Bulletin No. 1996–29

Bulletin No. 1996–29

July 15, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be relied

upon as authoritative interpretations.

INCOME TAX

T.D. 8675, page 5.

Final regulations under section 1001 of the Code relate

to the modification of debt instruments.

EXEMPT ORGANIZATIONS

Announcement 96–63, page 18.

Internal Revenue Service processing of most information

and tax returns filed by tax-exempt organizations is

being centralized into the Ogden Service Center. The

announcement specifies the returns covered and the

timetable for the change.

Announcement 96–66, page 19.

A list is given of organizations now classified as private

foundations.

EMPLOYMENT TAX

Page 14.

Railroad retirement; rate determination; quarterly.

The Railroad Retirement Board has determined that the

rate of tax imposed by section 3221(c) of the Code shall

Finding Lists begin on page 24.

Announcement Relating to Court Decisions begins on page 4.

Announcement of Disbarments and Suspensions begins on page 21.

be thirty-four cents for the quarter beginning July 1,

1996.

ADMINISTRATIVE

Rev. Proc. 96–37, page 16.

Qualified mortgage bonds; mortgage credit certificates; national median gross income. Guidance is

provided concerning the use of the national and area

median gross income figures by issuers of qualified

mortgage bonds and mortgage credit certificates in

determining the housing cost/income ratio described in

section 143(f)(5) of the Code. Rev. Proc. 95–32 is

obsolete except as provided in section 5.02 of this

revenue procedure.

Announcement 96–64, page 18.

T.D. 8659, 1996–16 I.R.B. 4, relating to the taxes on

gasoline and diesel fuel, is corrected.

Announcement 96–65, page 18.

INTL–0054–95, 1996–14 I.R.B. 39, relating to the

determination of the interest expense deduction of

foreign corporations and the branch profits tax, is

corrected.

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,

court decisions, and other items of general interest. It is

published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin

contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a

single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory

requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

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

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

3

Announcement Relating to Court Decisions

It is the policy of the Internal Revenue Service to announce at an early

date whether it will follow the holdings

in certain cases. An Action on Decision

is the document making such an announcement. An Action on Decision will

be issued at the discretion of the Service

only on unappealed issues decided adverse to the government. Generally, an

Action on Decision is issued where its

guidance would be helpful to Service

personnel working with the same or

similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action

on Decision is not an affirmative statement of Service position. It is not

intended to serve as public guidance and

may not be cited as precedent.

Actions on Decisions shall be relied

upon within the Service only as conclusions applying the law to the facts in the

particular case at the time the Action on

Decision was issued. Caution should be

exercised in extending the recommendation of the Action on Decision to similar

cases where the facts are different.

Moreover, the recommendation in the

Action on Decision may be superseded

by new legislation, regulations, rulings,

cases, or Actions on Decisions.

Prior to 1991, the Service published

acquiescence or nonacquiescence only in

certain regular Tax Court opinions. The

Service has expanded its acquiescence

program to include other civil tax cases

where guidance is determined to be

helpful. Accordingly, the Service now

may acquiesce or nonacquiesce in the

holdings of memorandum Tax Court

opinions, as well as those of the United

States District Courts, Claims Court, and

Circuit Courts of Appeal. Regardless of

the court deciding the case, the recommendation of any Action on Decision

will be published in the Internal Revenue Bulletin.

The recommendation in every Action

on Decision will be summarized as

acquiescence, acquiescence in result

only, or nonacquiescence. Both ‘‘acquiescence’’ and ‘‘acquiescence in result

only’’ mean that the Service accepts the

holding of the court in a case and that

the Service will follow it in disposing of

cases with the same controlling facts.

However, ‘‘acquiescence’’ indicates neither approval nor disapproval of the

reasons assigned by the court for its

conclusions; whereas, ‘‘acquiescence in

result only’’ indicates disagreement or

concern with some or all of those

reasons. Nonacquiescence signifies that,

although no further review was sought,

the Service does not agree with the

holding of the court and, generally, will

not follow the decision in disposing of

cases involving other taxpayers. In reference to an opinion of a circuit court of

appeals, a nonacquiescence indicates

that the Service will not follow the

holding on a nationwide basis. However,

the Service will recognize the

precedential impact of the opinion on

cases arising within the venue of the

deciding circuit.

The announcements published in the

weekly Internal Revenue Bulletins are

consolidated semiannually and annually.

The semiannual consolidation appears in

the first Bulletin for July and in the

Cumulative Bulletin for the first half of

the year, and the annual consolidation

appears in the first Bulletin for the

following January and in the Cumulative

Bulletin for the last half of the year.

The Commissioner ACQUIESCES in

the following decisions:

Alan K. Lauckner v. United States,1

68 F.3d 69 (3d Cir. 1995)

Tele-Communications, Inc. v. Commissioner,2

12 F.3d 1005 (10th Cir. 1993)

William H. Murphy v. Commissioner,3

103 T.C. 111 (1994)

1

Acquiescence relating to whether assessments of

the trust fund recovery penalty (TFRP) under

section 6672 of the Code are subject to the 3-year

statute of limitations contained in section 6501(a)

of the Code.

4

Clack, Est. of v. Commissioner,4

106 T.C. 6 (1996)

Cristofani, Est. of Maria, Deceased,

Frank Cristofani, Executor v. Commissioner,5

97 T.C. 74 (1991)

The Commissioner does NOT ACQUIESCE in the following decisions:

Fisher v. Commissioner,6

45 F.3d 396 (10th Cir. 1995)

Richard L. and Fiona Simon v. Commissioner,7

68 F.3d 41 (2d Cir. 1995)

2

Acquiescence relating to whether cable television

franchises issued by local governments are franchises within the meaning of section 1253 of the

Code.

3

Acquiescence relating to whether the nonrecognition provision of section 1034 of the Code for a

divorced or separated taxpayer may compute the

gain on a jointly owned residence, by taking into

account only his or her allowable share of the

basis and net proceeds from the sale of the jointly

owned residence when the taxpayer’s former

spouse has not met the section 1034 requirements

for deferral.

4

Acquiescence in result relating to whether the

surviving spouse has a ‘‘qualifying income interest

for life’’ in property where (1) the extent of the

surviving spouse’s income interest is contingent on

the executor’s qualified terminable interest property (QTIP) election and where (2) any part (or

all) of the property for which QTIP treatment is

not elected will go to someone other than the

surviving spouse.

5

Acquiescence in result relating to whether transfers of property to a trust, whose contingent

remainder beneficiaries have the right to withdraw

an amount not exceeding the section 2503(b)

exclusion within 15 days following such transfers,

constitute gifts of present interests in property

within the meaning of section 2503(b) of the

Code.

6

Nonacquiescence relating to whether the United

States Court of Appeals for the Tenth Circuit erred

in determining that the Commissioner abused her

discretion by not waiving the substantial understatement additions to tax under section 6661(c) of

the Code.

7

Nonacquiescence relating to whether professional

musicians are entitled, under section 168 of the

Code, to depreciate their antique musical instruments used in their trade or business, notwithstanding that the instruments have no determinable

useful lives.

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

Section 25.—Interest on Certain

Home Mortgages

26 CFR 1.25-4T: Qualified mortgage credit certificate program (temporary).

Guidance is provided for the use of the national

and area median gross income figures by issuers

of qualified mortgage bonds and mortgage credit

certificates in determining the housing cost/income

ratio described in section 143(f)(5) of the Code.

See Rev. Proc. 96–37, page 16.

Section 103.—State and Local

Bonds

26 CFR 1.103-1: Interest upon obligations of a

State, Territory, etc.

Guidance is provided for the use of the national

and area median gross income figures by issuers

of qualified mortgage bonds and mortgage credit

certificates in determining the housing cost/income

ratio described in section 143(f)(5) of the Code.

See Rev. Proc. 96–37, page 16.

Section 143.—Mortgage Revenue

Bonds: Qualified Mortgage Bond

and Qualified Veterans’ Mortgage

Bond

26 CFR 6a.103A-2: Qualified mortgage bond.

Guidance is provided for the use of the national

and area median gross income figures by issuers

of qualified mortgage bonds and mortgage credit

certificates in determining the housing cost/income

ratio described in section 143(f)(5) of the Code.

See Rev. Proc. 96–37, page 16.

Section 1001.—Determination of

Amount of and Recognition of Gain

or Loss

26 CFR 1.1001–3: Modifications of debt instruments.

T.D. 8675

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

RIN 1545–AR04

Modifications of Debt Instruments

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to the modification of debt instruments. The regulations govern when a modification is

treated as an exchange of the original

debt instrument for a modified instrument. The regulations provide needed

guidance to issuers and holders of debt

instruments.

DATES: These regulations are effective

September 24, 1996.

For dates of applicability of these

regulations, see § 1.1001–3(h).

FOR FURTHER INFORMATION CONTACT: Thomas J. Kelly, (202) 622–

3930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 2, 1992, proposed

amendments to 26 CFR part 1 were

published in the Federal Register (57

FR 57034 [FI–31–92, 1992–2 C.B.

683]) to provide guidance under

§ 1.1001–3. The proposed regulations

relate to the modification of debt instruments. On February 17, 1993, the IRS

held a public hearing on the proposed

regulations. In addition, the IRS received numerous written comments on

the proposed regulations. The proposed

regulations, with certain changes made

in response to comments, are adopted in

this Treasury decision as final regulations. The principal changes to the regulations, as well as the major comments

and suggestions, are discussed below.

Explanation of Provisions

A. General

The preamble to the proposed regulations states that the proposed regulations

are intended to address the uncertainty

concerning when the modification of a

debt instrument results in a deemed

exchange of the old debt instrument for

a new instrument. Some of this uncertainty resulted from the possible impact

of the decision of the Supreme Court in

Cottage Savings Ass’n v. Commissioner,

499 U.S. 554 (1991). The preamble

invites comments with respect to

whether it is desirable to provide rules

for the modification of debt instruments

as well as comments with respect to

what those rules should be.

Although the IRS received many

comments on the proposed regulations,

relatively few commentators addressed

the question of whether regulations on

the modification of debt instruments are

desirable. A few commentators argued

against the promulgation of regulations

on this subject. A number of other

commentators were supportive of the

attempt to provide certainty through a

series of specific rules. Some commentators suggested that the regulations

5

adopt a facts and circumstances approach with safe harbors under which

certain modifications would not be

treated as exchanges. In contrast, other

commentators suggested using additional

bright-line rules to provide more certainty with respect to when a modification is, and is not, treated as an exchange of the old debt instrument for a

new instrument. Most commentators,

however, limited their comments to the

specific rules of the proposed regulations.

The IRS and Treasury considered

adopting a single, general rule instead of

several detailed rules. That approach,

while providing less guidance, would

have the advantage of reducing complexity and avoiding anomalies that can

result from bright- line rules (for example, different results for economically

similar transactions). Nevertheless, after

considering that approach the IRS and

Treasury concluded that both taxpayers

and the IRS would benefit from regulations specifically addressing the treatment of certain modifications. A debt

modification that results in an exchange

may have a variety of consequences,

and parties contemplating a change to a

debt instrument should be able to determine whether that change will result in

an exchange.

Accordingly, the final regulations retain the basic structure of the proposed

regulations. Thus, an alteration of the

terms of a debt instrument is first tested

to determine whether the alteration is a

‘‘modification.’’ If there is a modification, the modification is then tested to

determine whether it is a ‘‘significant

modification.’’ A significant modification results in an exchange of the original debt instrument for a modified instrument that differs materially either in

kind or in extent within the meaning of

§ 1.1001–1(a).

Although the final regulations generally follow the approach of the proposed

regulations, certain rules have been

added or modified to address a number

of issues noted by commentators. For

example, in one instance the final regulations provide a general rule with respect to a particular type of modification

together with a safe harbor for certain

changes that will not result in exchanges. In other instances, the final

regulations retain the bright-line approach of the proposed regulations. The

IRS and Treasury invite comments on

the operation of the final regulations and

will consider providing additional guidance as appropriate.

B. Other instruments

In the preamble to the proposed regulations, the IRS invites comments with

respect to whether the regulations

should be expanded to address modifications of financial instruments other than

debt instruments. In response, several

commentators argued that a dealer’s assignment of its position in an interest

rate swap contract or other notional

principal contract should not result in an

exchange under section 1001 for the

nonassigning counterparty. In response

to these comments, the IRS and Treasury are issuing proposed and temporary

regulations that provide a special rule

for dealer assignments of notional principal contracts. However, those temporary and proposed regulations and these

final regulations do not address whether

particular instruments are debt instruments for Federal income tax purposes.

With the exception of those temporary

and proposed regulations, the final regulations have not been expanded to cover

the modification of financial instruments

other than debt instruments. The modification of other instruments is less common than the modification of debt

instruments, and the rules for modifications of debt instruments would not

necessarily work well or be appropriate

in determining whether modifications of

other instruments result in exchanges

under section 1001. For equity instruments in particular, the IRS and Treasury believe that the application of certain rules in these regulations would be

inappropriate. Similarly, for contracts

that are not debt instruments, the final

regulations do not limit or otherwise

affect the application of the ‘‘fundamental change’’ concept articulated in Rev.

Rul. 90–109 (1990–2 C.B. 191), in

which the IRS concluded that the exercise by a life insurance policyholder of

an option to change the insured under

the policy changed ‘‘the fundamental

substance’’ of the contract, and thus was

a disposition under section 1001.

C. Modifications

The final regulations retain the general rule of the proposed regulations that

a modification includes any alteration of

a legal right or obligation of the issuer

or holder. The final regulations, however, do not adopt the rule of the

proposed regulations that a unilateral

waiver of a right that does not rise to

the level of a settlement of terms between the parties is not a modification

of the original instrument. Commentators noted that it often is impossible to

distinguish between a unilateral waiver

of a right and a workout agreed to by

the parties in which only the holder of

the instrument makes meaningful concessions. Moreover, in the case of a

prepayable debt instrument, the holder’s

waiver of rights may be an inducement

to the obligor not to terminate the debt

instrument.

In defining when an alteration is a

modification, the final regulations also

generally retain the rule that a change in

a term of a debt instrument that occurs

by operation of the terms of a debt

instrument is not a modification. A

change may occur by operation of the

terms of an instrument at a specified

time, as a result of a contingency specified in the instrument, or upon the

exercise of an option provided for in the

instrument to change a term.

The final regulations limit the application of the rule for changes that occur

by operation of the terms of a debt

instrument in three respects. First, the

final regulations retain the rule of the

proposed regulations that any alteration

that results in an instrument or property

right that is not debt for federal income

tax purposes is a modification, even if

the alteration occurs by operation of the

terms of the instrument (unless the alteration occurs pursuant to a holder’s option under the terms of the instrument to

convert the instrument into equity of the

issuer). Second, the final regulations

also provide that any alteration that

results in a substitution of a new obligor, the addition or deletion of a coobligor, or a change in the recourse

nature of an instrument is a modification. The IRS and Treasury believe that

these changes may be so fundamental

that they should be considered modifications even if they occur by operation of

the terms of an instrument. Thus, these

modifications always must be tested for

significance to determine whether they

result in exchanges.

Third, the final regulations provide

that alterations resulting from the exercise of either of two categories of

options are modifications. These two

categories of options are (i) those that

are not unilateral (defined essentially in

the same manner as in the proposed

regulations) and (ii) holder options the

exercise of which results in a deferral or

a reduction in any scheduled payment of

interest or principal. Because alterations

6

resulting from the exercise of such options typically involve either negotiations between an issuer and holder or a

workout, the IRS and Treasury believe it

is appropriate to treat them as modifications and test for significance. In this

regard, the rule for holder options resulting in deferrals or reductions of payments addresses more specifically the

concerns underlying the proposed regulations’ rule discussed above regarding

unilateral waivers that rise to the level

of a settlement of the terms.

Many commentators argued that the

proposed regulations are overly restrictive in recognizing only temporary nonperformance by the issuer and temporary waivers of default rights by holders

as not being modifications. In particular,

commentators expressed concern about

an example in the proposed regulations

that illustrates the temporary waiver rule

with a situation in which the waiver is

only for a 3-month period. The IRS and

Treasury recognize that parties may

need a period of time to modify the

terms of a debt instrument following an

issuer’s default and that a holder’s

waiver or nonenforcement of default

rights may not itself evidence an agreement with respect to new terms.

The final regulations respond to these

comments in two respects. First, the

regulations provide that nonperformance

by the issuer is not, in and of itself, a

modification. Second, the regulations

provide a limited exception to the rule

that a waiver of rights is a modification.

Under this exception, absent an actual

written or oral agreement by the issuer

and the holder to alter other terms of the

instrument, an agreement by the holder

to stay collection or temporarily waive

an acceleration clause or similar default

right is not a modification for a period

of two years following the issuer’s nonperformance, or for a longer period

(after the initial two-year period) during

which the parties conduct good faith

negotiations or during the pendency of

bankruptcy proceedings. Once the parties agree to new terms, however, there

is a modification of the instrument.

As under the proposed regulations, a

modification is tested when the parties

agree to a change even if the change is

not immediately effective, but the final

regulations add exceptions for a change

in a term that is agreed to by the parties

but is subject to reasonable closing

conditions or that occurs as a result of

bankruptcy proceedings. In these cases,

a modification occurs on the date the

change in the term becomes effective.

Thus, if the conditions do not occur

(and the change in the term does not

become effective), a modification does

not occur.

D. Significant modifications

The final regulations retain the structure of the proposed regulations for

determining whether a modification is

significant, but change a number of the

specific rules for particular types of

modifications. The final regulations also

add a new general rule for types of

modifications for which specific rules

are not provided. Under this general rule

(the general significance rule), a modification is significant if, based on all the

facts and circumstances, the legal rights

or obligations being changed and the

degree to which they are being changed

are economically significant. The general significance rule also applies to a

type of modification for which specific

rules are provided if the modification is

effective upon the occurrence of a substantial contingency. Moreover, the general significance rule will apply for

certain types of modifications that are

effective on a substantially deferred basis. When testing a modification under

the general significance rule, all modifications made to the instrument (other

than those for which specific bright-line

rules are provided) are considered collectively. Thus, a series of related modifications, each of which independently is

not significant under the general significance rule, may together constitute a

significant modification.

With the addition of the general significance rule, certain specific rules of

the proposed regulations have not been

included in the final regulations. For

example, under the proposed regulations, whether the addition or deletion of

a put or call right is a significant

modification depends on the value of

the put or call. The significance of an

alteration of a put or call right depends

on whether the alteration significantly

affects the value of the right. The proposed regulations provide similar rules

for the addition, deletion, or alteration

of a conversion or exchange right. Under the proposed regulations, certain

changes in the types of payments under

a debt instrument (for example, a

change from a fixed rate debt instrument

to a variable rate or contingent payment

debt instrument) are significant modifications. These rules have not been included in the final regulations because

the general significance rule provides

adequate guidance.

For changes in the yield of a debt

instrument, the final regulations provide

that a change in yield is significant if

the change exceeds the greater of 25

basis points or five percent of the

original yield on the instrument. This

rule was modified in response to comments that a change of more than 25

basis points should be permitted in the

case of debt instruments issued with

high interest rates. The final regulations

also limit this change-of-yield brightline rule to fixed rate and variable rate

debt instruments. Because of the difficulties in developing appropriate mechanisms for measuring changes in the

yield of other debt instruments (for

example, contingent payment debt instruments), the final regulations provide

that the significance of changes in the

yield of those other instruments is determined under the general significance

rule. The final regulations also incorporate other technical changes to clarify

the application of the change-in-yield

rules.

The final regulations do not adopt the

suggestion of some commentators that a

reduction in the principal amount of a

debt instrument should not be considered a modification. As under the proposed regulations, for purposes of determining if there is a significant

modification, the yield on the modified

instrument is computed by reference to

the adjusted issue price immediately

before the modification. A reduction in

principal reduces the total payments on

the modified instrument and often results in a significantly reduced yield on

the instrument. Thus, these rules give

the same weight to changes in the

principal amount as to changes in the

interest payments. The IRS and Treasury

believe that the tax consequences of a

change in the yield that results from a

change in the amounts payable should

not differ because of the characterization

of the payments that are reduced as

principal rather than interest.

For changes in the timing of payments (including any resulting change in

the amount of payments), the proposed

regulations contain a rule that an extension of the final maturity of an instrument for the lesser of five years or 50

percent of the original term of the

instrument is not a significant modification. Any other change in the timing of

payments is subject to two rules. Under

the first rule, any material deferral of

payments is a significant modification.

Under the second rule, any change in

terms designed to avoid the application

7

of the rules for original issue discount is

a significant modification. Commentators objected to both of these rules

because they do not provide bright-line

rules for determining whether a modification is significant. In addition, the

commentators argued that an example in

the proposed regulations that concerns

the deferral of interim payments is inconsistent with the rule for an extension

of final maturity.

The final regulations combine the

rules for extensions of final maturity

and other changes in the timing and/or

amounts of payments. While adopting

the material deferral rule generally, the

final regulations also allow the deferral

of payments within a safe-harbor period

(the lesser of five years or 50 percent of

the original term of the instrument) if

the deferred amounts are unconditionally

payable at the end of that period. The

final regulations do not contain the rule

that the Commissioner may treat any

deferral of payments made with a principal purpose of avoiding the time value

of money rules, including the rules for

original issue discount, as a significant

modification. The concerns addressed by

this rule in the proposed regulations

have been resolved in final regulations

recently issued under section 1275. See

§ 1.1275–2(j).

For a change in the obligor on an

instrument, the final regulations retain

the general rule in the proposed regulations that changing the obligor on a

recourse debt instrument is significant.

In addition to the exception for section

381(a) transactions in the proposed

regulations, the final regulations include

an exception for transactions in which

the new obligor acquires substantially

all of the assets of the original obligor.

Each exception must meet two requirements. First, other than the substitution

of a new obligor, the transaction must

not result in any alteration that would be

a significant modification but for the

fact that it occurs by operation of the

terms of the instrument. Second, the

transaction must not result in a change

in payment expectations. The final regulations also provide that the substitution

of a new obligor on a tax-exempt bond

is not a significant modification if the

new obligor is a related entity to the

original obligor and the collateral securing the instrument continues to include

the original collateral.

A change in payment expectations

occurs if there is a substantial enhancement or impairment of the obligor’s

capacity to meet its payment obligations

under the instrument and the enhancement or impairment results in a change

to an adequate capacity from a speculative capacity or vice versa. There is no

change in payment expectations, however, if the obligor has at least an

adequate capacity to meet its payment

obligations both before and after the

modification.

The final regulations also apply the

payment expectations test to determine

whether the addition or deletion of a

co-obligor is a significant modification.

Similarly, the final regulations provide

that whether certain other modifications

are significant is determined by reference to whether the modifications result

in a change in payment expectations.

Those modifications include (i) the release, substitution, or addition of collateral as security for a recourse debt, (ii)

the addition, deletion, or alteration of a

guarantee or other credit enhancement,

and (iii) a change in the priority of a

debt instrument. As under the proposed

regulations, a modification that releases,

substitutes, or adds a substantial amount

of collateral as security for a

nonrecourse debt instrument is a significant modification.

A number of commentators raised

questions regarding the circumstances

under which the modification of a debt

instrument will require a determination

of whether the modified instrument is

debt or equity. Many expressed concern

that a deterioration in the financial condition of the issuer between the date of

original issuance and the date of the

modification could lead to a determination that the modified instrument is not

debt for tax purposes. The final regulations address this concern by providing

a rule that for purposes of this regulation, unless there is a substitution of a

new obligor, any deterioration in the

financial condition of the issuer is not

considered in determining whether the

modified instrument is properly characterized as debt.

The final regulations also modify the

rules pertaining to the significance of

changes in the method under which

payments are calculated. The proposed

regulations provide that a modification

is significant if it results in a change

between the categories of fixed rate,

variable rate, and contingent payment

instruments or if it changes the currency

in which payment under the debt instrument is made. The Treasury and the IRS

determined that such an approach was

both too broad and too narrow (i.e.,

certain changes involving economically

insignificant adjustments would be characterized as significant, while other

more economically dramatic changes

would not be characterized as significant). Accordingly, the final regulations

do not provide any bright-line rules so

that the significance of any change in

the method under which payments are

calculated is determined under the general significance rule.

The final regulations adopt the rule of

the proposed regulations that a change

in the recourse nature of an instrument

is a significant modification, but limit

this specific rule to changes from substantially all recourse to substantially all

nonrecourse, or vice versa. If an instrument is not substantially all recourse or

not substantially all nonrecourse either

before or after a modification, the significance of the modification is determined under the general significance

rule. The final regulations also provide

two exceptions. First, a modification

that changes a recourse debt instrument

to a nonrecourse debt instrument is not

a significant modification if the instrument continues to be secured only by

the original collateral and the modification does not result in a change in

payment expectations. Second, a

defeasance of a tax-exempt bond permitted by the terms of the instrument

generally is not a significant modification.

E. Rules of application

The rules of application in the final

regulations are similar to those in the

proposed regulations. In general, the

final regulations treat a series of

changes of an instrument over time as a

single change. To avoid the need to

retain information for all modifications

that affect yield over the life of the debt

instrument, however, the final regulations add a rule that, for changes in the

yield, modifications occurring more than

five years earlier are disregarded.

The final regulations do not adopt the

suggestion of commentators that the

rules in § 1.1001–3 should not apply to

tax-exempt bonds. These commentators

stated that, as a result of an intervening

change in the Internal Revenue Code

(Code) or regulations, a significant

modification could result in bonds that

were tax-exempt when issued ceasing to

be tax-exempt bonds. Because many

changes in the Code and regulations

have been made applicable to refunding

bonds, it is appropriate that changes to

outstanding tax-exempt bonds that are,

in substance, the equivalent of refund-

8

ings be treated as such. The IRS and

Treasury believe that the standards used

under § 1.1001–3 generally are appropriate for this purpose.

In response to other comments, a

number of changes have been made to

better coordinate the final regulations

with municipal financing practices. The

regulations clarify that state and local

bonds (other than those financing conduit loans) are treated as recourse obligations for purposes of determining

whether a modification is significant.

State and local bonds financing conduit

loans are nonrecourse only if there is no

recourse to either the actual issuer or the

conduit borrower. In the case of bonds

financing conduit loans, the final regulations clarify that the obligor of a taxexempt bond is the entity that issues the

bond and not the conduit borrower. The

regulations note, however, that a transaction between a holder of a tax-exempt

bond and a conduit borrower may result

in an indirect modification of the taxexempt bond.

F. Other matters

The preamble to the proposed regulations indicates that Notice 88–130

(1988–2 C.B. 543), which provides special rules for qualified tender bonds, will

continue to apply. The final regulations

continue this approach, and thus do not

apply for purposes of determining

whether tax-exempt bonds that are

qualified tender bonds are reissued for

purposes of sections 103 and 141

through 150. The IRS and Treasury are

reviewing the rules of Notice 88–130

and intend to issue proposed regulations

on this subject under section 150. When

the final regulations are issued under

section 150, the exclusion for qualified

tender bonds in § 1.1001–3 will be

revised or eliminated as appropriate.

Also, as noted in the preamble to the

proposed regulations, a modification of

a debt instrument that results in an

exchange under section 1001 does not

determine if there has been an exchange

or other disposition of an installment

obligation under section 453B. Whether

or not there has been an exchange or

other disposition of an installment obligation is determined under the cases and

rulings applicable to section 453B. Similarly, the fact that an alteration does not

constitute a modification or a significant

modification does not preclude other tax

consequences.

Simultaneously with the issuance of

these final regulations, the IRS and

Treasury are issuing temporary and pro-

posed regulations under section 166.

Those regulations allow taxpayers, in

certain limited situations, to claim a

deduction for a partially worthless debt

when the terms of a debt instrument are

modified. Commentators on the proposed regulations noted that section 166

permits a deduction for a partially

worthless debt only in the year that the

taxpayer makes a partial charge-off for

book accounting purposes. A significant

modification of a debt instrument that

has been partially charged off may result

in the recognition of gain and an increased tax basis in the instrument.

Because the book charge-off is not reversed, however, the taxpayer cannot

take another charge-off, and thus the

taxpayer cannot meet the requirement

for a deduction for a partially worthless

debt under section 166. In this situation,

the temporary and proposed regulations

deem the charge-off to have occurred at

the time of the significant modification

if certain requirements are met.

Effective Dates

The final regulation applies to alterations of the terms of a debt instrument

on or after September 24, 1996. Taxpayers, however, may rely on this section

for alterations of the terms of a debt

instrument after December 2, 1992, and

before September 24, 1996.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 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) and

the Regulatory Flexibility Act (5 U.S.C.

chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant

to section 7805(f) of the Internal Revenue Code, the notice of proposed

rulemaking preceding these regulations

was submitted to the Small Business

Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Thomas J. Kelly, Office of

Assistant Chief Counsel (Financial Institutions & Products), IRS. However,

other personnel from the IRS and the

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 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1001–3 is added to

read as follows:

§ 1.1001–3 Modifications of debt instruments.

(a) Scope—(1) In general. This section provides rules for determining

whether a modification of the terms of a

debt instrument results in an exchange

for purposes of § 1.1001–1(a). This section applies to any modification of a

debt instrument, regardless of the form

of the modification. For example, this

section applies to an exchange of a new

instrument for an existing debt instrument, or to an amendment of an existing

debt instrument. This section also applies to a modification of a debt instrument that the issuer and holder accomplish indirectly through one or more

transactions with third parties. This section, however, does not apply to exchanges of debt instruments between

holders.

(2) Qualified tender bonds. This section does not apply for purposes of

determining whether tax-exempt bonds

that are qualified tender bonds are reissued for purposes of sections 103 and

141 through 150.

(b) General rule. For purposes of

§ 1.1001–1(a), a significant modification of a debt instrument, within the

meaning of this section, results in an

exchange of the original debt instrument

for a modified instrument that differs

materially either in kind or in extent. A

modification that is not a significant

modification is not an exchange for

purposes of § 1.1001–1(a). Paragraphs

(c) and (d) of this section define the

term modification and contain examples

illustrating the application of the rule.

Paragraphs (e) and (f) of this section

provide rules for determining when a

modification is a significant modification. Paragraph (g) of this section contains examples illustrating the application of the rules in paragraphs (e) and

(f) of this section.

(c) Modification defined—(1) In general—(i) Alteration of terms. A modification means any alteration, including

9

any deletion or addition, in whole or in

part, of a legal right or obligation of the

issuer or a holder of a debt instrument,

whether the alteration is evidenced by

an express agreement (oral or written),

conduct of the parties, or otherwise.

(ii) Alterations occurring by operation of the terms of a debt instrument.

Except as provided in paragraph (c)(2)

of this section, an alteration of a legal

right or obligation that occurs by operation of the terms of a debt instrument is

not a modification. An alteration that

occurs by operation of the terms may

occur automatically (for example, an

annual resetting of the interest rate

based on the value of an index or a

specified increase in the interest rate if

the value of the collateral declines from

a specified level) or may occur as a

result of the exercise of an option

provided to an issuer or a holder to

change a term of a debt instrument.

(2) Exceptions. The alterations described in this paragraph (c)(2) are

modifications, even if the alterations

occur by operation of the terms of a

debt instrument.

(i) Change in obligor or nature of

instrument. An alteration that results in

the substitution of a new obligor, the

addition or deletion of a co-obligor, or a

change (in whole or in part) in the

recourse nature of the instrument (from

recourse to nonrecourse or from

nonrecourse to recourse) is a modification.

(ii) Property that is not debt. An

alteration that results in an instrument or

property right that is not debt for federal

income tax purposes is a modification

unless the alteration occurs pursuant to a

holder’s option under the terms of the

instrument to convert the instrument into

equity of the issuer (notwithstanding

paragraph (c)(2)(iii) of this section).

(iii) Certain alterations resulting from

the exercise of an option. An alteration

that results from the exercise of an

option provided to an issuer or a holder

to change a term of a debt instrument is

a modification unless—

(A) The option is unilateral (as defined in paragraph (c)(3) of this section); and

(B) In the case of an option exercisable by a holder, the exercise of the

option does not result in (or, in the case

of a variable or contingent payment, is

not reasonably expected to result in) a

deferral of, or a reduction in, any scheduled payment of interest or principal.

(3) Unilateral option. For purposes of

this section, an option is unilateral only

if, under the terms of an instrument or

under applicable law—

(i) There does not exist at the time

the option is exercised, or as a result of

the exercise, a right of the other party to

alter or terminate the instrument or put

the instrument to a person who is related (within the meaning of section

267(b) or section 707(b)(1)) to the issuer;

(ii) The exercise of the option does

not require the consent or approval of—

(A) The other party;

(B) A person who is related to that

party (within the meaning of section

267(b) or section 707(b)(1)), whether or

not that person is a party to the instrument; or

(C) A court or arbitrator; and

(iii) The exercise of the option does

not require consideration (other than

incidental costs and expenses relating to

the exercise of the option), unless, on

the issue date of the instrument, the

consideration is a de minimis amount, a

specified amount, or an amount that is

based on a formula that uses objective

financial information (as defined in

§ 1.446–3(c)(4)(ii))/

(4) Failure to perform—(i) In general. The failure of an issuer to perform

its obligations under a debt instrument is

not itself an alteration of a legal right or

obligation and is not a modification.

(ii) Holder’s temporary forbearance.

Notwithstanding paragraph (c)(1) of this

section, absent a written or oral agreement to alter other terms of the debt

instrument, an agreement by the holder

to stay collection or temporarily waive

an acceleration clause or similar default

right (including such a waiver following

the exercise of a right to demand payment in full) is not a modification

unless and until the forbearance remains

in effect for a period that exceeds—

(A) Two years following the issuer’s

initial failure to perform; and

(B) Any additional period during

which the parties conduct good faith

negotiations or during which the issuer

is in a title 11 or similar case (as

defined in section 368(a)(3)(A)).

(5) Failure to exercise an option. If a

party to a debt instrument has an option

to change a term of an instrument, the

failure of the party to exercise that

option is not a modification.

(6) Time of modification—(i) In general. Except as provided in this paragraph (c)(6), an agreement to change a

term of a debt instrument is a modification at the time the issuer and holder

enter into the agreement, even if the

change in the term is not immediately

effective.

(ii) Closing conditions. If the parties

condition a change in a term of a debt

instrument on reasonable closing conditions (for example, shareholder, regulatory, or senior creditor approval, or

additional financing), a modification occurs on the closing date of the agreement. Thus, if the reasonable closing

conditions do not occur so that the

change in the term does not become

effective, a modification does not occur.

(iii) Bankruptcy proceedings. If a

change in a term of a debt instrument

occurs pursuant to a plan of reorganization in a title 11 or similar case (within

the meaning of section 368(a)(3)(A)), a

modification occurs upon the effective

date of the plan. Thus, unless the plan

becomes effective, a modification does

not occur.

(d) Examples. The following examples illustrate the provisions of paragraph (c) of this section:

Example 1. Reset bond. A bond provides for the

interest rate to be reset every 49 days through an

auction by a remarketing agent. The reset of the

interest rate occurs by operation of the terms of

the bond and is not an alteration described in

paragraph (c)(2) of this section. Thus, the reset of

the interest rate is not a modification.

Example 2. Obligation to maintain collateral.

The original terms of a bond provide that the bond

must be secured by a certain type of collateral

having a specified value. The terms also require

the issuer to substitute collateral if the value of the

original collateral decreases. Any substitution of

collateral that is required to maintain the value of

the collateral occurs by operation of the terms of

the bond and is not an alteration described in

paragraph (c)(2) of this section. Thus, such a

substitution of collateral is not a modification.

Example 3. Alteration contingent on an act of a

party. The original terms of a bond provide that

the interest rate is 9 percent. The terms also

provide that, if the issuer files an effective registration statement covering the bonds with the

Securities and Exchange Commission, the interest

rate will decrease to 8 percent. If the issuer

registers the bond, the resulting decrease in the

interest rate occurs by operation of the terms of

the bond and is not an alteration described in

paragraph (c)(2) of this section. Thus, such a

decrease in the interest rate is not a modification.

Example 4. Substitution of a new obligor occurring by operation of the terms of the debt

instrument. Under the original terms of a bond

issued by a corporation, an acquirer of substantially all of the corporation’s assets may assume

the corporation’s obligations under the bond. Substantially all of the corporation’s assets are acquired by another corporation and the acquiring

corporation becomes the new obligor on the bond.

Under paragraph (c)(2)(i) of this section, the

substitution of a new obligor, even though it

occurs by operation of the terms of the bond, is a

modification.

Example 5. Defeasance with release of covenants. (i) A corporation issues a 30-year, recourse

bond. Under the terms of the bond, the corporation

10

may secure a release of the financial and restrictive covenants by placing in trust government

securities as collateral that will provide interest

and principal payments sufficient to satisfy all

scheduled payments on the bond. The corporation

remains obligated for all payments, including the

contribution of additional securities to the trust if

necessary to provide sufficient amounts to satisfy

the payment obligations. Under paragraph (c)(3) of

this section, the option to defease the bond is a

unilateral option.

(ii) The alterations occur by operation of the

terms of the debt instrument and are not described

in paragraph (c)(2) of this section. Thus, such a

release of the covenants is not a modification.

Example 6. Legal defeasance. Under the terms

of a recourse bond, the issuer may secure a release

of the financial and restrictive covenants by placing in trust government securities that will provide

interest and principal payments sufficient to satisfy

all scheduled payments on the bond. Upon the

creation of the trust, the issuer is released from

any recourse liability on the bond and has no

obligation to contribute additional securities to the

trust if the trust funds are not sufficient to satisfy

the scheduled payments on the bond. The release

of the issuer is an alteration described in paragraph (c)(2)(i) of this section, and thus is a

modification.

Example 7. Exercise of an option by a holder

that reduces amounts payable. (i) A financial

institution holds a residential mortgage. Under the

original terms of the mortgage, the financial

institution has an option to decrease the interest

rate. The financial institution anticipates that, if

market interest rates decline, it may exercise this

option in lieu of the mortgagor refinancing with

another lender.

(ii) The financial institution exercises the option

to reduce the interest rate. The exercise of the

option results in a reduction in scheduled payments and is an alteration described in paragraph

(c)(2)(iii) of this section. Thus, the change in

interest rate is a modification.

Example 8. Conversion of adjustable rate to

fixed rate mortgage. (i) The original terms of a

mortgage provide for a variable interest rate, reset

annually based on the value of an objective index.

Under the terms of the mortgage, the mortgagor

may, upon the payment of a fee equal to a

specified percentage of the outstanding principal

amount of the mortgage, convert to a fixed rate of

interest as determined based on the value of a

second objective index. The exercise of the option

does not require the consent or approval of any

person or create a right of the holder to alter the

terms of, or to put, the instrument.

(ii) Because the required consideration to exercise the option is a specified amount fixed on the

issue date, the exercise of the option is unilateral

as defined in paragraph (c)(3) of this section. The

conversion to a fixed rate of interest is not an

alteration described in paragraph (c)(2) of this

section. Thus, the change in the type of interest

rate occurs by operation of the terms of the

instrument and is not a modification.

Example 9. Holder’s option to increase interest

rate. (i) A corporation issues an 8-year note to a

bank in exchange for cash. Under the terms of the

note, the bank has the option to increase the rate

of interest by a specified amount upon a certain

decline in the corporation’s credit rating. The

bank’s right to increase the interest rate is a

unilateral option as described in paragraph (c)(3)

of this section.

(ii) The credit rating of the corporation declines

below the specified level. The bank exercises its

option to increase the rate of interest. The increase

in the rate of interest occurs by operation of the

terms of the note and does not result in a deferral

or a reduction in the scheduled payments or any

other alteration described in paragraph (c)(2) of

this section. Thus, the change in interest rate is not

a modification.

Example 10. Issuer’s right to defer payment of

interest. A corporation issues a 5-year note. Under

the terms of the note, interest is payable annually

at the rate of 10 percent. The corporation, however, has an option to defer any payment of

interest until maturity. For any payments that are

deferred, interest will compound at a rate of 12

percent. The exercise of the option, which results

in the deferral of payments, does not result from

the exercise of an option by the holder. The

exercise of the option occurs by operation of the

terms of the debt instrument and is not a modification.

Example 11. Holder’s option to grant deferral of

payment. (i) A corporation issues a 10-year note to

a bank in exchange for cash. Interest on the note

is payable semi-annually. Under the terms of the

note, the bank may grant the corporation the right

to defer all or part of the interest payments. For

any payments that are deferred, interest will

compound at a rate 150 basis points greater than

the stated rate of interest.

(ii) The corporation encounters financial difficulty and is unable to satisfy its obligations under

the note. The bank exercises its option under the

note and grants the corporation the right to defer

payments. The exercise of the option results in a

right of the corporation to defer scheduled payments and, under paragraph (c)(3)(i) of this section, is not a unilateral option. Thus, the alteration

is described in paragraph (c)(2)(iii) of this section

and is a modification.

Example 12. Alteration requiring consent. The

original terms of a bond include a provision that

the issuer may extend the maturity of the bond

with the consent of the holder. Because any

extension pursuant to this term requires the consent of both parties, such an extension does not

occur by the exercise of a unilateral option (as

defined in paragraph (c)(3) of this section) and is

a modification.

Example 13. Waiver of an acceleration clause.

Under the terms of a bond, if the issuer fails to

make a scheduled payment, the full principal

amount of the bond is due and payable immediately. Following the issuer’s failure to make a

scheduled payment, the holder temporarily waives

its right to receive the full principal for a period

ending one year from the date of the issuer’s

default to allow the issuer to obtain additional

financial resources. Under paragraph (c)(4)(ii) of

this section, the temporary waiver in this situation

is not a modification. The result would be the

same if the terms provided the holder with the

right to demand the full principal amount upon the

failure of the issuer to make a scheduled payment

and, upon such a failure, the holder exercised that

right and then waived the right to receive the

payment for one year.

(e) Significant modifications. Whether

the modification of a debt instrument is

a significant modification is determined

under the rules of this paragraph (e).

Paragraph (e)(1) of this section provides

a general rule for determining the significance of modifications not otherwise

addressed in this paragraph (e). Paragraphs (e)(2) through (6) of this section

provide specific rules for determining

the significance of certain types of

modifications. Paragraph (f) of this section provides rules of application, including rules for modifications that are

effective on a deferred basis or upon the

occurrence of a contingency.

(1) General rule. Except as otherwise

provided in paragraphs (e)(2) through

(e)(6) of this section, a modification is a

significant modification only if, based

on all facts and circumstances, the legal

rights or obligations that are altered and

the degree to which they are altered are

economically significant. In making a

determination under this paragraph

(e)(1), all modifications to the debt

instrument (other than modifications

subject to paragraphs (e)(2) through (6)

of this section) are considered collectively, so that a series of such modifications may be significant when considered

together

although

each

modification, if considered alone, would

not be significant.

(2) Change in yield—(i) Scope of

rule. This paragraph (e)(2) applies to

debt instruments that provide for only

fixed payments, debt instruments with

alternative payment schedules subject to

§ 1.1272–1(c), debt instruments that

provide for a fixed yield subject to

§ 1.1272–1(d) (such as certain demand

loans), and variable rate debt instruments. Whether a change in the yield of

other debt instruments (for example, a

contingent payment debt instrument) is a

significant modification is determined

under paragraph (e)(1) of this section.

(ii) In general. A change in the yield

of a debt instrument is a significant

modification if the yield computed under paragraph (e)(2)(iii) of this section

varies from the annual yield on the

unmodified instrument (determined as of

the date of the modification) by more

than the greater of—

(A) ¼ of one percent (25 basis

points); or

(B) 5 percent of the annual yield of

the unmodified instrument (.05 x annual

yield).

(iii) Yield of the modified instrument—(A) In general. The yield computed under this paragraph (e)(2)(iii) is

the annual yield of a debt instrument

with—

(1) an issue price equal to the adjusted issue price of the unmodified

instrument on the date of the modification (increased by any accrued but unpaid interest and decreased by any accrued bond issuance premium not yet

taken into account, and increased or

decreased, respectively, to reflect pay-

11

ments made to the issuer or to the

holder as consideration for the modification); and

(2) payments equal to the payments

on the modified debt instrument from

the date of the modification.

(B) Prepayment penalty. For purposes

of this paragraph (e)(2)(iii), a commercially reasonable prepayment penalty for

a pro rata prepayment (as defined in

§ 1.1275–2(f)) is not consideration for a

modification of a debt instrument and is

not taken into account in determining

the yield of the modified instrument.

(iv) Variable rate debt instruments.

For purposes of this paragraph (e)(2),

the annual yield of a variable rate debt

instrument is the annual yield of the

equivalent fixed rate debt instrument (as

defined in § 1.1275–5(e)) which is constructed based on the terms of the

instrument (either modified or unmodified, whichever is applicable) as of the

date of the modification.

(3) Changes in timing of payments—

(i) In general. A modification that

changes the timing of payments (including any resulting change in the amount

of payments) due under a debt instrument is a significant modification if it

results in the material deferral of scheduled payments. The deferral may occur

either through an extension of the final

maturity date of an instrument or

through a deferral of payments due prior

to maturity. The materiality of the deferral depends on all the facts and circumstances, including the length of the

deferral, the original term of the instrument, the amounts of the payments that

are deferred, and the time period between the modification and the actual

deferral of payments.

(ii) Safe-harbor period. The deferral

of one or more scheduled payments

within the safe-harbor period is not a

material deferral if the deferred payments are unconditionally payable no

later than at the end of the safe-harbor

period. The safe-harbor period begins on

the original due date of the first scheduled payment that is deferred and extends for a period equal to the lesser of

five years or 50 percent of the original

term of the instrument. For purposes of

this paragraph (e)(3)(ii), the term of an

instrument is determined without regard

to any option to extend the original

maturity and deferrals of de minimis

payments are ignored. If the period

during which payments are deferred is

less than the full safe-harbor period, the

unused portion of the period remains a

safe-harbor period for any subsequent

deferral of payments on the instrument.

(4) Change in obligor or security—

(i) Substitution of a new obligor on

recourse debt instruments—(A) In general. Except as provided in paragraph

(e)(4)(i)(B), (C), or (D) of this section,

the substitution of a new obligor on a

recourse debt instrument is a significant

modification.

(B) Section 381(a) transaction. The

substitution of a new obligor is not a

significant modification if the acquiring

corporation (within the meaning of section 381) becomes the new obligor

pursuant to a transaction to which section 381(a) applies, the transaction does

not result in a change in payment expectations, and the transaction (other than a

reorganization within the meaning of

section 368(a)(1)(F)) does not result in a

significant alteration.

(C) Certain asset acquisitions. The

substitution of a new obligor is not a

significant modification if the new obligor acquires substantially all of the

assets of the original obligor, the transaction does not result in a change in

payment expectations, and the transaction does not result in a significant

alteration.

(D) Tax-exempt bonds. The substitution of a new obligor on a tax-exempt

bond is not a significant modification if

the new obligor is a related entity to the

original obligor as defined in section

168(h)(4)(A) and the collateral securing

the instrument continues to include the

original collateral.

(E) Significant alteration. For purposes of this paragraph (e)(4), a significant alteration is an alteration that

would be a significant modification but

for the fact that the alteration occurs by

operation of the terms of the instrument.

(F) Section 338 election. For purposes of this section, an election under

section 338 following a qualified stock

purchase of an issuer’s stock does not

result in the substitution of a new

obligor.

(G) Bankruptcy proceedings. For purposes of this section, the filing of a

petition in a title 11 or similar case (as

defined in section 368(a)(3)(A)) by itself

does not result in the substitution of a

new obligor.

(ii) Substitution of a new obligor on

nonrecourse debt instruments. The substitution of a new obligor on a

nonrecourse debt instrument is not a

significant modification.

(iii) Addition or deletion of coobligor. The addition or deletion of a

co-obligor on a debt instrument is a

significant modification if the addition

or deletion of the co-obligor results in a

change in payment expectations. If the

addition or deletion of a co-obligor is

part of a transaction or series of related

transactions that results in the substitution of a new obligor, however, the

transaction is treated as a substitution of

a new obligor (and is tested under

paragraph (e)(4)(i)) of this section rather

than as an addition or deletion of a

co-obligor.

(iv) Change in security or credit enhancement—(A) Recourse debt instruments. A modification that releases, substitutes, adds or otherwise alters the

collateral for, a guarantee on, or other

form of credit enhancement for a recourse debt instrument is a significant

modification if the modification results

in a change in payment expectations.

(B) Nonrecourse debt instruments. A

modification that releases, substitutes,

adds or otherwise alters a substantial

amount of the collateral for, a guarantee

on, or other form of credit enhancement

for a nonrecourse debt instrument is a

significant modification. A substitution

of collateral is not a significant modification, however, if the collateral is

fungible or otherwise of a type where

the particular units pledged are unimportant (for example, government securities

or financial instruments of a particular

type and rating). In addition, the substitution of a similar commercially available credit enhancement contract is not

a significant modification, and an improvement to the property securing a

nonrecourse debt instrument does not

result in a significant modification.

(v) Change in priority of debt. A

change in the priority of a debt instrument relative to other debt of the issuer

is a significant modification if it results

in a change in payment expectations.

(vi) Change in payment expectations—(A) In general. For purposes of

this section, a change in payment expectations occurs if, as a result of a transaction—

(1) There is a substantial enhancement of the obligor’s capacity to meet

the payment obligations under a debt

instrument and that capacity was primarily speculative prior to the modification

and is adequate after the modification; or

(2) There is a substantial impairment

of the obligor’s capacity to meet the

payment obligations under a debt instrument and that capacity was adequate

prior to the modification and is primarily speculative after the modification.

12

(B) Obligor’s capacity. The obligor’s

capacity includes any source for payment, including collateral, guarantees, or

other credit enhancement.

(5) Changes in the nature of a debt

instrument—(i) Property that is not

debt. A modification of a debt instrument that results in an instrument or

property right that is not debt for federal

income tax purposes is a significant

modification. For purposes of this paragraph (e)(5)(i), any deterioration in the

financial condition of the obligor between the issue date of the unmodified

instrument and the date of modification

(as it relates to the obligor’s ability to

repay the debt) is not taken into account

unless, in connection with the modification, there is a substitution of a new

obligor or the addition or deletion of a

co-obligor.

(ii) Change in recourse nature—(A)

In general. Except as provided in paragraph (e)(5)(ii)(B) of this section, a

change in the nature of a debt instrument from recourse (or substantially all

recourse) to nonrecourse (or substantially all nonrecourse) is a significant

modification. Thus, for example, a legal

defeasance of a debt instrument in

which the issuer is released from all

liability to make payments on the debt

instrument (including an obligation to

contribute additional securities to a trust

if necessary to provide sufficient funds

to meet all scheduled payments on the

instrument) is a significant modification.

Similarly, a change in the nature of the

debt instrument from nonrecourse (or

substantially all nonrecourse) to recourse

(or substantially all recourse) is a significant modification. If an instrument is

not substantially all recourse or not

substantially all nonrecourse either before or after a modification, the significance of the modification is determined

under paragraph (e)(1) of this section.

(B) Exceptions—(1) Defeasance of

tax-exempt bonds. A defeasance of a

tax-exempt bond is not a significant

modification even if the issuer is released

from any liability to make payments

under the instrument if the defeasance

occurs by operation of the terms of the

original bond and the issuer places in

trust government securities or tax-exempt

government bonds that are reasonably

expected to provide interest and principal

payments sufficient to satisfy the payment obligations under the bond.

(2) Original collateral. A modification that changes a recourse debt instrument to a nonrecourse debt instrument is

not a significant modification if the

instrument continues to be secured only

by the original collateral and the modification does not result in a change in

payment expectations. For this purpose,

if the original collateral is fungible or

otherwise of a type where the particular

units pledged are unimportant (for example, government securities or financial instruments of a particular type and

rating), replacement of some or all units

of the original collateral with other units

of the same or similar type and aggregate value is not considered a change in

the original collateral.

(6) Accounting or financial covenants. A modification that adds, deletes, or alters customary accounting or

financial covenants is not a significant

modification.

(f) Rules of application—(1) Testing

for significance—(A) In general.

Whether a modification of any term is a

significant modification is determined

under each applicable rule in paragraphs

(e)(2) through (6) of this section and, if

not specifically addressed in those rules,

under the general rule in paragraph

(e)(1) of this section. For example, a

deferral of payments that changes the

yield of a fixed rate debt instrument

must be tested under both paragraphs

(e)(2) and (3) of this section.

(B) Contingent modifications. If a

modification described in paragraphs

(e)(2) through (5) of this section is

effective only upon the occurrence of a

substantial contingency, whether or not

the change is a significant modification

is determined under paragraph (e)(1) of

this section rather than under paragraphs

(e)(2) through (5) of this section.

(C) Deferred modifications. If a

modification described in paragraphs

(e)(4) and (5) of this section is effective

on a substantially deferred basis,

whether or not the change is a significant modification is determined under

paragraph (e)(1) of this section rather

than under paragraphs (e)(4) and (5) of

this section.

(2) Modifications that are not significant. If a rule in paragraphs (e)(2)

through (4) of this section prescribes a

degree of change in a term of a debt

instrument that is a significant modification, a change of the same type but of a

lesser degree is not a significant modification under that rule. For example, a

20 basis point change in the yield of a

fixed rate debt instrument is not a

significant modification under paragraph

(e)(2) of this section. Likewise, if a rule

in paragraph (e)(4) of this section requires a change in payment expectations

for a modification to be significant, a

modification of the same type that does

not result in a change in payment expectations is not a significant modification

under that rule.

(3) Cumulative effect of modifications. Two or more modifications of a

debt instrument over any period of time

constitute a significant modification if,

had they been done as a single change,

the change would have resulted in a

significant modification under paragraph

(e) of this section. Thus, for example, a

series of changes in the maturity of a

debt instrument constitutes a significant

modification if, combined as a single

change, the change would have resulted

in a significant modification. The significant modification occurs at the time

that the cumulative modification would

be significant under paragraph (e) of

this section. In testing for a change of

yield under paragraph (e)(2) of this

section, however, any prior modification

occurring more than 5 years before the

date of the modification being tested is

disregarded.

(4) Modifications of different terms.

Modifications of different terms of a

debt instrument, none of which separately would be a significant modification under paragraphs (e)(2) through (6)

of this section, do not collectively constitute a significant modification. For

example, a change in yield that is not a

significant modification under paragraph

(e)(2) of this section and a substitution

of collateral that is not a significant

modification under paragraph (e)(4)(iv)

of this section do not together result in a

significant modification. Although the

significance of each modification is determined independently, in testing a particular modification it is assumed that

all other simultaneous modifications

have already occurred.

(5) Definitions. For purposes of this

section:

(i) Issuer and obligor are used interchangeably and mean the issuer of a

debt instrument or a successor obligor.

(ii) Variable rate debt instrument and

contingent payment debt instrument

have the meanings given those terms in

section 1275 and the regulations thereunder.

(iii) Tax-exempt bond means a state

or local bond that satisfies the requirements of section 103(a).

(iv) Conduit loan and conduit borrower have the same meanings as in

§ 1.150–1(b).

(6) Certain rules for tax-exempt

bonds—(i) Conduit loans. For purposes

13

of this section, the obligor of a taxexempt bond is the entity that actually

issues the bond and not a conduit borrower of bond proceeds. In determining

whether there is a significant modification of a tax-exempt bond, however,

transactions between holders of the taxexempt bond and a borrower of a conduit loan may be an indirect modification under paragraph (a)(1) of this

section. For example, a payment by the

holder of a tax-exempt bond to a conduit borrower to waive a call right may

result in an indirect modification of the

tax-exempt bond by changing the yield

on that bond.

(ii) Recourse nature—(A) In general.

For purposes of this section, a taxexempt bond that does not finance a

conduit loan is a recourse debt instrument.

(B) Proceeds used for conduit loans.

For purposes of this section, a taxexempt bond that finances a conduit

loan is a recourse debt instrument unless

both the bond and the conduit loan are

nonrecourse instruments.

(C) Government securities as collateral. Notwithstanding paragraphs

(f)(6)(ii)(A) and (B) of this section, for

purposes of this section a tax-exempt

bond that is secured only by a trust

holding government securities or taxexempt government bonds that are reasonably expected to provide interest and

principal payments sufficient to satisfy

the payment obligations under the bond

is a nonrecourse instrument.

(g) Examples. The following examples illustrate the provisions of paragraphs (e) and (f) of this section:

Example 1. Modification of call right. (i) Under

the terms of a 30-year, fixed-rate bond, the issuer

can call the bond for 102 percent of par at the end

of ten years or for 101 percent of par at the end of

20 years. At the end of the eighth year, the holder

of the bond pays the issuer to waive the issuer’s

right to call the bond at the end of the tenth year.

On the date of the modification, the issuer’s credit

rating is approximately the same as when the bond

was issued, but market rates of interest have

declined from that date.

(ii) The holder’s payment to the issuer changes

the yield on the bond. Whether the change in yield

is a significant modification depends on whether

the yield on the modified bond varies from the

yield on the original bond by more than the

change in yield as described in paragraph (e)(2)(ii)

of this section.

(iii) If the change in yield is not a significant

modification, the elimination of the issuer’s call

right must also be tested for significance. Because

the specific rules of paragraphs (e)(2) through

(e)(6) of this section do not address this modification, the significance of the modification must be

determined under the general rule of paragraph

(e)(1) of this section.

Example 2. Extension of maturity and change in

yield. (i) A zero-coupon bond has an original

maturity of ten years. At the end of the fifth year,

the parties agree to extend the maturity for a

period of two years without increasing the stated

redemption price at maturity (i.e., there are no

additional payments due between the original and

extended maturity dates, and the amount due at

the extended maturity date is equal to the amount

due at the original maturity date).

(ii) The deferral of the scheduled payment at

maturity is tested under paragraph (e)(3) of this

section. The safe-harbor period under paragraph

(e)(3)(ii) of this section starts with the date the

payment that is being deferred is due. For this

modification, the safe-harbor period starts on the

original maturity date, and ends five years from

this date. All payments deferred within this period

are unconditionally payable before the end of the

safe-harbor period. Thus, the deferral of the payment at maturity for a period of two years is not a

material deferral under the safe-harbor rule of

paragraph (e)(3)(ii) of this section and thus is not

a significant modification.

(iii) Even though the extension of maturity is

not a significant modification under paragraph

(e)(3)(ii) of this section, the modification also

decreases the yield of the bond. The change in

yield must be tested under paragraph (e)(2) of this

section.

Example 3. Change in yield resulting from

reduction of principal. (i) A debt instrument issued

at par has an original maturity of ten years and

provides for the payment of $100,000 at maturity

with interest payments at the rate of 10 percent

payable at the end of each year. At the end of the

fifth year, and after the annual payment of interest,

the issuer and holder agree to reduce the amount

payable at maturity to $80,000. The annual interest

rate remains at 10 percent but is payable on the

reduced principal.

(ii) In applying the change in yield rule of

paragraph (e)(2) of this section, the yield of the

instrument after the modification (measured from

the date that the parties agree to the modification

to its final maturity date) is computed using the

adjusted issue price of $100,000. With four annual

payments of $8,000, and a payment of $88,000 at

maturity, the yield on the instrument after the

modification for purposes of determining if there

has been a significant modification under paragraph (e)(2)(i) of this section is 4.332 percent.

Thus, the reduction in principal is a significant

modification.

Example 4. Deferral of scheduled interest payments. (i) A 20-year debt instrument issued at par

provides for the payment of $100,000 at maturity

with annual interest payments at the rate of 10

percent. At the beginning of the eleventh year, the

issuer and holder agree to defer all remaining

interest payments until maturity with compounding. The yield of the modified instrument remains

at 10 percent.

(ii) The safe-harbor period of paragraph

(e)(3)(ii) of this section begins at the end of the

eleventh year, when the interest payment for that

year is deferred, and ends at the end of the

sixteenth year. However, the payments deferred

during this period are not unconditionally payable

by the end of that 5-year period. Thus, the deferral

of the interest payments is not within the safeharbor period.

(iii) This modification materially defers the

payments due under the instrument and is a

significant modification under paragraph (e)(3)(i)

of this section.

Example 5. Assumption of mortgage with increase in interest rate. (i) A recourse debt instrument with a 9 percent annual yield is secured by

an office building. Under the terms of the instru-

ment, a purchaser of the building may assume the

debt and be substituted for the original obligor if

the purchaser has a specified credit rating and if

the interest rate on the instrument is increased by

one-half percent (50 basis points). The building is

sold, the purchaser assumes the debt, and the

interest rate increases by 50 basis points.

(ii) If the purchaser’s acquisition of the building

does not satisfy the requirements of paragraphs

(e)(4)(i)(B) or (C) of this section, the substitution

of the purchaser as the obligor is a significant

modification under paragraph (e)(4)(i)(A) of this

section.

(iii) If the purchaser acquires substantially all of

the assets of the original obligor, the assumption

of the debt instrument will not result in a significant modification if there is not a change in

payment expectations and the assumption does not

result in a significant alteration.

(iv) The change in the interest rate, if tested

under the rules of paragraph (e)(2) of this section,

would result in a significant modification. The

change in interest rate that results from the

transaction is a significant alteration. Thus, the

transaction does not meet the requirements of

paragraph (e)(4)(i)(E) of this section and is a

significant modification under paragraph

(e)(4)(i)(A) of this section.

Example 6. Assumption of mortgage. (i) A

recourse debt instrument is secured by a building.

In connection with the sale of the building, the

purchaser of the building assumes the debt and is

substituted as the new obligor on the debt instrument. The purchaser does not acquire substantially

all of the assets of the original obligor.

(ii) The transaction does not satisfy any of the

exceptions set forth in paragraph (e)(4)(i)(B) or

(C) of this section. Thus, the substitution of the

purchaser as the obligor is a significant modification under paragraph (e)(4)(i)(A) of this section.

(iii) Section 1274(c)(4), however, provides that

if a debt instrument is assumed in connection with

the sale or exchange of property, the assumption is

not taken into account in determining if section

1274 applies to the debt instrument unless the

terms and conditions of the debt instrument are

modified in connection with the sale or exchange.

Because the purchaser assumed the debt instrument in connection with the sale of property and

the debt instrument was not otherwise modified,

the debt instrument is not retested to determine

whether it provides for adequate stated interest.

Example 7. Substitution of a new obligor in

section 381(a) transaction. (i) The interest rate on

a 30-year debt instrument issued by a corporation

provides for a variable rate of interest that is reset

annually on June 1st based on an objective index.

(ii) In the tenth year, the issuer merges (in a

transaction to which section 381(a) applies) into

another corporation that becomes the new obligor

on the debt instrument. The merger occurs on June

1st, at which time the interest rate is also reset by

operation of the terms of the instrument. The new

interest rate varies from the previous interest rate

by more than the greater of 25 basis points and 5

percent of the annual yield of the unmodified

instrument. The substitution of a new obligor does

not result in a change in payment expectations.

(iii) The substitution of the new obligor occurs

in a section 381(a) transaction and does not result

in a change in payment expectations. Although the

interest rate changed by more than the greater of

25 basis points and 5 percent of the annual yield

of the unmodified instrument, this alteration did

not occur as a result of the transaction and is not a

significant alteration under paragraph (e)(4)(i)(E)

of this section. Thus, the substitution meets the

14

requirements of paragraph (e)(4)(i)(B) of this

section and is not a significant modification.

Example 8. Substitution of credit enhancement

contract. (i) Under the terms of a recourse debt

instrument, the issuer’s obligations are secured by

a letter of credit from a specified bank. The debt

instrument does not contain any provision allowing a substitution of a letter of credit from a

different bank. The specified bank, however, encounters financial difficulty and rating agencies

lower its credit rating. The issuer and holder agree

that the issuer will substitute a letter of credit from

another bank with a higher credit rating.

(ii) Under paragraph (e)(4)(iv)(A) of this section, the substitution of a different credit enhancement contract is not a significant modification of a

recourse debt instrument unless the substitution

results in a change in payment expectations. While

the substitution of a new letter of credit by a bank

with a higher credit rating does not itself result in

a change in payment expectations, such a substitution may result in a change in payment expectations under certain circumstances (for example, if

the obligor’s capacity to meet payment obligations

is dependent on the letter of credit and the

substitution substantially enhances that capacity

from primarily speculative to adequate).

Example 9. Improvement to collateral securing

nonrecourse debt. A parcel of land and its improvements, a shopping center, secure a

nonrecourse debt instrument. The obligor expands

the shopping center with the construction of an

additional building on the same parcel of land.

After the construction, the improvements that

secure the nonrecourse debt include the new

building. The building is an improvement to the

property securing the nonrecourse debt instrument

and its inclusion in the collateral securing the debt

is not a significant modification under paragraph

(e)(4)(iv)(B) of this section.

(h) Effective date. This section applies to alterations of the terms of a debt

instrument on or after September 24,

1996. Taxpayers, however, may rely on

this section for alterations of the terms

of a debt instrument after December 2,

1992, and before September 24, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Leslie Samuels,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

June 25, 1996, 8:45 a.m., and published in the

issue of the Federal Register for June 26, 1996, 61

F.R. 32926)

Section 3221.—Rate of Tax

Determination of Quarterly Rate of

Excise Tax for Railroad Retirement

Supplemental Annuity Program

In accordance with directions in Section 3221(c) of the Railroad Retirement

Tax Act (26 U.S.C. 3221(c)), the Railroad Retirement Board has determined

that the excise tax imposed by such

Section 3221(c) on every employer, with

respect to having individuals in his

employ, for each work-hour for which

compensation is paid by such employer

for services rendered to him during the

quarter beginning July 1, 1996, shall be

at the rate of 34 cents.

In accordance with directions in Section 15(a) of the Railroad Retirement Act

of 1974, the Railroad Retirement Board

has determined that for the quarter beginning July 1, 1996, 33.4 percent of the

taxes collected under Sections 3211(b)

and 3221(c) of the Railroad Retirement

Tax Act shall be credited to the Railroad

Retirement Account and 66.6 percent of

the taxes collected under such Sections

3211(b) and 3221(c) plus 100 percent of

the taxes collected under Section 3221(d)

of the Railroad Retirement Tax Act shall

15

be credited to the Railroad Retirement

Supplemental Account.

Dated May 29, 1996.

Beatrice Ezerski,

Secretary to the Board.

(Filed by the Office of the Federal Register on

June 5, 1996, 8:45 a.m., and published in the issue

of the Federal Register for June 6, 1996, 61 F.R.

28911)

Part III . Administrative, Procedural, and Miscellaneous

26 CFR 601.201: Rulings and determination

letters.

(Also Part I, Sections 25, 103, 143; 1.25–4T,

1.103–1, 6a.103A–2.)

Rev. Proc. 96–37

SECTION 1. PURPOSE

This revenue procedure provides

guidance concerning the United States

and area median gross income figures

that are to be used by issuers of qualified mortgage bonds, as defined in

§ 143(a) of the Internal Revenue Code,

and issuers of mortgage credit certificates, as defined in § 25(c), in computing the housing cost/income ratio described in § 143(f)(5).

SECTION 2. BACKGROUND

.01 Section 103(a) provides that, except as provided in § 103(b), gross

income does not include interest on any

state or local bond. Section 103(b)(1)

provides that § 103(a) shall not apply to

any private activity bond that is not a

‘‘qualified bond’’ within the meaning of

§ 141. Section 141(e) provides that the

term ‘‘qualified bond’’ includes any private activity bond that (1) is a qualified

mortgage bond, (2) meets the volume

cap requirements under § 146, and (3)

meets the applicable requirements under

§ 147.

.02 Section 143(a)(1) provides that

the term ‘‘qualified mortgage bond’’

means a bond that is issued as part of a

‘‘qualified mortgage issue’’. Section

143(a)(2)(A) provides that the term

‘‘qualified mortgage issue’’ means an

issue of one or more bonds by a state or

political subdivision thereof, but only if

(i) all proceeds of the issue (exclusive

of issuance costs and a reasonably required reserve) are to be used to finance

owner- occupied residences; (ii) the issue meets the requirements of subsections (c),(d),(e),(f),(g),(h),(i), and (m)(7)

of § 143; (iii) the issue does not meet

the private business tests of paragraphs

(1) and (2) of § 141(b); and (iv) with

respect to amounts received more than

10 years after the date of issuance,

repayments of $250,000 or more of

principal on financing provided by the

issue are used not later than the close of

the first semi-annual period beginning

after the date the prepayment (or complete repayment) is received to redeem

bonds that are part of the issue.

.03 Section 143(f) imposes eligibility

requirements concerning the maximum

income of mortgagors for whom financ-

ing may be provided by qualified mortgage bonds. Section 25(c)(2)(A)(iii)(IV)

provides that recipients of mortgage

credit certificates must meet the income

requirements of § 143(f). Generally, under § § 143(f)(1) and 25(c)(2)(A)(iii)(IV), these income requirements are met

only if all owner-financing under a

qualified mortgage bond and all certified

indebtedness amounts under a mortgage

credit certificate program are provided

to mortgagors whose family income is

115 percent or less of the applicable

median

family

income.

Under

§ 143(f)(6), the income limitation is

reduced to 100 percent of the applicable

median family income if there are fewer

than three individuals in the family of

the mortgagor.

.04 Section 143(f)(4) provides that

the term ‘‘applicable median family income’’ means the greater of (A) the area

median gross income for the area in

which the residence is located or (B) the

statewide median gross income for the

state in which the residence is located.

.05 Section 143(f)(5) provides for an

upward adjustment of the income limitations in certain high housing cost areas.

Under § 143(f)(5)(C), a high housing

cost area is a statistical area for which

the housing cost/income ratio is greater

than 1.2. The housing cost/income ratio

is determined under § 143(f)(5)(D) by

dividing (a) the applicable housing price

ratio by (b) the ratio that the area

median gross income bears to the median gross income for the United States.

The applicable housing price ratio is the

new housing price ratio (new housing

average purchase price for the area

divided by the new housing average

purchase price for the United States) or

the existing housing price ratio (existing

housing average area purchase price

divided by the existing housing average

purchase price for the United States),

whichever results in the housing cost/

income ratio being closer to 1. This

income adjustment applies only to bonds

issued and nonissued bond amounts

elected after December 31, 1988.

.06 The Department of Housing and

Urban Development (HUD) has computed the median gross income for the

United States, the states, and statistical

areas within the states. The income

information was released to the HUD

regional offices on December 14, 1995,

and may be obtained by calling the

HUD reference service at 1–800–245–

2691, or, in the Washington, D.C., area,

16

at 301–251–5154. The Internal Revenue

Service annually publishes only the median gross income for the United States.

.07 The most recent nationwide average purchase prices and average area

purchase price safe harbor limitations

were published on September 6, 1994,

in Rev. Proc. 94–55, 1994–2 C.B. 716.

SECTION 3. APPLICATION

.01 When computing the housing

cost/income ratio under § 143(f)(5), issuers of qualified mortgage bonds and

mortgage credit certificates must use

$41,600 as the median gross income for

the United States. See section 2.06 of

this revenue procedure.

.02 When computing the housing

cost/income ratio under § 143(f)(5), issuers of qualified mortgage bonds and

mortgage credit certificates must use the

area median gross income figures released by HUD on December 14, 1995.

See section 2.06 of this revenue procedure.

SECTION 4. EFFECT ON OTHER

REVENUE PROCEDURES

.01 Rev. Proc. 95–32, 1995–28 I.R.B.

6, is obsolete except as provided in

section 5.02 of this revenue procedure.

.02 This revenue procedure does not

affect the effective date provisions of

Rev. Rul. 86–124, 1986–2 C.B. 27.

Those effective date provisions will remain operative at least until the Service

publishes a new revenue ruling that

conforms the approach to effective dates

set forth in Rev. Rul. 86–124 to the

general approach taken in this revenue

procedure.

SECTION 5. EFFECTIVE DATES

.01 Issuers must use the United States

and area median gross income figures

specified in section 3 of this revenue

procedure for commitments to provide

financing that are made, or (if the

purchase precedes the financing commitment) for residences that are purchased,

in the period that begins on December

14, 1995, the date HUD released the

income figures, and ends on the date

when these United States and area median gross income figures are rendered

obsolete by a new revenue procedure.

.02 Notwithstanding section 5.01 of

this revenue procedure, issuers may continue to rely on the United States and

area median gross income figures specified in Rev. Proc. 95–32 with respect to

bonds originally sold and nonissued

bond amounts elected not later than

August 14, if the commitments or purchases described in section 5.01 are

made not later than October 14, 1996.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Patricia M. Monahan of

the Office of Assistant Chief Counsel

17

(Financial Institutions and Products).

For further information regarding this

revenue procedure contact Ms.

Monahan on (202) 622–3219 (not a

toll-free call).

Part IV. Items of General Interest

Processing of Returns Filed by

Exempt Organizations to be

Centralized in the Ogden Service

Center

Announcement 96–63

Internal Revenue Service return processing of information and tax returns

filed by tax-exempt organizations is being centralized into the Ogden Service

Center. The centralization will be in two

stages. Beginning July 1, 1996, the

Ogden Service Center will assume the

responsibility for processing exempt organization returns normally filed in the

Fresno and Cincinnati Service Centers.

Also beginning July 1, 1996, the Ogden

Service Center will assume responsibility for printing and monitoring the

Supplemental Group Ruling Information

listings, which are sent to parent organizations to assist them in notifying the

Service of changes to their subordinate

groups as required by Revenue Procedure 80–27, 1980–1 C.B. 677.

Beginning January 1, 1997, the

Ogden Service Center will assume the

responsibility for processing exempt organization returns normally filed in all

other service centers. The forms that are

being centralized in the Ogden Service

Center are Form 990, Form 990–C,

Form 990–EZ, Form 990–PF, Form

990–T, Form 1041–A, Form 4720, Form

5227, Form 5578, and Form 5768.

Forms 990–BL and 6069 will continue to be filed and processed in the

Cincinnati Service Center. Any form not

listed above should be filed at the

service center listed in the form’s instruction as the appropriate service center for the area in which the exempt

organization is located.

Exempt organizations that normally

file any of the covered forms at the

Fresno or Cincinnati Service Centers

should, though they are not required to,

file at the Ogden Service Center beginning July 1, 1996, using the following

address: Internal Revenue Service,

Ogden, UT 84201. Exempt organization

returns that are filed at the Fresno or

Cincinnati Service Centers between July

1, 1996, and January 1, 1997, will be

forwarded to the Ogden Service Center.

Exempt organization forms and instructions will contain the new submission

address when the 1996 editions of the

forms and instructions are printed.

1996–29

I.R.B.

The principal author of this announcement is Thomas J. Miller of the Exempt

Organizations Division, Projects Branch

1. For further information regarding this

announcement contact Mr. Miller on

(202) 622–7867 (not a toll-free call).

Gasoline and Diesel Fuel Excise

Tax; Registration Requirements;

Correction

Announcement 96–64

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document contains

corrections to final regulations (TD

8659 [1996–16 I.R.B. 4]) which were

published in the Federal Register for

Thursday, March 14, 1996 (61 FR

10450). The final regulations relate to

the taxes on gasoline and diesel fuel

reflecting and implementing certain

changes made by the Omnibus Budget

Reconciliation Act of 1993.

EFFECTIVE DATE: March 14, 1996.

FOR FURTHER INFORMATION

CONTACT: Frank Boland (202) 622–

3130 (not a toll-free number).

(Filed by the Office of the Federal Register on

June 3, 1996, 8:45 a.m., and published in the issue

of the Federal Register for June 4, 1996, 61 F.R.

28053)

Proposed Amendments to the

Regulations on the Determination

of Interest Expense Deduction of

Foreign Corporations and Branch

Profits Tax; Correction

Announcement 96–65

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking.

SUMMARY: This document contains a

correction to the notice of proposed

rulemaking (INTL–0054–95 [1996–14

I.R.B. 39]) which was published in the

Federal Register for Friday, March 8,

1996 (61 FR 9377). The notice of

proposed rulemaking relate to the determination of the interest expense deduction of foreign corporations, and the

branch profits tax.

FOR FURTHER INFORMATION

CONTACT: Ahmad Pirasteh or Richard

Hoge (202) 622–3870 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

SUPPLEMENTARY INFORMATION:

Background

Background

The notice of proposed rulemaking

that is subject to these corrections are

under sections 882 and 884 of the

Internal Revenue Code.

The final regulations that are subject

to these corrections are under sections

4081 and 4101 of the Internal Revenue

Code.

Need for Correction

As published, [TD 8659] contains

errors that are in need of clarification.

Correction of Publication

Accordingly, the publication of final

regulations which are the subject of FR

Doc. 96–5586 is corrected as follows:

§ 48.4101–1 [Corrected]

On page 10460, column 2, paragraph

(f)(3)(ii)(D), lines 4 and 5 are corrected

by merging the two lines to read ‘‘paragraph (j) of this section, without regard

to’’.

Cynthia E. Grigsby,

Chief, Regulations Unit

Assistant Chief Counsel (Corporate).

18

Need for Correction

As published, the proposed rulemaking contains errors that are in need of

clarification.

Correction of Publication

Accordingly, the publication of the

proposed rulemaking which is the subject of FR Doc. 96–5264 is corrected as

follows:

1. On page 9378, in the preamble

under column 2, following the paragraph

heading ‘‘B. Hedging transactions’’, line

6, the language ‘‘case may be, the

amount of their U.S.’’ is corrected to

read ‘‘case may be, the amount of its

U.S.’’.

§ 1.882–5 [Corrected]

2. On page 9379, column 3,

§ 1.882–5 (d)(6), Example 4.(i), line 18,

the language ‘‘liabilities of 90x U.S.

dollars and 1000 x’’ is corrected to read

‘‘liabilities of 90x U.S. dollars and

1000x’’.

§ 1.884–1 [Corrected]

3. On page 9380, column 3,

§ 1.884–1 (d)(2)(xi), Example 8., last

line, the language ‘‘from securities) of

the value of the securities.’’ is corrected

to read ‘‘from securities) of the amount

of the securities.’’.

Cynthia E. Grigsby,

Chief, Regulations Unit

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

June 3, 1996, 8:45 a.m., and published in the issue

of the Federal Register for June 4, 1996, 61 F.R.

28118)

Foundations Status of Certain

Organizations

Announcement 96–66

The following organizations have

failed to establish or have been unable

to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not,

after this date, rely on previous rulings

or designations in the Cumulative List

of Organizations (Publication 78), or on

the presumption arising from the filing

of notices under section 508(b) of the

Code. This listing does not indicate that

the organizations have lost their status

as organizations described in section

501(c)(3), eligible to receive deductible

contributions.

Former Public Charities. The following organizations (which have been

treated as organizations that are not

private foundations described in section

509(a) of the Code) are now classified

as private foundations:

Alternatives for Area Youth, P.O. Box

571, Manistee, MI

American Friends of Machon Hasbara,

940 Leader Bldg., Cleveland, OH

Awakenings, Inc., Southgate, MI

Blanchester Friends Housing, Inc.,

Wilmington, OH

Christian Koinonia, Inc., Miami, FL

Chrysalis Systems, Inc., Oakland, MI

City Lutherans in Action, Chicago, IL

Clinton County Family Resource Center,

Inc., Saint John, MI

Columbus Metro Soccer Association,

Dublin, OH

Covenant Blu Community Development,

St. Louis, MO

Dentistry for Friends in Need Inc.,

Beavercreek, OH

Euclid Black Caucus, Euclid, OH

Family Planning Council of Nebraska,

Inc., Grand Island, NE

Fayette County Drug Alliance Families

in Action Inc., Somerville, TN

Fighting Chance for Children Inc.,

Omaha, NE

Flint Police Athletic League (PAL),

Flint, MI

Forty for the Future Inc., Research Triangle Park, NC

Friends of David Walker Inc.,

Wilmington, NC

Gastonia Sister Cities Committee Inc.,

Gastonia, NC

Gentry High School Academic Booster

Club, Gentry, AR

Great Lakes Aquarium & Research Center Inc., Muskegon, MI

Greater Atlanta Billy Graham Crusade

Inc., Atlanta, GA

Greater Mount Airy Emergency Rescue

Squad Inc., Mount Airy, NC

Greater White Stone Missionary Baptist

Church Fdn Inc., Memphis, TN

Gresham Environmental Center Inc.,

Knoxville, TN

Hamilton County Leadership Academy

Inc., Carmel, IN

Heavens Grocery Store Inc., Lithonia,

GA

Hiwassee Dam Eagle Booster Club,

Murphy, NC

Holland Village, Inc., Jersey City, NJ

Hopkinsville Christian Cty Youth

League, Inc., Hopkinsville, KY

HOW Inc., Toledo, OH

Howard University Alumni AssociationAtlanta Club, Atlanta, GA

Human Growth Corporation, Nashville,

TN

International Photographic Arts Foundation Inc., Camden, ME

Iowa Education Coalition, Newton, IA

Johnston County Finance Corp.,

Smithfield, NC

Kentuckians for Informed Decisions,

Inc., Frankfort, KY

Kentucky World Organization of China

Painters, Inc., Nicholasville, KY

Kids for Progress Inc., Mobile, AL

Kimberly House, High Point, NC

Lawrence Kiwanis Sunrise Inc. Scholarship Foundation, Lawrence, IN

Learning Care, Inc., Lansing, MI

Life Management Inc., Cleveland, TN

Lonesome Pine Special Trail Corp,

Bristol, VA

LSAA, Marquette, MI

Marcel Moyse Society Inc., Baltimore,

MD

19

Massillon ASA Girls Softball Association, Massillon, OH

Matawan-Aberdeen Baseball League,

Matawan, NJ

Memorial Day Weekend Salute to Veterans Celebration, Columbia, MO

Mental Health Programs Inc. VII, Cambridge, MA

Miracle on Caney Creek, Inc., Lexington, KY

Montgomery Area Sports Hall of Fame

Inc., Montgomery, AL

Mount Zion Institute for New Growth,

Lansing, MI

Mountain View Parent Teacher Organization PTO, Morganton, NC

Muncie Urban Enterprises Assocation,

Inc., Muncie, IN

Nashville Waldorf Assoc., Nashville, TN

Neuse River Community Development

Corp Inc., New Bern, NC

New Charlotte Corp., Charlotte, NC

New Horizons of Tennessee, Nashville,

TN

New Writers Forum Inc., Lexington

Park, MD

North Carolina Assoc. of Colleges and

Universities Inc., Greensboro, NC

North Rowan High Booster Club, Spencer, NC

Nova Vida, Inc., Charlotte, MI

Oxford Area Foundation for the Enhancement of Public Education, Oxford, MI

Ozark Depot Area Museum Inc.,

Charleston, AR

Options for Community Living,

Kalamazoo, MI

Page Band Boosters Inc., Greensboro,

NC

Paradigm Counseling Center of West

Michigan, Inc., Manistee, MI

Partners in Parenting, Oxford, NC

Patton Homes, Inc., Grosse Pointe, MI

Plainfield Pee-Wee Association, Inc.,

Plainfield, IN

Professional Medical Education Assocation, Inc., Grove City, OH

Project Outreach of Cumberland County

Inc., Crossville, TN

Prophetic Christian Ministries Association, Inc., Toledo, OH

Quail Unlimited Inc., Laurinburg, NC

Raintree Home, Inc., Canton, MI

Raishis Chochma, Lakewood, NJ

Recovery Systems Inc., Chattanooga,

TN

Rhode Island AFC Inc., Detroit, MI

Richmond County Health Foundation

Inc., Rockingham, NC

Robert P. Kellam Scholarship Foundation Inc., Owings Mills, MD

Rotary Club of Effingham Foundation

Inc., Rincon, GA

1996–29

I.R.B.

Saint Luke Outreach Inc., Laurinburg,

NC

S C O G Child Development Center,

Chicago, IL

Scouts Center, Inc., Converse, IN

Shoreview Arden Hills Loins Club

School District 621 Fdtn, Fridley, MN

Sociedad Biblica De Puerto Rico E Islas

Virgenes Inc., Bayamon, PR

Southern Michigan Association for the

Education Of Young Children, Jackson, MI

SRI-Lanka Ranga Kala Kavaya, Washington, DC

Steps to Potentials, Ludington, MI

1996–29

I.R.B.

Stone Creek Ministries, Creal Springs,

IL

Teamster Retiree Housing of St. Louis,

Inc., Beachwood, OH

Tiffin Area Babe Ruth League, Inc.,

Tiffin, OH

Time Corners Optimist Foundation of

Fort Wayne Indiana, Inc., Fort Wayne,

IN

Vegan Action Incorporated, Madison,

WI

War Cloud—Lone Wolf Foundation,

Inc., Cleveland, OH

We Care Network, Inc., Columbus, OH

Whitely Productions Inc., Mentor, OH

20

If an organization listed above submits information that warrants the renewal of its classification as a public

charity or as a private operating foundation, the Internal Revenue Service will

issue a ruling or determination letter

with the revised classification as to

foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

Announcement of the Disbarment, Suspension, and Consent to Voluntary

Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and

Enrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent or enrolled

actuary, in order to avoid the institution

or conclusion of a proceeding for his

disbarment or suspension from practice

before the Internal Revenue Service,

may offer his consent to suspension

from such practice. The Director of

Practice, in his discretion, may suspend

an attorney, certified public accountant,

enrolled agent or enrolled actuary in

accordance with the consent offered.

Attorneys, certified public accountants, enrolled agents and enrolled actuaries are prohibited in any Internal Rev-

enue Service matter from directly or

indirectly employing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred

or suspended from practice before the

Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents and enrolled actuaries to identify practitioners

under consent suspension from practice

before the Internal Revenue Service, the

Director of Practice will announce in the

Internal Revenue Bulletin the names and

addresses of practitioners who have

been suspended from such practice, their

designation as attorney, certified public

accountant, enrolled agent or enrolled

actuary and date or period of suspension. This announcement will appear in

the weekly Bulletin at the earliest practicable date after such action and will

continue to appear in the weekly Bulletins for five successive weeks or for as

many weeks as is practicable for each

attorney, certified public accountant, enrolled agent or enrolled actuary so suspended and will be consolidated and

published in the Cumulative Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue

Service:

Name

Address

Designation

Date of Suspension

Bruender, Lawrence

Pallman, James J.

Pribble Jr., William C.

Pyburn, Richard E.

Scalise, James J.

Kieldaisch, Dale W.

Ogorek, Charolotte F.

Korman, Steven B.

Myers, Donald L.

Sharrett, William R.

Cornwell, Douglas S.

Chang, Sun Kun

Cariveau, Stewart

Carter, Gary E.

Underwood, Wendell L.

Candiloro, James A.

Schwartz, Leonard J.

Forrester, Donald F.

Shade, Stephen E.

Woods, James G.

Grove, Michael J.

Jenkins, Frank

Brewton III, George W.

Fischer, Randall E.

Rhoney, Brian

Devereux, Michael J.

Cranston, Robert S.

Miller, Dwight W.

Beck, Clyde E.

Seal, Ernest E.

Dicker, Joseph W.

Lesueur, MN

New Haven, CT

Minneapolis, MN

Downers Grove, IL

New Britain, CT

Manteno, IL

Park Ridge, IL

Mulford, CT

Olney, MD

Paradise, CA

Norwalk, CT

McLean, VA

Minneapolis, MN

Ashdown, AR

Sedalia, MO

Glastonbury, CT

Danbury, CT

Fairfield, OH

Clearwater, FL

Huntington, CT

Alliance, Oh

Montgomery, AL

Greenville, MS

Lombard, IL

Wheaton, IL

Florissant, MO

Saugerties, NY

Overland Pk, KS

Salina, KS

Cleveland, MS

Minneapolis, MN

Attorney

CPA

Attorney

CPA

Attorney

CPA

CPA

CPA

CPA

Enrolled Agent

CPA

Enrolled Agent

CPA

CPA

CPA

CPA

Enrolled Agent

CPA

Enrolled Agent

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

Attorney

Indefinite from April 18, 1996

April 19, 1996 to October 18, 1996

Indefinite from May 1, 1996

May 1, 1996 to October 31, 1997

May 1, 1996 to July 31, 1996

May 1, 1996 to October 31, 1996

May 3, 1996 to July 2, 1996

May 3, 1996 to February 2, 1997

May 7, 1996 to May 6, 1998

May 8, 1996 to November 7, 1996

May 10, 1996 to November 9, 1996

May 13, 1996 to July 12, 1996

May 30, 1996 to August 29, 1996

June 1, 1996 to August 31, 1996

June 1, 1996 to July 31, 1996

June 1, 1996 to November 30, 1996

June 1, 1996 to February 28, 1997

Indefinite from June 4, 1996

June 8, 1996 to May 7, 1997

July 1, 1996 to June 30, 1997

July 1, 1996 to June 30, 1997

July 1, 1996 to December 31, 1996

July 1, 1996 to September 30, 1996

July 1, 1996 to September 30, 1996

July 1, 1996 to Decemer 31, 1996

July 1, 1996 to March 31, 1997

July 1, 1996 to December 31, 1996

July 1, 1996 to June 30, 1997

July 1, 1996 to October 31, 1996

August 1, 1996 to July 31, 1998

August 1, 1996 to October 31, 1996

21

Under Section 330, Title 31 of the

United States Code, the Secretary of the

Treasury, after due notice and opportunity for hearing, is authorized to suspend or disbar from practice before the

Internal Revenue Service any person

who has violated the rules and regulations governing the recognition of attorneys, certified public accountants, enrolled agents or enrolled actuaries to

practice before the Internal Revenue

Service.

Attorneys, certified public accountants, enrolled agents and enrolled actuaries are prohibited in any Internal Rev-

enue Service matter from directly or

indirectly employing, accepting assistance from, being employed by or sharing fees with, any practitioner disbarred

or under suspension from practice before the Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents and enrolled actuaries to identify such disbarred or suspended practitioners, the

Director of Practice will announce in the

Internal Revenue Bulletin the names and

addresses of practitioners who have

been suspended from such practice, their

designation as attorney, certified public

accountant, enrolled agent or enrolled

actuary, and the date of disbarment or

period of suspension. This announcement will appear in the weekly Bulletin

for five successive weeks or as long as

it is practicable for each attorney, certified public accountant, enrolled agent or

enrolled actuary so suspended or disbarred and will be consolidated and

published in the Cumulative Bulletin.

After due notice and opportunity for

hearing before an administrative law

judge, the following individuals have

been disbarred from further practice before the Internal Revenue Service:

Name

Address

Designation

Effective Date

Bushta, Patrick C.

Hart, Joel S.

Riggs, Patricia A.

Hammontree, Richard F.

Otto, Judith M.

Sacramento, CA

Beaumont, TX

Stockton, CA

Ogunquit, ME

Tucson, AZ

CPA

CPA

Enrolled Agent

CPA

Enrolled Agent

April 18, 1996

April 19, 1996

April 19, 1996

April 27, 1996

May 18, 1996

22

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as ‘‘rulings’’)

that have an effect on previous rulings

use the following defined terms to describe the effect:

Amplified describes a situation where

no change is being made in a prior

published position, but the prior position

is being extended to apply to a variation

of the fact situation set forth therein.

Thus, if an earlier ruling held that a

principle applied to A, and the new

ruling holds that the same principle also

applies to B, the earlier ruling is amplified. (Compare with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it

applies to both A and B, the prior ruling

is modified because it corrects a published position. (Compare with amplified

and clarified, above.)

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly

used in a ruling that lists previously

published rulings that are obsoleted because of changes in law or regulations.

A ruling may also be obsoleted because

the substance has been included in regulations subsequently adopted.

Revoked describes situations where

the position in the previously published

ruling is not correct and the correct

position is being stated in the new

ruling.

Superseded describes a situation

where the new ruling does nothing more

than restate the substance and situation

of a previously published ruling (or

rulings). Thus, the term is used to

republish under the 1986 Code and

regulations the same position published

under the 1939 Code and regulations.

The term is also used when it is desired

to republish in a single ruling a series of

situations, names, etc., that were previously published over a period of time in

separate rulings. If the new ruling does

more than restate the substance of a

prior ruling, a combination of terms is

used. For example, modified and superseded describes a situation where the

substance of a previously published ruling is being changed in part and is

continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names

of countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be

published that includes the list in the

original ruling and the additions, and

supersedes all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

PHC—Personal Holding Company.

PO—Possession of the U.S.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

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

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

M—Minor.

U.S.C.—United States Code.

Nonacq.—Nonacquiescence.

X—Corporation.

O—Organization.

Y—Corporation.

P—Parent Corporation.

Z—Corporation.

The following abbreviations in current use and

formerly used will appear in material published in

the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

23

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Numerical Finding List1

Bulletins 1996–27 through 1996–28

Announcements:

96–61, 1996–27 I.R.B. 72

96–62, 1996–28 I.R.B. 55

Notices:

96–36, 1996–27 I.R.B. 11

Proposed Regulations:

IA-292-84, 1996–28 I.R.B. 38

Revenue Procedures:

96–36, 1996–27 I.R.B. 11

Revenue Rulings:

96–33, 1996–27 I.R.B. 4

96–34, 1996–28 I.R.B. 4

Tax Conventions:

1996–28 I.R.B. 36

Treasury Decisions:

8673, 1996–27 I.R.B. 4

8674, 1996–28 I.R.B. 7

1

A cumulative list of all Revenue Rulings, Revenue Procedures, Treasury Decisions, etc., published in Internal Revenue Bulletins 1996–1

through 1996–26 will be found in Internal Revenue Bulletin 1996–27, dated July 1, 1996.

24

Finding List of Current Action on

Previously Published Items1

Bulletins 1996–27 through 1996–28

*Denotes entry since last publication

Revenue Procedures:

95–29

Superseded by

96–36, 1996–27 I.R.B. 11

95–29A

Superseded by

96–36, 1996–27 I.R.B. 11

1

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1996–1 through 1996–26 will be found in Internal

Revenue Bulletin 1996–27, dated July 1, 1996.

25