Internal Revenue Bulletin 2004-16 (PDF rendition): IRS Announcements

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

Bulletin No. 200
4-16
April 19, 2004
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
REG–121475–03, page 793.
Proposed regulations under section 1397E of the Code amend
the final regulations regarding qualified zone academy bonds
(QZABs). The proposed regulations contain guidance for state
and local governments that issue QZABs and for banks, insur-
ance companies, and other taxpayers that hold those bonds
on the maximum term, use of proceeds, and remedial actions
for QZABs. A public hearing is scheduled for July 21, 2004.
Notice 20
04–28, page 783.
Frivolou
sclaimsforrefundsofincomeoralternative
minimum t
ax incurred upon the exercise of compen-
satory st
ock options.This notice describes five claims and
explains
that in most cases the arguments behind such claims
are witho
ut merit and will not be respected by the Service. This
notice a
lso enumerates the penalties which may be applicable
to taxpa
yers relying on such claims or arguments.
EMPLOYEE PLANS
Ct. D. 2078, page 773.
Employee Retirement Income Security Act of 1974
(ERISA); participant; working owner.The Supreme Court
holds that the working owner of a business may qualify as a
“participant” in a pension plan covered by ERISA if the plan
covers one or more employees other than the business owner
and his or her spouse.Raymond B. Yates, M.D., P.C. Profit
Sharing Planet al.v. Hendon, Trustee.
REG–128309–03, page 800.
Proposed regulations under section 411(d)(6) of the Code pro-
vide guidance on the conditions under which a plan amend-
ment may eliminate or reduce an early retirement benefit, a
retirement-type subsidy, or an optional form of benefit with re-
spect to a participant’s benefits attributable to service before
the plan amendment. The regulations also provide guidance
on how the notice requirements of section 4980F apply with
respect to such plan amendments. A public hearing is sched-
uled for June 24, 2004.
Rev. Proc. 2004–25, page 791.
Remedial amendment period; disqualifying provisions;
December 31, 2001.This procedure extends the remedial
amendment period under section 401(b) of the Code with re-
spect to certain disqualifying provisions of all new plans put
into effect after December 31, 2001, until the end of the re-
medial amendment period for the Economic Growth and Tax
Relief Reconciliation Act of 2001.
EXEMPT ORGANIZATIONS
Announcement 2004–28, page 818.
A list is provided of organizations now classified as private foun-
dations.
(Continued on the next page)
Fi
nding Lists begin on page ii.

ADMINISTRATIVE
Notice 2004–26, page 782.
Public comments are requestedfor items that should be in-
cluded on the 2004–2005 Guidance Priority List. Taxpayers
may submit recommendations at any time during the year. All
recommendations received by April 30, 2004, will be reviewed
for possible inclusion on the original 2004–2005 Guidance Pri-
ority List. Recommendations received after April 30, 2004, will
be reviewed for inclusion in the quarterly updates if received by
August 31, 2004; November 30, 2004; or February 28, 2005,
respectively.
Notice 2004–
27, page 782.
Losses; decr
ease in stock value.This notice advises tax-
payers that t
he Service will disallow deductions for theft losses
claimed on ac
count of decreases in the market value of stock
purchased o
n the open market that may be attributable to
fraudulent
misrepresentations or other illegal misconduct of
corporate o
fficials. A taxpayer generally may deduct as a cap-
ital loss su
ch a decrease in value when it is recognized by the
taxpayer b
ecause the stock is sold or exchanged or becomes
wholly wor
thless.
Rev. Proc. 2004–23, page 785.
This document provides administrative procedures under
which taxpayers may obtain automatic consent to change
to a method of accounting provided in sections 1.263(a)–4,
1.263(a)–5, and 1.167(a)–3(b) of the regulations for the
taxpayer’s first taxable year ending on or after December
31, 2003. Rev. Proc. 2002–9 modified and amplified.
Announcement 93–60 obsoleted.
Rev. Proc. 2004–24, page 790.
Qualified mortgage bonds; mortgage credit certificates;
national median gross income.Guidance is provided con-
cerning the use of the national and area median gross income
figures by issuers of qualified mortgage bonds and mortgage
credit certificates in determining the housing cost/income ratio
described in section 143(f) of the Code. Rev. Proc. 2003–29,
obsoleted, except as provided in section 5.02 of this proce-
dure.
April 19, 20042004-16 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled 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, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last 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 last Bulletin of each semiannual period.
The c
ontents 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.
2004-16 I.R.B.April 19, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 56.—Adjustments
in Computing Alternative
Minimum Taxable Income
A notice describes the frivolous nature of certain
refund claims arising from the exercise of compen-
satory stock options. See Notice 2004-28, page 783.
Section 83.—Property
Transferred in Connection
With Performance of
Services
A notice describes the frivolous nature of certain
refund claims arising from the exercise of compen-
satory stock options. See Notice 2004-28, page 783.
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(b)–1: Certain retroactive changes in
plan.
A revenue procedure extends the remedial amend-
ment period under § 401(b) of the Code with respect
to certain disqualifying provisions of all new plans
put into effect after December 31, 2001, to the end
of the remedial amendment period for the Economic
Growth and Tax Relief Reconciliation Act of 2001.
See Rev. Proc. 2004-25, page 791.
Ct. D. 2078
SUPREME COURT OF THE
UNITED STATES
No. 02-458
RAYMOND B. YATES, M.D., P.C.
PROFIT SHARING
PLAN ET AL.v.HENDON, TRUSTEE
CERTIORARI TO THE
UNITED STATES COURT OF
APPEALS FOR
THE SIXTH CIRCUIT
March 2, 2004
Syllabus
Enacted “to protect . . . the interests
of participants in employee benefit plans
and their beneficiaries,” 29 U.S.C. Sec.
1001(b), the Employee Retirement Income
Security Act of 1974 (ERISA) comprises
four titles. Relevant here, Title I, 29 U.S.C.
Sec. 1001et seq., mandates minimum
participation, vesting, and funding sched-
ules for covered pension plans, and es-
tablishes fiduciary conduct standards for
plan administrators. Title II, codified in 26
U.S.C., amended various Internal Revenue
Code (IRC) provisions pertaining to qual-
ification of pension plans for special tax
treatment, in order,inter alia,toconform
to Title I’s standards. Title III, 29 U.S.C.
Sec. 1201et seq., contains provisions de-
signed to coordinate enforcement efforts
of different federal departments. Title IV,
29 U.S.C. Sec. 1301et seq., created the
Pension Benefit Guaranty Corporation and
an insurance program to protect employees
against the loss of “nonforfeitable” ben-
efits upon termination of pension plans
lacking sufficient funds to pay benefits in
full. This case concerns Title I’s definition
and coverage provisions, though those pro-
visions, indicating who may participate in
an ERISA-sheltered plan, inform each of
ERISA’s four titles. Title I defines “em-
ployee benefit plan” as “an employee wel-
fare benefit plan or an employee pension
benefit plan or . . . both,” Sec. 1002(3);
“participant” to encompass “any employee
. . . eligible to receive a benefit . . . from
an employee benefit plan,” Sec. 1002(7);
“employee” as “any individual employed
by an employer,” Sec. 1002(6); and “em-
ployer” to include “any person acting . . .
asanemployer,or...intheinterestofan
employer,” Sec. 1002(5).
Yates was sole shareholder and pres-
ident of a professional corporation that
maintained a profit sharing plan (Plan).
From the Plan’s inception at least one
person other than Yates or his wife was
a Plan participant. The Plan qualified
for favorable tax treatment under IRC
Sec. 401. As required by the IRC, 26
U.S.C. Sec. 401(a)(13), and ERISA, 29
U.S.C. Sec. 1056(d), the Plan contained
an anti-alienation provision. Entitled
“Spendthrift Clause,”the provision stated
in relevant part: “Except for . . . loans to
Participants as [expressly provided for in
the Plan], no benefit or interest available
hereunder will be subject to assignment
or alienation.” In December, 1989, Yates
borrowed $20,000 from another of his
corporation’s pension plans (which later
merged into the Plan), but failed to make
any of the required monthly payments.
In November, 1996, however, Yates paid
off the loan in full with the proceeds
of the sale of his house. Three weeks
later, Yates’s creditors filed an involun-
tary petition against him under Chapter
7 of the Bankruptcy Code. Respondent
Hendon, the Bankruptcy Trustee, filed a
complaint against petitioners (the Plan and
Yates, as Plan trustee), asking the Bank-
ruptcy Court to avoid the loan repayment.
Granting Hendon summary judgment, the
Bankruptcy Court first determined that
the repayment qualified as a preferential
transfer under 11 U.S.C. Sec. 547(b).
That finding was not challenged on ap-
peal. The Bankruptcy Court then held that
the Plan and Yates, as Plan trustee, could
not rely on the Plan’s anti-alienation pro-
vision to prevent Hendon from recovering
the loan repayment for the bankruptcy
estate. That holding was dictated by
Sixth Circuit precedent, under which a
self-employed owner of a pension plan’s
corporate sponsor could not “participate”
as an “employee” under ERISA, and there-
fore could not use ERISA’s provisions to
enforce the restriction on transfer of his
beneficial interest in the plan. The Dis-
trict Court and the Sixth Circuit affirmed
on the same ground. The Sixth Circuit’s
determination that Yates was not a “par-
ticipant” in the Plan for ERISA purposes
obviated the question whether, had Yates
qualified as such a participant, his loan
repayment would have been shielded from
the Bankruptcy Trustee’s reach.
Held: The working owner of a business
(here, the sole shareholder and president of
a professional corporation) may qualify as
a “participant” in a pension plan covered
by ERISA. If the plan covers one or more
employees other than the business owner
and his or her spouse, the working owner
may participate on equal terms with other
plan participants. Such a working owner,
in common with other employees, quali-
fies for the protections ERISA affords plan
participants and is governed by the rights
and remedies ERISA specifies. Pp. 8–20.
2004-16 I.R.B.773April 19, 2004

(a) Congress intended working owners
to qualify as plan participants. Because
ERISA’s definitions of “employee” and, in
turn, “participant” are uninformative, the
Court looks to other ERISA provisions for
instruction. SeeNationwide Mut. Ins. Co.
v. Darden, 503 U.S. 318, 323. ERISA’s
multiple textual indications that Congress
intended working owners to qualify as
plan participants provide, in combination,
“specific guidance,”ibid., so there is no
cause in this case to resort to common law.
ERISA’s enactment in 1974 did not change
the existing backdrop of IRC provisions
permitting corporate shareholders, part-
ners, and sole proprietors to participate
in tax-qualified pension plans. Rather,
Congress’ objective was to harmonize
ERISA with these longstanding tax provi-
sions. Title I of ERISA and related IRC
provisions expressly contemplate the par-
ticipation of working owners in covered
benefit plans. Most notably, Title I frees
certain plans in which working owners
likely participate from all of ERISA’s fidu-
ciary responsibility requirements. See 29
U.S.C. Sec. 1101(a) and 26 U.S.C. Secs.
414(q)(1)(A) and 416(i)(1)(B)(i). Title
I also contains more limited exemptions
from ERISA’s fiduciary responsibility
requirements for plans that ordinarily in-
clude working owners as participants. See
29 U.S.C. Secs. 1103(a) and (b)(3)(A) and
26 U.S.C. Secs. 401(c)(1) and (2)(A)(i),
1402(a) and (c). Further, Title I contains
exemptions from ERISA’s prohibited
transaction exemptions, which, like the
fiduciary responsibility exemptions, indi-
cate that working owners may participate
in ERISA-qualified plans. See 29 U.S.C.
Secs. 1108(b)(1)(B) and (d)(1) and 26
U.S.C. Sec. 401(c)(3). Exemptions of this
order would be unnecessary if working
owners could not qualify as participants in
ERISA-protected plans in the first place.
Provisions of Title IV of ERISA are cor-
roborative. For example, Title IV does
not apply to plans “established and main-
tainedexclusivelyfor substantial owners,”
Sec. 1321(b)(9) (emphasis added), a cat-
egory that includes sole proprietors and
shareholders and partners with a ten per-
cent or greater ownership interest, Sec.
1322(b)(5)(A). But Title IV does cover
plans in which substantial owners partici-
patealong withother employees. See Sec.
1322(b)(5)(B). Particularly instructive,
Title IV and the IRC, as amended by Title
II, clarify a key point missed by several
lower courts: Under ERISA, a working
owner may wear two hats,i.e., he can be an
employee entitled to participate in a plan
and, at the same time, the employer who
established the plan. See Sec. 1301(b)(1)
and 26 U.S.C. Sec. 401(c)(4). Congress’
aim to promote and facilitate employee
benefit plans is advanced by the Court’s
reading of ERISA’s text. The working
employer’s opportunity personally to par-
ticipate and gain ERISA coverage serves
as an incentive to the creation of plans
that will benefit employer and nonowner
employees alike. Treating the working
owner as a participant in an ERISA-shel-
teredplanalsoavoidstheanomalythatthe
same plan will be controlled by discrete
regimes: federal-law governance for the
nonowner employees; state-law gover-
nance for the working owner. Excepting
working owners from ERISA’s coverage
is hardly consistent with the statutory goal
of “uniform national treatment of pension
benefits,”Patterson v. Shumate,504U.S.
753, 765, and would generate adminis-
trative difficulties. A 1999 Department
of Labor advisory opinion (hereinafter
Advisory Opinion 99–04A) accords with
the Court’s comprehension of Title I’s
definition and coverage provisions. Con-
cluding that working owners may qualify
as participants in ERISA-protected plans,
the Department’s opinion reflects a “body
of experience and informed judgment to
which courts and litigants may properly
resort for guidance.”Skidmore v. Swift &
Co., 323 U.S. 134, 140. Pp. 8–14.
(b) This Court rejects the lower courts’
position that a working owner may rank
only as an “employer,” and not also as an
“employee” for purposes of ERISA-shel-
tered plan participation. The Sixth Cir-
cuit’s leading decision in point relied, in
large part, on an incorrect reading of a
portion of a Department of Labor regula-
tion, 29 CFR Sec. 2510.3–3, which states:
“[T]he term ‘employee benefit plan’ [as
used in Title I] shall not include any plan
. . . under which no employees are
participants”; “[f]or purposes of this sec-
tion,” “an individual and his or her spouse
shall not be deemed to be employees with
respect to a . . . business” they own.
(Emphasis added.) In common with other
Courts of Appeals that have held working
owners do not qualify as participants in
ERISA-governed plans, the Sixth Circuit
apparently understood the regulation to
provide a generally applicable definition
of “employee,” controlling for all Title I
purposes. The Labor Department’s Advi-
sory Opinion 99–04A, however, interprets
the regulation to mean that the statutory
term “employee benefit plan” does not
include a plan whoseonlyparticipants are
the owner and his or her spouse, but does
include a plan that covers as participants
one or more common-law employees, in
addition to the self-employed individuals.
This agency view, overlooked by the Sixth
Circuit, merits the Judiciary’s respectful
consideration.Cf. Clackamas Gastroen-
terology Assoc., P.C.,538U.S.at
.
Moreover, the Department’s regulation
itself reveals the definitional prescrip-
tion’s limited scope. The prescription
describes “employees” only “[f]or pur-
poses of this section,”i.e., the section
defining “employee benefit plans.” Ac-
cordingly, the regulation addresses only
what plans qualify as “employee benefit
plans” under ERISA’s Title I. Plans that
cover only sole owners or partners and
their spouses, the regulation instructs, fall
outside Title I’s domain, while plans that
cover working ownersandtheir nonowner
employees fall entirely within ERISA’s
compass. The Sixth Circuit’s leading de-
cision also mistakenly relied on ERISA’s
“anti-inurement” provision, 29 U.S.C.
Sec. 1103(c)(1), which states that plan
assets shall not inure to the benefit of
employers. Correctlyread, that provi-
sion does not preclude Title I coverage of
working owners as plan participants. It
demands only that plan assets be held to
supply benefits to plan participants. Its
purpose is to apply the law of trusts to
discourage abuses such as self-dealing,
imprudent investment, and misappropri-
ation of plan assets, by employers and
others. Those concerns are not implicated
by paying benefits to working owners
whoparticipateonanequalbasiswith
nonowner employees in ERISA-protected
plans. This Court expresses no opinion as
to whether Yates himself, in his handling
of loan repayments, engaged in conduct
inconsistent with the anti-inurement pro-
vision, an issue not yet reached by the
courts below. Pp. 14–20.
(c) Given the undisputed fact that Yates
failed to honor his loan’s periodic re-
payment requirements, these questions
should be addressed on remand: (1) Did
April 19, 20047742004-16 I.R.B.

the November 1996 close-to-bankruptcy
repayments, despite the prior defaults,
become a portion of Yates’s interest in
the Plan that is excluded from his bank-
ruptcy estate and (2) if so, were the repay-
ments beyond the reach of the Bankruptcy
Trustee’s power to avoid and recover pref-
erential transfers? P. 20.
287 F.3d 521, reversed and remanded.
GINSBURG, J., delivered the opinion
of the Court, in which REHNQUIST,
C. J., and STEVENS, O’CONNOR,
KENNEDY, SOUTER, and BREYER,
JJ., joined. SCALIA, J., and THOMAS,
J., each filed an opinion concurring in the
judgment.
SUPREME COURT OF THE
UNITED STATES
No. 02-458
RAYMOND B. YATES, M.D., P.C.
PROFIT SHARING
PLAN, AND RAYMOND B.
YATES, TRUSTEE,
PETITIONERSv.WILLIAM T.
HENDON, TRUSTEE
ON WRIT OF CERTIORARI
TO THE UNITED STATES
COURT OF APPEALS
FOR THE SIXTH CIRCUIT
March 2, 2004
JUSTICE GINSBURG delivered the
opinion of the Court.
This case presents a question on which
federal courts have divided: Does the
working owner of a business (here, the
sole shareholder and president of a pro-
fessional corporation) qualify as a “par-
ticipant” in a pension plan covered by the
Employee Retirement Income Security
Act of 1974 (ERISA or Act), 88 Stat. 832,
as amended, 29 U.S.C. Sec. 1001et seq.
The answer, we hold, is yes: If the plan
covers one or more employees other than
the business owner and his or her spouse,
the working owner may participate on
equal terms with other plan participants.
Such a working owner, in common with
other employees, qualifies for the protec-
tions ERISA affords plan participants and
is governed by the rights and remedies
ERISA specifies. In so ruling, we reject
the position, taken by the lower courts in
this case, that a business owner may rank
only as an “employer,” and not also as an
“employee” for purposes of ERISA-shel-
tered plan participation.
I
A
Enacted“toprotect...theinter-
ests of participants in employee benefit
plans and their beneficiaries,” 29 U.S.C.
Sec. 1001(b), ERISA comprises four ti-
tles. Title I, 29 U.S.C. Sec. 1001et seq.,
“requires administrators of all covered
pension plans to file periodic reports with
the Secretary of Labor, mandates mini-
mum participation, vesting and funding
schedules, establishes standards of fidu-
ciary conduct for plan administrators,
and provides for civil and criminal en-
forcement of the Act.”Nachman Corp.
v. Pension Benefit Guaranty Corporation,
446 U.S. 359, 361, n. 1 (1980). Title II,
codified in various parts of Title 26 of
the United States Code, “amended vari-
ous [Internal Revenue Code] provisions
. . . pertaining to qualification of pension
plans for special tax treatment, in order,
among other things, to conform to the
standards set forth in Title I.” 446 U.S., at
361, n. 1. Title III, 29 U.S.C. Sec. 1201
et seq., “contains provisions designed to
coordinate enforcement efforts of dif-
ferent federal departments, and provides
for further study of [benefit plans].” 446
U.S., at 361, n. 1. Title IV, 29 U.S.C.
Sec. 1301et seq., “created the Pension
Benefit Guaranty Corporation (PBGC)
and a termination insurance program to
protect employees against the loss of ‘non-
forfeitable’ benefits upon termination of
pension plans that lack sufficient funds
to pay such benefits in full.” 446 U.S., at
361, n. 1. See alsoMead Corp. v. Tilley,
490 U.S. 714, 717 (1989); Brief for United
States asAmicus Curiae 2.
This case concerns the definition and
coverage provisions of Title I, though
those provisions, indicating who may
participate in an ERISA-sheltered plan,
inform each of ERISA’s four titles. Ti-
tle I defines the term “employee benefit
plan” to encompass “an employee welfare
benefit plan or an employee pension ben-
efit plan or a plan which is both. . . .”
29 U.S.C. Sec. 1002(3). The same om-
nibus section defines “participant” as “any
employee or former employee of an em-
ployer, . . . who is or may become eligible
to receive a benefit of any type from an
employee benefit plan which covers em-
ployees of such employer . . ., or whose
beneficiaries may be eligible to receive
any such benefit.” Sec. 1002(7). “Em-
ployee,” under Title I’s definition section,
means “any individual employed by an
employer,” Sec. 1002(6), and “employer”
includes “any personacting directly as an
employer, or indirectly in the interest of
an employer, in relation to an employee
benefit plan,” Sec. 1002(5).
B
Dr. Raymond B. Yates was the sole
shareholder and president of Raymond B.
Yates, M.D., P.C., a professional corpora-
tion. 287 F.3d 521, 524 (CA6 2002); App.
to Pet. for Cert. 10a. The corporation
maintained the Raymond B. Yates, M.D.,
P.C. Profit Sharing Plan (Profit Sharing
Plan or Plan), for which Yates was the ad-
ministrator and trustee.Ibid.Fromthe
Profit Sharing Plan’s inception, at least one
person other than Yates or his wife was
a participant.Ibid.; App. 269a. The
Profit Sharing Plan qualified for favorable
tax treatment under Sec. 401 of the Inter-
nal Revenue Code (IRC). 287 F.3d at 524;
App. 71a–73a. As required by both the
IRC, 26 U.S.C. Sec. 401(a)(13), and Ti-
tle I of ERISA, 29 U.S.C. Sec. 1056(d),
the Plan contained an anti-alienation pro-
vision. That provision, entitled “Spend-
thrift Clause,” stated in relevant part: “Ex-
ceptfor...loanstoParticipantsas[ex-
pressly provided for in the Plan], no ben-
efit or interest available hereunder will be
subject to assignment or alienation, either
voluntarily or involuntarily.” App. 252a.
In December 1989, Yates borrowed
$20,000 at 11 percent interest from the
Raymond B. Yates, M.D., P.C. Money
Purchase Pension Plan (Money Purchase
Pension Plan), which later merged into the
Profit Sharing Plan.Id., at 268a–269a.
The terms of the loan agreement re-
quired Yates to make monthly payments
of $433.85 over the five-year period of the
loan.Id., at 269a. Yates failed to make
any monthly payment. 287 F.3d at 524.
In June 1992, coinciding with the Money
Purchase Pension Plan-Profit Sharing Plan
merger, Yates renewed the loan for five
years. App. 269a. Again, he made no
2004-16 I.R.B.775April 19, 2004

monthly payments. In fact, Yates repaid
nothing until November 1996. 287 F.3d,
at 524. That month, he used the proceeds
from the sale of his house to make two
payments totaling $50,467.46, which paid
off in full the principal and interest due on
the loan.Ibid. Yates maintained that, after
the repayment, his interest in the Profit
Sharing Plan amounted to about $87,000.
App. to Pet. for Cert. 39a.
Three weeks after Yates repaid the
loan to the Profit Sharing Plan, on De-
cember 2, 1996, Yates’s creditors filed
an involuntary petition against him under
Chapter 7 of the Bankruptcy Code.Id., at
12a; accord, App. 300a.In August 1998,
respondent William T. Hendon, the Bank-
ruptcy Trustee, filed a complaint, pursuant
to 11 U.S.C. Secs. 547(b) and 550, against
petitioners Profit Sharing Plan and Yates,
in his capacity as the Plan’s trustee. App.
1a–3a. Hendon asked the Bankruptcy
Court to “avoi[d] the . . . preferential
transfer by [Yates] to [the Profit Sharing
Plan] in the amount of $50,467.46 and
[to] orde[r] [the Plan and Yates, as trustee]
to pay over to the [bankruptcy] trustee
the sum of $50,467.46, plus legal interest
. . . , together with costs . . . .”Id., at 3a.
On cross-motions for summary judgment,
the Bankruptcy Court ruled for Trustee
Hendon. App. to Pet. for Cert. 36a–50a.
The Bankruptcy Court first determined
that the loan repayment qualified as a
preferential transfer under 11 U.S.C. Sec.
547(b).
1
App. to Pet. for Cert. 41a–42a.
That finding was not challenged on appeal.
The Bankruptcy Court then held that the
Profit Sharing Plan and Yates, as trustee,
could not rely on the Plan’s anti-alien-
ation provision to prevent Hendon from
recovering the loan repayment. As “a
self-employed owner of the professional
corporation that sponsor[ed] the pension
plan,” the Bankruptcy Court stated, Yates
could not “participate as an employee un-
der ERISA and . . . [therefore could not]
use its provisions to enforce the restriction
on the transfer of his beneficial interest
in the Defendant Plan.”Id., at 43a–44a.
In so ruling, the Bankruptcy Court relied
on Circuit precedent, includingSEC v.
Johnston, 143 F.3d 260 (CA6 1998), and
Fugarino v. Hartford Life and Accident
Ins. Co., 969 F.2d 178 (CA6 1992).
The District Court affirmed the Bank-
ruptcy Court’s judgment. App. to Pet. for
Cert. 9a–35a. Acknowledging that other
Courts of Appeals had reached a different
conclusion,id., at 19a, the District Court
observed that it was bound by Sixth Cir-
cuit precedent. According to the control-
ling Sixth Circuit decisions, neither a sole
proprietor,Fugarino, 969 F.2d at 186, nor
a sole owner of a corporation,Agrawal v.
PaulRevereLifeIns. Co., 205 F.3d 297,
302 (2000), qualifies as a “participant”
in an ERISA-sheltered employee benefit
plan. App. to Pet. for Cert. 20a–21a. Ap-
plying Circuit precedent, the District Court
concluded:
“The fact Dr. Yates was not qualified
to participate in an ERISA protected
plan means none of the money he con-
tributed to the Plan as an ‘employee’
was ever part of an ERISA plan. The
$50,467.46 he returned to the Plan was
not protected by ERISA, because none
ofthemoneyhehadinthePlanwaspro-
tected by ERISA.”Id., at 20a.
The Sixth Circuit affirmed the District
Court’s judgment. 287 F.3d 521. The
Court of Appeals adhered to its “published
caselaw [holding] that ‘a sole proprietor
or sole shareholder of a business must be
considered an employer and not an em-
ployee . . . for purposes of ERISA.’”
Id., at 525 (quotingFugarino,969F.2d
at 186). “[T]he spendthrift clause in the
Yates profit sharing/pension plan,” the ap-
peals court accordingly ruled, “[was] not
enforceable by Dr. Yates under ERISA.”
287 F.3d at 526. The Sixth Circuit’s deter-
mination that Yates was not a “participant”
in the Profit Sharing Plan for ERISA pur-
poses obviated the question whether, had
Yates qualified as such a participant, his
loan repayment would have been shielded
from the Bankruptcy Trustee’s reach. See
App. to Pet. for Cert. 46a–47a.
We granted certiorari, 539 U.S. —
(2003), in view of the division of opin-
ion among the Circuits on the question
whether a working owner may qualify as
a participant in an employee benefit plan
coveredbyERISA.CompareAgrawal,
205 F.3d, at 302 (sole shareholder is not a
participant in an ERISA-qualified plan);
Fugarino, 969 F.2d, at 186 (sole pro-
prietor is not a participant);Kwatcher v.
Massachusetts Serv. Employees Pension
Fund, 879 F.2d 957, 963 (CA1 1989) (sole
shareholder is not a participant);Giardono
v. Jones, 867 F.2d 409, 411–412 (CA7
1989) (sole proprietor is not a participant);
Peckham v. Board of Trustees of Int’l
Brotherhood of Painters and Allied Trades
Union, 653 F.2d 424, 427–428 (CA10
1981) (sole proprietor is not a participant),
withVega v. National Life Ins. Servs., Inc.,
188 F.3d 287, 294 (CA5 1999) (co-owner
is a participant);In re Baker, 114 F.3d 636,
639 (CA7 1997) (majority shareholder is
a participant);Madonia v. Blue Cross &
Blue Shield of Virginia,11F.3d444,450
1
Subsection 547(b) provides:
“Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
“(1) to or for the benefit of a creditor;
“(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
“(3) made while the debtor was insolvent;
“(4) made —
“(A) on or within 90 days before the date of the filing of the petition; or
“(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
“(5) that enables such creditor to receivemore than such creditor would receive if –
“(A) the case were a case under chapter 7 of this title;
“(B) the transfer had not been made; and
“(C) such creditor received payment of such debt to the extent provided by the provisions of this title.”
This provision permits the bankruptcy trustee to avoid certain transfers of “property that would have been part of the [bankruptcy] estate had it not been transferred before the commence-
ment of bankruptcy proceedings.”Begier v. IRS, 496 U.S. 53, 58 (1990).
April 19, 20047762004-16 I.R.B.

(CA4 1993) (sole shareholder is a partici-
pant).
2
II
A
ERISA’s definitions of “employee,”
and, in turn, “participant” are uninfor-
mative. SeeNationwide Mut. Ins. Co.
v. Darden, 503 U.S. 318, 323 (1992)
(“ERISA’s nominal definition of ‘em-
ployee’ as ‘any individual employed by
an employer,’ is completely circular and
explains nothing.” (citation omitted)). We
therefore look to other provisions of the
Act for instruction. Seeibid.ERISA’stext
contains multiple indications that Con-
gress intended working owners to qualify
as plan participants. Because these in-
dications combine to provide “specific
guidance,”ibid., there is no cause in this
case to resort to common law.
3
Congress enacted ERISA against a
backdrop of IRC provisions that permitted
corporate shareholders, partners, and sole
proprietors to participate in tax-qualified
pension plans. Brief for United States as
Amicus Curiae19–20. Working share-
holders have been eligible to participate
in such plans since 1942. See Revenue
Act of 1942, ch. 619, Sec. 165(a)(4), 56
Stat. 862 (a pension plan shall be tax-ex-
empt if,inter alia, “the contributions or
benefits provided under the plan do not
discriminate in favor of employees who
are officers, shareholders, persons whose
principal duties consist in supervising the
work of other employees, or highly com-
pensated employees”). Two decades later,
still prior to ERISA’s adoption, Congress
permitted partners and sole proprietors to
establish tax-favored pension plans, com-
monly known as “H.R. 10” or “Keogh”
plans. Self-Employed Individuals Tax
Retirement Act of 1962, 76 Stat. 809;
Brief for United States asAmicus Curiae
19. Thus, by 1962, working owners of
all kinds could contribute to tax-qualified
retirement plans.
ERISA’s enactment in 1974 did not
change that situation.
4
Rather, Congress’
objective was to harmonize ERISA with
longstanding tax provisions. Title I of
ERISA and related IRC provisions ex-
pressly contemplate the participation of
working owners in covered benefit plans.
Id., at 14–16. Most notably, several Title
I provisions partially exempt certain plans
in which working owners likely participate
from otherwise mandatory ERISA provi-
sions. Exemptions of this order would be
unnecessary if working owners could not
qualify as participants in ERISA-protected
plans in the first place.
To illustrate, Title I frees the following
plans from the Act’s fiduciary responsibil-
ity requirements:
“(1) a plan which is unfunded and is
maintained by an employer primarily
for the purpose of providing deferred
compensation for a select group of
management or highly compensated
employees;” or
“(2) any agreement described in sec-
tion 736 of [the IRC], which provides
payments to a retired partner or de-
ceased partner or a deceased partner’s
successor in interest.” 29 U.S.C. Sec.
1101(a).
The IRC defines the term “highly com-
pensated employee” to include “any em-
ployee who . . . was a 5-percent owner
at any time during the year or the preced-
ing year.” 26 U.S.C. Sec. 414(q)(1)(A). A
“5-percent owner,” the IRC further spec-
ifies, is “any person who owns . . .
more than 5 percent of the outstanding
stock of the corporation or stock possess-
ing more than 5 percent of the total com-
bined voting power of all stock of the cor-
poration” if the employer is a corporation,
or “any person who owns more than 5 per-
cent of the capital or profits interest in the
employer” if the employer is not a cor-
poration. Sec. 416(i)(1)(B)(i). Under
these definitions, some working owners
would fit the description “highly compen-
sated employees.” Similarly, agreements
that make payments to retired partners, or
to deceased partners’ successors in inter-
est, surely involve plans in which working
partners participate.
Title I also contains more limited ex-
emptions from ERISA’s fiduciary respon-
sibility requirements. These exemptions,
too, cover plans that ordinarily include
working owners as participants. To illus-
trate, assets of an employee benefit plan
typically must be held in trust. See 29
U.S.C. Sec. 1103(a). That requirement,
however, does not apply,inter alia,“to
a plan . . . some or all of the partici-
pants of which are employees described
in section 401(c)(1) of [the IRC].” 29
U.S.C. Sec. 1103(b)(3)(A). IRC Sec.
401(c)(1)(A) defines an “employee” to
include “a self-employed individual”; and
IRC Secs. 401(c)(1)(B) and (2)(A)(i), in
turn, define “a self-employed individual”
to cover an individual with “earned in-
come” from “a trade or business in which
personal services of the taxpayer are a
material income-producing factor.” This
definition no doubt encompasses working
sole proprietors and partners. 26 U.S.C.
Sec. 1402(a) and (c).
Title I also contains exemptions from
ERISA’s prohibited transaction provi-
sions. Like the fiduciary responsibility
exemptions, these exemptions indicate
that working owners may participate in
ERISA-qualified plans. For example, al-
though Title I generally bars transactions
between a plan and a party in interest,
29 U.S.C. Sec. 1106, the Act permits,
among other exceptions, loans to plan
participants if certain conditions are sat-
isfied, Sec. 1108(b)(1). One condition
is that loans must not be “made available
to highly compensated employees . . .
in an amount greater than the amount
made available to other employees.”
Sec. 1108(b)(1)(B). As just observed,
2
The Courts of Appeals are also divided on whether working owners may qualify as “beneficiaries” of ERISA-sheltered employee benefit plans. Compare 287 F.3d 521, 525 (CA6 2002)
(case below) (sole shareholder is not a beneficiary of an ERISA-qualified plan);Agrawal, 205 F.3d at 302 (sole shareholder is not a beneficiary), withGilbert v. Alta Health & Life Ins. Co.,
276 F.3d 1292, 1302 (CA11 2001) (sole shareholder is a beneficiary);Wolk v. UNUM Life Ins. of Am., 186 F.3d 352, 356 (CA3 1999) (partner is a beneficiary);Prudential Ins. Co. of Am.
v. Doe, 76 F.3d 206, 208 (CA8 1996) (controlling shareholder is a beneficiary);Robinson v. Linomaz, 58 F.3d 365, 370 (CA8 1995) (co-owners are beneficiaries);Peterson v. American Life
& Health Ins. Co., 48 F.3d 404, 409 (CA9 1995) (partner is a beneficiary). The United States, asamicus curiae, urges that treating working owners as “beneficiaries” of an ERISA-qualified
plan is not an acceptable solution. Brief for United States asAmicus Curiae 9(The beneficiary approach “has no logical stopping point, because it would allow a plan to cover anyone it
chooses, including independent contractors excluded by [Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992)]” and “fails to resolve participation questions for pension plans which,
unlike welfare plans, tie coverage directly to service as an employee.”);id., at 24–25. This issue is not presented here, and we do not resolve it.
3
Cf.Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992), andClackamas Gastroenterology Assoc., P.C. v. Wells, 538 U.S. 440 (2003) (finding textual clues absent, Court looked to
common law for guidance).
4
A particular employee benefit plan may be covered by one title of ERISA, but not by another. See Brief for United States asAmicus Curiae18, n. 9.
2004-16 I.R.B.777April 19, 2004

seesupra, at 9–10, some working owners,
including shareholder-employees, qualify
as “highly compensated employees.” Title
I goes on to exclude “owner-employees,”
as defined in the IRC, from the participant
loan exemption. Sec. 1108(d)(1). Under
the IRC’s definition, owner-employees
include partners “who ow[n] more than
10 percent of either the capital interest or
the profits interest in [a] partnership” and
sole proprietors, but not shareholder-em-
ployees. 26 U.S.C. Sec. 401(c)(3). In
sum, Title I’s provisions involving loans
to plan participants, by explicit inclusion
or exclusion, assume that working own-
ers — shareholder-employees, partners,
and sole proprietors — may participate in
ERISA-qualified benefit plans.
Provisions of Title IV of ERISA are
corroborative. Brief for United States
asAmicus Curiae17,andn.8.Title
IV does not apply to plans “established
and maintainedexclusivelyfor substan-
tial owners,” 29 U.S.C. Sec. 1321(b)(9)
(emphasis added), a category that in-
cludes sole proprietors and shareholders
and partners with a ten percent or greater
ownership interest, Sec. 1322(b)(5)(A).
But Title IV does cover plans in which
substantial owners participatealong with
other employees. See Sec. 1322(b)(5)(B).
In addition, Title IV does not cover plans
established by “professional service em-
ployers” with 25 or fewer active partici-
pants. Sec. 1321(b)(13). Yates’s medical
practice was set up as a professional ser-
vice employer. See Sec. 1321(c)(2)(A) (a
“professional service employer” is “any
proprietorship, partnership, corporation
. . . ownedorcontrolledbyprofessional
individuals . . . the principal business of
which is the performance of professional
services”). But significantly larger plans
— plans covering more than 25 employees
— established by a professional service
employer would presumably qualify for
protection.
Particularly instructive, Title IV and the
IRC, as amended by Title II, clarify a key
point missed by several lower courts: Un-
derERISA,aworkingownermayhave
dual status,i.e., he can be an employee
entitled to participate in a plan and, at
thesametime,theemployer(orowneror
member of the employer) who established
the plan. Both Title IV and the IRC de-
scribe the “employer” of a sole proprietor
or partner. See 29 U.S.C. Sec. 1301(b)(1)
(“An individual who owns the entire in-
terest in an unincorporated trade or busi-
ness is treated as his own employer, and
a partnership is treated as the employer of
each partner who is an employee within
the meaning of section 401(c)(1) of [the
IRC].”); 26 U.S.C. Sec. 401(c)(4) (“An
individual who owns the entire interest in
an unincorporated trade or business shall
be treated as his own employer. A part-
nership shall be treated as the employer of
each partner who is an employee within the
meaning of [Sec. 401(c)(1)].”). These de-
scriptions expressly anticipate that a work-
ing owner can wear two hats, as an em-
ployer and employee. Cf.Clackamas
Gastroenterology Assoc., P.C. v. Wells,
538 U.S. 440, — (2003) (slip op., at 2–3)
(GINSBURG, J., dissenting) (“Clackamas
readily acknowledges that the physician-
shareholders are ‘employees’ for ERISA
purposes.”).
In sum, because the statute’s text is ade-
quately informative, we need not look out-
side ERISA itself to conclude with security
that Congress intended working owners to
qualify as plan participants.
5
Congress’ aim is advanced by our read-
ing of the text. The working employer’s
opportunity personally to participate and
gain ERISA coverage serves as an in-
centive to the creation of plans that will
benefit employer and nonowner employ-
ees alike. See Brief for United States as
Amicus Curiae21–22. Treating working
owners as participants not only furthers
ERISA’s purpose to promote and facilitate
employee benefit plans. Recognizing the
working owner as an ERISA-sheltered
plan participant also avoids the anomaly
that the same plan will be controlled by
discrete regimes: federal-law governance
for the nonowner employees; state-law
governance for the working owner. See,
e.g.,Agrawal, 205 F.3d, at 302 (because
sole shareholder does not rank as a plan
participant under ERISA, his state-law
claims against insurer are not preempted).
ERISA’s goal, this Court has emphasized,
is “uniform national treatment of pen-
sion benefits.”Patterson v. Shumate,504
U.S. 753, 765 (1992). Excepting working
owners from the federal Act’s coverage
would generate administrative difficulties
and is hardly consistent with a national
uniformity goal. Cf.Madonia, 11 F.3d,
at 450 (“Disallowing shareholders . . .
from being plan ‘participants’ would re-
sult in disparate treatment of corporate
employees’ claims, thereby frustrating the
statutory purpose of ensuring similar treat-
ment for all claims relating to employee
benefit plans.”).
We note finally that a 1999 Depart-
ment of Labor advisory opinion accords
with our comprehension of Title I’s def-
inition and coverage provisions. Pension
and Welfare Benefits Admin., U.S. Dept.
of Labor, Advisory Opinion 99–04A, 26
BNA Pension and Benefits Rptr. 559
(hereinafter Advisory Opinion 99–04A).
Confirming that working owners may
qualify as participants in ERISA-pro-
tected plans, the Department’s opinion
concludes:
“In our view, the statutory provisions
of ERISA, taken as a whole, reveal a
clear Congressional design to include
‘working owners’ within the definition
of ‘participant’ for purposes of Title
I of ERISA. Congress could not have
intended that a pension plan operated
so as to satisfy the complex tax qual-
ification rules applicable to benefits
provided to ‘owner-employees’ under
the provisions of Title II of ERISA,
and with respect to which an employer
faithfully makes the premium pay-
ments required to protect the benefits
payable under the plan to such individ-
uals under Title IV of ERISA, would
somehow transgress against the limi-
tations of the definitions contained in
Title I of ERISA. Such a result would
cause an intolerable conflict between
the separate titles of ERISA, lead-
ing to the sort of ‘absurd results’ that
the Supreme Court warned against in
Nationwide Mutual Insurance Co. v.
Darden, 503 U.S. 318 (1992).”Id., at
560–561 (footnote omitted).
This agency view on the qualification of
a self-employed individual for plan partic-
ipation reflects a “body of experience and
informed judgment to which courts and lit-
igants may properly resort for guidance.”
5
We do not suggest that each provision describedsupra, at 9–12, in isolation, would compel the Court’s reading. But cf. post, at 1–2 (THOMAS, J., concurring in judgment). In combination,
however, the provisions supply “specific guidance” adequate to obviate any need to expound on common law. SeeDarden, 503 U.S., at 323.
April 19, 20047782004-16 I.R.B.

Skidmore v. Swift & Co., 323 U.S. 134, 140
(1944).
B
The Sixth Circuit’s leading decision
in point — its 1992 determination in
Fugarino—reliedinlargepart,onan
incorrect reading of a Department of La-
bor regulation, 29 CFR Sec. 2510.3–3.
TheFugarinocourt read the Department’s
regulation to rule out classification of a
working owner as an employee of the busi-
ness he owns. Entitled “Employee benefit
plan,” the regulation complements Sec.
3(3) of ERISA, 29 U.S.C. Sec. 1002(3),
which defines “employee benefit plan,”
seesupra, at 2, the regulation provides, in
relevant part:
“(b) Plans without employees. For
purposes of title I of the Act and this
chapter, the term ‘employee benefit
plan” shall not include any plan, fund
or program, other than an apprentice-
ship or other training program, under
which no employees are participants
covered under the plan, as defined in
paragraph (d) of this section. For ex-
ample, a so-called ‘Keogh’ or ’H.R.
10’ plan under which only partners or
only a sole proprietor are participants
covered under the plan will not be cov-
ered under title I. However, a Keogh
plan under which one or more com-
mon law employees, in addition to the
self-employed individuals, are partic-
ipants covered under the plan, will be
covered under title I. . . .
“(c) Employees.For purposes of this
section:
“(1) An individual and his or her
spouse shall not be deemed to be
employees with respect to a trade
or business, whether incorporated
or unincorporated, which is wholly
owned by the individual or by the in-
dividual and his or her spouse, and
“(2) A partner in a partnership
and his or her spouse shall not be
deemed to be employees with re-
spect to the partnership.” 29 CFR
Sec. 2510.3–3 (2003) (emphasis
added and deleted).
In common with other Courts of Ap-
peals that have held working owners do not
qualify as participants in ERISA-governed
employee benefit plans, the Sixth Circuit
apparently understood the regulation to
provide a generally applicable definition
of the term “employee,” controlling for
all Title I purposes.Fugarino, 969 F.2d,
at 185–186 (“As a result of [the] regu-
latio[n], a plan whose sole beneficiaries
are the company’s owners cannot qualify
as a plan under ERISA. Further, an em-
ployer cannot ordinarily be an employee
or participant under ERISA.” (citation
omitted)). See alsoKwatcher, 879 F.2d,
at 961 (“By its terms, the regulation un-
ambiguously debars a sole shareholder
...from‘employee’status,notwithstand-
ing that he may work for the corporation
he owns, shoulder to shoulder with eligi-
ble (non-owner) employees.”);Giardono,
867 F.2d, at 412 (“[This] regulatio[n]
exclude[s] from the definition of an em-
ployee any individual who wholly owns a
trade or business, whether incorporated or
unincorporated.”).
Almost eight years after its decision in
Fugarino,inAgrawal, the Sixth Circuit
implied that it may have misread the reg-
ulation: “Th[e] limiting definition of em-
ployee [in Sec. 2510.3–3(c)] addresses the
threshold issue of whether an ERISA plan
exists. It is not consistent with the pur-
pose of ERISA to apply this limiting defi-
nition of employee to the statutory defini-
tions of participant and beneficiary.” 205
F.3d, at 303. The Circuit, however, did
not overrule its earlier interpretation. See
287 F.3d, at 525 (case below) (“[T]he three
judge panel before which this appeal is cur-
rently pending has no authority to overrule
Fugarino.”);Agrawal, 205 F.3d, at 302
(“the decision in the present case is preor-
dained by theFugarinoholding”).
The Department of Labor’s 1999 advi-
sory opinion, seesupra, at 13–14, inter-
prets the “Employee benefit plan” regula-
tion as follows:
“In its regulation at 29 C.F.R. 2510.3–3,
the Department clarified that the term
‘employee benefit plan’ as defined in
section 3(3) of Title I does not include a
plan the only participants of which are
‘[a]n individual and his or her spouse
. . . with respect to a trade or business,
whether incorporated or unincorpo-
rated, which is wholly owned by the
individual or by the individual and his
or her spouse’ or ‘[a] partner in a part-
nership and his or her spouse.’ The
regulation further specifies, however,
that a plan that covers as participants
‘one or more common law employees,
in addition to the self-employed indi-
viduals’ will be included in the defini-
tion of ‘employee benefit plan’ under
section 3(3).The conclusion of this
opinion, that such ‘self-employed indi-
viduals’ are themselves ‘participants’
in the covered plan, is fully consistent
with that regulation. Advisory Opinion
99–04A, at 561, n. 7 (emphasis added).
This agency view, overlooked by the Sixth
Circuit, see Brief for United States asAm-
icus Curiae26, merits the Judiciary’s re-
spectful consideration. Cf.Clackamas
Gastroenterology Assoc., P.C., 538 U.S. at
— (slip op., at 9) (EEOC guidelines un-
der the Americans with Disabilities Act of
1990 are persuasive).
The Department’s regulation itself
reveals the definitional Prescription’s lim-
ited scope. The prescription describes
“employees” only “[f]or purposes of
this section,” seesupra, at 15 (empha-
sis deleted),i.e., the section defining
“employee benefit plans.” Accordingly,
the regulation addresses only what plans
qualify as “employee benefit plans” under
Title I of ERISA. Plans that cover only
sole owners or partners and their spouses,
the regulation instructs, fall outside Ti-
tle I’s domain.
6
Plans covering working
ownersandtheir nonowner employees,
on the other hand, fall entirely within
ERISA’s compass.
7
SeeVega, 188 F.3d, at
294 (“We . . . interpret the regulatio[n]
to define employee only for purposes of
6
Courts agree that if a benefit plan covers only working owners, it is not covered by Title I. See,e.g.,Slamen v. Paul Revere Life Ins. Co., 166 F.3d 1102, 1105 (CA11 1999) (sole shareholder
is not a participant where disability plan covered only him);In re Watson, 161 F.3d 593, 597 (CA9 1998) (sole shareholder is not a participant where retirement plan covered only him);SEC
v. Johnston, 143 F.3d 260, 262–263 (CA6 1998) (owner is not a participant where pension plan covered only owner and “perhaps” his wife);Schwartz v. Gordon, 761 F.2d 864, 867 (CA2
1985) (self-employed individual is not a participant where he is the only contributor to a Keogh plan). Such a plan, however, could qualify for favorable tax treatment. See Brief for United
States asAmicus Curiae18, n. 9.
7
Section 2510.3–3’s preamble supports this interpretation. The preamble states in relevant part:
“According to the comments [concerning proposed Sec. 2510.3–3], a definition of ‘employee’ excluding self-employed individuals might raise problems under section 404(a)(1) with
respect to disbursements to self-employed individuals from ‘Keogh’ or ‘H.R. 10’ plans covering both self-employed individuals and ‘common law’ employees.Therefore, the definition
of ‘employee’ formerly appearing in proposed Sec. 2510.3–6 has been inserted into Sec. 2510.3–3 and restricted in scope to that section.” 40 Fed. Reg. 34528 (1975) (emphasis added).
2004-16 I.R.B.779April 19, 2004

determining the existence of an ERISA
plan.”);Madonia, 11 F.3d, at 449–450
(“[T]he regulation does not govern the is-
sue of whether someone is a ‘participant’
in an ERISA plan, once the existence
of that plan has been established. This
makes perfect sense: once a plan has
been established, it would be anomalous
to have those persons benefiting from it
governed by two disparate sets of legal
obligations.”).
Also in common with other Courts
of Appeals that have denied participant
status to working owners, the Sixth Cir-
cuit’s leading decision mistakenly relied,
in addition, on ERISA’s “anti-inurement”
provision, 29 U.S.C. Sec. 1103(c)(1),
which prohibits plan assets from inuring
to the benefit of employers. SeeFugarino,
969 F.2d, at 186 (“A fundamental require-
ment of ERISA is that ‘the assets of a
plan shall never inure to the benefit of any
employer....’”);Kwatcher,879F.2d,
at 960 (“Once a person has been found
to fit within the ‘employer’ integument,
[Sec. 1103(c)(1)] prohibits payments to
him from a qualified plan.”);Giardono,
867 F.2d, at 411 (“It is a fundamental re-
quirement of ERISA that ‘. . . the assets
of a plan shall never inure to the benefit of
any employer. . . .’”).
Correctly read, however, the anti-inure-
ment provision does not preclude Title I
coverage of working owners as plan partic-
ipants. It states that, with enumerated ex-
ceptions, “the assets of a plan shall never
inure to the benefit of any employer and
shall be held for the exclusive purposes
of providing benefits to participants in the
plan and their beneficiaries and defraying
reasonable expenses of administering the
plan.” 29 U.S.C. Sec. 1103(c)(1). The
provision demands only that plan assets be
held for supplying benefits to plan partici-
pants. Like the Department of Labor regu-
lation, seesupra, at 14–15, the anti-inure-
ment provision does not address the dis-
crete question whether working owners,
along with nonowner employees, may be
participants in ERISA-sheltered plans. As
the Fifth Circuit observed inVega:
“Th[e] [anti-inurement] provision
refers to the congressional determi-
nation that funds contributed by the
employer (and, obviously, by the
[nonowner] employees . . .) must
never revert to the employer; it does
not relate to plan benefits being paid
with funds or assets of the plan to cover
a legitimate pension or health benefit
claim by an employee who happens to
be a stockholder or even the sole share-
holder of a corporation.” 188 F.3d, at
293, n. 5.
ERISA’s anti-inurement provision is
based on the analogous exclusive bene-
fit provision in the IRC, 26 U.S.C. Sec.
401(a)(2), which has never been under-
stood to bar tax-qualified plan partici-
pation by working owners. See H.R.
Conf. Rep. No. 93–1280, pp. 302–303
(1974); Brief for United States asAmicus
Curiae29. The purpose of the anti-inure-
ment provision, in common with ERISA’s
other fiduciary responsibility provisions,
is to apply the law of trusts to discourage
abuses such as self-dealing, imprudent
investment, and misappropriation of plan
assets, by employers and others. See,e.g.,
Prudential Ins. Co. of Am. v. Doe,76
F.3d 206, 209 (CA8 1996). Those con-
cerns are not implicated by paying benefits
to working owners who participate on an
equal basis with nonowner employees in
ERISA-protected plans.
In sum, the anti-inurement provision,
like the Department of Labor regulation,
establishes no categorical barrier to work-
ingownerparticipationinERISAplans.
Whether Yates himself, in his handling of
loan repayments, seesupra, at 4, engaged
in conduct inconsistent with the anti-inure-
ment provision is an issue not yet reached
by the courts below, one on which we ex-
press no opinion.
***
For the reasons stated, the judgment
of the Court of Appeals for the Sixth Cir-
cuit is reversed, and the case is remanded
for further proceedings consistent with
this opinion, including consideration of
questions earlier raised but not resolved.
Specifically, given the undisputed facts
concerning Yates’s handling of the loan,
i.e., his failure to honor the periodic repay-
ment requirements: (1) Did the November
1996 close-to-bankruptcy repayments,
despite the prior defaults, become “a por-
tion of [Yates’s] interest in a qualified
retirement plan . . . excluded from his
bankruptcy estate,” App. to Pet. for Cert.
40a, and (2) if so, were the repayments
“beyond the reach of[the Bankruptcy]
[T]rustee’s power to avoid and recover
preferential transfers,”id., at 47a?
It is so ordered.
SUPREME COURT OF THE
UNITED STATES
No. 02-458
RAYMOND B. YATES, M.D., P.C.
PROFIT SHARING
PLAN, AND RAYMOND B.
YATES, TRUSTEE,
PETITIONERSv.WILLIAM T.
HENDON, TRUSTEE
ON WRIT OF CERTIORARI
TO THE UNITED STATES
COURT OF APPEALS
FOR THE SIXTH CIRCUIT
March 2, 2004
JUSTICE SCALIA, concurring in the
judgment.
The Court uses a sledgehammer to kill a
gnat — though it may be a sledgehammer
prescribed byUnited States v. Mead Corp.,
533 U.S. 218 (2001). I dissented from
that case, seeid., at 257, and remain of
the view that authoritative interpretations
of law by the implementing agency, if rea-
sonable, are entitled to respect.Chevron
U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984).
In the present case the Solicitor Gen-
eral of the United States, in a brief signed
by the Acting Solicitor of Labor, has put
forward as the “considered view of the
agency charged by Congress with the ad-
ministration and enforcement of Title I of
ERISA,” an interpretation of the relevant
terms of that Act which would allow work-
ing owners (including sole owners, such as
Dr. Yates) to be plan participants under
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA). Brief for United
States asAmicus Curiae26. There is no
doubt that this position is the official view
of the Department of Labor, and that it has
not been contrived for this litigation. The
Solicitor General’s brief relies upon a De-
partment of Labor advisory opinion, issued
more than five years ago, which concluded
that “the statutory provisions of ERISA,
taken as a whole, reveal a clear Congres-
sional design to include ‘working owners’
within the definition of ‘participant’ for
purposes of Title I of ERISA.” Pension and
Welfare Benefits Admin., U.S. Dept. of
April 19, 20047802004-16 I.R.B.

Labor, Advisory Opinion 99–04A (Feb. 4,
1999), 26 BNA Pension and Benefits Rptr.
559, 560 (1999).
The Department’s interpretive conclu-
sion is certainly reasonable (the Court’s
lengthy analysis says that it is inevitable);
it is therefore binding upon us. See
Barnhart v. Thomas,540U.S.
,
(2003) (slip op., at 6). I would re-
verse the judgment of the Sixth Circuit on
that basis. The Court’s approach, which
denies many agency interpretations their
conclusive effect and thrusts the courts
into authoritative judicial interpretation,
deprives administrative agencies of two
of their principal virtues: (1) the power to
resolve statutory questions promptly, and
with nationwide effect, and (2) the power
(within the reasonable bounds of the text)
to change the application of ambiguous
laws as time and experience dictate. The
Court’s approach invites lengthy litigation
in all the circuits — the product of which
(when finally announced by this Court)
is a rule of law that only Congress can
change.
SUPREME COURT OF THE
UNITED STATES
No. 02-458
RAYMOND B. YATES, M.D., P.C.
PROFIT SHARING
PLAN, AND RAYMOND B.
YATES, TRUSTEE,
PETITIONERSv.WILLIAM T.
HENDON, TRUSTEE
ON WRIT OF CERTIORARI
TO THE UNITED STATES
COURT OF APPEALS
FOR THE SIXTH CIRCUIT
March 2, 2004
JUSTICE THOMAS, concurring in the
judgment.
I agree with the Court that the judg-
ment of the Court of Appeals should be
reversed. The Court persuasively ad-
dresses the Court of Appeals’ many errors
in this case. Seeante, at 14–19. I do
not, however, find convincing the Court’s
reliance on textual “indications,”ante,at
8. The text of the Employee Retirement
Income Security Act of 1974 (ERISA),
is certainly consistent with the Court’s
interpretation of the word “employee”
to include so-called “working owners.”
*
Ibid. However, the various Title I exemp-
tionsrelieduponsoheavilybytheCourt,
seeante, at 9–11, are equally consistent
with an interpretation of “employee” that
would not include all “working owners.”
As an example, the Court places weight
ontheexceptiontothe exemption from
29 U.S.C. Sec. 1106, which bars loans
made to parties in interest that are “‘made
available to highly compensated employ-
ees . . . in an amount greater than the
amount made available to other employ-
ees.’”Ante, at 10–11 (quoting 29 U.S.C.
Sec. 1108(b)(1)(B)). The Court notes that
“someworkingowners...qualifyas
‘highly compensated employees.’”Ante,
at 11. That may be true, but there are
surely numerous “highly compensated em-
ployees” who would both be “employees”
under the usual, common-law meaning of
that term (and hence “employees” under
ERISA, seeNationwide Mut. Ins. Co.
v. Darden, 503 U.S. 318 (1992)), and
would also not be considered “working
owners” as the Court uses the term. It is
entirely possible, then, that Congress was
merely attempting to exclude these indi-
viduals from Sec. 1106, rather than as-
suming that all “working owners” were
“employees.” Hence the existence of this
exception tells us nothing about whether
Congress “intended working owners” to be
“employees” under ERISA.Ante,at8.
Since the text is inconclusive, we must
turn to the common-law understanding of
the term “employee.”Darden,supra,at
322–323. On remand, then, I would direct
the Court of Appeals to address whether
the common-law understanding of the
term “employee,” as used in ERISA, in-
cludes Dr. Yates. I would be surprised if
it did not, seeIn re Baker, 114 F.3d 636,
639 (CA7 1997) (corporation’s separate
legal existence from shareholder must be
respected),Madonia v. Blue Cross & Blue
Shield of Virginia, 11 F.3d 444, 448–449
(CA4 1993) (same), but this is a matter
best resolved, in the first instance, by the
court below.
*
The Court does not clearly define who exactly makesup this class of “working owners,” even though members of this class are now considered categorically to fall under ERISA’s definition
of “employee.”
2004-16 I.R.B.781April 19, 2004

Part III. Administrative, Procedural, and Miscellaneous
Public Comment Invited
on Recommendations for
2004–2005 Guidance Priority
List
Notice 2004–26
The Department of Treasury and Int
er-
nal Revenue Service invite public
com-
ment on recommendations for items
that
should be included on the 2004–200
5
Guidance Priority List.
Treasury’s Office of Tax Policy an
dthe
ServiceusetheGuidancePriorit
y List each
year to identify and prioritize t
he tax is-
sues that should be addressed th
rough reg-
ulations, revenue rulings, rev
enue proce-
dures, notices, and other publi
shed admin-
istrative guidance. The 2004–2
005 Guid-
ance Priority List establishe
s the guidance
that the Treasury Department a
nd the Ser-
vice intend to issue from July 1
, 2004,
through June 30, 2005. The Tre
asury De-
partment and the Service reco
gnize the
importance of public input to
formulate
a Guidance Priority List that
focuses re-
sources on guidance items th
at are most
important to taxpayers and t
ax administra-
tion.
In reviewing recommendatio
ns and
selecting projects for incl
usiononthe
2004–2005 Guidance Priorit
y List, the
Treasury Department and th
e Service will
consider the following:
1. Whether the recommended guidance
is consistent with the Internal Rev-
enue Code and Congressional intent;
2. Whether the recommended guidance
promotes sound tax administration;
3. Whether taxpayers can easily under-
stand and apply the recommended
guidance;
4. Whether the Service can administer
the recommended guidance on a uni-
form basis; and
5. Whether the recommended guidance
reduces controversy and lessens the
burden on taxpayers or the Service.
Taxpayers may submit recommenda-
tions for guidance at any time during the
year. Please submit recommendations
by April 30, 2004, for possible inclusion
on the original 2004–2005 Guidance Pri-
ority List. The Service will update the
2004–2005 Guidance Priority List quar-
terly to reflect additional guidance that
the Treasury Department and the Service
intend to publish during the plan year.
The quarterly updates allow the Treasury
Department and the Service to respond
to the need for additional guidance that
may arise during the plan year. Generally,
recommendations for guidance received
after April 30, 2004, will be reviewed for
inclusion in the next quarterly update if re-
ceived by August 31, 2004; November 30,
2004; or February 28, 2005, respectively.
Taxpayers are not required to submit
recommendations for guidance in a partic-
ular format. Taxpayers should, however,
briefly describe the recommended guid-
ance and explain the need for the guidance.
In addition, taxpayers may include an anal-
ysis of how the issue should be resolved.
Taxpayers should send written com-
ments to:
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2004–26)
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand deliver comments between the
hours of 8 a.m. and 5 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2004–26)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, taxpayers may sub-
mit comments electronically via e-mail
to the following address:Notice.Com-
ments@irscounsel.treas.gov. Taxpayers
should include “Notice 2004–26” in the
subject line. All comments will be avail-
able for public inspection and copying in
their entirety.
For further information regarding this
notice, contact Crystal Foster of the Office
of Associate Chief Counsel (Procedure
and Administration) at (202) 622–7326
(not a toll-free call).
Loss Deductions for
Diminution in Value of Stock
Attributable to Corporate
Misconduct
Notice 2004–27
The Internal Revenue Service and Trea-
sury Department are aware that some tax-
payers who acquired stock on the open
market for investment have been advised
that they may be able to deduct as a theft
loss the decline in market value of their
stock caused by disclosure of accounting
fraud or other illegal misconduct of the of-
ficers or directors of the corporation that
issued the stock. The purpose of this notice
is to advise taxpayers that the Service in-
tends to disallow such deductions and may
impose penalties under § 6662.
Section 165(a) of the Internal Revenue
Code allows a deduction for any loss sus-
tained during the taxable year not compen-
sated for by insurance or otherwise. Un-
der § 165(c) losses for individuals are lim-
itedto(1)lossesincurredinatradeor
business, (2) losses incurred in any trans-
action entered into for profit, though not
connected with a trade or business, and
(3) losses of property not connected with
a trade or business or a transaction entered
into for profit, if such losses arise from
fire, storm, shipwreck, or other casualty, or
from theft. Section 1.165–1(b) of the In-
come Tax Regulations generally provides
that, to be allowable as a deduction under
section 165(a), a loss must be evidenced by
a closed and completed transaction, fixed
by an identifiable event or events, and ac-
tually sustained during the taxable year.
Section 1.165–4(a) provides that no de-
duction shall be allowed under § 165(a)
solely on account of a decline in the value
of stock owned by the taxpayer when the
decline is due to a fluctuation in the mar-
ket price of the stock or to another simi-
lar cause. However, a deduction is allowed
under § 165(a) if the stock is worthless and
has no recognizable value. A decline in the
value of stock owned by the taxpayer is not
allowed as a deduction under § 165(a) until
April 19, 20047822004-16 I.R.B.

the taxable year in which the loss is actu-
ally sustained as a result of the sale or ex-
change of the stock or the stock becoming
wholly worthless.
Section 165(f) provides that losses from
sales or exchanges of capital assets shall be
allowedonlytotheextentallowedinsec-
tions 1211 and 1212. Stock held for invest-
ment is a capital asset under section 1221.
Sections 1211 and 1212 limit the amount
that individual taxpayers may deduct for
losses from sales or exchanges of capital
assets and provide rules for carrying for-
ward to subsequent years the amount of
any excess capital loss.
Under § 165(g)(1), if any stock that is
a capital asset in the hands of a taxpayer,
such as stock purchased as an investment,
becomes worthless during a taxable year,
the resulting loss is treated as a loss from
the sale or exchange of a capital asset (i.e.,
a capital loss). Section 1.165–5(c) ex-
plains that if the stock becomes wholly
worthless during a taxable year, the result-
ing loss may be deducted under § 165(a)
subject to the limitations imposed on capi-
tal losses under §§ 1211 and 1212 and the
regulations thereunder.
Therefore, under § 165(a), subject to
the limitations of §§ 1211 and 1212, a tax-
payer who owns stock that was acquired
on the open market for investment and that
has declined in value is allowed a deduc-
tion for a capital loss in the taxable year in
which the stock is sold or exchanged or be-
comes wholly worthless.
Sections 165(e) and 1.165–8(a)(2) pro-
vide that, in general, a loss arising from
a theft shall be treated under § 165(a) as
sustained during the taxable year in which
the taxpayer discovers the loss. Section
1.165–1(d)(3) provides that if in the year
of discovery there exists a claim for reim-
bursement with respect to which the tax-
payer has a reasonable prospect of recov-
ery, the portion of the loss that may be re-
imbursed is not treated as sustained until
the tax year in which it can be ascertained
with reasonable certainty that reimburse-
ment will not be received.
Whether a loss constitutes a theft loss
is determined by examining the law of
the state where the alleged theft occurred.
Edwards v. Bromberg, 232 F.2d 107, 111
(5
th
Cir. 1956);Viehweg v. Commissioner,
90 T.C. 1248, 1253 (1988). Thus, to claim
a theft loss, the taxpayer must prove that
the “loss resulted from a taking of prop-
erty that is illegal under the law of the
state where it occurred and that the taking
was done with criminal intent.” Rev. Rul.
72–112, 1972–1 C.B. 60.
In cases involving stock purchased on
theopenmarket,thecourtshaveconsis-
tently disallowed theft loss deductions re-
lating to a decline in the value of the stock
that was attributable to corporate officers
misrepresenting the financial condition of
the corporation, even when the officers
were indicted for securities fraud or other
criminal violations. InPaine v. Commis-
sioner,63T.C.736,aff’d without pub-
lished opinion, 523 F.2d 1053 (5
th
Cir.
1975), the taxpayers claimed a theft loss
deduction for a decline in value of stock
stemming from misrepresentations of the
financial status of the corporation by cor-
porate officials. The court noted that the
taxpayers did not purchase the stock from
the corporate officers who made the mis-
representations, but on the open market. In
MTS International Inc. v. Commissioner,
169F.3d1018(6
th
Cir. 1999), an individ-
ual taxpayer sold at a loss stock that was
acquired on a public stock exchange and
argued that the substantial decline in value
was due to criminal conduct by the corpo-
ration’s officers. The Sixth Circuit con-
cluded that the loss was not a theft loss.
See also Crowell v. Commissioner,T.C.
Memo. 1986–314;DeFusco v. Commis-
sioner, T.C. Memo. 1979–230;Barry v.
Commissioner, T.C. Memo. 1978–215;
and Rev. Rul. 77–17, 1977–1 C.B. 44.
Accordingly, the Service will disallow a
deduction for a theft loss under § 165(a) re-
lating to a decline in the value of stock that
was acquired on the open market for in-
vestment. If the stock is sold or exchanged
or becomes wholly worthless, any result-
ing loss is a capital loss.
DRAFTING INFORMATION
The principal author of this notice is
Norma Rotunno of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this notice, please contact Ms. Rotunno at
(202) 622–7900 (not a toll-free call).
Frivolous Arguments to Avoid
Concerning Statutory and
Nonstatutory Stock Options
Notice 2004–28
The Internal Revenue Service is aware
that certain promoters are advising tax-
payers to take highly questionable, and in
most cases meritless, positions, described
below, on current and amended returns
regarding income or alternative minimum
tax (“AMT”) due upon the exercise of
nonstatutory or statutory stock options.
This notice alerts taxpayers that the Ser-
vice intends to challenge such positions
and will treat them as frivolous in appro-
priate cases. However, the Service will
consider each position and will not reject
or contest it solely because it is submitted
along with a frivolous position.SeeTreas.
Reg. § 1.6694–2(c)(2) (“a ‘frivolous’ po-
sition with respect to an item is one that
is patently improper”). The Service also
may apply civil or criminal penalties to
taxpayers and to promoters of these posi-
tions.
Income Tax Treatment of Stock Options
Generally
The federal income tax treatment of
stock options granted in exchange for
services is well established. In general,
the income tax consequences associated
with an option arise when the option is
exercised. When an employee exercises
a compensatory stock option (commonly
known as a “nonstatutory option”), both
§ 83 of the Internal Revenue Code (Code)
and long-standing judicial authority re-
quire that the difference between the fair
market value of the stock and the option
exercise price be included in the em-
ployee’s gross income as compensation.
See, e.g., Commissioner v. LoBue, 351
U.S. 243 (1956). In the case of stock pur-
chased under an incentive stock option (or
a “statutory option”) taxed under §§ 421
and 422, § 56 provides that the difference
between the fair market value of the stock
and the option exercise price must be in-
cluded in the employee’s gross income for
purposes of computing AMT.
Statutory stock options are not subject
to tax on the date of grant. Nonstatutory
stock options rarely are subject to tax on
the date of grant, and taxation at grant
2004-16 I.R.B.783April 19, 2004

typically occurs only if an option is ac-
tively traded on an established securities
market on that date or, if not so traded,
it has a readily ascertainable fair market
value.See§ 83(a) and (e), and § 1.83–7(a)
and (b) of the Income Tax Regulations. A
non-publicly traded nonstatutory stock op-
tion is considered to have a readily ascer-
tainable fair market value on the grant date
only if, on that date, it satisfies four con-
ditions: (1) the option is transferable; (2)
the option is exercisable immediately in
full by the optionee; (3) the option or the
property subject to the option is not sub-
ject to any restriction or condition which
has a significant effect upon the fair market
value of the option; and (4) the fair market
value of the option privilege is readily as-
certainable. § 1.83–7(b).
For more information regarding the fed-
eral tax treatment of stock options granted
in exchange for services, please consult
Publication 525,“Taxable and Nontaxable
Income,”pages 9–11.
Positions Promoted
The positions being promoted include,
but are not limited to, the following:
•“The options should have been taxed
at their grant date rather than their
exercise date.”Promoters of this ar-
gument typically claim that the proper
time for an employee to measure tax-
able income from a stock option is
when the option is granted (before
the stock has appreciated) rather than
when it is exercised (after the stock has
appreciated). This claim will rarely be
supported by the facts. For a nonstatu-
tory option, unless the requirements
for taxation at grant as described above
are satisfied, the proper time for mea-
surement and inclusion of income is
on the date of exercise. A statutory
option will never be subject to tax on
grant.See§§ 421 and 422.
•“The fair market value of stock pur-
chased under an option is reduced by
any restriction placed on the stock
bytheemployerthatprohibitsthe
employee from selling the stock for
a specified period of time.”Promot-
ers of this argument typically claim
that if an employee cannot sell stock
purchased under an option for a pe-
riod of time because of an agreement
with an employer, then the value of the
stock cannot be as high as the value
of the same stock that does not have
that restriction. This claim is with-
out merit because § 83(a) clearly re-
quires that the value of property trans-
ferred in connection with the perfor-
mance of services must be determined
without regard to restrictions that will
lapse, such as a requirement to hold
shares for a period of time.See also
§ 1.83–1(a)(1) andSakol v. Commis-
sioner, 67 T.C. 986 (1977),aff’d,574
F.2d 694 (2
nd
Cir. 1978),cert denied,
439 U.S. 859 (1978).
•“When, due to a margin call, a bro-
ker sells a taxpayer’s stock that was
purchased under a nonstatutory op-
tion, the stock having been pledged
as security for a loan to pay the ex-
ercise price, that sale is a forfeiture
of the stock that causes an ordi-
nary loss rather than a capital loss.”
Promoters of this argument generally
claim that a sale of stock required by a
broker’s margin call should be treated
as an ordinary loss. This claim is base-
less because, when an employee is
the beneficial owner of shares held by
the employee’s broker pursuant to a
stock option exercise, the stock is then
a capital asset to the employee.See
§ 1221. Capital gains or losses occur
upon the subsequent sale of the stock,
such as pursuant to a margin call. The
same analysis applies for purposes of
AMT, and gain or loss on disposition
due to a margin call would be capital
gain or loss for AMT purposes.See
§§ 56, 421 and 422.
•“The purchase of the stock using
borrowed funds was not in sub-
stance a purchase because the em-
ployee did not have the ability to
repay the loan.”Promoters of this
argument typically assert that an em-
ployee’s purchase of shares pursuant
to a stock option in exchange for a note
to pay the purchase price should not be
respected where the employee is sub-
sequently unable to pay the debt. This
claim will fail where, in fact, beneficial
ownership of the stock was transferred
to the employee, irrespective of the
employee’s subsequent ability to re-
pay the debt.See§ 1.83–3(a).
•“Options should have been viewed
as the economic equivalent of the
underlying stock and thus were not
subject to any taxation of the spread
on exercise.”Promoters of this ar-
gument typically claim that because
an option and the underlying stock
are functional equivalents, there is no
gain when the employee exercises the
option. As discussed above, gener-
ally, when an employee is granted a
nonstatutory option, § 83 requires the
inclusion of income equal to the differ-
ence between the stock’s fair market
value and the exercise price when the
option is exercised. Section 56(b)(3)
requires the employee to include that
difference in AMT income when an
employee exercises a statutory stock
option.
These positions and other similar
claims that disregard the long-standing ju-
dicial and statutory authorities concerning
the taxation of statutory and nonstatutory
options will be treated as frivolous in ap-
propriate circumstances.
In evaluating positions of this kind, the
Service will determine the additional tax
due from the taxpayer according to the
principles outlined above. In addition to
liability for tax due plusstatutory interest,
individuals who claim tax benefits on their
returns based on these and other frivolous
arguments face substantial civil and crimi-
nal penalties. Potentially applicable civil
penalties include: (1) the § 6662 accu-
racy-related penalty, which is equal to 20
percent of the amount of taxes the taxpayer
should have paid; (2) the § 6663 penalty
for civil fraud, which is equal to 75 per-
cent of the amount of taxes the taxpayer
should have paid; (3) a $500 penalty under
§ 6702 for filing a frivolous return; and (4)
a penalty of up to $25,000 under § 6673 if
the taxpayer makes frivolous arguments in
the United States Tax Court.
Taxpayers filing returns based on these
or similar positions also may face criminal
prosecution for: (1) attempting to evade
or defeat tax under § 7201 for which the
penalty is a fine of up to $100,000 and im-
prisonment for up to 5 years; or (2) making
false statements on a return under § 7206
forwhichthepenaltyisafineofupto
$100,000 and imprisonment for up to 3
years.
April 19, 20047842004-16 I.R.B.

Persons who promote these or similar
positions and those who assist taxpayers
in claiming tax benefits based on them
also face penalties. Potential penalties in-
clude: (1) a $250 penalty for each re-
turn prepared by an income tax return pre-
parer who knew or should have known that
the taxpayer’s argument was frivolous (or
$1,000 for each return where the return
preparer’s actions werewillful, intentional
or reckless); (2) a $1,000 penalty under
§ 6701 for aiding and abetting the under-
statement of tax; and (3) criminal prosecu-
tion under § 7206 for which the penalty is
a fine of up to $100,000 and imprisonment
forupto3yearsforassistingoradvis-
ing about the preparation of a false return
or other document under the internal rev-
enue laws. Promoters and others who as-
sist taxpayers in engaging in these schemes
also may be enjoined from doing so under
§ 7408.
Taxpayers who have submitted returns
relying on these or similar claims should
amend them as soon as possible to avoid
accruing additional penalties. Taxpayers
should consult with a tax advisor to take
appropriate corrective action.
For more information regarding the
taxability of stock options, taxpayers can
contact the Office of Division Counsel/As-
sociate Chief Counsel (Tax Exempt/Gov-
ernment Entities) at (202) 622–6030 (not
a toll-free call). For information regard-
ing AMT, contact the Office of Associate
Chief Counsel (Income Tax & Account-
ing) at (202) 622–4920 (not a toll-free
call). For information regarding penal-
ties, contact the Office of Associate Chief
Counsel (Procedure and Administration)
at (202) 622–4940 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also, Part 1, §§ 162, 263, 446, 461, 481;
1.167(a)–3(b), 1.263(a)–4, 1.263(a)–5, 1.446–1,
1.461–4, 1.461–5, 1.481–1.)
Rev. Proc. 2004–23
SECTION 1. PURPOSE
This revenue procedure provides the
exclusive administrative procedures under
which a taxpayer described in section 3 of
this revenue procedure may obtain auto-
matic consent for the taxpayer’s first tax-
able year ending on or after December 31,
2003, to change to a method of accounting
provided in §§ 1.263(a)–4, 1.263(a)–5,
and 1.167(a)–3(b) of the Income Tax Reg-
ulations (the “final regulations”).
SECTION 2. BACKGROUND
.01 On January 24, 2002, the Internal
Revenue Service and Treasury Department
published an advance notice of proposed
rulemaking (ANPRM) in theFederal
Register(REG–125638–01, published in
the Bulletin as Announcement 2002–9,
2002–1 C.B. 536 [67 FR 3461]) announc-
inganintentiontoprovideguidanceon
the extent to which § 263(a) of the Inter-
nal Revenue Code requires taxpayers to
capitalize amounts paid to acquire, create,
or enhance intangible assets. On Decem-
ber 19, 2002, the Service and Treasury
Department published a notice of pro-
posed rulemaking proposing regulations
under § 263(a) relating to the capitaliza-
tion requirements. On January 5, 2004,
the Service and Treasury Department pub-
lished final regulations in theFederal
Register(T.D. 9107, 2004–7 I.R.B. 447
[69 FR 436]). Section 1.263(a)–4 pre-
scribes the extent to which taxpayers must
capitalize amounts paid or incurred to
acquire or create (or to facilitate the acqui-
sition or creation of) intangibles. Section
1.263(a)–5 prescribes the extent to which
taxpayers must capitalize amounts paid or
incurred to facilitate an acquisition of a
trade or business, a change in the capital
structure of a business entity, and certain
other transactions. Section 1.167(a)–3(b)
provides a safe harbor useful life for
certain intangible assets. The final regula-
tions under §§ 1.263(a)–4 and 1.263(a)–5
are effective for amounts paid or incurred
on or after December 31, 2003. The final
regulations under § 1.167(a)–3(b) are ef-
fective for intangible assets created on or
after December 31, 2003.
.02 Sections 1.263(a)–4(p) and
1.263(a)–5(n) provide that a taxpayer
seeking to change to a method of ac-
counting provided in the final regula-
tions must secure the consent of the
Commissioner in accordance with the
requirements of § 1.446–1(e). In addi-
tion, §§ 1.263(a)–4(p) and 1.263(a)–5(n)
provide that, for the taxpayer’s first tax-
able year ending on or after December
31, 2003, the taxpayer is granted the con-
sent of the Commissioner to change to a
method of accounting provided in the final
regulations, provided the taxpayer follows
the administrative procedures issued un-
der § 1.446–1(e)(3)(ii) for obtaining the
Commissioner’s automatic consent to a
change in accounting method (for further
guidance, for example, see Rev. Proc.
2002–9, 2002–1 C.B. 327, as modified
and clarified by Announcement 2002–17,
2002–1 C.B. 561, modified and amplified
by Rev. Proc. 2002–19, 2002–1 C.B.
696, and amplified, clarified, and modi-
fied by Rev. Proc. 2002–54, 2002–2 C.B.
432). The final regulations further provide
that any applicable § 481(a) adjustment
for a change to a method of accounting
provided in the final regulations for a
taxpayer’s first taxable year ending on or
after December 31, 2003, is determined
by taking into account only amounts paid
or incurred in taxable years ending on or
after January 24, 2002. The preamble to
the final regulations states that the Service
may issue additional guidance for utiliz-
ing the automatic consent procedures to
change to a method of accounting pro-
vided in the regulations. This revenue
procedure constitutes the exclusive guid-
ance for utilizing the automatic consent
procedures to change to a method of ac-
counting provided in the final regulations
for a taxpayer’s first taxable year end-
ing on or after December 31, 2003. For
changes in methods of accounting to which
this revenue procedure applies, a taxpayer
may not file an application for a change
in method of accounting under Rev. Proc.
97–27, 1997–1 C.B. 680 (as modified and
amplified by Rev. Proc. 2002–19, 2002–1
C.B. 696, as amplified and clarified by
Rev. Proc. 2002–54, 2002–2 C.B. 432).
See section 4.02(1) of Rev. Proc. 97–27.
.03 Section 1.446–1(e)(3)(ii) authorizes
the Commissioner to prescribe adminis-
trative procedures setting forth the limita-
tions, terms, and conditions deemed neces-
sary to permit a taxpayer to obtain consent
to change a method of accounting.
.04 Rev. Proc. 2002–9 provides pro-
cedures by which a taxpayer may obtain
automatic consent to change to a method
of accounting described in the Appendix of
Rev. Proc. 2002–9.
.05 Rev. Rul. 90–38, 1990–1 C.B.
57, provides that, if a taxpayer uses an er-
roneous method of accounting for two or
more consecutive taxable years, the tax-
2004-16 I.R.B.785April 19, 2004

payer has adopted a method of accounting.
The ruling further provides that a taxpayer
may not, without the Commissioner’s con-
sent, retroactively change from an erro-
neous to a permissible method of account-
ingbyfilinganamendedreturn.
.06 This revenue procedure applies only
for a taxpayer’s first taxable year ending
on or after December 31, 2003, for changes
to methods of accounting provided in the
final regulations. The Service intends to
issue future guidance for changes in meth-
ods of accounting made for subsequent
taxable years, including automatic consent
procedures for some or all methods of ac-
counting provided in the final regulations.
For taxable years subsequent to the first
taxable year ending on or after Decem-
ber 31, 2003, as in this revenue proce-
dure, a term and condition of the Commis-
sioner’s consent with respect to a change
to a method of accounting provided in the
final regulations will be that any applicable
§ 481(a) adjustment will take into account
only amounts paid or incurred in taxable
years ending on or after January 24, 2002.
.07 As indicated in the preamble to the
final regulations, the preamble to the no-
tice of proposed rulemaking advised tax-
payers not to seek to change a method of
accounting in reliance upon the rules con-
tained in the notice of proposed rulemak-
ing until the rules were published as final
regulations. The Service has received nu-
merous Forms 3115 from taxpayers seek-
ing consent to change to a method of ac-
counting described in the notice of pro-
posed rulemaking for taxable years prior to
the effective date of the final regulations.
For example, the Service has received nu-
merous requests to change to a method of
accounting of applying the 12-month rule
contained in § 1.263(a)–4(f)(1) of the fi-
nal regulations.See also U.S. Freightways
Corp. v. Commissioner, 270 F.3d 1137
(7
th
Cir. 2001),rev’g113 T.C. 329 (1999).
As stated in the preamble to the final reg-
ulations, the Service suspended process-
ing of these requests pending publication
of the final regulations. The Service will
not grant a request to change to a method
of accounting provided in the final regula-
tions for a year of change earlier than the
effective date provided by the final regu-
lations. Affected taxpayers will be noti-
fied and given the opportunity to withdraw
their requests and obtain a refund of the
user fee. Any request not withdrawn will
be processed in accordance with the proce-
dures under which it was filed (e.g.,Rev.
Proc. 97–27) on the basis that the national
office is adverse to the request.
SECTION 3. SCOPE
.01 This revenue procedure applies to
a taxpayer that seeks, for the taxpayer’s
first taxable year ending on or after De-
cember 31, 2003, to change to a method
of accounting provided in the final regula-
tions.
.02 This revenue procedure also ap-
plies to a taxpayer that, for the taxpayer’s
first taxable year ending on or after De-
cember 31, 2003, in addition to seeking
a change to a method of accounting pro-
vided in the final regulations, also seeks
to change its method of accounting to
utilize the 3
1
/2month rule authorized
by § 1.461–4(d)(6)(ii) or to utilize the
recurring item exception authorized by
§ 1.461–5.
SECTION 4. APPLICATION
.01In general. A taxpayer within
the scope of this revenue procedure
is, in accordance with section 6.01 of
Rev. Proc. 2002–9, granted the con-
sent of the Commissioner to change to
a method of accounting provided in the
final regulations (and, if desired, to also
utilize the 3
1
/2month rule authorized
by § 1.461–4(d)(6)(ii) or the recurring
item exception authorized by § 1.461–5)
provided that the taxpayer follows the au-
tomatic change in method of accounting
provisions in Rev. Proc. 2002–9, with the
following modifications:
(1) The scope limitations in section 4.02
of Rev. Proc. 2002-9 do not apply;
(2) The taxpayer must prepare and file
Form 3115,Application for Change in Ac-
counting Method, in accordance with sec-
tion 4.02 of this revenue procedure;
(3) The copy of Form 3115 must be
sent to the following special address (note
the special post office box number): Com-
missioner of Internal Revenue, Attention:
CC:ITA (Automatic Rulings Branch, Rev.
Proc. 2004-23 Filing) P.O. Box 7616,
Benjamin Franklin Station, Washington,
D.C. 20044 (or in the case of a private
delivery service or hand delivery to the
courier’s desk: Commissioner of Inter-
nal Revenue, Attention: CC:ITA (Auto-
matic Rulings Branch, Rev. Proc. 2004-23
Filing), 1111 Constitution Avenue, NW,
Washington, D.C. 20224);
(4) The taxpayer must compute any ap-
plicable § 481(a) adjustment and take such
adjustment into account in accordance
with section 5 of this revenue procedure;
and
(5) A taxpayer described in section
4.03(2) of this revenue procedure must
file one or more amended federal income
tax returns (amended returns) in accor-
dance with section 4.03(3), (4), or (5), as
applicable, of this revenue procedure.
.02Form 3115. In preparing the Form
3115 referred to in section 4.01 of this rev-
enue procedure, a taxpayer must comply
with the following procedures:
(1) The taxpayer must use the current
version of Form 3115 (Revised December
2003);
(2) The taxpayer may use one Form
3115 for all changes in method of account-
ing made pursuant to the final regulations;
(3) The taxpayer is required to complete
only the following information on Form
3115:
(a) The identification section of Page
1 (above Part I);
(b) The signature section at the bottom
of Page 1;
(c) PartI,Line1(a). Thedesignated
automatic accounting method change
number for changes in method of ac-
counting made pursuant to this revenue
procedure is No. “78”;
(d) Part II, Lines 4(a) (and, if applica-
ble, lines 4(f) and 4(g)), 5(a), 5(b), 9, 10,
12 (see section 5.02(2) of this revenue pro-
cedure if the taxpayer is making more than
one change in method of accounting), and
16;
(e) Part IV, in accordance with section
5 of this revenue procedure; and
(f) Schedule E, if applicable;
(4) In addition to the other information
requiredonline12ofForm3115,the
taxpayer must include the citation to the
paragraph of the final regulations that pro-
vides for the proposed method of account-
ing for each item (e.g., § 1.263(a)–4(d)(6)
or § 1.263(a)–4(f)), and, if applicable,
April 19, 20047862004-16 I.R.B.

whether the taxpayer is also proposing to
change to a method that uses the 3
1
/2month
rule authorized by § 1.461–4(d)(6)(ii) or
the recurring item exception authorized by
§ 1.461–5 with respect to the item;
(5) In addition to the other informa-
tion required on Schedule E of Form
3115 (if applicable), the taxpayer must
include a statement as to whether the
useful life is the safe harbor useful life
prescribed by § 1.167(a)–3(b)(1) or
§ 1.167(a)–3(b)(1)(iv) and, if the useful
life is the safe harbor useful life prescribed
by § 1.167(a)–3(b)(1), a statement ex-
plaining why the intangible asset does not
have a useful life the length of which can
be estimated with reasonable accuracy;
and
(6) A taxpayer that must file one or
more amended returns as provided in sec-
tion 4.03 of this revenue procedure to be
eligible to use the automatic consent pro-
cedures of this revenue procedure must at-
tach to the Form 3115 a written statement
signed under penalties of perjury confirm-
ing that the taxpayer has filed the amended
returns pursuant to section 4.03 of this rev-
enue procedure.
.03Unauthorized change in a preced-
ing year.
(1) A taxpayer may change a method
of accounting only with the consent of the
Commissioner. § 1.446–1(e)(2). A tax-
payer that changes a method of account-
ing without the consent of the Commis-
sioner has made an unauthorized change
in method of accounting. If a taxpayer
makes an unauthorized change in method
of accounting, the Service may adjust the
taxpayer’s taxable income during the ex-
amination of the taxpayer’s income tax re-
turn for the taxable year the unauthorized
change was made and for all affected sub-
sequent years. As discussed above, the
preamble to the notice of proposed rule-
making advised taxpayers not to seek to
change a method of accounting in reliance
on rules contained in the notice of pro-
posed rulemaking until the rules were pub-
lished as final regulations. The Service
and Treasury Department are aware that
some taxpayers, prior to the effective date
of the final regulations, made an unau-
thorized change in method of accounting
for an item the treatment of which is pro-
vided for in the final regulations. The Ser-
vice and Treasury Department have deter-
mined that it is not appropriate for taxpay-
ers that have made an unauthorized change
in method of accounting for an item the
treatment of which is provided for in the fi-
nal regulations to obtain automatic consent
under this revenue procedure without cor-
recting such unauthorized change. There-
fore, a taxpayer that made an unautho-
rized change in method of accounting for
an item the treatment of which is provided
for in the final regulations is eligible to use
the automatic consent procedures provided
in this revenue procedure only if the tax-
payer amends prior federal income tax re-
turns to correct the unauthorized change in
method of accounting. However, as a mat-
ter of administrative grace, the Service and
Treasury Department have limited the ap-
plication of this section 4.03 to certain tax-
payers described in section 4.03(2) of this
revenue procedure.
(2) This section 4.03 applies to a tax-
payer that —
(a) in a taxable year for which the due
date of the federal income tax return (in-
cluding extensions, regardless of whether
such extension is automatic and whether
or not actually requested) is after January
24, 2002 (the date of publication of the
ANPRM) —
(i) made any unauthorized
change in method of accounting for an
item the treatment of which is provided
for in the final regulations; or
(ii) changed the treatment of an
item that is provided for in the final reg-
ulations in the taxable year immediately
preceding the taxpayer’s first taxable year
ending on or after December 31, 2003, but
has only used such treatment on one fed-
eral income tax return; or
(b) made an unauthorized change in
method of accounting to a method of ac-
counting that is provided in the final regu-
lations in a taxable year for which the due
date of the federal income tax return (in-
cluding extensions, regardless of whether
such extension is automatic and whether or
not actually requested) is on or before Jan-
uary 24, 2002, and for which the statute of
limitations has not yet expired, if the tax-
payer wishes to use the automatic consent
procedures to obtain the Commissioner’s
consent to change to the same method of
accounting to which the taxpayer previ-
ously made the unauthorized change.
(3) A taxpayer described in section
4.03(2)(a)(i) of this revenue procedure
is eligible to use the automatic consent
procedures to obtain the Commissioner’s
consent to change to a method of account-
ing provided in the final regulations only
if the taxpayer changes back to the prior
method of accounting (i.e.,themethod
of accounting used for an item prior to
making the unauthorized change for the
item) for each item referred to in section
4.03(2)(a) of this revenue procedure by
amending its federal income tax returns
for all of the preceding taxable years in
which the unauthorized method (or meth-
ods) was used.
(4) A taxpayer described in section
4.03(2)(a)(ii) of this revenue procedure
is eligible to use the automatic consent
procedures to obtain the Commissioner’s
consent to change to a method of account-
ing provided in the final regulations only
if the taxpayer amends its federal income
tax return for the preceding taxable year
in which the unauthorized treatment was
used to change the treatment of each item
referred to in section 4.03(2)(a) of this
revenue procedure to a treatment consis-
tent with the taxpayer’s historic method of
accounting (i.e., the method of accounting
used for an item prior to changing the
treatment of the item).
(5) A taxpayer described in section
4.03(2)(b) of this revenue procedure is
eligible to use the automatic consent pro-
cedures to obtain the Commissioner’s
consent to change to the same method
of accounting provided in the final regu-
lations to which the taxpayer previously
made the unauthorized change only if the
taxpayer changes back to its prior method
of accounting for the item (i.e.,themethod
of accounting used for the item prior to
making the unauthorized change for the
item) by amending its federal income tax
returns for all of the preceding taxable
years in which the unauthorized method
was used.
(6) A taxpayer filing one or more
amended returns pursuant to section
4.03(3), (4), or (5) of this revenue pro-
cedure must file the amended returns
before, or at the same time as, the taxpayer
files a Form 3115 under this revenue pro-
cedure (including the copy of Form 3115
filed with the national office under section
4.01(3) of this revenue procedure) for the
taxpayer’s first taxable year ending on or
2004-16 I.R.B.787April 19, 2004

after December 31, 2003. For this pur-
pose, a taxpayer under examination will
be considered to have filed an amended
return by providing the amended return to
the examining agent.
(7) In accordance with § 1.446–
1(e)(3)(ii) and Rev. Rul. 90–38, consent is
hereby granted for a taxpayer described in
section 3.01 of this revenue procedure that
alsoisdescribedinsection4.03(2)(a)(i)
or (b) of this revenue procedure to file
the amended returns referred to in section
4.03(3) or (5) of this revenue procedure
to retroactively change its method of ac-
counting. This consent is granted for
the taxable year for which the taxpayer
made the unauthorized change and for any
subsequent taxable year affected by the
unauthorized change.
SECTION 5. COMPUTATION OF
SECTION 481(a) ADJUSTMENT
.01In general. A taxpayer changing
a method of accounting under this rev-
enue procedure is required to take into
account any applicable § 481(a) adjust-
ment as provided in §§ 1.263(a)–4(p)(3)
and 1.263(a)–5(n)(3). As provided in
the regulations, the § 481(a) adjustment
is computed by taking into account only
amounts paid or incurred in taxable years
ending on or after January 24, 2002. Thus,
the § 481(a) adjustment is computed by
taking into account only amounts paid
or incurred in the period beginning with
the first day of the taxable year that in-
cludes January 24, 2002, and ending with
December 30, 2003. As a matter of ad-
ministrative convenience, a taxpayer may
report amounts paid or incurred on De-
cember 31, 2003, as part of the § 481(a)
adjustment. The amount of the § 481(a)
adjustment must include (i) as a reduction
of taxable income, any amounts paid or
incurred in the period beginning with the
first day of the taxable year that includes
January 24, 2002, and ending with De-
cember 30, 2003, that were capitalized
under the taxpayer’s present method of
accounting and are currently deductible
under the taxpayer’s proposed method
of accounting, reduced by the amount of
such capitalized costs recovered through
amortization or depreciation under the
taxpayer’s present method of accounting,
(ii) as an increase to taxable income, any
amounts paid or incurred in the period
beginning with the first day of the tax-
able year that includes January 24, 2002,
and ending with December 30, 2003, that
were currently deducted under the tax-
payer’s present method of accounting and
are capitalized under the taxpayer’s pro-
posed method of accounting, reduced by
the amount of capitalized costs that would
have been recovered through amortization
or depreciation if the taxpayer’s proposed
method of accounting had been applied in
taxable years ending on or after January
24, 2002, and (iii) as an increase or a re-
duction to taxable income, as appropriate,
any other adjustments required as a result
of the change in method of accounting.
If under its present method of account-
ing a taxpayer capitalized costs incurred
prior to the first taxable year that includes
January 24, 2002, the taxpayer must con-
tinue to treat amortization or depreciation
deductions attributable to those costs in
accordance with the taxpayer’s present
method of accounting. Thus, for example,
a taxpayer that files returns on a calendar
year basis continues to amortize or depre-
ciate in 2004 an intangible created in 2001,
even though the taxpayer has changed to
a method of accounting provided in the
final regulations under which the entire
cost of the intangible would be currently
deductible if incurred in 2004.
.02Reporting the section 481(a) adjust-
ment on Form 3115.
(1)Netting. For purposes of determin-
ing the adjustment period under section
2.05(2) of Rev. Proc. 2002–9, the § 481(a)
adjustment is determined separately for
each change in method of accounting be-
ing made under this revenue procedure.
Thus, a positive adjustment attributable to
a change in one method may not be netted
against a negative adjustment attributable
to a change in another method. However,
in determining the adjustment attribut-
able to a change in method, a taxpayer
must net positive § 481(a) adjustments
and negative § 481(a) adjustments result-
ing from that change in method (e.g.,ifa
taxpayer changes to a method of applying
the 12-month rule to prepaid amounts,
the taxpayer must net the resulting nega-
tive § 481(a) adjustment with the positive
§ 481(a) adjustment that results from
including those amounts in inventory pur-
suant to the taxpayer’s existing § 263A
method of accounting for inventory).
(2)Itemized listing on Form 3115.The
taxpayer must include on Form 3115, Part
IV, line 25, the total § 481(a) adjustment
for all changes in methods of accounting
being made. If the taxpayer is making
more than one change in method of ac-
counting under the final regulations, the
taxpayer must include on an attachment to
Form 3115 —
(a) the information required by Part
IV, line 25 for each change in method of
accounting (including the amount of the
§ 481(a) adjustment for each change in
method of accounting);
(b) the information required by Part II,
line 12 of Form 3115 that is associated with
each change; and
(c) the citation to the paragraph of
the final regulations that provides for
each proposed method of accounting (e.g.,
§ 1.263(a)–4(d)(6) or § 1.263(a)–4(f)).
.03Examples. The following examples
illustrate the computation of the § 481(a)
adjustment under this revenue procedure:
Example 1: Y, a calendar year taxpayer that
uses the accrual method of accounting, is a service
provider not required to maintain inventories. Y
incurred and capitalized $100x in taxable year 2001,
$200x in taxable year 2002, and $250x in taxable
year 2003. No portion of the $250x was incurred on
December 31, 2003. The $100x, $200x, and $250x
capitalized and depreciated by Y in 2001, 2002, and
2003 all relate to the same method of accounting
and would be currently deductible under the final
regulations if the amounts had been incurred on or
after December 31, 2003. Y claimed a depreciation
deduction of $10x in each of the taxable years 2001,
2002, and 2003 with respect to the $100x incurred
and capitalized in 2001, a depreciation deduction
of $20x in each of the taxable years 2002 and 2003
with respect to the $200x incurred and capitalized
in 2002, and a depreciation deduction of $25x in
taxable year 2003 with respect to the $250x incurred
and capitalized in 2003. For taxable year 2003, Y
may apply for an automatic change in method of
accounting with respect to the method under which
the amounts had been capitalized. Y’s section 481(a)
adjustment is a decrease in income of $385x ($160x
relating to amounts capitalized in 2002 ($200x - $40
($20 for 2002 and $20 for 2003)) + $225x relating to
amounts capitalized in 2003 ($250x - $25x)). Y must
continue to use its present method of accounting for
the amount capitalized in 2001.
Example 2: The same facts as Example 1, ex-
cept Y also incurs $25x of expenses on December 31,
2003, that were previously required to be capitalized
but may now be currently deducted under the final
regulations. Y may deduct the $25x currently on its
federal tax return for 2003 or add it to the $385x cal-
culated as its § 481(a) adjustment. Y’s year of change
is still 2003.
April 19, 20047882004-16 I.R.B.

SECTION 6. TRANSITION RULES
.01General rule for previously filed ap-
plications. If a taxpayer within the scope
of this revenue procedure has filed a Form
3115 (including a copy of Form 3115 filed
with the national office in advance of fil-
ing the taxpayer’s federal income tax re-
turn) to change to a method of accounting
provided in the final regulations for its first
taxable year ending on or after December
31, 2003, and the Form 3115 does not com-
ply with the provisions of this revenue pro-
cedure, the taxpayer will not be considered
to have filed the Form 3115 pursuant to the
automatic change in method of accounting
procedures referred to in §§ 1.263(a)–4(p)
and 1.263(a)–5(n) of the final regulations.
The taxpayer may file a new Form 3115
that does comply with this revenue proce-
dure, provided the new Form 3115 is filed
within the timely filing requirements of
section 6.02(3)(a) of Rev. Proc. 2002–9,
including the period described in section
6.02(3)(b)(i) of Rev. Proc. 2002–9. This
new Form 3115 must be labeled at the top:
“Corrected Form 3115 Filed Under Rev.
Proc. 2004–23”.
.02Limited relief for certain previously
filed applications. Notwithstanding sec-
tion 6.01 of this revenue procedure, if a
taxpayer within the scope of this revenue
procedure has filed a Form 3115 prior to
April 26, 2004, to change to a method of
accounting provided in the final regula-
tions for the taxpayer’s first taxable year
ending on or after December 31, 2003, the
taxpayer is not required to file a new Form
3115 under section 6.01 of this revenue
procedure for the same change in method
of accounting included in the Form 3115
filed prior to April 26, 2004, if the tax-
payer:
(1) prepares a written statement signed
under penalties of perjury that includes all
of the information necessary to comply
withthisrevenueprocedureforthesame
change in method of accounting included
in the Form 3115 filed prior to April 26,
2004, (without regard to section 4.02(1) of
this revenue procedure) that was not in-
cluded in the original filing;
(2) submits the written statement, with
an attached copy of page 1 of the origi-
nal Form 3115 filed by the taxpayer, to
the national office at the special address
provided in section 4.01(3) of this rev-
enue procedure, within the timely filing
requirements of section 6.02(3)(a) of Rev.
Proc. 2002–9, including the period de-
scribed in section 6.02(3)(b)(i) of Rev.
Proc. 2002–9;
(3) attaches the written statement and
a copy of the original Form 3115 to the
taxpayer’s federal income tax return for
the taxpayer’s—
(i) first taxable year ending on or after
December 31, 2003, or
(ii) second taxable year ending on or
after December 31, 2003, if the taxpayer
prior to April 26, 2004, has filed the tax-
payer’s federal income tax return for the
taxpayer’s first taxable year ending on or
after December 31, 2003, that includes
a Form 3115, a copy of which also has
been filed with the national office, and the
§ 481(a) adjustment included on that re-
turn was computed correctly as described
in section 5 of this revenue procedure; and
(4) except as provided in subsections
(1), (2), and (3) of this section 6.02, com-
plies with all other provisions of this rev-
enue procedure.
.03Special rule regarding amended re-
turnsfiledpursuanttosection4.03(3),(4),
and (5). A taxpayer within the scope of
this revenue procedure that files one or
more amended returns pursuant to section
4.03(3), (4), or (5) of this revenue proce-
dure must file the amended returns before,
or at the same time as, the taxpayer files
the written statement described in section
6.02(1) of this revenue procedure.
.04Automatic extension of time to file
late applications. If a taxpayer has filed its
federal income tax return for its first tax-
able year ending on or after December 31,
2003, and has not attached a Form 3115 to
change its method of accounting for that
taxable year to a method provided in the fi-
nal regulations, or has not attached a Form
3115 that complies with this revenue pro-
cedure to change its method of account-
ing for that taxable year to a method pro-
vided in the final regulations, the taxpayer
may, as provided in section 6.02(3)(b)(i) of
Rev. Proc. 2002–9, obtain an automatic
extension of 6 months from the due date
of its federal income tax return for the year
of change (excluding extensions) to obtain
the automatic consent provided by this rev-
enue procedure, provided the taxpayer at-
taches Form 3115 to an amended return for
the year of change and otherwise complies
with § 6.02(3)(b)(i) of Rev. Proc. 2002–9.
.05Example. The following example
illustrates the transition rules of section 6
of this revenue procedure:
Y corporation, a calendar year taxpayer that uses
the accrual method of accounting, made, for the tax-
able year ending December 31, 2001, an unauthorized
change in method of accounting to use the “one-year
rule” allowed to the taxpayer inU.S. Freightways
Corp. v. Commissioner. On January 15, 2004, Y
filed a Form 3115, for the taxable year ending De-
cember 31, 2003, to change to a method of account-
ing provided in the final regulations. As described
in section 4.03(1) of this revenue procedure, Y made
an unauthorized change in method of accounting to
a method of accounting provided in the final regula-
tions for a taxable year for which the due date of the
federal income tax return (including extensions, re-
gardless of whether such extension is automatic and
whether or not actually requested) is after January 24,
2002. Y is eligible to use the automatic consent pro-
cedures provided in this revenue procedure to obtain
the Commissioner’s consent to change to a method
of accounting provided in the final regulations only
if Y changes back to its prior method of accounting
for expenses that were deducted under the “one-year
rule” by amending its federal income tax returns for
its 2001 and 2002 taxable years. In accordance with
section 6.01 of this revenue procedure, Y must file
by September 15, 2004, a new Form 3115 for the tax-
able year ending December 31, 2003, that complies
with this revenue procedure, including the require-
ment under section 4.02(6) of this revenue procedure
that Y attach a written statement signed under penal-
ties of perjury confirming that Y has filed amended
returns pursuant to section 4.03 of this revenue pro-
cedure. Alternatively, in lieu of filing a new Form
3115, Y may comply with the requirements of sec-
tion 6.02 of this revenue procedure by preparing and
filing the written statement described in section 6.02
of this revenue procedure that includes all of the in-
formationnecessarytocomplywiththisrevenuepro-
cedure for the same change in method of accounting
included in the Form 3115 that was not included in
the original filing (including the requirement that Y
include a written statement signed under penalties of
perjury that Y has filed amended returns pursuant to
section4.03ofthisrevenue procedure).
SECTI
ON 7. EFFECT ON OTHER
DOCUM
ENTS
.01 Rev. Proc. 2002–9 is modified
and amplified to include these automatic
changes in method ofaccounting in section
3 of the APPENDIX.
.02 Announcement 93–60, 1993–16
I.R.B. 9, is obsoleted.
SEC
TION 8. EFFECTIVE DATE
This revenue procedure is effective for
a taxpayer’s first taxable year ending on or
after December 31, 2003.
2004-16 I.R.B.789April 19, 2004

SECTION 9. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Grace Matuszeski of the As-
sociate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, call
Ms. Matuszeski at (202) 622–7900 (not a
toll-free call).
26 CFR 601.601: Rules and regulations.
(Also, Part I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103A–2.)
Rev. Proc. 2004–24
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance with respect to the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage
bonds, as defined in § 143(a) of the Inter-
nal Revenue Code, and issuers of mortgage
credit certificates, as defined in § 25(c), in
computing the housing cost/income ratio
described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any pri-
vate activity bond that is not a qualified
bond (within the meaning of § 141). Sec-
tion 141(e) provides that the term “qual-
ified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap re-
quirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mort-
gage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of sub-
sections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
meet the private business tests of para-
graphs(1)and(2)of§141(b);and(iv)
with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of prin-
cipal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repay-
ment) is received to redeem bonds that are
part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing
may be provided by qualified mortgage
bonds. Section 25(c)(2)(A)(iii)(IV) pro-
vides that recipients of mortgage credit
certificates must meet the income re-
quirements of § 143(f). Generally, under
§§ 143(f)(1) and 25(c)(2)(A)(iii)(IV),
these income requirements are met only
if all owner-financing under a qualified
mortgage bond and all certified indebt-
edness amounts under a mortgage credit
certificate program are provided to mort-
gagors whose family income is 115 percent
or less of the applicable median family in-
come. Under § 143(f)(6), the income
limitation is reduced to 100 percent of the
applicable median family income if there
are fewer than three individuals in the
family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”
means the greater of (A) the area median
gross income for the area in which the res-
idence is located, or (B) the statewide me-
dian gross income for the state in which the
residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limita-
tions in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applica-
ble housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new hous-
ing average purchase price for the United
States) or the existinghousing price ratio
(existing housing average area purchase
price divided by the existing housing aver-
age purchase price for the United States),
whichever results in the housing cost/in-
come ratio being closer to 1. This income
adjustment applies only to bonds issued,
and nonissued bond amounts elected, after
December 31, 1988.See§ 4005(h) of the
Technical and Miscellaneous Revenue Act
of 1988, 1988–3 C.B. 1, 311 (1988).
.06 The Department of Housing and
Urban Development (HUD) has com-
puted the median gross income for the
United States, the states, and statisti-
cal areas within the states. The income
information was released to the HUD re-
gional offices on January 28, 2004, and
may be obtained by calling the HUD
reference service at 1–800–245–2691.
The income information is also avail-
able at HUD’s World Wide Web site,
http:huduser.org/datasets/il.html,which
provides a menu from which you may
select the year and type of data of interest.
The Internal Revenue Service annually
publishes the median gross income for the
United States.
.07 The most recent nationwide aver-
age purchase prices and average area pur-
chase price safe harbor limitations were
published on March 1, 2004, in Rev. Proc.
2004–18, 2004–9 I.R.B. 529.
SECTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use
$57,500 as the median gross income for
the United States.See§ 2.06 of this rev-
enue procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures released
by HUD on January 28, 2004.See§2.06
of this revenue procedure.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2003–29, 2003–1 C.B.
917, is obsolete except as provided in
§ 5.02 of this revenue procedure.
.02 This revenue procedure does not af-
fect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those ef-
April 19, 20047902004-16 I.R.B.

fective date provisions will remain opera-
tive at least until the Service publishes a
new revenue ruling that conforms the ap-
proach to effective dates set forth in Rev.
Rul. 86–124 to the general approach taken
in this revenue procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specified in section 3 of this revenue
procedure for commitments to provide fi-
nancing that are made, or (if the purchase
precedes the financing commitment) for
residences that are purchased, in the pe-
riod that begins on January 28, 2004, and
ends on the date when these United States
and area median gross income figures are
rendered obsolete by a new revenue pro-
cedure.
.02 Notwithstanding section 5.01 of this
revenue procedure, issuers may continue
to rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2003–29 with respect to bonds orig-
inally sold and nonissued bond amounts
elected not later than May 19, 2004, if
the commitments or purchases described
in § 5.01 are made not later than July 18,
2004.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David White of the Office of
Assistant Chief Counsel (Exempt Organi-
zations/Employment Tax/Government En-
tities). For further information regarding
this revenue procedure, contact Mr. White
at (202) 622–3980 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also, Part I, §§ 401; 1.401(b)–1.)
Rev. Proc. 2004–25
SECTION 1. PURPOSE
This revenue procedure extends the re-
medial amendment period under § 401(b)
of the Internal Revenue Code with respect
to certain disqualifying provisions until the
end of the remedial amendment period for
the Economic Growth and Tax Relief Rec-
onciliation Act of 2001, Pub. L. 107–16,
(EGTRRA). This extension applies to all
disqualifying provisions of new plans, that
is, plans that have been put into effect after
December 31, 2001, and to all disqualify-
ing provisions arising from a plan amend-
ment adopted after December 31, 2001.
SECTION 2. BACKGROUND
.01 Section 401(b) provides a reme-
dial amendment period during which
an amendment to a disqualifying provi-
sion may be made retroactively effective,
under certain circumstances, to comply
with the requirements of § 401(a). Sec-
tion 1.401(b)–1(b)(1)of the Income Tax
Regulations provides that a disqualifying
provision includes a provision of a new
plan, the absence of a provision from a
new plan, or an amendment to an existing
plan which causes the plan to fail to satisfy
the requirements of the Code applicable
to the qualification of the plan as of the
date the plan or amendment is first made
effective.
.02 As provided in § 1.401(b)–1(d),
the remedial amendment period for a
disqualifying provision described in
§ 1.401(b)–1(b)(1)begins, in the case
of a provision of, or absence of a pro-
vision from, a new plan, on the date the
plan is put into effect, and, in the case of
an amendment to an existing plan, on the
date the plan amendment is adopted or put
into effect (whichever is earlier). Gen-
erally, the remedial amendment period
for a disqualifying provision described
in § 1.401(b)–1(b)(1)ends with the due
date (including extensions) for filing the
income tax return for the employer’s tax
year that includes, in the case of a provi-
sion of, or absence of a provision from, a
new plan, the date the plan is put into ef-
fect, or, in the case of an amendment to an
existing plan, the date the plan amendment
is adopted or put into effect (whichever
is later). Section 1.401(b)–1(f) grants the
Commissioner the discretion to extend the
remedial amendment period.
.03 Section 1.401(b)–1(b)(3)provides
that the Commissioner may also designate
as a disqualifying provision under § 401(b)
a plan provision that either (1) results in
the failure of the plan to satisfy the qualifi-
cation requirements of the Code by reason
of a change in those requirements, or (2)
is integral to a qualification requirement
that has been changed. Pursuant to this
authority, Notice 2001–42, 2001–2 C.B.
70, provides a remedial amendment period
under § 401(b), ending no earlier than the
end of the 2005 plan year, in which any
needed retroactive remedial plan amend-
ments for EGTRRA must be adopted (the
EGTRRA remedial amendment period).
The availability of the EGTRRA remedial
amendment period is conditioned on the
timely adoption of required good faith
EGTRRA plan amendments. In general, a
good faith EGTRRA plan amendment is
adopted timely if it is adopted by the later
of the end of the plan year that includes
the effective date of the EGTRRA change
or the end of the plan’s GUST remedial
amendment period.
1
SECTION 3. EXTENSION OF
REMEDIAL AMENDMENT PERIOD
FOR DISQUALIFYING PROVISIONS
AFTER DECEMBER 31, 2001
.01 The remedial amendment period
with respect to disqualifying provisions
described in § 1.401(b)–1(b)(1)thatare
put into effect (in the case of new plans) or
adopted (in the case of existing plans) af-
ter December 31, 2001, is extended to the
end of the EGTRRA remedial amendment
period. Thus, the remedial amendment
period with respect to all disqualifying
provisions of new plans, that is, plans that
have been put into effect after Decem-
ber 31, 2001, and all plan amendments
adopted after December 31, 2001, that
would cause an existing plan to become
disqualified, will not end earlier than the
EGTRRA remedial amendment period.
1
The term "GUST" refers to the following:
•the Uruguay Round Agreements Act, Pub. L. 103–465;
•the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103–353;
•the Small Business Job Protection Act of 1996, Pub. L. 104–188;
•the Taxpayer Relief Act of 1997, Pub. L. 105–34;
•the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105–206; and
•the Community Renewal Tax Relief Act of 2000, Pub. L. 106–554.
The GUST remedial amendment period generally ended on the later of February 28, 2002, or the end of a plan’s 2001 plan year. However, for certain plans eligible for an extended GUST
remedial amendment period under Rev. Proc. 2000–20, 2000–1C.B. 553, the period generally ended on September 30, 2003.
2004-16 I.R.B.791April 19, 2004

.02 The time by which good faith
EGTRRA plan amendments must be
adopted is not extended. Thus, for ex-
ample, in the case of an individually
designed plan that was put into effect dur-
ing 2002, if the required EGTRRA good
faith amendments were adopted by the
duedate(includingextensions) for filing
the employer’s 2002 income tax return
(assuming a calendar plan and tax year),
the remedial amendment period for all dis-
qualifying provisions of the plan, whether
or not related to EGTRRA, will end no
earlier than the end of the plan’s 2005 plan
year.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective
April 19, 2004.
DRAFTING INFORMATION
The principal author of this revenue
procedure is James Flannery of the Em-
ployee Plans, Tax Exempt and Govern-
ment Entities Division. For further in-
formation regarding this revenue proce-
dure, please contact the Employee Plans’
taxpayer assistance telephone service at
1–877–829–5500 (a toll-free number),
between the hours of 8:00 a.m. and 6:30
p.m. Eastern time, Monday through Fri-
day. Mr. Flannery may be reached at
1–202–283–9888 (not a toll-free number).
April 19, 20047922004-16 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Qualified Zone Academy
Bonds; Obligations of States
and Political Subdivisions
REG–121475–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that amend the final
regulations on qualified zone academy
bonds. These regulations provide guid-
ance to State and local governments that
issue qualified zone academy bonds and
to banks, insurance companies, and other
taxpayers that hold those bonds. These
regulations provide guidance on the max-
imum term, permissible use of proceeds,
and remedial actions for qualified zone
academy bonds. This document also pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
on this rule must be received by June 24,
2004. Requests to speak and outlines of
topics to be discussed at the public hear-
ing scheduled for July 21, 2004, at 10
a.m., must be received by July 12, 2004.
Comments on the collection of informa-
tion should be received by May 25, 2004.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–121475–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–121475–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the
IRS Internet site at:www.irs.gov/regs.
The public hearing will be held in room
7218, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Timothy L. Jones or Zoran Stojanovic,
(202) 622–3980; concerning submissions
of comments, the hearing, and requests
to be placed on the building access list to
attend the meeting, Guy R. Traynor, (202)
622–3693 (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
collection 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 Regulatory Affairs, Washington, DC
20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Of-
ficer, SE:W:CAR:MP:T:T:SP; Washing-
ton, DC 20224. 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
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (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 appli-
cation of automated collection techniques
or other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in §1.1397E–1(h).
This collection of information is required
by the IRS to verify compliance with sec-
tion 1397E. This information will be used
to identify issuers of qualified zone acad-
emy bonds that have established a defea-
sance escrow as a remedial action taken
because of failure to satisfy certain re-
quirements of section 1397E. The collec-
tionofinformationisrequiredtoobtainor
retain a benefit. The likely respondents are
states or local governments that issue qual-
ified zone academy bonds.
Estimated total annual reporting bur-
den: 3 hours.
Estimated average annual burden hours
per respondent: 30 minutes.
Estimated number of respondents: 6.
Estimated annual frequency of re-
sponses: varies.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Section 1397E(a) of the Internal Rev-
enue Code (Code) provides that an eligible
taxpayer (within the meaning of section
1397E(d)(6)) that holds a qualified zone
academy bond on a credit allowance date is
allowed a credit against federal income tax
for the taxable year that includes the credit
allowance date. In general, a qualified
zone academy bond is a bond issued by a
State or local government to finance cer-
tain eligible public school purposes under
section 1397E(d). Section 1397E(b) pro-
vides that the amount of the qualified zone
academy bond credit equals the product of
the credit rate and the face amount of the
bond held by the taxpayer on the credit al-
lowance date. Under section 1397E(b)(2),
the credit rate is determined by the Trea-
sury Department and equals the percent-
age that the Department estimates gener-
ally will permit the issuance of qualified
zone academy bonds without discount and
without interest cost to the issuer. Sec-
2004-16 I.R.B.793April 19, 2004

tion 1397E(f)(1) definescredit allowance
dateas the last day of the one-year period
beginning on the date of issuance of the
issue and the last day of each successive
one-year period thereafter. Under section
1397E(d)(3), the maximum term of a qual-
ified zone academy bond is determined by
the Treasury Department and equals the
term that the Department estimates will re-
sult in the present value of the obligation
to repay the principal on the bond being
equal to 50 percent of the face amount of
the bond.
Section 1397E(g) provides that the
amount of the qualified zone academy
bond credit allowed to the taxpayer is in-
cluded in the taxpayer’s gross income.
Section 1397E(e) imposes a national
limitation on the amount of qualified zone
academy bonds that may be issued for each
calendar year. The limitation is allocated
by the Treasury Department among the
states on the basis of their respective pop-
ulations of individuals below the poverty
line.
Temporary regulations (T.D. 8755,
1998–1 C.B. 653 [63 FR 671]) inter-
preting section 1397E were published on
January 7, 1998, and amended on July 1,
1999 (T.D. 8826, 1999–2, C.B. 107 [64 FR
35573]). Final regulations under section
1397E (T.D. 8903, 2000–2 C.B. 352 [65
FR 57732]) (the final regulations) were
published on September 26, 2000. This
document contains proposed regulations
(the proposed regulations) that would
amend the final regulations.
Explanation of Provisions
I.Maximum Term
Section 1397E(d)(3) provides that the
Secretary of the Treasury Department shall
determine, during each calendar month,
the maximum term for qualified zone
academy bonds issued during the follow-
ing calendar month. Section 1397E(d)(3)
states that the maximum term shall be the
term that the Secretary estimates will re-
sult in the present value of the obligation
to repay the principal on the bond being
equal to 50 percent of the face amount of
the bond. Section 1.1397E–1(d) of the fi-
nal regulations provides that the maximum
term for a qualified zone academy bond
is determined under section 1397E(d)(3)
by using a discount rate equal to 110 per-
cent of the long-term adjusted applicable
federal rate (AFR), compounded semi-an-
nually, for the month in which the bond is
issued. The IRS publishes the long-term
adjusted AFR each month in a revenue
ruling.
Section 1397E(b)(2) provides that the
Secretary shall determine, during each
calendar month, a credit rate for quali-
fied zone academy bonds issued during
the following calendar month. Section
1.1397E–1(b) provides that the Secretary
shall determine monthly (or more often
as deemed necessary by the Secretary)
the credit rate the Secretary estimates
generally will permit the issuance of a
qualified zone academy bond without
discount and without interest cost to the
issuer. Notice 99–35, 1999–2 C.B. 26, in-
dicates that, until further notice, the credit
rate for a qualified zone academy bond
will be published daily by the Bureau of
Public Debt on its Internet site for State
and Local Government Series securities
(http://www.publicdebt.treas.gov). Notice
99–35 also provides that the credit rate
shall be applied to a qualified zone acad-
emybondonthefirstdayonwhichthereis
a binding contract in writing for the sale or
exchange of the bond. Notice 99–35 states
that the credit rate will be determined by
the Treasury Department based on its esti-
mate of the yield on outstanding AA rated
corporate bonds of a similar maturity for
the business day immediately prior to the
date on which there is a binding contract
in writing for the sale or exchange of the
bond.
Questions have been raised regarding
the maximum term of a qualified zone
academy bond that issold in one month
and issued in another month. Section
1.1397E–1(d) provides that the maximum
term is determined based on the month in
which the bond is issued. However, under
Notice 99–35, the credit rate for a qual-
ified zone academy bond is determined
based on the first day on which there is
a binding contract in writing for the sale
or exchange of the bond. The credit rate
and maximum term should be determined
on the same day because the credit rate
for a bond depends on its maximum term.
Accordingly, the proposed regulations
amend §1.1397E–1(d) to provide that the
maximum term for a qualified zone acad-
emy bond is determined based on the first
day on which there is a binding contract
in writing for the sale or exchange of the
bond.
II.Use of Proceeds and Remedial Actions
A.In general
Section 1397E(d)(1)(A) provides that a
bond issued as part of an issue is a qualified
zone academy bond only if, among other
requirements, at least 95 percent of the pro-
ceeds of the issue are to be used for a qual-
ified purpose with respect to a qualified
zone academy established by an eligible
local education agency (as defined in sec-
tion 1397E(d)(4)(B)). Section 1397E(d)(5)
definesqualified purpose, with respect to
any qualified zone academy, as (i) rehabil-
itating or repairing the public school facil-
ity in which such academy is established,
(ii) providing equipment for use at such
academy, (iii) developing course materi-
als for education to be provided at such
academy, and (iv) training teachers and
other school personnel in such academy.
Section 1397E(d)(4)(A) definesqualified
zone academyas any public school (or aca-
demic program within a public school) that
is established by and operated under the
supervision of an eligible local education
agency to provide education or training be-
low the postsecondary level if: (1) the pub-
lic school or program is designed in coop-
eration with business in accordance with
section 1397E(d)(4)(A)(i); (2) students in
the public school or program will be sub-
ject to the same academic standards and
assessments as other students educated by
the eligible local education agency; (3) the
comprehensive education plan of the pub-
lic school or program is approved by the
eligible local education agency; and (4) the
public school is located in an empower-
ment zone or enterprise community (as de-
fined in section 1393), or there is a rea-
sonable expectation (as of the date of is-
suance of the bonds) that at least 35 per-
cent of the students attending the school or
participating in the program will be eligi-
ble for free or reduced-cost lunches under
the school lunch program established un-
der the Richard B. Russell National School
Lunch Act.
April 19, 20047942004-16 I.R.B.

B.Compliance with 95-percent test
1. In General
Comments have been received request-
ing guidance on compliance with the
95-percent test in section 1397E(d)(1)(A).
The proposed regulations provide that,
in general, an issue must satisfy three
requirements to comply with section
1397E(d)(1)(A). First, the issuer must
reasonably expect, as of the date of is-
suance of the issue, that at least 95 percent
of the proceeds of the issue will be ex-
pended with due diligence. Second, the
issuer must reasonably expect, as of the
date of issuance of the issue, that at least
95 percent of the proceeds of the issue
will be used for a qualified purpose with
respect to a qualified zone academy for
the entire term of the issue (without regard
to any redemption provision). Third, ex-
cept as otherwise provided in the remedial
action provisions of the proposed regula-
tions, discussed below, at least 95 percent
of the proceeds of the issue must actually
be used for a qualified purpose with re-
spect to a qualified zone academy for the
entire term of the issue (without regard to
any redemption provision). For these pur-
poses, any unspent proceeds are treated as
used for a qualified purpose with respect
to a qualified zone academy during any
period that the issuer reasonably expects
that those proceeds will be expended with
due diligence for a qualified purpose with
respect to a qualified zone academy.
2. Proceeds Expended for Rehabilitation,
Repair or Equipment
Section 1397E(d)(5)(A) and (B) pro-
vides that the termqualified purposewith
respect to any qualified zone academy in-
cludes rehabilitating or repairing the pub-
lic school facility in which such academy
is established, and providing equipment
for use at such academy. The proposed
regulations specify that, if proceeds of an
issue are expended for a purpose described
in section 1397E(d)(5)(A) or (B) with re-
spect to a qualified zone academy, then
those proceeds are treated as used for a
qualified purpose with respect to the acad-
emy during any period after such expen-
diture that (1) the property financed with
those proceeds is used for the purposes of
the academy and (2) the academy main-
tains its status as a qualified zone acad-
emy. For this purpose, the retirement from
service of financed property due to normal
wear or obsolescence does not cause the
property not to be used for a qualified pur-
pose with respect to a qualified zone acad-
emy.
3. Proceeds Expended to Develop Course
Materials or Train Teachers
Section 1397E(d)(5)(C) and (D) pro-
vides that the termqualified purposewith
respect to any qualified zone academy in-
cludes developing course materials for ed-
ucation to be provided at such academy,
and training teachers and other school per-
sonnel in such academy. The proposed
regulations provide that, if proceeds of an
issue are expended for a purpose described
in section 1397E(d)(5)(C) or (D) with re-
spect to a qualified zone academy, then
those proceeds are treated as used for a
qualified purpose with respect to the acad-
emy during any period after such expendi-
ture.
4. Special Rule for Determining Status as
Qualified Zone Academy
Section 1397E(d)(4)(A)(iv) provides
that a public school (or academic pro-
gram within a public school) is a qualified
zone academy only if, among other re-
quirements, the public school is located
in an empowerment zone or enterprise
community, or there is a reasonable ex-
pectation (as of the date of issuance of
the bonds) that at least 35 percent of the
students attending the school or partici-
pating in the program (as the case may be)
will be eligible for free or reduced-cost
lunches under the school lunch program
established under the Richard B. Russell
National School Lunch Act. For purposes
of determining whether an issue complies
with section 1397E(d)(4)(A)(iv), the pro-
posed regulations provide that a public
school is treated as located in an empow-
erment zone or enterprise community for
the entire term of the issue if the public
school is located in an empowerment zone
or enterprise community on the date of
issuance of the issue.
C.Remedial actions
1. In General
Comments have been received request-
ing guidance specifying remedial actions
that may be taken to cure a violation of the
95-percent test in section 1397E(d)(1)(A).
The proposed regulations specify two
remedial actions that may be taken in cer-
tain circumstances if less than 95 percent
of the proceeds of an issue is actually used
for a qualified purpose with respect to a
qualified zone academy. These remedial
actions are available only if the issuer rea-
sonably expected on the date of issuance of
the issue that: (1) at least 95 percent of the
proceeds of the issue would be expended
with due diligence; and (2) at least 95 per-
cent of the proceeds of the issue would be
used for a qualified purpose with respect
to a qualified zone academy for the entire
term of the issue (without regard to any re-
demption provision).
As discussed below, the two remedial
actions specified in the proposed regula-
tions are (1) redemption or defeasance of
the nonqualified bonds and (2) alternative
use of the disposition proceeds. If the
applicable requirements are met, there-
demption or defeasanceremedial action is
available to cure any failure to satisfy the
95-percent test that was not reasonably ex-
pected as of the date of issuance. Thealter-
native use of disposition proceedsremedial
action applies only to certain dispositions
of financed property for cash.
2. Redemption or Defeasance of
Nonqualified Bonds
Aredemption or defeasanceremedial
action is taken if: (1) all of the nonquali-
fied bonds of the issue (determined by ap-
plying the principles of §1.142–2(e)) are
redeemed within 90 days after the date
on which the failure to properly use pro-
ceeds occurs; (2) if any nonqualified bonds
of the issue are not redeemed within 90
days after the date on which the failure
to properly use proceeds occurs (the unre-
deemed nonqualifiedbonds), a defeasance
escrow is established for the unredeemed
nonqualified bonds within 90 days after
the date on which the failure to properly
use proceeds occurs; or (3) if the fail-
ure to properly use proceeds is a disposi-
tion of financed property described in sec-
2004-16 I.R.B.795April 19, 2004

tion 1397E(d)(5)(A) or (B) and the con-
sideration for the disposition is exclusively
cash, all of the disposition proceeds (as de-
fined in §1.141–12(c)(1)) are used within
90 days after the date of the disposition to
redeem, or establish a defeasance escrow
for, apro rataportion of the nonqualified
bonds of the issue.
For proceeds that are not spent, a failure
to properly use proceeds occurs on the ear-
lier of: (1) the first date on which the pub-
lic school (or academic program within the
public school) does not constitute a qual-
ified zone academy; and (2) the first date
on which the issuer reasonably expects that
less than 95 percent of the proceeds of
the issue will be expended with due dili-
gence for a qualified purpose with respect
to a qualified zone academy. For pro-
ceeds that have been spent for rehabilita-
tion, repair or equipment described in sec-
tion 1397E(d)(5)(A) or (B) with respect to
a qualified zone academy, a failure to prop-
erly use proceeds occurs on the earlier of:
(1) the first date on which the public school
(or academic program within the public
school) does not constitute a qualified zone
academy; and (2) the first date on which
an action is taken that causes less than 95
percent of the proceeds of the issue to be
used for a qualified purpose with respect to
a qualified zone academy. If proceeds have
been spent for course materials or train-
ing described in section 1397E(d)(5)(C) or
(D) with respect to a qualified zone acad-
emy, no event subsequent to such expen-
diture shall constitute a failure to properly
use such proceeds.
A defeasance escrow is defined as an
irrevocable escrow established to retire
bonds on the earliest call date after the
date on which the failure to properly use
proceeds occurs in an amount that is suffi-
cient to retire the bonds on that call date.
At least 90 percent of the weighted aver-
age amount in a defeasance escrow must
be invested in investments (as defined in
§1.148–1(b)), except that no amount in a
defeasance escrow may be invested in any
investment the obligor (or any person that
is a related party with respect to the obligor
within the meaning of §1.150–1(b)) of
which is a user of proceeds of the bonds.
All purchases or sales of an investment in
a defeasance escrow must be made at the
fair market value of the investment within
the meaning of §1.148–5(d)(6).
In addition, the issuer must pay to the
United States, at the same time and in
the same manner as rebate amounts are
required to be paid under §1.148–3 (or
at such other time or in such other man-
ner as the Commissioner may prescribe),
100 percent of the investment earnings on
amounts in the defeasance escrow. For this
purpose, the first computation period be-
ginsonthedateonwhichthefailureto
properly use proceeds occurs.
Proceeds of qualified zone academy
bonds (other than unspent proceeds of the
issue for which the failure to properly use
proceeds occurs) are not permitted to be
used to redeem or defease the nonqualified
bonds. The issuer must provide written
notice to the Commissioner of the estab-
lishment of the defeasance escrow within
90 days of the date the defeasance escrow
is established.
3. Alternative Use of the Disposition
Proceeds
Thealternative use of disposition
proceedsremedial action has four re-
quirements. First, the failure to properly
use proceeds must be a disposition of
financed property described in section
1397E(d)(5)(A) or (B) and the considera-
tion for the disposition must be exclusively
cash. Second, the issuer must reasonably
expect as of the date of the disposition that:
(1) all of the disposition proceeds, plus any
amounts received from investing the dis-
position proceeds, will be expended within
two years after the date of the disposition
for a qualified purpose with respect to a
qualified zone academy; or (2) to the ex-
tent not expected to be so expended, used
within 90 days after the date of the dispo-
sition to take aredemption or defeasance
remedial action. Third, the disposition
proceeds, plus any amounts received from
investing the disposition proceeds, must
be treated as proceeds for purposes of sec-
tion 1397E. Fourth, if all of the disposition
proceeds, plus any amounts received from
investing the disposition proceeds, are not
actually expended for a qualified purpose
within the two-year period beginning on
the date of the disposition (or used within
90 days after the date of the disposition to
take aredemption or defeasanceremedial
action), the remainder of such amounts
must be used within 90 days after the end
of that two-year period for aredemption
or defeasanceremedial action.
D.Definition of proceeds
In general, §1.148–1(b) defines sale
proceeds as any amounts actually or con-
structively received from the sale of an
issue, including amounts used to pay un-
derwriters’ discount or compensation. The
proposed regulations provide that, for pur-
poses of the qualified zone academy bond
provisions (other than the private busi-
ness contribution requirement, discussed
below), proceeds means sale proceeds as
defined in §1.148–1(b), plus any amounts
received from investing sale proceeds.
Thus, under the proposed regulations, the
requirement in section 1397E(d)(1)(A)
that at least 95 percent of the proceeds of
an issue be used for a qualified purpose
with respect to a qualified zone academy
is applied by taking into account not only
the sale proceeds of the issue, but also any
amounts received from investing those
sale proceeds.
Section 1397E(d)(1)(C)(ii) provides
that a bond is a qualified zone academy
bond only if, among other requirements,
the issuer certifies that it has written
assurances that the private business contri-
bution requirement of section 1397E(d)(2)
will be met with respect to the qualified
zone academy. Section 1397E(d)(2)(A)
provides that the private business contri-
bution requirement is met if the eligible
local education agency that established the
qualified zone academy has written com-
mitments from private entities to make
qualified contributions (as defined in sec-
tion 1397E(d)(2)(B)) having a present
value (as of the date of issuance of the
issue) of not less than ten percent of the
proceeds of the issue. The proposed reg-
ulations provide that, for purposes of the
private business contribution requirement
of section 1397E(d)(2), proceeds means
sale proceeds as defined in §1.148–1(b).
Thus, the private business contribution
requirement is applied by taking into ac-
count only the sale proceeds of the issue
without regard to any amounts received
or expected to be received from investing
those sale proceeds.
April 19, 20047962004-16 I.R.B.

E.Payment of principal, interest or
redemption price
The proposed regulations provide that
the use of proceeds of a bond to pay prin-
cipal, interest or redemption price of the
bond or another bond is not a qualified
purpose within the meaning of section
1397E(d)(5). Thus, the use of proceeds
of a bond to refund another bond is not
a qualified purpose. In addition, the use
of proceeds of a bond to fund a sinking
fund to repay the bond is not a qualified
purpose.
Proposed Effective Dates
The proposed regulations are proposed
to apply to bonds sold on or after the
date that is 60 days after publication of
final regulations in theFederal Reg-
ister(the effective date). Issuers may
apply the proposed regulations in whole,
but not in part, to bonds sold before the
effective date, except that: (1) issuers
may apply the proposed regulations with-
out regard to §1.1397E–1(h)(8) (relating
to the definition of proceeds) to bonds
sold before the effective date; and (2)
§1.1397E–1(d) (relating to the maximum
term of a qualified zone academy bond)
and §1.1397E–1(h)(2) (relating to reim-
bursement of expenditures with proceeds
of a qualified zone academy bond) may
not be applied to bonds issued before July
1, 1999.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations. It is hereby certified that the col-
lection of information in these regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties. As previously noted, it is estimated
that each year only six issuers of quali-
fied zone academy bonds will be required
to report the establishment of a defeasance
escrow, and the estimated burden of each
such reporting is only 30 minutes. In ad-
dition, the establishment of a defeasance
escrow need only be reported once. There-
fore, a regulatory flexibility analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
that are submitted timely (preferably a
signed original and eight copies) to the
IRS. The IRS and Treasury Department
request comments on the clarity of the pro-
posed regulations and how they may be
made easier to understand. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled for
July 21, 2004, at 10 a.m. in room 7218,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. Be-
cause of access restrictions, visitors will
not be admitted beyond the lobby more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments by June 24, 2004, and submit
an outline of the topics to be discussed and
the amount of time to be devoted to each
topic by July 12, 2004.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Comments are requested on all aspects
of the proposed regulations.
Drafting Information
The principal authors of these reg-
ulations are Timothy L. Jones and
Zoran Stojanovic, Office of Asso-
ciate Chief Counsel, IRS (Tax Ex-
empt and Governmental Entities), and
Stephen J. Watson, Office of Tax Policy,
Treasury Department. However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority26U.S.C.7805***
Par. 2. Section 1.1397E–1 is amended
by
1. Revising the last sentence in para-
graph (a).
2. Revising paragraphs (d) and (h).
3. Redesignating the text of paragraph
(k) as paragraph (k)(1) and adding a head-
ingfornewlydesignatedparagraph(k)(1).
4. Adding paragraph (k)(2).
The revisions and additions read as fol-
lows:
§1.1397E–1 Qualified zone academy
bonds.
(a)***Thissectionalsoprovidesother
rules for qualified zone academy bonds, in-
cluding rules governing the credit rate, the
private business contribution requirement,
the maximum term, use of proceeds, reme-
dial actions, and eligible issuers.
*****
(d)Maximum term. The maximum
term for a qualified zone academy bond
is determined under section 1397E(d)(3)
by using a discount rate equal to 110
percent of the long-term adjusted AFR,
compounded semi-annually, for the month
in which the bond is sold. The Internal
Revenue Service publishes this figure
each month in a revenue ruling that is pub-
lished in the Internal Revenue Bulletin.
See §601.601(d)(2)(ii)(b) of this chapter.
A bond is sold on the first day on which
there is a binding contract in writing for
the sale or exchange of the bond.
2004-16 I.R.B.797April 19, 2004

*****
(h)Use of proceeds—(1)In general.
Section 1397E(d)(1)(A) provides that a
bond issued as part of an issue is a qual-
ified zone academy bond only if, among
other requirements, at least 95 percent of
the proceeds of the issue are to be used
for a qualified purpose with respect to a
qualified zone academy established by
an eligible local education agency (as de-
fined in section 1397E(d)(4)(B)). Section
1397E(d)(5) definesqualified purpose,
with respect to any qualified zone acad-
emy, as rehabilitating or repairing the pub-
lic school facility in which such academy
is established, providing equipment for
use at such academy, developing course
materials for education to be provided at
such academy, and training teachers and
other school personnel in such academy.
Section 1397E(d)(4)(A) definesqualified
zone academyas any public school (or
academic program within a public school)
that is established by and operated under
the supervision of an eligible local ed-
ucation agency to provide education or
training below the postsecondary level
and that meets the requirements of section
1397E(d)(4)(A)(i), (ii), (iii) and (iv).
(2)Use of proceeds requirements.An
issue meets the requirements of section
1397E(d)(1)(A) only if—
(i) The issuer reasonably expects, as of
the date of issuance of the issue, that—
(A) At least 95 percent of the proceeds
of the issue will be expended with due dili-
gence; and
(B) At least 95 percent of the proceeds
of the issue will be used for a qualified pur-
pose with respect to a qualified zone acad-
emy for the entire term of the issue (with-
out regard to any redemption provision);
and
(ii) Except as otherwise provided in
paragraph (h)(7) of this section, at least
95 percent of the proceeds of the issue is
actually used for a qualified purpose with
respect to a qualified zone academy for
the entire term of the issue (without regard
to any redemption provision).
(3)Unspent proceeds. For purposes
of paragraphs (h)(2)(i)(B) and (h)(2)(ii) of
this section, unspent proceeds are treated
as used for a qualified purpose with respect
to a qualified zone academy during any pe-
riod that the issuer reasonably expects that
those proceeds will be expended with due
diligence for a qualified purpose with re-
spect to a qualified zone academy.
(4)Proceeds expended for rehabilita-
tion, repair or equipment—(i)In general.
Section 1397E(d)(5)(A) and (B) provides
that the termqualified purposewith re-
spect to any qualified zone academy in-
cludes rehabilitating or repairing the pub-
lic school facility in which such academy
is established, and providing equipment
for use at such academy. If proceeds of an
issue are expended for a purpose described
in section 1397E(d)(5)(A) or (B) with re-
spect to a qualified zone academy, then
those proceeds are treated as used for a
qualified purpose with respect to the acad-
emy during any period after such expendi-
ture that—
(A) The property financed with those
proceeds is used for the purposes of the
academy; and
(B) The academy maintains its status
as a qualified zone academy under section
1397E(d)(4).
(ii)Retirement from service.There-
tirement from service of financed property
due to normal wear or obsolescence does
not cause the property not to be used for a
qualified purpose with respect to a quali-
fied zone academy.
(5)Proceeds expended to develop
course materials or train teachers. Sec-
tion 1397E(d)(5)(C) and (D) provides that
the termqualified purposewith respect
to any qualified zone academy includes
developing course materials for education
to be provided at such academy, and train-
ing teachers and other school personnel in
such academy. If proceeds of an issue are
expended for a purpose described in sec-
tion 1397E(d)(5)(C) or (D) with respect
to a qualified zone academy, then those
proceeds are treated as used for a quali-
fied purpose with respect to the academy
during any period after such expenditure.
(6)Special rule for determining sta-
tusasqualifiedzoneacademy. Section
1397E(d)(4)(A)(iv) provides that a pub-
lic school (or academic program within a
public school) is a qualified zone acad-
emy only if, among other requirements, the
public school is located in an empower-
ment zone or enterprise community (as de-
fined in section 1393), or there is a rea-
sonable expectation (as of the date of is-
suance of the bonds) that at least 35 percent
of the students attending the school or par-
ticipating in the program (as the case may
be) will be eligible for free or reduced-cost
lunches under the school lunch program
established under the Richard B. Russell
National School Lunch Act. For purposes
of determining whether an issue complies
with section 1397E(d)(4)(A)(iv), a public
school is treated as located in an empower-
ment zone or enterprise community for the
entire term of the issue if the public school
is located in an empowerment zone or en-
terprise community on the date of issuance
of the issue.
(7)Remedial actions—(i)General
rule. If less than 95 percent of the pro-
ceeds of an issue is actually used for a
qualified purpose with respect to a qual-
ified zone academy, the issue will be
treated as meeting the requirements of
section 1397E(d)(1)(A) if the issue met
the requirements of paragraph (h)(2)(i) of
this section and a remedial action is taken
under paragraph (h)(7)(ii) or (iii) of this
section.
(ii)Redemption or defeasance—(A)In
general. A remedial action is taken un-
der this paragraph (h)(7)(ii) if the require-
ments of paragraphs (h)(7)(ii)(B) and (C)
of this section are met.
(B)Retirement of nonqualified
bonds—(1)In general. The requirements
of this paragraph (h)(7)(ii)(B) are met if—
(i) All of the nonqualified bonds of the
issue (determined by applying the princi-
ples of §1.142–2(e)) are redeemed within
90 days after the date on which the failure
to properly use proceeds occurs (as deter-
mined under paragraph (h)(7)(ii)(D) of this
section); or
(ii) If any nonqualified bonds of the is-
sue are not redeemed within 90 days after
the date on which the failure to properly
use proceeds occurs (the unredeemed non-
qualified bonds), a defeasance escrow is
established for the unredeemed nonquali-
fied bonds within 90 days after the date on
which the failure to properly use proceeds
occurs.
(2)Special rule for dispositions for
cash. If the failure to properly use pro-
ceeds is a disposition of financed property
described in section 1397E(d)(5)(A) or (B)
and the consideration for the disposition
is exclusively cash,the requirements of
this paragraph (h)(7)(ii)(B) are met if all
of the disposition proceeds (as defined in
§1.141–12(c)(1)) are used within 90 days
after the date of the disposition to redeem,
or establish a defeasance escrow for, apro
April 19, 20047982004-16 I.R.B.

rataportion of the nonqualified bonds of
the issue.
(3)Definition of defeasance escrow.
For purposes of this section, a defeasance
escrow is an irrevocable escrow estab-
lished to retire bonds on the earliest call
date after the date on which the failure to
properly use proceeds occurs in an amount
that is sufficient to retire the bonds on
that call date. At least 90 percent of the
weighted average amount in a defeasance
escrow must be invested in investments
(as defined in §1.148–1(b)), except that
no amount in a defeasance escrow may
be invested in any investment the obligor
(or any person that is a related party with
respect to the obligor within the meaning
of §1.150–1(b)) of which is a user of pro-
ceeds of the bonds. All purchases or sales
of an investment in a defeasance escrow
must be made at the fair market value
of the investment within the meaning of
§1.148–5(d)(6).
(C)Additional rules—(1)Limitation on
source of funding. Proceeds of qualified
zone academy bonds (other than unspent
proceeds of the issue for which the failure
to properly use proceeds occurs) must not
be used to redeem or defease nonqualified
bonds under paragraph (h)(7)(ii)(B) of this
section.
(2)Rebate requirement.Theissuer
must pay to the United States, at the
same time and in the same manner as
rebate amounts are required to be paid
under §1.148–3 (or at such other time
or in such other manner as the Commis-
sioner may prescribe), 100 percent of
the investment earnings on amounts in
a defeasance escrow established under
paragraph (h)(7)(ii)(B) of this section. For
this purpose, the first computation period
begins on the date on which the failure to
properly use proceeds occurs under para-
graph (h)(7)(ii)(D) of this section.
(3)Notice of defeasance.Theis-
suer must provide written notice to the
Commissioner, at the place designated in
§1.150–5(a), of the establishment of the
defeasance escrow within 90 days of the
date the defeasance escrow is established.
(D)When a failure to properly use pro-
ceeds occurs—(1)Proceeds not spent.For
proceeds that are not spent, a failure to
properly use proceeds occurs on the earlier
of—
(i) The first date on which the public
school (or academic program within the
public school) does not constitute a qual-
ified zone academy; and
(ii) The first date on which the issuer
reasonably expects that less than 95 per-
cent of the proceeds of the issue will be ex-
pended with due diligence for a qualified
purpose with respect to a qualified zone
academy.
(2)Proceeds spent for rehabilitation,
repair or equipment. For proceeds that
have been spent for a purpose described in
section 1397E(d)(5)(A) or (B) with respect
to a qualified zone academy, a failure to
properly use proceeds occurs on the earlier
of—
(i) The first date on which the public
school (or academic program within the
public school) does not constitute a qual-
ified zone academy; and
(ii) The first date on which an action is
taken that causes less than 95 percent of
the proceeds of the issue to be used for a
qualified purpose with respect to a quali-
fied zone academy.
(3)Proceeds spent for course materi-
alsortraining. If proceeds have been
spent for a purpose described in section
1397E(d)(5)(C) or (D) with respect to a
qualified zone academy, no event subse-
quent to such expenditure shall constitute
a failure to properly use such proceeds.
(iii)Alternative use of disposition pro-
ceeds. A remedial action is taken un-
der this paragraph (h)(7)(iii) if all of the
requirements of paragraphs (h)(7)(iii)(A)
through (D) are met—
(A) The failure to properly use pro-
ceeds (as determined under paragraph
(h)(7)(ii)(D) of this section) is a dispo-
sition of financed property described in
section 1397E(d)(5)(A) or (B) and the
consideration for the disposition is exclu-
sively cash;
(B) The issuer reasonably expects as of
the date of the disposition that—
(1) All of the disposition proceeds (as
defined in §1.141–12(c)(1)), plus any
amounts received from investing the dis-
position proceeds, will be expended within
two years after the date of the disposition
for a qualified purpose with respect to a
qualified zone academy; or
(2) To the extent not expected to be so
expended, used within 90 days after the
date of the disposition to redeem or defease
bonds in a manner that meets the require-
ments of paragraph (h)(7)(ii) of this sec-
tion;
(C) The disposition proceeds, plus any
amounts received from investing the dis-
position proceeds, are treated as proceeds
for purposes of section 1397E; and
(D) If all of the disposition proceeds,
plus any amounts received from investing
the disposition proceeds, are not actually
used in the manner described in paragraph
(h)(7)(iii)(B) of this section, the remain-
der of such amounts are used within 90
days after the end of the two-year period
described in paragraph (h)(7)(iii)(B)(1)of
this section for a remedial action that meets
the requirements of paragraph (h)(7)(ii) of
this section.
(iv)Allocating disposition proceeds
among multiple funding sources.For
purposes of this paragraph (h)(7), if prop-
erty has been financed with an issue of
qualified zone academy bonds and one
or more other funding sources, any dis-
position proceeds from that property are
allocated to the issue under the principles
of §1.141–12(c)(3).
(8)Definition of proceeds—(i)In gen-
eral. Except as provided in paragraph
(h)(8)(ii) of this section, for purposes
of section 1397E and this section, pro-
ceeds means sale proceeds as defined in
§1.148–1(b), plus any amounts received
from investing sale proceeds.
(ii)Private business contribution re-
quirement. For purposes of the private
business contribution requirement of sec-
tion 1397E(d)(2), proceeds means sale
proceeds as defined in §1.148–1(b).
(9)Payment of principal, interest or re-
demption price. The use of proceeds of a
bond to pay principal, interest or redemp-
tion price of the bond or another bond is
not a qualified purpose within the mean-
ing of section 1397E(d)(5).
(10)Reimbursement. An expenditure
for a qualified purpose may be reimbursed
with proceeds of a qualified zone academy
bond. For this purpose, rules similar to
those in §1.150–2 shall apply.
*****
(k)Effective dates—(1)In general.***
(2)Special effective dates for para-
graphs (d) and (h)—(i)In general. Except
as otherwise provided in this paragraph
(k)(2), paragraphs (d) and (h) of this sec-
tion apply to bonds sold on or after the
date that is 60 days after publication of
final regulations in theFederal Register.
2004-16 I.R.B.799April 19, 2004

(ii)Permissive application—(A)In
general. Except as provided in paragraphs
(k)(2)(ii)(B) and (C) of this section, is-
suers may apply paragraphs (d) and (h) of
this section in whole, but not in part, to
bonds sold before the date that is 60 days
after publication of final regulations in the
Federal Register.
(B)Definition of proceeds. Issuers may
apply paragraphs (d) and (h) of this sec-
tion, without regard to the definition of
proceeds in paragraph (h)(8) of this sec-
tion, to bonds sold before the date that is
60 days after publication of final regula-
tions in theFederal Register.
(C)Bonds issued before July 1, 1999.
Paragraphs (d) and (h)(10) of this section
may not be applied to bonds issued before
July 1, 1999.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 25,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 26, 2004, 69 F.R. 15747)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Section 411(d)(6) Protected
Benefits
REG–128309–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations providing guidance on
the conditions under which a plan amend-
ment may eliminate or reduce an early
retirement benefit, a retirement-type sub-
sidy, or an optional form of benefit (sec-
tion 411(d)(6)(B) protected benefits) with
respect to a participant’s benefits attrib-
utable to service before the amendment.
The proposed regulations would also pro-
vide guidance concerning how the notice
requirements of section4980Fapplywith
respect to such plan amendments. These
proposed regulations would generally af-
fect plan sponsors of, and participants in,
qualified retirement plans. This document
also provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by June 22, 2004.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for June 24, 2004, at 10
a.m. must be received by June 3, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–128309–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington
DC 20044. Submissions may be hand
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–128309–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically to the IRS
Internet site atwww.irs.gov/regs. The pub-
lichearingwillbeheldintheAuditorium,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Pamela R. Kinard at (202)
622–6060; concerning submissions of
comments, the hearing, and the requests
to be placed on the building access list to
attend the hearing, contact Guy Traynor,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR parts 1 and 54
under sections 411(d)(6) and 4980F of
the Internal Revenue Code (Code) and
section 204(g) and (h) of the Employee
Retirement Income Security Act of 1974
(ERISA). These proposed regulations,
when finalized, would revise Treasury
regulations §1.411(d)–3 to reflect changes
to section 411(d)(6) made by the Economic
Growth and Tax Relief Reconciliation Act
of 2001, Public Law 107–16 (115 Stat.
38) (EGTRRA). These proposed regula-
tions would also include rules relating to
changes to section 411(d)(6) made by the
Retirement Equity Act of 1984, Public
Law 98–397 (98 Stat. 1426) (REA). In ad-
dition, these proposed regulations would
amend §54.4980F–1(b), Q&A–8, relating
to the notice requirement for certain plan
amendments that reduce early retirement
benefits or retirement-type subsidies.
Section 411(d)(6)(A) provides that a
plan is treated as not satisfying the re-
quirements of section 411 if the accrued
benefit of a participant is decreased by
an amendment of the plan, other than an
amendment described in section 412(c)(8)
of the Code or section 4281 of ERISA.
Section 411(a)(7) generally defines the
term “accrued benefit” as meaning, for
a defined benefit plan, the employee’s
accrued benefit determined under the
plan and, except as provided in section
411(c)(3), expressed in the form of an
annual benefit commencing at normal re-
tirement age. Under section 411(c)(3),
if an employee’s accrued benefit under a
defined benefit plan is to be determined
as an amount other than an annual benefit
commencing at normal retirement age, the
employee’s accrued benefit is the actuarial
equivalent of such benefit.
Section 301(a) of REA amended sec-
tion 411(d)(6) to add subparagraph (B),
which provides that a plan amendment that
has the effect of eliminating or reducing
an early retirement benefit or a retirement-
type subsidy, or eliminating an optional
form of benefit, with respect to benefits
attributable to service before the amend-
ment is treated as impermissibly reduc-
ing accrued benefits. For a retirement-
type subsidy, this protection applies only
with respect to an employee who satis-
fies the preamendment conditions for the
subsidy (either before or after the amend-
ment). Section 411(d)(6)(B) also autho-
rizes the Secretary to provide, through reg-
ulations, that section 411(d)(6)(B) does not
apply to any plan amendment that elimi-
nates optional forms of benefit (other than
a plan amendment that has the effect of
eliminating or reducing an early retirement
benefit or a retirement-type subsidy).
On July 11, 1988, final regulations
(T.D. 8212, 1988–2 C.B. 83 [53 FR 26050])
under section 411(d)(6) were published
in theFederal Register.Section
1.411(d)–4,Q&A–1(a),of the
Regulations provides that section
411(d)(6) protects certain benefits, to the
extent they have accrued, so that such
benefits cannot be reduced or eliminated
by plan amendment, except to the extent
permitted by regulations.Section
April 19, 20048002004-16 I.R.B.

1.411(d)–4 provides rules for when a plan
may be amended to reduce or eliminate a
section 411(d)(6) protected benefit.
Section 4980F of the Code and sec-
tion 204(h) of ERISA each require that
a plan administrator must give notice of
a plan amendment to affected plan par-
ticipants and beneficiaries when the plan
amendment provides for a significant re-
duction in the rate of future benefit accrual
or the elimination or significant reduction
in an early retirement benefit or a retire-
ment-type subsidy.
Section 645(b)(1) of EGTRRA
amended section 411(d)(6)(B) of the Code
to direct the Secretary to issue regulations
providing that section 411(d)(6)(B) does
not apply to any amendment that reduces
or eliminates early retirement benefits
or retirement-type subsidies that create
significant burdens or complexities for
the plan and plan participants unless such
amendment adversely affects the rights of
any participant in a more thande minimis
manner. Section 645(b)(2) of EGTRRA
also amended section 204(g)(2) of ERISA
to include a similar directive for purposes
of section 204(g) of ERISA, which pro-
vides a rule parallel to section 411(d)(6)
of the Code.
Under section 101 of Reorganization
Plan No. 4 of 1978 (43 FR 47713), the
Secretary of the Treasury has interpretive
jurisdiction over the subject matter ad-
dressed in these regulations for purposes
of ERISA, as well as the Code. Further,
section 204(g) of ERISA authorizes the
Secretary of the Treasury to issue the reg-
ulations under section 204(g) of ERISA,
relating to the permissible elimination of
optional forms of benefit. Thus, these
proposed Treasury regulations issued un-
der sections 411(d)(6) and 4980F of the
Code apply as well for purposes of section
204(g) and (h) of ERISA, and respond to
the EGTRRA directive for purposes of
both section 411(d)(6) of the Code and
section 204(g) of ERISA.
In Notice 2002–46, 2002–2 C.B. 96,
Treasury and the IRS requested comments
regarding the possible approaches for
eliminating optional forms of benefit from
defined benefit plans,including comments
on whether the retention of certain op-
tional forms of benefit under a defined
benefit plan results in significant burdens
or complexities for plan sponsors and par-
ticipants, and the conditions under which
these optional forms of benefit are ofde
minimisvaluetoplanparticipants.InNo-
tice 2003–10, 2003–1 C.B. 369, Treasury
and the IRS announced that regulations
would be proposed to provide general
guidance relating to early retirement ben-
efits and retirement-type subsidies under
section 411(d)(6)(B). Comments were re-
quested on the guidance that should be
provided with respect to early retirement
benefits and retirement-type subsidies, as
well as whether the proposed regulations
should permit plan amendments that elim-
inate or reduce early retirement benefits or
retirement-type subsidies that are contin-
gent on unpredictable events. A number
of helpful comments were received in
response to these notices and those com-
ments were considered in drafting these
proposed regulations.
Explanation of Provisions
General Overview
The proposed regulations would imple-
ment the provisions of section 645(b)(1)
of EGTRRA by permitting the elimina-
tion of early retirement benefits, retire-
ment-type subsidies, and optional forms
of benefit under a plan which create sig-
nificant burdens or complexities for the
plan and its participants, but only if the
elimination does not adversely affect the
rights of any participant in a more than
de minimismanner. These rules relating
to the permissible elimination of section
411(d)(6)(B) protected benefits are in ad-
dition to the rules permitting elimination of
section 411(d)(6) protected benefits under
§1.411(d)–4. These proposed regulations
would also include general guidance on
section 411(d)(6), including the meaning
of terms used therein, the scope of the sec-
tion 411(d)(6)(A) protection against plan
amendments decreasing a participant’s ac-
crued benefit, and the scope of the sec-
tion 411(d)(6)(B) protection for early re-
tirement benefits, retirement-type subsi-
dies, and optional forms of benefit.
Scope of Section 411(d)(6) Protections
The proposed regulations would re-
vise the existing final regulations at
§1.411(d)–3. The rules under those
regulations would generally be retained
but would be updated to reflect statu-
tory changes such as the elimination of
class-year vesting and the enactment of
section 411(d)(6)(B).
The proposed regulations also would
take into account and respond to judicial
decisions interpreting section 411(d)(6)
(or its parallel provision at section 204(g)
of ERISA).
1
For example, the proposed
regulations would provide that section
411(d)(6) protection applies to a partic-
ipant’s entire accrued benefit without
regard to whether any portion of that
accrued benefit is accrued before a par-
ticipant’s severance from employment or
is included in the accrued benefit of the
participant pursuant to a plan amendment
adopted after the participant’s severance
from employment.
2
The proposed regulations would retain
the rules in the existing regulations that
provide that, for purposes of determining
whether or not any participant’s accrued
benefit is decreased, all plan amendments
affecting, directly or indirectly, the com-
putation of accrued benefits are taken into
account, and that, in determining whether
a reduction has occurred, all amendments
with the same applicable amendment
date (the later of the adoption date or the
effective date) are treated as one plan
amendment, and would provide that these
rules apply to section 411(d)(6)(B) pro-
tected benefits as well. Thus, for example,
if there are two amendments with the
same applicable amendment date, and one
amendment increases accrued benefits
1
SeeBellas v. CBS, Inc., 221 F. 3d 517 (3
rd
Cir. 2000),cert. denied, 531 U.S. 1104 (2001) (involuntary separation benefit is bothan early retirement benefit and a retirement-type subsidy
to the extent it provides for the payment of normal retirement benefits that continue beyond normal retirement age),Board of Trustees of the Sheet Metal Workers’ National Pension Fund
v. C.I.R., 318 F.3d 599 (4
th
Cir. 2003) (a COLA benefit granted by a plan amendment is not an accrued benefit for participants that retired before the effective date of the amendment and,
thus, the subsequent plan amendment eliminating the COLA benefit did not violate the anti-cutback rule of section 411(d)(6)),Michael v. Riverside Cement, 266 F.3d 1023 (9
th
Cir. 2001)
(a plan amendment providing for an actuarial offset of early retirement benefits previously received by a rehire upon subsequent retirement violates ERISA section 204(g), even though the
net effect of the amendment is an increase in the early retirement benefit of the participant), andHeinz v. Central Laborers’ Pension Fund, 303 F.3d 802 (7
th
Cir. 2002) ),cert. granted,72
U.S.L.W. 3370 (U.S. Dec. 1, 2003) (a pension plan offering fully subsidizedearly retirement benefits violated section 204(g) of ERISA when the plan was amended to expand the definition
of disqualifying employment for purposes of applying its suspension of benefits rule).
2
This is contrary to the analysis inBoard of Trustees of the Sheet Metal Workers’ National Pension Fund v. C.I.R..
2004-16 I.R.B.801April 19, 2004

and the other amendment decreases the
early retirement factors that are used to
determine the early retirement annuity, the
amendments are treated as one amendment
and only violate section 411(d)(6) if the
net dollar amount of the early retirement
annuity after the two amendments is lower
at any point in time than it would have
been without the two amendments.
3
The proposed regulations would also
provide that a plan amendment violates
the requirements of section 411(d)(6) if
it is one of a series of plan amendments
made at different times that, when taken to-
gether, have the effect of reducing or elim-
inating a section 411(d)(6) protected ben-
efit in a manner that would otherwise be
prohibited if accomplished through a sin-
gle amendment. The proposed regulations,
however, do not address the interaction of
the vesting rules in section 411(a) with sec-
tion 411(d)(6). This topic, which is cur-
rently before the Supreme Court inCen-
tral Laborers’ Pension Fund v. Heinz,No.
02–891, is instead reserved for future guid-
ance.
The proposed regulations also provide
a number of clarifications regarding sec-
tion 411(d)(6)(B) protected benefits. The
proposed regulations would clarify that,
if a plan amendment merely replaces an
optional form of benefit with another op-
tional form of benefit that is of inherently
equal or greater value, the amendment is
not to be treated as eliminating an optional
form of benefit, or eliminating or reduc-
ing an early retirement benefit or retire-
ment-type subsidy. For example, a change
in the method of calculating a joint and
survivor annuity from using a 90% adjust-
ment factor on account of the survivorship
payment at particular ages on the annuity
starting date to using a 91% adjustment
factor at the same ages on the annuity start-
ing date is not treated as an elimination of
an optional form of benefit.
The proposed regulations would re-
flect the rules in the existing regulation
§1.411(d)–4, Q&A–1(d), that ancillary
benefits, other rights or features, and any
other benefits not described in section
411(d)(6) are not benefits protected under
section 411(d)(6). The definitions of op-
tional form of benefit, ancillary benefit,
and other right or feature have been drawn
from the definitions in §1.401(a)(4)–4. In
addition the proposed regulations would
provide a definition of early retirement
benefit, retirement-type benefit, and re-
tirement-type subsidy. See the discus-
sion in this preamble under the heading
Retirement-Type Subsidies and Contin-
gent-Event Benefits.
Permitted Elimination of Benefits that
are Burdensome or Complex and of De
Minimis Value to Participants
Section 411(d)(6)(B) of the Code, as
amended by EGTRRA, directs the Secre-
tary to issue regulations providing that sec-
tion 411(d)(6)(B) does not apply to any
amendment that reduces or eliminates ben-
efits or subsidies that create significant
burdens or complexities for the plan and
plan participants unless such amendment
adversely affects the rights of any partici-
pant in a more thande minimismanner.
The EGTRRA Conference Report pro-
vides that it is intended that the factors
to be considered in determining whether a
plan amendment has more than ade min-
imisadverse effect on any participant will
include: (1) all of the participant’s early
retirement benefits, retirement-type subsi-
dies, and optional forms of benefit that
are reduced or eliminated by the amend-
ment; (2) the extent to which early retire-
ment benefits, retirement-type subsidies,
and optional forms of benefit in effect with
respect to a participant after the amend-
ment’s effective date provide rights that
are comparable to the rights that are re-
duced or eliminated by the plan amend-
ment; (3) the number of years before the
participant attains normal retirement age
under the plan (or early retirement age, as
applicable); (4) the size of the participant’s
benefit that is affected by the plan amend-
ment, in relation to the amount of the par-
ticipant’s compensation; and (5) the num-
ber of years before the plan amendment is
effective. H.R. Conf. Rep. 107–84, at 254
(2001).
The proposed regulations would gener-
ally permit an employer to eliminate a sec-
tion 411(d)(6)(B) protected benefit if the
eliminated optional form of benefit is re-
dundant with respect to a retained optional
form of benefit. Additional rules would
apply to an amendment that, in addition
to eliminating an optional form of bene-
fit, also eliminates an early retirement ben-
efit or a retirement-type subsidy. Alter-
natively, an employer would be permitted
to eliminate a section 411(d)(6)(B) pro-
tected benefit if the plan amendment was
not effective for benefits that begin in the
next four years and certain core options are
made available to plan participants.
The concepts of allowing an employer
to eliminate a redundant optional form of
benefit and allowing an employer to elim-
inate all optional forms of benefit that fall
outside a list of core optional forms of
benefit were included in suggestions made
by commentators who suggested that the
elimination of an optional form of benefit
would not adversely affect the right of a
plan participant in more than ade minimis
manner as long as the plan offers other op-
tional forms of benefit that are sufficiently
similar to the eliminated optional form of
benefit. These concepts also reflect factors
identified in the legislative history (e.g.,
the extent to which section 411(d)(6)(B)
protected benefits that are available to a
participant after the amendment’s effective
date provide rights that are comparable to
the rights of section 411(d)(6)(B) protected
benefits that are reduced or eliminated by
the plan amendment).
The Treasury and IRS also received
comments from practitioners suggesting
that the proposed regulations provide a
utilization test, which would permit the
elimination of an optional form of benefit
if the employer can show that the benefit
has been utilized rarely by plan partici-
pants. These commentators suggested that
the lack of utilization is compelling evi-
dence that the elimination of the optional
form of benefit would not adversely affect
the rights of any plan participant in more
than ade minimismanner. The Treasury
and IRS did not include a utilization test
in the proposed regulations because of,
among other reasons, the difficulty in ap-
plying a utilization standard in situations
where there are few retirements (e.g.,a
small plan).
Under the proposed regulations, the de-
termination of whether the optional forms
of benefit that remain after an amendment
are sufficiently similar to an eliminated op-
tional form of benefit such that its elimina-
tion would not adversely affect the rights
of any plan participant in more than ade
3
This is contrary to the analysis inMichael v. Riverside Cement.
April 19, 20048022004-16 I.R.B.

minimismanner depends on a number of
factors. These factors include the extent
to which the remaining optional forms of
benefit provide the same essential charac-
teristics as the eliminated optional form
of benefit; whether the remaining optional
forms of benefit are available on the same
date and are actuarially equivalent to the
eliminated optional form of benefit; and
the period of time before the eliminated
optional form of benefit could have com-
menced.
The rules in the proposed regulations
would require any amendment eliminating
an optional form of benefit to have a de-
layed effective date. This requirement re-
flects some of the relevant factors listed in
the legislative history (i.e., the number of
years until the participant reaches retire-
ment age and the number of years until the
amendment is effective). A participant’s
expectations as to which optional forms of
benefit will be available are more settled
for a participant who is closer to commenc-
ing benefits. Therefore, whether any re-
maining optional form of benefit is suf-
ficiently similar to an eliminated optional
form of benefit so that the substitution of
one for the other does not adversely affect
the right of a plan participant in more than
ade minimismanner depends in part on
how far in the future the participant is ex-
pecting to commence benefits.
The Treasury and IRS believe that the
proposed regulations would assist plans
that have accumulated numerous optional
forms of benefits by simplifying plan ad-
ministration and reducing plan complex-
ity for participants. At the same time,
the proposed regulations would continue
to protect the rights of plan participants by
not permitting plan amendments that elim-
inate or reduce an early retirement bene-
fit or a retirement-type subsidy by more
than ade minimisamount and by pro-
tecting the right to elect an optional form
of benefit that is most advantageous for
a participant with substandard mortality
(through inclusion of that form of benefit
as a required core option). The rule re-
garding multiple amendments, discussed
above, would preclude the adoption of a
series of amendments that, when taken to-
gether, constitute an impermissible elimi-
nation of a section 411(d)(6)(B) protected
benefit. This rule would apply, for ex-
ample, if a series of amendments were
adopted that eliminated a benefit of more
thande minimisvalue when considered to-
gether, even though each amendment by
itself eliminated a benefit ofde minimis
value.
Elimination of Redundant Optional Forms
of Benefit
The proposed regulations would pro-
vide that a plan may be amended to elim-
inate an optional form of benefit for a
participant with respect to benefits attrib-
utable to service before the applicable
amendment date if the optional form of
benefit is redundant with respect to a re-
tained optional form of benefit and certain
other conditions are satisfied. An optional
form of benefit is considered redundant
with respect to a retained optional form
of benefit if the retained optional form of
benefit is in the same family of optional
forms of benefit as the optional form of
benefit being eliminated and the partici-
pant’s rights with respect to the retained
optional form of benefit are not subject to
materially greater restrictions than applied
to the optional form of benefit being elim-
inated.
Under the proposed regulations, a plan
would be permitted to be amended to elim-
inate a redundant optional form of bene-
fit for a participant (with respect to ben-
efits attributable to service before the ap-
plicable amendment date) only if the plan
amendment does not apply to an optional
form of benefit with an annuity starting
date that is earlier than 90 days after the
date the amendment is adopted. In addi-
tion, in cases in which the retained optional
form of benefit for the participant does not
commence on the same annuity starting
date as the optional form of benefit that
is being eliminated, or, as of the applica-
ble amendment date, the actuarial present
value of the retained optional form of ben-
efit is less than the actuarial present value
of the optional form of benefit being elim-
inated, the plan amendment would have to
satisfy additional conditions described be-
low.
The proposed regulations would de-
scribe 6 basic families of optional forms
of benefit — the 50% or more joint and
contingent family, the below 50% joint
and contingent family, the 10 years or less
term certain and life annuity family, the
greater than 10 years term certain and life
annuity family, the 10 years or less level
installment family, and the greater than
10 years level installment family. For this
purpose, the determination of whether two
optional forms of benefit are in one of the
6 basic families is made without regard
to certain differences among enumerated
additional features, such as the actuarial
factors used to determine the amount of
benefits under the optional form of benefit,
a social security leveling feature, a refund
of employee contributions feature, or a
retroactive annuity starting date feature.
Under the proposed regulations, not ev-
ery optional form of benefit will fit within
one of the 6 families listed above. For
example, a single-sum distribution option
will not be in one of the 6 families listed
above and, therefore, the right to receive
a single-sum distribution cannot be elim-
inated under the redundancy rule. How-
ever, if there are two optional forms of ben-
efit that do not fit within a family listed
above and the only differences between
those optional forms of benefit are differ-
ences that would be disregarded in deter-
mining whether two optional forms of ben-
efits are within the same family (e.g.,asin-
gle-sum distribution option with and with-
out a retroactive annuity starting date fea-
ture), the two optional forms of benefit are
treated as members of a separate family.
The proposed regulations would pro-
vide that the ability to eliminate redun-
dant optional forms of benefits generally
would not apply to optional forms of ben-
efit that are core options (as described be-
low). However, an optional form of bene-
fit that is a core option could be eliminated
infavorofasimilarretainedcoreoption
(where the only differences between the
eliminated optional form of benefit and the
retained optional form of benefit are differ-
ences that would be disregarded in deter-
mining whether the two optional forms of
benefits are within the same family).
The proposed regulations would also
provide that, to the extent an optional form
of benefit that is being eliminated includes
either a social security leveling feature or a
refund of employee contributions feature,
the retained optional form of benefit must
also include that feature, and, to the extent
that the optional form of benefit that is be-
ing eliminated does not include a social se-
curity leveling feature or a refund of em-
ployee contributions feature, the retained
optional form of benefit must not include
that feature. Thus, a plan cannot eliminate
2004-16 I.R.B.803April 19, 2004

an optional form of benefit that includes a
refund of employee contributions feature
in favor of an optional form of benefit that
does not include that feature. Similarly, a
plan cannot eliminate an optional form of
benefit that includes a social security level-
ing feature in favor of an optional form of
benefit that does not include that feature.
However, the plan need not retain social
security leveling features that provide for
assumed commencement of social security
benefits at more than one date.
In addition, the proposed regulations
provide that, to the extent an optional
form of benefit that is being eliminated
is payable without a retroactive annuity
starting date feature,the retained optional
form of benefit must be payable without
that feature. Thus, a plan cannot eliminate
an optional form of benefit that is payable
without a retroactive annuity starting date
feature in favor of an optional form of
benefit that is payable only with a retroac-
tive annuity starting date. However, the
plan can eliminate an optional form of
benefit payable with a retroactive annuity
starting date feature in favor of an optional
form of benefit that is payable without a
retroactive annuity starting date.
Permissible Elimination of Noncore
Optional Forms of Benefit Where Core
Options are Offered
As an alternative to the redundancy
rule, the proposed regulations would allow
a plan amendment to eliminate an optional
form of benefit for plan participants with
respect to benefits attributable to service
before the applicable amendment date if:
(1) the plan, after the amendment, offers
a designated set of core options to plan
participants with respect to benefits at-
tributable to service both before and after
the amendment; and (2) the amendment
does not apply to participants with annuity
starting dates less than four years after the
date the amendment is adopted.
The core options are defined in the
proposed regulations as a straight life an-
nuity, a 75% joint and contingent annuity,
a 10-year certain and life annuity, and the
most valuable option for a participant with
a short life expectancy. The core options
were selected to define a minimum set
of optional forms of benefit that provide
participants with a sufficiently broad set
of choices to meet participants’ essential
needs in a wide range of personal circum-
stances. The 75% joint and contingent
annuity has been chosen as a required core
option based on a recommendation from
the 1994–1996 report of the Advisory
Council on Social Security.
4
In that report,
the Council recommended that dependent
spousal benefits in Social Security be
gradually increased to 75% of the com-
bined benefit that the surviving spouse
and decedent spouse were receiving when
both of the spouses were alive. This rec-
ommendation was based on statistical
studies concluding that a retired surviving
spouse generally needs to receive at least
75% of the amount that the retired couple
was receiving in order for the surviving
spouse to maintain his or her standard of
living.
The Treasury and IRS received com-
ments emphasizing the importance of
ensuring that a core set of options include
some forms of distribution that would
be particularly valuable to a participant
whose life expectancy differs from the life
expectancy used by the plan for actuarial
adjustments. This includes providing an
option of a life annuity (valuable for a
participant with an above-average life ex-
pectancy) and the importance of retaining
a single-sum payment option (or the form
providing the largest death benefit) for a
participant with a below-average life ex-
pectancy, such as a participant who retires
due to a mortal illness.
In light of the comments received, the
proposed regulations would include in the
list of core options the most valuable op-
tion for a participant with a short life ex-
pectancy. This is defined as the optional
form of benefit that is reasonably expected
to result in payments that have the largest
actuarial present value in the case of a par-
ticipant who dies shortly after the annu-
ity starting date. The proposed regulations
would provide a safe harbor method for
determining which optional form of ben-
efit under the plan is the most valuable op-
tion for a participant with a short life ex-
pectancy. Under this safe harbor method,
a plan may treat a single-sum distribution
option with an actuarial present value that
is not less than the actuarial present value
of any optional form of benefit being elim-
inated as the most valuable option for a
participant with a short life expectancy. If
a plan does not offer such a single-sum dis-
tribution option, the plan may treat a joint
and contingent annuity with a continuation
percentage of at least as great as the high-
est continuation percentage available be-
fore the amendment as the most valuable
option for a participant with a short life
expectancy, provided that the continuation
percentage is at least 75%. In the event a
plan has neither a single-sum distribution
option nor a joint and contingent annuity
with a continuation percentage of at least
75%, the plan may treat a term certain and
life annuity with a term certain period of
at least 15 years as the most valuable op-
tion for a participant with a short life ex-
pectancy.
In addition, an employer would not be
permitted to use the core options alterna-
tive to eliminate a single-sum distribution.
An exception applies for a single-sum dis-
tribution option with respect to less than
25% of the participant’s accrued benefit
as of the date that the single-sum distribu-
tion option is eliminated. This protection
against elimination ofa single-sum distri-
bution option is in addition to any protec-
tion that might be afforded such option as
the most valuable option for a participant
with a short life expectancy.
The proposed regulations also would
provide that, to the extent an optional form
of benefit being eliminated includes either
a social security leveling feature or a re-
fund of employee contributions feature, at
least one of the core options must also be
available with that feature. In addition, to
the extent that an optional form of benefit
being eliminated does not include a social
security leveling feature or a refund of em-
ployee contributions feature, each of the
core options must be available without that
feature.
As with the redundancy rule, if the core
options do not commence on the same an-
nuity starting date as the optional form of
benefit that is being eliminated, or, as of
the applicable amendment date, the actu-
arial present value of the core option is less
than the actuarial present value of the op-
tional form of benefit being eliminated, the
plan amendment would have to satisfy ad-
ditional conditions described below.
4
See the Report of the 1994–1996 Advisory Council on Social Security, available athttp://www.ssa.gov/history/reports/adcouncil/report/findings.htm
April 19, 20048042004-16 I.R.B.

Elimination of Early Retirement Benefits
and Retirement-Type Subsidies
The proposed regulations would set
forth additional requirements that a plan
amendment must satisfy if the retained op-
tional form of benefit or each core option
does not have the same annuity starting
date or has a lower actuarial present value
than the optional form of benefit that is
being eliminated. Such an amendment
would be permitted only if the optional
form of benefit creates significant burdens
and complexities for the plan and plan
participants and the elimination does not
adversely affect the rights of any partici-
pant in more than ade minimismanner. If
the additional requirements are satisfied,
a plan may be amended to eliminate an
optional form of benefit without regard
to whether the amendment has the effect
of eliminating an early retirement bene-
fit or reducing a retirement-type subsidy.
These additional requirements would not
apply to an amendment that eliminates
an optional form of benefit in a manner
that is otherwise permissible under these
proposed regulations where both the annu-
ity starting date and the actuarial present
value of the retained optional form of ben-
efit are the same as those features of the
eliminated optional form of benefit.
The determination of whether a plan
amendment eliminates or reduces section
411(d)(6)(B) protected benefits that cre-
ate significant burdensor complexities for
the plan and its participants is based on
facts and circumstances. In the case of
an amendment that eliminates an early re-
tirement benefit, relevant factors include
whether the annuity starting dates under
the plan considered in the aggregate are
burdensome or complex (e.g.,thenumber
of categories of early retirement benefits,
whether the terms and conditions appli-
cable to the plan’s early retirement bene-
fits are difficult to summarize in a man-
ner that is concise and readily understand-
able to the average plan participant, and
whether those different early retirement
benefits were added to the plan as a re-
sult of plan mergers, acquisitions, or other
business transactions), and whether the ef-
fect of the plan amendment is to reduce
the number of categories of early retire-
ment benefit. Analogous factors apply in
the case of a plan amendment eliminating
a retirement-type subsidy or changing ac-
tuarial factors.
The proposed regulations would pro-
vide a rebuttable presumption for plan
amendments that eliminate a set of annu-
ity starting dates or actuarial factors where
the annuity starting dates or actuarial
factors under the plan considered in the
aggregate are burdensome or complex. If
this is the case, then elimination of any one
item of the relevant category (i.e., annuity
starting dates or actuarial factors) is pre-
sumed to eliminate section 411(d)(6)(B)
protected benefits that create significant
burdens or complexities for the plan and
its participants. However, if the effect of
a plan amendment with respect to a set
of optional forms of benefit is merely to
substitute one set of annuity starting dates
for another set of annuity starting dates (or
one set of actuarial factors for another set
of actuarial factors), without any reduction
in the number of different annuity starting
dates (or actuarial factors), then the plan
amendment would not be permitted under
these regulations.
The generally applicable rules regard-
ing multiple amendments apply to a se-
ries of plan amendments that first create
burdens and complexities and then later
eliminate them. In accordance with these
rules, for example, section 411(d)(6)(B)
protected benefits are not considered to
create burdens and complexities for a
plan and its participants if the plan adds
a retirement-type subsidy in order to later
eliminate another retirement-type subsidy,
even if the elimination of the other sub-
sidy would not adversely affect the rights
of any plan participant in a more thande
minimismanner as provided in the regula-
tions.
In the case of a plan amendment elim-
inating an optional form of benefit under
the redundancy rule, the proposed regula-
tions would provide that a plan amendment
eliminating the optional form of benefit
does not adversely affect the rights of any
participant in more than ade minimisman-
ner if the retained optional form of bene-
fit has substantially the same annuity start-
ing date as the optional form of benefit
that is being eliminated and the actuarial
present value of the eliminated optional
form of benefit does not exceed the actu-
arial present value of the retained optional
form of benefit by more than ade min-
imisamount. In the case of a plan amend-
ment eliminating an optional form of ben-
efit under the core options rule, the pro-
posed regulations would provide the plan
amendment does not adversely affect the
rights of any participant in more than ade
minimismanner if each of the core options
is available with substantially the same an-
nuity starting date as the optional form of
benefit that is being eliminated and the ac-
tuarial present value of the eliminated ben-
efit does not exceed the actuarial present
value of any core benefit by more than ade
minimisamount. For these purposes, the
proposed regulations would provide that
annuity starting dates are considered sub-
stantially the same if they are within six
months of each other.
TheConferenceReporttoEGTRRA
provides that the intent of the provision
authorizing regulations is solely to permit
the elimination of early retirement bene-
fits, retirement-type subsidies, or optional
forms of benefit that have no more than
ade minimiseffect on any participant but
create disproportionate burdens and com-
plexities for a plan and its participants, and
provides two examples illustrating this in-
tent. H.R. Conf. Rep. 107–84, at 254–55
(2001). These examples involve a situa-
tion in which the acquisition of the em-
ployer and subsequent merger of plans re-
sults in the maintenance of multiple retire-
ment-type subsidies (including early re-
tirement subsidies) that create dispropor-
tionate burdens and complexities for the
plan and its participants. Under the first
example, for a 25-year-old participant with
compensation of $40,000, the Conference
Report provides that Treasury regulations
could permit the participant’s retirement-
type subsidy under the plan to be elimi-
nated entirely. For this participant, taking
into account all relevant factors, including
the value of the benefit, the participant’s
compensation, and the number of years be-
fore eligibility for the subsidy, the partici-
pant’s subsidy, with a present value of $75,
is ofde minimisvalue. Under the sec-
ond example, for a 50-year-old participant
with compensation of $40,000, the Con-
ference Report provides that Treasury reg-
ulations could permit the participant’s re-
tirement-type subsidy with a present value
of $10,000 to be replaced with another re-
tirement-type subsidy with a present value
of $9,850. The Conference Report pro-
vides that the regulations could permit re-
placement in the retirement-type subsidy
2004-16 I.R.B.805April 19, 2004

(which reduces the value of the partici-
pant’s subsidy by $150) because the differ-
ence in subsidies isde minimis. However,
the $10,000 subsidy could not be entirely
eliminated.Id.
Based on these examples, the proposed
regulations would provide that a reduction
in actuarial present value is of no more
than ade minimisamount (and hence, the
rights of any participant are not adversely
affected in a more thande minimisman-
ner) if the reduction does not exceed the
greater of 2% of the present value of the re-
tirement-type subsidy under the eliminated
optional form of benefit (if any) prior to
the amendment or 1% of the participant’s
compensation for the prior plan year (as
defined in section 415(c)(3)).
In addition to this numerical test, the
proposed regulations would provide ade
minimistest relating to changes in early
retirement and otheractuarial adjustment
factors. Under this rule, the elimination
of an optional form of benefit does not
adversely affect the rights of any partici-
pant in more than ade minimismanner if
the amendment does not apply to an annu-
ity starting date before the end of the ex-
pected transition period for that optional
form of benefit. The expected transition
period for an optional form of benefit is
the period by the end of which it is rea-
sonable to expect, taking into account fu-
ture accruals, that the section 411(d)(6)(B)
protected benefit being eliminated would
be subsumed by another optional form of
benefit if the plan amendment limited the
optional form of benefit being eliminated
to the participant’s benefits attributable to
service before the applicable amendment
date. The expected transition period is thus
based on the expected wearaway period.
For purposes of this expected transition
rule, the expected transition period must be
determined in accordance with reasonable
actuarial assumptions about the future that
are likely to result in the longest reasonable
expected transition period, such as the as-
sumption that the participant’s compensa-
tion will not increase and that future accru-
als will not exceed accruals in recent peri-
ods. If the plan is subsequently amended to
reduce the rate of future benefit accrual (or
otherwise to lengthen the expected transi-
tion period) before the end of the previ-
ously determined expected transition pe-
riod, the subsequent plan amendment must
provide that the elimination of the optional
form of benefit is void (or must provide for
the effective date to be further extended to
a new expected transition date taking into
account the subsequent amendment). In
addition, a plan amendment eliminating an
optional form of benefit using the expected
transition rule must be limited to partici-
pants who continue employment through
the end of the expectedtransition period.
Advance Notice to Participants
Section 4980F(e) of the Code and sec-
tion 204(h) of ERISA require notice of an
amendment to an applicable pension plan
that either provides for a significant reduc-
tion in the rate of future benefit accrual
or that eliminates or significantly reduces
an early retirement benefit or a retirement-
type subsidy. See §54.4980F–1 gener-
ally. While §54.4980F–1(b), Q&A–7(b)
and 8(c), generally provide that an amend-
ment eliminating an optional form of bene-
fit as permitted under these proposed regu-
lations would not be a significant reduction
for which advance notice to participants is
required, plan sponsors are reminded that
an amendment limiting an early retirement
benefit or retirement-type subsidy to ser-
vice before the applicable amendment date
might be a significant reduction in future
benefits for which advance notice is re-
quired. Accordingly, advance notice may
be required for an amendment permitted
under these rules.
These regulationsinclude proposed
amendments to the section 4980F regula-
tions clarifying that, for purposes of deter-
mining whether an amendment reducing
a retirement-type subsidy as permitted
under the expected transition period rule
is a significant reduction for purposes of
section 4980F, the amendment is treated
in the same manner as an amendment
that limits the retirement-type subsidy to
benefits that accrue before the applicable
amendment date with respect to the par-
ticipants (and alternate payees) to whom
the reduction is reasonably expected to ap-
ply. The proposed changes to the section
4980F regulations also include examples
illustrating these rules and clarifying that
the effective date of the amendment for
purposes of section 4980F(e) of the Code
and section 204(h) of ERISA is not the
same as the effective date of the reduction.
Retirement-Type Subsidies and
Contingent-Event Benefits
Since section 411(d)(6)(B) was added
to the Code in REA, questions have arisen
as to whether a benefit that is contingent
on the occurrence of an unpredictable
event — such as a plant shutdown — is
a retirement-type subsidy and, thus, pro-
tected by section 411(d)(6). Some courts
have held that an unpredictable contin-
gent-event benefit is protected, while one
has held that it is not.
5
Notice 2003–10 requested comments
on anticipated guidance regarding early
retirement benefits and retirement-type
subsidies under section 411(d)(6)(B). No-
tice 2003–10 also stated that regulations
addressing subsidies provided upon a plant
shutdown would be prospective and that
relief from disqualification would be pro-
vided.
After reviewing the legislative his-
tory, the analysis in the relevant cases,
and the submissions of the commenta-
tors, Treasury and the IRS have con-
cluded that, if a contingent-event benefit
is a retirement-type subsidy, the benefit
cannot be reduced or eliminated with re-
spect to service prior to the applicable
amendment date without violating section
411(d)(6)(B). The proposed regulations
would apply this result without regard to
whether the contingent event that triggers
the payment of the benefit has or has not
occurred prior to theamendment. Thus,
the proposed regulations would require
the protection of contingent-event benefits
that provide retirement-type subsidies un-
der section 411(d)(6)(B) even before the
occurrence of the contingency.
The rules under the proposed regula-
tions for determining whether a contin-
5
CompareBellas v. CBS, Inc.,supra,atfn.1;Richardson v. Pension Plan of Bethlehem Steel Corp., 67 F.3d 1462 (9
th
Cir. 1995),withdrawn, 91 F.3d 1312 (9
th
Cir. 1996),modified,112
F.3d 982 (9
th
Cir. 1997) (shutdown benefit is a retirement-type subsidy protected under anticutback rule, opinion withdrawn and modified because court later found plan amendment not
valid);Harms v. Cavenham Forest Industries, Inc., 984 F.2d 686 (5
th
Cir.),cert. denied, 510 U.S. 944 (1993) (involuntary separation benefitis a retirement-type benefit protected under the
anticutback rule); andArena v. ABB Power T&D Company, Inc., 2003 U.S. Dist. LEXIS 13166, 31 Employee Benefit Cas. (BNA) 1473 (S.D. Ind. July 22, 2003) (plant shutdown benefit is
a retirement-type subsidy protected by the anticutback rule because the benefit continues beyondnormal retirement age and the amount of the benefitexceeds the actuarially reduced normal
retirement benefit); withRoss v. Pension Plan for Hourly Employees of SKF Industries, Inc., 847 F.2d 329 (6
th
Cir. 1988) (plant shutdown benefit is not a retirement-type subsidy).
April 19, 20048062004-16 I.R.B.

gent-event benefit provides a retirement-
type subsidy that is protected under section
411(d)(6) or an ancillary benefit that is not
protected would be based on the legisla-
tive history of REA. The legislative history
provides that:
[T]he term ‘retirement-type subsidy’ is
to be defined by Treasury regulations.
The committee intends that under these
regulations, a subsidy that continues
after retirement is generally to be con-
sidered a retirement-type subsidy. The
committee expects, however, that a
qualified disability benefit, a medical
benefit, a social security supplement, a
death benefit (including life insurance),
or a plant shutdown benefit (that does
not continue after retirement age) will
not be considered a retirement-type
subsidy. The committee expects that
Treasury regulations will prevent the
recharacterization of retirement-type
benefits as benefits that are not pro-
tected [under section 411(d)(6)].
6
The proposed regulations would pro-
vide that ancillary benefits are the benefits
listed in the legislative history and other
similar benefits that do not affect the pay-
ment of the accrued benefit. Thus, if the
contingent-event benefit is a plant-shut-
down benefit that does not continue be-
yond retirement age, then the proposed
regulations would include the benefit in
the definition of ancillary benefits and the
contingent-event benefit could be reduced
or eliminated without violating section
411(d)(6).
By contrast, the proposed regulations
would provide that the payment of an ac-
crued benefit in an optional form or the
payment of any other benefit that contin-
ues after retirement is a retirement-type
benefit (provided that it is not in the list
of ancillary benefits set forth in the reg-
ulations). Thus, the proposed regulations
would provide that if the contingent-event
benefit continues beyond retirement (and
is not in the list of ancillary benefits set
forth in the regulations), the contingent-
event benefit would be a retirement-type
benefit. To the extent that the retirement-
type benefit has a present value in excess
of the present value of the accrued benefit,
the contingent-event benefit provides a re-
tirement-type subsidy that is protected un-
der section 411(d)(6)(B).
Further, in accordance with the legisla-
tive history to REA, the regulations would
specifically prohibit an amendment that
recharacterizes a retirement-type benefit
as an ancillary benefit. Thus, for example,
a plan cannot be amended to recharacterize
any portion of an early retirement subsidy
as a social security supplement that is an
ancillary benefit. See also §1.411(d)–4,
Q&A–2(c), for rules relating to serial
amendments.
Proposed Effective Date
These regulations are proposed to be
applicable to amendments adopted on or
after the date of the publication of the Trea-
sury decision adopting these rules as fi-
nal regulations in theFederal Register.
These proposed regulations cannot be re-
lied upon until they are adopted in final
form. When these regulations are final-
ized, the IRS, under its general authority
in section 7805(b), will not treat a plan as
failing to satisfy the requirements of sec-
tions 401 and 411 merely because of a plan
amendment that eliminates or reduces an
early retirement benefit or retirement-type
subsidy that is conditioned on the occur-
rence of an unpredictable contingent event
(within the meaning of section 412(l)) if
the amendment is adopted and effective
prior to the occurrence of the contingent
event and prior to the finalization of these
proposed regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
This notice of proposed rulemaking does
not impose a collection of information on
small entities, thus the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Code, these proposed regulations will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The Treasury and IRS
specifically request comments on the clar-
ity of the proposed rules and how they can
be made easier to understand. All com-
ments will be available for public inspec-
tion and copying.
Comments are also requested on the fol-
lowing issues:
•Whether there should be additional
families of optional forms of benefit
besides the six families listed in the
redundancy rule at §1.411(d)–3(c)(4);
•Whether the core options, including
the specification of the most valuable
option for a participant with a short
life expectancy, are sufficient to pro-
tect the value of benefit distribution
options in a broad range of personal
circumstances, such as for a participant
with substandard mortality;
•Whether the rules in §1.411(d)–3(e)
permitting the reduction of present
value through changes in actuarial fac-
tors are administrable and sufficiently
protective of participants’ interests;
•Whether the expectedtransition period
rule should be permitted to apply to
a participant who severs employment
during the expectedtransition period
(and who satisfies the pre-amendment
conditions for the optional form of
benefit) if the optional form of benefit
being eliminated (or a comparable op-
tional form of benefit with at least the
same present value) is available before
the end of the expected transition pe-
riod and the former employee receives
written notice describing the effect of
the amendment before the amendment
becomes applicable;
•How to determine whether a benefit,
including a contingent-event benefit,
continues after retirement (or retire-
ment age);
6
S. Rep. No. 98–575, at 26 (1984).
2004-16 I.R.B.807April 19, 2004

•The extent to whichplant-shutdown
benefits that do not continue after re-
tirement age are permitted to be pro-
vided in a qualified plan (e.g.,whether
such benefits are limited to payments
payable before the plan’s earliest re-
tirement age or are the benefits lim-
ited to amounts that are less than the
expected social security benefit or, al-
ternatively, the normal retirement ben-
efit); and
•What other benefits (e.g., involuntary
termination benefits) that do not con-
tinue after retirement age and which
are similar to the benefits listed as an-
cillary in the legislative history should
be considered ancillary and should be
permitted to be provided in a qualified
plan.
A public hearing has been scheduled for
June 24, 2004, beginning at 10 a.m. in the
Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security
procedures, visitors must enter at the main
entrance, located at 1111 Constitution Av-
enue, NW. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediateentranceareamorethan30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” portion of
this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
presentoralcommentsmustsubmitwrit-
ten or electronic comments and an outline
of the topics to be discussed and time to be
devoted to each topic (signed original and
eight (8) copies) by June 3, 2004. A pe-
riod of 10 minutes will be allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for re-
ceiving comments has passed. Copies of
the agenda will be available free of charge
at the hearing.
Drafting Information
The principal author of these proposed
regulations is Pamela R. Kinard, Office of
Division Counsel/Associate Chief Coun-
sel(TaxExemptandGovernmentEnti-
ties), Internal Revenue Service. However,
personnel from other offices of the Internal
Revenue Service and Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 54 are
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.411(d)–3 also issued under 26
U.S.C. 411(d)(6) and section 645(b) of
the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law
107–16 (115 Stat. 38).* * *
Par. 2. Section 1.411(d)–3 is revised to
read as follows:
§1.411(d)–3 Section 411(d)(6) protected
benefits.
(a)Protection of accrued benefits—(1)
General rule. Under section 411(d)(6)(A),
a plan is not a qualified plan (and a trust
forming a part of such plan is not a quali-
fied trust) if a plan amendment decreases
the accrued benefit of any plan participant,
except as provided in section 412(c)(8),
section 4281 of the Employee Retirement
Income Security Act of 1974 as amended
(ERISA), or other applicable law (e.g.,
section 1541(a)(2) of the Taxpayer Relief
Act of 1997 (Public Law 105–34, 111 Stat.
788, 1085)). For purposes of this section,
a plan amendment includes any changes
to the terms of a plan and includes a plan
termination. The protection of section
411(d)(6) applies to a participant’s entire
accrued benefit without regard to whether
any portion of that accrued benefit is ac-
crued before a participant’s severance
from employment or is included in the
accrued benefit of the participant pursuant
to a plan amendment adopted after the
participant’s severance from employment.
(2)Plan provisions taken into ac-
count—(i)Direct and indirect reduction
in accrued benefit. For purposes of deter-
mining whether or not any participant’s
accrued benefit is decreased, amendments
to all the provisions of a plan affecting,
directly or indirectly, the computation
of accrued benefits are taken into ac-
count. Plan provisions indirectly affecting
accrued benefits include, for example,
provisions relating to years of service and
compensation.
(ii)Amendments effective on the same
applicable amendment date. In deter-
mining whether a reduction in accrued
benefit has occurred, all amendments with
the same applicable amendment date are
treated as one plan amendment. Thus,
if there are two amendments with the
same applicable amendment date, and one
amendment, standing alone, increases ben-
efits and the other amendment, standing
alone, decreases benefits, the amendments
are treated as one amendment and will
only violate section 411(d)(6) if the net
effect is to decrease the accrued benefit on
that date for any participant.
(iii)Multiple amendments.Aplan
amendment violates the requirements of
section 411(d)(6) if it is one of a series
of plan amendments made at different
times that, when taken together, have the
effect of reducing or eliminating a section
411(d)(6) protected benefit in a man-
ner that would be prohibited by section
411(d)(6) if accomplished through a single
amendment.
(3)Application of section 411(a) non-
forfeitability provisions with respect to
section 411(d)(6) protected benefits.[Re-
served].
(4)Examples. The following examples
illustrate the application of this paragraph
(a):
Example 1.(i)Facts. Plan A provides an annual
benefit of 2% of career average pay times years of ser-
vice commencing at normal retirement age (age 65).
Plan A is amended on November 1, 2004, effective
as of January 1, 2005, to provide for an annual ben-
efit of 1.3% of final pay times years of service, with
final pay computed as the average of a participant’s
highest 3 consecutive years of compensation. As of
January 1, 2005, Participant M has 16 years of ser-
vice, his career average pay is $37,500, and the av-
erage of his highest 3 consecutive years of compen-
sation is $67,308. Thus, M’s accrued benefit as of
the effective date of the amendment is increased from
$12,000 per year at normal retirement age (2% times
$37,500 times 16 years of service) to $14,000 per year
at normal retirement age (1.3% times $67,308 times
16 years of service). As of January 1, 2005, Partici-
pant N has 6 years of service, his career average pay is
$50,000, and the average of his highest 3 consecutive
April 19, 20048082004-16 I.R.B.

years of compensation is $51,282. Participant N’s ac-
crued benefit as of the applicable amendment date is
decreased from $6,000 per year at normal retirement
age (2% times $50,000 times 6 years of service) to
$4,000 per year at normal retirement age (1.3% times
$51,282 times 6 years of service).
(ii)Conclusion. The plan amendment fails to
satisfy the requirements of section 411(d)(6)(A) be-
cause the amendment decreases the accrued benefit
of Participant N below the level of the accrued bene-
fit of Participant N immediately before the applicable
amendment date.
Example 2.(i)Facts. The facts are the same as
Example 1except that Plan A includes a provision un-
der which Participant N’s accrued benefit cannot be
less than what it was immediately before the amend-
ment (so that Participant N’s accrued benefit could
not be less than $6,000 per year at normal retirement
age).
(ii)Conclusion. The amendment does not vio-
late the requirements of section 411(d)(6)(A) with
respect to Participant N (although Participant N
would not accrue any benefits until the point in time
at which the new formula amount would exceed
the amount payable under the minimum provision,
approximately 3 years after the amendment becomes
effective).
(b)Protection of section 411(d)(6)(B)
protected benefits—(1)General rule—(i)
Prohibition against plan amend-
ments eliminating or reducing section
411(d)(6)(B) protected benefits.Aplanis
treated as decreasing an accrued benefit
if it is amended to eliminate or reduce a
section 411(d)(6)(B) protected benefit as
defined in paragraph (f)(4) of this sec-
tion, except as provided in this section.
This paragraph (b)(1) applies to partici-
pants who satisfy (either before or after
the plan amendment) the pre-amendment
conditions for the section 411(d)(6)(B)
protected benefit.
(ii)Contingent benefits.Theruleof
paragraph (b)(1)(i) of this section ap-
plies to participants who satisfy (either
before or after the plan amendment) the
pre-amendment conditions for the section
411(d)(6)(B) protected benefit even if the
condition on which the eligibility for the
section 411(d)(6)(B) protected benefit de-
pends is an unpredictable event (e.g.,a
plant shutdown).
(iii)Application of general rules.For
purposes of determining whether or not
any participant’s section 411(d)(6)(B)
protected benefit is eliminated or re-
duced, the rules of paragraph (a) of this
section apply to section 411(d)(6)(B) pro-
tected benefits in the same manner as
they apply to benefits described in sec-
tion 411(d)(6)(A). As an example of the
application of paragraph (a)(2)(ii) of this
section to section 411(d)(6)(B) protected
benefits, if there are two amendments
with the same applicable amendment date,
and one amendment increases accrued
benefits and the other amendment de-
creases the early retirement factors that
are used to determine the early retirement
annuity, the amendments are treated as
one amendment and only violate section
411(d)(6) if the net dollar amount of the
early retirement annuity after the two
amendments is lower at any point in time
than it would have been without the two
amendments. As an example of the ap-
plication of paragraph(a)(2)(iii) of this
section to section 411(d)(6)(B) protected
benefits, a series of amendments that,
when taken together, have the effect of
reducing or eliminating early retirement
benefits or retirement-type subsidies in a
manner that adversely affects the rights of
any participant in more than ade minimis
manner violates section 411(d)(6)(B) even
if each amendment would be permissible
pursuant to paragraphs (c) through (e) of
this section.
(2)Permissible elimination of section
411(d)(6)(B) protected benefits—(i)In
general.Aplanmaybeamendedtoelim-
inate a section 411(d)(6)(B) protected
benefit if the elimination is in accordance
with section 411(d)(6)(C), (D), or (E),
paragraph (c) or (d) of this section, or
§1.411(d)–4.
(ii)Increases in payment amounts do
not eliminate an optional form of benefit.
If a plan amendment merely replaces an
optional form of benefit with another op-
tional form of benefit that is of inherently
equal or greater value (within the meaning
of §1.401(a)(4)–4(d)(4)(i)(A)), the amend-
ment is not to be treated as eliminating
an optional form of benefit, or eliminating
or reducing an early retirement benefit or
retirement-type subsidy. Thus, for exam-
ple, a change in the method of calculating
a joint and survivor annuity from using a
90% adjustment factor on account of the
survivorship payment at particular ages on
the annuity starting date to using a 91% ad-
justment factor at the same ages on the an-
nuity starting date is not treated as an elim-
ination of an optional form of benefit.
(3)Permissible elimination of benefits
that are not section 411(d)(6) protected
benefits—(i)In general. Section 411(d)(6)
does not provide protection for benefits
that are ancillary benefits, other rights
and features, or any other benefits that are
not described in section 411(d)(6). See
§1.411(d)–4, Q&A–1(d). However, a plan
may not be amended to recharacterize
a retirement-type benefit as an ancillary
benefit. Thus, for example, a plan amend-
ment to recharacterize any portion of an
early retirement subsidy as a social secu-
rity supplement that is an ancillary benefit
violates section 411(d)(6).
(ii)No protection for future benefit ac-
cruals. Section 411(d)(6) only protects
benefits that accrue before the applica-
ble amendment date. Thus, a plan may
be amended to eliminate or reduce an
early retirement benefit, a retirement-type
subsidy, or an optional form of benefit
with respect to benefits not yet accrued
on the applicable amendment date with-
out violating section 411(d)(6). However,
section 4980F(e) of the Internal Rev-
enue Code and section 204(h) of ERISA
require notice of an amendment to an
applicable pension plan that either pro-
vides for a significant reduction in the
rate of future benefit accrual or that elim-
inates or significantly reduces an early
retirement benefit or a retirement-type
subsidy. See §54.4980F–1 of this chap-
ter generally, and see §54.4980F–1(b),
Q&A–7(b) and Q&A–8(c), with respect
to whether such notice is required for a
reduction in an early retirement benefit or
retirement-type subsidy permitted under
section 411(d)(6)(B).
(c)Permissible elimination of optional
forms of benefit that are redundant—(1)
General rule. Except as otherwise pro-
vided in paragraph (c)(5) of this section, a
plan may be amended to eliminate an op-
tional form of benefit for a participant with
respect to benefits accrued before the ap-
plicable amendment date if—
(i) The optional form of benefit is re-
dundant with respect to a retained optional
form of benefit, within the meaning of
paragraph (c)(2) of this section;
(ii) The plan amendment is not appli-
cable with respect to an optional form of
benefit with an annuity starting date that is
less than 90 days after the date the amend-
ment is adopted; and
(iii) In any case in which the retained
optional form of benefit for the participant
does not commence on the same annuity
starting date as the optional form of ben-
efit that is being eliminated or, as of the
applicable amendment date, the actuarial
2004-16 I.R.B.809April 19, 2004

present value of the retained optional form
of benefit for the participant is less than the
actuarial present value of the optional form
of benefit that is being eliminated, the re-
quirements of paragraph (e) of this section
are satisfied.
(2)Similar types of optional forms of
benefit are redundant—(i)General rule.
An optional form of benefit is redundant
with respect to a retained optional form of
benefit if—
(A) The retained optional form of ben-
efit is available to the participant;
(B) The retained optional form of bene-
fit is in the same family of optional forms,
within the meaning of paragraphs (c)(3)
and (4) of this section, as the optional form
of benefit beingeliminated; and
(C) A participant’s rights with respect
to the retained optional form of benefit are
not subject to materially greater restric-
tions (such as conditions relating to eligi-
bility, restrictions on a participant’s ability
to designate the person who is entitled to
benefits following the participant’s death,
or restrictions on a participant’s right to re-
ceive an in-kind distribution) than applied
to the optional form of benefit being elim-
inated.
(ii)Special rule for core options.An
optional form of benefit that is a core op-
tion may not be eliminated as a redundant
benefit under the rules of this paragraph (c)
unless the retained optional form of bene-
fit and the eliminated core option are iden-
tical except for differences described in
paragraph (c)(3)(ii) of this section. Thus,
for example, a particular 10-year certain
and life annuity may not be eliminated by
plan amendment unless the retained op-
tional form of benefit is another 10-year
certain and life annuity.
(3)Family of optional forms of bene-
fit—(i)In general. Paragraph (c)(4) of this
section describes certain families of op-
tional forms of benefits. Not every op-
tional form of benefit that is offered under
a plan necessarily fits within a family as
described in paragraph (c)(4) of this sec-
tion. Each optional form of benefit that is
not included in any particular family listed
in paragraph (c)(4) of this section is in a
separate family with other optional forms
of benefit that would be identical to that
optional form of benefit but for differences
that are described in paragraph (c)(3)(ii) of
this section.
(ii)Certain differences among optional
forms of benefit—(A)Differences in ac-
tuarial factors and annuity starting dates.
The determination of whether two optional
forms of benefit are within a family of op-
tional forms of benefit is made without re-
gard to the actuarial factors that are used
to determine the amount of the distribu-
tions under those optional forms of bene-
fit and without regard to annuity starting
dates. For example, if a plan has a sin-
gle-sum distribution option that is calcu-
lated using a 5% interest rate and a specific
mortality table and another single-sum dis-
tribution option that is calculated using the
applicable interest rate as defined in sec-
tion 417(e)(3)(A)(ii)(II) and the applica-
ble mortality table as defined in section
417(e)(3)(A)(ii)(I),both single-sum distri-
bution options are in the same family under
the rules of paragraph (c)(3)(i) of this sec-
tion.
(B)Differences in social security lev-
eling features, refund of employee contri-
butions features, and retroactive annuity
starting date features. Two optional forms
of benefit that are identical except with re-
spect to social security leveling features,
refund of employee contributions features,
or retroactive annuitystarting date features
are treated as members of the same family
of optional forms of benefit. But see para-
graph (c)(5) of this section for special rules
relating to social security leveling, refund
of employee contributions, and retroactive
annuity starting date features in optional
forms of benefit.
(4)List of families.Thefollowingare
families of optional forms of benefit for
purposes of this paragraph (c):
(i)Joint and contingent options with
continuation percentages of 50% to 100%.
An optional form of benefit is within the
50% or more joint and contingent family if
it provides a life annuity to the participant
andasurvivorannuitytoanindividualthat
is at least 50% and no more than 100% of
the annuity provided to the participant. An
optional form of benefit is within the 50%
or more joint and contingent family with-
out regard to whether the form of benefit
includes a term certain provision, a pop-up
provision (under which payments increase
upon the death of the beneficiary or an-
other event that causes the beneficiary not
to be entitled to a survivor annuity), or a
cash refund feature (under which payment
is provided upon the death of the last annu-
itant in an amount equal to the excess of the
present value of the annuity at the annuity
starting date over the total of payments be-
fore the death of the last annuitant).
(ii)Joint and contingent options with
continuation percentages less than 50%.
An optional form of benefit is within the
below 50% joint and contingent family if
it provides a life annuity to the partici-
pantandasurvivorannuitytoanindivid-
ual that is no more than 50% of the annu-
ity provided to the participant. An optional
form of benefit is within the below 50%
joint and contingent family without regard
to whether the form of benefit includes a
term certain provision, a pop-up provision
(under which payments increase upon the
death of the beneficiary or another event
that causes the beneficiary not to be enti-
tled to a survivor annuity), or a cash refund
feature (under which payment is provided
upon the death of the last annuitant in an
amount equal to the excess of the present
value of the annuity at the annuity starting
date over the total of payments before the
death of the last annuitant).
(iii)Term certain and life annuity op-
tions with a term of 10 years or less.An
optional form of benefit is within the 10
years or less term certain and life family
if it is a life annuity with a guarantee that
payments will continue to the participant’s
designated beneficiary for the remainder
of a fixed period that is not in excess of 10
years if the participant dies before the end
of the fixed period.
(iv)Term certain and life annuity op-
tions with a term in excess of 10 years.
An optional form of benefit is within the
greater than 10 years term certain and life
family if it is a life annuity with a guaran-
tee that payments will continue to the par-
ticipant’s designatedbeneficiary for the re-
mainderofafixedperiodthatisinexcess
of 10 years if the participant dies before the
endofthefixedperiod.
(v)Level installment payment options
over a period of 10 years or less. An op-
tional form of benefit is within the 10 years
or less installment family if it provides for
substantially level payments to the partici-
pant for a fixed period of at least two years
with a guarantee that payments will con-
tinue to the participant’s beneficiary for
the remainder of the fixed period not in ex-
cess of 10 years if the participant dies be-
fore the end of the fixed period.
April 19, 20048102004-16 I.R.B.

(vi)Level installment payment options
over a period of more than 10 years.An
optional form of benefit is within the
greater than 10 years installment family
if it provides for substantially level pay-
ments to the participant for a fixed period
with a guarantee that payments will con-
tinue to the participant’s beneficiary for
the remainder of a fixed period that is in
excess of 10 years if the participant dies
before the end of the fixed period.
(5)Special rules for certain features in-
cluded in optional forms of benefit.For
purposes of applying this paragraph (c), to
the extent an optional form of benefit that
is being eliminated includes either a social
security leveling feature or a refund of em-
ployee contributions feature, the retained
optional form of benefit must also include
that feature, and to the extent that the op-
tional form of benefit that is being elim-
inated does not include a social security
leveling feature or a refund of employee
contributions feature,the retained optional
form of benefit must not include that fea-
ture. For purposes of applying this para-
graph (c), to the extent an optional form
of benefit that is being eliminated does not
include a retroactive annuity starting date
feature, the retained optional form of ben-
efit must not include the feature.
(d)Permissible elimination of non-
core optional forms of benefit where core
options are offered—(1)General rule.
Except as otherwise provided in para-
graph (d)(2) of this section, a plan may
be amended to eliminate an optional form
of benefit for a participant with respect to
benefits attributable to service before the
applicable amendment date if—
(i) After the amendment, each of the
core options described in paragraph (f)(3)
of this section is available to the participant
with respect to benefits attributable to ser-
vice before and after the amendment;
(ii) The plan amendment is not applica-
ble with respect to an optional form of ben-
efit with an annuity starting date that is less
than four years after the date the amend-
ment is adopted; and
(iii) In any case in which all of the core
options are not available commencing on
the same annuity starting date as each op-
tional form of benefit that is being elim-
inated or, as of the applicable amendment
date, the actuarial present value of the ben-
efit payable under any of the core options
with the same annuity starting date is less
than the actuarial present value of benefits
payable under the optional form of benefit
that is being eliminated, the requirements
of paragraph (e) of this section are satis-
fied.
(2)Special rules—(i)Treatment of cer-
tain features included in optional forms of
benefit. For purposes of applying this para-
graph (d), to the extent an optional form of
benefit that is being eliminated includes ei-
ther a social security leveling feature or a
refund of employee contributions feature,
at least one of the core options must also be
available with that feature, and, to the ex-
tent that the optional form of benefit that
is being eliminated does not include a so-
cial security leveling feature or a refund
of employee contributions feature, each of
the core options must be available with-
out that feature. For purposes of apply-
ing this paragraph (d), to the extent an op-
tional form of benefit that is being elimi-
nated does not include a retroactive annu-
ity starting date feature, each of the core
options must be available without that fea-
ture.
(ii)Eliminating the most valuable op-
tion for a participant with a short life
expectancy. For purposes of applying
this paragraph (d), if the most valuable
option for a participant with a short life
expectancy as described in paragraph
(f)(3)(i)(D) of this section is eliminated,
then, after the plan amendment, an op-
tional form of benefit that is identical,
except for differences described in para-
graph (c)(3)(ii) of this section, must be
available to the participant. However,
such a plan amendment cannot eliminate a
refund of employee contributions feature
from the most valuable option for a partic-
ipant with a short life expectancy.
(iii)Single-sum distributions.Aplan
amendment is not treated as satisfying this
paragraph (d) if it eliminates an optional
form of benefit that includes a single-sum
distribution that applies with respect to at
least 25% of the participant’s accrued ben-
efit as of the date the optional form of ben-
efit is eliminated. But see §1.411(d)–4,
Q&A–2(b)(2)(v), relating to involuntary
single-sum distributions for benefits with
a present value not in excess of the maxi-
mum dollar amount in section 411(a)(11).
(e)Permissible plan amendments under
paragraphs (c) and (d) eliminating or re-
ducing section 411(d)(6)(B) protected ben-
efits that are burdensome and of de min-
imis value—(1)In general. A plan amend-
ment that, pursuant to paragraph (c)(1)(iii)
or (d)(1)(iii) of this section, is required
to satisfy this paragraph (e) satisfies this
paragraph (e) if—
(i) The amendment eliminates section
411(d)(6)(B) protectedbenefits that create
significant burdens or complexities for the
plan and its participants as described in
paragraph (e)(2) of this section; and
(ii) The amendment does not adversely
affect the rights of any participant in a
more thande minimismanner as described
in paragraph (e)(3) of this section.
(2)Plan amendments eliminating
section 411(d)(6)(B) protected benefits
that create significant burdens and com-
plexities—(i)Facts and circumstances
analysis. The determination of whether
a plan amendment eliminates section
411(d)(6)(B) protectedbenefits that create
significant burdens or complexities for
the plan and its participants is based on
facts and circumstances. In the case of
an amendment that eliminates an early
retirement benefit, relevant factors include
whether the annuity starting dates under
the plan considered in the aggregate are
burdensome or complex (e.g., the number
of categories of early retirement benefits,
whether the terms and conditions applica-
ble to the plan’s early retirement benefits
are difficult to summarize in a manner that
is concise and readily understandable to
the average plan participant, and whether
those different early retirement benefits
were added to the plan as a result of plan
mergers, acquisitions, or other business
transactions), and whether the effect of the
plan amendment is to reduce the number
of categories of early retirement benefit.
Similarly, in the case of a plan amendment
eliminating a retirement-type subsidy or
changing actuarial factors, relevant fac-
tors include whether the actuarial factors
used for determining benefit distributions
available in otherwise identical forms of
benefit under the plan considered in the ag-
gregate are burdensome or complex (e.g.,
the number of different retirement-type
subsidies and other actuarial factors avail-
able under the plan, whether the terms
and conditions applicable to the plan’s
retirement-type subsidies are difficult to
summarize in a manner that is concise and
readily understandable to the average plan
participant, and whether those different re-
tirement-type subsidies and other actuarial
2004-16 I.R.B.811April 19, 2004

factors were added to the plan as a result of
plan mergers, acquisitions, or other busi-
ness transactions), and whether the effect
of the plan amendment is to reduce the
number of categories of retirement-type
subsidies or other actuarial factors.
(ii)Presumption for certain amend-
ments. If the annuity starting dates under
the plan considered in the aggregate are
burdensome or complex, then elimina-
tion of any one of the annuity starting
dates is presumed to eliminate section
411(d)(6)(B) protectedbenefits that create
significant burdens or complexities for the
plan and its participants. However, if the
effect of a plan amendment with respect
to a set of optional forms of benefit is
merely to substitute one set of annuity
starting dates for another set of annuity
starting dates, without any reduction in the
number of different annuity starting dates,
then the plan amendment does not satisfy
the requirements of paragraph (e) of this
section. Similarly, ifthe actuarial factors
used for determining benefit distributions
available in otherwise identical forms of
benefit under the plan considered in the
aggregate are burdensome or complex,
then elimination of any one set of actuarial
factors is presumed to eliminate section
411(d)(6)(B) protectedbenefits that create
significant burdens or complexities for the
plan and its participants. However, if the
effect of a plan amendment with respect to
a set of optional forms of benefit is merely
to substitute one set of actuarial factors for
another set of actuarial factors, without
any reduction in the number of different
actuarial factors, then the plan amendment
does not satisfy the requirements of para-
graph (e) of this section.
(iii)Restrictions against creating bur-
dens or complexities. See paragraph
(b)(1)(ii) of this section for general rules
applicable to multiple amendments. In
accordance with these rules, for example,
section 411(d)(6)(B) protected benefits
are not considered to create burdens and
complexities for a plan and its participants
if the plan adds a retirement-type subsidy
in order to later eliminate another retire-
ment-type subsidy, even if the elimination
of the other subsidy would not adversely
affect the rights of any plan participant in a
more thande minimismanner as provided
in paragraph (e)(3) of this section.
(3)Elimination of early retirement ben-
efits or retirement-type subsidies that are
de minimis—(i)Rules for retained op-
tional forms of benefit under paragraph
(c) of this section. For purposes of para-
graph (c) of this section, the elimination
of an optional form of benefit does not ad-
versely affect the rights of any participant
inamorethande minimismanner if—
(A) The retained optional form of ben-
efit described in paragraph (c) of this
section has substantially the same annuity
starting date as the optional form of bene-
fit that is being eliminated, as described in
paragraph (e)(4) of this section; and
(B) Either the actuarial present value of
the benefit payable in the optional form
of benefit that is being eliminated does
not exceed the actuarial present value of
the benefit payable in the retained optional
form of benefit by more than ade minimis
amount, as describedin paragraph (e)(5)
of this section, or the amendment satisfies
the requirements of paragraph (e)(6) of this
section relating to a delayed effective date.
(ii)Rules for core options under para-
graph (d) of this section. For purposes of
paragraph (d) of this section, the elimina-
tion of an optional form of benefit does not
adversely affect the rights of any partici-
pant in a more thande minimismanner if,
with respect to each of the core options—
(A) The core option is available after
the amendment with substantially the same
annuity starting date as the optional form
of benefit that is being eliminated, as de-
scribed in paragraph (e)(4) of this section;
and
(B) Either the actuarial present value of
the benefit payable in the optional form of
benefit that is being eliminated does not
exceed the actuarial present value of the
benefit payable under the core option by
more than ade minimisamount, as de-
scribed in paragraph (e)(5) of this section,
or the amendment satisfies the require-
ments of paragraph (e)(6) of this section.
(4)Definition of substantially the same
annuity starting dates. For purposes of ap-
plying paragraphs (e)(3)(i)(A) and (ii)(A)
of this section, annuity starting dates are
considered substantially the same if they
are within six months of each other.
(5)Definition of de minimis difference
in actuarial present value. For purposes
of applying paragraphs (e)(3)(i)(B) and
(ii)(B) of this section, a difference in ac-
tuarial present value between the optional
form of benefit being eliminated and the
retained optional form of benefit or core
optionisofnomorethanade minimis
amount if, as of the applicable amendment
date, the difference between the actuarial
present value of the eliminated optional
form of benefit and the actuarial present
value of the retained optional form of ben-
efit or core option is not more than the
greater of—
(i) 2% of the present value of the re-
tirement-type subsidy under the eliminated
optional form of benefit (if any) prior to the
amendment; or
(ii) 1% of the participant’s compensa-
tion for the prior plan year (as defined in
section 415(c)(3)).
(6)Delayed effective date—(i)General
rule. For purposes of applying paragraph
(e)(3) of this section, an amendment that
eliminates an optional form of benefit sat-
isfies the requirements of this paragraph
(e)(6) if the elimination of the optional
form of benefit is not applicable to any an-
nuity starting date before the end of the ex-
pected transition period for that optional
form of benefit.
(ii)Determination of expected transi-
tion period. The expected transition pe-
riod for an optional form of benefit is the
period that begins when the amendment
is adopted and ends when it is reason-
able to expect, with respect to a section
411(d)(6)(B) protected benefit (i.e.,not
taking into account future service), that
the form being eliminated would be sub-
sumed by another optional form of benefit
(after taking into account expected future
accruals). For this purpose, the expected
transition period must be determined in
accordance with reasonable actuarial as-
sumptions about the future that are likely
to result in the longest period of time until
the eliminated optional form of benefit
would be subsumed, such as the assump-
tion that the participant’s compensation
will not increase and that future accruals
will not exceed accruals in recent periods.
In addition, if the plan is subsequently
amended to reduce the rate of future ben-
efit accrual (or otherwise to lengthen the
expected transition period) before the end
of the previously determined expected
transition period, the later plan amend-
ment must provide that the elimination
of the optional form of benefit is void
(or must provide for the effective date to
be further extended to a new expected
transition date that satisfies this paragraph
April 19, 20048122004-16 I.R.B.

(e)(6) taking into account the subsequent
amendment).
(iii)Applicability of the delayed effec-
tive date rule limited to employees who
continue to accrue benefits through the end
of expected transition period.Anamend-
ment eliminating an optional form of bene-
fit under this paragraph (e)(6) must be lim-
ited to participants who continue to accrue
benefits under the plan through the end
of the expected transition period. Thus,
for example, the plan amendment may not
apply to any participant who has a sev-
erance from employment during the ex-
pected transition period.
(iv)Special rule for section 204(h) no-
tice. See §54.4980F–1(b), Q&A–8(c), of
this chapter for a special rule relating to
this paragraph (e)(6).
(f)Definitions and use of terms—(1)
Ancillary benefit.Anancillary bene-
fitmeans a social security supplement
(other than a QSUPP as defined in
§1.401(a)(4)–12), a disability benefit not
in excess of a qualified disability benefit
describedinsection411(a)(9),anancillary
life insurance or health insurance benefit, a
death benefit under a defined contribution
plan, a preretirement death benefit under
a defined benefit plan, a plant shutdown
benefit that does not continue past retire-
ment age, or any other similar benefit that
does not affect the payment of the accrued
benefit. See §§1.401–1(b)(1)(i), (ii), and
(iii) and 1.401(a)(4)–4(e)(2).
(2)Applicable amendment date.The
termapplicable amendment datemeans,
with respect to a plan amendment, the later
of the effective date of the amendment or
the date the amendment is adopted.
(3)Core options—(i)General rule.The
core optionsin a plan are—
(A) A straight life annuity under which
the participant is entitled to a level life an-
nuity with no benefit payable after the par-
ticipant’s death;
(B) A joint and contingent annuity un-
der which the participant is entitled to a
life annuity with a survivor annuity for the
individual designated by the participant
(whether or not the participant’s spouse)
that is 75% of the amount payable during
the participant’s life;
(C) A 10-year certainand life annuity
under which the participant is entitled to a
life annuity with a guarantee that payments
will continue to any person designated by
theparticipantfortheremainderofafixed
period of 10 years if the participant dies
before the end of the 10-year period; and
(D) The most valuable option for a par-
ticipant with a short life expectancy (as de-
fined in paragraph (f)(3)(iv) of this sec-
tion).
(ii)Treatment of similar core options
with different actuarial factors and annu-
ity starting dates. Except for core options
described in paragraph (f)(3)(i)(D) of this
section, whether an option is a core option
is determined without regard to the actu-
arial factors that are used to determine the
amount of the distributions under those op-
tional forms and without regard to annu-
ity starting dates. Thus, two core options
that are described in paragraph (f)(3)(i)(A)
or (B) or (C) of this section are not dif-
ferent core options solely because the core
options start on different annuity starting
dates.
(iii)Modification of core options to
satisfy other requirements. An annuity
does not fail to be a joint and contingent
annuity described in paragraph (f)(3)(i)(B)
of this section or a 10-year certain and life
annuity described in paragraph (f)(3)(i)(C)
of this section as a result of differences
to comply with applicable law, such as
limitations on death benefits to comply
with the incidental benefit requirement
of §1.401–1(b)(1)(i) or on account of the
spousal consent rules of section 417.
(iv)The most valuable option for a par-
ticipant with a short life expectancy—(A)
General definition. Except as provided in
paragraph (f)(3)(iv)(B) of this section,the
most valuable option for a participant with
a short life expectancymeans the optional
form of benefit, for each annuity starting
date, that is reasonably expected to result
in payments that have the largest actuarial
present value in the case of a participant
who dies shortly after the annuity starting
date, taking into account both payments
due to the participant prior to the partic-
ipant’s death and any payments due after
the participant’s death. For this purpose, a
plan is permitted to assume that the spouse
of the participant is the same age as the par-
ticipant. In addition, a plan is permitted
to assume that the optional form of ben-
efit that is the most valuable option for
a participant with a short life expectancy
when the participant is age 70
1
/2also is the
most valuable option for a participant with
a short life expectancy at all older ages, and
that the most valuable option for a partici-
pant with a short life expectancy at age 55
is the most valuable option for a participant
with a short life expectancy at all younger
ages.
(B)Safe harbor hierarchy—(1)Aplan
may treat a single-sum distribution option
with an actuarial present value that is not
less than the actuarialpresent value of any
optional form of benefit eliminated by the
plan amendment as the most valuable op-
tion for a participant with a short life ex-
pectancy for each annuity starting date if
it is available at all annuity starting dates,
without regard to whether the option was
available before the plan amendment.
(2) If a plan before the amendment does
not offer a single-sum distribution option
as described in paragraph (f)(3)(iv)(B)(1)
of this section, a plan may treat a joint
and contingent annuity with a continua-
tion percentage that is at least 75% and
that is at least as great as the highest con-
tinuation percentage available before the
amendment as the most valuable option for
a participant with a short life expectancy
for each annuity starting date if it is avail-
able at all annuity starting dates, without
regard to whether the option was available
before the plan amendment.
(3) If the plan before the amend-
ment offers neither a single-sum distri-
bution option as described in paragraph
(f)(3)(iv)(B)(1) of this section nor a joint
and contingent annuity with a continua-
tion percentage as described in paragraph
(f)(3)(iv)(B)(2) of this section, a plan may
treat a term certain and life annuity with a
term certain period no less than 15 years
as the most valuable option for a partici-
pant with a short life expectancy for each
annuity starting date if it is available at all
annuity starting dates, without regard to
whether the option was available before
the plan amendment.
(4)Definitions of types of section
411(d)(6)(B) protected benefits—(i)Early
retirement benefit.Anearly retirement
benefitmeans the right, under the terms
of a plan, to commence distribution of a
retirement-type benefit at a particular date
after severance from employment with the
employer and before normal retirement
age. Different early retirement benefits
result from differences in terms relating to
timing.
(ii)Optional form of benefit.Anop-
tional form of benefitmeans a distribution
alternative (including the normal form of
2004-16 I.R.B.813April 19, 2004

benefit) that is available under the plan
with respect to benefits described in sec-
tion 411(d)(6)(A) or a distribution alterna-
tive with respect to a retirement-type ben-
efit. Different optional forms of bene-
fit exist if a distribution alternative is not
payable on substantially the same terms as
another distribution alternative. The rele-
vant terms include all terms affecting the
value of the optional form, such as the
method of benefit calculation and the ac-
tuarial assumptions used to determine the
amount distributed. Thus, for example,
different optional forms of benefit may re-
sult from differences in terms relating to
the payment schedule, timing, commence-
ment, medium of distribution (e.g., in cash
or in kind), election rights, differences in
eligibility requirements, or the portion of
the benefit to which the distribution al-
ternative applies. Differences in the nor-
mal retirement ages of employees or in
the form in which the accrued benefit of
employees is payable at normal retirement
age under a plan are taken into account in
determining whether a distribution alterna-
tive constitutes one or more optional forms
of benefit.
(iii)Retirement-type benefit.Are-
tirement-type benefitmeans the payment
of a distribution alternative with respect
to an accrued benefit or the payment
of any other benefit that continues after
retirement that is not an ancillary ben-
efit (including a QSUPP as defined in
§1.401(a)(4)–12).
(iv)Retirement-type subsidy.Are-
tirement-type subsidymeans the excess,
if any, of the actuarial present value of a
retirement-type benefit, over the actuarial
present value of theaccrued benefit com-
mencing at normal retirement age or at
actual commencement date, if later, with
both such actuarial present values deter-
mined as of the date the retirement-type
benefit commences. Examples of retire-
ment-type subsidies include a subsidized
early retirement benefit and a subsidized
qualified joint and survivor annuity as
described in §1.415–3(c)(2)(i).
(v)Subsidized early retirement bene-
fit or early retirement subsidy.Asubsi-
dized early retirement benefitor anearly
retirement subsidymeans the right, under
the terms of a plan, to commence distri-
bution of a retirement-type benefit at a
particular date after severance from em-
ployment with the employer and before
normal retirement age where the actuarial
present value of the optional forms of ben-
efit available to the participant under the
plan at that annuity starting date exceeds
the actuarial present value of the accrued
benefitcommencingatnormalretirement
age (with such actuarial present values de-
termined as of the annuity starting date).
Thus, an early retirement subsidy is an
early retirement benefit that provides a re-
tirement-type subsidy.
(5)Eliminate; elimination; reduce; re-
duction.Thetermseliminateorelimina-
tionwhen used in connection with a sec-
tion 411(d)(6)(B) protected benefit mean
to eliminate or the elimination of an op-
tional form of benefit or an early retire-
ment benefit and to reduce or a reduction
in a retirement-type subsidy. The termsre-
duceandreductionwhen used in connec-
tion with a retirement-type subsidy mean
to reduce or a reduction in the amount of
the subsidy. For purposes of this section,
aneliminationincludes areductionand a
reductionincludes anelimination.
(6)Retirement. In general, for purposes
of this section, the date ofretirementrefers
to the annuity starting date. Thus, the term
preretirement refers to the time period be-
fore the annuity starting date.
(7)Other rights and features.Theterm
other right or featuregenerally means any
right or feature applicable to employees
under a plan. Different rights or features
exist if a right or feature is not available
on substantially the same terms as another
right or feature. For exceptions to the
definition of other right or feature, see
§1.401(a)(4)–4(e)(3)(ii).
(8)Actuarial present value.For
purposes of this section, the termac-
tuarial present valuemeans actuarial
present value (within the meaning of
§1.401(a)(4)–12) determined using rea-
sonable actuarial assumptions.
(9)Refund of employee contributions
feature.Arefund of employee contribu-
tions featuresmeans a feature with respect
to an optional form of benefit that pro-
vides for employee contributions and inter-
est thereon to be paid in a single sum at the
annuity starting date with the remainder to
be paid in another form beginning on that
date.
(10)Retroactive annuity starting date
feature.Aretroactive annuity starting
datefeature means a feature with respect
to an optional form of benefit under which
the annuity starting date for the distribu-
tion occurs prior to the date the participant
is furnished the notice described in section
417(a)(3).
(11)Section 411(d)(6)(B) protected
benefit.Thetermsection 411(d)(6)(B)
protected benefitmeans the portion of an
early retirement benefit, a retirement-type
subsidy, or an optional form of benefit
attributable to the service of a participant
before the applicable amendment date.
(12)Social security leveling feature.A
social security leveling featuremeans a
feature with respect to an optional form of
benefit which is designed to provide an ap-
proximately level amount annually when
the participant’s estimated old age bene-
fits from Social Security are taken into ac-
count.
(g)Examples. The following examples
illustrate the application of paragraphs (b)
through (f) of this section:
Example 1.(i)Facts involving amendments to an
early retirement subsidy. Plan A provides an annual
benefit of 2% of career average pay times years of ser-
vice commencing at normal retirement age (age 65).
Plan A is amended on November 1, 2004, effective as
of January 1, 2005, to provide for an annual benefit
of 1.3% of final pay times years of service, with final
pay computed as the average of a participant’s high-
est 3 consecutive years of compensation. Participant
M is age 50, he has 16 years of service, his career
average pay is $37,500, and the average of his high-
est 3 consecutive years of compensation is $67,308.
Thus, M’s accrued benefit as of the effective date of
the amendment is increased from $12,000 per year at
normal retirement age (2% times $37,500 times 16
years of service) to $14,000 per year at normal re-
tirement age (1.3% times $67,308 times 16 years of
service). (These facts are similar to the facts inEx-
ample 1in paragraph (a)(4) of this section.) Before
the amendment, Plan A permitted a former employee
to commence distribution of benefits as early as age
55 and, for a participant with at least 15 years of ser-
vice, actuarially reduced the amount payable in the
form of a straight life annuity commencing before
normal retirement age by 3% per year from age 60
to age 65 and by 7% per year from age 55 through
age 59. Thus, before the amendment, the amount of
M’s early retirement benefit that would be payable
for commencement at age 55 was $6,000 per year
($12,000 per year minus 3% for 5 years and minus
7% for 5 more years). The amendment also alters
the actuarial reduction factor so that, for a participant
with at least 15 years of service, the amount payable
in a straight life annuity commencing before normal
retirement age is reduced by 6% per year. As a re-
sult, the amount of M’s early retirement benefit at
age 55 becomes $5,600 per year after the amendment
($14,000 minus 6% for 10 years).
(ii)Conclusion. The straight life annuity payable
under Plan A at age 55 is an optional form of ben-
efit that is an early retirement subsidy. The plan
amendment fails to satisfy the requirements of sec-
tion 411(d)(6)(B) becausethe amendment decreases
April 19, 20048142004-16 I.R.B.

the optional form of benefit payable to Participant
M below the level that Participant M was entitled to
receive immediately before the effective date of the
amendment. If instead Plan A had included a pro-
vision under which M’s straight life annuity payable
at any age could be not be less than what it was im-
mediately before the amendment (so that M’s straight
life annuity payable at age 55 could not be less than
$6,000 per year), then the amendment would not fail
to satisfy the requirements of section 411(d)(6)(B)
with respect to M’s straight life annuity payable at
age 55 (although the straight life annuity payable to M
at age 55 would not increase until the point in time at
which the new formula amount with the new actuarial
reduction factors exceeds the amount payable under
the minimum provision, approximately 14 months af-
ter the amendment becomes effective).
Example 2.(i)Facts involving contingent-event
benefits. Plan B permits participants who have a sev-
erance from employment before normal retirement
age to commence distributions at any time after age
55 with the amount payable to be actuarially reduced
using reasonable actuarial assumptions regarding in-
terest and mortality, but provides that the annual re-
duction for any participant who has at least 20 years
of service and who has a severance from employment
after age 55 is only 3% per year (which is a smaller re-
duction than would apply under reasonable actuarial
reductions). Plan B also provides two plant shutdown
benefits to participants who have a severance of em-
ployment as a result of a plant shutdown. First, the
favorable 3% actuarial reduction will apply for com-
mencement of benefits after age 55 and before age
65 for any participant who has a severance from em-
ployment as a result of a plant shutdown and who has
at least 10 years of service. Second, all participants
who have at least 20 years of service and who have a
severance from employment after age 55 (and before
retirement age) as a result of a plant shutdown will
receive a supplement. Under the supplement, an ad-
ditional amount equal to the participant’s estimated
old-age insurance benefit under the Social Security
Act is payable until age 65. The supplement is not
a QSUPP, as defined in §1.401(a)(4)–12, because the
plan’s terms do not state that the supplement is treated
as an early retirement benefit that is protected under
section 411(d)(6).
(ii)Conclusion. The benefit payable with the 3%
annual reduction is a retirement-type benefit. The ex-
cess of the actuarial present value of the early retire-
ment benefit using the 3% annual reduction over the
actuarial present value of the normal retirement ben-
efit is a retirement-type subsidy and the right to re-
ceive payments of the subsidy at age 55 is an early
retirement benefit. Thus, the right to receive the re-
tirement-type subsidy for participants with at least
10 years of service at the time of a plant shutdown
is an early retirement benefit that provides a retire-
ment-type subsidy and is a section 411(d)(6)(B) pro-
tected benefit (even though no plant shutdown has oc-
curred). Therefore, a plan amendment cannot elim-
inate this benefit with respect to service before the
applicable amendment date, even before the occur-
rence of the plant shutdown. Because the plan pro-
vides that the supplement cannot exceed the OASDI
benefit (Social Security),the supplement is a social
security supplement, which is an ancillary benefit that
is not a section 411(d)(6)(B) protected benefit.
Example 3.(i)Facts involving elimination of op-
tional forms of benefit as redundant. Plan C is a de-
fined benefit plan under which employees may elect
to commence distributions at any time after the later
of termination of employment or attainment of age
55. At each potential annuity starting date, Plan C
permits employees to select, with spousal consent
where required, a straight life annuity or any of a
number of actuarially equivalent alternative forms of
payment, including a straight life annuity with cost-
of-living increases and a joint and contingent annu-
ity with the participant having the right to select any
beneficiary and any continuation percentage from 1%
to 100%, subject to modification to the extent neces-
sary to satisfy the requirements of the incidental ben-
efit requirement of §1.401–1(b)(1)(i). The amount of
any alternative payment is determined as the actuarial
equivalent of the straight life annuity payable at the
same age using reasonable actuarial assumptions. On
September 2, 2004, Plan C is amended to delete all
continuation percentages for joint and contingent op-
tions other than 25%, 50%, 75% or 100%, effective
with respect to annuity starting dates that are on or
after January 1, 2005.
(ii)Conclusion.(A)Categorization of family
members under the redundancy rule. The optional
forms of benefit describedinparagraph(i)ofthis
Example 3are members of four families: a straight
life annuity; a straight life annuity with cost-of-living
increases; joint and contingent options with contin-
uation percentages of less than 50%; and joint and
contingent options with continuation percentages of
50% or more. The amendment does not affect either
of the first two families, but affects the two families
relating to joint and contingent options.
(B)Conclusion for elimination of optional forms
of benefit as redundant. The amendment satisfies the
requirements of paragraph (c) of this section. First,
the eliminated optional forms of benefit are redundant
with respect to the retained optional forms of benefit
because each eliminated joint and contingent annu-
ity option with a continuation percentage of less than
50% is redundant with respect to the 25% continua-
tion option and each eliminated joint and contingent
annuity option with a continuation percent of 50% or
higher is redundant with respect to any one of the re-
tained 50%, 75%, or 100% continuation options. In
addition, to the extent that the optional form of benefit
that is being eliminated does not include a social se-
curity leveling feature, return of employee contribu-
tion feature, or retroactive annuity starting date fea-
ture, the retained optional form of benefit does not in-
clude that feature. Second, the amendment is not ef-
fective with respect to annuity starting dates that are
less than 90 days from the date of the amendment.
Third, the plan amendment does not eliminate any
available core options, including the most valuable
option for a participant with a short life expectance,
treating a joint and contingent annuity with a 100%
continuation percentage as this optional form of ben-
efit pursuant to paragraph (f)(3)(iv)(B)(2)ofthissec-
tion. Finally, the amendment need not satisfy the re-
quirements of paragraph (e) of this section because
the retained optional forms of benefit are available on
the same annuity starting dates and have the same ac-
tuarial present value as the optional forms of benefit
that are being eliminated.
Example 4.(i)Facts involving elimination of op-
tional forms of benefit as redundant if additional re-
strictions are imposed. The facts are the same asEx-
ample 3, except that the plan amendment also restricts
the class of beneficiaries that may be elected under
the four retained joint and contingent annuities to the
employee’s spouse.
(ii)Conclusion. The amendment fails to satisfy
the requirements of paragraph (c)(2)(i)(C) of this sec-
tion because the retained joint and contingent annu-
ities have materially greater restrictions on the bene-
ficiary designation than did the eliminated joint and
contingent annuities. Thus, the joint and contingent
annuities being eliminated are not redundant with re-
spect to the retained joint and contingent annuities. In
addition, the amendment fails to satisfy the require-
ments of the core option rules in paragraph (d) of this
section because the amendment fails to be limited to
annuity starting dates that are at least 4 years after the
date the amendment is adopted, the amendment fails
to include the core option in paragraph (f)(3)(i)(B) of
this section because the participant does not have the
right to designate any beneficiary, and the amendment
fails to include the core option described in paragraph
(f)(3)(i)(C) of this section because the plan does not
provide a 10-year certain and life annuity.
Example 5.(i)Facts involving elimination of a
social security leveling feature and a period certain
annuity as redundant. Plan D is a defined benefit
plan under which participants may elect to commence
distributions in the following actuarially equivalent
forms, with spousal consent if applicable: a straight
life annuity; a 50%, 75%, or 100% joint and contin-
gent annuity; a 5-year, 10-year, or a 15-year period
certain and life annuity; and an installment refund an-
nuity (i.e., an optional form of benefit that provides
a period certain, the duration of which is based on
the participant’s age), with the participant having the
right to select any beneficiary. In addition, each an-
nuity offered under the plan, if payable to a partic-
ipant who is less than age 65, is available both with
and without a social security leveling feature. The so-
cial security leveling feature provides for an assumed
commencement of social security benefits at any age
selected by the participant between age 62 and 65.
Plan D is amended on September 1, 2004, effective
as of January 1, 2005, to eliminate the installment re-
fund form of benefit and to restrict the social security
leveling feature to an assumed social security com-
mencement age of 65.
(ii)Conclusion. The amendment satisfies the re-
quirements of paragraph (c) of this section. First, the
installment refund annuity option is redundant with
respect to the 15-year certain and life annuity (except
for advanced ages where,because of shorter life
expectancies, the installment refund annuity option
is redundant with respect to the 5-year certain and
life annuity and also redundant with respect to the
10-year certain and life annuity). Second, with re-
spect to restricting the social security leveling feature
to an assumed social security commencement age of
65, under paragraph (c)(3)(ii) of this section, straight
life annuities with social security leveling features
that have different social security commencement
ages are treated as members of the same family as
straight life annuities without social security leveling
features. To the extent an optional form of benefit
that is being eliminated includes a social security
leveling feature, the retained optional form of benefit
must also include that feature, but it is permitted to
have a different assumed age for commencement of
2004-16 I.R.B.815April 19, 2004

social security benefits. Third, to the extent that the
optional form of benefit that is being eliminated does
not include a social security leveling feature, a return
of employee contribution feature, or retroactive an-
nuity starting date feature, the retained optional form
of benefit must not include that feature. Fourth, the
plan amendment does not eliminate any available
core options, including the most valuable option for
a participant with a short life expectance, treating
a joint and contingent annuity with a 100% contin-
uation percentage as this optional form of benefit
pursuant to paragraph (f)(3)(iv)(B)(2) of this section.
Fifth, the amendment is not effective with respect to
annuity starting dates that are less than 90 days from
the date the amendment is adopted. The amendment
need not satisfy the requirements of paragraph (e)
of this section because the retained optional forms
of benefit are available on the same annuity starting
dates and have the same actuarial present value as the
optional forms of benefit that are being eliminated.
Example 6.(i)Facts involving elimination of non-
core options. Employer N sponsors Plan E, a de-
fined benefit plan that permits every participant to
elect payment in the following actuarially equivalent
optional forms of benefit (Plan E’s uniformly avail-
able options), with spousal consent if applicable: a
straight life annuity, a 50%, 75%, or 100% joint and
contingent annuity with no restrictions on designa-
tion of beneficiaries, and a 5-, 10-, or 15-year pe-
riod certain and life annuity. In addition, each can
be elected in conjunction with a social security lev-
eling feature, with the participant permitted to select
a social security commencement age from age 62 to
age 67. None of Plan E’s uniformly available op-
tions include a single-sum distribution. The plan has
been in existence for over 30 years, during which time
Employer N has acquired a large number of other
businesses, including merging over 20 defined ben-
efit plans of acquired entities into Plan E. Many of
the merged plans offered optional forms of benefit
that were not among Plan E’s uniformly available op-
tions, including some plans funded through insurance
products, often offering all of the insurance annuities
that the insurance carrier offers, and with some of the
merged plans offering single-sum distributions. In
particular, under the XYZ acquisition, the XYZ ac-
quired plan offered a single-sum distribution option
that was frozen at the time of the acquisition. On
April 1, 2005, each single-sum distribution option ap-
plies to less than 25% of the XYZ acquired partici-
pants’ accrued benefits. Employer N has generally,
but not uniformly, followed the practice of limiting
the optional forms of benefit for an acquired unit to
an employee’s service before the date of the merger,
and has uniformly followed this practice with respect
to each of the early retirement subsidies in the ac-
quired unit’s plan. As a result, as of April 1, 2005,
Plan E includes a large number of optional forms of
benefit which are not members of families identified
in paragraph (c)(4) of this section, but there are no
participants who are entitled to any early retirement
subsidies because any subsidies have been subsumed
by the actuarially reduced accrued benefit. Plan E is
amended in April of 2005 to eliminate all of the op-
tional forms of benefit that Plan E offers other than
Plan E’s uniformly available options, except that the
amendment does not eliminate any single-sum distri-
bution option except with respect to XYZ acquired
participants and permits any commencement date that
was permitted under Plan E before the amendment.
Plan E also eliminates the single-sum distribution op-
tion for XYZ acquired participants. Further, each of
Plan E’s uniformly available options has an actuarial
present value that is not less than the actuarial present
value of any optional form of benefit offered before
the amendment. The amendment is effective with re-
spect to annuity starting dates that are on or after May
1, 2009.
(ii)Conclusion. The amendment satisfies the
requirements of paragraph (d) of this section. First,
Plan E, as amended, does not eliminate any sin-
gle-sum distribution option as provided in paragraph
(d)(2)(iii) of this section except for single-sum distri-
bution options that apply to less than 25% of a plan
participant’s accrued benefit as of the date the op-
tion is eliminated (May 1, 2009). Second, Plan E, as
amended, includes each of the core options as defined
in paragraph (f)(3) of this section, including offering
the most valuable option for a participant with a
short life expectancy (treating the 100% joint and
contingent annuity as this benefit, under paragraph
(f)(3)(iv)(B)(2) of this section). The grandfathered
single-sum distribution options are not the most
valuable option for a participant with a short life ex-
pectancy because these distributions are not available
with respect to a participant’s entire accrued benefit.
In addition, as required under paragraph (d)(2) of
this section, to the extent an optional form of ben-
efit that is being eliminated includes either a social
security leveling feature or a refund of employee
contributions feature, at least one of the core options
is available with that feature and, to the extent that
the optional form of benefit that is being eliminated
does not include a social security leveling feature
or a refund of employee contributions feature, each
of the core options is available without that feature.
Third, the amendment is not effective with respect
to annuity starting dates that are less than 4 years
after the date the amendment is adopted. Finally,
the amendment need not satisfy the requirements of
paragraph (e) of this section because the retained
optional forms of benefit are available on the same
annuity starting date and have the same actuarial
present value as the optional forms of benefit that are
being eliminated.
Example 7.(i)Facts involving reductions in ac-
tuarial present value. (A) Plan F is a defined benefit
plan providing an accrued benefit of 1% of the aver-
age of a participant’s highest 3 consecutive years’ pay
times years of service, payable as a straight life annu-
ity beginning at age 65. Plan F permits employees to
elect to commence reduced distributions at any time
after the later of termination of employment or attain-
ment of age 55. At each potential annuity starting
date, Plan F permits employees to select, with spousal
consent, either a straight life annuity, a joint and con-
tingent annuity with the participant having the right
to select any beneficiary and a continuation percent
of 50%, 66
2
/3%, 75%, or 100%, or a 10-year certain
and life annuity with the participant having the right
to select any beneficiary, subject to modification to
the extent necessary to satisfy the requirements of the
incidental benefit requirement of §1.401–1(b)(1)(i).
The amount of any joint and contingent annuity and
the 10-year certain and life annuity is determined as
the actuarial equivalent of the straight life annuity
payable at the same age using reasonable actuarial as-
sumptions. The plan covers employees at four divi-
sions, one of which, division X, was acquired on Jan-
uary 1, 1999. The plan provides for distributions be-
fore normal retirement age to be actuarially reduced,
but, if a participant retires after attainment of age 55
and completion of 10 years of service, the applicable
early retirement reduction factor is 3% per year for
the years between age 65 and 62 and 6% per year for
theagesfrom62to55forallemployeesatanydi-
vision, except for employees who were in division X
on January 1, 1999, for whom the early retirement re-
duction factor for retirement after age 55 and 10 years
of service is 5% for each year before age 65. On De-
cember 2, 2004, effective January 1, 2005, Plan F is
amended to change the early retirement reduction fac-
tors for all employees of division X to be the same as
for other employees, effective with respect to annuity
starting dates that are on or after January 1, 2006, but
only with respect to participants who are employees
on or after January 1, 2006, and only if Plan F con-
tinues accruals at the current rate through January 1,
2006 (or the effective date of the change in reduction
factors is delayed to reflect the change in the accrual
rate). For purposes of thisExample 7, it is assumed
that an actuarially equivalent early retirement factor
would have a reduction shown in column 4 of the fol-
lowing table, which compares the reduction factors
for division X before and after the amendment:
12345
AgeOld Division X FactorNew Factor
Actuarially Equivalent
Factor
Column 3 minus
Column 2
65
NANANANA
64
95
9791.1+2
63909483.2+4
62
85
9176.1
+5
6180
85
69.8
+5
April 19, 20048162004-16 I.R.B.

12345
AgeOld Division X FactorNew Factor
Actuarially Equivalent
Factor
Column 3 minus
Column 2
60
75
7964.1+4
59
7073
59.0
+3
5865
67
54.3
+2
57
6061
50.1
+1
565555
46.30
5550
4942.8-1
(B) On January 1, 2005, the employee with the
largest number of years of service is Employee E,
who is a
ge 54 and has 20 years of service. For 2004,
Employee E’s compensation is $80,000 and E’s high-
est 3 consecutive years of pay on January 1, 2005,
is $75
,000. Employee E’s accrued benefit as of the
effective date of the amendment is a life annuity of
$15,000 per year at normal retirement age (1% times
$75,0
00 times 20 years of service) and E’s early re-
tirement benefit commencing at age 55 has a present
value of $91,397 as of January 1, 2005. It is assumed
for p
urposes of this example that the longest expected
transition period for any active employee does not
exceed 5 months (20 years and 5 months, times 1%
time
s 49% exceeds 20 years times 1% times 50%).
Finally, it is assumed for purposes of this example
that the amendment reduces optional forms of bene-
fit
which are burdensome or complex.
(ii)Conclusion concerning application of section
411(d)(6)(B). The amendment reducing the early re-
tir
ement factors has the effect of eliminating the ex-
isting optional forms of benefit (where the amount
of the benefit is based on preamendment early retire-
men
t factors in any case where the new factors re-
sult in a smaller amount payable) and adding new op-
tional forms of benefit (where the amount of bene-
fi
t is based on the different early retirement factors).
Accordingly, the elimination must satisfy the require-
mentsofparagraph(c)or(d)ofthissectionifthe
am
ount payable at any date is less than would have
been payable under the plan before the amendment.
(iii)Conclusion concerning application of redun-
da
ncy rules. The amendment satisfies the require-
ments of paragraph (c)(1)(i) and (ii) of this section
(see paragraphs (iv) through (vi) of thisExample 7
f
or the requirements of paragraph (c)(1)(iii) of this
section). First, with respect to each eliminated op-
tional form of benefit (i.e., with respect to each op-
t
ional form of benefit with the Old Division X Fac-
tor), after the amendment there is a retained optional
form of benefit that is in the same family of optional
forms of benefit (i.e., the optional form of benefit with
the New Factor). Second, the amendment is not effec-
tive with respect to annuity starting dates that are less
than 90 days from the date the amendment is adopted.
Third, to the extent that the plan amendment elimi-
nates the most valuable option for a participant with
a short life expectancy, the retained optional form of
benefit is identical except for differences in actuarial
factors.
(iv)Conclusion concerning application of the
requirements under paragraph (e) of this section.
The plan amendment must satisfy the requirements
of paragraph (e) of this section because, as of the
applicable amendment date, the actuarial present
value of the early retirement subsidy is less than the
actuarial present value of the early retirement sub-
sidy be
ing eliminated. The plan amendment satisfies
the requirements under paragraph (e)(1)(i) of this
section because the amendment eliminates optional
forms
of benefit that create significant burdens or
complexities for the plan and its participants. See be-
low for thede minimisrequirement under paragraph
(e)(1
)(ii) of this section.
(v)Conclusion concerning application of de min-
imis rules under paragraph (e)(5) of this section.The
amen
dment does not satisfy the requirements of para-
graph (e)(5) of this section because the reduction in
the actuarial present value is more than ade minimis
amou
nt under paragraph (e)(5) of this section. For ex-
ample, for Employee E, the amount of the joint and
contingent annuity payable at age 55 is reduced from
$7,5
00 (50% of $15,000) to $7,350 (49% of $15,000)
and the reduction in present value as a result of the
amendment is $1,828 ($91,397 - $89,569). In this
cas
e, the retirement-type subsidy at age 55 is the ex-
cess of the present value of the 50% early retirement
benefit over the present value of the deferred pay-
men
t of the accrued benefit, or $13,921 ($97,269 -
$83,348) and the present value at age 54 of the re-
tirement-type subsidy is $13,081. The reduction in
pr
esent value is more than the greater of 2% of the
present value of the retirement-type subsidy and 1%
of E’s compensation because the reduction in present
va
lue exceeds $800 (the greater of $262, which is 2%
of the present value of the retirement-type subsidy for
the benefit being eliminated, and $800, which is 1%
o
f E’s compensation of $80,000).
(vi)Conclusion involving application of de min-
imis rules under paragraph (e)(6) relating to expected
t
ransition period. The amendment satisfies the re-
quirements of paragraph (e)(6) of this section and,
thus, satisfies the requirements of paragraph (c) of
t
his section, including the requirement in paragraph
(c)(1)(iii) of this section that paragraph (e) of this sec-
tion be satisfied. First, it is presumed that the amend-
ment reduces optional forms of benefit that are bur-
densome or complex. Second, the plan amendment is
not effective for annuity starting dates before January
1, 2006, and that date is not earlier than the longest
expected transition period for any participant in Plan
F on the date of the amendment. Third, the amend-
ment does not apply to any participant who has a sev-
erance from employment during the transition period.
If, however, a later plan amendment reduces accruals
under Plan F, the initial amendment will no longer
satisfy the requirements of paragraph (e)(6) of this
section (and must be voided) unless, as part of the
later amendment, the expected transition period is ex-
tended to reflect the reduction in accruals under Plan
F.
(h)Effective date. The rules of this sec-
tion apply to amendments adopted on or
after the date of publication of the Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
PART 54—PENSION EXCISE TAXES
Par.
3. The authority citation for part
54 c
ontinues to read, in part, as follows:
Auth
ority: 26 U.S.C. 7805 * * *
§54.
4980F–1 also issued under 26
U.S.
C. 4980F.* * *
Par.
4. Section 54.4980F–1(b) is
amen
ded by:
1. Re
vising paragraph (c) of A–8.
2. Re
vising paragraph (d) of A–8.
The r
evisions read as follows:
§54.4980F–1 Notice requirements
for certain pension plan amendments
significantly reducing the rate of future
benefit accrual.
*****
A–8. ***
(c)Application to certain amendments
reducing early retirement benefits or re-
tirement-type subsidies. Section 204(h)
notice is not required for an amendment
that reduces an early retirement benefit
or retirement-type subsidy if the amend-
ment is permitted under the third sentence
of section 411(d)(6)(B) of the Internal
Revenue Code and regulations thereunder
(relating to the elimination or reduction of
benefits or subsidies which create signifi-
cant burdens or complexities for the plan
and plan participants unless the amend-
ment adversely affects the rights of any
participant in a more thande minimisman-
ner). However, in determining whether
an amendment provides for a significant
reduction for purposes of this section
with respect to an amendment that has
2004-16 I.R.B.817April 19, 2004

an effective date on or after these rules
are adopted as final regulations and that
reduces a retirement-type subsidy as per-
mitted under §1.411(d)–3(e)(6) of this
chapter, the amendment is treated in the
same manner as an amendment that limits
the retirement-type subsidy to benefits
that accrue before the applicable amend-
ment date (as defined at §1.411(d)–3(f)(2)
of this chapter) with respect to each par-
ticipant or alternate payee to whom the
reduction is reasonably expected to apply.
(d)Example. The following examples
illustrate the rules in this Q&A–8:
Example 1.(i)Facts. Pension Plan A is a de-
fined benefit plan that provides a rate of benefit ac-
crual of 1% of highest-five years’ pay multiplied by
years of service, payable annually for life commenc-
ing at normal retirement age (or at actual retirement
age, if later). Plan A is amended on August 1, 2007,
effective January 1, 2008, to provide that any partic-
ipant who separates from service after December 31,
2007, and before January 1, 2013, will have the same
number of years of service he or she would have had
if his or her service continued to December 31, 2012.
(ii)Conclusion. While the amendment will re-
sult in a reduction in the annual rate of future benefit
accrual from 2009 through 2012 (because under the
amendment, benefits based upon an additional five
years of service accrue on January 1, 2008, and no ad-
ditional service is credited after January 1, 2008, until
January 1, 2013), the amendment does not result in a
reduction that is significant because the amount of the
annual benefit commencing at normal retirement age
(or at actual retirement age, if later) under the terms of
the plan as amended is not under any conditions less
than the amount of the annual benefit commencing at
normal retirement age (or at actual retirement age, if
later) to which any participant would have been enti-
tled under the terms of the plan had the amendment
not been made.
Example 2.(i)Facts. The facts are the same as
inExample 1, except that the 2008 amendment does
not alter the plan provisions relating to a participant’s
number of years of service, but instead amends the
plan’s provisions relating to early retirement benefits.
Before the amendment, the plan provides for distri-
butions before normal retirement age to be actuari-
ally reduced, but, if a participant retires after attain-
ment of age 55 and completion of 10 years of service,
the applicable early retirement reduction factor is 3%
per year for the years between age 65 and 62 and 6%
per year for the ages from 62 to 55. The amendment
changes these provisions so that an actuarial reduc-
tion applies in all cases,but, in accordance with sec-
tion 411(d)(6)(B), provides that no participant’s early
retirement benefit will be less than the amount pro-
vided under the plan as in effect on December 31,
2007, with respect to service before January 1, 2008.
For participant X, the reduction is significant.
(ii)Conclusion. The amendment will result in a
reduction in a retirement-type subsidy provided un-
der Plan A (i.e., Plan A’s early retirement subsidy).
Section 204(h) notice must be provided to participant
X and any other participant for whom the reduction
is significant and the notice must be provided at least
45 days before January 1, 2008 (or by such other date
as may apply under Q&A–9 of this section).
Example 3.(i)Facts. The facts are the same as in
Example 2, except that, for participant X, the change
does not go into effect for any annuity starting date
before January 1, 2009. Participant X continues em-
ployment through January 1, 2009.
(ii)Conclusion. The conclusion is the same as in
Example 2. Taking into account the rule in the second
sentence of Q&A–8(c) of this section, the reduction
that occurs for participant X on January 1, 2009, is
treated as the same reduction that occurs underEx-
ample 2. Accordingly, section 204(h) notice must be
provided to participant X atleast 45 days before Jan-
uary 1, 2008 (or by such other date as may apply un-
der Q&A–9 of this section).
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 23,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 24, 2004, 69 F.R. 13769)
Foundations Status of Certain
Organizations
Announcement 2004–28
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
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
10th Cavalry Buffalo Soldiers
Association, Inc., Atlanta, GA
312 Coldun Institute, Incorporated,
Louisville, KY
A-Z Women Center, Inc., Maitland, FL
AAR Counseling Services, Inc.,
Naples, FL
Above and Beyond, Inc., Nashville, TN
Academy of Youth Athletics, Inc.,
Augusta, GA
Acting Out Theatre Company,
Incorporated, Atlanta, GA
Actors Repertory Theatre of Naples, Inc.,
Naples, FL
Affordable America Housing, Inc.,
Palm Harbor, FL
Affordable Housing Organization of
Florida, Inc., Winter Haven, FL
Against the Flow Ministries, Inc.,
Nashville, TN
Agape Restoration Center,
College Park, GA
Albemarle Gymnastics Booster Club,
Elizabeth City, NC
All About U Employment Services, Inc.,
Tallahassee, FL
Always Believe Foundation,
Greensboro, NC
Amerihome, Inc., Atlanta, GA
Andy Smithey Foundation-Diabetes
Research & Awareness, Inc.,
Alpharetta, GA
Animals Animals Animals, Inc.,
Palm Bay, FL
Anointed Hands Early Learning Center,
Inc., Decatur, GA
Appalachian Standown, Huntington, WV
Appalachian Wilderness Experience,
Asheville, NC
Apple Classic Scholarship Fund,
Walhalla, SC
Archbishop B A Idahosa Foundation,
Temple Hills, MD
Archway Regional Tourism Association,
Zachariah, KY
Ark Foundation, Henderson, NC
Ark of Jackson County, Inc., Jefferson, GA
Arkadelphia Housing Group,
Arkadelphia, AR
Asian Pacific Alliance Educational
Foundation, Inc., Columbus, GA
Association for Women Attorneys
Foundation, Memphis, TN
Association of Gospel Songwriters,
Atlanta, GA
Athletics International, Inc., Marietta, GA
Atlanta 2000, Atlanta, GA
Atlanta Wild Animal Rescue Effort, Inc.,
Decatur, GA
Atlanta Youth Classical Theatre Company,
Clarkston, GA
Augusta Georgia Sports and Achievement
Hall of Fame, Inc., Augusta, GA
Babies of Georgia Fund, Inc.,
Marietta, GA
April 19, 20048182004-16 I.R.B.

Barnes Golden-Age Haven, Inc.,
Columbus, GA
Barton Housing, Inc., Dunn, NC
Basic Beginnings, Inc., Decatur, GA
Beauchamp Tower Information Systems
Corp., Milton, FL
Bethany Manor, Elizabeth City, NC
Bethany Missions, Inc., Atlanta, GA
Bethursday Business Park, Inc.,
Atlanta, GA
Big Hammock Archaeological
Foundation, Inc., Sarasota, FL
Birchwood Learning Center, Inc.,
Durham, NC
Birdawg Ministries, Thompsons Stn, TN
Birmingham African-American Arts and
Heritage, Inc., Birmingham, AL
Bishop Spalding Council No 2761
Knights of Columbus Charities, Inc.,
Louisville, KY
Black Belt World College Scholarship,
Raleigh, NC
Bluegrass Community Marriage Task
Force, Lexington, KY
Bold Maids Productions, Durham, NC
Bookworm Learning Center,
Walnut Cove, NC
Bosnian Community, Inc., Louisville, KY
Boys & Girls Club of Pleasants County,
Inc., St. Marys, WV
Boys & Girls Club of Thomson, Inc.,
Thomson, GA
Bradford Booster Club, Bradford, TN
Brandlewood Neighborhood Association,
Inc., Savannah, GA
Break the Cycle, Inc., Loudon, TN
Breathitt County Community Council,
Inc., Jackson, KY
Brentwood Blaze, Inc., Brentwood, TN
Brian Bloodworth Stroke & Head
Injury Research Foundation, Inc.,
Whitehouse, TN
Bridge Health Foundation, Inc.,
Nashville, TN
Bright Hope, Inc., Ringgold, GA
Brother and Sisters Help End Straits,
Lithonia, GA
Brown Magnolia CDC, Marianna, AR
Bukharian Jewish Community of Atlanta,
Inc., Marietta, GA
Cameron Community Club, Inc.,
Cameron, SC
Cannon Baptist Child Development,
Spartanburg, SC
Canopy Oaks Parent Teacher Organization
P T O, Tallahassee, FL
Care for Caregivers, Inc., Roswell, GA
Caring Hearts Organization, Seminole, FL
Carolina Cardinals, Charlotte, NC
Carolina Sailing Center, Hilton Head, SC
Carolinas Heritage Tourism Network,
Incorporated, Wilmington, NC
Catoma Volunteer Fire Protection
Authority, Inc., Montgomery, AL
CCSCN, Inc., Greenville, NC
Center for Democratic Initiatives, Inc.,
Tijeras, NM
Center for Orthotic and Prosthetic
Rehabilitation Institute, Inc.,
Louisville, KY
Central Atlanta Neighbor, Inc.,
Atlanta, GA
Centurion Outreach, Inc., Jackson, TN
Changed by Choice Ministries, Inc.,
Orlando, FL
Chapman Learning Center, Inc.,
New Corp., Knoxville, TN
Charleston Interactive Museum,
Charleston, SC
Charlotte Fire Girls Basketball Club,
Charlotte, NC
Charlotte Research Center, Charlotte, NC
Charter School Resource Center of
Tennessee, Nashville, TN
Chattahoochee Foundation, Marietta, GA
Cherokee Indians of Georgia, Inc.,
Albany, GA
Children Aid Society of Atlanta, Inc.,
Atlanta, GA
Children-R-Special, Inc., Clarksville, TN
Chipola Boys and Girls Club,
Marianna, FL
Choices-Turning Point, Inc., Palm Bay, FL
Christ is the Answer Ministries, Inc.,
Greenwood, SC
Christ the Rock Ministries, Inc.,
Kodak, TN
Christian Attic, Inc., Raleigh, NC
Christian Child Care Center, Inc.,
Memphis, TN
Christian Education Foundation, Inc.,
Dade City, FL
Christian Golfers Association of Middle
Tennessee, Laverne, TN
Christian Radio Media, Inc.,
Homosasa, FL
Christians for Community Awareness,
Inc., Durham, NC
City of Orangeburg Community
Development Corporation,
Orangeburg, SC
Clarence Rose Foundation,
Goldsboro, NC
Clarion Call, Inc., Gastonia, NC
Classical Music Association Charlotte,
Charlotte, NC
Clay County Consolidated Childrens
Charities, Inc., Orange Park, FL
Clericare, Memphis, TN
Cleveland Community Playground
Committee, Cleveland, TN
Coalition to Abolish the Fur Trade,
Dallas, TX
Coatopa Belmont Volunteer Fire
Department, Inc., Coatopa, AL
Columbians Housing Project, Inc.,
Lexington, KY
Communities for Kids, Belmont, MS
Communities Undertaking
Technological Empowerment,
Inc., Stone Mountain, GA
Community and Children in Crisis, Inc.,
Norcross, GA
Community and Economic Development
Center, Inc., Manning, SC
Community Benefit Network, Inc.,
St. Petersburg, FL
Community Care Center of Brandon, Inc.,
Valrico, FL
Community Empowerment Project,
Orlando, FL
Community Helps of Coosa County, Inc.,
Goodwater, AL
Community Light, Altamonte Springs, FL
Community Policing Interaction
Association, Inc., Apopka, FL
Community Recreation & Sports, Inc.,
Ashland, KY
Community Urban Design Center,
Raleigh, NC
Compassion Ministries of Indian Trail,
Inc., Indian Trail, NC
Concerned Citizens of Clarksville,
Clarksville, TN
Concert America Foundation, Inc.,
Raleigh, NC
Coney Island Sports Foundation, Inc.,
Brooklyn, NY
Courtwatch of Hillsborough County, Inc.,
Tampa, FL
Creative Community Services, Inc.,
Charlotte, NC
Crohns Disease Research, Inc.,
Winter Park, FL
Cultural Arts of Spencer County, Inc.,
Dale, IN
Daedalus Group, Inc., St. Petersburg, FL
Daily Devotion, Inc., Charlotte, NC
Dakota Youth Project, St. Petersburg, FL
D A L E Fund, Inc., Stone Mountain, GA
DanLandandDerrickMooreProFootball
Camp, Albany, GA
Dance to a Different Drum, Inc.,
Atlanta, GA
2004-16 I.R.B.819April 19, 2004

Dances of Youth Dance Arts Nurturing
the Creative Essence, Greensboro, NC
Dawn Foundation, Inc., Port Orange, FL
Daybreak Consultants Service, Inc.,
Atlanta, GA
DB Baseball, Inc., Daytona Beach, FL
Dearing Foundation, Inc., Macon, GA
Devi, Moundsville, WV
Diamond Association, Inc., Marietta, GA
Disabilities & Religion Project of Florida,
Inc., Lakeland, FL
DLC Foundation, Inc., Austell, GA
Dream Builders Foundation, Inc.,
Atlanta, GA
Dream Catchers Therapeutic Riding
Center, Inc., Conway, SC
DWC Foundation, Inc., Augusta, GA
Eagles Wings Outreach, Inc.,
Tallahassee, FL
Early Childhood Development Institute,
Inc., Tucker, GA
Easley High School Loyalty Association,
Inc., Easley, SC
East Carolina Community Services, Inc.,
Greenville, NC
East Tennessee Pride Basketball
Association, Bristol, TN
Eco Access, Durham, NC
Ecuadorian League of Florida, Inc.,
Miami, FL
Educational Communication,
Incorporated, Memphis, TN
Educational Solutions, Inc.,
Jacksonville, FL
Ellis Cross-Country Fire Department,
Inc., Salisbury, NC
Emma Louise Eagan Scholarship Fund,
Smyrna, GA
Employment Opportunity, Valdosta, GA
En Casa, Inc., Macon, GA
Ethiopian Community Association in
Memphis, Memphis, TN
Exchange Club Center for the Prevention
of Child Abuse, Inc., Tallahassee, FL
Ezras Team Enterprise, Inc.,
Stone Mountain, GA
Fairview Town Crier, Fairview, NC
Families & Youth for Christ,
Maynardville, TN
Family Alternatives, Kingstree, SC
Family Crisis and Intervention Center,
Fayetteville, NC
Fandango Farms, Hickory, NC
Fayette Animal Association,
Somerville, TN
Feed My Sheep Soup Kitchen, Inc.,
No. Augusta, SC
Fertility Foundation, Inc., Charlotte, NC
Fighting Aids for Kids Foundation,
Mt. Juliet, TN
First Chance Variety House, Marietta, GA
First Church of God Lenoir Child
Development & Learning, Lenoir, NC
Fit for Eternity Ministries, Escondido, CA
Florida Arts & Cultural Education, Inc.,
St. Petersburg, FL
Florida Cancer Society, Inc.,
St. Petersburg, FL
Florida Foundation for the Future,
Melbourne, FL
Florida Voters League, Inc., Ocala, FL
Florida World Museum of Natural History,
Incorporated, Clearwater, FL
Fort Hill Ice House, Inc., Louisville, KY
Foundation for Advancement of Children
Through Technology, Inc., Atlanta, GA
Foundation for Sun Valley, Inc.,
Matthews, NC
Fourth Avenue Step Team, Inc.,
Tallahassee, FL
Freedom Farm Ministries, Inc.,
St. Augustine, FL
Friend in Need Foundation, Pembroke, NC
Friend to Friend of East Tennessee,
Morristown, TN
Friends of International at Mobile, Inc.,
Mobile, AL
Friends of the Anna Porter Public Library,
Gatlinburg, TN
Friends of the Veterans Affairs
Medical Center Foundation, Inc.,
Birmingham, AL
Friendship & Resources for International
Edification & Nurturing Zones, Inc.,
Columbus, GA
Frog Loggers, Inc., Lexington, KY
Full Net, Inc., Louisville, KY
Funset Social and Charity Club,
Huntsville, AL
Gandhi Foundation of USA, Inc.,
Stone Mountain, GA
Gardner Foundation, Inc., Fort Mill, SC
Gateway Pet Rescue, Inc., Blue Ridge, GA
Gateway Towers Resident Council,
Incorporated, Chattanooga, TN
Genesis Group of Lebanon, Lebanon, TN
Georgia Council on High School Dropout
Prevention, Inc., Atlanta, GA
Georgia Evaluation and Satisfaction
Team, Inc., Talking Rock, GA
Georgia Rocket Basketball, Inc.,
Snellville, GA
Giant Step Family Preservation Centers,
Inc., St. Petersburg, FL
Gilbert Baker Ministries, Inc.,
Smithfield, NC
Gills Creek Watershed Association,
Columbia, SC
Given in Love Adoption Agency, Inc.,
Mary Esther, FL
Glad Tidings Ministries, Statesville, NC
Global Vision Ministries, Inc.,
Thomaston, GA
Glorious Light Ministries, Inc.,
Dublin, GA
G O A L, Inc., Greensboro, NC
Good News 2000 & Beyond, Inc.,
Asheville, NC
Goose Hollow Kids Club, Whiteville, NC
Grace By Day, Birmingham, AL
Grace Evangelistic Ministries, Inc.,
Nashville, TN
Great Commission Ministries,
Incorporated, Dunn, NC
Greater Cause Ministries-Unlimited, Inc.,
Lyons, GA
Greenways for Oldham County, Inc.,
Crestwood, KY
Gregory Burchell Journalism Scholarship,
Baton Rouge, LA
Guardian Association of Pinellas County,
Inc., Pinellas Park, FL
Hancock County Health Coalition,
Sparta, GA
Hands of Stone International Museum of
Humanities and Arts, Inc., Ocala, FL
Happy Delivery, Mattews, NC
Hardee Foundation, Washington, NC
Hardin County Humane Society, Inc.,
Radcliff, KY
Harvest Ministries & Enterprises, Inc.,
Montgomery, AL
Harvest of Love, Inc., College Park, GA
Hazard City Schools Educational
Endowment Foundation, Inc.,
Hazard, KY
Health Education and Community
Resource, Inc., Jacksonville, FL
Hearth and Home Housing Corp.,
St. Petersburg, FL
Heath Shuler Foundation, Inc., Blaine, TN
Heaven Sent Services, Maryville, TN
Helping Hands of Augusta, Inc.,
Augusta, GA
Helping Hands Programs for Youth and
Families, Inc., Sarasota, FL
Hepler International Ministries, Inc.,
Ormond Beach, FL
Higher Life Foundation, Greenville, SC
Highway to Heaven Outreach Ministry,
Inc., Baltimore, MD
Hillcrest Resident Organization,
Wilmington, NC
Homeownership Center, Charlotte, NC
April 19, 20048202004-16 I.R.B.

Homes for Homeless Families, Inc.,
Pinellas Park, FL
Honduras Aid, Inc., Lithonia, GA
Honkers Club, Inc., Acworth, GA
Hoover Youth Sports Council, Hoover, AL
Hope Crisis Center, Jackson, GA
Hope Ministry Outreach, Inc.,
Jacksonville Beach, FL
Horry County Museum Foundation,
Myrtle Beach, SC
Hospice of Macon County, Inc.,
Highlands, NC
House of Friends, Inc., Palm Harbor, FL
House of Hope, Greensboro, NC
How to Fish, Inc., Columbia, SC
Hundred Club of Franklin, Inc.,
Franklin, TN
I am Unlimited Ministries, Atlanta, GA
If Theres a Will an Incentive Program
for Women and the Economical,
Salisbury, NC
In His Name, Inc., Highland Heights, KY
Indigo Pictures, Inc., Las Vegas, NV
Inner City Housing, Inc., Atlanta, GA
Innovative Housing Group, Inc.,
Spartanburg, SC
Integrative Cancer Care Foundation, Inc.,
Atlanta, GA
International Hmong & Lao Women
Association, Valdese, NC
International Marine Educators, Inc.,
Stuart, FL
International Network to Freedom
Association, Washington, DC
J C Ranch, Inc., Atlanta, GA
Jacksonville Pastors and Christian Leaders
Fellowship, Inc., Jacksonville, FL
Jaffaria Islamic Center of Florida, Inc.,
Kissimmee, FL
Jennifer Leah Kairis Memorial Foundation
for the Theatre Arts, Lake Mary, FL
Jericho Alternative Community
Development Corporation, Atlanta, GA
John P. Mulloy, Inc., Nashville, TN
John Quincy Adams Academy, Inc.,
Marietta, GA
Johnson Economic Development, Inc.,
Dallas, TX
Josephs Coat Ministries, Inc.,
Chattanooga, TN
Joshua Foundation, Flower Mound, TX
JTM Ministries, Inc., Albemarle, NC
Junaluskee Foundation, Inc., Franklin, NC
Kadesh-Barnea Ministries, Inc.,
Franklin, TN
Kandy for Kids, Inc., Louisville, KY
Kappa Alpha Order-Upsilon
Chapter Educational Foundation,
Greensboro, NC
Kentucky Center for Integrative Medicine,
Irvine, KY
Kevins Place, Lexington, SC
Kidsports Another Option to
Alcohol Drugs & Crime, Inc.,
Daytona Beach, FL
L & S Life Support Counseling, Inc.,
Douglasville, GA
Laurens County Foster Parent Association,
Inc., Dublin, GA
Lazarus Ministries, Greensboro, NC
Learning Factory, Inc., Atlanta, GA
Learning Plus, Nashville, TN
Legacy Foundation, Inc., Tampa, FL
Leroy Butler Foundation, Inc.,
Jacksonville, FL
Library Park Fund, Inc., Spencer, NC
Lidz for Kidz, Inc., Charleston, WV
Life Center Foundation, Inc.,
Clarksville, TN
Lifeskills of Pasco, Inc.,
New Port Richey, FL
Lifewalk2000,Memphis,TN
Light Source Ministries, Inc.,
Orange City, FL
Lightly Salted Ministries,
Brownsboro, AL
Literacy Trust, Inc., Gainesville, FL
Living By Faith, Inc., San Diego, CA
Living Stones Ministry, Greensboro, NC
Living to Change Lives, Inc.,
Richardson, TX
Loafs & Fishes, Inc., Asheville, NC
Lol Enterprise, Inc., Daytona Beach, FL
Louis G. Nava Memorial Scholarship
Fund, Inc., Dunwoody, GA
Louisville Worship Arts, Inc.,
Louisville, KY
Love Faith & Deliverance Ministries,
Manson, NC
Love is All You Need, Inc., Raleigh, NC
Loving Acres Animal Sanctuary, Inc.,
Live Oak, FL
Maacam Enterprises, Inc., Atlanta, GA
MAC Foundation, Inc., Longwood, FL
Madison County Military Heritage
Commission, Huntsville, AL
Mallory Heights Merchants Association,
Inc., Memphis, TN
Mamie Lampley Meekins Center for
Development of Youth and Parents,
Goldsboro, NC
Massengale Park Citizen
Advisory Committee, Inc.,
St. Simons Islands, GA
Meadowview Housing, Inc., Dunn, NC
Memphis-Shelby County Children and
Young Adults Community Crime
Prevention, Memphis, TN
Mercer Auto Racing Group, Inc.,
Savannah, GA
Mercy Alumnae, Nashville, TN
Mercy International, Fayetteville, NC
Mercy Mountain Transportation, Inc.,
Rockholds, KY
Metcalfe County Crimestoppers, Inc.,
Edmonton, KY
Metro Atlanta Coalition Cancer
Awareness, Inc., Stone Mountain, GA
Middle Georgia Care, Inc., Bonaire, GA
Midlands Gymnastics Association, Inc.,
Gilbert, SC
Ministry Track Seminars, Inc.,
St. Petersburg, FL
Minor League Baseball Museum
Foundation, Memphis, TN
Miracle Daycare & Learning Center, Inc.,
Jacksonville, FL
Miriams Song Ministries, Inc., Oviedo, FL
Mission Carolina, Clinton, SC
Missions Central, Inc., Dunwoody, GA
Moms 3rd Eye, Inc., Lanexa, VA
Montessori Education Alliance, Inc.,
Flat Rock, NC
More of the Rock Motivational Center,
Inc., Clarkston, GA
Morris Chapel Community Development
Corporation, Washington, NC
Mothers Hip Connection Education
Foundation, Tallahassee, FL
Mt. Pleasant Order of the Eastern Star,
Mt. Pleasant, TN
Music Development Association of East
Point, Inc., Atlanta, GA
My Last Wish Project, Jacksonville, FL
Nami High Country, Boone, NC
Naples Women in Transition, Inc.,
Naples, FL
National Cancer Research Alliance, Inc.,
Hastings-on-Hudson, NY
National Easement Foundation, Inc.,
Alexandria, VA
National Institute to Enhance Leadership
& Law Practice, Buies Creek, NC
National Performing Arts Society, Inc.,
Atlanta, GA
National Pipeline Safety Education
Forum, Inc., Tallahassee, FL
National Practice Pattern Research,
Tallahassee, FL
National Womens Health Foundation,
Raleigh, NC
2004-16 I.R.B.821April 19, 2004

National Youth Association, Inc.,
Atlanta, GA
Nations Redevelopment Corp. &
Community Outreach Center,
Decatur, GA
Native American Support Effort,
Louisville, KY
NC Triangle Patriots, Inc., Raleigh, NC
New Beginning Group Home Corp.,
Altamonte, FL
New Change, Inc., Union City, GA
New Choice Intervention Program,
Roanoke, AL
New Choices, Inc., Charleston, SC
New Era Ministry for Economic
Development, Birmingham, AL
New Horizons Club, Inc., Auxier, KY
New Standard Ministries, Inc.,
Moultrie, GA
New Vision, Inc., Hopkins, SC
No Limit Soldiers, Inc., Marietta, GA
No More Silence, Inc., Tampa, FL
Noras Life Gift Foundation, Inc.,
Memphis, TN
North Hall Junior Football Association,
Inc., Gainesville, GA
Northeast Alabama Kidney Association,
Inc., Gadsden, AL
Northeast Florida Sailboat Rating
Association, Jacksonville, FL
Northwest Florida Hockey League, Inc.,
Pensacola, FL
Northwest Georgia Heritage, Inc.,
Cartersville, GA
Oconee Christian Learning Center,
West Union, SC
Ohio Valley United Way, Inc.,
Carrollton, KY
Oldsmar Cultural Arts Foundation, Inc.,
Oldsmar, FL
Omicron Phi Lambda Educational
Foundation, East Point, GA
Open Door Education Ministries, Inc.,
Sugar Hill, GA
Operating Understanding Charleston,
Charleston, SC
Operation Handclasp, Inc., Brandon, FL
Orlando Jazz Festival, Inc., Orlando, FL
Otis Redding Memorial Foundation, Inc.,
Round Oak, GA
Outreach Christian Ministry, Inc.,
Gainesville, GA
Parent Support for Granville County Kids
With Disabilities, Oxford, NC
Parents United for Child Care, Inc.,
Augusta, GA
PC Pals Computer Learning Center, Inc.,
Yonkers, NY
Pearl Ministries, Madison, AL
Pee Dee Alzheimers Coalition, Inc.,
Florence, SC
Pegasus Equine Retirement Foundation,
Inc., Prospect, KY
Pets Alive, Inc., Memphis, TN
PFP, Inc., Atlanta, GA
Pheloundashea Morgan,
Stone Mountain, GA
Phoebe Community Development
Corporation, Clarkston, GA
Piedmont Panthers AAU Baseball,
Walnut Cove, NC
Pinellas Youth Hockey Club, Largo, FL
Pittman Wildlife Trust, Somerville, TN
Pleasant Hill Community Development
Corporation, Inc., Washington, NC
Portfolio Center Scholarship Fund, Inc.,
Atlanta, GA
Postpartum Adjusment Resources of
Central Florida, Inc., Oviedo, FL
Presbyterian International News Service,
Inc., Lawrenceville, GA
Princeville Cemetery Preservation
Commission, Princeville, NC
Project Clarity, Inc., Port Richey, FL
Queens Family Preservation and Resource
Center, Inc., Far Rockaway, NY
Raeford-Hoke Crimestoppers,
Incorporated, Raeford, NC
Raising Expectations, Inc., Atlanta, GA
Raising the Standard Empowerment
Foundation, Inc., Atlanta, GA
Ralph Mark Gilbert Civil Rights Museum,
Inc., Savannah, GA
Ranch Recovery Mission, Inc.,
Springville, TN
Ravenhearst, Inc., Lexington, KY
Rays of Hope, Charlotte, NC
Real Issues Ministries, Inc., Lithonia, GA
Realized Potential Training Institute,
St. Petersburg, FL
Retrouvaille of Eastern North Carolina,
Inc., Cary, NC
RHA Affordable Housing II, Inc.,
Atlanta, GA
Rich in Mercy, Inc., Jacksonville, FL
Richland County Advisory Board for
Foster Children, Columbia, SC
Richmond Economic Partnership, Inc.,
Hamlet, NC
Ridgecrest Services, Incorporated,
Stone Mountain, GA
River of Healing Ministry, Inc.,
Louisville, KY
River Valley Community Economic
Development Organization, Inc.,
Blountstown, FL
RJ Leopold & Associates, Inc.,
New York, NY
R O C Ministries, Inc., Hedgesville, WV
Rose Garden Adult Day Care, Inc.,
Conyers, GA
Roses & Rainbows Ministries, Inc.,
Martinez, GA
Roswell Community Council for
Economic Redevelopment & Growth,
Roswell, GA
Roundtable, Inc., Sistersville, WV
Royal Hospitals 2000 Charity USA,
Charlotte, NC
Rural Georgia Community &
Neighborhood Development, Inc.,
Montezuma, GA
Rural Technologies, Inc., Ghent, KY
Russell Memorial Community
Development Corporation, Durham, NC
Sacred Heart Communications, Inc.,
Charlotte, NC
Safehouse Animal Sanctuary, Inc.,
St. Petersburg, FL
Sailing Veterinarian, Inc., Charleston, SC
Saint Josephs Food Pantry, Inc.,
Brandon, FL
Saint Paul Development Center, Inc.,
St. Augustine, FL
Sanford Affordable Housing Development
Corporation, Sanford, NC
Santos F C USA, Inc., Longwood, FL
Satchell and Poloki, Incorporated,
Tallahassee, FL
Saxtons Cornet Band, Lexington, KY
Schoolchildren of the World, Inc.,
Estes Park, CO
Scientific and Economic Assistance for
Africa, Cary, NC
Sea Pines Association for the Protection
of Wildlife, Inc., Hilton Head, SC
Shakespeare Carolina, Rock Hill, SC
Share Our Vision Ministries,
Chattanooga, TN
Share the Harvest, Inc., Decatur, GA
Shared Capitalism Institute, Inc.,
Atlanta, GA
Shelter of Love, Inc., Fayetteville, NC
Single Parents-Searching for Solutions,
Pfafftown, NC
Sisterhood, Inc., Atlanta, GA
Sisters in Unity, Inc., Morristown, TN
Skye Wallace Scholarship Foundation,
Atlanta, GA
Smoke-Free Kids, Inc., Mt. Pleasant, SC
Society for the Prevention of Cruelty to
Animals of Pitt County, Greenville, NC
Solid Rock Cafe Ministries, Inc.,
Ft. Oglethorpe, GA
April 19, 20048222004-16 I.R.B.

Sonrise Ministries, Panama City, FL
South Fork Housing, Inc., Booneville, KY
South Georgia Economic Development
Corporation, Albany, GA
South Lake County Historical Society,
Inc., Clermont, FL
South Metro Sane, Inc., Riverdale, GA
Southeast Burn Foundation, Inc.,
Gainesville, FL
Southwest Community Outreach Program,
Incorporated, Sweetwater, AL
Special Kids Resource Center, Inc.,
Tallahassee, FL
Spirit of the Wild, Inc., Bethlehem, GA
Spirit Wind Ministries, Inc., Pensacola, FL
Springfield Revitalization Corp.,
Springfield, GA
St. John Community Development Corp.,
Columbia, SC
St. Michaels Community Services, Inc.,
Anniston, AL
St. Paul Parish Economic Development
Council, Adams Run, SC
St. Peter Community Educational
Development Corporation,
North Charleston, SC
St. Stephen Community Redevelopment
Low Income Housing Corporation,
Morehead City, NC
Steps to Recovery, Inc., Adel, GA
Students Helping Students, Norcross, GA
Studio Stage, Inc., Lebanon, TN
Successful Imaging, Charlotte, NC
Summit Basketball Corporation,
Spring Hill, FL
Sunbelt Educational Broadcasting, Inc.,
Enterprise, FL
Talent Link, Inc., Charlotte, NC
Tampa Bay Women for Responsible
Automobile Safety, Inc., Gibsonton, FL
Tampa Chinese School, Safety Harbor, FL
Team Foundation, Inc., Valrico, FL
Team Louisville, Inc., Louisville, KY
Temple Academy, Inc., Atlanta, GA
Thompson Outreach Ministry,
Columbia, SC
Tilghman Heritage Foundation, Inc.,
Paducah, KY
Time & Season Ministries, Inc.,
Panama City, FL
Travis Day Care Center, Inc.,
Theodore, AL
Trevor C. Simpson Angel Foundation,
Indian Trail, NC
Tri-County Crusaders Christian Youth
Basketball Club, Inc., Morrow, GA
Tri-State Golden Charities, Inc.,
Ashland, KY
Triangle Growth Strategies, Inc.,
Raleigh, NC
Trinity in Motion, Inc., Jacksonville, FL
Trinoc-Con Corp., Raleigh, NC
Turnbull Clan Association of North
America, Elmhurst, NY
Turning Point Recovery Center, Inc.,
Decatur, GA
U S S Forrestal Sea Air Space Museum,
Inc., Tampa, FL
Ujaama Theatre Company, Atlanta, GA
United Church Builders, Inc.,
Tallahassee, FL
United People in Christ, Inc., Sarasota, FL
United Youth Ministries for Christ,
Charlotte, NC
Unity Hospice, Inc., Covington, GA
Vasco Da Gama Foundation,
Charleston, SC
Venus Lacy Foundation, Inc.,
Chattanooga, TN
Veterans New Life Action Center,
Columbus, GA
Virtual Education, Inc., Longwood, FL
Vision Without Limits, Inc.,
Riverdale, GA
Volunteer Center of Alamance,
Burlington, NC
Voter Freedom Foundation, Inc.,
Orlando, FL
Wadastick Artists Residency and Cultural
Center, Sacramento, CA
Wadessa Project Hope,
Hendersonville, TN
War Against Broken Hearts, Inc.,
Dallas, GA
Water Ladies, Inc., Tucker, GA
West Amazon Missions, Inc.,
Thomasville, GA
West Oakland Community Development
Corporation, Inc., Atlanta, GA
Western Interstate Child Support
Enforcement Council, Tenino, WA
Westminster Foundation, Inc.,
Atlanta, GA
Where U at Blackman, Inc., Atlanta, GA
White Dove Point, Rock Hill, SC
White Horse Ministries of New Bern,
Inc., New Bern, NC
Whitley County High School Football
Boosters, Corbin, KY
Williams Community Development
Corp., Atlanta, GA
Williamson County Sparks AAU,
Franklin, TN
Wilmington Warriors, Wilmington, NC
Winthrop Institute, Inc., Suwanee, GA
With One Accord, Inc., Durham, NC
Women for Growth, Inc., Tallahassee, FL
Woodstock Cheerleading Booster Club,
Woodstock, GA
World Aid Outreach, Inc., Charlotte, NC
World Dental Outreach, Smyrna, GA
World Harvest Ministries, Inc., Tampa, FL
Worldview Foundation Incorporation,
Tampa, FL
Worldwide Wildlife Conservation &
Education Center, Lebanon, TN
Young & Striving, Inc., Jonesboro, GA
Young Mariners of Florida, Inc.,
St. Petersburg, FL
Zenzele Service Corporation,
Lithonia, GA
Zeus Foundation, Inc., Alpharetta, GA
Zonta Foundation of Columbia, Inc.,
Columbia, SC
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nalRevenueServicewillissuearulingor
determinationletterwiththerevisedclas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
2004-16 I.R.B.823April 19, 2004

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
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—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
April 19, 2004i2004-16 I.R.B.

Numerical Finding List
1
Bulletins 2004–1 through 2004–16
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
2004-8, 2004-6 I.R.B.441
2004-9, 2004-6 I.R.B.441
2004-10, 2004-7 I.R.B.501
2004-11, 2004-10 I.R.B.581
2004-12, 2004-9 I.R.B.541
2004-13, 2004-9 I.R.B.543
2004-14, 2004-10 I.R.B.582
2004-15, 2004-11 I.R.B.612
2004-16, 2004-13 I.R.B.668
2004-17, 2004-12 I.R.B.635
2004-18, 2004-12 I.R.B.639
2004-19, 2004-13 I.R.B.668
2004-20, 2004-13 I.R.B.673
2004-21, 2004-13 I.R.B.673
2004-22, 2004-14 I.R.B.709
2004-23, 2004-13 I.R.B.673
2004-24, 2004-14 I.R.B.714
2004-25, 2004-15 I.R.B.737
2004-26, 2004-15 I.R.B.743
2004-27, 2004-14 I.R.B.714
2004-28, 2004-16 I.R.B.818
2004-29, 2004-15 I.R.B.772
Court Decisions:
2078, 2004-16 I.R.B.773
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
2004-12, 2004-10 I.R.B.556
2004-13, 2004-12 I.R.B.631
2004-14, 2004-9 I.R.B.526
2004-15, 2004-9 I.R.B.526
2004-16, 2004-9 I.R.B.527
2004-17, 2004-11 I.R.B.605
Notices— Continued:
2004-18, 2004-11 I.R.B.605
2004-19, 2004-11 I.R.B.606
2004-20, 2004-11 I.R.B.608
2004-21, 2004-11 I.R.B.609
2004-22, 2004-12 I.R.B.632
2004-23, 2004-15 I.R.B.725
2004-24, 2004-13 I.R.B.642
2004-25, 2004-15 I.R.B.727
2004-26, 2004-16 I.R.B.782
2004-27, 2004-16 I.R.B.782
2004-28, 2004-16 I.R.B.783
Proposed Regulations:
REG-106590-00, 2004-14 I.R.B.704
REG-116664-01, 2004-3 I.R.B.319
REG-122379-02, 2004-5 I.R.B.392
REG-139845-02, 2004-5 I.R.B.397
REG-165579-02, 2004-13 I.R.B.651
REG-166012-02, 2004-13 I.R.B.655
REG-115471-03, 2004-14 I.R.B.706
REG-121475-03, 2004-16 I.R.B.793
REG-126459-03, 2004-6 I.R.B.437
REG-126967-03, 2004-10 I.R.B.566
REG-128309-03, 2004-16 I.R.B.800
REG-149752-03, 2004-14 I.R.B.707
REG-153172-03, 2004-15 I.R.B.729
REG-156232-03, 2004-5 I.R.B.399
REG-156421-03, 2004-10 I.R.B.571
REG-167217-03, 2004-9 I.R.B.540
REG-167265-03, 2004-15 I.R.B.730
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-12, 2004-9 I.R.B.528
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
2004-16, 2004-10 I.R.B.559
2004-17, 2004-10 I.R.B.562
2004-18, 2004-9 I.R.B.529
2004-19, 2004-10 I.R.B.563
2004-20, 2004-13 I.R.B.642
2004-21, 2004-14 I.R.B.702
2004-22, 2004-15 I.R.B.727
2004-23, 2004-16 I.R.B.785
Revenue Procedures— Continued:
2004-24, 2004-16 I.R.B.790
2004-25, 2004-16 I.R.B.791
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-3, 2004-7 I.R.B.486
2004-4, 2004-6 I.R.B.414
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
2004-8, 2004-10 I.R.B.544
2004-9, 2004-6 I.R.B.428
2004-10, 2004-7 I.R.B.484
2004-11, 2004-7 I.R.B.480
2004-12, 2004-7 I.R.B.478
2004-13, 2004-7 I.R.B.485
2004-14, 2004-8 I.R.B.511
2004-15, 2004-8 I.R.B.515
2004-16, 2004-8 I.R.B.503
2004-17, 2004-8 I.R.B.516
2004-18, 2004-8 I.R.B.509
2004-19, 2004-8 I.R.B.510
2004-20, 2004-10 I.R.B.546
2004-21, 2004-10 I.R.B.544
2004-22, 2004-10 I.R.B.553
2004-23, 2004-11 I.R.B.585
2004-24, 2004-10 I.R.B.550
2004-25, 2004-11 I.R.B.587
2004-26, 2004-11 I.R.B.598
2004-27, 2004-12 I.R.B.625
2004-28, 2004-12 I.R.B.624
2004-29, 2004-12 I.R.B.627
2004-30, 2004-12 I.R.B.622
2004-31, 2004-12 I.R.B.617
2004-32, 2004-12 I.R.B.621
2004-33, 2004-12 I.R.B.628
2004-34, 2004-12 I.R.B.619
2004-35, 2004-13 I.R.B.640
2004-36, 2004-12 I.R.B.620
2004-37, 2004-11 I.R.B.583
2004-38, 2004-15 I.R.B.717
2004-39, 2004-14 I.R.B.700
2004-40, 2004-15 I.R.B.716
Tax Conventions:
2004-3, 2004-7 I.R.B.486
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
9104, 2004-6 I.R.B.406
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
2004-16 I.R.B.iiApril 19, 2004

Treasury Decisions— Continued:
9105, 2004-6 I.R.B.419
9106, 2004-5 I.R.B.384
9107, 2004-7 I.R.B.447
9108, 2004-6 I.R.B.429
9109, 2004-8 I.R.B.519
9110, 2004-8 I.R.B.504
9111, 2004-8 I.R.B.518
9112, 2004-9 I.R.B.523
9113, 2004-9 I.R.B.524
9114, 2004-11 I.R.B.589
9115, 2004-14 I.R.B.680
9116, 2004-14 I.R.B.674
9117, 2004-15 I.R.B.721
9118, 2004-15 I.R.B.718
April 19, 2004iii2004-16 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–16
Announcements:
93-60
Obsoleted by
Rev. Proc. 2004-23, 2004-16 I.R.B.785
2003-56
Modified by
Ann. 2004-11, 2004-10 I.R.B.581
Notices:
98-5
Withdrawn by
Notice 2004-19, 2004-11 I.R.B.606
2000-4
Obsoleted by
T.D. 9115, 2004-14 I.R.B.680
2003-76
Modified by
Notice 2004-19, 2004-11 I.R.B.606
2004–2
Modified by
Notice 2004–25, 2004–15 I.R.B.727
Proposed Regulations:
REG-110896-98
Corrected by
Ann. 2004-14, 2004-10 I.R.B.582
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-138499-02
Partially withdrawn by
REG-106590-00, 2004-14 I.R.B.704
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-163974-02
Corrected by
Ann. 2004-13, 2004-9 I.R.B.543
Revenue Procedures:
87-19
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
93-15
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
94-55
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
98-16
Suspended by
Notice 2004-12, 2004-10 I.R.B.556
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2001-10
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2001-23
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Rev. Proc. 2004-23, 2004-16 I.R.B.785
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
Ann. 2004-16, 2004-13 I.R.B.668
2002-28
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
Revenue Procedures— Continued:
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
2003-23
Modified and superseded by
Rev. Proc. 2004-14, 2004-7 I.R.B.489
2003-26
Supplemented by
Rev. Proc. 2004-17, 2004-10 I.R.B.562
2003-29
Obsoleted, except as provided in section 5.02, by
Rev. Proc. 2004-24, 2004-16 I.R.B.790
2003-64
Modified by
Rev. Proc. 2004-21, 2004-14 I.R.B.702
2004-1
Corrected by
Ann. 2004-8, 2004-6 I.R.B.441
2004-4
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-5
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-6
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
Revenue Rulings:
55-748
Modified and superseded by
Rev. Rul. 2004-20, 2004-10 I.R.B.546
92-19
Supplemented in part by
Rev. Rul. 2004-14, 2004-8 I.R.B.511
94-38
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
2004-16 I.R.B.ivApril 19, 2004

Revenue Rulings— Continued:
98-25
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
2004-38
Modified by
Rev. Proc. 2004-22, 2004-15 I.R.B.727
April 19, 2004v2004-16 I.R.B.
*U.S. Government Printing Office: 2004—304–778/60131