internal revenue bulletin no. 2001–44 bulletin october 29 ... · october 29, 2001 2001–44...

INCOME TAXCt. D. 2072, page 379.Under section 172 of the Code, an affiliated group’s productliability loss (PLL) must be figured on a consolidated, single-entity basis, not by aggregating PLLs separately determinedcompany by company. United Dominion Industries, Inc.v. United States.

EMPLOYEE PLANSAnnouncement 2001–106, page 416.Saver’s credit; employee plans and individual retire-ment arrangements. This announcement sets forth fre-quently asked questions and the related answers about theSaver’s Credit described in section 25B of the Code. It alsocontains examples and a table regarding eligibility for thisnew nonrefundable credit.

EXEMPT ORGANIZATIONSAnnouncement 2001–108, page 419.A list is provided of organizations now classified as privatefoundations.

EMPLOYMENT TAXCt. D. 2071, page 385.The Compensation Clause of the U.S. Constitution preventsthe government from collecting Social Security taxes, butnot Medicare taxes, from federal judges who held officebefore 1983, when Congress extended those taxes to fed-eral employees. United States v. Hatter, et al.

ADMINISTRATIVENotice 2001–66, page 396.This notice requests comments on and contains proposedaudit guidelines for qualified intermediaries (Qls). These Qlsare a key component of the withholding and reporting regu-lations that became effective on January 1, 2001 (T.D.8734, 1997–2 C.B. 109 and T.D. 8881, 2000–23 I.R.B.1158).

Announcement 2001–107, page 419.The Service announces that the Martinsburg ComputingCenter (MCC) Information Reporting Program Call Site nowhas a toll-free telephone number.

Announcement 2001–93, page 416.The Service announces new reporting requirements foremployee elective deferral “catch-up” contributions on the2002 Form W-2. Similar reporting requirements will beaddressed in the 2002 Instructions for Forms 1099-R and5498.

Internal Revenue

bbuulllleettiinnBulletin No. 2001–44

October 29, 2001

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page ii.

October 29, 2001 2001–44 I.R.B.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

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2001–44 I.R.B. 379 October 29, 2001

Section 172.—Net Operating LossDeduction

Ct. D. 2072

SUPREME COURT OF THE UNITED STATES

No. 00–157

UNITED DOMINION INDUSTRIES,INC. v. UNITED STATES

CERTIORARI TO THE UNITEDSTATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

June 4, 2001

SyllabusUnder the Internal Revenue Code of

1954, a “net operating loss” (NOL) re-sults from deductions in excess of grossincome for a given year. 26 U.S.C. Sec.172(c). A taxpayer may carry its NOLeither backward or forward to other taxyears in order to set off its lean yearsagainst its lush years. Sec. 172(b)(1)(A).The carryback period for “product liabil-i ty loss[es]” is 10 years. Sec.172(b)(1)(I). Because a product liabilityloss (PLL) is the total of a taxpayer’sproduct liability expenses (PLEs) up tothe amount of its NOL, Sec. 172(j)(1), ataxpayer with a positive annual income,and thus no NOL, may have PLEs butcan have no PLL. An affiliated group ofcorporations may file a single consoli-dated return. Sec. 1501. Treasury Regu-lations provide that such a group’s “con-solidated taxable income” (CTI), or,alternatively, its “consolidated net oper-ating loss” (CNOL), is determined bytaking into account several items, thefirst of which is the “separate taxable in-come” (STI) of each group member. Incalculating STI, the member must disre-gard items such as capital gains andlosses, which are considered, and fac-tored into CTI or CNOL, on a consoli-dated basis. Petitioner’s predecessor ininterest, AMCA International Corpora-tion, was the parent of an affiliated groupfiling consolidated returns for the years1983 through 1986. In each year,AMCA reported CNOL exceeding theaggregate of its 26 individual members’PLEs. Five group members with PLEsreported positive STIs. Nonetheless,

AMCA included those PLEs in deter-mining its PLL for 10-year carrybackunder a “single-entity” approach inwhich it compared the group’s CNOLand total PLEs to determine the group’stotal PLL. In contrast, the Government’s“separate-member” approach compareseach affiliate’s STI and PLEs in order todetermine whether each affiliate suffersa PLL, and only then combines anyPLLs of the individual affiliates to deter-mine a consolidated PLL. Under this ap-proach, PLEs incurred by an affiliatewith positive STI cannot contribute to aPLL. In 1986 and 1987, AMCA peti-tioned the Internal Revenue Service forrefunds based on its PLL calculations.The IRS ruled in AMCA’s favor, but wasreversed by a joint congressional com-mittee that controls refunds exceeding acertain threshold. AMCA then filed thisrefund action. The District Court ap-plied AMCA’s single-entity approach,concluding that so long as the affiliatedgroup’s consolidated return reflectsCNOL in excess of the group’s aggregatePLEs, the total of those expenses is aPLL that may be carried back. In revers-ing, the Fourth Circuit applied the sepa-rate-member approach.

Held: An affiliated group’s PLL mustbe figured on a consolidated, single-entitybasis, not by aggregating PLLs separatelydetermined company by company. Pp.5–15.

(a) The single-entity approach to cal-culating an affiliated group’s PLL isstraightforward. The first step in apply-ing Sec. 172(j)’s definition of PLL re-quires a taxpayer filing a consolidated re-turn to calculate an NOL. The Code andregulations governing affiliated groups ofcorporations filing consolidated returnsprovide only one definition of NOL:“consolidated” NOL. The absence of aseparate NOL for a group member in thiscontext is underscored by the fact that theregulations provide a measure of separateNOL in a different context, for any yearin which an affiliated corporation files aseparate return. The exclusive definitionof NOL as CNOL at the consolidatedlevel is important. Neither the Code northe regulations indicate that the essentialrelationship between NOL and PLL for aconsolidated group differs from their re-

lationship for a conventional corporatetaxpayer. Comparable treatment of PLLfor the group and the conventional tax-payer can be achieved only if PLEs arecompared with the loss amount at theconsolidated level after CNOL has beendetermined, for CNOL is the only NOLmeasure for the group. An approachbased on comparable treatment is also(relatively) easy to understand and toapply. Pp. 5–7.

(b) The case for the separate-memberapproach is not so easily made. Becausethere is no NOL below the consolidatedlevel, there is nothing for comparisonwith PLEs to produce a PLL at any stagebefore the CNOL calculation. Thus, aseparate-member proponent must identifysome figure in the consolidated returnscheme with a plausible analogy to NOLat the affiliated corporations level. An in-dividual member’s STI is not analogous,for it excludes several items that an indi-vidual taxpayer would normally count incomputing income or loss, but which anaffiliated group may tally only at the con-solidated level. The “separate net operating loss,” Treas. Reg. Sec.1.1502–79(a)(3), used by the Fourth Cir-cuit fares no better. Although that figureaccounts for some gains or losses that STIdoes not, Sec. 1.1502–79(a)(3)’s purposeis to allocate CNOL to an affiliate mem-ber seeking to carry back a loss to a yearin which the member was not part of theconsolidated group. Such returns are notat issue here. Pp. 8–11.

(c) Several objections to the single-en-tity approach—that it allows affiliatedgroups a double deduction, that the omis-sion of PLEs from the series of items thatTreas. Reg. Sec. 1.1502–12 requires to betallied at the consolidation level indicatesthat PLEs were not meant to be tallied atthat level, and that the single-entity ap-proach would permit significant tax avoid-ance abuses—are rejected. Pp. 11–15.

208 F.3d 452, reversed and remanded.

SOUTER, J., delivered the opinion ofthe Court, in which REHNQUIST, C.J.,and O’CONNOR, SCALIA, KENNEDY,THOMAS, GINSBURG, and BREYER,JJ., joined. THOMAS, J., filed a concur-ring opinion. STEVENS, J., filed a dis-senting opinion.

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

October 29, 2001 380 2001–44 I.R.B.


No. 00–157

UNITED DOMINION INDUSTRIES,INC., PETITIONER v. UNITED

STATES

532 U.S. ___ (2001)

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT OF

APPEALS FOR THE FOURTH CIRCUIT

June 4, 2001

JUSTICE SOUTER delivered the opin-ion of the Court.

Under Sec. 172(b)(1)(I) of the InternalRevenue Code of 1954, a taxpayer maycarry back its “product liability loss” up to10 years in order to offset prior years’ in-come. The issue here is the method forcalculating the product liability loss of anaffiliated group of corporations electing tofile a consolidated federal income tax re-turn. We hold that the group’s product lia-bility loss must be figured on a consoli-dated basis in the first instance, and not byaggregating product liability losses sepa-rately determined company by company.

I

A “net operating loss” results from de-ductions in excess of gross income for agiven year. 26 U.S.C. Sec. 172(c).1

Under Sec. 172(b)(1)(A), a taxpayer maycarry its net operating loss either back-ward to past tax years or forward to futuretax years in order to “set off its lean yearsagainst its lush years, and to strike some-thing like an average taxable incomecomputed over a period longer than oneyear,” Libson Shops, Inc. v. Koehler, 353U.S. 382, 386 (1957).

Although the normal carryback periodwas at the time three years, in 1978, Con-gress authorized a special 10-year carry-back for “product liability loss[es],” 26U.S.C. Sec. 172(b)(1)(I), since, it under-stood, losses of this sort tend to be partic-ularly “large and sporadic.” Joint Com-mittee on Taxation, 95th Cong., GeneralExplanation of the Revenue Act of 1978,

232 (Comm. Print 1979). The Code de-fines “product liability loss,” for a giventax year, as the lesser of (1) the taxpayer’s“net operating loss for such year” and (2)its allowable deductions attributable toproduct liability “expenses.” 26 U.S.C.Sec. 172(j)(1). In other words, a tax-payer’s product liability loss (PLL) is thetotal of its product liability expenses(PLEs), limited to the amount of its netoperating loss (NOL). By definition,then, a taxpayer with positive annual in-come, and thus no NOL, may have PLEsbut can have no PLL.2

Instead of requiring each member com-pany of “[a]n affiliated group of corpora-tions” to file a separate tax return, theCode permits the group to file a singleconsolidated return, 26 U.S.C. Sec. 1501,and leaves it to the Secretary of the Trea-sury to work out the details by promulgat-ing regulations governing such returns,Sec. 1502. Under Treas. Regs. Secs.1.1502–11(a) and 1.1502–21(f),3 an affili-ated group’s “consolidated taxable in-come” (CTI), or, alternatively, its “con-solidated net operating loss” (CNOL), isdetermined by “taking into account” sev-eral items. The first is the “separate tax-able income” (STI) of each group mem-ber. A member’s STI (whether positive ornegative) is computed as though themember were a separate corporation (i.e.,by netting income and expenses), but sub-ject to several important “modifications.”Treas. Reg. Sec. 1.1502–12. These modi-fications require a group member calcu-lating its STI to disregard, among otheritems, its capital gains and losses, charita-ble-contribution deductions, and divi-dends-received deductions. Ibid. Theseexcluded items are accounted for on aconsolidated basis, that is, they are com-

bined at the level of the group filing thesingle return, where deductions otherwiseattributable to one member (say, for acharitable contribution) can offset incomereceived by another (from a capital gain,for example). Treas. Regs. Secs.1.1502–11(a)(3)–(8); 1.1502–21(f)(2) to(6). A consolidated group’s CTI orCNOL, therefore, is the sum of eachmember’s STI, plus or minus a handful ofitems considered on a consolidated basis.

II

Petitioner United Dominion’s prede-cessor in interest, AMCA InternationalCorporation, was the parent of an affili-ated group of corporations that properlyelected to file consolidated tax returns forthe years 1983 through 1986. In each ofthese years, AMCA reported CNOL (thelowest being $85 million and the highest,$140 million) that exceeded the aggregateof its 26 individual members’ PLEs ($3.5million to $6.5 million). This case fo-cuses on the PLEs of five of AMCA’smember companies, which, together, gen-erated roughly $205,000 in PLEs in 1983,$1.6 million in 1984, $1.3 million in1985, and $250,000 in 1986. No one dis-putes these amounts or their characteriza-tion as PLEs. See 208 F.3d 452, 453(CA4 2000) (“The parties agree” with re-spect to the amount of “the product liabil-ity expenses incurred by the five groupmembers in the relevant years”). Rather,the sole question here is whether theAMCA affiliated group may include theseamounts on its consolidated return, in de-termining its PLL for 10-year carryback.The question arises because of the furtherundisputed fact that in each of the rele-vant tax years, each of the five companiesin question (with minor exceptions notrelevant here), reported a positive STI.

AMCA answered this question by fol-lowing what commentators have called a“single-entity” approach4 to calculatingits “consolidated” PLL. For each taxyear, AMCA (1) calculated its CNOL pur-suant to Treas. Reg. Sec. 1.1502–11(a),and (2) aggregated its individual mem-bers’ PLEs. Because, as noted above, foreach tax year AMCA’s CNOL was greater

1 Unless otherwise noted, all statutory references areto the Internal Revenue Code of 1954, 26 U.S.C. Sec.1 et seq. (1982 ed. and Supp. V), as in effect between1983 and 1986, the tax years here in question.

2 If, for example, a company had $100 in taxableincome, $50 in deductible PLEs, and $75 in addi-tional deductions, its NOL would be $25 (i.e., $100-$50-$75= -$25); it could count only $25 of its $50 inPLEs as PLL. If the company had $100 in income,$50 in PLEs, and $125 in additional deductions, itsNOL would be $75, and it could count its entire $50in PLEs as PLL. And, finally, if the company had$100 in income, $50 in PLEs, and $40 in additionaldeductions, it would have positive income and, thus,no NOL and no PLL.3 Unless otherwise noted, Treasury Regulation refer-ences are to the regulations in effect between 1983and 1986, 26 CFR Sec. 1.1502-11 et seq. (1982-1986).

4 Axelrod & Blank, The Supreme Court,Consolidated Returns, and 10-Year Carrybacks, 90Tax Notes, No. 10, p. 1383 (Mar. 5, 2001) (here-inafter Axelrod & Blank).

2001–44 I.R.B. 381 October 29, 2001

than the sum of its members’ PLEs,AMCA treated the full amount of thePLEs as consolidated PLL eligible for 10-year carryback. In AMCA’s view, the factthat several member companies throwingoff large PLEs also, when considered sep-arately, generated positive taxable incomewas of no significance.

From the Government’s perspective,however, the fact that the several affili-ated members with PLEs also generatedpositive separate taxable income is of crit-ical significance. According to the Gov-ernment’s methodology, which we willcall the “separate-member” approach,5

PLEs incurred by an affiliate with posi-tive separate taxable income cannot con-tribute to a PLL eligible for 10-year carry-back. Whereas AMCA compares thegroup’s total income (or loss) and totalPLEs in an effort to determine the group’stotal PLL, the Government compareseach affiliate’s STI and PLEs in order todetermine whether each affiliate suffers aPLL, and only then combines any PLLsof the individual affiliates to determine aconsolidated PLL amount.

In 1986 and 1987, AMCA petitionedthe Internal Revenue Service for refundsof taxes based on its PLL calculations.The IRS first ruled in AMCA’s favor butwas reversed by the Joint Committee onInternal Revenue Taxation of the UnitedStates Congress, which controls refundsexceeding a certain threshold, 26 U.S.C.Sec. 6405(a). AMCA then filed this re-fund action in the United States DistrictCourt for the Western District of NorthCarolina. The District Court agreed withAMCA that an affiliated group’s PLL isdetermined on a single-entity basis, andheld that, so long as the group’s consoli-dated return reflects CNOL in excess ofthe group’s aggregate PLEs, the total ofthose expenses (including those incurredby members with positive separate tax-able income) is a PLL that “may be car-ried back the full ten years.” No. 3:95-CV-341-MU (June 19, 1998), App. toPet. for Cert. 39a. The United StatesCourt of Appeals for the Fourth Circuitreversed, and held that “determining‘product liability loss’ separately for eachgroup member is correct and consistentwith [Treasury] regulations.” 208 F.3d,at 458.

Because the Fourth Circuit’s separate-member approach to calculating PLL con-flicted with the Sixth Circuit’s adoption ofthe single-entity approach in IntermetCorp. v. Commissioner, 209 F.3d 901(CA6 2000), we granted certiorari, 531U.S. 1009 (2000).6 We now reverse.

III

The case for the single-entity approachto calculating an affiliated group’s PLL isstraightforward. Section 172(j)(1) de-fines a taxpayer’s “product liability loss”for a given tax year as the lesser of its “netoperating loss for such year” and its prod-uct liability “expenses.” In order to applythis definition, the taxpayer first deter-mines whether it has taxable income orNOL, and in making that calculation itsubtracts PLEs. If the result is NOL, thetaxpayer then makes a simple comparisonbetween the NOL figure and the totalPLEs. The PLE total becomes the PLL tothe extent it does not exceed NOL. Thatis, until NOL has been determined, thereis no PLL.

The first step in applying the definitionand methodology of PLL to a taxpayer fil-ing a consolidated return thus requires thecalculation of NOL. As United Dominioncorrectly points out, the Code and regula-tions governing affiliated groups of cor-porations filing consolidated returns pro-vide only one definition of NOL:“consolidated” NOL, see Treas. Reg. Sec.1.1502–21(f). There is no definition ofseparate NOL for a member of an affili-ated group. Indeed, the fact that TreasuryRegulations do provide a measure of sep-arate NOL in a different context, for anaffiliated corporation as to any year inwhich it filed a separate return, infra, at___, underscores the absence of such ameasure for an affiliated corporation fil-ing as a group member. Given this appar-ently exclusive definition of NOL asCNOL in the instance of affiliated entities

with a consolidated return (and for rea-sons developed below, infra, at ___) wethink it is fair to say, as United Dominionsays, that the concept of separate NOL“simply does not exist.” Brief for Peti-tioner 15.7 The exclusiveness of NOL atthe consolidated level as CNOL is impor-tant here for the following reasons. TheCode’s authorization of consolidatedgroup treatment contains no indicationthat for a consolidated group the essentialrelationship between NOL and PLL willdiffer from their relationship for a con-ventional corporate taxpayer. Nor doesany Treasury Regulation purport tochange the relationship in the consoli-dated context. If, then, the relationship isto remain essentially the same, the key tounderstanding it lies in the regulations’definition of net operating loss exclu-sively at the consolidated level. Workingback from that, PLEs should be consid-ered first in calculating CNOL, and theyare: because any PLE of an affiliate af-fects the calculation of its STI, that samePLE necessarily affects the CTI or CNOLin exactly the same way, dollar for dollar.And because, by definition, there is noNOL measure for a consolidated returngroup or any affiliate except CNOL, PLEscannot be compared with any NOL toproduce PLL until CNOL has been calcu-lated. Then, and only then in the case ofthe consolidated filer, can total PLEs becompared with a net operating loss. Insum, comparable treatment of PLL in theinstances of the usual corporate taxpayerand group filing a consolidated return canbe achieved only if the comparison ofPLEs with a limiting loss amount occursat the consolidated level after CNOL hasbeen determined. This approach restingon comparable treatment has a further

7 In addition to Treas. Reg. Sec. 1.1502-79(a)(3),discussed infra, at ___, two other provisions, 26U.S.C. Sec. 1503(f)(2) and the current version(though not the version applicable between 1983 and1986) of Treas. Reg. Sec. 1502-21(b) (2000), refer toseparate group members’ NOLs. The parties herehave not emphasized those provisions, and withgood reason. Not only are they inapplicable to thequestion before us (either substantively, temporally,or both), but, as one commentator has observed, their references to separate NOLs “stem[] more fromcareless drafting than meaningful design.”Leatherman, Are Separate Liability Losses Separatefor Consolidated Groups?, 52 Tax. Law. 663, 705(1999) (hereinafter Leatherman, Separate LiabilityLosses).

6 Intermet involved “specified liability losses”(SLLs), not PLLs. The difference, however, doesnot matter. The PLL was a statutory predecessor to the SLL, and PLLs were folded into the SLL provi-sion in Sec. 11811(b)(1) of the Omnibus BudgetReconciliation Act of 1990, 104 Stat. 1388-532.Thus, “[i]n all relevant respects, the provisions on[PLLs] and SLLs are the same.” Leatherman,Current Developments for Consolidated Groups,486 PLI/Tax 389, 393, n. 5 (2000) (hereinafterLeatherman, Current Developments).5 Ibid.

October 29, 2001 382 2001–44 I.R.B.

virtue entitled to some weight in case ofdoubt: it is (relatively) easy to understandand to apply.

The case for the separate-member ap-proach, advanced (in one variant) by theGovernment and adopted (on a differentrationale) by the Court of Appeals, is notso easily made. In the analysis of compa-rable treatment just set out, of course,there is no NOL below the consolidatedlevel and hence nothing for comparisonwith PLEs to produce PLL at any stagebefore the CNOL calculation. At theleast, then, a proponent of the separate-member approach must identify some fig-ure in the consolidated return scheme thatcould have a plausible analogy to NOL atthe level of the affiliated corporations.See A. Dubroff, J. Blanchard, J. Broad-bent, & K. Duvall, Federal Income Taxa-tion of Corporations Filing ConsolidatedReturns Sec. 41.04[06], p. 41–75 (2d ed.2000) (hereinafter Dubroff) (“Even if sep-arate entity treatment was appropriate, itis unclear how a member with [PLEs]would compute its separate NOL”). TheGovernment and the Court of Appealshave suggested different substitute mea-sures. Neither one works.

The Government has argued that an in-dividual group member’s STI, as deter-mined under Treas. Reg. Sec. 1.1502–12,is analogous to a “separate” NOL, so thatan affiliate’s STI may be compared withits PLEs in order to determine any sepa-rate PLL. An individual member’s PLLwould be the amount of its separate PLEsup to the amount of its negative STI; amember having positive STI could haveno PLL.

The Government claims that an STI-based comparison places the group mem-ber closest to the position it would haveoccupied if it had filed a separate return.But that is simply not so. We have seenalready that the calculation of a groupmember’s STI by definition excludes sev-eral items that an individual taxpayerwould normally account for in computingincome or loss, but which an affiliatedgroup may tally only at the consolidatedlevel, such as capital gains and losses,charitable-contribution deductions, anddividends-received deductions. Treas.Reg. Secs. 1.1502–12(j) to (n). Owing tothese exclusions, an affiliate’s STI willtend to be inflated by eliminating deduc-tions it would have taken if it had filed

separately, or deflated by eliminating anincome item like capital gain.

When pushed, the Government con-cedes that STI is “not necessarily equiva-lent to the income or [NOL] figure thatthe corporation would have computed if ithad filed a separate return.” Brief forUnited States 21, n. 14. But, the Govern-ment claims, “[t]here has never been ataxpayer with [PLEs] who had a positive[STI] but a negative separate [NOL].” Tr.of Oral Arg. 27. In other words, the Gov-ernment says that the deductions excludedfrom STI have never once made a differ-ence and, therefore, that STI is, in fact, adecent enough proxy for a group mem-ber’s “separate” NOL. But whether or notthe excluded items have made a differ-ence in the past, or make a differencehere, they certainly could make a differ-ence and, given the potential importanceof some of the deductions involved (alarge charitable contribution, for exam-ple), it is not hard to see how the differ-ence could favor the Government.

The Court of Appeals was thereforeright to reject the Government’s relianceon STI as a functional surrogate for an af-filiate’s “separate” NOL. 208 F.3d, at459–460. But what the Court of Appealsused in place of STI fares no better. Thecourt relied on Treas. Reg. Sec.1.1502–79, which contains a definition of“separate net operating loss” that thecourt believed to be “analogous to an in-dividual’s ‘net operating loss’ on a sepa-rate return.” 208 F.3d at 460. Section1.1502–79(a)(3) provides that, “[f]or pur-poses of this subparagraph,” the “separatenet operating loss of a member of thegroup shall be determined under Sec.1.1502–12 . . . , adjusted for the . . . itemstaken into account in the computation of”the CNOL. As the Court of Appeals said,the directive of Sec. 1.1502–79(a)(3) (un-like the definition of STI) “takes into ac-count, for example, [a] member’s charita-ble contributions” and other consolidateddeductions. 208 F.3d, at 460–461.

But this sounds too good. It is truethat, insofar as Sec. 1.1502–79(a)(3) ac-counts for gains and losses that STI doesnot, it gets closer to a commonsense no-tion of a group member’s “separate” NOLthan STI does. But the fact that Sec.1.1502–79(a)(3) improves on STI simplyby undoing what Sec. 1.1502–12 requiresin defining STI is suspicious, and it turns

out that the suspicion is justified. Section1.1502–79(a)(3) unbakes the cake foronly one reason, and that reason has noapplication here. The definition on whichthe Court of Appeals relied applies, by itsterms, only “for purposes of” Sec.1.1502–79(a)(3), and context makes clearthat the purpose is to provide a way to al-locate CNOL to an affiliate member thatseeks to carry back a loss to a “separatereturn year,” that is, to a year in which themember was not part of the consolidatedgroup. See Treas. Reg. Sec. 1.1502–79(titled “Separate return years”); Sec.1.1502–79(a) (titled “Carryover and car-ryback of [CNOL] to separate returnyears”); Sec. 1.1502–79(a)(1) (“[i]f a[CNOL] can be carried . . . to a separatereturn year . . .”). No separate return yearsare at issue before us; all NOL carrybacksrelevant here apply to years in which thefive corporations were affiliated in thegroup. The Court of Appeals thus appliedconcepts addressing separate return yearsto a determination for a consolidated re-turn year, without any statutory or regula-tory basis for doing so. Cf. 49 Fed. Reg.30530 (1984) (“[A]lthough the consoli-dated net operating loss is apportioned toindividual members for purposes of carrybacks to separate return years [under Sec.1.1502–79(a)], the apportioned amountsare not separate NOLs of each member”).Hence, while Sec. 1.1502–79 might notdistort an affiliate’s separate NOL in thesame way that STI does, the facial inap-plicability of that regulation only under-scores the exclusive concern of Sec.1.1502–11(a) with consolidated NOL.

In sum, neither method for computingPLL on a separate-member basis squareswith the notion of comparability as ap-plied to consolidated return regulations.On the contrary, by expressly and exclu-sively defining NOL as CNOL, the regu-lations support the position that groupmembers’ PLEs should be aggregated andthe affiliated group’s PLL determined ona consolidated, single-entity basis.

IV

Several objections have been raised toa single-entity approach to calculatingPLL that we have not considered yet.First, the Government insists that a sin-gle-entity rule allows affiliated groups a“double deduction.” The Government ar-

2001–44 I.R.B. 383 October 29, 2001

gues that because PLEs are not includedamong the specific items (charitable-con-tribution deductions, etc.) for which con-solidated, single-entity treatment is re-quired under Treas. Reg. Sec. 1.1502–12,PLEs are “consumed” or “used up” incomputing members’ STIs, which, pur-suant to Treas. Regs. Secs. 1.1502–11(a)and 1.1502–21(f), are then used to calcu-late the group’s CTI or CNOL. Accord-ing to the Government, to permit the useof PLEs first to reduce an individualmember’s STI and then to contribute to anaggregate PLL for carryback purposeswould be tantamount to a double deduc-tion.

The double-deduction argument mayhave superficial appeal, but any appeal ithas rests on a fundamental misconceptionof the function of STI in computing an af-filiated group’s tax liability. Calculationof a group member’s STI is not in and ofitself the basis for any tax event, and thereis no separate tax saving when STI is cal-culated; that occurs only when deductionson the consolidated return equal incomeand (if they exceed income and produce aCNOL) are carried back against prior in-come. STI is merely an accounting con-struct devised as an interim step in com-puting a group’s CTI or CNOL; it “has noother purpose.” Intermet, 209 F.3d, at906 (“A member’s STI is simply a stepalong the way to calculating the group’staxable income or CNOL”). The fact thata group member’s PLEs reduce its STI,which in turn either reduces the group’sCTI or contributes to its CNOL “dollarfor dollar,” ibid., is of no other moment.8

If there were anything wrong in whatAMCA proposes to do, it would be wrongin relation to AMCA’s CNOL and its usefor any carryback. Yet, as noted above,no one here disputes that the group mem-bers had PLEs in the total amount claimedor that the AMCA group is entitled tocarry back the full amount of its CNOL tooffset income in prior years. The only

question is what portion, if any, ofAMCA’s CNOL is PLL and, as such, eli-gible for 10-year, as opposed to 3-yearcarryback treatment. There is no more ofa double deduction with a 10-year carry-back than one for three years.

A second objection was the reason thatthe Court of Appeals rejected the single-entity approach. That court attached dis-positive significance to the fact that,while the Treasury Regulation we havediscussed, Sec. 1.1502–12, specificallyprovides that several items (capital gainsand losses, charitable-contribution de-ductions, etc.) shall be accounted for ona consolidated basis, it does not similarlyprovide for accounting for PLEs on aconsolidated basis: “The regulationsprovide for blending the group members’[NOLs], and they explicit ly define[CNOL] without an accompanying refer-ence to consolidated [PLEs]. This omis-sion . . . makes clear that blending thoseexpenses is not permitted. . . .” 208 F.3d,at 458.

We think the omission of PLEs fromthe series of items that Sec. 1.1502–12 re-quires to be tallied at the consolidatedlevel has no such clear lesson, however.The logic that invests the omission withsignificance is familiar: the mention ofsome implies the exclusion of others notmentioned. Leatherman v. TarrantCounty Narcotics Intelligence and Coor-dination Unit, 507 U.S. 163, 167 (1993)(“Expressio unius est exclusio alterius”).But here, as always, the soundness of thatpremise is a function of timing: if therewas a good reason to consider the treat-ment of consolidated PLL at the time theregulation was drawn, then omitting PLLfrom the list of items for consolidatedtreatment may well have meant some-thing. But if there was no reason to con-sider PLL then, its omission would meannothing at all. And in fact, there was noreason. When the consolidated returnregulations were first promulgated in1966, there was no carryback provisionpegged to PLEs or PLLs; those notionsdid not become separate carryback itemsuntil 1978, when the 10-year rule was de-vised. See Revenue Act of 1978, Sec.371, 92 Stat. 2859; see also Leatherman,Current Developments 393, n. 5. Omis-sion of PLEs or PLLs from the series setout for consolidated treatment in the 1966regulation therefore meant absolutely

nothing in 1966. The issue, then, is thesignificance, not of omission, but of fail-ure to include later: has the significanceof the earlier regulation changed solelybecause the Treasury has never amendedit, even though PLL is now a separate car-ryback? We think that is unlikely. TheTreasury’s relaxed approach to amendingits regulations to track Code changes iswell documented. See, e.g., Dubroff41–72, n. 193; Axelrod & Blank 1391;Leatherman, Separate Liability Losses708–709. The absence of any amendmentto Sec. 1.1502–12 that might have addedPLEs or PLLs to the list of items formandatory single-member treatmenttherefore is more likely a reflection of theTreasury’s inattention than any affirma-tive intention on its part to say anything atall.

Last, the Government warns that “[t]herule that petitioner advocates would per-mit significant tax avoidance abuses.”Brief for United States 40. Specifically:

“Under petitioner’s approach, a cor-poration that is currently unprof-itable but that had substantial in-come in prior years could (i)acquire a profitable corporationwith product liability expense de-ductions in the year of acquisition,(ii) file a consolidated return and(iii) thereby create an otherwisenonexistent ‘product liability loss’for the new affiliated group thatwould allow the acquiring corpora-tion to claim refunds of the tax itpaid in prior years. Ibid.

The Government suggests, for exam-ple, that “a manufacturing company (withprior profits and current losses) that hasno product liability exposure could pur-chase a tobacco company (with both priorand current profits) that has significantproduct liability expenses,” and that“[t]he combined entity could . . . assert aten-year carryback of ‘product liabilitylosses’ even though the tobacco companyhas always made a profit and never in-curred a ‘loss’ of any type.” Id., at 40–41,n. 27.

There are several answers. First, on thescore of tax avoidance, the separate-mem-ber approach is no better (and is perhapsworse) than the single-entity treatment;both entail some risk of tax-motivated be-havior. See Leatherman, Separate Liabil-

8 It makes no difference whatsoever whether theaffiliate’s PLEs are (1) first netted against eachmember’s income and then aggregated or (2) firstaggregated and then netted against the group’s com-bined income: under either method, AMCA’s CNOLis the same. See Axelrod & Blank 1394 (noting thatthis conclusion follows from “the associative princi-ple of arithmetic (which holds that the groupings ofitems in the case of addition and subtraction have no effect on the result)”).

October 29, 2001 384 2001–44 I.R.B.

ity Losses 681 (Under the separate-mem-ber approach, “[d]espite sound non-taxbusiness reasons, a group may be disin-clined to form a new member or transferassets between members, because it mayworry that it would lose the benefit of aten-year carryback,” and “may be encour-aged to transfer assets between membersto increase its consolidated [PLL], evenwhen those transfers would otherwise beill-advised”). Second, the Governmentmay, as always, address tax-motivated be-havior under Internal Revenue Code Sec.269, which gives the Secretary ample au-thority to “disallow [any] deduction,credit, or other allowance” that resultsfrom a transaction “the principal purpose[of] which . . . is evasion or avoidance ofFederal income tax.” 26 U.S.C. Sec.269(a). And finally, if the Governmentwere to conclude that Sec. 269 providedtoo little protection and that it simplycould not live with the single-entity ap-proach, the Treasury could exercise theauthority provided by the Code, 26 U.S.C.Sec. 1502, and amend the consolidated re-turn regulations.

* * *Thus, it is true, as the Government has

argued, that “[t]he Internal Revenue Codevests ample authority in the Treasury toadopt consolidated return regulations toeffect a binding resolution of the questionpresented in this case.” Brief for UnitedStates 19–20. To the extent that the Gov-ernment has exercised that authority, itsactions point to the single-entity approachas the better answer. To the extent theGovernment disagrees, it may amend itsregulations to provide for a different one.

The judgment of the Court of Appealsis reversed, and the case is remanded forproceedings consistent with this opinion.

It is so ordered.


No. 00–157


STATES



June 4, 2001

JUSTICE THOMAS, concurring.I agree with the Court that the Internal

Revenue Code provision and the corre-sponding Treasury Regulations that con-trol consolidated filings are best inter-preted as requir ing a single-enti tyapproach in calculating product liabilityloss. I write separately, however, be-cause I respectfully disagree with thedissent’s suggestion that, when a provi-sion of the Code and the correspondingregulations are ambiguous, this Courtshould defer to the Government’s inter-pretation. See post, at 1–2. At a bareminimum, in cases such as this one, inwhich the complex statutory and regula-tory scheme lends itself to any numberof interpretations, we should be inclinedto rely on the traditional canon that con-strues revenue-raising laws against theirdrafter. See Leavell v. Blades, 237 Mo.695, 700–701, 141 S.W. 893, 894 (1911)(“When the tax gatherer puts his fingeron the citizen, he must also put his fin-ger on the law permitting it”); UnitedStates v. Merriam, 263 U.S. 179, 188(1923) (“If the words are doubtful, thedoubt must be resolved against the Gov-ernment and in favor of the taxpayer”);Bowers v. New York & Albany LiterageCo., 273 U.S. 346, 350 (1927) (“Theprovision is part of a taxing statute; andsuch laws are to be interpreted liberallyin favor of the taxpayers”). AccordAmerican Net & Twine Co. v. Worthing-ton, 141 U.S. 468, 474 (1891); Benzigerv. United States, 192 U.S. 38, 55 (1904).


No. 00–157


STATES



June 4, 2001

JUSTICE STEVENS, dissenting.This is a close and difficult case, in

which neither the statute nor the regula-tions offer a definitive answer to the cru-cial textual question. Absent a clear tex-tual anchor, I would credit the Secretaryof the Treasury’s concerns about the po-

tential for abuse created by the peti-tioner’s reading of the statutory schemeand affirm the decision of the Court ofAppeals on that basis.1

As the majority accurately reports, dur-ing the time relevant to this case, Sec.172(b)(1)(I) of the Internal Revenue Codeof 1954 allowed any “taxpayer” who“ha[d] a product liability loss” to carryback its excess product liability losses for10 years. The resolution of this case turnson whether, when a group of affiliatedcorporations files a consolidated tax re-turn, the entire group should be consid-ered the “taxpayer” for the purposes ofimplementing this provision or whethereach individual corporation should beseen as a “taxpayer.”

There is no obvious answer to thisquestion. On the one hand, it is gener-ally accepted that the rationale behindthe consolidated return regulations is toallow affiliated corporations that arerun as a single-entity to elect to betreated for tax purposes as a single-en-tity. See, e.g., Brief for Petit ioner17–19 (collecting sources in which theInternal Revenue Service so stated). Onthe other hand, it is quite clear that eachcorporation in such a group remains inboth a legal and a literal sense a “tax-payer,” a status that has important con-sequences. See Woolford Realty Co. v.Rose, 286 U.S. 319, 328 (1932) (“Thefact is not to be ignored that each of twoor more corporations joining . . . in aconsolidated return is none the less ataxpayer”); 26 U.S.C. Sec. 7701(a)(14)(defining a “taxpayer” as “any personsubject to any internal revenue tax,”where a related provision defines “per-son” to include corporations). As boththe group and the individual corpora-

1 JUSTICE THOMAS accurately points to a tradi-tion of cases construing “revenue-raising laws”against their drafter. See ante, at 1 (THOMAS, J.,concurring). However, when the ambiguous provi-sion in question is not one that imposes tax liabili-ty but rather one that crafts an exception from ageneral revenue duty for the benefit of some tax-payers, a countervailing tradition suggests that theambiguity should be resolved in the government’sfavor. See, e.g., INDOPCO, Inc. v. Commissioner,503 U.S. 79, 84 (1992); Interstate Transit Lines v.Commissioner, 319 U.S. 590, 593 (1943); Deputy v.Du Pont, 308 U.S. 488, 493 (1940); New ColonialIce Co. v. Helvering, 292 U.S. 435, 440 (1934);Woolford Realty Co. v. Rose, 286 U.S. 319, 326(1932).

2001–44 I.R.B. 385 October 29, 2001

tions are considered “taxpayers” in dif-ferent contexts, the statute presents agenuine ambiguity.

When a provision of the Internal Rev-enue Code presents a patent ambiguity,Congress, the courts, and the IRS sharea preference for resolving the ambiguityvia executive action. See, e.g., NationalMuffler Dealers Assn., Inc. v. UnitedStates, 440 U.S. 472, 477 (1979). Thisis best achieved by the issuing of a Trea-sury Regulation resolving the ambiguity.Ibid. In this instance, however, the Sec-retary of the Treasury issued no suchregulation. In the absence of such a reg-ulation, the majority has scoured tan-gentially related regulations, looking forclues to what the Secretary might in-tend. For want of a more precise basisfor resolving this case, that approach issound.

It is at this point, however, that I partcompany with the majority’s analysis.The fact that the regulations forward aparticular method for calculating a con-solidated “net operating loss” (NOL) fora group of affiliated companies, seeTreas. Reg. Sec. 1.1502–21(f), tells ushow the Secretary wants the NOL to becalculated whenever it is necessary todetermine a consolidated NOL, but itdoes not tell us what provisions of theCode require the calculation of a consol-idated NOL. That is a separate and priorquestion. Even if we were to draw somemild significance from the presence ofsuch a regulation (and the absence, atthe time these returns were filed, of asimilar regulation for the calculation ofcorporation-specific NOL’s), the powerof that inference is counterbalanced bythe fact that the regulations listing de-ductions that must be reported at theconsolidated level makes no mention ofproduct liability expenses. See Treas.Reg. Sec. 1.1502–12; see also H. Enter-prises Int’l, Inc. v. Commissioner, 105T.C. 71, 85 (1995) (construing Treas.Reg. Sec. 1.1502–80(a) to provide“[w]here the consolidated return regula-tions do not require that corporations fil-ing such returns be treated differentlyfrom the way separate entities would betreated, those corporations shall betreated as separate entities when apply-ing provisions of the Code”). In addi-tion, the subsequent promulgation of amethod for calculating a corporation-

specific NOL (albeit for a different pur-pose), see Sec. 1.1502–79(a)(3) (defin-ing “separate net operating loss”),demonstrates that there are no inherentproblems implicit in undertaking such acalculation.

In short, I find no answer to this casein the text of the statute or in any Trea-sury Regulation.2 However, the govern-ment does forward a valid policy con-cern that militates against petitioner’sconstruction of the statute: the fear oftax abuse. See Brief for United States40–42. Put simply, the Governmentfears that currently unprofitable but pre-viously profitable corporations might re-ceive a substantial windfall simply byacquiring a corporation with significantproduct liability expenses but no prod-uct liability losses. See id., at 40. On asubjective level, I find these concernstroubling. Cf. Woolford Realty Co., 286U.S., at 330 (rejecting “the notion thatCongress in permitting a consolidatedreturn was willing to foster an opportu-nity for juggling so facile and so obvi-ous”). More importantly, however, Icredit the Secretary of the Treasury’sconcerns about the potential scope ofabuse. Perhaps the Court is correct insuggesting that these concerns can be al-leviated through applications of otheranti-abuse provisions of the Tax Code,see ante, at 15, but I am not persuadedof my own ability to make that judg-ment. When we deal “with a subjectthat is highly specialized and so com-plex as to be the despair of judges,”Dobson v. Commissioner, 320 U.S. 489,498 (1943), an ounce of deference is ap-propriate.

I respectfully dissent.3

Section 3101.—Rate of Tax

Ct. D. 2071


No. 99–1978

UNITED STATES v. HATTER, JUDGE,UNITED STATES DISTRICT COURTFOR THE CENTRAL DISTRICT OF

CALIFORNIA, ET AL.

CERTIORARI TO THE UNITEDSTATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

May 21, 2001

Syllabus

In 1982, Congress extended Medicareto federal employees. That new lawmeant, inter alia, that then-sitting federaljudges, like all other federal employeesand most other citizens, began to haveMedicare taxes withheld from theirsalaries. In 1983, Congress required allnewly hired federal employees to partici-pate in Social Security and permitted,without requiring, about 96% of the then-currently employed federal employees toparticipate in that program. The remain-ing 4%—a class consisting of the Presi-dent, other high-level Government em-ployees, and all federal judges—wererequired to participate, except that thosewho contributed to a “covered” retirementprogram could modify their participationin a manner that left their total payroll de-duction for retirement and Social Securityunchanged, in effect allowing them toavoid any additional financial obligationas a result of joining Social Security. A“covered” program was defined to in-clude any retirement system to which anemployee had to contribute, which did notencompass the noncontributory pensionsystem for federal judges, whose financialobligations (and payroll deductions)therefore had to increase. A number offederal judges appointed before 1983filed this suit, arguing that the 1983 lawviolated the Compensation Clause, whichguarantees federal judges a “Compensa-tion, which shall not be diminished duringtheir Continuance in Office,” U.S. Const.,Art. III, Sec. 1. Initially, the Court ofFederal Claims ruled against the judges,but the Federal Circuit reversed. On cer-

2 I am also in full agreement with the Court’s rejec-tion of the Government’s double-deduction argu-ment. See ante, at 11-12.3 Because I agree with the majority that the calcula-tion contemplated by Treas. Reg. Sec. 1.1502-79(a)(3) better approximates the NOL that eachcompany would have had reported if filing individu-ally than the alternative forwarded by theGovernment, see ante, at 10, I agree with the Courtof Appeals’ decision to adopt that measure andwould affirm the decision below in its entirety.

October 29, 2001 386 2001–44 I.R.B.

tiorari, because some Justices were dis-qualified and this Court failed to find aquorum, the Federal Circuit’s judgmentwas affirmed “with the same effect asupon affirmance by an equally dividedcourt.” 519 U.S. 801. On remand, theCourt of Federal Claims found that thejudges’ Medicare claims were time barredand that a 1984 judicial salary increasepromptly cured any violation, makingdamages minimal. The Federal Circuitreversed, holding that the CompensationClause prevented the Government fromcollecting Medicare and Social Securitytaxes from the judges and that the viola-tion was not cured by the 1984 pay in-crease.

Held:

1. The Compensation Clause preventsthe Government from collecting SocialSecurity taxes, but not Medicare taxes,from federal judges who held office be-fore Congress extended those taxes tofederal employees. Pp. 6–19.

(a) The Court rejects the judges’ claimthat the “law of the case” doctrine nowprevents consideration of the Compensa-tion Clause because an affirmance by anequally divided Court is conclusive andbinding upon the parties. United States v.Pink, 315 U.S. 203, 216, on which thejudges rely, concerned an earlier case inwhich the Court heard oral argument andapparently considered the merits beforeaffirming by an equally divided Court.The law of the case doctrine presumes ahearing on the merits. See, e.g., Quern v.Jordan, 440 U.S. 332, 347, n. 18. Whenthis case previously was here, due to ab-sence of a quorum, the Court could notconsider either the merits or whether toconsider those merits through a grant ofcertiorari. This fact, along with the obvi-ous difficulty of finding other equivalentsubstitute forums, convinces the Courtthat Pinkdoes not control here. Pp. 6–7.

(b) Although the Compensation Clauseprohibits taxation that singles out judgesfor specially unfavorable treatment, itdoes not forbid Congress to enact a lawimposing a nondiscriminatory tax (includ-ing an increase in rates or a change inconditions) upon judges and other citi-zens. See O’Malley v. Woodrough, 307U.S. 277, 282. Insofar as Evans v. Gore,253 U.S. 245, 255, holds to the contrary,that case is overruled. See O’Malley,

supra, at 283. There is no good reasonwhy a judge should not share the tax bur-dens borne by all citizens. See Evans,supra, at 265, 267 (Holmes, J., dissent-ing); O’Malley, supra, at 281–283. Al-though Congress cannot directly reducejudicial salaries even as part of an equi-table effort to reduce all Governmentsalaries, a tax law, unlike a law mandatinga salary reduction, affects compensationindirectly, not directly. See United Statesv. Will, 449 U.S. 200, 226. And those pro-phylactic considerations that may justifyan absolute rule forbidding direct salaryreductions are absent here, where indirecttaxation is at issue. In practice, the likeli-hood that a nondiscriminatory tax repre-sents a disguised legislative effort to in-fluence the judicial will is virtuallynonexistent. Hence the potential threatsto judicial independence that underlie theCompensation Clause, see Evans, supra,at 251–252, cannot justify a special judi-cial exemption from a commonly sharedtax, not even as a preventive measure tocounter those threats. Because theMedicare tax is nondiscriminatory, theFederal Circuit erred in finding its appli-cation to federal judges unconstitutional.Pp. 7–13.

(c) However, because the specialretroactivity-related Social Security rulesenacted in 1983 effectively singled outthen-sitting federal judges for unfavorabletreatment, the Compensation Clause for-bids the application of the Social Securitytax to those judges. Four features of thelaw, taken together, lead to the conclusionthat it discriminates in a manner theClause forbids. First, the statutory his-tory, context, purpose, and language indi-cate that the category of “federal employ-ees” is the appropriate class against whichthe asserted discrimination must be mea-sured. Second, the practical upshot ofdefining “covered” system in the way thelaw did was to permit nearly every then-current federal employee, but not federaljudges, to avoid the newly imposed oblig-ation to pay Social Security taxes. Third,the new law imposed a substantial cost onfederal judges with little or no expectationof substantial benefit for most of them.Inclusion meant a deduction of about$2,000 per year, whereas 95% of the then-active judges had already qualified forSocial Security (due to private sector em-ployment) before becoming judges. And

participation would benefit only the mi-nority of judges who had not worked thequarters necessary to be fully insuredunder Social Security. Fourth, the Gov-ernment’s sole justification for the statu-tory distinction between judges and otherhigh-level federal employees—i.e., equal-izing the financial burdens imposed bythe noncontributory judicial retirementsystem and the contributory system towhich the other employees belonged—isunsound because such equalization takesplace not by offering all current federalemployees (including judges) the sameopportunities, but by employing a statu-tory disadvantage which offsets an advan-tage related to those protections affordedjudges by the Clause, and because the twosystems are not equalized with any preci-sion. Thus, the 1983 law is very differentfrom the nondiscriminatory tax upheld inO’Malley, supra, at 282. The Govern-ment’s additional arguments—that ArticleIII protects judges only against a reduc-tion in stated salary, not against indirectmeasures that only reduce take-home pay;that there is no evidence here that Con-gress singled out judges for special treat-ment in order to intimidate, influence, orpunish them; and that the law disfavorednot only judges but also the President andother high-ranking federal employees—are unconvincing. Pp. 13–19.

2. The Compensation Clause violationwas not cured by the 1984 pay increasefor federal judges. The context in whichthat increase took place reveals nothing tosuggest that it was intended to makewhole the losses sustained by the pre-1983 judges. Rather, everything in therecord suggests that the increase wasmeant to halt a slide in purchasing powerresulting from continued and unadjusted-for inflation. Although a circumstance-specific approach is more complex thanthe Government’s proposed automatic ap-proach, whereby a later salary increasewould terminate a Compensation Clauseviolation regardless of the increase’s pur-pose, there is no reason why such relief asdamages or an exemption from Social Se-curity would prove unworkable. Will ,supra, distinguished. Pp. 19–22.

203 F.3d 795, affirmed in part, reversedin part, and remanded.

BREYER, J., delivered the opinion ofthe Court, in which REHNQUIST, C.J.,and KENNEDY, SOUTER, and GINS-

2001–44 I.R.B. 387 October 29, 2001

BURG, JJ., joined, and in whichSCALIA, J., joined as to Parts I, II, and V.SCALIA, J., filed an opinion concurringin part and dissenting in part. THOMAS,J., filed an opinion concurring in the judg-ment in part and dissenting in part.STEVENS, J., and O’CONNOR, J., tookno part in the consideration or decision ofthe case.


No. 99–1978

UNITED STATES, PETITIONER v.TERRY J. HATTER, JR., JUDGE,

UNITED STATES DISTRICT COURTFOR THE CENTRAL DISTRICT OF

CALIFORNIA, ET AL.

532 U.S. ___(2001)


APPEALS FOR THE FEDERALCIRCUIT

May 21, 2001

JUSTICE BREYER delivered the opin-ion of the Court.

The Constitution’s CompensationClause guarantees federal judges a “Com-pensation, which shall not be diminishedduring their Continuance in Office.” U.S.Const., Art. III, Sec. 1. The Court of Ap-peals for the Federal Circuit held that thisClause prevents the Government fromcollecting certain Medicare and SocialSecurity taxes from a small number offederal judges who held office nearly 20years ago—before Congress extended thetaxes to federal employees in the early1980’s.

In our view, the Clause does not pre-vent Congress from imposing a “non-dis-criminatory tax laid generally” uponjudges and other citizens, O’Malley v.Woodrough, 307 U.S. 277, 282 (1939),but it does prohibit taxation that singlesout judges for specially unfavorable treat-ment. Consequently, unlike the Court ofAppeals, we conclude that Congress mayapply the Medicare tax—a nondiscrimi-natory tax—to then-sitting federal judges.The special retroactivity-related SocialSecurity rules that Congress enacted in1984, however, effectively singled outthen-sitting federal judges for unfavorabletreatment. Hence, like the Court of Ap-

peals, we conclude that the Clause forbidsthe application of the Social Security taxto those judges.

I

A

The Medicare law before us is straight-forward. In 1965, Congress created aFederal Medicare “hospital insurance”program and tied its financing to SocialSecurity. See Social Security Amend-ments of 1965, 79 Stat. 291. TheMedicare law required most Americanworkers (whom Social Security covered)to pay an additional Medicare tax. But itdid not require Federal Government em-ployees (whom Social Security did notcover) to pay that tax. See 26 U.S.C. Sec-tions 3121(b)(5), (6) (1982 ed.).

In 1982, Congress, believing that“[f]ederal workers should bear a more eq-uitable share of the costs of financing thebenefits to which many of them eventu-ally became entitled,” S. Rep. No.97–494, pt. 1, p. 378 (1982), extendedboth Medicare eligibility and Medicaretaxes to all currently employed federalemployees as well as to all newly hiredfederal employees, Tax Equity and FiscalResponsibility Act of 1982, Sec. 278, 96Stat. 559–563. That new law meant that(as of January 1, 1983) all federal judges,like all other federal employees and mostother citizens, would have to contributebetween 1.30% and 1.45% of their federalsalaries to Medicare’s hospital insurancesystem. See 26 U.S.C. Sections3101(b)(4)–(6).

The Social Security law before us ismore complex. In 1935, Congress createdthe Social Security program. See SocialSecurity Act, 49 Stat. 620. For nearly 50years, that program covered employees inthe private sector, but it did not coverGovernment employees. See 26 U.S.C.Sections 3121(b)(5), (6) (1982 ed.) (ex-cluding federal employees); Sec.3121(b)(7) (excluding state employees).In 1981, a National Commission on So-cial Security Reform, convened by thePresident and chaired by Alan Greenspan,noting the need for “action . . . tostrengthen the financial status” of SocialSecurity, recommended that Congress ex-tend the program to cover Federal, but notstate or local, Government employees.Report of the National Commission on

Social Security Reform 2–1, 2–7 (Jan.1983). In particular, the Commission rec-ommended that Congress require all in-coming federal employees (those hiredafter January 1, 1984) to enter the SocialSecurity system and to pay Social Secu-rity taxes. Id., at 2–7. The Commissionemphasized that “present Federal employ-ees will not be affected by this recom-mendation.” Id., at 2–8.

In 1983, Congress enacted the Com-mission’s recommendation into law (ef-fective January 1, 1984) with an impor-tant exception. See Social SecurityAmendments of 1983, Sec. 101(b)(1), 97Stat. 69 (amending 26 U.S.C. Sections3121(b)(5), (6)). As the Commission hadrecommended, Congress required allnewly hired federal employees to partici-pate in the Social Security program. Italso permitted, without requiring, almostall (about 96%) then-currently employedfederal employees to participate.

Contrary to the Commission’s recom-mendation, however, the law added an ex-ception. That exception seemed to restrictthe freedom of choice of the remaining4% of all current employees. This classconsisted of the President, Vice President,high-level Executive Branch employees,Members of Congress, a few other Leg-islative Branch employees, and all federaljudges. See 42 U.S.C. Sections410(a)(5)(C)–(G); see also H.R. Rep. No.98–25, p. 39 (1983); H.R. Conf. Rep. No.98–542, p. 13 (1983) (noting that forthese current federal employees “the rulesare being changed in the middle of thegame”). The new law seemed to requirethis class of current federal employees toenter into the Social Security program,see 42 U.S.C. Sections 410(a)(5)(C)–(G).But, as to almost all of these employees,the new law imposed no additional finan-cial obligation or burden.

That is because the new law then cre-ated an exception to the exception, seeFederal Employees’ Retirement Contribu-tion Temporary Adjustment Act of 1983,Secs. 203(a)(2), 208, 97 Stat. 1107, 1111(codified at note following 5 U.S.C. Sec.8331). The exception to the exceptionsaid that any member of this small classof current high-level officials (4% of allthen-current employees) who contributedto a “covered” retirement programnonetheless could choose to modify theirparticipation in a manner that left their

October 29, 2001 388 2001–44 I.R.B.

total payroll deduction—for retirementand Social Security—unchanged. A“covered” employee paying 7% of salaryto a “covered” program could continue topay that 7% and no more, in effect avoid-ing any additional financial obligation asa result of joining Social Security.

The exception to the exception defineda “covered” program to include the CivilService Retirement and Disability Sys-tem—a program long available to almostall federal employees—as well as anyother retirement system to which an em-ployee must contribute. Secs.203(a)(2)(A), (D). The definition of“covered” program, however, did not en-compass the pension system for federaljudges—a system that is noncontributoryin respect to a judge (but contributory inrespect to a spouse).

The upshot is that the 1983 law wasspecifically aimed at extending Social Se-curity to federal employees. It left about96% of those who were currently em-ployed free to choose not to participate inSocial Security, thereby avoiding any in-creased financial obligation. It requiredthe remaining 4% to participate in SocialSecurity while freeing them of any addedfinancial obligation (or additional payrolldeduction) so long as they previously hadparticipated in other contributory retire-ment programs. But it left those whocould not participate in a contributoryprogram without a choice. Their financialobligations (and payroll deductions) hadto increase. And this last mentionedgroup consisted almost exclusively offederal judges.

B

This litigation began in 1989, wheneight federal judges, all appointed before1983, sued the Government for “compen-sation” in the United States Claims Court.They argued that the 1983 law, in requir-ing them to pay Social Security taxes, vi-olated the Compensation Clause. Ini-tially, the Claims Court ruled against thejudges on jurisdictional grounds. 21 Cl.Ct. 786 (1990). The Court of Appeals re-versed. 953 F.2d 626 (CA Fed. 1992).On remand, eight more judges joined thelawsuit. They contested the extension tojudges of the Medicare tax as well.

The Court of Federal Claims heldagainst the judges on the merits. 31 Fed.Cl. 436 (1994). The Federal Circuit re-

versed, ordering summary judgment forthe judges as to liability. 64 F.3d 647(1995). The Government petitioned thisCourt for writ of certiorari. Some Mem-bers of this Court were disqualified fromhearing the matter, and we failed to find aquorum of six Justices. See 28 U.S.C.Sec. 1. Consequently, the Court of Ap-peals’ judgment was affirmed “with thesame effect as upon affirmance by anequally divided court.” 519 U.S. 801(1996); see 28 U.S.C. Sec. 2109.

On remand from the Court of Appeals,the Court of Federal Claims found (a) thatthe 6-year statute of limitations, see 28U.S.C. Sections 2401(a), 2501, barredsome claims, including all Medicareclaims; and (b) that, in any event, a subse-quently enacted judicial salary increasepromptly cured any violation, makingdamages minimal. 38 Fed. Cl. 166(1997). The Court of Appeals (eventuallyen banc) reversed both determinations.203 F.3d 795 (CA Fed. 2000).

The Government again petitioned forcertiorari. It asked this Court to considertwo questions:

(1) Whether Congress violated theCompensation Clause when it extendedthe Medicare and Social Security taxes tothe salaries of sitting federal judges; and

(2) If so, whether any such violationended when Congress subsequently in-creased the salaries of all federal judgesby an amount greater than the new taxes.

Given the specific statutory provisionsat issue and the passage of time, sevenMembers of this Court had (and nowhave) no financial stake in the outcome ofthis case. Consequently a quorum was,and is, available to consider the questionspresented. And we granted the Govern-ment’s petition for writ of certiorari.

II

At the outset, the judges claim that the“law of the case” doctrine prevents usfrom now considering the first questionpresented, namely, the scope of the Com-pensation Clause. They note that theGovernment presented that same questionin its petition from the Court of Appeals’earlier ruling on liability. They point outthat our earlier denial of that petition forlack of a quorum had the “same effect as”an “affirmance by an equally dividedcourt,” 28 U.S.C. Sec. 2109. And theyadd that this Court has said that an affir-

mance by an equally divided Court is“conclusive and binding upon the partiesas respects that controversy.” UnitedStates v. Pink, 315 U.S. 203, 216 (1942).

Pink, however, concerned a case,United States v. Moscow Fire Ins. Co.,309 U.S. 624 (1940), in which this Courthad heard oral argument and apparentlyconsidered the merits prior to concludingthat affirmance by an equally dividedCourt was appropriate. The law of thecase doctrine presumes a hearing on themerits. See, e.g., Quern v. Jordan, 440U.S. 332, 347, n. 18 (1979). This casedoes not involve a previous considerationof the merits. Indeed, when this case pre-viously was before us, due to absence of aquorum, we could not consider either themerits or whether to consider those meritsthrough grant of a writ of certiorari. Thisfact, along with the obvious difficulty offinding other equivalent substitute fo-rums, convinces us that Pink’s statementdoes not control the outcome here, thatthe “law of the case” doctrine does notprevent our considering both issues pre-sented, and that we should now proceedto decide them.

III

The Court of Appeals upheld thejudges’ claim of tax immunity upon theauthority of Evans v. Gore, 253 U.S. 245(1920). That case arose in 1919, whenJudge Walter Evans challenged Congress’authority to include sitting federal judgeswithin the scope of a federal income taxlaw that the Sixteenth Amendment hadauthorized a few years earlier. See Rev-enue Act of 1918, Sec. 213, 40 Stat. 1065(defining “gross income” to include judi-cial salaries). In Evansitself, the Courtheld that the Compensation Clause barredapplication of the tax to Evans, who hadbeen appointed a judge before Congressenacted the tax. 253 U.S., at 264. A fewyears later, the Court extended Evans,making clear that its rationale covered notonly judges appointed before Congressenacted a tax but also judges whose ap-pointments took place after the tax hadbecome law. See Miles v. Graham, 268U.S. 501, 509 (1925).

Fourteen years after deciding Miles,this Court overruled Miles. O’Malley v.Woodrough, 307 U.S. 277 (1939). But,as the Court of Appeals noted, this Courtdid not expressly overrule Evansitself.

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64 F.3d, at 650. The Court of Appealsadded that if “changes in judicial doc-trine” had significantly underminedEvans’ holding, this “Court itself wouldhave overruled the case.” Ibid. Notingthat this case is like Evans (involvingjudges appointed before enactment ofthe tax), not like O’Malley (involvingjudges appointed after enactment of thetax), the Court of Appeals held thatEvanscontrolled the outcome. 64 F.3d,at 650. Hence application of bothMedicare and Social Security taxes tothese pre-enactment judges violated theCompensation Clause.

The Court of Appeals was correct inapplying Evansto the instant case, giventhat “it is this Court’s prerogative alone tooverrule one of its precedents.” State OilCo. v. Khan, 522 U.S. 3, 20 (1997); seealso Rodriguez de Quijas v.Shearson/American Express, Inc., 490U.S. 477, 484 (1989). Nonetheless, thecourt below, in effect, has invited us to re-consider Evans. We now overrule Evansinsofar as it holds that the CompensationClause forbids Congress to apply a gener-ally applicable, nondiscriminatory tax tothe salaries of federal judges, whether ornot they were appointed before enactmentof the tax.

The Court’s opinion in Evansbegan byexplaining why the Compensation Clauseis constitutionally important, and webegin by reaffirming that explanation. AsEvanspoints out, 253 U.S., at 251–252,the Compensation Clause, along with theClause securing federal judges appoint-ments “during good Behavior,” U.S.Const., Art. III, Sec. 1—the practicalequivalent of life tenure—helps to guar-antee what Alexander Hamilton called the“complete independence of the courts ofjustice.” The Federalist No. 78, p. 466(C. Rossiter ed. 1961). Hamilton thoughtthese guarantees necessary because theJudiciary is “beyond comparison theweakest of the three” branches of govern-ment. Id., at 465–466. It has “no influ-ence over either the sword or the purse.”Id., at 465. It has “no direction either ofthe strength or of the wealth of the soci-ety.” Ibid. It has “neither FORCE norWILL but merely judgment.” Ibid.

Hamilton’s view, and that of manyother Founders, was informed by first-hand experience of the harmful conse-quences brought about when a King of

England “made Judges dependent on hisWill alone, for the tenure of their offices,and the amount and payment of theirsalaries.” The Declaration of Indepen-dence, Par. 11. And Hamilton knew that“ a power over a man’s subsistenceamounts to a power over his will.” TheFederalist No. 79, at 472. For this reason,he observed, “[n]ext to permanency in of-fice, nothing can contribute more to theindependence of the judges than a fixedprovision for their support.” Ibid.; seealso id., No. 48 at 310 (J. Madison) (“[A]sthe legislative department alone has ac-cess to the pockets of the people, and has . . . full discretion . . . over the pecuniaryrewards of those who fill the other depart-ments, a dependence is thus created in thelatter, which gives still greater facility toencroachments of the former”).

Evansproperly added that these guar-antees of compensation and life tenureexist, “not to benefit the judges,” but “as alimitation imposed in the public interest.”253 U.S., at 253. They “promote the pub-lic weal,” id., at 248, in part by helping toinduce “learned” men and women “to quitthe lucrative pursuits” of the private sec-tor, 1 J. Kent, Commentaries on AmericanLaw *294, but more importantly by help-ing to secure an independence of mindand spirit necessary if judges are “tomaintain that nice adjustment between in-dividual rights and governmental powerswhich constitutes political liberty,” W.Wilson, Constitutional Government in theUnited States 143 (1911).

Chief Justice John Marshall pointedout why this protection is important. Ajudge may have to decide “between theGovernment and the man whom thatGovernment is prosecuting: between themost powerful individual in the commu-nity, and the poorest and most unpopu-lar.” Proceedings and Debates of the Vir-ginia State Convention, of 1829–1830, p.616 (1830). A judge’s decision may af-fect an individual’s “property, his reputa-tion, his life, his all.” Ibid. In the “exer-cise of these duties,” the judge must“observe the utmost fairness.” Ibid. Thejudge must be “perfectly and completelyindependent, with nothing to influence orcontro[l] him but God and his con-science.” Ibid. The “greatest scourge . . .ever inflicted,” Marshall thought, “wasan ignorant, a corrupt, or a dependent Ju-diciary.” Id., at 619.

Those who founded the Republic rec-ognized the importance of these constitu-tional principles. See, e.g., Wilson, Lec-tures on Law (1791), in 1 Works of JamesWilson 363 (J. Andrews ed. 1896); (stat-ing that judges should be “completely in-dependent” in “their salaries, and in theiroffices”); McKean, Debate in Pennsylva-nia Ratifying Convention, Dec. 11, 1787,in 2 Debates on the Federal Constitution539 (J. Elliot ed. 1836) (the security ofundiminished compensation disposesjudges to be “more easy and indepen-dent”); see also 1 Kent, supra, at *294(“permanent support” and the “tenure oftheir office” “is well calculated . . . to give[judges] the requisite independence”).They are no less important today than inearlier times. And the fact that we over-rule Evansdoes not, in our view, diminishtheir importance.

We also agree with Evansinsofar as itholds that the Compensation Clause of-fers protections that extend beyond a leg-islative effort directly to diminish ajudge’s pay, say by ordering a lowersalary. 253 U.S., at 254. Otherwise a leg-islature could circumvent even the mostbasic Compensation Clause protection byenacting a discriminatory tax law, for ex-ample, that precisely but indirectlyachieved the forbidden effect.

Nonetheless, we disagree with Evans’application of Compensation Clause prin-ciples to the matter before it—a nondis-criminatory tax that treated judges thesame way it treated other citizens. Evans’basic holding was that the CompensationClause forbids such a tax because theClause forbids “all diminution,” including“taxation,” “whether for one purpose oranother.” Id., at 255. The Federal Circuitrelied upon this holding. 64 F.3d, at 650.But, in our view, it is no longer sound law.

For one thing, the dissenters in Evanscast the majority’s reasoning into doubt.Justice Holmes, joined by Justice Bran-deis, wrote that the Compensation Clauseoffers “no reason for exonerating” a judge“from the ordinary duties of a citizen,which he shares with all others. To re-quire a man to pay the taxes that all othermen have to pay cannot possibly be madean instrument to attack his independenceas a judge.” Evans, 253 U.S., at 265.Holmes analogized the “diminution” thata tax might bring about to the burden thata state law might impose upon interstate

commerce. If “there was no discrimina-tion against such commerce, the tax con-stituted one of the ordinary burdens ofgovernment from which parties were notexempted.” Id., at 267.

For another thing, this Court’s subse-quent law repudiated Evans’ reasoning.In 1939, 14 years after Miles extendedEvans’ tax immunity to judges appointedafter enactment of the tax, this Court re-treated from that extension. See O’Mal-ley, 307 U.S., at 283 (overruling Miles).And in so doing the Court, in an opinionannounced by Justice Frankfurter,adopted the reasoning of the Evansdis-sent. The Court said that the question waswhether judges are immune “from the in-cidences of taxation to which everyoneelse within the defined classes . . . is sub-jected.” Id., at 282. Holding that judgesare not “immun[e] from sharing with theirfellow citizens the material burden of thegovernment,” ibid., the Court pointed outthat the legal profession had criticizedEvans’ contrary conclusion, and thatcourts outside the United States had re-solved similar matters differently, id., at281. And the Court concluded that “anondiscriminatory tax laid generally onnet income is not, when applied to the in-come of a federal judge, a diminution ofhis salary within the prohibition of ArticleIII.” Id., at 282. The Court conceded thatMiles had reached the opposite conclu-sion, but it said that Miles “cannot sur-vive.” 307 U.S., at 283. Still later, thisCourt noted that “[b]ecause Miles reliedon Evans v. Gore, O’Malley must also beread to undermine the reasoning ofEvans.” United States v. Will, 449 U.S.200, 227, n. 31 (1980).

Finally, and most importantly, we be-lieve that the reasoning of JusticesHolmes and Brandeis, and of this Court inO’Malley, is correct. There is no goodreason why a judge should not share thetax burdens borne by all citizens. Weconcede that this Court has held that theLegislature cannot directly reduce judicialsalaries even as part of an equitable effortto reduce all Government salaries. See449 U.S., at 226. But a tax law, unlike alaw mandating a salary reduction, affectscompensation indirectly, not directly. Seeibid. (distinguishing between measuresthat directly and those that indirectly di-minish judicial compensation). And thoseprophylactic considerations that may jus-

tify an absolute rule forbidding directsalary reductions are absent here, whereindirect taxation is at issue. In practice,the likelihood that a nondiscriminatorytax represents a disguised legislative ef-fort to influence the judicial will is virtu-ally nonexistent. Hence, the potentialthreats to judicial independence that un-derlie the Constitution’s compensationguarantee cannot justify a special judicialexemption from a commonly shared tax,not even as a preventive measure tocounter those threats.

For these reasons, we hold that theCompensation Clause does not forbidCongress to enact a law imposing anondiscriminatory tax (including an in-crease in rates or a change in conditions)upon judges, whether those judges wereappointed before or after the tax law inquestion was enacted or took effect. Inso-far as Evans holds to the contrary, thatcase, in O’Malley’s words, “cannot sur-vive.” 307 U.S., at 283.

The Government points out that theMedicare tax is just such a nondiscrimina-tory tax. Neither the courts below, nor thefederal judges here, argue to the contrary.Hence, insofar as the Court of Appealsfound that application of the Medicare taxlaw to federal judges is unconstitutional,we reverse its decision.

IV

The Social Security tax is a differentmatter. Respondents argue that the 1983law imposing that tax upon then-sittingjudges violates the Compensation Clause,for it discriminates against judges in amanner forbidden by the Clause, even asinterpreted in O’Malley, not Evans. Cf.O’Malley, supra, at 282 (stating questionas whether judges are immune “from theincidences of taxation to which everyoneelse within the defined classes. . . is sub-jected” (emphasis added)). After examin-ing the statute’s details, we agree with thejudges that it does discriminate in a man-ner that the Clause forbids. Four featuresof the law, taken together, lead us to thisconclusion.

First, federal employees had remainedoutside the Social Security system fornearly 50 years prior to the passage of the1983 law. Congress enacted the law pur-suant to the Social Security Commission’srecommendation to bring those employ-ees within the law. See supra, at 3. And

the law itself deals primarily with thatsubject. Thus, history, context, statutorypurpose, and statutory language, taken to-gether, indicate that the category of “fed-eral employees” is the appropriate classagainst which we must measure the as-serted discrimination.

Second, the law, as applied in practice,in effect imposed a new financial obliga-tion upon sitting judges, but it did not im-pose a new financial burden upon anyother group of (then) current federal em-ployees. We have previously explainedwhy that is so. See supra, at 3–5. Thelaw required all newly hired federal em-ployees to join Social Security and pay re-lated taxes. It gave 96% of all currentemployees (employed as of January 1,1984 or earlier) total freedom to enter, ornot to enter, the system as they chose. Itgave the remaining 4% of all current em-ployees the freedom to maintain their pre-1984 payroll deductions, provided thatthey were currently enrolled in a “cov-ered” system. And it defined “covered”system in a way that included virtually allof that 4%, except for federal judges. Seesupra, at 4–5. The practical upshot is thatthe law permitted nearly every currentfederal employee, but not federal judges,to avoid the newly imposed financialobligation.

Third, the law, by including sittingjudges in the system, adversely affectedmost of them. Inclusion meant a require-ment to pay a tax of about $2,000 peryear, deducted from a monthly salarycheck. App. 49. At the same time, 95%of the then-active judges had alreadyqualified for Social Security (due to pri-vate sector employment) before becomingjudges. See id., at 115. And participationin Social Security as judges would benefitonly a minority. See id., at 116–119 (re-viewing examples of individual judgesand demonstrating that participation inSocial Security primarily would benefitthe minority of judges who had notworked the 40 quarters necessary to befully insured). The new law imposed asubstantial cost on federal judges with lit-tle or no expectation of substantial benefitfor most of them.

Fourth, when measured against Com-pensation Clause objectives, the Govern-ment’s justification for the statutory dis-tinction (between judges, who do, andother federal employees, who do not,

October 29, 2001 390 2001–44 I.R.B.

incur additional financial obligations) isunsound. The sole justification, accord-ing to the Government, is one of“equaliz[ing]” the retirement-relatedobligations that pre-1983 law imposedupon judges with the retirement-relatedobligations that pre-1983 law imposedupon other current high-level federal em-ployees. Brief for United States 40.Thus, the Government says that the newfinancial burden imposed upon judgeswas meant to make up for the fact that thejudicial retirement system is basically anoncontributory system, while the systemto which other federal employees be-longed was a contributory system. Id., at39–40; Reply Brief for United States 16.

This rationale, however, is the Govern-ment’s and not necessarily that of Con-gress, which was silent on the matter. Cf.Motor Vehicle Mfrs. Assn. of UnitedStates, Inc. v. State Farm Mut. Automo-bile Ins. Co., 463 U.S. 29, 50 (1983) (ex-pressing concern at crediting post hocex-planation of agency action).

More importantly, the judicial retire-ment system is noncontributory because itreflects the fact that the Constitution itselfguarantees federal judges life tenure—thereby constitutionally permitting fed-eral judges to draw a salary for life simplyby continuing to serve. Cf. Booth v.United States, 291 U.S. 339, 352 (1934)(holding that Compensation Clause pro-tects salary of judge who has retired).That fact means that a contributory sys-tem, in all likelihood, would not work.And, of course, as of 1982, the noncon-tributory pension salary benefits werethemselves part of the judge’s compensa-tion. The 1983 statute consequently sin-gles out judges for adverse treatmentsolely because of a feature required by theConstitution to preserve judicial inde-pendence. At the same time, the“equaliz[ation]” in question takes placenot by offering all current federal employ-ees (including judges) the same opportu-nities but by employing a statutory disad-vantage which offsets a constitutionallyguaranteed advantage. Hence, to acceptthe “justification” offered here is to per-mit, through similar reasoning, taxeswhich have the effect of weakening oreliminating those constitutional guaran-tees necessary to secure judicial indepen-dence, at least insofar as similar guaran-tees are not enjoyed by others. This point

would be obvious were Congress, say, todeny some of the benefits of a tax reduc-tion to those with constitutionally guaran-teed life tenure to make up for the factthat other employees lack such tenure.Although the relationships here—amongadvantages and disadvantages—are lessdistant and more complex, the principle issimilar.

Nor does the statute “equaliz[e]” withany precision. On the one hand, the then-current retirement system open to all fed-eral employees except judges required atypical employee to contribute 7% to 8%of his or her annual salary. See generally5 U.S.C. Sec. 8334(a)(1). In return it pro-vided a Member of Congress, for in-stance, with a pension that vested afterfive years and increased in value (by2.5% of the Member’s average salary)with each year of service to a maximumof 80% of salary, and covered both em-ployee and survivors. See 5 U.S.C. Sec-tions 8339, 8341. On the other hand, thejudges’ retirement system (based on lifetenure) required no contribution for ajudge who retired at age 65 (and who metcertain service requirements) to receivefull salary. But the right to receive thatsalary did not vest until retirement. Thesystem provided nothing for a judge wholeft office before age 65. Nor did the lawprovide any coverage for a judge’s sur-vivors. Indeed, in 1984, a judge had tocontribute 4.5% of annual salary to obtaina survivor’s annuity, which increased invalue by 1.25% of the judge’s salary peryear to a maximum of 40% of salary. 28U.S.C. Sections 376(b), (1) (1982 ed.).

These two systems were not equal ei-ther before or after Congress enacted the1983 law. Before 1983, a typical marriedfederal employee other than a judge hadto contribute 7 to 8% of annual salary toreceive benefits that were better in somerespects (vesting period, spousal benefit)and worse in some respects (80% salarymaximum) than his married judicial coun-terpart would receive in return for a 4.5%contribution. The 1983 law imposed anadded 5.7% burden upon the judge, in re-turn for which the typical judge receivedlittle, or no, financial benefit. Viewedpurely in financial equalization terms, andas applied to typical judges, the new re-quirement seems to over-equalize, puttingthe typical married judge at a financialdisadvantage—though perhaps it would

produce greater equality when applied toother, less typical examples.

Taken together, these four characteris-tics reveal a law that is special—in itsmanner of singling out judges for disad-vantageous treatment, in its justificationas necessary to offset advantages relatedto constitutionally protected features ofthe judicial office, and in the degree ofpermissible legislative discretion thatwould have to underlie any determinationthat the legislation has “equalized” ratherthan gone too far. For these reasons, thelaw before us is very different from the“nondiscriminatory” tax that O’Malleyupheld. 307 U.S., at 282. Were the Com-pensation Clause to permit Congress toenact a discriminatory law with these fea-tures, it would authorize the Legislatureto diminish, or to equalize away, thosevery characteristics of the Judicial Branchthat Article III guarantees—characteris-tics which, as we have said, see supra, at9–10, the public needs to secure that judi-cial independence upon which its rightsdepend. We consequently conclude thatthe 1983 Social Security tax law discrimi-nates against the Judicial Branch, in vio-lation of the Compensation Clause.

The Government makes additional ar-guments in support of reversal. But wefind them unconvincing. It suggests thatArticle III protects judges only against areduction in stated salary, not against in-direct measures that only reduce take-home pay. Brief for United States 28. InO’Malley, however, this Court, when up-holding a “nondiscriminatory” tax,strongly implied that the CompensationClause would bar a discriminatory tax.307 U.S., at 282. The commentatorswhose work O’Malley cited said so ex-plicitly. See Fellman, The Diminution ofJudicial Salaries, 24 Iowa L. Rev. 89, 99(1938); see also Hall, Case Comment, 20Ill. L. Rev. 376, 377 (1925); Corwin,Constitutional Law in 1919–1920, 14 Am.Pol. Sci. Rev. 635, 642 (1920). And inWill, the Court yet more strongly indi-cated that the Compensation Clause barsindirect efforts to reduce judges’ salariesthrough taxes when those taxes discrimi-nate. 449 U.S., at 226. Indeed, the Gov-ernment itself “assume[s] that discrimina-tory taxation of judges would contravenefundamental principles underlying ArticleIII, if not the [Compensation] Clause it-self.” Brief for United States 37, n. 27.

2001–44 I.R.B. 391 October 29, 2001

The Government also argues that thereis no evidence here that Congress singledout judges for special treatment in orderto intimidate, influence, or punish them.But, this Court has never insisted uponsuch evidence. To require it is to invitelegislative efforts that embody, but lackevidence of, some such intent, engender-ing suspicion among the branches andconsequently undermining that mutualrespect that the Constitution demands.Cf. Wilson, Lectures on Law, in 1 Worksof James Wilson, at 364 (stating thatjudges “should be removed from themost distant apprehension of being af-fected, in their judicial character and ca-pacity, by anything, except their own be-havior and its consequences”). Nothingin the record discloses anything otherthan benign congressional motives. Ifthe Compensation Clause is to offermeaningful protection, however, we can-not limit that protection to instances inwhich the Legislature manifests, say, di-rect hostility to the Judiciary.

Finally, the Government correctlypoints out that the law disfavored notonly judges but also the President of theUnited States and certain LegislativeBranch employees. As far as we can de-termine, however, all Legislative Branchemployees were free to join a coveredsystem, and the record provides us withno example of any current LegislativeBranch employee who had failed to doso. See Tr. of Oral Arg. 16–17, 37–38.The President’s pension is noncontribu-tory. See note following 3 U.S.C. Sec.102. And the President himself, like thejudges, is protected against diminutionin his “[c]ompensation.” See U.S.Const., Art. II, Sec. 1. These facts mayhelp establish congressional good faith.But, as we have said, we do not doubtthat good faith. And we do not see why,otherwise, the separate and special ex-ample of that single individual, the Pres-ident, should make a critical differencehere.

We conclude that, insofar as the 1983statute required then-sitting judges to jointhe Social Security System and pay SocialSecurity taxes, that statute violates theCompensation Clause.

V

The second question presented iswhether the

“constitutional violation ended whenCongress increased the statutorysalaries of federal judges by anamount greater than the amount [ofthe Social Security] taxes deductedfrom respondents’ judicial salaries.”Pet. for Cert. (I).

The Government argues for an affirma-tive answer. It points to a statutory salaryincrease that all judges received in 1984.It says that this increase, subsequent tothe imposition of Social Security taxes onjudges’ salaries, cured any earlier uncon-stitutional diminution of salaries in alesser amount. Otherwise, if “Congressimproperly reduced judges salaries from$140,000” per year “to $130,000” peryear, the judges would be able to collectthe amount of the improper reduction,here $10,000, forever—even if Congresscured the improper reduction by raisingsalaries $20,000, to $150,000, a year later.Reply Brief for United States 18. Toavoid this consequence, the Governmentargues, we should simply look to the factof a later salary increase “whether or notone of Congress’s purposes in increasingthe salaries” was “to terminate the consti-tutional violation.” Ibid.

But how could we always decidewhether a later salary increase terminatesa constitutional violation without examin-ing the purpose of that increase? Imaginea violation that affected only a few. Toaccept the Government’s position, wouldleave those few at a permanent salary dis-advantage. If, for example, Congress re-duced the salaries of one group of judgesby 20%, a later increase of 30% applica-ble to all judges would leave the firstgroup permanently 20% behind. And apay cut that left those judges at a perma-nent disadvantage, would perpetuate thevery harm that the Compensation Clauseseeks to prevent.

The Court of Appeals consequently ex-amined the context in which the later payincreases took place in order to determinetheir relation to the earlier CompensationClause violation. It found “nothing tosuggest” that the later salary increase atissue here sought “to make whole thelosses sustained by the pre-1983 judges.”185 F.3d, at 1362–1363. The Govern-ment presents no evidence to the contrary.

The relevant economic circumstancessurrounding the 1984, and subsequent,salary increases include inflation suffi-

ciently serious to erode the real value ofjudicial salaries and salary increases in-sufficient to maintain real salaries or realcompensation parity with many other pri-vate-sector employees. See Report of1989 Commission on Executive, Legisla-tive, and Judicial Salaries, Hearings be-fore the Senate Committee on Govern-mental Affairs, 101st Cong., 1st Sess.,12–13 (1989) (testimony of Lloyd Cutlerregarding effect of inflation on judges’salaries since 1969). For instance, whileconsumer prices rose 363% between 1969and 1999, salaries in the private sectorrose 421%, and salaries for district judgesrose 253%. See American Bar Associa-tion, Federal Judicial Pay Erosion 11(Feb. 2001). These figures strongly sug-gest that the judicial salary increases sim-ply reflected a congressional effort to re-store both to judges and to Members ofCongress themselves some, but not all, ofthe real compensation that inflation haderoded. Those salary increases amountedto a congressional effort to adjust judicialsalaries to reflect “fluctuations in thevalue of money,” The Federalist No. 79,at 473 (A. Hamilton)—the kind of adjust-ment that the Founders believed “may berequisite,” McKean, Debate in Pennsylva-nia Ratifying Convention, Dec. 11, 1787,in 2 Debates on the Federal Constitution,at 539; see also Rosenn, The Constitu-tional Guaranty Against Diminution ofJudicial Compensation, 24 UCLA L. Rev.308, 314–315 (1976).

We have found nothing to the contrary.And, we therefore agree with the Court ofAppeals’ similar conclusion. 185 F.3d at1363 (“[E]verything in the record” sug-gests that the increase was meant to halt“the slide in purchasing power resultingfrom continued and unadjusted-for infla-tion”).

The Government says that a circum-stance-specific approach may prove diffi-cult to administer. Brief for United States43. And we concede that examining thecircumstances in order to determinewhether there is or is not a relation be-tween an earlier violation and a later in-crease is more complex than the Govern-ment’s proposed automatic approach. Butwe see no reason why such relief as dam-ages or an exemption from Social Secu-rity would prove unworkable.

Finally, the Government looks to ourdecision in Will for support. In that case,

October 29, 2001 392 2001–44 I.R.B.

federal judges challenged the constitu-tionality of certain legislative “freezes”that Congress had imposed upon earlierenacted Government-wide cost-of-livingsalary adjustments. The Court found aCompensation Clause violation in re-spect to the freeze for what was desig-nated Year One (where Congress had re-scinded an earlier-voted 4.8% salaryincrease). Will, 449 U.S., at 225–226.The Government points out that the WillCourt “noted that Congress, later in thatfiscal year, enacted a statutory increasein judges’ salaries that exceeded thesalaries that judges would have re-ceived” without the rescission. Brief forUnited States 41. And the Governmentadds that “it was unquestioned in Will”that the judges could not receive dam-ages for the time subsequent to this laterenactment. Id., at 41–42.

The Will Year One example, however,shows only that, in the circumstances, andunlike the case before us, the later salaryincrease was related to the earlier salarydiminishment. Regardless, the very factthat the matter was “unquestioned” in Willshows that it was not argued. See 449U.S., at 206, n. 3 (noting that the judges’complaint sought relief for Year One’sdiminution only up to the moment of thesubsequent salary increase). Hence, theCourt did not decide the matter now be-fore us.

We conclude that later statutory salaryincreases did not cure the preceding un-constitutional harm.

VI

Insofar as the Court of Appeals foundthe application of Medicare taxes to thesalaries of judges taking office before1983 unconstitutional, its judgment is re-versed. Insofar as that court found the ap-plication of Social Security taxes to thesalaries of judges taking office before1984 unconstitutional, its judgment is af-firmed. We also affirm the Court of Ap-peals’ determination that the 1984 salaryincrease received by federal judges didnot cure the Compensation Clause viola-tion. The case is remanded for furtherproceedings consistent with this opinion.

It is so ordered.

JUSTICE STEVENS and JUSTICEO’CONNOR took no part in the consider-ation or decision of this case.


No. 99–1978



CALIFORNIA, ET AL.


APPEALS FOR THE FEDERAL CIRCUIT

May 21, 2001

JUSTICE SCALIA, concurring in partand dissenting in part.

I agree with the Court that extendingthe Social Security tax to sitting ArticleIII judges in 1984 violated Article III’sCompensation Clause. I part paths withthe Court on the issue of extending theMedicare tax to federal judges in 1983,which I think was also unconstitutional.1

I

As an initial matter, I think the Court isright in concluding that Evans v. Gore,253 U.S. 245 (1920)—holding that newtaxes of general applicability cannot beapplied to sitting Article III judges—is nolonger good law, and should be overruled.We went out of our way in O’Malley v.Woodrough, 307 U.S. 277, 280–281(1939), to catalog criticism of Evans, andsubsequently recognized, in United Statesv. Will, 449 U.S. 200, 227, and n. 31(1980), that O’Malley had “undermine[d]the reasoning of Evans.” The Court’s de-cision today simply recognizes whatshould be obvious: that Evanshas notonly been undermined, but has in fact col-lapsed.

II

My disagreement with the Court arisesfrom its focus upon the issue of discrimi-nation, which turns out to be dispositivewith respect to the Medicare tax. The

Court holds “that the CompensationClause does not forbid Congress to enacta law imposing a nondiscriminatory tax . . . upon judges, whether those judgeswere appointed before or after the tax lawin question was enacted or took effect.”Ante, at 12. Since “the Medicare tax isjust such a nondiscriminatory tax,” theCourt concludes that “application of [that]tax law to federal judges is [c]onstitu-tional.” Ante,at 12–13.

But we are dealing here with a “Com-pensation Clause,” not a “Discrimina-tion Clause.” See U.S. Const., Art III,Sec. 1 (“The Judges . . . shall, at statedTimes, receive for their Services, aCompensation, which shall not be di-minished during their Continuance inOffice”). As we have said, “the Consti-tution makes no exceptions for ‘nondis-criminatory’ reductions” in judicialcompensation, Will, supra, at 226. A re-duction in compensation is a reductionin compensation, even if all federal em-ployees are subjected to the same cut.The discrimination criterion that theCourt uses would make sense if the onlypurpose of the Compensation Clausewere to prevent invidious (and possiblycoercive) action against judges. But asthe Court acknowledges, the Clause“‘promote[s] the public weal’ . . . byhelping to induce ‘learned’ men andwomen to ‘quit the lucrative pursuits’ ofthe private sector,” ante, at 9 (quotingEvans, supra, at 248; 1 J. Kent, Com-mentaries on American Law *294).That inducement would not exist if Con-gress could cut judicial salaries so longas it did not do so discriminatorily.

What the question comes down to,then, is (1) whether exemption from a cer-tain tax can constitute part of a judge’s“compensation,” and (2) if so, whetherexemption from the Medicare tax waspart of the judges’ compensation here.The answer to the more general questionseems to me obviously yes. Surely theterm “compensation” refers to the entire“package” of benefits—not just cash, butretirement benefits, medical care, and ex-emption from taxation if that is part of theemployment package. It is simply unrea-sonable to think than “$150,000 a yeartax-free” (if that was the bargain struck) isnot higher compensation than “$150,000a year subject to taxes.” Ask the employ-ees of the World Bank.

2001–44 I.R.B. 393 October 29, 2001

1 I agree with the Court, see Part II, ante, that thelaw-of-the-case doctrine does not bar our considera-tion of the merits. I also join the Court in holding,see Part V, ante, that any constitutional violation wasnot remedied by subsequent salary increases.

The more difficult question—thoughfar from an insoluble one—is whenanexemption from tax constitutes compen-sation. In most cases, the presence orabsence of taxation upon wages, like thepresence or absence of many other fac-tors within the control of government—inflation, for example, or the ratescharged by government-owned utilities,or import duties that increase consumerprices—affects the value of compensa-tion, but is not an element of compensa-tion itself. The Framers had this distinc-t ion well in mind. Hamilton, forexample, wrote that as a result of “thefluctuations in the value of money,” “[i]twas . . . necessary to leave it to the dis-cretion of the legislature to vary its pro-visions” for judicial compensation. TheFederalist No. 79, p. 473 (C. Rossiter,ed. 1961); see also Will, supra, at 227(the Constitution “placed faith in the in-tegri ty and sound judgment of theelected representatives to enact in-creases” in judicial salaries to accountfor inflation). Since Hamilton thoughtthat the Compensation Clause “put it outof the power of [Congress] to change thecondition of the individual [judge] forthe worse,” The Federalist No. 79, at473, he obviously believed that inflationdoes not diminish compensation as thatterm is used in the Constitution.

This distinction between Governmentaction affecting compensation and Gov-ernment action affecting the value ofcompensation was the basis for ourstatement in O’Malley, 307 U.S., at 282,that “[t]o subject [judges] to a generaltax is merely to recognize that judgesare also citizens, and that their particularfunction in government does not gener-ate an immunity from sharing with theirfellow citizens the material burden ofthe government. . . .” I agree with theCourt, therefore, that Evans waswrongly decided—not, however, be-cause in Evansthere was no discrimina-tion, but because in Evansthe universalapplication of the tax demonstratedthatthe Government was not reducing thecompensation of its judges but was act-ing as sovereign rather than employer,imposing a general tax.

But just as it is clear that a federal em-ployee’s sharing of a tax-free status thatall citizens enjoy is not compensation(and elimination of that tax-free status

not a reduction in compensation), soalso it is clear that a tax-free status con-ditioned on federal employment is com-pensation, and its elimination a reduc-tion. The Court apparently acknow-ledges that if a tax is imposedon thebasis of federal employment (an incometax, for example, payable only by fed-eral judges) it would constitute a reduc-tion in compensation. It is impossible tounderstand why a tax that is suspendedon the basis of federal employment (anexemption from federal income tax forfederal judges) does not constitute theconferral of compensation—in whichcase its elimination is a reduction,whether or not federal judges end upbeing taxed just like other citizens. Onlyconverting the Compensation Clauseinto a Discrimination Clause can explaina contrary conclusion.

And this, of course, is what has beenachieved by the targeted extension ofthe Medicare tax to federal employeeswho were previously exempt. It maywell be that, in some abstract sense, theyare not being “discriminated against,”since they end up being taxed like othercitizens; but this does not alter the factthat, since exemption from the tax waspart of their employment package—since they had an employment expecta-tion of a preferential exemption fromtaxation—their compensationwas beingreduced. One of the benefits of being afederal judge (or any federal employee)had, prior to 1982, been an exemptionfrom the Medicare tax. This benefitCongress took away, much as a privateemployer might terminate a contractualcommitment to pay Medicare taxes onbehalf of its employees. The latterwould clearly be a cut in compensation,and so is the former.2 Had Congresssimply imposed the Medicare tax on its

own employees (including judges) at thetime it introduced that tax for otherworking people, no benefit of federalemployment would have been reduced,because, with respect to the newly intro-duced tax, none had ever existed. Butan extension to federal employees of atax from which they had previouslybeen exempt by reason of their employ-ment status,seems to me a flat-out re-duction of federal employment compen-sation.

III

As should be clear from the above,though I agree with the Court that theextension of the Social Security tax tofederal judges runs afoul of the Com-pensation Clause, I disagree with theCourt’s grounding of this holding on thediscriminatory manner in which the ex-tension occurred. In this part of itsopinion, however, the Court’s antidis-crimination rationale is slightly differ-ent from that which appeared in its dis-cussion of the Medicare tax. There, thefocus was on discrimination comparedwith ordinary citizens; here, the focus ison discrimination vis-a-vis other federalemployees. (As the Court explains, fed-eral judges, unlike nearly all other fed-eral employees, were not given the op-portunity to opt out of paying the tax).On my analysis, it would not matter ifevery federal employee had been madesubject to the Social Security tax alongwith judges, so long as one of the previ-ous entitlements of their federal em-ployment had been exemption from thattax. Federal judges, unlike all otherfederal employees except the President,see Art. II, Sec. 1, cl. 7, cannot, consis-tent with the Constitution, have theircompensation diminished. If this caseinvolved salary cuts to pay for SocialSecurity, rather than taxes to pay for So-cial Security, the irrelevance of whetherother federal employees were coveredby the operative legislation would beclear.

* * *

I join in the judgment that extensionof the Social Security tax to sitting Arti-cle III judges was unconstitutional. Iwould affirm the Federal Circuit’s hold-ing that extension of the Medicare taxwas unconstitutional as well.

October 29, 2001 394 2001–44 I.R.B.

2 As the Court explains, the purpose of the Medicaretax extension was to ensure that federal workers “beara more equitable share of the costs of financing thebenefits to which many of them eventually becameentitled” by reason of their own or their spouses’ pri-vate-sector employment. Ante, at 2 (internal quota-tion marks and citation omitted). As with the SocialSecurity tax, therefore, the Medicare tax aspect of thiscase does not present the situation in which a taxexemption has been eliminated in return for someother benefit, different in kind but equivalent in value.Cf. Ante, at 14 (“[P]articipation in Social Security asjudges would benefit only a minority”).

SUPREME COURT OF THEUNITED STATES

No. 99–1978



CALIFORNIA, ET AL.


APPEALS FOR THE FEDERAL CIRCUIT

May 21, 2001

JUSTICE THOMAS, concurring in thejudgment in part and dissenting in part.

I believe this Court was correct inEvans v. Gore, 253 U.S. 245 (1920), whenit held that any tax that reduces a judge’snet compensation violates Article III ofthe Constitution. Accordingly, I wouldaffirm the judgment of the Court of Ap-peals in its entirety.

2001–44 I.R.B. 395 October 29, 2001

October 29, 2001 396 2001–44 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Proposed Audit Guidance forExternal Auditors of QualifiedIntermediaries

Notice 2001–66

This notice requests comments on the at-tached proposed audit guidelines for quali-fied intermediaries (QI). QI’s are a keycomponent of the withholding and report-ing regulations that became effective onJanuary 1, 2001 (T.D. 8734, 1997–2 C.B.109 and T.D. 8881, 2000–23 I.R.B. 1158).

I. BACKGROUND

Generally, a QI is a non-U.S. financialinstitution that has entered into a contrac-tual agreement with the Internal RevenueService (IRS). Under the agreement, theQI generally agrees to report annuallycertain aggregate information concerningthe beneficial owners of U.S. source pay-ments and to make any necessary tax pay-ments to the IRS. Additionally, the QIagrees to engage an external auditor toverify that it is in compliance with the QIagreement. In return, the QI avoids theexpense and burden of forwarding docu-mentation with respect to each beneficialowner to a U.S. withholding agent inorder to claim reductions in U.S. with-holding tax. The QI also enjoys other sig-nificant benefits under the new rules, in-cluding the ability to rely on a collectiverefund procedure for its customers.

The IRS and Treasury have workedclosely with the financial community indeveloping the QI system. The auditguidelines attached to this notice arebeing issued in proposed form specifi-cally to continue the dialogue with the fi-nancial community on how to implementthe audit procedures of the QI agreementsin a way that minimizes costs to the QIswhile preserving the compliance goals ofthe withholding regulations. The IRS andTreasury recognize that achieving thesegoals requires that the audit process pre-serves the cooperative nature and effec-tiveness of the QI system.

II. THE PROPOSED THREE PARTQI AUDIT PROCESS

The guidelines attached to this noticereflect a three part audit process. As de-

scribed further below, whether a particu-lar QI’s audit will progress through allthree parts generally will depend upon theresults of each part. IRS expects that, if aQI demonstrates a satisfactory level ofcompliance with the QI agreement in thefirst part of the audit process, the QI willnot be required to complete any furtherparts in the process during that auditcycle.

A. PART 1: Basic Fact Finding

Part 1 consists of basic fact finding.The external auditor performs the tasksdetailed in the attached audit guidelines.From these fact finding activities, the au-ditor will develop a report of numericalresults. The attached audit guidelinescontain precise directions on what numer-ical information must be included in theauditor’s report. The auditor will send ahard copy of this initial report to the IRS.The IRS intends to develop a standardelectronic report form.

If the numerical results of a particularQI’s audit demonstrate a high level ofcompliance with the QI agreement, then itis expected that the IRS generally will no-tify the QI that its audit is complete andthat no additional steps need to be taken.If, however, the numerical results suggestthat the QI has experienced some difficul-ties in meeting its obligations under theagreement, then the IRS will notify the QIthat it is proceeding to Part 2 of the auditprocess.

B. PART 2: Follow Up Fact Finding

In Part 2 of the audit process, the IRSwill contact the auditor and ask about cer-tain numerical results in the auditor’s re-port. If additional information is needed,the IRS will direct the auditor to performadditional procedures and to report on theresults. The goal of this step of the auditprocess will be to identify the cause forthe numerical results and to determinewhether corrective actions are readily dis-cernible.

For example, an audit report may showthat the auditor was unable to associatebeneficial owner information with a spec-ified percentage of the QI’s accounts. Bydiscussing the facts with the auditor, theIRS may be able to determine that the

problem was attributable to deficient ac-count opening procedures in one of theQI’s branches. If the IRS is satisfied thatthe QI had taken corrective steps to en-sure that the branch was appropriatelyopening new accounts, and if the QI hasotherwise shown a high level of compli-ance with the QI agreement, then therewould be no need to proceed to Part 3 ofthe audit process. Under other circum-stances, however, the IRS may determinethat further work must be done to resolvethe issues raised in Part 1 of the auditprocess.

C. PART 3: Audit Meeting with QI

If the concerns arising from the numer-ical results reported in Part 1 of the auditprocess cannot be resolved by directedfact finding in Part 2, then the IRS willpropose to meet with the QI to attemptmutually to clarify and resolve those con-cerns. This part is designed specificallyto provide a forum where a productive di-alogue between the IRS and the QI canoccur. Treasury and the IRS continue tobelieve that the QI system, which allowsthe IRS’s compliance goals to be metwhile minimizing the administrative bur-dens on financial institutions, is a criticalcomponent of the withholding regula-tions. Accordingly, the IRS will seek todevelop mutually acceptable solutions tothe issues that arise in the course of ad-ministering the QI agreements so that itwill not become necessary to terminate aQI agreement.

III. Key Concepts for Comment in theAttached Audit Guidelines

The IRS and Treasury invite commentson all sections of both this Notice and theattached proposed audit guidelines. Thissection is intended to draw attention toparticularly important aspects of the auditguidelines that are designed to lessen bur-dens on financial institutions serving asQIs.

A. Submission of Audit Plans.

Under the proposed audit guidelines,the submission of an audit plan to theIRS prior to performing the audit is notnecessary if the external auditor plans tofollow the audit guidelines. If, however,

2001–44 I.R.B. 397 October 29, 2001

the external auditor plans to modify ordeviate from the audit guidelines, thenan audit plan should be submitted to theIRS for prior approval. For example,the external auditor may propose to usemultistage, cluster, stratification orsome other sampling methodology inconducting its audit. In such cases, theexternal auditor should submit a writtenaudit plan and should identify, and ex-plain the reasons for, any proposed mod-ifications or deviations from the auditguidelines.

B. Discretionary Waivers of ExternalAudit.

The proposed audit guidelines allowQIs to request that the IRS waive the per-formance of an audit by an external audi-tor in three cases. In the first case, a QImay request a waiver of the external auditif it has received not more than $250,000in reportable payments during the year tobe audited. Instead of an external audit inthis case, the QI must submit copies of itsForms 1042 and 945, copies of the Forms1042–S issued to it and filed by it, andcopies of its Forms W-8IMY provided toits withholding agents, along with infor-mation about the number of its accountholders of various classes.

In the second case, a QI may request awaiver of the external audit if it has madereportable payments to no more than 2000direct and indirect account holders duringthe year to be audited. Instead of an ex-ternal audit in this case, the QI must itselfperform the audit procedures and report tothe IRS in accordance with the auditguidelines. Statistical sampling will notbe permitted in this case. The IRS willnot agree to waive the external audit forthe first audit year of the first term of theQI Agreement in this case. The IRS willnot agree to waive the performance of anexternal audit for a Private ArrangementIntermediary (PAI).

In the third case, a QI may request awaiver of the external audit if it has a sub-stantial and independent internal audit de-partment and its internal audit departmenthas audited the QI’s compliance under theQI agreement for each of the three yearspreceding the year to be audited. Insteadof an external audit in this case, the QI’sinternal audit department must performthe audit and report to the IRS in accor-dance with the audit guidelines. Statisti-

cal sampling will be permitted in thiscase.

Whether the IRS will waive the exter-nal audit in any case is discretionary. Inthe second and third cases, the IRS willnot waive the external audit for more thanone audit year during any one term of theQI agreement.

C. External Auditor’s Reliance onInternal Auditors.

The proposed audit guidelines allowthe external auditor to use a QI’s internalaudit staff and internal audit reports toany extent the external auditor chooses.Nevertheless, the external auditor remainspersonally responsible for the conduct ofthe audit. The external auditor must dis-close in the audit report specifically howand when it has used internal audit staffand reports. Further, the external auditormust certify that the use of the internalaudit personnel and reports has not af-fected the accuracy of the external audi-tor’s report.

D. Projection of Underwithholding.

The QI agreement provides that if sta-tistical sampling has been used and theauditor determines that underwithholdinghas occurred with respect to the sampledaccounts, the IRS will determine the totalamount of underwithheld tax by project-ing the underwithholding over the entirepopulation of similar accounts.

Under the proposed audit guidelines,if the auditor uses a sample and hasfound that underwithholding has oc-curred with respect to an account in thesample, the auditor must report the un-derwithholding in the report for step 1 ofthe audit. In step 2 of the audit, the IRSwould direct the external auditor to per-form any additional procedures neces-sary to collect any information requiredto determine whether it is appropriate toproject the underwithholding and anyinformation required to make a projec-tion. The IRS will employ a projectionmethod that is consistent with the sam-pling methodology used. In step 3 ofthe audit, the QI may address whetherprojection is appropriate and may pro-pose a projection using another amountof underwithholding based on a moreaccurate population, a more accurateprojection technique, or an examinationof all similar accounts.

IV. Comments.

Written comments must be received byDecember 12, 2001. Send comments toCC:DOM:CORP:R (NOT–151112–01),Room 5228, Internal Revenue Service,Ben Franklin Station, Washington, DC20224. Alternatively, comments may behand delivered between the hours of 8:00AM and 5:00 PM to: CC:DOM:CORP:R(NOT–151112–01), Courier’s Desk, In-ternal Revenue Service, 1111 Constititu-tion Ave. NW, Washington, DC.

Contact Information

For further information regarding thisNotice, contact Carl Cooper or LaurieHatten-Boyd of the Office of the Associ-ate Chief Counsel (International), InternalRevenue Service, 1111 Constitution Av-enue, N.W., Washington, D.C. 20224.Mr. Cooper and Ms. Hatten-Boyd may becontacted by telephone at 202-622-3840(not a toll-free call).

APPENDIX

(PROPOSED) GUIDANCE

FOR EXTERNAL AUDITORS OFQUALIFIED INTERMEDIARIES

Section 4 of Rev. Proc. 2000–12(2000–4 I.R.B. 387, 388) provides thefinal text of the Qualified IntermediaryAgreement (“QI Agreement”) betweenthe Internal Revenue Service (“IRS”) anda qualified intermediary (“QI”). Section10 of the QI Agreement provides externalaudit procedures. In section 10, the IRSagrees not to conduct an on-site audit ofthe QI provided the QI engages an exter-nal auditor to conduct an audit in accor-dance with the procedures detailedtherein. Under those procedures, the ex-ternal auditor examines the QI to verifywhether it is in compliance with the QIAgreement and makes a report to the IRS.Section 10 of the QI Agreement is repro-duced below in bolded text for reference.Following each paragraph of section 10,procedural guidance on audit issues isprovided under the heading Audit Guid-ance numbered to correspond to the QIAgreement. The audit guidance undersections 10.01 to 10.03 includes proce-dures that a QI may follow to request anIRS audit or a waiver of audit. Section10.03(A), (B), (C), and (D) describe Part1 of the audit process. This section in-

October 29, 2001 398 2001–44 I.R.B.

cludes the procedures that an external au-ditor should follow in examining the QIand the information to be included in theexternal auditor’s report to the IRS. Sec-tion 10.04 provides guidance on the useof statistical sampling and projection ofunderwithholding. Section 10.05 pro-vides further guidance on the form, con-tent and submission of the external audi-tor ’s report. Section 10.06 providesguidance on Parts 2 and 3 of the auditprocess. The audit guidance does notamend, modify, or interpret the QI Agree-ment.

QI Agreement Sec. 10.01. In General.Unless QI requests an IRS audit in lieuof an external audit, the IRS agrees notto conduct an on-site audit of QI, orany PAI with which QI has an agree-ment, with respect to withholding andreporting obligations covered by thisAgreement provided that an externalauditor designated in Appendix B ofthis Agreement conducts an audit ofQI, and any PAI, in accordance withthis section 10. QI shall permit the ex-ternal auditor to have access to all rele-vant records of QI for purposes of per-forming the external audit, includinginformation regarding specific accountholders. QI shall permit the IRS tocommunicate directly with the externalauditor and to review the audit proce-dures followed by the external auditor.QI represents that there are no legalprohibitions that prevent the externalauditor from examining any informa-tion relevant to the external audit to beperformed under this section 10 andthat there are no legal prohibitions thatprevent the IRS from communicatingdirectly with the auditor. QI shall per-mit the IRS to examine the external au-ditor’s work papers and reports. How-ever, the external auditor is notrequired to divulge the identity of QI’saccount holders to the IRS.

Audit Guidance Sec. 10.01:

10.01.1. IRS Audit. A QI that is not pro-hibited by law from disclosing accountholder information may request an IRSonsite audit instead of an external audit.To request an IRS audit, the QI must sub-mit a written request to the IRS beforeMarch 31 of the year following the spe-cific year to be audited (“audit year”).

The QI must send the request to the fol-lowing address:

Internal Revenue ServiceLMSB:FS:QI290 Broadway New York, NY 10007-1867USA

If the IRS agrees to conduct an audit ofthe QI, the IRS will send the QI a writ-ten response within 90 days of the datethe IRS received the request. In somecases, the IRS will conduct an audit bycorrespondence. For instance, in thecase of a QI that has made reportablepayments to no more than 50 accountscovered by the QI Agreement, the IRSmay conduct an audit by correspon-dence. For purposes of this guidance,“accounts covered by the QI Agree-ment” are accounts maintained by theQI for its direct account holders (whichinclude intermediaries and flow-throughentities) to which the QI has made re-portable payments during the audit yearfrom the QI’s accounts with withholdingagents that the QI has designated as QIaccounts.

10.01.2. External Audit Waiver($250,000 Threshold). A QI may requestthat the IRS waive the performance of theaudit by an external auditor for an audityear if the QI has received reportable pay-ments during that year that do not exceed$250,000. To calculate the $250,000threshold, the QI must aggregate all re-portable payments (including paymentsbeneficially owned by the QI) made to itsaccounts with withholding agents that theQI has designated as QI accounts. The QImust submit its request for a waiver to theIRS in accordance with Audit Guidance10.01.1 (AG10.01.1).

The QI should include in its request:(a) Copies (for the audit year) of its Forms

1042 and 945, the Forms 1042-Sissued to it, the Forms 1042-S and1099 issued by it, and the Forms W-8IMY (including summaries ofwithholding statements) provided by itto its withholding agents;

(b) A reconciliation of the Forms 1042-Sissued to the QI and the Forms 1042-Sissued by the QI; and

(c) A statement made under penalties ofperjury by a person named as a respon-sible party for performance in the

QI’s application for a QI Agreement(“responsible party”) that:

1. States (i) The number of the QI’s direct

account holders during theaudit year;

(ii) The number of the QI’s indi-rect account holders duringthe audit year; and

(iii) Within each category, thenumber of account holdersthat were U.S. exempt recipi-ents, U.S. non-exempt recipi-ents, intermediaries, flow-through entities, and undoc-umented account holders;

(2) States the total amount of any un-derwithholding or collective re-fund for the audit year;

(3) States that no event of defaultunder section 11 of the QI Agree-ment has occurred during theaudit year;

(4) States that the QI does not referaccount holders to an affiliatedentity with the effect of circum-venting the $250,000 threshold;and

(5) Certifies that the QI was in com-pliance with the QI Agreementduring the audit year.

The IRS may contact the QI to request ad-ditional information. If the IRS agrees towaive the performance of the audit for theaudit year, the IRS will send the QI a writ-ten response within 90 days of the datethe IRS received the request. The IRSwill not agree to waive the performanceof an audit for a Private Arrangement In-termediary (“PAI”).

10.01.3. External Audit Waiver (2000Account Holder Threshold). A QI may re-quest that the IRS waive the performanceof the audit by an external auditor for anaudit year if, during the audit year, the QIhas made reportable payments to no morethan 2000 direct and indirect accountholders covered by the QI Agreement.The QI must submit its request for awaiver to the IRS in accordance with AG10.01.1. The QI must include in its re-quest a statement, made under penaltiesof perjury by the responsible party, thatstates:

(a) The number of account holders towhich the QI has made such payments;

2001–44 I.R.B. 399 October 29, 2001

(b) The aggregate amount of reportablepayments (including payments benefi-cially owned by the QI) made to itsaccounts with withholding agents thatthe QI has designated as QI accounts;

(c) The QI does not refer account holdersto an affiliated entity with the effect ofcircumventing the 2000 account hold-er threshold; and

(d) That, in lieu of the external audit, theQI itself will apply the procedures setforth in section 10 of the QI Agree-ment. In doing so, the QI agrees toexamine each account holder and tosubmit a report to the IRS signed bythe responsible party.

The IRS may contact the QI to requestadditional information. The QI mustagree that its performance of the auditwill be governed in all respects by sec-tion 10 of the QI Agreement as if the per-sons conducting the audit were the exter-nal auditor referred to in that section.The IRS will not permit the use of statis-tical sampling by the QI. The IRS willnot agree to waive the external audit formore than one audit year during any oneterm of the QI Agreement. If the IRSagrees to waive the performance of theaudit for the audit year, the IRS will sendthe QI a written response within 90 daysof the date the IRS receives the request.The IRS will not agree to waive the per-formance of an audit for a PAI. The IRSwill not agree to waive the external auditfor the first audit year of the first term ofthe QI Agreement.

10.01.4. External Audit Waiver (AnnualInternal Audits). A QI may request thatthe IRS waive the performance of theaudit by an external auditor for an audityear if the QI maintains a substantial andindependent internal audit staff, and theQI’s internal auditors have conducted anaudit of the QI’s compliance with the QIAgreement each year for the three yearspreceding the audit year. The QI mustsubmit its request for a waiver to the IRSin accordance with AG 10.01.1. The QImust include in its request a statement,made under penalties of perjury by theresponsible party, that states:

(a) The number of direct account holdersand the number of indirect accountholders to which the QI has made suchpayments;

(b) The aggregate amount of reportablepayments (including payments benefi-cially owned by the QI) made to itsaccounts with withholding agents thatthe QI has designated as QI accounts;

(c) How the internal audit staff is orga-nized, including position descriptions,the number of individuals in eachposition, the names of the individualor individuals with overall responsibil-ity for internal audit, the routine func-tions of the internal auditors within theQI, and the persons to whom the inter-nal auditors report;

(d) In brief summaries, the proceduresperformed, the findings, and the con-clusions or recommendations of eachannual audit of the QI’s compliancewith the QI Agreement conducted bythe QI’s internal auditors in each ofthe three years preceding the audityear; and

(e) That, in lieu of the external audit, theQI itself will apply the procedures setforth in section 10 of the QI Agree-ment to those accounts.

The IRS may contact the QI to request ad-ditional information. The QI must agreethat its performance of the audit will begoverned in all respects by section 10 ofthe QI Agreement as if the persons con-ducting the audit were the external auditorreferred to in that section. The IRS willnot agree to waive the external audit formore than one audit year during any oneterm of the QI Agreement. If the IRSagrees to waive the performance of theaudit for the audit year, the IRS will sendthe QI a written response within 90 daysof the date the IRS receives the request.The IRS will not agree to waive the per-formance of an audit for a PAI.

QI Agreement Sec. 10.02. Designationof External Auditor. QI’s external au-ditor must be one of the auditors listedin Appendix B of this Agreement, un-less QI and the IRS agree, prior to theaudit, to substitute another auditor. QIshall not propose an external auditorunless it has a reasonable belief that theauditor is subject to laws, regulations,or rules that impose sanctions for fail-ure to exercise its independence and toperform the audit competently. TheIRS has the right to reject a proposedexternal auditor, or to revoke its accep-tance of an external auditor, if the IRS,

in its sole discretion, reasonably be-lieves that the auditor is not indepen-dent or cannot perform an effectiveaudit under this Agreement.


10.02.1. Auditor Approval. To obtain as-surance that an external auditor will beacceptable to the IRS, the QI or the exter-nal auditor may submit a written requestexplaining the qualifications of the exter-nal auditor to the IRS at any time. The QIor the external auditor should send the re-quest to the address provided in AG10.01.1. The IRS will send the QI or theexternal auditor a written response within90 days of the date the IRS receives therequest.

10.02.2. Auditor Independence. A QIand its external auditor must disclose tothe IRS any circumstances that compro-mise or reasonably appear to compromisethe external auditor’s independence orability to perform an effective audit. Tomake a disclosure, the QI or the externalauditor must submit a written statementexplaining the circumstances and anysteps taken to address them as soon assuch circumstances are discovered. Thedisclosure must be sent to the address pro-vided in AG 10.01.1. If the IRS deter-mines that the external auditor is not ac-ceptable, it will send the QI and theexternal auditor a written notice to that ef-fect within 90 days of the date the IRS re-ceives the disclosure.

QI Agreement Sec. 10.03. Timing andScope of External Audits. QI shallhave the external auditor conduct anaudit of the second full calendar yearand the fifth full calendar year that thisAgreement is in effect, subject to sec-tion 10.06 of this Agreement. The ex-ternal auditor shall verify whether QIis in compliance with this Agreementby conducting an audit that meets therequirements of this section 10.03. Theexternal auditor shall verify whetherQI is in compliance with its QI agree-ment by providing a report to the IRS.The report must be received by theIRS, at the address set forth in section12.06 of this Agreement, no later thanJune 30 of the year following the yearbeing audited. The IRS may, however,upon request by the external auditor,extend the due date of the audit report

October 29, 2001 400 2001–44 I.R.B.

upon good cause. The report must dis-close that the external auditor has, at aminimum, performed the followingchecks listed in this paragraph 10.03,and set forth how each of those checkswas performed and the results of thechecks. QI’s (or a PAI’s) external audi-tor is encouraged to contact the IRS atthe address set forth in section 12.06 ofthis Agreement and submit an auditplan (which includes, if relevant, theextent to which the external auditorproposes to rely on QI’s internal auditprocedures) prior to performing theaudit so that the audit may be con-ducted in the most efficient and leastcostly manner possible.


10.03.1. Specifications of Audit Report.For guidance on the form and contents ofthe external auditor’s report, submittingthe report to the IRS, the due date of thereport and extensions of the due date, seeAG 10.05.

10.03.2. Submission of Audit Plan.Submission of an audit plan to the IRSprior to performing the audit is not nec-essary unless the external auditor plansto modify or deviate from the proceduresdescribed in AG 10.03 and 10.04. Insuch circumstances, the external auditorshould submit a written plan, identifyingand explaining the reasons for anyplanned modifications or deviationsfrom those procedures, prior to perform-ing the audit. The external auditor shouldsubmit the audit plan to the address pro-vided in AG 10.01.1. The IRS will sendthe external auditor a written responsewithin 90 days of the date the IRS re-ceives the audit plan.

10.03.3. Use of Internal Audit. The ex-ternal auditor is required to perform theaudit itself. The external auditor may usethe QI’s internal audit personnel and in-ternal audit reports to any extent the ex-ternal auditor chooses to do so. In thatcase, the external auditor remains respon-sible for the conduct of the audit as if theexternal auditor had personally performedthe audit. In its report to the IRS, the ex-ternal auditor must disclose specificallywhen and how it has used the QI’s inter-nal audit personnel and reports in con-ducting the audit and must certify that theuse of the internal audit personnel and re-

ports has not affected the accuracy of theexternal auditor’s report.

10.03.4. Use of Copies. In conductingthe audit, the external auditor may usecopies of any account records or writtenmaterials provided by the QI. Neverthe-less, the QI must permit the external audi-tor to have access to the complete and un-altered account holder records in theoriginal, if the external auditor deems itnecessary to examine originals.

QI Agreement 10.03(A). Documenta-tion. The external auditor must–(1) Verify that QI has training materi-als, manuals, and directives that in-struct the appropriate QI employeeshow to request, collect, review, andmaintain documentation in accordancewith this Agreement;

Audit Guidance 10.03(A)(1):

10.03(A)(1).1. Review of DocumentationTraining. The external auditor must:

Step 1: Identify the QI’s employees thatare responsible for opening andmaintaining customer accounts.

Step 2: Collect any written training mate-rials, manuals, and directives usedby those employees.

Step 3: Inspect the written training mate-rials, manuals, and directives todetermine whether they containinstructions specific to accountscovered by the QI Agreement onhow to request, collect, review,and maintain documentation.

10.03(A)(1).2. Documentation TrainingReport. The external auditor must specif-ically report:

Report 1: Whether the QI has writtentraining materials, manuals, anddirectives that contain instruc-tions specific to accounts cov-ered by the QI Agreement onhow to request, collect, review,and maintain customer docu-mentation.

QI Agreement Sec. 10.03(A)(2). ReviewQI’s account opening procedures and in-terview QI’s employees, to determine ifappropriate documentation is requestedfrom account holders and, if obtained,that it is reviewed and maintained in ac-cordance with this Agreement;

Audit Guidelines 10.03(A)(2)

10.03(A)(2).1. Review of Account Open-ing Procedures. The external auditormust:

Step 1: Identify the QI employees re-sponsible for opening and main-taining customer accounts and se-lect representative employees forinterview.

Step 2: Ask the selected employees howaccounts covered by the QIAgreement are opened, what doc-umentation is requested, how thedocumentation is obtained, andhow the documentation is re-viewed and maintained.

10.03(A)(2).2. Account Opening Proce-dures Report.The external auditor mustspecifically report:

Report 1: The number of employees inter-viewed.

Report 2: The number of employee re-sponses that indicate that FormsW-8 and documents listed in theAttachment to the QI Agree-ment are not routinely re-quested, reviewed, crosschecked against other accountinformation, or maintained inaccordance with section 5.12 ofthe QI Agreement.

QI Agreement Sec. 10.03(A)(3). Verifythat QI follows procedures designedto inform account holders that claima reduced rate of withholding underan income tax treaty about any ap-plicable limitation on benefits proce-dures;


10.03(A)(3).1. Review Limitation onBenefits (LOB) Procedure. The externalauditor must:

Step 1: Ask the QI employees selected forinterview under AG 10.03(A)(2)Step 1 how account holders thatare not individuals claim a re-duced rate of withholding underan income tax treaty.

10.03(A)(3).2. LOB Procedure Report.The external auditor must specifically re-port:

2001–44 I.R.B. 401 October 29, 2001

Report 1: The number of employee re-sponses that indicate that suchcustomers are not informedabout any applicable limitationon benefits provisions.

QI Agreement 10.03(A)(4). ReviewQI’s accounts, using a valid sample ofaccounts for which treaty benefits areclaimed, to ensure that QI is obtainingthe treaty statements required by sec-tion 5.03(B);


10.03(A)(4).1. Review of Treaty State-ments. The external auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that are notU.S. non-exempt recipients, or se-lect a valid sample of such ac-counts in accordance with AG10.04.

Step 2: From the accounts identified orselected in Step 1, segregate theaccounts for which treaty benefitsare claimed.

Step 3: From the accounts for whichtreaty benefits are claimed, segre-gate the accounts for which docu-mentary evidence has been ob-tained.

Step 4: From the accounts for which doc-umentary evidence has been ob-tained, segregate those accountsheld by account holders that arenot individuals or governments.

Step 5: For the accounts segregated inStep 4, inspect each accountholder’s documentation to deter-mine whether it contains a validtreaty statement described in sec-tion 5.03(B) of the QI Agreement.A valid treaty statement must besigned by the beneficial owner. Atreaty statement may be incorpo-rated into another document thatis signed by the beneficial owner.

Step 6: For the accounts segregated inStep 4, identify:

(a) All accounts covered by the QIAgreement held by intermedi-aries or flow through entitiesfor which recipient specific re-

porting is required under sec-tion 8.02(B) and (C) or section8.04 of the QI Agreement.

(b) The number in Step 6(a) thatare intermediaries.

(c) The number in Step 6(a) thatare flow through entities

(d) The number of indirect ac-count holders holding throughintermediaries that are directaccount holders; and

(e) The number of indirect ac-count holders holding througheach flow through entity that isa direct account holder.

Step 7: (a) For purposes of Step 7 and thefollowing sections, the exter-nal auditor must identify theindirect account holders forwhich recipient specific re-porting is required or select avalid sample of such accountholders in accordance with AG10.04. From the indirect ac-count holders identified or se-lected, segregate the indirectaccount holders for whichtreaty benefits are claimed.

(b) From the indirect accountholders segregated in (a), seg-regate the indirect accountholders for which documen-tary evidence has been ob-tained.

(c) From the indirect accountholders segregated in (b), seg-regate indirect account holdersthat are not individuals or gov-ernments.

(d) For the indirect account hold-ers segregated in (c), inspecteach indirect account holder’sdocumentation to determinewhether it contains a validtreaty statement described insection 5.03(B) of the QIAgreement.

10.03(A)(4).2. Treaty Statements Report.The external auditor must specifically re-port:

Report 1: The number of accounts deter-mined under each of Steps 1, 2,3, and 4.

Report 2: The number of accounts segre-gated in Step 4 that do not con-tain a valid treaty statement

described in section 5.03(B) ofthe QI Agreement.

Report 3: The number of indirect accountholders determined under Step6(a) through (e).

Report 4: The number of indirect accountholders identified, selected (ifsampling is used), and segre-gated under Step 7 (a) through(c).

Report 5: The number of indirect accountholders whose documentationdoes not contain a valid treatystatement described in section5.03(B) of the QI Agreement.

QI Agreement Sec. 10.03(A)(5).Reviewinformation, using a valid sample, con-tained in account holder files to deter-mine if the documentation validitystandards of section 5.10 of this Agree-ment are being met. For example, theexternal auditor must verify thatchanges in account holder information(e.g., a change of address to a U.S. ad-dress or change of account holder sta-tus from foreign to U.S.) are being con-veyed to QI’s withholding agent, or, ifQI assumes primary NRA withholdingresponsibility or primary Form 1099reporting and backup withholding re-sponsibility, that QI is applying the ap-propriate withholding rate;


10.03(A)(5).1. Review of DocumentationValidity (Foreign Persons and U.S. Ex-empt Recipients). The external auditormust:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that are notU.S. non-exempt recipients, oruse the same sample selected inAG 10.03(A)(4).1 Step 1.

Step 2: Sort those accounts according towhether they contain the follow-ing types of documentation:(a) Form W-8BEN;(b) Form W-8EXP;(c) Form W-8ECI;(d) Form W-8IMY;(e) Form W-9;(f) Documentary Evidence; and(g) no documentation.

October 29, 2001 402 2001–44 I.R.B.

Step 3: FORM W-8BEN: (a) For accounts documented with

a Form W-8BEN, inspect PartI of the Form W-8BEN. Deter-mine that the following linesare completed and consistentwith each other:(i) Line 1 (name of individual

or organization that is thebeneficial owner);

(ii) Line 2 (country of incorpo-ration or organization), fornon-individuals;

(iii) Line 3 (type of beneficialowner);

(iv) Line 4 (permanent resi-dence address, includingcountry) A permanent res-idence address cannot be aP.O. Box, in-care-of add-ress or an address at afinancial institution, in-cluding a hold mail address(except when the benefi-cial owner is a financialinstitution); and

(v) Signature and date.(A) Determine that Decem-

ber 31 of the audit yearwas within three fullcalendar years follow-ing the year of signa-ture; and

(B) Determine that the certi-fications attested underpenalties of perjuryhave not been modified.

(b) For a Form W-8BEN forwhich the beneficial owner hasclaimed treaty benefits, inspectPart II of the Form W-8BEN.Determine that the followinglines are completed and con-sistent with each other andwith Part I of the Form:(i) Line 9a (residence certifica-

tion, including name ofcountry); and

(ii) Line 9c (section 894 andLOB certification), but onlyfor non-individuals.

Step 4: FORM W-8EXP. For accountsdocumented with Form W-8EXP,inspect Form W-8EXP. Deter-mine that the following lines arecompleted and consistent witheach other:(a) Line 1 (name of organization);

(b) Line 2 (country of incorpora-tion or organization);

(c) Line 3 (type of entity);(d) Line 4 (permanent residence

address, including country), Apermanent residence addresscannot be a P.O. Box, in-care-of address or an address at a fi-nancial institution, including ahold mail address (exceptwhen the beneficial owner is afinancial institution);

(e) Either: (i) Line 9a and 9b or 9c; or (ii) Line 10 (and organization

is designated by executiveorder under 22 U.S.C. 288through 288(f)); or

(iii) Line 11; or (iv) Line 12a (including date) or

12b (including attachedopinion from U.S. counsel),and, for section 501(c)(3)organizations, Line12c(including affidavit) or 12d,and Line 6; or

(v) Line 13; and(f) Signature and date.

(i) Determine that the certifica-tions attested under penal-ties of perjury have not beenmodified.

Step 5: FORM W-8ECI. For accountsdocumented with Form W-8ECI,inspect the Form W-8ECI. Deter-mine that the following lines arecompleted and consistent witheach other:(a) Line 1 (name of organization);(b) Line 2 (country of incorpora-

tion or organization); (c) Line 3 (type of entity);(d) Line 4 (permanent residence

address, including country). Apermanent residence addresscannot be a P.O. Box, in-care-of address, or an address at afinancial institution, includinga hold mail address (exceptwhen the beneficial owner is afinancial institution);

(e) Line 5 (business address in theUnited States);

(f) Line 6 (U.S. taxpayer identifi-cation number);

(g) Line 9 (list of items of incomethat are effectively connectedwith the conduct of a trade or

business in the United States);and

(h) Signature and date. (i) Determine that December

31 of the audit year waswithin three full calendaryears following the year ofsignature; and

(ii) Determine that the certifi-cations attested under pen-alties of perjury have notbeen modified.

Step 6: FORM W-8IMY. For accountsdocumented with Form W-8IMY,inspect the Form W-8IMY. Deter-mine that the following lines arecompleted and consistent witheach other:(a) Line 1 (name of individual or

organization);(b) Line 2 (country of incorpora-

tion or organization), for non-individuals;

(c) Line 3 (type of entity);(d) Line 4 (permanent residence

address, including country). Apermanent residence addresscannot be a P.O. Box, in-care-of address or an address at a fi-nancial institution, including ahold mail address (exceptwhen the beneficial owner is afinancial institution).

(e) Either:(i) Line 9a and Line 6 (QI-

EIN); (ii) Line 10a; (iii) Line 11 and Line 6 (EIN),

and Line 12 or Line 13; (iv) Line 14 and Line 6; or(v) Line 15 (and, if line 3

(nonwithholding foreigngrantor trust) is checked,Line 6 (EIN)); and

(f) Signature and date.(i) Determine that the certifica-

tions attested under penal-ties of perjury have not beenmodified.

Step 7: FORM W-9. For accounts docu-mented with Form W-9, inspectthe Form W-9. Determine that thefollowing lines are completed andconsistent with each other:(a) Name;(b) U.S. taxpayer identification

number;

2001–44 I.R.B. 403 October 29, 2001

(c) Part II (For U.S. payees ex-empt from backup withhold-ing); and

(d) Signature and date.(i) Determine that the certifica-

tions attested under penal-ties of perjury have not beenmodified.

Step 8: DOCUMENTARY EVIDENCE.For accounts documented withdocumentary evidence, inspect thedocumentary evidence. Deter-mine:(a) Whether the documentary evi-

dence is one of the types listedin the applicable Attachment tothe QI Agreement,

(b) Whether it appears to be inproper form when compared todocuments of the same typelisted in the Attachment,

(c) Whether it:(i) Supports the account hold-

er’s foreign status and, for anaccount holder that claimstreaty benefits, supports theaccount holder’s residence inthe treaty country, or

(ii) Supports the account hold-er’s status as a U.S. exemptrecipient.

(d) In the case of an internationalorganization, whether the or-ganization is designated by ex-ecutive order under 22 U.S.C.288 through 288(f).

(e) In the case of a foreign govern-ment or foreign central bank ofissue, whether the documen-tary evidence supports the ac-count holder’s status as such.

Step 9: For each account determined to bedocumented under Steps 3through 8, examine the accountopening statement, any other ac-count documents or memorandaand any correspondence associ-ated with the account (for pur-poses of this section, “the accountholder’s file”). Determine:(a) Whether the identifying infor-

mation in the documentationmatches the identifying infor-mation in the account holder’sfile (taking into account anyupdated information that linksthe identifying information in

the documentation to the iden-tifying information in the ac-count holder’s file),

(b) Whether, in the case of an ac-count documented with docu-mentary evidence, the docu-mentary evidence and theaccount holder’s file containsonly: an address at a financialinstitution, including a holdmail instruction (except whenthe financial institution is thebeneficial owner), an in-care-of address, or a P.O. Box, andif so, whether the QI has satis-fied the additional require-ments of section 5.10(B)(2)(i)of the QI Agreement.

(c) Whether the documentation orthe account holder’s file showsa U.S. mailing or residence ad-dress for the account holder orstanding instructions to payfrom the account to a U.S. ad-dress or to an account main-tained in the United States, andif so, whether: (i) The account holder is a

U.S. person, or(ii) In the case of documentary

evidence, the QI has satis-fied the additional require-ments of section 5.10(B)(2)(i), (ii), and (iii) ofthe QI Agreement or, in thecase of Forms W-8, the QIhas satisfied the additionalrequirements of section1.1441–7(b)(5) of the regu-lations.

(d) For accounts where the benefi-cial owner has claimed treatybenefits, whether the documen-tation or the account holder’sfile shows a residence addressor mailing address, or a P.O.Box, in-care-of address or anaddress at a financial institution,including a hold mail instruc-tion (except when the financialinstitution is the beneficialowner), that is not in the applic-able treaty country, or standinginstructions to pay from the ac-count to an address outside thetreaty country or to an accountmaintained outside the treatycountry, and if so, whether:

(i) In the case of documentaryevidence, the QI has satis-fied the additional require-ments of section 5.10(B)(3)of the QI Agreement; or

(ii) In the case of Forms W-8,the QI has satisfied theadditional requirements ofsection 1.1441–7(b)(6) ofthe regulations.

(e) Include in the category of ac-counts with no documentation(AG 10.03(A)(5).1 Step 2(g))all accounts: (i) That are not documented

with Forms W-8BEN, W-8EXP, W-8IMY, W-8ECI,W-9 or documentary evi-dence that is listed in theapplicable Attachment to theQI Agreement, and

(ii) That are documented withForms W-8 or documentaryevidence that is inadequateafter applying the additionalrequirements of AG10.03(A)(5).1 Step 9(b)–(d).

Step 10:(a) Identify all indirect accountholders for which recipientspecific reporting is requiredunder section 8.02(B) and (C)or section 8.04 of the QIAgreement, or use the samesample of indirect accountholders selected under AG10.03(A)(4).1 Step 7.

(b) From those indirect accountholders, segregate the indirectaccount holders that are notU.S. non-exempt recipients.

(c) Inspect the documentation foreach indirect account holdersegregated in Step 10(b) to de-termine whether the documen-tation validity standards ofsection 5.03(C) of the QIAgreement are satisfied byperforming the proceduresunder AG 10.03(A)(5) with thefollowing modifications:(i) Part II of the Form W-8BEN

is not complete unless line9b and line 6 are completed,except in the case of a claimof treaty benefits for incomefrom a marketable security.

(ii) Documentary evidence est-ablishing entitlement to

October 29, 2001 404 2001–44 I.R.B.

treaty benefits must bedocumentary evidence de-scribed in section 5.03(A)(3) of the QI Agreement.Also, except in the case ofincome from a marketablesecurity, a TIN is required.

(iii) Documentary evidence forpurposes other than estab-lishing entitlement totreaty benefits must bedocumentary evidencedescribed in Treas. Reg.1.1441–1(c)(17).

Step 11: For indirect account holders, theexternal auditor must applySteps 1 through 9.

10.03(A)(5).2. Documentation ValidityReport (Foreign Persons and U.S. Ex-empt Recipients).The external auditormust specifically report:

Report 1: The number of accounts identi-fied or selected under Step 1.

Report 2: The number of accounts segre-gated under Step 2.

Report 3: The number of Forms W-8BENinspected under Step 3(a) andthe number of Forms W-8BENthat did not satisfy the criteriaunder that section.

Report 4: The number of Forms W-8BENinspected under Step 3(b) andthe number of Forms W-8BENthat did not satisfy the criteriaunder that section.

Report 5: The number of Forms W-8EXPinspected under Step 4 and thenumber of Forms W-8EXP thatdid not satisfy the criteria underthat section.

Report 6: The number of Forms W-8ECIinspected under Step 5 and thenumber of Forms W-8ECI thatdid not satisfy the criteria underthat section.

Report 7: The number of Forms W-8IMYinspected under Step 6 and thenumber of Forms W-8IMY thatdid not satisfy the criteria underthat section.

Report 8: The number of Forms W-9 in-spected under Step 7 and the

number of Forms W-9 that didnot satisfy the criteria underthat section.

Report 9: The number of accounts:(a) Documented with documen-

tary evidence inspected un-der Step 8;

(b) Reviewed under Step 8 thatdid not satisfy criteria (a) or(b) of that section;

(c) Reviewed under Step 8 thatsatisfy the criteria of eithersection (c)(i) or (ii);

(d) Reviewed under Step 8 thatdid not satisfy the criteria ofeither (c)(i) or (ii); and

(e) Described in each of (d) and(e) of Step 8 and the numberof accounts that did not sat-isfy the criteria of (d) and (e)of Step 8.

Report 10: The number of accounts:(a) That did not satisfy the cri-

teria of Step 9(a); (b) Described in Step 9(b) and

the number of accounts thatdid not satisfy the addition-al criteria of that step;

(c) Described in Step 9(c), thenumber of accounts de-scribed in (c)(i) of that step,and the number of accountsthat did not satisfy (c)(ii) ofthat step; and

(d) Described in Step 9(d) andthe number of accounts thatdid not satisfy the criteriaof (d)(i) or (ii) of that step.

Report 11: The number of accounts de-scribed in each of (i) and (ii) ofStep 9(e).

Report 12: For indirect account holders,the external auditor must sepa-rately complete Report 1through 11.

QI Agreement Sec. 10.03(A)(6). Reviewaccounts, using a valid sample of U.S.non-exempt recipient account holders,to determine if QI is obtaining FormsW-9 from those customers whose iden-tity is not prohibited by law from dis-closure, and that QI is transmittingthose forms to a withholding agent tothe extent QI does not assume primaryForm 1099 reporting and backup with-holding responsibility with respect to

reportable amounts and, if applicable,designated broker proceeds;


10.03(A)(6).1. Review of DocumentationValidity (Disclosed U.S. Non-exempt Re-cipients) The external auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that areU.S. non-exempt recipients, or se-lect a valid sample of such ac-counts in accordance with AG10.04.

Step 2: From those accounts, segregatethe accounts of those U.S. non-ex-empt recipients whose identity isnot prohibited by law from disclo-sure, including the accounts ofU.S. non-exempt recipients thathave waived the prohibitionsagainst disclosure.

Step 3: Obtain copies of the QI’s FormsW-8IMY and inspect them to de-termine whether the QI has as-sumed primary Form 1099 andbackup withholding responsibility.From the accounts segregated inStep 2, segregate the accounts ofU.S. non-exempt recipients forwhich the QI has not assumed pri-mary Form 1099 reporting andbackup withholding responsibility.

Step 4: From the accounts segregated inStep 3, segregate the accountsdocumented with Form W-9 anddetermine that each Form W-9satisfies the criteria of AG10.03(A)(5).1 Step 7.

Step 5: From the accounts segregated inStep 3, segregate the accounts thatare not documented with Form W-9 and the accounts for whichthe Forms W-9 did not satisfy thecriteria of AG 10.03(A)(5).1 Step7.

Step 6: Obtain the withholding statementsassociated with QI’s Forms W-8IMY.

Step 7: For each Form W-9 that satisfiesthe criteria of AG 10.03(A)(5).1Step 7, match the name and TINon the Form W-9 to the name andTIN on the withholding statement.

2001–44 I.R.B. 405 October 29, 2001

Step 8: For each account segregated inStep 5, match the name, and (ifprovided) address, and TIN of theU.S. non-exempt recipient to thename, address, and TIN on thewithholding statement.

Step 9: (a) Identify all accounts coveredby the QI Agreement forwhich recipient specific re-porting is required under sec-tion 8.02(B) and (C) or section8.04 of the QI Agreement.

(b) Identify the indirect accountholders holding through thoseaccounts, or use the same sam-ple selected under AG10.03(A)(4).1 Step 7.

(c) Segregate the indirect accountholders that are U.S. non-ex-empt recipients.

(d) Apply Steps 2 through 8.

10.03(A)(6).2. Documentation Validity(U.S. Non-exempt Recipients) Report.The external auditor must specifically re-port:

Report 1: The number of accounts segre-gated under each of Steps 1, 2,3, 4, and 5.

Report 2: The number of accounts thatdid not satisfy the criteria ofSteps 7 and 8.

Report 3: For indirect account holders,the external auditor must report:(a) The number of indirect

account holders identifiedand segregated under Step 9;

(b) The number of indirectaccount holders identifiedand segregated under Steps2 through 5; and

(c) The number of indirectaccount holders that did notsatisfy the criteria of Steps 7and 8.

QI Agreement Sec. 10.03(A)(7). Reviewaccounts, using a valid sample of U.S.non-exempt recipient account holderswhose identity and account informationis prohibited by law, including by con-tract, from disclosure, to verify that–

(i) Such accounts exist in only rare andunusual circumstances (and detailingin the audit report the nature of suchcircumstances); and

(ii) The procedures of section 6.04 havebeen, and are being, followed.


10.03(A)(7).1. Account Review of U.S.Non-exempt Recipients (Disclosure Pro-hibited). The external auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that areU.S. non-exempt recipients, oruse the same sample selected forAG 10.03(A)(6).

Step 2: From those accounts, segregatethe accounts of those U.S. non-ex-empt recipients whose identity isprohibited by law from disclosure,excluding the accounts of U.S.non-exempt recipients that havewaived the prohibitions againstdisclosure.

Step 3: From the accounts segregated inStep 2, segregate the accountsopened by U.S. non-exempt recip-ients on or after January 1, 2001.

Step 4: Obtain a letter from the responsi-ble party explaining why the ac-counts in section 10.07(A)(7).1Step 2 exist and how the proce-dures of section 6.04 of the QIAgreement have been and arebeing applied.

10.03(A)(7).2. Account Review of U.S.Non-exempt Recipients (Disclosure Pro-hibited) Report. The external auditormust specifically:

Report 1: Report the number of accountssegregated under Steps 1, 2, and3; and

Report 2: Include a copy of the letter ob-tained under Step 4.

QI Agreement Sec. 10.03(A)(8). ReviewQI’s agreements with its PAIs to ensurethat the obligations imposed on thePAIs are identical to the obligations im-posed on QI under this Agreement, ex-cept as otherwise provided in section4.02.


10.03(A)(8).1. Review PAI Obligations.The external auditor must:

Step 1: Obtain copies of the QI Agree-ment and all PAI agreements.

Step 2: Inspect each PAI agreement to de-termine whether:(a) The PAI agreement covers all

offices of the PAI located in acountry listed in Appendix Aof the QI Agreement;

(b) The PAI agreement providesthat the QI include all re-portable payments made bythe PAI in the QI’s Forms 945and 1099 and 1042 and 1042-S;

(c) The PAI agreement requiresthe PAI to provide the QI withall information necessary forthe QI to meet its obligationsunder the QI Agreement;

(d) There are not any provisionslimiting the PAI’s liability forunderwithholding or reportingdue to the PAI’s failure to per-form its obligations under thePAI agreement;

(e) The PAI agreement requiresthe PAI to disclose U.S. non-exempt recipients to the sameextent as the QI Agreement;

(f) The PAI agreement permits thePAI to assume primary with-holding responsibility or pri-mary Form 1099 reporting andbackup withholding responsi-bility;

(g) The PAI is subject to audit pro-cedures that are identical tothose applicable to the QIunder the QI Agreement andthat the PAI’s designated audi-tor is listed in Appendix B ofthe QI Agreement or has beenapproved by the IRS for thatPAI; and

(h) The PAI is subject to all otherobligations of the QI under theQI Agreement.

Step 3: Obtain a copy of the notice identi-fying each PAI filed by the QIwith the IRS described in section4.01(B) of the QI Agreement anddetermine that the date of filingfor each notice precedes the dateof the first payment received bythe PAI from the QI pursuant tothe PAI agreement.

October 29, 2001 406 2001–44 I.R.B.

Step 4: Obtain a copy of the PAI’s W-8IMY provided to the QI anddetermine that it satisfies the crite-ria of AG 10.03(A)(5).1 Step 6.

10.03(A)(8).2. PAI Obligations Report.The external auditor must specifically re-port:

Report 1: The number of PAI agreements;

Report 2: The number of PAI agreementsthat did not satisfy the criteriaof each of Step 2(a) through(h); and

Report 3: The number of PAI agreementsthat did not satisfy the criteriaof Step 3.

Report 4: The number of Forms W-8IMYobtained in Step 4 and the num-ber of Forms W-8IMY that didnot satisfy the criteria of Step 6.

QI Agreement Sec. 10.03(A)(9). Statein its external audit report if the audi-tor is aware that QI is in material viola-tion or is under investigation for viola-tion of any of the know-your-customerrules, practices, or procedures applica-ble to the offices audited.


10.03(A)(9).1. Knowledge of KYC Inves-tigations. The external auditor must:

Step 1: Obtain a letter signed by the re-sponsible party and by the QI’slegal counsel stating whether ei-ther is aware that the QI is in ma-terial violation or is under investi-gation for violation of any of theknow-your-customer rules, prac-tices, or procedures applicable toall branches of the QI located incountries named in the Attach-ments to the QI Agreement.

10.03(A)(9).2. KYC Investigations Re-port. The external auditor must specifi-cally report:

Report 1: Whether, based on the informa-tion in the letter described inStep 1 and on its own informa-tion, the external auditor isaware of any such material vio-lations or investigations and, ifso, identify them.

Report 2: The external auditor must at-tach to its report:

(a) A copy of the letter de-scribed in Step 1.

QI Agreement Sec. 10.03(A)(10). Statein its external audit report if the audi-tor is aware that QI removes U.S. non-exempt recipients from accounts cov-ered by this Agreement for the purposeof circumventing the Form 1099 re-porting and backup withholding provi-sions of this Agreement.


10.03(A)(10).1. Review for Removal ofU.S. Non-exempt Recipients. The exter-nal auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that areU.S. non-exempt recipients, oruse the sample selected in AG10.03(A)(6).1 Step 1.

Step 2: Inspect account closing records todetermine whether the accountwas closed during the audit year.

Step 3: Inspect account transfer records todetermine whether any assetshave been transferred to anotheraccount held by the same accountholder during the audit year.

10.03(A)(10).2. Removal of U.S. Non-exempt Recipients Report.The externalauditor must specifically report:

Report 1: The number of accounts cov-ered by the QI Agreement heldby U.S. non-exempt recipientsthat were closed during theaudit year.

Report 2: Whether the external auditor isaware of any accounts with theQI not covered by the QIAgreement held by the sameU.S. non-exempt recipients thatwere opened during the audityear, and if so, the number ofsuch accounts.

Report 3: Whether the external auditor isaware of any transfers of assetsfrom an account covered by theQI Agreement held by a U.S.non-exempt recipient to anotheraccount with the QI not coveredby the QI Agreement held bythe same U.S. non-exempt re-

cipient, and if so, the number ofaccounts to which such trans-fers were made.

Report 4: Whether the external auditor isaware that the QI removes U.S.non-exempt recipients from ac-counts covered by the QIAgreement for the purpose ofcircumventing the Form 1099reporting and backup withhold-ing provisions of the QI Agree-ment.

QI Agreement Sec. 10.03(B)(1). With-holding Rate Pools. The external audi-tor must–

(1) Verify that QI has training materi-als, manuals, and directives that in-struct the appropriate QI employeeshow to determine withholding ratepools based on documentation and thepresumption rules;

Audit Guidance 10.03(B)(1):

10.03(B)(1).1. Review of WithholdingRate Pool Training Materials. The exter-nal auditor must:

Step 1: Identify the QI’s employees thatare responsible for determiningwithholding rate pools.

Step 2: Collect any written training mate-rials, manuals, and directives usedby those employees.

Step 3: Inspect the written training mate-rials, manuals, and directives todetermine whether they containspecific instructions on how to de-termine withholding rate poolsbased on documentation and thepresumption rules.

10.03(B)(1).2. Withholding Rate PoolTraining Materials Report. The externalauditor must specifically report:

Report 1: Whether the QI has writtentraining materials, manuals, anddirectives that contain specificinstructions on how to deter-mine withholding rate poolsbased on documentation and thepresumption rules.

QI Agreement Sec. 10.03(B)(2). Inter-view employees responsible for deter-mining withholding rate pools to ascer-tain if they are adequately trained to

2001–44 I.R.B. 407 October 29, 2001

determine those pools and that they fol-low adequate procedures for determin-ing those pools;


10.03(B)(2).1. Review of PersonnelTraining (Withholding Rate Pool). Theexternal auditor must:

Step 1: Identify the QI’s employees thatare responsible for determiningwithholding rate pools and selectrepresentative employees for in-terview.

Step 2: Ask the selected employeeswhether they have received anyformal or informal training on de-termining withholding rate poolsand if so, ask the selected employ-ees to describe the training, whenit occurred, and how much timewas devoted to it.

Step 3: Ask the selected employees howan account is assigned to with-holding rate pools.

10.03(B)(2).2. Personnel Training(Withholding Rate Pool) Report.The ex-ternal auditor must report:


Report 2: The number of employee re-sponses that indicate that theemployee has not receivedtraining on how to determinewithholding rate pools.

Report 3: The number of employee re-sponses that indicate that ac-counts are assigned to with-holding rate pools withoutroutinely referring to documen-tation, presumptions, the typeof income earned, and the with-holding rate applied.

QI Agreement Sec. 10.03(B)(3). ReviewQI’s procedures for preparing the with-holding statements associated with QI’sForms W-8IMY and verify that thewithholding statements provided towithholding agents convey complete andcorrect information on a timely basis;


10.03(B)(3).1. Review of WithholdingStatements.The external auditor must:

Step 1: Identify the QI’s employees thatare responsible for preparingwithholding statements and pro-viding them to withholdingagents, and select representativeemployees for interview.

Step 2: Ask the selected employees howwithholding statements are pre-pared and provided to withholdingagents.

Step 3: Obtain copies of the withholdingstatements provided to withhold-ing agents and records of pay-ments from the withholdingagents to the QI.

Step 4: Inspect the withholding state-ments to determine whether theyare consistent with the paymentrecords.

Step 5: Inspect the withholding state-ments to determine whether thewithholding statement informa-tion was updated and provided tothe withholding agent before thewithholding agent made pay-ments.

10.03(B)(3).2. Withholding StatementReport. The external auditor must report:


Report 2: The number of employee re-sponses that indicate that with-holding statement informationwas not routinely reviewed, up-dated and provided to the with-holding agent before the with-holding agent made payments.

Report 3: The number of payments withrespect to which the withhold-ing statements were inconsis-tent.

Report 4: The number of payments withrespect to which the withhold-ing statement information wasnot updated or provided to thewithholding agent before pay-ment.

QI Agreement Sec. 10.03(B)(4). Per-form test checks, using a valid sampleof account holders assigned to eachwithholding rate pool, and cross checkthat assignment against the documen-

tation provided by, or presumptionrules that apply to, the account holder,the type of income earned, and thewithholding rate applied;

Audit Guidance:

10.03(B)(4).1. Review Withholding RatePool Classification.The external auditormust:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that are notU.S. non-exempt recipients, oruse the same sample selectedunder AG 10.03(A)(4).1 Step 1.

Step 2: Obtain copies of the QI’s FormsW-8IMY and inspect them to de-termine whether the QI has as-sumed primary NRA withholdingresponsibility. For accounts cov-ered by the QI Agreement forwhich the QI has not assumedsuch responsibility, the externalauditor must perform the proce-dures described below.

Step 3: Obtain:(a) The account statements and

records that show the invest-ment and the type of incomeearned and the amounts ofwithholding; and

(b) The account records that showhow the QI has classified thetype of income and withhold-ing rate for purposes of itswithholding rate pools.

Step 4: (a) Based on the records describedin Step 3(a), classify the ac-counts according to the type ofincome paid to each account.An account to which more thanone type of income has beenpaid must be placed into multi-ple income classifications.

(b) Based on the documentationfor the account (after the de-terminations under AG10.03(A)(4) and (5) havebeen made) and applicablepresumptions under section5.13 of the QI Agreement, de-termine the withholding rateand further classify the ac-counts within an income clas-sification according to with-holding rate. An account

October 29, 2001 408 2001–44 I.R.B.

within an income classifica-tion to which more than onewithholding rate has been ap-pl ied must be placed intomult iple withholding rateclassifications.

Step 5: Determine whether the classifica-tions under Step 4(a) and (b)match the QI’s classifications inthe account records described inStep 3(b).

Step 6: (a) Identify all accounts coveredby the QI Agreement forwhich recipient specific re-porting is required under sec-tion 8.02(B) and (C) or section8.04 of the QI Agreement;


(c) Segregate the indirect accountholders that are not U.S. non-exempt recipients.

(d) Apply Steps 2 through 5 tothose indirect account holders.

10.03(B)(4).2. Withholding Rate PoolClassification Report. The external audi-tor must specifically report:

Report 1: The number of accounts identi-fied or selected as a sample inStep 1.

Report 2: The number of accounts in Re-port 1 classified under Step 4(a)and (b).

Report 3: The number of accounts in Re-port 1 for which the QI’s classi-fications do not match the ac-count records under Step 5.

Report 4: For indirect account holders, (a) The number of indirect

account holders under Step6(a) through (c); and

(b) The number of indirectaccount holders under Step4(a) and (b) and Step 5.

QI Agreement Sec. 10.03(B)(5). Per-form test checks, using a valid sampleof accounts of U.S. non-exempt recipi-ents, to verify that appropriate with-holding rate pools are established forU.S. non-exempt recipients; and


10.03(B)(5).1. Review of WithholdingRate Pool Classification (U.S. Non-ex-empt Recipients). The external auditormust:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that areU.S. non-exempt recipients, oruse the same sample selectedunder AG 10.03(A)(6).1 Step 1.

Step 2: From those accounts, segregatethe accounts of those U.S. non-ex-empt recipients whose identity isnot prohibited by law from disclo-sure, including the accounts ofU.S. non-exempt recipients thathave waived the prohibitionsagainst disclosure.

Step 3: Obtain copies of the QI’s FormsW-8IMY and inspect them to de-termine whether the QI has as-sumed primary Form 1099 andbackup withholding responsibility.From the accounts segregated inStep 2, segregate the accounts ofU.S. non-exempt recipients forwhich the QI has not assumed pri-mary Form 1099 reporting andbackup withholding responsibility.

Step 4: Obtain:(a) The account statements and

records that show the invest-ment and the type of incomeearned and the amountsbackup withheld (if any); and

(b) The withholding statementsassociated with the Forms W-8IMY.

Step 5: Based on the records described inStep 4(a), classify the poolswithin each account according tothe type of reportable paymentmade to each account. The exter-nal auditor must apply this Step 5and Step 6 whether or not the QIis using the alternative procedurecontained in section 6.03(B) ofthe QI Agreement.

Step 6: Determine whether the classifica-tions and amounts of income andamounts backup withheld (if any)under Step 5 match classifica-tions and amounts in the with-

holding statements described inStep 4(b).

Step 7: For indirect account holders:(a) Identify all accounts covered

by the QI Agreement for whichrecipient specific reporting isrequired under section 8.02(B)and (C) or section 8.04 of theQI Agreement;


(c) From the indirect accountholders identified or selectedin (b), segregate the indirectaccount holders that are U.S.non-exempt recipients.

(d) Apply Steps 2 through 6 to theindirect account holders segre-gated in (c).

10.03(B)(5).2. Withholding Rate PoolClassification (U.S. Non-exempt Recipi-ent) Report.The external auditor mustspecifically report:

Report 1: The number of accounts segre-gated under Steps 1, 2, and 3.

Report 2: The number of accounts forwhich the classifications andamounts do not match the clas-sifications and amounts in theQI’s withholding statements.

Report 3: For indirect account holders, (a) The number of indirect ac-

count holders under Step7(a) through (c);

(b) The number of indirect ac-count holders under Step 2;and

(c) The number of indirect ac-count holders for which theclassifications and amountsdo not match the classifica-tions and amounts in the QI’swithholding statements.

QI Agreement Sec. 10.03(B)(6). Verify,if QI is using the alternative procedurefor U.S. non-exempt recipients con-tained in section 6.03(B) of this Agree-ment, that QI is providing sufficientand timely information to withholdingagents that allocates reportable pay-ments to U.S. non-exempt recipients.

2001–44 I.R.B. 409 October 29, 2001


10.03(B)(6).1. Review of AlternativeProcedure. The external auditor must:

Step 1: Inspect the withholding state-ments associated with the FormsW-8IMY to determine whether theallocation information for eachaccount was provided to the with-holding agent no later than Janu-ary 15 of the year following theyear of payment.

10.03(B)(6).2. Alternative ProcedureReport. The external auditor must specif-ically report:

Report 1: The number of accounts forwhich allocation informationwas not provided to the with-holding agent by January 15 ofthe year following the year ofpayment.

QI Agreement Sec. 10.03(C)(1). With-holding Responsibilities. The externalauditor must–

(1) To the extent QI has assumed pri-mary NRA withholding responsibility,perform test checks, using a valid sam-ple of foreign account holders, to verifythat QI is withholding the properamounts;

Audit Guidance 10.03(C)(1):

10.03(C)(1).1. Review of Withholding(NRA Withholding Assumed). The exter-nal auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are heldby direct account holders thatare not U.S. non-exempt recipi-ents, or use the same sample se-lected under AG 10.03(A)(4).1Step 1.

Step 2: Obtain copies of the QI’s FormsW-8IMY and inspect them to de-termine whether the QI has as-sumed primary NRA withholdingresponsibility. For accounts cov-ered by the QI Agreement forwhich the QI has assumed suchresponsibility, the external auditormust perform the procedures de-scribed below.

Step 3: Obtain the account statements andrecords that show the investment

and the type of income earned andthe amounts of withholding.

Step 4: (a) Based on the records describedin Step 3, classify the accountsaccording to the type of incomepaid to each account. An ac-count to which more than onetype of income has been paidmust be placed into multipleincome classifications.

(b) Based on the documentationfor the account (after the deter-minations under AG 10.03(A)(4) and (5) have beenmade), determine the with-holding rate and further clas-sify the accounts within an in-come classification accordingto withholding rate. An ac-count within an income classi-fication to which more thanone withholding rate has beenapplied must be placed intomultiple withholding rate clas-sifications.

Step 5: For each account, determine theamount (if any) by which theamount of withholding based onthe classifications under Step 4(a)and Step 4(b) exceeds the amountwithheld by the QI.



(c) From the indirect accountholders identified or selectedin (c), segregate the indirectaccount holders that are notU.S. non-exempt recipients.

(d) Obtain copies of the QI’sForms W-8IMY and inspectthem to determine whether theQI has assumed primary NRAwithholding. For accountscovered by the QI Agreementfor which the QI has assumedsuch responsibility, the exter-nal auditor must perform theprocedures described below.

(e) Complete Steps 4(a) through(c) and Step 5.

10.03(C)(1).2. Withholding (NRA With-holding Assumed) Report. The externalauditor must report:

Report 1: The amount of underwithhold-ing for each account examinedwithin each withholding rateclassification in Step 1.

Report 2: The amount of underwithhold-ing for each indirect accountholder examined within eachwithholding rate classification.

QI Agreement 10.03(C)(2).To the ex-tent QI has not assumed primaryNRA withholding responsibility, ver-ify that QI has fulfilled its responsibil-ities under section 3.02 of this Agree-ment;


10.03(C)(2).1. Review of Responsibilitiesunder Section 3.02.The external auditormust:

Step 1: For each account required to bereported under AG 10.03(B)(4).2Report 3 and each indirect ac-count holder required to be re-ported under AG 10.03(B)(4).2Report 4(b), determine theamount (if any) by which theamount of withholding based onthe classif ications under AG10.03(B)(4).1 Step 4(a) and Step4(b) exceeds the amount with-held.

10.03(C)(2).2. Responsibilities underSection 3.02 Report.The external auditormust report:

Report 1: The amount of underwithhold-ing for each account and eachindirect account holder withineach withholding classification.

QI Agreement 10.03(C)(3). To the ex-tent QI has assumed primary Form1099 reporting and backup withhold-ing responsibility, perform test checksusing a valid sample of U.S. non-ex-empt recipient account holders to ver-ify that QI backup withheld when re-quired;


October 29, 2001 410 2001–44 I.R.B.

10.03(C)(3).1. Review of Backup With-holding (Responsibilities Assumed).Theexternal auditor must:

Step 1: Identify all accounts covered bythe QI Agreement that are held bydirect account holders that areU.S. non-exempt recipients, oruse the same sample selectedunder AG 10.03(A)(6).1 Step 1.

Step 2: From the accounts identified orselected in Step 1, segregate theaccounts of those U.S. non-ex-empt recipients whose identity isnot prohibited by law from disclo-sure, including the accounts ofU.S. non-exempt recipients thathave waived the prohibitionsagainst disclosure.

Step 3: Obtain copies of the QI’s FormsW-8IMY and inspect them to de-termine whether the QI has as-sumed primary Form 1099 andbackup withholding responsibil-ity. From the accounts segregatedin Step 2, segregate the accountsof U.S. non-exempt recipients forwhich the QI has assumed pri-mary Form 1099 reporting andbackup withholding responsibil-ity.

Step 4: Obtain the account statements andrecords that show the investmentand the type of income earned andthe amounts backup withheld (ifany).

Step 5: Based on the records described inAG 10.03(A)(6).1, determinewhether account holder’s file con-tains the account holder’s TIN.

Step 6: If the account holder’s file doesnot contain the account holder’sTIN, determine whether the QIimposed backup withholding onreportable payments at the correctrate.


(b) Identify the indirect accountholders holding through thoseaccounts, or use the same sam-

ple selected under AG10.03(A)(4).1 Step 7;

(c) From the indirect accountholders in (b), segregate the in-direct account holders that areU.S. non-exempt recipients.

(d) Apply Steps 2 through 6 tothose indirect account holders.

10.03(B)(5).2. Backup Withholding Re-port (Responsibilities Assumed). The ex-ternal auditor must specifically report:

Report 1: The amount of underwithhold-ing for each account and eachindirect account holder thatdoes not contain the accountholder’s TIN.

QI Agreement Sec. 10.03(C)(4).To theextent QI has not assumed primaryForm 1099 reporting and backup with-holding responsibility, perform testchecks using a valid sample of U.S.non-exempt account holders to verifythat QI has fulfilled its backup with-holding responsibilities under sections3.04, 3.05, and 3.06 of this Agreement;


10.03(C)(4).1. Backup Withholding Re-view (Responsibilities Not Assumed). Theexternal auditor must:

Step 1: For each account required to bereported under AG 10.03(B)(5).2Report 2 and each indirect ac-count holder required to be re-ported under AG 10.03(B)(5).2Report 3(c), determine whetherbackup withholding was imposedat the correct amount.

10.03(C)(4).2. Backup Withholding Re-port (Responsibilities Not Assumed)Theexternal auditor must report:

Report 1: The amount of underwithhold-ing for each account and eachindirect account holder forwhich backup withholding isrequired.

QI Agreement Sec. 10.03(C)(5). Reviewthe accounts of U.S. non-exempt recipi-ent account holders whose identity isprohibited by law, including by con-tract, from disclosure and verify thatQI or another payor is backup with-holding on reportable payments madeto such account holders;


10.03(C)(5).1. Review of Backup With-holding on Reportable Payments (Disclo-sure Prohibited). The external auditormust:

Step 1: For each account required to bereported under AG 10.03(A)(7).2Report 2, determine whetherbackup withholding was imposedat the correct amount.

10.03(C)(5).2. Backup Withholding on Re-portable Payments (Disclosure Prohibited)Report. The external auditor must report:

Report 1: The amount of underwithhold-ing for each account for whichbackup withholding is required.

QI Agreement Sec. 10.03(C)(6).Reviewa valid sample of accounts of U.S. non-exempt recipient account holders anddetermine if assets that generate orcould generate reportable paymentsare held in an account of any U.S. non-exempt recipient account holderswhose identity is prohibited by law,including by contract, from disclosure,and ascertain the reason why suchassets have not been disposed of or theaccount holder disclosed;


10.03(C)(6).1. Review of Assets Held byU.S. Non-exempt Recipients (DisclosureProhibited). The external auditor must:

Step 1: For each account required to bereported under AG 10.03(A)(7).2 Report 2, obtain a letterfrom the responsible partyexplaining the reason why assetsthat generate or could generatereportable payments have notbeen disposed of or the accountholder disclosed.

10.03(C)(6).2. Assets Held by U.S. Non-exempt Recipients (Disclosure Prohib-ited) Report. The external auditor must:

Report 1: Include a copy of the letter ob-tained in Step 1 with its report.

QI Agreement Sec. 10.03(C)(7).Verifythat amounts withheld were timely de-posited in accordance with section 3.08of this Agreement.


2001–44 I.R.B. 411 October 29, 2001

10.03(C)(7).1. Review of Timely De-posits. The external auditor must:

Step 1: Obtain the QI’s records of pay-ments covered by the QI Agree-ment, the QI’s Form 1042 and theQI’s records of tax deposits.

Step 2: Determine that the payment datestimely correspond with the de-posit dates for any required de-posits.

10.03(C)(7).2. Timely Deposits Report.The external auditor must report:

Report 1: Any payment dates that do nottimely correspond with depositdates.

QI Agreement Sec. 10.03(D)(1).ReturnFiling and Information Reporting.The external auditor must–

(1) Obtain copies of original andamended Forms 1042 and Forms 945,and any schedules, statements, or at-tachments required to be filed withthose forms, and determine whetherthe amounts of income, taxes, and otherinformation reported on those formsare accurate by–

(i) Reviewing work papers;

(ii) Reviewing Forms W-8IMY, to-gether with the associated withholdingstatements, that QI has provided towithholding agents;

(iii) Reviewing copies of Forms 1042-Sthat withholding agents have providedQI;

(iv) Reviewing account statements fromwithholding agents;

(v) Reviewing correspondence betweenQI and withholding agents; and

(vi) Interviewing personnel responsiblefor preparing the Forms 1042 and 945and the work papers used to preparethose forms.

Audit Guidance 10.03(D)(1):

10.03(D)(1).1. Review of Forms 1042and 945.The external auditor must:

Step 1: Obtain copies of:a. The QI’s Forms W-8IMY and

associated withholding state-ments, Forms 1042 and 945,

and the Forms 1042-S issued tothe QI and the Forms 1042-Sfiled by the QI (for PAI’s, ob-tain the reporting pool informa-tion provided to its QI); and

b. The copies of the QI’s recordsof payments from withholdingagents and of payments to theQI’s reporting pools, other QI’sand withholding foreign part-nerships and trusts, other recipi-ents for which recipient specificreporting is required under sec-tion 8.02 of the QI Agreement,U.S. non-exempt recipients,and U.S. exempt recipients as aclass.

Step 2: Reconcile the amounts reportedpaid to the QI on the Forms 1042-S issued to the QI, the amounts re-ported paid by the QI on theForms 1042-S filed by the QI, theamounts shown paid by the QI toU.S. non-exempt recipients on itswithholding statements and in theQI’s records of payments, and theamounts shown paid by the QI toU.S. exempt recipients as a classin the QI’s records of payments,and the amounts reported on theQI’s Forms 1042 and 945.

10.03(D)(1).2. Forms 1042 and 945 Re-port. The external auditor must report:

Report 1: (a) The aggregate amount re-ported paid to the QI on theForms 1042-S issued to theQI;

(b) The aggregate amountreported paid by the QI onForms 1042-S to eachreporting pool;

(c) The aggregate amountreported paid by the QI onForms 1042-S to other QI’sas a class;

(d) The aggregate amountreported paid by the QI onForms 1042-S to indirectaccount holders;

(e) The aggregate amountshown paid by the QI toU.S. non-exempt recipientsas a class;

(f) The aggregate amountshown paid by the QI to U.S.exempt recipients as a class;

(g) The total amounts withheldby the QI; and

(h) The total amounts withheldby others.

Report 2: The aggregate amount of anyadjustments under section 9 ofthe QI agreement incorporatedin each amount in Report 1.

Report 3: The aggregate amount of anyother adjustments that were in-corporated in the amounts re-ported under Report 1 in per-forming the reconciliationunder Step 2.

Report 4: Attach a copy of the QI’s Form1042.

QI Agreement Sec. 10.03(D)(2). Obtaincopies of original and corrected Forms1042-S and Forms 1099 together withthe work papers used to prepare thoseforms and determine whether theamounts reported on those forms areaccurate by–

(i) Reviewing the Forms 1042-S re-ceived from withholding agents;

(ii) Reviewing the Forms W-8IMY, andthe associated withholding statements,that QI has provided withholdingagents;

(iii) Reviewing a valid sample of ac-count statements issued by QI to ac-count holders; and

(iv) Interviewing QI’s personnel re-sponsible for preparing the Forms1042-S and, if applicable, Forms 1099,and the work papers used to preparethose forms.


10.03(D)(2).1. Review of Forms 1042-Sand 1099.The external auditor must:

Step 1: Obtain copies of:(a) The QI’s records of payments

from withholding agents andthe QI’s records of paymentsto the QI’s reporting pools andto any other QIs (or PAIs) con-tained in the sample selectedfor AG 10.03(A)(4), and

(b) The Forms 1042-S filed by theQI for each reporting pool andany such QIs.

October 29, 2001 412 2001–44 I.R.B.

Step 2: Match the QI’s records of pay-ments to the amounts reported foreach reporting pool and any QI’sdescribed in Step 1(a) on the QI’sForms 1042-S.

Step 3: Identify:(a) All accounts covered by the QI

Agreement for which recipientspecific reporting is requiredunder section 8.02(B) and (C)or section 8.04 of the QIAgreement; and

(b) The indirect account holdersholding through those ac-counts, or use the same sampleselected under AG10.03(A)(4).1 Step 7.

Step 4: Obtain copies of: (a) The Forms 1042-S and Forms

1099 filed by the QI for eachindirect account holder;

(b) The Forms W-8IMY and asso-ciated withholding statementsapplicable to each indirect ac-count holder;

(c) The QI’s records of paymentsto each indirect accountholder; and

(d) The documentation for eachindirect account holder.

Step 5: Match the QI’s records of pay-ments to the amounts reportedfor each indirect account holderon the QI’s Forms 1042-S and1099.

Step 6: (a) In the case of a QI that as-sumed primary Form 1099 andbackup withholding responsi-bility, identify all accountscovered by the QI Agreementthat are held by U.S. non-ex-empt recipients, or use thesame sample as in AG10.03(A)(6).1 Step 1.

(b) Match the QI’s records of pay-ments to the amounts reportedon each Form 1099 filed bythe QI.

10.03(D)(2).2. Forms 1042-S and 1099Report. The external auditor must report:

Report 1: For each pool or QI for whichthe amounts paid and theamounts reported do not match,the amounts of income reportedon each Form 1042-S under

Step 2, and the amounts paid toeach pool or QI.

Report 2: The number of:(a) Nonqualified intermediaries

and flow through entitiesthat are direct account hold-ers under Step 3(a);

(b) Indirect account holdersunder Step 3(b);

Report 3: The number of indirect ac-count holders for which thepayments made do not matchthe payments reported onForms 1042-S and on Forms1099, and for those accountholders the amounts reportedon each form and the amountspaid to each indirect accountholder.

Report 4: The number of non-exempt re-cipients for which the paymentsmade do not match the pay-ments reported on Forms 1099,and for those accounts theamounts reported on each formand the amounts paid to eachnon-exempt recipient.

QI Agreement Sec. 10.03(D)(3). Thor-oughly review the statements attachedto amended Forms 1042 filed to claim arefund, ascertain their veracity, and de-termine the causes of any overwith-holding reported and ensure QI did notissue Forms 1042-S to persons whom itincluded as part of its collective creditor refund.


10.03(D)(3).1. Review of Refunds. Theexternal auditor must:

Step 1: Obtain: (a) The QI’s amended Form 1042

(including the attached state-ments), the Forms 1042-S filedby the QI, and the Forms 1042-S issued to the QI;

(b) The QI’s records of paymentsfrom withholding agents andthe QI’s records of paymentsto the QI’s reporting pools;and

(c) The QI’s records of paymentsto the account holders who re-ceived a refund of overwith-holding from the QI.

Step 2: Inspect the QI’s records of pay-ments to determine whetheroverwithholding occurred andthe amount of the overwithhold-ing.

Step 3: Match the amount of income,withholding, and overwithholdingwith the QI’s Form 1042.

Step 4: Identify the reporting pool orpools to which the overwithhold-ing is attributable and the amountof overwithholding attributable toeach pool.

Step 5: Identify the account holders whoreceived a refund of the overwith-holding from the QI.

Step 6: Identify all Forms 1042-S filed bythe QI on a recipient specificbasis.

Step 7: Match the account holders identi-fied under Step 5 with the Forms1042-S identified under Step 6.

10.03(D)(3).2. Refund Report. The ex-ternal auditor must report:

Report 1: The total amount of overwith-holding under Step 2.

Report 2: The amounts of overwithhold-ing by each pool under Step 4.

Report 3: The number of account holdersidentified under Step 5.

Report 4: The number of account holdersthat do not match with Forms1042-S under Step 7.

QI Agreement Sec. 10.03(D)(4). Deter-mine, in the case of collective credits orrefunds, that QI repaid the appropriateaccount holders prior to requesting acollective refund or credit.


10.03(D)(4).1. Review of Account HolderRepayment Prior to Refund. The externalauditor must:

Step 1: Obtain: (a) The QI’s amended Form 1042

(including attached state-ments); and

(b) The QI’s records of paymentsto the account holders who re-ceived a refund of overwith-holding from the QI.

2001–44 I.R.B. 413 October 29, 2001

Step 2: Inspect the QI’s Form 1042 andrecords of payments to determinethat the dates of payments of over-withholding made to each accountholder were prior to the date of fil-ing the Form 1042.

10.03(D)(4).2. Account Holder Repay-ment Prior to Refund Report:The exter-nal auditor must report:

Report 1: The amount of overwithholdingpaid to each account holder thatoccurred after the date of filingthe Form 1042.

QI Agreement Sec. 10.03(E).Change inCircumstances. The external auditormust verify that in the course of theaudit it has not discovered any signifi-cant change in circumstances, as de-scribed in section 11.03(A), (D), or (E)of this Agreement.

Audit Guidance 10.03(E):

10.03(E).1. Review of Change in Circum-stance. The external auditor must:

Step 1: Obtain a letter signed by the re-sponsible party and by the QI’slegal counsel stating: (a) Whether there has been an ac-

quisition of all, or substantiallyall, of the QI’s assets in anytransaction in which the QI isnot the surviving legal entity;

(b) Any material changes in theknow-your-customer rules andprocedures set forth in the At-tachments to the QI Agree-ment; and

(c) Any significant changes in theQI’s business practices that af-fect the QI’s ability to meet itsobligations under the QIAgreement.

10.03(E).2. Change in Circumstance Re-port. The external auditor must report achange in circumstances by:

Report 1: Attaching a copy of the letterunder Step 1.

QI Agreement Sec. 10.04. Use of Statis-tical Sampling. If the external auditoris required to make a determinationbased on a valid sample of accounts, itshall use a statistical sampling when-ever an examination of all of accountswithin a particular class of accountswould be prohibitive in terms of timeand expense. If it is reasonable to ex-amine all accounts in connection witha particular issue, statistical samplingtechniques shall not be used. If statis-tical sampling techniques are required,the external auditor must determine asample size that provides a 95 percentconfidence level. If statistical sam-pling has been used and the auditordetermines that underwithholding hasoccurred with respect to the sampledaccounts, the IRS will determine thetotal amount of underwithheld tax byprojecting the underwithholding overthe entire population of similar ac-counts. For this purpose, QI agrees toprovide the IRS with the information(e.g., number of accounts andamounts) required to project the un-derwithholding. QI shall either reportand pay, in accordance with section9.06 of this Agreement, the underwith-held tax determined under the IRSprojection or propose another amountof underwithholding based on a moreaccurate population, a more accurateprojection technique, or an examina-tion of all similar accounts. If the IRSdoes not agree with the amount pro-posed by QI, the IRS shall assess a tax

by making a return under section 6020of the Code.

Audit Guidance 10.04:

10.04.1. When to Use Statistical Sam-pling. The external auditor is permitted toselect three statistical samples for use inperforming the procedures in AG 10.03.These are the samples permitted to be se-lected in:

(a) AG 10.03(A)(4).1 Step 1 (asample of all accounts coveredby the QI Agreement that areheld by direct account holdersthat are not U.S. non-exemptrecipients);

(b) AG 10.03(A)(6).1 Step 1 (asample of all accounts coveredby the QI Agreement that areheld by direct account holdersthat are U.S. non-exempt re-cipients); and

(c) AG 10.03(A)(4).1 Step 7 (asample of the indirect accountholders for which recipientspecific reporting is required).

The external auditor may always elect toconduct a 100 percent review instead ofselecting a statistical sample. The statisti-cal sampling methodology used in theseguidelines cannot be used for any othertax purpose.

10.04.2. Sample Size. The external audi-tor is permitted to select a sample only ifthere are more than 50 accounts fromwhich to select a sample in 10.04.1(a) or(b) or more than 50 indirect account hold-ers from which to select a sample in10.04.1(c).

10.04.3. Sample Formula. The externalauditor must determine the sample size byusing the following formula:

October 29, 2001 414 2001–44 I.R.B.

where t=1.96 (confidence coefficient at95 percent two sided)

P=5 percent (error rate) Q=1-Pd=2 percent (precision level)N=total population

The sample size will not exceed 456 (asdetermined by the formula above) or 50percent of the population, whichever issmaller. In no event may the sample sizebe lower than 50.

10.04.4. Number Generator. The exter-nal auditor must select the sample byusing a random number generator.

10.04.5. Records of Sampling Methodol-ogy. The external auditor is required torecord its statistical sampling proceduresand to maintain the ability to reconstructthe sample.

10.04.6. Alternative Sampling Methods.Multistage, cluster, stratification or othersampling methodology may be used withthe consent of the IRS. The sample sizemay be adjusted to achieve a 5 percenterror rate, a 2 percent precision level anda 95 percent two sided confidence level.See AG 10.03.2 (Submission of AuditPlan).

10.04.7. Projection. If the external auditorhas used a sample and has determined thatunderwithholding under AG 10.03(C)(1),(2), (3), (4), or (5) has occurred, then theIRS will determine the total amount of un-derwithheld tax by projecting the under-withholding over the entire population ofsimilar accounts using a projection methodthat is consistent with the sampling methodused. For example, if a simple unrestrictedrandom sample as provided in these guide-lines has been used, then the IRS may de-termine the total amount of underwithheldtax by projecting the underwitholding overthe entire population of similar accounts asfollows:

(a) Dividing the amount of under-withholding for the sample bythe number of accounts (or in-direct account holders) in thesample; and

(b) Multiplying the result in (a) bythe total number of accounts inthe population.

(c) If the external auditor has useda sample and has determined

that overwithholding has oc-curred, the QI may not projectthe amount of overwithholdingin order to claim a refund. Forsamples of direct accountholders, the IRS will offset anyunderwithholding in the sam-ple against any overwithhold-ing in the sample, providedthat the QI enters into a closingagreement (Form 906) that QIwill not file a claim for refundfor any overwithholding thatthe external auditor has dis-covered.

(d) The IRS wil l determinewhether it is appropriate toproject an amount of under-withholding when the factsshow that:(i) The amount is the conse-

quence of an identified error;and

(ii) The error was not repeatedthroughout the populationover which it would be pro-jected.

(e) The QI may propose that it isnot appropriate to project anamount of underwithholdingwhen the QI shows that:(i) The underwithholding was

the consequence of an iden-tified error,

(ii) The QI has corrected theerror in the sample in whichit was discovered,

(iii) The QI has corrected theerror throughout the popu-lation from which the sam-ple was drawn,

(iv) The QI has establishedsafeguards to prevent repe-tition of the error in thefuture, and

(v) As a consequence of thecorrection, the facts as cor-rected show that there wasactually no underwithhold-ing during the audit year.(Penalties and interest maynevertheless be imposed.)

The QI may also propose an alter-native projected underwithholdingtax adjustment based on facts andcircumstances. See Audit meeting

in AG 10.06 Step 3 for proceduresfor making such proposals.

Sec. 10.05. External Auditor’s Report.Upon completion of the audit of QI andany PAI, the external auditor shallissue a report, or reports, of audit find-ings directly to the IRS by sending theoriginal report to the IRS at the ad-dress set forth in section 12.06 of thisAgreement by June 30 following thecalendar year being audited, or if thatdate falls on a Saturday or Sunday, thenext U.S. business day. The reportmust be in writing, in English, and cur-rency amounts must be stated in U.S.dollars. The report must fully describethe scope of the audit, the methodolo-gies (including sampling techniques)used to determine whether QI is incompliance with the provisions of thisAgreement, and the result of each suchdetermination. The report must alsospecifically address each of the items insection 10.03 of this Agreement.


10.05.1. Auditor’s Report Requirements.The external auditor’s report must:

(a) List the external auditor ’sname, address, contact personand contact person’s telephonenumber.

(b) List the QI’s name, address,QI-EIN, responsible party andresponsible party’s telephonenumber.

(c) List each procedure requiredunder these Audit Guidelinesin the order listed in the AuditGuidelines with a notation thatthe procedure was performed.

(d) Identify the audit year.(e) List, under each procedure, the

items required to be reportedunder these Audit Guidelinesin the order listed in the AuditGuidelines.

(f) Include any items required tobe attached to the report as Ap-pendix 1. These items shouldbe cross-referenced in the re-port with footnotes.

(g) Include any information thatrequires a narrative responseand any other information thatthe external auditor wishes toinclude as Appendix 2. These

2001–44 I.R.B. 415 October 29, 2001

items should be cross-refer-enced in the report with foot-notes.

(h) Contain a certification signedby the external auditor that therequired procedures have beencompetently performed andthat the information reported isaccurate and complete.

10.05.2. Electronic Report. The IRS in-tends to develop a standard electronic re-port form. For audit reports due after thepublication date of that form, the externalauditor must also complete that form andsend it to the IRS in the manner requiredby the form.

10.05.3. Report Due Dates.The externalauditor must send the hard copy audit re-port to the IRS at the address set forth insection 12.06 of the QI Agreement byJune 30 of the year following the audityear. The external auditor and the QI mayjointly request an extension of the duedate of the report by submitting a requestfor extension in writing signed by the ex-ternal auditor and by the QI’s responsibleparty to the IRS at the address in AG10.01.1 by June 30 of the year followingthe audit year. The request should statethe date to which the extension is re-quested, explain the reason for the exten-sion and include telephone numbers forthe external auditor’s contact person andthe QI’s responsible party. The IRS willsend the external auditor and the QI awritten response as soon as practicableafter receiving the request.

Sec. 10.06. Expanding Scope and Tim-ing of External Audit. Upon review ofthe external auditor’s report, the IRSmay request, and QI must permit, theexternal auditor to perform additionalaudit procedures, or to expand the ex-ternal audit to cover some or all of thecalendar years for which the period oflimitations for assessment of taxes hasnot expired. In addition, the IRS may

request, and QI agrees to permit, theexternal auditor to perform an auditfor one or more calendar years notscheduled for audit under section 10.03of this Agreement.


10.06.1 IRS Review of Audit Report.Within 90 days after the IRS receives theexternal auditor’s report, the IRS will re-view the report and, if the IRS determinesthat no further action is necessary, thenthe IRS will send a written notice to theQI and the external auditor informingthem of this determination.

10.06.2. Audit Part 2: IRS Directed Pro-cedures. The IRS may determine that ad-ditional fact finding is necessary. In suchcases, the IRS will contact the externalauditor and the QI by telephone or in writ-ing within 90 days after the IRS receivesthe external auditor’s report. The IRSwill direct the external auditor to performspecific audit procedures and to report inwriting the results of those procedures.The IRS directed procedures may includeinstructing the external auditor to forwardto the IRS certain of the external auditor’swork papers and reports or instructing theexternal auditor to perform specific pro-cedures (or perform an audit in accor-dance with these Audit Guidelines) for theaudit year or for years other than the audityear. The IRS will stipulate a due datenot more than 90 days from the date of itsinstructions to the external auditor for theexternal auditor’s report on the results ofany IRS directed procedures. The externalauditor may request an extension of thedue date in accordance with AG 10.05 atany time before the due date. Within 90days after receiving the external auditor’sreport on the results of the initial IRS di-rected procedures, the IRS will contactthe external auditor and the QI. If the IRSdetermines that additional fact finding isnecessary, then the IRS may direct the ex-ternal auditor to perform further addi-

tional procedures under this section untilthe IRS determines that the facts havebeen sufficiently developed. If the IRSdetermines that the audit is complete, theIRS will notify the external auditor andthe QI in writing of the completion of theaudit and of any actions that it will take asa result of the audit.

10.06.3. Audit Part 3: Audit Meeting. Atany time after the external auditor hassubmitted its report on the initial IRS di-rected procedures and before the IRS no-tifies the QI and the external auditor ofthe completion of the audit, either the IRSor the QI may request an audit meetingbetween the IRS and the QI to acceleratefact finding, and to clarify and resolveconcerns. To request and schedule ameeting, the IRS will contact the QI’s re-sponsible party by telephone or in writ-ing, and the QI may contact the IRS at theaddress in AG 10.01 by telephone or inwriting. The IRS will meet with the QIwithin 90 days of the date the IRS re-ceives or makes the request, or at suchother time as the IRS and the QI mayagree. If the IRS and the QI agree, the em-ployees of the external auditor who areacting in the capacity of external auditorsunder the QI Agreement may attend theaudit meeting in that capacity, and otheremployees of the same firm may attend inother capacities. The IRS may continueto direct the external auditor to performspecific audit procedures under AG10.06.2 without regard to whether anaudit meeting has been scheduled or held.After the first audit meeting, either theIRS or the QI may request further auditmeetings at any time before the IRS noti-fies the external auditor and the QI of thecompletion of the audit.

October 29, 2001 416 2001–44 I.R.B.

Reporting Elective DeferralCatch–up Contributions on the2002 Form W-2

Announcement 2001–93

Purpose

This is to advise employers how to re-port elective deferral catch-up contribu-tions beginning after December 31, 2001.

Statutory Change

The Economic Growth and Tax ReliefReconciliation Act of 2001 (P.L. 107–16)added section 414(v) to the Internal Rev-enue Code of 1986. For 2002, section414(v) enables applicable employer plansto allow eligible participants who are age50 or over to make additional elective de-ferrals, i.e., “catch-up” contributions.

Reporting on Form W-2

For 2002, employers are required to re-port participants’ elective pension defer-rals on Form W-2 in box 12 using CodesD through H and S. For employees’ qual-ified catch-up contributions after 2001,employers must report the elective defer-ral catch-up contributions in the totals re-ported for Codes D through H and S.

Reporting on Form 5498

The reporting of catch-up contributionswill be addressed in the 2002 Instructionsfor Forms 1099-R and 5498. No majorchanges are anticipated.

Saver’s Tax Credit forContributions by Individuals toEmployer Retirement Plans andIRAs


This announcement describes the new“saver’s credit,” an income tax credit thatis available to eligible taxpayers who con-tribute to a retirement plan or IRA. Thisannouncement includes a sample noticethat employers can give to employees ex-plaining the credit.

Q-1: What is the saver’s credit?

A-1: The saver’s credit is a nonrefund-able income tax credit for certain taxpay-ers with adjusted gross income that doesnot exceed $50,000. It is equal to a speci-fied percentage of certain employee con-tributions made to an employer-sponsoredretirement plan or of certain individual orspousal contributions to an individual re-tirement arrangement (IRA) for taxableyears beginning after December 31, 2001,and before January 1, 2007. The saver’scredit is contained in § 25B of the InternalRevenue Code, which was added by sec-tion 618 of the Economic Growth and TaxRelief Reconciliation Act of 2001.

Q-2: Who is eligible for the saver’scredit?

A-2: Taxpayers who are age 18 or overbefore the end of their taxable year, otherthan full-time students or persons claimedas dependents on another taxpayer’s re-turn, are eligible for the credit.

For this purpose, students includeindividuals who, during some part of eachof five months during the year, are (a)enrolled at a school that has a regularteaching staff, course of study, andregularly enrolled body of students inattendance, or (b) taking an on-farmtraining course given by such a school or astate, county, or local government. Astudent is a full-time student if he or she isenrolled for the number of hours or coursesthe school considers to be full-time.

Q-3: What is the maximum annualcontribution eligible for the saver’s credit?

A-3: $2,000 per year.

Q-4: Is the amount of the annualcontribution eligible for the saver’s creditever reduced?

A-4: Yes. The amount of any contribu-tion eligible for the saver’s credit is re-duced by the amount of any taxable distri-bution received by the taxpayer (or by thetaxpayer’s spouse if the taxpayer filedjointly with that spouse both for the yearduring which a distribution was made andthe year for which the credit is taken)from any plan described in A-5 belowduring the testing period. The testing pe-

riod consists of the year for which thecredit is claimed, the period after the endof that year and before the due date (withextensions) for filing the taxpayer’s returnfor that year, and the two taxable yearsthat precede the year for which the creditis claimed. In the case of a distributionfrom a Roth IRA, this reduction applies toany such distribution, whether or not tax-able, that is not rolled over. An amountdoes not count as a distribution for pur-poses of the reduction rule if the distribu-tion is a return of a contribution to an IRA(including a Roth IRA) made during thetax year and (1) the distribution is madebefore the due date (including extensions)of the individual’s tax return for that year,(2) no deduction is taken with respect tothe contribution, and (3) the distributionincludes any income attributable to thecontribution.

For example, if an individual contributes$3,000 to a 401(k) plan during 2002, buthad taken a $500 IRA withdrawal duringthat year and a $900 IRA withdrawalduring 2001 and neither of thesewithdrawals was rolled over, the amountof that individual’s 2002 plan contributioneligible for the credit is $1,600 ($3,000 -$500 - $900), instead of the $2,000 thatwould have been eligible for the credit ifno withdrawals had been taken.

Q-5: What types of contributions areeligible for the saver’s credit?

A-5: Salary reduction contributions to thefollowing arrangements are eligible forthe credit: a 401(k) plan (including aSIMPLE 401(k)), a section 403(b) annu-ity, an eligible deferred compensationplan of a state or local government (a“governmental 457 plan”), a SIMPLEIRA plan, or a salary reduction SEP. Thesaver’s credit is also available for volun-tary after-tax employee contributions to atax-qualified retirement plan or section403(b) annuity. For purposes of thecredit, an employee contribution will be“voluntary” as long as it is not required asa condition of employment. Finally, thesaver’s credit is available for contribu-tions to a traditional or Roth IRA.

An amount contributed to an individual’sIRA is not a contribution eligible for the

Part IV. Items of General Interest

2001–44 I.R.B. 417 October 29, 2001

saver’s credit if (1) the amount is distrib-uted to the individual before the due date(including extensions) of the individual’stax return for the year in which the con-tribution was made, (2) no deduction istaken with respect to the contribution,

and (3) the distribution includes any in-come attributable to the contribution.

Q-6: What is the saver’s credit rate?

A-6: The saver’s credit rate is based onthe taxpayer’s adjusted gross income for

the taxable year for which the credit isclaimed, as follows:

Adjusted Gross Income

Married filing joint Head of household All other filers Credit

$0-$30,000 $0-$22,500 $0-$15,000 50% of contribution$30,001-$32,500 $22,501-$24,375 $15,001-$16,250 20% of contribution$32,501-$50,000 $24,376-$37,500 $16,251-$25,000 10% of contributionOver $50,000 Over $37,500 Over $25,000 credit not available

For example, a taxpayer whose filing sta-tus is single with adjusted gross income of$15,000 may be entitled to a credit equalto 50% of his or her contributions (up to$2,000 of contributions) to a plandescribed in A-5 above.

Q-7: Does the saver’s credit affect an eli-gible individual’s entitlement to anydeduction or exclusion that would other-wise apply to the contribution?

A-7: No. Eligible individuals entitled todeduct IRA contributions or to excludeplan contributions from gross income willbe able to deduct or exclude thoseamounts and also claim the saver’s credit.

Q-8: Can a taxpayer use the saver’s cred-it to offset both an alternative minimumtax liability and a regular income tax lia-bility?

A-8: Yes.

Q-9: For married taxpayers filing jointly,do contributions by or for either or bothspouses give rise to the saver’s credit?

A-9: Yes, contributions by or for either orboth spouses, up to $2,000 per year for eachspouse, can give rise to the saver’s credit.

Q-10: Are salary reduction and after-taxemployee contributions that are eligiblefor the saver’s credit taken into account inthe ADP and ACP nondiscrimination testsof §§ 401(k) and (m) of the InternalRevenue Code?

A-10: Yes. Salary reduction contribu-tions to a 401(k) plan, whether or notthose contributions give rise to thesaver’s credit, are taken into account inthe nondiscrimination test for salary

reduction contributions (the ADP test)for plans subject to that test. Also, vol-untary after-tax employee contributionsto a qualified plan, whether or not thosecontributions give rise to the saver’scredit, are taken into account in thenondiscrimination test for employeeafter-tax contributions (the ACP test) forplans subject to that test.

Q-11: Can an individual claim the saver’scredit for an amount contributed to a planpursuant to automatic enrollment?

A-11: Yes. Any amount that is treated asan elective contribution on behalf of aneligible individual to an employer plandescribed in A-5 above can give rise tothe saver’s credit.

Q-12: Can an individual take a projectedsaver’s credit into account in figuring theallowable number of withholding al-lowances on Form W-4?

A-12: Yes. For information on convert-ing credits into withholding allowances,see IRS Publication 919, “How Do I Ad-just My Withholding?”

Q-13: Is there a sample notice that em-ployers can use to help explain the saver’scredit to employees?

A-13: Yes. Employers are encouraged totell their employees about the credit. Em-ployers can inform employees in any waythey choose, including use of the noticeset out below.

Drafting Information

The principal author of this announce-ment is Roger Kuehnle of the Employee

Plans, Tax Exempt and Government Enti-ties Division. For further information re-garding this announcement, please con-tact the Employee Plans’ taxpayerassistance telephone service at 1-877-829-5500 (a toll-free number), betweenthe hours of 8:00 a.m. and 9:30 p.m. East-ern Time, Monday through Friday. Mr.Kuehnle may be reached at (202) 283-9888 (not a toll-free number).

Notice to Employees RegardingSaver’s Credit:

This notice explains how you may be ableto pay less tax by contributing to [insertname of employer’s plan] (the “Plan”) orto an individual retirement arrangement(“IRA”).

Beginning in 2002, if you make contri-butions to the Plan or to an IRA, youmay be eligible for a tax credit, calledthe “saver’s credit.” This credit couldreduce the federal income tax you paydollar-for-dollar. The amount of thecredit you can get is based on the contri-butions you make and your credit rate.The credit rate can be as low as 10% oras high as 50%, depending on your ad-justed gross income — the lower yourincome, the higher the credit rate. Thecredit rate also depends on your filingstatus. See the tables at the end of thisnotice to determine your credit rate.

The maximum contribution taken into ac-count for the credit for an individual is$2,000. If you are married filing jointly,the maximum contribution taken into ac-count for the credit is $2,000 each for youand your spouse.

October 29, 2001 418 2001–44 I.R.B.

The credit is available to you if you:• are 18 or older, • are not a full-time student,• are not claimed as a dependent on

someone else’s return, and • have adjusted gross income (shown on

your tax return for the year of thecredit) that does not exceed:

$50,000 if you are married fi l ingjointly,$37,500 if you are a head of householdwith a qualifying person, or$25,000 if you are single or married fil-ing separately.

Example: Susan and John are marriedand file their federal income tax returnjointly. For 2002, their adjusted grossincome would have been $34,000 if theyhad not made any retirement contribu-tions. During 2002, Susan elected to have$2,000 contributed to her employer’s401(k) plan. John made a deductible con-tribution of $2,000 to an IRA for 2002. Asa result of these contributions, their 2002adjusted gross income is $30,000. If theirFederal income tax would have been$3,000 (after applying any other credits to

which they are entitled) without havingmade any retirement contributions, thentheir federal income tax as a result ofmaking the $4,000 retirement contribu-tions will be only $400 after applicationof the saver’s credit and other tax benefitsfor the retirement contributions. Thus, bysaving $4,000 for their retirement, Susanand John have also reduced their taxes by$2,600.

The annual contribution eligible for thecredit may have to be reduced by any tax-able distributions from a retirement planor IRA that you or your spouse receiveduring the year you claim the credit, dur-ing the 2 preceding years, or during theperiod after the end of the year for whichyou claim the credit and before the duedate for filing your return for that year. Adistribution from a Roth IRA that is notrolled over is taken into account for thisreduction, even if the distribution is nottaxable. After these reductions, the maxi-mum annual contribution eligible for thecredit per person is $2,000.

Example: Mark’s adjusted gross incomefor 2002 is low enough for him to be eli-

gible for the credit that year and he defers$3,000 of his pay to his employer’s 401(k)plan during 2002. During 2001, Marktook a $400 hardship withdrawal from hisemployer’s plan and during 2002 he takesan $800 IRA withdrawal. Mark’s 2002saver’s credit will be based on contribu-tions of $1,800 ($3,000 - $400 - $800).

The amount of your saver’s credit will notchange the amount of your refundable taxcredits. A refundable tax credit, such asthe earned income credit or the refundableamount of your child tax credit, is anamount that you would receive as a refundeven if you did not otherwise owe anytaxes.

The amount of your saver’s credit in anyyear cannot exceed the amount of tax thatyou would otherwise pay (not countingany refundable credits or the adoptioncredit) in any year. If your tax liability isreduced to zero because of other nonre-fundable credits, such as the HopeScholarship Credit, then you will not beentitled to the saver’s credit.

CREDIT RATES

If your income tax filing status is“married filing joint”and your adjusted gross income is: Your saver’s credit rate is:

$0-$30,000 50% of contribution$30,001-$32,500 20% of contribution$32,501-$50,000 10% of contributionOver $50,000 credit not available

If your income tax filing status is“head of household”and your adjusted gross income is: Your saver’s credit rate is:


If your income tax filing status is “single,”“married filing separate,” or “qualifying widow(er)”and your adjusted gross income is: Your saver’s credit rate is:


2001–44 I.R.B. 419 October 29, 2001

Information Reporting ProgramCall Site Update


IRS Martinsburg Commputing Center(MCC) Information Reporting ProgramCall Site Now Has a Toll-Free TelephoneNumber

The Call Site is located at IRS/MCCand operates in conjunction with the In-formation Reporting Program. The CallSite provides service to the payer commu-nity (financial institutions, employers,and other transmitters of information re-turns).

The Information Reporting ProgramCall Site answers both magnetic mediaand tax law questions relating to the filingof information returns (Forms 1096,1098, 1099, 5498, 8027, W-2G, and W-4).The Call Site also answers magneticmedia questions related to Forms 1042-S,and tax law and paper filing related ques-tions about Forms W-2 and W-3, as wellas handling inquiries dealing with backupwithholding and reasonable cause re-quirements due to missing and incorrecttaxpayer identification numbers.

The Call Site accepts calls from allareas of the country. The new toll-freenumber is 866-455-7438. Payers andtransmitters may still use the original tele-phone number, which is304-263-8700orTelecommunications Device for the Deaf(TDD) 304-267-3367. These are tollcalls. The Call Site can also be reachedvia email at [email protected] ofoperation for the Call Site are Mondaythrough Friday, 8:30 a.m. to 4:30 p.m.Eastern time. The Call Site is in opera-tion throughout the year to handle thequestions of payers, transmitters, and em-ployers. Due to the high demand for as-sistance at the end of January and Febru-ary, it is advisable to call as soon aspossible to avoid these peak filing sea-sons.

Foundations Status of CertainOrganizations

Announcement 2001–108The following organizations have

failed to establish or have been unable tomaintain their status as public charities

or as operating foundations. Accord-ingly, grantors and contributors may not,after this date, rely on previous rulingsor designations in the Cumulative Listof Organizations (Publication 78), or onthe presumption arising from the filingof notices under section 508(b) of theCode. This listing does not indicate thatthe organizations have lost their statusas organizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities.The follow-ing organizations (which have beentreated as organizations that are not pri-vate foundations described in section509(a) of the Code) are now classified asprivate foundations:

A-1 Universal Care, Inc., Hempstead, NYAlbany-El Cerrito Access, El Cerrito, CAAlliance for Youth Services Project, Inc.,

Long Beach, CAAmateur Baseball Association of Texas,

Inc., Houston, TXAmbassador Baptist Church of Houston,

Houston, TXAmerican Friends of Children of

Chernobyl, Inc., New York, NYAmerican Samoan Medical Team, Inc.,

Las Vegas, NVAmigas-Assisting Mexicans in Gaining

Academic Success, Houston, TXAmos York Ministries, Inc., Houston, TXAsian-American Culture Center,

Houston, TXAsociacion Boliviana De Houston, Inc.,

Houston, TXBalance Ministries, Houston, TXBarrett Station Youth Enrichment Project,

Inc., Crosby, TXBay Area School Reform Collaborative,

San Francisco, CABevcomm Internet Technology, Davis, CABinghampton Revitalization Association,

Inc., Memphis, TNBrazos River Preservation Society,

Sugar Land, TXCape Cod Discovery Museum, Inc.,

Dennisport, MACapital District Field of Dreams, Inc.,

Albany, NYCaregivers Empowered, Houston, TXCaring Neighbor Services, Inc.,

Jersey City, NJCenter for Value Inquiry, St. Paul, MNChild and Adult Development Center of

Houston, Inc., Houston, TX

Children of God Ministries-ChildheartMinistries International, Dallas, TX

Christ Outreach Center, Marion, OHC.I.E.L.O. Project/Radio Ranch,

Olympia, WACitrus 20-20, Inc., Homosassa, FLCitywide Youth Basketball League of

Houston, Inc., Houston, TXClinton School Committee for

Curriculum Advancement, Clinton, MT

Clyde Drexler Foundation, Inc., Houston, TX

Common Sense Forum, Inc., Milwaukee, WI

Community Advocacy FoundationFresno, CA

Community Housing and DevelopmentFund, Torrance, CA

Community Housing and RedevelopmentTrust, Inc., Homestead, FL

Creative Arts Institute, Port Hadlock, WADarley Park Community Association,

Inc., Baltimore, MDDesert Arts Unlimited, Lakeview, ORDevoted Care Home, Inc.,

Missouri City, TXDunamis Connection, Inc.,

Brookshire, TXEarning by Learning Stanislaus,

Modesto, CAEmmaus Ministries, Yakima, WAEnchanted Womanhood, Inc.,

Baytown, TXEncore Theatre, Houston, TXEnvironmental Exchange, Inc.,

Forest Hills, NYFalmouth Youth Basketball Association,

Falmouth, MEFamilies for Effective Autism Treatment,

Inc., Minnetonka, MNFaye and A.J. Wolf Foundation,

Houston, TXFederation of African American

Contractors, Oakland, CAFort Bend Cultural Arts Council,

Missouri City, TXFrank Steele Foundation, Inc., Geary, OKFraternal Organization, Killeen, TXFriends of Arch, Inc.,

New Hyde Park, NYFriends of the Paragon Carousel, Inc.,

Hull, MAGLT Foundation, Omaha, NEGolden Shadow Associates,

St. Charles, MOGoose Creek Navy Community

Foundation, Inc., Baytown, TX

October 29, 2001 420 2001–44 I.R.B.

Greater Houston Academic Challenge,Inc., Houston, TX

Greg Crawford Ministries, Inc., Huffman, TX

Heavenly Acres Foundation, Hugo, OK

Hematology-Oncology AssistanceResource Coalition, Kingwood, TX

Hidalgo Coordination, Inc., Lordsburg, NM

Highland Belle Booster Club, Inc.,Dallas, TX

Highland Park Dance Theater Company,Fresno, CA

Hmong Foundation, Inc., Milwaukee, WIHome Growth Program & Associates,

Inc., Sacramento, CAHospice Lights Foundation, Inc.,

New Freedom, PAHouston Pride Band, Inc., Houston, TXHouston Roundup, Houston, TXHuman Focus, Daly City, CAHyde Park Foundation, Houston, TXIndependent Heights Baptist Pastors

and Ministers Alliance, Inc., Houston, TX

Intellidebt Corp., Garland, TXInternational Marinelife Alliance, Inc.,

Honolulu, HIJackson Hole Community Radio,

Incorporated, Jackson, WYJackson Park Preservation Corporation,

Chicago, ILJafria Council USA, Inc., Corona, NYJames M. Tirella Memorial Foundation

for the Arts, New York, NYJames River Blues Society,

Lynchburg, VAJehovah Jirah Outreach Ministries, Inc.,

Winston-Salem, NCJohn F. and Annie M. Hurley Howells

Family Foundation, Inc., Salt Lake City, UT

Jojo Community Vocational andRehabilitation Services, Denver, CO

Jude-25 Christian Stewardship Fund,Inc., Palm Desert, CA

Kansas Alliance of Alcohol and OtherDrug Services, Inc., Abilene, KS

Kenner Housing Authority ResidentAssociation, Kenner, LA

Korean Civic Alliance, Incorporated,Bronx, NY

Laguna Hills Aquatics, Cathedral City, CA

Les Amis, St. Louis, MOLight Club 8, Incorporated,

Coral Springs, FL

Little Brothers & Little Sisters Program,Inc., Visalia, CA

Lucky Community Improvement Club,McMinnville, TN

Lyric Theatre, Ltd., Weehawken, NJMadison Township Volunteer Fire

Department, Inc., Greencastle, INMain Thing Ministries, Houston, TXMark Williams Charities, Houston, TXMasters Watchmen Ministry, Inc.,

Augusta, GAMat Rats, Inc., Hillsboro, ORMetropolitan Children Services, Inc.,

Matteson, ILMichigan Legal Foundation, Midland, MIMind Body and Science Institute,

San Antonio, TXMountain View Resident Council,

Big Stone Gap, VAMuslim American Youth, Inc.,

Lindenhurst, NYNa Kokua Ministries Haaii, Inc., Home

Fellowship Church of Jesus, Honolulu, HI

National Collegiate Exposure Program,Houston, TX

Navajo Scouting Organization, St. Michaels, AZ

Needham Ministries, Incorporated,Houston, TX

Netday, Irvine, CANeurosurgical Peruvian American

Foundation, Huntington Beach, CANew Century Development, Inc.,

McComb, MSNew Hope Outreach Ministries,

Incorporated, Lexington, NCNewburgh Housing Authoritys Outreach

Development Corp., Newburgh, NYNWLRC Legends Rowing Club,

Everett, WAOhitare Global for Family & Youth,

Tacoma, WAOptions of Ohio, Inc., Dellroy, OHOrange Area Boxing Club, Inc.,

Orange, TXOutrage, Inc., Houston, TXPalm Beach County Alzheimers Care

Association, Inc., Boca Raton, FLParental Alcohol-Drug Services,

Alameda, CAPath of Life, Inc., Houston, TXPathways to Freedom, Inc.,

Brentwood, TNPerry N. Finley Foundation, Ltd.,

Boston, MAPleasant Hill Community Development

Corporation, Houston, TX

Porter County Railroad Educational &Historical Fund, Valparaiso, IN

Prehospital Advisory Board, Moline, ILPrevention Intervention Program,

Plano, TXPulaski Court Residents Association of

Garfield, Inc., Garfield, NJQuality Connections, Inc., Seminole, OKRainbow Tribe Institution Foundation,

Inc., Albany, NYReach Me, Inc., Houston, TXRecovery Campuses of Texas Caring for

the Indigent, Galveston, TXResponsibility is Ours Trio, Houston, TXRichmond Historic Preservation

Committee, Richmond, TXRolla Area Lutheran for Life

Organization, Rolla, MORophe Ministries, Philadelphia, PARoseberg Roughnecks Football Club,

Rosenburg, TXRoz House of New Found Hope,

Chicago, ILRussell Community, Corporation,

Washington, DCSalt of the Earth A New Jersey Non-

Profit Corporation, Bagota, NJSamskriti Society for Indian Performing

Arts, Incorporated, Houston, TXSan Francisco Italian Athletic Club

Foundation, San Francisco, CASan Gabriel-Pomona Valleys Cocaine

Anonymous, Arcadia, CASave Our Shores, Dickinson, TXSenior Assistance Fund Elite,

Houston, TXSeymour Community School Scholarship

Trust, Seymour, WISharp Ministries International, Inc.,

Oklahoma City, OKSocial Assistance and Fundamental

Education, Inc.-SAFE, Houston, TXSociete Italiana Di Cultura, Chicago, ILSoul Ministries, Inc., La Marque, TXSoutheast Texas Area Emissions

Reduction Credit Organization,Port Arthur, TX

Southwestern Illinois Business Council,Inc., East St. Louis, IL

Space America Foundation for Education,Inc., Houston, TX

Springfield Eagles Charity, Inc.,Springfield, OH

St. Stephen Christian Center, Houston, TX

Story Center, A Historical Museum andCultural Center, Ames, IA

Success, Inc., Carpinteria, CA

2001–44 I.R.B. 421 October 29, 2001

Success of Minority Students, Inc.,Catskill, NY

Sweeny Historical Society, Inc., Sweeny, TX

Teen Life Community Action Group,Pfafftown, NC

Teenage Incentive Program, Inc.,Houston, TX

Texas Raptor & Wildlife Rehab &Education Center, Inc., Houston, TX

Thai Association of San Diego County,Excondido, CA

Three Corners Counseling Center,Concord, CA

Timberlawn Psychiatric ResearchFoundation, Inc., Greensboro, NC

Tomball Njotc Booster Club, Tomball, TX

Tournament Teams, Inc., Katy, TXTri-County Revitalization

Industrialization Pac-People Again,Ellicott, MD

Trinity Gardens Integral Forces, Inc.,Houston, TX

Upstate Alive 95, Inc., Greenville, SCUSA Joshinmon Shorin-Ryu Karate-Do

Federation, Houston, TXVision Entertainment, Inc., Dallas, TXVolunteers for Increased Public Safety,

La Quinta, CAWatts Home, Inc., Beaumont, TXWings for Wildlife, Denver, COWolf Laurel Historical Society,

Mars Hill, NCYorkshire Village Resident Council, Inc.,

Houston, TXZiggurratt Christian Ministries,

Richland, WA

If an organization listed above sub-mits information that warrants the re-newal of its classification as a publiccharity or as a private operating founda-tion, the Internal Revenue Service will

issue a ruling or determination letterwith the revised classification as tofoundation status. Grantors and contrib-utors may thereafter rely upon such rul-ing or determination letter as providedin section 1.509(a)–7 of the Income TaxRegulations. It is not the practice of theService to announce such revised classi-fication of foundation status in the Inter-nal Revenue Bulletin.

October 29, 2001 i 2001–44 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

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.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security

Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contributions Act.

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.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

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.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

2001–44 I.R.B. ii October 29, 2001

Numerical Finding List1

Bulletins 2001–27 through 2001–43

Announcements:

2001–69, 2001–27 I.R.B. 232001–70, 2001–27 I.R.B. 232001–71, 2001–27 I.R.B. 262001–72, 2001–28 I.R.B. 392001–73, 2001–28 I.R.B. 402001–74, 2001–28 I.R.B. 402001–75, 2001–28 I.R.B. 422001–76, 2001–29 I.R.B. 672001–77, 2001–30 I.R.B. 832001–78, 2001–30 I.R.B. 872001–79, 2001–31 I.R.B. 972001–80, 2001–31 I.R.B. 982001–81, 2001–33 I.R.B. 1752001–82, 2001–32 I.R.B. 1232001–83, 2001–35 I.R.B. 2052001–84, 2001–35 I.R.B. 2062001–85, 2001–36 I.R.B. 2192001–86, 2001–35 I.R.B. 2072001–87, 2001–35 I.R.B. 2082001–88, 2001–36 I.R.B. 2202001–89, 2001–38 I.R.B. 2912001–90, 2001–35 I.R.B. 2082001–91, 2001–36 I.R.B. 2212001–92, 2001–39 I.R.B. 3012001–94, 2001–39 I.R.B. 3032001–95, 2001–39 I.R.B. 3032001–96, 2001–41 I.R.B. 3172001–97, 2001–40 I.R.B. 3102001–98, 2001–41 I.R.B. 3172001–99, 2001–42 I.R.B. 3402001–100, 2001–41 I.R.B. 3172001–101, 2001–43 I.R.B. 3742001–102, 2001–42 I.R.B. 3402001–103, 2001–43 I.R.B. 3752001–104, 2001–43 I.R.B. 3762001–105, 2001–43 I.R.B. 376

Court Decisions:

2070, 2001–31 I.R.B. 90

Notices:

2001–39, 2001–27 I.R.B. 32001–41, 2001–27 I.R.B. 22001–42, 2001–30 I.R.B. 702001–43, 2001–30 I.R.B. 722001–44, 2001–30 I.R.B. 772001–45, 2001–33 I.R.B. 1292001–46, 2001–32 I.R.B. 1222001–47, 2001–36 I.R.B. 2122001–48, 2001–33 I.R.B. 1302001–49, 2001–34 I.R.B. 1882001–50, 2001–34 I.R.B. 1892001–51, 2001–34 I.R.B. 1902001–52, 2001–35 I.R.B. 2032001–53, 2001–37 I.R.B. 2252001–54, 2001–37 I.R.B. 225

Notices—Continued:

2001–55, 2001–39 I.R.B. 2992001–56, 2001–38 I.R.B. 2772001–57, 2001–38 I.R.B. 2792001–58, 2001–39 I.R.B. 2992001–59, 2001–41 I.R.B. 3152001–60, 2001–40 I.R.B. 3042001–61, 2001–40 I.R.B. 3052001–62, 2001–40 I.R.B. 3072001–63, 2001–40 I.R.B. 3082001–64, 2001–41 I.R.B. 3162001–65, 2001–43 I.R.B. 369

Proposed Regulations:

REG–110311–98, 2001–35 I.R.B. 204REG–106917–99, 2001–27 I.R.B. 4REG–103735–00, 2001–35 I.R.B. 204REG–103736–00, 2001–35 I.R.B. 204REG–107151–00, 2001–43 I.R.B. 370REG–100548–01, 2001–29 I.R.B. 67REG–106431–01, 2001–37 I.R.B. 272

Railroad Retirement Quarterly Rates:

2001–27, I.R.B. 12001–41, I.R.B. 314

Revenue Procedures:

2001–39, 2001–28 I.R.B. 382001–40, 2001–33 I.R.B. 1302001–41, 2001–33 I.R.B. 1732001–42, 2001–36 I.R.B. 2122001–43, 2001–34 I.R.B. 1912001–44, 2001–35 I.R.B. 2032001–45, 2001–37 I.R.B. 2272001–46, 2001–37 I.R.B. 2632001–47, 2001–42 I.R.B. 3322001–48, 2001–40 I.R.B. 3082001–49, 2001–39 I.R.B. 3002001–51, 2001–43 I.R.B. 369

Revenue Rulings:

2001–30, 2001–29 I.R.B. 462001–33, 2001–32 I.R.B. 1182001–34, 2001–28 I.R.B. 312001–35, 2001–29 I.R.B. 592001–36, 2001–32 I.R.B. 1192001–37, 2001–32 I.R.B. 1002001–38, 2001–33 I.R.B. 1242001–39, 2001–33 I.R.B. 1252001–40, 2001–38 I.R.B. 2762001–41, 2001–35 I.R.B. 1932001–42, 2001–37 I.R.B. 2232001–43, 2001–36 I.R.B. 2092001–44, 2001–37 I.R.B. 2232001–45, 2001–42 I.R.B. 3232001–46, 2001–42 I.R.B. 3212001–47, 2001–39 I.R.B. 2932001–48, 2001–42 I.R.B. 3242001–49, 2001–41 I.R.B. 3122001–50, 2001–43 I.R.B. 343

Treasury Decisions:

8947, 2001–28 I.R.B. 368948, 2001–28 I.R.B. 278949, 2001–28 I.R.B. 338950, 2001–28 I.R.B. 348951, 2001–29 I.R.B. 638952, 2001–29 I.R.B. 608953, 2001–29 I.R.B. 448954, 2001–29 I.R.B. 478955, 2001–32 I.R.B. 1018956, 2001–32 I.R.B. 1128957, 2001–33 I.R.B. 1258958, 2001–34 I.R.B. 1838959, 2001–34 I.R.B. 1858960, 2001–34 I.R.B. 1768961, 2001–35 I.R.B. 1948962, 2001–35 I.R.B. 2018963, 2001–35 I.R.B. 1978964, 2001–42 I.R.B. 3208965, 2001–43 I.R.B. 344

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 2001–1 through 2001–26is in Internal Revenue Bulletin 2001–27, dated July2, 2001.

October 29, 2001 iii 2001–44 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2001–27 through 2001–43

Announcements:

2000–48Modified byNotice 2001–43, 2001–30 I.R.B. 72

Notices:


99–41Modified and superseded by Notice 2001–62, 2001–40 I.R.B. 307



2001–15Supplemented byNotice 2001–51, 2001–34 I.R.B. 190


Proposed Regulations:

LR–97–79Withdrawn byREG–100548–01, 2001–29 I.R.B. 67

LR–107–84Withdrawn byREG–100548–01, 2001–29 I.R.B. 67

REG–110311–98Supplemented byT.D. 8961, 2001–35 I.R.B. 194

REG–106917–99Corrected byAnn. 2001–86, 2001–35 I.R.B. 207



REG–107186–00Corrected byAnn. 2001–71, 2001–27 I.R.B. 26

REG–130477–00Supplemented byAnn. 2001–82, 2001–32 I.R.B. 123

REG–130481–00Supplemented byAnn. 2001–82, 2001–32 I.R.B. 123

Revenue Procedures:

83–74Revoked byRev. Proc. 2001–49, 2001–39 I.R.B. 300

Revenue Procedures—Continued:

84–84Revoked byRev. Proc. 2001–49, 2001–39 I.R.B. 300

93–27Clarified byRev. Proc. 2001–43, 2001–34 I.R.B. 191

97–13Modified byRev. Proc. 2001–39, 2001–28 I.R.B. 38

97–19Modified by Notice 2001–62, 2001–40 I.R.B. 307

98–44Superseded byRev. Proc. 2001–40, 2001–33 I.R.B. 130

99–27Superseded byRev. Proc. 2001–42, 2001–36 I.R.B. 212

99–49Modified and amplified byRev. Proc. 2001–46, 2001–37 I.R.B. 263


2000–39Corrected byAnn. 2001–73, 2001–28 I.R.B. 40Superseded byRev. Proc. 2001–47, 2001–42 I.R.B. 332




Revenue Rulings:

57–589Obsoleted byREG–106917–99, 2001–27 I.R.B. 4


67–274Amplified byRev. Rul. 2001–46, 2001–42 I.R.B. 321



70–379Obsoleted byRev. Rul. 2001–39, 2001–33 I.R.B. 125


Revenue Rulings—Continued:

78–127Modified byRev. Rul. 2001–40, 2001–38 I.R.B. 276


89–42Modified and superseded byRev. Rul. 2001–48, 2001–42 I.R.B. 324

90–95Distinguished byRev. Rul. 2001–42, 2001–42 I.R.B. 321

92–19Supplemented byRev. Rul. 2001–38, 2001–33 I.R.B. 124

97–31Modified and superseded byRev. Rul. 2001–48, 2001–42 I.R.B. 324

Treasury Decisions:

8948Corrected byAnn. 2001–90, 2001–35 I.R.B. 208

1 A cumulative list of current actions on previouslypublished items in Internal Revenue Bulletins2001–1 through 2001–26 is in Internal RevenueBulletin 2001–27, dated July 2, 2001.

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