Internal Revenue Bulletin 2003-7 (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.

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. 2003–18, page 467.
Section 355.This ruling discusses whether the acquisition by
D, a brand X automobile dealer, of a brand Y automobile deal-
ership constitutes an expansion of the brand X business or an
acquisition of a new or different business under section 1.355–
3(b)(3)(ii) of the regulations. Rev. Rul. 57–190 obsoleted.
Rev. Rul. 2003–19, page 468.
Insurance demutualization.This ruling provides guidance as
to the tax consequences that occur when, as described in the
facts set forth in this ruling, a mutual insurance company con-
verts to a stock insurance company.
Rev. Rul. 2003–20, page 465.
New markets tax credit.This ruling holds that, for purposes
of determining the new markets tax credit under the facts of the
ruling, the amount of the qualified equity investment made by a
limited liability company (LLC) classified as a partnership in-
cludes cash from a nonrecourse loan to the LLC that the LLC in-
vests as equity in a qualified community development entity.
T.D. 9032, page 471
Final regulations provide guidance with respect to an election un-
der section 645 of the Code to have certain revocable trusts be
treated and taxed as part of an estate. These regulations also
provide reporting rules for a trust that is treated as owned by the
grantor, or another person under provisions of the Code for the
taxable year ending with the death of the grantor or other per-
son. Notice 2001–26 and Rev. Proc. 98–13 obsoleted.
T.D. 9033, page 483.
REG–124069–02, page 488.
Final, temporary, and proposed regulations under section 6038
of the Code provide that a United States partner must follow the
filing requirements that are specified in the instructions for Form
8865,Return of U.S. Persons With Respect to Certain For-
eign Partnerships, when the United States partner must file
Form 8865 and the foreign partnership completes and files
Form 1065,U.S. Return of Partnership Income, or Form
1065-B,U.S. Return for Electing Large Partnerships. This
amendment would facilitate revisions to the filing require-
ments such as electronic filing for Form 8865. A public hear-
ing on the proposed regulations is scheduled for March 12,
2003.
T.D. 9034, page 453.
Final regulations under section 25A of the Code relate to the edu-
cation tax credit for the payment of certain postsecondary edu-
cational expenses.
EXEMPT ORGANIZATIONS
Announcement 2003–10, page 490.
A list is provided of organizations now classified as private foun-
dations.
(Continued on the next page)
Bulletin No. 2003–7
February 18, 2003
Findings Lists begin on page ii.

ADMINISTRATIVE
REG–126016–01, page 486.
Proposed regulations under sections 6662 and 6664 of the Code
limit the defenses available to the imposition of the accuracy-
related penalty when taxpayers fail to disclose reportable trans-
actions or that they have taken a position based upon a regulation
being invalid. The regulations also clarify existing regulations with
respect to the facts and circumstances that the IRS will con-
sider in determining whether a taxpayer acted with reasonable
cause and in good faith in relying on an opinion or advice.
Announcement 2003–9, page 490.
This document contains corrections to proposed regulations
(REG–150313–01, 2002–44 I.R.B. 777) under sections 302,
304, and other sections of the Code providing guidance regard-
ing the treatment of the basis of redeemed stock when a distri-
bution in redemption of such stock is treated as a dividend.
February 18, 20032003–7 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of the
Commissioner of Internal Revenue for announcing official rul-
ings and procedures of the Internal Revenue Service and for pub-
lishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super-
intendent of Documents on a subscription basis. Bulletin contents
are consolidated semiannually into Cumulative Bulletins, which
are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify,
or amend any of those previously published in the Bulletin. All pub-
lished rulings apply retroactively unless otherwise indicated. Pro-
cedures relating solely to matters of internal management are
not published; however, statements of internal practices and pro-
cedures that affect the rights and duties of taxpayers are pub-
lished.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpay-
ers or technical advice to Service field offices, identifying de-
tails and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be re-
lied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and pro-
cedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Ser-
vice personnel and others concerned are cautioned against reach-
ing the same conclusions in other cases unless the facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
cluded in this part are Bank Secrecy Act Administrative Rulings.
Bank Secrecy Act Administrative Rulings are issued by the De-
partment of the Treasury’s Office of the Assistant Secretary (En-
forcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual pe-
riod, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2003–7 I.R.B.February 18, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 25A.—Hope and
Lifetime Learning Credits
26 CFR 1.25A–1: Calculation of education tax
credit and general eligibility requirements.
T.D. 9034
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Education Tax Credit
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the Hope Schol-
arship Credit and the Lifetime Learning
Credit under section 25A of the Internal
Revenue Code. The final regulations re-
flect changes made to the law by the Tax-
payer Relief Act of 1997. These regulations
provide guidance to individuals who may
claim the Hope Scholarship Credit or the
Lifetime Learning Credit for the payment
of certain postsecondary educational ex-
penses.
DATES:Effective Date:These regula-
tions are effective December 26, 2002.
Applicability Dates:For dates of appli-
cability, see § 1.25A–3(f) and § 1.25A
–4(d).
FOR FURTHER INFORMATION CON-
TACT: Marilyn E. Brookens, (202) 622–
4920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the Pa-
perwork Reduction Act of 1995 (44 U.S.C.
3507) under control number 1545–1630.
Responses to this collection of informa-
tion are mandatory.
The collection of information is in
§ 1.25A–1(d) and (f). Taxpayers must elect
to claim an education credit by attaching
Form 8863, “Education Credits (Hope and
Lifetime Learning Credits),” to a federal in-
come tax return for the taxable year in
which a credit is claimed. This collection
of information is required in order for a tax-
payer to elect to claim an education credit.
This information will be used to carry out
the internal revenue laws. The likely re-
spondents are individuals.
The reporting burden contained in
§ 1.25A–1(d) and (f) is reflected in the bur-
den of Form 8863, “Education Credits
(Hope and Lifetime Learning Credits),” and
Form 1040, “U.S. Individual Income Tax
Return.”
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
it displays a valid control number.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) regarding the Hope Scholarship Credit
and the Lifetime Learning Credit (educa-
tion tax credit) under section 25A of the In-
ternal Revenue Code. The Taxpayer Relief
Act of 1997 (Public Law 105–34 (111 Stat.
788) (TRA ’97)) added section 25A to pro-
vide the education tax credit. In general, the
education tax credit allows taxpayers to
claim a nonrefundable credit against their
federal income tax for the payment of cer-
tain postsecondary educational expenses.
The Economic Growth and Tax Relief Rec-
onciliation Act of 2001 (Public Law 107–16
(115 Stat. 38)) added section 222 of the In-
ternal Revenue Code to provide an above-
the-line deduction for certain postsecondary
education expenses paid in taxable years be-
ginning after December 31, 2001, and be-
fore January 1, 2006. Section 222 is an
alternative to section 25A, and taxpayers
cannot claim a section 222 deduction and
a section 25A education tax credit in the
same year with respect to the same stu-
dent.
On November 17, 1997, the IRS pub-
lished Notice 97–60, 1997–2 C.B. 310, to
provide general guidance on the higher edu-
cation tax incentives enacted by TRA ’97,
including the education tax credit. A no-
tice of proposed rulemaking (REG–106388–
98, 1999–1 C.B. 756 [64 FR 794]) was
published in theFederal Registeron Janu-
ary 6, 1999. One request for a public hear-
ing was received. However, the request was
withdrawn, and no public hearing was held.
The IRS received written and electronic
comments responding to the notice of pro-
posed rulemaking. After consideration of all
the comments, the proposed regulations are
adopted as amended by this Treasury de-
cision. The revisions are discussed below.
Explanation of Provisions and
Summary of Comments
1.Reporting Requirements Under
Section 6050S for Eligible Educational
Institutions
Many commentators requested clarifi-
cation of the information reporting require-
ments under section 6050S for eligible
educational institutions (institutions) that re-
ceive payments of qualified tuition and re-
lated expenses (qualified expenses). These
comments are outside the scope of sec-
tion 25A, which relates solely to the edu-
cation tax credit allowable to taxpayers for
payments of qualified expenses. However,
these comments were considered by the IRS
and the Treasury Department in drafting the
proposed regulations under section 6050S
that were published in theFederal Regis-
ter(REG–161424–01, 2002–21 I.R.B. 1010
[67 FR 20923]) on April 29, 2002.
2.Calculation of Education Tax Credit
and General Eligibility Requirements
Several commentators recommended
changes to the rules for calculating the
amount of any allowable education tax
credit. One commentator recommended that
the calculation of the Hope Scholarship
Credit be simplified so that the credit is al-
lowable for the first $1,500 of qualified ex-
penses, rather than 100 percent of the first
$1,000 of qualified expenses, and 50 per-
cent of the next $1,000 of qualified ex-
penses as provided in section 25A(b)(1).
This commentator also recommended that
the calculation of the Lifetime Learning
2003–7 I.R.B.453February 18, 2003

Credit be simplified so that the credit is al-
lowable for the first $1,000 of qualified ex-
penses, rather than 20 percent of the first
$5,000 of qualified expenses as provided in
section 25A(c)(1). Another commentator
recommended that, for purposes of the in-
come limitations in section 25A(d), in-
come realized on the conversion of a
traditional Individual Retirement Account
(IRA) to a Roth IRA should be excluded
from the definition of modified adjusted
gross income. The rules in the proposed
regulations regarding calculation of the
amount of the education tax credit and the
definition of modified adjusted gross in-
come derive from the statutory provisions
of section 25A. Therefore, the final regu-
lations do not adopt these recommenda-
tions.
Commentators requested clarification of
the rules for claiming the education tax
credit in the case of a dependent. Consis-
tent with the legislative history to section
25A,§1.25A–1(g) of the proposed regu-
lations provides that if a student is a claimed
dependent of a taxpayer, only that tax-
payer may claim the education tax credit
for the student’s qualified expenses; how-
ever, if the taxpayer is eligible to, but does
not claim the student as a dependent, only
the student may claim the education tax
credit for the student’s qualified expenses.
The final regulations retain this rule.
Commentators asked how the student’s
personal exemption deduction amount un-
der section 151 is calculated if a parent does
not claim the student as a dependent on the
parent’s income tax return in order that the
student may claim the education tax credit
on the student’s income tax return. Sec-
tion 151(d)(2) provides a special rule for
calculating the exemption deduction amount
in the case of an individual (for example,
a student) for whom a dependency exemp-
tion deduction is allowable to another tax-
payer (for example, a parent). Under this
rule, a student’s personal exemption de-
duction amount is zero on the student’s in-
come tax return if a parent is eligible to
claim the student as a dependent even if the
parent does not in fact claim a dependency
exemption deduction for the student. The
result is the same if the amount of the de-
pendency exemption deduction allowable
to the parent is reduced or eliminated un-
der the phase-out rule in section 151(d)(3).
Consistent with section 25A(g)(7), the
proposed regulations provide that a non-
resident alien individual is not eligible to
claim an education tax credit, unless the in-
dividual is treated as a resident alien of the
United States by reason of an election un-
der section 6013(g) or (h). One commen-
tator suggested thatExamples 7and8in
§1.25A–3(d)(2) of the proposed regula-
tions should be revised to avoid any con-
fusion about the eligibility of a nonresident
alien student to claim an education tax
credit. The final regulations modify these
examples to avoid any implication that a
nonresident alien student may claim an edu-
cation tax credit, in the absence of an elec-
tion under section 6013(g) or (h).
Another commentator requested clari-
fication as to whether a nonresident alien
individual who elects to be treated as a resi-
dent alien may claim an education tax
credit. A limited number of income tax trea-
ties allow certain individuals to elect to be
treated as residents of the United States. Be-
cause such an election is intended to ap-
ply for all tax purposes, an individual for
whom a valid election under a treaty is in
effect is treated as a resident for purposes
of section 25A.
3.Definitions
Several commentators requested clari-
fication of the definition ofacademic pe-
riod.The proposed regulations provide that
academic period means a quarter, semes-
ter, trimester, or other period of study (such
as a summer school session) as reason-
ably determined by the eligible educa-
tional institution. As stated in the preamble
of the proposed regulations, this defini-
tion is intended to include institutions that
use traditional academic terms and insti-
tutions that do not use academic terms, but
for example use clock hours or credit hours.
The IRS and the Treasury Department in-
vited comments on the proposed defini-
tion. One commentator suggested that the
final regulations provide that, in the case
of institutions that use clock hours or credit
hours, but do not use traditional academic
terms, the term academic period may in-
clude apayment periodas defined by the
Department of Education in 34 CFR 668.4.
The final regulations adopt this recommen-
dation.
Several commentators requested clari-
fication of the definition ofqualified tu-
ition and related expenses.The proposed
regulations define qualified tuition and re-
lated expenses to mean tuition and fees re-
quired for the enrollment or attendance of
a student for courses of instruction at an eli-
gible educational institution. The proposed
regulations provide that, in general, the test
for determining whether a fee is a quali-
fied expense is whether the fee is required
to be paid to the institution as a condition
of the student’s enrollment or attendance at
the institution. However, the proposed regu-
lations also provide that qualified expenses
do not include the costs of room and board,
insurance, medical expenses, transporta-
tion, and similar personal, living, or fam-
ily expenses, regardless of whether the
payment of such fees is required for the stu-
dent’s enrollment or attendance. The fi-
nal regulations retain these rules.
One commentator requested clarifica-
tion as to whether an education tax credit
is allowable for amounts paid in one year
for an independent study course which the
student has up to two years to complete.
The proposed regulations provide that quali-
fied expenses paid in one taxable year may
qualify for an education tax credit in the
year of the payment if the expenses re-
late to education furnished during an aca-
demic period beginning in the year of
payment or within the first three months of
the next taxable year. The final regula-
tions retain this rule. Therefore, an educa-
tion tax credit is allowable for qualified
expenses paid in one taxable year for in-
dependent study during an academic pe-
riod that begins in the taxable year of
payment or within the first three months of
the next taxable year.
One commentator requested clarifica-
tion as to when amounts paid for books are
qualified expenses. The proposed regula-
tions provide that, in general, an educa-
tion tax credit is not available for expenses
incurred to purchase books. The final regu-
lations continue to provide that qualified ex-
penses include fees for books, supplies, and
equipment used in a course of study only
if the fees must be paid to the institution
for the enrollment or attendance of the stu-
dent at the institution. In this situation, the
amount paid for books is a required fee.
Other commentators requested clarifi-
cation as to whether a required student
health service fee and a required transpor-
tation fee are qualified expenses. Consis-
tent with the legislative history to section
25A, the final regulations continue to pro-
vide that qualified expenses do not in-
clude fees for room and board, insurance,
February 18, 20034542003–7 I.R.B.

medical expenses, transportation, and simi-
lar personal, living, or family expenses, re-
gardless of whether the fee must be paid to
the institution as a condition of the stu-
dent’s enrollment or attendance. There-
fore, a required student health fee and a
required transportation fee are not quali-
fied expenses. The final regulations clarify
that, as stated in the preamble to the pro-
posed regulations, medical expenses in-
clude student health fees.
Several commentators requested clari-
fication of how a required general fee (re-
ferred to as abundled fee) should be treated
in calculating the amount of qualified ex-
penses. These commentators explained that
often institutions will charge a bundled fee
that includes charges for both qualified ex-
penses and personal expenses. These com-
mentators note that, unlike a comprehensive
fee, a bundled fee normally does not in-
clude tuition charges.
Section 1.25A–2(d)(4) of the proposed
regulations describes the treatment of a
comprehensive fee, which typically in-
cludes charges for tuition, fees, and per-
sonal expenses. The proposed regulations
provide that the portion of the comprehen-
sive fee that is allocable to personal ex-
penses is not a qualified expense, and
require institutions to make a reasonable al-
location between qualified expenses and
personal expenses. One commentator rec-
ommended that the final regulations pro-
vide a similar allocation rule for bundled
fees. Another commentator recommended
that institutions should not be required to
allocate a bundled fee that includes an in-
substantial amount of personal expenses.
Because personal expenses do not qualify
for the education tax credit, the final regu-
lations clarify that the allocation rule in
§1.25A–2(d)(4) applies to any required fee
that combines charges for both qualified ex-
penses and personal expenses (such as com-
prehensive fees and bundled fees).
One commentator noted that, under the
definition of ahobby coursein§1.25A–
2(d)(5) of the proposed regulations, one stu-
dent may be enrolled in a course to receive
academic credit toward a degree, another
student may be enrolled in the same course
on a noncredit basis to acquire or improve
job skills, while a third student may be en-
rolled in the same course as a hobby. Un-
der the proposed regulations, the first and
second students may be eligible to claim an
education tax credit, but the third student
is not. Consistent with sections 25A(c)(2)
and 25A(f)(1)(B), the final regulations con-
tinue to provide that expenses paid for
courses that involve sports, games, or hob-
bies, or any noncredit course, are not quali-
fied expenses, unless the course is part of
the individual’s degree program, or, in the
case of the Lifetime Learning Credit, the
student takes the course to acquire or im-
prove job skills.
4.Hope Scholarship Credit
Several commentators requested clari-
fication of the definition of aneligible stu-
dentfor purposes of the Hope Scholarship
Credit. One commentator recommended that
theyear of study requirementin the regu-
lations should be eliminated and that the
credit should be allowed for any two years
of undergraduate study. The year of study
requirement derives from the statutory re-
quirements in section 25A. Therefore, the
final regulations do not adopt this recom-
mendation.
Another commentator requested clari-
fication as to whether a student who com-
pletes a one-year postsecondary certificate
program and in a later year completes an-
other one-year postsecondary certificate pro-
gram (or enrolls in a postsecondary degree
program) may claim a Hope Scholarship
Credit for both years. The final regula-
tions include a new example in§1.25A–
3(d)(2) that illustrates that the Hope
Scholarship Credit is allowable for the first
two years of postsecondary education,
which may include two one-year certifi-
cate programs.
Commentators requested clarification of
Example 3in§1.25A–3(d)(2). The com-
mentators asked if an otherwise eligible stu-
dent who has not completed the first two
years of undergraduate study as of the be-
ginning of the taxable year may include
qualified expenses paid during the entire
taxable year in calculating the Hope Schol-
arship Credit, even if the student com-
pletes the first two years of undergraduate
study during the year. The example has been
revised to clarify that, if a student has not
completed the first two years of under-
graduate study as of the beginning of the
taxable year, the qualified expenses paid
during the entire taxable year may be taken
into account in calculating the Hope Schol-
arship Credit. However, in no event may a
Hope Scholarship Credit be claimed for
more than two taxable years with respect
to the same student.
5.Special Rules Relating to
Characterization and Timing of
Payments
Several commentators requested clari-
fication of the rules for payments of quali-
fied expenses by a third party. One
commentator asked how the third party pay-
ment rule in§1.25A–5 of the proposed
regulations applies in the case of a tax-
payer who, although not divorced, is not
treated as married within the meaning of
section 7703. The proposed regulations pro-
vide that if a third party (someone other
than the taxpayer, the taxpayer’s spouse, or
a claimed dependent) pays qualified ex-
penses on behalf of a student directly to an
institution, the student is treated as receiv-
ing the payment from the third party and,
in turn, paying the qualified expenses to the
institution. The final regulations clarify that,
for purposes of§1.25A–5(b), a third party
includes the spouse of a taxpayer who is not
treated as married under section 7703. Thus,
for example, if the taxpayer is a custodial
parent who is not treated as married un-
der section 7703, then (assuming that the
taxpayer claims the student as a depen-
dent) the taxpayer may claim an educa-
tion tax credit for qualified expenses paid
by the noncustodial parent on behalf of the
student.
One commentator requested clarifica-
tion as to whether an education tax credit
is allowable for the amount of any tuition
reduction provided by an eligible educa-
tional institution to its employees, or their
spouses or dependent children. The final
regulations provide in§1.25A–5(b)(2) that
an education tax credit is allowable for the
amount of any reduction in tuition only if
the amount of the tuition reduction is in-
cluded in the employee’s gross income.
Several commentators requested clari-
fication of the rules in§1.25A–5(c) of the
proposed regulations for reducing the
amount of qualified expenses paid during
the taxable year by the amount of certain
tax-free educational assistance (including
any qualified scholarship that is exclud-
able from gross income under section 117)
received during the taxable year. The pro-
2003–7 I.R.B.455February 18, 2003

posed regulations provide a rule for allo-
cating scholarships between qualified
expenses and expenses that do not qualify
for an education tax credit under section
25A (nonqualified expenses). The pro-
posed regulations provide that a scholar-
ship will be treated as allocated to qualified
expenses, and thus as a qualified scholar-
ship that reduces qualified expenses, un-
less the student includes the scholarship in
income or the terms of the scholarship re-
quire that it be applied to nonqualified ex-
penses.
Several commentators asked whether a
student may choose to include in income
a restricted scholarship that, by its terms,
must be used to pay qualified expenses and
claim an education tax credit for quali-
fied expenses covered by the scholarship.
The test for purposes of section 25A is
whether the scholarship is excludable from
gross income under section 117, and not
whether the student elects to include the
scholarship in income. The legislative his-
tory to section 25A states that qualified ex-
penses do not include expenses covered by
“education assistance that is not required to
be included in the gross income of either
the student or the taxpayer claiming the
credit.”See H.R. Conf. Rep. No. 220, 105th
Cong., 1st Sess., at 343 (1997). Section 117
provides, in general, that gross income shall
not include a scholarship that, consistent
with the terms of the scholarship, is used
to pay certain qualified expenses. A re-
stricted scholarship that must be used to pay
qualified expenses is a qualified scholar-
ship excludable under section 117. There-
fore, for purposes of section 25A, a
restricted scholarship that must be used to
pay qualified expenses reduces the amount
of qualified expenses that may be taken into
account in calculating the education tax
credit.
An unrestricted scholarship that may be
used to pay any of the student’s costs of at-
tendance (such as room and board and any
other incidental expenses) is excludable
from gross income only if used to pay
qualified expenses. To the extent that an un-
restricted scholarship, or a portion thereof,
is used to pay nonqualified expenses and
such use is consistent with the terms of the
scholarship, the scholarship is not a quali-
fied scholarship excludable under section
117. In this situation, the scholarship is in-
cluded in gross income and will not re-
duce the amount of qualified expenses that
may be taken into account in calculating the
education tax credit. The final regulations
clarify that, for purposes of section 25A, a
scholarship or fellowship grant is treated as
a qualified scholarship excludable under
section 117 (thereby reducing the amount
of qualified expenses) except to the extent:
(1) the scholarship may be applied, by its
terms, to expenses other than qualified ex-
penses (such as room and board) and the
student reports the scholarship as income;
or (2) the scholarship must be applied, by
its terms, to expenses other than qualified
expenses (such as room and board) and the
student reports the scholarship as income.
One commentator recommended that the
final regulations provide that loans are not
excludable educational assistance within the
meaning of§1.25A–5(c), and do not re-
duce the amount of qualified expenses. Sec-
tion 1.25A–5(e)(3) of the proposed
regulations specifically provides that
amounts paid with loan proceeds may
qualify for the education tax credit. In ad-
dition, an example in§1.25A–5(c)(4) of the
proposed regulations provides that a loan
is not tax-free educational assistance within
the meaning of§1.25A–5(c). The final
regulations retain these specific provisions
on loans.
The proposed regulations provide that
expenses paid with loan proceeds disbursed
directly to an institution are, in general,
treated as paid on the date of the disburse-
ment of the proceeds. Several commenta-
tors recommended that, in accordance with
the Department of Education regulations in
34 CFR 668.164(a), the date of disburse-
ment should be the date the institution cred-
its the student’s account with the loan
proceeds and not the date the lender dis-
burses the loan proceeds to the institu-
tion. In general, 34 CFR 668.164 regulates
the disbursement of federal student loans
under Title IV of the Higher Education Act
of 1965 (including the Federal Perkins
Loan, Federal Family Education Loan, and
William D. Ford Direct Loan Program).
These rules require an institution to verify
that a student is enrolled and is otherwise
eligible to receive the loan proceeds be-
fore crediting the student’s account or re-
leasing the funds to the student. Consistent
with these Department of Education rules,
the final regulations clarify that the quali-
fied expenses paid with loan proceeds dis-
bursed directly to an institution are treated
as paid at the time the loan proceeds are ac-
tually credited to the student’s account. In
the case of Title IV loan programs, De-
partment of Education rules require the in-
stitution to notify the borrower of the date
and the amount of the disbursement at the
time the institution credits the student’s ac-
count. See 34 CFR 668.165(a)(2). How-
ever, the final regulations provide that if the
taxpayer does not know the date the insti-
tution credits the student’s account, the tax-
payer must treat the expenses as paid on the
last date for payment prescribed by the in-
stitution.
Several commentators requested clari-
fication as to when a taxpayer may claim
an education tax credit for qualified ex-
penses paid through a third party install-
ment payment plan. One commentator
explained that institutions and taxpayers
may contract with a third party install-
ment payment company to provide an in-
stallment payment plan for the institution’s
students. The commentator explained that,
in general, the company agrees to collect
tuition payments over a period of time (usu-
ally 10 months) and remit the payments to
the institution on a predetermined sched-
ule. The commentator asked whether a tax-
payer is treated as paying the qualified
expenses when the taxpayer pays the third
party installment payment company, or
when the third party disburses the funds to
the institution. The final regulations clarify
that when the expenses are treated as paid
for purposes of section 25A depends on
whether, under the terms of the install-
ment payment agreement, the third party is
acting as an agent of the taxpayer or as an
agent of the institution.
One commentator requested clarifica-
tion as to whether an education tax credit
is allowable for any amounts paid for quali-
fied expenses that are retained by the in-
stitution, under the institution’s refund
policy, when the student withdraws. Sec-
tion 1.25A–5(f)(1) of the proposed regu-
lations provides that the amount of qualified
expenses is calculated by adding all the
qualified expenses paid for the year, and
subtracting any refund received from the in-
stitution during the same year. The final
regulations retain this rule. Therefore,
amounts required to be paid for enroll-
ment or attendance are qualified expenses
to the extent that such amounts are not re-
funded when the student withdraws. The fi-
nal regulations add a new paragraph
§1.25A–5(f)(4) to clarify that, with re-
February 18, 20034562003–7 I.R.B.

spect to qualified expenses paid with the
proceeds of a loan, any refund of loan pro-
ceeds by the institution back to the lender
on behalf of the borrower is treated as a re-
fund of qualified expenses.
The proposed regulations provide that if
a taxpayer receives a refund of qualified ex-
penses paid in a prior taxable year before
the taxpayer files a federal income tax re-
turn for the prior year, the amount of quali-
fied expenses for the prior taxable year is
reduced by the amount of the refund. One
commentator suggested that the taxpayer
should have the option of claiming the
credit for the full amount of qualified ex-
penses paid in the prior taxable year and
then recapturing the credit on the return
filed for the taxable year in which the re-
fund was received. The rule in the pro-
posed regulations is intended to simplify the
calculation of the education tax credit by
avoiding the need to recompute the allow-
able education tax credit in a later year and
report any resulting increase in tax. There-
fore, the final regulations do not adopt the
recommendation.
The final regulations clarify that, in the
case of a payment of qualified expenses in
one taxable year and a refund of quali-
fied expenses in a subsequent taxable year,
the recapture amount for the refund year is
the difference in tax liability for the prior
taxable year (taking into account any re-
determination of such tax liability by au-
dit or amended return) that results when the
tax liability for the prior year is calcu-
lated using the taxpayer’s redetermined
credit.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not re-
quired. It also has been determined that sec-
tion 553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because the regula-
tions do not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the In-
ternal Revenue Code, the proposed regu-
lations preceding these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Drafting Information
The principal author of the regulations
is Donna Welch, Office of Associate Chief
Counsel (Procedure & Administration), Ad-
ministrative Provisions & Judicial Prac-
tice Division. However, other personnel
from the IRS and the Treasury Depart-
ment participated in the development of the
regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805***
Section 1.25A–1 also issued under sec-
tion 26 U.S.C. 25A(i).
Section 1.25A–2 also issued under sec-
tion 26 U.S.C. 25A(i).
Section 1.25A–3 also issued under sec-
tion 26 U.S.C. 25A(i).
Section 1.25A–4 also issued under sec-
tion 26 U.S.C. 25A(i).
Section 1.25A–5 also issued under sec-
tion 26 U.S.C. 25A(i).***
Par. 2. Sections 1.25A–0 through
1.25A–5 are added to read as follows:
§1.25A–0 Table of contents.
This section lists captions contained in
§§1.25A–1, 1.25A–2, 1.25A–3, 1.25A–4,
and 1.25A–5.
§1.25A–1 Calculation of education tax
credit and general eligibility
requirements.
(a) Amount of education tax credit.
(b) Coordination of Hope Scholarship
Credit and Lifetime Learning Credit.
(1) In general.
(2) Hope Scholarship Credit.
(3) Lifetime Learning Credit.
(4) Examples.
(c) Limitation based on modified ad-
justed gross income.
(1) In general.
(2) Modified adjusted gross income de-
fined.
(3) Inflation adjustment.
(d) Election.
(e) Identification requirement.
(f) Claiming the credit in the case of a
dependent.
(1) In general.
(2) Examples.
(g) Married taxpayers.
(h) Nonresident alien taxpayers and de-
pendents.
§1.25A–2 Definitions.
(a) Claimed dependent.
(b) Eligible educational institution.
(1) In general.
(2) Rules on federal financial aid pro-
grams.
(c) Academic period.
(d) Qualified tuition and related ex-
penses.
(1) In general.
(2) Required fees.
(i) In general.
(ii) Books, supplies, and equipment.
(iii) Nonacademic fees.
(3) Personal expenses.
(4) Treatment of a comprehensive or
bundled fee.
(5) Hobby courses.
(6) Examples.
§1.25A–3 Hope Scholarship Credit.
(a) Amount of the credit.
(1) In general.
(2) Maximum credit.
(b) Per student credit.
(1) In general.
(2) Example.
(c) Credit allowed for only two tax-
able years.
(d) Eligible student.
(1) Eligible student defined.
(i) Degree requirement.
(ii) Work load requirement.
(iii) Year of study requirement.
(iv) No felony drug conviction.
(2) Examples.
(e) Academic period for prepayments.
(1) In general.
(2) Example.
(f) Effective date.
§1.25A–4 Lifetime Learning Credit.
(a) Amount of the credit.
(1) Taxable years beginning before Janu-
ary 1, 2003.
(2) Taxable years beginning after De-
cember 31, 2002.
(3) Coordination with the Hope Schol-
arship Credit.
2003–7 I.R.B.457February 18, 2003

(4) Examples.
(b) Credit allowed for unlimited num-
ber of taxable years.
(c) Both degree and nondegree courses
are eligible for the credit.
(1) In general.
(2) Examples.
(d) Effective date.
§1.25A–5 Special rules relating to
characterization and timing of payments.
(a) Educational expenses paid by claimed
dependent.
(b) Educational expenses paid by a third
party.
(1) In general.
(2) Special rule for tuition reduction in-
cluded in gross income of employee.
(3) Examples.
(c) Adjustment to qualified tuition and
related expenses for certain excludable edu-
cational assistance.
(1) In general.
(2) No adjustment for excludable edu-
cational assistance attributable to expenses
paid in a prior year.
(3) Scholarships and fellowship grants.
(4) Examples.
(d) No double benefit.
(e) Timing rules.
(1) In general.
(2) Prepayment rule.
(i) In general.
(ii) Example.
(3) Expenses paid with loan proceeds.
(4) Expenses paid through third party in-
stallment payment plans.
(i) In general.
(ii) Example.
(f) Refund of qualified tuition and re-
lated expenses.
(1) Payment and refund of qualified tu-
ition and related expenses in the same tax-
able year.
(2) Payment of qualified tuition and re-
lated expenses in one taxable year and re-
fund in subsequent taxable year before
return filed for prior taxable year.
(3) Payment of qualified tuition and re-
lated expenses in one taxable year and re-
fund in subsequent taxable year.
(i) In general.
(ii) Recapture amount.
(4) Refund of loan proceeds treated as
refund of qualified tuition and related ex-
penses.
(5) Excludable educational assistance re-
ceived in a subsequent taxable year treated
as a refund.
(6) Examples.
§1.25A–1 Calculation of education tax
credit and general eligibility
requirements.
(a)Amount of education tax credit.An
individual taxpayer is allowed a nonre-
fundable education tax credit against in-
come tax imposed by chapter 1 of the
Internal Revenue Code for the taxable year.
The amount of the education tax credit is
the total of the Hope Scholarship Credit (as
described in§1.25A–3) plus the Lifetime
Learning Credit (as described in§1.25A–
4). For limitations on the credits allowed
by subpart A of part IV of subchapter A of
chapter 1 of the Internal Revenue Code, see
section 26.
(b)Coordination of Hope Scholarship
Credit and Lifetime Learning Credit—(1)
In general.In the same taxable year, a tax-
payer may claim a Hope Scholarship Credit
for each eligible student’s qualified tu-
ition and related expenses (as defined in
§1.25A–2(d)) and a Lifetime Learning
Credit for one or more other students’quali-
fied tuition and related expenses. How-
ever, a taxpayer may not claim both a Hope
Scholarship Credit and a Lifetime Learn-
ing Credit with respect to the same stu-
dent in the same taxable year.
(2)Hope Scholarship Credit.Subject to
certain limitations, a Hope Scholarship
Credit may be claimed for the qualified tu-
ition and related expenses paid during a tax-
able year with respect to each eligible
student (as defined in§1.25A–3(d)). Quali-
fied tuition and related expenses paid dur-
ing a taxable year with respect to one
student may not be taken into account in
computing the amount of the Hope Schol-
arship Credit with respect to any other stu-
dent. In addition, qualified tuition and
related expenses paid during a taxable year
with respect to any student for whom a
Hope Scholarship Credit is claimed may not
be taken into account in computing the
amount of the Lifetime Learning Credit.
(3)Lifetime Learning Credit.Subject to
certain limitations, a Lifetime Learning
Credit may be claimed for the aggregate
amount of qualified tuition and related ex-
penses paid during a taxable year with re-
spect to students for whom no Hope
Scholarship Credit is claimed.
(4)Examples.The following examples
illustrate the rules of this paragraph (b):
Example 1.In 1999, Taxpayer A pays qualified tu-
ition and related expenses for his dependent, B, to at-
tend College Y during 1999. Assuming all other
relevant requirements are met, Taxpayer A may claim
either a Hope Scholarship Credit or a Lifetime Learn-
ing Credit with respect to dependent B, but not both.
See§1.25A–3(a) and§1.25A–4(a).
Example 2.In 1999, Taxpayer C pays $2,000 in
qualified tuition and related expenses for her depen-
dent, D, to attend College Z during 1999. In 1999, Tax-
payer C also pays $500 in qualified tuition and related
expenses to attend a computer course during 1999 to
improve Taxpayer C’s job skills. Assuming all other
relevant requirements are met, Taxpayer C may claim
a Hope Scholarship Credit for the $2,000 of quali-
fied tuition and related expenses attributable to de-
pendent D (see§1.25A–3(a)) and a Lifetime Learning
Credit (see§1.25A–4(a)) for the $500 of qualified tu-
ition and related expenses incurred to improve her job
skills.
Example 3.The facts are the same as inExample
2, except that Taxpayer C pays $3,000 in qualified tu-
ition and related expenses for her dependent, D, to at-
tend College Z during 1999. Although a Hope
Scholarship Credit is available only with respect to
the first $2,000 of qualified tuition and related ex-
penses paid with respect to D (see§1.25A–3(a)), Tax-
payer C may not add the $1,000 of excess expenses
to her $500 of qualified tuition and related expenses
in computing the amount of the Lifetime Learning
Credit.
(c)Limitation based on modified ad-
justed gross income—(1)In general.The
education tax credit that a taxpayer may
otherwise claim is phased out ratably for
taxpayers with modified adjusted gross in-
come between $40,000 and $50,000
($80,000 and $100,000 for married indi-
viduals who file a joint return). Thus, tax-
payers with modified adjusted gross income
above $50,000 (or $100,000 for joint fil-
ers) may not claim an education tax credit.
(2)Modified adjusted gross income de-
fined.The termmodified adjusted gross in-
comemeans the adjusted gross income (as
defined in section 62) of the taxpayer for
the taxable year increased by any amount
excluded from gross income under sec-
tion 911, 931, or 933 (relating to income
earned abroad or from certain U.S. pos-
sessions or Puerto Rico).
(3)Inflation adjustment.For taxable
years beginning after 2001, the amounts in
paragraph (c)(1) of this section will be in-
creased for inflation occurring after 2000
in accordance with section 1(f)(3). If any
amount adjusted under this paragraph (c)(3)
is not a multiple of $1,000, the amount will
be rounded to the next lowest multiple of
$1,000.
(d)Election.No education tax credit is
allowed unless a taxpayer elects to claim
the credit on the taxpayer’s federal in-
come tax return for the taxable year in
February 18, 20034582003–7 I.R.B.

which the credit is claimed. The election is
made by attaching Form 8863,“Educa-
tion Credits (Hope and Lifetime Learning
Credits),”to the federal income tax re-
turn.
(e)Identification requirement.No edu-
cation tax credit is allowed unless a tax-
payer includes on the federal income tax
return claiming the credit the name and the
taxpayer identification number of the stu-
dent for whom the credit is claimed. For
rules relating to assessment for an omis-
sion of a correct taxpayer identification
number, see sections 6213(b) and (g)(2)(J).
(f)Claiming the credit in the case of a
dependent—(1)In general.If a student is
a claimed dependent of another taxpayer,
only that taxpayer may claim the educa-
tion tax credit for the student’s qualified tu-
ition and related expenses. However, if
another taxpayer is eligible to, but does not,
claim the student as a dependent, only the
student may claim the education tax credit
for the student’s qualified tuition and re-
lated expenses.
(2)Examples.The following examples
illustrate the rules of this paragraph (f):
Example 1.In 1999, Taxpayer A pays qualified tu-
ition and related expenses for his dependent, B, to at-
tend University Y during 1999. Taxpayer A claims B
as a dependent on his federal income tax return. There-
fore, assuming all other relevant requirements are met,
Taxpayer A is allowed an education tax credit on his
federal income tax return, and B is not allowed an edu-
cation tax credit on B’s federal income tax return. The
result would be the same if B paid the qualified tu-
ition and related expenses. See§1.25A–5(a).
Example 2.In 1999, Taxpayer C has one depen-
dent, D. In 1999, D pays qualified tuition and re-
lated expenses to attend University Z during 1999.
Although Taxpayer C is eligible to claim D as a de-
pendent on her federal income tax return, she does not
do so. Therefore, assuming all other relevant require-
ments are met, D is allowed an education tax credit
on D’s federal income tax return, and Taxpayer C is
not allowed an education tax credit on her federal in-
come tax return, with respect to D’s education ex-
penses. The result would be the same if C paid the
qualified tuition and related expenses on behalf of D.
See§1.25A–5(b).
(g)Married taxpayers.If a taxpayer is
married (within the meaning of section
7703), no education tax credit is allowed
to the taxpayer unless the taxpayer and the
taxpayer’s spouse file a joint federal in-
come tax return for the taxable year.
(h)Nonresident alien taxpayers and de-
pendents.If a taxpayer or the taxpayer’s
spouse is a nonresident alien for any por-
tion of the taxable year, no education tax
credit is allowed unless the nonresident alien
is treated as a resident alien by reason of
an election under section 6013(g) or (h). In
addition, if a student is a nonresident alien,
a taxpayer may not claim an education tax
credit with respect to the qualified tuition
and related expenses of the student un-
less the student is a claimed dependent (as
defined in§1.25A–2(a)).
§1.25A–2 Definitions.
(a)Claimed dependent.Aclaimed de-
pendentmeans a dependent (as defined in
section 152) for whom a deduction under
section 151 is allowed on a taxpayer’s fed-
eral income tax return for the taxable year.
Among other requirements under section
152, a nonresident alien student must be a
resident of a country contiguous to the
United States in order to be treated as a de-
pendent.
(b)Eligible educational institution—
(1)In general.In general, aneligible edu-
cational institutionmeans a college,
university, vocational school, or other post-
secondary educational institution that is—
(i) Described in section 481 of the
Higher Education Act of 1965 (20 U.S.C.
1088) as in effect on August 5, 1997, (gen-
erally all accredited public, nonprofit, and
proprietary postsecondary institutions); and
(ii) Participating in a federal financial aid
program under title IV of the Higher Edu-
cation Act of 1965 or is certified by the De-
partment of Education as eligible to
participate in such a program but chooses
not to participate.
(2)Rules on federal financial aid pro-
grams.For rules governing an educational
institution’s eligibility to participate in fed-
eral financial aid programs, see 20 U.S.C.
1070; 20 U.S.C. 1094; and 34 CFR 600 and
668.
(c)Academic period. Academic period
means a quarter, semester, trimester, or other
period of study as reasonably determined
by an eligible educational institution. In the
case of an eligible educational institution
that uses credit hours or clock hours, and
does not have academic terms, each pay-
ment period (as defined in 34 CFR 668.4,
revised as of July 1, 2002) may be treated
as an academic period.
(d)Qualified tuition and related
expenses—(1)In general. Qualified tu-
ition and related expensesmeans tuition and
fees required for the enrollment or atten-
dance of a student for courses of instruc-
tion at an eligible educational institution.
(2)Required fees—(i)In general.Ex-
cept as provided in paragraph (d)(3) of this
section, the test for determining whether any
fee is a qualified tuition and related ex-
pense is whether the fee is required to be
paid to the eligible educational institution
as a condition of the student’s enrollment
or attendance at the institution.
(ii)Books, supplies, and equipment.
Qualified tuition and related expenses in-
clude fees for books, supplies, and equip-
ment used in a course of study only if the
fees must be paid to the eligible educa-
tional institution for the enrollment or at-
tendance of the student at the institution.
(iii)Nonacademic fees.Except as pro-
vided in paragraph (d)(3) of this section,
qualified tuition and related expenses in-
clude fees charged by an eligible educa-
tional institution that are not used directly
for, or allocated to, an academic course of
instruction only if the fee must be paid to
the eligible educational institution for the
enrollment or attendance of the student at
the institution.
(3)Personal expenses.Qualified tu-
ition and related expenses do not include
the costs of room and board, insurance,
medical expenses (including student health
fees), transportation, and similar personal,
living, or family expenses, regardless of
whether the fee must be paid to the eli-
gible educational institution for the enroll-
ment or attendance of the student at the
institution.
(4)Treatment of a comprehensive or
bundled fee.If a student is required to pay
a fee (such as a comprehensive fee or a
bundled fee) to an eligible educational in-
stitution that combines charges for quali-
fied tuition and related expenses with
charges for personal expenses described in
paragraph (d)(3) of this section, the por-
tion of the fee that is allocable to per-
sonal expenses is not included in qualified
tuition and related expenses. The determi-
nation of what portion of the fee relates to
qualified tuition and related expenses and
what portion relates to personal expenses
must be made by the institution using a rea-
sonable method of allocation.
(5)Hobby courses.Qualified tuition and
related expenses do not include expenses
that relate to any course of instruction or
other education that involves sports, games,
or hobbies, or any noncredit course, un-
less the course or other education is part of
the student’s degree program, or in the case
of the Lifetime Learning Credit, the stu-
dent takes the course to acquire or im-
2003–7 I.R.B.459February 18, 2003

prove job skills.
(6)Examples.The following examples
illustrate the rules of this paragraph (d). In
each example, assume that the institution
is an eligible educational institution and that
all other relevant requirements to claim an
education tax credit are met. The examples
are as follows:
Example 1.University V offers a degree program
in dentistry. In addition to tuition, all students en-
rolled in the program are required to pay a fee to Uni-
versity V for the rental of dental equipment. Because
the equipment rental fee must be paid to University
V for enrollment and attendance, the tuition and the
equipment rental fee are qualified tuition and re-
lated expenses.
Example 2.First-year students at College W are re-
quired to obtain books and other reading materials used
in its mandatory first-year curriculum. The books and
other reading materials are not required to be pur-
chased from College W and may be borrowed from
other students or purchased from off-campus book-
stores, as well as from College W’s bookstore. Col-
lege W bills students for any books and materials
purchased from College W’s bookstore. The fee that
College W charges for the first-year books and ma-
terials purchased at its bookstore is not a qualified tu-
ition and related expense because the books and
materials are not required to be purchased from Col-
lege W for enrollment or attendance at the institu-
tion.
Example 3.All students who attend College X are
required to pay a separate student activity fee in ad-
dition to their tuition. The student activity fee is used
solely to fund on-campus organizations and activi-
ties run by students, such as the student newspaper
and the student government (no portion of the fee cov-
ers personal expenses). Although labeled as a stu-
dent activity fee, the fee is required for enrollment or
attendance at College X. Therefore, the fee is a quali-
fied tuition and related expense.
Example 4.The facts are the same as inExample
3, except that College X offers an optional athletic fee
that students may pay to receive discounted tickets to
sports events. The athletic fee is not required for en-
rollment or attendance at College X. Therefore, the
fee is not a qualified tuition and related expense.
Example 5.College Y requires all students to live
on campus. It charges a single comprehensive fee to
cover tuition, required fees, and room and board. Based
on College Y’s reasonable allocation, sixty percent of
the comprehensive fee is allocable to tuition and other
required fees not allocable to personal expenses, and
the remaining forty percent of the comprehensive fee
is allocable to charges for room and board and other
personal expenses. Therefore, only sixty percent of Col-
lege Y’s comprehensive fee is a qualified tuition and
related expense.
Example 6.As a degree student at College Z, Stu-
dent A is required to take a certain number of courses
outside of her chosen major in Economics. To ful-
fill this requirement, Student A enrolls in a square
dancing class offered by the Physical Education De-
partment. Because Student A receives credit toward
her degree program for the square dancing class, the
tuition for the square dancing class is included in quali-
fied tuition and related expenses.
§1.25A–3 Hope Scholarship Credit.
(a)Amount of the credit—(1)In gen-
eral.Subject to the phaseout of the edu-
cation tax credit described in§1.25A–
1(c), the Hope Scholarship Credit amount
is the total of—
(i) 100 percent of the first $1,000 of
qualified tuition and related expenses paid
during the taxable year for education fur-
nished to an eligible student (as defined in
paragraph (d) of this section) who is the tax-
payer, the taxpayer’s spouse, or any claimed
dependent during any academic period be-
ginning in the taxable year (or treated as be-
ginning in the taxable year, see§1.25A–
5(e)(2)); plus
(ii) 50 percent of the next $1,000 of such
expenses paid with respect to that stu-
dent.
(2)Maximum credit.For taxable years
beginning before 2002, the maximum Hope
Scholarship Credit allowed for each eli-
gible student is $1,500. For taxable years
beginning after 2001, the amounts used in
paragraph (a)(1) of this section to deter-
mine the maximum credit will be increased
for inflation occurring after 2000 in accor-
dance with section 1(f)(3). If any amount
adjusted under this paragraph (a)(2) is not
a multiple of $100, the amount will be
rounded to the next lowest multiple of $100.
(b)Per student credit—(1)In general.
A Hope Scholarship Credit may be claimed
for the qualified tuition and related ex-
penses of each eligible student (as defined
in paragraph (d) of this section).
(2)Example.The following example il-
lustrates the rule of this paragraph (b). In
the example, assume that all the require-
ments to claim an education tax credit are
met. The example is as follows:
Example.In 1999, Taxpayer A has two depen-
dents, B and C, both of whom are eligible students.
Taxpayer A pays $1,600 in qualified tuition and re-
lated expenses for dependent B to attend a commu-
nity college. Taxpayer A pays $5,000 in qualified
tuition and related expenses for dependent C to at-
tend University X. Taxpayer A may claim a Hope
Scholarship Credit of $1,300 ($1,000 + (.50 x $600))
for dependent B, and the maximum $1,500 Hope
Scholarship Credit for dependent C, for a total Hope
Scholarship Credit of $2,800.
(c)Credit allowed for only two tax-
able years.For each eligible student, the
Hope Scholarship Credit may be claimed
for no more than two taxable years.
(d)Eligible student—(1)Eligible stu-
dent defined.For purposes of the Hope
Scholarship Credit, the termeligible stu-
dentmeans a student who satisfies all of the
following requirements—
(i)Degree requirement.For at least one
academic period that begins during the tax-
able year, the student enrolls at an eli-
gible educational institution in a program
leading toward a postsecondary degree, cer-
tificate, or other recognized postsecond-
ary educational credential;
(ii)Work load requirement.For at least
one academic period that begins during the
taxable year, the student enrolls for at least
one-half of the normal full-time work load
for the course of study the student is pur-
suing. The standard for what is half of the
normal full-time work load is determined
by each eligible educational institution.
However, the standard for half-time may not
be lower than the applicable standard for
half-time established by the Department of
Education under the Higher Education Act
of 1965 and set forth in 34 CFR 674.2(b)
(revised as of July 1, 2002) for a half-
time undergraduate student;
(iii)Year of study requirement.As of the
beginning of the taxable year, the student
has not completed the first two years of
postsecondary education at an eligible edu-
cational institution. Whether a student has
completed the first two years of postsec-
ondary education at an eligible educational
institution as of the beginning of a tax-
able year is determined based on whether
the institution in which the student is en-
rolled in a degree program (as described in
paragraph (d)(1)(i) of this section) awards
the student two years of academic credit at
that institution for postsecondary course
work completed by the student prior to the
beginning of the taxable year. Any aca-
demic credit awarded by the eligible edu-
cational institution solely on the basis of the
student’s performance on proficiency ex-
aminations is disregarded in determining
whether the student has completed two
years of postsecondary education; and
(iv)No felony drug conviction.The stu-
dent has not been convicted of a federal or
state felony offense for possession or dis-
tribution of a controlled substance as of the
end of the taxable year for which the credit
is claimed.
(2)Examples.The following examples
illustrate the rules of this paragraph (d). In
each example, assume that the student has
not been convicted of a felony drug of-
fense, that the institution is an eligible edu-
cational institution unless otherwise stated,
February 18, 20034602003–7 I.R.B.

that the qualified tuition and related ex-
penses are paid during the same taxable
year that the academic period begins, and
that a Hope Scholarship Credit has not pre-
viously been claimed for the student (see
paragraph (c) of this section). The examples
are as follows:
Example 1.Student A graduates from high school
in June 1998 and is enrolled in an undergraduate de-
gree program at College U for the 1998 Fall semes-
ter on a full-time basis. For the 1999 Spring semester,
Student A again is enrolled at College U on a full-
time basis. For the 1999 Fall semester, Student A is
enrolled in less than half the normal full-time course
work for her degree program. Because Student A is
enrolled in an undergraduate degree program on at least
a half-time basis for at least one academic period that
begins during 1998 and at least one academic pe-
riod that begins during 1999, Student A is an eli-
gible student for taxable years 1998 and 1999
(including the 1999 Fall semester when Student A en-
rolls at College U on less than a half-time basis).
Example 2.Prior to 1998, Student B attended col-
lege for several years on a full-time basis. Student B
transfers to College V for the 1998 Spring semester.
College V awards Student B credit for some (but not
all) of the courses he previously completed, and Col-
lege V classifies Student B as a first-semester sopho-
more. During both the Spring and Fall semesters of
1998, Student B is enrolled in at least one-half the nor-
mal full-time work load for his degree program at Col-
lege V. Because College V does not classify Student
B as having completed the first two years of post-
secondary education as of the beginning of 1998, Stu-
dent B is an eligible student for taxable year 1998.
Example 3.The facts are the same as inExample
2.After taking classes on a half-time basis for the 1998
Spring and Fall semesters, Student B is enrolled at Col-
lege V for the 1999 Spring semester on a full-time ba-
sis. College V classifies Student B as a second-semester
sophomore for the 1999 Spring semester and as a first-
semester junior for the 1999 Fall semester. Because
College V does not classify Student B as having com-
pleted the first two years of postsecondary educa-
tion as of the beginning of 1999, Student B is an
eligible student for taxable year 1999. Therefore, the
qualified expenses and required fees paid for the 1999
Spring semester and the 1999 Fall semester are taken
into account in calculating any Hope Scholarship
Credit.
Example 4.Prior to 1998, Student C was not en-
rolled at another eligible educational institution. At the
time that Student C enrolls in a degree program at Col-
lege W for the 1998 Fall semester, Student C takes
examinations to demonstrate her proficiency in sev-
eral subjects. On the basis of Student C’s perfor-
mance on these examinations, College W classifies
Student C as a second-semester sophomore as of the
beginning of the 1998 Fall semester. Student C is en-
rolled at College W during the 1998 Fall semester and
during the 1999 Spring and Fall semesters on a full-
time basis and is classified as a first-semester junior
as of the beginning of the 1999 Spring semester. Be-
cause Student C was not enrolled in a college or other
eligible educational institution prior to 1998 (but rather
was awarded three semesters of academic credit solely
because of proficiency examinations), Student C is not
treated as having completed the first two years of post-
secondary education at an eligible educational insti-
tution as of the beginning of 1998 or as of the
beginning of 1999. Therefore, Student C is an eli-
gible student for both taxable years 1998 and 1999.
Example 5.During the 1998 Fall semester, Stu-
dent D is a high school student who takes classes on
a half-time basis at College X. Student D is not en-
rolled as part of a degree program at College X be-
cause College X does not admit students to a degree
program unless the student has a high school di-
ploma or equivalent. Because Student D is not en-
rolled in a degree program at College X during 1998,
Student D is not an eligible student for taxable year
1998.
Example 6.The facts are the same as inExample
5.In addition, during the 1999 Spring semester, Stu-
dent D again attends College X but not as part of a
degree program. Student D graduates from high school
in June 1999. For the 1999 Fall semester, Student D
enrolls in College X as part of a degree program, and
College X awards Student D credit for her prior course
work at College X. During the 1999 Fall semester, Stu-
dent D is enrolled in more than one-half the normal
full-time work load of courses for her degree pro-
gram at College X. Because Student D is enrolled in
a degree program at College X for the 1999 Fall term
on at least a half-time basis, Student D is an eli-
gible student for all of taxable year 1999. There-
fore, the qualified tuition and required fees paid for
classes taken at College X during both the 1999 Spring
semester (during which Student D was not enrolled
in a degree program) and the 1999 Fall semester are
taken into account in computing any Hope Scholar-
ship Credit.
Example 7.Student E completed two years of un-
dergraduate study at College S. College S is not an
eligible educational institution for purposes of the edu-
cation tax credit. At the end of 1998, Student E en-
rolls in an undergraduate degree program at College
Z, an eligible educational institution, for the 1999
Spring semester on a full-time basis. College Z awards
Student E two years of academic credit for his pre-
vious course work at College S and classifies Stu-
dent E as a first-semester junior for the 1999 Spring
semester. Student E is treated as having completed the
first two years of postsecondary education at an eli-
gible educational institution as of the beginning of
1999. Therefore, Student E is not an eligible stu-
dent for taxable year 1999.
Example 8.Student F received a degree in 1998
from College R. College R is not an eligible educa-
tional institution for purposes of the education tax
credit. During 1999, Student F is enrolled in a
graduate-degree program at College Y, an eligible edu-
cational institution, for the 1999 Fall semester on a
full-time basis. By admitting Student F to its gradu-
ate degree program, College Y treats Student F as hav-
ing completed the first two years of postsecondary
education as of the beginning of 1999. Therefore, Stu-
dent F is not an eligible student for taxable year 1999.
Example 9.Student G graduates from high school
in June 2001. In January 2002, Student G is en-
rolled in a one-year postsecondary certificate pro-
gram on a full-time basis to obtain a certificate as a
travel agent. Student G completes the program in De-
cember 2002 and is awarded a certificate. In Janu-
ary 2003, Student G enrolls in a one-year
postsecondary certificate program on a full-time ba-
sis to obtain a certificate as a computer programer. Stu-
dent G meets the degree requirement, the work load
requirement, and the year of study requirement for the
taxable years 2002 and 2003. Therefore, Student G is
an eligible student for both taxable years 2002 and
2003.
(e)Academic period for prepayments—
(1)In general.For purposes of determin-
ing whether a student meets the
requirements in paragraph (d) of this sec-
tion for a taxable year, if qualified tuition
and related expenses are paid during one
taxable year for an academic period that be-
gins during January, February or March of
the next taxable year (for taxpayers on a fis-
cal taxable year, use the first three months
of the next taxable year), the academic pe-
riod is treated as beginning during the tax-
able year in which the payment is made.
(2)Example.The following example il-
lustrates the rule of this paragraph (e). In
the example, assume that all the require-
ments to claim a Hope Scholarship Credit
are met. The example is as follows:
Example.Student G graduates from high school in
June 1998. After graduation, Student G works full-
time for several months to earn money for college. Stu-
dent G is enrolled on a full-time basis in an
undergraduate degree program at University W, an eli-
gible educational institution, for the 1999 Spring se-
mester, which begins in January 1999. Student G pays
tuition to University W for the 1999 Spring semes-
ter in December 1998. Because the tuition paid by Stu-
dent G in 1998 relates to an academic period that
begins during the first three months of 1999, Stu-
dent G’s eligibility to claim a Hope Scholarship Credit
in 1998 is determined as if the 1999 Spring semes-
ter began in 1998. Thus, assuming Student G has not
been convicted of a felony drug offense as of De-
cember 31, 1998, Student G is an eligible student for
1998.
(f)Effective date.The Hope Scholar-
ship Credit is applicable for qualified tu-
ition and related expenses paid after
December 31, 1997, for education fur-
nished in academic periods beginning af-
ter December 31, 1997.
§1.25A–4 Lifetime Learning Credit.
(a)Amount of the credit—(1)Taxable
years beginning before January 1, 2003.
Subject to the phaseout of the education tax
credit described in§1.25A–1(c), for tax-
able years beginning before 2003, the Life-
time Learning Credit amount is 20 percent
of up to $5,000 of qualified tuition and re-
lated expenses paid during the taxable year
for education furnished to the taxpayer, the
taxpayer’s spouse, and any claimed depen-
dent during any academic period begin-
ning in the taxable year (or treated as
beginning in the taxable year, see§1.25A–
5(e)(2)).
(2)Taxable years beginning after De-
cember 31, 2002.Subject to the phaseout
2003–7 I.R.B.461February 18, 2003

of the education tax credit described in
§1.25A–1(c), for taxable years beginning
after 2002, the Lifetime Learning Credit
amount is 20 percent of up to $10,000 of
qualified tuition and related expenses paid
during the taxable year for education fur-
nished to the taxpayer, the taxpayer’s
spouse, and any claimed dependent dur-
ing any academic period beginning in the
taxable year (or treated as beginning in the
taxable year, see§1.25A–5(e)(2)).
(3)Coordination with the Hope Schol-
arship Credit.Expenses paid with respect
to a student for whom the Hope Scholar-
ship Credit is claimed are not eligible for
the Lifetime Learning Credit.
(4)Examples.The following examples
illustrate the rules of this paragraph (a). In
each example, assume that all the require-
ments to claim a Lifetime Learning Credit
or a Hope Scholarship Credit, as appli-
cable, are met. The examples are as follows:
Example 1.In 1999, Taxpayer A pays qualified tu-
ition and related expenses of $3,000 for dependent B
to attend an eligible educational institution, and Tax-
payer A pays qualified tuition and related expenses of
$4,000 for dependent C to attend an eligible educa-
tional institution. Taxpayer A does not claim a Hope
Scholarship Credit with respect to either B or C. Al-
though Taxpayer A paid $7,000 of qualified tuition and
related expenses during the taxable year, Taxpayer A
may claim the Lifetime Learning Credit with re-
spect to only $5,000 of such expenses. Therefore, the
maximum Lifetime Learning Credit Taxpayer A may
claim for 1999 is $1,000 (.20 x $5,000).
Example 2.In 1999, Taxpayer D pays $6,000 of
qualified tuition and related expenses for dependent
E, and $2,000 of qualified tuition and related ex-
penses for dependent F, to attend eligible educa-
tional institutions. Dependent F has already completed
the first two years of postsecondary education. For
1999, Taxpayer D claims the maximum $1,500 Hope
Scholarship Credit with respect to dependent E. In
computing the amount of the Lifetime Learning Credit,
Taxpayer D may not include any of the $6,000 of
qualified tuition and related expenses paid on be-
half of dependent E but may include the $2,000 of
qualified tuition and related expenses of dependent F.
(b)Credit allowed for unlimited num-
ber of taxable years.There is no limit to
the number of taxable years that a tax-
payer may claim a Lifetime Learning Credit
with respect to any student.
(c)Both degree and nondegree courses
are eligible for the credit—(1)In gen-
eral.For purposes of the Lifetime Learn-
ing Credit, amounts paid for a course at an
eligible educational institution are quali-
fied tuition and related expenses if the
course is either part of a postsecondary de-
gree program or is not part of a postsec-
ondary degree program but is taken by the
student to acquire or improve job skills.
(2)Examples.The following examples
illustrate the rule of this paragraph (c). In
each example, assume that all the require-
ments to claim a Lifetime Learning Credit
are met. The examples are as follows:
Example 1.Taxpayer A, a professional photogra-
pher, enrolls in an advanced photography course at a
local community college. Although the course is not
part of a degree program, Taxpayer A enrolls in the
course to improve her job skills. The course fee paid
by Taxpayer A is a qualified tuition and related ex-
pense for purposes of the Lifetime Learning Credit.
Example 2.Taxpayer B, a stockbroker, plans to travel
abroad on a“photo-safari”for his next vacation. In
preparation for the trip, Taxpayer B enrolls in a non-
credit photography class at a local community col-
lege. Because Taxpayer B is not taking the photography
course as part of a degree program or to acquire or
improve his job skills, amounts paid by Taxpayer B
for the course are not qualified tuition and related ex-
penses for purposes of the Lifetime Learning Credit.
(d)Effective date.The Lifetime Learn-
ing Credit is applicable for qualified tu-
ition and related expenses paid after June
30, 1998, for education furnished in aca-
demic periods beginning after June 30,
1998.
§1.25A–5 Special rules relating to
characterization and timing of payments.
(a)Educational expenses paid by
claimed dependent.For any taxable year for
which the student is a claimed dependent
of another taxpayer, qualified tuition and re-
lated expenses paid by the student are
treated as paid by the taxpayer to whom the
deduction under section 151 is allowed.
(b)Educational expenses paid by a third
party—(1)In general.Solely for purposes
of section 25A, if a third party (someone
other than the taxpayer, the taxpayer’s
spouse if the taxpayer is treated as mar-
ried within the meaning of section 7703, or
a claimed dependent) makes a payment di-
rectly to an eligible educational institu-
tion to pay for a student’s qualified tuition
and related expenses, the student is treated
as receiving the payment from the third
party and, in turn, paying the qualified tu-
ition and related expenses to the institu-
tion.
(2)Special rule for tuition reduction in-
cluded in gross income of employee.Solely
for purposes of section 25A, if an eligible
educational institution provides a reduc-
tion in tuition to an employee of the insti-
tution (or to the spouse or dependent child
of an employee, as described in section
132(h)(2)) and the amount of the tuition re-
duction is included in the employee’s gross
income, the employee is treated as receiv-
ing payment of an amount equal to the tu-
ition reduction and, in turn, paying such
amount to the institution.
(3)Examples.The following examples
illustrate the rules of this paragraph (b). In
each example, assume that all the require-
ments to claim an education tax credit are
met. The examples are as follows:
Example 1.Grandparent D makes a direct pay-
ment to an eligible educational institution for Stu-
dent E’s qualified tuition and related expenses. Student
E is not a claimed dependent in 1999. For purposes
of claiming an education tax credit, Student E is treated
as receiving the money from her grandparent and, in
turn, paying her qualified tuition and related ex-
penses.
Example 2.Under a court-approved divorce de-
cree, Parent A is required to pay Student C’s col-
lege tuition. Parent A makes a direct payment to an
eligible educational institution for Student C’s 1999
tuition. Under paragraph (b)(1) of this section, Stu-
dent C is treated as receiving the money from Par-
ent A and, in turn, paying the qualified tuition and
related expenses. Under the divorce decree, Parent B
has custody of Student C for 1999. Parent B prop-
erly claims Student C as a dependent on Parent B’s
1999 federal income tax return. Under paragraph (a)
of this section, expenses paid by Student C are treated
as paid by Parent B. Thus, Parent B may claim an edu-
cation tax credit for the qualified tuition and related
expenses paid directly to the institution by Parent A.
Example 3. University A, an eligible educational in-
stitution, offers reduced tuition charges to its employ-
ees and their dependent children. F is an employee of
University A. F’s dependent child, G, enrolls in a
graduate-level course at University A. Section 117(d)
does not apply, because it is limited to tuition reduc-
tions provided for education below the graduate level.
Therefore, the amount of the tuition reduction re-
ceived by G is treated as additional compensation from
University A to F and is included in F’s gross in-
come. For purposes of claiming a Lifetime Learn-
ing Credit, F is treated as receiving payment of an
amount equal to the tuition reduction from Univer-
sity A and, in turn, paying such amount to Univer-
sity A on behalf of F’s child, G.
(c)Adjustment to qualified tuition and
related expenses for certain excludable edu-
cational assistance—(1)In general.In de-
termining the amount of an education tax
credit, qualified tuition and related ex-
penses for any academic period must be re-
duced by the amount of any tax-free
educational assistance allocable to such pe-
riod. For this purpose,tax-free educational
assistancemeans—
(i) A qualified scholarship that is ex-
cludable from income under section 117;
(ii) A veterans’or member of the armed
forces’educational assistance allowance un-
der chapter 30, 31, 32, 34, or 35 of title 38,
United States Code, or under chapter 1606
of title 10, United States Code;
February 18, 20034622003–7 I.R.B.

(iii) Employer-provided educational as-
sistance that is excludable from income un-
der section 127; or
(iv) Any other educational assistance that
is excludable from gross income (other than
as a gift, bequest, devise, or inheritance
within the meaning of section 102(a)).
(2)No adjustment for excludable edu-
cational assistance attributable to expenses
paid in a prior year.A reduction is not re-
quired under paragraph (c)(1) of this sec-
tion if the amount of excludable educational
assistance received during the taxable year
is treated as a refund of qualified tuition and
related expenses paid in a prior taxable year.
See paragraph (f)(5) of this section.
(3)Scholarships and fellowship grants.
For purposes of paragraph (c)(1)(i) of this
section, a scholarship or fellowship grant
is treated as a qualified scholarship exclud-
able under section 117 except to the
extent—
(i) The scholarship or fellowship grant
(or any portion thereof) may be applied, by
its terms, to expenses other than qualified
tuition and related expenses within the
meaning of section 117(b)(2) (such as room
and board) and the student reports the grant
(or the appropriate portion thereof) as in-
come on the student’s federal income tax
return if the student is required to file a re-
turn; or
(ii) The scholarship or fellowship grant
(or any portion thereof) must be applied, by
its terms, to expenses other than qualified
tuition and related expenses within the
meaning of section 117(b)(2) (such as room
and board) and the student reports the grant
(or the appropriate portion thereof) as in-
come on the student’s federal income tax
return if the student is required to file a re-
turn.
(4)Examples.The following examples
illustrate the rules of this paragraph (c). In
each example, assume that all the require-
ments to claim an education tax credit are
met. The examples are as follows:
Example 1.University X charges Student A, who
lives on University X’s campus, $3,000 for tuition and
$5,000 for room and board. University X awards Stu-
dent A a $2,000 scholarship. The terms of the schol-
arship permit it to be used to pay any of a student’s
costs of attendance at University X, including tu-
ition, room and board, and other incidental expenses.
University X applies the $2,000 scholarship against
Student A’s $8,000 total bill, and Student A pays the
$6,000 balance of her bill from University X with a
combination of savings and amounts she earns from
a summer job. University X does not require A to pay
any additional fees beyond the $3,000 in tuition in or-
der to enroll in or attend classes. Student A does not
report any portion of the scholarship as income on her
federal income tax return. Since Student A does not
report the scholarship as income, the scholarship is
treated under paragraph (c)(3) of this section as a quali-
fied scholarship that is excludable under section 117.
Therefore, for purposes of calculating an education tax
credit, Student A is treated as having paid only $1,000
($3,000 tuition - $2,000 scholarship) in qualified tu-
ition and related expenses to University X.
Example 2.The facts are the same as inExample
1, except that Student A reports the entire scholar-
ship as income on the student’s federal income tax re-
turn. Since the full amount of the scholarship may be
applied to expenses other than qualified expenses
(room and board) and Student A reports the scholar-
ship as income, the exception in paragraph (c)(3) of
this section applies and the scholarship is not treated
as a qualified scholarship excludable under section 117.
Therefore, for purposes of calculating an education tax
credit, Student A is treated as having paid $3,000 of
qualified tuition and related expenses to University X.
Example 3.The facts are the same as inExample
1, except that the terms of the scholarship require it
to be used to pay tuition. Under paragraph (c)(3) of
this section, the scholarship is treated as a qualified
scholarship excludable under section 117. There-
fore, for purposes of calculating an education tax credit,
Student A is treated as having paid only $1,000 ($3,000
tuition - $2,000 scholarship) in qualified tuition and
related expenses to University X.
Example 4.The facts are the same as inExample
1, except that the terms of the scholarship require it
to be used to pay tuition or room and board charged
by University X, and the scholarship amount is $6,000.
Under the terms of the scholarship, Student A may al-
locate the scholarship between tuition and room and
board in any manner. However, because room and
board totals $5,000, that is the maximum amount that
can be applied under the terms of the scholarship to
expenses other than qualified expenses and at least
$1,000 of the scholarship must be applied to tu-
ition. Therefore, the maximum amount of the excep-
tion under paragraph (c)(3) of this section is $5,000
and at least $1,000 is treated as a qualified scholar-
ship excludable under section 117 ($6,000 scholar-
ship - $5,000 room and board). If Student A reports
$5,000 of the scholarship as income on the student’s
federal income tax return, then Student A will be
treated as having paid $2,000 ($3,000 tuition - $1,000
qualified scholarship excludable under section 117) in
qualified tuition and related expenses to University X.
Example 5.The facts are the same as inExample
1, except that in addition to the scholarship that Uni-
versity X awards to Student A, University X also pro-
vides Student A with an education loan and pays
Student A for working in a work/study job in the cam-
pus dining hall. The loan is not excludable educa-
tional assistance within the meaning of paragraph (c)
of this section. In addition, wages paid to a student
who is performing services for the payor are neither
a qualified scholarship nor otherwise excludable from
gross income. Therefore, Student A is not required to
reduce her qualified tuition and related expenses by
the amounts she receives from the student loan or as
wages from her work/study job.
Example 6.In 1999, Student B pays University Y
$1,000 in tuition for the 1999 Spring semester. Uni-
versity Y does not require Student B to pay any ad-
ditional fees beyond the $1,000 in tuition in order to
enroll in classes. Student B is an employee of Com-
pany Z. At the end of the academic period and dur-
ing the same taxable year that Student B paid tuition
to University Y, Student B provides Company Z with
proof that he has satisfactorily completed his courses
at University Y. Pursuant to an educational assis-
tance program described in section 127(b), Com-
pany Z reimburses Student B for all of the tuition paid
to University Y. Because the reimbursement from
Company Z is employer-provided educational assis-
tance that is excludable from Student B’s gross in-
come under section 127, the reimbursement reduces
Student B’s qualified tuition and related expenses.
Therefore, for purposes of calculating an education tax
credit, Student B is treated as having paid no quali-
fied tuition and related expenses to University Y dur-
ing 1999.
Example 7.The facts are the same as inExample
6except that the reimbursement from Company Z is
not pursuant to an educational assistance program de-
scribed in section 127(b), is not otherwise exclud-
able from Student B’s gross income, and is taxed as
additional compensation to Student B. Because the re-
imbursement is not excludable educational assis-
tance within the meaning of paragraph (c)(1) of this
section, Student B is not required to reduce his quali-
fied tuition and related expenses by the $1,000 re-
imbursement he received from his employer. Therefore,
for purposes of calculating an education tax credit, Stu-
dent B is treated as paying $1,000 in qualified tu-
ition and related expenses to University Y during 1999.
(d)No double benefit.Qualified tuition
and related expenses do not include any ex-
pense for which a deduction is allowed un-
der section 162, section 222, or any other
provision of chapter 1 of the Internal Rev-
enue Code.
(e)Timing rules—(1)In general.Ex-
cept as provided in paragraph (e)(2) of this
section, an education tax credit is allowed
only for payments of qualified tuition and
related expenses for an academic period be-
ginning in the same taxable year as the year
the payment is made. Except for certain in-
dividuals who do not use the cash receipts
and disbursements method of accounting,
qualified tuition and related expenses are
treated as paid in the year in which the ex-
penses are actually paid. See§1.461–
1(a)(1).
(2)Prepayment rule—(i)In general.If
qualified tuition and related expenses are
paid during one taxable year for an aca-
demic period that begins during the first
three months of the taxpayer’s next tax-
able year (i.e., in January, February, or
March of the next taxable year for calen-
dar year taxpayers), an education tax credit
is allowed with respect to the qualified tu-
ition and related expenses only in the tax-
able year in which the expenses are paid.
(ii)Example.The following example il-
lustrates the rule of this paragraph (e)(2).
In the example, assume that all the re-
2003–7 I.R.B.463February 18, 2003

quirements to claim an education tax credit
are met. The example is as follows:
Example.In December 1998, Taxpayer A, a calen-
dar year taxpayer, pays College Z $1,000 in quali-
fied tuition and related expenses to attend classes
during the 1999 Spring semester, which begins in Janu-
ary 1999. Taxpayer A may claim an education tax
credit only in 1998 for payments made in 1998 for
the 1999 Spring semester.
(3)Expenses paid with loan proceeds.
An education tax credit may be claimed for
qualified tuition and related expenses paid
with the proceeds of a loan only in the tax-
able year in which the expenses are paid,
and may not be claimed in the taxable year
in which the loan is repaid. Loan proceeds
disbursed directly to an eligible educa-
tional institution will be treated as paid on
the date the institution credits the pro-
ceeds to the student’s account. For ex-
ample, in the case of any loan issued or
guaranteed as part of a federal student loan
program under Title IV of the Higher Edu-
cation Act of 1965, loan proceeds will be
treated as paid on the date of disburse-
ment (as defined in 34 CFR 668.164(a), re-
vised as of July 1, 2002) by the eligible
educational institution. If a taxpayer does
not know the date the institution credits the
student’s account, the taxpayer must treat
the qualified tuition and related expenses
as paid on the last date for payment pre-
scribed by the institution.
(4)Expenses paid through third party in-
stallment payment plans—(i)In general.A
taxpayer, an eligible educational institu-
tion, and a third party installment pay-
ment company may enter into an agreement
in which the company agrees to collect in-
stallment payments of qualified tuition and
related expenses from the taxpayer and to
remit the installment payments to the in-
stitution. If the third party installment pay-
ment company is the taxpayer’s agent for
purposes of paying qualified tuition and re-
lated expenses to the eligible educational
institution, the taxpayer is treated as pay-
ing the qualified expenses on the date the
company pays the institution. However, if
the third party installment payment com-
pany is the eligible educational institu-
tion’s agent for purposes of collecting
payments of qualified tuition and related ex-
penses from the taxpayer, the taxpayer is
treated as paying the qualified expenses on
the date the taxpayer pays the company.
(ii)Example.The following example il-
lustrates the rule of this paragraph (e)(4).
The example is as follows:
Example.Student A, Company B, and College C en-
ter into a written agreement in which Student A agrees
to pay the tuition required to attend College C in 10
equal monthly installments to Company B. Under the
written agreement, Student A is not relieved of her ob-
ligation to pay College C until Company B remits the
payments to College C. Under the written agree-
ment, Company B agrees to disburse the monthly in-
stallment payments to College C within 30 days of
receipt. Because Company B acts as Student A’s agent
for purposes of paying qualified expenses to Col-
lege C, Student A is treated as paying qualified ex-
penses on the date Company B disburses payments
to College C.
(f)Refund of qualified tuition and re-
lated expenses—(1)Payment and refund of
qualified tuition and related expenses in the
same taxable year.With respect to any stu-
dent, the amount of qualified tuition and re-
lated expenses for a taxable year is
calculated by adding all qualified tuition and
related expenses paid for the taxable year,
and subtracting any refund of such ex-
penses received from the eligible educa-
tional institution during the same taxable
year (including refunds of loan proceeds de-
scribed in paragraph (f)(4) of this sec-
tion).
(2)Payment of qualified tuition and re-
lated expenses in one taxable year and re-
fund in subsequent taxable year before
return filed for prior taxable year.If, in a
taxable year, a taxpayer or someone other
than the taxpayer receives a refund (in-
cluding refunds of loan proceeds described
in paragraph (f)(4) of this section) of quali-
fied tuition and related expenses paid on be-
half of a student in a prior taxable year and
the refund is received before the taxpayer
files a federal income tax return for the prior
taxable year, the amount of the qualified tu-
ition and related expenses for the prior tax-
able year is reduced by the amount of the
refund.
(3)Payment of qualified tuition and re-
lated expenses in one taxable year and re-
fund in subsequent taxable year—(i)In
general.If, in a taxable year (refund year),
a taxpayer or someone other than the tax-
payer receives a refund (including refunds
of loan proceeds described in paragraph
(f)(4) of this section) of qualified tuition and
related expenses paid on behalf of a stu-
dent for which the taxpayer claimed an edu-
cation tax credit in a prior taxable year, the
tax imposed by chapter 1 of the Internal
Revenue Code for the refund year is in-
creased by the recapture amount.
(ii)Recapture amount.The recapture
amount is the difference in tax liability for
the prior taxable year (taking into account
any redetermination of such tax liability by
audit or amended return) that results when
the tax liability for the prior year is calcu-
lated using the taxpayer’s redetermined
credit. The redetermined credit is com-
puted by reducing the amount of the quali-
fied tuition and related expenses taken into
account in determining any credit claimed
in the prior taxable year by the amount of
the refund of the qualified tuition and re-
lated expenses (redetermined qualified ex-
penses), and computing the allowable credit
using the redetermined qualified expenses
and the relevant facts and circumstances of
the prior taxable year, such as modified ad-
justed gross income (redetermined credit).
(4)Refund of loan proceeds treated as
refund of qualified tuition and related ex-
penses.If loan proceeds used to pay quali-
fied tuition and related expenses (as
described in paragraph (e)(3) of this sec-
tion) during a taxable year are refunded by
an eligible educational institution to a lender
on behalf of the borrower, the refund is
treated as a refund of qualified tuition and
related expenses for purposes of paragraphs
(f)(1), (2), and (3) of this section.
(5)Excludable educational assistance re-
ceived in a subsequent taxable year treated
as a refund.If, in a taxable year, a tax-
payer or someone other than the taxpayer
receives any excludable educational assis-
tance (described in paragraph (c)(1) of this
section) for the qualified tuition and re-
lated expenses paid on behalf of a stu-
dent during a prior taxable year (or
attributable to enrollment at an eligible edu-
cational institution during a prior taxable
year), the educational assistance is treated
as a refund of qualified tuition and re-
lated expenses for purposes of paragraphs
(f)(2) and (3) of this section. If the exclud-
able educational assistance is received be-
fore the taxpayer files a federal income tax
return for the prior taxable year, the amount
of the qualified tuition and related expenses
for the prior taxable year is reduced by the
amount of the excludable educational as-
sistance as provided in paragraph (f)(2) of
this section. If the excludable educational
assistance is received after the taxpayer has
filed a federal income tax return for the
prior taxable year, any education tax credit
claimed for the prior taxable year is sub-
ject to recapture as provided in paragraph
(f)(3) of this section.
(6)Examples.The following examples
illustrate the rules of this paragraph (f). In
February 18, 20034642003–7 I.R.B.

each example, assume that all the require-
ments to claim an education tax credit are
met. The examples are as follows:
Example 1.In January 1998, Student A, a full-
time freshman at University X, pays $2,000 for quali-
fied tuition and related expenses for a 16-hour work
load for the 1998 Spring semester. Prior to begin-
ning classes, Student A withdraws from 6 course hours.
On February 15, 1998, Student A receives a $750 re-
fund from University X. In September 1998, Stu-
dent A pays University X $1,000 to enroll half-time
for the 1998 Fall semester. Prior to beginning classes,
Student A withdraws from a 2-hour course, and she
receives a $250 refund in October 1998. Student A
computes the amount of qualified tuition and re-
lated expenses she may claim for 1998 by:
(i) Adding all qualified expenses paid during the tax-
able year ($2,000 + 1,000 = $3,000);
(ii) Adding all refunds of qualified tuition and re-
lated expenses received during the taxable year ($750
+ $250 = $1,000); and, then
(iii) Subtracting paragraph (ii) of thisExample 1
from paragraph (i) of thisExample 1($3,000 - $1,000
= $2,000). Therefore, Student A’s qualified tuition and
related expenses for 1998 are $2,000.
Example 2.(i) In December 1998, Student B, a se-
nior at College Y, pays $2,000 for qualified tuition and
related expenses for a 16-hour work load for the 1999
Spring semester. Prior to beginning classes, Student
B withdraws from a 4-hour course. On January 15,
1999, Student B files her 1998 income tax return and
claims a $400 Lifetime Learning Credit for the $2,000
qualified expenses paid in 1998, which reduces her
tax liability for 1998 by $400. On February 15, 1999,
Student B receives a $500 refund from College Y.
(ii) Student B calculates the increase in tax for 1999
by—
(A) Calculating the redetermined qualified ex-
penses for 1998 ($2,000 - $500 = $1,500);
(B) Calculating the redetermined credit for the re-
determined qualified expenses ($1,500 x .20 = $300);
and
(C) Calculating the difference in tax liability for
1998 resulting from the redetermined credit. Be-
cause Student B’s tax liability for 1998 was reduced
by the full amount of the $400 education tax credit
claimed on her 1998 income tax return, the differ-
ence in tax liability can be determined by subtract-
ing the redetermined credit from the credit claimed
in 1998 ($400 - $300 = $100).
(iii) Therefore, Student B must increase the tax on
her 1999 federal income tax return by $100.
Example 3.In September 1998, Student C pays Col-
lege Z $1,200 in qualified tuition and related ex-
penses to attend evening classes during the 1998 Fall
semester. Student C is an employee of Company R.
On January 15, 1999, Student C files a federal in-
come tax return for 1998 claiming a Lifetime Learn-
ing Credit of $240 (.20 x $1,200), which reduces
Student C’s tax liability for 1998 by $240. Pursuant
to an educational assistance program described in sec-
tion 127(b), Company R reimburses Student C in Feb-
ruary 1999 for the $1,200 of qualified tuition and
related expenses paid by Student C in 1998. The $240
education tax credit claimed by Student C for 1998
is subject to recapture. Because Student C paid no net
qualified tuition and related expenses for 1998, the re-
determined credit for 1998 is zero. Student C must in-
crease the amount of Student C’s 1999 tax by the
recapture amount, which is $240 (the difference in tax
liability for 1998 resulting from the redetermined credit
for 1998 ($0)). Because the $1,200 reimbursement re-
lates to expenses for which the taxpayer claimed an
education tax credit in a prior year, the reimburse-
ment does not reduce the amount of any qualified tu-
ition and related expenses that Student C paid in 1999.
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 section 602.101, paragraph (b)
is revised by adding the following entry in
numerical order to the table:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.25A–1 .......................................................................................................................................................... 1545–1630
*****
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 13, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 24,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 26, 2002, 67 F.R. 78687)
Section 45D.—New Markets
Tax Credit
26 CFR 1.45D–1T: New markets tax credit.
New markets tax credit.This ruling
holds that, for purposes of determining the
new markets tax credit under the facts of
the ruling, the amount of the qualified eq-
uity investment made by a limited liabil-
ity company (LLC) classified as a
partnership includes cash from a nonre-
course loan to the LLC that the LLC in-
vests as equity in a qualified community
development entity.
Rev. Rul. 2003–20
ISSUE
For purposes of determining the new
markets tax credit allowable under§45D
of the Internal Revenue Code, does the
amount of the qualified equity investment
made by a limited liability company (LLC)
classified as a partnership include cash from
a nonrecourse loan to the LLC that the LLC
invests as equity in a qualified commu-
nity development entity?
FACTS
In Year 1,CDE, a qualified commu-
nity development entity under§45D(c), re-
ceives a new markets tax credit allocation
of $2,000xfrom the Secretary of the Trea-
sury. In Year 2,X, a widely-held C corpo-
ration, contributes $792xfor a 99-percent
member interest inLLC, a limited liabil-
ity company that is classified as a partner-
ship for federal tax purposes.Y, a widely-
held C corporation, contributes $8xfor a
1-percent managing member interest in
LLC. LLCborrows $1,200xfromBank,an
unrelated third party.LLCcontributes
$2,000xfor an equity interest inCDE,
which is a limited liability company clas-
2003–7 I.R.B.465February 18, 2003

sified as a partnership for federal tax pur-
poses.CDEdesignatesLLC’s equity
investment inCDEas a qualified equity in-
vestment under§45D(b)(1)(C).
The $1,200xloan fromBankis a non-
recourse liability that is characterized as in-
debtedness ofLLCfor federal tax purposes.
The loan is secured only byLLC’s inter-
est inCDE. The loan is not secured by any
assets ofCDE. The full amount of the loan
is repayable at the end of Year 9. The loan
is not convertible into an equity interest in
LLC.
On April 1 of Year 2,CDElends the
$2,000xto a qualified active low-income
community business, as defined in
§45D(d)(2)(A). This $2,000xloan is re-
payable in full at the end of Year 9. Inter-
est payments received byCDEfrom the
qualified active low-income community
business are distributed toLLC.XandYre-
tain their membership interests inLLC, and
LLCretains its $2,000xequity investment
inCDE, until the end of Year 9. The en-
tire $2,000xloan byCDEremains out-
standing, and the borrower continues to
qualify as a qualified active low-income
community business, until the end of Year
9.
LLCclaims its qualified equity invest-
ment inCDEis $2,000xon each credit al-
lowance date and allocates the new markets
tax credit with respect to this amount toX
andYin accordance with§704(b).
LAW
Section 45D(a)(1) provides that for pur-
poses of§38, in the case of a taxpayer who
holds a qualified equity investment on a
credit allowance date (as defined in
§45D(a)(3)) of the investment which oc-
curs during the taxable year, the new mar-
kets tax credit determined under§45D for
the taxable year is an amount equal to the
applicable percentage (as defined in
§45D(a)(2)) of the amount paid to the
qualified community development entity for
the investment at its original issue. Sec-
tion 7701(a)(14) defines the term“tax-
payer”to mean any person subject to any
internal revenue tax. Section 7701(a)(1) pro-
vides that the term“person”shall be con-
strued to mean and include an individual,
a trust, estate, partnership, association, com-
pany or corporation.
Section 45D(b)(1) defines the term
“qualified equity investment”as any eq-
uity investment in a qualified community
development entity if (A) the investment is
acquired by the taxpayer at its original is-
sue (directly or through an underwriter)
solely in exchange for cash, (B) substan-
tially all of the cash is used by the quali-
fied community development entity to make
qualified low-income community invest-
ments, and (C) the investment is desig-
nated for purposes of§45D by the qualified
community development entity.
Section 45D(b)(2) provides that the
maximum amount of equity investments is-
sued by a qualified community develop-
ment entity which may be designated under
§45D(b)(1)(C) by the entity shall not ex-
ceed the portion of the limitation amount
allocated under§45D(f) to the entity.
Section 45D(b)(6) defines the term“eq-
uity investment”as (A) any stock (other
than nonqualified preferred stock as de-
fined in§351(g)(2)) in an entity that is a
corporation, and (B) any capital interest in
an entity that is a partnership.
Section 45D(c)(1) defines the term
“qualified community development en-
tity”as any domestic corporation or part-
nership if (A) the primary mission of the
entity is serving, or providing investment
capital for, low-income communities or low-
income persons, (B) the entity maintains ac-
countability to residents of low-income
communities through their representation on
any governing board of the entity or on any
advisory board to the entity, and (C) the en-
tity is certified by the Secretary for pur-
poses of§45D as being a qualified
community development entity.
Section 45D(d)(1) defines the term
“qualified low-income community invest-
ment”as (A) any capital or equity invest-
ment in, or loan to, any qualified active low-
income community business, (B) the
purchase from another qualified commu-
nity development entity of any loan made
by the entity which is a qualified low-
income community investment, (C) finan-
cial counseling and other services specified
in regulations prescribed by the Secretary
to businesses located in, and residents of,
low-income communities, and (D) any eq-
uity investment in, or loan to, any quali-
fied community development entity. Section
45D(d)(2)(A) defines the term“qualified ac-
tive low-income community business”as
any corporation or partnership that satis-
fies the requirements of§45D(d)(2)(A)(i)
through (v).
ANALYSIS
Section 45D(b)(1)(A) requires that a
qualified equity investment be acquired by
the taxpayer solely in exchange for cash.
Section 45D does not prohibit a taxpayer
(including any taxpayer who is a person as
defined under§7701(a)(1)) from using cash
derived from a borrowing, including non-
recourse borrowing, to make a qualified eq-
uity investment in a qualified community
development entity. The facts of this rev-
enue ruling state that the loan fromBank
is characterized as indebtedness ofLLCfor
federal tax purposes. The loan proceeds and
the contributions byXandYtoLLCare
used byLLCto make an equity invest-
ment of $2,000xinCDE.The requirements
of§45D(b)(1)(A) are satisfied becauseLLC
acquires its investment inCDEat its origi-
nal issue solely in exchange for cash. The
requirements of§45D(b)(1)(B) are satis-
fied becauseCDEuses the entire equity in-
vestment of $2,000xto make a qualified
low-income community investment. The re-
quirements of§45D(b)(1)(C) are satis-
fied becauseCDEdesignates the equity
investment of $2,000xfor purposes of
§45D. Accordingly,LLCis treated as hav-
ing made a qualified equity investment of
$2,000xinCDEwhenLLCacquires its eq-
uity interest inCDE.LLCmay claim a new
markets tax credit on each credit allow-
ance date in an amount determined under
§45D that is equal to the applicable per-
centage of the $2,000xqualified equity in-
vestment inCDE.LLCmay allocate toX
andYthe amount of the new markets tax
credit thatLLCclaims with respect to the
$2,000xqualified equity investment. This
allocation must be made in accordance with
§704(b) (which provides rules regarding a
partnership’s allocation of income, gain,
loss, deduction, or credit (or item thereof)
among the partners).
HOLDING
Under the facts of this revenue ruling,
for purposes of determining the new mar-
kets tax credit allowable under§45D, the
amount of the qualified equity investment
made by an LLC classified as a partner-
ship includes cash from a nonrecourse loan
to the LLC that the LLC invests as eq-
uity in a qualified community develop-
ment entity.
February 18, 20034662003–7 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael J. Goldman of the Office of
Associate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this revenue ruling, con-
tact Mr. Goldman at (202) 622–3080. For
information regarding issues under§45D,
contact Gregory N. Doran of the Office of
Associate Chief Counsel (Passthroughs and
Special Industries) at (202) 622–3040. These
are not toll-free calls.
Section 355.—Distribution of
Stock and Securities of a
Controlled Corporation
26 CFR 1.355–3: Active conduct of a trade or
business.
Section 355.This ruling discusses
whether the acquisition by D, a brand X au-
tomobile dealer, of a brand Y automobile
dealership constitutes an expansion of the
brand X business or an acquisition of a new
or different business under section 1.355–
3(b)(3)(ii) of the regulations. Rev. Rul.
57–190 obsoleted.
Rev. Rul. 2003–18
ISSUE
Whether the acquisition by a dealer en-
gaged in the sale and service of brand X
automobiles of a franchise to sell and ser-
vice brand Y automobiles and the assets to
operate the franchise constitutes an expan-
sion of the brand X business rather than the
acquisition of a new or different business
under§1.355–3(b)(3)(ii) of the Income Tax
Regulations.
FACTS
Corporation D has been engaged un-
der a dealer franchise in the sale and ser-
vice of brand X automobiles since Year 1.
For over five years before Year 8, these op-
erations had been carried on in two build-
ings (L and M) within the same city. In Year
8, D acquired a franchise for the sale and
service of brand Y automobiles and pur-
chased the inventories, equipment, and
leasehold of a former brand Y automo-
bile dealer who operated in a building ad-
joining D’s building L. Shortly thereafter,
D relocated the inventory of brand X au-
tomobiles from building L to building M.
Thereafter, D used building M exclusively
for the sale and service of brand X auto-
mobiles and used building L and the ad-
joining leasehold exclusively for the sale
and service of brand Y automobiles.
In Year 10, D transferred all of the as-
sets, including building M, and liabilities
of the brand X automobile dealership to a
new corporation, C, in exchange for the
stock of C, and distributed the stock of C
pro ratato its shareholders.
LAW AND ANALYSIS
Section 355(a) of the Internal Revenue
Code provides that a corporation may dis-
tribute stock and securities in a controlled
corporation to its shareholders and secu-
rity holders in a transaction that will not
cause the distributees to recognize gain or
loss, provided that, among other require-
ments, (i) each of the distributing corpo-
ration and controlled corporation is engaged,
immediately after the distribution, in the ac-
tive conduct of a trade or business, (ii) each
trade or business has been actively con-
ducted throughout the five-year period end-
ing on the date of the distribution, and (iii)
neither trade or business has been acquired
in a transaction in which gain or loss was
recognized, in whole or in part, within the
five-year period. Sections 355(b)(1)(A),
355(b)(2)(B), and 355(b)(2)(C).
In determining whether an active trade
or business has been conducted by a cor-
poration throughout the five-year period pre-
ceding the distribution, the fact that a trade
or business underwent change during the
five-year period (for example, by the ad-
dition of new or the dropping of old prod-
ucts, changes in production capacity, and
the like) shall be disregarded, provided that
the changes are not of such a character as
to constitute the acquisition of a new or dif-
ferent business. Section 1.355–3(b)(3)(ii).
In particular, if a corporation engaged in the
active conduct of one trade or business dur-
ing that five-year period purchased, cre-
ated, or otherwise acquired another trade or
business in the same line of business, then
the acquisition of that other business is or-
dinarily treated as an expansion of the origi-
nal business, all of which is treated as
having been actively conducted during that
five-year period, unless that purchase, cre-
ation, or other acquisition effects a change
of such character as to constitute the ac-
quisition of a new or different business.Id.
In Example (8) of§1.355–3(c), corpo-
ration X had owned and operated hard-
ware stores in several states for four years
before purchasing the assets of a hard-
ware store in State M where X had not pre-
viously conducted business. Two years after
the purchase, X transferred the State M store
and related business assets to new subsid-
iary Y and distributed the Y stock to X’s
shareholders. Citing§1.355–3(b)(3)(i) and
(ii), the example concludes that X and Y
both satisfy the requirements of section
355(b).
In this case, because (i) the product of
the brand X automobile dealership is simi-
lar to the product of the brand Y automo-
bile dealership, (ii) the business activities
associated with the operation of the brand
X automobile dealership (i.e., sales and ser-
vice) are the same as the business activi-
ties associated with the operation of the
brand Y automobile dealership, and (iii) the
operation of the brand Y automobile deal-
ership involves the use of the experience
and know-how that D developed in the op-
eration of the brand X automobile dealer-
ship, the brand Y automobile dealership is
in the same line of business as the brand
X dealership and its acquisition does not
constitute the acquisition of a new or dif-
ferent business under§1.355–3(b)(3)(ii). In-
stead, it constitutes an expansion of D’s
existing business. Accordingly, each of D
and C is engaged in the active conduct of
a five-year active trade or business imme-
diately after the distribution.See§1.355–
3(c), Example (8).
HOLDING
The acquisition by D, a brand X auto-
mobile dealer, of the brand Y automobile
dealership constitutes an expansion of the
brand X business and does not constitute
the acquisition of a new or different busi-
ness under§1.355–3(b)(3)(ii).
EFFECT ON OTHER REVENUE
RULING
Rev. Rul. 57–190, 1957–1 C.B. 121, is
obsoleted as of January 5, 1989.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Lisa S. Dobson of the Office of As-
sociate Chief Counsel (Corporate). For
further information regarding this revenue
2003–7 I.R.B.467February 18, 2003

ruling, contact Ms. Dobson at (202) 622–
7790 (not a toll-free call).
Section 368.—Definitions
Relating to Corporate
Reorganizations
26 CFR 1.368–1: Purpose and scope of exception
of reorganization exchanges.
Insurance demutualization.This rul-
ing provides guidance as to the tax conse-
quences that occur when, as described in
the facts set forth in this ruling, a mutual
insurance company converts to a stock in-
surance company.
Rev. Rul. 2003–19
ISSUE
What are the tax consequences when, as
described in the facts below, a mutual in-
surance company converts to a stock in-
surance company?
FACTS
In each of the situations described be-
low, Mutual Company is a State Y mu-
tual insurance company that offers life
insurance and annuity products. Members
of Mutual Company have both member-
ship interests in Mutual Company and con-
tractual rights under either insurance policies
or annuity contracts.
A membership interest in Mutual Com-
pany arises from the purchase of a life in-
surance or an annuity contract and is
inextricably tied to the contract from the
time of purchase. A membership interest in
Mutual Company entitles the member to
vote for the board of directors and to re-
ceive assets or other consideration in the
event of the demutualization, dissolution,
or liquidation of Mutual Company. The
rights inherent in each membership inter-
est are created by operation of State Y law
solely as a result of the policyholder’s ac-
quisition of the underlying contract from
Mutual Company and cannot be transferred
separately from that contract. Further, if the
contract is surrendered by the policyholder
or, in the event the contract is terminated
by payment of benefits to the contract ben-
eficiary, these membership interests cease
to exist, having no continuing value.
Mutual Holding Company is a mutual
insurance holding company. A member-
ship interest in Mutual Holding Company
arises from the purchase of a life insur-
ance or an annuity contract from a wholly
owned subsidiary of Mutual Holding Com-
pany and is inextricably tied to the con-
tract from the time of purchase. A
membership interest in Mutual Holding
Company entitles the member to vote for
the board of directors of Mutual Holding
Company and to receive assets or other con-
sideration in the event of the demutualiza-
tion, dissolution, or liquidation of Mutual
Holding Company. The rights inherent in
each membership interest are created by op-
eration of State Y law solely as a result of
the policyholder’s acquisition of the un-
derlying contract from a wholly owned sub-
sidiary of Mutual Holding Company and
cannot be transferred separately from that
contract. Further, if the contract is surren-
dered by the policyholder or, in the event
the contract is terminated by payment of
benefits to the contract beneficiary, these
membership interests cease to exist, hav-
ing no continuing value.
Stock Holding Company is a stock com-
pany the articles of incorporation and by-
laws of which authorize the issuance of
capital stock.
Each transaction described below is un-
dertaken for a valid business purpose.
Situation 1. Pursuant to a plan to con-
vert Mutual Company from a mutual in-
surance company to a stock insurance
company, Mutual Company amends and re-
states its articles of incorporation and by-
laws to authorize the issuance of capital
stock and changes its name to Stock Com-
pany. Pursuant to State Y law, members of
Mutual Company surrender their member-
ship interests in Mutual Company to Stock
Company in exchange for all of Stock
Company’s voting common stock. How-
ever, those persons holding Mutual Com-
pany membership interests under contracts
covered by§403(b) or§408(b) of the In-
come Tax Code receive policy credits in ex-
change for those interests.
Situation 2. Pursuant to State Y law and
pursuant to an integrated plan to convert
Mutual Company from a mutual insur-
ance company to a stock insurance com-
pany and create a holding company
structure, the following events occur. Mu-
tual Company incorporates Mutual Hold-
ing Company as a mutual insurance holding
company, which, in turn, incorporates Stock
Holding Company. Thereafter, the follow-
ing events occur substantially contempo-
raneously: Mutual Company amends and re-
states its articles of incorporation and by-
laws to authorize the issuance of capital
stock and changes its name to Stock Com-
pany; Mutual Company’s members receive
Mutual Holding Company membership in-
terests in place of their former Mutual Com-
pany membership interests; Stock Company
issues all of its stock directly to Mutual
Holding Company; and Mutual Holding
Company transfers all of its Stock Com-
pany stock to Stock Holding Company in
exchange for voting stock of Stock Hold-
ing Company.
After these transactions, the former
members of Mutual Company are in con-
trol (within the meaning of§368(c)) of Mu-
tual Holding Company. Mutual Holding
Company plans to maintain control (within
the meaning of§368(c)) of Stock Hold-
ing Company after these transactions, and
Stock Holding Company plans to main-
tain control (within the meaning of§368(c))
of Stock Company after these transactions.
Situation 3. Mutual Holding Company
owns all of the stock of Stock Holding
Company, which owns all of the stock of
Stock Company 1, a stock insurance com-
pany that offers life insurance and annu-
ity products. Pursuant to State Y law and
pursuant to an integrated plan to acquire
Mutual Company, the following events oc-
cur substantially contemporaneously: Mu-
tual Company amends and restates its
articles of incorporation and by-laws to au-
thorize the issuance of capital stock and
changes its name to Stock Company 2; Mu-
tual Company’s members receive Mutual
Holding Company membership interests in
place of their former Mutual Company
membership interests; Stock Company 2 is-
sues all of its stock directly to Mutual Hold-
ing Company; and Mutual Holding
Company transfers all of its Stock Com-
pany 2 stock to Stock Holding Company
in exchange for voting stock of Stock Hold-
ing Company.
After these transactions, the former
members of Mutual Company are not in
control (within the meaning of§368(c)) of
Mutual Holding Company. Mutual Hold-
ing Company plans to maintain control
(within the meaning of§368(c)) of Stock
February 18, 20034682003–7 I.R.B.

Holding Company after these transactions,
and Stock Holding Company plans to main-
tain control (within the meaning of§368(c))
of Stock Company 2 after these transac-
tions.
In Situations 1 and 2, under State Y law,
Stock Company’s corporate existence as a
stock insurance company is a continua-
tion of Mutual Company’s corporate ex-
istence as a mutual insurance company. In
Situation 3, under State Y law, Stock Com-
pany 2’s corporate existence as a stock in-
surance company is a continuation of
Mutual Company’s corporate existence as
a mutual insurance company. In Situa-
tions 1, 2, and 3, the conversion of Mu-
tual Company from a mutual insurance
company to a stock insurance company does
not affect any of its policies in force as of
the time of the conversion nor the policy-
holders’rights to receive any policy divi-
dends thereunder. Moreover, after the
transactions, Stock Company has no plan
or intention to terminate or dispose of the
policies in force as of the time of the con-
version other than pursuant to their own
terms. After the conversions, Stock Com-
pany and Stock Company 2 continue to of-
fer life insurance and annuity products.
LAW
Section 351(a) provides that no gain or
loss will be recognized if property is trans-
ferred to a corporation by one or more per-
sons solely in exchange for stock in such
corporation and immediately after the ex-
change such person or persons are in con-
trol (as defined in§368(c)) of the
corporation.
Section 368(a)(1)(B) provides that the
term reorganization means the acquisition
by one corporation, in exchange solely for
all or a part of its voting stock (or in ex-
change solely for all or a part of the vot-
ing stock of a corporation which is in
control of the acquiring corporation), of
stock of another corporation if, immedi-
ately after the acquisition, the acquiring cor-
poration has control of such other
corporation (whether or not such acquir-
ing corporation had control immediately be-
fore the acquisition).
Section 368(a)(1)(E) provides that the
term reorganization includes a recapital-
ization. InHelvering v. Southwest Con-
sol. Corp., 315 U.S. 194, 202 (1942), the
Supreme Court defined a recapitalization as
a“reshuffling of a capital structure within
the framework of an existing corporation.”
Section 368(a)(1)(F) provides that the
term reorganization means a mere change
in identity, form, or place of organization
of one corporation, however effected.
Section 354(a) provides that, in gen-
eral, no gain or loss shall be recognized if
stock or securities in a corporation a party
to a reorganization are, in pursuance of the
plan of reorganization, exchanged solely for
stock or securities in such corporation or
in another corporation a party to the reor-
ganization.
Section 368(a)(2)(C) states, in relevant
part, that a transaction otherwise qualify-
ing under§368(a)(1)(B) will not be dis-
qualified by reason of the fact that part or
all of the stock that was acquired in the
transaction is transferred to a corporation
controlled by the corporation acquiring such
stock.
Section 1.368–2(k)(1) of the Income Tax
Regulations restates the general rule of
§368(a)(2)(C) but permits the assets or
stock acquired in certain types of reorga-
nizations, including reorganizations under
section 368(a)(1)(B), to be successively
transferred to one or more corporations con-
trolled (as defined in§368(c)) in each trans-
fer by the transferor corporation without
disqualifying the reorganization.
Generally, to qualify as a reorganiza-
tion under§368(a)(1), a transaction must
satisfy the continuity of business enter-
prise (COBE) requirement. Section 1.368–
1(d)(1) provides that COBE requires the
issuing corporation (generally the acquir-
ing corporation) in a potential reorganiza-
tion to either continue the target
corporation’s historic business or use a sig-
nificant portion of the target’s historic busi-
ness assets in a business. Pursuant to
§1.368–1(d)(4)(i), the issuing corpora-
tion is treated as holding all of the busi-
nesses and assets of all members of its
qualified group. Section 1.368–1(d)(4)(ii)
defines a qualified group as one or more
chains of corporations connected through
stock ownership with the issuing corpora-
tion, but only if the issuing corporation
owns directly stock meeting the require-
ments of§368(c) in at least one other cor-
poration,andstockmeetingthe
requirements of§368(c) in each of the cor-
porations (except the issuing corporation)
is owned directly by one of the other cor-
porations. Continuity of business enter-
prise is not required for a recapitalization
to qualify as a reorganization under
§368(a)(1)(E).SeeRev. Rul. 82–34, 1982–1
C.B. 59.
Generally, to qualify as a reorganiza-
tion under§368(a)(1), a transaction must
satisfy the continuity of interest require-
ment. Section 1.368–1(e)(1)(i) provides that
continuity of interest requires that in sub-
stance a substantial part of the value of the
proprietary interests in the target corpora-
tion be preserved in the reorganization. All
facts and circumstances must be consid-
ered in determining whether, in substance,
a proprietary interest in the target corpo-
ration is preserved. Continuity of interest
is not a requirement for reorganizations un-
der§368(a)(1)(E).SeeRev. Rul. 77–415,
1977–2 C.B. 311.
InPaulsen v. Commissioner, 469 U.S.
131 (1985), a state-chartered stock sav-
ings and loan association merged into a
federally-chartered non-stock mutual sav-
ings and loan association. The stockhold-
ers exchanged all of their stock in the state-
chartered stock savings and loan association
for passbook savings accounts and certifi-
cates of deposit in the federally-chartered
non-stock mutual savings and loan asso-
ciation. The Supreme Court determined that
the passbooks and certificates of deposit in
the federally-chartered non-stock mutual
savings and loan association had a pre-
dominantly cash-equivalent component and
an insubstantial equity component. Be-
cause the passbooks and certificates of de-
posit essentially represented cash with an
insubstantial equity component, the Court
held that the transaction did not satisfy the
continuity of interest requirement and, there-
fore, did not qualify as a tax-free reorga-
nization.
In Rev. Rul. 69–3, 1969–1 C.B. 103, X,
a mutual savings and loan association,
merged into Y, another mutual savings and
loan association. In the merger, Y issued to
each share account holder of X a share ac-
count equal to the dollar amount evidenced
by such holder’s passbook. Because the
share account holders of X received pro-
prietary interests in Y that were equiva-
lent to their equity interests in X before the
exchange, the exchange was solely an
equity-for-equity exchange that satisfied the
continuity of interest requirement. Accord-
ingly, the Service ruled that the transac-
tion qualified as a tax-free reorganization
under§368(a)(1)(A).
2003–7 I.R.B.469February 18, 2003

Section 403(b)(1) provides, in general,
that certain amounts contributed to an an-
nuity contract that satisfies the require-
ments of§403(b) are taxable to the
distributee under§72 in the year actually
distributed. Similarly,§408(d) provides, in
general, that any amount paid or distrib-
uted out of an individual retirement plan is
included in gross income by the payee or
distributee, as the case may be, in the man-
ner provided under§72.
ANALYSIS
Situation 1. Because Stock Company is
the same corporation as Mutual Company
under State Y law, the conversion from a
mutual insurance company to a stock in-
surance company is a reorganization un-
der§368(a)(1)(E) as well as a reorgan-
ization under§368(a)(1)(F), and the ex-
change by members of their Mutual Com-
pany membership interests for stock in
Stock Company is pursuant to that reorga-
nization.
Those persons holding Mutual Com-
pany interests under contracts covered by
§403(b) or§408(b) who receive only
policy credits in the conversion are treated
as receiving those policy credits in redemp-
tion of their Mutual Company interests.
However, pursuant to§§403(b)(1) and
408(d), no amount credited to the account
of a policyholder under a§403(b) con-
tract or under a§408(b) contract is tax-
able until actually distributed to the
policyholder or to a beneficiary under the
contract in accordance with§72.
Situation 2. As in Situation 1, because
Stock Company is the same corporation as
Mutual Company under State Y law, the
conversion from a mutual insurance com-
pany to a stock insurance company is a re-
organization under§368(a)(1)(E) as well
as a reorganization under§368(a)(1)(F).
This conclusion is not altered by the fact
that there is a subsequent change in the di-
rect ownership of the converted company.
See§1.368–1(e)(1); Rev. Rul. 96–29,
1996–1 C.B. 50; Rev. Rul. 77–415, 1977–2
C.B. 311.
Each of the membership interests in Mu-
tual Company and Mutual Holding Com-
pany constitutes a proprietary interest in the
entities that is treated as voting stock.See
Rev. Rul. 69–3, 1969–1 C.B. 103. Because
Mutual Holding Company acquires, in ex-
change solely for membership interests in
Mutual Holding Company, either an inter-
est equivalent to the stock of Stock Com-
pany or the actual stock of Stock Company,
and, immediately after that acquisition, Mu-
tual Holding Company controls Stock Com-
pany, that acquisition qualifies as a
reorganization under§368(a)(1)(B), pro-
vided that the continuity of business en-
terprise and continuity of interest
requirements are satisfied. Because Stock
Company continues to offer life insurance
and annuity products after the transac-
tions described herein, the continuity of
business enterprise requirement is satis-
fied.See§1.368–1(d)(1). In addition, the
acquisition satisfies the continuity of in-
terest requirement because, in the overall
transaction, the Mutual Company mem-
bers receive Mutual Holding Company
membership interests in place of their
former Mutual Company membership in-
terests.SeeRev. Rul. 69–3, 1969–1 C.B.
103;cf. Paulsen v. Commissioner, 469 U.S.
131 (1985). Thus, the acquisition quali-
fies as a reorganization within the mean-
ing of§368(a)(1)(B). Moreover, Mutual
Holding Company’s subsequent transfer of
the Stock Company stock to Stock Hold-
ing Company does not prevent the acqui-
sition from qualifying as a reorganization
under§368(a)(1)(B).See§368(a)(2)(C);
§1.368–1(d)(4)(i);§1.368–2(k).
For purposes of§354, the former Mu-
tual Company’s members’exchange of their
ownership interests for Mutual Holding
Company membership interests is pursu-
ant to that reorganization. That exchange
also qualifies as a transfer described in
§351, even though Mutual Holding Com-
pany transfers all of its Stock Company
stock to Stock Holding Company.SeeRev.
Rul. 77–449, 1977–2 C.B. 110.
Finally, because Stock Holding Com-
pany acquires in exchange solely for vot-
ing stock the stock of Stock Company and,
immediately after that acquisition, Stock
Holding Company controls Stock Com-
pany, that acquisition qualifies as a reor-
ganization under§368(a)(1)(B). For
purposes of§354, Mutual Holding Com-
pany’s exchange of stock of Stock Com-
pany for stock of Stock Holding Company
is pursuant to that reorganization. In addi-
tion, that exchange qualifies as a transfer
described in§351.
Situation 3. For the reasons described in
the analysis of Situation 2, the conver-
sion from Mutual Company to Stock Com-
pany 2 qualifies as a reorganization under
§368(a)(1)(E) as well as a reorganization
under§368(a)(1)(F). In addition, Mutual
Holding Company’s acquisition, in ex-
change solely for membership interests in
Mutual Holding Company, of either an in-
terest equivalent to the stock of Stock Com-
pany 2 or the actual stock of Stock
Company 2 qualifies as a reorganization un-
der§368(a)(1)(B). For purposes of§354,
the former Mutual Company’s members’ex-
change of their ownership interests for Mu-
tual Holding Company membership interests
is pursuant to that reorganization. Finally,
Mutual Holding Company’s transfer of its
Stock Company 2 stock to Stock Holding
Company qualifies as a reorganization
within the meaning of§368(a)(1)(B) and
as a transfer described in§351.
HOLDING
This revenue ruling describes the tax
consequences that occur when, as described
in the facts set forth in this ruling, a mu-
tual insurance company converts to a stock
insurance company. The same analysis with
respect to subchapter C also would apply
if Mutual Company had offered only prop-
erty and casualty insurance products and not
life insurance and annuity products.
The transactions described in Situa-
tions 1, 2, and 3 have no effect on the date
each life insurance and annuity contract of
Mutual Company was issued, entered into,
purchased or came into existence for pur-
poses of§§72(e)(4), 72(e)(5), 72(e)(10),
72(e)(11), 72(q), 72(s), 72(u), 72(v), 101(f),
264(a)(3), 264(a)(4), 264(f), 7702 and
7702A. Furthermore, the transactions do not
require retesting or the starting of new test
periods for contracts under§§264(d)(1),
7702(f)(7)(B) through (E) and 7702A
(c)(3)(A).
The transactions described in Situa-
tions 1, 2, and 3 have no effect on each life
insurance or annuity contract that is part of
a qualified plan within the meaning of
§401(a) or that meets the requirements of
§403(b) or§408(b) for purposes of
§§72(e)(5), 401, 402, 403, 408 and 408A.
These transactions do not result in a dis-
tribution in violation of§403(b)(11) or oth-
erwise disqualify a§403(b) contract under
§403(b). Similarly, these transactions do not
result in an actual or deemed distribution
in violation of§401(k)(2)(B) or other-
wise disqualify a qualified cash or de-
ferred arrangement within the meaning of
§401(k). These transactions do not con-
February 18, 20034702003–7 I.R.B.

stitute, with respect to policies issued by
Mutual Company and in force prior to the
effective date of the reorganizations and that
are tax-qualified under§401(a) or meet the
requirements of§403(b) or§408(b), a dis-
tribution from or a contribution to any of
these policies, plans or arrangements for
federal income tax purposes. Finally, the
transactions described in Situations 1, 2, and
3 do not result in a distribution and, thus,
do not result in: (a) any gross income to the
employee or the beneficiary of a contract
as a distribution from a qualified retire-
ment plan under§72, prior to an actual re-
ceipt of some amount therefrom by such
employee or beneficiary; (b) any 10 per-
cent additional tax under§72(t) for pre-
mature distributions from a qualified
retirement plan; (c) any 6 percent or 10 per-
cent excise tax under§§4973 or 4979, re-
spectively, for excess contributions to certain
qualified retirement plans; or (d) a desig-
nated distribution under§3405(e)(1)(A) that
is subject to withholding under§3405(b)
or (c).
DRAFTING INFORMATION
The principal authors of this revenue rul-
ing are Jeffrey B. Fienberg and Emidio J.
Forlini, Jr., of the Office of Associate Chief
Counsel (Corporate). For further informa-
tion regarding this revenue ruling, con-
tact either Mr. Fienberg or Mr. Forlini at
(202) 622–7930 (not a toll-free call).
Section 645.—Certain
Revocable Trusts Treated as
Part of Estate
26 CFR 1.645–1: Election by certain revocable
trusts to be treated as part of estate.
T.D. 9032
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and
602
Election to Treat Trust as Part
of an Estate
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations under section 645 relating
to an election for certain revocable trusts
to be treated and taxed as part of an es-
tate. The final regulations provide the pro-
cedures and requirements for making the
election, rules regarding the tax treatment
of the trust and the estate while the elec-
tion is in effect, and rules regarding the ter-
mination of the election. This document also
contains final regulations clarifying the re-
porting rules for a trust, or portion of a trust,
that is treated as owned by the grantor, or
another person under the provisions of sub-
part E, part I, subchapter J, chapter 1 of the
Internal Revenue Code, for the taxable year
ending with the death of the grantor or other
person.
DATES:Effective Date:These regulations
are effective December 24, 2002.
Applicability Date:For dates of appli-
cability of these regulations, see§§1.645–
1(j), 1.671–4(i)(3), 1.6072–1(a)(2)(ii),
301.6109–1(a)(6).
FOR FURTHER INFORMATION CON-
TACT: Faith Colson, (202) 622–3060
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been previ-
ously reviewed and approved by the Of-
fice of Management and Budget in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)) un-
der control number 1545–1578. This final
rule makes no substantive change in the pre-
viously approved collection of informa-
tion.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
it displays a valid control number assigned
by the Office of Management and Bud-
get.
Books or records relating to a collec-
tion of information must be retained as long
as their contents 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
On December 18, 2000, the IRS and the
Treasury Department published a notice of
proposed rulemaking (REG–106542–98,
2001–1 C.B. 473) in theFederal Regis-
ter(65 FR 79015) under section 645 re-
lating to an election for certain revocable
trusts to be treated and taxed as part of an
estate. This notice also contained proposed
amendments to the regulations under sec-
tion 671 relating to reporting rules for a
trust, or portion of a trust, that is treated as
owned by the grantor or another person un-
der the provisions of subpart E, part I, sub-
chapter J, chapter 1 of the Internal Revenue
Code (Code), for the taxable year ending
with the death of the grantor or other per-
son. Written comments responding to the
notice of proposed rulemaking were re-
ceived. A public hearing on the notice of
proposed rulemaking was scheduled for
April 11, 2001, but was canceled when no
one requested to speak at the hearing. Af-
ter consideration of all comments, the pro-
posed regulations, with certain changes in
response to the comments, are adopted as
final regulations by this Treasury deci-
sion.
Summary of Comments and
Explanation of Revisions
A.Comments and Changes to
§1.645–1(b): Definitions
Under section 645, if both the execu-
tor (if any) of an estate and the trustee of
a qualified revocable trust (QRT) elect the
treatment provided in section 645, the trust
shall be treated and taxed for income tax
purposes as part of the estate (and not as
a separate trust) during the election pe-
riod. The proposed regulations define a QRT
as any trust (or portion thereof) that on the
date of death of the decedent was treated
as owned by the decedent under section 676
by reason of a power held by the dece-
dent (determined without regard to sec-
tion 672(e)). In accordance with the
legislative history accompanying section
645, the proposed regulations provide that
a trust, in which the power is held solely
by a nonadverse party, is not a QRT. See
H.R. Conf. Rep. No. 220, 105
th
Cong., 1
st
Sess. at 711 (1997). In addition, the pro-
posed regulations provide that a trust, in
which the power was exercisable by the de-
cedent only with the approval or consent
of another person, is not a QRT.
2003–7 I.R.B.471February 18, 2003

Some commentators suggested that, if
the decedent’s power to revoke the trust was
exercisable only with the approval or con-
sent of a nonadverse party, the trust should
qualify as a QRT. Many persons use revo-
cable trusts as property management tools
and, to protect the grantor from improvi-
dent decisions or undue influence, their trust
agreements may provide that any revoca-
tion of the trust by the grantor will be ef-
fective only if consented to by a nonadverse
party. The commentators noted that the pro-
hibition described in the legislative his-
tory addresses trusts in which only a
nonadverse party has a power to revoke.
In response to these comments, the fi-
nal regulations provide that a trust that was
treated as owned by the decedent under sec-
tion 676 by reason of a power that was ex-
ercisable by the decedent with the consent
or approval of a nonadverse party is a QRT.
The final regulations also clarify that while
a trust, in which the power to revoke is held
only by the decedent’s spouse and not by
the decedent, is not a QRT, a trust, in which
the power to revoke is exercisable by the
decedent with the approval or consent of
the decedent’s spouse, is a QRT.
Clarification has also been requested re-
garding whether a trust qualifies as a QRT
if the grantor’s power to revoke the trust
lapses prior to the grantor’s death as a re-
sult of the grantor’s incapacity. Some trust
documents for revocable trusts provide that
the trustee is to disregard the instructions
of the grantor to revoke the trust if the
grantor is incapacitated. The IRS and the
Treasury Department believe that, if an
agent or legal representative of the grantor
can revoke the trust under state law dur-
ing the grantor’s incapacity, the trust will
qualify as a QRT, even if the grantor is in-
capacitated on the date of the grantor’s
death.
The proposed regulations also provide
that a QRT must be a domestic trust un-
der section 7701(a)(30)(E) and that a sec-
tion 645 election for a QRT must result in
adomesticestateundersection
7701(a)(30)(D). Several commentators sug-
gested that the section 645 election should
also be available in situations in which ei-
ther the QRT or the related estate, or both,
are foreign. According to the commenta-
tors, U.S. citizens living abroad frequently
use revocable trusts to avoid jurisdictional
disputes concerning the decedent’s assets,
as well as the cumbersome probate and
forced heirship rules of several foreign
countries. Many of the trusts will be for-
eign trusts upon the grantor’s death and, if
a section 645 election is permitted to be
made, will become part of a foreign es-
tate. The commentators questioned the au-
thority for the domestic restriction provided
in the proposed regulations given that the
statute and the legislative history do not ex-
plicitly limit the applicability of a section
645 election to domestic trusts and domes-
tic estates. Upon consideration of these
comments, the requirements that a QRT be
a domestic trust and that the election re-
sult in a domestic estate are removed from
the final regulations. The IRS and the Trea-
sury Department note, however, that a trust
for which a section 645 election is made is
treated as an estate for purposes of Sub-
title A of the Code, but not for purposes of
Subtitle F. Accordingly, information report-
ing under section 6048 will continue to ap-
ply with respect to a foreign trust even
though a section 645 election has been
made to allow the foreign trust to be taxed
as part of an estate for purposes of Sub-
title A of the Code.
The proposed regulations used the term
personal representative to denote the fidu-
ciary (or fiduciaries) of the decedent’s es-
tate. One commentator requested that the
definition of personal representative in the
proposed regulations be expanded to in-
clude a personal representative, as well as
an executor and an administrator. To be con-
sistent with the language of the statute, the
final regulations use the term executor, in-
stead of personal representative, to de-
note the fiduciary of the decedent’s estate.
With the exception of including a personal
representative in the definition of an ex-
ecutor as requested by the comment, the
definition of executor in the final regula-
tions is generally the same as the defini-
tion of a personal representative in the
proposed regulations. The definition of ex-
ecutor used in these final regulations, how-
ever, is not identical to the definition of an
executor under section 2203 of the Code:
under these final regulations, a person who
has actual or constructive possession of
property of the decedent is not an execu-
tor unless that person is also appointed, or
qualified as an executor, administrator, or
personal representative of the decedent’s es-
tate.
B.Comments and Changes to
§1.645–1(c): The Election
The section 645 election may be made
whether or not an executor is appointed for
the decedent’s estate. Under the final regu-
lations, if an executor is appointed for the
decedent’s estate, the executor and the
trustee of the QRT make the section 645
election by filing a form provided by the
IRS for the purpose of making the sec-
tion 645 election (election form). If an ex-
ecutor is not appointed for the decedent’s
estate, the trustee makes the section 645
election by filing the election form. Form
8855,“Election to Treat a Qualified Re-
vocable Trust as Part of an Estate,”will
be available for making the section 645
election within six months after the pub-
lication of these final regulations.
Guidance has also been requested re-
garding when the section 645 election must
be made if a Form 1041“U.S. Income Tax
Return for Estates and Trusts,”is not re-
quired to be filed for the first taxable year
of the combined electing trust and related
estate, if there is an executor, or of the elect-
ing trust if there is no executor, because the
combined electing trust and related es-
tate, or electing trust, as the case may be,
does not have sufficient income to require
the filing of a return. A commentator also
suggested permitting the section 645 elec-
tion to be made at any time during the three
year period after the due date for the Form
1041 for the estate’s first taxable year. The
final regulations do not adopt this sugges-
tion and clarify that, for the election to be
valid, the election form must be filed not
later than the time prescribed under sec-
tion 6072 for filing the Form 1041 for the
first taxable year of the combined elect-
ing trust and related estate, if there is an ex-
ecutor, or of the first taxable year of the
electing trust, if there is no executor (re-
gardless of whether there is sufficient in-
come to require the filing of that return).
If an extension is granted for the filing of
the Form 1041 for the first taxable year of
the combined electing trust and related es-
tate, if there is an executor, or the elect-
ing trust, if there is no executor, the election
form will be timely filed if it is filed by the
time prescribed under section 6072 for fil-
ing the Form 1041 including the exten-
sion granted with respect to the Form 1041.
A commentator noted that, under the
proposed regulations, an executor will have
direct liability for the tax due on Forms
February 18, 20034722003–7 I.R.B.

1041 filed for the combined electing trust
and related estate. Accordingly, the execu-
tor can be personally liable for tax on the
income from assets that are not under the
executor’s control. Further, the executor may
not have sufficient assets in the estate to
meet the income tax responsibilities of the
combined electing trust and related es-
tate. A commentator also noted that the re-
quirement in the proposed regulations that
the trustee agree to cooperate to insure that
the Forms 1041 for the combined related
estate and electing trust are timely filed and
the tax due timely paid places the trustee
in an untenable position because the ex-
ecutor controls the filing of the return and
the payment of the tax.
The IRS and the Treasury Department
note that under section 645, the electing
trust is not treated as part of the related es-
tate for purposes of Subtitle F of the Code.
Accordingly, although the final regula-
tions permit an electing trust and related es-
tate to file a single, combined Form 1041,
the electing trust and related estate con-
tinue to be separate taxpayers for purposes
of Subtitle F, and the fiduciaries of the elect-
ing trust and the fiduciaries of the related
estate each continue to have a responsibil-
ity for filing returns and paying the tax due
for their respective entities even though a
section 645 election has been made. Un-
der the final regulations, the executor must
file a complete, accurate, and timely Form
1041 for the combined related estate and
electing trust for each taxable year during
the election period. The trustee of the elect-
ing trust must timely provide the execu-
tor of the related estate with all the trust
information necessary to permit the execu-
tor to file a complete, accurate, and timely
Form 1041 for the combined electing trust
and related estate for each taxable year dur-
ing the election period. The trustee and the
executor must allocate the tax burden of the
combined electing trust and related estate
in a manner that reasonably reflects the re-
spective tax obligations of the electing trust
and related estate. If the tax burden is not
reasonably allocated, gifts may be deemed
to have been made. The trustee is respon-
sible for insuring that the electing trust’s
share of the tax burden is paid to the Sec-
retary, and the executor is responsible for
insuring that the related estate’s share of the
tax burden is timely paid to the Secre-
tary.
C.Comments and Changes to
§1.645–1(d): TIN and filing
requirements for a QRT
The proposed regulations provide that,
in general, a grantor trust must obtain a tax-
payer identification number (TIN) upon the
death of the grantor regardless of whether
or not the trust had a TIN prior to the death
of the grantor. See proposed regulation
§301.6109–1(a)(3). The proposed regula-
tions provide an exception to this general
rule. The proposed regulations provide that,
if there is an executor and a section 645
election has been made, a TIN must be ob-
tained for the related estate but a TIN is not
required to be obtained for the electing trust
or for a QRT for which a section 645 elec-
tion will be made. Further, under the pro-
posed regulations, the payors (as defined in
§301.6109–1(a)(5) of these final regula-
tions) of the electing trust or a QRT for
which the section 645 election will be made
are to be furnished with the TIN of the es-
tate on Form W–9,“Request for Taxpayer
Identification Number and Certification.”
The proposed regulations were designed to
simplify and lessen the reporting burdens
imposed on trustees and executors by the
interim guidance in Rev. Proc. 98–13,
1998–1 C.B. 370, by removing the require-
ment to obtain a TIN for electing trusts and
certain QRTs.
Several commentators reported, how-
ever, that many trustees automatically ob-
tain a TIN for the QRT immediately after
the decedent’s death and furnish that TIN
to payors. Under the proposed regulations,
if a trustee obtains a TIN for a QRT, the
trustee must file a completed Form 1041 for
the QRT for the short taxable year of the
QRT beginning with the decedent’s date of
death and ending December 31 of that year.
If a valid section 645 election is made for
the QRT, an amended Form 1041 must be
filed for the QRT and the payors of the
QRT must be furnished with a revised Form
W–9 containing the related estate’s TIN. As
a result, for trustees that obtain a TIN for
a QRT, the procedures in the proposed regu-
lations are more burdensome than the pro-
cedures in Rev. Proc. 98–13. In response,
the final regulations remove the provi-
sion in the proposed regulations that ex-
cepted an electing trust and a QRT for
which a section 645 election will be made
from the general requirement that a grantor
trust must obtain a TIN upon the death of
the grantor. Under the final regulations, the
trustee of an electing trust or a QRT for
which a section 645 election will be made
obtains a TIN upon the death of the dece-
dent as required by§301.6109–1(a)(3) of
these final regulations and furnishes this
TIN to the payors of the trust. Under the
final regulations, if a section 645 election
will be made for a QRT, the trustee is not
required to file a Form 1041 for the short
taxable year of the QRT beginning with the
decedent’s date of death and ending De-
cember 31 of that year.
The final regulations also simplify the
procedures for obtaining a TIN, furnish-
ing that TIN to the payors, and filing a
Form 1041 for a QRT if there is no execu-
tor. The proposed regulations provide that,
if there is no executor, the trustee must ob-
tain a TIN for the electing trust to file as
an estate during the section 645 election pe-
riod. The payors of the electing trust must
be furnished with the TIN obtained by the
trust to file as an estate. Under the pro-
posed regulations, if a section 645 elec-
tion will be made for a QRT, the trustee of
the QRT may choose to obtain a TIN for
the QRT to file as an estate under section
645 and avoid obtaining a TIN for the QRT
to file as a trust. If the trustee of the QRT
obtains a TIN to file as a trust (and not as
an estate), the trustee is required to file a
completed Form 1041 as a trust for the
short taxable year of the QRT beginning
with the decedent’s date of death and end-
ing December 31 of that year. If a sec-
tion 645 election to treat the QRT as an
estate is made after the Form 1041 is filed
for the QRT treating the QRT as a trust, the
trustee of the QRT is required to file an
amended Form 1041 as a trust (excluding
the items of income, deduction, and cred-
its that are to be reported on a return filed
as an estate), obtain another TIN to file as
an estate, provide revised Forms W–9 with
the new TIN to the payors of the QRT, and
file a Form 1041 as an estate. Under the fi-
nal regulations, if there is no executor, the
trustee of an electing trust or a QRT for
which a section 645 election will be made
obtains a TIN upon the death of the dece-
dent as required by§301.6109–1(a)(3) of
these final regulations and furnishes this
TIN to the payors of the trust. The trustee
uses this TIN to file Forms 1041 as an es-
tate during the election period. If a sec-
tion 645 election will be made for a QRT,
the trustee of the QRT is not required to file
a Form 1041 for the short taxable year be-
2003–7 I.R.B.473February 18, 2003

ginning with the decedent’s date of death
and ending December 31 of that year.
Regardless of whether or not there is an
executor, the final regulations retain the re-
quirement that a Form 1041 (including the
items of income, deduction, and credit of
the QRT) must be filed for the short tax-
able year of the QRT beginning with the de-
cedent’s date of death if a section 645
election will not be made for the trust, or
if the trustee and the executor are uncer-
tain whether a section 645 election will be
made for the QRT by the due date of the
Form 1041 for the short taxable year of the
QRT beginning after the decedent’s death
and ending December 31 of that year.
D.Comments and Changes to
§1.645–1(e): Tax Treatment and
General Filing Requirements of the
Electing Trust and Related Estate
During the Election Period
The proposed regulations provide that,
during the election period, if there is an ex-
ecutor, one Form 1041 is filed annually for
the combined electing trust and related es-
tate under the name and TIN of the re-
lated estate. Information regarding the
electing trust is also reported on the Form
1041 as required by the instructions to the
Form 1041.
The proposed regulations provide that the
electing trust and related estate are treated
as separate shares under section 663(c) for
purposes of computing distributable net in-
come (DNI) and applying the distribution
provisions of sections 661 and 662. The
proposed regulations also provide rules for
adjusting the DNI of the separate shares
with respect to distributions made from one
share to another share of the combined
electing trust and related estate to which
sections 661 and 662 would apply had the
distribution been made to a beneficiary other
than another share. Under the proposed
regulations, the share making the distribu-
tion reduces its DNI by the amount of the
distribution deduction that it would have
been entitled to under section 661 had the
distribution been made to a beneficiary other
than another share of the combined re-
lated estate and electing trust, and, solely
for purposes of calculating its DNI, the
share receiving the distribution increases its
gross income by this amount. One com-
mentator noted that, if the amount distrib-
uted from one share to another share
includes an item of DNI that is not in-
cluded in the gross income of the com-
bined electing trust and related estate, this
provision in the proposed regulations does
not produce an appropriate result because
of the operation of section 661(c). Accord-
ingly, the final regulations are revised to
provide that the share making the distri-
bution reduces its DNI by the amount of the
distribution deduction it would be entitled
to under section 661 (determined without
regard to section 661(c)), and solely for pur-
poses of calculating DNI, the share receiv-
ing the distribution increases its gross
income by the same amount.
Commentators requested clarification re-
garding whether an electing trust will be
treated as an estate or a trust for purposes
of the rules under section 401(a)(9). Fi-
nal regulations (T.D. 8987, 2002–19 I.R.B.
852) under sections 401, 403, and 408 were
published in theFederal Register(67 FR
18988) on April 17, 2002. The preamble to
those final regulations provides that an elect-
ing trust will not fail to be a trust for pur-
poses of section 401(a)(9) merely because
the trust elects to be treated as an estate un-
der section 645, as long as the trust con-
tinues to be a trust under state law.
Another commentator asked for clarifi-
cation regarding whether the exception for
estates under section 6654(l)(2) with re-
spect to the payment of estimated income
tax applies to an electing trust. The final
regulations clarify that each electing trust
and related estate, if any, is treated as a
separate taxpayer for all purposes of Sub-
title F of the Code, including, without limi-
tation, the application of section 6654. The
final regulations provide, however, that the
provisions of section 6654(l)(2)(A) relat-
ing to the 2 year exception to an estate’s
obligation to make estimated tax payments,
will apply to each electing trust for which
a section 645 election has been made.
E.Comments and Changes to
§1.645–1(f): Duration of the Election
Period
The proposed regulations provide that the
election period terminates on the day be-
fore the applicable date. One commenta-
tor suggested that section 645(a) should be
interpreted as terminating the election pe-
riod on the last day of the taxable year end-
ing before the applicable date. Another
commentator commended the interpreta-
tion taken by the proposed regulations be-
cause, if the estate is required to file a Form
706,“United States Estate (and Genera-
tion Skipping Transfer) Tax Return,”and
the election terminates on the last day of
the taxable year ending before the appli-
cable date, the election period could ter-
minate prior to the date of final
determination of liability for the estate tax,
rather than six months after that date. The
final regulations continue to provide that the
election terminates the day before the ap-
plicable date.
If a Form 706 is required to be filed, the
proposed regulations provide that the ap-
plicable date is the day that is 6 months af-
ter the date of final determination of liability
for the estate tax. In response to comments,
the final regulations provide that the ap-
plicable date is the day that is the later of
2 years after the date of the decedent’s death
or 6 months after the date of final deter-
mination of liability for estate tax.
The proposed regulations provide that the
date of final determination of liability for
the estate tax is the day on which the first
of a series of events has occurred. One of
the events is the issuance of an estate tax
closing letter, unless a claim for refund with
respect to the estate tax is filed within six
months after the issuance of the letter. Two
commentators requested that the issuance
of a closing letter be removed from the list
of events that can be considered the date
of final determination of liability. These
commentators contended that the closing let-
ter is not a final determination of liability
because the IRS may impose additional es-
tate tax after a closing letter has been is-
sued.
The IRS and the Treasury Department
note that the circumstances in which the
IRS may impose additional estate tax af-
ter a closing letter is issued are very lim-
ited. See Rev. Proc. 94–68, 1994–2 C.B.
803. In many cases, the issuance of a clos-
ing letter is sufficient to permit the clos-
ing of the probate estate and to complete
any administration of the electing trust that
was necessitated by the decedent’s death.
The IRS and the Treasury Department be-
lieve that eliminating the closing letter from
the list of events that are considered a fi-
nal determination of liability may encour-
age unduly prolonging the administration
of the electing trust and related estate in or-
der to prolong the section 645 election pe-
riod. While the final regulations retain the
issuance of the closing letter as one of the
triggers for the date of the final determi-
February 18, 20034742003–7 I.R.B.

nation of liability, the final regulations have
been changed to provide a minimum elec-
tion period of two years for all electing
trusts and related estates, as well as to pro-
vide that if the issuance of the closing let-
ter triggers the date of the final
determination of liability, the date of the fi-
nal determination of liability is the date that
is 6 months after the date the closing let-
ter is issued, rather than the date the clos-
ing letter is issued as provided in the
proposed regulations.
Proposed§1.641(b)–3 provides that, if
an estate has joined in making a valid sec-
tion 645 election, the estate shall not ter-
minate for federal tax purposes prior to the
termination of the section 645 election pe-
riod. Some interpreted proposed§1.641
(b)–3 as requiring the filing of Forms 1041
for the estate until the applicable date even
if, prior to that date, the electing trust and
the related estate had been completely ad-
ministered and the assets of the trust and
the estate completely distributed. In re-
sponse, the final regulations provide that the
election period terminates on the earlier of
the day on which both the electing trust and
related estate, if any, have distributed all of
their assets, or the day before the appli-
cable date. The final regulations continue
to provide that the election does not ap-
ply to successor trusts (trusts which are dis-
tributees under the trust instrument).
The proposed regulations provide that,
if the executor of the related estate is not
appointed until after the trustee has made
a section 645 election, the section 645 elec-
tion period will terminate if the later ap-
pointed executor refuses to agree to the
election. One commentator objected to the
termination of the election as a result of the
refusal to agree to the election by the later
appointed executor. This commentator sug-
gested that the election period should con-
tinue after the appointment of the executor
and that the person seeking appointment as
an executor could either accept or not ac-
cept appointment as an executor given the
responsibilities of the previously made sec-
tion 645 election. The IRS and the Trea-
sury Department believe that the later
appointed executor must consent to the sec-
tion 645 election for the election to be valid
with respect to the related estate. Accord-
ingly, the final regulations provide that, for
the election period to continue, a new elec-
tion form must be filed by the trustee and
the newly appointed executor within 90
days of the executor’s appointment. Oth-
erwise, the election period terminates the
day before the appointment of the execu-
tor.
F.Tax Treatment of the Electing Trust
and Related Estate Upon Termination of
the Election Period
At the close of the last day of the elec-
tion period, the combined electing trust and
related estate, if there is an executor, or the
electing trust, if there is no executor, is
deemed to distribute all the assets and li-
abilities of the share (or shares) compris-
ing the electing trust to a new trust in a
distribution to which sections 661 and 662
apply. Thus, the combined electing trust and
related estate, or the electing trust, as ap-
propriate, is entitled to a distribution de-
duction to the extent permitted under section
661 in the taxable year in which the elec-
tion period terminates as a result of the
deemed distribution. The new trust must in-
clude the amount of the deemed distribu-
tion in gross income to the extent required
under section 662.
One commentator questioned whether
the net capital gains attributable to the elect-
ing trust should be included in the sec-
tions 661 and 662 calculations for the
deemed distribution of the electing trust to
a new trust upon the termination of the elec-
tion period. The final regulations clarify that
the net capital gains attributable to the elect-
ing trust are includible in the DNI of the
share (or shares) comprising the electing
trust for the purpose of applying sections
661 and 662 to the deemed distribution to
the new trust.
If there is an executor and the electing
trust terminates on or before the termina-
tion of the section 645 election period, the
trustee must file a final Form 1041 under
the name and TIN of the electing trust to
notify the IRS that the trust no longer ex-
ists. This Form 1041 will not include any
of the trust’s items of income, deduction,
and credit because those items will be in-
cluded on the Form 1041 filed for the com-
bined electing trust and related estate.
If there is an executor, the trustee may
not need to obtain a TIN for the new trust
deemed to have been created upon the ter-
mination of the election period. The trustee
must consult the instructions to the Form
1041 upon the termination of the election
period to determine if a new TIN must be
obtained. If a new TIN is not required to
be obtained, the trustee must file Forms
1041 for the new trust under the TIN ob-
tained by the trustee under§301.6109–
1(a)(3) for the QRT following the death of
the decedent. If there is no executor, the
trustee must obtain a TIN for the new trust
deemed to have been created upon the ter-
mination of the election period. If a new
TIN is required under the regulations or the
instructions to the Form 1041, the trustee
must file Forms W–9 with the payors of the
trust to provide them with the TIN to be
used following the termination of the elec-
tion period.
G.Effective date of final regulations
under section 645
The final regulations provide that elec-
tion procedures in paragraph (c), the rules
in paragraph (d) regarding obtaining a TIN
for the electing trust and QRT, the rules in
paragraph (f) regarding the duration of the
election period, and paragraph (g) regard-
ing the later appointed executor are effec-
tive for estates and trusts of decedents dying
on or after December 24, 2002. The final
regulations provide that the rules in para-
graph (e), regarding the tax treatment and
general filing requirements of the elect-
ing trust and the related estate, if any, dur-
ing the election period, and the rules in
paragraph (h) regarding the tax treatment
of the electing trust and related estate, if any,
upon termination of the election period are
effective for taxable years ending on or af-
ter December 24, 2002. Estates and trusts
of decedents dying before December 24,
2002, may follow the election procedures
provided in the proposed regulations or Rev.
Proc. 98–13. With respect to obtaining a
TIN for a QRT and filing a Form 1041 for
the short taxable year beginning with the
decedent’s death and ending December 31
of that year, estates and trusts of dece-
dents dying before December 24, 2002, may
follow the procedures in these final regu-
lations, the proposed regulations, or Rev.
Proc. 98–13.
H.Clarification of the Reporting Rules
for Grantor Trusts Under§1.671–4
The proposed regulations amend
§1.671–4 to clarify that a trust, or por-
tion of a trust, reports under§1.671–4for
the taxable year that ends with the death of
the grantor or other person (decedent)
treated as the owner of the trust. If the trust
was filing a Form 1041 under§1.671–
4(a) during the life of the decedent, the due
2003–7 I.R.B.475February 18, 2003

date of the Form 1041 for the taxable year
ending with the decedent’s death is speci-
fied in§1.6072–1(a)(2). Proposed§1.6072–
1(a)(2) provides that the due date for the
Form 1041 for the taxable year ending with
the death of the decedent is the fifteenth day
of the fourth month following the close of
the 12-month period which began with the
first day of such fractional part of the year.
The final regulations under§1.6072–1(a)(2)
are revised to provide that the due date for
the Form 1041 filed for the taxable year
ending with the decedent’s death is the fif-
teenth day of the fourth month following
the close of the 12-month period that be-
gan with the first day of the decedent’s last
taxable year.
Section 301.6109–1(a)(3) of the pro-
posed regulations provides that a trust, all
of which was treated as owned by the de-
cedent, must obtain a new TIN upon the
death of the decedent, if the trust will con-
tinue after the decedent’s death. One com-
mentator asked if this provision is intended
to apply to an“administrative trust.”Sec-
tion 1.641(b)–3 recognizes that a trust does
not automatically terminate upon the hap-
pening of the event by which the dura-
tion of the trust is measured. A reasonable
period of time is permitted after such event
for the trustee to perform the duties nec-
essary to complete the administration of the
trust. Section 301.6109–1(a)(3) is intended
to clarify that a trust must obtain a new TIN
after the death of the decedent, if a trust that
was treated as owned by the decedent dur-
ing the decedent’s life will continue for a
period of time following the death of the
decedent to allow a winding up of the af-
fairs of the trust following the death of the
decedent.
For administrative convenience, the pro-
posed regulations provide that if a dece-
dent and others are treated as the owners
of a trust and following the decedent’s death
the decedent’s portion remains in the trust,
the trust continues to report under the TIN
used by the trust prior to the death of the
decedent. Commentators found this provi-
sion confusing and asked for clarifica-
tion. The final regulations clarify that this
provision applies to a trust that has mul-
tiple grantors (or other persons treated as
the owners) that must report under§1.671–
4(a) after the death of the decedent be-
cause, although a portion of the trust
continues to be treated as owned by a
grantor or another person, the decedent’s
portion of the trust is no longer treated as
owned by the decedent upon his death. The
final regulations provide an example of a
situation in which this provision applies.
Effect on Other Documents
The following publications are obso-
lete as of December 24, 2002:
Revenue Procedure 98–13, 1998–1 C.B.
370
Notice 2001–26, 2001–13 I.R.B. 942
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply and because this rule does not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply to these
regulations, and therefore, a Regulatory
Flexibility Analysis is not required. Pur-
suant to section 7805(f) of the Code, the no-
tice of proposed rulemaking preceding these
regulations was submitted to the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regula-
tions is Faith Colson, Office of Associate
Chief Counsel (Passthroughs and Special In-
dustries). However, other personnel from the
IRS and Treasury Department participated
in their development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.645–1 also issued under 26
U.S.C. 645.***
Par. 2. Section 1.641(b)–3 is amended
by adding a sentence to the end of para-
graph (a) to read as follows:
§1.641(b)–3 Termination of estates and
trusts.
(a)***Notwithstanding the above, if
the estate has joined in making a valid elec-
tion under section 645 to treat a qualified
revocable trust, as defined under section
645(b)(1), as part of the estate, the estate
shall not terminate under this paragraph
prior to the termination of the section 645
election period. See section 645 and the
regulations thereunder for rules regarding
the termination of the section 645 elec-
tion period.
*****
Par.3.In§1.642(c)–1, the last sen-
tence of paragraph (a)(1) is revised to read
as follows:
§1.642(c)–1 Unlimited deduction for
amounts paid for a charitable purpose.
(a)***(1)***Inapplying this para-
graph without reference to paragraph (b) of
this section, a deduction shall be allowed
for an amount paid during the taxable year
in respect of gross income received in a pre-
vious taxable year, but only if no deduc-
tion was allowed for any previous taxable
year to the estate or trust, or in the case of
a section 645 election, to a related estate,
as defined under§1.645–1(b), for the
amount so paid.
*****
Par. 4. An undesignated center head-
ing is added immediately after§1.642(c)–
6(A) to read as follows:
“Election to Treat Trust as Part of an Es-
tate”
Par. 5. Section 1.645–1 is added under
the new undesignated centerheading“Elec-
tion to Treat Trust as Part of an Estate”to
read as follows:
§1.645–1 Election by certain revocable
trusts to be treated as part of estate.
(a)In general.If an election is filed for
a qualified revocable trust, as defined in
paragraph (b)(1) of this section, in accor-
dance with the rules set forth in paragraph
(c) of this section, the qualified revocable
trust is treated and taxed for purposes of
subtitle A of the Internal Revenue Code as
part of its related estate, as defined in para-
graph (b)(5) of this section (and not as a
separate trust) during the election period,
as defined in paragraph (b)(6) of this sec-
tion. Rules regarding the use of taxpayer
identification numbers (TINs) and the fil-
February 18, 20034762003–7 I.R.B.

ing of a Form 1041,“U.S. Income Tax Re-
turn for Estates and Trusts,”for a qualified
revocable trust are in paragraph (d) of this
section. Rules regarding the tax treatment
of an electing trust and related estate and
the general filing requirements for the com-
bined entity during the election period are
in paragraph (e)(2) of this section. Rules re-
garding the tax treatment of an electing trust
and its filing requirements during the elec-
tion period if no executor, as defined in
paragraph (b)(4) of this section, is appointed
for a related estate are in paragraph (e)(3)
of this section. Rules for determining the
duration of the section 645 election pe-
riod are in paragraph (f) of this section.
Rules regarding the tax effects of the ter-
mination of the election are in paragraph
(h) of this section. Rules regarding the tax
consequences of the appointment of an ex-
ecutor after a trustee has made a section 645
election believing that an executor would
not be appointed for a related estate are in
paragraph (g) of this section.
(b)Definitions.For purposes of this
section:
(1)Qualified revocable trust.Aquali-
fied revocable trust(QRT) is any trust (or
portion thereof) that on the date of death
of the decedent was treated as owned by the
decedent under section 676 by reason of a
power held by the decedent (determined
without regard to section 672(e)). A trust
that was treated as owned by the dece-
dent under section 676 by reason of a power
that was exercisable by the decedent only
with the approval or consent of a nonad-
verse party or with the approval or con-
sent of the decedent’s spouse is a QRT. A
trust that was treated as owned by the de-
cedent under section 676 solely by rea-
son of a power held by a nonadverse party
or by reason of a power held by the dece-
dent’s spouse is not a QRT.
(2)Electing trust.Anelecting trustis a
QRT for which a valid section 645 elec-
tion has been made. Once a section 645
election has been made for the trust, the
trust shall be treated as an electing trust
throughout the entire election period.
(3)Decedent.Thedecedentis the indi-
vidual who was treated as the owner of the
QRT under section 676 on the date of that
individual’s death.
(4)Executor.Anexecutoris an execu-
tor, personal representative, or administra-
tor that has obtained letters of appointment
to administer the decedent’s estate through
formal or informal appointment proce-
dures. Solely for purposes of this para-
graph (b)(4), an executor does not include
a person that has actual or constructive pos-
session of property of the decedent un-
less that person is also appointed or
qualified as an executor, administrator, or
personal representative of the decedent’s es-
tate. If more that one jurisdiction has ap-
pointed an executor, the executor appointed
in the domiciliary or primary proceeding is
the executor of the related estate for pur-
poses of this paragraph (b)(4).
(5)Related estate.Arelated estateis the
estate of the decedent who was treated as
the owner of the QRT on the date of the de-
cedent’s death.
(6)Election period.Theelection pe-
riodis the period of time during which an
electing trust is treated and taxed as part of
its related estate. The rules for determin-
ing the duration of the election period are
in paragraph (f) of this section.
(c)The election—(1)Filing the elec-
tion if there is an executor—(i)Time and
manner for filing the election.If there is an
executor of the related estate, the trustees
of each QRT joining in the election and the
executor of the related estate make an elec-
tion under section 645 and this section to
treat each QRT joining in the election as
part of the related estate for purposes of
subtitle A of the Internal Revenue Code by
filing a form provided by the IRS for mak-
ing the election (election form) properly
completed and signed under penalties of
perjury, or in any other manner prescribed
after December 24, 2002, by forms pro-
vided by the Internal Revenue Service
(IRS), or by other published guidance for
making the election. For the election to be
valid, the election form must be filed not
later than the time prescribed under sec-
tion 6072 for filing the Form 1041 for the
first taxable year of the related estate (re-
gardless of whether there is sufficient in-
come to require the filing of that return).
If an extension is granted for the filing of
the Form 1041 for the first taxable year of
the related estate, the election form will be
timely filed if it is filed by the time pre-
scribed for filing the Form 1041 includ-
ing the extension granted with respect to the
Form 1041.
(ii)Conditions to election.In addition to
providing the information required by the
election form, as a condition to a valid sec-
tion 645 election, the trustee of each QRT
joining in the election and the executor of
the related estate agree, by signing the elec-
tion form under penalties of perjury, that:
(A) With respect to a trustee—
(1) The trustee agrees to the election;
(2) The trustee is responsible for timely
providing the executor of the related es-
tate with all the trust information neces-
sary to permit the executor to file a
complete, accurate, and timely Form 1041
for the combined electing trust(s) and re-
lated estate for each taxable year during the
election period;
(3) The trustee of each QRT joining the
election and the executor of the related es-
tate have agreed to allocate the tax bur-
den of the combined electing trust(s) and
related estate for each taxable year dur-
ing the election period in a manner that rea-
sonably reflects the tax obligations of each
electing trust and the related estate; and
(4) The trustee is responsible for insur-
ing that the electing trust’s share of the tax
obligations of the combined electing trust(s)
and related estate is timely paid to the Sec-
retary.
(B) With respect to the executor—
(1) The executor agrees to the elec-
tion;
(2) The executor is responsible for fil-
ing a complete, accurate, and timely Form
1041 for the combined electing trust(s) and
related estate for each taxable year dur-
ing the election period;
(3) The executor and the trustee of each
QRT joining in the election have agreed to
allocate the tax burden of the combined
electing trust(s) and related estate for each
taxable year during the election period in
a manner that reasonably reflects the tax ob-
ligations of each electing trust and the re-
lated estate;
(4) The executor is responsible for in-
suring that the related estate’s share of the
tax obligations of the combined electing
trust(s) and related estate is timely paid to
the Secretary.
(2)Filing the election if there is no
executor—(i)Time and manner for filing
the election.If there is no executor for a re-
lated estate, an election to treat one or more
QRTs of the decedent as an estate for pur-
poses of subtitle A of the Internal Rev-
enue Code is made by the trustees of each
QRT joining in the election, by filing a
properly completed election form, or in any
other manner prescribed after December 24,
2002, by forms provided by the IRS, or by
2003–7 I.R.B.477February 18, 2003

other published guidance for making the
election. For the election to be valid, the
election form must be filed not later than
the time prescribed under section 6072 for
filing the Form 1041 for the first taxable
year of the trust, taking into account the
trustee’s election to treat the trust as an es-
tate under section 645 (regardless of
whether there is sufficient income to re-
quire the filing of that return). If an exten-
sion is granted for the filing of the Form
1041 for the first taxable year of the elect-
ing trust, the election form will be timely
filed if it is filed by the time prescribed for
filing the Form 1041 including the exten-
sion granted with respect to the filing of the
Form 1041.
(ii)Conditions to election.In addition to
providing the information required by the
election form, as a condition to a valid sec-
tion 645 election, the trustee of each QRT
joining in the election agrees, by signing the
election form under penalties of perjury,
that—
(A) The trustee agrees to the election;
(B) If there is more than one QRT join-
ing in the election, the trustees of each QRT
joining in the election have appointed one
trustee to be responsible for filing the Form
1041 for the combined electing trusts for
each taxable year during the election pe-
riod (filing trustee) and the filing trustee has
agreed to accept that responsibility;
(C) If there is more than one QRT, the
trustees of each QRT joining in the elec-
tion have agreed to allocate the tax liabil-
ity of the combined electing trusts for each
taxable year during the election period in
a manner that reasonably reflects the tax ob-
ligations of each electing trust;
(D) The trustee agrees to:
(1) Timely file a Form 1041 for the
electing trust(s) for each taxable year dur-
ing the election period; or
(2) If there is more than one QRT and
the trustee is not the filing trustee, timely
provide the filing trustee with all of the
electing trust’s information necessary to per-
mit the filing trustee to file a complete, ac-
curate, and timely Form 1041 for the
combined electing trusts for each taxable
year during the election period;
(3) Insure that the electing trust’s share
of the tax burden is timely paid to the Sec-
retary;
(E) There is no executor and, to the
knowledge and belief of the trustee, one will
not be appointed; and
(F) If an executor is appointed after the
filing of the election form and the execu-
tor agrees to the section 645 election, the
trustee will complete and file a revised elec-
tion form with the executor.
(3)Election for more than one QRT.If
there is more than one QRT, the election
may be made for some or all of the QRTs.
If there is no executor, one trustee must be
appointed by the trustees of the electing
trusts to file Forms 1041 for the combined
electing trusts filing as an estate during the
election period.
(d)TIN and filing requirements for a
QRT—(1)Obtaining a TIN.Regardless of
whether there is an executor for a related
estate and regardless of whether a section
645 election will be made for the QRT, a
TIN must be obtained for the QRT follow-
ing the death of the decedent. See
§301.6109–1(a)(3) of this chapter. The
trustee must furnish this TIN to the pay-
ors of the QRT. See§301.6109–1(a)(5) of
this chapter for the definition of payor.
(2)Filing a Form 1041 for a QRT—
(i)Option not to file a Form 1041 for a
QRT for which a section 645 election will
be made.If a section 645 election will be
made for a QRT, the executor of the re-
lated estate, if any, and the trustee of the
QRT may treat the QRT as an electing trust
from the decedent’s date of death until the
due date for the section 645 election. Ac-
cordingly, the trustee of the QRT is not re-
quired to file a Form 1041 for the QRT for
the short taxable year beginning with the
decedent’s date of death and ending De-
cember 31 of that year. However, if a QRT
is treated as an electing trust under this
paragraph from the decedent’s date of death
until the due date for the section 645 elec-
tion but a valid section 645 election is not
made for the QRT, the QRT will be sub-
ject to penalties and interest for failing to
timely file a Form 1041 and pay the tax due
thereon.
(ii)Requirement to file a Form 1041 for
a QRT if paragraph (d)(2)(i) of this sec-
tion does not apply—(A)Requirement to
file Form 1041.If the trustee of the QRT
and the executor of the related estate, if any,
do not treat the QRT as an electing trust as
provided under paragraph (d)(2)(i) of this
section, or if the trustee of the electing trust
and the executor, if any, are uncertain
whether a section 645 election will be made
for a QRT, the trustee of the QRT must file
a Form 1041 for the short taxable year be-
ginning with the decedent’s death and end-
ing December 31 of that year (unless the
QRT is not required to file a Form 1041 un-
der section 6012 for this period).
(B)Requirement to amend Form 1041
if a section 645 election is made—(1) If
there is an executor.If there is an execu-
tor and a valid section 645 election is made
for a QRT after a Form 1041 has been filed
for the QRT as a trust (see paragraph
(d)(2)(ii)(A) of this section), the trustee must
amend the Form 1041. The QRT’s items of
income, deduction, and credit must be ex-
cluded from the amended Form 1041 filed
under this paragraph and must be included
on the Form 1041 filed for the first tax-
able year of the combined electing trust and
related estate under paragraph (e)(2)(ii)(A)
of this section.
(2)If there is no executor.If there is no
executor and a valid section 645 election
is made for a QRT after a Form 1041 has
been filed for the QRT as a trust (see para-
graph (d)(2)(ii)(A) of this section) for the
short taxable year beginning with the de-
cedent’s death and ending December 31 of
that year, the trustee must file an amended
return for the QRT. The amended return
must be filed consistent with paragraph
(e)(3) of this section and must be filed by
the due date of the Form 1041 for the QRT,
taking into account the trustee’s election un-
der section 645.
(e)Tax treatment and general filing re-
quirements of electing trust and related es-
tate during the election period—(1)Effect
of election.The section 645 election once
made is irrevocable.
(2)If there is an executor—(i)Tax treat-
ment of the combined electing trust and re-
lated estate.If there is an executor, the
electing trust is treated, during the elec-
tion period, as part of the related estate for
all purposes of subtitle A of the Internal
Revenue Code. Thus, for example, the elect-
ing trust is treated as part of the related es-
tate for purposes of the set-aside deduction
under section 642(c)(2), the subchapter S
shareholder requirements of section
1361(b)(1), and the special offset for rental
real estate activities in section 469(i)(4).
(ii)Filing requirements—(A)Filing the
Form 1041 for the combined electing trust
and related estate during the election pe-
riod.If there is an executor, the executor
files a single income tax return annually (as-
suming a return is required under section
6012) under the name and TIN of the re-
February 18, 20034782003–7 I.R.B.

lated estate for the combined electing trust
and the related estate. Information regard-
ing the name and TIN of each electing trust
must be provided on the Form 1041 as re-
quired by the instructions to that form. The
period of limitations provided in section
6501 for assessments with respect to an
electing trust and the related estate starts
with the filing of the return required un-
der this paragraph. Except as required un-
der the separate share rules of section
663(c), for purposes of filing the Form 1041
under this paragraph and computing the tax,
the items of income, deduction, and credit
of the electing trust and related estate are
combined. One personal exemption in the
amount of $600 is permitted under sec-
tion 642(b), and the tax is computed un-
der section 1(e), taking into account section
1(h), for the combined taxable income.
(B)Filing a Form 1041 for the elect-
ing trust is not required.Except for any fi-
nal Form 1041 required to be filed under
paragraph (h)(2)(i)(B) of this section, if
there is an executor, the trustee of the elect-
ing trust does not file a Form 1041 for the
electing trust during the election period. Al-
though the trustee is not required to file a
Form 1041 for the electing trust, the trustee
of the electing trust must timely provide the
executor of the related estate with all the
trust information necessary to permit the ex-
ecutor to file a complete, accurate and
timely Form 1041 for the combined elect-
ing trust and related estate. The trustee must
also insure that the electing trust’s share of
the tax obligations of the combined elect-
ing trust and related estate is timely paid
to the Secretary. In certain situations, the
trustee of a QRT may be required to file a
Form 1041 for the QRT’s short taxable year
beginning with the date of the decedent’s
death and ending December 31 of that year.
See paragraph (d)(2) of this section.
(iii)Application of the separate share
rules—(A)Distributions to beneficiaries
(other than to a share (or shares) of the
combined electing trust and related es-
tate).Under the separate share rules of sec-
tion 663(c), the electing trust and related
estate are treated as separate shares for pur-
poses of computing distributable net in-
come (DNI) and applying the distribution
provisions of sections 661 and 662. Fur-
ther, the electing trust share or the related
estate share may each contain two or more
shares. Thus, if during the taxable year, a
distribution is made by the electing trust or
the related estate, the DNI of the share mak-
ing the distribution must be determined and
the distribution provisions of sections 661
and 662 must be applied using the sepa-
rately determined DNI applicable to the dis-
tributing share.
(B)Adjustments to the DNI of the sepa-
rate shares for distributions between shares
to which sections 661 and 662 would ap-
ply.A distribution from one share to an-
other share to which sections 661 and 662
would apply if made to a beneficiary other
than another share of the combined elect-
ing trust and related estate affects the com-
putation of the DNI of the share making the
distribution and the share receiving the dis-
tribution. The share making the distribu-
tion reduces its DNI by the amount of the
distribution deduction that it would be en-
titled to under section 661 (determined with-
out regard to section 661(c)), had the
distribution been made to another benefi-
ciary, and, solely for purposes of calculat-
ing DNI, the share receiving the distribution
increases its gross income by the same
amount. The distribution has the same char-
acter in the hands of the recipient share as
in the hands of the distributing share. The
following example illustrates the provi-
sions of this paragraph (e)(2)(iii)(B):
Example.(i) A’s will provides that, after the pay-
ment of debts, expenses, and taxes, the residue of A’s
estate is to be distributed to Trust, an electing trust.
The sole beneficiary of Trust is C. The estate share
has $15,000 of gross income, $5,000 of deductions,
and $10,000 of taxable income and DNI for the tax-
able year based on the assets held in A’s estate. Dur-
ing the taxable year, A’s estate distributes $15,000 to
Trust. The distribution reduces the DNI of the es-
tate share by $10,000.
(ii) For the same taxable year, the trust share has
$25,000 of gross income and $5,000 of deductions.
None of the modifications provided for under sec-
tion 643(a) apply. In calculating the DNI for the trust
share, the gross income of the trust share is increased
by $10,000, the amount of the reduction in the DNI
of the estate share as a result of the distribution to
Trust. Thus, solely for purposes of calculating DNI,
the trust share has gross income of $35,000, and tax-
able income of $30,000. Therefore, the trust share has
$30,000 of DNI for the taxable year.
(iii) During the same taxable year, Trust distrib-
utes $35,000 to C. The distribution deduction re-
ported on the Form 1041 filed for A’s estate and Trust
is $30,000. As a result of the distribution by Trust to
C, C must include $30,000 in gross income for the
taxable year. The gross income reported on the Form
1041 filed for A’s estate and Trust is $40,000.
(iv)Application of the governing instru-
ment requirement of section 642(c).A de-
duction is allowed in computing the taxable
income of the combined electing trust and
related estate to the extent permitted un-
der section 642(c) for—
(A) Any amount of the gross income of
the related estate that is paid or set aside
during the taxable year pursuant to the terms
of the governing instrument of the related
estate for a purpose specified in section
170(c); and
(B) Any amount of gross income of the
electing trust that is paid or set aside dur-
ing the taxable year pursuant to the terms
of the governing instrument of the elect-
ing trust for a purpose specified in sec-
tion 170(c).
(3)If there is no executor—(i)Tax treat-
ment of the electing trust.If there is no ex-
ecutor, the trustee treats the electing trust,
during the election period, as an estate for
all purposes of subtitle A of the Internal
Revenue Code. Thus, for example, an elect-
ing trust is treated as an estate for pur-
poses of the set-aside deduction under
section 642(c)(2), the subchapter S share-
holder requirements of section 1361(b)(1),
and the special offset for rental real es-
tate activities under section 469(i)(4). The
trustee may also adopt a taxable year other
than a calendar year.
(ii)Filing the Form 1041 for the elect-
ing trust.If there is no executor, the trustee
of the electing trust must, during the elec-
tion period, file a Form 1041, under the TIN
obtained by the trustee under§301.6109–
1(a)(3) of this chapter upon the death of the
decedent, treating the trust as an estate. If
there is more than one electing trust, the
Form 1041 must be filed by the filing
trustee (see paragraph (c)(2)(ii)(B) of this
section) under the name and TIN of the
electing trust of the filing trustee. Infor-
mation regarding the names and TINs of the
other electing trusts must be provided on
the Form 1041 as required by the instruc-
tions to that form. Any return filed in ac-
cordance with this paragraph shall be treated
as a return filed for the electing trust (or
trusts, if there is more than one electing
trust) and not as a return filed for any sub-
sequently discovered related estate. Ac-
cordingly, the period of limitations provided
in section 6501 for assessments with re-
spect to a subsequently discovered related
estate does not start until a return is filed
with respect to the related estate. See para-
graph (g) of this section.
(4)Application of the section 6654(l)(2)
to the electing trust.Each electing trust and
related estate (if any) is treated as a sepa-
2003–7 I.R.B.479February 18, 2003

rate taxpayer for all purposes of subtitle F
of the Internal Revenue Code, including,
without limitation, the application of sec-
tion 6654. The provisions of section
6654(l)(2)(A) relating to the two year ex-
ception to an estate’s obligation to make es-
timated tax payments, however, will apply
to each electing trust for which a section
645 election has been made.
(f)Duration of election period—(1)In
general. The election period begins on the
date of the decedent’s death and termi-
nates on the earlier of the day on which
both the electing trust and related estate, if
any, have distributed all of their assets, or
the day before the applicable date. The elec-
tion does not apply to successor trusts (trusts
that are distributees under the trust instru-
ment).
(2)Definition of applicable date—(i)Ap-
plicable date if no Form 706“United States
Estate (and Generation Skipping Trans-
fer) Tax Return”is required to be filed.If
a Form 706 is not required to be filed as
a result of the decedent’s death, the appli-
cable date is the day which is 2 years af-
ter the date of the decedent’s death.
(ii)Applicable date if a Form 706 is re-
quired to be filed.If a Form 706 is re-
quired to be filed as a result of the
decedent’s death, the applicable date is the
later of the day that is 2 years after the date
of the decedent’s death, or the day that is
6 months after the date of final determi-
nation of liability for estate tax. Solely for
purposes of determining the applicable date
under section 645, the date of final deter-
mination of liability is the earliest of the
following—
(A) The date that is six months after the
issuance by the Internal Revenue Service
of an estate tax closing letter, unless a claim
for refund with respect to the estate tax is
filed within twelve months after the issu-
ance of the letter;
(B) The date of a final disposition of a
claim for refund, as defined in paragraph
(f)(2)(iii) of this section, that resolves the
liability for the estate tax, unless suit is in-
stituted within six months after a final dis-
position of the claim;
(C) The date of execution of a settle-
ment agreement with the Internal Rev-
enue Service that determines the liability for
the estate tax;
(D) The date of issuance of a decision,
judgment, decree, or other order by a court
of competent jurisdiction resolving the li-
ability for the estate tax unless a notice of
appeal or a petition forcertiorariis filed
within 90 days after the issuance of a de-
cision, judgment, decree, or other order of
a court; or
(E) The date of expiration of the pe-
riod of limitations for assessment of the es-
tate tax provided in section 6501.
(iii)Definition of final disposition of
claim for refund.For purposes of para-
graph (f)(2)(ii)(B) of this section, a claim
for refund shall be deemed finally dis-
posed of by the Secretary when all items
have been either allowed or disallowed. If
a waiver of notification with respect to dis-
allowance is filed with respect to a claim
for refund prior to disallowance of the
claim, the claim for refund will be treated
as disallowed on the date the waiver is filed.
(iv)Examples.The application of this
paragraph (f)(2) is illustrated by the fol-
lowing examples:
Example 1. Adied on October 20, 2002. The ex-
ecutor ofA’s estate and the trustee of Trust, an elect-
ing trust, made a section 645 election. A Form 706
is not required to be filed as a result ofA’s death. The
applicable date is October 20, 2004, the day that is
two years afterA’s date of death. The last day of the
election period is October 19, 2004. Beginning Oc-
tober 20, 2004, Trust will no longer be treated and
taxed as part ofA’s estate.
Example 2.Assume the same facts asExample 1,
except that a Form 706 is required to be filed as the
result ofA’s death. The Internal Revenue Service is-
sues an estate tax closing letter accepting the Form
706 as filed on March 15, 2005. The estate does not
file a claim for refund by March 15, 2006, the day that
is twelve months after the date of issuance of the es-
tate tax closing letter. The date of final determina-
tion of liability is September 15, 2005, and the
applicable date is March 15, 2006. The last day of the
election period is March 14, 2006. Beginning March
15, 2006, Trust will no longer be treated and taxed
as part ofA’s estate.
Example 3.Assume the same facts asExample 1,
except that a Form 706 is required to be filed as the
result ofA’s death. The Form 706 is audited, and a
notice of deficiency authorized under section 6212 is
mailed to the executor ofA’s estate as a result of the
audit. The executor files a petition in Tax Court. The
Tax Court issues a decision resolving the liability for
estate tax on December 14, 2005, and neither party
appeals within 90 days after the issuance of the de-
cision. The date of final determination of liability is
December 14, 2005. The applicable date is June 14,
2006, the day that is six months after the date of fi-
nal determination of liability. The last day of the elec-
tion period is June 13, 2006. Beginning June 14, 2006,
Trust will no longer be treated and taxed as part of
A’s estate.
(g)Executor appointed after the sec-
tion 645 election is made—(1)Effect on the
election.If an executor for the related es-
tate is not appointed until after the trustee
has made a valid section 645 election, the
executor must agree to the trustee’s elec-
tion, and the IRS must be notified of that
agreement by the filing of a revised elec-
tion form (completed as required by the in-
structions to that form) within 90 days of
the appointment of the executor, for the
election period to continue past the date of
appointment of the executor. If the execu-
tor does not agree to the election or a re-
vised election form is not timely filed as
required by this paragraph, the election pe-
riod terminates the day before the appoint-
ment of the executor. If the IRS issues other
guidance after December 24, 2002, for no-
tifying the IRS of the executor’s agree-
ment to the election, the IRS must be
notified in the manner provided in that guid-
ance for the election period to continue.
(2)Continuation of election period—
(i)Correction of returns filed before ex-
ecutor appointed.If the election period
continues under paragraph (g)(1) of this sec-
tion, the executor of the related estate and
the trustee of each electing trust must file
amended Forms 1041 to correct the Forms
1041 filed by the trustee before the execu-
tor was appointed. The amended Forms
1041 must be filed under the name and TIN
of the electing trust and must reflect the
items of income, deduction, and credit of
the related estate and the electing trust. The
name and TIN of the related estate must be
provided on the amended Forms 1041 as
required in the instructions to that Form.
The amended return for the taxable year
ending immediately before the executor was
appointed must indicate that this Form 1041
is a final return. If the period of limita-
tions for making assessments has expired
with respect to the electing trust for any of
the Forms 1041 filed by the trustee, the ex-
ecutor must file Forms 1041 for any items
of income, deduction, and credit of the re-
lated estate that cannot be properly in-
cluded on amended forms for the electing
trust. The personal exemption under sec-
tion 642(b) is not permitted to be taken on
these Forms 1041 filed by the executor.
(ii)Returns filed after the appointment
of the executor.All returns filed by the com-
bined electing trust and related estate af-
ter the appointment of the executor are to
be filed under the name and TIN of the re-
lated estate in accordance with paragraph
(e)(2) of this section. Regardless of the
change in the name and TIN under which
the Forms 1041 for the combined elect-
ing trust and related estate are filed, the
February 18, 20034802003–7 I.R.B.

combined electing trust and related estate
will be treated as the same entity before and
after the executor is appointed.
(3)Termination of the election period.
If the election period terminates under para-
graph (g)(1) of this section, the executor
must file Forms 1041 under the name and
TIN of the estate for all taxable years of the
related estate ending after the death of the
decedent. The trustee of the electing trust
is not required to amend any returns filed
for the electing trust during the election pe-
riod. Following termination of the elec-
tion period, the trustee of the electing trust
must obtain a new TIN. See§301.6109–
1(a)(4) of this chapter.
(h)Treatment of an electing trust and re-
lated estate following termination of the
election—(1)The share (or shares) com-
prising the electing trust is deemed to be
distributed upon termination of the elec-
tion period.On the close of the last day of
the election period, the combined elect-
ing trust and related estate, if there is an ex-
ecutor, or the electing trust, if there is no
executor, is deemed to distribute the share
(or shares, as determined under section
663(c)) comprising the electing trust to a
new trust in a distribution to which sec-
tions 661 and 662 apply. All items of in-
come, including net capital gains, that are
attributable to the share (or shares) com-
prising the electing trust are included in the
calculation of the distributable net income
of the electing trust and treated as distrib-
uted by the combined electing trust and re-
lated estate, if there is an executor, or by
the electing trust, if there is no executor, to
the new trust. The combined electing trust
and related estate, if there is an executor,
or the electing trust, if there is no execu-
tor, is entitled to a distribution deduction to
the extent permitted under section 661 in
the taxable year in which the election pe-
riod terminates as a result of the deemed
distribution. The new trust shall include the
amount of the deemed distribution in gross
income to the extent required under sec-
tion 662.
(2)Filing of the Form 1041 upon the
termination of the section 645 election—
(i)If there is an executor—(A)Filing the
Form 1041 for the year of termination.If
there is an executor, the Form 1041 filed
under the name and TIN of the related es-
tate for the taxable year in which the elec-
tion terminates includes—
(1) The items of income, deduction, and
credit of the electing trust attributable to the
period beginning with the first day of the
taxable year of the combined electing trust
and related estate and ending with the last
day of the election period;
(2) The items of income, deduction, and
credit, if any, of the related estate for the
entire taxable year; and
(3) A deduction for the deemed distri-
bution of the share (or shares) compris-
ing the electing trust to the new trust as
provided for under paragraph (h)(1) of this
section.
(B)Requirement to file a final Form
1041 under the name and TIN of the elect-
ing trust.If the electing trust terminates dur-
ing the election period, the trustee of the
electing trust must file a Form 1041 un-
der the name and TIN of the electing trust
and indicate that the return is a final re-
turn to notify the IRS that the electing trust
is no longer in existence. The items of in-
come, deduction, and credit of the trust are
not reported on this final Form 1041 but on
the appropriate Form 1041 filed for the
combined electing trust and related es-
tate.
(ii)If there is no executor.If there is no
executor, the taxable year of the electing
trust closes on the last day of the election
period. A Form 1041 is filed in the man-
ner prescribed under paragraph (e)(3)(ii) of
this section reporting the items of income,
deduction, and credit of the electing trust
for the short period ending with the last day
of the election period. The Form 1041 filed
under this paragraph includes a distribu-
tion deduction for the deemed distribu-
tion provided for under paragraph (h)(1) of
this section. The Form 1041 must indi-
cate that it is a final return.
(3)Use of TINs following termination of
the election—(i)If there is an executor.
Upon termination of the section 645 elec-
tion, a former electing trust may need to ob-
tain a new TIN. See§301.6109–1(a)(4) of
this chapter. If the related estate contin-
ues after the termination of the election pe-
riod, the related estate must continue to use
the TIN assigned to the estate during the
election period.
(ii)If there is no executor.If there is no
executor, the former electing trust must ob-
tain a new TIN if the trust will continue af-
ter the termination of the election period.
See§301.6109–1(a)(4) of this chapter.
(4)Taxable year of estate and trust upon
termination of the election—(i)Estate—
Upon termination of the section 645 elec-
tion period, the taxable year of the estate
is the same taxable year used during the
election period.
(ii)Trust. Upon termination of the sec-
tion 645 election, the taxable year of the
new trust is the calendar year. See sec-
tion 644.
(i)Reserved.
(j)Effective date.Paragraphs (a), (b), (c),
(d), (f), and (g) of this section apply to trusts
and estates of decedents dying on or after
December 24, 2002. Paragraphs (e) and (h)
of this section apply to taxable years end-
ing on or after December 24, 2002.
Par. 6. Section 1.671–4 is amended as
follows:
1. The text of paragraph (d) is redesig-
nated paragraph (d)(1) and a paragraph
heading is added for newly designated para-
graph (d)(1).
2. Paragraph (d)(2) is added.
3. Paragraphs (h) and (i) are redesig-
nated as paragraphs (i) and (j), respec-
tively.
4. New paragraph (h) is added.
5. The text of newly designated para-
graph (i)(1) is revised.
6. Paragraph (i)(3) is added.
The additions and revisions read as
follows:
§1.671–4 Method of reporting.
*****
(d)Due date and other requirements with
respect to statement required to be fur-
nished by trustee—(1)In general.***
(2)Statement for the taxable year end-
ing with the death of the grantor or other
person treated as the owner of the trust.If
a trust ceases to be treated as owned by the
grantor, or other person, by reason of the
death of that grantor or other person (de-
cedent), the due date for the statement re-
quired to be furnished for the taxable year
ending with the death of the decedent shall
be the date specified by section 6034A(a)
as though the decedent had lived through-
out the decedent’s last taxable year. See
paragraph (h) of this section for special re-
porting rules for a trust or portion of the
trust that ceases to be treated as owned by
the grantor or other person by reason of the
death of the grantor or other person.
*****
(h)Reporting rules for a trust, or por-
tion of a trust, that ceases to be treated as
2003–7 I.R.B.481February 18, 2003

owned by a grantor or other person by rea-
son of the death of the grantor or other
person—(1)Definition of decedent.For pur-
poses of this paragraph (h), thedecedentis
the grantor or other person treated as the
owner of the trust, or portion of the trust,
under subpart E, part I, subchapter J, chap-
ter 1 of the Internal Revenue Code on the
date of death of that person.
(2)In general.The provisions of this
section apply to a trust, or portion of a trust,
treated as owned by a decedent for the tax-
able year that ends with the decedent’s
death. Following the death of the dece-
dent, the trust or portion of a trust that
ceases to be treated as owned by the de-
cedent, by reason of the death of the de-
cedent, may no longer report under this
section. A trust, all of which was treated as
owned by the decedent, must obtain a new
TIN upon the death of the decedent, if the
trust will continue after the death of the de-
cedent. See§301.6109–1(a)(3)(i) of this
chapter for rules regarding obtaining a TIN
upon the death of the decedent.
(3)Special rules—(i)Trusts reporting
pursuant to paragraph (a) of this section
for the taxable year ending with the dece-
dent’s death.The due date for the filing of
a return pursuant to paragraph (a) of this
section for the taxable year ending with the
decedent’s death shall be the due date pro-
vided for under§1.6072–1(a)(2). The re-
turn filed under this paragraph for a trust
all of which was treated as owned by the
decedent must indicate that it is a final re-
turn.
(ii)Trust reporting pursuant to para-
graph (b)(2)(B) of this section for the tax-
able year of the decedent’s death.A trust
that reports pursuant to paragraph (b)(2)(B)
of this section for the taxable year ending
with the decedent’s death must indicate on
each Form 1096“Annual Summary and
Transmittal of the U.S. Information Re-
turns”that it files (or appropriately on mag-
netic media) for the taxable year ending
with the death of the decedent that it is the
final return of the trust.
(iii)Trust reporting under paragraph
(b)(3) of this section.If a trust has been re-
porting under paragraph (b)(3) of this sec-
tion, the trustee may not report under that
paragraph if any portion of the trust has a
short taxable year by reason of the death
of the decedent and the portion treated as
owned by the decedent does not termi-
nate on the death of the decedent.
(i)Effective date and transition rule—
(1)Effective date.The trustee of a trust any
portion of which is treated as owned by one
or more grantors or other persons must re-
port pursuant to paragraphs (a), (b), (c),
(d)(1), (e), (f), and (g) of this section for
taxable years beginning on or after Janu-
ary 1, 1996.
*****
(3)Effective date for paragraphs (d)(2)
and (h) of this section.
Paragraphs (d)(2) and (h) of this sec-
tion apply for taxable years ending on or
after December 24, 2002.
Par. 7. Section 1.6012–3 is amended by
adding paragraph (a)(1)(iv) to read as
follows:
§1.6012–3 Returns by fiduciaries.
(iv) For each trust electing to be taxed
as, or as part of, an estate under section 645
for which a trustee acts, and for each re-
lated estate joining in a section 645 elec-
tion for which an executor acts, if the
aggregate gross income of the electing
trust(s) and related estate, if any, joining in
the election for the taxable year is $600 or
more. (For the respective filing require-
ments of the trustee of each electing trust
and executor of any related estate, see
§1.645–1).
*****
Par. 8. Section 1.6072–1 is amended as
follows:
1. The text of paragraph (a) is redesig-
nated as paragraph (a)(1) and a paragraph
heading is added for newly designated para-
graph (a)(1).
2. Paragraph (a)(2) is added.
The additions are as follows:
§1.6072–1 Time for filing returns of
individuals, estates, and trusts.
(a)In general—(1)Returns of income
for individuals, estates and trusts.***
(2)Return of trust, or portion of a trust,
treated as owned by a decedent—(i)In gen-
eral.In the case of a return of a trust, or
portion of a trust, that was treated as owned
by a decedent under subpart E (section 671
and following), part I, subchapter J, chap-
ter 1 of the Internal Revenue Code as of the
date of the decedent’s death that is filed in
accordance with§1.671–4(a) for the frac-
tional part of the year ending with the date
of the decedent’s death, the due date of such
return shall be the fifteenth day of the fourth
month following the close of the 12-month
period which began with the first day of the
decedent’s taxable year.
(ii)Effective date.This paragraph (a)(2)
applies to taxable years ending on or af-
ter December 24, 2002.
*****
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 9. The authority citation for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 10. Section 301.6109–1 is amended
as follows:
1. Paragraph (a)(2)(iii) is removed.
2. Paragraphs (a)(3) through (a)(6) are
added.
The additions are as follows:
§301.6109–1 Identifying numbers.
(a)***
(3)Obtaining a taxpayer identification
number for a trust, or portion of a trust, fol-
lowing the death of the individual treated
as the owner—(i)In general—(A)A trust
all of which was treated as owned by a de-
cedent.In general, a trust all of which is
treated as owned by a decedent under sub-
part E (section 671 and following), part I,
subchapter J, chapter 1 of the Internal Rev-
enue Code as of the date of the decedent’s
death must obtain a new taxpayer identi-
fication number following the death of the
decedent if the trust will continue after the
death of the decedent.
(B)Taxpayer identification number of
trust with multiple owners.With respect to
a portion of a trust treated as owned un-
der subpart E (section 671 and follow-
ing), part I, subchapter J, chapter 1 (subpart
E) of the Internal Revenue Code by a de-
cedent as of the date of the decedent’s
death, if, following the death of the dece-
dent, the portion treated as owned by the
decedent remains part of the original trust
and the other portion (or portions) of the
trust continues to be treated as owned un-
der subpart E by a grantor(s) or other per-
son(s), the trust reports under the taxpayer
identification number assigned to the trust
prior to the decedent’s death and the por-
tion of the trust treated as owned by the de-
cedent prior to the decedent’s death
(assuming the decedent’s portion of the trust
is not treated as terminating upon the de-
cedent’s death) continues to report under the
February 18, 20034822003–7 I.R.B.

taxpayer identification number used for re-
porting by the other portion (or portions)
of the trust. For example, if a trust, report-
ing under§1.671–4(a) of this chapter, is
treated as owned by three persons and one
of them dies, the trust, including the por-
tion of the trust no longer treated as owned
by a grantor or other person, continues to
report under the tax identification num-
ber assigned to the trust prior to the death
of that person. See§1.671–4(a) of this
chapter regarding rules for filing the Form
1041,“U.S. Income Tax Return for Es-
tates and Trusts,”where only a portion of
the trust is treated as owned by one or more
persons under subpart E.
(ii)Furnishing correct taxpayer identi-
fication number to payors following the
death of the decedent.If the trust contin-
ues after the death of the decedent and is
required to obtain a new taxpayer identi-
fication number under paragraph (a)(3)(i)(A)
of this section, the trustee must furnish pay-
ors with a new Form W–9,“Request for
Taxpayer Identification Number and Cer-
tification,”or an acceptable substitute Form
W–9, containing the new taxpayer identi-
fication number required under paragraph
(a)(3)(i)(A) of this section, the name of the
trust, and the address of the trustee.
(4)Taxpayer identification number to be
used by a trust upon termination of a sec-
tion 645 election—(i)If there is an execu-
tor.Upon the termination of the section 645
election period, if there is an executor, the
trustee of the former electing trust may need
to obtain a taxpayer identification num-
ber. If§1.645–1(g) of this chapter regard-
ing the appointment of an executor after a
section 645 election is made applies to the
electing trust, the electing trust must ob-
tain a new TIN upon termination of the
election period. See the instructions to the
Form 1041 for whether a new taxpayer
identification number is required for other
former electing trusts.
(ii)If there is no executor.Upon termi-
nation of the section 645 election period,
if there is no executor, the trustee of the
former electing trust must obtain a new tax-
payer identification number.
(iii)Requirement to provide taxpayer
identification number to payors.If the
trustee is required to obtain a new tax-
payer identification number for a former
electing trust pursuant to this paragraph
(a)(4), or pursuant to the instructions to the
Form 1041, the trustee must furnish all pay-
ors of the trust with a completed Form W–9
or acceptable substitute Form W–9 signed
under penalties of perjury by the trustee pro-
viding each payor with the name of the
trust, the new taxpayer identification num-
ber, and the address of the trustee.
(5)Persons treated as payors.For pur-
poses of paragraphs (a)(2), (3), and (4) of
this section, apayoris a person described
in§1.671–4(b)(4) of this chapter.
(6)Effective date.Paragraphs (a)(3), (4),
and (5) of this section apply to trusts of de-
cedents dying on or after December 24,
2002.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. 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.
*****
1.645–1 ........................................................................................................................................................... 1545–1578
*****
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved December 12, 2002.
Pamela T. Olson,
Assistant Secretary of Treasury.
(Filed by the Office of the Federal Register on December 23,
2002. 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 24, 2002, 67 F.R. 78371)
Section 6038.—Information
Reporting With Respect to
Certain Foreign Corporations
and Partnerships
T.D. 9033
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Section 6038—Returns
Required With Respect to
Controlled Foreign
Partnerships
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulation.
SUMMARY: This document contains fi-
nal and temporary regulations relating to
controlled foreign partnerships. This docu-
ment requires that the United States part-
ner must follow the filing requirements that
are specified in the instructions for Form
8865. The text of the temporary regula-
tion also serves as the text of the proposed
regulation (REG–124069–02) on page 488
of this Bulletin.
DATES:Effective Date:These
regulations are effective December 23,
2003.
Applicability Date:For dates of
applicability, see§§1.6038–3(l) and
1.6038–3T(l).
2003–7 I.R.B.483February 18, 2003

FOR FURTHER INFORMATION CON-
TACT: Tasheaya Warren, (202) 622–3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued with-
out prior notice and public procedure pur-
suant to the Administrative Procedure Act
(5 U.S.C. 553). For this reason, the col-
lection of information contained in these
regulations has been reviewed and, pend-
ing receipt and evaluation of public com-
ments, approved by the Office of
Management and Budget under control
number 1545–1617. Responses to this col-
lection of information are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
the collection of information displays a valid
OMB control number.
For further information concerning this
collection of information, and where to sub-
mit comments on the collection of infor-
mation and the accuracy of the estimated
burden, and suggestions for reducing this
burden, please refer to the preamble to the
cross-referencing notice of proposed rule-
making published elsewhere in this issue of
the Bulletin.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
In 1997, Congress amended section 6038
to require information reporting by cer-
tain United States persons with direct and
indirect interests in controlled foreign part-
nerships (CFPs). Treas. Reg.§1.6038–3
was published in 1999 (T.D. 8850, 2000–1
C.B. 265 [64 FR 72545] (1999)) (the“1999
Final Regulations”) and provides guid-
ance regarding the reporting requirements
under section 6038 with respect to CFPs.
A United States person required to report
under section 6038 with respect to a CFP
must file Form 8865,Return of U.S. Per-
sons With Respect To Certain Foreign Part-
nerships. In addition to the reporting
obligation imposed on certain partners in
foreign partnerships under section 6038, sec-
tion 6031 requires certain foreign partner-
ships to file Form 1065,U.S. Return of
Partnership Incomeor Form 1065–B,U.S.
Return for Electing Large Partnerships.
Treas. Reg.§1.6038–3(j)(1) provides
that if a foreign partnership completes and
files Form 1065 and a United States part-
ner is required to file Form 8865 with re-
spect to that partnership, the United States
partner must attach to its Form 8865 cop-
ies of the Form 1065 schedules filed by the
partnership instead of completing the Form
8865 schedules that are equivalent to Form
1065 schedules. This rule was added to the
1999 Final Regulations to reduce the bur-
den imposed by those regulations where
there is an overlap between section 6038
and section 6031. However, this rule does
not directly address the filing requirements
for Form 8865, when a United States part-
ner files electronically its income tax re-
turn (including any attachments such as
Form 8865).
Explanation of Provisions
To facilitate revisions to the filing re-
quirements for Form 8865 (such as elec-
tronic filing of Form 8865), the temporary
regulation amends Treas. Reg.§1.6038–3
to provide that a United States partner must
follow the filing requirements that are speci-
fied in the instructions for Form 8865 when
the United States partner must file Form
8865 and the partnership completes and files
Form 1065 or Form 1065–B. As a transi-
tional matter, for the next filing season it
is anticipated that the instructions for Form
8865 will continue to provide for the ex-
isting filing procedure pursuant to which a
United States partner attaches certain sched-
ules from Form 1065 or Form 1065–Bto
its Form 8865 as well as provide for an al-
ternative electronic filing procedure for
Form 8865.
The final regulation also makes two re-
visions to the 1999 Final Regulations. If a
U.S. person is required to file Form 8865,
Treas. Reg.§1.6038–3(g)(1) provides that
a U.S. person must submit any informa-
tion that Form 8865 or its accompanying
instructions require to be submitted. The fi-
nal regulation clarifies the requirement un-
der Treas. Reg.§1.6038–3, as reflected in
the Form 8865 instructions, that the United
States partner must include the foreign part-
nership’s name, address, and taxpayer iden-
tification number on Form 8865. The final
regulation also corrects a cross reference in
Treas. Reg.§1.6038–3(b)(9) (Example 1).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to this regulation. For the applica-
bility of the Regulatory Flexibility Act (5
U.S.C. chapter 6) refer to the Special Analy-
ses section of the preamble to the cross-
reference notice of proposed rulemaking
published elsewhere in this issue of the Bul-
letin. Pursuant to section 7805(f) of the In-
ternal Revenue Code, this temporary
regulation will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its im-
pact on small businesses.
Drafting Information
The principal author of this regulation
is Tasheaya Warren, Office of the Associ-
ate Chief Counsel (International). How-
ever, other personnel from the IRS and
Treasury Department participated in its de-
velopment.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are
amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6038–3 is amended as
follows:
1. The last sentence in paragraph (b)(9)
Example 1is revised.
2. Paragraphs (g)(1)(i) through (g)(1)(v)
are redesignated as paragraphs (g)(1)(ii)
through (g)(1)(vi), respectively.
3. New paragraph (g)(1)(i) is added.
4. Paragraphs (j) and (l) are revised.
The revisions and addition read as
follows:
§1.6038–3 Information returns required
of certain United States persons with
respect to controlled foreign partnerships
(CFPs).
February 18, 20034842003–7 I.R.B.

*****
(b)***
(9)***
Example 1. Sole U.S. partner does not
own more than a fifty-percent interest.
***
See also§1.6046A-1(f)(1) regarding the
overlap between sections 6038B and
6046A).
*****
(g) *** (1) ***
(i) The name, address, and taxpayer iden-
tification number (if any) of the foreign
partnership of which the person qualified
as a controlling fifty-percent partner or a
controlling ten-percent partner;
*****
(j) [Reserved]. For further guidance, see
§1.6038–3T(j).
*****
(l)Effective date.Except as otherwise
provided, this section shall apply for tax
years of a foreign partnership ending on or
after December 31, 2000. For tax years of
a foreign partnership prior to December 23,
2003, see§1.6038–3(j) in effect prior to
these amendments (see 26 CFR part 1 re-
vised April 1, 2002).
Par. 3. Section 1.6038–3T is added to
read as follows:
§1.6038–3T Information returns
required of certain United States
persons with respect to controlled
foreign partnership (CFPs) (temporary).
(a) through (i)(2) [Reserved]. For fur-
ther guidance, see§1.6038–3(a) through
(i)(2).
(j)Overlap with section 6031.A part-
ner may be required to file Form 8865 un-
der this section and the foreign partnership
in which it is a partner may also be re-
quired to file a Form 1065 or Form 1065–B
under section 6031(e) for the same part-
nership tax year. For cases where a United
States person is a controlling fifty-percent
partner or a controlling ten-percent part-
ner with respect to a foreign partnership,
and that foreign partnership completes and
files Form 1065 or Form 1065–B, the in-
structions for Form 8865 will specify the
filing requirements that address this over-
lap in reporting obligations.
(k) [Reserved]. For further guidance, see
§1.6038–3(k).
(l)Effective date.This section shall ap-
ply to tax years of a foreign partnership
ending on or after December 23, 2003. The
applicability of this section expires on De-
cember 20, 2005.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK RE-
DUCTION ACT
Par. 4. The authority citation for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.5.In§602.101, paragraph (b) is
amended by adding the following 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.
*****
1.6038–37 ......................................................................................................................................................... 1545–1617
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 5, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 20,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 23, 2002, 67 F.R. 78174)
2003–7 I.R.B.485February 18, 2003

Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Establishing Defenses to the
Imposition of the
Accuracy-Related Penalty
REG–126016–01
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains pro-
posed regulations that limit the defenses
available to the imposition of the accuracy-
related penalty when taxpayers fail to dis-
close reportable transactions or fail to
disclose that they have taken a position on
a return based upon a regulation being in-
valid. By limiting a taxpayer’s ability to use
an opinion or advice from a tax profes-
sional as a basis for a defense, the pro-
posed regulations are intended to promote
the disclosure of reportable transactions and
positions by taxpayers that conflict with
regulations issued by the Secretary. The pro-
posed regulations also clarify the existing
regulations with respect to the facts and cir-
cumstances that the IRS will consider in de-
termining whether a taxpayer acted with
reasonable cause and in good faith in re-
lying on an opinion or advice.
DATES: Written or electrically generated
comments and requests for a public hear-
ing must be received by March 31, 2003.
ADDRESSES: Send submissions to
CC:IT&A:RU (REG–126016–01), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand deliv-
ered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to:
CC:IT&A:RU (REG–126016–01), Couri-
er’s Desk, Internal Revenue Building,1111
Constitution Avenue, NW, Washington, DC.
Alternatively, taxpayers may submit com-
ments electronically directly to the IRS In-
ternet site at:www.irs.gov/regs.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Jamie G. Bernstein or Heather L.
Dostaler at (202) 622–4940; concerning
submissions of comments and requests for
a public hearing, Ms. LaNita Van Dyke of
the Regulations Unit at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed regu-
lations amending the regulations promul-
gated pursuant to sections 6662 and 6664,
relating to the accuracy-related penalty. Sec-
tion 6662 provides for the imposition of an
accuracy-related penalty for underpay-
ments of tax, including underpayments due
to negligence or disregard of rules or regu-
lations and understatements that aresub-
stantialwithin the meaning of the statute.
Taxpayers, however, can avoid the accuracy-
related penalty if they can establish, among
other things, that there was reasonable cause
for the underpayment and that they acted
in good faith within the meaning of sec-
tion 6664(c).
Temporary regulations issued under sec-
tion 6011 require taxpayers to disclosere-
portable transactionson their returns within
the meaning of those temporary regula-
tions. Treas. Reg.§1.6011–4T. Report-
able transactions may be abusive tax
avoidance transactions. The early identifi-
cation of potentially abusive tax avoid-
ance transactions is a high priority for the
IRS and Treasury. On October 22, 2002, the
IRS and Treasury published proposed and
temporary regulations that significantly re-
vise the definition of certain types of re-
portable transactions. See Tax Shelter
Disclosure Statements, (T.D. 9017, 2002–45
I.R.B. 815 [67 FR 64799] and REG–
103735–00, 2002–45 I.R.B. 832 [67 FR
64840]) (October 22, 2002) (to be codi-
fied in 26 CFR parts 1, 20, 25, 31, 53, 54,
56, and 301). The proposed amendments to
the disclosure rules under section 6011 gen-
erally will apply to transactions entered into
on or after January 1, 2003.
The IRS and Treasury believe that tax-
payers have improperly relied on opin-
ions or advice issued by tax advisors to
establish reasonable cause and good faith
as a basis for avoiding the accuracy-related
penalty, even when the opinion or advice
relates to a reportable transaction that the
taxpayer should have, but did not, dis-
close pursuant to§1.6011–4T. The IRS and
Treasury also believe that taxpayers have
improperly relied upon opinions or ad-
vice that a regulation is invalid without dis-
closing on their returns their position that
the regulation is invalid.
Accordingly, the IRS and Treasury have
concluded that the regulations under sec-
tions 6662 and 6664 should be amended
and clarified so that (1) a taxpayer who
takes a position that a regulation is in-
valid cannot rely on an opinion or advice
to satisfy the reasonable cause and good
faith exception under section 6664(c) with
respect to any underpayment attributable to
such position if the position was not dis-
closed on a return; and (2) a taxpayer who
engages in a reportable transaction can-
not rely on an opinion or advice to sat-
isfy the reasonable cause and good faith
exception under section 6664(c) with re-
spect to any underpayment attributable to
the transaction if the transaction was not dis-
closed pursuant to the regulations promul-
gated under section 6011. Further, a
taxpayer who engages in a reportable trans-
action cannot rely on the realistic possi-
bility standard under section 6662 to avoid
the accuracy-related penalty for negligence
or disregard of rules or regulations if the
position regarding the reportable transac-
tion is contrary to a revenue ruling or no-
tice.
Explanation of Provisions
These proposed regulations amend 26
CFR part 1 relating to the defenses avail-
able to the imposition of the accuracy-
related penalty under section 6662(b)(1)
(underpayments of tax attributable to neg-
ligence or disregard of rules or regula-
tions) and the general exception to the
accuracy-related penalty under section
6664(c).
Under these proposed regulations, the ad-
equate disclosure exception to the accuracy-
related penalty for underpayments of tax
attributable to negligence or disregard of
rules or regulations (see§1.6662–3(a)) will
not apply to underpayments relating to a re-
portable transaction unless the reportable
transaction also is disclosed under§1.6011–
4T. In addition, if a position relates to a re-
portable transaction and is contrary to a
revenue ruling or notice (other than a no-
tice of proposed rulemaking), a taxpayer
may not rely upon the fact that the posi-
February 18, 20034862003–7 I.R.B.

tion has a realistic possibility of being sus-
tained on the merits as a defense to the
penalty imposed under section 6662(b)(1).
The taxpayer instead would be required to
satisfy the adequate disclosure exception un-
der§1.6662–3(c)(1), including the disclo-
sure of the reportable transaction under
§1.6011–4T.
The proposed regulations also clarify and
modify the standards for, and limits on, the
use of opinions and advice to satisfy the
reasonable cause and good faith excep-
tion under section 6664(c) as a defense to
the imposition of the accuracy-related pen-
alty under section 6662. The proposed regu-
lations, for instance, clarify that a taxpayer’s
education, sophistication and business ex-
perience will be relevant in determining
whether the taxpayer’s reliance on the opin-
ion or advice was reasonable and made in
good faith. The IRS currently takes these
facts and circumstances into account in de-
termining whether a taxpayer has satis-
fied the reasonable cause and good faith
exception under section 6664(c).
These proposed regulations amend
§1.6664–4(c) to specify when a taxpayer
cannot rely upon an opinion or advice to
satisfy the reasonable cause and good faith
exception. Taxpayers who do not disclose
positions based upon a regulation being in-
valid (see§1.6662–3(c)(2)) cannot use an
opinion or advice concerning the invalid-
ity of the regulation as a basis for satisfy-
ing the reasonable cause and good faith
exception under section 6664(c). Simi-
larly, the proposed regulations prohibit tax-
payers from using an opinion or advice as
a basis for satisfying the reasonable cause
and good faith exception under section
6664(c) with respect to a reportable trans-
action that the taxpayer did not disclose in
accordance with§1.6011–4T.
Under these proposed regulations, a tax-
payer, in order to properly disclose a trans-
action, may be required to file with the
taxpayer’s return more than one disclo-
sure form for the same transaction in or-
der to satisfy the requirements in the
regulations under sections 6662 and 6664
(as modified by these proposed regula-
tions), and section 6011. The IRS and Trea-
sury may consider permitting taxpayers to
use a single disclosure document to sat-
isfy those regulations, provided that all re-
quired information is provided by the
taxpayer and provided that the taxpayer files
a copy of the document with the Office of
Tax Shelter Analysis as required under
§1.6011–4T (or as may be otherwise pro-
vided in any successor regulations).
Proposed Effective Date
These regulations are proposed to ap-
ply to returns filed after December 30, 2002,
with respect to transactions entered into on
or after January 1, 2003, to coincide with
the temporary regulations relating to dis-
closure, promulgated under section 6011 and
applicable for transactions entered into on
or after January 1, 2003. The IRS, how-
ever, cautions taxpayers and tax practitio-
ners that it will rigorously apply the existing
facts and circumstances standard under
§1.6664–4(c) regarding a taxpayer’s rea-
sonable reliance in good faith on advice
from a tax professional, as well as the other
provisions of the regulations under sec-
tions 6662 and 6664, including§1.6664–
4(c) relating to special rules for the
substantial understatement penalty attrib-
utable to tax shelter items of a corpora-
tion. In addition to the modifications
contained in these proposed regulations, and
regardless of when a transaction was en-
tered into, the IRS, in appropriate circum-
stances, may consider a taxpayer’s failure
to disclose a reportable transaction or fail-
ure to disclose a position that a regula-
tion is invalid as a factor in determining
whether the taxpayer has satisfied the rea-
sonable cause and good faith exception un-
der section 6664(c) to the accuracy-related
penalty.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regulatory
assessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because the regulation does not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal Rev-
enue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small businesses.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the clarity of the proposed
regulations and how they can be made
easier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. If a pub-
lic hearing is scheduled, notice of the date,
time, and place for the public hearing will
be published in theFederal Register.
Drafting Information
The principal authors of these regula-
tions are Jamie G. Bernstein and Heather
L. Dostaler of the Office of Associate Chief
Counsel (Procedure and Administration),
Administrative Provisions and Judicial Prac-
tice Division.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6662–3 is amended by:
1. Revising paragraph (a).
2. Revising the last sentence of para-
graph (b)(2).
3. Revising the first sentence of para-
graph (c)(1).
The revisions read as follows:
§1.6662–3 Negligence or disregard of
rules or regulations.
(a)In general.If any portion of an un-
derpayment, as defined in section 6664(a)
and§1.6664–2, of any income tax im-
posed under subtitle A of the Internal Rev-
enue Code that is required to be shown on
a return is attributable to negligence or dis-
regard of rules or regulations, there is added
to the tax an amount equal to 20 percent
of such portion. The penalty for disre-
2003–7 I.R.B.487February 18, 2003

garding rules or regulations does not ap-
ply, however, if the requirements of para-
graph (c)(1) of this section are satisfied and
the position in question is adequately dis-
closed as provided in paragraph (c)(2) of
this section (and, if the position relates to
a reportable transaction as defined in
§1.6011–4T(b), the transaction is disclosed
in accordance with§1.6011–4T), or to the
extent that the reasonable cause and good
faith exception to this penalty set forth in
§1.6664–4 applies. In addition, if a posi-
tion with respect to an item (other than with
respect to a reportable transaction, as de-
fined in§1.6011–4T(b)) is contrary to a
revenue ruling or notice (other than a no-
tice of proposed rulemaking) issued by the
Internal Revenue Service and published in
the Internal Revenue Bulletin (see
§601.601(d)(2) of this chapter), this pen-
alty does not apply if the position has a re-
alistic possibility of being sustained on its
merits. See§1.6694–2(b) of the income tax
return preparer penalty regulations for a de-
scription of the realistic possibility stan-
dard.
(b)***
(2)***Nevertheless, a taxpayer who
takes a position (other than with respect to
a reportable transaction, as defined in
§1.6011–4T(b)) contrary to a revenue rul-
ing or a notice has not disregarded the rul-
ing or notice if the contrary position has a
realistic possibility of being sustained on its
merits.
*****
(c)***(1)***No penalty under sec-
tion 6662(b)(1) may be imposed on any
portion of an underpayment that is attrib-
utable to a position contrary to a rule or
regulation if the position is disclosed in ac-
cordance with the rules of paragraph (c)(2)
of this section (and, if the position relates
to a reportable transaction as defined in
§1.6011–4T(b), the transaction is disclosed
in accordance with§1.6011–4T) and, in
case of a position contrary to a regula-
tion, the position represents a good faith
challenge to the validity of the regula-
tion.
Par. 3. Section 1.6664–0 is amended by:
1. Adding an entry for§1.6664–
4(c)(1)(iii).
2. Redesignating the entries for
§1.6664–4(c)(2) and (c)(3) as§1.6664–
4(c)(3) and (c)(4), respectively.
3. Adding a new entry for§1.6664–
4(c)(2).
The additions read as follows:
§1.6664–0 Table of contents.
*****
§1.6664–4 Reasonable cause and good
faith exception to section 6662 penalties.
*****
(c)***
(1)***
(iii) Reliance on the invalidity of a regu-
lation.
(2) Opinions or advice relating to re-
portable transactions.
*****
Par. 4. Section 1.6664–4 is amended by:
1. Revising paragraph (c)(1) introduc-
tory text.
2. Revising the last sentence of para-
graph (c)(1)(i).
3. Adding paragraph (c)(1)(iii).
4. Redesignating paragraphs (c)(2) and
(c)(3) as paragraphs (c)(3) and (c)(4), re-
spectively.
5. Adding a new paragraph (c)(2).
The revision and additions read as
follows:
§1.6664–4 Reasonable cause and good
faith exception to section 6662 penalties.
(c)Reliance on opinion or advice—(1)
Facts and circumstances; minimum re-
quirements.All facts and circumstances
must be taken into account in determin-
ing whether a taxpayer has reasonably re-
lied in good faith on advice (including the
opinion of a professional tax advisor) as to
the treatment of the taxpayer (or any en-
tity, plan, or arrangement) under Federal tax
law. For example, the taxpayer’s educa-
tion, sophistication and business experi-
ence will be relevant in determining whether
the taxpayer’s reliance on the advice was
reasonable and made in good faith. In no
event will a taxpayer be considered to have
reasonably relied in good faith on advice
(including an opinion) unless the require-
ments of this paragraph (c)(1) are satis-
fied and the advice is not disqualified under
paragraph (c)(2) of this section. The fact that
these requirements are satisfied, however,
will not necessarily establish that the tax-
payer reasonably relied on the advice (in-
cluding the opinion of a professional tax
advisor) in good faith. For example, reli-
ance may not be reasonable or in good faith
if the taxpayer knew, or reasonably should
have known, that the advisor lacked knowl-
edge in the relevant aspects of Federal tax
law.
(i)***In addition, the requirements
of this paragraph (c)(1) are not satisfied if
the taxpayer fails to disclose a fact that it
knows, or reasonably should know, to be
relevant to the proper tax treatment of an
item.
*****
(iii)Reliance on the invalidity of a regu-
lation.A taxpayer may not rely on an opin-
ion or advice that a regulation is invalid to
establish that the taxpayer acted with rea-
sonable cause and good faith unless the tax-
payer adequately disclosed, in accordance
with§1.6662–3(c)(2), including the dis-
closure of the position that the regulation
in question is invalid, and, if the position
relates to a reportable transaction as de-
fined in§1.6011–4T(b), the transaction is
disclosed in accordance with§1.6011–
4T.
(2)Opinions or advice relating to re-
portable transactions.Taxpayers may not
reasonably rely on an opinion or advice of
a tax advisor if the opinion or advice is dis-
qualified under this paragraph. An opin-
ion or advice is disqualified if it relates to
the appropriate tax treatment of a report-
able transaction, as defined in§1.6011–
4T(b), and the taxpayer does not disclose
the transaction in accordance with§1.6011–
4T.
*****
David A. Mader,
Assistant Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on December 30,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 31, 2002, 67 F.R. 79894)
Notice of Proposed Rulemak-
ing by Cross-Reference to
Temporary Regulation and
Notice of Public Hearing
Section 6038—Returns
Required With Respect to
Controlled Foreign
Partnerships
REG–124069–02
AGENCY: Internal Revenue Service (IRS),
Treasury.
February 18, 20034882003–7 I.R.B.

ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lation and notice of public hearing.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing a temporary regulation
(T.D. 9033) relating to controlled foreign
partnerships. That document requires that
the United States partner must follow the
filing requirements that are specified in the
instructions for Form 8865. The text of that
regulation also serves as the text of this pro-
posed regulation. This document also pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
must be received by March 24, 2003. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for March 12, 2003,
at 10 a.m., must be received by February
19, 2003.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–124069–02), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 5 p.m. to: CC:ITA:RU (REG–
124069–02), Courier’s Desk, Internal Rev-
enue Service,1111Constitution Avenue,
NW, Washington, DC. Alternatively, tax-
payers may submit electronic comments di-
rectly to the IRS internet site atwww.irs.gov/
regs.The public hearing will be held in the
Auditorium, Internal Revenue Building,
1111Constitution Avenue, NW, Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Tasheaya Warren, (202) 622–3860;
concerning submissions and the hearing,
LaNita Van Dyke, (202) 622–7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the col-
lection 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 Regu-
latory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S, Washington, DC 20224.
Comments on the collection of informa-
tion should be received by February 21,
2003. Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the in-
formation will have practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of in-
formation (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
proposed collection of information may be
minimized, including through the applica-
tion of automated collection techniques or
other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this
regulation is in§1.6038–3T. This infor-
mation is required by the IRS to identify
foreign partnerships which are controlled by
United States persons and verify amounts
reported by the partners. The collection of
information is mandatory. The likely re-
spondents will be individuals and busi-
ness or other for-profit organizations.
The burden of complying with the col-
lection of information required to be re-
ported on Form 8865 is reflected in the
burden for Form 8865. The estimated num-
ber of respondents is 5000. The estimated
burden for the 2001 Form 8865 per re-
spondent is 89 hours.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
it displays a valid control number assigned
by the Office of Management and Bud-
get.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background and Explanation of
Provisions
The temporary regulation in this issue
of the Bulletin amends 26 CFR part 1. If
a foreign partnership files Form 1065 or
Form 1065–B and a United States partner
is required to file Form 8865 with respect
to that partnership, the temporary regula-
tion amends Treas. Reg.§1.6038–3 to pro-
vide that the United States partner must
follow the filing requirements that are speci-
fied in the instructions for Form 8865. The
text of the temporary regulation also serves
as the text of this proposed regulation. The
preamble to the temporary regulation ex-
plains the temporary regulation and this pro-
posed regulation.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regulatory
assessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and because this regulation does not im-
pose a collection of information on small
entities, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal Rev-
enue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its im-
pact on small businesses.
Comments and Public Hearing
Before this proposed regulation is
adopted as a final regulation, consider-
ation will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they can be made
easier to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled for
March 12, 2003, at 10 a.m., in the Audi-
torium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington, DC.
Because of access restrictions, visitors will
not be admitted beyond the immediate en-
2003–7 I.R.B.489February 18, 2003

trance area more than 30 minutes before the
hearing starts. For information about hav-
ing your name on the building access list
to attend the hearing, see the For Further
Information Contact portion of this pre-
amble. The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments must submit writ-
ten or electronic comments and an out-
line of the topics to be discussed and the
time to be devoted to each topic (a signed
original and eight (8) copies) by Febru-
ary 19, 2003. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of this regulation
is Tasheaya Warren, Office of the Associ-
ate Chief Counsel (International). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6038–3 is amended by
revising paragraph (j) to read as follows:
§1.6038–3 Information returns required
of certain United States persons with
respect to controlled foreign partnerships
(CFPs).
*****
(j) [The text of the proposed amend-
ment to§1.6038–3(j) is the same as the
text for§1.6038–3T(j) published else-
where in this issue of theFederal Regis-
ter.]
*****
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on December 20,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 23, 2002, 67 F.R. 78202)
Redemptions Taxable as
Dividends; Correction
Announcement 2003–9
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Correction to notice of proposed
rulemaking and notice of public hearing.
SUMMARY: This document contains cor-
rections to a notice of proposed rulemak-
ing and notice of public hearing (REG–
150313–01, 2002–44 I.R.B. 777) which was
published in theFederal Registeron Fri-
day, October 18, 2002 (67 FR 64331). This
regulation provides guidance regarding the
treatment of the basis of redeemed stock
when a distribution in redemption of such
stock is treated as a dividend, as well as
guidance regarding certain acquisitions of
stock by related corporations that are treated
as distributions in redemption of stock.
FOR FURTHER INFORMATION CON-
TACT: Lisa K. Leong at (202) 622–7530
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The proposed regulations that are the
subject of these corrections are under sec-
tions 302, 304, 704, 861, 1371, 1374, and
1502 of the Internal Revenue Code.
Need for Correction
As published, this notice of proposed
rulemaking contains errors that may prove
to be misleading and are in need of clari-
fication.
Correction of Publication
Accordingly, the publication of the no-
tice of proposed rulemaking and notice of
public hearing (REG–150303–01, 2002–44
I.R.B. 777), which is the subject of FR.
Doc. 02–26449, is corrected as follows:
1. On page 64332, column 1, in the pre-
amble under the paragraph heading“Pa-
perwork Reduction Act”, paragraph 7, line
12, the language“loss. The respondents are
shareholders”, is corrected to read“loss (or
gain, as appropriate). The respondents are
shareholders”.
§ 1.302–5 [Corrected]
2. On page 64339, column 1,§1.302–5,
paragraph (d)(8), line 4 from the bottom of
the paragraph“accelerated inclusion date
shall be made”is corrected to read“accel-
erated loss inclusion date shall be made”.
3. On page 64340, column 3,§1.302–5,
paragraph (f)(9), ofExample 7, lines 6 and
7, the language“equal to PS’s basis in the
corporation Z stock, ($50 after applica-
tion of section 301(c)(2)), is”, is corrected
to read“(equal to PS’s basis in the corpo-
ration Z stock, ($50 after application of sec-
tion 301(c)(2)) is”.
§ 1.304–3 [Corrected]
4. On page 64342, column 3,§1.304–3,
paragraph (a), lines 21 through 24, the lan-
guage“For the treatment of the redeemed
shareholder’s basis in the redeemed stock
in such cases, see§1.302–5.”is removed.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on December 24,
2002, 8:45 a.m., and published in the issue of the Federal Reg-
ister for December 26, 2002, 67 F.R. 78761)
Foundations Status of Certain
Organizations
Announcement 2003–10
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations in
the Cumulative List of Organizations (Pub-
lication 78), or on the presumption aris-
ing from the filing of notices under section
508(b) of the Code. This listing doesnot
indicate that the organizations have lost their
status as organizations described in sec-
tion 501(c)(3), eligible to receive deduct-
ible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations that are not private foun-
February 18, 20034902003–7 I.R.B.

dations described in section 509(a) of the
Code) are now classified as private
foundations:
1st Class, Ridgefield, WA
360 Whitehall Housing Development
Fund Corporation, Albany, NY
Abundant Living Self-Investment
Associates Ministries, Inc.,
Little Rock, AR
Access Laporte County, Michigan City, IN
Access to Loans for Learning Finance
Corporation, Los Angeles, CA
Access to Loans for Learning Student Credit
Corporation, Los Angeles, CA
Acrosports Advocate, Detroit, MI
Actions Community Development
Corporation, Houston, TX
Acts Ministries, Stansbury Park, UT
ADR Education Foundation, Inc.,
Philadelphia, PA
African-American Advocacy Education and
Training Consultant Group,
Incorporated, Syracuse, NY
African Immigrant Mission USA, Inc.,
West Orange, NJ
African Universities Foundation, Inc.,
Olney, MD
AHEC Foundation of Southwest
Oregon, Roseburg, OR
Al-Bright Children Educational
Foundation Trust, San Rafael, CA
All Helping Hands, Inc., Lake City, FL
Allen Temple Neighborhood Development
Corporation, Inc., Riviera Beach, FL
American Friends of the Vienna State
Opera, Beverly Hills, CA
Anchor Bay Square Club,
New Baltimore, MI
Antietam Skating Club, Frederick, MD
Artists With Disabilities, Inc., Mahopac, NY
Association for Bible Study, New York, NY
Astrological Institute, Scottsdale, AZ
Bayanihan Cultural Organization,
Hayward, CA
Berthoud Baseball Association,
Berthoud, CO
Black Hispanics Educational Foundation,
Bronx, NY
Bring Me a Book Foundation,
Mountain View, CA
Buffalo Women’s Amateur Soccer
Association, Ltd., Williamsville, NY
Buttons & Bows Family Child
Development Center, Incorporated,
Inkster, MI
Canon McMillan Baseball Association,
Canonsburg, PA
Career Access California, Inc.,
Burlingame, CA
Carolina Family Alliance, Spartanburg, SC
Center for Advanced Transportation
Technologies, Monroeville, PA
Center for Scientific Visualization, Ltd.,
New York, NY
Center for Social Ministry, Berkeley, CA
Charanjit Singh Batth Foundation,
Caruthers, CA
Chennai Educational Foundation, Inc.,
Vienna, VA
Cherrie Williams Foundation, Gardena, CA
Childcare International, Inc., Miami, FL
Children of Peace, Inc., Buffalo, NY
Christian Business & Consumer
Ministries Corporation, Fairhope, AL
Christian Family, Greeley, CO
Circuit Foundation, Brooklyn, NY
Citizens for Buckeye Basin Parks, Inc.,
Toledo, OH
Commanchees Retreat Organization,
Galion, OH
Communities With Vision, Inc.,
Sorrento, FL
Community Development Corporation of
LaFourche, Raceland, LA
Community Resources Technology, Inc.,
Lexington, MA
Community Revival Corporation,
Spring Valley, NY
Communitys Jennie Dean Project,
Manassas, VA
Comprehensive Human Resources, Inc.,
Newton, MA
Connecticut Spirit Association,
Woodbridge, CT
Copernicus Foundation, Inc., Boston, MA
Council International Study Programs, Inc.,
New York, NY
Council on Holistic Healing and
Recovery, Houston, TX
Covenant Academy, Inc., Asheboro, NC
Crusaders Community Development
Corporation, Philadelphia, PA
David Merrick and Natalie Lloyd
Foundation, Inc., New York, NY
Deep Waters Ministry, Inc.,
Port Washington, NY
Deliverance Outreach Center,
New Haven, CT
D.E.R.E.K. Program, Minneapolis, MN
District 39 Educational Foundation,
Wilmette, IL
Duplin County Agri-Community Center
Foundation, Kenansville, NC
Each One Help One Teach One,
Los Angeles, CA
Eagle Vision Society, Oklahoma City, OK
Easley & Associates Christian Develop-
ment, Inc., West Palm Beach, FL
Eastbridge, Norwalk, CT
Educational Video Foundation,
Silverton, OR
Enable, Inc., Everett, PA
Endangered Liberties Research Institute,
Washington, DC
ESPA, Warrensville Hts., OH
Eufaula-Barbour County Historic
Foundation, Eufaula, AL
F. D. Thomas Educational & Enrichment
Center, Inc., Thomasville, NC
Fire Island Wilderness Committee, Inc.,
Brookhaven, NY
Fire Wind & Rain Ministries,
Council Bluffs, IA
Flame of Fire, Eastman, GA
Foundation for Environmental Education
Development, Reno, NV
Freedom Institute, Springfield, MO
FreshStart, Inc., Memphis, TN
Friendly Village Mobilehome Park
Corporation, Santa Ana, CA
Friends in Friendship, Greensboro, NC
Friends It Is, Sylmar, CA
Full Harvest, Florissant, MO
Fundacion Oftalmologica De La Pena,
Montebello, CA
Fundamental Resources, Inc., Detroit, MI
Garden Square North Development
Company, Pittsburgh, PA
Get High on Life/Be D.E.A.R. to
Yourself, Inc., Huntington Beach, CA
Gethsemane Garden Day Care Center,
Memphis, TN
Global Health Access Foundation,
Tiburon, CA
Global Software Institute, Leverett, MA
Go Ye Ministries, Inc., Alturas, FL
Golden Bridge of Friendship
Organization, Inc., Suffern, NY
Grady County Children & Youth
Coordinating Council, Inc., Cairo, GA
Graham-Kapowsin Community Council,
Spanaway, WA
Green Mountain Wildlife Network,
Middlesex, VT
Haitian American Civic Center, Inc.,
Brooklyn, NY
Hallmark Opportunities for Progressive
Education HOPE, Sebastapol, CA
Hand In Hand We Can, Oakley, CA
Hannah Project, Incorporated, Ocala, FL
Health Beat, Inc., White Plains, NY
Help One Another Club, Inc., Mequon, WI
2003–7 I.R.B.491February 18, 2003

Hispanic Franchise Foundation, Inc.,
Los Angeles, CA
Holy Awakening Movement Global Love
Church, Burbank, CA
Homestead Hill, Inc., North Adams, MA
Hopeville Institution, San Antonio, TX
Improving Education, Inc., Stamford, CT
In-Touch Community Development, Inc.,
Fort Lauderdale, FL
Indiana Federation of Families for
Childrens Mental Health,
Indianapolis, IN
Indus Foundation, Sudbury, MA
Innovation Research, San Leandro, CA
Innovative Educational Design,
Pullman, WA
Institute for Sisters of Respect,
Clearwater, FL
Institute for the Restoration of
Antiquities, Inc., Teaneck, NJ
Institutional Scholarship Foundation,
Pittsburgh, PA
Inter-Americas Research and Information
Center, Inc., Medford, OR
Interlight Productions, Inc., Studio City, CA
International Botanical Conservatory &
Gardens of New Jersey, Fair Lawn, NJ
International Institute for Head and Neck
Cancer and Tobacco Related Diseases,
Inc., New York, NY
Janshee Educational Services, Inc.,
Miami, FL
Jesus Way, Staten Island, NY
John A. Reisenbach Foundation,
New York, NY
Joshua Foundation, Inc., Nashville, TN
Just Kids of Sarasota, Inc., Sarasota, FL
Kamaaina United to Protect the Aina,
Honaunau, HI
Keep Lowndes-Valdosta Beautiful, Inc.,
Valdosta, GA
Kids X-Pressions, Inc., Cumming, GA
Kings Mission, Engelhard, NC
Knowledge Initiative, Inc., Cabin John, MD
Koftbrol, Inc., Bronx, NY
KVMHC Housing, Inc., Waterville, ME
Labor Council for Latin American
Advancement-Rock, Janesville, WI
Lafayette Elderly Housing Development
Corporation II, Carencro, LA
LaFourche Schools Education
Foundation, Inc., Thibodaux, LA
Lake Economic Development, Inc.,
Belle Glade, FL
Largess, South Euclid, OH
Landmark Development Enterprises,
New Orleans, LA
Lee House, Inc., Valley Falls, KS
Libyan American Friendship Association,
Merrifield, VA
LIFE Institute, Inc., Louisville, KY
Lifequest Foundation, Saugus, CA
Lift Corporation, Indianapolis, IN
Light of Hope Community Development
Corporation, Chester Township, PA
Light of Hope Seniors Residence
Development, Corp.,
Chester Township, PA
Livingston County Community
Foundation, Chillicothe, MO
Los Angeles County Bomberos,
Incorporated, Montebello, CA
Louisiana Technical College-Tallulah
Foundation, Tallulah, LA
M&S Kolel Grocery, Inc.,
Spring Valley, NY
Maes Family Day Care, Hawthorne, CA
Marin County Chaplains Assoc.,
San Rafael, CA
Marvellous Light Corporation, El Paso, TX
Mazzei Foundation, Inc., Tulsa, OK
Meals 4 U, Grosse Pointe Woods, MI
Mecuda Foundation, Ltd.,
College Park, MD
Mega Booster Club, Evansville, IN
Metro Health California, Inc., Roswell, GA
Mid America Arts Foundation,
Kansas City, KS
Miracle Drummer and Dancers, Inc.,
Wasilla, AK
Miriam House Children’s Residential Care
Facility, Houston, TX
MIRTH, Inc., Pasadena, CA
Mission Arlington, Inc., Arlington, TX
Mission Connect, Houston, TX
Monroe Meadows, Inc., Monroe, MI
Mound Bayou Community Development
Corporation, Incorporated,
Mound Bayou, MS
Mr. & Mrs. Everett E. Brockett
Scholarship Fund, Inc.,
Southampton, NY
Nanocomputer Dream Team, Inc.,
San Antonio, TX
National Cancer Research & Education
Foundation, Blacksburg, VA
National Manufactured Home Owners
Institute, Willow Street, PA
National Training and Information
Center, Sacramento, CA
NCAL-Winston-Salem, Winston-Salem, NC
Neighbors Helping Neighbors, Canton, OH
Nevada Bar Foundation, Las Vegas, NV
New Directions Treatment Center,
Danville, IL
New Start Counseling Services, Peoria, AZ
New World Impact Education, Corville, AZ
Nick B. Della Foundation, Inc., Visalia, CA
Ninth Street Mobilehome Park
Corporation, Santa Ana, CA
Now Choose Life Ministries, Suprise, AZ
NPF Enterprises, Las Vegas, NV
Oceanography Research & Development,
Southwick, MA
Old Town Princeton Foundation, Inc.,
Bluefield, WV
Open Your Heart Fund, Inc., Flushing, NY
Orangewood Mobilehome Park
Corporation, Santa Ana, CA
Pacific Palms Mobilehome Park
Corporation, Santa Ana, CA
Pasadena Museum of Art, Pasadena, CA
Personal Technology Institute, Inc.,
Rochester, NY
Pet Emergency & Disaster Assistance, Inc.,
Lakewood, CA
Prairie View A&M University Class of 1949
50th Year Endowed Scholarship Fund,
Inc., Prairie View, TX
Praise Him Ministries, North Easton, MA
Prayer and Miracles, Inc., Detroit, MI
Prep First American Resources & Services
Corporation, Tucson, AZ
Pro-Visions for Life, Yuma, AZ
Progressive Lakeside Golfers Associations,
Inc., Shreveport, LA
Project Reach, Inc., Houston, TX
Pug Rescue of Southeast Texas,
Sugar Land, TX
Quachita Regional Soccer Association,
Monroe, LA
Ricky Edwards Ministries, Pawnee, OK
Royal Knights Jr. Athletic Association,
St. Louis, MO
Rural Community Development
Corporation, Port Gibson, MS
Russkaya Artists Group, Athens, OH
Safeguarding America for Everyone
(S.A.F.E.) Foundation, Inc.,
Upper Marlboro, MD
Saint Paul Community Development
Corporation, Lake Helen, FL
Salmon Recovery Forum, Inc., Bend, OR
San Fernando Valley Philharmonic Pops
Orchestra, Inc., Woodland Hills, CA
San Jose Community Center, San Jose, NM
Save-A-Stray, Inc., Troutman, NC
Second Chance Community Development,
Inc., Lauderhill, FL
Second Chance Outreach Ministries, Inc.,
Memphis, TN
Sickle Cell Disease International
Foundation, Inc., Boston, MA
Silent Teens Organization, Canoga Park, CA
February 18, 20034922003–7 I.R.B.

Sisterhood on the Move, Mattapan, MA
Spirit Acres Daycamp Foundation,
Riverton, CA
Spring Valley Terrace, Inc., Tempe, AZ
St. Marys Youth Baseball Association, Inc.,
St. Marys, PA
Star of Christopher, Inc., Coon Rapids, MN
Stone Institute for Challenged Adolescents,
Austin, TX
Stonehenge Foundation, Incorporated,
Gladwyne, PA
Stratford Housing Development Fund
Corporation, New York, NY
Studio in the Hood, Inc., Carbondale, IL
Summerdale Court, Inc., Pittsburgh, PA
Teensafe, Inc., Hurley, NM
Temple Foundation, Inc., White Plains, NY
Temple of Knowledge, St. Louis, MO
Tennessee Breakers Basketball Club,
Oak Ridge, TN
Teresa Anne Eglet Galvin Scholarship Fund,
Inc., Basking Ridge, NJ
Tippecanoe County Cooperative
Extension Board, Lafayette, IN
Treatment Resources, Inc., Richmond, VA
Trinity Educational Center, Inc.,
Covington, GA
Tropicana Mobilehome Park Corporation,
Santa Ana, CA
Troy Housing Development Corporation,
Troy, NC
Tupelo Affordable Housing System,
Tupelo, MS
Union County Educational Foundation, Inc.,
Morganfield, KY
Village Developers, Inc., Vineland, NJ
Viridian, Bremerton, WA
Walltown Community Association, Inc.,
Durham, NC
We are the Clay, Sacramento, CA
Westend Development Corporation,
Oakland, CA
What’s Up Club, Houston, TX
Wheeling Housing Authority Resident
Council, Incorporated, Wheeling, WV
Willow Career Institute, Inc.,
New York, NY
Wings of Care Association, Auburn, WA
Wish Come True Foundation, Inc.,
Westerly, RI
Women in Action, Inc., Southfield, MI
Work Opportunity Resource Center,
Hawthorne, CA
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal Rev-
enue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grant-
ors and contributors may thereafter rely
upon such ruling or determination letter as
provided in section 1.509(a)–7 of the In-
come Tax Regulations. It is not the prac-
tice of the Service to announce such revised
classification of foundation status in the In-
ternal Revenue Bulletin.
2003–7 I.R.B.493February 18, 2003

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F. R .—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
February 18, 2003i2003–7 I.R.B.

Numerical Finding List
1
Bulletins 2003–1 through 2003–6
Announcements:
2003–1, 2003–2 I.R.B.281
2003–2, 2003–3 I.R.B.301
2003–3, 2003–4 I.R.B.361
2003–4, 2003–5 I.R.B.396
2003–5, 2003–5 I.R.B.397
2003–6, 2003–6 I.R.B.450
2003–7, 2003–6 I.R.B.450
2003–8, 2003–6 I.R.B.451
Notices:
2003–1, 2003–2 I.R.B.257
2003–2, 2003–2 I.R.B.257
2003–3, 2003–2 I.R.B.258
2003–4, 2003–3 I.R.B.294
2003–5, 2003–3 I.R.B.294
2003–6, 2003–3 I.R.B.298
2003–7, 2003–4 I.R.B.310
2003–8, 2003–4 I.R.B.310
2003–9, 2003–5 I.R.B.369
2003–10, 2003–5 I.R.B.369
2003–11, 2003–6 I.R.B.422
2003–12, 2003–6 I.R.B.422
Proposed Regulations:
REG–209500–86, 2003–2 I.R.B.262
REG–125638–01, 2003–5 I.R.B.373
REG–151043–02, 2003–3 I.R.B.300
REG–164464–02, 2003–2 I.R.B.262
Revenue Procedures:
2003–1, 2003–1, I.R.B.1
2003–2, 2003–1, I.R.B.76
2003–3, 2003–1, I.R.B.113
2003–4, 2003–1, I.R.B.123
2003–5, 2003–1, I.R.B.163
2003–6, 2003–1, I.R.B.191
2003–7, 2003–1, I.R.B.233
2003–8, 2003–1, I.R.B.236
2003–10, 2003–2 I.R.B.259
2003–11, 2003–4 I.R.B.311
2003–12, 2003–4 I.R.B.316
2003–13, 2003–4 I.R.B.317
2003–14, 2003–4 I.R.B.319
2003–15, 2003–4 I.R.B.321
2003–16, 2003–4 I.R.B.359
2003–17, 2003–6 I.R.B.427
2003–18, 2003–6 I.R.B.439
2003–19, 2003–5 I.R.B.371
2003–20, 2003–6 I.R.B.445
2003–21, 2003–6 I.R.B.448
Revenue Rulings:
2003–1, 2003–3 I.R.B.291
2003–2, 2003–2 I.R.B.251
2003–3, 2003–3 I.R.B.252
2003–4, 2003–4 I.R.B.253
2003–5, 2003–5 I.R.B.254
2003–6, 2003–3 I.R.B.286
2003–7, 2003–5 I.R.B.363
Revenue Rulings—Continued:
2003–8, 2003–3 I.R.B.290
2003–9, 2003–4 I.R.B.303
2003–10, 2003–3 I.R.B.288
2003–11, 2003–3 I.R.B.285
2003–12, 2003–3 I.R.B.283
2003–13, 2003–4 I.R.B.305
2003–14, 2003–4 I.R.B.302
2003–15, 2003–4 I.R.B.302
2003–16, 2003–6 I.R.B.401
2003–17, 2003–6 I.R.B.400
Treasury Decisions:
9024, 2003–5 I.R.B.365
9025, 2003–5 I.R.B.362
9026, 2003–5 I.R.B.366
9027, 2003–6 I.R.B.413
9028, 2003–6 I.R.B.415
9029, 2003–6 I.R.B.403
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–26 through 2002–52 is
in Internal Revenue Bulletin 2003–1, dated January 6, 2003.
2003–7 I.R.B.iiFebruary 18, 2003

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2003–1 through 2003–6
Notices:
97–19
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2001–46
Modified by
Notice 2003–6, 2003–3 I.R.B.298
2001–69
Modified and superseded by
Notice 2003–1, 2003–2 I.R.B.257
2002–27
Clarified by
Notice 2003–3, 2003–2 I.R.B.258
2002–46
Modified by
Notice 2003–10, 2003–5 I.R.B.369
Proposed Regulations:
REG–209500–86
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
REG–164464–02
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
Revenue Procedures:
83–23
Supplemented by
Rev. Proc. 2003–21, 2003–6 I.R.B.448
84–37
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
93–38
Obsoleted by
Rev. Proc. 2003–15, 2003–4 I.R.B.321
2002–1
Superseded by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–2
Superseded by
Rev. Proc. 2003–2, 2003–1 I.R.B.76
2002–3
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–4
Superseded by
Rev. Proc. 2003–4, 2003–1 I.R.B.123
2002–5
Superseded by
Rev. Proc. 2003–5, 2003–1 I.R.B.163
Revenue Procedures—Continued:
2002–6
Superseded by
Rev. Proc. 2003–6, 2003–1 I.R.B.191
2002–7
Superseded by
Rev. Proc. 2003–7, 2003–1 I.R.B.233
2002–8
Superseded by
Rev. Proc. 2003–8, 2003–1 I.R.B.236
2002–9
Modified and amplified by
Rev. Proc. 2003–20, 2003–6 I.R.B.445
Rev. Rul. 2003–3, 2003–2 I.R.B.252
2002–22
Modified by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–29
Modified by
Rev. Proc. 2003–10, 2003–2 I.R.B.259
2002–52
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–67
Supplemented by
Ann. 2003–3, 2003–4 I.R.B.361
2002–75
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2003–3
Amplified by
Rev. Proc. 2003–14, 2003–4 I.R.B.319
2003–7
Corrected by
Ann. 2003–4, 2003–5 I.R.B396
Revenue Rulings:
53–131
Modified by
Rev. Rul. 2003–12, 2003–3 I.R.B.283
65–190
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
69–372
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
Treasury Decisions:
9002
Corrected by
Ann. 2003–8, 2003–6 I.R.B.451
9022
Supplemented by
Ann. 2003–7, 2003–6 I.R.B.450
2
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2002–26 through 2002–52 is in Internal Revenue
Bulletin 2003–1, dated January 6, 2003.
February 18, 2003iii*U.S. Government Printing Office: 2003—496-919/600702003–7 I.R.B.