Internal Revenue Bulletin 2003-40 (PDF rendition): IRS Revenue Rulings

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

Bulletin No. 200
3-40
October 6, 2003
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2003–105, page 696.
Split-dollar life insurance arrangements.Certain previously
published revenue rulings are obsoleted to the extent described
in this ruling. The previously published rulings are obsoleted
in light of T.D. 9092, which provides comprehensive final reg-
ulations regarding the federal income, gift, and employment
taxation of split-dollar life insurance arrangements. Rev. Ruls.
78ñ420 and 79ñ50 obsoleted. Rev. Rul. 66ñ610 partially ob-
soleted.
T.D. 9080, page 696.
REG–113112–03, page 760.
Final, temporary, and proposed regulations under section 108
of the Code clarify that, in the case of a transaction described in
section 381(a) that ends a year in which the distributor or trans-
feror corporation excludes COD income from gross income
under section 108(a), any tax attributes to which the acquir-
ing corporation succeeds under section 381, and the basis of
property acquired by the acquiring corporation in the transac-
tion, shall reflect the reductions required by sections 108 and
1017.
T.D. 9083, page 700.
Final regulations under section 280G of the Code provide rules
for the treatment of golden parachute payments. A golden
parachute payment includes certain compensation payments
made to certain individuals in connection with a change in own-
ership or control of a corporation. These rules are effective for
payments made on a change in control if the change in control
occurs on or after January 1, 2004.
T.D. 9084, page 742.
Final regulations under section 1503(d) of the Code provide
guidance regarding the events that require the recapture of dual
consolidated losses. The regulations will facilitate compliance
by taxpayers with the dual consolidated loss provisions. The
regulations generally provide that certain events will not trigger
recapture of a dual consolidated loss or payment of the asso-
ciated interest charge. The regulations provide for the filing of
certain agreements in such cases. This document also makes
clarifying and conforming changes to the current regulations.
Notice 2003–67, page 752.
This notice provides guidance to brokers and individuals for
information reporting of payments in lieu of dividends.
EMPLOYEE PLANS
T.D. 9079, page 729.
Final regulations under section 419A of the Code provide guid-
ance regarding whether a welfare benefit fund is part of a
ten-or-more employer plan described in section 419A(f)(6).
Announcement 2003–54, page 761.
Nonbank trustees; section 1.408–2(e) of the regulations.
This announcement contains a list of entities previously ap-
proved to act as nonbank trustees and nonbank custodians
within the meaning of section 1.408ñ2(e) of the regulations.
In addition, the announcement contains instructions on how er-
rors in the list may be corrected.
(Continued on the next page)
Finding Lists begin on page ii.
Index for July through September begins on page ix.

GIFT TAX
Rev. Rul. 2003–105, page 696.
Split-dollar life insurance arrangements.Certain previously
published revenue rulings are obsoleted to the extent described
in this ruling. The previously published rulings are obsoleted
in light of T.D. 9092, which provides comprehensive final reg-
ulations regarding the federal income, gift, and employment
taxation of split-dollar life insurance arrangements. Rev. Ruls.
78ñ420 and 79ñ50 obsoleted. Rev. Rul. 66ñ610 partially ob-
soleted.
EMPLOYMENT TAX
Rev. Rul. 2003–105, page 696.
Split-dollar life insurance arrangements.Certain previously
published revenue rulings are obsoleted to the extent described
in this ruling. The previously published rulings are obsoleted
in light of T.D. 9092, which provides comprehensive final reg-
ulations regarding the federal income, gift, and employment
taxation of split-dollar life insurance arrangements. Rev. Ruls.
78ñ420 and 79ñ50 obsoleted. Rev. Rul. 66ñ610 partially ob-
soleted.
EXCISE TAX
T.D. 9083, page 700.
Final regulations under section 280G o
f the Code provide rules
for the treatment of golden parachute p
ayments. A golden
parachute payment includes certa
in compensation payments
made to certain individuals in con
nection with a change in own-
ership or control of a corporatio
n. These rules are effective for
payments made on a change in cont
rol if the change in control
occurs on or after January 1, 200
4.
TAX CONVENTIONS
Announcement 2003–58, page 746.
Austria agreement on deferred payments. A copy of the news
release issued by the Director, International (U.S. Competent
Authority) on August 27, 2003, is set forth.
Announcement 2003–59, p
age 746.
This announcement conta
ins the text of a competent authority
agreement with the Swiss
government that provides guidance
on the application of th
e Limitation on Benefits (LOB) article of
theincometaxtreaty
and accompanying revised Memorandum
of Understanding (MO
U) between the United States and the
Swiss Confederatio
n. The agreement sets forth the categories
of U.S. residents th
at will be taken into account for purposes
of the derivative b
enefits ownership tests of the revised MOU.
ADMINISTRATIVE
REG–208199–91, page 756.
Proposed regulations under section 6503(j) of the Code
concern the use of designated summonses and related
summonses and the effect on the period of limitations on as-
sessment when a case is brought with respect to a designated
or related summons.
Notice 2003–65, page 747.
This notice provides two alternative safe harbors regarding the
identification of builit-in items under section 382(h) of the Code
and requests comments on this subject. Notice 87ñ79 modi-
fied.
October 6, 20032003-40 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
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin contents are consolidated semiannually into Cumulative
Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in
the Bulletin all sub-
stantive rulings necessary to promote a un
iform application of
the tax laws, including all rulings that s
upersede, revoke, mod-
ify, or amend any of those previously pub
lished in the Bulletin.
All published rulings apply retroacti
vely unless otherwise indi-
cated. Procedures relating solely
to matters of internal man-
agement are not published; howeve
r, statements of internal
practices and procedures that af
fect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury s Office of the Assistant Sec-
retary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and
are published in the first Bulletin of the succeeding semiannual
period, respectively.
The contents of this pu
blication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2003-40 I.R.B.October 6, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–22: Taxation of split-dollar life insur-
ance arrangements.
(Also: §§ 83; 301; 316; 2503; 2511; 2512;
7805; 7872; 1.83–3; 1.83–6; 1.301–1; 1.316–1;
25.2503–1; 25.2511–1; 25.2512–6; 301.7805–1;
1.7872–15.)
Split-dollar life insurance arrange-
ments.Certain previously published
revenue rulings are obsoleted to the extent
described in this ruling. The previously
published rulings are obsoleted in light of
T.D. 9092, which provides comprehensive
final regulations regarding the federal
income, gift, and employment taxation of
split-dollar life insurance arrangements.
Rev. Ruls. 78–420 and 79–50 obsoleted.
Rev. Rul. 66–610 partially obsoleted.
Rev. Rul. 2003–105
Treasury Decision 9092 provides
comprehensive final regulations (under
§§ 1.61–22, 1.83–3(e), 1.83–6(a)(5),
1.301–1(q), and 1.7872–15 of the Income
Tax Regulations) regarding the federal
income, gift, and employment taxation of
split-dollar life insurance arrangements
(as defined in § 1.61–22(b)(1) or (2)).
These regulations apply to any split-dollar
life insurance arrangement that is entered
into after September 17, 2003, and to any
split-dollar life insurance arrangement
entered into on or before September 17,
2003, that is materially modified after
September 17, 2003. See § 1.61–22(j).
The revenue rulings listed below are ob-
solete to the extent described below.
Rev. Rul. 79–50, 1979–1 C.B. 139
Rev. Rul. 78–420, 1978–2 C.B. 67
Rev. Rul. 66–110, 1966–1 C.B.
12 (except as provided in Section
III, Paragraph 3 of Notice 2002–8,
2002–1 C.B. 398, and Notice 2002–59,
2002–36 I.R.B. 481)
Rev. Rul. 64–328, 1964–2 C.B. 11.
In the case of any split-dollar life insur-
ance arrangement entered into on or be-
fore September 17, 2003, taxpayers may
continue to rely on these revenue rulings
to the extent described in Notice 2002–8,
but only if the arrangement is not materi-
ally modified after September 17, 2003.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Elizabeth K. Kaye of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Elizabeth K. Kaye at (202) 622–4920 (not
a toll-free call).
Section 83.—Property
Transferred in Connection
With Performance of Services
26 CFR 1.83-3: Meaning and use of certain terms.
26 CFR 1.83-6: Deduction by employer.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materi-
ally modified after September 17, 2003.See Rev. Rul.
2003-105, page 696.
Section 108.—Income From
Discharge of Indebtedness
26 CFR 1.108–7T: Reduction of attributes (tempo-
rary).
T.D. 9080
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Reduction of Tax Attributes Due
to Discharge of Indebtedness
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations relating to the reduction of tax
attributes under sections 108 and 1017
of the Internal Revenue Code. These
temporary regulations affect taxpayers
that exclude discharge of indebtedness
income from gross income under section
108. The text of the temporary regulations
also serves as the text of the proposed
regulations (REG–113112–03) set forth in
the notice of proposed rulemaking on this
subject in this issue of the Bulletin.
DATES:Effective Date:These temporary
regulations are effective July 17, 2003.
Applicability Date:These temporary
regulations apply to discharges of indebt-
edness occurring after July 17, 2003.
FOR FURTHER INFORMATION
CONTACT: Theresa M. Kolish (202
622–7930) of the Office of the Associate
Chief Counsel (Corporate) (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
The Debt Discharge Rules
Pursuant to section 61(a)(12), gross in-
come includes income from the discharge
of indebtedness (COD income). Section
108(a)(1), which reflects the amendments
enacted in the Bankruptcy Tax Act of
1980, Public Law 96–589, section 2, 94
Stat. 3389 (1980) (1980–2 C.B. 607),
however, provides that, where the dis-
charge occurs in a title 11 case, where
the taxpayer is insolvent, or where the
indebtedness is “qualified farm indebted-
ness” or “qualified real property business
indebtedness,” gross income does not
include any amount that otherwise would
be includible in gross income by reason of
that discharge (in whole or in part) of the
indebtedness of the taxpayer.
Although section 108(a) excludes COD
income from gross income under those cir-
cumstances, section 108(b) requires the
reduction of certain tax attributes in an
amount that reflects the amount excluded
from gross income, thereby generally de-
ferring, rather than permanently eliminat-
ing, the inclusion of COD income. Section
108(b)(2) requires the reduction of the fol-
lowing tax attributes of the taxpayer in the
following order: (A) net operating losses;
(B) general business credits; (C) minimum
tax credits; (D) capital loss carryovers;
(E) adjusted basis of property; (F) passive
activity losses and credit carryovers; and
(G) foreign tax credit carryovers. Section
108(b)(4)(A) provides that the reductions
2003-40 I.R.B.696October 6, 2003

are made after the determination of the tax
imposed for the taxable year of the dis-
charge. Section 108(b)(4)(B) provides that
the reductions of net operating losses and
capital loss carryovers are made first in the
loss for the taxable year of the discharge
and then in the carryovers to such taxable
year in the order of the taxable years from
which each such carryover arose. If the
excluded COD income exceeds the sum
of the taxpayer’s tax attributes, the excess
is disregarded such that it does not result
in income or have other tax consequences.
See H.R. Rep. No. 96–833, at 11 (1980).
Instead of reducing tax attributes in the
order set forth in section 108(b)(2), a tax-
payer may elect under section 108(b)(5) to
reduce first the adjusted bases of deprecia-
ble property to the extent of the excluded
COD income. The amount to which the
election applies is limited to the aggregate
adjusted basis of the depreciable property
held by the taxpayer as of the beginning
of the taxable year following the taxable
year in which the discharge occurs. If the
adjusted bases of depreciable property are
insufficient to offset the entire amount of
excluded COD income, the taxpayer must
then reduce any remaining tax attributes
in the order set forth in section 108(b)(2).
Congress intended the election under sec-
tion 108(b)(5) to allow debtors, including
debtors in bankruptcy, to account for a debt
discharge amount in a manner most favor-
able to their tax situations. See S. Rep.
No. 96–1035, at 10 (1980); H.R. Rep. No.
96–833, at 9 (1980).
Section 1017(a) provides that when any
portion of COD income excluded from
gross income under section 108(a) is to be
applied to reduce basis, then such portion
shall be applied to reduce the basis of
any property held by the taxpayer at the
beginning of the taxable year following
the taxable year in which the discharge
occurs. Section 1017(b)(1) provides that
the amount of reduction under section
1017(a), and the particular properties the
bases of which are to be reduced, shall be
determined under regulations.
The Reorganization Rules
Section 368(a)(1) defines a reorganiza-
tion to include certain types of asset ac-
quisitions. Under section 361, a corpora-
tion that is a party to a reorganization rec-
ognizes neither gain nor loss when it ex-
changes property, in pursuance of the plan
of reorganization, solely for stock or secu-
rities in another corporation that is a party
to the reorganization. If the corporation re-
ceives in the exchange not only stock or
securities permitted to be received without
the recognition of gain, but also other prop-
erty or money, then the corporation may be
required to recognize gain. Under section
362(b), if property is acquired by a corpo-
ration in connection with a reorganization,
then the basis is the same as it would be
in the hands of the transferor, increased by
the amount of gain recognized to the trans-
feror on such transfer.
Section 332(a) provides that a corpora-
tion recognizes no gain or loss on the re-
ceipt of property distributed in complete
liquidation of another corporation. Sec-
tion 337(a) provides that a liquidating cor-
poration recognizes no gain or loss on the
distribution to the 80-percent distributee
of any property in a complete liquidation
to which section 332 applies. Under sec-
tion 334(b)(1), if property is received by a
corporate distributee in a distribution in a
complete liquidation to which section 332
applies, the basis of such property in the
hands of such distributee is the same as
it would be in the hands of the transferor.
However, in any case in which gain or loss
is recognized by the liquidating corpora-
tion with respect to such property, the ba-
sis of such property in the hands of such
distributee is the fair market value of the
property at the time of the distribution.
Section 381 provides that a corporation
that acquires the assets of another corpo-
ration in a distribution to which section
332 applies or in a transfer to which sec-
tion 361 applies (but only if the transfer
is in connection with certain reorganiza-
tions described in sections 368(a)(1)(A),
(C), (D), (F), or (G)) shall succeed to,
and take into account, as of the close of
the day of distribution or transfer, the
items described in section 381(c) of the
distributor or transferor corporation, sub-
ject to certain conditions and limitations.
Among those items described in section
381(c) are net operating loss carryovers,
capital loss carryovers, general business
credits, and minimum tax credits. With
respect to net operating loss carryovers
and capital loss carryovers, the regulations
under section 381 reflect that the acquir-
ing corporation succeeds to only those
carryovers that remain after the applica-
tion of sections 172 and 1212 and their
carryforward and carryback provisions.
See §§1.381(c)(1)–1; 1.381(c)(3)–1. Fur-
thermore, those regulations provide that
the acquiring corporation succeeds to only
those general business credits that remain
unused by the transferor corporation af-
ter computing its taxable income for the
year of the transfer. See §1.381(c)(23)–1.
Section 381(b)(1) provides that, except in
the case of an acquisition in connection
with a reorganization described in section
368(a)(1)(F), the taxable year of the dis-
tributor or transferor corporation ends on
the date of distribution or transfer.
Interaction Between Debt Discharge and
Reorganization Rules
Questions have arisen regarding the ap-
plication of the attribute reduction rules
of sections 108 and 1017 when a transac-
tion described in section 381(a) ends a tax-
able year in which the transferor excludes
COD income from gross income. If sec-
tion 108(b)(4)(A) and section 1017 were
interpreted to require attribute reduction to
occur after the close of the taxable year
of discharge and after the transfer of as-
sets and carryover of items described in
section 381(c), then arguably no attributes
described in section 108(b)(2) would be
available for reduction.
Explanation of Provisions
The IRS and Treasury Department be-
lieve that the rule of section 108(b)(4)(A)
prescribes an ordering of calculations.
First, section 108(b)(4)(A) requires a
determination of the taxpayer’s tax for
the taxable year of discharge in order to
identify the amounts, if any, of the tax at-
tributes described in section 108(b)(2) that
remain available for reduction. Second,
section 108(b)(4)(A) requires the reduc-
tion of those attributes. This ordering rule
affords the taxpayer the use of certain
of its tax attributes described in section
108(b)(2), including any losses carried
forward to the taxable year of discharge,
October 6, 20036972003-40 I.R.B.

for purposes of determining its tax for the
taxable year of discharge, before subject-
ing those attributes to reduction.
Similarly, the IRS and Treasury believe
that the rule of section 1017 prescribes an
ordering of calculations. The Bankruptcy
Tax Act of 1980 reflects that Congress
enacted the rule of section 1017 “to avoid
interaction between basis reduction and
reduction of other attributes.” S. Rep.
No. 96–1035, at 14 (1980); H. Rep. No.
96–833, at 11 (1980). Without this rule,
a circular calculation could be required.
The taxpayer’s net operating loss for the
year of the discharge of indebtedness
might be based in part on the amount of
cost recovery deductions allowed to the
taxpayer. The amount of cost recovery
deductions, however, would depend on
the taxpayer’s basis in its depreciable or
amortizable property at the end of the year.
Because net operating losses are reduced
by excluded COD income prior to the
reduction of asset basis absent an election
under section 108(b)(5), the amount of
basis required to be reduced would depend
on the amount of net operating losses.
Reducing the basis of property held by the
taxpayer at the beginning of the taxable
year following the taxable year in which
the discharge occurs avoids this circular-
ity.
The position that sections 108 and 1017
require the reduction of attributes, includ-
ing the basis of transferred assets, in cases
where the debtor’s taxable year ends with
a transfer of assets in a transaction de-
scribed in section 381 is consistent with
the policies underlying sections 108 and
1017 and the corporate reorganization pro-
visions, including “deferring, but eventu-
ally collecting within a reasonable period,
tax on ordinary income realized from debt
discharge.” S. Rep. No. 96–1035, at 10
(1980). For example, assume that a debt
of corporation X is discharged in a title
11 case. X’s attributes described in sec-
tion 108(b)(2) consist solely of basis in
property. As part of a plan of reorgani-
zation, X transfers all of its assets to a
newly formed corporation, Y. Under sec-
tion 368(a)(3)(C), even though the transac-
tion also qualifies as a reorganization un-
der section 368(a)(1)(F), the transaction is
treated as qualifyingas a reorganization
only under section 368(a)(1)(G). If sec-
tions 108 and 1017 were interpreted to not
require a reduction of the bases of the prop-
erty transferred, X would permanently ex-
clude from gross income the COD income,
notwithstanding that X underwent noth-
ing more than a mere change in identity,
form, or place of organization. Accord-
ingly, consistent with the legislative his-
tory of the Bankruptcy Tax Act of 1980,
the IRS and Treasury Department believe
that the basis reduction rules of sections
108 and 1017 apply to property of a debtor
transferred in a transaction described in
section 381(a).
The legislative history of the Bank-
ruptcy Tax Act of 1980 reflects that Con-
gress specifically anticipated that amounts
that carry over in a transaction described
in section 381, including the basis of
transferred property, are to be adjusted
under the rules of sections 108 and 1017
to account for excluded COD income. See
H.R. Rep. No. 96–833, at 32–34 (1980).
The legislative history states:
Assume that Corporation A is in a
bankruptcy case commenced after Oc-
tober 1, 1979. Immediately prior to
a transfer under a plan of reorganiza-
tion, A’s assets have an adjusted basis
of $75,000 and a fair market value of
$100,000. A has a net operating loss
carryover of $200,000. A has outstand-
ing bonds of $100,000 (on which there
is no accrued but unpaid interest) and
trade debts of $100,000.
Under the plan of reorganization, A
is to transfer all its assets to Corpo-
ration B in exchange for $100,000 of
B stock. Corporation A will distribute
the stock, in exchange for their claims
against A, one-half to the security hold-
ers and one-half to the trade creditors.
A’s shareholders will receive nothing.
The transaction would qualify as
a reorganization under new section
368(a)(1)(G) of the Code, since all the
creditors are here treated as proprietors
for continuity of interest purposes.
Thus,Awouldrecognizenogainor
loss on the transfer of its assets to B
(sec. 361). B’s basis in the assets
would be $75,000 (sec. 362), and B
would succeed to A’s net operating loss
carryover (sec. 381).
Under the bill, . . . [o]n the distri-
bution of B stock to A’s trade creditors,
A excludes from gross income the debt
discharge amount of $50,000 —i.e.,the
difference between the $100,000 debt
held by non-security creditors and the
$50,000 worth of stock given for such
debt. A may elect to reduce the basis of
its depreciable assets transferred to B by
all or part of the $50,000 debt discharge
amount; to the extent the election is not
made, the debt discharge amount re-
duces A’s net operating loss carryover
by the remainder of the debt discharge
amount.
H.R. Rep. No. 96–833, at 34 (1980). The
treatment of the net operating loss and ba-
sis in the legislative history demonstrates
that, in a transaction described in section
381, the transferor’s attributes, including
the basis of transferred property, that carry
over to the transferee are reduced.
Accordingly, these temporary regula-
tions clarify that, in the case of a transac-
tion described in section 381(a) that ends
a year in which the distributor or trans-
feror corporation excludes COD income
from gross income under section 108(a),
any tax attributes to which the acquiring
corporation succeeds and the basis of prop-
erty acquired by the acquiring corporation
in the transaction shall reflect the reduc-
tions required by sections 108 and 1017.
For this purpose, all attributes listed in sec-
tion 108(b)(2) of the distributor or trans-
feror corporation immediately prior to the
transaction described in section 381(a), in-
cluding the basis of property, but after the
determination of tax for the year of the dis-
charge, are available for reduction under
section 108(b)(2).
These temporary regulations also clar-
ify that the tax attributes subject to reduc-
tion under section 108(b)(2) that are carry-
overs to the taxable year of the discharge,
or that may be carried back to taxable years
preceding the year of the discharge, are
first taken into account by the taxpayer for
the taxable year of the discharge or the pre-
ceding years, as the case may be, before
such attributes are reduced pursuant to sec-
tion 108(b)(2).
These temporary regulations apply to
discharges of indebtedness occurring after
July 17, 2003.
2003-40 I.R.B.698October 6, 2003

Special Analyses
It has been determined that these tem-
porary regulations are not a significant reg-
ulatory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It has also been deter-
mined that section 553(b) of the Adminis-
trative Procedures Act (5 U.S.C. chapter 5)
does not apply to these temporary regula-
tions, and, because no preceding notice of
proposed rulemaking is required for these
temporary regulations, the provisions of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
these temporary regulations will be sub-
mitted to the Chief Counsel for Advocacy
of the Small BusinessAdministration for
comment on its impact on small business.
Drafting Information
The principal author of these tempo-
rary regulations is Theresa M. Kolish, Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding the following
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108–7T also issued under 26
U.S.C. 108. * * *
Par. 2. Section 1.108–7T is added to
read as follows:
§1.108–7T Reduction of attributes
(temporary).
(a)In general. (1) If a taxpayer ex-
cludes discharge of indebtedness income
(COD income) from gross income under
section 108(a)(1)(A), (B), or (C), then the
amount excluded shall be applied to reduce
the following tax attributes of the taxpayer
in the following order:
(i) Net operating losses.
(ii) General business credits.
(iii) Minimum tax credits.
(iv) Capital loss carryovers.
(v) Basis of property.
(vi) Passive activity loss and credit car-
ryovers.
(vii) Foreign tax credit carryovers.
(2) The taxpayer may elect under sec-
tion 108(b)(5), however, to apply any por-
tion of the excluded COD income to re-
duce first the basis of depreciable prop-
erty. To the extent the excluded COD in-
come is not applied, the taxpayer must
then reduce any remaining tax attributes
in the order specified in section 108(b)(2).
If the excluded COD income exceeds the
sum of the taxpayer’s tax attributes, the
excess is permanently excluded from the
taxpayer’s gross income. For rules relat-
ingtobasisreductionsrequiredbysec-
tions 108(b)(2)(E) and 108(b)(5), see sec-
tion 1017 and §1.1017–1. For rules re-
latingtothetimeandmannerformaking
an election under section 108(b)(5), see
§1.108–4.
(b)Carryovers and carrybacks.Thetax
attributes subject to reduction under sec-
tion 108(b)(2) and paragraph (a)(1) of this
section that are carryovers to the taxable
year of the discharge, or that may be car-
ried back to taxable years preceding the
year of the discharge, are taken into ac-
count by the taxpayer for the taxable year
of the discharge or the preceding years, as
the case may be, before such attributes are
reduced pursuant to section 108(b)(2) and
paragraph (a)(1) of this section.
(c)Transactions to which section 381
applies. In the case of a transaction de-
scribed in section 381(a) that ends a tax-
able year in which the distributor or trans-
feror corporation excludes COD income
under section 108(a), any tax attributes
to which the acquiring corporation suc-
ceeds and the basis of property acquired
by the acquiring corporationinthetrans-
action shall reflect the reductions required
by section 108(b). For this purpose, all at-
tributes listed in section 108(b)(2) of the
distributor or transferor corporation imme-
diately prior to the transaction described in
section 381(a), but after the determination
of tax for the year of the discharge, includ-
ing basis of property, shall be available for
reduction under section 108(b)(2).
(d)Examples.Thefollowingexamples
illustrate the application of this section:
Example 1.(i)Facts. In Year 4, X, a corpo-
ration in a title
11 case, is entitled under section
108(a)(1)(A) to exclude from gross income $100,000
of COD income. For Year 4, X has gross income in
the amount of $50,000. In each of Years 1 and 2,
X had no taxable income or loss. In Year 3, X had
a net operating loss of $100,000, the use of which
when carried over to Year 4 is not subject to any
restrictions other than those of section 172.
(ii)Analysis. Pursuant to paragraph (b) of this
section, X takes into account the net operating loss
carryover from Year 3 in computing its taxable in-
come for Year 4 before any portion of the COD in-
come excluded under section 108(a)(1)(A) is applied
to reduce tax attributes. Thus, the amount of the net
operating loss carryover that is reduced under section
108(b)(2) and paragraph (a) of this section is $50,000.
Example 2.(i)Facts. The facts are the same as
inExample 1, except that in Year 4 X sustains a net
operating loss in the amount of $100,000. In addition,
in each of Years 2 and 3, X reported taxable income
in the amount of $25,000.
(ii)Analysis. Pursuant to paragraph (b) of this
section and section 172, the net operating loss sus-
tained in Year 4 is carriedback to Years 2 and 3 before
any portion of the COD income excluded under sec-
tion 108(a)(1)(A) is applied to reduce tax attributes.
Thus, the amount of the net operating loss that is re-
duced under section 108(b)(2) and paragraph (
a) of
this section is $50,000.
Example 3.(i)Facts. In Year 2, X, a corporation
in a title 11 case, has outstanding debts of $2
00,000
and a depreciable asset that has an adjusted basis of
$75,000 and a fair market value of $100,000. X has
no other assets or liabilities. X has a n
et operating loss
of $80,000 that is carried over to Year 2 but has no
general business credit, minimum tax credit, or capi-
tal loss carryovers. Under a plan of r
eorganization,
X transfers its asset to Corporation Y in exchange
for Y stock with a value of $100,000. X distributes
the Y stock to its creditors in exch
ange for release of
their claims against X. X’s shareholders receive noth-
ing in the transaction. The transaction qualifies as a
reorganization under sectio
n 368(a)(1)(G) that satis-
fies the requirements of section 354(b)(1)(A) and (B).
For Year 2, X has gross income of $10,000 (without
regard to any income from the
discharge of indebt-
edness) and is allowed a depreciation deduction of
$10,000 in respect of the asset. In addition, it gen-
erates no general busin
ess credits.
(ii)Analysis. On the distribution of Y stock to
X’s creditors, under section 108(a)(1)(A), X is enti-
tled to exclude from gro
ss income the debt discharge
amount of $100,000. (Under section 108(e)(8), X is
treated as satisfying $100,000 of the debt owed the
creditors for $100,0
00, the fair market value of the Y
stock transferred to those creditors.) In Year 2, X has
no taxable income or loss because its gross income
is exactly offset b
y the depreciation deduction. As a
result of the depreciation deduction, X’s basis in the
asset is reduced by $10,000 to $65,000. Pursuant to
paragraph (c) of
this section, the amount of X’s net
operating loss to which Y succeeds pursuant to sec-
tion 381 and the basis of X’s property transferred to
Y must take int
o account the reductions required by
section 108(b). Pursuant to paragraph (a) of this sec-
tion, X’s net operating loss carryover in the amount
of $80,000 is
reduced by $80,000 of the COD in-
come excluded under section 108(a)(1). In addition,
X’s basis in the asset is reduced by $20,000, the ex-
tent to whi
ch the COD income excluded under section
October 6, 20036992003-40 I.R.B.

108(a)(1) did not reduce the net operating loss. Ac-
cordingly, as a result of the reorganization, there is no
net operating loss to which Y succeeds under section
381. Pursuant to section 361, X recognizes no gain
or loss on the transfer of its property to Y. Pursuant to
section 362(b), Y’s basis in the asset acquired from X
is $45,000.
Example 4.(i)Facts. The facts are the same
as inExample 3, except that X elects under section
108(b)(5) to reduce first the basis of its depreciable
asset.
(ii)Analysis.AsinExample 3, on the distri-
bution of Y stock to X’s creditors, under section
108(a)(1)(A), X is entitled to exclude from gross
income the debt discharge amount of $100,000. In
addition, in Year 2, X has no taxable income or loss
because its gross income is exactly offset by the
depreciation deduction. As a result of the deprecia-
tion deduction, X’s basis in the asset is reduced by
$10,000 to $65,000. Pursuant to paragraph (c) of
this section, the amount of X’s net operating loss to
which Y succeeds pursuant to section 381 and the
basis of X’s property transferred to Y must take into
account the reductions required by section 108(b)
.
As a result of the election under section 108(b)(5),
X’s basis in the asset is reduced by $65,000 to $0.
In addition, X’s net operating loss is reduc
ed by
$35,000, the extent to which the amount excluded
from income under section 108(a)(1)(A) does not
reduce X’s asset basis. Accordingly, as a
result of
the reorganization, Y succeeds to X’s net operating
loss in the amount of $45,000 under section 381.
Pursuant to section 361, X recogniz
es no gain or
loss on the transfer of its property to Y. Pursuant to
section 362(b), Y’s basis in the asset acquired from
X is $0.
(e)Effective date. This section a
pplies
to discharges of indebtedness oc
curring af-
ter July 17, 2003.
Par. 3. Section 1.1017–1 is ame
nded by
adding paragraph (b)(4) to re
ad as follows:
§1.1017–1 Basis reductions f
ollowing a
discharge of indebtedness.
*****
(b) * * *
(4) For further guidance, se
e
§1.1017–1T(b)(4).
*****
Par. 4. Section 1.1017–1T is added to
read as follows:
§1.1017–1T Basis reductions following a
discharge of indebtedness (temporary).
(a) through (b)(3) [Reserved]. For fur-
ther guidance, see §1.1017–1(a) through
(b)(3).
(4)Transactions to which section 381
applies. In the case of a transaction
described in section 381(a) that ends a
taxable year in which the distributor or
transferor corporation excludes COD in-
come from gross income under section
108(a), the basis of property acquired by
the acquiring corporation in the transac-
tion shall reflect the reductions required
by section 1017 and this section. For
this purpose, the basis of property of the
distributor or transferor corporation imme-
diately prior to the transaction described in
section 381(a), but after the determination
of tax for the year of the discharge, shall
be available for reduction under section
108(b)(2). See §1.108–7T. This paragraph
(b)(4) applies to discharges of indebted-
ness occurring after July 17, 2003.
(c) through (i) [Reserved]. For further
guidance, see §1.1017–1(c) through (i).
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
Approved July 9, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
July 17, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 18, 2003, 68 F.R. 42590)
Section 280G.—Golden
Parachute Payments
26 CFR 280G–1: Golden parachute payments.
T.D. 9083
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1
Golden Parachute Payments
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relatingtogoldenparachute
payments under section 280G of the In-
ternal Revenue Code. These regulations
incorporate changes and clarifications to
reflect comments received concerning the
proposed regulations primarily concerning
the small corporation exemption, prepay-
ment of the excise tax, and the definition
of change in ownership or control.
DATES:Effective Date:August 4, 2003.
These regulations apply to any payment
that is contingent on a change in ownership
or control if the change in ownership or
control occurs on or after January 1, 2004.
Comments on the collection of informa-
tion in §1.280G–1, Q/A–7(a) should be re-
ceived by October 3, 2003.
ADDRESSES: Comments on the collec-
tion of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Reg-
ulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Ser-
vice, Attn: IRS Reports Clearance Offi-
cer, W:CAR:MP:T:T:SP, Washington, DC
20224.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Erinn Madden at (202) 622–6030 (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 1545–1851.
The collection of information in this
regulation is in §1.280G–1, Q/A–7(a).
This information is a brief description of
all material facts concerning all payments
which would be parachute payments (but
for §1.280G–1, Q/A–6). This information
may be used by certain corporations with
no readily tradeable stock (assuming cer-
tain shareholder approval requirements are
also met) to determine if the payments to
a disqualified individual are exempt from
the definition of parachute payments. The
collection of information is voluntary. The
likely respondents are business or other
for-profit institutions.
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk Of-
ficer for the Department of the Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
2003-40 I.R.B.700October 6, 2003

20224. Comments on the collection of
information in §1.280G–1, Q/A–7(a)
should be received by October 3, 2003.
Comments are specifically requested con-
cerning:
Whether the collection[s] of informa-
tion is necessary for the proper perfor-
mance of the functions of the Internal Rev-
enue Service, including whether the infor-
mation will have practical utility;
The accuracy of the estimated burden
associated with the collection of informa-
tion (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
collection of information may be mini-
mized, including through the application
of automated collection techniques or
other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide information.
Estimated total annual reporting and/or
recordkeeping burden: 12,000 hours.
Estimated average annual burden hours
per respondent: 15 hours.
Estimated number of respondents
and/or recordkeepers: 800
Estimated annual frequency of re-
sponses: On occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains amendments to
26 CFR part 1 under section 280G of the
Internal Revenue Code (Code). Sections
280G and 4999 of the Code were added to
the Code by section 67 of the Deficit Re-
duction Act of 1984, Public Law 98–369
(98 Stat. 585). Section 280G was amended
by section 1804(j) of the Tax Reform Act
of 1986, Public Law 99–514 (100 Stat.
2807), section 1018(d) of the Technical
and Miscellaneous Revenue Act of 1988,
Public Law 100–647 (102 Stat. 3581)
and section 1421 of the Small Business
Job Protection Act of 1996, Public Law
104–188 (110 Stat. 1755).
Section 280G denies a deduction to a
corporation for any excess parachute pay-
ment. Section 4999 imposes a 20-percent
excise tax on the recipient of any excess
parachute payment. Related provisions in-
clude section 275(a)(6), which denies the
recipient a deduction for the section 4999
excise tax, and section 3121(v)(2)(A),
which relates to the Federal Insurance
Contributions Act.
On February 20, 2002, a notice of
proposed rulemaking (REG–209114–90,
2002–1 C.B. 576), was published in the
Federal Registerat 67 FR 7630 (the 2002
proposed regulations) and corrected in the
Federal Registerat 67 FR 42210 on June
21, 2002 (Ann. 2002–65, 2002–2 C.B.
182). No hearing was requested or held.
The IRS received written and electronic
comments responding to the notice of
proposed rulemaking. After considera-
tion of the comments, the 2002 proposed
regulations are adopted as amended by
this Treasury decision. The significant
revisions are discussed below.
Explanation of Provisions and
Summary of Comments
Overview
Section 280G(b)(2)(A) defines a
parachute paymentas any payment that
meets all of the following four conditions:
(a) the payment is in the nature of com-
pensation; (b) the payment is to, or for the
benefit of, a disqualified individual; (c) the
payment is contingent on a change in the
ownership of a corporation, the effective
control of a corporation, or the ownership
of a substantial portion of the assets of
a corporation (a change in ownership or
control); and (d) the payment has (together
with other payments described in (a), (b),
and (c) of this paragraph with respect to
the same individual) an aggregate present
value of at least 3 times the individual’s
base amount. Section 280G(b)(2)(B) pro-
vides that the termparachute payment
also includes any payment in the nature
of compensation to, or for the benefit of,
a disqualified individual if the payment
is pursuant to an agreement that violates
any generally enforced securities laws or
regulations (securities violation parachute
payment).
Section 280G(b)(1) defines the term
excess parachute paymentas an amount
equal to the excess of any parachute pay-
ment over the portion of the disqualified
individual’s base amount that is allocated
to such payment. For this purpose, the
portion of the base amount allocated to
a parachute payment is the amount that
bears the same ratio to the base amount as
the present value of the parachute payment
bears to the aggregate present value of all
such payments to the same disqualified
individual.
Generally, excess parachute payments
may be reduced by certain amounts
of reasonable compensation. Section
280G(b)(4)(B) provides that, except in the
case of securities violation parachute pay-
ments, the amount of an excess parachute
payment is reduced by any portion of the
payment that the taxpayer establishes by
clear and convincing evidence is reason-
able compensation for personal services
actually rendered by the disqualified in-
dividual before the date of the change in
ownership or control. Such reasonable
compensation is first offset against the
portion of the base amount allocated to the
payment.
Exempt Payments
Section 280G specifically exempts
from the definition of the termparachute
paymentseveral types of payments that
would otherwise constitute parachute pay-
ments. Deductions for payments exempt
from the definition ofparachute payment
are not disallowed by section 280G, and
such exempt payments are not subject
to the 20-percent excise tax of section
4999. In addition, such exempt payments
are not taken into account in applying
the 3-times-base-amounttestofsection
280G(b)(2)(A)(ii).
1. Tax-Exempt Entities
Q/A–6 of the 2002 proposed regula-
tions provides that a payment with respect
to a tax-exempt entity that would other-
wise constitute a parachute payment is
exempt from the definition of the term
parachute paymentif certain conditions
are satisfied. First, the payment must
October 6, 20037012003-40 I.R.B.

be made by a corporation undergoing a
change in ownership or control that is a
tax-exempt organization. As defined in the
2002 proposed regulations, atax-exempt
organizationis any organization described
in section 501(c) that is subject to any
express statutory prohibition against in-
urement of net earnings to the benefit
of any private shareholder or individual,
an organization described in sections
501(c)(1) or 501(c)(21), any religious or
apostolic organization described in section
501(d), or any qualified tuition program
described in section 529. Second, the
organization must meet the definition of
tax-exempt organization, as defined in the
2002 proposed regulations, both imme-
diately before and immediately after the
change in ownership or control.
One commentator requested the elimi-
nation of the requirement that the payment
must be made by a tax-exempt organiza-
tion. Instead, the commentator suggested
that the regulations require only that the
payment be approved by the tax-exempt
organization. The exemption included in
Q/A–6 of the 2002 proposed regulations
for certain tax-exempt entities described in
section 501(c) is premised on the fact that
those entities are subject to a statutory pro-
hibition on private inurement. Requiring
merely the approval of a tax-exempt organ-
ization would allow corporations not sub-
ject to the inurement prohibition to make
the payments and, thus, to avoid the appli-
cation of section 280G. Thus, these regula-
tions retain the requirements contained in
the 2002 proposed regulations.
2. Small Corporation Exemption
Under section 280G and the 2002 pro-
posed regulations, the termparachute
paymentdoes not include any payment to
a disqualified individual with respect to
a corporation which (immediately before
the change in ownership or control) was
a small business corporation (as defined
in section 1361(b) but without regard to
section 1361(b)(1)(C) thereof). See also,
Q/A–6(a)(1).
Commentators indicated that the 2002
proposed regulations do not clearly ad-
dress whether a corporation that does not
elect to be treated as an S Corporation,
but could make the election (because aside
from the election the corporation other-
wise meets the requirements to be treated
as an S corporation), may use the exemp-
tion under Q/A–6(a)(1). These regulations
clarify that a corporation that could elect
to be treated as an S Corporation under the
Code, but does not do so, may nevertheless
use the exemption of Q/A–6(a)(1) for any
payments to a disqualified individual.
In addition, commentators recom-
mended that the final regulations provide
that a corporation domiciled outside the
United States can qualify for both the
small business corporation exception and
the shareholder approval exception. With
respect to the small business corporation
exception, Treasury and the IRS do not
have the authority to expand this exception
to include foreign corporations. Section
280G(b)(5)(A)(i) refers to “a small busi-
ness corporation (as defined in section
1361(b) but without regard to paragraph
(1)(C) thereof).” A small business cor-
poration as defined in section 1361(b)
must be a domestic corporation, and sec-
tion 1361(b)(1)(C) merely addresses the
existence of a nonresident alien as a share-
holder. It is clear from the statute that
the small business corporation exception
cannot apply to a foreign corporation.
On the other hand, Treasury and the
IRS believe that a foreign corporation may
qualify for the shareholder approval excep-
tion, discussed below, if all of the applica-
ble requirements are satisfied. Because the
statute and regulations permit this result, it
is not necessary to specify the treatment in
the final regulations.
3. Shareholder Approval
Additionally, under section 280G and
the 2002 proposed regulations, the term
parachute paymentdoes not include any
payment to a disqualified individual with
respect to a corporation if (i) immediately
before the change in ownership or con-
trol, no stock in such corporation was read-
ily tradeable on an established securities
market or otherwise, and (ii) certain share-
holder approval requirements are met.
Section 280G(b)(5)(B) provides that
the shareholder approval requirements are
met if two conditions are satisfied. First,
the payment is approved by a vote of the
persons who owned, immediately before
the change in ownership or control, more
than 75 percent of the voting power of
all outstanding stock of the corporation.
Second, there is adequate disclosure to
shareholders of all material facts concern-
ing all payments which (but for this rule)
would be parachute payments with respect
to a disqualified individual.
Q/A–7(b) of the 2002 proposed regula-
tions provides rules to determine the share-
holders who are entitled to vote. In re-
sponse to comments, Q/A–7(b)(1) is re-
vised to clarify that only stock that would
otherwise be entitled to vote is considered
outstanding and is entitled to vote for pur-
poses of Q/A–7(b). Thus, for example, be-
cause an individual who only holds options
generally would not be entitled to vote,
such individual will not be considered to
hold outstanding stock entitled to vote for
purposes of Q/A–7.
Q/A–7(b)(2) of the 2002 proposed reg-
ulations includes a rule of administrative
convenience allowing the corporation to
identify shareholders eligible to vote for
this purpose using the shareholders of
record at the time of any vote taken in con-
nection with a transaction or event giving
rise to the change in ownership or control
within the three-month period ending on
the date of the change in ownership or
control.
Several commentators suggested that
the final regulations permit corporations
to determine the shareholders of record
at any time during the three months prior
to the change in ownership or control.
Other commentators requested that the
time be expanded in the final regulations.
In response to these comments, these
regulations expand this rule to allow cor-
porations to determine the shareholders of
record on any day during the six-month
period ending on the date of the change
in ownership or control, regardless of
whether there was a vote on that day.
Q/A–7(b)(4) is revised to clarify that
stock held (directly or indirectly) by a dis-
qualified individual who would receive a
parachute payment if the shareholder ap-
proval requirements of Q/A–7 are not met
is not entitled to vote with respect to a pay-
ment to be made to any disqualified indi-
vidual. For example, assume E is a dis-
qualified individual with respect to Cor-
poration X. E’s base amount is $100,000,
and on a change in ownership or control
of X, E will receive contingent payments
of $295,000. Corporation X undergoes a
change in ownership or control. In deter-
mining the persons who are entitled to vote
under Q/A–7(b), any stock held by E is
2003-40 I.R.B.702October 6, 2003

considered outstanding and E is entitled to
vote. If E would receive contingent pay-
ments of $305,000 on the change in own-
ership or control, any stock held by E is not
considered outstanding and is not entitled
to vote under Q/A–7 with respect to pay-
ments to any disqualified individual.
An entity shareholder is not entitled
to vote stock that it holds that is con-
structively owned by a disqualified person
who would receive a parachute payment
if the shareholder approval requirements
of Q/A–7 are not met. Additionally, these
regulations provide in Q/A–7(b)(4) that
if the person authorized to vote the stock
of an entity shareholder is a disqualified
individual who would receive a parachute
payment if the requirements of Q/A–7
are not met, such person is not permit-
ted to vote any of the shares held by the
entity shareholder. However, the entity
shareholder is permitted to authorize an-
other equity interest holder in the entity
shareholder to vote the otherwise eligible
shares or, in the case of a trust, another
person eligible to vote on behalf of the
trust. Thus, for example, assume a partner
owns one-third of a partnership; the part-
ner is authorized to vote on behalf of the
partnership; the partnership owns stock in
a corporation; the partner is a disqualified
individual with respect to the corporation;
and the corporation undergoes a change
in ownership or control. Under these
circumstances, none of the stock held by
the partnership is entitled to vote under
Q/A–7. However, the partnership is per-
mitted to appoint an equity interest holder
in the entity shareholder (who is not a
disqualified individual who would receive
parachute payments if the shareholder
approval requirements of Q/A–7 are not
met) to vote two-thirds of the stock.
More generally, several commentators
requested significant revisions to Q/A–7 to
reflect certain business practices. The revi-
sions suggested by commentators include,
among other things, treating approval of a
compensation agreement when the agree-
ment is executed as sufficient for Q/A–7
or deeming shareholders who acquire
stock after approval of any compensation
agreements to consent to any parachute
payments contained in these agreements.
While the Treasury Department and IRS
understand that the requirements of Q/A–7
may not coincide with certain business
practices, the requirements of Q/A–7 are
based on the statutory framework pro-
vided by Congress. The golden parachute
provisions are intended to protect equity
shareholders whose interest in the cor-
poration could be impaired by parachute
payments to disqualified individuals by
discouraging these types of payments.
The basic structure of section 280G does
not permit any approval or shareholder
vote for a publicly traded corporation.
The exception for corporations that are
not publicly traded is based on a vote of
those persons who hold shares immedi-
ately before the change in ownership or
control after adequate disclosure. The
suggested revisions to the shareholder ap-
proval requirements are inconsistent with
these requirements and, accordingly, no
changes are made in these regulations.
Payment of the Excise Tax under section
4999
Q/A–11(c) of the 2002 proposed regu-
lations provided a mechanism to allow a
disqualified individual to prepay the excise
tax under section 4999 in certain circum-
stances. Thus, the requirements of section
4999 may be satisfied in the year of the
change in ownership or control (or the first
year for which a payment contingent on a
change in ownership or control is certain to
be made) even though the payment is not
yet includible in income (or otherwise re-
ceived).
These regulations continue to allow the
prepayment of the excise tax in the year of
the change in ownership or control. These
regulations also provide that a taxpayer
may prepay the excise tax in a later year.
For purposes of prepayment, these regula-
tions require the payor and disqualified in-
dividual to treat the payment of the excise
tax consistently and require the payor to
satisfy its obligations under section 4999.
These regulations clarify that the prepay-
ment of the excise tax is based on the
present value of the excise tax that would
be due in the year the excess parachute
payment would actually be paid. For pur-
poses of determining the present value of
the excise tax due, the discount rate is de-
termined in accordance with Q/A–32.
Thus, for example, assume that E is a
disqualified individual with respect to Cor-
poration X, that X undergoes a change in
ownership or control, and that E receives
parachute payments, including a series of
annual payments to be made for the next
10 years. Assume further that all other
parachute payments to E are made in the
year of the change in ownership or control
(with payment of the excise tax and com-
pliance by X with section 4999(c)). Un-
der these regulations, if three years after
a change in ownership or control, X and
E agree that E will prepay the excise tax
related to the remaining annual payments,
and that X will satisfy its obligations under
section 4999(c) related to these payments,
E is permitted to prepay the excise tax with
respect to the remaining payments.
The 2002 proposed regulations pro-
vided that the prepayment of the excise
tax would not be available with respect
to certain payments, including payments
related to health benefits or coverage.
Commenters requested that the prepay-
ment option be expanded to include
health benefits or coverage. Treasury
and the IRS do not consider the available
valuation methods sufficient to allow pro-
jections of individual payments related to
health coverage or health benefits for this
purpose. In the event that valuation meth-
ods change or there is otherwise greater
certainty with respect to the valuation of
such benefits, Treasury and the IRS may
consider additional guidance that would
make prepayment of the excise tax with
respect to such benefits available.
Treatment of Options
Q/A–13 of the 2002 proposed regula-
tions provides that the transfer of an option
is treated as a payment when the option be-
comes substantially vested without regard
to whether the option has an ascertain-
able fair market value under §1.83–7(b) of
the regulations. Thus, the vesting of an
option is treated as a payment in the na-
ture of compensation for purposes of sec-
tion 280G. Vested is defined in these reg-
ulations as substantially vested within the
meaning of §1.83–3(b) and (j) or the right
to the payment is not otherwise subject to
a substantial risk of forfeiture within the
meaning of section 83(c).
The 2002 proposed regulations, and the
1989 proposed regulations, provided that
options must be valued under the facts and
circumstances of a particular case. Factors
relevant to the determination include, but
are not limited to: the difference between
the option’s exercise price and the value
October 6, 20037032003-40 I.R.B.

of the option property, the probability of
the value of the option property increasing
or decreasing, and the length of the period
during which the option can be exercised.
In coordination with the issuance of
the 2002 proposed regulations, the Com-
missioner issued two revenue procedures
under section 280G providing additional
guidance on the valuation of options,
Rev. Proc. 2002–13, 2002–1 C.B. 549,
and Rev. Proc. 2002–45, 2002–2 C.B.
40. These revenue procedures provide
guidance on the use of option valuation
methods, and provide that using only the
spread between the exercise price and
the value of the option property is not an
adequate method for valuing an option.
The revenue procedures also provide a
safe harbor method of valuation based on
a table. Comments received in response
to these revenue procedures raised issues
related to the difficulty of valuing options
in the context of a change in ownership
or control, particularly with respect to
assumptions regarding the term of the
option and the volatility. In coordination
with the issuance of these regulations,
the IRS is issuing a revenue procedure
restating the previous revenue procedures
and addressing these comments.
Disqualified Individuals
The 2002 proposed regulations provide
that an individual is a disqualified indi-
vidual if, at any time during the disqual-
ified individual determination period, the
individual is an employee or independent
contractor of the corporation and is, with
respect to the corporation, a shareholder
(see Q/A–17), an officer (see Q/A–18),
or a highly-compensated individual (see
Q/A–19). The 2002 proposed regulations
provide that whether an individual is an of-
ficer with respect to a corporation is de-
termined based on all the facts and cir-
cumstances in the particular case (such as
the source of the individual’s authority, the
term for which the individual is elected or
appointed, and the nature and extent of the
individual’s duties).
These regulations retain this rule con-
cerning officers. However, under Q/A–18
of these regulations any individual who has
the title of officer is presumed to be an
officer unless the facts and circumstances
demonstrate that the individual does not
have the authority of an officer. However,
an individual who does not have the title
of officer may nevertheless be considered
an officer if the facts and circumstances
demonstrate that the individual should be
considered to be an officer.
Nonvested Payments under Q/A–24
Under Q/A–24(c) of the 2002 proposed
regulations, only a portion of certain non-
vested payments is treated as contingent on
a change in ownership or control. Specifi-
cally, Q/A–24(c) applies to a payment that
becomes vested as a result of a change
in ownership or control to the extent that
(i) without regard to the change in own-
ership or control, the payment was con-
tingent only on the continued performance
of services for the corporation for a spec-
ified period of time; and (ii) the payment
is attributable, at least in part, to the per-
formance of services before the date the
payment is made or becomes certain to be
made.
These regulations retain these rules re-
garding the calculation of the amount of
the payment that is considered contingent
on a change in ownership or control, with
one revision. Under the 2002 proposed
regulations, the payment calculation under
Q/A–24(c) could not exceed the amount
of the accelerated payment. A portion of
a payment is contingent on a change in
ownership or control if there is accelerated
vesting, even if there is no accelerated pay-
ment. In that case, the amount attributable
to the lapse of the obligation to perform
services is 1 percent of the present value of
the future payment multiplied by the num-
ber of full months between the date that the
individual’s right to receive the payment
is vested and the date that, absent the ac-
celeration, the payment would have been
vested. Under these final regulations, the
total portion of such payment treated as
contingent on the change in ownership or
control cannot exceed the present value of
the accelerated payment.
Change in Ownership or Control
A change in ownership or control is de-
fined in Q/A–27, 28, and 29 of the 2002
proposed regulations. Under Q/A–27 of
the 2002 proposed regulations, a change in
control of a corporation occurs on the date
that any one person (or persons acting as a
group) acquires ownership or stock of the
corporation that, together with stock held
by such person or group, has more than 50
percent of the total fair market value or to-
tal voting power of the corporation.
Under Q/A–28 of the 2002 proposed
regulations, a change in the effective con-
trol of a corporation is presumed to oc-
cur on the date that either (1) any one per-
son (or more than one person acting as a
group) acquires (or has acquired during the
12-month period ending on the date of the
most recent acquisition by such person or
persons) ownership of stock of the corpo-
ration possessing 20 percent or more of the
total voting power of the stock of such cor-
poration, or (2) a majority of members of
the corporation’s board of directors is re-
placed during any 12-month period by di-
rectors whose appointment or election is
not endorsed by a majority of the mem-
bers of the corporation’s board of directors
prior to the date of the appointment or elec-
tion.
Under Q/A–29 of the 2002 proposed
regulations, a change in the ownership of
a substantial portion of a corporation’s as-
sets occurs on the date that any one per-
son (or more than one person acting as a
group) acquires (or has acquired during the
12-month period ending on the date of the
most recent acquisition by such person) as-
sets from the corporation that have a total
gross fair market value equal to or more
than one third of the total gross fair market
value of all of the assets of the corporation
immediately prior to such acquisition.
These regulations generally follow the
same approach as the 2002 proposed regu-
lations. Some commenters suggested that
these three provisions explicitly address
whether more than one change in own-
ership or control can occur in a single
transaction. In response to these com-
ments, these regulations explicitly adopt
the “one change” rule that historically has
been applied by the IRS. These regula-
tions provide that if a corporation under-
goes a change in ownership or control as
described in either Q/A–27 or Q/A–29, the
2003-40 I.R.B.704October 6, 2003

other corporation involved in the transac-
tion does not undergo a change in owner-
ship or control.
1
As these regulations ap-
ply, in any transaction involving two cor-
porations, if one has a change in ownership
or control under Q/A–27 or 29, the other
corporation does not also have a change in
ownership or control, under either Q/A–27
or 29. Under these regulations, Q/A–28,
which relates to effective control, provides
that there is no change in effective control
of a corporation in a transaction in which
the other corporation has a change of con-
trol under Q/A–27 or 29.
Commentators also requested that the
final regulations define gross fair market
value for purposes of Q/A–29. Under
Q/A–29 of these regulations,gross fair
market valueis defined as the value of the
assets of the corporation, or the value of
the assets being disposed of, determined
without regard to any liabilities associated
with such assets. This definition is used
throughout these regulations.
For purposes of determining whether
there is a change in ownership or con-
trol under Q/A–27 through Q/A–29 of the
2002 proposed regulations, two or more
persons may be considered as acting as
a group. The 2002 proposed regulations
provide that, for purposes of determining
whether two or more persons are acting as
a group, a person who owns stock in both
corporations involved in a transaction (an
overlapping shareholder) is treated as act-
ing as a group with respect to the other
shareholders in a corporation only to the
extent of such person’s ownership of stock
in that corporation prior to the transaction,
and not with respect to his or her ownership
in the other corporation. This rule is con-
sistent with the interpretation of the 1989
proposed regulations by the IRS.
Commentators suggested different
alternatives to the overlapping share-
holder rule of Q/A–27 through Q/A–29
of the 2002 proposed regulations. One
commentator suggested eliminating the
overlapping shareholder rule and instead
relying on the presumption of Q/A–28
for all transactions. Under this approach
it would be possible for a transaction
to result in one, two, or no change in
ownership or control. Other commenta-
tors suggested replacing the overlapping
shareholder rule of the 2002 proposed reg-
ulations with a new rule based on section
355 or 382. Finally, another commentator
requested clarification of the application
of the overlapping shareholder rule of the
2002 proposed regulations under the 1989
proposed regulations.
These regulations retain the overlap-
ping shareholder rule of the 2002 proposed
regulations. The group concepts in section
355 or 382 do not fit well with the overall
purpose of section 280G. Finally, these
regulations are effective with respect to
changes in ownership or control that occur
after January 1, 2004, and to payments that
are contingent on such changes. These
regulations do not provide any transitional
rules for the application of the overlapping
shareholder rules for prior periods both
because these regulations are not effective
for prior periods and because the positions
set forth in 2002 proposed regulations are
merely clarifications of the positions taken
by the IRS under section 280G (illustrated
by the 1989 proposed regulations).
International Issues
Commentators recommended that the
final regulations provide that a disqualified
individual who, during the disqualified in-
dividual determination period, was a non-
resident alien and was not subject to in-
come tax in the United States on wages
earned from the affiliated group, not be
subject to the excise tax. Treasury and the
IRS do not believe that they have the au-
thority to preclude application of the ex-
cise tax to a nonresident alien under these
circumstances. Accordingly, the final reg-
ulations do not include any special rules
for excess parachute payments received by
nonresident aliens.
Commentators also requested clarifica-
tion that, even though parachute payments
made by a foreign subsidiary of a U.S.
corporation may not be deductible, such
payments reduce the foreign subsidiary’s
earnings and profits. Because this issue
has implications beyond section 280G and
foreign subsidiaries, it is not addressed in
these regulations.
EffectiveDateandReliance
These regulations apply to any pay-
ments that are contingent on a change
in ownership or control if the change of
ownership or control occurs on or after
January 1, 2004.
Under the 2002 proposed regulations,
taxpayers are permitted to rely on the
2002 proposed regulations until January
1, 2004. Taxpayers are permitted to rely
on the 1989 proposed regulations with re-
spect to payments contingent on a change
in ownership or control if that change
occurs before January 1, 2004. A clari-
fication in the 2002 proposed regulations
does not support reliance on the 1989 pro-
posed regulations for a position contrary
to the provisions of the 2002 proposed
regulations.
Taxpayers are permitted to rely on the
2002 proposed regulations, including for
purposes of amended returns with respect
to the following: (1) that a shareholder
who owns stock with a fair market value of
$1 million is not a disqualified individual
and (2) that the base amount includes the
amount of compensation included in gross
income under section 83(b).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a reg-
ulatory assessment is not required. Sec-
tion 1.280G–1 of these proposed regula-
tions provides for the collection of infor-
mation. It is hereby certified that the col-
lection of information in these regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties. This certification is based on the fact
that, as indicated in the Paperwork Reduc-
tion Act section earlier in the preamble,
only 800 small entities are expected to be
affected by the regulations annually, and
it is unlikely that any small entity would
be affected by these regulations more than
once or twice in its existence. Therefore,
an analysis under the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these regulations was submitted to the
1
Because Q/A–46 provides that all members of an affiliated group are treated as one corporation, even transactions involving multiple entities generally are treated as only two corporations
for purposes of section 280G.
October 6, 20037052003-40 I.R.B.

Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these regula-
tionsisErinnMadden,OfficeoftheDi-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR is amended as fol-
lows:
PART I — INCOME TAX; TAXABLE
YEARS BEGINNING AFTER
DECEMBER 31, 1986.
Paragraph 1. The authority citation for
part 1 is amended by adding the following
entry in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.280G–1 also issued under 26
U.S.C. 280G (b) and (e). * * *
Par. 2. Section §1.280G–1 is added to
read as follows:
§1.280G–1 Golden parachute payments.
The following questions and answers
relate to the treatment of golden parachute
payments under section 280G of the In-
ternal Revenue Code of 1986, as added
by section 67 of the Tax Reform Act of
1984 (Public Law No. 98–369; 98 Stat.
585) and amended by section 1804(j) of
the Tax Reform Act of 1986 (Public Law
No. 99–514; 100 Stat. 2807), section
1018(d)(6)–(8) of the Technical and Mis-
cellaneous Revenue Act of 1988 (Public
Law No. 100–647; 102 Stat. 3581), and
section 1421 of the Small Business Job
Protection Act of 1996 (Public Law No.
104–188; 110 Stat. 1755). The following
is a table of contents of subjects in this sec-
tion:
Overview
Effect of section 280G . . . Q/A–1
Meaning of “parachute payment” . . .
Q/A–2
Meaning of “excess parachute payment”
...Q/A–3
Effective date of section 280G . . . Q/A–4
Exempt Payments
Exemptpaymentsgenerally...Q/A–5
Exempt payments with respect to certain
corporations...Q/A–6
Shareholder approval requirements . . .
Q/A–7
Exempt payments under a qualified plan
...Q/A–8
Exempt payments of reasonable compen-
sation...Q/A–9
Payor of Parachute Payments...Q/A–10
Payments in the Nature of Compensation
The nature of compensation . . . Q/A–11
Property transfers . . . Q/A–12
Stock options . . . Q/A–13
Reduction of amount of payment by con-
sideration paid . . . Q/A–14
Disqualified Individuals
Meaning of “disqualified individual” . . .
Q/A–15
Personal service corporation treated as in-
dividual . . . Q/A–16
Meaning of “shareholder” . . . Q/A–17
Meaningof“officer”...Q/A–18
Meaning of “highly-compensated individ-
ual”...Q/A–19
Meaning of “disqualified individual deter-
mination period” . . . Q/A–20
Meaning of “compensation” . . . Q/A–21
Contingent on Change in Ownership or
Control
General rules for determining payments
contingent on change . . . Q/A–22
Payments under agreement entered into af-
ter change . . . Q/A–23
Amount of payment contingent on change
...Q/A–24
Presumption that payment is contingent on
change . . . Q/A–25, 26
Change in ownership or control . . .
Q/A–27, 28, 29
Three-Times-Base-Amount Test for
Parachute Payments
Three-times-base-amount test . . .
Q/A–30
Determination of present value . . .
Q/A–31, 32, 33
Meaningof“baseamount”...Q/A–34
Meaning of “base period” . . . Q/A–35
Special rule for determining base amount
...Q/A–36
Securities Violation Parachute Payments
...Q/A–37
Computation and Reduction of Excess
Parachute Payments
Computation of excess parachute pay-
ments . . . Q/A–38
Reduction by reasonable compensation
...Q/A–39
Determination of Reasonable Compensa-
tion
General criteria for determining reason-
able compensation . . . Q/A–40
Types of payments generally considered
reasonable compensation . . . Q/A–41, 42,
43
Treatment of severance payments . . .
Q/A–44
Miscellaneous rules
Definitionofcorporation...Q/A–45
Treatment of affiliated group as one corpo-
ration...Q/A–46
Effective date
General effective date of section 280G
.. . Q/A–47
Effective date of regulations . . . Q/A–48
Overview
Q–1: What is the effect of Internal Rev-
enue Code section 280G?
A–1: (a) Section 280G disallows a de-
duction for any excess parachute payment
paid or accrued. For rules relating to the
imposition of a nondeductible 20-percent
excise tax on the recipient of any excess
parachute payment, see Internal Rev-
enue Code sections 4999, 275(a)(6), and
3121(v)(2)(A).
(b) The disallowance of a deduction un-
der section 280G is not contingent on the
imposition of the excise tax under section
4999. The imposition of the excise tax
under section 4999 is not contingent on
the disallowance of a deduction under sec-
tion 280G. Thus, for example, because the
imposition of the excise tax under section
4999 is not contingent on the disallowance
of a deduction under section 280G, a payee
may be subject to the 20-percent excise tax
under section 4999 even though the dis-
allowance of the deduction for the excess
parachute payment may not directly affect
the federal taxable income of the payor.
Q–2: What is a parachute payment for
purposes of section 280G?
A–2: (a) The termparachute payment
means any payment (other than an exempt
payment described in Q/A–5) that —
(1) Is in the nature of compensation;
(2)Ismadeoristobemadeto(orfor
the benefit of) a disqualified individual;
(3) Is contingent on a change —
2003-40 I.R.B.706October 6, 2003

(i) In the ownership of a corporation;
(ii) In the effective control of a corpora-
tion; or
(iii) In the ownership of a substantial
portion of the assets of a corporation; and
(4) Has (together with other payments
described in paragraphs (a)(1), (2), and (3)
of this A–2 with respect to the same dis-
qualified individual) an aggregate present
value of at least 3 times the individual’s
base amount.
(b) Hereinafter, a change referred
to in paragraph (a)(3) of this A–2 is
generally referred to as a change in own-
ership or control. For a discussion of
the application of paragraph (a)(1), see
Q/A–11 through Q/A–14; paragraph
(a)(2), Q/A–15 through Q/A–21; para-
graph (a)(3), Q/A–22 through Q/A–29;
and paragraph (a)(4), Q/A–30 through
Q/A–36.
(c) The termparachute paymentalso
includes any payment in the nature of
compensation to (or for the benefit of)
a disqualified individual that is pursuant
to an agreement that violates a generally
enforced securities law or regulation. This
type of parachute payment is referred to
in this section as a securities violation
parachute payment. See Q/A–37 for the
definition and treatment of securities vio-
lation parachute payments.
Q–3: What is an excess parachute pay-
ment for purposes of section 280G?
A–3: The termexcess parachute pay-
mentmeans an amount equal to the ex-
cess of any parachute payment over the
portion of the base amount allocated to
such payment. Subject to certain excep-
tions and limitations, an excess parachute
payment is reduced by any portion of the
payment which the taxpayer establishes by
clear and convincing evidence is reason-
able compensation for personal services
actually rendered by the disqualified in-
dividual before the date of the change in
ownership or control. For a discussion of
the nonreduction of a securities violation
parachute payment by reasonable compen-
sation, see Q/A–37. For a discussion of the
computation of excess parachute payments
and their reduction by reasonable compen-
sation, see Q/A–38 through Q/A–44.
Q–4: What is the effective date of sec-
tion 280G and this section?
A–4: In general, section 280G applies
to payments under agreements entered into
or renewed after June 14, 1984. Section
280G also applies to certain payments un-
der agreements entered into on or before
June 14, 1984, and amended or supple-
mented in significant relevant respect after
that date. This section applies to any pay-
ment that is contingent on a change in own-
ership or control and the change in owner-
ship or control occurs on or after January
1, 2004. For a discussion of the applica-
tion of the effective date, see Q/A–47 and
Q/A–48.
Exempt Payments
Q–5: Are some types of payments
exempt from the definition of the term
parachute payment?
A–5: (a) Yes, the following five types of
payments are exempt from the definition of
parachute payment—
(1) Payments with respect to a small
business corporation (described in Q/A–6
of this section);
(2) Certain payments with respect to a
corporation no stock in which is readily
tradeable on an established securities mar-
ket (or otherwise) (described in Q/A–6 of
this section);
(3) Payments to or from a qualified plan
(described in Q/A–8 of this section);
(4) Certain payments made by a corpo-
ration undergoing a change in ownership
or control that is described in any of the
following sections of the Internal Revenue
Code: section 501(c) (but only if such or-
ganization is subject to an express statu-
tory prohibition against inurement of net
earnings to the benefit of any private share-
holder or individual, or if the organization
is described in section 501(c)(1) or sec-
tion 501(c)(21)), section 501(d), or section
529, collectively referred to astax-exempt
organizations(described in Q/A–6 of this
section); and
(5) Certain payments of reasonable
compensation for services to be rendered
on or after the change in ownership or con-
trol (described in Q/A–9 of this section).
(b) Deductions for payments exempt
from the definition ofparachute payment
are not disallowed by section 280G, and
such exempt payments are not subject to
the 20-percent excise tax of section 4999.
In addition, such exempt payments are
not taken into account in applying the
3-times-base-amount test of Q/A–30 of
this section.
Q–6: Which payments with respect to a
corporation referred toinparagraph(a)(1),
(a)(2), or (a)(4) of Q/A–5 of this section are
exempt from the definition ofparachute
payment?
A–6: (a) The termparachute payment
does not include —
(1) Any payment to a disqualified indi-
vidual with respect to a corporation which
(immediately before the change in owner-
ship or control) would qualify as a small
business corporation (as defined in sec-
tion 1361(b) but without regard to section
1361(b)(1)(C) thereof), without regard to
whether the corporation had an election to
be treated as a corporation under section
1361 in effect on the date of the change in
ownership or control;
(2) Any payment to a disqualified
individual with respect to a corporation
(other than a small business corporation
described in paragraph (a)(1) of this A–6)
if —
(i) Immediately before the change in
ownership or control, no stock in such cor-
poration was readily tradeable on an estab-
lished securities market or otherwise; and
(ii) The shareholder approval require-
ments described in Q/A–7 of this section
are met with respect to such payment; or
(3) Any payment to a disqualified in-
dividual made by a corporation which is
a tax-exempt organization (as defined in
paragraph (a)(4) of Q/A–5 of this section),
but only if the corporation meets the def-
inition of a tax-exempt organization both
immediately before and immediately after
the change in ownership or control.
(b) For purposes of paragraph (a)(1)
of this A–6, the members of an affiliated
group are not treated as one corporation.
(c) The requirements of paragraph
(a)(2)(i) of this A–6 are not met with
respect to a corporation if a substantial
portion of the assets of any entity consists
(directly or indirectly) of stock in such
corporation and any ownership interest
in such entity is readily tradeable on an
established securities market or otherwise.
For this purpose, such stock constitutes
a substantial portion of the assets of an
entity if the total fair market value of the
stock is equal to or exceeds one third of
the total gross fair market value of all of
the assets of the entity. For this purpose,
gross fair market valuemeans the value
of the assets of the entity, determined
October 6, 20037072003-40 I.R.B.

without regard to any liabilities associ-
ated with such assets. If a corporation is
a member of an affiliated group (which
group is treated as one corporation under
A–46 of this section), the requirements of
paragraph (a)(2)(i) of this A–6 are not met
if any stock in any member of such group
is readily tradeable on an established se-
curities market or otherwise.
(d) For purposes of paragraph (a)(2)(i)
of this A–6, the termstockdoes not in-
clude stock described insection 1504(a)(4)
if the payment does not adversely affect the
redemption and liquidation rights of any
shareholder owning such stock.
(e) For purposes of paragraph (a)(2)(i)
of this A–6, stock is treated as readily
tradeable if it is regularly quoted by bro-
kers or dealers making a market in such
stock.
(f) For purposes of paragraph (a)(2)(i)
of this A–6, the termestablished securi-
ties marketmeans an established securities
market as defined in §1.897–1(m).
(g) The following examples illustrate
the application of this exemption:
Example 1. A small business corporation (within
the meaning of paragraph (a)(1) of this A
–6) oper-
ates two businesses. The corporation sells the assets
of one of its businesses, and these assets represent a
substantial portion of the assets of th
e corporation.
Because of the sale, the corporation terminates its
employment relationship with persons employed in
the business the assets of which are s
old. Several of
these employees are highly-compensated individuals
to whom the owners of the corporation make sever-
ance payments in excess of 3 time
s each employee’s
base amount. Since the corporation is a small busi-
ness corporation immediately before the change in
ownership or control, the pay
ments are not parachute
payments.
Example 2. Assume the same facts as inExample
1, except that the corporat
ion is not a small business
corporation within the meaning of paragraph (a)(1)
of this A–6. If no stock in the corporation is readily
tradeable on an establis
hed securities market (or oth-
erwise) immediately before the change in ownership
or control and the shareholder approval requirements
described in Q/A–7 of th
is section are met, the pay-
ments are not parachute payments.
Example 3. Stock of Corporation S is owned by
Corporation P, stock
in which is readily tradeable on
an established securities market. The Corporation S
stock equals or exceeds one third of the total gross
fair market value of
the assets of Corporation P, and
thus, represents a substantial portion of the assets of
Corporation P. Corporation S makes severance pay-
ments to several
of its highly-compensated individ-
uals that are parachute payments under section 280G
and Q/A–2 of this section. Because stock in Corpora-
tion P is readil
y tradeable on an established securities
market, the payments are not exempt from the defini-
tion ofparachute paymentsunder this A–6.
Example 4. A is a corporation described in sec-
tion 501(c)(3), and accordingly, its net earnings are
prohibited from inuring to the benefit of any private
shareholder or individual. A transfers substantially
all of its assets to another corporation resulting in a
change in ownership or control. Contingent on the
change in ownership or control, A makes a payment
that, but for the potential application of the exemption
described in A–5(a)(4), would constitute aparachute
payment. However, one or more aspects of the trans-
action that constitutes the change in ownership or
control causes A to fail to be described in section
501(c)(3). Accordingly, A fails to meet the defini-
tion of atax-exempt organizationboth immediately
before and immediately after the change in owner-
ship or control, as required by this A–6. As a result,
the payment made by A that was contingent on the
change in ownership or control is not exempt from
the definition ofparachute paymentunder this A–6.
Example 5. B is a corporation described in sec-
tion 501(c)(15). B does not meet the definition of a
tax-exempt organizationbecause section 501(c)(15)
does not expressly prohibit inurement of B’s net earn-
ings to the benefit of any private shareholder or i
ndi-
vidual. Accordingly, if B has a change in ownership
or control and makes a payment that would otherwise
meet the definition of aparachute paymen
t, such pay-
ment is not exempt from the definition of the term
parachute paymentfor purposes of this A–6.
Q–7: How are the shareholder approval
requirements referred to in paragraph
(a)(2)(ii) of Q/A–6 of this section met?
A–7: (a)General rule. The shareholder
approval requirements referred to in para-
graph (a)(2)(ii) of Q/A–6 of this section are
met with respect to any payment if —
(1) Such payment is approved by more
than 75 percent of the voting power of all
outstanding stock of the corporation enti-
tled to vote (as described in this A–7) im-
mediately before thechange in ownership
or control; and
(2) Before the vote, there was adequate
disclosure to all persons entitled to vote (as
described in this A–7) of all material facts
concerning all material payments which
(but for Q/A–6 of this section) would be
parachute payments with respect to a dis-
qualified individual.
(b)Voting requirements—(1)General
rule. The vote described in paragraph
(a)(1) of this A–7 must determine the right
of the disqualified individual to receive the
payment, or, in the case of a payment made
before the vote, the right of the disquali-
fied individual to retain the payment. Ex-
cept as otherwise provided in this A–7, the
normal voting rules of the corporation are
applicable. Thus, for example, an option-
holder is generally not permitted to vote
for purposes of this A–7. For purposes
of this A–7, the vote can be on less than
the full amount of the payment(s) to be
made. Shareholder approval can be a sin-
gle vote on all payments to any one dis-
qualified individual, or on all payments to
more than one disqualified individual. The
total payment(s) submitted for shareholder
approval, however, must be separately ap-
proved by the shareholders. The require-
ments of this paragraph (b)(1) are not satis-
fied if approval of the change in ownership
or control is contingent, or otherwise con-
ditioned, on the approval of any payment
to a disqualified individual that would be
a parachute payment but for Q/A–6 of this
section.
(2)Special rule. A vote to approve the
payment does not fail to be a vote of the
outstanding stock of the corporation enti-
tled to vote immediately before the change
in ownership or control merely because the
determination of the shareholders entitled
to vote on the payment is based on the
shareholders of record as of any day within
the six-month period immediately prior to
and ending on date of the change in own-
ership or control, provided the disclosure
requirements described in paragraph (c) of
this A–7 are met.
(3)Entity shareholder. (i) Approval of
a payment by any shareholder that is not
an individual (an entity shareholder) gen-
erally must be made by the person autho-
rized by the entity shareholder to approve
the payment. See paragraph (b)(4) of this
A–7 if the person so authorized by the en-
tity shareholder is a disqualified individual
who would receive a parachute payment if
the shareholder approval requirements of
this A–7 are not met.
(ii) However, if a substantial portion of
the assets of an entity shareholder consists
(directly or indirectly) of stock in the cor-
poration undergoing the change in owner-
ship or control, approval of the payment by
that entity shareholder must be made by a
separate vote of the persons who hold, im-
mediately before the change in ownership
or control, more than 75 percent of the vot-
ing power of the entity shareholder entitled
to vote. The preceding sentence does not
apply if the value of the stock of the corpo-
ration owned, directly or indirectly, by or
for the entity shareholder does not exceed
1 percent of the total value of the outstand-
ing stock of the corporation undergoing a
change in ownership or control. Where
approval of a payment by an entity share-
holder must be made by a separate vote of
2003-40 I.R.B.708October 6, 2003

the owners of the entity shareholder, the
normal voting rights of the entity share-
holder determine which owners shall vote.
For purposes of this (b)(3)(ii), stock repre-
sents a substantial portion of the assets of
an entity shareholder if the total fair mar-
ket value of the stock held by the entity
shareholder in the corporation undergoing
the change in ownership or control is equal
to or exceeds one third of the total gross
fair market value of all of the assets of the
entity shareholder. For this purpose,gross
fair market valuemeans the value of the
assets of the entity, determined without re-
gard to any liabilities associated with such
assets.
(4)Disqualified individuals and attri-
bution of stock ownership. In determining
the persons entitled to vote referred to
in paragraph (a)(1) or (b)(3) of this A–7,
stock that would otherwise be entitled to
vote is not counted as outstanding stock
and is not considered in determining
whether the more than 75 percent vote has
been obtained under this A–7 if the stock
is actually owned or constructively owned
under section 318(a) by or for a disqual-
ified individual who receives (or is to
receive) payments that would be parachute
payments if the shareholder approval re-
quirements described in paragraph (a) of
this A–7 are not met. Likewise, stock is
not counted as outstanding stock if the
owner is considered under section 318(a)
to own any part of the stock owned di-
rectly or indirectly by or for a disqualified
individual described in the preceding
sentence. In addition, if the person au-
thorized to vote the stock of an entity
shareholder is a disqualified individual
who would receive a parachute payment
if the shareholder approval requirements
described in this A–7 are not met, such
person is not permitted to vote such shares,
but the entity shareholder is permitted to
appoint an equity interest holder in the
entity shareholder, or in the case of a trust
another person eligible to vote on behalf
of the trust, to vote the otherwise eligible
shares. However, if all persons who hold
voting power in the corporation undergo-
ing the change in ownership or control are
disqualified individuals or related persons
described in this paragraph (b)(4), then
such stock is counted as outstanding stock
and votes by such persons are considered
in determining whether the more than 75
percent vote has been obtained.
(c)Adequate disclosure.Tobeade-
quate disclosure for purposes of paragraph
(a)(2) of this A–7, disclosure must be full
and truthful disclosure of the material facts
and such additional information as is nec-
essary to make the disclosure not materi-
ally misleading at the time the disclosure
is made. Disclosure of such information
must be made to every shareholder of the
corporation entitled to vote under this A–7.
For each disqualified individual, material
facts that must be disclosed include, but
are not limited to, the event triggering the
payment or payments, the total amount of
the payments that would be parachute pay-
ments if the shareholder approval require-
ments described in paragraph (a) of this
A–7 are not met, and a brief description
of each payment (e.g., accelerated vesting
of options, bonus, or salary). An omitted
fact is considered a material fact if there
is a substantial likelihood that a reasonable
shareholder would consider it important.
(d)Corporation without sharehold-
ers. If a corporation does not have
shareholders, the exemption described
inQ/A–6(a)(2)ofthissectionandthe
shareholder approval requirements de-
scribed in this A–7 do not apply. Solely
for purposes of this paragraph (d), a share-
holder does not include a member in an
association, joint stock company, or insur-
ance company.
(e)Examples. The following examples
illustrate the application of this A–7:
Example 1. Corporation S has two shareholders
— Corporation P, which owns
76 percent of the stock
of Corporation S, and A, a disqualified individual
who would receive a parachute payment if the share-
holder approval require
ments of this A–7 are not met.
No stock of Corporation P or S is readily tradeable on
an established securities market (or otherwise). The
value of the stock of C
orporation S equals or exceeds
one third of the gross fair market value of the assets of
Corporation P, and thus, represents a substantial por-
tion of the assets of
Corporation P. All of the stock
of Corporation S is sold to Corporation M. Contin-
gent on the change in ownership of Corporation S,
severance payme
nts are made to certain officers of
Corporation S in excess of 3 times each officer’s base
amount. If the payments are approved by a separate
vote of the pers
ons who hold, immediately before the
sale, more than 75 percent of the voting power of the
outstanding stock entitled to vote of Corporation P
and the discl
osure rules of paragraph (a)(2) of this
A–7 are complied with, the shareholder approval re-
quirements of this A–7 are met, and the payments are
exempt fro
m the definition ofparachute paymentpur-
suant to A–6 of this section.
Example 2. (i) Stock of Corporation X, none of
which is tr
aded on an established market, is acquired
by Corporation Y. In the voting ballot concerning the
sale, the Corporation X shareholders are asked to vote
either “yes” on the sale and “yes” to paying parachute
payments to A, a disqualified individual with respect
to Corporation A, or “no” on the sale and “no” to
paying parachute payments to A.
(ii) Because the approval of the change in own-
ership or control is conditioned on the approval of
the payments to A, the shareholder approval require-
ments of this A–7 are not satisfied. If the payments
are made to A, the payments are not exempt from the
definition ofparachute paymentpursuant to Q/A–6
of this section.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2, except that the acquisition agreement
between Corporation X and Corporation Y states
that the acquisition is approved only if there are no
parachute payments made to A. If the shareholder ap-
proval and the disclosure requirements described in
this A–7 are met, the payments will not be parachute
payments. Alternatively, if the shareholders do not
approve the payments, the payments can not be made
(or retained). Thus, the transaction is not conditioned
on the approval of the parachute payments. If the
payments are made and the requirements of this A–7
are met, the payments are exempt from the definition
ofparachute paymentpursuant to Q/A–6 of this
section.
Example 3. Corporation M is wholly owned by
Partnership P. No interest in either M or P is read-
ily tradeable on an established securities
market (or
otherwise). The value of the stock of Corporation M
equals or exceeds one third of the gross fair market
value of the assets of Partnership P, a
nd thus, repre-
sents a substantial portion of the assets of Partnership
P. Corporation M undergoes a change in ownership
or control. Partnership P has one ge
neral partner and
200 limited partners. The general partner is not a dis-
qualified individual. None of the limited partners are
entitled to vote on issues involv
ing the management
of the partnership investments. If the payments that
would be parachute payments if the shareholder ap-
proval requirements of this
A–7 are not met are ap-
proved by the general partner and the disclosure rules
of paragraph (a)(2) of this A–7 are complied with,
the shareholder approval
requirements of this A–7 are
met, and the payments are exempt from the definition
ofparachute paymentpursuant to A–6 of this section.
Example 4. Corporation
A has several sharehold-
ers including X and Y, who are disqualified individu-
als with respect to Corporation A and would receive
parachute payments if
the shareholder approval re-
quirements of this A–7 are not met. No stock of
Corporation A is readily tradeable on an established
securities market (
or otherwise). Corporation A un-
dergoes a change in ownership or control. Contin-
gent on the change in ownership or control, severance
payments are paya
ble to X and Y that are in excess
of 3 times each individual’s base amount. To deter-
mine whether the shareholder approval requirements
of paragraph (a
)(1) of this A–7 are satisfied regarding
thepaymentstoXandY,thestockofXandYisnot
considered outstanding, and X and Y are not entitled
to vote.
Example 5. Assume the same facts as inExample
4, except that after adequate disclosure of all material
facts (withi
n the meaning of paragraph (a)(2) of this
A–7) to all shareholders entitled to vote, 60 percent of
the shareholders who are entitled to vote approve the
payments t
o X and Y. Because more than 75 percent
October 6, 20037092003-40 I.R.B.

of the shareholders holding outstanding stock who
were entitled to vote did not approve the payments
to X and Y, the payments cannot be made.
Example 6. Assume the same facts as inExam-
ple 4except that disclosure of all the material facts
(within the meaning of paragraph (a)(2) of this A–7)
regarding the payments to X and Y is made to two of
Corporation A’s shareholders, who collectively own
80 percent of Corporation A’s stock entitled to vote
and approve the payment. Both shareholders approve
the payments. Assume further that no adequate dis-
closure of the material facts regarding the payments
to X and Y is made to other Corporation A share-
holders who are entitled to vote within the meaning
of this A–7. Notwithstanding that 80 percent of the
shareholders entitled to vote approve the payments,
because disclosure regarding the payments to X and
Y is not made to all of Corporation A’s sharehold-
ers who were entitled to vote, the disclosure require-
ments of paragraph (a)(2) of this A–7 are not met,
and the payments are not exempt from the definition
ofparachute paymentpursuant to Q/A–6.
Example 7. Corporation C has three sharehold-
ers – Partnership, which owns 20 percent of the stoc
k
of Corporation C; A, an individual who owns 60 per-
cent of the stock of Corporation C; and B, an individ-
ual who owns 20 percent of Corporation C. Sto
ck of
Corporation C does not represent a substantial por-
tion of the assets of Partnership. No interest in either
Partnership or Corporation C is readily t
radeable on
an established securities market (or otherwise). P, a
one-third partner in Partnership, is a disqualified indi-
vidual with respect to Corporation
C. Corporation C
undergoes a change in ownership or control. Contin-
gent on the change, a severance payment is payable
to P in excess of 3 times P’s base am
ount. To de-
termine the persons who are entitled to vote referred
to in paragraph (a)(1) of this A–7, one-third of the
stock held by Partnership is no
t considered outstand-
ing stock. If P is the person authorized by Partnership
to approve the payment, none of the shares of Part-
nership are considered out
standing stock. However,
Partnership is permitted to appoint an equity interest
holder in Partnership (who is not a disqualified in-
dividual who would recei
ve a parachute payment if
the requirements of this A–7 are not met), to vote the
two-thirds of the shares held by Partnership that are
otherwise entitled t
obevoted.
Example 8. X, Y, and Z are all employees and
disqualified individuals with respect to Corporation
E.NostockinCorpora
tion E is readily tradeable on
an established securities market (or otherwise). Each
individual has a base amount of $100,000. Corpo-
ration E undergoes
a change in ownership or con-
trol. Contingent on the change, a severance payment
of $400,000 is payable to X; $600,000 is payable to
Y; and $1,000,0
00 is payable to Z. Corporation E
provides each Corporation E shareholder entitled to
vote (as determined under this A–7) with a ballot list-
ing and descri
bing the payments of $400,000 to X;
$600,000 to Y; and $1,000,000 to Z and the trigger-
ing event that generated the payments. Next to each
name and cor
responding amount on the ballot, Cor-
poration E requests approval (with a “yes” and “no”
box) of each total payment to be made to each indi-
vidual and
states that if the payment is not approved
the payment will not be made. Adequate disclosure,
within the meaning of this A–7 is made to each share-
holder e
ntitled to vote under this A–7. More than 75
percent of the Corporation Eshareholders who are en-
titled to vote under paragraph (a)(1) of this A–7 ap-
prove each payment to each individual. The share-
holder approval requirements of this A–7 are met,
and the payments are exempt from the definition of
parachute paymentpursuant to A–6 of this section.
Example 9. Assume the same facts as inExam-
ple 8except that the ballot does not request approval
of each total payment to each individual separately.
Instead, the ballot states that $2,000,000 in payments
will be made to X, Y, and Z and requests approval
of the $2,000,000 payments. Assuming the trigger-
ing event and amount of the payments to X, Y, and Z
are separately described to the shareholders entitled
to vote under this A–7, the shareholder approval re-
quirements of paragraph (a)(1) of this A–7 are met,
and the payments are exempt from the definition of
parachute paymentpursuant to A–6 of this section.
Example 10.B,anemployeeofCorporationX,is
a disqualified individual with respect to Corporation
X. Stock of Corporation X is not readily tradeable
on an established securities market (or otherwise).
Corporation X undergoes a change in ownership or
control. B’s base amount is $205,000. Under B’s
employment agreement with Corporation X, in the
event of a change in ownership or control, B’s stock
options will vest and B will receive severan
ce and
bonus payments. Contingent on the change in own-
ership or control, B’s stock options with a fair mar-
ket value of $500,000 immediately vest, $
200,000 of
which is contingent on the change, and B will receive
a $200,000 bonus payment and a $400,000 severance
payment. Corporation X distribute
s a ballot to every
shareholder of Corporation X who immediately be-
fore the change is entitled to vote as described in this
A–7. The ballot contains adequat
edisclosureofall
material facts and lists the following payments to be
made to B: the contingent payment of $200,000 at-
tributable to options, a $200,
000 bonus payment, and
a $400,000 severance payment. The ballot requests
shareholder approval of the $200,000 bonus payment
to B and states that whether
or not the $200,000 bonus
payment is approved, B will receive $200,000 attrib-
utable to options and a $400,000 severance payment.
More than 75 percent of th
e shareholders entitled to
vote as described by this A–7 approve the $200,000
bonus payment to B. The shareholder approval re-
quirements of this A–
7 are met, and the $200,000
payment is exempt from the definition ofparachute
paymentpursuant to A–6 of this section.
Q–8: Which payments under a quali-
fied plan are exempt from the definition of
parachute payment?
A–8: The termparachute paymentdoes
not include any payment to or from —
(a) A plan described in section 401(a)
which includes a trust exempt from tax un-
der section 501(a);
(b) An annuity plan described in section
403(a);
(c) A simplified employee pension (as
definedinsection408(k));or
(d) A simple retirement account (as de-
fined in section 408(p)).
Q–9: Which payments of reasonable
compensation are exempt from the defini-
tion ofparachute payment?
A–9: Except in the case of securities
violation parachute payments, the term
parachute paymentdoes not include any
payment (or portion thereof) which the
taxpayer establishes by clear and convinc-
ing evidence is reasonable compensation
for personal services to be rendered by
the disqualified individual on or after the
date of the change in ownership or con-
trol. See Q/A–37 of this section for the
definition and treatment of securities vio-
lation parachute payments. See Q/A–40
through Q/A–44 of this section for rules
on determining amounts of reasonable
compensation.
Payor of Parachute Payments
Q–10: Who may be the payor of
parachute payments?
A–10: Parachute payments within the
meaning of Q/A–2 of this section may be
paid, directly or indirectly, by—
(i) The corporation referred to in para-
graph (a)(3) of Q/A–2 of this section;
(ii) A person acquiring ownership or ef-
fective control of that corporation or own-
ership of a substantial portion of that cor-
poration’s assets; or
(iii) Any person whose relationship to
such corporation or other person is such
as to require attribution of stock ownership
between the parties under section 318(a).
Payments in the Nature of Compensation
Q–11: What types of payments are in
the nature of compensation?
A–11: (a)General rule. For purposes
of this section, all payments — in what-
ever form — are payments in the nature
of compensation if they arise out of an
employment relationship or are associated
with the performance of services. For this
purpose, the performance of services in-
cludes holding oneself out as available to
perform services and refraining from per-
forming services (such as under a covenant
not to compete or similar arrangement).
Payments in the nature of compensation
include (but are notlimited to) wages and
salary, bonuses, severance pay, fringe ben-
efits, life insurance, pension benefits, and
other deferred compensation (including
any amount characterized by the parties
as interest thereon). A payment in the
2003-40 I.R.B.710October 6, 2003

nature of compensation also includes cash
when paid, the value of the right to receive
cash (including the value of accelerated
vesting under Q/A–24(c)), or a transfer
of property. However, payments in the
nature of compensation do not include
attorney’s fees or court costs paid or in-
curred in connection with the payment
of any amount described in paragraphs
(a)(1), (2), and (3) of Q/A–2 of this section
or a reasonable rate of interest accrued on
any amount during the period the parties
contest whether a payment will be made.
(b)When payment is considered to be
made. Except as otherwise provided in
A–11 through Q/A–13 of this section, a
payment in the nature of compensation is
considered made (and is subject to the ex-
cise tax under section 4999) in the taxable
year in which it is includible in the dis-
qualified individual’s gross income or, in
the case of fringe benefits and other bene-
fits excludible from income, in the taxable
year the benefits are received.
(c)Prepayment rule. Notwithstanding
the general rule described in paragraph (b)
of this A–11, a disqualified individual may,
in the year of the change in ownership or
control, or any later year, prepay the ex-
cise tax under section 4999, provided that
the payor and disqualified individual treat
the payment of the excise tax consistently
and the payor satisfies its obligations under
section 4999(c) in the year of prepayment.
The prepayment of the excise tax for pur-
poses of section 4999 must be based on the
present value of the excise tax that would
be due in the year the excess parachute
payment would actually be paid (calcu-
lated using the discount rate equal to 120
percent of the applicable federal rate (de-
termined under section 1274(d) and regu-
lations thereunder; see Q/A–32)). For pur-
poses of projecting the future value of a
payment that provides for interest to be
credited at a variable interest rate, it is
permissible to make a reasonable assump-
tion regarding this variable rate. A dis-
qualified individual is not required to ad-
just the excise tax paid under this para-
graph (c) merely because the interest rates
in the future are not the same as the rate
used for purposes of projecting the future
value of the payment. However, a disqual-
ified individual may not apply this para-
graph (c) of this A–11 to a payment to be
made in cash if the present value of the
payment would be considered not reason-
ably ascertainable under section 3121(v)
and §31.3121(v)(2)–1(e)(4) of this Chap-
ter or to a payment related to health bene-
fits or coverage. The Commissioner may
provide additional guidance regarding the
applicability of this paragraph (c) to cer-
tain payments in published guidance of
general applicability under §601.601(d)(2)
of this Chapter.
(d)Transfers of property. Transfers
of property are treated as payments for
purposes of this A–11. See Q/A–12 of
this section for rules on determining when
such payments are considered made and
the amount of such payments. See Q/A–13
of this section for special rules on transfers
of stock options.
(e) The following example illustrates
the principles of this A–11:
Example. D is a disqualified individual with
respect to Corporation X. D has a base amount of
$100,000 and is entitled to receive two parachute
payments, one of $200,000 and the other of $400,000.
A change in ownership or control of Corporat
ion X
occurs on May 1, 2005, and the $200,000 payment
is made to D at the time of the change in ownership
or control. The $400,000 payment is to be m
ade on
October 1, 2010. Corporation X and D agree that
D will prepay the excise tax and X will satisfy its
obligations under section 4999(c)
with respect to the
$400,000 payment. Using discount rate determined
under Q/A–32, Corporation X and D determine
that the present value of the $400,
000 payment is
$300,000 on the date of the change in ownership or
control. The portions of the base amount allocated
to these payments are $40,000
(($200,000/$500,000)
x $100,000) and $60,000 (($300,000/$500,000 x
$100,000), respectively. Thus, the amount of the first
excess parachute payment i
s $160,000 ($200,000 -
$40,000) and that of the second excess parachute
payment is $340,000 ($400,000 - $60,000). The
excise tax on the $400,00
0 payment is $68,000
($340,000 x 20 percent). Assume the present value
(calculated in accordancewith paragraph (c) of this
A–11) of $68,000 is $5
0,000. To prepay the excise
tax due on the $400,000 payment, Corporation X
must satisfy its obligations under section 4999 with
respect to the $50,0
00, in addition to the $32,000
withholding required with respect to the $200,000
payment.
Q–12: If a property transfer to a dis-
qualified individual is a payment in the na-
ture of compensation, when is the payment
considered made (or to be made), and how
is the amount of the payment determined?
A–12: (a) Except as provided in this
A–12 and Q/A–13 of this section, a trans-
fer of property is considered a payment
made (or to be made) in the taxable year in
which the property transferred is includi-
ble in the gross income of the disquali-
fied individual under section 83 and the
regulations thereunder. Thus, in general,
such a payment is considered made (or to
be made) when the property is transferred
(as defined in §1.83–3(a)) to the disquali-
fied individual and becomes substantially
vested (as defined in §1.83–3(b) and (j)) in
such individual. The amount of the pay-
ment is determined under section 83 and
the regulations thereunder. Thus, in gen-
eral, the amount of the payment is equal to
the excess of the fair market value of the
transferred property (determined without
regard to any lapse restriction, as defined
in §1.83–3(i)) at the time that the prop-
erty becomes substantially vested, over the
amount (if any) paid for the property.
(b) An election made by a disqualified
individual under section 83(b) with respect
to transferred property will not apply for
purposes of this A–12. Thus, even if such
an election is made with respect to a prop-
erty transfer that is a payment in the nature
of compensation, for purposes of this sec-
tion, the payment is generally considered
made (or to be made) when the property
is transferred to and becomes substantially
vested in such individual.
(c) See Q/A–13 of this section for rules
on applying this A–12 to transfers of stock
options.
(d) The following example illustrates
the principles of this A–12:
Example. On January 1, 2006, Corporation M
gives to A, a disqualified indi
vidual, a bonus of 100
shares of Corporation M stock in connection with
the performance of services to Corporation M. Un-
der the terms of the bonus arra
ngement A is obli-
gated to return the Corporation M stock to Corpora-
tion M unless the earnings of Corporation M double
by January 1, 2009, or there
is a change in owner-
ship or control of Corporation M before that date.
A’s rights in the stock are treated as substantially
nonvested (within the m
eaning of §1.83–3(b)) during
that period because A’s rights in the stock are subject
to a substantial risk of forfeiture (within the mean-
ing of §1.83–3(c)) an
d are nontransferable (within
the meaning of §1.83–3(d)). On January 1, 2008, a
change in ownership or control of Corporation M oc-
curs. On that day, th
e fair market value of the Cor-
poration M stock is $250 per share. Because A’s
rights in the Corporation M stock become substan-
tially vested (w
ithin the meaning of §1.83–3(b)) on
that day, the payment is considered made on that day,
and the amount of the payment for purposes of this
section is equa
l to $25,000 (100 x $250). See Q/A–38
through 41 for rules relating to the reduction of the
excess parachute payment by the portion of the pay-
ment which i
s established to be reasonable compen-
sation for personal services actually rendered before
the date of a change in ownership or control.
Q–13: How are transfers of statutory
and nonstatutory stock options treated?
October 6, 20037112003-40 I.R.B.

A–13: (a) For purposes of this section,
an option (including an option to which
section 421 applies) is treated as prop-
erty that is transferred when the option
becomes vested (regardless of whether
the option has a readily ascertainable fair
market value as defined in §1.83–7(b)).
For purposes of this A–13,vestedmeans
substantially vested within the meaning
of §1.83–3(b) and (j) or the right to the
payment is not otherwise subject to a
substantial risk of forfeiture within the
meaning of section 83(c). Thus, for pur-
poses of this section, the vesting of such an
option is treated as a payment in the nature
of compensation. The value of an option
at the time the option vests is determined
under all the facts and circumstances in
the particular case. Factors relevant to
such a determination include, but are not
limited to: the difference between the
option’s exercise price and the value of the
property subject to the option at the time
of vesting; the probability of the value of
such property increasing or decreasing;
and the length of the period during which
the option can be exercised. Thus, an
option is treated as a payment in the nature
of compensation on the date of grant or
vesting, as applicable, without regard to
whether such option has an ascertainable
fair market value. For purposes of this
A–13, valuation may be determined by
any method prescribed by the Commis-
sioner in published guidance of general
applicability under §601.601(d)(2) of this
Chapter.
(b) Any money or other property trans-
ferred to the disqualified individual on the
exercise, or as consideration on the sale or
other disposition, of an option described in
paragraph (a) of this A–13 after the time
such option vests is not treated as a pay-
ment in the nature of compensation to the
disqualified individual under Q/A–11 of
this section. Nonetheless, the amount of
the otherwise allowable deduction under
section 162 or 212 with respect to such
transfer is reduced by the amount of the
payment described in paragraph (a) of this
A–13 treated as an excess parachute pay-
ment.
Q–14: Are payments in the nature of
compensation reducedby consideration
paid by the disqualified individual?
A–14: Yes, to the extent not other-
wise taken into account under Q/A–12 and
Q/A–13 of this section, the amount of any
payment in the nature of compensation is
reduced by the amount of any money or the
fair market value of any property (owned
by the disqualified individual without re-
striction) that is (or will be) transferred by
the disqualified individual in exchange for
the payment. For purposes of the preced-
ing sentence, the fair market value of prop-
erty is determined as of the date the prop-
erty is transferred by the disqualified indi-
vidual.
Disqualified Individuals
Q–15: Who is a disqualified individ-
ual?
A–15: (a) For purposes of this section,
an individual is a disqualified individual
with respect to a corporation if, at any time
during thedisqualified individual determi-
nation period(as defined in Q/A–20 of this
section), the individual is an employee or
independent contractor of the corporation
and is, with respect to the corporation —
(1) A shareholder (but see Q/A–17 of
this section);
(2) An officer (see Q/A–18 of this sec-
tion); or
(3) A highly-compensated individual
(see Q/A–19 of this section).
(b) For purposes of this A–15, a director
is a disqualified individual with respect to
a corporation if, at any time during thedis-
qualified individual determination period,
the director is, with respect to the corpora-
tion, a shareholder (see Q/A–17 of this sec-
tion), an officer (see Q/A–18 of this sec-
tion), or a highly-compensated individual
(see Q/A–19 of this section).
(c) For purposes of this A–15, an indi-
vidual who is an employee or independent
contractor of a corporation other than the
corporation undergoing a change in owner-
ship or control is disregarded for purposes
of determining who is a disqualified indi-
vidual if such individual is employed by
the corporation undergoing the change in
ownership or control only on the last day of
the disqualified individual determination
period. Thus, for example, assume that E
is an employee of Corporation X, that Y is
acquiredbyCorporationX,andthatYun-
dergoes a change in ownership or control.
If E becomes an employee of Y on the date
of the acquisition, in determining the dis-
qualified individuals with respect to Y, E is
disregarded under this paragraph (c).
Q–16: Is a personal service corporation
treated as an individual?
A–16: (a) Yes. For purposes of this sec-
tion, a personal service corporation (as de-
fined in section 269A(b)(1)), or a noncor-
porate entity that would be a personal ser-
vice corporation if it were a corporation, is
treated as an individual.
(b) The following example illustrates
the principles of this A–16:
Example. Corporation N, a personal service cor-
poration (as defined in section 269A(b)(1)), has a sin-
gle individual as its sole shareholder and employee.
Corporation N performs personal services for Corpo-
rationM.ThecompensationpaidtoCorporationNby
Corporation M puts Corporation N within the group
of highly-compensated individuals of Corporation M
as determined under A–19 of this section. Thus, Cor-
poration N is treated as a highly-compensated indi-
vidual with respect to Corporation M.
Q–17: Are all shareholders of a cor-
poration considered shareholders for
purposes of paragraphs (a)(1) and (b) of
Q/A–15 of this section?
A–17: (a) No. Only an individual who
owns stock of a corporation with a fair
market value that exceeds 1 percent of the
fair market value of the outstanding shares
of all classes of the corporation’s stock is
treated as a disqualified individual with re-
spect to the corporation by reason of stock
ownership. An individual who owns a
lesser amount of stock may, however, be a
disqualified individual with respect to the
corporation if such individual is an officer
(see Q/A–18) or highly-compensated in-
dividual (see Q/A–19) with respect to the
corporation.
(b) For purposes of determining the
amount of stock owned by an individual
for purposes of paragraph (a) of this A–17,
the constructive ownership rules of section
318(a) apply. Stock underlying a vested
option is considered owned by an individ-
ual who holds the vested option (and the
stock underlying an unvested option is not
considered owned by an individual who
holds the unvested option). For purposes
of the preceding sentence, however, if
the option is exercisable for stock that
is not substantially vested (as defined by
§§1.83–3(b) and (j)), the stock underlying
the option is not treated as owned by the
individual who holds the option. Solely
for purposes of determining the amount of
stock owned by an individual for purposes
of this A–17, mutual and cooperative cor-
porations are treated as having stock.
2003-40 I.R.B.712October 6, 2003

(c) The following examples illustrates
the principles of this A–17:
Example 1.E,anemployeeofCorporationA,re-
ceived options under Corporation A’s Stock Option
Plan. E’s stock options vest three years after the date
of grant. E is not an officer or highly compensated
individual during the disqualified individual determi-
nation period. E does not own, and is not considered
to own under section 318, any other Corporation A
stock. Two years after the options are granted to E, all
of Corporation A’s stock is acquired by Corporation
B. Under Corporation A’s Stock Option Plan, E’s op-
tions are converted to Corporation B options and the
vesting schedule remainsthe same. Under paragraph
(b) of this A–17, the stock underlying the unvested
options held by E on the date of the change in owner-
ship or control is not considered owned by E. Because
E is not considered to own Corporation A stock with
a fair market value exceeding 1 percent of the total
fair market value of all of the outstanding shares of
all classes of Corporation A and E is not an officer
or highly-compensated individual during the disq
ual-
ified individual determination period, E is not a dis-
qualified individual within the meaning of Q&A–15
of this section with respect to Corporation
A.
Example 2. Assume the same facts as inExample
1, except that Corporation A’s Stock Option Plan pro-
vides that all unvested options will vest i
mmediately
on a change in ownership or control. Under paragraph
(b) of this A–17, the stock underlying the options that
vest on the change in ownership or contro
l is consid-
ered owned by E. If the stock considered owned by
E exceeds 1 percent of the total fair market value of
all of the outstanding shares of al
l classes of Corpo-
ration A stock (including for this purpose, all stock
owned or constructively owned by all shareholders,
provided that no share of stock is
counted more than
once), E is a disqualified individual within the mean-
ing of Q/A–15 of this section with respect to Corpo-
ration A.
Example 3. Assume the same facts as inExample
1except that E received nonstatutory stock options
that are exercisable for st
ock subject to a substantial
risk of forfeiture under section 83. Assume further
that under Corporation A’s Stock Option Plan, the
nonstatutory options wil
l vest on a change in owner-
ship or control. Under paragraph (b) of this A–17, E
is not considered to own the stock underlying the op-
tions that vest on the
change in ownership or control
because the options are exercisable for stock subject
to a substantial risk of forfeiture within the meaning
of section 83. Becau
se E is not considered to own
Corporation A stock with a fair market value exceed-
ing 1 percent of the total fair market value of all of
the outstanding s
hares of all classes of Corporation A
stock and E is not an officer or highly compensated
individual during the disqualified individual determi-
nation period,
E is not a disqualified individual within
the meaning of Q/A–15 of this section with respect to
Corporation A.
Q–18: Who is an officer?
A–18: (a) For purposes of this sec-
tion, whether an individual is an officer
with respect to a corporation is determined
on the basis of all the facts and circum-
stances in the particular case (such as the
source of the individual’s authority, the
term for which the individual is elected or
appointed, and the nature and extent of the
individual’s duties). Any individual who
has the title of officer is presumed to be an
officer unless the facts and circumstances
demonstrate that the individual does not
have the authority of an officer. However,
an individual who does not have the title
of officer may nevertheless be considered
an officer if the facts and circumstances
demonstrate that the individual has the au-
thority of an officer. Generally, the term
officer means an administrative executive
who is in regular and continued service.
The term officer implies continuity of ser-
vice and excludes those employed for a
special and single transaction.
(b) An individual who is an officer with
respect to any member of an affiliated
group that is treated as one corporation
pursuant to Q/A–46 of this section is
treated as an officer of such one corpora-
tion.
(c)Nomorethan50employees(or,if
less, the greater of 3 employees, or 10 per-
cent of the employees (rounded up to the
nearest integer)) of the corporation (in the
case of an affiliated group treated as one
corporation, each member of the affiliated
group) are treated as disqualified individ-
uals with respect to a corporation by rea-
son of being an officer of the corporation.
For purposes of the preceding sentence, the
number of employees of the corporation is
the greatest number of employees the cor-
poration has during the disqualified indi-
vidual determination period (as defined in
Q/A–20 of this section). If the number
of officers of the corporation exceeds the
number of employees who may be treated
as officers under the first sentence of this
paragraph (c), then the employees who are
treated as officers for purposes of this sec-
tion are the highest paid 50 employees
(or, if less, the greater of 3 employees, or
10 percent of the employees (rounded up
to the nearest integer)) of the corporation
when ranked on the basis of compensation
(as determined under Q/A–21 of this sec-
tion) paid during the disqualified individ-
ual determination period.
(d) In determining the total number
of employees of a corporation for pur-
poses of this A–18, employees are not
counted if they normally work less than
17
1
/2hours per week (as defined in section
414(q)(5)(B) and the regulations there-
under) or if they normally work during
not more than 6 months during any year
(as defined in section 414(q)(5)(C) and
the regulations thereunder). However, an
employee who is not counted for purposes
of the preceding sentence may still be an
officer.
Q–19: Who is a highly-compensated
individual?
A–19: (a) For purposes of this section,
a highly-compensated individual with re-
spect to a corporation is any individual
who is, or would be if the individual were
an employee, a member of the group con-
sisting of the lesser of the highest paid 1
percent of the employees of the corpora-
tion (rounded up to the nearest integer), or
the highest paid 250 employees of the cor-
poration, when ranked on the basis of com-
pensation (as determined under Q/A–21
of this section) earned during the disqual-
ified individual determination period (as
defined in Q/A–20 of this section). For
purposes of the preceding sentence, the
number of employees of the corporation is
the greatest number of employees the cor-
poration has during the disqualified indi-
vidual determination period (as defined in
Q/A–20 of this section). However, no in-
dividual whose annualized compensation
during the disqualified individual determi-
nation period is less than the amount de-
scribed in section 414(q)(1)(B)(i) for the
year in which the change in ownership or
control occurs will be treated as a highly-
compensated individual.
(b) An individual who is not an em-
ployee of the corporation is not treated
as a highly-compensated individual with
respect to the corporation on account of
compensation received for performing
services (such as brokerage, legal, or in-
vestment banking services) in connection
with a change in ownership or control
of the corporation, if the services are
performed in the ordinary course of the
individual’s trade or business and the in-
dividual performs similar services for a
significant number of clients unrelated to
the corporation.
(c) The total number of employees of
a corporation for purposes of this A–19 is
determined in accordance with Q/A–18(d)
of this section. However, an employee who
is not counted for purposes of the preced-
ing sentence may still be a highly-compen-
sated individual.
Q–20: What is the disqualified individ-
ual determination period?
October 6, 20037132003-40 I.R.B.

A–20: The disqualified individual de-
termination period is the twelve-month pe-
riod prior to and ending on the date of the
change in ownership or control of the cor-
poration.
Q–21: How iscompensationdefined
for purposes of determining who is a dis-
qualified individual?
A–21: (a) For purposes of determining
who is a disqualified individual, the term
compensationmeans the compensation
which was earned by the individual for ser-
vices performed for the corporation with
respect to which the change in ownership
or control occurs (changed corporation),
forapredecessorentity,orforarelated
entity. Such compensation is determined
without regard to sections 125, 132(f)(4),
402(e)(3), and 402(h)(1)(B). Thus, for
example, compensation includes elective
or salary reduction contributions to a cafe-
teria plan, cash or deferred arrangement
or tax-sheltered annuity, and amounts
credited under a nonqualified deferred
compensation plan.
(b) For purposes of this A–21, a prede-
cessor entity is any entity which, as a re-
sult of a merger, consolidation, purchase or
acquisition of property or stock, corporate
separation, or other similar business trans-
action transfers some or all of its employ-
ees to the changed corporation or to a re-
latedentityortoapredecessorentityofthe
changed corporation. The termrelated en-
tityincludes—
(1) All members of a controlled group
of corporations (as defined in section
414(b)) that includes the changed corpo-
ration or a predecessor entity;
(2) All trades or businesses (whether or
not incorporated) that are under common
control (as defined in section 414(c)) if
such group includes the changed corpora-
tion or a predecessor entity;
(3) All members of an affiliated service
group (as defined in section 414(m)) that
includes the changed corporation or a pre-
decessor entity; and
(4) Any other entities required to be
aggregated with the changed corporation
or a predecessor entity pursuant to sec-
tion 414(o) and the regulations thereunder
(except leasing organizations as defined in
section 414(n)).
(c) For purposes of Q/A–18 and
Q/A–19 of this section, compensation
that was contingent on the change in own-
ership or control and that was payable in
the year of the change is not treated as
compensation.
Contingent on Change in Ownership or
Control
Q–22: When is a payment contingent
on a change in ownership or control?
A–22: (a) In general, a payment is
treated as contingent on a change in own-
ership or control if the payment would not,
in fact, have been made had no change
in ownership or control occurred, even
if the payment is also conditioned on the
occurrence of another event. A payment
generally is treated as one which would
not, in fact, have been made in the absence
of a change in ownership or control unless
it is substantially certain, at the time of the
change, that the payment would have been
made whether or not the change occurred.
(But see Q/A–23 of this section regarding
payments under agreements entered into
after a change in ownership or control.)
A payment that becomes vested as a re-
sult of a change in ownership or control
is not treated as a payment which was
substantially certain to have been made
whether or not the change occurred. For
purposes of this A–22,vestedmeans the
payment is substantially vested within the
meaning of §1.83–3(b) and (j) or the right
to the payment is not otherwise subject to
a substantial risk of forfeiture as defined
by section 83(c).
(b)(1) For purposes of paragraph (a),
a payment is treated as contingent on a
change in ownership or control if —
(i) The payment is contingent on an
event that is closely associated with a
change in ownership or control;
(ii) A change in ownership or control
actually occurs; and
(iii) The event is materially related to
the change in ownership or control.
(2) For purposes of paragraph (b)(1)(i)
of this A–22, a payment is treated as con-
tingent on an event that is closely associ-
ated with a change in ownership or con-
trol unless it is substantially certain, at the
time of the event, that the payment would
have been made whether or not the event
occurred. An event is considered closely
associated with a change in ownership or
control if the event is of a type often pre-
liminary or subsequent to, or otherwise
closely associated with, a change in own-
ership or control. For example, the fol-
lowing events are considered closely asso-
ciated with a change in the ownership or
control of a corporation: The onset of a
tender offer with respect to the corpora-
tion; a substantial increase in the market
price of the corporation’s stock that occurs
within a short period (but only if such in-
crease occurs prior to a change in owner-
ship or control); the cessation of the list-
ing of the corporation’s stock on an estab-
lished securities market; the acquisition of
more than 5 percent of the corporation’s
stock by a person (or more than one per-
son acting as a group) not in control of
the corporation; the voluntary or involun-
tary termination of the disqualified indi-
vidual’s employment; a significant reduc-
tion in the disqualified individual’s job re-
sponsibilities; and a change in ownership
or control as defined in the disqualified in-
dividual’s employment agreement (or else-
where) that does not meet the definition
of a change in ownership or control de-
scribed in Q/A–27, 28, or 29 of this sec-
tion. Whether other events are treated as
closely associated with a change in owner-
ship or control is based on all the facts and
circumstances of the particular case.
(3) For purposes of determining
whether an event (as described in para-
graph (b)(2) of this A–22) is materially
related to a change in ownership or con-
trol, the event is presumed to be materially
related to a change in ownership or control
if such event occurswithin the period
beginning one year before and ending
one year after the date of the change in
ownership or control. If such event occurs
outside of the period beginning one year
before and ending one year after the date
of change in ownership or control, the
event is presumed not materially related
to the change in ownership or control. A
payment does not fail to be contingent on
a change in ownership or control merely
because it is also contingent on the occur-
rence of a second event (without regard to
whether the second event is closely associ-
ated with or materially related to a change
in ownership or control). Similarly, a
payment that is treated as contingent on a
change in ownership or control because it
is contingent on a closely associated event
does not fail to be treated as contingent on
a change in ownership or control merely
2003-40 I.R.B.714October 6, 2003

because it is also contingent on the occur-
rence of a second event (without regard
to whether the second event is closely
associated with or materially related to a
change in ownership or control).
(c) A payment that would in fact have
been made had no change in ownership
or control occurred is treated as contin-
gent on a change in ownership or control
if the change in ownership or control (or
the occurrence of an event that is closely
associated with and materially related to
a change in ownership or control within
the meaning of paragraph (b)(1) of this
A–22), accelerates the time at which the
payment is made. Thus, for example, if a
change in ownership or control accelerates
the time of payment of deferred compen-
sation that is vested without regard to the
change in ownership or control, the pay-
ment may be treated as contingent on the
change. See Q/A–24 of this section re-
garding the portion of a payment that is
so treated. See also Q/A–8 of this section
regarding the exemption for certain pay-
ments under qualified plans and Q/A–40
of this section regarding the treatment of
a payment as reasonable compensation.
(d) A payment is treated as contingent
on a change in ownership or control even if
the employment or independent contractor
relationship of the disqualified individual
is not terminated (voluntarily or involun-
tarily) as a result of the change.
(e) The following examples illustrate
the principles of this A–22:
Example 1. A corporation grants a stock appreci-
ation right to a disqualifie
d individual, A, more than
one year before a change in ownership or control. Af-
ter the stock appreciation right vests and becomes ex-
ercisable, a change in o
wnership or control of the cor-
poration occurs, and A exercises the right. Assuming
neither the granting nor the vesting of the stock appre-
ciation right is conti
ngent on a change in ownership
or control, the payment made on exercise is not con-
tingent on the change in ownership or control.
Example 2. A contract
between a corporation
and B, a disqualified individual, provides that a pay-
ment will be made to B if the corporation undergoes
a change in ownersh
ip or control and B’s employ-
ment with the corporation is terminated at any time
over the succeeding 5 years. Eighteen months later,
a change in the ow
nership of the corporation occurs.
Two years after the change in ownership, B’s employ-
ment is terminated and the payment is made to B. Be-
cause it was no
t substantially certain that the corpora-
tion would have made the payment to B on B’s termi-
nation of employment if there had not been a change
in ownership
, the payment is treated as contingent on
the change in ownership under paragraph (a) of this
A–22. This is true even though B’s termination of
employmen
t is presumed not to be, and in fact may
not be, materially related to the change in ownership
or control.
Example 3. A contract between a corporation and
C, a disqualified individual, provides that a payment
will be made to C if C’s employment is terminated
at any time over the succeeding 3 years (without re-
gard to whether or not there is a change in ownership
or control). Eighteen months after the contract is en-
tered into, a change in the ownership or control of the
corporation occurs. Six months after the change in
ownership or control, C’semployment is terminated
and the payment is made to C. Termination of em-
ployment is considered an event closely associated
with a change in ownership or control. Because the
termination occurred within one year after the date
of the change in ownership or control, the termina-
tion of C’s employment is presumed to be materially
related to the change in ownership or control under
paragraph (b)(3) of this A–22. If this presumption is
not successfully rebutted, the payment will be treated
as contingent on the change in ownership or control
under paragraph (b) of this A–22.
Example 4. A contract between a corporation and
a disqualified individual, D, provides that a paym
ent
will be made to D upon the onset of a tender offer
for shares of the corporation’s stock. A tender offer
is made on December 1, 2008, and the payment i
s
made to D. Although the tender offer is unsuccessful,
it leads to a negotiated merger with another entity on
June 1, 2009, which results in a change in t
he own-
ership or control of the corporation. It was not sub-
stantially certain, at the time of the onset of the tender
offer, that the payment would have b
een made had no
tender offer taken place. The onset of a tender offer is
considered closely associated with a change in own-
ership or control. Because the te
nder offer occurred
within one year before the date of the change in own-
ership or control of the corporation, the onset of the
tender offer is presumed to be m
aterially related to the
change in ownership or control. If this presumption
is not rebutted, the payment will be treated as con-
tingent on the change in own
ership or control. If no
change in ownership or control had occurred, the pay-
ment would not be treated as contingent on a change
in ownership or control;
however, the payment still
could be a parachute payment under Q/A–37 of this
section if the contract violated a generally enforced
securities law or reg
ulation.
Example 5. A contract between a corporation and
a disqualified individual, E, provides that a payment
will be made to E if the
corporation’s level of prod-
uct sales or profits reaches a specified level. At the
time the contract was entered into, the parties had no
reason to believe t
hat such an increase in the corpora-
tion’s level of product sales or profits would be pre-
liminary or subsequent to, or otherwise closely asso-
ciated with, a c
hange in ownership or control of the
corporation. Eighteen months later, a change in the
ownership or control of the corporation occurs and
within one yea
r after the date of the change of own-
ership or control, the corporation’s level of product
sales or profits reaches the specified level. Under
these facts
and circumstances (and in the absence of
contradictory evidence), the increase in product sales
or profits of the corporation is not an event closely
associate
d with the change in ownership or control of
the corporation. Accordingly, even if the increase is
materially related to the change in ownership or con-
trol, the payment will not be treated as contingent on
a change in ownership or control.
Q–23: May a payment be treated as
contingent on a change in ownership or
control if the payment is made under an
agreement entered into after the change?
A–23: (a) No. Payments are not treated
as contingent on a change in ownership or
control if they are made (or are to be made)
pursuant to an agreement entered into after
the change (a post-change agreement). For
this purpose, an agreement that is executed
after a change in ownership or control pur-
suant to a legally enforceable agreement
that was entered into before the change is
considered to have been entered into be-
fore the change. (See Q/A–9 of this sec-
tion regarding the exemption for reason-
able compensation for services rendered
on or after a change in ownership or con-
trol.) If an individual has a right to re-
ceive a payment that would be a parachute
payment if made under an agreement en-
tered into prior to a change in ownership o
r
control (pre-change agreement) and give
s
up that right as bargained-for consider
ation
for benefits under a post-change ag
ree-
ment, the agreement is treated as a
post-
change agreement only to the exten
tthe
value of the payments under the ag
ree-
ment exceed the value of the paym
ents un-
der the pre-change agreement.
To the ex-
tent payments under the agre
ement have
the same value as the paymen
ts under the
pre-change agreement, su
ch payments re-
tain their character as pa
rachute payments
subject to this section.
(b) The following example
s illustrate
the principles of this A–
23:
Example 1. Assume that a disqualified individual
is an employee of a corporation. A change in owner-
ship or control of the c
orporation occurs, and there-
after the individual enters into an employment agree-
ment with the acquiring company. Because the agree-
ment is entered into a
fter the change in ownership or
control occurs, payments to be made under the agree-
ment are not treated as contingent on the change.
Example 2. Assume t
hesamefactsasinExample
1, except that the agreement between the disqualified
individual and the acquiring company is executed af-
ter the change in o
wnership or control, pursuant to a
legally enforceable agreement entered into before the
change. Payments to be made under the agreement
may be treated a
s contingent on the change in own-
ership or control pursuant to Q/A–22 of this section.
However, see Q/A–9 of this section regarding the ex-
emption from
the definition of parachute payment for
certain amounts of reasonable compensation.
Example 3. Assume the same facts as inEx-
ample 1, exce
pt that prior to the change in owner-
ship or control, the individual and corporation enter
October 6, 20037152003-40 I.R.B.

into an agreement under which the individual will re-
ceive parachute payments in the event of a change in
ownership or control of the corporation. After the
change, the individual agrees to give up the right to
payments under the pre-change agreement that would
be parachute payments if made, in exchange for com-
pensation under a new agreement with the acquiring
corporation. Because the individual gave up the right
to parachute payments under the pre-change agree-
ment in exchange for other payments under the post-
change agreement, payments in an amount equal to
the parachute payments under the pre-change agree-
ment are treated as contingent on the change in own-
ership or control under this A–23. Because the post-
change agreement was entered into after the change,
payments in excess of this amount are not treated as
parachute payments.
Q–24: If a payment is treated as contin-
gent on a change in ownership or control, is
the full amount of the payment so treated?
A–24: (a)(1)General rule.Yes.If
the payment is a transfer of property, the
amount of the payment is determined un-
der Q/A–12 or Q/A–13 of this section.
For all other payments, the amount of the
payment is determined under Q/A–11 of
this section. However, in certain circum-
stances, described in paragraphs (b) and
(c) of this A–24, only a portion of the
payment is treated as contingent on the
change. Paragraph (b) of this A–24 ap-
plies to a payment that is vested, without
regard to the change in ownership or con-
trol, and is treated as contingent on the
change in ownership or control because the
change accelerates the time at which the
payment is made. Paragraph (c) of this
A–24 applies to a payment that becomes
vested as a result of the change in own-
ership or control if, without regard to the
change in ownership or control, the pay-
ment was contingent only on the contin-
ued performance of services for the corpo-
ration for a specified period of time and if
the payment is attributable, at least in part,
to services performed before the date the
payment becomes vested. Paragraph (b)
or (c) does not apply to any payment (or
portion thereof) if the payment is treated as
contingent on the change in ownership or
control pursuant to Q/A–25 of this section.
For purposes of this A–24,vestedhas the
samemeaningasprovidedinQ/A–22(a).
(2)Reduction by reasonable compen-
sation. The amount of a payment under
paragraph (a)(1) of this A–24 is reduced
by any portion of such payment that the
taxpayer establishes by clear and convinc-
ing evidence is reasonable compensation
for personal services rendered by the dis-
qualified individual on or after the date
of the change of control. See Q/A–9 and
Q/A–38through44ofthissectionforrules
concerning reasonable compensation. The
portion of an amount treated as contingent
under paragraph (b) or (c) of this A–24
may not be reduced by reasonable com-
pensation.
(b)Vested payments. This paragraph
(b) applies if a payment is vested, with-
out regard to the change in ownership or
control, and is treated as contingent on the
change in ownership or control because
the change accelerates the time at which
the payment is made. In such a case,
the portion of the payment, if any, that is
treated as contingent on the change in own-
ership or control is the amount by which
the amount of the accelerated payment ex-
ceeds the present value of the payment ab-
sent the acceleration. If the value of such
a payment absent the acceleration is not
reasonably ascertainable, and the acceler-
ation of the payment does not significantly
increase the present value of the payment
absent the acceleration, the present value
of the payment absent the acceleration is
treated as equal to the amount of the ac-
celerated payment. If the value of the pay-
ment absent the acceleration is not reason-
ably ascertainable, butthe acceleration sig-
nificantly increases the present value of the
payment, the future value of such payment
is treated as equal to the amount of the ac-
celerated payment. For rules on determin-
ing present value, see paragraph (e) of this
A–24, Q/A–32, and Q/A–33 of this sec-
tion.
(c)(1)Nonvested payments. This para-
graph (c) applies to a payment that be-
comes vested as a result of the change in
ownership or control to the extent that —
(i) Without regard to the change in own-
ership or control, the payment was contin-
gent only on the continued performance of
services for the corporation for a specified
period of time; and
(ii) The payment is attributable, at least
in part, to the performance of services be-
fore the date the payment is made or be-
comes certain to be made.
(2) The portion of the payment subject
to paragraph (c) of this A–24 that is treated
as contingent on the change in ownership
or control is the amount described in para-
graph (b) of this A–24, plus an amount,
as determined in paragraph (c)(4) of this
A–24, to reflect the lapse of the obliga-
tion to continue to perform services. In
no event can the portion of the payment
treated as contingent on the change in own-
ership or control under this paragraph (c)
exceed the amount of the accelerated pay-
ment, or, if the payment is not accelerated,
the present value of the payment.
(3) For purposes of this paragraph (c) of
this A–24, the acceleration of the vesting
of a stock option or the lapse of a restric-
tion on restricted stock is considered to sig-
nificantly increase the value of a payment.
(4) The amount reflecting the lapse of
the obligation to continue to perform ser-
vices (described in paragraph (c)(2) of this
A–24) is 1 percent of the amount of the ac-
celerated payment multiplied by the num-
ber of full months between the date that
the individual’s right to receive the pay-
ment is vested and the date that, absent
the acceleration, the payment would have
been vested. This paragraph (c)(4) applies
to the accelerated vesting of a payment in
the nature of compensation even if the time
at which the payment is made is not ac-
celerated. In such a case, the amount re-
flecting the lapse of the obligation to con-
tinue to perform services is 1 percent of the
present value of the future payment mul-
tiplied by the number of full months be-
tween the date that the individual’s right to
receive the payment is vested and the date
that, absent the acceleration, the payment
would have been vested.
(d)Application of this A–24 to certain
payments.— (1)Benefits under a non-
qualified deferred compensation plan.In
the case of a payment of benefits under a
nonqualified deferred compensation plan,
paragraph (b) of this A–24 applies to the
extent benefits under the plan are vested
without regard to the change in ownership
or control. Paragraph (c) of this A–24 ap-
plies to the extent benefits under the plan
become vested as a result of the change in
ownership or control and are attributable,
at least in part, to the performance of ser-
vices prior to vesting. Any other payment
of benefits under a nonqualified deferred
compensation plan is a payment in the
nature of compensation subject to the
general rule of paragraph (a) of this A–24
and the rules in Q/A–11 of this section.
(2)Employment agreements. The gen-
eral rule of paragraph (a) of this A–24 (and
2003-40 I.R.B.716October 6, 2003

not the rules in paragraphs (b) or (c)) ap-
plies to the payment of amounts due un-
der an employment agreement on a termi-
nation of employment or a change in own-
ership or control that otherwise would be
attributable to the performance of services
(or refraining from the performance of ser-
vices) during any period that begins after
the date of termination of employment or
change in ownership or control, as applica-
ble. For purposes of this paragraph (d)(2)
of this A–24, an employment agreement
means an agreement between an employee
or independent contractor and employer or
service recipient which describes, among
other things, the amount of compensation
or remuneration payable to the employee
or independent contractor. See Q/A–42(b)
and44ofthissectionfor the treatment of
the remaining amounts of salary under an
employment agreement.
(3)Vesting due to an event other than
services. Neither paragraph (b) nor (c) of
this A–24 applies to a payment if (with-
out regard to the change in ownership or
control) vesting of the payment depends
on an event other than the performance
of services, such as the attainment of a
performance goal, and the event does not
occur prior to the change in ownership
or control. In such circumstances, the
full amount of the accelerated payment is
treated as contingent on the change in own-
ership or control under paragraph (a) of
this A–24. However, see Q/A–39 of this
section for rules relating to the reduction of
the excess parachute payment by the por-
tion of the payment which is established to
be reasonable compensation for personal
services actually rendered before the date
of a change in ownership or control.
(e)Present value. For purposes of this
A–24, the present value of a payment is
determined as of the date on which the
accelerated payment is made.
(f)Examples. The following examples
illustrate the principles of this A–24:
Example 1. (i) Corporation maintains a qualified
plan and a nonqua
lified supplemental retirement plan
(SERP) for its executives. Benefits under the SERP
are not paid to participants until retirement. E, a dis-
qualified indi
vidual with respect to Corporation, has a
vested account balance of $500,000 under the SERP.
A change in ownership or control of Corporation oc-
curs. The SE
RP provides that in the event of a change
in ownership or control, all vested accounts will be
paid to SERP participants.
(ii) Becaus
e E was vested in $500,000 of benefits
under the SERP prior to the change in ownership or
control and the change merely accelerated the time
at which the payment was made to E, only a portion
of the payment, as determined under paragraph (b)
of this A–24, is treated as contingent on the change.
Thus, the portion of the payment that is treated as
contingent on the change is the amount by which the
amount of the accelerated payment ($500,000) ex-
ceeds the present value of the payment absent the ac-
celeration.
(iii) Assume the same facts as in paragraph (i) of
thisExample 1, except that E’s account balance of
$500,000 is not vested. Instead, assume that E will
vest in E’s account balance of $500,000 in 2 years if
E continues to perform services for the next 2 years.
Assume further that the SERP provides that all un-
vested SERP benefits vest immediately on a change in
ownership or control and are paid to the participants.
Because the vesting of the SERP payment, without re-
gard to the change, depends only on the performance
of services for a specified period of time and the pay-
ment is attributable, in part, to the performance of ser-
vices before the change in ownership or control, onl
y
a portion of the $500,000 payment, as determined un-
der paragraph (c) of this A–24, is treated as contin-
gent on the change. The portion of the payment that
is treated as contingent on the change is the lesser of
the amount of the accelerated payment or the amount
by which the accelerated payment exceeds
the present
value of the payment absent the acceleration, plus an
amount to reflect the lapse of the obligation to con-
tinue to perform services.
(iv) Assume the same facts as in paragraph (i)
of thisExample 1, except that in addition to the pay
out of the vested account balance of
$500,000 on the
change in ownership or control, an additional $70,000
will be credited to E’s account and included in the
payment to E. Because the $500,00
0 was vested with-
out regard to the change in ownership or control, para-
graph (b) of this A–24 applies to the $500,000 pay-
ment. Because the $70,000 is no
t vested, without re-
gard to the change, and is not attributable to the per-
formance of services prior to the change, the entire
$70,000 payment is conting
ent on the change in own-
ership or control under paragraph (a) of this A–24.
(v) Assume the same facts as in paragraph (i)
of thisExample 1, except t
hat the benefit under the
SERP is calculated using a percentage of final aver-
age compensation multiplied by years of service. If,
contingent on the chan
ge in ownership or control, E
is credited with additional years of service, an adjust-
ment to final average compensation, or an increase in
the applicable perce
ntage, any increase in the benefit
payable under the SERP is not attributable to the per-
formance of services prior to the change, and the en-
tireincreaseinth
e benefit is contingent on the change
in ownership or control under paragraph (a) of this
A–24.
Example 2.Asares
ult of a change in the effective
control of a corporation D, a disqualified individual
with respect to the corporation, receives accelerated
payment of D’s v
ested account balance in a nonqual-
ified deferred compensation account plan. Actual in-
terest and other earnings on the plan assets are cred-
itedtoeacha
ccount as earned before distribution. In-
vestment of the plan assets is not restricted in such
a manner as would prevent the earning of a market
rate of retu
rn on the plan assets. The date on which
D would have received D’s vested account balance
absent the change in ownership or control is uncer-
tain, and
the rate of earnings on the plan assets is not
fixed. Thus, the amount of the payment absent the
acceleration is not reasonably ascertainable. Under
these facts, acceleration of the payment does not sig-
nificantly increase the present value of the payment
absent the acceleration, and the present value of the
payment absent the acceleration is treated as equal to
the amount of the accelerated payment. Accordingly,
no portion of the payment is treated as contingent on
the change.
Example 3. (i) On January 15, 2006, a corpora-
tion and a disqualified individual, F, enter into a con-
tract providing for a retention bonus of $500,000 to
be paid to F on January 15, 2011. The payment of the
bonus will be forfeited by F if F does not remain em-
ployed by the corporation for the entire 5-year period.
However, the contract provides that the full amount of
the payment will be made immediately on a change
in ownership or control of the corporation during the
5-year period. On January 15, 2009, a change in own-
ership or control of the corporation occurs and the full
amount of the payment ($500,000) is made on that
date to F. Under these facts, the payment of $500,000
was contingent only on F’s performance of services
for a specified period and is attributable, in par
t, to the
performance of services before the change in own-
ership or control. Therefore, only a portion of the
payment, as determined under paragraph (
c) of this
A–24 is treated as contingent on the change. The
portion of the payment that is treated as contingent
on the change is the amount by which the a
mount of
the accelerated payment (i.e., $500,000, the amount
paid to the individual because of the change in own-
ership) exceeds the present value
of the payment that
was expected to have been made absent the accelera-
tion (i.e., $406,838, the present value on January 15,
2009, of a $500,000 payment on Ja
nuary 15, 2011),
plus $115,000 (1 percent x 23 months x $500,000)
which is the amount reflecting the lapse of the obli-
gation to continue to perform
services. Accordingly,
the amount of the payment treated as contingent on
the change in ownership or control is $208,162, the
sum of $93,162 ($500,000
- $406,838) + $115,000).
This result does not change if F actually remains em-
ployed until the end of the 5-year period.
(ii) Assume the same fact
sasinparagraph(i)of
thisExample 3, except that the retention bonus will
vest on the change in ownership or control, but will
not be paid until Janu
ary 15, 2011 (the original date
in the contract). Because the payment of $500,000
was contingent only on F’s performance of services
for a specified per
iod and is attributable, in part, to the
performance of services before the change in owner-
ship or control, only a portion of the $500,000 pay-
ment is treated as
contingent on the change in owner-
ship or control as determined under paragraph (c) of
this A–24. Because there is accelerated vesting of the
bonus, the por
tion of the payment treated as contin-
gent on the change is the amount described in para-
graph (b) of this A–27, which is $0 under these facts,
plus an amoun
t reflecting the lapse of the obligation
to continue to perform services which is $93,573 (1
percent x 23 months x $406,838 (the present value of
a $500,000
payment).
Example 4. (i) On January 15, 2006, a corpora-
tion gives to a disqualified individual, in connection
with her pe
rformance of services to the corporation, a
bonus of 1,000 shares of the corporation’s stock. Un-
der the terms of the bonus arrangement, the individ-
ual is ob
ligated to return the stock to the corporation if
October 6, 20037172003-40 I.R.B.

she terminates her employment for any reason prior to
January 15, 2011. However, if there is a change in the
ownership or effective control of the corporation prior
to January 15, 2011, she ceases to be obligated to re-
turn the stock. The individual’s rights in the stock are
treated as substantially nonvested (within the mean-
ing of §1.83–3(b) and (j)) during that period. On Jan-
uary 15, 2009, a change in the ownership of the cor-
poration occurs. On that day, the fair market value of
the stock is $500,000.
(ii) Under these facts, the payment was contin-
gent only on performance of services for a specified
period and is attributable, in part, to the performance
of services before the change in ownership or con-
trol. Thus, only a portion of the payment, as deter-
mined under paragraph (c) of this A–24, is treated
as contingent on the change in ownership or control.
The portion of the payment that is treated as contin-
gent on the change is the amount by which the present
value of the accelerated payment on January 15, 2009
($500,000), exceeds the present value of the paymen
t
that was expected to have been made on January 15,
2011, plus an amount reflecting the lapse of the obli-
gation to continue to perform services. At the tim
eof
the change, it cannot be reasonably ascertained what
the value of the stock would have been on January
15, 2011. The acceleration of the lapse of
a restric-
tion on stock is treated as significantly increasing the
value of the payment. Therefore, the value of such
stock on January 15, 2011, is deemed to b
e $500,000,
the amount of the accelerated payment. The present
value on January 15, 2009, of a $500,000 payment to
be made on January 15, 2011, is $406
,838. Thus, the
portion of the payment treated as contingent on the
change is $208,162, the sum of $93,162 ($500,000
- $406,838), plus $115,000 (1 pe
rcent x 23 months x
$500,000), the amount reflecting the lapse of the obli-
gation to continue to perform services.
Example 5. (i) On January 15, 20
06, a corporation
grants to a disqualified individual nonqualified stock
options to purchase 30,000 shares of the corporation’s
stock. The options will be f
orfeited by the individual
if he fails to perform personal services for the corpo-
ration until January 15, 2009. The options will, how-
ever, vest in the individ
ual at an earlier date if there
is a change in ownership or control of the corpora-
tion. On January 16, 2008, a change in the ownership
or control of the corp
oration occurs and the options
become vested in the individual. The value of the op-
tions on January 16, 2008,determined in accordance
with Q/A–13, is $60
0,000.
(ii) The payment of the options to purchase
30,000 shares was contingent only on performance
of services for the
corporation until January 15, 2009,
and is attributable, in part, to the performance of
services before the change in ownership or control.
Therefore, onl
y a portion of the payment is treated
as contingent on the change. The portion of the
payment that is treated as contingent on the change
is the amount b
y which the accelerated payment on
January 16, 2008 ($600,000) exceeds the present
value on January 16, 2008, of the payment that was
expected to
have been made on January 15, 2009,
absent the acceleration,plus an amount reflecting
the lapse of the obligation to continue to perform
services.
At the time of the change, it cannot be
reasonably ascertained what the value of the op-
tions would have been on January 15, 2009. The
acceleration of vesting in the options is treated as
significantly increasing the value of the payment.
Therefore, the value of such options on January 15,
2009, is deemed to be $600,000, the amount of the
accelerated payment. The present value on January
16, 2008, of a $600,000 payment to be made on
January 15, 2009, is $549,964. Thus, the portion of
the payment treated as contingent on the change is
$116,036, the sum of $50,036 ($600,000 - $549,964),
plus an amount reflecting the lapse of the obligation
to continue to perform services which is $66,000 (1
percent x 11 months x $600,000).
Example 6. (i) Assume the same facts as inEx-
ample 5, except that the options become vested pe-
riodically (absent a change in ownership or control),
with one-third of the options vesting on January 15,
2007, 2008, and 2009, respectively. Thus, options to
purchase 20,000 shares vest independently of the Jan-
uary 16, 2008, change in ownership or control and the
options to purchase the remaining 10,000 shares vest
as a result of the change in ownership or control.
(ii) The payment of the options to purchase
10,000 shares was contingent only on performance
of services for the corporation until January 15,
2009, and is attributable, in part, to the performance
of services before the change in ownership or con-
trol. Therefore, only a portion of the payme
nt as
determined under paragraph (c) of this A–24 is
treated as contingent on the change in ownership or
control. The portion of the payment that i
s treated
as contingent on the change in ownership or control
is the amount by which the accelerated payment on
January 16, 2008 ($200,000) exceed
s the present
value on January 16, 2008, of the payment that was
expected to have been made on January 15, 2009,
absent the acceleration, plus an
amount reflecting
the lapse of the obligation to perform services. At
the time of the change in ownership or control, it
cannot be reasonably ascertai
ned what the value of
the options would have been on January 15, 2009.
The acceleration of vesting in the options is treated
as significantly increasi
ng the value of the payment.
Therefore, the value of such options on January 15,
2009, is deemed to be $200,000, the amount of the
accelerated payment. Th
epresentvalueonJanuary
16, 2008, of a $200,000 payment to be made on
January 15, 2009, is $183,328.38. Thus, the portion
of the payment treate
d as contingent on the change
is $38,671.62, the sum of $16,671.62 ($200,000 -
$183,328.38), plus an amount reflecting the lapse of
the obligation to c
ontinue to perform services which
is $22,000 (1 percent x 11 months x $200,000).
Example 7. Assume the same facts as inExam-
ple 5,exceptthatt
he option agreement provides that
the options will vest either on the corporation’s level
of profits reaching a specified level, or if earlier, on
thedateonwhic
h there is a change in ownership or
control of the corporation. The corporation’s level of
profits do not reach the specified level prior to Jan-
uary 16, 2008.
In such case, the full amount of the
payment, $600,000, is treated as contingent on the
change in ownership or control under paragraph (a)
of this A–24
. Because the payment was not contin-
gent only on the performance of services for the cor-
poration for a specified period, the rules of paragraph
(b) and (c)
of this A–24 do not apply. See Q/A–39 of
this section for rules relating to the reduction of the
excess parachute payment by the portion of the pay-
ment which is established to be reasonable compen-
sation for personal services actually rendered before
the date of a change in ownership or control.
Example 8. On January 1, 2005, E, a disquali-
fied individual with respecttoCorporationX,enters
into an employment agreement with Corporation X
under which E will be paid wages of $200,000 each
year during the 5-year employment agreement. The
employment agreement provides that if a change in
ownership or control of Corporation X occurs, E will
be paid the present value of the remaining salary un-
der the employment agreement. On January 1, 2006,
a change in ownership or control of Corporation X oc-
curs, E is terminated, and E receives a payment of the
present value of $200,000 for each of the 4 years re-
maining under the employment agreement. Because
the payment represents future salary under an em-
ployment agreement (i.e., amounts otherwise attrib-
utable to the performance ofservices for periods that
begin after the termination of employment), the gen
-
eral rule of paragraph (a)of this A–24 applies to the
payment and not the rules of paragraphs (b) and (c)
of this A–24. See Q/A–42(c) and 44 of this section
for the treatment of the remaining payments under an
employment agreement.
Presumption That Payment Is Contingent
on Change
Q–25: Is there a presumption that cer-
tain payments are contingent on a change
in ownership or control?
A–25: Yes, for purposes of this section,
any payment is presumed to be contingent
on such a change unless the contrary is es-
tablished by clear and convincing evidence
if the payment is made pursuant to —
(a) An agreement entered into within
one year before the date of a change in
ownership or control; or
(b) An amendment that modifies a pre-
vious agreement in any significant respect,
if the amendment is made within one year
before the date of a change in ownership or
control. In the case of an amendment de-
scribed in paragraph (b) of this A–25, only
the portion of any payment that exceeds the
amount of such payment that would have
been made in the absence of the amend-
ment is presumed, by reason of the amend-
ment, to be contingent on the change in
ownership or control.
Q–26: How may the presumption de-
scribed in Q/A–25 of this section be rebut-
ted?
A–26: (a) To rebut the presumption de-
scribedinQ/A–25ofthissection,thetax-
payer must establish by clear and convinc-
ing evidence that the payment is not con-
tingent on the change in ownership or con-
trol. Whether the payment is contingent
2003-40 I.R.B.718October 6, 2003

on such change is determined on the ba-
sis of all the facts and circumstances of the
particular case. Factors relevant to such a
determination include, but are not limited
to, the content of the agreement or amend-
ment and the circumstances surrounding
the execution of the agreement or amend-
ment, such as whether it was entered into at
a time when a takeover attempt had com-
menced and the degree of likelihood that
a change in ownership or control would
actually occur. However, even if the pre-
sumption is rebutted with respect to an
agreement, some or all of the payments un-
der the agreement may still be contingent
on the change in ownership or control pur-
suant to Q/A–22 of this section.
(b) In the case of an agreement de-
scribed in Q/A–25 of this section, clear and
convincing evidence that the agreement is
one of the three following types will gen-
erally rebut the presumption that payments
under the agreement are contingent on the
change in ownership or control —
(1) Anondiscriminatory employee plan
or programas defined in paragraph (c) of
this A–26;
(2) A contract between a corporation
and an individual that replaces a prior con-
tract entered into by the same parties more
than one year before the change in own-
ership or control, if the new contract does
not provide for increased payments (apart
from normal increases attributable to in-
creased responsibilities or cost of living
adjustments), accelerate the payment of
amounts due at a future time, or modify
(to the individual’s benefit) the terms or
conditions under which payments will be
made; or
(3) A contract between a corporation
and an individual who did not perform ser-
vices for the corporation prior to the one
year period before the change in owner-
ship or control occurs, if the contract does
not provide for payments that are signifi-
cantly different in amount, timing, terms,
or conditions from those provided under
contracts entered into by the corporation
(other than contracts that themselves were
entered into within one year before the
change in ownership or control and in con-
templation of the change) with individuals
performing comparable services.
(c) For purposes of this section, the
termnondiscriminatory employee plan
or programmeans: a group term life in-
surance plan that meets the requirements
of section 79(d); a self insured medical
reimbursement plan that meets the re-
quirements of section 105(h); a cafeteria
plan (within the meaning of section 125);
an educational assistance program (within
the meaning of section 127); a dependent
care assistance program (within the mean-
ing of section 129); a no-additional-cost
service (within the meaning of section
132(b)) or qualified employee discount
(within the meaning of section 132(c)); a
qualified retirement planning services pro-
gram under section 132(m); an adoption
assistance program (within the meaning of
section 137); and such other items as pro-
vided by the Commissioner in published
guidance of general applicability under
§601.601(d)(2). Payments under certain
other plans are exempt from the definition
ofparachute paymentunder Q/A–8 of this
section.
(d) The following examples illustrate
the application of the presumption:
Example 1. A corporation and a disqualified in-
dividual who is an employee of the corpora
tion enter
into an employment contract. The contract replaces a
prior contract entered into by the same parties more
than one year before the change in ow
nership or con-
trol and the new contract does not provide for any in-
creased payments other than a cost of living adjust-
ment, does not accelerate the paym
ent of amounts
due at a future time, and does not modify (to the indi-
vidual’s benefit) the terms or conditions under which
payments will be made. Clear and
convincing evi-
dence of these facts rebuts the presumption described
in A–25 of this section. However, payments under
the contract still may be co
ntingent on the change in
ownership or control pursuant to Q/A–22 of this sec-
tion.
Example 2. Assumethesamef
acts as inExam-
ple 1, except that the contract is entered into after
a tender offer for the corporation’s stock had com-
menced and it was likely t
hat a change in ownership
or control would occur and the contract provides for a
substantial bonus payment to the individual upon his
signing the contract
. The individual has performed
services for the corporation for many years, but pre-
vious employment contracts between the corporation
and the individual
did not provide for a similar sign-
ing bonus. One month after the contract is entered
into, a change in the ownership or control of the cor-
poration occurs
. All payments under the contract are
presumed to be contingent on the change in owner-
ship or control even though the bonus payment would
have been lega
lly required even if no change had oc-
curred. Clear and convincing evidence of these facts
rebuts the presumption described in A–25 of this sec-
tion with res
pect to all of the payments under the con-
tract with the exception of the bonus payment (which
is treated as contingent on the change). However,
payments o
ther than the bonus under the contract still
may be contingent on the change in ownership or con-
trol pursuant to Q/A–22 of this section.
Example 3. A corporation and a disqualified in-
dividual, who is an employee of the corporation, en-
ter into an employment contract within one year of
a change in ownership or control of the corporation.
Under the contract, in the event of a change in own-
ership or control and subsequent termination of em-
ployment, certain payments will be made to the in-
dividual. A change in ownership or control occurs,
but the individual is not terminated until 2 years af-
ter the change in ownership or control. If clear and
convincing evidence does not rebut the presumption
described in A–25 of this section, because the pay-
ment is made pursuant to an agreement entered into
within one year of the date of the change in ownership
or control, the payment is presumed contingent on the
change under A–25 of this section. This is true even
though A’s termination of employment is presumed
not to be materially related to the change in owner-
ship or control under Q/A–22 of this section.
Change in Ownership or Control
Q–27: When does a change in the own-
ership of a corporation occur?
A–27: (a) For purposes of this section,
a change in the ownership of a corporation
occurs on the date that any one person, or
more than one person acting as a group (as
defined in paragraph (b) of this A–27), ac-
quires ownership of stock of the corpora-
tion that, together with stock held by such
person or group, has more than 50 percent
of the total fair market value or total vot-
ing power of the stock of such corporation.
However, if any one person, or more than
one person acting as a group, is consid-
ered to own more than 50 percent of the to-
tal fair market value or total voting power
of the stock of a corporation, the acquisi-
tion of additional stock by the same per-
son or persons is not considered to cause a
change in the ownership of the corporation
(or to cause a change in the effective con-
trol of the corporation (within the meaning
of Q/A–28 of this section)). An increase
in the percentage of stock owned by any
one person, or persons acting as a group, as
a result of a transaction in which the cor-
poration acquires its stock in exchange for
property will be treated as an acquisition
of stock for purposes of this section. This
A–27 applies only when there is a transfer
of stock of a corporation (or issuance of
stock of a corporation) and stock in such
corporation remains outstanding after the
transaction. (See Q/A–29 for rules regard-
ing the transfer of assets of a corporation).
(b) For purposes of paragraph (a) of this
A–27, persons will not be considered to be
acting as a group merely because they hap-
pen to purchase or own stock of the same
October 6, 20037192003-40 I.R.B.

corporation at the same time, or as a re-
sult of the same public offering. However,
persons will be considered to be acting as
a group if they are owners of a corpora-
tion that enters into a merger, consolida-
tion, purchase or acquisition of stock, or
similar business transaction with the cor-
poration. If a person, including an en-
tity shareholder, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of stock,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in a corporation only
with respect to the ownership in that corpo-
ration prior to the transaction giving rise to
the change and not with respect to the own-
ership interest in the other corporation.
(c) For purposes of this A–27 (and
Q/A–28 and 29), section 318(a) applies
to determine stock ownership. Stock un-
derlying a vested option is considered
owned by the individual who holds the
vestedoption(andthestockunderlyingan
unvested option is not considered owned
by the individual who holds the unvested
option). For purposes of the preceding
sentence, however, if the option is exer-
cisable for stock that is not substantially
vested (as defined by sections 1.83–3(b)
and (j)), the stock underlying the option
is not treated as owned by the individual
who holds the option. In addition, mutual
and cooperative corporations are treated
as having stock for purposes of this A–27.
(d) The following examples illustrate
the principles of this A–27:
Example 1. Corporation M has owned stock with
a fair market value equal t
o 19 percent of the value of
the stock of Corporation N (an otherwise unrelated
corporation) for many years prior to 2006. Corpora-
tion M acquires addit
ional stock with a fair market
value equal to 15 percent of the value of the stock of
Corporation N on January 1, 2006, and an additional
18 percent on Februa
ry 21, 2007. As of February
21, 2007, Corporation M has acquired stock with a
fair market value greater than 50 percent of the value
of the stock of Cor
poration N. Thus, a change in the
ownership of Corporation N is considered to occur on
February 21, 2007 (assuming that Corporation M did
not have effect
ive control of Corporation N immedi-
ately prior to the acquisition on that date).
Example 2. All of the corporation’s stock is
ownedbythefou
nders of the corporation. The board
of directors of the corporation decides to offer shares
of the corporation to the public. After the public of-
fering, the
founders of the corporation own a total of
40 percent of the corporation’s stock, and members
of the public own 60 percent. If no one person (or
more than o
ne person acting as a group) owns more
than 50 percent of the corporation’s stock (by value
or voting power) after the public offering, there is no
change in the ownership of the corporation.
Example 3. Corporation P merges into Corpora-
tion O (a previously unrelated corporation). In the
merger, the shareholdersof Corporation P receive
Corporation O stock in exchange for their Corpora-
tion P stock. Immediately after the merger, the former
shareholders of Corporation P own stock with a fair
market value equal to 60 percent of the value of the
stock of Corporation O, and the former shareholders
of Corporation O own stock with a fair market value
equal to 40 percent of the value of the stock of Cor-
poration O. The former shareholders of Corporation
P will be treated as acting as a group in their acqui-
sition of Corporation O stock. Thus, a change in the
ownership of Corporation O occurs on the date of the
merger. See Q/A–29,Example 3, regarding whether
there is a change in ownership or control of P.
Example 4. Assume the same facts as inExample
3, except that immediately after the change, the for-
mer shareholders of Corporation P own stock with a
fair market value of 51 percent of the value of Corpo-
ration O stock and the former shareholders of Corpo-
ration O own stock with a fair market value equal to
49 percent of the value of Corporation O stock. As-
sume further that prior to the merger several Corpora-
tion O shareholders also owned Corporation
Pstock
(overlapping shareholders). In the merger, those O
shareholders received additional O stock by virtue of
their ownership of P stock with a fair mark
et value
of 5 percent of the value of Corporation O stock.
Including the O stock attributable to the P shares,
the O shareholders hold 54 percent o
fOafterthe
transaction. However, those overlapping sharehold-
ers that owned both Corporation O stock and Corpo-
ration P stock prior to the merger
are treated as acting
as a group with the Corporation O shareholders only
with respect to their ownership interest in Corpora-
tion O prior to the transaction
. Therefore, because
the Corporation O shareholders owned 49 percent of
the value of Corporation O stock, a change in the
ownership of Corporation O
occursonthedateofthe
merger. See Q/A–29,Example 3, regarding whether
there is a change in ownership or control of P.
Example 5. A, an individua
l, owns stock with
a fair market value equal to 20 percent of the value
of the stock of Corporation Q. On January 1, 2007,
Corporation Q acquire
s in a redemption for cash all
of the stock held by shareholders other than A. Thus,
A is left as the sole shareholder of Corporation O. A
change in ownership o
f Corporation O is considered
to occur on January 1, 2007 (assuming that A did not
have effective control of Corporation Q immediately
prior to the redemp
tion).
Example 6. Assume the same facts as inExample
5, except that A owns stock with a fair market value
equalto51percen
t of the value of all the stock of
Corporation Q immediately prior to the redemption.
There is no change in the ownership of Corporation
Q as a result of t
he redemption.
Q–28: When does a
change in the ef-
fective contro
l of a corporation occur?
A–28: (a) Notwi
thstanding that a cor-
poration has n
ot undergone a change in
ownership und
er Q/A–27, for purposes of
this section
, a change in the effective con-
trol of a corp
orationispresumedtooccur
on the date t
hat either —
(1) Any one person, or more than one
person acting as a group (as determined
under paragraph (e) of this A–28), acquires
(or has acquired during the 12-month pe-
riod ending on the date of the most re-
cent acquisition by such person or persons)
ownership of stock of the corporation pos-
sessing 20 percent or more of the total vot-
ing power of the stock of such corporation;
or
(2) A majority of members of the cor-
poration’s board of directors is replaced
during any 12-month period by directors
whose appointment or election is not en-
dorsed by a majority of the members of
the corporation’s board of directors prior
to the date of the appointment or election.
(b) The presumption of paragraph (a)
of this A–28 may be rebutted by establish-
ing that such acquisition or acquisitions of
the corporation’s stock, or such replace-
ment of the majority of the members of
the corporation’s board of directors, does
not transfer the power to control (directly
or indirectly) the management and policies
of the corporation from any one person (or
more than one person acting as a group)
to another person (or group). For purposes
of this section, in the absence of an event
described in paragraph (a)(1) or (2) of this
A–28, a change in the effective control of
a corporation is presumed not to have oc-
curred.
(c) In no event does a change in effec-
tive control under this A–28 occur in any
transaction in which either of the two cor-
porationsinvolvedinthetransactionhas
a change in ownership or control under
Q/A–27 or 29 of this section. Thus, for
example, assume Corporation P transfers
more than one-third of the total gross fair
market value of its assets to Corporation
O in exchange for 20 percent of O’s stock.
Because P has undergone a change in own-
ership of a substantial portion of its assets
under Q/A–29 of this section, O does not
have a change in effective control under
Q/A–28.
(d) If any one person, or more than one
person acting as a group, is considered to
effectively control acorporation (within
the meaning of this A–28), the acquisition
of additional control of the corporation by
the same person or persons is not consid-
ered to cause a change in the effective con-
trol of the corporation (or to cause a change
in the ownership of the corporation within
the meaning of Q/A–27 of this section).
2003-40 I.R.B.720October 6, 2003

(e) For purposes of this A–28, persons
will not be considered to be acting as a
group merely because they happen to pur-
chase or own stock of the same corpora-
tion at the same time, or as a result of the
same public offering. However, persons
will be considered to be acting as a group
if they are owners of a corporation that en-
ters into a merger, consolidation, purchase
or acquisition of stock, or similar business
transaction with the corporation. If a per-
son, including an entity shareholder, owns
stock in both corporations that enter into a
merger, consolidation, purchase or acqui-
sition of stock, or similar transaction, such
shareholder is considered to be acting as a
group with other shareholders in a corpo-
ration only with respect to the ownership
in that corporation prior to the transaction
giving rise to the change and not with re-
spect to the ownership interest in the other
corporation.
(f) For purposes of determining stock
ownership, see Q/A–27(c).
(g) The following examples illustrate
the principles of this A–28:
Example 1. Shareholder A acquired the follow-
ing percentages of the voting stock of
Corporation M
(an otherwise unrelated corporation) on the follow-
ing dates: 16 percent on January 1, 2005; 10 percent
on January 10, 2006; 8 percent on Feb
ruary 10, 2006;
11 percent on March 1, 2007; and 8 percent on March
10, 2007. Thus, on March 10, 2007, A owns a total
of 53 percent of M’s voting stock.
Because A did not
acquire 20 percent or more of M’s voting stock dur-
ingany12-monthperiod,thereisnopresumptionof
a change in effective contro
l pursuant to paragraph
(a)(1) of this A–28. In addition, under these facts
there is a presumption that no change in the effective
control of Corporation M o
ccurred. If this presump-
tionisnotrebutted(andthusnochangeineffective
control of Corporation M is treated as occurring prior
to March 10, 2007), a ch
ange in the ownership of Cor-
poration M is treated as having occurred on March
10, 2007 (pursuant to Q/A–27 of this section) because
A had acquired more th
an 50 percent of Corporation
M’s voting stock as of that date.
Example 2. A minority group of shareholders of
a corporation oppos
es the practices and policies of
the corporation’s current board of directors. A proxy
contest ensues. The minority group presents its own
slate of candidat
es for the board at the next annual
meeting of the corporation’s shareholders, and can-
didates of the minority group are elected to replace
a majority of th
e current members of the board. A
change in the effective control of the corporation is
presumed to have occurred on the date the election of
the new board
of directors becomes effective.
Q–29: When doe
s a change in the own-
ership of a su
bstantial portion of a corpo-
ration’s as
sets occur?
A–29: (a) For purposes of this section,
a change in the ownership of a substan-
tial portion of a corporation’s assets oc-
curs on the date that any one person, or
more than one person acting as a group
(as determined in paragraph (c) of this
A–29), acquires (or has acquired during
the 12-month period ending on the date of
the most recent acquisition by such per-
son or persons) assets from the corpora-
tion that have a total gross fair market value
equal to or more than one-third of the to-
tal gross fair market value of all of the as-
sets of the corporation immediately prior
to such acquisition or acquisitions. For this
purpose,gross fair market valuemeans the
value of the assets of the corporation, or
the value of the assets being disposed of,
determined without regard to any liabili-
ties associated with such assets. This A–29
applies in any situation other than one in-
volving the transfer of stock (or issuance of
stock) in a parent corporation and stock in
such corporation remains outstanding after
the transaction. Thus, this A–29 applies to
the sale of stock in a subsidiary (when that
subsidiary is treated as a single corporation
with the parent pursuant to Q/A–46) and
to mergers involving the creation of a new
corporation or with respect to the corpora-
tion that is not surviving entity.
(b)(1) There is no change in ownership
or control under this A–29 when there is a
transfer to an entity that is controlled by the
shareholders of the transferring corpora-
tion immediately after the transfer, as pro-
vided in this paragraph (b). A transfer of
assets by a corporation is not treated as a
change in the ownership of such assets if
the assets are transferred to —
(i) A shareholder of the corporation
(immediately before the asset transfer) in
exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of
the total value or voting power of which is
owned, directly or indirectly, by the corpo-
ration;
(iii) A person, or more than one person
acting as a group, that owns, directly or
indirectly, 50 percent or more of the total
value or voting power of all the outstanding
stock of the corporation; or
(iv) An entity, at least 50 percent of
the total value or voting power is owned,
directly or indirectly, by a person described
in paragraph (b)(1)(iii) of this A–29.
(2) For purposes of paragraph (b) and
except as otherwise provided, a person’s
status is determined immediately after the
transfer of the assets. For example, a trans-
fer to a corporation in which the trans-
feror corporation has no ownership inter-
est in before the transaction, but which is
a majority-owned subsidiary of the trans-
feror corporation after the transaction is
not treated as a change in the ownership of
the assets of the transferor corporation.
(c) For purposes of this A–29, persons
will not be considered to be acting as a
group merely because they happen to pur-
chase assets of the same corporation at
the same time, or as a result of the same
public offering. However, persons will
be considered to be acting as a group if
they are owners of a corporation that en-
ters into a merger, consolidation, purchase
or acquisition of assets, or similar business
transaction with the corporation. If a per-
son, including an entity shareholder, owns
stock in both corporations that enter into a
merger, consolidation, purchase or acqui-
sition of stock, or similar transaction, such
shareholder is considered to be acting as a
group with other shareholders in a corpo-
rationonlytotheextentoftheownership
in that corporation prior to the transaction
giving rise to the change and not with re-
spect to the ownership interest in the other
corporation.
(d) For purposes of determining stock
ownership, see Q/A–27(c).
(e) The following examples illustrate
the principles of this A–29:
Example 1. Corporation M acquires assets hav-
ing a gross fair market value
of $500,000 from Cor-
poration N (an unrelated corporation) on January 1,
2006. The total gross fair market value of Corpora-
tion N’s assets immediatel
y prior to the acquisition
was $3 million. Since the value of the assets acquired
by Corporation M is less than one-third of the total
gross fair market valu
e of Corporation N’s total as-
sets immediately prior to the acquisition, the acquisi-
tion does not represent a change in the ownership of
a substantial portio
n of Corporation N’s assets.
Example 2. Assume the same facts as inExample
1. Also assume that on November 1, 2006, Corpora-
tion M acquires fro
m Corporation N additional assets
having a fair market value of $700,000. Thus, Cor-
poration M has acquired from Corporation N assets
worth a total of $1
.2 million during the 12-month pe-
riod ending on November 1, 2006. Since $1.2 mil-
lion is more than one-third of the total gross fair mar-
ket value of all
of Corporation N’s assets immediately
prior to the earlier of these acquisitions ($3 million),
a change in the ownership of a substantial portion of
Corporation
N’s assets is considered to have occurred
on November 1, 2006.
October 6, 20037212003-40 I.R.B.

Example 3. (i) All of the assets of Corporation
P are transferred to Corporation O (an unrelated cor-
poration). In exchange, the shareholders of Corpo-
ration P receive Corporation O stock. Immediately
after the transfer, the former shareholders of Corpo-
ration P own 60 percent of the fair market value of the
outstanding stock of Corporation O and the former
shareholders of Corporation O own 40 percent of the
fair market value of the outstanding stock of Corpora-
tion O. Because Corporation O is an entity more than
50 percent of the fair market value of the outstanding
stock of which is owned by the former shareholders
of Corporation P (based on ownership of Corporation
P prior the change), the transfer of assets is not treated
as a change in ownership of a substantial portion of
the assets of Corporation P. However, a change in the
ownership (within the meaning of Q/A–27) of Cor-
poration O occurs.
(ii) The result in paragraph (i) would be the same
if immediately after the change, the former sharehold-
ers of Corporation P own stock with a fair market
value of 51 percent of the value of Corporation O
stock because Corporation O is an entity more than
50 percent of the fair market value of the outstand
ing
stock of which is owned by the former shareholders
of Corporation P. See Q/A–27,Example 4, regarding
whether there is a change in ownership or c
ontrol of
O.
Example 4. Corporation P sells all of the stock
of its wholly-owned subsidiary, S, to Cor
poration Y.
The fair market value of the affiliated group, deter-
mined without regard to its liabilities, is $210 mil-
lion. The fair market value of S, det
ermined without
regard to its liabilities, is $80 million. Because there
is a change in more than one-third of the gross fair
market value of the total assets o
f the affiliated group,
there is a change in the ownership of a substantial por-
tion of the assets of the affiliated group.
Three-Times-Base-Amount Test for
Parachute Payments
Q–30: Are all payments that are in
the nature of compensation, are made to
a disqualified individual, and are contin-
gent on a change in ownership or control,
parachute payments?
A–30: (a) No. To determine whether
such payments are parachute payments,
they must be tested against the individ-
ual’sbase amount(as defined in Q/A–34
of this section). To do this, the aggre-
gate present value of all payments in the
nature of compensation that are made or
to be made to (or for the benefit of) the
same disqualified individual and are con-
tingent on the change in ownership or con-
trol must be determined. If this aggre-
gate present value equals or exceeds the
amount equal to 3 times the individual’s
base amount, the payments are parachute
payments. If this aggregate present value
is less than the amount equal to 3 times
the individual’s base amount, no portion of
the payment is a parachute payment. See
Q/A–31, Q/A–32, and Q/A–33 of this sec-
tion for rules on determining present value.
Parachute payments that are securities vio-
lation parachute payments are not included
in the foregoing computation if they are
not contingent on a change in ownership or
control. See Q/A–37 of this section for the
definition and treatment of securities vio-
lation parachute payments.
(b) The following examples illustrate
the principles of this A–30:
Example 1. A is a disqualified individual with re-
spect to Corporation M. A’s base amount is $100,000.
Payments in the nature of compensation that are con-
tingent on a change in the ownership or control of
Corporation M totaling $400,000 are made to A on
the date of the change in ownership or control. The
payments are parachute payments because they have
an aggregate present value at least equal to 3 times A’
s
base amount of $100,000 (3 x $100,000 = $300,000).
Example 2. Assume the same facts as inExample
1, except that the payments contingent on the ch
ange
in the ownership or control of Corporation M total
$290,000. Because the payments do not have an ag-
gregate present value at least equal to 3 time
sA’sbase
amount, no portion of the payments is a parachute
payment.
Q–31: As of what date is the present
value of a payment determined?
A–31: (a) Except as provided in this
section, the present value of a payment is
determined as of the date on which the
change in ownership or control occurs, or,
if a payment is made prior to such date, the
date on which the payment is made.
(b)(1) For purposes of determining
whether a payment is a parachute pay-
ment, if a payment in the nature of com-
pensation is the right to receive payments
in a year (or years) subsequent to the year
of the change in ownership or control, the
value of the payment is the present value
of such payment (or payments) calculated
in accordance with Q/A–32 of this section
and based on reasonable actuarial assump-
tions.
(2) If the payment in the nature of com-
pensation is an obligation to provide health
care, then for purposes of this A–31 and
for applying the 3-times-base-amount test
under Q/A–30 of this section, the present
value of such obligation should be cal-
culated in accordance with generally ac-
cepted accounting principles. For pur-
poses of Q/A–30 and this A–31, the obli-
gation to provide health care is permitted
to be measured by projecting the cost of
premiums for purchased health care insur-
ance, even if no health care insurance is ac-
tually purchased. If the obligation to pro-
vide health care is made in coordination
with a health care plan that the corporation
makes available to a group, then the pre-
miums used for this purpose may be group
premiums.
Q–32: What discount rate is to be used
to determine present value?
A–32: For purposes of this section,
present value generally is determined by
using a discount rate equal to 120 per-
cent of the applicable federal rate (deter-
mined under section 1274(d) and the reg-
ulations thereunder) compounded semian-
nually. The applicable federal rate to be
used for this purpose is the federal rate
that is in effect on the date as of which
the present value is determined, using the
period until the payment would have been
made without regard to the change in own-
ership or control as the term of the debt
instrument under section 1274(d). See
Q/A–24 and 31 of this section. However,
for any payment, the corporation and the
disqualified individual may elect to use the
applicable federal rate that is in effect on
the date that the contract which provides
for the payment is entered into, if such
election is made in the contract.
Q–33: If the present value of a payment
to be made in the future is contingent on
an uncertain future event or condition, how
is the present value of the payment deter-
mined?
A–33: (a) In certain cases, it
may be necessary to apply the
3-times-base-amount test of Q/A–30
of this section, or to allocate a portion of
the base amount to a payment described in
paragraphs (a)(1), (2), and (3) of Q/A–2 of
this section, at a time when the aggregate
present value of all such payments cannot
be determined with certainty because the
time, amount, or right to receive one or
more such payments is contingent on the
occurrence of an uncertain future event or
condition. For example, a disqualified in-
dividual’s right to receive a payment may
be contingent on the involuntary termina-
tion of such individual’s employment with
the corporation. In such a case, it must be
reasonably estimated whether the payment
will be made. If it is reasonably estimated
that there is a 50-percent or greater prob-
ability that the payment will be made, the
full amount of the payment is considered
2003-40 I.R.B.722October 6, 2003

for purposes of the 3-times-base-amount
test and the allocation of the base amount.
Conversely, if it is reasonably estimated
that there is a less than 50-percent prob-
ability that the payment will be made,
the payment is not considered for either
purpose.
(b) If the estimate made under para-
graph (a) of this A–33 is later determined
to be incorrect, the 3-times-base-amount
testdescribedinQ/A–30ofthissection
must be reapplied (and the portion of the
base amount allocated to previous pay-
ments must be reallocated (if necessary) to
such payments) to reflect the actual time
and amount of the payment. Whenever
the 3-times-base-amount test is applied (or
whenever the base amount is allocated),
the aggregate present value of the pay-
ments received or to be received by the dis-
qualified individual is redetermined as of
the date described in A–31 of this section,
using the discount rate described in A–32
of this section. This redetermination may
affect the amount of any excess parachute
payment for a prior taxable year. Alterna-
tively, if, based on the application of the
3-times-base-amount test without regard to
the payment described in paragraph (a) of
this A–33, a disqualified individual is de-
termined to have an excess parachute pay-
ment or payments, then the 3-times-base-
amount test does not have to be reapplied
when a payment described in paragraph (a)
of this A–33 is made (or becomes certain
to be made) if no base amount is allocated
to such payment.
(c) To the extent provided in pub-
lished guidance of general applicability
under §601.601(d)(2) of this Chapter,
an initial estimate of the value of an op-
tion subject to Q/A–13 of this section
is permitted be made, with the valua-
tion subsequently redetermined, and the
three-times-base-amount test reapplied.
(d) The following examples illustrate
the principles of this A–33:
Example 1. A, a disqualified individual with
respect to Corpo
rationM,hasabaseamountof
$100,000. Under A’s employment agreement with
Corporation M, A is entitled to receive a payment
inthenatureof
compensation in the amount of
$250,000 contingent on a change in ownership or
control of Corporation M. In addition, the agreement
provides th
at if A’s employment is terminated within
1 year after the change in ownership or control, A will
receive an additional payment in the nature of com-
pensation
in the amount of $150,000, payable 1 year
after the date of the change in ownership or control.
A change in ownership or control of Corporation M
occurs and A receives the first payment of $250,000.
Corporation M reasonably estimates that there is a
50-percent probability that, as a result of the change,
A’s employment will be terminated within 1 year of
the date of the change. For purposes of applying the
3-times-base-amount test (and if the first payment is
determined to be a parachute payment, for purposes
of allocating a portion of A’s base amount to that
payment), because M reasonably estimates that there
is a 50-percent or greater probability that, as a result
of the change, A’s employment will be terminated
within 1 year of the date of the change, Corporation
M must assume that the $150,000 payment will be
made to A as a result of the change in ownership or
control. The present value of the additional payment
is determined under Q/A–31 and Q/A–32 of this
section.
Example 2. Assume the same facts as inExam-
ple 1, except that Corporation M reasonably estimates
that there is a less than 50-percent probability that, as
a result of the change, A’s employment will be termi-
nated within 1 year of the date of the change. For pur-
poses of applying the 3-times-base-amount test, be-
cause Corporation M reasonably estimates that th
ere
is a less than 50-percent probability that, as a result
of the change, A’s employment will be terminated
within 1 year of the date of the change, Cor
poration
M must assume that the $150,000 payment will not
be made to A as a result of the change in ownership
or control.
Example 3. B, a disqualified individual with
respect to Corporation P, has a base amount of
$200,000. Under B’s employment agr
eement with
Corporation P, if there is a change in ownership or
control of Corporation P, B will receive a sever-
ance payment of $600,000 and a bon
us payment of
$400,000. In addition, the agreement provides that
if B’s employment is terminated within 1 year after
the change, B will receive an ad
ditional payment in
the nature of compensation of $500,000. A change
in ownership or control of Corporation P occurs, and
B receives the $600,000 and
$400,000 payments.
At the time of the change in ownership or control,
Corporation P reasonably estimates that there is a
less than 50-percent pro
bability that B’s employment
will be terminated within 1 year of the change. For
purposes of applying the 3-times-base-amount test,
because Corporation
P reasonably estimates that
there is a less than 50-percent probability that B’s
employment will be terminated within 1 year of the
date of the change,
Corporation P assumes that the
$500,000 payment will not be made to B. Eleven
months after the change in ownership or control,
B’s employment is
terminated, and the $500,000
payment is made to B. Because B was determined to
have excess parachute payments without regard to
the $500,000 p
ayment, the 3-times-base-amount test
is not reapplied and the base amount is not reallo-
cated to include the $500,000 payment. The entire
$500,000 pay
ment is treated as an excess parachute
payment.
Q–34: What is the base amount?
A–34: (a) The base amount of a dis-
qualified individual is the average annual
compensation for services performed for
the corporation with respect to which the
change in ownership or control occurs (or
for a predecessor entity or a related entity
as defined in Q/A–21 of this section) which
was includible in the gross income of such
individual for taxable years in the base
period (including amounts that were ex-
cluded under section 911), or which would
have been includible in such gross income
if such person had been a United States
citizen or resident. See Q/A–35 of this
section for the definition of base period
and for examples of base amount compu-
tations.
(b) If the base period of a disqualified
individual includes a short taxable year or
less than all of a taxable year, compensa-
tion for such short or incomplete taxable
year must be annualized before determin-
ing the average annual compensation for
the base period. In annualizing compen-
sation, the frequency with which payments
are expected to be made over an annual pe-
riod must be taken into account. Thus, any
amount of compensation for such a short
or incomplete taxable year that represents
a payment that will not be made more of-
ten than once per year is not annualized.
(c) Because the base amount includes
only compensation that is includible in
gross income, the base amount does
not include certain items that constitute
parachute payments. For example, pay-
ments in the form of excludible fringe
benefits are not included in the base
amount but may be treated as parachute
payments.
(d) The base amount includes the
amount of compensation included in in-
come under section 83(b) during the base
period. See Q/A–35 for the definition of
base period.
(e) The following example illustrates
the principles of this A–34:
Example. A disqualified individual, D, receives
an annual salary of $500
,000 per year during the
5-year base period. D defers $100,000 of D’s salary
each year under the corporation’s nonqualified
deferred compensati
on plan. D’s base amount is
$400,000 ($400,000 x (5/5)).
Q–35: What is the base period?
A–35: (a) The base period of a disquali-
fied individual is the most recent 5 taxable
years of the individual ending before the
date of the change in ownership or control.
For this purpose, the date of the change in
ownership or control is the date the cor-
poration experiences one of the events de-
scribed in Q/A–27, Q/A–28, or Q/A–29 of
this section. However, if the disqualified
individual was not an employee or inde-
pendent contractor of the corporation with
October 6, 20037232003-40 I.R.B.

respect to which the change in ownership
or control occurs (or a predecessor entity
or a related entity as defined in Q/A–21 of
this section) for this entire 5-year period,
the individual’s base period is the portion
of such 5-year period during which the in-
dividual performed personal services for
the corporation or predecessor entity or re-
lated entity.
(b) The following examples illustrate
the principles of Q/A–34 of this section
and this Q/A–35:
Example 1. A disqualified individual, D, was em-
ployed by a corporation for 2 years and 4 months pre-
ceding the taxable year in which a change in owner-
ship or control of the corporation occurs. D’s includi-
ble compensation income from the corporation was
$30,000 for the 4-month period, $120,000 for the first
full year, and $150,000 for the second full year. D’s
base amount is $120,000, ((3 x $30,000) + $120,000
+ $150,000) / 3.
Example 2. Assume the same facts as inExam-
ple 1, except that D also received a $60,000 sign
-
ing bonus when D’s employment with the corpora-
tion commenced at the beginning of the 4-month pe-
riod. D’s base amount is $140,000, (($60,000
+(3
x $30,000)) + $120,000 + $150,000) / 3. Since the
bonus will not be paid more often than once per year,
the amount of the bonus is not increased in a
nnualiz-
ing D’s compensation for the 4-month period.
Example 3. E is a disqualified individual with
respect to Corporation X who was not an
employee
or independent contractor for the full 5-year base pe-
riod. In 2004 and 2005, E is a director of X and re-
ceives $30,000 per year for E’s serv
ices. In 2006,
E becomes an officer of X. E’s includible compen-
sation from Corporation X is $250,000 for 2006 and
2007, and $300,000 for 2008. In
2008, X undergoes
a change in ownership or control. E’s base amount is
$140,000 ((2 x $250,000) + (2 x $30,000)/4).
Q–36: How is the base amount deter-
mined in the case of a disqualified individ-
ual who did not perform services for the
corporation (or a predecessor entity or a re-
lated entity as defined in Q/A–21 of this
section), prior to the individual’s taxable
year in which the change in ownership or
control occurs?
A–36: (a) In such a case, the individ-
ual’s base amount is the annualized com-
pensation for services performed for the
corporation (or a predecessor entity or re-
lated entity) which —
(1) Was includible in the individual’s
gross income for that portion, prior to such
change, of the individual’s taxable year
in which the change occurred (including
amounts that were excluded under section
911), or would have been includible in
such gross income if such person had been
a United States citizen or resident;
(2) Was not contingent on the change in
ownership or control; and
(3) Was not a securities violation
parachute payment.
(b) The following examples illustrate
the principles of this A–36:
Example 1. On January 1, 2006, A, an individual
whose taxable year is the calendar year, enters into a
4-year employment contract with Corporation M as
an officer of the corporation. A has not previously
performed services for Corporation M (or any prede-
cessor entity or related entity as defined in Q/A–21
of this section). Under the employment contract, A
is to receive an annual salary of $120,000 for each
of the 4 years that he remains employed by Corpo-
ration M with any remaining unpaid balance to be
paid immediately in the event that A’s employment
is terminated without cause. On July 1, 2006, after
A has received compensation of $60,000, a change
in the ownership or control of Corporation M oc-
curs. Because of the change, A’s employment is ter-
minated without cause, and he receives a payment of
$420,000. It is established by clear and convincing
evidence that the $60,000 in compensation is not con-
tingent on the change in ownership or control, but the
presumption that the $420,000 payment is cont
ingent
on the change is not rebutted. Thus, the payment of
$420,000 is treated as contingent on the change in
ownership or control of Corporation M. In th
is case,
A’s base amount is $120,000 (2 x $60,000). Since
the present value of the payment which is contin-
gent on the change in ownership of Corp
oration M
($420,000) is more than 3 times A’s base amount of
$120,000 (3 x $120,000 = $360,000), the payment is
a parachute payment.
Example 2. Assume the same facts as inExam-
ple 1, except that A also receives a signing bonus of
$50,000 from Corporation M on Janu
ary 1, 2006. It is
established by clear and convincing evidence that the
bonus is not contingent on the change in ownership or
control. When the change in ow
nership or control oc-
curs on July 1, 2006, A has received compensation of
$110,000 (the $50,000 bonus plus $60,000 in salary).
In this case, A’s base amount
is $170,000 ($50,000 +
(2 x $60,000)). Because the $50,000 bonus will not
be paid more than once per year, the amount of the
bonus is not increased i
n annualizing A’s compensa-
tion. The present value of the potential parachute pay-
ment ($420,000) is less than 3 times A’s base amount
of $170,000 (3 x $170,0
00 = $510,000), and therefore
no portion of the payment is a parachute payment.
Securities Violation Parachute Payments
Q–37: Must a payment be contingent
on a change in ownership or control in or-
der to be a parachute payment?
A–37: (a) No, the termparachute pay-
mentalso includes any payment (other
than a payment exempted under Q/A–6
or Q/A–8 of this section) that is in the
nature of compensation and is to (or for
the benefit of) a disqualified individual,
if such payment is a securities violation
payment. A securities violation payment
is a payment made or to be made —
(1) Pursuant to an agreement that vi-
olates any generally enforced federal or
state securities laws or regulations; and
(2) In connection with a potential or
actual change in ownership or control.
(b) A violation is not taken into account
under paragraph (a)(1) of this A–37 if it is
merely technical in character or is not ma-
terially prejudicial to shareholders or po-
tential shareholders. Moreover, a viola-
tion will be presumed not to exist unless
the existence of the violation has been de-
termined or admitted in a civil or crimi-
nal action (or an administrative action by
a regulatory body charged with enforcing
the particular securities law or regulation)
which has been resolved by adjudication or
consent. Parachute payments described in
this A–37 are referred to in this section as
securities violation payments.
(c) Securities violation parachute
payments that are not contingent on a
change in ownership or control within
the meaning of Q/A–22 of this section
are not taken into account in applying
the 3-times-base-amount test of Q/A–30
of this section. Such payments are con-
sidered parachute payments regardless of
whether such test is met with respect to the
disqualified individual (and are included
in allocating base amount under Q/A–38
of this section). Moreover, the amount of
a securities violation parachute payment
treated as an excess parachute payment
shall not be reduced by the portion of such
payment that is reasonable compensation
for personal services actually rendered be-
fore the date of a change in ownership or
control if such payment is not contingent
on such change. Likewise, the amount of
a securities violation parachute payment
includes the portion of such payment that
is reasonable compensation for personal
services to be rendered on or after the date
of a change in ownership or control if such
payment is not contingent on such change.
(d) The rules in paragraph (b) of this
A–37 also apply to securities violation
parachute payments that are contingent
on a change in ownership or control if
the application of these rules results in
greater total excess parachute payments
with respect to the disqualified individual
than would result if the payments were
treated simply as payments contingent
on a change in ownership or control (and
hence were taken into account in ap-
plying the 3-times-base-amount test and
2003-40 I.R.B.724October 6, 2003

were reduced by, or did not include, any
applicable amount of reasonable compen-
sation).
(e) The following examples illustrate
the principles of this A–37:
Example 1. A, a disqualified individual with re-
spect to Corporation M, receives two payments in
the nature of compensation that are contingent on a
change in the ownership or control of Corporation
M. The present value of the first payment is equal
to A’s base amount and is not a securities violation
parachute payment. The present value of the second
payment is equal to 1.5 times A’s base amount and
is a securities violation parachute payment. Neither
payment includes any reasonable compensation. If
the second payment is treated simply as a payment
contingent on a change in ownership or control, the
amount of A’s total excess parachute payments is zero
because the aggregate present value of the payments
does not equal or exceed 3 times A’s base amount.
If the second payment is treated as a securities viola-
tion parachute payment subject to the rules of para-
graph (b) of this A–37, the amount of A’s total excess
parachute payments is 0.5 times A’s base amount.
Thus, the second payment is treated as a secur
ities
violation parachute payment.
Example 2. Assume the same facts as inExample
1, except that the present value of the first
payment is
equal to 2 times A’s base amount. If the second pay-
ment is treated simply as a payment contingent on a
change in ownership or control, the total
present value
of the payments is 3.5 times A’s base amount, and
the amount of A’s total excess parachute payments is
2.5 times A’s base amount. If the sec
ond payment
is treated as a securities violation parachute payment,
the amount of A’s total excess parachute payments is
0.5 times A’s base amount. Thus, th
e second payment
is treated simply as a payment contingent on a change
in ownership or control.
Example 3. B, a disqualified in
dividual with re-
spect to Corporation N, receives two payments in
the nature of compensation that are contingent on a
change in the control of Corp
oration N. The present
value of the first payment is equal to 4 times B’s base
amount and is a securities violation parachute pay-
ment. The present value of t
he second payment is
equal to 2 times B’s base amount and is not a secu-
rities violation parachute payment. B establishes by
clear and convincing e
vidence that the entire amount
of the first payment is reasonable compensation for
personal services to be rendered after the change in
ownership or control
. If the first payment is treated
simply as a payment contingent on a change in own-
ership or control, it is exempt from the definition of
parachute paymen
tpursuant to Q/A–9 of this section.
Thus, the amount of B’s total excess parachute pay-
ment is zero because the present value of the sec-
ond payment does
not equal or exceed three times
B’s base amount. However, if the first payment is
treated as a securities violation parachute payment,
the amount of B
’s total excess parachute payments is
3 times B’s base amount. Thus, the first payment is
treated as a securities violation parachute payment.
Example 4.As
sume the same facts as inExam-
ple 3, except that B does not receive the second pay-
ment and B establishes by clear and convincing evi-
dence that t
he first payment is reasonable compensa-
tion for services actually rendered before the change
in the control of Corporation N. If the payment is
treated simply as a payment contingent on a change
in ownership or control, the amount of B’s excess
parachute payment is zerobecause the amount treated
as an excess parachute payment is reduced by the
amount that B establishes as reasonable compensa-
tion. However, if the payment is treated as a securi-
ties violation parachute payment, the amount of B’s
excess parachute payment is 3 times B’s base amount.
Thus, the payment is treated as a securities violation
parachute payment.
Computation and Reduction of Excess
Parachute Payments
Q–38: How is the amount of an excess
parachute payment computed?
A–38: (a) The amount of an excess
parachute payment is the excess of the
amount of any parachute payment over
the portion of the disqualified individual’s
base amount that is allocated to such pay-
ment. For this purpose, the portion of
the base amount allocated to any parachute
payment is the amount that bears the same
ratio to the base amount as the present
value of such parachute payment bears to
the aggregate present value of all parachute
payments made or to be made to (or for the
benefit of) the same disqualified individ-
ual. Thus, the portion of the base amount
allocated to any parachute payment is de-
termined by multiplying the base amount
by a fraction, the numerator of which is the
present value of such parachute payment
and the denominator of which is the ag-
gregate present value of all such payments.
See Q/A–31, Q/A–32, and Q/A–33 of this
section for rules on determining present
value and Q/A–34 of this section for the
definition ofbase amount.
(b) The following example illustrates
the principles of this A–38:
Example. An individual w
ithabaseamountof
$100,000 is entitled to receive two parachute pay-
ments, one of $200,000 and the other of $400,000.
The $200,000 payment i
s made at the time of the
change in ownership or control, and the $400,000
payment is to be made at a future date. The present
value of the $400,0
00 payment is $300,000 on the
date of the change in ownership or control. The por-
tions of the base amount allocated to these payments
are $40,000 (($20
0,000/$500,000) x $100,000) and
$60,000 (($300,000/$500,000) x $100,000), respec-
tively. Thus, the amount of the first excess parachute
payment is $160
,000 ($200,000 - $40,000) and that
of the second is $340,000 ($400,000 - $60,000).
Q–39: May the amount of an excess
parachute payment bereduced by reason-
able compensation for personal services
actually rendered before the change in
ownership or control?
A–39: (a) Generally, yes. Except in
the case of payments treated as securities
violation parachute payments or when
the portion of a payment that is treated
as contingent on the change in ownership
or control is determined under paragraph
(b) or (c) of Q/A–24 of this section, the
amount of an excess parachute payment
is reduced by any portion of the payment
that the taxpayer establishes by clear and
convincing evidence is reasonable com-
pensation for personal services actually
rendered by the disqualified individual
before the date of the change in own-
ership or control. Services reasonably
compensated for by payments that are
not parachute payments (for example,
because the payments are not contingent
on a change in ownership or control and
are not securities violation parachute
payments, or because the payments are
exempt from the definition of parachute
payment under Q/A–6 through Q/A–9 of
this section) are not taken into account for
this purpose. The portion of any parachute
payment that is established as reasonable
compensation is first reduced by the por-
tion of the disqualified individual’s base
amount that is allocated to such parachute
payment; any remaining portion of the
parachute payment established as reason-
able compensation then reduces the excess
parachute payment.
(b) The following examples illustrate
the principles of this A–39:
Example 1. Assume that a parachute payment of
$600,000 is made to a disqu
alified individual, and
the portion of the individual’s base amount that is
allocated to the parachute payment is $100,000. Also
assume that $300,000 of
the $600,000 parachute
payment is established as reasonable compensation
for personal services actually rendered by the dis-
qualified individu
al before the date of the change
in ownership or control. Before the reasonable
compensation is taken into account, the amount of
the excess parach
ute payment is $500,000 ($600,000
- $100,000). In reducing the excess parachute pay-
ment by reasonable compensation, the portion of the
parachute paym
ent that is established as reasonable
compensation ($300,000) is first reduced by the por-
tion of the disqualified individual’s base amount that
is allocated
to the parachute payment ($100,000),
and the remainder ($200,000) then reduces the
excess parachute payment. Thus, in this case, the
excess para
chute payment of $500,000 is reduced by
$200,000 of reasonable compensation.
Example 2. Assume the same facts as inExam-
ple 1,exce
pt that the full amount of the $600,000
parachute payment is established as reasonable com-
pensation. In this case, theexcess parachute payment
of $500,0
00 is reduced to zero by $500,000 of rea-
sonable compensation. As a result, no portion of any
October 6, 20037252003-40 I.R.B.

deduction for the payment is disallowed by section
280G, and no portion of the payment is subject to the
20-percent excise tax of section 4999.
Determination of Reasonable
Compensation
Q–40: How is it determined whether
payments are reasonable compensation?
A–40: (a) In general, whether payments
are reasonable compensation for personal
services actually rendered, or to be ren-
dered, by the disqualified individual is de-
termined on the basis of all the facts and
circumstances of the particular case. Fac-
tors relevant to such a determination in-
clude, but are not limited to, the follow-
ing—
(1) The nature of the services rendered
or to be rendered;
(2) The individual’s historic compensa-
tion for performing such services; and
(3) The compensation of individuals
performing comparable services in sit-
uations where the compensation is not
contingent on a change in ownership or
control.
(b) For purposes of section 280G,
reasonable compensation for personal ser-
vices includes reasonable compensation
for holding oneself out as available to
perform services and refraining from per
-
forming services (such as under a covena
nt
not to compete).
Q–41: Is any particular type of evi-
dence generally considered clear an
dcon-
vincing evidence of reasonable com
pensa-
tion for personal services?
A–41: Yes. A showing that payments
are made under a nondiscriminator
y
employee plan or program (as de
fined
in Q/A–26 of this section) gene
rally is
considered to be clear and con
vincing
evidence that the payments ar
e reasonable
compensation. This is true w
hether the
personal services for whic
h the payments
are made are actually rende
red before, or
aretoberenderedonoraf
ter, the date
of the change in ownersh
ip or control.
Q/A–46 of this section
(relating to the
treatment of an affili
ated group as one
corporation) does no
t apply for purposes
of this A–41. No deter
mination of reason-
able compensation
is needed for payments
under qualified pl
ans to be exempt from
the definition of
parachute paymentunder
Q/A–8 of this sec
tion.
Q–42: Is any particular type of evi-
dence generally considered clear and con-
vincing evidence of reasonable compensa-
tion for personal services to be rendered on
or after the date of a change in ownership
or control?
A–42: (a) Yes, if payments are made or
to be made to (or on behalf of) a disquali-
fied individual for personal services to be
rendered on or after the date of a change in
ownership or control, a showing of the fol-
lowing generally is considered to be clear
and convincing evidence that the payments
are reasonable compensation for services
to be rendered on or after the date of the
change in ownership or control —
(1) The payments were made or are to
be made only for the period the individual
actually performs such personal services;
and
(2) If the individual’s duties and re-
sponsibilities are substantially the same af-
ter the change in ownership or control,
the individual’s annual compensation for
such services is not significantly greater
than such individual’s annual compensa-
tion prior to the change in ownership or
control, apart from normal increases attrib-
utable to increased responsibilities or cost
of living adjustments. If the scope of the
individual’s duties and responsibilities are
not substantially the same, the annual com-
pensation after the change is not signifi-
cantly greater than the annual compensa-
tion customarily paid by the employer or
by comparable employers to persons per-
forming comparable services. However,
except as provided in paragraph (b) and (c)
of this A–42, such clear and convincing ev-
idence will not exist if the individual does
not, in fact, perform the services contem-
plated in exchange for the compensation.
(b) Generally, an agreement under
which the disqualified individual must
refrain from performing services (e.g.,
a covenant not to compete) is an agree-
ment for the performance of personal
services for purposes of this A–42 to the
extent that it is demonstrated by clear and
convincing evidence that the agreement
substantially constrains the individual’s
ability to perform services and there is a
reasonable likelihood that the agreement
will be enforced against the individual.
In the absence of clear and convincing
evidence, payments under the agreement
are treated as severance payments under
Q/A–44 of this section.
(c) If the employment of a disqualified
individual is involuntarily terminated be-
fore the end of a contract term and the indi-
vidual is paid damages for breach of con-
tract, a showing of the following factors
generally is considered clear and convinc-
ing evidence that the payment is reason-
able compensation for personal services to
be rendered on or after the date of change
in ownership or control —
(1) The contract was not entered into,
amended, or renewed in contemplation of
the change in ownership or control;
(2) The compensation the individual
would have received under the contract
would have qualified as reasonable com-
pensation under section 162;
(3) The damages do not exceed the
present value (determined as of the date of
receipt) of the compensation the individual
would have received under the contract if
the individual had continued to perform
services for the employer until the end of
the contract term;
(4) The damages are received because
an offer to provide personal services was
made by the disqualified individual but
was rejected by the employer (including
involuntary termination or constructive
discharge); and
(5) The damages are reduced by mit-
igation. Mitigation will be treated as
occurring when such damages are reduced
(or any payment of such damages is re-
turned) to the extent of the disqualified
individual’s earned income (within the
meaning of section 911(d)(2)(A)) during
the remainder of the period in which the
contract would have been in effect. See
Q/A–44 of this section for rules regarding
damages for a failure to make severance
payments.
(d) The following examples illustrate
the principles of this A–42:
Example 1. A, a disqualified individual, has a
three-year employment c
ontract with Corporation M,
a publicly traded corporation. Under this contract, A
is to receive a salary for $100,000 for the first year of
the contract and, for
each succeeding year, an annual
salary that is 10 percent higher than the prior year’s
salary. During the third year of the contract, Corpora-
tion N acquires all
the stock of Corporation M. Prior
to the change in ownership, Corporation N arranges
to retain A’s services by entering into an employment
contract with A t
hat is essentially the same as A’s con-
tract with Corporation M. Under the new contract,
Corporation N is to fulfill Corporation M’s obliga-
tions for the th
ird year of the old contract, and, for
each of the succeeding years, pay A an annual salary
that is 10 percent higher than A’s prior year’s salary.
2003-40 I.R.B.726October 6, 2003

Amounts are payable under the new contract only for
the portion of the contract term during which A re-
mains employed by Corporation N. A showing of the
facts described above (andin the absence of contra-
dictory evidence) is regarded as clear and convincing
evidence that all payments under the new contract are
reasonable compensation for personal services to be
rendered on or after the date of the change in owner-
ship. Therefore, the payments under this agreement
are exempt from the definition ofparachute payment
pursuant to Q/A–9 of this section.
Example 2. Assume the same facts as inExam-
ple 1, except that A does not perform the services de-
scribed in the new contract, but receives payment un-
der the new contract. Because services were not ren-
dered after the change, the payments under this con-
tract are not exempt from the definition ofparachute
paymentpursuant to Q/A–9 of this section.
Example 3. Assume the same facts as inExample
1, except that under the new contract A agrees to per-
form consulting services to Corporation N, when and
if Corporation N requires A’s services. Assume fur-
ther that when Corporation N does not require A’s ser-
vices, the contract provides that A must not perfor
m
services for any other competing company. Corpora-
tion N previously enforced similar contracts against
former employees of Corporation N. Because
Ais
substantially constrained under this contract and Cor-
poration N is reasonably likely to enforce the con-
tract against A, the agreement is an agree
ment for the
performance of services under paragraph (b) of this
A–42. Assuming the requirements of paragraph (a)
of this A–42 are met and there is clea
r and convinc-
ing evidence that all payments under the new contract
are reasonable compensation for personal services to
be rendered on or after the date of
the change in own-
ership, the payments under this contract are exempt
from the definition ofparachute paymentpursuant to
Q/A–9 of this section.
Example 4. Assume the same facts as inExample
1, except that instead of agreeing not to compete with
Corporation N, under the new
agreement A agrees not
to disparage either Corporation M or Corporation N.
Because the nondisparagement agreement does not
substantially constrain
A’s ability to perform services,
no amount of the payments under this contract are
reasonable compensation for the nondisparagement
agreement.
Example 5. Assume the same facts as inExample
1, except that the employment contract with Corpo-
ration N does not provi
de that amounts are payable
under the contract only for the portion of the term
for which A remains employed by Corporation N.
Shortly after the ch
ange in ownership, and despite
A’s request to remain employed by Corporation N,
A’s employment with Corporation N is involuntar-
ily terminated. S
hortly thereafter, A obtains employ-
ment with Corporation O. A commences a civil ac-
tion against Corporation N, alleging breach of the
employment con
tract. In settlement of the litigation,
A receives an amount equal to the present value of
the compensation A would have received under the
contract wit
h Corporation N, reduced by the amount
of compensation A otherwise receives from Corpo-
ration O during the period that the contract would
have been in
effect. A showing of the facts described
above (and in the absence of contradictory evidence)
is regarded as clear and convincing evidence that the
amount A receives as damages is reasonable compen-
sation for personal services to be rendered on or after
the date of the change in ownership. Therefore, the
amount received by A is exempt from the definition
ofparachute paymentpursuant to Q/A–9 of this sec-
tion.
Q–43: Is any particular type of payment
generally considered reasonable compen-
sation for personal services actually ren-
dered before the date of a change in own-
ership or control?
A–43: Yes, payments of compensation
earned before the date of a change in own-
ership or control generally are considered
reasonable compensation for personal ser-
vices actually rendered before the date of
a change in ownership or control if they
qualify as reasonable compensation under
section 162.
Q–44: May severance payments be
treated as reasonable compensation?
A–44: (a) No, severance payments are
not treated as reasonable compensation for
personal services actually rendered before,
or to be rendered on or after, the date of a
change in ownership or control. Moreover,
any damages paid for a failure to make sev-
erance payments are not treated as reas
on-
able compensation for personal servic
es
actually rendered before, or to be ren
dered
on or after, the date of such change. F
or
purposes of this section, the terms
ever-
ance paymentmeans any payment that
is
made to (or for the benefit of) a dis
quali-
fied individual on account of t
he termina-
tion of such individual’s emp
loyment prior
totheendofacontractterm,b
ut does not
include any payment that oth
erwise would
be made to (or for the benefi
t of) such indi-
vidual on the termination o
f such individ-
ual’s employment, when
ever occurring.
(b) The following exampl
e illustrates
the principles of this A
–44:
Example. A, a disqualified individual, has a three-
year employment contract with Corporation X. Under
the contract, A will rec
eive a salary of $200,000 for
the first year of the contract, and for each succeeding
year, an annual salary that is $100,000 higher than
the previous year. I
n the event of A’s termination of
employment following a change in ownership or con-
trol, the contract provides that A will receive the re-
maining salary due
under the employment contract.
At the beginning of the second year of the contract,
Corporation Y acquires all of the stock of Corpora-
tionX,A’semplo
yment is terminated, and A receives
$700,000 ($300,000 for the second year of the con-
tract plus $400,000 for the third year of the contract)
representing
the remaining salary due under the em-
ployment contract. Because the $700,000 payment
is treated as a severance payment, it is not reason-
able compens
ation for personal services on or after
the date of the change in ownership or control. Thus,
the full amount of the $700,000 is a parachute pay-
ment.
Miscellaneous Rules
Q–45: How is the termcorporationde-
fined?
A–45: For purposes of this section,
the termcorporationhas the meaning
prescribed by section 7701(a)(3) and
§301.7701–2(b) of this Chapter. For ex-
ample, acorporation, for purposes of
this section, includes a publicly traded
partnership treated as a corporation under
section 7704(a); an entity described in
§301.7701–3(c)(1)(v)(A) of this Chapter;
a real estate investment trust under section
856(a); a corporation that has mutual or
cooperative (rather than stock) ownership,
such as a mutual insurance company, a
mutual savings bank, or a cooperative
bank (as defined in section 7701(a)(32)),
and a foreign corporation as defined under
section 7701(a)(5).
Q–46: How is an affiliated group
treated?
A–46: For purposes of this section,
and except as otherwise provided in this
section, all members of the same affili
ated
group (as defined in section 1504, det
er-
mined without regard to section 1504(
b))
are treated as one corporation. Rule
s
affected by this treatment of an a
ffiliated
group include (but are not limit
ed to) rules
relating to exempt payments of
certain
corporations (Q/A–6, Q/A–7 of
this sec-
tion (except as provided ther
ein)), payor
of parachute payments (Q/A–
10 of this
section), disqualified ind
ividuals (Q/A–15
through Q/A–21 of this se
ction (except
as provided therein)), r
ebuttal of the pre-
sumption that payments
are contingent on
achange(Q/A–26ofthis
section (except
as provide therein)),
change in ownership
or control (Q/A–27, 2
8,and29ofthis
section), and reas
onable compensation
(Q/A–42, 43, and 44
of this section).
Effective Date
Q–47: What is the ge
neral effective
date of section 28
0G?
A–47: (a) General
ly, section 280G ap-
plies to payment
s under agreements en-
teredintoorren
ewed after June 14, 1984.
Any agreement t
hat is entered into before
June 15, 1984, a
nd is renewed after June
October 6, 20037272003-40 I.R.B.

14, 1984, is treated as a new contract en-
teredintoonthedaytherenewaltakesef-
fect.
(b) For purposes of paragraph (a) of this
A–47, a contract that is terminable or can-
cellable unconditionally at will by either
party to the contract without the consent
of the other, or by both parties to the con-
tract, is treated as a new contract entered
into on the date any such termination or
cancellation, if made, would be effective.
However, a contract is not treated as so
terminable or cancellable if it can be ter-
minated or cancelled only by terminating
the employment relationship or indepen-
dent contractor relationship of the disqual-
ified individual.
(c) Section 280G applies to payments
under a contract entered into on or before
June 14, 1984, if the contract is amended
or supplemented after June 14, 1984, in
significant relevant respect. For this pur-
pose, asupplementto a contract is defined
as a new contract entered into after June
14, 1984, that affects the trigger, amount,
or time of receipt of a payment under an
existing contract.
(d)(1) Except as otherwise provided
in paragraph (e) of this A–47, a contract
is considered to be amended or supple-
mented in significant relevant respect if
provisions for payments contingent on a
change in ownership or control (parachute
provisions), or provisions in the nature
of parachute provisions, are added to the
contract, or are amended or supplemented
to provide significant additional benefits
to the disqualified individual. Thus, for
example, a contract generally is treated as
amended or supplemented in significant
relevant respect if it is amended or supple-
mented —
(i) To add or modify, to the disqualified
individual’s benefit, a change in ownership
or control trigger;
(ii) To increase amounts payable that
are contingent on a change in ownership or
control (or, where payment is to be made
under a formula, to modify the formula to
the disqualified individual’s advantage); or
(iii) To accelerate, in the event of a
change in ownership or control, the pay-
ment of amounts otherwise payable at a
later date.
(2) For purposes of paragraph (a) of this
A–47, a payment is not treated as being ac-
celerated in the event of a change in owner-
ship or control if the acceleration does not
increase the present value of the payment.
(e) A contract entered into on or before
June 14, 1984, is not treated as amended
or supplemented in significant relevant re-
spect merely by reason of normal adjust-
ments in the terms of employment relation-
ship or independent contractor relationship
of the disqualified individual. Whether an
adjustment in the terms of such a relation-
ship is considered normal for this purpose
depends on all of the facts and circum-
stances of the particular case. Relevant
factors include, but are not limited to, the
following—
(1) The length of time between the ad-
justment and the change in ownership or
control;
(2) The extent to which the corporation,
at the time of the adjustment, viewed itself
as a likely takeover candidate;
(3) A comparison of the adjustment
with historical practices of the corpora-
tion;
(4) The extent of overlap between the
group receiving the benefits of the adjust-
ment and those members of that group who
are the beneficiaries of pre-June 15, 1984,
parachute contracts; and
(5) The size of the adjustment, both in
absolute terms and in comparison with the
benefits provided to other members of the
group receiving the benefits of the adjust-
ment.
Q–48: What is the effective date of this
section?
A–48: This section applies to any pay-
ments that are contingent on a change in
ownership or control if the change in own-
ership or control occurs on or after January
1, 2004. Taxpayers may rely on these reg-
ulations after August 4, 2003, for the treat-
ment of any parachute payment.
Par 3. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.280G–1............................................................................. 1545–1851
*****
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
Approved July 14, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on August 1,
2003, 8:45 a.m., and published in the issue of the Federal
Register for August 4, 2003, 68 F.R. 45745)
Section 301.—Distributions
of Property
26 CFR 1.301-1: Rules applicable with respect to
distributions of money and other property.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materi-
ally modified after September 17, 2003.See Rev. Rul.
2003-105, page 696.
Section 316.—Dividend
Defined
26 CFR 1.316-1: Dividends.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
2003-40 I.R.B.728October 6, 2003

Section 419A.—Qualified
Asset Account; Limitation on
Additions to Account
26 CFR 1.419A(f)(6)–1: Exception for 10 or more
employer plan.
T.D. 9079
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
10 or More Employer Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains fi-
nal regulations that provide rules regard-
ing the requirements for a welfare bene-
fit fund that is part of a 10 or more em-
ployer plan. The regulations affect certain
employers that provide welfare benefits to
employees through a plan to which more
than one employer contributes.
DATES:Effective Date:T
hese regulations
are effective July 17, 2
003.
Applicability Date:F
or dates of appli-
cability, see §1.419
A(f)(6)–1(g).
FOR FURTHER INFORMATION
CONTACT: Betty J. Clary, (202)
622–6080 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Re
duction Act
The collections of information con-
tained in these final regulations have been
reviewedandapprovedbytheOffice
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1795. Responses to these collec-
tions of information are required to obtain
a benefit (to be treated as a 10 or more
employer plan excepted from the deduc-
tion limits for employer contributions to a
welfare benefit fund).
An agency may not conduct or sponsor,
and a person is not required to respond
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 and/or recordkeeper varies, de-
pending on individual circumstances, with
an estimated average of 25 hours.
Comments concerning the accuracy
of this burden estimate and sugges-
tions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to these col-
lections of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
This document contains amendments
to the Income Tax Regulations under sec-
tion 419A of the Internal Revenue Code
(Code). Sections 419 and 419A, which
were added to the Code by section 511 of
the Deficit Reduction Act of 1984 (Pub-
lic Law 98–369, 98 Stat. 494) set forth
special rules limiting the deduction of em-
ployer contributions to a welfare benefit
fund. Pursuant to section 419A(f)(6), the
rules of sections 419 and 419A do not
apply in the case of a welfare benefit fund
that is part of a plan to which more than
one employer contributes and to which
no employer normallycontributes more
than 10 percent of the contributions of all
employers under the plan, but only if the
plan does not maintain experience-rating
arrangements with respect to individual
employers.
Section 419A(i) of the Code provides
that the Secretary shall prescribe regula-
tions as may be appropriate to carry out the
purposes of sections 419 and 419A. Sec-
tion 419A(i) further provides that the regu-
lations may provide that the plan adminis-
trator of any welfare benefit fund to which
more than one employer contributes shall
submit such information to the employers
contributing to the fund as may be nec-
essary to enable the employers to comply
with the provisions of section 419A.
The legislative history of sections 419
and 419A of the Code explains that the
principal purpose of the deduction limits
for contributions to welfare benefit funds
“is to prevent employers from taking pre-
mature deductions, for expenses which
have not yet been incurred, by interposing
an intermediary organization which holds
assets which are used to provide benefits
to the employees of the employer.” H.R.
Conf. Rep. No. 861, 98
th
Cong., 2d Sess.
1155 (1984), 1984–3 C.B. (Vol. 2) 1, 409.
The legislative history of section
419A(f)(6) of the Code explains that
the reason the deduction limits of sections
419 and 419A do not generally apply to a
fund that is part of a 10 or more employer
plan is that “the relationship of a partici-
pating employer to [such a] plan often is
similar to the relationship of an insured
to an insurer.” H.R. Conf. Rep. No. 861,
98
th
Cong., 2d Sess. 1159 (1984), 1984–3
C.B. (Vol. 2) 1, 413. Thus, the premise
underlying the exception is that no spe-
cial limitation on deductions is necessary
in situations where a payment by an em-
ployer in excess of the minimum necessary
to currently provide for the benefits under
the plan is effectively lost to that employer,
because the economics of the plan will
discourage excessive contributions.
The 10 or more employer plan excep-
tion to the deduction limitation does not
apply, however, where the plan main-
tains experience-rating arrangements with
respect to individual employers. The
reason for excluding these plans from
the exception is that an experience-rating
arrangement with respect to an individual
employer changes the economics of the
plan and allows an employer to contribute
an amount in excess of the minimum
amount necessary to provide for the cur-
rent benefits with the confidence that the
excess will inure to the benefit of that
employer as the excess is used to provide
benefits to its employees. The legislative
history notes that making the exception to
the deduction limits unavailable to plans
that determine contributions on the basis
of experience rating is consistent with the
general rules relating to the definition of
fund because “the employer’s interest with
respect to such a plan is more similar to
the relationship of an employer to a fund
October 6, 20037292003-40 I.R.B.

than an insured to an insurer.” H.R. Conf.
Rep. No. 861, 98
th
Cong., 2d Sess. 1159
(1984), 1984–3 C.B. (Vol. 2) 1, 413.
In Notice 95–34, 1995–1 C.B. 309, the
IRS identified certain types of arrange-
ments that do not satisfy the requirements
of section 419A(f)(6). Those arrange-
ments typically require large employer
contributions relative to the cost of the
coverage for the benefits to be provided
under the plan. The plans identified in
the notice often maintain separate ac-
counting of the assets attributable to the
contributions made by each participating
employer.
1
In some cases an employer’s
contributions are related to the claims
experience of its employees, while in
other cases benefits are reduced if assets
derived from an employer’s contributions
are insufficient to fund the benefits to that
employer’s employees. Thus, a particular
employer’s contributions or its employ-
ees’ benefits may be determined in a way
that insulates the employer to a significant
extent from the experience of other partic-
ipating employers.
The arrangements described in Notice
95–34 and similar arrangements do not sat-
isfy the requirements of section 419A(f)(6)
of the Code and do not provide the tax
deductions claimed by their promoters for
any of several reasons. For example, such
an arrangement may be providing deferred
compensation; the arrangement may be
separate plans maintained for each em-
ployer; or the plan may be maintaining, in
form or in operation, experience-rating ar-
rangements with respect to individual em-
ployers (e.g., where the employers have
reason to expect that, at least for the most
part, their contributions will benefit only
their own employees). The notice also
states that even if an arrangement satisfies
the requirements of section 419A(f)(6), so
that the deduction limits of sections 419
and 419A do not apply to the arrange-
ment, the employer contributions may rep-
resent expenses that are not deductible un-
der other sections of the Code.
Transactions that are the same as or
substantially similar to the transactions
described in Notice 95–34 are listed trans-
actions for purposes of the tax shelter
disclosure, registration, and list mainte-
nance requirements. See Notice 2000–15,
2000–1 C.B. 826, (supplemented and su-
perseded by Notice 2001–51, 2001–2 C.B.
190), §1.6011–4(b)(2) of the Income Tax
Regulations, and §§301.6111–2(b)(2) and
301.6112–1(b)(2) of the Procedure and
Administration Regulations.
On July 11, 2002, a notice of pro-
posed rulemaking (REG–165868–01,
2002–2 C.B 270 [67 FR 45933]) relat-
ing to whether a welfare benefit fund is
part of a 10 or more employer plan (as
defined in section 419A(f)(6) of the Inter-
nal Revenue Code) was published in the
Federal Register. Written and electronic
comments responding to the notice of pro-
posed rulemaking were received. A public
hearing was held onNovember 14, 2002.
After consideration of all the comments,
the proposed regulations are adopted as
amended by this Treasury decision. The
revisions are discussed below.
Explanation of Provisions
Overview of Rules
These regulations provide guidance un-
dersection419A(f)(6)oftheCoderegard-
ing the requirements that a welfare bene-
fit fund must satisfy in order for an em-
ployer’s contribution to the fund to be ex-
cepted from the rules of sections 419 and
419A.
Section 419A(f)(6) of the Code pro-
vides that sections 419 and 419A do not
apply in the case of a welfare benefit fund
that is part of a 10 or more employer plan
that does not maintain experience-rating
arrangements with respect to individual
employers. A10 or more employer plan
is a plan to which more than one employer
contributes and to which no employer nor-
mally contributes more than 10 percent of
the total contributions contributed under
the plan by all employers. The regulations
provide that an employer is determined
by aggregating all of the entities required
to be aggregated under the rules under
section 414(b), (c), or (m). This is particu-
larly relevant for purposes of determining
how many employers contribute, whether
an employer normally contributes more
than 10 percent of the total contributions
under the plan, and whether the plan main-
tains experience-rating arrangements with
respect to individual employers.
In addition, the regulations make clear
that in order to be eligible for the excep-
tion from the deduction limits of sections
419 and 419A, a plan must satisfy the
requirements of section 419A(f)(6) and
these regulations both in form and op-
eration. The determination of whether a
plan is described in section 419A(f)(6) is
based on the totality of the arrangement
and all related facts and circumstances,
including any related insurance contracts.
Thus, all agreements and understandings
(including promotional materials and pol-
icy illustrations) will be taken into account
in determining whether the requirements
of section 419A(f)(6) are satisfied in
formandinoperation. Forexample,if
promotional materials indicate that an em-
ployer or its employees can be expected
to receive a future benefit based on the
employer’s accumulated contributions,
the plan will be treated as maintaining
experience-rating arrangements with re-
spect to individual employers, even if the
formal plan does not specifically provide
for experience rating.
The regulations provide generally that
a plan maintains an experience-rating ar-
rangement with respect to an employer —
making the plan ineligible for the section
419A(f)(6) exception – if any employer’s
cost of coverage for any period is based,
in whole or in part, either on the benefits
experience or on the overall experience of
that employer or one or more employees
of that employer. For purposes of the reg-
ulations, an employer’scost of coverageis
the relationship between that employer’s
contributions (including those of its em-
ployees) under the plan and the benefits or
other amounts payable under the plan with
respect to that employer. The termbene-
fits or other amounts payableincludes all
amounts payable or distributable (or that
will be otherwise provided), regardless of
the form of the payment or distribution.
Benefits experiencerefers, generally, to the
benefits and other amounts incurred, paid,
or distributed (or otherwise provided) in
the past. Theoverall experienceof an em-
ployer is the balance that would have ac-
cumulated in a welfare benefit fund if that
employer were the only employer provid-
ing benefits under the plan. Theoverall ex-
perienceof an employee is the balance that
1
SeeBooth v. Commissioner, 108 T.C. 524 (1997), for an arrangement using a separate accounting system that does not qualify under the 10 or more employer plan exception.
2003-40 I.R.B.730October 6, 2003

would have accumulated in a welfare bene-
fit fund if that employee were the only em-
ployee being provided benefits under the
plan.Overall experienceis defined simi-
larly for a group of employers or a group
of employees.
Definition of Experience Rating
A number of commentators suggested
that the regulatory definition of experi-
ence-rating arrangement is inconsistent
with industry usage and the discussions
of experience rating set forth inUnited
States v. American Bar Endowment,477
U.S. 105 (1986) andSears Roebuck and
Co.v.Commissioner, 972 F.2d 858 (7
th
Cir. 1992). These commentators have
urged that an experience-rating arrange-
ment be narrowly defined to include only
those situations in which the employer
is automatically entitled to a refund of a
portion of a premium payment if claims
experience is better than expected.
The IRS and Treasury have reviewed
these comments and have concluded that
the proposed regulatory definition of ex-
perience-rating arrangement should be re-
tained in the final regulations. Where a
Code section provides an exception from
the normal tax requirements, the exception
must be narrowly applied and its exclu-
sions interpreted broadly.Corn Products
Refining Co. v. Commissioner,350U.S.
46, 52 (1955). See also,Arkansas Best
Corporation v. Commissioner, 485 U.S.
212, 219–220 (1987). Thus, the exclusion
for experience-rating arrangements under
the 10 or more employer plan exception
should be interpreted broadly.
While both theAmerican Bar Endow-
mentcase and theSearscase discuss a
specific type of experience rating, there
are other ways an insurance contract or
other arrangement might take experience
into account. For example, under one type
of experience-rating arrangement, if the
premiums paid exceed the actual cost of
providing insurance to the group, the ex-
cess (the source of the dividend described
inAmerican Bar Endowment)isnotre-
funded to the premium payer, but is in-
stead used to reduce the cost of provid-
ing benefits for subsequent periods. This
reduction in the cost of providing bene-
fits for subsequent periods can be accom-
plished directly by adjusting premiums or
indirectly by providing additional benefits
under the arrangement at no cost to the pre-
mium payer, or through a combination of
premium reductions and additional bene-
fits.
In view of the variety of ways that an
arrangement might take experience into
account, the regulations provide that a
plan maintains an experience-rating ar-
rangement with respect to an individual
employer if the current (or future) cost
of coverage of the employer is (or will
be) based on either the past benefits or
other amounts paid with respect to one
or more of that employer’s employees
(or any proxy therefor) or on the balance
accumulated in the fund as a result of the
employer’s or its employees’ past contri-
butions (or any proxy therefor). Accord-
ingly, the process for determining whether
a plan maintains an experience-rating
arrangement is to inquire whether the
past experience of an individual employer
or its employees is used, in whole or in
part, to determine the employer’s cost
of coverage. This determination is not
intended to be purely a computational one
(although actual numbers often can be
used to demonstrate the existence of an
experience-rating arrangement).
Some commentators suggested that the
regulations equate benefits provided to the
employees of an employer with a payment
to the employer and that such an equa-
tion improperly ignores the existence of
the employer. This comment is based on a
misreading of the regulations. The regula-
tions reflect the fact that the provision of a
benefit to an employee at no cost to the em-
ployer is, in effect, a credit to the employer
that offsets the employer’s otherwise ap-
plicable cost of providing that benefit. Ac-
cordingly, if the amount of such a bene-
fit is based on the experience of the em-
ployer or its employees, the plan includes
an experience-rating arrangement with re-
spect to individual employers and is ineli-
gible for the section 419A(f)(6) exception
to sections 419 and 419A.
Use of Insurance Contracts
A number of commentators expressed
concern with the results under the pro-
posed regulations when the definition of
an experience-rating arrangement was ap-
plied to a plan which provides for contribu-
tions equal to the premiums on a whole life
insurance contract or other life insurance
contract having level premiums. These
commentators asserted that the purchase
of such policies is not inconsistent with
the requirements of section 419A(f)(6) and
that, if the premiums under the contract
are established using standardized actuar-
ial factors (including issue age), the ar-
rangement is not experience rated.
The final regulations retain the defini-
tion of experience rating arrangement and
the general results that flow from the ap-
plication of that definition to a level pre-
mium life insurance policy. This analy-
sis recognizes that if whole life insurance
contracts, or other insurance contracts that
provide for level premiums or otherwise
generate a savings element, are purchased
under an arrangement, the economic val-
ues reflected under those contracts (includ-
ing cash values, reserves, and any other
economic values, such as conversion cred-
its, high dividend rates, or the right to con-
tinue coverage at a premium that is lower
than the premium that would apply in the
absence of that savings element) are based
on the excess of the premiums paid over
the underlying mortality and related ex-
pense charges for providing the insurance
and, hence, reflect the overall experience
of the employers and employees who par-
ticipate under the plan.
If those economic values are used to de-
termine the current cost of coverage for
that employer (as opposed to being shared
among all of the employers participating
in the plan), the employer can anticipate
that its past contributions in excess of in-
curred losses for claims for its employees
will inure to the benefit of the employer or
its employees (as opposed to the other em-
ployers participating in the plan). This as-
surance that the employer or its employees
will benefit from favorable past experience
October 6, 20037312003-40 I.R.B.

is the hallmark of an experience-rating ar-
rangement.
2
Furthermore, Congress’ expectation
that employers participating in 10 or more
employer plans would have no financial
incentive to over-contribute was the ba-
sis for providing the section 419A(f)(6)
exception from the deduction limits of
sections 419 and 419A. Allowing a 10
or more employer plan to use insurance
contracts with retained values, where a
participating employer can benefit directly
or indirectly from the retained values gen-
erated with respect to its employees (e.g.,
through enhanced benefits to its employ-
ees), would provide a financial incentive
for the employer to over-contribute to the
plan and, thus, would be contrary to the
premise underlying the intent of Congress
in providing the exception. This financial
incentive can be seen most clearly in a
flexible premium universal life contract,
which is almost indistinguishable from
the welfare benefit fund that Congress
intended to be subject to the deduction
limitations of sections 419 and 419A. The
fact that the premiums on a whole life
contract or other level premium arrange-
ment are fixed ahead of time (at least with
respect to individual employees) does not
alter the fact that the buildup of cash value
is essentially the same as the accumula-
tion of assets in a fund. The result is the
same even where there is no cash value,
if the arrangement uses overpayments in
earlier years to levelize the premiums.
In all these cases, the retained values of
life insurance contracts relating to an em-
ployer’s employees are used to determine
that employer’s cost of coverage, and the
conclusion remains that there is an expe-
rience-rating arrangement of the type not
allowed by section 419A(f)(6).
Some commentators asserted that the
definition of experience-rating arrange-
ments in the proposed regulations will
preclude the use of cash value life insur-
ance under section 419A(f)(6) and will
therefore eviscerate the section 419A(f)(6)
exception. Neither section 419A(f)(6)
nor these regulations regulate the invest-
ments of a welfare benefit fund, including
investments by a trust in cash value poli-
cies. Instead, section 419A(f)(6) and the
regulations are concerned with the eco-
nomic relationship between a fund and
participating employers, and whether the
pass-through of premiums based on the
insurance contracts associated with an
employer’s employees has the effect of
creating experience-rating arrangements
with respect to individual employers.
Moreover, the IRS and Treasury also be-
lieve that the exception is still viable for
many life and health benefit arrangements
that are self-insured in accordance with
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA) or state law.
Under these types of arrangements, the
employers contribute the expected cost
of claims for their employees. Without
the section 419A(f)(6) exception, the
deduction for these contributions would
be limited to the welfare benefit fund’s
qualified cost for the taxable year. The
section 419A(f)(6) exception allows these
employers to deduct those contributions
without regard to whether the employees
actually incurred claims.
A number of commentators cited to
other provisions under sections 419 and
419A for support for their position that a
plan can provide for accumulations within
a welfare benefit fund that are effectively
allocated to the employees without caus-
ing the plan to be ineligible for the section
419A(f)(6) exception. The Service and
Treasury believe that these other provi-
sions are not relevant in the determination
of whether a plan provides an experience
rating arrangement. For example, the
fact that section 419(e)(4) specifically
excludes certain insurance contracts (in-
cluding contracts that provide experience
rated refunds or policy dividends) from the
definition of fund for purposes of section
419 does not necessarily mean that such
contracts may be held within a welfare
benefit fund while retaining the section
419A(f)(6) exception. Similarly, the fact
that section 419A(c)(2) permits an addi-
tional reserve for post-retirement medical
and life insurance benefits does not mean
that such a reserve would not cause the
plan to violate the prohibition on experi-
ence rating under section 419A(f)(6).
Special Rules of Application
The final regulations retain the special
rules of application relating to insurance
contracts that were set forth in the pro-
posed regulation. For example, insurance
contracts under an arrangement are treated
as assets of the fund, and the fund will be
treated as having either a gain or loss with
respect to those contracts.
Another special rule is provided in the
case of a plan maintaining an experience-
rating arrangement with respect to a group
of participating employers or a group of
employees covered under the plan (a rating
group). Under that rule, a plan will not be
treated as maintaining an experience-rat-
ing arrangement with respect to an individ-
ual employer merely because the cost of
coverage under a plan with respect to the
employer is based, in whole or in part, on
the benefits experience or the overall expe-
rience (or a proxy for either type of expe-
rience) of a rating group that includes the
employer or one or more of its employees,
provided that the employer does not nor-
mally contribute more than 10 percent of
all contributions with respect to that rating
group. The effect of this rule is to allow the
plan to provide for experience rating on a
plan-wide basis or on the basis of a sub-
set of the employers within the plan, pro-
vided that the subset of employers is not
overweighted by the experience of one em-
ployer and is not defined based on the ex-
perience of the employers.
Characteristics Indicating a Plan Is Not
Described in Section 419A(f)(6)
These regulations also identify five
characteristics thatare indications that an
employer’s interest with respect to the
plan is more similar to the relationship of
2
The existence of experience rating in a level premium life insurance arrangement can be viewed not only from the perspective of overall experience, but also from that of claims experience.
For example, assume that Employer A and Employer B have the same number of employees, and the employees of A have the same ages and other risk factors as thoseofB.If,onthesame
day in Year 1, each employer purchases from the same insurer the same amountof level premium whole life insurance coverage for each of its employees, the aggregate premium charges for
A and B will be equal. Further, assume that in Year 5, A’s employee who is age 60 dies, and is replaced by individual who is also age 60 and has identical riskcharacteristics. A purchases a
new level premium whole life insurance contract of the same amount for the new employee who has an issue age of 60. A’s premiums for the new 60-year-old employee will now be higher
than those of B for its employee corresponding to the 60-year-old who died, because B’s premiums for its60-year-old employee are based on an issue age of 55. A’s premiums for its other
employees will be the same as those for B’s corresponding employees. Thus, after the death of its employee, A’s aggregate premium charges are higher than those of B, and this is due solely
to the fact that A’s employees have incurred claims in excess of the claims of B’s employees.
2003-40 I.R.B.732October 6, 2003

an individual employer to a fund than an
insuredtoaninsurer. (See,H.R.Conf.
Rep. No. 861, 98
th
Cong., 2d Sess. 1155
(1984), 1984–3 C.B. (Vol. 2) 1, 413.) The
presence of some of these characteristics
in a plan suggests that there are multiple
plans present instead of a single plan.
The presence of others tends to indicate
that an employer’s cost of coverage is (or
will be) based on that employer’s bene-
fits experience. Others tend to indicate
that the plan is expected to accumulate
a surplus that ultimately will be used for
the benefit of the individual employers (or
their employees). One way this surplus
mightbeusedwouldbetoreducefuture
contributions for the individual employers
based on past contributions or claims of
the employers. Another way would be to
pay benefits to an employer’s employees
based on the employer’s share of the sur-
plus on the occasion of the withdrawal
of the employer or at plan termination,
thereby violating the rule that an em-
ployer’s cost of coverage cannot be based
on its overall experience. Accordingly,
these regulations provide that a plan ex-
hibiting any of these characteristics is not
a 10 or more employer plan described in
section 419A(f)(6) unless it is established
to the satisfaction of the Commissioner
that the plan satisfies the requirements
of section 419A(f)(6) and these proposed
regulations. It should be noted that the
fact that a plan has none of these charac-
teristics does not create an inference that
it is a 10 or more employer plan described
in section 419A(f)(6).
The first, third and fourth characteris-
tics under the proposed regulations indicat-
ing that a plan is not a 10 or more employer
plan described in section 419A(f)(6) (i.e.,
the assets of the plan are allocated among
the participating employers through a sep-
arate accounting of contributions and ex-
penditures for individual employers or oth-
erwise, the plan does not provide for fixed
welfare benefits for a fixed coverage pe-
riod for a fixed price or the plan charges
the participating employers an unreason-
ably high amount for the covered risk) have
been retained without change.
The second characteristic under the
proposed regulations indicating that a
plan is not a 10 or more employer plan
described in section 419A(f)(6) is that
amounts charged under the plan differ
among the employers in a manner that is
not reflective of differences in risk or rat-
ing factors that are commonly taken into
account in manual rates used by insurers
(such as age, gender, dependents covered,
geographic locale, or benefit terms). In
response to comments, this second char-
acteristic has been clarified so that the
exception for reflection of differences in
risk or rating factors commonly taken
into account in manual rates is limited to
differences in charges that are merely re-
flective of differences in current risk (such
as current age, gender, dependents cov-
ered, geographic locale, or benefit terms).
Accordingly, an arrangement that charges
different amounts for life insurance based
on issue age would exhibit this second
characteristic, unless the differences in
amount charged are merely reflective of
differences in risk or rating factors at the
current age (e.g., reflecting select and
ultimate mortality).
The fifth characteristic under the pro-
posed regulation indicating that a plan is
not a 10 or more employer plan described
in section 419A(f)(6) is that benefits
or other amounts payable can be pro-
vided upon triggering events other than
the illness, personal injury, or death of
an employee or family member, or the
employee’s involuntary termination of
employment. A number of commentators
expressed concern that this fifth character-
istic effectively prohibits a termination of
a welfare benefit arrangement or otherwise
redefines what is a welfare benefit arrange-
ment. This concern reflects a misreading
of the regulations, as this fifth charac-
teristic does not prohibit the payment of
benefits upon termination of the arrange-
ment or withdrawal of an employer from
the arrangement
3
or in any other way seek
to redefine what is a permitted welfare
benefit. Instead the characteristic reflects
the inherent difficulty an insurer would
have in determining an actuarially appro-
priate price for providing fixed benefits on
the occasion of these non-standard benefit
triggers and the associated likelihood that
the amount of the benefits payable on such
an occasion is being determined based on
the overall experience of the employee or
employer. The fact that some commenta-
tors have suggested that an employer be
able to “spin-off” the employer’s “share”
of a fund is further indication that many
plans that purport to fit within the section
419A(f)(6) exception are engaging in pro-
hibited experience rating.
Taxpayers are reminded that a plan that
exhibits one of these characteristics may
still establish that the plan satisfies the re-
quirements of section 419A(f)(6). For ex-
ample, in the case of a plan that provides
for a benefit to be provided on the occa-
sion of an employer’s withdrawal from the
plan, the plan would have to demonstrate
that the amount provided to an employee
is not based on the benefits experience or
the overall experience of the employee or
the employer. In addition, in response to
comments, the final regulations clarify that
a plan does not exhibit this fifth charac-
teristic merely because, upon cessation of
participation in the plan, an employee is
provided with the right to convert cover-
age under a group life insurance contract
to coverage under an individual life insur-
ance contract without demonstrating evi-
dence of insurability, but only if there is no
additional economic value associated with
the conversion right.
The examples in the proposed reg-
ulations illustrating the application of
the rules regarding experience-rating ar-
rangements to specific fact situations are
included in the final regulations, with
minor changes, and two additional ex-
amples have been included. The facts
described in some of the examples illus-
trate arrangements that do not maintain
experience-rating arrangements with re-
spect to individual employers. Other
examples, however, describe arrange-
ments that exhibit the characteristics of a
fund that Congress intended to be subject
to the deduction limitations of sections
419 and 419A. Each example illustrates
only the application of the definition of
experience-rating arrangements under
section 419A(f)(6) and these regulations,
and no inference should be drawn from the
scope of the examples about whether these
plans are otherwise described in section
3
A withdrawal of an employer merely terminates the arrangement for that employer, but it continues for the other employers.
October 6, 20037332003-40 I.R.B.

419A(f)(6) or about any other provision of
the Code.
4
Pursuant to the authority set forth in
section 419A(i), the regulations provide
a special rule to assist participating em-
ployers and the Commissioner in verifying
that the arrangement satisfies the section
419A(f)(6) requirements. Under that rule,
an arrangement satisfies the requirements
of section 419A(f)(6) and the regulations
only if the plan is maintained pursuant to
a written document that (1) requires the
plan administrator to maintain records suf-
ficient for the Commissioner or any par-
ticipating employer to readily verify the
plan’s compliance with section 419A(f)(6)
and (2) provides the Commissioner and
each participating employer with the right
to inspect and copy all such records.
Effective Date
Except as explained below, these regu-
lations — which generally clarify existing
law — are effective for contributions paid
or incurred in taxable years of an employer
beginning on or after July 11, 2002. For
contributions made before this effective
date, the IRS will continue applying exist-
ing law, including the analysis set forth in
Notice 95–34 and relevant case law. Thus,
taxpayers should not infer that a contribu-
tion that would be nondeductible under the
regulations would be deductible if made
before that date. In this regard, taxpayers
are reminded that the IRS has already
identified transactions that are the same as
or substantially similar to the transactions
described in Notice 95–34 aslisted trans-
actionsfor purposes of §1.6011–4T(b)(2)
of the Temporary Income Tax Regu-
lations and §301.6111–2T(b)(2) of the
Temporary Procedure and Administration
Regulations.
The requirement that written plan docu-
ments contain specified provisions relating
to compliance information and the record
maintenance requirement for plan admin-
istrators are effective for taxable years of a
welfare benefit fundbeginning after July
17, 2003. Existing record retention re-
quirements and recordproduction require-
ments under section 6001 continue to ap-
ply to employers and promoters.
Special Analyses
It has been determined that these reg-
ulations are not a significant regulatory
action for purposes of Executive Order
12866. Accordingly, a regulatory as-
sessment is not required. It has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
Chapter 5) does not apply to these regula-
tions.
It is hereby certified that the collection
of information in these regulations will not
have a significant economic impact on a
substantial number of small entities. The
collections of information in the regula-
tion are in §1.419A(f)(6)–1(a)(2) and (e)
and consist of the requirements that a plan
administrator maintain certain information
and that it provide that information upon
request to the Commissioner and to em-
ployers participating in the plan. This cer-
tification is based on the fact that requests
for such information are likely to be made,
on average, less than once per year per em-
ployer and that the costs of maintaining
and providing this information are small.
In addition, relatively few small entities are
plan administrators. Therefore, a Regula-
tory Flexibility Analysis under the Regula-
tory Flexibility Act (5 U.S.C. chapter 6) is
not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these regulations was sent to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regula-
tions is Betty J. Clary, Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.419A(f)(6)–1 is also issued under 26
U.S.C. 419A(i). * * *
Par. 2. Section 1.419A(f)(6)–1 is added
to read as follows:
§1.419A(f)(6)–1 Exception for 10 or more
employer plan
(a)Requirements—(1)In general. Sec-
tions 419 and 419A do not apply in the
case of a welfare benefit fund that is part
of a 10 or more employer plan described
in section 419A(f)(6). A plan is a 10 or
more employer plan described in section
419A(f)(6) only if it is a single plan—
(i) To which more than one employer
contributes;
(ii) To which no employer normally
contributes more than 10 percent of the
total contributions contributed under the
plan by all employers;
(iii) That does not maintain an expe-
rience-rating arrangement with respect to
any individual employer; and
(iv) That satisfies the requirements of
paragraph (a)(2) of this section.
(2)Compliance information.Aplan
satisfies the requirements of this paragraph
(a)(2) if the plan is maintained pursuant
to a written document that requires the
plan administrator to maintain records suf-
ficient for the Commissioner or any par-
ticipating employerto readily verify that
the plan satisfies the requirements of sec-
tion 419A(f)(6) and this section and that
provides the Commissioner and each par-
ticipating employer (or a person acting on
the participating employer’s behalf) with
the right, upon written request to the plan
administrator, to inspect and copy all such
records. See §1.414(g)–1 for the definition
of plan administrator.
(3)Application of rules—(i)In general.
The requirements described in paragraph
(a)(1) and (2) of this section must be satis-
fied both in form and in operation.
(ii)Arrangement is considered in its en-
tirety. The determination of whether a plan
is a 10 or more employer plan described
4
For example, inNeonatology Associates, P.A., v. Commissioner, 299 F.3d 221 (3d Cir. 2002), affirming 115 T.C. 43 (2000), the Court held that the contributions were in a large part
constructive dividends to the employee/owners (and thus did not reach thegovernment’s alternative contention that the plan was maintaining experience-rating arrangements with respect to
individual employers). InBooth v. Commissioner, 108 T.C. 524 (1997), the Tax Court held that the arrangement was an aggregation of separate plans (and thus was not a single plan) and that
there were experience-rating arrangements with respect to the individual employers.
2003-40 I.R.B.734October 6, 2003

in section 419A(f)(6) is based on the to-
tality of the arrangement and all related
facts and circumstances, including any re-
lated insurance contracts. Accordingly, all
agreements and understandings (including
promotional materials and policy illustra-
tions) and the terms of any insurance con-
tract will be taken into account in deter-
mining whether the requirements are sat-
isfied in form and in operation.
(b)Experience-rating arrange-
ments—(1)General rule.Aplanmain-
tains an experience-rating arrangement
with respect to an individual employer
and thus does not satisfy the requirement
of paragraph (a)(1)(iii) of this section if,
with respect to that employer, there is any
period for which the relationship of con-
tributions under the plan to the benefits or
other amounts payable under the plan (the
cost of coverage) is or can be expected
to be based, in whole or in part, on the
benefits experience or overall experience
(or a proxy for either type of experience)
of that employer or one or more employ-
ees of that employer. For purposes of
this paragraph (b)(1), an employer’s con-
tributions include all contributions made
by or on behalf of the employer or the
employer’s employees. See paragraph
(d) of this section for the definitions of
benefits experience,overall experience,
andbenefits or other amounts payable.
The rules of this paragraph (b) apply un-
der all circumstances, including employer
withdrawals and plan terminations.
(2)Adjustment of contributions.An
example of a plan that maintains an experi-
ence-rating arrangement with respect to an
individual employer is a plan that entitles
an employer to (or for which the employer
can expect) a reduction in future contribu-
tions if that employer’s overall experience
is positive. Similarly, a plan maintains
an experience-rating arrangement with
respect to an individual employer where
an employer can expect its future contri-
butions to be increased if the employer’s
overall experience is negative. A plan
also maintains an experience-rating ar-
rangement with respect to an individual
employer where an employer is entitled to
receive (or can expect to receive) a rebate
of all or a portion of its contributions if
that employer’s overall experience is pos-
itive or, conversely, where an employer is
liable to make additional contributions if
its overall experience is negative.
(3)Adjustment of benefits.Anexample
of a plan that maintains an experience-rat-
ing arrangement with respect to an individ-
ual employer is a plan under which ben-
efits for an employer’s employees are (or
can be expected to be) increased if that em-
ployer’s overall experience is positive or,
conversely, under which benefits are (or
can be expected to be) decreased if that
employer’s overall experience is negative.
A plan also maintains an experience-rating
arrangement with respect to an individual
employer if benefits for an employer’s em-
ployees are limited by reference, directly
or indirectly, to the overall experience of
the employer (rather than having all the
plan assets available to provide the bene-
fits).
(4)Special rules—(i)Treatment of
insurance contracts—(A)In general.
For purposes of this section, insurance
contracts under the arrangement will be
treated as assets ofthe fund. Accord-
ingly, the value of the insurance contracts
(including non-guaranteed elements) is
included in the value of the fund, and
amounts paid between the fund and the in-
surance company are disregarded, except
to the extent they generate gains or losses
as described in paragraph (b)(4)(i)(C) of
this section.
(B)Payments to and from an insur-
ance company. Payments from a partic-
ipating employer or its employees to an
insurance company pursuant to insurance
contracts under the arrangement will be
treated as contributions made to the fund,
and amounts paid under the arrangement
from an insurance company will be treated
as payments from the fund.
(C)Gains and losses from insurance
contracts.Asofanydate,ifthesumof
the benefits paid by the insurer and the
value of the insurance contract (including
non-guaranteed elements) is greater than
the cumulative premiums paid to the in-
surer, the excess is treated as a gain to the
fund. As of any date, if the cumulative pre-
miums paid to the insurer are greater than
the sum of the benefits paid by the insurer
and the value of the insurance contract (in-
cluding non-guaranteed elements), the ex-
cess is treated as a loss to the fund.
(ii)Treatment of flexible contribution
arrangements. Solely for purposes of de-
termining the cost of coverage under a
plan, if contributions for any period can
vary with respect to a benefit package,
the Commissioner may treat the employer
as contributing the minimum amount that
would maintain the coverage for that pe-
riod.
(iii)Experience rating by group of em-
ployers or group of employees.Aplan
will not be treated as maintaining an expe-
rience-rating arrangement with respect to
an individual employer merely because the
cost of coverage under the plan with re-
spect to the employer is based, in whole
or in part, on the benefits experience or
the overall experience (or a proxy for ei-
ther type of experience) of a rating group,
provided that no employer normally con-
tributes more than 10 percent of all contri-
butions with respect to that rating group.
For this purpose, arating groupmeans a
group of participating employers that in-
cludes the employer or a group of employ-
ees covered under the plan that includes
one or more employees of the employer.
(iv)Family members, etc. For purposes
of this section, contributions with respect
to an employee include contributions with
respect to any other person (e.g.,afamily
member)whomaybecoveredbyreason
of the employee’s coverage under the plan
and amounts provided with respect to an
employee include amounts provided with
respect to such a person.
(v)Leased employees. In the case of an
employer that is the recipient of services
performed by a leasedemployee described
in section 414(n)(2) who participates in
the plan, the leased employee is treated as
an employee of the recipient and contribu-
tions made by the leasing organization at-
tributable to service performed with the re-
cipient are treated as made by the recipient.
(c)Characteristics indicating a plan
is not a 10 or more employer plan—(1)
In general. The presence of any of the
characteristics described in paragraphs
(c)(2) through (c)(6) of this section gen-
erally indicates that the plan is not a
10 or more employer plan described in
section 419A(f)(6). Accordingly, un-
less established to the satisfaction of the
Commissioner that the plan satisfies the
requirements of section 419A(f)(6) and
this section, a plan having any of the
following characteristics is not a 10 or
more employer plan described in sec-
tion 419A(f)(6). A plan’s lack of all the
following characteristics does not create
any inference that the plan is a 10 or
October 6, 20037352003-40 I.R.B.

more employer plan described in section
419A(f)(6).
(2)Allocation of plan assets. Assets of
the plan or fund are allocated to a specific
employer or employers through separate
accounting of contributions and expendi-
tures for individual employers, or other-
wise.
(3)Differential pricing. The amount
charged under the plan is not the same
for all the participating employers, and
those differences are not merely reflec-
tive of differences in current risk or rat-
ing factors that are commonly taken into
account in manual rates used by insurers
(such as current age, gender, geographic
locale, number of covered dependents, and
benefit terms) for the particular benefit or
benefits being provided.
(4)No fixed welfare benefit package.
The plan does not provide for fixed wel-
fare benefits for a fixed coverage period for
a fixed cost, within the meaning of para-
graph (d)(5) of this section.
(5)Unreasonably high cost. The plan
provides for fixed welfare benefits for a
fixed coverage period for a fixed cost, but
that cost is unreasonably high for the cov-
ered risk for the plan as a whole.
(6)Nonstandard benefit triggers.Ben-
efits or other amounts payable can be
paid, distributed, transferred, or otherwise
provided from a fund that is part of the
plan by reason of any event other than
the illness, personal injury, or death of
an employee or family member, or the
employee’s involuntary separation from
employment. Thus, for example, a plan
exhibits this characteristic if the plan pro-
vides for the payment of benefits or the
distribution of an insurance contract to an
employer’s employees on the occasion of
the employer’s withdrawal from the plan.
A plan will not be treated as having the
characteristic described in this paragraph
merely because, upon cessation of partici-
pation in the plan, an employee is provided
with the right to convert coverage under a
group life insurance contract to coverage
under an individual life insurance contract
without demonstrating evidence of insur-
ability, but only if there is no additional
economic value associated with the con-
version right.
(d)Definitions. For purposes of this
section:
(1)Benefits or other amounts payable.
The termbenefits or other amounts
payableincludes all amounts that are
payable or distributable (or that will be
otherwise provided) directly or indirectly
to employers, to employees or their bene-
ficiaries, or to another fund as a result of a
spinoff or transfer, and without regard to
whether payable or distributable as wel-
fare benefits, cash, dividends, rebates of
contributions, property, promises to pay,
or otherwise.
(2)Benefits experience.Thebenefits
experienceof an employer (or of an em-
ployee or a group of employers or employ-
ees) means the benefits and other amounts
incurred, paid, or distributed (or otherwise
provided) directly or indirectly, including
to another fund as a result of a spinoff or
transfer, with respect to the employer (or
employee or group of employers or em-
ployees), and without regard to whether
provided as welfare benefits, cash, div-
idends, credits, rebates of contributions,
property, promises to pay, or otherwise.
(3)Overall experience—(i)Employer’s
overall experience.Thetermoverall expe-
riencemeans, with respect to an employer
(or group of employers), the balance that
would have accumulated in a welfare ben-
efit fund if that employer (or those employ-
ers) were the only employer (or employ-
ers) providing welfare benefits under the
plan. Thus, the overall experience is cred-
ited with the sum of the contributions un-
der the plan with respect to that employer
(or group of employers), less the benefits
and other amounts paid or distributed (or
otherwise provided) with respect to that
employer (or group of employers) or the
employees of that employer (or group of
employers), and adjusted for gain or loss
from insurance contracts (as described in
paragraph (b)(4)(i) of this section), invest-
ment return, and expenses. Overall experi-
ence as of any date may be either a positive
or a negative number.
(ii)Employee’s overall experience.The
termoverall experiencemeans, with re-
spect to an employee (or group of employ-
ees, whether or not employed by the same
employer), the balance that would have ac-
cumulated in a welfare benefit fund if the
employee (or group of employees) were
the only employee (or employees) being
provided welfare benefits under the plan.
Thus, the overall experience is credited
with the sum of the contributions under
the plan with respect to that employee (or
group of employees), less the benefits and
other amounts paid or distributed (or oth-
erwise provided) with respect to that em-
ployee (or group of employees), and ad-
justed for gain or loss from insurance con-
tracts (as described in paragraph (b)(4)(i)
of this section), investment return, and ex-
penses. Overall experience as of any date
maybeeitherapositiveoranegativenum-
ber.
(4)Employer.Thetermemployer
means the employer whose employees
are participating in the plan and those
employers required to be aggregated with
the employer under section 414(b), (c), or
(m).
(5)Fixed welfare benefit package—(i)
In general. A plan provides for fixed wel-
fare benefits for a fixed coverage period for
a fixed cost, if it—
(A) Defines one or more welfare bene-
fits, each of which has a fixed amount that
does not depend on the amount or type of
assets held by the fund;
(B) Specifies fixed contributions to pro-
vide for those welfare benefits; and
(C) Specifies a coverage period during
which the plan agrees to provide specified
welfare benefits, subject to the payment
of the specified contributions by the em-
ployer.
(ii)Treatment of actuarial gains or
losses. A plan will not be treated as fail-
ing to provide for fixed welfare benefits
for a fixed coverage period for a fixed
cost merely because the plan does not
pay the promised benefits (or requires
all participating employers to make pro-
portionate additional contributions based
on the fund’s shortfall) when there are
insufficient assets under the plan to pay
the promised benefits. Similarly, a plan
will not be treated as failing to provide for
fixed welfare benefits for a fixed coverage
period for a fixed cost merely because
the plan provides a period of extended
coverage after the end of the coverage
period with respect to employees of all
participating employers at no cost to the
employers (or provides a proportionate
refund of contributions to all participat-
ing employers) because of the plan-wide
favorable actuarial experience during the
coverage period.
(e)Maintenance of records. The plan
administrator of a plan that is intended
2003-40 I.R.B.736October 6, 2003

to be a 10 or more employer plan de-
scribed in section 419A(f)(6) shall main-
tain permanent records and other docu-
mentary evidence sufficient to substantiate
that the plan satisfies the requirements of
section 419A(f)(6) and this section. (See
§1.414(g)–1 for the definition of plan ad-
ministrator.)
(f)Examples. The provisions of para-
graph (c) of this section and the provi-
sions of section 419A(f)(6) and this section
relating to experience-rating arrangements
may be illustrated by the following exam-
ples. Unless stated otherwise, it should
be assumed that any life insurance con-
tract described in an example is non-par-
ticipating and has no value other than the
value of the policy’s current life insur-
ance protection plus its cash value, and that
no employer normally contributes more
than 10 percent of the total contributions
contributed under the plan by all employ-
ers. Paragraph (ii) of each example ap-
plies the characteristics listed in paragraph
(c) of this section to the facts described in
that example. Paragraphs (iii) and (iv) of
each example analyze the facts described
in the example to determine whether the
plan maintains experience-rating arrange-
ments with respect to individual employ-
ers. Paragraphs (iii) and (iv) of each ex-
ample illustrate only the meaning ofex-
perience-rating arrangements.Noinfer-
ence should be drawn from these examples
about whether these plans are otherwise
described in section 419A(f)(6) or about
the applicability or nonapplicability of any
other Internal Revenue Code provision that
may limit or deny the deduction of contri-
butions to the arrangements. Further, no
inference should be drawn from the exam-
ples concerning the tax treatment of em-
ployees as a result of the employer con-
tributions or the provision of the benefits.
The examples are as follows:
Example 1. (i) An arrangement provides welfare
benefits to emp
loyees of participating employers.
Each year a participating employer is required to
contribute an amount equal to the claims and other
expenses exp
ected with respect to that employer for
the year (based on current age, gender, geographic
locale, number of participating employees, benefit
terms, and o
ther risk or rating factors commonly
taken into account in manual rates used by insurers
for the benefits being provided), multiplied by the
ratio of a
ctual claims with respect to that employer
for the previous year over the expected claims with
respect to that employer for the previous year.
(ii) This
arrangement exhibits at least one of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(6).
Differential pricing exists under this arrangement be-
cause the amount charged under the plan is not the
same for all the participating employers, and those
differences are not merely reflective of differences in
current risk or rating factors that are commonly taken
into account in manual rates used by insurers for the
particular benefit or benefits being provided.
(iii) This arrangement does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisfied. Under the
arrangement, an employer’s cost of coverage for
each year is based, in part, on that employer’s bene-
fits experience (i.e., the benefits and other amounts
provided in the past with respect to one or more
employees of that employer). Accordingly, pursuant
to paragraph (b)(1) of this section, the arrangement
maintains experience-rating arrangements with re-
spect to individual employers.
Example 2.(i)ThefactsarethesameasinExam-
ple 1, except that the amount charged to an employer
each year is equal to claims and other expenses ex-
pected with respect to that employer for the year (de-
termined the same as inExample 1), multiplied by
the ratio of actual claims for the previous y
ear (deter-
mined on a plan-wide basis) over the expected claims
for the previous year (determined on a plan-wide ba-
sis).
(ii) Based on the limited facts described above,
this arrangement exhibits none of the characteristics
listed in paragraph (c) of this sectio
n generally indi-
cating that an arrangement is not a 10 or more em-
ployer plan described in section 419A(f)(6). Unlike
the arrangement discussed inExamp
le 1,thereisno
differential pricing under the arrangement because
the only differences in the amounts charged to the em-
ployers are solely reflective of
differences in current
risk or rating factors that are commonly taken into ac-
count in manual rates used by insurers for the partic-
ular benefit or benefits bei
ng provided.
(iii) Nothing in the facts described in thisExam-
ple 2indicates that the arrangement maintains expe-
rience-rating arrangement
s prohibited under section
419A(f)(6) and this section. An employer’s cost of
coverage under the arrangement is based, in part, on
the benefits experienc
e of that employer (as well as
of all the other participating employers). However,
pursuant to paragraph (b)(4)(iii) of this section, the
arrangement will not b
e treated as maintaining ex-
perience-rating arrangements with respect to the in-
dividual employers merely because the employers’
cost of coverage is b
ased on the benefits experience
of a group of employees eligible under the plan, pro-
vided no employer normally contributes more than 10
percent of all con
tributions with respect to the rating
group that includes the employees of an individual
employer. Under the arrangement described in this
Example 2,ther
ating group includes all the partici-
pating employers (or all of their employees), and no
employer normally contributes more than 10 percent
of the contri
butions made under the arrangement by
all the employers. Accordingly, absent other facts,
the arrangement will not be treated as maintaining ex-
perience-r
ating arrangements with respect to individ-
ual employers.
Example 3. (i) Arrangement A provides welfare
benefits t
o employees of participating employers.
Each year an employer is required to contribute
an amount equal to the claims and other expenses
expected with respect to that employer for the year
(based on current risk or rating factors commonly
taken into account in manual rates used by insurers
for the benefits being provided), adjusted based on
the employer’s notional account. An employer’s
notional account is determined as follows. The
account is credited with the sum of the employer’s
contributions previously paid under the plan less the
benefit claims for that employer’s employees. The
notional account is further increased by a fixed five
percent investment return (regardless of the actual
investment return earned on the funds). If an em-
ployer’s notional account is positive, the employer’s
contributions are reduced by a specified percentage
of the notional account. If an employer’s notional
account is negative, the employer’s contributions
are
increased by a specified percentage of the notional
account.
(ii) Arrangement A exhibits at least two of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(
6).
First, assets under the plan are allocated to specific
employers. Second, differential pricing exists be-
cause the amount charged under the plan is
not the
same for all the participating employers, and those
differences are not merely reflective of differences in
current risk or rating factors that are
commonly taken
into account in manual rates used by insurers for the
particular benefit or benefits being provided.
(iii) Arrangement A does not satisf
ythere-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is no
t satisfied. Under
the arrangement, a participating employer’s cost of
coverage for each year is based on a proxy for that
employer’s overall experienc
e. An employer’sover-
all experience, as that term is defined in paragraph
(d)(3) of this section, includes the balance that would
have accumulated in the fun
d if that employer’s
employees were the only employees being provided
benefits under the plan. Under that definition, the
overall experience is cr
edited with the sum of the
contributions paid under the plan by or on behalf
of that employer less the benefits or other amounts
provided to with resp
ect to that employer’s employ-
ees, and adjusted for gain or loss from insurance
contracts, expenses, and investment return. Under
the formula used by
the arrangement in this example
to determine employer contributions, expenses are
disregarded and a fixed investment return of five
percent is used in
stead of actual investment return.
The disregard of expenses and substitution of the
fixed investment return for the actual investment
return merely
results in an employer’s notional
account that is a proxy for the overall experience of
that employer. Accordingly, the arrangement main-
tains experi
ence-rating arrangements with respect to
individual employers.
Example 4. (i) Under Arrangement B, death
benefits ar
e provided for eligible employees of each
participating employer. Individual level premium
whole life insurance policies are purchased to provide
the death b
enefits. Each policy has a face amount
equal to the death benefit payable with respect to
the individual employee. Each year, a participating
employe
r is charged an amount equal to the level
October 6, 20037372003-40 I.R.B.

premiums payable with respect to the employees of
that employer. One participating employer, F, has an
employee, P, whose coverage under the arrangement
commenced at the beginning of 2000, when P was
age 50. P is covered under the arrangement for $1
million of death benefits, and a life insurance policy
with a face amount of $1 million has been purchased
on P’s life. The level annual premium on the policy is
$23,000. At the beginning of 2005, when P is age 55,
the $23,000 premium amount has been paid for five
years and the policy, which continues to have a face
amount of $1 million, has a cash value of $92,000.
Another employer, G, has an employee, R, who is
also 55 years old at the beginning of 2005 and is cov-
ered under Arrangement B for $1 million, for which
a level premium life insurance policy with a face
amount of $1 million has been purchased. However,
R did not become covered under Arrangement B until
the beginning of 2005. Because R’s coverage began
at age 55, the level annual premium charged for the
policy on R’s life is $30,000, or $7,000 more than t
he
premiums payable on the policy in effect on P’s life.
Employer F is charged $23,000 and employer G is
charged $30,000 for the death benefit for emplo
yees
P and R, respectively. Assume that employees P and
R are the only covered employees of their respective
employers and that they are identical wi
th respect
to current risk and rating factors that are commonly
taken into account in manual rates used by insurers
for death benefits.
(ii) Arrangement B exhibits at least three of
the characteristics listed in paragraph (c) of this
section generally indicating tha
t an arrangement is
not a 10 or more employer plan described in section
419A(f)(6). First, assets of the plan are effectively
allocated to specific employer
s. Second, there is
differential pricing under the arrangement. That is,
the amount charged under the plan during the year
for a specific amount of death
benefit coverage is not
the same for all the employers (employer F is charged
$23,000 each year for $1 million of death benefit
coverage while employer
G is charged $30,000 each
year for the same coverage), and the difference is
not merely reflective of differences in current risk or
rating factors that are
commonly taken into account
in manual rates used by insurers for the death benefit
being provided. (The differences in amounts charged
are attributable to
differences in issue age and not
to differences in current risk or rating factors, as
employees P and R are the same age). Third, during
the early years of
the arrangement, the amounts
charged are unreasonably high for the covered risk
for the plan as a whole.
(iii) Arrangemen
t B does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) o
f this section is not satisfied. Arrange-
ment B maintains experience-rating arrangements
with respect to individual employers because the
cost of cover
age for each year for any employer
participating in the arrangement is based on a proxy
for the overall experience of that employer. Under
Arrangeme
nt B, employer F’s cost of coverage for
2005 is $23,000 for $1 million of coverage. The
$92,000 cash value at the beginning of 2005 in the
policy in
suring P’s life is a proxy for employer F’s
overall experience. (The $92,000 is essentially the
balance that would have accumulated in the fund
if employer F were the only employer providing
welfare benefits under Arrangement B.) Further, the
$23,000 charged to F for the $1 million of coverage
in 2005 is based on the $92,000 since, in the absence
of the $92,000, employer F would have been charged
$30,000 for P’s $1 million death benefit coverage.
(Note that the conclusion that the $92,000 balance is
the basis for the lower premium charged to employer
F is consistent with the fact that a $92,000 balance,
if converted to a life annuity using the same actuarial
assumptions as were used to calculate the cash value
amount, would be sufficient to provide for annual
annuity payments of $7,000 for the life of P —
an amount equal to the $7,000 difference from the
premium charged in 2005 to employer G for the $1
million of coverage on employee R’s life.) Thus, F’s
cost of coverage for 2005 is based on a proxy for
F’s overall experience. Accordingly, Arrangement
B maintains an experience-rating arrangement with
respect to employer F.
(iv) Arrangement B also maintains an experience-
rating arrangement with respect to employer G be-
cause it can be expected that each year G will be
charged $30,000 for the $1 million of coverage on
R’s life. Each year, G’s cost of coverage will re-
flect G’s prior contributions and allocable earnings,
so that G’s cost of coverage will be based o
n a proxy
for G’s overall experience. Accordingly, Arrange-
ment B maintains an experience-rating arrangement
with respect to employer G. Similarly,
Arrangement
B maintains an experience-rating arrangement with
respect to each other participating employer. Ac-
cordingly, Arrangement B maintai
ns experience-rat-
ing arrangements with respect to individual employ-
ers. This would also be the result if Arrangement B
maintained an experience-rati
ng arrangement with re-
spect to only one individual employer.
Example 5.(i)ThefactsarethesameasinExam-
ple 4except that the death bene
fits are provided under
10-year level term life insurance policies. One par-
ticipating employer, H, has an employee, M, whose
coverage under the arrange
ment commenced at the
beginning of 2000, when M was age 35. M is cov-
ered under the arrangement for $1 million of death
benefits, and a 10-year l
evel term life insurance pol-
icy with a face amount of $1 million has been pur-
chased on M’s life. The level annual premium on the
policy for the first 1
0yearsis$700. Atthebegin-
ning of 2007, when M is age 42, the $700 premium
amount has been paid for seven years. Another em-
ployer, J, has an em
ployee, N, who is also 42 years
old at the beginning of 2007 and is covered under the
arrangement for $1 million, for which a 10-year level
term life insuran
ce policy with a face amount of $1
million has been purchased. However, N did not be-
come covered under the arrangement until the begin-
ning of 2007. B
ecause N’s coverage began at age 42,
the 10-year level term premium charged for the policy
on N’s life is $1,100, or $400 more than the premi-
ums then paya
bleonthepolicyineffectonM’slife.
Neither the policy on employee M nor the policy on
employee N has any cash value at any point during its
term. Assu
me that employees M and N are the only
covered employees of their respective employers and
that they are identical with respect to any current risk
and ratin
g factors that are commonly taken into ac-
count in manual rates used by insurers for the death
benefit being provided.
(ii) Based on the facts described in thisExample
5, this arrangement exhibits at least two of the charac-
teristics listed in paragraph (c) of this section gener-
ally indicating that an arrangement is not a 10 or more
employer plan described in section 419A(f)(6). First,
for the same reasons as described in paragraph (ii) of
Example 4, there is differential pricing under the ar-
rangement. Second, assets of the plan are effectively
allocated to specific employers. This is the case even
though the insurance policies used by employers H
and J have no accessible cash value.
(iii) The facts described in thisExample 5indicate
that the arrangement does not satisfy the requirements
of section 419A(f)(6) and this section because, at a
minimum, the requirement of paragraph (a)(1)(iii) of
this section is not satisfied. This arrangement main-
tains experience-rating arrangements with respect to
individual employers because the cost of coverage
for each year for any employer participating in the
arrangement is based on a proxy for the overall ex-
perience of that employer. Under this arrangement
employer H’s cost of coverage in 2007 is $700 for
$1 million of coverage. Although the policy insur-
ing M’s life has no cash value accessible to employ
er
H, the accumulation of the excesses of the amounts
paid by employer H on behalf of employee M over
each year’s underlying mortality and exp
ense charges
for providing life insurance coverage to employee M
provide economic value to employer H (i.e., the abil-
ity to purchase future coverage on M’s l
ife at a pre-
mium that is less than the underlying mortality and
expense charges as those underlying charges increase
with M’s increasing age). Thus, H’
scostofcoverage
for 2007 is based on a proxyfor H’s overall experi-
ence. Accordingly, this arrangement maintains an ex-
perience-rating arrangement w
ith respect to employer
H.
(iv) This arrangement also maintains an experi-
ence-rating arrangement with
respect to employer J
because it can be expected that for each of the next
nine years J will be charged $1,100 for the $1 million
of coverage on N’s life. Eac
h year, J’s cost of cover-
age will reflect J’s prior contributions, so that J’s cost
of coverage will be based on a proxy for J’s overall
experience. Accordingl
y, this arrangement maintains
an experience-rating arrangement with respect to em-
ployer J. Similarly, this arrangement maintains an ex-
periencing-rating a
rrangement with respect to each
other participating employer. Accordingly, this ar-
rangement maintains experience-rating arrangements
with respect to ind
ividual employers. This would also
be the result if this arrangement maintained an expe-
rience-rating arrangement with respect to only one in-
dividual employe
r.
Example 6. (i) Under Arrangement C, death ben-
efits are provided for eligible employees of each par-
ticipating emp
loyer. Flexible premium universal life
insurance policies are purchased to provide the death
benefits. Each policy has a face amount equal to the
death benefit
payable with respect to the individual
employee. Each participating employer can make any
contributions to the arrangement provided that the
amount paid
for each employee is at least the amount
needed to prevent the lapse of the policy. The amount
needed to prevent the lapse of the universal life insur-
ance polic
y is the excess, if any, of the mortality and
expense charges for the year over the policy balance.
All contributions made by an employer are paid as
2003-40 I.R.B.738October 6, 2003

premiums to the universal life insurance policies pur-
chased on the lives of the covered employees of that
employer. Participating employers S and V each have
a 50-year-old employee covered under Arrangement
C for death benefits of $1 million, which is the face
amount of the respective universal life insurance poli-
cies on the lives of the employees. In the first year of
coverage employer S makes a contribution of $23,000
(the amount of a level premium) while employer V
contributes only $6,000, which is the amount of the
mortality and expense charges for the first year. At
the beginning of year two, the balance in employer
S’s policy (including earnings) is $18,000, but the
balance in V’s policy is zero. Although S is not re-
quired to contribute anything in the second year of
coverage, S contributes an additional $15,000 in the
second year. Employer V contributes $7,000 in the
second year.
(ii) Arrangement C exhibits at least two of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10
or
more employer plan described in section 419A(f)(6).
First, assets of the plan are effectively allocated to
specific employers. Second, the arrangement doe
s
not provide for fixed welfare benefits for a fixed cov-
erage period for a fixed cost.
(iii) Arrangement C does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisf
ied. Arrangement
C maintains experience-rating arrangements with
respect to individual employers because the cost of
coverage of an employer participat
ing in the arrange-
ment is based on a proxy for the overall experience of
that employer. Pursuant to paragraph (b)(4)(ii) of this
section (concerning treatment o
f flexible contribution
arrangements), solely for purposes of determining
an employer’s cost of coverage, the Commissioner
may treat an employer as contri
buting the minimum
amount needed to maintain the coverage. Applying
this treatment, H’s cost of coverage for the first year
of coverage under Arrangem
ent C is $6,000 for $1
million of death benefit coverage, but for the second
year it is zero for the same amount of coverage be-
cause that is the minimum
amount needed to keep the
insurance policy from lapsing. Employer H’s overall
experience at the beginning of the second year of
coverage is $18,000,
because that is the balance that
would have accumulated in the fund if H were the
only employer providing benefits under Arrangement
C. (The special rul
e of paragraph (b)(4)(ii) of this
section only applies to determine cost of coverage;
it does not apply in determining overall experience.)
The $18,000 balan
ce in the policy insuring the life
of employer H’s employee is a proxy for H’s overall
experience. Employer H can choose not to make
any contribut
ions in the second year of coverage due
to the $18,000 policy balance. Thus, H’s cost of
coverage for the second year is based on a proxy for
H’s overall e
xperience. Accordingly, Arrangement
C maintains an experience-rating arrangement with
respect to employer H.
(iv) Arrang
ement C also maintains an experience-
rating arrangement with respect to employer J be-
cause in each year J can contribute more than the
amount nee
ded to prevent a lapse of the policy on the
life of its employee and can expect that its cost of cov-
erage for subsequent years will reflect its prior con-
tributions and allocable earnings. Accordingly, Ar-
rangement C maintains an experience-rating arrange-
ment with respect to employer J.
Example 7. (i) Arrangement D provides death
benefits for eligible employees of each participating
employer. Each employer can choose to provide a
death benefit of either one, two, or three times the an-
nual compensation of the covered employees. Under
Arrangement D, the death benefit is payable only if
the employee dies while employed by the employer.
If an employee terminates employment with the em-
ployer or if the employer withdraws from the arrange-
ment, the death benefit is no longer payable, no re-
fund or other credit is payable to the employer or
to the employees, and no policy or other property is
transferrable to the employer or the employees. Fur-
thermore, the employees are not provided with any
right under Arrangement D to coverage under any
other arrangement, nor with any right to purchase
or to convert to an individual insurance policy, other
than any conversion rights the employees may have
in accordance with state law (and which provide no
additional economic benefit). Arrangement D deter-
mines the amount required to be contributed by each
employer for each month of coverage by agg
regat-
ing the amount required to be contributed for each
covered employee of the employer. The amount re-
quiredtobecontributedforeachcover
ed employee
is determined by multiplying the amount of the death
benefit coverage (in thousands) for the employee by
five-year age bracket rates in a ta
ble specified by the
plan, which is used uniformly for all covered employ-
ees of all participating employers. The rates in the
specified table do not exceed th
e rates set forth in Ta-
ble I of §1.79–3(d)(2), and differences in the rates in
the table are merely reflective of differences in mor-
tality risk for the various ag
e brackets. The rates in
the table are not based in whole or in part on the ex-
perience of the employers participating in Arrange-
ment D. Arrangement D use
s the amount contributed
by each employer to purchase one-year term insur-
ance coverage on the lives of the covered employees
with a face amount equal
to the death benefit provided
by the plan. No employer is entitled to any rebates or
refunds provided under the insurance contract.
(ii) Arrangement D do
es not exhibit any of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan
described in section 419A(f)(6).
Under Arrangement D, assets are not allocated to
a specific employer or employers. Differences in
the amounts charg
ed to the employers are solely
reflective of differences in risk or rating factors that
are commonly taken into account in manual rates
used by insure
rs for the particular benefit or benefits
being provided. The arrangement provides for fixed
welfare benefits for a fixed coverage period for a
fixed cost, w
ithin the meaning of paragraph (d)(5) of
this section. The cost charged under the arrangement
is not unreasonably high for the covered risk of the
plan as a wh
ole. Finally, benefits and other amounts
payable can be paid, distributed, transferred, or oth-
erwise made available only by reason of the death of
the emplo
yee, so that there is no nonstandard benefit
trigger under the arrangement.
(iii) Nothing in the facts of thisExample 7indi-
cates that Arrangement D fails to satisfy the require-
ments of section 419A(f)(6) or this section by reason
of maintaining experience-rating arrangements with
respect to individual employers. Based solely on the
facts described above, Arrangement D does not main-
tain an experience rating-arrangement with respect to
any individual employer because for each participat-
ing employer there is no period for which the em-
ployer’s cost of coverage under the arrangement is
based, in whole or in part, on either the benefits expe-
rience or the overall experience (or a proxy for either
type of experience) of that employer or its employees.
Example 8. (i) The facts are the same as inEx-
ample 7, except that under the arrangement, any re-
fund or rebate provided under that year’s insurance
contract is allocated among all the employers partic-
ipating in the arrangement in proportion to their con-
tributions, and is used to reduce the employers’ con-
tributions for the next year.
(ii) This arrangement exhibits at least one of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(6
).
The arrangement includes nonstandard benefit trig-
gers because amounts are made available to an em-
ployer by reason of the insurer providing a r
efund or
rebate to the plan, an event that is other than the ill-
ness, personal injury, or death of an employee or fam-
ily member, or an employee’s involuntary
separation
from employment.
(iii) Based on the limited and specific facts de-
scribed in thisExample 8, an employer
participating
in this arrangement should be able to establish to the
satisfaction of the Commissioner that the plan does
not maintain experience-rating ar
rangements with re-
spect to individual employers. A participating em-
ployer’s cost of coverage is the relationship of its
contributions to the death benef
it coverage or other
amounts payable with respect to that employer, in-
cluding the employer’s portion of the insurance com-
pany rebate and refund amoun
ts. The rebate and re-
fund amounts are allocated to an employer based on
that employer’s contribution for the prior year. How-
ever, even though an emplo
yer’s overall experience
includes its past contributions, contributions alone are
not a proxy for an employer’s overall experience un-
der the particular fac
ts described in this Example 8.
As a result, a participating employer’s cost of cover-
age under the arrangement for each year (or any other
period) is not based o
n that employer’s benefits expe-
rience or its overall experience (or a proxy for either
type of experience), except as follows: If the total of
the insurance comp
any refund or rebate amounts is
a proxy for the overall experience of all participat-
ing employers, a participating employer’s cost of cov-
erage will be ba
sedinpartonthatemployer’sover-
all experience (or a proxy therefor) by reason of that
employer’s overall experience being a portion of the
overall exper
ience of all participating employers. Un-
der the special rule of paragraph (b)(2)(iii) of this
section, however, that fact alone will not cause the
arrangemen
t to be treated as maintaining an experi-
ence-rating arrangement with respect to an individual
employer because no employer normally contributes
more than 1
0 percent of the total contributions under
October 6, 20037392003-40 I.R.B.

the plan by all employers (the rating group). Accord-
ingly, the arrangement will not be treated as main-
taining experience-rating arrangements with respect
to individual employers.
Example 9. (i) Arrangement E provides medi-
cal benefits for covered employees of 90 participat-
ing employers. The level of medical benefits is deter-
mined by a schedule set forth in the trust document
and does not vary by employer. Other than any rights
an employee may have to COBRA continuation cov-
erage, the medical benefits cease when an employee
terminates employment with the employer. If an em-
ployer withdraws from the arrangement, there is no
refund of any contributions and there is no transfer of
anything of value to employees of the withdrawing
employer, to the withdrawing employer, or to another
plan or arrangement maintained by the withdrawing
employer. Arrangement E determines the amount re-
quired to be contributed by each employer for each
year of coverage, and the aggregate amounts charged
are not unreasonably high for the covered risk for th
e
plan as a whole. To determine the amount to be con-
tributed for each employer, Arrangement E classifies
an employer based on the employer’s location. The
se
geographic areas are not changed once established
under the arrangement. The amount charged for the
coverage under the arrangement to the emp
loyers in
a geographic area is determined from a rate-setting
manual based on the benefit package and geographic
area, and differences in the rates in th
emanualare
merely reflective of current differences in those risk
or rating factors. The rates in the rate-setting manual
are not based in whole or in part on t
he experience of
the employers participating in Arrangement E.
(ii) Arrangement E does not exhibit any of the
characteristics listed in parag
raph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(6).
Although the amounts charged u
nder the arrangement
to an employer in one geographic area can be ex-
pected to differ from those charged to an employer in
another geographic area, t
he differences are merely
reflective of differences incurrent risk or rating fac-
tors that are commonly taken into account in manual
ratesusedbyinsurersfo
r medical benefits.
(iii) Nothing in the facts of thisExample 9indi-
cates that Arrangement E fails to satisfy the require-
ments of section 419A(
f)(6) or this section by reason
of maintaining experience-rating arrangements with
respect to individual employers. Based solely on the
facts described abov
e, Arrangement E does not main-
tain an experience rating-arrangement with respect to
any individual employer because for each participat-
ing employer there
is no period for which the em-
ployer’s cost of coverage under the arrangement is
based, in whole or in part, on either the benefits expe-
rience or the ov
erall experience (or a proxy for either
type of experience) of that employer or its employees.
Example 10. (i) The facts are the same as inEx-
ample 9,except
that the amount charged for the cov-
erage under the arrangement to the employers in a ge-
ographic area is initially determined from a rate-set-
ting manual b
ased on the benefit package and then ad-
justed to reflect the claims experience of the employ-
ers in that classification as a whole. The arrangement
does not hav
e any geographic area classification for
which one of the employers in the classification nor-
mally contributes more than 10 percent of the contri-
butions made by all the employers in that classifica-
tion.
(ii) This arrangement exhibits at least one of the
characteristics listed in paragraph (c) of this section
generally indicating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(6).
There is differential pricing under the arrangement
because the amounts charged to an employer in one
geographic area can be expected to differ from those
chargedtoanemployerinanothergeographicarea,
and the differences are not merely reflective of current
risk or rating factors that are commonly taken into
account in manual rates used by insurers for medical
benefits.
(iii) Based on the facts described in thisExam-
ple 10, an employer participating in this arrangement
should be able to establish to the satisfaction of the
Commissioner that the plan does not maintain expe-
rience-rating arrangements with respect to individu
al
employers even though there is differential pricing.
Although an employer’s cost of coverage for each
year is based, in part, on its benefits experience (
as
well as the benefits experience of the other employ-
ers in its geographic area), that does not result in ex-
perience-rating arrangements with respec
ttoanyin-
dividual employer because the employers in each ge-
ographic area are a rating group and no employer nor-
mally contributes more than 10 percent of
the contri-
butions made by all the employers in its rating group.
(See paragraph (b)(4)(iii) of this section.)
Example 11. (i) The facts of Arrangeme
nt F are
the same as those described inExample 10, except
that K, an employer in one of Arrangement F’s geo-
graphic areas, normally contribut
es more than 10 per-
cent of the contributions made by the employers in
that geographic area.
(ii) For the same reasons as descri
bed inExample
10, Arrangement F results in differential pricing.
(iii) Arrangement F does not satisfy the re-
quirements of section 419A(f)(
6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisfied. An em-
ployer’s cost of coverage for
each year is based, in
part, on its benefits experience (as well as the benefits
experience of the other employers in its geographic
area) and the special rule
for experience-rating by
a rating group does not apply to Arrangement F
because employer K normally contributes more than
10 percent of the contri
butions made by the employ-
ers in its rating group. Accordingly, Arrangement
F maintains experience-rating arrangements with
respect to individua
l employers.
Example 12. (i) The facts of Arrangement G are
thesameasthosedescribedinExample 10, except for
the way that the arra
ngement classifies the employ-
ers. Under Arrangement G, the experience of each
employer for the prior year is reviewed and then the
employer is assig
ned to one of three classifications
(low cost, intermediate cost, or high cost) based on
the ratio of actual claims with respect to that employer
to expected cla
ims with respect to that employer. No
employer in any classification normally contributes
more than 10 percent of the contributions of all em-
ployers in tha
t classification.
(ii) For the same reasons as described inExample
10, Arrangement G results in differential pricing.
(iii) Arrangement G does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisfied. The special
rule in paragraph (b)(4)(iii) of this section for rating
groups can prevent a plan from being treated as main-
taining experience-rating arrangements with respect
to individual employers if the mere use of a rating
group is the only reason a plan would be so treated.
Under Arrangement G, however, an employer’s cost
of coverage for each year is based on the employer’s
benefits experience in two ways: the employer’s
benefits experience is part of the benefits experience
of a rating group that is otherwise permitted under the
special rule of paragraph (b)(4)(iii) of this section,
and the employer’s benefits experience is considered
annually in redetermining the rating group to which
the employer is assigned. Accordingly, Arrangemen
t
G maintains experience-rating arrangements with
respect to individual employers.
Example 13. (i) Arrangement H provides a death
benefit equal to a multiple of one, two, or three
times compensation as elected by the participating
employer for all of its covered employees. Univer
sal
life insurance contracts are purchased on the lives
of the covered employees. The face amount of each
contract is the amount of the death benefi
t payable
upon the death of the covered employee. Under the
arrangement, each employer is charged annually an
amount equal to 200 percent of the morta
lity and
expense charges under the contracts for that year
covering the lives of the covered employees of that
employer. Arrangement H pays the a
mount charged
each employer to the insurance company. Thus, the
insurance company receives an amount equal to 200
percent of the mortality and exp
ense charges under
the policies. The excess amounts charged and paid
to the insurance company increase the policy value
of the universal life insuran
ce contracts. When an
employer ceases to participate in Arrangement H,
the insurance policies are distributed to each of the
covered employees of the
withdrawing employer.
(ii) Arrangement H exhibits at least three of
the characteristics listed in paragraph (c) of this
section generally indic
ating that an arrangement is
not a 10 or more employer plan described in section
419A(f)(6). First, assets are effectively allocated
to specific employer
s. Second, because the amount
of the withdrawal benefit (i.e., the value of the life
insurance policies to be distributed) is unknown,
the arrangement do
es not provide for fixed welfare
benefits for a fixed coverage period for a fixed cost.
Finally, Arrangement H includes nonstandard benefit
triggers because
amounts can be distributed under
the arrangement for a reason other than the illness,
personal injury, or death of an employee or family
member, or an e
mployee’s involuntary separation
from employment.
(iii) Arrangement H does not satisfy the re-
quirements of
section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisfied. Pursuant
to paragrap
h (b)(1) of this section, the prohibition
against maintaining experience-rating arrangements
applies under all circumstances, including employer
withdrawa
ls. Arrangement H maintains experi-
ence-rating arrangements with respect to individual
employers because the cost of coverage for a partic-
ipating
employer is based on a proxy for the overall
2003-40 I.R.B.740October 6, 2003

experience of that employer. Under Arrangement
H, the contributions of a participating employer are
fixed. The benefits or other amounts payable with
respect to an employer include the value of the life
insurance policies that are distributable to the em-
ployees of that employer upon the withdrawal of that
employer from the plan. Thus, the cost of coverage
for any period of an employer’s participation in
Arrangement H is the relationship between the fixed
contributions for that period and the variable benefits
payable under the arrangement. The value of those
variable benefits depends on the value of the policies
that would be distributed if the employer were to
withdraw at the end of the period. (Each year the
insurance policies to be distributed to the employees
in the event of the employer’s withdrawal will in-
crease in value due to the premium amounts paid on
the policy in excess of current mortality and expens
e
charges.) For reasons similar to those discussed
above inExample 6, the aggregate value of the life
insurance policies on the lives of an employer’s
employees is a proxy for that employer’s overall
experience. Thus, a participating’s employer’s cost
of coverage for any period is based on a proxy for
the overall experience of that employer. Accord-
ingly, Arrangement H maintains experience-rating
arrangements with respect to individua
l employers.
(iv) The result would be the same if, rather than
distributing the policies, Arrangement H distributed
cash amounts equal to the cash values of
the policies.
The result would also be the same if the distribution
of policies or cash values is triggered by employees
terminating their employment rat
her than by employ-
ers ceasing to participate in the arrangement.
Example 14. (i)(1) The facts of Arrangement J
are the same as those described in
Example 13for
Arrangement H, except that–
(A) Arrangement J purchases a special term in-
surance policy on the life of each
covered employee
with a face amount equal to the death benefit payable
upon the death of the covered employee; and
(B) there is no benefit distri
butable upon an em-
ployer’s withdrawal.
(2) The special term policy includes a rider that
extends the term protection f
or a period of time be-
yond the term provided on the policy’s face. The
length of the extended term is not guaranteed, but is
based on the excess of prem
iums over mortality and
expense charges during the period of original term
protection, increased by any investment return cred-
ited to the policies.
(ii) Arrangement J exhibits two of the character-
istics listed in paragraph (c) of this section generally
indicating that an arra
ngement is not a 10 or more em-
ployer plan described in section 419A(f)(6). First, as-
sets of the plan are effectively allocated to specific
employers. Second,
the plan does not provide for
fixed welfare benefits for a fixed coverage period for
a fixed cost because the coverage period is not fixed.
(iii) Arrangement J
does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of t
his section is not satisfied. Arrange-
ment J maintains experience-rating arrangements
with respect to individual employers because the cost
of coverage for a participating employer is based on
a proxy for the overall experience of that employer.
Under Arrangement J, the contributions of a partic-
ipating employer are fixed. The benefits or other
amounts payable with respect to an employer are the
one-, two-, or three-times-compensation death bene-
fit for each employee of the employer for the current
year, plus the extended term protection coverage for
future years. Thus, for any period extending to or
beyond the end of the original term of one or more of
the policies on the lives of an employer’s employees,
the employer’s cost of coverage is the relationship
between the fixed contributions for that period and
the variable benefits payable under the arrangement.
The value of those variable benefits depends on
the aggregate value of the policies insuring the em-
ployer’s employees (i.e., the total of the premiums
paid on the policies by Arrangement J to the insur-
ance company, reduced by the mortality and expense
charges that were needed to provide the original term
protection, and increased by any investment retu
rn
credited to the policies). The aggregate value of the
policies insuring an employer’s employees is, at any
time, a proxy for the employer’s overall experi
ence.
Thus, a participating employer’s cost of coverage
for any period described above is based on a proxy
for the overall experience of that emplo
yer. Accord-
ingly, Arrangement J maintains experience-rating
arrangements with respect to individual employers.
Example 15. (i) Arrangement K provides
a death
benefit to employees of participating employers
equal to a specified multiple of compensation. Under
the arrangement, a flexible-prem
ium universal life
insurance policy is purchased on the life of each
covered employee in the amount of that employee’s
death benefit. Each policy has a
face amount equal to
the employee’s death benefit under the arrangement.
Each participating employer is charged annually with
the aggregate amount (if any)
needed to maintain
the policies covering the lives of its employees.
However, each employer is permitted to make ad-
ditional contributions
to the arrangement and, upon
doing so, the additional contributions are paid to
the insurance company and allocated to one or
more contracts coverin
g the lives of the employer’s
employees. In the event that any policy covering the
life of an employee would lapse in the absence of
new contributions f
rom that employee’s employer,
and if at the same time there are policies covering
the lives of other employees of the employer that
have cash values i
n excess of the amounts needed
to prevent their lapse, the employer has the option
of reducing its otherwise-required contribution by
amounts withdra
wn from those other policies.
(ii) Arrangement K exhibits at least two of the
characteristics listed in paragraph (c) of this section
generally ind
icating that an arrangement is not a 10 or
more employer plan described in section 419A(f)(6).
First, assets of the plan are allocated to specific em-
ployers. Sec
ond, because the plan allows an em-
ployer to choose to contribute an amount that is dif-
ferent than that contributed by another employer for
thesamebe
nefit, the amount charged under the plan is
not the same for all participating employers (and the
differences in the amounts are not merely reflective
of differences in current risk or rating factors that are
commonly taken into account in manual rates used
by insurers for the particular benefit or benefits being
provided), resulting in differential pricing.
(iii) Arrangement K does not satisfy the re-
quirements of section 419A(f)(6) and this section
because, at a minimum, the requirement of paragraph
(a)(1)(iii) of this section is not satisfied. Arrange-
ment K maintains experience-rating arrangements
with respect to individual employers because the
cost of coverage for any employer participating in
the arrangement is based on a proxy for the overall
experience of that employer. Under Arrangement K
the benefits with respect to an employer for any year
are a fixed amount. For purposes of determining
the employer’s cost of coverage for that year, the
Commissioner may treat the employer’s contribution
under the special rule of paragraph (b)(4)(ii) of this
section (concerning treatment of flexible contribution
arrangements) as being the minimum contribution
amount needed to maintain the universal life polici
es
with respect to that employer for the death benefit
coverage for that year. Because the employer has
the option to prevent the lapse of one policy by
having amounts withdrawn from other policies, that
minimum contribution amount will be based in part
on the aggregate value of the policies on t
he lives of
that employer’s employees. That aggregate value is a
proxy for the employer’s overall experience. Accord-
ingly, Arrangement K maintains experi
ence-rating
arrangements with respect to individual employers.
(g)Effective date—(1)In general.Ex-
cept as set forth in paragraph (g)(2) of this
section, this section applies to contribu-
tions paid or incurred in taxable years of
an employer beginning on or after July 11,
2002.
(2)Compliance information and
recordkeeping. Paragraphs (a)(1)(iv),
(a)(2), and (e) of this section apply for
taxable years of a welfare benefit fund
beginning after July 17, 2003.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. 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) * * *
October 6, 20037412003-40 I.R.B.

CFR part or section where
Identified and described
Current OMB
control No.
*****
1.419A(f)(6)–1........................................................................ 1545–1795
*****
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
Approved July 9, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 16, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 17, 2003, 68 F.R. 42254)
Section 1503.—Computation
and Payment of Tax
26 CFR 1503–2: Dual consolidated loss.
T.D. 9084
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Dual Consolidated Loss
Recapture Events
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations under section 1503(d) regard-
ing the events that require the recapture
of dual consolidated losses. These regula-
tions are issued to facilitate compliance by
taxpayers with the dual consolidated loss
provisions. The regulations generally pro-
vide that certain events will not trigger re-
capture of a dual consolidated loss or pay-
ment of the associated interest charge. The
regulations provide for the filing of cer-
tain agreements in such cases. This doc-
ument also makes clarifying and conform-
ing changes to the current regulations.
DATES:Effective Dates:These r
egula-
tions are effective January 1,
2002.
FOR FURTHER INFORMATION
CONTACT: Kenneth D. Allison or
Kathryn T. Holman, (202) 622–3860
(not a toll-free number).
SUPPLEMENTARY INFO
RMATION:
Paperwork Reduction Act
The collectio
n of information con-
tained in the
se final regulations has been
reviewed and
approved by the Office of
Management
and Budget in accordance
with the Pa
perwork Reduction Act of 1995
(44 U.S.C
. 3507(d)) under control number
1545–15
83. Responses to this collection
of info
rmation are required to obtain the
benef
it of avoiding entering into a closing
agree
ment with the IRS.
An age
ncy may not conduct or sponsor,
and a p
erson is not required to respond to, a
coll
ection of information unless it displays
ava
lid control number assigned by the Of-
fi
ce of Management and Budget.
The
estimated annual burden per
re
cordkeeper varies from 1 to 3 hours,
de
pending on individual circumstances,
w
ith an estimated average of 2 hours.
C
omments concerning the accuracy
o
f this burden estimate and sugges-
tions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collection
of information must be retained as long
as their contents might become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Final regulations implementin
g sec-
tion 1503(d) were adopted by T.
D. 8434,
1992–2, C.B. 240 [57 FR 41079]
,on
September 9, 1992, and pu
blishedinthe
Federal Register.OnAu
gust 1, 2002,
proposed regulations
(REG–106879–00,
2002–2 C.B. 402 [67 FR 4
9892]), amend-
ing the final regulat
ions, to reduce admin-
istrative burdens i
n certain cases, were
published in the Fe
deral Register. Three
written comment
s were received. No pub-
lic hearing was
requested or held. After
consideratio
n of the comments, these final
regulations
are adopted by this Treasury
decision. T
he changes and clarifications
made in the f
inal regulations in response
to the com
ments received are discussed
below.
Explana
tion of Provisions and
Summary
of Comments
Section
1503(d) generally provides that
a "dual
consolidated loss" of a domestic
corpo
ration cannot offsetthe taxable in-
come
of any other member of the corpo-
rati
on’s consolidated group. The statute,
how
ever, authorizes the issuance of regula-
ti
ons permitting the use of a dual consoli-
da
ted loss to offset the income of a domes-
t
ic affiliate if the loss does not offset the
income of a foreign corporation under for-
eign law.
Section 1.1503–2(g)(2)(i) currently
permits a taxpayer to elect to use a dual
consolidated loss of a dual resident corpo-
ration or separate unit to offset the income
of a domestic affiliate by filing an agree-
ment ((g)(2)(i) agreement) under which
the taxpayer certifies that the dual con-
solidated loss has not been, and will not
be, used to offset the income of another
person under the laws of a foreign country.
Section 1.1503–2(g)(2)(iii) provides that,
in the year of a “triggering event,” the tax-
payer must recapture and report as gross
income the amount of a dual consolidated
2003-40 I.R.B.742October 6, 2003

loss that is subject tothe (g)(2)(i) agree-
ment and must pay the interest charge
required by paragraph (g)(2)(vii). Section
1.1503–2(g)(2)(iv)(B), however, provides
that specified acquisitions are not con-
sidered to be triggering events if certain
conditions are satisfied. In particular, the
parties to the acquisition must enter into
a closing agreement with the IRS under
section 7121, and the acquiring corpora-
tion or consolidated group must file a new
(g)(2)(i) agreement with respect to the
loss.
The proposed regulations provided that
a triggering event generally does not oc-
cur in two types of acquisitions, without
any requirement to enter into a closing
agreement or file a new (g)(2)(i) agree-
ment: (1) when an unaffiliated dual res-
ident corporation or unaffiliated domestic
owner that filed a (g)(2)(i) agreement be-
comes a member of a consolidated group;
and (2) when a dual resident corporation,
or domestic owner, that is a member of
a consolidated group that filed a (g)(2)(i)
agreement (the acquired group) becomes
a member of another consolidated group
(the acquiring group) in an acquisition, so
long as each member of the acquired group
that is an includible corporation under sec-
tion 1504(b) is included immediately af-
ter the acquisition in a consolidated U.S.
income tax return filed by the acquiring
group. Instead, in such cases, the pro-
posed regulations required the filing of an
information statement, whereby taxpayers
would provide the IRS with most of the in-
formation that otherwise would have been
provided in a new (g)(2)(i) agreement.
The proposed regulations were in-
tended to relieve the burden of entering
into a closing agreement in circumstances
where the several liability imposed by
§1.1502–6, in combination with the orig-
inal (g)(2)(i) agreement, would provide
for liability by the acquiring group suffi-
ciently comparable to that provided by a
closing agreement. A commentator, who
raised questions regarding comparable
liability under §1.1502–6 in such cases,
in particular with respect to the interest
charge, recommended that the regulations
should retain the existing requirement for
the acquiring corporation or consolidated
group to enter into a new (g)(2)(i) agree-
ment with respect to the dual consolidated
loss. Although the IRS and Treasury
believe that §1.1502–6 provides an in-
dependent assurance of several liability,
the recommendation to retain the existing
requirement for a new (g)(2)(i) agreement
has been adopted in these final regulations.
The IRS and Treasury have concluded that
the intended reduction in administrative
burden can be accomplished through the
elimination of the requirement to enter into
a closing agreement in the cases specified
in the proposed regulations. Moreover,
with the retention of the requirement to
file a new (g)(2)(i) agreement, the require-
ment in the proposed regulations to file a
separate information statement containing
essentially the same information has been
eliminated. Additional changes have been
made to clarify the nature of the new
(g)(2)(i) agreement.
The commentators also suggested that
any affiliated dual resident corporation or
affiliated domestic owner should be per-
mitted to join the acquiring group with-
out causing a triggering event, regardless
of whether all members of the consolidated
group that filed the original (g)(2)(i) agree-
ment also join the acquiring group, pro-
vided that the acquiring group files a new
(g)(2)(i) agreement. This suggestion has
not been adopted in these final regulations.
The final regulations contain a modified
description of the types of transactions for
which a closing agreement no longer is re-
quired, to make clear that all members of
an acquired group (or their successors-in-
interest) must be members of the acquir-
ing group immediately after the acquisi-
tion (i.e., that no member of the acquired
group, or its successor-in-interest, is ex-
cluded from the acquiring group due to
any applicable restriction such as section
1504(a)(3) or section 1504(c)). However,
the IRS and Treasury are continuing to
consider this suggestion as well as other
alternatives for further reducing the admin-
istrative and compliance burdens under the
section 1503(d) regulations, and invite ad-
ditional comments in this regard.
In order to accomplish the intended
reduction in administrative burdens
promptly, the final regulations are applica-
ble with respect to transactions otherwise
constituting triggering events occurring on
or after January 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 deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that these regulations do
not have a significant economic impact on
a substantial number of small entities. This
certification is based on the fact that these
regulations will primarily affect affiliated
groups of corporations that also have a for-
eign affiliate, which tend to be larger busi-
nesses. Moreover, the number of taxpayers
affected and the average burden are min-
imal. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
the proposed regulations preceding these
regulations were submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal authors of these regula-
tions are Kenneth D. Allison and Kathryn
T. Holman of the Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1503–2 also issued under 26
U.S.C.1502***
Par. 2. In §1.1503–2 paragraphs (g)(2)
and (h)(1) are amended as follows:
1. Paragraphs (g)(2)(iv)(B)(1), intro-
ductory text, and (g)(2)(iv)(B)(1)(i)arere-
vised.
October 6, 20037432003-40 I.R.B.

2. Paragraph (g)(2)(iv)(B)(1)(ii)isre-
moved.
3. Paragraphs (g)(2)(iv)(B)(1)(iii)
and (iv) are redesignated as paragraphs
(g)(2)(iv)(B)(1)(ii)and(iii), respectively.
4. Paragraph (g)(2)(iv)(B)(2)and
(g)(2)(iv)(B)(2)(iii) are revised and redes-
ignated as paragraph (g)(2)(iv)(B)(3)and
(g)(2)(iv)(B)(3)(iii) respectively.
5.Newly designated paragraph
(g)(2)(4)(B)(3)(iii)isrevised.
6. New paragraph (g)(2)(iv)(B)(2)is
added.
7. Paragraph (g)(2)(iv)(D) is added.
8. Paragraph (h)(1) is amended by
adding a sentence at the end of the para-
graph.
The revisions and additions read as fol-
lows:
§1.1503–2 Dual consolidated loss.
*****
(g) * * *
(2) * * *
(iv) * * *
(B)* * *(1) If all the requirements of
paragraph (g)(2)(iv)(B)(3)ofthissection
are met, the following events shall not con-
stitute triggering events requiring the re-
capture of the dual consolidated loss under
paragraph (g)(2)(vii) of this section:
(i) An affiliated dual resident corpora-
tion or affiliated domestic owner becom
es
an unaffiliated domestic corporation
or
a member of a new consolidated group
(other than in a transaction describe
din
paragraph (g)(2)(iv)(B)(2)(ii)of
this sec-
tion);
*****
(2) If the requirements of pa
ragraph
(g)(2)(iv)(B)(3)(iii)of
this section are met,
the following events shall
not constitute
triggering events requir
ing the recapture of
the dual consolidated los
s under paragraph
(g)(2)(vii) of this se
ction—
(i) An unaffiliated dual resident corpo-
ration or unaffiliated domestic owner be-
comes a member of a consolidated group;
(ii) A consolidated group that filed an
agreement under this paragraph (g)(2)
ceases to exist as a result of a transaction
described in §1.1502–13(j)(5)(i) (other
than a transaction in which any member
of the terminating group, or the succes-
sor-in-interest of such member, is not a
member of the surviving group immedi-
ately after the terminating group ceases to
exist).
(3)Ifthefollowingrequirements(as
applicable) are satisfied, the events listed
in paragraphs (g)(2)(iv)(B)(1)and(2)of
this section shall not constitute triggering
events requiring recapture under paragraph
(g)(2)(vii) of this section.
*****
(iii) The unaffiliated domestic corpora-
tion or new consolidated group must file,
with its timely filed income tax return for
the taxable year in which the event de-
scribed in paragraph (g)(2)(iv)(B)(1)or(2)
of this section occurs, an agreement de-
scribed in paragraph (g)(2)(i) of this sec-
tion (new (g)(2)(i) agreement), whereby it
assumes the same obligations with respect
to the dual consolidated loss as the corpo-
ration or consolidated group that filed the
original (g)(2)(i) agreement with respect
to that loss. The new (g)(2)(i) agreement
must be signed under penalties of perjury
by the person who signs the return and
must include a reference to this paragraph
(g)(2)(iv)(B)(3)(iii).
*****
(D) Example. The following ex
am-
ple illustrates the appli
cation of paragraph
(g)(2)(iv)(B)(2)(ii)of
this section:
Example. (i) Facts. C is the common parent of a
consolidated group (the C Group) that includes DRC,
a domestic corporation. D
RC is a dual resident cor-
poration and incurs a dual consolidated loss in its tax-
able year ending December 31, Year 1. The C Group
elects to be bound by th
e provisions of this paragraph
(g)(2) with respect to the Year 1 dual consolidated
loss. No member of the C Group incurs a dual con-
solidated loss in Year 2. On December 31, Year 2,
stock of C is acquired by D in a transaction described
in § 1.1502–13(j)(5)(i). As a result of the acquisition,
all the C Group members, including DRC, become
members of a consolidated group of which D is the
common parent (the D Group).
(ii) Acquisition not a triggering event. Under
paragraph (g)(2)(iv)(B)(2)(ii) of this section, the
acquisition by D of the C Group is not an event
requiring the recapture of the Year 1 dual consol-
idated loss of DRC, or the payment of an interest
charge, as described in paragraph (g)(2)(vii) of
this section, provided that the D Group files the
new (g)(2)(i) agreement described in paragraph
(g)(2)(iv)(B)(3)(iii)ofthissection.
(iii) Subsequent event. A triggering event occurs
on December 31, Year 3, that requires recapture by
the D Group of the dual consolidated loss that DRC
incurred in Year 1, as well as the payment of an in-
terest charge, as provided in paragraph (g)(2)(vii) of
this section. Each member of the D Group, including
DRC and the other former members of the C Group, is
severally liable for the additional tax (and the interest
charge) due upon the recapture of the dual consoli-
dated loss of DRC.
*****
(h) * * *
(1)***Paragraph(g)(2)(iv)(B)(2)
of this section shall apply with respect to
transactions otherwise constituting trig-
gering events occurring on or after January
1, 2002.
*****
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (b) is
amended by adding an entry for 1.1503–2
to read as follows:
§602.601 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1503–2............................................................................. 1545–1583
*****
2003-40 I.R.B.744October 6, 2003

Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
Approved July 17, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 29, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 30, 2003, 68 F.R. 44616)
Section 2503.—Taxable Gifts
26 CFR 25.2503-1: General definitions of "taxable
gifts" and of "total amount of gifts."
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
Section 2511.—Transfers
in General
26 CFR 25.2511-1: Transfers in general.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
Section 2512.—Valuation
of Gifts
26 CFR 25.2512-6: Valuation of certain life i
nsur-
ance and annuity contracts; valuation of sha
res in an
open-end investment company.
Certain previously published revenue ruli
ngs are
obsolete with respect to the taxation of
split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
Section 6042.—Returns
Regarding Payments of
Dividends and Corporate
Earnings and Profits
The Service expects to revise Rev. Proc. 2003-28
to allow brokers to furnish composite substitute
payee statements for Forms 1099-DIV, "Dividends
and Distributions," and Forms 1099-MISC, Miscel-
laneous Income. See Notice 2003-67, page 752.
Section 6721.—Failure to File
Correct Information Returns
The Service will exercise its authority under sec-
tion 6724 to waive penalties under section 6721 for
information returns for 2003 if a broker makes a good
faith effort to satisfy its information reporting obliga-
tions consistent with the statutory changes effected by
the Jobs and Growth Tax Relief Reconciliation Act of
2003. See Notice 2003-67, page 752.
Section 6722.—Failure
to Furnish Correct Payee
Statements
The Service will exercise its authority under sec-
tion 6724 to waive penalties under section 6722 for
information returns for 2003 if a broker makes a good
faith effort to satisfy its information reporting obliga-
tions consistent with the statutory changes effected by
the Jobs and Growth Tax Relief Reconciliation Act of
2003. See Notice 2003-67, page 752.
Section 6724.—Waiver;
Definitions and Special Rules
The Service will exercise its authority under
section 6724 to waive penalties under sections 6721
and 6722 for information returns for 2003 if a broker
makes a good faith effort to satisfy its information
reporting obligations consistent with the statutory
changes effected by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. See Notice 2003-67,
page 752.
Section 7805.—Rules and
Regulations
26 CFR 301.7805-1: Rules and regulations.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
26 CFR 1.7872-15: Split-dollar loans.
Certain previously published revenue rulings are
obsolete with respect to the taxation of split-dollar
life insurance arrangements entered into or materially
modified after September 17, 2003. See Rev. Rul.
2003-105, page 696.
October 6, 20037452003-40 I.R.B.

Part II. Treaties and Tax Legislation
Subpart A.—Tax Conventions and Other Related Items
Austria Agreement on Deferred
Payments
Announcement 2003–58
Following is a copy of the News Re-
lease issued by the Director International
(U.S. Competent Authority) on August 27,
2003 (IR–2003–104).
U.S. & Austria Reach Agreement on
Taxing Deferred Payments to U.S.
Citizens Residing in Austria
WASHINGTON — The U.S. and
Austrian Competent Authorities have
entered into a competent authority
agreement. This agreement provides
that the U.S.-Austria Income Tax
Treaty signed on October 25, 1956,
does not prohibit Austria from taxing
deferred payments for services earned
by U.S. citizens while working and re-
siding in the United States, when such
compensation was paid after these em-
ployees became residents of Austria.
The agreement also confirms, however,
that Austria shall deduct from its tax the
amount of U.S. taxes imposed on the
deferred payments for services, as re-
quired by the treaty. The 1956 income
tax treaty is applicable for assessment
periods up to and including 1998.
Inquiries concerning this agreement
may be directed to Mr. Lynn Bartlett of
the IRS at (202) 435–5021.
Swiss Agreement on Treaty
Benefits
Announcement 2003–59
The following is a copy of the agree-
ment concluded between the U.S. and
Swiss competent authorities on August
20, 2003 and released on August 22, 2003
(IR–2003–103) regarding the Limitation
of Benefits Article of the income tax treaty
and accompanying Revised Memorandum
of Understanding between the United
States and the Swiss Confederation.
COMPETENT AUTHORITY
AGREEMENT
The Competent Authorities of the
United States and the Swiss Confedera-
tion enter into the following Agreement
(“Agreement”) concerning the ownership
requirements under paragraph 3 of Article
22 (Limitation on Benefits) and paragraph
7 (In reference to paragraph 6 of Arti-
cle22(LimitationonBenefits))ofthe
Revised Memorandum of Understanding
(“MOU”) of the Convention Between
the United States of America and the
Swiss Confederation for the Avoidance of
Double Taxation with Respect to Taxes
on Income, signed on October 2, 1996
(“Treaty”). The Agreement is entered into
under paragraph 3 of Article 25 (Mutual
Agreement Procedure).
It is understood that for purposes of this
Agreement, “Article” refers to an Article
of the Treaty.
Ownership requirements under Article
22(3) and paragraph 7 of the MOU
Article 22(3) allows a Swiss company
to receive limited derivative benefits with
respect to dividends, royalties, and inter-
est if it meets an ownership, base reduc-
tion, and derivative benefits test. Arti-
cle 22, subparagraphs 3(a)(i) and (ii), sets
forth a combined ownership test. One of
the ways in which a company can meet
the test under subparagraph 3(a)(ii) is if
greater than 70 percent of the aggregate
vote and value of its shares are ultimately
owned by persons that are residents of a
party to the North American Free Trade
Agreement (“NAFTA”), and that are also
described in Article 22(3)(b).
Under Article 22(6), a person who is not
entitled to benefits under Article 22, para-
graphs 1 through 5, may nevertheless be
granted benefits if the competent author-
ity of the State in which the income arises
so determines, after consultation with the
competent authority of the other Contract-
ing State. Under paragraph 7 of the MOU,
a company that meets an ownership test
and a base-erosion test will be granted
treaty benefits under Article 22(6). A com-
pany can meet the ownership test if the ul-
timate beneficial owners of 95 percent or
more of the aggregate vote and value of all
itssharesaresevenorfewerpersonsthat
are residents of a party to the European
Union, the European Economic Area or a
party to the North American Free Trade
Agreement (NAFTA), and that are also de-
scribed in Article 22(3)(b).
Under Article 22(3)(b), ultimate bene-
ficial ownership by a resident of a country
that is a party to NAFTA will be taken into
account for purposes of Article 22(3)(a)(ii)
and paragraph 7 of the MOU only if the ul-
timate beneficial owner meets three condi-
tions, one of which is that the owner be a
resident of a country with which the other
Contracting State has a comprehensive in-
come tax convention. While the United
States is a party to NAFTA, the United
States does not have a comprehensive in-
come tax convention with itself. Thus,
there has been doubt as to whether U.S.
residents may be taken into account.
In order to address this concern and pro-
vide certainty to taxpayers, the Compe-
tent Authorities of United States and the
Swiss Confederation have agreed that a
U.S. resident will qualify as a resident of
a party to NAFTA for purposes of Article
22(3)(b) if the person is a resident of the
United States and is also described in Ar-
ticle 22(1), sub-paragraphs (a) or (b), or
clause (i) of sub-paragraph (e). Accord-
ingly, an individual who is a resident of the
United States (as determined under Article
4); the United States or a political subdivi-
sion of the United States; an instrumental-
ity of the United States or political subdivi-
sion thereof; and a company incorporated
in the United States whose principal class
of shares is primarily and regularly traded
on a recognized stock exchange within the
meaning of paragraph 22(1)(e)(i) will be
treated as a resident of a country that is
a party to NAFTA for purposes of Arti-
cle 22(3)(b), and therefore taken into ac-
count for purposes of Article 22(3)(a)(ii)
and paragraph 7 of the MOU.
The principal author of this announce-
ment is Nina Chowdhry of the Office
of Associate Chief Counsel (Interna-
tional). For further information regard-
ing this announcement, contact Nina
Chowdhry at (202) 622–3880 (not a
toll-free call).
2003-40 I.R.B.746October 6, 2003

Part III. Administrative, Procedural, and Miscellaneous
Built-in Gains and Losses Under
Section 382(h)
Notice 2003–65
I. Purpose
The Internal Revenue Service (IRS) is
studying the circumstances under which
items of income, gain, deduction, and loss
that a loss corporation recognizes after
an ownership change should be treated
as recognized built-in gain (RBIG) and
recognized built-in loss (RBIL) under
section 382(h) of the Internal Revenue
Code. This notice provides guidance re-
garding the identification of built-in items
and requests comments on this subject.
As described below under the heading
Reliance on Notice, taxpayers may rely
upon this guidance until the IRS and Trea-
sury Department issue temporary or final
regulations under section 382(h). This no-
tice discusses two alternative approaches
for the identification of built-in items for
purposes of section 382(h): the 1374 ap-
proach and the 338 approach.
II. Background
Section 382 provides that, after an
ownership change, the amount of a loss
corporation’s taxable income for any
post-change year that may be offset by
pre-change losses shall not exceed the
section 382 limitation for that year. The
section 382 limitation generally equals
the fair market value of the old loss
corporation multiplied by the long-term
tax-exempt rate. A loss corporation is any
corporation that hasa net operating loss,
a net operating loss carryforward, or a net
unrealized built-in loss for the taxable year
in which the ownership change occurs.
An ownership change is a greater than
50-percentage-point increase in ownership
by 5-percent shareholders during the test-
ing period, which is generally three years.
Congress intended the section 382 limita-
tion to apply when shareholders that did
not bear the economic burden of the losses
acquire a controlling interest in the loss
corporation.SeeH.R. Rep. No. 99–426,
1986–3 C.B. (Vol. 2) 256; S. Rep. No.
99–313, 1986–3 C.B. (Vol. 3) 232.
Section 382(h) provides rules for the
treatment of built-in gain or loss recog-
nized with respect to assets owned by the
loss corporation at the time of its owner-
ship change. Section 382(h), as described
below, reflects that, as a general matter,
losses that offset built-in gain should not
be subject to the section 382 limitation
merely because the gain is recognized af-
ter an ownership change because if the gain
had been recognized before the ownership
change, it would have been offset with-
out limitation by the loss corporation’s net
operating losses. Similarly, built-in loss
should not escape the section 382 limita-
tion merely because it is recognized after
an ownership change because if the loss
had been recognized before the ownership
change, it would have been subject to the
section 382 limitation.
The question of whether RBIG in-
creases the section 382 limitation or
whether RBIL is subject to the section
382 limitation begins with a determination
of whether the loss corporation has a net
unrealized built-in gain (NUBIG) or a net
unrealized built-in loss (NUBIL). Pursuant
to section 382(h)(3), a loss corporation’s
NUBIG equals the excess, if any, of the
aggregate fair market value of its assets
immediately before an ownership change
over the assets’ aggregate adjusted basis at
that time, adjusted by the amount of certain
items of income or deduction described in
section 382(h)(6)(C) (described below).
In addition, a loss corporation’s NUBIL
equals the excess, if any, of the aggregate
adjusted basis of its assets immediately be-
fore an ownership change over the assets’
aggregate fair market value at that time,
adjusted by the amount of certain items of
income or deduction described in section
382(h)(6)(C). Under section 382(h)(3)(B),
if a loss corporation’s NUBIG or NUBIL
does not exceed a threshold amount (the
lesser of $10,000,000 or 15% of the fair
market value of its assets immediately
before the ownership change), the loss
corporation’s NUBIG or NUBIL is zero.
Thus, a loss corporation cannot have both
a NUBIG and a NUBIL, but it can have
neither.
If a loss corporation has a NUBIG,
pursuant to section 382(h)(1)(A), any
RBIG for any taxable year within the
5-year recognition period following the
ownership change increases the section
382 limitation for that year. Similarly, if
a loss corporation has a NUBIL, pursuant
to section 382(h)(1)(B), any RBIL for any
taxable year within the 5-year recognition
period following the ownership change is
treated as a pre-change loss subject to the
section 382 limitation. Thus, only a loss
corporation with a NUBIG can increase
the section 382 limitation by RBIG, and
only a loss corporation with a NUBIL can
have RBIL that is treated as a pre-change
loss.
In the case of dispositions of assets
during the recognition period, section
382(h)(2) places the burden on the loss
corporation to establish that any gain rec-
ognized is RBIG, and, conversely, that
any loss recognized is not RBIL. Section
382(h)(2)(A) defines RBIG as any gain
recognized during the 5-year recognition
period on the disposition of any asset to the
extent the new loss corporation establishes
that (i) it held the asset on the change date
and (ii) such gain does not exceed the
asset’s built-in gain on the change date.
Furthermore, section 382(h)(2)(B) defines
RBIL as any loss recognized during the
5-year recognition period on the disposi-
tion of any asset except to the extent the
new loss corporation establishes that (i) it
did not hold the asset on the change date
or (ii) such loss exceeds the asset’s built-in
loss on the change date.
Section 382(h)(6) and the second sen-
tence of section 382(h)(2)(B) provide
rules treating certain items of income or
deduction as RBIG or RBIL. Specifically,
section 382(h)(6)(A) provides that any
item of income “properly taken into ac-
count during the recognition period” is
treated as RBIG if the item is “attributable
to periods before the change date.” Section
382(h)(6)(B) provides that any item of de-
duction “allowable as a deduction during
the recognition period” is treated as RBIL
if the item is “attributable to periods before
the change date.” In addition, the second
sentence of section 382(h)(2)(B) provides
that allowable depreciation, amortization,
or depletion deductions are treated as
RBIL except to the extent the loss corpo-
ration establishes that the amount of the
deduction is not attributable to the asset’s
built-in loss on the change date. Finally,
section 382(h)(6)(C) provides that NUBIG
October 6, 20037472003-40 I.R.B.

or NUBIL shall be properly adjusted for
items of income and deduction that would
be treated as RBIG or RBIL under section
382(h)(6) if they were properly taken into
account or allowable as a deduction during
the recognition period.
The IRS has issued two notices con-
cerning guidance under section 382(h). In
Notice 87–79, 1987–1 C.B. 388, the IRS
announced that it anticipated that regula-
tions under section 382 would permit in-
come from a discharge of indebtedness that
is integrally related to a transaction result-
ing in an ownership change to be allocated
to the pre-change period. In Notice 90–27,
1990–1 C.B. 336, the IRS announced that
it would promulgate regulations providing
that, if a taxpayer that sells a built-in gain
asset either prior to or during the recogni-
tion period reports the gain using the in-
stallment method under section 453, the
provisions of section 382(h) will continue
to apply to RBIG from the installment sale
after the recognition period (including any
gain recognized from the disposition of the
installment obligation).
III. The 1374 Approach
The 1374 approach generally incor-
porates the rules of section 1374(d) a
nd
§§1.1374–3, 1.1374–4, and 1.1374–7 o
f
the Income Tax Regulations in calcul
at-
ing NUBIG and NUBIL and identifyi
ng
RBIG and RBIL. The following sec
tions
describe the application of th
ose rules in
the context of section 382(h) a
nd describe
those areas in which the 1374 a
pproach
departs from those rules.
A.Calculation of NUBIG and NUBIL
Under the 1374 approach, NUBIG or
NUBIL is the net amount of gain or loss
that would be recognized in a hypothet-
ical sale of the assets of the loss corpo-
ration immediately before the ownership
change. Specifically, NUBIG or NUBIL is
calculated by determining the amount that
would be the amount realized if immedi-
ately before the ownership change the loss
corporation had sold all of its assets, in-
cluding goodwill, at fair market value to
a third party that assumed all of its lia-
bilities, decreased by the sum of any de-
ductible liabilities of the loss corporation
that would be included in the amount real-
ized on the hypothetical sale and the loss
corporation’s aggregate adjusted basis in
all of its assets, increased or decreased by
the corporation’s section 481 adjustments
that would be taken into account on a hy-
pothetical sale, and increased by any RBIL
that would not be allowed as a deduction
under section 382, 383, or 384 on the hypo-
thetical sale.See§1.1374–3(a) (regarding
the calculation of NUBIG). The amount by
which this result exceeds $0 is the loss cor-
poration’s NUBIG; the amount by which
$0 exceeds this result is the loss corpora-
tion’s NUBIL.
For all of the examples in this notice,
unless otherwise noted, LossCo is a loss
corporation (as defined in section 382(k))
that is a calendar year basis taxpayer that
uses the accrual method of accounting and
that has an ownership change on the last
day of a taxable year.
Example 1. Immediately before an ownership
change, LossCo has one asset with a fair marke
tvalue
of $100 and an adjusted basis of $10, and a deductible
liability of $30. Disregarding the threshold require-
ment of section 382(h)(3)(B), LossCo has a
NUBIG
of $60 ($100, the amount LossCo would realize if it
sold all its assets to a third party that assumed all of
its liabilities, decreased by $40, the s
um of the de-
ductible liability ($30) and the aggregate basis in the
assets ($10)).
Example 2.Thefactsarethesameasi
nExample
1 except that the asset has an adjusted basis of $90
instead of $10. Disregarding the threshold require-
ment of section 382(h)(3)(B), Los
sCo has a NUBIL
of $20 (the amount by which $0 exceeds -$20 ($100,
the amount LossCo would realize if it sold all its as-
sets to a third party that assu
med all of its liabilities,
decreased by $120, the sum of the deductible liability
($30) and the aggregate basis in the assets ($90))).
B.Calculation of RBIG and RBIL
1.Gain and Loss from Sales or Exchanges
of Assets
Under the 1374 approach, the amount
of gain or loss recognized during the
recognition period on the sale or exchange
of an asset is RBIG or RBIL, respectively,
subject to the limitations described in sec-
tion 382(h)(2)(A) or (B). The sum of the
RBIG or RBIL (including deductions that
are treated as RBIL as described below)
attributable to an asset cannot exceed the
unrealized built-in gain or loss in that asset
on the change date.
With respect to gain from sales reported
under the section 453 installment method,
the 1374 approach follows the section
1374 regulations and Notice 90–27, which
treat built-in gain recognized from install-
ment sales that occur before or during
the recognition period as RBIG, even if
recognized after therecognition period.
See§1.1374–4(h);see alsoNotice 90–27,
1990–1 C.B. 336.
In addition, as set forth in Notice 90–27,
if a corporation transfers a built-in gain as-
set to an affiliated corporation, the gain
is deferred under the consolidated return
regulations, and, before the close of the
recognition period, the affiliated corpora-
tion sells the built-in gain asset in a sale
reportable under the installment method,
such deferred gain is RBIG when such gain
is taken into account by the selling or dis-
tributing member, and will cause an in-
crease in the section 382 limitation for the
taxable year of payment, even if the gain is
taken into account after the recognition pe-
riod.SeeNotice 90–27, 1990–1 C.B. 336,
338.
2.Items of Income and Deduction
a.In General
In cases other than sales and exchanges,
the 1374 approach generally relies on the
accrual method of accounting to identify
income or deduction items as RBIG or
RBIL, respectively. Under this approach,
items of income or deduction properly
included in income or allowed as a de-
duction during the recognition period
are considered “attributable to periods
before the change date” under sections
382(h)(6)(A) and (B) and, thus, are treated
as RBIG or RBIL, respectively, if an
accrual method taxpayer would have in-
cluded the item in income or been allowed
a deduction for the item before the change
date. However, for purposes of deter-
mining whether an item is RBIL, section
461(h)(2)(C) and §1.461–4(g) (concern-
ing certain liabilities for which payment is
economic performance) do not apply.See
§§1.1374–4(b)(1) and (2).
Example 3. Immediately before an ownership
change, LossCo, whic
h uses the cash method of ac-
counting, has a $50 account receivable with a fair
market value of $40 and a basis of $0. In Year 2 of the
recognition period
, LossCo sells the account receiv-
able for $40 before collecting any part of it. LossCo
has $40 of RBIG in Year 2.
Example 4.Thefac
ts are the same as inExample
3, except that instead of selling the account receiv-
able, LossCo collects $50 on the account receivable
in Year 2 of the re
cognition period. LossCo has $50
2003-40 I.R.B.748October 6, 2003

of RBIG in Year 2, because that is the amount that ac-
crued immediately before the ownership change.See
§1.1374–4(b)(3), Example 1.
Example 5. The facts are the same as inExample
3, except that LossCo collects $25 on the account re-
ceivable in Year 2 of the recognition period and then
sells the remainder of the account receivable for $20
in Year 3 of the recognition period. LossCo has $25
of RBIG in Year 2, and $15 of RBIG in Year 3 ($40
of built-in gain on the change date decreased by $25
of income previously treated as RBIG in Year 2).
(i)Income Generated by Built-in Gain
Assets
In general, the 1374 approach does not
treat income from a built-in gain asset dur-
ing the recognition period as RBIG be-
cause such income did not accrue before
the change date.
Example 6. LossCo has a NUBIG of $300,000
that is attributable to several non-amortizable assets
with an aggregate fair market value of $650,000 and
an aggregate adjusted basis of $500,000, and a pa
tent
with a fair market value of $170,000 and an adjusted
basis of $20,000. The patent is an “amortizable sec-
tion 197 intangible” as defined in section 197
(c). In
Year 1 of the recognition period, LossCo has gross in-
come of $75,000, $20,000 of which is attributable to
royalties collected in connection with the
license of
the patent. No part of the $20,000 attributable to the
royalties is RBIG in Year 1 because the income would
not have been properly taken into acco
unt before the
change date by an accrual method taxpayer. Accord-
ingly, LossCo’s section 382 limitation for Year 1 is
not increased by any part of that amo
unt.
(ii)Depreciation, Amortization an
d
Depletion Deductions with Resp
ect to
Built-in Loss Assets
The 1374 approach departs from t
he
tax accrual rule and the regula
tions under
section1374initstreatmento
famounts
allowable as depreciation, a
mortization,
or depletion (collective
ly, “amortization”)
deductions during the rec
ognition period.
In accordance with the se
cond sentence of
section 382(h)(2)(B), e
xcept to the extent
the loss corporation es
tablishes that the
amount is not attribut
able to the excess
of an asset’s adjust
ed basis over its fair
market value on the c
hange date, these
amounts are treate
d as RBIL, regardless
of whether they acc
rued for tax purposes
before the change
date. A loss corpora-
tionmayuseanyre
asonable method to
establish that
the amortization deduction
amount is not at
tributable to an asset’s
built-in loss
on the change date. One ac-
ceptable meth
od is to compare the amount
of the amorti
zation deduction actually
allowed to t
he amount of such deduction
that would have been allowed had the
loss corporation purchased the asset for
its fair market value on the change date.
The amount by which the amount of the
actual amortization deduction does not
exceed the amount of the hypothetical
amortization deduction is not RBIL.
Example 7. LossCo has a NUBIL of $300,000
that is attributable to several non-amortizable assets
with an aggregate fair market value of $500,000 and
an aggregate adjusted basis of $650,000, and a patent
with a fair market value of $125,000 and an adjusted
basis of $275,000. The patent is an “amortizable sec-
tion 197 intangible” as defined in section 197(c). As
of the change date, the patent has a remaining use-
ful life for tax purposes of 5 years. On its tax return
for Year 1, LossCo claims a $55,000 amortization de-
duction for the patent. If LossCo had purchased the
patent for its fair market value on the change date, it
would have been allowed an amortization deduction
in the amount of $8,333 on that return. Accordingly
,
LossCo is able to establish that $8,333 of the amorti-
zation deduction for that taxable year is not attribut-
able to the patent’s built-in loss on the cha
nge date.
Therefore, $46,667 of the actual amount of the amor-
tization deduction in Year 1 is RBIL. On the first day
of Year 2, LossCo sells the patent for $70,
000 and
recognizes $150,000 of loss. Of LossCo’s $150,000
loss from the sale, $103,333 is RBIL under section
382(h)(2)(B) ($150,000 built-in loss
on the change
date decreased by the $46,667 deduction attributable
to the patent previously treated as RBIL).
b.Discharge of Indebtedness Income and
Bad Debt Deductions
The 1374 approach generally treats as
RBIG or RBIL any income or deduction
item properly taken into account during
the first 12 months of the recognition pe-
riod as discharge of indebtedness income
(“COD income”) that is included in gross
income pursuant to section 61(a)(12) or as
a bad debt deduction under section 166 if
the item arises from a debt owed by or
to the loss corporation at the beginning of
the recognition period.See§1.1374–4(f).
Any reduction of tax basis under sections
108(b)(5) and 1017(a) that occurs as a re-
sult of COD income realized within the
first 12 months of the recognition period
is treated as having occurred immediately
before the ownership change for purposes
of determining whether a recognized gain
or loss is an RBIG or an RBIL under sec-
tion 382(h)(2). However, the reduction of
tax basis does not affect the loss corpo-
ration’s NUBIG or NUBIL under section
382(h)(3).
Example 8.Los
sCo has a NUBIG of $300,000.
On the change date, LossCo has an asset with a fair
market value of $200,000 and a basis of $150,000.
The asset is s
ubject to a debt with an adjusted issue
price of $98,000. During Year 1 of the recognition
period, LossCo satisfies the debt by paying the lender
$95,000. On its tax return for Year 1, LossCo includes
in gross income $3,000 of COD income. That amount
is RBIG in Year 1. In Year 2, LossCo sells the asset
for $200,000. The $50,000 of gain recognized on the
sale of the asset is RBIG in Year 2.
Example 9. The facts are the same as inExam-
ple 8, except that $3,000 of the debt is discharged in
a Title 11 case. LossCo excludes the $3,000 of COD
income under section 108(a) and reduces the tax basis
of the asset from $150,000 to $147,000 under sections
108(b)(5) and 1017(a). The $3,000 of COD income
that is excluded from income is not treated as RBIG.
However, because the basis reduction is treated as
having occurred immediately before the recognition
period for purposes of section 382(h)(2), the $53,000
of gain recognized on the sale of the asset is RBIG.
As suggested above, the treatment of
COD income under the 1374 approach dif-
fers from the treatment of that item as de-
scribed in Notice 87–79, which treats COD
income that is “integrally related to an
ownership change” but is recognized after
the ownership change as RBIG. Taxpayers
that otherwise follow the 1374 approach
may apply the rules described in Notice
87–79, rather than the rules included in t
he
1374 approach, to COD income for own-
ership changes that occur before Se
ptem-
ber 12, 2003, but may not rely on the r
ules
described in Notice 87–79 for owne
rship
changes that occur on or after Sep
tember
12, 2003.
IV. The 338 Approach
The 338 approach identifies i
tems of
RBIG and RBIL generally by com
par-
ing the loss corporation’s a
ctual items of
income, gain, deduction, a
nd loss with
those that would have resul
ted if a section
338 election had been ma
de with respect
to a hypothetical purch
ase of all of the
outstanding stock of t
he loss corporation
on the change date (the
“hypothetical pur-
chase”). As a result,
unlike under the 1374
approach, under the
338 approach, built-in
gain assets may be tr
eated as generating
RBIGeveniftheya
re not disposed of
at a gain during t
he recognition period,
and deductions f
or liabilities, in particular
contingent lia
bilities, that exist on the
change date may
be treated as RBIL.
A.Calculatio
n of NUBIG and NUBIL
Under the 338 a
pproach, NUBIG or
NUBIL is calcu
lated in the same manner
as it is under
the 1374 approach. Accord-
ingly, unli
ke the case in which a section
October 6, 20037492003-40 I.R.B.

338 election is actually made, contingent
consideration (including a contingent li-
ability) is taken into account in the ini-
tial calculation of NUBIG or NUBIL, and
no further adjustments are made to reflect
subsequent changes in deemed considera-
tion.
Example 10. Immediately before an ownership
change, LossCo has one asset with a fair market value
of $100 and a basis of $10 and a deductible contingent
liability estimated at $40. Disregarding the thresh-
old requirement of section 382(h)(3)(B), LossCo has
a NUBIG of $50 ($100, the amount LossCo would
realize if it sold all of its assets to a third party that
assumed all of its liabilities, decreased by $50, the
sum of deductible liabilities ($40) and the aggregate
basis of LossCo’s assets ($10)). During Year 1 of the
recognition period, a final legal determination fix
es
the contingent liability at $10. NUBIG is not read-
justed to reflect the resolution of the amount of the
contingent liability.
B.Calculation of RBIG and RBIL
The 338 approach identifies RBIG or
RBIL by comparing the loss corporation’s
actual items of income, gain, deduction,
and loss with the items of income, gain,
deduction, and loss that would result if a
section 338 election had been made for
the hypothetical purchase. For purp
oses
of identifying those items that wou
ld have
resulted had a section 338 election
been
made with respect to the hypotheti
cal pur-
chase, after the hypothetical pu
rchase, the
loss corporation is treated as us
ing those
accounting methods that the l
oss corpo-
ration actually uses. The fo
llowing sec-
tions describe the applica
tion of the 338
approach to certain items o
fthelosscor-
poration.
1.Gain and Loss from Sal
es or Exchanges
of Assets
The 338 approach identi
fies RBIG or
RBIL from sales and exc
hanges of assets
by comparing the loss c
orporation’s actual
item of gain or loss wi
th the gain or loss
that would result i
f a section 338 election
had been made for th
e hypothetical pur-
chase. With respe
ct to gain from sales re-
ported under the s
ection 453 installment
method, the 338 a
pproach follows Notice
90–27, which, a
s described above, treats
built-in gain
recognized from installment
sales that occ
ur before or during the recog-
nition perio
d as RBIG, even if recognized
after the re
cognition period. In addition,
the 338 appr
oach follows Notice 90–27 in
cases in wh
ich a corporation transfers a
built-in gain asset to an affiliated corpora-
tion, the gain is deferred under the consol-
idated return regulations, and, before the
close of the recognition period, the affili-
ated corporation sells the built-in gain asset
in a sale reportable under the installment
method. In such cases, the deferred gain is
RBIG when it is taken into account by the
selling or distributing member, even if the
gain is taken into account after the recog-
nition period.SeeNotice 90–27, 1990–1
C.B. 336.
2.Wasting or Consumption of Built-in
Gain Assets
As described above, for loss corpora-
tions with a NUBIG, the 338 approach
treats certain built-in gain assets of the loss
corporation as generating RBIG even if
such assets are not disposed of during the
recognition period. The 338 approach as-
sumes that, for any taxable year, an as-
set that had a built-in gain on the change
date generates income equal to the cost re-
covery deduction that would have been al-
lowed for such asset under the applicable
Code section if an election under section
338 had been made with respect to the hy-
pothetical purchase. Therefore, with re-
spect to an asset that had a built-in gain on
the change date, the 338 approach treats as
RBIG an amount equal to the excess of the
cost recovery deduction that would have
been allowable with respect to such as-
set had an election under section 338 been
made for the hypothetical purchase over
the loss corporation’s actual allowable cost
recovery deduction. The cost recovery de-
duction that would have been allowed to
the loss corporation had an election un-
der section 338 been made with respect to
the hypothetical purchase will be based on
the asset’s fair market value on the change
date and a cost recovery period that begins
on the change date. The excess amount is
RBIG, regardless of the loss corporation’s
gross income in any particular taxable year
during the recognition period.
Example 11. LossCo has a NUBIG of $300,000
that is attrib
utable to various non-amortizable assets
with an aggregate fair market value of $710,000 and
an aggregate adjusted basis of $500,000, and a patent
with a fair m
arket value of $120,000 and an adjusted
basis of $30,000. The patent is an “amortizable sec-
tion 197 intangible” as defined in section 197(c) for
which10ye
ars of tax depreciation remain. In Year 1
of the recognition period, LossCo has gross income
of $75,000. In Year 1, $5,000 is RBIG attributable to
the patent (the excess of the $8,000 amortization de-
duction that would have been allowed had a section
338 election been made with respect to a hypothetical
purchase of all of the stock of LossCo ($120,000 fair
market value divided by 15, the amortization period)
over $3,000 (the actual allowable amortization deduc-
tion)). This $5,000 of RBIG increases LossCo’s sec-
tion 382 limitation for Year 1.
On the first day of Year 2, LossCo sells the patent
to an unrelated third party for $117,000 and recog-
nizes $90,000 of gain. If a section 338 election had
been made with respect to a hypothetical purchase of
all of the stock of LossCo, LossCo would have rec-
ognized $5,000 of gain on the sale of the patent, be-
cause LossCo would have had an adjusted basis of
$112,000 in the patent at the time of its sale. There-
fore, LossCo has $85,000 of RBIG from the sale of
the patent (the excess of LossCo’s actual $90,000 of
gain over the $5,000 of gain LossCo would have rec-
ognized had an election under section 338 been made
with respect to a hypothetical purchase of all of the
stock of LossCo). Thus, LossCo’s section 382 limi-
tation for Year 2 is increased by $85,000.
Example 12. The facts are the same as inExam-
ple 11, except that, as of the change date, only 2 years
of tax depreciation remain for the patent. For Year 1
of the recognition period, LossCo has gross
income
of $75,000. No amount is RBIG attributable to the
patent ($8,000, the amortization deduction that would
have been allowed had a section 338 electi
on been
made with respect to the hypothetical purchase of all
of the stock of LossCo, does not exceed the $15,000
actual allowable amortization ded
uction). In Year 3,
$8,000 is RBIG attributable to the patent (the excess
of the $8,000 amortization deduction that would have
been allowed had a section 338 ele
ction been made
with respect to the hypothetical purchase of all of the
stock of LossCo over $0, the actual allowable amor-
tization deduction (because t
he patent’s basis is ex-
hausted)). Thus, LossCo’s section 382 limitation for
Year 3 is increased by $8,000.
3.Depreciation, Depletion, and
Amortization Deductions with Respect to
Built-in Loss Assets
For loss corporations with a NUBIL,
the 338 approach treats as RBIL certain de-
ductions of the loss corporation. In par-
ticular, with respect to an asset that has a
built-in loss on the change date, the 338 ap-
proach treats as RBIL the excess of the loss
corporation’s actual allowable cost recov-
ery deduction over the cost recovery de-
duction that would have been allowable to
the loss corporation with respect to such
asset had an election under section 338
been made with respect to the hypotheti-
cal purchase.
Example 13.Lo
ssCo has a NUBIL of $410,000
that is attributable to various non-amortizable assets
with an aggregate fair market value of $500,000 and
an aggregate
adjusted basis of $850,000, and a patent
with a fair market value of $90,000 and an adjusted
basis of $150,000. LossCo acquired the patent in a
2003-40 I.R.B.750October 6, 2003

transaction in which LossCo acquired no other intan-
gibles. The patent is an “amortizable section 197 in-
tangible” as defined in section 197(c) for which 10
years of tax depreciation remain. The patent gen-
erates a $15,000 amortization deduction each year.
During each year of the recognition period, $9,000
of the deduction is RBIL attributable to the patent
(the excess of the $15,000 actual allowable amortiza-
tion deduction over the $6,000 amortization deduc-
tion that would have been allowed had a section 338
election been made with respect to the hypothetical
purchase of all of the stock of LossCo ($90,000 fair
market value divided by 15, the amortization period)).
On the first day of Year 2 of the recognition
period, LossCo sells the patent to a third party for
$80,000 and recognizes a $55,000 loss. If a sec-
tion 338 election had been made with respect to a
hypothetical purchase of all of the stock of LossCo
on the change date, LossCo would have recognized
a $4,000 loss on the patent, because, in that case,
LossCo would have had an adjusted basis of $84,000
in the patent at the time of its sale. Therefore,
LossCo has $51,000 of RBIL from the sale of the
patent (the excess of LossCo’s actual $55,000 los
s
over the $4,000 loss LossCo would have recognized
had an election under section 338 been made with
respect to a hypothetical purchase of all
of the stock
of LossCo).
C.Contingent Liabilities
The 338 approach treats a deduction for
the payment of a liability that is contingent
on the change date as RBIL to the extent of
the estimated liability on the change date.
Example 14. LossCo has a contingent liability
estimated at $25 on the change date.
During Year 2
of the recognition period, LossCo pays $30 to settle
the liability and claims a deduction for that amount.
Of that amount, $25 is RBIL.
D.Discharge of Indebtedness I
ncome
Under the 338 approach, COD inc
ome
that is included in gross incom
e under sec-
tion 61(a)(12) and that is att
ributable to any
pre-change debt of the los
s corporation is
RBIG in an amount not excee
ding the ex-
cess, if any, of the adjus
ted issue price of
the discharged debt over
the fair market
value of the debt on the c
hange date. The
338 approach treats a r
eduction of tax ba-
sis under sections 1
08(b)(5) and 1017(a)
that occurs during t
he recognition period
as having occurred
immediately before the
ownership change f
or purposes of section
382(h)(2) to the e
xtent of the excess, if
any, of the adjust
ed issue price of the debt
over the fair ma
rket value of the debt on
the change date
. However, the reduction
of tax basis do
es not affect the loss cor-
poration’s NU
BIG or NUBIL under sec-
tion 382(h)(
3). As with the 1374 approach,
taxpayers that otherwise follow the 338
approach may apply the rules described
in Notice 87–79, rather than the rules in-
cluded in the 338 approach to COD income
for ownership changes that occur before
September 12, 2003, but may not rely on
the rules of Notice 87–79 for ownership
changes that occur on or after September
12, 2003.
Example 15. LossCo has a NUBIG of $300,000
that is, in part, attributable to an asset with a fair mar-
ket value of $200,000 and a basis of $150,000. The
asset is subject to a debt with an adjusted issue price
of $98,000, and a fair market value of $95,000. Dur-
ing Year 2 of the recognition period, $95,000 of the
debt is satisfied and $3,000 of the debt is discharged
in a Title 11 case. LossCo excludes the $3,000 COD
income under section 108(a) and reduces the tax ba-
sis of the asset under sections 108(b)(5) and 1017(a)
to $147,000. The tax basis of the asset does not oth-
erwise change during the recognition period. In Year
3, LossCo sells the asset for $200,000 and recognizes
$53,000 of gain. The $3,000 of COD income tha
tis
excluded from income is not RBIG. If a section 338
election had been made with respect to a hypothetical
purchase of all of the stock of LossCo, Los
sCo would
have recognized $0 of gain on the sale of the asset,
because, in that case, LossCo would have had an ad-
justed basis of $200,000 in the asset at
the time of its
sale. Therefore, LossCo has $53,000 of RBIG from
the sale of the asset (the excess of LossCo’s actual
$53,000 of gain over the $0 of gain
LossCo would
have recognized had an election under section 338
been made with respect to a hypothetical purchase of
all of the stock of LossCo). Thu
s, LossCo’s section
382 limitation for Year 3 is increased by $53,000.
E.Other Items
The 338 approach incorporates the spe-
cial rules in §1.1374–4(i) concerning part-
nership items and §1.1374–4(d) concern-
ing section 481 adjustments, to the extent
those items are not already taken into ac-
count in the basic methodology of the 338
approach of comparing actual items of the
loss corporation to those that would have
resulted had a section 338 election been
made with respect to the hypothetical pur-
chase.
V. Reliance on Notice
Taxpayers may rel
y on the approaches
set forth in this n
otice for purposes of
applying sectio
n382(h)toanownership
change that occ
urred prior to the issuance
of this notice
or on or after the issuance of
this notice an
d prior to the effective date
of temporary
or final regulations under
section 382
(h). The IRS will not assert an
alternativ
e interpretation of section 382(h)
against a taxpayer thatconsistently applies
either the 1374 approach or the 338 ap-
proach described in this notice. Taxpayers
may use either the 1374 approach or the
338 approach, but not elements of both,
for each ownership change with respect
to a loss corporation or a loss subgroup
as defined in §1.1502–91(d). Although
the approaches described in this notice
serve as safe harbors, they are not the
exclusive methods by which a taxpayer
may identify built-in items for purposes of
section 382(h). Other methods taxpayers
use to identify built-in items for purposes
of section 382(h) will be examined on a
case-by-case basis.
VI. Effect on Other Documents
Notice 87–79, 1987–1 C.B. 388, is
modified.
VII. Request for Comments
The IRS intends to publish, in the near
future, proposed regulations providing a
single set of rules for identifying built-in
items for purposes of section 382(h). The
IRS requests comments regarding whether
one of the two approaches described in
this notice should be adopted and to what
extent, if any, the approaches should be
combined or modified to produce a set of
rules that is both reflective of statutory
intent and administrable. The IRS also
invites comments regarding other issues
under section 382(h) that should be ad-
dressed in regulations. Finally, the IRS
requests comments regarding the extent to
which regulations promulgated under sec-
tion 384 identifying built-in items should
differ from regulations promulgated un-
der section 382(h) identifying built-in
items. Comments should refer to Notice
2003–65, and should be submitted to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Attn: CC:PA:LPD:PR
Room 5203
or electron
ically via the Service inter-
net site at:
Notice.Comments@irscoun
sel.treas
.gov(the Service comments
e-mail add
ress). All comments will be
October 6, 20037512003-40 I.R.B.

available for public inspection and copy-
ing.
DRAFTING INFORMATION
The principal author of this notice is
Marie Byrne of the Office of Associate
Chief Counsel (Corporate). For further
information regarding this notice, contact
Ms. Byrne at (202) 622–7750 (not a toll-
free number).
The Jobs and Growth Tax
Relief Reconciliation Act of
2003—Information Reporting
forPaymentsinLieuof
Dividends
Notice 2003–67
SECTION 1. PURPOSE
This notice provides guidance to bro-
kers and individuals regarding provisions
in the Jobs and Growth Tax Relief Recon-
ciliation Act of 2003 (the JGTRRA), Pub.
L. No. 108–27, 117 Stat. 752, that affect
information reporting for payments in lieu
of dividends (sometimes called “substitute
payments”). This notice announces that:
1. The Internal Revenue Service will
exercise its authority under section 6724(a)
of the Internal Revenue Code to waive
penalties under sections 6721 and 6722 for
information returns with respect to calen-
dar year 2003 payments if a broker makes
a good faith effort to satisfy its information
reporting obligations in a way that is con-
sistent with the statutory changes effected
by the JGTRRA.
2. The Service has revised the instruc-
tions to the 2003 Form 1099–MISC, “Mis-
cellaneous Income,” to require brokers to
report payments in lieu of dividends to in-
dividuals in Box 8 of Form 1099–MISC.
3. The Service expects to revise Rev.
Proc. 2003–28, 2003–16 I.R.B. 759, to al-
low brokers to furnish composite substitute
payee statements for Forms 1099–DIV,
“Dividends and Distributions,” and Forms
1099–MISC, reporting payments in lieu
of dividends, as well as other information
returns.
4. If a payment in lieu of dividends
is reported as dividend income on a 2003
Form 1099–DIV, the taxpayer receiving
the form may treat the payment for tax pur-
poses as a dividend, and not as a payment
in lieu of dividends, unless the taxpayer
knows, or has reason to know, of the ac-
tual character of the payment.
5. The Service expects to amend
section 1.6045–2 of the Income Tax Reg-
ulations to reflect the statutory changes
effected by the JGTRRA regarding pay-
ments in lieu of dividends. The Service ex-
pects to amend the regulations to provide
new rules for brokers to use to determine
which shares are loanable and to permit
brokers to use a new hierarchical method
to allocate transferred shares to new pools
of loanable shares. The amendments are
expected to be applicable to dividends
received on or after January 1, 2003.
SECTION 2. BACKGROUND
Effective for taxable years beginning
after December 31, 2002, and beginning
before January 1, 2009, section 302 of the
JGTRRA reduces the tax rate for “quali-
fied dividends” paid to an individual share-
holder to the same tax rate as capital gains.
The reduced tax rate does not apply to a
dividend on stock that is held (within the
meaning of section 246(c)) by the taxpayer
for60daysorlessofthe120-dayperiod
that begins 60 days before the ex-dividend
date. The favorable tax rate is also de-
nied to the extent that the taxpayer is un-
der an obligation (whether pursuant to a
short sale or otherwise) to make related
payments with respect to positions in sub-
stantially similar or related property.
The legislative history states, however,
that “Payments in lieu of dividends are
not eligible for the lower rates.” H.R.
REP. NO. 108–94, 108
th
Cong., 1
st
Sess.
31 n.36 (2003). (The distinction between
payments made with respect to a financial
instrument by its issuer and payments
made by a third party who had borrowed
the instrument was already relevant even
before the JGTRRA for exempt interest
dividends, capital gain dividends, distribu-
tions treated as a return of capital, foreign
tax credit dividends, and dividends eligible
for the dividends received deduction, but
was generally not relevant for dividends
or in lieu of dividend payments received
by an individual.Seesection 1.6045–2(a),
(f)). In addition, the Conference Report
states:
In the case of brokers and dealers who
engage in securities lending trans-
actions, short sales, or other similar
transactions on behalf of their cus-
tomers in the normal course of their
trade or business, the conferees intend
that the IRS will exercise its authority
under section 6724(a) to waive penal-
ties where dealers and brokers attempt
in good faith to comply with the infor-
mation reporting requirements under
sections 6042 and 6045, but are un-
able to reasonably comply because of
the period necessary to conform their
information reporting systems to the
retroactive rate reductions on qualified
dividends provided by the conference
agreement. In addition, the conferees
expect that individual taxpayers who
receive payments in lieu of dividends
from these transactions may treat the
payments as dividend income to the
extent that the payments are reported
to them as dividend income on their
Forms 1099–DIV received for calen-
dar year 2003, unless they know or
have reason to know that the payments
are in fact payments in lieu of divi-
dends rather than actual dividends. The
conferees expect that the Treasury De-
partment will issue guidance as rapidly
as possible on information reporting
with respect to payments in lieu of
dividends made to individuals.
H.R. CONF. REP. NO. 108–126, 108
th
Cong., 1
st
Sess. 42–43 (2003).
SECTION 3. WAIVER OF PENALTIES
UNDER SECTION 6724(a)
Section 6721 imposes a penalty if a
payor fails to file correct information re-
turns with the Service, including returns
requiredundersection6042(relatingto
payment of dividends) and section 6045
(relating to returns of brokers). Section
6722 imposes a penalty if a payor fails
to furnish correct information statements
to payees, including statements required
under sections 6042 and 6045. Section
6724(a) authorizes the Service to waive the
section 6721 and 6722 penalties if the fail-
ure to comply is due to reasonable cause
and not to willful neglect.
If they have not already done so,
brokers as defined in section 6045 who
engage in securities lending transactions,
short sales, or other similar transactions
2003-40 I.R.B.752October 6, 2003

on behalf of their customers in the normal
course of the brokers’ trade or business
should immediately undertake action to
conform their information reporting sys-
tems to the JGTRRA. The Service expects
brokers to complete those efforts as soon
as reasonably possible for the calendar
year 2003 and, to the extent reasonably
possible, to comply with their reporting
responsibilities in a manner consistent
with the JGTRRA for payments in lieu of
dividends for the calendar year 2003.
The Service will exercise its author-
ity under section 6724(a) to waive penal-
ties if a broker shows that it made a good
faith attempt to comply with the infor-
mation reporting requirements under sec-
tions 6042 and 6045 in a manner consis-
tent with the JGTRRA for dividend pay-
ments made during calendar year 2003 but
could not reasonably do so because the
broker had inadequate time within which
to conform the broker’s information re-
porting systems to the JGTRRA. The Ser-
vice will consider all relevant facts and cir-
cumstances in determining whether a bro-
ker acted in good faith in attempting to
comply with the information reporting re-
quirements for dividend payments made
during calendar year 2003. For dividend
payments made during calendar year 2004,
however, except in extraordinary circum-
stances, the Service will consider brokers
to have had adequate time to conform their
information reporting systems to the new
law for payments in lieu of dividends.
SECTION 4. INSTRUCTIONS TO
FORM 1099–MISC AND REV. PROC.
2003–28
The Service has revised the Instruc-
tions to Form 1099–MISC for calendar
year 2003 for payments in lieu of div-
idends. The revised instructions direct
brokers to report payments in lieu of div-
idends in Box 8 of Form 1099–MISC
whether the recipient is a corporation, an
individual, or some other type of taxpayer.
In addition, the Service expects to revise
Rev. Proc. 2003–28 to allow brokers to
furnish composite substitute payee state-
ments for Forms 1099–DIV and Forms
1099–MISC, reporting payments in lieu
of dividends, as well as other information
returns.
SECTION 5. PAYMENTS REPORTED
ON FORMS 1099–DIV FOR 2003
Some taxpayers may receive Forms
1099–DIV for calendar year 2003 that
erroneously characterize payments in lieu
of dividends as dividend income because
the brokers issuing the forms have not
yet modified their information reporting
systemstocomplywiththeJGTRRA.A
taxpayer who receives payments in lieu
of dividends may treat the payments as
dividend income to the extent that the
payments are reported to the taxpayer as
dividend income on Form 1099–DIV for
calendar year 2003, unless the taxpayer
knows, or has reason to know, that the
payments are in fact payments in lieu of
dividends rather than actual dividends.
SECTION 6. AMENDMENT OF
REGULATION SECTION 1.6045–2
In general, section 1.6045–2 of the ex-
isting regulations, which was issued prior
to enactment of the JGTRRA, excludes
from the broker reporting requirements of
section 6045 payments in lieu of dividends
received by a broker on behalf of an in-
dividual. That is, these regulations gener-
ally require broker reporting only for pay-
ments in lieu of dividends received on be-
half of corporations. The Service expects
to amend section 1.6045–2 to reflect the
differential tax treatment under JGTRRA
for dividends and payments in lieu of div-
idends, effective for dividends received on
or after January 1, 2003.
Under the existing regulations, brokers
must allocate transferred shares (that is,
shares giving rise to payments in lieu of
dividends) among: (1) shares of stock that
the broker has borrowed under a securi-
ties lending agreement with the customer
(borrowed shares); and (2) shares of stock
that are held by the broker on behalf of
customers who have authorized the broker
to loan their shares to third parties (loan-
able shares). Loanable shares also include
shares of the same class and issue held for
the broker’s own account. Under the ex-
isting regulations, transferred shares may
be allocated first to borrowed shares; then,
to the extent that the number of transferred
shares exceeds the number of borrowed
shares (or if the broker does not allocate the
transferred shares to the borrowed shares
first), the broker must allocate the trans-
ferred shares between pools of loanable
shares.
.01Loanable Shares Defined
The amendments to section 1.6045–2
are expected to clarify the present rule that
loanable shares do not include shares that
the broker by law is prevented from lend-
ing. Thus, loanable shares do not include
shares that the broker has not been given
permission to borrow or lend, shares that
the owner may not transfer (such as re-
stricted stock), and shares that, although
held in a margin account, may not be bor-
rowed because of Securities and Exchange
Commission restrictions on the value of
the shares that may be borrowed from the
account.
The Service also expects to amend the
existing regulations to provide new rules
regarding shares that are to be treated as
loanable shares. When amended, the reg-
ulations are expected to permit brokers to
exclude from loanable shares one or more
of the following categories of shares:
1. All shares held for the broker’s own
account.
2. All shares that would not be loanable
but for the fact that they are held in
a margin account pursuant to account
documentation authorizing the lend-
ing of shares.
3. Shares that the owner has requested
the broker not to lend (even if the
owner had executed a written au-
thorization to lend), provided that,
consistent with an established prac-
tice reflected in the broker’s books
and records, the broker complies with
the request.
4. Shares which had been loaned, but,
with respect to which the owner exer-
cised a right under the lending agree-
ment to call back the shares within a
fixed period.
5. Any other category of shares de-
scribed in guidance issued by the
Service.
The regulations are expected to pro-
vide that, under the preceding paragraph,
shares in any of these five categories may
October 6, 20037532003-40 I.R.B.

be treated as not loanable only if all of the
following requirements are satisfied:
a. At the time the broker designates the
share as not loanable, the share has
not, in fact, been loaned under an out-
standing loan agreement;
b. The designation of a category of
shares as not being loanable is re-
flected in a written policy of the
broker that was placed in its books
and records on or before the time of
the stock loans to be affected by the
policy; and
c. The policy is consistently applied for
both tax and nontax purposes to all
shares described in the category.
The Service invites comments on these
categories of shares and on the require-
ments that must be satisfied to treat the
shares as not loanable.
.02Allocation and Selection of
Transferred Shares
Pending issuance of amendments to
section 1.6045–2, the rules of that section
continue to apply for recordkeeping for
payments in lieu of dividends and for
identifying which customers had their
shares transferred. A broker may con-
tinue to allocate transferred shares to
borrowed shares. In addition, if a bro-
ker uses the method of allocation and
selection of loanable shares specified in
paragraph (f)(2)(ii) of section 1.6045–2,
the amendments are expected to allow
the broker, starting in 2003, to make
the selection of the transferred shares
within the individual pool described in
section 1.6045–2(f)(2)(ii)(C) using the
methods of selection of transferred shares
used within the nonindividual pool as pre-
scribedinsection1.6045–2(f)(2)(ii)(B).
The Service expects to amend the exist-
ing regulations to permit brokers to use a
new hierarchical method to allocate trans-
ferred shares. Under this new hierarchi-
cal method, a broker must allocate trans-
ferred shares first to shares that are bor-
rowed under a securities lending agree-
ment. Brokers must then allocate the re-
maining transferred shares to one or more
pools of shares held by tax-indifferent cus-
tomers to the extent of loanable shares in
those pools. For this purpose, a tax-indif-
ferent customer is a customer (for exam-
ple, a tax-exempt entity) for whom the bro-
ker has reasonably determined that the tax
treatment of qualifying dividends and pay-
ments in lieu of dividends are the same.
These pools may also include shares held
by customers for whom the tax treatment
of dividends is more desirable than the tax
treatment of payments in lieu of dividends,
but who have specifically authorized that
the shares be included in a tax-indiffer-
ent-customer pool. After the broker has
exhausted all the loanable shares in the
tax-indifferent-customer pools, the broker
must allocate the transferred shares to a
single residual pool of all other loanable
shares. If only a portion of the loanable
shares held in any pool are transferred, the
broker must allocate the transferred shares
among customers in the pool using the
random lottery method provided in sec-
tion 1.6045–2(f)(2)(ii)(B) of the existing
regulations. A broker may use some other
allocation method only with the consent
of the Service. See Rev. Proc. 2003–1,
2003–1 I.R.B. 1, for the procedures to re-
quest a letter ruling. The Service invites
comments on this hierarchical method as
well as other methods of allocating trans-
ferred shares (giving rise to payments in
lieu of dividends) among customers hold-
ing loanable shares. The amendments are
expected to allow brokers to use the al-
location method described in this Section
6 for dividends received after January 1,
2003. The provisions applicable to for-
eign persons receiving substitute dividends
payments continue to apply (e.g., character
rules under section 1.871–7(b)(2)).
SECTION 7. EFFECTIVE DATE
This Notice is effective September 16,
2003.
SECTION 8. COMMENTS
The Service invites interested persons
to comment on the issues raised in this no-
tice. Interested persons should send com-
ments to:
CC:PA:LPD:PR (NOT–139295–03)
Room 5203
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224
Alternatively, comments may be hand de-
livered between the hours of 8:00 a.m. and
5:00 p.m. to:
CC:PA:LPD:PR (NOT–139295–03)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224
Comments may also be transmitted elec-
tronically via the following e-mail address:
Notice.Comments@irscoun sel.treas.gov.
Please include “Notice 2003–67” in the
subject line of any electronic communica-
tions.
SECTION 9. PAPERWORK
REDUCTION ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1858.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The recordkeeping requirement in this
notice is in Section 6. This information is
required for brokers to use the rules for de-
termining loanable shares and to use the
rules for allocating transferred shares to
loanable shares. The collection of infor-
mation is voluntary to obtain a benefit. The
likely respondents are businesses or other
for profit institutions.
The estimated total annual recordkeep-
ing burden is 60,000 hours.
The estimated annual burden per
recordkeeper variesfrom 50 hours to 150
hours, depending on individual circum-
stances, with an estimated average of 100
hours.
The estimated numberof recordkeepers
is 600.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
2003-40 I.R.B.754October 6, 2003

SECTION 10. CONTACT
INFORMATION
The principal author of this notice is
Michael Hara of the Office of Associate
Chief Counsel (Procedure and Administra-
tion), Administrative Provisions and Judi-
cial Practice Division. Mr. Hara may be
contacted at (202) 622–4910 (not a toll-
free number).
October 6, 20037552003-40 I.R.B.

Part IV. Items of General Interest
Notice of Proposed Rulemaking
Suspension of Running of
Period of Limitations During
a Proceeding to Enforce or
Quash a Designated or Related
Summons
REG–208199–91
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations regarding the use of
designated summonses and related sum-
monses and the effect on the period of
limitations on assessment when a case is
brought with respect to a designated or
related summons. These proposed regula-
tions reflect changes to section 6503 of the
Internal Revenue Code of 1986 made by
the Omnibus Budget Reconciliation Act of
1990 and the Small Business Job Protec-
tion Act of 1996. This regulation affects
corporate taxpayers that are examined
under the coordinated issue case (CIC)
program and are served with designated
or related summonses. This regulation
also affects third parties that are served
with designated or related summonses for
information pertaining to the corporate
examination.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 29, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–208199–91), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered between the hours of 8 a.m. and
4 p.m. to: CC:PA:RU (REG–208199–91),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Taxpayers may also submit
electronic comments directly to the IRS
Internet site atwww.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Elizabeth Rawlins, (202)
622–3630 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed reg-
ulations amending the Procedure and
Administration Regulations (26 CFR part
301) under section 6503 of the Internal
Revenue Code of 1986. Section 11311
of the Omnibus Budget Reconciliation
Act of 1990 (Public Law 101–508, 104
Stat. 1388) (1990 Act) amended section
6503(k) to suspend the period of lim-
itations on assessment when a case is
brought with respect to a designated or
related summons. Section 6503(k) was
redesignated as section 6503(j) by section
1702(h)(17)(A) of the Small Business
Job Protection Act of 1996 (Public Law
104–188, 110 Stat. 1874).
Explanation of Provisions
These proposed regulations generally
provide that the period of limitations on as-
sessment provided for in section 6501 is
suspended with respect to any return of tax
by a corporation that is the subject of a des-
ignated or related summons if a court pro-
ceeding to enforce or quash is instituted
with respect to that summons.
Designated Summonses and Related
Summonses
A designated summons is a summons
issued to determine the amount of any
internal revenue tax of a corporation for
which a return was filed if certain ad-
ditional requirements are satisfied. A
designated summons may only be issued
to a corporation (or any other person
to whom such corporation has trans-
ferred records) if the corporation is being
examined under the IRS’ coordinated
examination program “or any successor
program.” The existing successor program
to the coordinated examination program is
the coordinated issue case (CIC) program.
Section 6503(j)(2)(A)(i) requires that
the issuance of the summons be preceded
by a review by the regional counsel of the
Office of Chief Counsel for the region in
which the examination of the corporation
is being conducted. Because the prior re-
gional structure of the IRS no longer exists,
these proposed regulations provide that the
review must be completed by the Division
Commissioner and the Division Counsel of
the Office of Chief Counsel for the organi-
zations that have jurisdiction over the cor-
poration whose liability is the subject of
the summons. The summons also must be
issued at least 60 days before the day on
which the statute of limitations on assess-
ment under section 6501 would otherwise
expire. Finally, the summons must clearly
state that it is a designated summons for
purposes of section 6503(j).
A related summons is any other sum-
mons that is issued with respect to the same
tax return of the corporation as a desig-
nated summons and is issued during the
30-day period that begins on the date the
designated summons is issued.
Suspension of Period of Limitations on
Assessment
Section 6503(j)(1) suspends the period
of limitations on assessment under section
6501 for the applicable tax period when a
court proceeding is brought with respect
to a designated or related summons. For
purposes of these proposed regulations, a
court proceeding is a proceeding brought
in a United States district court either to
quash a designated or related summons
under section 7609(b)(2) or to enforce a
designated or related summons under sec-
tion 7604. The court proceeding must be
brought within the otherwise applicable
period of limitations in order to suspend
that period under section 6503(j).
The proposed regulations provide that
the suspension begins on the day that a
court proceeding is brought and continues
until there is a final resolution as to the
summoned party’s response to the sum-
mons (discussed in the next section), plus
an additional 120 days if the court requires
any compliance with the summons at issue.
If the court does not require any compli-
ance, then the period of limitations on as-
sessment resumes running on the day fol-
lowing the date of the final resolution and
in no event shall expire before the 60th day
following the date of final resolution.
Final Resolution of a Summoned Party’s
Response to a Summons
Under section 6503(j)(3)(B), the length
of the suspension under section 6503(j)
2003-40 I.R.B.756October 6, 2003

depends on when “final resolution” of a
summoned party’s response to the desig-
nated or related summons occurs. The
term “final resolution” is not defined in the
statute. The legislative history to the 1990
Act states that the term “final resolution”
has the same meaning it has under section
7609(e)(2)(B), relating to third-party sum-
monses. H.R. Conf. Rep. No. 101–964
(1990). Specifically, the conference report
to the 1990 Act states that final resolution
means that no court proceeding remains
pending and that the summoned party has
complied with the summons to the extent
required by the court.
Accordingly, the proposed regulations
provide that final resolution occurs when
the summoned party complies with a sum-
mons to the extent required by the court
and all court proceedings and times for ap-
peals applicable to those proceedings have
terminated. If the summoned party has
complied with the summons to the extent
required by a court but there still remains
time to appeal that order, final resolution
occurs when the time for appeal has ex-
pired. (Were final resolution deemed to
occur before that point, the period of lim-
itations on assessment might resume run-
ning even though a later order after ap-
peal might require additional compliance.)
If all appeal periods have expired but the
summoned party has not complied with
the summons to the extent required by the
court order, the proposed regulations pro-
vide that final resolution does not occur un-
til the summoned party has complied with
the summons to the extent required by the
court order.
Whether a party has complied with the
terms of the summons as enforced by the
court cannot be determined until the com-
pleteness of the materials produced and the
testimony given have been evaluated. In
cases where the court wholly denies en-
forcement or orders that the summons in
its entirety be quashed, the date of com-
pliance with the court’s order is treated as
occurring on the date when all appeals are
disposed of or when all appeal periods ex-
pire.
In cases where the court orders the sum-
mons enforced in whole or in part, the
determination of whether the summoned
party has complied with the order will be
made by the Commissioner or his dele-
gate (Commissioner). This determination
will be made as soon as practicable af-
ter the summoned party has given testi-
mony or produced books, papers, records,
or other data as required by the court order.
Notification of a favorable determination,
and the date of such determination, will be
made in writing and sent to the summoned
party (and the taxpayer if the taxpayer is
not the summoned party) within five days
after the date the determination is made. If
the period to appeal the court’s order has
already run, the date of the favorable deter-
mination shall be the date of final resolu-
tion for purposes of determining the length
of the suspension under section 6503(j).
The proposed regulations provide that
the Commissioner is not required to give
notice that the court’s order has not been
complied with prior to instituting a collat-
eral proceeding challenging whether the
testimony given or the production made
by the summoned party fully satisfies the
court order and requesting that sanctions
be imposed against the summoned party
for a failure to testify or produce. The
proposed regulations further provide that
if such a collateral proceeding is insti-
tuted, then the collateral proceeding shall
be treated as a continuation of the original
proceeding.
Statement of Compliance
A summoned party also may request
a determination from the IRS that it has
fully complied with a designated or related
summons to the extent required by court
order. Under this procedure, if the sum-
moned party believes that it has complied,
the summoned party may submit a writ-
ten statement (statement of compliance) to
the IRS that the summoned party has fully
complied with the court order. The state-
ment of compliance must be properly ad-
dressed and sent by registered or certified
mail. The statement of compliance must
contain the summoned party’s current con-
tact information and information specifi-
cally identifying the applicable summons
and court order.
To prevent the filing of premature or
repetitious statements of compliance, the
proposed regulations provide that a state-
ment of compliance will be disregarded as
a nullity if it is submitted before produc-
tion or the giving of testimony (or the last
act of production when there is a mutual
agreement that production will be accom-
plished in stages) or before the IRS has
responded to a previously-submitted state-
ment of compliance. A statement of com-
pliance also will be treated as a nullity if it
is submitted by the summoned party while
a referral to the Department of Justice for
a collateral proceeding with respect to the
court order or an appeal of the court order
is pending.
Unless the IRS, within 180 days of the
receipt of a statement of compliance, or
within the time agreed to by the IRS and
the summoned party, mails to the sum-
moned party by registered or certified mail
notification that it has not fully satisfied the
designated or related summons, the sum-
mons will be treated as having been fully
complied with as of the 180th day follow-
ing the date the IRS received the statement.
The date on which the statement of compli-
ance was mailed by registered or certified
mail will be treated as the date on which
the IRS received the statement.
Other Rules
These proposed regulations provide ad-
ditional rules regarding the number of des-
ignated and related summonses that may
be issued with respect to a return for any
taxable period, the time within which a
court proceeding must be brought to en-
force or quash a designated or related sum-
mons, the computation of the suspension
period in cases of multiple court proceed-
ings, and the computation of the 60-day pe-
riod for assessment when the last day falls
on a weekend or holiday.
The proposed regulations also address
the relationship of the suspension period
provided for in section 6503(j) with other
suspension provisions in the Code. The
proposed regulations first provide that if a
designated or related summons also could
be subject to the suspension rules govern-
ing third-party summonses under section
7609(e), then the suspension rules in sec-
tion 6503(j) govern. In addition, the sec-
tion 6503(j) suspension period is indepen-
dent of, and may run concurrently with,
any other period of suspension, such as
the suspension period for third-party sum-
monses under section 7609(e) if a sepa-
rate third-party summons also was issued
in a case. Examples of these rules are con-
tained in the proposed regulations.
October 6, 20037572003-40 I.R.B.

Proposed Effective Date
These regulations are proposed to be
applicable on the date final regulations are
published in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply to these
regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pur-
suant to section 7805(f) of the Code, this
notice of proposed rulemaking will be sub-
mitted to the Chief Counsel for Advocacy
of the Small BusinessAdministration for
comment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and the Trea-
sury Department request comments on the
clarity of the proposed rules and how they
can be made easier to understand. All
comments will be available for public in-
spection and copying. A public hearing
may be scheduled if requested in writing
by a person who timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the hearing will be published in theFed-
eral Register.
Drafting Information
The principal author of these regula-
tions is Elizabeth Rawlins of the Office of
the Associate Chief Counsel, Procedure
and Administration (Collection, Bank-
ruptcy and Summonses Division), IRS.
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posedtobeamendedasfollows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6503(j)–1 is added
to read as follows:
§301.6503(j)–1 Suspension of running of
period of limitations; extension in case of
designated and related summonses.
(a)General rule. The running of the
applicable period of limitations on assess-
ment provided for in section 6501 is sus-
pended with respect to any return of tax by
a corporation that is the subject of a desig-
nated or related summons if a court pro-
ceeding is instituted with respect to that
summons.
(b)Period of suspension. The period
of suspension is the time during which the
running of the applicable period of limita-
tions on assessment provided for in section
6501 is suspended under section 6503(j).
If the court requires any compliance with
a designated or related summons by or-
dering that any record, document, paper,
object, or items be produced, or the testi-
mony of any person be given, the period
of suspension consists of the judicial en-
forcement period plus 120 days. If the
court does not require any compliance with
a designated or related summons, the pe-
riod of suspension consists of the judicial
enforcement period, and the period of lim-
itations on assessment provided in section
6501 shall not expire before the 60th day
after the judicial enforcement period.
(c)Definitions—(1)Designated sum-
mons. A designated summons is a sum-
mons issued to a corporation (or to any
other person to whom the corporation has
transferred records) with respect to any re-
turn of tax by such corporation for a tax-
able period for which such corporation is
being examined under the coordinated in-
dustry case program or any other successor
to the coordinated examination program–
(i) If the Division Commissioner and
the Division Counsel of the Office of Chief
Counsel (or their successors) for the or-
ganizations that have jurisdiction over the
corporation whose tax liability is the sub-
ject of the summons have reviewed the
summons before it is issued;
(ii) If the IRS issues the summons at
least 60 days before the day the period pre-
scribedinsection6501fortheassessment
of tax expires (determined with regard to
extensions); and
(iii) If the summons states that it is a
designated summons for purposes of sec-
tion 6503(j).
(2)Related summons.Arelatedsum-
mons is any summons issued that—
(i) Relates to the same return of the cor-
poration under examination as the desig-
nated summons; and
(ii) Is issued to any person, including
the person to whom the designated sum-
mons was issued, during the 30-day period
that begins on the day the designated sum-
mons is issued.
(3)Judicial enforcement period.The
judicial enforcement period is the period
that begins on the day on which a court pro-
ceeding is instituted with respect to a des-
ignated or related summons and ends on
the day on which there is a final resolution
as to the summoned person’s response to
that summons.
(4)Court proceeding—(i)In general.
For purposes of this section, a court pro-
ceeding is a proceeding filed in a United
States district court either to quash a des-
ignated or related summons under section
7609(b)(2) or to enforce a designated or
related summons under section 7604 and
includes any collateral proceeding to that
proceeding such as a civil contempt pro-
ceeding.
(ii)Date when proceeding is no longer
pending. A proceeding to quash or to en-
force a designated or related summons is
no longer pending when all appeals are re-
solved, or after the expiration of the period
in which an appeal may be taken or a re-
quest for further review may be made. If,
however, following an enforcement order,
a collateral proceeding is brought chal-
lenging whether the testimony given or
production made by the summoned party
fully satisfied the court order and whether
sanctions should be imposed against the
summoned party for a failure to so tes-
tify or produce, the proceeding to quash or
to enforce the summons shall include the
time from which the proceeding to quash
2003-40 I.R.B.758October 6, 2003

or to enforce the summons was brought un-
til the decision in the collateral proceeding
becomes final. The decision becomes final
on the date when all appeals are disposed
of or when the period in which an appeal
may be taken or a request for further re-
view may be made expires. Any collateral
proceeding to the original proceeding shall
be considered to be a continuation of the
original proceeding.
(5)Compliance—(i)In general.Com-
pliance is the giving of testimony or the
performance of an act or acts of produc-
tion, or both, in response to a court order
concerning the designated or related sum-
mons and the determination that the terms
of the court order have been satisfied.
(ii)Date compliance occurs. Compli-
ance with a court order that wholly de-
nies enforcement of a designated or related
summons is deemed to occur on the date
when all appeals are disposed of or when
the period in which an appeal may be taken
or a request for further review may be
made expires. Compliance with a court or-
der that grants enforcement, in whole or in
part, of a designated or related summons,
occurs on the date the Commissioner or his
delegate (Commissioner) determines that
the testimony given, or the books, papers,
records, or other data produced, or both, by
the summoned party fully satisfy the court
order concerning the summons. The deter-
mination whether there has been compli-
ance will be made as soon as practicable
after the testimony is given or the materi-
als are produced.
(6)Final resolution. Final resolution
means that compliance with a court order
concerning the designated or related sum-
mons has occurred and that court proceed-
ings are no longer pending.
(d)Special rules—(1)Number of
summonses that may be issued—(i)Des-
ignated summons. Only one designated
summons may be issued in connection
with the examination of a specific taxable
year or other period of a corporation. A
designated summons may cover more than
one year or other period of a corporation.
The designated summons may seek in-
formation that was previously sought in a
summons (other than a designated sum-
mons) that was issued in the course of the
examination of that particular corporation.
(ii)Related summonses.Thereisno
restriction on the number of related sum-
monses that may be issued in connection
with the examination of a corporation. As
provided in paragraph (c)(2) of this sec-
tion, however, a related summons must be
issued within the 30-day period that be-
gins on the date on which the designated
summons to which it relates is issued and
must relate to the same return as the desig-
nated summons. A related summons may
request the same information as the desig-
nated summons.
(2)Time within which court proceed-
ings must be brought. In order for the
period of limitations on assessment to be
suspended under section 6503(j), a court
proceeding to enforce or to quash a des-
ignated or related summons must be insti-
tuted within the period of limitations on as-
sessment provided in section 6501 other-
wise applicable to that tax return.
(3)Computation of suspension period if
multiple court proceedings are instituted.
If multiple court proceedings are instituted
to enforce or to quash a designated or one
or more related summonses concerning the
same tax return, the period of limitations
on assessment is suspended for the entire
period beginning on the day the first court
proceeding is brought and ending on the
last day of the last-ending suspension pe-
riod resulting from the court proceedings
that were brought.
(4)Effect on other suspension pe-
riods—(i)In general. The periods of
suspension on the running of the period of
limitations under section 6501 provided
for under sections 7609(e)(1) and (2) are
not applicable with respect to any sum-
mons that is issued pursuant to section
6503(j). The suspension under section
6503(j) on the running of the period of
limitations on assessment under section
6501 is independent of, and may run
concurrent with, any other period of sus-
pension of the period of limitations on
assessment applicable to the tax return to
which the designated or related summons
relates.
(ii)Examples. The rules of paragraph
(d)(4)(i) of this section are illustrated by
the following examples:
Example 1. The period of limitations on assess-
ment against Co
rporation P for its calendar 1997 re-
turn is scheduled to end on March 15, 2001. On Jan-
uary 3, 2001, a designated summons is issued to Cor-
poration P co
ncerning its 1997 return. On March 1,
2001 (14 days before the period of limitations on as-
sessment would otherwise expire with respect Cor-
poration P’
s 1997 tax return), a court proceeding is
brought to enforce the designated summons issued
to Corporation P. On June 5, 2001, the court orders
Corporation P to comply with the designated sum-
mons. Corporation P does not appeal the court’s or-
der. On September 3, 2001, agents for Corporation
P deliver material that they state are the records re-
quested by the designated summons. On October 15,
2001, a final resolution to Corporation P’s response
to the designated summons occurs when the Commis-
sioner determines that Corporation P has fully com-
plied with the court’s order. The suspension period
applicable with respect to the designated summons
issued to Corporation P consists of the judicial en-
forcement period (March 1, 2001, through October
15, 2001) and an additional 120-day period under sec-
tion 6503(j)(1)(B), because the court required Cor-
poration P to comply with the designated summons.
Thus, the suspension period applicable with respect
to the designated summons issued to Corporation P
would begin on March 1, 2001, and end on February
12, 2002. Under the facts of this example, the pe-
riod of limitations on assessment against Corpor
ation
P would be extended to February 26, 2002, to account
for the additional 14 days that remained on the period
of limitations on assessment under section 650
1when
the suspension period under section 6503(j) began.
Example 2. Assume the same facts set forth in
Example 1. On April 3, 2001, a summons conc
ern-
ing Corporation P’s calendar 1997 return is issued
and served on individual A, a third party. This sum-
mons is not a related summons because it
was not is-
sued during the 30-day period that began on the date
the designated summons was issued. The third-party
summons served on individual A is s
ubject to the no-
tice requirements of section 7609(a). If there is no fi-
nal resolution of individual A’s response to this sum-
mons by October 3, 2001, i.e., si
x months from the
date of service of the summons, the period of lim-
itations on assessment against Corporation P would
be suspended under section 76
09(e)(2) to the date on
which there is a final resolution to that response for
the purposes of section 7609(e)(2). If a final reso-
lution to the summons ser
ved on individual A occurs
after February 12, 2002, the end of the suspension pe-
riod for the designated summons, the period of lim-
itations on assessment
against Corporation P expires
14 days after the date that the final resolution as pro-
vided for in section 7609(e)(2) occurs with respect to
the summons served o
n individual A.
(5)Computation of 6
0-day period when
last day of assessme
nt period falls on a
weekend or holiday
. For purposes of para-
graph (c)(1)(ii)
of this section, in deter-
mining whether a d
esignated summons has
been issued at le
ast 60 days before the date
on which the per
iod of limitations on as-
sessment pres
cribed in section 6501 ex-
pires, the pr
ovisions of section 7503 apply
when the last
day of the assessment period
falls on a Sa
turday, Sunday, or legal holi-
day.
(6)Determi
nation of compliance with
designate
dandrelatedsummonsesifa
court proc
eeding has been instituted—(i)
In genera
l. The Commissioner will deter-
mine, in a
n expeditious manner, whether
October 6, 20037592003-40 I.R.B.

a summoned party has fully complied
with any court order if the designated or
related summons is the subject of a court
proceeding to quash or to enforce. The
determination will be made as soon as
practicable after the later of—
(A) The giving of any testimony re-
quired to be given by a summoned party;
or
(B) The act of production (or the last act
of production in the case of production that
is accomplished in parts or in stages pur-
suant to a mutual agreement between the
summoned party and the Commissioner)
by the summoned party.
(ii)Procedure for a favorable determi-
nation. If the Commissioner determines
that the summoned party has fully com-
plied with the court order, the Commis-
sioner will mail notice of that determina-
tion within 5 business days after the date
of the determination, which will be sent
by certified or registered mail, to the sum-
moned party and the taxpayer under ex-
amination (if the taxpayer is not the sum-
moned party).
(iii)Notification of favorable determi-
nation. The written notification that the
summoned party hasfully complied with
the court order will contain the following
information—
(A) The name and address of the sum-
moned party;
(B) The name, address, type of tax, and
taxable period of the taxpayer corporation
with respect to which testimony or records,
or both, were sought by the summons; and
(C) The date on which the Commis-
sioner made the determination that the
summoned party fully complied with
court order.
(iv)Effective date of favorable deter-
mination. The Commissioner’s determi-
nation that the summoned party has fully
complied with the court order will be effec-
tive on the date the determination is stated
to have been made in the written notifica-
tion sent to the summoned party.
(7)Statement of compliance with a
court order—(i)In general. In the case of
a court order to which paragraph (d)(6)(i)
of this section applies, the summoned
party may submit a statement in writing
that the summoned party has fully com-
plied with the court order to the office
identified on the summons (marked for the
attention of the Internal Revenue Service
employee who issued the summons to
which the order relates).
(ii)Form. The statement of compliance
shall be sent by registered or certified mail
and shall include—
(A) The name, current address, current
home and work telephone numbers of the
person making the statement and any con-
venient times that person can be contacted;
(B) A specific identification of the
court order with which compliance has
been achieved and the summons to which
the order relates; and
(C) The signature of the summoned
party or the duly authorized representa-
tive.
(iii)Response. (A) As soon as prac-
ticable after receipt of such a statement
of compliance, but in no event later than
180 days after such receipt, the Commis-
sioner will mail a response to the sum-
moned party (and a copy of the response
to the taxpayer, if the summoned party is
not the taxpayer) by registered or certified
mail. The date on which the summoned
person mails the statement of compliance
shall be deemed to be the date on which
the Commissioner receives it. The Com-
missioner’s response will notify the sum-
moned party—
(1) That a determination of compliance
with the court order has been made and the
date of that determination; or
(2) That a determination of noncompli-
ance has been made and the date of that
determination.
(B) The Commissioner is not required
to give notice that the court order has not
been complied with prior to instituting a
collateral proceeding challenging whether
the testimony given or the production
made by the summoned party fully sat-
isfies the court order and requesting that
sanctions be imposed against the sum-
moned party for a failure to comply with
the order. The institution of a collateral
proceeding shall constitute notice of a
determination of noncompliance.
(C) The summoned party may, in writ-
ing, grant the Commissioner additional
time within which to notify it regarding
compliance or noncompliance with the
summons.
(iv)Failuretorespondwithin180days.
If the Commissioner fails to respond to a
properly submitted statement of compli-
ance within the 180-day period, described
in paragraph (d)(7)(iii)(A) of this section,
or such longer period as agreed to in writ-
ingbythesummonedparty,thenthecourt
order with respect to which the summoned
party submitted a statement of compliance
shall be deemed complied with as of the
expiration of 180 days or such longer pe-
riod.
(v)Limitations. The Commissioner
may treat as a nullity and return to the
summoned party without action, as de-
scribed in paragraph (d)(7)(iii) of this
section, a statement of compliance that is
filedinthefollowingcircumstances—
(A) Before the summoned party has
provided testimony, or books, papers,
records, or other data, or both in response
to the court order (or before the last act of
production in the case of production that
is accomplished in stages pursuant to a
mutual agreement);
(B) Before the Commissioner has
issued a determination pursuant to para-
graph (d)(7)(iii) of this section with
respect to a previously-tendered statement
of compliance or before the expiration of
180 days from the date such statement of
compliance was received by the Commis-
sioner, whichever is earlier; or
(C) While a referral to the Department
of Justice for a collateral proceeding with
respect to the court order or an appeal of
that order is pending.
(e)Effective date. This section is appli-
cable on the date final regulations are pub-
lished in theFederal Register.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on July 30, 2003,
8:45 a.m., and published i
n the issue of the Federal Register
for July 31, 2003, 68 F.R. 44905)
Notice of Proposed Rul
emaking
by Cross-Reference
to Temporary
Regulations
Reduction of Tax Att
ributes Due
to Discharge of Ind
ebtedness
REG–113112–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
2003-40 I.R.B.760October 6, 2003

ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9080) relating to the reduction of tax
attributes under sections 108 and 1017 of
the Internal Revenue Code. The tempo-
rary regulations affect taxpayers that ex-
clude discharge of indebtedness income
from gross income under section 108. The
text of those regulations also serves as the
text of these proposed regulations.
DATES: Written or electronic comments
must be received by October 16, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–113112–03), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered between the hours of 8 a.m. and
4 p.m. to CC:PA:RU (REG–113112–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC or sent electronically, via the IRS
Internet site at:www.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Theresa M. Kolish
(202–622–7930) of the Office of the
Associate Chief Counsel (Corporate) (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Income Tax Reg-
ulations (26 CFR part 1) relating to sec-
tions 108 and 1017. The temporary regula-
tions will affect taxpayers that exclude dis-
charge of indebtedness income from gross
income under section 108. The text of
those temporary regulations also serves as
the text of these proposed regulations. The
preamble to the temporary regulations ex-
plains the amendments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regu-
latory assessment is not required. It has
also been determinedthat section 553(b)
of the Administrative Procedures 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 Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Pursuant to section 7805(f) of the In-
ternal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed orig-
inal and 8 copies) or electronic comments
that are submitted timely to the IRS. The
IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of the
se regula-
tionsisTheresaM.Kolish,
Office of As-
sociate Chief Counsel (Co
rporate). How-
ever, other personnel fr
om the IRS and
Treasury Department p
articipated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CF
R part 1 is proposed
to be amended as fo
llows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part1isamendedbyaddingthefollowing
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108–7 also issued under 26
U.S.C. 108. * * *
Par. 2. Section 1.108–7 is added to read
as follows:
§1.108–7 Reduction of attributes.
[The text of the proposed §1.108–7 is
the same as the text for §1.108–7T pub-
lished elsewhere in this issue of the Bul-
letin].
Par. 3. Section 1.1017–1 is amended by
adding paragraph (b)(4) to read as follows:
§1.1017–1 Basis reductions following a
discharge of indebtedness.
*****
(b) * * *
(4) [The text of the proposed
§1.1017–1(b)(4) is the same as the text for
§1.1017–1T(b)(4) published elsewhere in
this issue of the Bulletin].
*****
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 17, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 18, 2003, 68 F.R. 42652)
List of Nonbank Trustees and
Custodians
Announcement 2003–54
The following is a list of entities that
have been approved by the Commis-
sioner of the Internal Revenue Service,
pursuant to § 1.408–2(e) of the Income
Tax Regulations, to serve as a nonbank
trustee or custodian. This list updates and
supercedes the list published with An-
nouncement 2002–12, 2002–1 C.B. 553.
Archer medical savings accounts
(Archer MSAs) established under § 220
of the Internal Revenue Code, custodial
accounts of a pension plan qualified under
§ 401, custodial accounts described in
§ 403(b)(7), trust or custodial accounts
of individual retirement accounts (IRAs)
established under §§ 408(a), 408A (Roth
IRAs), or 530 (Coverdell Education Sav-
ings Accounts), and custodial accounts of
eligible deferred compensation plans de-
scribed in § 457(b) will not be tax exempt
if the trustee or custodian of such accounts
is not a bank (as defined in § 408(n)) (and
inthecaseofArcherMSAsabankwithin
October 6, 20037612003-40 I.R.B.

the meaning of § 408(n) or an insurance
company within the meaning of § 816) or
an approved nonbank trustee or custodian.
An entity that is not a bank, as defined
in § 408(n), must receive approval from
the Service to serve as a nonbank trustee
or nonbank custodian. A prospective non-
bank trustee or custodian must file a writ-
ten application with the Commissioner of
Internal Revenue demonstrating that the
requirements of § 1.408–2(e)(2) through
§ 1.408–2(e)(7) of the regulations will be
met. If the application is approved, a writ-
ten notice of approval will be issued to the
applicant. The notice of approval will state
the day on which it becomes effective, and
(except as otherwise provided therein) will
remain effective until revoked by the Ser-
vice or withdrawn by the applicant. Enti-
ties that have received such approval from
the Service may also sponsor certain re-
tirement plans, custodial accounts under
§ 403(b)(7) of the Code and individual re-
tirement arrangements established under
§ 408. (See Rev. Proc. 2000–20, 2000–1
C.B. 553, and Rev. Proc. 87–50, 1987–2
C.B. 647, as modified.)
A prospective nonbank trustee or custo-
dian may not accept any fiduciary account
before such notice of approval becomes ef-
fective. In addition, a nonbank trustee or
custodian may not accept a fiduciary ac-
count until after the plan administrator or
the person for whose benefit the account is
to be established is furnished with a copy
of the written notice of approval issued to
the applicant.
The continued reliance on a notice of
approval is dependent upon the continued
satisfaction of the nonbank trustee require-
ments set forth in the regulations. The
notice of approval issued to an applicant
will be revoked if the Commissioner de-
termines that the applicant is unwilling or
unable to administer fiduciary accounts in
a manner consistent with the requirements
of the regulations. Generally, the notice
will not be revoked unless the Commis-
sioner determines that the applicant has
knowingly, willfully, or repeatedly failed
to administer fiduciary accounts in a man-
ner consistent with the requirements of the
regulations, or has administered a fidu-
ciary account in a grossly negligent man-
ner.
Thewrittennoticeofapprovaltoserve
as a nonbank trustee or nonbank custodian
is not an endorsement of any investment
made with respect to any retirement plan
or arrangement handled by the approved
nonbank trustee or custodian. The Inter-
nal Revenue Service does not review or ap-
prove investments.
If the trustee or custodian of an account
described above is not a bank or an ap-
proved nonbank trustee or nonbank cus-
todian, the amounts held in such account
(including earned interest) will be deemed
distributed and includible in gross income
in the year(s) the account’s trustee or cus-
todian was not a bank or an approved non-
bank trustee or nonbank custodian. Con-
tributions made to such account are not de-
ductible from gross income and will be dis-
allowed if claimed on an income tax return.
This list of approved nonbank trustees
and nonbank custodians includes their
names, addresses, and the date each appli-
cation was approved.
If an approved nonbank trustee or cus-
todian believes that the information about
it is incorrect, incomplete, or that it has
been incorrectly omitted from this list,
it may, on or before December 5, 2003,
which is 60 days from the date of the pub-
lication of this list in the Internal Revenue
Bulletin, notify the Service in writing of
any changes it proposes to the list. This
notification should include a copy of the
approval letter.
The notification should be addressed to:
Internal Revenue Service
SE:T:EP:RA:T1
Announcement 2003–54
1111 Constitution Ave., NW
Washington, DC 20224
Drafting Information
The principal author of this announce-
ment is Calvin Thompson of the Em-
ployee Plans, Tax Exempt and Govern-
ment Entities Division. Please contact
Mr. Thompson at 1–202–283–9596 (not
a toll-free number), if there are any ques-
tions regarding the publication of this
list. Written inquiries concerning this
announcement should be addressed to the
Internal Revenue Service at the above
address.
2003-40 I.R.B.762October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
1. A.B. Culbertson & Co.1250 Continental Plaza
Fort Worth, TX 76102
May 15, 1984
2. A.G. Becker & Co.Chicago, ILDecember 12, 1979
3. A.G. Edwards & Sons, Inc.One North Jefferson
St. Louis, MO 63103
November 26, 1980
4. ABN AMRO Securities LLC55 East 52nd Street
New York, NY 10022
September 7, 2000
5. Adler, Coleman Clearing Corp.20 Broad St.
New York, NY 10005
April 7, 1987
6. Advanced Clearing, Inc.4211 South 102nd Street
Omaha, NE 68127-1031
April 18, 1984
7. Advest, Inc.280 Trumbull Street
Hartford, CT 06103
January 24, 1989
8. Aisel & Co.20 Broad Street
New York, NY 10005
April 26, 1991
9. American Brokerage Services, Inc.131 Lafayette Ave.
Detroit, MI 48226
September 18, 1991
10. American Capital Marketing, Inc.
(FKA American General Capital)
2777 Allen Parkway
Houston, TX 77215
June 25, 1984
11. American Express Financial Corp.IDS Tower 10
Minneapolis, MN 55440
August 12, 1977
12. American Heritage Life Ins. Co.76 South Laura Street
Jacksonville, FL 32202
December 11, 1984
13. American Transtech, Inc.8000 Baymeadows Way
Jacksonville, FL 32256
August 15, 1990
14. Analytic Investment Management, Inc.2222 Martin Street, Suite 230
Irvine, CA 92715-1454
May 9, 1989
15. Aspen Partnership1895 Claremont Road
Hoffman Estates, IL 60195
October 25, 1990
16. B.C. Ziegler & Co.215 North Main Street
West Bend, WI 53095
September 27, 1985
17. Banc One Capital CorporationP.O. Box 18277
90 North High Street
Columbus, OH 43218
February 24, 1992
18. Bank Hapoulim B.M.6501 Wilshire Blvd.
Los Angeles, CA 90048
May 15, 1986
19. Bank Julius Baer & Co., LTD330 Madison Avenue
New York, NY 10017
December 15, 1988
20. Bank Leumi Le - Israel B.N. Western
Hemisphere Regional Mgt.
242 Fifth Avenue
New York, NY 10022
February 10, 1982
21. Bartlett & Co.36 East Fourth Street
Cincinnati, OH 45202
February 1, 1989
22. Bear, Stearns & Co., Inc.5 Hanover Square
New York, NY 10004
June 2, 1986
October 6, 20037632003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
23. Bear, Sterns, Securities Corp.2Broadway,12thFloor
New York, NY 10004
June 24, 1991
24. Berklee College of Music, Inc.1140 Boylston Street
Boston, MA 02110
May 9, 1989
25. Blunt Ellis & Loewi, Inc.225 East Mason Street
Milwaukee, WI 53202
January 25, 1982
26. BNY Clearing Services, LLC (FKA
Kemper Clearing)
111 East Kilbourn
Milwaukee, WI 53202
August 21, 1989
27. Boettcher & Company, Inc.828 Seventeenth Street
Denver, CO 80201
August 10, 1987
28. Brown & Company Securities
Corporation
20 Winthrop Square
Boston, MA 02110
February 27, 1985
29. Bruns, Nordeman, Rea & Co.New York, NYOctober 31, 1977
30. Burke, Christensen & Lewis Securities,
Inc.
120 S. La Salle Street, Suite 940
Chicago, IL 60603
March 11, 1986
31. Burton J. Vincent, Chesley & Co.105 West Adams St.
Chicago, IL 60603
March 25, 1982
32. Butler Wick & Co., Inc.City Center One Bldg.
Youngstown, OH 44501
October 8, 1992
33. BUYandHold Securities Corporation110 Wall Street
New York, NY 10005
October 5, 2000
34. Carolina Securities Corp.239 Fayetteville St.
Raleigh, NC 27602
August 29, 1983
35. Chapin, Davis & Company, Inc.3 Village Square, Cross Keys
Baltimore, MD 21210
December 7, 1983
36. Charles Schwab & Co., Inc.101 Montgomery Street
San Francisco, CA 94104
January 8, 1982
37. Christian & Missionary AllianceP.O. Box C
Nyack, NY 10960
August 15, 1985
38. CIBC World Markets Corporation200 Liberty Street
New York, NY 10281
July 26, 1977
39. City Securities Corp.135 North Pennsylvania Street
Indianapolis, IN 46204
December 21, 1982
40. Commerce First ThriftMidvale, UT 84047May 25, 1978
41. Comprehensive Investment, Inc.One Moody Plaza
Galveston, TX 77550
June 16, 2000
42. Continental Trust Co.17110 Dallas Parkway, Suite 200
Dallas, TX 75248
February 22, 1977
43. D.A.Davidson&Co.Davidson Building
#8 Third Street North
Great Falls, MT 59403
June 11, 1982
44. D.J. St. Germain, Inc.1500 Main Street
Springfield, MA 01115
January 1, 1977
2003-40 I.R.B.764October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
45. Davenport & Co. of Virginia, Inc.901 E. Cary Street
Richmond, VA 23219
February 2, 1987
46. Davenport & Company LLC901 East Cary Street
Richmond, VA 23219
March 31, 1997
47. Deutsche Bank Securities Corp. d.b.a.
C.J. Lawrence Deutsche
1290 Avenue of the Americas
New York, NY 10104
March 14, 1980
48. Deutsche Bank Securities, Inc.1SouthStreet
Baltimore, MD 21203
April 11, 1994
49. Donaldson, Lufkin & Jenrette Securities
Corp.
140 Broadway
New York, NY 10005
December 4, 1985
50. Dougherty, Dawkins, Strand & Yost,
Inc.
100 South Fifth Street, Suite 2300
Minneapolis, MN 55402
February 22, 1986
51. Dresdner Kleinwort Wasserstein
Securities LLC
75 Wall Street
New York, NY 10005
October 9, 2002
52. Dreyfus Investment Services, Corp.Two Mellon Bank Center
Pittsburgh, PA 15259
May 18, 1989
53. Duncan-Williams, Inc.5860 Ridgeway Center Parkway
Memphis, TN 38120
December 13, 1995
54. E*Trade Clearing LLC10951 White Rock Road
Rancho Cardova, CA 95670
September 3, 2002
55. E*Trade Securities LLC4500 Bohannon Drive
Menlo Park, CA 94025
August 30, 2002
56. E*Trade Securities, Inc.480 California Avenue
Palo Alto, CA 94306
February 1, 1996
57. Eads Generoe TrustSt. Louis, MOFebruary 3, 1977
58. Edward D. Jones & Co.201 Progress Parkway
Maryland Height, MO 63043
May 30, 1985
59. El Paso Electric Co.P.O. Box 982
El Paso, TX 79960
June 15, 1983
60. Elan Investment Services, Inc.777 E. Wisconsin Ave.
Milwaukee, WI 53282
December 21, 1987
61. Emmett A. Larkin Co., Inc.100BushStreet
San Francisco, CA 94104
April 17, 1986
62. Eppler, Guerin & Turner, Inc.2001 Bryan Tower, Suite 2300
Dallas, TX 75201
September 6, 1984
63. EVEREN Securities, Inc.77 West Wacker Drive
Chicago, IL 60601-1694
November 19, 1998
64. Fahnestock & Co., Inc. (formerly
Edward A. Viner & Co.)
110 Wall Street
New York, NY 10005
April 15, 1982
65. Fechtor, Detwiler & Co., Inc.155 Federal Street
Boston, MA 02110
March 26, 1982
66. Ferris, Baker Watts, Inc. (formerly
Ferris & Company)
1720 Eye Street, NW
Washington, DC 20006
December 4, 1987
October 6, 20037652003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
67. Financial Data Services, Inc.400 Atrium Drive
Somerset, NJ 08873
November 14, 1990
68. First Albany Corp.41 State Street
Albany, NY 12207
September 26, 1979
69. First Clearing Corporation10700 Wheat First Dr.
Glen Allen, VA 23060
April 21, 1999
70. First Illinois Capital Corp.424 7th Street
Plaza 7
Rockford, IL 61110
May 27, 1982
71. First Investors Corp.120 Wall Street
New York, NY 10005
April 19, 1982
72. First Manhattan Co.437 Madison Avenue
New York, NY 10022
January 26, 1990
73. First of Michigan Corporation100 Renaissance Center, 26th Floor
Detroit, MI 48243
August 31, 1994
74. Fiserv Securities, Inc.One Commerce Square
2005 Market Street
Philadelphia, PA 19103
November 15, 1984
75. Fleet Clearing Corporation67 Wall Street
New York, NY 10005
December 3, 1986
76. Fleet Norstar Securities, Inc.14 Wall Street
New York, NY 10005
August 30, 1991
77. Folger, Nolan, Fleming & Douglass72515thStreet,N.W.
Washington, DC 20015
September 16, 1981
78. Freedom Capital Management
Corporation
One Beacon Street
Boston, MA 02108
August 29, 1991
79. Freeman Welwood & Co., Inc.1501 Fourth Avenue, Suite 1700
Seattle, WA 98101
February 13, 1996
80. G.T. Global Investors Services, Inc.50 California Street
San Francisco, CA 94111
May 27, 1994
81. General Conference of the Mennonite
Brethren Churches, Board of Trustees
315 South Lincoln
Hillsboro, KS 67063
March 8, 1983
82. Goldman, Sachs & Co.85 Broad Street
New York, NY 10004
December 8, 1982
83. Greek Catholic Union of the U.S.A.5400 Tuscarawas Rd.
Beaver, PA 15009-9513
May 24, 2000
84. Gruntal & Co, Inc.14 Wall Street
New York, NY 10005
June 13, 1984
85. H&R Block Financial Advisors, Inc.735 Griswold Street
Detroit, MI 48226
December 8, 1983
86. H.G. Wellington & Co., Inc.14 Wall Street
New York, NY 10005
September 13, 1993
87. H.M. Payson & Co.One Portland Square
P.O. Box 31
Portland, ME 04112
August 20, 1987
2003-40 I.R.B.766October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
88. Halpert and Company, Inc.284 Millburn Avenue
Millburn, NJ 07041
April 17, 1996
89. Hamilton Investments, Inc. (formerly
Illinois Company, Inc.)
30 North La Salle St.
Chicago, IL 60602
August 6, 1982
90. Hampshire Funding, Inc.One Granite Place
P.O. Box 2005
Concord, NH 03301
May 26, 1988
91. Hanifen, Imhoff Clearing Corp.1125 17th Street
Denver, CO 80217
April 22, 1997
92. Hanifen, Imhoff, Inc.1125 17th Street,
Suite 1700
Denver, CO 80202
December 3, 1985
93. Harris Investor Services LLCHarborside Financial Center
501 Plaza II
Jersey City, NJ 07311
May 1, 2002
94. Hartford Life Insurance Co.Hartford Plaza
Hartford, CT 06106
March 3, 1982
95. Hazlett, Burt & Watson, Inc.1300 Chapline Street
Wheeling, WV 26003
April 11, 1995
96. Heartland Securities, Inc.208 South LaSalle St.
Chicago, IL 60604
March 6, 1984
97. Henry Scott, Inc.Philadelphia, PAMarch 23, 1982
98. Herzfeld & Stern, Inc.30 Broad Street
New York, NY 10004
December 12, 1984
99. Herzog, Heine, Geduld, Inc.26 Broadway
New York, NY 10004
February 11, 1982
100. Holt & Collins188 Embarcadero, Suite 760
San Francisco, CA 94105
September 8, 1988
101. Home Life Financial Assurance
Corporation
2400 West Bay Drive
Largo, FL 33540
November 13, 1986
102. Howard, Weil, Labouisse, Friedrichs,
Inc.
1100 Paydrus Street, Suite 900
New Orleans, LA 70163
December 28, 1987
103. Howe Barnes Investments, Inc.135 S. LaSalle Street
Chicago, IL 60603
July 6, 1994
104. Huntleigh Securities Corporation222 South Central Ave.
St. Louis, MO 63102
October 22, 1997
105. I.M. Simon & Co.7730 Forsyth Blvd.
Clayton, MO 63105
November 3, 1981
106. iClearing, LLC100 Wood Avenue
South Iselin, NJ 08830
February 7, 2001
107. Investment Advisers, Inc.1100 Dain Tower
Minneapolis, MN 55440
October 9, 1981
108. Isler, Colling & McAdamsPortland, OROctober 5, 1978
October 6, 20037672003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
109. J.C. Bradford & Co.330 Commerce Street
Nashville, TN 37201
February 28, 1982
110. J.J.B. Hilliard, W.L. Lyons, Inc.Hilliard Lyons Center
501SouthFourthSt.
Louisville, KY 40202
February 11, 1992
111. Jacob Engle Foundation, Inc. (The)P.O. Box 1136
Upland, CA 91786
March 25, 1983
112. Janney Montgomery Scott, Inc.1801 Market Street
Philadelphia, PA 19103
March 23, 1982
113. Jefferson Pilot Investor Services, Inc.100 North Greene St.
Greensboro, NC 27401
October 22, 1979
114. Jesup, Josephthal & Co., Inc.One Whitehall Street
New York, NY 10004
December 18, 1990
115. John Hancock Clearing Corporation200 Liberty Street
New York, NY 10281
March 21, 1991
116. John Hancock Mutual Life Insurance
Company
John Hancock Place
200 Clarendon
Boston, MA 02117
August 24, 1993
117. Juran & Moody, Inc.Minnesota Mutual Life Center
400 N. Robert St.
St. Paul, MN 55101
May 27, 1994
118. Kagin Numismatic Services, Ltd.1000 Insurance Exchange Bldg.
Des Moines, IA 50309
March 18, 1980
119. KH Funding Company10801 Lockwood Drive, Suite 370
Silver Spring, MD 20901
February 13, 2002
120. Kirkpatrick, Pettis, Smith Polian, Inc.1623 Farnam Street, Suite 700
Omaha, NE 68102
August 18, 1981
121. L.F. Rothchild, Unterberg, Towbin55 Water Street
New York, NY 10041
December 23, 1985
122. Legg Mason Wood Walker, Inc.111 S. Calvert Street
P.O. Box 1476
Baltimore, MD 21203
June 4, 1985
123. Lehman Brothers, Inc.200 Vesey St.
New York, NY 10285
December 20, 2000
124. Lester Sumrall Evangelistic
Association, Inc.
530 East Ireland Road
South Bend, IN 46614
September 2, 1988
125. Liberty Life Insurance Co.P.O. Box 789
Greenville, SC 29602
September 3, 1982
126. Manley, Bennett, McDonald & Co.St. Louis, MOJanuary 1, 1977
127. McDonald & Company Securities, Inc.580 Walnut Street
Cincinnati, OH 45202
December 15, 1983
128. MEGA Life and Health Insurance
Company (The)
501 West Interstate 44 Service Road
Oklahoma City, OK 73118
May 29, 1991
129. Menold, Crawford, Hippler & Co.23930 Michigan Ave.
Dearborn, MI 40126
December 9, 1988
2003-40 I.R.B.768October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
130. Merrill, Lynch, Pierce, Fenner & Smith,
Inc.
One Liberty Plaza
New York, NY 10006
August 3, 1987
131. Merrimack Valley Investment, Inc.367 Kingsbury Ave.
Haverhill, MA 01830
September 28, 1984
132. Mesirow Financial, Inc.350 N. Clark Street
Chicago, IL 60610
May 28, 1982
133. Metropolitan Life Insurance Co.One Madison Avenue
New York, NY 10010
January 28, 1987
134. Metropolitan Mortgage & Securities
Corporation
W. 292 Sprague Ave.
Spokane, WA 99204
November 10, 1976
135. Mid-Ohio Securities Corp.Spitzer Park Plaza
511 Broad St.
Elyria, OH 44035
January 28, 1983
136. Mid-States Enterprises, Inc.Carroll, IADecember 30, 1976
137. Miller Johnson & Kuehn, Inc.5500 Wayzata Blvd.
Minneapolis, MN 55416
November 15, 2000
138. Milwaukee Company (The)250 E. Wisconsin Ave.
Milwaukee, WI 53202
September 15, 1986
139. MKI Securities Corp.61 Broadway
New York, NY 10006
April 17, 1985
140. Money Management Associates4922 Fairmont Avenue
Bethesda, MD 20814
May 26, 1987
141. Moore & Schley, Cameron & Co.Two Broadway
New York, NY 10004
November 15, 1977
142. Morgan Keegan & Company, Inc.Morgan Keegan Tower
Fifty Front Street
Memphis, TN 38108
January 27, 1982
143. Morgan Stanley DW, Inc.1585 Broadway
New York, NY 10036
May 29, 1986
144. Mortgage Loan Services, Inc.780 Lynnhaven Parkway, Suite 200
Virginia Beach, VA 23452
March 15, 1995
145. Moseley, Hallgarten, Estabrook &
Weeden, Inc.
One New York Plaza
New York, NY
December 10, 1985
146. Murphy Favre, Inc.W. 601 Riverside, 9th Floor
Spokane, WA 99201
August 2, 1976
147. Mutual Service CooperativeTwo Pine Tree Drive
Arden Hills, MN 55112
June 6, 1996
148. Myriad Corporation1400 50th Street
West Des Moines, IA 50265
July 20, 1977
149. National Bank of Greece, S.A.33 State Street
Boston, MA 02109
February 4, 1988
150. National Covenant PropertiesChicago, ILJune 30, 1978
151. National Investor Services Corp.44 Wall Street
New York, NY 10005
March 18, 1996
October 6, 20037692003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
152. National Life Insurance CompanyOne National Life Drive
Montpelier, VT 05604
January 1, 1998
153. National Securities Corporation1001 Fourth Avenue, Suite 2200
Seattle, WA 98154
December 31, 1986
154. Nationwide Advisory Services, Inc.
(Nationwide Financial Services, Inc)
One Nationwide Plaza
Columbus, OH 43216
September 25, 1985
155. Nationwide Credit UnionOne Nationwide Plaza
Columbus, OH 43216
April 13, 1978
156. NBC Securities, Inc.1927 First Ave., North
Birmingham, AL 35203
July 16, 1996
157. Neuberger & Berman522 Fifth Ave.
New York, NY 10036
October 4, 1983
158. Newhard, Cook & Co.300 North Broadway
St. Louis, MO 63102
June 4, 1985
159. Oberweis Securities, Inc.841 North Lake Street
Aurora, IL 60506
February 11, 1985
160. PaineWebber, Incorporated1285 Avenue of the Americas
New York, NY 10019
May 12, 1989
161. Parker/Hunter, Inc.600 Grant Street
Pittsburgh, PA 15219
June 15, 1990
162. Partnership Services, Inc.5520 LBJ Freeway, Suite 430
Dallas, TX 75240
March 31, 1993
163. Peninsular Securities Co.Waters Building
Grand Rapids, MI 49503
January 28, 1985
164. Perelman-Carley & Associates, Inc.3000 Farnam Street
Omaha, NE 68131
January 13, 1989
165. Perkins, Wolf, McDonnell & Company53 West Jackson Blvd.
Chicago, IL 60604
December 30, 1991
166. Pflueger & Baerwald, Inc.220 Montgomery Street
San Francisco, CA 94104
November 9, 1981
167. PFS Investments, Inc.3120 Breckenridge Blvd.
Duluth, GA 30199
September 28, 1995
168. Pioneer Financial Services, Inc.4233 Roanoke Road
Kansas City, MO 64111
January 25, 1985
169. Pioneer Investment Management60 State Street
Boston, MA 02109
February 21, 1986
170. Prescott, Ball & Turben, Inc.1331 Euclid Ave.
Cleveland, OH 44115
January 27, 1983
171. PrimeVest Financial Services, Inc.400 First Street South
St. Cloud, MN 56301-3600
December 8, 1993
172. Principal Life Insurance Company711 High Street
Des Moines, IA 50392-0001
July 27, 1988
173. Prudential Securities, Inc.100 Gold Street
New York, NY 10292
July 28, 1989
2003-40 I.R.B.770October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
174. R. Rowland & Co., Inc.St. Louis, MOMarch 29, 1984
175. R.G. Dickinson & Co.200 Des Moines Building
405 6th Ave.
Des Moines, IA 50309
July 20, 1983
176. R.J. Steichen & CompanyMidwest Plaza, Suite 100
801 Nicolett Mall
Minneapolis, MN 55402-2526
May 21, 1993
177. Raymond James & Associates, Inc.880 Carrillon Parkway
P.O. Box 12749
St. Petersburg, FL 33733-2749
April 26, 1982
178. Raymond James & Associates, Inc.880 Carillon Parkway
P.O. Box 12749
St. Petersburg, FL 33733-2749
March 8, 1982
179. RBC Dain Rauscher, Inc.Dain Rauscher Plazza
60 South Sixth Street
Minneapolis, MN 55402-4422
March 2, 1998
180. RBC Dain Rauscher, Inc.Dain Rauscher Plazza
60 South Sixth Street
Minneapolis, MN 55402-4422
January 22, 1982
181. Regan MacKenzie, Incorporated999 Third Avenue, Suite 4300
Seattle, WA 98104
August 31, 1989
182. Regions Investment Company, Inc.2011 Fourth Ave. North
Birmingham, AL 35203
July 20, 2000
183. Reserve Management Company, Inc.810 Seventh Avenue
New York, NY 10019
October 18, 1989
184. Robert W. Baird & Co., Inc.777 E. Wisconsin Ave.
Milwaukee, WI 53202
July 31, 1986
185. Robinson-Humphrey Co., Inc (The)2 Peachtree St., N.W.
Atlanta, GA 30383
May 24, 1982
186. Romano Bros. & Co.820 Davis Street
Evanston, IL 60201
September 28, 1984
187. Rose & Company Investment, Inc.141W.JacksonBlvd.
Chicago, IL 60604
April 14, 1982
188. Rotan Mosle, Inc.1500 South Tower Pennzoil Place
P.O. Box 3226
Houston, TX 77001
May 6, 1980
189. Rushmore Investment Brokers, Inc.4922 Fairmont Avenue
Bethesda, MD 20814
September 24, 1986
190. Salomon Smith Barney, Inc.388 Greenwich St.
New York, NY 10105
July 22, 1985
191. Sanford C. Bernstein & Co., Inc.767 Fifth Avenue
New York, NY 10153
November 13, 1986
192. Santa Ana City Employees Credit
Union
800 W. Santa Ana Blvd.
Santa Ana, CA 92701
March 25, 1982
October 6, 20037712003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
193. Saturna Capital Corporation101 Prospect Street
Bellingham, WA 98227-2838
March 28, 1991
194. SBC Trust Services, Inc.2401 Cedar Springs Rd.
Dallas, TX 75201-1407
April 10, 2001
195. SBCI Swiss Bank CorporationInvestment Banking, Inc.
222Broadway,4thFloor
New York, NY 10038
February 11, 1992
196. SBM Financial Services, Inc.8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, MN 55437
May 13, 1995
197. Scott & Stringfellow, Inc. (FKN Craige,
Inc.)
823 E. Main Street
Richmond, VA 23219
May 5, 1999
198. Scottsdale Securities, Inc.12855 Flushing Meadow Drive
St. Louis, MO 63131
October 9, 1996
199. Securities Management ResearchTwo Moody Plaza
Galveston, TX 77550
June 22, 1978
200. Security Management Company (FKA
Security Management)
700SWHarrisonSt.
Topeka, KS 66636-0001
August 14, 1996
201. SG Cowen Securities Corporation1221 Avenue of the Americas
New York, NY 10020
June 30, 1998
202. SMA Services, Inc.35 Lakeshore Drive
Birmingham, AL 35209
August 27, 1998
203. Smith, Moore & Co.400 Locust Street
St. Louis, MO 63102
January 18, 1983
204. Southwest Securities, Inc.Renaissance Tower
1201 Elm Street
Suite 4300
Dallas, TX 75270
December 9, 1992
205. Spear Rees & Co.505 North Brand Blvd., Sixteenth Floor
Glendale, CA 91203
January 13, 1988
206. Spear, Leeds & Kellog120 Broadway
New York, NY 10271
March 29, 1996
207. State Bond and Mortgage Company8500 Normandale Lake Blvd.,
Minneapolis, MN 55437
December 21, 1990
208. State Employees Credit Union801 Hillsborough Street
P.O. Box 26807
Raleigh, NC 27611-6807
January 1, 1977
209. State Farm Investment CorporationOne State Farm Plaza
Bloomington, IL 61410
September 22, 1999
210. Stephens, Inc.111 Center Street
Little Rock, AR 72201
December 4, 1987
211. Stern Brothers & Co1100 Main Street, Suite 2200
Kansas City, MO 64199
December 15, 1987
212. Sterne, Agee & Leach, Inc.1500 Am South-Sonat Tower
Birmingham, AL 35203
September 11, 1981
2003-40 I.R.B.772October 6, 2003

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
213. Stifel, Nicolaus & Co., Inc.500 North Broadway
St. Louis, MO 63102
September 9, 1981
214. Summit Discount Brokerage (FKA
Lehigh Securities Corp.)
1457 MacArthur Road
Lehigh Valley, PA 18002
April 4, 1990
215. Sunpoint Securities, Inc.911 W. Loop 281
Longview, TX 75604
April 1, 1998
216. SunTrust Capital Markets, Inc.3333 Peachtree Road, NE
Atlanta, GA 30326
May 27, 1982
217. Sutro & Company, Inc.201 California Street
San Francisco, CA 94111-5096
December 8, 1988
218. Swiss American Securities, Inc.100 Wall Street
New York, NY 10005
December 2, 1980
219. Texas First Securities Corporation1360 Post Oak Blvd., Suite 120
Houston, TX 77056
November 17, 1988
220. TIAA-CREF Individual & Institutional
Services, Inc.
730 Third Avenue
New York, NY 10017
September 9, 2002
221. Tucker Anthony, IncorporatedOne Beacon Street
Boston, MA 02108
October 23, 1980
222. U.S. Bancorp Piper Jaffray, Inc.800 Micollet Mall, Suite 800
Minneapolis, MN 55402-7020
April 21, 1982
223. U.S. Clearing Corporation120 Wall Street
New York, NY 10005
May 3, 1983
224. Unified Financial Securities, Inc.429 North Pennsylvania Street
Indianapolis, IN 46204
October 28, 1976
225. United of Omaha Life InsuranceMutual of Omaha Plaza
Omaha, NE 68175
March 16, 1982
226. USAA Transfer Agency Company of
Delaware
USAA Building
San Antonio, TX 78288
October 2, 1990
227. W.H. Reaves & Co., Inc.30 Montgomery Street
Jersey City, NJ 07302
December 7, 1990
228. W.H. Turlington & Co.509 East Center Street
Lexington, NC 27292
November 3, 1980
229. Wachovia Securities, Inc.201 North Tryon Street
Charlotte, NC 28202
April 6, 1990
230. Waterhouse Securities, Inc.44 Wall Street
New York, NY 10005
February 23, 1988
231. Wayne Hummer & Co.300 South Wacker Drive
Chicago, IL 60606
January 25, 1983
232. Web Street Securities, Inc.222 South Riverside Plaza, 11th Floor
Chicago, IL 60601
April 27, 2000
233. Wedbush Morgan Securities1000 Wilshire Boulevard
Los Angeles, CA 90030
December 24, 1984
234. Weiss, Peck & GreerOne New York Plaza
New York, NY 10004
June 16, 1982
October 6, 20037732003-40 I.R.B.

APPROVED Nonbank Trustees/Custodians as of December 31, 2002
NameAddressApproval Date
235. Wells Advisors, Inc.3885 Holcomb Bridge Road
Norcross, GA 30092
March 20, 1992
236. Wexford Clearing Services Corporation1 New York Plaza, 11th Floor
New York, NY 10292
June 30, 1998
237. Wheat, First Securities, Inc.707 East Main Street
P.O. Box 135
Richmond, VA 23211
March 23, 1983
238. William R. Hough & Co., Inc.100 2nd Avenue South, Suite 800
St. Petersburg, FL 33701
April 18, 1995
2003-40 I.R.B.774October 6, 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 ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified,above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
October 6, 2003i2003-40 I.R.B.

Numerical Finding List
1
Bulletins 2003–27 through 2003–40
Announcements:
2003-45, 2003-28 I.R.B.73
2003-46, 2003-30 I.R.B.222
2003-47, 2003-29 I.R.B.124
2003-48, 2003-28 I.R.B.73
2003-49, 2003-32 I.R.B.339
2003-50, 2003-30 I.R.B.222
2003-51, 2003-37 I.R.B.555
2003-52, 2003-32 I.R.B.345
2003-53, 2003-32 I.R.B.345
2003-54, 2003-40 I.R.B.761
2003-55, 2003-38 I.R.B.597
2003-56, 2003-39 I.R.B.694
2003-57, 2003-37 I.R.B.555
2003-58, 2003-40 I.R.B.746
2003-59, 2003-40 I.R.B.746
Notices:
2003-38, 2003-27 I.R.B.9
2003-39, 2003-27 I.R.B.10
2003-40, 2003-27 I.R.B.10
2003-41, 2003-28 I.R.B.49
2003-42, 2003-28 I.R.B.49
2003-43, 2003-28 I.R.B.50
2003-44, 2003-28 I.R.B.52
2003-45, 2003-29 I.R.B.86
2003-46, 2003-28 I.R.B.53
2003-47, 2003-30 I.R.B.132
2003-48, 2003-30 I.R.B.133
2003-49, 2003-32 I.R.B.294
2003-50, 2003-32 I.R.B.295
2003-51, 2003-33 I.R.B.361
2003-52, 2003-32 I.R.B.296
2003-53, 2003-33 I.R.B.362
2003-54, 2003-33 I.R.B.363
2003-55, 2003-34 I.R.B.395
2003-56, 2003-34 I.R.B.396
2003-57, 2003-34 I.R.B.397
2003-58, 2003-35 I.R.B.429
2003-59, 2003-35 I.R.B.429
2003-60, 2003-39 I.R.B.643
2003-62, 2003-38 I.R.B.576
2003-63, 2003-38 I.R.B.577
2003-64, 2003-39 I.R.B.646
2003-65, 2003-40 I.R.B.747
2003-67, 2003-40 I.R.B.752
Proposed Regulations:
REG-209377-89, 2003-36 I.R.B.521
REG-208199-91, 2003-40 I.R.B.756
REG-108639-99, 2003-35 I.R.B.431
REG-106736-00, 2003-28 I.R.B.60
Proposed Regulations— Continued:
REG-107618-02, 2003-27 I.R.B.13
REG-122917-02, 2003-27 I.R.B.15
REG-131997-02, 2003-33 I.R.B.366
REG-133791-02, 2003-35 I.R.B.493
REG-138495-02, 2003-37 I.R.B.541
REG-138499-02, 2003-37 I.R.B.541
REG-140808-02, 2003-38 I.R.B.582
REG-140930-02, 2003-38 I.R.B.583
REG-141669-02, 2003-34 I.R.B.408
REG-142538-02, 2003-38 I.R.B.590
REG-143679-02, 2003-38 I.R.B.592
REG-144908-02, 2003-38 I.R.B.593
REG-162625-02, 2003-35 I.R.B.500
REG-163974-02, 2003-38 I.R.B.595
REG-108676-03, 2003-36 I.R.B.523
REG-112039-03, 2003-35 I.R.B.504
REG-113112-03, 2003-40 I.R.B.760
REG-116914-03, 2003-32 I.R.B.338
REG-121122-03, 2003-37 I.R.B.550
REG-129709-03, 2003-35 I.R.B.506
REG-130262-03, 2003-37 I.R.B.553
REG-132483-03, 2003-34 I.R.B.410
Revenue Procedures:
2003-45, 2003-27 I.R.B.11
2003-46, 2003-28 I.R.B.54
2003-47, 2003-28 I.R.B.55
2003-48, 2003-29 I.R.B.86
2003-49, 2003-29 I.R.B.89
2003-50, 2003-29 I.R.B.119
2003-51, 2003-29 I.R.B.121
2003-52, 2003-30 I.R.B.134
2003-53, 2003-31 I.R.B.230
2003-54, 2003-31 I.R.B.236
2003-55, 2003-31 I.R.B.242
2003-56, 2003-31 I.R.B.249
2003-57, 2003-31 I.R.B.257
2003-58, 2003-31 I.R.B.262
2003-59, 2003-31 I.R.B.268
2003-60, 2003-31 I.R.B.274
2003-61, 2003-32 I.R.B.296
2003-62, 2003-32 I.R.B.299
2003-63, 2003-32 I.R.B.304
2003-64, 2003-32 I.R.B.306
2003-65, 2003-32 I.R.B.336
2003-66, 2003-33 I.R.B.364
2003-67, 2003-34 I.R.B.397
2003-68, 2003-34 I.R.B.398
2003-69, 2003-34 I.R.B.403
2003-70, 2003-34 I.R.B.406
2003-71, 2003-36 I.R.B.517
2003-72, 2003-38 I.R.B.578
2003-73, 2003-39 I.R.B.647
Revenue Rulings:
2003-70, 2003-27 I.R.B.3
2003-71, 2003-27 I.R.B.1
2003-72, 2003-33 I.R.B.346
2003-73, 2003-28 I.R.B.44
2003-74, 2003-29 I.R.B.77
2003-75, 2003-29 I.R.B.79
2003-76, 2003-33 I.R.B.355
2003-77, 2003-29 I.R.B.75
2003-78, 2003-29 I.R.B.76
2003-79, 2003-29 I.R.B.80
2003-80, 2003-29 I.R.B.83
2003-81, 2003-30 I.R.B.126
2003-82, 2003-30 I.R.B.125
2003-83, 2003-30 I.R.B.128
2003-84, 2003-32 I.R.B.289
2003-85, 2003-32 I.R.B.291
2003-86, 2003-32 I.R.B.290
2003-87, 2003-29 I.R.B.82
2003-88, 2003-32 I.R.B.292
2003-89, 2003-37 I.R.B.525
2003-90, 2003-33 I.R.B.353
2003-91, 2003-33 I.R.B.347
2003-92, 2003-33 I.R.B.350
2003-93, 2003-33 I.R.B.346
2003-94, 2003-33 I.R.B.357
2003-95, 2003-33 I.R.B.358
2003-96, 2003-34 I.R.B.386
2003-97, 2003-34 I.R.B.380
2003-98, 2003-34 I.R.B.378
2003-99, 2003-34 I.R.B.388
2003-100, 2003-34 I.R.B.385
2003-101, 2003-36 I.R.B.513
2003-102, 2003-38 I.R.B.559
2003-103, 2003-38 I.R.B.568
2003-104, 2003-39 I.R.B.636
2003-105, 2003-40 I.R.B.696
Tax Conventions:
2003-58, 2003-40 I.R.B.746
2003-59, 2003-40 I.R.B.746
Treasury Decisions:
9061, 2003-27 I.R.B.5
9062, 2003-28 I.R.B.46
9063, 2003-36 I.R.B.510
9064, 2003-36 I.R.B.508
9065, 2003-36 I.R.B.515
9066, 2003-36 I.R.B.509
9067, 2003-32 I.R.B.287
9068, 2003-37 I.R.B.538
9069, 2003-37 I.R.B.525
9070, 2003-38 I.R.B.574
9071, 2003-38 I.R.B.560
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27,
dated July 7, 2003.
2003-40 I.R.B.iiOctober 6, 2003

Treasury Decisions— Continued:
9072, 2003-37 I.R.B.527
9073, 2003-38 I.R.B.570
9074, 2003-39 I.R.B.601
9075, 2003-39 I.R.B.608
9076, 2003-38 I.R.B.562
9077, 2003-39 I.R.B.634
9078, 2003-39 I.R.B.630
9079, 2003-40 I.R.B.729
9080, 2003-40 I.R.B.696
9081, 2003-35 I.R.B.420
9083, 2003-40 I.R.B.700
9084, 2003-40 I.R.B.742
October 6, 2003iii2003-40 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2003-27 through 2003-40
Notices:
87-5
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
87-66
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
87-79
Modified by
Notice 2003-65, 2003-40 I.R.B.747
89-79
Modified and superseded by
Rev. Proc. 2003-47, 2003-28 I.R.B.55
89-94
Modified by
Notice 2003-50, 2003-32 I.R.B.295
94-46
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
95-50
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
95-53
Modified and superseded by
Notice 2003-55, 2003-34 I.R.B.395
2001-4
Section III.C. superseded for 2004 and subsequent
calendar years by
Rev. Proc. 2003-64, 2003-32 I.R.B.306
2001-70
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
2001-74
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
2002-1
Amplified by
Notice 2003-49, 2003-32 I.R.B.294
2003-36
Modified by
Notice 2003-59, 2003-35 I.R.B.429
Proposed Regulations:
REG-EE-86-88 (LR-279-81)
Withdrawn by
REG-122917-02, 2003-27 I.R.B.15
Proposed Regulations— Continued:
REG-105606-99
Withdrawn by
REG-133791-02, 2003-35 I.R.B.493
Revenue Procedures:
66-50
Modified, amplified, and superseded by
Rev. Proc. 2003-62, 2003-32 I.R.B.299
68-23
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-41
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-12
Amplified, modified, and superseded by
Rev. Proc. 2003-51, 2003-29 I.R.B.121
81-40
Modified and superseded by
Rev. Proc. 2003-62, 2003-32 I.R.B.299
89-12
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
89-21
Superseded by
Rev. Proc. 2003-53, 2003-31 I.R.B.230
90-19
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
90-32
Section4supersededby
Rev. Proc. 2003-55, 2003-31 I.R.B.242
Section5supersededby
Rev. Proc. 2003-56, 2003-31 I.R.B.249
Section6supersededby
Rev. Proc. 2003-57, 2003-31 I.R.B.257
Section7supersededby
Rev. Proc. 2003-59, 2003-31 I.R.B.268
Section8supersededby
Rev. Proc. 2003-60, 2003-31 I.R.B.274
91-11
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
91-13
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
91-39
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
92-33
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Procedures— Continued:
92-35
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
92-88
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
93-17
Obsoleted by
REG-132483-03, 2003-34 I.R.B.408
94-46
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
95-10
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
95-11
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
95-39
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
96-17
Modified and superseded by
Rev. Proc. 2003-69, 2003-34 I.R.B.402
96-30
Modified and amplified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
96-38
Obsoleted by
Rev. Proc. 2003-71, 2003-36 I.R.B.517
2000-12
Modified by
Rev. Proc. 2003-64, 2003-32 I.R.B.306
2000-15
Superseded by
Rev. Proc. 2003-61, 2003-32 I.R.B.296
2000-20
Modified by
Rev. Proc. 2003-72, 2003-38 I.R.B.578
2002-9
Modified by
Rev. Proc. 2003-45, 2003-27 I.R.B.11
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
Modified and amplified by
Rev. Proc. 2003-63, 2003-32 I.R.B.304
Rev. Rul. 2003-81, 2003-30 I.R.B.126
2002-13
Revoked by
Rev. Proc. 2003-68, 2003-34 I.R.B.398
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27, dated July 7, 2003.
2003-40 I.R.B.ivOctober 6, 2003

Revenue Procedures— Continued:
2002-29
Modified by
Rev. Proc. 2003-72, 2003-38 I.R.B.578
2002-33
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
2002-34
Superseded by
Rev. Proc. 2003-52, 2003-30 I.R.B.134
2002-45
Revoked by
Rev. Proc. 2003-68, 2003-34 I.R.B.398
2002-60
Superseded by
Rev. Proc. 2003-73, 2003-39 I.R.B.647
2003-3
Modified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
2003-15
Modified and superseded by
Rev. Proc. 2003-49, 2003-29 I.R.B.89
2003-28
Modified by
Ann. 2003-35, 2003-38 I.R.B.597
2003-44
Modified by
Rev. Proc. 2003-72, 2003-38 I.R.B.578
Revenue Rulings:
53-56
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
54-139
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
54-396
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
55-105
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
55-372
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-128
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-160
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
56-212
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-220
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-271
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-344
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-448
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-451
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-586
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-680
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
56-681
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
57-116
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
57-296
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
57-542
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
58-92
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
58-618
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-108
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-120
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-122
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
59-233
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-326
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-356
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-400
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
59-412
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
60-49
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
60-246
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
60-262
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
60-307
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
61-96
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
63-157
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
63-224
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
63-248
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
64-147
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
64-177
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
64-285
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
65-110
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
October 6, 2003v2003-40 I.R.B.

Revenue Rulings— Continued:
62-260
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
65-273
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
66-4
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
66-23
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
66-610
Partially obsoleted by
Rev. Rul. 2003-105, 2003-40 I.R.B.696
66-290
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
67-186
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
67-189
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
67-326
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-309
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-388
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-434
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-477
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-522
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-608
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-640
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
68-641
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
69-18
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-20
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-241
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-361
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-426
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-485
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
69-517
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-6
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-111
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-229
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-230
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-264
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-286
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-378
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-409
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
70-496
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-13
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
71-384
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-440
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-453
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-454
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-495
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-518
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-565
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
71-582
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-61
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-116
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-212
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-357
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-472
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-526
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-599
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
72-603
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-46
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
2003-40 I.R.B.viOctober 6, 2003

Revenue Rulings— Continued:
73-119
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-182
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-257
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-277
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-473
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-490
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
73-498
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-6
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-59
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-73
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-83
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-87
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-211
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-376
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-476
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-521
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
74-610
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
75-53
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-54
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-105
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-106
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-107
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-111
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-134
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-160
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-174
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-179
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-212
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-248
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-298
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-341
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-426
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-468
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
75-515
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
75-561
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-44
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-67
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-90
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-225
Revoked by
T.D. 9068, 2003–37538
76-239
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-329
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-347
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
76-535
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-41
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-81
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-150
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-256
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-284
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-321
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-343
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-405
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
October 6, 2003vii2003-40 I.R.B.

Revenue Rulings— Continued:
77-456
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-482
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
77-483
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
78-89
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
78-287
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
78-420
Obsoleted by
Rev. Rul. 2003-105, 2003-40 I.R.B.696
78-441
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-29
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-50
Obsoleted by
Rev. Rul. 2003-105, 2003-40 I.R.B.696
79-71
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-82
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-104
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-116
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-314
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
79-410
Amplified by
Rev. Rul. 2003-90, 2003-33 I.R.B.353
79-424
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
80-78
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
80-79
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
80-101
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
80-167
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
80-170
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
80-358
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
81-190
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
81-225
Clarified and amplified by
Rev. Rul. 2003-92, 2003-33 I.R.B.350
81-247
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
82-164
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
82-226
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
83-101
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
83-119
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
84-28
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
84-30
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
85-55
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
85-136
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
86-52
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
Revenue Rulings— Continued:
87-1
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
88-7
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
89-72
Obsoleted by
Rev. Rul. 2003-99, 2003-34 I.R.B.388
2003-58
Distinguished by
Rev. Rul. 2003-102, 2003-38 I.R.B.559
Treasury Decisions:
9033
Removed by
T.D. 9065, 2003-36 I.R.B.515
2003-40 I.R.B.viiiOctober 6, 2003

INDEX
Internal Revenue Bulletins
2003–27 through 2003–40
The abbreviation and number in parenthesis
following the index entry refer to the specific
item; numbers in roman and italic type follow-
ing the parentheses refer to the Internal Rev-
enue Bulletin in which the item may be found
and the page number 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
Catch-up contributions for individuals age
50 or older (TD 9072) 37,527
Compensation deferred under eligible
section 457 plans (TD 9075) 39,608
Defined contribution plans, minimum
vesting standards (REG–112039–03)
35,504
ESOPs, prohibited allocations of securi-
ties in an S corporation (TD 9081) 35,
420; (REG–129709–03) 35,506
Excise tax:
Reversion (RR 85) 32,291
Statute of limitations (RR 88) 32,292
Full funding limitations, weighted aver-
age interest rate for:
July 2003 (Notice 48) 30,133
August 2003 (Notice 58) 35,429
September 2003 (Notice 63) 38,577
Group health plan, COBRA, small em-
ployer plan exception (RR 70) 27,3
Minimum funding, entry age normal (RR
83) 30,128
Mortality tables, comments (Notice 62)
38,576
Nonbank trustees and nonbank custodi-
ans, approval list (Ann 54) 40,761
Proposed Regulations:
EMPLOYEE
PLANS—Cont.
26 CFR 1.401(k)–0, –1, revised;
1.401(k)–2 through –6, added;
1.401(m)–0 through –2, revised;
1.401(m)–3 through –5, added; re-
tirement plans; cash or deferred
arrangements under section 401(k)
and matching contributions or em-
ployee contributions under section
401(m) (REG–108639–99) 35,431
26 CFR 1.409(p)–1, added; prohibited
allocations of securities in an S cor-
poration (REG–129709–03) 35,506
26 CFR 1.411(d)–4, amended; elim-
ination of forms of distribution
in defined contribution plans
(REG–112039–03) 35,504
Qualified retirement plans:
Determination letter requests, mini-
mum distributions (RP 72) 38,578
Special rules for written explanations
after annuity starting dates (TD
9076) 38,562
Regulations:
26 CFR 1.402(g)–2, added;
1.414(v)–1, added; catch-up con-
tributions for individuals age 50 or
older (TD 9072) 37,527
26 CFR 1.409(p)–1T, added; prohib-
ited allocations of securities in an S
corporation (TD 9081) 35,420
26 CFR 1.417(e)–1, amended;
602.101, amended; special rules
under section 417(a)(7) for written
explanations provided by qualified
retirement plans after annuity start-
ing dates (TD 9076) 38,562
26 CFR 1.419A(f)(6)–1, added;
602.101, amended; 10 or more
employer plans (TD 9079) 40,729
26 CFR 1.475–1 through –4, re-
vised; 1.475–5 through –12, added;
602.101, amended; compensation
deferred under eligible section 457
deferred compensation plan (TD
9075) 39,608
Retirement plans, cash or deferred ar-
rangements under section 401(k) and
matching contributions or employee
contributions under section 401(m)
(REG–108639–99) 35,431
Ten-or-more employer plans, employer
deductions for contributions to welfare
benefit funds (TD 9079) 40,729
EMPLOYEE
PLANS—Cont.
User fees for determination letters, elimi-
nation (Notice 49) 32,294
EMPLOYMENT TAX
Extension of time, automatic extension
to file certain information returns and
exempt organization returns (TD 9061)
27,5; (REG–107618–02) 27,13
Federal unemployment tax deposits – de
minimis threshold (REG–144908–02)
38,593
Offers in compromise, submission and
processing (RP 71) 36,517
Proposed Regulations:
26 CFR 1.6081–1, amended;
1.6081–8, –9, added; 31.6081(a)–1,
revised; automatic extension of time
to file certain information returns
and exempt organization returns
(REG–107618–02) 27,13
26 CFR 31.6302(c)–3, amended;
federal unemployment tax de-
posits – de minimis threshold
(REG–144908–02) 38,593
Regulations:
26 CFR 1.6081–1T, removed; 1.6081–
8T, –9T, added; 31.6011(a)–5,
amended; 31.6051–1(d)(2)(i)(c),
amended; 31.6051–2(c), amended;
31.6081(a)–1, amended; 31.6081
(a)–1T, added; 602.101, amended;
automatic extension of time to file
certain information returns and ex-
empt organization returns (TD 9061)
27,5
Split-dollar life insurance arrangements,
obsolete rulings (RR 105) 40,696
ESTATE TAX
Charitable guaranteed annu
ity and uni-
trust interests, requireme
nts for qualifi-
cation (TD 9068) 37,538
Charitable lead trusts, sam
ple forms (No-
tice 39) 27,10
Charitable remainder annui
ty trusts:
Inter vivos:
For a term of years (RP 54) 31
,236
For one measuring life (RP 53
) 31,
230
October 6, 2003ix2003-40 I.R.B.

ESTATE TAX—Cont.
With concurrent and consecutive in-
terests for two measuring lives
(RP 56) 31,249
With consecutive interests for two
measuring lives (RP 55) 31,242
Testamentary:
For a term of years (RP 58) 31,262
For one measuring life (RP 57) 31,
257
With concurrent and consecutive in-
terests for two measuring lives
(RP 60) 31,274
With consecutive interests for two
measuring lives (RP 59) 31,268
Net gift treatment under section 2519 (TD
9077) 39,634
Offers in compromise, submission and
processing (RP 71) 36,517
Regulations:
26 CFR 20.2055–2, amended; defini-
tion of guaranteed annuity and uni-
trust interests (TD 9068) 37,538
26 CFR 20.2207A–1, amended; net
gift treatment under section 2519
(TD 9077) 39,634
EXCISE TAX
Golden parachute payments (TD 9083)
40,700
Group health plan, COBRA, small em-
ployer plan exception (RR 70) 27,3
Offers in compromise, submission and
processing (RP 71) 36,517
Regulations:
26 CFR 1.280G-1, added; 602.101,
amended; golden parachute pay-
ments (TD 9083) 40,700
Statute of limitations for employee plans
(RR 88) 32,292
Stocks, option valuation for purposes of
golden parachute payments (RP 68) 34,
398
Tax on reversion of qualified plan assets
to employer (RR 85) 32,291
EXEMPT
ORGANIZATIONS
Coverdell education savings accou
nt re-
porting (Notice 53) 33,362
Declaratory judgment suits (Ann 53
) 32,
345
EXEMPT
ORGANIZATIONS—Cont.
Extension of time, automatic extension
to file certain information returns and
exempt organization returns (TD 9061)
27,5; (REG–107618–02) 27,13
Fees for copies of publicly available ex-
empt organization material (TD 9070)
38,574; (REG–142538–02) 38,590
List of organizations classified as private
foundations (Ann 57) 37,555
Proposed Regulations:
26 CFR 1.6081–1, amended;
1.6081–8, –9, added; 31.6081(a)–1,
revised; automatic extension of time
to file certain information returns
and exempt organization returns
(REG–107618–02) 27,13
301.6104(a), amended; 301.6104(b),
amended; 301.6104(d), amended;
authority to charge fees for fur-
nishing copies of exempt orga-
nizations’ material open to pub-
lic inspection under section 6104
(REG–142538–02) 38,590
Regulations:
26 CFR 1.6081–1T, removed; 1.6081–
8T, –9T, added; 31.6011(a)–5,
amended; 31.6051–1(d)(2)(i)(c),
amended; 31.6051–2(c), amended;
31.6081(a)–1, amended; 31.6081
(a)–1T, added; 602.101, amended;
automatic extension of time to file
certain information returns and ex-
empt organization returns (TD 9061)
27,5
301.6104(a), amended; 301.6104(b),
amended; 301.6104(d), amended;
authority to charge fees for furnish-
ing copies of exempt organizations’
material open to public inspection
under section 6104 (TD 9070) 38,
574
Revocations (Ann 48) 28,73;(Ann52)
32,345
GIFT TAX
Charitable guaranteed annuity and uni-
trust interests, requirements for qualifi-
cation (TD 9068) 37,538
Charitable lead trusts, sample forms (No-
tice 39) 27,10
Charitable remainder annuity trusts:
GIFT TAX—Cont.
Inter vivos:
For a term of years (RP 54) 31,236
For one measuring life (RP 53) 31,
230
With concurrent and consecutive in-
terests for two measuring lives
(RP 56) 31,249
With consecutive interests for two
measuring lives (RP 55) 31,242
Testamentary:
For a term of years (RP 58) 31,262
For one measuring life (RP 57) 31,
257
With concurrent and consecutive in-
terests for two measuring lives
(RP 60) 31,274
With consecutive interests for two
measuring lives (RP 59) 31,268
Net gift treatment under section 2519 (TD
9077) 39,634
Offers in compromise, submission and
processing (RP 71) 36,517
Regulations:
26 CFR 25.2207A–1, amended;
25.2519–1, amended; net gift treat-
ment under section 2519 (TD 9077)
39,634
26 CFR 25.2522(c)–3, amended; defi-
nition of guaranteed annuity and uni-
trust interests (TD 9068) 37,538
Split-dollar life insurance arrangements,
obsolete rulings (RR 105) 40,696
INCOME TAX
Accounting, changes in accounting peri-
ods, automatic approval for individuals
(RP 62) 32,299;(Ann49)32,339
Advance refunding bonds, tax-exempt
bonds (RR 78) 29,76
Annuity contracts:
Tax-free exchanges (Notice 51) 33,
361
Tax-free exchanges and basis alloca-
tion (RR 76) 33,355
Assumption of a partner’s liabilities
not accounted for under section
752(a) and (b) (TD 9062) 28,46;
(REG–106736–00) 28,60
At-risk limitations; interest other than that
of a creditor (REG–209377–89) 36,521
Austria agreement on deferred payments
(Ann 58) 40,746
2003-40 I.R.B.xOctober 6, 2003

INCOME TAX—Cont.
Backup withholding rate, reduced for
amounts paid after December 31, 2002
(Ann 45) 28,73
Built-in gains, built-in losses (Notice 65)
40,747
Business incidental expenses, substantia-
tion while traveling away from home
(TD 9064) 36,508
California franchise tax, accrual of liabil-
ities (RR 90) 33,353
Capital gain reporting for 2002–2003 fis-
cal year entities (Ann 56) 39,694
Charitable guaranteed annuity and uni-
trust interests, requirements for qualifi-
cation (TD 9068) 37,538
Charitable remainder annuity trusts:
Inter vivos:
For a term of years (RP 54) 31,236
For one measuring life (RP 53) 31,
230
With concurrent and consecutive in-
terests for two measuring lives
(RP 56) 31,249
With consecutive interests for two
measuring lives (RP 55) 31,242
Testamentary:
For a term of years (RP 58) 31,262
For one measuring life (RP 57) 31,
257
With concurrent and consecutive in-
terests for two measuring lives
(RP 60) 31,274
With consecutive interests for two
measuring lives (RP 59) 31,268
Child’s attainment of an age (RR 72) 33,
346
Common trust fund, listed transaction,
straddle, tax shelter (Notice 54) 33,363
Compliance initiative, nonresident aliens
and foreign corporations (Notice 38)
27,9
Controlled foreign corporations, insur-
ance business treated as a domestic
corporation (RP 47) 28,55
Corporations:
Distributions of interests in a loss cor-
poration from qualified trusts (TD
9063) 36,510; (REG–108676–03)
36,523
Effect of section 338(h)(10) elec-
tions in certain multi-step trans-
actions (TD 9071) 38,560;
(REG–143679–02) 38,592
Outbound liquidations to foreign cor-
porations (TD 9066) 36,509
Spin-offs, stock distributions:
INCOME TAX—Cont.
Acquisition by an unrelated corpo-
ration (RR 79) 29,80
Requests for letter ruling or deter-
mination letter (RP 48) 29,86
Separation of two different busi-
nesses within the same corporate
group:
To concentrate on one business
(RR 74) 29,77
To resolve capital allocation
problem (RR 75) 29,79
Treatment of foreign stapled entity un-
der section 269B as domestic (No-
tice 50) 32,295
Credits:
Enhanced oil recovery credit, 2003 in-
flation adjustment (Notice 43) 28,50
Increasing research activities credit,
aggregate computation and alloca-
tion (REG–133791–02) 35,493
Low-income housing credit:
Carryovers to qualified states, 2003
National Pool (RP 67) 34,397
Community service facility under
section 42(d)(4)(C) of the Code
(RR 77) 29,75
Owners of low-income housing
projects (REG–131997–02) 33,
366
Satisfactory bond, “bond factor”
amounts for the period:
July through September 2003
(RR 93) 33,346
New markets tax credit:
Qualified community development
entities (CDEs) investments (No-
tice 64) 39,646
Qualified equity investments under
section 45D(b)(1)(C) (Notice 56)
34,396
Nonconventional source fuel credit,
qualified fuels under section
29(c)(1)(C), solid fuel from coal,
suspended private letter rulings
(Ann 46) 30,222
Declaratory judgment suits (Ann 53) 32,
345
Deductions, limitations of section 277
membership organizations (RR 73) 28,
44
Depreciation:
Changes in use (REG–138499–02) 37,
541
Ofassetsownedbyautility,usedin
the general business operations, as-
set class for (RR 81) 30,126
INCOME TAX—Cont.
Of vans and light trucks (TD 9069) 37,
525; (REG–138495–02) 37,541
Designated summonses and related sum-
monses (REG–208199–91) 40,756
Disaster relief for September 11, 2001,
terrorist attack for:
Additional first year depreciation, au-
tomatic extension (RP 50) 29,119
Depreciation and mid-quarter conven-
tion relief, automatic extension of
time to make election (Notice 45) 29,
86
Disciplinary actions involving attorneys,
certified public accountants, enrolled
agents, and enrolled actuaries (Ann 50)
30,222
Disclosure of return information by cer-
tain officers and employees for inves-
tigative purposes (TD 9073) 38,570;
(REG–140808–02) 38,582
Dual consolidated losses (TD 9084) 40,
742
Electronic and magnetic filing:
Requirements for submitting Form
8655 (RP 69) 34,403
Specifications for Forms 1098, 1099,
5498, and W-2G (RP 52) 30,134
Enhanced oil recovery credit, 2003 infla-
tion adjustment (Notice 43) 28,50
Entity classification for certain foreign el-
igible entities (Notice 46) 28,53
Equitable relief under section 66(c) or
section 6015(f) (RP 61) 32,296
Extension of time, automatic extension
to file certain information returns and
exempt organization returns (TD 9061)
27,5; (REG–107618–02) 27,13
Extraterritorialincome exclusion,
changes to Form 8873 and its in-
structions (Ann 47) 29,124
Foreign corporations, compliance initia-
tive (Notice 38) 27,9
Foreign earned income from a restricted
country (Notice 52) 32,296
Foreign trusts, Canadian retirement plan
trust reporting (Notice 57) 34,397
Forms:
1099–B and 1099–DIV, update to sub-
stitute forms specifications (Ann 55)
38,597
8655, Reporting Agent Authorization
for Magnetic Tape/Electronic Filers,
requirements (RP 69) 34,403
8873, Extraterritorial Income Exclu-
sion, changes to form and instruc-
tions (Ann 47) 29,124
October 6, 2003xi2003-40 I.R.B.

INCOME TAX—Cont.
Golden parachute payments (TD 9083)
40,700
Government obligations, state and subdi-
visions:
Allocation deadline for private activity
bond state ceiling (Notice 41) 28,49
Assignment deadline for private activ-
ity bond volume cap (Notice 42) 28,
49
Carryforward election of unused pri-
vate activity bond volume cap (RP
46) 28,54
Innocent spouse relief (Ann 51) 37,555
Insurance companies:
Foreign insurance companies, mini-
mum effectively connected net in-
vestment income (RP 70) 34,406
Life insurance companies, variable
contracts (RR 91) 33,347
Life insurance contracts, change in
benefits (RR 95) 33,358
Interest:
Deductibility, note-forward contract
units (RR 97) 34,380
Investment:
Federal short-term, mid-term, and
long-term rates for:
July 2003 (RR 71) 27,1
August 2003 (RR 94) 33,357
September 2003 (RR 101) 36,
513
Rates:
Underpayments and overpayments,
quarter beginning:
October 1, 2003 (RR 104) 39,
636
Inventory:
LIFO, price indexes used by depart-
ment stores for:
May 2003 (RR 87) 29,82
June 2003 (RR 100) 34,385
July 2003 (RR 103) 38,568
Valuation, acquired in liquidation of
lump sum purchase (RP 51) 29,121
Lease strips:
Reallocation of income and deductions
among unrelated parties (RR 96) 34,
386
Tax consequences (Notice 55) 34,395
Marginal production rates, 2003 (Notice
44) 28,52
Marginal properties, oil and gas produc-
tion, depletion, 2003 percentages (No-
tice 44) 28,52
Methods of accounting:
INCOME TAX—Cont.
Cable television systems, depreciation
(RP 63) 32,304
LIFO, automatic consent (RP 45) 27,
11
Uniform capitalization (Notice 59) 35,
429
New York Liberty Bonds, tax-exempt
bonds (Notice 40) 27,10
Nonconventional source fuel credit, qual-
ified fuels under section 29(c)(1)(C),
solid fuel from coal, suspended private
letter rulings (Ann 46) 30,222
Nonresident aliens, compliance initiative
(Notice 38) 27,9
Notarized statements of purchase under
section 1042 (REG–121122–03) 37,
550
Offers in compromise, submission and
processing (RP 71) 36,517
Partnerships:
Diversification requirements for
variable annuity, endowment,
and life insurance contracts
(REG–163974–02) 38,595
Returns required with respect to con-
trolled foreign partnerships (TD
9065) 36,515
Variable annuity or life insurance con-
tracts (RR 92) 33,350
Payments in lieu of dividends, informa-
tion reporting for (Notice 67) 40,752
Penalties, requirements for waiver
of information reporting penalties
(REG–141669–02) 34,408
Private foundations, organizations now
classified as (Ann 57) 37,555
Proposed Regulations:
26 CFR 1.41–0, –6, amended; credit
for increasing research activities
(REG–133791–02) 35,493
26 CFR 1.42–6, –8, –12, –14,
amended; section 42 carryover
and stacking rule amendments
(REG–131997–02) 33,366
26 CFR 1.83–7, amended; trans-
fers of compensatory options
(REG–116914–03) 32,338
26 CFR 1.108–7, added; 1.1017–1,
amended; reduction of tax attributes
due to discharge of indebtedness
(REG-113112–03) 40,760
26 CFR 1.141–0, –12, –15, –16,
amended; 1.142–0, –2, amended;
remedial actions for tax-exempt
bonds (REG–132483–03) 34,410
INCOME TAX—Cont.
26 CFR 1.168(a)–1, added;
1.168(b)–1, added; 1.168(i)–0,
–1, amended; 1.168(i)–4, added;
changes in use under section
168(i)(5) (REG–138499–02 37,
541
26 CFR 1.280F–6, amended; depre-
ciation of vans and light trucks
(REG–138495–02) 37,541
26 CFR 1.338(h)(10)(1), amended; ef-
fect of section 338(h)(10) elections
in certain multi-step transactions
(REG–143679–02) 38,592
26 CFR 1.358–7, added; 1.704–1,
–2, amended; 1.705–1, amended;
1.752–0, amended; 1.752–1, –5,
amended; 1.752–6, –7, added;
assumption of partner liabilities
(REG–106736–00) 28,60
26 CFR 1.382–1, amended; 1.382–10,
added; distributions of interests in
a loss corporation from qualified
trusts (REG–108676–03) 36,523
26 CFR 1.421–1 through –7 , removed;
1.421–7 redesignated as 1.421–1
and amended; 1.421–8 redesignated
as 1.421–2 and amended; 1.422–1,
–2, –4, –5, added; 1.422–4, re-
moved; 1.422–5 redesignated as
1.422–3; 1.423–1, –2, amended;
1.425–1 redesignated as 1.424–1
and amended; 1.6039–1, removed;
1.6039–2 redesignated as 1.6039–1
and revised; statutory options
(REG–122917–02) 27,15
26 CFR 1.446–6, added; 1.860A–0,
amended; 1.860C–1, amended;
1.863–0, –1, amended; REMICs;
application of section 446 with
respect to inducement fees
(REG–162625–02) 35,500
26 CFR 1.465–8, –20, amended;
at-risk limitations;interest
other than that of a creditor
(REG–209377–89) 36,521
26 CFR 1.817–5, amended; diversi-
fication requirements for variable
annuity, endowment, and life insur-
ance contracts (REG–163974–02)
38,595
26 CFR 1.1042–1T, amended; nota-
rized statements of purchase under
section 1042 (REG–121122–03) 37,
550
2003-40 I.R.B.xiiOctober 6, 2003

INCOME TAX—Cont.
26 CFR 1.1502–31, amended; stock
basis after a group structure change
(REG–130262–03) 37,553
26 CFR 1.6081–1, amended;
1.6081–8, –9, added; 31.6081(a)–1,
revised; automatic extension of time
to file certain information returns
and exempt organization returns
(REG–107618–02) 27,13
26 CFR 301.6103(k)(6)–1T, added;
disclosure of return information
by certain officers and employ-
ees for investigative purposes
(REG–140808–02) 38,582
26 CFR 301.6503(j)–1, added; suspen-
sion of running of period of limi-
tations during a proceeding to en-
force or to quash a designated or re-
lated summons (REG–208199–91)
40,756
26 CFR 301.6724–1, amended; waiver
of information reporting penalties
(REG–141669–02) 34,408
26 CFR 301.9000–1, revised;
301.9000–2 through –7, added; tes-
timony or production of records
in a court or other proceeding
(REG–140930–02) 38,583
Publications:
1167, substitute forms, general re-
quirements (RP 73) 39,647
1220, Specifications for Filing Forms
1098, 1099, 5498, and W-2G Elec-
tronically or Magnetically (RP 52)
30,134
Qualified census tracts, issuers of qual-
ified mortgage bonds and mortgage
credit certificates; correction (RP 49)
29,89
Qualified subchapter S election for testa-
mentary trusts (TD 9078) 39,630
Qualified tertiary injectant expenses and
enhanced oil recovery credit (RR 82)
30,125
Real estate investment trusts (REITs):
Loans from (RP 65) 32,336
Taxable REIT subsidiaries (TRSs) and
independent contractors, rents (RR
86) 32,290
Taxable subsidiaries (TSRs) (RP 66)
33,364
Reduction of tax attributes due to dis-
charge of indebtedness (TD 9080) 40,
696; (REG-113112–03) 40,760
Regulated investment company (RIC), re-
funded bonds (RR 84) 32,289
INCOME TAX—Cont.
Regulations:
26 CFR 1.62–2, amended; 1.274–5,
–5T, amended; substantiation of in-
cidental expenses (TD 9064) 36,508
26 CFR 1.66–1 through –5, added;
602.101, amended; treatment of
community income for certain indi-
viduals not filing joint returns (TD
9074) 39,601
26 CFR 1.83–7, amended; 1.83–7T,
added; transfers of compensatory
options (TD 9067) 32,287
26 CFR 1.108–7T, added; 1.1017–1,
amended; 1.1017–1T, added; reduc-
tion of tax attributes due to discharge
of indebtedness (TD 9080) 40,696
26 CFR 1.170A–6, amended; defini-
tion of guaranteed annuity and uni-
trust interests (TD 9068) 37,538
26 CFR 1.280F–6T, amended; depre-
ciation of vans and light trucks (TD
9069) 37,525
26 CFR 1.280G-1, added; 602.101,
amended; golden parachute pay-
ments (TD 9083) 40,700
26 CFR 1.338–3, amended;
1.338(h)(10)(1),amended;
1.338(h)(10)–1T, added; effect of
section 338(h)(10) elections in cer-
tain multi-step transactions (TD
9071) 38,560
26 CFR 1.367(e)–2, amended; out-
bound liquidations into foreign cor-
porations (TD 9066) 36,509
26 CFR 1.382–1, amended;
1.382–10T, added; distributions
of interests in a loss corporation
from qualified trusts (TD 9063) 36,
510
26 CFR 1.752–6T, added; assumption
of partner liabilities (TD 9062) 28,
46
26 CFR 1.1361–1, amended; qualified
subchapter S trust election for testa-
mentary trusts (TD 9078) 39,630
26 CFR 1.1503–2, amended; 602.101,
amended; dual consolidated loss re-
capture events (TD 9084) 40,742
26 CFR 1.6038–3, revised, 1.6038–3T,
removed; 602.101, amended; sec-
tion 6038 – returns required with re-
spect to controlled foreign partner-
ships (TD 9065) 36,515
26 CFR 1.6081–1T, removed; 1.6081–
8T, –9T, added; 31.6011(a)–5,
amended; 31.6051–1(d)(2)(i)(c),
INCOME TAX—Cont.
amended; 31.6051–2(c), amended;
31.6081(a)–1, amended; 31.6081
(a)–1T, added; 602.101, amended;
automatic extension of time to file
certain information returns and ex-
empt organization returns (TD 9061)
27,5
26 CFR 301.6103(k)(6)–1, removed;
301.6103(k)(6)–1T, added; disclo-
sure of return information by certain
officers and employees for investiga-
tive purposes (TD 9073) 38,570
REMICs, residual interests, inducement
fees (REG–162625–02) 35,500
Revocations, exempt organizations (Ann
48) 28,73; (Ann 52) 32,345
Rulings, obsolete (RR 99) 34,388
Self-insured medical reimbursement
plans (RR 102) 38,559
Split-dollar life insurance arrangements,
obsolete rulings (RR 105) 40,696
Standard Industry Fare Level (SIFL) for-
mula (RR 89) 37,525
Statute of limitations on assessment as af-
fected by bankruptcy (RR 80) 29,83
Stocks:
Deduction for compensatory stock op-
tion-related transactions following
certain corporate transactions (RR
98) 34,378
Determination of stock basis in a group
structure change (REG–130262–03)
37,553
Option valuation for purposes of
golden parachute payments (RP
68) 34,398
Statutory options (REG–122917–02)
27,15
Transfers of compensatory stock
options (TD 9067) 32,287;
(REG–116914–03) 32,338
Transfers of nonstatutory stock options
to related persons (Notice 47) 30,
132
Substitute forms:
General requirements (RP 73) 39,647
Update to rules and specifications for
Forms 1099–B and 1099–DIV (Ann
55) 38,597
Swiss Limitation on Benefits (LOB) com-
petent authority MAP agreement (Ann
59) 40,746
Tax-exempt bonds:
Advance refunding bonds (RR 78) 29,
76
October 6, 2003xiii2003-40 I.R.B.

INCOME TAX—Cont.
New York Liberty Bonds (Notice 40)
27,10
Remedial action rules, application
(REG–132483–03) 34,410
Tenancy by the entirety, federal tax lien
(Notice 60) 39,643
Testimony or production of records
in a court or other proceeding
(REG–140930–02) 38,583
Treatment of community income for cer-
tain individuals not filing a joint return
(TD 9074) 39,601
Withholding foreign partnership (WP)
and withholding foreign trust (WT)
agreements (RP 64) 32,306
SELF-EMPLOYMENT
Offers in compromise, submission and
processing (RP 71) 36,517
2003-40 I.R.B.xivOctober 6, 2003
*U.S.Government Printing Office: 2 003—4 96–9 19/60103