Internal Revenue Bulletin 2003-6 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

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
Announcement 2003–7, page 450.
This announcement provides transition rules for corporations and
brokers required under sections 1.6043–4T and 1.6045–3T (T.D.
9022, 2002–48 I.R.B. 909) to file and furnish Form 1099–
CAP with respect to acquisitions of control and substantial
changes in corporate structure occurring in 2002. Affected cor-
porations and brokers will not be required to file Form 1099–
CAP for transactions occurring in 2002. In lieu of furnishing Form
1099–CAP to shareholders and actual stock owners, the cor-
porations and brokers must furnish a letter containing speci-
fied language.
INCOME TAX
Rev. Rul. 2003–16, page 401.
Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate.For purposes of
sections 382, 1274, 1288, and other sections of the Code,
tables set forth the rates for January 2003.
Rev. Rul. 2003–17, page 400.
Foreign life insurance companies.This ruling discusses
whether a foreign life insurance company carrying on an insur-
ance business in the United States determines the amount of in-
come effectively connected with its U.S. business under section
842(a) of the Code based exclusively on the amount of income
reported by the business on its NAIC statement.
T.D. 9029, page 403.
Final regulations under section 6050S of the Code provide guid-
ance to eligible educational institutions on the information re-
porting requirements for qualified tuition and related expenses.
The regulations under section 6011(e) require certain informa-
tion returns to be filed on magnetic media.
Notice 2003–11, page 422.
Effective date of regulations under sections 6011 and
6112.This notice alerts the public that Treasury and the IRS will
be providing some relief in regards to the effective dates of tem-
porary regulations sections 1.6011–4T and 301.6112–1T that
relate to tax shelter registrations.
Notice 2003–12, page 422.
Nonaccrual experience (NAE) method.This notice pro-
vides interim guidance to taxpayers seeking to change to, or
from, a nonaccrual experience (NAE) method of accounting pend-
ing issuance of final regulations under section 448(d)(5) of the
Code, as amended by the Job Creation and Worker Assistance
Act of 2002. Rev. Proc. 2002–9 modified.
Rev. Proc. 2003–17, page 427.
Insurance companies; loss reserves; discounting unpaid
losses.The loss payment patterns and discount factors are set
forth for the 2002 determination year. These factors will be used
to compute discounted unpaid losses under section 846 of the
Code.
(Continued on the next page)
Bulletin No. 2003–6
February 10, 2003
Finding Lists begin on page ii.

INCOME TAX—Cont.
Rev. Proc. 2003–18, page 439.
Insurance companies; discounted estimated salvage re-
coverable.The salvage discount factors are set forth for 2002.
These factors must be used to compute discounted estimated
salvage recoverable under section 832 of the Code.
Rev. Proc. 2003–20, page 445.
Inventories; lower of cost or market; vehicle parts cores.
This procedure provides a safe harbor method of accounting for
the valuation of a taxpayer’s inventory of vehicle parts cores. The
safe harbor method is available to remanufacturers and rebuild-
ers of motor vehicle parts, as well as resellers of remanufac-
tured and rebuilt motor vehicle parts, that use the lower of cost
or market inventory valuation method to value their inventory of
cores held for remanufacturing or sale. Automatic method change
procedures are also provided for taxpayers wishing to change
to the safe harbor method. Rev. Proc. 2002–9 modified and am-
plified.
Announcement 2003–7, page 450.
This announcement provides transition rules for corporations and
brokers required under sections 1.6043–4T and 1.6045–3T (T.D.
9022, 2002–48 I.R.B. 909) to file and furnish Form 1099–
CAP with respect to acquisitions of control and substantial
changes in corporate structure occurring in 2002. Affected cor-
porations and brokers will not be required to file Form 1099–
CAP for transactions occurring in 2002. In lieu of furnishing Form
1099–CAP to shareholders and actual stock owners, the cor-
porations and brokers must furnish a letter containing speci-
fied language.
EMPLOYEE PLANS
Announcement 2003–6, page 450.
This announcement contains a change in the hearing date for
REG–209500–86 and REG–164464–02, 2003–2 I.R.B. 262,
from April 10, 2003, to April 9, 2003. These regulations pro-
vide rules regarding the requirements that accruals or alloca-
tions under certain retirement plans not cease or be reduced
because of the attainment of any age.
EXEMPT ORGANIZATIONS
Rev. Proc. 2003–21, page 448.
This procedure allows for relief for certain exempt organiza-
tions (other than private foundations) organized in U.S. posses-
sions from the requirement of filing an annual information return
on Form 990,Return of Organization Exempt From Income
Ta x. The procedure applies to U.S. possession organizations de-
scribed in section 501(c)(3) of the Code (other than private foun-
dations) that normally do not have more than $25,000 in annual
gross receipts from sources within the United States and have
no significant activity in the United States. Rev. Proc. 83–23
supplemented.
ADMINISTRATIVE
T.D. 9027, page 413.
Final regulations under section 6331 of the Code provide for the
prohibition of levy while an installment agreement is pending with
the Secretary, while an installment agreement is in effect, and
following the rejection or termination of an installment agree-
ment. The regulations clarify when levy is prohibited and the ef-
fect of that prohibition on the statute of limitations for collection.
They also provide that the IRS may not refer a case to the De-
partment of Justice for the commencement of a proceeding in
court for the collection of a tax included in a proposed or ac-
tive installment agreement while levy is prohibited by this sec-
tion.
T.D. 9028, page 415.
Final regulations under section 7602(c) of the Code describe the
rules and exceptions which prohibit IRS employees from con-
tacting any person other than the taxpayer for determination or
collection of the taxpayer’s liability.
Notice 2003–11, page 422.
Effective date of regulations under sections 6011 and
6112.This notice alerts the public that Treasury and the IRS will
be providing some relief in regards to the effective dates of tem-
porary regulations sections 1.6011–4T and 301.6112–1T that
relate to tax shelter registrations.
Announcement 2003–8, page 451.
This document contains corrections to final regulations (T.D.
9002, 2002–29 I.R.B. 120) relating to the agent for subsidiar-
ies of an affiliated group that files a consolidated return.
February 10, 20032003–6 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
Commissioner of Internal Revenue for announcing official rul-
ings and procedures of the Internal Revenue Service and for pub-
lishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super-
intendent of Documents on a subscription basis. Bulletin contents
are consolidated semiannually into Cumulative Bulletins, which
are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify,
or amend any of those previously published in the Bulletin. All pub-
lished rulings apply retroactively unless otherwise indicated. Pro-
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-
lished.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpay-
ers or technical advice to Service field offices, identifying de-
tails and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be re-
lied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and pro-
cedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Ser-
vice personnel and others concerned are cautioned against reach-
ing the same conclusions in other cases unless the facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
cluded in this part are Bank Secrecy Act Administrative Rulings.
Bank Secrecy Act Administrative Rulings are issued by the De-
partment of the Treasury’s Office of the Assistant Secretary (En-
forcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual pe-
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.
2003–6 I.R.B.February 10, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 263A.—Capitalization
and Inclusion in Inventory
Costs of Certain Expenses
26 CFR 1.263A–1: Uniform capitalization of costs.
A safe harbor method of accounting for the valu-
ation of motor vehicle parts “cores” is provided to re-
manufacturers and rebuilders of motor vehicle parts,
as well as resellers of remanufactured and rebuilt mo-
tor vehicle parts, that use the lower of cost or mar-
ket method of accounting. See Rev. Proc. 2003–20,
page 445.
Section 280G.—Golden Para-
chute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2003. See Rev.
Rul. 2003–16, page 401.
Section 382.—Limitation on
Net Operating Loss Carryfor-
wards and Certain Built-In
Losses Following Ownership
Change
The adjusted applicable federal long-term rate is
set forth for the month of February 2003. See Rev.
Rul. 2003–16, page 401.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
Procedures are provided for certain taxpayers us-
ing the lower of cost or market method of account-
ing to request automatic consent of the Commissioner
to change to a safe harbor method of accounting for
the valuation of motor vehicle parts “cores.” See Rev.
Proc. 2003–20, page 445.
Section 467.—Certain Pay-
ments for the Use of Property
or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 468.—Special Rules
for Mining and Solid Waste
Reclamation and Closing
Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 471.—General Rule
for Inventories
26 CFR 1.471–2: Valuation of Inventories.
A safe harbor method of accounting for the valu-
ation of motor vehicle parts “cores” is provided to re-
manufacturers and rebuilders of motor vehicle parts,
as well as resellers of remanufactured and rebuilt mo-
tor vehicle parts, that use the lower of cost or mar-
ket method of accounting. See Rev. Proc. 2003–20,
page 445.
Section 472.—Last-in, First-
out Inventories
26 CFR 1.472–2: Requirements incident to adop-
tion and use of LIFO inventory method.
Procedures are provided for certain taxpayers to
concurrently change from their cost method to the
lower of cost or market method in conjuction with a
change to a safe harbor method of accounting for the
valuation of motor vehicle parts “cores.” See Rev. Proc.
2003–20, page 445.
Section 481.—Adjustments
Required by Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
Procedures are provided for certain taxpayers us-
ing the lower of cost or market method of account-
ing to request automatic consent of the Commissioner
to change to a safe harbor method of accounting for
the valuation of motor vehicle parts “cores.” See Rev.
Proc. 2003–20, page 445.
Section 482.—Allocation of
Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2003. See Rev.
Rul. 2003–16, page 401.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 642.—Special Rules
for Credits and Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2003. See Rev.
Rul. 2003–16, page 401.
2003–6 I.R.B.399February 10, 2003

Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2002–16, page 401.
Section 832.—Insurance
Company Taxable Income
26 CFR 1.832–4: Gross income.
The salvage discount factors are set forth for 2002.
These factors must be used to compute discounted es-
timated salvage recoverable for purposes of section
832 of the Code. See Rev. Proc. 2003–18, page 439.
Section 842.—Foreign
Companies Carrying on
Insurance Business
26 CFR 1.864–4(c): U.S. source income effectively
connected with U.S. business.
(Also section 864(c).)
Rev. Rul. 2003–17
ISSUE
Whether a foreign life insurance com-
pany carrying on an insurance business in
the United States determines the amount of
income effectively connected with its U.S.
business under section 842(a) of the Inter-
nal Revenue Code (the“Code”) based ex-
clusively on the amount of income reported
by the business on the National Associa-
tion of Insurance Commissioner’s annual
statement (“NAIC statement”) filed with the
state insurance commissioner.
FACTS
FC, a Country X corporation, is a for-
eign life insurance company that issues life
insurance, annuity, and other insurance con-
tracts in Country X and the United States.
FC’s activities in connection with its in-
surance business constitute the conduct of
a trade or business within the United States
(the“U.S. branch”). FC conducts its in-
surance activities in State Y. Under the law
of State Y, FC is required to maintain trust-
eed assets and deposits in the United States
sufficient to satisfy all potential claims of
its U.S. policyholders. FC also maintains
in the United States and uses in its U.S.
business non-trusteed assets consisting of
bonds, stocks, and short-term investments
which are managed by individuals located
in the United States and accounted for on
the books of the U.S. branch.
FC is required to file a NAIC state-
ment with State Y. Generally, this NAIC
statement is intended to permit the insur-
ance regulatory body to determine whether
a foreign insurance company has suffi-
cient assets to satisfy all potential claims
of its U.S. policyholders. While the trust-
eed assets held by FC (and corresponding
income) are required to be included on the
NAIC statement, the non-trusteed assets
(and corresponding income) are not re-
flected in the NAIC statement.
LAW AND ANALYSIS
Section 842(a) provides that if a for-
eign company carrying on an insurance
business within the United States would
qualify under part I of subchapter L for the
taxable year if (without regard to income
not effectively connected with the con-
duct of any trade or business within the
United States) it were a domestic corpo-
ration, such company shall be taxable un-
der such part on its income effectively
connected with its conduct of any trade or
business within the United States. Sec-
tion 842(a) further provides that with re-
spect to the remainder of income which is
from sources within the United States, such
a foreign company shall be taxable as pro-
vided in section 881.
Section 864(c)(1) provides that in the
case of a foreign corporation engaged in a
trade or business within the United States
during the taxable year, the rules set forth
in section 864(c)(2), (3), (4), (6), and (7)
shall apply in determining the income, gain
or loss which shall be treated as effec-
tively connected with the conduct of a trade
or business within the United States
(“ECI”). Section 864(c)(2) generally pro-
vides rules for determining whether cer-
tain fixed or determinable, annual or
periodical income from sources within the
United States or gain or loss from sources
within the United States from sale or ex-
change of capital assets is ECI. In mak-
ing this determination, the factors taken into
account include whether (a) the income,
gain or loss is derived from assets used in
or held for use in the conduct of such trade
or business, or (b) the activities of such
trade or business were a material factor in
the realization of such income, gain or loss.
Sec. 864(c)(2). Treas. Reg.§1.864–4(c)(2)
sets forth factors to be considered in de-
termining whether an asset is used in or
held for use in the conduct of a U.S. trade
or business for purposes of section
864(c)(2). Under the regulations, an asset
is ordinarily treated as used in, or held for
use in, the conduct of a U.S. trade or busi-
ness if the asset is: (a) held for the princi-
pal purpose of promoting the present
conduct of the U.S. trade or business; (b)
acquired and held in the ordinary course of
the U.S. trade or business; or (c) other-
wise held in a direct relationship to the U.S.
trade or business. Treas. Reg.§1.864–
4(c)(2)(ii). In determining whether an as-
set is held in a direct relationship to the U.S.
trade or business, principal consideration is
given to whether the asset is held to meet
the present needs of the business. Treas.
Reg.§1.864–4(c)(2)(iv)(a). An asset shall
be considered as needed in the U.S. busi-
ness if, for example, the asset is held to
meet the operating expenses of that busi-
ness, but not if held for future diversifica-
tion into a new trade or business, expansion
of trade or business activities outside the
United States, or future business contin-
gencies.Id. The regulations provide for a
presumption of a direct relationship where:
(1) the asset was acquired with funds gen-
erated by the trade or business; (2) the in-
come from the asset is retained or reinvested
in the trade or business; and (3) person-
nel present in the United States and ac-
tively involved in the conduct of that trade
or business exercise significant manage-
ment and control over the investment of the
asset. Treas. Reg.§1.864–4(c)(2)(iv)(b).
In determining whether an asset is used
in or held for use in the conduct of a U.S.
trade or business or whether the activities
of the trade or business were a material fac-
tor in the realization of the income, gain or
loss, due regard is given to whether or not
such asset, or income, gain or loss was ac-
counted for through the trade or business.
Sec. 864(c)(2); Treas. Reg.§1.864–4(c)(4).
However, this accounting test shall not by
itself be controlling. Treas. Reg.§1.864–
4(c)(4).
All other income, gain or loss from
sources within the United States is treated
as ECI. Sec. 864(c)(3). Section 864(c)(4)(C)
provides that in the case of a foreign in-
surance company any income from sources
without the U.S. which is attributable to its
U.S. business is treated as ECI.See also
February 10, 20034002003–6 I.R.B.

Treas. Reg.§1.864–5(c) (In determining its
life insurance company taxable income from
its U.S. business, the foreign corporation
shall include all of its items of income from
sources without the United States which
would appropriately be taken into account
in determining the life insurance company
taxable income of a domestic corpora-
tion).
The Report of the House Committee on
Ways & Means (the“House Report”)
provides:
Your committee believes that foreign in-
surance companies—life insurance com-
panies and other insurance companies,
including both mutual and stock
companies—should, in general, be taxed
on their investment income in the same
manner as other foreign corporations. For
this reason, the bill provides that a for-
eign insurance corporation carrying on
an insurance business within the United
States is to be taxable in the same man-
ner as domestic companies carrying on
a similar business with respect to its in-
come which is effectively connected with
the conduct of a trade or business within
the United States....Forpurposes of
determining whether or not income of
a foreign life insurance company is ef-
fectively connected with the conduct of
its U.S. life insurance business, the an-
nual statement of its U.S. business on the
form approved by the National Asso-
ciation of Insurance Commissioners will
usuallybe followed. It is noted thatall
the income effectively connected with
the foreign life insurance company’s U.S.
life insurance business, from whatever
source derived, comes within the am-
bit of this provision. This is a continu-
ation of present law which subjects to
U.S. tax all the income attributable to the
U.S. life insurance business from what-
ever source derived.
H.R. Rep. No. 1450, 89th Cong., 2d Sess.
31, 32 (1966) (emphasis added); S. Rep.
No. 1707, 89th Cong., 2d Sess. 38 (1966)
(same).
The House Report also states that“[i]n
determining for purposes of subchapter L
whether a foreign corporation is carrying
on an insurance business in the United
States, and whether income is effectively
connected with the conduct of a trade or
business within the United States, section
864(b) and (c), as added by section 2(d) of
the bill, shall apply.”House Report at 94.
Thus, the legislative history confirms that
a foreign life insurance company applies the
standards set forth in section 864(c) to de-
termine the amount of its effectively con-
nected income.
Accordingly, under section 842(a) and
consistent with the accompanying legisla-
tive history, foreign insurance companies are
taxed on their ECI. Section 864(c) does not
contain specific rules for foreign insur-
ance companies other than in section
864(c)(4)(C). Similarly, no specific rules
were provided for foreign insurance com-
panies in regulations issued under section
864 other than Treas. Reg.§1.864–5(c).
Neither section 842 or 864 provides that an
insurance company determines its ECI
solely based on its NAIC statements.
While the legislative history states that
NAIC statements willusuallybe followed,
the legislative history makes clear that sec-
tion 864(c) shall determine whether in-
come is ECI. Accordingly, income on assets
such as the non-trusteed assets of FC are
not necessarily excluded from ECI merely
because they do not appear on the NAIC
statement.
Section 864(c)(2) and the regulations
thereunder provide that due regard shall be
given to whether or not an asset, income,
gain, or loss was accounted for through the
U.S. trade or business. Accordingly, in de-
termining if the income, gain or loss from
the non-trusteed assets is ECI, due regard
must be given to the fact that FC has ac-
counted for such assets on the books of the
U.S. branch.
HOLDING(S)
FC is taxable on any income effectively
connected with its U.S. trade or business.
For this purpose, ECI is determined un-
der section 864(c) and the accompanying
regulations. While due regard shall be given
to the NAIC statement, such statement shall
not be determinative of the amount of ECI.
Further, due regard also must be given to
the fact that FC has accounted for the non-
trusteed assets on the books of the U.S.
branch.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Sheila Ramaswamy of the Office of
Associate Chief Counsel (International). For
further information regarding this revenue
ruling, contact Ms. Ramaswamy at (202)
622–3870.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
26 CFR 1.846–1: Application of discount factors.
The loss payment patterns and discount factors are
set forth for the 2002 determination year. These fac-
tors will be used to compute discounted unpaid losses
under section 846 of the Code. See Rev. Proc. 2003–
17, page 427.
26 CFR 1.846–1: Application of discount factors.
The salvage discount factors are set forth for 2002.
These factors must be used to compute discounted es-
timated salvage recoverable for purposes of section
832 of the Code. See Rev. Proc. 2003–18, page 439.
Section 864(c).—Definitions
and Special Rules - Effectively
Connected Income, etc.
Whether a foreign life insurance company carry-
ing on an insurance business in the United States de-
termines the amount of income effectively connected
with its U.S. business under section 842(a) of the Code
based exclusively on the amount of income reported
by the business on its NAIC statement.
Section 1274.—Determina-
tion of Issue Price in the Case
of Certain Debt Instruments
Issued for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 1274, 1288, and other sec-
tions of the code, tables set forth the rates
for January 2003.
Rev. Rul. 2003–16
This revenue ruling provides various pre-
scribed rates for federal income tax pur-
2003–6 I.R.B.401February 10, 2003

poses for February 2003 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate per-
centages for determining the low-income
housing credit described in section 42(b)(2)
for buildings placed in service during the
current month. Finally, Table 5 contains the
federal rate for determining the present
value of annuity, an interest for life or for
a term of years, or a remainder or a rever-
sionary interest for purposes of section
7520.
REV. RUL. 2003–16 TABLE 1
Applicable Federal Rates (AFR) for February 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR1.65%1.64%1.64%1.63%
110% AFR1.81%1.80%1.80%1.79%
120% AFR1.98%1.97%1.97%1.96%
130% AFR2.14%2.13%2.12%2.12%
Mid-Term
AFR3.27%3.24%3.23%3.22%
110% AFR3.59%3.56%3.54%3.53%
120% AFR3.93%3.89%3.87%3.86%
130% AFR4.25%4.21%4.19%4.17%
150% AFR4.92%4.86%4.83%4.81%
175% AFR5.75%5.67%5.63%5.60%
Long-Term
AFR4.85%4.79%4.76%4.74%
110% AFR5.34%5.27%5.24%5.21%
120% AFR5.83%5.75%5.71%5.68%
130% AFR6.33%6.23%6.18%6.15%
REV. RUL. 2003–16 TABLE 2
Adjusted AFR for February 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR1.40%1.40%1.40%1.40%
Mid-term
adjusted AFR2.84%2.82%2.81%2.80%
Long-term
adjusted AFR4.56%4.51%4.48%4.47%
February 10, 20034022003–6 I.R.B.

REV. RUL. 2003–16 TABLE 3
Rates Under Section 382 for February 2003
Adjusted federal long-term rate for the current month4.56%
Long-term tax-exempt rate for ownership changes during the current month (the highest
of the adjusted federal long-term rates for the current month and the prior two months.)
4.65%
REV. RUL. 2003–16 TABLE 4
Appropriate Percentages Under Section 42(b)(2)
for February 2003
Appropriate percentage for the 70% present value low-income housing credit7.94%
Appropriate percentage for the 30% present value low-income housing credit3.40%
REV. RUL. 2003–16 TABLE 5
Rate Under Section 7520 for February 2003
Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest4.0%
Section 1288.—Treatment of
Original Issue Discounts on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 6050S.—Returns
Relating to Higher Education
Tuition and Related Expenses
26 CFR 1.6050S–1: Information reporting for
qualified tuition and related expenses.
T.D. 9029
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and
602
Information Reporting for
Qualified Tuition and Related
Expenses; Magnetic Media
Filing Requirements for
Information Returns
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the information
reporting requirements for qualified tu-
ition and related expenses under section
6050S of the Internal Revenue Code, in-
cluding rules prescribing when the required
information returns must be filed on mag-
netic media. The final regulations reflect
changes made to the law by the Taxpayer
Relief Act of 1997 and the amendments
made by the Internal Revenue Service Re-
structuring and Reform Act of 1998 and
Public Law 107–131. These regulations pro-
vide guidance to eligible educational in-
stitutions that enroll any individual for any
academic period. These regulations also pro-
vide guidance to insurers that make reim-
bursements or refunds of qualified tuition
and related expenses.
DATES:Effective Date:These regulations
are effective December 19, 2002.
Applicability Date:For dates of appli-
cability, see§1.6050S–1(f) and§301.6011–
2(g)(3).
FORFURTHERINFORMATION
CONTACT: Concerning the regulations,
Tonya Christianson, (202) 622–4910; and
concerning the magnetic media filing speci-
fications, waivers for filing on magnetic me-
dia, and extensions of time, contact the IRS,
Martinsburg Computing Center, (304) 263–
8700 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the Pa-
perwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–1678.
2003–6 I.R.B.403February 10, 2003

Responses to this collection of informa-
tion are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
it displays a valid control number assigned
by the Office of Management and Bud-
get.
The estimated reporting burden for the
reporting in these regulations is reflected on
the burden for Form 1098–T.
Estimated total annual reporting bur-
den for 2001 for Form 1098–T: 3,056,411
hours.
Estimated number of responses for 2001
for Form 1098–T as of November 22, 2002:
20,376,075.
Estimated average annual burden hours
per response for 2001 for Form 1098–T: 9
minutes.
Comments concerning the accuracy of
this burden and suggestions for reducing this
burden should be sent to theInternal Rev-
enueService, Attn:IRSReports
Clearance Officer, W:CAR:MP:FP:S, Wash-
ington, DC 20224, and to theOffice of
Management and Budget, Attn: Desk Of-
ficer for the Department of the Treasury, Of-
fice of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) relating to the information reporting re-
quirements for qualified tuition and re-
lated expenses under section 6050S of the
Internal Revenue Code (Code) and amend-
ments to the Procedure and Administra-
tion Regulations (26 CFR part 301) relating
to magnetic media reporting. The Tax-
payer Relief Act of 1997 (Public Law
105–34 (111 Stat. 788) (TRA’97)) added
section 6050S of the Code. Section 6050S
was amended by the Internal Revenue Ser-
vice Restructuring and Reform Act of 1998
(Public Law 105–206 (112 Stat. 685) (RRA
’98)), and Public Law 107–131 (115 Stat.
2410). In general, section 6050S requires
any eligible educational institution (insti-
tution) to file information returns and to fur-
nish written information statements to assist
taxpayers and the Internal Revenue Ser-
vice (IRS) in determining the amount of
qualified tuition and related expenses (quali-
fied expenses) for which an education tax
credit is allowable under section 25A (as
well as other tax benefits for higher edu-
cation expenses). See H.R. Conf. Rept. No.
599, 105th Cong., 2d Sess., pp. 319–320
(1998).
As provided by Public Law 107–131, for
calendar years beginning after December 31,
2002, institutions may elect to report ei-
ther the aggregate amount of payments re-
ceived, or the aggregate amount billed, for
qualified expenses during the calendar year
with respect to individuals enrolled for any
academic period. Institutions must report
separately adjustments (i.e., refunds of pay-
ments or reductions in charges) made dur-
ing the calendar year to payments received,
or amounts billed, for qualified expenses
that were reported in a prior calendar year.
In addition, institutions must report the ag-
gregate amount of scholarships or grants re-
ceived for an individual’s costs of
attendance that the institution adminis-
tered and processed during the calendar
year. Institutions must report separately ad-
justments (i.e., refunds or reductions) made
during the calendar year to scholarships that
were reported in a prior calendar year.
In addition, section 6050S requires any
person engaged in a trade or business of
making payments to any individual under
an insurance agreement as reimbursements
or refunds of qualified expenses (an in-
surer) to file information returns and to fur-
nish written information statements.
A notice of proposed rulemaking un-
der section 6050S (REG–105316–98,
2000–2 C.B. 98) was published in theFed-
eral Register(65 FR 37728) on June 16,
2000 (the 2000 proposed regulations). The
2000 proposed regulations relating to the
information reporting requirements for in-
stitutions and insurers were withdrawn and
a new notice of proposed rulemaking
(REG–161424–01, 2002–21 I.R.B. 1010)
was published in theFederal Register(67
FR 20923) on April 29, 2002 (the 2002 pro-
posed regulations). No request for a pub-
lic hearing was received on the 2002
proposed regulations. The IRS received
written and electronic comments respond-
ing to the 2002 notice of proposed rule-
making. After consideration of all the
comments, the 2002 proposed regulations
are adopted as amended by this Treasury
decision. The revisions are discussed be-
low.
Explanation of Provisions and
Summary of Comments
1.Information Reporting Relating to
Qualified Tuition and Related Expenses
A.Required reporting and exceptions to
reporting
(i) Reporting Based on Academic Year
vs. Calendar Year
One commentator to the 2002 proposed
regulations requested that institutions be al-
lowed to report financial data based on an
academic year, and not based on a calen-
dar year. Section 6050S requires institu-
tions to report on a calendar year in order
to assist taxpayers in calculating the edu-
cation tax credit that is allowable for quali-
fied expenses paid during a calendar year.
Therefore, the final regulations do not adopt
this recommendation.
(ii) Exception for Noncredit Courses
The 2002 proposed regulations provide
an exception to reporting for any student
who is enrolled during the calendar year
only in courses for which no academic
credit is offered. Several commentators to
the 2002 proposed regulations requested that
if a student is enrolled both in courses for
which academic credit is offered (e.g.,
courses in a postsecondary degree pro-
gram) and courses for which no academic
credit is offered (e.g., courses in a continu-
ing education program), institutions should
be required to report only the courses for
which academic credit is offered. The com-
mentators suggested that the exception to
reporting should be based on the category
of courses, not the category of students. The
commentators explained that institutions
maintain separate databases for credit
courses and noncredit courses and that it
would create a substantial hardship if in-
stitutions were required to report for both
credit courses and noncredit courses. In re-
sponse to these comments, and because un-
der section 25A and the regulations
thereunder a student enrolled in a postsec-
ondary degree program is not eligible to
claim a Hope Scholarship Credit (and may
not be eligible to claim a Lifetime Learn-
ing Credit) for noncredit courses, the fi-
nal regulations adopt this recommendation.
Accordingly, the final regulations provide
that institutions are not required to report
with respect to courses for which no aca-
February 10, 20034042003–6 I.R.B.

demic credit is offered by the institution,
even if the student is enrolled in a degree
program.
(iii) No Exception for Small Amounts of
Qualified Tuition and Related Expenses
One commentator to the 2002 proposed
regulations requested that the regulations
provide an exception to reporting for quali-
fied expenses of $100 or less. The lim-
ited exceptions to required reporting are
based on the fact that certain categories of
students may not be eligible to claim the
education tax credit and that certain pay-
ments may not be taken into account in cal-
culating the amounts paid for qualified
expenses for which an education tax credit
is allowable. An exception to reporting for
small amounts of qualified expenses has no
relationship to whether an education tax
credit is allowable for amounts paid for
qualified expenses. Therefore, the final regu-
lations do not adopt this recommenda-
tion.
(iv) Exception for Students Whose
Qualified Expenses Are Covered by For-
mal Billing Arrangement
The 2002 proposed regulations provide
an exception to reporting for any student
whose qualified expenses are paid by the
student’s employer through a formal bill-
ing arrangement under which the employ-
er’s employees attend the institution, the
institution bills only the employer, and the
institution does not maintain a separate ac-
count for any employee/student. Several
commentators to the 2002 proposed regu-
lations requested that this exception be ex-
pandedtoincludeformalbilling
arrangements between institutions and other
third party payors, such as the Veterans’Ad-
ministration, U.S. Armed Forces, and other
governmental and private organizations.
Under section 25A and the regulations
thereunder, a taxpayer cannot claim the edu-
cation tax credit for educational expenses
paid with amounts that are excludable from
gross income. Educational expenses paid
through a formal billing arrangement be-
tween an institution and a governmental en-
tity, such as the Veterans’Administration,
often are excludable from the gross in-
come of the individual student. Therefore,
the final regulations expand the excep-
tion to cover formal billing arrangements
between an institution and a governmen-
tal entity under which the institution bills
only the governmental entity and does not
maintain a separate account with respect to
any individual student. In addition, the fi-
nal regulations authorize the Commissioner
to designate additional types of formal bill-
ing arrangements for which no reporting
will be required. It is anticipated that any
additional formal billing arrangements des-
ignated by the Commissioner will be lim-
ited to situations in which the individual
students generally would not be eligible to
claim an education tax credit with respect
to the payments made by the institutional
third party payor.
(v) Family Educational Rights and Pri-
vacy Act and Optional Reporting
The U.S. Department of Education has
previously determined that reporting un-
der section 6050S does not violate the Fam-
ily Educational Rights and Privacy Act
(FERPA) (20 U.S.C. section 1232g). Sev-
eral commentators to the 2002 proposed
regulations requested clarification as to
whether an institution that chooses to re-
port on all students under section 6050S,
even if the regulations provide an excep-
tion to required reporting, would violate
FERPA. After the 2002 proposed regula-
tions were issued, the Treasury Depart-
ment asked the Department of Education to
consider whether its earlier determination
would extend to an institution that chooses
to report on students otherwise covered by
an exception to required reporting. The De-
partment of Education has recently deter-
mined that an institution will not violate
FERPA if it chooses to report informa-
tion on all students in accordance with sec-
tion 6050S, even if the regulations provide
an exception to required reporting.
B.Required information for institutions
(i) Reporting Amounts Billed in One
Year That Relate to an Academic Period that
Begins During the First Three Months of
the Next Year
Several commentators to the 2002 pro-
posed regulations requested that the final
regulations eliminate the requirement that
institutions indicate that amounts reported
as billed in one calendar year relate to quali-
fied expenses for an academic period that
begins during the first three months of the
next calendar year. The commentators ex-
plained that most institutions bill late in one
calendar year for the qualified expenses that
relate to an academic period that begins in
the first three months of the next calen-
dar year. The commentators questioned the
usefulness of this information.
Under section 25A and the regulations
thereunder, the education tax credit is al-
lowable only for amounts actually paid dur-
ing the calendar year for an academic period
that begins during the same calendar year
or during the first three months of the next
calendar year. Therefore, there may be situ-
ations where an institution reports amounts
billed for qualified expenses in one calen-
dar year that relate to an academic period
that begins during the first three months of
the next calendar year, and the taxpayer
pays the qualified expenses in the next cal-
endar year. In this situation, the taxpayer
and the IRS should be advised that the
amounts reported as billed during a calen-
dar year may not be amounts for which the
taxpayer may claim the education tax credit
for that year. Therefore, the final regula-
tions do not adopt this recommendation.
(ii) Reporting Requirements for Increases
to Charges for Qualified Expenses and
Grants Reported for a Prior Calendar Year
One commentator requested clarifica-
tion as to whether the 2002 proposed regu-
lations purposely did not require separate
reporting for increases to charges for quali-
fied expenses and grants reported by the in-
stitution for a prior calendar year. The
amendments to section 6050S by Public
Law 107–131 require institutions to re-
port the aggregate amount of charges for
qualified expenses and the aggregate amount
of grants administered and processed dur-
ing the calendar year. These aggregate
amounts would include any increases in
charges for qualified expenses that relate to
a prior year and any increases in grants that
relate to a prior year. Therefore, no sepa-
rate reporting is required for increases to
charges for qualified expenses and grants
that relate to a prior year.
(iii) Information Contact
The 2002 proposed regulations require
institutions and insurers to include on the
information statement furnished to the stu-
dent the name, address, and phone num-
ber of the office or department within the
institution or insurer that is the informa-
tion contact. Several commentators re-
quested that the regulations be revised to
allow third party service providers that file
information returns on behalf of the insti-
tutions or the insurers, as well as a third
party call centers, to be designated as the
information contact. Consistent with sec-
tion 6050S(d)(1), the final regulations re-
quire institutions and insurers to include the
2003–6 I.R.B.405February 10, 2003

name, address, and phone number of the in-
formation contact of the person required to
file the information return. This provision
does not preclude any institution or in-
surer that is required to file an informa-
tion return from including, in addition to its
own name, address, and phone number, the
name, address, and phone number of a third
party service provider.
C.Information reporting penalties
(i) Filing Information Returns with Miss-
ing TINs
Several commentators to the 2002 pro-
posed regulations requested that institu-
tions not be required to file information
returns and to furnish information state-
ments for students who refuse to provide
their TINs. Information returns and infor-
mation statements with missing TINs are
useful to both the IRS and the taxpayer in
verifying the amount of any allowable edu-
cation tax credit (as well as other tax ben-
efits for higher education expenses).
Therefore, the final regulations do not adopt
this recommendation.
2.Requirement to File Information Re-
turns on Magnetic Media
The final regulations amend the regu-
lations under section 6011(e) to require in-
stitutions and insurers who are required to
file 250 or more Forms 1098–T,Tuition
Statement,to file on magnetic media.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations. A final regula-
tory flexibility analysis has been prepared
for the collection of information in this
Treasury decision. This analysis is set forth
in this preamble under the heading“Final
Regulatory Flexibility Analysis.”Pursu-
ant to section 7805(f) of the Code, the pro-
posedregulationsprecedingthese
regulations were submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its im-
pact on small business.
Final Regulatory Flexibility Analysis
The collection of information contained
in§1.6050S–1 is needed to assist the IRS
and taxpayers in determining the amount of
any education tax credit allowable under
section 25A (as well as other tax benefits
for higher education expenses). The objec-
tives of these final regulations are to pro-
vide uniform, practicable, and administrable
rules under section 6050S. The types of
small entities to which the regulations may
apply are small eligible educational insti-
tutions (such as colleges and universities)
and certain insurers who reimburse educa-
tional expenses.
There are no known Federal rules that
duplicate, overlap, or conflict with these
regulations. The regulations are consid-
ered to have the least economic impact on
small entities of all alternatives consid-
ered.
Moreover, the regulations requiring fil-
ing Forms 1098–T on magnetic media im-
pose no additional reporting or record
keeping and only prescribe the method of
filing information returns that are already
required to be filed. Further, these regula-
tions are consistent with the statutory re-
quirement that an institution or insurer is
not required to file Forms 1098–T on mag-
netic media unless required to file at least
250 or more returns during the year. Fi-
nally, the economic impact caused by re-
quiring Forms 1098–T on magnetic media
should be minimal because most institu-
tions’or insurers’operations are comput-
erized. Even if their operations are not
computerized, the incremental cost of mag-
netic media reporting should be minimal in
most cases because of the availability of
computer service bureaus. In addition, the
existing regulations under section 6011(e)
provide that the IRS may waive the mag-
netic media filing requirements on a show-
ing of hardship. The waiver authority will
be exercised so as not to unduly burden in-
stitutions and insurers lacking both the nec-
essary data processing facilities and access
at a reasonable cost to computer service bu-
reaus.
Drafting Information
The principal author of the regulations
is Tonya Christianson, Office of Associ-
ate Chief Counsel (Procedure and Admin-
istration), Administrative Provisions and
Judicial Practice Division. However, other
personnel from the IRS and the Treasury
Department participated in the develop-
ment of the regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:
PA RT 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.6050S–1 also issued under sec-
tion 26 U.S.C. 6050S(g).***
Par. 2. Section 1.6050S–0 is amended by
revising the introductory language and add-
ing new entries for§1.6050S–1 to read as
follows:
§1.6050S–0 Table of contents
This section lists captions contained in
§§1.6050S–1, 1.6050S–2T, 1.6050S–3, and
1.6050S–4T.
§1.6050S–1 Information reporting for
qualified tuition and related expenses.
(a) Information reporting requirement.
(1) In general.
(2) Exceptions.
(i) No reporting by institutions or in-
surers for nonresident alien individuals.
(ii) No reporting by institutions for non-
credit courses.
(A) In general.
(B) Academic credit defined.
(C) Example.
(iii) No reporting by institutions for in-
dividuals whose qualified tuition and re-
lated expenses are waived or are paid with
scholarships.
(iv) No reporting by institutions for in-
dividuals whose qualified tuition and re-
lated expenses are covered by a formal
billing arrangement.
(A) In general.
(B) Formal billing arrangement defined.
(b) Requirement to file return.
(1) In general.
(2) Information reporting requirements
for institutions that elect to report pay-
ments received for qualified tuition and re-
lated expenses.
(i) In general.
(ii) Information included on return.
(iii) Reportable amount of payments re-
ceived for qualified tuition and related ex-
penses during calendar year determined.
(iv) Separate reporting of reimburse-
ments or refunds of payments of quali-
February 10, 20034062003–6 I.R.B.

fied tuition and related expenses that were
reported for a prior calendar year.
(v) Payments received for qualified tu-
ition and related expenses determined.
(vi) Reimbursements or refunds of pay-
ments for qualified tuition and related ex-
penses determined.
(vii) Examples.
(3) Information reporting requirements
for institutions that elect to report amounts
billed for qualified tuition and related ex-
penses.
(i) In general.
(ii) Information included on return.
(iii) Reportable amounts billed for quali-
fied tuition and related expenses during cal-
endar year determined.
(iv) Separate reporting of reductions
made to amounts billed for qualified tu-
ition and related expenses that were re-
ported for a prior calendar year.
(v) Examples.
(4) Requirements for insurers.
(i) In general.
(ii) Information included on return.
(5) Time and place for filing return.
(i) In general.
(ii) Return for nonresident alien indi-
vidual.
(iii) Extensions of time.
(6) Use of magnetic media.
(c) Requirement to furnish statement.
(1) In general.
(2) Time and manner for furnishing
statement.
(i) In general.
(ii) Statement to nonresident alien in-
dividual.
(iii) Extensions of time.
(3) Copy of Form 1098–T.
(d) Special rules.
(1) Enrollment determined.
(2) Payments of qualified tuition and re-
lated expenses received or collected by one
or more persons.
(i) In general.
(ii) Exception.
(3) Governmental units.
(e) Penalty provisions.
(1) Failure to file correct returns.
(2) Failure to furnish correct informa-
tion statements.
(3) Waiver of penalties for failures to in-
clude a correct TIN.
(i) In general.
(ii) Acting in a responsible manner.
(iii) Manner of soliciting TIN.
(4) Failure to furnish TIN.
(f) Effective date.
*****
Par. 3. Section 1.6050S–1 is added to
read as follows:
§1.6050S–1 Information reporting for
qualified tuition and related expenses.
(a)Information reporting requirement—
(1)In general.Except as provided in para-
graph (a)(2) of this section, any eligible edu-
cational institution (as defined in section
25A(f)(2) and the regulations thereun-
der) (an institution) that enrolls (as deter-
mined under paragraph (d)(1) of this sec-
tion) any individual for any academic period
(as defined in the regulations under sec-
tion 25A), and any person that is engaged
in a trade or business of making payments
under an insurance arrangement as reim-
bursements or refunds (or other similar
amounts) of qualified tuition and related ex-
penses (as defined in section 25A(f)(1) and
the regulations thereunder) (an insurer)
must—
(i) File an information return, as de-
scribed in paragraph (b) of this section, with
the Internal Revenue Service (IRS) with re-
spect to each individual described in para-
graph (b) of this section; and
(ii) Furnish a statement, as described in
paragraph (c) of this section, to each indi-
vidual described in paragraph (c) of this sec-
tion.
(2)Exceptions—(i)No reporting by in-
stitution or insurer for nonresident alien in-
dividuals.The information reporting
requirements of this section do not apply
with respect to any individual who is a non-
resident alien (as defined in section 7701(b)
and§301.7701(b)–3 of this chapter) dur-
ing the calendar year, unless the individual
requests the institution or insurer to re-
port. If a nonresident alien individual re-
quests an institution or insurer to report, the
institution or insurer must comply with the
requirements of this section for the calen-
dar year with respect to which the request
is made.
(ii)No reporting by institutions for non-
credit courses—(A)In general.The in-
formation reporting requirements of this
section do not apply with respect to any
course for which no academic credit is of-
fered by the institution.
(B)Academic credit defined. Academic
creditmeans credit offered by an institu-
tion for the completion of course work lead-
ing toward a post-secondary degree,
certificate, or other recognized post-
secondary educational credential.
(C)Example.The following example il-
lustrates the rules of this paragraph (a)(2)(ii):
Example.Student A, a medical doctor, takes a course
at University X’s medical school. Student A takes the
course to fulfill State Y’s licensing requirement that
medical doctors attend continuing medical educa-
tion courses each year. Student A is not enrolled in
a degree program at University X and takes the medi-
cal course through University X’s continuing profes-
sional education division. University X does not offer
credit toward a post-secondary degree on an aca-
demic transcript for the completion of the course but
gives Student A a certificate of attendance upon
completion. Under this paragraph (a)(2)(ii), Univer-
sity X is not subject to the information reporting re-
quirements of section 6050S and this section for the
medical education course taken by Student A.
(iii)No reporting by institutions for in-
dividuals whose qualified tuition and re-
lated expenses are waived or are paid with
scholarships.The information reporting re-
quirements of this section do not apply with
respect to any individual whose qualified
tuition and related expenses are waived in
their entirety or are paid entirely with schol-
arships.
(iv)No reporting by institutions for in-
dividuals whose qualified tuition and re-
lated expenses are covered by a formal
billing arrangement—(A)In general.The
information reporting requirements of this
section do not apply with respect to any in-
dividual whose qualified tuition and re-
lated expenses are covered by a formal
billing arrangement as defined in para-
graph (a)(2)(iv)(B) of this section.
(B)Formal billing arrangement de-
fined.Aformal billing arrangement
means—
(1) An arrangement in which the insti-
tution bills only an employer for educa-
tion furnished by the institution to an
individual who is the employer’s employee
and does not maintain a separate finan-
cial account for that individual;
(2) An arrangement in which the insti-
tution bills only a governmental entity for
education furnished by the institution to an
individual and does not maintain a sepa-
rate financial account for that individual; or
(3) Any other similar arrangement in
which the institution bills only an institu-
tional third party for education furnished to
an individual and does not maintain a sepa-
rate financial account for that individual, but
only if designated as a formal billing ar-
rangement by the Commissioner in pub-
2003–6 I.R.B.407February 10, 2003

lished guidance of general applicability or
in guidance directed to participants in spe-
cific arrangements.
(b)Requirement to file return—(1)In
general.Institutions may elect to report ei-
ther the information described in para-
graph (b)(2) of this section, or the
information described in paragraph (b)(3)
of this section. Once an institution elects to
report under either paragraph (b)(2) or (3)
of this section, the institution must use the
same reporting method for all calendar years
in which it is required to file returns, un-
less permission is granted to change re-
porting methods. Paragraph (b)(2) of this
section requires institutions to report, among
other information, the amount of payments
received during the calendar year for quali-
fied tuition and related expenses. Institu-
tions must report separately adjustments
made during the calendar year that relate
to payments received for qualified tuition
and related expenses that were reported for
a prior calendar year. For purposes of para-
graph (b)(2) of this section, an adjustment
made to payments received means a reim-
bursement or refund. Paragraph (b)(3) re-
quires institutions to report, among other
information, the amounts billed during the
calendar year for qualified tuition and re-
lated expenses. Institutions must report sepa-
rately adjustments made during the calendar
year that relate to amounts billed for quali-
fied tuition and related expenses that were
reported for a prior calendar year. For pur-
poses of paragraph (b)(3) of this section, an
adjustment made to amounts billed means
a reduction in charges. Insurers must re-
port the information described in para-
graph (b)(4) of this section.
(2)Information reporting requirements
for institutions that elect to report pay-
ments received for qualified tuition and re-
lated expenses—(i)In general.Except as
provided in paragraph (a)(2) of this sec-
tion, an institution reporting payments re-
ceived for qualified tuition and related
expenses must file an information return
with the IRS on Form 1098–T,Tuition
Statement, with respect to each individual
enrolled (as determined in paragraph (d)(1)
of this section) for an academic period be-
ginning during the calendar year or dur-
ing a prior calendar year and for whom a
transactiondescribedinparagraph
(b)(2)(ii)(C), (E), (F) or (G) of this sec-
tion is made during the calendar year. An
institution may use a substitute Form
1098–T if the substitute form complies with
applicable revenue procedures relating to
substitute forms (see§601.601(d)(2) of this
chapter).
(ii)Information included on return.An
institution reporting payments received for
qualified tuition and related expenses must
include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined in
section 7701(a)(41)) of the institution;
(B) The name, address, and TIN of the
individual who is, or has been, enrolled by
the institution;
(C) The amount of payments of quali-
fied tuition and related expenses that the in-
stitution received from any source with
respect to the individual during the calen-
dar year;
(D) An indication by the institution
whether any payments received for quali-
fied tuition and related expenses reported
for the calendar year relate to an academic
period that begins during the first three
months of the next calendar year;
(E) The amount of any scholarships or
grants for the payment of the individual’s
costs of attendance that the institution ad-
ministered and processed during the cal-
endar year;
(F) The amount of any reimbursements
or refunds of qualified tuition and related
expenses made during the calendar year
with respect to the individual that relate to
payments of qualified tuition and related ex-
penses that were reported by the institu-
tion for a prior calendar year;
(G) The amount of any reductions to the
amount of scholarships or grants for the
payment of the individual’s costs of atten-
dance that were reported by the institu-
tion with respect to the individual for a prior
calendar year;
(H) A statement or other indication
showing whether the individual was en-
rolled for at least half of the normal full-
time work load for the course of study the
individual is pursuing for at least one aca-
demic period that begins during the calen-
dar year (see section 25A and the
regulations thereunder);
(I) A statement or other indication show-
ing whether the individual was enrolled in
a program leading to a graduate-level de-
gree, graduate-level certificate, or other rec-
ognizedgraduate-leveleducational
credential; and
(J) Any other information required by
Form 1098–T and its instructions.
(iii)Reportable amount of payments re-
ceived for qualified tuition and related ex-
penses during calendar year determined.
The amount of payments received for quali-
fied tuition and related expenses with re-
spect to an individual during the calendar
year that is reportable on Form 1098–Tis
determined by netting the amount of pay-
ments received (as defined in paragraph
(b)(2)(v) of this section) for qualified tu-
ition and related expenses during the cal-
endar year against any reimbursements or
refunds (as defined in paragraph (b)(2)(vi)
of this section) made during the calendar
year that relate to payments received for
qualified tuition and related expenses dur-
ing the same calendar year.
(iv)Separate reporting of reimburse-
ments or refunds of payments of qualified
tuition and related expenses that were re-
ported for a prior calendar year.An insti-
tution must separately report on Form
1098–T any reimbursements or refunds (as
defined in paragraph (b)(2)(vi) of this sec-
tion) made during the current calendar year
that relate to payments of qualified tu-
ition and related expenses that were re-
ported by the institution for a prior calendar
year. Such reimbursements or refunds shall
not be netted against the payments received
for qualified tuition and related expenses
during the current calendar year.
(v)Payments received for qualified tu-
ition and related expenses determined.For
purposes of determining the amount of pay-
ments received for qualified tuition and re-
lated expenses during a calendar year,
payments received with respect to an in-
dividual during the calendar year from any
source (except for any scholarship or grant
that, by its terms, must be applied to ex-
penses other than qualified tuition and re-
lated expenses, such as room and board) are
treated as payments of qualified tuition and
related expenses up to the total amount
billed by the institution for such expenses.
For purposes of this section, a payment in-
cludes any positive account balance (such
as any reimbursement or refund credited to
an individual’s account) that an institu-
tion applies toward current charges.
(vi)Reimbursements or refunds of pay-
ments for qualified tuition and related ex-
penses determined.For purposes of
determining the amount of reimbursements
or refunds made of payments received for
February 10, 20034082003–6 I.R.B.

qualified tuition and related expenses, any
reimbursement or refund made with re-
spect to an individual during a calendar year
(except for any refund of a scholarship or
grant that, by its terms, was required to be
applied to expenses other than qualified tu-
ition and related expenses, such as room and
board) is treated as a reimbursement or re-
fund of payments for qualified tuition and
related expenses up to the amount of any
reduction in charges for such expenses. For
purposes of this section, a reimbursement
or refund includes amounts that an insti-
tution credits to an individual’s account, as
well as amounts disbursed to, or on be-
half of, the individual.
(vii)Examples.The following examples
illustrate the rules in this paragraph (b)(2):
Example 1.(i) In early August 2003, University X
bills enrolled Student A $10,000 for qualified tu-
ition and related expenses and $6,000 for room and
board for the 2003 Fall semester. In late August 2003,
Student A pays $11,000 to University X. In early Sep-
tember 2003, Student A drops to half-time enroll-
ment for the 2003 Fall semester. In late September
2003, University X credits $5,000 to Student A’s ac-
count, reflecting a $5,000 reduction in charges for
qualified tuition and related expenses. In late Sep-
tember 2003, University X applies the $5,000 posi-
tive account balance toward current charges.
(ii) Under paragraph (b)(2)(v) of this section, the
$11,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses. Un-
der paragraph (b)(2)(vi) of this section, the $5,000
credited to the student’s account is treated as a re-
imbursement or refund of payments for qualified tu-
ition and related expenses, because the current year
charges for qualified tuition and related expenses were
reduced by $5,000. Under paragraph (b)(2)(iii) of this
section, University X is required to net the $10,000
payment received for qualified tuition and related ex-
penses during 2003 against the $5,000 reimburse-
ment or refund of payments received for qualified
tuition and related expenses during 2003. There-
fore, Institution X is required to report $5,000 of pay-
ments received for qualified tuition and related
expenses during 2003.
Example 2.(i) The facts are the same as inEx-
ample 1, except that Student A pays the full $16,000
in late August 2003. In late September 2003, Uni-
versity X reduces the tuition charges by $5,000 and
issues a $5,000 refund to Student A.
(ii) Under paragraph (b)(2)(v) of this section, the
$16,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses. Un-
der paragraph (b)(2)(vi) of this section, the $5,000 re-
fund is treated as reimbursement or refund of payments
for qualified tuition and related expenses, because the
current year charges for qualified tuition and related
expenses were reduced by $5,000. Under paragraph
(b)(2)(iii) of this section, University X is required to
net the $10,000 payment received for qualified tu-
ition and related expenses during 2003 against the
$5,000 reimbursement or refund of payments re-
ceived for qualified tuition and related expenses dur-
ing 2003. Therefore, Institution X is required to report
$5,000 of payments received for qualified tuition and
related expenses during 2003.
Example 3.(i) The facts are the same as inEx-
ample 1, except that Student A is enrolled full-time,
and, in early September 2003, Student A decides to
live at home with her parents. In late September 2003,
University X adjusts Student A’s account to elimi-
nate room and board charges and issues a $1,000 re-
fund to Student A.
(ii) Under paragraph (b)(2)(v) of this section, the
$11,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses. Un-
der paragraph (b)(2)(vi) of this section, the $1,000 re-
fund is not treated as reimbursement or refund of
payments for qualified tuition and related expenses,
because there is no reduction in charges for quali-
fied tuition and related expenses. Therefore, under para-
graph (b)(2)(iii) of this section, University X is required
to report $10,000 of payments received for quali-
fied tuition and related expenses during 2003.
Example 4.(i) In early December 2003, College Y
bills enrolled Student B $10,000 for qualified tu-
ition and related expenses and $6,000 for room and
board for the 2004 Spring semester. In late Decem-
ber 2003, Student B pays $16,000. In mid-January
2004, after the 2004 Spring semester classes begin,
Student B drops to half-time enrollment. In mid-
January 2004, College Y credits Student B’s ac-
count with $5,000, reflecting a $5,000 reduction in
charges for qualified tuition and related expenses, but
does not issue a refund to Student B. In early Au-
gust 2004, College Y bills Student B $10,000 for quali-
fied tuition and related expenses and $6,000 for room
and board for the 2004 Fall semester. In early Sep-
tember 2004, College Y applies the $5,000 positive
account balance toward Student B’s $16,000 bill for
the 2004 Fall semester. In late September 2004, Stu-
dent B pays $6,000 towards the charges.
(ii) In the reporting for calendar year 2003, under
paragraph (b)(2)(v) of this section, the $16,000 pay-
ment in December 2003 is treated as a payment of
qualified tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses. Un-
der paragraph (b)(2)(iii) of this section, College Y is
required to report $10,000 of payments received for
qualified tuition and related expenses during 2003. In
addition, College Y is required to indicate that the pay-
ments reported for 2003 relate to an academic pe-
riod that begins during the first three months of the
next calendar year.
(iii) In the reporting for calendar year 2004, un-
der paragraph (b)(2)(vi) of this section, the $5,000
credited to Student B’s account is treated as a reim-
bursement or refund of qualified tuition and related
expenses, because the charges for qualified tuition and
related expenses were reduced by $5,000. Under para-
graph (b)(2)(iv) of this section, the $5,000 reimburse-
ment or refund of qualified tuition and related expenses
must be separately reported on Form 1098–T be-
cause it relates to payments of qualified tuition and
related expenses reported by College Y for 2003. Un-
der paragraph (b)(2)(v) of this section, the $5,000 posi-
tive account balance that is applied toward charges for
the 2004 Fall semester is treated as a payment. There-
fore, College Y received total payments of $11,000
during 2004 (the $5,000 credit plus the $6,000 pay-
ment). Under paragraph (b)(2)(v) of this section, the
$11,000 of total payments are treated as a payment
of qualified tuition and related expenses up to the
$10,000 billed for such expenses. Therefore, for 2004,
College Y is required to report $10,000 of payments
received for qualified tuition and related expenses dur-
ing 2004 and a $5,000 refund of payments of quali-
fied tuition and related expenses reported for 2003.
(3)Information reporting requirements
for institutions that elect to report amounts
billed for qualified tuition and related ex-
penses—(i)In general.Except as pro-
vided in paragraph (a)(2) of this section, an
institution reporting amounts billed for
qualified tuition and related expenses must
file an information return on Form 1098–T
with respect to each individual enrolled (as
determined in paragraph (d)(1) of this sec-
tion) for an academic period beginning dur-
ing the calendar year or during a prior
calendar year and for whom a transaction
described in paragraph (b)(3)(ii)(C), (E), (F)
or (G) of this section is made during the
calendar year. An institution may use a sub-
stitute Form 1098–T if the substitute form
complies with applicable revenue proce-
dures relating to substitute forms (see
§601.601(d)(2) of this chapter).
(ii)Information included on return.An
institution reporting amounts billed for
qualified tuition and related expenses must
include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined in
section 7701(a)(41)) of the institution;
(B) The name, address, and TIN of the
individual who is, or has been, enrolled by
the institution;
(C) The amount billed for qualified tu-
ition and related expenses with respect to
the individual during the calendar year;
(D) An indication by the institution
whether any amounts billed for qualified tu-
ition and related expenses reported for the
calendar year relate to an academic pe-
riod that begins during the first three months
of the next calendar year;
(E) The amount of any scholarships or
grants for the payment of the individual’s
costs of attendance that the institution ad-
ministered and processed during the cal-
endar year;
(F) The amount of any reductions in
charges made during the calendar year with
respect to the individual that relate to
amounts billed for qualified tuition and re-
lated expenses that were reported by the in-
stitution for a prior calendar year;
(G) The amount of any reductions to the
amount of scholarships or grants for the
2003–6 I.R.B.409February 10, 2003

payment of the individual’s costs of at-
tendance that were reported by the insti-
tution with respect to the individual for a
prior calendar year;
(H) A statement or other indication
showing whether the individual was en-
rolled for at least half of the normal full-
time work load for the course of study the
individual is pursuing for at least one aca-
demic period that begins during the calen-
dar year (see section 25A and the
regulations thereunder);
(I) A statement or other indication show-
ing whether the individual was enrolled in
a program leading to a graduate-level de-
gree, graduate-level certificate, or other rec-
ognizedgraduate-leveleducational
credential; and
(J) Any other information required by
Form 1098–T and its instructions.
(iii)Reportable amounts billed for quali-
fied tuition and related expenses during cal-
endar year determined.The amount billed
for qualified tuition and related expenses
with respect to an individual during the cal-
endar year that is reportable on Form
1098–T is determined by netting the
amounts billed for qualified tuition and re-
lated expenses during the calendar year
against any reductions in charges for quali-
fied tuition and related expenses made dur-
ing the calendar year that relate to amounts
billed for qualified tuition and related ex-
penses during the same calendar year.
(iv)Separate reporting of reductions
made to amounts billed for qualified tu-
ition and related expenses that were re-
ported for a prior calendar year.An
institution must separately report on Form
1098–T any reductions in charges made dur-
ing the current calendar year that relate to
amounts billed for qualified tuition and re-
lated expenses that were reported by the in-
stitution for a prior calendar year. Such
reductions shall not be netted against
amounts billed for qualified tuition and re-
lated expenses during the current calen-
dar year.
(v)Examples.The following examples
illustrate the rules in this paragraph (b)(3):
Example 1.(i) In early August 2003, University X
bills enrolled Student A $10,000 for qualified tu-
ition and related expenses and $6,000 for room and
board for the 2003 Fall semester. In late August 2003,
Student A pays $11,000 to University X. In early Sep-
tember 2003, Student A drops to half-time enroll-
ment for the 2003 Fall semester. In late September
2003, University X adjusts Student A’s account and
reduces the charges for qualified tuition and related
expenses by $5,000 to reflect half-time enrollment. In
late September 2003, University X applies the $5,000
account balance toward current charges.
(ii) Under paragraph (b)(3)(iii) of this section, Uni-
versity X is required to net the $10,000 amount of
qualified tuition and related expenses billed during
2003 against the $5,000 reduction in charges for quali-
fied tuition and related expenses during 2003. There-
fore, Institution X is required to report $5,000 in
amounts billed for qualified tuition and related ex-
penses during 2003.
Example 2.(i) The facts are the same as inEx-
ample 1, except that, in addition, in early December
2003, College X bills Student A $10,000 for quali-
fied tuition and related expenses and $6,000 for room
and board for the 2004 Spring semester. In early Janu-
ary 2004, Student A pays $16,000. In mid-January
2004, after the 2004 Spring semester classes begin,
Student A drops to half-time enrollment. In mid-
January 2004, College X credits $5,000 to Student A’s
account, reflecting a $5,000 reduction in charges for
qualified tuition and related expenses, but does not is-
sue a refund check to Student A. In early August 2004,
College X bills Student A $10,000 for qualified tu-
ition and related expenses and $6,000 for room and
board for the 2004 Fall semester. In early Septem-
ber 2004, College X applies the $5,000 positive ac-
count balance toward Student A’s $16,000 bill for the
2004 Fall semester. In late September 2004, Student
A pays $6,000 toward the charges.
(ii) In the reporting for calendar year 2003, under
paragraph (b)(3)(iii) of this section, College X is re-
quired to report $15,000 amounts billed for quali-
fied tuition and related expenses during 2003 ($5,000
for the 2003 Fall semester and $10,000 for the 2004
Spring semester). In addition, College X is required
to indicate that some of the amounts billed for quali-
fied tuition and related expenses reported for 2003 re-
late to an academic period that begins during the first
three months of the next calendar year.
(iii) In the reporting for calendar year 2004, un-
der paragraph (b)(3)(iv) of this section, the $5,000 re-
duction in charges for qualified tuition and related
expenses must be separately reported on Form 1098–T
because it relates to amounts billed for qualified tu-
ition and related expenses that were reported by Col-
lege X for 2003. Under paragraph (b)(3)(iii) of this
section, College X is required to report $10,000 in
amounts billed for qualified tuition and related ex-
penses during 2004.
(4)Requirements for insurers—(i)In
general.Except as otherwise provided in
this section, an insurer must file an infor-
mation return for each individual with re-
spect to whom reimbursements or refunds
of qualified tuition and related expenses are
made during the calendar year on Form
1098–T. An insurer may use a substitute
Form 1098–T if the substitute form com-
plies with applicable revenue procedures re-
latingtosubstituteforms(see
§601.601(d)(2) of this chapter).
(ii)Information included on return.An
insurer must include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined in
section 7701(a)(41)) of the insurer;
(B) The name, address, and TIN of the
individual with respect to whom reimburse-
ments or refunds of qualified tuition and re-
lated expenses were made;
(C) The aggregate amount of reimburse-
ments or refunds of qualified tuition and re-
lated expenses that the insurer made with
respect to the individual during the calen-
dar year; and
(D) Any other information required by
Form 1098–T and its instructions.
(5)Time and place for filing return—
(i)In general.Except as provided in para-
graphs (b)(5)(ii) and (iii) of this section,
Form 1098–T must be filed on or before
February 28 (March 31 if filed electroni-
cally) of the year following the calendar
year in which payments were received, or
amounts were billed, for qualified tuition
or related expenses, or reimbursements, re-
funds, or reductions of such amounts were
made. An institution or insurer must file
Form 1098–T with the IRS according to the
instructions to Form 1098–T.
(ii)Return for nonresident alien indi-
vidual.In general, an institution or in-
surer is not required to file a return on
behalf of a nonresident alien individual.
However, if a nonresident alien individual
requests an institution or insurer to re-
port, the institution or insurer must file a
return described in paragraph (b) of this sec-
tion with the IRS on or before the date pre-
scribed in paragraph (b)(5)(i) of this section,
or on or before the thirtieth day after the
request, whichever is later.
(iii)Extensions of time.The IRS may
grant an institution or insurer an exten-
sion of time to file returns required in this
section upon a showing of good cause. See
General Instructions for Forms 1099 se-
ries, 1098 series, 5498 series, and W–2G,
Certain Gambling Winnings, and appli-
cable revenue procedures for rules relat-
ing to extensions of time to file (see
§601.601(d)(2) of this chapter).
(6)Use of magnetic media.See sec-
tion 6011(e) and§301.6011–2 of this chap-
ter for rules relating to the requirement to
file Forms 1098–T on magnetic media.
(c)Requirement to furnish statement—
(1)In general.An institution or insurer must
furnish a statement to each individual for
whom it is required to file a Form 1098–T.
The statement must include—
(i) The information required under para-
graph (b) of this section;
February 10, 20034102003–6 I.R.B.

(ii) A legend that identifies the state-
ment as important tax information that is
being furnished to the IRS;
(iii) Instructions that—
(A) State that the statement reports ei-
ther total payments received by the insti-
tution for qualified tuition and related
expenses during the calendar year, or to-
tal amounts billed by the institution for
qualified tuition and related expenses dur-
ing the calendar year, or the total reim-
bursements or refunds made by the insurer;
(B) State that, under section 25A and the
regulations thereunder, the taxpayer may
claim an education tax credit only with re-
spect to qualified tuition and related ex-
penses actually paid during the calendar
year; and that the taxpayer may not be able
to claim an education tax credit with re-
spect to the entire amount of payments re-
ceived, or amounts billed, for qualified
tuition and related expenses reported for the
calendar year;
(C) State that the amount of any schol-
arships or grants reported for the calen-
dar year and other similar amounts not
reported (because they are not adminis-
tered and processed by the institution) may
reduce the amount of any allowable edu-
cation tax credit for the taxable year;
(D) State that the amount of any reim-
bursements or refunds of payments re-
ceived, or reductions in charges, for
qualified tuition and related expenses, or any
reductions to the amount of scholarships or
grants, reported by the institution with re-
spect to the individual for a prior calen-
dar year may affect the amount of any
allowable education tax credit for the prior
calendar year (and may result in an in-
crease in tax liability for the year of the re-
fund);
(E) State that the amount of any reim-
bursements or refunds of qualified tuition
and related expenses reported by an in-
surer may reduce the amount of an allow-
able education tax credit for a taxable year
(and may result in an increase in tax li-
ability for the year of the refund);
(F) State that the taxpayer should refer
to relevant IRS forms and publications, and
should not refer to the institution or the in-
surer, for explanations relating to the eli-
gibility requirements for, and calculation of,
any allowable education tax credit; and
(G) Include the name, address, and
phone number of the information contact
of the institution or insurer that filed the
Form 1098–T.
(2)Time and manner for furnishing
statement—(i)In general.Except as pro-
vided in paragraphs (c)(2)(ii) and (iii) of this
section, an institution or insurer must fur-
nish the statement described in paragraph
(c)(1) of this section to each individual for
whom it is required to file a return, on or
before January 31 of the year following the
calendar year in which payments were re-
ceived, or amounts were billed, for quali-
fied tuition and related expenses, or
reimbursements, refunds, or reductions of
such amounts were made. If mailed, the
statement must be sent to the individual’s
permanent address, or the individual’s tem-
porary address if the institution or insurer
does not know the individual’s perma-
nent address. If furnished electronically, the
statement must be furnished in accordance
with the applicable regulations.
(ii)Statement to nonresident alien in-
dividual.If an information return is filed for
a nonresident alien individual, the institu-
tion or insurer must furnish a statement de-
scribed in paragraph (c)(1) of this section
to the individual in the manner prescribed
in paragraph (c)(2)(i) of this section. The
statement must be furnished on or before
the later of the date prescribed in para-
graph (c)(2)(i) of this section or the thir-
tieth day after the nonresident alien’s request
to report.
(iii)Extensions of time.The IRS may
grant an institution or insurer an exten-
sion of time to furnish the statements re-
quired in this section upon a showing of
good cause. See General Instructions for
Forms 1099 series, 1098 series, 5498 se-
ries, and W–2G,Certain Gambling Win-
nings, and applicable revenue procedures
for rules relating to extensions of time to
furnish statements (see§601.601(d)(2) of
this chapter).
(3)Copy of Form 1098–T.An institu-
tion or insurer may satisfy the require-
ment of this paragraph (c) by furnishing
either a copy of Form 1098–T and its in-
structions or another document that con-
tains all of the information filed with the
IRS and the information required by para-
graph (c)(1) of this section if the docu-
ment complies with applicable revenue
procedures relating to substitute statements
(see§601.601(d)(2) of this chapter).
(d)Special rules—(1)Enrollment de-
termined.An institution may determine its
enrollment for each academic period un-
der its own rules and policies for deter-
mining enrollment or as of any of the
following dates—
(i) 30 days after the first day of the aca-
demic period;
(ii) A date during the academic period
on which enrollment data must be col-
lected for purposes of the Integrated Post
Secondary Education Data System admin-
istered by the Department of Education; or
(iii) A date during the academic period
on which the institution must report en-
rollment data to the State, the institution’s
governing body, or some other external gov-
erning body.
(2)Payments of qualified tuition and re-
lated expenses received or collected by one
or more persons—(i)In general.Ex-
cept as otherwise provided in paragraph
(d)(2)(ii) of this section, if a person col-
lects or receives payments of qualified tu-
ition and related expenses on behalf of
another person (e.g., an institution), the per-
son collecting or receiving payments must
satisfy the requirements of paragraphs (b)
and (c) of this section. In this case, those
requirements do not apply to the transfer
of the payments to the institution.
(ii)Exception.If the person collecting
or receiving payments of qualified tuition
and related expenses on behalf of another
person (e.g., an institution) does not pos-
sess the information needed to comply with
the requirements of paragraphs (b) and (c)
of this section, the other person must sat-
isfy those requirements.
(3)Governmental units.An institution
or insurer that is a governmental unit, or an
agency or instrumentality of a governmen-
tal unit, is subject to the requirements of
paragraphs (b) and (c) of this section and
an appropriately designated officer or em-
ployee of the governmental entity must sat-
isfy those requirements.
(e)Penalty provisions—(1)Failure to
file correct returns.The section 6721 pen-
alty may apply to an institution or insurer
that fails to file information returns re-
quired by section 6050S and this section on
or before the required filing date; that fails
to include all of the required information
on the return; or that includes incorrect in-
2003–6 I.R.B.411February 10, 2003

formation on the return. See section 6721,
and the regulations thereunder, for rules re-
lating to penalties for failure to file cor-
rect returns. See section 6724, and the
regulations thereunder, for rules relating to
waivers of penalties for certain failures due
to reasonable cause.
(2)Failure to furnish correct informa-
tion statements.The section 6722 penalty
may apply to an institution or insurer that
fails to furnish statements required by sec-
tion 6050S and this section on or before the
prescribed date; that fails to include all the
required information on the statement; or
that includes incorrect information on the
statement. See section 6722, and the regu-
lations thereunder, for rules relating to pen-
alties for failure to furnish correct
statements. See section 6724, and the regu-
lations thereunder, for rules relating to waiv-
ers of penalties for certain failures due to
reasonable cause.
(3)Waiver of penalties for failures to in-
clude a correct TIN—(i)In general.In the
case of a failure to include a correct TIN
on Form 1098–T or a related information
statement, penalties may be waived if the
failure is due to reasonable cause. Reason-
able cause may be established if the fail-
ure arose from events beyond the
institution’s or insurer’s control, such as a
failure of the individual to furnish a cor-
rect TIN. However, the institution or in-
surer must establish that it acted in a
responsible manner both before and after
the failure.
(ii)Acting in a responsible manner.An
institution or insurer must request the TIN
of each individual for whom it is required
to file a return if it does not already have
a record of the individual’s correct TIN. If
the institution or insurer does not have a
record of the individual’s correct TIN, then
it must solicit the TIN in the manner de-
scribed in paragraph (e)(3)(iii) of this sec-
tion on or before December 31 of each year
during which it receives payments, or bills
amounts, for qualified tuition and related ex-
penses or makes reimbursements, refunds,
or reductions of such amounts with re-
spect to the individual. If an individual re-
fuses to provide his or her TIN upon
request, the institution or insurer must file
the return and furnish the statement re-
quired by this section without the individu-
al’s TIN, but with all other required
information. The specific solicitation re-
quirements of paragraph (e)(3)(iii) of this
section apply in lieu of the solicitation re-
quirements of§301.6724–1(e) and (f) of
this chapter for the purpose of determin-
ing whether an institution or insurer acted
in a responsible manner in attempting to ob-
tain a correct TIN. An institution or in-
surer that complies with the requirements
of this paragraph (e)(3) will be consid-
ered to have acted in a responsible man-
ner within the meaning of§301.6724–
1(d) of this chapter with respect to any
failure to include the correct TIN of an in-
dividual on a return or statement required
by section 6050S and this section.
(iii)Manner of soliciting TIN.An insti-
tution or insurer must request the individu-
al’s TIN in writing and must clearly notify
the individual that the law requires the in-
dividual to furnish a TIN so that it may be
included on an information return filed by
the institution or insurer. A request for a TIN
made on Form W–9S,Request for Stu-
dent’s or Borrower’s Taxpayer Identifica-
tion Number and Certification, satisfies the
requirements of this paragraph (e)(3)(iii).
An institution or insurer may establish a
system for individuals to submit Forms
W–9S electronically as described in appli-
cable forms and instructions. An institu-
tion or insurer may also develop a separate
form to request the individual’s TIN or in-
corporate the request into other forms cus-
tomarily used by the institution or insurer,
such as admission or enrollment forms or
financial aid applications.
(4)Failure to furnish TIN.The section
6723 penalty may apply to any individual
who is required (but fails) to furnish his or
her TIN to an institution or insurer. See sec-
tion 6723, and the regulations thereunder,
for rules relating to the penalty for fail-
ure to furnish a TIN.
(f)Effective date.The rules in this sec-
tion apply to information returns required
to be filed, and information statements re-
quired to be furnished, after December 31,
2003.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 4. The authority citation for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 5. Section 301.6011–2 is amended
as follows:
1. In paragraph (b)(1), first sentence, add
the language“1098–T,”immediately af-
ter the language“1098–E,”.
2. Revising paragraph (g)(3).
The revision reads as follows:
§301.6011–2 Required use of magnetic
media.
*****
(g)***
(3) This section applies to returns on
Forms 1098–E,Student Loan Interest State-
ment, and 1098–T,Tuition Statement, filed
after December 31, 2003.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.7.In§602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
Control No.
*****
1.6050S-1 .............................................................................................................................................................. 1545-1678
*****
February 10, 20034122003–6 I.R.B.

David A. Mader,
Assistant Deputy Commissioner
of Internal Revenue.
Approved December 12, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 18,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 19, 2002, 67 F.R. 77678)
Section 6331.—Notice
Requirements
26 CFR 301.6331–4: Restrictions on levy while
installment agreements are pending or in effect.
T.D. 9027
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Levy Restrictions During
Installment Agreements
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final Regulations.
SUMMARY: This document contains fi-
nal regulations relating to restrictions on
levy during the period that an installment
agreement is proposed or in effect. The
regulations reflect changes to the law made
by the Internal Revenue Service Restruc-
turing and Reform Act of 1998.
EFFECTIVE DATE: These regulations are
effective December 18, 2002.
FORFURTHERINFORMATION
CONTACT: Frederick W. Schindler, (202)
622–3620 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions amending the Procedure and Admin-
istration Regulations (26 CFR part 301)
under section 6331 of the Internal Rev-
enue Code (Code). The regulations re-
flect the amendment of section 6331 by
section 3462 of the Internal Revenue Ser-
vice Restructuring and Reform Act of 1998
(RRA 1998), Public Law 105–206 (112
Stat. 685, 764). New section 6331(k) codi-
fies the IRS practice of withholding col-
lection during consideration of a taxpayer’s
offer to compromise and extends that prac-
tice to proposed installment agreements.
These regulations deal principally with the
effect of subsection 6331(k) when an in-
stallment agreement has been proposed and
is pending, is in effect, or has been re-
jected or terminated. On April 17, 2002, a
notice of proposed rulemaking (REG–
104762–00, 2002–18 I.R.B. 825 [67 FR
18839]) reflecting these changes was pub-
lished in theFederal Register.No writ-
ten comments on the proposed regulations
were received. No public hearing was
scheduled or held.
Explanation of Provisions
The regulations provide that, subject to
certain exceptions, the IRS may not levy to
collect a liability while a taxpayer’s pro-
posal to enter into an installment agree-
ment for payment of that liability is
pending, for thirty days after rejection of
such a proposal, while an installment agree-
ment is in effect, for thirty days after ter-
mination of an installment agreement by the
IRS, and during a timely filed appeal of a
rejection or termination by the IRS. A pro-
posed installment agreement is consid-
ered pending when it is accepted for
processing by the IRS and remains pend-
ing until the IRS accepts or rejects it or the
taxpayer withdraws the proposal. The fi-
nal regulations clarify that the IRS may not
accept a proposed installment agreement for
processing if jurisdiction over the tax li-
ability at issue has been transferred to the
Department of Justice for prosecution or de-
fense. If a proposed installment agree-
ment does not contain sufficient information
for the IRS to determine whether the pro-
posal should be accepted, the IRS will re-
quest the additional necessary information
from the taxpayer and provide a reason-
able time period for the taxpayer to re-
spond. The IRS may reject the proposed
installment agreement if the requested in-
formation is not provided.
Collection by levy is not prohibited if the
taxpayer waives the restriction on levy in
writing, if the IRS determines that collec-
tion of the tax liability is in jeopardy, or if
the IRS determines that the proposed in-
stallment agreement was submitted solely
to delay collection. The exception for pro-
posals submitted solely to delay collec-
tion is based on the legislative history
accompanying RRA 1998, which explained
that Congress did not intend that levy would
be prohibited if the IRS determined that an
offer to compromise was submitted solely
to delay collection. H.R. Conf. Rep. No.
509, 105th Cong., 2d Sess. 288 (1998). Be-
cause the legislative history indicates that
Congress intended the same restrictions on
levy with respect to offers in compromise
be applicable to installment agreements,
these regulations adopt the same rule with
respect to proposed installment agreements.
The regulations provide that the IRS may
take actions other than levy to protect the
interests of the United States with respect
to collection of the liability to which an in-
stallment agreement or proposed install-
ment agreement relates. Those actions
include, but are not limited to: crediting an
overpayment against the liability pursu-
ant to section 6402, filing or refiling no-
tices of Federal tax lien, and taking action
to collect from persons liable for the tax but
not named in the installment agreement.
The proposed regulations provided that
the IRS cannot institute a court proceed-
ing against the taxpayer named in the in-
stallment agreement to collect the tax
covered by the installment agreement. In the
final regulations, this provision has been
clarified. It now states that the IRS may not
refer a case to the Department of Justice to
collect an unpaid tax through a judicial pro-
ceeding while levy is prohibited by these
regulations. The IRS may, however, autho-
rize the Department of Justice to file a
counterclaim in any refund proceeding com-
menced by a taxpayer, participate in bank-
ruptcy or insolvency cases commenced by
or against the taxpayer, or join a taxpayer
in any other proceeding in which liability
for the tax at issue may be established or
disputed. Such proceedings may involve
taxes for which more than one person may
be jointly and severally liable for the same
tax, or may involve persons liable for re-
lated liabilities, such as a trust fund recov-
ery penalty under section 6672 or a personal
liability for excise tax under section 4103.
While an installment agreement allows
the IRS to accept the payment of tax in in-
stallments, the agreement does not conclu-
sively establish the taxpayer’s liability. A
taxpayer therefore is not prohibited from
seeking a refund of taxes paid pursuant to
an installment agreement. Allowing the IRS
2003–6 I.R.B.413February 10, 2003

to join the taxpayer in a proceeding where
the liability for the tax may be established
or disputed will protect the Government
from having to litigate the same tax in mul-
tiple forums only to face the argument in
each separate case (including, potentially,
from the taxpayer named in an install-
ment agreement) that the person or per-
sons not party to that suit were solely or
principally liable for non-payment of the
taxes at issue. The notice of proposed rule-
making stated that if a judgment was ob-
tained against a taxpayer named in an
installment agreement, collection would
continue to occur pursuant to the terms of
the installment agreement. The final regu-
lations clarify that this statement applies
only when the Department of Justice re-
fers the case back to the IRS for collec-
tion after the judgment is obtained. Section
6331(k) does not limit the collection op-
tions of the Department of Justice once a
case has been referred to the Department
by the IRS.
The regulations provide that the stat-
ute of limitations for collection under sec-
tion 6502 is suspended while a proposed
installment agreement is pending, for thirty
days after rejection or termination of an in-
stallment agreement, and during a timely
filed appeal of the rejection or termina-
tion decision. The running of the collec-
tion statute resumes after an installment
agreement takes effect. The statute of limi-
tations for collection shall continue to run
if an exception under this section applies
and levy is not prohibited with respect to
the taxpayer.
These regulations apply to installment
agreements proposed or entered into on or
after the date final regulations are pub-
lished in theFederal Register. However,
the rules set forth in these regulations mir-
ror practices the IRS has been following ad-
ministratively since the enactment of RRA
1998.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regulatory
assessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because the regulation does not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Code, the pre-
ceding notice of proposed rulemaking was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Drafting Information
The principal author of these regula-
tions is Frederick W. Schindler, Office of
the Associate Chief Counsel (Procedure &
Administration), Collection, Bankruptcy &
Summonses Division.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Sections 301.6331–3 and
301.6331–4 are added to read as follows:
§301.6331–3 Restrictions on levy while
offers to compromise are pending.
Cross-reference.For provisions relat-
ing to the making of levies while an offer
tocompromiseispending,see
§301.7122–1.
§301.6331–4 Restrictions on levy while
installment agreements are pending or in
effect.
(a)Prohibition on levy—(1)In gen-
eral.No levy may be made to collect a tax
liability that is the subject of an install-
ment agreement during the period that a
proposed installment agreement is pend-
ing with the Internal Revenue Service (IRS),
for 30 days immediately following the re-
jection of a proposed installment agree-
ment, during the period that an installment
agreement is in effect, and for 30 days im-
mediately following the termination of an
installment agreement. If, within the 30 days
following the rejection or termination of an
installment agreement, the taxpayer files an
appeal with the IRS Office of Appeals, no
levy may be made while the rejection or ter-
mination is being considered by Appeals.
This section will not prohibit levy to col-
lect the liability of any person other than
the person or persons named in the install-
ment agreement.
(2)When a proposed installment agree-
ment becomes pending.A proposed install-
ment agreement becomes pending when it
is accepted for processing. The IRS may not
accept a proposed installment agreement for
processing following reference of a case in-
volving the liability that is the subject of
the proposed installment agreement to the
Department of Justice for prosecution or de-
fense. The proposed installment agree-
ment remains pending until the IRS accepts
the proposal, the IRS notifies the taxpayer
that the proposal has been rejected, or the
proposal is withdrawn by the taxpayer. If
a proposed installment agreement that has
been accepted for processing does not con-
tain sufficient information to permit the IRS
to evaluate whether the proposal should be
accepted, the IRS will request the tax-
payer to provide the needed additional in-
formation. If the taxpayer does not submit
the additional information that the IRS has
requested within a reasonable time period
after such a request, the IRS may reject the
proposed installment agreement.
(3)Revised proposals of installment
agreements submitted following rejection.
If, following the rejection of a proposed in-
stallment agreement, the taxpayer makes a
good faith revision of the proposal and sub-
mits the revision within 30 days of the date
of rejection, the provisions of this section
shall apply to that revised proposal.
(4)Exceptions. Paragraph (a)(1) of this
section shall not prohibit levy if the tax-
payer files a written notice with the IRS that
waives the restriction on levy imposed by
this section, the IRS determines that the pro-
posed installment agreement was submit-
ted solely to delay collection, or the IRS
determines that collection of the tax to
which the installment agreement or pro-
posed installment agreement relates is in
jeopardy.
(b)Other actions by the IRS while levy
is prohibited—(1)In general.The IRS may
take actions other than levy to protect the
interests of the Government with regard to
the liability identified in an installment
agreement or proposed installment agree-
ment. Those actions include, for example—
(i) Crediting an overpayment against the
liability pursuant to section 6402;
February 10, 20034142003–6 I.R.B.

(ii) Filing or refiling notices of Fed-
eral tax lien; and
(iii) Taking action to collect from any
person who is not named in the install-
ment agreement or proposed installment
agreement but who is liable for the tax to
which the installment agreement relates.
(2)Proceedings in court.Except as oth-
erwise provided in this paragraph (b)(2), the
IRS will not refer a case to the Depart-
ment of Justice for the commencement of
a proceeding in court, against a person
named in an installment agreement or pro-
posed installment agreement, if levy to col-
lect the liability is prohibited by paragraph
(a)(1) of this section. Without regard to
whether a person is named in an install-
ment agreement or proposed installment
agreement, however, the IRS may autho-
rize the Department of Justice to file a
counterclaim or third-party complaint in a
refund action or to join that person in any
other proceeding in which liability for the
tax that is the subject of the installment
agreement or proposed installment agree-
ment may be established or disputed, in-
cluding a suit against the United States
under 28 U.S.C. 2410. In addition, the
United States may file a claim in any bank-
ruptcy proceeding or insolvency action
brought by or against such person. If a per-
son named in an installment agreement is
joined in a proceeding, the United States ob-
tains a judgment against that person, and
the case is referred back to the IRS for col-
lection, collection will continue to occur
pursuant to the terms of the installment
agreement.
(c)Statute of limitations—(1)Suspen-
sion of the statute of limitations on collec-
tion.The statute of limitations under section
6502 for collection of any liability shall be
suspended during the period that a pro-
posed installment agreement relating to that
liability is pending with the IRS, for 30 days
immediately following the rejection of a
proposed installment agreement, and for 30
days immediately following the termina-
tion of an installment agreement. If, within
the 30 days following the rejection or ter-
mination of an installment agreement, the
taxpayer files an appeal with the IRS Of-
fice of Appeals, the statute of limitations for
collection shall be suspended while the re-
jection or termination is being considered
by Appeals. The statute of limitations for
collection shall continue to run if an ex-
ception under paragraph (a)(4) of this sec-
tion applies and levy is not prohibited with
respect to the taxpayer.
(2)Waivers of the statute of limitations
on collection.The IRS may continue to re-
quest, to the extent permissible under sec-
tion 6502 and§301.6159–1, that the
taxpayer agree to a reasonable extension of
the statute of limitations for collection.
(d)Effective date.This section is appli-
cable on December 18, 2002.
David A. Mader,
Assistant Deputy Commissioner
of Internal Revenue.
Approved December 11, 2002.
Pamela F. Olson,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 17,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 18, 2002, 67 F.R. 77416)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
Section 7602.—Examination
of Books and Witnesses
26 CFR 301.7602–2: Third party contacts.
T.D. 9028
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Third Party Contacts
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance on third-
party contacts made with respect to the
determination or collection of tax liabili-
ties. The regulations reflect changes to sec-
tion 7602 of the Internal Revenue Code
made by section 3417 of the Internal Rev-
enue Service Restructuring and Reform Act
of 1998. The regulations potentially af-
fect all taxpayers whose Federal tax liabili-
ties are being determined or collected by
the IRS.
DATES:Effective Dates:These regula-
tions are effective on December 18, 2002.
Applicability Dates:For the date of ap-
plicability, see section 301.7602–2(g).
FORFURTHERINFORMATION
CONTACT: Robert A. Miller, 202–622–
3630 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 3417 of the IRS Restructuring
and Reform Act of 1998 (RRA 1998),
Pub. L. No. 105–206 (112 Stat. 685),
amended section 7602 by adding section
7602(c). This provision prohibits IRS of-
ficers and employees from contacting any
person, other than the taxpayer, with re-
spect to the determination or collection of
the taxpayer’s liability without giving the
taxpayer reasonable advance notice that con-
tacts with persons other than the taxpayer
may be made.
On January 2, 2001, the IRS published
in theFederal Registera notice of pro-
posed rulemaking (REG–104906–99, 66 FR
32479) to interpret and implement I.R.C.
§7602(c). Two written comments were re-
ceived but a public hearing was not held.
The proposed regulations, as revised by this
Treasury decision, are substantially adopted.
As described more fully in the preamble
to the proposed regulations, the final regu-
lations balance a taxpayer’s business and
reputational interests with third parties’pri-
vacy interests and the IRS’responsibility
to administer the internal revenue laws ef-
fectively. By providing general pre-contact
notice followed by post-contact identifica-
tion, these final regulations enable a tax-
payer to come forward with information
required by the IRS before third parties are
contacted. The taxpayer’s business and repu-
tational interests therefore can be addressed
without impeding the IRS’ability to make
those third-party contacts that are neces-
sary to administer the internal revenue laws.
These final regulations do not finalize
the provisions in the proposed regulations
regarding periodic reports. Subsequent to
the issuance of the proposed regulations, the
IRS determined that the issuance of peri-
odic reports may result in harm to third par-
ties and, accordingly, has determined that
2003–6 I.R.B.415February 10, 2003

periodic reports should not be issued. Tax-
payers will continue to receive pre-contact
notice and may specifically request from the
IRS reports of persons contacted.
Comments on the Proposed
Regulations
Section 301.7602–2(e)(3)(ii)—Post Con-
tact Reports
The proposed regulations provided that
for contacts with the employees, officers,
or fiduciaries of any entity who are act-
ing within the scope of their employment
or relationship, it is sufficient to record the
entity as the person contacted.
One commentator noted that there may
be situations where the name of a spe-
cific employee of a business should be re-
corded and made available to the taxpayer.
The commentator suggests adopting a“safe
harbor”rule that requires that the name of
the party contacted be recorded whenever
there is any doubt about how the contact
should be recorded. The commentator stated
that whenever an employee of a business
is contacted due to his or her personal
knowledge or business relationship with the
taxpayer, the name of the specific em-
ployee contacted should be recorded in the
contact record rather than (or in addition to)
the name of the business entity.
This comment has not been adopted in
the final regulations. The final regulations
do not prevent IRS employees from pro-
viding more than the name of the entity in
the record of contact when an employee of
a business is contacted. Because the infor-
mation being sought typically is that of the
entity, and not of any specific employee out-
side of their capacity as an employee, re-
quiring the identification of the specific
employees contacted is not required to pro-
vide notice to the taxpayer of the contact
made and may impede the IRS’ability to
obtain information from the entity.
Section 301.7602–2(f)(3)—Reprisal Excep-
tion
The proposed regulations provided that
a statement by the person contacted that
harm may occur is good cause for the IRS
to believe that reprisal may occur. Such con-
tacts are not reported by the IRS to the tax-
payer.
One commentator asserted that the pro-
posed regulations are inconsistent with the
statute’s origin and purpose because the pro-
posed regulations (i) subordinate the rights
given to taxpayers to the rights of third par-
ties and the IRS; (ii) provide an insuffi-
cient threshold for determining whether
good cause exists to conclude that reprisal
may occur; (iii) permit a third party to ex-
press concerns that providing notice to the
taxpayer may result in reprisal against an-
other person; (iv) permit the IRS to make
a reprisal determination based upon infor-
mation obtained from any source; and (v)
permit the IRS to make a reprisal determi-
nation without peer or supervisory review.
In brief, the commentator argued that the
scope of what would be considered re-
prisal is too broad and that the determina-
tion of when reprisal would be considered
to exist is too lenient. The commentator
claimed that the adoption of the proposed
regulations would render the requirement
in section 7602(c) to provide taxpayers with
a record of persons contacted a nullity.
The Treasury Department and the IRS
do not agree that the proposed regulations
are either too broad with respect to what
will be considered reprisal or too permis-
sive with respect to the determination of
whether the potential for reprisal exists. As
a general matter, by including a reprisal ex-
ception to the notice requirements of sec-
tion 7602(c), Congress recognized that the
rights of taxpayers to receive notice of third-
party contacts must be balanced with the
rights of third parties to be free from ad-
verse consequences that may result from the
IRS providing such notice. The reprisal ex-
ception reflects Congress’determination that
a taxpayer’s right to know whom the IRS
has contacted is outweighed by a third par-
ty’s right to be free from any reprisal. More-
over, since the statute’s effective date, the
IRS has been operating under reprisal pro-
cedures consistent with the proposed regu-
lations. Based upon the small number of
reprisal concerns expressed to date, the
Treasury Department and the IRS believe
that the final regulations, which make no
change to the proposed regulations with re-
spect to this issue, appropriately balance the
competing interests reflected in the stat-
ute and will not render section 7602(c)(2)
a nullity.
More specifically, the Treasury Depart-
ment and the IRS believe that a third party
is in the best position to evaluate its rela-
tionship with a taxpayer and the potential
for reprisal if a contact with that third party
is reported by the IRS to the taxpayer. Re-
quiring the IRS to investigate each claim
of potential reprisal, including supervi-
sory review of a reprisal determination,
would place a heavy administrative bur-
den on the IRS and, more importantly,
would intrude into the third party’s af-
fairs and require IRS employees to make
judgments that they are not well positioned
to make. For these reasons, the final regu-
lations do not adopt the“probable cause”
standard suggested by the commentator. In
addition, the rights provided to a taxpayer
under section 7602(c) (i.e., prior notice that
contacts with third parties may be made and
a record of persons contacted) cannot be
equated with a person’s Fourth Amend-
ment right to be free from unreasonable
searches and seizures.
In addition, the statute clearly contem-
plates that the reprisal exception is not lim-
ited to concerns of reprisal against the third
party contacted. The reprisal exception ap-
plies when providing notice to the tax-
payer“may involve reprisal againstany
person.”I.R.C.§7602(c)(3)(B) (empha-
sis added). The statutory exception also does
not restrict the source of information that
can be used in making a reprisal determi-
nation. In certain cases, an IRS employee
may be in possession of information that
is unknown to the third party contacted but
which suggests that reprisal may occur
against another person if the contact with
the third party is reported to the taxpayer.
Finally, limiting the reprisal exception to
physical harm would be inconsistent with
the statute and Congress’clear concern that
third parties be free from adverse conse-
quences as a result of being contacted by
the IRS regarding a taxpayer’s liability.
Congress did not define or limit the kind
of reprisal situations with which it was con-
cerned. Excluding economic, emotional, or
other types of harm would significantly di-
minish the third-party protections provided
by the reprisal exception.
Modifications of Proposed Regulations
Section 301.7602–2(c)(1)(i)
The proposed regulations stated that for
purposes of section 7602(c), an IRS em-
ployee includes,inter alia, a person who,
through a written agreement with the IRS,
is subject to disclosure restrictions consis-
tent with section 6103. The final regula-
tions provide that an IRS employee includes
a person described in section 6103(n), an
officer or employee of such person, and a
person who is subject to disclosure restric-
February 10, 20034162003–6 I.R.B.

tions pursuant to a written agreement in
connection with the solicitation of an agree-
ment described in section 6103(n) and its
implementing regulations. This change was
made to provide a legally precise state-
ment of the rule and to clarify that per-
sons who provide tax administration
services to the IRS and who enter into non-
disclosure agreements with the IRS, as well
as prospective bidders who enter into non-
disclosure agreements, are treated as IRS
employees for purposes of section 7602(c).
Section 301.7602–2(c)(1)(ii) Example 3
The regulations provide that returning
unsolicited telephone calls or speaking with
persons other than the taxpayer as part of
an attempt to speak to the taxpayer are not
initiations of third-party contacts. This pro-
vision is illustrated byExample 3, where
a revenue agent trying to contact the tax-
payer to discuss the taxpayer’s pending ex-
amination twice calls the taxpayer’s place
of business. The first call is answered by
a receptionist, and the second call is an-
swered by the office answering machine.
The example in the regulations states that
in both situations the employee leaves a
message“stating only his name, telephone
number, that he is with the IRS, and asks
that the taxpayer call him.”The phrase“that
he is with the IRS”has been deleted from
the example in the final regulations be-
cause there may be situations where it
would be inappropriate for an IRS em-
ployee to identify his or her employer in a
telephone conversation or message that can
be seen or heard by persons other than the
taxpayer. Section 6304(b)(4).
Section 301.7602–2(c)(3)(ii)
The final regulations addExamples 6(a)
and6(b)to illustrate the application of the
third-party contact rules to audits of
TEFRA partnerships.
Section 301.7602–2(d)(2)
The regulations provide that the pre-
contact notice need not be provided to a
taxpayer for third-party contacts when ad-
vance notice has otherwise been provided
to the taxpayer pursuant to another stat-
ute, regulation or administrative proce-
dure. The proposed regulations provide that
the Collection Due Process (CDP) notice
furnished under section 6330 and its regu-
lations is an example of a situation where
the pre-contact notice requirement is ful-
filled by another notice. The final regula-
tions modify the proposed regulations to
clarify that CDP notices sent to taxpayers
pursuant to section 6330 and its regula-
tions constitute reasonable advance no-
tice that contacts with third parties may be
made for purposes of effectuating a levy.
Section 301.7602–2(f)(7)
The final regulations add examples to il-
lustrate the application of the nonadmin-
istrative contacts exception.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. Likewise, section 553(b) of
the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to this regula-
tion, and because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal Rev-
enue Code, the notice of proposed
rulemaking was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Charles B. Christopher of the Of-
fice of Associate Chief Counsel, Procedure
& Administration (Collection, Bankruptcy
& Summonses Division).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURES AND
ADMINISTRATION
Par. 1. The authority citation for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 301.7602–2 is added to
read as follows:
§301.7602–2 Third party contacts.
(a)In general.Subject to the excep-
tions in paragraph (f) of this section, no of-
ficer or employee of the Internal Revenue
Service (IRS) may contact any person other
than the taxpayer with respect to the de-
termination or collection of such taxpay-
er’s tax liability without giving the taxpayer
reasonable notice in advance that such con-
tacts may be made. A record of persons so
contacted must be made and given to the
taxpayer upon the taxpayer’s request.
(b)Third-party contact defined.Con-
tacts subject to section 7602(c) and this
regulation shall be called“third-party con-
tacts.”A third-party contact is a commu-
nication which—
(1) Is initiated by an IRS employee;
(2) Is made to a person other than the
taxpayer;
(3) Is made with respect to the deter-
mination or collection of the tax liability of
such taxpayer;
(4) Discloses the identity of the tax-
payer being investigated; and
(5) Discloses the association of the IRS
employee with the IRS.
(c)Elements of third-party contact ex-
plained.(1)Initiation by an IRS employee
—(i)Explanation.(A)Initiation.An IRS
employee initiates a communication when-
ever it is the employee who first tries to
communicate with a person other than the
taxpayer. Returning unsolicited telephone
calls or speaking with persons other than
the taxpayer as part of an attempt to speak
to the taxpayer are not initiations of third-
party contacts.
(B)IRS employee.For purposes of this
section, an IRS employee includes all of-
ficers and employees of the IRS, the Chief
Counsel of the IRS and the National Tax-
payer Advocate, as well as a person de-
scribed in section 6103(n), an officer or
employee of such person, or a person who
is subject to disclosure restrictions pursu-
ant to a written agreement in connection
with the solicitation of an agreement de-
scribed in section 6103(n) and its imple-
menting regulations. No inference about the
employment or contractual relationship of
such other persons with the IRS may be
drawn from this regulation for any pur-
pose other than the requirements of sec-
tion 7602(c).
(ii)Examples.The following examples
illustrate this paragraph (c)(1):
Example 1.An IRS employee receives a message
to return an unsolicited call. The employee returns the
call and speaks with a person who reports informa-
2003–6 I.R.B.417February 10, 2003

tion about a taxpayer who is not meeting his tax re-
sponsibilities. Later, the employee makes a second call
to the person and asks for more information. The first
call is not a contact initiated by an IRS employee. Just
because the employee must return the call does not
change the fact that it is the other person, and not the
employee, who initiated the contact. The second call,
however, is initiated by the employee and so meets
the first element.
Example 2.An IRS employee wants to hire an ap-
praiser to help determine the value of a taxpayer’s oil
and gas business. At the initial interview, the ap-
praiser signs an agreement that prohibits him from dis-
closing return information of the taxpayer except as
allowed by the agreement. Once hired, the appraiser
initiates a contact by calling an industry expert in
Houston and discusses the taxpayer’s business. The
IRS employee’s contact with the appraiser does not
meet the first element of a third-party contact be-
cause the appraiser is treated, for section 7602(c) pur-
poses only, as an employee of the IRS. For the same
reason, however, the appraiser’s call to the industry
expert does meet the first element of a third-party con-
tact.
Example 3.A revenue agent trying to contact the
taxpayer to discuss the taxpayer’s pending examina-
tion twice calls the taxpayer’s place of business. The
first call is answered by a receptionist who states that
the taxpayer is not available. The IRS employee leaves
a message with the receptionist stating only his name
and telephone number, and asks that the taxpayer call
him. The second call is answered by the office an-
swering machine, on which the IRS employee leaves
the same message. Neither of these phone calls meets
the first element of a third-party contact because the
IRS employee is trying to initiate a communication
with the taxpayer and not a person other than the tax-
payer. The fact that the IRS employee must either
speak with a third party (the receptionist) or leave a
message on the answering machine, which may be
heard by a third party, does not mean that the em-
ployee is initiating a communication with a person
other than the taxpayer. Both the receptionist and the
answering machine are only intermediaries in the pro-
cess of reaching the taxpayer.
(2)Person other than the taxpayer—
(i)Explanation.The phrases“person other
than the taxpayer”and“third party”are
used interchangeably in this section, and do
not include—
(A) An officer or employee of the IRS,
as defined in paragraph (c)(1)(i)(B) of this
section, acting within the scope of his or
her employment;
(B) Any computer database or web site
regardless of where located and by whom
maintained, including databases or web sites
maintained on the Internet or in county
courthouses, libraries, or any other real or
virtual site; or
(C) A current employee, officer, or fi-
duciary of a taxpayer when acting within
the scope of his or her employment or re-
lationship with the taxpayer. Such em-
ployee, officer, or fiduciary shall be
conclusively presumed to be acting within
the scope of his or her employment or re-
lationship during business hours on busi-
ness premises.
(ii)Examples:The following examples
illustrate this paragraph (c)(2):
Example 1.A revenue agent examining a taxpay-
er’s return speaks with another revenue agent who has
previously examined the same taxpayer about a re-
curring issue. The revenue agent has not contacted a
“person other than the taxpayer”within the mean-
ing of section 7602(c).
Example 2.A revenue agent examining a taxpay-
er’s return speaks with one of the taxpayer’s employ-
ees on business premises during business hours. The
employee is conclusively presumed to be acting within
the scope of his employment and is therefore not a
“person other than the taxpayer”for section 7602(c)
purposes.
Example 3.A revenue agent examining a corpo-
rate taxpayer’s return uses a commercial online re-
search service to research the corporate structure of
the taxpayer. The revenue agent uses an IRS ac-
count, logs on with her IRS user name and pass-
word, and uses the name of the corporate taxpayer in
her search terms. The revenue agent later explores sev-
eral Internet web sites that may have information rel-
evant to the examination. The searches on the
commercial online research service and Internet web
sites are not contacts with“persons other than the tax-
payer.”
(3)With respect to the determination or
collection of the tax liability of such tax-
payer—(i)Explanation.(A)With respect
to.A contact is“with respect to”the de-
termination or collection of the tax liabil-
ity of such taxpayer when made for the
purpose of either determining or collect-
ing a particular tax liability and when di-
rectly connected to that purpose. While a
contact made for the purpose of determin-
ing a particular taxpayer’s tax liability may
also affect the tax liability of one or more
other taxpayers, such contact is not for that
reason alone a contact“with respect to”the
determination or collection of those other
taxpayers’tax liabilities. Contacts to de-
termine the tax status of a pension plan un-
der Chapter 1, Subchapter D (Deferred
Compensation) of the Internal Revenue
Code, are not“with respect to”the deter-
mination of plan participants’tax liabili-
ties. Contacts to determine the tax status of
a bond issue under Chapter 1, Subchapter
B, Part IV (Tax Exemption Requirements
for State and Local Bonds) of the Inter-
nal Revenue Code, are not“with respect to”
the determination of the bondholders’tax
liabilities. Contacts to determine the tax sta-
tus of an organization under Chapter 1, Sub-
chapter F (Exempt Organizations) of the
Internal Revenue Code, are not“with re-
spect to”the determination of the contribu-
tors’liabilities, nor are any similar
determinations“with respect to”any per-
sons with similar relationships to the tax-
payer whose tax liability is being
determined or collected.
(B)Determination or collection.A con-
tact is with respect to the“determination or
collection”of the tax liability of such tax-
payer when made during the administra-
tive determination or collection process. For
purposes of this paragraph (c) only, the ad-
ministrative determination or collection pro-
cess may include any administrative action
to ascertain the correctness of a return, make
a return when none has been filed, or de-
termine or collect the tax liability of any
person as a transferee or fiduciary under
Chapter 71 of Title 26.
(C)Tax liability.Atax liabilitymeans the
liability for any tax imposed by Title 26 of
the United States Code (including any in-
terest, additional amount, addition to the tax,
or penalty) and does not include the liabil-
ity for any tax imposed by any other ju-
risdiction nor any liability imposed by other
Federal statutes.
(D)Such taxpayer.A contact is with re-
spect to the determination or collection of
the tax liability of“such taxpayer”when
made while determining or collecting the
tax liability of a particular, identified tax-
payer. Contacts made during an investiga-
tion of a particular, identified taxpayer are
third-party contacts only as to the particu-
lar, identified taxpayer under investiga-
tion and not as to any other taxpayer whose
tax liabilities might be affected by such con-
tacts.
(ii)Examples.The following examples
illustrate the operation of this paragraph
(c)(3):
Example 1.As part of a compliance check on a re-
turn preparer, an IRS employee visits the preparer’s
office and reviews the preparer’s client files to en-
sure that the proper forms and records have been cre-
ated and maintained. This contact is not a third-
party contact“with respect to”the preparer’s clients
because it is not for the purpose of determining the
tax liability of the preparer’s clients, even though the
agent might discover information that would lead the
agent to recommend an examination of one or more
of the preparer’s clients.
Example 2.A revenue agent is assigned to exam-
ine a taxpayer’s return, which was prepared by a re-
turn preparer. As in all such examinations, the revenue
agent asks the taxpayer routine questions about what
information the taxpayer gave the preparer and what
advice the preparer gave the taxpayer. As a result of
the examination, the revenue agent recommends that
the preparer be investigated for penalties under sec-
tion 6694 or 6695. Neither the examination of the tax-
payer’s return nor the questions asked of the taxpayer
are“with respect to”the determination of the pre-
February 10, 20034182003–6 I.R.B.

parer’s tax liabilities within the meaning of section
7602(c) because the purpose of the contacts was to
determine the taxpayer’s tax liability, even though the
agent discovered information that may result in a later
investigation of the preparer.
Example 3.To help identify taxpayers in the flo-
rist industry who may not have filed proper returns,
an IRS employee contacts a company that supplies
equipment to florists and asks for a list of its cus-
tomers in the past year in order to cross-check the list
against filed returns. The employee later contacts the
supplier for more information about one particular flo-
rist who the employee believes did not file a proper
return. The first contact is not a contact with re-
spect to the determination of the tax liability of“such
taxpayer”because no particular taxpayer has been iden-
tified for investigation at the time the contact is made.
The later contact, however, is with respect to the de-
termination of the tax liability of“such taxpayer”be-
cause a particular taxpayer has been identified. The
later contact is also“with respect to”the determina-
tion of that taxpayer’s liability because, even though
no examination has been opened on the taxpayer, the
information sought could lead to an examination.
Example 4.A revenue officer, trying to collect the
trust fund portion of unpaid employment taxes of a
corporation, begins to investigate the liability of two
corporate officers for the section 6672 Trust Fund Re-
covery Penalty (TFRP). The revenue officer obtains
the signature cards for the corporation’s bank ac-
counts from the corporation’s bank. The contact with
the bank to obtain the signature cards is a contact with
respect to the determination of the two identified cor-
porate officers’tax liabilities because it is directly con-
nected to the purpose of determining a tax liability of
two identified taxpayers. It is not, however, a con-
tact with respect to any other person not already un-
der investigation for TFRP liability, even though the
signature cards might identify other potentially li-
able persons.
Example 5.The IRS is asked to rule on whether a
certain pension plan qualifies under section 401 so that
contributions to the pension plan are excludable from
the employees’incomes under section 402 and are also
deductible from the employer’s income under sec-
tion 404. Contacts made with the plan sponsor (and
with persons other than the plan sponsor) are not con-
tacts“with respect to”the determination of the tax li-
abilities of the pension plan participants because the
purpose of the contacts is to determine the status of
the plan, even though that determination may affect
the participants’tax liabilities.
Example 6(a).The IRS audits a TEFRA partner-
ship at the partnership (entity) level pursuant to sec-
tions 6221 through 6233. The tax treatment of
partnership items is at issue, but the respective tax li-
abilities of the partners may be affected by the re-
sults of the TEFRA partnership audit. With respect to
the TEFRA partnership, contacts made with employ-
ees of the partnership acting within the scope of their
duties or any partner are not section 7602(c) con-
tacts because they are considered the equivalent of con-
tacting the partnership. Contacts relating to the tax
treatment of partnership items made with persons other
than the employees of the partnership who are act-
ing within the scope of their duties or the partners are
section 7602(c) contacts with respect to the TEFRA
partnership, and reasonable advance notice should be
provided by sending the appropriate Letter 3164 to the
partnership’s tax matters partner (TMP). Individual
partners who are merely affected by the partnership
audit but who are not identified as subject to exami-
nation with respect to their individual tax liabilities
need not be sent Letters 3164.
Example 6(b).In the course of an audit of a
TEFRA partnership at the partnership (entity) level,
the IRS intends to contact third parties regarding trans-
actions between the TEFRA partnership and spe-
cific, identified partners. In addition to the partnership’s
TMP, the specific, identified partners should also be
provided advance notice of any third party contacts
relating to such transactions.
(4)Discloses the identity of the tax-
payer being investigated—(i)Explana-
tion.An IRS employee discloses the
taxpayer’s identity whenever the employee
knows or should know that the person be-
ing contacted can readily ascertain the tax-
payer’s identity from the information given
by the employee.
(ii)Examples.The following examples
illustrate this paragraph (c)(4):
Example 1.A revenue agent seeking to value the
taxpayer’s condominium calls a real estate agent and
asks for a market analysis of the taxpayer’s condo-
minium, giving the unit number of the taxpayer’s con-
dominium. The revenue agent has revealed the identity
of the taxpayer, regardless of whether the revenue agent
discloses the name of the taxpayer, because the real
estate agent can readily ascertain the taxpayer’s iden-
tity from the address given.
Example 2.A revenue officer seeking to value the
taxpayer’s condominium calls a real estate agent and,
without identifying the taxpayer’s unit, asks for the
sales prices of similar units recently sold and listing
prices of similar units currently on the market. The
revenue officer has not revealed the identity of the tax-
payer because the revenue officer has not given any
information from which the real estate agent can
readily ascertain the taxpayer’s identity.
(5)Discloses the association of the IRS
employee with the IRS.An IRS employee
discloses his association with the IRS when-
ever the employee knows or should know
that the person being contacted can readily
ascertain the association from the informa-
tion given by the employee.
(d)Pre-contact notice—(1)In gen-
eral.An officer or employee of the IRS may
not make third-party contacts without pro-
viding reasonable notice in advance to the
taxpayer that contacts may be made. The
pre-contact notice may be given either orally
or in writing. If written notice is given, it
may be given in any manner that the IRS
employee responsible for giving the no-
tice reasonably believes will be received by
the taxpayer in advance of the third-party
contact. Written notice is deemed reason-
able if it is—
(i) Mailed to the taxpayer’s last known
address;
(ii) Given in person;
(iii) Left at the taxpayer’s dwelling or
usual place of business; or
(iv) Actually received by the taxpayer.
(2)Pre-contact notice not required.Pre-
contact notice under this section need not
be provided to a taxpayer for third-party
contacts of which advance notice has oth-
erwise been provided to the taxpayer pur-
suant to another statute, regulation or
administrative procedure. For example, Col-
lection Due Process notices sent to taxpay-
ers pursuant to section 6330 and its
regulations constitute reasonable advance
notice that contacts with third parties may
be made in order to effectuate a levy.
(e)Post-contact reports—(1)Requested
reports.A taxpayer may request a record of
persons contacted in any manner that the
Commissioner reasonably permits. The
Commissioner may set reasonable limits on
how frequently taxpayer requests need be
honored. The requested report may be
mailed either to the taxpayer’s last known
address or such other address as the tax-
payer specifies in the request.
(2)Contents of record—(i)In gen-
eral.The record of persons contacted should
contain information, if known to the IRS
employee making the contact, which rea-
sonably identifies the person contacted. Pro-
viding the name of the person contacted
fully satisfies the requirements of this sec-
tion, but this section does not require IRS
employees to solicit identifying informa-
tion from a person solely for the purpose
of the post-contact report. The record need
not contain any other information, such as
the nature of the inquiry or the content of
the third party’s response. The record need
not report multiple contacts made with the
same person during a reporting period.
(ii)Special rule for employees.For con-
tacts with the employees, officers, or fidu-
ciaries of any entity who are acting within
the scope of their employment or relation-
ship, it is sufficient to record the entity as
the person contacted. A fiduciary, officer or
employee shall be conclusively presumed
to be acting within the scope of his em-
ployment or relationship during business
hours on business premises. For purposes
of this paragraph (e)(2)(ii), the termen-
titymeans any business (whether oper-
ated as a sole proprietorship, disregarded
entity under§301.7701–2 of the regula-
tions, or otherwise), trust, estate, partner-
ship, association, company, corporation, or
similar organization.
2003–6 I.R.B.419February 10, 2003

(3)Post-contact record not required.A
post-contact record under this section need
not be made, or provided to a taxpayer, for
third-party contacts of which the taxpayer
has already been given a similar record pur-
suant to another statute, regulation, or ad-
ministrative procedure.
(4)Examples.The following examples
illustrate this paragraph (e):
Example 1.An IRS employee trying to find a spe-
cific taxpayer’s assets in order to collect unpaid taxes
talks to the owner of a marina. The employee asks
whether the taxpayer has a boat at the marina. The
owner gives his name as John Doe. The employee may
record the contact as being with John Doe and is not
required by this regulation to collect or record any
other identifying information.
Example 2.An IRS employee trying to find a spe-
cific taxpayer and his assets in order to collect un-
paid taxes talks to a person at 502 Fernwood. The
employee asks whether the taxpayer lives next door
at 500 Fernwood, as well as where the taxpayer works,
what kind of car the taxpayer drives and whether the
camper parked in front of 500 Fernwood belongs to
the taxpayer. The person does not disclose his name.
The employee may record the contact as being with
a person at 502 Fernwood. If the employee then makes
the same inquiries of another person on the street in
front of 500 Fernwood, and does not learn that per-
son’s name, the latter contact may be reported as be-
ing with a person on the street in front of 500
Fernwood.
Example 3.An IRS employee examining a return
obtains loan documents from a bank where the tax-
payer applied for a loan. After reviewing the docu-
ments, the employee talks with the loan officer at the
bank who handled the application. The employee has
contacted only one“person other than the taxpayer.”
The bank and not the loan officer is the“person other
than the taxpayer”for section 7602(c) purposes. The
contact with the loan officer is treated as a contact with
the bank because the loan officer was an employee
of the bank and was acting within the scope of her
employment with the bank.
Example 4.An IRS employee issues a summons to
a third party with respect to the determination of a tax-
payer’s liability and properly follows the proce-
dures for such summonses under section 7609, which
requires that a copy of the summons be given to the
taxpayer. This third-party contact need not be main-
tained in a record of contacts available to the tax-
payer because providing a copy of the third-party
summons to the taxpayer pursuant to section 7609 sat-
isfies the post-contact recording and reporting re-
quirement of this section.
Example 5.An IRS employee serves a levy on a
third party with respect to the collection of a taxpay-
er’s liability. The employee provides the taxpayer with
a copy of the notice of levy form that shows the iden-
tity of the third party. This third-party contact need
not be maintained in a record of contacts available to
the taxpayer because providing a copy of the notice
of levy to the taxpayer satisfies the post-contact re-
cording and reporting requirement of this section.
(f)Exceptions.(1)Authorized by tax-
payer—(i)Explanation.Section 7602(c)
does not apply to contacts authorized by the
taxpayer. A contact is“authorized”within
the meaning of this section if—
(A) The contact is with the taxpayer’s
authorized representative, that is, a per-
son who is authorized to speak or act on
behalf of the taxpayer, such as a person
holding a power of attorney, a corporate of-
ficer, a personal representative, an execu-
tor or executrix, or an attorney representing
the taxpayer; or
(B) The taxpayer or the taxpayer’s au-
thorized representative requests or approves
the contact.
(ii)No prevention or delay of contact.
This section does not entitle any person to
prevent or delay an IRS employee from
contacting any individual or entity.
(2)Jeopardy—(i)Explanation.Sec-
tion 7602(c) does not apply when the IRS
employee making a contact has good cause
to believe that providing the taxpayer with
either a general pre-contact notice or a
record of the specific person contacted may
jeopardize the collection of any tax. For pur-
poses of this section only, good cause in-
cludes a reasonable belief that providing the
notice or record will lead to—
(A) Attempts by any person to conceal,
remove, destroy, or alter records or assets
that may be relevant to any tax examina-
tion or collection activity;
(B) Attempts by any person to prevent
other persons, through intimidation, brib-
ery, or collusion, from communicating any
information that may be relevant to any tax
examination or collection activity; or
(C) Attempts by any person to flee, or
otherwise avoid testifying or producing
records that may be relevant to any tax ex-
amination or collection activity.
(ii)Record of contact.If the circum-
stances described in this paragraph (f)(2) ex-
ist, the IRS employee must still make a
record of the person contacted, but the tax-
payer need not be provided the record un-
til it is no longer reasonable to believe that
providing the record would cause the jeop-
ardy described.
(3)Reprisal—(i)In general.Section
7602(c) does not apply when the IRS em-
ployee making a contact has good cause to
believe that providing the taxpayer with ei-
ther a general pre-contact notice or a spe-
cific record of the person being contacted
may cause any person to harm any other
person in any way, whether the harm is
physical, economic, emotional or other-
wise. A statement by the person contacted
that harm may occur against any person is
sufficient to constitute good cause for the
IRS employee to believe that reprisal may
occur. The IRS employee is not required to
further question the contacted person about
reprisal or otherwise make further inquir-
ies regarding the statement.
(ii)Examples.The following examples
illustrate this paragraph (f)(3):
Example 1.An IRS employee seeking to collect un-
paid taxes is told by the taxpayer that all the money
in his and his brother’s joint bank account belongs to
the brother. The IRS employee contacts the brother
to verify this information. The brother refuses to con-
firm or deny the taxpayer’s statement. He states that
he does not believe that reporting the contact to the
taxpayer would result in harm to anyone but further
states that he does not want his name reported to the
taxpayer because it would appear that he gave infor-
mation. This contact is not excepted from the stat-
ute merely because the brother asks that his name be
left off the list of contacts.
Example 2.Assume the same facts as inExample
1, except that the brother states that he fears harm from
the taxpayer should the taxpayer learn of the con-
tact, even though the brother gave no information. This
contact is excepted from the statute because the third
party has expressed a fear of reprisal. The IRS em-
ployee is not required to make further inquiry into the
nature of the brothers’relationship or otherwise ques-
tion the brother’s fear of reprisal.
Example 3.An IRS employee is examining a joint
return of a husband and wife, who recently divorced.
From reading the court divorce file, the IRS em-
ployee learns that the divorce was acrimonious and
that the ex-husband once violated a restraining or-
der issued to protect the ex-wife. This information pro-
vides good cause for the IRS employee to believe that
reporting contacts which might disclose the ex-wife’s
location may cause reprisal against any person. There-
fore, when the IRS employee contacts the ex-wife’s
new employer to verify salary information provided
by the ex-wife, the IRS employee has good cause not
to report that contact to the ex-husband, regardless of
whether the new employer expresses concern about
reprisal against it or its employees.
(4)Pending criminal investigations—
(i)IRS criminal investigations.Section
7602(c) does not apply to contacts made
during an investigation, or inquiry to de-
termine whether to open an investigation,
when the investigation or inquiry is—
(A) Made against a particular, identi-
fied taxpayer for the primary purpose of
evaluating the potential for criminal pros-
ecution of that taxpayer; and
(B) Made by an IRS employee whose
primary duties include either identifying or
investigating criminal violations of the law.
(ii)Other criminal investigations.Sec-
tion 7602(c) does not apply to contacts
which, if reported to the taxpayer, could in-
terfere with a known pending criminal in-
vestigation being conducted by law
February 10, 20034202003–6 I.R.B.

enforcement personnel of any local, state,
federal, foreign or other governmental en-
tity.
(5)Governmental entities.Section
7602(c) does not apply to any contact with
any office of any local, state, federal or for-
eign governmental entity except for con-
tacts concerning the taxpayer’s business
with the government office contacted, such
as the taxpayer’s contracts with or employ-
ment by the office. The termofficein-
cludes any agent or contractor of the office
acting in such capacity.
(6)Confidential informants.Section
7602(c) does not apply when the employee
making the contact has good cause to be-
lieve that providing either the pre-contact
notice or the record of the person con-
tacted would identify a confidential infor-
mant whose identity would be protected
under section 6103(h)(4).
(7)Nonadministrative contacts—(i)Ex-
planation.Section 7602(c) does not ap-
ply to contacts made in the course of a
pending court proceeding.
(ii)Examples.The following examples
illustrate this paragraph (f)(7):
Example 1.An attorney for the Office of Chief
Counsel needs to contact a potential witness for an up-
coming Tax Court proceeding involving the 1997 and
1998 taxable years of the taxpayer. Section 7602(c)
does not apply because the contact is being made in
the course of a pending court proceeding.
Example 2.While a Tax Court case is pending with
respect to a taxpayer’s 1997 and 1998 income tax li-
abilities, a revenue agent is conducting an examina-
tion of the taxpayer’s excise tax liabilities for the fiscal
year ending 1999. Any third-party contacts made by
the revenue agent with respect to the excise tax li-
abilities would be subject to the requirements of sec-
tion 7602(c) because the Tax Court proceeding does
not involve the excise tax liabilities.
Example 3.A taxpayer files a Chapter 7 bank-
ruptcy petition and receives a discharge. A revenue of-
ficer contacts a third party in order to determine
whether the taxpayer has any exempt assets against
which the IRS may take collection action to enforce
its federal tax lien. At the time of the contact, the bank-
ruptcy case has not been closed. Although the bank-
ruptcy proceeding remains pending, the purpose of this
contact relates to potential collection action by the IRS,
a matter not before or related to the bankruptcy court
proceeding.
(g)Effective Date.This section is ap-
plicable on the date the final regulations are
published in theFederal Register.
David A. Mader,
Assistant Deputy Commissioner
of Internal Revenue.
Approved December 12, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 17,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 18, 2002, 67 F.R. 77419)
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2003. See Rev. Rul. 2003–16, page 401.
2003–6 I.R.B.421February 10, 2003

Part III. Administrative, Procedural, and Miscellaneous
Effective Date of Regulations
Under Sections 6011 and
6112
Notice 2003–11
SECTION 1. BACKGROUND
In Treasury Decisions 9017 and 9018,
as published in the Federal Register on Oc-
tober 22, 2002 (2002–45 I.R.B. 815 [67 F.R.
64799]; 2002–45 I.R.B. 823 [67 F.R.
64807]) (October 2002 temporary regula-
tions), the Department of the Treasury
(Treasury) and the Internal Revenue Ser-
vice (Service) issued comprehensive amend-
ments to the rules under§1.6011–4T of the
temporary Income Tax Regulations and
§301.6112–1T of the temporary Proce-
dure and Administrative Regulations, and
made corresponding amendments to
§301.6111–2T.See2002–45 I.R.B. 815 and
823. These amendments related primarily
to the disclosure of reportable transac-
tions under§6011 of the Internal Rev-
enue Code and the list maintenance
requirements for potentially abusive tax
shelters under§6112. Specifically, Trea-
sury and the Service revised and clarified
the definition of“reportable transaction”and
the definition of“organizer and seller”to
ensure that the Service receives the infor-
mation needed to evaluate certain types of
potentially abusive transactions and to im-
prove compliance.
The October 2002 temporary regula-
tions generally are effective for transac-
tions entered into on or after January 1,
2003. Taxpayers are not required to dis-
close reportable transactions as defined un-
der the October 2002 temporary disclosure
regulations until the time they file their tax
return reporting those transactions. How-
ever, under the October 2002 temporary list
maintenance regulations, material advi-
sors have an immediate obligation to main-
tain lists with respect to reportable
transactions.
Treasury and the Service have received
numerous comments relating to the Octo-
ber 2002 temporary disclosure regulations
and the October 2002 temporary list main-
tenance regulations. Treasury and the Ser-
vice are currently reviewing these
comments. In particular, Treasury and the
Service are reviewing the comments that
provide suggested clarifications to the rules
pertaining to who must disclose transac-
tions. In addition, Treasury and the Ser-
vice are considering clarifications as to the
persons required to maintain lists and the
persons who must be included on lists.
Treasury and the Service also are re-
viewing the comments relating to the re-
portable transaction categories of loss
transactions and transactions with a sig-
nificant book-tax difference. More gener-
ally, Treasury and the Service are
considering how the rules in the October
2002 temporary regulations can be revised
to exclude transactions for which disclo-
sure and maintenance of information un-
der§§6011 and 6112 may be unnecessary,
while preserving the ability of Treasury and
the Service to obtain information about po-
tentially abusive transactions. Treasury and
the Service intend to publish final regula-
tions in February 2003.
SECTION 2. EFFECTIVE DATE FOR
THE DISCLOSURE REGULATIONS
UNDER§6011
Treasury and the Service intend to re-
vise the disclosure regulations under§6011
to reflect the consideration of the com-
ments received. Although the October 2002
temporary disclosure regulations under
§6011 will continue to apply to transac-
tions entered into on or after January 1,
2003, the revised regulations under§6011
will permit taxpayers who entered into
transactions on or after January 1, 2003, and
before the filing date of the revised regu-
lations, to elect to apply the revised regu-
lations instead of the October 2002
temporary disclosure regulations.
SECTION 3. EFFECTIVE DATE FOR
THE LIST MAINTENANCE
REGULATIONS UNDER§6112
In order to provide necessary clarifica-
tion to the October 2002 temporary list
maintenance regulations, Treasury and the
Service will change the effective date of the
October 2002 temporary list maintenance
regulations under§6112 to the date the re-
vised regulations under§6112 are filed. Ex-
cept as provided below, the list maintenance
requirements under§6112 will not apply
to transactions entered into on or after Janu-
ary 1, 2003, and before the filing date of
the revised regulations under§6112. The
delayed effective date, however, will not ap-
ply to listed transactions or transactions that
are§6111 shelters as defined in
§301.6112–1T(b)(1) of the October 2002
temporary regulations.
SECTION 4. CONTACT
INFORMATION
The principal author of this notice is
Tara P. Volungis of the Office of Associ-
ate Chief Counsel (Passthroughs and Spe-
cial Industries). For further information
regardingthisnotice,contact
Ms. Volungis at (202) 622–3080 (not a toll-
free call).
Nonaccrual Experience
Method of Accounting
Notice 2003–12
SECTION 1. PURPOSE
The Internal Revenue Service is cur-
rently working on regulations under
§448(d)(5) of the Internal Revenue Code
as amended by§403 of the Job Creation
and Worker Assistance Act of 2002,
Pub. L. No. 107–147,§403, 116 Stat. 21
(the Act), regarding the nonaccrual expe-
rience (“NAE”) method. Until such regu-
lations are issued in final form, this notice
provides interim guidance on which tax-
payers may rely. The Service expects that
the final regulations will incorporate the
rules set forth in this notice and will be ef-
fective for taxable years ending after March
9, 2002. This interim guidance includes: (1)
for taxpayers who no longer qualify to use
a NAE method, procedures to change their
method of accounting; (2) for taxpayers who
qualify to use a NAE method, two safe har-
bor NAE methods that will be presumed to
clearly reflect the taxpayer’s NAE; (3) for
taxpayers who qualify to use a NAE method
but wish to compute their NAE using a for-
mula other than the two safe harbors pro-
vided, the requirements that must be met
in order to use an alternative formula to
compute their NAE; and (4) for taxpay-
ers who wish to change to a different NAE
method, the procedures necessary to ob-
tain automatic consent of the Commis-
sioner to change to one of the safe harbor
February 10, 20034222003–6 I.R.B.

NAE methods or to an alternative NAE
method that clearly reflects their experi-
ence.
SECTION 2. BACKGROUND
.01 Under§448(d)(5), prior to its
amendment by the Act, taxpayers using an
accrual method of accounting and perform-
ing services were not required to accrue any
portion of their service-related income that,
on the basis of their experience, would not
be collected. The Act modifies§448(d)(5)
to provide that a NAE method is now avail-
able only for taxpayers using an accrual
method who either provide services in fields
described in§448(d)(2)(A) (i.e., health, law,
engineering, architecture, accounting, ac-
tuarial science, performing arts, or consult-
ing), or who meet the $5 million annual
gross receipts test of§448(c). As under
prior law, a NAE method is available only
to taxpayers not charging interest or pen-
alties for failure to timely pay the amount
charged.
.02 The Act also provides that the Ser-
vice and the Treasury Department will is-
sue regulations to permit taxpayers to
determine the uncollectible amounts us-
ing alternative computations or formulas,
including safe harbors, that, based on ex-
perience, accurately reflect the amount of
income that the taxpayers will not col-
lect. The amendments by the Act are ef-
fective for taxable years ending after March
9, 2002.
SECTION 3. NONACCRUAL
EXPERIENCE METHODS
.01In General.Pending the issuance of
final regulations under§448(d)(5), as
amended, a taxpayer eligible to use a NAE
method under§448(d)(5), as amended, may
use one of two safe harbor NAE methods
of accounting provided in section 3.02 of
this notice. Alternatively, a taxpayer eli-
gible to use a NAE method under
§448(d)(5), as amended, may use any other
NAE method (an“alternative NAE
method”) that clearly reflects the taxpay-
er’s NAE, subject to the requirements of
section 3.03 of this notice. See section 5 of
this notice for procedures to obtain auto-
matic consent to change to one of the safe
harbor NAE methods or to an alternative
NAE method.
.02Safe Harbor Methods.The safe har-
bor NAE methods provided in this sec-
tion 3.02 will be presumed to clearly reflect
a taxpayer’s NAE.
(1)Section 1.448–2T(e)(2) method.A
taxpayer may use the NAE method pro-
vided in§1.448–2T(e)(2) of the tempo-
rary income tax regulations.
(2)Actual experience method.(i)Op-
tion A: Three-year moving average.A tax-
payer may use a NAE method under which
the taxpayer determines the uncollectible
amount (“actual NAE amount”) by multi-
plying its year-end accounts receivable bal-
ance by a percentage (“three-year moving
average NAE percentage”) reflecting its ac-
tual NAE with respect to its accounts re-
ceivable balance at the beginning of the
current taxable year and the two immedi-
ately preceding taxable years. Under the ac-
tual experience method, a taxpayer is
allowed to increase its actual NAE amount
by 5% (“adjusted NAE amount”). The tax-
payer’s three-year moving average NAE
percentage, actual NAE amount, and ad-
justed NAE amount are determined accord-
ing to the following steps:
STEP 1. Track the receivables in the tax-
payer’s accounts receivable balance at the
beginning of the current year to determine
the dollar amount of the accounts receiv-
able actually determined to be uncollect-
ible and charged off and not recovered or
determined to be collectible by the date se-
lected by the taxpayer (the“determina-
tion date”) for the year. The determination
date may not be later than the earlier of the
due date (including extensions) for filing the
taxpayer’s federal income tax return for that
year or the date on which the taxpayer files
such return for that year.
STEP 2. Repeat STEP 1 for the taxpay-
er’s accounts receivable balance at the be-
ginning of each of the two immediately
preceding taxable years.
STEP 3. To determine the taxpayer’s
three-year moving average NAE percent-
age, (i) divide the sum of the net uncol-
lectible amounts from STEP 1 and 2, by (ii)
the sum of the accounts receivable bal-
ance at the beginning of the current tax-
able year and the accounts receivable
balance at the beginning of each of the two
preceding taxable years.
STEP 4. Multiply the percentage com-
puted in STEP 3 by the taxpayer’s accounts
receivable balance at the end of the cur-
rent taxable year. The product is the tax-
payer’s actual NAE amount for the current
taxable year.
STEP 5. To determine the taxpayer’s ad-
justed NAE amount, multiply the actual
NAE amount from STEP 4 by 1.05.See
Example 1in section 3.04 of this notice.
(ii)Option B: Up to three-year mov-
ing average.Alternatively, in computing its
adjusted NAE amount, a taxpayer may use:
its current year NAE percentage for the first
year this method is used; a two-year mov-
ing average NAE percentage for the sec-
ond year this method is used; and a three-
year moving average NAE percentage for
the third, and each succeeding, taxable year
this method is used.See Examples 2, 3and
4in section 3.04 of this notice.
(iii) A taxpayer that excludes an amount
from income during a taxable year as a re-
sult of the taxpayer’s use of the actual ex-
perience method cannot deduct in any
subsequent taxable year the amount ex-
cluded from income. Thus, the taxpayer
cannot deduct the excluded amount in the
next taxable year, which is the taxable year
in which the taxpayer actually determines
that the amount is uncollectible and charges
the amount off. If a taxpayer recovers an
amount excluded from income, the tax-
payer must include the recovered amount
in income. If a calendar year taxpayer us-
ing the actual experience method deter-
mines that an amount that was not excluded
from income is uncollectible and should be
charged off (e.g., the taxpayer determines
on November 1, 2002, that an account re-
ceivable that was originated on May 1,
2002, is uncollectible and should be charged
off) the taxpayer may deduct the amount
charged off when it is charged off, but must
include any subsequent recoveries in in-
come. The reasonableness of a taxpayer’s
determinations that amounts are uncollect-
ible and should be charged off may be con-
sidered on examination.See§§1.448–
2T(e)(3) and (e)(4) regarding the mechanics
of the NAE method and related examples.
.03Alternative NAE Methods.A tax-
payer may use any alternative NAE method
that clearly reflects the taxpayer’s actual
NAE, provided the taxpayer’s alternative
NAE method meets the self-test require-
ments as described in this section 3.03.
(1)Self-testing.A taxpayer using (or de-
siring to use) an alternative NAE method
must“self-test”its alternative NAE method
for its first taxable year ending after March
9, 2002, and every third taxable year there-
after by comparing the NAE amount un-
der the taxpayer’s alternative NAE method
2003–6 I.R.B.423February 10, 2003

(“alternative NAE amount”) with the ad-
justed NAE amount that would have re-
sulted from use of the actual experience
method, as described in section 3.02(2) of
this notice, for the test period. In no event
will the test period include taxable years
ending on or before March 9, 2002, or prior
to the first year in which the taxpayer used
its alternative NAE method.
(2)Treated as clearly reflecting NAE.If
the total of the alternative NAE amounts for
each year of the test period (“cumulative
alternative NAE amount”) is less than or
equal to the total of the adjusted NAE
amount computed under STEP 5 of sec-
tion 3.02(2)(i) of this revenue procedure for
each year of the test period (“cumulative
adjusted NAE amount”), then: (i) the tax-
payer’s alternative NAE method will be
treated as clearly reflecting its NAE for the
test period; and (ii) the taxpayer may con-
tinue to use that alternative NAE method,
subject to a requirement to self-test again
in three taxable years.See Example6in
section 3.04 of this notice.
(3)Treated as not clearly reflecting NAE.
If the cumulative alternative NAE amount
is more than the cumulative adjusted NAE
amount for the test period, then: (i) the tax-
payer’s alternative NAE method will be
treated as not clearly reflecting its NAE for
the test period; and (ii) the taxpayer must
change its NAE method of accounting to
a method that will clearly reflect its NAE.
See Examples 7and8in section 3.04 of this
notice.
(4)Changes to or from alternative NAE
methods.A taxpayer that voluntarily changes
its NAE method of accounting as a result
of section 3.03(3) of this notice should fol-
low the automatic change in method of ac-
counting procedures described in section
5.02 of this notice. A taxpayer that must
change its NAE method of accounting as
a result of section 3.03(3) of this notice, but
does not change, will be subject to being
changed by the Service on examination to
the actual experience method. A taxpayer
that does not maintain records of the data
necessary to determine its actual NAE (in
accordance with section 3.02(2) of this no-
tice) will be subject to being changed by
the Service on examination to the spe-
cific charge-off method. A taxpayer de-
scribed in this section that is required by
the Service to change its NAE method of
accounting on examination will be sub-
ject to such change in the earliest open tax-
able year under examination, and will be
required to take into account any result-
ing§481(a) adjustment entirely in the year
of change, and may be subject to penal-
ties.See§446(f).
.04Examples.In each example, the
taxpayer: (1) uses a calendar year for fed-
eral income tax purposes and an accrual
method of accounting; (2) is eligible to use
a NAE method under§448(d)(5), as
amended by the Act; and (3) selects an ap-
propriate determination date for each tax-
able year. In each ofExamples 1–5, the
taxpayer wants to use the actual experi-
ence method beginning in 2002.
Example 1.TaxpayerAhas the data necessary to
track the uncollectible amounts in its beginning-of-
year accounts receivable for the current taxable year
and the two immediately preceding taxable years.A
determines that its actual accounts receivable collec-
tion experience is as follows:
Ye a r
Total A/R Balance
At Beginning of Year
Beginning A/R Amount
Charged Off by Determination Date
(adjusted for recoveries)
2000$1,000,000$35,000
2001760,00075,000
20021,975,000
65,000
Total$3,735,000$175,000
A’s ending A/R Balance on 12/31/2002, is $880,000.
In 2002,Achooses to compute its NAE amount by
using the three-year moving average under Option A
in section 3.02(2)(i) of this notice. Thus,A’sthree-
year moving average NAE percentage is 4.7%, de-
termined by dividing the sum of the amount ofA’s
receivables in its account on January 1
st
of 2000, 2001,
and 2002, that were determined to be uncollectible and
charged off (adjusted for recoveries) on or before the
corresponding determination dates, by the sum of the
balances ofA’saccounts receivable account on Janu-
ary 1
st
of 2000, 2001, and 2002 (i.e., $175,000/
$3,735,000 or 4.7%). Thus,A’sactual NAE amount
for 2002 is determined by multiplying this percent-
age by the balance ofA’saccounts receivable ac-
count on December 31, 2002 (i.e., $880,000 x 4.7%
= $41,360).Ais permitted to exclude from gross in-
come in 2002 an amount equal to 105% ofA’sac-
tual NAE amount ($41,360 x 105% = $43,428). This
isA’sadjusted NAE amount for 2002.
Example 2.The facts are the same asExample 1,
exceptAhas not maintained the data necessary to use
Option A in section 3.02(2)(i) of this notice.Ade-
termines that, of its 2002 beginning-of-year receiv-
ables of $1,975,000, $65,000 were determined to be
uncollectible and charged off (adjusted for recover-
ies) on or before September 15, 2003, the dateAtimely
files its federal income tax return for 2002 (the de-
termination date).Achooses to use Option B in sec-
tion 3.02(2)(ii) of this notice to compute its adjusted
NAE amount for 2002.A’s current year NAE per-
centage is 3.3%, determined by dividing the amount
ofA’s receivables in its account on January 1, 2002,
that were charged off as uncollectible (adjusted for re-
coveries) on or before the determination date, by the
balance ofA’s accounts receivable account on Janu-
ary 1, 2002 (i.e., $65,000/$1,975,000 or 3.3%). Thus,
A’s actual NAE amount for 2002 is determined by
multiplying this percentage by the balance ofA’s ac-
counts receivable account on December 31, 2002 (i.e.,
$880,000 x 3.3% = $29,040).Ais permitted to ex-
clude from gross income in 2002 an amount equal to
105% ofA’s actual NAE amount ($29,040 x 105%
= $30,492). This isA’s adjusted NAE amount for 2002.
Example 3.The facts are the same asExample 2.
Adetermines that its accounts receivable collection ex-
perience for 2003 is as follows:
February 10, 20034242003–6 I.R.B.

Year
Total A/R Balance
At Beginning of Year
Beginning A/R Amount
Charged Off by Determination Date
(adjusted for recoveries)
2002$1,975,000$65,000
2003880,000
95,000
Total$2,855,000$160,000
A’s ending A/R Balance on 12/31/2003, is $ 2,115,000.
In 2003,Amust compute its NAE amount using an
average of its actual NAE for 2002 and 2003 (in ac-
cordance with Option B in section 3.02(2)(ii) of this
notice). Thus,A’s two-year moving average NAE per-
centage is 5.6%, determined by dividing the sum of
the amount ofA’s receivables in its accounts on Janu-
ary 1
st
of 2002 and 2003, that were determined to be
uncollectible and charged off (adjusted for recover-
ies) on or before the corresponding determination dates,
by the sum of the balances ofA’s accounts receiv-
able account on January 1
st
of 2002 and 2003 (i.e.,
$160,000/$2,855,000 or 5.6%). Thus,A’s actual NAE
amount for 2003 is determined by multiplying this per-
centage by the balance ofA’s accounts receivable ac-
count on December 31, 2003 (i.e., $2,115,000 x 5.6%
= $118,440).Ais permitted to exclude from gross in-
come in 2003 an amount equal to 105% ofA’s ac-
tual NAE amount ($118,440 x 105% = $124,362). This
isA’s adjusted NAE amount for 2003.
Example 4.The facts are the same asExample 3.
Adetermines that its accounts receivable collection ex-
perience for 2004 is as follows:
Year
Total A/R Balance
At Beginning of Year
Beginning A/R Amount
Charged Off by Determination Date
(adjusted for recoveries)
2002$1,975,000$65,000
2003880,00095,000
20042,115,000
105,000
Total$4,970,000$265,000
A’s ending A/R Balance on 12/31/2004, is $1,600,000.
In 2004,Amust compute its NAE amount using an
average of its actual NAE for 2002, 2003, and 2004
(in accordance with Option B in section 3.02(2)(ii) of
this notice). Thus,A’s actual three-year moving av-
erage NAE percentage is 5.3%, determined by divid-
ing the sum of the amount ofA’s receivables in its
account on January 1
st
of 2002, 2003, and 2004, that
were determined to be uncollectible and charged off
(adjusted for recoveries) on or before the correspond-
ing determination dates, by the sum of the balances
ofA’s accounts receivable account on January 1
st
of
2002, 2003, and 2004 (i.e., $265,000/$4,970,000 or
5.3%). Thus,A’s actual NAE amount for 2004 is de-
termined by multiplying this percentage by the bal-
ance ofA’s accounts receivable account on December
31, 2004 (i.e., $1,600,000 x 5.3% = $84,800).Ais per-
mitted to exclude from gross income in 2004 an
amount equal to 105% ofA’s actual NAE amount
($84,800 x 105% = $89,040). This isA’s adjusted
NAE amount for 2004. Thereafter,Amust continue
to use a 3-year moving average to compute its ac-
tual NAE, or obtain approval of the Commissioner to
change its method of accounting.
Example 5.TaxpayerBhas not tracked its 2002
beginning-of-year accounts receivable. Therefore,B
may not use the actual experience method for 2002.
Bmay use this method for 2003 ifBtracks its 2003
beginning-of-year receivables.
Example 6.Beginning in 2002, taxpayerCuses an
alternative NAE method similar to the method de-
scribed inBlack Motor Co. v. Comm’r,41 B.T.A. 300
(1940),aff’d,125 F.2d 977 (6th Cir. 1942).Cmust
self-test its alternative NAE method for the first year
it is used (2002), and then every three taxable years
after 2002 for whichCuses its alternative NAE
method. Thus, beginning in 2002,Cmust begin track-
ing its beginning-of-year accounts receivable and com-
puting its actual NAE as provided in section 3.02(2)
of this notice.C’s actual NAE amount and alterna-
tive NAE amount for 2002 are set forth below:
Year
Total A/R Balance
At Beginning of Year
Beginning A/R Amount
Charged Off by Determination Date
(adjusted for recoveries)Alternative NAE Amount
2002$350,000$14,000$20,700
C’s ending A/R Balance on 12/31/2002, is $500,000.
C’s actual NAE percentage is 4%, determined by
dividing the amount ofC’s receivables in its ac-
count on January 1, 2002, that were charged off as un-
collectible (adjusted for recoveries) on or before the
determination date, by the balance ofC’s accounts re-
ceivable account on January 1, 2002 (i.e., $14,000/
$350,000 or 4%). Thus,C’s actual NAE amount for
2002 is determined by multiplying this percentage by
the balance ofC’s accounts receivable account on De-
cember 31, 2002 (i.e., $500,000 x 4% = $20,000). Be-
causeC’s alternative NAE amount for 2002 ($20,700)
is not greater than 105% of its actual NAE amount
for 2002 (i.e., $20,000 x 1.05 = $21,000),C’s alter-
native NAE method will be treated as clearly reflect-
ing its actual NAE for the test period 2002.C’s next
test period would be taxable years 2003 through 2005.
C’s actual NAE amounts (computed under Option B
of section 3.02(2) of this revenue procedure, be-
causeClacked the data to use Option A) and alter-
native NAE amounts for those years are set forth
below:
2003–6 I.R.B.425February 10, 2003

Ye a r
Total A/R Balance
At Beginning of Year
Beginning A/R Amount
Charged Off by Determination Date
(adjusted for recoveries)
Actual NAE
Amount
Alternative NAE
Amount
2003$440,000$30,000$42,329$43,050
2004760,00065,000138,183140,200
20051,965,000
65,000101,106110,550
Total$3,165,000$160,000$281,618$293,800
Assume thatC’s ending A/R balance on 12/31/05, is
$2,000,000.
BecauseC’s cumulative alternative NAE amount
for this period ($293,800) is not greater than 105%
of its cumulative actual NAE amount for the same pe-
riod (i.e., $281,618 x 1.05 = $295,699),C’s alterna-
tive NAE method will be treated as clearly reflecting
its actual NAE for the test period. Accordingly,Cmay
continue to use its alternative NAE method, subject
to the requirement thatCself-test again after the next
three taxable years.
Example 7.The facts are the same asExample 6,
except thatC’s alternative NAE amount for 2002 is
$21,700. BecauseC’s alternative NAE amount for
2002 is more than 105% of its actual NAE amount
for 2002 (i.e., $20,000 x 1.05 = $21,000),C’s alter-
native NAE method will be treated as not clearly re-
flecting its NAE for the test period. As a result,C
cannot use its alternative NAE method of account-
ing, but must use a method that will clearly reflect its
NAE for 2002.
Example 8.The facts are the same asExample 7,
except that C used its alternative NAE method in tax-
able years prior to 2002. BecauseC’s alternative NAE
method will be treated as not clearly reflecting its NAE
for the test period,Cwill be required to change its
NAE method of accounting to a method that will
clearly reflect its NAE for 2002.
SECTION 4. AUDIT PROTECTION
FOR TAXPAYERS CURRENTLY
USING THE ACTUAL EXPERIENCE
METHOD
If a taxpayer uses the actual experi-
ence method described in section 3.02(2)
of this notice to determine its NAE amount,
the taxpayer’s use of that method will not
be raised as an issue by the Service in a tax-
able year that ends before January 22, 2003.
If the taxpayer uses the actual experience
method described in section 3.02(2) of this
notice, and its use of that method is an is-
sue under consideration (within the mean-
ing of section 3.09 of Rev. Proc. 2002–9)
in examination, in appeals, or before the
U.S. Tax Court in a taxable year that ends
before January 22, 2003, that issue will not
be further pursued by the Service.
SECTION 5. APPLICATION
.01Taxpayers No Longer Qualified Un-
der§448 to Use a NAE Method.In the
case of a taxpayer that is no longer quali-
fied under§448(d)(5), as amended by the
Act, to use a NAE method for its first tax-
able year ending after March 9, 2002, the
change from the taxpayer’s NAE method
is treated as initiated by the taxpayer, made
with the consent of the Commissioner, and
the net amount of the required§481(a) ad-
justment is to be taken into account over
a period of 4 taxable years (or, if less, the
number of taxable years that the taxpayer
has used the NAE method). Such a tax-
payer is not required to file Form 3115,Ap-
plication for Change in Accounting Method,
with the national office, or pay any asso-
ciated user fee. However, to assist the Ser-
vice in processing the taxpayer’s change in
method of accounting, the taxpayer should
attach Form 3115 to its income tax return
for the year of change, and write“Change
off of the nonaccrual experience method un-
der Notice 2003–12”at the top of the form.
.02Taxpayers Permitted to Use a NAE
Method.A change to a NAE method, or a
change from one NAE method to another
NAE method, is a change in method of ac-
counting to which the provisions of§§446
and 481, and the regulations thereunder, ap-
ply. Therefore, a taxpayer that wants to use
one of the NAE methods provided in this
notice, and that does not currently use that
method, must follow the automatic change
in method of accounting procedures in Rev.
Proc. 2002–9, 2002–3 I.R.B. 327 (as modi-
fied and amplified by Rev. Proc. 2002–
19, 2002–13 I.R.B. 696, modified and
clarified by Announcement 2002–17,
2002–8 I.R.B. 561, and amplified, clari-
fied, and modified by Rev. Proc. 2002–
54, 2002–35 I.R.B. 432) (or successors),
with the following modifications:
(1) The scope limitations in section
4.02 of Rev. Proc. 2002–9 do not apply to
a taxpayer that wants to change to a NAE
method provided in this notice for either its
first or second taxable year ending after
March 9, 2002, provided the taxpayer’s
NAE method is not an issue under consid-
eration for taxable years under examina-
tion, within the meaning of section 3.09 of
Rev. Proc. 2002–9, at the time the Form
3115 is filed with the national office (sub-
ject to the exception in Section 4 of this no-
tice);
(2) A taxpayer that wants to change
to a NAE method provided in this notice
for its first taxable year ending after March
9, 2002, that on or before March 12, 2003,
files its original federal income tax return
for that year is not required to comply with
the filing requirement in section 6.02(3)(a)
of Rev. Proc. 2002–9, provided the tax-
payer complies with the following filing re-
quirements. The taxpayer must complete
and file the Form 3115 in duplicate. The
original Form 3115 must be attached to an
amended federal income tax return for the
taxpayer’s first taxable year ending after
March 9, 2002. This amended return must
be filed no later than August 11, 2003. The
copy of the Form 3115 must be filed with
the national office (see section 6.02(6) of
Rev. Proc. 2002–9 for the address) no later
than when the taxpayer’s amended return
is filed; and
(3) When filing the Form 3115, the
taxpayer must complete all applicable parts
of the form and, in lieu of the label re-
quired by section 6.02(4) of Rev. Proc.
2002–9, are instructed to write“Change to
[identify the requested NAE method] un-
der Notice 2003–12”at the top of the form.
.03Taxpayers That Must Change After
Self-Testing.If a taxpayer required to change
its method of accounting as a result of sec-
tion 3.03 of this notice properly applied its
alternative NAE method during the test pe-
riod and the taxpayer makes the change for
its first taxable year following the last tax-
able year of the test period, the taxpayer
must follow the automatic change in method
February 10, 20034262003–6 I.R.B.

of accounting procedures in Rev. Proc.
2002–9 (or successors) and the scope limi-
tations of section 4.02 of Rev. Proc. 2002–9
will not apply.
SECTION 6. EFFECTIVE DATE AND
TRANSITION RULE
.01In General.This notice is effective
for taxable years ending after March 9,
2002.
.02Transition Rule.If a taxpayer filed
an application or ruling request under the
procedures prescribed in Rev. Proc. 97–
27, 1997–1 C.B. 680, with the national of-
fice to make a change in its method of
accounting under§448(d)(5), as amended,
for a year of change for which this notice
is effective and the application or ruling re-
quest is pending with the national office on
January 22, 2003, the taxpayer must no-
tify the national office in writing (see sec-
tion 8.06 of Rev. Proc. 97–27 for the
address) prior to March 24, 2003, if the tax-
payer wants the national office to con-
tinue processing its application or ruling
request under the procedures prescribed in
Rev. Proc. 97–27. If the taxpayer does not
notify the national office within the time
provided in this section, the taxpayer’s Form
3115, and any user fee that was submit-
ted with the Form 3115, will be returned
to the taxpayer. A taxpayer whose Form
3115 is returned under this section may file
a new Form 3115 under the procedures pre-
scribed in section 5.02 of this notice.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified to in-
clude the changes in method of account-
ing provided in this notice in section 5.06
of the Appendix.
REQUEST FOR COMMENTS
The Service and the Treasury Depart-
ment invite comments on the safe harbor
NAE methods described in this notice, sug-
gestions for additional safe harbor NAE
methods, the use of a“self-test”for alter-
native NAE methods, as well as any other
issues that should be addressed in the forth-
coming regulations. Written comments may
be submitted on or before April 23, 2003,
to:
Internal Revenue Service
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20224
Attn: CC:ITA:RU (Notice 2002–12),
Room 5226
Submissions also may be sent electroni-
cally via the Internet to the following e-mail
address:notice.comments@m1.irscounsel.
treas.gov.Comments will be available for
public inspection and copying.
DRAFTING INFORMATION
The principal author of this notice is
Terrance McWhorter of the Office of As-
sociate Chief Counsel (Income Tax and Ac-
counting). For further information regarding
this notice, contact Mr. McWhorter at
202–622–4970 (not a toll-free call).
26 CFR 601.201: Rulings and determination
letters.
(Also Part 1, section 846; 1.846–1.)
Rev. Proc. 2003–17
SECTION 1. PURPOSE
This revenue procedure prescribes the
loss payment patterns and discount fac-
tors for the 2002 determination year. These
factors will be used to compute discounted
unpaid losses under§846 of the Internal
Revenue Code.
SECTION 2. BACKGROUND
.01 Section 846 provides that discounted
unpaid losses must be separately deter-
mined for each accident year of each line
of business by applying an interest rate de-
termined under§846(c) and the appropri-
ate loss payment pattern to the amount of
unpaid losses as measured at the end of the
tax year.
Section 846(d) directs the Secretary to
use the most recent aggregate loss pay-
ment data of property and casualty insur-
ance companies to determine and publish
a loss payment pattern for each line of busi-
ness every five years. This payment pat-
tern is used to discount unpaid losses for
the accident year ending with a determi-
nation year and for each of the four suc-
ceeding accident years.
Section 846(e) allows a taxpayer to make
an election in each determination year to
use its own historical payment pattern in-
stead of the Secretary’s tables. This elec-
tion does not apply to any international
insurance or reinsurance line of business.
Section 846(f)(4) defines the term“line
of business”as a category for the report-
ing of loss payment patterns on the an-
nual statement for fire and casualty
companies approved by the National As-
sociation of Insurance Commissioners
(NAIC), except that the multiple peril lines
shall be treated as a single line of busi-
ness. Section 846(f)(5) states that the term
“multiple peril lines”means the lines of
business relating to farmowners multiple
peril, homeowners multiple peril, commer-
cial multiple peril, ocean marine, aircraft (all
perils) and boiler and machinery.
.02 Pursuant to§846(d), the Secretary
has determined a loss payment pattern for
each property and casualty line of busi-
ness for the 2002 determination year that,
pursuant to§846(d)(1), must be applied
through the 2006 accident year.
.03 The loss payment patterns for the
2002 determination year are based on the
aggregate loss payment information re-
ported on the 2000 annual statements of
property and casualty insurance compa-
nies and compiled by A.M. Best and Co.
The tables are arranged in alphabetical or-
der. Following is an additional explana-
tion of some of the tables and changes to
the tables.
(1)Lines of Business. The lines of busi-
ness for the 2002 determination year are the
same as the lines of business for the 1997
determination year.SeeRev. Proc. 98–11,
section 2.03, 1998–1 C.B. 358.
(2)Format of the Tables.To simplify the
tables, the columns entitled Tax Year pro-
vide the actual tax years, rather than AY+0,
AY+1, and so on.
(3)Accident Years Not Separately Re-
ported on the NAIC Annual Statement. Sec-
tion V of Notice 88–100, 1988–2 C.B. 439,
sets forth a composite method for comput-
ing discounted unpaid losses for accident
years that are not separately reported on the
annual statement. The tables separately pro-
vide discount factors for taxpayers who elect
to use the composite method of section V
of Notice 88–100.SeeRev. Proc. 2002–
74, 2002–51 I.R.B. 980.
2003–6 I.R.B.427February 10, 2003

(4)Comments Requested on Smooth-
ing Data. In some cases, the methodol-
ogy currently used to estimate unpaid losses
and salvage patterns may produce nega-
tive discount factors, discount factors that
exceed one, or large year-to-year differ-
ences in discount factors. (See, for ex-
ample, the unpaid loss discount factors for
Reinsurance C.) Notice 88–100, section IV,
sets forth a methodology to replace such
factors by a positive discount factor. No-
tice 88–100 does not extend this method-
ology to situations with positive, yet small,
discount factors, discount factors in ex-
cess of one, or factors that change substan-
tially from year to year. Comments are
requested as to whether a methodology
should be adopted to smooth the raw pay-
ment data and thus produce a more stable
pattern of discount factors. Comments
should be sent to CC:ITA:RU (Rev. Proc.
2003–17), room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Comments may be
hand delivered between the hours of 8 a.m.
and 4 p.m. to CC:ITA:RU (Rev. Proc.
2003–17), Courier’s Desk, Internal Rev-
enue Service,1111Constitution Avenue,
NW, Washington, DC 20224. In the alter-
native, e-mail comments toNotice.
Comments@irscounsel.treas.gov.
SECTION 3. SCOPE
This revenue procedure applies to any
taxpayer that is required to discount un-
paid losses under§846 for a line of busi-
ness using the discount factors published by
the Secretary.
SECTION 4. TABLES OF DISCOUNT
FACTORS
.01 The following tables present sepa-
rately for each line of business the dis-
count factors under§846 for accident year
2002. All the discount factors presented in
this section were determined using the ap-
plicable interest rate under§846(c) for
2002, 5.71 percent, and by assuming all loss
payments occur in the middle of the cal-
endar year.
.02 If the groupings of individual lines
of business on the annual statement change,
taxpayers must discount unpaid losses on
the resulting line of business in accor-
dance with the discounting patterns that
would have applied to those unpaid losses
based on their classification on the 2002 an-
nual statement.
.03 Tables
Accident and Health
(Other Than Disability Income or Credit Disability Insurance)
Taxpayers that do not use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are
incurred in this line of business in the 2002 accident year and that are outstanding at the end of the 2002 and later tax years.
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount all unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2002 tax year.
Auto Physical Damage
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200289.646889.646810.353210.045397.0259
200399.684510.03770.31550.298694.6349
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years0.15780.15780.153497.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
February 10, 20034282003–6 I.R.B.

Commercial Auto/Truck Liability/Medical
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200228.824428.824471.175663.939589.8335
200354.987126.162645.012940.691390.3990
200472.803917.816827.196124.696390.8082
200585.057212.253314.942813.508290.3992
200691.62766.57048.37247.524189.8680
200794.95143.32395.04864.536389.8537
200897.04532.09382.95472.642689.4349
200998.15741.11211.84261.650089.5481
201098.73700.57961.26301.148390.9194
201199.10700.37000.89300.833593.3331
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.37000.52300.500795.7246
2013 and later years0.37000.15300.148897.2617
Taxpayers that use the composite method of Notice 88–100 should use 96.4013 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Composite
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200240.998540.998559.001551.890187.9471
200365.843924.845434.156129.308185.8065
200477.502311.658322.497718.995084.4309
200584.62217.119815.377912.759482.9722
200690.24555.62349.75457.706279.0017
200792.27802.03257.72206.056678.4322
200894.39742.11955.60264.223275.3807
200995.25260.85524.74743.585175.5182
201096.27921.02663.72082.734373.4885
201196.43230.15313.56772.733076.6061
2003–6 I.R.B.429February 10, 2003

Composite
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.15313.41452.731780.0010
20130.15313.26142.730283.7124
20140.15313.10832.728687.7867
20150.15312.95512.727092.2803
2016 and later years0.15312.80202.725397.2617
Taxpayers that use the composite method of Notice 88–100 should use 88.0794 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Fidelity/Surety
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200238.332838.332861.667256.794092.0976
200358.848520.515641.151538.943794.6349
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years20.575820.575820.012397.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
Financial Guaranty/Mortgage Guaranty
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20024.07234.072395.927788.716992.4831
200340.763936.691659.236156.058094.6349
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years29.618029.618028.807097.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
February 10, 20034302003–6 I.R.B.

International (Composite)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200240.998540.998559.001551.890187.9471
200365.843924.845434.156129.308185.8065
200477.502311.658322.497718.995084.4309
200584.62217.119815.377912.759482.9722
200690.24555.62349.75457.706279.0017
200792.27802.03257.72206.056678.4322
200894.39742.11955.60264.223275.3807
200995.25260.85524.74743.585175.5182
201096.27921.02663.72082.734373.4885
201196.43230.15313.56772.733076.6061
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.15313.41452.731780.0010
20130.15313.26142.730283.7124
20140.15313.10832.728687.7867
20150.15312.95512.727092.2803
2016 and later years0.15312.80202.725397.2617
Taxpayers that use the composite method of Notice 88–100 should use 88.0794 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Medical Malpractice — Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20027.34477.344792.655380.056986.4030
200329.019121.674470.980962.343687.8315
200453.310824.291746.689240.927887.6600
200569.151715.840930.848326.977987.4534
200682.098112.946417.901915.207484.9486
200786.39954.301413.600511.653285.6826
200889.71113.311610.28898.913886.6354
200992.46882.75777.53126.587587.4691
201094.51632.04755.48374.858488.5983
201195.76351.24714.23653.853690.9614
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2003–6 I.R.B.431February 10, 2003

Medical Malpractice—Claims-Made
20121.24712.98942.791493.3767
20131.24711.74221.668595.7688
2014 and later years1.24710.49510.481597.2617
Taxpayers that use the composite method of Notice 88–100 should use 93.3767 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Medical Malpractice—Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20020.83160.831699.168479.304079.9691
20037.45736.625792.542777.020183.2266
200423.557516.100276.442564.864584.8539
200541.006217.448758.993850.628385.8197
200655.583214.577044.416838.531886.7505
200768.941313.358131.058726.997886.9250
200878.20959.268221.790519.010287.2408
200982.87274.663217.127315.301289.3380
201086.31783.445113.682212.632892.3302
201191.08344.76568.91668.454394.8160
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2012 and later years4.76564.15104.037397.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.1845 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Miscellaneous Casualty
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200279.779079.779020.221019.275995.3259
200394.941715.16275.05834.786994.6349
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years2.52922.52922.459997.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
February 10, 20034322003–6 I.R.B.

Multiple Peril Lines
(Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability
(Ocean Marine, Aircraft (All Perils), Boiler and Machinery))
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200259.744559.744540.255536.378590.3691
200381.034721.290218.965316.566187.3498
200487.33256.297812.667511.036987.1282
200591.06593.73348.93417.828687.6268
200695.17814.11224.82194.047783.9442
200795.76050.58244.23953.680086.8035
200897.05391.29332.94612.560486.9067
200997.64410.59032.35592.099789.1265
201098.70371.05961.29631.130287.1862
201198.6217-0.08211.37831.279192.7987
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.52260.85580.814895.2164
2013 and later years0.52260.33320.324097.2617
Taxpayers that use the composite method of Notice 88–100 should use 95.2688 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Other (Including Credit)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200269.172969.172930.827129.303395.0568
200391.216822.04398.78328.312094.6349
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years4.39164.39164.271497.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
2003–6 I.R.B.433February 10, 2003

Other Liability—Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200214.961814.961885.038271.825784.4629
200336.211321.249463.788754.079384.7787
200454.287618.076345.712438.582084.4015
200564.21639.928835.783730.576785.4488
200673.27329.056926.726823.010886.0964
200780.57487.301619.425216.817586.5760
200887.62007.045212.380010.534385.0912
200989.91552.295510.08458.775787.0214
201093.39463.47916.60545.699786.2886
201194.61701.22235.38304.768488.5817
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20121.22234.16073.783990.9440
20131.22232.93832.743293.3586
20141.22231.71601.643195.7504
2015 and later years1.22230.49360.480197.2617
Taxpayers that use the composite method of Notice 88–100 should use 90.9440 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Other Liability—Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200219.113319.113380.886765.867381.4315
200336.443417.330163.556651.810381.5183
200452.164815.721547.835238.604680.7033
200563.238311.073436.761729.423780.0389
200672.07808.839727.922022.015278.8453
200775.90213.824124.097919.340580.2579
200882.93057.028417.069513.218677.4395
200985.14412.213614.855911.697478.7391
201089.30064.156510.69948.091875.6286
201189.98980.689210.01027.845378.3725
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
February 10, 20034342003–6 I.R.B.

Other Liability—Occurrence
20120.68929.32107.584681.3711
20130.68928.63187.309084.6761
20140.68927.94267.017888.3566
20150.68927.25336.709992.5073
2016 and later years0.68926.56416.384497.2617
Taxpayers that use the composite method of Notice 88–100 should use 88.5630 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Private Passenger Auto Liability/Medical
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200243.192643.192656.807452.249991.9773
200372.200829.008227.799225.408591.4000
200484.563212.362515.436814.148891.6566
200591.93167.36848.06847.380991.4792
200695.87293.94134.12713.750190.8651
200797.78041.90752.21962.003090.2423
200898.79571.01531.20431.073589.1398
200999.24910.45350.75090.668689.0445
201099.51950.27030.48050.428889.2424
201199.63530.11590.36470.334291.6449
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.11590.24880.234294.1130
20130.11590.13300.128496.5863
2014 and later years0.11590.01710.016697.2617
Taxpayers that use the composite method of Notice 88–100 should use 95.0993 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Products Liability—Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20026.58046.580493.419675.644180.9723
200326.718320.137973.281759.258580.8639
200443.183416.465256.816645.713480.4579
200543.92090.737556.079147.565484.8185
2003–6 I.R.B.435February 10, 2003

Products Liability—Claims-Made
200654.380610.459745.619439.527286.6457
200778.363023.982421.637017.126779.1545
200882.86434.501317.135713.476578.6460
200968.2184-14.645931.781629.304392.2052
201079.158210.939920.841819.729894.6644
201189.696310.538110.303710.021597.2617
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2012 and later years97.2617
Taxpayers that use the composite method of Notice 88–100 should use 90.3597 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Products Liability—Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20029.41989.419890.580271.851379.3234
200320.584511.164779.415564.475081.1869
200436.780716.196263.219351.504381.4693
200555.597418.816744.402635.098779.0466
200666.623811.026333.376225.766177.1990
200777.263610.639922.736416.297971.6822
200879.18881.925120.811215.249273.2740
200983.68164.492816.318411.500770.4765
201085.55071.869114.449310.235670.8380
201185.72910.178414.270910.636674.5336
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.178414.092511.060578.4854
20130.178413.914111.508782.7124
20140.178413.735711.982487.2355
20150.178413.557312.483292.0772
2016 and later years0.178413.378913.012697.2617
Taxpayers that use the composite method of Notice 88–100 should use 87.5350 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
February 10, 20034362003–6 I.R.B.

Reinsurance A (Nonproportional Assumed Property)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200225.057125.057174.942967.501290.0701
200352.040226.983147.959843.612790.9360
200482.470930.430717.529114.815584.5198
200585.63873.167814.361312.404586.3747
200692.72287.08407.27725.829380.1036
200791.8604-0.86248.13967.048886.5992
200896.50164.64123.49842.679576.5908
200996.1872-0.31433.81283.155782.7657
201097.62061.43332.37941.862278.2609
201197.84190.22142.15811.740980.6694
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20120.22141.93671.612783.2710
20130.22141.71541.477286.1173
20140.22141.49401.334089.2892
20150.22141.27271.182692.9218
2016 and later years0.22141.05131.022597.2617
Taxpayers that use the composite method of Notice 88–100 should use 91.2226 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Reinsurance B (Nonproportional Assumed Liability)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20028.92238.922391.077771.535878.5436
200327.361818.439572.638256.661878.0055
200444.575817.214055.424242.198676.1374
200553.87819.302346.121935.043975.9810
200660.88967.011539.110429.836076.2865
200769.73278.843030.267322.447674.1644
200876.62926.896523.370816.638771.1942
200979.40302.773820.597014.736871.5484
201083.89364.490616.106410.961268.0553
201180.1707-3.722919.829315.414877.7378
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2003–6 I.R.B.437February 10, 2003

Reinsurance B (Nonproportional Assumed Liability)
20121.180518.648715.081280.8701
20131.180517.468214.728684.3167
20141.180516.287714.355988.1394
20151.180515.107213.961892.4186
2016 and later years1.180513.926613.545397.2617
Taxpayers that use the composite method of Notice 88–100 should use 90.3328 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Reinsurance C (Nonproportional Assumed Financial Lines)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200217.119517.119582.880571.662986.4654
200346.659029.539553.341045.383785.0823
200467.713521.054532.286526.327981.5446
200578.137910.424421.862117.113378.2786
200689.734611.596710.26546.167360.0786
200792.12682.39217.87324.060051.5667
200889.7323-2.394510.26776.753765.7759
200990.04600.31379.95406.816768.4827
201094.88674.84075.11332.229043.5925
201186.7041-8.182713.295910.769380.9970
Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20121.427711.86839.916483.5537
20131.427710.44069.014786.3430
20141.42779.01298.061689.4449
20151.42777.58527.054092.9969
2016 and later years1.42776.15755.988997.2617
Taxpayers that use the composite method of Notice 88–100 should use 83.5537 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
Special Property
(Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200262.932062.932037.068035.162794.8599
200388.495025.563111.505010.887794.6349
February 10, 20034382003–6 I.R.B.

Special Property
(Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses that
are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
2004 and later years5.75255.75255.595097.2617
Taxpayers that use the composite method of Notice 88–100 should use 97.2617 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2004 tax year.
Workers’Compensation
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200228.248928.248971.751161.595385.8458
200357.873929.624942.126134.653482.2611
200471.299913.426028.700122.828179.5402
200577.75846.458522.241617.491378.6421
200681.93014.171718.069914.200978.5885
200783.77391.843716.226113.116180.8329
200886.53502.761113.465011.026181.8872
200988.43671.901711.56339.700583.8901
201089.59261.155910.40749.065987.1103
201191.64412.05158.35597.474389.4497
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
that are incurred in this line of business in the 2002 accident year and that are outstanding at the end of the tax year shown.
20122.05156.30455.791991.8701
20132.05154.25304.013494.3668
20142.05152.20162.133496.9035
2015 and later years2.05150.15010.146097.2617
Taxpayers that use the composite method of Notice 88–100 should use 89.5412 percent to discount unpaid losses that are in-
curred in this line of business in 2002 and that are outstanding at the end of the 2012 tax year.
DRAFTING INFORMATION
The principal author of this revenue pro-
cedure is Katherine A. Hossofsky of the Of-
fice of the Associate Chief Counsel
(Financial Institutions & Products). For fur-
ther information regarding this revenue pro-
cedure, contact Ms. Hossofsky at
(202) 622–3577 (not a toll-free call).
26 CFR 601.201: Rulings and determination let-
ters.
(Also Part I, sections 832, 846; 1.832–4, 1.846–1.)
Rev. Proc. 2003–18
SECTION 1. PURPOSE
This revenue procedure prescribes the
salvage discount factors for 2002. These
factors must be used to compute discounted
estimated salvage recoverable under§832
of the Internal Revenue Code.
SECTION 2. BACKGROUND
Section 832(b)(5)(A) requires that all es-
timated salvage recoverable (including that
which cannot be treated as an asset for state
accounting purposes) be taken into ac-
count in computing the deduction for losses
incurred. Under§832(b)(5)(A), paid losses
are reduced by salvage and reinsurance re-
covered during the taxable year. This
amount is adjusted to reflect changes in dis-
counted unpaid losses on nonlife insur-
2003–6 I.R.B.439February 10, 2003

ance contracts and in unpaid losses on life
insurance contracts. An adjustment is then
made to reflect any changes in discounted
estimated salvage recoverable and in rein-
surance recoverable.
Pursuant to§832(b), the amount of es-
timated salvage is determined on a dis-
counted basis in accordance with procedures
established by the Secretary.
SECTION 3. SCOPE
This revenue procedure applies to any
taxpayer that is required to discount esti-
mated salvage recoverable under§832.
SECTION 4. APPLICATION
.01 The following tables present sepa-
rately for each line of business the dis-
count factors under§832 for 2002. All the
discount factors presented in this section
were determined using the applicable in-
terest rate under§846(c) for 2002, which
is 5.71 percent, and by assuming all esti-
mated salvage is recovered in the middle
of the calendar year
.02 Section V of Notice 88–100, 1988–2
C.B. 439, sets forth a composite method for
computing discounted unpaid losses for ac-
cident years that are not separately re-
ported on the annual statement. Rev. Proc.
2002–74, section 3.03, 2002–51 I.R.B. 980,
provides that an insurance company that
elects to use the composite method of No-
tice 88–100 must use the same method to
compute discounted estimated salvage re-
coverable. Accordingly, the tables sepa-
rately provide discount factors for taxpayers
who elect to use the composite method of
section V of Notice 88–100.
.03 These tables must be used by tax-
payers irrespective of whether they elected
to discount unpaid losses using their own
experience under§846(e).
.04 Tables.
Accident and Health (Other Than
DisabilityIncomeorCredit
Disability Insurance)
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
97.2617 percent to discount estimated
salvage recoverable as of the end of
2002 and later taxable years with re-
spect to losses incurred in this line of
business in 2002.
Accident and Health (Other Than
DisabilityIncomeorCredit
Disability Insurance)
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2002 with re-
spect to losses incurred in this line of
business in 2002.
Auto Physical Damage
Tax Year
Discount
Factors
(%)
200295.9613
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
Commercial Auto/Truck
Liability/Medical
Tax Year
Discount
Factors
(%)
200289.1648
200388.8184
200488.5411
200589.1228
200689.7404
200789.0554
200890.5327
200991.8164
201092.1496
201194.6715
Commercial Auto/Truck
Liability/Medical
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2211
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Composite
Tax Year
Discount
Factors
(%)
200289.0851
200387.5364
200486.9084
200586.1903
200684.7791
200784.8602
200884.5391
200984.4628
201084.5889
201186.8329
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201289.1538
201391.5493
201494.0070
201596.4596
2016 and later
years
97.2617
February 10, 20034402003–6 I.R.B.

Composite
Taxpayers that use the composite method
of Notice 88–100 should use 92.5879
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Fidelity/Surety
Tax Year
Discount
Factors
(%)
200292.0133
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
Financial Guaranty/Mortgage
Guaranty
Tax Year
Discount
Factors
(%)
200293.7635
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Financial Guaranty/Mortgage
Guaranty
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
International (Composite)
Tax Year
Discount
Factors
(%)
200289.0851
200387.5364
200486.9084
200586.1903
200684.7791
200784.8602
200884.5391
200984.4628
201084.5889
201186.8329
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201289.1538
201391.5493
201494.0070
201596.4596
2016 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 92.5879
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Medical Malpractice—Claims-Made
Tax Year
Discount
Factors
(%)
200283.3446
Medical Malpractice—Claims-Made
200377.4565
200483.3469
200580.3314
200681.5320
200774.4259
200886.8875
200990.5735
201095.0023
201197.2617
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Medical Malpractice—Occurrence
Tax Year
Discount
Factors
(%)
200278.2595
200379.6832
200484.2125
200586.0904
200670.2129
200782.8072
200889.2934
200993.1674
201095.3914
201197.2617
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2003–6 I.R.B.441February 10, 2003

Medical Malpractice—Occurrence
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.1286
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Miscellaneous Casualty
Tax Year
Discount
Factors
(%)
200295.3528
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
Multiple Peril Lines (Homeowners/
Farmowners, Commercial Multiple
Peril, and Special Liability (Ocean
Marine, Aircraft (All Perils), Boiler
and Machinery))
Tax Year
Discount
Factors
(%)
200290.2539
200388.1069
200489.0426
200588.6765
200688.1493
200789.7100
Multiple Peril Lines (Homeowners/
Farmowners, Commercial Multiple
Peril, and Special Liability (Ocean
Marine, Aircraft (All Perils), Boiler
and Machinery))
200889.7645
200989.9881
201091.9392
201194.4458
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201297.0065
2013 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.0065
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Other (Including Credit)
Tax Year
Discount
Factors
(%)
200295.5983
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Other (Including Credit)
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
Other Liability—Claims-Made
Tax Year
Discount
Factors
(%)
200288.5534
200377.0799
200459.8423
200585.1827
200680.6863
200779.6704
200887.4045
200991.7825
201087.7798
201190.1269
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201292.5413
201394.9916
2014 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 92.5413
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Other Liability—Occurrence
Tax Year
Discount
Factors
(%)
200282.1003
200383.8238
200485.1543
February 10, 20034422003–6 I.R.B.

Other Liability—Occurrence
200581.0240
200685.2626
200788.2873
200888.7248
200991.2567
201092.8723
201195.2829
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Private Passenger Auto
Liability/Medical
Tax Year
Discount
Factors
(%)
200292.6794
200392.4436
200492.1118
200591.1168
200690.8537
200789.5944
200889.5168
200989.5750
201091.0294
201193.4478
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
Private Passenger Auto
Liability/Medical
201295.8417
2013 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 96.2722
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Products Liability—Claims-Made
Tax Year
Discount
Factors
(%)
200283.8918
200383.9617
200485.9812
200580.9402
200675.8992
200783.6008
200889.1426
200994.2722
201012.7896
201194.7448
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Products Liability—Occurrence
Tax Year
Discount
Factors
(%)
200277.1249
200380.2580
200480.9969
200584.1881
200681.0130
200785.2160
200888.9333
200989.8343
201083.2562
201185.4521
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201287.7240
201390.0713
201492.4880
201594.9465
2016 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 89.9396
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Reinsurance A (Nonproportional
Assumed Property)
Tax Year
Discount
Factors
(%)
200283.0276
200379.4487
200484.3983
200588.9304
200689.6909
200791.8095
200893.9748
200995.5166
2003–6 I.R.B.443February 10, 2003

Reinsurance A (Nonproportional
Assumed Property)
201096.2373
201197.2617
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Reinsurance B (Nonproportional
Assumed Liability)
Tax Year
Discount
Factors
(%)
200282.5422
200379.7782
200483.6886
200581.1133
200672.7512
200776.9860
200876.1494
200978.8202
201072.6244
201181.6711
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
201284.1450
201386.8254
Reinsurance B (Nonproportional
Assumed Liability)
201489.7871
201593.1686
2016 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 90.7865
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Reinsurance C (Nonproportional
Assumed Financial Lines)
Tax Year
Discount
Factors
(%)
200282.1001
200382.9712
200487.1724
200584.0362
200687.9032
200779.5172
200883.3178
200991.6271
201093.2736
201195.6650
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2012 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
Special Property (Fire, Allied Lines,
Inland Marine, Earthquake, Glass,
Burglary and Theft)
Tax Year
Discount
Factors
(%)
200292.5352
200394.6349
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
2004 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 97.2617
percent to discount estimated salvage re-
coverable as of the end of 2004 with re-
spect to losses incurred in this line of
business in 2002.
Workers’Compensation
Tax Year
Discount
Factors
(%)
200283.1651
200384.7058
200485.2400
200585.1429
200684.3224
200785.3097
200885.0472
200985.2314
201086.2035
201188.4933
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount esti-
mated salvage recoverable as of the end
of the tax year shown with respect to
losses incurred in this line of business
in 2002.
February 10, 20034442003–6 I.R.B.

Workers’Compensation
201290.8522
201393.2636
201495.6550
2015 and later
years
97.2617
Taxpayers that use the composite method
of Notice 88–100 should use 93.1315
percent to discount estimated salvage re-
coverable as of the end of 2012 with re-
spect to losses incurred in this line of
business in 2002.
DRAFTING INFORMATION
The principal author of this revenue pro-
cedure is Katherine A. Hossofsky of the Of-
fice of the Associate Chief Counsel
(Financial Institutions and Products). For
further information regarding this revenue
procedure, contact Ms. Hossofsky at (202)
622–3477 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part 1,§§263A, 446, 471, 472, 481, 7121;
1.263A–1, 1.446–1, 1.471–2, 1.471–4, 1.472–2,
1.481–1.)
Rev. Proc. 2003–20
SECTION 1. PURPOSE
This revenue procedure provides a safe
harbor method of accounting (the“Core Al-
ternative Valuation”(CAV) method) for re-
manufacturers and rebuilders of motor
vehicle parts (“remanufacturers”) and re-
sellers of remanufactured and rebuilt mo-
tor vehicle parts (“resellers”) that use the
lower of cost or market (LCM) inventory
valuation method to value their inventory
of cores held for remanufacturing or sale.
The CAV method is provided by the Com-
missioner pursuant to his authority under
§446 of the Internal Revenue Code in or-
der to minimize disputes, provide certainty,
and simplify inventory computations. This
revenue procedure also provides a proce-
dure for qualifying remanufacturers and re-
sellers currently using an LCM method to
obtain automatic consent of the Commis-
sioner to change to the CAV method. In ad-
dition, this revenue procedure provides a
procedure for qualifying remanufacturers
and resellers not currently using an LCM
method to obtain automatic consent to
change to an LCM method in conjunc-
tion with a change to the CAV method.
SECTION 2. BACKGROUND
.01In General.
(1) Remanufacturers acquire invento-
ries of used motor vehicle parts (e.g., wiper
motors, engines, transmissions, and alter-
nators for automobiles, trucks, buses, etc.)
for use in remanufacturing. These used parts
are frequently referred to within the re-
manufacturing industry as“cores.”Re-
manufacturers rebuild motor vehicle parts
from cores through use of new and used
component parts and sell the resulting prod-
ucts as remanufactured replacement parts.
Resellers acquire cores in conjunction with
their resale activity and sell the cores to a
remanufacturer or another reseller in the dis-
tribution chain.
(2) Remanufacturers and resellers ac-
quire cores from customers (“customer
cores”) who purchase remanufactured re-
placement parts. To encourage a customer
to return the core, remanufacturers and re-
sellers generally offer the customer a credit
(offset against the purchase price). Re-
manufacturers and resellers also acquire
cores from third-party suppliers of cores
(businesses that specialize in supplying cores
to meet specific needs, referred to within
the industry as“core suppliers”or“core
brokers”) and occasionally acquire cores di-
rectly from other sources.
(3) Controversy exists as to the proper
market valuation of cores under the LCM
method.See Consolidated Manufactur-
ing, Inc. v. Commissioner, 249 F.3d 1231
(10
th
Cir. 2001),rev’g in part, 111 T.C. 1
(1998). In order to reduce controversy and
minimize disputes, the Service has deter-
mined that it is appropriate to provide a safe
harbor procedure for the LCM valuation of
cores in inventory.
.02 Section 471 of the Internal Rev-
enue Code, which governs the treatment of
inventories, provides two tests to which
each inventory must conform: (1) it must
conform as nearly as may be to the best ac-
counting practice in the trade or business;
and (2) it must clearly reflect income. Sec-
tion 1.471–2(c) of the Income Tax Regu-
lations provides that the bases of valuation
most commonly used by business con-
cerns and which meet the requirements of
§471 are (1) cost and (2) cost or market,
whichever is lower. Section 1.471–2(c) also
provides that any goods in an inventory that
are unsalable at normal prices or unus-
able in the normal way because of dam-
age, imperfections, shop wear, changes of
style, odd or broken lots, or other similar
causes, including second-hand goods taken
in exchange, should be valued, if such
goods consist of raw materials held for use
or consumption, upon a reasonable basis
taking into consideration the usability and
condition of the goods, but in no case shall
such value be less than the scrap value.
.03 Section 1.471–3(b) defines the cost
of merchandise purchased since the begin-
ning of the taxable year as the invoice price
less trade or other discounts, except strictly
cash discounts approximating a fair inter-
est rate, which may be deducted, or not, at
the option of the taxpayer, provided the tax-
payer follows a consistent course. To this
net invoice price should be added trans-
portation or other necessary charges in-
curred in acquiring possession of the goods.
In the case of merchandise produced by the
taxpayer,§1.471–3(c) defines cost as (1)
the cost of raw materials and supplies en-
tering into or consumed in connection with
the product, (2) expenditures for direct la-
bor, and (3) indirect production costs in-
cident to, and necessary for, the production
of the particular article, including in such
indirect production costs an appropriate por-
tion of management expenses, but not in-
cluding any cost of selling or return on
capital, whether by way of interest or profit.
See§§1.263A–1 and 1.263A–2 for more
specific rules regarding the treatment of pro-
duction costs.
.04 Section 1.471–4(a) provides that, un-
der ordinary circumstances and for nor-
mal goods in inventory,“market”means the
aggregate of the current bid prices prevail-
ing at the date of the inventory of the ba-
sic elements of cost reflected in inventories
of goods purchased and on hand, goods in
process of manufacture, and finished manu-
factured goods on hand. The basic ele-
ments of cost include direct materials, direct
labor, and indirect costs required to be in-
cluded in inventories by the taxpayer (e.g.,
under§263A and its underlying regula-
tions for taxpayers subject to that section).
For taxpayers to which§263A applies, for
example, the basic elements of cost must
reflect all direct costs and all indirect costs
properly allocable to goods on hand at the
inventory date at the current bid price of
2003–6 I.R.B.445February 10, 2003

those costs, including but not limited to the
cost of purchasing, handling, and storage
activities conducted by the taxpayer, both
prior to and subsequent to acquisition or
production of the goods.
.05 Section 1.471–4(c) provides that if
inventory is valued upon the basis of cost
or market, whichever is lower, the mar-
ket value of each article on hand at the in-
ventory date shall be compared with the
cost of the article, and the lower of such
values shall be taken as the inventory value
of the article.
.06 Section 1.471–2(f) provides deduct-
ing from inventory a reserve for price
changes, or an estimated depreciation in the
value of the inventory, is not in accord with
the regulations underlying§471.
.07 Section 472(b) and§1.472–2re-
quire taxpayers using the last-in, first-out
(LIFO) method to inventory their goods at
cost.
.08 Section 446(e) and§1.446–1(e)(2)(i)
require that, except as otherwise expressly
provided, a taxpayer must secure the con-
sent of the Commissioner before chang-
ing a method of accounting for federal
income tax purposes. Section 1.446–
1(e)(3)(ii) authorizes the Commissioner to
prescribe administrative procedures set-
ting forth the terms and conditions deemed
necessary to permit a taxpayer to obtain
consent to change a method of account-
ing in accordance with§446(e).
SECTION 3. SCOPE
.01Applicability.This revenue proce-
dure applies to remanufacturers and resell-
ers that want to change to the CAV method
described in section 4 of this revenue pro-
cedure to value inventories of cores. For
purposes of this revenue procedure,“cores”
include electrical, mechanical, hydraulic, and
other operating motor vehicle parts, includ-
ing parts of automobiles, trucks, buses, mo-
torcycles, boats, construction equipment,
farm machinery, and other on- and off-
road motorized equipment. The CAV
method applies only to cores held in in-
ventory for remanufacturing or, in the case
of a reseller, held for sale to a remanufac-
turer or another entity in the distribution
chain. The CAV method only applies to
cores valued under the LCM method.
.02Inapplicability.This revenue proce-
dure does not apply to a taxpayer that val-
ues its inventory of cores at cost (including
a taxpayer using the LIFO method) un-
less the taxpayer concurrently changes (un-
der section 6.02 of this revenue procedure)
from cost to the LCM method for its cores
(including labor and overhead related to the
cores in raw materials, work-in-process and
finished goods). A taxpayer that wants to
concurrently change from cost to the LCM
method must: (a) not be otherwise prohib-
ited from using the LCM method; (b) com-
ply with the general rules relating to
inventories under§471 and the regula-
tions thereunder; and (c) in the case of tax-
payers using the LIFO method, use the
LCM method and a permitted method for
identification as determined and defined in
section 10.01(1)(b) of the APPENDIX of
Rev. Proc. 2002–9, 2002–3 I.R.B. 327, 368–
69.
SECTION 4. THE CORE
ALTERNATIVE VALUATION
METHOD
.01In General.
(1) A taxpayer using the CAV method
values its inventory of cores at LCM, de-
termines cost in accordance with section
4.02 of this revenue procedure, and deter-
mines market in accordance with section
4.03 of this revenue procedure.
(2) The CAV method will be a permis-
sible method of accounting provided the
taxpayer follows the rules and computa-
tional methodology described in sections
4.02 through 4.05 of this revenue proce-
dure and, if the taxpayer is changing from
another method to the CAV method, the
provisions of section 6 of this revenue pro-
cedure regarding changes in method of ac-
counting. All computations under the CAV
method, however, are subject to verifica-
tion upon examination of the taxpayer’sin-
come tax returns.
.02Determination of Cost.
(1)In general.Under the CAV method,
the taxpayer is required to use as the cost
of each core in ending inventory the in-
voice price adjusted, as appropriate, for dis-
counts, freight costs, and other direct and
indirect costs properly allocable to the cores
as described in§§1.471–3 and 1.263A–1.
If the core was acquired from a core sup-
plier or broker, the invoice price is the
amount paid to the core supplier or bro-
ker. If the core was acquired from a cus-
tomer, the invoice price is the sum of any
credit allowed to the customer and any
amount paid to the customer.Consolidated
Manufacturing, Inc. v. Commissioner, 249
F.3d 1231 (10th Cir. 2001),aff’d on this is-
sue, 111 T.C. 1 (1998).
(2)Service may redetermine appropri-
ate cost.As a general rule, the taxpayer
must follow the form that the taxpayer used
for the transaction.See, for example,In re
Steen, 509 F.2d 1398, 1402 n.4 (9th Cir.
1975) andCommissioner v. Danielson, 378
F.2d 771, 775 (3d Cir. 1967). If the Ser-
vice determines, however, that the taxpay-
er’s use of the credit amount as the invoice
price does not clearly reflect income (for
example, because the taxpayer artificially
inflated both the price of the remanufac-
tured core and the credit amount solely to
manipulate gross receipts for tax avoid-
ance), the Service may examine the sub-
stance of the transaction to determine the
appropriate cost for a core.See, for ex-
ample,Gregory v. Helvering, 293 U.S. 465,
55 S. Ct. 266, 79 L. Ed. 596 (1935).
.03Determination of Market Value.
(1)In general. Under the CAV method,
the market value under§1.471–4 of each
core in ending inventory is the“allow-
able supplier price”adjusted, as appropri-
ate, for other direct and indirect costs
properly allocable to the core as described
in§§1.471–4 and 1.263A–1. The allow-
able supplier price will be considered to be
the replacement cost for purposes of
§§1.471–4 and 1.263A–1.
(2)Allowable supplier price.For pur-
poses of this revenue procedure the“al-
lowable supplier price”is the amount the
taxpayer would pay in an arm’s length
transaction to acquire a particular core from
a core supplier or core broker, plus the re-
lated transportation cost that would be in-
curred to acquire possession of the core
from the core broker or supplier at year-
end. If the taxpayer has purchased a par-
ticular type of core from several core
suppliers or core brokers during the tax year,
the allowable supplier price for that core
type will be deemed to be the weighted-
average price, including transportation cost,
the taxpayer would have to pay in an arm’s
length transaction to acquire the particu-
lar core type at year-end from the core sup-
pliers or core brokers from whom the cores
were purchased during the tax year. If the
taxpayer has not purchased a particular core
type from a core supplier or core broker
during the tax year, the taxpayer must iden-
tify its largest (in dollar terms) supplier of
cores during the current tax year that also
sells the particular core type in the ordi-
February 10, 20034462003–6 I.R.B.

nary course of its business; the allowable
supplier price will be the arm’s length price
from that supplier for the core type at year-
end plus the transportation cost that would
be incurred to acquire the core type from
that supplier. If none of the taxpayer’s sup-
pliers sell the particular core type, the tax-
payer must reasonably determine the
allowable supplier price based on the arm’s
length price for the core type at year-end,
plus the transportation cost, in the geo-
graphical area or market in which the tax-
payer regularly participates. In any case, no
further adjustments will be allowed in de-
termination of allowable supplier price.
(3)Example of allowable supplier price
calculation using weighted-average price.
Taxpayer, a remanufacturer, had 4 units of
Part X customer cores in inventory at year-
end. Taxpayer acquired these customer cores
from customers in transactions in which tax-
payer sold to the customers remanufac-
tured parts and received cores from the
customers in exchange for credits toward
the purchase price of the remanufactured
parts. During the tax year, Taxpayer pur-
chased 8 units of Part X cores from sup-
pliers (2 units of Part X from Core Supplier
A and 6 units of Part X from Core Sup-
plier B). Therefore, Taxpayer purchased
25% (2 of 8 units) of the total number of
Part X acquired for the year from Core Sup-
plier A and 75% (6 of 8 units) of the to-
tal number of Part X acquired for the year
from Core Supplier B. At the end of the
taxable year, the price Taxpayer would have
to pay in an arm’s length transaction to ac-
quire Part X, including transportation cost,
was $20 from Core Supplier A and $16
from Core Supplier B. Taxpayer would de-
termine the allowable supplier price for Part
X customer cores under the CAV method
as follows:
# of Units
Purchased
During Year
% of Total Units
Purchased
During Year
End of Year
Price
Core Supplier A225%$20
Core Supplier B6
75%$16
Total8
CAV Core Supplier Price for Part X Customer Cores = (25% x $20) + (75% x 16) = $17.
.04Comparison of Cost and Market.Un-
der the CAV method, the market value of
each core in ending inventory, as deter-
mined under section 4.03 of this revenue
procedure, shall be compared with the cost
of each core in ending inventory, as deter-
mined under section 4.02 of this revenue
procedure, and the lower of such values
shall be the inventory value of the core.
This analysis must be performed on a part-
by-part basis.
.05Write-down of Defective Cores. Un-
der the CAV method, a taxpayer may not
reduce the value of a defective core un-
der§1.471–2(c) until the taxpayer discov-
ers that the core is subnormal and scraps
the core or offers the core for sale at abona
fideselling price that is less than cost. In
no case may a taxpayer value a core at less
than the scrap value. A taxpayer may not
reduce the value of cores based on antici-
pated defect percentages or historical de-
fect experience rates. If a taxpayer complies
with the requirements of this revenue pro-
cedure, the Service will not disallow a
write-down of a defective core in the year
it is scrapped on the grounds that the de-
cline in the value of the core actually oc-
curred in a preceding taxable year.
SECTION 5. AUDIT PROTECTION
FOR TAXPAYERS CURRENTLY
USING THE SAFE HARBOR
METHOD
If a taxpayer within the scope of this rev-
enue procedure was consistently using the
CAV method provided in section 4 of this
revenue procedure before February 10,
2003, the taxpayer’s use of the CAV method
will not be raised by the Service as an is-
sue in a taxable year that ends before Feb-
ruary 10, 2003. Moreover, if such taxpayer’s
use of the CAV method has already been
raised as an issue in examination, appeals,
or before the Tax Court in a taxable year
that ends before February 10, 2003, the is-
sue will not be further pursued by the Ser-
vice.
SECTION 6. CHANGES IN METHOD
OF ACCOUNTING
.01In General. A change in the treat-
ment of customer cores in inventory to the
CAV method provided by this revenue pro-
cedure is a change in method of account-
ing to which the provisions of§§446 and
481 and the regulations thereunder apply.
Therefore, a taxpayer within the scope of
this revenue procedure that wishes to
change to the CAV method for a taxable
year ending on or after December 31, 2002,
must file a Form 3115,Application for
Change in Accounting Method.
.02Automatic Change for Taxpayers
Within the Scope of this Revenue Proce-
dure.
(1)Automatic change to the CAV
method.A taxpayer within the scope of this
revenue procedure that wants to change to
the CAV method must follow the auto-
matic change in accounting method provi-
sions of Rev. Proc. 2002–9, as modified by
Rev. Proc. 2002–19, 2002–13 I.R.B. 696,
Announcement 2002–17, 2002–8 I.R.B.
561, and Rev. Proc. 2002–54, 2002–35
I.R.B.432,withthefollowing
modifications:
(a) The scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply to a tax-
payer that wants to change to the CAV
method for its first taxable year ending on
or after December 31, 2002, provided the
taxpayer’s method of accounting for cores
is not an issue under consideration in ex-
amination (within the meaning of section
3.09 of Rev. Proc. 2002–9) at the time the
Form 3115 is filed with the national of-
fice;
2003–6 I.R.B.447February 10, 2003

(b) In lieu of the label required by sec-
tion 6.02(4) of Rev. Proc. 2002–9, taxpay-
ers are instructed to write“Filed under Rev.
Proc. 2003–20”at the top of the form; and
(c) Taxpayers making concurrent changes
under subsections (2) or (3) of this sec-
tion should include the concurrent change
with the change to the CAV method in a
single application.
(2)Change from cost to LCM. An au-
tomatic change in method of accounting to
the CAV method under this revenue pro-
cedure also includes, where applicable, a
concurrent change from the cost method to
the LCM method.
(3)Change from LIFO.An automatic
change in method of accounting to the CAV
method under this revenue procedure also
includes a concurrent change from the LIFO
method to a permitted method for identi-
fication as determined and defined in sec-
tion 10.01(1)(b) of the APPENDIX of Rev.
Proc. 2002–9. A taxpayer that desires to dis-
continue LIFO to use the CAV method must
make a concurrent change from its cost
method to the LCM method.
SECTION 7. RECORD KEEPING
Section 6001 provides that every per-
son liable for any tax imposed by the Code,
or for the collection thereof, must keep such
records, render such statements, make such
returns, and comply with such rules and
regulations as the Secretary may from time
to time prescribe. The books or records re-
quired by§6001 must be kept at all times
available for inspection by authorized in-
ternal revenue officers or employees, and
must be retained so long as the contents
thereof may become material in the ad-
ministration of any internal revenue law.
§1.6001–1(e). In order to satisfy the record
keeping requirements of§6001 and the
regulations thereunder, a taxpayer that uses
the CAV method should maintain records
supporting all aspects of its inventory valu-
ation including but not limited to cost of
supplier cores.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and am-
plified to include this automatic change in
section 9 of the APPENDIX.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decem-
ber 31, 2002.
SECTION 10. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Willie E. Armstrong, Jr. and
W. Thomas McElroy, Jr. of the Office of the
Associate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue procedure, contact
Mr. Armstrong or Mr. McElroy at (202)
622–4970 (not a toll free-call).
26 CFR 601.602: Forms and instructions.
(Also, Part 1, section 6033, 1.6033–2.)
Rev. Proc. 2003–21
SECTION 1. PURPOSE
This revenue procedure supplements
Rev. Proc. 83–23, 1983–1 C.B. 687, by re-
lieving certain United States possession or-
ganizations (other than private foundations)
from the requirement of having to file an
annual information return on Form 990,Re-
turn of Organization Exempt From Income
Ta x.
SECTION 2. BACKGROUND
.01 Section 6033(a)(1) of the Internal
Revenue Code states that, with certain ex-
ceptions, every organization exempt from
taxation under section 501(a) shall file an
annual information return.
.02 Section 6033(a)(2)(B) of the Code
provides that the Secretary may relieve any
organization from the requirement to file a
return if the Secretary determines that such
filing is not necessary to the efficient ad-
ministration of the internal revenue laws.
Section 1.6033–2(g)(6) of the Income Tax
Regulations delegates this authority to the
Commissioner.
.03 Rev. Proc. 83–23, 1983–1 C.B. 687,
lists certain classes or groups of organiza-
tions described in section 501(c) of the
Code and exempt from tax under section
501(a) that are not required to file an an-
nual information return on Form 990. The
list of organizations that are not required to
file an annual information return includes,
for tax years ending on or after Decem-
ber 31, 1982, any organization (other than
a private foundation) that normally has an-
nual gross receipts of not more than
$25,000. Rev. Proc. 94–17, 1994–1 C.B.
579, relieves certain foreign organizations
(other than private foundations) from the re-
quirement to file an annual return on Form
990. However, neither revenue procedure
addresses organizations formed in United
States possessions. Further, these revenue
procedures do not distinguish between re-
ceipts from sources within the United States
and from sources within United States pos-
sessions.
.04 Sections 861 through 865 of the
Code and the regulations thereunder de-
scribe what types of income will be treated
as income from sources within the United
States.
.05 Section 7701(a)(9) of the Code de-
fines“United States”when used in a geo-
graphical sense as only the States and the
District of Columbia.
.06 Section 7701(a)(30) of the Code de-
fines“United States person”as a citizen or
resident of the United States, a domestic
partnership, a domestic corporation, any es-
tate that is not a foreign estate (within the
meaning of section 7701(a)(31) of the
Code), or any trust if“(i) a court within the
United States is able to exercise primary su-
pervision over the administration of the
trust, and (ii) one or more United States per-
sons have the authority to control all sub-
stantial decisions of the trust.”
.07 For purposes of this revenue proce-
dure, a“United States possession organi-
zation”is any organization created or
organized in a possession of the United
States.
.08 A number of organizations formed
in United States possessions have asked the
Service for relief from filing Form 990
similar to the relief offered to foreign or-
ganizations. Because they do not have more
than $25,000 in receipts from United States
sources and no significant activity in the
United States, the organizations believe the
filing serves no useful purpose for tax ad-
ministration but imposes a significant bur-
den on the affected organizations.
SECTION 3. SCOPE
This revenue procedure applies to United
States possession organizations exempt un-
der section 501(a) of the Code (other than
private foundations) that normally do not
have more than $25,000 in annual gross re-
February 10, 20034482003–6 I.R.B.

ceipts from sources within the United States
and have no significant activity in the
United States. For purposes of the preced-
ing sentence: (i) the tests set forth in sec-
tion 5 of Revenue Procedure 83–23 apply
to determine whether the annual gross re-
ceipts of an organization are not normally
more than $25,000; (ii) an organization’s
gifts, grants, contributions and member-
ship fees are considered to be from sources
within the United States only if they are re-
ceived directly or indirectly from a United
States person, as defined in section
7701(a)(30) of the Code; for purposes of
this provision, amounts received from in-
dividuals who arebona fideresidents of a
United States possession will not be con-
sidered to be from a United States per-
son; and (iii) the source of an organization’s
other gross receipts is determined by ap-
plying rules provided in sections 861
through 865 of the Code and the regula-
tions thereunder (relating to the source of
taxable income).
SECTION 4. PROCEDURE
.01 A United States possession organi-
zation (other than a private foundation) oth-
erwise required to file Form 990 will be
relieved from the filing requirement for any
year in which it meets the following
conditions:
(1) it normally does not receive more
than $25,000 in gross receipts annually, as
defined in section 5 of Rev. Proc. 83–23,
from: (i) gifts, grants, contributions and
membership fees received directly or in-
directly from a United States person as de-
fined in section 7701(a)(30) of the Code;
for purposes of this provision a United
States person does not include individu-
als who arebona fideresidents of a United
States possession; and (ii) other gross re-
ceipts from sources in the United States as
determined under rules provided in sec-
tions 861 through 865 of the Code and the
regulations thereunder; and
(2) it has no significant activity in the
United States, as“United States”is de-
fined in section 7701(a)(9) of the Code. For
these purposes, the term“activity”includes
lobbying and political activity and the op-
eration of a trade or business, but does not
include investment activity.
.02 If at any time an organization ceases
to meet one or both of the conditions de-
scribed in section 4.01, the organization is
required to file the annual information re-
turn for the year in which it first ceased to
qualify for relief under this procedure and
for all subsequent years in which the or-
ganization does not qualify.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 83–23 is hereby supple-
mented.
SECTION 6. EFFECTIVE DATE
This revenue procedure applies for tax
years ending on or after December 31,
2002.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue pro-
cedure is Mary Jo Salins of Exempt Orga-
nizations Rulings and Agreements. For
further information regarding this revenue
procedure, contact Ms. Salins at (202) 283–
9453 (not a toll-free call).
2003–6 I.R.B.449February 10, 2003

Part IV. Items of General Interest
Reductions of Accruals and
Allocations Because of the
Attainment of any Age;
Application of
Nondiscrimination
Cross-Testing Rules to Cash
Balance Plans; Hearing
Announcement 2003–6
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Change in date and location for
public hearing on proposed rulemaking.
SUMMARY: This document provides no-
tice of a change of date and location for the
public hearing on proposed regulations
(REG–209500–86;REG–164464–02,
2003–2 I.R.B. 262) under sections 401 and
411 regarding the requirements that accru-
als or allocations under certain retirement
plans not cease or be reduced because of
the attainment of any age.
DATES: The public hearing is being held
on Wednesday, April 9, 2003, at 10 a.m.
Outlines of oral comment must be received
by Thursday, March 13, 2003.
ADDRESSES: The public hearing is be-
ing held in the auditorium, Internal Rev-
enue Building,1111Constitution Avenue,
NW, Washington, DC. Send submissions to:
CC:PA:RU (REG–209500–86 and REG–
164464–02), room 5226, Internal Rev-
enue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Submis-
sions may be hand delivered between the
hours of 8 a.m. and 4 p.m. to: CC:PA:RU
(REG–209500–86 and REG–164464–02),
Courier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, DC. Alternatively, taxpayers may sub-
mit outlines of oral comment electronically
directly to the IRS Internet site at
www.irs.gov/regs.
FORFURTHERINFORMATION:
Concerningtheregulations,Linda
Marshall (202) 622–6090; concerning sub-
missions, Sonya M. Cruse (202) 622–7180
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
A notice of proposed rulemaking and no-
tice of public hearing, appearing in theFed-
eral Registeron Wednesday, December 11,
2002 (67 FR 76123), announced that a pub-
lic hearing on proposed regulations relat-
ing to the requirements that accruals or
allocations under certain retirement plans
not cease or be reduced because of the at-
tainment of any age would be held on
Thursday, April 10, 2003, in room 4718, In-
ternal Revenue Building,1111Constitu-
tion Avenue, NW, Washington, DC.
Subsequently, the date and location of the
public hearing has been changed to Wednes-
day, April 9, 2003, in the auditorium. Out-
lines of oral comment must be received by
Thursday, March 13, 2003.
Cynthia E. Grigsby,
Chief Regulations Unit,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on January 16,
2003, 8:45 a.m., and published in the issue of the Federal Reg-
ister for January 17, 2003, 68 F.R. 2466)
Information Reporting
Relating to Acquisitions of
Control and Substantial
Changes in Capital Structure
Announcement 2003–7
For transactions occurring in 2002, cor-
porations and brokers shall furnish a let-
ter in lieu of Form 1099–CAP.
SECTION 1. BACKGROUND
On November 18, 2002, the Internal
Revenue Service issued temporary regula-
tions under section 6043(c) and 6045 (T.D.
9022, 2002–48 I.R.B. 909 [67 FR 69468]).
These regulations require information re-
porting if a domestic corporation under-
goes an acquisition of control or a
substantial change in capital structure af-
ter December 31, 2001, and gain (if any)
is required to be recognized due to the ap-
plication of section 367(a) as a result of the
transaction. In such case, the regulations re-
quire the corporation to file Form 8806 (or
interim statement) describing the transac-
tion to the Service. In addition, the regu-
lations require the corporation to file Form
1099–CAP with the Service with respect to
each shareholder of record that is not an ex-
empt recipient and to furnish the Form
1099–CAP to each such shareholder. The
regulations also require a broker, that holds
stock in the corporation on behalf of ac-
tual owners, to file Form 1099–CAP with
the Service with respect to each actual
owner and to furnish Form 1099–CAP to
each such owner. For transactions occur-
ring in 2002, corporations must furnish
Form 1099–CAP to shareholders on or be-
fore January 31, 2003, and brokers must
furnish Form 1099–CAP to actual owners
on or before February 28, 2003.
SECTION 2. PENALTY WAIVER
The Service recognizes that sufficient
time is necessary for affected corpora-
tions and brokers to establish systems
needed to capture and report the informa-
tion required by the temporary regulations.
Therefore, for transactions occurring in
2002, the Service will not impose penal-
ties on corporations and brokers that com-
ply with the requirements in the transition
rules below.
SECTION 3. TRANSITION RULES
FOR CORPORATIONS FOR
TRANSACTIONS OCCURRING IN
2002
.01 A corporation that undergoes an ac-
quisition of control or a substantial change
in capital structure (as defined in section
1.6043–4T(c) and (d), respectively) dur-
ing 2002 for which gain (if any) is re-
quired to be recognized due to the
application of section 367(a) will satisfy the
requirement to furnish Form 1099–CAP to
each shareholder of record that is not an ex-
empt recipient (as defined in section
1.6043–4T(b)(6)) by instead furnishing a let-
ter to such shareholder that contains the fol-
lowing language:
On [date], you exchanged shares in
[name of corporation] for new shares
[and cash and other property] in a trans-
action that may be subject to United
States federal income tax due to the ap-
plication of section 367(a) of the Inter-
nal Revenue Code. Depending on your
February 10, 20034502003–6 I.R.B.

individual circumstances, you may be re-
quired to report any gain from the ex-
change on your federal income tax
return. You had gain from the exchange
if [the cash and] the fair market value
on [the date of the exchange] of the new
shares [and any other property] you re-
ceived exceeded your basis in the shares
of [name of corporation] that you gave
up in the exchange. You are not permit-
ted to claim a loss on your tax return
with respect to the exchange.
The legend“Important Tax Return Docu-
ment Enclosed”must appear in a bold and
conspicuous manner on the outside of the
envelope containing the letter. The letter
must be furnished to the shareholder on or
before February 15, 2003.
.02 The corporation is required to file an
interim statement with the Service in ac-
cordance with section 1.6043–4T(a).
.03 Upon inquiry by a shareholder of
record on the date of the transaction (in-
cluding any clearing organization or bro-
ker), the corporation must identify itself as
a corporation described in section 3.01 of
this announcement.
.04 For transactions occurring in 2002,
provided the requirements of this section are
satisfied, the corporation is not required to
file Form 1099–CAP with the Service with
respect to its shareholders, or Form 1096
transmitting Form 1099–CAP. In addition,
the corporation is not required to furnish
Form 1099–CAP to any of its sharehold-
ers.
SECTION 4. TRANSITION RULES
FOR BROKERS FOR
TRANSACTIONS OCCURRING IN
2002
.01 A broker that holds shares in a cor-
poration that the broker reasonably be-
lieves, based on readily available
information (including, for example, infor-
mation from a clearing organization), has
engaged in a transaction described in sec-
tion 3.01 of this announcement must pro-
vide a letter to each actual owner of such
shares that is not an exempt recipient (as
defined in section 1.6043–4T(b)(6)) con-
taining the language set forth in section 3.01
of this announcement. A broker that fur-
nishes this letter to the actual owner sat-
isfies the reporting requirements of section
1.6045–3T. The legend“Important Tax Re-
turn Document Enclosed”must appear in
a bold and conspicuous manner on the out-
side of the envelope containing the letter.
The letter must be furnished to the actual
owner on or before March 15, 2003.
.02 The broker must satisfy any other re-
porting obligations the broker may have
with respect to the transaction. For ex-
ample, the broker may be required under
section 1.6045–1 of the regulations to re-
port cash proceeds from the transaction on
Form 1099–B.
.03 The broker is not required to send
a letter under section 4.01 of this announce-
ment to the actual owner if the broker fur-
nishes Form 1099–B to the actual owner
showing the amount of any cash and the fair
market value as of the date of the transac-
tion of the new shares and of any other
property received by the actual owner in the
transaction.
.04 For transactions occurring in 2002,
provided the requirements of this section are
satisfied, the broker is not required to file
Form 1099–CAP with the Service with re-
spect to the actual owners, or Form 1096
transmitting Form 1099–CAP. In addition,
the broker is not required to furnish Form
1099–CAP to the actual owners of such
shares.
SECTION 5. DRAFTING
INFORMATION
For further information regarding this an-
nouncement, contact Nancy Rose of the Of-
fice of the Associate Chief Counsel
(Procedure & Administration), Adminis-
trative Provisions and Judicial Practice Di-
vision, at (202) 622–4910 (not toll-free call).
Agent for Consolidated Group;
Correction
Announcement 2003–8
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains cor-
rections to final regulations (T.D. 9002,
2002–29 I.R.B. 120 [67 FR 43538]) that
were published in theFederal Registeron
Friday, June 28, 2002, regarding the agent
for subsidiaries of an affiliated group that
files a consolidated return.
DATES: This correction is effective June
28, 2002.
FORFURTHERINFORMATION
CONTACT: Gerald B. Fleming, (202) 622–
7770, or George R. Johnson, (202) 622–
7930 (not a toll-free number).
SUPPLEMENTARY INFROMATION:
Background
The final regulations that are the sub-
ject of these corrections are under sec-
tions 1502 and 6402(j) of the Internal
Revenue Code.
Need for Correction
As published, the final regulations con-
tain errors that may prove to be mislead-
ing and are in need of clarification.
Correction of Publication
Accordingly, the publication of the fi-
nal regulations (T.D. 9002), that were the
subject of FR Doc. 02–16399, is corrected
as follows:
§1.1502–77T [Corrected]
1. On page 43544, column 3,§1.1502–
77T [Removed], line 7, the language“year
(or agent designated under”is corrected to
read“year (or substitute agent designated
under”.
§602.101 [Corrected]
2. On page 43545, column 1, the amen-
datory language for paragraph 12 and
§602.101(b) is corrected to read as follows:
12. Section 602.101(b) is amended by
removing the entries“1.1502–77..............
1545–0123”and“1.1502–77T............ 1545–
1046”and adding new entries for
§§1.1502–77 and 1.1502–77A in numeri-
cal order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
2003–6 I.R.B.451February 10, 2003

CFR part or section where
identified and described
Current OMB
control No.
*****
1.1502–77................................................................................................................................................................ 1545–1699
1.1502–77A............................................................................................................................................................. 1545–0123
1545–1046
*****
Cynthia E. Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on December 18,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 19, 2002, 67 F.R. 77678)
February 10, 20034522003–6 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F. R .—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2003–6 I.R.B.iFebruary 10, 2003

Numerical Finding List
1
Bulletins 2003–1 through 2003–5
Announcements:
2003–1, 2003–2 I.R.B.281
2003–2, 2003–3 I.R.B.301
2003–3, 2003–4 I.R.B.361
2003–4, 2003–5 I.R.B.396
2003–5, 2003–5 I.R.B.397
Notices:
2003–1, 2003–2 I.R.B.257
2003–2, 2003–2 I.R.B.257
2003–3, 2003–2 I.R.B.258
2003–4, 2003–3 I.R.B.294
2003–5, 2003–3 I.R.B.294
2003–6, 2003–3 I.R.B.298
2003–7, 2003–4 I.R.B.310
2003–8, 2003–4 I.R.B.310
2003–9, 2003–5 I.R.B.369
2003–10, 2003–5 I.R.B.369
Proposed Regulations:
REG–209500–86, 2003–2 I.R.B.262
REG–125638–01, 2003–5 I.R.B.373
REG–151043–02, 2003–3 I.R.B.300
REG–164464–02, 2003–2 I.R.B.262
Revenue Procedures:
2003–1, 2003–1, I.R.B.1
2003–2, 2003–1, I.R.B.76
2003–3, 2003–1, I.R.B.113
2003–4, 2003–1, I.R.B.123
2003–5, 2003–1, I.R.B.163
2003–6, 2003–1, I.R.B.191
2003–7, 2003–1, I.R.B.233
2003–8, 2003–1, I.R.B.236
2003–10, 2003–2 I.R.B.259
2003–11, 2003–4 I.R.B.311
2003–12, 2003–4 I.R.B.316
2003–13, 2003–4 I.R.B.317
2003–14, 2003–4 I.R.B.319
2003–15, 2003–4 I.R.B.321
2003–16, 2003–4 I.R.B.359
2003–19, 2003–5 I.R.B.371
Revenue Rulings:
2003–1, 2003–3 I.R.B.291
2003–2, 2003–2 I.R.B.251
2003–3, 2003–3 I.R.B.252
2003–4, 2003–4 I.R.B.253
2003–5, 2003–5 I.R.B.254
2003–6, 2003–3 I.R.B.286
2003–7, 2003–5 I.R.B.363
2003–8, 2003–3 I.R.B.290
2003–9, 2003–4 I.R.B.303
2003–10, 2003–3 I.R.B.288
Revenue Rulings—Continued:
2003–11, 2003–3 I.R.B.285
2003–12, 2003–3 I.R.B.283
2003–13, 2003–4 I.R.B.305
2003–14, 2003–4 I.R.B.302
2003–15, 2003–4 I.R.B.302
Treasury Decisions:
9024, 2003–5 I.R.B.365
9025, 2003–5 I.R.B.362
9026, 2003–5 I.R.B.366
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–26 through 2002–52 is
in Internal Revenue Bulletin 2003–1, dated January 6, 2003.
February 10, 2003ii2003–6 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2003–1 through 2003–5
Notices:
97–19
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2001–46
Modified by
Notice 2003–6, 2003–3 I.R.B.298
2001–69
Modified and superseded by
Notice 2003–1, 2003–2 I.R.B.257
2002–27
Clarified by
Notice 2003–3, 2003–2 I.R.B.258
2002–46
Modified by
Notice 2003–10, 2003–5 I.R.B.369
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
93–38
Obsoleted by
Rev. Proc. 2003–15, 2003–4 I.R.B.321
2002–1
Superseded by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–2
Superseded by
Rev. Proc. 2003–2, 2003–1 I.R.B.76
2002–3
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–4
Superseded by
Rev. Proc. 2003–4, 2003–1 I.R.B.123
2002–5
Superseded by
Rev. Proc. 2003–5, 2003–1 I.R.B.163
2002–6
Superseded by
Rev. Proc. 2003–6, 2003–1 I.R.B.191
2002–7
Superseded by
Rev. Proc. 2003–7, 2003–1 I.R.B.233
2002–8
Superseded by
Rev. Proc. 2003–8, 2003–1 I.R.B.236
2002–9
Modified and amplified by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
Revenue Procedures—Continued:
2002–22
Modified by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–29
Modified by
Rev. Proc. 2003–10, 2003–2 I.R.B.259
2002–52
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–67
Supplemented by
Ann. 2003–3, 2003–4 I.R.B.361
2002–75
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2003–3
Amplified by
Rev. Proc. 2003–14, 2003–4 I.R.B.319
2003–7
Corrected by
Ann. 2003–4, 2003–5 I.R.B396
Revenue Rulings:
53–131
Modified by
Rev. Rul. 2003–12, 2003–3 I.R.B.283
65–190
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
69–372
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
2
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2002–26 through 2002–52 is in Internal Revenue
Bulletin 2003–1, dated January 6, 2003.
2003–6 I.R.B. iii

*U.S. Government Printing Office: 2003—496-919/60069
February 10, 2003