[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2017 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          

          Title 26

Internal Revenue


________________________

Part 1 (Secs. 1.61 to 1.139)

                         Revised as of April 1, 2017

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2017
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



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

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     633
      Alphabetical List of Agencies Appearing in the CFR......     653
      Table of OMB Control Numbers............................     663
      List of CFR Sections Affected...........................     681

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

                     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, 2017), 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 
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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.

PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
the revision date stated on the cover of each volume are not carried. 
Code users may find the text of provisions in effect on any given date 
in the past by using the appropriate List of CFR Sections Affected 
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Affected'' is published at the end of each CFR volume. For changes to 
the Code prior to the LSA listings at the end of the volume, consult 
previous annual editions of the LSA. For changes to the Code prior to 
2001, consult the List of CFR Sections Affected compilations, published 
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.

``[RESERVED]'' TERMINOLOGY

    The term ``[Reserved]'' is used as a place holder within the Code of 
Federal Regulations. An agency may add regulatory information at a 
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used 
editorially to indicate that a portion of the CFR was left vacant and 
not accidentally dropped due to a printing or computer error.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
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to materials already published elsewhere. For an incorporation to be 
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if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
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CFR INDEXES AND TABULAR GUIDES

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separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Authorities 
and Rules. A list of CFR titles, chapters, subchapters, and parts and an 
alphabetical list of agencies publishing in the CFR are also included in 
this volume.

[[Page vii]]

    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

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in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
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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 
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ELECTRONIC SERVICES

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CFR Sections Affected), The United States Government Manual, the Federal 
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register.
    The e-CFR is a regularly updated, unofficial editorial compilation 
of CFR material and Federal Register amendments, produced by the Office 
of the Federal Register and the Government Publishing Office. It is 
available at www.ecfr.gov.

    Oliver A. Potts,
    Director,
    Office of the Federal Register.
    April 1, 2017.

                                
                                      
                            

  

[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty-two volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2017. The first fifteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1.60; 
Secs. 1.61-1.139; Secs. 1.140-1.169; Secs. 1.170-1.300; Secs. 1.301-
1.400; Secs. 1.401-1.409; Secs. 1.410-1.440; 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. 1.1401-1.1550; and Sec. 1.1551 to end 
of part 1. The sixteenth 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.

    For this volume, Cheryl E. Sirofchuck was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of John 
Hyrum Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




            (This book contains part 1, Secs. 1.61 to 1.139)

  --------------------------------------------------------------------
                                                                    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, Mar. 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes (Continued)....................           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 (CONTINUED)--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.
1.61-22  Taxation of split-dollar life insurance arrangements.
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.
1.66-1  Treatment of community income.
1.66-2  Treatment of community income where spouses live apart.
1.66-3  Denial of the Federal income tax benefits resulting from the 
          operation of community property law where spouse not notified.
1.66-4  Request for relief from the Federal income tax liability 
          resulting from the operation of community property law.
1.66-5  Effective date.
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).
1.67-4  Costs paid or incurred by estates or non-grantor trusts.

               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.

[[Page 6]]

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.
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.
1.105-5  Accident and health plans.
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  [Reserved]
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.
1.108-7  Reduction of attributes.
1.108-8  Indebtedness satisfied by partnership interest.
1.108-9  Application of the bankruptcy and the insolvency provisions of 
          section 108 to grantor trusts and disregarded entities.
1.108(c)-1T  [Reserved]
1.108(i)-0  Definitions and effective/applicability dates.

[[Page 7]]

1.108(i)-1  Deferred discharge of indebtedness income and deferred 
          original issue discount deductions of C corporations.
1.108(i)-2  Application of section 108(i) to partnerships and S 
          corporations.
1.108(i)-3  Rules for the deduction of OID.
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.
1.118-1  Contributions to the capital of a corporation.
1.118-2  Contribution in aid of construction.
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.
1.121-4  Special rules.
1.121-5  Suspension of 5-year period for certain members of the 
          uniformed services and Foreign Service.
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.
1.125-3  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).

    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.
    Section 1.66-4 also issued under 26 U.S.C. 66(c);
    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 1.108(i)-0 also issued under 26 U.S.C. 108(i)(7) and 1502.
    Section 1.108(i)-1 also issued under 26 U.S.C. 108(i)(7) and 1502.
    Section 1.108(i)-2 also issued under 26 U.S.C. 108(i)(7).
    Section 1.108(i)-2T also issued under 26 U.S.C. 108(i)(7).

[[Page 8]]

    Section 1.108(i)-3 also issued under 26 U.S.C. 108(i)(7) and 1502.
    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.

    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 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

[[Page 9]]

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 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

[[Page 10]]

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 example, if an employee or independent contractor 
is the owner (as defined in Sec. 1.61-22(c)(1)) of a life insurance 
contract and the payments with regard to such contract are not split-
dollar loans under Sec. 1.7872-15(b)(1), the employee or independent 
contractor must include in income the amount of any such payments by the 
employer or service recipient with respect to such contract during any 
year to the extent that the employee's or independent contractor's 
rights to the life insurance contract are substantially vested (within 
the meaning of Sec. 1.83-3(b)). This result is the same regardless of 
whether the employee or independent contractor has at all times been the 
owner of the life insurance contract or the contract previously has been 
owned by the employer or service recipient as part of a split-dollar 
life insurance arrangement (as defined in Sec. 1.61-22(b)(1) or (2)) and 
was transferred by the employer or service recipient to the employee or 
independent contractor under Sec. 1.61-22(g). 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.
    (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.

[[Page 11]]

    (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; 
T.D. 9092, 68 FR 54344, Sept. 17, 2003]



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 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,

[[Page 12]]

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 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

[[Page 13]]

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 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

[[Page 14]]

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 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

[[Page 15]]

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.
    (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 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

[[Page 16]]

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
$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

[[Page 17]]

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.
    (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

[[Page 18]]

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 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

[[Page 19]]

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, 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

[[Page 20]]

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.
    (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

[[Page 21]]

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 (15,000  x  $.21 
+ 5,000  x  $.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 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

[[Page 22]]

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 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

[[Page 23]]

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 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

[[Page 24]]

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 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

[[Page 25]]

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 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

[[Page 26]]

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, 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

[[Page 27]]

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 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

[[Page 28]]

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 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.

[[Page 29]]

    (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 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

[[Page 30]]

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.


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

[[Page 31]]

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 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 operating 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

[[Page 32]]

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--
    (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

[[Page 33]]

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 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

[[Page 34]]

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.
    (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.

[[Page 35]]

    (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 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.

[[Page 36]]

    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,
    (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

[[Page 37]]

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)

    (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.

[[Page 38]]

    (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--
    (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

[[Page 39]]

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 
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

[[Page 40]]

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 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

[[Page 41]]

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 and except as otherwise 
provided by the Commissioner in published guidance (see 
Sec. 601.601(d)(2) of this chapter), 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 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; T.D. 9135, 69 FR 41192, 
July 8, 2004]



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

[[Page 42]]

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, 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

[[Page 43]]

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--
    (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.

[[Page 44]]

    (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 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.

[[Page 45]]

    (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 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).

[[Page 46]]

    (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;
    (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

[[Page 47]]

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 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.

[[Page 48]]

    (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.
    (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.

[[Page 49]]


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 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.

[[Page 50]]

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 (.4  x  ($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 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;

[[Page 51]]

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 ($9,250  x  .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 (.20  x  
$15,000). Eighty percent of $15,000, or $12,000, is excluded from A's 
income as a working condition fringe.
    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 (($15,000  x  
.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 (.20  x  $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

[[Page 52]]

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/($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

[[Page 53]]

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 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

[[Page 54]]

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 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--

[[Page 55]]

    (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. 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,

[[Page 56]]

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--
    (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

[[Page 57]]

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) 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

[[Page 58]]

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.
    (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

[[Page 59]]

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 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

[[Page 60]]

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 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

[[Page 61]]

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 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

[[Page 62]]

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 
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

[[Page 63]]

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 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 
((15,000  x  $.24) + (5,000  x  $.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

[[Page 64]]

    (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 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

[[Page 65]]

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 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

[[Page 66]]

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 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

[[Page 67]]

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 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

[[Page 68]]

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 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

[[Page 69]]

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 
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

[[Page 70]]

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 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: $100.36 ((.313  x  (($.1449  x  500) + ($.1105  x  
1,000) + ($.1062  x  500))) + $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.

[[Page 71]]

    (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 4  x  ((300 percent  x  the 
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 
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

[[Page 72]]

(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 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.

[[Page 73]]

    (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 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

[[Page 74]]

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 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

[[Page 75]]

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 employer. Except as otherwise 
provided in paragraph (g)(13) or paragraph (g)(14)(iii) of this section 
or in 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 
in a calendar year, the rule must be used to value all flights provided 
to all employees in the calendar year.
    (ii) Use by employee. Except as otherwise provided in paragraph 
(g)(13) or (g)(14)(iii) of this section or in 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.
    (iii) Exception for entertainment flights provided to specified 
individuals after October 22, 2004. Notwithstanding the provisions of 
paragraph (g)(14)(i) of this section, an employer may use the general 
valuation rules of paragraph (b) of this section to value the 
entertainment use of an aircraft provided after October 22, 2004, to a 
specified individual. An employer who uses the general valuation rules 
of paragraph (b) of this section to value any entertainment use of an 
aircraft by a specified individual in a calendar year must use the 
general valuation rules of paragraph (b) of this section to value all 
entertainment use of aircraft provided to all specified individuals 
during that calendar year.
    (A) Specified individuals defined. For purposes of paragraph 
(g)(14)(iii) of this section, specified individual is defined in section 
274(e)(2)(B) and Sec. 1.274-9(b).
    (B) Entertainment defined. For purposes of paragraph (g)(14)(iii) of 
this section, entertainment is defined in Sec. 1.274-2(b)(1).
    (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. 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

[[Page 76]]

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 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

[[Page 77]]

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 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

[[Page 78]]

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; T.D. 9597, 
77 FR 45483, Aug. 1, 2012]



Sec. 1.61-22  Taxation of split-dollar life insurance arrangements.

    (a) Scope--(1) In general. This section provides rules for the 
taxation of a split-dollar life insurance arrangement for purposes of 
the income tax, the gift tax, the Federal Insurance Contributions Act 
(FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement 
Tax Act (RRTA), and the Self-Employment Contributions Act of 1954 
(SECA). For the Collection of Income Tax at Source on Wages, this 
section also provides rules for the taxation of a split-dollar life 
insurance arrangement, other than a payment under a split-dollar life 
insurance arrangement that is a split-dollar loan under Sec. 1.7872-
15(b)(1). A split-dollar life insurance arrangement (as defined in 
paragraph (b) of this section) is subject to the rules of paragraphs (d) 
through (g) of this section, Sec. 1.7872-15, or general tax rules. For 
rules to determine which rules apply to a split-dollar life insurance 
arrangement, see paragraph (b)(3) of this section.
    (2) Overview. Paragraph (b) of this section defines a split-dollar 
life insurance arrangement and provides rules to determine whether an 
arrangement is subject to the rules of paragraphs (d) through (g) of 
this section, Sec. 1.7872-15, or general tax rules. Paragraph (c) of 
this section defines certain other terms. Paragraph (d) of this section 
sets forth rules for the taxation of economic benefits provided under a 
split-

[[Page 79]]

dollar life insurance arrangement. Paragraph (e) of this section sets 
forth rules for the taxation of amounts received under a life insurance 
contract that is part of a split-dollar life insurance arrangement. 
Paragraph (f) of this section provides rules for additional tax 
consequences of a split-dollar life insurance arrangement, including the 
treatment of death benefit proceeds. Paragraph (g) of this section 
provides rules for the transfer of a life insurance contract (or an 
undivided interest in the contract) that is part of a split-dollar life 
insurance arrangement. Paragraph (h) of this section provides examples 
illustrating the application of this section. Paragraph (j) of this 
section provides the effective date of this section.
    (b) Split-dollar life insurance arrangement--(1) In general. A 
split-dollar life insurance arrangement is any arrangement between an 
owner and a non-owner of a life insurance contract that satisfies the 
following criteria--
    (i) Either party to the arrangement pays, directly or indirectly, 
all or any portion of the premiums on the life insurance contract, 
including a payment by means of a loan to the other party that is 
secured by the life insurance contract;
    (ii) At least one of the parties to the arrangement paying premiums 
under paragraph (b)(1)(i) of this section is entitled to recover (either 
conditionally or unconditionally) all or any portion of those premiums 
and such recovery is to be made from, or is secured by, the proceeds of 
the life insurance contract; and
    (iii) The arrangement is not part of a group-term life insurance 
plan described in section 79 unless the group-term life insurance plan 
provides permanent benefits to employees (as defined in Sec. 1.79-0).
    (2) Special rule--(i) In general. Any arrangement between an owner 
and a non-owner of a life insurance contract is treated as a split-
dollar life insurance arrangement (regardless of whether the criteria of 
paragraph (b)(1) of this section are satisfied) if the arrangement is 
described in paragraph (b)(2)(ii) or (iii) of this section.
    (ii) Compensatory arrangements. An arrangement is described in this 
paragraph (b)(2)(ii) if the following criteria are satisfied--
    (A) The arrangement is entered into in connection with the 
performance of services and is not part of a group-term life insurance 
plan described in section 79;
    (B) The employer or service recipient pays, directly or indirectly, 
all or any portion of the premiums; and
    (C) Either--
    (1) The beneficiary of all or any portion of the death benefit is 
designated by the employee or service provider or is any person whom the 
employee or service provider would reasonably be expected to designate 
as the beneficiary; or
    (2) The employee or service provider has any interest in the policy 
cash value of the life insurance contract.
    (iii) Shareholder arrangements. An arrangement is described in this 
paragraph (b)(2)(iii) if the following criteria are satisfied--
    (A) The arrangement is entered into between a corporation and 
another person in that person's capacity as a shareholder in the 
corporation;
    (B) The corporation pays, directly or indirectly, all or any portion 
of the premiums; and
    (C) Either--
    (1) The beneficiary of all or any portion of the death benefit is 
designated by the shareholder or is any person whom the shareholder 
would reasonably be expected to designate as the beneficiary; or
    (2) The shareholder has any interest in the policy cash value of the 
life insurance contract.
    (3) Determination of whether this section or Sec. 1.7872-15 applies 
to a split-dollar life insurance arrangement--(i) Split-dollar life 
insurance arrangements involving split-dollar loans under Sec. 1.7872-
15. Except as provided in paragraph (b)(3)(ii) of this section, 
paragraphs (d) through (g) of this section do not apply to any split-
dollar loan as defined in Sec. 1.7872-15(b)(1). Section 1.7872-15 
applies to any such loan. See paragraph (b)(5) of this section for the 
treatment of a payment made by a non-owner under a split-dollar life 
insurance arrangement if the payment is not a split-dollar loan.
    (ii) Exceptions. Paragraphs (d) through (g) of this section apply 
(and

[[Page 80]]

Sec. 1.7872-15 does not apply) to any split-dollar life insurance 
arrangement if--
    (A) The arrangement is entered into in connection with the 
performance of services, and the employer or service recipient is the 
owner of the life insurance contract (or is treated as the owner of the 
contract under paragraph (c)(1)(ii)(A)(1) of this section); or
    (B) The arrangement is entered into between a donor and a donee (for 
example, a life insurance trust) and the donor is the owner of the life 
insurance contract (or is treated as the owner of the contract under 
paragraph (c)(1)(ii)(A)(2) of this section).
    (4) Consistency requirement. A split-dollar life insurance 
arrangement described in paragraph (b)(1) or (2) of this section must be 
treated in the same manner by the owner and the non-owner of the life 
insurance contract under either the rules of this section or 
Sec. 1.7872-15. In addition, the owner and non-owner must fully account 
for all amounts under the arrangement under paragraph (b)(5) of this 
section, paragraphs (d) through (g) of this section, or Sec. 1.7872-15.
    (5) Non-owner payments that are not split-dollar loans. If a non-
owner of a life insurance contract makes premium payments (directly or 
indirectly) under a split-dollar life insurance arrangement, and the 
payments are neither split-dollar loans nor consideration for economic 
benefits described in paragraph (d) of this section, then neither the 
rules of paragraphs (d) through (g) of this section nor the rules in 
Sec. 1.7872-15 apply to such payments. Instead, general income tax, 
employment tax, self-employment tax, and gift tax principles apply to 
the premium payments. See, for example, Sec. 1.61-2(d)(2)(ii)(A).
    (6) Waiver, cancellation, or forgiveness. If a repayment obligation 
described in Sec. 1.7872-15(a)(2) is waived, cancelled, or forgiven at 
any time, then the parties must take the amount waived, cancelled, or 
forgiven into account in accordance with the relationships between the 
parties (for example, as compensation in the case of an employee-
employer relationship).
    (7) Change in the owner. If payments made by a non-owner to an owner 
were treated as split-dollar loans under Sec. 1.7872-15 and the split-
dollar life insurance arrangement is modified such that, after the 
modification, the non-owner is the owner (within the meaning of 
paragraph (c)(1) of this section) of the life insurance contract under 
the arrangement, paragraphs (d) through (g) of this section apply to the 
split-dollar life insurance arrangement from the date of the 
modification. The payments made (both before and after the modification) 
are not treated as split-dollar loans under Sec. 1.7872-15 on or after 
the date of the modification. The non-owner of the life insurance 
contract under the modified split-dollar life insurance arrangement must 
fully take into account all economic benefits provided under the 
arrangement under paragraph (d) of this section on or after the date of 
the modification. For the treatment of a transfer of the contract when 
the unmodified arrangement is governed by paragraphs (d) through (g) of 
this section, see paragraph (g) of this section.
    (c) Definitions. The following definitions apply for purposes of 
this section:
    (1) Owner--(i) In general. With respect to a life insurance 
contract, the person named as the policy owner of such contract 
generally is the owner of such contract. If two or more persons are 
named as policy owners of a life insurance contract and each person has, 
at all times, all the incidents of ownership with respect to an 
undivided interest in the contract, each person is treated as the owner 
of a separate contract to the extent of such person's undivided 
interest. If two or more persons are named as policy owners of a life 
insurance contract but each person does not have, at all times, all the 
incidents of ownership with respect to an undivided interest in the 
contract, the person who is the first-named policy owner is treated as 
the owner of the entire contract.
    (ii) Special rule for certain arrangements--(A) In general. 
Notwithstanding paragraph (c)(1)(i) of this section--
    (1) An employer or service recipient is treated as the owner of a 
life insurance contract under a split-dollar life insurance arrangement 
that is entered into in connection with the performance of services if, 
at all times, the only economic benefit that will be provided under the 
arrangement is current

[[Page 81]]

life insurance protection as described in paragraph (d)(3) of this 
section; and
    (2) A donor is treated as the owner of a life insurance contract 
under a split-dollar life insurance arrangement that is entered into 
between a donor and a donee (for example, a life insurance trust) if, at 
all times, the only economic benefit that will be provided under the 
arrangement is current life insurance protection as described in 
paragraph (d)(3) of this section.
    (B) Modifications. If an arrangement described in paragraph 
(c)(1)(ii)(A) of this section is modified such that the arrangement is 
no longer described in paragraph (c)(1)(ii)(A) of this section, the 
following rules apply:
    (1) If, immediately after such modification, the employer, service 
recipient, or donor is the owner of the life insurance contract under 
the split-dollar life insurance arrangement (determined without regard 
to paragraph (c)(1)(ii)(A) of this section), the employer, service 
recipient, or donor continues to be treated as the owner of the life 
insurance contract.
    (2) If, immediately after such modification, the employer, service 
recipient, or donor is not the owner of the life insurance contract 
under the split-dollar life insurance arrangement (determined without 
regard to paragraph (c)(1)(ii)(A) of this section), the employer, 
service recipient, or donor is treated as having made a transfer of the 
entire life insurance contract to the employee, service provider, or 
donee under the rules of paragraph (g) of this section as of the date of 
such modification.
    (3) For purposes of this paragraph (c)(1)(ii)(B), entering into a 
successor split-dollar life insurance arrangement that has the effect of 
providing any economic benefit in addition to that described in 
paragraph (d)(3) of this section is treated as a modification of the 
prior split-dollar life insurance arrangement.
    (iii) Attribution rules for compensatory arrangements. For purposes 
of this section, if a split-dollar life insurance arrangement is entered 
into in connection with the performance of services, the employer or 
service recipient is treated as the owner of the life insurance contract 
if the owner (within the meaning of paragraph (c)(1)(i) of this section) 
of the life insurance contract under the split-dollar life insurance 
arrangement is--
    (A) A trust described in section 402(b);
    (B) A trust that is treated as owned (within the meaning of sections 
671 through 677) by the employer or the service recipient;
    (C) A welfare benefit fund within the meaning of section 419(e)(1); 
or
    (D) A member of the employer or service recipient's controlled group 
(within the meaning of section 414(b)) or a trade or business that is 
under common control with the employer or service recipient (within the 
meaning of section 414(c)).
    (iv) Life insurance contracts owned by partnerships. [Reserved]
    (2) Non-owner--(i) Definition. With respect to a life insurance 
contract, a non-owner is any person (other than the owner of such 
contract under paragraph (c)(1) of this section) that has any direct or 
indirect interest in such contract (but not including a life insurance 
company acting only in its capacity as the issuer of a life insurance 
contract).
    (ii) Example. The following example illustrates the provisions of 
this paragraph (c)(2):

    Example. (i) On January 1, 2009, Employer R and Trust T, an 
irrevocable life insurance trust that is not treated under sections 671 
through 677 as owned by a grantor or other person, enter into a split-
dollar life insurance arrangement in connection with the performance of 
services under which R will pay all the premiums on the life insurance 
contract until the termination of the arrangement or the death of E, an 
employee of R. C, the beneficiary of T, is E's child. R is the owner of 
the contract under paragraph (c)(1)(i) of this section. E is the insured 
under the life insurance contract. Upon termination of the arrangement 
or E's death, R is entitled to receive the lesser of the aggregate 
premiums or the policy cash value of the contract and T will be entitled 
to receive any remaining amounts. Under the terms of the arrangement and 
applicable state law, the policy cash value is fully accessible by R and 
R's creditors but T has the right to borrow or withdraw at any time the 
portion of the policy cash value exceeding the amount payable to R.
    (ii) Because E and T each have an indirect interest in the life 
insurance contract that is

[[Page 82]]

part of the split-dollar life insurance arrangement, each is a non-owner 
under paragraph (c)(2)(i) of this section. E and T each are provided 
economic benefits described in paragraph (d)(2) of this section pursuant 
to the split-dollar life insurance arrangement. Economic benefits are 
provided by owner R to E as a payment of compensation, and separately 
provided by E to T as a gift.

    (3) Transfer of entire contract or undivided interest therein. A 
transfer of the ownership of a life insurance contract (or an undivided 
interest in such contract) that is part of a split-dollar life insurance 
arrangement occurs on the date that a non-owner becomes the owner 
(within the meaning of paragraph (c)(1) of this section) of the entire 
contract or of an undivided interest in the contract.
    (4) Undivided interest. An undivided interest in a life insurance 
contract consists of an identical fractional or percentage interest or 
share in each right, benefit, and obligation with respect to the 
contract. In the case of any arrangement purporting to create undivided 
interests where, in substance, the rights, benefits or obligations are 
shared to any extent among the holders of such interests, the 
arrangement will be treated as a split-dollar life insurance 
arrangement.
    (5) Employment tax. The term employment tax means any tax imposed 
by, or collected under, the Federal Insurance Contributions Act (FICA), 
the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Tax Act 
(RRTA), and the Collection of Income Tax at Source on Wages.
    (6) Self-employment tax. The term self-employment tax means the tax 
imposed by the Self-Employment Contributions Act of 1954 (SECA).
    (d) Economic benefits provided under a split-dollar life insurance 
arrangement--(1) In general. In the case of a split-dollar life 
insurance arrangement subject to the rules of paragraphs (d) through (g) 
of this section, economic benefits are treated as being provided to the 
non-owner of the life insurance contract. The non-owner (and the owner 
for gift and employment tax purposes) must take into account the full 
value of all economic benefits described in paragraph (d)(2) of this 
section, reduced by the consideration paid directly or indirectly by the 
non-owner to the owner for those economic benefits. Depending on the 
relationship between the owner and the non-owner, the economic benefits 
may constitute a payment of compensation, a distribution under section 
301, a contribution to capital, a gift, or a transfer having a different 
tax character. Further, depending on the relationship between or among a 
non-owner and one or more other persons (including a non-owner or non-
owners), the economic benefits may be treated as provided from the owner 
to the non-owner and as separately provided from the non-owner to such 
other person or persons (for example, as a payment of compensation from 
an employer to an employee and as a gift from the employee to the 
employee's child).
    (2) Value of economic benefits. The value of the economic benefits 
provided to a non-owner for a taxable year under the arrangement 
equals--
    (i) The cost of current life insurance protection provided to the 
non-owner as determined under paragraph (d)(3) of this section;
    (ii) The amount of policy cash value to which the non-owner has 
current access within the meaning of paragraph (d)(4)(ii) of this 
section (to the extent that such amount was not actually taken into 
account for a prior taxable year); and
    (iii) The value of any economic benefits not described in paragraph 
(d)(2)(i) or (ii) of this section provided to the non-owner (to the 
extent not actually taken into account for a prior taxable year).
    (3) Current life insurance protection--(i) Amount of current life 
insurance protection. In the case of a split-dollar life insurance 
arrangement described in paragraph (d)(1) of this section, the amount of 
the current life insurance protection provided to the non-owner for a 
taxable year (or any portion thereof in the case of the first year or 
the last year of the arrangement) equals the excess of the death benefit 
of the life insurance contract (including paid-up additions thereto) 
over the total amount payable to the owner (including any outstanding 
policy loans that offset amounts otherwise payable to the owner) under 
the split-dollar life

[[Page 83]]

insurance arrangement, less the portion of the policy cash value 
actually taken into account under paragraph (d)(1) of this section or 
paid for by the non-owner under paragraph (d)(1) of this section for the 
current taxable year or any prior taxable year.
    (ii) Cost of current life insurance protection. The cost of current 
life insurance protection provided to the non-owner for any year (or any 
portion thereof in the case of the first year or the last year of the 
arrangement) equals the amount of the current life insurance protection 
provided to the non-owner (determined under paragraph (d)(3)(i) of this 
section) multiplied by the life insurance premium factor designated or 
permitted in guidance published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2)(ii) of this chapter).
    (4) Policy cash value--(i) In general. For purposes of this 
paragraph (d), policy cash value is determined disregarding surrender 
charges or other similar charges or reductions. Policy cash value 
includes policy cash value attributable to paid-up additions.
    (ii) Current access. For purposes of this paragraph (d), a non-owner 
has current access to that portion of the policy cash value--
    (A) To which, under the arrangement, the non-owner has a current or 
future right; and
    (B) That currently is directly or indirectly accessible by the non-
owner, inaccessible to the owner, or inaccessible to the owner's general 
creditors.
    (5) Valuation date--(i) General rules. For purposes of this 
paragraph (d), the amount of the current life insurance protection and 
the policy cash value shall be determined on the same valuation date. 
The valuation date is the last day of the non-owner's taxable year, 
unless the owner and non-owner agree to instead use the policy 
anniversary date as the valuation date. Notwithstanding the previous 
sentence, if the split-dollar life insurance arrangement terminates 
during the taxable year of the non-owner, the value of such economic 
benefits is determined on the day that the arrangement terminates.
    (ii) Consistency requirement. The owner and non-owner of the split-
dollar life insurance arrangement must use the same valuation date. In 
addition, the same valuation date must be used for all years prior to 
termination of the split-dollar life insurance arrangement unless the 
parties receive consent of the Commissioner to change the valuation 
date.
    (iii) Artifice or device. Notwithstanding paragraph (d)(5)(i) of 
this section, if any artifice or device is used to understate the amount 
of any economic benefit on the valuation date in paragraph (d)(5)(i) of 
this section, then, for purposes of this paragraph (d), the date on 
which the amount of the economic benefit is determined is the date on 
which the amount of the economic benefit is greatest during that taxable 
year.
    (iv) Special rule for certain taxes. For purposes of employment tax 
(as defined in paragraph (c)(5) of this section), self-employment tax 
(as defined in paragraph (c)(6) of this section), and sections 6654 and 
6655 (relating to the failure to pay estimated income tax), the portions 
of the current life insurance protection and the policy cash value that 
are treated as provided by the owner to the non-owner shall be treated 
as so provided on the last day of the taxable year of the non-owner. 
Notwithstanding the previous sentence, if the split-dollar life 
insurance arrangement terminates during the taxable year of the non-
owner, such portions of the current life insurance protection and the 
policy cash value shall be treated as so provided on the day that the 
arrangement terminates.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (d). Except as otherwise provided, both examples assume the 
following facts: employer (R) is the owner (as defined in paragraph 
(c)(1)(i) of this section) and employee (E) is the non-owner (as defined 
in paragraph (c)(2)(i) of this section) of a life insurance contract 
that is part of a split-dollar life insurance arrangement that is 
subject to the provisions of paragraphs (d) through (g) of this section; 
the contract is a life insurance contract as defined in section 7702 and 
not a modified endowment contract as defined in section 7702A; R does 
not withdraw or obtain a loan of any portion of the policy

[[Page 84]]

cash value and does not surrender any portion of the life insurance 
contract; the compensation paid to E is reasonable; E is not provided 
any economic benefits described in paragraph (d)(2)(iii) of this 
section; E does not make any premium payments; E's taxable year is the 
calendar year; the value of the economic benefits is determined on the 
last day of E's taxable year; and E reports on E's Federal income tax 
return for each year that the split-dollar life insurance arrangement is 
in effect the amount of income required to be reported under paragraph 
(d) of this section. The examples are as follows:

    Example 1. (i) Facts. On January 1 of year 1, R and E enter into the 
split-dollar life insurance arrangement. Under the arrangement, R pays 
all of the premiums on the life insurance contract until the termination 
of the arrangement or E's death. The arrangement provides that upon 
termination of the arrangement or E's death, R is entitled to receive 
the lesser of the aggregate premiums paid or the policy cash value of 
the contract and E is entitled to receive any remaining amounts. Under 
the terms of the arrangement and applicable state law, the policy cash 
value is fully accessible by R and R's creditors but E has the right to 
borrow or withdraw at any time the portion of the policy cash value 
exceeding the amount payable to R. To fund the arrangement, R purchases 
a life insurance contract with constant death benefit protection equal 
to $1,500,000. R makes premium payments on the life insurance contract 
of $60,000 in each of years 1, 2, and 3. The policy cash value equals 
$55,000 as of December 31 of year 1, $140,000 as of December 31 of year 
2, and $240,000 as of December 31 of year 3.
    (ii) Analysis. Under the terms of the split-dollar life insurance 
arrangement, E has the right for year 1 and all subsequent years to 
borrow or withdraw the portion of the policy cash value exceeding the 
amount payable to R. Thus, under paragraph (d)(4)(ii) of this section, E 
has current access to such portion of the policy cash value for each 
year that the arrangement is in effect. In addition, because R pays all 
of the premiums on the life insurance contract, R provides to E all of 
the economic benefits that E receives under the arrangement. Therefore, 
under paragraph (d)(1) of this section, E includes in gross income the 
value of all economic benefits described in paragraphs (d)(2)(i) and 
(ii) of this section provided to E under the arrangement.
    (iii) Results for year 1. For year 1, E is provided, under paragraph 
(d)(2)(ii) of this section, $0 of policy cash value (excess of $55,000 
policy cash value determined as of December 31 of year 1 over $55,000 
payable to R). For year 1, E is also provided, under paragraph (d)(2)(i) 
of this section, current life insurance protection of $1,445,000 
($1,500,000 minus $55,000 payable to R). Thus, E includes in gross 
income for year 1 the cost of $1,445,000 of current life insurance 
protection.
    (iv) Results for year 2. For year 2, E is provided, under paragraph 
(d)(2)(ii) of this section, $20,000 of policy cash value ($140,000 
policy cash value determined as of December 31 of year 2 minus $120,000 
payable to R). For year 2, E is also provided, under paragraph (d)(2)(i) 
of this section, current life insurance protection of $1,360,000 
($1,500,000 minus the sum of $120,000 payable to R and the aggregate of 
$20,000 of policy cash value that E actually includes in income on E's 
year 1 and year 2 federal income tax returns). Thus, E includes in gross 
income for year 2 the sum of $20,000 of policy cash value and the cost 
of $1,360,000 of current life insurance protection.
    (v) Results for year 3. For year 3, E is provided, under paragraph 
(d)(2)(ii) of this section, $40,000 of policy cash value ($240,000 
policy cash value determined as of December 31 of year 3 minus the sum 
of $180,000 payable to R and $20,000 of aggregate policy cash value that 
E actually included in gross income on E's year 1 and year 2 federal 
income tax returns). For year 3, E is also provided, under paragraph 
(d)(2)(i) of this section, current life insurance protection of 
$1,260,000 ($1,500,000 minus the sum of $180,000 payable to R and 
$60,000 of aggregate policy cash value that E actually includes in gross 
income on E's year 1, year 2, and year 3 federal income tax returns). 
Thus, E includes in gross income for year 3 the sum of $40,000 of policy 
cash value and the cost of $1,260,000 of current life insurance 
protection.
    Example 2. (i) Facts. The facts are the same as in Example 1 except 
that E cannot directly or indirectly access any portion of the policy 
cash value, but the terms of the split-dollar life insurance arrangement 
or applicable state law provide that the policy cash value in excess of 
the amount payable to R is inaccessible to R's general creditors.
    (ii) Analysis. Under the terms of the split-dollar life insurance 
arrangement or applicable state law, the portion of the policy cash 
value exceeding the amount payable to R is inaccessible to R's general 
creditors and E has a current or future right to that portion of the 
cash value. Thus, under paragraph (d)(4)(ii) of this section, E has 
current access to such portion of the policy cash value for each year 
that the arrangement is in effect. In addition, because R pays all of 
the premiums on the life insurance contract, R provides to E all of the 
economic benefits that E receives under the arrangement. Therefore, 
under paragraph (d)(1) of this section, E

[[Page 85]]

includes in gross income the value of all economic benefits described in 
paragraphs (d)(2)(i) and (ii) of this section provided to E under the 
arrangement.
    (iii) Results for years 1, 2 and 3. The results for this example are 
the same as the results in Example 1.

    (e) Amounts received under the contract--(1) In general. Except as 
otherwise provided in paragraph (f)(3) of this section, any amount 
received under a life insurance contract that is part of a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section (including, but not limited to, a policy 
owner dividend, proceeds of a specified policy loan described in 
paragraph (e)(2) of this section, or the proceeds of a withdrawal from 
or partial surrender of the life insurance contract) is treated, to the 
extent provided directly or indirectly to a non-owner of the life 
insurance contract, as though such amount had been paid to the owner of 
the life insurance contract and then paid by the owner to the non-owner. 
The amount received is taxable to the owner in accordance with the rules 
of section 72. The non-owner (and the owner for gift tax and employment 
tax purposes) must take the amount described in paragraph (e)(3) of this 
section into account as a payment of compensation, a distribution under 
section 301, a contribution to capital, a gift, or other transfer 
depending on the relationship between the owner and the non-owner.
    (2) Specified policy loan. A policy loan is a specified policy loan 
to the extent--
    (i) The proceeds of the loan are distributed directly from the 
insurance company to the non-owner;
    (ii) A reasonable person would not expect that the loan will be 
repaid by the non-owner; or
    (iii) The non-owner's obligation to repay the loan to the owner is 
satisfied or is capable of being satisfied upon repayment by either 
party to the insurance company.
    (3) Amount required to be taken into account. With respect to a non-
owner (and the owner for gift tax and employment tax purposes), the 
amount described in this paragraph (e)(3) is equal to the excess of--
    (i) The amount treated as received by the owner under paragraph 
(e)(1) of this section; over
    (ii) The amount of all economic benefits described in paragraphs 
(d)(2)(ii) and (iii) of this section actually taken into account by the 
non-owner (and the owner for gift tax and employment tax purposes) plus 
any consideration described in paragraph (d)(1) of this section paid by 
the non-owner for such economic benefits described in paragraphs 
(d)(2)(ii) and (iii) of this section. The amount determined under the 
preceding sentence applies only to the extent that neither this 
paragraph (e)(3)(ii) nor paragraph (g)(1)(ii) of this section previously 
has applied to such economic benefits.
    (f) Other tax consequences--(1) Introduction. In the case of a 
split-dollar life insurance arrangement subject to the rules of 
paragraphs (d) through (g) of this section, this paragraph (f) sets 
forth other tax consequences to the owner and non-owner of a life 
insurance contract that is part of the arrangement for the period prior 
to the transfer (as defined in paragraph (c)(3) of this section) of the 
contract (or an undivided interest therein) from the owner to the non-
owner. See paragraph (g) of this section and Sec. 1.83-6(a)(5) for tax 
consequences upon the transfer of the contract (or an undivided interest 
therein).
    (2) Investment in the contract--(i) To the non-owner. A non-owner 
does not receive any investment in the contract under section 72(e)(6) 
with respect to a life insurance contract that is part of a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section.
    (ii) To owner. Any premium paid by an owner under a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section is included in the owner's investment in the 
contract under section 72(e)(6). No premium or amount described in 
paragraph (d) of this section is deductible by the owner (except as 
otherwise provided in Sec. 1.83-6(a)(5)). Any amount paid by a non-
owner, directly or indirectly, to the owner of the life insurance 
contract for current life insurance protection or for any other

[[Page 86]]

economic benefit under the life insurance contract is included in the 
owner's gross income and is included in the owner's investment in the 
life insurance contract for purposes of section 72(e)(6) (but only to 
the extent not otherwise so included by reason of having been paid by 
the owner as a premium or other consideration for the contract).
    (3) Treatment of death benefit proceeds--(i) Death benefit proceeds 
to beneficiary (other than the owner). Any amount paid to a beneficiary 
(other than the owner) by reason of the death of the insured is excluded 
from gross income by such beneficiary under section 101(a) as an amount 
received under a life insurance contract to the extent such amount is 
allocable to current life insurance protection provided to the non-owner 
pursuant to the split-dollar life insurance arrangement, the cost of 
which was paid by the non-owner, or the value of which the non-owner 
actually took into account pursuant to paragraph (d)(1) of this section.
    (ii) Death benefit proceeds to owner as beneficiary. Any amount paid 
or payable to an owner in its capacity as a beneficiary by reason of the 
death of the insured is excluded from gross income of the owner under 
section 101(a) as an amount received under a life insurance contract to 
the extent such amount is not allocable to current life insurance 
protection provided to the non-owner pursuant to the split-dollar life 
insurance arrangement, the cost of which was paid by the non-owner, or 
the value of which the non-owner actually took into account pursuant to 
paragraph (d)(1) of this section.
    (iii) Transfers of death benefit proceeds. Death benefit proceeds 
paid to a party to a split-dollar life insurance arrangement (or the 
estate or beneficiary of that party) that are not excludable from that 
party's income under section 101(a) to the extent provided in paragraph 
(f)(3)(i) or (ii) of this section, are treated as transferred to that 
party in a separate transaction. The death benefit proceeds treated as 
so transferred will be taxed in a manner similar to other transfers. For 
example, if death benefit proceeds paid to an employee, the employee's 
estate, or the employee's beneficiary are not excludable from the 
employee's gross income under section 101(a) to the extent provided in 
paragraph (f)(3)(i) of this section, then such payment is treated as a 
payment of compensation by the employer to the employee.
    (g) Transfer of entire contract or undivided interest therein--(1) 
In general. Upon a transfer within the meaning of paragraph (c)(3) of 
this section of a life insurance contract (or an undivided interest 
therein) to a non-owner (transferee), the transferee (and the owner 
(transferor) for gift tax and employment tax purposes) takes into 
account the excess of the fair market value of the life insurance 
contract (or the undivided interest therein) transferred to the 
transferee at that time over the sum of--
    (i) The amount the transferee pays to the transferor to obtain the 
contract (or the undivided interest therein); and
    (ii) The amount of all economic benefits described in paragraph 
(d)(2)(ii) and (iii) of this section actually taken into account by the 
transferee (and the transferor for gift tax and employment tax 
purposes), plus any consideration described in paragraph (d)(1) of this 
section paid by the transferee for such economic benefits described in 
paragraphs (d)(2)(ii) and (iii) of this section. The amount determined 
under the preceding sentence applies only to the extent that neither 
this paragraph (g)(1)(ii) nor paragraph (e)(3)(ii) of this section 
previously has applied to such economic benefits.
    (2) Determination of fair market value. For purposes of paragraph 
(g)(1) of this section, the fair market value of a life insurance 
contract is the policy cash value and the value of all other rights 
under such contract (including any supplemental agreements thereto and 
whether or not guaranteed), other than the value of current life 
insurance protection. Notwithstanding the preceding sentence, the fair 
market value of a life insurance contract for gift tax purposes is 
determined under Sec. 25.2512-6(a) of this chapter.
    (3) Exception for certain transfers in connection with the 
performance of services. To the extent the ownership of a life insurance 
contract (or undivided

[[Page 87]]

interest in such contract) is transferred in connection with the 
performance of services, paragraph (g)(1) of this section does not apply 
until such contract (or undivided interest in such contract) is taxable 
under section 83. For purposes of paragraph (g)(1) of this section, fair 
market value is determined disregarding any lapse restrictions and at 
the time the transfer of such contract (or undivided interest in such 
contract) is taxable under section 83.
    (4) Treatment of non-owner after transfer--(i) In general. After a 
transfer of an entire life insurance contract (except when such transfer 
is in connection with the performance of services and the transfer is 
not yet taxable under section 83), the person who previously had been 
the non-owner is treated as the owner of such contract for all purposes, 
including for purposes of paragraph (b) of this section and for purposes 
of Sec. 1.61-2(d)(2)(ii)(A). After the transfer of an undivided interest 
in a life insurance contract (or, if later, at the time such transfer is 
taxable under section 83), the person who previously had been the non-
owner is treated as the owner of a separate contract consisting of that 
interest for all purposes, including for purposes of paragraph (b) of 
this section and for purposes of Sec. 1.61-2(d)(2)(ii)(A).
    (ii) Investment in the contract after transfer--(A) In general. The 
amount treated as consideration paid to acquire the contract under 
section 72(g)(1), in order to determine the aggregate premiums paid by 
the transferee for purposes of section 72(e)(6)(A) after the transfer 
(or, if later, at the time such transfer is taxable under section 83), 
equals the greater of the fair market value of the contract or the sum 
of the amounts determined under paragraphs (g)(1)(i) and (ii) of this 
section.
    (B) Transfers between a donor and a donee. In the case of a transfer 
of a contract between a donor and a donee, the amount treated as 
consideration paid by the transferee to acquire the contract under 
section 72(g)(1), in order to determine the aggregate premiums paid by 
the transferee for purposes of section 72(e)(6)(A) after the transfer, 
equals the sum of the amounts determined under paragraphs (g)(1)(i) and 
(ii) of this section except that--
    (1) The amount determined under paragraph (g)(1)(i) of this section 
includes the aggregate of premiums or other consideration paid or deemed 
to have been paid by the transferor; and
    (2) The amount of all economic benefits determined under paragraph 
(g)(1)(ii) of this section actually taken into account by the transferee 
does not include such benefits to the extent such benefits were 
excludable from the transferee's gross income at the time of receipt.
    (C) Transfers of an undivided interest in a contract. If a portion 
of a contract is transferred to the transferee, then the amount to be 
included as consideration paid to acquire the contract is determined by 
multiplying the amount determined under paragraph (g)(4)(ii)(A) of this 
section (as modified by paragraph (g)(4)(ii)(B) of this section, if the 
transfer is between a donor and a donee) by a fraction, the numerator of 
which is the fair market value of the portion transferred and the 
denominator of which is the fair market value of the entire contract.
    (D) Example. The following example illustrates the rules of this 
paragraph (g)(4)(ii):

    Example. (i) In year 1, donor D and donee E enter into a split-
dollar life insurance arrangement as defined in paragraph (b)(1) of this 
section. D is the owner of the life insurance contract under paragraph 
(c)(1) of this section. The life insurance contract is not a modified 
endowment contract as defined in section 7702A. In year 5, D 
gratuitously transfers the contract, within the meaning of paragraph 
(c)(3) of this section, to E. At the time of the transfer, the fair 
market value of the contract is $200,000 and D had paid $50,000 in 
premiums under the arrangement. In addition, by the time of the 
transfer, E had current access to $80,000 of policy cash value which was 
excludable from E's gross income under section 102.
    (ii) E's investment in the contract is $50,000, consisting of the 
$50,000 of premiums paid by D. The $80,000 of policy cash value to which 
E had current access is not included in E's investment in the contract 
because such amount was excludable from E's gross income when E had 
current access to that policy cash value.

    (iii) No investment in the contract for current life insurance 
protection. Except as provided in paragraph (g)(4)(ii)(B) of

[[Page 88]]

this section, no amount allocable to current life insurance protection 
provided to the transferee (the cost of which was paid by the transferee 
or the value of which was provided to the transferee) is treated as 
consideration paid to acquire the contract under section 72(g)(1) to 
determine the aggregate premiums paid by the transferee for purposes of 
determining the transferee's investment in the contract under section 
72(e) after the transfer.
    (h) Examples. The following examples illustrate the rules of this 
section. Except as otherwise provided, each of the examples assumes that 
the employer (R) is the owner (as defined in paragraph (c)(1) of this 
section) of a life insurance contract that is part of a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section, that the employee (E) is not provided any 
economic benefits described in paragraph (d)(2)(iii) of this section, 
that the life insurance contract is not a modified endowment contract 
under section 7702A, that the compensation paid to E is reasonable, and 
that E makes no premium payments. The examples are as follows:

    Example 1. (i) In year 1, R purchases a life insurance contract on 
the life of E. R is named as the policy owner of the contract. R and E 
enter into an arrangement under which R will pay all the premiums on the 
life insurance contract until the termination of the arrangement or E's 
death. Upon termination of the arrangement or E's death, R is entitled 
to receive the greater of the aggregate premiums or the policy cash 
value of the contract. The balance of the death benefit will be paid to 
a beneficiary designated by E.
    (ii) Because R is designated as the policy owner of the contract, R 
is the owner of the contract under paragraph (c)(1)(i) of this section. 
In addition, R would be treated as the owner of the contract regardless 
of whether R were designated as the policy owner under paragraph 
(c)(1)(i) of this section because the split-dollar life insurance 
arrangement is described in paragraph (c)(1)(ii)(A)(1) of this section. 
E is a non-owner of the contract. Under the arrangement between R and E, 
a portion of the death benefit is payable to a beneficiary designated by 
E. The arrangement is a split-dollar life insurance arrangement under 
paragraph (b)(1) or (2) of this section. Because R pays all the premiums 
on the life insurance contract, R provides to E the entire amount of the 
current life insurance protection E receives under the arrangement. 
Therefore, for each year that the split-dollar life insurance 
arrangement is in effect, E must include in gross income under paragraph 
(d)(1) of this section the value of current life insurance protection 
described in paragraph (d)(2)(i) of this section provided to E in each 
year.
    Example 2. (i) The facts are the same as in Example 1 except that, 
upon termination of the arrangement or E's death, R is entitled to 
receive the lesser of the aggregate premiums or the policy cash value of 
the contract. Under the terms of the arrangement and applicable state 
law, the policy cash value is fully accessible by R and R's creditors 
but E has the right to borrow or withdraw at any time the portion of the 
policy cash value exceeding the amount payable to R.
    (ii) Because R is designated as the policy owner, R is the owner of 
the contract under paragraph (c)(1)(i) of this section. E is a non-owner 
of the contract. For each year that the split-dollar life insurance 
arrangement is in effect, E has the right to borrow or withdraw at any 
time the portion of the policy cash value exceeding the amount payable 
to R. Thus, under paragraph (d)(4)(ii) of this section, E has current 
access to such portion of the policy cash value for each year that the 
arrangement is in effect. In addition, because R pays all the premiums 
on the life insurance contract, R provides to E all the economic 
benefits that E receives under the arrangement. Therefore, for each year 
that the split-dollar life insurance arrangement is in effect, E must 
include in gross income under paragraph (d)(1) of this section, the 
value of all economic benefits described in paragraph (d)(2)(i) and (ii) 
of this section provided to E in each year.
    Example 3. (i) The facts are the same as in Example 1 except that in 
year 5, R and E modify the split-dollar life insurance arrangement to 
provide that, upon termination of the arrangement or E's death, R is 
entitled to receive the greater of the aggregate premiums or one-half 
the policy cash value of the contract. Under the terms of the modified 
arrangement and applicable state law, the policy cash value is fully 
accessible by R and R's creditors but E has the right to borrow or 
withdraw at any time the portion of the policy cash value exceeding the 
amount payable to R.
    (ii) For each year that the split-dollar life insurance arrangement 
is in effect, E must include in gross income under paragraph (d)(1) of 
this section the value of the economic benefits described in paragraph 
(d)(2)(i) of this section provided to E under the arrangement during 
that year. In year 5 (and subsequent years), E has the right to borrow 
or withdraw at any time the portion of the policy cash value exceeding 
the amount payable to R. Thus, under paragraph

[[Page 89]]

(d)(4)(ii) of this section, E has current access to such portion of the 
policy cash value. Thus, in year 5 (and each subsequent year), E must 
also include in gross income under paragraph (d)(1) of this section the 
value of the economic benefits described in paragraph (d)(2)(ii) of this 
section provided to E in each year.
    (iii) The arrangement is not described in paragraph (c)(1)(ii)(A)(1) 
of this section after it is modified in year 5. Because R is the 
designated owner of the life insurance contract, R continues to be 
treated as the owner of the contract under paragraph (c)(1)(ii)(B)(1) of 
this section after the arrangement is modified. In addition, because the 
modification made by R and E in year 5 does not involve the transfer 
(within the meaning of paragraph (c)(3) of this section) of an undivided 
interest in the life insurance contract from R to E, the modification is 
not a transfer for purposes of paragraph (g) of this section.
    Example 4. (i) The facts are the same as in Example 2 except that in 
year 7, R and E modify the split-dollar life insurance arrangement to 
provide that, upon termination of the arrangement or E's death, R will 
be paid the lesser of 80 percent of the aggregate premiums or the policy 
cash value of the contract. Under the terms of the modified arrangement 
and applicable state law, the policy cash value is fully accessible by R 
and R's creditors but E has the right to borrow or withdraw at any time 
the portion of the policy cash value exceeding the lesser of 80 percent 
of the aggregate premiums paid by R or the policy cash value of the 
contract.
    (ii) Commencing in year 7 (and in each subsequent year), E must 
include in gross income the economic benefits described in paragraph 
(d)(2)(ii) of this section as provided in this Example 4(ii) rather than 
as provided in Example 2(ii). Thus, in year 7 (and in each subsequent 
year) E must include in gross income under paragraph (d) of this 
section, the excess of the policy cash value over the lesser of 80 
percent of the aggregate premiums paid by R or the policy cash value of 
the contract (to the extent E did not actually include such amounts in 
gross income for a prior taxable year). In addition, in year 7 (and each 
subsequent year) E must also include in gross income the value of the 
economic benefits described in paragraph (d)(2)(i) of this section 
provided to E under the arrangement in each such year.
    Example 5. (i) The facts are the same as in Example 3 except that in 
year 7, E is designated as the policy owner. At that time, E's rights to 
the contract are substantially vested as defined in Sec. 1.83-3(b).
    (ii) In year 7, R is treated as having made a transfer (within the 
meaning of paragraph (c)(3) of this section) of the life insurance 
contract to E. E must include in gross income the amount determined 
under paragraph (g)(1) of this section.
    (iii) After the transfer of the contract to E, E is the owner of the 
contract and any premium payments by R will be included in E's income 
under paragraph (b)(5) of this section and Sec. 1.61-2(d)(2)(ii)(A) 
(unless R's payments are split-dollar loans as defined in Sec. 1.7872-
15(b)(1)).
    Example 6. (i) In year 1, E and R enter into a split-dollar life 
insurance arrangement as defined in paragraph (b)(2) of this section. 
Under the arrangement, R is required to make annual premium payments of 
$10,000 and E is required to make annual premium payments of $500. In 
year 5, a $500 policy owner dividend payable to E is declared by the 
insurance company. E directs the insurance company to use the $500 as 
E's premium payment for year 5.
    (ii) For each year the arrangement is in effect, E must include in 
gross income the value of the economic benefits provided during the 
year, as required by paragraph (d)(2) of this section, over the $500 
premium payments paid by E. In year 5, E must also include in gross 
income as compensation the excess, if any, of the $500 distributed to E 
from the proceeds of the policy owner dividend over the amount 
determined under paragraph (e)(3)(ii) of this section.
    (iii) R must include in income the premiums paid by E during the 
years the split-dollar life insurance arrangement is in effect, 
including the $500 of the premium E paid in year 5 with proceeds of the 
policy owner dividend. R's investment in the contract is increased in an 
amount equal to the premiums paid by E, including the $500 of the 
premium paid by E in year 5 from the proceeds of the policy owner 
dividend. In year 5, R is treated as receiving a $500 distribution under 
the contract, which is taxed pursuant to section 72.
    Example 7. (i) The facts are the same as in Example 2 except that in 
year 10, E withdraws $100,000 from the cash value of the contract.
    (ii) In year 10, R is treated as receiving a $100,000 distribution 
from the insurance company. This amount is treated as an amount received 
by R under the contract and taxed pursuant to section 72. This amount 
reduces R's investment in the contract under section 72(e). R is treated 
as paying the $100,000 to E as cash compensation, and E must include 
that amount in gross income less any amounts determined under paragraph 
(e)(3)(ii) of this section.
    Example 8. (i) The facts are the same as in Example 7 except E 
receives the proceeds of a $100,000 specified policy loan directly from 
the insurance company.
    (ii) The transfer of the proceeds of the specified policy loan to E 
is treated as a loan by the insurance company to R. Under the rules of 
section 72(e), the $100,000 loan is not included in R's income and does 
not reduce R's investment in the contract. R is treated as paying the 
$100,000 of loan proceeds to E

[[Page 90]]

as cash compensation. E must include that amount in gross income less 
any amounts determined under paragraph (e)(3)(ii) of this section.

    (i) [Reserved]
    (j) Effective date--(1) General rule--(i) In general. This section 
applies to any split-dollar life insurance arrangement (as defined in 
paragraph (b)(1) or (2) of this section) entered into after September 
17, 2003.
    (ii) Determination of when an arrangement is entered into. For 
purposes of paragraph (j) of this section, a split-dollar life insurance 
arrangement is entered into on the latest of the following dates:
    (A) The date on which the life insurance contract under the 
arrangement is issued;
    (B) The effective date of the life insurance contract under the 
arrangement;
    (C) The date on which the first premium on the life insurance 
contract under the arrangement is paid;
    (D) The date on which the parties to the arrangement enter into an 
agreement with regard to the policy; or
    (E) The date on which the arrangement satisfies the definition of a 
split-dollar life insurance arrangement (as defined in paragraph (b)(1) 
or (2) of this section).
    (2) Modified arrangements treated as new arrangements--(i) In 
general. For purposes of paragraph (j)(1) of this section, if an 
arrangement entered into on or before September 17, 2003 is materially 
modified after September 17, 2003, the arrangement is treated as a new 
arrangement entered into on the date of the modification.
    (ii) Non-material modifications. The following is a non-exclusive 
list of changes that are not material modifications under paragraph 
(j)(2)(i) of this section (either alone or in conjunction with other 
changes listed in paragraphs (j)(2)(ii)(A) through (I) of this 
section)--
    (A) A change solely in the mode of premium payment (for example, a 
change from monthly to quarterly premiums);
    (B) A change solely in the beneficiary of the life insurance 
contract, unless the beneficiary is a party to the arrangement;
    (C) A change solely in the interest rate payable under the life 
insurance contract on a policy loan;
    (D) A change solely necessary to preserve the status of the life 
insurance contract under section 7702;
    (E) A change solely to the ministerial provisions of the life 
insurance contract (for example, a change in the address to send 
payment);
    (F) A change made solely under the terms of any agreement (other 
than the life insurance contract) that is a part of the split-dollar 
life insurance arrangement if the change is non-discretionary by the 
parties and is made pursuant to a binding commitment (whether set forth 
in the agreement or otherwise) in effect on or before September 17, 
2003;
    (G) A change solely in the owner of the life insurance contract as a 
result of a transaction to which section 381(a) applies and in which 
substantially all of the former owner's assets are transferred to the 
new owner of the policy;
    (H) A change to the policy solely if such change is required by a 
court or a state insurance commissioner as a result of the insolvency of 
the insurance company that issued the policy; or
    (I) A change solely in the insurance company that administers the 
policy as a result of an assumption reinsurance transaction between the 
issuing insurance company and the new insurance company to which the 
owner and the non-owner were not a party.
    (iii) Delegation to Commissioner. The Commissioner, in revenue 
rulings, notices, and other guidance published in the Internal Revenue 
Bulletin, may provide additional guidance with respect to other 
modifications that are not material for purposes of paragraph (j)(2)(i) 
of this section. See Sec. 601.601(d)(2)(ii) of this chapter.

[T.D. 9092, 68 FR 54344, Sept. 17, 2003; 68 FR 63735, Nov. 10, 2003]



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

[[Page 91]]

    (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)-(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]



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 following), 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

[[Page 92]]

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).
    (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

[[Page 93]]

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 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

[[Page 94]]

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 
$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.

[[Page 95]]

    (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.

    (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

[[Page 96]]

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 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,

[[Page 97]]

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 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) and (j), which grant the Commissioner the authority 
to establish optional methods of substantiating certain expenses. 
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 general applicability 
under which a reimbursement or other expense allowance arrangement that 
provides per

[[Page 98]]

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 which is treated as paid under a nonaccountable plan under 
paragraph (c)(3)(ii) of this section is subject to

[[Page 99]]

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' Forms W-2 and must withhold and pay employment taxes on the 
entire $200 when paid.

[[Page 100]]

    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 B is $130. 
However, Employer W does not require Employee B to return the remaining

[[Page 101]]

$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 (2  x  (120%  x  $100) + 4  x  (120%  x  $125)), and does not 
require Employee C to return the excess portion ($140 excess portion = 
(2 days  x  $20 ($120-$100) + 4 days  x  $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 102]]

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; T.D. 9064, 68 FR 39011, July 1, 2003]



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

[[Page 103]]

(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]



Sec. 1.66-1  Treatment of community income.

    (a) In general. Married individuals domiciled in a community 
property state who do not elect to file a joint individual Federal 
income tax return under section 6013 generally must report half of the 
total community income earned by the spouses during the taxable year 
except at times when one of the following exceptions applies:
    (1) The spouses live apart and meet the qualifications of Sec. 1.66-
2.
    (2) The Secretary denies a spouse the Federal income tax benefits 
resulting from community property law under Sec. 1.66-3, because that 
spouse acted as if solely entitled to the income and failed to notify 
his or her spouse of the nature and amount of the income prior to the 
due date for the filing of his or her spouse's return.
    (3) A requesting spouse qualifies for traditional relief from the 
Federal income tax liability resulting from the operation of community 
property law under Sec. 1.66-4(a).
    (4) A requesting spouse qualifies for equitable relief from the 
Federal income tax liability resulting from the operation of community 
property law under Sec. 1.66-4(b).
    (b) Applicability. (1) The rules of this section apply only to 
community income, as defined by state law. The rules of this section do 
not apply to income that is not community income. Thus, the rules of 
this section do not apply to income from property that was formerly 
community property, but in accordance with state law, has ceased to be 
community property, becoming, e.g., separate property or property held 
by joint tenancy or tenancy in common.
    (2) When taxpayers report income under paragraph (a) of this 
section, all community income for the calendar year is treated in 
accordance with the rules provided by section 879(a). Unlike the other 
provisions under section 66, section 66(a) does not permit inclusion on 
an item-by-item basis.
    (c) Transferee liability. The provisions of section 66 do not negate 
liability that arises under the operation of other laws. Therefore, a 
spouse who is not subject to Federal income tax on community income may 
nevertheless remain liable for the unpaid tax (including additions to 
tax, penalties, and interest) to the extent provided by Federal or state 
transferee liability or property laws (other than community property 
laws). For the rules regarding the liability of transferees, see 
sections 6901 through 6904 and the regulations thereunder.

[T.D. 9074, 68 FR 41070, July 10, 2003]



Sec. 1.66-2  Treatment of community income where spouses live apart.

    (a) Community income of spouses domiciled in a community property 
state will be treated in accordance with the rules provided by section 
879(a) if all of the following requirements are satisfied--
    (1) The spouses are married to each other at any time during the 
calendar year;
    (2) The spouses live apart at all times during the calendar year;
    (3) The spouses do not file a joint return with each other for a 
taxable year beginning or ending in the calendar year;
    (4) One or both spouses have earned income that is community income 
for the calendar year; and
    (5) No portion of such earned income is transferred (directly or 
indirectly) between such spouses before the close of the calendar year.
    (b) Living apart. For purposes of this section, living apart 
requires that spouses maintain separate residences. Spouses who maintain 
separate residences due to temporary absences are not considered to be 
living apart. Spouses who are not members of the same household under 
Sec. 1.6015-3(b) are considered to be living apart for purposes of this 
section.
    (c) Transferred income. For purposes of this section, transferred 
income does not include a de minimis amount of earned income that is 
transferred between the spouses. In addition, any amount of earned 
income transferred

[[Page 104]]

for the benefit of the spouses' child will not be treated as an indirect 
transfer to one spouse. Additionally, income transferred between spouses 
is presumed to be a transfer of earned income. This presumption is 
rebuttable.
    (d) Examples. The following examples illustrate the rules of this 
section:

    Example 1 Living apart. H and W are married, domiciled in State A, a 
community property state, and have lived apart the entire year of 2002. 
W, who is in the Army, was stationed in Korea for the entire calendar 
year. During their separation, W intended to return home to H, and H 
intended to live with W upon W's return. H and W do not file a joint 
return for taxable year 2002. H and W may not report their income under 
this section because a temporary absence due to military service is not 
living apart as contemplated under this section.
    Example 2 Transfer of earned income--de minimis exception. H and W 
are married, domiciled in State B, a community property state, and have 
lived apart the entire year of 2002. H and W are estranged and intend to 
live apart indefinitely. H and W do not file a joint return for taxable 
year 2002. H occasionally visits W and their two children, who live with 
W. When H visits, he often buys gifts for the children, takes the 
children out to dinner, and occasionally buys groceries or gives W money 
to buy the children new clothes for school. Both W and H have earned 
income in the year 2002 that is community income under the laws of State 
B. H and W may report their income on separate returns under this 
section.
    Example 3 Transfer of earned income--source of transfer. H and W are 
married, domiciled in State C, a community property state, and have 
lived apart the entire year of 2002. H and W are estranged and intend to 
live apart indefinitely. H and W do not file a joint return for taxable 
year 2002. W provides H $1,000 a month from March 2002 through August 
2002 while H is working part-time and seeking full-time employment. W is 
not legally obligated to make the $1,000 payments. W earns $75,000 in 
2002 in wage income. W also receives $10,000 in capital gains income in 
December 2002. H wants to report his income in accordance with this 
section, alleging that the $6,000 that he received from W was not from 
W's earned income, but from the capital gains income W received in 2002. 
The facts and circumstances surrounding the periodic payments to H from 
W do not indicate that W made the payments out of her capital gains. H 
and W may not report their income in accordance with this section, as 
the $6,000 W transferred to H is presumed to be from W's earned income, 
and H has not presented any facts to rebut the presumption.

[T.D. 9074, 68 FR 41070, July 10, 2003]



Sec. 1.66-3  Denial of the Federal income tax benefits resulting from
the operation of community property law where spouse not notified.

    (a) In general. The Secretary may deny the Federal income tax 
benefits of community property law to any spouse with respect to any 
item of community income if that spouse acted as if solely entitled to 
the income and failed to notify his or her spouse of the nature and 
amount of the income before the due date (including extensions) for the 
filing of the return of his or her spouse for the taxable year in which 
the item of income was derived. Whether a spouse has acted as if solely 
entitled to the item of income is a facts and circumstances 
determination. This determination focuses on whether the spouse used, or 
made available, the item of income for the benefit of the marital 
community.
    (b) Effect. The item of community income will be included, in its 
entirety, in the gross income of the spouse to whom the Secretary denied 
the Federal income tax benefits resulting from community property law. 
The tax liability arising from the inclusion of the item of community 
income must be assessed in accordance with section 6212 against this 
spouse.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1 Acting as if solely entitled to income. (i) H and W are 
married and are domiciled in State A, a community property state. W's 
Form W-2 for taxable year 2000 showed wage income of $35,000. W also 
received a Form 1099-INT, ``Interest Income,'' showing $1,000 W received 
in taxable year 2000. W's wage income was directly deposited into H and 
W's joint account, from which H and W paid bills and household expenses. 
W did not inform H of her interest income or the Form 1099-INT, but W 
gave H a copy of the W-2 when she received it in January 2001. W did not 
use her interest income for bills or household expenses. Instead W gave 
her interest income to her brother, who was unemployed. Neither the 
separate return filed by H nor the separate return filed by W included 
the interest income. In 2002, the IRS audits both H and W. The Internal 
Revenue Service (IRS) may raise section 66(b) as to W's interest income, 
denying W the Federal income

[[Page 105]]

tax benefit resulting from community property law as to this item of 
income.
    (ii) H and W are married and are domiciled in State B, a community 
property state. For taxable year 2000, H receives $45,000 in wage income 
that H places in a separate account. H and W maintain separate 
residences. H's wage income is community income under the laws of State 
B. That same year, W loses her job, and H pays W's mortgage and 
household expenses for several months while W seeks employment. Neither 
H nor W files a return for 2000, the taxable year for which the IRS 
subsequently audits them. The IRS may not raise section 66(b) and deny H 
the Federal income tax benefits resulting from the operation of 
community property law as to H's wage income of $45,000, as H has not 
treated this income as if H were solely entitled to it.
    Example 2 Notification of nature and amount of the income. H and W 
are married and domiciled in State C, a community property state. H and 
W do not file a joint return for taxable year 2001. H's and W's earned 
income for 2001 is community income under the laws of State C. H 
receives $50,000 in wage income in 2001. In January 2002, H receives a 
Form W-2 that erroneously states that H earned $45,000 in taxable year 
2001. H provides W a copy of H's Form W-2 in February 2002. W files for 
an extension prior to April 15, 2002. H receives a corrected Form W-2 
reflecting wages of $50,000 in May 2002. H provides a copy of the 
corrected Form W-2 to W in May 2002. W files a separate return in June 
2002, but reports one half of $45,000 ($22,500) of wage income that H 
earned. H files a separate return reporting half of $50,000 ($25,000) in 
wage income. The IRS audits both H and W. Even if H had acted as if 
solely entitled to the wage income, the IRS may not raise section 66(b) 
as to this income because H notified W of the nature and amount of the 
income prior to the due date of W's return (including extensions).

[T.D. 9074, 68 FR 41070, July 10, 2003]



Sec. 1.66-4  Request for relief from the Federal income tax liability
resulting from the operation of community property law.

    (a) Traditional relief--(1) In general. A requesting spouse will 
receive relief from the Federal income tax liability resulting from the 
operation of community property law for an item of community income if--
    (i) The requesting spouse did not file a joint Federal income tax 
return for the taxable year for which he or she seeks relief;
    (ii) The requesting spouse did not include in gross income for the 
taxable year an item of community income properly includible therein, 
which, under the rules contained in section 879(a), would be treated as 
the income of the nonrequesting spouse;
    (iii) The requesting spouse establishes that he or she did not know 
of, and had no reason to know of, the item of community income; and
    (iv) Taking into account all of the facts and circumstances, it is 
inequitable to include the item of community income in the requesting 
spouse's individual gross income.
    (2) Knowledge or reason to know. (i) A requesting spouse had 
knowledge or reason to know of an item of community income if he or she 
either actually knew of the item of community income, or if a reasonable 
person in similar circumstances would have known of the item of 
community income. All of the facts and circumstances are considered in 
determining whether a requesting spouse had reason to know of an item of 
community income. The relevant facts and circumstances include, but are 
not limited to, the nature of the item of community income, the amount 
of the item of community income relative to other income items, the 
couple's financial situation, the requesting spouse's educational 
background and business experience, and whether the item of community 
income was reflected on prior years' returns (e.g., investment income 
omitted that was regularly reported on prior years' returns).
    (ii) If the requesting spouse is aware of the source of community 
income or the income-producing activity, but is unaware of the specific 
amount of the nonrequesting spouse's community income, the requesting 
spouse is considered to have knowledge or reason to know of the item of 
community income. The requesting spouse's lack of knowledge of the 
specific amount of community income does not provide a basis for relief 
under this section.
    (3) Inequitable. All of the facts and circumstances are considered 
in determining whether it is inequitable to hold a requesting spouse 
liable for a deficiency attributable to an item of community income. One 
relevant factor for this purpose is whether the requesting spouse 
benefitted, directly or indirectly, from the omitted item of

[[Page 106]]

community income. A benefit includes normal support, but does not 
include de minimis amounts. Evidence of direct or indirect benefit may 
consist of transfers of property or rights to property, including 
transfers received several years after the filing of the return. Thus, 
for example, if a requesting spouse receives from the nonrequesting 
spouse property (including life insurance proceeds) that is traceable to 
items of community income attributable to the nonrequesting spouse, the 
requesting spouse will have benefitted from those items of community 
income. Other factors may include, if the situation warrants, desertion, 
divorce or separation. Factors relevant to whether it would be 
inequitable to hold a requesting spouse liable, more specifically 
described under the applicable administrative procedure issued under 
section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447) (See 
Sec. 601.601(d)(2) of this chapter), or other applicable guidance 
published by the Secretary), are to be considered in making a 
determination under this paragraph.
    (b) Equitable relief. Equitable relief may be available when the 
four requirements of paragraph (a)(1) of this section are not satisfied, 
but it would be inequitable to hold the requesting spouse liable for the 
unpaid tax or deficiency. Factors relevant to whether it would be 
inequitable to hold a requesting spouse liable, more specifically 
described under the applicable administrative procedure issued under 
section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447), or other 
applicable guidance published by the Secretary), are to be considered in 
making a determination under this paragraph.
    (c) Applicability. Traditional relief under paragraph (a) of this 
section applies only to deficiencies arising out of items of omitted 
income. Equitable relief under paragraph (b) of this section applies to 
any deficiency or any unpaid tax (or any portion of either). Equitable 
relief is available only for the portion of liabilities that were unpaid 
as of July 22, 1998, and for liabilities that arise after July 22, 1998.
    (d) Effect of relief. When the requesting spouse qualifies for 
relief under paragraph (a) or (b) of this section, the IRS must assess 
any deficiency of the nonrequesting spouse arising from the granting of 
relief to the requesting spouse in accordance with section 6212.
    (e) Examples. The following examples illustrate the rules of this 
section:

    Example 1 Item-by-item approach. H and W are married, living 
together, and domiciled in State A (a community property state). H and W 
file separate returns for taxable year 2002 on April 15, 2003. H earns 
$56,000 in wages, and W earns $46,000 in wages, in 2002. H reports half 
of his wage income as shown on his Form W-2, in the amount of $28,000, 
and half of W's wage income as shown on her Form W-2, in the amount of 
$23,000. W reports half of her wage income as shown on her W-2, in the 
amount of $23,000, and half of H's wage income as shown on his Form W-2, 
in the amount of $28,000. Neither H nor W reports W's income from her 
sole proprietorship of $34,000 or W's investment income of $5,000 for 
taxable year 2002. The Internal Revenue Service (IRS) proposes 
deficiencies with respect to H's and W's taxable year 2002 returns due 
to the omission of W's income from her sole proprietorship and 
investments. H timely requests relief under section 66(c). Because the 
IRS determines that H satisfies the four requirements of the traditional 
relief provision of section 66(c) with respect to W's omitted investment 
income, the IRS grants H's request for relief as to the omitted 
investment income. The IRS determines that H does not satisfy the four 
requirements of the traditional relief provision of section 66(c) as to 
W's sole proprietorship income. The IRS further determines that, under 
the equitable relief provision of section 66(c), it is not inequitable 
to hold H liable for the sole proprietorship income. Relief is 
applicable on an item-by-item basis. Thus, H is liable for the tax on 
half of his wage income in the amount of $28,000, half of W's wage 
income in the amount of $23,000, half of W's sole proprietorship income 
in the amount of $17,000, but none of W's investment income, for which H 
obtained relief under section 66(c). W is liable for the tax on half of 
H's wage income in the amount of $28,000, half of W's wage income in the 
amount of $23,000, half of W's sole proprietorship income in the amount 
of $17,000, and all of W's investment income in the amount of $5,000, 
because H obtained relief under section 66(c).
    Example 2 Benefit. H and W are married, living together, and 
domiciled in State B (a community property state). Neither H nor W files 
a return for taxable year 2000. H earns $60,000 in 2000, which he 
deposits in a joint account. H and W pay the mortgage payment, household 
bills, and other family expenses out of the joint account. W earns 
$20,000 in 2000. W uses a portion of the $20,000

[[Page 107]]

to make monthly loan payments on the family cars, but loses the 
remainder at the local racetrack. In 2002, the IRS audits H and W. H 
requests relief under section 66(c), stating that he did not know or 
have reason to know of W's additional income, as H travels extensively 
while W handles the family finances. Regardless of whether H had 
knowledge or reason to know of the source of W's income, H is not 
eligible for traditional relief under section 66(c) because H benefitted 
from W's income. H's benefit, the portion of W's income used to make 
monthly payments on the car loans, was more than a de minimis amount. 
While this benefit was not in excess of normal support, it is enough to 
preclude relief under the traditional relief provision of section 66(c). 
H may still qualify for equitable relief under section 66(c), depending 
on all of the facts and circumstances.

    (f) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to his or her spouse as part of a fraudulent scheme, 
relief is not available under this section. For purposes of this 
section, a fraudulent scheme includes a scheme to defraud the Secretary 
or another third party, such as a creditor, ex-spouse, or business 
partner.
    (g) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who does not file a joint Federal income tax return with the 
nonrequesting spouse for the taxable year in question, and who requests 
relief from the Federal income tax liability resulting from the 
operation of community property law under this section for the portion 
of the liability arising from his or her share of community income for 
such taxable year.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
to whom the requesting spouse was married and whose income or deduction 
gave rise to the tax liability from which the requesting spouse seeks 
relief in whole or in part.
    (h) Effect of prior closing agreement or offer in compromise. A 
requesting spouse is not entitled to relief from the Federal income tax 
liability resulting from the operation of community property law under 
section 66 for any taxable year for which the requesting spouse has 
entered into a closing agreement (other than an agreement pursuant to 
section 6224(c) relating to partnership items) with the Secretary that 
disposes of the same liability that is the subject of the request for 
relief. In addition, a requesting spouse is not entitled to relief from 
the Federal income tax liability resulting from the operation of 
community property law under section 66 for any taxable year for which 
the requesting spouse has entered into an offer in compromise with the 
Secretary. For rules relating to the effect of closing agreements and 
offers in compromise, see sections 7121 and 7122, and the regulations 
thereunder.
    (i) [Reserved]
    (j) Time and manner for requesting relief--(1) Requesting relief. To 
request relief from the Federal income tax liability resulting from the 
operation of community property law under this section, a requesting 
spouse must file, within the time period prescribed in paragraph (j)(2) 
of this section, Form 8857, ``Request for Innocent Spouse Relief'' (or 
other specified form), or other written request, signed under penalties 
of perjury, stating why relief is appropriate. The requesting spouse 
must include the nonrequesting spouse's name and taxpayer identification 
number in the written request. The requesting spouse must also comply 
with the Secretary's reasonable requests for information that will 
assist the Secretary in identifying and locating the nonrequesting 
spouse.
    (2) Time period for filing a request for relief--(i) Traditional 
relief. The earliest time for submitting a request for relief from the 
Federal income tax liability resulting from the operation of community 
property law under paragraph (a) of this section, for an amount 
underreported on, or omitted from, the requesting spouse's separate 
return, is the date the requesting spouse receives notification of an 
audit or a letter or notice from the IRS stating that there may be an 
outstanding liability with regard to that year (as described in 
paragraph (j)(2)(iii) of this section). The latest time for requesting 
relief under paragraph (a) of this section is 6 months before the 
expiration of the period of limitations on assessment, including 
extensions, against the nonrequesting spouse for the taxable year that 
is the subject of the request for relief, unless the examination of the 
requesting spouse's return commences

[[Page 108]]

during that 6-month period. If the examination of the requesting 
spouse's return commences during that 6-month period, the latest time 
for requesting relief under paragraph (a) of this section is 30 days 
after the commencement of the examination.
    (ii) Equitable relief. The earliest time for submitting a request 
for relief from the Federal income tax liability resulting from the 
operation of community property law under paragraph (b) of this section 
is the date the requesting spouse receives notification of an audit or a 
letter or notice from the IRS stating that there may be an outstanding 
liability with regard to that year (as described in paragraph 
(j)(2)(iii) of this section). A request for equitable relief from the 
Federal income tax liability resulting from the operation of community 
property law under paragraph (b) of this section for a liability that is 
properly reported but unpaid is properly submitted with the requesting 
spouse's individual Federal income tax return, or after the requesting 
spouse's individual Federal income tax return is filed.
    (iii) Premature requests for relief. The Secretary will not consider 
a premature request for relief under this section. The notices or 
letters referenced in this paragraph (j)(2) do not include notices 
issued pursuant to section 6223 relating to TEFRA partnership 
proceedings. These notices or letters include notices of computational 
adjustment to a partner or partner's spouse (Notice of Income Tax 
Examination Changes) that reflect a computation of the liability 
attributable to partnership items of the partner or the partner's 
spouse.
    (k) Nonrequesting spouse's notice and opportunity to participate in 
administrative proceedings--(1) In general. When the Secretary receives 
a request for relief from the Federal income tax liability resulting 
from the operation of community property law under this section, the 
Secretary must send a notice to the nonrequesting spouse's last known 
address that informs the nonrequesting spouse of the requesting spouse's 
request for relief. The notice must provide the nonrequesting spouse 
with an opportunity to submit any information for consideration in 
determining whether to grant the requesting spouse relief from the 
Federal income tax liability resulting from the operation of community 
property law. The Secretary will share with each spouse the information 
submitted by the other spouse, unless the Secretary determines that the 
sharing of this information will impair tax administration.
    (2) Information submitted. The Secretary will consider all of the 
information (as relevant to the particular relief provision) that the 
nonrequesting spouse submits in determining whether to grant relief from 
the Federal income tax liability resulting from the operation of 
community property law under this section.

[T.D. 9074, 68 FR 41070, July 10, 2003]



Sec. 1.66-5  Effective date.

    Sections 1.66-1 through 1.66-4 are applicable on July 10, 2003. In 
addition, Sec. 1.66-4 applies to any request for relief filed prior to 
July 10, 2003, for which the Internal Revenue Service has not issued a 
preliminary determination as of July 10, 2003.

[T.D. 9074, 68 FR 41070, July 10, 2003]



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

[[Page 109]]

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 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

[[Page 110]]

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 ($3,750  x  20%). The amount of A's miscellaneous 
itemized deductions that are disallowed under section 67 is $2,000 
($100,000  x  2%). 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 ($4,000  x  $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 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

[[Page 111]]

    (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 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

[[Page 112]]

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.

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

[[Page 113]]

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
    (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

[[Page 114]]

(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) 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--

[[Page 115]]

    (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 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

[[Page 116]]

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, 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

[[Page 117]]

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
    (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

[[Page 118]]

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 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]

[[Page 119]]



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 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

[[Page 120]]

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]



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--

[[Page 121]]

    (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 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-

[[Page 122]]

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
    (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

[[Page 123]]

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 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.

[[Page 124]]

    (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 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;

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    (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 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

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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]



Sec. 1.67-4  Costs paid or incurred by estates or non-grantor trusts.

    (a) In general. Section 67(e) provides an exception to the 2-percent 
floor on miscellaneous itemized deductions for costs that are paid or 
incurred in connection with the administration of an estate or a trust 
not described in Sec. 1.67-2T(g)(1)(i) (a non-grantor trust) and that 
would not have been incurred if the property were not held in such 
estate or trust. A cost is subject to the 2-percent floor to the extent 
that it is included in the definition of miscellaneous itemized 
deductions under section 67(b), is incurred by an estate or non-grantor 
trust, and commonly or customarily would be incurred by a hypothetical 
individual holding the same property.
    (b) ``Commonly'' or ``Customarily'' Incurred--(1) In general. In 
analyzing a cost to determine whether it commonly or customarily would 
be incurred by a hypothetical individual owning the same property, it is 
the type of product or service rendered to the estate or non-grantor 
trust in exchange for the cost, rather than the description of the cost 
of that product or service, that is determinative. In addition to the 
types of costs described as commonly or customarily incurred by 
individuals in paragraphs (b)(2), (3), (4),

[[Page 127]]

and (5) of this section, costs that are incurred commonly or customarily 
by individuals also include, for example, costs incurred in defense of a 
claim against the estate, the decedent, or the non-grantor trust that 
are unrelated to the existence, validity, or administration of the 
estate or trust.
    (2) Ownership costs. Ownership costs are costs that are chargeable 
to or incurred by an owner of property simply by reason of being the 
owner of the property. Thus, for purposes of section 67(e), ownership 
costs are commonly or customarily incurred by a hypothetical individual 
owner of such property. Such ownership costs include, but are not 
limited to, partnership costs deemed to be passed through to and 
reportable by a partner if these costs are defined as miscellaneous 
itemized deductions pursuant to section 67(b), condominium fees, 
insurance premiums, maintenance and lawn services, and automobile 
registration and insurance costs. Other expenses incurred merely by 
reason of the ownership of property may be fully deductible under other 
provisions of the Code, such as sections 62(a)(4), 162, or 164(a), which 
would not be miscellaneous itemized deductions subject to section 67(e).
    (3) Tax preparation fees. Costs relating to all estate and 
generation-skipping transfer tax returns, fiduciary income tax returns, 
and the decedent's final individual income tax returns are not subject 
to the 2-percent floor. The costs of preparing all other tax returns 
(for example, gift tax returns) are costs commonly and customarily 
incurred by individuals and thus are subject to the 2-percent floor.
    (4) Investment advisory fees. Fees for investment advice (including 
any related services that would be provided to any individual investor 
as part of an investment advisory fee) are incurred commonly or 
customarily by a hypothetical individual investor and therefore are 
subject to the 2-percent floor. However, certain incremental costs of 
investment advice beyond the amount that normally would be charged to an 
individual investor are not subject to the 2-percent floor. For this 
purpose, such an incremental cost is a special, additional charge that 
is added solely because the investment advice is rendered to a trust or 
estate rather than to an individual or attributable to an unusual 
investment objective or the need for a specialized balancing of the 
interests of various parties (beyond the usual balancing of the varying 
interests of current beneficiaries and remaindermen) such that a 
reasonable comparison with individual investors would be improper. The 
portion of the investment advisory fees not subject to the 2-percent 
floor by reason of the preceding sentence is limited to the amount of 
those fees, if any, that exceeds the fees normally charged to an 
individual investor.
    (5) Appraisal fees. Appraisal fees incurred by an estate or a non-
grantor trust to determine the fair market value of assets as of the 
decedent's date of death (or the alternate valuation date), to determine 
value for purposes of making distributions, or as otherwise required to 
properly prepare the estate's or trust's tax returns, or a generation-
skipping transfer tax return, are not incurred commonly or customarily 
by an individual and thus are not subject to the 2-percent floor. The 
cost of appraisals for other purposes (for example, insurance) is 
commonly or customarily incurred by individuals and is subject to the 2-
percent floor.
    (6) Certain fiduciary expenses. Certain other fiduciary expenses are 
not commonly or customarily incurred by individuals, and thus are not 
subject to the 2-percent floor. Such expenses include without limitation 
the following: Probate court fees and costs; fiduciary bond premiums; 
legal publication costs of notices to creditors or heirs; the cost of 
certified copies of the decedent's death certificate; and costs related 
to fiduciary accounts.
    (c) Bundled fees--(1) In general. If an estate or a non-grantor 
trust pays a single fee, commission, or other expense (such as a 
fiduciary's commission, attorney's fee, or accountant's fee) for both 
costs that are subject to the 2-percent floor and costs (in more than a 
de minimis amount) that are not, then, except to the extent provided 
otherwise by guidance published in the Internal Revenue Bulletin, the 
single fee, commission, or other expense (bundled fee) must be 
allocated, for purposes of computing the adjusted

[[Page 128]]

gross income of the estate or non-grantor trust in compliance with 
section 67(e), between the costs that are subject to the 2-percent floor 
and those that are not.
    (2) Exception. If a bundled fee is not computed on an hourly basis, 
only the portion of that fee that is attributable to investment advice 
is subject to the 2-percent floor; the remaining portion is not subject 
to that floor.
    (3) Expenses not subject to allocation. Out-of-pocket expenses 
billed to the estate or non-grantor trust are treated as separate from 
the bundled fee. In addition, payments made from the bundled fee to 
third parties that would have been subject to the 2-percent floor if 
they had been paid directly by the estate or non-grantor trust are 
subject to the 2-percent floor, as are any fees or expenses separately 
assessed by the fiduciary or other payee of the bundled fee (in addition 
to the usual or basic bundled fee) for services rendered to the estate 
or non-grantor trust that are commonly or customarily incurred by an 
individual.
    (4) Reasonable method. Any reasonable method may be used to allocate 
a bundled fee between those costs that are subject to the 2-percent 
floor and those costs that are not, including without limitation the 
allocation of a portion of a fiduciary commission that is a bundled fee 
to investment advice. Facts that may be considered in determining 
whether an allocation is reasonable include, but are not limited to, the 
percentage of the value of the corpus subject to investment advice, 
whether a third party advisor would have charged a comparable fee for 
similar advisory services, and the amount of the fiduciary's attention 
to the trust or estate that is devoted to investment advice as compared 
to dealings with beneficiaries and distribution decisions and other 
fiduciary functions. The reasonable method standard does not apply to 
determine the portion of the bundled fee attributable to payments made 
to third parties for expenses subject to the 2-percent floor or to any 
other separately assessed expense commonly or customarily incurred by an 
individual, because those payments and expenses are readily identifiable 
without any discretion on the part of the fiduciary or return preparer.
    (d) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2014.

[T.D. 9664, 79 FR 26619, May 9, 2014, as amended at 79 FR 41636, July 
17, 2014]

               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

[[Page 129]]

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 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

[[Page 130]]

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 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

[[Page 131]]

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.
    (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.

[[Page 132]]

    (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
    (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

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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?
    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

[[Page 134]]

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 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

[[Page 135]]

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.

    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?

[[Page 136]]

    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 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

[[Page 137]]

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 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

[[Page 138]]

$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 
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

[[Page 139]]

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 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

[[Page 140]]

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 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

[[Page 141]]

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 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

[[Page 142]]

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 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

[[Page 143]]

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 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

[[Page 144]]

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, 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.


[[Page 145]]


    (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 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

[[Page 146]]

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 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

[[Page 147]]

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 ($1,200  x  79.1 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 (500  x  79.1 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 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

[[Page 148]]

    (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 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

[[Page 149]]

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 ($600  x  \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 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 (2  x  
$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.


[[Page 150]]


    (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 
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
                                                            ============

[[Page 151]]

 
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.
    (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

[[Page 152]]

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 $100  x  12 months equals annual payment of    $1,200
Multiple shown in Table I, male, age 66.......................      14.4
                                                               ---------
Expected return (1,200  x  14.4)..............................    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:

--------------------------------------------------------------------------------------------------------------------------------------------------------
 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        0     -0.1     -0.2     -0.3     -0.4     -0.5
                                                            0.5    0.4    0.3    0.2    0.1
                                                         -----------------------------------------------------------------------------------------------
    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 ($1,200  x  13.9 [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

[[Page 153]]

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 $60  x  12 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 ($720  x  4.8)..........................................
 


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 $60  x  12 months equals annual              $720.00
 payment 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 ($720  x  4.9)..........................
 


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 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 $90  x  12 months equals annual               $1,080
 payment 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 $90  x  12 months equals annual               $1,080
 payment 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 $150  x  12 months equals annual              $1,800
 payment of............................................

[[Page 154]]

 
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 $150  x  12 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..............................................
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 $100  x  12 months equals annual              $1,200
 payment of............................................
Multiple shown in Table II (male, age 70, female, age               19.7
 67)...................................................
                                                        ----------------
Expected return ($1,200  x  19.7)......................          $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 $100  x  12 months equals annual              $1,200
 payment of............................................
Multiple shown in Table VI (ages 70, 67)...............             22.0
                                                        ----------------
Expected return ($1,200  x  22.0)......................          $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.

[[Page 155]]

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 ($600  x             $4,560
 7.6)..................................................
Portion of expected return, first annuitant ($1,200  x           $14,520
 12.1).................................................
                                                        ----------------
    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 ($600  x             $3,600
 6.0)..................................................
Plus: Portion of expected return, first annuitant                $19,200
 ($1,200  x  16.0).....................................
                                                        ----------------
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 ($1,200 
x  7.6). An expected return of $7,260 ($600  x  12.1) 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

[[Page 156]]

be obtained from Table I as of the annuity starting date determined in 
accordance with paragraph (b)(2)(i) of Sec. 1.72-4.
    (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 ($900  x  19.7--sum per year          $17,730
 after first death)....................................
Plus: Portion of expected return ($300  x  9.3--amount            $2,790
 of 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 ($900  x  22.0--sum per year          $19,800
 after first death)....................................
Plus: Portion of expected return ($300  x  12.4--amount           $3,720
 of 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 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

[[Page 157]]

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 ((.39  x  100) + (.42  x  100)), 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 ((.39  x  75) + 
(.42  x  75)), 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               x  6
 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             x  2
 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             x  8
                                                        ----------------
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                 x  6
 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.
    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

[[Page 158]]

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 
(6  x  23.2). 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 (2  x  12.6 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 units  x  $2), and B will have an 
additional allocation of the investment in the contract of $12 (6 units 
x  $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               x  4
 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             x  6
 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.            x  10
                                                        ----------------
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                 x  4
 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 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               x  4
 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             x  6
 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.            x  10
                                                        ----------------

[[Page 159]]

 
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                 x  4
 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             x  6
 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.            x  10
                                                        ----------------
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                 x  4
 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 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

[[Page 160]]

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 received as an 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

[[Page 161]]

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]



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.

[[Page 162]]

    (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:

    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 ($1,000  x     14,500
 14.5 [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

[[Page 163]]

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
    (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.

[[Page 164]]

    (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, 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.

[[Page 165]]

    (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 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.

[[Page 166]]

    (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 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.

[[Page 167]]

    (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)..........................
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/$21,053  x  $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/$21,053  x  $1,200).....................
Number of years for which payment guaranteed ($11,053             17.54
 $630).....................................................
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

[[Page 168]]

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:
    [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.

[[Page 169]]

 
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.
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.

[[Page 170]]

    (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
------------------------------------------------------------------------

    (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 ($1,200  x  10)..........................      $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

[[Page 171]]

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 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 ($1,350  x  15), 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

[[Page 172]]

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)...............................................
                                                      ------------------
    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......................................
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

[[Page 173]]

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 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

[[Page 174]]

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 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

[[Page 175]]

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, 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

[[Page 176]]

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
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
 

[[Page 177]]

 
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 178]]


                                                 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
 
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

[[Page 179]]

 
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
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

[[Page 180]]

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


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

[[Page 181]]

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


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


[[Page 182]]


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

[[Page 183]]

 
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
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
 

[[Page 184]]

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


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


[[Page 185]]


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

[[Page 186]]

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


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

[[Page 187]]

 
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
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

[[Page 188]]

 
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
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

[[Page 189]]

 
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
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

[[Page 190]]

 
 
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
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

[[Page 191]]

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


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     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  .......  .......  .......  .......  .......  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                         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

[[Page 192]]

 
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
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

[[Page 193]]

 
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
 
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

[[Page 194]]

 
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
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

[[Page 195]]

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


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

[[Page 196]]

 
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
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
 

[[Page 197]]

 
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
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

[[Page 198]]

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


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

[[Page 199]]

 
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
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

[[Page 200]]

 
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
 
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

[[Page 201]]

 
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
 
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

[[Page 202]]

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


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

[[Page 203]]

 
 
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
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
 

[[Page 204]]

 
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  .......  .......
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


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

[[Page 205]]

 
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  .......  .......  .......  .......  .......  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                           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
 

[[Page 206]]

 
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
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

[[Page 207]]

 
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
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
 

[[Page 208]]

 
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
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

[[Page 209]]

 
 
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
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

[[Page 210]]

 
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
 
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

[[Page 211]]

 
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
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

[[Page 212]]

 
 
106....................................  111......................                53       66       74
107....................................  112......................       35       53       71
108....................................  113......................       40       64  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


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

[[Page 213]]

 
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
 
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

[[Page 214]]

 
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
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

[[Page 215]]

 
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
 
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

[[Page 216]]

 
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
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

[[Page 217]]

 
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
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
 

[[Page 218]]

 
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
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 219]]


  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
12..................................................      80.9      80.3      79.6      79.0      78.4      77.9      77.3      76.8      76.3      75.9

[[Page 220]]

 
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
83..................................................      76.6      75.7      74.7      73.7      72.7      71.7      70.7      69.8      68.8      67.8

[[Page 221]]

 
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
46..................................................      67.4      66.4      65.4      64.6      63.6      62.7      61.8      60.9      60.0      59.1

[[Page 222]]

 
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 223]]


                             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 224]]

 
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 225]]

 
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 226]]

 
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 227]]

 
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 228]]

 
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 229]]

 
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 230]]


                             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 231]]

 
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 232]]

 
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 233]]

 
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 234]]

 
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 235]]

 
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 236]]

 
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 237]]


                                     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 238]]

 
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 239]]

 
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 240]]

 
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 241]]

 
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 242]]

 
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 243]]

 
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 244]]

 
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 245]]

 
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 246]]

 
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 247]]

 
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 248]]

 
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 249]]

 
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 250]]

 
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 251]]

 
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 252]]

 
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 253]]

 
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 254]]

 
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; 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 255]]

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 256]]

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 257]]

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 [$900  x  18.2])     19.6
 (percent)............................................
Subtract amount excludable during five years A received              882
 payments (19.6 percent of $4,500 [$900  x  5])................
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 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

[[Page 258]]

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 [$900  x  24.2])            15.9
   (percent)................................................
  Subtract amount excludable during five years A received        $715.50
   payments (15.9 percent of $4,500 [$900  x  5])...........
                                                             -----------
  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.
    (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

[[Page 259]]

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 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

[[Page 260]]

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 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

[[Page 261]]

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 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

[[Page 262]]

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 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

[[Page 263]]

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 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

[[Page 264]]

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. Paragraphs (d), (h), and (i) of this section apply for 
taxable years beginning on or after January 1, 2015.
    (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 section 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 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

[[Page 265]]

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 includible in 
gross income except to the extent that the amounts are excludable from 
gross income under section 105(b) or (c) and the regulations under those 
sections. See Sec. 1.402(a)-1(e) for rules relating to the use of a 
qualified plan under section 401(a) to pay premiums for accident or 
health insurance.
    (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, the investment in the 
contract or aggregate premiums paid must be adjusted as provided in 
paragraph (c)(3) of this section.
    (f) [Reserved]
    (g) Payments to or on behalf of a self-employed individual. A self-
employed individual is not considered an employee 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

[[Page 266]]

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. See Sec. 1.402(a)-
1(e)(2) for rules relating to the payment of medical benefits described 
in section 401(h) under a qualified pension or annuity plan.
    (i) Special rules--(1) In general. For purposes of section 72(b) and 
(d) and this section, the taxpayer must maintain such records as are 
necessary to substantiate the amount treated as an investment in the 
taxpayer's annuity contract.
    (2) Delegation to Commissioner. 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 the taxpayer's investment 
in his or her annuity contract. This form may be required to be filed 
with the taxpayer's returns for years in which the amounts are excluded 
under section 72 or 105.

[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; T.D. 
9665, 79 FR 26841, May 12, 2014]



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 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

[[Page 267]]

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 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

[[Page 268]]

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, 10  x  $1,320................................   $13,200
Exclusion ratio, $5,940  $13,200.............................      0.45
Annual exclusion, 0.45  x  $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 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

[[Page 269]]

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 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

[[Page 270]]

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),
    (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

[[Page 271]]

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 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   Contribution
                                                  years     weighted for
                                Contribution  contribution    years in
                                                 was in      trust (A  x
                                                 trust--         B)
------------------------------------------------------------------------
1972..........................      $1,000             0             0
1971..........................         800             1           800
1970..........................       1,200             2         2,400
1969..........................         600             3         1,800

[[Page 272]]

 
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.
$5,400  x  (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.
    (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

[[Page 273]]

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 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. 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

[[Page 274]]

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), (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

[[Page 275]]

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 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

[[Page 276]]

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 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

[[Page 277]]

 
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, 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

[[Page 278]]

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 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

[[Page 279]]

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 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

[[Page 280]]

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]



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.

[[Page 281]]

    (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 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--

[[Page 282]]

    (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 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

[[Page 283]]

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 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

[[Page 284]]

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 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

[[Page 285]]

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]



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

[[Page 286]]

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);
    (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).

[[Page 287]]

    (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; or
    (2) In a document that is delivered through an electronic medium 
under an electronic system that satisfies the requirements of 
Sec. 1.401(a)-21 of this chapter.
    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 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.


[[Page 288]]


    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 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

[[Page 289]]

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 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

[[Page 290]]

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)(5)(iii).
    Q-13: How does a reduction (offset) of an account balance in order 
to repay a 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

[[Page 291]]

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 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?

[[Page 292]]

    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.
    (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

[[Page 293]]

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 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

[[Page 294]]

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 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

[[Page 295]]

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 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

[[Page 296]]

$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 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

[[Page 297]]

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, 9535, Feb. 28, 2003; T.D. 9169, 69 FR 
78153, Dec. 29, 2004; T.D. 9294, 71 FR 61883, Oct. 20, 2006]



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 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

[[Page 298]]

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 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

[[Page 299]]

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

    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

[[Page 300]]

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.

----------------------------------------------------------------------------------------------------------------
                                                                                          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]

[[Page 301]]



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.
    (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

[[Page 302]]

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 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

[[Page 303]]

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, 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

[[Page 304]]

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.
    (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

[[Page 305]]

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.
    (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

[[Page 306]]

(DDB) at the end of any policy year for any particular employee is equal 
to--


R/Y

Where--

R is the net level premium reserve at the end of that policy year for 
          all benefits provided to the employee by the policy or, if 
          greater, the fair market 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.

    (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:

F  x  C

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

[[Page 307]]

 
(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 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; T.D. 9223, 70 FR 50971, Aug. 29, 2005]



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

[[Page 308]]

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 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

[[Page 309]]

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 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

[[Page 310]]

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 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

[[Page 311]]

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 
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

[[Page 312]]

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 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

[[Page 313]]

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 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.

[[Page 314]]

    (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]



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

[[Page 315]]

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 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

[[Page 316]]

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 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

[[Page 317]]

(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 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

[[Page 318]]

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 
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

[[Page 319]]

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 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

[[Page 320]]

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 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

[[Page 321]]

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)). For the taxation of life insurance protection under a 
split-dollar life insurance arrangement (as defined in Sec. 1.61-
22(b)(1) or (2)), see Sec. 1.61-22.
    (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

[[Page 322]]

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 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

[[Page 323]]

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, as amended by T.D. 9092, 68 FR 
54351, Sept. 17, 2003]



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 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--

[[Page 324]]

    (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 which the person who performed the 
services files his return.
    (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;
    (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.
    (g) Effective/applicability date. Paragraph (c) of this section 
applies to property transferred on or after January 1, 2016.

[T.D. 7554, 43 FR 31915, July 24, 1978, as amended by T.D. 9779, 81 FR 
48708, July 26, 2016]



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)). For special rules 
applying to the transfer of a life insurance contract (or an undivided 
interest therein) that is part of a split-dollar life insurance 
arrangement (as defined in Sec. 1.61-22(b)(1) or (2)), see Sec. 1.61-
22(g).
    (2) Option. The grant of an option to purchase certain property does 
not

[[Page 325]]

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.
    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.

[[Page 326]]

    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 these regulations, whether a risk of forfeiture is 
substantial or not depends upon the facts and circumstances. Except as 
set forth in paragraphs (j) and (k) of this section, a substantial risk 
of forfeiture exists only if 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 
upon the occurrence of a condition related to a purpose of the transfer 
if the possibility of forfeiture is substantial. Property is not 
transferred subject to a substantial risk of forfeiture if at the time 
of transfer the facts and circumstances demonstrate that the forfeiture 
condition is unlikely to be enforced. Further, 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. A restriction on the transfer of property, whether 
contractual or by operation of applicable law, will result in a 
substantial risk of forfeiture only if and to the extent that the 
restriction is described in paragraph (j) or (k) of this section. For 
this purpose, transfer restrictions that will not result in a 
substantial risk of forfeiture include, but are not limited to, 
restrictions that if violated, whether by transfer or attempted transfer 
of the property, would result in the forfeiture of some or all of the 
property, or liability by the employee for any damages, penalties, fees, 
or other amount.
    (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 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

[[Page 327]]

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 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

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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.
    Example 6. On April 3, 2013, Y corporation grants to Q, an officer 
of Y, a nonstatutory option to purchase Y common stock. Although the 
option is immediately exercisable, it has no readily ascertainable fair 
market value when it is granted. Under the option, Q has the right to 
purchase 100 shares of Y common stock for $10 per share, which is the 
fair market value of a Y share on the date of grant of the option. On 
August 1, 2013, Y sells its common stock in an initial public offering. 
Pursuant to an underwriting agreement entered into in connection with 
the initial public offering, Q agrees not to sell, otherwise dispose of, 
or hedge any Y common stock from August 1 through February 1 of 2014 
(``the lock-up period''). Q exercises the option and Y shares are 
transferred to Q on November 15, 2013, during the lock-up period. The 
underwriting agreement does not impose a substantial risk of forfeiture 
on the Y shares acquired by Q because the provisions of the agreement do 
not condition Q's rights in the shares upon anyone's future performance 
(or refraining from performance) of substantial services or on the 
occurrence of a condition related to the purpose of the transfer of 
shares to Q. Accordingly, neither section 83(c)(3) nor the imposition of 
the lock-up period by the underwriting agreement precludes taxation 
under section 83 when the shares resulting from exercise of the option 
are transferred to Q.
    Example 7. Assume the same facts as in Example 6, except that on 
August 1, 2013, Y also adopts an insider trading compliance program, 
under which, as applied to 2013, insiders (such as Q) may trade Y shares 
only during a limited number of days following each quarterly earnings 
release (``a trading window''). Under the program, if Q trades Y shares 
outside a trading window without Y's permission, Y has the right to 
terminate Q's employment. However, the exercise of the nonstatutory 
options outside a trading window for Y shares is not prohibited under 
the insider trading compliance program. Q fully exercises the option, 
and Y shares are transferred to Q, on November 15, 2013. The exercise of 
the option occurs outside a trading window, and, on the date of 
exercise, Q is in possession of material nonpublic information 
concerning Y that would subject him to liability under Rule 10b-5 under 
the Securities Exchange Act of 1934 if Q sold the Y shares while in 
possession of such information. Neither the insider trading compliance 
program nor the potential liability under Rule 10b-5 impose a 
substantial risk of forfeiture on the

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Y shares acquired by Q because the provisions of the program and Rule 
10b-5 do not condition Q's rights in the shares upon anyone's future 
performance (or refraining from performance) of substantial services or 
on the occurrence of a condition related to the purpose of the transfer 
of shares to Q. Accordingly, none of section 83(c)(3), the imposition of 
the trading windows by the insider trading compliance program, and the 
potential liability under Rule 10b-5 preclude taxation under section 83 
when the shares resulting from exercise of the option are transferred to 
Q.

    (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 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, or any undivided interest therein, the policy cash 
value and all other rights under such contract (including any 
supplemental agreements thereto and whether or not guaranteed), other 
than current life insurance protection, are treated as property for 
purposes of this section. However, in the case of the transfer of a life 
insurance contract, retirement income contract, endowment contract, or 
other contract providing life insurance protection, which was part of a 
split-dollar arrangement (as defined in Sec. 1.61-22(b)) entered into 
(as defined in Sec. 1.61-22(j)) on or before September 17, 2003, and 
which is not materially modified (as defined in Sec. 1.61-22(j)(2)) 
after September 17, 2003, 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

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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 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

[[Page 331]]

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.
    Example 4. (i) On June 3, 2013, Y corporation grants to Q, an 
officer of Y, a nonstatutory option to purchase Y common stock. Y stock 
is traded on an established securities market. Although the option is 
immediately exercisable, it has no readily ascertainable fair market 
value when it is granted. Under the option, Q has the right to purchase 
100 shares of Y common stock for $10 per share, which is the fair market 
value of a Y share on the date of grant of the option. The grant of the 
option is not one that satisfies the requirements for a transaction that 
is exempt from section 16(b) of the Securities Exchange Act of 1934. On 
December 15, 2013, Y stock is trading at more than $10 per share. On 
that date, Q fully exercises the option, paying the exercise price in 
cash, and receives 100 Y shares. Q's rights in the shares received as a 
result of the exercise are not conditioned upon the future performance 
of substantial services. Because no exemption from section 16(b) was 
available for the June 3, 2013 grant of the option, the section 16(b) 
liability period expires on December 1, 2013. Accordingly, the section 
16(b) liability period expires before the date that Q exercises the 
option and the Y common stock is transferred to Q. Thus, the shares 
acquired by Q pursuant to the exercise of the option are not subject to 
a substantial risk of forfeiture under section 83(c)(3) as a result of 
section 16(b). As a result, section 83(c)(3) does not preclude taxation 
under section 83 when the shares acquired pursuant to the December 15, 
2013 exercise of the option are transferred to Q.
    (ii) Assume the same facts as in paragraph (i) of this Example 4 
except that Q exercises the nonstatutory option on October 30, 2013 when 
Y stock is trading at more than $10 per share. The shares acquired are 
subject to a substantial risk of forfeiture under section 83(c)(3) as a 
result of section 16(b) through December 1, 2013.
    (iii) Assume the same facts as in paragraph (i) of this Example 4 
except that on November 5, 2013, Q also purchases 100 shares of Y common 
stock on the public market. The purchase of the shares is not a 
transaction exempt from section 16(b) of the Securities Exchange Act of 
1934. Because no exemption from section 16(b) was available for the 
November 5, 2013 purchase of shares, the section 16(b) liability period 
with respect to such shares will last for a period of six months after 
the November 5, 2013 purchase of shares. Notwithstanding the non-exempt 
purchase of Y common stock on November 5, 2013, the shares acquired by Q 
pursuant to the December 15, 2013 exercise of the option are not subject 
to a substantial risk of forfeiture under section 83(c)(3) as a result 
of section 16(b). As a result, section 83(c)(3) does not preclude 
taxation under section 83 when the shares acquired pursuant to the 
December 15, 2013 exercise of the option are transferred to Q.

    (k) For purposes of section 83 and the regulations 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).
    (l) Effective/applicability date. This section applies to property 
transferred on or after January 1, 2013. For rules relating to property 
transferred before that date, see Sec. 1.83-3 as contained in 26 CFR 
part 1 (as of April 1, 2012).

[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; T.D. 9092, 68 FR 
54351, Sept. 17, 2003; T.D. 9223, 70 FR 50971, Aug. 29, 2005; T.D. 9659, 
79 FR 10664, Feb. 26, 2014]



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

[[Page 332]]

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 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, 
1016, and 1022.
    (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.
    (d) Effective/applicability date. The provisions in this section are 
applicable for taxable years beginning on or after July 21, 1978. The 
provisions of paragraph (b)(1) of this section relating to section 1022 
are effective on and after January 19, 2017.

[T.D. 7554, 43 FR 31918, July 24, 1978, as amended by T.D. 9811, 82 FR 
6236, Jan. 19, 2017]



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

[[Page 333]]

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 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

[[Page 334]]

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. 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

[[Page 335]]

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) Transfer of life insurance contract (or an undivided interest 
therein)--(i) General rule. In the case of a transfer of a life 
insurance contract (or an undivided interest therein) described in 
Sec. 1.61-22(c)(3) in connection with the performance of services, a 
deduction is allowable under paragraph (a)(1) of this section to the 
person for whom the services were performed. The amount of the 
deduction, if allowable, is equal to the sum of the amount included as 
compensation in the gross income of the service provider under 
Sec. 1.61-22(g)(1) and the amount determined under Sec. 1.61-
22(g)(1)(ii).
    (ii) Effective date--(A) General rule. Paragraph (a)(5)(i) of this 
section applies to any split-dollar life insurance arrangement (as 
defined in Sec. 1.61-22(b)(1) or (2)) entered into after September 17, 
2003. For purposes of this paragraph (a)(5), an arrangement is entered 
into as determined under Sec. 1.61-22(j)(1)(ii).
    (B) Modified arrangements treated as new arrangements. If an 
arrangement entered into on or before September 17, 2003 is materially 
modified (within the meaning of Sec. 1.61-22(j)(2)) after September 17, 
2003, the arrangement is treated as a new arrangement entered into on 
the date of the modification.
    (6) 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 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

[[Page 336]]

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; T.D. 9092, 68 FR 54352, 
Sept. 17, 2003]



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 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. The 
preceding sentence does not apply to a sale or other disposition of the 
option to a person related to the service provider that occurs on or 
after July 2, 2003. For this purpose, a person is related to the service 
provider if--
    (1) The person and the service provider bear a relationship to each 
other that is specified in section 267(b) or 707(b)(1), subject to the 
modifications that the language ``20 percent'' is used instead of ``50 
percent'' each place it appears in sections 267(b) and 707(b)(1), and 
section 267(c)(4) is applied as if the family of an individual includes 
the spouse of any member of the family; or
    (2) The person and the service provider are engaged in trades or 
businesses under common control (within the meaning of section 52(a) and 
(b)); provided that a person is not related to the service provider if 
the person is the service recipient with respect to the option or the 
grantor 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

[[Page 337]]

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 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]
    (d) This section applies on and after July 2, 2003. For transactions 
prior to that date, see Sec. 1.83-7 as published in 26 CFR part 1 
(revised as of April 1, 2003).

[T.D. 7554, 43 FR 31920, July 24, 1978, as amended by T.D. 9067, 68 FR 
39454, July 2, 2003; T.D. 9148, 69 FR 48392, Aug. 10, 2004]



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

[[Page 338]]

    (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 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

[[Page 339]]

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]



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.

[[Page 340]]

    (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);
    (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

[[Page 341]]

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 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

[[Page 342]]

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]

              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

[[Page 343]]

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 Sec. 1.403(b)-3 applies, see 
Sec. 1.403(b)-7; 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 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

[[Page 344]]

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 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; T.D. 9340, 
72 FR 41159, July 26, 2007]

[[Page 345]]



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 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)-

[[Page 346]]

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, 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

[[Page 347]]

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 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

[[Page 348]]

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 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

[[Page 349]]

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).
    (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

[[Page 350]]

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 
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

[[Page 351]]

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 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)).........................................................
 


[[Page 352]]

    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, 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

[[Page 353]]

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 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

[[Page 354]]

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. 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.

[[Page 355]]

    (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
                                                               ---------
    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 (2  x  $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

[[Page 356]]

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 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

[[Page 357]]

(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 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

[[Page 358]]

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, $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,

[[Page 359]]

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 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

[[Page 360]]

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 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)............................

[[Page 361]]

 
(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]



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-

[[Page 362]]

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.
    (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.

[[Page 363]]

    (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 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.

[[Page 364]]

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.



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.

[[Page 365]]

    (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 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

[[Page 366]]

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 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

[[Page 367]]

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, 
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

[[Page 368]]

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 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

[[Page 369]]

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 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

[[Page 370]]

(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 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

[[Page 371]]

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 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

[[Page 372]]

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 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

[[Page 373]]

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 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.

[[Page 374]]

    (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 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.

[[Page 375]]

    (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.
    (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

[[Page 376]]

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 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 377]]



                                                            [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 378]]

    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 379]]

    (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 380]]

    (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 381]]

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 382]]

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 383]]

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 384]]

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 385]]

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 386]]

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 387]]

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) 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.

[[Page 388]]

    (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.
    (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.

[[Page 389]]

    (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 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

[[Page 390]]

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 at www.fdsys.gov.



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 
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

[[Page 391]]

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 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

[[Page 392]]

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) 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

[[Page 393]]

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 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

[[Page 394]]

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 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

[[Page 395]]

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 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

[[Page 396]]

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'' 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

[[Page 397]]

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 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

[[Page 398]]

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 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.

[[Page 399]]

    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 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

[[Page 400]]

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 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

[[Page 401]]

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. 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.

[[Page 402]]

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 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

[[Page 403]]

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).
    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

[[Page 404]]

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?
    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

[[Page 405]]

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?
    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

[[Page 406]]

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 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

[[Page 407]]

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 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

[[Page 408]]

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).
    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

[[Page 409]]

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 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.

[[Page 410]]

    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 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?

[[Page 411]]

    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 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 calendar 
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)-

[[Page 412]]

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 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.

[[Page 413]]

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 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.

[[Page 414]]

    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 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 calendar 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

[[Page 415]]

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).
    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

[[Page 416]]

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 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

[[Page 417]]

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 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

[[Page 418]]

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--
    (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

[[Page 419]]

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 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.

[[Page 420]]

    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.
    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

[[Page 421]]

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.
    (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

[[Page 422]]

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 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:

[[Page 423]]

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 = $150  x  .5  x  W  x  Y / 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 = $200,000,000  x  .5  x  Y / 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]



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.

[[Page 424]]

    (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]



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

[[Page 425]]

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:

$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

[[Page 426]]

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 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.....................................

[[Page 427]]

 
$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:

          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:

[[Page 428]]

    (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 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

[[Page 429]]

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.
    (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

[[Page 430]]

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 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.

[[Page 431]]

    (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 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

[[Page 432]]

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 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

[[Page 433]]

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 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 physical injuries or 
physical sickness--(1) In general. Section 104(a)(2) excludes from gross 
income the amount of any damages (other than punitive damages) received 
(whether by suit or agreement and whether as lump sums or as periodic 
payments) on account of personal physical injuries or physical sickness. 
Emotional distress is not considered a physical injury or physical 
sickness. However, damages for emotional distress attributable to a 
physical injury or physical sickness are excluded from income under 
section 104(a)(2). Section 104(a)(2) also excludes damages not in excess 
of the amount paid for medical care (described in section 213(d)(1)(A) 
or (B)) for emotional distress. For purposes of this paragraph (c), the 
term damages means an amount received (other than workers' compensation) 
through prosecution of a legal suit or action, or through a settlement 
agreement entered into in lieu of prosecution.
    (2) Cause of action and remedies. The section 104(a)(2) exclusion 
may apply to damages recovered for a personal physical injury or 
physical sickness under a statute, even if that statute does not provide 
for a broad range of remedies. The injury need not be defined as a tort 
under state or common law.
    (3) Effective/applicability date. This paragraph (c) applies to 
damages paid pursuant to a written binding agreement, court decree, or 
mediation award entered into or issued after September 13, 1995, and 
received after January 23, 2012. Taxpayers also may apply these final 
regulations to damages paid pursuant to a written binding agreement, 
court decree, or mediation award entered into or issued after September 
13, 1995, and received after August 20, 1996. If applying these final 
regulations to

[[Page 434]]

damages received after August 20, 1996, results in an overpayment of 
tax, the taxpayer may file a claim for refund before the period of 
limitations under section 6511 expires. To qualify for a refund of tax 
on damages paid after August 20, 1996, under a written binding 
agreement, court decree, or mediation award entered into or issued after 
September 13, 1995, a taxpayer must meet the requirements of section 
1605 of the Small Business Job Protection Act of 1996, Public Law 104-
188 (110 Stat. 1838).
    (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 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

[[Page 435]]

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; T.D. 9573, 77 
FR 3107, Jan. 23, 2012]



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 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

[[Page 436]]

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 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

[[Page 437]]

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 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

[[Page 438]]

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 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).

[[Page 439]]



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. 1.105-11  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 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

[[Page 440]]

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-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

[[Page 441]]

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 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

[[Page 442]]

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 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,

[[Page 443]]

    (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 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

[[Page 444]]

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 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

[[Page 445]]

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 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:


[[Page 446]]


    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.

    (a) The gross income of an employee does not include the 
contributions that the employer makes to an accident or health plan for 
compensation (through insurance or otherwise) to the employee for 
personal injuries or sickness incurred by the employee, the employee's 
spouse, the employee's dependents (as defined in section 152 determined 
without regard to section 152(b)(1), (b)(2), or (d)(1)(B)), or any child 
(as defined in section 152(f)(1)) of the employee who as of the end of 
the taxable year has not attained age 27. 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. For the treatment of the payment of premiums 
for accident or health insurance from a qualified trust under section 
401(a), see Secs. 1.72-15 and 1.402(a)-1(e).
    (b) Effective/applicability date. The first and last sentences of 
paragraph (a) of this section apply for taxable years beginning on or 
after January 1, 2015.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as 
amended by T.D. 9665, 79 FR 26841, May 12, 2014]



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 447]]

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  [Reserved]



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 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

[[Page 448]]

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 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.

[[Page 449]]

    (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;
    (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

[[Page 450]]

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.
    (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.

[[Page 451]]

    (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.
    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

[[Page 452]]

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 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.

[[Page 453]]

    (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 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.

[[Page 454]]

    (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. 1.108-7  Reduction of attributes.

    (a) In general. (1) If a taxpayer excludes discharge of indebtedness 
income (COD income) from gross income under section 108(a)(1)(A), (B), 
or (C), then the amount excluded shall be applied to reduce the 
following tax attributes of the taxpayer in the following order:
    (i) Net operating losses.
    (ii) General business credits.
    (iii) Minimum tax credits.
    (iv) Capital loss carryovers.
    (v) Basis of property.
    (vi) Passive activity loss and credit carryovers.
    (vii) Foreign tax credit carryovers.
    (2) The taxpayer may elect under section 108(b)(5), however, to 
apply any portion of the excluded COD income to reduce first the basis 
of depreciable property. To the extent the excluded COD income is not so 
applied, the taxpayer must then reduce any remaining tax attributes in 
the order specified in section 108(b)(2). If the excluded COD income 
exceeds the sum of the taxpayer's tax attributes, the excess is 
permanently excluded from the taxpayer's gross income. For rules 
relating to basis reductions required by sections 108(b)(2)(E) and 
108(b)(5), see sections 1017 and 1.1017-1. For rules relating to the 
time and manner for making an election under section 108(b)(5), see 
Sec. 1.108-4.
    (b) Carryovers and carrybacks. The tax attributes subject to 
reduction under section 108(b)(2) and paragraph (a)(1) of this section 
that are carryovers to the taxable year of the discharge, or that may be 
carried back to taxable years preceding the year of the discharge, are 
taken into account by the taxpayer for the taxable year of the discharge 
or the preceding years, as the case may be, before such attributes are 
reduced pursuant to section 108(b)(2) and paragraph (a)(1) of this 
section.
    (c) Transactions to which section 381 applies. If a taxpayer 
realizes COD income that is excluded from gross income under section 
108(a) either during or after a taxable year in which the taxpayer is 
the distributor or transferor of assets in a transaction described in 
section 381(a), any tax attributes to which the acquiring corporation 
succeeds, including the basis of property acquired by the acquiring 
corporation in the transaction, must reflect the reductions required by 
section 108(b). For this purpose, all attributes listed in section 
108(b)(2) immediately prior to the transaction described in section 
381(a), but after the determination of tax for the year of the 
distribution or transfer of assets, including basis of property, will be 
available for reduction under section 108(b)(2). However, the basis of 
stock or securities of the acquiring corporation, if any, received by 
the taxpayer in exchange for the transferred assets shall not be 
available for reduction under section 108(b)(2).
    (d) Special rules for S corporations--(1) In general. If an S 
corporation excludes COD income from gross income under section 
108(a)(1)(A), (B), or (C), the amount excluded shall be applied to 
reduce the S corporation's tax attributes under paragraph (a)(1) of this 
section. For purposes of paragraph (a)(1)(i) of this section, the 
aggregate amount of the shareholders' losses or deductions that are 
disallowed for the taxable year of the discharge under section 
1366(d)(1), including disallowed losses or deductions of a shareholder 
that transfers all of the shareholder's stock in the S corporation 
during the taxable year of the discharge, is treated as the net 
operating loss tax attribute (deemed NOL) of the S corporation for the 
taxable year of the discharge.
    (2) Allocation of excess losses or deductions--(i) In general. If 
the amount of an S corporation's deemed NOL exceeds the amount of the S 
corporation's COD income that is excluded from gross income under 
section 108(a)(1)(A), (B), or (C), the excess deemed NOL shall be 
allocated to the shareholder or shareholders of the S corporation as a 
loss or deduction that is disallowed under section 1366(d) for the 
taxable year of the discharge.
    (ii) Multiple shareholders--(A) In general. If an S corporation has 
multiple shareholders, to determine the amount of the S corporation's 
excess deemed

[[Page 455]]

NOL to be allocated to each shareholder under paragraph (d)(2)(i) of 
this section, calculate with respect to each shareholder the 
shareholder's excess amount. The shareholder's excess amount is the 
amount (if any) by which the shareholder's losses or deductions 
disallowed under section 1366(d)(1) (before any reduction under 
paragraph (a)(1) of this section) exceed the amount of COD income that 
would have been taken into account by that shareholder under section 
1366(a) had the COD income not been excluded under section 108(a).
    (B) Shareholders with a shareholder's excess amount. Each 
shareholder that has a shareholder's excess amount, as determined under 
paragraph (d)(2)(ii)(A) of this section, is allocated an amount equal to 
the S corporation's excess deemed NOL multiplied by a fraction, the 
numerator of which is the shareholder's excess amount and the 
denominator of which is the sum of all shareholders' excess amounts.
    (C) Shareholders with no shareholder's excess amount. If a 
shareholder does not have a shareholder's excess amount as determined in 
paragraph (d)(2)(ii)(A) of this section, none of the S corporation's 
excess deemed NOL shall be allocated to that shareholder.
    (iii) Terminating shareholder. Any amount of the S corporation's 
excess deemed NOL allocated under paragraph (d)(2) of this section to a 
shareholder that had transferred all of the shareholder's stock in the 
corporation during the taxable year of the discharge is permanently 
disallowed under Sec. 1.1366-2(a)(6), unless the transfer of stock is 
described in section 1041(a). If the transfer of stock is described in 
section 1041(a), the amount of the S corporation's excess deemed NOL 
allocated to the transferor under paragraph (d)(2) of this section shall 
be treated as a loss or deduction incurred by the corporation in the 
succeeding taxable year with respect to the transferee. See section 
1366(d)(2)(B).
    (3) Character of excess losses or deductions allocated to a 
shareholder. The character of an S corporation's excess deemed NOL that 
is allocated to a shareholder under paragraph (d)(2) of this section 
consists of a proportionate amount of each item of the shareholder's 
loss or deduction that is disallowed for the taxable year of the 
discharge under section 1366(d)(1).
    (4) Information requirements. If an S corporation excludes COD 
income from gross income under section 108(a) for a taxable year, each 
shareholder of the S corporation during the taxable year of the 
discharge must report to the S corporation the amount of the 
shareholder's losses and deductions that are disallowed for the taxable 
year of the discharge under section 1366(d)(1), even if that amount is 
zero. If a shareholder fails to report the amount of the shareholder's 
losses and deductions that are disallowed for the taxable year of the 
discharge under section 1366(d)(1) to the S corporation, or if the S 
corporation knows that the amount reported by the shareholder is 
inaccurate, or if the information, as reported, appears to be incomplete 
or incorrect, the S corporation may rely on its own books and records, 
as well as other information available to the S corporation, to 
determine the amount of the shareholder's losses and deductions that are 
disallowed for the taxable year of the discharge under section 
1366(d)(1), provided that the S corporation knows or reasonably believes 
that its information presents an accurate reflection of the 
shareholder's disallowed losses and deductions under section 1366(d)(1). 
The S corporation must report to each shareholder the amount of the S 
corporation's excess deemed NOL that is allocated to that shareholder 
under paragraph (d)(2) of this section, even if that amount is zero, in 
accordance with applicable forms and instructions.
    (e) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) Facts. In Year 4, X, a corporation in a title 11 
case, is entitled under section 108(a)(1)(A) to exclude from gross 
income $100,000 of COD income. For Year 4, X has gross income in the 
amount of $50,000. In each of Years 1 and 2, X had no taxable income or 
loss. In Year 3, X had a net operating loss of $100,000, the use of 
which when carried over to Year 4 is not subject to any restrictions 
other than those of section 172.
    (ii) Analysis. Pursuant to paragraph (b) of this section, X takes 
into account the net operating loss carryover from Year 3 in computing 
its taxable income for Year 4 before any portion of the COD income 
excluded

[[Page 456]]

under section 108(a)(1)(A) is applied to reduce tax attributes. Thus, 
the amount of the net operating loss carryover that is reduced under 
section 108(b)(2) and paragraph (a) of this section is $50,000.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that in Year 4 X sustains a net operating loss in the amount of 
$100,000. In addition, in each of Years 2 and 3, X reported taxable 
income in the amount of $25,000.
    (ii) Analysis. Pursuant to paragraph (b) of this section and section 
172, the net operating loss sustained in Year 4 is carried back to Years 
2 and 3 before any portion of the COD income excluded under section 
108(a)(1)(A) is applied to reduce tax attributes. Thus, the amount of 
the net operating loss that is reduced under section 108(b)(2) and 
paragraph (a) of this section is $50,000.
    Example 3. (i) Facts. In Year 2, X, a corporation in a title 11 
case, has outstanding debts of $200,000 and a depreciable asset that has 
an adjusted basis of $75,000 and a fair market value of $100,000. X has 
no other assets or liabilities. X has a net operating loss of $80,000 
that is carried over to Year 2 but has no general business credit, 
minimum tax credit, or capital loss carryovers. Under a plan of 
reorganization, X transfers its asset to Corporation Y in exchange for Y 
stock with a value of $100,000. X distributes the Y stock to its 
creditors in exchange for release of their claims against X. X's 
shareholders receive nothing in the transaction. The transaction 
qualifies as a reorganization under section 368(a)(1)(G) that satisfies 
the requirements of section 354(b)(1)(A) and (B). For Year 2, X has 
gross income of $10,000 (without regard to any income from the discharge 
of indebtedness) and is allowed a depreciation deduction of $10,000 in 
respect of the asset. In addition, it generates no general business 
credits.
    (ii) Analysis. On the distribution of Y stock to X's creditors, 
under section 108(a)(1)(A), X is entitled to exclude from gross income 
the debt discharge amount of $100,000. (Under section 108(e)(8), X is 
treated as satisfying $100,000 of the debt owed the creditors for 
$100,000, the fair market value of the Y stock transferred to those 
creditors.) In Year 2, X has no taxable income or loss because its gross 
income is exactly offset by the depreciation deduction. As a result of 
the depreciation deduction, X's basis in the asset is reduced by $10,000 
to $65,000. Pursuant to paragraph (c) of this section, the amount of X's 
net operating loss to which Y succeeds pursuant to section 381 and the 
basis of X's property transferred to Y must take into account the 
reductions required by section 108(b). Pursuant to paragraph (a) of this 
section, X's net operating loss carryover in the amount of $80,000 is 
reduced by $80,000 of the COD income excluded under section 108(a)(1). 
In addition, X's basis in the asset is reduced by $20,000, the extent to 
which the COD income excluded under section 108(a)(1) did not reduce the 
net operating loss. Accordingly, as a result of the reorganization, 
there is no net operating loss to which Y succeeds under section 381. 
Pursuant to section 361, X recognizes no gain or loss on the transfer of 
its property to Y. Pursuant to section 362(b), Y's basis in the asset 
acquired from X is $45,000.
    Example 4. (i) Facts. The facts are the same as in Example 3, except 
that X elects under section 108(b)(5) to reduce first the basis of its 
depreciable asset.
    (ii) Analysis. As in Example 3, on the distribution of Y stock to 
X's creditors, under section 108(a)(1)(A), X is entitled to exclude from 
gross income the debt discharge amount of $100,000. In addition, in Year 
2, X has no taxable income or loss because its gross income is exactly 
offset by the depreciation deduction. As a result of the depreciation 
deduction, X's basis in the asset is reduced by $10,000 to $65,000. 
Pursuant to paragraph (c) of this section, the amount of X's net 
operating loss to which Y succeeds pursuant to section 381 and the basis 
of X's property transferred to Y must take into account the reductions 
required by section 108(b). As a result of the election under section 
108(b)(5), X's basis in the asset is reduced by $65,000 to $0. In 
addition, X's net operating loss is reduced by $35,000, the extent to 
which the amount excluded from income under section 108(a)(1)(A) does 
not reduce X's asset basis. Accordingly, as a result of the 
reorganization, Y succeeds to X's net operating loss in the amount of 
$45,000 under section 381. Pursuant to section 361, X recognizes no gain 
or loss on the transfer of its property to Y. Pursuant to section 
362(b), Y's basis in the asset acquired from X is $0.
    Example 5. (i) Facts. During the entire calendar year 2009, A, B, 
and C each own equal shares of stock in X, a calendar year S 
corporation. As of December 31, 2009, A, B, and C each have a zero stock 
basis and X does not have any indebtedness to A, B, or C. For the 2009 
taxable year, X excludes from gross income $45,000 of COD income under 
section 108(a)(1)(A). The COD income (had it not been excluded) would 
have been allocated $15,000 to A, $15,000 to B, and $15,000 to C under 
section 1366(a). For the 2009 taxable year, X has $30,000 of losses and 
deductions that X passes through pro rata to A, B, and C in the amount 
of $10,000 each. The losses and deductions that pass through to A, B, 
and C are disallowed under section 1366(d)(1). In addition, B has 
$10,000 of section 1366(d) losses from prior years and C has $20,000 of 
section 1366(d) losses from prior years. A's ($10,000), B's ($20,000) 
and C's ($30,000) combined $60,000 of disallowed losses and deductions 
for the taxable year of the discharge are treated as a current year net 
operating loss tax attribute of X under section 108(d)(7)(B)

[[Page 457]]

(deemed NOL) for purposes of the section 108(b) reduction of tax 
attributes.
    (ii) Allocation. Under section 108(b)(2)(A), X's $45,000 of excluded 
COD income reduces the $60,000 deemed NOL to $15,000. Therefore, X has a 
$15,000 excess net operating loss (excess deemed NOL) to allocate to its 
shareholders. Under paragraph (d)(2)(ii)(C) of this section, none of the 
$15,000 excess deemed NOL is allocated to A because A's section 1366(d) 
losses and deductions immediately prior to the section 108(b)(2)(A) 
reduction ($10,000) do not exceed A's share of the excluded COD income 
for 2008 ($15,000). Thus, A has no shareholder's excess amount. Each of 
B's and C's respective section 1366(d) losses and deductions immediately 
prior to the section 108(b)(2)(A) reduction exceed each of B's and C's 
respective shares of the excluded COD income for 2008. B's excess amount 
is $5,000 ($20,000-$15,000) and C's excess amount is $15,000 
($30,000-$15,000). Therefore, the total of all shareholders' excess 
amounts is $20,000. Under paragraph (d)(2) of this section, X will 
allocate $3,750 of the $15,000 excess deemed NOL to B ($15,000  x  
$5,000/$20,000) and $11,250 of the $15,000 excess deemed NOL to C 
($15,000  x  $15,000/$20,000). These amounts are treated as losses and 
deductions disallowed under section 1366(d)(1) for the taxable year of 
the discharge. Accordingly, at the beginning of 2010, A has no section 
1366(d)(2) carryovers, B has $3,750 of carryovers, and C has $11,250 of 
carryovers.
    (iii) Character. Immediately prior to the section 108(b)(2)(A) 
reduction, B's $20,000 of section 1366(d) losses and deductions 
consisted of $8,000 of long-term capital losses, $7,000 of section 1231 
losses, and $5,000 of ordinary losses. After the section 108(b)(2)(A) 
tax attribute reduction, X will allocate $3,750 of the excess deemed NOL 
to B. Under paragraph (d)(3) of this section, the $3,750 excess deemed 
NOL allocated to B consists of $1,500 of long-term capital losses 
(($8,000/$20,000)  x  $3,750), $1,312.50 of section 1231 losses 
(($7,000/$20,000)  x  $3,750), and $937.50 of ordinary losses (($5,000/
$20,000)  x  $3,750). As a result, at the beginning of 2010, B's $3,750 
of section 1366(d)(2) carryovers consist of $1,500 of long-term capital 
losses, $1,312.50 of section 1231 losses, and $937.50 of ordinary 
losses.
    Example 6. (i) A and B each own 50 percent of the shares of stock in 
X, a calendar year S corporation. On March 1, 2009, X realizes $12,000 
of COD income and excludes this amount from gross income under section 
108(a)(1)(A) for X's 2009 taxable year. On June 30, 2009, A sells all of 
her shares of stock in X to C in a transfer not described in section 
1041(a). X does not make a terminating election under section 
1377(a)(2). The COD income (had it not been excluded) would have been 
allocated $3,000 to A, $6,000 to B, and $3,000 to C under section 
1366(a). Prior to the section 108(b)(2)(A) reduction, for the taxable 
year of the discharge the shareholders have disallowed losses and 
deductions under section 1366(d) (including disallowed losses carried 
over to the current year under section 1366(d)(2)) in the following 
amounts: A--$5,000, B--$13,000, and C--$2,000. The combined $20,000 of 
disallowed losses and deductions for the taxable year of the discharge 
are treated as a current year net operating loss tax attribute of X 
under section 108(d)(7)(B) (deemed NOL).
    (ii) Under section 108(b)(2)(A), X's $12,000 of excluded COD income 
reduces the $20,000 deemed NOL to $8,000. Therefore, X has an $8,000 
excess net operating loss (excess deemed NOL) to allocate to its 
shareholders. Under paragraph (d)(2)(ii)(C) of this section, none of the 
$8,000 excess deemed NOL is allocated to C because C's section 1366(d) 
losses and deductions immediately prior to the section 108(b)(2)(A) 
reduction ($2,000) do not exceed C's share of the excluded COD income 
for 2008 ($3,000). However, each of A's and B's respective section 
1366(d) losses and deductions immediately prior to the section 
108(b)(2)(A) reduction exceed each of A's and B's respective shares of 
the excluded COD income for 2009. A's excess amount is $2,000 
($5,000-$3,000) and B's excess amount is $7,000 ($13,000-$6,000). 
Therefore, the total of all shareholders' excess amounts is $9,000. 
Under paragraph (d)(2) of this section, X will allocate $1,777.78 of the 
$8,000 excess deemed NOL to A ($8,000  x  $2,000/$9,000) and $6,222.22 
of the $8,000 excess deemed NOL to B ($8,000  x  $7,000/$9,000). 
However, because A transferred all of her shares of stock in X in a 
transaction not described in section 1041(a), A's $1,777.78 of section 
1366(d) losses and deductions are permanently disallowed under paragraph 
(d)(2)(iii) of this section. Accordingly, at the beginning of 2010, B 
has $6,222.22 of section 1366(d)(2) carryovers and C has no section 
1366(d)(2) carryovers.
    Example 7. The facts are the same as in Example 6, except that X, 
with the consent of A and C, makes a terminating election under section 
1377(a)(2) upon A's sale of her stock in X to C. Therefore, the COD 
income (had it not been excluded) would have been allocated $6,000 to A, 
$6,000 to B, and $0 to C. Under paragraph (d)(2)(ii)(C) of this section, 
none of the $8,000 excess deemed NOL is allocated to A because A's 
section 1366(d) losses and deductions immediately prior to the section 
108(b)(2)(A) reduction ($5,000) do not exceed A's share of the excluded 
COD income for 2009 ($6,000). However, each of B's and C's respective 
section 1366(d) losses and deductions immediately prior to the section 
108(b)(2)(A) reduction exceed each of B's and C's respective shares of 
the excluded COD income for 2009. B's excess amount is $7,000 
($13,000-$6,000), C's excess amount is $2,000 ($2,000-$0). Therefore, 
the total of all shareholders' excess amounts is $9,000. Under paragraph 
(d)(2) of this section, X will allocate $6,222.22 of the $8,000 excess 
deemed NOL

[[Page 458]]

to B ($8,000  x  $7,000/$9,000) and $1,777.78 of the $8,000 excess 
deemed NOL to C. Accordingly, at the beginning of 2010, B has $6,222.22 
of section 1366(d)(2) carryovers and C has $1,777.78 of section 
1366(d)(2) carryovers.

    (f) Effective/applicability date--(1) Paragraphs (a), (b), (c), and 
Examples 1, 2, 3, and 4 of paragraph (e) of this section apply to 
discharges of indebtedness occurring on or after May 10, 2004.
    (2) Paragraph (d) and Examples 5, 6, and 7 of paragraph (e) of this 
section apply to discharges of indebtedness occurring on or after 
October 30, 2009. Paragraph (d)(2)(iii) of this section applies on and 
after July 23, 2014. For rules that apply before that date, see 26 CFR 
part 1 (revised as of April 1, 2014).

[T.D. 9080, 68 FR 42592, July 18, 2003; 68 FR 56556, Oct. 1, 2003. 
Redesignated and amended by T.D. 9127, 69 FR 26039, May 11, 2004; T.D. 
9469, 74 FR 56111, Oct. 30, 2009; T.D. 9682, 79 FR 42677, July 23, 2014]



Sec. 1.108-8  Indebtedness satisfied by partnership interest.

    (a) In general. For purposes of determining income of a debtor from 
discharge of indebtedness (COD income), if a debtor partnership 
transfers a capital or profits interest in the partnership to a creditor 
in satisfaction of its recourse or nonrecourse indebtedness (a debt-for-
equity exchange), the partnership is treated as having satisfied the 
indebtedness with an amount of money equal to the fair market value of 
the partnership interest.
    (b) Determination of fair market value--(1) In general. All the 
facts and circumstances are considered in determining the fair market 
value of a partnership interest transferred by a debtor partnership to a 
creditor in satisfaction of the debtor partnership's indebtedness (debt-
for-equity interest) for purposes of paragraph (a) of this section. If 
the fair market value of the debt-for-equity interest does not equal the 
fair market value of the indebtedness exchanged, then general tax law 
principles shall apply to account for the difference.
    (2) Safe harbor--(i) General rule. For purposes of paragraph (a) of 
this section, the fair market value of a debt-for-equity interest is 
deemed to be equal to the liquidation value of the debt-for-equity 
interest, as defined in paragraph (b)(2)(iii) of this section, if the 
following requirements are satisfied--
    (A) The creditor, debtor partnership, and its partners treat the 
fair market value of the indebtedness as being equal to the liquidation 
value of the debt-for-equity interest for purposes of determining the 
tax consequences of the debt-for-equity exchange;
    (B) If, as part of the same overall transaction, the debtor 
partnership transfers more than one debt-for-equity interest to one or 
more creditors, then each creditor, debtor partnership, and its partners 
treat the fair market value of each debt-for-equity interest transferred 
by the debtor partnership to such creditors as equal to its liquidation 
value;
    (C) The debt-for-equity exchange is a transaction that has terms 
that are comparable to terms that would be agreed to by unrelated 
parties negotiating with adverse interests; and
    (D) Subsequent to the debt-for-equity exchange, the debtor 
partnership does not redeem the debt-for-equity interest, and no person 
bearing a relationship to the debtor partnership or its partners that is 
specified in section 267(b) or section 707(b) purchases the debt-for-
equity interest, as part of a plan at the time of the debt-for-equity 
exchange that has as a principal purpose the avoidance of COD income by 
the debtor partnership.
    (ii) Tiered-partnership rule. For purposes of this paragraph (b)(2), 
the liquidation value of a debt-for-equity interest in a partnership 
(upper-tier partnership) that directly or indirectly owns an interest in 
one or more partnerships (lower-tier partnership(s)) is determined by 
taking into account the liquidation value of such lower-tier partnership 
interests.
    (iii) Definition of liquidation value. For purposes of this 
paragraph (b)(2), the liquidation value of a debt-for-equity interest 
equals the amount of cash that the creditor would receive with respect 
to the debt-for-equity interest if, immediately after the debt-for-
equity exchange, the partnership sold all of its assets (including 
goodwill, going concern value, and any other intangibles) for cash equal 
to the fair market value of those assets and then liquidated.

[[Page 459]]

    (c) Example. The following example illustrates the provisions of 
this section:

    Example. (i) AB partnership has $1,000 of outstanding indebtedness 
owed to C. C agrees to transfer to AB partnership the $1,000 
indebtedness in a debt-for-equity exchange for a debt-for-equity 
interest in AB partnership. The liquidation value of C's debt-for-equity 
interest is $700, which is the amount of cash that C would receive with 
respect to that interest if, immediately after the debt-for-equity 
exchange, AB partnership sold all of its assets for cash equal to the 
fair market value of those assets and then liquidated. Each of the 
requirements of the liquidation value safe harbor described in paragraph 
(b)(2) of this section is satisfied.
    (ii) Because the requirements in paragraph (b)(2) of this section 
are satisfied, the fair market value of C's debt-for-equity interest in 
AB partnership for purposes of determining AB partnership's COD income 
is the liquidation value of C's debt-for-equity interest, or $700. 
Accordingly, AB partnership is treated as satisfying the $1,000 
indebtedness for $700 under section 108(e)(8).

    (d) Effective/applicability date. This section applies to debt-for-
equity exchanges occurring on or after November 17, 2011.

[T.D. 9557, 76 FR 71258, Nov. 17, 2011]



Sec. 1.108-9  Application of the bankruptcy and the insolvency
provisions of section 108 to grantor trusts and disregarded entities.

    (a) General rule--(1) Owner is the taxpayer. For purposes of 
applying section 108(a)(1)(A) and (B) to discharge of indebtedness 
income of a grantor trust or a disregarded entity, neither the grantor 
trust nor the disregarded entity shall be considered to be the 
``taxpayer,'' as that term is used in section 108(a)(1) and (d)(1) 
through (3). Rather, for purposes of section 108(a)(1)(A) and (B) and 
(d)(1) through (3) and subject to section 108(d)(6), the owner of the 
grantor trust or the owner of the disregarded entity is the 
``taxpayer.''
    (2) The bankruptcy exclusion. If indebtedness of a grantor trust or 
a disregarded entity is discharged in a title 11 case, section 
108(a)(1)(A) applies to that discharged indebtedness only if the owner 
of the grantor trust or the owner of the disregarded entity is under the 
jurisdiction of the court in a title 11 case as the title 11 debtor. If 
the grantor trust or the disregarded entity is under the jurisdiction of 
the court in a title 11 case as the title 11 debtor, but the owner of 
the grantor trust or the owner of the disregarded entity is not, section 
108(a)(1)(A) does not apply to the discharge of indebtedness income.
    (3) The insolvency exclusion. Section 108(a)(1)(B) applies to the 
discharged indebtedness of a grantor trust or a disregarded entity only 
to the extent the owner of the grantor trust or the owner of the 
disregarded entity is insolvent. If the grantor trust or the disregarded 
entity is insolvent, but the owner of the grantor trust or the owner of 
the disregarded entity is solvent, section 108(a)(1)(B) does not apply 
to the discharge of indebtedness income.
    (b) Application to partnerships. Under section 108(d)(6), in the 
case of a partnership, section 108(a)(1)(A) and (B) applies at the 
partner level. If a partnership holds an interest in a grantor trust or 
a disregarded entity, the applicability of section 108(a)(1)(A) and (B) 
to the discharge of indebtedness income is tested by looking to each 
partner to whom the income is allocable.
    (c) Definitions--(1) Disregarded entity. For purposes of this 
section, a disregarded entity is an entity that is disregarded as an 
entity separate from its owner for Federal income tax purposes. See 
Sec. 301.7701-2(c)(2)(i) of this chapter, the Procedure and 
Administration Regulations. Examples of disregarded entities include a 
domestic single-member limited liability company that does not elect to 
be classified as a corporation for Federal income tax purposes pursuant 
to Sec. 301.7701-3 of this chapter, a corporation that is a qualified 
REIT subsidiary (within the meaning of section 856(i)(2)), and a 
corporation that is a qualified subchapter S subsidiary (within the 
meaning of section 1361(b)(3)(B)).
    (2) Grantor trust. For purposes of this section, a grantor trust is 
any portion of a trust that is treated under subpart E of part I of 
subchapter J of chapter 1 of subtitle A of title 26 of the United States 
Code as being owned by the grantor or another person.

[[Page 460]]

    (3) Owner. Notwithstanding any other provision of this section to 
the contrary, neither a grantor trust nor a disregarded entity shall be 
considered an owner for purposes of this section.
    (4) Title 11 debtor. For purposes of this section, a title 11 debtor 
is a debtor in a case under title 11 of the United States Code, as 
defined in 11 U.S.C. 101(13).
    (d) Applicability date. The rules of this section apply to discharge 
of indebtedness income occurring on or after June 10, 2016.

[T.D. 9771, 81 FR 37507, June 10, 2016]



Sec. 1.108(c)-1T  [Reserved]



Sec. 1.108(i)-0  Definitions and effective/applicability dates.

    (a) Definitions. For purposes of regulations under section 108(i)--
    (1) Acquisition. An acquisition, with respect to any applicable debt 
instrument, includes an acquisition of the debt instrument for cash or 
other property, the exchange of the debt instrument for another debt 
instrument (including an exchange resulting from a modification of the 
debt instrument), the exchange of the debt instrument for corporate 
stock or a partnership interest, the contribution of the debt instrument 
to capital, the complete forgiveness of the indebtedness by the holder 
of the debt instrument, and a direct or an indirect acquisition within 
the meaning of Sec. 1.108-2.
    (2) Applicable debt instrument. An applicable debt instrument is a 
debt instrument that was issued by a C corporation or any other person 
in connection with the conduct of a trade or business by such person. In 
the case of an intercompany obligation (as defined in Sec. 1.1502-
13(g)(2)(ii)), applicable debt instrument includes only an instrument 
for which COD income is realized upon the instrument's deemed 
satisfaction under Sec. 1.1502-13(g)(5).
    (3) C corporation issuer. C corporation issuer means a C corporation 
that issues a debt instrument with any deferred OID deduction.
    (4) C corporation partner. A C corporation partner is a C 
corporation that is a direct or indirect partner of an electing 
partnership or a related partnership.
    (5) COD income. COD income means income from the discharge of 
indebtedness, as determined under sections 61(a)(12) and 108(a) and the 
regulations under those sections.
    (6) COD income amount. A COD income amount is a partner's 
distributive share of COD income with respect to an applicable debt 
instrument of an electing partnership.
    (7) Debt instrument. Debt instrument means a bond, debenture, note, 
certificate, or any other instrument or contractual arrangement 
constituting indebtedness (within the meaning of section 1275(a)(1)).
    (8) Deferral period. For a reacquisition that occurs in 2009, 
deferral period means the taxable year of the reacquisition and the four 
taxable years following such taxable year. For a reacquisition that 
occurs in 2010, deferral period means the taxable year of the 
reacquisition and the three taxable years following such taxable year.
    (9) Deferred amount. A deferred amount is the portion of a partner's 
COD income amount with respect to an applicable debt instrument that is 
deferred under section 108(i).
    (10) Deferred COD income. Deferred COD income means COD income that 
is deferred under section 108(i).
    (11) Deferred item. A deferred item is any item of deferred COD 
income or deferred OID deduction that has not been previously taken into 
account under section 108(i).
    (12) Deferred OID deduction. A deferred OID deduction means an 
otherwise allowable deduction for OID that is deferred under section 
108(i)(2) with respect to a debt instrument issued (or treated as issued 
under section 108(e)(4)) in a debt-for-debt exchange described in 
section 108(i)(2)(A) or a deemed debt-for-debt exchange described in 
Sec. 1.108(i)-3(a).
    (13) Deferred section 465 amount. A deferred section 465 amount is 
described in paragraph (d)(3) of Sec. 1.108(i)-2.
    (14) Deferred section 752 amount. A deferred section 752 amount is 
described in paragraph (b)(3) of Sec. 1.108(i)-2.
    (15) Direct partner. A direct partner is a person that owns a direct 
interest in a partnership.
    (16) Electing corporation. An electing corporation is a C 
corporation with deferred COD income by reason of a section 108(i) 
election.

[[Page 461]]

    (17) Electing entity. An electing entity is an entity that is a 
taxpayer that makes an election under section 108(i).
    (18) Electing member. An electing member is an electing corporation 
that is a member of an affiliated group that files a consolidated 
return.
    (19) Electing partnership. An electing partnership is a partnership 
that makes an election under section 108(i).
    (20) Electing S corporation. An electing S corporation is an S 
corporation that makes an election under section 108(i).
    (21) Included amount. An included amount is the portion of a 
partner's COD income amount with respect to an applicable debt 
instrument that is not deferred under section 108(i) and is included in 
the partner's distributive share of partnership income for the taxable 
year of the partnership in which the reacquisition occurs.
    (22) Inclusion period. The inclusion period is the five taxable 
years following the last taxable year of the deferral period.
    (23) Indirect partner. An indirect partner is a person that owns an 
interest in a partnership through an S corporation and/or one or more 
partnerships.
    (24) Issuing entity. An issuing entity is any entity that is--
    (i) A related partnership;
    (ii) A related S corporation;
    (iii) An electing partnership that issues a debt instrument (or is 
treated as issuing a debt instrument under section 108(e)(4)) in a debt-
for-debt exchange described in section 108(i)(2)(A) or a deemed debt-
for-debt exchange described in Sec. 1.108(i)-3(a); or
    (iv) An electing S corporation that issues a debt instrument (or is 
treated as issuing a debt instrument under section 108(e)(4)) in a debt-
for-debt exchange described in section 108(i)(2)(A) or a deemed debt-
for-debt exchange described in Sec. 1.108(i)-3(a).
    (25) OID. OID means original issue discount, as determined under 
sections 1271 through 1275 (and the regulations under those sections). 
If the amount of OID with respect to a debt instrument is less than a de 
minimis amount as determined under Sec. 1.1273-1(d), the OID is treated 
as zero for purposes of section 108(i)(2).
    (26) Reacquisition. A reacquisition, with respect to any applicable 
debt instrument, is any event occurring after December 31, 2008 and 
before January 1, 2011, that causes COD income with respect to such 
applicable debt instrument, including any acquisition of the debt 
instrument by the debtor that issued (or is otherwise the obligor under) 
the debt instrument or a person related to such debtor (within the 
meaning of section 108(i)(5)(A)).
    (27) Related partnership. A related partnership is a partnership 
that is related to the electing entity (within the meaning of section 
108(i)(5)(A)) and that issues a debt instrument in a debt-for-debt 
exchange described in section 108(i)(2)(A) or a deemed debt-for-debt 
exchange described in Sec. 1.108(i)-3(a).
    (28) Related S corporation. A related S corporation is an S 
corporation that is related to the electing entity (within the meaning 
of section 108(i)(5)(A)) and that issues a debt instrument in a debt-
for-debt exchange described in section 108(i)(2)(A) or a deemed debt-
for-debt exchange described in Sec. 1.108(i)-3(a).
    (29) Separate interest. A separate interest is a direct interest in 
an electing partnership or in a partnership or S corporation that is a 
direct or indirect partner of an electing partnership.
    (30) S corporation partner. An S corporation partner is an S 
corporation that is a direct or indirect partner of an electing 
partnership or a related partnership.
    (b) Effective/Applicability dates--(1) In general. The rules of this 
section, Sec. 1.108(i)-1, and Sec. 1.108(i)-2, apply on or after July 2, 
2013, to reacquisitions of applicable debt instruments in taxable years 
ending after December 31, 2008. In addition, the rules of Sec. 1.108(i)-
3 apply on or after July 2, 2013, to debt instruments issued after 
December 31, 2008, in connection with reacquisitions of applicable debt 
instruments in taxable years ending after December 31, 2008.
    (2) Prior periods. For rules applying before July 2, 2013, see 
Sec. 1.108(i)-0T, Sec. 1.108(i)-1T, Sec. 1.108(i)-2T, and Sec. 1.108(i)-
3T, as contained in 26 CFR part 1, revised April 1, 2013.

[T.D. 9622, 78 FR 39986, July 3, 2013; 78 FR 48607, Aug. 9, 2013]

[[Page 462]]



Sec. 1.108(i)-1  Deferred discharge of indebtedness income and
deferred original issue discount deductions of C corporations.

    (a) Overview. Section 108(i)(1) provides an election for the 
deferral of COD income arising in connection with the reacquisition of 
an applicable debt instrument. An electing corporation generally 
includes deferred COD income ratably over the inclusion period. 
Paragraph (b) of this section provides rules for the mandatory 
acceleration of an electing corporation's remaining deferred COD income, 
the mandatory acceleration of a C corporation issuer's deferred OID 
deductions, and for the elective acceleration of an electing member's 
(other than the common parent's) remaining deferred COD income. 
Paragraph (c) of this section provides examples illustrating the 
application of the mandatory and elective acceleration rules. Paragraph 
(d) of this section provides rules for the computation of an electing 
corporation's earnings and profits. Paragraph (e) of this section refers 
to the effective/applicability dates.
    (b) Acceleration events--(1) Deferred COD income. Except as 
otherwise provided in paragraphs (b)(2) and (3) of this section, and 
Sec. 1.108(i)-2(b)(6) (in the case of a corporate partner), an electing 
corporation's deferred COD income is taken into account ratably over the 
inclusion period.
    (2) Mandatory acceleration events. An electing corporation takes 
into account all of its remaining deferred COD income, including its 
share of an electing partnership's deferred COD income, immediately 
before the occurrence of any one of the events described in this 
paragraph (b)(2) (mandatory acceleration events), regardless of whether 
the electing corporation is in a title 11 or similar case at the time 
the mandatory acceleration event occurs.
    (i) Changes in tax status. The electing corporation changes its tax 
status. For purposes of the preceding sentence, an electing corporation 
is treated as changing its tax status if it becomes one of the following 
entities:
    (A) A tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2).
    (B) An S corporation as defined in section 1361(a)(1).
    (C) A qualified subchapter S subsidiary as defined in section 
1361(b)(3)(B).
    (D) An entity operating on a cooperative basis within the meaning of 
section 1381.
    (E) A regulated investment company (RIC) as defined in section 851 
or a real estate investment trust (REIT) as defined in section 856.
    (F) A qualified REIT subsidiary as defined in section 856(i), but 
only if the qualified REIT subsidiary was not a REIT immediately before 
it became a qualified REIT subsidiary.
    (ii) Cessation of corporate existence--(A) In general. The electing 
corporation ceases to exist for Federal income tax purposes.
    (B) Exception for section 381(a) transactions--(1) In general. The 
electing corporation is not treated as ceasing to exist and is not 
required to take into account its remaining deferred COD income solely 
because its assets are acquired in a transaction to which section 381(a) 
applies. In such a case, the acquiring corporation succeeds to the 
electing corporation's remaining deferred COD income and becomes subject 
to section 108(i) and the regulations thereunder, including all 
reporting requirements, as if the acquiring corporation were the 
electing corporation. A transaction is not treated as one to which 
section 381(a) applies for purposes of this paragraph (b)(2)(ii)(B) in 
the following circumstances--
    (i) The acquisition of the assets of an electing corporation by an S 
corporation, if the acquisition is described in section 1374(d)(8);
    (ii) The acquisition of the assets of an electing corporation by a 
RIC or REIT, if the acquisition is described in Sec. 1.337(d)-
7(a)(2)(ii);
    (iii) The acquisition of the assets of a domestic electing 
corporation by a foreign corporation;
    (iv) The acquisition of the assets of a foreign electing corporation 
by a domestic corporation, if as a result of the transaction, one or 
more exchanging shareholders include in income as a deemed dividend the 
all earnings and profits amount with respect to stock in the foreign 
electing corporation pursuant to Sec. 1.367(b)-3(b)(3);

[[Page 463]]

    (v) The acquisition of the assets of an electing corporation by a 
tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2); or
    (vi) The acquisition of the assets of an electing corporation by an 
entity operating on a cooperative basis within the meaning of section 
1381.
    (2) Special rules for consolidated groups--(i) Liquidations. For 
purposes of paragraph (b)(2)(ii)(B) of this section, the acquisition of 
assets by distributee members of a consolidated group upon the 
liquidation of an electing corporation is not treated as a transaction 
to which section 381(a) applies, unless immediately prior to the 
liquidation, one of the distributee members owns stock in the electing 
corporation meeting the requirements of section 1504(a)(2) (without 
regard to Sec. 1.1502-34). See Sec. 1.1502-80(g).
    (ii) Taxable years. In the case of an intercompany transaction to 
which section 381(a) applies, the transaction does not cause the 
transferor or distributor to have a short taxable year for purposes of 
determining the taxable year of the deferral and inclusion period.
    (iii) Net value acceleration rule--(A) In general. The electing 
corporation engages in an impairment transaction and, immediately after 
the transaction, the gross value of the electing corporation's assets 
(gross asset value) is less than one hundred and ten percent of the sum 
of its total liabilities and the tax on the net amount of its deferred 
items (the net value floor) (the net value acceleration rule). 
Impairment transactions are any transactions, however effected, that 
impair an electing corporation's ability to pay the amount of Federal 
income tax liability on its deferred COD income and include, for 
example, distributions (including section 381(a) transactions), 
redemptions, below-market sales, charitable contributions, and the 
incurrence of additional indebtedness without a corresponding increase 
in asset value. Value-for-value sales or exchanges (for example, an 
exchange to which section 351 or section 721 applies), or mere declines 
in the market value of the electing corporation's assets are not 
impairment transactions. In addition, an electing corporation's 
investments and expenditures in pursuance of its good faith business 
judgment are not impairment transactions. For purposes of determining an 
electing corporation's gross asset value, the amount of any distribution 
that is not treated as an impairment transaction under paragraph 
(b)(2)(iii)(D) of this section (distributions and charitable 
contributions consistent with historical practice) or under paragraph 
(b)(2)(iii)(E) of this section (special rules for RICs and REITs) is 
treated as an asset of the electing corporation. Solely for purposes of 
computing the amount of the net value floor, the tax on the deferred 
items is determined by applying the highest rate of tax specified in 
section 11(b) for the taxable year.
    (B) Transactions integrated. Any transaction that occurs before the 
reacquisition of an applicable debt instrument, but that occurs pursuant 
to the same plan as the reacquisition, is taken into account in 
determining whether the gross asset value of the electing corporation is 
less than the net value floor.
    (C) Corrective action to restore net value. An electing corporation 
is not required to take into account its deferred COD income under the 
net value acceleration rule of paragraph (b)(2)(iii)(A) of this section 
if, before the due date of the electing corporation's return (including 
extensions), value is restored in a transaction in an amount equal to 
the lesser of--
    (1) The amount of value that was removed from the electing 
corporation in one or more impairment transactions (net of amounts 
previously restored under this paragraph (b)(2)(iii)(C)); or
    (2) The amount by which the electing corporation's net value floor 
exceeds its gross asset value.
    For example, assume an electing corporation incurs $50 of debt, 
distributes the $50 of proceeds to its shareholder, and immediately 
after the distribution, the electing corporation's gross asset value is 
below the net value floor by $25. The electing corporation may avoid the 
inclusion of its remaining deferred COD income if value of at least $25 
is restored to it before the due date of the electing corporation's tax 
return (including extensions) for the taxable year that includes the 
distribution.

[[Page 464]]

The value that must be restored is determined at the time of the 
impairment transaction on a net value basis (for example, additional 
borrowings by an electing corporation do not restore value).
    (D) Exceptions for distributions and charitable contributions that 
are consistent with historical practice. An electing corporation's 
distributions are not treated as impairment transactions (and are not 
taken into account as a reduction of the electing corporation's gross 
asset value when applying the net value acceleration rule to any 
impairment transaction), to the extent that the distributions are 
described in section 301(c) and the amount of these distributions, in 
the aggregate, for the applicable taxable year (applicable distribution 
amount) does not exceed the annual average amount of section 301(c) 
distributions over the preceding three taxable years (average 
distribution amount). If an electing corporation's applicable 
distribution amount exceeds its average distribution amount (excess 
amount), then the amount of the impairment transaction equals the excess 
amount. Appropriate adjustments must be made to take into account any 
issuances or redemptions of stock, or similar transactions, occurring 
during the taxable year of distribution or any of the preceding three 
taxable years. If the electing corporation has a short taxable year for 
the year of the distribution or for any of the preceding three taxable 
years, the amounts are determined on an annualized basis. If an electing 
corporation has been in existence for less than three years, the period 
during which the electing corporation has been in existence is 
substituted for the preceding three taxable years. For purposes of 
determining an electing corporation's average distribution amount, the 
electing corporation does not take into account the distribution history 
of a distributor or transferor in a transaction to which section 381(a) 
applies (other than a transaction described in section 368(a)(1)(F)). 
Rules similar to those prescribed in this paragraph (b)(2)(iii)(D) also 
apply to an electing corporation's charitable contributions (within the 
meaning of section 170(c)) that are consistent with its historical 
practice.
    (E) Special rules for RICs and REITs--(1) Distributions. 
Notwithstanding paragraph (b)(2)(iii)(D) of this section, in the case of 
a RIC or REIT, any distribution with respect to stock that is treated as 
a dividend under section 852 or 857 is not treated as an impairment 
transaction (and is not taken into account as a reduction in gross asset 
value when applying the net value acceleration rule to any impairment 
transaction).
    (2) Redemptions by RICs. Any redemption of a redeemable security, as 
defined in 15 U.S.C. section 80a-2(a)(32), by a RIC in the ordinary 
course of business is not treated as an impairment transaction (and is 
not taken into account as a reduction in gross asset value when applying 
the net value acceleration rule to any impairment transaction).
    (F) Special rules for consolidated groups--(1) Impairment 
transactions and net value acceleration rule. In the case of an electing 
member, the determination of whether the member has engaged in an 
impairment transaction is made on a group-wide basis. An electing member 
is treated as engaging in an impairment transaction if any member's 
transaction impairs the group's ability to pay the tax liability 
associated with all electing members' deferred COD income. Accordingly, 
intercompany transactions are not impairment transactions. Similarly, 
the net value acceleration rule is applied by reference to the gross 
asset value of all members (excluding stock of members whether or not 
described in section 1504(a)(4)), the liabilities of all members, and 
the tax on all members' deferred items. For example, assume P is the 
common parent of the P-S consolidated group, S has a section 108(i) 
election in effect, and S makes a $100 distribution to P which, on a 
separate entity basis, would reduce S's gross asset value below the net 
value floor. S's intercompany distribution to P is not an impairment 
transaction. However, if P makes a $100 distribution to its shareholder, 
P's distribution is an impairment transaction (unless the distribution 
is consistent with its historical practice under paragraph 
(b)(2)(iii)(D)

[[Page 465]]

of this section), and the net value acceleration rule is applied by 
reference to the assets, liabilities, and deferred items of the P-S 
group.
    (2) Departing member. If an electing member that previously engaged 
in one or more impairment transactions on a separate entity basis ceases 
to be a member of a consolidated group (departing member), the cessation 
is treated as an impairment transaction and the net value acceleration 
rule under paragraph (b)(2)(iii)(A) of this section is applied to the 
departing member on a separate entity basis immediately after ceasing to 
be a member (and taking into account the impairment transaction(s) that 
occurred on a separate entity basis). If the departing member's gross 
asset value is below the net value floor, the departing member's 
remaining deferred COD income is taken into account immediately before 
the departing member ceases to be a member (unless value is restored 
under paragraph (b)(2)(iii)(C) of this section). If the departing 
member's deferred COD income is not accelerated, the departing member is 
subject to the reporting requirements of section 108(i) on a separate 
entity basis. If the departing member becomes a member of another 
consolidated group, the cessation is treated as an impairment 
transaction and the net value acceleration rule under paragraph 
(b)(2)(iii)(A) of this section is applied by reference to the assets, 
liabilities, and the tax on deferred items of the members of the 
acquiring group immediately after the transaction. If the acquiring 
group's gross asset value is below the net value floor, the departing 
member's remaining deferred COD income is taken into account immediately 
before the departing member ceases to be a member (unless value is 
restored under paragraph (b)(2)(iii)(C) of this section). If the 
departing member's remaining deferred COD income is not accelerated, the 
common parent of the acquiring group succeeds to the reporting 
requirements of section 108(i) with respect to the departing member.
    (3) Elective acceleration for certain consolidated group members--
(i) In general. An electing member (other than the common parent) of a 
consolidated group may elect at any time to accelerate in full (and not 
in part) the inclusion of its remaining deferred COD income with respect 
to all applicable debt instruments by filing a statement described in 
paragraph (b)(3)(ii) of this section. Once made, an election to 
accelerate deferred COD income under this paragraph (b)(3) is 
irrevocable.
    (ii) Time and manner for making election--(A) In general. The 
election to accelerate the inclusion of an electing member's remaining 
deferred COD income with respect to all applicable debt instruments is 
made on a statement attached to a timely filed tax return (including 
extensions) for the year in which the deferred COD income is taken into 
account. The election is made by the common parent on behalf of the 
electing member. See Sec. 1.1502-77(a).
    (B) Additional information. The statement must include--
    (1) Label. A label entitled ``SECTION 1.108(i)-1 ELECTION AND 
INFORMATION STATEMENT BY [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER 
OF THE ELECTING MEMBER]''; and
    (2) Required Information. An identification of each applicable debt 
instrument to which an election under this paragraph (b)(3) applies and 
the corresponding amount of--
    (i) Deferred COD income that is accelerated under this paragraph 
(b)(3); and
    (ii) Deferred OID deductions that are accelerated under paragraph 
(b)(4) of this section.
    (4) Deferred OID deductions--(i) In general. Except as otherwise 
provided in paragraph (b)(4)(ii) of this section and Sec. 1.108(i)-
2(b)(6) (in the case of a C corporation partner), a C corporation 
issuer's deferred OID deductions are taken into account ratably over the 
inclusion period.
    (ii) OID acceleration events. A C corporation issuer takes into 
account all of its remaining deferred OID deductions with respect to a 
debt instrument immediately before the occurrence of any one of the 
events described in this paragraph (b)(4)(ii), regardless of whether the 
C corporation issuer is in a title 11 or similar case.
    (A) Inclusion of deferred COD income. An electing entity or its 
owners take

[[Page 466]]

into account all of the remaining deferred COD income to which the C 
corporation issuer's deferred OID deductions relate. If, under 
Sec. 1.108(i)-2(b) or (c), an electing entity or its owners take into 
account only a portion of the deferred COD income to which the deferred 
OID deductions relate, then the C corporation issuer takes into account 
a proportionate amount of the remaining deferred OID deductions.
    (B) Changes in tax status. The C corporation issuer changes its tax 
status within the meaning of paragraph (b)(2)(i) of this section.
    (C) Cessation of corporate existence--(1) In general. The C 
corporation issuer ceases to exist for Federal income tax purposes.
    (2) Exception for section 381(a) transactions--(i) In general. A C 
corporation issuer is not treated as ceasing to exist and does not take 
into account its remaining deferred OID deductions in a transaction to 
which section 381(a) applies, taking into account the application of 
Sec. 1.1502-34, as appropriate. See Sec. 1.1502-80(g). This exception 
does not apply to a transaction that is not treated as one to which 
section 381(a) applies under paragraph (b)(2)(iii)(B)(1) of this 
section.
    (ii) Taxable years. In the case of an intercompany transaction to 
which section 381(a) applies, the transaction does not cause the 
transferor or distributor to have a short taxable year for purposes of 
determining the taxable year of the deferral and inclusion period.
    (c) Examples. The application of this section is illustrated by the 
following examples. Unless otherwise stated, P, S, S1, and X are 
domestic C corporations, and each files a separate return on a calendar 
year basis:

    Example 1 Net value acceleration rule. (i) Facts. On January 1, 
2009, S reacquires its own note and realizes $400 of COD income. 
Pursuant to an election under section 108(i), S defers recognition of 
the entire $400 of COD income. Therefore, absent a mandatory 
acceleration event, S will take into account $80 of its deferred COD 
income in each year of the inclusion period. On December 31, 2010, S 
makes a $25 distribution to its sole shareholder, P, and this is the 
only distribution made by S in the past four years. Immediately 
following the distribution, S's gross asset value is $100, S has no 
liabilities, and the Federal income tax on S's $400 of deferred COD 
income is $140. Accordingly, S's net value floor is $154 (110%  x  
$140).
    (ii) Analysis. Under paragraph (b)(2)(iii)(A) of this section, S's 
distribution is an impairment transaction. Immediately following the 
distribution, S's gross asset value of $100 is less than the net value 
floor of $154. Accordingly, under the net value acceleration rule of 
paragraph (b)(2)(iii)(A) of this section, S takes into account its $400 
of deferred COD income immediately before the distribution.
    (iii) Corrective action to restore value. The facts are the same as 
in paragraph (i) of this Example 1, except that P contributes assets 
with a value of $25 to S before the due date of S's 2010 return 
(including extensions). Because P restores $25 of value to S (the lesser 
of the amount of value removed in the distribution ($25) or the amount 
by which S's net value floor exceeds its gross asset value ($54)), under 
paragraph (b)(2)(iii)(C) of this section, S does not take into account 
its $400 of deferred COD income.
    Example 2 Distributions consistent with historical practice. (i) 
Facts. P, a publicly traded corporation, makes a valid section 108(i) 
election with respect to COD income realized in 2009. On December 31, 
2009, P distributes $25 million on its 5 million shares of common stock 
outstanding. As of January 1, 2006, P has 10 million shares of common 
stock outstanding, and on March 31, 2006, P distributes $10 million on 
those 10 million shares. On September 15, 2006, P effects a 2:1 reverse 
stock split, and on December 31, 2006, P distributes $10 million on its 
5 million shares of common stock outstanding. In each of 2007 and 2008, 
P distributes $5 million on its 5 million shares of common stock 
outstanding. All of the distributions are described in section 301(c).
    (ii) Amount of impairment transaction. Under paragraph 
(b)(2)(iii)(D) of this section, P's 2009 distributions are not treated 
as impairment transactions (and are not taken into account as a 
reduction of P's gross asset value when applying the net value 
acceleration rule to any impairment transaction), to the extent that the 
aggregate amount distributed in 2009 (the applicable distribution 
amount) does not exceed the annual average amount of distributions (the 
average distribution amount) over the preceding three taxable years. 
Accordingly, P's applicable distribution amount for 2009 is $25 million, 
and its average distribution amount is $10 million ($20 million (2006) 
plus $5 million (2007) plus $5 million (2008) divided by 3). The reverse 
stock split in 2006 is not a transaction requiring an adjustment to the 
determination of the average distribution amount. Because P's applicable 
distribution amount of $25 million exceeds its average distribution 
amount of $10 million, under paragraph (b)(2)(iii)(D) of this section, 
the

[[Page 467]]

amount of P's 2009 distribution that is treated as an impairment 
transaction is $15 million. The balance of the 2009 distribution, $10 
million, is not treated as an impairment transaction (and is not taken 
into account as a reduction in P's gross asset value when applying the 
net value acceleration rule to any impairment transaction).
    (iii) Distribution history. The facts are the same as in paragraph 
(i) of this Example 2, except that in 2010, P merges into X in a 
transaction to which section 381(a) applies, with X succeeding to P's 
deferred COD income, and X makes a distribution to its shareholders. For 
purposes of determining whether X's distribution is consistent with its 
historical practice, the average distribution amount is determined 
solely with respect to X's distribution history.
    Example 3 Cessation of corporate existence. (i) Transaction to which 
section 381(a) applies. P owns all of the stock of S. In 2009, S 
reacquires its own note and elects to defer recognition of its $400 of 
COD income under section 108(i). On December 31, 2010, S liquidates into 
P in a transaction that qualifies under section 332. Under paragraph 
(b)(2) of this section, S must take into account all of its remaining 
deferred COD income upon the occurrence of any one of the mandatory 
acceleration events. Although S ceases its corporate existence as a 
result of the liquidation, S is not required to take into account its 
remaining deferred COD income under the exception in paragraph 
(b)(2)(ii)(B) of this section because its assets are acquired in a 
transaction to which section 381(a) applies. However, under paragraph 
(b)(2)(iii)(A) of this section, S's distribution to P is an impairment 
transaction and the net value acceleration rule is applied with respect 
to the assets, liabilities, and deferred items of P (S's successor) 
immediately following the distribution. If S's deferred COD income is 
not taken into account under the net value acceleration rule of 
(b)(2)(iii) of this section, P succeeds to S's remaining deferred COD 
income and to S's reporting requirements as if P were the electing 
corporation.
    (ii) Debt-laden distributee. The facts are the same as in paragraph 
(i) of this Example 3, except that in the liquidation, S distributes 
$100 of assets to P, a holding company whose only asset is its stock in 
S. Assume that immediately following the distribution, P's gross asset 
value is $100, P has $60 of liabilities, and the Federal income tax on 
the $400 of deferred COD income is $140. Under paragraph (b)(2) of this 
section, S must take into account all of its remaining deferred COD 
income upon the occurrence of any one of the mandatory acceleration 
events. Although S ceases its corporate existence as a result of the 
liquidation, S is not required to take into account its remaining 
deferred COD income under the exception in paragraph (b)(2)(ii)(B) of 
this section because its assets are acquired in a transaction to which 
section 381(a) applies. However, under paragraph (b)(2)(iii)(A) of this 
section, S's distribution to P is an impairment transaction and the net 
value acceleration rule is applied with respect to the assets, 
liabilities, and deferred items of P (S's successor). Immediately 
following the distribution, P's gross asset value of $100 is less than 
the net value floor of $220 [110%  x  ($60 + $140)]. Accordingly, under 
the net value acceleration rule of paragraph (b)(2)(iii)(A) of this 
section, S is required to take into account its $400 of deferred COD 
income immediately before the distribution, unless value is restored to 
P pursuant to paragraph (b)(2)(iii)(C) of this section.
    (iii) Foreign acquirer. The facts are the same as in paragraph (i) 
of this Example 3, except that P is a foreign corporation. Although S's 
assets are acquired in a transaction to which section 381(a) applies, 
under paragraph (b)(2)(ii)(B)(1)(iii) of this section, the exception to 
accelerated inclusion does not apply and S takes into account its 
remaining deferred COD income immediately before the liquidation. See 
also section 367(e)(2) and the regulations thereunder.
    (iv) Section 338 transaction. P, the common parent of a consolidated 
group (P group), owns all the stock of S1, one of the members of the P 
group. In 2009, S1 reacquires its own indebtedness and realizes $30 of 
COD income. Pursuant to an election under section 108(i), S1 defers 
recognition of the entire $30 of COD income. In 2010, P sells all the 
stock of S1 to X, an unrelated corporation, for $300, and P and X make a 
timely section 338(h)(10) election with respect to the sale. Under 
paragraph (b)(2)(ii)(A) of this section, an electing corporation takes 
into account its remaining deferred COD income when it ceases its 
existence for Federal income tax purposes unless the exception in 
paragraph (b)(2)(ii)(B) of this section applies. Pursuant to section 
338(h)(10) and the regulations, S1 is treated as transferring all of its 
assets to an unrelated person in exchange for consideration that 
includes the discharge of its liabilities. This deemed value-for-value 
exchange is not an impairment transaction. Following the deemed sale, 
while S1 is still a member of the P group, S1 is treated as distributing 
all of its assets to P and as ceasing its existence. Under these facts, 
the distribution of all of S1's assets constitutes a deemed liquidation, 
and is a transaction to which sections 332 and 381(a) apply. Although S1 
ceases its corporate existence as a result of the liquidation, S1 is not 
required to take into account its remaining deferred COD income under 
the exception in paragraph (b)(2)(ii)(B) of this section because its 
assets are acquired in a transaction to which section 381(a) applies. P 
succeeds to S1's remaining deferred COD income and to S1's reporting 
requirements as if P were the electing corporation. Under paragraph

[[Page 468]]

(b)(2)(iii)(F)(1) of this section, the intercompany distribution from S1 
to P is not an impairment transaction.

    (d) Earnings and profits--(1) In general. Deferred COD income 
increases earnings and profits in the taxable year that it is realized 
and not in the taxable year or years that the deferred COD income is 
includible in gross income. Deferred OID deductions decrease earnings 
and profits in the taxable year or years in which the deduction would be 
allowed without regard to section 108(i).
    (2) Exceptions--(i) RICs and REITs. Notwithstanding paragraph (d)(1) 
of this section, deferred COD income increases earnings and profits of a 
RIC or REIT in the taxable year or years in which the deferred COD 
income is includible in gross income and not in the year that the 
deferred COD income is realized. Deferred OID deductions decrease 
earnings and profits of a RIC or REIT in the taxable year or years that 
the deferred OID deductions are deductible.
    (ii) Alternative minimum tax. For purposes of calculating 
alternative minimum taxable income, any items of deferred COD income or 
deferred OID deduction increase or decrease, respectively, adjusted 
current earnings under section 56(g)(4) in the taxable year or years 
that the item is includible or deductible.
    (e) Effective/applicability dates. For effective/applicability 
dates, see Sec. 1.108(i)-0(b).

[T.D. 9622, 78 FR 39987, July 3, 2013; 78 FR 48607, Aug. 9, 2013]



Sec. 1.108(i)-2  Application of section 108(i) to partnerships and
S corporations.

    (a) Overview. Under section 108(i), a partnership or an S 
corporation may elect to defer COD income arising in connection with a 
reacquisition of an applicable debt instrument for the deferral period. 
COD income deferred under section 108(i) is included in gross income 
ratably over the inclusion period, or earlier upon the occurrence of any 
acceleration event described in paragraph (b)(6) or (c)(3) of this 
section. If a debt instrument is issued (or treated as issued under 
section 108(e)(4)) in a debt-for-debt exchange described in section 
108(i)(2)(A) or a deemed debt-for-debt exchange described in 
Sec. 1.108(i)-3(a), some or all of the deductions for OID with respect 
to such debt instrument must be deferred during the deferral period. The 
aggregate amount of OID deductions deferred during the deferral period 
is generally allowed as a deduction ratably over the inclusion period, 
or earlier upon the occurrence of any acceleration event described in 
paragraph (b)(6) or (c)(3) of this section. Paragraph (b) of this 
section provides rules that apply to partnerships. Paragraph (c) of this 
section provides rules that apply to S corporations. Paragraph (d) of 
this section provides general rules that apply to partnerships and S 
corporations. Paragraph (e) of this section provides election procedures 
and reporting requirements. Paragraph (f) of this section contains the 
effective/applicability date. See Sec. 1.108(i)-0(a) for definitions 
that apply to this section.
    (b) Specific rules applicable to partnerships--(1) Allocation of COD 
income and partner's deferred amounts. An electing partnership that 
defers any portion of COD income realized from a reacquisition of an 
applicable debt instrument under section 108(i) must allocate all of the 
COD income with respect to the applicable debt instrument to its direct 
partners that are partners in the electing partnership immediately 
before the reacquisition in the manner in which the income would be 
included in the distributive shares of the partners under section 704 
and the regulations under section 704, including Sec. 1.704-
1(b)(2)(iii), without regard to section 108(i). The electing partnership 
may determine, in any manner, the portion, if any, of a partner's COD 
income amount with respect to an applicable debt instrument that is the 
deferred amount, and the portion, if any, that is the included amount. 
However, no partner's deferred amount with respect to an applicable debt 
instrument may exceed that partner's COD income amount with respect to 
such applicable debt instrument, and the aggregate amount of the 
partners' COD income amounts and deferred amounts with respect to each 
applicable debt instrument must equal the electing partnership's COD 
income

[[Page 469]]

amount and deferred amount, respectively, with respect to each such 
applicable debt instrument.
    (2) Basis adjustments and capital account maintenance--(i) Basis 
adjustments. The adjusted basis of a partner's interest in a partnership 
is not increased under section 705(a)(1) by the partner's deferred 
amount in the taxable year of the reacquisition. The adjusted basis of a 
partner's interest in a partnership is not decreased under section 
705(a)(2) by the partner's share of any deferred OID deduction in the 
taxable year in which the deferred OID accrues. The adjusted basis of a 
partner's interest in a partnership is adjusted under section 705(a) by 
the partner's share of the electing partnership's deferred items for the 
taxable year in which the partner takes into account such deferred items 
under this section.
    (ii) Capital account maintenance. For purposes of maintaining a 
partner's capital account under Sec. 1.704-1(b)(2)(iv) and 
notwithstanding Sec. 1.704-1(b)(2)(iv)(n), the capital account of a 
partner of a partnership is adjusted under Sec. 1.704-1(b)(2)(iv) for a 
partner's share of an electing partnership's deferred items as if no 
election under section 108(i) were made.
    (3) Deferred section 752 amount--(i) In general. An electing 
partnership shall determine, for each of its direct partners with a 
deferred amount, the partner's deferred section 752 amount, if any, with 
respect to an applicable debt instrument. A partner's deferred section 
752 amount with respect to an applicable debt instrument equals the 
decrease in the partner's share of a partnership liability under section 
752(b) resulting from the reacquisition of the applicable debt 
instrument that is not treated as a current distribution of money under 
section 752(b) by reason of section 108(i)(6) (deferred section 752 
amount). A partner's deferred section 752 amount is treated as a 
distribution of money by the partnership to the partner under section 
752(b) at the same time and, to the extent remaining, in the same amount 
as the partner recognizes the deferred amount with respect to the 
applicable debt instrument.
    (ii) Electing partnership's computation of a partner's deferred 
section 752 amount. To compute a partner's deferred section 752 amount, 
the electing partnership must first determine the amount of gain that 
its direct partner would recognize in the taxable year of a 
reacquisition under section 731 as a result of the reacquisition of one 
or more applicable debt instruments during the taxable year absent the 
deferral provided in the second sentence of section 108(i)(6) (the 
section 108(i)(6) deferral). If a direct partner of an electing 
partnership would not recognize any gain under section 731 as a result 
of the reacquisition of one or more applicable debt instruments during 
the taxable year absent the section 108(i)(6) deferral, the partner will 
not have a deferred section 752 amount with respect to any applicable 
debt instrument that is reacquired during the taxable year. If a direct 
partner of an electing partnership would recognize gain under section 
731 as a result of the reacquisition of one or more applicable debt 
instruments during the taxable year absent the section 108(i)(6) 
deferral, the partner's deferred section 752 amount for all applicable 
debt instruments that are reacquired during the taxable year is equal to 
the lesser of the partner's aggregate deferred amounts from the electing 
partnership for all applicable debt instruments reacquired during the 
taxable year, or the gain that the partner would recognize in the 
taxable year of the reacquisitions under section 731 as a result of the 
reacquisitions absent the section 108(i)(6) deferral. In determining the 
amount of gain that the direct partner would recognize in the taxable 
year of a reacquisition under section 731 as a result of the 
reacquisition of one or more applicable debt instruments during the 
taxable year absent the section 108(i)(6) deferral, the rule under 
Sec. 1.731-1(a)(1)(ii) applies to any deemed distribution of money under 
section 752(b) resulting from a decrease in the partner's share of a 
reacquired applicable debt instrument that is treated as an advance or 
drawing of money. The amount of any deemed distribution of money under 
section 752(b) resulting from a decrease in the partner's share of a 
reacquired applicable debt instrument that is treated as an advance or 
drawing of

[[Page 470]]

money under Sec. 1.731-1(a)(1)(ii) is determined as if no COD income 
resulting from the reacquisition of the applicable debt instrument is 
deferred under section 108(i).
    (iii) Multiple section 108(i) elections. If a direct partner of an 
electing partnership has a deferred section 752 amount under paragraph 
(b)(3)(ii) of this section for the taxable year of a reacquisition, and 
the partner has a deferred amount with respect to more than one 
applicable debt instrument from the electing partnership for which a 
section 108(i) election is made in that taxable year, the partner's 
deferred section 752 amount with respect to each such applicable debt 
instrument equals the partner's deferred section 752 amount as 
determined under paragraph (b)(3)(ii) of this section, multiplied by a 
ratio, the numerator of which is the partner's deferred amount with 
respect to such applicable debt instrument, and the denominator of which 
is the partner's aggregate deferred amounts from the electing 
partnership for all applicable debt instruments reacquired during the 
taxable year.
    (iv) Electing partnership's request for information. At the request 
of an electing partnership, each direct partner of the electing 
partnership that has a deferred amount with respect to such partnership 
must provide to the electing partnership a written statement containing 
information requested by the partnership that is necessary to determine 
the partner's deferred section 752 amount (such as the partner's 
adjusted basis in the partner's interest in the electing partnership). 
The written statement must be signed under penalties of perjury and 
provided to the requesting partnership within 30 days of the date of the 
request by the electing partnership.
    (v) Examples. The following examples illustrate the rules under 
paragraph (b)(3) of this section:

    Example 1. (i) A and B each hold a 50 percent interest in 
Partnership, a calendar-year partnership. As of January 1, 2009, A and B 
each have an adjusted basis of $50 in their partnership interests. 
Partnership has two applicable debt instruments outstanding, debt one of 
$300 and debt two of $200. A and B share equally in the debt for section 
752(b) purposes. On March 1, 2009, debt one is cancelled and Partnership 
realizes $300 of COD income. On December 1, 2009, debt two is cancelled 
and Partnership realizes $200 of COD income. The Partnership has no 
other income or loss items for 2009. A and B are each allocated $150 of 
COD income from debt one and $100 of COD income from debt two. 
Partnership makes an election under section 108(i) to defer $225 of the 
$300 of COD income realized from the reacquisition of debt one, $150 of 
which is A's deferred amount, and $75 of which is B's deferred amount. 
Partnership also makes an election under section 108(i) to defer $125 of 
the $200 of COD income realized from the reacquisition of debt two, $100 
of which is A's deferred amount, and $25 of which is B's deferred 
amount. A has no included amount for either debt. B has an included 
amount of $75 with respect to debt one and an included amount of $75 
with respect to debt two for 2009.
    (ii) Under paragraph (b)(3)(ii) of this section, the amount of gain 
that A would recognize under section 731 as a result of the 
reacquisitions absent the section 108(i)(6) deferral is $200. Thus, A's 
deferred section 752 amount with respect to debt one and debt two equals 
$200 (the lesser of A's aggregate deferred amounts with respect to debt 
one and debt two of $250, or gain that A would recognize under section 
731 in 2009, as a result of the reacquisitions absent the section 
108(i)(6) deferral, of $200). Under paragraph (b)(3)(iii) of this 
section, $120 of A's $200 deferred section 752 amount relates to debt 
one ($200  x  $150/$250) and $80 relates to debt two ($200  x  $100/
$250).
    (iii) Under paragraph (b)(3)(ii) of this section, the amount of gain 
that B would recognize under section 731 as a result of the 
reacquisitions absent the section 108(i)(6) deferral is $50. Thus, B's 
deferred section 752 amount with respect to debt one and debt two equals 
$50 (the lesser of B's aggregate deferred amounts with respect to debt 
one and debt two of $100, or gain that B would recognize under section 
731 in 2009, as a result of the reacquisitions absent the section 
108(i)(6) deferral, of $50). Under paragraph (b)(3)(iii) of this 
section, $37.50 of B's $50 deferred section 752 amount relates to debt 
one ($50  x  $75/$100) and $12.50 relates to debt two ($50  x  $25/
$100).
    (iv) A will recognize $50 of deferred COD income ($30 with respect 
to debt one and $20 with respect to debt two) in each of the five 
taxable years of the inclusion period, provided there are no earlier 
acceleration events under paragraph (b)(6) of this section. Under 
paragraph (b)(3)(i) of this section, A will be treated as receiving a 
$30 deemed distribution under section 752(b) with respect to debt one 
and a $20 deemed distribution with respect to debt two in each of the 
first, second, third, and fourth taxable years of the inclusion period. 
A will not have any remaining deferred section 752 amounts in the fifth 
taxable year of the inclusion period.

[[Page 471]]

    (v) B will recognize $20 of deferred COD income ($15 with respect to 
debt one and $5 with respect to debt two) in each of the five taxable 
years of the inclusion period, provided there are no earlier 
acceleration events under paragraph (b)(6) of this section. Under 
paragraph (b)(3)(i) of this section, B will be treated as receiving a 
$15 deemed distribution under section 752(b) with respect to debt one 
and a $5 deemed distribution with respect to debt two in the first and 
second taxable year of the inclusion period, and a $7.50 deemed 
distribution under section 752(b) with respect to debt one ($10  x  $15/
$20) and a $2.50 deemed distribution with respect to debt two ($10  x  
$5/$20) in the third taxable year of the inclusion period. B will not 
have any remaining deferred section 752 amounts in the fourth and fifth 
taxable years of the inclusion period.
    Example 2. (i) The facts are the same as in Example 1, except that 
Partnership has gross income for the year (including the $500 of COD 
income) of $700 and other separately stated losses of $500. A's and B's 
distributive share of each item is 50 percent.
    (ii) In determining the amount of gain that A would recognize under 
section 731 as a result of the reacquisitions absent the section 
108(i)(6) deferral, Partnership first increases A's $50 adjusted basis 
in his interest in Partnership by A's distributive share of Partnership 
income (other than the deferred amounts relating to debt one and debt 
two) of $100, and then decreases A's adjusted basis in Partnership by 
deemed distributions under section 752(b) of $250 and, thereafter, by 
A's distributive share of Partnership losses of $250, but only to the 
extent that A's basis is not reduced below zero. Under paragraph 
(b)(3)(ii) of this section, the amount of gain that A would recognize 
under section 731 as a result of the reacquisitions absent section 
108(i)(6) deferral is $100. Thus, A's deferred section 752 amount with 
respect to debt one and debt two equals $100 (the lesser of A's 
aggregate deferred amounts with respect to debt one and debt two of 
$250, or gain that A would recognize under section 731 as a result of 
the reacquisitions absent the deferral section 108(i)(6) deferral of 
$100). Under paragraph (b)(3)(iii) of this section, A's deferred section 
752 amount with respect to debt one is $60 ($100  x  $150/$250), and A's 
deferred section 752 amount with respect to debt two is $40 ($100  x  
$100/$250). A's $250 of Partnership losses are suspended under section 
704(d).
    (iii) In determining the amount of gain that B would recognize under 
section 731 as a result of the reacquisitions absent the section 
108(i)(6) deferral, Partnership first increases B's $50 adjusted basis 
in his interest in Partnership by B's distributive share of Partnership 
income (other than the deferred amounts relating to debt one and debt 
two) of $250 ($100 other income plus $150 included amount with respect 
to debt one and debt two), and then decreases B's adjusted basis in 
Partnership by deemed distributions under section 752(b) of $250 and, 
thereafter, by B's distributive share of Partnership losses of $250, but 
only to the extent that B's basis is not reduced below zero. Under 
paragraph (b)(3)(ii) of this section, B would not recognize any gain 
under section 731 as a result of the reacquisitions absent the section 
108(i)(6) deferral. Thus, B has no deferred section 752 amount with 
respect to either debt one or debt two. B may deduct his distributive 
share of Partnership losses to the extent of $50, with the remaining 
$200 suspended under section 704(d).
    (4) Tiered partnerships--(i) In general. If a partnership (upper-
tier partnership) is a direct or indirect partner of an electing 
partnership and directly or indirectly receives an allocation of a COD 
income amount from the electing partnership, all or a portion of which 
is deferred under section 108(i), the upper-tier partnership must 
allocate its COD income amount to its partners that are partners in the 
upper-tier partnership immediately before the reacquisition in the 
manner in which the income would be included in the distributive shares 
of the partners under section 704 and the regulations under section 704, 
including Sec. 1.704-1(b)(2)(iii), without regard to section 108(i). The 
upper-tier partnership may determine, in any manner, the portion, if 
any, of a partner's COD income amount with respect to an applicable debt 
instrument that is the deferred amount, and the portion, if any, that is 
the included amount. However, no partner's deferred amount with respect 
to an applicable debt instrument may exceed that partner's COD income 
amount with respect to such applicable debt instrument, and the 
aggregate amount of the partners' COD income amounts and deferred 
amounts with respect to each applicable debt instrument must equal the 
upper-tier partnership's COD income amount and deferred amount, 
respectively, with respect to each such applicable debt instrument.
    (ii) Deferred section 752 amount. The computation of a partner's 
deferred section 752 amount, as described in paragraph (b)(3)(ii) of 
this section, is calculated only for direct partners of the electing 
partnership. An upper-tier partnership's deferred section 752 amount 
with respect to an applicable

[[Page 472]]

debt instrument of the electing partnership is allocated only to those 
partners of the upper-tier partnership that have a deferred amount with 
respect to that applicable debt instrument, and in proportion to such 
partners' share of the upper-tier partnership's deferred amount with 
respect to that applicable debt instrument. A partner's share of the 
upper-tier partnership's deferred section 752 amount with respect to an 
applicable debt instrument must not exceed that partner's share of the 
upper-tier partnership's deferred amount with respect to the applicable 
debt instrument to which the deferred section 752 amount relates. The 
deferred section 752 amount of a partner of an upper-tier partnership is 
treated as a distribution of money by the upper-tier partnership to the 
partner under section 752(b), at the same time and, to the extent 
remaining, in the same amount as the partner recognizes the deferred 
amount with respect to the applicable debt instrument.
    (iii) Examples. The following examples illustrate the rules under 
paragraph (b)(4) of this section:

    Example 1. (i) PRS, a calendar-year partnership, has two equal 
partners, A, an individual, and XYZ, a partnership. As of January 1, 
2009, A and XYZ each have an adjusted basis of $50 in their partnership 
interests. PRS has a $500 applicable debt instrument outstanding. On 
June 1, 2009, the creditor agrees to cancel the $500 indebtedness. PRS 
realizes $500 of COD income as a result of the reacquisition. PRS has no 
other income or loss items for 2009. PRS makes an election under section 
108(i) to defer $200 of the $500 of COD income. PRS allocates the $500 
of COD income equally between its partners ($250 each). PRS determines 
that, for each partner, $100 of the COD income amount is the deferred 
amount, and $150 is the included amount. For 2009, each of A's and XYZ's 
share of the decrease in PRS's reacquired applicable debt instrument is 
$250.
    (ii) XYZ has two equal partners, individuals X and Y. X and Y share 
equally in XYZ's liabilities. XYZ allocates the $250 COD income amount 
from PRS equally between X and Y ($125 each). XYZ determines that X has 
a deferred amount of $100 and an included amount of $25. All $125 of Y's 
COD income amount is Y's included amount. For 2009, each of X's and Y's 
share of XYZ's $250 decrease in liability with respect to the reacquired 
applicable debt instrument of PRS is $125.
    (iii) Under paragraph (b)(3)(ii) of this section, PRS determines 
that XYZ has a deferred section 752 amount of $50. Therefore, for 2009, 
of XYZ's $250 share of the decrease in PRS's reacquired applicable debt 
instrument, $200 is treated as a deemed distribution under section 
752(b) and $50 is the deferred section 752 amount.
    (iv) Under paragraph (b)(4)(ii) of this section, none of XYZ's $50 
deferred section 752 amount is allocated to Y because Y does not have a 
deferred amount with respect to the reacquired applicable debt interest. 
XYZ's entire $50 of deferred section 752 amount is allocated to X. 
Therefore, of X's $125 share of the XYZ's decrease in liability with 
respect to the reacquired applicable debt instrument of PRS, $75 is 
treated as a deemed distribution under section 752(b) and $50 is X's 
deferred section 752 amount. Y's $125 share of XYZ's decrease in 
liability with respect to the reacquired applicable debt instrument of 
PRS is treated as a deemed distribution under section 752(b) and none is 
a deferred section 752 amount.
    Example 2. (i) The facts are the same as in Example 1, except for 
the following: XYZ has three partners, X, Y, and Z. The profits and 
losses of XYZ are shared 25 percent by X, 25 percent by Y, and 50 
percent by Z. XYZ allocates its $250 COD income amount from PRS $62.50 
to each of X and Y, and $125 to Z. XYZ determines that X has a deferred 
amount of $50 and an included amount of $12.50, Y has a deferred amount 
of $0 and an included amount of $62.50, and Z has a deferred amount of 
$50 and an included amount of $75 with respect to the applicable debt 
instrument. X's, Y's, and Z's share of XYZ's decrease in liability with 
respect to the reacquired applicable debt instrument of PRS is $62.50, 
$62.50 and $125, respectively.
    (ii) Under paragraph (b)(4)(ii) of this section, none of XYZ's $50 
deferred section 752 amount is allocated to Y because Y does not have a 
deferred amount with respect to the reacquired applicable debt 
instrument. XYZ's $50 deferred section 752 amount is allocated to X and 
Z in proportion to X's and Z's share of XYZ's deferred amount, or $25 
each ($50  x  ($50/$100)). Therefore, of X's $62.50 share of XYZ's 
decrease in liability with respect to the reacquired applicable debt 
instrument, $37.50 is treated as a deemed distribution under section 
752(b) and $25 is X's deferred section 752 amount. All of Y's $62.50 
share of XYZ's decrease in liability with respect to the reacquired 
applicable debt instrument is treated as a deemed distribution under 
section 752(b). Of Z's $125 share of XYZ's decrease in liability with 
respect to the reacquired applicable debt instrument, $100 is treated as 
a deemed distribution under section 752(b) and $25 is Z's deferred 
section 752 amount.


[[Page 473]]


    (5) S corporation partner--(i) In general. If an S corporation 
partner has a deferred amount with respect to an applicable debt 
instrument of an electing partnership, such deferred amount is shared 
pro rata only among those shareholders that are shareholders of the S 
corporation partner immediately before the reacquisition of the 
applicable debt instrument.
    (ii) Basis adjustments. The adjusted basis of a shareholder's stock 
in an S corporation partner is not increased under section 1367(a)(1) by 
the shareholder's share of the S corporation partner's deferred amount 
in the taxable year of the reacquisition. The adjusted basis of a 
shareholder's stock in an S corporation partner is not decreased under 
section 1367(a)(2) by the shareholder's share of the S corporation 
partner's deferred OID deduction in the taxable year in which the 
deferred OID accrues. The adjusted basis of a shareholder's stock in an 
S corporation partner is adjusted under section 1367(a) by the 
shareholder's share of the S corporation partner's share of the electing 
partnership's deferred items for the taxable year in which the 
shareholder takes into account its share of such deferred items under 
this section.
    (iii) Accumulated adjustments account. The accumulated adjustments 
account (AAA), as defined in section 1368(e)(1), of an S corporation 
partner that has a deferred amount with respect to an applicable debt 
instrument of an electing partnership is not increased by its deferred 
amount in the taxable year of the reacquisition. The AAA of an S 
corporation partner is not decreased by its share of any deferred OID 
deduction in the taxable year in which the deferred OID accrues. The AAA 
of an S corporation partner is adjusted under section 1368(e) by a 
shareholder's share of the S corporation partner's share of the electing 
partnership's deferred items for the S period (as defined in section 
1368(e)(2)) in which the shareholder of the S corporation partner takes 
into account its share of the deferred items under this section.
    (6) Acceleration of deferred items--(i) Electing partnership-level 
events
    (A) General rules. Except as provided in paragraph (b)(6)(iii) of 
this section, a direct or indirect partner's share of an electing 
partnership's deferred items is accelerated and must be taken into 
account by such partner--
    (1) In the taxable year in which the electing partnership 
liquidates;
    (2) In the taxable year in which the electing partnership sells, 
exchanges, transfers (including contributions and distributions), or 
gifts substantially all of its assets;
    (3) In the taxable year in which the electing partnership ceases 
doing business; or
    (4) In the taxable year that includes the day before the day on 
which the electing partnership files a petition in a title 11 or similar 
case.
    (B) Substantially all requirement. For purposes of this paragraph 
(b)(6), substantially all of a partnership's assets means assets 
representing at least 90 percent of the fair market value of the net 
assets, and at least 70 percent of the fair market value of the gross 
assets, held by the partnership immediately prior to the sale, exchange, 
transfer, or gift. For purposes of applying the rule in paragraph 
(b)(6)(i)(A)(2) of this section, a sale, exchange, transfer, or gift by 
any direct or indirect lower-tier partnership of the electing 
partnership (lower-tier partnership) of all or part of its assets is not 
treated as a sale, exchange, transfer, or gift of the assets of any 
partnership that holds, directly or indirectly, an interest in such 
lower-tier partnership. However, for purposes of applying the rule in 
paragraph (b)(6)(i)(A)(2) of this section, a sale, exchange, transfer, 
or gift of substantially all of the assets of a transferee partnership 
(as described in paragraph (b)(6)(iii)(A)(1) of this section), or of a 
lower-tier partnership that received assets of the electing partnership 
from a transferee partnership or another lower-tier partnership in a 
transaction governed all or in part by section 721, is treated as a 
sale, exchange, transfer, or gift by the holder of an interest in such 
transferee partnership or lower-tier partnership of its entire interest 
in that transferee partnership or lower-tier partnership.
    (ii) Direct or indirect partner-level events--(A) General rules. 
Except as provided in paragraph (b)(6)(iii) of this section, a direct or 
indirect partner's

[[Page 474]]

share of an electing partnership's deferred items with respect to a 
separate interest is accelerated and must be taken into account by such 
partner in the taxable year in which--
    (1) The partner dies or liquidates;
    (2) The partner sells, exchanges (including redemptions treated as 
exchanges under section 302), transfers (including contributions and 
distributions), or gifts (including transfers treated as gifts under 
section 1041) all or a portion of its separate interest;
    (3) The partner's separate interest is redeemed within the meaning 
of paragraph (b)(6)(ii)(B)(2) of this section; or
    (4) The partner abandons its separate interest.
    (B) Meaning of terms; special rules--(1) Partial transfers. For 
purposes of paragraph (b)(6)(ii)(A)(2) of this section, if a partner 
sells, exchanges (including redemptions treated as exchanges under 
section 302), transfers (including contributions and distributions), or 
gifts (including transfers treated as gifts under section 1041) a 
portion of its separate interest, such partner's share of the electing 
partnership's deferred items with respect to the separate interest 
proportionate to the separate interest sold, exchanged, transferred, or 
gifted is accelerated and must be taken into account by such partner.
    (2) Redemptions. For purposes of paragraph (b)(6)(ii)(A)(3) of this 
section, a partner's separate interest is redeemed if the partner 
receives a distribution of cash and/or property in complete liquidation 
of such separate interest.
    (3) S corporation partners. In addition to the rules in paragraphs 
(b)(6)(i) and (ii) of this section, an S corporation partner's share of 
the electing partnership's deferred items is accelerated and the 
shareholders of the S corporation partner must take into account their 
respective shares of the S corporation partner's share of the electing 
partnership's deferred items in the taxable year in which the S 
corporation partner's election under section 1362(a) terminates.
    (4) C corporation partners. In addition to the rules in paragraphs 
(b)(6)(i), (ii), and (iii) of this section, the acceleration rules in 
Sec. 1.108(i)-1(b) and the earnings and profits rules in Sec. 1.108(i)-
1(d) apply to partners that are electing corporations.
    (iii) Events not constituting acceleration. Notwithstanding the 
rules in paragraphs (b)(6)(i) and (ii) of this section, a direct or 
indirect partner's share of an electing partnership's deferred items 
with respect to a separate interest is not accelerated by any of the 
events described in this paragraph (b)(6)(iii).
    (A) Section 721 contributions--(1) Electing partnership 
contributions. A direct or indirect partner's share of an electing 
partnership's deferred items is not accelerated if the electing 
partnership contributes all or a portion of its assets in a transaction 
governed all or in part by section 721(a) to another partnership 
(transferee partnership) in exchange for an interest in the transferee 
partnership provided that the electing partnership does not terminate 
under section 708(b)(1)(A) or transfer its assets and liabilities in a 
transaction described in section 708(b)(2)(A) or section 708(b)(2)(B). 
See paragraph (b)(6)(iii)(D) of this section for transactions governed 
by section 708(b)(2)(A). Notwithstanding the rules in this paragraph 
(b)(6)(iii)(A)(1), the rules in paragraphs (b)(6)(i)(A) and 
(b)(6)(ii)(A) of this section apply to any part of the transaction to 
which section 721(a) does not apply.
    (2) Partner contributions. A direct or indirect partner's share of 
an electing partnership's deferred items with respect to a separate 
interest is not accelerated if the holder of such interest (contributing 
partner) contributes its entire separate interest (contributed separate 
interest) in a transaction governed all or in part by section 721(a) to 
another partnership (transferee partnership) in exchange for an interest 
in the transferee partnership provided that the partnership in which the 
separate interest is held does not terminate under section 708(b)(1)(A) 
or transfer its assets and liabilities in a transaction described in 
section 708(b)(2)(A) or section 708(b)(2)(B). See paragraph 
(b)(6)(iii)(D) of this section for transactions governed by section 
708(b)(2)(A). The transferee partnership becomes subject to section 
108(i), including all reporting requirements under this section, with 
respect to the

[[Page 475]]

contributing partner's share of the electing partnership's deferred 
items associated with the contributed separate interest. The transferee 
partnership must allocate and report the share of the electing 
partnership's deferred items that is associated with the contributed 
separate interest to the contributing partner to the same extent that 
such share of the electing partnership's deferred items would have been 
allocated and reported to the contributing partner in the absence of 
such contribution. Notwithstanding the rules in this paragraph 
(b)(6)(iii)(A)(2), the rules in paragraph (b)(6)(ii)(A) of this section 
apply to any part of the transaction to which section 721(a) does not 
apply.
    (B) Section 1031 exchanges. A direct or indirect partner's share of 
the electing partnership's deferred items is not accelerated if the 
electing partnership transfers property held for productive use in a 
trade or business or for investment in exchange for property of like 
kind which is to be held either for productive use in a trade or 
business or for investment in a transaction to which section 1031(a)(1) 
applies. Notwithstanding the rules in this paragraph (b)(6)(iii)(B), to 
the extent the electing partnership receives money or other property 
which does not meet the requirements of section 1031(a) (boot) in the 
exchange, a proportionate amount of the property transferred by the 
electing partnership equal to the proportion of the boot to the total 
consideration received in the exchange shall be treated as sold for 
purposes of paragraph (b)(6)(i)(A)(2) of this section.
    (C) Section 708(b)(1)(B) terminations. A direct or indirect 
partner's share of the deferred items of an electing partnership with 
respect to a separate interest is not accelerated if the electing 
partnership or a partnership that is a direct or indirect partner of the 
electing partnership terminates under section 708(b)(1)(B). 
Notwithstanding the rules in this paragraph (b)(6)(iii)(C), the rules in 
paragraph (b)(6)(ii)(A) of this section apply to the event that causes 
the termination under section 708(b)(1)(B) to the extent not otherwise 
excepted under paragraph (b)(6)(iii) of this section.
    (D) Section 708(b)(2)(A) mergers or consolidations. A direct or 
indirect partner's share of the deferred items of an electing 
partnership with respect to a separate interest is not accelerated if 
the partnership in which the separate interest is held (the merger 
transaction partnership) merges into or consolidates with another 
partnership in a transaction to which section 708(b)(2)(A) applies. The 
resulting partnership or new partnership, as determined under 
Sec. 1.708-1(c)(1), becomes subject to section 108(i), including all 
reporting requirements under this section, to the same extent that the 
merger transaction partnership was so subject prior to the transaction, 
and must allocate and report any merger transaction partnership's 
deferred items to the same extent and to the same partners that the 
merger transaction partnership allocated and reported such items prior 
to such transaction. Notwithstanding the rules in this paragraph 
(b)(6)(iii)(D), the rules in paragraphs (b)(6)(i)(A)(2) and 
(b)(6)(ii)(A)(2) of this section apply to that portion of the 
transaction that is treated as a sale, and the rules of (b)(6)(ii)(A)(3) 
apply if, as part of the transaction, the partner's separate interest is 
redeemed and the partner does not receive an interest in the resulting 
partnership with respect to such separate interest.
    (E) Certain distributions of separate interests. If a partnership 
(upper-tier partnership) that is a direct or indirect partner of an 
electing partnership distributes its entire separate interest 
(distributed separate interest) to one or more of its partners 
(distributee partners) that have a share of the electing partnership's 
deferred items from upper-tier partnership with respect to the 
distributed separate interest, the distributee partners' shares of the 
electing partnership's deferred items with respect to such distributed 
separate interest are not accelerated. The partnership, the separate 
interest in which was distributed, must allocate and report the share of 
the electing partnership's deferred items associated with the 
distributed separate interest only to such distributee partners that had 
a share of the electing partnership's deferred items from the upper-tier 
partnership with respect to the

[[Page 476]]

distributed separate interest prior to the distribution. This paragraph 
(b)(6)(iii)(E) does not apply if the electing partnership terminates 
under section 708(b)(1)(A).
    (F) Section 381 transactions. A C corporation partner's share of an 
electing partnership's deferred items is not accelerated if, as part of 
a transaction described in paragraph (b)(6)(ii)(A) of this section, the 
assets of the C corporation partner are acquired by another C 
corporation (acquiring C corporation) in a transaction that is treated, 
under Sec. 1.108(i)-1(b)(2)(ii)(B), as a transaction to which section 
381(a) applies. An S corporation partner's share of an electing 
partnership's deferred items is not accelerated if, as part of a 
transaction described in paragraph (b)(6)(ii)(A) of this section, the 
assets of the S corporation partner are acquired by another S 
corporation (acquiring S corporation) in a transaction to which section 
381(a) applies. In such cases, the acquiring C corporation or acquiring 
S corporation, as the case may be, succeeds to the C corporation 
partner's or the S corporation partner's remaining share of the electing 
partnership's deferred items and becomes subject to section 108(i), 
including all reporting requirements under this section, as if the 
acquiring C corporation or acquiring S corporation were the C 
corporation partner or the S corporation partner, respectively. The 
acquiring S corporation must allocate and report the S corporation 
partner's deferred items to the same extent as the S corporation partner 
would have been required to allocate and report those deferred items, 
and only to those shareholders of the S corporation partner who had a 
share of the S corporation partner's deferred items from the electing 
partnership prior to the transaction. This paragraph (b)(6)(iii)(F) does 
not apply if the electing partnership terminates under section 
708(b)(1)(A).
    (G) Intercompany transfers. A C corporation partner's share of an 
electing partnership's deferred items is not accelerated if, as part of 
a transaction described in paragraph (b)(6)(ii)(A) of this section, the 
C corporation partner transfers its entire separate interest in an 
intercompany transaction, as described in Sec. 1.1502-13(b)(1)(i), and 
the electing partnership does not terminate under section 708(b)(1)(A) 
as a result of the intercompany transaction.
    (H) Retirement of a debt instrument. See Sec. 1.108(i)-3(c)(1) for 
rules regarding the retirement of a debt instrument that is subject to 
section 108(i).
    (I) Other non-acceleration events. A direct or indirect partner's 
share of an electing partnership's deferred items is not accelerated 
with respect to any transaction if the Commissioner makes a 
determination by published guidance that such transaction is not an 
acceleration event under the rules of this paragraph (b)(6).
    (iv) Related partnerships. A direct or indirect partner's share of a 
related partnership's deferred OID deduction (as determined in paragraph 
(d)(2) of this section) that has not previously been taken into account 
is accelerated and taken into account by the direct or indirect partner 
in the taxable year in which, and to the extent that, the deferred COD 
income to which the related partnership's deferred OID deduction relates 
is taken into account by the electing entity or its owners.
    (v) Examples. The following examples illustrate the rules under this 
paragraph (b)(6):
    Example 1 Meaning of ``separate interest.'' (i) Electing partnership 
(EP) has three partners, MT1, MT2, and UT, each of which is a 
partnership. The partners of MT1 are X and UT. The partners of MT2 are 
Y, UT, and B. The partners of UT are A, B, and C. In addition to their 
interests in the partnerships noted, MT1, MT2, and UT own other assets.
    (ii) Within the meaning of paragraph (a)(29) of Sec. 1.108(i)-0, A 
and C each hold one separate interest (their interests in UT), B holds 
two separate interests (its interests in UT and MT2), UT holds three 
separate interests (its interests in MT1, MT2, and EP), MT1 and MT2 each 
hold one separate interest (their interests in EP), and X and Y each 
hold one separate interest (their interests in MT1 and MT2, 
respectively) with respect to EP.
    Example 2 Distributions of separate interests in an electing 
partnership. (i) The facts are the same as in Example 1, except that A, 
as a direct partner of UT, has a share of EP's deferred items with 
respect to UT's interests in MT1 and EP. A does not have a share of EP's 
deferred items with respect to UT's interest in MT2. B, as a direct 
partner of UT, has a share of EP's deferred items with respect to UT's 
interest in MT1 and MT2, but not with respect to UT's interest in EP. B 
also has a share of EP's deferred items with respect to

[[Page 477]]

its separate interest in MT2. C does not have any share of EP's deferred 
items with respect to UT's interest in MT1, MT2, or EP.
    (ii) UT distributes 40 percent of its separate interest in MT1 to A 
in redemption of A's interest in UT. Under paragraphs (b)(6)(ii)(A)(2) 
and (b)(6)(ii)(B)(1) of this section, a portion of UT's interest in MT1 
has been transferred and a corresponding portion (40 percent) of UT's 
share of EP's deferred items from MT1 is accelerated. Thus, 40 percent 
of A's and B's share of EP's deferred items from UT with respect to UT's 
interest in MT1 is accelerated. Further, because A's interest in UT is 
redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this 
section, all of A's shares of EP's deferred items from UT are 
accelerated under paragraph (b)(6)(ii)(A)(3) of this section. UT 
continues to allocate and report to B its remaining share of EP's 
deferred items from its separate interest in MT1 that was not 
distributed to A.
    (iii) UT distributes its entire separate interest in MT1 to B (other 
than in redemption of B's interest in UT). Under paragraph 
(b)(6)(ii)(A)(2) of this section, UT's share of EP's deferred items from 
MT1 would be accelerated. However, because UT distributes its entire 
separate interest in MT1 to B, B's share of EP's deferred items from UT 
with respect to UT's separate interest in MT1 is not accelerated under 
paragraph (b)(6)(iii)(E) of this section. MT1 allocates and reports to B 
B's share of EP's deferred items from UT's separate interest in MT1 that 
was distributed to B.
    (iv) UT distributes its entire separate interest in MT1 to A and B 
(other than in redemption of their interests in UT). Under paragraph 
(b)(6)(iii)(E) of this section, none of A's or B's shares of EP's 
deferred items from UT with respect to UT's separate interest in MT1 is 
accelerated, and MT1 allocates and reports to A and B their respective 
share of EP's deferred items from UT's separate interest in MT1 that was 
distributed to A and B.
    Example 3 Partial sale of interest by an indirect partner. (i) 
Individual A holds a 50 percent partnership interest in UTP, a 
partnership that holds a 50 percent interest in EP, a partnership that 
makes an election to defer COD income under section 108(i). A's share of 
UTP's deferred amount with respect to EP's election under section 108(i) 
is $100. During a taxable year within the deferral period, A sells 25 
percent of his partnership interest in UTP to an unrelated third party.
    (ii) Under paragraphs (b)(6)(ii)(A)(2) and (b)(6)(ii)(B)(1) of this 
section, 25 percent of A's $100 deferred amount is accelerated as a 
result of A's partial sale of his interest in UTP. Thus, A must 
recognize $25 of his deferred amount in the taxable year of the sale. 
A's remaining deferred amount is $75.
    Example 4 Section 708(b)(1)(B) termination of electing partnership. 
(i) A and B are equal partners in partnership AB. On January 1, 2009, AB 
reacquires an applicable debt instrument and makes an election under 
section 108(i) to defer $400 of COD income. A and B each have a deferred 
amount with respect to the applicable debt instrument of $200. On 
January 1, 2010, A sells its entire 50 percent interest in AB to C in a 
transfer that terminates the partnership under section 708(b)(1)(B).
    (ii) Under paragraph (b)(6)(iii)(C) of this section, the technical 
termination of AB under section 708(b)(1)(B) does not cause A's or B's 
shares of AB's deferred items to be accelerated. However, A's $200 
deferred amount is accelerated under paragraph (b)(6)(ii)(A)(2) of this 
section as a result of the sale.
    Example 5 Section 708(b)(2)(A) mergers. (i) A, B, and C are equal 
partners in partnership X, which has made an election under section 
108(i) to defer $150 of COD income. The fair market value of each 
interest in partnership X is $100. A, B, and C each has a deferred 
amount of $50 with respect to partnership X's election under section 
108(i). E, F, and G are partners in partnership Y. Partnership X and 
partnership Y merge in a taxable year during the deferral period of 
partnership X's election under section 108(i). Under section 
708(b)(2)(A), the resulting partnership is considered a continuation of 
partnership Y and partnership X is considered terminated. Under state 
law, partnerships X and Y undertake the assets-over form of Sec. 1.708-
1(c)(3)(i) to accomplish the merger. C does not want to become a partner 
in partnership Y, and partnership X does not have the resources to 
redeem C's interest before the merger. C, partnership X, and partnership 
Y enter into a merger agreement that satisfies the requirements of 
Sec. 1.708-1(c)(4) and specifies that partnership Y will purchase C's 
interest in partnership X for $100 before the merger, and as part of the 
agreement, C consents to treat the transaction in a manner that is 
consistent with the agreement. As part of the merger, partnership X 
receives from partnership Y $100 (which will be distributed to C 
immediately before the merger), $100 (which will be distributed equally 
to A and B ($50 each)), and interests in partnership Y with a value of 
$100 (which will be distributed equally to A and B) in exchange for 
partnership X's assets and liabilities.
    (ii) Under the general rule of paragraph (b)(6)(iii)(D) of this 
section, and except as provided below, the deferred items of partnership 
X are not accelerated as a result of the merger with partnership Y. 
Partnership Y, the resulting partnership that is considered the 
continuation of partnership X, becomes subject to section 108(i), 
including all reporting requirements under section 108(i), to the same 
extent that partnership X was subject to such rules. Under paragraph

[[Page 478]]

(b)(6)(iii)(D) of this section, partnership Y must allocate and report 
partnership X's deferred items to A and B in the same manner as 
partnership X had prior to the merger transaction.
    (iii) Under Sec. 1.708-1(c)(4), C is treated as selling its interest 
in partnership X immediately before the merger. As a result, C's $50 
deferred amount is accelerated under paragraph (b)(6)(ii)(A)(2) of this 
section.
    (iv) Under section 707(a)(2)(B), partnership X is deemed to have 
sold a portion of its assets to partnership Y. Because partnership X is 
not treated as selling substantially all of its assets under paragraph 
(b)(6)(i)(B) of this section, A's and B's deferred amounts are not 
accelerated under paragraph (b)(6)(i)(A)(2) of this section.
    (v) Because A's and B's interests in partnership X are redeemed 
within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of 
their shares of partnership X's deferred items would be accelerated 
under paragraph (b)(6)(ii)(A)(3). However, because they receive an 
interest in partnership Y in the merger, none of A's and B's share of 
partnership X's deferred items is accelerated.

    (7) Withholding under section 1446. See section 1446 regarding 
withholding by a partnership on a foreign partner's share of income 
effectively connected with a U.S. trade or business.
    (c) Specific rules applicable to S corporations--(1) Deferred COD 
income. An electing S corporation's COD income deferred under section 
108(i) (an S corporation's deferred COD income) is shared pro rata among 
those shareholders that are shareholders of the electing S corporation 
immediately before the reacquisition of the applicable debt instrument. 
Any COD income deferred under section 108(i) is taken into account under 
section 1366(a) by those shareholders in the inclusion period, or 
earlier upon the occurrence of an acceleration event described in 
paragraph (c)(3) of this section.
    (2) Basis adjustments and accumulated adjustments account--(i) Basis 
adjustments. The adjusted basis of a shareholder's stock in an electing 
S corporation is not increased under section 1367(a)(1) by the 
shareholder's share of the S corporation's deferred COD income in the 
taxable year of the reacquisition. The adjusted basis of a shareholder's 
stock in an electing S corporation or a related S corporation is not 
decreased under section 1367(a)(2) by the shareholder's share of the S 
corporation's deferred OID deduction in the taxable year in which the 
deferred OID accrues. The adjusted basis of a shareholder's stock in an 
electing S corporation or a related S corporation is adjusted under 
section 1367(a) by the shareholder's share of the S corporation's 
deferred items for the taxable year in which the shareholder takes into 
account its share of the deferred items under this section.
    (ii) Accumulated adjustments account. The AAA of an electing S 
corporation is not increased by the S corporation's deferred COD income 
in the taxable year of a reacquisition. The AAA of an electing S 
corporation or a related S corporation is not decreased by the S 
corporation's deferred OID deduction in the taxable year in which the 
deferred OID accrues. The AAA of an electing S corporation or a related 
S corporation is adjusted under section 1368(e) by a shareholder's share 
of the S corporation's deferred items for the S period (as defined in 
section 1368(e)(2)) in which a shareholder of the S corporation takes 
into account its share of the deferred items under this section.
    (3) Acceleration of deferred items--(i) Electing S corporation-level 
events--(A) General rules. Except as provided in paragraph (c)(3)(iii) 
of this section, a shareholder's share of an electing S corporation's 
deferred items is accelerated and must be taken into account by such 
shareholder--
    (1) In the taxable year in which the electing S corporation 
liquidates;
    (2) In the taxable year in which the electing S corporation sells, 
exchanges, transfers (including contributions and distributions), or 
gifts substantially all of its assets;
    (3) In the taxable year in which the electing S corporation ceases 
doing business;
    (4) In the taxable year in which the electing S corporation's 
election under section 1362(a) terminates; or
    (5) In the taxable year that includes the day before the day on 
which the electing S corporation files a petition in a title 11 or 
similar case.
    (B) Substantially all requirement. For purposes of this paragraph 
(c)(3), substantially all of an electing S corporation's or 
partnership's assets means assets representing at least 90 percent of 
the fair market value of the net assets,

[[Page 479]]

and at least 70 percent of the fair market value of the gross assets, 
held by the S corporation or partnership immediately prior to the sale, 
exchange, transfer, or gift. For purposes of applying the rule in 
paragraph (c)(3)(i)(A)(2) of this section, a sale, exchange, transfer, 
or gift by any direct or indirect lower-tier partnership of the electing 
S corporation (lower-tier partnership) of all or part of its assets is 
not treated as a sale, exchange, transfer, or gift of the assets of any 
person that holds, directly or indirectly, an interest in such lower-
tier partnership. However, for purposes of applying the rule in 
paragraph (c)(3)(i)(A)(2) of this section, a sale, exchange, transfer, 
or gift of substantially all of the assets of a transferee partnership 
(as described in paragraph (c)(3)(iii)(A) of this section), or of a 
lower-tier partnership that received assets of the electing S 
corporation from a transferee partnership of the electing S corporation 
or another lower-tier partnership in a transaction governed all or in 
part by section 721, is treated as a sale, exchange, transfer, or gift 
by the holder of an interest in such transferee partnership or lower-
tier partnership of its entire interest in that transferee partnership 
or lower-tier partnership.
    (ii) Shareholder events--(A) General rules. Except as provided in 
paragraph (c)(3)(iii) of this section, a shareholder's share of an 
electing S corporation's deferred items is accelerated and must be taken 
into account by such shareholder in the taxable year in which--
    (1) The shareholder dies;
    (2) The shareholder sells, exchanges (including redemptions treated 
as exchanges under section 302), transfers (including contributions and 
distributions), or gifts (including transfers treated as gifts under 
section 1041) all or a portion of its interest in the electing S 
corporation; or
    (3) The shareholder abandons its interest in the electing S 
corporation.
    (B) Partial transfers. For purposes of paragraph (c)(3)(ii)(A)(2) of 
this section, if a shareholder of an electing S corporation sells, 
exchanges (including redemptions treated as exchanges under section 
302), transfers (including contributions or distributions), or gifts 
(including transfers treated as gifts under section 1041) a portion of 
its interest in the electing S corporation, such shareholder's share of 
the electing S corporation's deferred items proportionate to the 
interest that was sold, exchanged, transferred, or gifted is accelerated 
and must be taken into account by such shareholder.
    (iii) Events not constituting acceleration. Notwithstanding the 
rules in paragraphs (c)(3)(i) and (ii) of this section, a shareholder's 
share of an electing S corporation's deferred items is not accelerated 
by any of the events described in this paragraph (c)(3)(iii).
    (A) Electing S corporation's contributions. A shareholder's share of 
an electing S corporation's deferred items is not accelerated if the 
electing S corporation contributes all or a portion of its assets in a 
transaction governed all or in part by section 721(a) to a partnership 
(transferee partnership) in exchange for an interest in the transferee 
partnership. Notwithstanding the rules in this paragraph (c)(3)(iii)(A), 
the rules in paragraph (c)(3)(i)(A) of this section apply to any part of 
the transaction to which section 721(a) does not apply.
    (B) Section 1031 exchanges. A shareholder's share of an electing S 
corporation's deferred items is not accelerated if the electing S 
corporation transfers property held for productive use in a trade or 
business or for investment in exchange for property of like kind which 
is to be held either for productive use in a trade or business or for 
investment in a transaction to which section 1031(a)(1) applies. 
Notwithstanding the rules in this paragraph (c)(3)(iii)(B), to the 
extent the electing S corporation receives money or other property which 
does not meet the requirements of section 1031(a) (boot) in the 
exchange, a proportionate amount of the property transferred by the 
electing S corporation equal to the proportion of the boot to the total 
consideration received in the exchange shall be treated as sold for 
purposes of paragraph (c)(3)(i)(A)(2) of this section.
    (C) Section 381 transactions. A shareholder's share of an electing S 
corporation's deferred items is not accelerated if, as part of a 
transaction described in paragraph (c)(3)(i)(A) of this section,

[[Page 480]]

the electing S corporation's assets are acquired by another S 
corporation (acquiring S corporation) in a transaction to which section 
381(a) applies. In such a case, the acquiring S corporation succeeds to 
the electing S corporation's remaining deferred items and becomes 
subject to section 108(i), including all reporting requirements under 
this section, as if the acquiring S corporation were the electing S 
corporation. The acquiring S corporation must allocate and report the 
electing S corporation's deferred items to the same extent that the 
electing S corporation would have been required to allocate and report 
those deferred items, and only to those shareholders who had a share of 
the electing S corporation's deferred items prior to the transaction.
    (D) Retirement of a debt instrument. See Sec. 1.108(i)-3(c)(1) for 
rules regarding the retirement of a debt instrument that is subject to 
section 108(i).
    (E) Other non-acceleration events. A shareholder's share of an 
electing S corporation's deferred items is not accelerated with respect 
to any transaction if the Commissioner makes a determination by 
published guidance that such transaction is not an acceleration event 
under the rules of this paragraph (c)(3).
    (iv) Related S corporations. A shareholder's share of a related S 
corporation's deferred OID deduction (as determined in paragraph (d)(2) 
of this section) that has not previously been taken into account is 
accelerated and taken into account by the shareholder in the taxable 
year in which, and to the extent that, deferred COD income to which the 
related S corporation's deferred OID deduction relates is taken into 
account by the electing entity or its owners.
    (d) General rules applicable to partnerships and S corporations--(1) 
Applicable debt instrument (trade or business requirement). The 
determination of whether a debt instrument issued by a partnership or an 
S corporation is treated as a debt instrument issued in connection with 
the conduct of a trade or business by the partnership or S corporation 
for purposes of this section is based on all the facts and 
circumstances. However, a debt instrument issued by a partnership or an 
S corporation shall be treated as an applicable debt instrument for 
purposes of this section if the electing partnership or electing S 
corporation can establish that--
    (i) The gross fair market value of the trade or business assets of 
the partnership or S corporation that issued the debt instrument 
represented at least 80 percent of the gross fair market value of that 
partnership's or S corporation's total assets on the date of issuance;
    (ii) The trade or business expenditures of the partnership or S 
corporation that issued the debt instrument represented at least 80 
percent of the partnership's or S corporation's total expenditures for 
the taxable year of issuance;
    (iii) At least 95 percent of interest paid or accrued on the debt 
instrument issued by the partnership or S corporation was allocated to 
one or more trade or business expenditures under Sec. 1.163-8T for the 
taxable year of issuance;
    (iv) At least 95 percent of the proceeds from the debt instrument 
issued by the partnership or S corporation were used by the partnership 
or S corporation to acquire one or more trades or businesses within six 
months from the date of issuance; or
    (v) The partnership or S corporation issued the debt instrument to a 
seller of a trade or business to acquire the trade or business.
    (2) Deferral of OID at entity level--(i) In general. For each 
taxable year during the deferral period, an issuing entity determines 
the amount of its deferred OID deduction with respect to a debt 
instrument, if any. An issuing entity's deferred OID deduction for a 
taxable year is the lesser of:
    (A) The OID that accrues in a current taxable year during the 
deferral period with respect to the debt instrument (less any of such 
OID that is allowed as a deduction in the current taxable year as a 
result of an acceleration event), or
    (B) The excess, if any, of the electing entity's deferred COD income 
(less the aggregate amount of such deferred COD income that has been 
included in income in the current taxable year and any previous taxable 
year during the deferral period) over the aggregate amount of OID that 
accrued in previous taxable years during the deferral

[[Page 481]]

period with respect to the debt instrument (less the aggregate amount of 
such OID that has been allowed as a deduction in the current taxable 
year and any previous taxable year during the deferral period).
    (ii) Excess deferred OID deduction. If, as a result of an 
acceleration event during a taxable year in the deferral period, an 
issuing entity's aggregate deferred OID deduction for previous taxable 
years with respect to a debt instrument (less the aggregate amount of 
such deferred OID deduction that has been allowed as a deduction in a 
previous taxable year during the deferral period) exceeds the amount of 
the electing entity's deferred COD income (less the aggregate amount of 
such deferred COD income that has been included in income in the current 
taxable year and any previous taxable year during the deferral period), 
the excess deferred OID deduction shall be allowed as a deduction in the 
taxable year in which the acceleration event occurs.
    (iii) Examples. The following examples illustrate the rules under 
paragraph (d)(2) of this section:

    Example 1 Partner joins partnership during deferral period. (i) A 
and B each hold a 50 percent interest in AB partnership, a calendar-year 
partnership. On January 1, 2009, AB partnership issues a new debt 
instrument with OID and uses all of the proceeds to reacquire an 
outstanding applicable debt instrument of AB partnership, realizing $100 
of COD income, and makes an election under section 108(i) to defer $50 
of the COD income. During the deferral period, a total of $150 of OID 
accrues on the new debt instrument issued as part of the reacquisition. 
A and B each have a deferred amount of $25 with respect to the 
applicable debt instrument reacquired by AB partnership. For 2009, $28 
of OID accrues on the new debt instrument and A and B are each allocated 
$14 of accrued OID with respect to the new debt instrument. On January 
1, 2010, C contributes cash to AB partnership in exchange for a \1/3\ 
partnership interest. For 2010, $29 of OID accrues on the new debt 
instrument, and A, B, and C are each allocated $9.67 of accrued OID.
    (ii) Under paragraph (d)(2) of this section, AB partnership's 
deferred OID deduction for 2009 is the lesser of: $28 of OID that 
accrues on the new debt instrument in 2009, or the excess of AB 
partnership's deferred COD income of $50 over the aggregate amount of 
OID that accrued on the debt instrument in previous taxable years during 
the deferral period of $0, or $50. Thus, all $28 of the OID that accrues 
on the debt instrument in 2009 is deferred under section 108(i).
    (iii) Under paragraph (d)(2) of this section, AB partnership's 
deferred OID deduction for 2010 is the lesser of: $29 of OID that 
accrues on the new debt instrument in 2010, or the excess of AB 
partnership's deferred COD income of $50 over the aggregate amount of 
OID that accrued on the debt instrument in previous taxable years during 
the deferral period of $28, or $22. Thus, $22 of the $29 of OID that 
accrues in 2010 is deferred under section 108(i). A, B, and C will each 
defer $7.33 of the $9.67 of accrued OID that was allocated to each of 
them.
    Example 2 Acceleration of deferred items during deferral period. (i) 
On January 1, 2009, ABC partnership, a calendar-year partnership with 
three partners, issues a new debt instrument with OID and uses all of 
the proceeds to reacquire an outstanding applicable debt instrument of 
ABC partnership. ABC partnership realizes $150 of COD income and makes 
an election under section 108(i) to defer the $150 of COD income. A's 
deferred amount with respect to the applicable debt instrument is $75, 
while B and C each have a deferred amount of $37.50. In 2009, $28 of OID 
accrues on the new debt instrument and is allocated $7.00 to A and 
$10.50 to each of B and C. In 2010, $29 of OID accrues on the new debt 
instrument and is allocated $7.25 to A and $10.87 to each of B and C. In 
2011, $30 of OID accrues on the new debt instrument and is allocated 
$7.50 to A and $11.25 to each of B and C. In 2012, $31 of OID accrues on 
the new debt instrument and is allocated $7.75 to A and $11.62 to each 
of B and C. On December 31, 2012, A's entire share of ABC partnership's 
deferred items is accelerated under paragraph (b)(6) of this section. 
For 2012, A includes $75 of COD income in income and is allowed a 
deduction of $21.75 for A's share of ABC partnership's deferred OID 
deduction for taxable years 2009 through 2011, and a deduction of $7.75 
for A's share of ABC partnership's OID that accrues on the debt 
instrument in 2012.
    (ii) Under paragraph (d)(2) of this section, ABC partnership's 
deferred OID deduction for 2012 is the lesser of: $23.25 ($31 of OID 
that accrues on the new debt instrument in 2012 less $7.75 of this OID 
that is allowed as a deduction to A in 2012) or $9.75 (the excess of $75 
(ABC partnership's deferred COD income of $150 less A's share of ABC 
partnership's deferred COD income that is included in A's income for 
2012 of $75) over $65.25 (the aggregate amount of OID that accrued in 
previous taxable years of $87 less the aggregate amount of such OID that 
has been allowed as a deduction by A in 2012 of $21.75)). Thus, of the 
$31 of OID that accrues in 2012, $9.75 is deferred under section 108(i).


[[Page 482]]


    (3) Effect of an election under section 108(i) on recapture amounts 
under section 465(e)--(i) In general. To the extent that a decrease in a 
partner's or shareholder's amount at risk (as defined in section 465) in 
an activity as a result of a reacquisition of an applicable debt 
instrument would cause a partner with a deferred amount or a shareholder 
with a share of the S corporation's deferred COD income to have income 
under section 465(e) in the taxable year of the reacquisition, such 
decrease (not to exceed the partner's deferred amount or the 
shareholder's share of the S corporation's deferred COD income with 
respect to that applicable debt instrument) (deferred section 465 
amount) shall not be taken into account for purposes of determining the 
partner's or shareholder's amount at risk in an activity under section 
465 as of the close of the taxable year of the reacquisition. A 
partner's or shareholder's deferred section 465 amount is treated as a 
decrease in the partner's or shareholder's amount at risk in an activity 
at the same time, and to the extent remaining in the same amount, as the 
partner recognizes its deferred amount or the S corporation shareholder 
recognizes its share of the S corporation's deferred COD income.
    (ii) Example. The following example illustrates the rules in 
paragraph (d)(3) of this section:

    Example. (i) PRS is a calendar-year partnership with two equal 
partners, individuals A and B. PRS is engaged in an activity described 
in section 465(c) (Activity). PRS has a $500 recourse applicable debt 
instrument outstanding. Each partner's amount at risk on January 1, 2009 
is $50. On June 1, 2009, the creditor agrees to cancel the $500 
indebtedness. PRS realizes $500 of COD income as a result of the 
reacquisition. The partners' share of the liabilities of PRS decreases 
by $500 under section 752(b), and each partner's amount at risk is 
decreased by $250. Other than the $500 of COD income, PRS's income and 
expenses for 2009 are equal. PRS makes an election under section 108(i) 
to defer $200 of the $500 COD income realized in connection with the 
reacquisition. PRS allocates the $500 of COD income equally between its 
partners, A and B. A and B each have a COD income amount of $250 with 
respect to the applicable debt instrument. PRS determines that, for both 
partners A and B, $100 of the $250 COD income amount is the deferred 
amount, and $150 is the included amount. Beginning in each taxable year 
2014 through 2018, A and B each include $20 of the deferred amount in 
gross income.
    (ii) Under paragraph (d)(3)(i) of this section, $50 of the $250 
decrease in A's and B's amount at risk in Activity is the deferred 
section 465 amount for each of A and B and is not taken into account for 
purposes of determining A's and B's amount at risk in Activity at the 
close of 2009. In taxable year 2014, A's and B's amount at risk in 
Activity is decreased by $20 (deferred section 465 amount that equals 
the deferred amount included in A's and B's gross income in 2014). In 
taxable year 2015, A's and B's amount at risk in Activity is decreased 
by $20 for the deferred section 465 amount that equals the deferred 
amount included in A's and B's gross income in 2015. In taxable year 
2016, A's and B's amount at risk in Activity is decreased by $10 (the 
remaining amount of the deferred section 465 amount).
    (e) Election procedures and reporting requirements--(1) 
Partnerships--(i) In general. A partnership makes an election under 
section 108(i) by following procedures outlined in guidance and 
applicable forms and instructions issued by the Commissioner. An 
electing partnership (or its successor) must provide to its partners 
certain information as required by guidance and applicable forms and 
instructions issued by the Commissioner.
    (ii) Tiered passthrough entities. A partnership that is a direct or 
indirect partner of an electing partnership (or its successor) or a 
related partnership or an S corporation partner must provide to its 
partners or shareholders, as the case may be, certain information as 
required by guidance and applicable forms and instructions issued by the 
Commissioner.
    (iii) Related partnerships. A related partnership must provide to 
its partners certain information as required by guidance and applicable 
forms and instructions issued by the Commissioner.
    (2) S corporations--(i) In general. An S corporation makes an 
election under section 108(i) by following procedures outlined in 
guidance and applicable forms and instructions issued by the 
Commissioner. An electing S corporation (or its successor) must provide 
to its shareholders certain information as required by guidance and 
applicable forms and instructions issued by the Commissioner.
    (ii) Related S corporations. A related S corporation must provide to 
its shareholders certain information as required

[[Page 483]]

by guidance and applicable forms and instructions issued by the 
Commissioner.
    (f) Effective/applicability dates. For the applicability dates of 
this section, see Sec. 1.108(i)-0(b).

[T.D. 9623, 78 FR 39975, July 3, 2013; 78 FR 49366, Aug. 14, 2013]



Sec. 1.108(i)-3  Rules for the deduction of OID.

    (a) Deemed debt-for-debt exchanges--(1) In general. For purposes of 
section 108(i)(2) (relating to deferred OID deductions that arise in 
certain debt-for-debt exchanges involving the reacquisition of an 
applicable debt instrument), if the proceeds of any debt instrument are 
used directly or indirectly by the issuer or a person related to the 
issuer (within the meaning of section 108(i)(5)(A)) to reacquire an 
applicable debt instrument, the debt instrument shall be treated as 
issued for the applicable debt instrument being reacquired. Therefore, 
section 108(i)(2) may apply, for example, to a debt instrument issued by 
a corporation for cash in which some or all of the proceeds are used 
directly or indirectly by the corporation's related subsidiary in the 
reacquisition of the subsidiary's applicable debt instrument.
    (2) Directly or indirectly. Whether the proceeds of an issuance of a 
debt instrument are used directly or indirectly to reacquire an 
applicable debt instrument depends upon all of the facts and 
circumstances surrounding the issuance and the reacquisition. The 
proceeds of an issuance of a debt instrument will be treated as being 
used indirectly to reacquire an applicable debt instrument if--
    (i) At the time of the issuance of the debt instrument, the issuer 
of the debt instrument anticipated that an applicable debt instrument of 
the issuer or a person related to the issuer would be reacquired by the 
issuer, and the debt instrument would not have been issued if the issuer 
had not so anticipated such reacquisition;
    (ii) At the time of the issuance of the debt instrument, the issuer 
of the debt instrument or a person related to the issuer anticipated 
that an applicable debt instrument would be reacquired by a related 
person and the related person receives cash or property that it would 
not have received unless the reacquisition had been so anticipated; or
    (iii) At the time of the reacquisition, the issuer or a person 
related to the issuer foresaw or reasonably should have foreseen that 
the issuer or a person related to the issuer would be required to issue 
a debt instrument, which it would not have otherwise been required to 
issue if the reacquisition had not occurred, in order to meet its future 
economic needs.
    (b) Proportional rule for accruals of OID. For purposes of section 
108(i)(2), if only a portion of the proceeds from the issuance of a debt 
instrument are used directly or indirectly to reacquire an applicable 
debt instrument, the rules of section 108(i)(2)(A) will apply to the 
portion of OID on the debt instrument that is equal to the portion of 
the proceeds from such instrument used to reacquire the outstanding 
applicable debt instrument. Except as provided in the last sentence of 
section 108(i)(2)(A), the amount of deferred OID deduction that is 
subject to section 108(i)(2)(A) for a taxable year is equal to the 
product of the amount of OID that accrues in the taxable year under 
section 1272 or section 1275 (and the regulations under those sections), 
whichever section is applicable, and a fraction, the numerator of which 
is the portion of the total proceeds from the issuance of the debt 
instrument used directly or indirectly to reacquire the applicable debt 
instrument and the denominator of which is the total proceeds from the 
issuance of the debt instrument.
    (c) No acceleration--(1) Retirement. Retirement of a debt instrument 
subject to section 108(i)(2) does not accelerate deferred OID 
deductions.
    (2) Cross-reference. See Sec. 1.108(i)-1 and Sec. 1.108(i)-2 for 
rules relating to the acceleration of deferred OID deductions.
    (d) Examples. The application of this section is illustrated by the 
following examples. Unless otherwise stated, all taxpayers in the 
following examples are calendar-year taxpayers, and P and S each file 
separate returns:

    Example 1. (i) Facts. P, a domestic corporation, owns all of the 
stock of S, a domestic corporation. S has a debt instrument outstanding 
that has an adjusted issue price of $100,000. On January 1, 2010, P 
issues for

[[Page 484]]

$160,000 a four-year debt instrument that has an issue price of $160,000 
and a stated redemption price at maturity of $200,000, resulting in 
$40,000 of OID. In P's discussion with potential lenders/holders, and as 
described in offering materials provided to potential lenders/holders, P 
disclosed that it planned to use all or a portion of the proceeds from 
the issuance of the debt instrument to reacquire outstanding debt of P 
and its affiliates. Following the issuance, P makes a $70,000 capital 
contribution to S. S then reacquires its debt instrument from X, a 
person not related to S within the meaning of section 108(i)(5)(A), for 
$70,000. At the time of the reacquisition, the adjusted issue price of 
S's debt instrument is $100,000. Under Sec. 1.61-12(c), S realizes 
$30,000 of COD income. S makes a section 108(i) election for the $30,000 
of COD income.
    (ii) Analysis. Under the facts, at the time of P's issuance of its 
$160,000 debt instrument, P anticipated that the loan proceeds would be 
used to reacquire the debt of S, and P's debt instrument would not have 
been issued for an amount greater than $90,000 if P had not anticipated 
that S would use the proceeds to reacquire its debt. Pursuant to 
paragraph (a) of this section, the proceeds from P's issuance of its 
debt instrument are treated as being used indirectly to reacquire S's 
applicable debt instrument. Therefore, section 108(i)(2)(B) applies to 
P's debt instrument and P's OID deductions on its debt instrument are 
subject to deferral under section 108(i)(2)(A). However, because only a 
portion of the proceeds from P's debt instrument are used by S to 
reacquire its applicable debt instrument, only a portion of P's total 
OID deductions will be deferred under section 108(i)(2)(A). See section 
108(i)(2)(B). Accordingly, a maximum of $17,500 ($40,000  x  $70,000/
$160,000) of P's $40,000 total OID deductions is subject to deferral 
under section 108(i)(2)(A). Under paragraph (b) of this section, the 
amount of P's deferred OID deduction each taxable year under section 
108(i)(2)(A) is equal to the product of the amount of OID that accrues 
in the taxable year under section 1272 for the debt instrument and a 
fraction ($70,000/$160,000). As a result, P's deferred OID deductions 
are the following amounts: $4,015.99 for 2010 ($9,179.40  x  $70,000/
$160,000); $4,246.39 for 2011 ($9,706.04  x  $70,000/$160,000); 
$4,490.01 for 2012 ($10,262.88  x  $70,000/$160,000); and $4,747.61 for 
2013 ($10,851.68  x  $70,000/$160,000).
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that S makes a section 108(i) election for only $10,000 of the $30,000 
of COD income.
    (ii) Analysis. The maximum amount of P's deferred OID deductions 
under section 108(i)(2)(A) is $10,000 rather than $17,500 because S made 
a section 108(i) election for only $10,000 of the $30,000 of COD income. 
Under section 108(i)(2)(A), because the amount of OID that accrues prior 
to 2014 attributable to the portion of the debt instrument issued to 
indirectly reacquire S's applicable debt instrument under paragraph (b) 
of this section ($17,500) exceeds the amount of deferred COD income 
under section 108(i) ($10,000), P's deferred OID deductions are the 
following amounts: $4,015.99 for 2010; $4,246.39 for 2011; $1,737.62 for 
2012; and $0 for 2013.
    Example 3. (i) Facts. The facts are the same as in Example 1, except 
that P pays $200,000 in cash to the lenders/holders on December 31, 
2012, to retire the debt instrument. P did not directly or indirectly 
obtain the funds to retire the debt instrument from the issuance of 
another debt instrument with OID.
    (ii) Analysis. Under paragraph (c)(1) of this section, the 
retirement of P's debt instrument is not an acceleration event for the 
deferred OID deductions of $4,015.99 for 2010, $4,246.39 for 2011, and 
$4,490.01 for 2012. Except as provided in Sec. 1.108(i)-1(b)(4), these 
amounts will be taken into account during the inclusion period. P, 
however, paid a repurchase premium of $10,851.68 in 2012 ($200,000 minus 
the adjusted issue price of $189,148.32) to retire the debt instrument. 
If otherwise allowable, P may deduct this amount in 2012 under 
Sec. 1.163-7(c).
    (e) Effective/applicability dates. For effective/applicability 
dates, see Sec. 1.108(i)-0(b).

[T.D. 9622, 78 FR 39991, July 3, 2013]



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

[[Page 485]]

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--
    (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

[[Page 486]]

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 
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.

[[Page 487]]

    (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 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

[[Page 488]]

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 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

[[Page 489]]

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 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

[[Page 490]]

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 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.

[[Page 491]]

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 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.

[[Page 492]]

    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 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

[[Page 493]]

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 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

[[Page 494]]

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
    (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

[[Page 495]]

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 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

[[Page 496]]

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 
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--

[[Page 497]]

    (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 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

[[Page 498]]

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 ($300  x  
4) and must include the remaining $800 in gross income for that year. 
For the year 1956, he will exclude $1,500 ($300  x  5) 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 ($300  x  9) 
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 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 ($300  x  12) 
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 ($300  x  5) 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 ($300  x  7) 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

[[Page 499]]

 
    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 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

[[Page 500]]

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 
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.

[[Page 501]]


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 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

[[Page 502]]

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. 1.118-2  Contribution in aid of construction.

    (a) Special rule for water and sewerage disposal utilities--(1) In 
general. For purposes of section 118, the term contribution to the 
capital of the taxpayer includes any amount of money or other property 
received from any person (whether or not a shareholder) by a regulated 
public utility that provides water or sewerage disposal services if--
    (i) The amount is a contribution in aid of construction under 
paragraph (b) of this section;
    (ii) In the case of a contribution of property other than water or 
sewerage disposal facilities, the amount satisfies the expenditure rule 
under paragraph (c) of this section; and
    (iii) The amount (or any property acquired or constructed with the 
amount) is not included in the taxpayer's rate base for ratemaking 
purposes.
    (2) Definitions--(i) Regulated public utility has the meaning given 
such term by section 7701(a)(33), except that such term does not include 
any utility which is not required to provide water or sewerage disposal 
services to members of the general public in its service area.
    (ii) Water or sewerage disposal facility is defined as tangible 
property described in section 1231(b) that is used predominately (80% or 
more) in the trade or business of furnishing water or sewerage disposal 
services.
    (b) Contribution in aid of construction--(1) In general. For 
purposes of section 118(c) and this section, the term contribution in 
aid of construction means any amount of money or other property 
contributed to a regulated public utility that provides water or 
sewerage disposal services to the extent that the purpose of the 
contribution is to provide for the expansion, improvement, or 
replacement of the utility's water or sewerage disposal facilities.
    (2) Advances. A contribution in aid of construction may include an 
amount of money or other property contributed to a regulated public 
utility for a water or sewerage disposal facility subject to a 
contingent obligation to repay the amount, in whole or in part, to the 
contributor (commonly referred to as an advance). For example, an amount 
received by a utility from a developer to construct a water facility 
pursuant to an agreement under which the utility will pay the developer 
a percentage of the receipts from the facility over a fixed period may 
constitute a contribution in aid of construction. Whether an advance is 
a contribution or a loan is determined under general principles of 
federal tax law based on all the facts and circumstances. For the 
treatment of any amount of a contribution in aid of construction that is 
repaid by the utility to the contributor, see paragraphs (c)(2)(ii) and 
(d)(2) of this section.
    (3) Customer connection fee--(i) In general. Except as provided in 
paragraph (b)(3)(ii) of this section, a customer connection fee is not a 
contribution in aid of construction under this paragraph (b) and 
generally is includible in income. The term customer connection fee 
includes any amount of money or other property transferred to the 
utility representing the cost of installing a connection or service line 
(including the cost of meters and piping) from the

[[Page 503]]

utility's main water or sewer lines to the line owned by the customer or 
potential customer. A customer connection fee also includes any amount 
paid as a service charge for starting or stopping service.
    (ii) Exceptions--(A) Multiple customers. Money or other property 
contributed for a connection or service line from the utility's main 
line to the customer's or the potential customer's line is not a 
customer connection fee if the connection or service line serves, or is 
designed to serve, more than one customer. For example, a contribution 
for a split service line that is designed to serve two customers is not 
a customer connection fee. On the other hand, if a water or sewerage 
disposal utility treats an apartment or office building as one utility 
customer, then the cost of installing a connection or service line from 
the utility's main water or sewer lines serving that single customer is 
a customer connection fee.
    (B) Fire protection services. Money or other property contributed 
for public and private fire protection services is not a customer 
connection fee.
    (4) Reimbursement for a facility previously placed in service--(i) 
In general. If a water or sewerage disposal facility is placed in 
service by the utility before an amount is contributed to the utility, 
the contribution is not a contribution in aid of construction under this 
paragraph (b) with respect to the cost of the facility unless, no later 
than 8\1/2\ months after the close of the taxable year in which the 
facility was placed in service, there is an agreement, binding under 
local law, that the utility is to receive the amount as reimbursement 
for the cost of acquiring or constructing the facility. An order or 
tariff, binding under local law, that is issued or approved by the 
applicable public utility commission requiring current or prospective 
utility customers to reimburse the utility for the cost of acquiring or 
constructing the facility, is a binding agreement for purposes of the 
preceding sentence. If an agreement exists, the basis of the facility 
must be reduced by the amount of the expected contributions. Appropriate 
adjustments must be made if actual contributions differ from expected 
contributions.
    (ii) Example. The application of paragraph (b)(4)(i) of this section 
is illustrated by the following example:

    Example. M, a calendar year regulated public utility that provides 
water services, spent $1,000,000 for the construction of a water 
facility that can serve 200 customers. M placed the facility in service 
in 2000. In June 2001, the public utility commission that regulates M 
approves a tariff requiring new customers to reimburse M for the cost of 
constructing the facility by paying a service availability charge of 
$5,000 per lot. Pursuant to the tariff, M expects to receive 
reimbursements for the cost of the facility of $100,000 per year for the 
years 2001 through 2010. The reimbursements are contributions in aid of 
construction under paragraph (b) of this section because no later than 
8\1/2\ months after the close of the taxable year in which the facility 
was placed in service there was a tariff, binding under local law, 
approved by the public utility commission requiring new customers to 
reimburse the utility for the cost of constructing the facility. The 
basis of the $1,000,000 facility is zero because the expected 
contributions equal the cost of the facility.

    (5) Classification by ratemaking authority. The fact that the 
applicable ratemaking authority classifies any money or other property 
received by a utility as a contribution in aid of construction is not 
conclusive as to its treatment under this paragraph (b).
    (c) Expenditure rule--(1) In general. An amount satisfies the 
expenditure rule of section 118(c)(2) if the amount is expended for the 
acquisition or construction of property described in section 
118(c)(2)(A), the amount is paid or incurred before the end of the 
second taxable year after the taxable year in which the amount was 
received as required by section 118(c)(2)(B), and accurate records are 
kept of contributions and expenditures as provided in section 
118(c)(2)(C).
    (2) Excess amount--(i) Includible in the utility's income. An amount 
received by a utility as a contribution in aid of construction that is 
not expended for the acquisition or construction of water or sewerage 
disposal facilities as required by paragraph (c)(1) of this section (the 
excess amount) is not a contribution to the capital of the taxpayer 
under paragraph (a) of this section. Except as provided in paragraph 
(c)(2)(ii) of this section, such excess amount is includible in the 
utility's income in

[[Page 504]]

the taxable year in which the amount was received.
    (ii) Repayment of excess amount. If the excess amount described in 
paragraph (c)(2)(i) of this section is repaid, in whole or in part, 
either--
    (A) Before the end of the time period described in paragraph (c)(1) 
of this section, the repayment amount is not includible in the utility's 
income; or
    (B) After the end of the time period described in paragraph (c)(1) 
of this section, the repayment amount may be deducted by the utility in 
the taxable year in which it is paid or incurred to the extent such 
amount was included in income.
    (3) Example. The application of this paragraph (c) is illustrated by 
the following example:

    Example. M, a calendar year regulated public utility that provides 
water services, received a $1,000,000 contribution in aid of 
construction in 2000 for the purpose of constructing a water facility. 
To the extent that the $1,000,000 exceeded the actual cost of the 
facility, the contribution was subject to being returned. In 2001, M 
built the facility at a cost of $700,000 and returned $200,000 to the 
contributor. As of the end of 2002, M had not returned the remaining 
$100,000. Assuming accurate records are kept, the requirement under 
section 118(c)(2) is satisfied for $700,000 of the contribution. Because 
$200,000 of the contribution was returned within the time period during 
which qualifying expenditures could be made, this amount is not 
includible in M's income. However, the remaining $100,000 is includible 
in M's income for its 2000 taxable year (the taxable year in which the 
amount was received) because the amount was neither spent nor repaid 
during the prescribed time period. To the extent M repays the remaining 
$100,000 after year 2002, M would be entitled to a deduction in the year 
such repayment is paid or incurred.

    (d) Adjusted basis--(1) Exclusion from basis. Except for a repayment 
described in paragraph (d)(2) of this section, to the extent that a 
water or sewerage disposal facility is acquired or constructed with an 
amount received as a contribution to the capital of the taxpayer under 
paragraph (a) of this section, the basis of the facility is reduced by 
the amount of the contribution. To the extent the water or sewerage 
disposal facility is acquired as a contribution to the capital of the 
taxpayer under paragraph (a) of this section, the basis of the 
contributed facility is zero.
    (2) Repayment of contribution. If a contribution to the capital of 
the taxpayer under paragraph (a) of this section is repaid to the 
contributor, either in whole or in part, then the repayment amount is a 
capital expenditure in the taxable year in which it is paid or incurred, 
resulting in an increase in the property's adjusted basis in such year. 
Capital expenditures allocated to depreciable property under paragraph 
(d)(3) of this section may be depreciated over the remaining recovery 
period for that property.
    (3) Allocation of contributions. An amount treated as a capital 
expenditure under this paragraph (d) is to be allocated proportionately 
to the adjusted basis of each property acquired or constructed with the 
contribution based on the relative cost of such property.
    (4) Example. The application of this paragraph (d) is illustrated by 
the following example:

    Example. A, a calendar year regulated public utility that provides 
water services, received a $1,000,000 contribution in aid of 
construction in 2000 as an advance from B, a developer, for the purpose 
of constructing a water facility. To the extent that the $1,000,000 
exceeds the actual cost of the facility, the contribution is subject to 
being returned. Under the terms of the advance, A agrees to pay to B a 
percentage of the receipts from the facility over a fixed period, but 
limited to the cost of the facility. In 2001, A builds the facility at a 
cost of $700,000 and returns $300,000 to B. In 2002, A pays $20,000 to B 
out of the receipts from the facility. Assuming accurate records are 
kept, the $700,000 advance is a contribution to the capital of A under 
paragraph (a) of this section and is excludable from A's income. The 
basis of the $700,000 facility constructed with this contribution to 
capital is zero. The $300,000 excess amount is not a contribution to the 
capital of A under paragraph (a) of this section because it does not 
meet the expenditure rule described in paragraph (c)(1) of this section. 
However, this excess amount is not includible in A's income pursuant to 
paragraph (c)(2)(ii) of this section since the amount is repaid to B 
within the required time period. The repayment of the $300,000 excess 
amount to B in 2001 is not treated as a capital expenditure by A. The 
$20,000 payment to B in 2002 is treated as a capital expenditure by A in 
2002 resulting in an increase in the adjusted basis of the water 
facility from zero to $20,000.


[[Page 505]]


    (e) Statute of limitations--(1) Extension of statute of limitations. 
Under section 118(d)(1), the statutory period for assessment of any 
deficiency attributable to a contribution to capital under paragraph (a) 
of this section does not expire before the expiration of 3 years after 
the date the taxpayer notifies the Secretary in the time and manner 
prescribed in paragraph (e)(2) of this section.
    (2) Time and manner of notification. Notification is made by 
attaching a statement to the taxpayer's federal income tax return for 
the taxable year in which any of the reportable items in paragraphs 
(e)(2)(i) through (iii) of this section occur. The statement must 
contain the taxpayer's name, address, employer identification number, 
taxable year, and the following information with respect to 
contributions of property other than water or sewerage disposal 
facilities that are subject to the expenditure rule described in 
paragraph (c) of this section--
    (i) The amount of contributions in aid of construction expended 
during the taxable year for property described in section 118(c)(2)(A) 
(qualified property) as required under paragraph (c)(1) of this section, 
identified by taxable year in which the contributions were received;
    (ii) The amount of contributions in aid of construction that the 
taxpayer does not intend to expend for qualified property as required 
under paragraph (c)(1) of this section, identified by taxable year in 
which the contributions were received; and
    (iii) The amount of contributions in aid of construction that the 
taxpayer failed to expend for qualified property as required under 
paragraph (c)(1) of this section, identified by taxable year in which 
the contributions were received.
    (f) Effective date. This section is applicable for any money or 
other property received by a regulated public utility that provides 
water or sewerage disposal services on or after January 11, 2001.

[T.D. 8936, 66 FR 2254, Jan. 11, 2001]



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 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

[[Page 506]]

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 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

[[Page 507]]

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 
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.

[[Page 508]]

    (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.
    (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

[[Page 509]]

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.
    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

[[Page 510]]

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.



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

[[Page 511]]

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 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

[[Page 512]]

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 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

[[Page 513]]

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 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

[[Page 514]]

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 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,

[[Page 515]]

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 
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).


[[Page 516]]


    (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 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

[[Page 517]]

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.
    (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

[[Page 518]]

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 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

[[Page 519]]

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) 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 be by reason of a change in place of employment, health, 
or unforeseen circumstances. If a safe harbor described in this section 
applies, a sale or exchange is deemed to be by reason of a change in 
place of employment, health, or unforeseen circumstances. If a safe 
harbor described in this section does not apply, 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. 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 is 
materially impaired;
    (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. A sale or exchange is deemed to be by 
reason of 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 qualified 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 qualified 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 2003. In 2004 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 2002. In May 2003 B moves 
out of his house to take a 3-year assignment in Germany. B sells his 
house in January 2004. 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

[[Page 520]]

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 2002 that is 35 miles from R's 
Philadelphia office. In May 2003 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 2005 C is assigned to work in R's London office. C sells 
her house in August 2005 as a result of the assignment to London. The 
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 2003 D, who works as an emergency medicine 
physician, buys a condominium that is 5 miles from her place of 
employment and uses it as her principal residence. In February 2004, D 
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. Because of the demands of the new job, 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 an individual is not a 
sale or exchange by reason of health.
    (2) Physician's recommendation safe harbor. A sale or exchange is 
deemed to be by reason of 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 2003 A buys a house that she uses as her principal 
residence. A is injured in an accident and is unable to care for 
herself. A sells her house in 2004 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 2003 H and W 
purchase a house that they use as their principal residence. In 2004 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 2003 that they use as their 
principal residence. Their son suffers from a chronic illness that 
requires regular medical care. Later that year their son begins a new 
treatment that is available at a hospital 100 miles away from their 
residence. In 2004 H and W sell their house so that they can be closer 
to the hospital to facilitate their son's treatment. 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 2003 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 
2004 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 2003 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 outdoor exercise, but H is not suffering from any disease that can 
be

[[Page 521]]

treated or mitigated by outdoor exercise. In 2004 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 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 could not reasonably have anticipated before 
purchasing and occupying the residence. A sale or exchange by reason of 
unforeseen circumstances (other than a sale or exchange deemed to be by 
reason of unforeseen circumstances under paragraph (e)(2) or (3) of this 
section) does not qualify for the reduced maximum exclusion if the 
primary reason for the sale or exchange is a preference for a different 
residence or an improvement in financial circumstances.
    (2) Specific event safe harbors. A sale or exchange is deemed to be 
by reason of 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 qualified 
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.
    (3) Designation of additional events as unforeseen circumstances. 
The Commissioner may designate other events or situations as unforeseen 
circumstances in published guidance of general applicability and may 
issue rulings addressed to specific taxpayers identifying other events 
or situations as unforeseen circumstances with regard to those taxpayers 
(see Sec. 601.601(d)(2) of this chapter).
    (4) 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 and reasonable basic living expenses for their 
household 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. In 2003 B buys a condominium in a high-rise building 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 replaces the building's roof and heating system. Six months 
later, B's monthly condominium fee doubles in order to pay for the

[[Page 522]]

repairs. B sells the condominium in 2004 because he is unable to afford 
the new condominium fee along with a 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, the 
doubling of the condominium fee, is an unforeseen circumstance because B 
could not reasonably have anticipated that the condominium fee would 
double at the time he purchased and occupied the property. Consequently, 
the sale of the condominium is by reason of 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 traveled road. C sells 
the property in 2004 because C is disturbed by the traffic. The safe 
harbors of paragraph (e)(2) of this section do not apply. Under the 
facts and circumstances, the primary reason for the sale, the traffic, 
is not an unforeseen circumstance because C could reasonably have 
anticipated the traffic at the time he purchased and occupied the house. 
Consequently, the sale of the house is not by reason of unforeseen 
circumstances and C is not entitled to claim a reduced maximum exclusion 
under section 121(c)(2).
    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, the 
broken engagement, is an unforeseen circumstance because D and E could 
not reasonably have anticipated the broken engagement at the time they 
purchased and occupied the house. Consequently, the sale is by reason of 
unforeseen circumstances and D and E are each entitled to claim a 
reduced maximum exclusion under section 121(c)(2).
    Example 7. In 2003 F buys a small condominium that she uses as her 
principal residence. In 2005 F receives a promotion and a large increase 
in her salary. F sells the condominium in 2004 and purchases a house 
because she can now afford the house. The safe harbors of paragraph 
(e)(2) of this section do not apply. Under the facts and circumstances, 
the primary reason for the sale of the house, F's salary increase, is an 
improvement in F's financial circumstances. Under paragraph (e)(1) of 
this section, an improvement in financial circumstances, even if the 
result of unforeseen circumstances, does not qualify for the reduced 
maximum exclusion by reason of unforeseen circumstances under section 
121(c)(2).
    Example 8. In April 2003 G buys a house that he uses as his 
principal residence. G sells his house in October 2004 because the house 
has greatly appreciated in value, mortgage rates have substantially 
decreased, and G can afford a bigger house. The safe harbors of 
paragraph (e)(2) of this section do not apply. Under the facts and 
circumstances, the primary reasons for the sale of the house, the 
changes in G's house value and in the mortgage rates, are an improvement 
in G's financial circumstances. Under paragraph (e)(1) of this section, 
an improvement in financial circumstances, even if the result of 
unforeseen circumstances, does not qualify for the reduced maximum 
exclusion by reason of unforeseen circumstances under section 121(c)(2).
    Example 9. H works as a police officer for City X. In 2003 H buys a 
condominium that he uses as his principal residence. In 2004 H is 
assigned to City X's K-9 unit and is required to care for the police 
service dog at his home. Because H's condominium association does not 
permit H to have a dog in his condominium, in 2004 he sells the 
condominium and buys a house. 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, H's assignment to the K-9 unit, is an 
unforeseen circumstance because H could not reasonably have anticipated 
his assignment to the K-9 unit at the time he purchased and occupied the 
condominium. Consequently, the sale of the condominium is by reason of 
unforeseen circumstances and H is entitled to claim a reduced maximum 
exclusion under section 121(c)(2).
    Example 10. In 2003, J buys a small house that she uses as her 
principal residence. After J wins the lottery, she sells the small house 
in 2004 and buys a bigger, more expensive house. The safe harbors of 
paragraph (e)(2) of this section do not apply. Under the facts and 
circumstances, the primary reason for the sale of the house, winning the 
lottery, is an improvement in J's financial circumstances. Under 
paragraph (e)(1) of this section, an improvement in financial 
circumstances, even if the result of unforeseen circumstances, does not 
qualify for the reduced maximum exclusion under section 121(c)(2).

    (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

[[Page 523]]

    (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) 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) Effective dates. Paragraphs (a) and (g) of this section are 
applicable for sales and exchanges on or after December 24, 2002. 
Paragraphs (b) through (f) of this section are applicable for sales and 
exchanges on or after August 13, 2004.

[T.D. 9030, 67 FR 78361, Dec. 24, 2002, as amended by T.D. 9152, 69 FR 
50304, Aug. 16, 2004]



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.


[[Page 524]]


    (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 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

[[Page 525]]

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 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

[[Page 526]]

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 
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. 1.121-5  Suspension of 5-year period for certain members of 
the uniformed services and Foreign Service.

    (a) In general. Under section 121(d)(9), a taxpayer who is serving 
(or whose spouse is serving) on qualified official extended duty as a 
member of the uniformed services or Foreign Service of the United States 
may elect to suspend the running of the 5-year period of ownership and 
use during such service but for not more than 10 years. The election 
does not suspend the running of the 5-year period for any period during 
which the running of the 5-year period with respect to any other 
property of the taxpayer is suspended by an election under section 
121(d)(9).
    (b) Manner of making election. The taxpayer makes the election under 
section 121(d)(9) and this section by filing a return for the taxable 
year of the sale or exchange of the taxpayer's principal residence that 
does not include the gain in the taxpayer's gross income.
    (c) Application of election to closed years. A taxpayer 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 on or after May 7, 
1997, may elect to apply section 121(d)(9) and this section for any 
years for which a claim for refund is barred by operation of any law or 
rule of law by filing an amended return before November 11, 2004.
    (d) Example. The provisions of this section are illustrated by the 
following example:

    Example. B purchases a house in Virginia in 2003 that he uses as his 
principal residence for 3 years. For 8 years, from 2006 through 2014, B 
serves on qualified official extended duty as a member of the Foreign 
Service of the United States in Brazil. In 2015 B sells the house. B did 
not use the house as his principal residence for 2 of the 5 years 
preceding the sale. Under section 121(d)(9)and this section, however, B 
may elect to suspend the running of the 5-year period of ownership and 
use during his 8-year period of service with the Foreign Service in 
Brazil. If B makes the election, the 8-year period is not counted in 
determining whether B used the house for 2 of the 5 years preceding the 
sale. Therefore, B may exclude the gain from the sale of the house under 
section 121.


[[Page 527]]


    (e) Effective date. This section is applicable for sales and 
exchanges on or after May 7, 1997.

[T.D. 9152, 69 FR 50306, Aug. 16, 2004]



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 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

[[Page 528]]

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:

    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

[[Page 529]]

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  9000  x  $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)......................................
                                                  -----------
    (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

[[Page 530]]

 
    (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.
    (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

[[Page 531]]

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 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

[[Page 532]]

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. 1.125-3  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.
    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

[[Page 533]]

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 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

[[Page 534]]

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.

    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

[[Page 535]]

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.
    (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

[[Page 536]]

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 
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

[[Page 537]]

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 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

[[Page 538]]

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 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

[[Page 539]]

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.
    (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

[[Page 540]]

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.
    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

[[Page 541]]

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 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.

[[Page 542]]

    (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 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

[[Page 543]]

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 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

[[Page 544]]

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 (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

[[Page 545]]

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 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

[[Page 546]]

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 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

[[Page 547]]

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; 66 FR 13013, Mar. 2, 2001; T.D. 8966, 66 FR 52680, 
Oct. 17, 2001]



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.
    (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

[[Page 548]]

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 preceding 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 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

[[Page 549]]

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 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.

[[Page 550]]

    (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.
    (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.

[[Page 551]]

    (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.

            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

[[Page 552]]

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 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,

[[Page 553]]

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, 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.

[[Page 554]]

    (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 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

[[Page 555]]

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 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,

[[Page 556]]

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 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

[[Page 557]]

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 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

[[Page 558]]

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 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

[[Page 559]]

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 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

[[Page 560]]

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 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

[[Page 561]]

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 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.


[[Page 562]]


    (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 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.

[[Page 563]]

    (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).
    (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

[[Page 564]]

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.
    (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

[[Page 565]]

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 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:


[[Page 566]]


    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 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

[[Page 567]]

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.
    (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.

[[Page 568]]

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 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

[[Page 569]]

(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.
    (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''

[[Page 570]]

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 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

[[Page 571]]

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 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

[[Page 572]]

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 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

[[Page 573]]

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 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

[[Page 574]]

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 
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.


[[Page 575]]


    (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 (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.

[[Page 576]]

    (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 ($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. 1.61-21(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

[[Page 577]]

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 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).

[[Page 578]]

    (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 
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. 1.274-5(k)) is excluded from gross income as a working condition 
fringe, provided that, in the case of a vehicle described in Sec. 1.274-
5(k)(3) through (8), the use of the vehicle conforms to the requirements 
of paragraphs (k)(3) through (8).
    (2) Shared usage of qualified nonpersonal use vehicles. In general, 
a working condition fringe under this paragraph (h) is available to the 
driver and all passengers of a qualified nonpersonal

[[Page 579]]

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. 1.274-5(k)(2)(ii)(L) or (P).
    (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 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

[[Page 580]]

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 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:

[[Page 581]]

    (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. 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.

[[Page 582]]

    (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 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:


[[Page 583]]


    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 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

[[Page 584]]

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 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

[[Page 585]]

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 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

[[Page 586]]

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 
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).

[[Page 587]]

    (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 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

[[Page 588]]

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 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

[[Page 589]]

(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 under subtitle A of the Internal 
Revenue Code.

[T.D. 8256, 54 FR 28608, July 6, 1989, as amended by T.D. 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; T.D. 
9483, 75 FR 27936, May 19, 2010]



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

[[Page 590]]

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, 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

[[Page 591]]

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 
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)

[[Page 592]]

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 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]

[[Page 593]]

    (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 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

[[Page 594]]

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 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

[[Page 595]]

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 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

[[Page 596]]

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 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--

[[Page 597]]

    (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 
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

[[Page 598]]

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.
    (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

[[Page 599]]

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 
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

[[Page 600]]

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 
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

[[Page 601]]

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.
    (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

[[Page 602]]

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 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

[[Page 603]]

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 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

[[Page 604]]

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 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

[[Page 605]]

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]



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

[[Page 606]]

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 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

[[Page 607]]

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 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

[[Page 608]]

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 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

[[Page 609]]

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 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

[[Page 610]]

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.
    (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,

[[Page 611]]

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 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

[[Page 612]]

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 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

[[Page 613]]

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 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

[[Page 614]]

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 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

[[Page 615]]

(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.
    (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.


[[Page 616]]


    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 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.

[[Page 617]]

    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 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.

[[Page 618]]

    (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 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).

[[Page 619]]

    (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 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?

[[Page 620]]

    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.
    (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. See Sec. 1.401(a)-21 of this chapter 
for rules permitting the use of electronic media to make participant 
elections with respect to employee benefit arrangements.
    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

[[Page 621]]

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 $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.

[[Page 622]]

    (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, 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

[[Page 623]]

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 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

[[Page 624]]

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 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

[[Page 625]]

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 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

[[Page 626]]

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.
    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

[[Page 627]]

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 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, as 
amended by T.D. 9294, 71 FR 61883, Oct. 20, 2006]



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

[[Page 628]]

(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 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)

[[Page 629]]

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]

[[Page 631]]



                              FINDING AIDS




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

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  Table of OMB Control Numbers
  List of CFR Sections Affected

[[Page 633]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2017)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
       III  Administrative Conference of the United States (Parts 
                300--399)
        IV  Miscellaneous Agencies (Parts 400--500)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
        II  Office of Management and Budget Guidance (Parts 200--
                299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300--
                399)
        IV  Department of Agriculture (Parts 400--499)
        VI  Department of State (Parts 600--699)
       VII  Agency for International Development (Parts 700--799)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
         X  Department of the Treasury (Parts 1000--1099)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
      XIII  Department of Commerce (Parts 1300--1399)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
        XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Housing and Urban Development (Parts 2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)
     XXVII  Small Business Administration (Parts 2700--2799)

[[Page 634]]

    XXVIII  Department of Justice (Parts 2800--2899)
      XXIX  Department of Labor (Parts 2900--2999)
       XXX  Department of Homeland Security (Parts 3000--3099)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
     XXXIV  Department of Education (Parts 3400--3499)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
     XXXVI  Office of National Drug Control Policy, Executive 
                Office of the President (Parts 3600--3699)
    XXXVII  Peace Corps (Parts 3700--3799)
     LVIII  Election Assistance Commission (Parts 5800--5899)
       LIX  Gulf Coast Ecosystem Restoration Council (Parts 5900--
                5999)

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability Office (Parts 1--199)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Office of Personnel Management and Office of the 
                Director of National Intelligence (Parts 1400--
                1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600--3699)
    XXVIII  Department of Justice (Parts 3800--3899)

[[Page 635]]

      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Parts 4300--
                4399)
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
      XXXV  Office of Personnel Management (Parts 4500--4599)
     XXXVI  Department of Homeland Security (Parts 4600--4699)
    XXXVII  Federal Election Commission (Parts 4700--4799)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)
     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)

[[Page 636]]

     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
    LXXXVI  National Credit Union Administration (Parts 9600--
                9699)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
    XCVIII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)
      XCIX  Military Compensation and Retirement Modernization 
                Commission (Parts 9900--9999)
         C  National Council on Disability (Partys 10000--10049)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--199)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)

[[Page 637]]

        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)

[[Page 638]]

         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
         X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XII  Federal Housing Finance Agency (Parts 1200--1299)
      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)

[[Page 639]]

        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research (Parts 1600--1699)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)

[[Page 640]]

       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599)

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)

[[Page 641]]

         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Millennium Challenge Corporation (Parts 1300--1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)

[[Page 642]]

       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799) [Reserved]
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099) [Reserved]
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

[[Page 643]]

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)

[[Page 644]]

        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
         V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)

[[Page 645]]

      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
         X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)

[[Page 646]]

        IV  Office of Career, Technical and Adult Education, 
                Department of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599) 
                [Reserved]
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799) 
                [Reserved]
            Subtitle C--Regulations Relating to Education
        XI  [Reserved]
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
        VI  [Reserved]
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  U.S. Copyright Office, Library of Congress (Parts 
                200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--199)
        II  Armed Forces Retirement Home (Parts 200--299)

[[Page 647]]

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)
      VIII  Gulf Coast Ecosystem Restoration Council (Parts 1800--
                1899)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
  103--104  [Reserved]
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)

[[Page 648]]

       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--599)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)

[[Page 649]]

        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
        IX  Denali Commission (Parts 900--999)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Administration for Children and Families, Department 
                of Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)
        IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)

[[Page 650]]

         2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
         3  Health and Human Services (Parts 300--399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]
        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)

[[Page 651]]

        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board (Parts 1000--1399)
        XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 653]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2017)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     5, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII

[[Page 654]]

Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Career, Technical and Adult Education, Office of  34, IV
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazardous Investigation       40, VI
     Board
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X, XIII
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I

[[Page 655]]

Defense Department                                2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III; 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Denali Commission                                 45, IX
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Career, Technical and Adult Education, Office   34, IV
       of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Career, Technical, and Adult Education, Office  34, IV
       of
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99

[[Page 656]]

  National Drug Control Policy, Office of         2, XXXVI; 21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV

[[Page 657]]

Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Gulf Coast Ecosystem Restoration Council          2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X, XIII
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 5, XXXVI; 6, I; 8, 
                                                  I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Independent Counsel, Offices of                   28, VI

[[Page 658]]

Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department                               2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Safety and Enforcement Bureau, Bureau of        30, II
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Independent Counsel, Offices of                 28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  2, XXIX; 5, XLII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI

[[Page 659]]

  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I, VII
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Royalty Board                         37, III
  U.S. Copyright Office                           37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Military Compensation and Retirement              5, XCIX
     Modernization Commission
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    5, C; 34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           2, XXXVI; 21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Geospatial-Intelligence Agency           32, I
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II
National Intelligence, Office of Director of      5, IV; 32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III

[[Page 660]]

National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III, IV
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 5, IV; 45, 
                                                  VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Privacy and Civil Liberties Oversight Board       6, X
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of   30, II
Saint Lawrence Seaway Development Corporation     33, IV

[[Page 661]]

Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                5, XXXIV; 17, II
Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               2, X;5, XXI; 12, XV; 17, 
                                                  IV; 31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
U.S. Copyright Office                             37, II
Utah Reclamation Mitigation and Conservation      43, III
   Commission
[[Page 662]]

Veterans Affairs Department                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I, VII
World Agricultural Outlook Board                  7, XXXVIII

[[Page 663]]

                                     

                                     



                      Table of OMB Control Numbers



The OMB control numbers for chapter I of title 26 were consolidated into 
Secs. 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR 
58008, Nov. 12, 1996, Sec. 601.9000 was removed. Section 602.101 is 
reprinted below for the convenience of the user.



PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents





Sec. 602.101  OMB Control numbers.

    (a) Purpose. This part collects and displays the control numbers 
assigned to collections of information in Internal Revenue Service 
regulations by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980. The Internal Revenue Service intends 
that this part comply with the requirements of Secs. 1320.7(f), 1320.12, 
1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations implementing 
the Paperwork Reduction Act), for the display of control numbers 
assigned by OMB to collections of information in Internal Revenue 
Service regulations. This part does not display control numbers assigned 
by the Office of Management and Budget to collections of information of 
the Bureau of Alcohol, Tobacco, and Firearms.
    (b) Display.

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................    1545-1654
1.23-5.....................................................    1545-0074
1.25-1T....................................................    1545-0922
                                                               1545-0930
1.25-2T....................................................    1545-0922
                                                               1545-0930
1.25-3T....................................................    1545-0922
                                                               1545-0930
1.25-4T....................................................    1545-0922
1.25-5T....................................................    1545-0922
1.25-6T....................................................    1545-0922
1.25-7T....................................................    1545-0922
1.25-8T....................................................    1545-0922
1.25A-1....................................................    1545-1630
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.32-3.....................................................    1545-1575
1.36B-5....................................................    1545-2232
1.37-1.....................................................    1545-0074
1.37-3.....................................................    1545-0074
1.41-2.....................................................    1545-0619
1.41-3.....................................................    1545-0619
1.41-4A....................................................    1545-0074
1.41-4 (b) and (c).........................................    1545-0074
1.41-8(b)..................................................    1545-1625
1.41-8(d)..................................................    1545-0732
1.41-9.....................................................    1545-0619
1.42-1T....................................................    1545-0984
                                                               1545-0988
1.42-2.....................................................    1545-1005
1.42-5.....................................................    1545-1357
1.42-6.....................................................    1545-1102
1.42-8.....................................................    1545-1102
1.42-10....................................................    1545-1102
1.42-13....................................................    1545-1357
1.42-14....................................................    1545-1423
1.42-17....................................................    1545-1357
1.42-18....................................................    1545-2088
1.43-3(a)(3)...............................................    1545-1292
1.43-3(b)(3)...............................................    1545-1292
1.44B-1....................................................    1545-0219
1.45D-1....................................................    1545-1765
1.45G-1....................................................    1545-2031
1.46-1.....................................................    1545-0123
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1.46-11....................................................    1545-0155
1.47-1.....................................................    1545-0155
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1.47-3.....................................................    1545-0155
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1.47-4.....................................................    1545-0123
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1.47-6.....................................................    1545-0099
1.48-3.....................................................    1545-0155
1.48-4.....................................................    1545-0155
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1.48-5.....................................................    1545-0155
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1.48-12....................................................    1545-0155
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1.50A-1....................................................    1545-0895
1.50A-2....................................................    1545-0895
1.50A-3....................................................    1545-0895
1.50A-4....................................................    1545-0895
1.50A-5....................................................    1545-0895
1.50A-6....................................................    1545-0895
1.50A-7....................................................    1545-0895
1.50B-1....................................................    1545-0895
1.50B-2....................................................    1545-0895
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1.50B-4....................................................    1545-0895
1.50B-5....................................................    1545-0895
1.51-1.....................................................    1545-0219
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1.52-2.....................................................    1545-0219
1.52-3.....................................................    1545-0219
1.56-1.....................................................    1545-0123
1.56(g)-1..................................................    1545-1233
1.56A-1....................................................    1545-0227
1.56A-2....................................................    1545-0227
1.56A-3....................................................    1545-0227
1.56A-4....................................................    1545-0227
1.56A-5....................................................    1545-0227
1.57-5.....................................................    1545-0227
1.58-1.....................................................    1545-0175
1.58-9(c)(5)(iii)(B).......................................    1545-1093
1.58-9(e)(3)...............................................    1545-1093
1.59-1.....................................................    1545-1903
1.61-2.....................................................    1545-0771
1.61-2T....................................................    1545-0771
1.61-4.....................................................    1545-0187
1.61-15....................................................    1545-0074
1.62-2.....................................................    1545-1148
1.63-1.....................................................    1545-0074
1.66-4.....................................................    1545-1770
1.67-2T....................................................    1545-0110
1.67-3.....................................................    1545-1018
1.67-3T....................................................    1545-0118
1.71-1T....................................................    1545-0074
1.72-4.....................................................    1545-0074
1.72-6.....................................................    1545-0074
1.72-9.....................................................    1545-0074
1.72-17....................................................    1545-0074
1.72-17A...................................................    1545-0074
1.72-18....................................................    1545-0074
1.74-1.....................................................    1545-1100
1.79-2.....................................................    1545-0074
1.79-3.....................................................    1545-0074
1.83-2.....................................................    1545-0074
1.83-5.....................................................    1545-0074
1.83-6.....................................................    1545-1448
1.103-10...................................................    1545-0123
                                                               1545-0940
1.103-15AT.................................................    1545-0720
1.103-18...................................................    1545-1226
1.103(n)-2T................................................    1545-0874
1.103(n)-4T................................................    1545-0874
1.103A-2...................................................    1545-0720
1.105-4....................................................    1545-0074
1.105-5....................................................    1545-0074
1.105-6....................................................    1545-0074
1.108-4....................................................    1545-1539
1.108-5....................................................    1545-1421
1.108-7....................................................    1545-2155
1.108(i)-1.................................................    1545-2147
1.108(i)-2.................................................    1545-2147
1.110-1....................................................    1545-1661
1.117-5....................................................    1545-0869
1.118-2....................................................    1545-1639
1.119-1....................................................    1545-0067
1.120-3....................................................    1545-0057
1.121-1....................................................    1545-0072
1.121-2....................................................    1545-0072
1.121-3....................................................    1545-0072
1.121-4....................................................    1545-0072
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1.121-5....................................................    1545-0072
1.127-2....................................................    1545-0768
1.132-1T...................................................    1545-0771
1.132-2....................................................    1545-0771
1.132-2T...................................................    1545-0771
1.132-5....................................................    1545-0771
1.132-5T...................................................    1545-0771
                                                               1545-1098
1.132-9(b).................................................    1545-1676
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.142(f)(4)-1..............................................    1545-1730
1.148-0....................................................    1545-1098
1.148-1....................................................    1545-1098
1.148-2....................................................    1545-1098
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1.148-3....................................................    1545-1098
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1.148-8....................................................    1545-1098
1.148-11...................................................    1545-1098
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1.149(e)-1.................................................    1545-0720
1.150-1....................................................    1545-1347
1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
                                                               1545-1783
1.152-4....................................................    1545-0074
1.152-4T...................................................    1545-0074
1.162-1....................................................    1545-0139
1.162-2....................................................    1545-0139
1.162-3....................................................    1545-0139
1.162-4....................................................    1545-0139
1.162-5....................................................    1545-0139
1.162-6....................................................    1545-0139
1.162-7....................................................    1545-0139
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1.162-9....................................................    1545-0139
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1.162-12...................................................    1545-0139
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1.162-15...................................................    1545-0139
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1.162-24...................................................    1545-2115
1.162-27...................................................    1545-1466
1.163-5....................................................    1545-0786
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1.163-8T...................................................    1545-0995
1.163-10T..................................................    1545-0074
1.163-13...................................................    1545-1491
1.163(d)-1.................................................    1545-1421
1.165-1....................................................    1545-0177
1.165-2....................................................    1545-0177
1.165-3....................................................    1545-0177
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1.165-5....................................................    1545-0177
1.165-6....................................................    1545-0177
1.165-7....................................................    1545-0177
1.165-8....................................................    1545-0177
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1.166-4....................................................    1545-0123
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1.167(a)-5T................................................    1545-1021
1.167(a)-7.................................................    1545-0172
1.167(a)-11................................................    1545-0152
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1.167(a)-12................................................    1545-0172
1.167(d)-1.................................................    1545-0172
1.167(e)-1.................................................    1545-0172
1.167(f)-11................................................    1545-0172
1.167(l)-1.................................................    1545-0172
1.168(d)-1.................................................    1545-1146
1.168(f)(8)-1T.............................................    1545-0923
1.168(i)-1.................................................    1545-1331
1.168-5....................................................    1545-0172
1.169-4....................................................    1545-0172
1.170-1....................................................    1545-0074
1.170-2....................................................    1545-0074
1.170-3....................................................    1545-0123
1.170A-1...................................................    1545-0074
1.170A-2...................................................    1545-0074
1.170A-4(A)(b).............................................    1545-0123
1.170A-8...................................................    1545-0074
1.170A-9...................................................    1545-0052
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1.170A-11..................................................    1545-0074
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1.170A-13..................................................    1545-0074
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1.170A-13(f)...............................................    1545-1464
1.170A-14..................................................    1545-0763
1.171-4....................................................    1545-1491
1.171-5....................................................    1545-1491
1.172-1....................................................    1545-0172
1.172-13...................................................    1545-0863
1.173-1....................................................    1545-0172
1.174-3....................................................    1545-0152
1.174-4....................................................    1545-0152
1.175-3....................................................    1545-0187
1.175-6....................................................    1545-0152
1.177-1....................................................    1545-0172
1.179-2....................................................    1545-1201
1.179-3....................................................    1545-1201
1.179-5....................................................    1545-0172
                                                               1545-1201
1.179B-1T..................................................    1545-2076
1.179C-1...................................................    1545-2103
1.179C-1T..................................................    1545-2103
1.180-2....................................................    1545-0074
1.181-1....................................................    1545-2059
1.181-2....................................................    1545-2059
1.181-3....................................................    1545-2059
1.182-6....................................................    1545-0074
1.183-1....................................................    1545-0195
1.183-2....................................................    1545-0195
1.183-3....................................................    1545-0195
1.183-4....................................................    1545-0195
1.190-3....................................................    1545-0074
1.194-2....................................................    1545-0735
1.194-4....................................................    1545-0735
1.195-1....................................................    1545-1582
1.197-1T...................................................    1545-1425
1.197-2....................................................    1545-1671
1.199-6....................................................    1545-1966
1.213-1....................................................    1545-0074
1.215-1T...................................................    1545-0074
1.217-2....................................................    1545-0182
1.243-3....................................................    1545-0123
1.243-4....................................................    1545-0123
1.243-5....................................................    1545-0123
1.248-1....................................................    1545-0172
1.261-1....................................................    1545-1041
1.263(a)-1.................................................    1545-2248
1.263(a)-3.................................................    1545-2248
1.263(a)-5.................................................    1545-1870
1.263(e)-1.................................................    1545-0123
1.263A-1...................................................    1545-0987
1.263A-1T..................................................    1545-0187
1.263A-2...................................................    1545-0987
1.263A-3...................................................    1545-0987
1.263A-8(b)(2)(iii)........................................    1545-1265
1.263A-9(d)(1).............................................    1545-1265
1.263A-9(f)(1)(ii).........................................    1545-1265
1.263A-9(f)(2)(iv).........................................    1545-1265
1.263A-9(g)(2)(iv)(C)......................................    1545-1265
1.263A-9(g)(3)(iv).........................................    1545-1265
1.265-1....................................................    1545-0074
1.265-2....................................................    1545-0123
1.266-1....................................................    1545-0123
1.267(f)-1.................................................    1545-0885
1.268-1....................................................    1545-0184
1.274-1....................................................    1545-0139
1.274-2....................................................    1545-0139
1.274-3....................................................    1545-0139
1.274-4....................................................    1545-0139
1.274-5....................................................    1545-0771
1.274-5A...................................................    1545-0139
                                                               1545-0771
1.274-5T...................................................    1545-0074
                                                               1545-0172
                                                               1545-0771
1.274-6....................................................    1545-0139
                                                               1545-0771
1.274-6T...................................................    1545-0074
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1.274-7....................................................    1545-0139
1.274-8....................................................    1545-0139
1.279-6....................................................    1545-0123
1.280C-4...................................................    1545-1155
1.280F-3T..................................................    1545-0074
1.280G-1...................................................    1545-1851
1.281-4....................................................    1545-0123
1.302-4....................................................    1545-0074
1.305-3....................................................    1545-0123
1.305-5....................................................    1545-1438
1.307-2....................................................    1545-0074
1.312-15...................................................    1545-0172
1.316-1....................................................    1545-0123
1.331-1....................................................    1545-0074
1.332-4....................................................    1545-0123
1.332-6....................................................    1545-2019
1.336-2....................................................    1545-2125
1.336-4....................................................    1545-2125
1.337(d)-1.................................................    1545-1160
1.337(d)-2.................................................    1545-1160
                                                               1545-1774
1.337(d)-4.................................................    1545-1633
1.337(d)-5.................................................    1545-1672
1.337(d)-6.................................................    1545-1672
1.337(d)-7.................................................    1545-1672
1.338-2....................................................    1545-1658
1.338-5....................................................    1545-1658
1.338-10...................................................    1545-1658
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1.338(h)(10)-1.............................................    1545-1658
1.338(i)-1.................................................    1545-1990
1.341-7....................................................    1545-0123
1.351-3....................................................    1545-2019
1.355-5....................................................    1545-2019
1.362-2....................................................    1545-0123
1.362-4....................................................    1545-2247
1.367(a)-1T................................................    1545-0026
1.367(a)-2T................................................    1545-0026
1.367(a)-3.................................................    1545-0026
                                                               1545-1478
1.367(a)-3T................................................    1545-2183
1.367(a)-6T................................................    1545-0026
1.367(a)-7.................................................    1545-2183
1.367(a)-7T................................................    1545-2183
1.367(a)-8.................................................    1545-1271
                                                               1545-2056
                                                               1545-2183
1.367(b)-1.................................................    1545-1271
1.367(b)-3T................................................    1545-1666
1.367(d)-1T................................................    1545-0026
1.367(e)-1.................................................    1545-1487
1.367(e)-2.................................................    1545-1487
1.368-1....................................................    1545-1691
1.368-3....................................................    1545-2019
1.371-1....................................................    1545-0123
1.371-2....................................................    1545-0123
1.374-3....................................................    1545-0123
1.381(b)-1.................................................    1545-0123
1.381(c)(4)-1..............................................    1545-0123
                                                               1545-0152
                                                               1545-0879
1.381(c)(5)-1..............................................    1545-0123
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1.381(c)(6)-1..............................................    1545-0123
                                                               1545-0152
1.381(c)(8)-1..............................................    1545-0123
1.381(c)(10)-1.............................................    1545-0123
1.381(c)(11)-1(k)..........................................    1545-0123
1.381(c)(13)-1.............................................    1545-0123
1.381(c)(17)-1.............................................    1545-0045
1.381(c)(22)-1.............................................    1545-1990
1.381(c)(25)-1.............................................    1545-0045
1.382-1T...................................................    1545-0123
1.382-2....................................................    1545-0123
1.382-2T...................................................    1545-0123
1.382-3....................................................    1545-1281
                                                               1545-1345
1.382-4....................................................    1545-1120
1.382-6....................................................    1545-1381
1.382-8....................................................    1545-1434
1.382-9....................................................    1545-1120
                                                               1545-1260
                                                               1545-1275
                                                               1545-1324
1.382-11...................................................    1545-2019
1.382-91...................................................    1545-1260
                                                               1545-1324
1.383-1....................................................    1545-0074
                                                               1545-1120
1.401-1....................................................    1545-0020
                                                               1545-0197
                                                               1545-0200
                                                               1545-0534
                                                               1545-0710
1.401(a)-11................................................    1545-0710
1.401(a)-20................................................    1545-0928
1.401(a)-31................................................    1545-1341
1.401(a)-50................................................    1545-0710
1.401(a)(9)-1..............................................    1545-1573
1.401(a)(9)-3..............................................    1545-1466
1.401(a)(9)-4..............................................    1545-1573
1.401(a)(9)-6..............................................    1545-2234
1.401(a)(31)-1.............................................    1545-1341
1.401(b)-1.................................................    1545-0197
1.401(f)-1.................................................    1545-0710
1.401(k)-1.................................................    1545-1039
                                                               1545-1069
                                                               1545-1669
                                                               1545-1930
1.401(k)-2.................................................    1545-1669
1.401(k)-3.................................................    1545-1669
1.401(k)-4.................................................    1545-1669
1.401(m)-3.................................................    1545-1699
1.401-12(n)................................................    1545-0806
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
                                                               1545-1632
1.402A-1...................................................    1545-1992
1.403(b)-1.................................................    1545-0710
1.403(b)-3.................................................    1545-0996
1.403(b)-7.................................................    1545-1341
1.403(b)-10................................................    1545-2068
1.404(a)-4.................................................    1545-0710
1.404(a)-12................................................    1545-0710
1.404A-2...................................................    1545-0123
1.404A-6...................................................    1545-0123
1.408-2....................................................    1545-0390
1.408-5....................................................    1545-0747
1.408-6....................................................    1545-0203
                                                               1545-0390
1.408-7....................................................    1545-0119
1.408(q)-1.................................................    1545-1841
1.408A-2...................................................    1545-1616
1.408A-4...................................................    1545-1616
1.408A-5...................................................    1545-1616
1.408A-7...................................................    1545-1616
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11................................................    1545-1471
                                                               1545-1632
1.411(d)-4.................................................    1545-1545
1.411(d)-6.................................................    1545-1477
1.412(b)-5.................................................    1545-0710
1.412(c)(1)-2..............................................    1545-0710
1.412(c)(2)-1..............................................    1545-0710
1.412(c)(3)-2..............................................    1545-0710
1.414(c)-5.................................................    1545-0797
1.414(r)-1.................................................    1545-1221
1.415-2....................................................    1545-0710
1.415-6....................................................    1545-0710
1.417(a)(3)-1..............................................    1545-0928
1.417(e)-1.................................................    1545-1471
                                                               1545-1724
1.417(e)-1T................................................    1545-1471
1.419A(f)(6)-1.............................................    1545-1795
1.422-1....................................................    1545-0820
1.430(f)-1.................................................    1545-2095
1.430(g)-1.................................................    1545-2095
1.430(h)(2)-1..............................................    1545-2095
1.432(e)(9)-1T.............................................    1545-2260
1.436-1....................................................    1545-2095
1.441-2....................................................    1545-1748
1.442-1....................................................    1545-0074
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1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.444-4....................................................    1545-1591
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1.446-4(d).................................................    1545-1412
1.448-1(g).................................................    1545-0152
1.448-1(h).................................................    1545-0152
1.448-1(i).................................................    1545-0152
1.448-2....................................................    1545-1855
1.448-2T...................................................    1545-0152
                                                               1545-1855
1.451-1....................................................    1545-0091
1.451-4....................................................    1545-0123
1.451-5....................................................    1545-0074
1.451-6....................................................    1545-0074
1.451-7....................................................    1545-0074
1.453-1....................................................    1545-0152
1.453-2....................................................    1545-0152
1.453-8....................................................    1545-0152
                                                               1545-0228
1.453-10...................................................    1545-0152
1.453A-1...................................................    1545-0152
                                                               1545-1134
1.453A-2...................................................    1545-0152
                                                               1545-1134
1.453A-3...................................................    1545-0963
1.454-1....................................................    1545-0074
1.455-2....................................................    1545-0152
1.455-6....................................................    1545-0123
1.456-2....................................................    1545-0123
1.456-6....................................................    1545-0123
1.456-7....................................................    1545-0123
1.457-8....................................................    1545-1580
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-1....................................................    1545-1650
1.460-6....................................................    1545-1031
                                                               1545-1572
                                                               1545-1732
1.461-1....................................................    1545-0074
1.461-2....................................................    1545-0096
1.461-4....................................................    1545-0917
1.461-5....................................................    1545-0917
1.463-1T...................................................    1545-0916
1.465-1T...................................................    1545-0712
1.466-1T...................................................    1545-0152
1.466-4....................................................    1545-0152
1.468A-3...................................................    1545-1269
                                                               1545-1378
                                                               1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d).....................    1545-2091
1.468A-4...................................................    1545-0954
1.468A-7...................................................    1545-0954
                                                               1545-1511
1.468A-8...................................................    1545-1269
1.468B-1...................................................    1545-1631
1.468B-1(j)................................................    1545-1299
1.468B-2(k)................................................    1545-1299
1.468B-2(l)................................................    1545-1299
1.468B-3(b)................................................    1545-1299
1.468B-3(e)................................................    1545-1299
1.468B-5(b)................................................    1545-1299
1.468B-9...................................................    1545-1631
1.469-1....................................................    1545-1008
1.469-2T...................................................    1545-0712
                                                               1545-1091
1.469-4T...................................................    1545-0985
                                                               1545-1037
1.469-7....................................................    1545-1244
1.471-2....................................................    1545-0123
1.471-5....................................................    1545-0123
1.471-6....................................................    1545-0123
1.471-8....................................................    1545-0123
1.471-11...................................................    1545-0123
                                                               1545-0152
1.472-1....................................................    1545-0042
                                                               1545-0152
1.472-2....................................................    1545-0152
1.472-3....................................................    1545-0042
1.472-5....................................................    1545-0152
1.472-8....................................................    1545-0028
                                                               1545-0042
                                                               1545-1767
1.475(a)-4.................................................    1545-1945
1.475(b)-4.................................................    1545-1496
1.481-4....................................................    1545-0152
1.481-5....................................................    1545-0152
1.482-1....................................................    1545-1364
1.482-4....................................................    1545-1364
1.482-7....................................................    1545-1364
                                                               1545-1794
1.482-9(b).................................................    1545-2149
1.501(a)-1.................................................    1545-0056
                                                               1545-0057
1.501(c)(3)-1..............................................    1545-0056
1.501(c)(9)-5..............................................    1545-0047
1.501(c)(17)-3.............................................    1545-0047
1.501(e)-1.................................................    1545-0814
1.501(r)-3.................................................    1545-0047
1.501(r)-4.................................................    1545-0047
1.501(r)-6.................................................    1545-0047
1.503(c)-1.................................................    1545-0047
                                                               1545-0052
1.505(c)-1T................................................    1545-0916
1.506-1T...................................................    1545-2268
1.507-1....................................................    1545-0052
1.507-2....................................................    1545-0052
1.508-1....................................................    1545-0052
                                                               1545-0056
1.509(a)-3.................................................    1545-0047
1.509(a)-4.................................................    1545-2157
1.509(a)-5.................................................    1545-0047
1.509(c)-1.................................................    1545-0052
1.512(a)-1.................................................    1545-0687
1.512(a)-4.................................................    1545-0047
                                                               1545-0687
1.521-1....................................................    1545-0051
                                                               1545-0058
1.527-2....................................................    1545-0129
1.527-5....................................................    1545-0129
1.527-6....................................................    1545-0129
1.527-9....................................................    1545-0129
1.528-8....................................................    1545-0127
1.533-2....................................................    1545-0123
1.534-2....................................................    1545-0123
1.542-3....................................................    1545-0123
1.545-2....................................................    1545-0123
1.545-3....................................................    1545-0123
1.547-2....................................................    1545-0045
                                                               1545-0123
1.547-3....................................................    1545-0123
1.551-4....................................................    1545-0074
1.552-3....................................................    1545-0099
1.552-4....................................................    1545-0099
1.552-5....................................................    1545-0099
1.556-2....................................................    1545-0704
1.561-1....................................................    1545-0044
1.561-2....................................................    1545-0123
1.562-3....................................................    1545-0123
1.563-2....................................................    1545-0123
1.564-1....................................................    1545-0123
1.565-1....................................................    1545-0043
                                                               1545-0123
1.565-2....................................................    1545-0043
1.565-3....................................................    1545-0043
1.565-5....................................................    1545-0043
1.565-6....................................................    1545-0043

[[Page 668]]

 
1.585-1....................................................    1545-0123
1.585-3....................................................    1545-0123
1.585-8....................................................    1545-1290
1.586-2....................................................    1545-0123
1.593-1....................................................    1545-0123
1.593-6....................................................    1545-0123
1.593-6A...................................................    1545-0123
1.593-7....................................................    1545-0123
1.595-1....................................................    1545-0123
1.597-2....................................................    1545-1300
1.597-4....................................................    1545-1300
1.597-6....................................................    1545-1300
1.597-7....................................................    1545-1300
1.611-2....................................................    1545-0099
1.611-3....................................................    1545-0007
                                                               1545-0099
                                                               1545-1784
1.612-4....................................................    1545-0074
1.612-5....................................................    1545-0099
1.613-3....................................................    1545-0099
1.613-4....................................................    1545-0099
1.613-6....................................................    1545-0099
1.613-7....................................................    1545-0099
1.613A-3...................................................    1545-0919
1.613A-3(e)................................................    1545-1251
1.613A-3(l)................................................    1545-0919
1.613A-5...................................................    1545-0099
1.613A-6...................................................    1545-0099
1.614-2....................................................    1545-0099
1.614-3....................................................    1545-0099
1.614-5....................................................    1545-0099
1.614-6....................................................    1545-0099
1.614-8....................................................    1545-0099
1.617-1....................................................    1545-0099
1.617-3....................................................    1545-0099
1.617-4....................................................    1545-0099
1.631-1....................................................    1545-0007
1.631-2....................................................    1545-0007
1.641(b)-2.................................................    1545-0092
1.642(c)-1.................................................    1545-0092
1.642(c)-2.................................................    1545-0092
1.642(c)-5.................................................    1545-0074
1.642(c)-6.................................................    1545-0020
                                                               1545-0074
                                                               1545-0092
1.642(g)-1.................................................    1545-0092
1.642(i)-1.................................................    1545-0092
1.645-1....................................................    1545-1578
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-1(a)(7)..............................................    1545-1536
1.664-1(c).................................................    1545-2101
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196
1.665(a)-0A through
1.665(g)-2A................................................    1545-0192
1.666(d)-1A................................................    1545-0092
1.671-4....................................................    1545-1442
1.671-5....................................................    1545-1540
1.701-1....................................................    1545-0099
1.702-1....................................................    1545-0074
1.703-1....................................................    1545-0099
1.704-2....................................................    1545-1090
1.706-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0134
1.706-1T...................................................    1545-0099
1.706-4(f).................................................    1545-0123
1.707-3(c)(2)..............................................    1545-1243
1.707-5(a)(7)(ii)..........................................    1545-1243
1.707-6(c).................................................    1545-1243
1.707-8....................................................    1545-1243
1.708-1....................................................    1545-0099
1.732-1....................................................    1545-0099
                                                               1545-1588
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
                                                               1545-1588
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-2....................................................    1545-1905
1.752-5....................................................    1545-1090
1.752-7....................................................    1545-1843
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.761-2....................................................    1545-1338
1.801-1....................................................    1545-0123
                                                               1545-0128
1.801-3....................................................    1545-0123
1.801-5....................................................    1545-0128
1.801-8....................................................    1545-0128
1.804-4....................................................    1545-0128
1.811-2....................................................    1545-0128
1.812-2....................................................    1545-0128
1.815-6....................................................    1545-0128
1.818-4....................................................    1545-0128
1.818-5....................................................    1545-0128
1.818-8....................................................    1545-0128
1.819-2....................................................    1545-0128
1.821-1....................................................    1545-1027
1.821-3....................................................    1545-1027
1.821-4....................................................    1545-1027
1.822-5....................................................    1545-1027
1.822-6....................................................    1545-1027
1.822-8....................................................    1545-1027
1.822-9....................................................    1545-1027
1.823-2....................................................    1545-1027
1.823-5....................................................    1545-1027
1.823-6....................................................    1545-1027
1.825-1....................................................    1545-1027
1.826-1....................................................    1545-1027
1.826-2....................................................    1545-1027
1.826-3....................................................    1545-1027
1.826-4....................................................    1545-1027
1.826-6....................................................    1545-1027
1.831-3....................................................    1545-0123
1.831-4....................................................    1545-0123
1.832-4....................................................    1545-1227
1.832-5....................................................    1545-0123
1.848-2(g)(8)..............................................    1545-1287
1.848-2(h)(3)..............................................    1545-1287
1.848-2(i)(4)..............................................    1545-1287
1.851-2....................................................    1545-1010
1.851-4....................................................    1545-0123
1.852-1....................................................    1545-0123
1.852-4....................................................    1545-0123
                                                               1545-0145
1.852-6....................................................    1545-0123
                                                               1545-0144
1.852-7....................................................    1545-0074
1.852-9....................................................    1545-0074
                                                               1545-0123
                                                               1545-0144
                                                               1545-0145
                                                               1545-1783
1.852-11...................................................    1545-1094
1.853-3....................................................    1545-2035
1.853-4....................................................    1545-2035
1.854-2....................................................    1545-0123
1.855-1....................................................    1545-0123
1.856-2....................................................    1545-0123

[[Page 669]]

 
                                                               1545-1004
1.856-6....................................................    1545-0123
1.856-7....................................................    1545-0123
1.856-8....................................................    1545-0123
1.857-8....................................................    1545-0123
1.857-9....................................................    1545-0074
1.858-1....................................................    1545-0123
1.860-2....................................................    1545-0045
1.860-4....................................................    1545-0045
                                                               1545-1054
                                                               1545-1057
1.860E-1...................................................    1545-1675
1.860E-2(a)(5).............................................    1545-1276
1.860E-2(a)(7).............................................    1545-1276
1.860E-2(b)(2).............................................    1545-1276
1.860G-2...................................................    1545-2110
1.861-2....................................................    1545-0089
1.861-3....................................................    1545-0089
1.861-4....................................................    1545-1900
1.861-8....................................................    1545-0126
1.861-8(e)(6) and (g)......................................    1545-1224
1.861-9T...................................................    1545-0121
                                                               1545-1072
1.861-18...................................................    1545-1594
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1476
                                                               1545-1556
1.863-3A...................................................    1545-0126
1.863-4....................................................    1545-0126
1.863-7....................................................    1545-0132
1.863-8....................................................    1545-1718
1.863-9....................................................    1545-1718
1.864-4....................................................    1545-0126
1.871-1....................................................    1545-0096
1.871-6....................................................    1545-0795
1.871-7....................................................    1545-0089
1.871-10...................................................    1545-0089
                                                               1545-0165
1.874-1....................................................    1545-0089
1.881-4....................................................    1545-1440
1.882-4....................................................    1545-0126
1.883-0....................................................    1545-1677
1.883-1....................................................    1545-1677
1.883-2....................................................    1545-1677
1.883-3....................................................    1545-1677
1.883-4....................................................    1545-1677
1.883-5....................................................    1545-1677
1.884-0....................................................    1545-1070
1.884-1....................................................    1545-1070
1.884-2....................................................    1545-1070
1.884-2T...................................................    1545-0126
                                                               1545-1070
1.884-4....................................................    1545-1070
1.884-5....................................................    1545-1070
1.892-1T...................................................    1545-1053
1.892-2T...................................................    1545-1053
1.892-3T...................................................    1545-1053
1.892-4T...................................................    1545-1053
1.892-5T...................................................    1545-1053
1.892-6T...................................................    1545-1053
1.892-7T...................................................    1545-1053
1.897-2....................................................    1545-0123
                                                               1545-0902
1.897-3....................................................    1545-0123
1.897-5T...................................................    1545-0902
1.897-6T...................................................    1545-0902
1.901-2....................................................    1545-0746
1.901-2A...................................................    1545-0746
1.901-3....................................................    1545-0122
1.902-1....................................................    1545-0122
                                                               1545-1458
1.904-1....................................................    1545-0121
                                                               1545-0122
1.904-2....................................................    1545-0121
                                                               1545-0122
1.904-3....................................................    1545-0121
1.904-4....................................................    1545-0121
1.904-5....................................................    1545-0121
1.904-7....................................................    1545-2104
1.904-7T...................................................    1545-2104
1.904(f)-1.................................................    1545-0121
                                                               1545-0122
1.904(f)-2.................................................    1545-0121
1.904(f)-3.................................................    1545-0121
1.904(f)-4.................................................    1545-0121
1.904(f)-5.................................................    1545-0121
1.904(f)-6.................................................    1545-0121
1.904(f)-7.................................................    1545-1127
1.905-2....................................................    1545-0122
1.905-3T...................................................    1545-1056
1.905-4T...................................................    1545-1056
1.905-5T...................................................    1545-1056
1.911-1....................................................    1545-0067
                                                               1545-0070
1.911-2....................................................    1545-0067
                                                               1545-0070
1.911-3....................................................    1545-0067
                                                               1545-0070
1.911-4....................................................    1545-0067
                                                               1545-0070
1.911-5....................................................    1545-0067
                                                               1545-0070
1.911-6....................................................    1545-0067
                                                               1545-0070
1.911-7....................................................    1545-0067
                                                               1545-0070
1.913-13...................................................    1545-0067
1.921-1T...................................................    1545-0190
                                                               1545-0884
                                                               1545-0935
                                                               1545-0939
1.921-2....................................................    1545-0884
1.921-3T...................................................    1545-0935
1.923-1T...................................................    1545-0935
1.924(a)-1T................................................    1545-0935
1.925(a)-1T................................................    1545-0935
1.925(b)-1T................................................    1545-0935
1.926(a)-1T................................................    1545-0935
1.927(a)-1T................................................    1545-0935
1.927(b)-1T................................................    1545-0935
1.927(d)-1.................................................    1545-0884
1.927(d)-2T................................................    1545-0935
1.927(e)-1T................................................    1545-0935
1.927(e)-2T................................................    1545-0935
1.927(f)-1.................................................    1545-0884
1.931-1....................................................    1545-0074
                                                               1545-0123
1.934-1....................................................    1545-0782
1.935-1....................................................    1545-0074
                                                               1545-0087
                                                               1545-0803
1.936-1....................................................    1545-0215
                                                               1545-0217
1.936-4....................................................    1545-0215
1.936-5....................................................    1545-0704
1.936-6....................................................    1545-0215
1.936-7....................................................    1545-0215
1.936-10(c)................................................    1545-1138
1.937-1....................................................    1545-1930
1.952-2....................................................    1545-0126
1.953-2....................................................    1545-0126
1.954-1....................................................    1545-1068
1.954-2....................................................    1545-1068
1.955-2....................................................    1545-0123

[[Page 670]]

 
1.955-3....................................................    1545-0123
1.955A-2...................................................    1545-0755
1.955A-3...................................................    1545-0755
1.956-1....................................................    1545-0704
1.956-2....................................................    1545-0704
1.959-1....................................................    1545-0704
1.959-2....................................................    1545-0704
1.960-1....................................................    1545-0122
1.962-2....................................................    1545-0704
1.962-3....................................................    1545-0704
1.962-4....................................................    1545-0704
1.964-1....................................................    1545-0126
                                                               1545-0704
                                                               1545-1072
                                                               1545-2104
1.964-3....................................................    1545-0126
1.970-2....................................................    1545-0126
1.985-2....................................................    1545-1051
                                                               1545-1131
1.985-3....................................................    1545-1051
1.987-1....................................................    1545-2265
1.987-3....................................................    1545-2265
1.987-9....................................................    1545-2265
1.987-10...................................................    1545-2265
1.988-0....................................................    1545-1131
1.988-1....................................................    1545-1131
1.988-2....................................................    1545-1131
1.988-3....................................................    1545-1131
1.988-4....................................................    1545-1131
1.988-5....................................................    1545-1131
1.988-6....................................................    1545-1831
1.992-1....................................................    1545-0190
                                                               1545-0938
1.992-2....................................................    1545-0190
                                                               1545-0884
                                                               1545-0938
1.992-3....................................................    1545-0190
                                                               1545-0938
1.992-4....................................................    1545-0190
                                                               1545-0938
1.993-3....................................................    1545-0938
1.993-4....................................................    1545-0938
1.994-1....................................................    1545-0938
1.995-5....................................................    1545-0938
1.1001-1...................................................    1545-1902
1.1012-1...................................................    1545-0074
                                                               1545-1139
1.1014-4...................................................    1545-0184
1.1015-1...................................................    1545-0020
1.1017-1...................................................    1545-1539
1.1031(d)-1T...............................................    1545-1021
1.1033(a)-2................................................    1545-0184
1.1033(g)-1................................................    1545-0184
1.1034-1...................................................    1545-0072
1.1039-1...................................................    1545-0184
1.1041-1T..................................................    1545-0074
1.1041-2...................................................    1545-1751
1.1042-1T..................................................    1545-0916
1.1044(a)-1................................................    1545-1421
1.1045-1...................................................    1545-1893
1.1060-1...................................................    1545-1658
                                                               1545-1990
1.1071-1...................................................    1545-0184
1.1071-4...................................................    1545-0184
1.1081-4...................................................    1545-0028
                                                               1545-0046
                                                               1545-0123
1.1081-11..................................................    1545-2019
1.1082-1...................................................    1545-0046
1.1082-2...................................................    1545-0046
1.1082-3...................................................    1545-0046
                                                               1545-0184
1.1082-4...................................................    1545-0046
1.1082-5...................................................    1545-0046
1.1082-6...................................................    1545-0046
1.1083-1...................................................    1545-0123
1.1092(b)-1T...............................................    1545-0644
1.1092(b)-2T...............................................    1545-0644
1.1092(b)-3T...............................................    1545-0644
1.1092(b)-4T...............................................    1545-0644
1.1092(b)-5T...............................................    1545-0644
1.1211-1...................................................    1545-0074
1.1212-1...................................................    1545-0074
1.1221-2...................................................    1545-1480
1.1231-1...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0074
1.1232-3...................................................    1545-0074
1.1237-1...................................................    1545-0184
1.1239-1...................................................    1545-0091
1.1242-1...................................................    1545-0184
1.1243-1...................................................    1545-0123
1.1244(e)-1................................................    1545-0123
                                                               1545-1447
1.1245-1...................................................    1545-0184
1.1245-2...................................................    1545-0184
1.1245-3...................................................    1545-0184
1.1245-4...................................................    1545-0184
1.1245-5...................................................    1545-0184
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1.1402(h)-1................................................    1545-0064
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1.1502-77B.................................................    1545-1699
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1.1502-95A.................................................    1545-1218
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5c.168(f)(8)-6.............................................    1545-0123
5c.168(f)(8)-8.............................................    1545-0123
5c.305-1...................................................    1545-0110
5c.442-1...................................................    1545-0152
5f.103-1...................................................    1545-0720
5f.103-3...................................................    1545-0720
5f.6045-1..................................................    1545-0715
6a.103A-2..................................................    1545-0123
                                                               1545-0720
6a.103A-3..................................................    1545-0720
7.465-1....................................................    1545-0712
7.465-2....................................................    1545-0712
7.465-3....................................................    1545-0712
7.465-4....................................................    1545-0712
7.465-5....................................................    1545-0712
7.936-1....................................................    1545-0217
7.999-1....................................................    1545-0216
7.6039A-1..................................................    1545-0015
7.6041-1...................................................    1545-0115
11.410-1...................................................    1545-0710
11.412(c)-7................................................    1545-0710
11.412(c)-11...............................................    1545-0710
12.7.......................................................    1545-0190
12.8.......................................................    1545-0191
12.9.......................................................    1545-0195
14a.422A-1.................................................    1545-0123
15A.453-1..................................................    1545-0228
16.3-1.....................................................    1545-0159
16A.126-2..................................................    1545-0074
16A.1255-1.................................................    1545-0184
16A.1255-2.................................................    1545-0184
18.1371-1..................................................    1545-0130
18.1378-1..................................................    1545-0130
18.1379-1..................................................    1545-0130
18.1379-2..................................................    1545-0130
20.2010-2..................................................    1545-0015
20.2011-1..................................................    1545-0015
20.2014-5..................................................    1545-0015
                                                               1545-0260
20.2014-6..................................................    1545-0015
20.2016-1..................................................    1545-0015
20.2031-2..................................................    1545-0015
20.2031-3..................................................    1545-0015
20.2031-4..................................................    1545-0015
20.2031-6..................................................    1545-0015
20.2031-7..................................................    1545-0020
20.2031-10.................................................    1545-0015
20.2032-1..................................................    1545-0015
20.2032A-3.................................................    1545-0015
20.2032A-4.................................................    1545-0015
20.2032A-8.................................................    1545-0015
20.2039-4..................................................    1545-0015
20.2051-1..................................................    1545-0015
20.2053-3..................................................    1545-0015
20.2053-9..................................................    1545-0015
20.2053-10.................................................    1545-0015
20.2055-1..................................................    1545-0015
20.2055-2..................................................    1545-0015
                                                               1545-0092
20.2055-3..................................................    1545-0015
20.2056(b)-4...............................................    1545-0015
20.2056(b)-7...............................................    1545-0015
                                                               1545-1612
20.2056A-2.................................................    1545-1443
20.2056A-3.................................................    1545-1360
20.2056A-4.................................................    1545-1360
20.2056A-10................................................    1545-1360
20.2106-1..................................................    1545-0015
20.2106-2..................................................    1545-0015
20.2204-1..................................................    1545-0015
20.2204-2..................................................    1545-0015
20.6001-1..................................................    1545-0015
20.6011-1..................................................    1545-0015
20.6018-1..................................................    1545-0015

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                                                               1545-0531
20.6018-2..................................................    1545-0015
20.6018-3..................................................    1545-0015
20.6018-4..................................................    1545-0015
                                                               1545-0022
20.6036-2..................................................    1545-0015
20.6060-1(a)(1)............................................    1545-1231
20.6061-1..................................................    1545-0015
20.6065-1..................................................    1545-0015
20.6075-1..................................................    1545-0015
20.6081-1..................................................    1545-0015
                                                               1545-0181
                                                               1545-1707
20.6091-1..................................................    1545-0015
20.6107-1..................................................    1545-1231
20.6161-1..................................................    1545-0015
                                                               1545-0181
20.6161-2..................................................    1545-0015
                                                               1545-0181
20.6163-1..................................................    1545-0015
20.6166-1..................................................    1545-0181
20.6166A-1.................................................    1545-0015
20.6166A-3.................................................    1545-0015
20.6324A-1.................................................    1545-0754
20.7520-1..................................................    1545-1343
20.7520-2..................................................    1545-1343
20.7520-3..................................................    1545-1343
20.7520-4..................................................    1545-1343
22.0.......................................................    1545-0015
25.2511-2..................................................    1545-0020
25.2512-2..................................................    1545-0020
25.2512-3..................................................    1545-0020
25.2512-5..................................................    1545-0020
25.2512-9..................................................    1545-0020
25.2513-1..................................................    1545-0020
25.2513-2..................................................    1545-0020
                                                               1545-0021
25.2513-3..................................................    1545-0020
25.2518-2..................................................    1545-0959
25.2522(a)-1...............................................    1545-0196
25.2522(c)-3...............................................    1545-0020
                                                               1545-0196
25.2523(a)-1...............................................    1545-0020
                                                               1545-0196
25.2523(f)-1...............................................    1545-0015
25.2701-2..................................................    1545-1241
25.2701-4..................................................    1545-1241
25.2701-5..................................................    1545-1273
25.2702-5..................................................    1545-1485
25.2702-6..................................................    1545-1273
25.6001-1..................................................    1545-0020
                                                               1545-0022
25.6011-1..................................................    1545-0020
25.6019-1..................................................    1545-0020
25.6019-2..................................................    1545-0020
25.6019-3..................................................    1545-0020
25.6019-4..................................................    1545-0020
25.6060-1(a)(1)............................................    1545-1231
25.6061-1..................................................    1545-0020
25.6065-1..................................................    1545-0020
25.6075-1..................................................    1545-0020
25.6081-1..................................................    1545-0020
25.6091-1..................................................    1545-0020
25.6091-2..................................................    1545-0020
25.6107-1..................................................    1545-1231
25.6151-1..................................................    1545-0020
25.6161-1..................................................    1545-0020
25.7520-1..................................................    1545-1343
25.7520-2..................................................    1545-1343
25.7520-3..................................................    1545-1343
25.7520-4..................................................    1545-1343
26.2601-1..................................................    1545-0985
26.2632-1..................................................    1545-0985
                                                               1545-1892
26.2642-1..................................................    1545-0985
26.2642-2..................................................    1545-0985
26.2642-3..................................................    1545-0985
26.2642-4..................................................    1545-0985
26.2642-6..................................................    1545-1902
26.2652-2..................................................    1545-0985
26.2654-1..................................................    1545-1902
26.2662-1..................................................    1545-0015
                                                               1545-0985
26.2662-2..................................................    1545-0985
26.6060-1(a)(1)............................................    1545-1231
26.6107-1..................................................    1545-1231
31.3102-3..................................................    1545-0029
                                                               1545-0059
                                                               1545-0065
31.3121(b)(19)-1...........................................    1545-0029
31.3121(d)-1...............................................    1545-0004
31.3121(i)-1...............................................    1545-0034
31.3121(k)-4...............................................    1545-0137
31.3121(r)-1...............................................    1545-0029
31.3121(s)-1...............................................    1545-0029
31.3121(v)(2)-1............................................    1545-1643
31.3302(a)-2...............................................    1545-0028
31.3302(a)-3...............................................    1545-0028
31.3302(b)-2...............................................    1545-0028
31.3302(e)-1...............................................    1545-0028
31.3306(c)(18)-1...........................................    1545-0029
31.3401(a)-1...............................................    1545-0029
31.3401(a)(6)..............................................    1545-1484
31.3401(a)(6)-1............................................    1545-0029
                                                               1545-0096
                                                               1545-0795
31.3401(a)(7)-1............................................    1545-0029
31.3401(a)(8)(A)-1 ........................................    1545-0029
                                                               1545-0666
31.3401(a)(8)(C)-1 ........................................    1545-0029
31.3401(a)(15)-1...........................................    1545-0182
31.3401(c)-1...............................................    1545-0004
31.3402(b)-1...............................................    1545-0010
31.3402(c)-1...............................................    1545-0010
31.3402(f)(1)-1............................................    1545-0010
31.3402(f)(2)-1............................................    1545-0010
                                                               1545-0410
31.3402(f)(3)-1............................................    1545-0010
31.3402(f)(4)-1............................................    1545-0010
31.3402(f)(4)-2............................................    1545-0010
31.3402(f)(5)-1............................................    1545-0010
                                                               1545-1435
31.3402(h)(1)-1............................................    1545-0029
31.3402(h)(3)-1............................................    1545-0010
                                                               1545-0029
31.3402(h)(4)-1............................................    1545-0010
31.3402(i)-(1).............................................    1545-0010
31.3402(i)-(2).............................................    1545-0010
31.3402(k)-1...............................................    1545-0065
31.3402(l)-(1).............................................    1545-0010
31.3402(m)-(1).............................................    1545-0010
31.3402(n)-(1).............................................    1545-0010
31.3402(o)-2...............................................    1545-0415
31.3402(o)-3...............................................    1545-0008
                                                               1545-0010
                                                               1545-0415
                                                               1545-0717
31.3402(p)-1...............................................    1545-0415
                                                               1545-0717
31.3402(q)-1...............................................    1545-0238
                                                               1545-0239
31.3404-1..................................................    1545-0029
31.3405(c)-1...............................................    1545-1341
31.3406(a)-1...............................................    1545-0112

[[Page 676]]

 
31.3406(a)-2...............................................    1545-0112
31.3406(a)-3...............................................    1545-0112
31.3406(a)-4...............................................    1545-0112
31.3406(b)(2)-1............................................    1545-0112
31.3406(b)(2)-2............................................    1545-0112
31.3406(b)(2)-3............................................    1545-0112
31.3406(b)(2)-4............................................    1545-0112
31.3406(b)(2)-5............................................    1545-0112
31.3406(b)(3)-1............................................    1545-0112
31.3406(b)(3)-2............................................    1545-0112
31.3406(b)(3)-3............................................    1545-0112
31.3406(b)(3)-4............................................    1545-0112
31.3406(b)(4)-1............................................    1545-0112
31.3406(c)-1...............................................    1545-0112
31.3406(d)-1...............................................    1545-0112
31.3406(d)-2...............................................    1545-0112
31.3406(d)-3...............................................    1545-0112
31.3406(d)-4...............................................    1545-0112
31.3406(d)-5...............................................    1545-0112
31.3406(e)-1...............................................    1545-0112
31.3406(f)-1...............................................    1545-0112
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
                                                               1545-1819
31.3406(g)-2...............................................    1545-0112
31.3406(g)-3...............................................    1545-0112
31.3406(h)-1...............................................    1545-0112
31.3406(h)-2...............................................    1545-0112
31.3406(h)-3...............................................    1545-0112
31.3406(i)-1...............................................    1545-0112
31.3501(a)-1T..............................................    1545-0771
31.3503-1..................................................    1545-0024
31.3504-1..................................................    1545-0029
31.6001-1..................................................    1545-0798
31.6001-2..................................................    1545-0034
                                                               1545-0798
31.6001-3..................................................    1545-0798
31.6001-4..................................................    1545-0028
31.6001-5..................................................    1545-0798
31.6001-6..................................................    1545-0029
                                                               1459-0798
31.6011(a)-1...............................................    1545-0029
                                                               1545-0034
                                                               1545-0035
                                                               1545-0059
                                                               1545-0074
                                                               1545-0256
                                                               1545-0718
                                                               1545-2097
31.6011(a)-2...............................................    1545-0001
                                                               1545-0002
31.6011(a)-3...............................................    1545-0028
31.6011(a)-3A..............................................    1545-0955
31.6011(a)-4...............................................    1545-0034
                                                               1545-0035
                                                               1545-0718
                                                               1545-1413
                                                               1545-2097
31.6011(a)-5...............................................    1545-0028
                                                               1545-0718
                                                               1545-2097
31.6011(a)-6...............................................    1545-0028
31.6011(a)-7...............................................    1545-0074
31.6011(a)-8...............................................    1545-0028
31.6011(a)-9...............................................    1545-0028
31.6011(a)-10..............................................    1545-0112
31.6011(b)-1...............................................    1545-0003
31.6011(b)-2...............................................    1545-0029
31.6051-1..................................................    1545-0008
                                                               1545-0182
                                                               1545-0458
                                                               1545-1729
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065
                                                               1545-1603
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
                                                               1545-1603
31.6060-1(a)(1)............................................    1545-1231
31.6065(a)-1...............................................    1545-0029
31.6071(a)-1...............................................    1545-0001
                                                               1545-0028
                                                               1545-0029
31.6071(a)-1A..............................................    1545-0955
31.6081(a)-1...............................................    1545-0008
                                                               1545-0028
31.6091-1..................................................    1545-0028
                                                               1545-0029
31.6107-1..................................................    1545-1231
31.6157-1..................................................    1545-0955
31.6205-1..................................................    1545-0029
                                                               1545-2097
31.6301(c)-1AT.............................................    1545-0035
                                                               1545-0112
                                                               1545-0257
31.6302-1..................................................    1545-1413
31.6302-2..................................................    1545-1413
31.6302-3..................................................    1545-1413
31.6302-4..................................................    1545-1413
31.6302(c)-2...............................................    1545-0001
                                                               1545-0257
31.6302(c)-2A..............................................    1545-0955
31.6302(c)-3...............................................    1545-0257
31.6402(a)-2...............................................    1545-0256
                                                               1545-2097
31.6413(a)-1...............................................    1545-0029
                                                               1545-2097
31.6413(a)-2...............................................    1545-0029
                                                               1545-0256
                                                               1545-2097
31.6413(c)-1...............................................    1545-0029
                                                               1545-0171
31.6414-1..................................................    1545-0029
                                                               1545-2097
32.1.......................................................    1545-0029
                                                               1545-0415
32.2.......................................................    1545-0029
35a.3406-2.................................................    1545-0112
35a.9999-5.................................................    1545-0029
36.3121(l)(1)-1............................................    1545-0137
36.3121(l)(1)-2............................................    1545-0137
36.3121(l)(3)-1............................................    1545-0123
36.3121(1)(7)-1............................................    1545-0123
36.3121(1)(10)-1...........................................    1545-0029
36.3121(1)(10)-3...........................................    1545-0029
36.3121(1)(10)-4...........................................    1545-0257
40.6060-1(a)(1)............................................    1545-1231
40.6107-1..................................................    1545-1231
40.6302(c)-3(b)(2)(ii).....................................    1545-1296
40.6302(c)-3(b)(2)(iii)....................................    1545-1296
40.6302(c)-3(e)............................................    1545-1296
40.6302(c)-3(f)(2)(ii).....................................    1545-1296
41.4481-1..................................................    1545-0143
41.4481-2..................................................    1545-0143
41.4483-3..................................................    1545-0143
41.6001-1..................................................    1545-0143
41.6001-2..................................................    1545-0143
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41.6060-1(a)(1)............................................    1545-1231
41.6071(a)-1...............................................    1545-0143
41.6081(a)-1...............................................    1545-0143
41.6091-1..................................................    1545-0143
41.6107-1..................................................    1545-1231
41.6109-1..................................................    1545-0143
41.6151(a)-1...............................................    1545-0143
41.6156-1..................................................    1545-0143
41.6161(a)(1)-1............................................    1545-0143
44.4401-1..................................................    1545-0235
44.4403-1..................................................    1545-0235
44.4412-1..................................................    1545-0236
44.4901-1..................................................    1545-0236
44.4905-1..................................................    1545-0236
44.4905-2..................................................    1545-0236
44.6001-1..................................................    1545-0235
44.6011(a)-1...............................................    1545-0235
                                                               1545-0236
44.6060-1(a)(1)............................................    1545-1231
44.6071-1..................................................    1545-0235
44.6091-1..................................................    1545-0235
44.6107-1..................................................    1545-1231
44.6151-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-2..................................................    1545-0235
46.4371-4..................................................    1545-0023
46.4374-1..................................................    1545-0023
46.4375-1..................................................    1545-2238
46.4376-1..................................................    1545-2238
46.4701-1..................................................    1545-0023
                                                               1545-0257
48.4041-4..................................................    1545-0023
48.4041-5..................................................    1545-0023
48.4041-6..................................................    1545-0023
48.4041-7..................................................    1545-0023
48.4041-9..................................................    1545-0023
48.4041-10.................................................    1545-0023
48.4041-11.................................................    1545-0023
48.4041-12.................................................    1545-0023
48.4041-13.................................................    1545-0023
48.4041-18.................................................    1545-0023
48.4041-19.................................................    1545-0023
48.4041-20.................................................    1545-0023
48.4041-21.................................................    1545-1270
48.4042-2..................................................    1545-0023
48.4052-1..................................................    1545-1418
48.4061(a)-1...............................................    1545-0023
48.4061(a)-2...............................................    1545-0023
48.4061(b)-3...............................................    1545-0023
48.4064-1..................................................    1545-0014
                                                               1545-0242
48.4071-1..................................................    1545-0023
48.4073-1..................................................    1545-0023
48.4073-3..................................................    1545-0023
                                                               1545-1074
                                                               1545-1087
48.4081-2..................................................    1545-1270
                                                               1545-1418
48.4081-3..................................................    1545-1270
                                                               1545-1418
                                                               1545-1897
48.4081-4(b)(2)(ii)........................................    1545-1270
48.4081-4(b)(3)(i).........................................    1545-1270
48.4081-4(c)...............................................    1545-1270
48.4081-6(c)(1)(ii)........................................    1545-1270
48.4081-7..................................................    1545-1270
                                                               1545-1418
48.4082-1T.................................................    1545-1418
48.4082-2..................................................    1545-1418
48.4082-6..................................................    1545-1418
48.4082-7..................................................    1545-1418
48.4091-3..................................................    1545-1418
48.4101-1..................................................    1545-1418
48.4101-1T.................................................    1545-1418
48.4101-2..................................................    1545-1418
48.4161(a)-1...............................................    1545-0723
48.4161(a)-2...............................................    1545-0723
48.4161(a)-3...............................................    1545-0723
48.4161(b)-1...............................................    1545-0723
48.4216(a)-2...............................................    1545-0023
48.4216(a)-3...............................................    1545-0023
48.4216(c)-1...............................................    1545-0023
48.4221-1..................................................    1545-0023
48.4221-2..................................................    1545-0023
48.4221-3..................................................    1545-0023
48.4221-4..................................................    1545-0023
48.4221-5..................................................    1545-0023
48.4221-6..................................................    1545-0023
48.4221-7..................................................    1545-0023
48.4222(a)-1...............................................    1545-0014
                                                               1545-0023
48.4223-1..................................................    1545-0023
                                                               1545-0257
                                                               1545-0723
48.6302(c)-1...............................................    1545-0023
                                                               1545-0257
48.6412-1..................................................    1545-0723
48.6416(a)-1...............................................    1545-0023
                                                               1545-0723
48.6416(a)-2...............................................    1545-0723
48.6416(a)-3...............................................    1545-0723
48.6416(b)(1)-1............................................    1545-0723
48.6416(b)(1)-2............................................    1545-0723
48.6416(b)(1)-3............................................    1545-0723
48.6416(b)(1)-4............................................    1545-0723
48.6416(b)(2)-1............................................    1545-0723
48.6416(b)(2)-2............................................    1545-0723
48.6416(b)(2)-3............................................    1545-0723
                                                               1545-1087
48.6416(b)(2)-4............................................    1545-0723
48.6416(b)(3)-1............................................    1545-0723
48.6416(b)(3)-2............................................    1545-0723
48.6416(b)(3)-3............................................    1545-0723
48.6416(b)(4)-1............................................    1545-0723
48.6416(b)(5)-1............................................    1545-0723
48.6416(c)-1...............................................    1545-0723
48.6416(e)-1...............................................    1545-0023
                                                               1545-0723
48.6416(f)-1...............................................    1545-0023
                                                               1545-0723
48.6416(g)-1...............................................    1545-0723
48.6416(h)-1...............................................    1545-0723
48.6420(c)-2...............................................    1545-0023
48.6420(f)-1...............................................    1545-0023
48.6420-1..................................................    1545-0162
                                                               1545-0723
48.6420-2..................................................    1545-0162
                                                               1545-0723
48.6420-3..................................................    1545-0162
                                                               1545-0723
48.6420-4..................................................    1545-0162
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    1545-0162
                                                               1545-0723
48.6421-0..................................................    1545-0162
                                                               1545-0723
48.6421-1..................................................    1545-0162
                                                               1545-0723
48.6421-2..................................................    1545-0162
                                                               1545-0723
48.6421-3..................................................    1545-0162
                                                               1545-0723

[[Page 678]]

 
48.6421-4..................................................    1545-0162
                                                               1545-0723
48.6421-5..................................................    1545-0162
                                                               1545-0723
48.6421-6..................................................    1545-0162
                                                               1545-0723
48.6421-7..................................................    1545-0162
                                                               1545-0723
48.6424-0..................................................    1545-0723
48.6424-1..................................................    1545-0723
48.6424-2..................................................    1545-0723
48.6424-3..................................................    1545-0723
48.6424-4..................................................    1545-0723
48.6424-5..................................................    1545-0723
48.6424-6..................................................    1545-0723
48.6427-0..................................................    1545-0723
48.6427-1..................................................    1545-0023
                                                               1545-0162
                                                               1545-0723
48.6427-2..................................................    1545-0162
                                                               1545-0723
48.6427-3..................................................    1545-0723
48.6427-4..................................................    1545-0723
48.6427-5..................................................    1545-0723
48.6427-8..................................................    1545-1418
48.6427-9..................................................    1545-1418
48.6427-10.................................................    1545-1418
48.6427-11.................................................    1545-1418
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4251-4(d)(2)............................................    1545-1628
49.4253-3..................................................    1545-0023
49.4253-4..................................................    1545-0023
49.4264(b)-1...............................................    1545-0023
                                                               1545-0224
                                                               1545-0225
                                                               1545-0226
                                                               1545-0230
                                                               1545-0257
                                                               1545-0912
49.4271-1(d)...............................................    1545-0685
49.5000B-1.................................................    1545-2177
51.2(f)(2)(ii).............................................    1545-2209
51.7.......................................................    1545-2209
52.4682-1(b)(2)(iii).......................................    1545-1153
52.4682-2(b)...............................................    1545-1153
                                                               1545-1361
52.4682-2(d)...............................................    1545-1153
                                                               1545-1361
52.4682-3(c)(2)............................................    1545-1153
52.4682-3(g)...............................................    1545-1153
52.4682-4(f)...............................................    1545-0257
                                                               1545-1153
52.4682-5(d)...............................................    1545-1361
52.4682-5(f)...............................................    1545-1361
53.4940-1..................................................    1545-0052
                                                               1545-0196
53.4942(a)-1...............................................    1545-0052
53.4942(a)-2...............................................    1545-0052
53.4942(a)-3...............................................    1545-0052
53.4942(b)-3...............................................    1545-0052
53.4945-1..................................................    1545-0052
53.4945-4..................................................    1545-0052
53.4945-5..................................................    1545-0052
53.4945-6..................................................    1545-0052
53.4947-1..................................................    1545-0196
53.4947-2..................................................    1545-0196
53.4948-1..................................................    1545-0052
53.4958-6..................................................    1545-1623
53.4961-2..................................................    1545-0024
53.4963-1..................................................    1545-0024
53.6001-1..................................................    1545-0052
53.6011-1..................................................    1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0196
53.6060-1(a)(1)............................................    1545-1231
53.6065-1..................................................    1545-0052
53.6071-1..................................................    1545-0049
53.6081-1..................................................    1545-0066
                                                               1545-0148
53.6107-1..................................................    1545-1231
53.6161-1..................................................    1545-0575
54.4972-1..................................................    1545-0197
54.4975-7..................................................    1545-0575
54.4977-1T.................................................    1545-0771
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
54.4980F-1.................................................    1545-1780
54.4981A-1T................................................    1545-0203
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
54.6060-1(a)(1)............................................    1545-1231
54.6107-1..................................................    1545-1231
54.9801-3..................................................    1545-1537
54.9801-4..................................................    1545-1537
54.9801-5..................................................    1545-1537
54.9801-6..................................................    1545-1537
54.9812-1T.................................................    1545-2165
54.9815-1251T..............................................    1545-2178
54.9815-2711T..............................................    1545-2179
54.9815-2712T..............................................    1545-2180
54.9815-2714T..............................................    1545-2172
54.9815-2715...............................................    1545-2229
54.9815-2719AT.............................................    1545-2181
54.9815-2719T..............................................    1545-2182
55.6001-1..................................................    1545-0123
55.6011-1..................................................    1545-0123
                                                               1545-0999
                                                               1545-1016
55.6060-1(a)(1)............................................    1545-1231
55.6061-1..................................................    1545-0999
55.6071-1..................................................    1545-0999
55.6107-1..................................................    1545-1231
56.4911-6..................................................    1545-0052
56.4911-7..................................................    1545-0052
56.4911-9..................................................    1545-0052
56.4911-10.................................................    1545-0052
56.6001-1..................................................    1545-1049
56.6011-1..................................................    1545-1049
56.6060-1(a)(1)............................................    1545-1231
56.6081-1..................................................    1545-1049
56.6107-1..................................................    1545-1231
56.6161-1..................................................    1545-0257
                                                               1545-1049
57.2(e)(2)(i)..............................................    1545-2249
145.4051-1.................................................    1545-0745
145.4052-1.................................................    1545-0120
                                                               1545-0745
                                                               1545-1076
145.4061-1.................................................    1545-0224
                                                               1545-0230
                                                               1545-0257
                                                               1545-0745
156.6001-1.................................................    1545-1049
156.6011-1.................................................    1545-1049
156.6060-1(a)(1)...........................................    1545-1231
156.6081-1.................................................    1545-1049
156.6107-1.................................................    1545-1231
156.6161-1.................................................    1545-1049
157.6001-1.................................................    1545-1824
157.6011-1.................................................    1545-1824
157.6060-1(a)(1)...........................................    1545-1231

[[Page 679]]

 
157.6081-1.................................................    1545-1824
157.6107-1.................................................    1545-1231
157.6161-1.................................................    1545-1824
301.6011-2.................................................    1545-0225
                                                               1545-0350
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
301.6011(g)-1..............................................    1545-2079
301.6017-1.................................................    1545-0090
301.6034-1.................................................    1545-0092
301.6035-1.................................................    1545-0123
301.6036-1.................................................    1545-0013
                                                               1545-0773
301.6047-1.................................................    1545-0367
                                                               1545-0957
301.6056-1.................................................    1545-2251
301.6056-2.................................................    1545-2251
301.6057-1.................................................    1545-0710
301.6057-2.................................................    1545-0710
301.6058-1.................................................    1545-0710
301.6059-1.................................................    1545-0710
301.6103(c)-1..............................................    1545-1816
301.6103(n)-1..............................................    1545-1841
301.6103(p)(2)(B)-1........................................    1545-1757
301.6104(a)-1..............................................    1545-0495
301.6104(a)-5..............................................    1545-0056
301.6104(a)-6..............................................    1545-0056
301.6104(b)-1..............................................    1545-0094
                                                               1545-0742
301.6104(d)-1..............................................    1545-1655
301.6104(d)-2..............................................    1545-1655
301.6104(d)-3..............................................    1545-1655
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
                                                               1545-2242
301.6109-3.................................................    1545-1564
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6111-2.................................................    1545-0865
                                                               1545-1687
301.6112-1.................................................    1545-0865
                                                               1545-1686
301.6112-1T................................................    1545-0865
                                                               1545-1686
301.6114-1.................................................    1545-1126
                                                               1545-1484
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790
301.6222(b)-2..............................................    1545-0790
301.6222(b)-3..............................................    1545-0790
301.6223(b)-1..............................................    1545-0790
301.6223(c)-1..............................................    1545-0790
301.6223(e)-2..............................................    1545-0790
301.6223(g)-1..............................................    1545-0790
301.6223(h)-1..............................................    1545-0790
301.6224(b)-1..............................................    1545-0790
301.6224(c)-1..............................................    1545-0790
301.6224(c)-3..............................................    1545-0790
301.6227(c)-1..............................................    1545-0790
301.6227(d)-1..............................................    1545-0790
301.6229(b)-2..............................................    1545-0790
301.6230(b)-1..............................................    1545-0790
301.6230(e)-1..............................................    1545-0790
301.6231(a)(1)-1...........................................    1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6231(c)-1..............................................    1545-0790
301.6231(c)-2..............................................    1545-0790
301.6241-1T................................................    1545-0130
301.6316-4.................................................    1545-0074
301.6316-5.................................................    1545-0074
301.6316-6.................................................    1545-0074
301.6316-7.................................................    1545-0029
301.6324A-1................................................    1545-0015
301.6361-1.................................................    1545-0024
                                                               1545-0074
301.6361-2.................................................    1545-0024
301.6361-3.................................................    1545-0074
301.6402-2.................................................    1545-0024
                                                               1545-0073
                                                               1545-0091
301.6402-3.................................................    1545-0055
                                                               1545-0073
                                                               1545-0091
                                                               1545-0132
                                                               1545-1484
301.6402-5.................................................    1545-0928
301.6404-1.................................................    1545-0024
301.6404-2T................................................    1545-0024
301.6404-3.................................................    1545-0024
301.6405-1.................................................    1545-0024
301.6501(c)-1..............................................    1545-1241
                                                               1545-1637
301.6501(d)-1..............................................    1545-0074
                                                               1545-0430
301.6501(o)-2..............................................    1545-0728
301.6511(d)-1..............................................    1545-0024
                                                               1545-0582
301.6511(d)-2..............................................    1545-0024
                                                               1545-0582
301.6511(d)-3..............................................    1545-0024
                                                               1545-0582
301.6652-2.................................................    1545-0092
301.6685-1.................................................    1545-0092
301.6689-1T................................................    1545-1056
301.6707-1T................................................    1545-0865
                                                               1545-0881
301.6708-1T................................................    1545-0865
301.6712-1.................................................    1545-1126
301.6723-1A(d).............................................    1545-0909
301.6903-1.................................................    1545-0013
                                                               1545-1783
301.6905-1.................................................    1545-0074
301.7001-1.................................................    1545-0123
301.7101-1.................................................    1545-1029
301.7207-1.................................................    1545-0092
301.7216-2.................................................    1545-0074
301.7216-2(o)..............................................    1545-1209
301.7425-3.................................................    1545-0854
301.7430-2(c)..............................................    1545-1356
301.7502-1.................................................    1545-1899
301.7507-8.................................................    1545-0123
301.7507-9.................................................    1545-0123
301.7513-1.................................................    1545-0429
301.7517-1.................................................    1545-0015
301.7605-1.................................................    1545-0795
301.7623-1.................................................    1545-0409
                                                               1545-1534
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-7.................................................    1545-1600
301.7701-16................................................    1545-0795
301.7701(b)-1..............................................    1545-0089
301.7701(b)-2..............................................    1545-0089
301.7701(b)-3..............................................    1545-0089
301.7701(b)-4..............................................    1545-0089
301.7701(b)-5..............................................    1545-0089

[[Page 680]]

 
301.7701(b)-6..............................................    1545-0089
301.7701(b)-7..............................................    1545-0089
                                                               1545-1126
301.7701(b)-9..............................................    1545-0089
301.7705-1T................................................    1545-2266
301.7705-2T................................................    1545-2266
301.7805-1.................................................    1545-0805
301.9000-5.................................................    1545-1850
301.9001-1.................................................    1545-0220
301.9100-2.................................................    1545-1488
301.9100-3.................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
301.9100-6T................................................    1545-0872
301.9100-7T................................................    1545-0982
301.9100-8.................................................    1545-1112
301.9100-11T...............................................    1545-0123
301.9100-12T...............................................    1545-0026
                                                               1545-0074
                                                               1545-0172
                                                               1545-1027
301.9100-14T...............................................    1545-0046
301.9100-15T...............................................    1545-0046
301.9100-16T...............................................    1545-0152
302.1-7....................................................    1545-0024
305.7701-1.................................................    1545-0823
305.7871-1.................................................    1545-0823
404.6048-1.................................................    1545-0160
420.0-1....................................................    1545-0710
Part 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845
Part 521...................................................    1545-0848
601.104....................................................    1545-0233
601.105....................................................    1545-0091
601.201....................................................    1545-0019
                                                               1545-0819
601.204....................................................    1545-0152
601.401....................................................    1545-0257
601.504....................................................    1545-0150
601.601....................................................    1545-0800
601.602....................................................    1545-0295
                                                               1545-0387
                                                               1545-0957
601.702....................................................    1545-0429
------------------------------------------------------------------------


(26 U.S.C. 7805)

[T.D. 8011, 50 FR 10222, Mar. 14, 1985]

    Editorial Note: For Federal Register citations affecting 
Sec. 602.101, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and at www.fdsys.gov.

[[Page 681]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2012 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.fdsys.gov. For changes to this volume of the CFR 
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The 
``List of CFR Sections Affected 1986-2000'' is available at 
www.fdsys.gov.

                                  2012

26 CFR
                                                                   77 FR
                                                                    Page
Chapter I
1.61-21  (g)(14)(i) and (ii) revised; (g)(14)(iii) added...........45483
1.104-1  (c) revised................................................3107

                                  2013

26 CFR
                                                                   78 FR
                                                                    Page
Chapter I
1.108(i)-0  Added..................................................39986
    (b) correctly revised..........................................48607
1.108(i)-0T  Removed...............................................39987
1.108(i)-1  Added..................................................39987
    (b)(2)(iii)(D) and (c) Example 3 (ii) correctly amended........48607
1.108(i)-1T  Removed...............................................39991
1.108(i)-2  Added..................................................39975
    (b)(6)(i)(A)(4), (c)(3)(i)(A)(5) and (d)(2)(iii) Example 2 
(ii) correctly revised.............................................49366
1.108(i)-2T  Removed...............................................39984
1.108(i)-3  Added..................................................39991
1.108(i)-3T  Removed...............................................39991

                                  2014

26 CFR
                                                                   79 FR
                                                                    Page
Chapter I
1.67-4  Added......................................................26619
    (d) revised....................................................41636
1.67-4T  Removed...................................................26620
1.72-15  (a) amended; (d), (h) and (i) revised; (f) removed........26841
1.83-3  (c)(1) revised; (c)(4) Example 6, Example 7, (j)(2) 
        Example and (l) added; (j)(3) and (k) removed; (k)(1) 
        redesignated as (k)........................................10664
1.105-4  Removed...................................................26841
1.105-6  Removed...................................................26841
1.106-1  Existing text designated as (a) and amended; (b) added....26841

[[Page 682]]

1.108-7  (d)(2)(iii) and (f)(2) amended............................42677

                                  2015

                       (No regulations published)

                                  2016

26 CFR
                                                                   81 FR
                                                                    Page
Chapter I
1.83-2  (c) revised; (g) added.....................................48708
1.108-9  Added.....................................................37507
1.125-4T  Removed; CFR correction..................................17083

                                  2017

   (Regulations published from January 1, 2017, through April 1, 2017)

26 CFR
                                                                   82 FR
                                                                    Page
Chapter I
1.83-4  (b)(1) amended; (d) added...................................6236