us-irs-notices-irb-2003-14-pdf•Internal Revenue Bulletin 2003-14 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2003-14 (PDF rendition): IRS Notices
us-irs-notices-irb-2003-14-pdfInternal Revenue Bulletin 2003-14 (PDF rendition): IRS NoticesGuidance
Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.
HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2003–32, page 689. Scholarship grants, employer-related private founda- tions.This ruling states that for purposes of sections 117 and 4945 of the Code, scholarships and educational grants awarded by a private foundation under an employer-related program to em- ployees and their children, when the employee is a victim killed or seriously injured in a qualified disaster, may be awarded with- out regard to the percentage guidelines in Rev. Proc. 76–47, 1976–2 C.B. 670. Thus, grants awarded under such a pro- gram will be described in section 4945(g)(1) and will not be tax- able expenditures under section 4945(d)(3). Rev. Rul. 2003–35, page 687. Federal rates; adjusted federal rates; adjusted federal long- term rate and the long-term exempt rate.For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for April 2003. T.D. 9047, page 676. Final regulations apply to certain transactions or events that re- sult in a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT) owning property that has a basis deter- mined by reference to a C corporation’s basis in the property. These regulations affect RICs, REITs, and C corporations and clarify the tax treatment of transfers of C corporation property to a RIC or REIT. T.D. 9049, page 685. Final regulations under section 705 of the Code provide guid- ance for making basis adjustments necessary to coordinate sec- tions 705 and 1032 in situations in which a corporation owns a direct or indirect interest in a partnership that holds stock in that corporation. Notice 2003–18, page 699. Disaster relief grants; businesses.This notice provides an- swers to frequently asked questions for businesses not ex- empt from federal income tax regarding the tax treatment of grant payments the Empire State Development Corporation, in coor- dination with the New York City Economic Development Corpo- ration, will make under three grant programs to businesses located in the area of the World Trade Center attacks. EXEMPT ORGANIZATIONS Rev. Rul. 2003–32, page 689. Scholarship grants, employer-related private founda- tions.This ruling states that for purposes of sections 117 and 4945 of the Code, scholarships and educational grants awarded by a private foundation under an employer-related program to em- ployees and their children, when the employee is a victim killed or seriously injured in a qualified disaster, may be awarded with- out regard to the percentage guidelines in Rev. Proc. 76–47, 1976–2 C.B. 670. Thus, grants awarded under such a pro- gram will be described in section 4945(g)(1) and will not be tax- able expenditures under section 4945(d)(3). EXCISE TAX Rev. Rul. 2003–32, page 689. Scholarship grants, employer-related private founda- tions.This ruling states that for purposes of sections 117 and 4945 of the Code, scholarships and educational grants awarded by a private foundation under an employer-related program to em- ployees and their children, when the employee is a victim killed or seriously injured in a qualified disaster, may be awarded with- out regard to the percentage guidelines in Rev. Proc. 76–47, 1976–2 C.B. 670. Thus, grants awarded under such a pro- gram will be described in section 4945(g)(1) and will not be tax- able expenditures under section 4945(d)(3). (Continued on the next page) Bulletin No. 2003–14 April 7, 2003 Announcements of Disbarments and Suspensions begin on page 712. Finding Lists begin on page ii. Index for January through March begins on page iv. ADMINISTRATIVE T.D. 9044, page 690. Final regulations under section 6103 of the Code require con- tractors who engage in tax administration services to notify their officers and employees of the prohibitions against and penal- ties for unauthorized disclosure and inspection of returns or re- turn information. T.D. 9050, page 693. Final regulations implement changes to sections 7433 and 7426 of the Code. Section 7433 provides for the recovery of dam- ages caused by the willful violation of the automatic stay or dis- charge provisions of the Bankruptcy Code by an employee or officer of the Service. Section 7426 provides for the recovery of damages associated with certain wrongful levies. Notice 2003–19, page 703. This notice advises taxpayers of the proper address for filing cer- tain elections, statements, and other documents with the Ser- vice as a result of the reorganization, including with respect to offices or officials that no longer exist as part of the reorgani- zation. April 7, 20032003–14 I.R.B. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rul- ings and procedures of the Internal Revenue Service and for pub- lishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general inter- est. It is published weekly and may be obtained from the Super- intendent of Documents on a subscription basis. Bulletin contents are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All pub- lished rulings apply retroactively unless otherwise indicated. Pro- cedures relating solely to matters of internal management are not published; however, statements of internal practices and pro- cedures that affect the rights and duties of taxpayers are pub- lished. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpay- ers or technical advice to Service field offices, identifying de- tails and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be re- lied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and pro- cedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Ser- vice personnel and others concerned are cautioned against reach- ing the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legisla- tion and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these sub- jects are contained in the other Parts and Subparts. Also in- cluded in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the De- partment of the Treasury’s Office of the Assistant Secretary (En- forcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbar- ment and suspension lists, and announcements. The first Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the first Bulletin of the succeeding semiannual pe- riod, respectively. The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. 2003–14 I.R.B.April 7, 2003 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—Low-Income Housing Credit The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. Section 102.—Gifts and Inheritances 26 CFR 1.102–1: Gifts and inheritances. Why are grant payments made to businesses under the World Trade Center grant program not excluded from a grant recipient’s gross income as a gift under section 102(a)? See Notice 2003–18, page 699. Section 118.—Contributions to the Capital of a Corpo- ration 26 CFR 1.118–1: Contributions to the capital of a corporation. Are grant payments made to businesses under the World Trade Center grant programs excluded from gross income as contributions to capital under section 118? See Notice 2003–18, page 699. Section 139.—Disaster Relief Payments Why are grant payments made to businesses under the World Trade Center grant programs not excluded from a recipient’s gross income as qualified disaster relief payments under section 139? See Notice 2003–18, page 699. Section 165.—Losses 26 CFR 1.165–1: Losses. Must recipients of grant payments made under the World Trade Center grant programs reduce the amount of an allowable casualty loss deduction under section 165 or include in gross income all or part of a casualty loss claimed in a prior year? See Notice 2003–18, page 699. Section 280G.—Golden Parachute Payments Federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. Section 337.—Nonrecognition for Property Distributed to Parent in Complete Liquidation of Subsidiary 26 CFR 1.337(d)–6: New transitional rules imposing tax on property owned by a C corporation that becomes property of a RIC or REIT. T.D. 9047 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 Certain Transfers of Property to Regulated Investment Companies [RICs] and Real Estate Investment Trusts [REITs] AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains fi- nal regulations that apply to certain trans- actions or events that result in a Regulated Investment Company [RIC] or a Real Es- tate Investment Trust [REIT] owning prop- erty that has a basis determined by reference to a C corporation’s basis in the property. These regulations affect RICs, REITs, and C corporations and clarify the tax treat- ment of transfers of C corporation prop- erty to a RIC or REIT. DATES:Effective Date:These regulations are effective March 18, 2003. Applicability Dates:For dates of appli- cability, see §§1.337(d)–5(d), 1.337(d)– 6(e) and 1.337(d)–7(f). FOR FURTHER INFORMATION CON- TACT: Jennifer D. Sledge, (202) 622–7750 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in these final regulations has been reviewed and approved by the Office of Manage- ment and Budget in accordance with the Pa- perwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545–1672. This information is required to obtain a ben- efit,i.e., to elect to recognize gain as if the C corporation had sold the property at fair market value or to elect section 1374 treat- ment. An agency may not conduct or spon- sor, and a person is not required to re- spond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget. The estimated annual burden per re- spondent is 30 minutes. Comments concerning the accuracy of this burden estimate and suggestions for re- ducing this burden should be sent to theIn- ternal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224, and to theOf- fice of Management and Budget, ATTN: Desk Officer for the Department of the Treasury, Office of Information and Regu- latory Affairs, Washington, DC 20503. Books or records relating to a collec- tion of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background This document contains amendments to 26 CFR part 1. On February 7, 2000, tem- porary regulations (T.D. 8872, 2000–1 C.B. 639 [65 FR 5775]) (the 2000 temporary regulations) relating to certain transac- tions or events that result in a RIC or REIT owning property that has a basis deter- mined by reference to a C corporation’s ba- sis in the property were published in the Federal Register. A notice of proposed rulemaking (REG–209135–88, 2000–1 C.B. 2003–14 I.R.B.676April 7, 2003 681 [65 FR 5805]) cross-referencing the temporary regulations was published in the Federal Registerfor the same day. The 2000 temporary regulations were intended to carry out the purposes of the repeal of theGeneral Utilitiesdoctrine as enacted in the Tax Reform Act of 1986 (the 1986 Act) (Public Law 99–514, 100 Stat. 2085), as amended by the Technical and Miscella- neous Revenue Act of 1988 (Public Law 100–647, 102 Stat. 3342). The 1986 Act amended sections 336 and 337 to require corporations to recognize gain or loss on the distribution of prop- erty in connection with complete liquida- tions other than certain subsidiary liquidations. Section 337(d) directs the Sec- retary to prescribe regulations as may be necessary to carry out the purposes of the General Utilitiesrepeal, including rules to “ensure that such purposes may not be cir- cumvented...through the use of a regu- lated investment company, a real est- ate investment trust, or tax-exempt entity....” The 2000 temporary regulations also re- flected the principles set forth in Notice 88– 19, 1988–1 C.B. 486, in which the IRS announced its intention to promulgate regu- lations under the authority of section 337(d) with respect to transactions or events that result in a RIC or REIT owning property that has a basis determined by reference to a C corporation’s basis (a carryover ba- sis). Notice 88–19 provided that the regu- lations would apply with respect to the net built-in gain of C corporation assets that be- come assets of a RIC or REIT by the quali- fication of a C corporation as a RIC or REIT or by the transfer of assets of a C cor- poration to a RIC or REIT (a conversion transaction). The notice further provided that, where the regulations apply, the C cor- poration would be treated, for all purposes, as if it had sold all of its assets at their re- spective fair market values and immedi- ately liquidated. The notice provided, however, that the regulations would not al- low the recognition of a net loss and that immediate gain recognition could be avoided if the C corporation that quali- fied as a RIC or REIT or the transferee RIC or REIT, as the case may have been, elected to be subject to tax under section 1374 with respect to the C corporation property. No- tice 88–19 also indicated that the regula- tions would apply retroactively to June 10, 1987. A public hearing on the cross-referenced notice of proposed rulemaking was held on May 10, 2000. Written or electronic com- ments responding to the notice of pro- posed rulemaking were received. After consideration of these comments, Trea- sury and the IRS decided to issue two new sets of temporary regulations. On January 2, 2002, temporary regulations (T.D. 8975, 2002–1 C.B. 379 [67 FR 8]) (the 2002 tem- porary regulations) were published in the Federal Register. The regulations under §1.337(d)–6T apply to conversion transac- tions occurring on or after June 10, 1987, and before January 2, 2002, and the regu- lations under§1.337(d)–7T apply to con- version transactions occurring on or after January 2, 2002. A notice of proposed rule- making (REG–142299–01 and REG– 209135–88, 2002–1 C.B. 418 [67 FR 48]) cross-referencing the temporary regula- tions was published in theFederal Reg- isterfor the same day. The regulations under§1.337(d)–6T pro- vide that, if property of a C corporation that is not a RIC or REIT becomes the prop- erty of a RIC or REIT in a conversion transaction, then the C corporation is sub- ject to deemed sale treatment, unless the RIC or REIT elects to be subject to sec- tion 1374 treatment. Thus, the C corpora- tion generally recognizes gain and loss as if it sold the property converted to RIC or REIT property or transferred to the RIC or REIT (the converted property) to an unre- lated party at fair market value immedi- ately before the conversion transaction. If the C corporation recognizes net gain on the deemed sale, then the basis of the con- verted property in the hands of the RIC or REIT is adjusted to its fair market value im- mediately before the conversion transac- tion. The regulations under§1.337(d)–6T do not permit a C corporation to recog- nize a net loss on the deemed sale. Where there is a net loss, the C corporation rec- ognizes no gain or loss on the deemed sale, and the C corporation’s basis in the con- verted property carries over to the RIC or REIT. The regulations under§1.337(d)–7T pro- vide that, if property of a C corporation that is not a RIC or REIT becomes the prop- erty of a RIC or REIT in a conversion transaction, then the RIC or REIT will be subject to tax on the net built-in gain in the converted property under the rules of sec- tion 1374 and the regulations thereunder, unless the C corporation that qualifies as a RIC or REIT or transfers property to a RIC or REIT elects deemed sale treatment. In most other respects, the regulations un- der§1.337(d)–7T follow the regulations un- der§1.337(d)–6T. No public hearing was requested or held on the 2002 temporary regulations. Writ- ten or electronic comments responding to the notice of proposed rulemaking were re- ceived. After consideration of all the com- ments, the proposed regulations are adopted as amended (the final regulations) by this Treasury decision, and the corresponding temporary regulations are removed. The re- visions are discussed below. Explanation and Summary of Comments This preamble first discusses a change in the time for making the section 1374 election under§1.337(d)–6. This preamble then discusses the clarification of the rules concerning the use of loss carryforwards, credits and credit carryforwards found in the regulations under both§1.337(d)–6 and §1.337(d)–7. Finally, this preamble dis- cusses the clarification of certain issues re- lated to the special rule for partnerships found in§1.337(d)–7. Time for Making Section 1374 Election under§1.337(d)–6 As explained above, the regulations un- der§1.337(d)–6T provide that, if prop- erty of a C corporation that is not a RIC or REIT becomes the property of a RIC or REIT in a conversion transaction, then the C corporation is subject to deemed sale treatment, unless the RIC or REIT elects to be subject to section 1374 treatment. Un- der§1.337(d)–6T(c)(4)(ii), the section 1374 election may be filed by the RIC or REIT with any federal income tax return filed by the RIC or REIT on or before March 15, 2003, provided that the RIC or REIT has reported consistently with such election for all periods. Commentators expressed con- cern that, in the case of a conversion trans- action occurring on January 1, 2002 (the last date of applicability of§1.337(d)–6T), the time limit for making a section 1374 elec- tion could preclude a RIC or REIT from ex- tending the due date of its federal income tax return beyond March 15, 2003. In re- sponse to this comment, the final regula- April 7, 20036772003–14 I.R.B. tions under§1.337(d)–6 extend the time for making the section 1374 election to Sep- tember 15, 2003. Use of Loss Carryforwards, Credits and Credit Carryforwards Under the 2002 temporary regulations, recognized built-in gains and recognized built-in losses that have been taxed in ac- cordance with these regulations are treated like other gains and losses of RICs and REITs that are not subject to tax under these regulations. Thus, they are included in com- puting investment company taxable in- come for purposes of section 852(b)(2), real estate investment trust taxable income for purposes of section 857(b)(2), net capital gain for purposes of sections 852(b)(3) and 857(b)(3), gross income derived from sources within any foreign country or pos- session of the United States for purposes of section 853, and the dividends paid de- ductionforpurposesofsections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and 857(b)(3)(A). In addition, consistent with section 1374, the 2002 temporary regulations generally al- low RICs and REITs to use loss carryfor- wards and credits and credit carryforwards arising in taxable years for which the cor- poration that generated the attribute was a C corporation (and not a RIC or REIT) to reduce net recognized built-in gain and the tax thereon, subject to the limitations im- posed by sections 1374(b)(2) and (b)(3) and §§1.1374–5 and 1.1374–6. The 2002 tem- porary regulations also provide an order- ing rule for applying loss carryforwards, credits, and credit carryforwards to re- duce net recognized built-in gain (and the tax thereon) and RIC or REIT taxable in- come (and the tax thereon). Under this or- dering rule, loss carryforwards of a RIC or REIT must be used to reduce net recog- nized built-in gain for a taxable year to the greatest extent possible before such losses can be used to reduce investment com- pany taxable income for purposes of sec- tion 852(b) or real estate investment trust taxable income for purposes of section 857(b). A similar rule applies to the use of credits and credit carryforwards. A commentator asked whether the use of loss carryforwards, credits and credit car- ryforwards for purposes of section 1374 af- fected the use of loss carryforwards, credits and credit carryforwards for purposes of subchapter M. In response to this com- ment,thefinalregulationsunder §§1.337(d)–6 and 1.337(d)–7 clarify that the use of loss carryforwards, credits and credit carryforwards for purposes of the section 1374 tax does not change the extent to which such loss carryforwards, credits and credit carryforwards can be used for pur- poses of subchapter M. Special Rule for Partnerships under §1.337(d)–7 Section§1.337(d)–7T applies to prop- erty transferred by a partnership to a RIC or REIT to the extent of any C corpora- tion partner’s proportionate share of the transferred property (the partnership rule). The regulations state that, if the partner- ship elects deemed sale treatment with re- spect to such transfer, then any gain recognized by the partnership on the deemed sale must be specially allocated to the C corporation partner. In response to comments, the regula- tions have been revised to clarify that the principles of section 704(b) and (c) apply in determining the C corporation partner’s share of the transferred property. As re- vised, the regulations provide that the prin- ciples of these regulations apply to property transferred by a partnership to a RIC or REIT to the extent of any C corporation partner’s distributive share of the gain or loss in the transferred property. The fol- lowing sections highlight other specific comments received with respect to this rule. Partnerships with Multiple Corporate Partners A commentator expressed concern that the partnership rule does not specify whether the C corporation partner or the partnership is considered the transferor for purposes of making the deemed sale elec- tion. Further, the commentator asserted that in the case of a partnership with multiple corporate partners, each corporate partner should be allowed to make (or not make) a deemed sale election. Treasury and the IRS believe that re- quiring each corporate partner to make a deemed sale election would be inconsis- tent with section 703(b) (which generally requires that elections be made at the part- nership level) and would create unneces- sary administrative complexity. Therefore, the final regulations under§1.337(d)–7 re- tain the rule under section 703(b) that the deemed sale election is made at the part- nership level. Contribution of Loss Assets by Partnership Under the partnership rule, if a partner- ship were to elect deemed sale treatment un- der§1.337(d)–7T, any gain recognized by the partnership on the deemed sale is al- located to the C corporation partner. A com- mentator expressed concern that if the contribution by the partnership to a RIC or REIT includes multiple assets, the deemed sale may generate losses on certain assets and gain on others even though there is an overall net built-in gain. The commenta- tor suggested that losses recognized by the partnership must also be allocated to the C corporation partner. Under§1.337(d)–7T, when a partner- ship elects deemed sale treatment, only net gains are recognized. If a net gain is rec- ognized, the C corporation partner will re- ceive the benefit of offsetting losses (as a result of the reduction in net gain). The fi- nal regulations under§1.337(d)–7 have been modified to clarify that the gain allocated to the C corporation partner on a deemed sale transaction is the C corporation part- ner’s distributive share of the net gain in the assets transferred to the RIC or REIT by the partnership. Allocation of Gain or Loss on Subsequent Sale of RIC or REIT Stock Under section 358, a partnership that elects deemed sale treatment under §1.337(d)–7T(c) with respect to a conver- sion transaction increases its basis in the RIC or REIT stock by the net gain recog- nized on such transaction. A commenta- tor suggested that the C corporation partner should be allowed to use this basis in- crease to offset any gain or loss recog- nized by the partnership on the eventual sale of the RIC or REIT stock. Treasury and the IRS agree with this comment. Accordingly, the final regula- tions under§1.337(d)–7 provide that any adjustment to the basis of the RIC or REIT stock held by the partnership as a result of electing deemed sale treatment will con- stitute an adjustment to the basis of that stock with respect to the C corporation part- ner only. 2003–14 I.R.B.678April 7, 2003 Partnerships with Tax-Exempt Partners A commentator expressed concern that the partnership rule in§1.337(d)–7T may have an unintended punitive effect when the C corporation partner is a tax-exempt en- tity. Tax-exempt entities that are partners in a partnership that holds debt financed prop- erty are subject to tax under the unrelated business income tax (UBIT) rules unless certain criteria are satisfied. One of these criteria (the fractions rule) requires that: (1) the tax-exempt partner’s share of overall partnership income for any tax year is no greater than its smallest share of partner- ship loss in any tax year; and (2) each al- location with respect to the partnership has substantial economic effect within the mean- ing of section 704(b)(2). The commenta- tor expressed concern that the special allocation of gain to the tax-exempt part- ner that is required by§1.337(d)–7T when the partnership makes a deemed sale elec- tion may violate the fractions rule, taint- ing all income from the partnership for UBIT purposes. In response to this comment, Treasury and the IRS have amended the regulations under section 514 to provide that alloca- tions that are mandated by statute or regu- lation (other than subchapter K of chapter 1 of the Internal Revenue Code and the regulations thereunder) are not consid- ered for purposes of determining qualifi- cation under the fractions rule. This rule applies to partnership allocations made in taxable years beginning on or after Janu- ary 1, 2002. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because the regulations do not impose a collection of information on small entities, the Regula- tory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pur- suant to section 7805(f) of the Code, these final regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Drafting Information The principal author of these regula- tions is Jennifer D. Sledge of the Office of Associate Chief Counsel (Corporate). Other personnel from Treasury Department and the IRS participated in their development. ***** Adoption of Amendments to the Regu- lations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PA RT 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by removing the en- tries for“Section 1.337(d)–5T”,“Section 1.337(d)–6T”, and“Section 1.337(d)–7T” and adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805*** Section 1.337(d)–5 also issued under 26 U.S.C. 337. Section 1.337(d)–6 also issued under 26 U.S.C. 337. Section 1.337(d)–7 also issued under 26 U.S.C. 337.*** §1.337(d)–5T [Redesignated as §1.337(d)–5] Par. 2. Section 1.337(d)–5T is redesig- nated as§1.337(d)–5 and the language “(temporary)”is removed from the end of the section heading. Par. 3. Newly designated§1.337(d)–5is amended as follows: 1. In paragraph (b)(3), first sentence, the reference to“§1.337(d)–5T(b)”is removed and“paragraph (b) of this section”is added in its place. 2. In paragraph (d), third sentence, the references to“§1.337(d)–5T(b)(1)”and “§1.337(d)–6T”are removed and“para- graph (b)(1) of this section”and “§1.337(d)–6”are added in their places, re- spectively. 3. In paragraph (d), fourth sentence, the reference to“§1.337(d)–6T”is removed and “§1.337(d)–6”is added in its place. 4. In paragraph (d), last sentence, the reference to“§1.337(d)–7T”is removed and “§1.337(d)–7”is added in its place. Par. 4. Section 1.337(d)–6 is added to read as follows: §1.337(d)–6 New transitional rules imposing tax on property owned by a C corporation that becomes property of a RIC or REIT. (a)General rule—(1)Property owned by a C corporation that becomes property of a RIC or REIT.If property owned by a C corporation (as defined in paragraph (a)(2)(i) of this section) becomes the property of a RIC or REIT (the converted property) in a conversion transaction (as defined in para- graph (a)(2)(ii) of this section), then deemed sale treatment will apply as described in paragraph (b) of this section, unless the RIC or REIT elects section 1374 treatment with respect to the conversion transaction as pro- vided in paragraph (c) of this section. See paragraph (d) of this section for excep- tions to this paragraph (a). (2)Definitions—(i)C corporation.For purposes of this section, the termC cor- porationhas the meaning provided in sec- tion 1361(a)(2) except that the term does not include a RIC or REIT. (ii)Conversion transaction.For pur- poses of this section, the termconversion transactionmeans the qualification of a C corporation as a RIC or REIT or the trans- fer of property owned by a C corporation to a RIC or REIT. (b)Deemed sale treatment—(1)In gen- eral.If property owned by a C corpora- tion becomes the property of a RIC or REIT in a conversion transaction, then the C cor- poration recognizes gain and loss as if it sold the converted property to an unre- lated party at fair market value on the deemed sale date (as defined in paragraph (b)(3) of this section). This paragraph (b) does not apply if its application would re- sult in the recognition of a net loss. For this purpose,net lossis the excess of aggre- gate losses over aggregate gains (includ- ing items of income), without regard to character. (2)Basis adjustment.If a corporation recognizes a net gain under paragraph (b)(1) of this section, then the converted prop- erty has a basis in the hands of the RIC or REIT equal to the fair market value of such property on the deemed sale date. (3)Deemed sale date—(i)RIC or REIT qualifications.If the conversion transac- tion is a qualification of a C corporation as a RIC or REIT, then the deemed sale date is the end of the last day of the C corpo- April 7, 20036792003–14 I.R.B. ration’s last taxable year before the first tax- able year in which it qualifies to be taxed as a RIC or REIT. (ii)Other conversion transactions.If the conversion transaction is a transfer of prop- erty owned by a C corporation to a RIC or REIT, then the deemed sale date is the end of the day before the day of the transfer. (4)Example.The rules of this para- graph (b) are illustrated by the following example: Example. Deemed sale treatment on merger into RIC.(i) X, a calendar-year taxpayer, has qualified as a RIC since January 1, 1991. On May 31, 1994, Y, a C corporation and calendar-year taxpayer, trans- fers all of its property to X in a transaction that quali- fies as a reorganization under section 368(a)(1)(C). X does not elect section 1374 treatment under para- graph (c) of this section and chooses not to rely on §1.337(d)–5. As a result of the transfer, Y is subject to deemed sale treatment under this paragraph (b) on its tax return for the short taxable year ending May 31, 1994. On May 31, 1994, Y’s only assets are Capi- tal Asset, which has a fair market value of $100,000 and a basis of $40,000 as of the end of May 30, 1994, and $50,000 cash. Y also has an unrestricted net op- erating loss carryforward of $12,000 and accumu- lated earnings and profits of $50,000. Y has no taxable income for the short taxable year ending May 31, 1994, other than gain recognized under this paragraph (b). In 1997, X sells Capital Asset for $110,000. As- sume the applicable corporate tax rate is 35%. (ii) Under this paragraph (b), Y is treated as if it sold the converted property (Capital Asset and $50,000 cash) at fair market value on May 30, 1994, recog- nizing $60,000 of gain ($150,000 amount realized - $90,000 basis). Y must report the gain on its tax re- turn for the short taxable year ending May 31, 1994. Y may offset this gain with its $12,000 net operat- ing loss carryforward and will pay tax of $16,800 (35% of $48,000). (iii) Under section 381, X succeeds to Y’s accu- mulated earnings and profits. Y’s accumulated earn- ings and profits of $50,000 increase by $60,000 and decrease by $16,800 as a result of the deemed sale. Thus, the aggregate amount of subchapter C earn- ings and profits that must be distributed to satisfy sec- tion 852(a)(2)(B) is $93,200 ($50,000 + $60,000 - $16,800). X’s basis in Capital Asset is $100,000. On X’s sale of Capital Asset in 1997, X recognizes $10,000 of gain, which is taken into account in com- puting X’s net capital gain for purposes of section 852(b)(3). (c)Election of section 1374 treatment— (1)In general—(i)Property owned by a C corporation that becomes property of a RIC or REIT.Paragraph (b) of this section does not apply if the RIC or REIT that was for- merly a C corporation or that acquired prop- erty from a C corporation makes the election described in paragraph (c)(4) of this section. A RIC or REIT that makes such an election will be subject to tax on the net built-in gain in the converted property un- der the rules of section 1374 and the regu- lations thereunder, as modified by this paragraph (c), as if the RIC or REIT were an S corporation. (ii)Property subject to the rules of sec- tion 1374 owned by a RIC, REIT, or S cor- poration that becomes property of a RIC or REIT.If property subject to the rules of sec- tion 1374 owned by a RIC, a REIT, or an S corporation (the predecessor) becomes the property of a RIC or REIT (the succes- sor) in a continuation transaction, the rules of section 1374 apply to the successor to the same extent that the predecessor was subject to the rules of section 1374 with re- spect to such property, and the 10-year rec- ognition period of the successor with respect to such property is reduced by the por- tion of the 10-year recognition period of the predecessor that expired before the date of the continuation transaction. For this pur- pose, a continuation transaction means the qualification of the predecessor as a RIC or REIT or the transfer of property from the predecessor to the successor in a transac- tion in which the successor’s basis in the transferred property is determined, in whole or in part, by reference to the predeces- sor’s basis in that property. (2)Modification of section 1374 treatment—(i)Net recognized built-in gain for REITs—(A)Prelimitation amount.The prelimitation amount determined as pro- vided in§1.1374–2(a)(1) is reduced by the portion of such amount, if any, that is sub- ject to tax under section 857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is com- puted as follows: (1) Where the tax under section 857(b)(5) is computed by reference to sec- tion 857(b)(5)(A), the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is the tax imposed by section 857(b)(5) multiplied by a fraction the numerator of which is the amount of recognized built-in gain (with- out regard to recognized built-in loss and recognized built-in gain from prohibited transactions) that is not derived from sources referred to in section 856(c)(2) and the de- nominator of which is the gross income (without regard to gross income from pro- hibited transactions) of the REIT that is not derived from sources referred to in sec- tion 856(c)(2). (2) Where the tax under section 857(b)(5) is computed by reference to sec- tion 857(b)(5)(B), the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is the tax imposed by section 857(b)(5) multiplied by a fraction the numerator of which is the amount of recognized built-in gain (with- out regard to recognized built-in loss and recognized built-in gain from prohibited transactions) that is not derived from sources referred to in section 856(c)(3) and the de- nominator of which is the gross income (without regard to gross income from pro- hibited transactions) of the REIT that is not derived from sources referred to in sec- tion 856(c)(3). (B)Taxable income limitation.The tax- able income limitation determined as pro- vided in§1.1374–2(a)(2) is reduced by an amount equal to the tax imposed under sec- tions 857(b)(5), (6), and (7). (ii)Loss carryforwards, credits and credit carryforwards—(A)Loss carryforwards. Consistent with paragraph (c)(1)(i) of this section, net operating loss carryforwards and capital loss carryforwards arising in tax- able years for which the corporation that generated the loss was not subject to sub- chapter M of chapter 1 of the Internal Rev- enue Code are allowed as a deduction against net recognized built-in gain to the extent allowed under section 1374 and the regulations thereunder. Such loss carryfor- wards must be used as a deduction against net recognized built-in gain for a taxable year to the greatest extent possible before such losses can be used to reduce other in- vestment company taxable income for pur- poses of section 852(b) or other real estate investment trust taxable income for pur- poses of section 857(b) for that taxable year. (B)Credits and credit carryforwards. Consistent with paragraph (c)(1)(i) of this section, minimum tax credits and busi- ness credit carryforwards arising in tax- able years for which the corporation that generated the credit was not subject to sub- chapter M of chapter 1 of the Internal Rev- enue Code are allowed to reduce the tax imposed on net recognized built-in gain un- der this paragraph (c) to the extent allowed under section 1374 and the regulations thereunder. Such credits and credit carry- forwards must be used to reduce the tax im- posed under this paragraph (c) on net recognized built-in gain for a taxable year to the greatest extent possible before such credits and credit carryforwards can be used to reduce the tax, if any, on other invest- 2003–14 I.R.B.680April 7, 2003 ment company taxable income for pur- poses of section 852(b) or on other real estate investment trust taxable income for purposes of section 857(b) for that tax- able year. (iii)10-year recognition period.In the case of a conversion transaction that is a qualification of a C corporation as a RIC or REIT, the 10-year recognition period de- scribed in section 1374(d)(7) begins on the first day of the RIC’s or REIT’s first tax- able year. In the case of other conversion transactions, the 10-year recognition pe- riod begins on the day the property is ac- quired by the RIC or REIT. (3)Coordination with subchapter M rules—(i)Recognized built-in gains and losses subject to subchapter M. Recog- nized built-in gains and losses of a RIC or REIT are included in computing invest- ment company taxable income for pur- poses of section 852(b)(2), real estate investment trust taxable income for pur- poses of section 857(b)(2), capital gains for purposes of sections 852(b)(3) and 857(b)(3), gross income derived from sources within any foreign country or pos- session of the United States for purposes of section 853, and the dividends paid de- ductionforpurposesofsections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and 857(b)(3)(A). In computing such in- come and deduction items, capital loss car- ryforwards and net operating loss carryforwards that are used by the RIC or REIT to reduce recognized built-in gains are allowed as a deduction, but only to the ex- tent that they are otherwise allowable as a deduction against such income under the In- ternal Revenue Code (including section 852(b)(2)(B)). (ii)Treatment of tax imposed.The amount of tax imposed under this para- graph (c) on net recognized built-in gain for a taxable year is treated as a loss sustained by the RIC or the REIT during such tax- able year. The character of the loss is determined by allocating the tax propor- tionately (based on recognized built-in gain) among the items of recognized built-in gain included in net recognized built-in gain. With respect to RICs, the tax imposed un- der this paragraph (c) on net recognized built-in gain is treated as attributable to the portion of the RIC’s taxable year occur- ring after October 31. (4)Making the section 1374 election— (i)In general.A RIC or REIT makes a sec- tion 1374 election with the following statement:“[Insert name and employer iden- tification number of electing RIC or REIT] elects under§1.337–6(c) to be subject to the rules of section 1374 and the regulations thereunder with respect to its property that formerly was held by a C corporation, [in- sert name and employer identification num- ber of the C corporation, if different from name and employer identification num- ber of the RIC or REIT].”However, a RIC or REIT need not file an election under this paragraph (c), but will be deemed to have made such an election if it can demon- strate that it informed the Internal Rev- enue Service prior to January 2, 2002, of its intent to make a section 1374 election. An election under this paragraph (c) is ir- revocable. (ii)Time for making the election.An election under this paragraph (c) may be filed by the RIC or REIT with any fed- eral income tax return filed by the RIC or REIT on or before September 15, 2003, provided that the RIC or REIT has reported consistently with such election for all pe- riods. (5)Example.The rules of this para- graph (c) are illustrated by the following example: Example. Section 1374 treatment on REIT elec- tion.(i)X,aCcorporation that is a calendar-year tax- payer, elects to be taxed as a REIT on its 1994 tax return, which it files on March 15, 1995. As a re- sult, X is a REIT for its 1994 taxable year and would be subject to deemed sale treatment under paragraph (b) of this section but for X’s timely election of sec- tion 1374 treatment under this paragraph (c). X chooses not to rely on§1.337(d)–5. As of the beginning of the 1994 taxable year, X’s property consisted of Real Prop- erty, which is not section 1221(a)(1) property and which had a fair market value of $100,000 and an ad- justed basis of $80,000, and $25,000 cash. X also had accumulated earnings and profits of $25,000, unre- stricted capital loss carryforwards of $3,000, and un- restricted business credit carryforwards of $2,000. On July 1, 1997, X sells Real Property for $110,000. For its 1997 taxable year, X has no other income or de- duction items. Assume the highest corporate tax rate is 35%. (ii) Upon its election to be taxed as a REIT, X re- tains its $80,000 basis in Real Property and its $25,000 accumulated earnings and profits. X retains its $3,000 of capital loss carryforwards and its $2,000 of busi- ness credit carryforwards. To satisfy section 857(a)(2)(B), X must distribute $25,000, an amount equal to its earnings and profits accumulated in non- REIT years, to its shareholders by the end of its 1994 taxable year. (iii) Upon X’s sale of Real Property in 1997, X recognizes gain of $30,000 ($110,000–$80,000). X’s recognized built-in gain for purposes of applying sec- tion 1374 is $20,000 ($100,000 fair market value as of the beginning of X’s first taxable year as a REIT - $80,000 basis). Because X’s $30,000 of net in- come for the 1997 taxable year exceeds the net rec- ognized built-in gain of $20,000, the taxable income limitation does not apply. X, therefore, has $20,000 net recognized built-in gain for the year. Assuming that X has not used its $3,000 of capital loss carryfor- wards in a prior taxable year and that their use is al- lowed under section 1374(b)(2) and§1.1374–5, X is allowed a $3,000 deduction against the $20,000 net recognized built-in gain. X would owe tax of $5,950 (35% of $17,000) on its net recognized built-in gain, except that X may use its $2,000 of business credit carryforwards to reduce this tax, assuming that X has not used the credit carryforwards in a prior taxable year and that their use is allowed under section 1374(b)(3) and§1.1374–6. Thus, X owes tax of $3,950 under this paragraph (c). (iv) For purposes of subchapter M of chapter 1 of the Internal Revenue Code, X’s earnings and profits for the year increase by $26,050 ($30,000 capital gain on the sale of Real Property - $3,950 tax under this paragraph (c)). For purposes of section 857(b)(2) and (b)(3), X’s net capital gain for the year is $23,050 ($30,000 capital gain reduced by $3,000 capital loss carryforward and further reduced by $3,950 tax). (d)Exceptions—(1)Gain otherwise rec- ognized.Paragraph (a) of this section does not apply to any conversion transaction to the extent that gain or loss otherwise is rec- ognized on such conversion transaction. See, for example, sections 336, 351(b), 351(e), 356, 357(c), 367, 368(a)(2)(F), and 1001. (2)Re-election of RIC or REIT status— (i)Generally.Except as provided in para- graphs (d)(2)(ii) and (iii) of this section, paragraph (a)(1) of this section does not ap- ply to any corporation that— (A) Immediately prior to qualifying to be taxed as a RIC or REIT was subject to tax as a C corporation for a period not ex- ceeding two taxable years; and (B) Immediately prior to being subject to tax as a C corporation was subject to tax as a RIC or REIT for a period of at least one taxable year. (ii)Property acquired from another cor- poration while a C corporation.The ex- ception described in paragraph (d)(2)(i) of this section does not apply to property ac- quired by the corporation while it was sub- ject to tax as a C corporation from any person in a transaction that results in the ac- quirer’s basis in the property being deter- mined by reference to a C corporation’s basis in the property. (iii)RICs and REITs previously sub- ject to section 1374 treatment.If the RIC or REIT had property subject to paragraph (c) of this section before the RIC or REIT became subject to tax as a C corporation as described in paragraph (d)(2)(i) of this section, then paragraph (c) of this section applies to the RIC or REIT upon its requali- April 7, 20036812003–14 I.R.B. fication as a RIC or REIT, except that the 10-year recognition period with respect to such property is reduced by the portion of the 10-year recognition period that ex- pired before the RIC or REIT became sub- ject to tax as a C corporation and by the period of time that the corporation was sub- ject to tax as a C corporation. (e)Effective date.This section applies to conversion transactions that occur on or after June 10, 1987, and before January 2, 2002. In lieu of applying this section, tax- payers generally may apply§1.337(d)–5to determine the tax consequences (for all tax- able years) of any conversion transaction that occurs on or after June 10, 1987, and before January 2, 2002, except that RICs and REITs that are subject to section 1374 treatment with respect to a conversion trans- action may not rely on§1.337(d)–5(b)(1), but must apply paragraphs (c)(1)(i), (c)(2)(i), (c)(2)(ii), and (c)(3) of this section, with re- spect to built-in gains and losses recog- nized in taxable years beginning on or after January 2, 2002. Taxpayers are not pre- vented from relying on§1.337(d)–5 merely because they elect section 1374 treatment in the manner described in paragraph (c)(4) of this section instead of in the manner de- scribed in§1.337(d)–5(b)(3) and (c). For conversion transactions that occur on or af- ter January 2, 2002, see§1.337(d)–7. §1.337(d)–6T [Removed] Par. 5. Section 1.337(d)–6T is removed. Par. 6. Section 1.337(d)–7 is added to read as follows: §1.337(d)–7 Tax on property owned by a C corporation that becomes property of a RIC or REIT. (a)General rule—(1)Property owned by a C corporation that becomes property of a RIC or REIT.If property owned by a C corporation (as defined in paragraph (a)(2)(i) of this section) becomes the property of a RIC or REIT (the converted property) in a conversion transaction (as defined in para- graph (a)(2)(ii) of this section), then sec- tion 1374 treatment will apply as described in paragraph (b) of this section, unless the C corporation elects deemed sale treat- ment with respect to the conversion trans- action as provided in paragraph (c) of this section. See paragraph (d) of this section for exceptions to this paragraph (a). (2)Definitions—(i)C corporation.For purposes of this section, the termC cor- porationhas the meaning provided in sec- tion 1361(a)(2) except that the term does not include a RIC or REIT. (ii)Conversion transaction.For pur- poses of this section, the termconversion transactionmeans the qualification of a C corporation as a RIC or REIT or the trans- fer of property owned by a C corporation to a RIC or REIT. (b)Section 1374 treatment—(1)In general—(i)Property owned by a C cor- poration that becomes property of a RIC or REIT.If property owned by a C corpora- tion becomes the property of a RIC or REIT in a conversion transaction, then the RIC or REIT will be subject to tax on the net built-in gain in the converted property un- der the rules of section 1374 and the regu- lations thereunder, as modified by this paragraph (b), as if the RIC or REIT were an S corporation. (ii)Property subject to the rules of sec- tion 1374 owned by a RIC, REIT, or S cor- poration that becomes property of a RIC or REIT.If property subject to the rules of sec- tion 1374 owned by a RIC, a REIT, or an S corporation (the predecessor) becomes the property of a RIC or REIT (the succes- sor) in a continuation transaction, the rules of section 1374 apply to the successor to the same extent that the predecessor was subject to the rules of section 1374 with re- spect to such property, and the 10-year rec- ognition period of the successor with respect to such property is reduced by the por- tion of the 10-year recognition period of the predecessor that expired before the date of the continuation transaction. For this pur- pose, a continuation transaction means the qualification of the predecessor as a RIC or REIT or the transfer of property from the predecessor to the successor in a transac- tion in which the successor’s basis in the transferred property is determined, in whole or in part, by reference to the predeces- sor’s basis in that property. (2)Modification of section 1374 treatment—(i)Net recognized built-in gain for REITs—(A)Prelimitation amount.The prelimitation amount determined as pro- vided in§1.1374–2(a)(1) is reduced by the portion of such amount, if any, that is sub- ject to tax under section 857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is com- puted as follows: (1) Where the tax under section 857(b)(5) is computed by reference to sec- tion 857(b)(5)(A), the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is the tax imposed by section 857(b)(5) multiplied by a fraction the numerator of which is the amount of recognized built-in gain (with- out regard to recognized built-in loss and recognized built-in gain from prohibited transactions) that is not derived from sources referred to in section 856(c)(2) and the de- nominator of which is the gross income (without regard to gross income from pro- hibited transactions) of the REIT that is not derived from sources referred to in sec- tion 856(c)(2). (2) Where the tax under section 857(b)(5) is computed by reference to sec- tion 857(b)(5)(B), the amount of a REIT’s recognized built-in gain that is sub- ject to tax under section 857(b)(5) is the tax imposed by section 857(b)(5) multiplied by a fraction the numerator of which is the amount of recognized built-in gain (with- out regard to recognized built-in loss and recognized built-in gain from prohibited transactions) that is not derived from sources referred to in section 856(c)(3) and the de- nominator of which is the gross income (without regard to gross income from pro- hibited transactions) of the REIT that is not derived from sources referred to in sec- tion 856(c)(3). (B)Taxable income limitation.The tax- able income limitation determined as pro- vided in§1.1374–2(a)(2) is reduced by an amount equal to the tax imposed under sec- tion 857(b)(5), (6), and (7). (ii)Loss carryforwards, credits and credit carryforwards—(A)Loss carryforwards. Consistent with paragraph (b)(1)(i) of this section, net operating loss carryforwards and capital loss carryforwards arising in tax- able years for which the corporation that generated the loss was not subject to sub- chapter M of chapter 1 of the Internal Rev- enue Code are allowed as a deduction against net recognized built-in gain to the extent allowed under section 1374 and the regulations thereunder. Such loss carryfor- wards must be used as a deduction against net recognized built-in gain for a taxable year to the greatest extent possible before such losses can be used to reduce other in- vestment company taxable income for pur- poses of section 852(b) or other real estate 2003–14 I.R.B.682April 7, 2003 investment trust taxable income for pur- poses of section 857(b) for that taxable year. (B)Credits and credit carryforwards. Consistent with paragraph (b)(1)(i) of this section, minimum tax credits and busi- ness credit carryforwards arising in tax- able years for which the corporation that generated the credit was not subject to sub- chapter M of chapter 1 of the Internal Rev- enue Code are allowed to reduce the tax imposed on net recognized built-in gain un- der this paragraph (b) to the extent al- lowed under section 1374 and the regulations thereunder. Such credits and credit carryforwards must be used to re- duce the tax imposed under this paragraph (b) on net recognized built-in gain for a tax- able year to the greatest extent possible be- fore such credits and credit carryforwards can be used to reduce the tax, if any, on other investment company taxable income for purposes of section 852(b) or on other real estate investment trust taxable income for purposes of section 857(b) for that tax- able year. (iii)10-year recognition period.In the case of a conversion transaction that is a qualification of a C corporation as a RIC or REIT, the 10-year recognition period de- scribed in section 1374(d)(7) begins on the first day of the RIC’s or REIT’s first tax- able year. In the case of other conversion transactions, the 10-year recognition pe- riod begins on the day the property is ac- quired by the RIC or REIT. (3)Coordination with subchapter M rules—(i)Recognized built-in gains and losses subject to subchapter M. Recog- nized built-in gains and losses of a RIC or REIT are included in computing invest- ment company taxable income for pur- poses of section 852(b)(2), real estate investment trust taxable income for pur- poses of section 857(b)(2), capital gains for purposes of sections 852(b)(3) and 857(b)(3), gross income derived from sources within any foreign country or pos- session of the United States for purposes of section 853, and the dividends paid de- ductionforpurposesofsections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and 857(b)(3)(A). In computing such in- come and deduction items, capital loss car- ryforwards and net operating loss carryforwards that are used by the RIC or REIT to reduce recognized built-in gains are allowed as a deduction, but only to the ex- tent that they are otherwise allowable as a deduction against such income under the In- ternal Revenue Code (including section 852(b)(2)(B)). (ii)Treatment of tax imposed.The amount of tax imposed under this para- graph (b) on net recognized built-in gain for a taxable year is treated as a loss sustained by the RIC or the REIT during such tax- able year. The character of the loss is de- terminedbyallocatingthetax proportionately (based on recognized built-in gain) among the items of recognized built-in gain included in net recognized built-in gain. With respect to RICs, the tax imposed un- der this paragraph (b) on net recognized built-in gain is treated as attributable to the portion of the RIC’s taxable year occur- ring after October 31. (4)Example.The rules of this para- graph (b) are illustrated by the following example: Example. Section 1374 treatment on REIT elec- tion.(i)X,aCcorporation that is a calendar-year tax- payer, elects to be taxed as a REIT on its 2004 tax return, which it files on March 15, 2005. As a re- sult, X is a REIT for its 2004 taxable year and is sub- ject to section 1374 treatment under this paragraph (b). X does not elect deemed sale treatment under para- graph (c) of this section. As of the beginning of the 2004 taxable year, X’s property consisted of Real Prop- erty, which is not section 1221(a)(1) property and which had a fair market value of $100,000 and an ad- justed basis of $80,000, and $25,000 cash. X also had accumulated earnings and profits of $25,000, unre- stricted capital loss carryforwards of $3,000, and un- restricted business credit carryforwards of $2,000. On July 1, 2007, X sells Real Property for $110,000. For its 2007 taxable year, X has no other income or de- duction items. Assume the highest corporate tax rate is 35%. (ii) Upon its election to be taxed as a REIT, X re- tains its $80,000 basis in Real Property and its $25,000 accumulated earnings and profits. X retains its $3,000 of capital loss carryforwards and its $2,000 of busi- ness credit carryforwards. To satisfy section 857(a)(2)(B), X must distribute $25,000, an amount equal to its earnings and profits accumulated in non- REIT years, to its shareholders by the end of its 2004 taxable year. (iii) Upon X’s sale of Real Property in 2007, X recognizes gain of $30,000 ($110,000 - $80,000). X’s recognized built-in gain for purposes of applying sec- tion 1374 is $20,000 ($100,000 fair market value as of the beginning of X’s first taxable year as a REIT - $80,000 basis). Because X’s $30,000 of net in- come for the 2007 taxable year exceeds the net rec- ognized built-in gain of $20,000, the taxable income limitation does not apply. X, therefore, has $20,000 net recognized built-in gain for the year. Assuming that X has not used its $3,000 of capital loss carryfor- wards in a prior taxable year and that their use is al- lowed under section 1374(b)(2) and§1.1374–5, X is allowed a $3,000 deduction against the $20,000 net recognized built-in gain. X would owe tax of $5,950 (35% of $17,000) on its net recognized built-in gain, except that X may use its $2,000 of business credit carryforwards to reduce the tax, assuming that X has not used the credit carryforwards in a prior taxable year and that their use is allowed under section 1374(b)(3) and§1.1374–6. Thus, X owes tax of $3,950 under this paragraph (b). (iv) For purposes of subchapter M of chapter 1 of the Internal Revenue Code, X’s earnings and profits for the year increase by $26,050 ($30,000 capital gain on the sale of Real Property - $3,950 tax under this paragraph (b)). For purposes of section 857(b)(2) and (b)(3), X’s net capital gain for the year is $23,050 ($30,000 capital gain reduced by $3,000 capital loss carryforward and further reduced by $3,950 tax). (c)Election of deemed sale treatment— (1)In general.Paragraph (b) of this sec- tion does not apply if the C corporation that qualifies as a RIC or REIT or transfers property to a RIC or REIT makes the elec- tion described in paragraph (c)(5) of this section. A C corporation that makes such an election recognizes gain and loss as if it sold the converted property to an unre- lated party at fair market value on the deemed sale date (as defined in paragraph (c)(3) of this section). See paragraph (c)(4) of this section concerning limitations on the use of loss in computing gain. This para- graph (c) does not apply if its application would result in the recognition of a net loss. For this purpose,net lossis the excess of aggregate losses over aggregate gains (in- cluding items of income), without regard to character. (2)Basis adjustment.If a corporation recognizes a net gain under paragraph (c)(1) of this section, then the converted prop- erty has a basis in the hands of the RIC or REIT equal to the fair market value of such property on the deemed sale date. (3)Deemed sale date—(i)RIC or REIT qualifications.If the conversion transac- tion is a qualification of a C corporation as a RIC or REIT, then the deemed sale date is the end of the last day of the C corpo- ration’s last taxable year before the first tax- able year in which it qualifies to be taxed as a RIC or REIT. (ii)Other conversion transactions.If the conversion transaction is a transfer of prop- erty owned by a C corporation to a RIC or REIT, then the deemed sale date is the end of the day before the day of the transfer. (4)Anti-stuffing rule.A C corporation must disregard converted property in com- puting gain or loss recognized on the con- version transaction under this paragraph (c), if— (i) The converted property was acquired by the C corporation in a transaction to which section 351 applied or as a contri- bution to capital; April 7, 20036832003–14 I.R.B. (ii) Such converted property had an ad- justed basis immediately after its acquisi- tion by the C corporation in excess of its fair market value on the date of acquisi- tion; and (iii) The acquisition of such converted property by the C corporation was part of a plan a principal purpose of which was to reduce gain recognized by the C corpora- tion in connection with the conversion trans- action. For purposes of this paragraph (c)(4), the principles of section 336(d)(2) apply. (5)Making the deemed sale election.A C corporation (or a partnership to which the principles of this section apply under para- graph (e) of this section) makes the deemed sale election with the following statement: “[Insert name and employer identifica- tion number of electing corporation or part- nership] elects deemed sale treatment under §1.337(d)–7(c) with respect to its prop- erty that was converted to property of, or transferred to, a RIC or REIT, [insert name and employer identification number of the RIC or REIT, if different from the name and employer identification number of the C corporation or partnership].”This state- ment must be attached to the federal in- come tax return of the C corporation or partnership for the taxable year in which the deemed sale occurs. An election under this paragraph (c) is irrevocable. (6)Examples.The rules of this para- graph (c) are illustrated by the following examples: Example 1. Deemed sale treatment on merger into RIC.(i) X, a calendar-year taxpayer, has qualified as a RIC since January 1, 2001. On May 31, 2004, Y, a C corporation and calendar-year taxpayer, trans- fers all of its property to X in a transaction that quali- fies as a reorganization under section 368(a)(1)(C). As a result of the transfer, Y would be subject to sec- tion 1374 treatment under paragraph (b) of this sec- tion but for its timely election of deemed sale treatment under this paragraph (c). As a result of such elec- tion, Y is subject to deemed sale treatment on its tax return for the short taxable year ending May 31, 2004. On May 31, 2004, Y’s only assets are Capital As- set, which has a fair market value of $100,000 and a basis of $40,000 as of the end of May 30, 2004, and $50,000 cash. Y also has an unrestricted net operat- ing loss carryforward of $12,000 and accumulated earnings and profits of $50,000. Y has no taxable in- come for the short taxable year ending May 31, 2004, other than gain recognized under this paragraph (c). In 2007, X sells Capital Asset for $110,000. As- sume the applicable corporate tax rate is 35%. (ii) Under this paragraph (c), Y is treated as if it sold the converted property (Capital Asset and $50,000 cash) at fair market value on May 30, 2004, recog- nizing $60,000 of gain ($150,000 amount realized - $90,000 basis). Y must report the gain on its tax re- turn for the short taxable year ending May 31, 2004. Y may offset this gain with its $12,000 net operat- ing loss carryforward and will pay tax of $16,800 (35% of $48,000). (iii) Under section 381, X succeeds to Y’s accu- mulated earnings and profits. Y’s accumulated earn- ings and profits of $50,000 increase by $60,000 and decrease by $16,800 as a result of the deemed sale. Thus, the aggregate amount of subchapter C earn- ings and profits that must be distributed to satisfy sec- tion 852(a)(2)(B) is $93,200 ($50,000 + $60,000 - $16,800). X’s basis in Capital Asset is $100,000. On X’s sale of Capital Asset in 2007, X recognizes $10,000 of gain which is taken into account in com- puting X’s net capital gain for purposes of section 852(b)(3). Example 2. Loss limitation.(i) Assume the facts are the same as those described inExample 1, but that, prior to the reorganization, a shareholder of Y con- tributed to Y a capital asset, Capital Asset 2, which has a fair market value of $10,000 and a basis of $20,000, in a section 351 transaction. (ii) Assuming that Y’s acquisition of Capital As- set 2 was made pursuant to a plan a principal pur- pose of which was to reduce the amount of gain that Y would recognize in connection with the conver- sion transaction, Capital Asset 2 would be disre- garded in computing the amount of Y’s net gain on the conversion transaction. (d)Exceptions—(1)Gain otherwise rec- ognized.Paragraph (a) of this section does not apply to any conversion transaction to the extent that gain or loss otherwise is rec- ognized on such conversion transaction. See, for example, sections 336, 351(b), 351(e), 356, 357(c), 367, 368(a)(2)(F), and 1001. (2)Re-election of RIC or REIT status— (i)Generally.Except as provided in para- graphs (d)(2)(ii) and (iii) of this section, paragraph (a)(1) of this section does not ap- ply to any corporation that— (A) Immediately prior to qualifying to be taxed as a RIC or REIT was subject to tax as a C corporation for a period not ex- ceeding two taxable years; and (B) Immediately prior to being subject to tax as a C corporation was subject to tax as a RIC or REIT for a period of at least one taxable year. (ii)Property acquired from another cor- poration while a C corporation.The ex- ception described in paragraph (d)(2)(i) of this section does not apply to property ac- quired by the corporation while it was sub- ject to tax as a C corporation from any person in a transaction that results in the ac- quirer’s basis in the property being deter- mined by reference to a C corporation’s basis in the property. (iii)RICs and REITs previously sub- ject to section 1374 treatment.If the RIC or REIT had property subject to paragraph (b) of this section before the RIC or REIT became subject to tax as a C corporation as described in paragraph (d)(2)(i) of this section, then paragraph (b) of this section applies to the RIC or REIT upon its requali- fication as a RIC or REIT, except that the 10-year recognition period with respect to such property is reduced by the portion of the 10-year recognition period that ex- pired before the RIC or REIT became sub- ject to tax as a C corporation and by the period of time that the corporation was sub- ject to tax as a C corporation. (e)Special rule for partnerships.The principles of this section apply to prop- erty transferred by a partnership to a RIC or REIT to the extent of any C corpora- tion partner’s distributive share of the gain or loss in the transferred property. If the partnership were to elect deemed sale treat- ment under paragraph (c) of this section in lieu of section 1374 treatment under para- graph (b) of this section with respect to such transfer, then any net gain recognized by the partnership on the deemed sale must be al- located to the C corporation partner, but does not increase the capital account of any partner. Any adjustment to the partner- ship’s basis in the RIC or REIT stock as a result of deemed sale treatment under para- graph (c) of this section shall constitute an adjustment to the basis of that stock with respect to the C corporation partner only. The principles of section 743 apply to such basis adjustment. (f)Effective date.This section applies to conversion transactions that occur on or af- ter January 2, 2002. For conversion trans- actions that occurred on or after June 10, 1987, and before January 2, 2002, see §§1.337(d)–5 and 1.337(d)–6. §1.337(d)–7T [Removed] Par. 7. Section 1.337(d)–7T is removed. Par. 8. In§1.514(c)–2, paragraph (e)(1)(v) is added to read as follows: §1.514(c)–2 Permitted allocations under section 514(c)(9)(E). ***** (e)*** (1)*** (v) Allocations made in taxable years be- ginning on or after January 1, 2002, that are mandated by statute or regulation other than subchapter K of chapter 1 of the Internal Revenue Code and the regulations there- under. ***** 2003–14 I.R.B.684April 7, 2003 Par. 9. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 10. In§602.101, paragraph (b) is amended by removing the entries for “1.337(d)–5T”,“1.337(d)–6T”, and“1.337– 7T”and adding entries in numerical or- der to the table to read as follows: §602.101 OMB Control numbers. ***** (b)*** CFR Part or section where identified or described Current OMB control No. ***** 1.337(d)–5 ............................................................................................................................................................. 1545–1672 1.337(d)–6 ............................................................................................................................................................. 1545–1672 1.337(d)–7 ............................................................................................................................................................. 1545–1672 ***** David A. Mader, Assistant Deputy Commissioner of Internal Revenue. Approved March 7, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on March 13, 2003, 1:16 p.m., and published in the issue of the Federal Regis- ter for March 18, 2003, 68 F.R. 12817) 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 April 2003. See Rev. Rul. 2003–35, page 687. Section 412.—Minimum Funding Standards The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. Section 467.—Certain Payments for the Use of Property or Services The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. 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 April 2003. See Rev. Rul. 2003–35, page 687. 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 April 2003. See Rev. Rul. 2003–35, page 687. 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 April 2003. See Rev. Rul. 2003–35, page 687. Section 642.—Special Rules for Credits and Deductions Federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. Section 705.—Determination of Basis of Partner’s Interest 26 CFR 1.705–1: Determination of basis of partner’s interest. T.D. 9049 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Amendments to Rules for Determination of Basis of Partner’s Interest; Special Rules AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains fi- nal regulations relating to special rules on determination of basis of a partner’s inter- est under section 705. The final regula- tions are necessary to coordinate sections 705 and 1032. DATES:Effective Date:These regulations are effective March 18, 2003. Applicability Date:For dates of appli- cability, see§1.705–2(e). FOR FURTHER INFORMATION CON- TACT: Barbara (MacMillan) Campbell or Rebekah A. Myers (202) 622–3050 (not a toll-free number). April 7, 20036852003–14 I.R.B. SUPPLEMENTARY INFORMATION: Background On March 29, 2002, the Treasury De- partment and the IRS published final regu- lations (T.D. 8986, 2002–1 C.B. 780 [67 FR 15112]) under section 705 of the Internal Revenue Code (Code) in theFederal Reg- ister. Those final regulations provide guid- ance on the coordination of sections 705 and 1032 in situations where a corpora- tion acquires an interest in a partnership that holds stock in that corporation, a section 754 election is not in effect with respect to the partnership for the taxable year in which the corporation acquires the interest, and the partnership later sells or exchanges the stock. During the development of those fi- nal regulations, the Treasury Department and the IRS considered other issues re- lated to the coordination of sections 705 and 1032. Accordingly, also on March 29, 2002, the Treasury Department and the IRS pub- lished proposed regulations (REG–167648– 01, 2002–1 C.B. 790 [67 FR 15132]) to revise the final regulations contained in §1.705–2of26CFRpart1intheFed- eral Register. No written comments were received in response to the notice of pro- posed rulemaking, and no public hearing was requested or held. The proposed regu- lations are adopted as revised by this Trea- sury decision. Explanation of Provisions 1. Overview of Proposed Regulations The proposed regulations apply to situ- ations where a corporation owns a direct or indirect interest in a partnership that owns stock in that corporation, the partnership dis- tributes money or other property to an- other partner and that partner recognizes gain on the distribution during a year in which the partnership does not have an elec- tion under section 754 in effect, and the partnership subsequently sells or exchanges the stock. As stated in the preamble to the proposed regulations, in these situations it may be inconsistent with the intent of sec- tions 705 and 1032 to increase the basis of the corporation’s partnership interest by the full amount of any gain resulting from the partnership’s sale or exchange of the stock which is not recognized by the corpora- tion under section 1032. Accordingly, the proposed regulations re- vise the purpose statement of§1.705–2(a) to take into account situations involving such partnership distributions. The pro- posed regulations provide a specific rule implementing the revised purpose in single partnership cases. The proposed regula- tions also revise§1.705–2(c) to clarify that the tiered partnerships rule applies to situ- ations involving such partnership distribu- tions. In addition, the proposed regulations clarify that references in the regulations to stock of a corporate partner include any po- sition in stock of a corporate partner to which section 1032 applies. 2. Revisions in Final Regulations These final regulations follow the pro- posed regulations but extend the rules of the proposed regulations to situations where a corporation owns a direct or indirect inter- est in a partnership that owns stock in that corporation, the partnership distributes money or other property to another part- ner and that partner recognizes loss on the distribution or the basis of the property dis- tributed to that partner is adjusted during a year in which the partnership does not have an election under section 754 in ef- fect, and the partnership subsequently sells or exchanges the stock. The revisions pro- vide a more consistent approach, and bet- ter conform these final regulations to the final regulations issued on March 29, 2002, under section 705 (T.D. 8986, 2002–1 C.B. 780). 3. Effective Date The final regulations apply with re- spect to sales or exchanges of stock occur- ring on or after March 18, 2003, except that paragraph (d) applies with respect to sales or exchanges of stock occurring on or af- ter March 29, 2002. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regula- tory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regu- lations was submitted to the Chief Coun- sel for Advocacy of the Small Business Administration for comment on its im- pact on small businesses. Drafting Information The principal author of these proposed regulations is Barbara (MacMillan) Camp- bell of the Office of the Associate Chief Counsel (Passthroughs and Special Indus- tries). However, personnel from other of- fices of the IRS and the Treasury Department participated in their develop- ment. ***** Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PA RT 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 1.705–1 is amended by revising paragraph (a)(7) to read as follows: §1.705–1 Determination of basis of partner’s interest. (a)*** (7) For basis adjustments necessary to coordinate sections 705 and 1032 in cer- tain situations in which a partnership dis- poses of stock or any position in stock to which section 1032 applies of a corpora- tion that holds a direct or indirect interest in the partnership, see§1.705–2. ***** Par. 3. Section 1.705–2 is amended as follows: 1. Paragraph (a) is amended by adding a new sentence after the third sentence. 2. Paragraph (b)(2) is added. 3. Paragraph (c)(1) is amended by add- ing a sentence at the end of the paragraph. 4. Paragraph (d) is added. 5. Paragraph (e) is revised. The additions and revision read as follows: §1.705–2 Basis adjustments coordinating sections 705 and 1032. (a)***Similarly, in situations where a section 754 election was not in effect for the year in which a partnership distrib- 2003–14 I.R.B.686April 7, 2003 utes money or other property to another partner and that partner recognizes gain or loss on the distribution or the basis of the property distributed to that partner is ad- justed, the remaining partners’inside ba- sis and outside basis may not be equal. *** ***** (b)*** (2)Required adjustments relating to dis- tributions.(i) This paragraph (b)(2) ap- plies in situations where a corporation owns a direct or indirect interest in a partner- ship that owns stock in that corporation, the partnership distributes money or other prop- erty to another partner and that partner rec- ognizes gain or loss on the distribution or the basis of the property distributed to that partner is adjusted during a year in which the partnership does not have an election under section 754 in effect, and the part- nership subsequently sells or exchanges the stock. In these situations, the increase (or decrease) in the corporation’s adjusted ba- sis in its partnership interest resulting from the sale or exchange of the stock equals the amount of gain (or loss) that the corpo- rate partner would have recognized (ab- sent the application of section 1032) if, for the year in which the partnership made the distribution, a section 754 election had been in effect. (ii) The provisions of this paragraph (b)(2) are illustrated by the following example: Example.(i) A, B, and corporation C form part- nership PRS. A and B each contribute $10,000 and C contributes $20,000 in exchange for a partnership in- terest. PRS has no liabilities. PRS purchases stock in corporation C for $10,000, which appreciates in value to $70,000. PRS distributes $25,000 to A in com- plete liquidation of A’s interest in PRS in a year for which an election under section 754 is not in effect. PRS later sells the C stock for $70,000. PRS real- izes a gain of $60,000 on the sale of the C stock. C’s share of the gain is $40,000. Under section 1032, C does not recognize its share of the gain. (ii) Normally, C would be entitled to a $40,000 increase in the basis of its PRS interest for its allo- cable share of PRS’s gain from the sale of the C stock, but a special rule applies in this situation. If a sec- tion 754 election had been in effect for the year in which PRS made the distribution to A, PRS would have been entitled to adjust the basis of partnership property under section 734(b)(1)(A) by $15,000 (the amount of gain recognized by A with respect to the distribution to A under section 731(a)(1)). See§1.734– 1(b). Under§1.755–1(c)(1)(ii), the basis adjustment under section 734(b) would have been allocated to the C stock, increasing its basis to $25,000 (where there is a distribution resulting in an adjustment under sec- tion 734(b)(1)(A) to the basis of undistributed part- nership property, the adjustment is allocated only to capital gain property). (iii) If a section 754 election had been in effect for the year in which PRS made the distribution to A, the amount of gain that PRS would have recognized upon PRS’s disposition of C stock would be $45,000 ($70,000 minus $25,000 basis in the C stock), and the amount of gain C would have recognized upon PRS’s disposition of the C stock (absent the application of section 1032) would be $30,000 (C’s share of PRS’s gain of $45,000 from the stock sale). Accordingly, upon PRS’s sale of the C stock, the increase in the basis of C’s interest in PRS is $30,000. (c)***(1)***Similarly, if a cor- poration owns an indirect interest in its own stock through a chain of two or more part- nerships, and a partnership in the chain dis- tributes money or other property to another partner and that partner recognizes gain or loss on the distribution or the basis of the property distributed to that partner is ad- justed during a year in which the partner- ship does not have an election under section 754 in effect, then upon any subsequent sale or exchange of the stock, the bases of the interests in the partnerships included in the chain shall be adjusted in a manner that is consistent with the purpose of this sec- tion. ***** (d)Positions in Stock.For purposes of this section, stock includes any position in stock to which section 1032 applies. (e)Effective date.This section applies to gain or loss allocated with respect to sales or exchanges of stock occurring after De- cember 6, 1999, except that paragraph (d) of this section is applicable with respect to sales or exchanges of stock occurring on or after March 29, 2002, and the fourth sen- tence of paragraph (a), paragraph (b)(2), and the third sentence of paragraph (c)(1) of this section are applicable with respect to sales or exchanges of stock occurring on or af- ter March 18, 2003. David A. Mader, Assistant Deputy Commissioner of Internal Revenue. Approved March 6, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on March 17, 2003, 8:45 a.m., and published in the issue of the Federal Regis- ter for March 18, 2003, 68 F.R. 12815) 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 April 2003. See Rev. Rul. 2003–35, on this page. 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 April 2003. See Rev. Rul. 2003–35, on this page. Section 1033.—Involuntary Conversions 26 CFR 1.1033(a)–1: Involuntary conversions; nonrecognition of gain. May a business defer, under section 1033, recognition of gain realized on receipt of a grant payment made under the World Trade Center grant program? See Notice 2003–18, page 699. Section 1274.—Determin- ation 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.) Federalrates;adjustedfederal rates; adjusted federal long-term rate and the long-term exempt rate.For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for April 2003. Rev. Rul. 2003–35 This revenue ruling provides various pre- scribed rates for federal income tax pur- poses for April 2003 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Rev- enue 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 April 7, 20036872003–14 I.R.B. 1288(b). Table 3 sets forth the adjusted fed- eral long-term rate and the long-term tax- exempt rate described in section 382(f). Table 4 contains the appropriate percent- ages for determining the low-income hous- ing credit described in section 42(b)(2) for buildings placed in service during the cur- rent month. Finally, Table 5 contains the federal rate for determining the present value of annuity, an interest for life or for a term of years, or a remainder or a rever- sionary interest for purposes of section 7520. REV. RUL. 2003–35 TABLE 1 Applicable Federal Rates (AFR) for April 2003 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-Term AFR1.46%1.45%1.45%1.45% 110% AFR1.61%1.60%1.60%1.59% 120% AFR1.75%1.74%1.74%1.73% 130% AFR1.90%1.89%1.89%1.88% Mid-Term AFR2.96%2.94%2.93%2.92% 110% AFR3.26%3.23%3.22%3.21% 120% AFR3.56%3.53%3.51%3.50% 130% AFR3.86%3.82%3.80%3.79% 150% AFR4.46%4.41%4.39%4.37% 175% AFR5.22%5.15%5.12%5.10% Long-Term AFR4.58%4.53%4.50%4.49% 110% AFR5.04%4.98%4.95%4.93% 120% AFR5.51%5.44%5.40%5.38% 130% AFR5.98%5.89%5.85%5.82% REV. RUL. 2003–35 TABLE 2 Adjusted AFR for April 2003 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term adjusted AFR1.26%1.26%1.26%1.26% Mid-term adjusted AFR2.57%2.55%2.54%2.54% Long-term adjusted AFR4.41%4.36%4.34%4.32% 2003–14 I.R.B.688April 7, 2003 REV. RUL. 2003–35 TABLE 3 Rates Under Section 382 for April 2003 Adjusted federal long-term rate for the current month4.41% Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.)4.58% REV. RUL. 2003–35 TABLE 4 Appropriate Percentages Under Section 42(b)(2) for April 2003 Appropriate percentage for the 70% present value low-income housing credit7.87% Appropriate percentage for the 30% present value low-income housing credit3.37% REV. RUL. 2003–35 TABLE 5 Rate Under Section 7520 for April 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 interest3.6% Section 1288.—Treatment of Original Issue Discounts on Tax-Exempt Obligations The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. Section 4945.—Taxes on Taxable Expenditures 26 CFR 53.4945–4: Grants to individuals. (Also§117;§1.117–1.) Scholarshipgrants,employer- related private foundations.This ruling states that for purposes of sections 117 and 4945 of the Code, scholarships and educational grants awarded by a private foundation under an employer-related program to employees and their children, when the employee is a victim killed or seriously injured in a qualified disaster, may be awarded without regard to the percentage guidelines in Rev. Proc. 76–47, 1976–2 C.B. 670. Thus, grants awarded under such a program will be described in section 4945(g)(1) and will notbetaxableexpendituresunder section 4945(d)(3). Rev. Rul. 2003–32 ISSUE If a private foundation awards educa- tional grants to employees or children of employees of a particular employer who are victims of a qualified disaster as defined in §139 of the Internal Revenue Code, and the educational grants do not satisfy the per- centage test of Rev. Proc. 76–47, 1976–2 C.B. 670, are these educational grants treated as scholarships subject to the pro- visions of§117 and not treated as tax- able expenditures under§4945(d)(3)? FACTS The foundation is exempt from federal income tax under§501(c)(3) and is a pri- vate foundation under§509(a). The foun- dation has applied under§4945(g) for approval of its proposed scholarship pro- gram. The foundation intends to provide scholarships to employees or children of employees of a particular employer if the employee is seriously injured or killed as a result of a qualified disaster within the meaning of§139(c)(1), (2), or (3). The foundation will determine whether these cri- teria are satisfied using objective stan- dards that are consistently applied. Section 139(c) provides that the term “qualified disaster”includes (1) a disas- ter that results from a terroristic or mili- tary action (as defined in§692(c)), (2) a Presidentially declared disaster (as de- fined in§1033(h)(3)), or (3) a disaster that results from an accident involving a com- mon carrier, or from any other event, which is determined by the Secretary to be of a catastrophic nature. The group of employees or children of employees from whom grantees are se- lected is sufficiently broad to constitute a charitable class. The foundation’s scholar- ship program will satisfy the requirements of§4945(g)(1) and the guidelines of April 7, 20036892003–14 I.R.B. §§4.01 through 4.07 of Rev. Proc. 76– 47, 1976–2 C.B. 670; however, the foun- dation will award grants without regard to the percentage limitation test of§4.08 of Rev. Proc. 76–47. The foundation intends to make grants to all eligible applicants. LAW AND ANALYSIS A grant by a private foundation to an in- dividual for travel, study, or other similar purposes is a taxable expenditure by the pri- vate foundation under§4945(d)(3) un- less such grant satisfies the requirements of §4945(g). Such a grant, awarded on an ob- jective and nondiscriminatory basis pursu- ant to a procedure approved in advance by the Secretary, may satisfy the requirements of§4945(g)(1) if it is demonstrated to the satisfaction of the Secretary that the grant (i) constitutes a scholarship or fellowship grant that is subject to the provisions of §117(a) as in effect on the day before the date of the enactment of the Tax Reform Act of 1986 and (ii) is to be used for study at an educational organization described in §170(b)(1)(A)(ii). When an employer makes educational grants available to its employees on a pref- erential basis, the employer-employee re- lationship immediately suggests that the grant may be compensatory. To ensure that employer-related grant programs are out- side the pattern of employment and, there- fore, not compensatory, substantial factors not related to employment must control and limit grant programs to such an extent that the preferential treatment derived from em- ployment does not continue to be of any significance beyond being an initial quali- fier. Rev. Proc. 76–47, 1976–2 C.B. 670, pro- vides guidelines for determining whether a grant made by a private foundation under an employer-related grant program to an employee or to a child of an employee of the particular employer is a scholarship un- der§§117 and 4945(g)(1), rather than a form of compensation, an employment in- centive, or an employee fringe benefit. The Service will assume that grants awarded un- der an employer-related grant program will be scholarships or fellowship grants un- der§§117 and 4945(g)(1) if the program satisfies the seven conditions in§§4.01 through 4.07 and the percentage test de- scribed in§4.08 of Rev. Proc. 76–47. Rev. Proc. 76–47, 1976–2 C.B. 670, pro- vides that if an employer-related private foundation’s educational grant program sat- isfies the seven conditions of Rev. Proc. 76– 47,§§4.01 through 4.07, but does not meet the percentage test of§4.08, then all the facts and circumstances will be reviewed in determining whether the primary pur- pose of the program is to provide extra compensation or another employment in- centive, or whether the primary purpose is to educate recipients in their individual ca- pacities. For this program, employment is the ini- tial, but not the sole, qualifier. An em- ployee or the child of an employee is eligible for an educational grant only in the event the employee is seriously injured or killed as a result of a qualified disaster. These eligibility criteria provide suffi- cient assurance that the primary purpose of the grant is to educate recipients in their in- dividual capacities, outside of any pattern of employment, rather than to compen- sate employees or provide an employment fringe benefit. Therefore, this educational grant program is not required to satisfy the percentage test of§4.08 because its eligi- bility requirements meet the facts and cir- cumstances test of Rev. Proc. 76–47. HOLDING Under the facts set forth above, grants awarded under the program satisfy the re- quirements of Rev. Proc. 76–47, 1976–2 C.B. 670, and constitute scholarships sub- ject to the provisions of§117. Therefore, grants awarded under the program satisfy the requirements of§4945(g)(1) and will not be taxable expenditures under §4945(d)(3). This revenue ruling does not address the extent to which the grants meet the requirements of“qualified scholar- ships”that may be excluded from the gross income of recipients under§117(a). See Notice 87–31, 1987–1 C.B. 475, for fur- ther information relating to the exclusion of qualified scholarships from gross in- come. APPLICATION This ruling also applies to Revenue Pro- cedure 80–39, 1980–2 C.B. 772, which pro- vides parallel guidelines for determining whether educational loans made by a pri- vate foundation under an employer-related loan program will satisfy the requirements of§4945(g)(3) and will not be taxable ex- penditures under§4945(d)(3). DRAFTING INFORMATION The principal author of this revenue rul- ing is Janet E. Gitterman of the Exempt Or- ganizations, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, contact Ms. Gitterman at (202) 283–9458 (not a toll-free call). Section 6103.—Confiden- tiality and Disclosure of Returns and Return Information 26 CFR 301.6103(n)–1: Disclosure of returns and return information in connection with procurement of property and services for tax administration purposes. T.D. 9044 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 301 and 602 Amendment of 26 CFR §301.6103(n)–1to Incorporate Taxpayer Browsing Protection Act AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulation. SUMMARY: This final regulation requires persons to whom returns or return infor- mation is or may be disclosed as autho- rized by§301.6103(n)–1(a) (generally, contractors employed to perform tax ad- ministration services) to notify their officers and employees of the prohibitions against and penalties for unauthorized in- spection of returns or return information. DATES:Effective Date:This final regula- tion is effective March 12, 2003. 2003–14 I.R.B.690April 7, 2003 FOR FURTHER INFORMATION CON- TACT: Carol Marchant, 202–622–4590 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information in this fi- nal rule has been reviewed and, pending re- ceipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545–1821. The collection of information in this regula- tion is in§301.6103(n)–1(c). This infor- mation is required and will be used to promote compliance by officers and em- ployees with the restrictions of sections 6103, 7213, and 7213A, and to protect the privacy of American taxpayers. The col- lection of information is required to ob- tain a benefit. The likely respondents are state or local governments, business or other for-profit institutions, Federal agencies, and/or small businesses or organizations. Comments on the collection of infor- mation should be sent to theOffice of Management and Budget, Attn: Desk Of- ficer for the Department of the Treasury, Of- fice of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Re- ports Clearance Officer, W:CAR:MP:T:T: SP, Washington, DC 20224. Comments on the collection of information should be re- ceived by May 12, 2003. Comments are specifically requested concerning: Whether the collection of in- formation is necessary for the proper per- formance of the functions of theInternal Revenue Service, including whether the in- formation will have practical utility; The ac- curacy of the estimated burden associated with the collection of information (see be- low); How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the collection of information may be minimized, including through the applica- tion of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and pur- chase of service to provide information. Es- timated total annual reporting burden: 250 hours. Estimated average annual burden hours per respondent: 6 minutes. Estimated number of respondents: 2500. Estimated an- nual frequency of responses: Annually. An agency may not conduct or spon- sor, and a person is not required to re- spond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Bud- get. Books or records relating to a collec- tion of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, returns and return informa- tion are confidential, as required by 26 U.S.C. 6103. Background Under section 7213A of the Internal Revenue Code (Code) as added by Public Law 105–35 (111 Stat. 1104) (the Tax- payer Browsing Protection Act of 1997), any person described in section 6103(n), or an officer or employee of any such per- son, is prohibited from willfully inspect- ing any returns or return information, except as authorized by the Code. Any person who violates section 7213A may be subject to a fine in any amount not exceeding $1,000, or imprisonment of not more than one year, or both. Currently,§301.6103(n)–1(c) pro- vides that each officer or employee of any person to whom returns or return informa- tion is or may be disclosed as authorized by§301.6103(n)–1(a) must be notified of the prohibitions against unauthorized dis- closure of returns or return information, and the potential penalties for such acts, im- posed under section 7213. The regulation does not reflect the penalties imposed by section 7213A. This document adopts a final regula- tion amending§301.6103(n)–1(c) to re- flect the penalties contained in section 7213A. The regulation requires that each of- ficer or employee of any person to whom returns or return information is or may be disclosed as authorized by§301.6103(n)– 1(a) must also receive notification of the prohibitions against unauthorized inspec- tion of returns or return information and the potential penalties for such acts, in addi- tion to the notifications of the penalties for unauthorized disclosure. The Internal Rev- enue Service (IRS) already requires, in all section 6103(n) contracts, that contrac- tors notify their officers and employees of the penalties for unauthorized inspection. The final regulation updates the regula- tory requirements to conform to the present law for both unauthorized inspection and disclosure. Explanation of Provisions This final regulation adds a require- ment that persons to whom returns or re- turn information is or may be disclosed as authorized by§301.6103(n)–1(a) notify their officers and employees that such officers and employees are prohibited from will- fully inspecting any returns or return in- formation, except as authorized by the Code, and that they may be subject to a fine in any amount not exceeding $1,000, or im- prisonment of not more than one year, or both, for any violation of section 7213A. The IRS has a number of section 6103(n) agreements with federal agen- cies. This final regulation also clarifies the penalty provisions that are applicable to of- ficers and employees of Federal agencies who are performing tax administration ser- vices for the IRS pursuant to section 6103(n). Special Analyses Section 553 of the Administrative Pro- cedure Act (5 U.S.C. chapter 5) requires that a notice of proposed rulemaking be pub- lished in theFederal Registerand, after such notice, that the Federal agency that is- sued the notice give interested persons an opportunity to participate in the rulemak- ing through submission of written com- ments, with or without opportunity for oral presentation. These requirements are sub- ject to certain exceptions set forth in 5 U.S.C. 553(b), including when the agency for good cause finds that notice and pub- lic comment are impracticable, unneces- sary, or contrary to the public interest. Because the final regulation merely amends an existing regulation to add an additional notification requirement that has already been imposed administratively, it is deter- mined that the notice and public-comment procedure required by 5 U.S.C. 553 is un- necessary in this case. For the same rea- son, a delayed effective date is not required pursuant to 5 U.S.C. 553(d)(3). It has also been determined that this Treasury decision is not a significant regu- latory action as defined in Executive Or- der 12866. Therefore, a regulatory assessment is not required. Because no no- tice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act April 7, 20036912003–14 I.R.B. (5 U.S.C. 601–612) do not apply. Pursu- ant to section 7805(f) of the Code, this regu- lation was submitted to the Chief Counsel of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of this final regu- lation is Carol Marchant, Office of Asso- ciate Chief Counsel (Procedure & Administration), Disclosure and Privacy Law Division. ***** Adoption of Amendments to the Regu- lations Accordingly, 26 CFR parts 301 and 602 are amended as follows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805*** Par. 2. In§301.6103(n)–1, paragraph (c) is revised and paragraph (f) is added to read as follows: §301.6103(n)–1 Disclosure of returns and return information in connection with procurement of property and services for tax administration purposes. ***** (c)Notification requirements. Persons to whom returns or return information is or may be disclosed as authorized by para- graph (a) of this section shall provide writ- ten notice to their officers or employees— (1) That returns or return informa- tion disclosed to such officer or employee can be used only for a purpose and to the extent authorized by paragraph (a) of this section; (2) That further inspection of any re- turns or return information for a purpose or to an extent unauthorized by paragraph (a) of this section constitutes a misdemeanor, punishable upon conviction by a fine of as much as $1,000, or imprisonment for as long as 1 year, or both, together with costs of prosecution; (3) That further disclosure of any re- turns or return information for a purpose or to an extent unauthorized by paragraph (a) of this section constitutes a felony, pun- ishable upon conviction by a fine of as much as $5,000, or imprisonment for as long as 5 years, or both, together with the costs of prosecution; (4) That any such unauthorized fur- ther inspection or disclosure of returns or return information may also result in an award of civil damages against any per- son who is not an officer or employee of the United States in an amount not less than $1,000 for each act of unauthorized in- spection or disclosure or the sum of ac- tual damages sustained by the plaintiff as a result of such unauthorized disclosure or inspection as well as an award of costs and reasonable attorneys fees; and (5) If such person is an officer or em- ployee of the United States, a conviction for an offense referenced in paragraph (c)(2) or (c)(3) of this section shall result in dis- missal from office or discharge from em- ployment. ***** (f)Effective date.Section 301.6103(n)– 1(c) is applicable on March 12, 2003. PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 4. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par.5.In§602.101, paragraph (b) is amended by adding an entry in numerical order to the table to read as follows: §602.101 OMB Control numbers. ***** (b)*** CFR part or section where identified and described Current OMB control No. ***** 301.6103(n)–1................................................................................................................................................. 1545–1841 ***** David A. Mader, Assistant Deputy Commissioner of Internal Revenue. Approved February 11, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on March 11, 2003, 8:45 a.m., and published in the issue of the Federal Regis- ter for March 12, 2003, 68 F.R. 11739) 2003–14 I.R.B.692April 7, 2003 Section 7433.—Civil Damages for Certain Unauthorized Collection Actions 26 CFR 301.7433–1: Civil cause of action for certain unauthorized collection actions. T.D. 9050 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301 Civil Cause of Action for Damages Caused by Unlawful Tax Collection Actions, Including Actions Taken in Violation of Section 362 or 524 of the Bankruptcy Code AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains fi- nal regulations relating to civil causes of ac- tion for damages caused by unlawful collection actions of officers and employ- ees of the IRS and the awarding of costs and certain fees. The regulations reflect amendments made by the Taxpayer Bill of Rights 2 and the Internal Revenue Ser- vice Restructuring and Reform Act of 1998. The regulations affect all persons who suf- fer damages caused by unlawful collec- tion actions of officers or employees of the IRS. EFFECTIVE DATES: These regulations are effective March 25, 2003. FOR FURTHER INFORMATION CON- TACT: Kevin B. Connelly, (202) 622–3630 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains final amend- ments to the Procedure and Administra- tion Regulations (26 CFR part 301) relating to civil actions for damages caused by un- lawful collection actions of officers or em- ployees of the IRS. The Taxpayer Bill of Rights 2 (TBOR2), Public Law 104–168 (110 Stat. 1465), amended section 7433 of the Internal Revenue Code of 1986 (Code) by increasing the maximum amount of damages a taxpayer may be awarded for un- lawful collection actions from $100,000 to $1,000,000. TBOR2 also eliminated the ju- risdictional requirement that administra- tive remedies be exhausted before a court may award damages; TBOR2 authorized the court, however, to reduce damages if it de- termined that the plaintiff did not exhaust administrative remedies. These TBOR2 pro- visions were effective for actions of IRS of- ficers or employees after July 30, 1996. The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Public Law 105–206 (112 Stat. 685), although re- taining the pre-existing authorization for an award of damages in the case of reckless or intentional disregard of the Code or regu- lations, amended section 7433(a) by pro- viding that taxpayers may file actions for damages caused by the negligent disre- gard of the Code or regulations. RRA 1998 also added subsection (e) to section 7433. This amendment provides that an action for damages could be brought for the IRS’s willful violation of section 362 (relating to the automatic stay) or section 524 (relat- ing to the effect of discharge) of the Bank- ruptcy Code. Actions for damages caused by the violation of section 362 or 524 of the Bankruptcy Code are limited to will- ful violations. The maximum amount of damages that may be awarded for negli- gent disregard under section 7433(a) is $100,000. The maximum amount of dam- ages that may be awarded for reckless or intentional disregard under subsection (a) or for willful violations of section 362 or 524 of the Bankruptcy Code under sub- section (e) is $1,000,000. RRA 1998 also reinstated the requirement under section 7433 that the plaintiff must exhaust ad- ministrative remedies before a court may award damages. These RRA 1998 provi- sions apply to actions of IRS officers or em- ployees after July 22, 1998. RRA 1998 also added section 7426(h), which authorizes persons who bring wrong- ful levy actions under section 7426 to sue for damages caused by the reckless or in- tentional, or negligent, disregard of any pro- vision of the Code, plus costs of the action. Consistent with section 7433, damages awarded under section 7426(h) are lim- ited to $1,000,000 for reckless or inten- tional disregard and $100,000 for negligent disregard. In addition, a plaintiff must ex- haust administrative remedies before a court may award damages under section 7426(h). The provisions of section 7433 relating to mitigation and the period for bringing an action also apply to actions brought un- der section 7426(h). IRS published a no- tice of proposed rulemaking reflecting these changes in theFederal Registeron March 5, 2002. (REG–107366–00, 2002–1C.B. 645 [67 FR 9929]). No written comments on the proposed regulations were received. No public hearing was held. Explanation of Provisions §301.7426–2 RRA 1998 added subsection (h) to sec- tion 7426. Subsection (h) authorizes per- sons to sue the United States in Federal district court for damages due to a wrong- ful levy caused by the reckless or inten- tional, or negligent, disregard of a provision of the Code. Plaintiffs may recover the lesser of actual direct economic damages and costs of the action or $1,000,000 ($100,000 in the case of negligence). The amendment also provided that the rules of section 7433(d) relating to exhaustion of ad- ministrative remedies, mitigation of dam- ages, and the period for bringing an action shall apply. The regulations thus adopt rules like those promulgated under section 7433. Plaintiffs must mitigate damages and no damages may be awarded unless the court determines that the plaintiff has exhausted administrative remedies available within the IRS,e.g., by filing an administrative claim for damages. The regulations provide that any action for damages under this section must be brought within two years after the date the action accrues. This two-year limi- tations period is independent of the nine- month period following the wrongful levy during which the third party may make a claim for wrongfully levied property. §301.7430–8 Section 7430 provides that reasonable administrative costs may be awarded to the prevailing party in an administrative pro- ceeding brought by or against the United States in connection with the determina- tion, collection, or refund of any tax, in- terest, or penalty under Title 26 of the United States Code. Prior to the amend- ments in RRA 1998, taxpayers generally were not entitled to recover costs for ad- ministrative proceedings in connection with collection matters. Accordingly, the cur- April 7, 20036932003–14 I.R.B. rent regulations exclude such collection mat- ters, including proceedings under sections 7432 and 7433, from the definition of ad- ministrative proceedings. To reflect the RRA 1998 amendments, the regulations expand the definition of an administrative proceed- ing to include any administrative action for damages under section 7433(e) and any pro- cedure or action brought before the IRS seeking relief with respect to a violation by the IRS of section 362 or 524 of the Bank- ruptcy Code. The regulations provide that the pre- vailing party is a party who establishes that, in connection with the collection of his or her federal tax, the IRS has willfully vio- lated a provision of section 362 or 524 of the Bankruptcy Code. The only adminis- trative costs that may be awarded are those incurred after the date of the bankruptcy pe- tition that gave rise to the section 362 stay or section 524 discharge injunction. A claim with the IRS for administra- tive costs must be filed within 90 days af- ter the date the IRS mails its decision on the taxpayer’s administrative claim for dam- ages under§301.7433–2(e) or claim for re- lief from a violation of section 362 or 524 of the Bankruptcy Code. §301.7433–1 Section 3102 of RRA 1998 amended section 7433(a) of the Code by providing that a taxpayer may sue the United States in a district court of the United States for damages caused by the negligent disre- gard of the Code or regulations in connec- tion with the collection of the taxpayer’s tax liability. Section 801 of TBOR2 amended section 7433(b) by increasing the maxi- mum amount of damages that a taxpayer may recover for damages caused by the reckless or intentional disregard of the Code or regulations from $100,000 to $1,000,000. Section 3102 of RRA 1998 caps the amount of damages that a taxpayer may recover for negligent disregard at $100,000. The regu- lations under§301.7433–1 reflect these changes. §301.7433–2 RRA 1998 also amended section 7433 by adding subsection (e). Subsection (e) gives taxpayers the right to petition the bankruptcy court to recover damages if, in connection with the collection of a fed- eral tax, any officer or employee of the IRS willfully violates section 362 or 524 of the Bankruptcy Code or any regulation pro- mulgated thereunder. Damages in connec- tion with a claim under section 7433(e) for willful violations of section 362 or 524 are recoverable under section 7433(b) and are subject to the limitations imposed by sec- tion 7433(d). Under section 7433(b), if the IRS is found liable, the plaintiff may re- cover an amount equal to the lesser of $1,000,000 or the actual, direct economic damages sustained by the plaintiff as a proximate result of the IRS’s willful ac- tion plus costs of the action. A plaintiff may not recover damages for the mere negli- gent violation of section 362 or 524 of the Bankruptcy Code. Section 362 relates to the automatic stay, which arises by operation of law when a debtor files a bankruptcy petition. The stay prohibits certain collection actions against the debtor, the debtor’s property, and the property of the bankruptcy estate. Prior to enactment of section 7433(e), individuals injured by the IRS’s willful violation of the automatic stay could only sue to recover ac- tual damages, including costs and attor- neys’fees, under Bankruptcy Code section 362(h). Section 7433(e) provides an alter- native cause of action to recover dam- ages, but still permits an individual to recover damages under section 362(h) of the Bankruptcy Code, in lieu of an action un- der section 7433(e). However, section 7433(e) explicitly provides that adminis- trative and litigation costs incurred in press- ing a claim under section 362(h) of the Bankruptcy Code may only be paid pur- suant to, and subject to the conditions de- scribed in, section 7430 of the Code. Section 7430 authorizes the payment of ad- ministrative and litigation costs only if a taxpayer exhausts administrative remedies. The regulations provide that in order to qualify for an award of administrative and litigation costs in an action under section 362(h) of the Bankruptcy Code, a taxpayer must (as in the case of damages actions un- der section 7433(e)) file an administra- tive claim with the IRS relating to the violation of the automatic stay. Section 524 sets forth the effect of a dis- charge under the Bankruptcy Code. A dis- charge operates as an injunction against the commencement or continuation of any ac- tion to collect a discharged debt as a per- sonal liability of the debtor. Prior to enactment of section 7433(e), a debtor who believed the IRS had willfully violated the discharge injunction could request the Bank- ruptcy Court under Bankruptcy Code sec- tion 105 to hold the IRS in contempt and seek to recover damages under that Bank- ruptcy Code provision. Section 7433(e) now provides the exclusive remedy for the IRS’s willful violation of the discharge injunc- tion. The regulations set forth procedures re- lating to these claim and damage allow- ance provisions. Damages recoverable under section 7433(e) for a violation of the au- tomatic stay or the discharge injunction are limited to (1) the actual, direct economic damages sustained by the taxpayer (and the taxpayer has a duty to mitigate those dam- ages), plus (2) costs of the action. The maximum damage award is $1,000,000. No petition for damages under section 7433(e) may be filed in a bankruptcy court unless the taxpayer first exhausts administrative remedies within the IRS. Similar to rules previously adopted with respect to other wrongful collection ac- tions, the regulations define direct, eco- nomic damages as actual, pecuniary damages sustained by the taxpayer as a re- sult of the willful violation of section 362 or 524 of the Bankruptcy Code. Injuries such as inconvenience, loss of reputation, and emotional distress, are not compens- able except to the extent they result in ac- tual pecuniary loss. The regulations define costs of the ac- tion that are recoverable as damages un- der section 7433(e) as: (1) fees of the clerk and marshal; (2) fees of the court reporter for all or any part of the stenographic tran- script necessarily obtained for use in the case; (3) fees and disbursements for print- ing and witnesses; (4) fees for exemplifi- cation and copies of paper necessarily obtained for use in the case; (5) docket fees; and (6) compensation of court appointed ex- perts and interpreters. Costs of the action do not include any costs other than those enumerated in this paragraph. Reasonable administrative and litiga- tion costs, including attorneys fees, are not recoverable as direct economic damages. These costs are recoverable, if at all, un- der section 7430. The taxpayer generally will be entitled to reasonable administra- tive and litigation costs under section 7430 if the taxpayer (1) files an administrative claim with the IRS, (2) establishes that the IRS willfully violated either the automatic stay under Bankruptcy Code section 362 or 2003–14 I.R.B.694April 7, 2003 the discharge injunction under section 524, (3) substantially prevails with respect to the amount of damages or the most signifi- cant issue in controversy, and (4) meets the requirements of sections 7430(c)(4)(A)(ii) regarding net worth. A petition for damages under section 7433 may not be filed in a bankruptcy court unless the taxpayer first files an adminis- trative claim for damages with the IRS. The claim must be made in writing to the Chief, Local Insolvency Unit, for the judicial dis- trict in which the taxpayer filed the under- lying bankruptcy case giving rise to the alleged violation. The claim must include: (1) the claimant taxpayer’s name, taxpayer identification number, current address, cur- rent home and work telephone numbers and any convenient times to be contacted; (2) the court and case number of the bank- ruptcy case in which the violation occurred; (3) a description, in reasonable detail, of the violation (with copies of any available sub- stantiating documentation or correspon- dence with the IRS); (4) a description of the injuries incurred by the taxpayer filing the claim (with copies of any available sub- stantiating documentation or evidence); (5) the dollar amount of the claim, including any damages that have not yet been in- curred but which are reasonably foresee- able (along with any available substantiating documentation or evidence); and (6) the sig- nature of the taxpayer or any duly autho- rized representative. The regulations provide that, after an ad- ministrative claim for damages has been filed, a petition for damages under sec- tion 7433 may not be filed in a bankruptcy court until the earlier of (1) the time a de- cision is rendered on the claim or (2) six months from the date the administrative claim is filed. Because a taxpayer must pe- tition the bankruptcy court for damages within two years after the cause of action accrues, the regulations contain an excep- tion for claims filed in the last six months before the two-year limitation period ex- pires. In those circumstances, taxpayers may file petitions for damages at any time af- ter they file their administrative claims and before the period of limitations expires. A cause of action accrues under this section when the taxpayer has had a reasonable op- portunity to discover all essential elements of a possible cause of action. Special Analysis It has been determined that this final regulation is not a significant regulatory ac- tion as defined in Executive Order 12866. Therefore, a regulatory assessment is not re- quired. It also has been determined that sec- tion 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regula- tions do not impose a collection of infor- mation on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking was submitted to the Chief Counsel for Ad- vocacy of the Small Business Administra- tion for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Kevin B. Connelly, Office of As- sociate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division, CC:PA:CBS, IRS. However, other personnel from the IRS and the Treasury Department participated in their development. ***** Adoption of Amendments to the Regu- lations Accordingly, 26 CFR part 301 is amended as follows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805*** Par. 2. Section 301.7426–2 is added to read as follows: §301.7426–2 Recovery of damages in certain cases. (a)In general.In addition to remedies related to wrongful levy set forth in §301.7426–1(b), if a district court of the United States finds in any action brought under section 7426 that any officer or em- ployee of the Internal Revenue Service reck- lessly or intentionally, or by reason of negligence, disregarded any provision of this title, the United States shall be liable to the plaintiff for damages. The plaintiff has a duty to mitigate damages. The total amount of damages recoverable under this sec- tion is the lesser of $1,000,000 ($100,000 in the case of negligence), or the sum of— (1) Actual, direct economic damages as defined in§301.7433–1(b) sustained as a proximate result of the reckless, inten- tional, or negligent actions of the officer or employee, reduced by the amount of any damages awarded under§301.7426–1(b); and (2) Costs of the action as defined in §301.7433–1(c). (b)Administrative remedies must be ex- hausted.The court may not award a judg- ment for damages under paragraph (a) of this section unless the court determines that the plaintiff has filed an administrative claim pursuant to paragraph (d) of this section, and has satisfied the requirements of para- graph (c) of this section. (c)No request for damages in a dis- trict court of the United States prior to fil- ing an administrative claim.(1) Except as provided in paragraph (c)(2) of this sec- tion, no request for damages under para- graph (a) of this section shall be maintained in any district court of the United States be- fore the earlier of the following dates— (i) The date the decision is rendered on a claim filed in accordance with paragraph (d) of this section; or (ii) The date that is six months after the date an administrative claim is filed in ac- cordance with paragraph (d) of this sec- tion. (2) If an administrative claim is filed in accordance with paragraph (d) of this sec- tion during the last six months of the pe- riod of limitations described in paragraph (f) of this section, the claimant may file an action in a district court of the United States any time after the administrative claim is filed and before the expiration of the pe- riod of limitations. (d)Procedures for an administrative claim—(1)Manner.An administrative claim for the lesser of $1,000,000 ($100,000 in the case of negligence) or actual, direct eco- nomic damages as defined in§301.7433– 1(b) shall be sent in writing to the Area Director, Attn: Compliance Technical Sup- port Manager of the area in which the tax- payer currently resides. April 7, 20036952003–14 I.R.B. (2)Form.The administrative claim shall include— (i) The name, taxpayer identification number, current address and current home and work telephone numbers (indicating any convenient times to be contacted) of the per- son making the claim; (ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspon- dence with the Internal Revenue Service); (iii) A description of the damages in- curred by the claimant filing the claim (in- clude copies of any available substantiating documentation or evidence); (iv) The dollar amount of the claim, in- cluding any damages that have not yet been incurred but which are reasonably foresee- able (include copies of any available sub- stantiating documentation or evidence); and (v) The signature of the claimant or duly authorized representative. (3)Duly authorized representative.For purposes of this paragraph (d), a duly au- thorized representative is any attorney, cer- tified public accountant, enrolled actuary, or any other person permitted to repre- sent the claimant before the Internal Rev- enue Service who is not disbarred or suspended from practice before the Inter- nal Revenue Service and who has a writ- ten power of attorney executed to the claimant. (e)No liability for damages for any sum in excess of the dollar amount sought in the administrative claim.See§301.7433–1(f). (f)Period of limitations—(1)Time for filing.A civil action under paragraph (a) of this section must be brought in a district court of the United States within two years after the date the cause of action accrues. (2)Right of action accrues.A cause of action under paragraph (a) of this section accrues when the plaintiff has had a rea- sonable opportunity to discover all essen- tial elements of a possible cause of action. (g)Recovery of costs under section 7430. See§301.7433–1(h). (h)Effective date.This section is appli- cable March 25, 2003. Par. 3. Section 301.7430–1 is amended by redesignating paragraphs (e), (f) and (g) as paragraphs (f), (g) and (h), respectively, revising the phrase“paragraph (e)(1), (e)(2), (e)(3), or (e)(4) of this section”to read “paragraph (f)(1), (f)(2), (f)(3), or (f)(4) of this section”, and adding a new paragraph (e) to read as follows: §301.7430–1 Exhaustion of administrative remedies. ***** (e)Actions involving willful violations of the automatic stay under section 362 or the discharge provisions under section 524 of the Bankruptcy Code—(1)Section 7433 claims.A party has not exhausted admin- istrative remedies within the Internal Rev- enue Service with respect to asserted violations of the automatic stay under sec- tion 362 of the Bankruptcy Code or the dis- charge provisions under section 524 of the Bankruptcy Code unless it files an admin- istrative claim for damages or for relief from a violation of section 362 or 524 of the Bankruptcy Code with the Chief, Local In- solvency Unit, for the judicial district in which the bankruptcy petition that is the ba- sis for the asserted automatic stay or dis- charge violation was filed pursuant to §301.7433–2(e) and satisfies the other con- ditions set forth in§301.7433–2(d) prior to filing a petition under section 7433. (2)Section 362(h) claims.A party has not exhausted administrative remedies within the Internal Revenue Service with respect to asserted violations of the auto- matic stay under section 362 of the Bank- ruptcy Code unless it files an administrative claim for relief from a violation of sec- tion 362 of the Bankruptcy Code with the Chief, Local Insolvency Unit, for the ju- dicial district in which the bankruptcy pe- tition that is the basis for the asserted automatic stay violation was filed pursu- ant to§301.7433–2(e) and satisfies the other conditions set forth in§301.7433–2(d) prior to filing a petition under section 362(h) of the Bankruptcy Code. ***** §301.7430–2 [Amended] Par. 4. In§301.7430–2, paragraph (c)(2) is amended by: 1. Adding the language“, except that re- quests with respect to administrative pro- ceedings defined by§301.7430–8(c) should be made to the Chief, Local Insolvency Unit”at the end of the first sentence. 2. Removing the language“District Di- rector for the district”and adding“Inter- nal Revenue Service office”in its place in the second sentence. Par. 5. Section 301.7430–3 is amended by: 1. Revising paragraph (a)(4). 2. Paragraph (b) is amended by adding the language“, except those collection ac- tions described by section 7433(e)”at the end of the penultimate sentence. The revision reads as follows: §301.7430–3 Administrative proceeding and administrative proceeding date. (a)*** (4) Proceedings in connection with col- lection actions (as defined in paragraph (b) of this section), including proceedings un- der section 7432 or 7433, except proceed- ings brought under section 7433(e) and §301.7433–2 or proceedings otherwise de- scribedin§301.7430–8(c).See §301.7430–8. ***** Par. 6. Section 301.7430–6 is amended by adding a sentence at the end of the sec- tion to read as follows: §301.7430–6 Effective dates. ***Sections 301.7430–1(e), 301.7430– 2(c)(2), 7430–3(a)(4) and (b) are appli- cable with respect to actions taken by the Internal Revenue Service after July 22, 1998. Par. 7. Section 301.7430–8 is added to read as follows: §301.7430–8 Administrative costs incurred in damage actions for violations of section 362 or 524 of the Bankruptcy Code. (a)In general.The Internal Revenue Ser- vice may grant a taxpayer’s request for re- covery of reasonable administrative costs incurred in connection with the adminis- trative proceeding before the Internal Rev- enue Service relating to the willful violation of section 362 or 524 of the Bankruptcy Code only if the taxpayer is a prevailing party. (b)Prevailing party.A taxpayer is a pre- vailing party for purposes of this section only if— (1) The taxpayer satisfies the net worth and size limitations in paragraph (f) of §301.7430–5; (2) The taxpayer establishes that in con- nection with the collection of his or her fed- eral tax an officer or employee of the Internal Revenue Service has willfully vio- lated a provision of section 362 or 524 of the Bankruptcy Code; and 2003–14 I.R.B.696April 7, 2003 (3) The position of the Internal Rev- enue Service in the proceeding was not sub- stantially justified. (c)Administrative proceeding.For pur- poses of this section, an administrative pro- ceeding is a proceeding related to an administrative claim presented to the In- ternal Revenue Service seeking relief from a violation of section 362 or 524 of the Bankruptcy Code by the Internal Revenue Service or recovery of damages from the Internal Revenue Service under§301.7433– 2(e). (d)Costs incurred after filing of bank- ruptcy petition.Administrative costs may be recovered only if incurred on or after the date of filing of the bankruptcy petition that formed the basis for the stay on collec- tion under Bankruptcy Code section 362 or the discharge injunction under Bankruptcy Code section 524, as the case might be. (e)Time for filing claim for adminis- trative costs.(1) For purposes of this sec- tion, the taxpayer must file a claim for administrative costs before the Internal Rev- enue Service not later than 90 days after the date the Internal Revenue Service mails to the taxpayer, or otherwise notifies the tax- payer of, the decision regarding the claim for relief from or damages relating to a vio- lation of the collection stay or the dis- charge injunction. (2) If the Internal Revenue Service de- nies the claim for administrative costs in whole or in part, the taxpayer must file a petition with the Bankruptcy Court for ad- ministrative costs no later than 90 days af- ter the date on which the denial of the claim for administrative costs is mailed, or oth- erwise furnished, to the taxpayer. If the In- ternal Revenue Service does not respond on the merits to a request by the taxpayer for an award of reasonable administrative costs within six months after such request is filed, the Internal Revenue Service’s failure to re- spond may be considered by the taxpayer as a denial of an award of reasonable ad- ministrative costs. (3) For purposes of paragraphs (e)(1) and (2) of this section, if the 90th day falls on a Saturday, Sunday, or a legal holiday, the 90-day period shall end on the next suc- ceeding day which is not a Saturday, Sun- day, or a legal holiday. The term legal holiday means a legal holiday in the Dis- trict of Columbia. If the request for costs is to be filed with the Internal Revenue Ser- vice at an office of the Internal Revenue Service located outside the District of Co- lumbia, the term legal holiday also means a statewide legal holiday in the state where such office is located. (f)Effective date.This section is appli- cable with respect to actions taken by the Internal Revenue Service after July 22, 1998. Par. 8. Section 301.7433–1 is amended as follows: 1. In paragraph (a) introductory text, in the first sentence, the language“, or by rea- son of negligence,”is added after the lan- guage“recklessly or intentionally”.In addition, the language“$100,000”in the third sentence is removed and“$1,000,000 ($100,000 in the case of negligence)”is added in its place. 2. In paragraph (b)(1), in the first sen- tence, the language“, or negligent,”is added after the language“reckless or in- tentional”. 3. In paragraph (e)(1), in the first sen- tence, the language“$100,000”is removed and“$1,000,000 ($100,000 in the case of negligence)”is added in its place. In ad- dition, the language“district director (marked for the attention of the Chief, Spe- cial Procedures Function) of the district”is removed and“Area Director, Attn: Com- pliance Technical Support Manager of the area”is added in its place. 4. In paragraph (h), in the penultimate sentence, the language“7432(a)”is re- moved and“7433(a)”is added in its place. 5. Revising paragraph (i). The revision reads as follows: §301.7433–1 Civil cause of action for certain unauthorized collection actions. ***** (i)Effective dates.The portions of this section relating to reckless or intentional acts are applicable to actions taken by Inter- nal Revenue Service officials after July 30, 1996. The portions of this section relat- ing to negligent acts are applicable to ac- tions taken by the Internal Revenue Service officials after July 22, 1998. Par. 9. Section 301.7433–2 is added to read as follows: §301.7433–2 Civil cause of action for violation of section 362 or 524 of the Bankruptcy Code. (a)In general.(1) If, in connection with the collection of a federal tax with respect to a taxpayer, an officer or employee of the Internal Revenue Service willfully vio- lates any provision of section 362 (relat- ing to the automatic stay) or section 524 (relating to discharge) of title 11, United States Code, or any regulation promul- gated under such provision, the taxpayer may file a petition for damages against the United States in Federal bankruptcy court. The taxpayer has a duty to mitigate dam- ages. The total amount of damages recov- erable under this section is the lesser of $1,000,000, or the sum of— (i) Actual, direct economic damages sus- tained as a proximate result of the willful actions of the officer or employee; and (ii) Costs of the action. (2) An action under this section consti- tutes the exclusive remedy under the In- ternal Revenue Code for violations of sections 362 and 524 of the Bankruptcy Code. In addition, taxpayers injured by vio- lations of section 362 of the Bankruptcy Code may maintain actions under section 362(h) of the Bankruptcy Code (relating to an individual injured by a willful viola- tion of the stay). However, any adminis- trative or litigation costs in connection with an action under section 362(h) may be awarded, if at all, only under section 7430 of the Internal Revenue Code. (b)Actual, direct economic damages— (1)Definition.See§301.7433–1(b)(1). (2)Litigation costs and administrative costs not recoverable as actual, direct eco- nomic damages.Litigation costs and ad- ministrative costs are not recoverable as actual, direct economic damages. These costs may be recoverable under section 7430 (see paragraph (h) of this section), or, solely to the extent described in paragraph (c) of this section, as costs of the action. (c)Costs of the action.Costs of the ac- tion recoverable as damages under this sec- tion are limited to the costs set forth in §301.7433–1(c). (d)No civil action in federal bankruptcy court prior to filing an administrative claim—(1)In general.Except as provided in paragraph (d)(2) of this section, no ac- tion under paragraph (a)(1) of this sec- tion shall be maintained in any bankruptcy court before the earlier of the following dates— (i) The date the decision is rendered on a claim filed in accordance with paragraph (e) of this section; or April 7, 20036972003–14 I.R.B. (ii) The date that is six months after the date an administrative claim is filed in ac- cordance with paragraph (e) of this sec- tion. (2)When administrative claim filed in last six months of period of limitations.If an administrative claim is filed in accor- dance with paragraph (e) of this section dur- ing the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may petition the bank- ruptcy court any time after the administra- tive claim is filed and before the expiration of the period of limitations. (e)Procedures for an administrative claim—(1)Manner. An administrative claim for the lesser of $1,000,000 or actual, di- rect economic damages as defined in para- graph (b) of this section shall be sent in writing to the Chief, Local Insolvency Unit, for the judicial district in which the tax- payer filed the underlying bankruptcy case giving rise to the alleged violation. (2)Form.The administrative claim shall include— (i) The name, taxpayer identification number, current address, and current home and work telephone numbers (with an iden- tification of any convenient times to be con- tacted) of the taxpayer making the claim; (ii) The location of the bankruptcy court in which the underlying bankruptcy case was filed and the case number of the case in which the violation occurred; (iii) A description, in reasonable de- tail, of the violation (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service); (iv) A description of the injuries in- curred by the taxpayer filing the claim (in- clude copies of any available substantiating documentation or evidence); (v) The dollar amount of the claim, in- cluding any damages that have not yet been incurred but which are reasonably foresee- able (include copies of any available docu- mentation or evidence); and (vi) The signature of the taxpayer or duly authorized representative. (3)Duly authorized representative de- fined.For purposes of this paragraph (e), a duly authorized representative is any at- torney, certified public accountant, en- rolled actuary, or any other person permitted to represent the taxpayer before the Inter- nal Revenue Service who is not disbarred or suspended from practice before the In- ternal Revenue Service and who has a writ- ten power of attorney executed by the taxpayer. (f)No action in bankruptcy court for any sum in excess of the dollar amount sought in the administrative claim.No action for actual, direct economic damages under para- graph (a) of this section may be instituted in federal bankruptcy court for any sum in excess of the amount (already incurred and estimated) of the administrative claim filed under paragraph (e) of this section, ex- cept where the increased amount is based upon newly discovered evidence not rea- sonably discoverable at the time the ad- ministrative claim was filed, or upon allegation and proof of intervening facts re- lating to the amount of the claim. (g)Period of limitations—(1)Time for filing.A petition for damages under para- graph (a) of this section must be filed in bankruptcy court within two years after the date the cause of action accrues. (2)Right of action accrues.A cause of action under paragraph (a) of this section accrues when the taxpayer has had a rea- sonable opportunity to discover all essen- tial elements of a possible cause of action. (h)Recovery of litigation costs and ad- ministrative costs under section 7430— (1)In general.Litigation costs, as defined in§301.7433–1(b)(2)(i), including attor- neys fees, not recoverable under this sec- tion may be recoverable under section 7430 if a taxpayer challenges in whole or in part an Internal Revenue Service denial of an administrative claim for damages by fil- ing a petition in the bankruptcy court. If, following the Internal Revenue Service’s de- nial of an administrative claim for dam- ages, a taxpayer files a petition in the bankruptcy court challenging that denial in whole or in part, substantially prevails with respect to the amount of damages in con- troversy, and meets the requirements of sec- tion 7430(c)(4)(A)(ii) (relating to net worth and size requirements), the taxpayer will be considered a prevailing party for purposes of section 7430, unless the Internal Rev- enue Service establishes that the position of the Internal Revenue Service in the pro- ceeding was substantially justified. Such taxpayer will generally be entitled to at- torneys’fees and other reasonable litiga- tion costs not recoverable under this section. For purposes of this paragraph (h), if the Internal Revenue Service does not respond on the merits to an administrative claim for damages within six months after the claim is filed, the Internal Revenue Service’s fail- ure to respond will be considered a de- nial of the claim on the grounds that the Internal Revenue Service did not willfully violate Bankruptcy Code section 362 or 524. (2)Administrative costs—(i)In gen- eral.Administrative costs, as defined in §301.7433–1(b)(2)(ii), including attorneys’ fees, not recoverable under this section may be recoverable under section 7430. See §301.7430–8. (ii)Limitation regarding recoverable ad- ministrative costs.Administrative costs may be awarded only if incurred on or after the date of filing of the bankruptcy petition that formed the basis for the stay on collec- tion under Bankruptcy Code section 362 or the discharge injunction under Bankruptcy Code section 524, as the case might be. (i)Effective date.This section is appli- cable to actions taken by the Internal Rev- enue Service officials after July 22, 1998. David A. Mader, Assistant Deputy Commissioner of Internal Revenue. Approved March 5, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on March 24, 2003, 8:45 a.m., and published in the issue of the Federal Regis- ter for March 25, 2003, 68 F.R. 14316) Section 7520.—Valuation Tables The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of April 2003. See Rev. Rul. 2003–35, page 687. 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 April 2003. See Rev. Rul. 2003–35, page 687. 2003–14 I.R.B.698April 7, 2003 Part III. Administrative, Procedural, and Miscellaneous Tax Treatment of Grants Made by the Empire State Development Corporation to Businesses to Aid Recovery From the Attack of September 11, 2001, on the World Trade Center Notice 2003–18 PURPOSE This notice provides answers to fre- quently asked questions for businesses not exempt from federal income tax regard- ing the tax treatment of grant payments the Empire State Development Corporation (the ESDC), in coordination with the New York City Economic Development Corporation (the EDC), will make to businesses under (1) the World Trade Center (WTC) Busi- ness Recovery Grant Program, (2) the WTC Small Firm Attraction and Retention Grant Program, and (3) the WTC Job Creation and Retention Program (collectively, the “WTC Grant Programs”). BACKGROUND The ESDC is a public benefit corpora- tion of the State of New York and the EDC is a non-profit corporation organized by the City of New York. The ESDC will distrib- ute a portion of $2.7 billion in Commu- nity Development Block Grants (CDBG) appropriated by Congress to enable New York City to make grants under the WTC Grant Programs. In general, the WTC Grant Programs are intended for businesses that were located in the WTC area (the“Eli- gible Area”as defined in the guidelines for the WTC Grant Programs) or that intend to relocate there, and had or have specified numbers of“full-time permanent employ- ees”(as defined in the guidelines for the WTC Grant Programs). Grant funds un- der the WTC Grant Programs are also avail- able to tax-exempt non-profit businesses that meet certain additional criteria. The CDBG funds for the WTC Grant Programs were authorized by§434 of the Departments of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, 2002, Pub. L. No. 107– 73, 115 Stat. 651, 699 (2001), and Chap- ter 13 of the Department of Defense and Emergency Supplemental Appropriations for Recovery from and Response to Terrorist Attacks on the United States Act, 2002, Pub. L. No. 107–117, 115 Stat. 2230, 2336 (2002) (the Acts). WTC Business Recovery Grant Program The WTC Business Recovery Grant Pro- gram (BRGP) provides grants to compen- sate certain small businesses that were located in the Eligible Area as of Septem- ber 11, 2001, for certain losses resulting from the attack on the WTC. The BRGP is administered by ESDC in coordination with EDC on behalf of the State of New York. Grant recipients must continue their busi- ness operations at the same location or in- tend to resume them within New York City. The BRGP is intended to compensate quali- fied businesses for the net economic losses they incurred from September 11, 2001, through December 31, 2001, in connec- tion with the attack on the WTC. Such net economic losses include, but are not lim- ited to: (1) damage to, or destruction of, real property and other tangible assets, includ- ing equipment, furniture and fixtures, sup- plies and inventory; (2) financial losses due to business interruption, including reduced business ac- tivity; (3) employee wages paid for work that was not performed and fees for con- tract services that were not performed; (4) temporary or permanent reloca- tion expenses; and (5) debris removal and other clean up costs. The net economic loss equals the amount of economic loss reduced by other speci- fied governmental grant assistance and by insurance proceeds the business has re- ceived or applied for related to its losses. The amount of a BRGP grant that a business can receive with respect to a par- ticular location equals the lesser of (i) the business’net economic loss or (ii) the maxi- mum grant amount as computed by the ESDC (which can range from $50,000 to $300,000 depending upon the specific area in which the business was located). A busi- ness with multiple locations within the Eli- gible Area may receive a separate grant for each business location. The maximum grant to any business, however, cannot exceed $500,000. The ESDC may require a grant recipient to repay BRGP grant funds un- der certain circumstances. WTC Small Firm Attraction and Retention Grant Program The WTC Small Firm Attraction and Re- tention Grant Program (SFARG) is admin- istered by the ESDC and the EDC on behalf of the City and State of New York. The SFARG program generally is for businesses employing 200 or fewer full-time perma- nent employees at an eligible premises. The SFARG program provides grants to small businesses that are at risk of leaving down- town Manhattan that commit to remain in the Eligible Area for at least 5 years be- yond their current commitment. It also pro- vides grants to small businesses that were located in or near the WTC that commit to remain in New York City for at least 5 years. The SFARG program will also make grants to businesses (for example, new busi- nesses) that commit to remain in the Eli- gible Area for at least 5 years. The amount of a SFARG grant gener- ally is $3,500 per full-time employee. How- ever, a business that was operating in that part of the Eligible Area called the“Re- stricted Zone”(as defined in the SFARG program guidelines) on September 11, 2001, and remains or relocates within the Eli- gible Area, is eligible to receive $5,000 per full-time employee. The grants are gener- ally payable in two installments. Grant recipients must agree to allocate SFARG funds to wages for full-time per- manent employees that were on the busi- ness’payroll as of the dates it requests the grant disbursements. The ESDC may re- quire a grant recipient to repay SFARG funds under certain circumstances, such as relocating a substantial portion of its busi- ness from an eligible premises. WTC Job Creation and Retention Program The WTC Job Creation and Retention Program (JCRP) includes grants to cer- tain large businesses displaced from their workspace for at least one month as a re- sult of the September 11, 2001, attack on the WTC, and grants to other affected busi- nesses, including those willing to create new jobs in lower Manhattan. This program gen- erally is for businesses employing 200 or more permanent full-time employees. Busi- April 7, 20036992003–14 I.R.B. nesses receiving JCRP grants must com- mit to remain in lower Manhattan for a minimum of 7 years and achieve certain employment goals. Although businesses seeking to locate new operations in lower Manhattan are eligible to receive JCRP grants, priority is given to businesses that were located in the Eligible Area on Sep- tember 11, 2001. Businesses must use the grant proceeds exclusively for the following expenses in- curred after September 11, 2001: (1) wages; (2) payroll taxes; (3) employee benefits; (4) rent; and (5) moveable equipment and furni- ture. The program documents do not indi- cate that a business must have incurred property losses to receive a JCRP grant or that a JCRP grant is intended to compen- sate for property losses. The ESDC may re- quire a grant recipient to repay JCRP grant funds if a business does not meet its com- mitment to retain or create jobs for the minimum 7-year period. Applicable Provisions of Law Section 61(a) of the Internal Revenue Code provides that, except as otherwise pro- vided by law, gross income means all in- come from whatever source derived. Under §61, Congress intends to tax all gains or undeniable accessions to wealth, clearly re- alized, over which taxpayers have com- plete dominion.Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), 1955–1 C.B. 207. The Internal Revenue Service has con- sistently concluded that payments to indi- viduals by governmental units under legislatively provided social benefit pro- grams for the promotion of the general wel- fare are not includible in a recipient’s gross income (“general welfare exclusion”).See, e.g., Rev. Rul. 74–205, 1974–1 C.B. 20; Rev. Rul. 98–19, 1998–1 C.B. 840. To qualify under the general welfare exclu- sion, payments must: (i) be made from a governmental fund, (ii) be for the promo- tion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75–246, 1975–1 C.B. 24; Rev. Rul. 82–106, 1982–1 C.B. 16. Payments to busi- nesses generally do not qualify for the ex- clusion because they are not based on individual or family needs.See Bailey v. Commissioner, 88 T.C. 1293, 1300–1301 (1987),acq., 1989–2 C.B. 1; Rev. Rul. 76– 131, 1976–1 C.B. 16. Moreover, income- replacementpayments(whetherto businesses or individuals) do not qualify un- der the general welfare exclusion.SeeRev. Rul. 73–408, 1973–2 C.B. 15, Rev. Rul. 76– 75, 1976–1 C.B. 14, andGraff v. Commis- sioner, 74 T.C. 743 (1980),aff’d, 673 F.2d 784 (5th Cir. 1982). Section 102(a) provides that the value of property acquired by gift is excluded from gross income. Under§102(a), a gift must proceed“from a‘detached and dis- interested generosity,’...‘out of affec- tion, respect, admiration, charity or like impulses.’”Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), 1960–2 C.B. 428. On the other hand, payments that proceed “primarily from the‘constraining force of any moral or legal duty’or from‘the in- centive of anticipated benefit’of an eco- nomic nature”are not gifts.Dubersteinat 285. Governmental grants in response to a disaster (whether to a business or an indi- vidual) generally do not qualify as gifts be- cause the government’s intent in making the payments proceeds from a government’s duty to relieve the hardship caused by the disaster. In addition, a government can ex- pect an economic benefit from programs that relieve business or individual hard- ships.See Kroon v. United States, Civil No. A–90–71 (D. Alaska 1974), and Rev. Rul. 2003–12, 2003–3 I.R.B. 283. Section 139(a) excludes from gross in- come any amount received by an indi- vidual as a qualified disaster relief payment. Section 139(b)(1) provides, in part, that the term“qualified disaster relief payment” means any amount paid to or for the ben- efit of an individual: (1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster (§139(b)(1)); (2) to reimburse or pay reasonable and necessary expenses incurred for the re- pair or rehabilitation of a personal resi- dence, or repair or replacement of its contents, to the extent that the need for such repair, rehabilitation, or replacement is at- tributabletoaqualifieddisaster (§139(b)(2)); or (3) if such amount is paid by a fed- eral, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to pro- mote the general welfare (§139(b)(4)). Thus,§139(b)(4) codifies (but does not supplant) the administrative general wel- fare exclusion with respect to certain di- saster relief payments to individuals. Section 118(a) provides that, in the case of a corporation, gross income does not in- clude any contribution to the capital of the taxpayer. Section 1.118–1 of the Income Tax Regulations provides that§118 also ap- plies to contributions to capital made by persons other than shareholders. For ex- ample, the exclusion applies to the value of land or other property contributed to a cor- poration by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a par- ticular community, or for the purpose of en- abling the corporation to expand its operating facilities. However, the exclu- sion does not apply to any money or prop- erty transferred to the corporation in consideration for goods or services ren- dered, or to subsidies paid for the pur- pose of inducing the taxpayer to limit production. The Supreme Court of the United States has also considered the contribution to capi- tal concept. InDetroit Edison Co. v. Com- missioner, 319 U.S. 98 (1943), 1943 C.B. 1019, the Court held that payments by pro- spective customers to an electric utility com- pany to cover the cost of extending the utility’s facilities to their homes were part of the price of service rather than contri- butions to capital. The case concerned cus- tomers’payments to a utility company for the estimated cost of constructing service facilities that the utility company other- wise was not obligated to provide. Later, the Court held that payments to a corporation by community groups to in- duce the location of a factory in their com- munity represented a contribution to capital. Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), 1950–1 C.B. 38. The Court concluded that the contributions made by the citizens were made without anticipa- tion of any direct service or recompense, but rather with the expectation that the con- tributions would prove advantageous to the community at large.Brownat 591. The con- tract entered into by the community groups and the corporation provided that in ex- change for a contribution of land and cash, the corporation agreed to construct a fac- 2003–14 I.R.B.700April 7, 2003 tory, operate it for at least 10 years, and meet a minimum payroll.Brownat 586. Finally, inUnited States v. Chicago, B.&Q.R.Co., 412 U.S. 401 (1973), 1973–2 C.B. 428, the Court, in determin- ing whether a taxpayer was entitled to de- preciate the cost of certain facilities that had been funded by the federal government, held that the governmental subsidies were not contributions to the taxpayer’s capi- tal. The Court recognized that the hold- ing inDetroit Edison Co.had been qualified by its decision inBrown Shoe Co.The Court inChicago B. & Q. R. Co.found that the distinguishing characteristic between those two cases was the differing purposes motivating the respective transfers. InBrown Shoe Co.,the only expectation of the con- tributors was that such contributions might prove advantageous to the community at large. Thus, inBrown Shoe Co., because the transfers were made with the purpose, not of receiving direct service or recompense, but only of obtaining advantage for the gen- eral community, the result was a contribu- tion to capital. The Court inChicago, B. & Q. R. Co., also stated that there were other character- istics of a nonshareholder contribution to capital implicit inDetroit Edison Co.and Brown Shoe Co.From these two cases, the Court distilled some of the characteristics of a nonshareholder contribution to capi- tal under both the 1939 and 1954 Codes: 1. It must become a permanent part of the transferee’s working capital structure; 2. It may not be compensation, such as a direct payment for a specific, quantifi- able service provided for the transferor by the transferee; 3. It must be bargained for; 4. The asset transferred must foresee- ably result in benefit to the transferee in an amount commensurate with its value; and 5. The asset ordinarily, if not always, will be employed in or contribute to the production of additional income and its value will be assured in that respect. Under§362(c)(2), if money is received by a corporation as a contribution to capi- tal, and is not contributed by a shareholder as such, then the basis of any property ac- quired with such money during the 12- month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The ex- cess (if any) of the amount of such con- tribution over the amount of the reduction shall be applied to the reduction of the ba- sis of any other property held by the tax- payer. Section 165(a) allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(b) limits the amount of the deduction for the loss to the ad- justed basis of the property, as determined under§1011. Under§165(i)(1), a tax- payer may elect to take a loss attributable to a disaster occurring in a Presidentially declared disaster area into account for the taxable year immediately preceding the tax- able year in which the disaster occurred. Section 165(i)(3) provides that the amount of the loss taken into account in the pre- ceding taxable year cannot exceed the un- compensated amount determined on the basis of the facts existing at the date the tax- payer claims the loss. Section 1.165– 1(d)(2)(iii) provides that if a taxpayer has deducted a loss and in a subsequent tax- able year receives reimbursement for such loss, the amount of the reimbursement must be included in gross income for the tax- able year in which received, subject to the provisions of§111, relating to recovery of amounts previously deducted. Section 1033(a) provides that if prop- erty, as a result of its destruction in whole or in part, is involuntarily converted into money, the gain, if any, is recognized ex- cept to the extent that the electing tax- payer, within 2 years after the close of the first taxable year in which any gain was re- alized, purchases other property similar or related in service or use to the property so converted. Section 1400L(g) extends this re- placement period from 2 years to 5 years for property compulsorily or involuntarily converted as a result of the terrorist at- tacks on September 11, 2001, in the New York Liberty Zone (as defined in §1400L(h)), if substantially all of the use of the replacement property is in New York City. (The New York Liberty Zone is the area in New York City located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway)). Under§1033(a)(2), replace- ment property is treated as purchased only if, but for the provisions of§1033(b), its unadjusted basis would be determined un- der§1012. In accordance with§1033(a), the gain is recognized only to the extent that the amount realized upon such conver- sion exceeds the cost of the replacement property. Under§1033(h)(2), if business or in- vestment property is involuntarily con- verted due to a Presidentially declared disaster as defined in§1033(h)(3) (gener- ally, a disaster in an area that has been sub- sequently determined by the President to warrant federal assistance under the Disas- ter Relief and Emergency Assistance Act), any tangible property held for productive use in a trade or business is treated as prop- erty similar or related in service or use to the converted property. QUESTIONS AND ANSWERS Q–1. Are grant payments made under the WTC Grant Programs included in a grant recipient’s gross income? A–1.Generally yes. Payments made un- der the three WTC grant programs (BRGP, SFARG, and JCRP) are included within the broad definition of“gross income”under §61 and, as explained in theQ&Asbe- low, generally do not qualify for any ex- clusion under the law. A limited exception to this general rule applies in the case of certain JCRP grant payments that qualify for exclusion as a contribution to capital un- der§118.See Q&A–5. Grant recipients should note that, even if they must include part or all of a grant in gross income, they are, of course, al- lowed to deduct against the grant proceeds and other gross income all deductible busi- ness expenses, net operating losses, and other allowable deductions (for example, de- preciation deductions) for that year. More- over, to the extent that BRGP grant payments compensate the recipient for dam- aged or destroyed property, the recipient may offset the amount of the grant pay- ment against the recipient’s adjusted ba- sis in the damaged or destroyed property, and defer recognition of the resulting gain under§1033.See Q&A–6 and Q&A–7. Q–2. Why are payments made under the WTC Grant Programs not excluded from a grant recipient’s gross income under the general welfare exclusion? A–2.The grant payments under the WTC Grant Programs do not qualify for the gen- eral welfare exclusion because that exclu- sion generally is limited to individuals who receive governmental payments to help them with their individual needs (e.g., hous- ing, education, and basic sustenance ex- April 7, 20037012003–14 I.R.B. penses). In addition, grant payments that compensate for lost profits or business in- come (whether to individuals or to busi- nesses) do not qualify for the general welfare exclusion. Q–3. Why are grant payments made un- der the WTC Grant Programs not excluded from a grant recipient’s gross income as gifts under§102? A–3.The governmental grant payments to businesses under the WTC Grant Pro- grams do not qualify for the gift exclu- sion under§102(a) because the intent of the federal, state, and local governments in making these payments proceeds, not from charity or detached and disinterested gen- erosity, but from the government’s duty to relieve the hardship resulting from the di- saster and the economic benefits it antici- pates from a revitalized New York City economy.See Kroon.Neither the Acts that appropriated the CDBG funds for the WTC Grant Programs nor the legislative his- tory of those Acts disclose a donative in- tent. Instead, Congress indicated that the grant funds were for“economic revitaliza- tion,”to help New York City in its“over- all economic recovery,”and to assist the “economic recovery”of areas affected by the terrorist attack.See§434 of Pub. L. No. 107–73, H.R. Conf. Rep. No. 272, 107th Cong. 1st Sess. 176 (2001), and H.R. Conf. Rep. No. 350, 107th Cong. 1st Sess. 455 (2001). Q–4. Why are grant payments made un- der the WTC Grant Programs not excluded from a grant recipient’s gross income as qualified disaster relief payments under §139? A–4.The grant payments under the WTC Grant Programs to businesses other than sole proprietors do not qualify for exclu- sion from gross income under§139 be- cause that exclusion applies only to individuals. In the case of sole propri- etors, the grant payments made under the WTC Grant Programs do not qualify for ex- clusion under§139 because the payments are not made for any of the specific pur- poses described in§139(b)(1), (2), or (4). Q–5. Are payments made under the WTC Grant Programs excluded from gross in- come as contributions to capital under §118? A–5.No, in the case of BRGP and SFARG grant payments, but yes in the case of some JCRP payments. The BRGP grant payments compen- sate small businesses for certain losses re- sulting from the September 11, 2001, attacks on the WTC. Accordingly, these payments are more akin to insurance payments re- ceived for losses than contributions to capi- tal of a corporation, within the definition of§118 and the case law. Businesses must use SFARG grant pay- ments to pay wages of their employees, an ordinary business expense under§162. Ac- cordingly, such payments are not contri- butions to the capital of the recipient corporation under§118 and the case law. The BRGP and SFARG grant payments must be included in gross income under §61.SeeQ&A–1. To the extent a corporate recipient of a JCRP grant payment applies for, receives, and utilizes the grant funds to acquire fur- niture and equipment, the JCRP grant pay- ment will be a nonshareholder contribution to capital under§118 and the case law. Pur- suant to§362(c), the basis of furniture and equipment acquired will be reduced by the amount of the JCRP grant received for such purposes. JCRP grant payments that are made for the other listed purposes of wages, pay- roll taxes, employee benefits, and rent are not contributions to the capital of a corpo- ration under§118 and the case law. These payments must be included in gross in- come under§61.SeeQ&A–1. Q–6. Must recipients of grant payments made under the WTC Grant Programs re- duce the amount of an allowable casualty loss deduction under§165 or include in gross income all or part of a casualty loss claimed in a prior year? A–6.No, in the case of SFARG and JCRP grant payments, but yes in the case of BRGP grant payments. Section 165 allows deductions for cer- tain losses sustained during the taxable year only if the loss is not compensated by in- surance or otherwise. SFARG and JCRP grant payments are not treated as payments in the nature of insurance compensation un- der§165 because they are not paid to com- pensate the business for losses to damaged or destroyed property. Thus, SFARG and JCRP grant payments do not reduce losses on any property destroyed or damaged in the attack on the WTC. SFARG and JCRP grant payments must be included in gross income (see Q&A–1) except to the extent that JCRP payments qualify as an exclud- able contribution to capital under§118.See Q&A–5. One purpose of the BRGP is to com- pensate businesses for damage to, or de- struction of, real property and other tangible assets, including equipment, furniture and fixtures, supplies, and inventory. Thus, BRGP payments are treated as compensa- tion received for such losses under§165 to the extent they compensate businesses for their property losses. If a business prop- erly deducted property losses resulting from the WTC attack on a federal income tax re- turn (for example, for 2000 or 2001), and is reimbursed for that loss by a BRGP grant payment in a later year, the business must include the amount of reimbursement in gross income, as ordinary income, on its federal income tax return for that later year to the extent that its income tax liability for the prior year was reduced by reason of the prior year property loss deduction.See §165(i)(1) and§1.165–1(d)(2)(iii). A busi- ness that did not deduct the property loss on a return for a year prior to the year in which it received the grant payment must reduce any allowable deduction for prop- erty loss by the amount of the BRGP grant payment to the extent such payment com- pensates for that property loss. If the amount of compensation exceeds the business’ba- sis in the damaged or destroyed property, the excess (gain) generally must be in- cluded in gross income unless the busi- ness qualifies to defer recognition of the gain under§1033.See Q&A–7. Q–7. May a business defer, under §1033, recognition of gain realized on re- ceipt of a grant payment made under the WTC Grant Programs? A–7.Yes, in the case of BRGP grant payments (SFARG and JCRP grant pay- ments are not paid to compensate the busi- ness for losses to damaged or destroyed property). A business may elect, under §1033, to defer the gain on BRGP grant payments received to compensate for losses due to damage to, or destruction of, real property and other tangible assets, includ- ing equipment, furniture and fixtures, sup- plies, and inventory used in a trade or business caused by the attack on the WTC. Businesses using BRGP grant payments for the purpose of repairing or replacing the damaged or destroyed property generally are eligible to defer gain under§1033, if they make the required election and timely pur- 2003–14 I.R.B.702April 7, 2003 chase property similar or related in ser- vice or use to the converted property, the basis of which would be determined un- der§1012 if§1033(b) did not apply (“qualified replacement property”). Amounts paid by the grant recipients to repair dam- aged or destroyed property, including amounts paid for debris removal and other clean-up costs, are generally treated as amounts paid to purchase qualified replace- ment property. In addition, because the property for which businesses will receive the BRGP grant payments was destroyed in a Presidentially declared disaster, the busi- nesses may use the BRGP grant payments to purchase any tangible property of a type held for use in a trade or business and still defer recognition of the gain.See §1033(h)(2). A BRGP grant recipient must replace the damaged or destroyed prop- erty within 2 years after the close of the tax- able year in which the BRGP grant payment is received (or 5 years if the property was damaged or destroyed due to the Septem- ber 11, 2001, terrorist attacks in the New York Liberty Zone and substantially all of the use of the replacement property is in New York City), but if necessary may re- quest additional time from its local IRS of- fice. The basis of the new property usually will be the same as the basis of the old property if the entire amount of compen- sation for the damaged property is used to purchase the replacement property. The following example illustrates the ap- plication of§§165 and 1033 to a busi- ness receiving a BRGP grant payment. Example.(i) BusinessXowned tangible per- sonal property with a fair market value of $18,000 and a basis of $10,000 that was destroyed in the attack on the World Trade Center.Xfiled an amended 2000 fed- eral income tax return and properly claimed a casu- alty loss of $10,000. In 2003,Xreceives a BRGP grant payment of $18,000 as a result of damage to its tan- gible personal property and uses the entire amount to purchase replacement property for use in its trade or business. (ii) Pursuant to§111 and the tax benefit rule,X must include in gross income on its 2003 federal in- come tax return $10,000 of the grant as ordinary in- come, attributable to the property loss deductionXtook on its 2000 income tax return.Xmay defer includ- ing in income the remaining $8,000 of the grant un- der§1033, assuming the requirements of that section are met.X’sbasis in the replacement property is $10,000 ($18,000 cost of the replacement property mi- nus $8,000 gain deferred under§1033). DRAFTING INFORMATION The principal author of this notice is Shareen S. Pflanz of the Office of Asso- ciate Chief Counsel (Income Tax and Ac- counting). For further information regarding this notice, contact Mrs. Shareen Pflanz at 202–622–4920 (not a toll-free call). Place for Filing Certain Elections, Statements, Returns and Other Documents Notice 2003–19 SECTION 1. PURPOSE Certain provisions of Title 26 of the Code of Federal Regulations direct taxpay- ers to file elections, statements, and other documents with offices or officials that have been eliminated in the recent Internal Rev- enue Service (Service) reorganization. This notice advises taxpayers of the proper ad- dress for filing certain elections, state- ments, and other documents with the Service as a result of the reorganization, in- cluding with respect to offices or offi- cials that no longer exist as part of the reorganization. This notice, however, does not modify any existing delegation order and does not identify Service officials who currently are authorized to perform any ac- tion currently provided for in a regula- tion. Taxpayers should contact the Service if they have questions regarding who within the Service is authorized to perform any ac- tion currently provided for in a regulation with respect to a Service official or posi- tion that no longer exists as a result of the reorganization. This notice does not affect any filing prior to its issuance. Furthermore, although this notice does not modify the regula- tions identified herein, taxpayers should fol- low the filing instructions contained in the notice in order to ensure the timely re- ceipt and processing of filings made with the Service. However, if a taxpayer files an election, statement, or document as di- rected in existing regulations, the Service will forward such election, statement, or document to its proper filing location. The Treasury Department and Service in- tend to issue revised regulations that will take into account the recent Service reor- ganization. In addition, until such time, the Service intends to periodically update tax- payers (through updated notices or other means of communication) regarding where elections, statements, and other documents should be filed. SECTION 2. BACKGROUND Section 1001(a) of the Internal Rev- enue Service Restructuring and Reform Act of 1998, Pub. L. No. 105–206, 112 Stat. 686, requires the Commissioner of Inter- nal Revenue to develop and implement a plan to reorganize the Service. As a re- sult of this reorganization, the Service re- placed the national, regional, and district structure with organizational units serv- ing particular industries and groups of tax- payers. Existing regulations direct taxpayers to file certain elections, statements, and other documents with various national, regional, and district offices, and specify that cer- tain Service officials or positions are au- thorized to perform certain actions. Some of these regulations pertain to elections, statements, and other documents that, be- cause of a change in the law or other fac- tor, are no longer required to be filed. Other regulations specify outdated places of fil- ing (e.g., the Office of District Director), contain outdated filing instructions, lack spe- cific filing addresses for elections, state- ments, and other documents that are currently required or permitted to be filed, or specify that certain actions are to be taken by Service officials or positions that no longer exist. SECTION 3. FORMAT OF THIS NOTICE This notice lists the affected sections of the regulations, and provides the proper Ser- vice office for filing each election, state- ment, and other document required or permitted by the regulations. Section 4 of this notice is organized according to the In- ternal Revenue Code section under which the regulations were issued; section 5 pro- vides the mailing addresses for the vari- ous Service offices, including the case processing site, listed in the notice; and sec- tion 6 provides a telephone number that tax- payers may call to obtain information regarding the location of the nearest Ser- vice office. April 7, 20037032003–14 I.R.B. SECTION 4. REGULATIONS AND PLACE OF FILING ORGANIZED BY INTERNAL REVENUE CODE SECTION CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING Non-Code50.8 Taxes Imposed on Certain Hydraulic MiningCincinnati Submission Processing Center Non-Code302.1–3 through 302.1–7 Taxes Under the International Claims Settlement Act Ogden Submission Processing Center Non-Code303.1–4 through 303.1–7 Taxes Under the Trading With the Enemy Act Ogden Submission Processing Center 431.43–3(a)(2) Petroleum Engineer’s Certification of a Project Ogden Submission Processing Center 431.43–3(b)(2) Owner’s Continued Certification of a Project Ogden Submission Processing Center 481.48–12(d)(7)(ii) Request for Extension of the Period of Limitations IRS Tax Credit Unit Drop 607 P.O. Box 245 Bensalem, PA 19020 1671.167(d)–1 Agreement as to Useful Life and Rates of Depreciation Ogden Submission Processing Center 1671.167(l)–1(h)(5) Depreciation on Qualified Public Utility Property Cincinnati Submission Processing Center 1691.169–4 Election to Revoke Amortization Deduction Ogden Submission Processing Center 1751.175–6 Treatment of Expenditures for Soil or Water Conservation Cincinnati Submission Processing Center 1801.180–2 Expenditures by Farmers for Fertilizer, etc.Ogden Submission Processing Center 2431.243–4 Dividends Received DeductionOgden Submission Processing Center 2431.243–5 Effect of ElectionOgden Submission Processing Center 3021.302–4 Termination of Shareholder’s Interest Section 302(c)(2)(A)(iii) agreement: attach to return Notice of acquisition: Cincinnati or Ogden Submission Processing Center 3321.332–4 Liquidations Covering More Than 1 YearOgden Submission Processing Center 3411.341–7 Certain Sales of Stock of Consenting Corporations Ogden Submission Processing Center 3811.381(c)(25)–1 Deficiency Dividend of Qualified Investment Entity Ogden Submission Processing Center 4421.442–1(b) Change of Accounting PeriodSubmission Processing Center where return was filed 4431.443–1(b)(2)(v) Computation of Tax for Short Period Return Ogden Submission Processing Center 4511.451–6(b)(2) Requests for Revocation of Election to Include in Gross Income Insurance Proceeds Ogden Submission Processing Center 5031.503(c)–1 Future Status of Organizations Denied Exemption IRS P.O. 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Box 192 Covington, KY 41012 5471.547–2 Deficiency DividendOgden Submission Processing Center 6161.616–2 Election to Defer Development Expenditures Submission Processing Center where return was filed 2003–14 I.R.B.704April 7, 2003 CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING 6421.642(g)–1 Disallowance of Double DeductionCase Processing Site 7541.754–1(c)(1) Time and Manner of Making Election to Adjust Basis of Partnership Property Ogden Submission Processing Center 8561.856–6 REIT Election to Treat Property as Foreclosure Property Ogden Submission Processing Center 8561.856–8 Revocation of REIT ElectionOgden Submission Processing Center 8601.860–2 Deficiency Dividend Deduction for Qualified Investment Entity Ogden Submission Processing Center 8631.863–3(b)(1), (3) and (e)(1) Allocation and Apportionment of Income (election to use books and records method) Philadelphia Submission Processing Center 8631.863–3(e)(1) Allocation and Apportionment of Income (method change requests) Philadelphia Submission Processing Center 9361.936–7(c) Revocation of Section 936 ElectionPhiladelphia Submission Processing Center 9641.964–1(c)(3)(ii) Determination of Earnings and Profits of a Foreign Corporation (method change statements) Philadelphia Submission Processing Center 9701.970–2 Election as to Date of Determining Investment in Export Assets Philadelphia Submission Processing Center 13751.1375–1(d)(2) Passive Investment Income of an S Corporation Ogden Submission Processing Center 14411.1441–4(b)(2)(v) Exemption from Withholding on Compensation for Independent (and certain Dependent) Personal Services of a Nonresident Alien (filing by withholding agent) Internal Revenue Service International Section P.O. Box 920 Bensalem, PA 19020–8518 15021.1502–75(h)(1) Consolidated Return Made by Common Parent Corporation Returns should be filed where the common parent would file a separate return 15631.1563–3(d)(2)(iv) Election Designating Group in which the Corporation is to be Included Ogden Submission Processing Center 201620.2016–1 Recovery of Death Taxes Claimed as a Credit Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 203120.2031–6 Estate Tax–Valuation of Household & Personal Effects Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 205320.2053–3 Estate Tax–Deduction for Expenses of Administering Estate Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 205320.2053–9 Estate Tax–Deduction for Certain State Death Taxes Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 205320.2053–10 Estate Tax–Deduction for Certain Foreign Death Taxes Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 2056A20.2056A–2 Requirements for Qualified Domestic Trusts Case Processing Site April 7, 20037052003–14 I.R.B. CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING 2056A20.2056A–11 Filing Requirements & Payment of IRC§2056A Estate Tax Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 270125.2701–4 Accumulated Qualified Payments Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 60121.6012–1(a)(5) Individuals Required to Make Returns of Income Submission Processing Center where return will be filed 60121.6012–2 Corporations Required to Make Returns of Income Ogden Submission Processing Center or to the address specified in the form or instructions. 60321.6032–1 Returns of Banks for Common Trust Funds Ogden Submission Processing Center 6036301.6036–1 Notice Required of Executor, Receiver, or Other Fiduciary Case Processing Site 60391.6039–2(b)(2) Time for Furnishing Statements (to Participants in Certain Stock Option Plans) See Code section 6039(a) as to nature of participant statements, as 1.6039–2(b)(2) has not yet been amended to reflect current law. IRS–Martinsburg Computing Center Information Reporting Program Attn: Extension of Time Coordinator 240 Murall Drive Kearneysville, WV 25430 60431.6043–1 Returns Requiring Corporate Dissolution or Liquidation Ogden Submission Processing Center 60441.6044–4 Exemption for Certain Consumer Cooperatives Ogden Submission Processing Center 6050J1.6050J–1T Information Returns Relating to Foreclosure of Security Ogden Submission Processing Center 609120.6091–1 Estate Tax–Place of Filing of Returns & Documents Returns and other forms should be mailed to the address specified in the form or instructions. Other documents should be mailed to: Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. Hand-carried returns, forms, or other documents should be filed with the local Service office (see section 6 of this notice). 609125.6091–1 Gift Tax–Place for Filing Returns and Other Documents Returns and other forms should be mailed to the address specified in the form or instructions. Other documents should be mailed to: Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. Hand-carried returns, forms, or other documents should be filed with the local Service office (see section 6 of this notice). 2003–14 I.R.B.706April 7, 2003 CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING 609131.6091–1 Place for Filing ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 609140.6091–1 Excise Tax–Place for Filing ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 609141.6091–1 Place for Filing ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 609144.6091–1 Place for Filing ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 609155.6091–1 Place for Filing Chapter 44 Tax ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 6091156.6091–1 Place for Filing Chapter 54 (Greenmail) Tax Returns Returns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 6091301.6091–1 Place for Filing Returns or Other Documents Returns and other forms should be mailed to the address specified in the form or instructions. Other documents should be mailed to the Case Processing Site. Hand-carried returns, forms, or other documents should be filed with the local Service office (see section 6 of this notice). 60911.6091–2 Place for Filing Income Tax ReturnsReturns should be mailed to the address specified in the form or instructions. Hand-carried returns should be filed with the local Service office (see section 6 of this notice). 6104301.6104(a)–5(a) Withholding of Information from Public Inspection by Applicant for Tax Exempt Status IRS P.O. Box 192 Covington, KY 41012 61611.6161–1 Extension of Time for Paying Tax or Deficiency Cincinnati or Ogden Submission Processing Center 616120.6161–1(b) Extension of Time for Paying Tax Shown on the Return Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. April 7, 20037072003–14 I.R.B. CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING 616125.6161–1 Gift Tax–Extension of Time for Paying Tax or Deficiency Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 616120.6161–2 Extension of Time for Paying Deficiency in Tax Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center 616320.6163–1 Estate Tax–Extension of Time for Paying Tax Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 61641.6164–1 Extension of Time for Payment of Taxes by Corporation With Carryback Cincinnati or Ogden Submission Processing Center 61641.6164–8 Corporations–Payments on TerminationCincinnati or Ogden Submission Processing Center 616520.6165–1 Estate Tax–Bonds Where Time to Pay has Been Extended Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 6166A20.6166A–1 Estate Tax–Extension of Time to Pay Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 6324B20.6324B–1 Special Lien for Additional Estate Tax Attributable to Farm Value Case Processing Site 632520.6325–1 Estate Tax–Release of Lien or Partial Discharge of Property Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 6325301.6325–1 Application for Certificate of Discharge of Property from Lien Case Processing Site 6326301.6326–1 Appeal of Erroneous Filing of LienCase Processing Site 6334301.6334–3 Determination of Exempt AmountCase Processing Site 6334301.6334–4 Verified StatementsCase Processing Site 6337301.6337–1 Right to Redeem Property Before or After Sale Case Processing Site 6343301.6343–1 Request for Release of LevyCase Processing Site 6343301.6343–2 Request for Return of Property Wrongfully Levied Upon Case Processing Site 6501301.6501(o)–2 Special Rules for Partnership Items of Federally Registered Partnerships Cincinnati or Ogden Submission Processing Center 6679301.6679–1 Failure to File Returns Regarding Foreign Corporations or Partnerships Philadelphia Submission Processing Center 6724301.6724–1 Reasonable CauseCincinnati or Ogden Submission Processing Center 6863301.6863–1 Stay of Collection of Jeopardy Assessments Case Processing Site 6863301.6863–2 Collection of Jeopardy Assessment, Stay of Sale of Property Case Processing Site 7001301.7001–1 License to Collect Foreign ItemsSubmission Processing Center where return will be filed. 7101301.7101–1 Form of Bond and Surety RequiredCase Processing Site 2003–14 I.R.B.708April 7, 2003 CODE SECTION REGULATION SECTION AND DESCRIPTIONPLACE OF FILING 7102301.7102–1 Single Bond in Lieu of Multiple BondsCase Processing Site 7406301.7406–1 Disposition of Judgments and Moneys Received Case Processing Site 7425301.7425–2 Discharge of Liens, Nonjudicial SalesCase Processing Site 7430301.7430–1(d)(1)(i) Exhaustion of Administrative Remedies Case Processing Site 7432301.7432–1 Civil Damages for Failure to Release Lien Case Processing Site 7433301.7433–1 Civil Damages for Unauthorized Collection Actions Case Processing Site 7507301.7507–9 Exemption of Insolvent Banks from Tax Cincinnati or Ogden Submission Processing Center 7517301.7517–1 Estate and Gift Tax–Determination of Value Taxpayers domiciled in the U.S.: Cincinnati Submission Processing Center Taxpayers domiciled outside the U.S.: Philadelphia Submission Processing Center. 7623301.7623–1 Rewards for InformationCase Processing Site SECTION 5. MAILING ADDRESSES FOR SERVICE OFFICES LISTED IN THIS NOTICE Taxpayers required or permitted to file elections, statements, or other documents with the Cincinnati Submission Process- ing Center should mail the election, state- ment, or other document to the following address: Cincinnati Submission Processing Center Cincinnati, OH 45999 Taxpayers required or permitted to file elections, statements, or other documents with the Ogden Submission Processing Cen- ter should mail the election, statement, or other document to the following address: Ogden Submission Processing Center P.O. Box 9941 Ogden, UT 84409 Taxpayers required or permitted to file elections, statements, or other documents with the Philadelphia Submission Process- ing Center should mail the election, state- ment, or other document to the following address: Philadelphia Submission Processing Center P.O. Box 245 Bensalem, PA 19020 Taxpayers required or permitted to file elections, statements, or other documents with a Case Processing Site should mail the election, statement, or other document to the appropriate address indicated in the fol- lowing chart: Taxpayers located in:Mail Election, Statement, or Other Document to: Maine, Massachusetts, New Hampshire, Vermont, Connecticut, Rhode Island Internal Revenue Service Case Processing, Stop 41125 P.O. Box 9112 Boston, MA 02203 New YorkInternal Revenue Service Case Processing 10 Metrotech Center 625 Fulton Street Brooklyn, NY 11201 Pennsylvania and New JerseyInternal Revenue Service Case Processing P.O. Box 12041 600 Arch Street Philadelphia, PA 19106 April 7, 20037092003–14 I.R.B. Taxpayers located in:Mail Election, Statement, or Other Document to: Delaware, Maryland, Virginia, North Carolina, South Carolina Internal Revenue Service Case Processing 31 Hopkins Plaza, Room 1108 Baltimore, MD 21201 FloridaInternal Revenue Service Case Processing, Stop 4900 400 West Bay Street Jacksonville, FL 32202 Michigan, Ohio, Kentucky, West Virginia Internal Revenue Service Case Processing P.O. Box 330500, Stop 25 Detroit, MI 48232–6500 Illinois, Indiana, WisconsinInternal Revenue Service Case Processing, Stop 4040CHI 230 S. Dearborn Street Chicago, IL 60604 Georgia, Alabama, Mississippi, Louisiana, Arkansas, Tennessee Internal Revenue Service Case Processing, Stop 35 810 Broadway Street Nashville, TN 37203–3876 Minnesota, North Dakota, South Dakota, Iowa, Nebraska, Missouri, Kansas Internal Revenue Service Case Processing, Stop 4020 316 N. Robert Street St. Paul, MN 55101 Texas and OklahomaInternal Revenue Service Case Processing, MS:4023 DAL 1100 Commerce Street Dallas, TX 75242 Montana, Wyoming, Colorado, Utah, Nevada, New Mexico, Arizona Internal Revenue Service Case Processing, Stop 4800 DEN 600 17 th Street Denver, CO 80204 Northern and Central California except for Oxnard, including the following counties: Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Nevada, Contra Costa, Del Norte, El Dorado, Glenn, Humboldt, Lake, Lassen, Marin, Placer, Mendocino, Modoc, Napa, Plumas, Sacramento, Shasta, San Francisco, San Joaquin, San Mateo, Sierra, Siskiyou, Solano, Sonoma, Sutter, Tehema, Trinity, Yolo, Yuba, Fresno, Inyo, Kern, Kings, Madera, Merced, Mono, Monterey, San Benito, Santa Clara, Stanislaus, Tulare, Tuolumne Internal Revenue Service Case Processing 1301 Clay Street, Suite 880S Oakland, CA 94612–5210 2003–14 I.R.B.710April 7, 2003 Taxpayers located in:Mail Election, Statement, or Other Document to: Southern California south of Los Angeles, including the following counties: Imperial, Orange, San Diego, San Bernardino, Riverside and the Carson area in Los Angeles Internal Revenue Service Case Processing 24000 Avila Road M/S 5735 Laguna Niguel, CA 92607 Los Angeles and Oxnard, including the following counties: Los Angeles, San Luis Obispo, Santa Barbara, Ventura Internal Revenue Service Case Processing, Stop 4002 300 N. Los Angeles Street Los Angeles, CA 90012 Alaska, Hawaii, Idaho, Washington, OregonInternal Revenue Service Case Processing, M/S W155 915 2 nd Avenue Seattle, WA 98174 SBSE Taxpayers outside of the United StatesInternal Revenue Service Case Processing P.O. Box 12041 600 Arch Street Philadelphia, PA 19106 LMSB Taxpayers outside of the United StatesInternal Revenue Service Case Processing 31 Hopkins Plaza, Room 1108 Baltimore, MD 21201 SECTION 6. OBTAINING INFORMATION FOR LOCATION OF SERVICE OFFICES WHERE ELECTIONS, STATEMENTS, RETURNS, AND OTHER DOCUMENTS CAN BE FILED BY PERSONAL DELIVERY Taxpayers required to file elections, state- ments, returns, and other documents who are permitted to file by personal delivery with a Service office may obtain informa- tion regarding the location of the nearest Service office by calling the Service’s toll- free number (1–800–829–1040). SECTION 7. EFFECTIVE DATE This notice is effective for elections, statements, and other documents filed on or after April 7, 2003. SECTION 8. DRAFTING INFORMATION The principal author of this notice is Michael E. Hara of the Office of Associ- ate Chief Counsel (Procedure and Admin- istration). April 7, 20037112003–14 I.R.B. Part IV. Items of General Interest Announcement of Disciplinary Actions Involving Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries—Suspensions, Censures, Disbarments, and Resignations Announcement 2003–15 Under Title 31, Code of Federal Regu- lations, Part 10, attorneys, certified pub- lic 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 assistance relates to a matter constituting practice be- fore the Internal Revenue Service and may not knowingly aid or abet another person to practice before the Internal Revenue Ser- vice during a period of suspension, disbar- ment, or ineligibility of such other person. To enable attorneys, certified public ac- countants, enrolled agents, and enrolled ac- tuaries to identify persons to whom these restrictions apply, the Director, Office of Professional Responsibility will announce in the Internal Revenue Bulletin their names, their city and state, their profes- sional designation, the effective date of dis- ciplinary 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 Bulle- tins 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 administrative law judge, the following in- dividuals have been placed under suspen- sion from practice before the Internal Revenue Service: NameAddressDesignationEffective Date Cramer, GeorgeChicago, ILCPAJanuary 18, 2003 to January 17, 2005 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 administrative law judge, the following in- dividuals have been disbarred from prac- tice before the Internal Revenue Service: NameAddressDesignationEffective Date Whalley, Christopher J.Ellsworth, MEAttorneyJuly 28, 2002 Chapin, Frank L.Sandpoint, IDEnrolled AgentAugust 13, 2002 Engstrand Jr., Edward E.Minneapolis, MNCPANovember 2, 2002 Fisher, JoannaPortland, OREnrolled AgentNovember 15, 2002 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 institution or con- clusion of a proceeding for his or her dis- barment or suspension from practice before 2003–14 I.R.B.712April 7, 2003 the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Profes- sional Responsibility, in his discretion, may suspend an attorney, certified public ac- countant, enrolled agent or enrolled actu- ary in accordance with the consent offered. The following individuals have been placed under consent suspension from prac- tice before the Internal Revenue Service: NameAddressDesignationDate of Suspension Kuhajda, BenPlainfield, ILCPAAugust 26, 2002 to August 24, 2005 Vaughn, James A.Albuquerque, NMCPAOctober 1, 2002 to September 29, 2004 McBroom, ByronManteca, CACPAOctober 21, 2002 to October 19, 2006 Jacobs, RobertPhiladelphia, PAAttorneyOctober 21, 2002 to April 20, 2006 Kwak, JongBeverly Hills, CAAttorneyOctober 22, 2002 to October 20, 2003 Smith, Frank L.Brooksville, FLAttorneyNovember 1, 2002 to October 30, 2005 Schwartz, Kenneth J.Woodland Hills, CAAttorneyNovember 1, 2002 to February 27, 2006 Agulnick, Barry W.New York, NYAttorneyNovember 1, 2002 to April 29, 2004 O’Connor, Thomas P.Palos Park, ILCPANovember 1, 2002 to October 20, 2003 Brand, Joe A.Dundee, OHCPANovember 18, 2002 to November 16, 2004 Battino, StevenPlainview, NYCPANovember 25, 2002 to May 23, 2004 Chipman, KenFarmington, NMEnrolled AgentDecember 1, 2002 to November 29, 2003 April 7, 20037132003–14 I.R.B. NameAddressDesignationDate of Suspension Kirgis, Grant A.Rochester, MNCPADecember 1, 2002 to May 30, 2003 Welch, FrankStamford, CTCPAIndefinite from January 31, 2003 Pickens, ValerieSeattle, WACPAJanuary 1, 2003 to December 30, 2004 Kidd, Roger F.Philadelphia, PAAttorneyJanuary 20, 2003 to April 18, 2003 Sullivan, RaymondSonoma, CAAttorneyMarch 15, 2003 to November 14, 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 be- fore the Internal Revenue Service any prac- titioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, cer- tified 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 be- fore the Internal Revenue Service by vir- tue of the expedited proceeding provisions: NameAddressDesignationDate of Suspension Pirro, Anthony G.South Salem, NYCPAIndefinite from June 26, 2002 Scott, RogerBuffalo, NYAttorneyIndefinite from August 12, 2002 Patrick, GeorgeCheshire, CTCPAIndefinite from September 9, 2002 Rochon, Jason B.Lafayette, LAAttorneyIndefinite from September 9, 2002 Voccola, EdwardHingham, MAAttorneyIndefinite from October 18, 2002 2003–14 I.R.B.714April 7, 2003 NameAddressDesignationDate of Suspension Linn, Charles B.Croton-on-Hudson, NYAttorneyIndefinite from October 18, 2002 Lum, Eugene K.H.Long Beach, CAAttorneyIndefinite from October 18, 2002 Gwilliam, PeterLynn, MACPAIndefinite from October 28, 2002 Herlehy, Jon L.McHenry, ILCPAIndefinite from October 28, 2002 Herndon, HenryPikeville, NCCPAIndefinite from November 1, 2002 McCurry, ToddDurham, NCAttorneyIndefinite from November 25, 2002 Adams, James L.Breckenridge, COAttorneyIndefinite from November 25, 2002 Cloer, StewartPlano, TXAttorneyIndefinite from December 13, 2002 Caruso, RobertSaddle River, NJCPAIndefinite from December 16, 2002 Duru, Ike E.Atlanta, GAAttorneyIndefinite from January 10, 2003 Pelletier, Richard A.Bolton, CTCPAIndefinite from January 10, 2003 Austin, JackSteamboat Springs, COCPAIndefinite from January 10, 2003 Gibson, Brian M.Monroe, NYAttorneyIndefinite from January 10, 2003 Jackson, RobertMt. Juliet, TNAttorneyIndefinite from January 10, 2003 April 7, 20037152003–14 I.R.B. NameAddressDesignationDate of Suspension Tenzer, James L.East Meadow, NYAttorneyIndefinite from February 4, 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 Inter- nal Revenue Service, may offer his or her resignation as an enrolled agent. The Di- rector, Office of Professional Responsibil- ity, in his discretion, may accept the offered resignation. The Director, Office of Professional Re- sponsibility, has accepted offers of resig- nation as an enrolled agent from the following individuals: NameAddressDate of Resignation Korman, LindaLas Vegas, NVJanuary 23, 2003 2003–14 I.R.B.716April 7, 2003 Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as“rulings”) that have an effect on previous rulings use the following defined terms to describe the effect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodified, below). Clarifiedis used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confu- sion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously published ruling and points out an essen- tial difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a pub- lished position. (Compare withamplified andclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in law or regulations. A ruling may also be obsoleted because the sub- stance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published rul- ing is not correct and the correct position is being stated in the new ruling. Supersededdescribes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example,modified andsupersededdescribes a situation where the substance of a previously pub- lished ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is super- seded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rul- ings in the series. Suspendedis used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F. R .—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign Corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statements of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. April 7, 2003i2003–14 I.R.B. Numerical Finding List 1 Bulletins 2003–1 through 2003–13 Announcements: 2003–1, 2003–2 I.R.B.281 2003–2, 2003–3 I.R.B.301 2003–3, 2003–4 I.R.B.361 2003–4, 2003–5 I.R.B.396 2003–5, 2003–5 I.R.B.397 2003–6, 2003–6 I.R.B.450 2003–7, 2003–6 I.R.B.450 2003–8, 2003–6 I.R.B.451 2003–9, 2003–7 I.R.B.490 2003–10, 2003–7 I.R.B.490 2003–11, 2003–10 I.R.B.585 2003–12, 2003–10 I.R.B.585 2003–13, 2003–11 I.R.B.603 2003–14, 2003–11 I.R.B.603 2003–15, 2003–11 I.R.B.605 2003–16, 2003–12 I.R.B.641 2003–18, 2003–13 I.R.B.675 Notices: 2003–1, 2003–2 I.R.B.257 2003–2, 2003–2 I.R.B.257 2003–3, 2003–2 I.R.B.258 2003–4, 2003–3 I.R.B.294 2003–5, 2003–3 I.R.B.294 2003–6, 2003–3 I.R.B.298 2003–7, 2003–4 I.R.B.310 2003–8, 2003–4 I.R.B.310 2003–9, 2003–5 I.R.B.369 2003–10, 2003–5 I.R.B.369 2003–11, 2003–6 I.R.B.422 2003–12, 2003–6 I.R.B.422 2003–13, 2003–8 I.R.B.513 2003–14, 2003–8 I.R.B.515 2003–15, 2003–9 I.R.B.540 2003–16, 2003–10 I.R.B.575 2003–17, 2003–12 I.R.B.633 Proposed Regulations: REG–209500–86, 2003–2 I.R.B.262 REG–104385–01, 2003–12 I.R.B.634 REG–116641–01, 2003–8 I.R.B.518 REG–125638–01, 2003–5 I.R.B.373 REG–126016–01, 2003–7 I.R.B.486 REG–126485–01, 2003–9 I.R.B.542 REG–103580–02, 2003–9 I.R.B.543 REG–124069–02, 2003–7 I.R.B.488 REG–131478–02, 2003–13 I.R.B.669 REG–138882–02, 2003–8 I.R.B.522 REG–139768–02, 2003–10 I.R.B.583 REG–151043–02, 2003–3 I.R.B.300 REG–164464–02, 2003–2 I.R.B.262 Revenue Procedures: 2003–1, 2003–1 I.R.B.1 2003–2, 2003–1 I.R.B.76 2003–3, 2003–1 I.R.B.113 2003–4, 2003–1 I.R.B.123 2003–5, 2003–1 I.R.B.163 Revenue Procedures—Continued: 2003–6, 2003–1 I.R.B.191 2003–7, 2003–1 I.R.B.233 2003–8, 2003–1 I.R.B.236 2003–9, 2003–8 I.R.B.516 2003–10, 2003–2 I.R.B.259 2003–11, 2003–4 I.R.B.311 2003–12, 2003–4 I.R.B.316 2003–13, 2003–4 I.R.B.317 2003–14, 2003–4 I.R.B.319 2003–15, 2003–4 I.R.B.321 2003–16, 2003–4 I.R.B.359 2003–17, 2003–6 I.R.B.427 2003–18, 2003–6 I.R.B.439 2003–19, 2003–5 I.R.B.371 2003–20, 2003–6 I.R.B.445 2003–21, 2003–6 I.R.B.448 2003–22, 2003–10 I.R.B.577 2003–23, 2003–11 I.R.B.599 2003–24, 2003–11 I.R.B.599 2003–25, 2003–11 I.R.B.601 2003–26, 2003–13 I.R.B.666 2003–27, 2003–13 I.R.B.667 Revenue Rulings: 2003–1, 2003–3 I.R.B.291 2003–2, 2003–2 I.R.B.251 2003–3, 2003–2 I.R.B.252 2003–4, 2003–2 I.R.B.253 2003–5, 2003–2 I.R.B.254 2003–6, 2003–3 I.R.B.286 2003–7, 2003–5 I.R.B.363 2003–8, 2003–3 I.R.B.290 2003–9, 2003–4 I.R.B.303 2003–10, 2003–3 I.R.B.288 2003–11, 2003–3 I.R.B.285 2003–12, 2003–3 I.R.B.283 2003–13, 2003–4 I.R.B.305 2003–14, 2003–4 I.R.B.302 2003–15, 2003–4 I.R.B.302 2003–16, 2003–6 I.R.B.401 2003–17, 2003–6 I.R.B.400 2003–18, 2003–7 I.R.B.467 2003–19, 2003–7 I.R.B.468 2003–20, 2003–7 I.R.B.465 2003–21, 2003–8 I.R.B.509 2003–22, 2003–8 I.R.B.494 2003–23, 2003–8 I.R.B.511 2003–24, 2003–10 I.R.B.557 2003–25, 2003–13 I.R.B.642 2003–26, 2003–10 I.R.B.563 2003–27, 2003–11 I.R.B.597 2003–28, 2003–11 I.R.B.594 2003–29, 2003–11 I.R.B.587 2003–30, 2003–13 I.R.B.659 2003–31, 2003–13 I.R.B.643 2003–33, 2003–13 I.R.B.642 Treasury Decisions: 9024, 2003–5 I.R.B.365 9025, 2003–5 I.R.B.362 9026, 2003–5 I.R.B.366 9027, 2003–6 I.R.B.413 9028, 2003–6 I.R.B.415 Treasury Decisions—Continued: 9029, 2003–6 I.R.B.403 9030, 2003–8 I.R.B.495 9031, 2003–8 I.R.B.504 9032, 2003–7 I.R.B.471 9033, 2003–7 I.R.B.483 9034, 2003–7 I.R.B.453 9035, 2003–9 I.R.B.528 9036, 2003–9 I.R.B.533 9037, 2003–9 I.R.B.535 9038, 2003–9 I.R.B.524 9039, 2003–10 I.R.B.561 9040, 2003–10 I.R.B.568 9041, 2003–8 I.R.B.510 9042, 2003–10 I.R.B.564 9043, 2003–12 I.R.B.611 9045, 2003–12 I.R.B.610 9046, 2003–12 I.R.B.614 9048, 2003–13 I.R.B.644 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2002–26 through 2002–52 is in Internal Revenue Bulletin 2003–1, dated January 6, 2003. 2003–14 I.R.B.iiApril 7, 2003 Finding List of Current Actions on Previously Published Items 2 Bulletins 2003–1 through 2003–13 Notices: 97–19 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2001–26 Obsoleted by T.D. 9032, 2003–7 I.R.B.471 2001–46 Modified by Notice 2003–6, 2003–3 I.R.B.298 2001–69 Modified and superseded by Notice 2003–1, 2003–2 I.R.B.257 2002–27 Clarified by Notice 2003–3, 2003–2 I.R.B.258 2002–40 Modified by Ann. 2003–18, 2003–13 I.R.B.675 2002–46 Modified by Notice 2003–10, 2003–5 I.R.B.369 Proposed Regulations: REG–209500–86 Corrected by Ann. 2003–6, 2003–6 I.R.B.450 REG–103829–99 Corrected by Ann. 2003–12, 2003–10 I.R.B.585 REG–126485–01 Withdrawn by REG–126485–01, 2003–9 I.R.B.542 REG–143321–02 Corrected by Ann. 2003–12, 2003–10 I.R.B.585 REG–164464–02 Corrected by Ann. 2003–6, 2003–6 I.R.B.450 Revenue Procedures: 83–23 Supplemented by Rev. Proc. 2003–21, 2003–6 I.R.B.448 84–37 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 93–38 Obsoleted by Rev. Proc. 2003–15, 2003–4 I.R.B.321 Revenue Procedures—Continued: 97–31 Modified by Rev. Proc. 2003–9, 2003–8 I.R.B.516 98–13 Obsoleted by T.D. 9032, 2003–7 I.R.B.471 2002–1 Superseded by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2002–2 Superseded by Rev. Proc. 2003–2, 2003–1 I.R.B.76 2002–3 Superseded by Rev. Proc. 2003–3, 2003–1 I.R.B.113 2002–4 Superseded by Rev. Proc. 2003–4, 2003–1 I.R.B.123 2002–5 Superseded by Rev. Proc. 2003–5, 2003–1 I.R.B.163 2002–6 Superseded by Rev. Proc. 2003–6, 2003–1 I.R.B.191 2002–7 Superseded by Rev. Proc. 2003–7, 2003–1 I.R.B.233 2002–8 Superseded by Rev. Proc. 2003–8, 2003–1 I.R.B.236 2002–9 Modified and amplified by Rev. Proc. 2003–20, 2003–6 I.R.B.445 Rev. Rul. 2003–3, 2003–2 I.R.B.252 2002–20 Supplemented by Rev. Proc. 2003–26, 2003–13 I.R.B.666 2002–22 Modified by Rev. Proc. 2003–3, 2003–1 I.R.B.113 2002–29 Modified by Rev. Proc. 2003–10, 2003–2 I.R.B.259 2002–52 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2002–67 Supplemented by Ann. 2003–3, 2003–4 I.R.B.361 2002–75 Superseded by Rev. Proc. 2003–3, 2003–1 I.R.B.113 Revenue Procedures—Continued: 2003–3 Amplified by Rev. Proc. 2003–14, 2003–4 I.R.B.319 2003–7 Corrected by Ann. 2003–4, 2003–5 I.R.B396 Revenue Rulings: 53–131 Modified by Rev. Rul. 2003–12, 2003–3 I.R.B.283 57–190 Obsoleted by Rev. Rul. 2003–18, 2003–7 I.R.B.467 65–190 Revoked by Rev. Rul. 2003–3, 2003–2 I.R.B.252 69–372 Revoked by Rev. Rul. 2003–3, 2003–2 I.R.B.252 92–19 Supplemented in part by Rev. Rul. 2003–24, 2003–10 I.R.B.557 2003–2 Revoked by Rev. Rul. 2003–22, 2003–8 I.R.B.494 Treasury Decisions: 9002 Corrected by Ann. 2003–8, 2003–6 I.R.B.451 9021 Corrected by Ann. 2003–16, 2003–12 I.R.B.641 9022 Supplemented by Ann. 2003–7, 2003–6 I.R.B.450 Corrected by Ann. 2003–11, 2003–10 I.R.B.585 2 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2002–26 through 2002–52 is in Internal Revenue Bulletin 2003–1, dated January 6, 2003. April 7, 2003iii2003–14 I.R.B. INDEX Internal Revenue Bulletins 2003–1 through 2003–13 The abbreviation and number in paren- thesis following the index entry refer to the specific item; numbers in roman and italic type following the parenthesis refer to the Internal Revenue Bulletin in which the item may be found and the page num- ber on which it appears. Key to Abbreviations: AnnAnnouncement CDCourt Decision DODelegation Order EOExecutive Order PLPublic Law PTEProhibited Transaction Exemption RPRevenue Procedure RRRevenue Ruling SPRStatement of Procedural Rules TCTax Convention TDTreasury Decision TDOTreasury Department Order EMPLOYEE PLANS Advance letter rulings and determination letters, areas which will not be issued from: Associates Chief Counsel and Division Counsel/Associate Chief Counsel (TE/GE) (RP 3) 1,113 Associate Chief Counsel (Interna- tional) (RP 7) 1,233; correction (Ann 4) 5,396 Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Defined benefit plans, required minimum distributions (Notice 2) 2,257 Determination letters: Form 5310 revised (Ann 13) 11,603 Issuing procedures (RP 6) 1,191 Employee stock ownership plans, delayed effective date, abuse (RR 6) 3,286 Form 5310, Application for Determina- tion for Terminating Plan, revised (Ann 13) 11,603 Full funding limitations, weighted aver- age interest rate for: EMPLOYEE PLANS— Cont. January 2003 (Notice 7) 4,310 February 2003 (Notice 14) 8,515 March 2003 (Notice 17) 12,633 Individual retirement arrangements: Deemed IRAs (RP 13) 4,317 Required minimum distributions (Notice 3) 2,258 Letter rulings: Determination letters and information letters issued by Associates Chief Counsel and Division Counsel/ Associate Chief Counsel (TE/GE) (RP 1) 1,1 Information letters, etc. (RP 4) 1,123 Limitation on annual compensation, non- discrimination (RR 11) 3,285 Nondiscrimination, governmental plans (Notice 6) 3,298 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Proposed Regulations: 26 CFR 1.401(a)(4)–3,–9, revised; 1.411(b)–2, revised; reductions of accruals and allocations because of the attainment of any age; applica- tion of nondiscrimination cross- testing rules to cash balance plans (REG–209500–86, REG–164464– 02) 2,262; correction (Ann 6) 6,450 Qualified retirement plans: Age discrimination (REG–209500–86, REG–164464–02) 2,262; correc- tion (Ann 6) 6,450 Definition of early retirement benefits and retirement-type subsidies, con- tingent benefits (Notice 10) 5,369 Distributions, rollover, waiver of 60-day requirement (RP 16) 4,359 Loans to participants or beneficiaries under section 72(p) (Ann 16) 12, 641 Minimum distributions, delayed amendment date (RP 10) 2,259 Regulations: 26 CFR 1.72(p)–1; loans from a quali- fied employer plan to plan partici- pants or beneficiaries (TD 9021); correction (Ann 16) 12,641 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 EMPLOYEE PLANS— Cont. Technical advice: Proposed cash balance regulations, age discrimination issues (Ann 1) 2,281 To directors and chiefs, appeals offices, from Associates Chief Counsel and Division Counsel/ Associate Chief Counsel (TE/GE) (RP 2) 1,76 To IRS employees (RP 5) 1,163 User fees, request for letter rulings (RP 8) 1,236 EMPLOYMENT TAX Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Disclosure of returns and return informa- tion by other agencies (TD 9036) 9, 533 Levy restrictions during installment agreements (TD 9027) 6,413 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Regulations: 26 CFR 31.6011–4, added; 31.6011– 4T, removed; tax shelter regulations (TD 9046) 12,614 26 CFR 301.6103(p)(2)(B)–1, added; 301.6103(p)(2)(B)–1T, removed; 602.101, amended; disclosure of returns and return information by other agencies (TD 9036) 9,533 26 CFR 301.6331–3,–4, added; levy restrictions during installment agree- ments (TD 9027) 6,413 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 Tax shelter regulations (TD 9046) 12, 614 ESTATE TAX Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Disclosure of returns and return informa- tion by other agencies (TD 9036) 9, 533 Levy restrictions during installment agreements (TD 9027) 6,413 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 2003–14 I.R.B.ivApril 7, 2003 ESTATE TAX—Cont. Regulations: 26 CFR 20.6011–4, added; 20.6011– 4T, removed; tax shelter regulations (TD 9046) 12,614 26 CFR 301.6103(p)(2)(B)–1, added; 301.6103(p)(2)(B)–1T, removed; 602.101, amended; disclosure of returns and return information by other agencies (TD 9036) 9,533 26 CFR 301.6331–3,–4, added; levy restrictions during installment agree- ments (TD 9027) 6,413 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 Tax shelter regulations (TD 9046) 12, 614 EXCISE TAX Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Disclosure of returns and return informa- tion by other agencies (TD 9036) 9, 533 Highway vehicle, definition; correction (Ann 12) 10,585 Insurance premium excise tax, liability for (TD 9024) 5,365 Levy restrictions during installment agreements (TD 9027) 6,413 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Proposed Regulations: 26 CFR 41.4482(a)–1; 48.4041–8; 48.4051–1; 48.4072–1; 48.4081–1; 48.6421–4; 145.4051–1; definition of highway vehicle (REG–103829– 99); correction (Ann 12) 10,585 26 CFR Part 157, added; excise tax on structured settlement factoring trans- actions (REG–139768–02) 10,583 Regulations: 26 CFR 46.4374–1, revised; liability for insurance premium excise tax (TD 9024) 5,365 26 CFR 53.6011–4, added; 53.6011– 4T, removed; 54.6011–4, added; 54.6011–4T, removed; 56.6011–4, added; 56.6011–4T, removed; tax shelter regulations (TD 9046) 12, 614 EXCISE TAX—Cont. 26 CFR 301.6103(p)(2)(B)–1, added; 301.6103(p)(2)(B)–1T, removed; 602.101, amended; disclosure of returns and return information by other agencies (TD 9036) 9,533 26 CFR 301.6331–3,–4, added; levy restrictions during installment agree- ments (TD 9027) 6,413 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 26 CFR Part 157, added; 602.101, amended; excise tax on structured settlement factoring transactions (TD 9042) 10,564 Structured settlement factoring transac- tions (TD 9042) 10,564; (REG– 139768–02) 10,583 Tax shelter regulations (TD 9046) 12, 614 EXEMPT ORGANIZATIONS Advance letter rulings and determination letters, areas which will not be issued from Associates Chief Counsel and Division Counsel/Associate Chief Counsel (TE/GE) (RP 3) 1,113 Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Dissolution clause requirements for sec- tion 501(c)(3) entities seeking a section 115(1) letter ruling (RP 12) 4,316 Form 990, Return of Organization Exempt From Income Tax, U.S. posses- sions, relief from filing (RP 21) 6,448 Letter rulings: Determination letters and information letters issued by Associates Chief Counsel and Division Counsel/ Associate Chief Counsel (TE/GE) (RP 1) 1,1 Information letters, etc. (RP 4) 1,123 List of organizations classified as private foundations (Ann 10) 7,490; (Ann 14) 11,603 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Private foundations, termination, transfer of assets (RR 13) 4,305 Regulations: 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 EXEMPT ORGANIZATIONS— Cont. Tax shelter regulations (TD 9046) 12, 614 Technical advice to: Directors and chiefs, appeals offices, from Associates Chief Counsel and Division Counsel/Associate Chief Counsel (TE/GE) (RP 2) 1,76 IRS employees (RP 5) 1,163 U.S. possessions, relief from filing Form 990 (RP 21) 6,448 User fees, request for letter rulings (RP 8) 1,236 GIFT TAX Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6, 415 Disclosure of returns and return informa- tion by other agencies (TD 9036) 9, 533 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Regulations: 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 26 CFR 25.6011–4, added; 25.6011– 4T, removed; tax shelter regulations (TD 9046) 12,614 26 CFR 301.6103(p)(2)(B)–1, added; 301.6103(p)(2)(B)–1T, removed; 602.101, amended; disclosure of returns and return information by other agencies (TD 9036) 9,533 Tax shelter regulations (TD 9046) 12, 614 INCOME TAX Accounting, application of normalization accounting rules to balances of excess deferred income taxes and accumulated deferred investment tax credits (REG– 104385–01) 12,634 Accuracy-related penalty, defenses avail- able to the imposition (REG–126016– 01) 7,486 Accrual of income (RR 10) 3,288 Advance letter rulings and determination letters, areas which will not be issued from: April 7, 2003v2003–14 I.R.B. INCOME TAX—Cont. Associates Chief Counsel and Division Counsel/Associate Chief Counsel (TE/GE) (RP 3) 1,113 Associate Chief Counsel (Interna- tional) (RP 7) 1,233; correction (Ann 4) 5,396 Basis of redeemed stock when a distribu- tion in redemption of stock is treated as a dividend (Ann 9) 7,490 Capitalization of amounts paid to acquire, create, or enhance intangible assets (REG–125638–01) 5,373 Census Bureau, disclosure of tax informa- tion (TD 9037) 9,535 Charitable contributions; patents (RR 28) 11,594 Consolidated income tax return, common parent as agent for consolidated group, substitute agent, tentative carryback adjustments (Ann 8) 6,451 Constructive sales: Short sales, transition rule (RR 31) 13, 643 Treatment for appreciated financial positions (RR 1) 3,291 Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6,415 Contingent liability transaction cases, list of arbitrators (Ann 3) 4,361 Corporations: Acquisitions, auto dealer expansion (RR 18) 7,467 Foreign tax credit limitation, dividends from a noncontrolled section 902 corporation (Notice 5) 3,294 S corporation, employee stock owner- ship plan (ESOP): Basis (RR 27) 11,597 IRA rollovers and S corporation election (RP 23) 11,599 Statutory mergers and consolidations (TD 9038) 9,524; (REG–126485– 01), 9542 Transactions involving deemed sale of corporate assets under section 338, new Form 8883 (Ann 2) 3,301 Cost-share payments, Agricultural Man- agement Assistance Program (AMA) (RR 15) 4,302 Costa Rican withholding taxes, noncredit- ability (RR 8) 3,290 Credits: Adoption credit (Notice 15) 9,540 INCOME TAX—Cont. Earned income credit, update (TD 9045) 12,610 Education tax credit (TD 9034) 7, 453 Foreign taxpayers, disallowance of deductions and credits for failure to file timely return (TD 9043) 12, 611 Low-income housing credit: 2003 population figures used for calculation (Notice 16) 10,575 Satisfactory bond,“bond factor” amounts for the period: January through March 2003 (RR 2) 2,251; correction (RR 22) 8,494 New markets tax credit (RR 20) 7, 465; extension of deadline (Notice 9) 5,369 Disaster relief for taxpayers affected by the September 11, 2001, terrorist attack, extension for estates (Ann 18) 13,675 Disciplinary actions involving attorneys, certified public accountants, enrolled agents, and enrolled actuaries (Ann 15) 11,605 Disclosure of returns and return informa- tion by other agencies (TD 9036) 9, 533 Election to treat trust as part of an estate (TD 9032) 7,471 Electronic tax administration, guidance to facilitate (TD 9040) 10,568 Estimated tax, application of the addition to the tax for underpayment (RR 23) 8, 511 Exclusion of gain from the sale or exchange of a principal residence (TD 9030) 8,495 Family day care, deduction of business expenses, standard meal rates (RP 22) 10,577 Foreign personal holding company income, commodities hedging and interest-bearing liabilities (TD 9039) 10,561 Form 8883, Asset Allocation Statement Under Section 338, new (Ann 2) 3,301 Information reporting: On Form 1099–B for securities futures contracts (Notice 8) 4,310 Payment card transactions, information reporting and backup withholding (REG–116641–01) 8,518 INCOME TAX—Cont. Requirements for qualified tuition and related expenses under section 6059S, filing information returns on magnetic media (TD 9029) 6,403 Taxable stock transactions, corporate reorganizations, brokers (Ann 11) 10,585 Transition rules for acquisitions of control and substantial changes in capital structure (Ann 7) 6,450 Innocent spouse relief, nonrequesting spouse administrative appeal rights (RP 19) 5,371 Insurance companies: Corporate reorganization and mergers, demutualization (RR 19) 7,468 Determination of effectively connected income of foreign insurance compa- nies (RR 17) 6,400 Interest rate tables (RR 24) 10,557 Loss payment patterns and discount factors for the 2002 accident year (RP 17) 6,427 Recomputed differential earnings rate for 2000 and the differential earn- ings rate for 2001 for mutual life insurance companies (RR 4) 2,253 Salvage discount factors for the 2002 accident year (RP 18) 6,439 Interest: Investment: Federal short-term, mid-term, and long-term rates for: January 2003 (RR 5) 2,254 February 2003 (RR 16) 6,401 March 2003 (RR 26) 10,563 Rates: Underpayments and overpayments, quarter beginning: April 1, 2003 (RR 30) 13,659 Inventory: LIFO, price indexes used by depart- ment stores for: November 2002 (RR 9) 4,303 December 2002 (RR 21) 8,509 January 2003 (RR 33) 13,642 Valuation of vehicle parts cores (RP 20) 6,445 Leave-based donation programs (Notice 1) 2,257 Letter rulings, determination letters and information letters issued by Associates Chief Counsel and Division Counsel/ Associate Chief Counsel (TE/GE) (RP 1) 1,1 2003–14 I.R.B.viApril 7, 2003 INCOME TAX—Cont. Levy restrictions during installment agreements (TD 9027) 6,413 LIFO recapture installment payments (Notice 4) 3,294 Loss transactions, exceptions (RP 24) 11, 599 Low-income taxpayer clinics, income tax return preparer (TD 9026) 5,366 Methods of accounting, nonaccrual expe- rience (NAE) method (Notice 12) 6, 422 Noncompensatory partnership options (REG–103580–02) 9,543 Offshore Voluntary Compliance Initiative (RP 11) 4,311 Partnerships, section 6038, returns required with respect to controlled for- eign partnerships (TD 9033) 7,483; (REG–124069–02) 7,488 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Presidentially declared disaster: Gross income, disaster relief payments (RR 12) 3,283 Major disaster and emergency areas list (RR 29) 11,587 Private activity bonds, 2003 population figures used for calculation (Notice 16) 10,575 Private foundations, organizations now classified as (Ann 10) 7,490; (Ann 14) 11,603 Proposed Regulations: 26 CFR 1.46–6, amended; 1.168(i)–3 added; application of normalization accounting rules to balances of excess deferred income taxes and accumulated deferred investment tax credits of public utilities whose gen- eration assets cease to be public util- ity property (REG–104385–01) 12, 634 26 CFR 1.61–8, revised; rents and roy- alties (REG–151043–02) 3,300 26 CFR 1.121–3, amended; reduced maximum exclusion of gain from sale or exchange of principal resi- dence (REG–138882–02) 8,522 26 CFR 1.167(a)–3, amended; 1.263(a)–4, added; 1.446–5, added; guidance regarding deduction and capitalization of expenditures (REG–125638–01) 5,373 INCOME TAX—Cont. 26 CFR 1.302–5, 1.304–3; redemp- tions taxable as dividends (REG– 150313–01); correction (Ann 9) 7, 490 26 CFR 1.368–2, revised; statutory mergers and consolidations (REG– 126485–01) 9,542 26 CFR 1.704–1,–3, amended; 1.721–2, added; 1.761–3, added; 1.1272–1, amended; 1.1273–2, amended; 1.1275–4, amended; non- compensatory partnership options (REG–103580–02) 9,543 26 CFR 1.1502–21,–32, amended; 1.1502–35, added; guidance under section 1502, suspension of losses on certain stock dispositions (REG– 131478–02) 13,669 26 CFR 1.6038–3, amended; returns required with respect to controlled foreign partnerships (REG–124069– 02) 7,488 26 CFR 1.6043–4; 1.6045–3; informa- tion reporting relating to taxable stock transactions (REG–143321– 02); correction (Ann 12) 10,585 26 CFR 1.6662–3, amended; 1.6664–0,–4, amended; establishing defenses to the imposition of the accuracy-related penalty (REG– 126016–01) 7,486 26 CFR 31.3406(g)–1, (j)–1, amended; 301.6724–1, amended; information reporting and backup withholding for payment card transactions (REG–116641–01) 8,518 Qualified census tracts, issuers of quali- fied mortgage bonds and mortgage credit certificates (RP 15) 4,321 Qualified Payment Card Agent (QPCA), proposed revenue procedure to request a determination (Notice 13) 8,513 Regulations: 26 CFR 1.25A–0 through–5, added; 602.101, revised; education tax credit (TD 9034) 7,453 26 CFR 1.32–2, amended; earned income credit for taxable years beginning after December 31, 1978 (TD 9045) 12,610 INCOME TAX—Cont. 26 CFR 1.48–12, amended; 1.48–12T, removed; 1.152–3, amended; 1.152– 3T, removed; 1.611–3, amended; 1.611–3T, removed; 1.852–9, amended; 1.852–9T, removed; 301.6011–1, added; 301.6011–1T, removed; 301.6903–1, amended; 301.6903–1T, removed; 602.101, amended; guidance necessary to facilitate electronic tax administra- tion (TD 9040) 10,568 26 CFR 1.121–1 through–4, amended; 1.121–5, removed; 1.1398–3, added; exclusion of gain from sale or exchange of principal residence (TD 9030) 8,495 26 CFR 1.121–3T, added; reduced maximum exclusion of gain from sale or exchange of principal resi- dence (TD 9031) 8,504 26 CFR 1.368–2, revised; 1.368–2T, added; statutory mergers and con- solidations (TD 9038) 9,524 26 CFR 1.446–1, amended; 1.1502– 13, revised; intercompany transac- tions: conforming amendments to section 446 (TD 9025) 5,362 26 CFR 1.641(b)–3, amended; 1.642(c)–1,–6A, revised; 1.645–1, added; 1.671–4, amended; 1.6012–3, amended; 1.6072–1, amended; 301.6109–1, amended; 602.101, amended; election to treat trust as part of an estate (TD 9032) 7,471 26 CFR 1.874–1, revised; 1.874–1T, removed; 1.882–4, revised; 1.882– 4T, removed; disallowance of deductions and credits for failure to file timely return (TD 9043) 12, 611 26 CFR 1.954–0,–2, amended; guid- ance regarding the definition of for- eign personal holding company income (TD 9039) 10,561 26 CFR 1.1041–1T, amended; 1.1041–2, added; 602.101, amended; constructive transfers and transfers of property to a third party on behalf of a spouse (TD 9035) 9,528 April 7, 2003vii2003–14 I.R.B. INCOME TAX—Cont. 26 CFR 1.1502–21, amended; 1.1502– 21T, revised; 1.1502–32, amended; 1.1502–32T, revised; 1.1502–35T, added; 602.101, amended; guidance under section 1502; suspension of losses on certain stock dispositions (TD 9048) 13,644 26 CFR 1.1502–77T, 602.101; agent for consolidated group (TD 9002); correction (Ann 8) 6,451 26 CFR 1.6011–4. added; 1.6011–4T, removed; 301.6111–2, added; 301.6111–2T, removed; 301.6112–1, added; 301.6112–1T, removed; 602.101, amended; tax shelter regu- lations (TD 9046) 12,614 26 CFR 1.6038–3, amended; 1.6038– 3T, added; 602.101, amended; returns required with respect to con- trolled foreign partnerships (TD 9033) 7,483 26 CFR 1.6043–4T; information reporting relating to taxable stock transactions (TD 9022); correction (Ann 11) 10,585 26 CFR 1.6050S–0, amended; 1.6050S–1, added; 301.6011–2, amended; 602.101, amended; infor- mation reporting for qualified tuition and related expenses; magnetic media filing requirements for infor- mation returns (TD 9029) 6,403 26 CFR 31.3406(j)–1, amended; 31.3406(j)–1T, added; Taxpayer Identification Number (TIN) Match- ing Program (TD 9041) 8,510 26 CFR 301.6103(j)(1)–1, revised; 301.6103(j)(1)–1T, removed; disclo- sure of return information to the Bureau of the Census (TD 9037) 9, 535 26 CFR 301.6103(p)(2)(B)–1, added; 301.6103(p)(2)(B)–1T, removed; 602.101, amended; disclosure of returns and return information by other agencies (TD 9036) 9,533 26 CFR 301.6331–3,–4, added; levy restrictions during installment agree- ments (TD 9027) 6,413 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 26 CFR 301.7701–15, amended; low- income taxpayer clinics-definition of income tax return preparer (TD 9026) 5,366 INCOME TAX—Cont. Rents and royalties, inclusion of advance rentals in gross income (REG–151043– 02) 3,300 Reportable transactions, book-tax differ- ences, exceptions (RP 25) 11,601 Sale or exchange of a principal residence, reduced maximum exclusion of gain (TD 9031) 8,504;REG–138882–02, 8,522 Section 911(d)(4) waiver, 2002 update (RP 26) 13,666 Soil and Water Conservation Assistance Program (SWCA) (RR 14) 4,302 Standard Industry Fare Level (SIFL) for- mula (RR 25) 13,642 State tax refunds, accrual of income (RR 3) 2,252 Stocks: Determination and recognition of gain or loss (RR 7) 5,363 Guidance under section 1502, suspen- sion of losses on certain stock dispo- sitions (TD 9048) 13,644; (REG– 131478–02) 13,669 Redemptions by a spouse or former spouse during marriage or incident to divorce (TD 9035) 9,528 Tax shelter registrations, effective date (Notice 11) 6,422 Tax shelter regulations (TD 9046) 12, 614 Taxable stock transactions, corporate reorganizations, brokers; correction (Ann 12) 10,585 Taxicabs, information reporting for small cash transactions (RP 27) 13,667 Taxpayer Indentification Number (TIN) Matching Program: Expanded to online matching for all payors and authorized agents (RP 9) 8,516 Expansion (TD 9041) 8,510 Technical advice to: Directors and chiefs, appeals offices, from Associates Chief Counsel and Divison Counsel/Associate Chief Counsel (TE/GE) (RP 2) 1,76 IRS employees (RP 5) 1,163 Timing rules of intercompany transaction (TD 9025) 5,362 Trusts for minors, Indian Gaming Regula- tory Act (IGRA) (RP 14) 4,319 SELF-EMPLOYMENT TAX Contacts with third parties for determina- tion or collection of taxes (TD 9028) 6, 415 Levy restrictions during installment agreements (TD 9027) 6,413 Practice before the Internal Revenue Ser- vice (Ann 5) 5,397 Regulations: 26 CFR 301.6331–3,–4, added; levy restrictions during installment agree- ments (TD 9027) 6,413 26 CFR 301.7602–2, added; third party contacts (TD 9028) 6,415 2003–14 I.R.B.viii*U.S. Government Printing Office: 2003—496–919/60077April 7, 2003
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