Part I. Rulings — Internal Revenue Bulletin 2001-12

Section 61.—Gross Income Defined

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation for- mula. For purposes of section 1.61–21(g) of the regulations, relating to the rule for valuing noncommercial flights on employer-provided aircraft, the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charges in effect for the first half of 2001 are set forth.

Rev. Rul. 2001–13

For purposes of the taxation of fringe benefits under section 61 of the Internal Revenue Code, section 1.61–21(g) of the Income Tax Regulations provides a rule for valuing noncommercial flights on employer-provided aircraft. Section 1.61–21(g)(5) provides an aircraft valuation formula to determine the value of such flights. 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 provided in section 1.61–21(g)(7) 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 reviewed semi-annually.

The following chart sets forth the terminal charges and SIFL mileage rates:

Period During Which Terminal SIFL Mileage the Flight Is Taken Charge Rates

1/1/01 - 6/30/01 $35.84 Up to 500 miles = $.1961 per mile

501-1500 miles = $.1495 per mile

Over 1500 miles = $.1437 per mile

DRAFTING INFORMATION

The principle author of this revenue ruling is Kathleen Edmondson of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue ruling, contact Ms. Edmondson at (202) 622-6040 (not a toll-free call).

Section 446.—General Rule for Methods of Accounting

26 CFR 1.446–1: General rule for methods of accounting.

The revenue procedure, which modifies section 13.02 of the Appendix to Rev. Proc. 99–49, allows any bank that uses the cash receipts and disbursements method of accounting to change automatically its method of accounting for stated interest on

short-term loans made in the ordinary course of its business. See Rev. Proc. 2001–25, page 913.

Section 472.—Last-in, First-out Inventories

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

LIFO; price indexes; department stores. The January 2001 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, January 31, 2001.

Rev. Rul. 2001–14

The following Department Store Inventory Price Indexes for January 2001 were

issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, January 31, 2001.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

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

(January 1941 = 100, unless otherwise noted)

Percent Change Groups Jan. Jan. from Jan. 2000 2000 2001 to Jan. 2001 ¹

Piece Goods ---------------------------------------------- 493.8 490.8 -0.6
Domestics and Draperies ------------------------------- 622.0 614.6 -1.2
Women’s and Children’s Shoes------------------------ 613.3 628.8 2.5

March 19, 2001 898 2001–12 I.R.B.

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

(January 1941 = 100, unless otherwise noted)

Percent Change Groups Jan. Jan. from Jan. 2000 2000 2001 to Jan. 2001 ¹

Men’s Shoes---------------------------------------------- 887.2 886.8 0.0
Infants’ Wear --------------------------------------------- 650.8 609.2 -6.4
Women’s Underwear------------------------------------ 571.4 556.3 -2.6
Women’s Hosiery---------------------------------------- 327.6 343.8 4.9
Women’s and Girls’Accessories ---------------------- 530.3 526.9 -0.6
Women’s Outerwear and Girls’ Wear----------------- 369.1 369.7 0.2
Men’s Clothing ------------------------------------------ 612.9 586.1 -4.4
Men’s Furnishings--------------------------------------- 618.0 603.2 -2.4
Boys’ Clothing and Furnishings----------------------- 497.1 484.6 -2.5
Jewelry ---------------------------------------------------- 962.0 956.1 -0.6
Notions---------------------------------------------------- 764.5 784.3 2.6
Toilet Articles and Drugs------------------------------- 970.9 987.1 1.7
Furniture and Bedding---------------------------------- 697.0 685.2 -1.7
Floor Coverings------------------------------------------ 603.2 630.1 4.5
Housewares----------------------------------------------- 789.9 769.4 -2.6
Major Appliances---------------------------------------- 233.3 229.9 -1.5
Radio and Television------------------------------------ 62.7 56.8 -9.4
Recreation and Education ² ----------------------------- 95.2 91.0 -4.4
Home Improvements ² ----------------------------------- 129.8 127.7 -1.6
Auto Accessories ² --------------------------------------- 107.6 108.7 1.0

Groups 1 - 15: Soft Goods ---------------------------------- 588.6 583.7 -0.8 Groups 16 - 20: Durable Goods------------------------------ 446.2 432.9 -3.0 Groups 21 - 23: Misc. Goods ² ------------------------------- 102.2 99.4 -2.7 Store Total ³ ----------------------------------------------- 535.4 527.4 -1.5

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

DRAFTING INFORMATION

The principal author of this revenue ruling is Alan J. Tomsic of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Tomsic at (202) 622-4970 (not a toll-free call).

Section 503.—Requirements for Exemption

26 CFR 1.503(a)–1: Denial of exemption to certain organizations engaged in prohibited transactions.

T.D. 8939

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 301

Definition of Last Known Address

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final regulations defining last known ad- dress in relation to the mailing of notices of deficiency and other notices, statements, and documents sent to a taxpayer’s last known address. The final regulations affect taxpayers who receive notices of deficiency and other notices, statements, and documents sent to taxpayers’ last known addresses.

DATES: Effective date : These regulations are effective January 12, 2001.

Applicability date : For dates of applicability, see §301.6212–2(d).

FOR FURTHER INFORMATION CONTACT: Charles A. Hall, (202) 622-4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Regulations on Procedure and Administration (26 CFR part 301) under section 6212(b) relating to the sufficiency of a notice of deficiency if it is mailed to the last known address of a taxpayer. This document also contains amendments to the Income Tax Regulations (26 CFR part 1) and the Regulations on Procedure and Administration (26 CFR part 301) to provide crossreferences to the last known address rules under section 6212(b) in order to apply those rules to other notices, statements, and documents required to be sent to the last known address of a taxpayer.

2001–12 I.R.B. 899 March 19, 2001

A notice of proposed rulemaking (REG–104939–99, 1999–2 C.B. 643) was published in the Federal Register (64 FR 63768) on November 22, 1999. No public hearing was requested or held. Three written comments were received. After consideration of the comments, the proposed regulations are adopted as modified by this Treasury decision. The comments are discussed below.

Explanation of Revisions

Under the proposed regulations, the IRS would have accessed the United States Postal Service (USPS) National Change of Address database (NCOA database) annually to update all taxpayer address records maintained in the IRS’s automated masterfile for purposes of updating the IRS’s mailing list. The IRS’s mailing list contains the last known address for each taxpayer. In addition, prior to mailing correspondence to any particular taxpayer from an IRS Service Center, the IRS would have accessed the NCOA database to update the taxpayer’s last known address. Employees mailing correspondence from one of the district offices would have accessed an updated address by virtue of the annual update of the entire masterfile. Except in the case of certain joint filers, the annual update was scheduled to occur in May 2000, November 2000, and every November thereafter. The update based on correspondence mailed from an IRS Service Center was scheduled to begin May 2000. All steps necessary to implement the proposed regulations were not completed by May 2000. Therefore, the IRS delayed use of the NCOA database to update a taxpayer’s last known address. See Announcement 2000–49 (2000–19 I.R.B. 998 (May 8, 2000)). The procedures for updating taxpayer address records maintained in the IRS’s automated masterfile are modified by these regulations. Implementing the proposed procedures for updating a taxpayer’s last known address upon the mailing of correspondence from a Service Center required complicated programming that resulted in the delay in finalizing the proposed regulations. In addition, one commentator on the proposed regulations noted that the difference in treatment for Service Center mailings and district office mailings might cause

confusion for taxpayers. The IRS, in conjunction with the USPS, has developed an improved system for updating taxpayer addresses that is intended to be easier to implement and operate and minimize confusion.

To gain access to the NCOA database, the IRS has become a limited licensee of the NCOA database. The NCOA database is a computerized record of changes of address maintained by the USPS. This database retains address changes for a thirty-six month period. As a limited licensee, the IRS will receive from the USPS a copy of the entire thirty-six month NCOA database. The IRS’s copy of the NCOA database will be retained at the Martinsburg Computing Center (MCC) in Martinsburg, West Virginia. Additionally, the IRS will receive weekly updates to the NCOA database. The updates will contain the most recent changes of address submitted to the USPS. The IRS will update its copy of the full NCOA database with the most recent changes of address in the weekly update.

Beginning in January 2001, the IRS will access the NCOA database to update taxpayer address records maintained in the IRS’s automated masterfile for purposes of updating the IRS’s mailing list. The IRS plans to undertake two different procedures in order to assure the most comprehensive update of taxpayer addresses.

First, the IRS will compare taxpayer addresses in IRS’s records to the most recent changes of address contained in the weekly updates to the NCOA database received from the USPS. To accomplish this, the IRS will use the USPS’s FASTCheck system. The FASTCheck System works by comparing key elements of existing taxpayer address information maintained in IRS records to an extract of the same elements from the weekly updates to the NCOA. The key address elements used by IRS to detect possible matches include primary house number, secondary number, secondary designator, and nine digit zip code. If there is a match between the key address elements from IRS records and the key address elements from the weekly update to the NCOA database, the IRS will then compare the taxpayer’s complete address information in IRS records to the full NCOA database to determine if there is a

change of address for a taxpayer. If the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database, the new address in the NCOA database is the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address. A match will only be made if the taxpayer’s name in IRS records is the same, within certain tolerances, as is found in the NCOA database. There may be a delay of up to two to three weeks from the date a taxpayer notifies the USPS that his or her change of address is effective and the time the new address is posted to the IRS’s automated masterfile.

In addition, the IRS plans to annually compare all taxpayer address records maintained in the IRS’s automated masterfile with the full thirty-six month NCOA database for purposes of updating the IRS’s mailing list. The IRS will begin comparing all taxpayer address records with the full NCOA database for the first time in January 2001. If the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database, the new address in the NCOA database is the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address. As with the weekly updates, the names must be the same, within certain tolerances, in both the IRS’s records and the NCOA database. Matching all taxpayer address records to the full NCOA database will take several months. The next annual update will be completed by September 30, 2002, and every September 30th thereafter if the IRS determines that subsequent annual updates are necessary in addition to the weekly updates.

For taxpayers who file joint income tax returns under section 6013, the IRS’s automated masterfile is currently only able to retain one address. Beginning with the processing of tax year 2000 joint income tax returns, the IRS’s automated masterfile will be able to retain a second address. Therefore, if the NCOA database contains change of address information for only one spouse from a joint return, the rules of this regulation will not apply to notices, statements, and other documents mailed before the processing of the

March 19, 2001 900 2001–12 I.R.B.

taxpayers’ tax year 2000 joint income tax return.

Summary of Comments

Commentators also suggested that these regulations refer to section 6672(b)(1) and section 4103. Because section 6672(b)(1) requires that the IRS mail notices to the taxpayer’s last known address, a cross-reference under §301.6672–1 has been added to these regulations. However, because section 4103 does not require the IRS to mail notices to the taxpayer’s last known address, no cross-reference is necessary.

A third commentator suggested that the IRS coordinate these regulations with Rev. Proc. 90–18 (1990–1 C.B. 491). Rev. Proc. 90–18 will be updated to incorporate changes made by these final regulations and to provide rules for oral notification of a change of address, additional tax forms from which taxpayer addresses will be updated, and additional Internal Revenue Code sections that require a notice be sent to a taxpayer’s last known address.

The commentator also asked what is the most recently filed return for purposes of §301.6212–2(a) of the regulations, i.e., whether different returns filed by the same taxpayer will update the taxpayer’s last known address. The rules provided in these regulations do not in any way alter the existing rules for updating a taxpayer’s last known address from a filed return. Section 5.01 of Rev. Proc. 90–18 provides which returns will update a taxpayer’s last known address under a social security number or an employer identification number. Therefore, an amended return filed on a Form 1040X with a different address from that which appeared on the taxpayer’s previously filed Form 1040 will update the taxpayer’s last known address of record with the IRS. However, a Form 941 filed by a Schedule C business would not update the address for the taxpayer’s individual income tax account as the Form 941 is filed with an employer identification number and the individual income tax account is associated with the taxpayer’s social security number.

Finally, as mentioned above, the commentator noted that accessing the NCOA database for IRS Service Center mailings but not for district office mailings might cause confusion for taxpayers. As the procedures for updating taxpayer addresses are modified by these final regula

tions, there is no longer any difference between Service Center and other field or area office mailings.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Charles A. Hall of the Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.468A–5, paragraph (c)(1)(ii) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.468A–5 Nuclear decommissioning fund qualification requirements; prohibitions against self-dealing; disqualification of nuclear decommissioning fund; termination of fund upon substantial completion of decommissioning.

(c) * * * (1) * * * (ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 3. In §1.503(a)–1, paragraph (c) concluding text is amended by adding a sentence at the end of the paragraph to read as follows:

§1.503(a)–1 Denial of exemption to certain organizations engaged in prohibited transactions.

- - For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 4. In §1.547–2, paragraph (b)(1)(v) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§1.547–2 Requirements for deficiency dividends.

(b) * * * (1) * * * (v) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 5. In §1.856–6, paragraph (g)(5) is amended by adding a sentence after the first sentence of the paragraph to read as follows:

§1.856–6 Foreclosure property.

(g) * * * (5) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 6. In §1.860–2, paragraph (b)(1)(ii) is amended by adding a sentence after the fourth sentence of the paragraph to read as follows:

§1.860–2 Requirements for deficiency dividends.

(b) * * * (1) * * *

2001–12 I.R.B. 901 March 19, 2001

(ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 7. In §1.963–6, paragraph (c)(5) is amended by adding a sentence after the second sentence of the paragraph to read as follows:

§1.963–6 Deficiency distribution.

(c) * * * (5) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 8. In §1.992–3, paragraph (c)(3)(iv) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§1.992–3 Deficiency distributions to meet qualification requirements.

(c) * * * (3) * * * (iv) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 9. In §1.6081–2, paragraph (f) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–2 Automatic extension of time to file partnership return of income.

(f) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 10. In §1.6081–3, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–3 Automatic extension of time for filing corporation income tax returns.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 11. In §1.6081–4, paragraph (c) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–4 Automatic extension of time for filing individual income tax returns.

Par. 12. In §1.6081–6, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–6 Automatic extension of time to file trust income tax return.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 13. In §1.6081–7, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–7 Automatic extension of time to file Real Estate Mortgage Investment Conduit (REMIC) income tax return.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

PART 301—PROCEDURE AND ADMINISTRATION

Par. 14. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 15. In §301.6110–4, paragraph (c)(3) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6110–4 Communications from third parties.

Par. 16. In §301.6110–5, paragraph (b)(4) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6110–5 Notice and time requirements; actions to restrain disclosure; actions to obtain additional disclosure.

(b) * * * (4) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 17. In §301.6110–6, paragraph (b)(2)(v) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6110–6 Written determinations issued in response to requests submitted before November 1, 1976.

(b) * * * (2) * * * (v) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 18. Section 301.6212–2 is added to read as follows:

§301.6212–2 Definition of last known address.

(a) General rule . Except as provided in paragraph (b)(2) of this section, a taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address. Further information on what constitutes clear and concise notification of a different address and a properly processed Federal tax return can be found in Rev. Proc. 90–18 (1990–1 C.B. 491) or in procedures subsequently prescribed by the Commissioner.

(b) Address obtained from third party —(1) In general . Except as provided in paragraph (b)(2) of this section, change of address information that a taxpayer provides to a third party, such as a payor or another government agency, is not clear and concise notification of a different address for purposes of determining a last known address under this section.

(2) Exception for address obtained from the United States Postal Service —(i) Updating taxpayer addresses . The IRS will update taxpayer addresses maintained in IRS records by referring to data accumulated and maintained in the United States Postal Service (USPS) National Change of Address database that retains

March 19, 2001 902 2001–12 I.R.B.

change of address information for thirtysix months (NCOA database). Except as provided in paragraph (b)(2)(ii) of this section, if the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database, the new address in the NCOA database is the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address.

(ii) Duration of address obtained from NCOA database . The address obtained from the NCOA database under paragraph (b)(2)(i) of this section is the taxpayer’s last known address until one of the following events occurs—

(A) The taxpayer files and the IRS properly processes a Federal tax return with an address different from the address obtained from the NCOA database; or

(B) The taxpayer provides the Internal Revenue Service with clear and concise notification of a change of address, as defined in procedures prescribed by the Commissioner, that is different from the address obtained from the NCOA database.

(3) Examples . The following examples illustrate the rules of paragraph (b)(2) of this section:

Example 1 . (i) A is an unmarried taxpayer. The address on A’s 1999 Form 1040, U.S. Individual In- come Tax Return, filed on April 14, 2000, and 2000 Form 1040 filed on April 13, 2001, is 1234 Anyplace Street, Anytown, USA 43210. On May 15, 2001, A informs the USPS of a new permanent address (9876 Newplace Street, Newtown, USA 12345) using the USPS Form 3575, “Official Mail Forwarding Change of Address Form.” The change of address is included in the weekly update of the USPS NCOA database. On May 29, 2001, A’s address maintained in IRS records is changed to 9876 Newplace Street, Newtown, USA 12345.

(ii) In June 2001 the IRS determines a deficiency for A’s 1999 tax year and prepares to issue a notice of deficiency. The IRS obtains A’s address for the notice of deficiency from IRS records. On June 15, 2001, the Internal Revenue Service mails the notice of deficiency to A at 9876 Newplace Street, Newtown, USA 12345. For purposes of section 6212(b), the notice of deficiency mailed on June 15, 2001, is mailed to A’s last known address.

Example 2 . (i) The facts are the same as in Ex- ample 1, except that instead of determining a deficiency for A’s 1999 tax year in June 2001, the IRS determines a deficiency for A’s 1999 tax year in May 2001.

(ii) On May 21, 2001, the IRS prepares a notice of deficiency for A and obtains A’s address from IRS records. Because A did not inform the USPS of the change of address in sufficient time for the IRS to process and post the new address in Internal Revenue Service’s records by May 21, 2001, the

notice of deficiency is mailed to 1234 Anyplace Street, Anytown, USA 43210. For purposes of section 6212(b), the notice of deficiency mailed on May 21, 2001, is mailed to A’s last known address.

Example 3 . (i) C and D are married taxpayers. The address on C and D’s 2000 Form 1040, U.S. Individual Income Tax Return, filed on April 13, 2001, and 2001 Form 1040 filed on April 15, 2002, is 2468 Spring Street, Little City, USA 97531. On August 15, 2002, D informs the USPS of a new permanent address (8642 Peachtree Street, Big City, USA 13579) using the USPS Form 3575, “Official Mail Forwarding Change of Address Form.” The change of address is included in the weekly update of the USPS NCOA database. On August 29, 2002, D’s address maintained in IRS records is changed to 8642 Peachtree Street, Big City, USA 13579. (ii) In October 2002 the IRS determines a deficiency for C and D’s 2000 tax year and prepares to issue a notice of deficiency. The Internal Revenue Service obtains C’s address and D’s address for the notice of deficiency from IRS records. On October 15, 2002, the IRS mails a copy of the notice of deficiency to C at 2468 Spring Street, Little City, USA 97531, and to D at 8642 Peachtree Street, Big City, USA 13579. For purposes of section 6212(b), the notices of deficiency mailed on October 15, 2002, are mailed to C and D’s respective last known addresses.

(c) Last known address for all notices, statements, and documents . The rules in paragraphs (a) and (b) of this section apply for purposes of determining whether all notices, statements, or other documents are mailed to a taxpayer’s last known address whenever the term last known address is used in the Internal Revenue Code or the regulations thereunder.

(d) Effective Date —(1) In general . Except as provided in paragraph (d)(2) of this section, this section is effective on January 29, 2001.

(2) Individual moves in the case of joint filers . In the case of taxpayers who file joint returns under section 6013, if the NCOA database contains change of address information for only one spouse, paragraphs (b)(2) and (3) of this section will not apply to notices, statements, and other documents mailed before the processing of the taxpayers’ 2000 joint return.

Par. 19. In §301.6303–1, paragraph (a) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6303–1 Notice and demand for tax.

(a) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 20. In §301.6305–1, paragraph (b)(2)(ii) is revised to read as follows:

§301.6305–1 Assessment and collection of certain liability.

(b) * * * (2) * * * (ii) The name, social security number, and last known address of the individual owing the assessed amount. For further guidance regarding the definition of last known address, see §301.6212–2;

Par. 21. In §301.6320–1T, paragraph (a)(1) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6320–1T Notice and opportunity for hearing upon filing of notice of Federal tax lien (temporary).

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 22. In §301.6325–1, paragraph (f)(2)(ii)( a ) is revised to read as follows:

§301.6325–1 Release of lien or discharge of property.

(f) * * * (2) * * * (ii) * * * ( a ) Mailing notice of the revocation to the taxpayer at his last known address (see §301.6212–2 for further guidance regarding the definition of last known address); and

Par. 23. In §301.6330–1T, paragraph (a)(1) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6330–1T Notice and opportunity for hearing prior to levy (temporary).

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 24. In §301.6331–2, paragraph (a)(1) is amended by adding a sentence after the second sentence of the paragraph to read as follows:

2001–12 I.R.B. 903 March 19, 2001

§301.6331–2 Procedures and restrictions on levies.

ulations provide guidance to holders and issuers of these debt instruments .

DATES: Effective Date : These regulations are effective March 13, 2001.

Applicability Dates : For dates of applicability, see §§1.163–7(f), 1.1275–1(f), 1.1275–2(d), and 1.1275–2(k)(5).

FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202) 6223950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On November 5, 1999, temporary regulations were published in the Federal Register (64 FR 60342) that revised the rules for when a reopening of Treasury securities is a qualified reopening. The temporary regulations eliminated the acute, protracted shortage requirement that was in §1.1275–2(d). See §1.1275–2T(d) of the temporary Income Tax Regulations. As a result, additional Treasury securities issued in a reopening are part of the same issue as the original Treasury securities if (1) the additional Treasury securities have the same terms as the original Treasury securities, and (2) the additional Treasury securities are issued not more than one year after the original Treasury securities were first issued to the public.

On November 5, 1999, proposed regulations (REG–115932–99, 1999-2 C.B. 583) also were published in the Federal Register (64 FR 60395) that, for the first time, provided rules for reopenings of debt instruments other than Treasury securities. See §1.1275–2(k) of the proposed Income Tax Regulations.

Although a public hearing on the proposed regulations was held on March 22, 2000, no one testified at the hearing. Eight comment letters, however, were received on the proposed regulations. The proposed regulations, with certain changes to respond to the comments, are adopted as final regulations.

Explanation of Provisions

Reopenings

A. General description

In certain circumstances, an issuer would like to reopen an existing issue of debt instruments (that is, sell additional amounts of debt instruments with terms

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2. * * *

Par. 25. Section 301.6332–2 is amended as follows:

Paragraphs (b)(1) introductory text, (b)(1)(i), and (b)(1)(ii) are redesignated as paragraphs (b)(1)(i) introductory text, (b)(1)(i)(A), and (b)(1)(i)(B), respectively.
In newly designated paragraph (b)(1)(i)(B), the text beginning with the second sentence is redesignated as paragraph (b)(1)(ii).
Newly designated paragraph (b)(1)(ii) is amended by adding a sentence after the second sentence of the paragraph.

The addition reads as follows:

§301.6332–2 Surrender of property subject to levy in the case of life insurance and endowment contracts.

(b) * * * (1) In general . (ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2. * * *

Par. 26. In §301.6335–1, paragraph (b)(1) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§301.6335–1 Sale of seized property.

(b) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2. * * *

Par. 27. In §301.6503(c)–1, paragraph (a) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6503(c)–1 Suspension of running of period of limitation; location of property outside the United States or removal of property from the United States; taxpayer outside of United States.

(a) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 28. Section 301.6672–1 is amended by adding a sentence at the end of the section to read as follows:

§301.6672–1 Failure to collect and pay over tax, or attempt to evade or defeat tax.

- - For further guidance regarding the determination of the proper address for mailing the notice required under section 6672(b)(1), see §301.6212–2.

Par. 29. In §301.6903–1, paragraph (c) is amended by adding a sentence after the first sentence of the paragraph to read as follows:

§301.6903–1 Notice of fiduciary relationship.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved December 11, 2000.

Jonathan Talisman, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on January 11, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 12, 2001, 66 F.R. 2817)

Section 1275.— Other Definitions and Special Rules

26 CFR 1.1275–2: Special rules relating to debt instruments.

T.D. 8934

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reopenings of Treasury Securities and Other Debt Instruments; Original Issue Discount

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the federal income tax treatment of debt instruments issued in certain reopenings. The final reg

March 19, 2001 904 2001–12 I.R.B.

that are identical to the terms of the original debt instruments and with the same CUSIP number and tax characteristics as the original debt instruments). In most cases, the purpose of the reopening is to create a large, liquid issue of debt instruments. However, during periods of rising market interest rates, the original issue discount (OID) provisions of the Code can effectively prohibit reopenings, especially if the additional debt instruments are not considered part of the same issue as the original debt instruments.

If the debt instruments sold in the reopening are considered part of the original issue, they have OID only to the extent the debt instruments in the original issue have OID. Thus, if the original debt instruments were issued without OID, the subsequently sold debt instruments also do not have OID. In this case, any discount on the subsequently sold debt instruments generally is market discount, not OID. Conversely, if the subsequently sold debt instruments are a separate issue for tax purposes, any discount that arises as part of their issuance is OID if it equals or exceeds the OID de minimi s amount for the debt instruments.

The holder and issuer have different consequences depending upon whether the discount is characterized as OID or market discount. For a holder, the primary difference is whether the holder has to include the discount in income on a current basis as it accrues. If it is OID, the holder must include the accruals in income currently; if it is market discount, the holder generally does not have to include discount in income until the debt instrument is disposed of or redeemed. In general, an issuer’s interest deduction does not depend on whether the discount is OID or market discount. However, the issuer’s reporting obligations depend on whether the discount is OID or market discount. If the subsequently sold debt instruments are part of a separate issue and if the discount is OID, the issuer (or a broker or middleman) generally is required under section 6049 to make OID information reports for these debt instruments. To comply with this reporting obligation, the issuer must be able to distinguish the subsequently sold debt instruments (which require OID information reports) from the originally sold debt instruments. As a practical matter, the

only way the subsequently sold debt instruments can be distinguished is if they are assigned new CUSIP numbers. The different tax treatment and the assignment of new CUSIP numbers prevents the debt instruments from being fungible and, thereby, defeats the purpose of the reopening.

B. Proposed regulations

In an attempt to strike a balance between the tax policy concern about the conversion of OID into market discount and the need to have the tax rules reflect current capital market practices, the proposed regulations specified when debt instruments issued in a reopening are considered part of the same issue as the original debt instruments (a qualified reopening). (As noted above, §1.1275– 2T(d) provides rules to determine when a reopening of Treasury securities is a qualified reopening.)

Under §1.1275–2(k) of the proposed regulations, a reopening of debt instruments is a qualified reopening if: (1) the original debt instruments are publicly traded; (2) the issue date of the additional debt instruments (treated as if they were a separate issue) is not more than six months after the issue date of the original debt instruments; (3) seven days before the date on which the price of the additional debt instruments is established, the yield of the original debt instruments (based on their fair market value) is not more than 107.5 percent of the yield of the original debt instruments on their issue date; and (4) the yield of the additional debt instruments (based on the sales price of the additional debt instruments) is no more than 115 percent of the yield of the original debt instruments on their issue date. For purposes of the yield tests, if the original debt instruments were issued with no more than a de minimis amount of OID, the coupon rate of the original debt instruments is used rather than the yield. A qualified reopening also includes a reopening of original debt instruments if the first two conditions described above are met and the additional debt instruments (treated as a separate issue) are issued with no more than a de minimis amount of OID. A qualified reopening, however, does not include a reopening of tax-exempt obligations or contingent payment debt instruments.

The 107.5 percent test was designed to give some relief to the reopening of relatively short-term issues (that is, issues with a remaining term of ten years or less), which tend to be the most impacted by the OID de minimis rules. In addition, the 107.5 percent test, which is tested seven days before the anticipated pricing date, would give the issuer an indication as to whether the reopening would be a qualified reopening. The 115 percent test was designed to prevent, in a situation in which interest rates were to move sharply upward in the period between the announcement date and the issue date, a conversion of a significant amount of OID into market discount.

C. Final regulations

(1) Fixed Reopening Period

Commentators suggested that the final regulations extend the one-year rule for reopenings of Treasury securities to other issuers. In support of this change, commentators stated that different rules will impede the ability of U.S. issuers to compete with foreign issuers for investors’ funds and will affect the ability of nonTreasury issuers to make their dollar-denominated issues attractive alternatives to U.S. Treasury securities as benchmarks for prevailing market interest rates. They also stated that an extended period (from six to twelve months) is often required in order to aggregate sufficient debt issuances to create a large liquid issue and that many holders of reopened debt instruments are tax-indifferent parties.

If the one-year rule is not adopted in the final regulations, some commentators suggested that the final regulations provide a fixed period of less than one year in which there would be no restrictions on reopenings (for example, a period of six months for non-Treasury securities with an original maturity of less than ten years and nine months for non-Treasury securities with an original maturity of at least ten years). In addition, other commentators suggested that the final regulations extend the one-year rule to reopenings of issuers whose securities are treated as government securities for U.S. securities law purposes.

After careful consideration of these comments, the IRS and the Treasury Department have decided not to adopt these

2001–12 I.R.B. 905 March 19, 2001

suggestions. Congress adopted different statutory regimes for OID and market discount. The IRS and the Treasury Department believe that adopting the commentators’ suggestions would not strike the appropriate balance between the statutory scheme and providing some flexibility for issuers. Additionally, the reopening of Treasury securities does not produce a potential mismatch between the issuer’s interest deductions and the holder’s income inclusions.

(2) Yield Test

Commentators suggested that the twopart yield test be replaced with a single yield test. According to the commentators, by the time a reopening is priced, dealers, traders, and investors have arranged their affairs in reliance on the issue coming to market, and the issuer has earmarked the proceeds for use in its business. In addition, many of the participants have arranged hedges and other transactions around the reopening. In those cases in which the second-yield test would not be met (which would be caused by unexpected market volatility), a cancelled reopening could generate lost economic costs for these capital market participants. In addition, the second test would create marketing and credibility concerns for issuers.

Most of the commentators suggested that any yield test should be applied either on the pricing date or the announcement date. According to one commentator, the yield test should be applied by an issuer on a single date that is the announcement date for the reopening transaction, provided the pricing date for the transaction occurs thereafter within a period consistent with customary commercial practice. Although customary commercial practice may vary somewhat by issuer and market, the period between the announcement date and the pricing date is usually five business days or less. The yield test should allow issuers to presume that a transaction is consistent with customary commercial practice if the period between the announcement date and the pricing date is five business days or less.

For public transactions, the commentators suggested that the announcement date can be defined as the date that the reopening transaction is publicly announced through one or more media, including a

press release, a news item posted on a public messaging service such as Reuters, Telerate, or Bloomberg, or a posting on the issuer’s public web site. (Because the transaction is a reopening, the payment terms of the securities to be issued will be known in advance based on the prior issue.) A test based on a public announcement date would be fairly easy to administer for both issuers and the government. Moreover, if an announced reopening transaction is not priced within a customary commercial time frame, it is likely that the transaction will be re-evaluated and subsequently re-announced on a later date that could serve as the appropriate announcement date for the yield test.

According to another commentator, each reopening should be tested on the earlier of the pricing date or the announcement date of a reopening. The term announcement date could be defined as the later of seven days before pricing or the date on which an issuer’s intent to reopen a security is reported on the standard electronic news services used by security broker-dealers. This rule would accommodate issuers who announce and price reopenings on the same day as well as Treasury and non-Treasury issuers who announce reopenings up to 7 days before pricing.

According to a third commentator, an issuer should be permitted to satisfy any yield test by demonstrating that the test was satisfied on any one of the seven days prior to the date on which the price of the additional debt instruments was established.

Based on historical evidence, the commentators stated that the 107.5 percent test in the proposed regulations would not have been met in a number of cases in which a reopening would be economically desirable. Therefore, the commentators suggested that any yield test should be based on 115 percent of the yield rather than 107.5 percent of the yield. While a 115 percent test also would not be met in a number of cases, the commentators stated that the 115 percent figure used in the proposed regulations represents an acceptable middle ground. (However, some commentators stated that a 115 percent test would be too low to qualify many reopenings of sovereign debt issued by emerging market governments.)

In response to the comments, the final regulations adopt a single yield test to determine if the reopening is a qualified reopening. Under the final regulations, the yield test is satisfied if, on the date on which the price of the additional debt instruments is established (or, if earlier, the announcement date), the yield of the original debt instruments (based on their fair market value) is not more than 110 percent of the yield of the original debt instruments on their issue date (or, if the original debt instruments were issued with no more than a de minimis amount of OID, the coupon rate). For purposes of the yield test, the announcement date is the later of seven days before the date on which the price of the additional debt instruments is established or the date on which the issuer’s intent to reopen a security is publicly announced through one or more media, including an announcement reported on the standard electronic news services used by security broker-dealers (for example, Reuters, Telerate, or Bloomberg). The test rate of 110 percent in the final regulations reflects a compromise between the 107.5 percent test rate in the proposed regulations and the 115 percent test rate suggested by the commentators.

(3) Six-Month Period

Some of the commentators suggested that the six-month period be extended to one year. According to the commentators, many issuers have specific funding needs that arise sporadically over the course of a year or, in the case of foreign sovereign issuers, are often fiscally constrained from reopening issues within a six-month period. Therefore, an extended period (from six to twelve months) is required in order to aggregate sufficient debt issuances to create a large, liquid issue. Because the extension of the six-month period would increase the likelihood of the conversion of OID into market discount, the final regulations do not adopt this suggestion.

(4) De Minimis Test

Some of the commentators suggested that the final regulations clarify the treatment of reopened debt instruments that are issued with no more than a de minimis amount of OID after the expiration of the six-month period (a de facto qualified re

March 19, 2001 906 2001–12 I.R.B.

opening). According to the commentators, the proposed regulations apparently are stricter than current law in limiting a de facto qualified reopening to one in which the reopened securities are issued within six months after the issue date of the original debt instruments. As a result, there is uncertainty in the debt markets where none existed for these securities.

The final regulations provide that a reopening (including a reopening of Treasury securities) is a qualified reopening if the original debt instruments are publicly traded and the additional debt instruments are issued with no more than a de minimis amount of OID (determined without the application of §1.1275–2(k)). As a result, the de minimis test is no longer limited to the six-month period after the issue date of the original debt instruments.

(5) Reopenings after the Six-Month Period

Some of the commentators suggested that the final regulations allow a reopening occurring after the expiration of the fixed reopening period to be a qualified reopening if the reopening satisfies a yield test that would limit the amount of OID converted into market discount. In the experience of the commentators, as longer-term debt securities progress in age, they become less liquid as compared with shorter-term debt securities of equal remaining life. (For example, a thirtyyear debt issue with five years of remaining life generally can be expected to be less liquid than an otherwise identical new five-year issue.) The ability to reopen a security throughout its life would help issuers increase the liquidity of their longer-term issues as needed to address such competitive concerns. This ability would be highly valuable to private sector and government-sponsored enterprise issuers; therefore, it would be appropriate to allow it so long as a yield test ultimately limits the amount of OID that can be converted into market discount. For example, the final regulations could permit an issuer (including the Treasury Department) to reopen a security after the fixed reopening period if a 10 percent yield-change test is met.

The final regulations do not adopt this suggestion. The IRS and the Treasury Department believe that the changes to the de minimis test described above pro

vide the appropriate relief for debt instruments reopened after the six-month period.

D. Treasury securities

The final regulations concerning reopenings of Treasury securities are generally the same as the temporary regulations. See §1.1275–2(d)(2). In addition, under the final regulations, if a reopening of Treasury securities is not a qualified reopening under §1.1275–2(d)(2) (for example, because the reopening date is more than one year after the issue date of the original Treasury securities), the reopening is a qualified reopening under §1.1275–2(k) if the additional Treasury securities are issued with no more than a de minimis amount of OID (determined without the application of §1.1275–2(k)).

E. Issuer’s treatment

The proposed regulations require the issuer to take into account, as an adjustment to its interest expense, any difference between the amounts paid by the holders to acquire the additional debt instruments issued in a qualified reopening and the adjusted issue price of the original debt instruments. This difference would either increase or decrease the adjusted issue prices of all of the debt instruments in the issue (both original and additional) with respect to the issuer (but not the holder). The issuer would then, as of the reopening date, recompute the yield of the debt instruments in the issue based on this aggregate adjusted issue price and the remaining payment schedule of the debt instruments. The issuer would use this recomputed yield for purposes of applying the constant yield method to determine its accruals of interest expense over the remaining term of the debt instruments in the issue.

One commentator suggested that the adjusted issue price of the combined debt instruments simply should be the sum of the issuer’s adjusted issue price in the original debt instruments on the reopening date and the issue price of the additional debt instruments determined as if they were a separate issue. The final regulations do not adopt this suggestion; the rule in the proposed regulations is more accurate than the rule suggested by the commentator. The same commentator

also suggested that the final regulations state that, for purposes of determining the adjusted issue price of the combined debt instruments, pre-issuance accrued interest on the additional debt instruments for which the issuer is compensated at issuance is not treated as part of the issue price of the additional debt instruments. In effect, this suggestion would make the rule in §1.1273–2(m) mandatory for debt instruments issued in a qualified reopening. Under § 1.1273–2(m), a taxpayer can choose to determine the issue price of a debt instrument by excluding pre-issuance accrued interest. There does not seem to be a compelling reason to make this rule mandatory for debt instruments issued in a qualified reopening when it is not mandatory for other debt instruments. As a result, the final regulations do not adopt this suggestion.

F. Effective date

The rules in the final regulations for qualified reopenings (other than for Treasury reopenings subject to §1.1275–2(d)) apply to debt instruments that are part of a reopening where the reopening date is on or after March 13, 2001.

Definition of Issue

The proposed regulations define the term issue as two or more debt instruments that (1) have the same credit and payment terms, (2) are issued either pursuant to a common plan or as part of a single transaction or a series of related transactions, and (3) are issued within a period of 13 days beginning with the date on which the first debt instrument that would be part of the issue is issued to a person other than a bond house, broker, or similar person acting in the capacity of an underwriter, placement agent, or wholesaler. The final regulations generally are the same as the proposed regulations but for the additional requirement that the debt instruments be issued on or after March 13, 2001. The final regulations also provide certain transition rules if the debt instruments are issued prior to March 13, 2001.

Issue Price of Treasury Securities

Under §1.1275–2T(d)(1), the issue price of an issue of Treasury securities auctioned before November 2, 1998, is the average price of the securities sold,

2001–12 I.R.B. 907 March 19, 2001

and the issue price of an issue of Treasury securities auctioned on or after November 2, 1998, is the price of the securities sold at auction. The change to the definition of issue price for Treasury securities in the temporary regulations reflected the Treasury Department’s switch on November 2, 1998, from an average price auction to a single price auction for selling Treasury securities. However, in order to accommodate all types of auction techniques and because the rule for an average price auction, when applied to a single price auction, produces the same result as the rule for a single price auction, the final regulations provide that the issue price of an issue of Treasury securities is the average price of the securities sold.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of the regulations is William E. Blanchard, Office of the Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

Part 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entry for §1.1275–2T to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.163–7 is amended by:

Revising paragraph (e).
Adding a new paragraph (f). The revision and addition read as follows:

§1.163–7 Deduction for OID on certain debt instruments.

(e) Qualified reopening —(1) In gen- eral . In a qualified reopening of an issue of debt instruments, if a holder pays more or less than the adjusted issue price of the original debt instruments to acquire an additional debt instrument, the issuer treats this difference as an adjustment to the issuer’s interest expense for the original and additional debt instruments. As provided by paragraphs (e)(2) through (5) of this section, the adjustment is taken into account over the term of the instrument using constant yield principles.

(2) Positive adjustment . If the difference is positive (that is, the holder pays more than the adjusted issue price of the original debt instrument), then, with respect to the issuer but not the holder, the difference increases the aggregate adjusted issue prices of all of the debt instruments in the issue, both original and additional.

(3) Negative adjustment . If the difference is negative (that is, the holder pays less than the adjusted issue price of the original debt instrument), then, with respect to the issuer but not the holder, the difference reduces the aggregate adjusted issue prices of all of the debt instruments in the issue, both original and additional.

(4) Determination of issuer’s interest accruals . As of the reopening date, the issuer must redetermine the yield of the debt instruments in the issue for purposes of applying the constant yield method described in §1.1272–1(b) to determine the issuer’s accruals of interest expense over the remaining term of the debt instruments in the issue. This redetermined yield is based on the aggregate adjusted issue prices of the debt instruments in the issue (as determined under this paragraph (e)) and the remaining payment schedule of the debt instruments in the issue. If the aggregate adjusted issue prices of the debt instruments in the issue (as determined under this paragraph (e)) are less than the aggregate stated redemption price at maturity of the instruments (determined as of

the reopening date) by a de minimis amount (within the meaning of §1.1273–1(d)), the issuer may use the rules in paragraph (b) of this section to determine the issuer’s accruals of interest expense.

(5) Effect of adjustments on issuer’s ad- justed issue price . The adjustments made under this paragraph (e) are taken into account for purposes of determining the issuer’s adjusted issue price under §1.1275–1(b).

(6) Definitions . The terms additional debt instrument, original debt instrument, qualified reopening, and reopening date have the same meanings as in §1.1275–2(k).

(f) Effective dates . This section (other than paragraph (e) of this section) applies to debt instruments issued on or after April 4, 1994. Taxpayers, however, may rely on this section (other than paragraph (e) of this section) for debt instruments issued after December 21, 1992, and before April 4, 1994. Paragraph (e) of this section applies to qualified reopenings where the reopening date is on or after March 13, 2001. Par. 3. In §1.1271-0, paragraph (b) is amended by:

Adding entries for paragraphs (f)(1), (f)(2), (f)(3), and (f)(4) of §1.1275–1.
Removing the language “[Reserved]” from the entry for paragraph (d) and adding entries for paragraph (d) of §1.1275–2.
Adding entries for paragraph (k) of §1.1275–2.
Removing the entries for §1.1275–2T.
Removing the language “[Reserved]” from the entry for paragraph (g) and adding an entry for paragraph (g) of §1.1275–7.

The revisions and additions read as follows:

§1.1271–0 Original issue discount; effective date; table of contents.

(b) * * *

§1.1275–1 Definitions.

(f) Issue . (1) Debt instruments issued on or after March 13, 2001 .

March 19, 2001 908 2001–12 I.R.B.

(2) Debt instruments issued before March 13, 2001 . (3) Transition rule . (4) Cross-references for reopening and aggregation rules .

§1.1275–2 Special rules relating to debt instruments.

(d) Special rules for Treasury securities . (1) Issue price and issue date . (2) Reopenings of Treasury securities .

(k) Reopenings . (1) In general . (2) Definitions . (3) Qualified reopening . (4) Issuer’s treatment of a qualified re- opening . (5) Effective date .

§1.1275–7 Inflation-indexed debt instruments.

(g) Reopenings .

Par. 4. In §1.1275–1, paragraph (f) is revised to read as follows:

§1.1275–1 Definitions.

(f) Issue —(1) Debt instruments issued on or after March 13, 2001 . Except as provided in paragraph (f)(3) of this section, two or more debt instruments are part of the same issue if the debt instruments—

(i) Have the same credit and payment terms;

(ii) Are issued either pursuant to a common plan or as part of a single transaction or a series of related transactions;

(iii) Are issued within a period of thirteen days beginning with the date on which the first debt instrument that would be part of the issue is issued to a person other than a bond house, broker, or similar person or organization acting in the capacity of an underwriter, placement agent, or wholesaler; and

(iv) Are issued on or after March 13, 2001. (2) Debt instruments issued before March 13, 2001 . Except as provided in paragraph (f)(3) of this section, two or

more debt instruments are part of the same issue if the debt instruments—

(i) Have the same credit and payment terms;

(ii) Are sold reasonably close in time either pursuant to a common plan or as part of a single transaction or a series of related transactions; and

(iii) Are issued on or after April 4, 1994, and before March 13, 2001. (3) Transition rule . If the issue date of any of the debt instruments that would be part of the same issue (determined as if each debt instrument were part of a separate issue) is on or after March 13, 2001, then the definition of the term issue in paragraph (f)(1) of this section applies rather than the definition in paragraph (f)(2) of this section to determine if the debt instruments are part of the same issue.

(4) Cross-references for reopening and aggregation rules . See §1.1275–2(d) and (k) for rules that treat debt instruments issued in certain reopenings as part of an issue of original (outstanding) debt instruments. See §1.1275–2(c) for rules that treat two or more debt instruments as a single debt instrument.

Par. 5. In §1.1275–2, paragraph (d) is revised and paragraph (k) is added to read as follows:

§1.1275–2 Special rules relating to debt instruments.

(d) Special rules for Treasury securi- ties —(1) Issue price and issue date . The issue price of an issue of Treasury securities is the average price of the securities sold. The issue date of an issue of Treasury securities is the first settlement date on which a substantial amount of the securities in the issue is sold. For an issue of Treasury securities sold from November 1, 1998, to March 13, 2001, the issue price of the issue is the price of the securities sold at auction.

(2) Reopenings of Treasury securities —(i) Treatment of additional Treasury securities . Notwithstanding §1.1275–1(f), additional Treasury securities issued in a qualified reopening are part of the same issue as the original Treasury securities. As a result, the additional Treasury securities have the same issue price, issue date, and (with respect to

holders) the same adjusted issue price as the original Treasury securities. This paragraph (d)(2) applies to qualified reopenings that occur on or after March 25, 1992. (ii) Definitions —(A) Additional Trea- sury securities . Additional Treasury securities are Treasury securities with terms that are in all respects identical to the terms of the original Treasury securities.

(B) Original Treasury securities . Original Treasury securities are securities comprising any issue of outstanding Treasury securities.

(C) Qualified reopening—reopenings on or after March 13, 2001 . For a reopening of Treasury securities that occurs on or after March 13, 2001, a qualified reopening is a reopening that occurs not more than one year after the original Treasury securities were first issued to the public or, under paragraph (k)(3)(iii) of this section, a reopening in which the additional Treasury securities are issued with no more than a de minimis amount of OID.

(D) Qualified reopening—reopenings before March 13, 2001 . For a reopening of Treasury securities that occurs before March 13, 2001, a qualified reopening is a reopening that occurs not more than one year after the original Treasury securities were first issued to the public. However, for a reopening of Treasury securities (other than Treasury Inflation-Indexed Securities) that occurred prior to November 5, 1999, a qualified reopening is a reopening of Treasury securities that satisfied the preceding sentence and that was intended to alleviate an acute, protracted shortage of the original Treasury securities.

(k) Reopenings —(1) In general . Notwithstanding §1.1275–1(f), additional debt instruments issued in a qualified reopening are part of the same issue as the original debt instruments. As a result, the additional debt instruments have the same issue date, the same issue price, and (with respect to holders) the same adjusted issue price as the original debt instruments.

(2) Definitions —(i) Original debt in- struments . Original debt instruments are debt instruments comprising any single issue of outstanding debt instruments. For purposes of determining whether a particu

2001–12 I.R.B. 909 March 19, 2001

lar reopening is a qualified reopening, debt instruments issued in prior qualified reopenings are treated as original debt instruments and debt instruments issued in the particular reopening are not so treated.

(ii) Additional debt instruments . Additional debt instruments are debt instruments that, without the application of this paragraph (k)—

(A) Are part of a single issue of debt instruments;

(B) Are not part of the same issue as the original debt instruments; and

(C) Have terms that are in all respects identical to the terms of the original debt instruments as of the reopening date.

(iii) Reopening date . The reopening date is the issue date of the additional debt instruments (determined without the application of this paragraph (k)).

(iv) Announcement date . The announcement date is the later of seven days before the date on which the price of the additional debt instruments is established or the date on which the issuer’s intent to reopen a security is publicly announced through one or more media, including an announcement reported on the standard electronic news services used by security broker-dealers (for example, Reuters, Telerate, or Bloomberg).

(3) Qualified reopening —(i) Definition . A qualified reopening is a reopening of original debt instruments that is described in paragraph (k)(3)(ii) or (iii) of this section. In addition, see paragraph (d)(2) of this section to determine if a reopening of Treasury securities is a qualified reopening.

(ii) Reopening within six months . A reopening is described in this paragraph (k)(3)(ii) if—

(A) The original debt instruments are publicly traded (within the meaning of §1.1273–2(f));

(B) The reopening date of the additional debt instruments is not more than six months after the issue date of the original debt instruments; and

(C) On the date on which the price of the additional debt instruments is established (or, if earlier, the announcement date), the yield of the original debt instruments (based on their fair market value) is not more than 110 percent of the yield of the original debt instruments on their issue date (or, if the original debt instruments were issued with no more than a de minimis amount of OID, the coupon rate).

(iii) Reopening with de minimis OID . A reopening (including a reopening of Treasury securities) is described in this paragraph (k)(3)(iii) if—

(A) The original debt instruments are publicly traded (within the meaning of §1.1273–2(f)); and

(B) The additional debt instruments are issued with no more than a de minimis amount of OID (determined without the application of this paragraph (k)).

(iv) Exceptions . This paragraph (k)(3) does not apply to a reopening of tax-exempt obligations (as defined in section 1275(a)(3)) or contingent payment debt instruments (within the meaning of §1.1275–4).

(4) Issuer’s treatment of a qualified re- opening . See §1.163–7(e) for the issuer’s treatment of the debt instruments that are part of a qualified reopening.

(5) Effective date . This paragraph (k) applies to debt instruments that are part of a reopening where the reopening date is on or after March 13, 2001.

§1.1275–2T [Removed]

Par. 6. Section 1.1275–2T is removed. Par. 7. In §1.1275–7, paragraph (g) is added to read as follows:

§1.1275–7 Inflation-indexed debt instruments.

(g) Reopenings . For rules concerning a reopening of Treasury Inflation-Indexed Securities, see paragraphs (d)(2) and (k)(3)(iii) of §1.1275–2.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved December 29, 2000.

Jonathan Talisman, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on January 11, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 12, 2001, 66 FR 2811)

Section 1281.—Current Inclusion in Income of Discount on Certain Short-Term Obligations

March 19, 2001 910 2001–12 I.R.B.