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Bulletin No. 2002–44
November 4, 2002
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT December 2002. This ruling also provides a summary of the bond
factor amounts for dispositions occurring during the period Janu-
Announcement 2002–101, page 800. ary through September 2002.
This announcement solicts applications from potential part-
ners to participate in the 2003 IRS Individual e-file Partner- REG–112306–00, page 767.
ship Program. The partnership opportunities are a result of Proposed regulations under section 1296 of the Code contain
RRA 98, which requires the IRS to receive 80 percent of all procedures for certain United States persons holding market-
returns electronically by 2007. RRA 98 authorized the IRS able stock in a passive foreign investment company (PFIC) to elect
Commissioner to promote the benefits of and encourage the mark to market treatment for that stock. A public hearing is
use of e-file services through partnerships with various en- scheduled for November 6, 2002.
tities that offer low cost tax preparation and electronic fil-
ing of income tax returns for qualified taxpayers. Those REG–150313–01, page 777.
applicants that are accepted as partners will have a link(s) Proposed regulations under sections 302, 304, and other sec-
and description(s) of their services placed on the IRS web- tions of the Code provide guidance regarding the treatment of
site at www.irs.gov (IRS e-file Partners Page). the basis of redeemed stock when a distribution in redemption
of such stock is treated as a dividend. The regulations also pro-
INCOME TAX vide guidance regarding certain acquisitions of stock by re-
lated corporations that are treated as distributions in redemption
Rev. Rul. 2002–69, page 760. of stock. A public hearing is scheduled for February 20, 2003.
Business expenses; interest; lease-in/lease-out transac-
tions. A taxpayer may not deduct currently, under sections 162 Notice 2002–70, page 765.
and 163 of the Code, rent and interest paid or incurred in con- This notice alerts taxpayers and their representatives about cer-
nection with a lease-in/lease-out (LILO) transaction that prop- tain reinsurance transactions intended to shift income to off-
erly is characterized as conferring only a future interest in shore related companies purported to be insurance companies
property. Rev. Rul. 99–14 modified and superseded. that are subject to little or no U.S. federal income tax. These trans-
actions often do not generate the federal tax benefits that tax-
Rev. Rul. 2002–71, page 763. payers claim are allowable for federal income tax purposes. This
Notional principal contract (NPC). This ruling provides guid- notice also alerts taxpayers, their representatives, and promot-
ance on the timing of recognition of gain or loss on the termi- ers of these transactions, to certain reporting and record keep-
nation of a notional principal contract that hedges a portion of ing obligations and penalties that they may be subject to with
the term of a debt instrument issued by the taxpayer. respect to these transactions.
Rev. Rul. 2002–72, page 759. Announcement 2002–100, page 799.
Low-income housing credit; satisfactory bond; “bond fac- This document contains corrections to proposed regulations un-
tor” amounts for the period October through December der section 1503(d) of the Code (REG–106879–00, 2002–34
2002. This ruling announces the monthly bond factor amounts I.R.B. 402) relating to the events that require the recapture of dual
to be used by taxpayers who dispose of qualified low-income consolidated losses.
buildings or interests therein during the period October through
Finding Lists begin on page ii.
Index for July through October begins on page v.
Announcement 2002–102, page 802.
This document changes the date of a scheduled public hearing
and extends the public comment period on proposed regula-
tions (REG–136311–01, 2002–36 I.R.B. 485) that relate to when
a foreign corporation engaged in the international operation of
ships or aircraft may exclude its U.S. source income from gross
income for U.S. federal income tax purposes. The hearing is re-
scheduled from November 12, 2002, to November 25, 2002.
EMPLOYEE PLANS
REG–124667–02, page 791.
Proposed regulations under section 417 of the Code would con-
solidate the content requirements applicable to explanations of
qualified joint and survivor annuities and qualified preretire-
ment survivor annuities payable from certain retirement plans.
In addition, these regulations would specify requirements for dis-
closing the relative value of optional forms of benefit that are pay-
able from certain retirement plans in lieu of a qualified joint and
survivor annuity. A public hearing is scheduled for January 14,
2003.
November 4, 2002 2002–44 I.R.B.
The IRS Mission
Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of the decisions, rulings, and procedures must be considered, and Ser-
Commissioner of Internal Revenue for announcing official rul- vice personnel and others concerned are cautioned against reach-
ings and procedures of the Internal Revenue Service and for pub- ing the same conclusions in other cases unless the facts and
lishing Treasury Decisions, Executive Orders, Tax Conventions, circumstances are substantially the same.
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super- The Bulletin is divided into four parts as follows:
intendent of Documents on a subscription basis. Bulletin contents
are consolidated semiannually into Cumulative Bulletins, which Part I. — 1986 Code.
are sold on a single-copy basis. This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of Part II.—Treaties and Tax Legislation.
the tax laws, including all rulings that supersede, revoke, modify,
This part is divided into two subparts as follows: Subpart A, Tax
or amend any of those previously published in the Bulletin. All pub-
Conventions and Other Related Items, and Subpart B, Legisla-
lished rulings apply retroactively unless otherwise indicated. Pro-
tion and Related Committee Reports.
cedures relating solely to matters of internal management are
not published; however, statements of internal practices and pro-
cedures that affect the rights and duties of taxpayers are pub- Part III.—Administrative, Procedural, and Miscellaneous.
lished. To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
Revenue rulings represent the conclusions of the Service on the cluded in this part are Bank Secrecy Act Administrative Rulings.
application of the law to the pivotal facts stated in the revenue Bank Secrecy Act Administrative Rulings are issued by the De-
ruling. In those based on positions taken in rulings to taxpay- partment of the Treasury’s Office of the Assistant Secretary (En-
ers or technical advice to Service field offices, identifying de- forcement).
tails and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory Part IV.—Items of General Interest.
requirements. This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they The first Bulletin for each month includes a cumulative index for
may be used as precedents. Unpublished rulings will not be re- the matters published during the preceding months. These
lied on, used, or cited as precedents by Service personnel in the monthly indexes are cumulated on a semiannual basis, and are
disposition of other cases. In applying published rulings and pro- published in the first Bulletin of the succeeding semiannual pe-
cedures, the effect of subsequent legislation, regulations, court riod, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2002–44 I.R.B. November 4, 2002
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income ance to taxpayers concerning the general may establish a Treasury Direct Account
Housing Credit methodology used by the Treasury Depart- and pledge certain United States Treasury
ment in computing the bond factor amounts securities to the Internal Revenue Service
Low-income housing credit; satisfac- used in calculating the amount of bond con- as security.
tory bond; “bond factor” amounts for the sidered satisfactory by the Secretary un- This revenue ruling provides in Table 1
period October through December 2002. der § 42(j)(6) of the Internal Revenue Code. the bond factor amounts for calculating the
This ruling announces the monthly bond It further announced that the Secretary amount of bond considered satisfactory un-
factor amounts to be used by taxpayers who would publish in the Internal Revenue Bul- der § 42(j)(6) or the amount of United
dispose of qualified low-income build- letin a table of “bond factor” amounts for States Treasury securities to pledge in a
ings or interests therein during the period dispositions occurring during each calen- Treasury Direct Account under Rev. Proc.
October through December 2002. This rul- dar month. 99–11 for dispositions of qualified low-
ing also provides a summary of the bond Rev. Proc. 99–11, 1999–1 C.B. 275, es- income buildings or interests therein dur-
factor amounts for dispositions occuring tablished a collateral program as an alter- ing the period October through December
during the period January through Septem-
native to providing a surety bond for 2002. Table 1 also provides a summary of
ber 2002.
taxpayers to avoid or defer recapture of the the bond factor amounts for dispositions oc-
Rev. Rul. 2002–72 low-income housing tax credits under curring during the period January through
§ 42(j)(6). Under this program, taxpayers September 2002.
In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guid-
Table 1
Rev. Rul. 2002–72
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Disposition
Jan ’02 17.76 32.73 45.44 56.24 65.46 65.92 66.46 66.99 67.63 68.35 69.24
Feb ’02 17.76 32.73 45.44 56.24 65.46 65.75 66.28 66.80 67.44 68.16 69.05
Mar ’02 17.76 32.73 45.44 56.24 65.46 65.57 66.10 66.62 67.26 67.98 68.86
Apr ’02 17.76 32.73 45.44 56.24 65.46 65.40 65.93 66.45 67.08 67.80 68.68
May ’02 17.76 32.73 45.44 56.24 65.46 65.23 65.76 66.27 66.91 67.62 68.50
Jun ’02 17.76 32.73 45.44 56.24 65.46 65.06 65.59 66.11 66.74 67.46 68.33
Jul ’02 17.76 32.73 45.44 56.24 65.46 64.90 65.42 65.94 66.58 67.29 68.17
Aug ’02 17.76 32.73 45.44 56.24 65.46 64.74 65.26 65.78 66.42 67.13 68.01
Sep ’02 17.76 32.73 45.44 56.24 65.46 64.58 65.10 65.62 66.26 66.98 67.86
Oct ’02 17.76 32.73 45.44 56.24 65.46 64.43 64.95 65.47 66.11 66.83 67.72
Nov ’02 17.76 32.73 45.44 56.24 65.46 64.27 64.80 65.32 65.96 66.68 67.58
Dec ’02 17.76 32.73 45.44 56.24 65.46 64.12 64.65 65.17 65.81 66.54 67.44
2002–44 I.R.B. 759 November 4, 2002
Table 1 (cont’d)
Rev. Rul. 2002–72
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of 1999 2000 2001 2002
Disposition
Jan ’02 70.13 70.98 72.28 72.55
Feb ’02 69.92 70.77 72.05 72.55
Mar ’02 69.73 70.58 71.84 72.55
Apr ’02 69.55 70.40 71.67 72.55
May ’02 69.38 70.24 71.51 72.55
Jun ’02 69.21 70.09 71.37 72.55
Jul ’02 69.05 69.94 71.25 72.55
Aug ’02 68.90 69.81 71.14 72.55
Sep ’02 68.76 69.68 71.04 72.55
Oct ’02 68.62 69.57 70.94 72.55
Nov ’02 68.49 69.45 70.86 72.55
Dec ’02 68.37 69.35 70.78 72.55
For a list of bond factor amounts appli- Rev. Rul. 2002–69 the Headlease for the first 20 years is sub-
cable to dispositions occurring during other stantially the same as FM’s right to pos-
calendar years, see: Rev. Rul. 98–3, 1998–1 session under the Sublease for the primary
C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B. ISSUE term.
255; and Rev. Rul. 2001–53, 2001–2 C.B. The Headlease requires X to make two
488. May a taxpayer deduct currently, un- rental payments to FM during its 40-year
der §§ 162 and 163 of the Internal Rev- term: (1) an $89 million prepayment at the
DRAFTING INFORMATION enue Code, rent and interest paid or incurred beginning of year 1; and (2) a postpay-
in connection with a “lease-in/lease-out” ment at the end of year 40 that has a dis-
The principal author of this revenue rul- (“LILO”) transaction? counted present value of $8 million. For
ing is Gregory N. Doran of the Office of
federal income tax purposes, X and FM al-
Associate Chief Counsel (Passthroughs and FACTS
locate the prepayment ratably to the first 6
Special Industries). For further informa-
X is a U.S. corporation. FM is a for- years of the Headlease and the future value
tion regarding this revenue ruling, con-
eign municipality that has historically owned of the postpayment ratably to the remain-
tact Mr. Doran at (202) 622–3040 (not a
and used certain property. As of 1997, it is ing 34 years of the Headlease.
toll-free call).
estimated that the property has a remain- The Sublease requires FM to make fixed,
ing useful life of 50 years and a fair mar- annual rental payments over both the pri-
Section 162.—Trade or ket value of $100 million. BK1 and BK2 are mary term and, if exercised, the put re-
banks. None of these four parties is re- newal term. The fixed, annual payments
Business Expenses during the put renewal term are equal to 90
lated to any of the others.
26 CFR 1.162–11: Rentals. On January 1, 1997, X and FM entered percent of the amounts that (as of Janu-
(Also § 163; 1.163–1.) into a LILO transaction under which FM ary 1, 1997) are projected to be the fair
leased the property to X under a “Head- market value rental amounts for that term.
Business expenses; interest; lease-in/ lease,” and X immediately leased the prop- To partially fund the $89 million Head-
lease-out transactions. A taxpayer may not erty back to FM under a “Sublease.” The lease prepayment, X borrows $54 million
deduct currently, under sections 162 and 163 term of the Headlease is 40 years. The pri- from BK1 and $6 million from BK2. Both
of the Code, rent or interest paid or in- mary term of the Sublease is 20 years. loans are nonrecourse, have fixed interest
curred in connection with a lease-in/lease- Moreover, as described below, the Sub- rates, and provide for annual debt service
out (LILO) transaction that properly is lease also may be renewed for a term of 10 payments that fully amortize the loans over
characterized as conferring only a future in- years (“put renewal term”) at the option of the 20-year primary term of the Sublease.
terest in property. X. X’s right to possess the property under The amount and timing of the debt ser-
November 4, 2002 760 2002–44 I.R.B.
vice payments mirror the amount and tim- nated, is substantially reduced through the Having economically defeased both its
ing of the Sublease payments due during deposit arrangement. As a result, neither rental obligations under the Sublease and
the primary term of the Sublease. The re- bank requires an independent source of its fixed-payment under the fixed-payment
maining $29 million of the Headlease pre- funds to make the loans, or bears signifi- option, FM keeps the remaining portion of
payment is provided by X. cant risk of nonpayment. In short, during the Headlease prepayment as its return on
Upon receiving the $89 million Head- the primary Sublease term, the transac- the transaction. If FM does not exercise the
lease prepayment, FM deposits $54 mil- tion is characterized by reciprocal and cir- fixed-payment option and X exercises the
lion into a deposit account with an affiliate cular obligations that offset one another. put renewal option, X can require FM to
of BK1 and $6 million into a deposit ac- At the end of the Sublease primary term, purchase a letter of credit guaranteeing the
count with an affiliate of BK2. The depos- FM has a fixed-payment option to pur- put renewal rents. If FM does not obtain the
its with the affiliates of BK1 and BK2 earn chase from X the Headlease residual (the letter of credit, FM must exercise the fixed-
interest at the same rates as the loans from right to use the property beyond the Sub- payment option.
BK1 and BK2. FM directs the affiliate of lease primary term subject to the obliga- For tax purposes, X claims deductions
BK1 to pay BK1 annual amounts equal to tion to make the rent postpayment) for a for interest on the loans and for the allo-
90 percent of FM’s annual rent obliga- fixed exercise price equal to 105 percent of cated rents on the Headlease. X includes in
tion under the Sublease (that is, amounts the amount that (as of January 1, 1997) is gross income the rents received on the Sub-
sufficient to satisfy X’s debt service obli- projected to be the future fair market value lease. If the fixed-payment option is exer-
gation to BK1). The parties treat these of the Headlease residual. If FM exercises cised, X also includes the option price and
amounts as having been paid from the af- the option, the transaction is terminated at recaptures rent deductions taken during the
filiate to FM, then from FM to X as rental that point, and X receives the exercise price primary Sublease term that are attribut-
payments, and finally from X to BK1 as of the option and is not required to make able to the postpayment it is no longer re-
debt service payments. In addition, FM any portion of the postpayment due un- quired to make.
pledges the deposit account to X as secu- der the Headlease. If FM does not exer-
rity for FM’s obligations under the Sub- LAW AND ANALYSIS
cise the option, X may elect to (1) use the
lease, while X, in turn, pledges its interest property itself for the remaining term of the X and FM’s allocations of the prepay-
in FM’s pledge to BK1 as security for X’s Headlease, (2) lease the property to an- ment and the postpayment for federal in-
obligations under the loan from BK1. Simi- other person for the remaining term of the come tax purposes meet the uneven rent test
larly, FM directs the affiliate of BK2 to pay Headlease, or (3) compel FM to lease the contained in proposed § 467 regulations
BK2 annual amounts equal to 10 percent of property for the 10-year put renewal term (§ 1.467–3(c)(2)(i)), and under those regu-
FM’s annual rent obligation under the Sub- of the Sublease. If FM does not exercise the lations the Headlease would not be treated
lease (that is, amounts sufficient to sat- fixed-payment option and X exercises its put as a disqualified leaseback or long-term
isfy X’s debt service obligation to BK2). The renewal option, X will receive rents that are agreement subject to constant rental ac-
parties treat these amounts as having been equal to 90 percent of the amounts that are crual. Because this LILO transaction was
paid from the affiliate to FM, then from FM (as of January 1, 1997) projected to be the entered into after June 3, 1996, and on or
to X as rental payments, and finally from fair market rents for that term. If the ac- before May 18, 1999, the provisions of the
X to BK2 as debt service payments. Al- tual fair market rents in 20 years turn out proposed regulations are available. See
though FM’s deposit with the BK2 affili- to be less than the amount specified in the § 1.467–9(c). For later years, however, fi-
ate is not pledged, the parties understand put renewal option and FM does not ex- nal § 467 regulations effective May 18,
that FM will use the account to pay the re- ercise the fixed-payment option, X will be 1999, treat the prepayment of rent as re-
maining 10 percent of FM’s annual rent ob- able to compel FM to lease the property for sulting in a deemed loan from X to FM and
ligation under the Sublease. rents that are greater than the then fair mar- require the imputation of interest income to
As a result of the foregoing arrange- ket rental value. Thus, as a practical mat- X. § 1.467–4. Moreover, X’s rent deduc-
ment, X’s obligation to make the property ter, the fixed-payment option and put tion would be subject to proportional rent
available under the 20-year primary term renewal option operate to “collar” the value rules that reflect the time value of money
of the Sublease is completely offset by X’s of the Headlease residual during the pri- concept. See § 1.467–2(c).
right to use the property under the Head- mary term. The substance of a transaction, not its
lease. X’s obligation to make debt service In addition, X has nominal exposure to form, governs its tax treatment. Gregory v.
payments on the loans from BK1 and BK2 FM’s credit under the fixed-payment op- Helvering, 293 U.S. 465 (1935). In Frank
is completely offset by X’s right to re- tion and, if exercised, the put renewal term. Lyon Co. v. United States, 435 U.S. 561,
ceive Sublease rentals from FM. More- At the inception of the transaction, X re- 573 (1978), the United States Supreme
over, X’s exposure to the risk that FM will quires FM to invest $15 million of the Court stated, “In applying the doctrine of
not make the rent payments is further lim- Headlease prepayment in highly-rated debt substance over form, the Court has looked
ited by the arrangements with the affili- securities that will mature in an amount suf- to the objective economic realities of a
ates of BK1 and BK2. In the case of the ficient to fund the fixed amount due un- transaction rather than to the particular form
loan from BK1, X’s economic risk is elimi- der the fixed-payment option, and to pledge the parties employed.” The Court evalu-
nated through the defeasance arrangement. these debt securities to X. This arrange- ated the substance of the transaction in
In the case of the $6 million loan from BK2, ment ensures that FM is able to make the Frank Lyon to determine that it was in-
X’s economic risk, although not elimi- payment under the fixed-payment option. deed a sale/leaseback, as it was structured,
2002–44 I.R.B. 761 November 4, 2002
rather than a financing. The Court subse- Subsequently, AG purportedly sold the also United States v. Ingalls, 399 F.2d 143
quently relied on its approach in Frank Lyon equipment to a domestic corporation (5th Cir. 1968); Blue Flame Gas Co. v.
to recharacterize a sale and repurchase of (Sutton), which in turn purportedly sold in- Commissioner, 54 T.C. 584 (1970); Green-
federal securities as a loan, finding that the terests in the equipment to the taxpayer field v. Commissioner, T.C. Memo. 1982–
economic realities of the transaction did not (Bussing) and four other individual inves- 617; Big “D” Development Corp. v.
support the form chosen by the taxpayer. tors. Bussing acquired his interest in the Commissioner, T.C. Memo. 1971–148, aff’d
Nebraska Dep’t of Revenue v. Loewen- computer equipment subject to the under- per curiam, 453 F.2d 1365 (5th Cir.1972).
stein, 513 U.S. 123 (1994). lying lease by paying cash, short-term Similarly, the Headlease and Sublease
Where parties have in form entered into promissory notes, and a long-term prom- impose offsetting obligations that must be
two separate transactions that result in off- issory note to Sutton. Bussing then leased disregarded, regardless of whether other
setting obligations, the courts often have his interest in the equipment back to AG for components of the LILO transaction are re-
collapsed the offsetting obligations and re- nine years. The rents due Bussing from AG spected. During the first 20 years of its
characterized the two transactions as a single equaled Bussing’s annual payments on the term, the Headlease confers to X a right to
transaction. In Rogers v. United States, 281 long-term promissory note to Sutton for the use the property that is immediately re-
F.3d 1108 (10th Cir. 2002), the part-owner first three years and were supposed to gen- versed by the Sublease grant to FM of sub-
(Fogelman) of a professional baseball team erate nominal annual cash flow thereaf- stantially the same right to use property. In
that was organized as an S corporation bor- ter. the LILO transaction, the Sublease inter-
rowed money from the S corporation. The The court first disregarded Sutton’s par- est retained by FM is of the same nature
nonrecourse loan was secured by Fogel- ticipation in the transactions on substance
as the Headlease interest conveyed to X. Be-
man’s ownership interest in the corpora- over form grounds. It then held that
cause the transfer and retransfer of the right
tion and his existing option to purchase the Bussing’s long-term indebtedness also must
to possess the property for the first 20 years
rest of the shares from the taxpayer (Kauff- be disregarded because it was completely
are disregarded as offsetting obligations, the
man), the other owner of the team. Fogel- offset by AG’s rent payments in a “pur-
ported sale-leaseback pursuant to which the transaction that remains is, at best, a trans-
man also granted the corporation an option
respective lease and debt obligations flow fer of funds from X to FM in exchange for
to purchase both his shares and his exist-
ing option to buy Kauffman’s shares. The between only two parties.” Id. at 458. The FM’s obligation to repay those funds and
option price was an amount equal to the court stated, provide X the right to begin to lease the
outstanding loan balance. The corpora- The respective obligations between AG property in 20 years.
tion exercised its option immediately but de- and Bussing cancel each other out. Any An analogous situation occurs when the
ferred closing until the due date of possible claim by AG with respect to the conveyance of property is accompanied by
Fogelman’s loan, five months later. On that note is fully offset by AG’s rental obli- the retention of some interest in the same
date, Fogelman transferred his shares in the gation to Bussing. . . . Bussing, effec- property. If the interest retained is of sub-
corporation to the corporation in lieu of its tively, will never be required to make any stantially the same nature as the interest
foreclosure on the loan. The corporation payments on his debt obligation, a fea- conveyed, only a future interest is con-
claimed that the shares had no value at that ture of the transaction that we believe the veyed. In McCully Ashlock v. Commis-
time and deducted the loan amount as a bad parties intended to achieve. sioner, 18 T.C. 405 (1952), acq., 1952–2
debt, which was passed through to Kauff- Id. After collapsing the offsetting loan and C.B. 1, taxpayer had acquired property
man. lease, the court concluded that Bussing had through a deed dated June 6, 1945. The
The court in Rogers applied the sub- acquired an interest in a joint venture with seller, however, had retained the right to
stance over form doctrine to collapse the AG and the other investors to the extent of possession and rentals through August 15,
loan and the option transaction into a re- his cash payment only. 1947. The court found that taxpayer had ac-
demption of Fogelman’s stock in exchange Courts have similarly disregarded the quired only a future interest in the prop-
for cash. Fogelman had no incentive to re- parties’ obligations in purported install- erty because “the trustees [sellers] not only
pay the loan because any reduction in the ment sales where the taxpayer received an retained the rents legally but they also re-
loan balance would reduce the option price. installment note that was offset by some tained control and benefits of ownership.”
The immediate exercise of the option pre- other arrangement between the two par- Id. at 411. Consequently, rentals from the
cluded any attempt by Fogelman to repay ties, indicating that the maker of the note property were income to the seller.
the loan and keep the stock. On the basis would not be called upon to pay the in- Similarly, in Kruesel v. United States,
of those facts, among others, the court held stallment obligation. See Rickey v. Com- 63–2 U.S. Tax Cas. (CCH) ¶ 9714 (D.
that the substance of the transaction was a missioner, 502 F.2d 748 (9th Cir. 1974), Minn. 1963), the court concluded that tax-
sale of Fogelman’s stock to the corpora- aff ’g 54 T.C. 680 (1970). Although tax- payer had transferred only a future, re-
tion. payers are entitled to arrange the terms of mainder interest in property and reserved
In Bussing v. Commissioner, 88 T.C. 449, a sale in order to qualify for the install- a life estate. The government had unsuc-
reconsideration denied, 89 T.C. 1050 ment method, “the arrangements must have cessfully argued that taxpayer had sold its
(1987), a Swiss subsidiary of a computer substance and must reflect the true situa- entire interest in the property and the tax-
leasing company (AG) purchased com- tion rather than being merely the formal payer’s amount realized on the sale in-
puter equipment in a sale/leaseback trans- documentation of the terms of the sale.” Id. cluded the value of a right to occupancy
action involving a five-year lease. at 752–53, quoting 54 T.C. 680 at 694. See provided to the taxpayer by the buyer.
November 4, 2002 762 2002–44 I.R.B.
In contrast, in Alstores Realty Corp. v. erty 20 years hence for a term of 20 years. sis and holding apply as well to LILO
Commissioner, 46 T.C. 363 (1966), acq., (Economically, $29 million is an overpay- transactions that involve or include domes-
1967–2 C.B.1, the court held that a sale of ment for the value of any right that X ob- tic tax-exempt or tax-indifferent entities.
property accompanied by the reservation of tains to lease the property in the future. X
HOLDING
a right of occupancy did not result in the was willing to overpay in this manner, how-
transfer of only a future interest because the ever, in order to induce FM to participate A taxpayer may not deduct currently, un-
seller’s right of occupancy was in the na- in the transaction.). In accordance with der §§ 162 and 163, rent or interest paid or
ture of a leasehold interest, because the pur- § 467, the $29 million “equity” portion of incurred in connection with a LILO trans-
chaser acquired the benefits and burdens of the Headlease prepayment is deductible over action that properly is characterized as con-
ownership of the property. the 20-year residual term of the Head- ferring only a future interest in property.
Alstores can be distinguished from lease (the 10-year put renewal term and the Where appropriate, the Service will con-
McCully Ashlock and Kruesel. McCully 10-year “shirttail” period). Alternatively, in tinue to disallow the tax benefits claimed
Ashlock and Kruesel conclude that where the event FM exercises its fixed-price op- in connection with LILO transactions upon
a retained interest is of the same nature as tion at the end of the primary term of the other grounds, including that the substance
the interest conveyed, only a future inter- Sublease, X will have gain or loss equal to over form doctrine requires their rechar-
est has been transferred. In Alstores, the in- the difference between the option price and acterization as financing arrangements and
terests were not of the same nature. X’s cost of acquiring a right to the Head- that they are to be disregarded for lack of
Similarly, the LILO transaction is dis- lease residual term. Section 1001. economic substance.
tinguishable from the transaction involved The remainder of the Headlease pre-
in Comdisco, Inc. v. Commissioner, 756 payment, $60 million, must be disregarded, EFFECT ON OTHER DOCUMENTS
F.2d 569 (7th Cir. 1985). In that case, equip- because the “loans” that purportedly fi- Rev. Rul. 99–14, 1999–1 C.B. 835, is
ment was subject to end user leases, and the nance this portion of the Headlease pre- modified and superseded.
lessor of that equipment assigned an inter- payment are without substance. In Bridges
est to taxpayer in a transaction designed to v. Commissioner, 39 T.C. 1064, aff’d 325 DRAFTING INFORMATION
give the taxpayer investment tax credits. The F.2d 180 (4th Cir. 1963), taxpayer “bor-
taxpayer’s entitlement to the credits de- rowed” funds from banks and used the The principal author of this revenue rul-
pended on whether it had the status of funds to purchase Treasury notes, which the ing is John Aramburu of the Office of As-
lessee/sublessor. In concluding that it did, banks held as collateral and ultimately sold sociate Chief Counsel (Income Tax &
the court noted a number of factors that to satisfy taxpayer’s debts. The court’s ra- Accounting). For further information re-
supported taxpayer’s claim that it had ac- tionale for disallowing taxpayer’s deduc- garding this revenue ruling, contact Mr.
quired a leasehold interest. The taxpayer tions of prepaid interest is equally applicable Aramburu at (202) 622–4960 (not a toll-
was obligated to the lessor in the event of here: free call).
a default by the sublessee. The taxpayer re- [P]etitioner at no time had the uncon-
let certain equipment after one sublease had trolled use of any additional money, of the
expired. In connection with another sub- bonds, or of the interest on the bonds. He Section 163.—Interest
lease, the taxpayer was responsible for rent assumed no risk of a rise or fall in the 26 CFR 1.162–17: Interest deduction in general.
to its assignor in excess of amounts paid by market price of the bonds and could not
the sublessee directly to the assignor. The take advantage of such. His payment to May a taxpayer deduct currently, under § 163, in-
court also emphasized the regulatory re- the bank was not for the use or forbear- terest paid or incurred in connection with a lease-in/
lease-out (LILO) transaction that properly is
strictions on direct leases between the as- ance of money; it was for the purchase characterized as conferring only a future interest in
signor and the end users. Id. at 576–77. of a rigged sales price for the bonds and property. See Rev. Rul. 2002–69, page 760.
Unlike Comdisco, in the LILO transac- for a tax deduction. Petitioner incurred no
tion the headlessor and the sublessee are the genuine indebtedness, within the mean-
same party. Further, in the LILO transac- ing of the statute, and as a payment of in- Section 446.—General Rule
tion the headlessee/sublessor is not mate- terest, this transaction was also a sham. for Methods of Accounting
rially exposed to the risk that the sublessee Id. at 1078–79. Neither X nor FM obtain
will fail to make rent payments. use of the “borrowed” funds. The “loans” (Also 26 CFR 1.446–4)
Section 162(a)(3) permits a deduction for purportedly are made to finance X’s acqui-
rentals and other payments required to be sition of the Headlease interest. But that Notional principal contract (NPC).
made as a condition to the continued use leasehold interest is substantially offset by This ruling provides guidance on the tim-
or possession, for purposes of the trade or an interdependent Sublease with the Head- ing of recognition of gain or loss on the ter-
business, of property. Because X does not lessor. What remains can only be enjoyed mination of a notional principal contract that
acquire a current leasehold interest in the after 20 years and after the loans have been hedges a portion of the term of a debt in-
property, it is not entitled to current de- “repaid” using “rents” from a Sublease that strument issued by the taxpayer.
ductions for rent. The $29 million “eq- itself lacks substance. Under the circum-
uity” portion of the Headlease prepayment stances, the loans are disregarded.
is, effectively, a payment for at most X’s Although this ruling refers to a for-
right under the Headlease to lease the prop- eign municipality and its property, the analy-
2002–44 I.R.B. 763 November 4, 2002
Rev. Rul. 2002–71 for a hedging transaction must clearly re- ment, and TP generally would have been
flect income. Section 1.446–4(b) further required to take into account the remain-
provides that to clearly reflect income, the ing income, deduction, gain, or loss over
ISSUE method used for a hedging transaction must the period from Year 3 through Year 5. The
reasonably match the timing of income, de- termination payment made or received by
When should a taxpayer take into ac- duction, gain, or loss from the hedging TP represents the present value of the ex-
count gain or loss on the termination of a transaction with the timing of income, de- tinguished rights and obligations under the
notional principal contract (NPC) that duction, gain, or loss from the item being NPC for Year 3 through Year 5. There-
hedges a portion of the term of a debt in- hedged. fore, the gain or loss from the hedging
strument issued by the taxpayer? Section 1.446–4(e)(4) provides that gain transaction relates to Year 3 through Year
FACTS or loss from a transaction that hedges a debt 5. To clearly reflect income in accordance
instrument issued or to be issued by a tax- with the matching requirement of § 1.446–
Situation 1 payer, or a debt instrument held or to be 4(b), TP must take into account the gain or
held by a taxpayer, must be accounted for loss from terminating the NPC over the pe-
Taxpayer TP uses the calendar year as by reference to the terms of the debt in- riod from Year 3 through Year 5.
its taxable year. On the first day of Year 1, strument and the period or periods to which
TP issues a debt instrument. The debt in- the hedge relates. A hedge of an instru- Situation 2
strument has a 10-year term and provides ment that provides for interest to be paid Following the analysis from Situation 1,
for interest to be paid annually at a fixed at a fixed rate or a qualified floating rate, TP would have already taken into account
rate. Contemporaneously with the issu- for example, generally is accounted for us- in Year 3 a portion of the gain or loss from
ance of the debt instrument, TP also en- ing constant yield principles. Thus, assum- termination of the NPC in Year 2. How-
ters into an NPC with a 5-year term that ing that a fixed rate or qualified floating rate ever, upon retiring the debt instrument in
converts the fixed rate payments under the instrument remains outstanding, hedging Year 4, TP’s remaining gain or loss from
debt instrument into floating rate payments. gain or loss is taken into account in the the termination of the NPC should be rec-
That is, the NPC provides for TP to re- same periods in which it would be taken ognized in order to match the timing of in-
ceive payments equal to the product of the into account if it adjusted the yield of the come, deduction, gain, or loss from the
fixed rate on the debt instrument and a no- instrument over the term to which the hedge hedging transaction with the timing of in-
tional amount equal to the principal amount relates. Section 1.446–4(e)(4) provides, as come, deduction, gain, or loss from the item
of the debt instrument in exchange for pay- an example, that gain or loss realized on a being hedged.
ments by TP equal to the product of a float- transaction that hedged an anticipated fixed
ing rate and the same notional amount. rate borrowing for its entire term is ac- HOLDING
Pursuant to § 1.1221–2(f), TP properly iden- counted for, solely for purposes of
tifies the NPC as a hedging transaction cov- (1) In Situation 1, TP must account for
§ 1.446–4, as if it decreased or increased
ering Year 1 through Year 5 of the debt the gain or loss arising from terminating the
the issue price of the debt instrument. How-
instrument and complies with the other re- NPC over the period from Year 3 through
ever, in all events, the taxpayer’s method,
quirements necessary for the NPC to be Year 5, the remaining period to which the
as actually applied to the taxpayer’s hedg-
treated as a hedge under §§ 1.1221–2 and terminated hedge relates.
ing transactions, must clearly reflect in-
1.446–4. TP terminates the NPC on the last (2) In Situation 2, TP takes into ac-
come by meeting the matching requirement
day of Year 2 and either receives or makes count in Year 3 a portion of the gain or loss
of § 1.446–4(b). See § 1.446–4(e) (intro-
a termination payment. arising from the termination of the NPC and
ductory sentences).
takes into account in Year 4 the remain-
Situation 2 ANALYSIS ing balance of the gain or loss from the ter-
minated hedge.
The facts are the same as Situation 1, Situation 1
but, in addition, TP retires the debt instru- DRAFTING INFORMATION
Unlike the hedging transaction described
ment in Year 4.
in § 1.446–4(e)(4) that hedges a fixed rate The principal authors of this revenue rul-
LAW borrowing over its entire term, TP’s NPC ing are K. Scott Brown and Clay
does not hedge the entire term of the debt Littlefield of the Office of Associate Chief
Section 1.446–4(a) provides that a hedg- instrument. Rather, TP’s NPC hedges, and Counsel (Financial Institutions and Prod-
ing transaction as defined in § 1.1221– relates only to, Year 1 through Year 5 of the ucts). For further information regarding this
2(b) must be accounted for under the rules 10-year term of the debt instrument. Prior revenue ruling, contact Messrs. Brown or
set forth in § 1.446–4. to its termination on the last day of Year 2, Littlefield at (202) 622–3920 (not a toll-
Section 1.446–4(b) provides that the the NPC would have continued to hedge free call).
method of accounting used by a taxpayer Year 3 through Year 5 of the debt instru-
November 4, 2002 764 2002–44 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous
Certain Reinsurance able year do not exceed $350,000), § 806 its actual activities during the year. Inter-
Arrangements (providing a deduction for certain life in- American Life Ins. Co. v. Commissioner, 56
surance companies with life insurance com- T.C. 497, 506–08 (1971), aff ’d per cu-
pany taxable income not in excess of riam, 469 F.2d 697 (9th Cir. 1972) (tax-
Notice 2002–70 $15,000,000), or § 831(b) (allowing quali- payer whose predominant source of income
fying non-life insurance companies whose was from investments did not qualify as an
The Internal Revenue Service and Trea- net written premiums are between $350,000 insurance company); see also Bowers v.
sury Department have become aware of a and $1,200,000 to elect to be taxed solely Lawyers Mortgage Co., 285 U.S. 182, 188
type of transaction, described below, that on investment income). (1932). To qualify as an insurance com-
is being used by taxpayers to shift income Taxpayer receives premiums from its pany, a taxpayer “must use its capital and
from taxpayers to related companies pur- customers and remits those premiums (typi- efforts primarily in earning income from the
ported to be insurance companies that are cally net of its sales commission) to Com- issuance of contracts of insurance.” In-
subject to little or no U.S. federal income pany X. Company X pays any claims and dus. Life Ins. Co. v. United States, 344 F.
state premium taxes due and retains an Supp. 870, 877 (D. S.C. 1972), aff’d per
tax. This notice alerts taxpayers and their
amount from the premiums received from curiam, 481 F.2d 609 (4th Cir. 1973). To
representatives that these transactions of-
Taxpayer. Under Company Y’s reinsur- determine whether Company Y qualifies as
ten do not generate the federal tax ben-
ance agreement with Company X, Com- an insurance company, all of the relevant
efits that taxpayers claim are allowable for
pany Y reinsures all insurance policies that facts will be considered, including but not
federal income tax purposes. This notice
Taxpayer sells to its customers. Company limited to, the size and activities of any
also alerts taxpayers, their representatives,
X transfers the remainder of the premi- staff, whether Company Y engages in other
and promoters of these transactions, to cer-
ums to Company Y as reinsurance premi- trades or businesses, and its sources of in-
tain reporting and record keeping obliga-
ums. come. See generally Lawyers Mortgage Co.
tions and penalties that they may be subject
to with respect to these transactions. at 188–90; Indus. Life Ins. Co., at 875–
ANALYSIS
The transaction generally involves a tax- 77; Cardinal Life Ins. Co. v. United States,
payer (“Taxpayer”) (typically a service pro- Many of the transactions described in 300 F. Supp. 387, 391–92 (N.D. Tex. 1969),
vider, automobile dealer, lender, or retailer) this notice have been designed to use a re- rev’d on other grounds, 425 F. 2d 1328 (5th
that offers its customers the opportunity to insurance arrangement to divert income Cir. 1970); Serv. Life Ins. Co. v. United
purchase an insurance contract through Tax- properly attributable to Taxpayer to Com- States, 189 F. Supp. 282, 285–86 (D. Neb.
payer in connection with the products or pany Y, Taxpayer’s wholly-owned reinsur- 1960), aff’d on other grounds, 293 F.2d 72
services being sold. The insurance pro- ance company that is subject to little or no (8th Cir. 1961); Inter-Am. Life Ins. Co., at
vides coverage for repair or replacement federal income tax. The Service intends to 506–08 ; Nat’l. Capital Ins. Co. of the Dist.
costs if the product breaks down or is lost, challenge the purported tax benefits from of Columbia v. Commissioner, 28 B.T.A.
stolen, or damaged, or coverage for the cus- these transactions on a number of grounds. 1079, 1085–86 (1933).
tomer’s payment obligations in case the cus- First, depending upon the facts and cir- If Company Y is not an insurance com-
tomer dies, or becomes disabled or cumstances, the Service may assert that pany, it is not entitled to the benefits of
unemployed. Company Y is not an insurance company §§ 501(c)(15), 806, or 831(b). Further, if
Taxpayer offers the insurance to its cus- for federal income tax purposes. For fed- Company Y is a foreign corporation and is
tomers by acting as an insurance agent for eral income tax purposes, an insurance com- not an insurance company, any election
an unrelated insurance company (“Com- pany is a company whose primary and Company Y made under § 953(d) is not
pany X”). Taxpayer receives a sales com- predominant business activity during the valid and Company Y will be treated as a
mission from Company X equal to a taxable year is the issuing of insurance or controlled foreign corporation as defined in
percentage of the premiums paid by Tax- annuity contracts or the reinsuring of risks § 957. In such a case, Taxpayer will be
payer’s customers. Taxpayer forms a underwritten by insurance companies. treated as a U.S. shareholder of Company
wholly-owned corporation (“Company Y”), § 1.801–3(a) of the Income Tax Regula- Y and generally will include in its gross in-
typically in a foreign country, to reinsure tions; § 816(a) (which provides that a com- come on a current basis any subpart F in-
the policies sold by Taxpayer. Promoters pany will be treated as an insurance come of Company Y. See § 951(a) and (b).
sometimes refer to these companies as pro- company for federal income tax purposes In addition, Company Y will not qualify for
ducer owned reinsurance companies or only if “more than half of the business” of the exceptions from subpart F income un-
“PORCs”. If Company Y is a foreign cor- that company is the issuing of insurance or der §§ 953(a)(2) and 954(i) for certain in-
poration, it typically elects to be treated as annuity contracts or the reinsuring of risks surance income because those exceptions
a domestic insurance company under underwritten by insurance companies). are only available to a foreign corpora-
§ 953(d) of the Internal Revenue Code. While a taxpayer’s name, charter powers, tion that, among other requirements, is en-
Company Y takes the position that it is en- and state regulation help to indicate the ac- gaged in the insurance business and would
titled to the benefits of § 501(c)(15) (pro- tivities in which it may properly engage, be subject to tax under subchapter L if such
viding that non-life insurance companies are whether the taxpayer qualifies as an insur- corporation were a domestic corporation.
tax exempt if premiums written for the tax- ance company for tax purposes depends on See § 953(e)(3)(C).
2002–44 I.R.B. 765 November 4, 2002
Second, the Service may apply §§ 482 missioner, 899 F.2d 905, 908–09 (10th Cir. alty under § 6700, and the aiding and abet-
or 845 to allocate income from Company 1990); Shriver v. Commissioner, 899 F.2d ting penalty under § 6701.
Y to Taxpayer if necessary clearly to re- 724, 727 (8th Cir. 1990); Rose v. Commis- The principal authors of this notice are
flect the income of Taxpayer and Com- sioner, 868 F.2d 851, 853 (6th Cir. 1989); John Glover of the Office of Associate
pany Y. Section 482 provides the Secretary Kirchman. Although a taxpayer has the right Chief Counsel (Financial Institutions and
with authority to allocate gross income, de- to arrange its affairs to reduce its tax li- Products) and Theodore Setzer and Sheila
ductions, credits or allowances among per- ability, the substance of a transaction must Ramaswamy of the Office of Associate
sons owned or controlled directly or govern its tax consequences regardless of Chief Counsel (International). For further
indirectly by the same interests, if such al- information regarding this notice, contact
the form in which the transaction is cast.
location is necessary to prevent evasion of Mr. Glover at (202) 622–3970 or
See Gregory v. Helvering, 293 U.S. 465,
Mr. Setzer or Ms. Ramaswamy (202) 622–
taxes or clearly to reflect income. The § 482 469 (1935). If the transactions involving
3870 (not a toll-free call).
regulations provide that in determining the Taxpayer, Company X, and Company Y are
taxable income of a controlled person, the disregarded, the income of Company Y is
standard to be applied is that of a person income of Taxpayer. See Wright v. Com-
dealing at arm’s length with an uncon- missioner, T.C.M. 1993–328.
trolled person. § 1.482–1(b)(1). Section 482 Transactions that are the same as, or sub-
may apply to a transaction between two or stantially similar to, the transaction de-
more controlled persons notwithstanding scribed in this notice that involve taxpayers
that an uncontrolled person participates in claiming entitlement to the benefits of
the transaction as an intermediary. See GAC §§ 501(c)(15), 806, or 831(b) are identi-
Produce Co. v. Commissioner, T.C.M.
fied as “listed transactions” for purposes of
1999–134. If, as a result of the reinsur-
§ 1.6011–4T(b)(2) of the temporary In-
ance transaction, Taxpayer’s income is not
come Tax Regulations and § 301.6111–
consistent with the arm’s length standard,
2T(b)(2) of the temporary Procedure and
then § 482 authorizes the Secretary to al-
locate income from Company Y to Tax- Administration Regulations. See also
payer. Section 845(a) allows the Service to § 301.6112–1T, A–4. Independent of their
reallocate income, deductions, assets, re- classification as “listed transactions” for pur-
serves, credits, and other items between two poses of §§ 1.6011–4T(b)(2) and 301.6111–
or more related parties who are parties to 2T(b)(2), transactions that are the same as,
a reinsurance agreement. Thus, such items or substantially similar to, the transaction
may be reallocated from Company Y to described in this notice may already be sub-
Taxpayer under the authority of § 845(a). ject to the disclosure requirements of
Third, in appropriate cases, the Ser- § 6011, the tax shelter registration require-
vice may disregard the insurance and re- ments of § 6111, or the list maintenance re-
insurance arrangements, and thereby require quirements of § 6112 (§§ 1.6011–4T,
Taxpayer to recognize an additional por- 301.6111–1T, 301.6111–2T and 301.6112–
tion of premiums received from its cus- 1T, A–3 and A–4).
tomers as its income, if the arrangements Persons who are required to satisfy the
are shams in fact or shams in substance. See registration requirement of § 6111 with re-
Kirchman v. Commissioner, 862 F.2d 1486, spect to the transactions described in this
1492 (11th Cir. 1989). Courts have distin- notice and who fail to do so may be sub-
guished between “shams in fact” where the ject to the penalty under § 6707(a). Per-
reported transactions never occurred and sons who are required to satisfy the list-
“shams in substance” which actually oc- keeping requirement of § 6112 with respect
curred but lack the substance their form rep- to the transactions described in this no-
resents. ACM Partnership v. Commissioner, tice and who fail to do so may be subject
157 F.3d 231, 247 n. 30 (3d Cir. 1998), cert. to the penalty under § 6708(a). In addi-
denied, 526 U.S. 1017 (2002) (citations tion, the Service may impose penalties on
omitted). In determining whether a trans- participants in these transactions or sub-
action constitutes a sham in substance, both stantially similar transactions involving tax-
a majority of the Courts of Appeals and the payers claiming entitlement to the benefits
Tax Court consider two related factors, eco- of §§ 501(c)(15), 806, or 831(b) or, as ap-
nomic substance apart from tax conse- plicable, on persons who participate in the
quences, and business purpose. See ACM promotion or reporting of such transac-
Partnership; Karr v. Commissioner, 924 tions, including the accuracy-related pen-
F.2d 1018, 1023 (11th Cir. 1991), cert. de- alty under § 6662, the return preparer
nied, 502 U.S. 1082 (1992); James v. Com- penalty under § 6694, the promoter pen-
November 4, 2002 766 2002–44 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Vandyke (202) 622–7180 (not toll-free num- On January 25, 2000, final regulations
Rulemaking and Notice of bers). were published under section 1296(e) (2000
final regulations). T.D. 8867, 2000–1 C.B.
Public Hearing SUPPLEMENTARY INFORMATION: 620 [65 FR 3817]. The 2000 final regula-
tions provide guidance regarding the defi-
Background
Electing Mark to Market for nition of marketable stock for purposes of
Since the enactment of the Tax Reform section 1296.
Marketable Stock
Act of 1986, United States persons that own
In General
REG–112306–00 PFIC stock have been subject to two al-
ternative tax regimes: the interest charge United States persons who own market-
rules under section 1291 of the Internal able stock (as defined in section 1296(e))
AGENCY: Internal Revenue Service Revenue Code (Code) and the qualified in a PFIC may elect to mark to market that
(IRS), Treasury. electing fund (QEF) rules under section stock annually pursuant to section 1296
1293. Congress recognized that the inter- (section 1296 election). United States per-
ACTION: Notice of proposed
rulemaking and notice of public hearing. est charge rules are a substantial source of sons making a section 1296 election with
complexity for PFIC shareholders and that respect to PFIC stock (section 1296 stock)
some shareholders would prefer the cur- are not subject to the generally applicable
SUMMARY: This document contains pro-
rent inclusion method afforded by the QEF interest charge regime of section 1291. The
cedures for certain United States persons
regime, but are unable to obtain the nec- section 1296 election is available to United
holding marketable stock in a passive for-
essary information from the PFIC. See H.R. States persons and controlled foreign cor-
eign investment company (PFIC) to elect
mark to market treatment for that stock un- Rep. No. 105–148, at 533 (1997); S. Rep. porations (CFCs) that own, or are treated
der section 1296 and related provisions of No. 105–33 at 94 (1997). Accordingly, Con- as owning, marketable stock in a PFIC.
sections 1291 and 1295. These proposed gress enacted new section 1296 in the Tax-
regulations affect United States persons payer Relief Act of 1997 to provide Explanation of Provisions
owning marketable stock in a PFIC. This shareholders with an alternative method to
include income currently with respect to A. Changes to Proposed § 1.1291–1(c):
document also provides notice of a pub-
their interest in a PFIC by allowing them Coordination of PFIC Rules and other
lic hearing on these proposed regulations.
to elect to mark to market their PFIC stock Mark to Market Provisions
DATES: Written comments and outlines of provided the stock is marketable. In 1998, Except for the coordination rules dis-
oral comments to be presented at the pub- Congress enacted certain technical correc- cussed herein, section 1291(d)(1) provides
lic hearing scheduled for November 6, 2002, tions to section 1296 and related provi- that the interest charge regime does not ap-
at 10 a.m., must be received by October 16, sions, including rules to address the overlap ply in the case of PFIC stock that is marked
2002. between the PFIC and other mark to mar- to market under (i) section 1296, or (ii) sec-
ket provisions in the Code. IRS Restruc- tion 475 or any other provision of chap-
ADDRESSES: Send submissions to: turing and Reform Act of 1998, section ter 1 of the Code. This regulation revises
CC:IT&A:RU (REG–112306–00), room 6011(c). § 1.1291–1(c), 57 FR 11024, proposed April
5226, Internal Revenue Service, POB 7604, Proposed § 1.1291–8 (INTL–656–87, 1, 1992, to incorporate this coordination rule
Ben Franklin Station, Washington, DC 1992–1 C.B. 1124) had been published on and to clarify that the interest charge re-
20044. In the alternative, submissions may April 1, 1992 (57 FR 11024). This pro- gime does not apply to a United States per-
be hand delivered between the hours of posed regulation would have provided an son that marks to market its PFIC stock
8 a.m. and 5 p.m. to: CC:IT&A:RU (REG– election for certain regulated investment under any provision of chapter 1 of the
112306–00), Courier’s Desk, Internal Rev- companies (RICs) to use a mark to mar- Code, without regard to whether such re-
enue Building, 1111 Constitution Avenue, ket method for their PFIC stock. Although gime is mandatory or elective. Proposed
NW, Washington, DC. Alternatively, tax- § 1.1291–8 was originally proposed to be § 1.1295–1(i)(3) and proposed § 1.1296–
payers may submit comments electroni- effective prospectively, the IRS subse- 1(h)(3)(i) further clarify that, with respect
cally directly to the IRS Internet site at: quently notified taxpayers that the pro- to taxation under a mark to market provi-
www.irs.gov/regs. The public hearing will posed regulations, when finalized, would sion other than under section 1296, this co-
be held in room 4718, Internal Revenue permit this limited mark to market elec- ordination rule applies without regard to
Service Building, 1111 Consitiution Av- tion to be made only for taxable years end- whether the taxpayer also has made a sec-
enue, NW, Washington, DC. ing after March 31, 1992, and before April tion 1296 election or a QEF election with
1, 1993. Notice 92–53, 1992–2 C.B. 384. respect to such stock, by providing that ei-
FOR FURTHER INFORMATION As a result of the enactment of section ther election is automatically terminated im-
CONTACT: Concerning the regulations, 1296, proposed § 1.1291–8 was withdrawn mediately following the close of the
Mark Pollard at (202) 622–3850, concern- (64 FR 5015); see also Notice 99–14, taxpayer’s taxable year preceding the first
ing submissions and the hearing, Ms. Lanita 1999–1 C.B. 736. taxable year for which the stock of the PFIC
2002–44 I.R.B. 767 November 4, 2002
is subject to the mark to market regime un- 2. Re-election of QEF regime share of the ordinary earnings and long-
der another provision of chapter 1 of the term capital gain of a PFIC under the QEF
Code. The proposed regulations further pro- rules. For example, unrealized items that
The proposed regulations also provide vide that if the section 1296 election is sub- were reflected in annual mark to market in-
a special rule for situations where a tax- sequently terminated or revoked, other than clusions could be taken into account sub-
payer owns PFIC stock that becomes sub- because the taxpayer marks to market un- sequently under the QEF rules when
ject to a mark to market regime other than der another provision of the Code, (e.g., be- realized. These issues presently are ad-
section 1296 after the first taxable year of cause the stock is no longer marketable), dressed through the respective basis ad-
the taxpayer’s holding period. In such in- the shareholder will be subject to tax un- justments provided for under the QEF and
stances, the taxpayer must apply the coor- der section 1291, unless a new QEF elec- mark to market rules. See sections 1293(d)
dination rules of § 1.1291–1(c)(3)(ii) for the tion is made. Section 1.1295–1(i)(4) and 1296(b). Comments are requested on
first taxable year that such other mark to currently provides that without the Com- possible alternative approaches for address-
market regime applies. Thereafter, the gen- missioner’s consent, a shareholder whose ing this situation with a view toward en-
eral rule above, overriding the applica- QEF election was invalidated, terminated, suring administrability and avoiding
tion of the section 1291, QEF and PFIC or revoked may not make a new QEF elec- additional complexity.
mark to market regimes, applies for all sub- tion with respect to the PFIC before the
sequent taxable years provided that the sixth taxable year ending after the tax- C. Addition of § 1.1296–1
PFIC stock continues to be marked to mar- able year in which the invalidation, termi- 1. Effect of election
ket under another provision of chapter 1 of nation, or revocation became effective. The
the Code. regulations propose to amend § 1.1295– The proposed regulations provide that,
1(i) to provide an exception for situations on the last day of a taxable year to which
B. Changes to § 1.1295–1 where a United States person’s QEF elec- a section 1296 election applies, the United
tion was terminated because it elected to States person recognizes gain to the ex-
1. Revocation of QEF election mark to market such stock under section tent that the fair market value of section
1296, and the 1296 election was subse- 1296 stock exceeds its adjusted basis. Any
The proposed regulations also provide
quently terminated because the stock ceased such gain shall be treated as ordinary in-
guidance on the coordination of the mark
to be marketable. A similar exception is pro- come. To the extent that the adjusted ba-
to market provisions under section 1296
vided for situations where a United States sis of section 1296 stock exceeds its fair
with the existing rules for QEFs. In gen-
person’s QEF election is terminated be- market value, the United States person may
eral, the Service considered the circum-
cause its PFIC stock is marked to market take a deduction equal to the lesser of the
stances in which a taxpayer would be
under another provision of chapter 1 of the amount of such excess or the unreversed in-
permitted to switch from one regime to an-
Code, and such provision subsequently clusions with respect to such stock. Any
other in light of the relative administra-
ceases to apply. In either circumstance, con- such deduction will be treated as an ordi-
tive burdens imposed under each set of
sent of the Commissioner will not be re- nary loss.
rules, and the stated intent of Congress that
quired for the United States person to re- Under former proposed § 1.1291–8, cer-
one of the purposes for enacting section
elect QEF status prior to the sixth taxable tain RICs were permitted to mark to mar-
1296 was to provide another alternative to
year ending after the taxable year that its ket PFIC stock. For RICs that elect to mark
the interest charge rules of section 1291 that
QEF election was terminated. In situa- to market their PFIC stock under section
would be available in instances where tax-
tions where a QEF election is terminated 1296, the unreversed inclusions include
payers cannot obtain sufficient informa-
because a United States person makes a sec- amounts that were included in gross in-
tion to make a QEF election. See H.R. Rep.
tion 1296 election, and then this election ter- come under former proposed § 1.1291–8
No. 105–148, at 533 (1997); S. Rep. No.
minates for some reason other than the with respect to that stock for prior tax-
105–33 at 94 (1997). Accordingly, the pro-
stock ceasing to be marketable (e.g., pur- able years. See Notice 92–53, 1992–2 C.B.
posed regulations are structured to facili-
suant to the consent of the Commissioner 384.
tate an election for mark to market treatment
under proposed § 1.1296–1(h)(3)(A)), a tax- The proposed regulations also address
by permitting a taxpayer with an existing
payer may request consent under § 1.1295– the application of section 1296 in taxable
QEF election to make a section 1296 elec-
1(i) to make a new QEF election prior to years in which the foreign corporation has
tion and terminate the existing QEF elec-
such sixth taxable year. ceased to be a PFIC under section 1297(a),
tion without requiring consent of the
Special issues arise in situations where and is not treated as a PFIC under sec-
Commissioner. In instances where a tax-
a taxpayer makes a QEF election with re- tion 1298(b)(1) (the once a PFIC, always
payer has an existing section 1296 elec-
spect to stock that was previously marked a PFIC rule). The proposed regulations
tion, it is permitted to make a QEF election
to market under section 1296 (or where a clarify that there will be no mark to mar-
only if the section 1296 election is termi-
taxpayer re-elects QEF treatment after a ter- ket inclusions or deductions for taxable
nated as provided by section 1296 and the
mination of mark-to-market treatment). In years in which the foreign corporation is not
regulations thereunder (e.g., if the PFIC
such situations, the taxpayer shifts from an- a PFIC. The suspension of mark to mar-
stock ceases to be marketable) or is re-
nual inclusions under the mark to market ket treatment while the foreign corpora-
voked with consent of the Commissioner.
rules that are based on the amount of un- tion is not a PFIC is consistent with
realized gain (or loss) in the stock of the § 1.1295–1(c)(2)(ii), which provides that a
PFIC, to annual inclusions of a pro rata shareholder that has made a QEF election
November 4, 2002 768 2002–44 I.R.B.
with respect to stock of a foreign corpo- person with respect to such stock. The IRS determining the taxpayer’s adjusted basis
ration is not required to include its pro rata considered imposing reporting and record will apply only for purposes of section 1296
share of ordinary income and capital gains keeping requirements on the foreign enti- and the regulations thereunder. Accord-
under section 1293 for years in which the ties to track the adjustments to the ad- ingly, any gain or loss recognized on the
foreign corporation is not a PFIC. justed basis of any section 1296 stock they disposition of section 1296 stock that is at-
In order to accomplish this suspension held directly or indirectly. The IRS de- tributable to the period before the indi-
of mark to market treatment, the proposed cided not to adopt this approach in the pro- vidual became a United States person will
regulations start a new holding period, for posed regulations because one of the be subject to the general rules of the Code,
all purposes of the PFIC rules, in stock that motivations for the enactment of section including any limitation on the deductibil-
is marked to market under section 1296 be- 1296 was to provide an alternative tax re- ity of a loss, for example, under section
ginning on the first day of the first tax- gime to section 1291 for taxpayers that 1211.
able year beginning after the last taxable could not obtain sufficient information from
year for which section 1296 applied. Ac- a PFIC to make a QEF election. Com- 4. Indirect ownership of PFIC stock
cordingly, prior periods during which the ments are requested about other approaches
Except as discussed below in the case
foreign corporation was a PFIC, but for for satisfying the compliance obligations of
of eligible RICs, the proposed regulations
which the shareholder had a section 1296 U.S. persons making a section 1296 elec-
apply the specific attribution rules of sec-
election in effect, are not included in such tion and the intervening entity or entities
tion 1296(g) in determining whether PFIC
shareholder’s holding period for purposes through which such stock is owned.
stock is considered owned by a taxpayer for
of applying section 1298(b)(1). The taxpayer and the entity through
purposes of section 1296 and, therefore,
Cessation of a foreign corporation’s sta- which the taxpayer owns section 1296 stock
with respect to which the taxpayer is per-
tus as a PFIC will not, however, termi- may have different taxable years. Consis-
mitted to make a section 1296 election.
nate a section 1296 election (although a tent with the general approach of sections
Thus, a United States person will be per-
shareholder may request consent of the 706(a), 652(c), and 662(c), a United States
mitted to make a section 1296 election with
Commissioner to revoke the election in such person who owns stock in a PFIC through
respect to stock owned through a foreign
instance, as discussed below). Thus, if the any foreign partnership, foreign trust, or for-
partnership, foreign trust, or foreign es-
foreign corporation once again becomes a eign estate determines the mark to mar-
tate. In general, stock owned by or for such
PFIC in any taxable year after a year in ket gain or mark to market loss with
entities will be considered as being owned
which it is not treated as a PFIC, the share- reference to the last day of the taxable year
proportionately by its partners or benefi-
holder’s original section 1296 election con- of the foreign partnership, foreign trust or
ciaries. For purposes of this rule, stock
tinues to apply and the shareholder must foreign estate and then includes that gain
owned, directly or indirectly, by or for a for-
mark to market the PFIC stock for such or loss in the taxable year of such United
eign trust described in sections 671 through
year. States person that includes the last day of
679, shall be considered as being owned
the taxable year of the entity.
2. Adjustment to basis proportionately by its grantors or other per-
Finally, if PFIC stock is acquired from
sons treated as owners under sections 671
a decedent by bequest, devise, or inherit-
The proposed regulations provide that a through 679 of any portion of the trust that
ance (or by the decedent’s estate) and a
United States person will increase the ad- includes the stock.
mark to market election was in effect on the
justed basis of its section 1296 stock by the The section 1296(g) attribution rules do
decedent’s date of death, the adjusted ba-
amount of mark to market gain recognized. not attribute ownership through foreign cor-
sis of such stock in the hands of the re-
Conversely, if the United States person is porations. Accordingly, a United States per-
cipient will be equal to the lesser of the
entitled to a deduction under this section, son will not be permitted to make a section
basis determined under section 1014 or the
the adjusted basis of its section 1296 stock 1296 election with respect to stock owned
adjusted basis of the stock in the hands of
is decreased by the amount of such deduc- indirectly through a foreign corporation.
the decedent immediately prior to his or her
tion. However, as discussed below, in instances
death.
If a United States person owns section where the foreign corporation is a CFC, the
1296 stock through a foreign partnership, 3. Rule for individuals that become foreign corporation is permitted to make a
foreign trust, or foreign estate, the basis subject to United States income taxation section 1296 election directly.
rules apply to both the United States per- Special attribution rules for eligible RICs
son and the entity or entities through which The proposed regulations provide that if are provided in § 1.1296(e)–1(f). There is
the United States person is considered to any individual becomes a United States per- a different attribution rule for RICs be-
own the stock. The increase or decrease in son in a taxable year beginning after De- cause section 1296(e)(2), which provides a
the adjusted basis of the stock in the hands cember 31, 1997, the adjusted basis (before special rule for RICs, states that stock
of the foreign partnership, foreign trust, or any adjustments resulting from the mark to owned, directly or indirectly, by the RIC,
foreign estate will be solely attributable to market election are made) of any stock in without reference to the ownership attri-
the electing United States person (in a man- a PFIC owned by such individual on the bution rules in section 1296(g), shall be
ner similar to an adjustment under sec- first day of such taxable year shall be treated as marketable stock. This approach
tion 743(b)), and will apply only for treated as being the greater of its fair mar- is consistent with former proposed
purposes of determining the subsequent U.S. ket value on such first day or its adjusted § 1.1291–8, which permitted certain RICs
income tax treatment of the United States basis on such first day. This special rule for to mark to market PFIC stock that it owned
2002–44 I.R.B. 769 November 4, 2002
directly or indirectly. Under the proposed regulations, if a sec- sioner. Such consent will only be granted,
An issue not addressed in these pro- tion 1296 election is made for a CFC with however, upon a showing of a substantial
posed regulations is the treatment of cer- respect to its PFIC stock, the PFIC rules do change in circumstances. Similar rules ap-
tain situations involving multiple tiers of not also apply separately to any United ply in the case of the revocation of a QEF
PFICs. For example, assume a United States States shareholder, as defined in section election.
person owns marketable stock in a PFIC, 951(b), with respect to its pro rata share of
7. Coordination rules for first year of
that itself owns stock in a second PFIC, the the PFIC stock held by the CFC. Instead,
election
ownership of which is attributable to the the United States shareholder generally will
United States person under section recognize the mark to market gain as an in- Finally, the proposed regulations pro-
1298(a)(2). If the United States person clusion of income under section 951(a). vide coordination rules that apply to the first
makes a section 1296 election with re- Thus, United States shareholders of CFCs taxable year to which section 1296 ap-
spect to stock of the upper-tier PFIC, the are appropriately excluded from the appli- plies. A United States person (other than a
annual mark to market inclusions of in- cation of section 1291 if a section 1296 RIC) whose holding period includes a pe-
come under section 1296 will be based on election is made by the CFC. This rule, riod when the foreign corporation was a
the fair market value of the upper-tier PFIC however, does not apply to United States PFIC and for which a QEF election had not
stock, whose value should reflect the value persons who own stock of the CFC but are been made generally will be subject to sec-
of the lower-tier PFIC, as such stock is an not United States shareholders within the tion 1291 in the year of the election and
asset of the upper-tier PFIC. However, un- meaning of section 951(b). Those United subject to section 1296 in subsequent years.
der current law, the United States person States persons continue to be subject to the Special rules also apply to RICs for the first
continues to be subject to taxation with re- PFIC provisions with respect to the stock year in which a section 1296 election ap-
spect to its indirect ownership of the lower- of such foreign corporation, and may avail plies.
tier PFIC under section 1291 on any excess themselves of a QEF election. This rule is
distributions from the lower-tier PFIC or consistent with the CFC/PFIC overlap rule D. Changes to § 1.1296(e)–1(b)
gain from an indirect disposition of the in section 1297(e), which eliminates the ap-
lower-tier PFIC stock (although the con- plication of the PFIC provisions solely for As discussed above, a section 1296 elec-
sequences from the tiered ownership may United States shareholders of the entity that tion is only available for marketable stock
be ameliorated by adjustments to the ba- is both a PFIC and a CFC. Finally, com- of a PFIC. Section 1296(e) defines mar-
sis of the upper-tier PFIC stock). See pro- ments are requested about whether simi- ketable stock to include any stock which is
posed §§ 1.1291–2(f), and 1.1291–3(e). lar rules should apply to United States regularly traded on certain securities ex-
Similar issues arise if the United States per- persons that are United States sharehold- changes or other markets. The 2000 final
son makes a QEF election with respect to ers of a CFC solely by application of sec- regulations provide guidance regarding the
the lower-tier PFIC. Comments are re- tion 953(c)(1)(A). definition of marketable stock for pur-
quested regarding coordination rules or other poses of section 1296. In particular, the
adjustments that may be appropriate to ad- 6. Elections 2000 final regulations define regularly
dress this situation and similar structures in- traded for these purposes to require that a
The proposed regulations provide that a class of stock be traded on at least 15 days
volving a United States person that owns
United States person may make a section during each calendar quarter for any cal-
stock directly and indirectly in tiers of
1296 election for a taxable year begin- endar year. Taxpayers have noted that this
PFICs.
ning after December 31, 1997, by the due rule would exclude stock issued as a re-
5. Treatment of CFCs as United States date (including extensions) of the United sult of an initial public offering (IPO) from
persons States person’s federal income tax return. qualifying as marketable stock for the year
The proposed regulations further provide of issuance in many instances (e.g., stock
A CFC that owns PFIC stock is treated that a section 1296 election of a CFC is issued through a public offering occur-
as a United States person for purposes of made by its controlling United States share- ring other than during the first quarter of
section 1296 and, as noted above, is per- holders by the due date (including exten- the year). Therefore, these regulations pro-
mitted to make a section 1296 election di- sions) of their federal income tax returns pose modifying the current rule in such in-
rectly. If a section 1296 election is made in accordance with the general rules for stances.
with respect to PFIC stock owned by a CFC elections by a CFC under § 1.964–1(c)(5). The proposed regulations provide that the
directly, or treated as owned by a CFC ap- The proposed regulations provide that a stock issued in a public offering will qualify
plying the section 1296(g) attribution rules, section 1296 election applies to the year for as regularly traded if the stock is traded on
then any mark to market gains are included which made and to each succeeding year one or more qualified exchanges or other
in the gross income of the CFC as for- unless the election is terminated or re- markets, other than in de minimis quanti-
eign personal holding company income un- voked. A section 1296 election automati- ties, on 1/6 of the days remaining in the
der section 954(c)(1)(A) and any mark to cally terminates when (i) the PFIC stock quarter in which the offering occurs, and
market losses are treated as deductions al- ceases to be marketable, or (ii) when the on at least 15 days during each remain-
locable to such foreign personal holding PFIC stock is marked to market under an- ing quarter of the calendar year. If the pub-
company income for purposes of comput- other provision of chapter 1 of the Code. lic offering occurs in the fourth quarter of
ing net foreign base company income un- A section 1296 election also may be re- the calendar year, the stock will qualify as
der § 1.954–1(c). voked with the consent of the Commis- regularly traded if it is traded on such ex-
November 4, 2002 770 2002–44 I.R.B.
changes or markets, other than in de mini- will be given to any written comments (a PART 1—INCOME TAXES
mis quantities, on the greater of 1/6 of the signed original and eight (8) copies) that are
days remaining in the quarter in which the submitted timely (in a manner described in Paragraph 1. The authority citation for
offering occurs, or 5 days. The proposed the “ADDRESSES” portion of this pre- part 1 is amended by adding an entry in nu-
regulations also modify the anti-abuse rule amble) to the IRS. The IRS and Treasury merical order to read in part as follows:
in § 1.1296(e)–1(b)(2) to apply to these request comments on the clarity of the pro- Authority: 26 U.S.C. 7805 * * *
changes to the definition of regularly traded. posed rules and how they can be made Section 1.1296–1 also issued under 26
easier to understand. All comments will be USC 1296(g) and 26 USC 1298(f). * * *
E. Amendment of § 1.6031(a)–1 available for public inspection and copy- Par. 2. Section 1.1291–1, as proposed on
ing. April 1, 1992, at 57 FR 11024, is amended
In general, a foreign partnership that has by:
A public hearing is scheduled for No-
U.S. source income is required to file a U.S. 1. Revising the headings to paragraphs
vember 6, 2002, beginning at 10:00 a.m. in
Federal income tax return pursuant to (c) and (c)(1).
room 4718, Internal Revenue Building, 1111
§ 1.6031(a)–1(b)(1). An issue arises whether 2. Redesignating the text of paragraphs
Constitution Avenue, NW, Washington, DC.
a filing obligation is created on behalf of (c)(1) and (c)(2) as (c)(1)(i) and (c)(1)(ii),
Due to building security procedures, visi-
a foreign partnership where a U.S. part- respectively.
tors must enter at the Constitution Av-
ner of the foreign partnership makes a sec- 3. Adding new paragraphs (c)(2) and
enue entrance. In addition, all visitors must
tion 1296 election with respect to the U.S. (c)(3).
present photo identification to enter the
partner’s share of the PFIC stock held by 4. Revising paragraph (j)(1).
building. Because of access restrictions, visi-
the partnership. The income of the part- 5. Removing paragraph (j)(3).
tors will not be admitted beyond the im-
ner arising as a result of the section 1296 The revisions and addition read as
mediate entrance area more than 30 minutes
election generally will be U.S. source. See follows:
before the hearing starts. For information
sections 1296(c)(2) and 865(a), (i)(5). The
about having your name placed on the § 1.1291–1 Taxation of U.S. persons that
proposed regulations resolve this issue by
building access list to attend the hearing, are shareholders of section 1291 funds.
modifying § 1.6031(a)–1(b)(1) such that a
see the “FOR FURTHER INFORMATION
foreign partnership will not be required to *****
CONTACT” portion of this preamble.
file a partnership return if the only rea- (c) Coordination with other
The rules of 26 CFR 601.601(a)(3) ap-
son for filing a return, but for this special PFIC rules—(1) Coordination with QEF
ply to this hearing. Persons who wish to
rule, would be U.S. source income result- rules.* * *
present oral comments must submit writ-
ing from a direct or indirect partner’s sec- (2) Coordination with section 1296: dis-
ten comments and an outline of the top-
tion 1296 election. tributions and dispositions. If PFIC stock
ics to be discussed and the time to be
Special Analysis devoted to each topic (a signed original and is marked to market under section 1296 for
eight (8) copies) by October 16, 2002. A any taxable year, then, except as provided
It has been determined that this notice period of 10 minutes will be allotted to each in § 1.1296–1(i), section 1291 and the regu-
of proposed rulemaking is not a signifi- person for making comments. An agenda lations thereunder shall not apply to any dis-
cant regulatory action as defined in Ex- showing the scheduling of the speakers will tribution with respect to section 1296 stock
ecutive Order 12866. Therefore, a regulatory be prepared after the deadline for review- (as defined in § 1.1296–1(a)(2)), or to any
assessment is not required. It has also been ing outlines has passed. Copies of the disposition of such stock, for such tax-
determined that section 553(b) of the Ad- agenda will be available free of charge at able year.
ministrative Procedure Act (5 U.S.C. chap- the hearing. (3) Coordination with mark to market
ter 5) does not apply to these regulations, rules under chapter 1 of the Internal Rev-
and, because the regulations do not im- Drafting Information enue Code other than section 1296—(i) In
pose a collection of information on small general. If PFIC stock is marked to mar-
The principal authors of this regula- ket for any taxable year under section 475
entities, the Regulatory Flexibility Act (5
tion are Mark Pollard and Laurie Hatten- or any other provision of chapter 1 of the
U.S.C. chapter 6) does not apply. Pursu-
Boyd, Office of Associate Chief Counsel Internal Revenue Code, other than sec-
ant to section 7805(f) of the Code, this no-
(International). However, other personnel tion 1296, regardless of whether the appli-
tice of proposed rulemaking will be
from the IRS and Treasury Department par- cation of such provision is mandatory or
submitted to the Chief Counsel for Advo-
ticipated in their development. results from an election by the taxpayer or
cacy of the Small Business Administra-
tion for comment on its impact on small another person, then, except as provided in
***** paragraph (c)(3)(ii) of this section, sec-
business.
Proposed Amendments to the tion 1291 and the regulations thereunder
Comments and Public Hearing shall not apply to any distribution with re-
Regulations
spect to such PFIC stock or to any dispo-
Before these proposed regulations are sition of such PFIC stock for such taxable
Accordingly, 26 CFR part 1 is proposed
adopted as final regulations, consideration year. See §§ 1.1295–1(i)(3) and 1.1296–
to be amended as follows:
1(h)(3)(i) for rules regarding the automatic
termination of an existing election under
section 1295 or section 1296 when a tax-
2002–44 I.R.B. 771 November 4, 2002
payer marks to market PFIC stock under § 1.1295–1 Qualified electing funds (ii) Special rule. Notwithstanding para-
section 475 or any other provision of chap- ***** graph (i)(5)(i) of this section, a shareholder
ter 1 of the Internal Revenue Code. whose section 1295 election was termi-
(i)* * *
(ii) Coordination rule—(A) Notwith- nated pursuant to paragraph (i)(3) of this
(3) Automatic termination. If a United
standing any provision in this section to the section, and either whose section 1296 elec-
States person, or the United States share-
contrary, the rule of paragraph (c)(3)(ii)(B) tion has subsequently been terminated be-
of this section shall apply to the first tax- holder on behalf of a controlled foreign cor- cause its PFIC stock ceased to be
able year in which a United States person poration, makes an election pursuant to marketable or who no longer marks to mar-
marks to market its PFIC stock under a pro- section 1296 and the regulations thereun- ket such stock under another provision of
vision of chapter 1 of the Internal Rev- der with respect to PFIC stock for which chapter 1 of the Internal Revenue Code,
enue Code, other than section 1296, if such a QEF election is in effect, or marks to mar- may make a section 1295 election with re-
foreign corporation was a PFIC for any tax- ket such stock under another provision of spect to its PFIC stock before the sixth tax-
able year, prior to such first taxable year, chapter 1 of the Internal Revenue Code, the able year in which its prior section 1295
during the United States person’s holding QEF election is automatically terminated election was terminated.
period (as defined in section 1291(a)(3)(A) with respect to such stock that is marked *****
and § 1.1296–1(f)) in such stock, and for to market under section 1296 or another (k) Effective dates. Except as other-
which such corporation was not treated as provision of Chapter 1 of the Internal Rev- wise provided, paragraphs (b)(2)(iii), (b)(3),
a QEF with respect to such United States enue Code. Such termination shall be ef- (b)(4), and (c) through (j) of this section are
person. fective on the last day of the shareholder’s applicable to taxable years of sharehold-
(B) For the first taxable year of a United taxable year preceding the first taxable year ers beginning after December 31, 1997.
States person that marks to market its PFIC for which the section 1296 election is in ef- However, taxpayers may apply the rules un-
stock under any provision of chapter 1 of fect or such stock is marked to market un- der paragraphs (b)(4), (f) and (g) of this sec-
the Internal Revenue Code, other than sec- der another provision of chapter 1 of the tion to a taxable year beginning before
tion 1296, such United States person shall, Internal Revenue Code. January 1, 1998, provided the statute of
in lieu of the rules under which the United Example. A, a U.S. corporation, owns directly 100 limitations on the assessment of tax has not
States person marks to market, apply the shares of marketable stock in foreign corporation X,
a PFIC. A also owns a 50 percent interest in Y, a for-
expired as of April 27, 1998, and, in the
rules of § 1.1296–1(i)(2) and (3) as if the eign partnership that owns 200 shares of X. Accord- case of paragraph (b)(4) of this section, the
United States person had made an elec- ingly, under section 1298(a)(3) and § 1.1296–1(e)(1), taxpayers who filed the joint return have
tion under section 1296 for such first tax- A is treated as indirectly owning 100 shares of X. A consistently applied the rules of that sec-
able year. also owns 100 percent of the stock of Z, a foreign cor- tion to all taxable years following the year
poration that is not a PFIC. Z owns 100 shares of X,
***** and therefore under section 1298(a)(2)(A), A is treated
the election was made. Paragraph (b)(3)(v)
(j) Effective date—(1) In general. Ex- as owning the 100 shares of X owned by Z. For tax- of this section is applicable as of Febru-
cept as otherwise provided in this para- able year 2003, A has a QEF election in effect with ary 7, 2000, however, a taxpayer may ap-
respect to X that applies to all 300 shares of X stock ply the rules to a taxable year prior to the
graph (j), §§ 1.1291–1 through 1.1291–7
owned directly or indirectly by A. See generally applicable date provided the statute of limi-
apply on April 11, 1992. Section 1.1291– § 1.1295–1(c)(1). For taxable year 2004, A makes a
1(c)(2) and (3) apply as of the date final timely election pursuant to section 1296 and the regu-
tations on the assessment of tax for that tax-
regulations are published in the Federal lations thereunder. For purposes of section 1296, A able year has not expired. Paragraphs (i)(3)
Register. Shareholders of 1291 funds, in de- is treated as owning stock held indirectly through a and (i)(5)(ii) of this section are applicable
partnership, but not through a foreign corporation. Sec- as of the date final regulations are pub-
termining their liability under sections 1291
tion 1296(g); § 1.1296–1(e)(1). Accordingly, A’s sec- lished in the Federal Register.
through 1297 beginning after December 31, tion 1296 election covers the 100 shares it owns
1986, and before the effective date of these directly and the 100 shares it owns indirectly through
Par. 4. Section 1.1296–1 is added to read
regulations, must apply reasonable inter- Y, but not the 100 shares owned by Z. With respect as follows:
pretations of the statute and legislative his- to the first 200 shares, A’s QEF election is automati-
cally terminated effective December 31, 2003. With
§ 1.1296–1 Mark to market election for
tory and employ reasonable methods to marketable stock.
respect to the 100 shares A owns through foreign cor-
apply the interest charge. poration Z, A’s QEF election remains in effect un- (a) Definitions—(1) Eligible RIC. An eli-
***** less invalidated, terminated, or revoked pursuant to this gible RIC is a regulated investment com-
paragraph (i).
Par. 3. Section 1.1295–1 is amended by: pany that offers for sale, or has outstanding,
1. Redesignating paragraphs (i)(3) and ***** any stock of which it is the issuer and
(i)(4) as paragraphs (i)(4) and (i)(5), re- (5) Effect after invalidation, termina- which is redeemable at net asset value, or
spectively. tion, or revocation— (i) In general. With- that publishes net asset valuations at least
2. Adding a new paragraph (i)(3). out the Commissioner’s consent, a annually.
3. Revising newly designated paragraph shareholder whose section 1295 election (2) Section 1296 stock. The term sec-
(i)(5). was invalidated, terminated, or revoked un- tion 1296 stock means marketable stock in
4. Revising paragraph (k). der this paragraph (i) may not make the sec- a passive foreign investment company
The revisions and addition read as tion 1295 election with respect to the PFIC (PFIC), including any PFIC stock owned
follows: before the sixth taxable year in which the directly or indirectly by an eligible RIC, for
invalidation, termination, or revocation be- which there is a valid section 1296 elec-
came effective. tion. Section 1296 stock does not include
November 4, 2002 772 2002–44 I.R.B.
stock of a foreign corporation that previ- ration (CFC) that owns directly, or is treated able year equal to the lesser of the amount
ously had been a PFIC, and for which a as owning under this section, marketable of such excess or the unreversed inclu-
section 1296 election remains in effect. stock, as defined in § 1.1296(e)–1, in a sions with respect to such stock (mark to
(3) Unreversed inclusions—(i) Gen- PFIC may make an election to mark to mar- market loss).
eral rule. The term unreversed inclusions ket such stock in accordance with the pro- (4) Character of loss—(i) Losses not in
means with respect to any section 1296 visions of section 1296 and this section. excess of unreversed inclusions. Any mark
stock, the excess, if any, of— (2) Election applicable to specific United to market loss allowed as a deduction un-
(A) The amount of mark to market gain States person. A section 1296 election ap- der paragraph (c)(3) of this section, and any
included in gross income of the United plies only to the United States person (or loss on the sale or other disposition of sec-
States person under paragraph (c)(1) of this CFC that is treated as a U.S. person un- tion 1296 stock, to the extent that such loss
section with respect to such stock for prior der paragraph (g)(2) of this section) that does not exceed the unreversed inclusions
taxable years; over makes the election. Accordingly, a United attributable to such stock, shall be treated
(B) The amount allowed as a deduc- States person’s section 1296 election will as an ordinary loss, deductible in comput-
tion to the United States person under para- not apply to a transferee of section 1296 ing adjusted gross income.
graph (c)(3) of this section with respect to stock. (ii) Losses in excess of unreversed in-
such stock for prior taxable years. (3) Election applicable to specific cor- clusions. (A) Any loss recognized on the
(ii) Section 1291 adjustment. The amount poration only. A section 1296 election is sale or other disposition of section 1296
referred to in paragraph (a)(3)(i)(A) of this made with respect to a single foreign cor- stock in excess of any prior unreversed in-
section shall include any amount subject to poration, and thus a separate section 1296 clusions will be subject to the rules gen-
section 1291 under the coordination rule of election must be made for each foreign cor- erally applicable to losses provided
paragraph (i)(2)(ii) of this section. poration that otherwise meets the require- elsewhere in the Internal Revenue Code and
(iii) Example. An example of the com- ments of this section. A United States the regulations thereunder.
putation of unreversed inclusions is as person’s section 1296 election with re- (B) The following example illustrates the
follows: spect to stock in a foreign corporation ap- treatment of losses in excess of unreversed
Example. A, a United States person, acquired stock
plies to all marketable stock of the inclusions:
in D, a foreign corporation, on January 1, 2003, for
$150. At such time and at all times thereafter, D was corporation that the person owns directly, Example. A, a United States person and a calen-
a PFIC and A’s stock in D was marketable. For tax- or is treated as owning under paragraph (e) dar year taxpayer, purchased marketable stock in FC,
a foreign corporation that was a PFIC, for $1,000 on
able years 2003 and 2004, D was a nonqualified fund of this section, at the time of the election
subject to taxation under section 1291. A made a timely January 31, 2003. A made a section 1296 election with
or that is subsequently acquired. respect to the stock of FC for 2003. At the close of
section 1296 election with respect to the D stock, ef-
fective for tax year 2005. The fair market value of the
(c) Effect of election—(1) Recognition 2003, the fair market value of A’s stock in FC was
D stock was $200 as of December 31, 2004, and $240 of gain. If the fair market value of sec- $1,200. Under paragraph (c)(1) and (2) of this sec-
as of December 31, 2005. Additionally, D made no tion 1296 stock on the last day of the tion, A included $200 of mark to market gain as or-
distribution with respect to its stock for the taxable dinary income for 2003, and pursuant to paragraph
United States person’s taxable year ex- (d)(1) of this section, increased his basis in the stock
years at issue. In 2005, pursuant to paragraph (i)(2)(ii) ceeds its adjusted basis, the United States
of this section, A must include the $90 gain in the D by that amount. On June 15, 2004, A sold his stock
stock in accordance with the rules of section 1291 for
person shall include in gross income for its in FC for $900. At that time, A’s unreversed inclu-
purposes of determining the deferred tax amount and taxable year the excess of the fair market sions with respect to the stock in FC were $200. Ac-
any applicable interest. Nonetheless, for purposes of value of such stock over its adjusted ba- cordingly, A may deduct the amount equal to his
determining the amount of the unreversed inclu- unreversed inclusions, $200, as an ordinary loss. The
sis (mark to market gain). $100 loss in excess of A’s unreversed inclusions will
sions pursuant to paragraph (a)(3)(ii) of this sec- (2) Character of gain. (i) Mark to mar-
tion, A will include the $90 of gain that was taxed be treated as a long term capital loss because A has
under section 1291 and not the interest thereon.
ket gain, and any gain on the sale or other held the FC stock for more than one year.
(iv) Special rule for regulated invest- disposition of section 1296 stock, shall be (5) Application of election to separate
ment companies. In the case of a regu- treated as ordinary income. lots of stock. (i) In the case in which a
lated investment company which had (ii) Example. The following example il- United States person purchased or acquired
elected to mark to market the PFIC stock lustrates this paragraph (c)(2): shares of stock in a PFIC at different prices,
held by such company as of the last day of Example. A, a United States person, purchases the rules of this section shall be applied in
stock in C, a foreign corporation that is not a PFIC, a manner consistent with the rules of
the taxable year preceding such compa- in 1990 for $1,000. On January 1, 2003, when the fair
ny’s first taxable year for which such com- § 1.1012–1.
market value of the C stock is $1,100, foreign cor-
pany makes a section 1296 election, the poration C becomes a PFIC. A makes a timely sec- (ii) Example. The following example il-
amount referred to in paragraph (a)(3)(i)(A) tion 1296 election for year 2003. On December 31, lustrates this paragraph (c)(5):
2003, the fair market value of the C stock is $1,200. Example. On January 1, 2003, United States cor-
of this section shall include amounts pre-
For taxable year 2003, A includes $200 of mark to poration A purchased 100 shares (first lot) of stock in
viously included in gross income by the market gain (the excess of the fair market value of C foreign corporation X, a PFIC, for $500 ($5 per share).
company pursuant to such mark to mar- stock ($1,200) over A’s adjusted basis ($1,000)) in On June 1, 2003, A purchased 100 shares (second lot)
ket election with respect to such stock for gross income as ordinary income. of stock in X for $1,000 ($10 per share). A made a
prior taxable years. See Notice 92–53, (3) Recognition of loss. If the adjusted timely section 1296 election with respect to its stock
in X for taxable year 2003. On December 31, 2003,
1992–2 C.B. 384. basis of section 1296 stock exceeds its fair
the fair market value of X stock was $8 per share. For
(b) Application of section 1296 market value on the last day of the United taxable year 2003, A recognizes $300 of gross in-
election—(1) In general. Any United States States person’s taxable year, such person come under paragraph (c)(1) of this section with re-
person and any controlled foreign corpo- shall be allowed a deduction for such tax- spect to the first lot, and adjusts its basis in that lot
2002–44 I.R.B. 773 November 4, 2002
to $800 pursuant to paragraph (d)(1) of this section. corporation, with no direct or indirect shareholders that stock on December 31, 2003, is $110. Under para-
With respect to the second lot, A is not permitted to are U.S. persons, owns a 50% interest in FP. A, B, C, graph (d)(5)(i) of this section, X computes the amount
recognize a loss under paragraph (c)(3) of this sec- and FP are all calendar year taxpayers. In 2002, FP of mark to market gain or loss in 2003 by reference
tion for taxable year 2003. Although A’s adjusted ba- purchases stock in a PFIC for $1,000. A makes a to an adjusted basis of $100, and therefore X in-
sis in that stock exceeds its fair market value by $200, timely section 1296 election for taxable year 2003. On cludes $10 in gross income as mark to market gain
A has no unreversed inclusions with respect to that December 31, 2003, the fair market value of the PFIC under paragraph (c)(1) of this section. Additionally,
particular lot of stock. On July 1, 2004, A sells 100 stock is $1,100. A includes $20 of ordinary income under paragraph (d)(1) of this section, X’s adjusted
shares of X stock for $900. Assuming that A ad- in 2003 under paragraphs (c)(1) and (2) of this sec- basis in the stock for purposes of this section is in-
equately identifies (in accordance with the rules of tion. A increases its basis in its FP partnership inter- creased to $110 (or to $60 for all other tax purposes).
§ 1.1012–1(c)) the shares of X corporation stock sold est by $20. FP increases its basis in the stock to $1,020 X sells the stock in 2004 for $120. For purposes of
as being from the second lot, A recognizes $100 of solely for purposes of determining the subsequent treat- applying section 1001, X must use its original basis
long term capital loss pursuant to paragraph (c)(4)(ii) ment of A, under chapter 1 of the Internal Revenue of $50, with any adjustments under paragraph (d)(1)
of this section. Code, with respect to such stock. In 2004, FP sells the of this section, $10 in this case, and therefore X rec-
stock for $1,200. For purposes of determining the ognizes $60 of gain. Under paragraph (c)(2) of this
(6) Source rules. The source of any section (which is applied using an adjusted basis of
amount of gain of A, FP will be treated as having $180
amount included in gross income under $110), $10 of such gain is treated as ordinary in-
in gain of which $20 is allocated to A. A’s $20 of gain
paragraph (c)(1) of this section, or the al- will be treated as ordinary income under paragraph come. The remaining $50 of gain from the sale of the
location and apportionment of any amount (c)(2) of this section. For purposes of determining the stock is long-term capital gain because X held such
allowed as a deduction under paragraph amount of gain attributable to B, FP will be treated stock for more than one year.
(c)(3) of this section, shall be determined as having $200 gain, $60 of which will be allocated (e) Stock owned through certain for-
in the same manner as if such amounts were to B. eign entities—(1) In general. Except as pro-
gain or loss (as the case may be) from the (3) Stock owned indirectly by an eli- vided in paragraph (e)(2) of this section, the
sale of stock in the PFIC. gible RIC. Paragraph (d)(2) of this sec- following rules shall apply in determin-
(d) Adjustment to basis—(1) Stock held tion shall also apply to an eligible RIC ing stock ownership for purposes of this
directly. The adjusted basis of the section which is an indirect shareholder under section. PFIC stock owned, directly or in-
1296 stock shall be increased by the amount § 1.1296(e)–1(f) of stock in a PFIC and has directly, by or for a foreign partnership, for-
included in the gross income of the United a valid section 1296 election in effect. eign trust (other than a foreign trust
States person under paragraph (c)(1) of this (4) Stock acquired from a decedent. In described in sections 671 through 679), or
section with respect to such stock, and de- the case of stock of a PFIC which is ac- foreign estate shall be considered as be-
creased by the amount allowed as a de- quired by bequest, devise, or inheritance (or ing owned proportionately by its partners
duction to the United States person under by the decedent’s estate) and with respect or beneficiaries. PFIC stock owned, di-
paragraph (c)(3) of this section with re- to which a section 1296 election was in ef- rectly or indirectly, by or for a foreign trust
spect to such stock. fect as of the date of the decedent’s death, described in sections 671 through 679 shall
(2) Stock owned through certain for- notwithstanding section 1014, the basis of be considered as being owned proportion-
eign entities. (i) In the case of section 1296 such stock in the hands of the person so ac- ately by its grantors or other persons treated
stock that a United States person is treated quiring it shall be the adjusted basis of such as owners under sections 671 through 679
as owning through certain foreign entities stock in the hands of the decedent imme- of any portion of the trust that includes the
pursuant to paragraph (e) of this section, the diately before his death (or, if lesser, the ba- stock. The determination of a person’s pro-
basis adjustments under paragraph (d)(1) of sis which would have been determined portionate interest in a foreign partner-
this section shall apply to such stock in the under section 1014 without regard to this ship, foreign trust or foreign estate will be
hands of the foreign entity actually hold- paragraph). made on the basis of all the facts and cir-
ing such stock, but only for purposes of de- (5) Transition rule for individuals be- cumstances. Stock considered owned by
termining the subsequent treatment under coming subject to United States income reason of this paragraph shall, for pur-
chapter 1 of the Internal Revenue Code of taxation—(i) In general. If any individual poses of applying the rules of this sec-
the United States person with respect to becomes a United States person in a tax- tion, be treated as actually owned by such
such stock. Such increase or decrease in the able year beginning after December 31, person.
adjusted basis of the section 1296 stock 1997, solely for purposes of this section, the (2) Stock owned indirectly by eligible
shall constitute an adjustment to the basis adjusted basis, before adjustments under this RICs. The rules for attributing ownership
of partnership property only with respect to paragraph (d), of any section 1296 stock of stock contained in § 1.1296(e)–1(f) will
the partner making the section 1296 elec- owned by such individual on the first day apply to determine the indirect ownership
tion. Corresponding adjustments shall be of such taxable year shall be treated as be- of PFIC stock by an eligible RIC.
made to the adjusted basis of the United ing the greater of its fair market value or (f) Holding period. Solely for purposes
States person’s interest in the foreign en- its adjusted basis on such first day. of sections 1291 through 1298, if section
tity and in any intermediary entity described (ii) An example of the transition rule for 1296 applied to stock with respect to the
in paragraph (e) of this section through individuals becoming subject to United taxpayer for any prior taxable year, the tax-
which the United States person holds the States income taxation is as follows: payer’s holding period in such stock shall
PFIC stock. Example. X, a nonresident alien individual, pur- be treated as beginning on the first day of
chases marketable stock in a PFIC for $50 in 1995. the first taxable year beginning after the last
(ii) Example. The following example il- On January 1, 2003, X becomes a United States per-
taxable year for which section 1296 so ap-
lustrates this paragraph (d)(2): son and makes a timely section 1296 election with re-
Example. FP is a foreign partnership. A, a U.S. cor- spect to the stock in accordance with paragraph (h) plied.
poration, owns a 20% interest in FP. B, a U.S. cor- of this section. The fair market value of the stock on (g) Special rules—(1) Certain disposi-
poration, owns a 30% interest in FP. C, a foreign January 1, 2003, is $100. The fair market value of the tions of stock. To the extent a United States
November 4, 2002 774 2002–44 I.R.B.
person is treated as actually owning stock cordance with paragraphs (c) and (i)(2)(ii) 1297 or treated as a PFIC under section
in a PFIC under paragraph (e) of this sec- of this section as of the last day of the tax- 1298(b)(1) (taking into account the hold-
tion, any disposition which results in the able year of the foreign partnership, for- ing period rule of paragraph (f) of this sec-
United States person being treated as no eign trust or foreign estate and then included tion). Cessation of a foreign corporation’s
longer owning such stock, and any dispo- in the taxable year of such United States status as a PFIC will not, however, termi-
sition by the person owning such stock, person that includes the last day of the tax- nate a section 1296 election. Thus, if a for-
shall be treated as a disposition by the able year of the entity. eign corporation is a PFIC in a taxable year
United States person of the stock in the (h) Elections—(1) Timing and manner after a year in which it is not treated as a
PFIC. for making a section 1296 election—(i) PFIC, the United States person’s original
(2) Treatment of CFC as a United States United States persons. A United States per- election (unless revoked or terminated in ac-
person. In the case of a CFC that owns, or son that owns marketable stock in a PFIC, cordance with paragraph (h)(3) of this sec-
is treated as owning under paragraph (e) of or is treated as owning marketable stock un- tion) continues to apply and the shareholder
this section, section 1296 stock: der paragraph (e) of this section, on the last must include any mark to market gain or
(i) Other than with respect to the sourc- day of the taxable year of such person, and loss in such year.
ing rules in paragraph (c)(6) of this sec- that wants to make a section 1296 elec- (3) Revocation or termination of
tion, this section shall apply to the CFC in tion, must make a section 1296 election for election—(i) In general. A United States
such taxable year on or before the due date person’s section 1296 election is termi-
the same manner as if such corporation
(including extensions) of the United States nated if the section 1296 stock ceases to be
were a United States person. The CFC will
person’s income tax return for that year. The marketable; if the United States person
be treated as a foreign person for purposes
section 1296 election must be made on the elects, or is required, to mark to market the
of applying the source rules of paragraph
Form 8621, “Return by a Shareholder of section 1296 stock under another provi-
(c)(6).
a Passive Foreign Investment Company or sion of chapter 1 of the Internal Revenue
(ii) For purposes of subpart F of part III
Qualified Electing Fund”, included with the Code; or if the Commissioner, in the Com-
of subchapter N of the Internal Revenue
original tax return of the United States per- missioner’s discretion, consents to the
Code—
son for that year, or on an amended re- United States person’s request to revoke its
(A) Amounts included in the CFC’s
turn, provided that the amended return is section 1296 election upon a finding of a
gross income under paragraph (c)(1) or
filed on or before the election due date. substantial change in circumstances. A sub-
(i)(2)(ii) of this section shall be treated as
(ii) Controlled foreign corporations. A stantial change in circumstances for this pur-
foreign personal holding company income
section 1296 election by a CFC shall be pose may include a foreign corporation
under section 954(c)(1)(A); and
made by its controlling United States share- ceasing to be a PFIC.
(B) Amounts allowed as a deduction un-
holders, as defined in § 1.964–1(c)(5), and (ii) Timing of termination or revoca-
der paragraph (c)(3) of this section shall be
shall be included with the Form 5471, “In- tion. Where a section 1296 election is ter-
treated as a deduction allocable to for-
formation Return of U.S. Persons With Re- minated automatically (e.g., the stock ceases
eign personal holding company income for
spect To Certain Foreign Corporations”, for to be marketable), section 1296 will cease
purposes of computing net foreign base
that CFC by the due date (including ex- to apply beginning with the taxable year in
company income under § 1.954–1(c).
tensions) of the original income tax re- which such termination occurs. Where a
(iii) A United States shareholder, as de-
turns of the controlling United States section 1296 election is revoked with the
fined in section 951(b), of the CFC shall
shareholders for that year. A section 1296 consent of the Commissioner, section 1296
not be subject to section 1291 with re-
election by a CFC shall be binding on all will cease to apply beginning with the first
spect to any stock of the PFIC for the pe-
United States shareholders of the CFC. taxable year of the United States person af-
riod during which the section 1296 election
(iii) Retroactive elections for PFIC stock ter the revocation is granted unless other-
is in effect for that stock, and the holding
held in prior years. A late section 1296 wise provided by the Commissioner.
period rule of paragraph (f) of this sec-
tion shall apply to such United States share- election may be permitted only in accor- (4) Examples. The operation of the rules
holder. dance with § 301.9100 of this chapter. of this paragraph (h) are illustrated by the
(iv) The rules of this paragraph (g)(2) (2) Effect of section 1296 election—(i) following examples:
Example 1. X, a United States person, owns stock
shall not apply to a United States person In General. A section 1296 election will ap- in a PFIC. X makes a QEF election in 1996 with re-
that is a shareholder of the PFIC for pur- ply to the taxable year for which such elec- spect to such stock. For taxable year 1999, X makes
poses of section 1291, but is not a United tion is made and remain in effect for each a timely section 1296 election with respect to its stock,
States shareholder under section 951(b) with succeeding taxable year unless such elec- and thus its QEF election is automatically termi-
nated pursuant to § 1.1295–1(i)(3). In 2000, X’s stock
respect to the CFC making a section 1296 tion is revoked or terminated pursuant to
ceases to be marketable, and therefore its section 1296
election. paragraph (h)(3) of this section. election is automatically terminated under paragraph
(3) Timing of inclusions for stock owned (ii) Cessation of a foreign corporation (h)(3) of this section. Beginning with taxable year
through certain foreign entities. In the case as a PFIC. A United States person will not 2000, X is subject to the rules of section 1291 with
of section 1296 stock that a United States include mark to market gain or loss pur- respect to its stock in the PFIC unless it makes a new
QEF election. See § 1.1295–1(i)(5).
person is treated as owning through cer- suant to paragraph (c) of this section with
Example 2. The facts are the same as in Example
tain foreign entities pursuant to paragraph respect to any stock of a foreign corpora- 1, except that X’s stock in the PFIC becomes mar-
(e) of this section, the mark to market gain tion for any taxable year that such for- ketable again in 2001. X may make a new section
or mark to market loss is determined in ac- eign corporation is not a PFIC under section 1296 election with respect to such stock for its tax year
2002–44 I.R.B. 775 November 4, 2002
2001, or thereafter. X will be subject to the coordi- Example 1. A, a United States person and a cal- in the fourth quarter of the calendar year,
nation rules under paragraph (i) of this section un- endar year taxpayer, owns marketable stock in a PFIC such class of stock meets the requirements
less it made a new QEF election in 2000. that it acquired on January 1, 1995. At all times, A’s
PFIC stock was a nonqualified fund subject to taxa-
of paragraph (b)(1) of this section in the cal-
(i) Coordination rules for first year of
tion under section 1291. A made a timely section 1296 endar year of the offering if the stock is
election—(1) In general. Notwithstand-
election effective for taxable year 2003. At the close regularly traded on such exchanges or mar-
ing any provision in this section to the con- of taxable year 2003, the fair market value of A’s PFIC kets, other than in de minimis quantities, on
trary, the rules of this paragraph (i) shall stock exceeded its adjusted basis by $10. Pursuant to the greater of 1/6 of the days remaining in
apply to the first taxable year in which a paragraph (i)(2)(ii) of this section, A must treat the $10
gain under section 1291 as if the stock were dis-
the quarter in which the offering occurs, or
section 1296 election is effective with re-
posed of on December 31, 2003. Further, A will in- 5 days.
spect to marketable stock of a PFIC if such
crease its adjusted basis in the PFIC stock by the $10 (3) Anti-abuse rule. Trades that have as
foreign corporation was a PFIC for any tax- in accordance with paragraph (i)(2)(iii) of this sec- one of their principal purposes the meet-
able year, prior to such first taxable year, tion. ing of the trading requirements of para-
during the United States person’s holding Example 2. Assume the same facts as in Example
1, except that A is a RIC. In taxable year 2003, A
graph (b)(1) or (2) of this section shall be
period (as defined in paragraph (f) of this
would include $10 of ordinary income under para- disregarded. Further, a class of stock shall
section) in such stock, and for which such
graph (c)(1) of this section, and such amount will not not be treated as meeting the trading re-
corporation was not treated as a QEF with be subject to section 1291. A also must increase its quirement of paragraph (b)(1) or (2) of this
respect to such United States person. tax imposed under section 852 by the amount of in- section if there is a pattern of trades con-
(2) Shareholders other than regulated in- terest that would have been determined under sec-
tion 1291(c)(3), and no deduction will be permitted
ducted to meet the requirement of para-
vestment companies. For the first taxable
for such amount. Finally, under paragraph (d)(1) of graph (b)(1) or (2) of this section. Similarly,
year of a United States person (other than
this section, A will increase its adjusted basis in the paragraph (b)(2) of this section shall not ap-
a regulated investment company) for which PFIC stock by $10. ply to a public offering of stock that has as
a section 1296 election is in effect with re- (j) Effective Date. The provisions is this one of its principal purposes to avail it-
spect to the stock of a PFIC, such United section are applicable as of the date final self of the reduced trading requirements un-
States person shall, in lieu of the rules of regulations are published in the Federal der the special rule for the calendar year of
paragraphs (c) and (d) of this section— Register. an initial public offering. For purposes of
(i) Apply the rules of section 1291 to any
***** applying the immediately preceding sen-
distributions with respect to, or disposi-
Par. 5. Section 1.1296(e)–1 is amended tence, consideration will be given to
tion of, section 1296 stock;
by: whether the trading requirements of para-
(ii) Apply section 1291 to the amount of
1. Revising paragraph (b)(2). graph (b)(1) of this section are satisfied in
the excess, if any, of the fair market value
2. Adding paragraph (b)(3). the subsequent calendar year.
of such section 1296 stock on the last day
of the United States person’s taxable year 3. Revising both references to “sec- *****
over its adjusted basis, as if such amount tions 958(a)(1) and (2)” in paragraph (f)(1) Par. 6. Section 1.6031(a)–1 is amended
were gain recognized from the disposi- to read “section 1298(a)”. by:
tion of stock on the last day of the taxpay- The revision and addition reads as 1. Redesignating the text of paragraph
er’s taxable year; and follows: (b)(1) as (b)(1)(i).
(iii) Increase its adjusted basis in the sec- 2. Adding a heading to newly desig-
§ 1.1296(e)–1 Definition of marketable
tion 1296 stock by the amount of excess, nated paragraph (b)(1)(i).
stock.
if any, subject to section 1291 under para- 3. Adding paragraph (b)(1)(ii).
graph (i)(2)(ii) of this section. ***** The additions read as follows:
(3) Shareholders that are regulated in- (b) * * *
vestment companies. For the first taxable (2) Special rule for year of initial pub- § 1.6031(a)–1 Return of Partnership in-
year of a regulated investment company for lic offering. For the calendar year in which come.
which a section 1296 election is in effect a corporation initiates a public offering of
with respect to the stock of a PFIC, such a class of stock for trading on one or more *****
regulated investment company shall in- qualified exchanges or other markets, as de- (b) * * * (1) * * * (i) Filing require-
crease its tax under section 852 by the fined in paragraph (c) of this section, such ment. * * *
amount of interest that would have been im- class of stock meets the requirements of (ii) Special rule. For purposes of this
posed under section 1291(c)(3) for such tax- paragraph (b)(1) of this section for such year paragraph (b)(1) and paragraph (b)(3)(iii)
able year if such regulated investment if the stock is regularly traded on such ex- of this section, a foreign partnership will not
company were subject to the rules of para- changes or markets, other than in de mini- be considered to have derived income from
graph (i)(2) of this section, and not this mis quantities, on 1/6 of the days remaining sources within the United States solely be-
paragraph (i)(3). No deduction or increase in the quarter in which the offering oc- cause a U.S. partner marks to market his
in basis shall be allowed for the increase curs, and on at least 15 days during each pro rata share of PFIC stock held by the
in tax imposed under this paragraph (i)(3). remaining quarter of the taxpayer’s calen- foreign partnership pursuant to an elec-
(4) The operation of the rules of this dar year. In cases where a corporation ini- tion under section 1296.
paragraph (i) is illustrated by the follow- tiates a public offering of a class of stock
ing examples. *****
November 4, 2002 776 2002–44 I.R.B.
Robert E. Wenzel, NW, Washington, DC 20224. Alternatively, Estimates of capital or start-up costs and
Deputy Commissioner of taxpayers may submit electronic comments costs of operation, maintenance, and pur-
Internal Revenue directly to the IRS Internet site at chase of services to provide information.
www.irs.gov/regs. The public hearing will The collection of information in these
(Filed by the Office of the Federal Register on July 30, 2002,
8:45 a.m., and published in the issue of the Federal Regis- be held in Room 4718, Internal Revenue proposed regulations is in § 1.302–5(e) and
ter for July 31, 2002, 67 F.R. 49634) Building, 1111 Constitution Avenue, NW, § 1.1502–19(b)(5)(v). This collection of in-
Washington, DC. formation is required by the IRS to verify
compliance with section 302. This infor-
FOR FURTHER INFORMATION
Notice of Proposed mation will be used to determine whether
CONTACT: Concerning the proposed regu-
the amount of tax has been calculated cor-
Rulemaking and Notice of lations generally, Lisa K. Leong, (202) 622–
rectly. The collection of information is re-
Public Hearing 7530; concerning issues under sections 367, quired to properly determine the amount
861 and 864 of the Internal Revenue Code, permitted to be taken into account as a loss.
Aaron A. Farmer, (202) 622–3860; con- The respondents are shareholders (includ-
Redemptions Taxable as cerning submissions of comments, the hear- ing individuals, corporations and pass-
Dividends ing, and/or to be placed on the building through entities) whose stock in a
access list to attend the hearing, Treena V. corporation is redeemed or is treated as re-
REG–150313–01 Garrett, (202) 622–7180 (not toll-free num- deemed.
bers). Estimated total annual reporting burden:
AGENCY: Internal Revenue Service
1,500 hours.
(IRS), Treasury. SUPPLEMENTARY INFORMATION: Estimated average annual burden per
ACTION: Notice of proposed respondent: 30 minutes.
Paperwork Reduction Act
rulemaking and notice of public hearing. Estimated number of respondents: 3,000.
The collection of information contained Estimated annual frequency of responses:
in this notice of proposed rulemaking has On occasion.
SUMMARY: This document contains pro-
been submitted to the Office of Manage- An agency may not conduct or spon-
posed regulations that provide guidance re-
sor, and a person is not required to re-
garding the treatment of the basis of ment and Budget for review in accordance
spond to, a collection of information unless
redeemed stock when a distribution in re- with the Paperwork Reduction Act of 1995
it displays a valid control number assigned
demption of such stock is treated as a divi- (44 U.S.C. 3507(d)). Comments on the col-
by the Office of Management and Bud-
dend, as well as guidance regarding certain lection of information should be sent to the
get.
acquisitions of stock by related corpora- Office of Management and Budget, Attn: Books or records relating to a collec-
tions that are treated as distributions in re- Desk Officer for the Department of the tion of information must be retained as long
demption of stock. The proposed regulations Treasury, Office of Information and Regu- as their contents may become material in
affect shareholders whose stock in a cor- latory Affairs, Washington, DC 20503, with the administration of any internal revenue
poration is redeemed or is acquired by a copies to the Internal Revenue Service, law. Generally, tax returns and tax return
corporation related to the issuer of the stock, Attn: IRS Reports Clearance Officer, information are confidential, as required by
and are necessary to provide such share- W:CAR:MP:FP:S, Washington, DC 20224. 26 U.S.C. 6103.
holders with guidance regarding the treat-
Comments on the collection of informa-
ment of the basis of such stock. This Background
tion should be received by December 17,
document also provides notice of a pub-
2002. Comments are specifically requested
lic hearing on these proposed regulations. This document contains proposed revi-
concerning:
sions and amendments to the Income Tax
Whether the proposed collection of in- Regulations (26 CFR part 1) under sec-
DATES: Written or electronic comments formation is necessary for the proper per-
must be received by January 16, 2003. Re- tions 302, 304, 704, 861, 1371, 1374, and
formance of the functions of the IRS, 1502 of the Internal Revenue Code (Code).
quests to speak and outlines of topics to be
including whether the information will have The proposed regulations would amend the
discussed at the public hearing scheduled
practical utility; temporary and final regulations under sec-
for February 20, 2003, at 10 a.m. must be
The accuracy of the estimated burden as- tions 302, 304, 704, 861, 1371, 1374, and
received by January 30, 2003.
sociated with the proposed collection of in- 1502 to provide guidance concerning the
ADDRESSES: Send submissions to: formation (see below); treatment of the basis of stock redeemed or
CC:ITA:RU (REG–150313–01), room 5226, How the quality, utility, and clarity of the treated as redeemed where the redemp-
Internal Revenue Service, POB 7604, Ben information to be collected may be en- tion proceeds are treated as a dividend dis-
Franklin Station, Washington, DC 20044. hanced; tribution. These proposed regulations would
Submissions may be hand delivered Mon- How the burden of complying with the also amend the final regulations under sec-
day through Friday between the hours of proposed collection of information may be tion 304 to conform them to certain of the
8 a.m. and 5 p.m. to: CC:ITA:RU (REG– minimized, including through the applica- amendments made to section 304 by leg-
150313–01), Courier’s desk, Internal Rev- tion of automated collection techniques or islation, including section 226 of the Tax
enue Service, 1111 Constitution Avenue, other forms of information technology; and Equity and Fiscal Responsibility Act of
2002–44 I.R.B. 777 November 4, 2002
1982, Public Law 97–248 (96 Stat. 325, porations related to the issuer of the ac- C. The Unutilized Basis of Stock
490) (September 3, 1982), section 712(l) of quired stock. Pursuant to section 304(a)(1), Redeemed in Certain Transactions
the Deficit Reduction Act of 1984, Public an acquisition of stock by a corporation
Law 98–369 (98 Stat. 494, 953–55) (July from one or more persons that are in con- While sections 301 and 302 clearly set
18, 1984), section 1875(b) of the Tax Re- trol of both the acquiring and issuing cor- forth the character of property received in
form Act of 1986, Public Law 99–514 (100 porations is treated as if the property a redemption (whether actual or deemed)
Stat. 2085, 2894) (October 22, 1986), and received in respect of the acquired stock of stock, they do not prescribe the tax treat-
section 1013 of the Taxpayer Relief Act of were a distribution in redemption of the ment of the unutilized basis of the redeemed
1997, Public Law 105–34 (111 Stat. 788, stock of the acquiring corporation. Prior to stock or the stock treated as redeemed. In
918) (August 5, 1997). the amendments made by the Taxpayer Re- 1955, the IRS and Treasury promulgated
lief Act of 1997, section 304 provided that, regulations under section 302 that pro-
A. The Character of Property Received to the extent that the deemed distribution vide guidance in this regard in the case of
in Redemption of Stock was treated as a distribution to which sec- an actual redemption of stock. Section
tion 301 applies, the stock acquired was 1.302–2(c) of the Income Tax Regulations
Section 302 of the Code governs the tax states that “[i]n any case in which an
treated as having been transferred by the
treatment of distributions in redemption of amount received in redemption of stock is
person from whom acquired and as hav-
stock. The rules of section 302 attempt to treated as a distribution of a dividend,
ing been received by the corporation ac-
distinguish between distributions that “may proper adjustment of the basis of the re-
quiring it, as a contribution to the capital
have capital-gain characteristics because maining stock will be made with respect to
of such corporation. The Taxpayer Relief
they are not made pro rata among the vari- the stock redeemed.” The regulation con-
Act of 1997 amended section 304(a)(1) to
ous shareholders” and distributions “char- tains examples illustrating what consti-
provide that, to the extent that this deemed
acterized by what happens solely at the tutes a proper adjustment. In Example 1 and
distribution is treated as a distribution to
corporate level by reason of the assets dis- Example 3, the redeemed shareholder ac-
which section 301 applies, the shareholder
tributed.” S. Rep. No. 1622, 83d Cong., 2d tually owns stock of the redeeming corpo-
and the acquiring corporation are treated as
Sess. 49 (1954). Section 302(a) provides ration immediately after a redemption that
if the shareholder had transferred the stock
that a corporation’s redemption of its stock is treated as a distribution of a dividend. In
of the issuing corporation to the acquir-
is treated as a distribution in part or full those cases, the basis of the shares of the
ing corporation in exchange for stock of the
payment in exchange for the stock if the re- redeeming corporation that the shareholder
acquiring corporation in a transaction to
demption satisfies any one of the follow- owns after the redemption is increased by
which section 351(a) applies, and then the
ing criteria: (1) the redemption is not the basis of the redeemed shares. See also
acquiring corporation had redeemed the
essentially equivalent to a dividend (sec- United States v. Davis, 397 U.S. 301 (1970)
stock it was treated as issuing in that trans-
tion 302(b)(1)); (2) the redemption is sub- (interpreting § 1.302–2(c) to shift the ba-
action. Pursuant to section 304(a)(2), an ac-
stantially disproportionate (section sis of redeemed stock to other shares held
quisition of stock by a corporation
302(b)(2)); (3) the redemption completely by the redeemed shareholder, even where
controlled by the issuer of the acquired
terminates the redeemed shareholder’s in- those other shares are of a different class
stock is treated as if the property received
terest (section 302(b)(3)); or (4) the re- of stock than those redeemed); Rev. Rul.
in respect of the acquired stock was a dis-
demption is in connection with a qualifying 66–37, 1966–1 C.B. 209 (same). In Ex-
tribution in redemption of the stock of the
partial liquidation (section 302(b)(4)). If a ample 2, although the redeemed share-
issuing corporation.
redemption satisfies none of these crite- holder actually owns no stock of the
For purposes of section 304, control
ria, pursuant to section 302(d), the redemp- redeeming corporation immediately after a
means the ownership of stock possessing
tion is treated as a distribution of property redemption that is treated as a distribu-
at least 50 percent of either the total com-
to which section 301 applies. tion of a dividend, he does constructively
bined voting power of all classes of stock
Under sections 301(c)(1) and 316(a), a own stock of the redeeming corporation im-
entitled to vote or the total value of shares
distribution is treated as a dividend to the mediately after the redemption by reason
of all classes of stock. The determination
extent of the redeeming corporation’s earn- of his wife’s continuing ownership of stock
of the amount and source of the distribu-
ings and profits. Any portion of the distri- of the redeeming corporation. The example
tion that is treated as a dividend is made
bution that is not treated as a dividend is concludes that the redeemed sharehold-
as if the property received in respect of the
first applied against the adjusted basis of er’s basis in the redeemed shares shifts to
redeemed stock were distributed by the ac-
the redeemed stock to the extent of such ba- his wife’s basis in her shares of stock of the
quiring corporation to the extent of its earn-
sis under section 301(c)(2), and then treated redeeming corporation.
ings and profits and then by the issuing
as gain from the sale or exchange of prop- In addition, on December 2, 1955, the
corporation to the extent of its earnings and
erty under section 301(c)(3). IRS and Treasury promulgated §§ 1.304–
profits. Because section 304 recharacter-
B. The Character of Property Received izes certain stock acquisition transactions 2(a) and 1.304–3(a). With respect to an ac-
in Certain Stock Acquisitions as redemptions of stock, transactions to quisition of stock by a related corporation
which section 304 applies implicate the re- (other than a subsidiary), § 1.304–2(a) pro-
The redemption rules of section 302 are demption rules of section 302. vides that the transferor’s basis for his stock
implicated not only when an issuing cor- in the acquiring corporation is increased by
poration acquires its own stock, but also in the basis of the stock of the issuing cor-
the case of certain stock acquisitions by cor- poration surrendered by him. Similarly, with
November 4, 2002 778 2002–44 I.R.B.
respect to an acquisition of stock by a sub- even if they shift basis from a person that 1. General description of the proposed
sidiary, § 1.304–3(a) provides that the trans- is not subject to U.S. tax to a person that rules
feror’s basis in his remaining stock in the is subject to U.S. tax or to stock other than
parent corporation is increased by the ba- stock of the redeeming corporation. No- Certain transactions that, in form, in-
sis of the stock deemed redeemed by the tice 2001–45, 2001–2 C.B. 129, describes volve the redemption of shares are eco-
parent corporation. The treatment of the a type of transaction with respect to which nomically identical or similar to distributions
transferor’s unutilized basis in stock of the taxpayers have taken the position that, un- to shareholders that do not involve any re-
der § 1.302–2(c), all or a portion of the ba- demption of shares. For example, if a single
issuing corporation as a result of transac-
sis of stock redeemed from a person that shareholder owns all of the stock of the re-
tions subject to section 304(a) is the sub-
is not subject to U.S. tax or is otherwise in- deeming corporation, the redemption of
ject of Revenue Ruling 70–496, 1970–2
different to the Federal income tax conse- some shares from that shareholder for cash
C.B. 74, and Revenue Ruling 71–563,
quences of the redemption of the stock is is economically indistinguishable from the
1971–2 C.B. 175. mere distribution of corporate cash to the
added to the basis of other stock in the re-
In Revenue Ruling 70–496, a first-tier shareholder. In recognition of this, sec-
deeming corporation owned by a taxpayer
subsidiary (Y) of a parent corporation (X) tion 302 taxes these transactions as corpo-
that is subject to U.S. tax to create a loss
sold all of its stock in a second-tier sub- rate distributions notwithstanding their form
on the disposition of the other stock. Al-
sidiary of X (S) to another first-tier sub- though the IRS intends to challenge the ad- as redemptions. The underlying premise of
sidiary of X (Z). The ruling concludes that justments claimed in such transactions, the section 302 is that distribution treatment is
the transaction is governed by sections IRS and Treasury believe it is desirable to called for in these cases because, in ef-
304(a)(1) and 302(d). Accordingly, the rul- revise the rules that govern accounting for fect, the redeemed shareholder still owns (or
ing holds that the sales proceeds consti- unutilized basis attributable to redeemed is treated as owning) its stock in the cor-
tute dividends to the extent of Z’s earnings stock to better reflect the purposes of the poration, even if it may have turned in some
and profits and, to the extent in excess of relevant Code provisions. physical shares.
such amount, constitute gain under sec- Although section 302 does not provide
tion 301(c)(3). With respect to Y’s basis in Explanation of Provisions any explicit guidance regarding the share-
the sold S stock, the ruling holds that be- holder’s basis of the shares redeemed, in de-
cause Y had no direct stock ownership in A. Rules Under Section 302 riving a regulatory regime to address the
Z before or after the sale, Y’s basis in the treatment of the unutilized basis of re-
This notice of proposed rulemaking pro-
S stock surrendered disappears and can- deemed stock, it is appropriate to con-
poses a replacement for the “proper ad-
not be used to increase the basis of any as- sider what happens when a shareholder
justment” regime of current § 1.302–2(c) for
set of Y. receives a distribution and keeps its shares,
taking into account the unutilized basis at-
In Revenue Ruling 71–563, A, an indi- because that analogy underlies distribu-
tributable to redeemed stock in any case in
vidual, owned all the stock of X. C, A’s son, tion treatment under section 302. Because
which a redemption of stock is treated as
owned all of the outstanding stock of Y. A the Code does not permit basis to offset any
a distribution of property to which sec-
sold 25 percent of its stock in X to Y for portion of the redemption distribution that
tion 301 applies. The rules are proposed to
cash. The ruling states that, under section is treated as a dividend, and because such
apply both where the redeemed shareholder
304(a)(1), the sale is treated as a contri- an offset is not available when a corpora-
actually owns no stock of the redeeming
bution by A of the stock of X to the capi- tion distributes a dividend and the share-
corporation immediately after the redemp-
tal of Y and a distribution to A by Y in holder retains its shares, the redemption date
tion (a complete redemption) and where the
redemption of its stock. Because the deemed is not the appropriate time to recover the
redeemed shareholder actually owns stock
redemption is governed by section 302(d), unutilized basis of the redeemed stock.
of the redeeming corporation immediately
the cash received is taxable as a dividend However, if the shareholder receives a dis-
after the redemption (a partial redemp-
to A under section 301(c)(1). Furthermore, tribution and retains its shares, it also re-
tion). While consideration was given to re-
the ruling reasons that, because A owns no tains its basis, which it can recover later in
taining the “proper adjustment” rule of
stock in Y directly after the transaction, the situations other than dividends, such as the
current § 1.302–2(c) where only a por-
basis of the X stock should be added to the sale of the shares. Accordingly, the unuti-
tion of the shareholder’s interest in the re-
basis of the remaining stock of X that A lized basis of the redeemed stock should not
deeming corporation is redeemed, the IRS
continues to own after the transaction. disappear and should be taken into ac-
and Treasury believe the two situations are
The current regulatory regime preserves, count for Federal income tax purposes at
similar enough to warrant the same rules,
and prevents the elimination of, basis in some time. In addition, any tax benefit as-
and that the rules proposed herein best carry
transactions subject to section 302 where sociated with the unutilized basis of re-
out the purposes of section 302 even where
a proper adjustment may be made to the ba- deemed stock should remain with the
the redeemed shareholder continues di-
sis of the remaining stock of the redeem- taxpayer that made, or succeeded to, the in-
rectly to own stock in the redeeming cor-
ing corporation and in transactions subject vestment that gave rise to the unutilized ba-
poration because, even in that case, dividend
to section 304 where, immediately after the sis. Accordingly, these regulations propose
treatment under section 302 may have re-
transaction, the seller owns stock of the ac- that, in any case where a redemption of
sulted from shares owned by attribution
quiring corporation. In certain transac- stock is treated as a distribution of a divi-
rather than directly. The following para-
tions, however, taxpayers have taken the dend, an amount equal to the adjusted ba-
graphs describe the proposed rules.
position that certain adjustments are proper, sis of the redeemed stock is treated as a loss
2002–44 I.R.B. 779 November 4, 2002
recognized on the disposition of the re- 301(c)(3) or gain recognized on a dispo- 2. Special issues related to certain
deemed stock on the date of the redemp- sition of stock of the redeeming corpora- pass-through entities
tion. That loss is taken into account as tion is referred to as an “accelerated loss
described below. inclusion date.” Although there can be only Where stock is redeemed from a part-
Once the facts and circumstances that one final inclusion date, there can be sev- nership and all or a portion of the distri-
caused the redemption distribution to be eral accelerated loss inclusion dates. bution in redemption of such stock is treated
treated as a distribution subject to section Because the loss attributable to the ba- as a dividend, any loss attributable to the
sis of the redeemed stock is treated as rec- basis of redeemed stock is treated as a cur-
301 no longer exist (i.e., the redeemed
ognized on a disposition of the redeemed rent loss to the partnership on the date of
shareholder has sufficiently reduced its ac-
stock on the redemption date, the attributes the redemption. To the extent of the lesser
tual and constructive ownership interest in
(e.g., character and source) of that loss are of the amount of such distribution that is
the redeeming corporation), these regula- treated as a dividend and such loss that is
fixed on the redemption date, even if such
tions permit the loss attributable to the un- not allocated pursuant to section 704(c) and
loss is not taken into account until after the
utilized basis of redeemed stock that has not the regulations thereunder, the dividend and
redemption date. For example, if a corpo-
previously been taken into account to be the loss must be allocated in equal amounts.
ration redeems its stock from a shareholder
taken into account. The first date on which within one year after the shareholder’s ac- Such amounts must be allocated in accor-
the redeemed shareholder would satisfy the quisition of such stock and the proceeds of dance with the partners’ interests in the part-
criteria of section 302(b)(1), (2) or (3) if the the redemption are treated as a dividend dis- nership. An allocation will be deemed to be
facts and circumstances that exist on such tribution, the character of any amount of the in accordance with a partner’s interest in the
date had existed immediately after the re- loss that is taken into account is treated as partnership if the allocation is in the same
demption is referred to as the “final inclu- short-term capital loss (assuming the re- proportion as the allocation of (i) the ex-
sion date.” In addition, a date is the final deemed shareholder held the redeemed cess of the dividend income over the loss
inclusion date if there is no later date on stock as a capital asset), even if such loss attributable to the basis of the redeemed
which the redeemed shareholder could take is taken into account more than one year stock, if any, (ii) the excess of the loss at-
the loss into account. For example, if the after the redeemed shareholder’s acquisi- tributable to the basis of the redeemed stock
redeemed shareholder is an individual, the tion of the redeemed stock. Nonetheless, for over the dividend income, if any, or, (iii)
final inclusion date includes the date of purposes of the carryforward and carry- if neither, in the same proportion as the part-
death of such individual. If the redeemed back provisions of sections 172 and 1212, nership’s net taxable income or loss for the
shareholder is a corporation, the final in- such loss is treated as a loss for the tax- year is allocated. This rule ensures that the
clusion date includes the date such corpo- able year in which it is taken into account benefit of the loss may be realized by the
ration transfers its assets in a liquidation rather than for the taxable year of the stock person to whom the dividend income was
described in section 331. If the redeemed redemption that gave rise to such loss. allocated. The excess dividend or loss at-
shareholder is a foreign corporation, the fi- Because a redemption of stock may give tributable to the basis of redeemed stock
nal inclusion date includes the date such rise to, or increase, an excess loss account must be allocated in a manner that takes
corporation transfers its assets to a domes- in redeemed stock where the redeemed into account the requirements of section
tic corporation in either a liquidation de- shareholder and the redeeming corpora- 704.
scribed in section 332 or a reorganization tion are members of the same consoli- The loss attributable to the basis of re-
described in section 368(a)(1) to which sec- dated group, these regulations propose rules deemed stock allocated to a partner under
tion 381 applies. If the redeemed share- similar to those described above where the the rules of this section is not taken into ac-
holder is a foreign corporation that is not redeemed shareholder has an excess loss ac- count at the partner level until the final in-
a controlled foreign corporation, within the count in the redeemed stock. clusion date or an accelerated loss inclusion
meaning of section 957(a), on the date of These proposed regulations do not ap- date, as applicable. For purposes of deter-
the redemption, the term final inclusion date ply on the redemption of stock described mining whether a particular date is the fi-
includes the date such corporation trans- in section 306(c). Pursuant to section nal inclusion date with respect to such a
fers its assets to a controlled foreign cor- 306(a)(2), a redemption of stock described loss, if the partner is a partner of the part-
poration in a liquidation described in section in section 306(c) is treated as a distribu- nership on such date, the partnership is
332 or a reorganization described in sec- tion of property to which section 301 ap- treated as the redeemed shareholder. Oth-
tion 368(a)(1) to which section 381 ap- plies. Example 2 of § 1.306–1 suggests that erwise, the former partner is treated as the
plies. the unutilized basis of redeemed section 306 redeemed shareholder and the determina-
These proposed regulations also pro- stock is added back to the basis of the stock tion of whether a particular date is the fi-
vide that the redeemed shareholder is per- with respect to which the section 306 stock nal inclusion date is made by comparing
mitted to take into account the loss was distributed. The IRS and Treasury re- such former partner’s actual and construc-
attributable to the unutilized basis of re- quest comments on whether such treat- tive ownership of the redeeming corpora-
deemed stock when the redeemed share- ment of the unutilized basis of redeemed tion immediately prior to the redemption to
holder recognizes a gain on stock of the section 306 stock is appropriate or whether such former partner’s actual and construc-
redeeming corporation to the extent of the an alternative regime should apply when tive ownership of the redeeming corpora-
gain recognized. Any date on which the re- such a redemption is treated as a distribu- tion at the end of such particular date. For
deemed shareholder must take into ac- tion to which section 301 applies. purposes of determining whether a particu-
count gain recognized pursuant to section lar date is an accelerated loss inclusion date
November 4, 2002 780 2002–44 I.R.B.
with respect to a loss attributable to the ba- eficiary, whether a particular date is the fi- 304(a)(1) applies is treated as a distribu-
sis of redeemed stock that is allocated to nal inclusion date or an accelerated loss tion to which section 301 applies, the trans-
a partner from a partnership, the partner is inclusion date with respect to such a loss feror and the acquiring corporation are
treated as the redeemed shareholder. Simi- is determined by treating such beneficiary treated as if (1) the transferor transferred the
lar rules are proposed to apply where stock as the redeemed shareholder. stock of the target corporation to the ac-
is redeemed from an S corporation. quiring corporation in exchange for stock
3. Special rules related to apportionment
The proposed regulations provide that of the acquiring corporation in a transac-
of interest and other expenses
where stock is redeemed from a C corpo- tion to which section 351(a) applies, and (2)
ration, and the C corporation subsequently Under section 864(e), taxpayers appor- the acquiring corporation then redeemed the
elects to be taxed as an S corporation, any tion interest expense between U.S. and for- stock it is treated as having issued. The
loss attributable to the basis of redeemed eign source income on the basis of the same rules that govern an actual redemp-
relative values of their U.S. and foreign as- tion govern a deemed redemption.
stock that has not been taken into account
sets. For this purpose, taxpayers may choose In transactions under section 304 that in-
at the time of the election is treated as a car-
to value their assets using either fair mar- volve one or more foreign corporations, fur-
ryforward arising in a taxable year for
ket value or tax book value (adjusted ba- ther consequences may apply under the
which the corporation was a C corpora-
sis). If the taxpayer apportions interest international provisions of the Code. For ex-
tion. Such loss is allowed as a deduction
expense using tax book value, the adjusted ample, where target corporation stock is
against net recognized built-in gain under
basis of stock in any nonaffiliated 10 per- transferred to a foreign corporation in the
section 1374 in the year of the final inclu-
cent owned corporation (as defined in sec- deemed section 351 transaction, section 367
sion date or an accelerated loss inclusion
tion 864(e)(4)(B)) is increased by the and the regulations promulgated thereun-
date.
amount of earnings and profits (and re- der apply to the transfer. See Rev. Rul.
To the extent that a trust from which
duced by any deficits in earnings and prof- 91–5, 1991–1 C.B. 114, (holding that sec-
stock is redeemed is wholly or partially a
its) attributable to such stock that tion 367 applied to the deemed contribu-
grantor trust, the proposed rules treat the re-
accumulated during the period the tax- tion to capital of the target corporation stock
deemed stock as having been owned di-
payer held such stock. The proposed regu- under prior law because section 367(c)(2)
rectly by the grantor. When stock is
lations provide that for purposes of resulted in the stock transfer constituting a
redeemed from an estate or from a trust that
apportioning expenses on the basis of the section 351 transaction). The IRS intends
is not a wholly grantor trust, and all or a
tax book value of assets, the adjusted ba- to issue guidance on the application of the
portion of a distribution in redemption of
sis in any remaining shares of the redeem- international provisions to section 304 trans-
such stock is treated as a dividend, any loss
ing corporation that are owned by the actions and requests comments on such
attributable to the basis of redeemed stock
redeemed shareholder or certain affiliated transactions, including what changes, if any,
that is not attributable to the basis of re-
corporations will be increased by the to existing published guidance may be ap-
deemed stock treated as owned by the
amount of the unutilized basis of redeemed propriate in light of the 1997 amendments
grantor is not taken into account by such
stock. This adjustment is intended to pro- to section 304.
estate or trust until the final inclusion date
or an accelerated loss inclusion date. In that vide consistent interest allocation conse- Proposed Effective Date
case, whether a particular date is the final quences in the case of dividends and
inclusion date or an accelerated loss inclu- redemptions treated as dividends by non- These regulations are proposed to ap-
sion date is determined by treating such es- affiliated 10 percent owned corporations. ply to transactions occurring after the date
tate or trust, not its beneficiaries, as the these regulations are published as final regu-
B. Revisions to Regulations Under
redeemed shareholder. In the event that the lations in the Federal Register.
Section 304
trust or estate terminates before it has been Special Analyses
permitted to take into account all of the loss The current regulations under section 304
attributable to the basis of redeemed stock, do not reflect all of the legislative amend- It has been determined that this notice
any remaining loss is treated as a loss un- ments that have been made to section 304. of proposed rulemaking is not a signifi-
der section 172 or section 1212 for pur- This notice of proposed rulemaking pro- cant regulatory action as defined in Ex-
poses of section 642(h) (regarding the poses certain revisions to the current regu- ecutive Order 12866. It is hereby certified
availability to beneficiaries of unused loss lations under section 304 to incorporate that the collection of information in this No-
carryovers and excess deductions of an es- these legislative amendments to the ex- tice of Proposed Rulemaking will not have
tate or trust upon termination). Each ben- tent that those legislative amendments are a significant economic impact on a sub-
eficiary’s interest in the loss distributed relevant to the issues that are subject to the stantial number of small entities. This cer-
under section 642(h), however, shall be lim- proposed regulations under section 302. In tification is based upon the fact that the IRS
ited to the proportion of that loss that is particular, these revisions reflect the amend- and Treasury estimate that at most 3,000
equal to the proportion of the total amount ments to section 304 made by section 1013 taxpayers will be subject to these require-
of the distribution treated as a dividend that of the Taxpayer Relief Act of 1997, Pub- ments and most of those taxpayers will be
is represented by that beneficiary’s benefi- lic Law 105–34 (111 Stat. 788, 918) (Au- individuals or large businesses. There-
cial interest in that dividend. Once all or a gust 5, 1997), that provide that, to the extent fore, a Regulatory Flexibility Analysis un-
portion of such a loss is distributed to a ben- that a stock acquisition to which section der the Regulatory Flexibility Act (5 U.S.C.
2002–44 I.R.B. 781 November 4, 2002
chapter 6) is not required. Pursuant to sec- ***** tion 381(a), the acquiring corporation
tion 7805(f), this notice of proposed rule- (within the meaning of section 381) there-
making will be submitted to the Chief Proposed Amendments to the Regula- after is treated as the redeemed shareholder.
Counsel for Advocacy of the Small Busi- tions For rules concerning the person that is
ness Administration for comment on its im- treated as the redeemed shareholder where
Accordingly, 26 CFR part 1 is proposed
pact on small business. the redeemed stock is held by a partner-
to be amended as follows:
ship or an S corporation at the time of the
Comments and Public Hearing redemption, see paragraphs (d)(6) and (7)
PART 1— INCOME TAXES
of this section. For rules concerning the per-
Before these proposed regulations are
Paragraph 1. The authority citation for son that is treated as the redeemed share-
adopted as final regulations, consideration
part 1 continues to read in part as follows: holder where the redeemed stock is held by
will be given to any written (a signed origi-
Authority: 26 U.S.C. 7805 * * * an estate or a trust not treated as wholly
nal and eight (8) copies) or electronic com-
owned by the grantor or another person at
ments that are submitted timely to the IRS. § 1.302–2 [Amended] the time of the redemption and a loss at-
The IRS and Treasury Department request
tributable to the basis of such redeemed
comments on the clarity of the proposed Par. 2. In § 1.302–2, paragraph (c) is re-
stock is distributed to a beneficiary of such
rules and how they can be made easier to moved.
estate or trust, see paragraph (d)(8) of this
understand. All comments will be avail- Par. 3. Section 1.302–5 is added to read
section.
able for public inspection and copying. as follows:
(2) Redeeming corporation. Except as
A public hearing has been scheduled for
§ 1.302–5 Redemptions taxable as provided in paragraph (d)(5) of this sec-
February 20, 2003, beginning at 10 a.m. in
dividends. tion, the redeeming corporation is the cor-
Room 4718 of the Internal Revenue Build-
poration that issued the stock that is
ing, 1111 Constitution Avenue, NW, Wash-
(a) In general. In any case in which an redeemed. For rules concerning the entity
ington, DC. Due to building security
amount received in redemption of stock is that is treated as the redeeming corpora-
procedures, visitors must enter at the Con-
treated as a distribution of a dividend, an tion where the redeeming corporation ceases
stitution Avenue entrance. In addition, all
amount equal to the basis of the redeemed to exist in a transaction described in sec-
visitors must present photo identification to
stock, after adjusting such basis to reflect tion 381(a) or where the redeeming cor-
enter the building. Because of access re-
the application of section 301(c)(2), 961(b), poration distributes to its shareholders stock
strictions, visitors will not be admitted be-
1059, § 1.1502–32, or any other appli- of one or more controlled corporations in
yond the immediate entrance area more than
cable provision of the Internal Revenue a distribution described in section 355(a),
30 minutes before the hearing starts. For in-
Code or the regulations thereunder, is treated see paragraph (d)(5) of this section.
formation about having your name placed
as a loss recognized on a disposition of the (3) Final inclusion date. Except as oth-
on the building access list to attend the hear-
redeemed stock on the date of the redemp- erwise provided in paragraphs (d)(5), (6),
ing, see the FOR FURTHER INFORMA-
tion. The redeemed shareholder (as de- (7), and (8) of this section, the final inclu-
TION CONTACT portion of this preamble.
fined in paragraph (b)(1) of this section) sion date is the first date on which the re-
The rules of 26 CFR 601.601(a)(3) ap-
shall be permitted to take such loss into ac- deemed shareholder would satisfy the
ply to the hearing. Persons who wish to
count pursuant to the provisions of this sec- criteria of section 302(b)(1), (2), or (3) if
present oral comments must submit writ-
tion. Although such loss may be taken into the facts and circumstances that exist at the
ten or electronic comments and an out-
account on a date later than the date of the end of such day had existed immediately
line of the topics to be discussed and the
redemption, the attributes (e.g., character after the redemption. In addition, a date is
time to be devoted to each topic (a signed
and source) of such loss are determined on the final inclusion date if there is no later
original and eight (8) copies) by January 30,
the date of the redemption of the stock that date on which the redeemed shareholder
2003. A period of 10 minutes will be al-
gave rise to such loss. See § 1.1502– could take the loss into account. For pur-
lotted to each person for making com-
19(b)(5) for rules that apply where an poses of the preceding sentence, the exist-
ments. An agenda showing the scheduling
amount received in redemption of stock is ence or creation of a limitation under section
of the speakers will be prepared after the
treated as a dividend and such amount ei- 382 is not treated as preventing the loss
deadline for receiving outlines has passed.
ther increases or creates an excess loss ac- from being taken into account. For ex-
Copies of the agenda will be available free
count in the redeemed stock. ample, if the redeemed shareholder is an in-
of charge at the hearing.
(b) Definitions—(1) Redeemed share- dividual, the final inclusion date includes
Drafting Information holder. Except as provided in paragraphs the date of death of such individual. If the
(d)(6), (7), and (8) of this section, the re- redeemed shareholder is a corporation, the
The principal author of these proposed deemed shareholder is the person whose final inclusion date includes the date such
regulations is Lisa K. Leong of the Of- stock is redeemed in a transaction in which corporation transfers its assets in a liqui-
fice of the Associate Chief Counsel (Cor- a portion or all of the redemption pro- dation described in section 331. If the re-
porate), IRS. However, other personnel from ceeds are treated as a dividend. If the as- deemed shareholder is a foreign corporation,
the IRS and Treasury participated in their sets of the redeemed shareholder are the final inclusion date includes the date
development. acquired in a transaction described in sec- such corporation transfers its assets to a do-
November 4, 2002 782 2002–44 I.R.B.
mestic corporation in either a liquidation de- (i) The amount of such loss reduced by into account, not the taxable year of the re-
scribed in section 332 or a reorganization the amount of such loss previously taken demption that gave rise to such loss. If an
described in section 368(a)(1) to which sec- into account pursuant to this paragraph estate or trust terminates before it is per-
tion 381 applies. If the redeemed share- (c)(2); and mitted to take into account all of the loss
holder is a foreign corporation that is not (ii) The amount of gain recognized with attributable to the basis of redeemed stock,
a controlled foreign corporation, within the respect to stock of the redeeming corpo- such loss that it has not been permitted to
meaning of section 957(a), on the date of ration that must be taken into account by take into account is treated as a loss un-
the redemption, the term final inclusion date the redeemed shareholder on such accel- der section 172 or 1212 for purposes of sec-
includes the date such corporation trans- erated loss inclusion date. tion 642(h), provided, however, that the
fers its assets to a controlled foreign cor- (d) Special rules—(1) Treatment of loss identification of carryover years of the ben-
poration in a liquidation described in section attributable to basis of redeemed stock. Ex- eficiaries will be determined in accordance
332 or a reorganization described in sec- cept as otherwise provided in this sec- with the preceding sentence. Notwithstand-
tion 368(a)(1) to which section 381 ap- tion, for purposes of applying the provisions ing the preceding sentence, each benefi-
plies. of the Internal Revenue Code and the regu- ciary’s interest in the loss distributed under
(4) Accelerated loss inclusion date. An lations thereunder, any loss attributable to section 642(h) shall be limited to the pro-
accelerated loss inclusion date is a date the basis of redeemed stock that has not portion of that loss that is equal to the pro-
other than the final inclusion date on which been permitted to be taken into account portion of the total amount of the
the redeemed shareholder must take into ac- shall be treated as a net operating loss car- distribution treated as a dividend that is rep-
count gain from an actual or deemed sale ryforward or a capital loss carryforward, as resented by that beneficiary’s beneficial in-
or exchange of stock of the redeeming cor- applicable. For example, for purposes of de- terest in that dividend. If a deduction for
poration. For example, the redeemed share- termining under sections 382 and 383 any portion of such loss is disallowed by
holder must take into account gain from an whether the redeemed shareholder is a loss section 382 or 383 for the taxable year in
actual or deemed sale or exchange of stock corporation that has an ownership change which the redeemed shareholder is permit-
of the redeeming corporation when such and whether the loss attributable to the ba- ted to take such loss into account, such por-
shareholder receives a distribution with re- sis of redeemed stock is a pre-change loss, tion shall be carried forward to subsequent
spect to stock of the redeeming corpora- any loss attributable to the basis of re- taxable years under rules similar to the rules
tion to which section 301(c)(3) applies, deemed stock that the redeemed share- for the carrying forward of net operating
recognizes gain on stock of the redeem- holder is not permitted to take into account losses or capital losses, as applicable, but
ing corporation as a result of the applica- before a testing date shall be treated as a shall be subject to the section 382 limita-
tion of section 475, recognizes gain on a net operating loss carryforward or a capi- tion (and the other rules of sections 382 and
sale or exchange of stock of the redeem- tal loss carryforward, as applicable, that 383) for any post-change year to which it
ing corporation (even if such gain is char- arose in the taxable year in which the re- is carried.
acterized as a dividend under section 1248), demption that gave rise to such loss oc- (3) Expenses apportioned on the basis
recognizes gain in connection with a con- curred and that can be carried forward to of assets. For special rules regarding ad-
structive sale of stock of the redeeming cor- the taxable year that includes the testing justments in the case of taxpayers appor-
poration within the meaning of section date. If such loss is treated as a pre-change tioning expenses on the basis of the tax
1259, or is a partner of a partnership or a loss because of an ownership change on the book value of assets, see § 1.861–
shareholder of an S corporation that is al- testing date, it is subject to the section 382 12(c)(2)(vi).
located, and must take into account, gain limitation (and the other rules of section 382 (4) Effect of loss attributable to basis of
recognized on the partnership’s or S cor- or 383) for any post-change year in which redeemed stock on earnings and profits. If
poration’s sale or exchange of stock of the it is taken into account under paragraph (c) the redeemed shareholder is a corpora-
redeeming corporation. of this section and any other post-change tion, any loss attributable to the basis of re-
(c) Inclusion of loss attributable to ba- year to which it is carried pursuant to sec- deemed stock is not reflected in such
sis of redeemed stock—(1) Amount taken tion 172 or 1212, as applicable, and para- corporation’s earnings and profits before it
into account on final inclusion date. On the graph (d)(2) of this section. The order in is taken into account pursuant to the rules
final inclusion date, the redeemed share- which the loss is absorbed (and in which of paragraph (c) of this section. See, for ex-
holder is permitted to take into account the it absorbs the section 382 limitation (see ample, §§ 1.312–6(a), 1.312–7, and 1.1502–
loss attributable to the basis of redeemed § 1.383–1(d)(2)), however, is determined in 33(c)(2).
stock, reduced by the amount of such loss a manner consistent with the principles of (5) Successors to the redeeming
that was previously taken into account pur- section 172 or 1212, as applicable, and corporation—(i) Acquisitive transactions.
suant to paragraph (c)(2) of this section. paragraph (d)(2) of this section. If the assets of the redeeming corporation
(2) Amount taken into account on ac- (2) Net operating loss deduction and are acquired by another corporation in a
celerated loss inclusion date. On an accel- capital loss carrybacks and carryovers. For transaction described in section 381(a), the
erated loss inclusion date, the redeemed purposes of sections 172 and 1212, any por- determination of whether a particular date
shareholder is permitted to take into ac- tion of a loss attributable to the basis of re- is the final inclusion date or an acceler-
count the loss attributable to the basis of re- deemed stock shall be treated as occurring ated loss inclusion date is made by treat-
deemed stock in the amount of the lesser in the taxable year in which the redeemed ing the facts and circumstances that exist
of— shareholder is permitted to take such loss at the end of such day (including the ac-
2002–44 I.R.B. 783 November 4, 2002
quisition of the assets of the redeeming cor- (6) Redeemed shareholder is a mining whether a particular date is an ac-
poration) as existing immediately after the partnership—(i) Treatment and alloca- celerated loss inclusion date with respect to
redemption and treating the acquiring cor- tion of loss attributable to basis of re- a loss attributable to the basis of redeemed
poration (within the meaning of section 381) deemed stock. Where stock is redeemed stock that is allocated to a partner from a
as the redeeming corporation. from a partnership and all or a portion of partnership, the partner is treated as the re-
(ii) Divisive transactions. In general, if the distribution in redemption of such stock deemed shareholder.
the redeeming corporation distributes to its is treated as a dividend, any loss attribut- (7) Redeemed shareholder is an S
shareholders the stock of one or more con- able to the basis of redeemed stock is corporation—(i) Treatment and alloca-
trolled corporations in a distribution to treated as a current loss to the partner- tion of loss attributable to basis of re-
which section 355 (or so much of section ship on the date of the redemption. To the deemed stock. Where stock is redeemed
356 as relates to section 355) applies, the extent of the lesser of the amount of such from an S corporation and all or a por-
loss attributable to the basis of redeemed distribution that is treated as a dividend and tion of the distribution in redemption of
stock is allocated among the stock of the such loss that is not allocated pursuant to such stock is treated as a dividend, any loss
distributing and any controlled corpora- section 704(c) and the regulations there- attributable to the basis of redeemed stock
tions that the redeemed shareholder owns, under, the dividend and the loss must be al- is treated as a current loss to the S corpo-
actually and constructively pursuant to the located in equal amounts. Such amounts ration on the date of the redemption and is
rules of section 318, immediately after the must be allocated in accordance with the allocated to the S corporation’s sharehold-
distribution in proportion to the fair mar- partners’ interests in the partnership. An al- ers under section 1366(a). The portion of
ket value of the stock of the distributing cor- location will be deemed to be in accor- such loss that is allocated to an S corpo-
poration that the redeemed shareholder is dance with a partner’s interest in the ration shareholder from the S corporation
treated as so owning and the distributed partnership if the allocation is in the same is not permitted to be taken into account by
stock of the controlled corporation that the proportion as the allocation of the excess such shareholder until the final inclusion
redeemed shareholder is treated as so own- of the dividend income over the loss at- date or an accelerated loss inclusion date,
ing. To the extent that such loss is allo- tributable to the basis of the redeemed stock, as provided in this section.
cated to the stock of the distributing if any, the excess of the loss attributable to (ii) Identification of redeemed share-
corporation, the distributing corporation will the basis of the redeemed stock over the holder. For purposes of determining whether
be treated as the redeeming corporation for dividend income, if any, or, if neither, in the a particular date is the final inclusion date
purposes of determining whether a particu- same proportion as the partnership’s net tax- with respect to a loss attributable to the ba-
lar date is the final inclusion date or an ac- able income or loss for the year is allo- sis of redeemed stock that is allocated to
celerated loss inclusion date with respect to cated. The excess dividend or loss a shareholder of an S corporation from an
such loss. To the extent that such loss is al- attributable to the basis of redeemed stock S corporation, if the S corporation share-
located to the stock of a controlled corpo- must be allocated to the partners in a man- holder is a shareholder of the S corpora-
ration, such controlled corporation will be ner that takes into account the require- tion at the end of such day, the S
treated as the redeeming corporation for pur- ments of section 704. The loss attributable corporation is treated as the redeemed share-
poses of determining whether a particular to the basis of redeemed stock allocated to holder. If the S corporation shareholder is
date is the final inclusion date or an accel- a partner under the rules of this section is not a shareholder of the S corporation at the
erated loss inclusion date with respect to not taken into account until the final in- end of such day, the former S corporation
such loss. Where the controlled corpora- clusion date or an accelerated loss inclu- shareholder is treated as the redeemed
tion was wholly owned by the distribut- sion date, as provided in this section. shareholder and the determination of
ing corporation and all of the stock of the (ii) Identification of redeemed share- whether such date is the final inclusion date
controlled corporation was distributed to the holder. For purposes of determining whether is made by comparing such former S cor-
shareholders of the distributing corpora- a particular date is the final inclusion date poration shareholder’s actual and construc-
tion in a distribution to which section 355 with respect to a loss that is allocated to a tive ownership of the redeeming corporation
(or so much of section 356 as relates to sec- partner, if the partner is a partner of the immediately prior to the redemption to such
tion 355) applies, the determination of partnership at the end of such day, the part- former S corporation shareholder’s actual
whether a particular date is the final inclu- nership is treated as the redeemed share- and constructive ownership of the redeem-
sion date with respect to a loss that is al- holder. If the partner is not a partner of the ing corporation at the end of such particu-
located to a controlled corporation is made partnership at the end of such day, the lar day; provided, however, that for purposes
by treating the redeemed shareholder as former partner is treated as the redeemed of computing such former S corporation
owning a percentage of stock of the con- shareholder and the determination of shareholder’s ownership of the redeem-
trolled corporation immediately prior to the whether such date is the final inclusion date ing corporation immediately prior to the re-
redemption equal to the percentage of stock is made by comparing such former part- demption, section 318(a)(2)(C) shall be
of the distributing corporation the redeemed ner’s actual and constructive ownership of applied without regard to the 50 percent
shareholder actually and constructively the redeeming corporation immediately prior limitation contained therein. For purposes
owned immediately prior to the redemp- to the redemption to such former part- of determining whether a particular date is
tion. In all other cases, appropriate calcu- ner’s actual and constructive ownership of an accelerated loss inclusion date with re-
lations shall apply to determine whether a the redeeming corporation at the end of spect to a loss attributable to the basis of
particular date is the final inclusion date. such particular day. For purposes of deter- redeemed stock that is allocated to an S cor-
November 4, 2002 784 2002–44 I.R.B.
poration shareholder from an S corpora- loss that is taken into account on such re- A is permitted to take into account the loss of $100
tion, the S corporation shareholder is treated turn pursuant to this section and shall iden- attributable to his basis in the redeemed stock. Be-
cause that loss is treated as having been recognized
as the redeemed shareholder. tify the shares to which such amounts relate.
on a disposition of the redeemed stock on the re-
(8) Redeemed shareholder is an estate (f) Examples. For purposes of the ex- demption date, December 31 of Year 1, such loss is
or trust. To the extent that a trust from amples in this section, each of corpora- treated as a short-term capital loss.
which stock is redeemed is treated as owned tion X, corporation Y, corporation Z, Example 3. (i) Facts. Corporation Y has 200 shares
corporation D, and corporation C is a do- of common stock outstanding. L, an individual, owns
(in part or in whole) by the grantor or an-
mestic corporation that files U.S. tax re- 150 shares of common stock in corporation Y and has
other person under subpart E of part I of owned these shares for several years. The remain-
subchapter J of the Internal Revenue Code, turns on a calendar-year basis. The ing 50 shares are owned by K, L’s father. In Year 1,
the rules of this section are applied as principles of this section are illustrated by corporation Y redeems 50 shares of L’s corporation
though the redeemed stock were owned di- the following examples: Y stock, which have a basis of $75, for $200. At the
Example 1. (i) Facts. A and B, husband and wife, end of Year 1, corporation Y’s current and accumu-
rectly by such grantor or other person. each own 100 shares (50 percent) of the stock of cor- lated earnings and profits exceed $200. The redemp-
Where stock is redeemed from an estate or poration X and hold the corporation X stock as a capi- tion of L’s stock is treated as a distribution to which
from a trust not treated as wholly owned tal asset. A purchased his corporation X shares on section 301 applies. L recognizes dividend income in
February 1, Year 1, for $200. On December 31, Year the amount of $200. In Year 4, L sells 25 of his re-
by the grantor or another person under sub-
1, corporation X redeems all of A’s 100 shares of its maining shares of corporation Y stock, which have a
part E of part I of subchapter J of the In- stock for $300. At the end of Year 1, corporation X basis of $50, to K for $100 and recognizes $50 of
ternal Revenue Code, and all or a portion has current and accumulated earnings and profits of long-term capital gain.
of the distribution in redemption of such $200. In connection with the redemption transac- (ii) Analysis. Under this section, an amount equal
stock is treated as a dividend, any loss at- tion, A does not file an agreement described in sec- to L’s basis in the corporation Y stock that is re-
tion 302(c)(2) waiving the application of the family deemed, $75, is treated as a loss recognized on a dis-
tributable to the basis of redeemed stock, attribution rules. The redemption proceeds, there- position of the redeemed stock on the date of the
except any loss attributable to the basis of fore, are treated under section 301(c)(1) as a divi- redemption. The date on which L sells 25 shares of
redeemed stock treated as owned by the dend to the extent of corporation X’s earnings and corporation Y stock to K is not the final inclusion date
grantor or another person, is not taken into profits of $200, and under section 301(c)(2) as a re- under paragraph (b)(3) of this section because L does
account by such estate or trust until the fi- covery of basis in the amount of $100. On July 1, Year not satisfy the criteria of section 302(b)(1), (2), or (3)
2, B sells all of her shares of corporation X stock to at the end of such day. Under paragraph (b)(4) of this
nal inclusion date or an accelerated loss in- G, her mother. section, however, that date is an accelerated loss in-
clusion date, and whether a particular date (ii) Analysis. Under this section, an amount equal clusion date because, on that date, L recognizes gain
is the final inclusion date or an acceler- to A’s basis in the corporation X stock ($100 after ap- of $50 on a disposition of stock of corporation Y, the
ated loss inclusion date is determined by plication of section 301(c)(2)) is treated as a loss rec- redeeming corporation. Thus, on that date, L is per-
treating such estate or trust, not its benefi- ognized on a disposition of the redeemed stock on mitted to take into account $50 of the loss attribut-
December 31, Year 1, the date of the redemption. able to his basis in the redeemed stock. The remaining
ciaries, as the redeemed shareholder. How- $25 of such loss is taken into account on the earlier
When B sells her shares to G, A no longer owns, ac-
ever, if all or a portion of such loss is tually or constructively, any shares of corporation X of the final inclusion date or the next accelerated loss
distributed to a beneficiary of such estate stock. Thus, if the facts that existed at the end of July inclusion date (to the extent of gain recognized).
or trust pursuant to section 642(h) and para- 1, Year 2, had existed immediately after the redemp- Example 4. (i) Facts. The facts are the same as
graph (d)(2) of this section, the determi- tion, A would have been treated as having received in Example 3, except that L does not sell any shares
a distribution in part or full payment in exchange for of corporation Y to K in Year 4. Instead, in Year 4,
nation of whether a particular date is the
the redeemed stock pursuant to section 302(a). Un- corporation Y distributes $75 to L with respect to his
final inclusion date or an accelerated in- der this section, therefore, July 1, Year 2, is the fi- remaining 100 shares of corporation Y stock. L’s ba-
clusion date shall be made by treating each nal inclusion date and, on that date, A is permitted to sis in these shares is only $30, and at the end of Year
such beneficiary as the redeemed share- take into account the loss of $100 attributable to his 4, corporation Y’s current and accumulated earn-
holder with respect to the loss distributed basis in the redeemed stock. Because that loss is treated ings and profits are $20, instead of $200. Under sec-
as having been recognized on a disposition of the re- tion 301(c)(1), $20 of the distribution is treated as a
to such beneficiary.
deemed stock on the date of the redemption, Decem- dividend, under section 301(c)(2), $30 of the distri-
(9) Redeemed shareholder is a C cor- ber 31 of Year 1, such loss is treated as a short-term bution is treated as a recovery of basis, and, under sec-
poration that converts to an S corpora- capital loss. tion 301(c)(3), $25 of the distribution is treated as gain
tion. For rules regarding the treatment of Example 2. (i) Facts. The facts are the same as from the sale or exchange of stock.
a loss attributable to the basis of redeemed in Example 1, except that, instead of selling all of her (ii) Analysis. As in Example 3, an amount equal
100 shares of corporation X stock to G on July 1, Year to L’s basis in the corporation Y stock redeemed in
stock when the redeemed shareholder is a
2, B sells only 75 shares of corporation X stock to G Year 1, $75, is treated as a loss recognized on a dis-
C corporation on the date of the redemp- on that date. position of the redeemed stock on the date of the re-
tion and elects to be taxed as an S corpo- (ii) Analysis. As in Example 1, an amount equal demption. Because L recognizes gain under section
ration prior to the final inclusion date or an to A’s basis in the redeemed stock ($100 after appli- 301(c)(3) upon the receipt of the Year 4 distribu-
accelerated loss inclusion date, see cation of section 301(c)(2)) is treated as a loss rec- tion, the date of that distribution is an accelerated loss
ognized on a disposition of the redeemed stock on inclusion date. Accordingly, on that date, L is per-
§§ 1.1371–1(a)(1) and 1.1374–5(b)(2).
December 31, Year 1, the date of the redemption. Im- mitted to take into account $25 of the loss attribut-
(e) Statement to be filed with returns. mediately after B’s sale of 75 shares of corporation able to the basis of the redeemed stock. The remaining
With or as part of the income tax return for X stock to G, A constructively owns 25 percent of the $50 of such loss is taken into account on the earlier
the year in which a redeemed shareholder shares of corporation X stock. Thus, if the facts that of the final inclusion date or the next accelerated loss
takes into account any loss pursuant to this existed at the end of July 1, Year 2, had existed im- inclusion date (to the extent of gain recognized).
mediately after the redemption, A would have been Example 5. (i) Facts. Corporation Z has 100 shares
section, the redeemed shareholder shall pro-
treated as receiving a distribution in part or full pay- of stock outstanding, 50 shares of which are owned
vide a statement entitled “Claim of Loss At- ment in exchange for the redeemed stock pursuant to by each of A and his son, B. A’s basis in each of his
tributable to Basis of Redeemed Stock.” The section 302(a). Under this section, therefore, July 1, shares of corporation Z stock is $1. During Year 1,
statement shall specify the amount of the Year 2, is the final inclusion date and, on that date, corporation Z redeems from A 25 shares of corpora-
2002–44 I.R.B. 785 November 4, 2002
tion Z stock for $200. At the end of Year 1, corpo- poration C that J is treated as so owning. Accord- clusion date for B. If the facts that exist at the end
ration Z has current and accumulated earnings and ingly, each of corporation D and corporation C is of the day of A’s sale of his PS interest to C had ex-
profits in excess of $200. The redemption is treated treated as the redeeming corporation for purposes of isted immediately after the redemption, PS would have
as a distribution to which section 301 applies. Ac- determining whether a particular date after the date been treated as receiving a distribution in part or full
cordingly, A recognizes dividend income of $200. In of the distribution is an accelerated loss inclusion date payment in exchange for the redeemed stock pursu-
Year 2, corporation Y acquires all of corporation Z’s or the final inclusion date with respect to $200 of the ant to section 302(a). Therefore, B is permitted to take
assets in exchange solely for voting stock in a reor- loss. In this case, the date in Year 6 on which M sells into account the $25 loss attributable to the basis of
ganization described in section 368(a)(1)(C). In the her corporation D stock to an unrelated person is the the redeemed stock that was allocated to him. Be-
reorganization, A and B surrender their shares of cor- final inclusion date with respect to J’s loss allocated cause A is no longer a partner in PS after January 1,
poration Z stock. A receives 2,500 shares of com- to J’s constructively owned corporation D stock, be- Year 4, A is treated as the redeemed shareholder for
mon stock of corporation Y and B receives 5,000 cause had corporation D’s distribution of corpora- purposes of determining if January 1, Year 4, is the
shares of common stock of corporation Y. Immedi- tion C stock occurred immediately after the redemption final inclusion date for A. Immediately prior to the re-
ately after the reorganization, corporation Y has out- of J’s stock and M’s Year 6 sale of corporation D stock demption, A actually and constructively owns 90 per-
standing one million shares of common stock. occurred immediately thereafter in Year 1, the re- cent of the corporation Z stock. After the sale of the
(ii) Analysis. Under this section, an amount equal demption of J’s corporation D stock would have been PS interest, A actually owns 100 percent of the cor-
to A’s basis in the redeemed stock after the Year 1 re- treated as a distribution in part or full payment in ex- poration Z stock. If these facts had existed immedi-
demption, $25, is treated as a loss recognized on a dis- change for the redeemed stock pursuant to section ately after the redemption, A would not have been
position of the redeemed stock on the date of the 302(a). Accordingly, on that date in Year 6, J is per- treated as receiving a distribution in part or full pay-
redemption. Under paragraph (d)(5) of this section, for mitted to take into account the $200 loss allocated to ment in exchange for the redeemed stock pursuant to
purposes of determining whether a particular date on the corporation D stock. The $200 loss allocated to section 302(a). Therefore, January 1, Year 4, is not the
or after the date of the reorganization is the final in- the corporation C stock is taken into account on the final inclusion date for A.
clusion date or an accelerated loss inclusion date, cor- earlier of the final inclusion date or the next accel- Example 8. (i) Facts. H, I, and J are sharehold-
poration Y, the acquiring corporation, is treated as the erated loss inclusion date (to the extent of gain rec- ers in corporation S, a corporation that has made a
redeeming corporation. If the facts and circumstances ognized) with respect to the corporation C stock. valid election to be taxed as an S corporation. H, I,
that exist at the end of the day of the reorganization Example 7. (i) Facts. In Year 1, A and B, two un- and J respectively hold 60 percent, 20 percent, and 20
had existed on the date of the redemption, the re- related individuals, each contribute $100 to form a percent of the stock in corporation S. H, I, and J have
demption would have been treated as a distribution 50–50 general partnership, PS. A and B share in the no relation to each other apart from their ownership
in part or full payment in exchange for the redeemed income of PS equally. PS buys 100 shares of corpo- interests in corporation S. Corporation S owns 20 per-
stock pursuant to section 302(a). Therefore, the date ration Z stock for $200. A owns the remaining 400 cent of the outstanding shares of corporation X with
of the reorganization is the final inclusion date and outstanding shares of corporation Z stock directly. In a $100 adjusted basis. H owns the remaining out-
A is permitted to take into account the loss of $25 at- Year 2, corporation Z redeems all of PS’s shares for standing shares of corporation X. In Year 1, all of cor-
tributable to his basis in the redeemed stock. $300. At that time, the basis of A’s interest in PS is poration S’s shares of corporation X stock are
Example 6. (i) Facts. Corporation D has 300 shares $100 and the basis of B’s interest in PS is $100. At redeemed for their fair market value, $200. Corpo-
of stock outstanding. J and her two daughters, M and the end of Year 2, corporation Z has current and ac- ration X has current and accumulated earnings and
N, each own 100 shares of corporation D stock. J’s cumulated earnings and profits of $150. Because A’s profits of $300 at the end of Year 1. Because H’s own-
basis in her corporation D shares is $400. In Year 1, ownership of the Z stock is attributed to PS under sec- ership of X stock is attributed to corporation S un-
corporation D redeems all of J’s shares for $1,000. At tion 318(a)(3)(A), the redemption is treated as a dis- der section 318(a)(2)(C), the redemption is treated as
the end of Year 1, corporation D has current earn- tribution to which section 301 applies. The redemption a distribution to which section 301 applies and is
ings and profits exceeding $1,000. The redemption is proceeds, therefore, are treated as a dividend to the treated as a dividend. H, I, and J will be allocated
treated as a distribution to which section 301 ap- extent of corporation Z’s earnings and profits, $150, $120, $40, and $40 of dividend income, respectively.
plies. Accordingly, J recognizes dividend income in and as a recovery of basis in the amount of $150. As- In Year 2, J sells his stock of corporation S to K, an
the amount of $1,000. Subsequently, M and N de- sume that PS’s only items of income, gain, loss, de- unrelated person. In Year 3, H sells his stock of cor-
cide to separate corporation D’s business. Accord- duction, and credit for Year 2 arise from the redemption poration X to L, an unrelated person.
ingly, they cause corporation D to contribute one- of the corporation Z stock. On January 1 of Year 4, (ii) Analysis. Under this section, an amount equal
half of its assets to corporation C, a newly formed A sells his entire interest in PS to C, an unrelated in- to corporation S’s basis in the redeemed stock ($100)
corporation, in exchange for all of corporation C’s dividual. is treated as a loss recognized on a disposition of the
stock and to distribute all of the corporation C stock (ii) Analysis. Under this section, an amount equal redeemed stock on the date of the disposition. H, I,
to N in exchange for all of her corporation D stock. to PS’s basis in the corporation Z stock, ($50 after ap- and J will be allocated $60, $20, and $20 of the loss,
Immediately after the distribution, the value of cor- plication of section 301(c)(2)), is treated as a cur- respectively, in the year of the redemption. Both the
poration D is equal to the value of corporation C. In rent loss recognized by the partnership on a disposition allocation of dividend income and the allocation of
Year 6, M sells her shares in corporation D to an un- of the redeemed stock on the date of the redemp- the loss give rise to adjustments to each sharehold-
related person. tion. Under this section, $50 of the dividend and $50 er’s basis in corporation S. H, I, and J, however, will
(ii) Analysis. Under this section, an amount equal of the loss must be allocated in equal amounts in ac- not be able to take into account this loss until the fi-
to J’s basis in the corporation D stock redeemed, $400, cordance with A’s and B’s interests in PS. Accord- nal inclusion date or an accelerated loss inclusion date.
is treated as a loss recognized on a disposition of the ingly, if the remaining $100 of the dividend is allocated In Year 2, when J sells his stock of corporation S to
redeemed stock on the date of the redemption. Upon $50 to A and $50 to B under section 704 and the regu- K, J is no longer a shareholder in corporation S and
corporation D’s distribution of the stock of corpora- lations thereunder, $25 of each of the dividend and will be treated as the redeemed shareholder for pur-
tion C in Year 2, J’s loss attributable to the basis of the loss is allocated to each of A and B. A’s and B’s poses of determining whether a particular date is the
the redeemed corporation D stock is allocated among basis in their PS interests are increased by their shares final inclusion date or an accelerated loss inclusion
the stock of corporation D and corporation C that J of the dividend and decreased by their shares of the date. In addition, the determination of whether the date
owns, actually and constructively, immediately after loss attributable to the basis of the redeemed stock. of the Year 2 sale is the final inclusion date for J is
the distribution in proportion to the fair market value A and B will not be able to take that loss into ac- made by comparing J’s actual and constructive own-
of the stock of each such corporation. Although J does count until the final inclusion date or an accelerated ership of corporation S stock immediately prior to the
not actually own any stock of corporation D or cor- loss inclusion date. When A sells his PS interest to C, redemption to J’s actual and constructive ownership
poration C, because J constructively owns all of the an unrelated individual, PS and A are no longer re- of corporation S stock at the end of the date of the
stock of both corporation D and corporation C and lated. Therefore, PS no longer owns, actually or con- Year 2 sale. However, for purposes of computing J’s
each of the stock of corporation D and the stock of structively, any shares of corporation Z stock. Because ownership of the redeeming corporation immedi-
corporation C have the same value immediately af- B remains a partner in PS after January 1, Year 4, PS ately prior to the redemption, section 318(a)(2)(C) is
ter the distribution, $200 of the loss is allocated to each is treated as the redeemed shareholder for purposes applied without regard to the 50 percent limitation con-
of the stock of corporation D and the stock of cor- of determining if January 1, Year 4, is the final in- tained therein. Immediately prior to the redemption,
November 4, 2002 786 2002–44 I.R.B.
therefore, J is treated as owning actually and con- distribution to which section 301 applies if distribution in full payment in exchange for
structively 4 percent of the stock of corporation X and, section 302(a) or 303 does not apply. For stock of the acquiring corporation under
at the end of the day of J’s sale of corporation S stock,
J owns, actually and constructively, no corporation X rules regarding the amount constituting a section 302(a). The basis and holding pe-
stock. Therefore, if the facts that existed on the date dividend in such cases, see § 1.304–6. riod of the stock of the acquiring corpora-
of the Year 2 sale had existed immediately after the (2) In applying section 302(b), refer- tion that is treated as having been redeemed
redemption, J would have been treated as having re- ence shall be had to the shareholder’s own- shall be the same as the basis and hold-
ceived a distribution in part or full payment in ex-
ership of stock in the issuing corporation ing period of the stock of the issuing cor-
change for the redeemed stock pursuant to section
302(a). Therefore, the date of J’s sale of corporation and not to its ownership of stock in the ac- poration actually surrendered. The acquiring
S stock to K is the final inclusion date. J is permit- quiring corporation (except for purposes of corporation shall take a cost basis in the
ted to take into account J’s share of the loss attrib- applying section 318(a)), section 318(a) (re- stock of the issuing corporation that it ac-
utable to the basis of the redeemed stock as of that quires. See section 1012.
date. While H and I remain shareholders of corpora- lating to the constructive ownership of
tion S, whether a particular date is the final inclu- stock) shall be applied without regard to the *****
sion date will be determined by treating corporation 50 percent limitation contained in section (c) Examples. For purposes of the ex-
S as the redeemed shareholder. Thus, in Year 3 when 318(a)(2)(C) and (3)(C), and a series of re- amples in this section, each of corpora-
H disposes of his shares of corporation X, corpora-
demptions referred to in section tion X and corporation Y is a domestic
tion S actually and constructively owns no stock of
corporation X. As of that date, therefore, H and I will 302(b)(2)(D) shall include acquisitions by corporation that files U.S. tax returns on a
be permitted to take into account their respective shares either of the corporations of stock of the calendar-year basis. The principles of this
of the loss attributable to the basis of the redeemed other and stock redemptions by both cor- section are illustrated by the following
stock. examples:
(g) Effective date. This section applies porations.
Example 1. (i) Facts. Corporation X and corpo-
to transactions occurring after the date these (3) If, pursuant to section 302(d), sec- ration Y each have outstanding 100 shares of com-
regulations are published as final regula- tion 301 applies to the property treated as mon stock. A, an individual, owns one-half of the stock
tions in the Federal Register. received in redemption of stock of the ac- of each corporation, B owns one-half of the stock of
quiring corporation pursuant to paragraph corporation X, and C owns one-half of the stock of
Par. 4. Section 1.304–1 is revised to read corporation Y. A, B, and C are unrelated. A sells 30
as follows: (a)(1) of this section, the transferor and the
shares of the stock of corporation X, which have an
acquiring corporation shall be treated, for adjusted basis of $10,000, to corporation Y for $50,000.
§ 1.304–1 In general. all Federal income tax purposes, in the same (ii) Analysis. Because before the sale A owns 50
manner as if the transferor had transferred percent of the stock of corporation X and after the sale
(a) In general. Section 304 is appli- the stock of the issuing corporation to the A owns only 35 percent of such stock (20 shares di-
cable where a shareholder sells stock of one acquiring corporation in exchange for stock rectly and 15 constructively because one-half of the
corporation to a related corporation as de- 30 shares owned by corporation Y are attributed to A),
of the acquiring corporation in a transac- the redemption is substantially disproportionate as to
fined in section 304. Sales to which sec- tion to which section 351(a) applies, and A pursuant to the provisions of section 302(b)(2). A,
tion 304 is applicable shall be treated as then the acquiring corporation had redeemed therefore, realizes a gain of $40,000 ($50,000 mi-
redemptions subject to sections 302 and the stock it was treated as issuing in the nus $10,000). If the stock surrendered is a capital as-
303. transaction in exchange for the property. Ac- set, such gain is long-term or short-term capital gain
(b) Effective date. This section applies depending on the period of time that such stock was
cordingly, under section 362, the acquir-
to transactions occurring after the date these held. The basis to A for the stock of corporation Y is
ing corporation’s basis in the stock of the not changed as a result of the sale. Under section 1012,
regulations are published as final regula- issuing corporation is equal to the basis the the basis that corporation Y takes in the acquired stock
tions in the Federal Register. transferor had in that stock and, under sec- of corporation X is its cost of $50,000.
Par. 5. Section 1.304–2 is amended as tion 358, the transferor’s basis in the stock Example 2. (i) Facts. Corporation X and corpo-
follows: of the acquiring corporation deemed is- ration Y each have outstanding 200 shares of com-
1. Paragraphs (a) and (c) are revised. mon stock, all of which are owned by H, an individual.
sued to the transferor in the deemed trans- H has a basis in his corporation X stock of $60 and
2. Paragraph (d) is added. action to which section 351(a) applies is in his corporation Y stock of $30. Corporation X has
The revisions and addition read as equal to the transferor’s basis in the stock $80 of current and accumulated earnings and profits
follows: of the issuing corporation it surrendered. and corporation Y has $80 of current and accumu-
lated earnings and profits. H sells his 200 shares of
§ 1.304–2 Acquisition by related Section 1.302–5 applies to the transfer-
corporation X stock to corporation Y for $150.
corporation (other than subsidiary). or’s unutilized basis, if any, in the stock of (ii) Analysis. Because H is in control of both cor-
the acquiring corporation treated as re- poration X and corporation Y and receives property
(a) In general. (1) If a corporation (the deemed in connection with an acquisition from corporation Y in exchange for the corporation
acquiring corporation), in return for prop- described in paragraph (a)(1) of this sec- X stock, H’s sale of 200 shares of corporation X stock
to corporation Y is subject to section 304(a)(1). Ac-
erty, acquires stock of another corpora- tion by treating the acquiring corporation
cordingly, H is treated as receiving $150 as a distri-
tion (the issuing corporation) from one or as the redeeming corporation and the trans- bution in redemption of corporation Y stock. Because
more persons, and the person or persons feror as the redeemed shareholder. H actually owns 100 percent of corporation X be-
from whom the stock was acquired were in (4) If section 301 does not apply to the fore the sale and is treated as owning 100 percent of
control of both such corporations, then such property treated as received in redemp- corporation X after the sale, pursuant to section 302(d),
section 302(a) does not apply to the deemed redemp-
property shall be treated as received in re- tion of stock of the acquiring corporation
tion distribution and the proceeds of the deemed re-
demption of stock of the acquiring corpo- pursuant to paragraph (a)(1) of this sec- demption are treated as a distribution to which section
ration. As to each person transferring stock, tion, the property received by the trans- 301 applies. Therefore, H is treated as transferring the
the amount received shall be treated as a feror shall be treated as received in a corporation X stock to corporation Y in exchange for
2002–44 I.R.B. 787 November 4, 2002
corporation Y stock in a transaction to which sec- owned 100 percent of corporation Y directly and con- ent corporation as the redeeming corpora-
tion 351(a) applies. Corporation Y’s basis in the cor- structively. After the deemed redemption, A owns 100 tion and the shareholder as the redeemed
poration X stock acquired is $60, the same basis that percent of corporation Y constructively by attribu-
shareholder.
H had in the corporation X stock surrendered. H takes tion from B. Accordingly, the redemption distribu-
a basis of $60 in the corporation Y stock he is treated tion is treated as a distribution to which section 301 *****
as receiving in the deemed section 351 exchange. That applies. Because the earnings and profits of corpo- (c) Effective date. This section applies
corporation Y stock is then treated as redeemed by cor- ration Y exceed the amount of cash paid by corpo- on and after December 2, 1955, except for
poration Y for $150. Under section 302, that redemp- ration Y to A for the corporation X stock, pursuant to paragraph (a) of this section, which ap-
tion is treated as a distribution to which section 301 § 1.304–6(a), the entire amount is a dividend. An
applies because H owns directly 100 percent of cor-
plies to transactions occurring after the date
amount equal to the basis in the corporation Y stock
poration Y both before and after the redemption of the that A was deemed to receive and that was then
these regulations are published as final regu-
corporation Y stock that was deemed issued. Thus, the deemed redeemed, $25, is treated as a loss recog- lations in the Federal Register.
deemed redemption proceeds are treated as a distri- nized on a disposition of the stock deemed redeemed Par. 7. Section 1.304–5 is amended as
bution to which section 301 applies. Pursuant to on the date of the deemed redemption and is taken into follows:
§ 1.304–6(a), H is treated as receiving a dividend of account under rules set forth in §1.302–5. A’s basis
$150 ($80 from the current and accumulated earn- 1. Paragraph (a) is amended by adding
in the 75 shares that he continues to hold remains $1 a sentence at the end of the paragraph.
ings and profits of corporation Y and then $70 from
per share for an aggregate basis of $75.
the current and accumulated earnings and profits of 2. Paragraph (c) is revised.
corporation X). An amount equal to the basis in the (d) Effective date. This section, except
The revision and addition read as
corporation Y stock that H is deemed to receive and for paragraph (b) of this section, applies to follows:
that is deemed redeemed, $60 is treated as a loss rec- transactions occurring after the date these
ognized on a disposition of the stock deemed re-
regulations are published as final regula- § 1.304–5 Control.
deemed on the date of the deemed redemption and is
taken into account under rules set forth in § 1.302–5. tions in the Federal Register. Paragraph (b)
H’s basis in the 200 shares of corporation Y stock that of this section applies on and after Decem- (a) * * * Specifically, section 318(a)
H owned before the sale and continues to own im- ber 2, 1955. shall be applied by using the language “5
mediately after the sale remains $30. percent” instead of “50 percent” in sec-
Par. 6. Section 1.304–3 is amended as
Example 3. (i) Facts. The facts are the same as tion 318(a)(2)(C) and by using the lan-
in Example 2, except that corporation X has $5 of cur- follows:
1. Paragraph (a) is revised. guage “5 percent” instead of “50 percent”
rent and accumulated earnings and profits and cor-
poration Y has $25 of current and accumulated in section 318(a)(3)(C), except that if sec-
2. Paragraph (c) is added.
earnings and profits. tion 318(a)(3)(C) would not have applied
The revision and addition read as
(ii) Analysis. As in Example 2, H takes a basis of but for this substitution, by considering a
$60 in the corporation Y stock he is treated as re- follows:
corporation as owning the stock (other than
ceiving and $150 is treated as a distribution to which stock in such corporation) owned by or for
section 301 applies. Pursuant to § 1.304–6(a), H is § 1.304–3 Acquisition by a subsidiary.
treated as receiving a dividend of $30 ($25 from the
any shareholder of such corporation in that
current and accumulated earnings and profits of cor- (a) In general. If a subsidiary, in re- proportion which the value of the stock
poration Y and $5 from the current and accumu- turn for property, acquires stock of its par- which such shareholder owned in such cor-
lated earnings and profits of corporation X). In poration bears to the value of all stock in
addition, $60 of the distribution is treated as a re-
ent corporation from a shareholder of the
parent corporation, the acquisition of such such corporation.
turn of basis and $60 of the distribution is treated as
gain from the sale or exchange of corporation Y stock. stock shall be treated as if the parent cor- *****
H’s basis in the 200 shares of corporation Y stock that poration had redeemed its own stock in ex- (c) Effective date. This section applies
he owned before and continues to own immediately on and after January 20, 1994, except the
after the sale remains $30. Corporation Y’s basis in
change for the property. For purposes of this
the corporation X stock acquired is $60, the same ba- section, a corporation is a parent corpora- last sentence of paragraph (a) of this sec-
sis that H had in the corporation X stock surren- tion if it meets the 50 percent ownership re- tion applies to transactions occurring af-
dered. quirements of section 304(c). The ter the date these regulations are published
Example 4. (i) Facts. A, an individual, owns 100 as final regulations in the Federal Regis-
determination of whether the amount re-
shares of corporation X stock, which is all of the out- ter.
standing stock of corporation X. A has a basis of $1 ceived shall be treated as an amount re-
in each share of his corporation X stock. B, the son ceived in payment in exchange for the stock Par. 8. Section 1.304–6 is added to read
of A, owns all the outstanding stock of corporation shall be made by applying section 303, or as follows:
Y. A sells 25 shares of the stock of corporation X to
by applying section 302(b) with reference § 1.304–6 Amount constituting a
corporation Y for $50. For that year, the current and
accumulated earnings and profits of corporation Y ex- to the stock of the issuing parent corpora- dividend.
ceed $50. tion. For rules regarding the amount that
(ii) Analysis. Because A is in control of both cor- constitutes a dividend in a redemption (a) In general. The determination of the
poration X and corporation Y (corporation X di- treated as a distribution subject to section amount of the property that is a dividend
rectly and corporation Y through attribution from B)
and receives property in exchange for the corpora-
301, see § 1.304–6. For the treatment of the is made as if the property were distrib-
tion X stock, A’s sale of corporation X stock to cor- redeemed shareholder’s basis in the re- uted by the acquiring corporation to the ex-
poration Y is subject to section 304(a)(1). deemed stock in such cases, see § 1.302–5. tent of its earnings and profits and then by
Consequently, A is treated as transferring the corpo- Section 1.302–5 applies to the sharehold- the issuing corporation to the extent of its
ration X stock to corporation Y in exchange for cor- er’s unutilized basis, if any, in the stock of earnings and profits. Where, however, the
poration Y stock in a transaction to which section
351(a) applies. That corporation Y stock is then treated
the parent corporation treated as redeemed acquiring corporation is a foreign corpo-
as redeemed by corporation Y for $50. Before the in connection with an acquisition described ration, for purposes of the preceding sen-
deemed redemption of the corporation Y stock, A in this paragraph (a) by treating the par- tence, the earnings and profits of the
November 4, 2002 788 2002–44 I.R.B.
acquiring corporation are taken into ac- holder does not own directly any shares in The addition reads as follows:
count only to the extent that they— the 10 percent owned corporation as of the
(1) Are attributable to stock of the ac- end of the taxable year, but is treated for § 1.861–12T Characterization rules and
quiring corporation owned (within the purposes of section 302(b) as owning shares adjustments for certain assets
meaning of section 958(a)) by a corpora- (temporary regulations.)
actually owned by another member of the
tion or individual that is— redeemed shareholder’s affiliated group, as *****
(i) A United States shareholder (within defined in section 1504(a), or by a corpo-
the meaning of section 951(b)) of the ac- ration that is either an affiliate described in (c) * * *
quiring corporation; and § 1.904(i)–1(b)(1) or an affiliated corpo- (2) * * *
(ii) The transferor or a person who bears ration described in § 1.861–11T(d)(6) with (vi) [Reserved]. For further guidance, see
a relationship to the transferor described in § 1.861–12(c)(2)(vi).
respect to the redeemed shareholder, then
section 267(b) or 707(b); and
the adjusted basis of the shares in the 10
(2) Were accumulated during the pe- *****
percent owned corporation, if any, that are Par. 12. Section 1.1371–1 is added to
riod or periods such stock was owned by
owned by such other corporation or cor- read as follows:
such person while the acquiring corpora-
tion was a controlled foreign corporation. porations shall be increased by the amount
(b) Effective date. This section applies of the redeemed shareholder’s unrecov- § 1.1371–1 Coordination with
to transactions occurring after the date these ered loss (and allocated among such cor- subchapter C.
regulations are published as final regula- porations, if applicable, in proportion to their
relative adjusted bases (as adjusted pursu- (a) No carryover between C and S
tions in the Federal Register. years—(1) Loss attributable to basis of re-
Par. 9. Section 1.704–1 is amended by ant to this paragraph and § 1.861–12T(c)(2))
deemed stock. A loss described in § 1.302–
adding paragraph (b)(4)(viii) to read as in the stock of the redeeming corpora-
5(a) is treated as a carryforward arising in
follows: tion). These adjustments are to be made an-
a taxable year for which a corporation is a
nually and are noncumulative.
C corporation. Therefore, it may not be car-
§ 1.704–1 Partner’s distributive share. (vii) Examples. [Reserved]. Certain of the ried to a taxable year for which such cor-
rules of this paragraph (c)(2) may be illus- poration is an S corporation.
*****
trated by the following examples: (2)[Reserved].
(b) * * * Examples 1 and 2. [Reserved]. For further guid- (b) Effective date. This section applies
(4) * * * ance, see § 1.861–12T(c)(2)(vii), Examples 1 and 2. to transactions occurring after the date these
Example 3. The facts are the same as in § 1.861– regulations are published as final regula-
(viii) Loss attributable to basis of re-
12T(c)(2)(vii) Example 2, except that the taxable year tions in the Federal Register.
deemed stock under § 1.302–5. For rules re-
is 2003, and during the taxable year Y redeems some
garding allocations on a redemption of stock Par. 13. In § 1.1374–5, paragraph (a) is
of the shares of its stock held by X for $100,000. X’s
all or a portion of which is treated as a divi- adjusted basis in the redeemed shares is $50,000. Be-
amended by adding a sentence at the end
dend, see § 1.302–5(d)(6)(i). cause X still owns all of the outstanding stock of Y, of the paragraph.
the redemption is treated as a distribution with re-
***** spect to the stock of Y under section 301. Under § 1.1374–5 Loss carryforwards.
Par. 10. Section 1.861–12 is added to § 1.302–5, X’s $50,000 adjusted basis in the re-
read as follows: deemed shares is treated as a loss recognized on the (a) In general. * * * However, for re-
date of the redemption, none of which is taken into demptions of stock occurring after the date
§ 1.861–12 Characterization rules and account in 2003. X invests the $100,000 of redemp- these regulations are published as final regu-
adjustments for certain assets. tion proceeds in assets that generate foreign source gen- lations in the Federal Register, a loss at-
eral limitation income. Under paragraph (c)(2)(vi) of tributable to the basis of redeemed stock that
(a) through (c)(2)(v) [Reserved]. For fur- this section, X’s adjusted basis in its remaining Y stock
is taken into account pursuant to the rules
is considered to be $2,000,000 ($1,950,000 adjusted
ther guidance, see § 1.861–12T(a) through of § 1.302–5 is allowed for purposes of sec-
basis in the Y stock plus $50,000 unrecovered loss in
(c)(2)(v). the redeemed shares). X’s adjusted basis of assets that tion 1374(b)(2) as a deduction against net
(c)(2)(vi) Adjustments in respect of re- generate foreign source general limitation income is recognized built-in gain of the S corpora-
deemed stock for taxpayers using the tax considered to be $2,500,000 ($2,000,000 adjusted ba- tion for the taxable year, provided that the
book value method. Solely for purposes of sis in the Y stock plus $500,000 other assets), and the loss arose in a year in which the corpora-
apportioning expenses on the basis of the resulting apportionment of interest expense is the same tion was a C corporation.
tax book value of assets, the adjusted ba- as in § 1.861–12T(c)(2)(vii) Example 2.
sis of any stock in a 10 percent owned cor- (c)(3) through (j) [Reserved]. For fur- *****
poration owned directly by a taxpayer that ther guidance, see § 1.861–12T(c)(3) Par. 14. In § 1.1374–10, paragraph (a)
is a redeemed shareholder (as defined in through (j). is revised to read as follows:
§ 1.302–5(b)(1)) with respect to such cor- Par. 11. Section 1.861–12T is amended
as follows: § 1.1374–10 Effective date and
poration shall be increased by the amount
1. Paragraph (c)(2)(vi) is redesignated as additional rules.
of any loss that has not been taken into ac-
count under § 1.302–5(c) as of the close of paragraph (c)(2)(vii). (a) In general. Except as provided
the redeemed shareholder’s taxable year 2. New paragraph (c)(2)(vi) is added. in § 1.1374–5(a), §§ 1.1374–1 through
(unrecovered loss). If the redeemed share-
2002–44 I.R.B. 789 November 4, 2002
1.1374–9 apply for taxable years ending on P’s S stock and, as a result, an excess loss sition of S stock without regard to the ap-
or after December 27, 1994, but only in account is either increased or created in such plication of § 1.337(d)–2T.
cases where the S corporation’s return for redeemed stock, P takes into account such (iii) Application of other rules. In ad-
the taxable year is filed pursuant to an S excess loss account under the rules of para- dition to the rules set forth in this para-
election or a section 1374(d)(8) transac- graph (b)(5) of this section. graph (b)(5), the rules of § 1.302–5(d) apply
tion occurring on or after December 27, for purposes of determining the appropri-
1994. *****
ate time to take into account any portion of
(5) Redemptions of member stock; treat-
***** an excess loss account in redeemed stock
ment of excess loss account in redeemed
Par. 15. In § 1.1502–13, paragraph (f)(7) by treating P as the redeemed shareholder
stock—(i) In general. In any case in which
Example 3(b) is revised to read as follows: and S as the redeeming corporation. How-
an amount received in redemption of S
ever, the rules of § 1.302–5(d) shall be ap-
§ 1.1502–13 Intercompany transactions. stock is treated as a distribution to P to
plied by using the language “accelerated
which section 301 applies and such amount income inclusion date” instead of “accel-
***** either increases or creates an excess loss ac-
(f) * * * erated loss inclusion date” each time that
count in the redeemed S stock, after ad- term appears.
(7) * * * justing such basis or excess loss account to
Example 3. * * * (iv) Statement to be filed with returns.
reflect the application of section 301(c)(2),
(b) Treatment as a section 301 distribution. The With or as part of the income tax return for
merger of S into B is a transaction to which para- section 1059, § 1.1502–32, or any other ap-
the year in which P takes into account any
graph (f)(3) of this section applies. P is treated as re- plicable provision of the Internal Rev-
income attributable to an excess loss ac-
ceiving additional B stock with a fair market value of enue Code or the regulations thereunder,
$500 and, under section 358, a basis of $250. Imme-
count in redeemed stock, P shall provide a
such excess loss account is treated as in-
diately after the merger, $150 of the stock received statement entitled “Inclusion of Income At-
come (ordinary income or gain) recog-
is treated as redeemed, and the redemption is treated tributable to Excess Loss Account in Re-
under section 302(d) as a distribution to which sec- nized on a disposition of the redeemed stock
deemed Stock.” The statement shall specify
tion 301 applies. Because the $150 distribution is on the date of the redemption. Such in-
the amount of the income that is taken into
treated as not received as part of the merger, sec- come shall be taken into account by P un-
tion 356 does not apply and no basis adjustments are
account on such return pursuant to this para-
der the provisions of this paragraph (b)(5).
required under section 358(a)(1)(A) and (B). Be- graph (b)(5) and shall identify the shares
(ii) Inclusion of gain attributable to ex-
cause B is treated under section 381(c)(2) as receiv- to which such amounts relate.
ing S’s earnings and profits and the redemption is cess loss account in redeemed stock—(A)
treated as occurring after the merger, $100 of the dis- Amount taken into account on final inclu- *****
tribution is treated as a dividend under section 301 and sion date. On the final inclusion date (as (g) * * *
P’s basis in the B stock is reduced correspondingly defined in § 1.302–5(b)(3)), P must in- Example 7.Redemption of member stock. (a) Facts.
under § 1 .1502–32. Under paragraph (f)(2)(ii) of this
clude in income as ordinary income or gain P directly owns all of the outstanding stock of S1 and
section, P’s $100 of dividend income is not included S2. S1 and S2 each own 50 shares of S3’s outstand-
in gross income. Accordingly, P has a $75 excess loss the excess loss account in the redeemed
ing 100 shares of stock. P is the common parent of
account in the redeemed stock. That excess loss ac- stock, reduced by any amounts of such ex-
the consolidated group. S1’s adjusted basis in the S3
count is treated as income recognized on a disposi- cess loss account that are taken into ac- stock is $50. In Year 1, S3 redeems all of its stock
tion of the redeemed stock on the date of the count pursuant to the provisions of from S1 for $100. In Year 2, P sells all of its shares
redemption and is taken into account under the rules
paragraph (b)(5)(ii)(B) of this section. of S1 stock to an unrelated party.
of § 1.1502–19(b)(5).
(B) Amount taken into account on ac- (b) Analysis. In Year 1, because S1 actually and
celerated income inclusion date. (1) On an constructively owns 100 percent of stock of S3 im-
*****
mediately before and immediately after the redemp-
Par. 16. Section 1.1502–19 is amended accelerated income inclusion date (as de- tion, the redemption is treated as a distribution to which
as follows: fined in paragraph (b)(5)(ii)(B)(2) of this section 301 applies. S3’s distribution is an intercom-
1. Paragraph (b)(2)(i) is amended by section), P must include in income as or- pany distribution under § 1.1502–13(f)(2)(ii) and ex-
adding a sentence at the end of the para- dinary income or gain the excess loss ac- cluded from S1’s gross income. Under § 1.1502–32,
S1’s basis in S3’s stock is reduced by the amount of
graph. count of the redeemed stock to the extent
the distribution, creating an excess loss account of $50.
2. Paragraph (b)(5) is added. of the lesser of— Pursuant to paragraph (b)(5)(i) of this section, that ex-
3. Paragraph (g) Example 7 is added. (i) The amount of such excess loss ac- cess loss account is treated as income recognized on
4. The heading for paragraph (h) is re- count reduced by the amount of such ex- a disposition of the redeemed stock on the date of the
vised. cess loss account previously taken into redemption. That income, however, is not taken into
account on such date. Instead, it is taken into ac-
5. The first sentence of paragraph (h)(1) account pursuant to this paragraph (b)(5)(ii);
count on the date on which S1 departs from the con-
is removed and two new sentences are and solidated group as that date is the final inclusion date
added in its place. (ii) The amount of loss recognized on the because, if the facts that exist at the end of that day
The revisions and additions read as disposition of stock of S that the group of had existed immediately after the redemption, the re-
follows: which P is a member is permitted to take demption would have been treated as a distribution
in part or full payment in exchange for the redeemed
into account on such accelerated income in- stock pursuant to section 302(b)(3). Accordingly, S1
§ 1.1502–19 Excess loss accounts.
clusion date without regard to the applica- must include in its income as gain an amount equal
***** tion of § 1.337(d)–2T. to the excess loss account in the redeemed S3 stock.
(b) * * * (2) An accelerated income inclusion date (h) Effective dates—(1) Application. This
(2) * * * (i) * * * As another example, is a date on which P is permitted to take section, except for the last sentence of para-
if S redeems (or is treated as redeeming) into account a loss recognized on a dispo- graph (b)(2)(i), and paragraphs (b)(5) and
November 4, 2002 790 2002–44 I.R.B.
(g) Example 7 of this section, applies with for January 14, 2003, at 10 a.m., must be How the quality, utility, and clarity of the
respect to determinations of the basis of (in- received by January 2, 2003. information to be collected may be en-
cluding an excess loss account in) the stock hanced;
of a member in consolidated return years ADDRESSES: Send submissions to: How the burden of complying with the
beginning on or after January 1, 1995. The CC:ITA:RU (REG–124667–02), room 5226, proposed collection of information may be
last sentence of paragraph (b)(2)(i), and Internal Revenue Service, POB 7604, Ben minimized, including through the applica-
paragraphs (b)(5) and (g) Example 7 of this Franklin Station, Washington, DC 20044. tion of automated collection techniques or
section apply to transactions occurring af- In the alternative, submissions may be hand other forms of information technology; and
ter the date these regulations are published delivered to: CC:ITA:RU (REG–124667– Estimates of capital or start-up costs and
as final regulations in the Federal Regis- 02), room 5226, Internal Revenue Ser- costs of operation, maintenance, and pur-
ter. * * * vice, 1111 Constitution Avenue, NW, chase of services to provide information.
Washington, DC. Alternatively, taxpayers The collections of information in this
*****
may submit comments electronically via the proposed regulation are in § 1.417(a)(3)–1.
David A. Mader, Internet by submitting comments directly This information is required by the IRS to
Acting Deputy Commissioner to the IRS Internet site at: www.irs.gov/ comply with the requirements of section
of Internal Revenue. regs. The public hearing will be held in 417(a)(3) regarding explanations that must
room 4718 of the Internal Revenue Build- be provided to participants in a qualified
(Filed by the Office of the Federal Register on plan prior to a waiver of a qualified joint
October 17, 2002, 8:45 a.m., and published in the is- ing, 1111 Constitution Avenue, NW, Wash-
sue of the Federal Register for October 18, 2002, 67 ington, DC. and survivor annuity (QJSA) or a quali-
F.R. 64331) fied preretirement survivor annuity (QPSA).
This information will be used by partici-
FOR FURTHER INFORMATION
pants and spouses of participants to deter-
CONTACT: Concerning the regulations,
Notice of Proposed mine whether to waive a QJSA or QPSA,
Linda S. F. Marshall, 202–622–6090; con- and by the IRS to confirm that the plan
Rulemaking and Notice of cerning submissions and the hearing, and/or complies with applicable qualification re-
Public Hearing to be placed on the building access list to quirements to avoid adverse tax conse-
attend the hearing, Guy Traynor, 202–622– quences. The collections of information are
7180 (not toll-free numbers). mandatory. The respondents are nonprofit
Disclosure of Relative Values
institutions.
of Optional Forms of Benefit SUPPLEMENTARY INFORMATION:
Estimated total annual reporting burden:
Paperwork Reduction Act 375,000 hours.
REG–124667–02 The estimated annual burden per re-
The collections of information contained spondent varies from .01 to .99 hours, de-
AGENCY: Internal Revenue Service
in this notice of proposed rulemaking have pending on individual circumstances, with
(IRS), Treasury.
been submitted to the Office of Manage- an estimated average of .5 hours.
ACTION: Notice of proposed ment and Budget for review in accordance Estimated number of respondents:
rulemaking and notice of public hearing. with the Paperwork Reduction Act of 1995 750,000.
(44 U.S.C. 3507(d)). Comments on the col- The estimated annual frequency of
SUMMARY: This document contains pro- responses: on occasion.
lections of information should be sent to the
posed regulations that would consolidate the An agency may not conduct or spon-
Office of Management and Budget, Attn:
content requirements applicable to expla- sor, and a person is not required to re-
Desk Officer for the Department of the
nations of qualified joint and survivor an- spond to, a collection of information unless
Treasury, Office of Information and Regu-
nuities and qualified preretirement survivor it displays a valid control number assigned
latory Affairs, Washington, DC 20503, with
annuities payable under certain retirement by the Office of Management and Bud-
copies to the Internal Revenue Service, Attn:
plans, and would specify requirements for get.
IRS Reports Clearance Officer, W:CAR:
disclosing the relative value of optional Books or records relating to a collec-
MP:FP:S, Washington, DC 20224. Com-
forms of benefit that are payable from cer- tion of information must be retained as long
ments on the collections of information
tain retirement plans in lieu of a qualified as their contents may become material in
should be received by December 6, 2002.
joint and survivor annuity. These regula- the administration of any internal revenue
Comments are specifically requested
tions would affect retirement plan spon- law. Generally, tax returns and tax return
concerning:
sors and administrators, and participants in information are confidential, as required by
Whether the proposed collections of in-
and beneficiaries of retirement plans. This 26 U.S.C. 6103.
formation are necessary for the proper per-
document also provides notice of a pub- formance of the functions of the IRS, Background
lic hearing on these proposed regulations. including whether the information will have
practical utility; This document contains proposed
DATES: Written comments, requests to The accuracy of the estimated burden as- amendments to 26 CFR part 1 under sec-
speak and outlines of oral comments to be sociated with the proposed collection of in- tion 417(a)(3) of the Internal Revenue Code
discussed at the public hearing scheduled formation (see below); of 1986 (Code).
2002–44 I.R.B. 791 November 4, 2002
A qualified retirement plan to which sec- flect any early retirement subsidy in lieu of sued prior to the enactment of section 417,
tion 401(a)(11) applies must pay a vested a QJSA that reflects a substantial early re- and provides rules relating to written ex-
participant’s retirement benefit under the tirement subsidy. As a further example, a planations that were required prior to a par-
plan in the form of a qualified joint and sur- participant might be entitled to receive a ticipant’s election of a preretirement survivor
vivor annuity (QJSA), except as provided single-sum distribution at normal retire- annuity or election to waive a joint and sur-
in section 417. Section 401(a)(11) applies ment age in lieu of a QJSA that is subsi- vivor annuity. Section 1.401(a)–11(c)
to defined benefit plans, money purchase dized as described in section 417(a)(5). (3)(i)(C) provides that such a written ex-
pension plans, and certain other defined Section 417(a) provides rules under planation must contain a general explana-
contribution plans. A QJSA is defined in which a participant (with spousal consent) tion of the relative financial effect of these
section 417(b) as an annuity for the life of may waive payment of the participant’s ben- elections on a participant’s annuity.
the participant with a survivor annuity for efit in the form of a QJSA. Section In addition, under section 411 and
the life of the spouse (if the participant is 417(a)(3) provides that a plan must pro- § 1.411(a)–11(c), so long as a benefit is im-
married) that is not less than 50 percent of vide to each participant, within a reason- mediately distributable (within the mean-
(and is not greater than 100 percent of) the able period before the annuity starting date ing of § 1.411(a)–11(c)(4)), a participant
amount of the annuity that is payable dur- (and consistent with such regulations as the must be informed of his or her right to de-
ing the joint lives of the participant and the Secretary may prescribe) a written expla- fer that distribution. This requirement is in-
spouse. Under section 417(b)(2), a QJSA nation of the terms and conditions of the dependent of the section 417 requirements
for a married participant generally must be QJSA, the participant’s right to make, and addressed in these proposed regulations.
Concerns have been expressed that, in
the actuarial equivalent of the single life an- the effect of, an election to waive the QJSA
certain cases, the information provided to
nuity benefit payable for the life of the par- form of benefit, the rights of the partici-
participants under section 417(a)(3) regard-
ticipant. However, a plan is permitted to pant’s spouse, and the right to revoke (and
ing the available distribution forms does not
subsidize the QJSA for a married partici- the effect of the revocation of) an elec-
adequately enable them to compare those
pant. If the plan fully subsidizes the QJSA tion to waive the QJSA form of benefit.
distribution forms without professional ad-
for a married participant so that failure to Section 205 of the Employee Retire-
vice. In particular, participants who are eli-
waive the QJSA would not result in re- ment Income Security Act of 1974
gible for both subsidized annuity
duced payments over the life of the par- (ERISA), Public Law 93–406 (88 Stat. 829)
distributions and unsubsidized single-sum
ticipant compared to the single life annuity as subsequently amended, provides paral-
distributions may be receiving notices that
benefit, then the plan need not provide an lel rules to the rules of sections 401(a)(11)
do not adequately explain the value of the
election to waive the QJSA. See section and 417 of the Internal Revenue Code. In
subsidy that is foregone if the single-sum
417(a)(5). particular, section 205(a)(3) of ERISA pro-
distribution is elected. In such a case,
For a married participant, the QJSA must vides a parallel rule to section 417(a)(3) of
merely disclosing the amount of the single-
be at least as valuable as any other op- the Code. Treasury regulations issued un-
sum distribution and the amount of annu-
tional form of benefit payable under the der section 417(a)(3) of the Code apply as
ity payments may not adequately enable
plan at the same time. See § 1.401(a)–20, well for purposes of section 205(a)(3) of
those participants to make an informed
Q&A–16. Further, the anti-forfeiture rules ERISA.
comparison of the relative values of those
of section 411(a) prohibit a participant’s Regulations governing the requirements
distribution forms, even if the interest rate
benefit under a defined benefit plan from for waiver of a QJSA were published in the
used to derive the single sum is disclosed.
being satisfied through payment that is ac- Federal Register on August 19, 1988 (T.D.
Furthermore, questions have been raised as
tuarially less valuable than the value of the 8219, 1988–2 C.B. 48 [53 FR 31837]). Sec-
to how the relative values of optional forms
participant’s accrued benefit expressed in tion 1.401(a)–20, Q&A–36, provides rules
of benefit are required to be expressed un-
the form of an annual benefit commenc- for the explanation that must be provided
der current regulations. Accordingly, these
ing at normal retirement age. These deter- under section 417(a)(3) as a prerequisite to
proposed regulations are being issued to
minations must be made using reasonable waiver of a QJSA. Section 1.401(a)–20,
propose disclosure requirements that would
actuarial assumptions. However, see Q&A–36, requires that such a written ex-
enable participants to compare the rela-
§ 1.417(e)–1(d) for actuarial assumptions re- planation must contain a general descrip-
tive values of the available distribution
quired for use in certain present value cal- tion of the eligibility conditions and other
forms using more readily understandable in-
culations. material features of the optional forms of
formation.
If a plan provides a subsidy for one op- benefit and sufficient additional informa-
tional form of benefit (i.e., the payments un- tion to explain the relative values of the op- Explanation of Provisions
der an optional form of benefit have an tional forms of benefit available under the
actuarial present value that is greater than plan (e.g., the extent to which optional The proposed regulations would con-
the actuarial present value of the accrued forms are subsidized relative to the nor- solidate the content requirements appli-
benefit), there is no requirement to ex- mal form of benefit or the interest rates used cable to explanations of QJSAs and QPSAs
tend a similar subsidy (or any subsidy) to to calculate the optional forms). In addi- under section 417(a)(3), and would specify
every other optional form of benefit. Thus, tion, § 1.401(a)–20, Q&A–36, provides that rules for disclosing the relative value of op-
for example, a participant might be en- the written explanation must comply with tional forms of benefit as part of the QJSA
titled to receive a single-sum distribution the requirements set forth in § 1.401(a)– explanation. Similar to the requirements in
upon early retirement that does not re- 11(c)(3). Section 1.401(a)–11(c)(3) was is- the current regulations, the required expla-
November 4, 2002 792 2002–44 I.R.B.
nation must contain, with respect to each viding a description of the relative value of value to the value of the QJSA. Thus, these
of the optional forms of benefit presently an optional form of benefit compared to the rules would permit a plan that provides no
available to the participant, a description of value of the QJSA (and also for purposes subsidized forms of benefit to state the com-
the optional form of benefit, a descrip- of comparing the financial effect of the dis- parison of relative values simply by stat-
tion of the eligibility conditions for the op- tribution forms available to a participant), ing that all distribution forms are
tional form of benefit, a description of the a plan would be permitted to provide rea- approximately equal in value to the QJSA.
financial effect of electing the optional form sonable estimates (e.g., estimates based on Another way in which this disclosure
of benefit, a description of the relative value data as of an earlier date than the annuity may be simplified is through the use of rep-
of the optional form of benefit, and a de- starting date or an estimate of the spouse’s resentative values: if, under the banding
scription of any other material features of age). If estimates are used, the participant rule, two or more optional forms of ben-
the optional form of benefit. Further, as un- has a right to a more precise calculation efit are grouped, a representative relative
der the current regulations, the QJSA ex- upon request. value for all of the grouped options could
planation would be permitted to be made Since disclosing the relative value of ev- be used as the approximate relative value
either by providing the participant with in- ery optional form of benefit regardless of for all of the grouped options, in lieu of us-
formation specific to the participant, or by the degree of subsidy may be too burden- ing the relative value of one of the op-
providing the participant with generally ap- some, and may provide participants with in- tional forms of benefit in the group. For this
plicable information and offering the par- formation that appears more precise than is purpose, a representative relative value is
ticipant the opportunity to request additional warranted based on the inexact nature of the any relative value that is not less than the
information specifically applicable to the actuarial assumptions used, the proposed relative value of the member of the group
participant with respect to any optional regulations would provide some ways to of optional forms of benefit with the low-
forms of benefit available to the partici- simplify this disclosure of relative values est relative value and is not greater than the
pant. The proposed regulations would clarify of optional forms of benefit. One way in relative value of the member of that group
that a defined contribution plan is not re- which this disclosure would be simplified with the highest relative value when mea-
quired to provide a description of the rela- is through a banding rule under which two sured on a consistent basis. For example,
tive values of optional forms of benefit or more optional forms of benefit that have if three optional forms have relative val-
compared to the value of the QJSA. approximately the same value could be ues of 87.5%, 89%, and 91% of the value
The proposed regulations would pro- grouped for purposes of disclosing rela- of the QJSA, all three optional forms can
vide additional guidance regarding the re- tive value. Under these proposed regula- be treated as having a relative value of ap-
quired description of the relative values of tions, two or more optional forms of benefit proximately 90% of the value of the QJSA.
optional forms of benefit compared to the would be treated as having approximately The proposed regulations would also per-
value of the QJSA and the content of the the same value if those optional forms of mit the disclosure of the financial effect and
required disclosure of relative values. Un- benefit vary in relative value in compari- relative value of optional forms of ben-
der the proposed regulations, the descrip- son to the value of the QJSA by 5 percent- efit to be made in the form of generally ap-
tion of the relative value of an optional form age points or less when the relative value plicable information rather than information
of benefit compared to the value of the comparison is made by expressing the ac- specific to the participant, provided that in-
QJSA must be expressed in a manner that tuarial present value of each of those op- formation specific to the participant re-
provides a meaningful comparison of the tional forms of benefit as a percentage of garding the optional form of benefit must
relative economic values of the two forms the actuarial present value of the QJSA. For be furnished at the participant’s request.
of benefit without the participant having to such a group of optional forms of ben- Thus, under the proposed regulations, in lieu
make calculations using interest or mor- efit, the requirement relating to disclos- of providing a QJSA explanation that de-
tality assumptions. In order to make this ing the relative value of each optional form scribes each optional form that is pres-
comparison, the benefit under one or both of benefit compared to the value of the ently available to the participant, the
optional forms of benefit must be con- QJSA could be satisfied by disclosing the generalized QJSA explanation need only re-
verted, taking into account the time value relative value of any one of the optional flect the generally available optional forms
of money and life expectancies, so that both forms in the group compared to the value of benefits, along with a reference to where
are expressed in the same form. The pro- of the QJSA, and disclosing that the other a participant can obtain the information for
posed regulations give several examples of optional forms of benefit in the group are any other optional forms of benefits (such
techniques that may be used for this of approximately the same value. If a single- as optional forms from prior benefit struc-
comparison: expressing the actuarial present sum distribution is included in such a group tures for limited groups of employees) that
value of the optional form of benefit as a of optional forms of benefit, the single- are presently available to the participant.
percentage or factor of the actuarial present sum distribution must be the distribution With respect to the generally available
value of the QJSA; stating the amount of form that is used for purposes of this com- optional forms of benefits, in lieu of pro-
an annuity payable at the same time and un- parison. The relative value of all optional viding a statement of financial effect and
der the same conditions as the QJSA that forms of benefit that have an actuarial relative value comparison that is specific to
is the actuarial equivalent of the optional present value that is at least 95% of the ac- the participant, the generalized QJSA ex-
form of benefit; or stating the actuarial tuarial present value of the QJSA may be planation is permitted to include a chart or
present value of both the QJSA and the op- described by stating that those optional other comparable device showing a series
tional form of benefit. For purposes of pro- forms of benefit are of approximately equal of examples of financial effects and rela-
2002–44 I.R.B. 793 November 4, 2002
tive value comparisons for hypothetical par- ticipant. The uniform interest and mortal- employee’s individual circumstances. For
ticipants. The examples in the chart should ity assumptions should be used regardless example, the plan may wish to add fur-
reflect a representative range of ages for the of whether those assumptions are actu- ther explanation of the effects of ill health
hypothetical participants and use reason- ally used to determine the amount of ben- or other factors influencing expected lon-
able assumptions for the age of the hypo- efit payments under any particular optional gevity on the desirability of electing an-
thetical participant’s spouse and any other form. nuity forms of distribution.
variable that affects the financial effect, or The proposed regulations would also re- The proposed regulations contain rules
relative value, of the optional form of ben- quire disclosure of information to help a regarding the method for providing the
efit. The chart must be accompanied by a participant understand the significance of QJSA explanation and the QPSA explana-
general statement describing the effect of a disclosure of the relative value of an op- tion. Under the proposed regulations, these
significant variations between the assumed tional form of benefit. Under the proposed explanations must be written explanations.
First class mail to the last known address
ages or other variables on the financial ef- regulations, the notice would be required to
of the party is an acceptable delivery
fect of electing the optional form of ben- provide an explanation of the concept of
method for a section 417(a)(3) explana-
efit and the comparison of the relative value relative value. Specifically, the notice would
tion. Likewise, hand delivery is accept-
of the optional form of benefit to the value be required to explain that the relative value
able. However, the posting of the
of the QJSA. A generalized QJSA expla- comparison is intended to allow the par- explanation is not considered provision of
nation that includes this chart must also in- ticipant to compare the total value of dis- the section 417(a)(3) explanation.
clude the amount payable to the participant tributions paid in different forms, that the These proposed regulations do not ad-
under the normal form of benefit, either at relative value comparison is made by con- dress the extent to which the QJSA expla-
normal retirement age, or payable imme- verting the value of the optional forms of nation or the QPSA explanation can be
diately. In addition, this chart must be ac- benefit currently available to a common provided through electronic media. The IRS
companied by a statement that includes an form (such as the QJSA or single-sum dis- and the Treasury Department are consid-
offer to provide, upon the participant’s re- tribution), and that this conversion uses in- ering the extent to which the QJSA expla-
quest, a statement of financial effect along terest and life expectancy assumptions. nation and the QPSA explanation, as well
with a comparison of relative values that Under the proposed regulations, a re- as other notices under the various Inter-
is specific to the participant for one or more quired numerical comparison of the value nal Revenue Code requirements relating to
presently available optional forms of ben- of the optional form of benefit to the value qualified retirement plans, can be provided
efit, and a description of how a partici- of the QJSA under the plan generally would electronically, taking into account the ef-
pant may obtain this additional information. be required to disclose the interest rate that fect of the Electronic Signatures in Glo-
Thus, with respect to those optional forms is used to develop a required numerical bal and National Commerce Act (ESIGN),
of benefit for which additional informa- comparison. However, if all optional forms Public Law 106–229, 114 Stat. 464 (2000).
tion is requested, the participant must re- of benefit are permitted to be treated as hav- The IRS and the Treasury Department an-
ceive a QJSA explanation specific to the ing approximately the same value after ap- ticipate issuing proposed regulations re-
participant that is based on the partici- plication of the banding rule described garding these issues, and invite comments
pant’s actual age and benefit. above, then the plan would not be required on these issues.
The proposed regulations would pro- to disclose the interest rate used to de-
vide rules governing the actuarial assump- velop a required numerical comparison to Proposed Effective Date
tions to be used in comparing the value of the QJSA for optional form of benefit that
an optional form of benefit to the QJSA. is not subject to the requirements of sec- The regulations are proposed to be ap-
If an optional form of benefit is subject to tion 417(e)(3). In addition, the proposed plicable to QJSA explanations with re-
the requirements of section 417(e)(3) and regulations would require the plan to pro- spect to distributions with annuity starting
§ 1.417(e)–1(d) (e.g., a single-sum distri- vide a general statement that all numeri- dates on or after January 1, 2004, and to
bution), any comparison of the value of the cal comparisons of relative value provided QPSA explanations provided on or after
optional form of benefit to the value of the are based on average life expectancies, and January 1, 2004.
QJSA must be made using the applicable that the relative value of payments ulti- Special Analyses
mortality table and the applicable interest mately made under an annuity optional form
rate as defined in § 1.417(e)–1(d)(2) and (3) of benefit will depend on actual longev- It has been determined that this notice
(or, at the option of the plan, another rea- ity. of proposed rulemaking is not a signifi-
sonable interest rate and reasonable mor- Under the proposed regulations, both the cant regulatory action as defined in Ex-
tality table used under the plan to calculate QPSA explanation and the QJSA explana- ecutive Order 12866. Therefore, a regulatory
the amount payable under the optional form tion must be written in a manner calcu- assessment is not required. It is hereby cer-
of benefit). All other optional forms of ben- lated to be understood by the average tified that the collection of information in
efit payable to the participant must be com- participant. A plan may wish to provide ad- these regulations will not have a signifi-
pared with the QJSA using a single set of ditional information beyond the minimum cant economic impact on a substantial num-
interest rates and mortality tables that are information that would be required under ber of small entities. This certification is
reasonable and that are applied uniformly these proposed regulations, in order to help based upon the fact that qualified retire-
for this purpose with respect to all such an employee to evaluate the form of ben- ment plans of small businesses typically
other optional forms payable to the par- efit that would be most desirable under the commence distribution of benefits to few,
November 4, 2002 794 2002–44 I.R.B.
if any, plan participants in any given year Drafting Information 401(a)(11) only if the plan meets the re-
and, similarly, only offer elections to waive quirements of section 417(a)(3) and this sec-
a QPSA to few, if any, participants in any The principal author of these proposed tion regarding the written explanation
given year. Thus, the collection of infor- regulations is Linda S. F. Marshall of the required to be provided a participant with
mation in these regulations will only have Office of the Division Counsel/Associate
respect to a QJSA or a QPSA. A written ex-
a minimal economic impact on most small Chief Counsel (Tax Exempt and Govern-
planation required to be provided to a par-
entities. Therefore, an analysis under the ment Entities). However, other personnel
ticipant with respect to either a QJSA or a
Regulatory Flexibility Act (5 U.S.C. chap- from the IRS and Treasury participated in
QPSA under section 417(a)(3) and this sec-
ter 6) is not required. Pursuant to section their development.
***** tion is referred to in this section as a sec-
7805(f) of the Code, this notice of pro- tion 417(a)(3) explanation. See § 1.401(a)–
posed rulemaking will be submitted to the
Proposed Amendments to the 20, Q&A–37, for exceptions to the written
Chief Counsel for Advocacy of the Small
Regulations explanation requirement in the case of a
Business Administration for comment on its
fully subsidized QPSA or QJSA, and
impact on small business. Accordingly, 26 CFR part 1 is proposed § 1.401(a)–20, Q&A–38, for the defini-
to be amended as follows: tion of a fully subsidized QPSA or QJSA.
Comments and Public Hearing
(2) Time for providing section 417(a)(3)
PART 1 — INCOME TAX; TAXABLE
Before these proposed regulations are explanation—(i) QJSA explanation. See
YEARS BEGINNING AFTER
adopted as final regulations, consideration § 1.417(e)–1(b)(3)(ii) for rules governing the
DECEMBER 31, 1986.
will be given to written comments (pref- timing of the QJSA explanation.
erably a signed original and eight (8) cop- Paragraph 1. The authority citation for (ii) QPSA explanation. See § 1.401(a)–
ies) that are submitted timely to the IRS. part 1 continues to read in part as follows: 20, Q&A–35, for rules governing the tim-
Alternatively, taxpayers may submit com- Authority: 26 U.S.C. 7805 * * * ing of the QPSA explanation.
ments electronically to the IRS Internet site Par. 2. Paragraph (c)(3) of § 1.401(a)–11 (3) Required method for providing sec-
at www.irs.gov/regs. All comments will be is revised to read as follows: tion 417(a)(3) explanation. A section
available for public inspection and copy- 417(a)(3) explanation must be a written ex-
ing. The IRS and Treasury request com- § 1.401(a)–11 Qualified joint and planation. First class mail to the last known
ments on the clarity of the proposed rules survivor annuities. address of the participant is an acceptable
and how they may be made easier to un- delivery method for a section 417(a)(3) ex-
derstand or to implement. ***** planation. Likewise, hand delivery is ac-
A public hearing has been scheduled for (c) * * * ceptable. However, the posting of the
January 14, 2003, at 10 a.m. in room 4718 (3) Information to be provided by plan. explanation is not considered provision of
of the Internal Revenue Building, 1111 Con- For rules regarding the information re- the section 417(a)(3) explanation.
stitution Avenue, NW, Washington, DC. All quired to be provided with respect to the
(4) Understandability. A section
visitors must present photo identification to election to waive a QJSA or a QPSA, see
417(a)(3) explanation must be written in a
enter the building. Because of access re- § 1.417(a)(3)–1.
manner calculated to be understood by the
strictions, visitors will not be admitted be- average participant.
*****
yond the immediate entrance area more than (b) Required content of section 417(a)(3)
Par. 3. A–36 of § 1.401(a)–20 is re-
30 minutes before the hearing starts at the explanation—(1) Content of QPSA expla-
vised to read as follows:
Constitution Avenue entrance. For infor- nation. The QPSA explanation must con-
mation about having your name placed on § 1.401(a)–20 Requirements of qualified tain a general description of the QPSA, the
the building access list to attend the hear- joint and survivor annuity and qualified circumstances under which it will be paid
ing, see the “FOR FURTHER INFORMA- preretirement survivor annuity. if elected, the availability of the election of
TION CONTACT” section of this preamble. the QPSA, and, except as provided in para-
The rules of 26 CFR 601.601(a)(3) ap- ***** graph (d)(3) of this section, a description
ply to the hearing. Persons who wish to A–36. For rules regarding the explana- of the financial effect of the election of the
present oral comments at the hearing must tion of QPSAs and QJSAs required under QPSA on the participant’s benefits (i.e., an
submit written comments and an outline of section 417(a)(3), see § 1.417(a)(3)–1. estimate of the reduction to the partici-
the topics to be discussed and the time to pant’s estimated normal retirement ben-
be devoted to each topic (signed original *****
Par. 4. Section 1.417(a)(3)–1 is added to efit that would result from an election of
and eight (8) copies) by January 2, 2003. the QPSA).
A period of 10 minutes will be allotted to read as follows:
(2) Content of QJSA explanation. The
each person for making comments. An QJSA explanation must satisfy either para-
§ 1.417(a)(3)–1 Required explanation of
agenda showing the scheduling of the graph (c) or paragraph (d) of this section.
qualified joint and survivor annuity and
speakers will be prepared after the dead- Under paragraph (c) of this section, the
qualified preretirement survivor annuity.
line for receiving outlines has passed. Cop- QJSA explanation must contain certain spe-
ies of the agenda will be available free of (a) Written explanation requirement— cific information relating to the benefits
charge at the hearing. (1) General rule. A plan meets the survi- available under the plan to the particular
vor annuity requirements of section participant. Alternatively, under paragraph
2002–44 I.R.B. 795 November 4, 2002
(d) of this section, the QJSA explanation at the same time and under the same con- value of the member of that group with the
can contain generally applicable informa- ditions as the QJSA; or highest relative value when measured on a
tion in lieu of specific participant informa- (C) Stating the actuarial present value of consistent basis. For example, if three op-
tion, provided that the participant has the both the optional form of benefit and the tional forms have relative values of 87.5%,
right to request additional information re- QJSA. 89%, and 91% of the value of the QJSA,
garding the participant’s benefits under the (ii) Simplified presentations permitted— all three optional forms can be treated as
plan. (A) Grouping of certain optional forms. having a relative value of approximately
(c) Participant-specific information re- Two or more optional forms of benefit that 90% of the value of the QJSA. As required
quired to be provided—(1) In general. A have approximately the same value may be under paragraph (c)(2)(ii)(A) of this sec-
QJSA explanation satisfies this paragraph grouped for purposes of a required numeri- tion, if a single-sum distribution is included
(c) if it provides the following informa- cal comparison described in this paragraph in the group of optional forms of benefit,
tion with respect to each of the optional (c)(2). For this purpose, two or more op- the 90% relative factor of the value of the
forms of benefit presently available to the tional forms of benefit have approximately QJSA must be disclosed as the approxi-
participant— the same value if those optional forms of mate relative value of the single sum, and
(i) A description of the optional form of benefit vary in relative value in compari- the other forms can be described as hav-
benefit; son to the value of the QJSA by 5 percent- ing the same approximate value as the
(ii) A description of the eligibility con- age points or less when the relative value single sum.
ditions for the optional form of benefit; comparison is made by expressing the ac- (iii) Actuarial assumptions used to de-
(iii) A description of the financial ef- tuarial present value of each of those op- termine relative values. For the purpose of
fect of electing the optional form of ben- tional forms of benefit as a percentage of providing a numerical comparison of the
efit (i.e., the amount payable under the form the actuarial present value of the QJSA. For value of an optional form of benefit to the
of benefit); such a group of optional forms of ben- value of the immediately commencing
(iv) In the case of a defined benefit plan, efit, the requirement relating to disclos- QJSA, the following rules apply—
a description of the relative value of the op- ing the relative value of each optional form (A) If an optional form of benefit is sub-
tional form of benefit compared to the value of benefit compared to the value of the ject to the requirements of section 417(e)(3)
of the QJSA, in the manner described in QJSA can be satisfied by disclosing the and § 1.417(e)–1(d), any comparison of the
paragraph (c)(2) of this section; and relative value of any one of the optional value of the optional form of benefit to the
(v) A description of any other material forms in the group compared to the value value of the QJSA must be made using the
features of the optional form of benefit. of the QJSA, and disclosing that the other applicable mortality table and the appli-
(2) Requirement for numerical compari- optional forms of benefit in the group are cable interest rate as defined in § 1.417(e)–
son of relative values—(i) In general. The of approximately the same value. If a single- 1(d)(2) and (3) (or, at the option of the plan,
description of the relative value of an op- sum distribution is included in such a group another reasonable interest rate and rea-
tional form of benefit compared to the value of optional forms of benefit, the single- sonable mortality table used under the plan
of the QJSA under paragraph (c)(1)(iv) of sum distribution must be the distribution to calculate the amount payable under the
this section must be expressed to the par- form that is used for purposes of this com- optional form of benefit); and
ticipant in a manner that provides a mean- parison. In addition, the relative value of (B) All other optional forms of benefit
ingful comparison of the relative economic all optional forms of benefit that have an payable to the participant must be com-
values of the two forms of benefit with- actuarial present value that is at least 95% pared with the QJSA using a single set of
out the participant having to make calcu- of the actuarial present value of the QJSA interest and mortality assumptions that are
lations using interest or mortality is permitted to be described by stating that reasonable and that are applied uniformly
assumptions. Thus, in performing the cal- those optional forms of benefit are approxi- with respect to all such optional forms pay-
culations necessary to make this compari- mately equal in value to the QJSA, or that able to the participant (regardless of whether
son, the benefits under one or both optional all of those forms of benefit and the QJSA those assumptions are actually used un-
forms of benefit must be converted, tak- are approximately equal in value. der the plan for purposes of determining
ing into account the time value of money (B) Representative relative value for benefit payments).
and life expectancies, so that the values of grouped optional forms. If, in accordance (iv) Required disclosure of
both optional forms of benefit are expressed with paragraph (c)(2)(ii)(A) of this sec- assumptions—(A) Explanation of concept
in the same form. For example, such a com- tion, two or more optional forms of ben- of relative value. The notice must pro-
parison may be expressed to the partici- efits are grouped, the relative values for all vide an explanation of the concept of rela-
pant using any of the following of the optional forms of benefit in the group tive value, communicating that the relative
techniques— can be stated using a representative rela- value comparison is intended to allow the
(A) Expressing the actuarial present tive value as the approximate relative value participant to compare the total value of dis-
value of the optional form of benefit as a for the entire group. For this purpose, a rep- tributions paid in different forms, that the
percentage or factor of the actuarial present resentative relative value is any relative relative value comparison is made by con-
value of the QJSA; value that is not less than the relative value verting the value of the optional forms of
(B) Stating the amount of the annuity of the member of the group of optional benefit presently available to a common
that is the actuarial equivalent of the op- forms of benefit with the lowest relative form (such as the QJSA or a single-sum dis-
tional form of benefit and that is payable value and is not greater than the relative tribution), and that this conversion uses in-
November 4, 2002 796 2002–44 I.R.B.
terest and life expectancy assumptions. The (iii) Revision of prior information. If a ing the financial effect and relative value
explanation of relative value must include more precise calculation described in para- of optional forms of benefit in a series of
a general statement that all comparisons graph (c)(3)(ii) of this section materially examples specifying the amount of the op-
provided are based on average life expect- changes the relative value of an optional tional form of benefit payable to a hypo-
ancies, and that the relative value of pay- form compared to the value of the QJSA, thetical participant at a representative range
ments ultimately made under an annuity the revised relative value of that optional of ages and the comparison of relative val-
optional form of benefit will depend on ac- form must be disclosed, regardless of ues at those same representative ages. Each
tual longevity. whether the financial effect of selecting the example in this chart must show the finan-
(B) Disclosure of interest assumptions. optional form is affected by the more pre- cial effect of electing the optional form of
A required numerical comparison of the cise calculation. benefit pursuant to the rules of paragraph
value of the optional form of benefit to the (4) Special rules for disclosure of fi- (c)(1)(iii) of this section, and a compari-
value of the QJSA under the plan is re- nancial effect for defined contribution plans. son of the relative value of the optional
quired to disclose the interest rate that is For a written explanation provided by a de- form of benefit to the value of the QJSA
used to develop the comparison. If all op- fined contribution plan, a description of fi- pursuant to the rules of paragraph (c)(2) of
tional forms of benefit are permitted to be nancial effect required by paragraph this section, using reasonable assumptions
grouped under paragraph (c)(2)(ii)(A) of this (c)(1)(iii) of this section with respect to an for the age of the hypothetical participant’s
section, then the requirement of this para- annuity form of benefit must include a state- spouse and any other variables that affect
graph (c)(2)(iv)(B) does not apply for any ment that the annuity will be provided by the financial effect, or relative value, of the
optional form of benefit not subject to the purchasing an annuity contract from an in- optional form of benefit. The requirement
requirements of section 417(e)(3) and surance company with the participant’s ac- to show the financial effect of electing an
§ 1.417(e)–1(d)(3). count balance under the plan. If the optional form can be satisfied through the
(3) Permitted estimates of financial ef- description of the financial effect of the op- use of other methods (e.g., expressing the
fect and relative value—(i) General rule. tional form of benefit is provided using es- amount of the optional form as a percent-
For purposes of providing a description of timates rather than by assuring that an age or a factor of the amount payable un-
the financial effect of the distribution forms insurer is able to provide the amount dis- der the normal form of benefit), provided
available to a participant as required un- closed to the participant, the written ex- that the method provides sufficient infor-
der paragraph (c)(1)(iii) of this section, and planation must also disclose this fact. mation so that a participant can determine
for purposes of providing a description of (d) Substitution of generally applicable the amount of benefits payable in the op-
the relative value of an optional form of information for participant information in tional form. The chart or other compa-
benefit compared to the value of the QJSA the section 417(a)(3) explanation—(1) rable device must be accompanied by the
for a participant as required under para- Forms of benefit available. In lieu of pro- disclosures described in paragraph (c)(2)(iv)
graph (c)(1)(iv) of this section, the plan is viding the information required under para- of this section explaining the concept of
permitted to provide reasonable estimates graphs (c)(1)(i) through (v) of this section relative value and disclosing certain inter-
(e.g., estimates based on data as of an ear- for each optional form of benefit pres- est assumptions. In addition, the chart or
lier date than the annuity starting date, a rea- ently available to the participant as de- other comparable device must be accom-
sonable assumption for the age of the scribed in paragraph (c) of this section, the panied by a general statement describing the
participant’s spouse, or, in the case of a de- QJSA explanation may contain the infor- effect of significant variations between the
fined contribution plan, reasonable esti- mation required under paragraphs (c)(1)(i) assumed ages or other variables on the fi-
mates of amounts that would be payable through (v) of this section for the QJSA and nancial effect of electing the optional form
under a purchased annuity contract), in- each other optional form of benefit gener- of benefit and the comparison of the rela-
cluding reasonable estimates of the appli- ally available under the plan, along with a tive value of the optional form of benefit
cable interest rate under section 417(e)(3). reference to where a participant may readily to the value of the QJSA.
(ii) Right to more precise calculation. If obtain the information required under para- (ii) Actual benefit must be disclosed. The
a QJSA notice uses a reasonable estimate graphs (c)(1)(i) through (v) of this sec- generalized notice described in this para-
under paragraph (c)(3)(i) of this section, the tion for any other optional forms of benefit graph (d)(2) will satisfy the requirements
QJSA explanation must identify the esti- that are presently available to the partici- of paragraph (b)(2) of this section only if
mate and explain that the plan will, upon pant. the notice includes either the amount pay-
the request of the participant, provide a (2) Financial effect and comparison of able to the participant under the normal
more precise calculation and the plan must relative values—(i) General rule. In lieu of form of benefit or the amount payable to
provide the participant with a more pre- providing a statement of the financial ef- the participant under the normal form of
cise calculation if so requested. Thus, for fect of electing an optional form of ben- benefit adjusted for immediate commence-
example, if a plan provides an estimate of efit as required under paragraph (c)(1)(iii) ment. For this purpose, the normal form of
the amount of the QJSA that is based on of this section, or a comparison of rela- benefit is the form under which payments
a reasonable assumption concerning the age tive values as required under paragraph due to the participant under the plan are ex-
of the participant’s spouse, the participant (c)(1)(iv) of this section, based on the ac- pressed under the plan, prior to adjust-
can request a calculation that takes into ac- tual age and benefit of the participant, the ments for form of benefit. For example,
count the actual age of the spouse, as pro- QJSA explanation is permitted to include assuming that a plan’s benefit accrual for-
vided by the participant. a chart (or other comparable device) show- mula is expressed as a straight life annu-
2002–44 I.R.B. 797 November 4, 2002
ity, the generalized notice must provide the tual age and benefit. In addition, the plan lent in value to a QJSA of $1,215. (This amount is
amount of either the straight life annuity must comply with paragraph (c)(3)(iii) of 45% of the value of the QJSA at age 55 ($1,215 di-
vided by 89.96% of $3,000 equals 45%).) The ex-
commencing at normal retirement age or the this section.
planation states that the relative value comparison
straight life annuity commencing immedi- (ii) Explanation of QPSA. If, as permit- converts the value of the single life annuity and the
ately. ted under paragraph (d)(3) of this sec- single-sum options to the value of each if paid in the
(iii) Ability to request additional infor- tion, the content of a QPSA explanation form of the QJSA and that this conversion uses in-
mation. The generalized notice described in does not include all the items described in terest and life expectancy assumptions. The explana-
paragraph (b)(1) of this section, then, upon tion specifies that the calculations relating to the single-
this paragraph (d)(2) must be accompa- sum distribution were prepared using 5.5% interest and
nied by a statement that includes an offer a timely request from the participant for an
average life expectancy, that the other calculations were
to provide, upon the participant’s request, estimate of the reduction to the partici-
prepared using a 6% interest rate and that the rela-
a statement of financial effect and a com- pant’s estimated normal retirement ben- tive value of actual annuity payments for an indi-
parison of relative values that is specific to efit that would result from a QPSA election, vidual can vary depending on how long the individual
the participant for any presently available the plan must furnish such an estimate. and spouse live. The explanation notes that the cal-
optional form of benefit, and a descrip- (e) Examples. The following examples culation of the QJSA assumed that the spouse was age
illustrate the application of this section. 55, that the amount of the QJSA will depend on the
tion of how a participant may obtain this actual age of the spouse (for example, annuity pay-
additional information. Solely for purposes of these examples, the
ments will be significantly lower if the spouse is sig-
applicable interest rate that applies to any
(3) Financial effect of QPSA election. In nificantly younger than the participant), and that the
distribution that is subject to the rules of
lieu of providing a specific description of amount of the single-sum payment will depend on the
section 417(e)(3) is assumed to be 51⁄2%, interest rates that apply when the participant actu-
the financial effect of the QPSA election,
and the applicable mortality table under sec- ally takes a distribution. The explanation also in-
the QPSA explanation may provide a gen-
tion 417(e)(3) and § 1.417(e)–1(d)(2) is as- cludes an offer to provide a more precise calculation
eral description of the financial effect of the to the participant taking into account the spouse’s ac-
sumed to be the table that applies as of
election. Thus, for example, the descrip- tual age.
January 1, 2003. In addition, solely for pur-
tion can be in the form of a chart show- (iv) Participant M requests a more precise calcu-
poses of these examples, assume that a plan
ing the reduction to a hypothetical lation of the financial effect of choosing a QJSA, tak-
which determines actuarial equivalence us-
participant’s normal retirement benefit at a ing into the actual age of Participant M’s spouse. Based
ing 6% interest and the applicable mortal- on the fact that M’s spouse is age 50, Plan A deter-
representative range of participant ages as
ity table under section 417(e)(3) and mines that the monthly payments under the QJSA are
a result of the QPSA election (using a rea-
§ 1.417(e)–1(d)(2) that applies as of Janu- 87.62% of the monthly payments under the single life
sonable assumption for the age of the hy- annuity, or $2,628.60 per month, and provides this in-
ary 1, 1995, is using reasonable actuarial
pothetical participant’s spouse relative to the formation to M. Plan A is not required to provide an
assumptions. The examples are as follows:
age of the hypothetical participant). In ad- Example 1. (i) Participant M participates in Plan updated calculation of the relative value of the single
dition, this chart must be accompanied by A, a qualified defined benefit plan. Under Plan A, the sum because the value of single sum continues to be
a statement that includes an offer to pro- QJSA is a joint and 100% survivor annuity, which is 45% of the value of the QJSA.
vide, upon the participant’s request, an es- actuarially equivalent to the single life annuity de- Example 2. (i) The facts are the same as in Ex-
timate of the reduction to the participant’s termined using 6% interest and the section 417(e)(3) ample 1, except that under Plan A, the single-sum dis-
applicable mortality table that applies as of January tribution is determined as the actuarial present value
estimated normal retirement benefit, and a 1, 1995. On January 1, 2004, M will terminate em- of the immediately commencing single life annuity.
description of how a participant may ob- ployment at age 55. When M terminates employ- In addition, Plan A provides a joint and 75% survi-
tain this additional information. ment, M will be eligible to elect an unreduced early vor annuity that is reduced from the single life an-
(4) Additional information required to be retirement benefit, payable as either a life annuity or nuity and that is the QJSA under Plan A. For purposes
furnished at the participant’s request—(i) the QJSA. M will also be eligible to elect a single- of determining the amount of the QJSA, the reduc-
sum distribution equal to the actuarial present value tion is only half of the reduction that would nor-
Explanation of QJSA. If, as permitted un- of the single life annuity payable at normal retire- mally apply under the actuarial assumptions specified
der paragraphs (d)(1) and (2) of this sec- ment age (age 65), determined using the applicable in Plan A for determining actuarial equivalence of op-
tion, the content of a QJSA explanation does mortality table and the applicable interest rate under tional forms.
not include all the items described in para- section 417(e)(3). (ii) In lieu of providing information specific to Par-
(ii) Participant M is provided with a QJSA ex- ticipant M in the QJSA notice as set forth in para-
graph (c) of this section, then, upon a timely
planation that describes the single life annuity, the graph (c) of this section, Plan A satisfies the QJSA
request from the participant for any of the QJSA, and single-sum distribution option under the explanation requirement in accordance with para-
information required under paragraphs plan, and any eligibility conditions associated with graph (d)(2) of this section by providing M with a
(c)(1)(i) through (v) of this section for one these options. The explanation indicates that, if Par- statement that M’s monthly benefit under an imme-
or more presently available optional forms ticipant M commenced benefits at age 55 and had a diately commencing single life annuity (which is the
spouse age 55, the monthly benefit under an imme- normal form of benefit under Plan A, adjusted for im-
(including a request for all optional forms
diately commencing single life annuity is $3,000, the mediate commencement) is $3,000, along with the fol-
presently available to the participant), the monthly benefit under the QJSA is estimated to be lowing chart showing the financial effect and the
plan must furnish the information required 89.96% of the monthly benefit under the immedi- relative value of the optional forms of benefit com-
under paragraphs (c)(1)(i) through (v) of this ately commencing single life annuity or $2,699, and pared to the QJSA for a hypothetical participant with
section with respect to those optional forms. the single sum is estimated to be 74.7645 times the a $1,000 benefit and a spouse who is three years
monthly benefit under the immediately commenc- younger than the participant. For each optional form
Thus, with respect to those optional forms
ing single life annuity or $224,293. generally available under the plan, the chart shows the
of benefit, the participant must receive a (iii) The QJSA explanation indicates that the single financial effect and the relative value, using the group-
QJSA explanation specific to the partici- life annuity and the QJSA are of approximately the ing rules of paragraph (c)(2)(ii) of this section. Sepa-
pant that is based on the participant’s ac- same value, but that the single-sum option is equiva- rate charts are provided for ages 55, 60, and 65.
November 4, 2002 798 2002–44 I.R.B.
Age 55 Commencement
Optional Form Amount of distribution per $1,000 of immediate Relative Value
single life annuity
Life Annuity $1,000 per month approximately the same value as the QJSA
QJSA (joint and 75% survivor annuity) $956 per month n/a
Joint and 100% survivor annuity $886 per month approximately the same value as the QJSA
Lump sum $165,959 approximately the same value as the QJSA
Age 60 Commencement
Optional Form Amount of distribution per $1,000 of immediate Relative Value
single life annuity
Life Annuity $1,000 per month approximately 94% of the value of the QJSA
QJSA (joint and 75% survivor annuity) $945 per month n/a
Joint and 100% survivor annuity $859 per month approximately 94% of the value of the QJSA
Lump sum $151,691 approximately the same value as the QJSA
Age 65 Commencement
Optional Form Amount of distribution per $1,000 of immediate Relative Value
single life annuity
Life Annuity $1,000 per month approximately 93% of the value of the QJSA
QJSA (joint and 75% survivor annuity) $932 per month n/a
Joint and 100% survivor annuity $828 per month approximately 93% of the value of the QJSA
Lump sum $135,759 approximately 93% of the value of the QJSA
(iii) The chart disclosing the financial effect
and relative value of the optional forms specifies
(vi) Plan A provides M with a QJSA explana- Dual Consolidated Loss
tion that incorporates these more precise calcula-
that the calculations were prepared assuming that tions of the financial effect and relative value of the Recapture Events; Correction
the spouse is three years younger than the
participant, that the calculations relating to the optional forms for which M requested information.
single-sum distribution were prepared using 5.5% (f) Effective date. This section applies to
interest and average life expectancy, that the other QJSA explanations provided with respect Announcement 2002–100
calculations were prepared using a 6% interest rate,
and that the relative value of actual payments for to distributions with annuity starting dates
an individual can vary depending on how long the on or after January 1, 2004, and to QPSA AGENCY: Internal Revenue Service
individual and spouse live. The explanation states
explanations provided on or after January (IRS), Treasury.
that the relative value comparison converts the
QJSA, the single life annuity, the joint and 100% 1, 2004. ACTION: Notice of proposed
survivor annuity, and the single-sum options to an
equivalent present value and that this conversion § 1.417(e)–1 [Amended] rulemaking and notice of public hearing.
uses interest and life expectancy assumptions. The
explanation notes that the calculation of the QJSA
depends on the actual age of the spouse (for Par. 5. In § 1.417(e)–1, paragraph (b)(2) SUMMARY: This document contains cor-
example, annuity payments will be significantly is amended by removing the language rections to proposed regulations (REG–
lower if the spouse is significantly younger than
the participant), and that the amount of the single- “§ 1.401(a)–20 Q&A–36” and adding 106879–00, 2002–34 I.R.B. 402) as
sum payment will depend on the interest rates that “§ 1.417(a)(3)–1” in its place. published in the Internal Revenue Bulle-
apply when the participant actually takes a
distribution. The explanation also includes an offer
tin. These regulations under section 1503(d)
to provide a calculation specific to the participant Robert E. Wenzel, relate to the events that require the recap-
upon request. Deputy Commissioner of ture of dual consolidated losses.
(iv) Participant M requests information regard-
Internal Revenue.
ing the amounts payable under the QJSA, the joint and
100% survivor annuity, and the single sum. DATES: These corrections are effective
(Filed by the Office of the Federal Register on October 4,
(v) Based on the information about the age of Par- 2002, 8:45 a.m., and published in the issue of the Federal Reg-
August 26, 2002.
ticipant M’s spouse, Plan A determines that M’s QJSA ister for October 7, 2002, 67 F.R. 62417)
is $2,856.30 per month, the joint and 100% survi- FOR FURTHER INFORMATION
vor annuity is $2,628.60 per month, and the single sum CONTACT: Kenneth D. Allison or
is $497,876. The actuarial present value of the QJSA Kathryn T. Holman at (202) 622–3860 (not
(determined using the 5.5% interest and the section
417(e)(3) applicable mortality table, the actuarial as-
a toll-free number).
sumptions required under section 417) is $525,091.
Accordingly, the value of the single-sum distribu-
tion available to M at January 1, 2004, is 94.8% of
the actuarial present value of the QJSA. In addition,
the actuarial present value of the life annuity and the
100% joint and survivor annuity are 95.0% of the ac-
tuarial present value of the QJSA.
2002–44 I.R.B. 799 November 4, 2002
SUPPLEMENTARY INFORMATION: Request for Applications to web site (www.irs.gov) for a complete list-
Participate in the 2003 IRS ing of accepted forms and schedules.
Background
Individual e-file Partnership FILING SEASON 2003
The notice of proposed rulemaking that Program
is the subject of these corrections is un- For Filing Season 2003, the IRS will fo-
der section 1503(d). cus on the 1040 series income tax returns
Announcement 2002–101 covering “IRS e-file Using a Tax Preparer”
Need for Correction and “IRS e-file Using a Personal Com-
The Stakeholder Partnerships, Educa- puter.” Additional emphasis is being placed
As published in the Internal Revenue
tion and Communication (SPEC) func- on the following features: “Self-Select Per-
Bulletin, this notice of proposed rulemak-
tion within the Internal Revenue Service sonal Identification Number (PIN) for e-file;
ing contains errors which may prove to be
(IRS) is continuing its efforts to establish “Using e-file for Federal/State Returns”, and
misleading and are in need of clarifica-
IRS e-file partnerships with various enti- “Electronic Payment Options” for balance
tion.
ties. The IRS is seeking non-monetary e-file due and estimated payment options.
Correction of Publication Emphasis should also be placed on the
partnerships for Filing Season 2003. No ap-
first-time filer population. IRS research in-
plications for funding (monetary compen-
Accordingly, the notice of proposed rule- dicates that this segment of the popula-
sation) will be considered. Applications may
making (REG–106879–00) as published in tion continues to lag behind other segments
be submitted by a commercial business,
the Internal Revenue Bulletin is corrected of the population that e-file. In addition, re-
as follows: non-profit organization, state government search indicates that e-file is still lagging
1. On page 404 of the Internal Rev- or local government. Applications are not in the self-prepared simple segment. An-
enue Bulletin (I.R.B.), column 1, under solicited from other Federal government other area of emphasis is to reach those tax-
“Proposed Effective Date”, the language agencies. The program is an annual pro- payers who continue to file computer
“These regulations amending the dual con- gram and covers the period January 2003 prepared paper returns (v-code). Research
solidated loss rules under § 1.1503–2 are through October 15, 2003. All prior year indicates that the number of v-code re-
proposed to apply to transactions other- partners must reapply for Filing Sea- turns continues to increase (76% of all
wise constituting triggering events occur- son 2003. v-code returns are prepared by paid pre-
ring on or after August 1, 2002.” is parers). Emphasis should be placed on en-
corrected to read “These regulations amend- BACKGROUND couraging v-code filers to electronically file
ing the dual consolidated loss rules under their returns through the marketing and pro-
The IRS Restructuring and Reform Act
§ 1.1503–2 are proposed to apply to trans- motion of the benefits of e-file.
actions otherwise constituting triggering of 1998 (RRA 98) requires the IRS to re- The IRS expects all accepted partners to
events occurring on or after [DATE THE ceive 80 percent of all returns electroni- aggressively market, promote and offer e-file
FINAL REGULATIONS ARE PUB- cally by 2007. RRA 98 authorized the IRS services through October 15, 2003. The IRS
LISHED IN THE FEDERAL REGIS- Commissioner to promote the benefits of will supply the partners with the Filing Sea-
TER].” and encourage the use of e-file services. As son and post April 15 e-file campaign mes-
2. On page 405 of the I.R.B., column a result of RRA 98, the IRS enters into non- sage(s), if available, to target additional
2, the language “Paragraphs (g)(2)(iv)(A)(4) monetary partnerships with businesses to of- qualified taxpayers, i.e., extensions, mili-
and (5) of this section, and paragraphs fer low cost income tax preparation and tary returns, etc. Pending the passage of leg-
(g)(2)(iv)(B)(l)(ii) and (iii) of this sec- electronic filing for qualified taxpayers. islation, Participants are encouraged to offer
tion, shall apply with respect to transac- Continued opportunities for growth in the April 30 due date extension for e-file.
tions otherwise constituting triggering events electronic tax administration are evident. For For additional information on the vari-
occurring on or after August 1, 2002.” is Filing Season 2002, the IRS received over ous e-file programs, features, and market re-
corrected to read “Paragraphs 46 million electronically filed returns, an in- search, visit our web site at www.irs.gov.
(g)(2)(iv)(A)(4) and (5) of this section, and crease of 16% over the previous year. Visit For a listing of our current partners and the
paragraphs (g)(2)(iv)(B)(l)(ii) and (iii) of this the IRS web site, www.irs.gov, “IRS e-file services they offer, refer to the IRS e-file
section, shall apply with respect to trans- for Tax Professionals, Software Develop- Partners Page at www.irs.gov.
actions otherwise constituting triggering ers, and Transmitters” for the most cur- Participants will receive hyperlinks from
events occurring on or after [DATE THE rent results from market research on the IRS web site to the Participant’s web
FINAL REGULATIONS ARE PUB- site. Potential Participants may request links
individual taxpayers: demographic data and
LISHED IN THE FEDERAL REGIS- for the following categories: IRS e-file
psychographic studies. This includes atti-
TER].” Partners for Taxpayers, IRS e-file Part-
tudinal surveys, customer satisfaction sur-
The corrections made herein will be re- ners for Tax Professionals, IRS e-file
veys, Public Service Announcements
flected in the notice of proposed rulemak- Partners for Financial Institutions/
ing published in the Cumulative Bulletin. (PSAs)/Paid Advertising Tracking Stud- Employers, and IRS e-file Partners for
ies and any focus group results. Credit Card Payment Options.
The IRS currently accepts 115 forms and
schedules for electronic filing. Visit the IRS
November 4, 2002 800 2002–44 I.R.B.
PARTICIPATION REQUIREMENTS • The Participant’s web site will not con- guidelines in the announcement ad-
tain inappropriate content nor will the vertised on www.irs.gov.
• The Participant (Electronic Return Participant provide links to inappro- • If the IRS determines that the partici-
Originator, Intermediate Service Pro- priate content. pant is not meeting the “Participa-
vider, Software Developer, and Trans- • The Participant will clearly disclose to tion Requirements,” the IRS may
mitter) must be in good standing with users its customer service support op- terminate its partnership with the Par-
the IRS, comply with the e-file re- tions and privacy policy. ticipant and remove the participant’s
quirements stated in the IRS Rev- • The Participant should submit writ- hyperlink(s) from the IRS e-file Part-
enue Procedure 2000–31, 2000–2 C.B. ten notification, i.e., email, to the IRS ners Page.
146, Publications 1345 and 1345A, 26 of changes/additions/deletions to • The Participant should notify the IRS
U.S.C. 7216, U.S.C. 6103, and pass URLs, link descriptions, etc. immediately if it wishes to terminate
• The Participant will submit a Perfor- its partnership with the IRS. The no-
the annual Suitability and Participants
mance Report to the IRS Point of tification should be submitted through
Acceptance Testing (PATS) conducted
Contact by May 30, 2003. The re- email to the IRS Point of Contact or
by the IRS. All other Participants are
port will cover Filing Season activi- sent to the Point of Contact’s address.
exempt from these requirements.
ties (i.e., statistical information, web
• The Participant will offer their prod- APPLICATION PROCESS
site activity, etc.). The IRS Point of
ucts and services to filers of the 1040 Contact will provide written report- Applications should contain the
Series returns, including complicated ing instructions and requirements to following:
returns, balance due returns, Federal/ accepted participants. • Include the Applicant’s Point of Con-
State returns, and 1040EZ returns. The tact information (name, title, address,
Participant is encouraged to reach first- PERFORMANCE STANDARDS telephone number, fax number and
time filers and v-coders. The partici- e-mail address) for discussion of your
pant will offer a variety of e-file • The IRS will have the accepted par- application.
features including the Self-Select PIN, ticipant’s hyperlink(s) available on the • Identify the Applicant’s secure web
Electronic Payment Options, Direct IRS web site by December 31, 2002, site.
Deposit of Refunds, etc. or before the start of electronic fil- • Identify the Applicant’s tax prepara-
• The Participant will aggressively mar- ing, subject to the participant’s pass- tion software (if applicable).
ket, promote and offer e-file services ing of the annual Suitability and PATS • Include the Applicant’s Electronic Filer
through October 15, 2003. The Par- testing. Hyperlinks will remain on the Identification Number (EFIN) and/or
ticipant will use the current Filing Sea- IRS e-file Partners Page at least Electronic Transmitter Identification
through October 15, 2003, or later. Number (ETIN) (if applicable).
son e-file marketing/promotional
• The IRS will rotate on a daily basis • Identify the Applicant’s hyperlink(s)
messages developed by the IRS. In ad-
the hyperlinks that exist on the IRS and provide a short description (350
dition, the Participant will use the post
e-file Partners Page. characters or less) of the services and
April 15 e-file campaign message(s) • The IRS may establish a link from the products to be promoted on the IRS
and other promotional tools, if avail- IRS e-file Partners Page to the Free In- e-file Partners Page. In addition, the
able, to target qualified taxpayers, i.e., ternet Filing Consortium web page. Applicant should provide the associ-
extensions, military returns, etc. • The IRS will accept, if appropriate, the ated URL(s). The URL(s) address
• The Participant is encouraged to of- Participant’s written request for cannot contain the word “IRS.” In-
fer the April 30 due date extension for changes/additions/deletions to a URL, dicate the category for each
e-file, upon passage of authorizing leg- link description, etc. hyperlink(s): IRS e-file Partners for
islation. • The IRS has a right to review the Par- Taxpayers, IRS e-file Partners for
• The Participant will have a hyper- ticipant’s web site(s) to ensure that Tax Professionals, IRS e-file Part-
link(s) from the IRS web site to their participation requirements are met. ners for Financial Institutions/
site. Participants will not have a • The IRS will not endorse specific of- Employers, and IRS e-file Partners
URL(s) containing the word “IRS”. ferings or products, but will promote for Electronic Payment Options. Re-
• The Participant will place the IRS the IRS e-file Partners Page. A “Site fer to the IRS e-file Partners Page
e-file logo on its web site. Disclaimer” will exist on the IRS web (www.irs.gov) for examples of link de-
• The Participant will provide a descrip- site before the user enters the Partici- scriptions.
tion (350 characters or less) for each pant’s web site. • Identify the Applicant’s communica-
hyperlink placed on the IRS e-file tion vehicle(s) (i.e., web site,
Partners Page. The Participant will PARTICIPATION TERMS marketing/promotional products, etc.)
have a link(s) to the IRS web site. to market and promote your prod-
• The Participant will not offer its ser- • The IRS Individual e-file Partner- ucts and services and IRS e-file. De-
vices and/or products based on the ship Program is an annual program, scribe the incentives, discounts, offers,
condition in obtaining an eligible tax- and all prospective Participants, in- benefits to taxpayers or other spe-
payer’s consent to solicitations of ad- cluding returning Participants, must re- cific approaches to increase e-file vol-
ditional business. apply each year following the umes.
2002–44 I.R.B. 801 November 4, 2002
• Certify the Applicant’s compliance If your application is denied, you will re- electronically via the Internet by submit-
with the privacy and disclosure pro- ceive written notification from the IRS with ting comments directly to the IRS Inter-
visions of 26 U.S.C. 7216 and 26 an explanation of the denial. net site at: http://www.irs.gov/regs.
U.S.C. 6103 (if applicable).
IRS POINT OF CONTACT/ FOR FURTHER INFORMATION
Exclusions From Gross CONTACT: Guy Traynor of the Regula-
APPLICATION SUBMISSION
Income of Foreign tions Unit, Associate Chief Counsel (In-
Applications to participate in the IRS In- Corporations; Hearing come Tax & Accounting), at (202) 622–
dividual e-file Partnership Program should 7180 (not a toll-free number).
be submitted as a Word document through
email at *WIe-filepartners@irs.gov (Please Announcement 2002–102 SUPPLEMENTARY INFORMATION:
make sure there is an asterisk before the WI
(Wage and Investment) when submitting an AGENCY: Internal Revenue Service A notice of proposed rulemaking and no-
application.) An application may also be (IRS), Treasury. tice of public hearing appearing in the Fed-
sent to Karen Bradley at the following eral Register on Friday, August 2, 2002 (67
address: ACTION: Change of date of public FR 50510), announced that a public hear-
hearing, extension of time for submitting ing on proposed regulations relating to ex-
Internal Revenue Service public comments and outlines of oral clusions from gross income of foreign
5000 Ellin Road comments. corporations under section 883 of the In-
Lanham, MD 20706
ternal Revenue Code would be held on
Attention: Karen Bradley
SUMMARY: This document changes the Tuesday, November 12, 2002, beginning at
W:CAR:SPEC:FO:IMS
date of a public hearing on proposed regu- 10 a.m. in room 4718 of the Internal Rev-
C5–351
lations (REG–208280–86; REG–136311– enue Building, 1111 Constitution Avenue,
If you wish to have a hyperlink(s) on the 01, 2002–36 I.R.B. 485) relating to NW, Washington, DC. The deadline for sub-
IRS e-file Partners Page by December 31, exclusions from gross income of foreign mitting public comments and outlines of
2002, or before the start of electronic fil- corporations under section 883 of the In- topics to be discussed, is October 22, 2002.
ing, your application must be submitted by ternal Revenue Code, and extends the time The date of the hearing and deadline for
December 4, 2002, otherwise, there is no for submitting public comments and out- submitting public comments has changed.
deadline for your application. lines of oral comments. The hearing is scheduled for Monday, No-
Illustrations of marketing materials may
vember 25, 2002, beginning at 10 a.m. in
be submitted in Adobe Acrobat Portable DATES: The public hearing originally room 4718, Internal Revenue Building, 1111
Document (PDF) or other appropriate files. scheduled for Tuesday, November 12, 2002, Constitution Avenue, NW, Washington, DC.
Any questions regarding the develop- at 10 a.m. is rescheduled for Monday, No- We must receive written and electronic pub-
ment of applications, the submission of Per- vember 25, 2002, at 10 a.m. The due date
formance Reports, or any other type of lic comments and outlines of topics to be
for written or electronic public comments discussed, by November 5, 2002. Because
contact for this program should be directed and outlines of topics to be discussed, is
to Karen Bradley at (202) 283–7034 or of the controlled access restrictions, atten-
November 5, 2002.
through email to *WIe-filepartners dants will not be admitted beyond the lobby
@irs.gov (Please make sure there is an as- ADDRESSES: The public hearing is be- area of the Internal Revenue Building un-
terisk before the WI (Wage and Invest- ing held in room 4718, Internal Revenue til 9:30 a.m. The IRS will prepare an agenda
ment) for any type of email contact.) Building, 1111 Constitution Avenue, NW, showing the scheduling of the speakers af-
Washington, DC. Due to building secu- ter the outlines are received from the per-
APPLICATION EVALUATION rity procedures, visitors must enter at the sons testifying and make copies available
Constitution Avenue entrance. Send sub- free of charge at the hearing.
All applications will be evaluated based
missions to: CC:ITA:RU (REG–208280–
on the required information provided to the Cynthia E. Grigsby,
86; REG–136311–01), room 5226, Internal
IRS and the applicant’s ability to fulfill their Chief, Regulations Unit,
Revenue Service, POB 7604, Ben
responsibilities. Prior year performance will
Franklin Station, Washington, DC 20044. Associate Chief Counsel
also be considered when evaluating appli-
Submissions may be hand delivered Mon- (Income Tax & Accounting).
cations from returning partners.
day through Friday between the hours of
(Filed by the Office of the Federal Register on October 17,
ACCEPTANCE/DENIAL OF 8 a.m. and 5 p.m. to: CC:ITA:RU (REG– 2002, 8:45 a.m., and published in the issue of the Federal Reg-
APPLICATION 208280–86; REG–136311–01), Courier’s ister for October 18, 2002, 67 F.R. 64331)
Desk, Internal Revenue Service, 1111 Con-
If your application is accepted, you will stitution Avenue, NW, Washington, DC. Al-
receive written notification from the IRS. ternatively, comments may be transmitted
November 4, 2002 802 2002–44 I.R.B.
Definition of Terms
Revenue rulings and revenue procedures applies to both A and B, the prior ruling new ruling does more than restate the
(hereinafter referred to as“rulings”) that is modified because it corrects a pub- substance of a prior ruling, a combination
have an effect on previous rulings use the lished position. (Compare with amplified of terms is used. For example, modified
following defined terms to describe the and clarified, above). and superseded describes a situation
effect: Obsoleted describes a previously pub- where the substance of a previously pub-
Amplified describes a situation where lished ruling that is not considered deter- lished ruling is being changed in part and
no change is being made in a prior pub- minative with respect to future transac- is continued without change in part and it
lished position, but the prior position is tions. This term is most commonly used is desired to restate the valid portion of
being extended to apply to a variation of in a ruling that lists previously published the previously published ruling in a new
the fact situation set forth therein. Thus, if rulings that are obsoleted because of ruling that is self contained. In this case,
an earlier ruling held that a principle changes in law or regulations. A ruling the previously published ruling is first
applied to A, and the new ruling holds may also be obsoleted because the sub- modified and then, as modified, is super-
that the same principle also applies to B, stance has been included in regulations seded.
the earlier ruling is amplified. (Compare subsequently adopted. Supplemented is used in situations in
with modified, below). Revoked describes situations where the which a list, such as a list of the names of
Clarified is used in those instances position in the previously published rul- countries, is published in a ruling and that
where the language in a prior ruling is ing is not correct and the correct position list is expanded by adding further names
being made clear because the language is being stated in the new ruling. in subsequent rulings. After the original
has caused, or may cause, some confu- Superseded describes a situation where ruling has been supplemented several
sion. It is not used where a position in a the new ruling does nothing more than times, a new ruling may be published that
prior ruling is being changed. restate the substance and situation of a includes the list in the original ruling and
Distinguished describes a situation previously published ruling (or rulings). the additions, and supersedes all prior rul-
where a ruling mentions a previously Thus, the term is used to republish under ings in the series.
published ruling and points out an essen- the 1986 Code and regulations the same Suspended is used in rare situations to
tial difference between them. position published under the 1939 Code show that the previous published rulings
Modified is used where the substance and regulations. The term is also used will not be applied pending some future
of a previously published position is when it is desired to republish in a single action such as the issuance of new or
being changed. Thus, if a prior ruling ruling a series of situations, names, etc., amended regulations, the outcome of
held that a principle applied to A but not that were previously published over a cases in litigation, or the outcome of a
to B, and the new ruling holds that it period of time in separate rulings. If the Service study.
Abbreviations
The following abbreviations in current E.O.—Executive Order. PO—Possession of the U.S.
ER—Employer. PR—Partner.
use and formerly used will appear in
ERISA—Employee Retirement Income Security Act. PRS—Partnership.
material published in the Bulletin. EX—Executor. PTE—Prohibited Transaction Exemption.
F—Fiduciary. Pub. L.—Public Law.
A—Individual.
FC—Foreign Country. REIT—Real Estate Investment Trust.
Acq.—Acquiescence. FICA—Federal Insurance Contributions Act.
B—Individual. Rev. Proc.—Revenue Procedure.
FISC—Foreign International Sales Company. Rev. Rul.—Revenue Ruling.
BE—Beneficiary. FPH—Foreign Personal Holding Company.
BK—Bank. S—Subsidiary.
F.R.—Federal Register.
B.T.A.—Board of Tax Appeals. S.P.R.—Statements of Procedural Rules.
FUTA—Federal Unemployment Tax Act.
C—Individual. Stat.—Statutes at Large.
FX—Foreign Corporation.
C.B.—Cumulative Bulletin. T—Target Corporation.
G.C.M.—Chief Counsel’s Memorandum.
CFR—Code of Federal Regulations. GE—Grantee. T.C.—Tax Court.
CI—City. GP—General Partner. T.D.—Treasury Decision.
COOP—Cooperative. GR—Grantor. TFE—Transferee.
Ct.D.—Court Decision. IC—Insurance Company. TFR—Transferor.
CY—County. I.R.B.—Internal Revenue Bulletin. T.I.R.—Technical Information Release.
D—Decedent. LE—Lessee. TP—Taxpayer.
DC—Dummy Corporation. LP—Limited Partner. TR—Trust.
DE—Donee. LR—Lessor. TT—Trustee.
Del. Order—Delegation Order. M—Minor. U.S.C.—United States Code.
DISC—Domestic International Sales Corporation. Nonacq.—Nonacquiescence. X—Corporation.
DR—Donor. O—Organization. Y—Corporation.
E—Estate. P—Parent Corporation. Z—Corporation.
EE—Employee. PHC—Personal Holding Company.
2002–44 I.R.B. i November 4, 2002
Numerical Finding List1 Notices—Continued: Revenue Procedures—Continued:
Bulletin 2002–26 through 2002–43 2002–54, 2002–30 I.R.B. 189 2002–62, 2002–40 I.R.B. 683
2002–55, 2002–36 I.R.B. 481 2002–63, 2002–41 I.R.B. 691
Announcements: 2002–56, 2002–32 I.R.B. 319 2002–64, 2002–42 I.R.B. 718
2002–57, 2002–33 I.R.B. 379 2002–65, 2002–41 I.R.B. 700
2002–59, 2002–26 I.R.B. 28 2002–58, 2002–35 I.R.B. 432 2002–66, 2002–42 I.R.B. 725
2002–60, 2002–26 I.R.B. 28 2002–59, 2002–36 I.R.B. 481 2002–67, 2002–43 I.R.B. 733
2002–61, 2002–27 I.R.B. 72 2002–60, 2002–36 I.R.B. 482 2002–68, 2002–43 I.R.B. 753
2002–62, 2002–27 I.R.B. 72 2002–61, 2002–38 I.R.B. 563
2002–62, 2002–39 I.R.B. 574 Revenue Rulings:
2002–63, 2002–27 I.R.B. 72
2002–64, 2002–27 I.R.B. 72 2002–63, 2002–40 I.R.B. 644
2002–38, 2002–26 I.R.B. 4
2002–65, 2002–29 I.R.B. 182 2002–64, 2002–41 I.R.B. 690
2002–39, 2002–27 I.R.B. 33
2002–66, 2002–29 I.R.B. 183 2002–65, 2002–41 I.R.B. 690
2002–40, 2002–27 I.R.B. 30
2002–66, 2002–42 I.R.B. 716
2002–67, 2002–30 I.R.B. 237 2002–41, 2002–28 I.R.B. 75
2002–67, 2002–42 I.R.B. 716
2002–68, 2002–31 I.R.B. 283 2002–42, 2002–28 I.R.B. 76
2002–68, 2002–43 I.R.B. 730
2002–69, 2002–31 I.R.B. 283 2002–43, 2002–28 I.R.B. 85
2002–69, 2002–43 I.R.B. 730
2002–70, 2002–31 I.R.B. 284 2002–44, 2002–28 I.R.B. 84
2002–71, 2002–32 I.R.B. 323 Proposed Regulations: 2002–45, 2002–29 I.R.B. 116
2002–72, 2002–32 I.R.B. 323 2002–46, 2002–29 I.R.B. 117
2002–73, 2002–33 I.R.B. 387 REG–248110–96, 2002–26 I.R.B. 19 2002–47, 2002–29 I.R.B. 119
2002–74, 2000–33 I.R.B. 387 REG–110311–98, 2002–28 I.R.B. 109 2002–48, 2002–31 I.R.B. 239
2002–75, 2002–34 I.R.B. 416 REG–103823–99, 2002–27 I.R.B. 44 2002–49, 2002–32 I.R.B. 288
2002–76, 2002–35 I.R.B. 471 REG–103829–99, 2002–27 I.R.B. 59 2002–50, 2002–32 I.R.B. 292
2002–77, 2002–35 I.R.B. 471 REG–103735–00, 2002–28 I.R.B. 109 2002–51, 2002–33 I.R.B. 327
2002–78, 2002–36 I.R.B. 514 REG–106457–00, 2002–26 I.R.B. 23 2002–52, 2002–34 I.R.B. 388
2002–79, 2002–36 I.R.B. 515 REG–106871–00, 2002–30 I.R.B. 190 2002–53, 2002–35 I.R.B. 427
2002–80, 2002–36 I.R.B. 515 REG–106876–00, 2002–34 I.R.B. 392 2002–54, 2002–37 I.R.B. 527
2002–81, 2002–37 I.R.B. 533 REG–106879–00, 2002–34 I.R.B. 402 2002–55, 2002–37 I.R.B. 529
2002–82, 2002–37 I.R.B. 533 REG–107524–00, 2002–28 I.R.B. 110 2002–56, 2002–37 I.R.B. 526
2002–83, 2002–38 I.R.B. 564 REG–115285–01, 2002–27 I.R.B. 62 2002–57, 2002–37 I.R.B. 526
2002–84, 2002–37 I.R.B. 533 REG–115781–01, 2002–33 I.R.B. 380 2002–58, 2002–38 I.R.B. 541
2002–85, 2002–39 I.R.B. 624 REG–116644–01, 2002–31 I.R.B. 268 2002–59, 2002–38 I.R.B. 557
2002–86, 2002–39 I.R.B. 624 REG–123345–01, 2002–32 I.R.B. 321 2002–60, 2002–40 I.R.B. 641
2002–87, 2002–39 I.R.B. 624 REG–126024–01, 2002–27 I.R.B. 64 2002–61, 2002–40 I.R.B. 639
2002–88, 2002–38 I.R.B. 564 REG–136311–01, 2002–36 I.R.B. 485 2002–62, 2002–42 I.R.B. 710
2002–89, 2002–39 I.R.B. 626 REG–164754–01, 2002–30 I.R.B. 212 2002–64, 2002–41 I.R.B. 688
2002–90, 2002–40 I.R.B. 684 REG–165868–01, 2002–31 I.R.B. 270 2002–65, 2002–43 I.R.B. 729
2002–91, 2002–40 I.R.B. 685 REG–106359–02, 2002–34 I.R.B. 405
REG–122564–02, 2002–26 I.R.B. 25 Treasury Decisions:
2002–92, 2002–41 I.R.B. 709
2002–93, 2002–41 I.R.B. 709 REG–123305–02, 2002–26 I.R.B. 26
8997, 2002–26 I.R.B. 6
2002–94, 2002–42 I.R.B. 728 REG–124256–02, 2002–33 I.R.B. 383
8998, 2002–26 I.R.B. 1
2002–95, 2002–42 I.R.B. 728 REG–133254–02, 2002–34 I.R.B. 412
8999, 2002–28 I.R.B. 78
2002–96, 2002–43 I.R.B. 756 REG–134026–02, 2002–40 I.R.B. 684
9000, 2002–28 I.R.B. 87
2002–97, 2002–43 I.R.B. 757 9001, 2002–29 I.R.B. 128
Revenue Procedures:
2002–98, 2002–43 I.R.B. 758 9002, 2002–29 I.R.B. 120
2002–99, 2002–43 I.R.B. 758 2002–43, 2002–28 I.R.B. 99 9003, 2002–32 I.R.B. 294
2002–44, 2002–26 I.R.B. 10 9004, 2002–33 I.R.B. 331
Court Decisions: 2002–45, 2002–27 I.R.B. 40 9005, 2002–32 I.R.B. 290
2002–46, 2002–28 I.R.B. 105 9006, 2002–32 I.R.B. 315
2075, 2002–38 I.R.B. 548
2002–47, 2002–29 I.R.B. 133 9007, 2002–33 I.R.B. 349
Notices: 2002–48, 2002–37 I.R.B. 531 9008, 2002–33 I.R.B. 335
2002–49, 2002–29 I.R.B. 172 9009, 2002–33 I.R.B. 328
2002–42, 2002–27 I.R.B. 36 2002–50, 2002–29 I.R.B. 173 9010, 2002–33 I.R.B. 341
2002–43, 2002–27 I.R.B. 38 2002–51, 2002–29 I.R.B. 175 9011, 2002–33 I.R.B. 356
2002–44, 2002–27 I.R.B. 39 2002–52, 2002–31 I.R.B. 242 9012, 2002–34 I.R.B. 389
2002–45, 2002–28, I.R.B. 93 2002–53, 2002–31 I.R.B. 253 9013, 2002–38 I.R.B. 542
2002–46, 2002–28 I.R.B. 96 2002–54, 2002–35 I.R.B. 432 9014, 2002–35 I.R.B. 429
2002–47, 2002–28 I.R.B. 97 2002–55, 2002–35 I.R.B. 435 9015, 2002–40 I.R.B. 642
2002–48, 2002–29 I.R.B. 130 2002–56, 2002–36 I.R.B. 483 9016, 2002–40 I.R.B. 628
2002–49, 2002–29 I.R.B. 130 2002–57, 2002–39 I.R.B. 575
2002–50, 2002–28 I.R.B. 98 2002–58, 2002–40 I.R.B. 644
2002–51, 2002–29 I.R.B. 131 2002–59, 2002–39 I.R.B. 615
2002–52, 2002–30 I.R.B. 187 2002–60, 2002–40 I.R.B. 645
2002–53, 2002–30 I.R.B. 187 2002–61, 2002–39 I.R.B. 616
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
November 4, 2002 ii 2002–44 I.R.B.
Finding List of Current Actions Proposed Regulations—Continued: Revenue Procedures—Continued:
on Previously Published Items1 REG–126100–00 2001–12
Withdrawn by Obsoleted by
Bulletin 2002–26 through 2002–43 REG–133254–02, 2002–34 I.R.B. 412 T.D. 9004, 2002–33 I.R.B. 331
Announcements: REG–136193–01 2001–15
Corrected by Superseded by
98–99
Ann. 2002–67, 2002–30 I.R.B. 237 Rev. Proc. 2002–64, 2002–42 I.R.B. 718
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B. 10 REG–136311–01 2001–17
Corrected by Modified and superseded by
2000–4 Rev. Proc. 2002–47, 2002–29 I.R.B. 133
Ann. 2002–94, 2002–42 I.R.B. 728
Modified by
Ann. 2002–60, 2002–26 I.R.B. 28 REG–161424–01 2001–26
Corrected by Superseded by
2001–9
Ann. 2002–67, 2002–30 I.R.B. 237 Rev. Proc. 2002–53, 2002–31 I.R.B. 253
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B. 10 REG–165706–01 2001–45
Corrected by Superseded by
Notices: Ann. 2002–67, 2002–30 I.R.B. 237 Rev. Proc. 2002–60, 2002–40 I.R.B. 645
89–25
REG–165868–01 2001–46
Modified by
Corrected by Modified and amplified by
Rev. Rul. 2002–62, 2002–42 I.R.B. 710
Ann. 2002–93, 2002–41 I.R.B. 709 Rev. Proc. 2002–65, 2002–41 I.R.B. 700
97–26
Modified and superseded by REG–102740–02 2001–47
Notice 2002–62, 2002–39 I.R.B. 574 Corrected by Superseded by
Ann. 2002–67, 2002–30 I.R.B. 237 Rev. Proc. 2002–63, 2002–41 I.R.B. 691
2001–6
Superseded by REG–106359–02 2001–50
Notice 2002–63, 2002–40 I.R.B. 644 Corrected by Superseded by
Ann. 2002–81, 2002–37 I.R.B. 533 Rev. Proc. 2002–57, 2002–39 I.R.B. 575
2001–62
REG–108697–02
Modified and superseded by 2001–52
Corrected by
Notice 2002–62, 2002–39 I.R.B. 574 Updated by
Ann. 2002–84, 2002–37 I.R.B. 533
Rev. Proc. 2002–66, 2002–42 I.R.B. 725
Proposed Regulations: REG–123305–02
2001–54
REG–208280–86 Corrected by
Superseded by
Withdrawn by Ann. 2002–69, 2002–31 I.R.B. 283
Rev. Proc. 2002–61, 2002–39 I.R.B. 616
REG–136311–01, 2002–36 I.R.B. 485
Revenue Procedures:
2002–9
REG–209114–90
88–10 Modified and amplified by
Corrected by
Superseded by Rev. Proc. 2002–46, 2002–28 I.R.B. 105
Ann. 2002–65, 2002–29 I.R.B. 182
Rev. Proc. 2002–48, 2002–37 I.R.B. 531 Rev. Proc. 2002–65, 2002–41 I.R.B. 700
REG–209813–96 Amplified, clarified, and modified by
Withdrawn by 91–23 Rev. Proc. 2002–54, 2002–35 I.R.B. 432
REG–106871–00, 2002–30 I.R.B. 190 Modified and superseded by
Rev. Proc. 2002–52, 2002–31 I.R.B. 242 2002–13
REG–103823–99 Modified by
Corrected by 91–26 Rev. Proc. 2002–45, 2002–27 I.R.B. 40
Ann. 2002–67, 2002–30 I.R.B. 237 Modified and superseded by
Ann. 2002–79, 2002–36 I.R.B. 515 Rev. Proc. 2002–52, 2002–31 I.R.B. 242 2002–15
Modified and superseded by
REG–103829–99 95–18 Rev. Proc. 2002–59, 2002-39 I.R.B. 615
Corrected by Superseded by
Ann. 2002–82, 2002–37 I.R.B. 533 Rev. Proc. 2002–51, 2002–29 I.R.B. 175 2002–16
Ann. 2002–95, 2002–42 I.R.B. 728 Modified and superseded by
96–13 Rev. Proc. 2002–68, 2002–43 I.R.B. 753
REG–105885–99
Modified and superseded by
Corrected by 2002–19
Rev. Proc. 2002–52, 2002–31 I.R.B. 242
Ann. 2002–67, 2002–30 I.R.B. 237 Amplified and clarified by
REG–105369–00 96–14 Rev. Proc. 2002–54, 2002–35 I.R.B. 432
Clarified by Modified and superseded by
Notice 2002–52, 2002–30 I.R.B. 187 Rev. Proc. 2002–52, 2002–31 I.R.B. 242
Corrected by 96–53
Ann. 2002–67, 2002–30 I.R.B. 237 Amplified by
REG–118861–00 Rev. Proc. 2002–52, 2002–31 I.R.B. 242
Corrected by
Ann. 2002–67, 2002–30 I.R.B. 237
1
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
2002–44 I.R.B. iii November 4, 2002
Revenue Rulings: Treasury Decisions:
54–571 8925
Obsoleted by Corrected by
T.D. 9010, 2002–33 I.R.B. 341 Ann. 2002–89, 2002–39 I.R.B. 626
55–534 8997
Distinguished by Corrected by
Rev. Rul. 2002–60, 2002–40 I.R.B. 641 Ann. 2002–68, 2002–31 I.R.B. 283
55–606 8999
Obsoleted by Corrected by
T.D. 9010, 2002–33 I.R.B. 341 Ann. 2002–71, 2002–32 I.R.B. 323
59–328 9013
Obsoleted by Corrected by
T.D. 9010, 2002–33 I.R.B. 341 Ann. 2002–83, 2002–38 I.R.B. 564
64–36
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
65–129
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
67–197
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
69–259
Modified and superseded by
Rev. Rul. 2002–50, 2002–32 I.R.B. 292
69–595
Obsoleted in part by
T.D. 9010, 2002–33 I.R.B. 341
70–608
Obsoleted in part by
T.D. 9010, 2002–33 I.R.B. 341
73–232
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
76–225
Revoked by
REG–115781–01, 2002–33 I.R.B. 380
77–53
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
85–50
Obsoleted by
T.D. 2002–33 I.R.B. 341
92–17
Amplified by
Rev. Rul. 2002–49, 2002–32 I.R.B. 288
92–75
Clarified by
Rev. Proc. 2002–52, 2002–31 I.R.B. 242
93–70
Obsoleted by
T.D. 9010, 2002–33 I.R.B. 341
94–76
Amplified by
Rev. Rul. 2002–42, 2002–28 I.R.B. 76
November 4, 2002 iv 2002–44 I.R.B.
INDEX EMPLOYEE PLANS— EMPLOYMENT TAX
Internal Revenue Bulletins
Cont. Compromise of tax liabilities (TD 9007)
2002–26 through 2002–43 Practice before the Internal Revenue Ser- 33, 349
vice (TD 9011) 33, 356 Effective date of Rev. Proc. 2002–41
The abbreviation and number in paren- Premature distributions, substantially (Notice 55) 36, 481
thesis following the index entry refer to equal periodic payments (RR 62) 42, Information reporting, payments made on
the specific item; numbers in roman and 710 behalf of another person, to joint pay-
italic type following the parenthesis refer Proposed Regulations: ees, and of gross proceeds from sales
to the Internal Revenue Bulletin in which 26 CFR 1.401(a)(9)–6, added; required involving investment advisors (TD
the item may be found and the page num- distributions from retirement plans, 9010) 33, 341
ber on which it appears. notice of public hearing (Ann 84) Practice before the Internal Revenue Ser-
37, 533 vice (TD 9011) 33, 356
26 CFR 1.408–4, amended; 1.408–11, Proposed Regulations:
Key to Abbreviations: added; 1.408A–5, revised; earnings 26 CFR 1.61–2, amended; 1.61–22,
Ann Announcement calculation for returned or recharac- added; 1.83–1, –3, –6, amended;
CD Court Decision terized IRA contributions (REG– 1.301–1(q), added; 1.1402(a)–18,
DO Delegation Order 124256–02) 33, 383 added; 1.7872–15, added;
EO Executive Order 26 CFR 1.419A(f)(6)–1, added; 10-or- 31.3121(a), 31.3231(e), 31.3306(b),
PL Public Law more employer plans (REG– 31.3401(a), amended; split-dollar
165868–01) 31, 270; correction life insurance arrangements (REG–
PTE Prohibited Transaction
(Ann 93) 41, 709 164754–01) 30, 212
Exemption
Publications: 26 CFR 31.3406(d)–5, revised;
RP Revenue Procedure
590, Individual Retirement Arrange- 301.6724–1, amended; receipt of
RR Revenue Ruling ments (IRAs), Supplement to (Ann multiple notices with respect to
SPR Statement of Procedural 73) 33, 387 incorrect taxpayer identification
Rules Qualified retirement plans: numbers (REG–116644–01) 31, 268
TC Tax Convention Deductions: Publications:
TD Treasury Decision Contributions (Notice 48) 29, 130 1141, General Rules and Specifica-
TDO Treasury Department Order Timing (RR 46) 29, 117 tions for Substitute Forms W–2 and
Defined benefit plan, phased retire- W–3, revised (RP 53) 31, 253
ment (Notice 43) 27, 38 1223, General Rules and Specifica-
Money purchase pension plan, partial tions for Substitute Forms W–2c and
EMPLOYEE PLANS termination (RR 42) 28, 76 W–3c, revised (RP 51) 29, 175
Notice to interested parties require- Regulations:
Accident and health plans, amounts ment (TD 9006) 32, 315 26 CFR 1.6041–1, –3, amended;
received (RR 58) 38, 541 Required minimum distributions, 1.6045–1, –2, amended; 1.6049–4,
Defined benefit plans, elimination of notice of public hearing (Ann 84) revised; 5f.6045–1, removed;
optional forms of benefit (Notice 46) 37, 533 31.3406, amended; 602.101,
28, 96 Restorative payments (RR 45) 29, 116 amended; information reporting
Employee Plans Compliance Resolution Refund of mistaken contributions and requirements for certain payments
System (EPCRS) update (RP 47) 29, withdrawal liability payments (TD made on behalf of another person,
133 9005) 32, 290 payments to joint payees, and pay-
Full funding limitations: Regulations: ments of gross proceeds from sales
Weighted average interest rate for: 26 CFR 1.401(a)(2)–1, added; refund involving investment advisors (TD
July 2002 (Notice 49) 29, 130 of mistaken contributions and with- 9010) 33, 341
August 2002 (Notice 57) 33, 379 drawal liability payments (TD 9005) 26 CFR 301.7122–0, –1, added;
September 2002 (Notice 61) 38, 32, 290 301.7122–0T, –1T, removed; com-
563 26 CFR 1.7476–1, –2, amended; promise of tax liabilities (TD 9007)
October 2002 (Notice 68) 43, 730 601.201, amended; notice to inter- 33, 349
Health reimbursement arrangements ested parties (TD 9006) 32, 315 31 CFR Part 10, amended; regulations
(HRAs) (RR 41) 28, 75; (Notice 45) 31 CFR Part 10, amended; regulations governing practice before the Inter-
28, 93 governing practice before the Inter- nal Revenue Service (TD 9011)
Individual retirement arrangements, earn- nal Revenue Service (TD 9011) 33, 356
33, 356 Split-dollar life insurance arrangements
ings calculation for returned or rechar-
Ten-or-more employer plans (REG– (REG–164754–01) 30, 212
acterized IRA contributions (REG–
165868–01) 31, 270; correction (Ann Statutory stock options, application of
124256–02) 33, 383
93) 41, 709 employment taxes (Notice 47) 28, 97
2002–44 I.R.B. v November 4, 2002
EMPLOYMENT TAX— EXCISE TAX— EXEMPT
Cont. Cont. ORGANIZATIONS—
Substitute Forms: Golden parachute payments:
Cont.
W–2 and W–3, general rules and Excess payments (Ann 65) 29, 181
Indian tribal governments treated as
specifications (RP 53) 31, 253 Valuation of options (RP 45) 27, 40
states, list (RP 64) 42, 717
W–2c and W–3c, general rules and Highway vehicle, definition (REG–
List of organizations classified as private
specifications (RP 51) 29, 175 103829–99) 27, 59; correction (Ann
foundations (Ann 64) 27, 72; (Ann 66)
Taxpayer identification numbers, backup 82) 37, 533; hearing (Ann 95) 42, 727
29, 183; (Ann 70) 31, 284; (Ann 72)
withholding, waiver of information Practice before the Internal Revenue Ser-
32, 323; (Ann 75) 34, 416; (Ann 77)
reporting penalties (REG–116644–01) vice (TD 9011) 33, 356
35, 471; (Ann 80) 36, 515; (Ann 88)
31, 268 Prohibited transactions, excise tax com-
38, 564
putation (RR 43) 28, 85
Practice before the Internal Revenue Ser-
ESTATE TAX Proposed Regulations:
vice (TD 9011) 33, 356
26 CFR 1.280G–1, golden parachute
Regulations:
Annuities, death benefits (RR 39) 27, 33 payments; correction (Ann 65) 29,
31 CFR Part 10, amended; regulations
Compromise of tax liabilities (TD 9007) 181
governing practice before the Inter-
33, 349 26 CFR 41.4482(a)–1, amended;
nal Revenue Service (TD 9011)
Guaranteed annuity and lead unitrust 48.4041–8, amended; 48.4051–1,
33, 356
interests, definition (REG–115781–01) added; 48.4072–1, amended;
Revocations (Ann 99) 43, 758
33, 380 48.4081–1, amended; 48.6421–4,
Tax-exempt electric cooperatives, pro-
Practice before the Internal Revenue Ser- revised; 145.4051–1, amended; defi-
pane distribution and sale (RR 54) 37,
vice (TD 9011) 33, 356 nition of highway vehicle (REG–
527
Proposed Regulations: 103829–99) 27, 59; correction (Ann
Treatment of subsidiary income under the
26 CFR 20.2055–2, amended; defini- 82) 37, 533; hearing (Ann 95)
85 percent member income test (RR
tion of guaranteed annuity and lead 42, 727
55) 37, 529
unitrust interests (REG–115781–01) 26 CFR 48.4081–1, –3, amended; die-
33, 380 sel fuel, blended taxable fuel (REG–
Regulations: 106457–00) 26, 23 GIFT TAX
26 CFR 301.7122–0, –1, added; Regulations:
26 CFR 301.7122–0, –1, added; Compromise of tax liabilities (TD 9007)
301.7122–0T, –1T, removed; com-
301.7122–0T, –1T, removed; com- 33, 349
promise of tax liabilities (TD 9007)
promise of tax liabilities (TD 9007) Guaranteed annuity and lead unitrust
33, 349
33, 349 interests, definition (REG–115781–01)
31 CFR Part 10, amended; regulations
31 CFR Part 10, amended; regulations 33, 380
governing practice before the Inter-
governing practice before the Inter- Net gift treatment under section 2519
nal Revenue Service (TD 9011)
nal Revenue Service (TD 9011) (REG–123345–01) 32, 321
33, 356
33, 356 Practice before the Internal Revenue Ser-
Split-dollar life insurance arrangements,
Tax-free sales of articles for use by pur- vice (TD 9011) 33, 356
standards for valuing current life insur-
chaser as supplies for vessels or aircraft Proposed Regulations:
ance protection (Notice 59) 36, 481
(RR 50) 32, 292 26 CFR 1.61–2, amended; 1.61–22,
Tax conventions, competent authority
added; 1.83–1, –3, –6, amended;
procedures (RP 52) 31, 242
1.301–1(q), added; 1.1402(a)–18,
EXEMPT
EXCISE TAX ORGANIZATIONS
added; 1.7872–15, added;
31.3121(a), 31.3231(e), 31.3306(b),
Air transportation, mileage awards: 31.3401(a), amended; split-dollar
Sales of frequent flyer miles (Notice Forms: life insurance arrangements (REG–
63) 40, 644 990, request for comments on possible 164754–01) 30, 212
Taxation rules (RR 60) 40, 641 changes (Ann 87) 39, 624 26 CFR 25.2207A–1, amended;
Compromise of tax liabilities (TD 9007) 1023, Application for Recognition of 25.2519–1, amended; net gift treat-
33, 349 Exemption Under Section 501(c)(3) ment under section 2519 (REG–
Diesel fuel, blended taxable fuel (REG– of the Internal Revenue Code, 123345–01) 32, 321
106457–00) 26, 23 request for comments (Ann 92) 26 CFR 25.2522(c)–3, amended; defi-
41, 709 nition of guaranteed annuity and
lead unitrust interests (REG–
115781–01) 33, 380
November 4, 2002 vi 2002–44 I.R.B.
GIFT TAX—Cont. INCOME TAX— INCOME TAX—
Regulations: Cont. Cont.
26 CFR 301.7122–0, –1, added;
Corporations: Domestic reverse hybrid entity, eligibility
301.7122–0T, –1T, removed; com-
Carryback of consolidated net operat- for treaty benefits (TD 8999) 28, 78;
promise of tax liabilities (TD 9007)
ing losses to separate return years correction (Ann 71) 32, 323
33, 349
(TD 8997) 26, 6; correction (Ann Dual consolidated loss recapture events
31 CFR Part 10, amended; regulations
68) 31, 283; (REG–122564–02) (REG–106879–00) 34, 402
governing practice before the Inter-
26, 25 Effective date of Rev. Proc. 2002–41
nal Revenue Service (TD 9011)
Exclusions from gross income of for- (Notice 55) 36, 481
33, 356
eign corporations (REG–136311– Entity classification rules (TD 9012)
Split-dollar life insurance arrangements:
01) 36, 485; correction (Ann 94) 34, 389
Income, employment, and gift taxation
42, 727 “Excepted sale” for information reporting
of (REG–164754–01) 30, 212
on Form 1099–B for certain sales of
Standards for valuing current life Foreign loss payment patterns (Notice
stock (RP 50) 29, 173
insurance protection (Notice 59) 36, 69) 43, 730
Extension of time to file, or for amending
481 Spin-offs, mergers and acquisitions
the statement of information required
Tax conventions, competent authority (RR 49) 32, 288
under section 149(e) of the Code (RP
procedures (RP 52) 31, 242 Treatment of a controlled foreign cor- 48) 37, 531
poration’s distributive share of part- Foreign insurance companies, minimum
INCOME TAX nership income under subpart F (TD effectively connected net investment
9008) 33, 335 income (RP 58) 40, 644
Accident and health plans, amounts Credits: Forms:
received (RR 58) 38, 541 Enhanced oil recovery credit, 2002 1096, 1098, 1099, 5498, W–2G, and
Alternative identifying number of income inflation adjustment (Notice 53) 30, 1042–S, substitute form specifica-
tax return preparer (TD 9014) 35, 429 187 tions (RP 57) 39, 575
Appeals: Increasing research activities credit 1099–B, information reporting for cer-
Arbitration procedures, extension of (Notice 44) 27, 39 tain sales of stock, exception (RP
test (Ann 60) 26, 28 Low-income housing credit: 50) 29, 173
Mediation procedure (RP 44) 26, 10 Carryovers to qualified states, 2002 Golden parachute payments:
Settlement initiative for section 302/ Excess payments (Ann 65) 29, 181
National Pool (RP 56) 36, 483
318 basis-shifting transactions (Ann Valuation of options (RP 45) 27, 40
Rental assistance payments (RR 65)
97) 43, 757 Guaranteed annuity and lead unitrust
43, 729
Termination of settlement initiative for interests, definition (REG–115781–01)
Satisfactory bond, “bond factor”
corporate owned life insurance 33, 380
(COLI) cases (Ann 96) 43, 756 amounts for the period:
July through September 2002 Health reimbursement arrangements
Archer MSAs, 2002 not a cut-off year (HRAs) (RR 41) 28, 75; (Notice 45)
(Ann 90) 40, 684 (RR 51) 33, 327
New markets tax credit, other federal 28, 93
Business and traveling expenses, per Information reporting:
diem allowances, 2003 (RP 63) tax benefits (Notice 64) 41, 690
Investment trusts (REG–106871–00)
41, 691 Definition of income tax return preparer,
30, 190
Capital gains and losses (Notice 58) 35, low-income taxpayer clinics (REG–
Payments made on behalf of another
432 115285–01) 27, 62
person, to joint payees, and of gross
Capital gains, qualified empowerment Depreciation, income forecast method
proceeds from sales involving
zone (QEZ) asset (RP 62) 40, 682 (REG–103823–99) 27, 44; correction investment advisors (TD 9010)
Classification of newly formed entity (RP (Ann 79) 36, 515 33, 341
59) 39, 615 Designated private delivery services, Information returns, discharges of indebt-
Compromise of tax liabilities (TD 9007) 2002 (Notice 62) 39, 574 edness (REG–107524–00) 28, 110
33, 349 Designation of persons before whom a Insurance company interest rates (REG–
Consolidated income tax return: summoned person shall appear (TD 248110–96) 26, 19
Agent for the group (RP 43) 28, 99 9015) 40, 642; (REG–134026–02) 40, Interest:
Common parent as agent for consoli- 684 Bank deposit interest paid to nonresi-
dated group, substitute agent, tenta- Disaster relief for September 11, 2001, dent aliens (REG–133254–02)
tive carryback adjustments (TD terrorist attacks; exclusion of gain from 34, 412
9002) 29, 120 the sale or exchange of a taxpayer’s Investment:
Contingent liability tax shelter cases, principal residence (Notice 60) 36, 482 Federal short-term, mid-term, and
settlement (RP 67) 43, 733 Disclosure of return information, Census long-term rates for:
of Agriculture (TD 9001) 29, 128 July 2002 (RR 40) 27, 30
2002–44 I.R.B. vii November 4, 2002
INCOME TAX— INCOME TAX— INCOME TAX—
Cont. Cont. Cont.
August 2002 (RR 48) 31, 239 Practice before the Internal Revenue Ser- 26 CFR 1.883–0 through –5, added;
September 2002 (RR 53) 35, 427 vice (TD 9011) 33, 356 exclusions from gross income of for-
October 2002 (RR 61) 40, 639 Private foundations, organizations now eign corporations (REG–136311–
Rates: classified as (Ann 64) 27, 72; (Ann 66) 01) 36, 485; correction (Ann 94) 42,
Underpayments and overpayments, 29, 183; (Ann 70) 31, 284; (Ann 72) 727
quarter beginning: 32, 323; (Ann 75) 34, 416; (Ann 77) 26 CFR 1.897 –1, –2, –3, –5T, –6T,
October 1, 2002 (RR 59) 38, 557 35, 471; (Ann 80) 36, 515; (Ann 88) amended; 1.897–5, added; 1.1445–1
Inventory: 38, 564 through –6, amended; 1.1445–9T,
LIFO: Proposed Regulations: removed; 301.6109–1, amended; use
26 CFR 1.61–2, amended; 1.61–22, of taxpayer identifying numbers on
Price indexes used by department
added; 1.83–1, –3, –6, amended; submissions under sections 897 and
stores for:
1.301–1(q), added; 1.1402(a)–18, 1445 (REG–106876–00) 34, 392
May 2002 (RR 47) 29, 119
added; 1.7872–15, added; 26 CFR 1.1502–21, amended; carry-
June 2002 (RR 52) 34, 388
31.3121(a), 31.3231(e), 31.3306(b), back of consolidated net operating
July 2002 (RR 57) 37, 526 31.3401(a), amended; split-dollar losses to separate return years
August 2002 (RR 64) 41, 688 life insurance arrangements (REG– (REG–122564–02) 26, 25
Joint return, relief from joint and several 164754–01) 30, 212 26 CFR 1.1503–2, amended; dual con-
liability (TD 9003) 32, 294; correction 26 CFR 1.167(n)–0 through –7, added; solidated loss recapture events
(Ann 83) 38, 564 guidance on cost recovery under the (REG–106879–00) 34, 402
Loss limitation rules (TD 8998) 26, 1; income forecast method (REG– 26 CFR 1.6011–4, amended;
(REG–123305–02) 26, 26; correction 103823–99) 27, 44; correction (Ann 301.6111–2, amended; modification
(Ann 69) 31, 283 79) 36, 515 of tax shelter rules III (REG–
Marginal properties, oil and gas produc- 26 CFR 1.170A–6, amended; defini- 103735–00, REG–110311–98) 28,
tion, depletion, 2002 percentages tion of guaranteed annuity and lead 109
(Notice 54) 30, 189 unitrust interests (REG–115781–01) 26 CFR 1.6041–1(a)(1)(ii), –3,
Methods of accounting: 33, 380 amended; 1.6045–5, added; report-
Automatic consent to change certain 26 CFR 1.280G–1; golden parachute ing of gross proceeds payments to
methods of accounting (RP 54) 35, payments; correction (Ann 65) attorneys (REG–126024–01) 27, 64
432 29, 181 26 CFR 1.6049–4, –6, –8, revised;
Safe harbor method for premium 26 CFR 1.337(d)–2, amended; 1.1502– 31.3406(g)–1, revised; guidance on
acquisition expenses, non-life insur- 20, amended; loss limitation rules reporting of deposit interest paid to
ance companies (RP 46) 28, 105 (REG–123305–02) 26, 26; correc- nonresident aliens (REG–133254–
New York Liberty Zone, tax benefits tion (Ann 69) 31, 283 02) 34, 412
(Notice 42) 27, 36 26 CFR 1.482–0, –1, –5, –7, amended; 26 CFR 1.6050P–0, –1, amended;
compensatory stock options in quali- 1.6050P–2, added; guidance regard-
Noncustomary services provided to ten-
fied cost sharing arrangements ing cancellation of indebtedness
ants of a REIT (RR 38) 26, 4
(REG–106359–02) 34, 405; correc- (REG–107524–00) 28, 110
Optional standard mileage rates for 2003
tion (Ann 81) 37, 533 26 CFR 31.3406(d)–5, revised;
(RP 61) 39, 616
26 CFR 1.671–4, amended; 1.671–5, 301.6724–1, amended; receipt of
Partnerships: added; 1.6041–9, added; 1.6042–5, multiple notices with respect to
Mergers and divisions (Ann 89) added; 1.6045–1, amended; incorrect taxpayer identification
39, 626 1.6049–4, –5, amended; 1.6050N–2, numbers (REG–116644–01) 31, 268
Optional election to make monthly added; 301.6109–1, amended; 26 CFR 301.7602–1, revised; desig-
section 706(a) computations (RP 68) 602.101, amended; reporting for nated IRS officer or employee under
43, 753 widely held fixed investment trusts section 7602(a)(2) of the Internal
Straddle tax shelter (Notice 50) 28, 98 (REG–106871–00) 30, 190 Revenue Code (REG–134026–02)
Taxable year, foreign and tax-exempt 26 CFR 1.807–2, added; 1.811–3, 40, 684
partners (TD 9009) 33, 328 added; 1.812–9, added; 1.817A–0, 26 CFR 301.7701–15, amended; low-
Withholding tax on nonresident aliens, –1, added; guidance regarding modi- income taxpayer clinics--definition
Qualified Intermediaries (Notice 66) fied guaranteed contracts (REG– of income tax return preparer (REG–
42, 715 248110–96) 26, 19 115285–01) 27, 62
Passive activity losses and credits, limita- Public hearings, correction of dates
tions (TD 9013) 38, 542 and/or locations (Ann 67) 30, 237
Penalties, substantial understatement (RP Public hearings for proposed regulations,
66) 42, 724 correction of dates and locations (Ann
67) 30, 237
November 4, 2002 viii 2002–44 I.R.B.
INCOME TAX— INCOME TAX— INCOME TAX—
Cont. Cont. Cont.
Publications: Real estate mortgage investment conduits 26 CFR 1.1502–21, amended; 1.1502–
463, Travel, Entertainment, Gift, and (REMICs) (TD 9004) 33, 331 21T, added; 602.101, amended; car-
Car Expenses, Supplement to (Ann Regulations: ryback of consolidated net operating
59) 26, 28 26 CFR 1.141–0, –2, –15, amended; losses to separate return years (TD
520, Scholarships and Fellowships, 1.141–7, –8, added; 1.141–7T, –8T, 8997) 26, 6; correction (Ann 68)
revised (Ann 86) 39, 624 –15T, removed; obligations of states 31, 283
536, Net Operating Losses (NOLs) for and political subdivisions (TD 9016) 26 CFR 1.6011–4T, amended;
Individuals, Estates, and Trusts, 40, 628 1.6031(a)–1, amended; 1.6037–1,
Supplement to (Ann 59) 26, 28 26 CFR 1.337(d)–2T, amended; amended; 301.6111–2T, amended;
551, Basis of Assets, revised (Ann 61) 1.1502–20T, amended; loss limita- modification of tax shelter rules III
(TD 9000) 28, 87
27, 71 tion rules (TD 8998) 26, 1
26 CFR 1.6013–4(d), added;
555, Community Property, revised 26 CFR 1.338–1, amended; 1.1502–6,
1.6013–5, removed; 1.6015–0
(Ann 85) 39, 624 amended; 1.1502–77, redesignated
through –9, added; relief from joint
583, Starting a Business and Keeping as 1.1502–77A and amended;
and several liability (TD 9003) 32,
Records, revised (Ann 62) 27, 72 1.1502–77, added; 1.1502–77T(a), 294; correction (Ann 83) 38, 564
590, Individual Retirement Arrange- redesignated as 1.1502–77A(e) and 26 CFR 1.6041–1, –3, amended;
ments (IRAs), Supplement to (Ann amended; 1.1502–77T, removed; 1.6045–1, –2, amended; 1.6049–4,
73) 33, 387 1.1502–78, amended; 602.101, revised; 5f.6045–1, removed;
946, How To Depreciate Property, amended; agent for consolidated 31.3406, amended; 602.101,
Supplement to (Ann 59) 26, 28 group (TD 9002) 29, 120 amended; information reporting
971, Innocent Spouse Relief (And 26 CFR 1.469–0, –7, –11, amended; requirements for certain payments
Separation of Liability and Equi- 602.101, amended; limitations on made on behalf of another person,
table Relief), revised (Ann 74) passive activity losses and credits— payments to joint payees, and pay-
33, 387 treatment of self-charged items of ments of gross proceeds from sales
1141, General Rules and Specifica- income and expense (TD 9013) 38, involving investment advisors (TD
tions for Substitute Forms W–2 and 542 9010) 33, 341
W–3, revised (RP 53) 31, 253 26 CFR 1.702–1, amended; 1.952– 26 CFR 1.6109–2, redesignated as
1167, substitute forms, general 1(g), added; 1.954–1(g), –2(a)(5), 1.6109–2A; 1.6109–2, added;
requirements (RP 60) 40, 645 –3(a)(6), –4(b)(2)(iii), added; 1.956– 1.6109–2T, removed; furnishing
1179, substitute forms 1096, 1098, 2(a)(3), added; guidance under sub- identifying number of income tax
1099, 5498, W–2G, and 1042–S, part F relating to partnerships (TD return preparer (TD 9014) 35, 429
specifications (RP 57) 39, 575 9008) 33, 335 26 CFR 301.6103(j)(5)–1, amended;
1187, Specifications for Filing Form 26 CFR 1.706–1, revised; 1.706–3T, disclosure of return information to
1042–S, Foreign Person’s U.S. removed; taxable years of partner officers and employees of the
Source Income Subject to Withhold- and partnership, foreign partners Department of Agriculture for cer-
(TD 9009) 33, 328 tain statistical purposes and related
ing, Magnetically or Electronically,
26 CFR 1.708–1, amended; 1.752–1, activities (TD 9001) 29, 128
2002 updates (Ann 98) 43, 758
–5, amended; partnership mergers 26 CFR 301.7122–0, –1, added;
1220, Specifications for Filing Forms
and divisions; correction (Ann 89) 301.7122–0T, –1T, removed; com-
1098, 1099, 5498, and W–2G Elec-
39, 626 promise of tax liabilities (TD 9007)
tronically of Magnetically, changes 26 CFR 1.860A–0, amended; 33, 349
(Ann 76) 35, 471 1.860E–1, amended; 602.101, 26 CFR 301.7602–1, revised;
1223, General Rules and Specifica- amended; real estate mortgage 301.7602–1T, added; designated IRS
tions for Substitute Forms W–2c and investment conduits (TD 9004) officer or employee under section
W–3c, revised (RP 51) 29, 175 33, 331 7602(a)(2) of the Internal Revenue
3991, Highlights of the Job Creation 26 CFR 1.892–5, added; 1.892–5T, Code (TD 9015) 40, 642
and Worker Assistance Act, new amended; 301.7701–2, amended; 31 CFR Part 10, amended; regulations
(Ann 59) 26, 28 clarification of entity classification governing practice before the Inter-
Qualified cost sharing arrangements, rules (TD 9012) 34, 389 nal Revenue Service (TD 9011)
costs attributable to stock options 26 CFR 1.894–1(d), amended; treaty 33, 356
(REG–106359–02) 34, 405; correction guidance regarding payments with Reporting of gross proceeds payments to
(Ann 81) 37, 533 respect to domestic reverse hybrid attorneys (REG–126024–01) 27, 64
Railroad track maintenence costs, entities (TD 8999) 28, 78; correc- Reprint, Internal Revenue Bulletin
accounting methods (RP 65) 41, 700 tion (Ann 71) 32, 323 2002–33 (Ann 78) 36, 514
2002–44 I.R.B. ix November 4, 2002
INCOME TAX— INCOME TAX—
Cont. Cont.
Revocations, exempt organizations (Ann Used on submissions under sections
99) 43, 758 897 and 1445 (REG–106876–00)
Split-dollar life insurance arrangements: 34, 392
Income, employment, and gift taxation USDA Peanut Quota Buyout Program,
of (REG–164754–01) 30, 212 gain or loss (Notice 67) 42, 715
Standards for valuing current life Utility companies, non-recognition treat-
insurance protection (Notice 59) 36, ment of stranded costs (RP 49) 29, 172
481 Withholdings, qualified intermediaries,
Standard Industry Fare Level (SIFL) for- audit guidelines, nonresident aliens,
mula (RR 56) 37, 526
foreign financial institutions (RP 55)
Stock gain or loss, short sale (RR 44)
35, 435
28, 84
Substitute Forms:
W–2 and W–3, general rules and SELF-EMPLOYMENT
specifications (RP 53) 31, 253
W–2c and W–3c, general rules and
TAX
specifications (RP 51) 29, 175 Compromise of tax liabilities (TD 9007)
1096, 1098, 1099, 5498, W–2G, and 33, 349
1042–S, rules and specifications (RP
Practice before the Internal Revenue Ser-
57) 39, 575
4
vice (TD 9011) 33, 356
General requirements (RP 60) 40, 645
Regulations:
Tax accrual and other financial audit
26 CFR 301.7122–0, –1, added;
workpapers, request for (Ann 63)
27, 72 301.7122–0T, –1T, removed; com-
Tax conventions, competent authority promise of tax liabilities (TD 9007)
procedures (RP 52) 31, 242 33, 349
Tax-exempt bonds: 31 CFR Part 10, amended; regulations
Exempt facility bonds, population fig- governing practice before the Inter-
ures (Notice 56) 32, 319 nal Revenue Service (TD 9011)
Guidance regarding mixed use output 33, 356
facilities (Ann 91) 40, 685
Investment-type property and private
loan (prepayments) (Notice 52)
30, 187
Output facilities and the $15 million
limitation (TD 9016) 40, 628
Solid waste disposal facilities, recy-
cling facilities (Notice 51) 29, 131
Tax-exempt electric cooperatives, pro-
pane distribution and sale (RR 54) 37,
527
Tax liens (CD 2075) 38, 548
Tax shelters:
Disclosure and registration (TD 9000)
28, 87; (REG–103735–00, REG–
110311–98) 28, 109
Partnership straddle (Notice 50) 28,
98
Passthrough entity straddle (Notice 65)
41, 690
Taxpayer identification numbers:
Backup withholding, waiver of infor-
mation reporting penalties (REG–
116644–01) 31, 268
November 4, 2002 x *U.S. Government Printing Office: 496-919/60055 2002–44 I.R.B.
