Td 8995

Federal Register / Vol. 67, No. 94 / Wednesday, May 15, 2002 / Rules and Regulations
Books or records relating to a
collection of information must be
retained as long as their contents might
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8995]
RIN 1545–AY31

Mid-Contract Change in Taxpayer
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations concerning a mid-contract
change in taxpayer of a contract
accounted for under a long-term
contract method of accounting. A
taxpayer that is a party to such a
contract will be affected by these
regulations.
DATES: Effective Date: These regulations
are effective May 15, 2002.
Applicability Date: These regulations
apply to transactions on or after May 15,
2002.
FOR FURTHER INFORMATION CONTACT: John
Aramburu at (202) 622–4960 (not a tollfree number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1732.
The collection of information in these
final regulations is in § 1.460–
6(g)(3)(ii)(D). This information is
required to enable taxpayers to make
look-back computations when the
income from a long-term contract has
been previously reported by another
taxpayer.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number.
The estimated average annual
disclosure burden per respondent is 2
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:CAR:MP:FP, Washington, DC 20224,
and to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.

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Background
Section 460 generally requires that
long-term contracts be accounted for
under the percentage-of-completion
method (PCM), under which a taxpayer
must recognize income according to the
estimated percentage of the contract that
is completed during each taxable year
and make a look-back computation of
interest to compensate the government
(or the taxpayer) for any
underestimation (or overestimation) of
income from the contract. However,
home construction contracts and certain
contracts of smaller construction
contractors are exempt from these
requirements. Moreover, residential
builders are entitled to use the 70/30
percentage-of-completion/capitalized
cost method (PCCM), and certain
shipbuilders are entitled to use the 40/
60 PCCM. A long-term contract or a
portion of a long-term contract that is
exempt from the PCM may be accounted
for under any permissible method,
including the completed contract
method (CCM), under which a taxpayer
does not report income until a contract
is complete, even though progress
payments are received in years prior to
completion.
This document contains amendments
to 26 CFR part 1. On February 16, 2001,
a notice of proposed rulemaking (REG–
105946–00) relating to a mid-contract
change in taxpayer of a contract
accounted for under a long-term
contract method of accounting was
published in the Federal Register (66
FR 10643). Written comments were
received from the public in response to
the notice of proposed rulemaking. No
public hearing was requested or held.
After consideration of all comments, the
proposed regulations are adopted as
amended by this Treasury decision.
Explanation and Summary of
Comments
The proposed regulations divide the
rules regarding a mid-contract change in
taxpayer of a contract accounted for
under a long-term contract method of
accounting into two categories—
constructive completion transactions
and step-in-the-shoes transactions.
Generally, a constructive completion
transaction results in the taxpayer
originally accounting for the long-term
contract (old taxpayer) recognizing

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income from the contract based on a
contract price that takes into account
any amounts realized from the
transaction or paid by the old taxpayer
to the taxpayer subsequently accounting
for the long-term contract (new
taxpayer) that are allocable to the
contract. Similarly, the new taxpayer in
a constructive completion transaction is
treated as though it entered into a new
contract as of the date of the transaction,
with the contract price taking into
account the purchase price and any
amount paid by the old taxpayer that is
allocable to the contract. In the case of
a step-in-the-shoes transaction, the old
taxpayer’s obligation to account for the
contract terminates on the date of the
transaction and is assumed by the new
taxpayer. The new taxpayer must
assume the old taxpayer’s methods of
accounting for the contract, with both
the contract price and allocable contract
costs based on amounts taken into
account by both parties.
Commentators raised concerns
regarding the general application of
step-in-the-shoes treatment to contracts
of S corporations accounted for using
the CCM. For example, these
commentators were concerned with the
potential for income shifting that can
occur when the stock of an S
corporation that is accounting for a
long-term contract using the CCM is
sold to a party with a lower marginal tax
rate or to a tax indifferent shareholder.
Similarly, income from a CCM contract
could be shifted to a party with a lower
tax rate or a tax indifferent party by
making an S election or transferring the
contract in a section 351 transaction,
followed by an S election and a sale of
stock. To prevent such a shifting of
income, these commentators generally
recommend that the transferor be
required to apply the PCM to CCM
contracts in progress as of the
transaction date.
While these commentators’ concerns
and recommendations relate solely to
CCM contracts, the potential for such
income shifting also exists with PCM
contracts due to the fact that recognition
of income under both the PCM and the
CCM does not correspond to the receipt
of progress payments. In addition, many
of the commentators’ concerns are not
unique to the section 460 regulations as
similar opportunities are presented
whenever an S corporation or an
electing S corporation has assets with
built-in gain or loss. Moreover, adoption
of the commentators’ recommendation
would trigger tax as of the transaction
date and thus would be inconsistent
with the policy of providing for tax-free
reorganizations of going concerns. Thus,
the commentators’ proposals for

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Federal Register / Vol. 67, No. 94 / Wednesday, May 15, 2002 / Rules and Regulations

addressing this potential abuse were not
adopted. However, as in the proposed
regulations, the final regulations contain
an anti-abuse rule that is designed to
prevent such income shifting.
Commentators suggested that for
purposes of the section 1374 built-in
gain rules applicable to S corporation
elections, long-term contracts should be
valued at the amount of income
reportable under the PCM on the date of
the election. The section 1374
regulations currently measure
recognized built-in gain attributable to a
long-term contract accounted for using
the CCM based on the amount of income
reportable under the PCM on the date of
the election. See § 1.1374–4(g). These
final regulations, however, do not
provide a specific rule to determine the
value of a long-term contract because
the fair market value of a long-term
contract reflects a variety of factors,
including the amount earned by the old
taxpayer as compared to the progress
payments received and retained by the
old taxpayer, and the new taxpayer’s
estimates of future revenues and costs.
One commentator pointed out that
while the preamble indicates the
treatment of partnership transactions
(i.e., transactions described in sections
721 and 731, and transfers of
partnership interests) have been
reserved, the proposed regulations, by
default, place these transactions in the
taxable, constructive completion
category. This commentator suggested
that the regulations reserve the
treatment of partnership transactions
and provide only that taxpayers use
reasonable methods.
The final regulations provide that a
contribution to a partnership in a
transaction described in section 721(a),
a transfer of a partnership interest, and
a distribution by a partnership to which
section 731 applies (other than a
distribution of a contract accounted for
using a long-term contract method of
accounting) are step-in-the-shoes
transactions. The final regulations,
however, reserve on the special rules
that will apply to such transfers. As
described in Notice 2002–37 (2002–23
I.R.B.), the IRS and Treasury
Department intend to publish
regulations that will set forth the special
rules that will apply to such partnership
transactions in a separate project. These
regulations will be effective for
contributions of long-term contracts to
partnerships and transfers of interests in
partnerships that are engaged in longterm contracts on or after May 15, 2002.
One commentator objected to the
required use of the simplified marginal
impact method of computing look back
interest in the case of a step-in-the-shoes

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transaction. In response to this
comment, the final regulations give
taxpayers the option of using this
method without requiring it, except in
those cases in which the existing
regulations require its use. See § 1.460–
6(d)(4).
Questions have arisen as to whether
the implementation of these rules
requires a taxpayer to request a change
in method of accounting by filing a
Form 3115, ‘‘Application for Change in
Accounting Method.’’ In response to
these questions, the final regulations
clarify that the application of these rules
to a transaction occurring after the
effective date is not a change in method
of accounting and, therefore, does not
require the filing of Form 3115.
In addition to changes made in
response to the comments and questions
described above, the final regulations
clarify the application of the step-in-theshoes rules to certain transfers of
contracts that result in the old taxpayer
recognizing income with respect to the
contract. Specifically, the final
regulations explain how the old
taxpayer calculates the gain realized
with respect to the contract in these
transactions, clarify the operation of the
basis adjustment rule in certain cases of
successive transfers of a contract, and
provide that the contract price of a new
taxpayer should be reduced to the
extent that the old taxpayer recognizes
income with respect to the contract in
connection with these transactions. The
final regulations also clarify that a
taxpayer is not entitled to a loss in the
amount of its basis in the contract
(including the uncompleted property, if
applicable) where that basis is
determined under section 362 or 334. In
addition, to the extent the basis of the
contract (including the uncompleted
property, if applicable) reflects the old
taxpayer’s recognition of income
attributable to the contract in the stepin-the-shoes transaction, such income
recognition reduces the total contract
price. Accordingly, the new taxpayer
recovers this additional basis over the
time that it performs the contract. To the
extent the basis of the contract
(including the uncompleted property, if
applicable) reflects costs incurred by the
old taxpayer that have not yet been
deducted (i.e., in the case of a CCM
contract), such costs will give rise to a
deduction upon completion of the
contract. Therefore, disallowing the new
taxpayer a loss for its basis in the
contract (including the uncompleted
property, if applicable) is necessary to
prevent the new taxpayer from
benefitting twice from the same item.
Finally, the final regulations include
new examples to illustrate these rules.

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Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby
certified that the collection of
information in this Treasury decision
will not have a significant economic
impact on a substantial number of small
entities. This certification is based on
the fact that the relevant information is
already maintained by taxpayers.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, the proposed regulations
preceding these regulations were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal author of these
regulations is John Aramburu, Office of
Associate Chief Counsel (Income Tax
and Accounting). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
1. The authority citation for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

2. In § 1.358–1, a sentence is added at
the end of paragraph (a) to read as
follows:
§ 1.358–1

Basis to distributees.

(a) * * * See § 1.460–4(k)(3)(iv)(A) for
rules relating to stock basis adjustments
required where a contract accounted for
using a long-term contract method of
accounting is transferred in a
transaction described in section 351 or
a reorganization described in section

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Federal Register / Vol. 67, No. 94 / Wednesday, May 15, 2002 / Rules and Regulations
368(a)(1)(D) with respect to which the
requirements of section 355 (or so much
of section 356 as relates to section 355)
are met.
*
*
*
*
*
3. In § 1.334–1, a sentence is added at
the end of paragraph (b) to read as
follows:
§ 1.334–1 Basis of property received in
liquidations.

*

*
*
*
*
(b) * * * See § 1.460–4(k)(3)(iv)(B)(2)
for rules relating to adjustments to the
basis of certain contracts accounted for
using a long-term contract method of
accounting that are acquired in certain
liquidations described in section 332.
*
*
*
*
*
4. In § 1.362–1, a sentence is added at
the end of paragraph (a) to read as
follows:
§ 1.362–1

Basis to corporations.

(a) * * * See § 1.460–4(k)(3)(iv)(B)(2)
for rules relating to adjustments to the
basis of certain contracts accounted for
using a long-term contract method of
accounting that are acquired in certain
transfers described in section 351 and
certain reorganizations described in
section 368(a).
*
*
*
*
*
5. In § 1.381(c)(4)–1, a sentence is
added at the end of paragraph (a)(2) to
read as follows:
§ 1.381(c)(4)–1

Method of accounting.

(a) * * *
(2) * * * See § 1.460–4(k) for rules
relating to transfers of contracts
accounted for using a long-term contract
method of accounting in a transaction to
which section 381 applies.
*
*
*
*
*
6. Section 1.460–0 is amended by:
1. Revising the entry for paragraph (k)
of § 1.460–4.
2. Adding entries for paragraphs (k)(1)
through (k)(6) of § 1.460–4.
3. Adding entries for paragraphs (g)
through (g)(4) of § 1.460–6.
§ 1.460–0 Outline of regulations under
section 460.

*

*

*

*

*

*
*
*
*
(k) Mid-contract change in taxpayer.
(1) In general.
(2) Constructive completion
transactions.
(i) Scope.
(ii) Old taxpayer.
(iii) New taxpayer.

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§ 1.460–6

Look-back method.

*

*
*
*
*
(g) Mid-contract change in taxpayer.
(1) In general.
(2) Constructive completion
transactions.
(3) Step-in-the-shoes transactions.
(i) General rules.
(ii) Application of look-back method
to pre-transaction period.
(A) Contract Price
(B) Method.
(C) Interest accrual period.
(D) Information old taxpayer must
provide.
(iii) Application of look-back method
to post-transaction years.
(iv) S corporation elections.
(4) Effective date.
*
*
*
*
*
7. Section 1.460–4 is amended by:
1. Adding a sentence at the end of
paragraph (a).
2. Adding paragraph (k).
The additions read as follows:
§ 1.460–4 Methods of accounting for longterm contracts.

*

§ 1.460–4 Methods of accounting for longterm contracts.

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(iv) Special rules relating to
distributions of certain contracts by a
partnership. [Reserved.]
(3) Step-in-the-shoes transactions.
(i) Scope.
(ii) Old taxpayer.
(A) In general.
(B) Gain realized on the transaction.
(iii) New taxpayer.
(A) Method of accounting.
(B) Contract price.
(C) Contract costs.
(iv) Special rules related to certain
corporate transactions.
(A) Old taxpayer—basis adjustment.
(1) In general.
(2) Basis adjustment in excess of stock
basis.
(3) Subsequent dispositions of certain
contracts.
(B) New taxpayer.
(1) Contract price adjustment.
(2) Basis in contract.
(v) Special rules related to certain
partnership transactions. [Reserved.]
(4) Anti-abuse rule.
(5) Examples.
(6) Effective date.
*
*
*
*
*

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(a) * * * Finally, paragraph (k) of this
section provides rules relating to a midcontract change in taxpayer of a contract
accounted for using a long-term contract
method of accounting.
*
*
*
*
*
(k) Mid-contract change in taxpayer—
(1) In general. The rules in this
paragraph (k) apply if prior to the
completion of a long-term contract

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34605

accounted for using a long-term contract
method by a taxpayer (old taxpayer),
there is a transaction that makes another
taxpayer (new taxpayer) responsible for
accounting for income from the same
contract. For purposes of this paragraph
(k) and § 1.460–6(g), an old taxpayer
also includes any old taxpayer(s) (e.g.,
predecessors) of the old taxpayer. In
addition, a change in status from taxable
to tax exempt or from domestic to
foreign, or vice versa, will be considered
a change in taxpayer. Finally, a contract
will be treated as the same contract if
the terms of the contract are not
substantially changed in connection
with the transaction, whether or not the
customer agrees to release the old
taxpayer from any or all of its
obligations under the contract. The rules
governing constructive completion
transactions are provided in paragraph
(k)(2) of this section, while the rules
governing step-in-the-shoes transactions
are provided in paragraph (k)(3) of this
section. Special rules related to the
treatment of certain partnership
transactions are reserved under
paragraphs (k)(2)(iv) and (k)(3)(v) of this
section. For application of the look-back
method to mid-contract changes in
taxpayers for contracts accounted for
using the PCM, see § 1.460–6(g).
(2) Constructive completion
transactions—(i) Scope. The
constructive completion rules in this
paragraph (k)(2) apply to transactions
(constructive completion transactions)
that result in a change in the taxpayer
responsible for reporting income from a
contract and that are not described in
paragraph (k)(3)(i) of this section.
Constructive completion transactions
generally include, for example, taxable
sales under section 1001 and deemed
asset sales under section 338.
(ii) Old taxpayer. The old taxpayer is
treated as completing the contract on
the date of the transaction. The total
contract price (or, gross contract price in
the case of a long-term contract
accounted for under the CCM) for the
old taxpayer is the sum of any amounts
realized from the transaction that are
allocable to the contract and any
amounts the old taxpayer has received
or reasonably expects to receive under
the contract. Total contract price (or
gross contract price) is reduced by any
amount paid by the old taxpayer to the
new taxpayer, and by any transaction
costs, that are allocable to the contract.
Thus, the old taxpayer’s allocable
contract costs determined under
paragraph (b)(5) of this section do not
include any consideration paid, or costs
incurred, as a result of the transaction
that are allocable to the contract. In the
case of a transaction subject to section

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338 or 1060, the amount realized from
the transaction allocable to the contract
is determined by using the residual
method under §§ 1.338–6 and 1.338–7.
(iii) New taxpayer. The new taxpayer
is treated as entering into a new contract
on the date of the transaction. The new
taxpayer must evaluate whether the new
contract should be classified as a longterm contract within the meaning of
§ 1.460–1(b) and account for the
contract under a permissible method of
accounting. For a new taxpayer who
accounts for a contract using the PCM,
the total contract price is any amount
the new taxpayer reasonably expects to
receive under the contract consistent
with paragraph (b)(4) of this section.
Total contract price is reduced by the
amount of any consideration paid by the
new taxpayer as a result of the
transaction, and by any transaction
costs, that are allocable to the contract
and is increased by the amount of any
consideration received by the new
taxpayer as a result of the transaction
that is allocable to the contract.
Similarly, the gross contract price for a
contract accounted for using the CCM is
all amounts the new taxpayer is entitled
by law or contract to receive consistent
with paragraph (d)(3) of this section,
adjusted for any consideration paid (or
received) by the new taxpayer as a result
of the transaction, and for any
transaction costs, that are allocable to
the contract. Thus, the new taxpayer’s
allocable contract costs determined
under paragraph (b)(5) of this section do
not include any consideration paid, or
costs incurred, as a result of the
transaction that are allocable to the
contract. In the case of a transaction
subject to sections 338 or 1060, the
amount of consideration paid that is
allocable to the contract is determined
by using the residual method under
§§ 1.338–6 and 1.338–7.
(iv) Special rules relating to
distributions of certain contracts by a
partnership. [Reserved]
(3) Step-in-the-shoes transactions—(i)
Scope. The step-in-the-shoes rules in
this paragraph (k)(3) apply to the
following transactions that result in a
change in the taxpayer responsible for
reporting income from a contract
accounted for using a long-term contract
method of accounting (step-in-the-shoes
transactions)—
(A) Transfers to which section 361
applies if the transfer is in connection
with a reorganization described in
section 368(a)(1)(A), (C) or (F);
(B) Transfers to which section 361
applies if the transfer is in connection
with a reorganization described in
section 368(a)(1)(D) or (G), provided the

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requirements of section 354(b)(1)(A) and
(B) are met;
(C) Distributions to which section 332
applies, provided the contract is
transferred to an 80-percent distributee;
(D) Transfers described in section 351;
(E) Transfers to which section 361
applies if the transfer is in connection
with a reorganization described in
section 368(a)(1)(D) with respect to
which the requirements of section 355
(or so much of section 356 as relates to
section 355) are met;
(F) Transfers (e.g., sales) of S
corporation stock;
(G) Conversion to or from an S
corporation;
(H) Members joining or leaving a
consolidated group;
(I) Contributions to which section
721(a) applies;
(J) Transfers of partnership interests;
(K) Distributions to which section 731
applies (other than the distribution of
the contract); and
(L) Any other transaction designated
in the Internal Revenue Bulletin by the
Internal Revenue Service. See
§ 601.601(d)(2)(ii) of this chapter.
(ii) Old taxpayer—(A) In general. The
new taxpayer will ‘‘step into the shoes’’
of the old taxpayer with respect to the
contract. Thus, the old taxpayer’s
obligation to account for the contract
terminates on the date of the transaction
and is assumed by the new taxpayer, as
set forth in paragraph (k)(3)(iii) of this
section. As a result, an old taxpayer
using the PCM is required to recognize
income from the contract based on the
cumulative allocable contract costs
incurred as of the date of the
transaction. Similarly, an old taxpayer
using the CCM is not required to
recognize any revenue and may not
deduct allocable contract costs incurred
with respect to the contract.
(B) Gain realized on the transaction.
The amount of gain the old taxpayer
realizes on the transfer of a contract in
a step-in-the-shoes transaction must be
determined after application of
paragraph (k)(3)(ii)(A) of this section
using the rules of paragraph (k)(2) of
this section that apply to constructive
completion transactions. (The amount of
gain realized on a transfer of a contract
is relevant, for example, in determining
the amount of gain recognized with
respect to the contract in a section 351
transaction in which the old taxpayer
receives from the new taxpayer money
or property other than stock of the
transferee.)
(iii) New taxpayer—(A) Method of
accounting. Beginning on the date of the
transaction, the new taxpayer must
account for the long-term contract by
using the same method of accounting

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used by the old taxpayer prior to the
transaction. The same method of
accounting must be used for such
contract regardless of whether the old
taxpayer’s method is the new taxpayer’s
principal method of accounting under
§ 1.381(c)(4)–1(b)(3) or whether the new
taxpayer is otherwise eligible to use the
old taxpayer’s method. Thus, if the old
taxpayer uses the PCM to account for
the contract, the new taxpayer steps into
the shoes of the old taxpayer with
respect to its completion factor and
percentage of completion methods (such
as the 10-percent method), even if the
new taxpayer has not elected such
methods for similarly classified
contracts. Similarly, if the old taxpayer
uses the CCM, the new taxpayer steps
into the shoes of the old taxpayer with
respect to the CCM, even if the new
taxpayer is not otherwise eligible to use
the CCM. However, the new taxpayer is
not necessarily bound by the old
taxpayer’s method for similarly
classified contracts entered into by the
new taxpayer subsequent to the
transaction and must apply general tax
principles, including section 381, to
determine the appropriate method to
account for these subsequent contracts.
To the extent that general tax principles
allow the taxpayer to account for
similarly classified contracts using a
method other than the old taxpayer’s
method, the taxpayer is not required to
obtain the consent of the Commissioner
to begin using such other method.
(B) Contract price. In the case of a
long-term contract that has been
accounted for under PCM, the total
contract price for the new taxpayer is
the sum of any amounts the old
taxpayer or the new taxpayer has
received or reasonably expects to
receive under the contract consistent
with paragraph (b)(4) of this section.
Similarly, the gross contract price in the
case of a long-term contract accounted
for under the CCM includes all amounts
the old taxpayer or the new taxpayer is
entitled by law or by contract to receive
consistent with paragraph (d)(3) of this
section.
(C) Contract costs. Total allocable
contract costs for the new taxpayer are
the allocable contract costs as defined
under paragraph (b)(5) of this section
incurred by either the old taxpayer prior
to, or the new taxpayer after, the
transaction. Thus, any payments
between the old taxpayer and the new
taxpayer with respect to the contract in
connection with the transaction are not
treated as allocable contract costs.
(iv) Special rules related to certain
corporate transactions—(A) Old
taxpayer—basis adjustment—(1) In
general. Except as provided in

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paragraph (k)(3)(iv)(A)(2) of this section,
in the case of a transaction described in
paragraph (k)(3)(i)(D) or (E) of this
section, the old taxpayer must adjust its
basis in the stock of the new taxpayer
by—
(i) Increasing such basis by the
amount of gross receipts the old
taxpayer has recognized under the
contract; and
(ii) Reducing such basis by the
amount of gross receipts the old
taxpayer has received or reasonably
expects to receive under the contract.
(2) Basis adjustment in excess of stock
basis. If the old and new taxpayer do not
join in the filing of a consolidated
Federal income tax return, the old
taxpayer may not adjust its basis in the
stock of the new taxpayer under
paragraph (k)(3)(iv)(A)(1) of this section
below zero and the old taxpayer must
recognize ordinary income to the extent
the basis in the stock of the new
taxpayer otherwise would be adjusted
below zero. If the old and new taxpayer
join in the filing of a consolidated
Federal income tax return, the old
taxpayer must create an (or increase an
existing) excess loss account to the
extent the basis in the stock of the new
taxpayer otherwise would be adjusted
below zero under paragraph
(k)(3)(iv)(A)(1) of this section. See
§§ 1.1502–19 and 1.1502–32(a)(3)(ii).
(3) Subsequent dispositions of certain
contracts. If the old taxpayer disposes of
a contract in a transaction described in
paragraph (k)(3)(i)(D) or (E) of this
section that the old taxpayer acquired in
a transaction described in paragraph
(k)(3)(i)(D) or (E) of this section, the
basis adjustment rule of this paragraph
(k)(3)(iv)(A) is applied by treating the
old taxpayer as having recognized the
amount of gross receipts recognized by
the previous old taxpayer under the
contract and any amount recognized by
the previous old taxpayer with respect
to the contract in connection with the
transaction in which the old taxpayer
acquired the contract. In addition, the
old taxpayer is treated as having
received or as reasonably expecting to
receive under the contract any amount
the previous old taxpayer received or
reasonably expects to receive under the
contract. Similar principles will apply
in the case of multiple successive
transfers described in paragraph
(k)(3)(i)(D) or (E) of this section
involving the contract.
(B) New Taxpayer—(1) Contract price
adjustment. Generally, payments
between the old taxpayer and the new
taxpayer with respect to the contract in
connection with the transaction do not
affect the contract price.
Notwithstanding the preceding sentence

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and paragraph (k)(3)(iii)(B) of this
section, however, in the case of
transactions described in paragraph
(k)(3)(i)(B), (D) or (E) of this section, the
total contract price (or gross contract
price) must be reduced to the extent of
any amount recognized by the old
taxpayer with respect to the contract in
connection with the transaction (e.g.,
any amount recognized under section
351(b) or 357 that is attributable to the
contract and any income recognized by
the old taxpayer pursuant to the basis
adjustment rule of paragraph
(k)(3)(iv)(A)).
(2) Basis in Contract. The new
taxpayer’s basis in a contract (including
the uncompleted property, if applicable)
acquired in a transaction described in
paragraphs (k)(3)(i)(A) through (E) of
this section will be computed under
section 362 or section 334, as
applicable. Upon a new taxpayer’s
completion (actual or constructive) of a
CCM or a PCM contract acquired in a
transaction described in paragraphs
(k)(3)(i)(A) through (E) of this section,
the new taxpayer’s basis in the contract
(including the uncompleted property, if
applicable) is reduced to zero. The new
taxpayer is not entitled to a deduction
or loss in connection with any basis
reduction pursuant to this paragraph
(k)(3)(iv)(B)(2).
(v) Special rules related to certain
partnership transactions. [Reserved]
(4) Anti-abuse rule. Notwithstanding
this paragraph (k), in the case of a
transaction entered into with a principal
purpose of shifting the tax consequences
associated with a long-term contract in
a manner that substantially reduces the
aggregate U.S. Federal income tax
liability of the parties with respect to
that contract, the Commissioner may
allocate to the old (or new) taxpayer the
income from that contract properly
allocable to the old (or new) taxpayer.
For example, the Commissioner may
reallocate income from a long-term
contract in a transaction in which a
contract accounted for using the CCM,
or using the PCM where the old
taxpayer has received advance
payments in excess of its contribution to
the contract, is transferred to a tax
indifferent party (e.g., a foreign person
not subject to U.S. Federal income tax).
(5) Examples. The following examples
illustrate the rules of this paragraph (k).
For purposes of these examples, it is
assumed that the contract is a long-term
construction contract accounted for
using the PCM prior to the transaction
unless stated otherwise and the contract
is not transferred with a principal
purpose of shifting the tax consequences
associated with a long-term contract in
a manner that substantially reduces the

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aggregate U.S. Federal income tax
liability of the parties with respect to
that contract. The examples are as
follows:
Example 1. Constructive completion—
PCM—(i) Facts. In Year 1, X enters into a
contract. The total contract price is
$1,000,000 and the estimated total allocable
contract costs are $800,000. In Year 1, X
incurs costs of $200,000. In Year 2, X incurs
additional costs of $400,000 before selling
the contract as part of a taxable sale of its
business in Year 2 to Y, an unrelated party.
At the time of sale, X has received $650,000
in progress payments under the contract. The
consideration allocable to the contract under
section 1060 is $150,000. Pursuant to the
sale, the new taxpayer Y immediately
assumes X’s contract obligations and rights.
Y is required to account for the contract
using the PCM. In Year 2, Y incurs additional
allocable contract costs of $50,000. Y
correctly estimates at the end of Year 2 that
it will have to incur an additional $75,000 of
allocable contract costs in Year 3 to complete
the contract.
(ii) Old taxpayer. For Year 1, X reports
receipts of $250,000 (the completion factor
multiplied by total contract price ($200,000/
$800,000 x $1,000,000)) and costs of
$200,000, for a profit of $50,000. X is treated
as completing the contract in Year 2 because
it sold the contract. For purposes of applying
the PCM in Year 2, the total contract price
is $800,000 (the sum of the amounts received
under the contract and the amount realized
in the sale ($650,000 + $150,000)) and the
total allocable contract costs are $600,000
(the sum of the costs incurred in Year 1 and
Year 2 ($200,000 + $400,000)). Thus, in Year
2, X reports receipts of $550,000 (total
contract price minus receipts already
reported ($800,000 ¥ $250,000)) and costs
incurred in year 2 of $400,000, for a profit
of $150,000.
(iii) New taxpayer. Y is treated as entering
into a new contract in Year 2. The total
contract price is $200,000 (the amount
remaining to be paid under the terms of the
contract less the consideration paid allocable
to the contract ($1,000,000 ¥ $650,000 ¥
$150,000)). The estimated total allocable
contract costs at the end of Year 2 are
$125,000 (the allocable contract costs that Y
reasonably expects to incur to complete the
contract ($50,000 + $75,000)). In Year 2, Y
reports receipts of $80,000 (the completion
factor multiplied by the total contract price
[($50,000/$125,000) x $200,000] and costs of
$50,000 (the costs incurred after the
purchase), for a profit of $30,000. For Year
3, Y reports receipts of $120,000 (total
contract price minus receipts already
reported ($200,000 ¥ $80,000)) and costs of
$75,000, for a profit of $45,000.
Example 2. Constructive completion—
CCM—(i) Facts. The facts are the same as in
Example 1, except that X and Y properly
account for the contract under the CCM.
(ii) Old taxpayer. X does not report any
income or costs from the contract in Year 1.
In Year 2, the contract is deemed complete
for X, and X reports its gross contract price
of $800,000 (the sum of the amounts received
under the contract and the amount realized
in the sale

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($650,000 + $150,000)) and its total allocable
contract costs of $600,000 (the sum of the
costs incurred in Year 1 and Year 2 ($200,000
+ $400,000)) in that year, for a profit of
$200,000.
(iii) New taxpayer. Y is treated as entering
into a new contract in Year 2. Under the
CCM, Y reports no gross receipts or costs in
Year 2. Y reports its gross contract price of
$200,000 (the amount remaining to be paid
under the terms of the contract less the
consideration paid allocable to the contract
($1,000,000 ¥ $650,000 ¥ $150,000)) and its
total allocable contract costs of $125,000 (the
allocable contract costs that Y incurred to
complete the contract ($50,000 + $75,000)) in
Year 3, the completion year, for a profit of
$75,000.
Example 3. Step-in-the-shoes—PCM—(i)
Facts. The facts are the same as in Example
1, except that X transfers the contract
(including the uncompleted property) to Y in
exchange for stock of Y in a transaction that
qualifies as a statutory merger described in
section 368(a)(1)(A) and does not result in
gain or loss to X under section 361(a).
(ii) Old taxpayer. For Year 1, X reports
receipts of $250,000 (the completion factor
multiplied by total contract price ($200,000/
$800,000 x $1,000,000)) and costs of
$200,000, for a profit of $50,000. Because the
mid-contract change in taxpayer results from
a transaction described in paragraph (k)(3)(i)
of this section, X is not treated as completing
the contract in Year 2. In Year 2, X reports
receipts of $500,000 (the completion factor
multiplied by the total contract price and
minus the Year 1 gross receipts [($600,000/
$800,000 × $1,000,000)–$250,000]) and costs
of $400,000, for a profit of $100,000.
(iii) New taxpayer. Because the midcontract change in taxpayer results from a
step-in-the-shoes transaction, Y must account
for the contract using the same methods of
accounting used by X prior to the transaction.
Total contract price is the sum of any
amounts that X and Y have received or
reasonably expect to receive under the
contract, and total allocable contract costs are
the allocable contract costs of X and Y. Thus,
the estimated total allocable contract costs at
the end of Year 2 are $725,000 (the
cumulative allocable contract costs of X and
the estimated total allocable contract costs of
Y ($200,000 + $400,000 + $50,000 +
$75,000)). In Year 2, Y reports receipts of
$146,552 (the completion factor multiplied
by the total contract price minus receipts
reported by the old taxpayer ([($650,000/
$725,000) × $1,000,000]–$750,000) and costs
of $50,000, for a profit of $96,552. For Year
3, Y reports receipts of $103,448 (the total
contract price minus prior year receipts
($1,000,000–$896,552)) and costs of $75,000,
for a profit of $28,448.
Example 4. Step-in-the-shoes—CCM—(i)
Facts. The facts are the same as in Example
3, except that X properly accounts for the
contract under the CCM.
(ii) Old taxpayer. X reports no income or
costs from the contract in Years 1, 2 or 3.
(iii) New taxpayer. Because the midcontract change in taxpayer results from a
step-in-the-shoes transaction, Y must account
for the contract using the same method of
accounting used by X prior to the transaction.

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Thus, in Year 3, the completion year, Y
reports receipts of $1,000,000 and total
contract costs of $725,000, for a profit of
$275,000.
Example 5. Step in the shoes—PCM—basis
adjustment.
The facts are the same as in Example 3,
except that X transfers the contract
(including the uncompleted property) with a
basis of $0 and $125,000 of cash to a new
corporation, Z, in exchange for all of the
stock of Z in a section 351 transaction. Thus,
under section 358(a), X’s basis in the Z stock
is $125,000. Pursuant to paragraph
(k)(3)(iv)(A)(1) of this section, X must
increase its basis in the Z stock by the
amount of gross receipts X recognized under
the contract, $750,000 ($250,000 receipts in
Year 1 + $500,000 receipts in Year 2), and
reduce its basis by the amount of gross
receipts X received under the contract, the
$650,000 in progress payments. Accordingly,
X’s basis in the Z stock is $225,000. All other
results are the same.
Example 6. Step in the shoes—CCM—basis
adjustment—(i) Facts. The facts are the same
as in Example 4, except that X receives
progress payments of $800,000 (rather than
$650,000) and transfers the contract
(including the uncompleted property) with a
basis of $600,000 and $125,000 of cash to a
new corporation, Z, in exchange for all of the
stock of Z in a section 351 transaction. X and
Z do not join in filing a consolidated Federal
income tax return.
(ii) Old taxpayer. X reports no income or
costs under the contract in Years 1, 2, or 3.
Under section 358(a), X’s basis in Z is
$725,000. Pursuant to paragraph
(k)(3)(iv)(A)(1), X must reduce its basis in the
stock of Z by $800,000, the progress
payments received by X. However, X may not
reduce its basis in the Z stock below zero
pursuant paragraph (k)(3)(iv)(A)(2) of this
section. Accordingly, X’s basis in the Z stock
is reduced by $725,000 to zero and X must
recognize ordinary income of $75,000.
(iii) New taxpayer. Upon completion of the
contract in Year 3, Z reports gross receipts of
$925,000 ($1,000,000 original contract
price—$75,000 income recognized by the old
taxpayer pursuant to the basis adjustment
rule of paragraph (k)(3)(iv)(A)) and total
contract costs of $725,000, for a profit of
$200,000.
Example 7. Step in the shoes—PCM—gain
recognized in transaction—(i) Facts. The
facts are the same as in Example 3, except
that X transfers the contract (including the
uncompleted property) with a basis of $0 and
an unrelated capital asset with a value of
$100,000 and a basis of $0 to a new
corporation, Z, in exchange for stock of Z
with a value of $200,000 and $50,000 of cash
in a section 351 transaction.
(ii) Old taxpayer. For year 1, X reports
receipts of $250,000 ($200,000/$800,000 ×
$1,000,000) and costs of $200,000, for a profit
of $50,000. X is not treated as completing the
contract in Year 2. In Year 2, X reports
receipts of $500,000 (($600,000/$800,000 ×
$1,000,000 = $750,000 cumulative gross
receipts)—$250,000 prior year cumulative
gross receipts) and costs of $400,000, for a
profit of $100,000. Under paragraph
(k)(3)(ii)(B) of this section, X determines that

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the gain realized on the transfer of the
contract to Z under the constructive
completion rules of paragraph (k)(2)(ii) of
this section is $50,000 (total contract price of
$800,000 ($150,000 value allocable to the
contract + $650,000 progress payments)—
$750,000 previously recognized cumulative
gross receipts—$0 costs incurred but not
recognized). The gain realized on the transfer
of the unrelated capital asset to Z is
$100,000. The amount of gain X must
recognize due to the receipt of $50,000 cash
in the exchange is $50,000, of which $30,000
is allocated to the contract ($150,000 value of
contract/$250,000 total value of property
transferred to Z × $50,000) and is treated as
ordinary income, and $20,000 is allocated to
the unrelated capital asset ($100,000 value of
capital asset/$250,000 total value of property
transferred to Z × $50,000). Under section
358(a), X’s basis in the Z stock is $0.
However, pursuant to paragraph
(k)(3)(iv)(A)(1) of this section, X must
increase its basis in the Z stock by $750,000,
the amount of gross receipts recognized
under the contract, and must reduce its basis
in the Z stock by $650,000, the amount of
gross receipts X received under the contract.
Therefore, X’s basis in the Z stock is
$100,000.
(iii) New taxpayer. Z must account for the
contract using the same PCM method used by
X prior to the transaction. Pursuant to
paragraph (k)(3)(iv)(B)(1) of this section, the
total contract price is $970,000 ($1,000,000
amount X and Z have received or reasonably
expect to receive under the contract—
$30,000 income recognized by X with respect
to the contract as a result of the receipt of
$50,000 cash in the transaction). In Year 2,
Z reports gross receipts of $119,655
($650,000/$725,000 × $970,000 = $869,655
current year cumulative gross receipts—
$750,000 cumulative gross receipts reported
by the old taxpayer) and costs of $50,000, for
a profit of $69,655. In Year 3, Z reports gross
receipts of $100,345 ($970,000–$869,655)
and costs of $75,000, for a profit of $25,345.
Example 8. Step in the shoes—CCM—gain
recognized in transaction—(i) Facts. The
facts are the same as in Example 4, except
that X transfers the contract (including the
uncompleted property) with a basis of
$600,000 and an unrelated capital asset with
a value of $125,000 and a basis of $0 to a new
corporation, Z, in exchange for all the stock
of Z with a value of $175,000 and $100,000
of cash in a section 351 transaction. X and
Z do not join in filing a consolidated Federal
income tax return.
(ii) Old taxpayer. X reports no income or
costs under the contract in Years 1, 2, or 3.
Under paragraph (k)(3)(ii)(B), X determines
that the gain realized on the transfer of the
contract to Z under the constructive
completion rules of paragraph (k)(2)(ii) of
this section is $200,000 ($800,000 total
contract price ($150,000 value allocable to
the contract + $650,000 progress payments)—
$600,000 costs incurred but not recognized).
The gain realized on the transfer of the
unrelated capital asset to Z is $125,000. The
amount of gain X must recognize due to the
receipt of $100,000 of cash in the exchange
is $100,000, of which $54,545 is allocated to
the contract ($150,000 value of the contract/

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$275,000 total value of property transferred
to Z × $100,000) and is treated as ordinary
income, and $45,455 is allocated to the
unrelated capital asset ($125,000 value of
capital asset/$275,000 total value of property
transferred to Z × $100,000). Under section
358(a), X’s basis in the Z stock is $600,000
($600,000 basis in the contract and unrelated
capital asset transferred—$100,000 cash
received + $100,000 gain recognized).
Pursuant to paragraph (k)(3)(iv)(A)(1) of this
section, X must reduce its basis in the stock
of Z by $650,000, the progress payments
received under the contract. However, X may
not reduce its basis in the Z stock below zero
pursuant to paragraph (k)(3)(iv)(A)(2) of this
section. Accordingly, X’s basis in the Z stock
is reduced by $600,000 to zero and X must
recognize income of $50,000.
(iii) New taxpayer. Z must account for the
contract using the same CCM used by X prior
to the transaction. Pursuant to paragraph
(k)(3)(iv)(B)(1) of this section, the total
contract price is $895,455 ($1,000,000
original contract price—$54,545 income
recognized by old taxpayer with respect to
the contract as a result of the receipt of cash
in the transaction—$50,000 income
recognized by the old taxpayer pursuant to
the basis adjustment rule of paragraph
(k)(3)(iv)(A)). Accordingly, upon completion
of the contract in Year 3, Z reports gross
receipts of $895,455 and total contract costs
of $725,000, for a profit of $170,455.

(6) Effective date. This paragraph (k)
is applicable for transactions on or after
May 15, 2002. Application of the rules
of this paragraph (k) to a transaction that
occurs on or after May 15, 2002 is not
a change in method of accounting.
8. In § 1.460–6, paragraph (g) is
revised to read as follows:
§ 1.460–6

Look-back method.

*

*
*
*
*
(g) Mid-contract change in taxpayer—
(1) In general. The rules in this
paragraph (g) apply if, as described in
§ 1.460–4(k), prior to the completion of
a long-term contract accounted for using
the PCM or the PCCM by a taxpayer (old
taxpayer), there is a transaction that
makes another taxpayer (new taxpayer)
responsible for accounting for income
from the same contract. The rules
governing constructive completion
transactions are provided in paragraph
(g)(2) of this section, while the rules
governing step-in-the-shoes transactions
are provided in paragraph (g)(3) of this
section. For purposes of this paragraph,
pre-transaction years are all taxable
years of the old taxpayer in which the
old taxpayer accounted for (or should
have accounted for) gross receipts from
the contract, and post-transaction years
are all taxable years of the new taxpayer
in which the new taxpayer accounted
for (or should have accounted for) gross
receipts from the contract.
(2) Constructive completion
transactions. In the case of a transaction

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described in § 1.460–4(k)(2)(i)
(constructive completion transaction),
the look-back method is applied by the
old taxpayer with respect to pretransaction years upon the date of the
transaction and, if the new taxpayer
uses the PCM or the PCCM to account
for the contract, by the new taxpayer
with respect to post-transaction years
upon completion of the contract. The
contract price and allocable contract
costs to be taken into account by the old
taxpayer or the new taxpayer in
applying the look-back method are
described in § 1.460–4(k)(2).
(3) Step-in-the-shoes transactions—(i)
General rules. In the case of a
transaction described in § 1.460–
4(k)(3)(i) (step-in-the-shoes transaction),
the look-back method is not applied at
the time of the transaction, but is
instead applied for the first time when
the contract is completed by the new
taxpayer. Upon completion of the
contract, the look-back method is
applied by the new taxpayer with
respect to both pre-transaction years and
post-transaction years, taking into
account all amounts reasonably
expected to be received by either the old
or new taxpayer and all allocable
contract costs incurred during both
periods as described in § 1.460–4(k)(3).
The new taxpayer is liable for filing the
Form 8697 and for interest computed on
hypothetical underpayments of tax, and
is entitled to receive interest with
respect to hypothetical overpayments of
tax, for both pre- and post-transaction
years. The old taxpayer will be
secondarily liable for any interest
required to be paid with respect to pretransaction years reduced by any
interest on pre-transaction
overpayments.
(ii) Application of look-back method
to pre-transaction period—(A) Contract
price. The actual contract price for pretransaction taxable years must be
determined by the new taxpayer
without regard to any contract price
adjustment described in paragraph
(k)(3)(iv)(B)(1) of this section.
(B) Method. The new taxpayer may
apply the look-back method to each pretransaction taxable year that is a
redetermination year using the
simplified marginal impact method
described in paragraph (d) of this
section (regardless of whether or not the
old taxpayer would have actually used
that method and without regard to the
tax liability ceiling). But see paragraph
(d)(4) of this section, which requires use
of the simplified marginal impact
method by certain pass-through entities.
(C) Interest accrual period. With
respect to any hypothetical
underpayment or overpayment of tax for

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a pre-transaction taxable year, interest
accrues from the due date of the old
taxpayer’s tax return (not including
extensions) for the taxable year of the
underpayment or overpayment until the
due date of the new taxpayer’s return
(not including extensions) for the
completion year or the year of a postcompletion adjustment, whichever is
applicable.
(D) Information old taxpayer must
provide. In order to help the new
taxpayer to apply the look-back method
with respect to pre-transaction taxable
years, any old taxpayer that accounted
for income from a long-term contract
under the PCM or PCCM for either
regular or alternative minimum tax
purposes is required to provide the
information described in this paragraph
to the new taxpayer by the due date (not
including extensions) of the old
taxpayer’s income tax return for the first
taxable year ending on or after a stepin-the-shoes transaction described in
§ 1.460–4(k)(3)(i). The required
information is as follows—
( 1) The portion of the contract
reported by the old taxpayer under PCM
for regular and alternative minimum tax
purposes (i.e., whether the old taxpayer
used PCM, the 40/60 PCCM method, or
the 70/30 PCCM method);
(2) Any submethods used in the
application of PCM (e.g., the simplified
cost-to-cost method or the 10-percent
method);
(3) The amount of total contract price
reported by year;
(4) The numerator and the
denominator of the completion factor by
year;
(5) The due date (not including
extensions) of the old taxpayer’s income
tax returns for each taxable year in
which income was required to be
reported;
(6) Whether the old taxpayer was a
corporate or a noncorporate taxpayer by
year; and
(7) Any other information required by
the Commissioner by administrative
pronouncement.
(iii) Application of look-back method
to post-transaction years. With respect
to post-transaction taxable years, the
new taxpayer must use the same lookback method it uses for other contracts
(i.e., the simplified marginal impact
method or the actual method) to
determine the amount of any
hypothetical overpayment or
underpayment of tax and the time
period for computing interest on these
amounts.
(iv) S corporation elections. Following
the conversion of a C corporation into
an S corporation, the look-back method
is applied at the entity level with

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respect to contracts entered into prior to
the conversion, notwithstanding section
460(b)(4)(B)(i).
(4) Effective date. This paragraph (g)
is applicable for transactions on or after
May 15, 2002.
§ 1.1362–2

‘‘§ 1.451–3(c)(1)’’ and adding ‘‘§ 1.460–
4(b)’’ in its place.
§ 1.1374–4

[Amended]

9. In § 1.1362–2, paragraph (c)(6)
Example 2, first sentence is amended by
removing the language ‘‘§ 1.451–3(b)’’
and adding ‘‘§ 1.460–1(b)(1)’’ in its
place, and removing the language

*
*
1.460–6 ...........................................................................

*
*
*
1545–1031; ........................

*

PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Parts 4022 and 4044
Benefits Payable in Terminated SingleEmployer Plans; Allocation of Assets
in Single-Employer Plans; Interest
Assumptions for Valuing and Paying
Benefits
AGENCY: Pension Benefit Guaranty
Corporation.
ACTION: Final rule.
SUMMARY: The Pension Benefit Guaranty
Corporation’s regulations on Benefits
Payable in Terminated Single-Employer
Plans and Allocation of Assets in
Single-Employer Plans prescribe interest
assumptions for valuing and paying
benefits under terminating singleemployer plans. This final rule amends
the regulations to adopt interest
assumptions for plans with valuation
dates in June 2002. Interest assumptions
are also published on the PBGC’s Web
site (http://www.pbgc.gov).
EFFECTIVE DATE: June 1, 2002.
FOR FURTHER INFORMATION CONTACT:
Harold J. Ashner, Assistant General
Counsel, Office of the General Counsel,
Pension Benefit Guaranty Corporation,
1200 K Street, NW., Washington, DC
20005, 202–326–4024. (TTY/TDD users

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17:13 May 14, 2002

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12. In § 602.101, paragraph (b) is
amended by revising the entry for
1.460–6 to read as follows:
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Current OMB
control No.

BILLING CODE 4830–01–P

Authority: 26 U.S.C. 7805.

§ 602.101

CFR part or section where identified and described

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: May 2, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02–11792 Filed 5–14–02; 8:45 am]

11. The authority section for part 602
continues to read as follows:

10. In § 1.1374–4, paragraph (g), first
sentence is amended by removing the
language ‘‘§ 1.451–3(d)’’ and adding
‘‘§ 1.460–4(d)’’ in its place, and
removing the language ‘‘§ 1.451–3(c)’’
and adding ‘‘§ 1.460–4(b)’’ in its place.

[Amended]

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PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT

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may call the Federal relay service tollfree at 1–800–877–8339 and ask to be
connected to 202–326–4024.)
The
PBGC’s regulations prescribe actuarial
assumptions—including interest
assumptions—for valuing and paying
plan benefits of terminating singleemployer plans covered by title IV of
the Employee Retirement Income
Security Act of 1974. The interest
assumptions are intended to reflect
current conditions in the financial and
annuity markets.
Three sets of interest assumptions are
prescribed: (1) A set for the valuation of
benefits for allocation purposes under
section 4044 (found in appendix B to
part 4044), (2) a set for the PBGC to use
to determine whether a benefit is
payable as a lump sum and to determine
lump-sum amounts to be paid by the
PBGC (found in appendix B to Part
4022), and (3) a set for private-sector
pension practitioners to refer to if they
wish to use lump-sum interest rates
determined using the PBGC’s historical
methodology (found in Appendix C to
Part 4022).
Accordingly, this amendment (1) adds
to appendix B to part 4044 the interest
assumptions for valuing benefits for
allocation purposes in plans with
valuation dates during June 2002, (2)
adds to appendix B to Part 4022 the
interest assumptions for the PBGC to
use for its own lump-sum payments in
plans with valuation dates during June
2002, and (3) adds to Appendix C to
Part 4022 the interest assumptions for
private-sector pension practitioners to
refer to if they wish to use lump-sum
interest rates determined using the

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PBGC’s historical methodology for
valuation dates during June 2002.
For valuation of benefits for allocation
purposes, the interest assumptions that
the PBGC will use (set forth in appendix
B to part 4044) will be 5.70 percent for
the first 25 years following the valuation
date and 4.25 percent thereafter. These
interest assumptions represent a
decrease (from those in effect for May
2002) of 0.20 percent for the first 25
years following the valuation date and
are otherwise unchanged.
The interest assumptions that the
PBGC will use for its own lump-sum
payments (set forth in appendix B to
part 4022) will be 4.50 percent for the
period during which a benefit is in pay
status and 4.00 percent during any years
preceding the benefit’s placement in pay
status. These interest assumptions
represent a decrease (from those in
effect for May 2002) of 0.25 percent for
the period during which a benefit is in
pay status and are otherwise unchanged.
For private-sector payments, the
interest assumptions (set forth in
Appendix C to part 4022) will be the
same as those used by the PBGC for
determining and paying lump sums (set
forth in appendix B to part 4022).
The PBGC has determined that notice
and public comment on this amendment
are impracticable and contrary to the
public interest. This finding is based on
the need to determine and issue new
interest assumptions promptly so that
the assumptions can reflect, as
accurately as possible, current market
conditions.
Because of the need to provide
immediate guidance for the valuation
and payment of benefits in plans with
valuation dates during June 2002, the

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