ($350 x .60) leaving
an income inclusion of $140. If the value of the availability of an
automobile is determined under the Annual Lease Value rule for one
period and Daily Lease Value rule for a second period (see Sec. 1.61-
2T), the working condition fringe exclusion must be calculated
separately for the two periods.
(c) Applicability of sections 162 and 274(d)--(1) In general. The
value of property or services provided to an employee may not be
excluded from the employee's gross income as a working condition fringe,
by either the employer or the employee, unless the applicable
substantiation requirements of either section 274(d) or section 162
(whichever is applicable) and the regulations thereunder are statisfied.
With respect to listed property, the substantiation requirements of
section 274(d) and the regulations thereunder do not apply to the
determination of an employee's working condition fringe exclusion prior
to the date that those requirements apply to the first taxable year of
the employer beginning after December 31, 1985. For example, if an
employer's first taxable year beginning after December 31, 1985, begins
on July 1, 1986, with respect to listed property, the substantiation
requirements of section 274(d) apply as of that date. The substantiation
requirements of section 274(d) apply to an employee even if the
requirements of section 274 do not apply to the employee's employer for
deduction purposes (such as when the employer is a tax-exempt
organization or a governmental unit); in these cases, the requirements
of section 274(d) apply to the employee as of January 1, 1986.
(2) Section 274(d) requirements. The substantiation requirements of
section 274(d) are satisfied by ``adequate records or sufficient
evidence corroborating the [employee's] own statement''. Therefore, such
records or evidence provided by the employee, and relied upon by the
employer to the extent permitted by the regulations promulgated under
section 274(d), will be sufficient to substantiate a working condition
fringe exclusion.
(d) Safe harbor rules--(1) In general. Section 1.274-6T provides
that the substantiation requirements of section 274(d) and the
regulations thereunder may be satisfied, in certain circumstances, by
using one or more of the safe harbor rules prescribed in Sec. 1.274-6T.
If the employer uses one of the safe harbor rules prescribed in
Sec. 1.274-6T during a period with respect to a vehicle (as defined in
Sec. 1.61-2T), that rule must be used by the employer to substantiate a
working condition fringe exclusion with respect to that vehicle during
the period. An employer that is exempt from Federal income tax may still
use one of the safe harbor rules (if the requirements of that section
are otherwise met during a period) to substantiate a working condition
[[Page 566]]
fringe exclusion with respect to a vehicle during the period. If the
employer uses one of the methods prescribed in Sec. 1.274-6T during a
period with respect to an employer-provided vehicle, that method may be
used by an employee to substantiate a working condition fringe exclusion
with respect to the same vehicle during the period, as long as the
employee includes in gross income the amount allocated to the employee
pursuant to Sec. 1.274-6T and this section. (See Sec. 1.61-2T(c)(2)(i)
for other rules concerning when an employee must include in income the
amount determined by the employer.) If, however, the employer uses the
safe harbor rule prescribed in Sec. 1.274-6T(a) (2) or (3) and the
employee without the employer's knowledge uses the vehicle for purposes
other than de minimis personal use (in the case of the rule prescribed
in Sec. 1.274-6T(a)(2)), or for purposes other than de minimis personal
use and commuting (in the case of the rule prescribed in Sec. 1.274-
6T(a)(3)), then the employee must include additional income for the
unauthorized use of the vehicle.
(2) Period for use of safe harbor rules. The rules prescribed in
this paragraph (d) assume that the safe harbor rules prescribed in
Sec. 1.274-6T are used for a one-year period. Accordingly, references to
the value of the availability of a vehicle, amounts excluded as a
working condition fringe, etc., are based on a one-year period. If the
safe harbor rules prescribed in Sec. 1.274-6T are used for a period of
less than a year, the amounts referenced in the previous sentence must
be adjusted accordingly. For purposes of this section, the term
``personal use'' has the same meaning as prescribed in Sec. 1.274-
6T(e)(5).
(e) Vehicles not available to employees for personal use. For a
vehicle described in Sec. 1.274-6T(a)(2) (relating to certain vehicles
not used for personal purposes), the working condition fringe exclusion
is equal to the value of the availability of the vehicle if the employer
uses the method prescribed in Sec. 1.274-6T(a)(2).
(f) Vehicles not available to employees for personal use other than
commuting. For a vehicle described in Sec. 1.274-6T(a)(3) (relating to
certain vehicles not used for personal purposes other than commuting),
the working condition fringe exclusion is equal to the value of the
availability of the vehicle for purposes other than commuting if the
employer uses the method prescribed in Sec. 1.274-6T(a)(3). This rule
applies only if the special rule for valuing commuting use, as
prescribed in Sec. 1.61-2T, is used and the amount determined under the
special rule is either included in the employee's income or reimbursed
by the employee.
(g) Vehicles used in connection with the business of farming that
are available to employees for personal use--(1) In general. For a
vehicle described in Sec. 1.274-6T(b) (relating to certain vehicles used
in connection with the business of farming), the working condition
fringe exclusion is calculated by multiplying the value of the
availability of the vehicle by 75 percent.
(2) Vehicles available to more than one individual. If the vehicle
is available to more than one individual, the employer must allocate the
gross income attributable to the vehicle (25 percent of the value of the
availability of the vehicle) among the employees (and other individuals
whose use would not be attributed to an employee) to whom the vehicle
was available. This allocation must be done in a reasonable manner to
reflect the personal use of the vehicle by the individuals. An amount
that would be allocated to a sole proprietor reduces the amounts that
may be allocated to employees but are otherwise to be disregarded for
purposes of this paragraph (g). For purposes of this paragraph (g), the
value of the availability of a vehicle may be calculated as if the
vehicle were available to only one employee continuously and without
regard to any working condition fringe exclusion.
(3) Examples. The following examples illustrate a reasonable
allocation of gross income with respect to an employer-provided vehicle
between two employees:
Example (1). Assume that two farm employees share the use of a
vehicle which for a calendar year is regularly used directly in
connection with the business of farming and qualifies for use of the
rule in Sec. 1.274-6T (b). Employee A uses the vehicle in the morning
directly in connection with the business of farming and employee B uses
the vehicle in the afternoon directly in connection with the business of
farming. Assume further that
[[Page 567]]
employee B takes the vehicle home in the evenings and on weekends. The
employer should allocate all the income attributable to the availability
of the vehicle to employee B.
Example (2). Assume that for a calendar year, farm employees C and D
share the use of a vehicle that is regularly used directly in connection
with the business of farming and qualifies for use of the rule in
Sec. 1.274-6T (b). Assume further that the employees alternate taking
the vehicle home in the evening and alternate the availability of the
vehicle for personal purposes on weekends. The employer should allocate
the income attributable to the availability of the vehicle for personal
use (25 percent of the value of the availability of the vehicle) equally
between the two employees.
Example (3). Assume the same facts as in example (2) except that C
is the sole proprietor of the farm. Based on these facts, C should
allocate the same amount of income to D as was allocated to D in example
(2). No other income attributable to the availability of the vehicle for
personal use should be allocated.
(h) Qualified non-personal use vehicles. Effective January 1, 1985,
100 percent of the value of the use of a qualified nonpersonal use
vehicle (as described in Sec. 1.274-5T (k)) is excluded from gross
income as a working condition fringe, provided that, in the case of a
vehicle described in paragraph (k) (3) through (7) of that section, the
use of the vehicles conforms to the requirements of that paragraph.
(i) [Reserved]
(j) Application of section 280F. In determining the amount, if any,
of an employee's working condition fringe, section 280F and the
regulations thereunder do not apply. For example, assume that an
employee has available for a calendar year an employer-provided
automobile with a fair market value of $28,000. Assume further that the
special rule provided in Sec. 1.61-2T is used and that the Annual Lease
Value, as defined in Sec. 1.61-2T, is $7,750, and that all of the
employee's use of the automobile is in the employer's business. The
employee would be entitled to exclude the entire Annual Lease Value as a
working condition fringe, despite the fact that if the employee paid for
the availability of the automobile, an income inclusion would be
required under Sec. 1.280F-5T(d)(1). This paragraph (j) does not affect
the applicability of section 280F to the employer with respect to such
employer-provided automobile, nor does it affect the applicability of
section 274. For rules concerning substantiation of an employee's
working condition fringe, see paragraph (c) of this section.
(k) Aircraft allocation rule. In general, with respect to a flight
on an employer-provided aircraft, the amount excludable as a working
condition fringe is the amount that would be allowable as a deduction
under section 162 or 167 if the employee paid for the flight on the
aircraft. For example, if employee P flies on P's employer's airplane
primarily for business reasons of P's employer, the value of P's flight
is excludable as a working condition fringe. However, if P's spouse and
children accompany P on such airplane trip primarily for personal
reasons, the value of the flights by P's spouse and children are
includable in P's gross income. See Sec. 1.61-2T(g) for special rules
for valuing personal flights.
(l) [Reserved]
(m) Employer-provided transportation for security concerns--(1) In
general. The amount of a working condition fringe exclusion with respect
to employer-provided transportation is the amount that would be
allowable as a deduction under section 162 or 167 if the employee paid
for the transportation. Generally, if an employee pays for
transportation taken for primarily personal purposes, the employee may
not deduct any part of the amount paid. Thus, the employee may not
generally exclude the value of employer-provided transportation as a
working condition fringe if such transportation is primarily personal.
If, however, for bona fide business-oriented security concerns, the
employee purchases transportation that provides him or her with
additional security, the employee may generally deduct the excess of the
amount paid for the transportation over the lesser amount the employee
would have paid for the same mode of transportation absent the bona fide
business-oriented security concerns. With respect to a vehicle, the
phrase ``the same mode of transportation'' means use of the same vehicle
without the additional security aspects, such as bulletproof glass. With
respect to air transportation, the phrase ``the same
[[Page 568]]
mode of transportation'' means comparable air transportation. These same
rules apply to the determination of an employee's working condition
fringe exclusion. For example, if an employer provides an employee with
an automobile for commuting and, for bona fide business-oriented
security concerns, the automobile is specially designed for security,
then the employee may exclude the value of the special security design
as a working condition fringe if the employee's automobile would not
have had such security design but for the bona fide business-oriented
security concerns. The employee may not exclude the value of the
commuting from income as a working condition fringe because commuting is
a nondeductible personal expense. Similarly, if an employee travels on a
personal trip in an employer-provided aircraft for bona fide business-
oriented security concerns, the employee may exclude the excess, if any,
of the value of the flight over the amount the employee would have paid
for comparable air transportation, but for the bona fide business-
oriented security concerns. Because personal travel is a nondeductible
expense, the employee may not exclude the total value of the trip as a
working condition fringe.
(2) Demonstration of bona fide business-oriented security concerns--
(i) In general. For purposes of this paragraph (m), the existence of a
bona fide business-oriented security concern for the furnishing of a
specific form of transportation to an employee is determined on the
basis of all the facts and circumstances within the following
guidelines:
(A) Services performed outside the United States. With respect to an
employee performing services for an employer in a geographic area other
than the United States, a factor indicating a bona fide business-
oriented security concern is a recent history of violent terrorist
activity in such geographic area (such as bombings or abductions for
ransom), unless such activity is focused on a group of individuals which
does not include the employee or a similarly situated employee or on a
section of the geographic area which does not incude the employee.
(B) Services performed in the United States. With respect to an
employee performing services for an employer in the United States, a
factor indicating a bona fide business-oriented security concern is
threats on the life of the employee or on the life of a similarly
situated employee because of the employee's status as an employee of the
employer.
(ii) Establishment of overall security program. Notwithstanding
anything in paragraph (m)(2)(i) of this section to the contrary, no bona
fide business-oriented security concern will be deemed to exist unless
the employee's employer establishes an overall security program with
respect to the employee involved.
(iii) Overall security program--(A) Definition. An overall security
program is one in which security is provided to protect the employee on
a 24-hour basis. The employee must be protected while at the employee's
residence, while commuting to and from the employee's workplace, and
while at the employee's workplace. In addition, the employee must be
protected while traveling, whether for business or personal purposes. An
overall security program would include the provision of a bodyguard/
driver who is trained in evasive driving techniques; and automobile
specially equipped for security; guards, metal detectors, alarms, or
similar methods of controling access to the employee's workplace and
residence; and, in appropriate cases, flights on the employer's aircraft
for business and personal reasons.
(B) Application. There is no overall security program when, for
example, security is provided at the employee's workplace but not at the
employee's residence. In addition, the fact that an employer requires an
employee to travel on the employer's aircraft, or in an employer-
provided vehicle that contains special security features, does not alone
constitute an overall security program. The preceding sentence applies
regardless of the existence of a corporate or other resolution requiring
the employee to travel in the employer's airplane or vehicle for
personal as well as business reasons. Similarly, the existence of an
independent security study particular to the employer and
[[Page 569]]
its employees, or to the employee involved, does not alone constitute an
overall security program.
(iv) Effect of an independent security study. An overall security
program with respect to an employee is deemed to exist even though
security is not provided to an employee on a 24-hour basis if the
conditions of this paragraph (m)(2)(iv) are satisfied:
(A) A security study is performed with respect to the employer and
the employee (or a similarly situated employee) by an independent
security consultant;
(B) The security study is based on an objective assessment of all
the facts and circumstances;
(C) The recommendation of the security study is that an overall
security program (as defined in paragraph (m)(2)(iii) of this section)
is not necessary and such recommendation is reasonable under the
circumstances; and
(D) The employer applies the specific security recommendations
contained in the security study to the employee on a consistent basis.
The value of the security provided pursuant to a security study that
meets the requirements of this paragraph (m)(2)(iv) may be excluded from
income, if the security study conclusions are reasonable and, but for
the bona fide business-oriented security concerns, the employee would
not have had such security. No exclusion from income applies to security
provided by the employer that is not recommended in the security study.
Security study conclusions may be reasonable even if, for example, it is
recommended that security be limited to certain geographic areas, as in
the case where air travel security is provided only in certain foreign
countries.
(v) Application of security rules to spouses and dependents. The
availability of a working condition fringe exclusion based on the
existence of a bona fide business-oriented security concern with respect
to the spouse and dependents of an employee is determined separately for
such spouse and dependents under the rules established in this paragraph
(m).
(vi) Working condition safe harbor. Under the special rule of this
paragraph (m)(2)(vi), if, for a bona fide business-oriented security
concern, the employer requires that the employee travel on an employer-
provided aircraft for a personal trip, the employer and the employee may
exclude, as a working condition fringe, the excess value of the trip
over comparable first-class airfare without having to show that but for
the bona fide business-oriented security concerns, the employee would
have flown first-class on a commercial aircraft. If the special
valuation rule provided in Sec. 1.61-2T is used, the excess over the
amount determined by multiplying an aircraft multiple of 200-percent by
the base aircraft valuation formula may be excluded as a working
condition fringe.
(3) Examples. The provisions of this paragraph (m) may be
illustrated by the following examples:
Example (1). Assume that in response to several death threats on the
life of A, the president of a multinational company (company X), company
X establishes an overall security program for A, including an alarm
system at A's home and guards at A's workplace, the use of a vehicle
that is specially equipped with alarms, bulletproof glass, and armor
plating and a bodyguard/driver who is trained in evasive driving
techniques. Assume further that A is driven for both personal and
business reasons in the vehicle. Also, assume that but for the bona fide
business-oriented security concerns, no part of the overall suecurity
program would been provided to A. With respect to the transportation
provided for security reasons, A may exclude as a working condition
fringe the value of the special security features of the vehicle and the
value attributable to the bodyguard/driver. Thus, if the value of the
specially equipped vehicle is $40,000, and the value of the vehicle
without the security features is $25,000, A may determine A's income
attributable to the vehicle as if the vehicle were worth $25,000. A must
include in income the value of the availability of the vehicle for
personal use.
Example (2). Assume that B is the chief executive officer of a
multinational corporation (company Y). Assume further that there have
been kidnapping attempts and other terrorist activities in the foreign
countries in which B performs services and that at least some of such
activities have been directed against B or similarly situated employees.
In response to these activities, company Y provides B with an overall
security program, including an alarm system at B's home and bodyguards
at B's workplace, a bodyguard/driver who is trained in evasive
[[Page 570]]
driving techniques, and a vehicle specially designed for security during
B's overseas travels. In addition, assume that company Y requires B to
travel in company Y's airplane for business and personal trips taken to,
from, and within these foreign countries. Also, assume that but for bona
fide business-oriented security concerns, no part of the overall
sucurity program would have been provided to B. B may exclude as a
working condition fringe the value of the special security features of
the automobile and the value attributable to the bodyguards and the
bodyguard/driver. B may also exclude as a working condition fringe the
excess, if any, of the value of personal flights in the company Y
airplane over first-class airfare (as determined under the special
valuation rule provided in Sec. 1.61-2T if the safe harbor described in
paragraph (m)(2)(vi) of this section is used). B must include in income
the value of the availability of the vehicle for personal use and the
lesser of the value of first-class airfare or the value of the flight
determined under Sec. 1.61-2T for each personal flight taken by B in
company Y's airplane.
Example (3). Assume the same facts as in example (2) except that
company Y also requires B to travel in company Y's airplane within the
United States, and provides B with a chauffeur-driven limousine for
business and personal travel in the United States. Assume further that
company Y also requires B's spouse and dependents to travel in company
Y's airplane for personal flights in the United States. If no bona fide
business-oriented security concern exists with respect to travel in the
United States, B may not exclude any portion of the value of the
availability of the driver or limousine for personal use in the United
States. Thus, B must include in income the value of the availability of
the vehicle and driver for personal use. In addition, B may not exclude
any portion of the value attributable to personal flights by B or B's
spouse and dependents on company Y's airplane. Thus, B must include in
income the value attributable to the personal use of company Y's
airplane. See Sec. 1.61-2T for rules relating to the valuation of
personal flights on employer-provided airplanes.
Example (4). Assume that company Z retains an independent security
consultant to perform a security study with respect to its chief
executive officer. Assume further that, based on an objective assessment
of the facts and circumstances, the security consultant reasonably
recommends that the employee be provided security at his workplace and
for ground transportation, but not for air transportation. If company Z
follows the recommendations on a consistent basis, an overall security
program will be deemed to exist with respect to the workplace and ground
transportation security only.
Example (5). Assume the same facts as in example (4) except that
company Z only provides the employee security while commuting to and
from work, but not for any other ground transportation. Since the
recommendations of the independent security study are not applied on a
consistent basis, an overall security program will not be deemed to
exist.
(n) Product testing--(1) In general. The fair market value of the
use of consumer goods, which are manufactured for sale to nonemployees,
for product testing and evaluation by an employee outside the employer's
workplace is excludable as a working condition fringe if--
(i) Consumer testing and evaluation of the product is an ordinary
and necessary business expense of the employer,
(ii) Business reasons necessitate that the testing and evaluation of
the product be performed off the employer's business premises by
employees (i.e., the testing and evaluation cannot be carried out
adequately in the employer's office or in laboratory testing
facilities),
(iii) The product is furnished to the employee for purposes of
testing and evaluation,
(iv) The product is made available to the employee for no longer
than necessary to test and evaluate its performance and must be returned
to the employer at completion of the testing and evaluation period,
(v) The employer imposes limitations of the employee's use of the
product which significantly reduce the value of any personal benefit to
the employee, and
(vi) The employee must submit detailed reports to the employer on
the testing and evaluation.
The length of the testing and evaluation period must be reasonable in
relation to the product being tested.
(2) Employer-imposed limitations. The requirement of paragraph
(n)(1)(v) of this section is satisfied if--
(i) The employer places limitations on the employee's ability to
select among different models or varieties of the consumer product that
is furnished for testing and evaluation purposes,
(ii) The employer's policy provides for the employee, in appropriate
cases, to purchase or lease at his or her own
[[Page 571]]
expense the same type of product as that being tested (so that personal
use by the employee's family will be limited), and
(iii) The employer generally prohibits use of the product by members
of the employee's family.
(3) Discriminating classifications. If an employer furnishes
products under a testing and evaluation program only to officers,
owners, or highly compensated employees, this fact may be considered in
a determination of whether the products are furnished for testing and
evaluation purposes or for compensation purposes, unless the employer
can show a business reason for the classification of employees to whom
the products are furnished (e.g., that automobiles are furnished for
testing and evaluation by an automobile manufacturer to its design
engineers and supervisory mechanics).
(4) Factors that negate the existence of a product testing program.
If an employer fails to tabulate and examine the results of the detailed
reports within a reasonable period of time after expiration of the
testing period, the program will not be considered a product testing
program. Existence of one or more of the following factors may also
establish that the program is not a bona fide product testing program:
(i) The program is in essence a leasing program under which
employees lease the consumer goods from the employer for a fee;
(ii) The nature of the product and other considerations are
insufficient to justify the testing program; or
(iii) The expense of the program outweighs the benefits to be gained
from testing and evaluation.
(5) Failure to meet the requirements of this paragraph (n). The fair
market value of the use of property for product testing and evaluation
by an employee outside the employee's workplace, under a product testing
program that does not meet all of the requirements of this paragraph
(n), is not excludable as a working condition fringe.
(6) Example. Assume that an employer that manufactures automobiles
establishes a product testing program under which 50 of its 5,000
employees test and evaluate the automobiles for 30 days. Assume further
that the 50 employees represent a fair cross section of all of the
employees of the employer, such employees submit detailed reports to the
employer on the testing and evaluation, the employer tabulates and
examines the test results within a reasonable time, and the use of the
automobiles is restricted to the employees. If the rules of paragraph
(n)(2) of this section are also met, the employees may exclude the value
of the use of the automobile during the testing and evaluation period.
(o) Qualified automobile demonstration use--(1) In general. The
value of qualified automobile demonstration use is excludable from gross
income as a working condition fringe. The term ``qualified automobile
demonstration use'' means any use of a demonstration automobile by a
full-time automobile salesman in the sales area in which the automobile
dealer's sales office is located if--
(i) Such use is provided primarily to facilitate the salesman's
performance of services for the employer, and
(ii) There are substantial restrictions on the personal use of the
automobile by the salesman.
(2) Full-time automobile salesman--(i) Definition. The term ``full-
time automobile salesman'' means any individual who--
(A) Is employed by an automobile dealer,
(B) Customarily spends substantially all of a normal business day on
the sales floor selling automobiles to customers of the automobile
dealership,
(C) Customarily works a number of hours considered full-time in the
industry (but at a rate not less than 1,000 hours per year), and
(D) Derives at least 85 percent of his or her gross income from the
automobile dealership directly as a result of such automobile sales
activities.
An individual, such as the general manager of an automobile dealership,
who receives a sales commission on the sale of an automobile is not a
full-time automobile salesman unless the requirements of this paragraph
(o)(2)(i) are met. The exclusion provided in this paragraph (o) is
available to an individual who meets the definition of this paragraph
(o)(2)(i) regardless of whether the individual performs services in
[[Page 572]]
addition to those described in this paragraph (o)(2)(i). For example, an
individual who is an owner of the automobile dealership but who
otherwise meets the requirements of this paragraph (o)(2)(i) may exclude
from gross income the value of qualified automobile demonstration use.
(ii) Use by an individual other than a full-time automobile
salesman. Personal use of a demonstration automobile by an individual
other than a full-time automobile salesman is not treated as a working
condition fringe. Therefore, any personal use, including commuting use,
of a demonstration automobile by a part-time salesman, automobile
mechanic, manager, or other individual is not ``qualified automobile
demonstration use'' and thus not excludable from gross income.
(3) Demonstration Automobile. The exclusion provided in this
paragraph (o) applies only to qualified use of a demonstration
automobile. A demonstration automobile is an automobile that is--
(i) Currently in the inventory of the automobile dealership, and
(ii) Available for test drives by customers during the normal
business hours of the employee.
(4) Substantial restrictions on personal use. Substantial
restrictions on the personal use of demonstration automobiles exist when
all of the following conditions are satisfied:
(i) Use by individuals other than the full-time automobile salesmen
(e.g., the salesman's family) is prohibited,
(ii) Use for personal vacation trips is prohibited,
(iii) The storage of personal possessions in the automobile is
prohibited, and
(iv) The total use by mileage of the automobile by the salesman
outside the salesman's normal working hours is limited.
(5) Sales area--(i) In general. Qualified automobile demonstration
use must be use in the sales area in which the automobile dealer's sales
office is located. The sales area is the geographic area surrounding the
automobile dealer's sales office from which the office regularly derives
customers.
(ii) Sales area safe harbor. With respect to a particular full-time
salesman, the automobile dealer's sales area may be treated as the
larger of the area within a 75 mile radius of the dealer's sales office,
or the on-way commuting distance (in miles) of the particular salesman.
(p) Parking--(1) In general. The value of parking provided to an
employee on or near the business premises of the employer is excludable
from gross income as a working condition fringe. The working condition
fringe exclusion applies whether the employer owns or rents the parking
facility or parking space.
(2) Reimbursement of parking expenses. Any reimbursement to the
employee of the ordinary and necessary expenses of renting a parking
space on or near the business premises of the employer is excludable as
a working condition fringe. The preceding sentence does not apply,
however, to cash payments that are not actually used for renting a
parking space. Thus, that part of a general transportation allowance
that is not used for parking is not excludable as a working condition
fringe under this paragraph (p).
(3) Parking on residential property. With respect to an employee,
this paragraph (p) does not apply to any parking facility or space
located on property owned or leased for residential purposes by the
employee.
(q) Nonapplicability of nondiscrimination rules. Except to the
extent provided in paragraph (n)(3) of this section, the
nondiscrimination rules of section 132(h)(1) and Sec. 1.132-8T do not
apply in determining the amount, if any, of a working condition fringe.
[T.D. 8063, 50 FR 52303, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-6 De minimis fringes.
(a) In general. Gross income does not include the value of a de
minimis fringe provided to an employee. The term ``de minimis fringe''
means any property or service the value of which is (after taking into
account the frequency with which similar fringes are provided by the
employer to the employer's employees) so small as to make accounting for
it unreasonable or administratively impracticable.
[[Page 573]]
(b) Frequency--(1) Employee-measured frequency. Generally, the
frequency with which similar fringes are provided by the employer to the
employer's employees is determined by reference to the frequency with
which the employer provides the fringes to each individual employee. For
example, if an employer provides a free meal in kind to one employee on
a daily basis, but not to any other employee, the value of the meals is
not de minimis with respect to that one employee even though with
respect to the employer's entire workforce the meals are provided
``infrequently.''
(2) Employer-measured frequency. Notwithstanding the rule of
paragraph (b)(1) of this section, except for purposes of applying the
special rules of paragraph (d)(2) of this section, where it would be
administratively difficult to determine frequency with respect to
individual employees, the frequency with which similar fringes are
provided by the employer to the employer's employees is determined by
reference to the frequency with which the employer provides the fringes
to the workforce as a whole. Therefore, under this rule, the frequency
with which any individual employee receives such a fringe benefit is not
relevant and in some circumstances, the de minimis fringe exclusion may
apply with respect to a benefit even though a particular employee
receives the benefit frequently. For example, if an employer exercises
sufficient control and imposes significant restrictions on the personal
use of a company copying machine so that at least 85 percent of the use
of the machine is for business purposes, any personal use of the copying
machine by particular employees is considered to be a de minimis fringe.
(c) Administrability. Unless excluded by a provision of chapter 1 of
the Internal Revenue Code of 1986 other than section 132(a)(4), the
value of any fringe benefit that would not be unreasonable or
administratively impracticable to account for is includible in the
employee's gross income. Thus, except as provided in paragraph (d)(2) of
this section, the provision of any cash fringe benefit is never
excludable under section 132(a) as a de minimis fringe benefit.
Similarly except as otherwise provided in paragraph (d) of this section,
a cash equivalent fringe benefit (such as a fringe benefit provided to
an employee through the use of a gift certificate or charge or credit
card) is generally not excludable under section 132(a) even if the same
property or service acquired (if provided in kind) would be excludable
as a de minimis fringe benefit. For example, the provision of cash to an
employee for a theatre ticket that would itself be excludable as a de
minimis fringe (see paragraph (e)(1) of this section) is not excludable
as a de minimis fringe.
(d) Special rules--(1) Transit passes. A public transit pass
provided at a discount to defray an employee's commuting costs may be
excluded from the employee's gross income as a de minimis fringe if such
discount does not exceed $21 in any month. The exclusion provided in
this paragraph (d)(1) also applies to the provision of tokens or fare
cards that enable an individual to travel on the public transit system
if the value of such tokens and fare cards in any month does not exceed
by more than $21 the amount the employee paid for the tokens and fare
cards for such month. Similarly, the exclusion of this paragraph (d)(1)
applies to the provision of a voucher or similar instrument that is
exchangeable solely for tokens, fare cards, or other instruments that
enable the employee to use the public transit system if the value of
such vouchers and other instruments in any month does not exceed $21.
The exclusion of this paragraph (d)(1) also applies to reimbursements
made by an employer to an employee after December 31, 1988, to cover the
cost of commuting on a public transit system, provided the employee does
not receive more than $21 in such reimbursements for commuting costs in
any given month. The reimbursement must be made under a bona fide
reimbursement arrangement. A reimbursement arrangement will be treated
as bona fide if the employer establishes appropriate procedures for
verifying on a periodic basis that the employee's use of public
transportation for commuting is consistent with the value of the benefit
provided by the employer for that purpose. The amount of in-kind public
transit commuting benefits and reimbursements provided during any month
[[Page 574]]
that are excludible under this paragraph (d)(1) is limited to $21. For
months ending before July 1, 1991, the amount is $15 per month. The
exclusion provided in this paragraph (d)(1) does not apply to the
provision of any benefit to defray public transit expenses incurred for
personal travel other than commuting.
(2) Occasional meal money or local transportation fare--(i) General
rule. Meals, meal money or local transportation fare provided to an
employee is excluded as a de minimis fringe benefit if the benefit
provided is reasonable and is provided in a manner that satisfies the
following three conditions:
(A) Occasional basis. The meals, meal money or local transportation
fare is provided to the employee on an occasional basis. Whether meal
money or local transportation fare is provided to an employee on an
occasional basis will depend upon the frequency i.e. the availability of
the benefit and regularity with which the benefit is provided by the
employer to the employee. Thus, meals, meal money, or local
transportation fare or a combination of such benefits provided to an
employee on a regular or routine basis is not provided on an occasional
basis.
(B) Overtime. The meals, meal money or local transportation fare is
provided to an employee because overtime work necessitates an extension
of the employee's normal work schedule. This condition does not fail to
be satisifed merely because the circumstances giving rise to the need
for overtime work are reasonably foreseeable.
(C) Meal money. ln the case of a meal or meal money, the meal or
meal money is provided to enable the employee to work overtime. Thus,
for example, meals provided on the employer's premises that are consumed
during the period that the employee works overtime or meal money
provided for meals consumed during such period satisfy this condition.
In no event shall meal money or local transportation fare calculated on
the basis of the number of hours worked (e.g., $1.00 per hour for each
hour over eight hours) be considered a de minimis fringe benefit.
(ii) Applicability of other exclusions for certain meals and for
transportation provided for security concerns. The value of meals
furnished to an employee, an employee's spouse, or any of the employee's
dependents by or on behalf of the employee's employer for the
convenience of the employer is excluded from the employee's gross income
if the meals are furnished on the business premises of the employer (see
section 119). (For purposes of the exclusion under section 119, the
definitions of an employee under Sec. 1.132-1(b) do not apply.) If, for
a bona fide business-oriented security concern, an employer provides an
employee vehicle transportation that is specially designed for security
(for example, the vehicle is equipped with bulletproof glass and armor
plating), and the conditions of Sec. 1.132-5(m) are satisfied, the value
of the special security design is excludable from gross income as a
working condition fringe if the employee would not have had such special
security design but for the bona fide business-oriented security
concern.
(iii) Special rule for employer-provided transportation provided in
certain circumstances. (A) Partial exclusion of value. If an employer
provides transportation (such as taxi fare to an employee for use in
commuting to and/or from work because or unusual circumstances and
because, based on the facts and circumstances, it is unsafe for the
employee to use other available means of transportation, the excess of
the value of each one-way trip over $1.50 per one-way commute is
excluded from gross income. The rule of this paragraph (d)(2)(iii) is
not available to a control employee as defined in Sec. 1.61-21(f) (5)
and (6).
(B) ``Unusual circumstances''. Unusual circumstances are determined
with respect to the employee receiving the transportation and are based
on all facts and circumstances. An example of unusual circumstances
would be when an employee is asked to work outside of his normal work
hours (such as being called to the workplace at 1:00 am when the
employee normally works from 8:00 am to 4:00 pm). Another example of
unusual circumstances is a temporary change in the employee's work
schedule (such as working from 12 midnight to 8:00 am rather than from
[[Page 575]]
8:00 am to 4:00 pm for a two-week period).
(C) ``Unsafe conditions''. Factors indicating whether it is unsafe
for an employee to use other available means of transportation are the
history of crime in the geographic area surrounding the employee's
workplace or residence and the time of day during which the employee
must commute.
(3) Use of special rules or examples to establish a general rule.
The special rules provided in this paragraph (d) or examples provided in
paragraph (e) of this section may not be used to establish any general
rule permitting exclusion as a de minimis fringe. For example, the fact
that $252 (i.e., $21 per month for 12 months) worth of public transit
passes can be excluded from gross income as a de minimis fringe in 1992
does not mean that any fringe benefit with a value equal to or less than
$252 may be excluded as a de minimis fringe. As another example, the
fact that the commuting use of an employer-provided vehicle more than
one day a month is an example of a benefit not excludable as a de
minimis fringe (see paragraph (e)(2) of this section) does not mean that
the commuting use of a vehicle up to 12 times per year is excludable
from gross income as a de minimis fringe.
(4) Benefits exceeding value and frequency limits. If a benefit
provided to an employee is not de minimis because either the value or
frequency exceeds a limit provided in this paragraph (d), no amount of
the benefit is considered to be a de minimis fringe. For example, if, in
1992, an employer provides a $50 monthly public transit pass, the entire
$50 must be included in income, not just the excess value over $21.
(e) Examples--(1) Benefits excludable from income. Examples of de
minimis fringe benefits are occasional typing of personal letters by a
company secretary; occasional personal use of an employer's copying
machine, provided that the employer exercises sufficient control and
imposes significant restrictions on the personal use of the machine so
that at least 85 percent of the use of the machine is for business
purposes; occasional cocktail parties, group meals, or picnics for
employees and their guests; traditional birthday or holiday gifts of
property (not cash) with a low fair market value; occasional theater or
sporting event tickets; coffee, doughnuts, and soft drinks; local
telephone calls; and flowers, fruit, books, or similar property provided
to employees under special circumstances (e.g., on account of illness,
outstanding performance, or family crisis).
(2) Benefits not excludable as de minimis fringes. Examples of
fringe benefits that are not excludable from gross income as de minimis
fringes are: season tickets to sporting or theatrical events; the
commuting use of an employer-provided automobile or other vehicle more
than one day a month; membership in a private country club or athletic
facility, regardless of the frequency with which the employee uses the
facility; employer-provided group-term life insurance on the life of the
spouse or child of an employee; and use of employer-owned or leased
facilities (such as an apartment, hunting lodge, boat, etc.) for a
weekend. Some amount of the value of certain of these fringe benefits
may be excluded from income under other statutory provisions, such as
the exclusion for working condition fringes. See Sec. 1.132-5.
(f) Nonapplicability of nondiscrimination rules. Except to the
extent provided in Sec. 1.132-7, the nondiscrimination rules of section
132(h)(1) and Sec. 1.132-8 do not apply in determining the amount, if
any, of a de minimis fringe. Thus, a fringe benefit may be excludable as
a de minimis fringe even if the benefit is provided exclusively to
highly compensated employees of the employer.
[T.D. 8256, 54 FR 28615, July 6, 1989, as amended by T.D. 8389, 57 FR
1871, Jan 16, 1992; 57 FR 5982, Feb. 19, 1992]
Sec. 1.132-6T De minimis fringe--1985 through 1988 (temporary).
(a) In general. Gross income does not include the value of a de
minimis fringe provided to an employee. The term ``de minimis fringe''
means any property or service the value of which is (after taking into
account the frequency with which similar fringes are provided by the
employer to the employer's employees) so small as to make accounting for
it unreasonable or administratively impracticable.
[[Page 576]]
(b) Frequency. Generally, the frequency with which similar fringes
are provided by the employer to the employer's employees is determined
by reference to the frequency with which the employer provides the
fringe to each individual employee. For example, if an employer provides
a free meal to one employee on a daily basis, but not to any other
employee, the value of the meals is not de minimis with respect to that
one employee even though with respect to the employer's entire workforce
the meals are provided ``infrequently.'' However, where it would be
administratively difficult to determine frequency with respect to
individual employees, the frequency with which similar fringes are
provided by the employer to the employer's employees is determined by
reference to the frequency with which the employer provides the fringes
to the employees and not the frequency with which individual employees
receive them. In these cases, if an employer occasionally provides a
fringe benefit of de minimis value to the employer's employees, the de
minimis fringe exclusion may apply even though a particular employee
receives the benefit frequently. For example, if an employer exercises
sufficient control and imposes significant restrictions on the personal
use of a company copying machine so that at least 85 percent of the use
of the machine is for business purposes, any personal use the copying
machine by particular employees is considered to be a de minimis fringe.
(c) Administrability. Unless excluded by a statutory provision other
than section 132(a)(4), the value of any fringe benefit that would not
be unreasonable or administratively impracticable to account for must be
included in the employee's gross income. Thus, except as otherwise
provided in this section, the provision of any cash fringe benefit (or
any fringe benefit provided to an employee through the use of a charge
or credit card) is not excludable as a de minimis fringe. For example,
the provision of cash to an employee for personal entertainment is not
excludable as a de minimis fringe.
(d) Special rules--(1) Transit passes. A transit pass provided to an
employee at a discount not exceeding $15 per month may be excluded as a
de minimis fringe. The exclusion provided in this paragraph (d) also
applies to the provision of $15 in tokens or fare cards that enable an
individual to travel on the transit system. The exclusion provided in
this paragraph (d) does not apply to any provision of cash or other
benefit to defray transit expenses incurred for personal travel.
(2) Occasional meal money or local transportation fare. Occasional
meal money or local transportation fare provided to an employee because
overtime work necessitates an extension of the employee's normal workday
is excluded as a de minimis fringe.
(3) Use of special rules to establish a general rule. The special
rules provided in this paragraph (d) may not be used to establish any
general rule. For example, the fact that $180 ($15 per month for 12
months) worth of transit passes can be excluded in a year does not mean
that any fringe benefit with a value equal to or less than $180 may be
excluded as a de minimis fringe.
(4) Benefits exceeding value and frequency limitations. If the
benefit provided to an employee is not de minimis because either the
value or frequency exceeds a limit provided in this paragraph (d), no
amount of the benefit is considered to be de minimis. For example, if an
employer provides a $20 monthly transit pass, the entire $20 must be
included in income, not just the excess value over $15.
(e) Nonapplicability of nondiscrimination rules. Except to the
extent provided in Sec. 1.132-7T, the nondiscrimination rules of section
132(h)(1) and Sec. 1.132-8T do not apply. Thus, for example, a fringe
benefit may be a de minimis fringe even if the benefit is provided
exclusively to officers of the employer.
(f) Examples--(1) Benefits excludable from income. Examples of de
minimis fringe benefits are occasional typing of personal letters by a
company secretary; occasional personal use of an employer's copying
machine, provided that the employer exercises sufficient control and
imposes significant restrictions on the personal use of the machine so
that at least 85 percent of the use of the machine is for business
purposes; occasional cocktail parties or
[[Page 577]]
picnics for employees and their guests; traditional holiday gifts of
property (not cash) with a low fair market value; occasional theatre or
sporting event tickets; and coffee and doughnuts.
(2) Benefits not excludable as de minimis fringes. Examples of
fringe benefits that are not excludable from income as de minimis
fringes are: season tickets to sporting or theatrical events; the
commuting use of an employer-provided automobile or other vehicle more
than once a month; membership in a private country club or athletic
facility, regardless of the frequency with which the employee uses the
facility; and use of employer-owned or leased facilities (such as an
apartment, hunting lodge, boat, etc.) for a weekend. Some amount of the
value of these fringe benefits may be excluded under other statutory
provisions, such as the exclusion for working condition fringes. See
Sec. 1.132-5T.
[T.D. 8063, 50 FR 52308, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-7 Employer-operated eating facilities.
(a) In general--(1) Condition for exclusion--(i) General rule. The
value of meals provided to employees at an employer-operated eating
facility for employees is excludable from gross income as a de minimis
fringe only if on an annual basis, the revenue from the facility equals
or exceeds the direct operating costs of the facility.
(ii) Additional condition for highly compensated employees. With
respect to any highly compensated employee, an exclusion is available
under this section only if the condition set out in paragraph (a)(1)(i)
of this section is satisfied and access to the facility is available on
substantially the same terms to each member of a group of employees that
is defined under a reasonable classification set up by the employer that
does not discriminate in favor of highly compensated employees. See
Sec. 1.132-8. For purposes of this paragraph (a)(1)(ii), each dining
room or cafeteria in which meals are served is treated as a separate
eating facility, whether each such dining room or cafeteria has its own
kitchen or other food-preparation area.
(2) Employer-operated eating facility for employees. An employer-
operated eating facility for employees is a facility that meets all of
the following conditions--
(i) The facility is owned or leased by the employer,
(ii) The facility is operated by the employer,
(iii) The facility is located on or near the business premises of
the employer, and
(iv) The meals furnished at the facility are provided during, or
immediately before or after, the employee's workday.
For purposes of this section, the term ``meals'' means food, beverages,
and related services provided at the facility. If an employer can
reasonably determine the number of meals that are excludable from income
by the recipient employees under section 119, the employer may, in
determining whether the requirement of paragraph (a)(1)(i) of this
section is satisfied, disregard all costs and revenues attributable to
such meals provided to such employees. lf an employer can reasonably
determine the number of meals received by volunteers who receive food
and beverages at a hospital, free or at a discount, the employer may, in
determining whether the requirement of paragraph (a)(1)(i) of this
section is satisfied, disregard all costs and revenues attributable to
such meals provided to such volunteers. If an employer charges
nonemployees a greater amount than employees, in determining whether the
requirement of paragraph (a)(1)(i) of this section is satisfied, the
employer must disregard all costs and revenues attributable to such
meals provided to such nonemployees.
(3) Operation by the employer. If an employer contracts with another
to operate an eating facility for its employees, the facility is
considered to be operated by the employer for purposes of this section.
If an eating facility is operated by more than one employer, it is
considered to be operated by each employer.
(4) Example. The provisions of this paragraph (a)(2) may be
illustrated by the following example:
Example (1). Assume that a not-for-profit hospital system maintains
cafeterias for the
[[Page 578]]
use of its employees and volunteers. Only the employees are charged for
food service at the cafeteria and the policy of the hospital is to
charge the employees only for the costs of food, beverage and labor
directly attributable to the meal. Most of the cafeterias within the
system furnish more free meals to volunteers than they serve paid meals
to employees. For purposes of this paragraph, as long as the employer
can accurately determine the number of meals received free or at a
discount by volunteers, the employer may disregard all the costs and
revenues attributable to such meals provided to volunteers. Therefore,
for purposes of this paragraph, the costs of the hospital system for
furnishing meals to employees who pay for them are the costs to be
compared to determine if the revenues from the facility equal or exceed
direct operating costs of the facility's service to employees.
(b) Direct operating costs--(1) In general. For purposes of this
section, the direct operating costs of an eating facility are--
(i) The cost of food and beverages, and
(ii) The cost of labor for personnel whose services relating to the
facility are performed primarily on the premises of the eating facility.
Direct operating costs do not include the labor cost attributable to
personnel whose services relating to the facility are not performed
primarily on the premises of the eating facility. Thus, for example, the
labor costs attributable to cooks, waiters, and waitresses are included
in direct operating costs, but the labor cost attributable to a manager
of an eating facility whose services relating to the facility are not
primarily performed on the premises of the eating facility is not
included in direct operating costs. If an employee performs services
relating to the facility both on and off the premises of the eating
facility, only the portion of the total labor cost of the employee
relating to the facility that bears the same proportion to such total
labor cost as time spent on the premises bears to total time spent
performing services relating to the facility is included in direct
operating costs. For example, assume that 60 percent of the services of
a cook in the above example are not related to the eating facility. Only
40 percent of the total labor cost of the cook is includible in direct
operating costs. For purposes of this section, labor costs include all
compensation required to be reported on a Form W-2 for income tax
purposes and related employment taxes paid by the employer. In
determining the direct operating costs of an eating facility, the
employer may include as part of the facility, vending machines that are
provided by the employer and located on the same premises as the other
eating facilities operated by the employer.
(2) Multiple dining rooms or cafeterias. The direct operating costs
test may be applied separately for each dining room or cafeteria.
Alternatively, the direct operating costs test may be applied with
respect to all the eating facilities operated by the employer.
(3) Payment to operator of facility. If an employer contracts with
another to operate an eating facility for its employees, the direct
operating costs of the facility consist both of direct operating costs,
if any, incurred by the employer and the amount paid to the operator of
the facility to the extent that such amount is attributable to what
would be direct operating costs if the employer operated the facility
directly.
(c) Valuation of non-excluded meals provided at an employer-operated
eating facility for employees. If the exclusion for meals provided at an
employer-operated eating facility for employees is not available, the
recipient of meals provided at such facility must include in income the
amount by which the fair market value of the meals provided exceeds the
sum of--
(1) The amount, if any, paid for the meals, and
(2) The amount, if any, specifically excluded by another section of
chapter 1 of this subtitle.
For special valuation rules relating to such meals, see Sec. 1.61-21(j).
[T.D. 8256, 54 FR 28617, July 6, 1989]
Sec. 1.132-7T Treatment of employer-operated eating facilities--1985 through 1988 (temporary).
(a) In general--(1) General rule. The value of meals provided to
employees at an employer-operated eating facility for employees is
excludable from gross income as a de minimis fringe only if--
(i) On an annual basis, the revenue from the facility equals or
exceeds the
[[Page 579]]
direct operating costs of the facility, and
(ii) With respect to any officer, owner or highly compensated
employee, access to the facility is available on substantially the same
terms to each member of a group of employees that is defined under a
reasonable classification set up by the employer that does not
discriminate in favor of officers, owners, and highly compensated
employees. See Sec. 1.132-8T.
(2) Employer-operated eating facility for employees. An employer-
operated eating facility for employees is a facility that meets all of
the following conditions--
(i) The facility is owned or leased by the employer,
(ii) The facility is operated by the employer,
(iii) The facility is located on or near the business premises of
the employer,
(iv) Substantially all of the use of the facility is by employees of
the employer operating the facility, and
(v) The meals furnished at the facility are provided during, or
immediately before or after, the employee's workday.
For purposes of this section, the term ``meals'' means food, beverages,
and related services provided at the facility. If an employer can
determine the number of employees who receive meals that are excludable
from income under section 119, the employer may, in determining whether
the requirement of paragraph (a)(1)(i) of this section is satisfied,
disregard all costs and revenues attributable to such meals provided to
such employees. For purposes of this section, each dining room or
cafeteria in which meals are served is treated as a separate eating
facility, regardless of whether each such dining room or cafeteria has
its own kitchen or other food-preparation area.
(3) Operation by the employer. If an employer contracts with another
to operate an eating facility for its employees, the facility is
considered to be operated by the employer for purposes of this section.
If an eating facility is operated by more than one employer, it is
considered to be operated by each employer.
(b) Direct operating costs. The direct operating costs test must be
applied separately for each dining room or cafeteria. For purpose of
this section, the direct operating costs of an eating facilities are:
(1) The cost of food and beverages and (2) the cost of labor for
personnel whose services relating to the facility are performed
primarily on the premises of the eating facility. Direct operating costs
do not include the cost of labor for personnel whose services relating
to the facility are not performed primarily on the premises of the
eating facility. Thus, for example, the labor cost for cooks, waiters,
and waitresses is included in direct operating costs, but the labor cost
for a manager of an eating facility whose services relating to the
facility are not primarily performed on the premises of the eating
facility is not included in direct operating costs. If an employee
perfoms services both on and off the premises of the eating facility,
only the applicable percentage of the total labor cost of the employee
that bears the same proportion as time spent on the premises bears to
total time is included in direct operating costs. For example, assume
that 60 percent of the services of the cooks in the above example are
not related to the eating facility. Only 40 percent of the total labor
cost of the cooks is includible in direct operating costs. For purposes
of this section, labor costs include all compensation required to be
reported on a Form W-2 for income tax purposes and related employment
taxes paid by the employer.
(c) Valuation of non-excluded meals provided at an employer-operated
eating facility for employees. If the exclusion for meals provided at an
employer-operated eating facility for employees is not available, the
recipient of meals provided at such facility must include in income the
amount by which the fair market value of the meals provided exceeds the
sume of: (1) The amount, if any, paid for the meals, and (2) the amount,
if any, specifically excluded by another section of the Code. For
special valuation rules relating to such meals see Sec. 1.61-2T (j).
[T.D. 8063, 50 FR 52308, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
[[Page 580]]
Sec. 1.132-8 Fringe benefit nondiscrimination rules.
(a) Application of nondiscrimination rules--(1) General rule. A
highly compensated employee who receives a no-additional cost service, a
qualified employee discount or a meal provided at an employer-operated
eating facility for employees shall not be permitted to exclude such
benefit from his or her income unless the benefit is available on
substantially the same terms to:
(i) All employees of the employer; or
(ii) A group of employees of the employer which is defined under a
reasonable classification set up by the employer that does not
discriminate in favor of highly compensated employees. See paragraph (f)
of this section for the definition of a highly compensated employee.
(2) Consequences of discrimination--(i) In general. If an employer
maintains more than one fringe benefit program, i.e., either different
fringe benefits being provided to the same group of employees, or
different classifications of employees or the same fringe benefit being
provided to two or more classifications of employees, the
nondiscrimination requirements of section 132 will generally be applied
separately to each such program. Thus, a determination that one fringe
benefit program discriminates in favor of highly compensated employees
generally will not cause other fringe benefit programs covering the same
highly compensated employees to be treated as discriminatory. If the
fringe benefits provided to a highly compensated individual do not
satisfy the nondiscrimination rules provided in this section, such
individual shall be unable to exclude from gross income any portion of
the benefit. For example, if an employer offers a 20 percent discount
(which otherwise satisfies the requirements for a qualified employee
discount) to all non-highly compensated employees and a 35 percent
discount to all highly compensated employees, the entire value of the 35
percent discount (not just the excess over 20 percent) is includible in
the gross income and wages of the highly compensated employees who make
purchases at a discount.
(ii) Exception--(A) Related fringe benefit programs. If one of a
group of fringe benefit programs discriminates in favor of highly
compensated employees, no related fringe benefit provided to such highly
compensated employees under any other fringe benefit program may be
excluded from the gross income of such highly compensated employees. For
example, assume a department store provides a 20 percent merchandise
discount to all employees under one fringe benefit program. Assume
further that under a second fringe benefit program, the department store
provides an additional 15 percent merchandise discount to a group of
employees defined under a classification which discriminates in favor of
highly compensated employees. Because the second fringe benefit program
is discriminatory, the 15 percent merchandise discount provided to the
highly compensated employees is not a qualified employee discount. In
addition, because the 20 percent merchandise discount provided under the
first fringe benefit program is related to the fringe benefit provided
under the second fringe benefit program, the 20 percent merchandise
discount provided the highly compensated employees is not a qualified
employee discount. Thus, the entire 35 percent merchandise discount
provided to the highly compensated employees is includible in such
employees' gross incomes.
(B) Employer operated eating facilities for employees. For purposes
of paragraph (a)(2)(ii)(A) of this section, meals at different employer-
operated eating facilities for employees are not related fringe
benefits, so that a highly compensated employee may exclude from gross
income the value of a meal at a nondiscriminatory facility even though
any meals provided to him or her at a discriminatory facility cannot be
excluded.
(3) Scope of the nondiscrimination rules provided in this section.
The nondiscrimination rules provided in this section apply only to
fringe benefits provided pursuant to section 132 (a)(1), (a)(2), and
(e)(2). These rules have no application to any other employee benefit
that may be subject to nondiscrimination requirements under any other
section of the Code.
(b) Aggregation of employees--(1) Section 132(a) (1) and (2). For
purposes of
[[Page 581]]
determining whether the exclusions for no-additional-cost services and
qualified employee discounts are available to highly compensated
employees, the nondiscrimination rules of this section are applied by
aggregating the employees of all related employers (as defined in
Sec. 1.132-1(c)), except that employees in different lines of business
(as defined in Sec. 1.132-4) are not to be aggregated. Thus, in general,
for purposes of this section, the term ``employees of the employer''
refers to all employees of the employer and any other entity that is a
member of a group described in sections 414 (b), (c), (m), or (o) and
that performs services within the same line of business as the employer
which provides the particular fringe benefit. Employees in different
lines of business will be aggregated, however, if the line of business
limitation has been relaxed pursuant to paragraphs (b) through (g) of
Sec. 1.132-4.
(2) Section 132 (e) (2). For purposes of determining whether the
exclusions for meals provided at employer-operated eating facilities are
available to highly compensated, the nondiscrimination rules of this
section are applied by aggregating the employees of all related
employers (as defined in section Sec. 1.132-1(c)) who regularly work at
or near the premises on which the eating facility is located, except
that employees in different lines of business (as defined in Sec. 1.132-
4) are not to be aggregated. The nondiscrimination rules of this section
are applied separately to each eating facility. Each dining room or
cafeteria in which meals are served is treated as a separate eating
facility, regardless of whether each such dining room or cafeteria has
its own kitchen or other food-preparation area.
(3) Classes of employees who may be excluded. For purposes of
applying the nondiscrimination rules of this section to a particular
fringe benefit program, there may be excluded from consideration
employees who may be excluded from consideration under section 89(h), as
enacted by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085
(1986) and amended by the Technical and Miscellaneous Revenue Act of
1988, Pub. L. 100-647, 102 Stat. 3342 (1988).
(c) Availability on substantially the same terms--(1) General rule.
The determination of whether a benefit is available on substantially the
same terms shall be made upon the basis of the facts and circumstances
of each situation. In general, however, if any one of the terms or
conditions governing the availability of a particular benefit to one or
more employees varies from any one of the terms or conditions governing
the availability of a benefit made available to one or more other
employees, such benefit shall not be considered to be available on
substantially the same terms except to the extent otherwise provided in
paragraph (c)(2) of this section. For example, if a department store
provides a 20 percent qualified employee discount to all of its
employees on all merchandise, the substantially the same terms
requirement will be satisfied. Similarly, if the discount provided to
all employees is 30 percent on certain merchandise (such as apparel),
and 20 percent on all other merchandise, the substantially the same
terms requirement will be satisfied. However, if a department store
provides a 20 percent qualified employee discount to all employees, but
as to the employees in certain departments, the discount is available
upon hire, and as to the remaining departments, the discount is only
available when an employee has completed a specified term of services,
the 20 percent discount is not available on substantially the same terms
to all of the employees of the employer. Similarly, if a greater
discount is given to employees with more seniority, full-time work
status, or a particular job description, such benefit (i.e., the
discount) would not be available to all employees eligible for the
discount on substantially the same terms, except to the extent otherwise
provided in paragraph (c)(2) of this section. These examples also apply
to no-additional-cost-services. Thus, if an employer charges non-highly
compensated employees for a no-additional-cost service and does not
charge highly compensated employees (or charges highly compensated
employees a lesser amount), the substantially the same terms requirement
will not be satisfied.
(2) Certain terms relating to priority. Certain fringe benefits made
available
[[Page 582]]
to employees are available only in limited quantities that may be
insufficient to meet employee demand. This situation may occur either
because of employer policy (such as where an employer determines that
only a certain number of units of a specific product will be made
available to employees each year) or because of the nature of the fringe
benefit (such as where an employer provides a no-additional-cost
transportation service that is limited to the number of seats available
just before departure). Under these circumstances, an employer may find
it necessary to establish some method of allocating the limited fringe
benefits among the employees eligible to receive the fringe benefits.
The employer may establish the priorities described below.
(i) Priority on a first come, first served, or similar basis. A
benefit shall not fail to be treated as available to a group of
employees on substantially the same terms merely because the employer
allocates the benefit among such employees on a ``first come, first
served'' or lottery basis, provided that the same notice of the terms of
availability is given to all employees in the group and the terms under
which the benefit is provided to employees within the group are
otherwise the same with respect to all employees. For purposes of the
preceding sentence, a program that gives priority to employees who are
the first to submit written requests for the benefit will constitute
priority on a ``first come, first served'' basis. Similarly, if the
employer regularly engages in the practice of allocating benefits on a
priority basis to employees demonstrating a critical need, such benefit
shall not fail to be treated as available on substantially the same
terms to all of the employees with respect to whom such priority status
is available as long as the determination is based upon uniform and
objective criteria which have been communicated to all employees in the
group of eligible employees. An example of a critical need would be
priority transportation given to an employee in the event of a medical
emergency involving the employee (or a member of the employee's
immediate family) or a recent death in the employee's immediate family.
Frustrated vacation plans or forfeited deposits would not be treated as
giving rise to particularly critical needs.
(ii) Priority on the basis of seniority. Solely for purposes of
Sec. 1.132-8, a benefit shall not fail to be treated as available to a
group of employees of the employer on substantially the same terms
merely because the employer allocates the benefit among such employees
on a seniority basis provided that:
(A) The same notice of the terms of availability is given to all
employees in the group; and
(B) The average value of the benefit provided for each nonhighly
compensated employee is at least 75% of that provided for each highly
compensated employee. For purposes of this test, the average value of
the benefit provided for each nonhighly compensated (highly compensated)
employee is determined by taking the sum of the fair market values of
such benefit provided to all the nonhighly compensated (highly
compensated) employees, determined in accordance with Sec. 1.61-21, and
then dividing that sum by the total number of nonhighly compensated
(highly compensated) employees of the employer. For purposes of
determining the average value of the benefit provided for each employee,
all employee's of the employer are counted, including those who are not
eligible to receive the benefit from the employer.
(d) Testing for discrimination--(1) Classification test. In the
event that a benefit described in section 132 (a)(1), (a)(2) or (e)(2)
is not available on substantially the same terms to all of the employees
of the employer, no exclusion shall be available to a highly compensated
employee for such benefit unless the program under which the benefit is
provided satisfies the nondiscrimination standards set forth in this
section. The nondiscrimination standard of this section will be
satisfied only if the benefit is available on substantially the same
terms to a group of employees of the employer which is defined under a
reasonable classification established by the employer that does not
discriminate in favor of highly compensated employees. The determination
of whether a
[[Page 583]]
particular classification is discriminatory will generally depend upon
the facts and circumstances involved, based upon principles similar to
those applied for purposes of section 410(b)(2)(A)(i) or, for years
commencing prior to January 1, 1988, section 410(b)(1)(B). Thus, in
general, except as otherwise provided in this section, if a benefit is
available on substantially the same terms to a group of employees which,
when compared with all of the other employees of the employer,
constitutes a nondiscriminatory classification under section
410(b)(2)(A)(i) (or, if applicable, section 410(b)(1)(B)), it shall be
deemed to be nondiscriminatory.
(2) Classifications that are per se discriminatory. A classification
that, on its face, makes fringe benefits available principally to highly
compensated employees is per se discriminatory. In addition, a
classification that is based on either an amount or rate of compensation
is per se discriminatory if it favors those with the higher amount or
rate of compensation. On the other hand, a classification that is based
on factors such as seniority, full-time vs. part-time employment, or job
description is not per se discriminatory but may be discriminatory as
applied to the workforce of a particular employer.
(3) Former employees. When determining whether a classification is
discriminatory, former employees shall be tested separately from other
employees of the employer. Therefore, a classification is not
discriminatory solely because the employer does not make fringe benefits
available to any former employee. Whether a classification of former
employees discriminates in favor of highly compensated employees will
depend upon the particular facts and circumstances.
(4) Restructuring of benefits. For purposes of testing whether a
particular group of employees would constitute a discriminatory
classification for purposes of this section, an employer may restructure
its fringe benefit program as described in this paragraph. If a fringe
benefit is provided to more than one group of employees, and one or more
such groups would constitute a discriminatory classification if
considered by itself, then for purposes of this section, the employer
may restructure its fringe benefit program so that all or some of the
members of such group may be aggregated with another group, provided
that each member of the restructured group will have available to him or
her the same benefit upon the same terms and conditions. For example,
assume that all highly compensated employees of an employer have fewer
than five years of service and all nonhighly compensated employees have
over five years of service. If the employer provided a five percent
discount to employees with under five years of service and a ten percent
discount to employees with over five years of service, the discount
program available to the highly compensated employees would not satisfy
the nondiscriminatory classification test; however, as a result of the
rule described in this paragraph (d)(4), the employer could structure
the program to consist of a five percent discount for all employees and
a five percent additional discount for nonhighly compensated employees.
(5) Employer-operated eating facilities for employees--(i) General
rule. If access to an employer-operated eating facility for employees is
available to a classification of employees that discriminates in favor
of highly compensated employees, then the classification will not be
treated as discriminating in favor of highly compensated employees
unless the facility is used by one or more executive group employees
more than a de minimis amount.
(ii) Executive group employee. For purposes of this paragraph
(d)(5), an employee is an ``executive group employee'' if the definition
of paragraph (f)(1) of this section is satisfied. For purposes of
identifying such employees, the phrase ``top one percent of the
employees'' is substituted for the phrase ``top ten percent of the
employees'' in section 414(q)(4) (relating to the definition of ``top-
paid group'').
(e) Cash bonuses or rebates. A cash bonus or rebate provided to an
employee by an employer that is determined with reference to the value
of employer-provided property or services purchased by the employee, is
treated as an equivalent employee discount. For example, assume a
department
[[Page 584]]
store provides a 20 percent merchandise discount to all employees under
a fringe benefit program. In addition, assume that the department store
provides cash bonuses to a group of employees defined under a
classification which discriminates in favor of highly compensated
employees. Assume further that such cash bonuses equal 15 percent of the
value of merchandise purchased by each employee. This arrangement is
substantively identical to the example described in paragraph (e)(2)(i)
of this section concerning related fringe benefit programs. Thus, both
the 20 percent merchandise discount and the 15 percent cash bonus
provided to the highly compensated employees are includible in such
employees' gross incomes.
(f) Highly compensated employee--(1) Government and nongovernment
employees. A highly compensated employee of any employer is any employee
who, during the year or the preceding year--
(i) Was a 5-percent owner,
(ii) Received compensation from the employer in excess of $75,000,
(iii) Received compensation from the employer in excess of $50,000
and was in the top-paid group of employees for such year, or
(iv) Was at any time an officer and received compensation greater
than 150 percent of the amount in effect under section 415(c)(1)(A) for
such year.
For purposes of determining whether an employee is a highly compensated
employee, the rules of sections 414 (q), (s), and (t) apply.
(2) Former employees. A former employee shall be treated as a highly
compensated employee if--
(i) The employee was a highly compensated employee when the employee
separated from service, or
(ii) The employee was a highly compensated employee at any time
after attaining age 55.
[T.D. 8256, 54 FR 28618, July 6, 1989]
Sec. 1.132-8T Nondiscrimination rules--1985 through 1988 (temporary).
(a) Application of nondiscrimination rules--(1) General rule. To
qualify under section 132 for the exclusions for non-additional-cost
services, qualified employee discounts, or meals provided at employer-
operated eating facilities for employees, the fringe benefit must be
available on substantially the same terms to each member of a group of
employees which is defined under a reasonable classification set up by
the employer that does not discriminate in favor of officers, owners, or
highly compensated employees (the ``prohibited group employees'').
(2) Consequences of discrimination. If the availability of or the
provision of the fringe benefit does not satisfy the nondiscrimination
rules provided in this section, the exclusion applies only to those
employees (if any) who receive the benefit and who are not prohibited
group employees. For example, if an employer offers a 20 percent
discount (which otherwise satisfies the requirements for a qualified
employee discount) to all nonprohibited group employees and a 35 percent
discount to all prohibited group employees, the entire value of the 35
percent discount (not just the excess over 20 percent) is includible in
the gross income and wages of the prohibited group employees who make
purchases at a discount.
(3) Scope of the nondiscrimination rules provided in this section.
The nondiscrimination rules provided in this section apply only to
fringe benefits provided pursuant to section 132 (a)(1), (a)(2), and
(e)(2). These rules have no application to any other employee benefit
that may be subject to nondiscrimination requirements under any other
section of the Code.
(b) Coverage requirement--(1) Section 132 (a)(1) and (2). For
purposes of the exclusions for no-additional-cost services and qualified
employee discounts, the nondiscrimination rules of this section are
applied by aggregating the employees of all related employers (as
defined in Sec. 1.132-1T (c)), but without aggregating employees in
different lines of business (as defined in Sec. 1.132-4T). Employees in
different lines of business will be aggregated, however, if the line of
business limitation has been relaxed pursuant to either section 1.132-4T
(b) or (c). Except as provided in paragraph (e) of this section, the
nondiscrimination rules of this section are generally applied separately
to each fringe benefit program of an employer.
[[Page 585]]
(2) Section 132(e)(2). For purposes of the exclusion for meals
provided at employer-operated eating facilities for employees, the
nondiscrimination rules of this section are applied by aggregating the
employees of all related employers, without regard to different lines of
business, who regularly work at or near the premises on which the eating
facility is located. The nondiscrimination rules of this section are
applied separately to each eating facility. Each dining room or
cafeteria in which meals are served is treated as a separate eating
facility, regardless of whether each such dining room or cafeteria has
its own kitchen or other food-preparation area.
(3) Classes of employees who may be excluded. Except as otherwise
provided in this section, for purposes of applying the nondiscrimination
rules of this section to a particular fringe benefit program, there may
be excluded from consideration the following classes of employees
provided that, with respect to each class (other than the class
described in paragraph (b)(3)(iii) of this section), all employees in
the class are excluded from participating in the particular fringe
benefit program--
(i) All part-time or seasonal employees who are (or who are
reasonably expected to be) credited with less than 1,000 hours (or such
lesser number required for the program) of service during a calendar
year;
(ii) All employees who are included in a unit of employees covered
by an agreement with the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and one or more
employers, if there is evidence that the particular fringe benefit
program was the subject of good faith bargaining between such employee
representatives and such employer or employers (and if, after March 31,
1984, the additional condition of section 7701(a)(46) is satisfied);
(iii) All employees who are nonresident aliens and who receive no
earned income (within the meaning of section 911(d)(2)) from the
employer which constitutes income from services within the United States
(within the meaning of section 861(a)(3));
(iv) All employees who have not completed at least one year (or such
lesser period required for the program) of service with the employer;
(v) All employees who have separated from the service of the
employer in a year prior to the current year (regardless of the reason
for the separation);
(vi) All employees who have separated from the service of the
employer in a year prior to the current year except for retired and/or
disabled employees (either with or without a time limit based on a set
number of years since separation from the service of the employer); and
(vii) All employees of a leased section of a department store.
(c) Classification requirement--(1) General rule. The determination
of whether a particular classification established by an employer
discriminates in favor of the prohibited group will depend on the facts
and circumstances involved, based on principles similar to those applied
in the qualified plan area (see section 410(b)(1)(B) and the regulations
thereunder). In general, except as otherwise provided in this section, a
classification that would be determined to be nondiscriminatory pursuant
to the application of the nondiscrimination standards that are applied
in the qualified plan area shall be deemed to be nondiscriminatory for
purposes of section 132.
(2) Classifications that are per se discriminatory. A classification
that, on its face, makes fringe benefits available only to prohibited
group employees is per se discriminatory, and no exclusion from gross
income is available to any prohibited group employee under section 132.
In addition, a classification that is based on either an amount or rate
of compensation is per se discriminatory if it favors those with the
higher amount or rate of compensation. On the other hand, a
classification that is based on factors such as seniority, full-time vs.
part-time employment, or job description is not per se discriminatory
but may be discriminatory as applied to the workforce of a particular
employer.
(3) Former employees. When determining whether a classification is
discriminatory, former employees shall not be considered together with
other
[[Page 586]]
employees of the employer. Therefore, a classification is not
discriminatory if the employer does not make the fringe benefits
available to any former employee. Whether a classification of former
employees discriminates in favor of prohibited group employees will
depend on the facts and circumstances. The rules of this section shall
apply separately to the former employee classification.
(4) Employer-operated eating facilities for employees--(i) General
rule. If access to an employer-operated eating facility for employees is
available to a classification of employees that discriminates in favor
of highly compensated employees, the classification will not be treated
as discriminating in favor of the prohibited group employees unless the
facility is used, more than a de minimis amount, by any executive group
employee.
(ii) Executive group employees. For purposes of this paragraph
(c)(4), the term ``executive group employees'' has the same meaning as
the term ``prohibited group employees'' (as defined in paragraph (g) of
this section), except that for purposes of identifying highly
compensated employees--
(A) The exception provided in paragraph (g)(1)(i)(A) of this section
does not apply, and
(B) The phrase ``highest-paid one percent of all employees of an
employer'' is substituted for the phrase ``highest-paid ten percent of
all employees of an employer'' in paragraph (g)(1)(ii)(A) of this
section.
(d) Substantially-the-same-terms requirement--(1) General rule.
Fringe benefits available to a particular classification of employees
must be available to each employee in the classification on
substantially the same terms. The determination of whether this
requirement is met shall depend on the facts and circumstances involved.
For example, if a department store provides a 20 percent qualified
employee discount to its employees on all merchandise, the
substantially-the-same-terms requirement will be satisfied. Similarly,
if the discount provided to all employees is 30 percent on certain
merchandise (such as apparel), and 20 percent on all other merchandise,
the substantially-the-same-terms requirement will be satisfied. However,
if the discount provided is 20 percent on all merchandise for hourly
employees and 30 percent on all merchandise for salaried employees, the
substantially-the-same-terms requirement will not be satisfied. In
addition, if the percentage discount varies depending on either an
employee's amount or rate of compensation, or volume of purchases, the
substantially-the-same-terms requirement will not be satisfied. In order
to determine whether such a discount program satisfies the
nondiscrimination requirements of section 132, each group of employees
that does receive fringe benefits on substantially the same terms must
be treated as a separate classification. However, subject to the rules
of paragraph (e)(2) of this section, an employer may divide a fringe
benefit program into two programs for purposes of aggregating groups of
employees. See Example (1) of paragraph (d)(3) of this section.
(2) Terms relating to priority. Certain fringe benefits made
available to employees are available only in limited quantities that may
be insufficient to meet employee demand. This may occur either because
of employer policy (such as where an employer determines that only a
certain number of units of a specific product will be made available to
employees each year) or because of the nature of the fringe benefit
(such as where an employer provides a no-additional-cost transportation
service that is limited to the number of seats available just before
departure). Under these circumstances, an employer may find it necessary
to establish some method of allocating the limited fringe benefits among
the employees eligible to receive the fringe benefits. An allocation
among employees on a ``first-come, first-served'' basis will not violate
the substantially-the-same-terms requirement provided that such an
allocation is not discriminatory in practice. In addition, an allocation
among employees on a lottery basis will not violate the substantially-
the-same-terms requirement provided that such an allocation is
nondiscriminatory in practice. For example, assume that an employer has
a limited number of a particular benefit to offer to its employees.
Assume further that
[[Page 587]]
the employees interested in receiving the benefit submit their names to
the employer who then selects a number of names, at random, equal to the
number of fringe benefits available. This lottery system would not
violate the substantially-the-same-terms requirement. An allocation
among employees on other than a ``first-come, first-served'', lottery,
or similar basis will violate the substantially-the-same-terms
requirement. Therefore, an allocation based on seniority, full-time vs.
part-time employment, or job description will violate the substantially-
the-same-terms requirement. In order to determine whether such a fringe
benefit program satisfies the nondiscrimination requirements of section
132, each group of employees that does receive fringe benefits on
substantially the same terms must be treated as a separate
classification. For purposes of this rule, the last two sentences of
paragraph (d)(1) of this section apply.
(3) Examples. The followings examples illustrate the provisions of
this paragraph (d):
Example 1. Assume that with respect to a benefit available in
limited quantities an employer provides priority to employees based on
seniority. Assume further that all non-prohibited group employees have
ten years of seniority and all prohibited group employees have nine
years seniority. If each of these groups were tested separately, the
benefits offered to prohibited group employees would be discriminatory
under this section. In this case, the employer could divide the fringe
benefit program provided to non-prohibited group employees into two
parts: one relating to nine years of seniority and one relating to an
additional year of seniority. As restructured in this manner, all
employees receive the benefit relating to nine years seniority and only
non-prohibited group employees receive the benefit relating to an
additional year of seniority. Both groups (all employees and all non-
prohibited group employees) are nondiscriminatory groups.
Example 2. Assume that prices charged to prohibited group employees
at an employer-operated eating facility for employees are lower than
prices charged to non-prohibited group employees. The substantially-the-
same requirement is not satisfied.
(4) Disproportionate use of eating facility. If access to an
employer-operated eating facility for employees is technically available
on substantially-the-same-terms (to (i) all employees who regularly work
at or near the premises on which the eating facility is located (the
employee group), or (ii) a nondiscriminatory classification of the
employee group, but in practice a highly disproportionate number of the
prohibited group employees in the employee group, compared to the non-
prohibited group employees in the employee group, use the facility, the
substantially-the-same-terms requirement will not be satisfied unless no
member of the executive group eats there more than a de minimis amount.
(e) Aggregation of separate fringe benefit programs--(1) General
rule. If an employer maintains more than one fringe benefit program,
i.e., two or more classifications of employees providing either
identical or different fringe benefits, the nondiscrimination
requirements of section 132 will generally be applied separately to each
such program. Thus, a determination that one fringe benefit program
discriminates in favor of prohibited group employees generally will not
cause other fringe benefit programs covering the same prohibited group
employees to be treated as discriminatory.
(2) Exception--(i) Related fringe benefit programs. If one of a
group of fringe benefit programs discriminates in favor of prohibited
group employees, no related fringe benefit provided to such prohibited
group employees under any other fringe benefit program may be excluded
from the gross income of such prohibited group employees. For example,
assume a department store provides a 20 percent merchandise discount to
all employees under one fringe benefit program. Assume further that
under a second fringe benefit program, the department store provides an
additional 15 percent merchandise discount to a group of employees
defined under a classification which discriminates in favor of the
prohibited group. Because the second fringe benefit program is
discriminatory, the 15 percent merchandise discount provided to the
prohibited group employees is not a qualified employee discount. In
addition, because the 20 percent merchandise discount provided under the
first fringe benefit program is related to the fringe benefit provided
under the second
[[Page 588]]
fringe benefit program, the 20 percent merchandise discount provided the
prohibited group employees is not a qualified employee discount. Thus,
the entire 35 percent merchandise discount provided to the prohibited
group employees is includible in such employees' gross incomes.
(ii) Employer-operated eating facilities for employees. For purposes
of paragraph (e)(2)(i) of this section, meals at different employer-
operated eating facilities for employees are not related fringe
benefits, so that a prohibited group employee may exclude the value of a
meal at a nondiscriminatory facility even though any meals provided to
him or her at the discriminatory facility cannot be excluded.
(f) Cash bonuses or rebates. A cash bonus or rebate provided to an
employee by an employer that is determined pursuant to the value of
employer-provided property or services purchased by the employee, is
treated as an equivalent employee discount. For example, assume a
department store provides a 20 percent merchandise discount to all
employees under a fringe benefit program. In addition, assume that the
department store provides cash bonuses to a group of employees defined
under a classification which discriminates in favor of the prohibited
group. Assume further that such cash bonuses equal 15 percent of the
value of merchandise purchased by each employee. This arrangement is
substantively identical to the example described in paragraph (e)(2) of
this section. Thus, both the 20 percent merchandise discount and the 15
percent cash bonus provided to the prohibited group employees are
includible in such employees' gross incomes.
(g) Prohibited group employees--(1) Highly compensated--(i) General
rule. Except as otherwise provided in this paragraph (g)(1)(i), any
employee of an employer who has (or is reasonably expected to have)
compensation during a calendar year equal to or greater than the
employer's base compensation amount is highly compensated. There are two
exceptions to this rule:
(A) Any employee who has (or is reasonably expected to have)
compensation during a calendar year equal to or greater than $50,000 is
highly compensated, regardless of whether such compensation is in excess
of the base compensation amount, and
(B) Any employee who is reasonably expected to have compensation
during a calendar year equal to or less than $20,000 is not highly
compensated, unless no employee of the employer is reasonably expected
to have compensation equal to or greater than $35,000.
The determination of whether an employee is a highly compensated
employee will be determined based on the entire employee workforce of
all employers aggregated pursuant to the rules of section 414 (b), (c),
or (m) without regard to the regular workplace of the employees.
(ii) Base compensation amount--(A) General rule. The term ``base
compensation amount'' is defined as that amount corresponding to the
lowest annual compensation amount received by the highest-paid ten
percent of all employees of an employer (the number of employees in the
top ten percent will be increased to the next highest integer if
necessary), determined on the basis of the preceding calendar year. For
purposes of this paragraph (g)(1)(ii), the term ``employer'' includes
all entities that would be aggregated pursuant to the rules of section
414 (b), (c), or (m).
(B) Employees that are excluded. For purposes of determining the
base compensation amount with respect to a fringe benefit program,
employees described in paragraph (b)(3) of this section are excluded
whether or not they are covered under the fringe benefit program, except
that: (1) Employees described in paragraph (b)(3)(ii) of this section
are taken into account with respect to the program even if they are
excluded under paragraph (b)(3), and (2) employees described in
paragraph (b)(3) (i) and (iv) of this section are taken into account
with respect to the program unless they are excluded under paragraph
(b)(3).
(C) Exception to preceding calendar year rule. In the case of an
employer's first year of operation, or where an employer's business has
changed significantly from the prior calendar year (e.g., due to an
acquisition or merger), the employer must make a good faith attempt to
either determine or adjust
[[Page 589]]
the base compensation amount for the current year based on reasonable
estimates of current year compensation.
(iii) Compensation. The term ``compensation'' is defined as the
amount reportable on a Form W-2 as income. Amounts that would be
excluded from income but for section 132(h)(1) are not included in
compensation for purposes of this paragraph (g)(1). Compensation
includes amounts received from all entities which would be treated as a
single employer under section 414 (b), (c), or (m) and is not restricted
to amounts received with respect to any one line of business.
(iv) Employee. Generally, for purposes of determining whether an
employee is highly compensated under this paragraph (g)(1), the term
``employee'' does not include any individual who does not perform
services for the employer as an employee during the calendar year. For
example, if an employer has active employees, retired or disabled
employees, and widows or widowers who are ``employees'' under section
132(f)(1)(B), the general rule (described in paragraph (g)(1)(i) of this
section) applies only to the active employees.
(2) Owner--(i) General rule. For purposes of this section, the term
``owner'' means any employee who owns a one percent or greater interest
in either the employer or in any entity that would be aggregated with
the employer pursuant to the rules of section 414 (b), (c), or (m). In
addition, such an employee shall be treated as an owner of all entities
that would be aggregated with the employer pursuant to the rules of
section 414 (b), (c), or (m).
(ii) Determining ownership. Ownership in a corporation shall be
determined pursuant to the rules of section 318(a). For purposes of
determining ownership in an entity other than a corporation, the rules
of section 318(a) shall apply in a manner similar to the way in which
they apply for purposes of determining ownership in a corporation. For
non-corporate interests, capital or profits interest must be substituted
for stock.
(3) Officer--(i) Non-government. For purposes of this section, an
officer of a non-government employer is any employee who is appointed,
confirmed, or elected by the Board or shareholders of the employer. An
employee who is an officer of an employer shall be treated as an officer
of all entities treated as a single employer pursuant to section 414
(b), (c), or (m). The number of officers is not to exceed one-percent of
the total number of employees of all entities treated as a single
employer pursuant to section 414 (b), (c), or (m) (increased to the next
highest integer, if necessary). If the number of officers exceeds one-
percent of all employees, then the limitation is to be applied to
employees in descending order of compensation (as defined in paragraph
(g)(1)(iii) of this section). Thus, if an employer with 1,000 employees
has 11 board-appointed officers, the employee with the least
compensation of those officers would not be an officer under this
paragraph (g)(3)(i). In determining the total number of employees with
respect to a fringe benefit program, employees described in paragraph
(b)(3) of this section are excluded whether or not they are covered
under the fringe benefit program, except that (A) employees described in
paragraph (b)(3)(ii) of this section are taken into account with respect
to the program even if they are excluded under paragraph (b)(3), and (B)
employees described in paragraph (b)(3) (i) and (iv) of this section are
taken into account with respect to the program unless they are excluded
under paragraph (b)(3).
(ii) Government. For purposes of this section, an officer of a
government employer is any--
(A) Elected official,
(B) Federal employee appointed by the President and confirmed by the
Senate. However, in the case of any commissioned officer of the United
States Armed Forces, an officer is any employee with the rank of
brigadier general or rear admiral (lower half) or above, and
(C) State or local executive officer comparable to individuals
described in paragraphs (g)(3)(ii) (A) and (B) of this section.
For purposes of this paragraph (g)(3)(ii), the term ``government''
includes any Federal, state, or local governmental unit, and any agency
or instrumentality thereof.
[[Page 590]]
(4) Former employees. [Reserved]
[T.D. 8063, 50 FR 52309, Dec. 23, 1985, as amended by T.D. 8256, 54 FR
28600, July 6, 1989]
Sec. 1.132-9 Qualified transportation fringes.
(a) Table of contents. This section contains a list of the questions
and answers in Sec. 1.132-9.
(1) General rules.
Q-1. What is a qualified transportation fringe?
Q-2. What is transportation in a commuter highway vehicle?
Q-3. What are transit passes?
Q-4. What is qualified parking?
Q-5. May qualified transportation fringes be provided to individuals
who are not employees?
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
(2) Dollar limitations.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
Q-8. What amount is includible in an employee's wages for income and
employment tax purposes if the value of the qualified transportation
fringe exceeds the applicable statutory monthly limit?
Q-9. Are excludable qualified transportation fringes calculated on a
monthly basis?
Q-10. May an employee receive qualified transportation fringes from
more than one employer?
(3) Compensation reduction.
Q-11. May qualified transportation fringes be provided to employees
pursuant to a compensation reduction agreement?
Q-12. What is a compensation reduction election for purposes of
section 132(f)?
Q-13. Is there a limit to the amount of the compensation reduction?
Q-14. When must the employee have made a compensation reduction
election and under what circumstances may the amount be paid in cash to
the employee?
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
(4) Expense reimbursements.
Q-16. How does section 132(f) apply to expense reimbursements?
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
(5) Special rules for parking and vanpools.
Q-20. How is the value of parking determined?
Q-21. How do the qualified transportation fringe rules apply to van
pools?
(6) Reporting and employment taxes.
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
(7) Interaction with other fringe benefits.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
(8) Application to individuals who are not employees.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-corporations,
or independent contractors?
(9) Effective date.
Q-25. What is the effective date of this section?
(b) Questions and answers.
Q-1. What is a qualified transportation fringe?
A-1. (a) The following benefits are qualified transportation fringe
benefits:
(1) Transportation in a commuter highway vehicle.
(2) Transit passes.
(3) Qualified parking.
(b) An employer may simultaneously provide an employee with any one
or more of these three benefits.
Q-2. What is transportation in a commuter highway vehicle?
A-2. Transportation in a commuter highway vehicle is transportation
provided by an employer to an employee in connection with travel between
the employee's residence and place of employment. A commuter highway
vehicle is a highway vehicle with a seating capacity of at least 6
adults (excluding the driver) and with respect to which at least 80
percent of the vehicle's mileage for a year is reasonably expected to
be--
(a) For transporting employees in connection with travel between
their residences and their place of employment; and
(b) On trips during which the number of employees transported for
commuting is at least one-half of the adult seating capacity of the
vehicle (excluding the driver).
Q-3. What are transit passes?
A-3. A transit pass is any pass, token, farecard, voucher, or
similar item (including an item exchangeable
[[Page 591]]
for fare media) that entitles a person to transportation--
(a) On mass transit facilities (whether or not publicly owned); or
(b) Provided by any person in the business of transporting persons
for compensation or hire in a highway vehicle with a seating capacity of
at least 6 adults (excluding the driver).
Q-4. What is qualified parking?
A-4. (a) Qualified parking is parking provided to an employee by an
employer--
(1) On or near the employer's business premises; or
(2) At a location from which the employee commutes to work
(including commuting by carpool, commuter highway vehicle, mass transit
facilities, or transportation provided by any person in the business of
transporting persons for compensation or hire).
(b) For purposes of section 132(f), parking on or near the
employer's business premises includes parking on or near a work location
at which the employee provides services for the employer. However,
qualified parking does not include--
(1) The value of parking provided to an employee that is excludable
from gross income under section 132(a)(3) (as a working condition
fringe), or
(2) Reimbursement paid to an employee for parking costs that is
excludable from gross income as an amount treated as paid under an
accountable plan. See Sec. 1.62-2.
(c) However, parking on or near property used by the employee for
residential purposes is not qualified parking.
(d) Parking is provided by an employer if--
(1) The parking is on property that the employer owns or leases;
(2) The employer pays for the parking; or
(3) The employer reimburses the employee for parking expenses (see
Q/A-16 of this section for rules relating to cash reimbursements).
Q-5. May qualified transportation fringes be provided to individuals
who are not employees?
A-5. An employer may provide qualified transportation fringes only
to individuals who are currently employees of the employer at the time
the qualified transportation fringe is provided. The term employee for
purposes of qualified transportation fringes is defined in Sec. 1.132-
1(b)(2)(i). This term includes only common law employees and other
statutory employees, such as officers of corporations. See Q/A-24 of
this section for rules regarding partners, 2-percent shareholders, and
independent contractors.
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
A-6. No. Section 132(f) does not require that a qualified
transportation fringe benefit plan be in writing.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
A-7. (a) Transportation in a commuter highway vehicle and transit
passes. Before January 1, 2002, up to $65 per month is excludable from
the gross income of an employee for transportation in a commuter highway
vehicle and transit passes provided by an employer. On January 1, 2002,
this amount is increased to $100 per month.
(b) Parking. Up to $175 per month is excludable from the gross
income of an employee for qualified parking.
(c) Combination. An employer may provide qualified parking benefits
in addition to transportation in a commuter highway vehicle and transit
passes.
(d) Cost-of-living adjustments. The amounts in paragraphs (a) and
(b) of this Q/A-7 are adjusted annually, beginning with 2000, to reflect
cost-of-living. The adjusted figures are announced by the Service before
the beginning of the year.
Q-8. What amount is includible in an employee's wages for income and
employment tax purposes if the value of the qualified transportation
fringe exceeds the applicable statutory monthly limit?
A-8. (a) Generally, an employee must include in gross income the
amount by which the fair market value of the benefit exceeds the sum of
the amount, if any, paid by the employee and any amount excluded from
gross income under section 132(a)(5). Thus, assuming no other statutory
exclusion applies, if an employer provides an employee with a qualified
transportation fringe that exceeds the applicable statutory
[[Page 592]]
monthly limit and the employee does not make any payment, the value of
the benefits provided in excess of the applicable statutory monthly
limit is included in the employee's wages for income and employment tax
purposes. See Sec. 1.61-21(b)(1).
(b) The following examples illustrate the principles of this Q/A-8:
Example 1. (i) For each month in a year in which the statutory
monthly transit pass limit is $100 (i.e., a year after 2001), Employer M
provides a transit pass valued at $110 to Employee D, who does not pay
any amount to Employer M for the transit pass.
(ii) In this Example 1, because the value of the monthly transit
pass exceeds the statutory monthly limit by $10, $120 ($110--$100, times
12 months) must be included in D's wages for income and employment tax
purposes for the year with respect to the transit passes.
Example 2. (i) For each month in a year in which the statutory
monthly qualified parking limit is $175, Employer M provides qualified
parking valued at $195 to Employee E, who does not pay any amount to M
for the parking.
(ii) In this Example 2, because the fair market value of the
qualified parking exceeds the statutory monthly limit by $20, $240
($195--$175, times 12 months) must be included in Employee E's wages for
income and employment tax purposes for the year with respect to the
qualified parking.
Example 3. (i) For each month in a year in which the statutory
monthly qualified parking limit is $175, Employer P provides qualified
parking with a fair market value of $220 per month to its employees, but
charges each employee $45 per month.
(ii) In this Example 3, because the sum of the amount paid by an
employee ($45) plus the amount excludable for qualified parking ($175)
is not less than the fair market value of the monthly benefit, no amount
is includible in the employee's wages for income and employment tax
purposes with respect to the qualified parking.
Q-9. Are excludable qualified transportation fringes calculated on a
monthly basis?
A-9. (a) In general. Yes. The value of transportation in a commuter
highway vehicle, transit passes, and qualified parking is calculated on
a monthly basis to determine whether the value of the benefit has
exceeded the applicable statutory monthly limit on qualified
transportation fringes. Except in the case of a transit pass provided to
an employee, the applicable statutory monthly limit applies to qualified
transportation fringes used by the employee in a month. Monthly
exclusion amounts are not combined to provide a qualified transportation
fringe for any month exceeding the statutory limit. A month is a
calendar month or a substantially equivalent period applied
consistently.
(b) Transit passes. In the case of transit passes provided to an
employee, the applicable statutory monthly limit applies to the transit
passes provided by the employer to the employee in a month for that
month or for any previous month in the calendar year. In addition,
transit passes distributed in advance for more than one month, but not
for more than twelve months, are qualified transportation fringes if the
requirements in paragraph (c) of this Q/A-9 are met (relating to the
income tax and employment tax treatment of advance transit passes). The
applicable statutory monthly limit under section 132(f)(2) on the
combined amount of transportation in a commuter highway vehicle and
transit passes may be calculated by taking into account the monthly
limits for all months for which the transit passes are distributed. In
the case of a pass that is valid for more than one month, such as an
annual pass, the value of the pass may be divided by the number of
months for which it is valid for purposes of determining whether the
value of the pass exceeds the statutory monthly limit.
(c) Rule if employee's employment terminates--(1) Income tax
treatment. The value of transit passes provided in advance to an
employee with respect to a month in which the individual is not an
employee is included in the employee's wages for income tax purposes.
(2) Reporting and employment tax treatment. Transit passes
distributed in advance to an employee are excludable from wages for
employment tax purposes under sections 3121, 3306, and 3401 (FICA, FUTA,
and income tax withholding) if the employer distributes transit passes
to the employee in advance for not more than three months and, at the
time the transit passes are distributed, there is not an established
date that the employee's employment will terminate (for example, if the
employee has given notice of retirement) which will occur before the
beginning
[[Page 593]]
of the last month of the period for which the transit passes are
provided. If the employer distributes transit passes to an employee in
advance for not more than three months and at the time the transit
passes are distributed there is an established date that the employee's
employment will terminate, and the employee's employment does terminate
before the beginning of the last month of the period for which the
transit passes are provided, the value of transit passes provided for
months beginning after the date of termination during which the employee
is not employed by the employer is included in the employee's wages for
employment tax purposes. If transit passes are distributed in advance
for more than three months, the value of transit passes provided for the
months during which the employee is not employed by the employer is
includible in the employee's wages for employment tax purposes
regardless of whether at the time the transit passes were distributed
there was an established date of termination of the employee's
employment.
(d) Examples. The following examples illustrate the principles of
this Q/A-9:
Example 1. (i) Employee E incurs $150 for qualified parking used
during the month of June of a year in which the statutory monthly
parking limit is $175, for which E is reimbursed $150 by Employer R.
Employee E incurs $180 in expenses for qualified parking used during the
month of July of that year, for which E is reimbursed $180 by Employer
R.
(ii) In this Example 1, because monthly exclusion amounts may not be
combined to provide a benefit in any month greater than the applicable
statutory limit, the amount by which the amount reimbursed for July
exceeds the applicable statutory monthly limit ($180 minus $175 equals
$5) is includible in Employee E's wages for income and employment tax
purposes.
Example 2. (i) Employee F receives transit passes from Employer G
with a value of $195 in March of a year (for which the statutory monthly
transit pass limit is $65) for January, February, and March of that
year. F was hired during January and has not received any transit passes
from G.
(ii) In this Example 2, the value of the transit passes (three
months times $65 equals $195) is excludable from F's wages for income
and employment tax purposes.
Example 3. (i) Employer S has a qualified transportation fringe
benefit plan under which its employees receive transit passes near the
beginning of each calendar quarter for that calendar quarter. All
employees of Employer S receive transit passes from Employer S with a
value of $195 on March 31 for the second calendar quarter covering the
months April, May, and June (of a year in which the statutory monthly
transit pass limit is $65).
(ii) In this Example 3, because the value of the transit passes may
be calculated by taking into account the monthly limits for all months
for which the transit passes are distributed, the value of the transit
passes (three months times $65 equals $195) is excludable from the
employees' wages for income and employment tax purposes.
Example 4. (i) Same facts as in Example 3, except that Employee T,
an employee of Employer S, terminates employment with S on May 31. There
was not an established date of termination for Employee T at the time
the transit passes were distributed.
(ii) In this Example 4, because at the time the transit passes were
distributed there was not an established date of termination for
Employee T, the value of the transit passes provided for June ($65) is
excludable from T's wages for employment tax purposes. However, the
value of the transit passes distributed to Employee T for June ($65) is
not excludable from T's wages for income tax purposes.
(iii) If Employee T's May 31 termination date was established at the
time the transit passes were provided, the value of the transit passes
provided for June ($65) is included in T's wages for both income and
employment tax purposes.
Example 5. (i) Employer F has a qualified transportation fringe
benefit plan under which its employees receive transit passes semi-
annually in advance of the months for which the transit passes are
provided. All employees of Employer F, including Employee X, receive
transit passes from F with a value of $390 on June 30 for the 6 months
of July through December (of a year in which the statutory monthly
transit pass limit is $65). Employee X's employment terminates and his
last day of work is August 1. Employer F's other employees remain
employed throughout the remainder of the year.
(ii) In this Example 5, the value of the transit passes provided to
Employee X for the months September, October, November, and December
($65 times 4 months equals $260) of the year is included in X's wages
for income and employment tax purposes. The value of the transit passes
provided to Employer F's other employees is excludable from the
employees' wages for income and employment tax purposes.
Example 6. (i) Each month during a year in which the statutory
monthly transit pass limit is $65, Employer R distributes transit passes
with a face amount of $70 to each of
[[Page 594]]
its employees. Transit passes with a face amount of $70 can be purchased
from the transit system by any individual for $65.
(ii) In this Example 6, because the value of the transit passes
distributed by Employer R does not exceed the applicable statutory
monthly limit ($65), no portion of the value of the transit passes is
included as wages for income and employment tax purposes.
Q-10. May an employee receive qualified transportation fringes from
more than one employer?
A-10. (a) General rule. Yes. The statutory monthly limits described
in Q/A-7 of this section apply to benefits provided by an employer to
its employees. For this purpose, all employees treated as employed by a
single employer under section 414(b), (c), (m), or (o) are treated as
employed by a single employer. See section 414(t) and Sec. 1.132-1(c).
Thus, qualified transportation fringes paid by entities under common
control under section 414(b), (c), (m), or (o) are combined for purposes
of applying the applicable statutory monthly limit. In addition, an
individual who is treated as a leased employee of the employer under
section 414(n) is treated as an employee of that employer for purposes
of section 132. See section 414(n)(3)(C).
(b) Examples. The following examples illustrate the principles of
this Q/A-10:
Example 1. (i) During a year in which the statutory monthly
qualified parking limit is $175, Employee E works for Employers M and N,
who are unrelated and not treated as a single employer under section
414(b), (c), (m), or (o). Each month, M and N each provide qualified
parking benefits to E with a value of $100.
(ii) In this Example 1, because M and N are unrelated employers, and
the value of the monthly parking benefit provided by each is not more
than the applicable statutory monthly limit, the parking benefits
provided by each employer are excludable as qualified transportation
fringes assuming that the other requirements of this section are
satisfied.
Example 2. (i) Same facts as in Example 1, except that Employers M
and N are treated as a single employer under section 414(b).
(ii) In this Example 2, because M and N are treated as a single
employer, the value of the monthly parking benefit provided by M and N
must be combined for purposes of determining whether the applicable
statutory monthly limit has been exceeded. Thus, the amount by which the
value of the parking benefit exceeds the monthly limit ($200 minus the
monthly limit amount of $175 equals $25) for each month in the year is
includible in E's wages for income and employment tax purposes.
Q-11. May qualified transportation fringes be provided to employees
pursuant to a compensation reduction agreement?
A-11. Yes. An employer may offer employees a choice between cash
compensation and any qualified transportation fringe. An employee who is
offered this choice and who elects qualified transportation fringes is
not required to include the cash compensation in income if--
(a) The election is pursuant to an arrangement described in Q/A-12
of this section;
(b) The amount of the reduction in cash compensation does not exceed
the limitation in Q/A-13 of this section;
(c) The arrangement satisfies the timing and reimbursement rules in
Q/A-14 and 16 of this section; and
(d) The related fringe benefit arrangement otherwise satisfies the
requirements set forth elsewhere in this section.
Q-12. What is a compensation reduction election for purposes of
section 132(f)?
A-12. (a) Election requirements generally. A compensation reduction
arrangement is an arrangement under which the employer provides the
employee with the right to elect whether the employee will receive
either a fixed amount of cash compensation at a specified future date or
a fixed amount of qualified transportation fringes to be provided for a
specified future period (such as qualified parking to be used during a
future calendar month). The employee's election must be in writing or
another form, such as electronic, that includes, in a permanent and
verifiable form, the information required to be in the election. The
election must contain the date of the election, the amount of the
compensation to be reduced, and the period for which the benefit will be
provided. The election must relate to a fixed dollar amount or fixed
percentage of compensation reduction. An election to reduce compensation
for a period by a set amount for such period may be automatically
renewed for subsequent periods.
[[Page 595]]
(b) Automatic election permitted. An employer may provide under its
qualified transportation fringe benefit plan that a compensation
reduction election will be deemed to have been made if the employee does
not elect to receive cash compensation in lieu of the qualified
transportation fringe, provided that the employee receives adequate
notice that a compensation reduction will be made and is given adequate
opportunity to choose to receive the cash compensation instead of the
qualified transportation fringe.
Q-13. Is there a limit to the amount of the compensation reduction?
A-13. Yes. Each month, the amount of the compensation reduction may
not exceed the combined applicable statutory monthly limits for
transportation in a commuter highway vehicle, transit passes, and
qualified parking. For example, for a year in which the statutory
monthly limit is $65 for transportation in a commuter highway vehicle
and transit passes, and $175 for qualified parking, an employee could
elect to reduce compensation for any month by no more than $240 ($65
plus $175) with respect to qualified transportation fringes. If an
employee were to elect to reduce compensation by $250 for a month, the
excess $10 ($250 minus $240) would be includible in the employee's wages
for income and employment tax purposes.
Q-14. When must the employee have made a compensation reduction
election and under what circumstances may the amount be paid in cash to
the employee?
A-14. (a) The compensation reduction election must satisfy the
requirements set forth under paragraphs (b), (c), and (d) of this Q/A-
14.
(b) Timing of election. The compensation reduction election must be
made before the employee is able currently to receive the cash or other
taxable amount at the employee's discretion. The determination of
whether the employee is able currently to receive the cash does not
depend on whether it has been constructively received for purposes of
section 451. The election must specify that the period (such as a
calendar month) for which the qualified transportation fringe will be
provided must not begin before the election is made. Thus, a
compensation reduction election must relate to qualified transportation
fringes to be provided after the election. For this purpose, the date a
qualified transportation fringe is provided is--
(1) The date the employee receives a voucher or similar item; or
(2) In any other case, the date the employee uses the qualified
transportation fringe.
(c) Revocability of elections. The employee may not revoke a
compensation reduction election after the employee is able currently to
receive the cash or other taxable amount at the employee's discretion.
In addition, the election may not be revoked after the beginning of the
period for which the qualified transportation fringe will be provided.
(d) Compensation reduction amounts not refundable. Unless an
election is revoked in a manner consistent with paragraph (c) of this Q/
A-14, an employee may not subsequently receive the compensation (in cash
or any form other than by payment of a qualified transportation fringe
under the employer's plan). Thus, an employer's qualified transportation
fringe benefit plan may not provide that an employee who ceases to
participate in the employer's qualified transportation fringe benefit
plan (such as in the case of termination of employment) is entitled to
receive a refund of the amount by which the employee's compensation
reductions exceed the actual qualified transportation fringes provided
to the employee by the employer.
(e) Examples. The following examples illustrate the principles of
this Q/A-14:
Example 1. (i) Employer P maintains a qualified transportation
fringe benefit arrangement during a year in which the statutory monthly
limit is $100 for transportation in a commuter highway vehicle and
transit passes (2002 or later) and $180 for qualified parking. Employees
of P are paid cash compensation twice per month, with the payroll dates
being the first and the fifteenth day of the month. Under P's
arrangement, an employee is permitted to elect at any time before the
first day of a month to reduce his or her compensation payable during
that month in an amount up to the applicable statutory monthly limit
($100 if the employee elects coverage for transportation in a commuter
highway vehicle or a mass transit pass, or
[[Page 596]]
$180 if the employee chooses qualified parking) in return for the right
to receive qualified transportation fringes up to the amount of the
election. If such an election is made, P will provide a mass transit
pass for that month with a value not exceeding the compensation
reduction amount elected by the employee or will reimburse the cost of
other qualified transportation fringes used by the employee on or after
the first day of that month up to the compensation reduction amount
elected by the employee. Any compensation reduction amount elected by
the employee for the month that is not used for qualified transportation
fringes is not refunded to the employee at any future date.
(ii) In this Example 1, the arrangement satisfies the requirements
of this Q/A-14 because the election is made before the employee is able
currently to receive the cash and the election specifies the future
period for which the qualified transportation fringes will be provided.
The arrangement would also satisfy the requirements of this Q/A-14 and
Q/A-13 of this section if employees are allowed to elect to reduce
compensation up to $280 per month ($100 plus $180).
(iii) The arrangement would also satisfy the requirements of this Q/
A-14 (and Q/A-13 of this section) if employees are allowed to make an
election at any time before the first or the fifteenth day of the month
to reduce their compensation payable on that payroll date by an amount
not in excess of one-half of the applicable statutory monthly limit
(depending on the type of qualified transportation fringe elected by the
employee) and P provides a mass transit pass on or after the applicable
payroll date for the compensation reduction amount elected by the
employee for the payroll date or reimburses the cost of other qualified
transportation fringes used by the employee on or after the payroll date
up to the compensation reduction amount elected by the employee for that
payroll date.
Example 2. (i) Employee Q elects to reduce his compensation payable
on March 1 of a year (for which the statutory monthly mass transit limit
is $65) by $195 in exchange for a mass transit voucher to be provided in
March. The election is made on the preceding February 27. Employee Q was
hired in January of the year. On March 10 of the year, the employer of
Employee Q delivers to Employee Q a mass transit voucher worth $195 for
the months of January, February, and March.
(ii) In this Example 2, $65 is included in Employee Q's wages for
income and employment tax purposes because the compensation reduction
election fails to satisfy the requirement in this Q/A-14 and Q/A-12 of
this section that the period for which the qualified transportation
fringe will be provided not begin before the election is made to the
extent the election relates to $65 worth of transit passes for January
of the year. The $65 for February is not taxable because the election
was for a future period that includes at least one day in February.
(iii) However, no amount would be included in Employee Q's wages as
a result of the election if $195 worth of mass transit passes were
instead provided to Q for the months of February, March, and April
(because the compensation reduction would relate solely to fringes to be
provided for a period not beginning before the date of the election and
the amount provided does not exceed the aggregate limit for the period,
i.e., the sum of $65 for each of February, March, and April). See Q/A-9
of this section for rules governing transit passes distributed in
advance for more than one month.
Example 3. (i) Employee R elects to reduce his compensation payable
on March 1 of a year (for which the statutory monthly parking limit is
$175) by $185 in exchange for reimbursement by Employer T of parking
expenses incurred by Employee R for parking on or near Employer T's
business premises during the period beginning after the date of the
election through March. The election is made on the preceding February
27. Employee R incurs $10 in parking expenses on February 28 of the
year, and $175 in parking expenses during the month of March. On April 5
of the year, Employer T reimburses Employee R $185 for the parking
expenses incurred on February 28, and during March, of the year.
(ii) In this Example 3, no amount would be includible in Employee
R's wages for income and employment tax purposes because the
compensation reduction related solely to parking on or near Employer R's
business premises used during a period not beginning before the date of
the election and the amount reimbursed for parking used in any one month
does not exceed the statutory monthly limitation.
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
A-15. (a) Yes. An employee may carry over unused compensation
reduction amounts to subsequent periods under the plan of the employee's
employer.
(b) The following example illustrates the principles of this Q/A-15:
Example. (i) By an election made before November 1 of a year for
which the statutory monthly mass transit limit is $65, Employee E elects
to reduce compensation in the amount of $65 for the month of November. E
incurs $50 in employee-operated commuter highway vehicle expenses during
November for which E is reimbursed $50 by Employer R,
[[Page 597]]
E's employer. By an election made before December, E elects to reduce
compensation by $65 for the month of December. E incurs $65 in employee-
operated commuter highway vehicle expenses during December for which E
is reimbursed $65 by R. Before the following January, E elects to reduce
compensation by $50 for the month of January. E incurs $65 in employee-
operated commuter highway vehicle expenses during January for which E is
reimbursed $65 by R because R allows E to carry over to the next year
the $15 amount by which the compensation reductions for November and
December exceeded the employee-operated commuter highway vehicle
expenses incurred during those months.
(ii) In this Example, because Employee E is reimbursed in an amount
not exceeding the applicable statutory monthly limit, and the
reimbursement does not exceed the amount of employee-operated commuter
highway vehicle expenses incurred during the month of January, the
amount reimbursed ($65) is excludable from E's wages for income and
employment tax purposes.
Q-16. How does section 132(f) apply to expense reimbursements?
A-16. (a) In general. The term qualified transportation fringe
includes cash reimbursement by an employer to an employee for expenses
incurred or paid by an employee for transportation in a commuter highway
vehicle or qualified parking. The term qualified transportation fringe
also includes cash reimbursement for transit passes made under a bona
fide reimbursement arrangement, but, in accordance with section
132(f)(3), only if permitted under paragraph (b) of this Q/A-16. The
reimbursement must be made under a bona fide reimbursement arrangement
which meets the rules of paragraph (c) of this Q/A-16. A payment made
before the date an expense has been incurred or paid is not a
reimbursement. In addition, a bona fide reimbursement arrangement does
not include an arrangement that is dependent solely upon an employee
certifying in advance that the employee will incur expenses at some
future date.
(b) Special rule for transit passes--(1) In general. The term
qualified transportation fringe includes cash reimbursement for transit
passes made under a bona fide reimbursement arrangement, but, in
accordance with section 132(f)(3), only if no voucher or similar item
that may be exchanged only for a transit pass is readily available for
direct distribution by the employer to employees. If a voucher is
readily available, the requirement that a voucher be distributed in-kind
by the employer is satisfied if the voucher is distributed by the
employer or by another person on behalf of the employer (for example, if
a transit operator credits amounts to the employee's fare card as a
result of payments made to the operator by the employer).
(2) Voucher or similar item. For purposes of the special rule in
paragraph (b) of this Q/A-16, a transit system voucher is an instrument
that may be purchased by employers from a voucher provider that is
accepted by one or more mass transit operators (e.g., train, subway, and
bus) in an area as fare media or in exchange for fare media. Thus, for
example, a transit pass that may be purchased by employers directly from
a voucher provider is a transit system voucher.
(3) Voucher provider. The term voucher provider means any person in
the trade or business of selling transit system vouchers to employers,
or any transit system or transit operator that sells vouchers to
employers for the purpose of direct distribution to employees. Thus, a
transit operator might or might not be a voucher provider. A voucher
provider is not, for example, a third-party employee benefits
administrator that administers a transit pass benefit program for an
employer using vouchers that the employer could obtain directly.
(4) Readily available. For purposes of this paragraph (b), a voucher
or similar item is readily available for direct distribution by the
employer to employees if and only if an employer can obtain it from a
voucher provider that--
(i) does not impose fare media charges that cause vouchers to not be
readily available as described in paragraph (b)(5) of this section; and
(ii) does not impose other restrictions that cause vouchers to not
be readily available as described in paragraph (b)(6) of this section.
(5) Fare media charges. For purposes of paragraph (b)(4) of this
section, fare media charges relate only to fees paid by the employer to
voucher providers for vouchers. The determination of
[[Page 598]]
whether obtaining a voucher would result in fare media charges that
cause vouchers to not be readily available as described in this
paragraph (b) is made with respect to each transit system voucher. If
more than one transit system voucher is available for direct
distribution to employees, the employer must consider the fees imposed
for the lowest cost monthly voucher for purposes of determining whether
the fees imposed by the voucher provider satisfy this paragraph.
However, if transit system vouchers for multiple transit systems are
required in an area to meet the transit needs of the individual
employees in that area, the employer has the option of averaging the
costs applied to each transit system voucher for purposes of determining
whether the fare media charges for transit system vouchers satisfy this
paragraph. Fare media charges are described in this paragraph (b)(5),
and therefore cause vouchers to not be readily available, if and only if
the average annual fare media charges that the employer reasonably
expects to incur for transit system vouchers purchased from the voucher
provider (disregarding reasonable and customary delivery charges imposed
by the voucher provider, e.g., not in excess of $15) are more than 1
percent of the average annual value of the vouchers for a transit
system.
(6) Other restrictions. For purposes of paragraph (b)(4) of this
section, restrictions that cause vouchers to not be readily available
are restrictions imposed by the voucher provider other than fare media
charges that effectively prevent the employer from obtaining vouchers
appropriate for distribution to employees. Examples of such restrictions
include--
(i) Advance purchase requirements. Advance purchase requirements
cause vouchers to not be readily available only if the voucher provider
does not offer vouchers at regular intervals or fails to provide the
voucher within a reasonable period after receiving payment for the
voucher. For example, a requirement that vouchers may be purchased only
once per year may effectively prevent an employer from obtaining
vouchers for distribution to employees. An advance purchase requirement
that vouchers be purchased not more frequently than monthly does not
effectively prevent the employer from obtaining vouchers for
distribution to employees.
(ii) Purchase quantity requirements. Purchase quantity requirements
cause vouchers to not be readily available if the voucher provider does
not offer vouchers in quantities that are reasonably appropriate to the
number of the employer's employees who use mass transportation (for
example, the voucher provider requires a $1,000 minimum purchase and the
employer seeks to purchase only $200 of vouchers).
(iii) Limitations on denominations of vouchers that are available.
If the voucher provider does not offer vouchers in denominations
appropriate for distribution to the employer's employees, vouchers are
not readily available. For example, vouchers provided in $5 increments
up to the monthly limit are appropriate for distribution to employees,
while vouchers available only in a denomination equal to the monthly
limit are not appropriate for distribution to employees if the amount of
the benefit provided to the employer's employees each month is normally
less than the monthly limit.
(7) Example. The following example illustrates the principles of
this paragraph (b):
Example. (i) Company C in City X sells mass transit vouchers to
employers in the metropolitan area of X in various denominations
appropriate for distribution to employees. Employers can purchase
vouchers monthly in reasonably appropriate quantities. Several different
bus, rail, van pool, and ferry operators service X, and a number of the
operators accept the vouchers either as fare media or in exchange for
fare media. To cover its operating expenses, C imposes on each voucher a
50 cents charge, plus a reasonable and customary $15 charge for delivery
of each order of vouchers. Employer M disburses vouchers purchased from
C to its employees who use operators that accept the vouchers and M
reasonably expects that $55 is the average value of the voucher it will
purchase from C for the next calendar year.
(ii) In this Example, vouchers for X are readily available for
direct distribution by the employer to employees because the expected
cost of the vouchers disbursed to M's employees for the next calendar
year is not more than 1 percent of the value of the vouchers (50 cents
divided by $55 equals 0.91
[[Page 599]]
percent), the delivery charges are disregarded because they are
reasonable and customary, and there are no other restrictions that cause
the vouchers to not be readily available. Thus, any reimbursement of
mass transportation costs in X would not be a qualified transportation
fringe.
(c) Substantiation requirements. Employers that make cash
reimbursements must establish a bona fide reimbursement arrangement to
establish that their employees have, in fact, incurred expenses for
transportation in a commuter highway vehicle, transit passes, or
qualified parking. For purposes of section 132(f), whether cash
reimbursements are made under a bona fide reimbursement arrangement may
vary depending on the facts and circumstances, including the method or
methods of payment utilized within the mass transit system. The employer
must implement reasonable procedures to ensure that an amount equal to
the reimbursement was incurred for transportation in a commuter highway
vehicle, transit passes, or qualified parking. The expense must be
substantiated within a reasonable period of time. An expense
substantiated to the payor within 180 days after it has been paid will
be treated as having been substantiated within a reasonable period of
time. An employee certification at the time of reimbursement in either
written or electronic form may be a reasonable reimbursement procedure
depending on the facts and circumstances. Examples of reasonable
reimbursement procedures are set forth in paragraph (d) of this Q/A-16.
(d) Illustrations of reasonable reimbursement procedures. The
following are examples of reasonable reimbursement procedures for
purposes of paragraph (c) of this Q/A-16. In each case, the
reimbursement is made at or within a reasonable period after the end of
the events described in paragraphs (d)(1) through (d)(3) of this
section.
(1) An employee presents to the employer a parking expense receipt
for parking on or near the employer's business premises, the employee
certifies that the parking was used by the employee, and the employer
has no reason to doubt the employee's certification.
(2) An employee either submits a used time-sensitive transit pass
(such as a monthly pass) to the employer and certifies that he or she
purchased it or presents an unused or used transit pass to the employer
and certifies that he or she purchased it and the employee certifies
that he or she has not previously been reimbursed for the transit pass.
In both cases, the employer has no reason to doubt the employee's
certification.
(3) If a receipt is not provided in the ordinary course of business
(e.g., if the employee uses metered parking or if used transit passes
cannot be returned to the user), the employee certifies to the employer
the type and the amount of expenses incurred, and the employer has no
reason to doubt the employee's certification.
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
A-17. (a) General rule. Yes. Qualified transportation fringes
include reimbursement to employees for costs incurred for transportation
in more than one month, provided the reimbursement for each month in the
period is calculated separately and does not exceed the applicable
statutory monthly limit for any month in the period. See Q/A-8 and 9 of
this section if the limit for a month is exceeded.
(b) Example. The following example illustrates the principles of
this Q/A-17:
Example. (i) Employee R pays $100 per month for qualified parking
used during the period from April 1 through June 30 of a year in which
the statutory monthly qualified parking limit is $175. After receiving
adequate substantiation from Employee R, R's employer reimburses R $300
in cash on June 30 of that year.
(ii) In this Example, because the value of the reimbursed expenses
for each month did not exceed the applicable statutory monthly limit,
the $300 reimbursement is excludable from R's wages for income and
employment tax purposes as a qualified transportation fringe.
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
A-18. There are no substantiation requirements if the employer
distributes transit passes. Thus, an employer may distribute a transit
pass for each month with a value not more than the
[[Page 600]]
statutory monthly limit without requiring any certification from the
employee regarding the use of the transit pass.
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
A-19. Yes.
Q-20. How is the value of parking determined?
A-20. Section 1.61-21(b)(2) applies for purposes of determining the
value of parking.
Q-21. How do the qualified transportation fringe rules apply to van
pools?
A-21. (a) Van pools generally. Employer and employee-operated van
pools, as well as private or public transit-operated van pools, may
qualify as qualified transportation fringes. The value of van pool
benefits which are qualified transportation fringes may be excluded up
to the applicable statutory monthly limit for transportation in a
commuter highway vehicle and transit passes, less the value of any
transit passes provided by the employer for the month.
(b) Employer-operated van pools. The value of van pool
transportation provided by or for an employer to its employees is
excludable as a qualified transportation fringe, provided the van
qualifies as a commuter highway vehicle as defined in section
132(f)(5)(B) and Q/A-2 of this section. A van pool is operated by or for
the employer if the employer purchases or leases vans to enable
employees to commute together or the employer contracts with and pays a
third party to provide the vans and some or all of the costs of
operating the vans, including maintenance, liability insurance and other
operating expenses.
(c) Employee-operated van pools. Cash reimbursement by an employer
to employees for expenses incurred for transportation in a van pool
operated by employees independent of their employer are excludable as
qualified transportation fringes, provided that the van qualifies as a
commuter highway vehicle as defined in section 132(f)(5)(B) and Q/A-2 of
this section. See Q/A-16 of this section for the rules governing cash
reimbursements.
(d) Private or public transit-operated van pool transit passes. The
qualified transportation fringe exclusion for transit passes is
available for travel in van pools owned and operated either by public
transit authorities or by any person in the business of transporting
persons for compensation or hire. In accordance with paragraph (b) of Q/
A-3 of this section, the van must seat at least 6 adults (excluding the
driver). See Q/A-16(b) and (c) of this section for a special rule for
cash reimbursement for transit passes and the substantiation
requirements for cash reimbursement.
(e) Value of van pool transportation benefits. Section 1.61-21(b)(2)
provides that the fair market value of a fringe benefit is based on all
the facts and circumstances. Alternatively, transportation in an
employer-provided commuter highway vehicle may be valued under the
automobile lease valuation rule in Sec. 1.61-21(d), the vehicle cents-
per-mile rule in Sec. 1.61-21(e), or the commuting valuation rule in
Sec. 1.61-21(f). If one of these special valuation rules is used, the
employer must use the same valuation rule to value the use of the
commuter highway vehicle by each employee who share the use. See
Sec. 1.61-21(c)(2)(i)(B).
(f) Qualified parking prime member. If an employee obtains a
qualified parking space as a result of membership in a car or van pool,
the applicable statutory monthly limit for qualified parking applies to
the individual to whom the parking space is assigned. This individual is
the prime member. In determining the tax consequences to the prime
member, the statutory monthly limit amounts of each car pool member may
not be combined. If the employer provides access to the space and the
space is not assigned to a particular individual, then the employer must
designate one of its employees as the prime member who will bear the tax
consequences. The employer may not designate more than one prime member
for a car or van pool during a month. The employer of the prime member
is responsible for including the value of the qualified parking in
excess of the statutory monthly limit in the prime member's wages for
income and employment tax purposes.
[[Page 601]]
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
A-22. (a) Employment tax treatment generally. Qualified
transportation fringes not exceeding the applicable statutory monthly
limit described in Q/A-7 of this section are not wages for purposes of
the Federal Insurance Contributions Act (FICA), the Federal Unemployment
Tax Act (FUTA), and federal income tax withholding. Any amount by which
an employee elects to reduce compensation as provided in Q/A-11 of this
section is not subject to the FICA, the FUTA, and federal income tax
withholding. Qualified transportation fringes exceeding the applicable
statutory monthly limit described in Q/A-7 of this section are wages for
purposes of the FICA, the FUTA, and federal income tax withholding and
are reported on the employee's Form W-2, Wage and Tax Statement.
(b) Employment tax treatment of cash reimbursement exceeding monthly
limits. Cash reimbursement to employees (for example, cash reimbursement
for qualified parking) in excess of the applicable statutory monthly
limit under section 132(f) is treated as paid for employment tax
purposes when actually or constructively paid. See Secs. 31.3121(a)-
2(a), 31.3301-4, 31.3402(a)-1(b) of this chapter. Employers must report
and deposit the amounts withheld in addition to reporting and depositing
other employment taxes. See Q/A-16 of this section for rules governing
cash reimbursements.
(c) Noncash fringe benefits exceeding monthly limits. If the value
of noncash qualified transportation fringes exceeds the applicable
statutory monthly limit, the employer may elect, for purposes of the
FICA, the FUTA, and federal income tax withholding, to treat the noncash
taxable fringe benefits as paid on a pay period, quarterly, semi-annual,
annual, or other basis, provided that the benefits are treated as paid
no less frequently than annually.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
A-23. For purposes of section 132, the terms working condition
fringe and de minimis fringe do not include any qualified transportation
fringe under section 132(f). If, however, an employer provides local
transportation other than transit passes (without any direct or indirect
compensation reduction election), the value of the benefit may be
excludable, either totally or partially, under fringe benefit rules
other than the qualified transportation fringe rules under section
132(f). See Secs. 1.132-6(d)(2)(i) (occasional local transportation
fare), 1.132-6(d)(2)(iii) (transportation provided under unusual
circumstances), and 1.61-21(k) (valuation of local transportation
provided to qualified employees). See also Q/A-4(b) of this section.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-corporations,
or independent contractors?
A-24. (a) General rule. Section 132(f)(5)(E) states that self-
employed individuals who are employees within the meaning of section
401(c)(1) are not employees for purposes of section 132(f). Therefore,
individuals who are partners, sole proprietors, or other independent
contractors are not employees for purposes of section 132(f). In
addition, under section 1372(a), 2-percent shareholders of S
corporations are treated as partners for fringe benefit purposes. Thus,
an individual who is both a 2-percent shareholder of an S corporation
and a common law employee of that S corporation is not considered an
employee for purposes of section 132(f). However, while section 132(f)
does not apply to individuals who are partners, 2-percent shareholders
of S corporations, or independent contractors, other exclusions for
working condition and de minimis fringes may be available as described
in paragraphs (b) and (c) of this Q/A-24. See Secs. 1.132-1(b)(2) and
1.132-1(b)(4).
(b) Transit passes. The working condition and de minimis fringe
exclusions under section 132(a)(3) and (4) are available for transit
passes provided to individuals who are partners, 2-percent shareholders,
and independent contractors. For example, tokens or farecards provided
by a partnership to an individual who is a partner that enable the
partner to commute on a public transit system (not including privately-
operated van pools) are excludable from the
[[Page 602]]
partner's gross income if the value of the tokens and farecards in any
month does not exceed the dollar amount specified in Sec. 1.132-6(d)(1).
However, if the value of a pass provided in a month exceeds the dollar
amount specified in Sec. 1.132-6(d)(1), the full value of the benefit
provided (not merely the amount in excess of the dollar amount specified
in Sec. 1.132-6(d)(1)) is includible in gross income.
(c) Parking. The working condition fringe rules under section 132(d)
do not apply to commuter parking. See Sec. 1.132-5(a)(1). However, the
de minimis fringe rules under section 132(e) are available for parking
provided to individuals who are partners, 2-percent shareholders, or
independent contractors that qualifies under the de minimis rules. See
Sec. 1.132-6(a) and (b).
(d) Example. The following example illustrates the principles of
this Q/A-24:
Example. (i) Individual G is a partner in partnership P. Individual
G commutes to and from G's office every day and parks free of charge in
P's lot.
(ii) In this Example, the value of the parking is not excluded under
section 132(f), but may be excluded under section 132(e) if the parking
is a de minimis fringe under Sec. 1.132-6.
Q-25. What is the effective date of this section?
A-25. (a) Except as provided in paragraph (b) of this Q/A-25, this
section is applicable for employee taxable years beginning after
December 31, 2001. For this purpose, an employer may assume that the
employee taxable year is the calendar year.
(b) The last sentence of paragraph (b)(5) of Q/A-16 of this section
(relating to whether transit system vouchers for transit passes are
readily available) is applicable for employee taxable years beginning
after December 31, 2003. For this purpose, an employer may assume that
the employee taxable year is the calendar year.
[T.D. 8933, 66 FR 2244, Jan. 11, 2001; 66 FR 18190, Apr. 6, 2001]
Sec. 1.133-1T Questions and answers relating to interest on certain loans used to acquire employer securities (temporary).
Q-1: What does section 133 provide?
A-1: In general, section 133 provides that certain commercial
lenders may exclude from gross income fifty percent of the interest
received with respect to securities acquisition loans. A securities
acquisition loan is any loan to an employee stock ownership plan (ESOP)
(as defined in section 4975(e)(7)) that qualifies as an exempt loan
under Secs. 54.4975-7 and -11 to the extent that the proceeds are used
to acquire employer securities (within the meaning of section 409(l))
for the ESOP. A loan made to a corporation sponsoring an ESOP (or to a
person related to such corporation under section 133(b)(2)) may also
qualify as a securities acquisition loan to the extent and for the
period that the proceeds are (a) loaned to the corporation's ESOP under
a loan that qualifies as an exempt loan under Secs. 54.4975-7 and -11
and that has substantially similar terms as the loan from the commercial
lender to the sponsoring corporation, and (b) used to acquire employer
securities for the ESOP. The terms of the loan between the commercial
lender and the sponsoring corporation (or a related corporation) and the
loan between such corporation and the ESOP shall be treated as
substantially similar only if the timing and rate at which employer
securities would be released from encumbrance if the loan from the
commercial lender were the exempt loan under the applicable rule of
Sec. 54.4975-7(b)(8) are substantially similar to the timing and rate at
which employer securities will actually be released from encumbrance in
accordance with such rule. For this purpose, if the loan from the
commercial lender to the sponsoring corporation states a variable rate
of interest and the loan between the corporation and the ESOP states a
fixed rate of interest, whether the terms of the loans are substantially
similar shall be determined at the time the obligations are initially
issued by taking into account the adjustment interval on the variable
rate loan and the maturity of the fixed rate loan. For example, if the
rate on the loan from the commercial lender to the sponsoring
corporation adjusts each six months and the loan from the corporation to
the ESOP has a ten year term, the initial interest rate on the variable
rate
[[Page 603]]
loan could be compared to the rate on the fixed rate loan by comparing
the yields on 6 month and ten year Treasury obligations. Similarly, if
the rates on the two loans are based on different compounding
assumptions, whether the terms of the loans are substantially similar
shall be determined by taking into account the different compounding
assumptions. A securities acquisition loan may be evidenced by any note,
bond, debenture, or certificate. Also, section 133(b)(2) provides that
certain loans between related persons are not securities acquisition
loans. In addition, a loan from a commercial lender to an ESOP or
sponsoring corporation to purchase employer securities will not be
treated as a securities acquisition loan to the extent that such loan is
used, either directly or indirectly, to purchase employer securities
from any other qualified plan, including any other ESOP, maintained by
the employer or any other corporation which is a member of the same
controlled group (as defined in section 409(l)(4)).
Q-2: What lenders are eligible to receive the fifty percent interest
exclusion?
A-2: Under section 133(a), a bank (within the meaning of section
581), an insurance company to which subchapter L applies, or a
corporation (other than a subchapter S corporation) actively engaged in
the business of lending money may exclude from gross income fifty
percent of the interest received with respect to a securities
acquisition loan (as defined in Q&A-1 of Sec. 1.133-1T). For purposes of
section 133(a)(3), a corporation is actively engaged in the business of
lending money if it lends money to the public on a regular and
continuing basis (other than in connection with the purchase by the
public of goods and services from the lender or a related party). A
corporation is not actively engaged in the business of lending money if
a predominant share of the original value of the loans it makes to
unrelated parties (other than in connection with the purchase by the
public of goods and services from the lender or a related party) are
securities acquisition loans.
Q-3: May loans which qualify for the fifty percent interest
exclusion under section 133 be syndicated to other lending institutions?
A-3: Securities acquisition loans under section 133 may be
syndicated to other lending institutions provided that such lending
institutions are described in section 133(a) (1), (2) or (3) and the
loan was originated by a qualified holder. Subsequent holders of the
debt instrument may qualify for the partial interest exclusion of
section 133 if such holders satisfy the requirements of section 133 and
such loan does not fail to be a securities acquisition loan under
section 133(b)(2).
Q-4: When is section 133 effective?
A-4: Section 133 applies to securities acquisition loans made after
July 18, 1984, and used to acquire employer securities after July 18,
1984. The provision does not apply to loans made after July 18, 1984, to
the extent that such loans are renegotiations, directly or indirectly,
of loans outstanding on such date. A loan extended to an ESOP or
sponsoring corporation after July 18, 1984, will be treated as a
renegotiation of an outstanding loan if the loan proceeds are used to
refinance acquisitions of employer securities made prior to July 19,
1984. For example, if an ESOP borrowed money prior to July 19, 1984, to
purchase employer securities and after July 18, 1984, borrows other
funds from the same or a different commercial lender to repay the first
loan, the second loan will be treated as a renegotiation of an
outstanding loan to the extent of the repaid amount. Similarly, if,
after July 18, 1984, an ESOP sells employer securities, uses the
proceeds to retire a pre-July 19, 1984, loan and obtains a second loan
to acquire replacement employer securities, the second loan will be
treated as a renegotiation of an outstanding loan.
[T.D. 8073, 51 FR 4319, Feb. 4, 1986]
Sec. 1.141-0 Table of contents.
This section lists the captioned paragraphs contained in
Secs. 1.141-1 through 1.141-16.
Sec. 1.141-1 Definitions and rules of general application.
(a) In general.
(b) Certain general definitions.
(c) Elections.
(d) Related parties.
[[Page 604]]
Sec. 1.141-2 Private activity bond tests.
(a) Overview.
(b) Scope.
(c) General definition of private activity bond.
(d) Reasonable expectations and deliberate actions.
(1) In general.
(2) Reasonable expectations test.
(3) Deliberate action defined.
(4) Special rule for dispositions of personal property in the
ordinary course of an established governmental program.
(5) Special rule for general obligation bond programs that finance a
large number of separate purposes.
(e) When a deliberate action occurs.
(f) Certain remedial actions.
(g) Examples.
Sec. 1.141-3 Definition of private business use.
(a) General rule.
(1) In general.
(2) Indirect use.
(3) Aggregation of private business use.
(b) Types of private business use arrangements.
(1) In general.
(2) Ownership.
(3) Leases.
(4) Management contracts.
(5) Output contracts.
(6) Research agreements.
(7) Other actual or beneficial use.
(c) Exception for general public use.
(1) In general.
(2) Use on the same basis.
(3) Long-term arrangements not treated as general public use.
(4) Relation to other use.
(d) Other exceptions.
(1) Agents.
(2) Use incidental to financing arrangements.
(3) Exceptions for arrangements other than arrangements resulting in
ownership of financed property by a nongovernmental person.
(4) Temporary use by developers.
(5) Incidental use.
(6) Qualified improvements.
(e) Special rule for tax assessment bonds.
(f) Examples.
(g) Measurement of private business use.
(1) In general.
(2) Measurement period.
(3) Determining average percentage of private business use.
(4) Determining the average amount of private business use for a 1-
year period.
(5) Common areas.
(6) Allocation of neutral costs.
(7) Commencement of measurement of private business use.
(8) Examples.
Sec. 1.141-4 Private security or payment test.
(a) General rule.
(1) Private security or payment.
(2) Aggregation of private payments and security.
(3) Underlying arrangement.
(b) Measurement of private payments and security.
(1) Scope.
(2) Present value measurement.
(c) Private payments.
(1) In general.
(2) Payments taken into account.
(3) Allocation of payments.
(d) Private security.
(1) In general.
(2) Security taken into account.
(3) Pledge of unexpended proceeds.
(4) Secured by any interest in property or payments.
(5) Payments in respect of property.
(6) Allocation of security among issues.
(e) Generally applicable taxes.
(1) General rule.
(2) Definition of generally applicable taxes.
(3) Special charges.
(4) Manner of determination and collection.
(5) Payments in lieu of taxes.
(f) Certain waste remediation bonds.
(1) Scope.
(2) Persons that are not private users.
(3) Persons that are private users.
(g) Examples.
Sec. 1.141-5 Private loan financing test.
(a) In general.
(b) Measurement of test.
(c) Definition of private loan.
(1) In general.
(2) Application only to purpose investments.
(3) Grants.
(4) Hazardous waste remediation bonds.
(d) Tax assessment loan exception.
(1) General rule.
(2) Tax assessment loan defined.
(3) Mandatory tax or other assessment.
(4) Specific essential governmental function.
(5) Equal basis requirement.
(6) Coordination with private business tests.
(e) Examples.
Sec. 1.141-6 Allocation and accounting rules.
(a) Allocation of proceeds to expenditures.
(b) Allocation of proceeds to property. [Reserved]
(c) Special rules for mixed use facilities. [Reserved]
(d) Allocation of proceeds to common areas. [Reserved]
(e) Allocation of proceeds to bonds. [Reserved]
(f) Treatment of partnerships. [Reserved]
[[Page 605]]
(g) Examples. [Reserved]
Sec. 1.141-7 Special rules for output facilities.
(a) Overview.
(b) Definitions.
(1) Available output.
(2) Measurement period.
(3) Sale at wholesale.
(4) Take contract and take or pay contract.
(5) Requirements contract.
(6) Nonqualified amount.
(c) Output contracts.
(1) General rule.
(2) Take contract or take or pay contract.
(3) Requirements contract.
(4) Output contract properly characterized as a lease.
(d) Measurement of private business use.
(e) Measurement of private security or payment.
(f) Exceptions for certain contracts.
(1) Small purchases of output.
(2) Swapping and pooling arrangements.
(3) Short-term output contracts.
(4) Certain conduit parties disregarded.
(g) Special rules for electric output facilities used to provide
open access.
(1) Operation of transmission facilities by nongovernmental persons.
(2) Certain use by nongovernmental persons under output contracts.
(3) Ancillary services.
(4) Exceptions to deliberate action rules.
(5) Additional transactions as permitted by the Commissioner.
(h) Allocations of output facilities and systems.
(1) Facts and circumstances analysis.
(2) Illustrations.
(3) Transmission and distribution contracts.
(4) Allocation of payments.
(i) Examples.
Sec. 1.141-8 $15 million limitation for output facilities.
(a) In general.
(1) General rule.
(2) Reduction in $15 million output limitation for outstanding
issues.
(3) Benefits and burdens test applicable.
(b) Definition of project.
(1) General rule.
(2) Separate ownership.
(3) Generating property.
(4) Transmission and distribution.
(5) Subsequent improvements.
(6) Replacement property.
(c) Examples.
Sec. 1.141-9 Unrelated or disproportionate use test.
(a) General rules.
(1) Description of test.
(2) Application of unrelated or disproportionate use test.
(b) Unrelated use.
(1) In general.
(2) Use for the same purpose as government use.
(c) Disproportionate use.
(1) Definition of disproportionate use.
(2) Aggregation of related uses.
(3) Allocation rule.
(d) Maximum use taken into account.
(e) Examples.
Sec. 1.141-10 Coordination with volume cap.[Reserved]
Sec. 1.141-11 Acquisition of nongovernmental output property.[Reserved]
Sec. 1.141-12 Remedial actions.
(a) Conditions to taking remedial action.
(1) Reasonable expectations test met.
(2) Maturity not unreasonably long.
(3) Fair market value consideration.
(4) Disposition proceeds treated as gross proceeds for arbitrage
purposes.
(5) Proceeds expended on a governmental purpose.
(b) Effect of a remedial action.
(1) In general.
(2) Effect on bonds that have been advance refunded.
(c) Disposition proceeds.
(1) Definition.
(2) Allocating disposition proceeds to an issue.
(3) Allocating disposition proceeds to different sources of funding.
(d) Redemption or defeasance of nonqualified bonds.
(1) In general.
(2) Special rule for dispositions for cash.
(3) Notice of defeasance.
(4) Special limitation.
(5) Defeasance escrow defined.
(e) Alternative use of disposition proceeds.
(1) In general.
(2) Special rule for use by 501(c)(3) organizations.
(f) Alternative use of facility.
(g) Rules for deemed reissuance.
(h) Authority of Commissioner to provide for additional remedial
actions.
(i) Effect of remedial action on continuing compliance.
(j) Nonqualified bonds.
(1) Amount of nonqualified bonds.
(2) Allocation of nonqualified bonds.
(k) Examples.
Sec. 1.141-13 Refunding issues.[Reserved]
Sec. 1.141-14 Anti-abuse rules.
(a) Authority of Commissioner to reflect substance of transactions.
(b) Examples.
Sec. 1.141-15 Effective dates.
(a) Scope.
(b) Effective dates.
[[Page 606]]
(c) Refunding bonds.
(d) Permisive application of regulations.
(e) Permissive retroactive application of certain sections.
(f) Effective dates for certain regulations relating to output
facilities.
(1) General rule.
(2) Transition rule for requirements contracts.
(g) Refunding bonds for output facilities.
(h) Permissive retroactive application.
(i) Permissive application of certain regulations relating to output
facilities.
Sec. 1.141-16 Effective dates for qualified private activity bond
provisions.
(a) Scope.
(b) Effective dates.
(c) Permissive application.
[T.D. 8712, 62 FR 2283, Jan. 16, 1997, as amended by T.D. 8757, 63 FR
3259, Jan. 22, 1998; T.D. 8941, 66 FR 4664, Jan. 18, 2001; T.D. 9016, 67
FR 59759, Sept. 23, 2002]
Tax Exemption Requirements for State and Local Bonds
Sec. 1.141-1 Definitions and rules of general application.
(a) In general. For purposes of Secs. 1.141-0 through 1.141-16, the
following definitions and rules apply: the definitions in this section,
the definitions in Sec. 1.150-1, the definition of placed in service
under Sec. 1.150-2(c), the definition of grant under Sec. 1.148-
6(d)(4)(iii), the definition of reasonably required reserve or
replacement fund in Sec. 1.148-2(f), and the following definitions under
Sec. 1.148-1: bond year, commingled fund, fixed yield issue, higher
yielding investments, investment, investment proceeds, issue price,
issuer, nonpurpose investment, purpose investment, qualified guarantee,
qualified hedge, reasonable expectations or reasonableness, rebate
amount, replacement proceeds, sale proceeds, variable yield issue, and
yield.
(b) Certain general definitions.
Common areas means portions of a facility that are equally available
to all users of a facility on the same basis for uses that are
incidental to the primary use of the facility. For example, hallways and
elevators generally are treated as common areas if they are used by the
different lessees of a facility in connection with the primary use of
that facility.
Consistently applied means applied uniformly to account for proceeds
and other amounts.
Deliberate action is defined in Sec. 1.141-2(d)(3).
Discrete portion means a portion of a facility that consists of any
separate and discrete portion of a facility to which use is limited,
other than common areas. A floor of a building and a portion of a
building separated by walls, partitions, or other physical barriers are
examples of a discrete portion.
Disposition is defined in Sec. 1.141-12(c)(1).
Disposition proceeds is defined in Sec. 1.141-12(c)(1).
Essential governmental function is defined in Sec. 1.141-
5(d)(4)(ii).
Financed means constructed, reconstructed, or acquired with proceeds
of an issue.
Governmental bond means a bond issued as part of an issue no portion
of which consists of private activity bonds.
Governmental person means a state or local governmental unit as
defined in Sec. 1.103-1 or any instrumentality thereof. It does not
include the United States or any agency or instrumentality thereof.
Hazardous waste remediation bonds is defined in Sec. 1.141-4(f)(1).
Measurement period is defined in Sec. 1.141-3(g)(2).
Nongovernmental person means a person other than a governmental
person.
Output facility means electric and gas generation, transmission,
distribution, and related facilities, and water collection, storage, and
distribution facilities.
Private business tests means the private business use test and the
private security or payment test of section 141(b).
Proceeds means the sale proceeds of an issue (other than those sale
proceeds used to retire bonds of the issue that are not deposited in a
reasonably required reserve or replacement fund). Proceeds also include
any investment proceeds from investments that accrue during the project
period (net of rebate amounts attributable to the project period).
Disposition proceeds of an issue are treated as proceeds to the extent
[[Page 607]]
provided in Sec. 1.141-12. The Commissioner may treat any replaced
amounts as proceeds.
Project period means the period beginning on the issue date and
ending on the date that the project is placed in service. In the case of
a multipurpose issue, the issuer may elect to treat the project period
for the entire issue as ending on either the expiration of the temporary
period described in Sec. 1.148-2(e)(2) or the end of the fifth bond year
after the issue date.
Public utility property means public utility property as defined in
section 168(i)(10).
Qualified bond means a qualified bond as defined in section 141(e).
Renewal option means a provision under which either party has a
legally enforceable right to renew the contract. Thus, for example, a
provision under which a contract is automatically renewed for 1-year
periods absent cancellation by either party is not a renewal option
(even if it is expected to be renewed).
Replaced amounts means replacement proceeds other than amounts that
are treated as replacement proceeds solely because they are sinking
funds or pledged funds.
Weighted average maturity is determined under section 147(b).
Weighted average reasonably expected economic life is determined
under section 147(b). The reasonably expected economic life of property
may be determined by reference to the class life of the property under
section 168.
(c) Elections. Elections must be made in writing on or before the
issue date and retained as part of the bond documents, and, once made,
may not be revoked without the permission of the Commissioner.
(d) Related parties. Except as otherwise provided, all related
parties are treated as one person and any reference to ``person''
includes any related party.
[T.D. 8712, 62 FR 2284, Jan. 16, 1997]
Sec. 1.141-2 Private activity bond tests.
(a) Overview. Interest on a private activity bond is not excludable
from gross income under section 103(a) unless the bond is a qualified
bond. The purpose of the private activity bond tests of section 141 is
to limit the volume of tax-exempt bonds that finance the activities of
nongovernmental persons, without regard to whether a financing actually
transfers benefits of tax-exempt financing to a nongovernmental person.
The private activity bond tests serve to identify arrangements that have
the potential to transfer the benefits of tax-exempt financing, as well
as arrangements that actually transfer these benefits. The regulations
under section 141 may not be applied in a manner that is inconsistent
with these purposes.
(b) Scope. Sections 1.141-0 through 1.141-16 apply generally for
purposes of the private activity bond limitations under section 141.
(c) General definition of private activity bond. Under section 141,
bonds are private activity bonds if they meet either the private
business use test and private security or payment test of section 141(b)
or the private loan financing test of section 141(c). The private
business use and private security or payment tests are described in
Secs. 1.141-3 and 1.141-4. The private loan financing test is described
in Sec. 1.141-5.
(d) Reasonable expectations and deliberate actions--(1) In general.
An issue is an issue of private activity bonds if the issuer reasonably
expects, as of the issue date, that the issue will meet either the
private business tests or the private loan financing test. An issue is
also an issue of private activity bonds if the issuer takes a deliberate
action, subsequent to the issue date, that causes the conditions of
either the private business tests or the private loan financing test to
be met.
(2) Reasonable expectations test--(i) In general. In general, the
reasonable expectations test must take into account reasonable
expectations about events and actions over the entire stated term of an
issue.
(ii) Special rule for issues with mandatory redemption provisions.
An action that is reasonably expected, as of the issue date, to occur
after the issue date and to cause either the private business tests or
the private loan financing test to be met may be disregarded for
purposes of those tests if--
(A) The issuer reasonably expects, as of the issue date, that the
financed
[[Page 608]]
property will be used for a governmental purpose for a substantial
period before the action;
(B) The issuer is required to redeem all nonqualifying bonds
(regardless of the amount of disposition proceeds actually received)
within 6 months of the date of the action;
(C) The issuer does not enter into any arrangement with a
nongovernmental person, as of the issue date, with respect to that
specific action; and
(D) The mandatory redemption of bonds meets all of the conditions
for remedial action under Sec. 1.141-12(a).
(3) Deliberate action defined--(i) In general. Except as otherwise
provided in this paragraph (d)(3), a deliberate action is any action
taken by the issuer that is within its control. An intent to violate the
requirements of section 141 is not necessary for an action to be
deliberate.
(ii) Safe harbor exceptions. An action is not treated as a
deliberate action if--
(A) It would be treated as an involuntary or compulsory conversion
under section 1033; or
(B) It is taken in response to a regulatory directive made by the
federal government. See Sec. 1.141-7(g)(4).
(4) Special rule for dispositions of personal property in the
ordinary course of an established governmental program--(i) In general.
Dispositions of personal property in the ordinary course of an
established governmental program are not treated as deliberate actions
if--
(A) The weighted average maturity of the bonds financing that
personal property is not greater than 120 percent of the reasonably
expected actual use of that property for governmental purposes;
(B) The issuer reasonably expects on the issue date that the fair
market value of that property on the date of disposition will be not
greater than 25 percent of its cost; and
(C) The property is no longer suitable for its governmental purposes
on the date of disposition.
(ii) Reasonable expectations test. The reasonable expectation that a
disposition described in paragraph (d)(4)(i) of this section may occur
in the ordinary course while the bonds are outstanding will not cause
the issue to meet the private activity bond tests if the issuer is
required to deposit amounts received from the disposition in a
commingled fund with substantial tax or other governmental revenues and
the issuer reasonably expects to spend the amounts on governmental
programs within 6 months from the date of commingling.
(iii) Separate issue treatment. An issuer may treat the bonds
properly allocable to the personal property eligible for this exception
as a separate issue under Sec. 1.150-1(c)(3).
(5) Special rule for general obligation bond programs that finance a
large number of separate purposes. The determination of whether bonds of
an issue are private activity bonds may be based solely on the issuer's
reasonable expectations as of the issue date if all of the requirements
of paragraphs (d)(5)(i) through (vii) of this section are met.
(i) The issue is an issue of general obligation bonds of a general
purpose governmental unit that finances at least 25 separate purposes
(as defined in Sec. 1.150-1(c)(3)) and does not predominantly finance
fewer than 4 separate purposes.
(ii) The issuer has adopted a fund method of accounting for its
general governmental purposes that makes tracing the bond proceeds to
specific expenditures unreasonably burdensome.
(iii) The issuer reasonably expects on the issue date to allocate
all of the net proceeds of the issue to capital expenditures within 6
months of the issue date and adopts reasonable procedures to verify that
net proceeds are in fact so expended. A program to randomly spot check
that 10 percent of the net proceeds were so expended generally is a
reasonable verification procedure for this purpose.
(iv) The issuer reasonably expects on the issue date to expend all
of the net proceeds of the issue before expending proceeds of a
subsequent issue of similar general obligation bonds.
(v) The issuer reasonably expects on the issue date that it will not
make any loans to nongovernmental persons with the proceeds of the
issue.
(vi) The issuer reasonably expects on the issue date that the
capital expenditures that it could make during the 6-month period
beginning on the issue
[[Page 609]]
date with the net proceeds of the issue that would not meet the private
business tests are not less than 125 percent of the capital expenditures
to be financed with the net proceeds of the issue.
(vii) The issuer reasonably expects on the issue date that the
weighted average maturity of the issue is not greater than 120 percent
of the weighted average reasonably expected economic life of the capital
expenditures financed with the issue. To determine reasonably expected
economic life for this purpose an issuer may use reasonable estimates
based on the type of expenditures made from a fund.
(e) When a deliberate action occurs. A deliberate action occurs on
the date the issuer enters into a binding contract with a
nongovernmental person for use of the financed property that is not
subject to any material contingencies.
(f) Certain remedial actions. See Sec. 1.141-12 for certain remedial
actions that prevent a deliberate action with respect to property
financed by an issue from causing that issue to meet the private
business use test or the private loan financing test.
(g) Examples. The following examples illustrate the application of
this section:
Example 1. Involuntary action. City B issues bonds to finance the
purchase of land. On the issue date, B reasonably expects that it will
be the sole user of the land for the entire term of the bonds.
Subsequently, the federal government acquires the land in a condemnation
action. B sets aside the condemnation proceeds to pay debt service on
the bonds but does not redeem them on their first call date. The bonds
are not private activity bonds because B has not taken a deliberate
action after the issue date. See, however, Sec. 1.141-14(b), Example 2.
Example 2. Reasonable expectations test--involuntary action. The
facts are the same as in Example 1, except that, on the issue date, B
reasonably expects that the federal government will acquire the land in
a condemnation action during the term of the bonds. On the issue date,
the present value of the amount that B reasonably expects to receive
from the federal government is greater than 10 percent of the present
value of the debt service on the bonds. The terms of the bonds do not
require that the bonds be redeemed within 6 months of the acquisition by
the federal government. The bonds are private activity bonds because the
issuer expects as of the issue date that the private business tests will
be met.
Example 3. Reasonable expectations test--mandatory redemption. City
C issues bonds to rehabilitate an existing hospital that it currently
owns. On the issue date of the bonds, C reasonably expects that the
hospital will be used for a governmental purpose for a substantial
period. On the issue date, C also plans to construct a new hospital, but
the placed in service date of that new hospital is uncertain. C
reasonably expects that, when the new hospital is placed in service, it
will sell or lease the rehabilitated hospital to a private hospital
corporation. The bond documents require that the bonds must be redeemed
within 6 months of the sale or lease of the rehabilitated hospital
(regardless of the amount actually received from the sale). The bonds
meet the reasonable expectations requirement of the private activity
bond tests if the mandatory redemption of bonds meets all of the
conditions for a remedial action under Sec. 1.141-12(a).
Example 4. Dispositions in the ordinary course of an established
governmental program. City D issues bonds with a weighted average
maturity of 6 years for the acquisition of police cars. D reasonably
expects on the issue date that the police cars will be used solely by
its police department, except that, in the ordinary course of its police
operations, D sells its police cars to a taxicab corporation after 5
years of use because they are no longer suitable for police use.
Further, D reasonably expects that the value of the police cars when
they are no longer suitable for police use will be no more than 25
percent of cost. D subsequently sells 20 percent of the police cars
after only 3 years of actual use. At that time, D deposits the proceeds
from the sale of the police cars in a commingled fund with substantial
tax revenues and reasonably expects to spend the proceeds on
governmental programs within 6 months of the date of deposit. D does not
trace the actual use of these commingled amounts. The sale of the police
cars does not cause the private activity bond tests to be met because
the requirements of paragraph (d)(4) of this section are met.
[T.D. 8712, 62 FR 2284, Jan. 16, 1997, as amended by T.D. 8757, 63 FR
3260, Jan. 22, 1998; T.D. 9016, 67 FR 59759, Sept. 23, 2002]
Sec. 1.141-3 Definition of private business use.
(a) General rule--(1) In general. The private business use test
relates to the use of the proceeds of an issue. The 10 percent private
business use test of section 141(b)(1) is met if more than 10 percent of
the proceeds of an issue is used in a trade or business of a
nongovernmental person. For this purpose, the
[[Page 610]]
use of financed property is treated as the direct use of proceeds. Any
activity carried on by a person other than a natural person is treated
as a trade or business. Unless the context or a provision clearly
requires otherwise, this section also applies to the private business
use test under sections 141(b)(3) (unrelated or disproportionate use),
141(b)(4) ($15 million limitation for certain output facilities), and
141(b)(5) (the coordination with the volume cap where the nonqualified
amount exceeds $15 million).
(2) Indirect use. In determining whether an issue meets the private
business use test, it is necessary to look to both the indirect and
direct uses of proceeds. For example, a facility is treated as being
used for a private business use if it is leased to a nongovernmental
person and subleased to a governmental person or if it is leased to a
governmental person and then subleased to a nongovernmental person,
provided that in each case the nongovernmental person's use is in a
trade or business. Similarly, the issuer's use of the proceeds to engage
in a series of financing transactions for property to be used by
nongovernmental persons in their trades or businesses may cause the
private business use test to be met. In addition, proceeds are treated
as used in the trade or business of a nongovernmental person if a
nongovernmental person, as a result of a single transaction or a series
of related transactions, uses property acquired with the proceeds of an
issue.
(3) Aggregation of private business use. The use of proceeds by all
nongovernmental persons is aggregated to determine whether the private
business use test is met.
(b) Types of private business use arrangements--(1) In general. Both
actual and beneficial use by a nongovernmental person may be treated as
private business use. In most cases, the private business use test is
met only if a nongovernmental person has special legal entitlements to
use the financed property under an arrangement with the issuer. In
general, a nongovernmental person is treated as a private business user
of proceeds and financed property as a result of ownership; actual or
beneficial use of property pursuant to a lease, or a management or
incentive payment contract; or certain other arrangements such as a take
or pay or other output-type contract.
(2) Ownership. Except as provided in paragraph (d)(1) or (d)(2) of
this section, ownership by a nongovernmental person of financed property
is private business use of that property. For this purpose, ownership
refers to ownership for federal income tax purposes.
(3) Leases. Except as provided in paragraph (d) of this section, the
lease of financed property to a nongovernmental person is private
business use of that property. For this purpose, any arrangement that is
properly characterized as a lease for federal income tax purposes is
treated as a lease. In determining whether a management contract is
properly characterized as a lease, it is necessary to consider all of
the facts and circumstances, including the following factors--
(i) The degree of control over the property that is exercised by a
nongovernmental person; and
(ii) Whether a nongovernmental person bears risk of loss of the
financed property.
(4) Management contracts--(i) Facts and circumstances test. Except
as provided in paragraph (d) of this section, a management contract
(within the meaning of paragraph (b)(4)(ii) of this section) with
respect to financed property may result in private business use of that
property, based on all of the facts and circumstances. A management
contract with respect to financed property generally results in private
business use of that property if the contract provides for compensation
for services rendered with compensation based, in whole or in part, on a
share of net profits from the operation of the facility.
(ii) Management contract defined. For purposes of this section, a
management contract is a management, service, or incentive payment
contract between a governmental person and a service provider under
which the service provider provides services involving all, a portion
of, or any function of, a facility.
[[Page 611]]
For example, a contract for the provision of management services for an
entire hospital, a contract for management services for a specific
department of a hospital, and an incentive payment contract for
physician services to patients of a hospital are each treated as a
management contract.
(iii) Arrangements generally not treated as management contracts.
The arrangements described in paragraphs (b)(4)(iii)(A) through (D) of
this section generally are not treated as management contracts that give
rise to private business use.
(A) Contracts for services that are solely incidental to the primary
governmental function or functions of a financed facility (for example,
contracts for janitorial, office equipment repair, hospital billing, or
similar services).
(B) The mere granting of admitting privileges by a hospital to a
doctor, even if those privileges are conditioned on the provision of de
minimis services, if those privileges are available to all qualified
physicians in the area, consistent with the size and nature of its
facilities.
(C) A contract to provide for the operation of a facility or system
of facilities that consists predominantly of public utility property, if
the only compensation is the reimbursement of actual and direct expenses
of the service provider and reasonable administrative overhead expenses
of the service provider.
(D) A contract to provide for services, if the only compensation is
the reimbursement of the service provider for actual and direct expenses
paid by the service provider to unrelated parties.
(iv) Management contracts that are properly treated as other types
of private business use. A management contract with respect to financed
property results in private business use of that property if the service
provider is treated as the lessee or owner of financed property for
federal income tax purposes, unless an exception under paragraph (d) of
this section applies to the arrangement.
(5) Output contracts. See Sec. 1.141-7 for special rules for
contracts for the purchase of output of output facilities.
(6) Research agreements--(i) Facts and circumstances test. Except as
provided in paragraph (d) of this section, an agreement by a
nongovernmental person to sponsor research performed by a governmental
person may result in private business use of the property used for the
research, based on all of the facts and circumstances.
(ii) Research agreements that are properly treated as other types of
private business use. A research agreement with respect to financed
property results in private business use of that property if the sponsor
is treated as the lessee or owner of financed property for federal
income tax purposes, unless an exception under paragraph (d) of this
section applies to the arrangement.
(7) Other actual or beneficial use--(i) In general. Any other
arrangement that conveys special legal entitlements for beneficial use
of bond proceeds or of financed property that are comparable to special
legal entitlements described in paragraphs (b)(2), (3), (4), (5), or (6)
of this section results in private business use. For example, an
arrangement that conveys priority rights to the use or capacity of a
facility generally results in private business use.
(ii) Special rule for facilities not used by the general public. In
the case of financed property that is not available for use by the
general public (within the meaning of paragraph (c) of this section),
private business use may be established solely on the basis of a special
economic benefit to one or more nongovernmental persons, even if those
nongovernmental persons have no special legal entitlements to use of the
property. In determining whether special economic benefit gives rise to
private business use it is necessary to consider all of the facts and
circumstances, including one or more of the following factors--
(A) Whether the financed property is functionally related or
physically proximate to property used in the trade or business of a
nongovernmental person;
(B) Whether only a small number of nongovernmental persons receive
the special economic benefit; and
(C) Whether the cost of the financed property is treated as
depreciable by any nongovernmental person.
[[Page 612]]
(c) Exception for general public use--(1) In general. Use as a
member of the general public (general public use) is not private
business use. Use of financed property by nongovernmental persons in
their trades or businesses is treated as general public use only if the
property is intended to be available and in fact is reasonably available
for use on the same basis by natural persons not engaged in a trade or
business.
(2) Use on the same basis. In general, use under an arrangement that
conveys priority rights or other preferential benefits is not use on the
same basis as the general public. Arrangements providing for use that is
available to the general public at no charge or on the basis of rates
that are generally applicable and uniformly applied do not convey
priority rights or other preferential benefits. For this purpose, rates
may be treated as generally applicable and uniformly applied even if--
(i) Different rates apply to different classes of users, such as
volume purchasers, if the differences in rates are customary and
reasonable; or
(ii) A specially negotiated rate arrangement is entered into, but
only if the user is prohibited by federal law from paying the generally
applicable rates, and the rates established are as comparable as
reasonably possible to the generally applicable rates.
(3) Long-term arrangements not treated as general public use. An
arrangement is not treated as general public use if the term of the use
under the arrangement, including all renewal options, is greater than
200 days. For this purpose, a right of first refusal to renew use under
the arrangement is not treated as a renewal option if--
(i) The compensation for the use under the arrangement is
redetermined at generally applicable, fair market value rates that are
in effect at the time of renewal; and
(ii) The use of the financed property under the same or similar
arrangements is predominantly by natural persons who are not engaged in
a trade or business.
(4) Relation to other use. Use of financed property by the general
public does not prevent the proceeds from being used for a private
business use because of other use under this section.
(d) Other exceptions--(1) Agents. Use of proceeds by nongovernmental
persons solely in their capacity as agents of a governmental person is
not private business use. For example, use by a nongovernmental person
that issues obligations on behalf of a governmental person is not
private business use to the extent the nongovernmental person's use of
proceeds is in its capacity as an agent of the governmental person.
(2) Use incidental to financing arrangements. Use by a
nongovernmental person that is solely incidental to a financing
arrangement is not private business use. A use is solely incidental to a
financing arrangement only if the nongovernmental person has no
substantial rights to use bond proceeds or financed property other than
as an agent of the bondholders. For example, a nongovernmental person
that acts solely as an owner of title in a sale and leaseback financing
transaction with a city generally is not a private business user of the
property leased to the city, provided that the nongovernmental person
has assigned all of its rights to use the leased facility to the trustee
for the bondholders upon default by the city. Similarly, bond trustees,
servicers, and guarantors are generally not treated as private business
users.
(3) Exceptions for arrangements other than arrangements resulting in
ownership of financed property by a nongovernmental person--(i)
Arrangements not available for use on the same basis by natural persons
not engaged in a trade or business. Use by a nongovernmental person
pursuant to an arrangement, other than an arrangement resulting in
ownership of financed property by a nongovernmental person, is not
private business use if--
(A) The term of the use under the arrangement, including all renewal
options, is not longer than 100 days;
(B) The arrangement would be treated as general public use, except
that it is not available for use on the same basis by natural persons
not engaged in a trade or business because generally applicable and
uniformly applied rates are not reasonably available to natural
[[Page 613]]
persons not engaged in a trade or business; and
(C) The property is not financed for a principal purpose of
providing that property for use by that nongovernmental person.
(ii) Negotiated arm's-length arrangements. Use by a nongovernmental
person pursuant to an arrangement, other than an arrangement resulting
in ownership of financed property by a nongovernmental person, is not
private business use if--
(A) The term of the use under the arrangement, including all renewal
options, is not longer than 50 days;
(B) The arrangement is a negotiated arm's-length arrangement, and
compensation under the arrangement is at fair market value; and
(C) The property is not financed for a principal purpose of
providing that property for use by that nongovernmental person.
(4) Temporary use by developers. Use during an initial development
period by a developer of an improvement that carries out an essential
governmental function is not private business use if the issuer and the
developer reasonably expect on the issue date to proceed with all
reasonable speed to develop the improvement and property benefited by
that improvement and to transfer the improvement to a governmental
person, and if the improvement is in fact transferred to a governmental
person promptly after the property benefited by the improvement is
developed.
(5) Incidental use--(i) General rule. Incidental uses of a financed
facility are disregarded, to the extent that those uses do not exceed
2.5 percent of the proceeds of the issue used to finance the facility. A
use of a facility by a nongovernmental person is incidental if--
(A) Except for vending machines, pay telephones, kiosks, and similar
uses, the use does not involve the transfer to the nongovernmental
person of possession and control of space that is separated from other
areas of the facility by walls, partitions, or other physical barriers,
such as a night gate affixed to a structural component of a building (a
nonpossessory use);
(B) The nonpossessory use is not functionally related to any other
use of the facility by the same person (other than a different
nonpossessory use); and
(C) All nonpossessory uses of the facility do not, in the aggregate,
involve the use of more than 2.5 percent of the facility.
(ii) Illustrations. Incidental uses may include pay telephones,
vending machines, advertising displays, and use for television cameras,
but incidental uses may not include output purchases.
(6) Qualified improvements. Proceeds that provide a governmentally
owned improvement to a governmentally owned building (including its
structural components and land functionally related and subordinate to
the building) are not used for a private business use if--
(i) The building was placed in service more than 1 year before the
construction or acquisition of the improvement is begun;
(ii) The improvement is not an enlargement of the building or an
improvement of interior space occupied exclusively for any private
business use;
(iii) No portion of the improved building or any payments in respect
of the improved building are taken into account under section
141(b)(2)(A) (the private security test); and
(iv) No more than 15 percent of the improved building is used for a
private business use.
(e) Special rule for tax assessment bonds. In the case of a tax
assessment bond that satisfies the requirements of Sec. 1.141-5(d), the
loan (or deemed loan) of the proceeds to the borrower paying the
assessment is disregarded in determining whether the private business
use test is met. However, the use of the loan proceeds is not
disregarded in determining whether the private business use test is met.
(f) Examples. The following examples illustrate the application of
paragraphs (a) through (e) of this section. In each example, assume that
the arrangements described are the only arrangements with
nongovernmental persons for use of the financed property.
Example 1. Nongovernmental ownership. State A issues 20-year bonds
to purchase
[[Page 614]]
land and equip and construct a factory. A then enters into an
arrangement with Corporation X to sell the factory to X on an
installment basis while the bonds are outstanding. The issue meets the
private business use test because a nongovernmental person owns the
financed facility. See also Sec. 1.141-2 (relating to the private
activity bond tests), and Sec. 1.141-5 (relating to the private loan
financing test).
Example 2. Lease to a nongovernmental person. (i) The facts are the
same as in Example 1, except that A enters into an arrangement with X to
lease the factory to X for 3 years rather than to sell it to X. The
lease payments will be made annually and will be based on the tax-exempt
interest rate on the bonds. The issue meets the private business use
test because a nongovernmental person leases the financed facility. See
also Sec. 1.141-14 (relating to anti-abuse rules).
(ii) The facts are the same as in Example 2(i), except that the
annual payments made by X will equal fair rental value of the facility
and exceed the amount necessary to pay debt service on the bonds for the
3 years of the lease. The issue meets the private business use test
because a nongovernmental person leases the financed facility and the
test does not require that the benefits of tax-exempt financing be
passed through to the nongovernmental person.
Example 3. Management contract in substance a lease. City L issues
30-year bonds to finance the construction of a city hospital. L enters
into a 15-year contract with M, a nongovernmental person that operates a
health maintenance organization relating to the treatment of M's members
at L's hospital. The contract provides for reasonable fixed compensation
to M for services rendered with no compensation based, in whole or in
part, on a share of net profits from the operation of the hospital.
However, the contract also provides that 30 percent of the capacity of
the hospital will be exclusively available to M's members and M will
bear the risk of loss of that portion of the capacity of the hospital so
that, under all of the facts and circumstances, the contract is properly
characterized as a lease for federal income tax purposes. The issue
meets the private business use test because a nongovernmental person
leases the financed facility.
Example 4. Ownership of title in substance a leasehold interest.
Nonprofit Corporation R issues bonds on behalf of City P to finance the
construction of a hospital. R will own legal title to the hospital. In
addition, R will operate the hospital, but R is not treated as an agent
of P in its capacity as operator of the hospital. P has certain rights
to the hospital that establish that it is properly treated as the owner
of the property for federal income tax purposes. P does not have rights,
however, to directly control operation of the hospital while R owns
legal title to it and operates it. The issue meets the private business
use test because the arrangement provides a nongovernmental person an
interest in the financed facility that is comparable to a leasehold
interest. See paragraphs (a)(2) and (b)(7)(i) of this section.
Example 5. Rights to control use of property treated as private
business use--parking lot. Corporation C and City D enter into a plan to
finance the construction of a parking lot adjacent to C's factory.
Pursuant to the plan, C conveys the site for the parking lot to D for a
nominal amount, subject to a covenant running with the land that the
property be used only for a parking lot. In addition, D agrees that C
will have the right to approve rates charged by D for use of the parking
lot. D issues bonds to finance construction of the parking lot on the
site. The parking lot will be available for use by the general public on
the basis of rates that are generally applicable and uniformly applied.
The issue meets the private business use test because a nongovernmental
person has special legal entitlements for beneficial use of the financed
facility that are comparable to an ownership interest. See paragraph
(b)(7)(i) of this section.
Example 6. Other actual or beneficial use--hydroelectric
enhancements. J, a political subdivision, owns and operates a
hydroelectric generation plant and related facilities. Pursuant to a
take or pay contract, J sells 15 percent of the output of the plant to
Corporation K, an investor-owned utility. K is treated as a private
business user of the plant. Under the license issued to J for operation
of the plant, J is required by federal regulations to construct and
operate various facilities for the preservation of fish and for public
recreation. J issues its obligations to finance the fish preservation
and public recreation facilities. K has no special legal entitlements
for beneficial use of the financed facilities. The fish preservation
facilities are functionally related to the operation of the plant. The
recreation facilities are available to natural persons on a short-term
basis according to generally applicable and uniformly applied rates.
Under paragraph (c) of this section, the recreation facilities are
treated as used by the general public. Under paragraph (b)(7) of this
section, K's use is not treated as private business use of the
recreation facilities because K has no special legal entitlements for
beneficial use of the recreation facilities. The fish preservation
facilities are not of a type reasonably available for use on the same
basis by natural persons not engaged in a trade or business. Under all
of the facts and circumstances (including the functional relationship of
the fish preservation facilities to property used in K's trade or
business) under paragraph (b)(7)(ii) of this section, K derives a
special economic benefit from the fish preservation facilities.
Therefore, K's private
[[Page 615]]
business use may be established solely on the basis of that special
economic benefit, and K's use of the fish preservation facilities is
treated as private business use.
Example 7. Other actual or beneficial use--pollution control
facilities. City B issues obligations to finance construction of a
specialized pollution control facility on land that it owns adjacent to
a factory owned by Corporation N. B will own and operate the pollution
control facility, and N will have no special legal entitlements to use
the facility. B, however, reasonably expects that N will be the only
user of the facility. The facility will not be reasonably available for
use on the same basis by natural persons not engaged in a trade or
business. Under paragraph (b)(7)(ii) of this section, because under all
of the facts and circumstances the facility is functionally related and
is physically proximate to property used in N's trade or business, N
derives a special economic benefit from the facility. Therefore, N's
private business use may be established solely on the basis of that
special economic benefit, and N's use is treated as private business use
of the facility. See paragraph (b)(7)(ii) of this section.
Example 8. General public use--airport runway. (i) City I issues
bonds and uses all of the proceeds to finance construction of a runway
at a new city-owned airport. The runway will be available for take-off
and landing by any operator of an aircraft desiring to use the airport,
including general aviation operators who are natural persons not engaged
in a trade or business. It is reasonably expected that most of the
actual use of the runway will be by private air carriers (both charter
airlines and commercial airlines) in connection with their use of the
airport terminals leased by those carriers. These leases for the use of
terminal space provide no priority rights or other preferential benefits
to the air carriers for use of the runway. Moreover, under the leases
the lease payments are determined without taking into account the
revenues generated by runway landing fees (that is, the lease payments
are not determined on a ``residual'' basis). Although the lessee air
carriers receive a special economic benefit from the use of the runway,
this economic benefit is not sufficient to cause the air carriers to be
private business users, because the runway is available for general
public use. The issue does not meet the private business use test. See
paragraphs (b)(7)(ii) and (c) of this section.
(ii) The facts are the same as in Example 8(i), except that the
runway will be available for use only by private air carriers. The use
by these private air carriers is not for general public use, because the
runway is not reasonably available for use on the same basis by natural
persons not engaged in a trade or business. Depending on all of the
facts and circumstances, including whether there are only a small number
of lessee private air carriers, the issue may meet the private business
use test solely because the private air carriers receive a special
economic benefit from the runway. See paragraph (b)(7)(ii) of this
section.
(iii) The facts are the same as in Example 8(i), except that the
lease payments under the leases with the private air carriers are
determined on a residual basis by taking into account the net revenues
generated by runway landing fees. These leases cause the private
business use test to be met with respect to the runway because they are
arrangements that convey special legal entitlements to the financed
facility to nongovernmental persons. See paragraph (b)(7)(i) of this
section.
Example 9. General public use--airport parking garage. City S issues
bonds and uses all of the proceeds to finance construction of a city-
owned parking garage at the city-owned airport. S reasonably expects
that more than 10 percent of the actual use of the parking garage will
be by employees of private air carriers (both charter airlines and
commercial airlines) in connection with their use of the airport
terminals leased by those carriers. The air carriers' use of the parking
garage, however, will be on the same basis as passengers and other
members of the general public using the airport. The leases for the use
of the terminal space provide no priority rights to the air carriers for
use of the parking garage, and the lease payments are determined without
taking into account the revenues generated by the parking garage.
Although the lessee air carriers receive a special economic benefit from
the use of the parking garage, this economic benefit is not sufficient
to cause the air carriers to be private business users, because the
parking garage is available for general public use. The issue does not
meet the private business use test. See paragraphs (b)(7)(ii) and (c) of
this section.
Example 10. Long-term arrangements not treated as general public
use--insurance fund. Authority T deposits all of the proceeds of its
bonds in its insurance fund and invests all of those proceeds in tax-
exempt bonds. The insurance fund provides insurance to a large number of
businesses and natural persons not engaged in a trade or business. Each
participant receives insurance for a term of 1 year. The use by the
participants, other than participants that are natural persons not
engaged in a trade or business, is treated as private business use of
the proceeds of the bonds because the participants have special legal
entitlements to the use of bond proceeds, even though the contractual
rights are not necessarily properly characterized as ownership,
leasehold, or similar interests listed in paragraph (b) of this section.
Use of the bond proceeds is not treated as general
[[Page 616]]
public use because the term of the insurance is greater than 200 days.
See paragraphs (b)(7)(i) and (c)(3) of this section.
Example 11. General public use--port road. Highway Authority W uses
all of the proceeds of its bonds to construct a 25-mile road to connect
an industrial port owned by Corporation Y with existing roads owned and
operated by W. Other than the port, the nearest residential or
commercial development to the new road is 12 miles away. There is no
reasonable expectation that development will occur in the area
surrounding the new road. W and Y enter into no arrangement (either by
contract or ordinance) that conveys special legal entitlements to Y for
the use of the road. Use of the road will be available without
restriction to all users, including natural persons who are not engaged
in a trade or business. The issue does not meet the private business use
test because the road is treated as used only by the general public.
Example 12. General public use of governmentally owned hotel. State
Q issues bonds to purchase land and construct a hotel for use by the
general public (that is, tourists, visitors, and business travelers).
The bond documents provide that Q will own and operate the project for
the term of the bonds. Q will not enter into a lease or license with any
user for use of rooms for a period longer than 200 days (although users
may actually use rooms for consecutive periods in excess of 200 days).
Use of the hotel by hotel guests who are travelling in connection with
trades or businesses of nongovernmental persons is not a private
business use of the hotel by these persons because the hotel is intended
to be available and in fact is reasonably available for use on the same
basis by natural persons not engaged in a trade or business. See
paragraph (c)(1) of this section.
Example 13. General public use with rights of first refusal.
Authority V uses all of the proceeds of its bonds to construct a parking
garage. At least 90 percent of the spaces in the garage will be
available to the general public on a monthly first-come, first-served
basis. V reasonably expects that the spaces will be predominantly leased
to natural persons not engaged in a trade or business who have priority
rights to renew their spaces at then current fair market value rates.
More than 10 percent of the spaces will be leased to nongovernmental
persons acting in a trade or business. These leases are not treated as
arrangements with a term of use greater than 200 days. The rights to
renew are not treated as renewal options because the compensation for
the spaces is redetermined at generally applicable, fair market value
rates that will be in effect at the time of renewal and the use of the
spaces under similar arrangements is predominantly by natural persons
who are not engaged in a trade or business. The issue does not meet the
private business use test because at least 90 percent of the use of the
parking garage is general public use. See paragraph (c)(3) of this
section.
Example 14. General public use with a specially negotiated rate
agreement with agency of United States. G, a sewage collection and
treatment district, operates facilities that were financed with its
bonds. F, an agency of the United States, has a base located within G.
Approximately 20 percent of G's facilities are used to treat sewage
produced by F under a specially negotiated rate agreement. Under the
specially negotiated rate agreement, G uses its best efforts to charge F
as closely as possible the same amount for its use of G's services as
its other customers pay for the same amount of services, although those
other customers pay for services based on standard district charges and
tax levies. F is prohibited by federal law from paying for the services
based on those standard district charges and tax levies. The use of G's
facilities by F is on the same basis as the general public. See
paragraph (c)(2)(ii) of this section.
Example 15. Arrangements not available for use by natural persons
not engaged in a trade or business--federal use of prisons. Authority E
uses all of the proceeds of its bonds to construct a prison. E contracts
with federal agency F to house federal prisoners on a space-available,
first-come, first-served basis, pursuant to which F will be charged
approximately the same amount for each prisoner as other persons that
enter into similar transfer agreements. It is reasonably expected that
other persons will enter into similar agreements. The term of the use
under the contract is not longer than 100 days, and F has no right to
renew, although E reasonably expects to renew the contract indefinitely.
The prison is not financed for a principal purpose of providing the
prison for use by F. It is reasonably expected that during the term of
the bonds, more than 10 percent of the prisoners at the prison will be
federal prisoners. F's use of the facility is not general public use
because this type of use (leasing space for prisoners) is not available
for use on the same basis by natural persons not engaged in a trade or
business. The issue does not meet the private business use test,
however, because the leases satisfy the exception of paragraph (d)(3)(i)
of this section.
Example 16. Negotiated arm's-length arrangements--auditorium
reserved in advance (i) City Z issues obligations to finance
the construction of a municipal auditorium that it will own and operate.
The use of the auditorium will be open to anyone who wishes to use it
for a short period of time on a rate-scale basis. Z reasonably expects
that the auditorium will be used by schools, church groups, sororities,
and numerous commercial organizations. Corporation H, a nongovernmental
person, enters into an arm's-length
[[Page 617]]
arrangement with Z to use the auditorium for 1 week for each year for a
10-year period (a total of 70 days), pursuant to which H will be charged
a specific price reflecting fair market value. On the date the contract
is entered into, Z has not established generally applicable rates for
future years. Even though the auditorium is not financed for a principal
purpose of providing use of the auditorium to H, H is not treated as
using the auditorium as a member of the general public because its use
is not on the same basis as the general public. Because the term of H's
use of the auditorium is longer than 50 days, the arrangement does not
meet the exception under paragraph (d)(3)(ii) of this section.
(ii) The facts are the same as in Example 16(i), except that H will
enter into an arm's-length arrangement with Z to use the auditorium for
1 week for each year for a 4-year period (a total of 28 days), pursuant
to which H will be charged a specific price reflecting fair market
value. H is not treated as a private business user of the auditorium
because its contract satisfies the exception of paragraph (d)(3)(ii) of
this section for negotiated arm's-length arrangements.
(g) Measurement of private business use--(1) In general. In general,
the private business use of proceeds is allocated to property under
Sec. 1.141-6. The amount of private business use of that property is
determined according to the average percentage of private business use
of that property during the measurement period.
(2) Measurement period--(i) General rule. Except as provided in this
paragraph (g)(2), the measurement period of property financed by an
issue begins on the later of the issue date of that issue or the date
the property is placed in service and ends on the earlier of the last
date of the reasonably expected economic life of the property or the
latest maturity date of any bond of the issue financing the property
(determined without regard to any optional redemption dates). In
general, the period of reasonably expected economic life of the property
for this purpose is based on reasonable expectations as of the issue
date.
(ii) Special rule for refundings of short-term obligations. For an
issue of short-term obligations that the issuer reasonably expects to
refund with a long-term financing (such as bond anticipation notes), the
measurement period is based on the latest maturity date of any bond of
the last refunding issue with respect to the financed property
(determined without regard to any optional redemption dates).
(iii) Special rule for reasonably expected mandatory redemptions. If
an issuer reasonably expects on the issue date that an action will occur
during the term of the bonds to cause either the private business tests
or the private loan financing test to be met and is required to redeem
bonds to meet the reasonable expectations test of Sec. 1.141-2(d)(2),
the measurement period ends on the reasonably expected redemption date.
(iv) Special rule for ownership by a nongovernmental person. The
amount of private business use resulting from ownership by a
nongovernmental person is the greatest percentage of private business
use in any 1-year period.
(v) Anti-abuse rule. If an issuer establishes the term of an issue
for a period that is longer than is reasonably necessary for the
governmental purposes of the issue for a principal purpose of increasing
the permitted amount of private business use, the Commissioner may
determine the amount of private business use according to the greatest
percentage of private business use in any 1-year period.
(3) Determining average percentage of private business use. The
average percentage of private business use is the average of the
percentages of private business use during the 1-year periods within the
measurement period. Appropriate adjustments must be made for beginning
and ending periods of less than 1 year.
(4) Determining the average amount of private business use for a 1-
year period--(i) In general. The percentage of private business use of
property for any 1-year period is the average private business use
during that year. This average is determined by comparing the amount of
private business use during the year to the total amount of private
business use and use that is not private business use (government use)
during that year. Paragraphs (g)(4) (ii) through (v) of this section
apply to determine the average amount of private business use for a 1-
year period.
(ii) Uses at different times. For a facility in which actual
government use
[[Page 618]]
and private business use occur at different times (for example,
different days), the average amount of private business use generally is
based on the amount of time that the facility is used for private
business use as a percentage of the total time for all actual use. In
determining the total amount of actual use, periods during which the
facility is not in use are disregarded.
(iii) Simultaneous use. In general, for a facility in which
government use and private business use occur simultaneously, the entire
facility is treated as having private business use. For example, a
governmentally owned facility that is leased or managed by a
nongovernmental person in a manner that results in private business use
is treated as entirely used for a private business use. If, however,
there is also private business use and actual government use on the same
basis, the average amount of private business use may be determined on a
reasonable basis that properly reflects the proportionate benefit to be
derived by the various users of the facility (for example, reasonably
expected fair market value of use). For example, the average amount of
private business use of a garage with unassigned spaces that is used for
government use and private business use is generally based on the number
of spaces used for private business use as a percentage of the total
number of spaces.
(iv) Discrete portion. For purposes of this paragraph (g),
measurement of the use of proceeds allocated to a discrete portion of a
facility is determined by treating that discrete portion as a separate
facility.
(v) Relationship to fair market value. For purposes of paragraphs
(g)(4) (ii) through (iv) of this section, if private business use is
reasonably expected as of the issue date to have a significantly greater
fair market value than government use, the average amount of private
business use must be determined according to the relative reasonably
expected fair market values of use rather than another measure, such as
average time of use. This determination of relative fair market value
may be made as of the date the property is acquired or placed in service
if making this determination as of the issue date is not reasonably
possible (for example, if the financed property is not identified on the
issue date). In general, the relative reasonably expected fair market
value for a period must be determined by taking into account the amount
of reasonably expected payments for private business use for the period
in a manner that properly reflects the proportionate benefit to be
derived from the private business use.
(5) Common areas. The amount of private business use of common areas
within a facility is based on a reasonable method that properly reflects
the proportionate benefit to be derived by the users of the facility.
For example, in general, a method that is based on the average amount of
private business use of the remainder of the entire facility reflects
proportionate benefit.
(6) Allocation of neutral costs. Proceeds that are used to pay costs
of issuance, invested in a reserve or replacement fund, or paid as fees
for a qualified guarantee or a qualified hedge must be allocated ratably
among the other purposes for which the proceeds are used.
(7) Commencement of measurement of private business use. Generally,
private business use commences on the first date on which there is a
right to actual use by the nongovernmental person. However, if an issuer
enters into an arrangement for private business use a substantial period
before the right to actual private business use commences and the
arrangement transfers ownership or is an arrangement for other long-term
use (such as a lease for a significant portion of the remaining economic
life of financed property), private business use commences on the date
the arrangement is entered into, even if the right to actual use
commences after the measurement period. For this purpose, 10 percent of
the measurement period is generally treated as a substantial period.
(8) Examples. The following examples illustrate the application of
this paragraph (g):
Example 1. Research facility. University U, a state owned and
operated university, owns and operates a research facility. U proposes
to finance general improvements to the facility with the proceeds of an
issue of bonds. U enters into sponsored research agreements with
nongovernmental persons that result in private business use because the
sponsors
[[Page 619]]
will own title to any patents resulting from the research. The
governmental research conducted by U and the research U conducts for the
sponsors take place simultaneously in all laboratories within the
research facility. All laboratory equipment is available continuously
for use by workers who perform both types of research. Because it is not
possible to predict which research projects will be successful, it is
not reasonably practicable to estimate the relative revenues expected to
result from the governmental and nongovernmental research. U contributed
90 percent of the cost of the facility and the nongovernmental persons
contributed 10 percent of the cost. Under this section, the
nongovernmental persons are using the facility for a private business
use on the same basis as the government use of the facility. The
portions of the costs contributed by the various users of the facility
provide a reasonable basis that properly reflects the proportionate
benefit to be derived by the users of the facility. The nongovernmental
persons are treated as using 10 percent of the proceeds of the issue.
Example 2. Stadium. (i) City L issues bonds and uses all of the
proceeds to construct a stadium. L enters into a long-term contract with
a professional sports team T under which T will use the stadium 20 times
during each year. These uses will occur on nights and weekends. L
reasonably expects that the stadium will be used more than 180 other
times each year, none of which will give rise to private business use.
This expectation is based on a feasibility study and historical use of
the old stadium that is being replaced by the new stadium. There is no
significant difference in the value of T's uses when compared to the
other uses of the stadium, taking into account the payments that T is
reasonably expected to make for its use. Assuming no other private
business use, the issue does not meet the private business use test
because not more than 10 percent of the use of the facility is for a
private business use.
(ii) The facts are the same as in Example 2(i), except that L
reasonably expects that the stadium will be used not more than 60 other
times each year, none of which will give rise to private business use.
The issue meets the private business use test because 25 percent of the
proceeds are used for a private business use.
Example 3. Airport terminal areas treated as common areas. City N
issues bonds to finance the construction of an airport terminal. Eighty
percent of the leasable space of the terminal will be leased to private
air carriers. The remaining 20 percent of the leasable space will be
used for the term of the bonds by N for its administrative purposes. The
common areas of the terminal, including waiting areas, lobbies, and
hallways are treated as 80 percent used by the air carriers for purposes
of the private business use test.
[T.D. 8712, 62 FR 2286, Jan. 16, 1997, as amended by T.D. 8967, 66 FR
58062, Nov. 20, 2001]
Sec. 1.141-4 Private security or payment test.
(a) General rule--(1) Private security or payment. The private
security or payment test relates to the nature of the security for, and
the source of, the payment of debt service on an issue. The private
payment portion of the test takes into account the payment of the debt
service on the issue that is directly or indirectly to be derived from
payments (whether or not to the issuer or any related party) in respect
of property, or borrowed money, used or to be used for a private
business use. The private security portion of the test takes into
account the payment of the debt service on the issue that is directly or
indirectly secured by any interest in property used or to be used for a
private business use or payments in respect of property used or to be
used for a private business use. For additional rules for output
facilities, see Sec. 1.141-7.
(2) Aggregation of private payments and security. For purposes of
the private security or payment test, payments taken into account as
private payments and payments or property taken into account as private
security are aggregated. However, the same payments are not taken into
account as both private security and private payments.
(3) Underlying arrangement. The security for, and payment of debt
service on, an issue is determined from both the terms of the bond
documents and on the basis of any underlying arrangement. An underlying
arrangement may result from separate agreements between the parties or
may be determined on the basis of all of the facts and circumstances
surrounding the issuance of the bonds. For example, if the payment of
debt service on an issue is secured by both a pledge of the full faith
and credit of a state or local governmental unit and any interest in
property used or to be used in a private business use, the issue meets
the private security or payment test.
(b) Measurement of private payments and security--(1) Scope. This
paragraph
[[Page 620]]
(b) contains rules that apply to both private security and private
payments.
(2) Present value measurement--(i) Use of present value. In
determining whether an issue meets the private security or payment test,
the present value of the payments or property taken into account is
compared to the present value of the debt service to be paid over the
term of the issue.
(ii) Debt service--(A) Debt service paid from proceeds. Debt service
does not include any amount paid or to be paid from sale proceeds or
investment proceeds. For example, debt service does not include payments
of capitalized interest funded with proceeds.
(B) Adjustments to debt service. Debt service is adjusted to take
into account payments and receipts that adjust the yield on an issue for
purposes of section 148(f). For example, debt service includes fees paid
for qualified guarantees under Sec. 1.148-4(f) and is adjusted to take
into account payments and receipts on qualified hedges under Sec. 1.148-
4(h).
(iii) Computation of present value--(A) In general. Present values
are determined by using the yield on the issue as the discount rate and
by discounting all amounts to the issue date. See, however, Sec. 1.141-
13 for special rules for refunding bonds.
(B) Fixed yield issues. For a fixed yield issue, yield is determined
on the issue date and is not adjusted to take into account subsequent
events.
(C) Variable yield issues. The yield on a variable yield issue is
determined over the term of the issue. To determine the reasonably
expected yield as of any date, the issuer may assume that the future
interest rate on a variable yield bond will be the then-current interest
rate on the bonds determined under the formula prescribed in the bond
documents. A deliberate action requires a recomputation of the yield on
the variable yield issue to determine the present value of payments
under that arrangement. In that case, the issuer must use the yield
determined as of the date of the deliberate action for purposes of
determining the present value of payments under the arrangement causing
the deliberate action. See paragraph (g) of this section, Example 3.
(iv) Application to private security. For purposes of determining
the present value of debt service that is secured by property, the
property is valued at fair market value as of the first date on which
the property secures bonds of the issue.
(c) Private payments--(1) In general. This paragraph (c) contains
rules that apply to private payments.
(2) Payments taken into account--(i) Payments for use--(A) In
general. Both direct and indirect payments made by any nongovernmental
person that is treated as using proceeds of the issue are taken into
account as private payments to the extent allocable to the proceeds used
by that person. Payments are taken into account as private payments only
to the extent that they are made for the period of time that proceeds
are used for a private business use. Payments for a use of proceeds
include payments (whether or not to the issuer) in respect of property
financed (directly or indirectly) with those proceeds, even if not made
by a private business user. Payments are not made in respect of financed
property if those payments are directly allocable to other property
being directly used by the person making the payment and those payments
represent fair market value compensation for that other use. See
paragraph (g) of this section, Example 4 and Example 5. See also
paragraph (c)(3) of this section for rules relating to allocation of
payments to the source or sources of funding of property.
(B) Payments not to exceed use. Payments with respect to proceeds
that are used for a private business use are not taken into account to
the extent that the present value of those payments exceeds the present
value of debt service on those proceeds. Payments need not be directly
derived from a private business user, however, to be taken into account.
Thus, if 7 percent of the proceeds of an issue is used by a person over
the measurement period, payments with respect to the property financed
with those proceeds are taken into account as private payments only to
the extent that the present value of those payments does not exceed the
present value of 7 percent of the debt service on the issue.
[[Page 621]]
(C) Payments for operating expenses. Payments by a person for a use
of proceeds do not include the portion of any payment that is properly
allocable to the payment of ordinary and necessary expenses (as defined
under section 162) directly attributable to the operation and
maintenance of the financed property used by that person. For this
purpose, general overhead and administrative expenses are not directly
attributable to those operations and maintenance. For example, if an
issuer receives $5,000 rent during the year for use of space in a
financed facility and during the year pays $500 for ordinary and
necessary expenses properly allocable to the operation and maintenance
of that space and $400 for general overhead and general administrative
expenses properly allocable to that space, $500 of the $5,000 received
would not be considered a payment for the use of the proceeds allocable
to that space (regardless of the manner in which that $500 is actually
used).
(ii) Refinanced debt service. Payments of debt service on an issue
to be made from proceeds of a refunding issue are taken into account as
private payments in the same proportion that the present value of the
payments taken into account as private payments for the refunding issue
bears to the present value of the debt service to be paid on the
refunding issue. For example, if all the debt service on a note is paid
with proceeds of a refunding issue, the note meets the private security
or payment test if (and to the same extent that) the refunding issue
meets the private security or payment test. This paragraph (c)(2)(ii)
does not apply to payments that arise from deliberate actions that occur
more than 3 years after the retirement of the prior issue that are not
reasonably expected on the issue date of the refunding issue. For
purposes of this paragraph (c)(2)(ii), whether an issue is a refunding
issue is determined without regard to Sec. 1.150-1(d)(2)(i) (relating to
certain payments of interest).
(3) Allocation of payments--(i) In general. Private payments for the
use of property are allocated to the source or different sources of
funding of property. The allocation to the source or different sources
of funding is based on all of the facts and circumstances, including
whether an allocation is consistent with the purposes of section 141. In
general, a private payment for the use of property is allocated to a
source of funding based upon the nexus between the payment and both the
financed property and the source of funding. For this purpose, different
sources of funding may include different tax-exempt issues, taxable
issues, and amounts that are not derived from a borrowing, such as
revenues of an issuer (equity).
(ii) Payments for use of discrete property. Payments for the use of
a discrete facility (or a discrete portion of a facility) are allocated
to the source or different sources of funding of that discrete property.
(iii) Allocations among two or more sources of funding. In general,
except as provided in paragraphs (c)(3)(iv) and (v) of this section, if
a payment is made for the use of property financed with two or more
sources of funding (for example, equity and a tax-exempt issue), that
payment must be allocated to those sources of funding in a manner that
reasonably corresponds to the relative amounts of those sources of
funding that are expended on that property. If an issuer has not
retained records of amounts expended on the property (for example,
records of costs of a building that was built 30 years before the
allocation), an issuer may use reasonable estimates of those
expenditures. For this purpose, costs of issuance and other similar
neutral costs are allocated ratably among expenditures in the same
manner as in Sec. 1.141-3(g)(6). A payment for the use of property may
be allocated to two or more issues that finance property according to
the relative amounts of debt service (both paid and accrued) on the
issues during the annual period for which the payment is made, if that
allocation reasonably reflects the economic substance of the
arrangement. In general, allocations of payments according to relative
debt service reasonably reflect the economic substance of the
arrangement if the maturity of the bonds reasonably corresponds to the
reasonably expected economic life of the property and debt service
payments on the
[[Page 622]]
bonds are approximately level from year to year.
(iv) Payments made under an arrangement entered into in connection
with issuance of bonds. A private payment for the use of property made
under an arrangement that is entered into in connection with the
issuance of the issue that finances that property generally is allocated
to that issue. Whether an arrangement is entered into in connection with
the issuance of an issue is determined on the basis of all of the facts
and circumstances. An arrangement is ordinarily treated as entered into
in connection with the issuance of an issue if--
(A) The issuer enters into the arrangement during the 3-year period
beginning 18 months before the issue date; and
(B) The amount of payments reflects all or a portion of debt service
on the issue.
(v) Allocations to equity. A private payment for the use of property
may be allocated to equity before payments are allocated to an issue
only if--
(A) Not later than 60 days after the date of the expenditure of
those amounts, the issuer adopts an official intent (in a manner
comparable to Sec. 1.150-2(e)) indicating that the issuer reasonably
expects to be repaid for the expenditure from a specific arrangement;
and
(B) The private payment is made not later than 18 months after the
later of the date the expenditure is made or the date the project is
placed in service.
(d) Private security--(1) In general. This paragraph (d) contains
rules that relate to private security.
(2) Security taken into account. The property that is the security
for, or the source of, the payment of debt service on an issue need not
be property financed with proceeds. For example, unimproved land or
investment securities used, directly or indirectly, in a private
business use that secures an issue provides private security. Private
security (other than financed property and private payments) for an
issue is taken into account under section 141(b), however, only to the
extent it is provided, directly or indirectly, by a user of proceeds of
the issue.
(3) Pledge of unexpended proceeds. Proceeds qualifying for an
initial temporary period under Sec. 1.148-2(e)(2) or (3) or deposited in
a reasonably required reserve or replacement fund (as defined in
Sec. 1.148-2(f)(2)(i)) are not taken into account under this paragraph
(d) before the date on which those amounts are either expended or loaned
by the issuer to an unrelated party.
(4) Secured by any interest in property or payments. Property used
or to be used for a private business use and payments in respect of that
property are treated as private security if any interest in that
property or payments secures the payment of debt service on the bonds.
For this purpose, the phrase any interest in is to be interpreted
broadly and includes, for example, any right, claim, title, or legal
share in property or payments.
(5) Payments in respect of property. The payments taken into account
as private security are payments in respect of property used or to be
used for a private business use. Except as otherwise provided in this
paragraph (d)(5) and paragraph (d)(6) of this section, the rules in
paragraphs (c)(2)(i)(A) and (B) and (c)(2)(ii) of this section apply to
determine the amount of payments treated as payments in respect of
property used or to be used for a private business use. Thus, payments
made by members of the general public for use of a facility used for a
private business use (for example, a facility that is the subject of a
management contract that results in private business use) are taken into
account as private security to the extent that they are made for the
period of time that property is used by a private business user.
(6) Allocation of security among issues. In general, property or
payments from the disposition of that property that are taken into
account as private security are allocated to each issue secured by the
property or payments on a reasonable basis that takes into account
bondholders' rights to the payments or property upon default.
(e) Generally applicable taxes--(1) General rule. For purposes of
the private security or payment test, generally applicable taxes are not
taken into account (that is, are not payments from a nongovernmental
person and are not
[[Page 623]]
payments in respect of property used for a private business use).
(2) Definition of generally applicable taxes. A generally applicable
tax is an enforced contribution exacted pursuant to legislative
authority in the exercise of the taxing power that is imposed and
collected for the purpose of raising revenue to be used for governmental
purposes. A generally applicable tax must have a uniform tax rate that
is applied to all persons of the same classification in the appropriate
jurisdiction and a generally applicable manner of determination and
collection.
(3) Special charges. A payment for a special privilege granted or
service rendered is not a generally applicable tax. Special assessments
paid by property owners benefiting from financed improvements are not
generally applicable taxes. For example, a tax or a payment in lieu of
tax that is limited to the property or persons benefited by an
improvement is not a generally applicable tax.
(4) Manner of determination and collection--(i) In general. A tax
does not have a generally applicable manner of determination and
collection to the extent that one or more taxpayers make any
impermissible agreements relating to payment of those taxes. An
impermissible agreement relating to the payment of a tax is taken into
account whether or not it is reasonably expected to result in any
payments that would not otherwise have been made. For example, if an
issuer uses proceeds to make a grant to a taxpayer to improve property,
agreements that impose reasonable conditions on the use of the grant do
not cause a tax on that property to fail to be a generally applicable
tax. If an agreement by a taxpayer causes the tax imposed on that
taxpayer not to be treated as a generally applicable tax, the entire tax
paid by that taxpayer is treated as a special charge, unless the
agreement is limited to a specific portion of the tax.
(ii) Impermissible agreements. The following are examples of
agreements that cause a tax to fail to have a generally applicable
manner of determination and collection: an agreement to be personally
liable on a tax that does not generally impose personal liability, to
provide additional credit support such as a third party guarantee, or to
pay unanticipated shortfalls; an agreement regarding the minimum market
value of property subject to property tax; and an agreement not to
challenge or seek deferral of the tax.
(iii) Permissible agreements. The following are examples of
agreements that do not cause a tax to fail to have a generally
applicable manner of determination and collection: an agreement to use a
grant for specified purposes (whether or not that agreement is secured);
a representation regarding the expected value of the property following
the improvement; an agreement to insure the property and, if damaged, to
restore the property; a right of a grantor to rescind the grant if
property taxes are not paid; and an agreement to reduce or limit the
amount of taxes collected to further a bona fide governmental purpose.
For example, an agreement to abate taxes to encourage a property owner
to rehabilitate property in a distressed area is a permissible
agreement.
(5) Payments in lieu of taxes. A tax equivalency payment and any
other payment in lieu of a tax is treated as a generally applicable tax
if--
(i) The payment is commensurate with and not greater than the
amounts imposed by a statute for a tax of general application; and
(ii) The payment is designated for a public purpose and is not a
special charge (as described in paragraph (e)(3) of this section). For
example, a payment in lieu of taxes made in consideration for the use of
property financed with tax-exempt bonds is treated as a special charge.
(f) Certain waste remediation bonds--(1) Scope. This paragraph (f)
applies to bonds issued to finance hazardous waste clean-up activities
on privately owned land (hazardous waste remediation bonds).
(2) Persons that are not private users. Payments from
nongovernmental persons who are not (other than coincidentally) either
users of the site being remediated or persons potentially responsible
for disposing of hazardous waste on that site are not taken into account
as private security. This paragraph (f)(2) applies to payments that
[[Page 624]]
secure (directly or indirectly) the payment of principal of, or interest
on, the bonds under the terms of the bonds. This paragraph (f)(2)
applies only if the payments are made pursuant to either a generally
applicable state or local taxing statute or a state or local statute
that regulates or restrains activities on an industry-wide basis of
persons who are engaged in generating or handling hazardous waste, or in
refining, producing, or transporting petroleum, provided that those
payments do not represent, in substance, payment for the use of
proceeds. For this purpose, a state or local statute that imposes
payments that have substantially the same character as those described
in Chapter 38 of the Code are treated as generally applicable taxes.
(3) Persons that are private users. If payments from nongovernmental
persons who are either users of the site being remediated or persons
potentially responsible for disposing of hazardous waste on that site do
not secure (directly or indirectly) the payment of principal of, or
interest on, the bonds under the terms of the bonds, the payments are
not taken into account as private payments. This paragraph (f)(3)
applies only if at the time the bonds are issued the payments from those
nongovernmental persons are not material to the security for the bonds.
For this purpose, payments are not material to the security for the
bonds if--
(i) The payments are not required for the payment of debt service on
the bonds;
(ii) The amount and timing of the payments are not structured or
designed to reflect the payment of debt service on the bonds;
(iii) The receipt or the amount of the payment is uncertain (for
example, as of the issue date, no final judgment has been entered into
against the nongovernmental person);
(iv) The payments from those nongovernmental persons, when and if
received, are used either to redeem bonds of the issuer or to pay for
costs of any hazardous waste remediation project; and
(v) In the case when a judgment (but not a final judgment) has been
entered by the issue date against a nongovernmental person, there are,
as of the issue date, costs of hazardous waste remediation other than
those financed with the bonds that may be financed with the payments.
(g) Examples. The following examples illustrate the application of
this section:
Example 1. Aggregation of payments. State B issues bonds with
proceeds of $10 million. B uses $9.7 million of the proceeds to
construct a 10-story office building. B uses the remaining $300,000 of
proceeds to make a loan to Corporation Y. In addition, Corporation X
leases 1 floor of the building for the term of the bonds. Under all of
the facts and circumstances, it is reasonable to allocate 10 percent of
the proceeds to that 1 floor. As a percentage of the present value of
the debt service on the bonds, the present value of Y's loan repayments
is 3 percent and the present value of X's lease payments is 8 percent.
The bonds meet the private security or payment test because the private
payments taken into account are more than 10 percent of the present
value of the debt service on the bonds.
Example 2. Indirect private payments. J, a political subdivision of
a state, will issue several series of bonds from time to time and will
use the proceeds to rehabilitate urban areas. Under all of the facts and
circumstances, the private business use test will be met with respect to
each issue that will be used for the rehabilitation and construction of
buildings that will be leased or sold to nongovernmental persons for use
in their trades or businesses. Nongovernmental persons will make
payments for these sales and leases. There is no limitation either on
the number of issues or the aggregate amount of bonds that may be
outstanding. No group of bondholders has any legal claim prior to any
other bondholders or creditors with respect to specific revenues of J,
and there is no arrangement whereby revenues from a particular project
are paid into a trust or constructive trust, or sinking fund, or are
otherwise segregated or restricted for the benefit of any group of
bondholders. There is, however, an unconditional obligation by J to pay
the principal of, and the interest on, each issue. Although not directly
pledged under the terms of the bond documents, the leases and sales are
underlying arrangements. The payments relating to these leases and sales
are taken into account as private payments to determine whether each
issue of bonds meets the private security or payment test.
Example 3. Computation of payment in variable yield issues. (i) City
M issues general obligation bonds with proceeds of $10 million to
finance a 5-story office building. The bonds bear interest at a variable
rate that is recomputed monthly according to an index that reflects
current market yields. The
[[Page 625]]
yield that the interest index would produce on the issue date is 6
percent. M leases 1 floor of the office building to Corporation T, a
nongovernmental person, for the term of the bonds. Under all of the
facts and circumstances, T is treated as using more than 10 percent of
the proceeds. Using the 6 percent yield as the discount rate, M
reasonably expects on the issue date that the present value of lease
payments to be made by T will be 8 percent of the present value of the
total debt service on the bonds. After the issue date of the bonds,
interest rates decline significantly, so that the yield on the bonds
over their entire term is 4 percent. Using this actual 4 percent yield
as the discount rate, the present value of lease payments made by T is
12 percent of the present value of the actual total debt service on the
bonds. The bonds are not private activity bonds because M reasonably
expected on the issue date that the bonds would not meet the private
security or payment test and because M did not take any subsequent
deliberate action to meet the private security or payment test.
(ii) The facts are the same as Example 3(i), except that 5 years
after the issue date M leases a second floor to Corporation S, a
nongovernmental person, under a long-term lease. Because M has taken a
deliberate action, the present value of the lease payments must be
computed. On the date this lease is entered into, M reasonably expects
that the yield on the bonds over their entire term will be 5.5 percent,
based on actual interest rates to date and the then-current rate on the
variable yield bonds. M uses this 5.5 percent yield as the discount
rate. Using this 5.5 percent yield as the discount rate, as a percentage
of the present value of the debt service on the bonds, the present value
of the lease payments made by S is 3 percent. The bonds are private
activity bonds because the present value of the aggregate private
payments is greater than 10 percent of the present value of debt
service.
Example 4. Payments not in respect of financed property. In order to
further public safety, City Y issues tax assessment bonds the proceeds
of which are used to move existing electric utility lines underground.
Although the utility lines are owned by a nongovernmental utility
company, that company is under no obligation to move the lines. The debt
service on the bonds will be paid using assessments levied by City Y on
the customers of the utility. Although the utility lines are privately
owned and the utility customers make payments to the utility company for
the use of those lines, the assessments are payments in respect of the
cost of relocating the utility line. Thus, the assessment payments are
not made in respect of property used for a private business use. Any
direct or indirect payments to Y by the utility company for the
undergrounding are, however, taken into account as private payments.
Example 5. Payments from users of proceeds that are not private
business users taken into account. City P issues general obligation
bonds to finance the renovation of a hospital that it owns. The hospital
is operated for P by D, a nongovernmental person, under a management
contract that results in private business use under Sec. 1.141-3. P will
use the revenues from the hospital (after the required payments to D and
the payment of operation and maintenance expenses) to pay the debt
service on the bonds. The bonds meet the private security or payment
test because the revenues from the hospital are payments in respect of
property used for a private business use.
Example 6. Limitation of amount of payments to amount of private
business use not determined annually. City Q issues bonds with a term of
15 years and uses the proceeds to construct an office building. The debt
service on the bonds is level throughout the 15-year term. Q enters into
a 5-year lease with Corporation R under which R is treated as a user of
11 percent of the proceeds. R will make lease payments equal to 20
percent of the annual debt service on the bonds for each year of the
lease. The present value of R's lease payments is equal to 12 percent of
the present value of the debt service over the entire 15-year term of
the bonds. If, however, the lease payments taken into account as private
payments were limited to 11 percent of debt service paid in each year of
the lease, the present value of these payments would be only 8 percent
of the debt service on the bonds over the entire term of the bonds. The
bonds meet the private security or payment test, because R's lease
payments are taken into account as private payments in an amount not to
exceed 11 percent of the debt service of the bonds.
Example 7. Allocation of payments to funds not derived from a
borrowing. City Z purchases property for $1,250,000 using $1,000,000 of
proceeds of its tax increment bonds and $250,000 of other revenues that
are in its redevelopment fund. Within 60 days of the date of purchase, Z
declared its intent to sell the property pursuant to a redevelopment
plan and to use that amount to reimburse its redevelopment fund. The
bonds are secured only by the incremental property taxes attributable to
the increase in value of the property from the planned redevelopment of
the property. Within 18 months after the issue date, Z sells the
financed property to Developer M for $250,000, which Z uses to reimburse
the redevelopment fund. The property that M uses is financed both with
the proceeds of the bonds and Z's redevelopment fund. The payments by M
are properly allocable to the costs of property financed with the
amounts in Z's redevelopment fund. See paragraphs (c)(3) (i) and (v) of
this section.
[[Page 626]]
Example 8. Allocation of payments to different sources of funding--
improvements. In 1997, City L issues bonds with proceeds of $8 million
to finance the acquisition of a building. In 2002, L spends $2 million
of its general revenues to improve the heating system and roof of the
building. At that time, L enters into a 10-year lease with Corporation M
for the building providing for annual payments of $1 million to L. The
lease payments are at fair market value, and the lease payments do not
otherwise have a significant nexus to either the issue or to the
expenditure of general revenues. Eighty percent of each lease payment is
allocated to the issue and is taken into account under the private
payment test because each lease payment is properly allocated to the
sources of funding in a manner that reasonably corresponds to the
relative amounts of the sources of funding that are expended on the
building.
Example 9. Security not provided by users of proceeds not taken into
account. County W issues certificates of participation in a lease of a
building that W owns and covenants to appropriate annual payments for
the lease. A portion of each payment is specified as interest. More than
10 percent of the building is used for private business use. None of the
proceeds of the obligations are used with respect to the building. W
uses the proceeds of the obligations to make a grant to Corporation Y
for the construction of a factory that Y will own. Y makes no payments
to W, directly or indirectly, for its use of proceeds, and Y has no
relationship to the users of the leased building. If W defaults under
the lease, the trustee for the holders of the certificates of
participation has a limited right of repossession under which the
trustee may not foreclose but may lease the property to a new tenant at
fair market value. The obligations are secured by an interest in
property used for a private business use. However, because the property
is not provided by a private business user and is not financed property,
the obligations do not meet the private security or payment test.
Example 10. Allocation of payments among issues. University L, a
political subdivision, issued three separate series of revenue bonds
during 1989, 1991, and 1993 under the same bond resolution. L used the
proceeds to construct facilities exclusively for its own use. Bonds
issued under the resolution are equally and ratably secured and payable
solely from the income derived by L from rates, fees, and charges
imposed by L for the use of the facilities. The bonds issued in 1989,
1991, and 1993 are not private activity bonds. In 1997, L issues another
series of bonds under the resolution to finance additional facilities. L
leases 20 percent of the new facilities for the term of the 1997 bonds
to nongovernmental persons who will use the facilities in their trades
or businesses. The present value of the lease payments from the
nongovernmental users will equal 15 percent of the present value of the
debt service on the 1997 bonds. L will commingle all of the revenues
from all its bond-financed facilities in its revenue fund. The present
value of the portion of the lease payments from nongovernmental lessees
of the new facilities allocable to the 1997 bonds under paragraph (d) of
this section is less than 10 percent of the present value of the debt
service on the 1997 bonds because the bond documents provide that the
bonds are equally and ratably secured. Accordingly, the 1997 bonds do
not meet the private security test. The 1997 bonds meet the private
payment test, however, because the private lease payments for the new
facility are properly allocated to those bonds (that is, because none of
the proceeds of the prior issues were used for the new facilities). See
paragraph (c) of this section.
Example 11. Generally applicable tax. (i) Authority N issues bonds
to finance the construction of a stadium. Under a long-term lease,
Corporation X, a professional sports team, will use more than 10 percent
of the stadium. X will not, however, make any payments for this private
business use. The security for the bonds will be a ticket tax imposed on
each person purchasing a ticket for an event at the stadium. The portion
of the ticket tax attributable to tickets purchased by persons attending
X's events will, on a present value basis, exceed 10 percent of the
present value of the debt service on N's bonds. The bonds meet the
private security or payment test. The ticket tax is not a generally
applicable tax and, to the extent that the tax receipts relate to X's
events, the taxes are payments in respect of property used for a private
business use.
(ii) The facts are the same as Example 11(i), except that the ticket
tax is imposed by N on tickets purchased for events at a number of large
entertainment facilities within the N's jurisdiction (for example, other
stadiums, arenas, and concert halls), some of which were not financed
with tax-exempt bonds. The ticket tax is a generally applicable tax and
therefore the revenues from this tax are not payments in respect of
property used for a private business use. The receipt of the ticket tax
does not cause the bonds to meet the private security or payment test.
[T.D. 8712, 62 FR 2291, Jan. 16, 1997]
Sec. 1.141-5 Private loan financing test.
(a) In general. Bonds of an issue are private activity bonds if more
than the lesser of 5 percent or $5 million of the proceeds of the issue
is to be used (directly or indirectly) to make or finance
[[Page 627]]
loans to persons other than governmental persons. Section 1.141-2(d)
applies in determining whether the private loan financing test is met.
In determining whether the proceeds of an issue are used to make or
finance loans, indirect, as well as direct, use of the proceeds is taken
into account.
(b) Measurement of test. In determining whether the private loan
financing test is met, the amount actually loaned to a nongovernmental
person is not discounted to reflect the present value of the loan
repayments.
(c) Definition of private loan--(1) In general. Any transaction that
is generally characterized as a loan for federal income tax purposes is
a loan for purposes of this section. In addition, a loan may arise from
the direct lending of bond proceeds or may arise from transactions in
which indirect benefits that are the economic equivalent of a loan are
conveyed. Thus, the determination of whether a loan is made depends on
the substance of a transaction rather than its form. For example, a
lease or other contractual arrangement (for example, a management
contract or an output contract) may in substance constitute a loan if
the arrangement transfers tax ownership of the facility to a
nongovernmental person. Similarly, an output contract or a management
contract with respect to a financed facility generally is not treated as
a loan of proceeds unless the agreement in substance shifts significant
burdens and benefits of ownership to the nongovernmental purchaser or
manager of the facility.
(2) Application only to purpose investments--(i) In general. A loan
may be either a purpose investment or a nonpurpose investment. A loan
that is a nonpurpose investment does not cause the private loan
financing test to be met. For example, proceeds invested in loans, such
as obligations of the United States, during a temporary period, as part
of a reasonably required reserve or replacement fund, as part of a
refunding escrow, or as part of a minor portion (as each of those terms
are defined in Sec. 1.148-1 or Sec. 1.148-2) are generally not treated
as loans under the private loan financing test.
(ii) Certain prepayments treated as loans. Except as otherwise
provided, a prepayment for property or services is treated as a loan for
purposes of the private loan financing test if a principal purpose for
prepaying is to provide a benefit of tax-exempt financing to the seller.
A prepayment is not treated as a loan for purposes of the private loan
financing test if--
(A) The prepayment is made for a substantial business purpose other
than providing a benefit of tax-exempt financing to the seller and the
issuer has no commercially reasonable alternative to the prepayment; or
(B) Prepayments on substantially the same terms are made by a
substantial percentage of persons who are similarly situated to the
issuer but who are not beneficiaries of tax-exempt financing.
(3) Grants--(i) In general. A grant of proceeds is not a loan.
Whether a transaction may be treated as a grant or a loan depends on all
of the facts and circumstances.
(ii) Tax increment financing--(A) In general. Generally, a grant
using proceeds of an issue that is secured by generally applicable taxes
attributable to the improvements to be made with the grant is not
treated as a loan, unless the grantee makes any impermissible agreements
relating to the payment that results in the taxes imposed on that
taxpayer not to be treated as generally applicable taxes under
Sec. 1.141-4(e).
(B) Amount of loan. If a grant is treated as a loan under this
paragraph (c)(3), the entire grant is treated as a loan unless the
impermissible agreement is limited to a specific portion of the tax. For
this purpose, an arrangement with each unrelated grantee is treated as a
separate grant.
(4) Hazardous waste remediation bonds. In the case of an issue of
hazardous waste remediation bonds, payments from nongovernmental persons
that are either users of the site being remediated or persons
potentially responsible for disposing of hazardous waste on that site do
not establish that the transaction is a loan for purposes of this
section. This paragraph (c)(4) applies only if those payments do not
secure the payment of principal of, or interest on, the bonds (directly
or indirectly), under the terms of the bonds
[[Page 628]]
and those payments are not taken into account under the private payment
test pursuant to Sec. 1.141-4(f)(3).
(d) Tax assessment loan exception--(1) General rule. For purposes of
this section, a tax assessment loan that satisfies the requirements of
this paragraph (d) is not a loan for purposes of the private loan
financing test.
(2) Tax assessment loan defined. A tax assessment loan is a loan
that arises when a governmental person permits or requires property
owners to finance any governmental tax or assessment of general
application for an essential governmental function that satisfies each
of the requirements of paragraphs (d) (3) through (5) of this section.
(3) Mandatory tax or other assessment. The tax or assessment must be
an enforced contribution that is imposed and collected for the purpose
of raising revenue to be used for a specific purpose (that is, to defray
the capital cost of an improvement). Taxes and assessments do not
include fees for services. The tax or assessment must be imposed
pursuant to a state law of general application that can be applied
equally to natural persons not acting in a trade or business and persons
acting in a trade or business. For this purpose, taxes and assessments
that are imposed subject to protest procedures are treated as enforced
contributions.
(4) Specific essential governmental function--(i) In general. A
mandatory tax or assessment that gives rise to a tax assessment loan
must be imposed for one or more specific, essential governmental
functions.
(ii) Essential governmental functions. For purposes of paragraph (d)
of this section, improvements to utilities and systems that are owned by
a governmental person and that are available for use by the general
public (such as sidewalks, streets and street-lights; electric,
telephone, and cable television systems; sewage treatment and disposal
systems; and municipal water facilities) serve essential governmental
functions. For other types of facilities, the extent to which the
service provided by the facility is customarily performed (and financed
with governmental bonds) by governments with general taxing powers is a
primary factor in determining whether the facility serves an essential
governmental function. For example, parks that are owned by a
governmental person and that are available for use by the general public
serve an essential governmental function. Except as otherwise provided
in this paragraph (d)(4)(ii), commercial or industrial facilities and
improvements to property owned by a nongovernmental person do not serve
an essential governmental
function. Permitting installment payments of property taxes or other
taxes is not an essential governmental function.
(5) Equal basis requirement--(i) In general. Owners of both business
and nonbusiness property benefiting from the financed improvements must
be eligible, or required, to make deferred payments of the tax or
assessment giving rise to a tax assessment loan on an equal basis (the
equal basis requirement). A tax or assessment does not satisfy the equal
basis requirement if the terms for payment of the tax or assessment are
not the same for all taxed or assessed persons. For example, the equal
basis requirement is not met if certain property owners are permitted to
pay the tax or assessment over a period of years while others must pay
the entire tax or assessment immediately or if only certain property
owners are required to prepay the tax or assessment when the property is
sold.
(ii) General rule for guarantees. A guarantee of debt service on
bonds, or of taxes or assessments, by a person that is treated as a
borrower of bond proceeds violates the equal basis requirement if it is
reasonable to expect on the date the guarantee is entered into that
payments will be made under the guarantee.
(6) Coordination with private business tests. See Secs. 1.141-3 and
1.141-4 for rules for determining whether tax assessment loans cause the
bonds financing those loans to be private activity bonds under the
private business use and the private security or payment tests.
(e) Examples. The following examples illustrate the application of
this section:
Example 1. Turnkey contract not treated as a loan. State agency Z
and federal agency H will each contribute to rehabilitate a project
owned by Z. H can only provide its funds
[[Page 629]]
through a contribution to Z to be used to acquire the rehabilitated
project on a turnkey basis from an approved developer. Under H's turnkey
program, the developer must own the project while it is rehabilitated. Z
issues its notes to provide funds for construction. A portion of the
notes will be retired using the H contribution, and the balance of the
notes will be retired through the issuance by Z of long-term bonds. Z
lends the proceeds of its notes to Developer B as construction financing
and transfers title to B for a nominal amount. The conveyance is made on
condition that B rehabilitate the property and reconvey it upon
completion, with Z retaining the right to force reconveyance if these
conditions are not satisfied. B must name Z as an additional insured on
all insurance. Upon completion, B must transfer title to the project
back to Z at a set price, which price reflects B's costs and profit, not
fair market value. Further, this price is adjusted downward to reflect
any cost-underruns. For purposes of section 141(c), this transaction
does not involve a private loan.
Example 2. Essential government function requirement not met. City D
creates a special taxing district consisting of property owned by
nongovernmental persons that requires environmental clean-up. D imposes
a special tax on each parcel within the district in an amount that is
related to the expected environmental clean-up costs of that parcel. The
payment of the tax over a 20-year period is treated as a loan by the
property owners for purposes of the private loan financing test. The
special district issues bonds, acting on behalf of D, that are payable
from the special tax levied within the district, and uses the proceeds
to pay for the costs of environmental clean-up on the property within
the district. The bonds meet the private loan financing test because
more than 5 percent of the proceeds of the issue are loaned to
nongovernmental persons. The issue does not meet the tax assessment loan
exception because the improvements to property owned by a
nongovernmental person are not an essential governmental function under
section 141(c)(2). The issue also meets the private business tests of
section 141(b).
[T.D. 8712, 62 FR 2296, Jan. 16, 1997]
Sec. 1.141-6 Allocation and accounting rules.
(a) Allocation of proceeds to expenditures. For purposes of
Secs. 1.141-1 through 1.141-15, the provisions of Sec. 1.148-6(d) apply
for purposes of allocating proceeds to expenditures. Thus, allocations
generally may be made using any reasonable, consistently applied
accounting method, and allocations under section 141 and section 148
must be consistent with each other.
(b) Allocation of proceeds to property. [Reserved]
(c) Special rules for mixed use facilities. [Reserved]
(d) Allocation of proceeds to common areas. [Reserved]
(e) Allocation of proceeds to bonds. [Reserved]
(f) Treatment of partnerships. [Reserved]
(g) Examples. [Reserved]
[T.D. 8712, 62 FR 2297, Jan. 16, 1997]
Sec. 1.141-7 Special rules for output facilities.
(a) Overview. This section provides special rules to determine
whether arrangements for the purchase of output from an output facility
cause an issue of bonds to meet the private business tests. For this
purpose, unless otherwise stated, water facilities are treated as output
facilities. Sections 1.141-3 and 1.141-4 generally apply to determine
whether other types of arrangements for use of an output facility cause
an issue to meet the private business tests.
(b) Definitions. For purposes of this section and Sec. 1.141-8, the
following definitions and rules apply:
(1) Available output. The available output of a facility financed by
an issue is determined by multiplying the number of units produced or to
be produced by the facility in one year by the number of years in the
measurement period of that facility for that issue.
(i) Generating facilities. The number of units produced or to be
produced by a generating facility in one year is determined by reference
to its nameplate capacity or the equivalent (or where there is no
nameplate capacity or the equivalent, its maximum capacity), which is
not reduced for reserves, maintenance or other unutilized capacity.
(ii) Transmission and other output facilities--(A) In general. For
transmission, distribution, cogeneration, and other output facilities,
available output must be measured in a reasonable manner to reflect
capacity.
(B) Electric transmission facilities. Measurement of the available
output of all or a portion of electric transmission facilities may be
determined in a manner consistent with the reporting rules
[[Page 630]]
and requirements for transmission networks promulgated by the Federal
Energy Regulatory Commission (FERC). For example, for a transmission
network, the use of aggregate load and load share ratios in a manner
consistent with the requirements of the FERC may be reasonable. In
addition, depending on the facts and circumstances, measurement of the
available output of transmission facilities using thermal capacity or
transfer capacity may be reasonable.
(iii) Special rule for facilities with significant unutilized
capacity. If an issuer reasonably expects on the issue date that persons
that are treated as private business users will purchase more than 30
percent of the actual output of the facility financed with the issue,
the Commissioner may determine the number of units produced or to be
produced by the facility in one year on a reasonable basis other than by
reference to nameplate or other capacity, such as the average expected
annual output of the facility. For example, the Commissioner may
determine the available output of a financed peaking electric generating
unit by reference to the reasonably expected annual output of that unit
if the issuer reasonably expects, on the issue date of bonds that
finance the unit, that an investor-owned utility will purchase more than
30 percent of the actual output of the facility during the measurement
period under a take or pay contract, even if the amount of output
purchased is less than 10 percent of the available output determined by
reference to nameplate capacity. The reasonably expected annual output
of the generating facility must be consistent with the capacity reported
for prudent reliability purposes.
(iv) Special rule for facilities with a limited source of supply. If
a limited source of supply constrains the output of an output facility,
the number of units produced or to be produced by the facility must be
determined by reasonably taking into account those constraints. For this
purpose, a limited source of supply shall include a physical limitation
(for example, flow of water), but not an economic limitation (for
example, cost of coal or gas). For example, the available output of a
hydroelectric unit must be determined by reference to the reasonably
expected annual flow of water through the unit.
(2) Measurement period. The measurement period of an output facility
financed by an issue is determined under Sec. 1.141-3(g).
(3) Sale at wholesale. A sale at wholesale means a sale of output to
any person for resale.
(4) Take contract and take or pay contract. A take contract is an
output contract under which a purchaser agrees to pay for the output
under the contract if the output facility is capable of providing the
output. A take or pay contract is an output contract under which a
purchaser agrees to pay for the output under the contract, whether or
not the output facility is capable of providing the output.
(5) Requirements contract. A requirements contract is an output
contract, other than a take contract or a take or pay contract, under
which a nongovernmental person agrees to purchase all or part of its
output requirements.
(6) Nonqualified amount. The nonqualified amount with respect to an
issue is determined under section 141(b)(8).
(c) Output contracts--(1) General rule. The purchase pursuant to a
contract by a nongovernmental person of available output of an output
facility (output contract) financed with proceeds of an issue is taken
into account under the private business tests if the purchase has the
effect of transferring the benefits of owning the facility and the
burdens of paying the debt service on bonds used (directly or
indirectly) to finance the facility (the benefits and burdens test). See
paragraph (c)(4) of this section for the treatment of an output contract
that is properly characterized as a lease for Federal income tax
purposes. See paragraphs (d) and (e) of this section for rules regarding
measuring the use of, and payments of debt service for, an output
facility for determining whether the private business tests are met. See
also Sec. 1.141-8 for rules for when an issue that finances an output
facility (other than a water facility) meets the private business tests
because the nonqualified amount of the issue exceeds $15 million.
[[Page 631]]
(2) Take contract or take or pay contract. The benefits and burdens
test is met if a nongovernmental person agrees pursuant to a take
contract or a take or pay contract to purchase available output of a
facility.
(3) Requirements contract--(i) In general. A requirements contract
may satisfy the benefits and burdens test under paragraph (c)(3)(ii) or
(iii) of this section. See Sec. 1.141-15(f)(2) for special effective
dates for the application of this paragraph (c)(3) to issues financing
facilities subject to requirements contracts.
(ii) Requirements contract similar to take contract or take or pay
contract. A requirements contract generally meets the benefits and
burdens test to the extent that it contains contractual terms that
obligate the purchaser to make payments that are not contingent on the
output requirements of the purchaser or that obligate the purchaser to
have output requirements. For example, a requirements contract with an
industrial purchaser meets the benefits and burdens test if the
purchaser enters into additional contractual obligations with the issuer
or another governmental unit not to cease operations. A requirements
contract does not meet the benefits and burdens test, however, by reason
of a provision that requires the purchaser to pay reasonable and
customary damages (including liquidated damages) in the event of a
default, or a provision that permits the purchaser to pay a specified
amount to terminate the contract while the purchaser has requirements,
in each case if the amount of the payment is reasonably related to the
purchaser's obligation to buy requirements that is discharged by the
payment.
(iii) Wholesale requirements contract--(A) In general. A
requirements contract that is a sale at wholesale (a wholesale
requirements contract) may satisfy the benefits and burdens test,
depending on all the facts and circumstances.
(B) Significant factors. Significant factors that tend to establish
that a wholesale requirements contract meets the benefits and burdens
test include, but are not limited to--
(1) The term of the contract is substantial relative to the term of
the issue or issues that finance the facility; and
(2) The amount of output to be purchased under the contract
represents a substantial portion of the available output of the
facility.
(C) Safe harbors. A wholesale requirements contract does not meet
the benefits and burdens test if--
(1) The term of the contract, including all renewal options, does
not exceed the lesser of 5 years or 30 percent of the term of the issue;
or
(2) The amount of output to be purchased under the contract (and any
other requirements contract with the same purchaser or a related party
with respect to the facility) does not exceed 5 percent of the available
output of the facility.
(iv) Retail requirements contract. Except as otherwise provided in
this paragraph (c)(3), a requirements contract that is not a sale at
wholesale does not meet the benefits and burdens test.
(4) Output contract properly characterized as a lease.
Notwithstanding any other provision of this section, an output contract
that is properly characterized as a lease for Federal income tax
purposes shall be tested under the rules contained in Secs. 1.141-3 and
1.141-4 to determine whether it is taken into account under the private
business tests.
(d) Measurement of private business use. If an output contract
results in private business use under this section, the amount of
private business use generally is the amount of output purchased under
the contract.
(e) Measurement of private security or payment. The measurement of
payments made or to be made by nongovernmental persons under output
contracts as a percent of the debt service of an issue is determined
under the rules provided in Sec. 1.141-4.
(f) Exceptions for certain contracts--(1) Small purchases of output.
An output contract for the use of a facility is not taken into account
under the private business tests if the average annual payments to be
made under the contract do not exceed 1 percent of the average annual
debt service on all outstanding tax-exempt bonds issued to finance the
facility, determined as of the effective date of the contract.
[[Page 632]]
(2) Swapping and pooling arrangements. An agreement that provides
for swapping or pooling of output by one or more governmental persons
and one or more nongovernmental persons does not result in private
business use of the output facility owned by the governmental person to
the extent that--
(i) The swapped output is reasonably expected to be approximately
equal in value (determined over periods of three years or less); and
(ii) The purpose of the agreement is to enable each of the parties
to satisfy different peak load demands, to accommodate temporary
outages, to diversify supply, or to enhance reliability in accordance
with prudent reliability standards.
(3) Short-term output contracts. An output contract with a
nongovernmental person is not taken into account under the private
business tests if--
(i) The term of the contract, including all renewal options, is not
longer than 3 years;
(ii) The contract either is a negotiated, arm's-length arrangement
that provides for compensation at fair market value, or is based on
generally applicable and uniformly applied rates; and
(iii) The output facility is not financed for a principal purpose of
providing that facility for use by that nongovernmental person.
(4) Certain conduit parties disregarded. A nongovernmental person
acting solely as a conduit for the exchange of output among
governmentally owned and operated utilities is disregarded in
determining whether the private business tests are met with respect to
financed facilities owned by a governmental person.
(g) Special rules for electric output facilities used to provide
open access--(1) Operation of transmission facilities by nongovernmental
persons--(i) In general. The operation of an electric transmission
facility by a nongovernmental person may result in private business use
of the facility under Sec. 1.141-3 and this section based on all the
facts and circumstances. For example, a transmission facility is
generally used for a private business use if a nongovernmental person
enters into a contract to operate the facility and receives compensation
based, in whole or in part, on a share of net profits from the operation
of the facility.
(ii) Certain use by independent transmission operators. A contract
for the operation of an electric transmission facility by an independent
entity, such as a regional transmission organization or an independent
system operator (independent transmission operator), does not constitute
private business use of the facility if--
(A) The facility is owned by a governmental person;
(B) The operation of the facility by the independent transmission
operator is approved by the FERC under one or more provisions of the
Federal Power Act (16 U.S.C. 791a through 825r) (or by a state authority
under comparable provisions of state law);
(C) No portion of the compensation of the independent transmission
operator is based on a share of net profits from the operation of the
facility; and
(D) The independent transmission operator does not bear risk of loss
of the facility.
(2) Certain use by nongovernmental persons under output contracts--
(i) Transmission facilities. The use of an electric transmission
facility by a nongovernmental person pursuant to an output contract does
not constitute private business use of the facility if--
(A) The facility is owned by a governmental person;
(B) The facility is operated by an independent transmission operator
in a manner that satisfies paragraph (g)(1)(ii) of this section; and
(C) The facility is not financed for a principal purpose of
providing that facility for use by that nongovernmental person.
(ii) Distribution facilities. The use of an electric distribution
facility by a nongovernmental person pursuant to an output contract does
not constitute private business use of the facility if--
(A) The facility is owned by a governmental person;
(B) The facility is available for use on a nondiscriminatory, open
access basis by buyers and sellers of electricity in accordance with
rates that are generally applicable and uniformly
[[Page 633]]
applied within the meaning of Sec. 1.141-3(c)(2); and
(C) The facility is not financed for a principal purpose of
providing that facility for use by that nongovernmental person (other
than a retail end-user).
(3) Ancillary services. The use of an electric output facility to
provide ancillary services required to be offered as part of an open
access transmission tariff under rules promulgated by the FERC under the
Federal Power Act (16 U.S.C. 791a through 825r) (or by a state
regulatory authority under comparable provisions of state law) does not
result in private business use.
(4) Exceptions to deliberate action rules--(i) Mandated wheeling.
Entering into a contract for the use of electric transmission or
distribution facilities is not treated as a deliberate action under
Sec. 1.141-2(d) if--
(A) The contract is entered into in response to (or in anticipation
of) an order by the United States under sections 211 and 212 of the
Federal Power Act (16 U.S.C. 824j and 824k) (or a state regulatory
authority under comparable provisions of state law); and
(B) The terms of the contract are bona fide and arm's-length, and
the consideration paid is consistent with the provisions of section
212(a) of the Federal Power Act.
(ii) Actions taken to implement non-discriminatory, open access. An
action is not treated as a deliberate action under Sec. 1.141-2(d) if it
is taken to implement the offering of non-discriminatory, open access
tariffs for the use of electric transmission or distribution facilities
in a manner consistent with rules promulgated by the FERC under sections
205 and 206 of the Federal Power Act (16 U.S.C. 824d and 824e) (or
comparable provisions of state law). This paragraph (g)(4)(ii) does not
apply, however, to the sale, exchange, or other disposition (within the
meaning of section 1001(a)) of transmission or distribution facilities
to a nongovernmental person.
(iii) Application of reasonable expectations test to certain current
refunding bonds. An action taken or to be taken with respect to electric
transmission or distribution facilities refinanced by an issue is not
taken into account under the reasonable expectations test of Sec. 1.141-
2(d) if--
(A) The action is described in paragraph (g)(4)(i) or (ii) of this
section;
(B) The bonds of the issue are current refunding bonds that refund
bonds originally issued before February 23, 1998; and
(C) The weighted average maturity of the refunding bonds is not
greater than the remaining weighted average maturity of the prior bonds.
(5) Additional transactions as permitted by the Commissioner. The
Commissioner may, by published guidance, set forth additional
circumstances in which the use of electric output facilities in a
restructured electric industry does not constitute private business use.
(h) Allocations of output facilities and systems--(1) Facts and
circumstances analysis. Whether output sold under an output contract is
allocated to a particular facility (for example, a generating unit), to
the entire system of the seller of that output (net of any uses of that
system output allocated to a particular facility), or to a portion of a
facility is based on all the facts and circumstances. Significant
factors to be considered in determining the allocation of an output
contract to financed property are the following:
(i) The extent to which it is physically possible to deliver output
to or from a particular facility or system.
(ii) The terms of a contract relating to the delivery of output
(such as delivery limitations and options or obligations to deliver
power from additional sources).
(iii) Whether a contract is entered into as part of a common plan of
financing for a facility.
(iv) The method of pricing output under the contract, such as the
use of market rates rather than rates designed to pay debt service of
tax-exempt bonds used to finance a particular facility.
(2) Illustrations. The following illustrate the factors set forth in
paragraph (h)(1) of this section:
(i) Physical possibility. Output from a generating unit that is fed
directly into a low voltage distribution system of the owner of that
unit and that cannot physically leave that distribution system generally
must be allocated to
[[Page 634]]
those receiving electricity through that distribution system. Output may
be allocated without regard to physical limitations, however, if
exchange or similar agreements provide output to a purchaser where, but
for the exchange agreements, it would not be possible for the seller to
provide output to that purchaser.
(ii) Contract terms relating to performance. A contract to provide a
specified amount of electricity from a system, but only when at least
that amount of electricity is being generated by a particular unit, is
allocated to that unit. For example, a contract to buy 20 MW of system
power with a right to take up to 40 percent of the actual output of a
specific 50 MW facility whenever total system output is insufficient to
meet all of the seller's obligations generally is allocated to the
specific facility rather than to the system.
(iii) Common plan of financing. A contract entered into as part of a
common plan of financing for a facility generally is allocated to the
facility if debt service for the issue of bonds is reasonably expected
to be paid, directly or indirectly, from payments under the contract.
(iv) Pricing method. Pricing based on the capital and generating
costs of a particular turbine tends to indicate that output under the
contract is properly allocated to that turbine.
(3) Transmission and distribution contracts. Whether use under an
output contract for transmission or distribution is allocated to a
particular facility or to a transmission or distribution network is
based on all the facts and circumstances, in a manner similar to
paragraphs (h)(1) and (2) of this section. In general, the method used
to determine payments under a contract is a more significant contract
term for this purpose than nominal contract path. In general, if
reasonable and consistently applied, the determination of use of
transmission or distribution facilities under an output contract may be
based on a method used by third parties, such as reliability councils.
(4) Allocation of payments. Payments for output provided by an
output facility financed with two or more sources of funding are
generally allocated under the rules in Sec. 1.141-4(c).
(i) Examples. The following examples illustrate the application of
this section:
Example 1. Joint ownership. Z, an investor-owned electric utility,
and City H agree to construct an electric generating facility of a size
sufficient to take advantage of the economies of scale. H will issue $50
million of its 24-year bonds, and Z will use $100 million of its funds
for construction of a facility they will jointly own as tenants in
common. Each of the participants will share in the ownership, output,
and operating expenses of the facility in proportion to its contribution
to the cost of the facility, that is, one-third by H and two-thirds by
Z. H's bonds will be secured by H's ownership interest in the facility
and by revenues to be derived from its share of the annual output of the
facility. H will need only 50 percent of its share of the annual output
of the facility during the first 20 years of operations. It agrees to
sell 10 percent of its share of the annual output to Z for a period of
20 years pursuant to a contract under which Z agrees to take that power
if available. The facility will begin operation, and Z will begin to
receive power, 4 years after the H bonds are issued. The measurement
period for the property financed by the issue is 20 years. H also will
sell the remaining 40 percent of its share of the annual output to
numerous other private utilities under contracts of three years or less
that satisfy the exception under paragraph (f)(3) of this section. No
other contracts will be executed obligating any person to purchase any
specified amount of the power for any specified period of time. No
person (other than Z) will make payments that will result in a transfer
of the burdens of paying debt service on bonds used directly or
indirectly to provide H's share of the facilities. The bonds are not
private activity bonds, because H's one-third interest in the facility
is not treated as used by the other owners of the facility. Although 10
percent of H's share of the annual output of the facility will be used
in the trade or business of Z, a nongovernmental person, under this
section, that portion constitutes not more than 10 percent of the
available output of H's ownership interest in the facility.
Example 2. Wholesale requirements contract. (i) City J issues 20-
year bonds to acquire an electric generating facility having a
reasonably expected economic life substantially greater than 20 years
and a nameplate capacity of 100 MW. The available output of the facility
under paragraph (b)(1) of this section is approximately 17,520,000 MWh
(100 MW x 24 hours x 365 days x 20 years). On the issue date, J enters
into a contract with T, an investor-owned utility, to provide T with all
of its power requirements for a period of 10
[[Page 635]]
years, commencing on the issue date. J reasonably expects that T will
actually purchase an average of 30 MW over the 10-year period. The
contract is taken into account under the private business tests pursuant
to paragraph (c)(3) of this section because the term of the contract is
substantial relative to the term of the issue and the amount of output
to be purchased is a substantial portion of the available output.
(ii) Under paragraph (d) of this section, the amount of reasonably
expected private business use under this contract is approximately 15
percent (30 MW x 24 hours x 365 days x 10 years, or 2,628,000 MWh) of
the available output. Accordingly, the issue meets the private business
use test. J reasonably expects that the amount to be paid for an average
of 30 MW of power (less the operation and maintenance costs directly
attributable to generating that 30 MW of power), will be more than 10
percent of debt service on the issue on a present-value basis.
Accordingly, the issue meets the private security or payment test
because J reasonably expects that payment of more than 10 percent of the
debt service will be indirectly derived from payments by T. The bonds
are private activity bonds under paragraph (c) of this section. Further,
if 15 percent of the sale proceeds of the issue is greater than $15
million and the issue meets the private security or payment test with
respect to the $15 million output limitation, the bonds are also private
activity bonds under section 141(b)(4). See Sec. 1.141-8.
Example 3. Retail contracts. (i) State Agency M, a political
subdivision, issues bonds in 2003 to finance the construction of a
generating facility that will be used to furnish electricity to M's
retail customers. In 2007, M enters into a 10-year contract with
industrial corporation I. Under the contract, M agrees to supply I with
all of its power requirements during the contract term, and I agrees to
pay for that power at a negotiated price as it is delivered. The
contract does not require I to pay for any power except to the extent I
has requirements. In addition, the contract requires I to pay reasonable
and customary liquidated damages in the event of a default by I, and
permits I to terminate the contract while it has requirements by paying
M a specified amount that is a reasonable and customary amount for
terminating the contract. Any damages or termination payment by I will
be reasonably related to I's obligation to buy requirements that is
discharged by the payment. Under paragraph (c)(3) of this section, the
contract does not meet the benefits and burdens test. Thus, it is not
taken into account under the private business tests.
(ii) The facts are the same as in paragraph (i) of this Example 3,
except that the contract requires I to make guaranteed minimum payments,
regardless of I's requirements, in an amount such that the contract does
not meet the exception for small purchases in paragraph (f)(1) of this
section. Under paragraph (c)(3)(ii) of this section, the contract meets
the benefits and burdens test because it obligates I to make payments
that are not contingent on its output requirements. Thus, it is taken
into account under the private business tests.
Example 4. Allocation of existing contracts to new facilities. Power
Authority K, a political subdivision created by the legislature in State
X to own and operate certain power generating facilities, sells all of
the power from its existing facilities to four private utility systems
under contracts executed in 1999, under which the four systems are
required to take or pay for specified portions of the total power output
until the year 2029. Existing facilities supply all of the present needs
of the four utility systems, but their future power requirements are
expected to increase substantially beyond the capacity of K's current
generating system. K issues 20-year bonds in 2004 to construct a large
generating facility. As part of the financing plan for the bonds, a
fifth private utility system contracts with K to take or pay for 15
percent of the available output of the new facility. The balance of the
output of the new facility will be available for sale as required, but
initially it is not anticipated that there will be any need for that
power. The revenues from the contract with the fifth private utility
system will be sufficient to pay less than 10 percent of the debt
service on the bonds (determined on a present value basis). The balance,
which will exceed 10 percent of the debt service on the bonds, will be
paid from revenues derived from the contracts with the four systems
initially from sale of power produced by the old facilities. The output
contracts with all the private utilities are allocated to K's entire
generating system. See paragraphs (h)(1) and (2) of this section. Thus,
the bonds meet the private business use test because more than 10
percent of the proceeds will be used in the trade or business of a
nongovernmental person. In addition, the bonds meet the private security
or payment test because payment of more than 10 percent of the debt
service, pursuant to underlying arrangements, will be derived from
payments in respect of property used for a private business use.
Example 5. Allocation to displaced resource. Municipal utility MU, a
political subdivision, purchases all of the electricity required to meet
the needs of its customers (1,000 MW) from B, an investor-owned utility
that operates its own electric generating facilities, under a 50-year
take or pay contract. MU does not anticipate that it will require
additional electric resources, and any new resources would produce
electricity at a higher cost to MU than its cost under its contract with
B. Nevertheless, B encourages MU to
[[Page 636]]
construct a new generating plant sufficient to meet MU's requirements.
MU issues obligations to construct facilities that will produce 1,000 MW
of electricity. MU, B, and I, another investor-owned utility, enter into
an agreement under which MU assigns to I its rights under MU's take or
pay contract with B. Under this arrangement, I will pay MU, and MU will
continue to pay B, for the 1,000 MW. I's payments to MU will at least
equal the amounts required to pay debt service on MU's bonds. In
addition, under paragraph (h)(1)(iii) of this section, the contract
among MU, B, and I is entered into as part of a common plan of financing
of the MU facilities. Under all the facts and circumstances, MU's
assignment to I of its rights under the original take or pay contract is
allocable to MU's new facilities under paragraph (h) of this section.
Because I is a nongovernmental person, MU's bonds are private activity
bonds.
Example 6. Operation of transmission facilities by regional
transmission organization. (i) Public Power Agency D is a political
subdivision that owns and operates electric generation, transmission and
distribution facilities. In 2003, D transfers operating control of its
transmission system to a regional transmission organization (RTO), a
nongovernmental person, pursuant to an operating agreement that is
approved by the FERC under sections 205 and 206 of the Federal Power
Act. D retains ownership of its facilities. No portion of the RTO's
compensation is based on a share of net profits from the operation of
D's facilities, and the RTO does not bear any risk of loss of those
facilities. Under paragraph (g)(1)(ii) of this section, the RTO's use of
D's facilities does not constitute a private business use.
(ii) Company A is located in D's service territory. In 2004, Power
Supplier E, a nongovernmental person, enters into a 10-year contract
with A to supply A's electricity requirements. The electricity supplied
by E to A will be transmitted over D's transmission and distribution
facilities. D's distribution facilities are available for use on a
nondiscriminatory, open access basis by buyers and sellers of
electricity in accordance with rates that are generally applicable and
uniformly applied within the meaning of Sec. 1.141-3(c)(2). D's
facilities are not financed for a principal purpose of providing the
facilities for use by E. Under paragraph (g)(2) of this section, the
contract between A and E does not result in private business use of D's
facilities.
Example 7. Certain actions not treated as deliberate actions. The
facts are the same as in Example 6 of this paragraph (i), except that
the RTO's compensation is based on a share of net profits from operating
D's facilities. In addition, D had issued bonds in 1994 to finance
improvements to its transmission system. At the time D transfers
operating control of its transmission system to the RTO, D chooses to
apply the private activity bond regulations of Secs. 1.141-1 through
1.141-15 to the 1994 bonds. The operation of D's facilities by the RTO
results in private business use under Sec. 1.141-3 and paragraph
(g)(1)(i) of this section. Under the special exception in paragraph
(g)(4)(ii) of this section, however, the transfer of control is not
treated as a deliberate action. Accordingly, the transfer of control
does not cause the 1994 bonds to meet the private activity bond tests.
Example 8. Current refunding. The facts are the same as in Example 7
of this paragraph (i), and in addition D issues bonds in 2004 to
currently refund the 1994 bonds. The weighted average maturity of the
2004 bonds is not greater than the remaining weighted average maturity
of the 1994 bonds. D chooses to apply the private activity bond
regulations of Secs. 1.141-1 through 1.141-15 to the refunding bonds. In
general, reasonable expectations must be separately tested on the date
that refunding bonds are issued under Sec. 1.141-2(d). Under the special
exception in paragraph (g)(4)(iii) of this section, however, the
transfer of the financed facilities to the RTO need not be taken into
account in applying the reasonable expectations test to the refunding
bonds.
[T.D. 9016, 67 FR 59759, Sept. 23, 2002; 67 FR 70845, Nov. 27, 2002]
Sec. 1.141-8 $15 million limitation for output facilities.
(a) In general--(1) General rule. Section 141(b)(4) provides a
special private activity bond limitation (the $15 million output
limitation) for issues 5 percent or more of the proceeds of which are to
be used to finance output facilities (other than a facility for the
furnishing of water). Under this rule, an issue consists of private
activity bonds under the private business tests of section 141(b)(1) and
(2) if the nonqualified amount with respect to output facilities
financed by the proceeds of the issue exceeds $15 million. The $15
million output limitation applies in addition to the private business
tests of section 141(b)(1) and (2). Under section 141(b)(4) and
paragraph (a)(2) of this section, the $15 million output limitation is
reduced in certain cases. Specifically, an issue meets the test in
section 141(b)(4) if both of the following tests are met:
(i) More than $15 million of the proceeds of the issue to be used
with respect to an output facility are to be
[[Page 637]]
used for a private business use. Investment proceeds are disregarded for
this purpose if they are not allocated disproportionately to the private
business use portion of the issue.
(ii) The payment of the principal of, or the interest on, more than
$15 million of the sale proceeds of the portion of the issue used with
respect to an output facility is (under the terms of the issue or any
underlying arrangement) directly or indirectly--
(A) Secured by any interest in an output facility used or to be used
for a private business use (or payments in respect of such an output
facility); or
(B) To be derived from payments (whether or not to the issuer) in
respect of an output facility used or to be used for a private business
use.
(2) Reduction in $15 million output limitation for outstanding
issues--(i) General rule. In determining whether an issue 5 percent or
more of the proceeds of which are to be used with respect to an output
facility consists of private activity bonds under the $15 million output
limitation, the $15 million limitation on private business use and
private security or payments is applied by taking into account the
aggregate nonqualified amounts of any outstanding bonds of other issues
5 percent or more of the proceeds of which are or will be used with
respect to that output facility or any other output facility that is
part of the same project.
(ii) Bonds taken into account. For purposes of this paragraph
(a)(2), in applying the $15 million output limitation to an issue (the
later issue), a tax-exempt bond of another issue (the earlier issue) is
taken into account if--
(A) That bond is outstanding on the issue date of the later issue;
(B) That bond will not be redeemed within 90 days of the issue date
of the later issue in connection with the refunding of that bond by the
later issue; and
(C) 5 percent or more of the sale proceeds of the earlier issue
financed an output facility that is part of the same project as the
output facility that is financed by 5 percent or more of the sale
proceeds of the later issue.
(3) Benefits and burdens test applicable--(i) In general. In
applying the $15 million output limitation, the benefits and burdens
test of Sec. 1.141-7 applies, except that ``$15 million'' is applied in
place of ``10 percent'', or ``5 percent'' as appropriate.
(ii) Earlier issues for the project. If bonds of an earlier issue
are outstanding and must be taken into account under paragraph (a)(2) of
this section, the nonqualified amount for that earlier issue is
multiplied by a fraction, the numerator of which is the adjusted issue
price of the earlier issue as of the issue date of the later issue, and
the denominator of which is the issue price of the earlier issue. Pre-
issuance accrued interest as defined in Sec. 1.148-1(b) is disregarded
for this purpose.
(b) Definition of project--(1) General rule. For purposes of
paragraph (a)(2) of this section, project has the meaning provided in
this paragraph. Facilities that are functionally related and subordinate
to a project are treated as part of that same project. Facilities having
different purposes or serving different customer bases are not
ordinarily part of the same project. For example, the following are
generally not part of the same project--
(i) Generation, transmission and distribution facilities;
(ii) Separate facilities designed to serve wholesale customers and
retail customers; and
(iii) A peaking unit and a baseload unit (regardless of the location
of the units).
(2) Separate ownership. Except as otherwise provided in this
paragraph (b)(2), facilities that are not owned by the same person are
not part of the same project. If different governmental persons act in
concert to finance a project, however (for example as participants in a
joint powers authority), their interests are aggregated with respect to
that project to determine whether the $15 million output limitation is
met. In the case of undivided ownership interests in a single output
facility, property that is not owned by different persons is treated as
separate projects only if the separate interests are financed--
(i) With bonds of different issuers; and
(ii) Without a principal purpose of avoiding the limitation in this
section.
[[Page 638]]
(3) Generating property--(i) Property on same site. In the case of
generation and related facilities, project means property located at the
same site.
(ii) Special rule for generating units. Separate generating units
are not part of the same project if one unit is reasonably expected, on
the issue date of each issue that finances the units, to be placed in
service more than 3 years before the other. Common facilities or
property that will be functionally related to more than one generating
unit must be allocated on a reasonable basis. If a generating unit
already is constructed or is under construction (the first unit) and
bonds are to be issued to finance an additional generating unit (the
second unit), all costs for any common facilities paid or incurred
before the earlier of the issue date of bonds to finance the second unit
or the commencement of construction of the second unit are allocated to
the first unit. At the time that bonds are issued to finance the second
unit (or, if earlier, upon commencement of construction of that unit),
any remaining costs of the common facilities may be allocated between
the first and second units so that in the aggregate the allocation is
reasonable.
(4) Transmission and distribution. In the case of transmission or
distribution facilities, project means functionally related or
contiguous property. Separate transmission or distribution facilities
are not part of the same project if one facility is reasonably expected,
on the issue date of each issue that finances the facilities, to be
placed in service more than 2 years before the other.
(5) Subsequent improvements--(i) In general. An improvement to
generation, transmission or distribution facilities that is not part of
the original design of those facilities (the original project) is not
part of the same project as the original project if the construction,
reconstruction, or acquisition of that improvement commences more than 3
years after the original project was placed in service and the bonds
issued to finance that improvement are issued more than 3 years after
the original project was placed in service.
(ii) Special rule for transmission and distribution facilities. An
improvement to transmission or distribution facilities that is not part
of the original design of that property is not part of the same project
as the original project if the issuer did not reasonably expect the need
to make that improvement when it commenced construction of the original
project and the construction, reconstruction, or acquisition of that
improvement is mandated by the federal government or a state regulatory
authority to accommodate requests for wheeling.
(6) Replacement property. For purposes of this section, property
that replaces existing property of an output facility is treated as part
of the same project as the replaced property unless--
(i) The need to replace the property was not reasonably expected on
the issue date or the need to replace the property occurred more than 3
years before the issuer reasonably expected (determined on the issue
date of the bonds financing the property) that it would need to replace
the property; and
(ii) The bonds that finance (and refinance) the output facility have
a weighted average maturity that is not greater than 120 percent of the
reasonably expected economic life of the facility.
(c) Example. The application of the provisions of this section is
illustrated by the following example:
Example. (i) Power Authority K, a political subdivision, intends to
issue a single issue of tax-exempt bonds at par with a stated principal
amount and sale proceeds of $500 million to finance the acquisition of
an electric generating facility. No portion of the facility will be used
for a private business use, except that L, an investor-owned utility,
will purchase 10 percent of the output of the facility under a take
contract and will pay 10 percent of the debt service on the bonds. The
nonqualified amount with respect to the bonds is $50 million.
(ii) The maximum amount of tax-exempt bonds that may be issued for
the acquisition of an interest in the facility in paragraph (i) of this
Example is $465 million (that is, $450 million for the 90 percent of the
facility that is governmentally owned and used plus a nonqualified
amount of $15 million).
[T.D. 9016, 67 FR 59763, Sept. 23, 2002]
[[Page 639]]
Sec. 1.141-9 Unrelated or disproportionate use test.
(a) General rules--(1) Description of test. Under section 141(b)(3)
(the unrelated or disproportionate use test), an issue meets the private
business tests if the amount of private business use and private
security or payments attributable to unrelated or disproportionate
private business use exceeds 5 percent of the proceeds of the issue. For
this purpose, the private business use test is applied by taking into
account only use that is not related to any government use of proceeds
of the issue (unrelated use) and use that is related but
disproportionate to any government use of those proceeds
(disproportionate use).
(2) Application of unrelated or disproportionate use test--(i) Order
of application. The unrelated or disproportionate use test is applied by
first determining whether a private business use is related to a
government use. Next, private business use that relates to a government
use is examined to determine whether it is disproportionate to that
government use.
(ii) Aggregation of unrelated and disproportionate use. All the
unrelated use and disproportionate use financed with the proceeds of an
issue are aggregated to determine compliance with the unrelated or
disproportionate use test. The amount of permissible unrelated and
disproportionate private business use is not reduced by the amount of
private business use financed with the proceeds of an issue that is
neither unrelated use nor disproportionate use.
(iii) Deliberate actions. A deliberate action that occurs after the
issue date does not result in unrelated or disproportionate use if the
issue meets the conditions of Sec. 1.141-12(a).
(b) Unrelated use--(1) In general. Whether a private business use is
related to a government use financed with the proceeds of an issue is
determined on a case-by-case basis, emphasizing the operational
relationship between the government use and the private business use. In
general, a facility that is used for a related private business use must
be located within, or adjacent to, the governmentally used facility.
(2) Use for the same purpose as government use. Use of a facility by
a nongovernmental person for the same purpose as use by a governmental
person is not treated as unrelated use if the government use is not
insignificant. Similarly, a use of a facility in the same manner both
for private business use that is related use and private business use
that is unrelated use does not result in unrelated use if the related
use is not insignificant. For example, a privately owned pharmacy in a
governmentally owned hospital does not ordinarily result in unrelated
use solely because the pharmacy also serves individuals not using the
hospital. In addition, use of parking spaces in a garage by a
nongovernmental person is not treated as unrelated use if more than an
insignificant portion of the parking spaces are used for a government
use (or a private business use that is related to a government use),
even though the use by the nongovernmental person is not directly
related to that other use.
(c) Disproportionate use--(1) Definition of disproportionate use. A
private business use is disproportionate to a related government use
only to the extent that the amount of proceeds used for that private
business use exceeds the amount of proceeds used for the related
government use. For example, a private use of $100 of proceeds that is
related to a government use of $70 of proceeds results in $30 of
disproportionate use.
(2) Aggregation of related uses. If two or more private business
uses of the proceeds of an issue relate to a single government use of
those proceeds, those private business uses are aggregated to apply the
disproportionate use test.
(3) Allocation rule. If a private business use relates to more than
a single use of the proceeds of the issue (for example, two or more
government uses of the proceeds of the issue or a government use and a
private use), the amount of any disproportionate use may be determined
by--
(i) Reasonably allocating the proceeds used for the private business
use among the related uses;
[[Page 640]]
(ii) Aggregating government uses that are directly related to each
other; or
(iii) Allocating the private business use to the government use to
which it is primarily related.
(d) Maximum use taken into account. The determination of the amount
of unrelated use or disproportionate use of a facility is based on the
maximum amount of reasonably expected government use of a facility
during the measurement period. Thus, no unrelated use or
disproportionate use arises solely because a facility initially has
excess capacity that is to be used by a nongovernmental person if the
facility will be completely used by the issuer during the term of the
issue for more than an insignificant period.
(e) Examples. The following examples illustrate the application of
this section:
Example 1. School and remote cafeteria. County X issues bonds with
proceeds of $20 million and uses $18.1 million of the proceeds for
construction of a new school building and $1.9 million of the proceeds
for construction of a privately operated cafeteria in its administrative
office building, which is located at a remote site. The bonds are
secured, in part, by the cafeteria. The $1.9 million of proceeds is
unrelated to the government use (that is, school construction) financed
with the bonds and exceeds 5 percent of $20 million. Thus, the issue
meets the private business tests.
Example 2. Public safety building and courthouse. City Y issues
bonds with proceeds of $50 million for construction of a new public
safety building ($32 million) and for improvements to an existing
courthouse ($15 million). Y uses $3 million of the bond proceeds for
renovations to an existing privately operated cafeteria located in the
courthouse. The bonds are secured, in part, by the cafeteria. Y's use of
the $3 million for the privately operated cafeteria does not meet the
unrelated or disproportionate use test because these expenditures are
neither unrelated use nor disproportionate use.
Example 3. Unrelated garage. City Y issues bonds with proceeds of
$50 million for construction of a new public safety building ($30.5
million) and for improvements to an existing courthouse ($15 million). Y
uses $3 million of the bond proceeds for renovations to an existing
privately operated cafeteria located in the courthouse. The bonds are
secured, in part, by the cafeteria. Y also uses $1.5 million of the
proceeds to construct a privately operated parking garage adjacent to a
private office building. The private business use of the parking garage
is unrelated to any government use of proceeds of the issue. Since the
proceeds used for unrelated uses and disproportionate uses do not exceed
5 percent of the proceeds, the unrelated or disproportionate use test is
not met.
Example 4. Disproportionate use of garage. County Z issues bonds
with proceeds of $20 million for construction of a hospital with no
private business use ($17 million); renovation of an office building
with no private business use ($1 million); and construction of a garage
that is entirely used for a private business use ($2 million). The use
of the garage is related to the use of the office building but not to
the use of the hospital. The private business use of the garage results
in $1 million of disproportionate use because the proceeds used for the
garage ($2 million) exceed the proceeds used for the related government
use ($1 million). The bonds are not private activity bonds, however,
because the disproportionate use does not exceed 5 percent of the
proceeds of the issue.
Example 5. Bonds for multiple projects. (i) County W issues bonds
with proceeds of $80 million for the following purposes: (1) $72 million
to construct a County-owned and operated waste incinerator; (2) $1
million for a County-owned and operated facility for the temporary
storage of hazardous waste prior to final disposal; (3) $1 million to
construct a privately owned recycling facility located at a remote site;
and (4) $6 million to build a garage adjacent to the County-owned
incinerator that will be leased to Company T to store and repair trucks
that it owns and uses to haul County W refuse. Company T uses 75 percent
of its trucks to haul materials to the incinerator and the remaining 25
percent of its trucks to haul materials to the temporary storage
facility.
(ii) The $1 million of proceeds used for the recycling facility is
used for an unrelated use. The garage is related use. In addition, 75
percent of the use of the $6 million of proceeds used for the garage is
allocable to the government use of proceeds at the incinerator. The
remaining 25 percent of the proceeds used for the garage ($1.5 million)
relates to the government use of proceeds at the temporary storage
facility. Thus, this portion of the proceeds used for the garage exceeds
the proceeds used for the temporary storage facility by $0.5 million and
this excess is disproportionate use (but not unrelated use). Thus, the
aggregate amount of unrelated use and disproportionate use financed with
the proceeds of the issue is $1.5 million. Alternatively, under
paragraph (c)(3)(iii) of this section, the entire garage may be treated
as related to the government use of the incinerator and, under that
allocation, the garage is not disproportionate use. In either event,
section 141(b)(3) limits the aggregate unrelated use and
disproportionate use to $4 million. Therefore, the
[[Page 641]]
bonds are not private activity bonds under this section.
[T.D. 8712, 62 FR 2297, Jan. 16, 1997]
Sec. 1.141-10 Coordination with volume cap. [Reserved]
Sec. 1.141-11 Acquisition of nongovernmental output property. [Reserved]
Sec. 1.141-12 Remedial actions.
(a) Conditions to taking remedial action. An action that causes an
issue to meet the private business tests or the private loan financing
test is not treated as a deliberate action if the issuer takes a
remedial action described in paragraph (d), (e), or (f) of this section
with respect to the nonqualified bonds and if all of the requirements in
paragraphs (a) (1) through (5) of this section are met.
(1) Reasonable expectations test met. The issuer reasonably expected
on the issue date that the issue would meet neither the private business
tests nor the private loan financing test for the entire term of the
bonds. For this purpose, if the issuer reasonably expected on the issue
date to take a deliberate action prior to the final maturity date of the
issue that would cause either the private business tests or the private
loan financing test to be met, the term of the bonds for this purpose
may be determined by taking into account a redemption provision if the
provisions of Sec. 1.141-2(d)(2)(ii) (A) through (C) are met.
(2) Maturity not unreasonably long. The term of the issue must not
be longer than is reasonably necessary for the governmental purposes of
the issue (within the meaning of Sec. 1.148-1(c)(4)). Thus, this
requirement is met if the weighted average maturity of the bonds of the
issue is not greater than 120 percent of the average reasonably expected
economic life of the property financed with the proceeds of the issue as
of the issue date.
(3) Fair market value consideration. Except as provided in paragraph
(f) of this section, the terms of any arrangement that results in
satisfaction of either the private business tests or the private loan
financing test are bona fide and arm's-length, and the new user pays
fair market value for the use of the financed property. Thus, for
example, fair market value may be determined in a manner that takes into
account restrictions on the use of the financed property that serve a
bona fide governmental purpose.
(4) Disposition proceeds treated as gross proceeds for arbitrage
purposes. The issuer must treat any disposition proceeds as gross
proceeds for purposes of section 148. For purposes of eligibility for
temporary periods under section 148(c) and exemptions from the
requirement of section 148(f) the issuer may treat the date of receipt
of the disposition proceeds as the issue date of the bonds and disregard
the receipt of disposition proceeds for exemptions based on expenditure
of proceeds under Sec. 1.148-7 that were met before the receipt of the
disposition proceeds.
(5) Proceeds expended on a governmental purpose. Except for a
remedial action under paragraph (d) of this section, the proceeds of the
issue that are affected by the deliberate action must have been expended
on a governmental purpose before the date of the deliberate action.
(b) Effect of a remedial action--(1) In general. The effect of a
remedial action is to cure use of proceeds that causes the private
business use test or the private loan financing test to be met. A
remedial action does not affect application of the private security or
payment test.
(2) Effect on bonds that have been advance refunded. If proceeds of
an issue were used to advance refund another bond, a remedial action
taken with respect to the refunding bond proportionately reduces the
amount of proceeds of the advance refunded bond that is taken into
account under the private business use test or the private loan
financing test.
(c) Disposition proceeds--(1) Definition. Disposition proceeds are
any amounts (including property, such as an agreement to provide
services) derived from the sale, exchange, or other disposition
(disposition) of property (other than investments) financed with the
proceeds of an issue.
(2) Allocating disposition proceeds to an issue. In general, if the
requirements of paragraph (a) of this section are met, after the date of
the disposition, the proceeds of the issue allocable to the
[[Page 642]]
transferred property are treated as financing the disposition proceeds
rather than the transferred property. If a disposition is made pursuant
to an installment sale, the proceeds of the issue continue to be
allocated to the transferred property. If an issue does not meet the
requirements for remedial action in paragraph (a) of this section or the
issuer does not take an appropriate remedial action, the proceeds of the
issue are allocable to either the transferred property or the
disposition proceeds, whichever allocation produces the greater amount
of private business use and private security or payments.
(3) Allocating disposition proceeds to different sources of funding.
If property has been financed by different sources of funding, for
purposes of this section, the disposition proceeds from that property
are first allocated to the outstanding bonds that financed that property
in proportion to the principal amounts of those outstanding bonds. In no
event may disposition proceeds be allocated to bonds that are no longer
outstanding or to a source of funding not derived from a borrowing (such
as revenues of the issuer) if the disposition proceeds are not greater
than the total principal amounts of the outstanding bonds that are
allocable to that property. For purposes of this paragraph (c)(3),
principal amount has the same meaning as in Sec. 1.148-9(b)(2) and
outstanding bonds do not include advance refunded bonds.
(d) Redemption or defeasance of nonqualified bonds--(1) In general.
The requirements of this paragraph (d) are met if all of the
nonqualified bonds of the issue are redeemed. Proceeds of tax-exempt
bonds must not be used for this purpose, unless the tax-exempt bonds are
qualified bonds, taking into account the purchaser's use of the
facility. If the bonds are not redeemed within 90 days of the date of
the deliberate action, a defeasance escrow must be established for those
bonds within 90 days of the deliberate action.
(2) Special rule for dispositions for cash. If the consideration for
the disposition of financed property is exclusively cash, the
requirements of this paragraph (d) are met if the disposition proceeds
are used to redeem a pro rata portion of the nonqualified bonds at the
earliest call date after the deliberate action. If the bonds are not
redeemed within 90 days of the date of the deliberate action, the
disposition proceeds must be used to establish a defeasance escrow for
those bonds within 90 days of the deliberate action.
(3) Notice of defeasance. The issuer must provide written notice to
the Commissioner of the establishment of the defeasance escrow within 90
days of the date the defeasance escrow is established.
(4) Special limitation. The establishment of a defeasance escrow
does not satisfy the requirements of this paragraph (d) if the period
between the issue date and the first call date of the bonds is more than
10 1/2 years.
(5) Defeasance escrow defined. A defeasance escrow is an irrevocable
escrow established to redeem bonds on their earliest call date in an
amount that, together with investment earnings, is sufficient to pay all
the principal of, and interest and call premium on, bonds from the date
the escrow is established to the earliest call date. The escrow may not
be invested in higher yielding investments or in any investment under
which the obligor is a user of the proceeds of the bonds.
(e) Alternative use of disposition proceeds--(1) In general. The
requirements of this paragraph (e) are met if--
(i) The deliberate action is a disposition for which the
consideration is exclusively cash;
(ii) The issuer reasonably expects to expend the disposition
proceeds within two years of the date of the deliberate action;
(iii) The disposition proceeds are treated as proceeds for purposes
of section 141 and are used in a manner that does not cause the issue to
meet either the private business tests or the private loan financing
test, and the issuer does not take any action subsequent to the date of
the deliberate action to cause either of these tests to be met; and
(iv) If the issuer does not use all of the disposition proceeds for
an alternative use described in paragraph (e)(1)(iii) of this section,
the issuer uses those remaining disposition proceeds for a remedial
action that meets paragraph (d) of this section.
[[Page 643]]
(2) Special rule for use by 501(c)(3) organizations. If the
disposition proceeds are to be used by a 501(c)(3) organization, the
nonqualified bonds must in addition be treated as reissued for purposes
of sections 141, 145, 147, 149, and 150 and, under this treatment,
satisfy all of the applicable requirements for qualified 501(c)(3)
bonds. Thus, beginning on the date of the deliberate action,
nonqualified bonds that satisfy these requirements must be treated as
qualified 501(c)(3) bonds for all purposes, including sections 145(b)
and 150(b).
(f) Alternative use of facility. The requirements of this paragraph
(f) are met if--
(1) The facility with respect to which the deliberate action occurs
is used in an alternative manner (for example, used for a qualifying
purpose by a nongovernmental person or used by a 501(c)(3) organization
rather than a governmental person);
(2) The nonqualified bonds are treated as reissued, as of the date
of the deliberate action, for purposes of sections 55 through 59 and
141, 142, 144, 145, 146, 147, 149 and 150, and under this treatment, the
nonqualified bonds satisfy all the applicable requirements for qualified
bonds throughout the remaining term of the nonqualified bonds;
(3) The deliberate action does not involve a disposition to a
purchaser that finances the acquisition with proceeds of another issue
of tax-exempt bonds; and
(4) Any disposition proceeds other than those arising from an
agreement to provide services (including disposition proceeds from an
installment sale) resulting from the deliberate action are used to pay
the debt service on the bonds on the next available payment date or,
within 90 days of receipt, are deposited into an escrow that is
restricted to the yield on the bonds to pay the debt service on the
bonds on the next available payment date.
(g) Rules for deemed reissuance. For purposes of determining whether
bonds that are treated as reissued under paragraphs (e) and (f) of this
section are qualified bonds--
(1) The provisions of the Code and regulations thereunder in effect
as of the date of the deliberate action apply; and
(2) For purposes of paragraph (f) of this section, section 147(d)
(relating to the acquisition of existing property) does not apply.
(h) Authority of Commissioner to provide for additional remedial
actions. The Commissioner may, by publication in the Federal Register or
the Internal Revenue Bulletin, provide additional remedial actions,
including making a remedial payment to the United States, under which a
subsequent action will not be treated as a deliberate action for
purposes of Sec. 1.141-2.
(i) Effect of remedial action on continuing compliance. Solely for
purposes of determining whether deliberate actions that are taken after
a remedial action cause an issue to meet the private business tests or
the private loan financing test--
(1) If a remedial action is taken under paragraph (d), (e), or (f)
of this section, the private business use or private loans resulting
from the deliberate action are not taken into account for purposes of
determining whether the bonds are private activity bonds; and
(2) After a remedial action is taken, the amount of disposition
proceeds is treated as equal to the proceeds of the issue that had been
allocable to the transferred property immediately prior to the
disposition. See paragraph (k) of this section, Example 5.
(j) Nonqualified bonds--(1) Amount of nonqualified bonds. The
percentage of outstanding bonds that are nonqualified bonds equals the
highest percentage of private business use in any 1-year period
commencing with the deliberate action.
(2) Allocation of nonqualified bonds. Allocations to nonqualified
bonds must be made on a pro rata basis, except that, for purposes of
paragraph (d) of this section (relating to redemption or defeasance), an
issuer may treat bonds with longer maturities (determined on a bond-by-
bond basis) as the nonqualified bonds.
(k) Examples. The following examples illustrate the application of
this section:
Example 1. Disposition proceeds less than outstanding bonds used to
retire bonds. On June 1,
[[Page 644]]
1997, City C issues 30-year bonds with an issue price of $10 million to
finance the construction of a hospital building. The bonds have a
weighted average maturity that does not exceed 120 percent of the
reasonably expected economic life of the building. On the issue date, C
reasonably expects that it will be the only user of the building for the
entire term of the bonds. Six years after the issue date, C sells the
building to Corporation P for $5 million. The sale price is the fair
market value of the building, as verified by an independent appraiser. C
uses all of the $5 million disposition proceeds to immediately retire a
pro rata portion of the bonds. The sale does not cause the bonds to be
private activity bonds because C has taken a remedial action described
in paragraph (d) of this section so that P is not treated as a private
business user of bond proceeds.
Example 2. Lease to nongovernmental person. The facts are the same
as in Example 1, except that instead of selling the building, C, 6 years
after the issue date, leases the building to P for 7 years and uses
other funds to redeem all of the $10 million outstanding bonds within 90
days of the deliberate act. The bonds are not treated as private
activity bonds because C has taken the remedial action described in
paragraph (d) of this section.
Example 3. Sale for less than fair market value. The facts are the
same as in Example 1, except that the fair market value of the building
at the time of the sale to P is $6 million. Because the transfer was for
less than fair market value, the bonds are ineligible for the remedial
actions under this section. The bonds are private activity bonds because
P is treated as a user of all of the proceeds and P makes a payment ($6
million) for this use that is greater than 10 percent of the debt
service on the bonds, on a present value basis.
Example 4. Fair market value determined taking into account
governmental restrictions. The facts are the same as in Example 1,
except that the building was used by C only for hospital purposes and C
determines to sell the building subject to a restriction that it be used
only for hospital purposes. After conducting a public bidding procedure
as required by state law, the best price that C is able to obtain for
the building subject to this restriction is $4.5 million from P. C uses
all of the $4.5 million disposition proceeds to immediately retire a pro
rata portion of the bonds. The sale does not cause the bonds to be
private activity bonds because C has taken a remedial action described
in paragraph (d) of this section so that P is not treated as a private
business user of bond proceeds.
Example 5. Alternative use of disposition proceeds. The facts are
the same as in Example 1, except that C reasonably expects on the date
of the deliberate action to use the $5 million disposition proceeds for
another governmental purpose (construction of governmentally owned
roads) within two years of receipt, rather than using the $5 million to
redeem outstanding bonds. C treats these disposition proceeds as gross
proceeds for purposes of section 148. The bonds are not private activity
bonds because C has taken a remedial action described in paragraph (e)
of this section. After the date of the deliberate action, the proceeds
of all of the outstanding bonds are treated as used for the construction
of the roads, even though only $5 million of disposition proceeds was
actually used for the roads.
Example 6. Alternative use of financed property. The facts are the
same as in Example 1, except that C determines to lease the hospital
building to Q, an organization described in section 501(c)(3), for a
term of 10 years rather than to sell the building to P. In order to
induce Q to provide hospital services, C agrees to lease payments that
are less than fair market value. Before entering into the lease, an
applicable elected representative of C approves the lease after a
noticed public hearing. As of the date of the deliberate action, the
issue meets all the requirements for qualified 501(c)(3) bonds, treating
the bonds as reissued on that date. For example, the issue meets the two
percent restriction on use of proceeds of finance issuance costs of
section 147(g) because the issue pays no costs of issuance from
disposition proceeds in connection with the deemed reissuance. C and Q
treat the bonds as qualified 501(c)(3) bonds for all purposes commencing
with the date of the deliberate action. The bonds are treated as
qualified 501(c)(3) bonds commencing with the date of the deliberate
action.
Example 7. Deliberate action before proceeds are expended on a
governmental purpose. County J issues bonds with proceeds of $10 million
that can be used only to finance a correctional facility. On the issue
date of the bonds, J reasonably expects that it will be the sole user of
the bonds for the useful life of the facility. The bonds have a weighted
average maturity that does not exceed 120 percent of the reasonably
expected economic life of the facility. After the issue date of the
bonds, but before the facility is placed in service, J enters into a
contract with the federal government pursuant to which the federal
government will make a fair market value, lump sum payment equal to 25
percent of the cost of the facility. In exchange for this payment, J
provides the federal government with priority rights to use of 25
percent of the facility. J uses the payment received from the federal
government to defease the nonqualified bonds. The agreement does not
cause the bonds to be private activity bonds because J has taken a
remedial action described in paragraph (d) of this section. See
paragraph (a)(5) of this section.
[[Page 645]]
Example 8. Compliance after remedial action. In 1997, City G issues
bonds with proceeds of $10 million to finance a courthouse. The bonds
have a weighted average maturity that does not exceed 120 percent of the
reasonably expected economic life of the courthouse. G uses $1 million
of the proceeds for a private business use and more than 10 percent of
the debt service on the issue is secured by private security or
payments. G later sells one-half of the courthouse property to a
nongovernmental person for cash. G immediately redeems 60 percent of the
outstanding bonds. This percentage of outstanding bonds is based on the
highest private business use of the courthouse in any 1-year period
commencing with the deliberate action. For purposes of subsequently
applying section 141 to the issue, G may continue to use all of the
proceeds of the outstanding bonds in the same manner (that is, for both
the courthouse and the existing private business use) without causing
the issue to meet the private business use test. The issue, however,
continues to meet the private security or payment test. The result would
be the same if D, instead of redeeming the bonds, established a
defeasance escrow for those bonds, provided that the requirement of
paragraph (d)(4) of this section was met.
[T.D. 8712, 62 FR 2298, Jan. 16, 1997]
Sec. 1.141-13 Refunding issues. [Reserved]
Sec. 1.141-14 Anti-abuse rules.
(a) Authority of Commissioner to reflect substance of transactions.
If an issuer enters into a transaction or series of transactions with
respect to one or more issues with a principal purpose of transferring
to nongovernmental persons (other than as members of the general public)
significant benefits of tax-exempt financing in a manner that is
inconsistent with the purposes of section 141, the Commissioner may take
any action to reflect the substance of the transaction or series of
transactions, including--
(1) Treating separate issues as a single issue for purposes of the
private activity bond tests;
(2) Reallocating proceeds to expenditures, property, use, or bonds;
(3) Reallocating payments to use or proceeds;
(4) Measuring private business use on a basis that reasonably
reflects the economic benefit in a manner different than as provided in
Sec. 1.141-3(g); and
(5) Measuring private payments or security on a basis that
reasonably reflects the economic substance in a manner different than as
provided in Sec. 1.141-4.
(b) Examples. The following examples illustrate the application of
this section:
Example 1. Reallocating proceeds to indirect use. City C issues
bonds with proceeds of $20 million for the stated purpose of financing
improvements to roads that it owns. As a part of the same plan of
financing, however, C also agrees to make a loan of $7 million to
Corporation M from its general revenues that it otherwise would have
used for the road improvements. The interest rate of the loan
corresponds to the interest rate on a portion of the issue. A principal
purpose of the financing arrangement is to transfer to M significant
benefits of the tax-exempt financing. Although C actually allocates all
of the proceeds of the bonds to the road improvements, the Commissioner
may reallocate a portion of the proceeds of the bonds to the loan to M
because a principal purpose of the financing arrangement is to transfer
to M significant benefits of tax-exempt financing in a manner that is
inconsistent with the purposes of section 141. The bonds are private
activity bonds because the issue meets the private loan financing test.
The bonds also meet the private business tests. See also Secs. 1.141-
3(a)(2), 1.141-4(a)(1), and 1.141-5(a), under which indirect use of
proceeds and payments are taken into account.
Example 2. Taking into account use of amounts derived from proceeds
that would be otherwise disregarded. County B issues bonds with proceeds
of $10 million to finance the purchase of land. On the issue date, B
reasonably expects that it will be the sole user of the land.
Subsequently, the federal government acquires the land for $3 million in
a condemnation action. B uses this amount to make a loan to Corporation
M. In addition, the interest rate on the loan reflects the tax-exempt
interest rate on the bonds and thus is substantially less than a current
market rate. A principal purpose of the arrangement is to transfer to M
significant benefits of the tax-exempt financing. Although the
condemnation action is not a deliberate action, the Commissioner may
treat the condemnation proceeds as proceeds of the issue because a
principal purpose of the arrangement is to transfer to M significant
benefits of tax-exempt financing in a manner inconsistent with the
purposes of section 141. The bonds are private activity bonds.
Example 3. Measuring private business use on an alternative basis.
City F issues bonds with a 30-year term to finance the acquisition of an
industrial building having a remaining reasonably expected useful
economic life of more than 30 years. On the issue date, F
[[Page 646]]
leases the building to Corporation G for 3 years. F reasonably expects
that it will be the sole user of the building for the remaining term of
the bonds. Because of the local market conditions, it is reasonably
expected that the fair rental value of the industrial building will be
significantly greater during the early years of the term of the bonds
than in the later years. The annual rental payments are significantly
less than fair market value, reflecting the interest rate on the bonds.
The present value of these rental payments (net of operation and
maintenance expenses) as of the issue date, however, is approximately 25
percent of the present value of debt service on the issue. Under
Sec. 1.141-3, the issue does not meet the private business tests,
because only 10 percent of the proceeds are used in a trade or business
by a nongovernmental person. A principal purpose of the issue is to
transfer to G significant benefits of tax-exempt financing in a manner
inconsistent with the purposes of section 141. The method of measuring
private business use over the reasonably expected useful economic life
of financed property is for the administrative convenience of issuers of
state and local bonds. In cases where this method is used in a manner
inconsistent with the purposes of section 141, the Commissioner may
measure private business use on another basis that reasonably reflects
economic benefit, such as in this case on an annual basis. If the
Commissioner measures private business use on an annual basis, the bonds
are private activity bonds because the private payment test is met and
more than 10 percent of the proceeds are used in a trade or business by
a nongovernmental person.
Example 4. Treating separate issues as a single issue. City D enters
into a development agreement with Corporation T to induce T to locate
its headquarters within D's city limits. Pursuant to the development
agreement, in 1997 D will issue $20 million of its general obligation
bonds (the 1997 bonds) to purchase land that it will grant to T. The
development agreement also provides that, in 1998, D will issue $20
million of its tax increment bonds (the 1998 bonds), secured solely by
the increase in property taxes in a special taxing district.
Substantially all of the property within the special taxing district is
owned by T or D. T will separately enter into an agreement to guarantee
the payment of tax increment to D in an amount sufficient to retire the
1998 bonds. The proceeds of the 1998 bonds will be used to finance
improvements owned and operated by D that will not give rise to private
business use. Treated separately, the 1997 issue meets the private
business use test, but not the private security or payment test; the
1998 issue meets the private security or payment test, but not the
private business use test. A principal purpose of the financing plan,
including the two issues, is to transfer significant benefits of tax-
exempt financing to T for its headquarters. Thus, the 1997 issue and the
1998 issue may be treated by the Commissioner as a single issue for
purposes of applying the private activity bond tests. Accordingly, the
bonds of both the 1997 issue and the 1998 issue may be treated as
private activity bonds.
Example 5. Reallocating proceeds. City E acquires an electric
generating facility with a useful economic life of more than 40 years
and enters into a 30-year take or pay contract to sell 30 percent of the
available output to investor-owned utility M. E plans to use the
remaining 70 percent of available output for its own governmental
purposes. To finance the entire cost of the facility, E issues $30
million of its series A taxable bonds at taxable interest rates and $70
million series B bonds, which purport to be tax-exempt bonds, at tax-
exempt interest rates. E allocates all of M's private business use to
the proceeds of the series A bonds and all of its own government use to
the proceeds of the series B bonds. The series A bonds have a weighted
average maturity of 15 years, while the series B bonds have a weighted
average maturity of 26 years. M's payments under the take or pay
contract are expressly determined by reference to 30 percent of M's
total costs (that is, the sum of the debt service required to be paid on
both the series A and the series B bonds and all other operating costs).
The allocation of all of M's private business use to the series A bonds
does not reflect economic substance because the series of transactions
transfers to M significant benefits of the tax-exempt interest rates
paid on the series B bonds. A principal purpose of the financing
arrangement is to transfer to M significant benefits of the tax-exempt
financing. Accordingly, the Commissioner may allocate M's private
business use on a pro rata basis to both the series B bonds as well as
the series A bonds, in which case the series B bonds are private
activity bonds.
Example 6. Allocations respected. The facts are the same as in
Example 5, except that the debt service component of M's payments under
the take or pay contract is based exclusively on the amounts necessary
to pay the debt service on the taxable series A bonds. E's allocation of
all of M's private business use to the series A bonds is respected
because the series of transactions does not actually transfer benefits
of tax-exempt interest rates to M. Accordingly, the series B bonds are
not private activity bonds. The result would be the same if M's payments
under the take or pay contract were based exclusively on fair market
value pricing, rather than the tax-exempt interest rates on E's bonds.
The result also would be the same if the series A bonds and the series B
bonds had substantially equivalent weighted average maturities and E and
M had entered into a customary contract providing for payments based on
a ratable share of
[[Page 647]]
total debt service. E would not be treated by the Commissioner in any of
these cases as entering into the contract with a principal purpose of
transferring the benefits of tax-exempt financing to M in a manner
inconsistent with the purposes of section 141.
[T.D. 8712, 62 FR 2301, Jan. 16, 1997]
Sec. 1.141-15 Effective dates.
(a) Scope. The effective dates of this section apply for purposes of
Secs. 1.141-1 through 1.141-6(a), 1.141-7 through 1.141-14, 1.145-1
through 1.145-2, 1.150-1(a)(3) and the definition of bond documents
contained in Sec. 1.150-1(b).
(b) Effective dates--(1) In general. Except as otherwise provided in
this section, Secs. 1.141-1 through 1.141-6(a), 1.141-9 through 1.141-
14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the definition of bond
documents contained in Sec. 1.150-1(b) apply to bonds issued on or after
May 16, 1997, that are subject to section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602).
(2) Certain short-term arrangements. The provisions of Sec. 1.141-3
that refer to arrangements for 200 days, 100 days, or 50 days apply to
any bond sold on or after November 20, 2001 and may be applied to any
bond outstanding on November 20, 2001 to which Sec. 1.141-3 applies.
(c) Refunding bonds. Sections 1.141-1 through 1.141-6(a), 1.141-9
through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the
definition of bond documents contained in Sec. 1.150-1(b) do not apply
to any bonds issued on or after May 16, 1997, to refund a bond to which
those sections do not apply unless--
(1) The refunding bonds are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of the refunding bonds is
longer than--
(A) The weighted average maturity of the refunded bonds; or
(B) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a bond
anticipation note), 120 percent of the weighted average reasonably
expected economic life of the facilities financed; or
(ii) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans.
(d) Permissive application of regulations. Except as provided in
paragraph (e) of this section, Secs. 1.141-1 through 1.141-6(a), 1.141-9
through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the
definition of bond documents contained in Sec. 1.150-1(b) may be applied
in whole, but not in part, to actions taken before February 23, 1998,
with respect to--
(1) Bonds that are outstanding on May 16, 1997, and subject to
section 141; or
(2) Refunding bonds issued on or after May 16, 1997 that are subject
to section 141.
(e) Permissive application of certain sections. The following
sections may each be applied to any bonds--
(1) Section 1.141-3(b)(4);
(2) Section 1.141-3(b)(6); and
(3) Section 1.141-12.
(f) Effective dates for certain regulations relating to output
facilities--(1) General rule. Except as otherwise provided in this
section, Secs. 1.141-7 and 1.141-8 apply to bonds sold on or after
November 22, 2002, that are subject to section 1301 of the Tax Reform
Act of 1986 (100 Stat. 2602).
(2) Transition rule for requirements contracts. For bonds otherwise
subject to Secs. 1.141-7 and 1.141-8, Sec. 1.141-7(c)(3) applies to
output contracts entered into on or after September 19, 2002. An output
contract is treated as entered into on or after that date if it is
amended on or after that date, but only if the amendment results in a
change in the parties to the contract or increases the amount of
requirements covered by the contract by reason of an extension of the
contract term or a change in the method for determining such
requirements. For purposes of this paragraph (f)(2)--
(i) The extension of the term of a contract causes the contract to
be treated as entered into on the first day of the additional term;
(ii) The exercise by a party of a legally enforceable right that was
provided under a contract before September 19, 2002, on terms that were
fixed and determinable before such date, is not treated as an amendment
of the contract. For example, the exercise by a purchaser after
September 19, 2002 of a renewal option that was provided under a
contract before that date, on terms identical to the original
[[Page 648]]
contract, is not treated as an amendment of the contract; and
(iii) An amendment that increases the amount of requirements covered
by the contract by reason of a change in the method for determining such
requirements is treated as a separate contract that is entered into as
of the effective date of the amendment, but only with respect to the
increased output to be provided under the contract.
(g) Refunding bonds for output facilities. Except as otherwise
provided in paragraph (h) or (i) of this section, Secs. 1.141-7 and
1.141-8 do not apply to any bonds sold on or after November 22, 2002, to
refund a bond to which Secs. 1.141-7 and 1.141-8 do not apply unless--
(1) The refunding bonds are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of the refunding bonds is
longer than--
(A) The weighted average maturity of the refunded bonds; or
(B) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a bond
anticipation note), 120 percent of the weighted average reasonably
expected economic life of the facilities financed; or
(ii) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans.
(h) Permissive retroactive application. Except as provided in
paragraphs (d), (e) or (i) of this section, Secs. 1.141-1 through 1.141-
6(a), 1.141-7 through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3)
and the definition of bond documents contained in Sec. 1.150-1(b) may be
applied by issuers in whole, but not in part, to--
(1) Outstanding bonds that are sold before November 22, 2002, and
subject to section 141; or
(2) Refunding bonds that are sold on or after November 22, 2002, and
subject to section 141.
(i) Permissive application of certain regulations relating to output
facilities. Issuers may apply Secs. 1.141-7(f)(3) and 1.141-7(g) to any
bonds.
[T.D. 8757, 63 FR 3265, Jan. 22, 1998, as amended by T.D. 8941, 66 FR
4670, Jan. 18, 2001; T.D. 8967, 66 FR 58062, Nov. 20, 2001; T.D. 9016,
67 FR 59765, Sept. 23, 2002]
Sec. 1.141-16 Effective dates for qualified private activity bond provisions.
(a) Scope. The effective dates of this section apply for purposes of
Secs. 1.142-0 through 1.142-2, 1.144-0 through 1.144-2, 1.147-0 through
1.147-2, and 1.150-4.
(b) Effective dates. Except as otherwise provided in this section,
the regulations designated in paragraph (a) of this section apply to
bonds issued on or after May 16, 1997 (the effective date).
(c) Permissive application. The regulations designated in paragraph
(a) of this section may be applied in whole, but not in part, to bonds
outstanding on the effective date.
[T.D. 8712, 62 FR 2302, Jan. 16, 1997]
Sec. 1.142-0 Table of contents.
This section lists the captioned paragraphs contained in
Secs. 1.142-1 through 1.142-3.
Sec. 1.142-1 Exempt facility bonds.
(a) Overview.
(b) Scope.
(c) Effective dates.
Sec. 1.142-2 Remedial actions.
(a) General rule.
(b) Reasonable expectations requirement.
(c) Redemption or defeasance.
(1) In general.
(2) Notice of defeasance.
(3) Special limitation.
(4) Special rule for dispositions of personal property.
(5) Definitions.
(d) When a failure to properly use proceeds occurs.
(1) Proceeds not spent.
(2) Proceeds spent.
(e) Nonqualified bonds.
Sec. 1.142-3 Refunding issues. [Reserved]
[T.D. 8712, 62 FR 2302, Jan. 16, 1997]
Sec. 1.142-1 Exempt facility bonds.
(a) Overview. Interest on a private activity bond is not excludable
from gross income under section 103(a) unless the bond is a qualified
bond. Under section 141(e)(1)(A), an exempt facility bond issued under
section 142 may be a qualified bond.
Under section 142(a), an exempt facility bond is any bond issued as
a part of an issue using 95 percent or more of the proceeds for certain
exempt facilities.
(b) Scope. Sections 1.142-0 through 1.142-3 apply for purposes of
the rules for exempt facility bonds under section 142, except that, with
respect to net
[[Page 649]]
proceeds that have been spent, Sec. 1.142-2 does not apply to bonds
issued under section 142(d) (relating to bonds issued to provide
qualified residential rental projects) and section 142(f) (2) and (4)
(relating to bonds issued to provide local furnishing of electric energy
or gas).
(c) Effective dates. For effective dates of Secs. 1.142-0 through
1.142-2, see Sec. 1.141-16.
[T.D. 8712, 62 FR 2302, Jan. 16, 1997]
Sec. 1.142-2 Remedial actions.
(a) General rule. If less than 95 percent of the net proceeds of an
exempt facility bond are actually used to provide an exempt facility,
and for no other purpose, the issue will be treated as meeting the use
of proceeds requirement of section 142(a) if the issue meets the
condition of paragraph (b) of this section and the issuer takes the
remedial action described in paragraph (c) of this section.
(b) Reasonable expectations requirement. The issuer must have
reasonably expected on the issue date that 95 percent of the net
proceeds of the issue would be used to provide an exempt facility and
for no other purpose for the entire term of the bonds (disregarding any
redemption provisions). To meet this condition the amount of the issue
must have been based on reasonable estimates about the cost of the
facility.
(c) Redemption or defeasance--(1) In general. The requirements of
this paragraph (c) are met if all of the nonqualified bonds of the issue
are redeemed on the earliest call date after the date on which the
failure to properly use the proceeds occurs under paragraph (d) of this
section. Proceeds of tax-exempt bonds (other than those described in
paragraph (d)(1) of this section) must not be used for this purpose. If
the bonds are not redeemed within 90 days of the date on which the
failure to properly use proceeds occurs, a defeasance escrow must be
established for those bonds within 90 days of that date.
(2) Notice of defeasance. The issuer must provide written notice to
the Commissioner of the establishment of the defeasance escrow within 90
days of the date the escrow is established.
(3) Special limitation. The establishment of a defeasance escrow
does not satisfy the requirements of this paragraph (c) if the period
between the issue date and the first call date is more than 10\1/2\
years.
(4) Special rule for dispositions of personal property. For
dispositions of personal property exclusively for cash, the requirements
of this paragraph (c) are met if the issuer expends the disposition
proceeds within 6 months of the date of the disposition to acquire
replacement property for the same qualifying purpose of the issue under
section 142.
(5) Definitions. For purposes of paragraph (c)(4) of this section,
disposition proceeds means disposition proceeds as defined in
Sec. 1.141-12(c).
(d) When a failure to properly use proceeds occurs--(1) Proceeds not
spent. For net proceeds that are not spent, a failure to properly use
proceeds occurs on the earlier of the date on which the issuer
reasonably determines that the financed facility will not be completed
or the date on which the financed facility is placed in service.
(2) Proceeds spent. For net proceeds that are spent, a failure to
properly use proceeds occurs on the date on which an action is taken
that causes the bonds not to be used for the qualifying purpose for
which the bonds were issued.
(e) Nonqualified bonds. For purposes of this section, the
nonqualified bonds are a portion of the outstanding bonds in an amount
that, if the remaining bonds were issued on the date on which the
failure to properly use the proceeds occurs, at least 95 percent of the
net proceeds of the remaining bonds would be used to provide an exempt
facility. If no proceeds have been spent to provide an exempt facility,
all of the outstanding bonds are nonqualified bonds. The nonqualified
bonds must be determined on a pro rata allocation basis, except that an
issuer may treat bonds with longer maturities (determined on a bond-by-
bond basis) as the nonqualified bonds.
[T.D. 8712, 62 FR 2302, Jan. 16, 1997]
[[Page 650]]
Sec. 1.142-3 Refunding Issues. [Reserved]
Sec. 1.142-4 Use of proceeds to provide a facility.
(a) In general. [Reserved]
(b) Reimbursement allocations. If an expenditure for a facility is
paid before the issue date of the bonds to provide that facility, the
facility is described in section 142(a) only if the expenditure meets
the requirements of Sec. 1.150-2 (relating to reimbursement
allocations). For purposes of this paragraph (b), if the proceeds of an
issue are used to pay principal of or interest on an obligation other
than a State or local bond (for example, temporary construction
financing of the conduit borrower), that issue is not a refunding issue,
and, thus, Sec. 1.150-2(g) does not apply.
(c) Limitation on use of facilities by substantial users--(1) In
general. If the original use of a facility begins before the issue date
of the bonds to provide the facility, the facility is not described in
section 142(a) if any person that was a substantial user of the facility
at any time during the 5-year period before the issue date or any
related person to that user receives (directly or indirectly) 5 percent
or more of the proceeds of the issue for the user's interest in the
facility and is a substantial user of the facility at any time during
the 5-year period after the issue date, unless--
(i) An official intent for the facility is adopted under Sec. 1.150-
2 within 60 days after the date on which acquisition, construction, or
reconstruction of that facility commenced; and
(ii) For an acquisition, no person that is a substantial user or
related person after the acquisition date was also a substantial user
more than 60 days before the date on which the official intent was
adopted.
(2) Definitions. For purposes of paragraph (c)(1) of this section,
substantial user has the meaning used in section 147(a)(1), related
person has the meaning used in section 144(a)(3), and a user that is a
governmental unit within the meaning of Sec. 1.103-1 is disregarded.
(d) Effective date--(1) In general. This section applies to bonds
sold on or after July 8, 1997. See Sec. 1.103-8(a)(5) for rules
applicable to bonds sold before that date.
(2) Elective retroactive application. An issuer may apply this
section to any bond sold before July 8, 1997.
[T.D. 8718, 62 FR 25506, May 9, 1997]
Sec. 1.142(a)(5)-1 Exempt facility bonds: Sewage facilities.
(a) In general. Under section 103(a), a private activity bond is a
tax-exempt bond only if it is a qualified bond. A qualified bond
includes an exempt facility bond, defined as any bond issued as part of
an issue 95 percent or more of the net proceeds of which are used to
provide a facility specified in section 142. One type of facility
specified in section 142(a) is a sewage facility. This section defines
the term sewage facility for purposes of section 142(a).
(b) Definitions--(1) Sewage facility defined. A sewage facility is
property--
(i) Except as provided in paragraphs (b)(2) and (d) of this section,
used for the secondary treatment of wastewater; however, for property
treating wastewater reasonably expected to have an average daily raw
wasteload concentration of biochemical oxygen demand (BOD) that exceeds
350 milligrams per liter as oxygen (measured at the time the influent
enters the facility) (the BOD limit), this paragraph (b)(1)(i) applies
only to the extent the treatment is for wastewater having an average
daily raw wasteload concentration of BOD that does not exceed the BOD
limit;
(ii) Used for the preliminary and/or primary treatment of wastewater
but only to the extent used in connection with secondary treatment
(without regard to the BOD limit described in paragraph (b)(1)(i) of
this section);
(iii) Used for the advanced or tertiary treatment of wastewater but
only to the extent used in connection with and after secondary
treatment;
(iv) Used for the collection, storage, use, processing, or final
disposal of--
(A) Wastewater, which property is necessary for such preliminary,
primary, secondary, advanced, or tertiary treatment; or
(B) Sewage sludge removed during such preliminary, primary,
secondary, advanced, or tertiary treatment (without regard to the BOD
limit described in paragraph (b)(1)(i) of this section);
[[Page 651]]
(v) Used for the treatment, collection, storage, use, processing, or
final disposal of septage (without regard to the BOD limit described in
paragraph (b)(1)(i) of this section); and
(vi) Functionally related and subordinate to property described in
this paragraph (b)(1), such as sewage disinfection property.
(2) Special rules and exceptions--(i) Exception to BOD limit. A
facility treating wastewater with an average daily raw wasteload
concentration of BOD exceeding the BOD limit will not fail to qualify as
a sewage facility described in paragraph (b)(1) of this section to the
extent that the failure to satisfy the BOD limit results from the
implementation of a federal, state, or local water conservation program
(for example, a program designed to promote water use efficiency that
results in BOD concentrations beyond the BOD limit).
(ii) Anti-abuse rule for BOD limit. A facility does not satisfy the
BOD limit if there is any intentional manipulation of the BOD level to
circumvent the BOD limit (for example, increasing the volume of water in
the wastewater before the influent enters the facility with the
intention of reducing the BOD level).
(iii) Authority of Commissioner. In appropriate cases upon
application to the Commissioner, the Commissioner may determine that
facilities employing technologically advanced or innovative treatment
processes qualify as sewage facilities if it is demonstrated that these
facilities perform functions that are consistent with the definition of
sewage facilities described in paragraph (b)(1) of this section.
(3) Other applicable definitions--(i) Advanced or tertiary treatment
means the treatment of wastewater after secondary treatment. Advanced or
tertiary treatment ranges from biological treatment extensions to
physical-chemical separation techniques such as denitrification, ammonia
stripping, carbon adsorption, and chemical precipitation.
(ii) Nonconventional pollutants are any pollutants that are not
listed in 40 CFR 401.15, 401.16, or appendix A to part 423.
(iii) Preliminary treatment means treatment that removes large
extraneous matter from incoming wastewater and renders the incoming
wastewater more amenable to subsequent treatment and handling.
(iv) Pretreatment means a process that preconditions wastewater to
neutralize or remove toxic, priority, or nonconventional pollutants that
could adversely affect sewers or inhibit a preliminary, primary,
secondary, advanced, or tertiary treatment operation.
(v) Primary treatment means treatment that removes material that
floats or will settle, usually by screens or settling tanks.
(vi) Priority pollutants are those pollutants listed in appendix A
to 40 CFR part 423.
(vii) Secondary treatment means the stage in sewage treatment in
which a bacterial process (or an equivalent process) consumes the
organic parts of wastes, usually by trickling filters or an activated
sludge process.
(viii) Sewage sludge is defined in 40 CFR 122.2 and includes
septage.
(ix) Toxic pollutants are those pollutants listed in 40 CFR 401.15.
(c) Other property not included in the definition of a sewage
facility. Property other than property described in paragraph (b)(1) of
this section is not a sewage facility. Thus, for example, property is
not a sewage facility, or functionally related and subordinate property,
if the property is used for pretreatment of wastewater (whether or not
this treatment is necessary to perform preliminary, primary, secondary,
advanced, or tertiary treatment), or the related collection, storage,
use, processing, or final disposal of the wastewater. In addition,
property used to treat, process, or use wastewater subsequent to the
time the wastewater can be discharged into navigable waters, as defined
in 33 U.S.C. 1362, is not a sewage facility.
(d) Allocation of costs. In the case of property that has both a use
described in paragraph (b)(1) of this section (a sewage treatment
function) and a use other than sewage treatment, only the portion of the
cost of the property allocable to the sewage treatment function is taken
into account as an expenditure to provide sewage facilities. The portion
of the cost of property allocable to
[[Page 652]]
the sewage treatment function is determined by allocating the cost of
that property between the property's sewage treatment function and any
other uses by any method which, based on all the facts and
circumstances, reasonably reflects a separation of costs for each use of
the property.
(e) Effective date--(1) In general. This section applies to issues
of bonds issued after February 21, 1995.
(2) Refundings. In the case of a refunding bond issued to refund a
bond to which this section does not apply, the issuer need not apply
this section to that refunding bond. This paragraph (e)(2) applies only
if the weighted average maturity of the refunding bonds, as described in
section 147(b), is not greater than the remaining weighted average
maturity of the refunded bonds.
[T.D. 8576, 59 FR 66163, Dec. 23, 1994]
Sec. 1.142(f)(4)-1 Manner of making election to terminate tax-exempt bond financing.
(a) Overview. Section 142(f)(4) permits a person engaged in the
local furnishing of electric energy or gas (a local furnisher) that uses
facilities financed with exempt facility bonds under section 142(a)(8)
and that expands its service area in a manner inconsistent with the
requirements of sections 142(a)(8) and (f) to make an election to ensure
that those bonds will continue to be treated as exempt facility bonds.
The election must meet the requirements of paragraphs (b) and (c) of
this section.
(b) Time for making election--(1) In general. An election under
section 142(f)(4)(B) must be filed with the Internal Revenue Service on
or before 90 days after the date of the service area expansion that
causes bonds to cease to meet the requirements of sections 142(a)(8) and
(f).
(2) Date of service area expansion. For the purposes of this
section, the date of the service area expansion is the first date on
which the local furnisher is authorized to collect revenue for the
provision of service in the expanded area.
(c) Manner of making election. An election under section
142(f)(4)(B) must be captioned ``ELECTION TO TERMINATE TAX-EXEMPT BOND
FINANCING'', must be signed under penalties of perjury by a person who
has authority to sign on behalf of the local furnisher, and must contain
the following information--
(1) The name of the local furnisher;
(2) The tax identification number of the local furnisher;
(3) The complete address of the local furnisher;
(4) The date of the service area expansion;
(5) Identification of each bond issue subject to the election,
including the complete name of each issue, the tax identification number
of each issuer, the report number of the information return filed under
section 149(e) for each issue, the issue date of each issue, the CUSIP
number (if any) of the bond with the latest maturity of each issue, the
issue price of each issue, the adjusted issue price of each issue as of
the date of the election, the earliest date on which the bonds of each
issue may be redeemed, and the principal amount of bonds of each issue
to be redeemed on the earliest redemption date;
(6) A statement that the local furnisher making the election agrees
to the conditions stated in section 142(f)(4)(B); and
(7) A statement that each issuer of the bonds subject to the
election has received written notice of the election.
(d) Effect on section 150(b). Except as provided in paragraph (e) of
this section, if a local furnisher files an election within the period
specified in paragraph (b) of this section, section 150(b) does not
apply to bonds identified in the election during and after that period.
(e) Effect of failure to meet agreements. If a local furnisher fails
to meet any of the conditions stated in an election pursuant to
paragraph (c)(6) of this section, the election is invalid.
(f) Corresponding provisions of the Internal Revenue Code of 1954.
Section 103(b)(4)(E) of the Internal Revenue Code of 1954 set forth
corresponding requirements for the exclusion from gross income of the
interest on bonds issued for facilities for the local furnishing of
electric energy or gas. For the purposes of this section any reference
to sections 142(a)(8) and (f) of
[[Page 653]]
the Internal Revenue Code of 1986 includes a reference to the
corresponding portion of section 103(b)(4)(E) of the Internal Revenue
Code of 1954.
(g) Effective dates. This section applies to elections made on or
after January 19, 2001.
[T.D. 8941, 66 FR 4671, Jan. 18, 2001]
Sec. 1.144-0 Table of contents.
This section lists the captioned paragraphs contained in
Secs. 1.144-1 and 1.144-2.
Sec. 1.144-1 Qualified small issue bonds, qualified student loan bonds,
and qualified redevelopment bonds.
(a) Overview.
(b) Scope.
(c) Effective dates.
Sec. 1.144-2 Remedial actions.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
Sec. 1.144-1 Qualified small issue bonds, qualified student loan bonds, and qualified redevelopment bonds.
(a) Overview. Interest on a private activity bond is not excludable
from gross income under section 103(a) unless the bond is a qualified
bond. Under section 141(e)(1)(D), a qualified small issue bond issued
under section 144(a) may be a qualified bond. Under section 144(a), any
qualified small issue bond is any bond issued as a part of an issue 95
percent or more of the proceeds of which are to be used to provide
certain manufacturing facilities or certain depreciable farm property
and which meets other requirements. Under section 141(e)(1)(F) a
qualified redevelopment bond issued under section 144(c) is a qualified
bond. Under section 144(c), a qualified redevelopment bond is any bond
issued as a part of an issue 95 percent or more of the net proceeds of
which are to be used for one or more redevelopment purposes and which
meets certain other requirements.
(b) Scope. Sections 1.144-0 through 1.144-2 apply for purposes of
the rules for small issue bonds under section 144(a) and qualified
redevelopment bonds under section 144(c), except that Sec. 1.144-2 does
not apply to the requirements for qualified small issue bonds under
section 144(a)(4) (relating to the limitation on capital expenditures)
or under section 144(a)(10) (relating to the aggregate limit of tax-
exempt bonds per taxpayer).
(c) Effective dates. For effective dates of Secs. 1.144-0 through
1.144-2, see Sec. 1.141-16.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
Sec. 1.144-2 Remedial actions.
The remedial action rules of Sec. 1.142-2 apply to qualified small
issue bonds issued under section 144(a) and to qualified redevelopment
bonds issued under section 144(c), for this purpose treating those bonds
as exempt facility bonds and the qualifying purposes for those bonds as
exempt facilities.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
Sec. 1.145-0 Table of contents.
This section lists the captioned paragraphs contained in
Secs. 1.145-1 and 1.145-2.
Sec. 1.145-1 Qualified 501(c)(3) bonds.
(a) Overview.
(b) Scope.
(c) Effective dates.
Sec. 1.145-2 Application of private activity bond regulations.
(a) In general.
(b) Modification of private business tests.
(c) Exceptions.
(1) Certain provisions relating to governmental programs.
(2) Costs of issuance.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
Sec. 1.145-1 Qualified 501(c)(3) bonds.
(a) Overview. Interest on a private activity bond is not excludable
from gross income under section 103(a) unless the bond is a qualified
bond. Under section 141(e)(1)(G), a qualified 501(c)(3) bond issued
under section 145 is a qualified bond. Under section 145, a qualified
501(c)(3) bond is any bond issued as a part of an issue that satisfies
the requirements of sections 145(a) through (d).
(b) Scope. Sections 1.145-0 through 1.145-2 apply for purposes of
section 145(a).
(c) Effective dates. For effective dates of Secs. 1.145-0 through
1.145-2, see Sec. 1.141-15.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
[[Page 654]]
Sec. 1.145-2 Application of private activity bond regulations.
(a) In general. Except as provided in this section, Secs. 1.141-0
through 1.141-15 apply to section 145(a). For example, under this
section, Sec. 1.141-1, and Sec. 1.141-2, an issue ceases to be an issue
of qualified 501(c)(3) bonds if the issuer or a conduit borrower
501(c)(3) organization takes a deliberate action, subsequent to the
issue date, that causes the issue to fail to comply with the
requirements of sections 141(e) and 145 (such as an action that results
in revocation of exempt status of the 501(c)(3) organization).
(b) Modification of private business tests. In applying Secs. 1.141-
0 through 1.141-15 to section 145(a)--
(1) References to governmental persons include 501(c)(3)
organizations with respect to their activities that do not constitute
unrelated trades or businesses under section 513(a);
(2) References to ``10 percent'' and ``proceeds'' in the context of
the private business use test and the private security or payment test
mean ``5 percent'' and ``net proceeds''; and
(3) References to the private business use test in Secs. 1.141-2 and
1.141-12 include the ownership test of section 145(a)(1).
(c) Exceptions--(1) Certain provisions relating to governmental
programs. The following provisions do not apply to section 145:
Sec. 1.141-2(d)(4) (relating to the special rule for dispositions of
personal property in the ordinary course of an established governmental
program) and Sec. 1.141-2(d)(5) (relating to the special rule for
general obligation bond programs that finance a large number of separate
purposes).
(2) Costs of issuance. Section 1.141-3(g)(6) does not apply to
section 145(a)(2) to the extent that it provides that costs of issuance
are allocated ratably among the other purposes for which the proceeds
are used. For purposes of section 145(a)(2), costs of issuance are
treated as private business use.
[T.D. 8712, 62 FR 2303, Jan. 16, 1997]
Sec. 1.147-0 Table of contents.
This section lists the captioned paragraphs contained in
Secs. 1.147-1 and 1.147-2.
Sec. 1.147-1 Other requirements applicable to certain private activity
bonds.
(a) Overview.
(b) Scope.
(c) Effective dates.
Sec. 1.147-2 Remedial actions.
[T.D. 8712, 62 FR 2304, Jan. 16, 1997]
Sec. 1.147-1 Other requirements applicable to certain private activity bonds.
(a) Overview. Interest on a private activity bond is not excludable
from gross income under section 103(a) unless the bond is a qualified
bond. Under section 147, certain requirements must be met for a private
activity bond to qualify as a qualified bond.
(b) Scope. Sections 1.147-0 through 1.147-2 apply for purposes of
the rules in section 147 for qualified private activity bonds that
permit use of proceeds to acquire land for environmental purposes
(section 147(c)(3)), permit use of proceeds for certain rehabilitations
(section 147(d) (2) and (3)), prohibit use of proceeds to finance
skyboxes, airplanes, gambling establishments and similar facilities
(section 147(e)), and require public approval (section 147(f)), but not
for the rules limiting use of proceeds to acquire land or existing
property under sections 147(c) (1) and (2), and (d)(1).
(c) Effective dates. For effective dates of Secs. 1.147-0 through
1.147-2, see Sec. 1.141-16.
[T.D. 8712, 62 FR 2304, Jan. 16, 1997]
Sec. 1.147-2 Remedial actions.
The remedial action rules of Sec. 1.142-2 apply to the rules in
section 147 for qualified private activity bonds that permit use of
proceeds to acquire land for environmental purposes (section 147(c)(3)),
permit use of proceeds for certain rehabilitations (section 147(d) (2)
and (3)), prohibit use of proceeds to finance skyboxes, airplanes,
gambling establishments and similar facilities (section 147(e)), and
require public approval (section 147(f)), for this purpose treating
those private activity bonds subject to the rules under section 147 as
exempt facility bonds and the qualifying purposes for those bonds as
exempt facilities.
[T.D. 8712, 62 FR 2304, Jan. 16, 1997]
[[Page 655]]
Sec. 1.147(b)-1 Bond maturity limitation-treatment of working capital.
Section 147(b) does not apply to proceeds of a private activity bond
issue used to finance working capital expenditures.
[T.D. 8476, 58 FR 33515, June 18, 1993]
Sec. 1.148-0 Scope and table of contents.
(a) Overview. Under section 103(a), interest on certain obligations
issued by States and local governments is excludable from the gross
income of the owners. Section 148 was enacted to minimize the arbitrage
benefits from investing gross proceeds of tax-exempt bonds in higher
yielding investments and to remove the arbitrage incentives to issue
more bonds, to issue bonds earlier, or to leave bonds outstanding longer
than is otherwise reasonably necessary to accomplish the governmental
purposes for which the bonds were issued. To accomplish these purposes,
section 148 restricts the direct and indirect investment of bond
proceeds in higher yielding investments and requires that certain
earnings on higher yielding investments be rebated to the United States.
Violation of these provisions causes the bonds in the issue to become
arbitrage bonds, the interest on which is not excludable from the gross
income of the owners under section 103(a). The regulations in
Secs. 1.148-1 through 1.148-11 apply in a manner consistent with these
purposes.
(b) Scope. Sections 1.148-1 through 1.148-11 apply generally for
purposes of the arbitrage restrictions on State and local bonds under
section 148.
(c) Table of contents. This paragraph (c) lists the table of
contents for Secs. 1.148-1, 1.148-2, 1.148-3, 1.148-4, 1.148-5, 1.148-6,
1.148-7, 1.148-8, 1.148-9, 1.148-10 and 1.148-11.
Sec. 1.148-1 Definitions and elections.
(a) In general.
(b) Certain definitions.
(c) Definition of replacement proceeds.
(1) In general.
(2) Sinking fund.
(3) Pledged fund.
(4) Other replacement proceeds.
(d) Elections.
(e) Investment-type property.
Sec. 1.148-2 General arbitrage yield restriction rules.
(a) In general.
(b) Reasonable expectations.
(1) In general.
(2) Certification of expectations.
(c) Intentional acts.
(d) Materially higher yielding investments.
(1) In general.
(2) Definitions of materially higher yield.
(3) Mortgage loans.
(e) Temporary periods.
(1) In general.
(2) General 3-year temporary period for capital projects and
qualified mortgage loans.
(3) Temporary period for restricted working capital expenditures.
(4) Temporary period for pooled financings.
(5) Temporary period for replacement proceeds.
(6) Temporary period for investment proceeds.
(7) Other amounts.
(f) Reserve or replacement funds.
(1) General 10 percent limitation on funding with sale proceeds.
(2) Exception from yield restriction for reasonably required reserve
or replacement funds.
(3) Certain parity reserve funds.
(g) Minor portion.
(h) Certain waivers permitted.
Sec. 1.148-3 General arbitrage rebate rules.
(a) In general.
(b) Definition of rebate amount.
(c) Computation of future value of a payment or receipt.
(d) Payments and receipts.
(1) Definition of payments.
(2) Definition of receipts.
(3) Special rules for commingled funds.
(e) Computation dates.
(1) In general.
(2) Final computation date.
(f) Amount of required rebate installment payment.
(1) Amount of interim rebate payments.
(2) Amount of final rebate payment.
(3) Future value of rebate payments.
(g) Time and manner of payment.
(h) Penalty in lieu of loss of tax exemption.
(1) In general.
(2) Interest on underpayments.
(3) Waivers of the penalty.
(4) Application to alternative penalty under Sec. 1.148-7.
(i) Recovery of overpayment of rebate.
(1) In general.
(2) Limitations on recovery.
(j) Examples.
(k) Bona fide debt service fund exception.
Sec. 1.148-4 Yield on an issue of bonds.
(a) In general.
(b) Computing yield on a fixed yield issue.
(1) In general.
(2) Yield on certain fixed yield bonds subject to mandatory or
contingent early redemption.
[[Page 656]]
(3) Yield on certain fixed yield bonds subject to optional early
redemption.
(4) Yield recomputed upon transfer of certain rights associated with
the bond.
(5) Special aggregation rule treating certain bonds as a single
fixed yield bond.
(6) Examples.
(c) Computing yield on a variable yield issue.
(1) In general.
(2) Payments on bonds included in yield for a computation period.
(3) Example.
(d) Conversion from variable yield issue to fixed yield issue.
(e) Value of bonds.
(1) Plain par bonds.
(2) Other bonds.
(f) Qualified guarantees.
(1) In general.
(2) Interest savings.
(3) Guarantee in substance.
(4) Reasonable charge.
(5) Guarantee of purpose investments.
(6) Allocation of qualified guarantee payments.
(7) Refund or reduction of guarantee payments.
(g) Yield on certain mortgage revenue and student loan bonds.
(h) Qualified hedging transactions.
(1) In general.
(2) Qualified hedge defined.
(3) Accounting for qualified hedges.
(4) Certain variable yield bonds treated as fixed yield bonds.
(5) Contracts entered into before issue date of hedged bond.
(6) Authority of the Commissioner.
Sec. 1.148-5 Yield and valuation of investments.
(a) In general.
(b) Yield on an investment.
(1) In general.
(2) Yield on a separate class of investments.
(3) Investments to be held beyond issue's maturity or beyond
temporary period.
(4) Consistent redemption assumptions on purpose investments.
(5) Student loan special allowance payments included in yield.
(c) Yield reduction payments to the United States.
(1) In general.
(2) Manner of payment.
(3) Applicability of special yield reduction rule.
(d) Value of investments.
(1) In general.
(2) Mandatory valuation of yield restricted investments at present
value.
(3) Mandatory valuation of certain investments at fair market value.
(4) Special transition rule for transferred proceeds.
(5) Definition of present value of an investment.
(6) Definition of fair market value.
(e) Administrative costs of investments.
(1) In general.
(2) Qualified administrative costs on nonpurpose investments.
(3) Qualified administrative costs on purpose investments.
Sec. 1.148-6 General allocation and accounting rules.
(a) In general.
(1) Reasonable accounting methods required.
(2) Bona fide deviations from accounting method.
(b) Allocation of gross proceeds to an issue.
(1) One-issue rule and general ordering rules.
(2) Universal cap on value of nonpurpose investments allocated to an
issue.
(c) Fair market value limit on allocations to nonpurpose
investments.
(d) Allocation of gross proceeds to expenditures.
(1) Expenditures in general.
(2) Treatment of gross proceeds invested in purpose investments.
(3) Expenditures for working capital purposes.
(4) Expenditures for grants.
(5) Expenditures for reimbursement purposes.
(6) Expenditures of certain commingled investment proceeds of
governmental issues.
(7) Payments to related parties.
(e) Special rules for commingled funds.
(1) In general.
(2) Investments held by a commingled fund.
(3) Certain expenditures involving a commingled fund.
(4) Fiscal periods.
(5) Unrealized gains and losses on investments of a commingled fund.
(6) Allocations of commingled funds serving as common reserve funds
or sinking funds.
Sec. 1.148-7 Spending exceptions to the rebate requirement.
(a) Scope of section.
(1) In general.
(2) Relationship of spending exceptions.
(3) Spending exceptions not mandatory.
(b) Rules applicable for all spending exceptions.
(1) Special transferred proceeds rules.
(2) Application of multipurpose issue rules.
(3) Expenditures for governmental purposes of the issue.
(4) De minimis rule.
(5) Special definition of reasonably required reserve or replacement
fund.
(6) Pooled financing issue.
(c) 6-month exception.
(1) General rule.
(2) Additional period for certain bonds.
(3) Amounts not included in gross proceeds.
[[Page 657]]
(4) Series of refundings.
(d) 18-month exception.
(1) General rule.
(2) Extension for reasonable retainage.
(3) Gross proceeds.
(4) Application to multipurpose issues.
(e) 2-year exception.
(1) General rule.
(2) Extension for reasonable retainage.
(3) Definitions.
(f) Construction issue.
(1) Definition.
(2) Use of actual facts.
(3) Ownership requirement.
(g) Construction expenditures.
(1) Definition.
(2) Certain acquisitions under turnkey contracts treated as
construction expenditures.
(3) Constructed personal property.
(4) Specially developed computer software.
(5) Examples.
(h) Reasonable retainage definition.
(i) Available construction proceeds.
(1) Definition in general.
(2) Earnings on a reasonably required reserve or replacement fund.
(3) Reasonable expectations test for future earnings.
(4) Issuance costs.
(5) One and one-half percent penalty in lieu of arbitrage rebate.
(6) Payments on purpose investments and repayments of grants.
(7) Examples.
(j) Election to treat portion of issue used for construction as
separate issue.
(1) In general.
(2) Example.
(k) One and one-half percent penalty in lieu of arbitrage rebate.
(1) In general.
(2) Application to reasonable retainage.
(3) Coordination with rebate requirement.
(l) Termination of 1\1/2\ percent penalty.
(1) Termination after initial temporary period.
(2) Termination before end of initial temporary period.
(3) Application to reasonable retainage.
(4) Example.
(m) Payment of penalties.
Sec. 1.148-8 Small issuer exception to rebate requirement.
(a) Scope.
(b) General taxing powers.
(c) Size limitation.
(1) In general.
(2) Aggregation rules.
(3) Certain refunding bonds not taken into account.
(d) Pooled financings.
(1) Treatment of pool issuer.
(2) Treatment of conduit borrowers.
(e) Refunding issues.
(1) In general.
(2) Multipurpose issues.
Sec. 1.148-9 Arbitrage rules for refunding issues.
(a) Scope of application.
(b) Transferred proceeds allocation rule.
(1) In general.
(2) Special definition of principal amount.
(3) Relation of transferred proceeds rule to universal cap rule.
(4) Limitation on multi-generational transfers.
(c) Special allocation rules for refunding issues.
(1) Allocations of investments.
(2) Allocations of mixed escrows to expenditures for principal,
interest, and redemption prices on a prior issue.
(d) Temporary periods in refundings.
(1) In general.
(2) Types of temporary periods in refundings.
(e) Reasonably required reserve or replacement funds in refundings.
(f) Minor portions in refundings.
(g) Certain waivers permitted.
(h) Multipurpose issue allocations.
(1) Application of multipurpose issue allocation rules.
(2) Rules on allocations of multipurpose issues.
(3) Separate purposes of a multipurpose issue.
(4) Allocations of bonds of a multipurpose issue.
(5) Limitation on multi-generation allocations.
(i) Operating rules for separation of prior issues into refunded and
unrefunded portions.
(1) In general.
(2) Allocations of proceeds and investments in a partial refunding.
(3) References to prior issue.
Sec. 1.148-10 Anti-abuse rules and authority of Commissioner.
(a) Abusive arbitrage device.
(1) In general.
(2) Abusive arbitrage device defined.
(3) Exploitation of tax-exempt interest rates.
(4) Overburdening the tax-exempt market.
(b) Consequences of overburdening the tax-exempt bond market.
(1) In general.
(2) Application.
(c) Anti-abuse rules on excess gross proceeds of advance refunding
issues.
(1) In general.
(2) Definition of excess gross proceeds.
(3) Special treatment of transferred proceeds.
(4) Special rule for crossover refundings.
(5) Special rule for gross refundings.
(d) Examples.
(e) Authority of the Commissioner to clearly reflect the economic
substance of a transaction.
[[Page 658]]
(f) Authority of the Commissioner to require an earlier date for
payment of rebate.
(g) Authority of the Commissioner to waive regulatory limitations.
Sec. 1.148-11 Effective dates.
(a) In general.
(b) Elective retroactive application in whole.
(1) In general.
(2) No elective retroactive application for 18-month spending
exception.
(3) No elective retroactive application for hedges of fixed rate
issues.
(c) Elective retroactive application of certain provisions.
(1) Retroactive application of overpayment recovery provisions.
(2) Certain allocations of multipurpose issues.
(3) Special limitation.
(d) Transition rule excepting certain state guarantee funds from the
definition of replacement proceeds.
(1) Certain perpetual trust funds.
(2) Permanent University Fund.
(e) Transition rule regarding special allowance payments.
(f) Transition rule regarding applicability of yield reduction rule.
(g) Provisions applicable to certain bonds sold before effective
date.
[T.D. 8476, 58 FR 33515, June 18, 1993, as amended by T.D. 8538, 59 FR
24041, May 10, 1994; T.D. 8718, 62 FR 25506, May 9, 1997]
Sec. 1.148-1 Definitions and elections.
(a) In general. The definitions in this section and the definitions
under section 150 apply for purposes of section 148 and Secs. 1.148-1
through 1.148-11.
(b) Certain definitions. The following definitions apply:
Accounting method means both the overall method used to account for
gross proceeds of an issue (e.g., the cash method or a modified accrual
method) and the method used to account for or allocate any particular
item within that overall accounting method (e.g., accounting for
investments, expenditures, allocations to and from different sources,
and particular items of the foregoing).
Annuity contract means annuity contract as defined in section 72.
Available amount means available amount as defined in Sec. 1.148-
6(d)(3)(iii).
Bona fide debt service fund means a fund, which may include proceeds
of an issue, that--
(1) Is used primarily to achieve a proper matching of revenues with
principal and interest payments within each bond year; and
(2) Is depleted at least once each bond year, except for a
reasonable carryover amount not to exceed the greater of:
(i) the earnings on the fund for the immediately preceding bond
year; or
(ii) one-twelfth of the principal and interest payments on the issue
for the immediately preceding bond year.
Bond year means, in reference to an issue, each 1-year period that
ends on the day selected by the issuer. The first and last bond years
may be short periods. If no day is selected by the issuer before the
earlier of the final maturity date of the issue or the date that is 5
years after the issue date, bond years end on each anniversary of the
issue date and on the final maturity date.
Capital project or capital projects means all capital expenditures,
plus related working capital expenditures to which the de minimis rule
under Sec. 1.148-6(d)(3)(ii)(A) applies, that carry out the governmental
purposes of an issue. For example, a capital project may include capital
expenditures for one or more buildings, plus related start-up operating
costs.
Commingled fund means any fund or account containing both gross
proceeds of an issue and amounts in excess of $25,000 that are not gross
proceeds of that issue if the amounts in the fund or account are
invested and accounted for collectively, without regard to the source of
funds deposited in the fund or account. An open-end regulated investment
company under section 851, however, is not a commingled fund.
Computation date means each date on which the rebate amount for an
issue is computed under Sec. 1.148-3(e).
Computation period means the period between computation dates. The
first computation period begins on the issue date and ends on the first
computation date. Each succeeding computation period begins on the date
immediately following the computation date and ends on the next
computation date.
Consistently applied means applied uniformly within a fiscal period
and between fiscal periods to account for gross proceeds of an issue and
any amounts that are in a commingled fund.
De minimis amount means--
[[Page 659]]
(1) In reference to original issue discount (as defined in section
1273(a)(1)) or premium on an obligation--
(i) An amount that does not exceed 2 percent multiplied by the
stated redemption price at maturity; plus
(ii) Any original issue premium that is attributable exclusively to
reasonable underwriters' compensation; and
(2) In reference to market discount (as defined in section
1278(a)(2)(A)) or premium on an obligation, an amount that does not
exceed 2 percent multiplied by the stated redemption price at maturity.
Economic accrual method (also known as the constant interest method
or actuarial method) means the method of computing yield that is based
on the compounding of interest at the end of each compounding period.
Fair market value means fair market value as defined in Sec. 1.148-
5(d)(6).
Fixed rate investment means any investment whose yield is fixed and
determinable on the issue date.
Fixed yield bond means any bond whose yield is fixed and
determinable on the issue date using the assumptions and rules provided
in Sec. 1.148-4(b).
Fixed yield issue means any issue if each bond that is part of the
issue is a fixed yield bond.
Gross proceeds means any proceeds and replacement proceeds of an
issue.
Guaranteed investment contract includes any nonpurpose investment
that has specifically negotiated withdrawal or reinvestment provisions
and a specifically negotiated interest rate, and also includes any
agreement to supply investments on two or more future dates (e.g., a
forward supply contract).
Higher yielding investments means higher yielding investments as
defined in section 148(b)(1).
Investment means any investment property as defined in sections
148(b)(2) and 148(b)(3), and any other tax-exempt bond.
Investment proceeds means any amounts actually or constructively
received from investing proceeds of an issue.
Investment-type property is defined in paragraph (e) of this
section.
Issue price means, except as otherwise provided, issue price as
defined in sections 1273 and 1274. Generally, the issue price of bonds
that are publicly offered is the first price at which a substantial
amount of the bonds is sold to the public. Ten percent is a substantial
amount. The public does not include bond houses, brokers, or similar
persons or organizations acting in the capacity of underwriters or
wholesalers. The issue price does not change if part of the issue is
later sold at a different price. The issue price of bonds that are not
substantially identical is determined separately. The issue price of
bonds for which a bona fide public offering is made is determined as of
the sale date based on reasonable expectations regarding the initial
public offering price. If a bond is issued for property, the applicable
Federal tax-exempt rate is used in lieu of the Federal rate in
determining the issue price under section 1274. The issue price of bonds
may not exceed their fair market value as of the sale date.
Issuer generally means the entity that actually issues the issue,
and, unless the context or a provision clearly requires otherwise, each
conduit borrower of the issue. For example, rules imposed on issuers to
account for gross proceeds of an issue apply to a conduit borrower to
account for any gross proceeds received under a purpose investment.
Provisions regarding elections, filings, liability for the rebate
amount, and certifications of reasonable expectations apply only to the
actual issuer.
Multipurpose issue means an issue the proceeds of which are used for
two or more separate purposes determined in accordance with Sec. 1.148-
9(h).
Net sale proceeds means sale proceeds, less the portion of those
sale proceeds invested in a reasonably required reserve or replacement
fund under section 148(d) and as part of a minor portion under section
148(e).
Nonpurpose investment means any investment property, as defined in
section 148(b), that is not a purpose investment.
Payment means a payment as defined in Sec. 1.148-3(d) for purposes
of computing the rebate amount, and a payment as defined in Sec. 1.148-
5(b) for purposes of computing the yield on an investment.
Plain par bond means a qualified tender bond or a bond--
[[Page 660]]
(1) Issued with not more than a de minimis amount of original issue
discount or premium;
(2) Issued for a price that does not include accrued interest other
than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated,
fixed rate or that is a variable rate debt instrument under section
1275, in each case with interest unconditionally payable at least
annually; and
(4) That has a lowest stated redemption price that is not less than
its outstanding stated principal amount.
Plain par investment means an investment that is an obligation--
(1) Issued with not more than a de minimis amount of original issue
discount or premium, or, if acquired on a date other than the issue
date, acquired with not more than a de minimis amount of market discount
or premium;
(2) Issued for a price that does not include accrued interest other
than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated,
fixed rate or that is a variable rate debt instrument under section
1275, in each case with interest unconditionally payable at least
annually; and
(4) That has a lowest stated redemption price that is not less than
its outstanding stated principal amount.
Pre-issuance accrued interest means amounts representing interest
that accrued on an obligation for a period not greater than one year
before its issue date but only if those amounts are paid within one year
after the issue date.
Proceeds means any sale proceeds, investment proceeds, and
transferred proceeds of an issue. Proceeds do not include, however,
amounts actually or constructively received with respect to a purpose
investment that are properly allocable to the immaterially higher yield
under Sec. 1.148-2(d) or section 143(g) or to qualified administrative
costs recoverable under Sec. 1.148-5(e).
Program investment means a purpose investment that is part of a
governmental program in which--
(1) The program involves the origination or acquisition of purpose
investments;
(2) At least 95 percent (90 percent for qualified student loans
under section 144(b)(1)(A)) of the cost of the purpose investments
acquired under the program represents one or more loans to a substantial
number of persons representing the general public, States or political
subdivisions, 501(c)(3) organizations, persons who provide housing and
related facilities, or any combination of the foregoing;
(3) At least 95 percent of the receipts from the purpose investments
are used to pay principal, interest, or redemption prices on issues that
financed the program, to pay or reimburse administrative costs of those
issues or of the program, to pay or reimburse anticipated future losses
directly related to the program, to finance additional purpose
investments for the same general purposes of the program, or to redeem
and retire governmental obligations at the next earliest possible date
of redemption;
(4) The program documents prohibit any obligor on a purpose
investment financed by the program or any related party to that obligor
from purchasing bonds of an issue that finance the program in an amount
related to the amount of the purpose investment acquired from that
obligor; and
(5) The issuer has not waived the right to treat the investment as a
program investment.
Purpose investment means an investment that is acquired to carry out
the governmental purpose of an issue.
Qualified administrative costs means qualified administrative costs
as defined in Sec. 1.148-5(e).
Qualified guarantee means a qualified guarantee as defined in
Sec. 1.148-4(f).
Qualified hedge means a qualified hedge as defined in Sec. 1.148-
4(h)(2).
Reasonable expectations or reasonableness. An issuer's expectations
or actions are reasonable only if a prudent person in the same
circumstances as the issuer would have those same expectations or take
those same actions, based on all the objective facts and circumstances.
Factors relevant to a determination of reasonableness include the
issuer's history of conduct concerning stated expectations made in
connection with the issuance of obligations, the level of inquiry by the
issuer
[[Page 661]]
into factual matters, and the existence of covenants, enforceable by
bondholders, that require implementation of specific expectations. For a
conduit financing issue, factors relevant to a determination of
reasonableness include the reasonable expectations of the conduit
borrower, but only if, under the circumstances, it is reasonable and
prudent for the issuer to rely on those expectations.
Rebate amount means 100 percent of the amount owed to the United
States under section 148(f)(2), as further described in Sec. 1.148-3.
Receipt means a receipt as defined in Sec. 1.148-3(d) for purposes
of computing the rebate amount, and a receipt as defined in Sec. 1.148-
5(b) for purposes of computing yield on an investment.
Refunding escrow means one or more funds established as part of a
single transaction or a series of related transactions, containing
proceeds of a refunding issue and any other amounts to provide for
payment of principal or interest on one or more prior issues. For this
purpose, funds are generally not so established solely because of--
(1) The deposit of proceeds of an issue and replacement proceeds of
the prior issue in an escrow more than 6 months apart, or
(2) The deposit of proceeds of completely separate issues in an
escrow.
Replacement proceeds is defined in paragraph (c) of this section.
Restricted working capital expenditures means working capital
expenditures that are subject to the proceeds-spent-last rule in
Sec. 1.148-6(d)(3)(i) and are ineligible for any exception to that rule.
Sale proceeds means any amounts actually or constructively received
from the sale of the issue, including amounts used to pay underwriters'
discount or compensation and accrued interest other than pre-issuance
accrued interest. Sale proceeds also include, but are not limited to,
amounts derived from the sale of a right that is associated with a bond,
and that is described in Sec. 1.148-4(b)(4). See also Sec. 1.148-4(h)(5)
treating amounts received upon the termination of certain hedges as sale
proceeds.
Stated redemption price means the redemption price of an obligation
under the terms of that obligation, including any call premium.
Transferred proceeds means transferred proceeds as defined in
Sec. 1.148-9 (or the applicable corresponding provision of prior law).
Unconditionally payable means payable under terms in which--
(1) Late payment or nonpayment results in a significant penalty to
the borrower or reasonable remedies to the lender, and
(2) It is reasonably certain on the issue date that the payment will
actually be made.
Value means value determined under Sec. 1.148-4(e) for a bond, and
value determined under Sec. 1.148-5(d) for an investment.
Variable yield bond means any bond that is not a fixed yield bond.
Variable yield issue means any issue that is not a fixed yield
issue.
Yield means yield computed under Sec. 1.148-4 for an issue, and
yield computed under Sec. 1.148-5 for an investment.
Yield restricted means required to be invested at a yield that is
not materially higher than the yield on the issue under section 148(a)
and Sec. 1.148-2.
(c) Definition of replacement proceeds--(1) In general. Amounts are
replacement proceeds of an issue if the amounts have a sufficiently
direct nexus to the issue or to the governmental purpose of the issue to
conclude that the amounts would have been used for that governmental
purpose if the proceeds of the issue were not used or to be used for
that governmental purpose. For this purpose, governmental purposes
include the expected use of amounts for the payment of debt service on a
particular date. The mere availability or preliminary earmarking of
amounts for a governmental purpose, however, does not in itself
establish a sufficient nexus to cause those amounts to be replacement
proceeds. Replacement proceeds include, but are not limited to, sinking
funds, pledged funds, and other replacement proceeds described in
paragraph (c)(4) of this section, to the extent that those funds or
amounts are held by or derived from a substantial beneficiary of the
issue. A substantial beneficiary of an issue includes the issuer and any
related party to the issuer, and, if the issuer is
[[Page 662]]
not a state, the state in which the issuer is located. A person is not a
substantial beneficiary of an issue solely because it is a guarantor
under a qualified guarantee.
(2) Sinking fund. Sinking fund includes a debt service fund,
redemption fund, reserve fund, replacement fund, or any similar fund, to
the extent reasonably expected to be used directly or indirectly to pay
principal or interest on the issue.
(3) Pledged fund--(i) In general. A pledged fund is any amount that
is directly or indirectly pledged to pay principal or interest on the
issue. A pledge need not be cast in any particular form but, in
substance, must provide reasonable assurance that the amount will be
available to pay principal or interest on the issue, even if the issuer
encounters financial difficulties. A pledge to a guarantor of an issue
is an indirect pledge to secure payment of principal or interest on the
issue. A pledge of more than 50 percent of the outstanding stock of a
corporation that is a conduit borrower of the issue is not treated as a
pledge for this purpose, unless the corporation is formed or availed of
to avoid the creation of replacement proceeds.
(ii) Negative pledges. An amount is treated as pledged to pay
principal or interest on an issue if it is held under an agreement to
maintain the amount at a particular level for the direct or indirect
benefit of the bondholders or a guarantor of the bonds. An amount is not
treated as pledged under this paragraph (c)(3)(ii), however, if--
(A) The issuer or a substantial beneficiary may grant rights in the
amount that are superior to the rights of the bondholders or the
guarantor; or
(B) The amount does not exceed reasonable needs for which it is
maintained, the required level is tested no more frequently than every 6
months, and the amount may be spent without any substantial restriction
other than a requirement to replenish the amount by the next testing
date.
(4) Other replacement proceeds--(i) Bonds outstanding longer than
necessary--(A) In general. Replacement proceeds arise to the extent that
the issuer reasonably expects as of the issue date that--
(1) The term of an issue will be longer than is reasonably necessary
for the governmental purposes of the issue, and
(2) There will be available amounts during the period that the issue
remains outstanding longer than necessary. Whether an issue is
outstanding longer than necessary is determined under Sec. 1.148-10.
Replacement proceeds are created under this paragraph (c)(4)(i)(A) at
the beginning of each fiscal year during which an issue remains
outstanding longer than necessary in an amount equal to available
amounts of the issuer as of that date.
(B) Safe harbor against creation of replacement proceeds. As a safe
harbor, replacement proceeds do not arise under paragraph (c)(4)(i)(A)
of this section--
(1) For the portion of an issue that is to be used to finance
restricted working capital expenditures, if that portion is not
outstanding longer than 2 years;
(2) For the portion of an issue (including a refunding issue) that
is to be used to finance or refinance capital projects, if that portion
has a weighted average maturity that does not exceed 120 percent of the
average reasonably expected economic life of the financed capital
projects, determined in the same manner as under section 147(b); or
(3) For the portion of an issue that is a refunding issue, if that
portion has a weighted average maturity that does not exceed the
remaining weighted average maturity of the prior issue, and the issue of
which the prior issue is a part satisfies paragraph (c)(4)(i)(B) (1) or
(2) of this section.
(ii) Bonds financing a working capital reserve--(A) In general.
Except as otherwise provided in paragraph (c)(4)(ii)(B) of this section,
replacement proceeds arise to the extent a working capital reserve is,
directly or indirectly, financed with the proceeds of the issue
(regardless of the expenditure of proceeds of the issue). Thus, for
example, if an issuer that does not maintain a working capital reserve
borrows to fund a working capital reserve, the issuer will have
replacement proceeds. To determine the amount of a working capital
reserve maintained, an issuer may use the average amount maintained as a
working capital reserve
[[Page 663]]
during annual periods of at least 1 year, the last of which ends within
1 year before the issue date. For example, the amount of a working
capital reserve may be computed using the average of the beginning or
ending monthly balances of the amount maintained as a reserve (net of
unexpended gross proceeds) during the 1 year period preceding the issue
date.
(B) Exception to creation of replacement proceeds. Replacement
proceeds do not arise under paragraph (c)(4)(ii)(A) of this section with
respect to an issue--
(1) All of the net proceeds of which are spent within 6 months of
the issue date under section 148(f)(4)(B)(iii)(I); or
(2) That is not subject to the rebate requirement under the
exception provided by section 148(f)(4)(D).
(d) Elections. Except as otherwise provided, any required elections
must be made in writing, and, once made, may not be revoked without the
permission of the Commissioner.
(e) Investment-type property--(1) In general. Investment-type
property includes any property, other than property described in section
148(b)(2) (A), (B), (C), or (E), that is held principally as a passive
vehicle for the production of income. For this purpose, production of
income includes any benefit based on the time value of money, including
the benefit from making a prepayment.
(2) Non-customary prepayments. Except as otherwise provided in this
paragraph (e), a prepayment for property or services gives rise to
investment-type property if a principal purpose for prepaying is to
receive an investment return from the time the prepayment is made until
the time payment otherwise would be made. A prepayment does not give
rise to investment-type property if--
(i) The prepayment is made for a substantial business purpose other
than investment return and the issuer has no commercially reasonable
alternative to the prepayment; or
(ii) Prepayments on substantially the same terms are made by a
substantial percentage of persons who are similarly situated to the
issuer but who are not beneficiaries of tax-exempt financing.
(3) Certain hedges. Investment-type property also includes the
investment element of a contract that is a hedge (within the meaning of
Sec. 1.148-4(h)(2)(i)(A)) and that contains a significant investment
element because a payment by the issuer relates to a conditional or
unconditional obligation by the hedge provider to make a payment on a
later date. See Sec. 1.148-4(h)(2)(ii) relating to hedges with a
significant investment element.
[T.D. 8476, 58 FR 33517, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24041, May 10, 1994; T.D. 8718, 62 FR 25507,
May 9, 1997]
Sec. 1.148-2 General arbitrage yield restriction rules.
(a) In general. Under section 148(a), the direct or indirect
investment of the gross proceeds of an issue in higher yielding
investments causes the bonds of the issue to be arbitrage bonds. The
investment of proceeds in higher yielding investments, however, during a
temporary period described in paragraph (e) of this section, as part of
a reasonably required reserve or replacement fund described in paragraph
(f) of this section, or as part of a minor portion described in
paragraph (g) of this section does not cause the bonds of the issue to
be arbitrage bonds. Bonds are not arbitrage bonds under this section as
a result of an inadvertent, insubstantial error.
(b) Reasonable expectations--(1) In general. Except as provided in
paragraph (c) of this section, the determination of whether an issue
consists of arbitrage bonds under section 148(a) is based on the
issuer's reasonable expectations as of the issue date regarding the
amount and use of the gross proceeds of the issue.
(2) Certification of expectations--(i) In general. An officer of the
issuer responsible for issuing the bonds must, in good faith, certify
the issuer's expectations as of the issue date. The certification must
state the facts and estimates that form the basis for the issuer's
expectations. The certification is evidence of the issuer's
expectations, but does not establish any conclusions of law or any
presumptions regarding either the issuer's actual expectations or their
reasonableness.
(ii) Exceptions to certification requirement. An issuer is not
required to make
[[Page 664]]
a certification for an issue under paragraph (b)(2)(i) of this section
if--
(A) The issuer reasonably expects as of the issue date that there
will be no unspent gross proceeds after the issue date, other than gross
proceeds in a bona fide debt service fund (e.g., equipment lease
financings in which the issuer purchases equipment in exchange for an
installment payment note); or
(B) The issue price of the issue does not exceed $1,000,000.
(c) Intentional acts. The taking of any deliberate, intentional
action by the issuer or person acting on its behalf after the issue date
in order to earn arbitrage causes the bonds of the issue to be arbitrage
bonds if that action, had it been expected on the issue date, would have
caused the bonds to be arbitrage bonds. An intent to violate the
requirements of section 148 is not necessary for an action to be
intentional.
(d) Materially higher yielding investments--(1) In general. The
yield on investments is materially higher than the yield on the issue to
which the investments are allocated if the yield on the investments over
the term of the issue exceeds the yield on the issue by an amount in
excess of the applicable definition of materially higher set forth in
paragraph (d)(2) of this section. If yield restricted investments in the
same class are subject to different definitions of materially higher,
the applicable definition of materially higher that produces the lowest
permitted yield applies to all the investments in the class. The yield
on the issue is determined under Sec. 1.148-4. The yield on investments
is determined under Sec. 1.148-5.
(2) Definitions of materially higher yield--(i) General rule for
purpose and nonpurpose investments. For investments that are not
otherwise described in this paragraph (d)(2), materially higher means
one-eighth of 1 percentage point.
(ii) Refunding escrows and replacement proceeds. For investments in
a refunding escrow or for investments allocable to replacement proceeds,
materially higher means one-thousandth of 1 percentage point.
(iii) Program investments. For program investments that are not
described in paragraph (d)(2)(iv) of this section, materially higher
means 1 and one-half percentage points.
(iv) Student loans. For qualified student loans that are program
investments, materially higher means 2 percentage points.
(v) Tax-exempt investments. For investments that are tax-exempt
bonds and are not investment property under section 148(b)(3), no yield
limitation applies.
(3) Mortgage loans. Qualified mortgage loans that satisfy the
requirements of section 143(g) are treated as meeting the requirements
of this paragraph (d).
(e) Temporary periods--(1) In general. During the temporary periods
set forth in this paragraph (e), the proceeds and replacement proceeds
of an issue may be invested in higher yielding investments without
causing bonds in the issue to be arbitrage bonds. This paragraph (e)
does not apply to refunding issues (see Sec. 1.148-9).
(2) General 3-year temporary period for capital projects and
qualified mortgage loans--(i) In general. The net sale proceeds and
investment proceeds of an issue reasonably expected to be allocated to
expenditures for capital projects qualify for a temporary period of 3
years beginning on the issue date (the 3-year temporary period). The 3-
year temporary period also applies to the proceeds of qualified mortgage
bonds and qualified veterans' mortgage bonds by substituting qualified
mortgage loans in each place that capital projects appears in this
paragraph (e)(2). The 3-year temporary period applies only if the issuer
reasonably expects to satisfy the expenditure test, the time test, and
the due diligence test. These rules apply separately to each conduit
loan financed by an issue (other than qualified mortgage loans), with
the expenditure and time tests measured from the issue date of the
issue.
(A) Expenditure test. The expenditure test is met if at least 85
percent of the net sale proceeds of the issue are allocated to
expenditures on the capital projects by the end of the 3-year temporary
period.
(B) Time test. The time test is met if the issuer incurs within 6
months of the issue date a substantial binding obligation to a third
party to expend at
[[Page 665]]
least 5 percent of the net sale proceeds of the issue on the capital
projects. An obligation is not binding if it is subject to contingencies
within the issuer's or a related party's control.
(C) Due diligence test. The due diligence test is met if completion
of the capital projects and the allocation of the net sale proceeds of
the issue to expenditures proceed with due diligence.
(ii) 5-year temporary period. In the case of proceeds expected to be
allocated to a capital project involving a substantial amount of
construction expenditures (as defined in Sec. 1.148-7), a 5-year
temporary period applies in lieu of the 3-year temporary period if the
issuer satisfies the requirements of paragraph (e)(2)(i) of this section
applied by substituting ``5 years'' in each place that ``3 years''
appears, and both the issuer and a licensed architect or engineer
certify that the longer period is necessary to complete the capital
project.
(3) Temporary period for restricted working capital expenditures--
(i) General rule. The proceeds of an issue that are reasonably expected
to be allocated to restricted working capital expenditures within 13
months after the issue date qualify for a temporary period of 13 months
beginning on the issue date. Paragraph (e)(2) of this section contains
additional temporary period rules for certain working capital
expenditures that are treated as part of a capital project.
(ii) Longer temporary period for certain tax anticipation issues. If
an issuer reasonably expects to use tax revenues arising from tax levies
for a single fiscal year to redeem or retire an issue, and the issue
matures by the earlier of 2 years after the issue date or 60 days after
the last date for payment of those taxes without interest or penalty,
the temporary period under paragraph (e)(3)(i) of this section is
extended until the maturity date of the issue.
(4) Temporary period for pooled financings--(i) In general. Proceeds
of a pooled financing issue reasonably expected to be used to finance
purpose investments qualify for a temporary period of 6 months while
held by the issuer before being loaned to a conduit borrower. Any
otherwise available temporary period for proceeds held by a conduit
borrower, however, is reduced by the period of time during which those
proceeds were held by the issuer before being loaned. For example, if
the proceeds of a pooled financing issue loaned to a conduit borrower
would qualify for a 3-year temporary period, and the proceeds are held
by the issuer for 5 months before being loaned to the conduit borrower,
the proceeds qualify for only an additional 31-month temporary period
after being loaned to the conduit borrower. Except as provided in
paragraph (e)(4)(iv) of this section, this paragraph (e)(4) does not
apply to any qualified mortgage bond or qualified veterans' mortgage
bond under section 143.
(ii) Loan repayments--(A) Amount held by the issuer. The temporary
period under this paragraph (e)(4) for proceeds from the sale or
repayment of any loan that are reasonably expected to be used to make or
finance new loans is 3 months.
(B) Amounts re-loaned to conduit borrowers. Any temporary period for
proceeds held by a conduit borrower under a new loan from amounts
described in paragraph (e)(4)(ii)(A) of this section is determined by
treating the date the new loan is made as the issue date and by reducing
the temporary period by the period the amounts were held by the issuer
following the last repayment.
(iii) Construction issues. If all or a portion of a pooled financing
issue qualifies as a construction issue under Sec. 1.148-7(b)(6),
paragraph (e)(4)(i) of this section is applied by substituting ``2
years'' for ``6 months.''
(iv) Amounts re-loaned for qualified mortgage loans. The temporary
period under this paragraph (e)(4) for proceeds from the sale,
prepayment, or repayment of any qualified mortgage loan that are
reasonably expected to be used to make or finance new qualified mortgage
loans is 3 years.
(5) Temporary period for replacement proceeds--(i) In general.
Except as otherwise provided, replacement proceeds qualify for a
temporary period of 30 days beginning on the date that the amounts are
first treated as replacement proceeds.
(ii) Temporary period for bona fide debt service funds. Amounts in a
bona fide
[[Page 666]]
debt service fund for an issue qualify for a temporary period of 13
months. If only a portion of a fund qualifies as a bona fide debt
service fund, only that portion qualifies for this temporary period.
(6) Temporary period for investment proceeds. Except as otherwise
provided in this paragraph (e), investment proceeds qualify for a
temporary period of 1 year beginning on the date of receipt.
(7) Other amounts. Gross proceeds not otherwise eligible for a
temporary period described in this paragraph (e) qualify for a temporary
period of 30 days beginning on the date of receipt.
(f) Reserve or replacement funds--(1) General 10 percent limitation
on funding with sale proceeds. An issue consists of arbitrage bonds if
sale proceeds of the issue in excess of 10 percent of the stated
principal amount of the issue are used to finance any reserve or
replacement fund, without regard to whether those sale proceeds are
invested in higher yielding investments. If an issue has more than a de
minimis amount of original issue discount or premium, the issue price
(net of pre-issuance accrued interest) is used to measure the 10-percent
limitation in lieu of stated principal amount. This rule does not limit
the use of amounts other than sale proceeds of an issue to fund a
reserve or replacement fund.
(2) Exception from yield restriction for reasonably required reserve
or replacement funds--(i) In general. The investment of amounts that are
part of a reasonably required reserve or replacement fund in higher
yielding investments will not cause an issue to consist of arbitrage
bonds. A reasonably required reserve or replacement fund may consist of
all or a portion of one or more funds, however labelled, derived from
one or more sources. Amounts in a reserve or replacement fund in excess
of the amount that is reasonably required are not part of a reasonably
required reserve or replacement fund.
(ii) Size limitation. The amount of gross proceeds of an issue that
qualifies as a reasonably required reserve or replacement fund may not
exceed an amount equal to the least of 10 percent of the stated
principal amount of the issue, the maximum annual principal and interest
requirements on the issue, or 125 percent of the average annual
principal and interest requirements on the issue. If an issue has more
than a de minimis amount of original issue discount or premium, the
issue price of the issue (net of pre-issuance accrued interest) is used
to measure the 10 percent limitation in lieu of its stated principal
amount. For a reserve or replacement fund that secures more than one
issue (e.g. a parity reserve fund), the size limitation may be measured
on an aggregate basis.
(iii) Valuation of investments. Investments in a reasonably required
reserve or replacement fund may be valued in any reasonable,
consistently applied manner that is permitted under Sec. 1.148-5.
(iv) 150 percent debt service limitation on investment in nonpurpose
investments for certain private activity bonds. Section 148(d)(3)
contains additional limits on the amount of gross proceeds of an issue
of private activity bonds, other than qualified 501(c)(3) bonds, that
may be invested in higher yielding nonpurpose investments without
causing the bonds to be arbitrage bonds. For purposes of these rules,
initial temporary period means the temporary periods under paragraphs
(e)(2), (e)(3), and (e)(4) of this section and under Sec. 1.148-
9(d)(2)(i), (ii), and (iii).
(3) Certain parity reserve funds. The limitation contained in
paragraph (f)(1) of this section does not apply to an issue if the
master legal document authorizing the issuance of the bonds (e.g., a
master indenture) was adopted before August 16, 1986, and that document-
-
(i) Requires a reserve or replacement fund in excess of 10 percent
of the sale proceeds, but not more than maximum annual principal and
interest requirements;
(ii) Is not amended after August 31, 1986 (other than to permit the
issuance of additional bonds as contemplated in the master legal
document); and
(iii) Provides that bonds having a parity of security may not be
issued by or on behalf of the issuer for the purposes provided under the
document without satisfying the reserve fund requirements of the
indenture.
[[Page 667]]
(g) Minor portion. Under section 148(e), a bond of an issue is not
an arbitrage bond solely because of the investment in higher yielding
investments of gross proceeds of the issue in an amount not exceeding
the lesser of--
(1) 5 percent of the sale proceeds of the issue; or
(2) $100,000.
(h) Certain waivers permitted. On or before the issue date, an
issuer may elect to waive the right to invest in higher yielding
investments during any temporary period under paragraph (e) of this
section or as part of a reasonably required reserve or replacement fund
under paragraph (f) of this section. At any time, an issuer may waive
the right to invest in higher yielding investments as part of a minor
portion under paragraph (g) of this section.
[T.D. 8476, 58 FR 33520, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24042, May 10, 1994; T.D. 8718, 62 FR 25507,
May 9, 1997]
Sec. 1.148-3 General arbitrage rebate rules.
(a) In general. Section 148(f) requires that certain earnings on
nonpurpose investments allocable to the gross proceeds of an issue be
paid to the United States to prevent the bonds in the issue from being
arbitrage bonds. The arbitrage that must be rebated is based on the
difference between the amount actually earned on nonpurpose investments
and the amount that would have been earned if those investments had a
yield equal to the yield on the issue.
(b) Definition of rebate amount. As of any date, the rebate amount
for an issue is the excess of the future value, as of that date, of all
receipts on nonpurpose investments over the future value, as of that
date, of all payments on nonpurpose investments.
(c) Computation of future value of a payment or receipt. The future
value of a payment or receipt at the end of any period is determined
using the economic accrual method and equals the value of that payment
or receipt when it is paid or received (or treated as paid or received),
plus interest assumed to be earned and compounded over the period at a
rate equal to the yield on the issue, using the same compounding
interval and financial conventions used to compute that yield.
(d) Payments and receipts-- (1) Definition of payments. For purposes
of this section, payments are--
(i) Amounts actually or constructively paid to acquire a nonpurpose
investment (or treated as paid to a commingled fund);
(ii) For a nonpurpose investment that is first allocated to an issue
on a date after it is actually acquired (e.g., an investment that
becomes allocable to transferred proceeds or to replacement proceeds) or
that becomes subject to the rebate requirement on a date after it is
actually acquired (e.g., an investment allocated to a reasonably
required reserve or replacement fund for a construction issue at the end
of the 2-year spending period), the value of that investment on that
date;
(iii) For a nonpurpose investment that was allocated to an issue at
the end of the preceding computation period, the value of that
investment at the beginning of the computation period;
(iv) On the last day of each bond year during which there are
amounts allocated to gross proceeds of an issue that are subject to the
rebate requirement, and on the final maturity date, a computation credit
of $1,000; and
(v) Yield reduction payments on nonpurpose investments made pursuant
to Sec. 1.148-5(c).
(2) Definition of receipts. For purposes of this section, receipts
are--
(i) Amounts actually or constructively received from a nonpurpose
investment (including amounts treated as received from a commingled
fund), such as earnings and return of principal;
(ii) For a nonpurpose investment that ceases to be allocated to an
issue before its disposition or redemption date (e.g., an investment
that becomes allocable to transferred proceeds of another issue or that
ceases to be allocable to the issue pursuant to the universal cap under
Sec. 1.148-6) or that ceases to be subject to the rebate requirement on
a date earlier than its disposition or redemption date (e.g., an
investment allocated to a fund initially subject to the rebate
requirement but that subsequently qualifies
[[Page 668]]
as a bona fide debt service fund), the value of that nonpurpose
investment on that date; and
(iii) For a nonpurpose investment that is held at the end of a
computation period, the value of that investment at the end of that
period.
(3) Special rules for commingled funds. Section 1.148-6(e) provides
special rules to limit certain of the required determinations of
payments and receipts for investments of a commingled fund.
(e) Computation dates--(1) In general. For a fixed yield issue, an
issuer may treat any date as a computation date. For a variable yield
issue, an issuer:
(i) May treat the last day of any bond year ending on or before the
latest date on which the first rebate amount is required to be paid
under paragraph (f) of this section (the first required payment date) as
a computation date but may not change that treatment after the first
payment date; and
(ii) After the first required payment date, must consistently treat
either the end of each bond year or the end of each fifth bond year as
computation dates and may not change these computation dates after the
first required payment date.
(2) Final computation date. The date that an issue is discharged is
the final computation date. For an issue retired within 3 years of the
issue date, however, the final computation date need not occur before
the end of 8 months after the issue date or during the period in which
the issuer reasonably expects that any of the spending exceptions under
Sec. 1.148-7 will apply to the issue.
(f) Amount of required rebate installment payment--(1) Amount of
interim rebate payments. The first rebate installment payment must be
made for a computation date that is not later than 5 years after the
issue date. Subsequent rebate installment payments must be made for a
computation date that is not later than 5 years after the previous
computation date for which an installment payment was made. A rebate
installment payment must be in an amount that, when added to the future
value, as of the computation date, of previous rebate payments made for
the issue, equals at least 90 percent of the rebate amount as of that
date.
(2) Amount of final rebate payment. For the final computation date,
a final rebate payment must be paid in an amount that, when added to the
future value of previous rebate payments made for the issue, equals 100
percent of the rebate amount as of that date.
(3) Future value of rebate payments. The future value of a rebate
payment is determined under paragraph (c) of this section. This value is
computed by taking into account recoveries of overpayments.
(g) Time and manner of payment. Each rebate payment must be paid no
later than 60 days after the computation date to which the payment
relates. Any rebate payment paid within this 60-day period may be
treated as paid on the computation date to which it relates. A rebate
payment is paid when it is filed with the Internal Revenue Service at
the place or places designated by the Commissioner. A payment must be
accompanied by the form provided by the Commissioner for this purpose.
(h) Penalty in lieu of loss of tax exemption--(1) In general. The
failure to pay the correct rebate amount when required will cause the
bonds of the issue to be arbitrage bonds, unless the Commissioner
determines that the failure was not caused by willful neglect and the
issuer promptly pays a penalty to the United States. If no bond of the
issue is a private activity bond (other than a qualified 501(c)(3)
bond), the penalty equals 50 percent of the rebate amount not paid when
required to be paid, plus interest on that amount. Otherwise, the
penalty equals 100 percent of the rebate amount not paid when required
to be paid, plus interest on that amount.
(2) Interest on underpayments. Interest accrues at the underpayment
rate under section 6621, beginning on the date the correct rebate amount
is due and ending on the date 10 days before it is paid.
(3) Waivers of the penalty. The penalty is automatically waived if
the rebate amount that the issuer failed to pay plus interest is paid
within 180 days after discovery of the failure, unless, the Commissioner
determines that the failure was due to willful neglect, or the issue is
under examination by the Commissioner at any time during the
[[Page 669]]
period beginning on the date the failure first occurred and ending on
the date 90 days after the receipt of the rebate amount. Generally,
extensions of this 180-day period and waivers of the penalty in other
cases will be granted by the Commissioner only in unusual circumstances.
For purposes of this paragraph (h)(3), willful neglect does not include
a failure that is attributable solely to the permissible retroactive
selection of a short first bond year if the rebate amount that the
issuer failed to pay is paid within 60 days of the selection of that
bond year.
(4) Application to alternative penalty under Sec. 1.148-7.
Paragraphs (h) (1), (2), and (3) of this section apply to failures to
pay penalty payments under Sec. 1.148-7 (alternative penalty amounts) by
substituting alternative penalty amounts for rebate amount and the last
day of each spending period for computation date.
(i) Recovery of overpayment of rebate-- (1) In general. An issuer
may recover an overpayment for an issue of tax-exempt bonds by
establishing to the satisfaction of the Commissioner that the
overpayment occurred. An overpayment is the excess of the amount paid to
the United States for an issue under section 148 over the sum of the
rebate amount for the issue as of the most recent computation date and
all amounts that are otherwise required to be paid under section 148 as
of the date the recovery is requested.
(2) Limitations on recovery. (i) An overpayment may be recovered
only to the extent that a recovery on the date that it is first
requested would not result in an additional rebate amount if that date
were treated as a computation date.
(ii) Except for overpayments of penalty in lieu of rebate under
section 148(f)(4)(C)(vii) and Sec. 1.148-7(k), an overpayment of less
than $5,000 may not be recovered before the final computation date.
(j) Examples. The provisions of this section may be illustrated by
the following examples.
Example 1. Calculation and payment of rebate for a fixed yield
issue. (i) Facts. On January 1, 1994, City A issues a fixed yield issue
and invests all the sale proceeds of the issue ($49 million). There are
no other gross proceeds. The issue has a yield of 7.0000 percent per
year compounded semiannually (computed on a 30 day month/360 day year
basis). City A receives amounts from the investment and immediately
expends them for the governmental purpose of the issue as follows:
------------------------------------------------------------------------
Date Amount
------------------------------------------------------------------------
2/1/94.................................................. $3,000,000
5/1/94.................................................. 5,000,000
1/1/95.................................................. 5,000,000
9/1/95.................................................. 20,000,000
3/1/96.................................................. 22,000,000
------------------------------------------------------------------------
(ii) First computation date. (A) City A chooses January 1, 1999, as
its first computation date. This date is the latest date that may be
used to compute the first required rebate installment payment. The
rebate amount as of this date is computed by determining the future
value of the receipts and the payments for the investment. The
compounding interval is each 6-month (or shorter) period and the 30 day
month/360 day year basis is used because these conventions were used to
compute yield on the issue. The future value of these amounts, plus the
computation credit, as of January 1, 1999, is:
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/94................................ ($49,000,000) ($69,119,339)
2/1/94................................ 3,000,000 4,207,602
5/1/94................................ 5,000,000 6,893,079
1/1/95................................ 5,000,000 6,584,045
1/1/95................................ (1,000) (1,317)
9/1/95................................ 20,000,000 25,155,464
1/1/96................................ (1,000) 1,229)
3/1/96................................ 22,000,000 26,735,275
1/1/97................................ (1,000) (1,148)
---------------------------------
Rebate amount (1/01/99)............... ............... 452,432
------------------------------------------------------------------------
(B) City A pays 90 percent of the rebate amount ($407,189) to the
United States within 60 days of January 1, 1999.
(iii) Second computation date. (A) On the next required computation
date, January 1, 2004, the future value of the payments and receipts is:
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/99........................................ $452,432 $638,200
-------------------------
Rebate amount (1/01/04)....................... ........... 638,200
------------------------------------------------------------------------
(B) As of this computation date, the future value of the payment
treated as made on January 1, 1999, is $574,380, which equals at least
90 percent of the rebate amount as of this computation date ($638,200 x
0.9), and thus no additional rebate payment is due as of this date.
(iv) Final computation date. (A) On January 1, 2009, City A redeems
all the bonds, and thus this date is the final computation date. The
future value of the receipts and payments as of this date is:
[[Page 670]]
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/04...................................... $638,200 $900,244
1/1/09...................................... (1,000) (1,000)
---------------------------
Rebate amount (1/01/09)..................... ............ 899,244
------------------------------------------------------------------------
(B) As of this computation date, the future value of the payment
made on January 1, 1999, is $810,220 and thus an additional rebate
payment of $89,024 is due. This payment reflects the future value of the
10 percent unpaid portion, and thus would not be owed had the issuer
paid the full rebate amount as of any prior computation date.
Example 2. Calculation and payment of rebate for a variable yield
issue. (i) Facts. On July 1, 1994, City B issues a variable yield issue
and invests all of the sale proceeds of the issue ($30 million). There
are no other gross proceeds. As of July 1, 1999, there are nonpurpose
investments allocated to the issue. Prior to July 1, 1999, City B
receives amounts from nonpurpose investments and immediately expends
them for the governmental purpose of the issue as follows:
------------------------------------------------------------------------
Date Amount
------------------------------------------------------------------------
8/1/1994.................................................. $5,000,000
7/1/1995.................................................. 8,000,000
12/1/1995................................................. 17,000,000
7/1/1999.................................................. 650,000
------------------------------------------------------------------------
(ii) First computation date. (A) City B treats the last day of the
fifth bond year (July 1, 1999) as a computation date. The yield on the
variable yield issue during the first computation period (the period
beginning on the issue date and ending on the first computation date) is
6.0000 percent per year compounded semiannually. The value of the
nonpurpose investments allocated to the issue as of July 1, 1999, is $3
million. The rebate amount as of July 1, 1999, is computed by
determining the future value of the receipts and the payments for the
nonpurpose investments. The compounding interval is each 6-month (or
shorter) period and the 30 day month/360 day year basis is used because
these conventions were used to compute yield on the issue. The future
value of these amounts and of the computation date credits as of July 1,
1999, is:
------------------------------------------------------------------------
Receipts FV (6.0000
Date (payments) percent)
------------------------------------------------------------------------
7/1/1994............................. ($30,000,000) ($40,317,491)
8/1/1994............................. 5,000,000 6,686,560
7/1/1995............................. (1,000) (1,267)
7/1/1995............................. 8,000,000 10,134,161
12/1/1995............................ 17,000,000 21,011,112
7/1/1996............................. (1,000) (1,194)
7/1/1997............................. (1,000) (1,126)
7/1/1998............................. (1,000) (1,061)
7/1/1999............................. 3,000,000 3,000,000
7/1/1999............................. 650,000 650,000
7/1/1999............................. (1,000) (1,000)
----------------------------------
Rebate amount (7/01/1999)............ 1,158,694
------------------------------------------------------------------------
(B) City B pays 90 percent of the rebate amount ($1,042,824.60) to
the United States within 60 days of July 1, 1999.
(iii) Next computation date. (A) On July 1, 2004, City B redeems all
of the bonds. Thus, the next computation date is July 1, 2004. On July
30, 1999, City B chose to compute rebate for periods following the first
computation period by treating the end of each fifth bond year as a
computation date. The yield during the second computation period is
5.0000 percent per year compounded semiannually. The computation of the
rebate amount as of this date reflects the value of the nonpurpose
investments allocated to the issue at the end of the prior computation
period. On July 1, 2004, City B sells those nonpurpose investments for
$3,925,000 and expends that amount for the governmental purpose of the
issue.
(B) As of July 1, 2004, the future value of the rebate amount
computed as of July 1, 1999, and of all other payments and receipts is:
------------------------------------------------------------------------
Receipts FV (5.0000
Date (payments) percent)
------------------------------------------------------------------------
7/1/1999..................................... $1,158,694 $1,483,226
7/1/1999..................................... (3,000,000) (3,840,254)
7/1/2000..................................... (1,000) (1,218)
7/1/2001..................................... (1,000) (1,160)
7/1/2002..................................... (1,000) (1,104)
7/1/2003..................................... (1,000) (1,051)
7/1/2004..................................... (2,000) (2,000)
7/1/2004..................................... 3,925,000 3,925,000
--------------------------
1,561,439
------------------------------------------------------------------------
(C) As of this computation date, the future value of the payment
made on July 1, 1999, is $1,334,904 and thus an additional rebate
payment of $226,535 is due.
(D) If the yield during the second computation period were, instead,
7.0000 percent, the rebate amount computed as of July 1, 1999, would be
$1,320,891. The future value of the payment made on July 1, 1999, would
be $1,471,007, and, therefore, City B would have overpaid the rebate
amount by $150,116.
(k) Bona fide debt service fund exception. Under section
148(f)(4)(A), the rebate requirement does not apply to amounts in
certain bona fide debt service funds. An issue with an average annual
debt service that is not in excess
[[Page 671]]
of $2,500,000 may be treated as satisfying the $100,000 limitation in
section 148(f)(4)(A)(ii).
[T.D. 8476, 58 FR 33522, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24042, May 10, 1994; T.D. 8476, 59 FR 24350,
May 11, 1994; T.D. 8718, 62 FR 25507, May 9, 1997]
Sec. 1.148-4 Yield on an issue of bonds.
(a) In general. The yield on an issue of bonds is used to apply
investment yield restrictions under section 148(a) and to compute rebate
liability under section 148(f). Yield is computed under the economic
accrual method using any consistently applied compounding interval of
not more than one year. A short first compounding interval and a short
last compounding interval may be used. Yield is expressed as an annual
percentage rate that is calculated to at least four decimal places
(e.g., 5.2525 percent). Other reasonable, standard financial
conventions, such as the 30 days per month/360 days per year convention,
may be used in computing yield but must be consistently applied. The
yield on an issue that would be a purpose investment (absent section
148(b)(3)(A)) is equal to the yield on the conduit financing issue that
financed that purpose investment. The Commissioner may permit issuers of
qualified mortgage bonds or qualified student loan bonds to use a single
yield for two or more issues.
(b) Computing yield on a fixed yield issue--(1) In general--(i)
Yield on an issue. The yield on a fixed yield issue is the discount rate
that, when used in computing the present value as of the issue date of
all unconditionally payable payments of principal, interest, and fees
for qualified guarantees on the issue and amounts reasonably expected to
be paid as fees for qualified guarantees on the issue, produces an
amount equal to the present value, using the same discount rate, of the
aggregate issue price of bonds of the issue as of the issue date.
Further, payments include certain amounts properly allocable to a
qualified hedge. Yield on a fixed yield issue is computed as of the
issue date and is not affected by subsequent unexpected events, except
to the extent provided in paragraphs (b)(4) and (h)(3) of this section.
(ii) Yield on a bond. Yield on a fixed yield bond is computed in the
same manner as yield on a fixed yield issue.
(2) Yield on certain fixed yield bonds subject to mandatory or
contingent early redemption--(i) In general. The yield on a fixed yield
issue that includes a bond subject to mandatory early redemption or
expected contingent redemption is computed by treating that bond as
redeemed on its reasonably expected early redemption date for an amount
equal to its value on that date. Reasonable expectations are determined
on the issue date. A bond is subject to mandatory early redemption if it
is unconditionally payable in full before its final maturity date. A
bond is subject to a contingent redemption if it must be, or is
reasonably expected to be, redeemed prior to final maturity upon the
occurrence of a contingency. A contingent redemption is taken into
account only if the contingency is reasonably expected to occur, in
which case the date of occurrence of the contingency must be reasonably
estimated. For example, if bonds are reasonably expected to be redeemed
early using excess revenues from general or special property taxes or
benefit assessments or similar amounts, the reasonably expected
redemption schedule is used to determine yield. For purposes of this
paragraph (b)(2)(i), excess proceeds calls for issues for which the
requirements of Sec. 1.148-2(e) (2) or (3) are satisfied, calamity
calls, and refundings do not cause a bond to be subject to early
redemption. The value of a bond is determined under paragraph (e) of
this section.
(ii) Substantially identical bonds subject to mandatory early
redemption. If substantially identical bonds of an issue are subject to
specified mandatory redemptions prior to final maturity (e.g., a
mandatory sinking fund redemption requirement), yield on that issue is
computed by treating those bonds as redeemed in accordance with the
redemption schedule for an amount equal to their value. Generally, bonds
are substantially identical if the stated interest rate, maturity, and
payment dates are the same. In computing the yield on an issue
containing bonds described in this paragraph (b)(2)(ii), each
[[Page 672]]
of those bonds must be treated as redeemed at its present value, unless
the stated redemption price at maturity of the bond does not exceed the
issue price of the bond by more than one-fourth of one percent
multiplied by the product of the stated redemption price at maturity and
the number of years to the weighted average maturity date of the
substantially identical bonds, in which case each of those bonds must be
treated as redeemed at its outstanding stated principal amount, plus
accrued, unpaid interest. Weighted average maturity is determined by
taking into account the mandatory redemption schedule.
(3) Yield on certain fixed yield bonds subject to optional early
redemption--(i) In general. If a fixed yield bond is subject to optional
early redemption and is described in paragraph (b)(3)(ii) of this
section, the yield on the issue containing the bond is computed by
treating the bond as redeemed at its stated redemption price on the
optional redemption date that would produce the lowest yield on the
issue.
(ii) Fixed yield bonds subject to special yield calculation rule. A
fixed yield bond is described in this paragraph (b)(3)(ii) only if it--
(A) Is subject to optional redemption within five years of the issue
date, but only if the yield on the issue computed by assuming all bonds
in the issue subject to redemption within 5 years of the issue date are
redeemed at maturity is more than one-eighth of one percentage point
higher than the yield on that issue computed by assuming all bonds
subject to optional redemption within 5 years of the issue date are
redeemed at the earliest date for their redemption;
(B) Is issued at an issue price that exceeds the stated redemption
price at maturity by more than one-fourth of one percent multiplied by
the product of the stated redemption price at maturity and the number of
complete years to the first optional redemption date for the bond; or
(C) Bears interest at increasing interest rates (i.e., a stepped
coupon bond).
(4) Yield recomputed upon transfer of certain rights associated with
the bond. For purposes of Sec. 1.148-3, as of the date of any transfer,
waiver, modification, or similar transaction (collectively, a transfer)
of any right that is part of the terms of a bond or is otherwise
associated with a bond (e.g., a redemption right), in a transaction that
is separate and apart from the original sale of the bond, the issue is
treated as if it were retired and a new issue issued on the date of the
transfer (reissued). The redemption price of the retired issue and the
issue price of the new issue equal the aggregate values of all the bonds
of the issue on the date of the transfer. In computing yield on the new
issue, any amounts received by the issuer as consideration for the
transfer are taken into account.
(5) Special aggregation rule treating certain bonds as a single
fixed yield bond. Two variable yield bonds of an issue are treated in
the aggregate as a single fixed yield bond if--
(i) Aggregate treatment would result in the single bond being a
fixed yield bond; and
(ii) The terms of the bonds do not contain any features that could
distort the aggregate fixed yield from what the yield would be if a
single fixed yield bond were issued. For example, if an issue contains a
bond bearing interest at a floating rate and a related bond bearing
interest at a rate equal to a fixed rate minus that floating rate, those
two bonds are treated as a single fixed yield bond only if neither bond
may be redeemed unless the other bond is also redeemed at the same time.
(6) Examples. The provisions of this paragraph (b) may be
illustrated by the following examples.
Example 1. No early call--(i) Facts. On January 1, 1994, City A
issues an issue consisting of four identical fixed yield bonds. The
stated final maturity date of each bond is January 1, 2004, and no bond
is subject to redemption before this date. Interest is payable on
January 1 of each year at a rate of 6.0000 percent per year on the
outstanding principal amount. The total stated principal amount of the
bonds is $20 million. The issue price of the bonds $20,060,000.
(ii) Computation. The yield on the issue is computed by treating the
bonds as retired at the stated maturity under the general rule of
Sec. 1.148-4(b)(1). The bonds are treated as redeemed for their stated
redemption prices. The yield on the issue is 5.8731 percent per year
compounded semiannually, computed as follows:
[[Page 673]]
------------------------------------------------------------------------
PV (5.8731
Date Payments percent)
------------------------------------------------------------------------
1/1/1995..................................... $1,200,000 $1,132,510
1/1/1996..................................... 1,200,000 1,068,816
1/1/1997..................................... 1,200,000 1,008,704
1/1/1998..................................... 1,200,000 951,973
1/1/1999..................................... 1,200,000 898,433
1/1/2000..................................... 1,200,000 847,903
1/1/2001..................................... 1,200,000 800,216
1/1/2002..................................... 1,200,000 755,210
1/1/2003..................................... 1,200,000 712,736
1/1/2004..................................... 21,200,000 11,883,498
-------------
20,060,000
------------------------------------------------------------------------
Example 2. Mandatory calls. (i) Facts. The facts are the same as in
Example 1. In this case, however, the bonds are subject to mandatory
sinking fund redemption on January 1 of each year, beginning January 1,
2001. On each sinking fund redemption date, one of the bonds is chosen
by lottery and is required to be redeemed at par plus accrued interest.
(ii) Computation. Because the bonds are subject to specified
redemptions, yield on the issue is computed by treating the bonds as
redeemed in accordance with the redemption schedule under Sec. 1.148-
4(b)(2)(ii). Because the bonds are not sold at a discount, the bonds are
treated as retired at their stated redemption prices. The yield on the
issue is 5.8678 percent per year compounded semiannually, computed as
follows:
------------------------------------------------------------------------
PV (5.8678
Date Payments percent)
------------------------------------------------------------------------
1/1/1995..................................... $1,200,000 $1,132,569
1/1/1996..................................... 1,200,000 1,068,926
1/1/1997..................................... 1,200,000 1,008,860
1/1/1998..................................... 1,200,000 952,169
1/1/1999..................................... 1,200,000 898,664
1/1/2000..................................... 1,200,000 848,166
1/1/2001..................................... 6,200,000 4,135,942
1/1/2002..................................... 5,900,000 3,714,650
1/1/2003..................................... 5,600,000 3,327,647
1/1/2004..................................... 5,300,000 2,972,407
-------------
$20,060,000
------------------------------------------------------------------------
Example 3. Optional early call. (i) Facts. On January 1, 1994, City
C issues an issue consisting of three bonds. Each bond has a stated
principal amount of $10 million dollars and is issued for par. Bond X
bears interest at 5 percent per year and matures on January 1, 1999.
BondY bears interest at 6 percent per year and matures on January 1,
2002. Bond Z bears interest at 7 percent per year and matures on January
1, 2004. Bonds Y and Z are callable by the issuer at par plus accrued
interest after December 31, 1998.
(ii) Computation. (A) The yield on the issue computed as if each
bond is outstanding to its maturity is 6.0834 percent per year
compounded semiannually, computed as follows:
------------------------------------------------------------------------
PV (6.0834
Date Payments percent)
------------------------------------------------------------------------
1/1/1995..................................... $1,800,000 $1,695,299
1/1/1996..................................... 1,800,000 1,596,689
1/1/1997..................................... 1,800,000 1,503,814
1/1/1998..................................... 1,800,000 1,416,342
1/1/1999..................................... 11,800,000 8,744,830
1/1/2000..................................... 1,300,000 907,374
1/1/2001..................................... 1,300,000 854,595
1/1/2002..................................... 11,300,000 6,996,316
1/1/2003..................................... 700,000 408,190
1/1/2004..................................... 10,700,000 5,876,551
-------------
30,000,000
------------------------------------------------------------------------
(B) The yield on the issue computed as if all bonds are called at
the earliest date for redemption is 5.9126 percent per year compounded
semiannually, computed as follows:
------------------------------------------------------------------------
PV (5.9126
Date Payments percent)
------------------------------------------------------------------------
1/1/1995..................................... $1,800,000 $1,698,113
1/1/1996..................................... 1,800,000 1,601,994
1/1/1997..................................... 1,800,000 1,511,315
1/1/1998..................................... 1,800,000 1,425,769
1/1/1999..................................... 31,800,000 23,762,809
-------------
30,000,000
------------------------------------------------------------------------
(C) Because the yield on the issue computed by assuming all bonds in
the issue subject to redemption within 5 years of the issue date are
redeemed at maturity is more than one-eighth of one percentage point
higher than the yield on the issue computed by assuming all bonds
subject to optional redemption within 5 years of the issue date are
redeemed at the earliest date for their redemption, each bond is treated
as redeemed on the date that would produce the lowest yield for the
issue. The lowest yield on the issue would result from a redemption of
all the bonds on January 1, 1999. Thus, the yield on the issue is 5.9126
percent per year compounded semiannually.
(c) Computing yield on a variable yield issue--(1) In general. The
yield on a variable yield issue is computed separately for each
computation period. The yield for each computation period is the
discount rate that, when used in computing the present value as of the
first day of the computation period of all the payments of principal and
interest and fees for qualified guarantees that are attributable to the
computation period, produces an amount equal to the present value, using
the same discount rate, of the aggregate issue price (or deemed issue
price, as determined in paragraph (c)(2)(iv) of this section) of the
bonds of the issue as of the first day of the computation period. The
yield on a variable yield bond
[[Page 674]]
is computed in the same manner as the yield on a variable yield issue.
Except as provided in paragraph (c)(2) of this section, yield on any
fixed yield bond in a variable yield issue is computed in the same
manner as the yield on a fixed yield issue as provided in paragraph (b)
of this section.
(2) Payments on bonds included in yield for a computation period--
(i) Payments in general. The payments on a bond that are attributable to
a computation period include any amounts actually paid during the period
for principal on the bond. Payments also include any amounts paid during
the current period both for interest accruing on the bond during the
current period and for interest accruing during the prior period that
was included in the deemed issue price of the bond as accrued unpaid
interest at the start of the current period under this paragraph (c)(2).
Further, payments include any amounts properly allocable to fees for a
qualified guarantee of the bond for the period and to any amounts
properly allocable to a qualified hedge for the period.
(ii) Payments at actual redemption. If a bond is actually redeemed
during a computation period, an amount equal to the greater of its value
on the redemption date or the actual redemption price is a payment on
the actual redemption date.
(iii) Payments for bonds outstanding at end of computation period.
If a bond is outstanding at the end of a computation period, a payment
equal to the bond's value is taken into account on the last day of that
period.
(iv) Issue price for bonds outstanding at beginning of next
computation period. A bond outstanding at the end of a computation
period is treated as if it were immediately reissued on the next day for
a deemed issue price equal to the value from the day before as
determined under paragraph (c)(2)(iii) of this section.
(3) Example. The provisions of this paragraph (c) may be illustrated
by the following example.
Example. On January 1, 1994, City A issues an issue of identical
plain par bonds in an aggregate principal amount of $1,000,000. The
bonds pay interest at a variable rate on each June 1 throughout the term
of the issue. The entire principal amount of the bonds plus accrued,
unpaid interest is payable on the final maturity date of January 1,
2000. No bond year is selected. On June 1, 1994, 1995, 1996, 1997, and
1998, interest in the amounts of $30,000, $55,000, $57,000, $56,000, and
$45,000 is paid on the bonds. From June 1, 1998, to January 1, 1999,
$30,000 of interest accrues on the bonds. From January 1, 1999, to June
1, 1999, another $35,000 of interest accrues. On June 1, 1999, the
issuer actually pays $65,000 of interest. On January 1, 2000, $1,000,000
of principal and $38,000 of accrued interest are paid. The payments for
the computation period starting on the issue date and ending on January
1, 1999, include all annual interest payments paid from the issue date
to June 1, 1998. Because the issue is outstanding on January 1, 1999, it
is treated as redeemed on that date for amount equal to its value
($1,000,000 plus accrued, unpaid interest of $30,000 under paragraph
(e)(1) of this section). Thus, $1,030,000 is treated as paid on January
1, 1999. The issue is then treated as reissued on January 1, 1999, for
$1,030,000. The payments for the next computation period starting on
January 1, 1999, and ending on January 1, 2000, include the interest
actually paid on the bonds during that period ($65,000 on June 1, 1999,
plus $38,000 paid on January 1, 2000). Because the issue was actually
redeemed on January 1, 2000, an amount equal to its stated redemption
price is also treated as paid on January 1, 2000.
(d) Conversion from variable yield issue to fixed yield issue. For
purposes of determining yield under this section, as of the first day on
which a variable yield issue would qualify as a fixed yield issue if it
were newly issued on that date (a conversion date), that issue is
treated as if it were reissued as a fixed yield issue on the conversion
date. The redemption price of the variable yield issue and the issue
price of the fixed yield issue equal the aggregate values of all the
bonds on the conversion date. Thus, for example, for plain par bonds
(e.g., tender bonds), the deemed issue price would be the outstanding
principal amount, plus accrued unpaid interest. If the conversion date
occurs on a date other than a computation date, the issuer may continue
to treat the issue as a variable yield issue until the next computation
date, at which time it must be treated as converted to a fixed yield
issue.
(e) Value of bonds--(1) Plain par bonds. Except as otherwise
provided, the value of a plain par bond is its outstanding stated
principal amount, plus accrued unpaid interest. The value of a plain
[[Page 675]]
par bond that is actually redeemed or treated as redeemed is its stated
redemption price on the redemption date, plus accrued, unpaid interest.
(2) Other bonds. The value of a bond other than a plain par bond on
a date is its present value on that date. The present value of a bond is
computed under the economic accrual method taking into account all the
unconditionally payable payments of principal, interest, and fees for a
qualified guarantee to be paid on or after that date and using the yield
on the bond as the discount rate, except that for purposes of
Sec. 1.148-6(b)(2) (relating to the universal cap), these values may be
determined by consistently using the yield on the issue of which the
bonds are a part. To determine yield on fixed yield bonds, see paragraph
(b)(1) of this section. The rules contained in paragraphs (b)(2) and
(b)(3) of this section apply for this purpose. In the case of bonds
described in paragraph (b)(2)(ii) of this section, the present value of
those bonds on any date is computed using the yield to the final
maturity date of those bonds as the discount rate. In determining the
present value of a variable yield bond under this paragraph (e)(2), the
initial interest rate on the bond established by the interest index or
other interest rate setting mechanism is used to determine the interest
payments on that bond.
(f) Qualified guarantees--(1) In general. Fees properly allocable to
payments for a qualified guarantee for an issue (as determined under
paragraph (f)(6) of this section) are treated as additional interest on
that issue under section 148. A guarantee is a qualified guarantee if it
satisfies each of the requirements of paragraphs (f)(2) through (f)(4)
of this section.
(2) Interest savings. As of the date the guarantee is obtained, the
issuer must reasonably expect that the present value of the fees for the
guarantee will be less than the present value of the expected interest
savings on the issue as a result of the guarantee. For this purpose,
present value is computed using the yield on the issue, determined with
regard to guarantee payments, as the discount rate.
(3) Guarantee in substance. The arrangement must create a guarantee
in substance. The arrangement must impose a secondary liability that
unconditionally shifts substantially all of the credit risk for all or
part of the payments, such as payments for principal and interest,
redemption prices, or tender prices, on the guaranteed bonds. Reasonable
procedural or administrative requirements of the guarantee do not cause
the guarantee to be conditional. In the case of a guarantee against
failure to remarket a qualified tender bond, commercially reasonable
limitations based on credit risk, such as limitations on payment in the
event of default by the primary obligor or the bankruptcy of a long-term
credit guarantor, do not cause the guarantee to be conditional. The
guarantee may be in any form. The guarantor may not be a co-obligor.
Thus, the guarantor must not expect to make any payments other than
under a direct-pay letter of credit or similar arrangement for which the
guarantor will be reimbursed immediately. The guarantor and any related
parties together must not use more than 10 percent of the proceeds of
the portion of the issue allocable to the guaranteed bonds.
(4) Reasonable charge--(i) In general. Fees for a guarantee must not
exceed a reasonable, arm's-length charge for the transfer of credit
risk. In complying with this requirement, the issuer may not rely on the
representations of the guarantor.
(ii) Fees for services other than transfer of credit risk must be
separately stated. A fee for a guarantee must not include any payment
for any direct or indirect services other than the transfer of credit
risk, unless the compensation for those other services is separately
stated, reasonable, and excluded from the guarantee fee. Fees for the
transfer of credit risk include fees for the guarantor's overhead and
other costs relating to the transfer of credit risk. For example, a fee
includes payment for services other than transfer of credit risk if--
(A) It includes payment for the cost of underwriting or remarketing
bonds or for the cost of insurance for casualty to bond-financed
property;
(B) It is refundable upon redemption of the guaranteed bond before
the final maturity date and the amount of the
[[Page 676]]
refund would exceed the portion of the fee that had not been earned; or
(C) The requirements of Sec. 1.148-2(e)(2) (relating to temporary
periods for capital projects) are not satisfied, and the guarantor is
not reasonably assured that the bonds will be repaid if the project to
be financed is not completed.
(5) Guarantee of purpose investments. Except for guarantees of
qualified mortgage loans and qualified student loans, a guarantee of
payments on a purpose investment is a qualified guarantee of the issue
if all payments on the purpose investment reasonably coincide with
payments on the related bonds and the payments on the purpose investment
are unconditionally payable no more than 6 months before the
corresponding interest payment and 12 months before the corresponding
principal payments on the bonds. This paragraph (f)(5) only applies if,
in addition to satisfying the other requirements of this paragraph (f),
the guarantee is, in substance, a guarantee of the bonds allocable to
that purpose investment and to no other bonds except for bonds that are
equally and ratably secured by purpose investments of the same conduit
borrower.
(6) Allocation of qualified guarantee payments--(i) In general.
Payments for a qualified guarantee must be allocated to bonds and to
computation periods in a manner that properly reflects the proportionate
credit risk for which the guarantor is compensated. Proportionate credit
risk for bonds that are not substantially identical may be determined
using any reasonable, consistently applied method. For example, this
risk may be based on the ratio of the total principal and interest paid
and to be paid on a guaranteed bond to the total principal and interest
paid and to be paid on all bonds of the guaranteed issue. An allocation
method generally is not reasonable, for example, if a substantial
portion of the fee is allocated to the construction portion of the issue
and a correspondingly insubstantial portion is allocated to the later
years covered by the guarantee. Reasonable letter of credit set up fees
may be allocated ratably during the initial term of the letter of
credit. Upon an early redemption of a variable yield bond, fees
otherwise allocable to the period after the redemption are allocated to
remaining outstanding bonds of the issue or, if none remain outstanding,
to the period before the redemption.
(ii) Safe harbor for allocation of qualified guarantee fees for
variable yield issues. An allocation of non-level payments for a
qualified guarantee for variable yield bonds is treated as meeting the
requirements of paragraph (f)(6)(i) of this section if, for each bond
year for which the guarantee is in effect, an equal amount (or for any
short bond year, a proportionate amount of the equal amount) is treated
as paid as of the beginning of that bond year. The present value of the
annual amounts must equal the fee for the guarantee allocated to that
bond, with present value computed as of the first day the guarantee is
in effect by using as the discount rate the yield on the variable yield
bonds covered by the guarantee, determined without regard to any fee
allocated under this paragraph (f)(6)(ii).
(7) Refund or reduction of guarantee payments. If as a result of an
investment of proceeds of a refunding issue in a refunding escrow, there
will be a reduction in, or refund of, payments for a guarantee
(savings), the savings must be treated as a reduction in the payments on
the refunding issue.
(g) Yield on certain mortgage revenue and student loan bonds. For
purposes of section 148 and this section, section 143(g)(2)(C)(ii)
applies to the computation of yield on an issue of qualified mortgage
bonds or qualified veterans' mortgage bonds. For purposes of applying
section 148 and section 143(g) with respect to purpose investments
allocable to a variable yield issue of qualified mortgage bonds,
qualified veterans' mortgage bonds, or qualified student loan bonds that
is reasonably expected as of the issue date to convert to a fixed yield
issue, the yield may be computed over the term of the issue, and, if the
yield is so computed, paragraph (d) of this section does not apply to
the issue. As of any date, the yield over the term of the issue is based
on--
(1) With respect to any bond of the issue that has not converted to
a fixed and determinable yield on or before that date, the actual
amounts paid or
[[Page 677]]
received to that date and the amounts that are reasonably expected (as
of that date) to be paid or received with respect to that bond over the
remaining term of the issue (taking into account prepayment assumptions
under section 143(g)(2)(B)(iv), if applicable); and
(2) With respect to any bond of the issue that has converted to a
fixed and determinable yield on or before that date, the actual amounts
paid or received before that bond converted, if any, and the amount that
was reasonably expected (on the date that bond converted) to be paid or
received with respect to that bond over the remaining term of the issue
(taking into account prepayment assumptions under section
143(g)(2)(B)(iv), if applicable).
(h) Qualified hedging transactions--(1) In general. Payments made or
received by an issuer under a qualified hedge (as defined in paragraph
(h)(2) of this section) relating to bonds of an issue are taken into
account (as provided in paragraph (h)(3) of this section) to determine
the yield on the issue. Except as provided in paragraphs (h)(4) and
(h)(5)(ii)(E) of this section, the bonds to which a qualified hedge
relates are treated as variable yield bonds from the issue date of the
bonds. This paragraph (h) applies solely for purposes of sections
143(g), 148, and 149(d).
(2) Qualified hedge defined. Except as provided in paragraph (h)(5)
of this section, the term qualified hedge means a contract that
satisfies each of the following requirements:
(i) Hedge--(A) In general. The contract is entered into primarily to
modify the issuer's risk of interest rate changes with respect to a bond
(a hedge). For example, the contract may be an interest rate swap, an
interest rate cap, a futures contract, a forward contract, or an option.
(B) Special rule for fixed rate issues. If the contract modifies the
issuer's risk of interest rate changes with respect to a bond that is
part of an issue that, absent the contract, would be a fixed rate issue,
the contract must be entered into--
(1) No later than 15 days after the issue date (or the deemed issue
date under paragraph (d) of this section) of the issue; or
(2) No later than the expiration of a qualified hedge with respect
to bonds of that issue that satisfies paragraph (h)(2)(i)(B)(1) of this
section; or
(3) No later than the expiration of a qualified hedge with respect
to bonds of that issue that satisfies either paragraph (h)(2)(i)(B)(2)
of this section or this paragraph (h)(2)(i)(B)(3).
(C) Contracts with certain acquisition payments. If a hedge provider
makes a single payment to the issuer (e.g., a payment for an off-market
swap) in connection with the acquisition of a contract, the issuer may
treat a portion of that contract as a hedge provided--
(1) The hedge provider's payment to the issuer and the issuer's
payments under the contract in excess of those that it would make if the
contract bore rates equal to the on-market rates for the contract
(determined as of the date the parties enter into the contract) are
separately identified in a certification of the hedge provider; and
(2) The payments described in paragraph (h)(2)(i)(C)(1) of this
section are not treated as payments on the hedge.
(ii) No significant investment element--(A) In general. The contract
does not contain a significant investment element. Except as provided in
paragraph (h)(2)(ii)(B) of this section, a contract contains a
significant investment element if a significant portion of any payment
by one party relates to a conditional or unconditional obligation by the
other party to make a payment on a different date. Examples of contracts
that contain a significant investment element are a debt instrument held
by the issuer; an interest rate swap requiring any payments other than
periodic payments, within the meaning of Sec. 1.446-3 (periodic
payments) (e.g., a payment for an off-market swap or prepayment of part
or all of one leg of a swap); and an interest rate cap requiring the
issuer's premium for the cap to be paid in a single, up-front payment.
(B) Special level payment rule for interest rate caps. An interest
rate cap does not contain a significant investment element if--
(1) All payments to the issuer by the hedge provider are periodic
payments;
(2) The issuer makes payments for the cap at the same time as
periodic
[[Page 678]]
payments by the hedge provider must be made if the specified index
(within the meaning of Sec. 1.446-3) of the cap is above the strike
price of the cap; and
(3) Each payment by the issuer bears the same ratio to the notional
principal amount (within the meaning of Sec. 1.446-3) that is used to
compute the hedge provider's payment, if any, on that date.
(iii) Parties. The contract is entered into between the issuer or
the political subdivision on behalf of which the issuer issues the bonds
(collectively referred to in this paragraph (h) as the issuer) and a
provider that is not a related party (the hedge provider).
(iv) Hedged bonds. The contract covers, in whole or in part, all of
one or more groups of substantially identical bonds in the issue (i.e.,
all of the bonds having the same interest rate, maturity, and terms).
Thus, for example, a qualified hedge may include a hedge of all or a pro
rata portion of each interest payment on the variable rate bonds in an
issue for the first 5 years following their issuance. For purposes of
this paragraph (h), unless the context clearly requires otherwise,
hedged bonds means the specific bonds or portions thereof covered by a
hedge.
(v) Interest based contract. The contract is primarily interest
based. A contract is not primarily interest based unless--
(A) The hedged bond, without regard to the contract, is either a
fixed rate bond, a variable rate debt instrument within the meaning of
Sec. 1.1275-5 provided the rate is not based on an objective rate other
than a qualified inverse floating rate or a qualified inflation rate, a
tax-exempt obligation described in Sec. 1.1275-4(d)(2), or an inflation-
indexed debt instrument within the meaning of Sec. 1.1275-7; and
(B) As a result of treating all payments on (and receipts from) the
contract as additional payments on (and receipts from) the hedged bond,
the resulting bond would be substantially similar to either a fixed rate
bond, a variable rate debt instrument within the meaning of Sec. 1.1275-
5 provided the rate is not based on an objective rate other than a
qualified inverse floating rate or a qualified inflation rate, a tax-
exempt obligation described in Sec. 1.1275-4(d)(2), or an inflation-
indexed debt instrument within the meaning of Sec. 1.1275-7. For this
purpose, differences that would not prevent the resulting bond from
being substantially similar to another type of bond include a difference
between the index used to compute payments on the hedged bond and the
index used to compute payments on the hedge where one index is
substantially the same, but not identical to, the other; the difference
resulting from the payment of a fixed premium for a cap (e.g., payments
for a cap that are made in other than level installments); and the
difference resulting from the allocation of a termination payment where
the termination was not expected as of the date the contract was entered
into.
(vi) Payments closely correspond. The payments received by the
issuer from the hedge provider under the contract correspond closely in
time to either the specific payments being hedged on the hedged bonds or
specific payments required to be made pursuant to the bond documents,
regardless of the hedge, to a sinking fund, debt service fund, or
similar fund maintained for the issue of which the hedged bond is a
part.
(vii) Source of payments. Payments to the hedge provider are
reasonably expected to be made from the same source of funds that,
absent the hedge, would be reasonably expected to be used to pay
principal and interest on the hedged bonds.
(viii) Identification. The contract must be identified by the actual
issuer on its books and records maintained for the hedged bonds not
later than 3 days after the date on which the issuer and the hedge
provider enter into the contract. The identification must specify the
hedge provider, the terms of the contract, and the hedged bonds. The
identification must contain sufficient detail to establish that the
requirements of this paragraph (h)(2) and, if applicable, paragraph
(h)(4) of this section are satisfied. In addition, the existence of the
hedge must be noted on the first form relating to the issue of which the
hedged bonds are a part that is filed with the Internal Revenue Service
on or after the date on which the contract is identified pursuant to
this paragraph (h)(2)(viii).
[[Page 679]]
(3) Accounting for qualified hedges--(i) In general. Except as
otherwise provided in paragraph (h)(4) of this section, payments made or
received by the issuer under a qualified hedge are treated as payments
made or received, as appropriate, on the hedged bonds that are taken
into account in determining the yield on those bonds. These payments are
reasonably allocated to the hedged bonds in the period to which the
payments relate, as determined under paragraph (h)(3)(iii) of this
section. Payments made or received by the issuer include payments deemed
made or received when a contract is terminated or deemed terminated
under this paragraph (h)(3). Payments reasonably allocable to the
modification of risk of interest rate changes and to the hedge
provider's overhead under this paragraph (h) are included as payments
made or received under a qualified hedge.
(ii) Exclusions from hedge. If any payment for services or other
items under the contract is not expressly treated by paragraph (h)(3)(i)
of this section as a payment under the qualified hedge, the payment is
not a payment with respect to a qualified hedge.
(iii) Timing and allocation of payments. Except as provided in
paragraphs (h)(3)(iv) and (h)(5) of this section, payments made or
received by the issuer under a qualified hedge are taken into account in
the same period in which those amounts would be treated as income or
deductions under Sec. 1.446-4 (without regard to Sec. 1.446-4(a)(2)(iv))
and are adjusted as necessary to reflect the end of a computation period
and the start of a new computation period.
(iv) Termination payments--(A) Termination defined. A termination of
a qualified hedge includes any sale or other disposition of the hedge by
the issuer or the acquisition by the issuer of an offsetting hedge. A
deemed termination occurs when the hedged bonds are redeemed or when a
hedge ceases to be a qualified hedge of the hedged bonds. In the case of
an assignment by a hedge provider of its remaining rights and
obligations under the hedge to a third party or a modification of the
hedging contract, the assignment or modification is treated as a
termination with respect to the issuer only if it results in a deemed
exchange of the hedge and a realization event under section 1001 to the
issuer.
(B) General rule. A payment made or received by an issuer to
terminate a qualified hedge, including loss or gain realized or deemed
realized, is treated as a payment made or received on the hedged bonds,
as appropriate. The payment is reasonably allocated to the remaining
periods originally covered by the terminated hedge in a manner that
reflects the economic substance of the hedge.
(C) Special rule for terminations when bonds are redeemed. Except as
otherwise provided in this paragraph (h)(3)(iv)(C) and in paragraph
(h)(3)(iv)(D) of this section, when a qualified hedge is deemed
terminated because the hedged bonds are redeemed, the fair market value
of the qualified hedge on the redemption date is treated as a
termination payment made or received on that date. When hedged bonds are
redeemed, any payment received by the issuer on termination of a hedge,
including a termination payment or a deemed termination payment,
reduces, but not below zero, the interest payments made by the issuer on
the hedged bonds in the computation period ending on the termination
date. The remainder of the payment, if any, is reasonably allocated over
the bond years in the immediately preceding computation period or
periods to the extent necessary to eliminate the excess.
(D) Special rules for refundings. To the extent that the hedged
bonds are redeemed using the proceeds of a refunding issue, the
termination payment is accounted for under paragraph (h)(3)(iv)(B) of
this section by treating it as a payment on the refunding issue, rather
than the hedged bonds. In addition, to the extent that the refunding
issue is redeemed during the period to which the termination payment has
been allocated to that issue, paragraph (h)(3)(iv)(C) of this section
applies to the termination payment by treating it as a payment on the
redeemed refunding issue.
(E) Safe harbor for allocation of certain termination payments. A
payment to terminate a qualified hedge does not result in that hedge
failing to satisfy the
[[Page 680]]
applicable provisions of paragraph (h)(3)(iv)(B) of this section if the
payment is allocated in accordance with this paragraph (h)(3)(iv)(E).
For an issue that is a variable yield issue after termination of a
qualified hedge, an amount must be allocated to each date on which the
hedge provider's payment, if any, would have been made had the hedge not
been terminated. The amounts allocated to each date must bear the same
ratio to the notional principal amount (within the meaning of
Sec. 1.446-3) that would have been used to compute the hedge provider's
payment, if any, on that date, and the sum of the present values of
those amounts must equal the present value of the termination payment.
Present value is computed as of the day the qualified hedge is
terminated, using the yield on the hedged bonds, determined without
regard to the termination payment. The yield used for this purpose is
computed for the period beginning on the first date the qualified hedge
is in effect and ending on the date the qualified hedge is terminated.
On the other hand, for an issue that is a fixed yield issue after
termination of a qualified hedge, the termination payment is taken into
account as a single payment on the date it is paid.
(4) Certain variable yield bonds treated as fixed yield bonds--(i)
In general. Except as otherwise provided in this paragraph (h)(4), if
the issuer of variable yield bonds enters into a qualified hedge, the
hedged bonds are treated as fixed yield bonds paying a fixed interest
rate if:
(A) Maturity. The term of the hedge is equal to the entire period
during which the hedged bonds bear interest at variable interest rates,
and the issuer does not reasonably expect that the hedge will be
terminated before the end of that period.
(B) Payments closely correspond. Payments to be received under the
hedge correspond closely in time to the hedged portion of payments on
the hedged bonds. Hedge payments received within 15 days of the related
payments on the hedged bonds generally so correspond.
(C) Aggregate payments fixed. Taking into account all payments made
and received under the hedge and all payments on the hedged bonds (i.e.,
after netting all payments), the issuer's aggregate payments are fixed
and determinable as of a date not later than 15 days after the issue
date of the hedged bonds. Payments on bonds are treated as fixed for
purposes of this paragraph (h)(4)(i)(C) if payments on the bonds are
based, in whole or in part, on one interest rate, payments on the hedge
are based, in whole or in part, on a second interest rate that is
substantially the same as, but not identical to, the first interest rate
and payments on the bonds would be fixed if the two rates were
identical. Rates are treated as substantially the same if they are
reasonably expected to be substantially the same throughout the term of
the hedge. For example, an objective 30-day tax-exempt variable rate
index or other objective index may be substantially the same as an
issuer's individual 30-day interest rate.
(ii) Accounting. Except as otherwise provided in this paragraph
(h)(4)(ii), in determining yield on the hedged bonds, all the issuer's
payments on the hedged bonds and all payments made and received on a
hedge described in paragraph (h)(4)(i) of this section are taken into
account. If payments on the bonds and payments on the hedge are based,
in whole or in part, on variable interest rates that are substantially
the same within the meaning of paragraph (h)(4)(i)(C) of this section
(but not identical), yield on the issue is determined by treating the
variable interest rates as identical. For example, if variable rate
bonds bearing interest at a weekly rate equal to the rate necessary to
remarket the bonds at par are hedged with an interest rate swap under
which the issuer receives payments based on a short-term floating rate
index that is substantially the same as, but not identical to, the
weekly rate on the bonds, the interest payments on the bonds are treated
as equal to the payments received by the issuer under the swap for
purposes of computing the yield on the bonds.
(iii) Effect of termination--(A) In general. Except as otherwise
provided in this paragraph (h)(4)(iii) and paragraph (h)(5) of this
section, the issue of which the hedged bonds are a part is treated
[[Page 681]]
as if it were reissued as of the termination date of the qualified hedge
covered by paragraph (h)(4)(i) of this section in determining yield on
the hedged bonds for purposes of Sec. 1.148-3. The redemption price of
the retired issue and the issue price of the new issue equal the
aggregate values of all the bonds of the issue on the termination date.
In computing the yield on the new issue for this purpose, any
termination payment is accounted for under paragraph (h)(3)(iv) of this
section, applied by treating the termination payment as made or received
on the new issue under this paragraph (h)(4)(iii).
(B) Effect of early termination. Except as otherwise provided in
this paragraph (h)(4)(iii), the general rules of paragraph (h)(4)(i) of
this section do not apply in determining the yield on the hedged bonds
for purposes of Sec. 1.148-3 if the hedge is terminated or deemed
terminated within 5 years after the issue date of the issue of which the
hedged bonds are a part. Thus, the hedged bonds are treated as variable
yield bonds for purposes of Sec. 1.148-3 from the issue date.
(C) Certain terminations disregarded. This paragraph (h)(4)(iii)
does not apply to a termination if, based on the facts and circumstances
(e.g., taking into account both the termination and any qualified hedge
that immediately replaces the terminated hedge), there is no change in
the yield.
(5) Contracts entered into before issue date of hedged bond--(i) In
general. A contract does not fail to be a hedge under paragraph
(h)(2)(i) of this section solely because it is entered into before the
issue date of the hedged bond. However, that contract must be one to
which either paragraph (h)(5)(ii) or (h)(5)(iii) of this section
applies.
(ii) Contracts expected to be closed substantially contemporaneously
with the issue date of hedged bond--(A) Application. This paragraph
(h)(5)(ii) applies to a contract if, on the date the contract is
identified, the issuer reasonably expects to terminate or otherwise
close (terminate) the contract substantially contemporaneously with the
issue date of the hedged bond.
(B) Contract terminated. If a contract to which this paragraph
(h)(5)(ii) applies is terminated substantially contemporaneously with
the issue date of the hedged bond, the amount paid or received, or
deemed to be paid or received, by the issuer in connection with the
issuance of the hedged bond to terminate the contract is treated as an
adjustment to the issue price of the hedged bond and as an adjustment to
the sale proceeds of the hedged bond for purposes of section 148.
Amounts paid or received, or deemed to be paid or received, before the
issue date of the hedged bond are treated as paid or received on the
issue date in an amount equal to the future value of the payment or
receipt on that date. For this purpose, future value is computed using
yield on the hedged bond without taking into account amounts paid or
received (or deemed paid or received) on the contract.
(C) Contract not terminated. If a contract to which this paragraph
(h)(5)(ii) applies is not terminated substantially contemporaneously
with the issue date of the hedged bond, the contract is deemed
terminated for its fair market value as of the issue date of the hedged
bond. Once a contract has been deemed terminated pursuant to this
paragraph (h)(5)(ii)(C), payments on and receipts from the contract are
no longer taken into account under this paragraph (h) for purposes of
determining yield on the hedged bond.
(D) Relation to other requirements of a qualified hedge. Payments
made in connection with the issuance of a bond to terminate a contract
to which this paragraph (h)(5)(ii) applies do not prevent the contract
from satisfying the requirements of paragraph (h)(2)(vi) of this
section.
(E) Fixed yield treatment. A bond that is hedged with a contract to
which this paragraph (h)(5)(ii) applies does not fail to be a fixed
yield bond if, taking into account payments on the contract and the
payments to be made on the bond, the bond satisfies the definition of
fixed yield bond. See also paragraph (h)(4) of this section.
(iii) Contracts expected not to be closed substantially
contemporaneously with the issue date of hedged bond--(A) Application.
This paragraph (h)(5)(iii) applies to a contract if, on the date the
contract is identified, the issuer does not reasonably expect to
terminate the
[[Page 682]]
contract substantially contemporaneously with the issue date of the
hedge bond.
(B) Contract terminated. If a contract to which this paragraph
(h)(5)(iii) applies is terminated in connection with the issuance of the
hedged bond, the amount paid or received, or deemed to be paid or
received, by the issuer to terminate the contract is treated as an
adjustment to the issue price of the hedged bond and as an adjustment to
the sale proceeds of the hedged bond for purposes of section 148.
(C) Contract not terminated. If a contract to which this paragraph
(h)(5)(iii) applies is not terminated substantially contemporaneously
with the issue date of the hedged bond, no payments with respect to the
hedge made by the issuer before the issue date of the hedged bond are
taken into account under this section.
(iv) Identification. The identification required under paragraph
(h)(2)(viii) of this section must specify the reasonably expected
governmental purpose, issue price, maturity, and issue date of the
hedged bond, the manner in which interest is reasonably expected to be
computed, and whether paragraph (h)(5)(ii) or (h)(5)(iii) of this
section applies to the contract. If an issuer identifies a contract
under this paragraph (h)(5)(iv) that would be a qualified hedge with
respect to the anticipated bond, but does not issue the anticipated bond
on the identified issue date, the contract is taken into account as a
qualified hedge of any bond of the issuer that is issued for the
identified governmental purpose within a reasonable interval around the
identified issue date of the anticipated bond.
(6) Authority of the Commissioner. The Commissioner, by publication
of a revenue ruling or revenue procedure (see Sec. 601.601(d)(2) of this
chapter), may specify contracts that, although they do not meet the
requirements of paragraph (h)(2) of this section, are qualified hedges
or, although they do not meet the requirements of paragraph (h)(4) of
this section, cause the hedged bonds to be treated as fixed yield bonds.
[T.D. 8476, 58 FR 33524, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24042, May 10, 1994; T.D. 8718, 62 FR 25507,
May 9, 1997; T.D. 8838, 64 FR 48547, Sept. 7, 1999]
Sec. 1.148-5 Yield and valuation of investments.
(a) In general. This section provides rules for computing the yield
and value of investments allocated to an issue for various purposes
under section 148.
(b) Yield on an investment--(1) In general. Except as otherwise
provided, the yield on an investment allocated to an issue is computed
under the economic accrual method, using the same compounding interval
and financial conventions used to compute the yield on the issue. The
yield on an investment allocated to an issue is the discount rate that,
when used in computing the present value as of the date the investment
is first allocated to the issue of all unconditionally payable receipts
from the investment, produces an amount equal to the present value of
all unconditionally payable payments for the investment. For this
purpose, payments means amounts to be actually or constructively paid to
acquire the investment, and receipts means amounts to be actually or
constructively received from the investment, such as earnings and return
of principal. The yield on a variable rate investment is determined in a
manner comparable to the determination of the yield on a variable rate
issue. For an issue of qualified mortgage bonds, qualified veterans'
mortgage bonds, or qualified student loan bonds on which interest is
paid semiannually, all regular monthly loan payments to be received
during a semiannual debt service period may be treated as received at
the end of that period. In addition, for any conduit financing issue,
payments made by the conduit borrower are not treated as paid until the
conduit borrower ceases to receive the benefit of earnings on those
amounts.
(2) Yield on a separate class of investments--(i) In general. For
purposes of the yield restriction rules of section
[[Page 683]]
148(a) and Sec. 1.148-2, yield is computed separately for each class of
investments. For this purpose, in determining the yield on a separate
class of investments, the yield on each individual investment within the
class is blended with the yield on other individual investments within
the class, whether or not held concurrently, by treating those
investments as a single investment. The yields on investments that are
not within the same class are not blended.
(ii) Separate classes of investments. Each of the following is a
separate class of investments--
(A) Each category of yield restricted purpose investment and program
investment that is subject to a different definition of materially
higher under Sec. 1.148-2(d)(2);
(B) Yield-restricted nonpurpose investments; and
(C) All other nonpurpose investments;
(iii) Permissive application of single investment rules to certain
yield restricted investments for all purposes of section 148. For all
purposes of section 148, if an issuer reasonably expects as of the issue
date to establish and maintain a sinking fund solely to reduce the yield
on the investments in a refunding escrow, then the issuer may treat all
of the yield restricted nonpurpose investments in the refunding escrow
and that sinking fund as a single investment having a single yield,
determined under this paragraph (b)(2). Thus, an issuer may not treat
the nonpurpose investments in a reasonably required reserve fund and a
refunding escrow as a single investment having a single yield under this
paragraph (b)(2)(iii).
(iv) Mandatory application of single investment rules for refunding
escrows for all purposes of section 148. For all purposes of section
148, in computing the yield on yield restricted investments allocable to
proceeds (i.e., sale proceeds, investment proceeds, and transferred
proceeds) of a refunding issue that are held in one or more refunding
escrows, the individual investments are treated as a single investment
having a single yield, whether or not held concurrently. For example,
this single investment includes both the individual investments
allocable to sale and investment proceeds of a refunding issue that are
held in one refunding escrow for a prior issue and the investments
allocable to transferred proceeds of that refunding issue that are held
in another refunding escrow.
(3) Investments to be held beyond issue's maturity or beyond
temporary period. In computing the yield on investments allocable to an
issue that are to be held beyond the reasonably expected redemption date
of the issue, those investments are treated as sold for an amount equal
to their value on that date. In computing the yield on investments that
are held beyond an applicable temporary period under Sec. 1.148-2, for
purposes of Sec. 1.148-2 those investments may be treated as purchased
for an amount equal to their fair market value as of the end of the
temporary period.
(4) Consistent redemption assumptions on purpose investments. The
yield on purpose investments allocable to an issue is computed using the
same redemption assumptions used to compute the yield on the issue.
Yield on purpose investments allocable to an issue of qualified mortgage
bonds and qualified veterans' mortgage bonds must be determined in a
manner that is consistent with, and using the assumptions required by,
section 143(g)(2)(B).
(5) Student loan special allowance payments included in yield.
Except as provided in Sec. 1.148-11(e), the yield on qualified student
loans is computed by including as receipts any special allowance
payments made by the Secretary of Education pursuant to section 438 of
the Higher Education Act of 1965.
(c) Yield reduction payments to the United States--(1) In general.
In determining the yield on an investment to which this paragraph (c)
applies, any amount paid to the United States in accordance with this
paragraph (c), including a rebate amount, is treated as a payment for
that investment that reduces the yield on that investment.
(2) Manner of payment--(i) In general. Except as otherwise provided
in paragraph (c)(2)(ii) of this section, an amount is paid under this
paragraph (c) if it is paid to the United States at the same time and in
the same manner as rebate amounts are required to be paid
[[Page 684]]
or at such other time or in such manner as the Commissioner may
prescribe. For example, yield reduction payments must be made on or
before the date of required rebate installment payments as described in
Secs. 1.148-3(f), (g), and (h). The provisions of Sec. 1.148-3(i) apply
to payments made under this paragraph (c).
(ii) Special rule for purpose investments. For purpose investments
allocable to an issue--
(A) No amounts are required to be paid to satisfy this paragraph (c)
until the earlier of the end of the tenth bond year after the issue date
of the issue or 60 days after the date on which the issue is no longer
outstanding; and
(B) For payments made prior to the date on which the issue is
retired, the issuer need not pay more than 75 percent of the amount
otherwise required to be paid as of the date to which the payment
relates.
(3) Applicability of special yield reduction rule--(i) Covered
investments. This paragraph (c) applies to--
(A) Nonpurpose investments allocable to proceeds of an issue that
qualified for one of the temporary periods available for capital
projects, restricted working capital expenditures, pooled financings, or
investment proceeds under Sec. 1.148-2(e)(2), (e)(3), (e)(4), or (e)(6),
respectively;
(B) Investments allocable to a variable yield issue during any
computation period in which at least 5 percent of the value of the issue
is represented by variable yield bonds, unless the issue is an issue of
hedge bonds (as defined in section 149(g)(3)(A));
(C) Nonpurpose investments allocable to transferred proceeds of--
(1) A current refunding issue to the extent necessary to reduce the
yield on those investments to satisfy yield restrictions under section
148(a); or
(2) An advance refunding issue to the extent that investment of the
refunding escrows allocable to the proceeds, other than transferred
proceeds, of the refunding issue in zero-yielding nonpurpose investments
is insufficient to satisfy yield restrictions under section 148(a);
(D) Purpose investments allocable to qualified student loans under a
program described in section 144(b)(1)(A);
(E) Nonpurpose investments allocable to gross proceeds of an issue
in a reasonably required reserve or replacement fund or in a fund that,
except for its failure to satisfy the size limitation in Sec. 1.148-
2(f)(2)(ii), would qualify as a reasonably required reserve or
replacement fund, but only to the extent that--
(1) The value of the nonpurpose investments in the fund is not
greater than 15 percent of the stated principal amount of the issue, as
computed under Sec. 1.148-2(f)(2)(ii), or
(2) The amounts in the fund (other than investment earnings) are not
reasonably expected to be used to pay debt service on the issue other
than in connection with reductions in the amount required to be in that
fund (e.g. a reserve fund for a revolving fund loan program);
(F) Nonpurpose investments allocated to replacement proceeds of a
refunded issue as a result of the application of the universal cap to
amounts in a refunding escrow (see Sec. 1.148-11(c)(1)(ii)); and
(G) Investments described in Sec. 1.148-11(f).
(ii) Exception to yield reduction payments rule for advance
refunding issues. Paragraph (c)(1) of this section does not apply to
investments allocable to gross proceeds of an advance refunding issue,
other than--
(A) Transferred proceeds to which paragraph (c)(3)(i)(C) of this
section applies;
(B) Replacement proceeds to which paragraph (c)(3)(i)(F) of this
section applies; and
(C) Transferred proceeds to which paragraph (c)(3)(i)(E) of this
section applies, but only to the extent necessary to satisfy yield
restriction under section 148(a) on those proceeds treating all
investments allocable to those proceeds as a separate class.
(d) Value of investments--(1) In general. Except as otherwise
provided, the value of an investment (including a payment or receipt on
the investment) on a date must be determined using one of the following
valuation methods consistently for all purposes of section 148 to that
investment on that date:
[[Page 685]]
(i) Plain par investment--outstanding principal amount. A plain par
investment may be valued at its outstanding stated principal amount,
plus any accrued unpaid interest on that date.
(ii) Fixed rate investment--present value. A fixed rate investment
may be valued at its present value on that date.
(iii) Any investment--fair market value. An investment may be valued
at its fair market value on that date.
(2) Mandatory valuation of yield restricted investments at present
value. Any yield restricted investment must be valued at present value.
For example, a purpose investment or an investment allocable to gross
proceeds in a refunding escrow after the expiration of the initial
temporary period must be valued at present value. See, however,
paragraph (b)(3) of this section.
(3) Mandatory valuation of certain investments at fair market value-
-(i) In general. Except as provided in paragraphs (d)(2), (d)(3)(ii),
and (d)(4) of this section, an investment must be valued at fair market
value on the date that it is first allocated to an issue or first ceases
to be allocated to an issue as a consequence of a deemed acquisition or
deemed disposition. For example, if an issuer deposits existing
investments into a sinking fund for an issue, those investments must be
valued at fair market value as of the date first deposited into the
fund.
(ii) Exception to fair market value requirement for transferred
proceeds allocations, universal cap allocations, and commingled funds.
Paragraph (d)(3)(i) of this section does not apply if the investment is
allocated from one issue to another issue as a result of the transferred
proceeds allocation rule under Sec. 1.148-9(b) or the universal cap rule
under Sec. 1.148-6(b)(2), provided that both issues consist exclusively
of tax-exempt bonds. In addition, paragraph (d)(3)(i) of this section
does not apply to investments in a commingled fund (other than a bona
fide debt service fund) unless it is an investment being initially
deposited in or withdrawn from a commingled fund described in
Sec. 1.148-6(e)(5)(iii).
(4) Special transition rule for transferred proceeds. The value of a
nonpurpose investment that is allocated to transferred proceeds of a
refunding issue on a transfer date may not exceed the value of that
investment on the transfer date used for purposes of applying the
arbitrage restrictions to the refunded issue.
(5) Definition of present value of an investment. Except as
otherwise provided, present value of an investment is computed under the
economic accrual method, using the same compounding interval and
financial conventions used to compute the yield on the issue. The
present value of an investment on a date is equal to the present value
of all unconditionally payable receipts to be received from and payments
to be paid for the investment after that date, using the yield on the
investment as the discount rate.
(6) Definition of fair market value--(i) In general. The fair market
value of an investment is the price at which a willing buyer would
purchase the investment from a willing seller in a bona fide, arm's-
length transaction. Fair market value generally is determined on the
date on which a contract to purchase or sell the nonpurpose investment
becomes binding (i.e., the trade date rather than the settlement date).
Except as otherwise provided in this paragraph (d)(6), an investment
that is not of a type traded on an established securities market, within
the meaning of section 1273, is rebuttably presumed to be acquired or
disposed of for a price that is not equal to its fair market value. The
fair market value of a United States Treasury obligation that is
purchased directly from the United States Treasury is its purchase
price.
(ii) Safe harbor for establishing fair market value for certificates
of deposit. This paragraph (d)(6)(ii) applies to a certificate of
deposit that has a fixed interest rate, a fixed payment schedule, and a
substantial penalty for early withdrawal. The purchase price of such a
certificate of deposit is treated as its fair market value on the
purchase date if the yield on the certificate of deposit is not less
than--
(A) The yield on reasonably comparable direct obligations of the
United States; and
(B) The highest yield that is published or posted by the provider to
be currently available from the provider
[[Page 686]]
on reasonably comparable certificates of deposit offered to the public.
(iii) Safe harbor for establishing fair market value for guaranteed
investment contracts and investments purchased for a yield restricted
defeasance escrow. The purchase price of a guaranteed investment
contract and the purchase price of an investment purchased for a yield
restricted defeasance escrow will be treated as the fair market value of
the investment on the purchase date if all of the following requirements
are satisfied:
(A) The issuer makes a bona fide solicitation for the purchase of
the investment. A bona fide solicitation is a solicitation that
satisfies all of the following requirements:
(1) The bid specifications are in writing and are timely forwarded
to potential providers.
(2) The bid specifications include all material terms of the bid. A
term is material if it may directly or indirectly affect the yield or
the cost of the investment.
(3) The bid specifications include a statement notifying potential
providers that submission of a bid is a representation that the
potential provider did not consult with any other potential provider
about its bid, that the bid was determined without regard to any other
formal or informal agreement that the potential provider has with the
issuer or any other person (whether or not in connection with the bond
issue), and that the bid is not being submitted solely as a courtesy to
the issuer or any other person for purposes of satisfying the
requirements of paragraph (d)(6)(iii)(B)(1) or (2) of this section.
(4) The terms of the bid specifications are commercially reasonable.
A term is commercially reasonable if there is a legitimate business
purpose for the term other than to increase the purchase price or reduce
the yield of the investment. For example, for solicitations of
investments for a yield restricted defeasance escrow, the hold firm
period must be no longer than the issuer reasonably requires.
(5) For purchases of guaranteed investment contracts only, the terms
of the solicitation take into account the issuer's reasonably expected
deposit and drawdown schedule for the amounts to be invested.
(6) All potential providers have an equal opportunity to bid. For
example, no potential provider is given the opportunity to review other
bids (i.e., a last look) before providing a bid.
(7) At least three reasonably competitive providers are solicited
for bids. A reasonably competitive provider is a provider that has an
established industry reputation as a competitive provider of the type of
investments being purchased.
(B) The bids received by the issuer meet all of the following
requirements:
(1) The issuer receives at least three bids from providers that the
issuer solicited under a bona fide solicitation meeting the requirements
of paragraph (d)(6)(iii)(A) of this section and that do not have a
material financial interest in the issue. A lead underwriter in a
negotiated underwriting transaction is deemed to have a material
financial interest in the issue until 15 days after the issue date of
the issue. In addition, any entity acting as a financial advisor with
respect to the purchase of the investment at the time the bid
specifications are forwarded to potential providers has a material
financial interest in the issue. A provider that is a related party to a
provider that has a material financial interest in the issue is deemed
to have a material financial interest in the issue.
(2) At least one of the three bids described in paragraph
(d)(6)(iii)(B)(1) of this section is from a reasonably competitive
provider, within the meaning of paragraph (d)(6)(iii)(A)(7) of this
section.
(3) If the issuer uses an agent to conduct the bidding process, the
agent did not bid to provide the investment.
(C) The winning bid meets the following requirements:
(1) Guaranteed investment contracts. If the investment is a
guaranteed investment contract, the winning bid is the highest yielding
bona fide bid (determined net of any broker's fees).
(2) Other investments. If the investment is not a guaranteed
investment contract, the following requirements are met:
(i) The winning bid is the lowest cost bona fide bid (including any
broker's
[[Page 687]]
fees). The lowest cost bid is either the lowest cost bid for the
portfolio or, if the issuer compares the bids on an investment-by-
investment basis, the aggregate cost of a portfolio comprised of the
lowest cost bid for each investment. Any payment received by the issuer
from a provider at the time a guaranteed investment contract is
purchased (e.g., an escrow float contract) for a yield restricted
defeasance escrow under a bidding procedure meeting the requirements of
this paragraph (d)(6)(iii) is taken into account in determining the
lowest cost bid.
(ii) The lowest cost bona fide bid (including any broker's fees) is
not greater than the cost of the most efficient portfolio comprised
exclusively of State and Local Government Series Securities from the
United States Department of the Treasury, Bureau of Public Debt. The
cost of the most efficient portfolio of State and Local Government
Series Securities is to be determined at the time that bids are required
to be submitted pursuant to the terms of the bid specifications.
(iii) If State and Local Government Series Securities from the
United States Department of the Treasury, Bureau of Public Debt are not
available for purchase on the day that bids are required to be submitted
pursuant to terms of the bid specifications because sales of those
securities have been suspended, the cost comparison of paragraph
(d)(6)(iii) (C)(2)(ii) of this section is not required.
(D) The provider of the investments or the obligor on the guaranteed
investment contract certifies the administrative costs that it pays (or
expects to pay, if any) to third parties in connection with supplying
the investment.
(E) The issuer retains the following records with the bond documents
until three years after the last outstanding bond is redeemed:
(1) For purchases of guaranteed investment contracts, a copy of the
contract, and for purchases of investments other than guaranteed
investment contracts, the purchase agreement or confirmation.
(2) The receipt or other record of the amount actually paid by the
issuer for the investments, including a record of any administrative
costs paid by the issuer, and the certification under paragraph
(d)(6)(iii)(D) of this section.
(3) For each bid that is submitted, the name of the person and
entity submitting the bid, the time and date of the bid, and the bid
results.
(4) The bid solicitation form and, if the terms of the purchase
agreement or the guaranteed investment contract deviated from the bid
solicitation form or a submitted bid is modified, a brief statement
explaining the deviation and stating the purpose for the deviation. For
example, if the issuer purchases a portfolio of investments for a yield
restricted defeasance escrow and, in order to satisfy the yield
restriction requirements of section 148, an investment in the winning
bid is replaced with an investment with a lower yield, the issuer must
retain a record of the substitution and how the price of the substitute
investment was determined. If the issuer replaces an investment in the
winning bid portfolio with another investment, the purchase price of the
new investment is not covered by the safe harbor unless the investment
is bid under a bidding procedure meeting the requirements of this
paragraph (d)(6)(iii).
(5) For purchases of investments other than guaranteed investment
contracts, the cost of the most efficient portfolio of State and Local
Government Series Securities, determined at the time that the bids were
required to be submitted pursuant to the terms of the bid
specifications.
(e) Administrative costs of investments--(1) In general. Except as
otherwise provided in this paragraph (e), an allocation of gross
proceeds of an issue to a payment or a receipt on an investment is not
adjusted to take into account any costs or expenses paid, directly or
indirectly, to purchase, carry, sell, or retire the investment
(administrative costs). Thus, these administrative costs generally do
not increase the payments for, or reduce the receipts from, investments.
(2) Qualified administrative costs on nonpurpose investments--(i) In
general. In determining payments and receipts on nonpurpose investments,
qualified administrative costs are taken into account. Thus, qualified
administrative
[[Page 688]]
costs increase the payments for, or decrease the receipts from, the
investments. Qualified administrative costs are reasonable, direct
administrative costs, other than carrying costs, such as separately
stated brokerage or selling commissions, but not legal and accounting
fees, recordkeeping, custody, and similar costs. General overhead costs
and similar indirect costs of the issuer such as employee salaries and
office expenses and costs associated with computing the rebate amount
under section 148(f) are not qualified administrative costs. In general,
administrative costs are not reasonable unless they are comparable to
administrative costs that would be charged for the same investment or a
reasonably comparable investment if acquired with a source of funds
other than gross proceeds of tax-exempt bonds.
(ii) Special rule for administrative costs of nonpurpose investments
in certain regulated investment companies and commingled funds.
Qualified administrative costs include all reasonable administrative
costs, without regard to the limitation on indirect costs under
paragraph (e)(2)(i) of this section, incurred by:
(A) Regulated investment companies. A publicly offered regulated
investment company (as defined in section 67(c)(2)(B)); and
(B) External commingled funds. A widely held commingled fund in
which no investor in the fund owns more than 10 percent of the
beneficial interest in the fund. For purposes of this paragraph
(e)(2)(ii)(B), a fund is treated as widely held only if, during the
immediately preceding fixed, semiannual period chosen by the fund (e.g.,
semiannual periods ending June 30 and December 31), the fund had a daily
average of more than 15 investors that were not related parties, and the
daily average amount each investor had invested in the fund was not less
than the lesser of $500,000 and 1 percent of the daily average of the
total amount invested in the fund. For purposes of this paragraph
(e)(2)(ii)(B), an investor will be treated as owning not more than 10
percent of the beneficial interest in the fund if, on the date of each
deposit by the investor into the fund, the total amount the investor and
any related parties have on deposit in the fund is not more than 10
percent of the total amount that all investors have on deposit in the
fund. For purposes of the preceding sentence, the total amount that all
investors have on deposit in the fund is equal to the sum of all
deposits made by the investor and any related parties on the date of
those deposits and the closing balance in the fund on the day before
those deposits. If any investor in the fund owns more than 10 percent of
the beneficial interest in the fund, the fund does not qualify under
this paragraph (e)(2)(ii)(B) until that investor makes sufficient
withdrawals from the fund to reduce its beneficial interest in the fund
to 10 percent or less.
(iii) Special rule for guaranteed investment contracts. For a
guaranteed investment contract, a broker's commission or similar fee
paid on behalf of either an issuer or the provider is treated as an
administrative cost and, except in the case of an issue that satisfies
section 148(f)(4)(D)(i), is a qualified administrative cost to the
extent that the present value of the commission, as of the date the
contract is allocated to the issue, does not exceed the lesser of a
reasonable amount within the meaning of paragraph (e)(2)(i) of this
section or the present value of annual payments equal to .05 percent of
the weighted average amount reasonably expected to be invested each year
of the term of the contract. For this purpose, present value is computed
using the taxable discount rate used by the parties to compute the
commission or, if not readily ascertainable, the yield to the issuer on
the investment contract or other reasonable taxable discount rate.
(iv) Special rule for investments purchased for a yield restricted
defeasance escrow. For investments purchased for a yield restricted
defeasance escrow, a fee paid to a bidding agent is a qualified
administrative cost only if the following requirements are satisfied:
(A) The fee is comparable to a fee that would be charged for a
reasonably comparable investment if acquired with a source of funds
other than gross proceeds of tax-exempt bonds, and it is reasonable. The
fee is deemed to be comparable to a fee that would be charged for a
comparable investment
[[Page 689]]
acquired with a source of funds other than gross proceeds of tax-exempt
bonds, and to be reasonable if the fee does not exceed the lesser of
$10,000 or .1% of the initial principal amount of investments deposited
in the yield restricted defeasance escrow.
(B) For transactions in which a guaranteed investment contract and
other investments are purchased for a yield restricted defeasance escrow
in a single investment (e.g., an issuer bids United States Treasury
obligations and an escrow float contract collectively), a broker's fee
described in paragraph (e)(2)(iv)(A) of this section will apply to the
initial principal amount of the investment deposited in the yield
restricted defeasance escrow, and a broker's fee described in paragraph
(e)(2)(iii) of this section will apply only to the guaranteed investment
contract portion of the investment.
(3) Qualified administrative costs on purpose investments--(i) In
general. In determining payments and receipts on purpose investments,
qualified administrative costs described in this paragraph (e)(3) paid
by the conduit borrower are taken into account. Thus, these costs
increase the payments for, or decrease the receipts from, the purpose
investments. This rule applies even if those payments merely reimburse
the issuer. Although the actual payments by the conduit borrower may be
made at any time, for this purpose, a pro rata portion of each payment
made by a conduit borrower is treated as a reimbursement of reasonable
administrative costs, if the present value of those payments does not
exceed the present value of the reasonable administrative costs paid by
the issuer, using the yield on the issue as the discount rate.
(ii) Definition of qualified administrative costs of purpose
investments--(A) In general. Except as otherwise provided in this
paragraph (e)(3)(ii), qualified administrative costs of a purpose
investment means--
(1) Costs or expenses paid, directly or indirectly, to purchase,
carry, sell, or retire the investment; and
(2) Costs of issuing, carrying, or repaying the issue, and any
underwriters' discount.
(B) Limitation on program investments. For a program investment,
qualified administrative costs include only those costs described in
paragraph (e)(3)(ii)(A)(2) of this section.
[T.D. 8476, 58 FR 33529, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24044, May 10, 1994; T.D. 8718, 62 FR 25511,
May 9, 1997; T.D. 8801, 63 FR 71751, Dec. 30, 1998]
Sec. 1.148-6 General allocation and accounting rules.
(a) In general--(1) Reasonable accounting methods required. An
issuer may use any reasonable, consistently applied accounting method to
account for gross proceeds, investments, and expenditures of an issue.
(2) Bona fide deviations from accounting method. An accounting
method does not fail to be reasonable and consistently applied solely
because a different accounting method is used for a bona fide
governmental purpose to consistently account for a particular item. Bona
fide governmental purposes may include special State law restrictions
imposed on specific funds or actions to avoid grant forfeitures.
(3) Absence of allocation and accounting methods. If an issuer fails
to maintain books and records sufficient to establish the accounting
method for an issue and the allocation of the proceeds of that issue,
the rules of this section are applied using the specific tracing method.
This paragraph (a)(3) applies to bonds issued on or after May 16, 1997.
(b) Allocation of gross proceeds to an issue--(1) One-issue rule and
general ordering rules. Except as otherwise provided, amounts are
allocable to only one issue at a time as gross proceeds, and if amounts
simultaneously are proceeds of one issue and replacement proceeds of
another issue, those amounts are allocable to the issue of which they
are proceeds. Amounts cease to be allocated to an issue as proceeds only
when those amounts are allocated to an expenditure for a governmental
purpose, are allocated to transferred proceeds of another issue, or
cease to be allocated to that issue at retirement of the issue or under
the universal cap of paragraph (b)(2) of this section. Amounts cease to
be allocated to an issue as replacement proceeds only when those amounts
are
[[Page 690]]
allocated to an expenditure for a governmental purpose, are no longer
used in a manner that causes those amounts to be replacement proceeds of
that issue, or cease to be allocated to that issue because of the
retirement of the issue or the application of the universal cap under
paragraph (b)(2) of this section. Amounts that cease to be allocated to
an issue as gross proceeds are eligible for allocation to another issue.
Under Sec. 1.148-10(a), however, the rules in this paragraph (b)(1) do
not apply in certain cases involving abusive arbitrage devices.
(2) Universal cap on value of nonpurpose investments allocated to an
issue--(i) Application. The rules in this paragraph (b)(2) provide an
overall limitation on the amount of gross proceeds allocable to an
issue. Although the universal cap generally may be applied at any time
in the manner described in this paragraph (b)(2), it need not be applied
on any otherwise required date of application if its application on that
date would not result in a reduction or reallocation of gross proceeds
of an issue. For this purpose, if an issuer reasonably expects as of the
issue date that the universal cap will not reduce the amount of gross
proceeds allocable to the issue during the term of the issue, the
universal cap need not be applied on any date on which an issue actually
has all of the following characteristics--
(A) No replacement proceeds are allocable to the issue, other than
replacement proceeds in a bona fide debt service fund or a reasonably
required reserve or replacement fund;
(B) The net sale proceeds of the issue--
(1) Qualified for one of the temporary periods available for capital
projects, restricted working capital expenditures, or pooled financings
under Sec. 1.148-2 (e)(2), (e)(3), or (e)(4), and those net sales
proceeds were in fact allocated to expenditures prior to the expiration
of the longest applicable temporary period; or
(2) were deposited in a refunding escrow and expended as originally
expected;
(C) The issue does not refund a prior issue that, on any transfer
date, has unspent proceeds allocable to it;
(D) None of the bonds are retired prior to the date on which those
bonds are treated as retired in computing the yield on the issue; and
(E) No proceeds of the issue are invested in qualified student loans
or qualified mortgage loans.
(ii) General rule. Except as otherwise provided below, amounts that
would otherwise be gross proceeds allocable to an issue are allocated
(and remain allocated) to the issue only to the extent that the value of
the nonpurpose investments allocable to those gross proceeds does not
exceed the value of all outstanding bonds of the issue. For this
purpose, gross proceeds allocable to cash, tax-exempt bonds that would
be nonpurpose investments (absent section 148(b)(3)(A)), qualified
student loans, and qualified mortgage loans are treated as nonpurpose
investments. The values of bonds and investments are determined under
Sec. 1.148-4(e) and Sec. 1.148-5(d), respectively. The value of all
outstanding bonds of the issue is referred to as the universal cap.
Thus, for example, the universal cap for an issue of plain par bonds is
equal to the outstanding stated principal amount of those bonds plus
accrued interest.
(iii) Determination and application of the universal cap. Except as
otherwise provided, beginning with the first bond year that commences
after the second anniversary of the issue date, the amount of the
universal cap and the value of the nonpurpose investments must be
determined as of the first day of each bond year. For refunding and
refunded issues, the cap and values must be determined as of each date
that, but for this paragraph (b)(2), proceeds of the refunded issue
would become transferred proceeds of the refunding issue, and need not
otherwise be determined in the bond year in which that date occurs. All
values are determined as of the close of business on each determination
date, after giving effect to all payments on bonds and payments for and
receipts on investments on that date.
(iv) General ordering rule for allocations of amounts in excess of
the universal cap--(A) In general. If the value of all nonpurpose
investments allocated to the gross proceeds of an issue exceeds the
universal cap for that issue on a
[[Page 691]]
date as of which the cap is determined under paragraph (b)(2)(iii) of
this section, nonpurpose investments allocable to gross proceeds
necessary to eliminate that excess cease to be allocated to the issue,
in the following order of priority--
(1) First, nonpurpose investments allocable to replacement proceeds;
(2) Second, nonpurpose investments allocable to transferred
proceeds; and
(3) Third, nonpurpose investments allocable to sale proceeds and
investment proceeds.
(B) Re-allocation of certain amounts. Except as provided in
Sec. 1.148-9(b)(3), amounts that cease to be allocated to an issue as a
result of the application of the universal cap may only be allocated to
another issue as replacement proceeds.
(C) Allocations of portions of investments. Portions of investments
to which this paragraph (b)(2)(iv) applies are allocated under either
the ratable method or the representative method in the same manner as
allocations of portions of investments to transferred proceeds under
Sec. 1.148-9(c).
(v) Nonpurpose investments in a bona fide debt service fund not
counted. For purposes of this paragraph (b)(2), nonpurpose investments
allocated to gross proceeds in a bona fide debt service fund for an
issue are not taken into account in determining the value of the
nonpurpose investments, and those nonpurpose investments remain
allocated to the issue.
(c) Fair market value limit on allocations to nonpurpose
investments. Upon a purchase or sale of a nonpurpose investment, gross
proceeds of an issue are not allocated to a payment for that nonpurpose
investment in an amount greater than, or to a receipt from that
nonpurpose investment in an amount less than, the fair market value of
the nonpurpose investment as of the purchase or sale date. For purposes
of this paragraph (c) only, the fair market value of a nonpurpose
investment is adjusted to take into account qualified administrative
costs allocable to the investment.
(d) Allocation of gross proceeds to expenditures--(1) Expenditures
in general--(i) General rule. Reasonable accounting methods for
allocating funds from different sources to expenditures for the same
governmental purpose include any of the following methods if
consistently applied: a specific tracing method; a gross proceeds spent
first method; a first-in, first-out method; or a ratable allocation
method.
(ii) General limitation. An allocation of gross proceeds of an issue
to an expenditure must involve a current outlay of cash for a
governmental purpose of the issue. A current outlay of cash means an
outlay reasonably expected to occur not later than 5 banking days after
the date as of which the allocation of gross proceeds to the expenditure
is made.
(iii) Timing. An issuer must account for the allocation of proceeds
to expenditures not later than 18 months after the later of the date the
expenditure is paid or the date the project, if any, that is financed by
the issue is placed in service. This allocation must be made in any
event by the date 60 days after the fifth anniversary of the issue date
or the date 60 days after the retirement of the issue, if earlier. This
paragraph (d)(1)(iii) applies to bonds issued on or after May 16, 1997.
(2) Treatment of gross proceeds invested in purpose investments--(i)
In general. Gross proceeds of an issue invested in a purpose investment
are allocated to an expenditure on the date on which the conduit
borrower under the purpose investment allocates the gross proceeds to an
expenditure in accordance with this paragraph (d).
(ii) Exception for qualified mortgage loans and qualified student
loans. If gross proceeds of an issue are allocated to a purpose
investment that is a qualified mortgage loan or a qualified student
loan, those gross proceeds are allocated to an expenditure for the
governmental purpose of the issue on the date on which the issuer
allocates gross proceeds to that purpose investment.
(iii) Continuing allocation of gross proceeds to purpose
investments. Regardless of whether gross proceeds of a conduit financing
issue invested in a purpose investment have been allocated to an
expenditure under paragraph (d)(2) (i) or (ii) of this section, with
respect to the actual issuer those gross proceeds continue to be
allocated to the purpose
[[Page 692]]
investment until the sale, discharge, or other disposition of the
purpose investment.
(3) Expenditures for working capital purposes--(i) In general.
Except as otherwise provided in this paragraph (d)(3) or paragraph
(d)(4) of this section, proceeds of an issue may only be allocated to
working capital expenditures as of any date to the extent that those
working capital expenditures exceed available amounts (as defined in
paragraph (d)(3)(iii) of this section) as of that date (i.e., a
``proceeds-spent-last'' method). For this purpose, proceeds include
replacement proceeds described in Sec. 1.148-1(c)(4).
(ii) Exceptions--(A) General de minimis exception. Paragraph
(d)(3)(i) of this section does not apply to expenditures to pay--
(1) Any issuance costs of the issue or any qualified administrative
costs within the meaning of Secs. 1.148-5(e)(2) (i) or (ii), or
Sec. 1.148-5(e)(3)(ii)(A);
(2) Fees for qualified guarantees of the issue or payments for a
qualified hedge for the issue;
(3) Interest on the issue for a period commencing on the issue date
and ending on the date that is the later of three years from the issue
date or one year after the date on which the project is placed in
service;
(4) Amounts paid to the United States under Secs. 1.148-3, 1.148-
5(c), or 1.148-7 for the issue;
(5) Costs, other than those described in paragraphs (d)(3)(ii)(A)
(1) through (4) of this section, that do not exceed 5 percent of the
sale proceeds of an issue and that are directly related to capital
expenditures financed by the issue (e.g., initial operating expenses for
a new capital project);
(6) Principal or interest on an issue paid from unexpected excess
sale or investment proceeds; and
(7) Principal or interest on an issue paid from investment earnings
on a reserve or replacement fund that are deposited in a bona fide debt
service fund.
(B) Exception for extraordinary items. Paragraph (d)(3)(i) of this
section does not apply to expenditures for extraordinary, nonrecurring
items that are not customarily payable from current revenues, such as
casualty losses or extraordinary legal judgments in amounts in excess of
reasonable insurance coverage. If, however, an issuer or a related party
maintains a reserve for such items (e.g., a self-insurance fund) or has
set aside other available amounts for such expenses, gross proceeds
within that reserve must be allocated to expenditures only after all
other available amounts in that reserve are expended.
(C) Exception for payment of principal and interest on prior issues.
Paragraph (d)(3)(i) of this section does not apply to expenditures for
payment of principal, interest, or redemption prices on a prior issue
and, for a crossover refunding issue, interest on that issue.
(D) No exceptions if replacement proceeds created. The exceptions
provided in this paragraph (d)(3)(ii) do not apply if the allocation
merely substitutes gross proceeds for other amounts that would have been
used to make those expenditures in a manner that gives rise to
replacement proceeds. For example, if a purported reimbursement
allocation of proceeds of a reimbursement bond does not result in an
expenditure under Sec. 1.150-2, those proceeds may not be allocated to
pay interest on an issue that, absent this allocation, would have been
paid from the issuer's current revenues.
(iii) Definition of available amount--(A) In general. For purposes
of this paragraph (d)(3), available amount means any amount that is
available to an issuer for working capital expenditure purposes of the
type financed by an issue. Except as otherwise provided, available
amount excludes proceeds of the issue but includes cash, investments,
and other amounts held in accounts or otherwise by the issuer or a
related party if those amounts may be used by the issuer for working
capital expenditures of the type being financed by an issue without
legislative or judicial action and without a legislative, judicial, or
contractual requirement that those amounts be reimbursed.
(B) Reasonable working capital reserve treated as unavailable. A
reasonable working capital reserve is treated as unavailable. Any
working capital reserve is reasonable if it does not exceed 5 percent of
the actual working capital expenditures of the issuer in the fiscal
[[Page 693]]
year before the year in which the determination of available amounts is
made. For this purpose only, in determining the working capital
expenditures of an issuer for a prior fiscal year, any expenditures
(whether capital or working capital expenditures) that are paid out of
current revenues may be treated as working capital expenditures.
(C) Qualified endowment funds treated as unavailable. For a
501(c)(3) organization, a qualified endowment fund is treated as
unavailable. A fund is a qualified endowment fund if--
(1) The fund is derived from gifts or bequests, or the income
thereon, that were neither made nor reasonably expected to be used to
pay working capital expenditures;
(2) Pursuant to reasonable, established practices of the
organization, the governing body of the 501(c)(3) organization
designates and consistently operates the fund as a permanent endowment
fund or quasi-endowment fund restricted as to use; and
(3) There is an independent verification that the fund is reasonably
necessary as part of the organization's permanent capital.
(D) Application to statutory safe harbor for tax and revenue
anticipation bonds. For purposes of section 148(f)(4)(B)(iii)(II),
available amount has the same meaning as in paragraph (d)(3)(iii) of
this section, except that the otherwise-permitted reasonable working
capital reserve is treated as part of the available amount.
(4) Expenditures for grants--(i) In general. Gross proceeds of an
issue that are used to make a grant are allocated to an expenditure on
the date on which the grant is made.
(ii) Characterization of repayments of grants. If any amount of a
grant financed by gross proceeds of an issue is repaid to the grantor,
the repaid amount is treated as unspent proceeds of the issue as of the
repayment date unless expended within 60 days of repayment.
(iii) Definition of grant. Grant means a transfer for a governmental
purpose of money or property to a transferee that is not a related party
to or an agent of the transferor. The transfer must not impose any
obligation or condition to directly or indirectly repay any amount to
the transferor. Obligations or conditions intended solely to assure
expenditure of the transferred moneys in accordance with the
governmental purpose of the transfer do not prevent a transfer from
being a grant.
(5) Expenditures for reimbursement purposes. In allocating gross
proceeds of issues of reimbursement bonds (as defined in Sec. 1.150-2))
to certain expenditures, Sec. 1.150-2 applies. In allocating gross
proceeds to an expenditure to reimburse a previously paid working
capital expenditure, paragraph (d)(3) of this section applies. Thus, if
the expenditure is described in paragraph (d)(3)(ii) of this section or
there are no available amounts on the date a working capital expenditure
is made and there are no other available amounts on the date of the
reimbursement of that expenditure, gross proceeds are allocated to the
working capital expenditure as of the date of the reimbursement.
(6) Expenditures of certain commingled investment proceeds of
governmental issues. This paragraph (d)(6) applies to any issue of
governmental bonds, any issue of private activity bonds issued to
finance a facility that is required by section 142 to be owned by a
governmental unit, and any portion of an issue that is not treated as
consisting of private activity bonds under section 141(b)(9). Investment
proceeds of the issue (other than investment proceeds held in a
refunding escrow) are treated as allocated to expenditures for a
governmental purpose when the amounts are deposited in a commingled fund
with substantial tax or other revenues from governmental operations of
the issuer and the amounts are reasonably expected to be spent for
governmental purposes within 6 months from the date of the commingling.
In establishing these reasonable expectations, an issuer may use any
reasonable accounting assumption and is not bound by the proceeds-spent-
last assumption generally required for working capital expenditures
under paragraph (d)(3) of this section.
(7) Payments to related parties. Any payment of gross proceeds of
the issue to a related party of the payor is not an expenditure of those
gross proceeds.
[[Page 694]]
(e) Special rules for commingled funds--(1) In general. An
accounting method for gross proceeds of an issue in a commingled fund,
other than a bona fide debt service fund, is reasonable only if it
satisfies the requirements of paragraphs (e)(2) through (6) of this
section in addition to the other requirements of this section.
(2) Investments held by a commingled fund--(i) Required ratable
allocations. Not less frequently than as of the close of each fiscal
period, all payments and receipts (including deemed payments and
receipts) on investments held by a commingled fund must be allocated
(but not necessarily distributed) among the different investors in the
fund. This allocation must be based on a consistently applied,
reasonable ratable allocation method.
(ii) Safe harbors for ratable allocation methods. Reasonable ratable
allocation methods include, without limitation, methods that allocate
these items in proportion to either--
(A) The average daily balances of the amounts in the commingled fund
from different investors during a fiscal period (as described in
paragraph (e)(4) of this section); or
(B) The average of the beginning and ending balances of the amounts
in the commingled fund from different investors for a fiscal period that
does not exceed one month.
(iii) Definition of investor. For purposes of this paragraph (e),
the term investor means each different source of funds invested in a
commingled fund. For example, if a city invests gross proceeds of an
issue and tax revenues in a commingled fund, it is treated as two
different investors.
(3) Certain expenditures involving a commingled fund. If a ratable
allocation method is used under paragraph (d) of this section to
allocate expenditures from the commingled fund, the same ratable
allocation method must be used to allocate payments and receipts on
investments in the commingled fund under paragraph (e)(2) of this
section.
(4) Fiscal periods. The fiscal year of a commingled fund is the
calendar year unless the fund adopts another fiscal year. A commingled
fund may use any consistent fiscal period that does not exceed three
months (e.g., a daily, weekly, monthly, or quarterly fiscal period).
(5) Unrealized gains and losses on investments of a commingled fund-
-(i) Mark-to-market requirement for internal commingled funds with
longer-term investment portfolios. Except as otherwise provided in this
paragraph (e), in the case of a commingled fund in which the issuer and
any related party own more than 25 percent of the beneficial interests
in the fund (an internal commingled fund), the fund must treat all its
investments as if sold at fair market value either on the last day of
the fiscal year or the last day of each fiscal period. The net gains or
losses from these deemed sales of investments must be allocated to all
investors of the commingled fund during the period since the last
allocation.
(ii) Exception for internal commingled funds with shorter-term
investment portfolios. If the remaining weighted average maturity of all
investments held by a commingled fund during a particular fiscal year
does not exceed 18 months, and the investments held by the commingled
fund during that fiscal year consist exclusively of obligations, the
mark-to-market requirement of paragraph (e)(5)(i) of this section does
not apply.
(iii) Exception for commingled reserve funds and sinking funds. The
mark-to-market requirement of paragraph (e)(5)(i) of this section does
not apply to a commingled fund that operates exclusively as a reserve
fund, sinking fund, or replacement fund for two or more issues of the
same issuer.
(6) Allocations of commingled funds serving as common reserve funds
or sinking funds--(i) Permitted ratable allocation methods. If a
commingled fund serves as a common reserve fund, replacement fund, or
sinking fund for two or more issues (a commingled reserve), after making
reasonable adjustments to account for proceeds allocated under paragraph
(b)(1) or (b)(2) of this section, investments held by that commingled
fund must be allocated ratably among the issues served by the commingled
fund in accordance with one of the following methods--
(A) The relative values of the bonds of those issues under
Sec. 1.148-4(e);
[[Page 695]]
(B) The relative amounts of the remaining maximum annual debt
service requirements on the outstanding principal amounts of those
issues; or
(C) The relative original stated principal amounts of the
outstanding issues.
(ii) Frequency of allocations. An issuer must make any allocations
required by this paragraph (e)(6) as of a date at least every 3 years
and as of each date that an issue first becomes secured by the
commingled reserve. If relative original principal amounts are used to
allocate, allocations must also be made on the retirement of any issue
secured by the commingled reserve.
[T.D. 8476, 58 FR 33532, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24045, May 10, 1994; T.D. 8712, 62 FR 2304,
Jan. 16, 1997; T.D. 8718, 62 FR 25512, May 9, 1997]
Sec. 1.148-7 Spending exceptions to the rebate requirement.
(a) Scope of section--(1) In general. This section provides guidance
on the spending exceptions to the arbitrage rebate requirement of
section 148(f)(2). These exceptions are the 6-month exception in section
148(f)(4)(B) (the 6-month exception), the 18-month exception under
paragraph (d) of this section (the 18-month exception), and the 2-year
construction exception under section 148(f)(4)(C) (the 2-year exception)
(collectively, the spending exceptions).
(2) Relationship of spending exceptions. Each of the spending
exceptions is an independent exception to arbitrage rebate. For example,
a construction issue may qualify for the 6-month exception or the 18-
month exception even though the issuer makes one or more elections under
the 2-year exception with respect to the issue.
(3) Spending exceptions not mandatory. Use of the spending
exceptions is not mandatory. An issuer may apply the arbitrage rebate
requirement to an issue that otherwise satisfies a spending exception.
If an issuer elects to pay penalty in lieu of rebate under the 2-year
exception, however, the issuer must apply those penalty provisions.
(b) Rules applicable for all spending exceptions. The provisions of
this paragraph (b) apply for purposes of applying each of the spending
exceptions.
(1) Special transferred proceeds rules--(i) Application to prior
issues. For purposes of applying the spending exceptions to a prior
issue only, proceeds of the prior issue that become transferred proceeds
of the refunding issue continue to be treated as unspent proceeds of the
prior issue. If the prior issue satisfies one of the spending
exceptions, the proceeds of the prior issue that are excepted from
rebate under that spending exception are not subject to rebate either as
proceeds of the prior issue or as transferred proceeds of the refunding
issue.
(ii) Application to refunding issues--(A) In general. The only
spending exception applicable to refunding issues is the 6-month
exception. For purposes of applying the 6-month exception to a refunding
issue only, proceeds of the prior issue that become transferred proceeds
of the refunding issue generally are not treated as proceeds of the
refunding issue and need not be spent for the refunding issue to satisfy
that spending exception. Even if the refunding issue qualifies for that
spending exception, those transferred proceeds are subject to rebate as
proceeds of the refunding issue unless an exception to rebate applied to
those proceeds as proceeds of the prior issue.
(B) Exception. For purposes of applying the 6-month exception to
refunding issues, those transferred proceeds of the refunding issue
excluded from the gross proceeds of the prior issue under the special
definition of gross proceeds in paragraph (c)(3) of this section, and
those that transferred from a prior taxable issue, are generally treated
as gross proceeds of the refunding issue. Thus, for the refunding issue
to qualify for the 6-month exception, those proceeds must be spent
within 6 months of the issue date of the refunding issue, unless those
amounts continue to be used in a manner that does not cause those
amounts to be gross proceeds under paragraph (c)(3) of this section.
(2) Application of multipurpose issue rules. Except as otherwise
provided, if any portion of an issue is treated as a separate issue
allocable to refunding purposes under Sec. 1.148-9(h) (relating to
multipurpose issues), for purposes of this section, that portion is
treated as a separate issue.
[[Page 696]]
(3) Expenditures for governmental purposes of the issue. For
purposes of this section, expenditures for the governmental purpose of
an issue include payments for interest, but not principal, on the issue,
and for principal or interest on another issue of obligations. The
preceding sentence does not apply for purposes of the 18-month and 2-
year exceptions if those payments cause the issue to be a refunding
issue.
(4) De minimis rule. Any failure to satisfy the final spending
requirement of the 18-month exception or the 2-year exception is
disregarded if the issuer exercises due diligence to complete the
project financed and the amount of the failure does not exceed the
lesser of 3 percent of the issue price of the issue or $250,000.
(5) Special definition of reasonably required reserve or replacement
fund. For purposes of this section only, a reasonably required reserve
or replacement fund also includes any fund to the extent described in
Sec. 1.148-5(c)(3)(i)(E) or (G).
(6) Pooled financing issue--(i) In general. Except as otherwise
provided in this paragraph (b)(6), the spending exceptions apply to a
pooled financing issue as a whole, rather than to each loan separately.
(ii) Election to apply spending exceptions separately to each loan--
(A) In general. At the election (made on or before the issue date) of
the issuer of a pooled financing issue, the spending exceptions are
applied separately to each conduit loan, and the applicable spending
requirements for a loan begin on the earlier of the date the loan is
made, or the first day following the 1-year period beginning on the
issue date of the pooled financing issue. If this election is made, the
rebate requirement applies to, and none of the spending exceptions are
available for, gross proceeds of the pooled financing bonds before the
date on which the spending requirements for those proceeds begin.
(B) Application of spending exceptions. If the issuer makes the
election under this paragraph (b)(6)(ii), the rebate requirement is
satisfied for proceeds used to finance a particular conduit loan to the
extent that the loan satisfies a spending exception or the small issuer
exception under Sec. 1.148-8, regardless of whether any other conduit
loans allocable to the issue satisfy such an exception. A pooled
financing issue is an issue of arbitrage bonds, however, unless the
entire issue satisfies the requirements of section 148. An issuer may
pay rebate for some conduit loans and 1\1/2\ percent penalty for other
conduit loans from the same pooled financing issue. The 1\1/2\ percent
penalty is computed separately for each conduit loan.
(C) Elections under 2-year exception. If the issuer makes the
election under this paragraph (b)(6)(ii), the issuer may make all
elections under the 2-year exception separately for each loan. Elections
regarding a loan that otherwise must be made by the issuer on or before
the issue date instead may be made on or before the date the loan is
made (but not later than 1 year after the issue date).
(D) Example. The operation of this paragraph (b)(6) is illustrated
by the following example:
Example. Pooled financing issue. On January 1, 1994, Authority J
issues bonds. As of the issue date, J reasonably expects to use the
proceeds of the issue to make loans to City K, County L, and City M. J
does not reasonably expect to use more than 75 percent of the available
construction proceeds of the issue for construction expenditures. On or
before the issue date, J elects to apply the spending exceptions
separately for each loan, with spending requirements beginning on the
earlier of the date the loan is made or the first day following the 1-
year period beginning on the issue date. On February 1, 1994, J loans a
portion of the proceeds to K, and K reasonably expects that 45 percent
of those amounts will be used for construction expenditures. On the date
this loan is made, J elects under paragraph (j) of this section to treat
60 percent of the amount loaned to K as a separate construction issue,
and also elects the 1\1/2\ percent penalty under paragraph (k) of this
section for the separate construction issue. On March 1, 1994, J loans a
portion of the proceeds to L, and L reasonably expects that more than 75
percent of those amounts will be used for construction expenditures. On
March 1, 1995, J loans the remainder of the proceeds to M, and none of
those amounts will be used for construction expenditures. J must satisfy
the rebate requirement for all gross proceeds before those amounts are
loaned. For the loan to K, the spending periods begin on February 1,
1994, and the 1\1/2\ percent penalty must be paid for any failure to
meet a spending requirement
[[Page 697]]
for the portion of the loan to K that is treated as a separate
construction issue. Rebate must be paid on the remaining portion of the
loan to K, unless that portion qualifies for the 6-month exception. For
the loan to L, the spending periods begin on March 1, 1994, and the
rebate requirement must be satisfied unless the 6-month, 18-month, or
the 2-year exception is satisfied with respect to those amounts. For the
loan to M, the spending periods begin on January 2, 1995, and the rebate
requirement must be satisfied for those amounts unless the 6-month or
18-month exception is satisfied.
(c) 6-month exception-- (1)General rule. An issue is treated as
meeting the rebate requirement if--
(i) The gross proceeds (as modified by paragraph (c)(3) of this
section) of the issue are allocated to expenditures for the governmental
purposes of the issue within the 6-month period beginning on the issue
date (the 6-month spending period); and
(ii) The rebate requirement is met for amounts not required to be
spent within the 6-month spending period (excluding earnings on a bona
fide debt service fund).
(2) Additional period for certain bonds. The 6-month spending period
is extended for an additional 6 months in certain circumstances
specified under section 148(f)(4)(B)(ii).
(3) Amounts not included in gross proceeds. For purposes of
paragraph (c)(1)(i) of this section only, gross proceeds has the meaning
used in Sec. 1.148-1, except it does not include amounts--
(i) In a bona fide debt service fund;
(ii) In a reasonably required reserve or replacement fund (see
Sec. 1.148-7(b)(5));
(iii) That, as of the issue date, are not reasonably expected to be
gross proceeds but that become gross proceeds after the end of the 6-
month spending period;
(iv) Representing sale or investment proceeds derived from payments
under any purpose investment of the issue; and
(v) Representing repayments of grants (as defined in Sec. 1.148-
6(d)(4)) financed by the issue.
(4) Series of refundings. If a principal purpose of a series of
refunding issues is to exploit the difference between taxable and tax-
exempt interest rates by investing proceeds during the temporary periods
provided in Sec. 1.148-9(d), the 6-month spending period for all issues
in the series begins on the issue date of the first issue in the series.
(d) 18-month exception--(1) General rule. An issue is treated as
meeting the rebate requirement if all of the following requirements are
satisfied--
(i) 18-month expenditure schedule met. The gross proceeds (as
defined in paragraph (d)(3) of this section) are allocated to
expenditures for a governmental purpose of the issue in accordance with
the following schedule (the 18-month expenditure schedule) measured from
the issue date--
(A) At least 15 percent within 6 months (the first spending period);
(B) At least 60 percent within 12 months (the second spending
period); and
(C) 100 percent within 18 months (the third spending period).
(ii) Rebate requirement met for amounts not required to be spent.
The rebate requirement is met for all amounts not required to be spent
in accordance with the 18-month expenditure schedule (other than
earnings on a bona fide debt service fund).
(iii) Issue qualifies for initial temporary period. All of the gross
proceeds (as defined in paragraph (d)(3)(i) of this section) of the
issue qualify for the initial temporary period under Sec. 1.148-2(e)(2).
(2) Extension for reasonable retainage. An issue does not fail to
satisfy the spending requirement for the third spending period as a
result of a reasonable retainage if the reasonable retainage is
allocated to expenditures within 30 months of the issue date. Reasonable
retainage has the meaning under paragraph (h) of this section, as
modified to refer to net sale proceeds on the date 18 months after the
issue date.
(3) Gross proceeds--(i) Definition of gross proceeds. For purposes
of paragraph (d)(1) of this section only, gross proceeds means gross
proceeds as defined in paragraph (c)(3) of this section, as modified to
refer to ``18 months'' in paragraph (c)(3)(iii) of this section in lieu
of ``6 months.''
(ii) Estimated earnings. For purposes of determining compliance with
the first two spending periods under paragraph (d)(1)(i) of this
section, the
[[Page 698]]
amount of investment proceeds included in gross proceeds of the issue is
determined based on the issuer's reasonable expectations on the issue
date.
(4) Application to multipurpose issues. This paragraph (d) does not
apply to an issue any portion of which is treated as meeting the rebate
requirement under paragraph (e) of this section (relating to the 2-year
exception).
(e) 2-year exception--(1) General rule. A construction issue is
treated as meeting the rebate requirement for available construction
proceeds if those proceeds are allocated to expenditures for
governmental purposes of the issue in accordance with the following
schedule (the 2-year expenditure schedule), measured from the issue
date--
(i) At least 10 percent within 6 months (the first spending period);
(ii) At least 45 percent within 1 year (the second spending period);
(iii) At least 75 percent within 18 months (the third spending
period); and
(iv) 100 percent within 2 years (the fourth spending period).
(2) Extension for reasonable retainage. An issue does not fail to
satisfy the spending requirement for the fourth spending period as a
result of unspent amounts for reasonable retainage (as defined in
paragraph (h) of this section) if those amounts are allocated to
expenditures within 3 years of the issue date.
(3) Definitions. For purposes of the 2-year exception, the following
definitions apply:
(i) Real property means land and improvements to land, such as
buildings or other inherently permanent structures, including interests
in real property. For example, real property includes wiring in a
building, plumbing systems, central heating or air-conditioning systems,
pipes or ducts, elevators, escalators installed in a building, paved
parking areas, roads, wharves and docks, bridges, and sewage lines.
(ii) Tangible personal property means any tangible property other
than real property, including interests in tangible personal property.
For example, tangible personal property includes machinery that is not a
structural component of a building, subway cars, fire trucks,
automobiles, office equipment, testing equipment, and furnishings.
(iii) Substantially completed. Construction may be treated as
substantially completed when the issuer abandons construction or when at
least 90 percent of the total costs of the construction reasonably
expected, as of that date, to be financed with the available
construction proceeds have been allocated to expenditures.
(f) Construction issue--(1) Definition. Construction issue means any
issue that is not a refunding issue if--
(i) The issuer reasonably expects, as of the issue date, that at
least 75 percent of the available construction proceeds of the issue
will be allocated to construction expenditures (as defined in paragraph
(g) of this section) for property owned by a governmental unit or a
501(c)(3) organization; and
(ii) Any private activity bonds that are part of the issue are
qualified 501(c)(3) bonds or private activity bonds issued to finance
property to be owned by a governmental unit or a 501(c)(3) organization.
(2) Use of actual facts. For the provisions of paragraphs (e)
through (m) of this section that apply based on the issuer's reasonable
expectations, an issuer may elect on or before the issue date to apply
all of those provisions based on actual facts, except that this election
does not apply for purposes of determining whether an issue is a
construction issue under paragraph (f)(1) of this section if the 1\1/2\
percent penalty election is made under paragraph (k) of this section.
(3) Ownership requirement--(i) In general. A governmental unit or
501(c)(3) organization is treated as the owner of property if it would
be treated as the owner for Federal income tax purposes. For obligations
issued on behalf of a State or local governmental unit, the entity that
actually issues the bonds is treated as a governmental unit.
(ii) Safe harbor for leases and management contracts. Property
leased by a governmental unit or a 501(c)(3) organization is treated as
owned by the governmental unit or 501(c)(3) organization if the lessee
complies with the requirements of section 142(b)(1)(B). For a bond
described in section 142(a)(6), the
[[Page 699]]
requirements of section 142(b)(1)(B) apply as modified by section
146(h)(2).
(g) Construction expenditures--(1) Definition. Except as otherwise
provided, construction expenditures means capital expenditures (as
defined in Sec. 1.150-1) that are allocable to the cost of real property
or constructed personal property (as defined in paragraph (g)(3) of this
section). Except as provided in paragraph (g)(2) of this section,
construction expenditures do not include expenditures for acquisitions
of interests in land or other existing real property.
(2) Certain acquisitions under turnkey contracts treated as
construction expenditures. Expenditures are not for the acquisition of
an interest in existing real property other than land if the contract
between the seller and the issuer requires the seller to build or
install the property (e.g., a turnkey contract), but only to the extent
that the property has not been built or installed at the time the
parties enter into the contract.
(3) Constructed personal property. Constructed personal property
means tangible personal property (or, if acquired pursuant to a single
acquisition contract, properties) or specially developed computer
software if--
(i) A substantial portion of the property or properties is completed
more than 6 months after the earlier of the date construction or
rehabilitation commenced and the date the issuer entered into an
acquisition contract;
(ii) Based on the reasonable expectations of the issuer, if any, or
representations of the person constructing the property, with the
exercise of due diligence, completion of construction or rehabilitation
(and delivery to the issuer) could not have occurred within that 6-month
period; and
(iii) If the issuer itself builds or rehabilitates the property, not
more than 75 percent of the capitalizable cost is attributable to
property acquired by the issuer (e.g., components, raw materials, and
other supplies).
(4) Specially developed computer software. Specially developed
computer software means any programs or routines used to cause a
computer to perform a desired task or set of tasks, and the
documentation required to describe and maintain those programs, provided
that the software is specially developed and is functionally related and
subordinate to real property or other constructed personal property.
(5) Examples. The operation of this paragraph (g) is illustrated by
the following examples:
Example 1. Purchase of construction materials. City A issues bonds
to finance a new office building. A uses proceeds of the bonds to
purchase materials to be used in constructing the building, such as
bricks, pipes, wires, lighting, carpeting, heating equipment, and
similar materials. Expenditures by A for the construction materials are
construction expenditures because those expenditures will be
capitalizable to the cost of the building upon completion, even though
they are not initially capitalizable to the cost of existing real
property. This result would be the same if A hires a third-party to
perform the construction, unless the office building is partially
constructed at the time that A contracts to purchase the building.
Example 2. Turnkey contract. City B issues bonds to finance a new
office building. B enters into a turnkey contract with developer D under
which D agrees to provide B with a completed building on a specified
completion date on land currently owned by D. Under the agreement, D
holds title to the land and building and assumes any risk of loss until
the completion date, at which time title to the land and the building
will be transferred to B. No construction has been performed by the date
that B and D enter into the agreement. All payments by B to D for
construction of the building are construction expenditures because all
the payments are properly capitalized to the cost of the building, but
payments by B to D allocable to the acquisition of the land are not
construction expenditures.
Example 3. Right-of-way. P, a public agency, issues bonds to finance
the acquisition of a right-of-way and the construction of sewage lines
through numerous parcels of land. The right-of-way is acquired primarily
through P' s exercise of its powers of eminent domain. As of the issue
date, P reasonably expects that it will take approximately 2 years to
acquire the entire right-of-way because of the time normally required
for condemnation proceedings. No expenditures for the acquisition of the
right-of-way are construction expenditures because they are costs
incurred to acquire an interest in existing real property.
Example 4. Subway cars. City C issues bonds to finance new subway
cars. C reasonably expects that it will take more than 6 months for the
subway cars to be constructed to C's specifications. The subway cars are
constructed personal property. Alternatively, if
[[Page 700]]
the builder of the subway cars informs C that it will only take 3 months
to build the subway cars to C's specifications, no payments for the
subway cars are construction expenditures.
Example 5. Fractional interest in property. U, a public agency,
issues bonds to finance an undivided fractional interest in a newly
constructed power-generating facility. U contributes its ratable share
of the cost of building the new facility to the project manager for the
facility. U's contributions are construction expenditures in the same
proportion that the total expenditures for the facility qualify as
construction expenditures.
Example 6. Park land. City D issues bonds to finance the purchase of
unimproved land and the cost of subsequent improvements to the land,
such as grading and landscaping, necessary to transform it into a park.
The costs of the improvements are properly capitalizable to the cost of
the land, and therefore, are construction expenditures, but expenditures
for the acquisition of the land are not.
(h) Reasonable retainage definition. Reasonable retainage means an
amount, not to exceed 5 percent of available construction proceeds as of
the end of the fourth spending period, that is retained for reasonable
business purposes relating to the property financed with the proceeds of
the issue. For example, a reasonable retainage may include a retention
to ensure or promote compliance with a construction contract in
circumstances in which the retained amount is not yet payable, or in
which the issuer reasonably determines that a dispute exists regarding
completion or payment.
(i) Available construction proceeds--(1) Definition in general.
Available construction proceeds has the meaning used in section
148(f)(4)(C)(vi). For purposes of this definition, earnings include
earnings on any tax-exempt bond. Pre-issuance accrued interest and
earnings thereon may be disregarded. Amounts that are not gross proceeds
as a result of the application of the universal cap under Sec. 1.148-
6(b)(2) are not available construction proceeds.
(2) Earnings on a reasonably required reserve or replacement fund.
Earnings on any reasonably required reserve or replacement fund are
available construction proceeds only to the extent that those earnings
accrue before the earlier of the date construction is substantially
completed or the date that is 2 years after the issue date. An issuer
may elect on or before the issue date to exclude from available
construction proceeds the earnings on such a fund. If the election is
made, the rebate requirement applies to the excluded amounts from the
issue date.
(3) Reasonable expectations test for future earnings. For purposes
of determining compliance with the spending requirements as of the end
of each of the first three spending periods, available construction
proceeds include the amount of future earnings that the issuer
reasonably expected as of the issue date.
(4) Issuance costs. Available construction proceeds do not include
gross proceeds used to pay issuance costs financed by an issue, but do
include earnings on such proceeds. Thus, an expenditure of gross
proceeds of an issue for issuance costs does not count toward meeting
the spending requirements. The expenditure of earnings on gross proceeds
used to pay issuance costs does count toward meeting those requirements.
If the spending requirements are met and the proceeds used to pay
issuance costs are expended by the end of the fourth spending period,
those proceeds and the earnings thereon are treated as having satisfied
the rebate requirement.
(5) One and one-half percent penalty in lieu of arbitrage rebate.
For purposes of the spending requirements of paragraph (e) of this
section, available construction proceeds as of the end of any spending
period are reduced by the amount of penalty in lieu of arbitrage rebate
(under paragraph (k) of this section) that the issuer has paid from
available construction proceeds before the last day of the spending
period.
(6) Payments on purpose investments and repayments of grants.
Available construction proceeds do not include--
(i) Sale or investment proceeds derived from payments under any
purpose investment of the issue; or
(ii) Repayments of grants (as defined in Sec. 1.148-6(d)(4))
financed by the issue.
(7) Examples. The operation of this paragraph (i) is illustrated by
the following examples:
Example 1. Treatment of investment earnings. City F issues bonds
having an issue price of $10,000,000. F deposits all of the proceeds of
the issue into a construction fund to be used
[[Page 701]]
for expenditures other than costs of issuance. F estimates on the issue
date that, based on reasonably expected expenditures and rates of
investment, earnings on the construction fund will be $800,000. As of
the issue date and the end of each of the first three spending periods,
the amount of available construction proceeds is $10,800,000. To qualify
as a construction issue, F must reasonably expect on the issue date that
at least $8,100,000 (75 percent of $10,800,000) will be used for
construction expenditures. In order to meet the 10 percent spending
requirement at the end of the first spending period, F must spend at
least $1,080,000. As of the end of the fourth spending period, F has
received $1,100,000 in earnings. In order to meet the spending
requirement at the end of the fourth spending period, however, F must
spend all of the $11,100,000 of actual available construction proceeds
(except for reasonable retainage not exceeding $555,000).
Example 2. Treatment of investment earnings without a reserve fund.
City G issues bonds having an issue price of $11,200,000. G does not
elect to exclude earnings on the reserve fund from available
construction proceeds. G uses $200,000 of proceeds to pay issuance costs
and deposits $1,000,000 of proceeds into a reasonably required reserve
fund. G deposits the remaining $10,000,000 of proceeds into a
construction fund to be used for construction expenditures. On the issue
date, G reasonably expects that, based on the reasonably expected date
of substantial completion and rates of investment, total earnings on the
construction fund will be $800,000, and total earnings on the reserve
fund to the date of substantial completion will be $150,000. G
reasonably expects that substantial completion will occur during the
fourth spending period. As of the issue date, the amount of available
construction proceeds is $10,950,000 ($10,000,000 originally deposited
into the construction fund plus $800,000 expected earnings on the
construction fund and $150,000 expected earnings on the reserve fund).
To qualify as a construction issue, G must reasonably expect on the
issue date that at least $8,212,500 will be used for construction
expenditures.
Example 3. Election to exclude earnings on a reserve fund. The facts
are the same as Example 2, except that G elects on the issue date to
exclude earnings on the reserve fund from available construction
proceeds. The amount of available construction proceeds as of the issue
date is $10,800,000.
(j) Election to treat portion of issue used for construction as
separate issue--(1) In general. For purposes of paragraph (e) of this
section, if any proceeds of an issue are to be used for construction
expenditures, the issuer may elect on or before the issue date to treat
the portion of the issue that is not a refunding issue as two, and only
two, separate issues, if--
(i) One of the separate issues is a construction issue as defined in
paragraph (f) of this section;
(ii) The issuer reasonably expects, as of the issue date, that this
construction issue will finance all of the construction expenditures to
be financed by the issue; and
(iii) The issuer makes an election to apportion the issue under this
paragraph (j)(1) in which it identifies the amount of the issue price of
the issue allocable to the construction issue.
(2) Example. The operation of this paragraph (j) is illustrated by
the following example.
Example. City D issues bonds having an issue price of $19,000,000.
On the issue date, D reasonably expects to use $10,800,000 of bond
proceeds (including investment earnings) for construction expenditures
for the project being financed. D deposits $10,000,000 in a construction
fund to be used for construction expenditures and $9,000,000 in an
acquisition fund to be used for acquisition of equipment not qualifying
as construction expenditures. D estimates on the issue date, based on
reasonably expected expenditures and rates of investment, that total
earnings on the construction fund will be $800,000 and total earnings on
the acquisition fund will be $200,000. Because the total construction
expenditures to be financed by the issue are expected to be $10,800,000,
the maximum available construction proceeds for a construction issue is
$14,400,000 ($10,800,000 divided by 0.75). To determine the maximum
amount of the issue price allocable to a construction issue, the
estimated investment earnings allocable to the construction issue are
subtracted. The entire $800,000 of earnings on the construction fund are
allocable to the construction issue. Only a portion of the $200,000 of
earnings on the acquisition fund, however, are allocable to the
construction issue. The total amount of the available construction
proceeds that is expected to be used for acquisition is $3,600,000
($14,400,000-$10,800,000). The portion of earnings on the acquisition
fund that is allocable to the construction issue is $78,261
($200,000x$3,600,000/$9,200,000). Accordingly, D may elect on or before
the issue date to treat up to $13,521,739 of the issue price as a
construction issue ($14,400,000-$800,000-$78,261). D's election must
specify the amount of the issue price treated as a construction issue.
The balance of the issue price is treated as a separate nonconstruction
issue that is subject to the rebate requirement unless it meets another
[[Page 702]]
exception to arbitrage rebate. Because the financing of a construction
issue is a separate governmental purpose under Sec. 1.148-9(h), the
election causes the issue to be a multipurpose issue under that section.
(k) One and one-half percent penalty in lieu of arbitrage rebate--
(1) In general. Under section 148(f)(4)(C)(vii), an issuer of a
construction issue may elect on or before the issue date to pay a
penalty (the 1\1/2\ percent penalty) to the United States in lieu of the
obligation to pay the rebate amount on available construction proceeds
upon failure to satisfy the spending requirements of paragraph (e) of
this section. The 1\1/2\ percent penalty is calculated separately for
each spending period, including each semiannual period after the end of
the fourth spending period, and is equal to 1.5 percent times the
underexpended proceeds as of the end of the spending period. For each
spending period, underexpended proceeds equal the amount of available
construction proceeds required to be spent by the end of the spending
period, less the amount actually allocated to expenditures for the
governmental purposes of the issue by that date. The 1\1/2\ percent
penalty must be paid to the United States no later than 90 days after
the end of the spending period to which it relates. The 1\1/2\ percent
penalty continues to apply at the end of each spending period and each
semiannual period thereafter until the earliest of the following--
(i) The termination of the penalty under paragraph (l) of this
section;
(ii) The expenditure of all of the available construction proceeds;
or
(iii) The last stated final maturity date of bonds that are part of
the issue and any bonds that refund those bonds.
(2) Application to reasonable retainage. If an issue meets the
exception for reasonable retainage except that all retainage is not
spent within 3 years of the issue date, the issuer must pay the 1\1/2\
percent penalty to the United States for any reasonable retainage that
was not so spent as of the close of the 3-year period and each later
spending period.
(3) Coordination with rebate requirement. The rebate requirement is
treated as met with respect to available construction proceeds for a
period if the 1\1/2\ percent penalty is paid in accordance with this
section.
(l) Termination of 1\1/2\ percent penalty--(1)Termination after
initial temporary period. The issuer may terminate the 1\1/2\ percent
penalty after the initial temporary period (a section 148(f)(4)(C)(viii)
penalty termination) if--
(i) Not later than 90 days after the earlier of the end of the
initial temporary period or the date construction is substantially
completed, the issuer elects to terminate the 1\1/2\ percent penalty;
provided that solely for this purpose, the initial temporary period may
be extended by the issuer to a date ending 5 years after the issue date;
(ii) Within 90 days after the end of the initial temporary period,
the issuer pays a penalty equal to 3 percent of the unexpended available
construction proceeds determined as of the end of the initial temporary
period, multiplied by the number of years (including fractions of years
computed to 2 decimal places) in the initial temporary period;
(iii) For the period beginning as of the close of the initial
temporary period, the unexpended available construction proceeds are not
invested in higher yielding investments; and
(iv) On the earliest date on which the bonds may be called or
otherwise redeemed, with or without a call premium, the unexpended
available construction proceeds as of that date (not including any
amount earned after the date on which notice of the redemption was
required to be given) must be used to redeem the bonds. Amounts used to
pay any call premium are treated as used to redeem bonds. This
redemption requirement may be met by purchases of bonds by the issuer on
the open market at prices not exceeding fair market value. A portion of
the annual principal payment due on serial bonds of a construction issue
may be paid from the unexpended amount, but only in an amount no greater
than the amount that bears the same ratio to the annual principal due
that the total unexpended amount bears to the issue price of the
construction issue.
(2) Termination before end of initial temporary period. If the
construction to be financed by the construction issue is substantially
completed before the end of the initial temporary period, the
[[Page 703]]
issuer may elect to terminate the 1\1/2\ percent penalty before the end
of the initial temporary period (a section 148(f)(4)(C)(ix) penalty
termination) if--
(i) Before the close of the initial temporary period and not later
than 90 days after the date the construction is substantially completed,
the issuer elects to terminate the 1\1/2\ percent penalty;
(ii) The election identifies the amount of available construction
proceeds that will not be spent for the governmental purposes of the
issue; and
(iii) The issuer has met all of the conditions for a section
148(f)(4)(C)(viii) penalty termination, applied as if the initial
temporary period ended as of the date the required election for a
section 148(f)(4)(C)(ix) penalty termination is made. That penalty
termination election satisfies the required election for a section
148(f)(4)(C)(viii) termination.
(3) Application to reasonable retainage. Solely for purposes of
determining whether the conditions for terminating the 1\1/2\ percent
penalty are met, reasonable retainage may be treated as spent for a
governmental purpose of the construction issue. Reasonable retainage
that is so treated continues to be subject to the 1\1/2\ percent
penalty.
(4) Example. The operation of this paragraph (l) is illustrated by
the following example.
Example. City I issues a construction issue having a 20-year
maturity and qualifying for a 3-year initial temporary period. The bonds
are first subject to optional redemption 10 years after the issue date
at a premium of 3 percent. I elects, on or before the issue date, to pay
the 1\1/2\ percent penalty in lieu of arbitrage rebate. At the end of
the 3-year temporary period, the project is not substantially completed,
and $1,500,000 of available construction proceeds of the issue are
unspent. At that time, I reasonably expects to need $500,000 to complete
the project. I may terminate the 1\1/2\ percent penalty in lieu of
arbitrage rebate with respect to the excess $1,500,000 by electing to
terminate within 90 days of the end of the initial temporary period;
paying a penalty to the United States of $135,000 (3 percent of
$1,500,000 multiplied by 3 years); restricting the yield on the
investment of unspent available construction proceeds for 7 years until
the first call date, although any portion of these proceeds may still be
spent on the project prior to that call date; and using the available
construction proceeds that, as of the first call date, have not been
allocated to expenditures for the governmental purposes of the issue to
redeem bonds on that call date. If I fails to make the termination
election, I is required to pay the 1\1/2\ percent penalty on unspent
available construction proceeds every 6 months until the latest maturity
date of bonds of the issue (or any bonds of another issue that refund
such bonds).
(m) Payment of penalties. Each penalty payment under this section
must be paid in the manner provided in Sec. 1.148-3(g). See Sec. 1.148-
3(h) for rules on failures to pay penalties under this section.
[T.D. 8476, 58 FR 33535, June 18, 1993; 58 FR 44452, Aug. 23, 1993]
Sec. 1.148-8 Small issuer exception to rebate requirement.
(a) Scope. Under section 148(f)(4)(D), bonds issued to finance
governmental activities of certain small issuers are treated as meeting
the arbitrage rebate requirement of section 148(f)(2) (the ``small
issuer exception''). This section provides guidance on the small issuer
exception.
(b) General taxing powers. The small issuer exception generally
applies only to bonds issued by governmental units with general taxing
powers. A governmental unit has general taxing powers if it has the
power to impose taxes (or to cause another entity to impose taxes) of
general applicability which, when collected, may be used for the general
purposes of the issuer. The taxing power may be limited to a specific
type of tax, provided that the applicability of the tax is not limited
to a small number of persons. The governmental unit's exercise of its
taxing power may be subject to procedural limitations, such as voter
approval requirements, but may not be contingent on approval by another
governmental unit. See, also, section 148(f)(4)(D)(iv).
(c) Size limitation--(1) In general. An issue (other than a
refunding issue) qualifies for the small issuer exception only if the
issuer reasonably expects, as of the issue date, that the aggregate face
amount of all tax-exempt bonds (other than private activity bonds)
issued by it during that calendar year
[[Page 704]]
will not exceed $5,000,000; or the aggregate face amount of all tax-
exempt bonds of the issuer (other than private activity bonds) actually
issued during that calendar year does not exceed $5,000,000. For this
purpose, if an issue has more than a de minimis amount of original issue
discount or premium, aggregate face amount means the aggregate issue
price of that issue (determined without regard to pre-issuance accrued
interest).
(2) Aggregation rules. The following aggregation rules apply for
purposes of applying the $5,000,000 size limitation under paragraph
(c)(1) of this section.
(i) On-behalf-of issuers. An issuer and all entities (other than
political subdivisions) that issue bonds on behalf of that issuer are
treated as one issuer.
(ii) Subordinate entities--(A) In general. Except as otherwise
provided in paragraph (d) of this section and section 148(f)(4)(D)(iv),
all bonds issued by a subordinate entity are also treated as issued by
each entity to which it is subordinate. An issuer is subordinate to
another governmental entity if it is directly or indirectly controlled
by the other entity within the meaning of Sec. 1.150-1(e).
(B) Exception for allocations of size limitation. If an entity
properly makes an allocation of a portion of its $5,000,000 size
limitation to a subordinate entity (including an on behalf of issuer)
under section 148(f)(4)(D)(iv), the portion of bonds issued by the
subordinate entity under the allocation is treated as issued only by the
allocating entity and not by any other entity to which the issuing
entity is subordinate. These allocations are irrevocable and must bear a
reasonable relationship to the benefits received by the allocating unit
from issues issued by the subordinate entity. The benefits to be
considered include the manner in which--
(1) Proceeds are to be distributed;
(2) The debt service is to be paid;
(3) The facility financed is to be owned;
(4) The use or output of the facility is to be shared; and
(5) Costs of operation and maintenance are to be shared.
(iii) Avoidance of size limitation. An entity formed or availed of
to avoid the purposes of the $5,000,000 size limitation and all entities
that would benefit from the avoidance are treated as one issuer.
Situations in which an entity is formed or availed of to avoid the
purposes of the $5,000,000 size limitation include those in which the
issuer--
(A) Issues bonds which, but for the $5,000,000 size limitation,
would have been issued by another entity; and
(B) Does not receive a substantial benefit from the project financed
by the bonds.
(3) Certain refunding bonds not taken into account. In applying the
$5,000,000 size limitation, there is not taken into account the portion
of an issue that is a current refunding issue to the extent that the
stated principal amount of the refunding bond does not exceed the
portion of the outstanding stated principal amount of the refunded bond
paid with proceeds of the refunding bond. For this purpose, principal
amount means, in reference to a plain par bond, its stated principal
amount plus accrued unpaid interest, and in reference to any other bond,
its present value.
(d) Pooled financings--(1) Treatment of pool issuer. To the extent
that an issuer of a pooled financing is not an ultimate borrower in the
financing and the conduit borrowers are governmental units with general
taxing powers and not subordinate to the issuer, the pooled financing is
not counted towards the $5,000,000 size limitation of the issuer for
purposes of applying the small issuer exception to its other issues. The
issuer of the pooled financing issue is, however, subject to the rebate
requirement for any unloaned gross proceeds.
(2) Treatment of conduit borrowers. A loan to a conduit borrower in
a pooled financing qualifies for the small issuer exception, regardless
of the size of either the pooled financing or of any loan to other
conduit borrowers, only if--
(i) The bonds of the pooled financing are not private activity
bonds;
(ii) None of the loans to conduit borrowers are private activity
bonds; and
(iii) The loan to the conduit borrower meets all the requirements of
the small issuer exception.
(e) Refunding issues--(1) In general. Sections 148(f)(4)(D) (v) and
(vi) provide
[[Page 705]]
restrictions on application of the small issuer exception to refunding
issues.
(2) Multipurpose issues. The multipurpose issue allocation rules of
Sec. 1.148-9(h) apply for purposes of determining whether refunding
bonds meet the requirements of section 148(f)(4)(D)(v).
[T.D. 8476, 58 FR 33540, June 18, 1993]
Sec. 1.148-9 Arbitrage rules for refunding issues.
(a) Scope of application. This section contains special arbitrage
rules for refunding issues. These rules apply for all purposes of
section 148 and govern allocations of proceeds, bonds, and investments
to determine transferred proceeds, temporary periods, reasonably
required reserve or replacement funds, minor portions, and separate
issue treatment of certain multipurpose issues.
(b) Transferred proceeds allocation rule--(1) In general. When
proceeds of the refunding issue discharge any of the outstanding
principal amount of the prior issue, proceeds of the prior issue become
transferred proceeds of the refunding issue and cease to be proceeds of
the prior issue. The amount of proceeds of the prior issue that becomes
transferred proceeds of the refunding issue is an amount equal to the
proceeds of the prior issue on the date of that discharge multiplied by
a fraction--
(i) The numerator of which is the principal amount of the prior
issue discharged with proceeds of the refunding issue on the date of
that discharge; and
(ii) The denominator of which is the total outstanding principal
amount of the prior issue on the date immediately before the date of
that discharge.
(2) Special definition of principal amount. For purposes of this
section, principal amount means, in reference to a plain par bond, its
stated principal amount, and in reference to any other bond, its present
value.
(3) Relation of transferred proceeds rule to universal cap rule--(i)
In general. Paragraphs (b)(1) and (c) of this section apply to allocate
transferred proceeds and corresponding investments to a refunding issue
on any date required by those paragraphs before the application of the
universal cap rule of Sec. 1.148-6(b)(2) to reallocate any of those
amounts. To the extent nonpurpose investments allocable to proceeds of a
refunding issue exceed the universal cap for the issue on the date that
amounts become transferred proceeds of the refunding issue, those
transferred proceeds and corresponding investments are reallocated back
to the issue from which they transferred on that same date to the extent
of the unused universal cap on that prior issue.
(ii) Example. The following example illustrates the application of
this paragraph of (b)(3):
Example. On January 1, 1995, $100,000 of nonpurpose investments
allocable to proceeds of issue A become transferred proceeds of issue B
under Sec. 1.148-9, but the unused portion of issue B' s universal cap
is $75,000 as of that date. On January 1, 1995, issue A has unused
universal cap in excess of $25,000. Thus, $25,000 of nonpurpose
investments representing the transferred proceeds are immediately
reallocated back to issue A on January 1, 1995, and are proceeds of
issue A. On the next transfer date under Sec. 1.148-9, the $25,000
receives no priority in determining transferred proceeds as of that date
but is treated the same as all other proceeds of issue A subject to
transfer.
(4) Limitation on multi-generational transfers. This paragraph
(b)(4) contains limitations on the manner in which proceeds of a first
generation issue that is refunded by a refunding issue (a second
generation issue) become transferred proceeds of a refunding issue (a
third generation issue) that refunds the second generation issue.
Proceeds of the first generation issue that become transferred proceeds
of the third generation issue are treated as having a yield equal to the
yield on the refunding escrow allocated to the second generation issue
(i.e., as determined under Sec. 1.148-5(b)(2)(iv)). The determination of
the transferred proceeds of the third generation issue does not affect
compliance with the requirements of section 148, including the
determination of the amount of arbitrage rebate with respect to or the
yield on the refunding escrow, of the second generation issue.
(c) Special allocation rules for refunding issues--(1) Allocations
of investments--(i) In general. Except as otherwise provided in this
paragraph (c), investments purchased with sale proceeds or investment
proceeds of a refunding issue must be allocated to
[[Page 706]]
those proceeds, and investments not purchased with those proceeds may
not be allocated to those proceeds (i.e., a specific tracing method).
(ii) Allocations to transferred proceeds. When proceeds of a prior
issue become transferred proceeds of a refunding issue, investments (and
the related payments and receipts) of proceeds of the prior issue that
are held in a refunding escrow for another issue are allocated to the
transferred proceeds under the ratable allocation method described in
paragraph (c)(1)(iii) of this section. Investments of proceeds of the
prior issue that are not held in a refunding escrow for another issue
are allocated to the transferred proceeds by application of the
allocation methods described in paragraph (c)(1) (iii) or (iv) of this
section, consistently applied to all investments on a transfer date.
(iii) Ratable allocation method. Under the ratable allocation
method, a ratable portion of each nonpurpose and purpose investment of
proceeds of the prior issue is allocated to transferred proceeds of the
refunding issue.
(iv) Representative allocation method--(A) In general. Under the
representative allocation method, representative portions of the
portfolio of nonpurpose investments and the portfolio of purpose
investments of proceeds of the prior issue are allocated to transferred
proceeds of the refunding issue. Unlike the ratable allocation method,
this representative allocation method permits an allocation of
particular whole investments. Whether a portion is representative is
based on all the facts and circumstances, including, without limitation,
whether the current yields, maturities, and current unrealized gains or
losses on the particular allocated investments are reasonably comparable
to those of the unallocated investments in the aggregate. In addition,
if a portion of nonpurpose investments is otherwise representative, it
is within the issuer's discretion to allocate the portion from whichever
source of funds it deems appropriate, such as a reserve fund or a
construction fund for a prior issue.
(B) Mark-to-market safe harbor for representative allocation method.
In addition to other representative allocations, a specific allocation
of a particular nonpurpose investment to transferred proceeds (e.g., of
lower yielding investments) is treated as satisfying the representative
allocation method if that investment is valued at fair market value on
the transfer date in determining the payments and receipts on that date,
but only if the portion of the nonpurpose investments that transfers is
based on the relative fair market value of all nonpurpose investments.
(2) Allocations of mixed escrows to expenditures for principal,
interest, and redemption prices on a prior issue--(i) In general. Except
for amounts required or permitted to be accounted for under paragraph
(c)(2)(ii) of this section, proceeds of a refunding issue and other
amounts that are not proceeds of a refunding issue that are deposited in
a refunding escrow (a mixed escrow) must be accounted for under this
paragraph (c)(2)(i). Those proceeds and other amounts must be allocated
to expenditures for principal, interest, or stated redemption prices on
the prior issue so that the expenditures of those proceeds do not occur
faster than ratably with expenditures of the other amounts in the mixed
escrow. During the period that the prior issue has unspent proceeds,
however, these allocations must be ratable (with reasonable adjustments
for rounding) both between sources for expenditures (i.e., proceeds and
other amounts) and between uses (i.e., principal, interest, and stated
redemption prices on the prior issue).
(ii) Exceptions--(A) Mandatory allocation of certain non-proceeds to
earliest expenditures. If amounts other than proceeds of the refunding
issue are deposited in a mixed escrow, but before the issue date of the
refunding issue those amounts had been held in a bona fide debt service
fund or a fund to carry out the governmental purpose of the prior issue
(e.g., a construction fund), those amounts must be allocated to the
earliest maturing investments in the mixed escrow.
(B) Permissive allocation of non-proceeds to earliest expenditures.
Excluding amounts covered by paragraph (c)(2)(ii)(A) of this section and
subject to any required earlier expenditure of those amounts, any
amounts in a mixed escrow that are not proceeds of
[[Page 707]]
a refunding issue may be allocated to the earliest maturing investments
in the mixed escrow, provided that those investments mature and the
proceeds thereof are expended before the date of any expenditure from
the mixed escrow to pay any principal of the prior issue.
(d) Temporary periods in refundings--(1) In general. Proceeds of a
refunding issue may be invested in higher yielding investments under
section 148(c) only during the temporary periods described in paragraph
(d)(2) of this section.
(2) Types of temporary periods in refundings. The available
temporary periods for proceeds of a refunding issue are as follows:
(i) General temporary period for refunding issues. Except as
otherwise provided in this paragraph (d)(2), the temporary period for
proceeds (other than transferred proceeds) of a refunding issue is the
period ending 30 days after the issue date of the refunding issue.
(ii) Temporary periods for current refunding issues--(A) In general.
Except as otherwise provided in paragraph (d)(2)(ii)(B) of this section,
the temporary period for proceeds (other than transferred proceeds) of a
current refunding issue is 90 days.
(B) Temporary period for short-term current refunding issues. The
temporary period for proceeds (other than transferred proceeds) of a
current refunding issue that has an original term to maturity of 270
days or less may not exceed 30 days. The aggregate temporary periods for
proceeds (other than transferred proceeds) of all current refunding
issues described in the preceding sentence that are part of the same
series of refundings is 90 days. An issue is part of a series of
refundings if it finances or refinances the same expenditures for a
particular governmental purpose as another issue.
(iii) Temporary periods for transferred proceeds--(A) In general.
Except as otherwise provided in paragraph (d)(2)(iii)(B) of this
section, each available temporary period for transferred proceeds of a
refunding issue begins on the date those amounts become transferred
proceeds of the refunding issue and ends on the date that, without
regard to the discharge of the prior issue, the available temporary
period for those proceeds would have ended had those proceeds remained
proceeds of the prior issue.
(B) Termination of initial temporary period for prior issue in an
advance refunding. The initial temporary period under Sec. 1.148-2(e)
(2) and (3) for the proceeds of a prior issue that is refunded by an
advance refunding issue (including transferred proceeds) terminates on
the issue date of the advance refunding issue.
(iv) Certain short-term gross proceeds. Except for proceeds of a
refunding issue held in a refunding escrow, proceeds otherwise
reasonably expected to be used to pay principal or interest on the prior
issue, replacement proceeds not held in a bona fide debt service fund,
and transferred proceeds, the temporary period for gross proceeds of a
refunding issue is the 13-month period beginning on the date of receipt.
(e) Reasonably required reserve or replacement funds in refundings.
In addition to the requirements of Sec. 1.148-2(f), beginning on the
issue date of a refunding issue, a reserve or replacement fund for a
refunding issue or a prior issue is a reasonably required reserve or
replacement fund under section 148(d) that may be invested in higher
yielding investments only if the aggregate amount invested in higher
yielding investments under this paragraph (e) for both the refunding
issue and the prior issue does not exceed the size limitations under
Sec. 1.148-2 (f)(2) and (f)(3), measured by reference to the refunding
issue only (regardless of whether proceeds of the prior issue have
become transferred proceeds of the refunding issue).
(f) Minor portions in refundings. Beginning on the issue date of the
refunding issue, gross proceeds not in excess of a minor portion of the
refunding issue qualify for investment in higher yielding investments
under section 148(e), and gross proceeds not in excess of a minor
portion of the prior issue qualify for investment in higher yielding
investments under either section 148(e) or section 149(d)(3)(A)(v),
whichever is applicable. Minor portion is defined in Sec. 1.148-2(g).
(g) Certain waivers permitted. On or before the issue date, an
issuer may waive the right to invest in higher
[[Page 708]]
yielding investments during any temporary period or as part of a
reasonably required reserve or replacement fund. At any time, an issuer
may waive the right to invest in higher yielding investments as part of
a minor portion.
(h) Multipurpose issue allocations--(1) Application of multipurpose
issue allocation rules. The portion of the bonds of a multipurpose issue
reasonably allocated to any separate purpose under this paragraph (h) is
treated as a separate issue for all purposes of section 148 except the
following--
(i) Arbitrage yield. Except to the extent that the proceeds of an
issue are allocable to two or more conduit loans that are tax-exempt
bonds, determining the yield on a multipurpose issue and the yield on
investments for purposes of the arbitrage yield restrictions of section
148 and the arbitrage rebate requirement of section 148(f);
(ii) Rebate amount. Except as provided in paragraph (h)(1)(i) of
this section, determining the rebate amount for a multipurpose issue,
including subsidiary matters with respect to that determination, such as
the computation date credit under Sec. 1.148-3(d)(1), the due date for
payments, and the $100,000 bona fide debt service fund exception under
section 148(f)(4)(A)(ii);
(iii) Minor portion. Determining the minor portion of an issue under
section 148(e);
(iv) Reasonably required reserve or replacement fund. Determining
the portion of an issue eligible for investment in higher yielding
investments as part of a reasonably required reserve or replacement fund
under section 148(d); and
(v) Effective date. Applying the provisions of Sec. 1.148-11(b)
(relating to elective retroactive application of Secs. 1.148-1 through
1.148-10 to certain issues).
(2) Rules on allocations of multipurpose issues--(i) In general.
This paragraph (h) applies to allocations of multipurpose issues,
including allocations involving the refunding purposes of the issue.
Except as otherwise provided in this paragraph (h), proceeds,
investments, and bonds of a multipurpose issue may be allocated among
the various separate purposes of the issue using any reasonable,
consistently applied allocation method. An allocation is not reasonable
if it achieves more favorable results under section 148 or 149(d) than
could be achieved with actual separate issues. An allocation under this
paragraph (h) may be made at any time, but once made may not be changed.
(ii) Allocations involving certain common costs. A ratable
allocation of common costs (as described in paragraph (h)(3)(ii) of this
section) among the separate purposes of the multipurpose issue is
generally reasonable. If another allocation method more accurately
reflects the extent to which any separate purpose of a multipurpose
issue enjoys the economic benefit or bears the economic burden of
certain common costs, that allocation method may be used.
(3) Separate purposes of a multipurpose issue--(i) In general.
Separate purposes of a multipurpose issue include refunding a separate
prior issue, financing a separate purpose investment, financing a
construction issue (as defined in Sec. 1.148-7(f)), and any clearly
discrete governmental purpose reasonably expected to be financed by that
issue. In general, all integrated or functionally related capital
projects that qualify for the same initial temporary period under
Sec. 1.148-2(e)(2) are treated as having a single governmental purpose.
The separate purposes of a refunding issue include the separate purposes
of the prior issue, if any. Separate purposes may be treated as a single
purpose if the proceeds used to finance those purposes are eligible for
the same initial temporary period under section 148(c). For example, the
use of proceeds of a multipurpose issue to finance separate qualified
mortgage loans may be treated as a single purpose.
(ii) Financing common costs. Common costs of a multipurpose issue
are not separate purposes. Common costs include issuance costs, accrued
interest, capitalized interest on the issue, a reserve or replacement
fund, qualified guarantee fees, and similar costs properly allocable to
the separate purposes of the issue.
(iii) Example. The following example illustrates the application of
this paragraph (h)(3).
Example. On January 1, 1994, Housing Authority of State A issues a
$10 million issue
[[Page 709]]
(the 1994 issue) at an interest rate of 10 percent to finance qualified
mortgage loans for owner-occupied residences under section 143. During
1994, A originates $5 million in qualified mortgage loans at an interest
rate of 10 percent. In 1995, the market interest rates for housing loans
falls to 8 percent and A is unable to originate further loans from the
1994 issue. On January 1, 1996, A issues a $5 million issue (the 1996
issue) at an interest rate of 8 percent to refund partially the 1994
issue. Under paragraph (h) of this section, A treats the portion of the
1994 issue used to originate $5 million in loans as a separate issue
comprised of that group of purpose investments. A allocates those
purpose investments representing those loans to that separate unrefunded
portion of the issue. In addition, A treats the unoriginated portion of
the 1994 issue as a separate issue and allocates the nonpurpose
investments representing the unoriginated proceeds of the 1994 issue to
the refunded portion of the issue. Thus, when proceeds of the 1996 issue
are used to pay principal on the refunded portion of the 1994 issue that
is treated as a separate issue under paragraph (h) of this section, only
the portion of the 1994 issue representing unoriginated loan funds
invested in nonpurpose investments transfer to become transferred
proceeds of the 1996 issue.
(4) Allocations of bonds of a multipurpose issue--(i) Reasonable
allocation of bonds to portions of issue. After reasonable adjustment of
the issue price of a multipurpose issue to account for common costs, the
portion of the bonds of a multipurpose issue allocated to a separate
purpose must have an issue price that bears the same ratio to the
aggregate issue price of the multipurpose issue as the portion of the
sale proceeds of the multipurpose issue used for that separate purpose
bears to the aggregate sale proceeds of the multipurpose issue. For a
refunding issue used to refund two or more prior issues, the portion of
the sales proceeds allocated to the refunding of a separate prior issue
is based on the present value of the refunded debt service on that prior
issue, using the yield on investments in the refunding escrow allocable
to the entire refunding issue as the discount rate.
(ii) Safe harbor for pro rata allocation method for bonds. The use
of the relative amount of sales proceeds used for each separate purpose
to ratably allocate each bond or a ratable number of substantially
identical whole bonds is a reasonable method for allocating bonds of a
multipurpose issue.
(iii) Safe harbor for allocations of bonds used to finance separate
purpose investments. An allocation of a portion of the bonds of a
multipurpose issue to a particular purpose investment is generally
reasonable if that purpose investment has principal and interest
payments that reasonably coincide in time and amount to principal and
interest payments on the bonds allocated to that purpose investment.
(iv) Rounding of bond allocations to next whole bond denomination
permitted. An allocation that rounds each resulting fractional bond up
or down to the next integral multiple of a permitted denomination of
bonds of that issue not in excess of $100,000 does not prevent the
allocation from satisfying this paragraph (h)(4).
(v) Restrictions on allocations of bonds to refunding purposes. For
each portion of a multipurpose issue that is used to refund a separate
prior issue, a method of allocating bonds of that issue is reasonable
under this paragraph (h) only if, in addition to the requirements of
paragraphs (h)(1) and (h)(2) of this section, the portion of the bonds
allocated to the refunding of that prior issue--
(A) Results from a pro rata allocation under paragraph (h)(4)(ii) of
this section;
(B) Reflects aggregate principal and interest payable in each bond
year that is less than, equal to, or proportionate to, the aggregate
principal and interest payable on the prior issue in each bond year;
(C) Results from an allocation of all the bonds of the entire
multipurpose issue in proportion to the remaining weighted average
economic life of the capital projects financed or refinanced by the
issue, determined in the same manner as under section 147(b); or
(D) Results from another reasonable allocation method, but only to
the extent that the application of the allocation methods provided in
this paragraph (h)(4)(v) is not permitted under state law restrictions
applicable to the bonds, reasonable terms of bonds issued before, or
subject to a master indenture that became effective prior to, July 1,
1993, or other similar restrictions or circumstances. This paragraph
[[Page 710]]
(h)(4)(v)(D) shall be strictly construed and is available only if it
does not result in a greater burden on the market for tax-exempt bonds
than would occur using one of the other allocation methods provided in
this paragraph (h)(4)(v). (See also Sec. 1.148-11(c)(2).)
(vi) Exception for refundings of interim notes. Paragraph (h)(4)(v)
of this section need not be applied to refunding bonds issued to provide
permanent financing for one or more projects if the prior issue had a
term of less than 3 years and was sold in anticipation of permanent
financing, but only if the aggregate term of all prior issues sold in
anticipation of permanent financing was less than 3 years.
(5) Limitation on multi-generation allocations. This paragraph (h)
does not apply to allocations of a multipurpose refunded issue unless
that refunded issue is refunded directly by an issue to which this
paragraph (h) applies. For example, if a 1994 issue refunds a 1984
multipurpose issue, which in turn refunded a 1980 multipurpose issue,
this paragraph (h) applies to allocations of the 1984 issue for purposes
of allocating the refunding purposes of the 1994 issue, but does not
permit allocations of the 1980 issue.
(i) Operating rules for separation of prior issue into refunded and
unrefunded portions--(1) In general. For purposes of paragraph (h)(3)(i)
of this section, the separate purposes of a prior issue include the
refunded and unrefunded portions of the prior issue. Thus, the refunded
and unrefunded portions are treated as separate issues under paragraph
(h)(1) of this section. Those separate issues must satisfy the
requirements of paragraphs (h) and (i) of this section. The refunded
portion of the bonds of a prior issue is based on a fraction the
numerator of which is the principal amount of the prior issue to be paid
with proceeds of the refunding issue and the denominator of which is the
outstanding principal amount of the bonds of the prior issue, each
determined as of the issue date of the refunding issue. (See also
paragraph (b)(2) of this section.)
(2) Allocations of proceeds and investments in a partial refunding.
As of the issue date of a partial refunding issue under this paragraph
(i), unspent proceeds of the prior issue are allocated ratably between
the refunded and unrefunded portions of the prior issue and the
investments allocable to those unspent proceeds are allocated in the
manner required for the allocation of investments to transferred
proceeds under paragraph (c)(1)(ii) of this section.
(3) References to prior issue. If the refunded and unrefunded
portions of a prior issue are treated as separate issues under this
paragraph (i), then, except to the extent that the context clearly
requires otherwise (e.g., references to the aggregate prior issue in the
mixed escrow rule in paragraph (c)(2) of this section), all references
in this section to a prior issue refer only to the refunded portion of
that prior issue.
[T.D. 8476, 58 FR 33541, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24045, May 10, 1994; T.D. 8718, 62 FR 25512,
May 9, 1997]
Sec. 1.148-10 Anti-abuse rules and authority of Commissioner.
(a) Abusive arbitrage device--(1) In general. Bonds of an issue are
arbitrage bonds under section 148 if an abusive arbitrage device under
paragraph (a)(2) of this section is used in connection with the issue.
This paragraph (a) is to be applied and interpreted broadly to carry out
the purposes of section 148, as further described in Sec. 1.148-0.
Except as otherwise provided in paragraph (c) of this section, any
action that is expressly permitted by section 148 or Secs. 1.148-1
through 1.148-11 is not an abusive arbitrage device (e.g., investment in
higher yielding investments during a permitted temporary period under
section 148(c)).
(2) Abusive arbitrage device defined. Any action is an abusive
arbitrage device if the action has the effect of--
(i) Enabling the issuer to exploit the difference between tax-exempt
and taxable interest rates to obtain a material financial advantage; and
(ii) Overburdening the tax-exempt bond market.
(3) Exploitation of tax-exempt interest rates. An action may exploit
tax-exempt interest rates under paragraph (a)(2) of this section as a
result of an investment of any portion of the gross
[[Page 711]]
proceeds of an issue over any period of time, notwithstanding that, in
the aggregate, the gross proceeds of the issue are not invested in
higher yielding investments over the term of the issue.
(4) Overburdening the tax-exempt market. An action overburdens the
tax-exempt bond market under paragraph (a)(2)(ii) of this section if it
results in issuing more bonds, issuing bonds earlier, or allowing bonds
to remain outstanding longer than is otherwise reasonably necessary to
accomplish the governmental purposes of the bonds, based on all the
facts and circumstances. Whether an action is reasonably necessary to
accomplish the governmental purposes of the bonds depends on whether the
primary purpose of the transaction is a bona fide governmental purpose
(e.g., an issue of refunding bonds to achieve a debt service
restructuring that would be issued independent of any arbitrage
benefit). An important factor bearing on this determination is whether
the action would reasonably be taken to accomplish the governmental
purpose of the issue if the interest on the issue were not excludable
from gross income under section 103(a) (assuming that the hypothetical
taxable interest rate would be the same as the actual tax-exempt
interest rate). Factors evidencing an overissuance include the issuance
of an issue the proceeds of which are reasonably expected to exceed by
more than a minor portion the amount necessary to accomplish the
governmental purposes of the issue, or an issue the proceeds of which
are, in fact, substantially in excess of the amount of sale proceeds
allocated to expenditures for the governmental purposes of the issue.
One factor evidencing an early issuance is the issuance of bonds that do
not qualify for a temporary period under Sec. 1.148-2(e)(2), (e)(3), or
(e)(4). One factor evidencing that bonds may remain outstanding longer
than necessary is a term that exceeds the safe harbors against the
creation of replacement proceeds under Sec. 1.148-1(c)(4)(i)(B). These
factors may be outweighed by other factors, however, such as bona fide
cost underruns or long-term financial distress.
(b) Consequences of overburdening the tax-exempt bond market--(1) In
general. An issue that overburdens the tax-exempt bond market (within
the meaning of paragraph (a)(4) of this section) is subject to the
following special limitations--
(i) Special yield restriction. Investments are subject to the
definition of materially higher yield under Sec. 1.148-2(d) that is
equal to one-thousandth of 1 percent. In addition, each investment is
treated as a separate class of investments under Sec. 1.148-5(b)(2)(ii),
the yield on which may not be blended with that of other investments.
(ii) Certain regulatory provisions inapplicable. The provisions of
Sec. 1.148-5(c) (relating to yield reduction payments) and Sec. 1.148-
5(e) (2) and (3) (relating to recovery of qualified administrative
costs) do not apply.
(iii) Restrictive expenditure rule. Proceeds are not allocated to
expenditures unless the proceeds-spent-last rule under Sec. 1.148-
6(d)(3)(i) is satisfied, applied by treating those proceeds as proceeds
to be used for restricted working capital expenditures. For this
purpose, available amount includes a reasonable working capital reserve
as defined in Sec. 1.148-6(d)(3)(iii)(B).
(2) Application. The provisions of this paragraph (b) only apply to
the portion of an issue that, as a result of actions taken (or actions
not taken) after the issue date, overburdens the market for tax-exempt
bonds, except that for an issue that is reasonably expected as of the
issue date to overburden the market, those provisions apply to all of
the gross proceeds of the issue.
(c) Anti-abuse rules on excess gross proceeds of advance refunding
issues--(1) In general. Except as otherwise provided in this paragraph
(c), an abusive arbitrage device is used and bonds of an advance
refunding issue are arbitrage bonds if the issue has excess gross
proceeds.
(2) Definition of excess gross proceeds. Excess gross proceeds means
all gross proceeds of an advance refunding issue that exceed an amount
equal to 1 percent of sale proceeds of the issue, other than gross
proceeds allocable to--
(i) Payment of principal, interest, or call premium on the prior
issue;
[[Page 712]]
(ii) Payment of pre-issuance accrued interest on the refunding
issue, and interest on the refunding issue that accrues for a period up
to the completion date of any capital project for which the prior issue
was issued, plus one year;
(iii) A reasonably required reserve or replacement fund for the
refunding issue or investment proceeds of such a fund;
(iv) Payment of costs of issuance of the refunding issue;
(v) Payment of administrative costs allocable to repaying the prior
issue, carrying and repaying the refunding issue, or investments of the
refunding issue;
(vi) Transferred proceeds that will be used or maintained for the
governmental purpose of the prior issue;
(vii) Interest on purpose investments;
(viii) Replacement proceeds in a sinking fund for the refunding
issue;
(ix) Qualified guarantee fees for the refunding issue or the prior
issue; and
(x) Fees for a qualified hedge for the refunding issue.
(3) Special treatment of transferred proceeds. For purposes of this
paragraph (c), all unspent proceeds of the prior issue as of the issue
date of the refunding issue are treated as transferred proceeds of the
advance refunding issue.
(4) Special rule for crossover refundings. An advance refunding
issue is not an issue of arbitrage bonds under this paragraph (c) if all
excess gross proceeds of the refunding issue are used to pay interest
that accrues on the refunding issue before the prior issue is
discharged, and no gross proceeds of any refunding issue are used to pay
interest on the prior issue or to replace funds used directly or
indirectly to pay such interest (other than transferred proceeds used to
pay interest on the prior issue that accrues for a period up to the
completion date of the project for which the prior issue was issued,
plus one year, or proceeds used to pay principal that is attributable to
accrued original issue discount).
(5) Special rule for gross refundings. This paragraph (c)(5) applies
if an advance refunding issue (the series B issue) is used together with
one or more other advance refunding issues (the series A issues) in a
gross refunding of a prior issue, but only if the use of a gross
refunding method is required under bond documents that were effective
prior to November 6, 1992. These advance refunding issues are not
arbitrage bonds under this paragraph (c) if--
(i) All excess gross proceeds of the series B issue and each series
A issue are investment proceeds used to pay principal and interest on
the series B issue;
(ii) At least 99 percent of all principal and interest on the series
B issue is paid with proceeds of the series B and series A issues or
with the earnings on other amounts in the refunding escrow for the prior
issue;
(iii) The series B issue is discharged not later than the prior
issue; and
(iv) As of any date, the amount of gross proceeds of the series B
issue allocated to expenditures does not exceed the aggregate amount of
expenditures before that date for principal and interest on the series B
issue, and administrative costs of carrying and repaying the series B
issue, or of investments of the series B issue.
(d) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. Mortgage sale. In 1982, City issued its revenue issue
(the 1982 issue) and lent the proceeds to Developer to finance a low-
income housing project under former section 103(b)(4)(A) of the 1954
Code. In 1994, Developer encounters financial difficulties and
negotiates with City to refund the 1982 issue. City issues $10 million
in principal amount of its 8 percent bonds (the 1994 issue). City lends
the proceeds of the 1994 issue to Developer. To evidence Developer's
obligation to repay that loan, Developer, as obligor, issues a note to
City (the City note). Bank agrees to provide Developer with a direct-pay
letter of credit pursuant to which Bank will make all payments to the
trustee for the 1994 issue necessary to meet Developer's obligations
under the City note. Developer pays Bank a fee for the issuance of the
letter of credit and issues a note to Bank (the Bank note). The Bank
note is secured by a mortgage on the housing project and is guaranteed
by FHA. The Bank note and the 1994 issue have different prepayment
terms. The City does not reasonably expect to treat prepayments of the
Bank note as gross proceeds of the 1994 issue. At the same time or
pursuant to a series of related transactions, Bank sells the Bank note
to Investor for $9.5 million. Bank invests these monies together
[[Page 713]]
with its other funds. In substance, the transaction is a loan by City to
Bank, under which Bank enters into a series of transactions that, in
effect, result in Bank retaining $9.5 million in amounts treated as
proceeds of the 1994 issue. Those amounts are invested in materially
higher yielding investments that provide funds sufficient to equal or
exceed the Bank's liability under the letter of credit. Alternatively,
the letter of credit is investment property in a sinking fund for the
1994 issue provided by Developer, a substantial beneficiary of the
financing. Because, in substance, Developer acquires the $10 million
principal amount letter of credit for a fair market value purchase price
of $9.5 million, the letter of credit is a materially higher yielding
investment. Neither result would change if Developer's obligation under
the Bank note is contingent on Bank performing its obligation under the
letter of credit. Each characterization causes the bonds to be arbitrage
bonds.
Example 2. Bonds outstanding longer than necessary for yield-
blending device. (i) Longer bond maturity to create sinking fund. In
1994, Authority issues an advance refunding issue (the refunding issue)
to refund a 1982 prior issue (the prior issue). Under current market
conditions, Authority will have to invest the refunding escrow at a
yield significantly below the yield on the refunding issue. Authority
issues its refunding issue with a longer weighted average maturity than
otherwise necessary primarily for the purpose of creating a sinking fund
for the refunding issue that will be invested in a guaranteed investment
contract. The weighted average maturity of the refunding issue is less
than 120 percent of the remaining average economic life of the
facilities financed with the proceeds of the prior issue. The guaranteed
investment contract has a yield that is higher than the yield on the
refunding issue. The yield on the refunding escrow blended with the
yield on the guaranteed investment contract does not exceed the yield on
the issue. The refunding issue uses an abusive arbitrage device and the
bonds of the issue are arbitrage bonds under section 148(a).
(ii) Refunding of noncallable bonds. The facts are the same as in
paragraph (i) of this Example 2 except that instead of structuring the
refunding issue to enable it to take advantage of sinking fund
investments, Authority will also refund other long-term, non-callable
bonds in the same refunding issue. There are no savings attributable to
the refunding of the non-callable bonds (e.g., a low-to-high refunding).
The Authority invests the portion of the proceeds of the refunding issue
allocable to the refunding of the non-callable bonds in the refunding
escrow at a yield that is higher than the yield on the refunding issue,
based on the relatively long escrow period for this portion of the
refunding. The Authority invests the other portion of the proceeds of
the refunding issue in the refunding escrow at a yield lower than the
yield on the refunding issue. The blended yield on all the investments
in the refunding escrow for the prior issues does not exceed the yield
on the refunding issue. The portion of the refunding issue used to
refund the noncallable bonds, however, was not otherwise necessary and
was issued primarily to exploit the difference between taxable and tax-
exempt rates for that long portion of the refunding escrow to minimize
the effect of lower yielding investments in the other portion of the
escrow. The refunding issue uses an abusive arbitrage device and the
bonds of the issue are arbitrage bonds.
(iii) Governmental purpose. In paragraphs (i) and (ii) of this
Example 2, the existence of a governmental purpose for the described
financing structures would not change the conclusions unless Authority
clearly established that the primary purpose for the use of the
particular structure was a bona fide governmental purpose. The fact that
each financing structure had the effect of eliminating significant
amounts of negative arbitrage is strong evidence of a primary purpose
that is not a bona fide governmental purpose. Moreover, in paragraph (i)
of this Example 2, the structure of the refunding issue coupled with the
acquisition of the guaranteed investment contract to lock in the
investment yield associated with the structure is strong evidence of a
primary purpose that is not a bona fide governmental purpose.
Example 3. Window refunding. (i) Authority issues its 1994 refunding
issue to refund a portion of the principal and interest on its
outstanding 1985 issue. The 1994 refunding issue is structured using
zero-coupon bonds that pay no interest or principal for the 5-year
period following the issue date. The proceeds of the 1994 refunding
issue are deposited in a refunding escrow to be used to pay only the
interest requirements of the refunded portion of the 1985 issue.
Authority enters into a guaranteed investment contract with a financial
institution, G, under which G agrees to provide a guaranteed yield on
revenues invested by Authority during the 5-year period following the
issue date. The guaranteed investment contract has a yield that is no
higher than the yield on the refunding issue. The revenues to be
invested under this guaranteed investment contract consist of the
amounts that Authority otherwise would have used to pay principal and
interest on the 1994 refunding issue. The guaranteed investment contract
is structured to generate receipts at times and in amounts sufficient to
pay the principal and redemption requirements of the refunded portion of
the 1985 issue. A principal purpose of these transactions is to avoid
transferred proceeds. Authority will continue to invest the unspent
proceeds of the 1985 issue that are on deposit in a refunding escrow for
its 1982
[[Page 714]]
issue at a yield equal to the yield on the 1985 issue and will not
otherwise treat those unspent proceeds as transferred proceeds of the
1994 refunding issue. The 1994 refunding issue is an issue of arbitrage
bonds since those bonds involve a transaction or series of transactions
that overburdens the market by leaving bonds outstanding longer than is
necessary to obtain a material financial advantage based on arbitrage.
Specifically, Authority has structured the 1994 refunding issue to make
available for the refunding of the 1985 issue replacement proceeds
rather than proceeds so that the unspent proceeds of the 1985 issue will
not become transferred proceeds of the 1994 refunding issue.
(ii) The result would be the same in each of the following
circumstances:
(A) The facts are the same as in paragraph (i) of this Example 3
except that Authority does not enter into the guaranteed investment
contract but instead, as of the issue date of the 1994 refunding issue,
reasonably expects that the released revenues will be available for
investment until used to pay principal and interest on the 1985 issue.
(B) The facts are the same as in paragraph (i) of this Example 3
except that there are no unspent proceeds of the 1985 issue and
Authority invests the released revenues at a yield materially higher
than the yield on the 1994 issue.
(C) The facts are the same as in paragraph (i) of this Example 3
except that Authority uses the proceeds of the 1994 issue for capital
projects instead of to refund a portion of the 1985 issue.
Example 4. Sale of conduit loan. On January 1, 1994, Authority
issues a conduit financing issue (the 1994 conduit financing issue) and
uses the proceeds to purchase from City, an unrelated party, a tax-
exempt bond of City (the City note). The proceeds of the 1994 conduit
financing issue are to be used to advance refund a prior conduit
financing issue that was issued in 1988 and used to make a loan to City.
The 1994 conduit financing issue and the City note each have a yield of
8 percent on January 1, 1994. On June 30, 1996, interest rates have
decreased and Authority sells the City note to D, a person unrelated to
either City or Authority. Based on the sale price of the City note and
treating June 30, 1996 as the issue date of the City note, the City note
has a 6 percent yield. Authority deposits the proceeds of the sale of
the City note into an escrow to redeem the bonds of the 1994 conduit
financing issue on January 1, 2001. The escrow is invested in nonpurpose
investments having a yield of 8 percent. For purposes of section 149(d),
City and Authority are related parties and, therefore, the issue date of
the City note is treated as being June 30, 1996. Thus, the City note is
an advance refunding of Authority's 1994 conduit financing issue.
Interest on the City note is not exempt from Federal income tax from the
date it is sold to D under section 149(d), because, by investing the
escrow investments at a yield of 8 percent instead of a yield not
materially higher than 6 percent, the sale of the City note employs a
device to obtain a material financial advantage, based on arbitrage,
apart from the savings attributable to lower interest rates. In
addition, the City note is not a tax-exempt bond because the note is the
second advance refunding of the original bond under section 149(d)(3).
The City note also employs an abusive arbitrage device and is an
arbitrage bond under section 148.
Example 5. Re-refunding. (i) On January 1, 1984, City issues a tax-
exempt issue (the 1984 issue) to finance the cost of constructing a
prison. The 1984 issue has a 7 percent yield and a 30-year maturity. The
1984 issue is callable at any time on or after January 1, 1994. On
January 1, 1990, City issues a refunding issue (the 1990 issue) to
advance refund the 1984 issue. The 1990 issue has an 8 percent yield and
a 30-year maturity. The 1990 issue is callable at any time on or after
January 1, 2000. The proceeds of the 1990 issue are invested at an 8
percent yield in a refunding escrow for the 1984 issue (the original
1984 escrow) in a manner sufficient to pay debt service on the 1984
issue until maturity (i.e., an escrow to maturity). On January 1, 1994,
City issues a refunding issue (the 1994 issue). The 1994 issue has a 6
percent yield and a 30-year maturity. City does not invest the proceeds
of the 1994 issue in a refunding escrow for the 1990 issue in a manner
sufficient to pay a portion of the debt service until, and redeem a
portion of that issue on, January 1, 2000. Instead, City invests those
proceeds at a 6 percent yield in a new refunding escrow for a portion of
the 1984 issue (the new 1984 escrow) in a manner sufficient to pay debt
service on a portion of the 1984 issue until maturity. City also
liquidates the investments allocable to the proceeds of the 1990 issue
held in the original 1984 escrow and reinvests those proceeds in an
escrow to pay a portion of the debt service on the 1990 issue itself
until, and redeem a portion of that issue on, January 1, 2000 (the 1990
escrow). The 1994 bonds are arbitrage bonds and employ an abusive device
under section 149(d)(4). Although, in form, the proceeds of the 1994
issue are used to pay principal on the 1984 issue, this accounting for
the use of the proceeds of the 1994 issue is an unreasonable,
inconsistent accounting method under Sec. 1.148-6(a). Moreover, since
the proceeds of the 1990 issue were set aside in an escrow to be used to
retire the 1984 issue, the use of proceeds of the 1994 issue for that
same purpose involves a replacement of funds invested in higher yielding
investments under section 148(a)(2). Thus, using a reasonable,
consistent accounting method and giving effect to the substance of the
transaction, the proceeds of the 1994 issue are treated as used to
refund the 1990 issue
[[Page 715]]
and are allocable to the 1990 escrow. The proceeds of the 1990 issue are
treated as used to refund the 1984 issue and are allocable to the
investments in the new 1984 escrow. The proceeds of the 1990 issue
allocable to the nonpurpose investments in the new 1984 escrow become
transferred proceeds of the 1994 issue as principal is paid on the 1990
issue from amounts on deposit in the 1990 escrow. As a result, the yield
on nonpurpose investments allocable to the 1994 issue is materially
higher than the yield on the 1994 issue, causing the bonds of the 1994
issue to be arbitrage bonds. In addition, the transaction employs a
device under section 149(d)(4) to obtain a material financial advantage
based on arbitrage, other than savings attributable to lower interest
rates.
(ii) The following changes in the facts do not affect the conclusion
that the 1994 issue consists of arbitrage bonds--
(1) The 1990 issue is a taxable issue;
(2) The original 1984 escrow is used to pay the 1994 issue (rather
than the 1990 issue); or
(3) The 1994 issue is used to retire the 1984 issue within 90 days
of January 1, 1994.
(e) Authority of the Commissioner to clearly reflect the economic
substance of a transaction. If an issuer enters into a transaction for a
principal purpose of obtaining a material financial advantage based on
the difference between tax-exempt and taxable interest rates in a manner
that is inconsistent with the purposes of section 148, the Commissioner
may exercise the Commissioner's discretion to depart from the rules of
Sec. 1.148-1 through Sec. 1.148-11 as necessary to clearly reflect the
economic substance of the transaction. For this purpose, the
Commissioner may recompute yield on an issue or on investments,
reallocate payments and receipts on investments, recompute the rebate
amount on an issue, treat a hedge as either a qualified hedge or not a
qualified hedge, or otherwise adjust any item whatsoever bearing upon
the investments and expenditures of gross proceeds of an issue. For
example, if the amount paid for a hedge is specifically based on the
amount of arbitrage earned or expected to be earned on the hedged bonds,
a principal purpose of entering into the contract is to obtain a
material financial advantage based on the difference between tax-exempt
and taxable interest rates in a manner that is inconsistent with the
purposes of section 148.
(f) Authority of the Commissioner to require an earlier date for
payment of rebate. If the Commissioner determines that an issue is
likely to fail to meet the requirements of Sec. 1.148-3 and that a
failure to serve a notice of demand for payment on the issuer will
jeopardize the assessment or collection of tax on interest paid or to be
paid on the issue, the date that the Commissioner serves notice on the
issuer is treated as a required computation date for payment of rebate
for that issue.
(g) Authority of the Commissioner to waive regulatory limitations.
Notwithstanding any specific provision in Secs. 1.148-1 through 1.148-
11, the Commissioner may prescribe extensions of temporary periods,
larger reasonably required reserve or replacement funds, or consequences
of failures or remedial action under section 148 in lieu of or in
addition to other consequences of those failures, or take other action,
if the Commissioner finds that good faith or other similar circumstances
so warrant, consistent with the purposes of section 148.
[T.D. 8476, 58 FR 33544, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24046, May 10, 1994; T.D. 8476, 59 FR 24351,
May 11, 1994; T.D. 8718, 62 FR 25512, May 9, 1997]
Sec. 1.148-11 Effective dates.
(a) In general. Except as otherwise provided in this section,
Secs. 1.148-1 through 1.148-11 apply to bonds sold on or after July 8,
1997.
(b) Elective retroactive application in whole--(1) In general.
Except as otherwise provided in this section, and subject to the
applicable effective dates for the corresponding statutory provisions,
an issuer may apply the provisions of Secs. 1.148-1 through 1.148-11 in
whole, but not in part, to any issue that is outstanding on July 8,
1997, and is subject to section 148(f) or to sections 103(c)(6) or
103A(i) of the Internal Revenue Code of 1954, in lieu of otherwise
applicable regulations under those sections.
(2) No elective retroactive application for 18-month spending
exception. The provisions of Sec. 1.148-7(d) (relating to the 18-month
spending exception) may not be applied to any issue issued on or before
June 30, 1993.
[[Page 716]]
(3) No elective retroactive application for hedges of fixed rate
issues. The provisions of Sec. 1.148-4(h)(2)(i)(B) (relating to hedges
of fixed rate issues) may not be applied to any bond sold on or before
July 8, 1997.
(4) No elective retroactive application for safe harbor for
establishing fair market value for guaranteed investment contracts and
investments purchased for a yield restricted defeasance escrow. The
provisions of Secs. 1.148-5(d)(6)(iii) (relating to the safe harbor for
establishing fair market value of guaranteed investment contracts and
yield restricted defeasance escrow investments) and 1.148-5(e)(2)(iv)
(relating to a special rule for yield restricted defeasance escrow
investments) may not be applied to any bond sold before December 30,
1998.
(c) Elective retroactive application of certain provisions and
special rules--(1) Retroactive application of overpayment recovery
provisions. An issuer may apply the provisions of Sec. 1.148-3(i) to any
issue that is subject to section 148(f) or to sections 103(c)(6) or
103A(i) of the Internal Revenue Code of 1954.
(2) Certain allocations of multipurpose issues. An allocation of
bonds to a refunding purpose under Sec. 1.148-9(h) may be adjusted as
necessary to reflect allocations made between May 18, 1992, and August
15, 1993, if the allocations satisfied the corresponding prior provision
of Sec. 1.148-11(j)(4) under applicable prior regulations.
(3) Special limitation. The provisions of Sec. 1.148-9 apply to
issues issued before August 15, 1993, only if the issuer in good faith
estimates the present value savings, if any, associated with the effect
of the application of that section on refunding escrows, using any
reasonable accounting method, and applies those savings, if any, to
redeem outstanding tax-exempt bonds of the applicable issue at the
earliest possible date on which those bonds may be redeemed or otherwise
retired. These savings are not reduced to take into account any
administrative costs associated with applying these provisions
retroactively.
(d) Transition rule excepting certain state guarantee funds from the
definition of replacement proceeds--(1) Certain perpetual trust funds. A
guarantee by a fund created and controlled by a State and established
pursuant to its constitution does not cause the amounts in the fund to
be pledged funds treated as replacement proceeds if--
(i) Substantially all of the corpus of the fund consists of
nonfinancial assets, revenues derived from these assets, gifts, and
bequests;
(ii) The corpus of the guarantee fund may be invaded only to support
specifically designated essential governmental functions (designated
functions) carried on by political subdivisions with general taxing
powers;
(iii) Substantially all of the available income of the fund is
required to be applied annually to support designated functions;
(iv) The issue guaranteed consists of general obligations that are
not private activity bonds substantially all of the proceeds of which
are to be used for designated functions;
(v) The fund satisfied each of the requirements of paragraphs
(d)(1)(i) through (d)(1)(iii) of this section on August 16, 1986; and
(vi) The guarantee is not attributable to a deposit to the fund made
after May 14, 1989, unless--
(A) The deposit is attributable to the sale or other disposition of
fund assets; or
(B) Prior to the deposit, the outstanding amount of the bonds
guaranteed by the fund did not exceed 250 percent of the lower of the
cost or fair market value of the fund.
(2) Permanent University Fund. Replacement proceeds do not include
amounts allocable to investments of the fund described in section 648 of
Public Law 98-369.
(e) Transition rule regarding special allowance payments. Section
1.148-5(b)(5) applies to any bond issued after January 5, 1990, except a
bond issued exclusively to refund a bond issued before January 6, 1990,
if the amount of the refunding bond does not exceed 101 percent of the
amount of the refunded bond, and the maturity date of the refunding bond
is not later than the date that is 17 years after the date on which the
refunded bond was issued (or, in the case of a series of refundings, the
date on which the original bond was issued), but only if Sec. 1.148-
2(d)(2)(iv) is applied
[[Page 717]]
by substituting 1 and one-half percentage points for 2 percentage
points.
(f) Transition rule regarding applicability of yield reduction rule.
Section 1.148-5(c) applies to nonpurpose investments allocable to
replacement proceeds of an issue that are held in a reserve or
replacement fund to the extent that--
(1) Amounts must be paid into the fund under a constitutional
provision, statute, or ordinance adopted before May 3, 1978;
(2) Under that provision, amounts paid into the fund (and investment
earnings thereon) can be used only to pay debt service on the issues;
and
(3) The size of the payments made into the fund is independent of
the size of the outstanding issues or the debt service thereon.
(g) Provisions applicable to certain bonds sold before effective
date. Except for bonds to which paragraph (b)(1) of this section
applies--
(1) Section 1.148-11A provides rules applicable to bonds sold after
June 6, 1994, and before July 8, 1997; and
(2) Sections 1.148-1 through 1.148-11 as in effect on July 1, 1993
(see 26 CFR part 1 as revised April 1, 1994), and Sec. 1.148-11A(i)
(relating to elective retroactive application of certain provisions)
provide rules applicable to certain issues issued before June 7, 1994.
(h) Safe harbor for establishing fair market value for guaranteed
investment contracts and investments purchased for a yield restricted
defeasance escrow. The provisions of Sec. 1.148-5(d)(6)(iii) are
applicable to bonds sold on or after March 1, 1999. Issuers may apply
these provisions to bonds sold on or after December 30, 1998, and before
March 1, 1999.
(i) Special rule for investments purchased for a yield restricted
defeasance escrow. The provisions of Sec. 1.148-5(e)(2)(iv) are
applicable to bonds sold on or after March 1, 1999. Issuers may apply
these provisions to bonds sold on or after December 30, 1998, and before
March 1, 1999.
[T.D. 8476, 58 FR 33547, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24046, May 10, 1994; T.D. 8718, 62 FR 25512,
May 9, 1997; T.D. 8476, 64 FR 37037, July 9, 1999]
Sec. 1.149(b)-1 Federally guaranteed bonds.
(a) General rule. Under section 149(b) and this section, nothing in
section 103(a) or in any other provision of law shall be construed to
provide an exemption from Federal income tax for interest on any bond
issued as part of an issue that is federally guaranteed.
(b) Exceptions. Pursuant to section 149(b)(3)(B), section 149(b)(1)
and paragraph (a) of this section do not apply to--
(1) Investments in obligations issued pursuant to Sec. 21B(d)(3) of
the Federal Home Loan Bank Act, as amended by Sec. 511 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, or any
successor provision; or
(2) Any investments that are held in a refunding escrow (as defined
in Sec. 1.148-1).
(c) Effective date. This section applies to investments made after
June 30, 1993.
[T.D. 8476, 58 FR 33548, June 18, 1993]
Sec. 1.149(d)-1 Limitations on advance refundings.
(a) General rule. Under section 149(d) and this section, nothing in
section 103(a) or in any other provision of law shall be construed to
provide an exemption from Federal income tax for interest on any bond
issued as part of an issue described in paragraphs (2), (3), or (4) of
section 149(d).
(b) Advance refunding issues that employ abusive devices--(1) In
general. An advance refunding issue employs an abusive device and is
described in section 149(d)(4) if the issue violates any of the anti-
abuse rules under Sec. 1.148-10.
(2) Failure to pay required rebate. An advance refunding issue is
described in section 149(d)(4) if the issue fails to meet the
requirements of Sec. 1.148-3. This paragraph (b)(2) applies to any
advance refunding issue issued after August 31, 1986.
(3) Mixed escrows invested in tax-exempt bonds. An advance refunding
issue is described in section 149(d)(4) if--
(i) Any of the proceeds of the issue are invested in a refunding
escrow in
[[Page 718]]
which a portion of the proceeds are invested in tax-exempt bonds and a
portion of the proceeds are invested in nonpurpose investments;
(ii) The yield on the tax-exempt bonds in the refunding escrow
exceeds the yield on the issue;
(iii) The yield on all the investments (including investment
property and tax-exempt bonds) in the refunding escrow exceeds the yield
on the issue; and
(iv) The weighted average maturity of the tax-exempt bonds in the
refunding escrow is more than 25 percent greater or less than the
weighted average maturity of the nonpurpose investments in the refunding
escrow, and the weighted average maturity of nonpurpose investments in
the refunding escrow is greater than 60 days.
(4) Tax-exempt conduit loans. For purposes of applying section
149(d) to a conduit financing issue that finances any conduit loan that
is a tax-exempt bond, the actual issuer of a conduit financing issue and
the conduit borrower of that conduit financing issue are treated as
related parties. Thus, the issue date of the conduit loan does not occur
prior to the date on which the actual issuer of the conduit financing
issue sells, exchanges, or otherwise disposes of that conduit loan, and
the use of the proceeds of the disposition to pay debt service on the
conduit financing issue causes the conduit loan to be a refunding issue.
See Sec. 1.148-10(d), Example 4.
(c) Unrefunded debt service remains eligible for future advance
refunding. For purposes of section 149(d)(3)(A)(i), any principal or
interest on a prior issue that has not been paid or provided for by any
advance refunding issue is treated as not having been advance refunded.
(d) Application of arbitrage regulations--(1) Application of
multipurpose issue rules. For purposes of sections 149(d)(2) and
(3)(A)(i), (ii), and (iii), the provisions of the multipurpose issue
rule in Sec. 1.148-9(h) apply, except that the limitation in Sec. 1.148-
9(h)(5) is disregarded.
(2) General mixed escrow rules. For purposes of section 149(d), the
provisions of Sec. 1.148-9(c) (relating to mixed escrows) apply, except
that those provisions do not apply for purposes of section 149(d)(2) and
(d)(3)(A) (i) and (ii) to amounts that were not gross proceeds of the
prior issue before the issue date of the refunding issue.
(3) Temporary periods and minor portions. Section 1.148-9(d) and (f)
contains rules applicable to temporary periods and minor portions for
advance refunding issues.
(4) Definitions. Section 1.148-1 applies for purposes of section
149(d).
(e) Taxable refundings--(1) In general. Except as provided in
paragraph (e)(2) of this section, for purposes of section
149(d)(3)(A)(i), an advance refunding issue the interest on which is not
excludable from gross income under section 103(a) (i.e., a taxable
advance refunding issue) is not taken into account. In addition, for
this purpose, an advance refunding of a taxable issue is not taken into
account unless the taxable issue is a conduit loan of a tax-exempt
conduit financing issue.
(2) Use to avoid section 149(d)(3)(A)(i). A taxable issue is taken
into account under section 149(d)(3)(A)(i) if it is issued to avoid the
limitations of that section. For example, in the case of a refunding of
a tax-exempt issue with a taxable advance refunding issue that is, in
turn, currently refunded with a tax-exempt issue, the taxable advance
refunding issue is taken into account under section 149(d)(3)(A)(i) if
the two tax-exempt issues are outstanding concurrently for more than 90
days.
(f) Redemption at first call date--(1) General rule. Under sections
149(d)(3)(A) (ii) and (iii) (the first call requirement), bonds refunded
by an advance refunding must be redeemed on their first call date if the
savings test under section 149(d)(3)(B)(i) (the savings test) is
satisfied. The savings test is satisfied if the issuer may realize
present value debt service savings (determined without regard to
administrative expenses) in connection with the issue of which the
refunding bond is a part.
(2) First call date. First call date means the earliest date on
which a bond may be redeemed (or, if issued before 1986, on the earliest
date on which that bond may be redeemed at a redemption price not in
excess of 103 percent of par). If, however, the savings test is not met
with respect to the date described in
[[Page 719]]
the preceding sentence (i.e., there are no present value savings if the
refunded bonds are retired on that date), the first call date is the
first date thereafter on which the bonds can be redeemed and on which
the savings test is met.
(3) Application of savings test to multipurpose issues. Except as
otherwise provided in this paragraph (f)(3), the multipurpose issue
rules in Sec. 1.148-9(h) apply for purposes of the savings test. If any
separate issue in a multipurpose issue increases the aggregate present
value debt service savings on the entire multipurpose issue or reduces
the present value debt service losses on that entire multipurpose issue,
that separate issue satisfies the savings test.
(g) Effective date--(1) In general. Except as provided in paragraph
(g)(2) of this section, this section applies to bonds issued after June
30, 1993, to which Secs. 1.148-1 through 1.148-11 apply, including
conduit loans that are treated as issued after June 30, 1993, under
paragraph (b)(4) of this section. In addition, this section applies to
any issue to which the election described in Sec. 1.148-11(b)(1) is
made.
(2) Special effective date for paragraph (b)(3). Paragraph (b)(3) of
this section applies to any advance refunding issue issued after May 28,
1991.
(3) Special effective date for paragraph (f)(3). Paragraph (f)(3) of
this section applies to bonds sold on or after July 8, 1997, and to any
issue to which the election described in Sec. 1.148-11(b)(1) is made.
See Sec. 1.148-11A(i) for rules relating to certain bonds sold before
July 8, 1997.
[T.D. 8476, 58 FR 33548, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24046, May 10, 1994; T.D. 8718, 62 FR 25513,
May 9, 1997]
Sec. 1.149(e)-1 Information reporting requirements for tax-exempt bonds.
(a) General rule. Interest on a bond is included in gross income
unless certain information with respect to the issue of which the bond
is a part is reported to the Internal Revenue Service in accordance with
the requirements of this section. This section applies to any bond if
the issue of which the bond is a part is issued after December 31, 1986
(including any bond issued to refund a bond issued on or before December
31, 1986).
(b) Requirements for private activity bonds--(1) In general. If the
issue of which the bond is a part is an issue of private activity bonds,
the issuer must comply with the following requirements--
(i) Not later than the 15th day of the second calendar month after
the close of the calendar quarter in which the issue is issued, the
issuer must file with the Internal Revenue Service a completed
information reporting form prescribed for this purpose;
(ii) If any bond that is part of the issue is taken into account
under section 146 (relating to volume cap on private activity bonds),
the state certification requirement of paragraph (b)(2) of this section
must be satisfied; and
(iii) If any bond that is part of the issue is a qualified mortgage
bond or qualified veterans' mortgage bond (within the meaning of section
143 (a) or (b) or section 103A(c) (1) or (3) as in effect on the day
before enactment of the Tax Reform Act of 1986), the issuer must submit
the annual report containing information on the borrowers of the
original proceeds of the issue as required under Sec. 1.103A-2
(k)(2)(ii) and (k)(3) through (k)(6).
(2) State certification with respect to volume cap--(i) In general.
If an issue is subject to the volume cap under section 146, a state
official designated by state law (if there is no such official, then the
governor or the governor's delegate) must certify that the issue meets
the requirements of section 146, and a copy of this certification must
be attached to the information reporting form filed with respect to the
issue. In the case of any constitutional home rule city (as defined in
section 146(d)(3)(C)), the preceding sentence is applied by substituting
``city'' for ``state'' and ``chief executive officer'' for ``governor.''
(ii) Certification. The certifying official need not perform an
independent investigation in order to certify that the issue meets the
requirements of section 146. For example, if the certifying official
receives an affidavit that was executed by an officer of the issuer who
is responsible for issuing the bonds
[[Page 720]]
and that sets forth, in brief and summary terms, the facts necessary to
determine that the issue meets the requirements of section 146 and if
the certifying official has compared the information in that affidavit
to other readily available information with respect to that issuer
(e.g., previous affidavits and certifications for other private activity
bonds issued by that issuer), the certifying official may rely on the
affidavit.
(c) Requirements for governmental bonds--(1) Issue price of $100,000
or more. If the issue of which the bond is a part has an issue price of
$100,000 or more and is not an issue of private activity bonds, then,
not later than the 15th day of the second calendar month after the close
of the calendar quarter in which the issue is issued, the issuer must
file with the Internal Revenue Service a completed information reporting
form prescribed for this purpose.
(2) Issue price of less than $100,000--(i) In general. If the issue
of which the bond is a part has an issue price of less than $100,000 and
is not an issue of private activity bonds, the issuer must file with the
Internal Revenue Service one of the following information reporting
forms within the prescribed period--
(A) Separate return. Not later than the 15th day of the second
calendar month after the close of the calendar quarter in which the
issue is issued, a completed information reporting form prescribed for
this purpose with respect to that issue; or
(B) Consolidated return. Not later than February 15 of the calendar
year following the calendar year in which the issue is issued, a
completed information form prescribed for this purpose with respect to
all issues to which this paragraph (c)(2) applies that were issued by
the issuer during the calendar year and for which information was not
reported on a separate information return pursuant to paragraph
(c)(2)(i)(A) of this section.
(ii) Bond issues issued before January 1, 1992. Paragraph
(c)(2)(i)(A) of this section does not apply if the issue of which the
bond is a part is issued before January 1, 1992.
(iii) Extended filing date for first and second calendar quarters of
1992. If the issue of which the bond is a part is issued during the
first or second calendar quarter of 1992, the prescribed period for
filing an information reporting form with respect to that issue pursuant
to paragraph (c)(2)(i)(A) of this section is extended until November 16,
1992.
(d) Filing of forms and special rules--(1) Completed form. For
purposes of this section--
(i) Good faith effort. An information reporting form is treated as
completed if the issuer (or a person acting on behalf of the issuer) has
made a good faith effort to complete the form (taking into account the
instructions to the form).
(ii) Information. In general, information reporting forms filed
pursuant to this section must be completed on the basis of available
information and reasonable expectations as of the date the issue is
issued. Forms that are filed on a consolidated basis pursuant to
paragraph (c)(2)(i)(B) of this section, however, may be completed on the
basis of information readily available to the issuer at the close of the
calendar year to which the form relates, supplemented by estimates made
in good faith.
(iii) Certain information not required. An issuer need not report to
the Internal Revenue Service any information specified in the first
sentence of section 149(e)(2) that is not required to be reported to the
Internal Revenue Service pursuant to the information reporting forms
prescribed under that section and the instructions to those forms.
(2) Manner of filing--(i) Place for filing. The information
reporting form must be filed with the Internal Revenue Service at the
address specified on the form or in the instructions to the form.
(ii) Extension of time. The Commissioner may grant an extension of
time to file any form or attachment required under this section if the
Commissioner determines that the failure to file in a timely manner was
not due to willful neglect. The Commissioner may make this determination
with respect to an issue or to a class of issues.
(e) Definitions. For purposes of this section only--(1) Private
activity bond. The term ``private activity bond'' has the meaning given
that term in section
[[Page 721]]
141(a) of the Internal Revenue Code, except that the term does not
include any bond described in section 1312(c) of the Tax Reform Act of
1986 to which section 1312 or 1313 of the Tax Reform Act of 1986
applies.
(2) Issue--(i) In general. Except as otherwise provided in this
paragraph (e)(2), bonds are treated as part of the same issue only if
the bonds are issued--
(A) By the same issuer;
(B) On the same date; and
(C) Pursuant to a single transaction or to a series of related
transactions.
(ii) Draw-down loans, commercial paper, etc. (A) Bonds issued during
the same calendar year may be treated as part of the same tissue if the
bonds are issued--
(1) Pursuant to a loan agreement under which amounts are to be
advanced periodically (``draw-down loan''); or
(2) With a term not exceeding 270 days.
(B) In addition, the bonds must be equally and ratably secured under
a single indenture or loan agreement and issued pursuant to a common
financing arrangement (e.g., pursuant to the same official statement
that is periodically updated to reflect changing factual circumstances).
In the case of bonds issued pursuant to a draw-down loan that meets the
requirements of the preceding sentence, bonds issued during different
calendar years may be treated as part of the same issue if all the
amounts to be advanced pursuant to the draw-down loan are reasonably
expected to be advanced within three years of the date of issue of the
first bond.
(iii) Leases and installment sales. Bonds other than private
activity bonds may be treated as part of the same issue if--
(A) The bonds are issued pursuant to a single agreement that is in
the form of a lease or installment sales agreement; and
(B) All of the property covered by that agreement is reasonably
expected to be delivered within three years of the date of issue of the
first bond.
(iv) Qualified 501(c)(3) bonds. If an issuer elects under section
141(b)(9) to treat a portion of an issue as a qualified 501(c)(3) bond,
that portion is treated as a separate issue.
(3) Date of issue--(i) Bond. The date of issue of a bond is
determined under Sec. 1.150-1.
(ii) Issue. The date of issue of an issue of bonds is the date of
issue of the first bond that is part of the issue. See paragraphs (e)(2)
(ii) and (iii) of this section for rules relating to draw-down loans,
commercial paper, etc., and leases and installment sales.
(iii) Bonds to which prior law applied. Notwithstanding the
provisions of this paragraph (e)(3), an issue for which an information
report was required to be filed under section 103(l) or section
103A(j)(3) is treated as issued prior to January 1, 1987.
(4) Issue price. The term ``issue price'' has the same meaning given
the term under Sec. 1.148-1(b).
[T.D. 8425, 57 FR 36002, Aug. 12, 1992, as amended by T.D. 8425, 59 FR
24351, May 11, 1994]
Sec. 1.149(g)-1 Hedge bonds.
(a) Certain definitions. Except as otherwise provided, the
definitions set forth in Sec. 1.148-1 apply for purposes of section
149(g) and this section. In addition, the following terms have the
following meanings:
Reasonable expectations means reasonable expectations (as defined in
Sec. 1.148-1), as modified to take into account the provisions of
section 149(f)(2)(B).
Spendable proceeds means net sale proceeds (as defined in
Sec. 1.148-1).
(b) Applicability of arbitrage allocation and accounting rules.
Section 1.148-6 applies for purposes of section 149(g), except that an
expenditure that results in the creation of replacement proceeds (other
than amounts in a bona fide debt service fund or a reasonably required
reserve or replacement fund) is not an expenditure for purposes of
section 149(g).
(c) Refundings--(1) Investment in tax-exempt bonds. A bond issued to
refund a bond that is a tax-exempt bond by virtue of the rule in section
149(g)(3)(B) is not a tax-exempt bond unless the gross proceeds of that
refunding bond (other than proceeds in a refunding escrow for the
refunded bond) satisfy the requirements of section 149(g)(3)(B).
[[Page 722]]
(2) Anti-abuse rule. A refunding bond is treated as a hedge bond
unless there is a significant governmental purpose for the issuance of
that bond (e.g., an advance refunding bond issued to realize debt
service savings or to relieve the issuer of significantly burdensome
document provisions, but not to otherwise hedge against future increases
in interest rates).
(d) Effective date. This section applies to bonds issued after June
30, 1993 to which Secs. 1.148-1 through 1.148-11 apply. In addition,
this section applies to any issue to which the election described in
Sec. 1.148-11(b)(1) is made.
[T.D. 8476, 58 FR 33549, June 18, 1993]
Sec. 1.150-1 Definitions.
(a) Scope and effective date--(1) In general. Except as otherwise
provided, the definitions in this section apply for all purposes of
sections 103 and 141 through 150.
(2) Effective date--(i) In general. Except as otherwise provided in
this paragraph (a)(2), this section applies to issues issued after June
30, 1993 to which Secs. 1.148-1 through 1.148-11 apply. In addition,
this section (other than paragraph (c)(3) of this section) applies to
any issue to which the election described in Sec. 1.148-11(b)(1) is
made.
(ii) Special effective date for paragraphs (c)(1), (c)(4)(iii), and
(c)(6). Paragraphs (c)(1), (c)(4)(iii), and (c)(6) of this section apply
to bonds sold on or after July 8, 1997 and to any issue to which the
election described in Sec. 1.148-11(b)(1) is made. See Sec. 1.148-11A(i)
for rules relating to certain bonds sold before July 8, 1997.
(3) Exception to general effective date. See Sec. 1.141-15 for the
effective date of the definition of bond documents contained in
paragraph (b) of this section.
(b) Certain general definitions. The following definitions apply:
Bond means any obligation of a State or political subdivision
thereof under section 103(c)(1).
Bond documents means the bond indenture or resolution, transcript of
proceedings, and any related documents.
Capital expenditure means any cost of a type that is properly
chargeable to capital account (or would be so chargeable with a proper
election or with the application of the definition of placed in service
under Sec. 1.150-2(c)) under general Federal income tax principles. For
example, costs incurred to acquire, construct, or improve land,
buildings, and equipment generally are capital expenditures. Whether an
expenditure is a capital expenditure is determined at the time the
expenditure is paid with respect to the property. Future changes in law
do not affect whether an expenditure is a capital expenditure.
Conduit borrower means the obligor on a purpose investment (as
defined in Sec. 1.148-1). For example, if an issuer invests proceeds in
a purpose investment in the form of a loan, lease, installment sale
obligation, or similar obligation to another entity and the obligor uses
the proceeds to carry out the governmental purpose of the issue, the
obligor is a conduit borrower.
Conduit financing issue means an issue the proceeds of which are
used or are reasonably expected to be used to finance at least one
purpose investment representing at least one conduit loan to one conduit
borrower.
Conduit loan means a purpose investment (as defined in Sec. 1.148-
1).
Governmental bond means any bond of an issue of tax-exempt bonds in
which none of the bonds are private activity bonds.
Issuance costs means costs to the extent incurred in connection
with, and allocable to, the issuance of an issue within the meaning of
section 147(g). For example, issuance costs include the following costs
but only to the extent incurred in connection with, and allocable to,
the borrowing: underwriters' spread; counsel fees; financial advisory
fees; rating agency fees; trustee fees; paying agent fees; bond
registrar, certification, and authentication fees; accounting fees;
printing costs for bonds and offering documents; public approval process
costs; engineering and feasibility study costs; guarantee fees, other
than for qualified guarantees (as defined in Sec. 1.148-4(f)); and
similar costs.
Issue date means, in reference to an issue, the first date on which
the issuer receives the purchase price in exchange for delivery of the
evidence of indebtedness representing any bond included
[[Page 723]]
in the issue. Issue date means, in reference to a bond, the date on
which the issuer receives the purchase price in exchange for that bond.
In no event is the issue date earlier than the first day on which
interest begins to accrue on the bond or bonds for Federal income tax
purposes.
Obligation means any valid evidence of indebtedness under general
Federal income tax principles.
Pooled financing issue means an issue the proceeds of which are to
be used to finance purpose investments representing conduit loans to two
or more conduit borrowers, unless those conduit loans are to be used to
finance a single capital project.
Private activity bond means a private activity bond (as defined in
section 141).
Qualified mortgage loan means a mortgage loan with respect to an
owner-occupied residence acquired with the proceeds of an obligation
described in section 143(a)(1) or 143(b) (or applicable prior law).
Qualified student loan means a student loan acquired with the
proceeds of an obligation described in section 144(b)(1).
Related party means, in reference to a governmental unit or a
501(c)(3) organization, any member of the same controlled group, and, in
reference to any person that is not a governmental unit or 501(c)(3)
organization, a related person (as defined in section 144(a)(3)).
Taxable bond means any obligation the interest on which is not
excludable from gross income under section 103.
Tax-exempt bond means any bond the interest on which is excludable
from gross income under section 103(a). For purposes of section 148,
tax-exempt bond includes:
(1) An interest in a regulated investment company to the extent that
at least 95 percent of the income to the holder of the interest is
interest that is excludable from gross income under section 103; and
(2) A certificate of indebtedness issued by the United States
Treasury pursuant to the Demand Deposit State and Local Government
Series program described in 31 CFR part 344.
Working capital expenditure means any cost that is not a capital
expenditure. Generally, current operating expenses are working capital
expenditures.
(c) Definition of issue--(1) In general. Except as otherwise
provided in this paragraph (c), the term issue means two or more bonds
that meet all of the following requirements:
(i) Sold at substantially the same time. The bonds are sold at
substantially the same time. Bonds are treated as sold at substantially
the same time if they are sold less than 15 days apart.
(ii) Sold pursuant to the same plan of financing. The bonds are sold
pursuant to the same plan of financing. Factors material to the plan of
financing include the purposes for the bonds and the structure of the
financing. For example, generally--
(A) Bonds to finance a single facility or related facilities are
part of the same plan of financing;
(B) Short-term bonds to finance working capital expenditures and
long-term bonds to finance capital projects are not part of the same
plan of financing; and
(C) Certificates of participation in a lease and general obligation
bonds secured by tax revenues are not part of the same plan of
financing.
(iii) Payable from same source of funds. The bonds are reasonably
expected to be paid from substantially the same source of funds,
determined without regard to guarantees from parties unrelated to the
obligor.
(2) Exception for taxable bonds. Taxable bonds and tax-exempt bonds
are not part of the same issue under this paragraph (c). The issuance of
tax-exempt bonds in a transaction (or series of related transactions)
that includes taxable bonds, however, may constitute an abusive
arbitrage device under Sec. 1.148-10(a) or a device to avoid other
limitations in sections 103 and 141 through 150 (for example, structures
involving windows or unreasonable allocations of bonds).
(3) Exception for certain bonds financing separate purposes--(i) In
general. Bonds may be treated as part of separate issues if the
requirements of this paragraph (c)(3) are satisfied. Each of these
separate issues must finance a separate purpose (e.g., refunding a
separate prior issue, financing a separate
[[Page 724]]
purpose investment, financing integrated or functionally related capital
projects, and financing any clearly discrete governmental purpose). Each
of these separate issues independently must be a tax-exempt bond (e.g.,
a governmental bond or a qualified mortgage bond). The aggregate
proceeds, investments, and bonds in such a transaction must be allocated
between each of the separate issues using a reasonable, consistently
applied allocation method. If any separate issue consists of refunding
bonds, the allocation rules in Sec. 1.148-9(h) must be satisfied. An
allocation is not reasonable if it achieves more favorable results under
sections 103 and 141 to 150 than could be achieved with actual separate
issues. All allocations under this paragraph (c)(3) must be made in
writing on or before the issue date.
(ii) Exceptions. This paragraph (c)(3) does not apply for purposes
of sections 141(b)(5), 141(c)(1), 141(d)(1), 144(a), 148, 149(d), and
149(g).
(4) Special rules for certain financings--(i) Draw-down loans. Bonds
issued pursuant to a draw-down loan are treated as part of a single
issue. The issue date of that issue is the first date on which the
aggregate draws under the loan exceed the lesser of $50,000 or 5 percent
of the issue price.
(ii) Commercial paper--(A) In general. Short-term bonds having a
maturity of 270 days or less (commercial paper) issued pursuant to the
same commercial paper program may be treated as part of a single issue,
the issue date of which is the first date the aggregate amount of
commercial paper issued under the program exceeds the lesser of $50,000
or 5 percent of the aggregate issue price of the commercial paper in the
program. A commercial paper program is a program to issue commercial
paper to finance or refinance the same governmental purpose pursuant to
a single master legal document. Commercial paper is not part of the same
commercial paper program unless issued during an 18-month period,
beginning on the deemed issue date. In addition, commercial paper issued
after the end of this 18-month period may be treated as part of the
program to the extent issued to refund commercial paper that is part of
the program, but only to the extent that--
(1) There is no increase in the principal amount outstanding; and
(2) The program does not have a term in excess of--
(i) 30 years; or
(ii) The period reasonably necessary for the governmental purposes
of the program.
(B) Safe harbor. The requirement of paragraph (c)(4)(ii)(A)(2) of
this section is treated as satisfied if the weighted average maturity of
the issue does not exceed 120 percent of the weighted average expected
economic life of the property financed by the issue.
(iii) Certain general obligation bonds. Except as otherwise provided
in paragraph (c)(2) of this section, bonds that are secured by a pledge
of the issuer's full faith and credit (or a substantially similar
pledge) and sold and issued on the same dates pursuant to a single
offering document may be treated as part of the same issue if the issuer
so elects on or before the issue date.
(5) Anti-abuse rule. In order to prevent the avoidance of sections
103 and 141 through 150 and the general purposes thereof, the
Commissioner may treat bonds as part of the same issue or as part of
separate issues to clearly reflect the economic substance of a
transaction.
(6) Sale date. The sale date of a bond is the first day on which
there is a binding contract in writing for the sale or exchange of the
bond.
(d) Definition of refunding issue and related definitions--(1)
General definition of refunding issue. Refunding issue means an issue of
obligations the proceeds of which are used to pay principal, interest,
or redemption price on another issue (a prior issue, as more
particularly defined in paragraph (d)(5) of this section), including the
issuance costs, accrued interest, capitalized interest on the refunding
issue, a reserve or replacement fund, or similar costs, if any, properly
allocable to that refunding issue.
(2) Exceptions and special rules. For purposes of paragraph (d)(1)
of this section, the following exceptions and special rules apply--
(i) Payment of certain interest. An issue is not a refunding issue
if the
[[Page 725]]
only principal and interest that is paid with proceeds of the issue
(determined without regard to the multipurpose issue rules of
Sec. 1.148-9(h)) is interest on another issue that--
(A) Accrues on the other issue during a one-year period including
the issue date of the issue that finances the interest;
(B) Is a capital expenditure; or
(C) Is a working capital expenditure to which the de minimis rule of
Sec. 1.148-6(d)(3)(ii)(A) applies.
(ii) Certain issues with different obligors--(A) In general. An
issue is not a refunding issue to the extent that the obligor (as
defined in paragraph (d)(2)(ii)(B) of this section) of one issue is
neither the obligor of the other issue nor a related party with respect
to the obligor of the other issue.
(B) Definition of obligor. The obligor of an issue means the actual
issuer of the issue, except that the obligor of the portion of an issue
properly allocable to an investment in a purpose investment means the
conduit borrower under that purpose investment. The obligor of an issue
used to finance qualified mortgage loans, qualified student loans, or
similar program investments (as defined in Sec. 1.148-1) does not
include the ultimate recipient of the loan (e.g., the homeowner, the
student).
(iii) Certain special rules for purpose investments. For purposes of
this paragraph (d), the following special rules apply:
(A) Refunding of a conduit financing issue by a conduit loan
refunding issue. Except as provided in paragraph (d)(2)(iii)(B) of this
section, the use of the proceeds of an issue that is used to refund an
obligation that is a purpose investment (a conduit refunding issue) by
the actual issuer of the conduit financing issue determines whether the
conduit refunding issue is a refunding of the conduit financing issue
(in addition to a refunding of the obligation that is the purpose
investment).
(B) Recycling of certain payments under purpose investments. A
conduit refunding issue is not a refunding of a conduit financing issue
to the extent that the actual issuer of the conduit financing issue
reasonably expects as of the date of receipt of the proceeds of the
conduit refunding issue to use those amounts within 6 months (or, if
greater, during the applicable temporary period for those amounts under
section 148(c) or under applicable prior law) to acquire a new purpose
investment. Any new purpose investment is treated as made from the
proceeds of the conduit financing issue.
(C) Application to tax-exempt loans. For purposes of this paragraph
(d), obligations that would be purpose investments (absent section
148(b)(3)(A)) are treated as purpose investments.
(iv) Substance of transaction controls. In the absence of other
applicable controlling rules under this paragraph (d), the determination
of whether an issue is a refunding issue is based on the substance of
the transaction in light of all the facts and circumstances.
(v) Certain integrated transactions in connection with asset
acquisition not treated as refunding issues. If, within six months
before or after a person assumes (including taking subject to)
obligations of an unrelated party in connection with an asset
acquisition (other than a transaction to which section 381(a) applies if
the person assuming the obligation is the acquiring corporation within
the meaning of section 381(a)), the assumed issue is refinanced, the
refinancing issue is not treated as a refunding issue.
(3) Current refunding issue. Current refunding issue means:
(i) Except as provided in paragraph (d)(3)(ii) of this section, a
refunding issue that is issued not more than 90 days before the last
expenditure of any proceeds of the refunding issue for the payment of
principal or interest on the prior issue; and
(ii) In the case of a refunding issue issued before 1986--
(A) A refunding issue that is issued not more than 180 days before
the last expenditure of any proceeds of the refunding issue for the
payment of principal or interest on the prior issue; or
(B) A refunding issue if the prior issue had a term of less than 3
years and was sold in anticipation of permanent financing, but only if
the aggregate term of all prior issues sold in anticipation of permanent
financing was less than 3 years.
[[Page 726]]
(4) Advance refunding issue. Advance refunding issue means a
refunding issue that is not a current refunding issue.
(5) Prior issue. Prior issue means an issue of obligations all or a
portion of the principal, interest, or call premium on which is paid or
provided for with proceeds of a refunding issue. A prior issue may be
issued before, at the same time as, or after a refunding issue. If the
refunded and unrefunded portions of a prior issue are treated as
separate issues under Sec. 1.148-9(i), for the purposes for which that
section applies, except to the extent that the context clearly requires
otherwise, references to a prior issue refer only to the refunded
portion of that prior issue.
(e) Controlled group means a group of entities controlled directly
or indirectly by the same entity or group of entities within the meaning
of this paragraph (e).
(1) Direct control. The determination of direct control is made on
the basis of all the relevant facts and circumstances. One entity or
group of entities (the controlling entity) generally controls another
entity or group of entities (the controlled entity) for purposes of this
paragraph if the controlling entity possesses either of the following
rights or powers and the rights or powers are discretionary and non-
ministerial--
(i) The right or power both to approve and to remove without cause a
controlling portion of the governing body of the controlled entity; or
(ii) The right or power to require the use of funds or assets of the
controlled entity for any purpose of the controlling entity.
(2) Indirect control. If a controlling entity controls a controlled
entity under the test in paragraph (e)(1) of this section, then the
controlling entity also controls all entities controlled, directly or
indirectly, by the controlled entity or entities.
(3) Exception for general purpose governmental entities. An entity
is not a controlled entity under this paragraph (e) if the entity
possesses substantial taxing, eminent domain, and police powers. For
example, a city possessing substantial amounts of each of these
sovereign powers is not a controlled entity of the state.
[T.D. 8476, 58 FR 33549, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24046, May 10, 1994; T.D. 8712, 62 FR 2304,
Jan. 16, 1997; T.D. 8718, 62 FR 25513, May 9, 1997]
Sec. 1.150-2 Proceeds of bonds used for reimbursement.
(a) Table of contents. This table of contents contains a listing of
the headings contained in Sec. 1.150-2.
(a) Table of contents.
(b) Scope.
(c) Definitions.
(d) General operating rules for reimbursement expenditures.
(1) Official intent.
(2) Reimbursement period.
(3) Nature of expenditure.
(e) Official intent rules.
(1) Form of official intent.
(2) Project description in official intent.
(3) Reasonableness of official intent.
(f) Exceptions to general operating rules.
(1) De minimis exception.
(2) Preliminary expenditures exception.
(g) Special rules on refundings.
(1) In general--once financed, not reimbursed.
(2) Certain proceeds of prior issue used for reimbursement treated
as unspent.
(h) Anti-abuse rules.
(1) General rule.
(2) One-year step transaction rule.
(i) Authority of the Commissioner to prescribe rules.
(j) Effective date.
(1) In general.
(2) Transitional rules.
(b) Scope. This section applies to reimbursement bonds (as defined
in paragraph (c) of this section) for all purposes of sections 103 and
141 to 150.
(c) Definitions. The following definitions apply:
Issuer means--
(1) For any private activity bond (excluding a qualified 501(c)(3)
bond, qualified student loan bond, qualified mortgage bond, or qualified
veterans' mortgage bond), the entity that actually issues the
reimbursement bond; and
(2) For any bond not described in paragraph (1) of this definition,
either the entity that actually issues the reimbursement bond or, to the
extent that the reimbursement bond proceeds are to be loaned to a
conduit borrower, that conduit borrower.
[[Page 727]]
Official intent means an issuer's declaration of intent to reimburse
an original expenditure with proceeds of an obligation.
Original expenditure means an expenditure for a governmental purpose
that is originally paid from a source other than a reimbursement bond.
Placed in service means, with respect to a facility, the date on
which, based on all the facts and circumstances--
(1) The facility has reached a degree of completion which would
permit its operation at substantially its design level; and
(2) The facility is, in fact, in operation at such level.
Reimbursement allocation means an allocation in writing that
evidences an issuer's use of proceeds of a reimbursement bond to
reimburse an original expenditure. An allocation made within 30 days
after the issue date of a reimbursement bond may be treated as made on
the issue date.
Reimbursement bond means the portion of an issue allocated to
reimburse an original expenditure that was paid before the issue date.
(d) General operating rules for reimbursement expenditures. Except
as otherwise provided, a reimbursement allocation is treated as an
expenditure of proceeds of a reimbursement bond for the governmental
purpose of the original expenditure on the date of the reimbursement
allocation only if:
(1) Official intent. Not later than 60 days after payment of the
original expenditure, the issuer adopts an official intent for the
original expenditure that satisfies paragraph (e) of this section.
(2) Reimbursement period--(i) In general. The reimbursement
allocation is made not later than 18 months after the later of--
(A) The date the original expenditure is paid; or
(B) The date the project is placed in service or abandoned, but in
no event more than 3 years after the original expenditure is paid.
(ii) Special rule for small issuers. In applying paragraph (d)(2)(i)
of this section to an issue that satisfies section 148(f)(4)(D)(i) (I)
through (IV), the ``18 month'' limitation is changed to ``3 years'' and
the ``3-year'' maximum reimbursement period is disregarded.
(iii) Special rule for long-term construction projects. In applying
paragraph (d)(2)(i) to a construction project for which both the issuer
and a licensed architect or engineer certify that at least 5 years is
necessary to complete construction of the project, the maximum
reimbursement period is changed from ``3 years'' to ``5 years.''
(3) Nature of expenditure. The original expenditure is a capital
expenditure, a cost of issuance for a bond, an expenditure described in
Sec. 1.148-6(d)(3)(ii)(B) (relating to certain extraordinary working
capital items), a grant (as defined in Sec. 1.148-6(d)(4)), a qualified
student loan, a qualified mortgage loan, or a qualified veterans'
mortgage loan.
(e) Official intent rules. An official intent satisfies this
paragraph (e) if:
(1) Form of official intent. The official intent is made in any
reasonable form, including issuer resolution, action by an appropriate
representative of the issuer (e.g., a person authorized or designated to
declare official intent on behalf of the issuer), or specific
legislative authorization for the issuance of obligations for a
particular project.
(2) Project description in official intent--(i) In general. The
official intent generally describes the project for which the original
expenditure is paid and states the maximum principal amount of
obligations expected to be issued for the project. A project includes
any property, project, or program (e.g., highway capital improvement
program, hospital equipment acquisition, or school building renovation).
(ii) Fund accounting. A project description is sufficient if it
identifies, by name and functional purpose, the fund or account from
which the original expenditure is paid (e.g., parks and recreation fund-
-recreational facility capital improvement program).
(iii) Reasonable deviations in project description. Deviations
between a project described in an official intent and the actual project
financed with reimbursement bonds do not invalidate the official intent
to the extent that the actual project is reasonably related in function
to the described project. For example, hospital equipment is a
reasonable deviation from hospital building improvements. In contrast, a
city office building rehabilitation is not a
[[Page 728]]
reasonable deviation from highway improvements.
(3) Reasonableness of official intent. On the date of the
declaration, the issuer must have a reasonable expectation (as defined
in Sec. 1.148-1(b)) that it will reimburse the original expenditure with
proceeds of an obligation. Official intents declared as a matter of
course or in amounts substantially in excess of the amounts expected to
be necessary for the project (e.g., blanket declarations) are not
reasonable. Similarly, a pattern of failure to reimburse actual original
expenditures covered by official intents (other than in extraordinary
circumstances) is evidence of unreasonableness. An official intent
declared pursuant to a specific legislative authorization is rebuttably
presumed to satisfy this paragraph (e)(3).
(f) Exceptions to general operating rules--(1) De minimis exception.
Paragraphs (d)(1) and (d)(2) of this section do not apply to costs of
issuance of any bond or to an amount not in excess of the lesser of
$100,000 or 5 percent of the proceeds of the issue.
(2) Preliminary expenditures exception. Paragraphs (d)(1) and (d)(2)
of this section do not apply to any preliminary expenditures, up to an
amount not in excess of 20 percent of the aggregate issue price of the
issue or issues that finance or are reasonably expected by the issuer to
finance the project for which the preliminary expenditures were
incurred. Preliminary expenditures include architectural, engineering,
surveying, soil testing, reimbursement bond issuance, and similar costs
that are incurred prior to commencement of acquisition, construction, or
rehabilitation of a project, other than land acquisition, site
preparation, and similar costs incident to commencement of construction.
(g) Special rules on refundings--(1) In general--once financed, not
reimbursed. Except as provided in paragraph (g)(2) of this section,
paragraph (d) of this section does not apply to an allocation to pay
principal or interest on an obligation or to reimburse an original
expenditure paid by another obligation. Instead, such an allocation is
analyzed under rules on refunding issues. See Sec. 1.148-9.
(2) Certain proceeds of prior issue used for reimbursement treated
as unspent. In the case of a refunding issue (or series of refunding
issues), proceeds of a prior issue purportedly used to reimburse
original expenditures are treated as unspent proceeds of the prior issue
unless the purported reimbursement was a valid expenditure under
applicable law on reimbursement expenditures on the issue date of the
prior issue.
(h) Anti-abuse rules--(1) General rule. A reimbursement allocation
is not an expenditure of proceeds of an issue under this section if the
allocation employs an abusive arbitrage device under Sec. 1.148-10 to
avoid the arbitrage restrictions or to avoid the restrictions under
sections 142 through 147.
(2) One-year step transaction rule--(i) Creation of replacement
proceeds. A purported reimbursement allocation is invalid and thus is
not an expenditure of proceeds of an issue if, within 1 year after the
allocation, funds corresponding to the proceeds of a reimbursement bond
for which a reimbursement allocation was made are used in a manner that
results in the creation of replacement proceeds (as defined in
Sec. 1.148-1) of that issue or another issue. The preceding sentence
does not apply to amounts deposited in a bona fide debt service fund (as
defined in Sec. 1.148-1).
(ii) Example. The provisions of paragraph (h)(2)(i) of this section
are illustrated by the following example.
Example. On January 1, 1994, County A issues an issue of 7 percent
tax-exempt bonds (the 1994 issue) and makes a purported reimbursement
allocation to reimburse an original expenditure for specified capital
improvements. A immediately deposits funds corresponding to the proceeds
subject to the reimbursement allocation in an escrow fund to provide for
payment of principal and interest on its outstanding 1991 issue of 9
percent tax-exempt bonds (the prior issue). The use of amounts
corresponding to the proceeds of the reimbursement bonds to create a
sinking fund for another issue within 1 year after the purported
reimbursement allocation invalidates the reimbursement allocation. The
proceeds retain their character as unspent proceeds of the 7 percent
issue upon deposit in the escrow fund. Accordingly, the proceeds are
subject to the 7 percent yield restriction of the 1994 issue instead of
the 9 percent yield restriction of the prior issue.
[[Page 729]]
(i) Authority of the Commissioner to prescribe rules. The
Commissioner may by revenue ruling or revenue procedure (see
Sec. 601.601(d)(2)(ii)(b) of this chapter) prescribe rules for the
expenditure of proceeds of reimbursement bonds in circumstances that do
not otherwise satisfy this section.
(j) Effective date--(1) In general. The provisions of this section
apply to all allocations of proceeds of reimbursement bonds issued after
June 30, 1993.
(2) Transitional rules--(i) Official intent. An official intent is
treated as satisfying the official intent requirement of paragraph
(d)(1) of this section if it--
(A) Satisfied the applicable provisions of Sec. 1.103-8(a)(5) as in
effect prior to July 1, 1993, (as contained in 26 CFR part 1 revised as
of April 1, 1993) and was made prior to that date, or
(B) Satisfied the applicable provisions of Sec. 1.103-18 as in
effect between January 27, 1992, and June 30, 1993, (as contained in 26
CFR part 1 revised as of April 1, 1993) and was made during that period.
(ii) Certain expenditures of private activity bonds. For any
expenditure that was originally paid prior to August 15, 1993, and that
would have qualified for expenditure by reimbursement from the proceeds
of a private activity bond under T.D. 7199, section 1.103-8(a)(5), 1972-
2 C.B. 45 (see Sec. 601.601(d)(2)(ii)(b)) of this chapter, the
requirements of that section may be applied in lieu of this section.
[T.D. 8476, 58 FR 33551, June 18, 1993; 58 FR 44453, Aug. 23, 1993]
Sec. 1.150-4 Change in use of facilities financed with tax-exempt private activity bonds.
(a) Scope. This section applies for purposes of the rules for change
of use of facilities financed with private activity bonds under sections
150(b)(3) (relating to qualified 501(c)(3) bonds), 150(b)(4) (relating
to certain exempt facility bonds and small issue bonds), 150(b)(5)
(relating to facilities required to be owned by governmental units or
501(c)(3) organizations), and 150(c).
(b) Effect of remedial actions--(1) In general. Except as provided
in this section, the change of use provisions of sections 150(b) (3)
through (5), and 150(c) apply even if the issuer takes a remedial action
described in Secs. 1.142-2, 1.144-2, or 1.145-2.
(2) Exceptions--(i) Redemption. If nonqualified bonds are redeemed
within 90 days of a deliberate action under Sec. 1.145-2(a) or within 90
days of the date on which a failure to properly use proceeds occurs
under Sec. 1.142-2 or Sec. 1.144-2, sections 150(b) (3) through (5) do
not apply during the period between that date and the date on which the
nonqualified bonds are redeemed.
(ii) Alternative qualifying use of facility. If a bond-financed
facility is used for an alternative qualifying use under Secs. 1.145-2
and 1.141-12(f), sections 150(b) (3) and (5) do not apply because of the
alternative use.
(iii) Alternative use of disposition proceeds. If disposition
proceeds are used for a qualifying purpose under Secs. 1.145-2 and
1.141-12(e), 1.142-2(c)(4), or 1.144-2, sections 150(b) (3) through (5)
do not apply because of the deliberate action that gave rise to the
disposition proceeds after the date on which all of the disposition
proceeds have been expended on the qualifying purpose. If all of the
disposition proceeds are so expended within 90 days of the date of the
deliberate action, however, sections 150(b) (3) through (5) do not apply
because of the deliberate action.
(c) Allocation rules--(1) In general. If a change in use of a
portion of the property financed with an issue of qualified private
activity bonds causes section 150 (b)(3), (b)(4), or (b)(5) to apply to
an issue, the bonds of the issue allocable to that portion under section
150(c)(3) are the same as the nonqualified bonds determined for purposes
of Secs. 1.142-1, 1.144-1, and 1.145-1, except that bonds allocable to
all common areas are also allocated to that portion.
(2) Special rule when remedial action is taken. If an issuer takes a
remedial action with respect to an issue of private activity bonds under
Secs. 1.142-2, 1.144-2, or 1.145-2, the bonds of the issue allocable to
a portion of property are the same as the nonqualified bonds determined
for purposes of those sections.
(d) Effective dates. For effective dates of this section, see
Sec. 1.141-16.
[T.D. 8712, 62 FR 2304, Jan. 16, 1997]
[[Page 730]]
Sec. 1.150-5 Filing notices and elections.
(a) In general. Notices and elections under the following sections
must be filed with the Internal Revenue Service, 1111 Constitution
Avenue, NW, Attention: T:GE:TEB:O, Washington, DC 20224 or such other
place designated by publication of a notice in the Internal Revenue
Bulletin--
(1) Section 1.141-12(d)(3);
(2) Section 1.142(f)(4)-1; and
(3) Section 1.142-2(c)(2).
(b) Effective dates. This section applies to notices and elections
filed on or after January 19, 2001.
[T.D. 8941, 66 FR 4671, Jan. 18, 2001]
Regulations Applicable to Certain Bonds Sold Prior to July 8, 1997
Editorial Note: IRS redesignated the following sections to appear
below the undesignated center heading ``Regulations Applicable to
Certain Bonds Sold Prior to July 8, 1997'' and preceding the
undesignated center heading ``Deductions for Personal Exemptions.'' See
62 FR 25507 and 25513, May 9, 1997 for the specific sections involved in
the redesignation.
Sec. 1.148-1A Definitions and elections.
(a) [Reserved]. For guidance see Sec. 1.148-1.
(b) Certain definitions.
Investment-type property. See Sec. 1.148-1(b). Investment-type
property also includes a contract that would be a hedge (within the
meaning of Sec. 1.148-4(h)) except that it contains a significant
investment element.
(c) through (c)(4)(i) [Reserved]. For guidance see Sec. 1.148-1.
(c)(4)(ii) Bonds financing a working capital reserve--(A) In
general. Except as otherwise provided in Sec. 1.148-1(c)(4)(ii)(B),
replacement proceeds arise to the extent a working capital reserve is,
directly or indirectly, financed with the proceeds of the issue
(regardless of the expenditure of proceeds of the issue). Thus, for
example, if an issuer that does not maintain a working capital reserve
borrows to fund such a reserve, the issuer will have replacement
proceeds. To determine the amount of a working capital reserve
maintained, an issuer may use the average amount maintained as a working
capital reserve during annual periods of at least one year, the last of
which ends within a year before the issue date. For example, the amount
of a working capital reserve may be computed using the average of the
beginning or ending monthly balances of the amount maintained as a
reserve (net of unexpended gross proceeds) during the one year period
preceding the issue date.
[T.D. 8538, 59 FR 24041, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-2A General arbitrage yield restriction rules.
(a) through (b)(2)(i) [Reserved]. For guidance see Sec. 1.148-2.
(b)(2)(ii) Exceptions to certification requirement. An issuer is not
required to make a certification for an issue under Sec. 1.148-
2(b)(2)(i) if--
(A) The issuer reasonably expects as of the issue date that there
will be no unspent gross proceeds after the issue date, other than gross
proceeds in a bona fide debt service fund (e.g., equipment lease
financings in which the issuer purchases equipment in exchange for an
installment payment note); or
(B) The issue price of the issue does not exceed $1,000,000.
[T.D. 8538, 59 FR 24042, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-3A General arbitrage rebate rules.
(a) through (h)(2) [Reserved]. For guidance see Sec. 1.148-3.
(h)(3) Waivers of the penalty. For purposes of Sec. 1.148-3(h)(3),
willful neglect does not include a failure that is attributable solely
to the permissible retroactive selection of a short first bond year if
the rebate amount that the issuer failed to pay is paid within 60 days
of the selection of that bond year.
[T.D. 8538, 59 FR 24042, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-4A Yield on an issue of bonds.
(a) through (b)(4) [Reserved]. For guidance see Sec. 1.148-4.
(b)(5) Special aggregation rule treating certain bonds as a single
fixed yield bond. Two variable yield bonds of an issue
[[Page 731]]
are treated in the aggregate as a single fixed yield bond if--
(i) Aggregate treatment would result in the single bond being a
fixed yield bond; and
(ii) The terms of the bonds do not contain any features that could
distort the aggregate fixed yield from what the yield would be if a
single fixed yield bond were issued. For example, if an issue contains a
bond bearing interest at a floating rate and a related bond bearing
interest at a rate equal to a fixed rate minus that floating rate, those
two bonds are treated as a single fixed yield bond only if neither bond
may be redeemed unless the other bond is also redeemed at the same time.
(c) through (f) [Reserved]. For guidance see Sec. 1.148-4.
(g) Yield on certain mortgage revenue and student loan bonds. For
purposes of section 148 and Sec. 1.148-4, section 143(g)(2)(C)(ii)
applies to the computation of yield on an issue of qualified mortgage
bonds or qualified veterans' mortgage bonds. For purposes of applying
sections 148 and 143(g) to a variable yield issue of qualified mortgage
bonds, qualified veterans' mortgage bonds, or qualified student loan
bonds, the yield on that issue is computed over the term of the issue,
and Sec. 1.148-4(d) does not apply to the issue. As of any date before
the final maturity date, the yield over the term of the issue is based
on the actual amounts paid or received to that date and the amounts that
are reasonably expected (as of that date) to be paid or received over
the remaining term of the issue.
(h) Qualified hedging transactions--(1) In general. Payments made or
received by an issuer under a qualified hedge (as defined in Sec. 1.148-
4(h)(2)) relating to bonds of an issue are taken into account (as
provided in paragraph (h)(3) of this section) to determine the yield on
the issue. Except as provided in paragraphs (h)(4) and (h)(5)(ii)(C) of
this section, the bonds to which a qualified hedge relates are treated
as variable yield bonds. These hedging rules apply solely for purposes
of sections 143(g), 148, and 149(d).
(2) (i) through (vi) [Reserved]. For guidance see Sec. 1.148-
4(h)(2).
(2)(vii) Timing and duration. For a contract to be a qualified hedge
under Sec. 1.148-4(h)(2), payments must not begin to accrue under the
contract on a date earlier than the issue date of the hedged bonds and
must not accrue longer than the hedged interest payments on the hedged
bonds.
(viii) [Reserved]. For guidance see Sec. 1.148-4(h).
(ix) Identification. For a contract to be a qualified hedge under
Sec. 1.148-4(h)(2), the contract must be identified by the actual issuer
on its books and records maintained for the hedged bonds not later than
three days after the date on which the parties enter into the contract.
The identification must specify the hedge provider, the terms of the
contract, and the hedged bonds. The identification must contain
sufficient detail to establish that the requirements of Sec. 1.148-
4(h)(2), and if applicable, paragraph (h)(4) of this section are
satisfied. The existence of the hedge must be noted on all forms filed
with the Internal Revenue Service for the issue on or after the date on
which the hedge is entered into.
(3) Accounting for qualified hedges--(i) In general. Except as
otherwise provided in paragraph (h)(4) of this section, payments made or
received by the issuer under a qualified hedge are treated as payments
made or received, as appropriate, on the hedged bonds that are taken
into account in determining the yield on those bonds. These payments are
reasonably allocated to the hedged bonds in the period to which the
payments relate, as determined under paragraph (h)(3)(iii) of this
section. Payments made or received by the issuer include payments deemed
made or received when a contract is terminated or deemed terminated
under this paragraph (h)(3). Payments reasonably allocable to the
reduction of risk of interest rate changes and to the hedge provider's
overhead under this paragraph (h) are included as payments made or
received under a qualified hedge.
(ii) Exclusions from hedge. Payments for services or other items
under the contract that are not expressly treated as payments under the
qualified hedge under paragraph (h)(3)(i) of this section are not
payments with respect to a qualified hedge.
[[Page 732]]
(iii) Timing and allocation of payments. The period to which a
payment made by the issuer relates is determined under general Federal
income tax principles, including, without limitation, Sec. 1.446-3, and
adjusted as necessary to reflect the end of a computation period and the
start of a new computation period. Except as provided in paragraphs
(h)(3)(iv) and (h)(5)(ii) of this section, a payment received by the
issuer is taken into account in the period that the interest payment
that the payment hedges is required to be made.
(iv) Termination payments--(A) Termination defined. A termination of
a qualified hedge includes any sale or other disposition of the hedge by
the issuer, or the acquisition by the issuer of an offsetting hedge. A
deemed termination occurs when the hedged bonds are redeemed and when a
hedge ceases to be a qualified hedge of the hedged bonds. In the case of
an assignment by a hedge provider of its remaining rights and
obligations on the hedge to a third party or a modification of the
hedging contract, the assignment or modification is treated as a
termination with respect to the issuer only if it results in a deemed
exchange of the hedge and a realization event under section 1001.
(B) General rule. A payment made or received by an issuer to
terminate a qualified hedge, including loss or gain realized or deemed
realized, is treated as a payment made or received on the hedged bonds,
as appropriate. The payment is reasonably allocated to the remaining
periods originally covered by the terminated hedge in a manner that
reflects the economic substance of the hedge.
(C) Special rule for terminations when bonds are redeemed. Except as
otherwise provided in this paragraph (h)(3)(iv)(C) and in paragraph
(h)(3)(iv)(D) of this section, when a qualified hedge is deemed
terminated because the hedged bonds are redeemed, the fair market value
of the contract on the redemption date is treated as a termination
payment made or received on that date. When hedged bonds are redeemed,
any payment received by the issuer on termination of a hedge, including
a termination payment or a deemed termination payment, reduces, but not
below zero, the interest payments made by the issuer on the hedged bonds
in the computation period ending on the termination date. The remainder
of the payment, if any, is reasonably allocated over the bond years in
the immediately preceding computation period or periods to the extent
necessary to eliminate the excess.
(D) Special rules for refundings. To the extent that the hedged
bonds are redeemed using the proceeds of a refunding issue, the
termination payment is accounted for under paragraph (h)(3)(iv)(B) of
this section by treating it as a payment on the refunding issue, rather
than the hedged bonds. In addition, to the extent that the refunding
issue, rather than the hedged bonds, has been redeemed, paragraph
(h)(3)(iv)(C) of this section applies to the termination payment by
treating it as a payment on the redeemed refunding issue.
(E) Safe harbor for certain non-level payments. A non-level payment
to terminate a hedge does not result in that hedge failing to satisfy
the applicable provisions of paragraph (h)(3)(iv)(B) of this section if
the payment is allocated to each bond year for which the hedge would
have been in effect in accordance with this paragraph (h)(3)(iv)(E). For
a variable yield issue, an equal amount (or for any short bond year, a
proportionate amount of the equal amount) must be allocated to each bond
year such that the sum of the present values of the annual amounts
equals the present value of the non-level payment. Present value is
computed as of the day the hedge is terminated, using the yield on the
hedged bonds, determined without regard to the non-level payment. The
yield used for this purpose is computed for the period beginning on the
first date the hedge is in effect and ending on the date the hedge is
terminated. On the other hand, for a fixed yield issue, the non-level
payment is taken into account as a single payment on the date it is
paid.
(4) Certain variable yield bonds treated as fixed yield bonds--(i)
In general. Except as otherwise provided in this paragraph (h)(4), if
the issuer of variable yield bonds enters into a qualified hedge, the
hedged bonds are treated as
[[Page 733]]
fixed yield bonds paying a fixed interest rate if:
(A) Start date. The date on which payments begin to accrue on the
hedge is not later than 15 days after the issue date of the hedged
bonds.
(B) Maturity. The term of the hedge is equal to the entire period
during which the hedged bonds bear interest at variable interest rates.
(C) Payments closely correspond. Payments to be received under the
hedge correspond closely in time to the hedged portion of the payments
on the hedged bonds. Hedge payments received within 15 days of the
related payments on the hedged bonds generally so correspond.
(D) Aggregate payments fixed. Taking into account all payments made
and received under the hedge and all payments on the hedged bonds (i.e.,
after netting all payments), the issuer's aggregate payments are fixed
and determinable as of a date not later than 15 days after the issue
date of the hedged bonds. Payments on bonds are treated as fixed for
purposes of this paragraph (h)(4)(i)(D) if payments on the bonds are
based, in whole or in part, on one interest rate, payments on the hedge
are based, in whole or in part, on a second interest rate that is
substantially the same as, but not identical to, the first interest rate
and payments on the bonds would be fixed if the two rates were
identical. Rates are treated as substantially the same if they are
reasonably expected to be substantially the same throughout the term of
the hedge. For example, an objective 30-day tax-exempt variable rate
index or other objective index (e.g., J.J. Kenny Index, PSA Municipal
swap index, a percentage of LIBOR) may be substantially the same as an
issuer's individual 30-day interest rate.
(ii) Accounting. Except as otherwise provided in this paragraph
(h)(4)(ii), in determining yield on the hedged bonds, all the issuer's
actual interest payments on the hedged bonds and all payments made and
received on a hedge described in paragraph (h)(4)(i) of this section are
taken into account. If payments on the bonds and payments on the hedge
are based, in whole or in part, on variable interest rates that are
substantially the same within the meaning of paragraph (h)(4)(i)(D) of
this section (but not identical), yield on the issue is determined by
treating the variable interest rates as identical. For example, if
variable rate bonds bearing interest at a weekly rate equal to the rate
necessary to remarket the bonds at par are hedged with an interest rate
swap under which the issuer receives payments based on a short-term
floating rate index that is substantially the same as, but not identical
to, the weekly rate on the bonds, the interest payments on the bonds are
treated as equal to the payments received by the issuer under the swap
for purposes of computing the yield on the bonds.
(iii) Effect of termination--(A) In general. Except as otherwise
provided in this paragraph (h)(4)(iii) and paragraph (h)(5) of this
section, the issue of which the hedged bonds are a part is treated as if
it were reissued as of the termination date of the qualified hedge
covered by paragraph (h)(4)(i) of this section in determining yield on
the hedged bonds for purposes of Sec. 1.148-3. The redemption price of
the retired issue and the issue price of the new issue equal the
aggregate values of all the bonds of the issue on the termination date.
In computing the yield on the new issue for this purpose, any
termination payment is accounted for under paragraph (h)(3)(iv) of this
section, applied by treating the termination payment as made or received
on the new issue under this paragraph (h)(4)(iii).
(B) Effect of early termination. Except as otherwise provided in
this paragraph (h)(4)(iii), the general rules of paragraph (h)(4)(i) of
this section do not apply in determining the yield on the hedged bonds
for purposes of Sec. 1.148-3 if the hedge is terminated or deemed
terminated within 5 years after the issue date of the issue of which the
hedged bonds are a part. Thus, the hedged bonds are treated as variable
yield bonds for purposes of Sec. 1.148-3 from the issue date.
(C) Certain terminations disregarded. This paragraph (h)(4)(iii)
does not apply to a termination if, based on the facts and circumstances
(e.g., taking into account both the termination and any qualified hedge
that immediately replaces the terminated hedge), there
[[Page 734]]
is no change in the yield. In addition, this paragraph (h)(4)(iii) does
not apply to a termination caused by the bankruptcy or insolvency of the
hedge provider if the Commissioner determines that the termination
occurred without any action by the issuer (other than to protect its
rights under the hedge).
(5) Special rules for certain hedges--(i) Certain acquisition
payments. A payment to the issuer by the hedge provider (e.g., an up-
front payment for an off-market swap) in connection with the acquisition
of a hedge that, but for that payment, would be a qualified hedge, does
not cause the hedge to fail to be a qualified hedge provided the payment
to the issuer and the issuer's payments under the hedge in excess of
those that it would make if the hedge bore rates equal to the on-market
rates for the hedge are separately identified in a certification of the
hedge provider and not taken into account in determining the yield on
the issue of which the hedged bonds are a part. The on-market rates are
determined as of the date the parties enter into the contract.
(ii) Anticipatory hedges--(A) In general. A contract does not fail
to be a hedge under Sec. 1.148-4(h)(2)(i)(A) solely because it is
entered into with respect to an anticipated issuance of tax-exempt
bonds. The identification required under Sec. 1.148-4T(h)(2)(ix) must
specify the reasonably expected governmental purpose, principal amount,
and issue date of the hedged bonds, and the manner in which interest is
reasonably expected to be computed.
(B) Special rules. Payments made in connection with the issuance of
a bond to terminate or otherwise close (terminate) an anticipatory hedge
of that bond do not prevent the hedge from satisfying the requirements
of Sec. 1.148-4(h)(2)(vi) and paragraph (h)(2)(vii) of this section.
Amounts received or deemed to be received by the issuer in connection
with the issuance of the hedged bonds to terminate an anticipatory hedge
are treated as proceeds of the hedged bonds.
(C) Fixed yield treatment. A bond that is hedged with an
anticipatory hedge is a fixed yield bond if, taking into account
payments on the hedge that are made or fixed on or before the issue date
of the bond and the payments to be made on the bond, the bond satisfies
the definition of fixed yield bond. See also paragraph (h)(4) of this
section.
(6) Authority of the Commissioner--(i) In general. A contract is not
a qualified hedge if the Commissioner determines, based on all the facts
and circumstances, that treating the contract as a qualified hedge would
provide a material potential for arbitrage, or a principal purpose for
entering into the contract is that arbitrage potential. For example, a
contract that requires a substantial nonperiodic payment may constitute,
in whole or part, an embedded loan, investment-type property, or other
investment.
(ii) Other qualified hedges. The Commissioner, by publication of a
revenue ruling or revenue procedure, may specify contracts that do not
otherwise meet the requirements of Sec. 1.148-4(h)(2) as qualified
hedges and contracts that do not otherwise meet the requirements of
paragraph (h)(4) of this section as causing the hedged bonds to be
treated as fixed yield bonds.
(iii) Recomputation of yield. If an issuer enters into a hedge that
is not properly identified, fails to properly associate an anticipatory
hedge with the hedged bonds, or otherwise fails to meet the requirements
of this section, the Commissioner may recompute the yield on the issue
taking the hedge into account if the failure to take the hedge into
account distorts that yield or otherwise fails to clearly reflect the
economic substance of the transaction.
[T.D. 8538, 59 FR 24042, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-5A Yield and valuation of investments.
(a) through (b)(2)(ii) [Reserved]. For guidance see Sec. 1.148-5.
(b)(2)(iii) Permissive application of single investment rules to
certain yield restricted investments for all purposes of section 148.
For all purposes of section 148, an issuer may treat all of the yield
restricted nonpurpose investments in a refunding escrow and a sinking
fund that is reasonably expected as of the issue date to be maintained
to reduce the yield on the investments in the refunding escrow as a
single investment
[[Page 735]]
having a single yield, determined under Sec. 1.148(b)(2).
(b) (2)(iv) through (c)(1) [Reserved]. For guidance see Sec. 1.148-
5.
(c)(2) Manner of payment--(i) In general. Except as otherwise
provided in Sec. 1.148-5(c)(2)(ii), an amount is paid under Sec. 1.148-
5(c) if it is paid to the United States at the same time and in the same
manner as rebate amounts are required to be paid or at such other time
or in such manner as the Commissioner may prescribe. For example, yield
reduction payments must be made on or before the date of required rebate
installment payments as described in Sec. 1.148-3(f). The date a payment
is required to be paid is determined without regard to Sec. 1.148-3(h).
An amount that is paid untimely is not taken into account under this
paragraph (c) unless the Commissioner determines that the failure to pay
timely is not due to willful neglect. The provisions of Sec. 1.148-3(i)
apply to payments made under Sec. 1.148-5(c).
(c)(2)(ii) through (c)(3)(i) [Reserved] For guidance see Sec. 1.148-
5.
(c)(3)(ii) Exception to yield reduction payments rule for advance
refunding issues. Section 1.148-5(c)(1) does not apply to investments
allocable to gross proceeds of an advance refunding issue, other than--
(A) Transferred proceeds to which Sec. 1.148-5(c)(3)(i)(C) applies;
(B) Replacement proceeds to which Sec. 1.148-5(c)(3)(i)(F) applies;
and
(C) Transferred proceeds to which Sec. 1.148-5(c)(3)(i)(E) applies,
but only to the extent necessary to satisfy yield restriction under
section 148(a) on those proceeds treating all investments allocable to
those proceeds as a separate class.
(d)(1) through (d)(3)(i) [Reserved]. For guidance see Sec. 1.148-5.
(d)(3)(ii) Exception to fair market value requirement for
transferred proceeds allocations, universal cap allocations, and
commingled funds. Section 1.148-5(d)(3)(i) does not apply if the
investment is allocated from one issue to another issue as a result of
the transferred proceeds allocation rule under Sec. 1.148-9(b) or the
universal cap rule under Sec. 1.148-6(b)(2), provided that both issues
consist exclusively of tax-exempt bonds. In addition, Sec. 1.148-
5(d)(3)(i) does not apply to investments in a commingled fund (other
than a bona fide debt service fund) unless it is an investment being
initially deposited in or withdrawn from a commingled fund described in
Sec. 1.148-6(e)(5)(iii).
(e)(1) through (e)(2)(ii)(A) [Reserved]. For guidance see
Sec. 1.148-5.
(e)(2)(ii)(B) External commingled funds. For any semiannual period,
a commingled fund satisfies the 10 percent requirement of Sec. 1.148-
5(e)(2)(ii)(B) if--
(1) Based on average amounts on deposit, this requirement was
satisfied for the prior semiannual period; and
(2) The fund does not accept deposits that would cause it to fail to
meet this requirement.
(iii) Special rule for guaranteed investment contracts. For a
guaranteed investment contract, a broker's commission or similar fee
paid on behalf of either an issuer or the provider is treated as an
administrative cost and, except in the case of an issue that satisfies
section 148(f)(4)(D)(i), is not a qualified administrative cost to the
extent that the present value of the commission, as of the date the
contract is allocated to the issue, exceeds the present value of annual
payments equal to .05 percent of the weighted average amount reasonably
expected to be invested each year of the term of the contract. For this
purpose, present value is computed using the taxable discount rate used
by the parties to compute the commission or, if not readily
ascertainable, a reasonable taxable discount rate.
[T.D. 8538, 59 FR 24045, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-6A General allocation and accounting rules.
(a) through (d)(3)(iii)(B) [Reserved]. For guidance see Sec. 1.148-
6.
(d)(3)(iii)(C) Qualified endowment funds treated as unavailable. For
a 501(c)(3) organization, a qualified endowment fund is treated as
unavailable. A fund is a qualified endowment fund if--
(1) The fund is derived from gifts or bequests, or the income
thereon, that were neither made nor reasonably expected to be used to
pay working capital expenditures;
(2) Pursuant to reasonable, established practices of the
organization,
[[Page 736]]
the governing body of the 501(c)(3) organization designates and
consistently operates the fund as a permanent endowment fund or quasi-
endowment fund restricted as to use; and
(3) There is an independent verification (e.g., from an independent
certified public accountant) that the fund is reasonably necessary as
part of the organization's permanent capital.
[T. D. 8538, 59 FR 24045, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-9A Arbitrage rules for refunding issues.
(a) through (c)(2)(ii)(A) [Reserved]. For guidance see Sec. 1.148-9.
(c)(2)(ii)(B) Permissive allocation of non-proceeds to earliest
expenditures. Excluding amounts covered by Sec. 1.148-9(c)(2)(ii)(A) and
subject to any required earlier expenditure of those amounts, any
amounts in a mixed escrow that are not proceeds of a refunding issue may
be allocated to the earliest maturing investments in the mixed escrow,
provided that those investments mature and the proceeds thereof are
expended before the date of any expenditure from the mixed escrow to pay
any principal of the prior issue.
(d) through (h)(4)(v) [Reserved]. For guidance see Sec. 1.148-9.
(h)(4)(vi) Exception for refundings of interim notes. Section 1.148-
9(h)(4)(v) need not be applied to refunding bonds issued to provide
permanent financing for one or more projects if the prior issue had a
term of less than 3 years and was sold in anticipation of permanent
financing, but only if the aggregate term of all prior issues sold in
anticipation of permanent financing was less than 3 years.
[T.D. 8538, 59 FR 24045, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-10A Anti-abuse rules and authority of Commissioner.
(a) through (b)(1) [Reserved]. For guidance see Sec. 1.148-10.
(b)(2) Application. The provisions of Sec. 1.148-10(b) only apply to
the portion of an issue that, as a result of actions taken (or actions
not taken) after the issue date, overburdens the market for tax-exempt
bonds, except that for an issue that is reasonably expected as of the
issue date to overburden the market, those provisions apply to all of
the gross proceeds of the issue.
(c) through (c)(2)(viii) [Reserved]. For guidance see Sec. 1.148-10.
(c)(2)(ix) For purposes of Sec. 1.148-10(c)(2), excess gross
proceeds do not include gross proceeds allocable to fees for a qualified
hedge for the refunding issue.
[T.D. 8538, 59 FR 24046, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25507, May 9, 1997]
Sec. 1.148-11A Effective dates.
(a) through (c)(3) [Reserved]. For guidance see Sec. 1.148-11.
(c)(4) Retroactive application of overpayment recovery provisions.
An issuer may apply the provisions of Sec. 1.148-3(i) to any issue that
is subject to section 148(f) or to sections 103(c)(6) or 103A(i) of the
Internal Revenue Code of 1954.
(d) through (h) [Reserved]. For guidance see Sec. 1.148-11.
(i) Transition rules for certain amendments--(1) In general. Section
1.103-8(a)(5), Secs. 1.148-1, 1.148-2, 1.148-3, 1.148-4, .148-5, 1.148-
6, 1.148-7, 1.148-8, 1.148-9, 1.148-10, 1.148-11, 1.149(d)-1, and 1.150-
1 as in effect on June 7, 1994 (see 26 CFR part 1 as revised April 1,
1997), and Secs. 1.148-1A through 1.148-11A, 1.149(d)-1A, and 1.150-1A
apply, in whole, but not in part--
(i) To bonds sold after June 6, 1994, and before July 8, 1997;
(ii) To bonds issued before July 1, 1993, that are outstanding on
June 7, 1994, if the first time the issuer applies Secs. 1.148-1 through
1.148-11 as in effect on June 7, 1994 (see 26 CFR part 1 as revised
April 1, 1997), to the bonds under Sec. 1.148-11 (b) or (c) is after
June 6, 1994, and before July 8, 1997;
(iii) At the option of the issuer, to bonds to which Secs. 1.148-1
through 1.148-11, as in effect on July 1, 1993 (see 26 CFR part 1 as
revised April 1, 1994), apply, if the bonds are outstanding on June 7,
1994, and the issuer applies Sec. 1.103-8(a)(5), Secs. 1.148-1, 1.148-2,
1.148-3, 1.148-4, 1.148-5, 1.148-6, 1.148-7, 1.148-8, 1.148-9, 1.148-10,
1.148-11, 1.149(d)-1, and 1.150-1 as in effect on June 7, 1994 (see 26
CFR part 1 as revised April 1, 1997), and Secs. 1.148-1A through 1.148-
11A, 1.149(d)-1A, and 1.150-1A to the bonds before July 8, 1997.
[[Page 737]]
(2) Special rule. For purposes of paragraph (i)(1) of this section,
any reference to a particular paragraph of Secs. 1.148-1T, 1.148-2T,
1.148-3T, 1.148-4T, 1.148-5T, 1.148-6T, 1.148-9T, 1.148-10T, 1.148-11T,
1.149(d)-1T, or 1.150-1T shall be applied as a reference to the
corresponding paragraph of Secs. 1.148-1A, 1.148-2A, 1.148-3A, 1.148-4A,
1.148-5A, 1.148-6A, 1.148-9A, 1.148-10A, 1.148-11A, 1.149(d)-1A, or
1.150-1A, respectively.
(3) Identification of certain hedges. For any hedge entered into
after June 18, 1993, and on or before June 6, 1994, that would be a
qualified hedge within the meaning of Sec. 1.148-4(h)(2), as in effect
on June 7, 1994 (see 26 CFR part 1 as revised April 1, 1997), except
that the hedge does not meet the requirements of Sec. 1.148-4A(h)(2)(ix)
because the issuer failed to identify the hedge not later than 3 days
after which the issuer and the provider entered into the contract, the
requirements of Sec. 1.148-4A(h)(2)(ix) are treated as met if the
contract is identified by the actual issuer on its books and records
maintained for the hedged bonds not later than July 8, 1997.
[T.D. 8538, 59 FR 24046, May 10, 1994. Redesignated and amended by T.D.
8718, 62 FR 25507, 25513, May 9, 1997]
Sec. 1.149(d)-1A Limitations on advance refundings.
(a) through (f)(2) [Reserved]. For guidance see Sec. 1.149(d)-1.
(f)(3) Application of savings test to multipurpose issues. Except as
otherwise provided in this paragraph (f)(3), the multipurpose issue
rules in Sec. 1.148-9(h) apply for purposes of the savings test. If any
separate issue in a multipurpose issue increases the aggregate present
value debt service savings on the entire multipurpose issue or reduces
the present value debt service losses on that entire multipurpose issue,
that separate issue satisfies the savings test.
[T.D. 8538, 59 FR 24046, May 10, 1994. Redesignated by T.D. 8718, 62 FR
25513, May 9, 1997]