Internal Revenue Bulletin 2003-33 (PDF rendition): IRS Revenue Rulings

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.

Bulletin No. 2003-33
August 18, 2003
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2003–72, page 346.
Determination of a child’s specific age.Achildattainsanage
on his or her birthday for purposes of Code sections 21 (child
and dependent care credit), 23 (adoption credit), 24 (child tax
credit), 32 (earned income credit), 129 (excludable dependent
care benefits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (dependency
exemptions).
Rev. Rul. 2003–76, page 355.
Exchange of a portion of annuity cont
ract.An exchange of
a portion of an annuity contract int
o a new annuity contract is
treated as a tax-free exchange unde
r section 1035 of the Code.
Investment in the contract and bas
is are allocated according to
cash value immediately prior to t
he exchange using the rules
of sections 72 and 1031.
Rev. Rul. 2003–90, page 353.
Accrual of liability for California franchise tax.This ruling
holds that, for federal income tax purposes, a taxpayer that
uses an accrual method of accounting incurs a liability for Cal-
ifornia franchise tax in the taxable year following the taxable
year in which the tax is incurred under the California Revenue
and Tax Code. Rev. Rul. 79–410 amplified.
Rev. Rul. 2003–91, page 347.
Investor control doctrine.This ruling presents guidance on
the investor control doctrine by presenting a factual scenario
in which a variable contract holder does not have control over
segregated account assets sufficient to be deemed the owner
of the assets. In this manner, this ruling presents a „safe har-
bor‰ from which taxpayers may operate.
Rev. Rul. 2003–92, page 350.
Variable contract holder.This ruling holds that a variable con-
tract holder is the owner of interests in a nonregistered part-
nership where interests in the nonregistered partnership are not
available exclusively through the purchase of a life insurance or
annuity contract. Rev. Rul. 81–225 clarified and amplified.
Rev. Rul. 2003–93, page 346.
Low-income housing credit; satisfactory bond; “bond fac-
tor” amounts for the period July through September 2003.
This ruling announces the monthly bond factor amounts to be
used by taxpayers who dispose of qualified low-income build-
ings or interests therein during the period July through Septem-
ber 2003.
Rev. Rul. 2003–94, page 357.
Federal rates; adjusted federal rate
s; adjusted federal long-
term rate and the long-term exempt ra
te.For purposes of
sections 382, 1274, 1288, and other
sections of the Code,
tables set forth the rates for Au
gust 2003.
Rev. Rul. 2003–95, page 358.
Life insurance contracts; distributions made in connection
with a change in benefits.This ruling describes the rules of
section 7702(f)(7) of the Code regarding the tax treatment of
a cash distribution made in connection with a reduction in the
benefits of a life insurance contract.
REG–131997–02, page 366.
Proposed regulations under section 42 of the Code concern-
ing the low-income housing tax credit make amendments to
existing regulations to reflect statutory changes made by the
Community Renewal Tax Relief Act of 2000. A public hearing
is scheduled for September 23, 2003.
(Continued on the next page)
Anno
uncements of Disbarments and Suspensions begin on page 372.
Finding Lists begin on page ii.

Notice 2003–51, page 361.
This notice accompanies Rev. Rul. 2003–76. The notice re-
quests comments on possible additional guidance prescribing
the tax treatment of partial exchanges of annuity contracts and
also provides interim guidance.
Notice 2003–54, page 363.
This notice advises taxpayers and their representatives about
a tax shelter that uses a common trust fund (CTF) to invest in
offsetting gain and loss positions in foreign currencies for the
purpose of creating losses for a high net worth taxpayer and
notifies the taxpayers and their representatives that the claimed
tax benefits purportedly generated by these transactions are
not allowable for federal income tax purposes. The notice also
states that this transaction is a „listed transaction‰ and warns of
the potential penalties that may be imposed if taxpayers claim
losses from such a transaction.
Rev. Proc. 2003–66, page 364.
Rents paid to a real estate investment trust (REIT) by a jo
int
venture partnership that includes a taxable REIT s
ubsidiary
(TRS) of the REIT.This procedure provides condit
ions under
which payments to a REIT from a joint venture betw
een a TRS
and an unrelated third party for space at a prope
rty owned
by the REIT will be treated as rents from real pr
operty under
section 856(d) of the Code.
EXEMPT ORGANIZATIONS
Notice 2003–53, page 362.
This notice provides modifications to the reporting require-
ments for distributions from Coverdell Education Savings
Accounts (CESAs) for calendar years after 2002.
ADMINISTRATIVE
Notice 2003–53, page 362.
This notice provides modifications to the reporting require-
ments for distributions from Coverdell Education Savings
Accounts (CESAs) for calendar years after 2002.
August 18, 20032003-33 I.R.B.

The IRS Mission
Provide AmericaÊs 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
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin 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 un
iform application of
the tax laws, including all rulings that s
upersede, revoke, mod-
ify, or amend any of those previously pub
lished in the Bulletin.
All published rulings apply retroacti
vely unless otherwise indi-
cated. Procedures relating solely
to matters of internal man-
agement are not published; howeve
r, statements of internal
practices and procedures that af
fect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
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, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the TreasuryÊs Office of the Assistant Sec-
retary (Enforcement).
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
period, respectively.
The contents of this pu
blication 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.
2003-33 I.R.B.August 18, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 21.—Expenses for
Household and Dependent
Care Services Necessary for
Gainful Employment
26 CFR 1.44A–1: Expenses for household and depen-
dent care services necessary for gainful employment.
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 23.—Adoption
Expenses
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 24.—Child Tax Credit
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 32.—Earned Income
26 CFR 1.32–2: Earned income credit for taxable
years beginning after December 31, 1978.
(Also §§ 21, 23, 24, 129, 131, 137, 151; 1.44A–1,
1.151–2.)
Determination of achild’s specific
age.A child attains an age on his or her
birthday for purposes of Code sections
21 (child and dependent care credit), 23
(adoption credit), 24 (child tax credit), 32
(earned income credit), 129 (excludable
dependent care benefits), 131 (exclud-
able foster care benefits), 137 (excludable
adoption assistance benefits), and 151
(dependency exemptions).
Rev. Rul. 2003–72
This revenue ruling applies a uniform
method of determining when a child at-
tains a specific age for purposes of the
following sections of the Internal Rev-
enue Code: 21 (dependent care credit), 23
(adoption credit), 24 (child tax credit), 32
(earned income credit), 129 (dependent
care assistance programs), 131 (foster
care payments), 137 (adoption assistance
programs), and 151 (dependency exemp-
tions).
Each of these provisions allows a credit,
exclusion, or deduction to the taxpayer,
provided, among other requirements, a
child has not attained a specific age. For
example, under § 24(c), one of the re-
quirements for a qualifying child for the
child tax credit is that the child “has not
attained the age of 17 as of the close of the
calendar year in which the taxable year of
the taxpayer begins.”
HOLDING
For purposes of each of the provisions
identified in this revenue ruling, a child
attains a given age on the anniversary of the
date that the child was born. For example,
a child born on January 1, 1987, attains the
age of 17 on January 1, 2004.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Karin Loverud of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this rev-
enue ruling, contact Ms. Loverud at (202)
622–6080 (not a toll-free call).
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 August 2003. See Rev. Rul. 2003-94, page 357.
Low-income housing credit; satis-
factory bond; “bond factor” amounts
for the period July through September
2003.This ruling announces the monthly
bond factor amounts to be used by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the
period July through September 2003.
Rev. Rul. 2003–93
In Rev. Rul. 90–60, 1990–2 C.B. 3,
the Internal Revenue Service provided
guidance to taxpayers concerning the gen-
eral methodology used by the Treasury
Department in computing the bond factor
amounts used in calculating the amount
of bond considered satisfactory by the
Secretary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publishintheInternal
Revenue Bulletin a table of bond factor
amounts for dispositions occurring during
each calendar month.
Rev. Proc. 99–11, 1999–1 C.B. 275,
established a collateral program as an al-
ternative to providing a surety bond for
taxpayers to avoid or defer recapture of
the low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculating
the amount of bond considered satisfactory
under § 42(j)(6) or the amount of United
States Treasury securities to pledge in a
Treasury Direct Account under Rev. Proc.
99–11 for dispositions of qualified low-in-
come buildings or interests therein during
the period July through September 2003.
2003-33 I.R.B.346August 18, 2003

Table 1
Rev. Rul. 2003–93
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19891990199119921993199419951996199719981999
Jul ’0316.2330.0441.8351.9360.5059.3759.2759.2759.3559.5859.83
Aug ’0316.2330.0441.8351.9360.5059.2459.1459.1459.2359.4559.72
Sep ’0316.2330.0441.8351.9360.5059.1159.0159.0259.1059.3459.60
Table 1 (cont’d)
Rev. Rul. 2003–93
Monthly Bond Factor Amounts for Disp
ositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
2000200120022003
Jul ’0360.1560.8361.7762.68
Aug ’0360.0560.7461.7062.68
Sep ’0359.9560.6561.6362.68
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul. 98–3,
1998–1 C.B. 248; Rev. Rul. 2001–2,
2001–1 C.B. 255; Rev. Rul. 2001–53,
2001–2 C.B. 488; and Rev. Rul. 2002–72,
2002–44 I.R.B. 759. For dispositions oc-
curring during the period January through
March 2003, see Rev. Rul. 2003–22,
2003–8 I.R.B. 494. For dispositions oc-
curring during the period April through
June 2003, see Rev. Rul. 2003–44,
2003–18 I.R.B. 848.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Gregory N. Doran of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. Doran at (202) 622–3040 (not
a toll-free call).
Section 61.—Gross Income
Defined
26 CFR 1.61–1: Gross income.
(Also §§ 801, 817; 1.817–5.)
Investor control doctrine.This ruling
presents guidance on the investor control
doctrine by presenting a factual scenario
in which a variable contract holder does
not have control over segregated account
assets sufficient to be deemed the owner
of the assets. In this manner, this ruling
presents a “safe harbor” from which tax-
payers may operate.
Rev. Rul. 2003–91
ISSUE
Under the facts set forth below, will the
holder of a variable contract be considered
to be the owner, for federal income tax pur-
poses, of the assets that fund the variable
contract? Will income earned on those as-
sets be included in the income of the holder
in the year in which it is earned?
FACTS
Situation 1:ICis a life insurance com-
pany subject to tax under § 801 of the In-
ternal Revenue Code. In states where it is
authorized to do so,ICoffers variable life
and variable annuity contracts that qualify
as variable contracts under § 817(d) (“Con-
tracts”).
The assets that fund the Contracts
are segregated from the assets that fund
IC's traditional life insurance products.
ICmaintains a separate account (“Sepa-
rate Account”) for the assets funding the
Contracts, and the income and liabilities
associated with the Separate Account are
maintained separately fromIC's other
accounts.
The Separate Account is divided into
various sub-accounts (“Sub-accounts”).
Each Sub-account's assets and liabilities
August 18, 20033472003-33 I.R.B.

are maintained separately from the as-
sets and liabilities of other Sub-accounts.
Interests in the Sub-accounts are not
available for sale to the public. Rather,
interests in the Sub-accounts are available
solely through the purchase of a Contract.
ICengages an independent investment
advisor (“Advisor”) to manage the in-
vestment activities of each Sub-account.
1
Each Sub-account will at all times meet
the asset diversification test set forth in
§ 1.817–5(b)(1) of the Income Tax Regu-
lations.
Twelve sub-accounts are currently
available under the Contracts, butICmay
increase or decrease this number at any
time. However, there will never be more
than 20 Sub-accounts available under the
Contracts. Each Sub-account offers a
different investment strategy. The cur-
rently available Sub-accounts include a
bond fund, a large company stock fund, an
international stock fund, a small company
stock fund, a mortgage backed securi-
ties fund, a health care industry fund, an
emerging markets fund, a money mar-
ket fund, a telecommunication fund, a
financial services industry fund, a South
American stock fund, an energy fund and
an Asian markets fund.
An individual (“Holder”) purchases a
life insurance Contract (“LIC”). At the
time of purchase, Holder specifies the
allocation of premium paid among the
then available Sub-accounts. Holder may
change the allocation of premiums at any
time, and Holder may transfer funds from
one Sub-account to another. Holder is per-
mitted one transfer between Sub-accounts
without charge per thirty-day period. Any
additional transfersduring this period are
subject to a fee assessed against the cash
value of LIC.
There is no arrangement, plan, con-
tract, or agreement between Holder and
ICor between Holder and Advisor re-
garding the availability of a particular
Sub-account, the investment strategy of
any Sub-account, or the assets to be held
by a particular sub-account. Other than
Holder's right to allocate premiums and
transfer funds among the available Sub-ac-
counts as described above, all investment
decisions concerning the Sub-accounts are
made byICor Advisor in their sole and
absolute discretion. Specifically, Holder
cannot select or recommend particular
investments or investment strategies.
Moreover, Holder cannot communicate
directly or indirectly with any investment
officer ofICor its affiliates or with Ad-
visor regarding the selection, quality, or
rate of return of any specific investment
or group of investments held in a Sub-ac-
count. Holder has no legal, equitable,
direct, or indirect interest in any of the as-
sets held by a Sub-account. Rather, Holder
has only a contractual claim againstICto
collect cash fromICin the form of death
benefits, or cash surrender values under
the Contract.
All decisions concerning the choice
of Advisor or the choice of any ofIC's
investment officers that are involved in
the investment activities of Separate Ac-
count or any of theSub-accounts, and
any subsequent changes thereof, are made
byICin its sole and absolute discretion.
Holder may not communicate directly or
indirectly withICconcerning the selection
or substitution of Advisor or the choice
of anyIC's investment officers that are
involved in the investment activities of
Separate Account or any of the Sub-ac-
counts.
Situation 2: The facts are the same as
Situation 1 except that Holder purchases an
annuity Contract (“Annuity”).
LAW
Section 61(a) provides that the term
“gross income” means all income from
whatever source derived, including gains
derived from dealings in property, interest
and dividends.
A long standing doctrine of taxation
provides that “taxation is not so much con-
cerned with the refinements of title as it
is with actual command over the property
taxed—the actual benefit for which the tax
is paid.”Corliss v. Bowers,281U.S.376
(1930). The incidence of taxation attribut-
able to ownership of property is not shifted
if the transferor continues to retain signif-
icant control over the property transferred,
Frank Lyon Company v. United States,435
U.S. 561 (1978);Commissioner v. Sunnen,
333 U.S. 591 (1948);Helvering v. Clifford,
309 U.S. 331 (1940), without regard to
whether such control is exercised through
specific retention of legal title, the creation
of a new equitable but controlled inter-
est, or the maintenance of effective benefit
through the interposition of a subservient
agency.Christoffersen v. U.S., 749 F.2d
513 (8
th
Cir.),rev'g578 F. Supp. 398 (N.D.
Iowa 1984).
Rev. Rul. 77–85, 1977–1 C.B. 12, con-
siders a situation in which the individual
purchaserofavariableannuity contract re-
tained the right to direct the custodian of
the account supporting that variable annu-
ity to sell, purchase, and exchange securi-
ties or other assets held in the custodial ac-
count. The purchaser also was able to ex-
ercise an owner's right to vote account se-
curities either through the custodian or in-
dividually. The Service concluded that the
purchaser possessed “significant incidents
of ownership” over the assets held in the
custodial account. The Service reasoned
that if a purchaser of an “investment an-
nuity” contract may select and control the
investment assets in the separate account
of the life insurance company issuing the
contract, then the purchaser is treated as
the owner of those assets for federal in-
come tax purposes. Thus, any interest, div-
idends, or other income derived from the
investment assets are included in the pur-
chaser's gross income.
In Rev. Rul. 80–274, 1980–2 C.B. 27,
the Service, applying Rev. Rul. 77–85,
concludes that, if a purchaser of an an-
nuity contract may select and control the
certificates of deposit supporting the con-
tract, then the purchaser is considered the
owner of the certificates of deposit for fed-
eral income tax purposes. Similarly, Rev.
Rul. 81–225, 1981–2 C.B. 12, concludes
that investments in mutual fund shares to
fund annuity contracts are considered to
be owned by the purchaser of the annuity
if the mutual fund shares are available for
purchase by the general public. Rev. Rul.
81–225 also concludes that, if the mutual
fund shares are available only through the
purchase of an annuity contract, then the
sole function of the fund is to provide an
investment vehicle that allows the issuing
insurance company to meet its obligations
under its annuity contracts and the mutual
fund shares are considered to be owned by
the insurance company. Finally, in Rev.
1
For these purposes, the term investment officer refers to anyone whose responsibilities include giving investment advice or making investment decisions relating to assets held in a Sub-account
and to any person who directly or indirectly supervises the work performed by such individual.
2003-33 I.R.B.348August 18, 2003

Rul. 82–54, 1982–1 C.B. 11, the pur-
chaser of certain annuity contracts could
allocate premium payments among three
funds and had an unlimited right to reallo-
cate contract value among the funds prior
to the maturity date of the annuity con-
tract. Interests in the funds were not avail-
able for purchase by the general public, but
were instead only available through pur-
chase of an annuity contract. The Service
concludes that the purchaser's ability to
choose among general investment strate-
gies (for example, between stock, bonds,
or money market instruments) either at the
time of the initial purchase or subsequent
thereto, does not constitute control suffi-
cient to cause the contract holders to be
treated as the owners of the mutual fund
shares.
InChristoffersen v. U.S., the Eighth
Circuit considered the federal income tax
consequences of the ownership of the as-
sets supporting a segregated asset account.
The taxpayers inChristoffersenpurchased
a variable annuity contract that reflected
the investment return and market value of
assets held in an account that was segre-
gated from the general asset account of the
issuing insurance company. The taxpay-
ers had the right to direct that their pre-
mium payments be invested in any one
of six publicly traded mutual funds. The
taxpayers could reallocate their investment
among the funds at any time. The taxpay-
ers also had the right upon seven days no-
tice to withdraw funds, surrender the con-
tract, or apply the accumulated value under
the contract to provide annuity payments.
The Eighth Circuit held that, for fed-
eral income tax purposes, the taxpayers,
not the issuing insurance company, owned
the mutual fund shares that funded the vari-
able annuity. The court concluded that the
taxpayers “surrendered few of the rights of
ownership or control over the assets of the
sub-account,” that supported the annuity
contract.Christoffersen, 749 F.2d at 515.
According to the court, “the payment of
annuity premiums, management fees and
the limitation of withdrawals to cash [did]
not reflect a lack of ownership or control as
the same requirements could be placed on
traditional brokerage or management ac-
counts.”Id. at 515–16. Thus, the tax-
payers were required to include in gross
income any gains, dividends, or other in-
come derived from the mutual fund shares.
Section 817, which was enacted by
Congress as part of the Deficit Reduction
Act of 1984 (Pub. L. No. 98–369) (the
“1984 Act”), provides rules regarding the
tax treatment of variable life insurance and
annuity contracts. Section 817(d) defines
a “variable contract” as a contract that
provides for the allocation of all or part of
the amounts received under the contract to
an account that, pursuant to State law or
regulation, is segregated from the general
asset accounts of the company and that
provides for the payment of annuities, or
is a life insurance contract. In the leg-
islative history of the 1984 Act, Congress
expressed its intent to deny life insurance
treatment to any variable contract if the as-
sets supporting the contract include funds
publicly available to investors:
The conference agreement allows any
diversifiedfundtobeusedastheba-
sis of variable contracts so long as all
shares of the funds are owned by one
or more segregated asset accounts of
insurance companies, but only if ac-
cess to the fund is available exclusively
through the purchase of a variable con-
tract from an insurance company. . . .
In authorizing Treasury to prescribe
diversification standards, the conferees
intend that the standards be designed
to deny annuity or life insurance treat-
ment for investments that are publicly
available to investors . . .
H. R. Conf. Rep. No. 98–861, at 1055
(1984).
Section 817(h)(1) provides that a vari-
able contract based on a segregated asset
account shall not be treated as an annu-
ity, endowment, or life insurance contract
unless the segregated asset account is ade-
quately diversified in accordance with reg-
ulations prescribed by the Secretary. If a
segregated asset account is not adequately
diversified, income earned by that segre-
gated asset account is treated as ordinary
income received or accrued by the policy-
holders.
Approximately two years after enact-
ment of § 817(h), the Treasury Department
issued proposed and temporary regulations
prescribing the minimum level of diversi-
fication that must be met for an annuity
or life insurance contract to be treated as
a variable contract within the meaning of
§ 817(d). The preamble to the regulations
stated as follows:
The temporary regulations . . . do not
provide guidance concerning the cir-
cumstances in which investor control
of the investments of a segregated asset
account may cause the investor, rather
than the insurance company, to be
treated as the owner of the assets in the
account. For example, the temporary
regulations provide that in appropriate
cases a segregated asset account may
include multiple sub-accounts, but do
not specify the extent to which policy-
holders may direct their investments to
particular sub-accounts without being
treated as owners of the underlying
assets. Guidance on this and other is-
sues will be provided in regulations or
revenue rulings under section 817(d),
relating to the definition of variable
contracts.
T.D. 8101, 1986–2 C.B. 97 [51 FR 32633]
(Sept. 15, 1986). The text of the temporary
regulations served as the text of proposed
regulations in the notice of proposed rule-
making.SeeLR–295–84, 1986–2 C.B.
801 [51 FR 32664] (Sept. 15, 1986). The
final regulations adopted, with certain revi-
sions not relevant here, the text of the pro-
posed regulations.
ANALYSIS
The determination of whether Holder
possesses sufficient incidents of ownership
over Sub-account assets to be deemed the
owner of the assets supporting LIC and
Annuity depends on all of the relevant facts
and circumstances.
Holder may not select or direct a par-
ticular investment to be made by either
the Separate Account orthe Sub-accounts.
Holder may not sell, purchase, or exchange
assets held in the Separate Account or the
Sub-accounts. All investment decisions
concerning the Separate Account and the
Sub-accounts are made byICor Advisor
in their sole and absolute discretion.
The investment strategies of the Sub-ac-
counts currently available are sufficiently
broad to prevent Holder from making
particular investment decisions through
investment in a Sub-account. OnlyIC
may add or substitute Sub-accounts or
investment strategies in the future. No
arrangement, plan, contract, or agreement
exists between Holder andICor between
Holder and Advisor regarding the specific
investments or investment objective of the
August 18, 20033492003-33 I.R.B.

Sub-accounts. In addition, Holder may
not communicate directly or indirectly
withAdvisororanyofIC's investment
officers concerning the selection, quality,
or rate of return of any specific investment
or group of investments held by Separate
Account or in a Sub-account.
Investment in the Sub-accounts is
available solely through the purchase of
a Contract, thus, Sub-accounts are not
publicly available. The ability to allo-
cate premiums and transfer funds among
Sub-accounts alone does not indicate that
Holder has control over either Separate
Account or Sub-account assets sufficient
to be treated as the owner of those assets
for federal income tax purposes.
Based on all the facts and circum-
stances, Holder does not have direct or
indirect control over the Separate Account
or any Sub-account asset. Therefore,
Holder does not possess sufficient in-
cidents of ownership over the assets
supporting either LIC or Annuity to be
deemed the owner of the assets for federal
income tax purposes. So long as LIC and
Annuity continue to satisfy the diversifica-
tion requirements of § 817(h) andIC's and
Holder's future conduct is consistent with
the facts of this ruling, Holder will not
be required to include the earnings on the
assets held in Separate Account or any of
the Sub-accounts in income under § 61(a).
HOLDING
Under the facts set forth above, the
holder of a variable contract will not be
considered to be the owner, for federal in-
come tax purposes, of the assets that fund
the variable contract. Therefore, any in-
terest, dividends, or other income derived
from the assets that fund the variable con-
tract is not included in the holder's gross
income in the year in which the interest,
dividends, or other income is earned.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is James Polfer of the Office of Asso-
ciate Chief Counsel (Financial Institutions
and Products). For further information
regarding this revenue ruling, contact
Mr. Polfer at (202) 622–3970 (not a
toll-free call).
26 CFR 1.61–1: Gross income.
(Also §§ 801, 817, 7702; 1.817–5.)
Variable contract holder.This rul-
ing holds that a variable contract holder is
the owner of interests in a nonregistered
partnership where interests in the nonreg-
istered partnership are not available exclu-
sively through the purchase of a life in-
surance or annuity contract. Rev. Rul.
81–225 clarified and amplified.
Rev. Rul. 2003–92
ISSUES
Under the facts set forth below, will
theholderofavariableannuityorlifein-
surance contract be considered to be the
owner, for federal income tax purposes, of
the partnership interests that fund the vari-
able contract if interests in the partnerships
are available for purchase by the general
public? What are the income tax conse-
quences to the holder of the contract if that
holder is considered to be the owner of the
partnership interests that fund the variable
contract?
FACTS
Situation 1.ICis a life insurance com-
pany subject to tax under § 801 of the In-
ternal Revenue Code. In states where it is
authorized to do so,ICoffers deferred vari-
able annuity contracts.IChas developed a
variable annuity contract (“Annuity”) for
sale only to “qualified purchasers”
1
that
are “accredited investors”
2
or to no more
than one hundred accredited investors.IC
is not required to register Annuity under
the federal security laws.
Contract Holder, an individual quali-
fying as both a qualified purchaser and
an accredited investor, purchases Annu-
ity fromIC. Annuity contains a number
of provisions common to deferred annu-
ity contracts, including the right of Con-
tract Holder to surrender Annuity in part
or entirely for cash (subject to a surren-
der charge) and the right to convert (at fu-
ture dates chosen by Contract Holder) the
accumulated values under Annuity into a
stream of periodic payments under one of
several settlement options.
The assets supporting Annuity are held
in a segregated asset account that is main-
tained separately fromIC's other accounts.
The segregated asset account is divided
into 10 sub-accounts (“Sub-accounts”).
Each Sub-account's assets and liabilities
are maintained separately from the assets
and liabilities of other Sub-accounts. At
the time of purchase, Contract Holder
specifies the premium allocation among
the available Sub-accounts. Contract
Holder may change the allocation of sub-
sequent premiums at any time.
Each Sub-account available under An-
nuity invests in interests in a partnership
(“Partnership”). None of the Partnerships
are publicly traded partnerships under
§ 7704. All of the Partnerships are exempt
from registration under federal security
laws. Interests in each Partnership are
sold in private placement offerings and are
sold only to qualified purchasers that are
accredited investors or to no more than
one hundred accredited investors.
Each Partnership has an investment
manager that selects the Partnership's
specific investments. Contract Holder
may not act as an investment manager
or independently own any interest in any
Partnership offered under Annuity. In
addition, Contract Holder will have no
voting rights with respect to any Partner-
ship interest held by any Sub-account.
Each Sub-account will at all times meet
the asset diversification test set forth in
§ 1.817–5(b)(1) of the Income Tax Regu-
lations.
Situation 2. The facts are the same as
those in Situation 1, exceptICoffers, and
Contract Holder purchases, a variable life
insurance contract (“LIC”) that qualifies as
a life insurance contract under § 7702.
Situation 3. The facts are the same
as those in Situation 1, except that (i)
Contract Holder purchases both an Annu-
ity and an LIC and (ii) interests in each
Partnership are available for purchase
only through the purchase of an Annuity,
1
Under 15 U.S.C. § 80a–2(a)(51) a “qualified purchaser” is an individual, or other specified entity, that satisfies certain threshold financial requirements.
2
The term “accredited investor,” as defined by 15 U.S.C. § 77b(a)(15), and amplified by 17 CFR § 230.501(a), is also an investor that satisfies certain financial criteria. An accredited investor
may be either an individual or certain enumerated entities. Because the criteria to be an accredited investor are similar to, but not identical to, thecriteria that must be met to be a qualified
purchaser it is possible for an accredited investor to also be a qualified purchaser. It is also possible for an investor to qualify only as either an accredited or qualified investor.
2003-33 I.R.B.350August 18, 2003

an LIC, or other variable contracts from
insurance companies.
LAW
Section 61(a) provides that the term
“gross income” means all income from
whatever source derived, including gains
derived from dealings in property, interest,
and dividends.
Section 817, which was enacted by
Congress as part of the Deficit Reduction
Act of 1984 (Pub. L. No. 98–369) (the
“1984 Act”), provides rules regarding the
tax treatment of variable life insurance and
annuity contracts. Section 817(d) defines
a “variable contract” as a contract that
provides for the allocation of all or part of
the amounts received under the contract to
an account that, pursuant to State law or
regulation, is segregated from the general
asset accounts of the company and that
provides for the payment of annuities, or
is a life insurance contract. In the leg-
islative history of the 1984 Act Congress
expressed its intent to deny life insurance
treatment to any variable contract if the as-
sets supporting the contract include funds
publicly available to investors:
The conference agreement allows any
diversified fund to be used as the ba-
sis of variable contracts so long as all
shares of the funds are owned by one
or more segregated asset accounts of
insurance companies, but only if ac-
cess to the fund is available exclusively
through the purchase of a variable con-
tract from an insurance company. . . .
InauthorizingTreasurytoprescribe
diversification standards, the conferees
intend that the standards be designed
to deny annuity or life insurance treat-
ment for investments that are publicly
available to investors . . .
H. R. Conf. Rep. No. 98–861, at 1055
(1984).
Section 817(h)(1) provides that a vari-
able contract based on a segregated asset
account shall not be treated as an annu-
ity, endowment, or life insurance contract
unless the segregated asset account is ade-
quately diversified in accordance with reg-
ulations prescribedby the Secretary. If a
segregated asset account is not adequately
diversified, income earned by that segre-
gated asset account is treated as ordinary
income received or accrued by the policy-
holders.
Approximately two years after enact-
ment of § 817(h), the Treasury Department
issued proposed and temporary regulations
prescribing the minimum level of diversi-
fication that must be met for an annuity
or life insurance contract to be treated as
a variable contract within the meaning of
§ 817(d). The preamble to the regulations
stated as follows:
The temporary regulations . . . do not
provide guidance concerning the cir-
cumstances in which investor control
of the investments of a segregated asset
account may cause the investor, rather
than the insurance company, to be
treated as the owner of the assets in the
account. For example, the temporary
regulations provide that in appropriate
cases a segregated asset account may
include multiple sub-accounts, but do
not specify the extent to which policy-
holders may direct their investments to
particular sub-accounts without being
treated as owners of the underlying
assets. Guidance on this and other is-
sues will be provided in regulations or
revenue rulings under section 817(d),
relating to the definition of variable
contracts.
51 FR 32633 (Sept. 15, 1986). The text
of the temporary regulations served as the
text of proposed regulations in the notice
of proposed rulemaking.See51 FR 32664
(Sept. 15, 1986). The final regulations
adopted, with certain revisions not relevant
here, the text of the proposed regulations.
Prior to enactment of § 817, the Ser-
vice issued a number of revenue rulings re-
garding when the owner of an annuity con-
tract will be treated as the owner of the as-
sets that fund the annuity. In the revenue
rulings, the Service relied on long stand-
ing tax principles.See generally,Commis-
sioner v. Sunnen, 333 U.S. 591 (1948);
Helvering v. Clifford, 309 U.S. 331 (1940);
Corliss v. Bowers, 281 U.S. 376 (1930).
The revenue rulings consider whether the
contract owners described in each ruling
have retained sufficient incidents of own-
ership, as described in cases cited above,
over the assets or retain sufficient control
over the assets to be treated as the owners
of those assets.
Rev. Rul. 77–85, 1977–1 C.B. 12, con-
cludesthatifapurchaserofan“investment
annuity” contract selects and controls the
investment assets in the separate account
of the issuing life insurance company, then
the purchaser will be treated as the owner
of those assets for federal income tax pur-
poses. Thus, any interest, dividends, or
other income derived from the investment
assets are includible in the gross income
of the purchaser. Similarly, Rev. Rul.
80–274, 1980–2 C.B. 27, holds that if a
purchaser of an annuity contract may se-
lect and control the certificates of deposit
supporting the contract, then the purchaser
is treated as the owner of the certificates of
deposit for federal income tax purposes. In
Rev. Rul. 80–274, the insurance company
could not dispose of the deposit or con-
vert it into a different asset. The insurance
company did, however, have the power to
withdraw the deposit from a failing savings
and loan association.
Rev. Rul. 81–225, 1981–2 C.B. 12,
describes four situations in which invest-
ments in mutual fund shares to fund an-
nuity contracts are treated as owned by
the policyholder rather than by the issu-
ing insurance company, and one situation
in which the issuing insurance company is
treated as the owner of the mutual fund
shares. In Situation 1, the investment as-
sets in the segregated account supporting
the annuity contracts consisted solely of
shares in a single, publicly available mu-
tual fund managed by an independent in-
vestment advisor. Situation 2 is similar to
Situation 1, except that the publicly avail-
able mutual fund was managed by the issu-
ing insurance company or one of its affili-
ates. Situation 3 also is similar to Situation
1, except that the segregated asset account
supporting the annuity contracts consisted
of five sub-accounts. Each sub-account
was invested in the shares of a different
mutual fund. Shares of the mutual funds
were offered for sale to the general public.
The policyholder retained the right to al-
locate or reallocate funds among the five
sub-accounts during the life of the annu-
ity contract. Situation 4 is similar to Sit-
uation 2, except that the mutual fund did
not sell shares directly to the public. The
shares of the mutual fund were available
only through the purchase of an annuity
contract or by participation in an invest-
ment plan account of the type described in
Rev. Rul. 70–525, 1970–2 C.B. 144. Situ-
ation 5 also was similar to Situation 2, ex-
cept that the shares in the mutual fund were
available only through the purchase of an
annuity contract.
August 18, 20033512003-33 I.R.B.

Rev. Rul. 81–225 concludes that the
policyholders in Situations 1 through 4 had
sufficient control and other incidents of
ownership to be treated as the owners of
the mutual fund shares for federal income
tax purposes. The ruling reaches the oppo-
site conclusion in Situation 5, because the
sole function of the mutual fund in Situa-
tion 5 was to provide an investment vehicle
that allows the issuing insurance company
to meet its obligations under its annuity
contracts and the insurance company pos-
sessed sufficient incidents of ownership to
be treated as the owner of the underlying
portfolio of assets of the mutual fund for
federal income tax purposes.
In Rev. Rul. 82–54, 1982–1 C.B. 11,
the purchasers of certain annuity contracts
could direct the issuing insurance com-
pany to invest in the shares of any one or
any combination of three mutual funds
that were not available to the public. One
mutual fund invested primarily in common
stocks, another in bonds, and the third in
money market investments. Policyholders
could allocate their premium payments
among the three funds and had an un-
limited right to reallocate contract values
among the funds prior to the maturity
date of the annuity contract. The ruling
concludes that the policyholders' abil-
ity to choose among general investment
strategies (for example, between stock,
bonds, or money market funds) either at
the time of the initial purchase or subse-
quent thereto, did not constitute control
sufficient to cause the policyholders to be
treated as the owners of the mutual fund
shares.
InChristoffersen v. United States,749
F.2d 513 (8
th
Cir.),rev'g578 F. Supp. 398
(N.D. Iowa 1984), the Eighth Circuit con-
sidered the federal income tax ownership
of the assets supporting a segregated asset
account. The taxpayers inChristoffersen
purchased a variable annuity contract that
reflected the investment return and market
value of assets held in an account that was
segregated from the general asset account
of the issuing insurance company. The tax-
payers had the right to direct that their pre-
mium payments be invested in any one or
a combination of six publicly traded mu-
tual funds. The taxpayers could reallo-
cate their investment among the funds at
any time. The taxpayers also had the right
upon seven days notice to withdraw funds,
surrender the contract, or apply the accu-
mulated value under the contract to pro-
vide annuity payments.
The Eighth Circuit held that, for fed-
eral income tax purposes, the taxpayers,
not the issuing insurance company, owned
the mutual fund shares that funded the vari-
able annuity. The court concluded that the
taxpayers “surrender few of the rights of
ownership or control over the assets of the
sub-account” that supported the annuity
contract.Christoffersen, 749 F.2d at 515.
According to the court, “the payment of
annuity premiums, management fees and
the limitation of withdrawals to cash [did]
not reflect the lack of ownership or control
as the same requirements could be placed
on traditional brokerage or management
accounts.”Id. at 515–16. Thus, the tax-
payers were required to include in gross
income any gains, dividends, or other in-
come derived from the mutual fund shares.
ANALYSIS
In Situation 1, Sub-accounts hold in-
terests in Partnerships available for pur-
chase other than by purchasers of Annu-
ity or other variable contracts from insur-
ance companies. Therefore, for federal in-
come tax purposes, Contract Holder is the
owner of the interests in Partnerships held
by Sub-accounts. As a result, pursuant to
§ 61(a), Contract Holder must include in
its gross income any interest, dividends,
or other income derived from the interests
in the Partnerships in the year in which
the interest, dividends, or other income is
earned.
In Situation 2, Sub-accounts hold inter-
ests in Partnerships available for purchase
other than by purchasers of LIC or other
variable contracts from insurance compa-
nies. Therefore, for federal income tax
purposes, Contract Holder is the owner of
the interests in Partnerships held by Sub-
accounts. As a result, pursuant to § 61(a),
Contract Holder must include any interest,
dividends, or other income derived from
the Partnerships in gross income in the year
in which the interest, dividends, or other
income is earned.
In Situation 3, Sub-accounts hold inter-
ests in Partnerships available for purchase
only by a purchaser of an Annuity, a LIC,
or other variable contracts from insurance
companies. Therefore, for federal income
tax purposes,ICowns the interests in Part-
nerships that fund the Sub-accounts. As
a result, pursuant to § 61(a), any interest,
dividends, or other income derived from
the Partnerships is not included in Contract
Holder's gross income in the year in which
the interest, dividends, or other income is
earned.
HOLDINGS
Under the facts set forth above, the
holder of a variable annuity or life insur-
ance contract will be considered to be the
owner, for federal income tax purposes,
of the partnership interests that fund the
variable contract if interests in the part-
nerships are available for purchase by the
general public. If the holder of a variable
annuity or life insurance contract is con-
sidered to be the owner of the partnership
interests that fund thevariable contract,
pursuant to § 61(a), the contract holder
must include any interest, dividends, or
other income derived from the partnership
interests in gross income in the year in
which the interest, dividends, or other
income is earned.
EFFECT ON OTHER REVENUE
RULING
Rev. Rul. 81–225, 1981–2 C.B. 12 is
hereby clarified and amplified.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is James Polfer of the Office of As-
sociate Chief Counsel (Financial Institu-
tions and Products). For further informa-
tion regarding this revenue ruling, con-
tact Mr. Polfer at (202) 622–3970 (not a
toll-free call).
Section 72.—Annuities;
Certain Proceeds of
Endowment and Life
Insurance Contracts
Under the facts stated below, is a direct transfer of
a portion of the cash surrender value of an existing
annuity contract for a new annuity contract issued by
a second insurance company a tax-free exchange un-
der section 1035 of the Internal Revenue Code. See
Rev. Rul. 2003-76, page 355.
A revenue ruling describes the tax treatment of a
cash distribution made in connection with a reduction
2003-33 I.R.B.352August 18, 2003

in the benefits of a life insurance contract. See Rev.
Rul. 2003-95, page 358.
Notice addresses the taxation of certain tax-free
exchanges of annuity contracts under section 72(e)
and section 1035 of the Internal Revenue Code. This
notice announces that Treasury and the Service are
considering whether to exercise the authority granted
under section 72(e)(11) to promulgate regulations
that would prescribe the tax treatment of these trans-
actions. See Notice 2003-51, page 361.
Section 129.—Dependent
Care Assistance Programs
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 131.—Certain Foster
Care Payments
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 137.—Adoption
Assistance Programs
A child attains an age on his or her birth
day for pur-
poses of sections 21 (child and depend
ent care credit),
23 (adoption credit), 24 (child tax cr
edit), 32 (earned
income credit), 129 (excludable d
ependent care ben-
efits), 131 (excludable foster c
are benefits), 137 (ex-
cludable adoption assistance be
nefits), and 151 (de-
pendency exemptions). See Rev.
Rul. 2003-72, page
346.
Section 151.—Allowance
of Deductions for Personal
Exemptions
26 CFR 1.151–2: Additional exemptions for depen-
dents.
A child attains an age on his or her birthday for pur-
poses of sections 21 (child and dependent care credit),
23 (adoption credit), 24 (child tax credit), 32 (earned
income credit), 129 (excludable dependent care ben-
efits), 131 (excludable foster care benefits), 137 (ex-
cludable adoption assistance benefits), and 151 (de-
pendency exemptions). See Rev. Rul. 2003-72, page
346.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of August 2003. See Rev.
Rul. 2003-94, page 357.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of August 2003. See Rev. Rul.
2003-94, page 357.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2003. See Rev. Rul. 2003-94, page 357.
Section 461.—General Rule
for Taxable Year of Deduction
26 CFR 1.461–1: General rule f
or taxable year of
deduction.
Accrual of liability for California
franchise tax.This ruling holds that, for
federal income tax purposes, a taxpayer
that uses an accrual method of accounting
incurs a liability for California franchise
tax in the taxable year following the tax-
able year in which the tax is incurred
under the California Revenue and Tax
Code. Rev. Rul. 79–410 amplified.
Rev. Rul. 2003–90
ISSUE
For taxable years beginning on or after
January 1, 2000, when does a taxpayer us-
ing an accrual method of accounting incur
a liability for California franchise tax for
federal income tax purposes?
FACTS
X is a corporation that uses an accrual
method of accounting and files its federal
income tax return on a calendar year ba-
sis. X has conducted business in Califor-
nia continuously for several years and is re-
quired to pay a franchise tax imposed un-
der § 23151 of the California Revenue &
Taxation Code (Cal. Rev. & Tax. Code)
(West 1998 & Supp. 2002). In 2002,
X has net income attributable to Califor-
nia of $10,000. X remits payments of es-
timated California franchise tax of $884
during 2002. Under California law, X's
franchise tax liability for 2002 is $884, de-
termined on the basis of X's 2002 net in-
come attributable to California of $10,000.
LAW AND ANALYSIS
Section 164(a) of the Internal Revenue
Code allows a deduction for certain taxes
paid or accrued during the taxable year in-
cluding state franchise taxes imposed on
corporations.
Section 461(a) provides that the amount
of any deduction or credit is taken for the
taxable year that is the proper taxable year
under the method of accounting used in
computing taxable income.
Section 1.461–1(a)(2)(i) of the Income
Tax Regulations provides that under an ac-
crual method of accounting, a liability is
incurred in the taxable year in which all
the events have occurred that establish the
fact of the liability, the amount of the liabil-
ity can be determined with reasonable ac-
curacy, and economic performance has oc-
curred with respect to the liability. Section
1.461–4(g)(6)(i) generally provides that if
the liability of a taxpayer is to pay a tax,
economic performance occurs as the tax is
paid to the governmental authority that im-
posed the tax.
However, § 461(d) provides that, in the
case of a taxpayer whose taxable income
is computed under an accrual method of
accounting, to the extent the time for ac-
cruing a tax is earlier than it would have
been but for any action of any taxing ju-
risdiction taken after December 31, 1960,
the tax is to be treated as accruing at the
time it would have accrued but for the ac-
tion by the taxing jurisdiction. Section
1.461–1(d)(1) provides that any action by a
taxing jurisdiction that results in the accel-
eration of the accrual of any tax is to be dis-
regarded in determining the time for accru-
ing the tax for purposes of the deduction
allowed for the tax, with respect to both
taxpayers upon whichthe tax is imposed at
August 18, 20033532003-33 I.R.B.

the time of the action, and taxpayers upon
which the tax is imposed at any time sub-
sequent to the action.
Section 1.461–1(d)(1) further provides
that, whenever an acceleration of the time
for accruing a tax is to be disregarded, the
taxpayer shall accrue the tax at the time the
tax would have accrued but for the accel-
erating action (original accrual date). Sec-
tion 1.461–1(d)(1) also provides that in the
absence of any action of the taxing juris-
diction placing the time for accruing the
tax at a time subsequent to the original ac-
crual date, the taxpayer shall continue to
accrue the tax as of the original accrual
date for all future taxable years.
Section 1.461–1(d)(2)(iii) provides that
the term “any action” includes the enact-
ment or re-enactment of legislation, the
adoption of an ordinance, the exercise of
any taxing or administrative authority, or
the taking of any other step, the result
of which is an acceleration of the accrual
event of any tax.
Cal. Rev. & Tax. Code § 23151 (West
1998 & Supp. 2002) imposes a franchise
tax for the privilege of doing business as
a corporation within California. For years
beginning before January 1, 2000, the tax
generally was measured by the net income
of the year preceding the year for which
the tax was imposed, subject to a mini-
mum tax, with special rules for corpora-
tions commencing or ceasing business in
California. Cal. Rev. & Tax. Code,
§ 23151.1 (West 1998 & Supp. 2002).
The year in which the tax was imposed and
payable was a corporation's “taxable year”
(“California taxable year”). Cal. Rev. &
Tax. Code § 23041(a) (West 1998 & Supp.
2002). The income year (“California in-
come year”) was defined as the “year upon
the basis of which the net income is com-
puted.” Cal. Rev. & Tax. Code § 23042(a)
(West 1998 & Supp. 2002). Thus, in the
case of an ongoing corporation, the tax due
for a California taxable year for the privi-
lege of exercising the corporate franchise
during the California taxable year was cal-
culated based on the net income earned
during the preceding year (the California
income year).
Under pre-1961 California law, a cor-
poration's liability for the franchise tax be-
came fixed upon the corporation's exer-
cise of the franchise in the California tax-
able year.Central Investment Corpora-
tion v. Commissioner, 9 T.C. 128 (1947),
aff'd167 F.2d 1000 (9th Cir. 1948). A
corporation that ceased to do business in
California had no liability to pay franchise
tax measured by income earned in the fi-
nal year of operation if the corporation did
not exercise its franchise in the follow-
ing California taxable year. Thus, under
pre-1961 California law, a continuing cor-
poration did not have a fixed liability to pay
California franchise tax with respect to in-
come earned in Year 1 (the California in-
come year) until the corporation exercised
its corporate franchise in Year 2 (the Cal-
ifornia taxable year). As a result, for pur-
poses of § 1.461–1(a)(2), the corporation
did not have a fixed liability in Year 1 for
the California franchise tax with respect to
income earned in Year 1, but rather the li-
ability for California franchise tax with re-
spect to income earned in Year 1 became
fixed in Year 2, when the corporation ex-
ercised its corporate franchise. SeeHall-
mark Cards , Inc. v. Commissioner,90
T.C. 26 (1988).
Rev. Rul. 79–410, 1979–2 C.B. 213,
addresses the timing of the deduction for
California franchise tax liabilities and the
application of § 461(d) to California law
for years after 1972. Amendments to Cali-
fornia law in 1971 and 1972 required a cor-
poration ceasing to do business after De-
cember 31, 1972, to pay a franchise tax in
its final year of operation based upon both
the preceding year's net income and the
net income earned in the corporation's final
year. The ruling concludes that the 1971
and 1972 amendments caused the liabil-
ity for California franchise tax to become
fixed for purposes of § 1.461–1(a)(2) in the
California income year. However, because
the fixing of the liability in the California
income year was earlier than when the li-
ability became fixed under pre-1961 Cali-
fornia law, the ruling concludes that, pur-
suant to § 461(d), the amendments are dis-
regarded and the liability continues to be
incurred for federal income tax purposes
in the California taxable year, the taxable
year in which the liability became fixed
under pre-1961 California law. See also
Epoch Food Service, Inc. v. Commis-
sioner, 72 T.C. 1051, 1054 (1979).
For taxable years beginning on or af-
ter January 1, 2000, the Cal. Rev. & Tax.
Code was amended to replace references to
the term “income year” with the term “tax-
able year” (“redefined California taxable
year”). Cal. Rev. & Tax. Code § 23042(b)
(West Supp. 2002). As a result, the Cali-
fornia franchise tax is measured by the net
income of the year in which the tax is im-
posed and payable. Cal. Rev. & Tax.
Code § 23151.1(c)(2) (West Supp. 2002).
The transition year (2000) was the Califor-
nia taxable year under the former law with
respect to income earned in 1999, and also
the redefined California taxable year un-
der the amendment for income earned in
the first taxable year beginning on or after
January 1, 2000. The accompanying leg-
islative history states, however, that there
was no intent to change the amount of tax
or the timing of payment. See 2000 Cal.
Stat. 862 (Sept. 29, 2000).
Under § 1.461–1(a)(2)(i), the liability
for California franchise tax is established
and the amount can be determined with
reasonable accuracy in the taxable year
that the net income is earned. However,
when compared to pre-1961 California
law, the 2000 amendment to the California
law, like the 1971 and 1972 amendments,
accelerates the accrual of the franchise
tax for a continuing corporation from the
taxable year following the taxable year
in which the net income is earned to the
taxable year in which the net income is
earned. Thus, pursuant to § 461(d), the
2000 amendment must be disregarded
and the liability for California franchise
tax continues to be incurred for federal
income tax purposes in the California
taxable year, the taxable year in which
the liability became fixed under pre-1961
California law.
Therefore, for taxable years beginning
on or after January 1, 2000, X incurs a lia-
bility for California franchise tax for fed-
eral income tax purposes in the taxable
year that follows the taxable year in which
X earns the income on which the tax is
measured. The California franchise tax
of $884 that X pays in 2002, based on
the $10,000 of net income that X earns in
2002, is deductible on X's federal income
tax return for taxable year 2003.
HOLDING
For taxable years beginning on or after
January 1, 2000, a taxpayer that uses an ac-
crual method of accounting incurs a liabil-
ity for California franchise tax for federal
income tax purposes in the taxable year
following the taxable year in which the
2003-33 I.R.B.354August 18, 2003

California franchise tax is incurred under
theCal.Rev.&Tax.Code,asamended.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 79–410 is amplified.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Sean M. Dwyer of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Dwyer at (202) 622–5020 (not a
toll-free number).
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-te
rm, mid-
term, and long-term rates are set forth fo
r the month
of August 2003. See Rev. Rul. 2003-94, pa
ge 357.
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 August 2003. See Rev. Rul. 2003-94, page 357.
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 August 2003. See Rev.
Rul. 2003-94, page 357.
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 August 2003. See Rev. Rul. 2003-94, page 357.
Section 642.—Special Rules
for Credits and Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of August 2003. See Rev.
Rul. 2003-94, page 357.
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 August 2003. See Rev. Rul. 2003-94, page 357.
Section 817.—Treatment of
Variable Contracts
A revenue ruling describes the tax treatment of
the assets in a variable contract’s segregated asset ac-
count. See Rev. Rul. 2003-91, page 347.
A revenue ruling describes the tax treatment of
the assets in a variable contract’s segregated asset ac-
count. See Rev. Rul. 2003-92, page 350.
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 August 2003. See Rev. Rul. 2003-94, page 357.
Section 856.—Definition of
Real Estate Investment Trust
If a REIT leases space to a joint venture that in-
cludes a taxable REIT subsidiary of the REIT, do pay-
ments to the REIT from the joint venture qualify as
rents from real property under section 856(d) of t
he
Internal Revenue Code. See Rev. Proc. 2003-66,
page 364.
Section 1031.—Exchange of
Property Held for Productive
Use or Investment
Under the facts stated below, is a direct transfer of
a portion of the cash surrender value of an existing
annuity contract for a new annuity contract issued by
a second insurance company a tax-free exchange un-
der section 1035 of the Internal Revenue Code. See
Rev. Rul. 2003-76, page 355.
Notice addresses the taxation of certain tax-free
exchanges of annuity contracts under section 72(e)
and section 1035 of the Internal Revenue Code. This
notice announces that Treasury and the Service are
considering whether to exercise the authority granted
under section 72(e)(11) to promulgate regulations
that would prescribe the tax treatment of these trans-
actions. See Notice 2003-51, page 361.
Section 1035.—Certain
Exchanges of Insurance
Policies
26 CFR 1.1035–1: Certain exchanges of insurance
policies.
(Also Part I, §§ 72, 1031.)
Exchange of a portion of annuity con-
tract.An exchange of a portion of an an-
nuity contract into a new annuity contract
is treated as a tax-free exchange under sec-
tion 1035 of the Code. Investment in the
contract and basis are allocated according
to cash value immediately prior to the ex-
change using the rules of sections 72 and
1031.
Rev. Rul. 2003–76
ISSUES
Under the facts stated below, is a direct
transfer of a portion of the cash surrender
value of an existing annuity contract for a
new annuity contract issued by a second in-
surance company a tax-free exchange un-
der § 1035 of the Internal Revenue Code?
What is the basis under § 1035 and the
investment in the existing contract under
§ 72 after the transfer? What is the basis
under § 1035 and the investment in the new
annuity contract under § 72?
FACTS
A owns Contract B, an annuity contract
issued by Company B. A is the obligee un-
der Contract B. A contracts with Insurance
Company C to issue Contract C, a new an-
nuity contract. A assigns 60 percent of the
cash surrender value of Contract B to Com-
pany C to be used to purchase Contract
C. At no time during the transaction does
A have access to the cash surrender value
of Contract B that is transferred by Com-
pany B to Company C and used to purchase
Contract C. No consideration other than
the cash surrender value of Contract B that
is transferred from Company B to Com-
panyCwillbepaidinthistransaction.The
terms of Contract B are unchanged by this
transaction, and Contract B is not treated
as newly issued.
LAW AND ANALYSIS
Section 1035(a)(3) provides that no
gain or loss shall be recognized on the
August 18, 20033552003-33 I.R.B.

exchange of an annuity contract for an
annuity contract. Section 1.1035–1 of the
Income Tax Regulations provides that the
exchange, without recognition of gain or
loss, of an annuity contract for another
annuity contract under § 1035(a)(3) is lim-
ited to cases in which the same person or
persons are the obligee or obligees under
the contract received in the exchange as
under the original contract.
The legislative history of § 1035 states
that exchange treatment is appropriate for
“individuals who have merely exchanged
one insurance policy for another better
suited to their needs and who have not
actually realized gain.” H.R. Rep. No.
1337, 83d Cong., 2d Sess. 81 (1954). In
Conway v. Commissioner, 111 T.C. 350
(1998),acq., 1999–2 C.B. xvi, the Tax
Court held that the direct exchange by
an insurance company of a portion of an
existing annuity contract to an unrelated
insurance company for a new annuity
contract was a tax-free exchange under
§ 1035. In that case, the transfer was made
directly from the first insurance company
to the unrelated insurance company, and
none of the assets transferred in the trans-
action were received by the taxpayer.
Section 1035(d)(2) references § 1031
for the rules to determine the basis of
property acquired in a § 1035 exchange.
Section 1031(d) provides that property ac-
quired in a § 1035 exchange has the same
basis as that of the property exchanged,
decreased by the amount of any money
received by the taxpayer and increased by
any gain (or decreased by any loss) recog-
nized by the taxpayer on the exchange.
Section 1.1031(d)–1 provides, in part,
that in a § 1035 exchange the basis of the
property acquired is the same as the ba-
sis of the property transferred by the tax-
payer with proper adjustments to the date
of the exchange. Section 1.1031(j)–1(c)
provides that, in the case of a multiple ex-
change of properties, the basis of prop-
erties received is the “aggregate adjusted
basis of the properties transferred,” which
is then “allocated proportionately to each
property received in the transaction.”Cf.
Section 1.1031(j)–1(d) ex. 5 (the basis of a
single property transferred in a non-recog-
nition transaction is allocated on apro rata
basis to the two properties received in the
transaction). Section 1.61–6(a) echoes the
allocation rule of § 1.1031(d)–1, providing
that when a part of a larger property is sold,
the basis of the entire property is equitably
apportioned among the parts, and the gain
realized or loss sustained on the part sold
is the difference between the selling price
and the basis allocated to such part.
Section § 72 governs the federal tax
treatment of distributions from an annuity
contract. When amounts received are not
annuity payments, § 72(e)(6) defines the
investment in the contract. (For purposes
of § 72(b), which applies to annuity pay-
ments, § 72(c)(1) defines the investment in
the contract in a similar, but not identical,
manner). Section 72(e) sets forth rules re-
garding the tax treatment of distributions
from annuity contracts. Under § 72(e)(2),
distributions that are not amounts received
as an annuity, including withdrawals and
partial surrenders, result in income to the
contract holder to the extent of the earn-
ings in the contract and then in a recovery
of the contract holder’s investment in the
contract.
After completion of the transaction, A
still owns original Contract B, reduced in
value to reflect the cash surrender value
transferred to Company C for Contract C.
A also owns new Contract C. Because the
funds were transferred by Company B di-
rectly to Company C, A had no access to
the funds during the transaction other than
in the form of annuity contracts. There-
fore, the transfer of a portion of Contract
B to Company C for new Contract C is
a tax-free exchange under § 1035. The
continued existence of Contract B with
its reduced cash value does not affect the
tax-free character of the exchange.
Under § 1035(d), A’s basis in Contract
B immediately before the exchange is al-
located ratably between Contract B and
Contract C based on the percentage of the
cash value retained in Contract B and the
percentage of the cash value transferred
to purchase Contract C. A’s investment
in Contract B immediately before the ex-
change is allocated ratably between Con-
tract B and Contract C based on the per-
centage of the cash value retained in Con-
tract B and the percentage of the cash value
transferred to purchase Contract C.
HOLDINGS
(1) The direct transfer by A of a portion
of the cash surrender value of Contract B
to Company C for Contract C is a tax-free
exchange under § 1035.
(2) After the transaction, pursuant to
§ 1035, A’s basis in Contract C equals 60
percent of A’s basis in Contract B immedi-
ately before the exchange. After the trans-
action, A’s basis in Contract B equals 40
percent of A’s basis in Contract B immedi-
ately before the exchange.
(3) After the transaction, pursuant to
§ 72, A’s investment in Contract C equals
60 percent of A’s investment in Contract
B immediately before the exchange. Af-
ter the transaction, A’s investment in Con-
tract B equals 40 percent of A’s investment
in Contract B immediately before the ex-
change.
TREATMENT OF CERTAIN PARTIAL
EXCHANGES
Treasury and the Internal Revenue
Service (the Service) are concerned that
some taxpayers may enter into a partial
exchange of a portion of one annuity con-
tract for a new annuity contract as a means
of reducing or avoiding tax that would
otherwise be imposed under § 72(e). On
August 18, 2003, Treasury and the Ser-
vice published Notice 2003–51, 2003–33
I.R.B. 361, which announced that Treasury
and the Service are considering whether
to exercise the authority granted under
§ 72(e)(11) to promulgate regulations that
would prescribe the tax treatment of these
transactions. Notice 2003–51 provides
interim guidance regarding the tax treat-
ment of these transactions. Finally, Notice
2003–51 requests comments regarding the
appropriate application of § 72(e)(11) to
these transactions. Taxpayers should re-
view Notice 2003–51 prior to entering into
a partial exchange to determine whether
their transaction is subject to the interim
guidance provided by the notice.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Ann H. Logan of the Office of Asso-
ciate Chief Counsel (Financial Institutions
and Products). For further information re-
garding this revenue ruling, contact her at
(202) 622–3970 (not a toll-free call).
2003-33 I.R.B.356August 18, 2003

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 August 2003.
Rev. Rul. 2003–94
This revenue ruling provides various
prescribed rates for federal income tax
purposes for August 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
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted 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 percentages 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 de-
termining the present value of annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2003–94 TABLE 1
Applicable Federal Rates (AFR) for August 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR1.21%1.21%1.21%1.21%
110% AFR1.33%1.33%1.33%1.33%
120% AFR1.46%1.45%1.45%1.45%
130% AFR1.58%1.57%1.57%1.56%
Mid-Term
AFR2.70%2.68%2.67%2.67%
110% AFR2.97%2.95%2.94%2.93%
120% AFR3.25%3.22%3.21%3.20%
130% AFR3.51%3.48%3.46%3.46%
150% AFR4.06%4.02%4.00%3.99%
175% AFR4.74%4.69%4.66%4.64%
Long-Term
AFR4.36%4.31%4.29%4.27%
110% AFR4.80%4.74%4.71%4.69%
120% AFR5.24%5.17%5.14%5.12%
130% AFR5.68%5.60%5.56%5.54%
August 18, 20033572003-33 I.R.B.

REV. RUL. 2003–94 TABLE 2
Adjusted AFR for August 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjustedAFR
1.08%1.08%1.08%1.08%
Mid-term
adjustedAFR
2.37%2.36%2.35%2.35%
Long-term
adjustedAFR
4.12%4.08%4.06%4.05%
REV. RUL. 2003–94 TABLE 3
Rates Under Section 382 for August 2003
Adjusted federal long-term rate for the current month4.12%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal
long-term rates for the month and the prior two months.)
4.35%
REV. RUL. 2003–94 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for August 2003
Appropriate percentage for the 70% present value low-income housing credit7.82%
Appropriate percentage for the 30% present value low-income housing credit3.35%
REV. RUL. 2003–94 TABLE 5
Rate Under Section 7520 for August 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 interest
3.2%
S
ection 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 August 2003. See Rev. Rul. 2003-94, page 357.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2003. See Rev. Rul. 2003-94, page 357.
Section 7702.—Life
Insurance Contract Defined
(Also Section 72.)
Life insurance contracts; distribu-
tions made in connection with a change
in benefits.This ruling describes the rules
of section 7702(f)(7) of the Code regard-
ing the tax treatment of a cash distribution
madeinconnectionwithareductioninthe
benefits of a life insurance contract.
Rev. Rul. 2003–95
ISSUE
How is a cash distribution upon a
change in the benefits of a life insurance
contract taxed under § 7702(f)(7) of the
Internal Revenue Code?
FACTS
Situation 1. In Year 1,Apurchased
a life insurance contract with a $350,000
death benefit. The contract is a life in-
surance contract under applicable state law
and meets the cash value accumulation test
prescribed in § 7702(a)(1) and § 7702(b).
The contract is not a “modified endowment
contract” as defined in § 7702A.
Through the end of Year 4,Apaid to-
tal premiums of $45,000 with regard to
the contract. At the end of the Year 4,
when the cash surrender value of the con-
tract was $60,000,Asurrendered 60% of
the contract and received a cash distribu-
tion of $36,000. The death benefit under
the contract decreased to $140,000 as a
result of the partial surrender. Based on
A's age at the time of the partial surrender,
2003-33 I.R.B.358August 18, 2003

the net single premium (determined under
§ 7702(b)) was $355 per $1000 of insur-
ance coverage.
Situation 2. Same facts as Situation
1, except that the contract qualifies as a
life insurance contract using the guide-
line premium/cash value corridor test
of §§ 7702(a)(2), 7702(c), and 7702(d)
rather than the cash value accumula-
tion test. When the contract was issued,
the guideline premium limitation was
$80,500. Immediately after the partial
surrender, the guideline premium limita-
tion (determined under § 7702(c)(3)) was
$265 per $1000 of insurance coverage
and the cash value corridor percentage
(determined under § 7702(d)) was 185.
Situation 3. Same facts as Situation 2,
except that the partial surrender occurred 6
years after the issuance of the contract.
LAW AND ANALYSIS
Section 7702(f)(7)(B) provides that if
the benefits under a life insurance contract
are reduced during the 15-year period be-
ginning on the issue date of the contract
and a cash distribution is made to the pol-
icyholder as a result of the reduction in
benefits, then § 72(e) (other than subsec-
tion (e)(5) thereof) applies to the portion
of the cash distribution that does not ex-
ceed the applicable recapture ceiling. Un-
der § 72(e)(2)(B), a distribution is included
in gross income to the extent of the income
on the contract. Income on the contract is
the amount by which the contract's cash
value (determined without regard to any
surrender charge) immediately before the
distribution exceeds the policyholder's in-
vestment in the contract (determined under
§ 72(e)(6)) at such time.See§ 72(e)(3)(A).
Accordingly, under § 7702(f)(7)(B), the
gross income of a policyholder receiving
a cash distribution upon a reduction in the
benefits during the 15 year period follow-
ing the issue date of the contract includes
an amount equal to the lesser of— (i) the
applicable recaptureceiling, (ii) the in-
come on the contract, or (iii) the amount of
the distribution. To the extent the distribu-
tion exceeds the amount included in gross
income, the excess is treated as a tax-free
recovery of investment in the contract.See
§72(e)(2)(B).
The applicable recapture ceiling under
§ 7702(f)(7) varies depending on when the
reduction in benefits occurs and on which
of the § 7702 tests is used to qualify the
contract as a life insurance contract for fed-
eral tax purposes.
If the reduction in benefits occurs dur-
ing the 5-year period beginning on the is-
sue date of the contract and the contract
qualifies as a life insurance contract by sat-
isfying the cash value accumulation test,
then § 7702(f)(7)(C)(i) provides that the
applicable recapture ceiling equals the ex-
cess of— (1) the cash surrender value of
the contract immediately before the reduc-
tion in benefits, over (2) the net single pre-
mium (determined under § 7702(b)) for
the contract immediately after the reduc-
tion in benefits. If the contract qualifies as
a life insurance contract under the guide-
line premium/cash value corridor test, then
§ 7702(f)(7)(C)(ii) provides that the appli-
cable recapture ceiling is the greater of—
(1) the excess of— (A) the aggregate
premiums paid under the contract immedi-
ately before the reduction in the contract's
benefits, over (B) the adjusted guideline
premium limitation for the contract; or
(2) the excess of— (A) the cash sur-
render value of the contract immediately
before the reduction in the contract's ben-
efits, over (B) the maximum cash value
permitted under the cash value corridor of
§ 7702(d) immediately after the reduction
of the contract's benefits.
The first and third of the four amounts
required for this calculation, the aggregate
premiums paid under the contract immedi-
ately before the reduction in the contract's
benefits and the cash surrender value, are
known facts. The second amount, the ad-
justed guideline premium limitation for the
contract, is calculated by subtracting from
the original guideline premium limitation a
guideline premium limitation (determined
under § 7702(c)(2)) for the decrease in
the contract's benefits. The guideline pre-
mium limitation is determined as of the
date of the reduction in benefits using the
attained age of the insured on that date.
S. Rep. No. 313, 99
th
Cong. 2d Sess. 989
(1986); 1986–3 (Vol. 3) C.B. 989. The
fourth amount, the maximum cash value
permitted under the cash value corridor of
§ 7702(d) immediately after the reduction
of the contract's benefits, is calculated by
dividing the death benefit of the contract
immediately after the reduction by the ap-
plicable percentage set forth in § 7702(d).
If the reduction in benefits occurs more
than 5 years but less than 16 years after
the contract's issue date, a single recapture
ceiling applies to all contracts. The re-
capture ceiling equals the excess of— (1)
the cash surrender value of the contract
immediately before the reduction, over
(2) the maximum cash value that would
be permitted under the cash value corri-
dor of § 7702(d) immediately after the
reduction of the contract's benefits.See
§ 7702(f)(7)(D).
InSituation 1,Areceived a $36,000
cash distribution upon the surrender of
60% of the benefits under the life insur-
ance contract. Immediately before the
surrender, the income on the contract was
$15,000 [$60,000−$45,000 = $15,000].
The partial surrender reduced the death
benefit underA's contract from $350,000
to $140,000. As the reduction in the
benefits occurred within the 5-year pe-
riod beginning on the issue date of the
contract and the contract qualifies as a
life insurance contract under the cash
value accumulation test, the applicable
recapture ceiling isdetermined under
§ 7702(f)(7)(C)(i).The recapture ceiling
is the excess of the contract's $60,000 cash
surrender value immediately before the
reduction in benefits over the net single
premium for the contract immediately
after the reduction in benefits. On the date
of the reduction in benefits, the net single
premium was $355 per $1000 of insurance
coverage. The net single premium for
the contract's reduced death benefit was
$49,700 [$140,000 × $355 ÷ $1,000 =
$49,700]. The recapture ceiling, there-
fore, was $10,300 [$60,000−$49,700 =
$10,300].
Pursuant to § 7702(f)(7)(B),A's gross
income includes the portion of the distribu-
tion equal to the lesser of— (i) the applica-
ble recapture ceiling ($10,300), (ii) the in-
come on the contract ($15,000), or (iii) the
amount of the distribution ($36,000). Ac-
cordingly, $10,300 is included inA's gross
income. The remaining $25,700 of the dis-
tribution is treated, under § 72(e)(5), as a
return of a portion of theA's $45,000 in-
vestment in the contract.A's investment in
the contract immediately after the partial
surrender is $19,300 [$45,000−$25,700
= $19,300].See§72(e)(6).
InSituation 2, the reduction in the
benefits underA's life insurance contract
also occurred within the 5-year period
beginning on the issue date of the contract.
However, because the contract qualifies
August 18, 20033592003-33 I.R.B.

as a life insurance contract using the
guideline premium/cash value corridor
test, the applicable recapture ceiling under
§ 7702(f)(7)(C)(ii) is the greater of—
(1) the excess of— (A) the aggregate
premiums paid under the contract immedi-
ately before the reduction in the contract's
benefits, over (B) the adjusted guideline
premium limitation for the contract; or
(2) the excess of— (A) the cash sur-
render value of the contract immediately
before the reduction in the contract's ben-
efits, over (B) the maximum cash value
permitted under the cash value corridor of
§ 7702(d) immediately after the reduction
of the contract's benefits.
Apaid aggregate premiums of $45,000
under the contract prior to the reduction of
the contract's benefits. The adjusted guide-
line premium limitation for the contract
immediately after the reduction of bene-
fits is calculated by subtracting from the
$80,500 original guideline premium limi-
tation a guideline premium limitation for
the amount of the decrease in the contract's
death benefit. The partial surrender re-
sulted in a $210,000 decrease in the death
benefit underA's contract. Immediately af-
ter the reduction in benefits, the guideline
premium limitation was $265 per $1000
of insurance coverage. The guideline pre-
mium for the decrease in death benefits
was $55,650 [$210,000 × $265 ÷ $1,000
= $55,650]. The adjusted guideline pre-
mium limitation for the contract immedi-
ately after the reduction in benefits, there-
fore, was $24,850 [$80,500−$55,650 =
$24,850]. The excess of the aggregate pre-
miums paid under the contract over the ad-
justed guideline premium limitation was
$20,150 [$45,000−$24,850 = $20,150].
The cash surrender value ofA's contract
immediately before the reduction in ben-
efits was $60,000. Immediately after the
reduction of benefits, the cash value cor-
ridor of § 7702(d) requires the contract's
death benefit to be at least 185% of the
contract's cash surrender value. The par-
tial surrender reduced the contract's death
benefit to $140,000. The maximum cash
value permitted under the cash value cor-
ridor requirement, therefore, was $75,675
[$140,000 ÷ 1.85 = $75,675]. The cash
surrender value ofA's contract immedi-
ately before the reduction in the contract's
benefits was less than the maximum cash
value permitted under the cash value corri-
dor of § 7702(d) immediately after the re-
duction in benefits.
As the $20,150 excess of the aggregate
premiums paid under the contract over the
adjusted guideline premium limitation was
greater than the $0 excess of the cash sur-
render value of the contract immediately
before the reduction in the contract's ben-
efits over the maximum cash value per-
mitted under the cash value corridor im-
mediately after the reduction of the con-
tracts benefits, the recapture ceiling was
$20,150.
Pursuant to § 7702(f)(7)(B),A's gross
income includes the portion of the distribu-
tion equal to the lesser of— (i) the applica-
ble recapture ceiling ($20,150), (ii) the in-
come on the contract ($15,000), or (iii) the
amount of the distribution ($36,000). Ac-
cordingly, $15,000 is included inA's gross
income. The remaining $21,000 of the dis-
tribution is treated, under § 72(e)(5), as a
return of a portion of theA's $45,000 in-
vestment in the contract.A's investment in
the contract immediately after the partial
surrender is $24,000 [$45,000−$21,000
= $24,000].
InSituation 3, the reduction in the ben-
efits underA's life insurance contract oc-
curred more than 5 years but less than 16
years after the contract's issue date. Un-
der § 7702(f)(7)(D),the recapture ceiling
equals the excess of— (1) the cash surren-
der value of the contract immediately be-
fore the reduction, over (2) the maximum
cash value that would be permitted under
the cash value corridor of § 7702(d) imme-
diately after the reduction of the contracts
benefits.
The cash surrender value ofA's contract
immediately before the reduction in bene-
fits was $60,000. The maximum permitted
cash value under the cash value corridor re-
quirement immediately after the reduction
of benefits was $75,675 [$140,000 ÷ 1.85
= $75,675]. As the $60,000 cash surrender
value ofA's contract immediately before
the reduction in the contract's benefits was
less than the $75,675 maximum cash value
permitted under the cash value corridor re-
quirement immediately after the reduction
in benefits, the excess was $0. The appli-
cable recapture ceiling, therefore, was $0.
Pursuant to section 7702(f)(7)(B),A's
gross income includes the portion of the
distribution equal to the lesser of— (i) the
applicable recapture ceiling ($0), (ii) the
income on the contract ($15,000), or (iii)
the amount of the distribution ($36,000).
Accordingly, none of the $36,000 distri-
bution is included inA's gross income.
The entire distribution is treated, under
§ 72(e)(5), as a return of a portion of the
A's $45,000 investment in the contract.A's
investment in the contract immediately af-
ter the partial surrender is $9,000 [$45,000
−$36,000 = $9,000].
HOLDING
InSituation 1, $10,300 of the cash dis-
tribution is included inA's gross income.
The remaining $25,700 of the distribution
is treated as a return of a portion of theA's
$45,000 investment in the contract, which
reducesA's investment in the contract to
$19,300.
InSituation 2, $15,000 of the cash dis-
tribution is included inA's gross income.
The remaining $21,000 of the distribution
is treated as a return of a portion of theA's
$45,000 investment in the contract, which
reducesA's investment in the contract to
$24,000.
InSituation 3, none of the cash distribu-
tion is included inA's gross income. The
entire $36,000 of the distribution is treated
as a return of a portion of theA's $45,000
investment in the contract, which reduces
A's investment in the contract to $9,000.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Stephen Hooe of the Office of As-
sociate Chief Counsel (Financial Institu-
tions and Products). For further informa-
tion regarding this revenue ruling, contact
Kay Hossofsky at (202) 622–3970 (not a
toll-free call).
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 August 2003. See Rev. Rul. 2003-94, page 357.
2003-33 I.R.B.360August 18, 2003

Part III. Administrative, Procedural, and Miscellaneous
Section 1035.—Certain
Exchanges of Insurance Policies
Notice 2003–51
SECTION 1—PURPOSE
This notice addresses the taxation of
certain tax-free exchanges of annuity
contracts under § 72(e) and § 1035 of
the Internal Revenue Code. This notice
announces that Treasury and the Service
are considering whether to exercise the
authority granted under § 72(e)(11) to pro-
mulgate regulations that would prescribe
the tax treatment of these transactions.
This notice provides interim guidance
regarding the tax treatment of these trans-
actions. Finally, this notice requests
comments regarding the appropriate appli-
cation of § 72(e)(11) to these transactions.
SECTION 2—BACKGROUND
Section 1035(a)(3) provides that no
gain or loss shall be recognized on the ex-
change of an annuity contract for another
annuity contract. Section 1.1035–1 of the
Income Tax Regulations provides that “the
exchange, without recognition of gain or
loss, of an annuity contract for another
annuity contract under § 1035(a)(3) is
limited to cases where the same person or
persons are the obligee or obligees under
the contract received in the exchange as
under the original contract.”
The legislative history of § 1035 states
that exchange treatment is appropriate for
“individuals who have merely exchanged
one insurance policy for another better
suited to their needs and who have not
actually realized gain.” H.R. Rep. No.
1337, 83d Cong., 2d Sess. 81 (1954). In
Conway v. Commissioner, 111 T.C. 350
(1998),acq., 1999–2 C.B. xvi, the Tax
Court held that the direct exchange by
an insurance company of a portion of an
existing annuity contract to an unrelated
insurance company for a new annuity
contract was a tax-free exchange under
§ 1035. In that case, the transfer was made
directly from the first insurance company
to the unrelated insurance company, and
none of the assets transferred in the trans-
action were received by the taxpayer.
Section 1035(d)(2) cross-references
§ 1031 for the rules to determine the basis
of property acquired in a § 1035 exchange.
Section 1031(d) provides that property ac-
quired in a § 1035 exchange has the same
basis as that of the property exchanged,
decreased by the amount of any money
received by the taxpayer and increased by
any gain (or decreased by any loss) rec-
ognized by the taxpayer on the exchange.
Revenue Ruling 2003–76, 2003–33 I.R.B.
355, addresses a transaction in which a
taxpayer transfers a portion of the cash
value of an existing contract to a new
insurance company in exchange for a new
annuity contract (commonly referred to as
“partial exchanges”). Rev. Rul. 2003–76
holds that the basis under § 1031 and in-
vestment in the contract under § 72 of the
surviving contract immediately before the
exchange is allocated ratably between the
surviving contract and the newly issued
contract.
Section 72(e) governs the federal tax
treatment of distributions from an annu-
ity contract. Section 72(e)(11) provides
anti-abuse rules applicable to transactions
governed by § 72(e). Section 72(e)(11)(B)
grants the Secretary broad authority
to publish regulations as necessary “to
prevent avoidance of the purposes of
[§ 72(e)].”
Section 72(q)(1) imposes a 10 percent
penalty on withdrawals from, or surrenders
of, annuity contracts. Section 72(q)(2)
provides that distributions from an annu-
ity contract will not be subject to the 10
percent penalty if the distribution is made
after the taxpayer attains age 59-1/2, if the
distribution is made on or after the death of
the annuity holder, if the distribution is at-
tributable to the taxpayer’s becoming dis-
abled, or if other conditions not relevant
here are satisfied.
SECTION 3—TREATMENT OF
CERTAIN PARTIAL EXCHANGES
Treasury and the IRS are concerned
that some taxpayers may enter into a
transaction similar to the transaction at
issue inConway(commonly referred to as
a “partial exchange”) to reduce or avoid
the tax that would otherwise be imposed
by § 72(e)(2). For example, if a taxpayer
withdraws $100 from an annuity contract
with a cash surrender value of $200 and
investment in the contract of $80, the
entire $100 of the withdrawal would be
included in income pursuant to § 72(e)(2).
However, if that same taxpayer assigned
50 percent of the cash surrender value of
the annuity contract in a partial exchange,
such that the cash surrender value of each
contract after the exchange was $100 and
the investment in each contract after the
exchange was $40, and then surrendered
either the existing annuity contract or the
new annuity contract, under § 72(e)(2)
only $60 would be included in income
and $40 would be excluded as a return of
investment in the contract.
Treasury and the Service are consid-
ering whether to exercise the regulatory
authority of § 72(e)(11) to address the
transaction described above to assure
that such transactions do not become a
vehicle for avoiding the rules of § 72(e).
In particular, Treasury and the Service
are considering whether such regulations
should provide rules for determining
when a partial exchange of an annuity
contract followed by the surrender of, or
distributions from, either the surviving
annuity contract or the new annuity con-
tract should be presumed to have been
entered into for tax avoidance purposes.
Specifically, Treasury and the Service are
considering whether to treat surrenders or
distributions that occur within 24 months
of the date on which the partial exchange
was completed as presumptively entered
into for tax avoidance purposes. However,
Treasury and the Service believe that tax-
payers should be provided the opportunity
to rebut any presumption by demonstrat-
ing that the surrender or withdrawal was
not contemplated at the time the partial ex-
change was completed. Treasury and the
Service are considering whether to treat
any surrender or distribution that is not
subject to the 10 percent penalty tax im-
posed by § 72(q)(1) because it is described
in § 72(q)(2) as successfully rebutting
any presumption. In addition, Treasury
and the Service are considering whether
other events, such as the safe harbors set
forth in § 1.121–3T(e), for divorce, loss
of employment and other similar events,
should be treated as successfully rebutting
any presumption.
August 18, 20033612003-33 I.R.B.

SECTION 4—INTERIM GUIDANCE
Pending the publication of final regula-
tions, the Service, using general principles
of tax law, will consider all the facts and
circumstances to determine whether a par-
tial exchange and a subsequent withdrawal
from, or surrender of, either the surviving
annuity contract or the new annuity con-
tract within 24 months of the date on which
the partial exchange was completed should
be treated as an integrated transaction, and
thus whether the two contracts should be
viewed as a single contract to determine
the tax treatment of a surrender or with-
drawal under § 72(e).See Helvering v.
LeGeirse, 312 U.S. 531 (1941) (conclud-
ing that, in substance, annuity contracts
and the life insurance contracts purchased
by the taxpayer were integrated contracts).
However, if a taxpayer demonstrates that
one of the conditions of § 72(q)(2), or any
other similar life event, such as a divorce or
the loss of employment, occurred between
the partial exchange and the surrender or
distribution, and that the surrender or dis-
tribution was not contemplated at the time
of the partial exchange, the taxpayer will
not be treated as having entered into the
partial exchange and the surrender or dis-
tribution for tax avoidance purposes.
SECTION 5—REQUEST FOR
COMMENTS
Treasury and the Service request com-
ments regarding the need for regulations
under § 72(e)(11) to prevent the use of par-
tial exchange transactions as a means of
avoiding the tax imposed by § 72(e). In
addition, Treasury and the Service request
comments regarding whether the princi-
ples outlined in Section 3 appropriately
address Treasury’s and the Service’s con-
cern without significantly limiting the abil-
ity of taxpayers to use partial exchanges
to acquire annuity contracts that “are bet-
ter suited to their needs” as contemplated
by Congress. Treasury and the Service
also request comments regarding any other
similar transactions that any regulations
under § 72(e)(11) should address.
DRAFTING INFORMATION
The principal author of this notice is
Ann H. Logan of the Office of Associate
Chief Counsel (Financial Institutions and
Products). For further information re-
garding this notice, contact her at (202)
622–3970 (not a toll-free call).
Coverdell Education Savings
Accounts
Notice 2003–53
This notice provides guidance regard-
ing certain reporting requirements and
transition rules applicable to Coverdell
Education Savings Accounts (“CESAs”)
described in section 530 of the Internal
Revenue Code.
Section 530(h) provides that the trustee
or custodian of a CESA shall make reports
to the Secretary and to the beneficiary of
the CESA with respect to contributions,
distributions, and such other matters as the
Secretary may require in the time and man-
ner required by the Secretary.
For calendar years before 2003, CESA
trustees and custodians were required to
report on Form 1099–R (Distributions
From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.) gross distributions from
CESAs during the calendar year, together
with other information including the name,
address and TIN of the beneficiary. For
calendar years after 2002, CESA trustees
and custodians are required to report on
Form 1099–Q (Payments From Qualified
Education Programs (Under Sections 529
and 530)) not only gross distributions
from CESAs during the calendar year
(as they did on Form 1099–R), but also
the earnings and basis portions of the
distributions, and certain other informa-
tion. Gross distributions reportable on
Form 1099–Q include transfers from the
CESA trustee to a section 529 qualified
tuition program (QTP) or to another CESA
(trustee-to-trustee transfers).
The Internal Revenue Service (IRS) has
received comments concerning changes
to the reporting requirements for distribu-
tions from CESAs. Commentators have
stated that a financial institution that acts
as trustee or custodian of CESAs may
not have collected historical account in-
formation that would enable the financial
institution to determine the basis and earn-
ings portions of gross distributions for a
taxable year. Further, even if a financial
institution has collected its own historical
basis and earnings information for the
CESAs it holds, the financial institution
may not have the basis and earnings infor-
mation for amounts that were transferred
to the financial institution from CESAs
managed by other financial institutions.
Commentators also asked whether gross
distributions required to be reported on
Form 1099–Q include trustee-to-trustee
transfers. Commentators indicated that
the records of a financial institution that
acts as trustee or custodian of CESAs may
not establish whether a CESA distribution
wassenttoaCESAorQTPatanother
financial institution or directly to the
beneficiary. Commentators requested ad-
ditional time to allow financial institutions
to implement appropriate recordkeeping
and reporting procedures.
Modifications to reporting for 2003
The IRS is modifying the reporting re-
quirements relating to CESAs. If a trustee
or custodian is unable to calculate the earn-
ings and basis portions of a gross distri-
bution from a CESA made in 2003, the
trustee or custodian will satisfy the report-
ing requirements of section 530(h) if the
trustee or custodian provides in a timely
manner a Form 1099–Q that includes:
•Gross distributions, including the
amount of any excess contributions
and earnings thereon distributed to a
participant during the calendar year, in
box 1;
•All other required information except
for earnings and basis information in
boxes 2 and 3, which should be left
blank unless the gross distribution in-
cludes a distribution of earnings on ex-
cess contributions;
•The amount of any earnings on ex-
cess contributions in box 2, computed
using the method for calculating the
net income attributable to IRA con-
tributions that are distributed as a re-
turned contribution pursuant to section
408(d)(4) of the Code under Notice
2000–39, 2000–2 C.B. 132, and Pro-
posed section 1.408–11, Income Tax
Regulations;
•If earnings on excess contributions are
reported in box 2, an indication in the
2003-33 I.R.B.362August 18, 2003

empty box below boxes 5 and 6 that the
amount in box 2 includes earnings on
excess contributions;
•The fair market value of the CESA
(appropriately labeled) as of Decem-
ber 31, 2003, in the empty box below
boxes 5 and 6; and
•A cross reference in the empty box
belowboxes5and6toPublication
970 (Tax Benefits for Education), as
provided in the instructions to Form
1099–Q, so that recipients will know
how to calculate the earnings portion
of the gross distribution.
If the trustee or custodian does not have
records indicating whether a gross distri-
bution from a CESA made in 2003 was
a trustee-to-trustee transfer, the trustee
orcustodianmayleavebox4ofForm
1099–Q blank.
These modifications allow additional
time for CESA trustees or custodians
to implement recordkeeping proce-
dures to enable them to report basis
and earnings information, and to identify
trustee-to-trustee transfers. The IRS ex-
pects to publish further guidance about
required reporting for CESA distribu-
tions made in 2004 and future years.
These modifications remain in effect until
further guidance is issued. These modifi-
cations do not apply to QTPs, which are
required to report distributions, including
trustee-to-trustee transfers, in accordance
with Notice 2001–81, 2001–2 C.B. 617.
Request for Comments
The IRS recognizes that to report basis
and earnings information for 2004 and
future years, trustees and custodians that
have not previously collected this infor-
mation with respect to existing CESAs
will need to use information from various
sources to establish basis and earnings.
The IRS invites comments on sources of
information that should be considered sat-
isfactory for this purpose, including Forms
5498 (IRA and Coverdell ESA Contribu-
tion Information) filed by other trustees
or custodians, account statements from
financial institutions, and other forms of
documentation. The IRS invites comments
on an appropriate rule for determining ba-
sis and earnings if documentation is not
available. The IRS also invites comments
on other CESA reporting matters that may
be appropriate for additional guidance.
Comments should reference Notice
2003–53. Please send written comments
by October 17, 2003, to: CC:PA:RU
(Notice 2003–53), room 5226, Inter-
nal Revenue Service, POB 7604, Ben
Franklin Station, Washington DC 20044.
Submissions may be hand-delivered Mon-
day through Friday between the hours
of8a.m. and4p.m. toCC:PA:RU
(Notice 2003–53), Courier's Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington DC. Com-
ments may also be sent via e-mail to
notice.comments@irscounsel.treas.gov.
Comments will be available for public
inspection.
DRAFTING INFORMATION
The principal author of this notice is
Monice Rosenbaum of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this no-
tice, contact Ms. Rosenbaum at (202)
622–6070 (not a toll-free number).
Common Trust Fund Straddle
Tax Shelter
Notice 2003–54
The Internal Revenue Service and the
Treasury Department have become aware
of a type of transaction, described below,
that is being used by taxpayers for the pur-
pose of generating deductions. This notice
alerts taxpayers and their representatives
that the claimed tax benefits purportedly
generated by these transactions are not al-
lowable for federal income tax purposes.
This notice also alerts parties involved with
these transactions of certain responsibili-
ties that may arise from their involvement
with these transactions.
FACTS
The transaction involves the use of a
common trust fund (CTF) that invests in
economically offsetting gain and loss po-
sitions in foreign currencies and allocates
the gains to one or more tax indifferent
parties and the losses to another taxpayer.
For example, in the transaction, a bank
(Bank) forms a CTF. The CTF's plan pro-
vides for monthly valuation dates and for
the computation of income and loss on
a monthly basis. Two tax indifferent in-
vestors, through grantor trusts (Investors'
Trusts), each invest money in the CTF. The
CTF then invests the money in econom-
ically offsetting positions in foreign cur-
rencies, which become offsetting gain and
loss positions as a result of market price
movements. The CTF sells the gain posi-
tion and allocates the gain proportionately
to the Investors' Trusts.
The next month, an investor (Taxpayer)
who desires a tax loss uses a grantor trust
(Taxpayer's Trust) to invest in the CTF.
Taxpayer'sTrustmakesalargeinvestment
for an 80 percent share of the CTF. Conse-
quently, the shares of the CTF's portfolio
owned by the Investors' Trusts are di-
minished to 10 percent each. The CTF
then sells the loss position. For tax pur-
poses, the loss is allocated proportionately
among Taxpayer's Trust and Investors'
Trusts. Taxpayer's Trust is allocated 80
percent of the tax loss and Investors' Trusts
are each allocated 10 percent of the tax
loss under the accounting rules provided
in § 1.584–2(c)(2) of the Income Tax
Regulations.
ANALYSIS
The transaction described in this notice
has been designed to use economically off-
setting positions, one or more tax indiffer-
ent parties, and the CTF accounting rules
of § 584 of the Internal Revenue Code to
allow Taxpayer to claim a noneconomic
loss. The Service intends to challenge the
purported tax benefits from this transaction
on a number of grounds.
The offsetting positions entered into by
the CTF did not have any effect on the
CTF's net economic position or non-tax
objectives and did not serve any non-tax
objectives of the CTF or afford it a rea-
sonable prospect for profit. Therefore,
the losses purportedly resulting from this
transaction are not allowable.See ACM
Partnership v. Commissioner, 157 F.3d
231, 260 (3d Cir. 1998),cert. denied,526
U.S. 1017 (1999). In addition, the Ser-
vice may disallow the loss of an individ-
ual under § 165(c)(2) by asserting that the
loss was not incurred in a transaction un-
dertaken for profit.See Smith v. Com-
missioner, 78 T.C. 350 (1982) andFox v.
August 18, 20033632003-33 I.R.B.

Commissioner, 82 T.C. 1001 (1984) (disal-
lowing losses from straddle transactions).
Further, the Service may, under appropri-
ate circumstances, assert that the CTF does
not meet the requirements of § 584, in-
cluding the requirement that it be operated
in conformity with the rules and regula-
tionsoftheComptrolleroftheCurrency,
as set forth in 12 CFR § 9.18 (2003). In
that event, the Service will recharacterize
such a CTF as a partnership and reallocate
the gains and losses in accordance with the
economics of the transaction and the in-
terests of the participants.See§ 704(b).
In addition, the Service may challenge the
allowance of the loss deduction based on
other statutory provisions, including § 988,
and judicial doctrines.
Transactions that are the same as, or
substantially similar to, the transaction
described in this notice are identified
as “listed transactions” for purposes of
§ 1.6011–4(b)(2) of the Income Tax Reg-
ulations and §§ 301.6111–2(b)(2) and
301.6112–1(b)(2) of the Procedure and
Administration Regulations. The trans-
action described in this notice and the
transactions described in Notice 2002–50,
2002–28 I.R.B. 98 (Partnership Strad-
dle Tax Shelter), and Notice 2002–65,
2002–41 I.R.B. 690 (Passthrough Entity
Straddle Tax Shelter), are substantially
similar transactions. For purposes of
§§ 1.6011–4(b)(2), 301.6111–2(b)(2),
and 301.6112–1(b)(2), a transaction will
be considered the same as, or substan-
tially similar to, the transaction described
in this notice even if the gain and loss
legs of the economically offsetting po-
sitions are triggered in separate taxable
years, or a trust other than a grantor
trust is used. Further, it should be noted
that, independent of their classification
as “listed transactions” for purposes of
§§ 1.6011–4(b)(2), 301.6111–2(b)(2), and
301.6112–1(b)(2), transactions that are
the same as, or substantially similar to,
the transaction described in this notice
may already be subject to the disclosure
requirements of § 6011, the tax shelter
registration requirements of § 6111, or the
list maintenance requirements of § 6112
(§§ 1.6011–4, 301.6111–1T, 301.6111–2
and 301.6112–1).
Persons who are required to satisfy the
registration requirement of § 6111 with re-
spect to the transaction described in this
notice or substantially similar transactions
and who fail to do so may be subject to the
penalty under § 6707(a). Persons who are
required to satisfy the list-keeping require-
ment of § 6112 with respect to the trans-
action or substantially similar transactions
and who fail to do so may be subject to
the penalty under § 6708(a). In addition,
the Service may impose penalties on par-
ticipants in this transaction or substantially
similar transactions or, as applicable, on
persons who participate in the reporting
of this transaction or substantially simi-
lar transactions, including the accuracy-re-
lated penalty under § 6662 and the return
preparer penalty under § 6694.
The principal author of this notice is
Tara P. Volungis of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Ms. Volungis
at (202) 622–3080 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also Part I, § 856, 1.856–4.)
Rev. Proc. 2003–66
SECTION 1. PURPOSE
This revenue procedure describes con-
ditions under which payments to a real es-
tate investment trust (REIT) from a joint
venture between a taxable REIT subsidiary
of the REIT (TRS) and a third party that is
not related either to the TRS or the REIT
for space at a property owned by the REIT
will be treated as rents from real prop-
erty under § 856(d) of the Internal Revenue
Code.
SECTION 2. BACKGROUND
.01 A TRS may form a joint venture
with one or more third parties to provide
services to tenants of the TRS' parent
REIT. To facilitate the services that are
provided to tenants, the joint venture may
lease space at the property where it is
providing services to tenants.
.02 To qualify as a REIT, an entity must
derive at least 95 percent of its gross in-
come from sources listed in § 856(c)(2)
and at least 75 percent of its gross income
from sources listed in § 856(c)(3). “Rents
from real property” are among the sources
listed in both of those sections.
.03 Section 856(d)(1) defines rents from
real property (subject to exclusions pro-
vided in § 856(d)(2)) to include rents from
interests in real property, charges for ser-
vices customarily rendered in connection
with the rental of real property, and rent at-
tributable to certain leased personal prop-
erty.
.04 Section 856(d)(2)(B) provides, in
part, that except as provided in § 856(d)(8),
the term “rents from real property” does
not include any amount received or ac-
crued directly or indirectly from any per-
son if the REIT owns, directly or indi-
rectly: (i) in the case of any person that is a
corporation, stock of such person possess-
ing 10 percent or more of the total com-
bined voting power of all classes of stock
entitled to vote, or 10 percent or more of
the total value of shares of all classes of
stock of such person; or (ii) in the case
of any person that is not a corporation, an
interest of 10 percent or more in the as-
sets or net profits of such person. Sec-
tion 856(d)(5) provides that for purposes
of § 856(d), the rules prescribed in sec-
tion 318(a) apply for determining the own-
ership of stock, assets, or net profits of
any person, except as modified by subpara-
graphs (A) and (B) of §856(d)(5).
.05 Section 856(d)(8)(A) provides that
amounts paid to a REIT by a TRS shall
not be excluded from rents from real prop-
erty by reason of § 856(d)(2)(B) if at least
90 percent of the leased space of the prop-
erty is rented to persons other than TRSs of
the REIT and other than related parties de-
scribedin§856(d)(2)(B),butonlytothe
extent that the amounts paid to the REIT
by the TRS as rents from real property are
substantially comparable to such rents paid
by the other tenants of the REIT's property
for comparable space.
SECTION 3. SCOPE
This revenue proc
edure applies to a
REIT that leases s
pace to a joint venture
between a TRS of t
he REIT and a third
party that is un
relatedtoeithertheTRSor
the REIT and is t
reated as a partnership for
federal incom
e tax purposes, if the REIT
would be trea
ted under §856(d)(2) as hav-
inganinter
est of 10 percent or more in the
assets or ne
t profits of the joint venture.
2003-33 I.R.B.364August 18, 2003

SECTION 4. PROCEDURE
The Internal Revenue Service will treat
rents from a joint venture that qualifies un-
der Section 3 of this revenue procedure as
rents from real property if amounts paid to
the REIT by the joint venture as rents from
real property are substantially comparable
to such rents paid by the other tenants of
the REIT's property for comparable space
and at least 90 percent of the leased space
oftheREIT'spropertyisrentedtopersons
other than (i) TRSs of the REIT and (ii)
related parties described in § 856(d)(2)(B)
(including joint ventures that qualify under
Section 3 of this revenue procedure).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
leases in effect or entered into on or after
January 1, 2001.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jonathan D. Silver of the
Office of the Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
procedure, contact Mr. Silver at (202)
622–3920 (not a toll-free call).
August 18, 20033652003-33 I.R.B.

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Section 42 Carryover and
Stacking Rule Amendments
REG–131997–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that amend several ex-
isting regulations concerning the low-in-
come housing tax credit. These proposed
regulations primarily reflect changes to the
law made by the Community Renewal Tax
Relief Act of 2000 and affect owners of
low-income housing projects who claim
the credit and the State or local housing
credit agencies who administer the credit.
This document also contains a notice of a
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments,
requests to speak, and outlines of topics to
be discussed at the public hearing sched-
uled for September 23, 2003, must be re-
ceived by September 5, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–131997–02), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 5
p.m. to: CC:PA:RU (REG–131997–02),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC.
Alternatively, taxpayers may submit
comments electronically directly to the
IRS Internet site atwww.irs.gov/regs.The
public hearing will be held in room 2615,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Lauren R. Taylor, (202) 622–3040, or
Christopher J. Wilson, (808) 539–2874;
concerning submission of comments, the
hearing, or to be placed on the building
access list to attend the hearing, Guy
Traynor, (202) 622–7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
The Community Renewal Tax Relief
Act of 2000 (Public Law 106–554) (2000
Act) amended various provisions in sec-
tion 42 of the Internal Revenue Code
(Code), including provisions relating to
the time for meeting the 10 percent ba-
sis requirement for carryover allocations
under section 42(h)(1)(E) and (F), and
the order in which housing credit dollar
amounts are allocated from the different
components of a State's housing credit
ceiling under section 42(h)(3)(C). To
conform the existing regulations to these
changes, the proposed regulations con-
tain amendments to §1.42–6 (Buildings
qualifying for carryoverallocations)and
§1.42–14 (Allocation rules for post-1989
State housing credit ceiling amounts) of
the Income Tax Regulations (26 CFR part
1).
The proposed regulations also amend
§1.42–6 and §1.42–8 (Election of appro-
priate percentage month) by removing the
requirements that certain documents (for
example, carryover allocation documents,
election statements, and binding agree-
ments) be attached to a taxpayer's income
tax return when it is filed. These amend-
ments help to facilitatethe electronic filing
of income tax returns.
Explanation of Provisions
Buildings Qualifying for Carryover
Allocations
Section 42 provides for a low-income
housing credit that may be claimed as part
of the general business credit under sec-
tion 38. In general, the credit is allowable
only if the owner of a qualified low-income
building receives a housing credit alloca-
tion from a State or local housing credit
agency (Agency) of the jurisdiction where
the building is located.
In general, an allocation must be made
not later than the close of the calendar year
in which the building is placed in service.
Under section 42(h)(1)(E), an allocation
(carryover allocation) may be made to a
“qualified building” that has not yet been
placed in service, provided the building is
placed in service not later than the close of
the second calendar year following the cal-
endar year of the allocation. Prior to the
2000 Act changes, section 42(h)(1)(E)(ii)
defined a qualified building as any building
that is part of a project if the taxpayer's ba-
sis in the project (as of the close of the cal-
endar year of the allocation) is more than
10 percent of the taxpayer’s reasonably ex-
pected basis in the project (as of the close
of the second calendar year following the
calendar year of the allocation). If the tax-
payer failed to meet this 10 percent basis
requirement by the close of the calendar
year of the allocation, the carryover allo-
cation was not valid and was treated as if it
had not been made.
The 2000 Act amended the definition
of a qualified building to provide that the
10 percent basis requirement must be met
by the later of: (1) the date which is 6
months after the date that the allocation
was made, or (2) the close of the calendar
year in which the allocation is made. The
proposed regulations amend the existing
regulations to reflect this change. Thus,
the proposed regulations provide that for
carryover allocations made before July 1,
a taxpayer must meet the 10 percent basis
requirement as of the close of the calendar
year of allocation. For carryover alloca-
tions made after June 30, a taxpayer must
meet the 10 percent basis requirement by
thecloseofthedatethatis6monthsafter
the date the allocation is made. In addition,
the proposed regulations provide that an al-
location made before July 1 will be invalid
and will be treated as if it had not been
made if the 10 percent basis requirement
is not met by the close of the calendar year
of the allocation. An allocation made af-
ter June 30 will be treated as validly made
in the calendar year of the allocation but
returned to the Agency the following cal-
endar year if the 10 percent basis require-
ment is not met by the close of the date that
is 6 months after the date the allocation is
made.
The proposed regulations also facil-
itate the electronic filing of income tax
returns by removing the requirement of
2003-33 I.R.B.366August 18, 2003

§1.42–6(d)(4)(i) that a taxpayer file a copy
of the carryover allocation with its income
tax return for the first taxable year a credit
is claimed.
Election of Appropriate Percentage Month
Section 42(a) provides that the amount
of the low-income housing credit for any
taxable year in the 10-year credit period is
the applicable percentage of the qualified
basis of each qualified low-income build-
ing. Section 42(b)(2)(A) provides that, for
any qualified low-income building placed
in service by the taxpayer after 1987, the
applicable percentage is the appropriate
percentage prescribed by the Secretary for
the month the building is placed in service,
unless the taxpayer otherwise elects.
The taxpayer may elect to use the
appropriate percentage for the month in
which the taxpayer and the Agency en-
ter into an agreement with respect to the
building (which is binding on the Agency,
the taxpayer, and all successors in interest)
as to the housing credit dollar amount to
be allocated to the building. In the case
of a substantially bond-financed building
(as described in section 42(h)(4)(B)), the
taxpayer may elect to use the appropriate
percentage for the month in which the
tax-exempt obligations are issued. In ei-
ther case, the election must be made no
later than the 5th day after the close of
the month elected by the taxpayer. An
election, once made, is irrevocable.
The proposed regulations facilitate
theelectronicfilingofincometaxre-
turns by removing the requirements of
§1.42–8(a)(6)(i) and §1.42–8(b)(4)(i) that
ataxpayerfileacopyoftheelectionstate-
ment (and, in the case of §1.42–8(a)(6)(i),
the binding agreement) with its income
tax return for the first taxable year that
credit is claimed.
Allocation Rules for Post-1989 State
Housing Credit Ceiling Amounts
Under section 42(h), the aggregate
housing credit dollar amount that an
Agency may allocate for any calendar
year is limited to the State housing credit
ceiling (Credit Ceiling) apportioned to the
Agency for that calendar year. Prior to
the 2000 Act changes, section 42(h)(3)(C)
provided that the Credit Ceiling of any
State for any calendar year was an amount
equal to the sum of: (a) $1.25 multiplied
by the State population (the population
component); (b) the unused Credit Ceil-
ing, if any, of the State for the preceding
calendar year (the unused carryforward
component); (c) the amount of Credit
Ceiling returned in the calendar year (the
returned credit component); plus (d) the
amount, if any, allocated to the State by
the Secretary under section 42(h)(3)(D)
from a national pool of unused credit (the
national pool component).
Read together, sections 42(h)(3)(C) and
42(h)(3)(D)(ii) provide rules governing the
order in which credit is allocated from the
various components of the Credit Ceiling
(the stacking rule). Prior to the 2000 Act
changes the stacking rule provided that
credit was allocated first from the sum of
the population and returned credit compo-
nents, then from the unused carryforward
component, and finally, from the national
pool component. In addition, unlike un-
allocated credit attributable to the popula-
tion and returned credit components, un-
allocated credit attributable to the national
pool component could not be carried for-
ward, and therefore, was not included in
the unused carryforward component of the
following calendar year's Credit Ceiling.
The 2000 Act increased the size of the
population component to the greater of
(1) $1.75 ($1.50 for 2001) multiplied by
the State population, or (2) $2,000,000,
with these amounts being increased by
a cost-of-living adjustment for calendar
years after 2002. The proposed regula-
tions amend the existing regulations to
reflect this change.
The 2000 Act also amended the re-
turned credit component of a Credit Ceil-
ing for any calendar year to include credits
from a carryover allocation made in the
prior calendar year where a taxpayer fails
to satisfy the 10 percent basis requirement
by a date after the close of the calendar
year of the allocation. The proposed reg-
ulations amend the final regulations to
reflect this change.
Finally, the 2000 Act amended the
stacking rule to provide that credit is allo-
cated first from the unused carryforward
component, then from the sum of the
population, returned credit, and national
pool components. The 2000 Act also
amended the computation of the unused
carryforward component. The proposed
regulations amend the existing regulations
to reflect these changes and clarify that
under the 2000 Act changes, amounts
remaining unallocated from the national
pool component in a calendar year are
included as part of the unused carryfor-
ward component of the following calendar
year's Credit Ceiling.
Proposed Effective Date
The proposed regulations that reflect
the changes made by the 2000 Act will be
effective for housingcredit dollar amounts
allocated after the date these regulations
are published as final regulations in the
Federal Register. However, the proposed
regulations that reflect the changes made
by the 2000 Act may be applied by Agen-
cies and taxpayers for housing credit dol-
lar amounts allocated after December 31,
2000, and before the effective date of the
final regulations. The proposed regula-
tions that facilitate the electronic filing
of
income tax returns will be effective for
forms filed after the date these regulatio
ns
are published as final regulations in the
Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment 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 regulations do not impose
a new collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. The col-
lection of information contained in this no-
tice of proposed rulemaking has been pre-
viously reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1102. Pursuant to section 7805(f)
of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and
Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
August 18, 20033672003-33 I.R.B.

(preferably a signed original and eight (8)
copies) that are submitted timely to the
IRS. Comments are requested on all as-
pects of the proposed regulations. In addi-
tion, comments are specifically requested
on the clarity of the proposed regulations
andhowtheycanberevisedtobemore
easily understood. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for September 23, 2003, at 10 a.m. in
room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton DC. All visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance area at the Constitution Avenue
entrance more than30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
Personsthatwishtopresentoralcom-
ments at the hearing must submit written
comments and an outline of the topics to
be discussed (with the time to be devoted
to each topic) by September 5, 2003.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of these reg-
ulations are Christopher J. Wilson and
Lauren R. Taylor, Office of the Associate
Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.42–6 is amended by:
1. Revising paragraph (a).
2. Amending Example 1. of paragraph
(b)(4) by removing the word “September”
and by adding the word “May” in its place;
by removing the date “1993” each place it
appears and by adding the date “2003” in
its place; and by removing the date “1995”
and adding the date “2005” in its place.
3. Revising Example 2. of paragraph
(b)(4).
4. Revising paragraph (c)(1).
5. Amending the first and last sentences
of paragraph (c)(2) by removing the lan-
guage “by the close of the calendar year
of the allocation” and adding the language
“by the close of the calendar year of the al-
location (for allocations made before July
1) or by the close of the date that is 6
months after the date the allocation is made
(for allocations made after June 30)” in its
place.
6. Revising paragraph (c)(3).
7. Revising paragraph (d)(2)(viii).
8. Revising paragraph (d)(4)(i).
9. Amending paragraph (d)(4)(ii) by re-
moving the language “, ‘Carryover Alloca-
tion of the Low-Income Housing Credit,’”.
10. Amending the first sentence of
paragraph (e)(2) by removing the language
“before the close of the calendar year of the
allocation” and adding the language “by
the close of the calendar year of the allo-
cation (for allocations made before July 1)
or by the close of the date that is 6 months
after the date the allocation is made (for al-
locations made after June 30)” in its place.
The revisions read as follows:
§1.42–6. Buildings qualifying for
carryover allocations.
(a)Carryover allocations—(1)In gen-
eral. A carryover allocation is an alloca-
tion that meets the requirements of section
42(h)(1)(E) or (F). If the requirements of
section 42(h)(1)(E) or (F) that are required
to be satisfied by the close of a calendar
year are not satisfied, the allocation is not
valid and is treated as if it had not been
made for that calendar year. For example,
if a carryover allocation fails to satisfy a
requirement in §1.42–6(d) for making an
allocation, such as failing to be signed or
dated by an authorized official of an al-
locating agency by the close of a calen-
dar year, the allocation is not valid and is
treated as if it had not been made for that
calendar year.
(2)10 percent basis requirement. A car-
ryover allocation may only be made with
respect to a qualified building. A quali-
fied building is any building which is part
of a project if, by the date specified un-
der paragraph (a)(2)(i) or (ii) of this sec-
tion, a taxpayer's basis in the project is
more than 10 percent of the taxpayer's rea-
sonably expected basis in the project as
of the close of the second calendar year
following the calendar year the allocation
is made. For purposes of meeting the
10 percent basis requirement, the deter-
mination of whether a building is part of
a single-building project or multi-build-
ing project is based on whether the car-
ryover allocation is made under section
42(h)(1)(E) (building-based allocation) or
section 42(h)(1)(F) (project-based alloca-
tion).
(i)AllocationmadebeforeJuly1.Ifa
carryover allocation is made before July 1
of a calendar year, a taxpayer must meet
the 10 percent basisrequirement by the
close of that calendar year. If a taxpayer
does not meet the 10 percent basis require-
ment by the close of the calendar year,
the carryover allocation is not valid and is
treated as if it had not been made.
(ii)Allocation made after June 30.Ifa
carryover allocation is made after June 30
of a calendar year, a taxpayer must meet
the 10 percent basisrequirement by the
close of the date that is 6 months after the
date the allocation was made. If a tax-
payer does not meet the 10 percent basis
requirement by the close of the required
date, the carryover allocation must be re-
turned to the Agency. Unlike a carryover
allocation made before July 1, if a taxpayer
does not meet the 10 percent basis require-
ment by the close of the required date, the
carryover allocation is treated as a valid al-
location for the calendar year of allocation,
but is included in the “returned credit com-
ponent” for purposes of determining the
State housing credit ceiling under section
42(h)(3)(C) for the calendar year follow-
ing the calendar year of the allocation. See
§1.42–14(d)(1).
(b) * * *
(4) * * *
(iii) * * *
2003-33 I.R.B.368August 18, 2003

Example 2.(i)Facts. D, an accrual-method tax-
payer, received a carryover allocation from Agency,
the state housing credit agency of State X, on Septem-
ber 12, 2003. As of that date, D has not begun con-
struction of the low-income housing building D plans
to build and D does not have basis in the land on
which D plans to build the building. From Septem-
ber 12, 2003, to the close of March 12, 2004, D incurs
some costs related to the planned building, including
architects' fees. As of the close of March 12, 2004,
these costs do not exceed 10 percent of D's reason-
ably expected basis in the single-building project as
of the close of 2005.
(ii)Determination of whether building is quali-
fied. Because D's carryover-allocation basis as of the
close of March 12, 2004, is not more than 10 percent
of D's reasonably expected basis in the single-build-
ing project, the building is not a qualified building f
or
purposes of section 42(h)(1)(E)(ii) and paragraph (a)
of this section. Accordingly, the carryover allocation
to D must be returned to the Agency. The allocation is
valid for purposes of determining the amount of credit
allocated by Agency from State X's 2003 State hous-
ing credit ceiling, but is included in the returne
d credit
component of State X's 2004 housing credit ceiling.
(c)Verification of basis by Agency—(1)
Verification requirement. An Agency that
makes a carryover allocation to a taxpayer
must verify that the taxpayer has met the
10 percent basis requirement of paragraph
(a)(2) of this section.
(2) * * *
(3)Time of verification.—(i)Alloca-
tions made before July 1. For a carryover
allocation made before July 1, an Agency
may require that the basis certification be
submitted to or received by the Agency
prior to the close of the calendar year
of allocation or within a reasonable time
following the close of the calendar year of
allocation. The Agency will need to verify
basis as provided in paragraph (c)(2) of
this section to accurately complete the
Form 8610, “Annual Low-Income Hous-
ing Credit Agencies Report,” and the
Schedule A (Form 8610), “Carryover Al-
location of Low-Income Housing Credit,”
for the calendar year of the allocation. If
the basis certification is not timely made,
or supporting documentation is lacking,
inadequate, or does not actually support
the certification, the Agency should notify
the taxpayer and try to get adequate doc-
umentation. If the Agency cannot verify
before the Form 8610 is filed that the
taxpayer has satisfied the 10 percent basis
requirement for a carryover allocation
made before July 1, the allocation is not
valid and is treated as if it had not been
made and the carryover allocation should
not be reported on the Schedule A (Form
8610).
(ii)Allocations made after June 30.An
Agency may require that the basis certifi-
cation be submitted to or received by the
Agency prior to the close of the date that
is 6 months after the date the allocation
was made or within a reasonable period of
time following the close of the date that
is 6 months after the date the allocation
was made. The Agency will need to ver-
ify basis as provided in paragraph (c)(2) of
this section. If the basis certification is not
timely made, or supporting documentation
is lacking, inadequate, or does not actu-
ally support the certification, the Agency
should notify the taxpayer and try to get
adequate documentation. If the Agency
cannot verify that the taxpayer has satisfied
the 10 percent basis requirement for a car-
ryover allocation made after June 30, the
allocation must be returned to the Agency.
The carryover allocation is a valid alloca-
tion for the calendar year of the allocation,
but is included in the returned credit com-
ponent of the State housing credit ceiling
for the calendar year following the calen-
dar year of the allocation.
(d) * * *
(2) * * *
(viii) For carryover allocations made
before July 1, the taxpayer's basis in the
project (land and depreciable basis) as of
the close of the calendar year of the alloca-
tion and the percentage that basis bears to
the reasonably expected basis in the project
(land and depreciable basis) as of the close
of the second calendar year following the
calendar year of allocation;
*****
(4)Recordkeeping requirements—(i)
Taxpayer. Whenanallocationismade
pursuant to section 42(h)(1)(E) or (F),
the taxpayer must retain a copy of the
allocation document. The Form 8609
that reflects the allocation must be filed
for the first taxable year that the credit is
claimed and for each taxable year there-
after throughout the compliance period,
whetherornotacreditisclaimedforthe
taxable year.
*****
Par. 3. Section 1.4
2–8 is amended by:
1. Revising the se
cond sentence of
paragraph (a)(6)
(i).
2. Revising parag
raph (a)(6)(ii).
3. Redesignating t
he year “1993” as
“2003” and the yea
r “1994” as “2004”
each place it appears in paragraph (a)(7),
Example 1 and Example 2.
4. InExample 1. of paragraph (a)(7),
revising the second to the last sentence of
(ii), removing the second sentence of (iii),
and revising (iv).
5. InExample 2. of paragraph (a)(7),
removing the third sentence of (iii) and
revising (iv).
6. Removing the third sentence of para-
graph (b)(4)(i).
7. Revising paragraph (b)(4)(ii).
The revisions read as follows:
§1.42–8 Election of appropriate
percentage month.
(a) * * *
(6)Procedures—(i)Taxpayer.***
The taxpayer must retain a copy of the
binding agreement and the election state-
ment.
(ii)Agency.TheAgencymustretain
the original of the binding agreement and
election statement and, to the extent re-
quired by Schedule A (Form 8610), “Car-
ryover Allocation ofLow-Income Housing
Credit,” account for the binding agreement
and election statement on that schedule.
(7) * * *
Example 1.***
(ii)***Because allocations were made for the
building in two separate calendar years, Agency must
issue two Forms 8609, “Low-Income Housing Credit
Allocation Certification,”toX.***
*****
(iv) Agency retains the original of the binding
agreement, election statement, and 2003 carryover al-
location document. Agency accounts for the bind-
ing agreement, election statement, and 2003 carry-
over allocation on the Schedule A (Form 8610) that
it files for the 2003 calendar year. After the building
is placed in service in 2004, and assuming other nec-
essary requirements for issuing a Form 8609 are met
(for example, taxpayer has certified all sources and
uses of funds and development costs for the building
under §1.42–17), Agency issues to X a copy of the
Form 8609 reflecting the 2003 carryover allocation
of $100,000. Agency accounts for the Form 8609 on
the first Form 8610 that it files following the date the
Form 8609 is issued to X. Agency also issues to X a
copy of the Form 8609 reflecting the $50,000 alloca-
tion made in 2004 and accounts for the 2004 alloca-
tion on the Form 8610, “Annual Low-Income Housing
Credit Agencies Report,” that it files for the 2004 cal-
endar year. Agency retains copies of the Forms 8609
that are issued to X.
Example 2.***
*****
(iv) Agency retains the original of the binding
agreeme
nts, election statements, and carryover allo-
cation documents. Agency accounts for the binding
August 18, 20033692003-33 I.R.B.

agreement, election statement, and 2003 carryover al-
location on the Schedule A (Form 8610) that it files
for the 2003 calendar year. Agency also accounts
for the binding agreement, election statement, and
2004 carryover allocation on the Schedule A (Form
8610) that it files for the 2004 calendar year. After
each separate new building is placed in service, and
assuming other necessary requirements for issuing a
Form 8609 are met (for example, taxpayer has cer-
tified all sources and uses of funds and development
costs for the building under §1.42–17), the Agency
will issue to X a copy of the Form 8609 reflecting
the 2003 carryover allocation of $70,000 and a copy
of the Form 8609 reflecting the 2004 carryover allo-
cation of $50,000, respectively. Agency accounts for
each Form 8609 on the Form 8610 that reflects the
calendar year each Form 8609 is issued. Agency re-
tains copies of the Forms 8609 that are issued to X.
(b) * * *
(4) * * *
(ii)Agency.TheAgencymustretain
the original of the election statement and
a copy of the Form 8609 that reflects the
election statement. The Agency must file
an additional copy of the Form 8609 with
the Agency's Form 8610 that reflects the
calendar year the Form 8609 is issued.
Par. 4. Section 1.42–12 is amended by
revising paragraph (a) to read as follows:
§1.42–12 Effective dates and transitio
nal
rules.
(a)Effective dates—(1)In general.Ex-
cept as provided in paragraphs (a)(2) a
nd
(a)(3) of this section, the rules set f
orth in
§§1.42–6 and 1.42–8 through 1.42–
12 are
effective May 2, 1994. However, b
ind-
ing agreements, election statem
ents, and
carryover allocation document
s entered
into before May 2, 1994, that fo
llow the
guidance set forth in Notice 89
–1, 1989–1
C.B. 620 (see §601.601(d)(2)
(ii)(b)ofthis
chapter), need not be chan
ged to conform
to the rules set forth in §§
1.42–6 and
1.42–8 through 1.42–12.
(2)Community Renewal Tax
Relief
Actof2000.In general.P
aragraphs (a),
(b)(4)(iii) Example 1 an
dExample2,(c),
(d)(2)(viii), and (e)
(2) of § 1.42–6 are
effective for housin
g credit dollar amounts
allocated after the
date these regulations
are published as fin
al regulations in the
Federal Register.
However, the rules in
paragraphs (a), (b
)(4)(iii) Example 1 and
Example 2, (c), (
d)(2)(viii), and (e)(2)
of §1.42–6 may be
applied by Agencies
and taxpayers f
or housing credit dollar
amounts alloca
ted after December 31,
2000, and on or
beforethedatethese
regulations are published as final regula-
tions in theFederal Register.Otherwise,
subject to the applicable effective dates
of the corresponding statutory provisions,
the rules that apply for housing credit
dollar amounts allocated on or before the
date these regulations are published as
final regulations in theFederal Register
are contained in §1.42–6 in effect on and
before these regulations are published as
final regulations in theFederal Register
(see 26 CFR part 1 revised as of April 1,
2003).
(3)Electronic filing simplification
changes.Section 1.42–6(d)(4) and
§1.42–8(a)(6)(i), (a)(6)(ii), (a)(7)Ex-
ample 1andExample 2, (b)(4)(i), and
(b)(4)(ii) are effective for forms filed after
the date these regulations are published as
final regulations in theFederal Register.
The rules that apply for forms filed on or
before the date these regulations are pub-
lished as final regulations in theFederal
Registerare contained in § 1.42–6 and
1.42–8 in effect on and before these reg-
ulations are published as final regulations
in theFederal Register(see 26 CFR part
1 revised as of April 1, 2003).
*****
Par. 5. Section 1.42–14 is amended by:
1. Revising the section heading and
paragraph (a).
2. Removing paragraph (c).
3. Redesignating paragraph (b) as para-
graph (c).
4. Adding a new paragraph (b).
5. Adding a new sentence at the end of
paragraph (d)(2)(iv)(A).
6. Removing the second to the last sen-
tence of paragraph (e).
7. Revising paragraph (g).
8. Revising paragraph (i)(2).
9. Revising paragraph (k).
10. Revising paragraph (l).
The revisions and addition read as fol-
lows:
§1.42–14. Allocation rules for post–2000
State housing credit ceiling amount.
(a)State housing credit ceiling—(1)In
general. The State housing credit ceiling
for a State for any calendar year after 2000
is comprised of four components. The four
components are—
(i) The unused State housing credit ceil-
ing, if any, of the State for the preced-
ing calendar year (theunused carryforward
component);
(ii) The greater of—
(A) $1.75 ($1.50 for calendar year
2001) multiplied by the State population,
or
(B) $2,000,000 (the population compo-
nent);
(iii) The amount of State housing credit
ceiling returned in the calendar year (the
returned credit component); plus
(iv) The amount, if any, allocated to
the State by the Secretary under section
42(h)(3)(D) from a national pool of unused
credit (the national pool component).
(2)Cost of Living Adjustment.—(i)
General rule. For any calendar year after
2002, the $2,000,000 and $1.75 amounts
in paragraph (a)(1)(ii) of this section are
each increased by an amount equal to—
(A) the dollar amount, multiplied by
(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the cal-
endar year by substituting “calendar year
2001” for “calendar year 1992” in section
1(f)(3)(B).
(ii)Rounding. Any increase resulting
from the application of paragraph (a)(2)(i)
of this section which, in the case of the
$2,000,000 amount, is not a multiple of
$5,000, is rounded to the next lowest multi-
ple of $5,000, and which, in the case of the
$1.75 amount, is not a multiple of 5 cents,
is rounded to the next lowest multiple of 5
cents.
(b)The unused carryforward compo-
nent. The unused carryforward component
of the State housing credit ceiling for any
calendar year is the unused State housing
credit ceiling, if any, of the State for the
preceding calendar year. The unused State
housing credit ceiling for any calendar year
is the excess, if any, of—
(1) the sum of the population, returned
credit, and national pool components for
the calendar year, over
(2) the aggregate housing credit dollar
amount allocated for the calendar year re-
duced by the housing credit dollar amounts
allocated from the unused carryforward
component for the calendar year.
*****
(d) * * *
(2) * * *
(iv)***
(A)Building not qualified within re-
quired time period.***Also,abuild-
2003-33 I.R.B.370August 18, 2003

ing that has received a post-June 30 carry-
over allocation is not qualified within the
required time period if the taxpayer does
not meet the 10 percent basis requirement
by the date that is 6 months after the date
the allocation was made (as described in
§ 1.42–6(a)(2)(ii)).
*****
(g)Stacking Order. Credit is treated as
allocated from the various components of
the State housing credit ceiling in the fol-
lowing order. The first credit allocated for
any calendar year is treated as credit from
the unused carryforward component of the
State housing credit ceiling for the calen-
dar year. After all of the credit in the un-
used carryforward component has been al-
located, any credit allocated is treated as
allocated from the sum of the population,
returned credit, and national pool compo-
nents of the State housing credit ceiling.
*****
(i) * * *
(2)Unused housing credit carryover.
The unused housing credit carryover of a
State for any calendar year is the excess, if
any, of—
(i) the unused carryforward component
of the State housing credit ceiling for the
calendar year, over
(ii) the total housing credit dollar
amount allocated for the calendar year.
*****
(k)Examples.—(1) The operation of
the rules of this section is illustrated by
the following examples. Unless otherwise
stated in an example, Agency A is the
sole Agency authorized to make alloca-
tions of housing credit dollar amounts in
State M, all of Agency A's allocations are
valid, and for calendar year 2003, Agency
A has available for allocation a State hous-
ing credit ceiling consisting of the follow-
ing housing credit dollar amounts:
A. unused carryforward
component............... $50
B. populationcomponent.....
$110
C. returned credit component .
$10
D. national pool component . .
$0
Total.......................
$170
(2) In addition, the $10 of returned
credit component was returned before
October 1, 2003.
Example 1—(i)Additional facts. By the close of
2003, Agency A had allocated $80 of the State M
housing credit ceiling. Of the $80 allocated, $17 was
allocated to projects involving qualified nonprofit or-
ganizations.
(ii)Application of stacking rules.The$80ofal-
located credit is first treated as allocated from the un-
used carryforward component of the State housing
credit ceiling. The $80 of allocated credit exceeds the
$50 attributable to the unused carryforward compo-
nent by $30. Because the unused carryforward com-
ponent is fully utilized no credit will be forfeited by
State M to the 2004 National Pool. The remaining
$30 of allocated credit will next be treated as allo-
cated from the $120 in credit determined by aggregat-
ing the population, returned credit, and national pool
components ($110 + 10 + 0 = $120). The $90 of unal-
located credit remaining in State M's 2003 State hous-
ing credit ceiling ($120 - 30 = $90) represents the un-
used carryforward component of State M's 2004 State
housing credit ceiling. Under paragraph (i)(3) of this
section, State M does not qualify for credit from the
2004 National Pool.
(iii)Nonprofit set-aside. Agency A allocated
exactly the amount of credit to projects involving
qualified nonprofit organizations as nece
ssary to
meet the nonprofit set-aside requirement ($17, 10%
of the $170 ceiling).
Example 2—(i)Additional facts.Bythe
close of
2003, Agency A had allocated $40 of the State M
housing credit ceiling. Of the $40 allocated, $20 was
allocated to projects involving qual
ified nonprofit or-
ganizations.
(ii)Application of stacking rules.The$40ofal-
located credit is first treated as al
located from the un-
used carryforward component of the State housing
credit ceiling. Because the $40 of allocated credit
does not exceed the $50 attribut
able to the unused car-
ryforward component, the remaining components of
the State housing credit ceiling are unaffected. The
$10 remaining in the unused ca
rryforward component
is assigned to the Secretary for inclusion in the 2004
National Pool. The $120 in credit determined by the
aggregating the population
, returned credit, and na-
tional pool components becomes the unused carry-
forward component of State M's 2004 State housing
credit ceiling. Under p
aragraph (i)(3) of this section,
State M does not qualify for credit from the 2004 Na-
tional Pool.
(iii)Nonprofit set-as
ide. Agency A allocated $3
more credit to projects involving qualified nonprofit
organizations than necessary to meet the nonprofit
set-aside requirem
ent. This does not reduce the ap-
plication of the 10% nonprofit set-aside requirement
to the State M housing credit ceiling for calendar year
2004.
Example 3—(i)Additional fact. None of the ap-
plications for credit that Agency A received for 2003
are for projects i
nvolving qualified nonprofit organi-
zations.
(ii)Nonprofit set-aside. Because at least 10% of
the State housin
g credit ceiling must be set aside for
projects involving a qualified nonprofit organization,
Agency A can allocate only $153 of the $170 State
housing credit
ceiling for calendar year 2003 ($170 -
17 = $153). If Agency A allocates $153 of credit, the
credit is treated as allocated $50 from the unused car-
ryforward component and $103 from the sum of the
population, returned credit, and national pool compo-
nents. The $17 of unallocated credit that is set aside
for projects involving qualified nonprofit organiza-
tions becomes the unused carryforward component
of State M's 2004 State housing credit ceiling. Un-
der paragraph (i)(3) of this section, State M does not
qualify for credit from the 2004 National Pool.
Example 4—(i)Additional facts. The $10 of re-
turned credit component was returned prior to Oc-
tober 1, 2003. However, a $40 credit that had been
allocated in calendar year 2002 to a project involv-
ing a qualified nonprofit organization was returned
to the Agency by a mutual consent agreement dated
November 15, 2003. By the close of 2003, Agency
A had allocated $170 of the State M's housing credit
ceiling, including $17 of credit to projects involving
qualified nonprofit organizations.
(ii)Effect of three-month rule. Under the three-
month rule of paragraph (d)(2)(iii) of this section,
Agency A may treat all or part of the $40 of previ-
ously allocated credit as returned on January 1, 20
04.
If Agency A treats all of the $40 amount as hav-
ing been returned in calendar year 2004, the State
M housing credit ceiling for 2003 is $170. Th
is en-
tire amount, including the $17 nonprofit set-aside, has
been allocated in 2003. Under paragraph (i)(3) of this
section, State M qualifies for the 2004 Na
tional Pool.
(iii)If three-month rule not used. If Agency A
treats all of the $40 of previously allocated credit
as returned in calendar year 2003, the
State hous-
ing credit ceiling for the 2003 calendar year will be
$210 of which $50 will be attributable to the returned
credit component ($10 + $40 = $50). B
ecause credit
amounts allocated to a qualified nonprofit organiza-
tion in a prior calendar year that are returned in a
subsequent calendar year do not r
etain their nonprofit
character, the nonprofit set-aside for calendar year
2003 is $21 (10% of the $210 State housing credit
ceiling). The $170 that Agen
cy A allocated during
2003 is first treated as allocated from the unused car-
ryforward component of the State housing credit ceil-
ing. The $170 of allocated
credit exceeds the $50 at-
tributable to the unused carryforward component by
$120. Because the unused carryforward component
is fully utilized, no c
redit will be forfeited by State
M to the 2004 National Pool. The remaining $120
of allocated credit will next be treated as allocated
from the $160 in credi
t determined by aggregating the
population, returned credit, and national pool compo-
nents ($110 + 50 + 0 = $160). The $40 of unallocated
credit (which incl
udes $4 of unallocated credit from
the $21 nonprofit set-aside) remaining in State M's
2003 housing credit ceiling ($160 - 120 = $40) rep-
resents the unu
sed carryforward component of State
M's 2004 housing credit ceiling. Under paragraph
(i)(3) of this section, State M does not qualify for
credit from th
e 2004 National Pool.
(l)Effective d
ates—(1)In general.Ex-
cept as provid
ed in paragraph (l)(2), the
rules set for
th in this section are effective
January 1, 1
994.
(2)Communit
y Renewal Tax Relief Act
of 2000 chan
ges. Paragraphs (a), (b), (c),
August 18, 20033712003-33 I.R.B.

(e), (i)(2) and (k) of this section are effec-
tive for housing credit dollar amounts al-
located after the date these regulations are
published as final regulations in theFed-
eral Register. However, paragraphs (a),
(b), (c), (e), (i)(2) and (k) of this section
may be applied by Agencies and taxpayers
for housing credit dollar amounts allocated
after December 31, 2000, and on or before
the date these regulations are published as
final regulations in theFederal Register.
Otherwise, subject to the applicable effec-
tive dates of the corresponding statutory
provisions, the rules that apply for hous-
ing credit dollar amounts allocated on or
before the date these regulations are pub-
lished as final regulations in theFederal
Registerare contained in this section in
effect on and before these regulations are
published as final regulations in theFed-
eral Register(see 26 CFR part 1 revised
as of April 1, 2003).
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 3, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 7, 2003, 68 F.R. 40218)
Announcement of Disciplinary Actions Involving Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled
Actuaries — Suspensions, Censures, Disbarments, and
Resignations
Announcement 2003-50
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individuals
have been placed under suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationEffective Date
Arnold, JohnClovis, CAEnrolled AgentFebruary 13, 2003
to
August 12, 2003
2003-33 I.R.B.372August 18, 2003

Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individuals
have been disbarred from practice before
the Internal Revenue Service:
NameAddressDesignationEffective Date
Kalajian, ThomasLaguna Hills, CACPAOctober 2, 2002
Messman, CarlaOuting, MNEnrolled AgentJanuary 9, 2003
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Kemp, BartSonoma, CAAttorneyMarch 15, 2003
to
November 15, 2003
Marks, GaryHewlett, NYCPAMarch 24, 2003
to
March 23, 2004
Fehl, KennethPalo Alto, CAAttorneyApril 1, 2003
to
March 31, 2004
Cohen, PeterEdison, NJCPAApril 3, 2003
to
May 2, 2005
Kohn, MichaelSt. Louis, MOAttorneyIndefinite
from
April 30, 2003
Sogamoso, CarlosBellflower,CAEnrolled AgentIndefinite
from
May 1, 2003
Huston, JamesKingman, AZCPAMay 1, 2003
to
April 30, 2006
Halleran, EdwardCarle Place, NYEnrolled AgentIndefinite
from
May 1, 2003
August 18, 20033732003-33 I.R.B.

NameAddressDesignationDate of Suspension
Marshall, E. PeterGlens Falls, NYCPAMay 1, 2003
to
April 30, 2006
Bell, RosannaIrvington, NYCPAIndefinite
from
May 8, 2003
Kingsley, StevenWeston, CTCPAIndefinite
from
May 15, 2003
Schawe, RudolphBrenham, TXEnrolled AgentMay 22, 2003
to
October 21, 2004
Scheve, MichaelBaltimore, MDCPAIndefinite
from
May 27, 2003
McKenzie, DawnaFort Smith, AREnrolled AgentIndefinite
from
June 2, 2003
Suen, MingSan Francisco, CAEnrolled AgentIndefinite
from
June 3, 2003
Reyes, RupertoPlacentia, CAEnrolled AgentJune 10, 2003
to
December 9, 2005
Garmo, GeorgisW. Bloomfield, MICPAIndefinite
from
June 10, 2003
Holmes, James L.Burlington, NCEnrolled AgentIndefinite
from
June 18, 2003
Brooks, SandraSan Diego, CAEnrolled AgentIndefinite
from
June 20, 2003
Malley, WayneCupertino, CAEnrolled AgentIndefinite
from
June 27, 2003
Leininger, BarbaraLutz, FLEnrolled AgentIndefinite
from
June 27, 2003
2003-33 I.R.B.374August 18, 2003

Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal Revenue Service any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attorney,
certified public accountant, or actuary sus-
pended or revoked for cause or (2) has been
convicted of certain crimes.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding provi-
sions:
NameAddressDesignationDate of Suspension
Radwick, PeterWoodinville, WACPAIndefinite
from
March 10, 2003
Jellinger, RichardAnoka, MNAttorneyIndefinite
from
March 10, 2003
Deen, BillyMansfield, TXCPAIndefinite
from
March 10, 2003
Dougherty Jr, WilliamNewport News, VAAttorneyIndefinite
from
March 10, 2003
Abood, NormanOregon, OHAttorneyIndefinite
from
March 10, 2003
Matis, VendelRedlands, CAAttorneyIndefinite
from
March 31, 2003
Workman, AndrewPanama City, FLCPAIndefinite
from
March 31, 2003
Bagwell, Jr., NoelCunningham, TNAttorneyIndefinite
from
March 31, 2003
O’Brien, BrienSioux City, IAAttorneyIndefinite
from
March 31, 2003
Boykoff, FranklinPleasantville, NYAttorneyIndefinite
from
March 31, 2003
McKinnon, MarvaStatesville, NCAttorneyIndefinite
from
March 31, 2003
Bailey, Scott K.Eden Prairie, MNAttorneyIndefinite
from
March 31, 2003
August 18, 20033752003-33 I.R.B.

NameAddressDesignationDate of Suspension
Kim, KunAtlanta, GACPAIndefinite
from
March 31, 2003
Massari III, DomenicTampa, FLAttorneyIndefinite
from
May 12, 2003
Haugabrook II, TyroneValdosta, GAAttorneyIndefinite
from
May 19, 2003
Wester, JosephMontgomery, ALCPAIndefinite
from
May 19, 2003
Smercina, DavidSolon, OHCPAIndefinite
from
May 19, 2003
Pullings, RetnaWashington, DCAttorneyIndefinite
from
May 19, 2003
Boyd, JamesMendota Heights, MNAttorneyIndefinite
from
May 20, 2003
Spindler, JudithOmaha, NEAttorneyIndefinite
from
May 20, 2003
Wintroub, EdwardOmaha, NEAttorneyIndefinite
from
May 20, 2003
Brinker, PeterOmaha, NEAttorneyIndefinite
from
May 21, 2003
Valdes, AlfredoOld Greenwich, CTCPAIndefinite
from
May 21, 2003
Cruise, MichaelLincoln, NEAttorneyIndefinite
from
May 22, 2003
Schoppert, ThomasMinot, NDAttorneyIndefinite
from
June 2, 2003
White, PaulSmithfield, NCEnrolled AgentIndefinite
from
June 2, 2003
Brier, MichaelProvidence, RICPAIndefinite
from
June 16, 2003
2003-33 I.R.B.376August 18, 2003

Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of
resignation as an enrolled agent from the
following individuals:
NameAddressDate of Designation
Evans, CarolineTiverton, RIMay 7, 2003
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Pargas, Carlos B.Miami, FLCPAMarch 19, 2003
Malkasian, GarySacramento, CACPAMarch 27, 2003
Wilcox, Ronald E.Mt. Carmel, ILCPAApril 29, 2003
Wood, David T.Shawneetown, ILCPAMay 27, 2003
August 18, 20033772003-33 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 ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,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 confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
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 published position. (Compare
withamplifiedandclarified,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 rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
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 rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings 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.—Statement 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.
2003-33 I.R.B.iAugust 18, 2003

Numerical Finding List
1
Bulletins 2003–27 through 2003–32
Announcements:
2003-45, 2003-28 I.R.B.73
2003-46, 2003-30 I.R.B.222
2003-47, 2003-29 I.R.B.124
2003-48, 2003-28 I.R.B.73
2003-49, 2003-32 I.R.B.339
2003-50, 2003-30 I.R.B.222
2003-52, 2003-32 I.R.B.345
2003-53, 2003-32 I.R.B.345
Notices:
2003-38, 2003-27 I.R.B.9
2003-39, 2003-27 I.R.B.10
2003-40, 2003-27 I.R.B.10
2003-41, 2003-28 I.R.B.49
2003-42, 2003-28 I.R.B.49
2003-43, 2003-28 I.R.B.50
2003-44, 2003-28 I.R.B.52
2003-45, 2003-29 I.R.B.86
2003-46, 2003-28 I.R.B.53
2003-47, 2003-30 I.R.B.132
2003-48, 2003-30 I.R.B.133
2003-49, 2003-32 I.R.B.294
2003-50, 2003-32 I.R.B.295
2003-52, 2003-32 I.R.B.296
Proposed Regulations:
REG-106736-00, 2003-28 I.R.B.60
REG-107618-02, 2003-27 I.R.B.13
REG-122917-02, 2003-27 I.R.B.15
REG-116914-03, 2003-32 I.R.B.338
Revenue Procedures:
2003-45, 2003-27 I.R.B.11
2003-46, 2003-28 I.R.B.54
2003-47, 2003-28 I.R.B.55
2003-48, 2003-29 I.R.B.86
2003-49, 2003-29 I.R.B.89
2003-50, 2003-29 I.R.B.119
2003-51, 2003-29 I.R.B.121
2003-52, 2003-30 I.R.B.134
2003-53, 2003-31 I.R.B.230
2003-54, 2003-31 I.R.B.236
2003-55, 2003-31 I.R.B.242
2003-56, 2003-31 I.R.B.249
2003-57, 2003-31 I.R.B.257
2003-58, 2003-31 I.R.B.262
2003-59, 2003-31 I.R.B.268
2003-60, 2003-31 I.R.B.274
2003-61, 2003-32 I.R.B.296
2003-62, 2003-32 I.R.B.299
2003-63, 2003-32 I.R.B.304
Revenue Procedures— Continued:
2003-64, 2003-32 I.R.B.306
2003-65, 2003-32 I.R.B.336
Revenue Rulings:
2003-70, 2003-27 I.R.B.3
2003-71, 2003-27 I.R.B.1
2003-73, 2003-28 I.R.B.44
2003-74, 2003-29 I.R.B.77
2003-75, 2003-29 I.R.B.79
2003-77, 2003-29 I.R.B.75
2003-78, 2003-29 I.R.B.76
2003-79, 2003-29 I.R.B.80
2003-80, 2003-29 I.R.B.83
2003-81, 2003-30 I.R.B.126
2003-82, 2003-30 I.R.B.125
2003-83, 2003-30 I.R.B.128
2003-84, 2003-32 I.R.B.289
2003-85, 2003-32 I.R.B.291
2003-86, 2003-32 I.R.B.290
2003-87, 2003-29 I.R.B.82
2003-88, 2003-32 I.R.B.292
Treasury Decisions:
9061, 2003-27 I.R.B.5
9062, 2003-28 I.R.B.46
9067, 2003-32 I.R.B.287
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27,
dated July 7, 2003.
August 18, 2003ii2003-33 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2003–27 through 2003–32
Notices:
89-79
Modified and superseded by
Rev. Proc. 2003-47, 2003-28 I.R.B.55
89-94
Modified by
Notice 2003-50, 2003-32 I.R.B.295
2001-4
Section III.C. superseded for 2004 and subsequent
calendar years by
Rev. Proc. 2003-64, 2003-32 I.R.B.306
2001–70
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
2001–74
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
2002-1
Amplified by
Notice 2003-49, 2003-32 I.R.B.294
Proposed Regulations:
EE-86-88 (LR-279-81)
Withdrawn by
REG-122917-02, 2003-27 I.R.B.15
Revenue Procedures:
66-50
Modified,amplified,andsupersededby
Rev. Proc. 2003-62, 2003-32 I.R.B.299
77-12
Amplified, modified, and superseded by
Rev. Proc. 2003-51, 2003-29 I.R.B.121
81-40
Modified and superseded by
Rev. Proc. 2003-62, 2003-32 I.R.B.299
89-21
Superseded by
Rev. Proc. 2003-53, 2003-31 I.R.B.230
90-32
Section 4 superseded by
Rev. Proc. 2003-55, 2003-31 I.R.B.242
Section 5 superseded by
Rev. Proc. 2003-56, 2003-31 I.R.B.249
Section 6 superseded by
Rev. Proc. 2003-57, 2003-31 I.R.B.257
Section 7 superseded by
Rev. Proc. 2003-59, 2003-31 I.R.B.268
Revenue Procedures— Continued:
Section8supersededby
Rev. Proc. 2003-60, 2003-31 I.R.B.274
96-30
Modified and amplified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
2000-12
Modified by
Rev. Proc. 2003-64, 2003-32 I.R.B.306
2000–15
Superseded by
Rev. Proc. 2003-61, 2003-32 I.R.B.296
2002-9
Modified by
Rev. Proc. 2003-45, 2003-27 I.R.B.11
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
Modified and amplified by
Rev. Proc. 2003-63, 2003-32 I.R.B.304
Rev. Rul. 2003-81, 2003-30 I.R.B.126
2002-33
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
2002-34
Superseded by
Rev. Proc. 2003-52, 2003-30 I.R.B.134
2003-3
Modified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
2003-15
Modified and superseded by
Rev. Proc. 2003-49, 2003-29 I.R.B.89
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27, dated July 7, 2003.
2003-33 I.R.B. iii August 18, 2003
*U.S.GovernmentPrintingOffice:2 003—496–919/60096